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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Insurance Industry Ripe For Mergers, Cost-Cuts Safeco Purchase May Trigger Many More

Bloomberg News

This week’s announcement that Safeco Corp. will buy the property and casualty insurance unit of Lincoln National Corp. for $2.8 billion is the tip of an investment iceberg, in the eyes of Kevin Parke.

Parke, who helps manage $38 billion in stocks as director of equity research at Massachusetts Financial Services, said at a recent investment outlook conference he expects a string of mergers, acquisitions and cost-cutting among U.S. insurers.

The U.S. insurance industry is one of the top opportunities for conservative investors, said Parke, whose No. 1 pick in the group is Chubb Corp. Parke expects to see more transactions like the sale by Chubb of its real estate division for $758 million in cash and assumed debt.

While Parke classified Chubb as a “premier” property-casualty insurance company, he said its decision to diversify into life, health and real estate units in the last 10 years took a toll. “Every time they diversified they weakened their crown jewel,” he said.

“This year, they’ve gone in a major reversal, selling all those ancillary businesses and taking that capital and giving it back to the shareholders, principally by buying back stock,” said Parke.

What’s left for investors “is a fast-growth insurance company with incredibly high returns, and a much more shareholder-focused management.”

Investors have a chance to profit from the industry’s consolidation, which is similar to what banks and savings and loans went through in recent years, Parke said. Since the current expansion began in 1991, more than 2,800 mergers and acquisitions worth $230 billion have been announced by U.S. banks and thrifts.

Events such as Safeco’s purchase of assets and Chubb’s sale of real estate are “the first wave of consolidation and restructuring,” Parke said. As a result, investors are probably in only the second year of a process that may take five years.

Parke said insurance stocks get their “first pop” when restructuring starts, then move higher when they improve growth rates.

Massachusetts Financial has reaped the rewards of its strategy. So far this year, the Standard & Poor’s Insurance Composite Index of 19 insurance stocks is ahead 30 percent, compared with a 20 percent gain for the Dow Jones Industrial Average.

Twelve of those 19 stocks - Aetna Inc., Chubb, American International Group Inc., Cigna, General Re Corp., Hartford Financial Services Group, Safeco, Torchmark Corp., Transamerica Corp., Travelers Group, UNUM Corp. and USLIFE Corp. - reached records this week.