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Life Will Lead Insurance Mergers

Expect some major deals in the insurance industry.
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) -- 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


recent $5 billion pound ($7.8 billion) takeover bid for




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 --



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."







Prudential Financial

(PRU) - Get Free Report





Berkshire Hathaway

(BRK.A) - Get Free Report

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) - Get Free Report

was forced into after its bailout, particularly AIG's sale of ALICO to


(MET) - Get Free 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.

One of those deals could be for UK-based Prudential, which may be vulnerable to an approach from a bidder after its failed bid for AIG's Asian subsidiary AIA.

The property and casualty is also ripe for consolidation because of the sheer amount of companies in the space, according to Meyer Shields, an equity analyst at Stifel Nicolaus. He argues that a large number of mid-sized specialized insurers are ripe to be acquired by larger carriers looking strategic growth.

"A little bit before earnings we saw activity," says Shields. "Fairfax bought Zenith, Max Capital bought Harbor Point and PMA Capital was acquired by Old Republic.

"Farmers also has been a pretty active acquirer in the past couple of years. They have a unique situation in which they can make an acquisition and doesn't have to worry about risk going forward," Sheilds adds.


Written by Maria Woehr in New York