Competitive Intelligence

MetLife Buys Travelers from CitiGroup

Reversing the strategic changes Sandy Weill undertook in the financial services consolidation of the 1990's, Citigroup dumped its Travelers life and annuity business to redeploy capital to in faster growing markets in Asia and Europe, as MetLife plopped down more than $11.5 billion to become the largest life insurance company in the business:

Citigroup, the largest financial institution in the United States, had retained Travelers Life & Annuity in 2002 when it spun off Travelers Property Casualty Corp. in a $5 billion initial public offering. Travelers Property merged with St. Paul Cos. Inc. in 2003 to create The St. Paul Travelers Cos., based in St. Paul, Minn.

The announcement Monday said that Citigroup and MetLife "have entered into 10-year agreements under which MetLife will greatly expand its distribution by making products available through certain Citigroup distribution channels," including Citi branches and its Smith Barney brokerage unit.

It said that Citigroup will receive $1 billion to $3 billion US in MetLife equity securities and the balance in cash, which will result in an after-tax gain of about $2 billion. It added that MetLife may finance the cash portion of the transaction through a combination of cash on hand, debt, mandatory convertible securities and selected asset sales.

In a phone call with analysts, MetLife's chief financial officer, William J. Wheeler, said that the asset sales could include divestiture of MetLife's reinsurance operations. Reinsurance is backup coverage purchased by insurance companies.

MetLife owns about 52 per cent of the Reinsurance Group of America.

Wheeler said asset sales could also include "equity real estate investments and potential other things."

C. Robert Henrikson, MetLife's president and chief operating officer, said the purchase would bring "even more balance" to MetLife's business mix.

MetLife currently earns about 46 per cent of its profits from institutional sales and 30 per cent from individual sales, he said. After the merger, profits from institutional sales should drop to about 43 per cent, while earnings from individual sales should rise to 36 per cent. Other categories are international, seven per cent; auto and home six per cent; and miscellaneous, eight per cent.

Citigroup said that the businesses being acquired by MetLife generated total revenues of $5.2 billion and profits of $901 million in 2004. The business had total assets of $96 billion at year's end, it said.

The transaction announced Monday doesn't directly involve operations in Canada, although the financial ratings of Citigroup's Primerica Life Insurance of Canada along with its parent Primerica were put under review Monday by A.M. Best Co.

A.M. Best also lowered ratings of Travelers Insurance Co and Travelers Life and Annuity, to A-plus superior from A-double-plus superior, reflecting their move out of the Citigroup group of companies.

Metropolitan Life sold the bulk of its Canadian operations in 1998.

The move was the latest by Citigroup to sell off noncore businesses.

Citigroup chief executive Charles Prince said that selling Travelers "sharpens our focus on Citigroup's long-term growth franchises." He did not say how Citigroup would use the proceeds from the sale.

In November, Citigroup sold a truck-leasing operation to General Electric Co. for $4.4 billion. It also sold its European vendor-finance leasing operation for CIT Group Inc.

Although no longer consider strategic, Travelers had played a big part in the creation of Citigroup.

Citigroup chairman Sanford I. Weill acquired the Travelers insurance group in 1993 and Travelers then acquired Shearson in 1993 and Salomon brokerage in 1997; it merged with Citicorp in 1998 to form Citigroup.

Of course, then there's American Express, that in an otherwise seemingly disconnected move, suddenly decided to spin off its personal finance unit, American Express Financial Advisors, to shareholders in the third quarter. Reportedly, the move is being planned so the Minneapolis unit, formerly called IDS back in the day, could "pursue new products, partnerships and expansion without having to compete with credit cards and other businesses for capital." I wonder if it doesn't have more to do with confirming theories about the disintegration of the "integrated financial services" strategy signified by the MetLife/CitiGroup deal...?

The financial advisory business provides financial planning and advice, asset management, insurance, annuities and related businesses through a network of more than 12,500 advisors. It generated revenues of about $7 billion and earned about $700 million in 2004.

"This spin-off will create two distinct businesses and allow them to capitalize on their respective growth opportunities," Kenneth I. Chenault, chairman and chief executive officer of American Express, said in a statement.

He said the new company would have greater latitude as an independent company to compete for capital or management resources, and react more quickly to business opportunities.

After the spin-off, American Express will consist of a charge and credit card business and a network that processes more than $400 billion in transactions from merchants throughout the world. It will also operate global travel and Travelers Cheque businesses and an international bank serving wealthy consumers and financial institutions.

Those businesses delivered approximately $22 billion of revenues and net income of $2.7 billion in 2004.

The two companies will be independent, have separate public ownership, boards of directors and management.

The spinoff business will continue to be led by James Cracchiolo as chairman and chief executive.

All this refocusing lends credence to thoughts that consolidation, at least in financial services, has been a failed strategy to create scale across multiple business units. Perhaps it's more a matter of getting the right people in charge - and MetLife looks to be the chief beneficiary of that change in approach.

- Arik