Safeco Corp. is joining the wave of life insurance mergers and acquisitions with its decision to put its life and investment business up for sale.
Michael McGavick, the Seattle insurer's chief executive officer, said in a conference call Tuesday that it has become "apparent that we could not be truly excellent in both the p and c and the life and investment business."
Safeco said Tuesday that it has hired Goldman Sachs to help it find a buyer for the life and investment operation, which includes life insurance, annuities, mutual funds, employee benefits, group stop-loss medical insurance, and other financial products sold through independent agents, banks, and financial advisers.
The insurer said it will focus solely on its property/casualty business and intends to cut $75 million of expenses and 500 jobs from that business by the end of 2004.
Mr. McGavick said the life and investment business has performed well but that it has become clear, as interest rates flattened and made it harder to earn money on many life and investment products, that "lacking scale over time was going to be a crucial disadvantage." The unit will have the best chance for success if it is "owned by someone focused on that business with superior scale," he added.
In 2002, life and investments generated pretax operating earnings for Safeco of about $237 million, on revenues of nearly $2 billion. Total assets were $23.2 billion, and mutual fund assets under management were $4 billion at June 30.
Christine Mead, Safeco's chief financial officer, said in the conference call that the business' book value, measured by generally accepted accounting principles, was $2.8 billion at June 30, or $1.7 billion excluding unrealized gains.
Safeco's life and investments unit is the 11th-largest provider of fixed annuities through banks, though it has seen a sales decline in the channel in recent quarters. In the second quarter, its fixed annuity sales were $217 million, down 25% from the year before and 7% from the first quarter of 2003, according to Kenneth Kehrer Associates, a Princeton, N.J., consulting firm that tracks insurance and investment sales through banks.
The company blamed falling interest rates for the decline.
It sold more than $1 billion of fixed annuities through banks last year.
Safeco has almost no variable annuity presence in the bank channel but had begun to push mutual funds and term-life insurance there. Sales of both these products were small, the company has said.
But a sale of the business could change the bank distribution landscape if another top fixed annuity player chose to be the buyer.
Andy Davidson, a director of life insurance ratings in Fitch Inc.'s Chicago office, said Safeco should have no difficulty finding a buyer.
"Theoretically, they could sell this in pieces," Mr. Davidson said. "They have a group medical business and a structured settlement business that could go in different deals."
He added, however, that it could also very easily go in one deal and that the wealth management industry has plenty of possible suitors.
"For the right price, Lincoln would look at them, and AIG, at the right price, would buy anyone," he said. "Of course, at the right price, almost any of these companies would buy anyone."
Also on the list of possible buyers are MetLife Inc. and Prudential Financial. Prudential had been rumored to be close to a deal for John Hancock Financial Services Inc., but Hancock agreed Sunday to sell itself to Manulife of Canada.
On Tuesday, Fitch put its AA-minus insurer financial strength rating for Safeco Life Insurance Co. on rating watch evolving.
J. Paul Newsome, an analyst at A.G. Edwards, said any buyer would probably find cost-cutting opportunities at Safeco. "Given the breadth of Safeco's products," he said, "I think it is a very long list" of potential buyers, including top insurers such as Prudential, MetLife, Jefferson Pilot, and Lincoln National.
"All of these companies are bigger than Safeco and have a desire to continue in the scale game," Mr. Newman said. Most of these insurers, he said, are big enough to do a deal for as much as $2 billion to $3 billion. (A.G. Edwards' disclosures say the company makes a market in Safeco securities.)
Mr. McGavick said recent deal activity in the life insurance marketplace and the "nice revival of interest in life properties" only prove that Safeco is making a good decision. He highlighted the planned sale of Hancock.
That deal "makes it even more clear that we have sent ourselves on the right strategic course," Mr. McGavick said, because even Hancock with its more than $10 billion of book value did not feel it could succeed independently in the life and investment business.
Mr. McGavick declined to give details about his expectations for the sale or to say whether any circumstance could prompt Safeco to pull back from its decision. He did say, however, "We would not have gone down this road if we did not have strong reasons to believe this would be an accretive deal to our shareholders."
He said the proceeds will be used to pay down debt and any remainder would be returned to shareholders in the form of a dividend or share repurchase.
