Insurance Industry Offers Investment Possibilities Mergers Will Grow In Size, Reward Those With Patience

The life insurance industry, its growth sputtering, has not been a big player in the recent surge in mergers and acquisitions. Investment bankers aren’t breaking their spears on the shields of opposing investment bankers.

There are no rapacious raiders, no blustery moguls. No barbarians. No Gates.

Even so, insurance-industry analysts say, there are opportunities for investors who are willing to be patient and a bit untraditional. Instead of hoping for gains on companies that may be acquired, the experts say it may be smarter to buy the acquiring companies like SunAmerica, which bought three life insurance companies last year.

And although a few publicly traded companies, like the USLife Corp. in New York, could become tempting takeover targets, most deals are likely years away.

Publicly traded insurance companies making aggressive, even hostile, bids for other insurance companies is a little distant, so there is little for investors to buy.

Of the 20 or more life-insurance deals in 1995, most involved companies selling their non-core insurance businesses, said insurance analyst John Hall. The Ford Motor Co., for example, sold its life-insurance unit to SunAmerica for $172.5 million.

The insurance companies that bought the units got a good, even cheap, price. “They bought from motivated sellers,” Hall said. “The next phase is insurance companies selling specialized units to other insurance companies for better fits, like a life insurance company that wants only life insurance or a property and casualty company that wants only property and casualty. The price goes up for that group.

“But the highest price of all,” Hall continued, “is when a public company goes after another public company, and that won’t happen in earnest until all the other cheaper subsidiaries are bought up.”

Analysts say that as many as 20 percent of the more than 1,500 public and privately owned life and health insurance companies face consolidation. Many of these merging companies will be mutual companies, which are owned by the policyholders, rather than shareholders. Eventually, public companies will also join the fray.

Several forces compel the consolidation. The insurance business has been slow to computerize, so operating costs have grown and profit margins have narrowed.

About a third of all life insurance is still sold through the old-fashioned - meaning expensive - way of distribution known as the door-to-door sales agent. An agent’s commission can total as much as the first year’s premiums on a policy.

And with overall interest rates low, the return on investment for insurance policies is 8 percent or less, compared with mutual funds posting double-digit returns insurance policies lack allur.

Perhaps most importantly, Americans are simply living longer and see less need for life insurance.

“When you buy life insurance, you are trying to protect certain assets,” said Lawrence G. Mayewski, senior vice president for A.M. Best’s life-health division. “But there is less compelling need to purchase, or if you have purchased, retain a policy once the kids have left school.”

Health care has become a far more important issue for a graying population, and life insurance companies have responded by selling long-term disability insurance to provide for health-care expenditures.

For investors, it is difficult to figure out which life insurance companies are likely to become acquisition targets, especially if the deals involved privately owned mutuals whose transactions differ in accounting procedures from publicly owned companies.

Analyst Andrew Kligerman said an exception is USLife, which has a strong balance sheet with some $7 billion in assets in 1994.

Kligerman has a buy recommendation for U.S. Life based on its potential attractiveness as a takeover target. While U.S. Life’s earnings have been flat in recent years, its earnings potential appears sustainable over the next five years.

At 11 times earnings, Kligerman thinks its stock is cheap. It closed Friday at $33.13.

It is far easier to look at insurance companies likely to do the acquiring because of the efficiencies a round of consolidations will probably bring to the industry over all.

Hall of Northington Partners likes five companies - American Bankers Insurance, American General, Jefferson-Pilot, Penncorp Financial, and SunAmerica - that bought insurance companies in 1995 and, he says, are likely to buy more in the near future.

But he notes the big acquisitions lie ahead, as health-care reform will affect profit margins at life and health insurance companies as well as hospitals and HMOs. A cut in the capital-gains tax would make mutual funds even more attractive, hurting the insurance business even more.