Sandy Weill's decision to oust Travelers P-C operations from financial services conglomerate Citigroup was an initially stunning decision. Ronald Gift Mullins considers the factors behind the sell-off.
So eager were The Travelers Group and Citicorp to merge in 1998, they knowingly flaunted the 65-year-old Glass-Stegall law that prohibited the combining of banks, stockbrokerages and insurance companies under one management. The resulting company, Citigroup Inc, with assets of more than $700bn, emerged as the largest financial services corporation in the world. Sanford Weill from The Travelers and John Reed from Citibank became co-chairmen and CEOs.
Mr Weill, with his no-nonsense, aggressive management style of buying, selling, merging and rearranging companies with a keen eye for cutting expenses and expanding profits, set out to change the law, suggesting that the mammoth merger might give the legislation a needed shove toward passage. Without the freedom to engage in all aspects of financial services, including plentiful opportunities for cross-selling of insurance products, the full potential of the combination of the two companies would not be achieved.
Appending the Travelers' logo of an open red umbrella, Citigroup now comprised Citibank, Travelers, Salomon Smith Barney, Commercial Credit (renamed CitiFinancial) and Primerica. Weill saw the merger as a means of creating "a universal bank where banks and insurance companies, and investment companies are all part." He compared it with what had already been happening in Europe and Asia, and now Citigroup would be a US company that "will be able to compete very effectively all over the world."
Mr Weill's timing was perfect. For more than a decade, bills had been introduced (and died) in the US Congress to either soften the strictures on banks and insurers combining, or eliminate the restrictions altogether. Finally, in November 1999, the Gramm-Leach-Bliley Act became law which knocked down most of the barriers between the combination of insurers and banks under one management. Phil Gramm, chairman of the Senate Committee on Banking, Housing and Urban Affairs, said the act will create wholly new financial services organisations in America and "it will literally bring to every city and town in America the financial services supermarket."
Mr Weill's bold gamble had paid off. Now, Citigroup could legally forge ahead with heightened energy to become a global financial supermarket, offering a vast and tempting array of banking, insurance and financial products, and services to its 100 million customers, including consumer banking and credit, corporate and investment banking, insurance, securities brokerage and asset management.
Then, late last year, Mr Weill, now sole CEO of Citigroup, made a stunning announcement: 20% of Travelers Property-Casualty would be sold to the public before the end of 2002, and the balance spun off to Citigroup shareholders. Travelers P-C will become an independent, public company once more and be headquartered in Hartford, Conn. The offering, depending on the demand in the market, will raise $4bn to $6bn, analysts estimate. It will surmount the record $3.03bn raised by Prudential Financial last year following its demutualisation.
Mr Weill said the sale of Travelers will enable "Citigroup to focus its resources more fully on higher growth areas of global financial services." To sweeten the deal, Robert L Lipp, the former CEO of Travelers, was persuaded to come out of retirement and serve as Travelers' Chairman and CEO. Lipp had been instrumental in turning Travelers around in the 1990s and melding Aetna's property/casualty business into Travelers' operations. Further, Mr Weill announced that Travelers P-C will declare a dividend of approximately $1bn, which will be paid to Citigroup over the course of 2002.
Larry Altman, vice-president, Booz Allen Hamilton, New York, rationalising the proposed sell of Travelers P-C said: "I think that insurance rates are increasing which will improve the rate of return on capital, but market multiples of insurers are below what other financial companies are producing. Mr Weill may see selling of Travelers as an opportunity to secure a higher return from other sources."
Mr Altman believes Mr Weill may potentially be in the market for additional companies, maybe banks. "He is very good at timing markets and I would say he is doing it at a good time. Of course, he may get a better price if he waited a while, maybe a year, but who knows if the market will stay up."
Selling the company now rather than waiting a year or so, said J Paul Newsome, vice-president and senior equity analyst at Lehman Brothers, "is a very smart move to sell into a hardening insurance market. This gives potential investors an opportunity to benefit from buying the stock. No one buys stock expecting it to go down."
