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Deal dilemma dates back a long way
By John Sanders
(This article was first published in 1998 on Reuters newswire)
LONDON, Jan 23 (Reuters) - Treasure trove or time-bomb, trick or treat? Dealing in insurance companies is a risky
business where players can win or lose a lot more than they bargained for. Markets are quick to judge and are more
likely to respond positively to an insurer slimming down than going on a spending spree, partly because of the
risk of being landed with hidden, long-term liabilities.
Chubb Corp's acquisition of Pacific Indemnity in 1967 eventually left the new parent with an asbestos liability
bill of $1.3 billion, 13 times the purchase tag. On the other hand, AMP's 1989 purchase of Pearl effectively paid
for itself when in 1996 the British life insurer released almost 1.0 billion pounds ($1.6 billion) of so-called
orphan assets to its Australian owners.
The AMP deal was an exception in the buying bonanza of the late 1980s, which saw many insurers paying first and
asking questions later. Recent deals have shown more promise. "It's been a very patchy record. The evidence
suggests that the industry has learnt from its past mistakes and is not overpaying," said Bob Yates, insurance
analyst at Fox-Pitt Kelton. "Insurers also have a clearer idea of why they are buying things. Unless there are
palpably overpaid deals, I would expect them to add value for shareholders."
Round two
The global insurance industry is now in the second consolidation phase of the last 10 years, with the non-life,
life, reinsurance and broker sectors all embroiled in wholesale changes to the corporate landscape. The current
bout of consolidation began in 1995 and has seen Allianz AG Holding, Axa-UAP and Generali vying for domination of
key European non-life markets.
Axa merged with UAP in late 1996 to topple Allianz from the number one position in Europe, only to see Allianz
blaze back in the closing days of last year with a successful bid for AGF. Analysts said it is too early to judge
whether these and other recent deals will be successful, although the early impressions are generally encouraging
for shareholders.
"Axa has been the radical leader in the current phase, but it's too early to say whether it's all working," said
Jonathan Lawlor, insurance analyst at HSBC James Capel. Axa-UAP looks set to achieve annual savings of 1.5- 2.0
billion francs ($326.3 million) a year, while the biggest insurance merger in Britain -- the creation of Royal &
Sun Alliance in 1996 -- has also begun well.
Royal & Sun has cut annual costs by 100 million pounds and is on target for savings of 175 million. The first
round of post merger cost-cutting is fairly straightforward, said HSBC James Capel analyst Nick Bunker. It is the
second phase, centred on business re-engineering, which is the greater management challenge.
Lessons learned
Recent deals appear to have avoided the pitfalls of the 1988-91 round, which were driven by a perception that
insurers needed a pan-European presence almost overnight. "The merger mania of the years 1988 to 1991 was
generally a disaster, at the minimum buyers paid too much and sometimes they bought a pile of rubbish," said
Yates.
This led to companies such as UAP overpaying for Colonia, while "Allianz made some acquisitions which, with the
benefit of hindsight, they probably wouldn't have made," said HSBC James Capel's Lawlor. "M&As done in the late
1980s and early 1990s were driven by empire building, often with scant regard for the financial consequences. The
aim was to plant a flag on every continent. It's hard to point to a successful acquisition from that phase," he
added.
Following this disastrous phase, insurers' attention was focused on a downturn in the underwriting cycle until the
mid 1990s, which put aggressive expansion on the back-burner. However, all sectors of the insurance market have
seen a burst of activity since 1995, driven by globalisation and the pressures to cut costs.
The structure of the insurance broker market has been totally rewritten in the last two years, largely by Marsh
McLennan and Aon Corp which now dominate the business. Again, analysts are wary of commenting on the success or
otherwise of the string of acquisitions both have made, although some say Aon's share price shows market concerns
about the speed and size of its expansion. "These deals have certainly generated cost savings, but it will be 1999
or 2000 before we can look back and say whether they were successful or not," said one analyst.
Reinsurance machismo
Activity in the reinsurance market has cooled since a frenetic round of deals in 1996, some of which look more
positive than others. Swiss Re's purchase of M&G Re is singled out as one of the more promising reinsurance deals
by analysts, "The theory of consolidation, earnings enhancement, etc, is justified for the likes of Swiss Re, but
it's too early to say whether it's machismo or really justified," said Lawlor.
Other reinsurance moves are making up ground after a rocky start. Munich Re's acquisition of American Re suffered
from loss of American Re staff in the early days. Another Transatlantic deal, General Re Corp's purchase of
Cologne Re in late 1994, has taken time to integrate the very different types of business, but is now making
headway, analysts said.
Life insurance has seen fewer big deals, with the emphasis on consolidation within national markets. The big Dutch
insurers, Aegon NV and ING, have been among the most active internationally, with Aegon buying Scottish Equitable
and Providian, while ING snapped up Equitable of Iowa.
Apart from the short time frame in which to judge recent deals, many have been hard to assess because of a lack of
information. "Where there's a welter of activity, such as with Axa, there's a lack of information, no pro-forma
accounts to compare with and it's even harder to tell how a deal is going," said Lawlor. The same was true of
Zurich's takeover of BAT's financial services arm. "I have sympathies for what the management is trying to
achieve, but it's fudgy because of a lack of data."
© John Sanders, 1998
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John Sanders, freelance journalist, John Sanders
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