Mergers & Acquisitions: Hancock/Manulife Merger: Let The Dealing Begin

After a prolonged lull in activity, consolidation in the insurance industry--marked by a new wave of proposed mergers and divestitures--appears to be gathering newfound momentum, with two major developments illustrating the potential changes that loom ahead.In late September, the board of directors of Boston-based John Hancock Financial Services Inc. and Manulife Financial Co., based in Toronto, unanimously approved a tax-free, stock-for-stock merger of the two financial services giants.

The proposed merger is expected to create the largest life insurance company in Canada and the second-largest in North America-valued at $25.6 billion. Once the companies obtain the necessary regulatory approvals, officials on both sides expect the merger to close the second quarter of 2004.

On the other side of the country, Seattle-based Safeco Corp. announced in late September that it's putting its life and investments business on the block.

Despite the fact that life insurance operations have a far better track record stimulating profit margins and overall growth, Safeco opted to peddle the life unit to concentrate on its property/casualty business.

Safeco's new property/casualty business model has been delivering superior results across its three largest lines-auto, homeowners and small commercial, says Mike McGavick, Safeco chairman and CEO. "The more energy we invest in this model, the greater the returns."

McGavick adds that Safeco is taking these actions now to be more competitive at a time when insurance companies' investment income is depressed due to historically low interest rates, and to position the company for when the positive pricing environment in the P&C sector peaks.

Solid synergies

The Hancock/Manulife merger is undoubtedly significant from a scope and scale standpoint. And a closer look reveals that the deal appears to make sense from a corporate synergy perspective as well.

Hancock suffered high layoffs in the late 1990s-a time when there was a great deal of uncertainty surrounding the company. Hancock also has gained a reputation as a highly visible corporation with an affinity for branding opportunities, co-sponsoring high-profile events from the Olympic Games to the Boston Marathon.

But the company also gradually lost its identity, says Susan Cournoyer, senior analyst for Stamford, Conn.-based Gartner Inc. Hancock has been "a financial services company masquerading as an insurance company," she says. "Hancock has to get back to the basics of insurance, and Manulife will play a significant role in that effort."

Manulife, on the other hand, has kept its focus sharp. "Manulife has not been seduced by the investment riches of the late 1990s and did a good job focusing on their core business," she says. "Compared with Hancock, Manulife has been far less flashy with marketing, and more focused on insurance systems and applications integration."

Overall, analysts such as Cournoyer predict a seamless progression following the merger, mainly from a sales and distribution perspective. However, over the next couple years, "the merged company will have to determine whether it can afford to maintain multiple sub-brands that might overlap," Cournoyer says.

IT implications

Also curious: When the deal was announced, neither party provided details about IT department consolidation, which can be a contentious part of any merger and acquisition, Cournoyer explains. She says it will be interesting to watch how these details unfold.

Hancock and Manulife also have engaged in IT outsourcing initiatives, with both firms striking a partnership with IBM Global Services for its on demand computing solution.

On demand will draw closer scrutiny following the merger, Cournoyer predicts. "This merger could be a showcase for IBM's on demand solution, or it could also be a showdown for it," Cournoyer says. "It will be interesting to see if on demand can deliver results for the merged entity, particularly the anticipated 10% reduction in operational costs that have been discussed."

While the insurance community watches the Manulife-Hancock merger closely, many will also begin to speculate about potential suitors for Safeco's life and investment unit.

Retaining Goldman Sachs to assist in the sale proceedings, Safeco is divesting its life and investments unit to better position itself to reduce expenses-to the tune of $75 million by the end of 2004.

"We did the hard work in successfully turning our company around and making Safeco competitive again," says McGavick. "That was only the first step. We might have been able to cruise along at this level, producing average results quarter after quarter. But we aspire to be much better than average.

"We aim to be an extraordinary company-among the leaders in our industry in terms of profit, return to shareholders, premium growth, and agent and customer satisfaction."

In 2002, L&I generated pretax operating earnings of $237 million on revenues of nearly $2.0 billion. L&I total assets were $23.2 billion, and its Mutual Funds assets under management were $4 billion at the end of the second quarter of 2003. Most of the proceeds of the sale will be returned to shareholders in the form of a special dividend, a stock repurchase plan, or a combination of the two, McGavick states.

Safeco's decision to sell its L&I unit is viewed as a trend by many insurers to "focus on specialization," according to Cournoyer. "At first glance, investing in P/C and divesting a life company, which is viewed as the better long-term investment, would not appear to be a promising move. But as underwriting improves and costs are reduced, a company like Safeco might come to the conclusion that they are able to drive good business results on the P&C side."

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