Takeovers will take off in the insurance market

Takeovers will take off in the insurance market - at Moneyweek.co.uk - the best of the week's international financial media.

The insurance sector, as it suffers from heavy claims, poor share performance and regulatory investigation, is widely seen as ripe for consolidation, says James Daley in The Independent. But it wont be plain sailing. Just last week, Corvus Capital Inc, a UK investment company run by financier Andrew Regan, said it would not bid for Royal & Sun Alliance. This proposed deal, announced on 13 June, was described as one of 'several' potential takeover opportunities. Corvus now says that it won't bid because RSA's managers didn't cooperate, say Jonathan Rosenthal and Jon Menon on Bloomberg.com. RSA has underperformed the sector as it has been hard hit by US losses related to asbestos claims, US workers' compensation payments and falling stockmarkets.

Corvus is not the only investment company to find insurance a stumbling block. Last year, Capital Insurance Holdings, a Warren Buffett-backed vehicle led by Michael Wade, pledged to 'kick-start' the industry's consolidation by bidding for a string of smaller players. However, the venture never got off the ground. Not only did last year's plan fail, but this year US regulators have made the worlds greatest investor angry. For Warren Buffett, the unthinkable is happening, says Ian Watson in The Business. His integrity has been questioned. Investigators have launched a probe into suspect insurance contracts at American Insurance Group (AIG), the worlds biggest insurance company, dragging Buffett's General Re into the fray. AIG admitted that a deal with General Re was 'improperly documented' and it is now being investigated by New York Attorney General Eliot Spitzer and the US Securities & Exchange Commission. Buffett has denied all knowledge of any irregularities and said he will co-operate fully with the investigators.

In an echo of the US probes, Brussels plans to investigate the role of brokers and intermediaries in the insurance and the reinsurance sectors, says Tobias Buck in the Financial Times. The European Commission has announced the launch of 'sweeping' investigations into competition in the insurance sector, amid fears that consumers have been denied the full benefits of liberalisation. Concerns about the insurance sector were 'heightened' in March when the German Federal Cartel Office fined Allianz, Axa, Munich Re and seven other groups a total of e130m ($170m, £105m) for colluding to raise premiums in the German market.

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Despite failed deals, regulator probes and the sector's woes, several of the UK's largest fund managers own stakes in a number of the small Lloyd's insurers, and are believed to be keen to see the industry's consolidation get under way. Fidelity owns a 'significant' stake in Chaucer Holdings, the Lloyd's of London insurer whose stock jumped more than 11.5% recently after the firm admitted it had received a takeover approach from an unnamed bidder, believed to be its larger rival, Amlin. And Britannic Group, the Glasgow-based financial services company, is also getting in on the act with the announcement of a merger with Resolution Life, the manager of closed life-insurance funds. This deal will create a new business with a market value of up to £2.6bn, says Damian Reece in The Independent, with talks between the two sides at an 'advanced stage'.

The same trend is evident overseas, with South African insurance group Old Mutual confirming recently it is in talks to buy the Swedish insurer Skandia.

Two insurance company shares worth buying

Shares in Royal & Sun Alliance Insurance Group Plc, Britains second-biggest insurer, 'plunged' more than 70% over the last five years. But things could be looking up. Last month, it reported that net income tripled in the first quarter and the market has drawn comfort from its decision to retreat from the US, where it has suffered years of absestos-related losses, say Jonathan Rosenthal and Jon Menon on Bloomberg.com. ING Wholesale Bank analyst Kevin Ryan in London rates the shares a 'buy'. He told Bloomberg that the longer the company goes on without increasing reserves, the more attractive it looks as a potential taekover target to any 'third party' out there.

Mark Tucker has been in the top job at life insurer Prudential for barely a month, but the rumours that he will shortly dust off the plan to sell the insurer's 79% stake in Egg, the internet bank, keep bubbling up, says Grant Ringshaw in The Sunday Telegraph. The Egg sale has been a huge problem for Prudential. The failure to sell was one in a series of 'blunders' that led to the ousting of Jonathan Bloomer, Tucker's predecessor. But the final straw was a shock £1bn rights issue. The bulk of Egg's business is in providing credit cards and insurance to protect people if they fail to pay their bills. Both areas face significant dangers from the slowdown in consumer spending.