When Citicorp and Travelers Group merged in October 1998, banking and insurance experts universally hailed the deal as the beginning of a new era in financial services in the United States: the one-stop financial superstore.Indeed, given the emergence of technologies that enable companies to slice and dice customer data to pinpoint cross-sell and up-sell opportunities, the Citicorp/Travelers combo was viewed at the time as a powerhouse that would set the stage for similar deals.

But that never happened, even after the passage of the Gramm-Leach-Bliley Act, which dismantled the regulatory walls prohibiting banks from owning insurance companies. With the news Jan. 31 that Citigroup was selling Travelers Life & Annuity to MetLife for $11.5 billion, it now appears that the grand vision that John Reed and Sanford Weill promoted in forming Citigroup was more of an illusion than a market reality.

Why did the union of a banking giant and an insurance goliath dissolve? Most industry observers say that Citigroup executives recognized that the financial returns from Travelers Life could not match the returns from other aspects of the company's core financial services. In 2002, Citigroup spun off Travelers Property Casualty (which merged with St. Paul Cos. last year) for that reason.

Different than banking

"I don't think a banking and brokerage operation can stomach the financials of an insurance company because of the risk, the liability and the slow growth," says Cynthia Saccocia, senior analyst in the insurance practice at TowerGroup Inc., Needham, Mass. "Plus, the financial returns on an insurance operation are very different than banking and asset management returns."

That's not to say that the Travelers Life & Annuity business isn't profitable; MetLife is acquiring a business that reported total revenues of $5.2 billion and net income of $901 million in 2004, and total assets of $96 billion.

"While there is a lot of potential in bancassurance as a marketing model, there is little reason for a bank to actually own an insurer," says Matthew Josefowicz, director of the insurance practice for Celent Communications Inc., Boston.

"The Citicorp/Travelers merger was expected to start a wave of bank-insurance mergers, but once banks started looking at the comparatively low average return on equity of insurers, they decided they were better off without the drag on their balance sheets."

Although industry observers say they're not surprised by Citigroup's decision, few experts would have predicted in 1998 that the mega Citicorp/Travelers merger, which was valued at $140 billion, would unravel in less than seven years.

Experts speculate that Citigroup executives may have underestimated how difficult it would be to sell insurance to Citibank customers.

"Citigroup was in the business of manufacturing insurance products that were sold through Citi branches, Smith Barney and Primerica, but these distribution channels had other relationships," Saccocia explains. "Travelers wasn't the only product there and it may not have been the most attractive product for those distributors to sell."

Difficult to sell

The fact that life insurance is a complicated product for customers to understand makes it a difficult sell for bank representatives, says Todd Eyler, a vice president with META Group, Stamford, Conn. "Citigroup never achieved the benefits that it had expected when it acquired Travelers, and it didn't experience the cross-selling advantage that had been expected."

However, Saccocia notes that banks haven't given up on the notion of selling life insurance to its customers. Zurich Life was purchased in 2003 by Bank One Corp. and is now an operating unit of JP Morgan Chase. "And, MetLife has a substantial banking business of its own and has been cross-selling with its existing customers and employees."

Although MetLife is paying a hefty price to acquire Travelers Life & Annuity, industry observers say the deal will make MetLife a global force to reckon with.

In addition to a 10-year agreement that will enable MetLife to sell products through Citigroup distribution channels that include bank branches, Smith Barney and Primerica, MetLife is acquiring Travelers' wholly owned insurance companies in Argentina, Australia, Belgium, Brazil, Poland and the United Kingdom, joint ventures in Japan and Hong Kong, and offices in China.

"The international piece of this deal is a very big gain for MetLife," Saccocia says. "It gives them a substantial block of product and international distribution and it complements Met's existing footprint."

With the deal, MetLife will become the nation's largest writer of individual life policies and third-largest provider of individual annuities. Globally, however, Sacoccia says MetLife doesn't rank among the top 10 writers of life policies in terms of written premium.

"Clearly the deal will help MetLife in the international arena where there is a better opportunity from a margins perspective," Eyler says. "Travelers Life has a very strong presence in Latin America, and the bank channel distribution opportunities are very attractive."

Market clout

Instant growth and market clout might be the biggest benefits to MetLife in an industry where better profit margins are gained by increasing sales volume and customers while using the same back-end systems, experts note.

"You can spread the minimal fixed costs over a larger volume of policies to achieve better margins," Eyler explains. "You need massive scale to drive up margins, and that's what this deal gives MetLife."

"Buying the Travelers name and book of business at this price could be a great way to expand in a relatively flat market where opportunities for organic growth are more limited," says Celent's Josefowicz. "Now that MetLife is a public company, it is under pressure from investors to demonstrate growth."

Oftentimes the success of mergers hinges on successfully integrating information systems and data, but industry experts don't expect that will be a major issue for MetLife.

"MetLife has been very focused on its technical architecture for a long time and it has given them a competitive advantage," Eyler says.

"It will be a complex systems integration project, but MetLife's architecture will serve the company well. Also, the company has experience in this area with its past mergers with New England Financial and Paragon Life Insurance Co.," he says.

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