Life insurer mergers redistributing capital.

The recent flurry of merger-and-acquisition activity has life insurance industry observers wondering whether this is the beginning of a trend--and whether the industry has recovered its economic momentum.

Since the beginning of 2003, North America has seen the completion of the Sun Life Financial Inc./Clarica Life Insurance Co. merger; the merger of Great-West Lifeco Inc. and Canada Life Financial Corp.; and the proposed acquisition of MONY Group Inc. by Axa Financial Inc. Most recently, John Hancock Financial Services Inc. announced a $25.8 billion merger with Manulife Financial Corp., while Safeco Corp. said it would sell off its life and investments unit and was looking for a buyer.

Companies have a continued call for capital to support the higher ratings of their companies, recent reserve standard changes caused by the economic environment and changes in accounting practices, and the additional reserving by companies, John Nigh, mergers-and-acquisitions practice leader with Tillinghast-Towers Perrin, said. Rating agencies continually look for higher levels of capital to achieve the same ratings than was previously necessary, he said.

For these transactions to make sense, efficiencies must result from them, Craig Weber, a senior analyst with Celent Communications, told Best's Review. It's good to have enhanced distribution and a broader product mix and exposure to different markets, but the expense savings are critical, he said.

When asked whether merger-and-acquisition activity will continue, equity analysts don't agree.

"Absolutely, we can expect to see more of this sort of thing," Nigh said. "It wouldn't surprise me to see one relatively large transaction at something of a pace of one every two months, or maybe even one every month for perhaps more than a year"

Whether this is a surge of activity or a slow and steady progression, companies have the perception that a larger capital base is needed to be able to operate successfully in the marketplace and compete against the big players, said professor Edward Graves, who holds the Charles J. Zimmerman Chair in Life Insurance Education at the American College in Bryn Mawr, Pa. "These recent announcements may provide fuel for another flurry of M&A activity, but I don't think it will be the end of the longer-term consolidation movement," he said.

Donald Light, a senior analyst with Celent Communications, said the John Hancock-Manulife merger makes sense. "This deal makes more sense than other rumored company mergers in discussion, because there is less overlap with product and distribution between the companies."

From the Canadian standpoint, the Hancock/Manulife merger looks to be the blockbuster for that segment of the industry, Weber said. From Manulife's perspective, John Hancock is a world-class brand, and that gives Manulife additional exposure in the United States it didn't have previously, he said.

John Hancock Life Insurance Co.

* Rated A++

* Information as of 2002 year-end:

Assets: $69.3 billion Net Premium Written: $6.7 billion Operating Return on Equity: 18.3% Direct Premium Written, all lines: $7.5 billion Lines of business: ordinary, group and credit life, Individual and group annuities, individual, credit and group A&H

Manufacturers Life Insurance Co.

* Rated A++

* Information as of 2002 year-and: Assets: $43.9 billion Net Premium Written: $3.4 billion Operating Return on Equity: 15.9% Direct Premium Written, all lines: $3.2 billion Lines of business: individual life, group life, individual and group annuity, individual and group A&S

A.M. Best Ratings as of Oct. 16, 2003.