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TheStreet Open House

Life Will Lead Insurance Mergers

NEW YORK ( TheStreet) -- Slowly but surely the insurance industry is consolidating, but don't look for a flurry of activity anytime soon.

The merger and acquisition environment for insurers will be driven by one-off deals, such as RSA Insurance's (RSA) recent $5 billion pound ($7.8 billion) takeover bid for Aviva ( AV).

However, industry watchers say the potential U.K deal is just the tip of the iceberg for major activity that will also spill into the U.S.

"The consolidation in the insurance industry is being driven by the excess capital insurance companies are holding," Jim Ryan, senior analyst with Morningstar told The Street.

Insurers have little opportunity for organic growth into new products or customer segments as a result of the shaky economy and new financial regulations. But with significant amounts of cash on their balance sheets, insurers are debating what is the best option for their shareholders; make a strategic acquisition or do a buyback.

Although the industry has seen its fair share of buybacks -- Aetna's ( AET) repurchase of $1 billion of its common stock being one of the most recent -- many companies are also considering acquisitions.

The life sector will be most acquisitive, says Nicholas Potter, a partner at the law firm of Debevoise & Plimpton. "There is likely to be consolidation in the life area because they fixed their balance sheet problems before the financial crisis," he told The Street. "There are some real buyers out there."

Resolution ( RSL) , ACE ( ACE), Prudential Financial ( PRU), AXA ( AXA) and Berkshire Hathaway (BRK.A) have all been rumored to be seeking acquisitions in the life insurance space, according to published reports.

Some experts argue that the mergers, especially in the life insurance industry, are also being prompted by divestments American International Group ( AIG) was forced into after its bailout, particularly AIG's sale of ALICO to Metlife (MET - Get Report).

"What you have seen recently has really been deals driven by AIG. Those are very large transactions," says Angelo Graci, a desk analyst at Chapdelaine Credit Partners.

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