Insurance Quotes & Advice

The U.S. insurance industry has been hit hard by the recent economic downturn and a slew of companies will need to raise capital, some of which will be forced to sell off successful business units that are attractive to prospective buyers.  The accounting firm Deloitte, released a recent report on The 2009 Insurance M&A Outlook: Opportunity in an Uncertain Environment.

The financial crisis and significant catastrophe-related losses in the third quarter of last year – combined with lower investment returns, ratings downgrades and a global economic recession – have created a “perfect storm” within the insurance M&A arena. As a result, insurance M&A buy-side activity approached an all-time low as 2008 drew to a close. The only bright spot in insurance M&A was the relative weakness of the U.S. dollar during most of the 2007-2008 period, which made U.S. insurers potentially attractive acquisition targets for foreign buyers seeking to increase their presence in the U.S. insurance market.

The Dollar isn’t going to get much stronger and with all the federal spending adding to a bloated national debt it will likely get weaker.  There’s is also a perception that most investors are shying away from the financial services industry of which insurance is included and as a result some insurance companies seem to be significantly undervalued, adding to their attractiveness.

It’s definitely a Buyer’s market out there, companies with strong capital positions and excess cash on hand will be able to pick and choose from a number of buying opportunities in the insurance industry.  The insurance industry hasn’t received the type of federal support like it’s financial services counterparts in the banking industry and segments like life insurance have been hit hard from investment losses.

There are some foreign entities with significant cash positions and they will be able to bargain hard with any insurance company desperately seeking to raise capital.  While some of these companies may be able to seek government support, there is no question there is a stigma attached to any company getting a bailout.

There is also the fact that any company receiving federal money has several constraints placed on them that may seem less favorable than being forced to sell assets at a discount.  All in all we are likely to see the pace of merger and acquisition activity increase in the coming months as more and more foreign players enter the arena.

There may be a number of insurers lined up for government money, if and when they gain access to TARP funds.  There has been a renewed drive recently to include insurance companies and reports claim that a decision to include insurers may come shortly.

Still there is the question, is there enough remaining in TARP to solve the problems of the banking system, let alone help out the struggling insurance industry?  With the Treasury still conducting it’s stress test for the nation’s largest banks, it is still unclear how much more capital they will need.

To date the only insurer that has received government funds is AIG, in a massive bailout that has soured many Americans’ support for subsidizing financial institutions in danger of collapse.  The executive compensation scandal has probably done the most harm in preventing insurers from gaining access to TARP thus far.

Gaining access to that capital would likely prevent credit downgrades for a number of insurers and further erosion of their access to said credit.  The government is also likely to take equity stakes in these companies like they have for many of the banks that have already received TARP funds.

Are we likely to see the gradual nationalization of the insurance industry like what has already started to happen in the banking system?  For now it seems unlikely, for the most part the problems in the insurance industry don’t seem as widespread as is the case for the banking system, for another there just isn’t that much money left in TARP any ways.

Only a few select insurers are likely to gain approval for TARP considering that banks will get most of what’s remaining.  It is also likely that the government will have to tap into the $250 billion placeholder in this year’s budget that has been set aside for additional financial support.

For the some insurers it could mean the difference between insolvency and staying in business and they can’t wait to get in line for their handouts.

A number of insurance companies have purchased banks in recent months in order to gain access TARP funds.  Albeit not on the scale of their financial brethren, the insurance industry has also struggled during the financial crisis and has seen it’s largest company, AIG, require massive federal aid in order to avoid bankruptcy.

Two life insurance companies, the Hartford and Lincoln National received approval last month to convert into bank holding companies, paving the way for them to be eligible for federal aid.  Troubled bond insurers, Ambac and MBIA have also applied to the government for capital injections in recent months.

Giving aid to bond insurers would help out the municipal bond sector, which has been in upheaval for the past year ever since a number of the major players received credit downgrades.  A number of critics have complained that this would purport the original intention of TARP in the first place.

Some have called for the insurance industry to receive their own sort of bailout program as TARP was set to originally help re-capitalize the banking system.  While the insurance industry is a part of the financial services sector, helping them out will do little to help unfreeze credit markets. 

With only $350 billion remaining, not many people believe that will be enough to help both the banking system and the insurance industry.