The life reinsurance sector is often overshadowed by the property/casualty reinsurance business

And yet the market has been busily merging, acquiring and otherwise restructuring over the past twelve months. News of the Reinsurance Group of America (RGA)'s transaction with Allianz Life Insurance Co of North America in December of last year, adding almost $450m in extra premiums on to RGA's books and cementing its position as the second largest life reinsurer in the US after Swiss Re, barely caused a flutter, despite the ongoing changes in the sector.

Gallic story

One of the continuing stories of the past year has been SCOR's attempts to spin off its life reinsurance business. Back in July 2003, the French reinsurer announced its intentions, a statement that rating agency Fitch greeted as "a defining strategic step for its future". With SCOR's life operations accounting for around 30% of the organisation's overall business, restructuring could well enhance its capital adequacy, said the rating agency, noting at the same time that there could be an execution risk issue. In fact, for 2003, SCOR's life and accident business contributed EUR1.5bn in premiums out of a total EUR3.7bn operations. In October, SCOR's board issued a statement, saying it had received "a progress report on the plans to incorporate its life reinsurance business" and was to receive final proposals before the end of October. A month later, the board convened to take "a series of decisions aimed at bolstering group solvency and laying solid foundations for its future." These included the incorporation of its life reinsurance business, a proposal agreed to by a general shareholders' meeting at the beginning of December. In a letter to investors dated 5 January, SCOR's chairman and CEO Denis Kessler wrote: "This incorporation, now implemented, will accelerate the development of a business that represents a source of stable recurring revenues for the group as shown by its results in recent years. This is also the reason why the board decided not to spin off this business, which therefore remains wholly-owned by the SCOR Group." The addition of just over EUR750m in new capital through a share offering at the end of 2003 probably helped in that decision.

At about the same time, RGA went to market and raised $427m by offering just over 12 million new shares concurrent with its Allianz transaction.

Scottish Re followed a similar fund-raising route, privately placing $30m of trust preferred securities, and completing an offering of 5,750,000 hybrid capital units (HCUs), including an overallotment option of 750,000, raising net proceeds of $138.2m. By the end of last year, Scottish Re's total assets had reached $6.1bn, including $1.4bn it had taken on through the acquisition of ERC Life for $151m. Other acquisitions during the course of the past twelve months have included Swiss Re completing its purchase of CNA's life business through Admin Re for about $700m, while the headline direct deal from last September is probably Manulife's merger with John Hancock in a stock-for-stock deal which created the largest life insurer in Canada and the second-largest in North America. David D'Alessandro from John Hancock, who took on the mantle of Chief Operating Officer of the combined business, commented: "Not only is consolidation in our industry inevitable, but for companies of our size to compete and grow in the future, it is necessary."

AXA acquisition

About the same time, AXA announced it was seeking to buy the MONY Group at some point in the second quarter of 2004 in an acquisition valued at $1.5bn. Deal terms were changed in February to up dividends to MONY shareholders, but, at time of writing, it is still hanging in the balance. While issuing its first quarter results, MONY's Chairman and CEO Michael I Roth, commented: "Increased competition, lack of scale and lower interest rates continue to impede our ability to generate appropriate levels of profitability. This is why we believe that the merger with AXA Financial represents the best opportunity for, and provides full and fair value to, our shareholders."

That the life sector has had a rocky ride over recent years is in little doubt, particularly in light of figures issued by Mercer Oliver Wyman estimating that European insurers have lost $400bn in the past five years, much of which can be laid at the door of the life sector. Speaking at the World Economic Forum in Davos, Switzerland, in January, John Drzik, President of Mercer Oliver Wyman, said: "The drain in value from the European insurance sector can be put down to the lacklustre performance of European life insurers, both pure life companies and composites. While capital erosion, the equity market downturn and low interest rates have certainly contributed to this, the sheer extent of the underperformance indicates that another factor is at play. We believe this factor is the disappearance of the 'growth premium' that many life and composite insurers enjoyed in the late 1990s."

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