Is 2013 the Year of the Insurance Company Merger?

by Gavin Magor, Senior Financial Analyst | December 19, 2012

Last month, we discussed how our predictions for 2012 worked out for insurers, including issues such as the Affordable Care Act, which will remain an ongoing industry development.

What do we see for insurance companies in 2013? It appears as though the scene is set for a tremendous opportunity for mergers and acquisitions driven by different issues in different market segments.

Property and Casualty Insurers – We thought that 2011 was a terrible year for property and casualty insurers because of the numbers and the size of claims’ events. This year, we’ve seen even more failures, two as recent as this month, as the weakened financial strength of companies was exacerbated by the continued soft insurance market together with low investment returns.

The New Year will certainly bring additional pressure on property and casualty insurers. With low interest rates guaranteed to continue, investment returns that even in 2012 represented profitability for insurers will no longer prop up company financials. Additional failures are likely.

Insurers need the market to harden so that higher rates will reduce underwriting losses that have traditionally been part of the business. If the market does not turn, look for companies to take additional investment risk in the pursuit of higher returns.

Thus, the scene is potentially set for an aggressive merger-and-acquisition-driven market. This could bode well for solid, well-capitalized insurers looking for growth opportunities to pick up new business at a good price in 2013.

Mortgage Guaranty Insurers – We saw support for the industry with the Federal Reserve reducing interest rates through the end of 2012. With the Fed announcement after this month’s meeting that it would extend the purchase of mortgage-backed securities through 2013, mortgage guaranty insurers can be confident that a solid base for growth in mortgage lending will continue.

What we do not yet know is whether the growth will extend beyond re-mortgages (mortgage refinancings?) into the purchase of new homes. Indicators are, that with the transition from a buyers’ market to a sellers’ market, even in Florida there could be an end to depressed prices.

For surviving mortgage insurers this means that the profitable business is likely to continue, and grow substantially. This appears to be the turn in the fortunes of these stressed insurers, and as long as they can maintain financial stability throughout 2013, should enter 2014 with a more prosperous future.

Health Insurers – In 2013, preparations will be completed for the full implementation of the Affordable Care Act (ACA) in 2014. Although the ACA will not remain the political football this coming year, the volatile environment surrounding health insurers will continue.

Movements in the stock prices of health insurers will depend on their progress in adapting to the changes ACA brings and their expectation of profitability. Medicaid-dominated insurers may well receive more aggressive approaches from larger insurers seeking to grow.

Look for more mergers to take place. Smaller insurers may find that they become marginalized by the larger ones looking for growth. They may not see much of the incremental growth promised by expanding coverage to the uninsured. One thing is certain, 2013 will not be the year that the rising cost of health insurance is finally addressed, but it will certainly become part of the conversation.

Life and Annuity Insurers – The life and annuity business is changing to adapt to the challenges of a low-yield investment environment. Overall, this is a financially stable group of insurers, but the challenges remain as to how to generate business in a market where there is still a lot of concern about being able to save for retirement.

Insurers have responded by adapting products to meet the needs of the changing market. Seeking higher returns while at the same time reducing risk has required changes to investment products offered by insurers. Look for risky investments to be cleansed from balance sheets. This may result in realized losses, but result in stronger insurers overall.

Products are changing, including adding riders that creatively allow consumers new ways to manage their investments. College funding through annuities and payouts for life policies when long-term care is required are just some of the growth areas that we’re seeing in the industry.

Meanwhile, expect some of the merger and acquisition fever to spread from the health insurers and property and casualty insurers into life and annuity as consolidation is seen as the way to introduce additional synergies.

Although it may not start off in a particularly exciting manner, 2013 could bring tremendous market interest in the little loved area of insurance companies, especially if we see consolidation and the tides change from a soft to hard market. Without a doubt, 2013 will be an interesting year for the insurance industry.

Gavin Magor, senior financial analyst at Weiss Ratings, has more than 25 years of international experience in credit-risk management, insurance, commercial lending and analysis. He leads the firm’s insurance ratings division and developed the methodology for Weiss’ Sovereign Debt Ratings.