Allmerica Financial Corp.'s agreement to sell its runoff variable life insurance and annuity business shuts the door on a muffed strategy and, CEO Frederick Eppinger said Tuesday, lays groundwork for the company to participate eventually in the property/casualty industry consolidation.
Mr. Eppinger said in a conference call after the deal with Goldman Sachs Group Inc. was announced that the Worcester, Mass., insurer is focused on being a superregional company focused on the property/casualty business throughout its 15-state market footprint. He was hired in August 2003 after an aggressive strategy for variable product design left the company with expensive liabilities for guaranteed death benefits.
"Since we started, we have been working to build the skill set in the management team to build some distinctive products in order to participate in the consolidation in the industry," Mr. Eppinger said. "Clearly, we are focused on that, but we are not at the point yet where we are able to capitalize on that - hence the share buybacks. But we are building the company to participate in that [consolidation]. I see that coming."
Up to $200 million of the Goldman deal's $275 million up-front payment, plus an estimated $70 million over three years, is to be used to fund a share repurchase program starting after the deal closes on or after Nov. 30, the company said. Analysts said the sale should help Allmerica because it could now concentrate on being a pure-play property/casualty company.
"This deal takes an albatross away from Allmerica," said Jeffrey Thompson, an analyst at Keefe, Bruyette & Woods Inc. who covers Allmerica. "The runoff from the life business added to earnings volatility every quarter because of the sensitivity these products had to the S&P. This deal freed up some excess capital so Allmerica can focus on growing its core businesses."
Analysts who cover Goldman said the investment bank could use the deal to move further into the insurance business, allocate the $11 billion of assets and 200,000 customers within its existing reinsurance business, or repackage the business and sell it.
"This seems to be another opportunity for Goldman in terms of pursuing another avenue for their fixed and currency commodity business," said Leslie Bright, an analyst at Fitch Ratings who covers Goldman. "This is an acquisition of a block of assets at a very attractive price."
Allmerica was a multiline insurance company that began offering life insurance and variable annuities in the early 1990s.
It created an aggressive line of insurance products and annuities that, during the bear market in equities early this decade, saddled the company with liability for guaranteed minimum death benefits that the investments underlying the products could not support, analysts said.
These annuity benefits promised a certain level of payout at death - often the highest value the underlying investments had reached, no matter what happened subsequently in the stock market. The record highs reached in 2000 followed by persistent declines left Allmerica on the hook.
The bear market prompted Allmerica to stop selling the products in 2002, and the company decided in October that year to sell the business. In November 2002, John F. O'Brien, Allmerica's president and chief executive officer, resigned, and in January 2003 the company sold its fixed universal life insurance business to John Hancock Financial Services Inc.
Analysts said the company began to turn the corner two years ago when it hired Mr. Eppinger to be the president and chief executive officer.
Mr. Thompson said Mr. Eppinger, who was the executive vice president of property and casualty field service operations at Hartford Financial Services Group Inc., has acted swiftly to right Allmerica's course. Roughly 20% to 30% of senior management has turned over since Mr. Eppinger was hired, Mr. Thompson said, and Allmerica has become a company "all about execution."
The deal is Goldman's first for an insurance company.
Michael Duvally, a spokesman at Goldman, said the company has sold insurance through its reinsurance subsidiary, Goldman Sachs Reinsurance, and that the purchased lines of business would be assimilated into the reinsurance group. "We do see this as a platform for additional opportunities," he said.
Analysts said even if Goldman decides not to enter the insurance business the deal would benefit the company because it was so attractively priced.
"Goldman has a variety of options in front of them in terms of managing or dealing these assets," said Fitch's Ms. Bright. "This is not a new effort into insurance or reinsurance. This was just an opportunity to purchase assets at a discounted rate."
Mark Rouck, an analyst at Fitch who covers Allmerica, said the sale would give modest benefits to the Massachusetts insurer. The deal is not a precursor for the industry, he said, because most insurers that sustained losses on guaranteed minimum death benefits were larger companies.
"Allmerica was a unique situation," he said. "They had an aggressive product design that caused them difficulties when equities tanked. Most companies that had these products could ride the markets out, but Allmerica couldn't. Now they are refocused."