Travelers Life and Annuity, the smallest part of the Travelers Group, will be retained by Citigroup. According to the third quarter 2001 report from Citigroup, which discussed a variety of cross-marketing initiatives, the sale of Travelers Life and Annuity products through the Citibank branch channel rose 11% from the 2000 quarter.
Just last year, Moody's upgraded Travelers P-C because of several factors, including "significant and growing cross-sales through other Citigroup companies, including Salomon Smith Barney, Citistreet, Citibank and the agents of Primerica Financial Services, Inc. These captive or quasi-captive channels provide Travelers P-C and its subsidiaries with a unique competitive sales advantage and tend to promote better policy persistency than non-captive distribution."
Further, the timing of the sale is perplexing as Travelers P-C has been a profitable company for several years. Its $52m loss in the third quarter 2001 was mostly the result of $490m in net losses from the World Trade attack. In the third quarter 2000, net income was $807m. Also, rates, particularly for commercial lines, are increasing rapidly due to many years of insubstantial pricing, augmented by tighter capacity following the $40bn to $50bn in losses the industry incurred from the WTC attack.
With all the pieces in place to create his `universal bank', why does Mr Weill want to jettison one of the most essential sections? Does the selling of Travelers P-C signify that perhaps the cross-selling opportunities that seemed so evident when the bank and insurer combined in 1998 are now not so transparent? Is one-stop shopping for financial services, given the legal go-ahead with passage of the Gramm-Leach-Bliley Act, now not a viable corporate structure and mode of operation?
Recognition of synergy
Steve Bolland, senior vice-president, Gill & Roeser Inc Intermediaries and Financial Consultants, New York, said: "I think Sandy Weill, being a smart guy, has recognised that the life insurance and pension side has a lot more synergy with the banking industry than property/casualty does. There isn't too much being done by banks with insurance. Most banks have approached insurance as a fee opportunity, rather than buying an insurance company."
In fact, there has been no rush of banks and security firms to buy insurers, or for insurers to buy banks and security firms since the passage of G-L-B. The one big acquisition was by Wells Fargo in March 2001, when the California bank acquired ACO, the parent company of Acordia Inc, a large independent property/casualty insurance agency. This gave Wells Fargo full-service insurance agencies in 34 states, including 20 states in which the bank provides banking services. "We've been cross-selling a long time," said Tim King, president of Wells Fargo Insurance. "Now there will be even more obvious opportunities between Wells Fargo business partners and our agencies."
Mr Bolland noted that Acordia is an insurance broker and thus does not bear risk. To encourage cross-selling, the bank could give its client list to the brokers who try to sell insurance products to them. But it is a risk that something about the pitch may turn them off, he explained, and they could lose the client for the bank as well.
Mr Altman of Booz Allen Hamilton, agreed that as a general rule, "banks have been trying to get out of the risk business and into fee income. Fees generate a constant stream of revenue and this can produce more consistent results. I think a majority of banks see involvement in insurance products as a source of fee income." Cross-selling has had more successes in Citigroup than elsewhere, Altman continued. "I sense that life and pension products are a better fit with other products that Citigroup sells," he said. "Turning branches into financial centres and motivating customers to go through a financial planning process that includes life and annuity products will be a good fit. Homeowners and car insurance sells are limited so far."
Historically, cross-selling has been a real challenge for any type of industry, not just banks and insurance companies. "Sales people polish their sales approach around a product they know well," he said, "and tend to ignore or give short shift to products that are not familiar to them, or that have less appeal."
Mr Altman is not convinced that consumers want to buy all their financial products from one person or firm. "`Can one company be that good at all processes?' the consumer may ask," he said, "and consequently not trust that one firm to give him the best deal all around. In in a way, one-stop shopping eliminates the sense of competition which may make the consumer uneasy." He also mentioned that by encouraging consumers to do all their financial business with one person or branch, the firm actually is increasing its operational risk. If the consumer becomes unhappy with one aspect of the package, he may pull out of all areas entirely.
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Source: Author's own
By Ronald Gift Mullins
Ronald Gift Mullins is a US-based re/insurance journalist.