Recent billion-dollar acquisitions of U.S. life carriers by large Japanese life insurers don’t necessarily mark the beginning of a trend, as very few Japanese insurers are large enough to execute such transactions, an analyst said.
With three of the four largest Japanese insurers having announced U.S. acquisitions in the past year, the Japanese giants are likely to pause to digest and integrate their new purchases instead of going out and buying more, Morgan Stanley analyst Nigel Dally said.
“What has been especially of interest to investors have been the substantial premiums the Japanese insurers have paid — in the past three transactions, the transaction price was a 36 percent premium on average to where the stocks were trading prior to the announcement,” Dally said in a note to investors this week.
On Aug. 11, the Japanese life insurance giant Sumitomo Life announced it would buy Symetra Financial, the former life insurance business of Safeco, in a deal valued at $3.7 billion.
The Symetra Financial transaction followed on the heels of the July 23 announcement that Meiji Yasuda Life Insurance would buy StanCorp Financial Group in a deal valued at $5 billion.
Last June, Dai-ichi Life Insurance announced it would buy Protective Life as part of a deal valued at $5.5 billion.
In a Japan-only transaction consummated last July, The Hartford announced the completion of the sale of its Japanese annuity subsidiary to ORIX Life Insurance.
On the property/casualty side, three other insurance deals between Japanese buyers and foreign target companies have been announced since the beginning of 2014.
Analysts say the Japanese moves into the U.S. are no surprise as Japanese life insurance companies look to growth by tapping into the world’s largest insurance market.
China’s slowing economy has led to a broad market selloff in recent days and, in the U.S., the Federal Reserve appears to be close to raising benchmark lending rates. Rising interest rates make life and annuity products more attractive to policyholders and also mean insurance carriers earn more on their fixed-income investments.
“What can they do with their excess capital in Japan? Not a whole lot except invest it a very low interest rates,” Steven Schwartz, an insurance industry analyst with Raymond James, told BloombergBusiness last week.
Tougher regulatory challenges cause insurers to develop less capital intensive and market sensitive products. In addition, lower expected margins in some lines also may factor into the decision to consolidate, according to a 2014 report published by A.M. Best.
Whatever the cause for the forays of Japanese insurers abroad, the average insurance deal size is on the rise.
For global life and health insurers, the average deal size was approximately $753 million in the first half of last year, compared with $654 million in 2013, and $357 million in 2012, according to data compiled by Best.
With the exception of Nippon Life, which has more in excess capital than any other Japanese insurer, Dally doesn’t see many foreign insurers coming into the U.S. market.
SONY Life in Japan has said it prefers to grow domestically and Samsung Life in Korea seems to favor asset managers over insurers, Dally said in his investor note.
European life insurers are consumed with regulatory constraints, and Canadian insurers have shown more appetite in asset management companies and group insurers over variable annuities and long-term care, Dally also said.
“The consensus view appears to be that there is a broad variety of foreign insurers lining up to make countless additional acquisitions in the U.S. market,” Dally writes in the investor note published Aug. 19. “In our view, this is an overly simplistic view.”
Torchmark and Unum are seen as too large for a Japanese suitor who might be put off in any case by some of the long-term care liabilities on those companies’ books.
Other than Nippon Life, Japanese insurers would be limited to smaller deals than those announced recently. Dally said a “consolidation premium” on U.S. life insurance company stock might be appropriate for CNO Financial Group in Carmel, Ind.
In recent years, CNO Financial management has taken steps to stabilize the company which serves middle-market pre-retirees and retirees through subsidiaries Bankers Life, Colonial Penn Life and Washington National.
Dally also said Principal Financial Group might eventually be of interest to Nippon Life, which has signaled its intent to pursue acquisition. Nippon already owns 6.1 percent of Principal Financial.
But Dally also said that in a recent conference call Principal Financial executives downplayed Nippon Life’s small stake as Nippon Life is more interested in group life insurance and annuity products, medical care and long-term care insurance.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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