Convergence: Slowly, But Surely
Insurance Networking News, June 2002
When Citicorp acquired Travelers in 1998-forming Citigroup, one of the world's largest financial services institutions-many analysts hailed the union of the insurance and banking entities as the beginning of a revolution in the financial services industry.
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Not surprisingly, analysts' predictions about financial services convergence-like their ratings for Enron stock-have turned out to be distorted. Financial services firms are definitely moving onto each other's turf-to increase revenues and capture more of their customers' "wallet share." But most are proceeding at a cautious pace-much more like the tortoise than the hare in Aesop's famous tale.
In fact, insurance-related M&A activity actually has declined in 1999, 2000 and 2001, according to Conning & Co. (see chart, page 35).
"There's been some disappointment around convergence," say Ken Porello, leader of the North American Insurance Practice at New York-based Deloitte Consulting (see "The Last Word," page 48). "There was the feeling that convergence was going to be a revolutionary change, and we don't have a revolution on our hands. It's moving slowly." Nonetheless, it will be no less fundamental in its long-term impact, he says.
Doomed to fail?
Perhaps most disconcerting to the pundits who expected an era of mega-mergers was New York-based Citigroup Inc.'s decision late last year to exit the P&C business. The spinoff of Travelers Property and Casualty Corp. was announced a mere two years after Gramm-Leach-Bliley passed, which left many wondering: Did the divestiture signal the inevitable failure of banking and insurance convergence?
Not at all, according to industry observers. The spin-off was a logical financial decision for Citigroup, not a strategic one, says DeLoitte's Porello. Travelers' performance was strong under the Citigroup umbrella, he says. But returns on equity in the P&C business have been significantly lower than returns in banking. In addition, the P&C market is hardening now-a favorable market for a company to dispose of P&C assets.
Citigroup's decision to sell Travelers should not be thought of as a disavowel of convergence, Conning & Co. concurs in a recent report, titled "Mergers & Acquisitions and Public Equity Offering: 2002 Edition." But the spin-off of Travelers, along with the General Electric Co.'s possible divestiture of its Employers Reinsurance Corp. unit, may be an indication that the P&C business won't figure prominently in convergence-at least not for large conglomerates with aggressive growth targets.
So far, the life insurance business is much more attractive than P&C. Not one property/casualty transaction was among the 10 largest last year, but eight of the 10 largest transactions were in the life sector, notes Jack Gohsler, senior vice president at Conning & Co, Hartford, Conn.
Interestingly, Citigroup is retaining Travelers' life and annuity business, which the firm obviously sees as a better fit than the more volatile P&C business, according to Conning. There's a logical fit between banking and life insurance, Gohsler says, because the two sectors have similar products and cultures, and a focus on wealth accumulation. In addition, demographics are favorable for life insurance and annuities, he adds.
"The U.S. population is aging . . . and it's becoming clear that Americans are going to have more responsibility for funding their own retirements and long-term care," Gohsler says.
The outlook for the life sector is so favorable that even traditional P&C insurers are expanding into that market. For example, last year, American International Group, acquired life insurer American General Corp. for $23.2 billion-the largest insurance-related transaction of 2001.
A bright spot
The risky nature of the P&C business has led some of the largest property/casualty insurers-especially those with a solid distribution network, a strong brand, and a large customer base-to branch into other sectors of financial services. "Many companies that are primarily regarded as P&C realize that by widening their product offerings, they can increase their top line and stabilize their bottom line," Gohsler says.
State Farm Mutual Automobile Insurance Co. and Allstate Insurance Co., for instance, both began offering mutual funds and banking products in the last two years. Although the banking and mutual fund operations of State Farm and Allstate currently represent a small portion of each carriers' revenues, "these companies are very serious about broadening their footprint with their customers," Deloitte's Porello says.
So far, broadening their footprint is improving the balance sheet for both companies. The results in State Farm's banking and mutual fund operations "were definitely a bright spot in our financial picture last year," says Frasier Engerman, a spokesperson for the Bloomington, Ill.-based carrier, which suffered a $5 billion after-tax net loss in 2001.
Positive Performance
State Farm Bank, which received its charter in late 1998 and opened in mid-1999, held $2.3 billion in total assets as of March 31 this year, up from $1.2 billion reported in January. Ten new State Farm mutual funds-managed by State Farm Investment Management Corp.-became available to customers in March 2001. (The company has offered mutual funds to its employees and agents since 1968.) As of March 31, 2002, the new funds had accumulated $100 million in total assets under management.
Allstate Insurance Co.'s financial business, which is focusing on providing Middle America with financial products for retirement, also saw positive results. The Northbrook, Ill.-based carrier launched Allstate Bank at the end of last year, and the company offers 74 mutual fund families, including AIM Funds, Fidelity Advisors Funds and Putnam Funds.
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