Convergence among U.S. banks and insurers were not significant according to a recent study by Conning & Co. titled "Mergers and Acquisitions and Public Equity Offerings: 2001 Edition."

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According to the report, there are two dominant and divergent M&A trends developing: one is toward consolidation and convergence and the other is on merger and acquisition activity which is narrowly focused on the particular strengths of specific companies.

Although hindered by several factors including stock market valuations, Conning believes that activity is likely to intensify toward convergence and consolidation as insurers seek to create scale and/or broaden product lines to compete in a global marketplace.

The total number of transactions decreased in 2000 despite speculation that the passage of the Gramm-Leach-Bliley Act late in 1999 would lead to increased M&A activity.

"Industry leaders are under new pressure to demonstrate that a merger or acquisition will deliver immediate benefits and this has made them more conservative in their decision making," said Clint Harris, Vice President at Conning and author of the study. "Large, scale-building mergers are often risky. Although there were some mergers clearly focused on building scale and product diversity, many of the transactions that occurred in 2000 were narrowly focused to build on the companies most visible strengths."

According to Conning, the total number of transactions declined about 37 percent - from 468 in 1999 to 293 in 2000. (This was the fewest number of annual transactions since 221 were identified in 1994.) The number of transactions declined significantly in all sectors in 2000, from a 16% decrease in property-casualty to a 68% decrease in the services sector.

Although the aggregate value of transactions in 2000 exceeded that of 1999- $55.7 billion versus $41.7 billion - it was the $31.1 billion Citigroup, Inc. acquisition of Associates First Capital Corporation that accounted for the lion's share of the transaction value in 2000.

There were only six large transactions (those with values reported in excess of $1 billion) in 2000, compared to 14 in 1999 and 23 in 1998. The biggest change in the mix of M&A activity among the various sectors was in insurance services. Insurance services accounted for 20% of M&A activity in 1999; in 2000, it accounted for only 10 percent.

Reductions in technology-related transactions account for much of this decline. Conning suggests that this decline is related to investors' disenchantment with technology companies as a whole. Banks continued to acquire insurance agencies to enhance their distribution capabilities to sell insurance, but few opted to acquire or merge with insurers.

In fact, the distribution sector accounted for 49% of all M&A transactions in 2000 and banks accounted for 34% of M&A activity in this sector. According to Conning, most banks do not yet appear interested in underwriting; rather, they are concentrating on rounding out services to their customers and generating distribution fees.

Many industry watchers expect that the GLBA (also known as The Financial Services Modernization Act) will result in a flurry of cross-industry M&A activity between banks and insurers. Conning cites the following reasons why banks and insurers have not yet participated in major cross-industry mergers or acquisitions: The bancassurance model in Europe is untested in the U.S.
Insurance companies' return on investment has been unattractive for banks, which have been recording higher returns.
Banks and insurance companies have different cultures, which may impede a successful merger.
Unresolved privacy and other regulatory issues.
Insurers and banks can capitalize on potential cross-industry advantages through strategic alliances. The market for public equity offerings for the insurance industry - both initial and secondary offerings - remained weak in 2000.

There were only three IPOs, all the result of demutualization, down from 10 in 1999. Secondary offerings totaled $566 million, down 69 percent from $1.8 billion in 1999.

The Conning study is available from Conning & Co. for $575 by calling toll free (888) 707-1177 or (860) 520-1245 or can be purchased through the company's website at www.conning.com. A complete listing of all Conning Strategic Studies can also be fou

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