Out of life

FINANCE & ECONOMICS

Citigroup and MetLife

Feb 3rd 2005 NEW YORK
From The Economist print edition

America's biggest bank completes its exit from insurance

MORE than six years on, the reasons for Citicorp's merger with Travelers, a big insurer, in October 1998 remain sound. Moody's, a rating agency, says the value of diversification alone has played a role in boosting the credit rating of the giant now known as Citigroup. With its enormous distribution network of branches and Smith Barney brokers, as well as a missionary salesforce of more than 100,000 part-timers, Citigroup was well equipped to push insurance policies—products that, as industry lore has it, are sold not bought.

Nevertheless, on January 31st Citigroup said that it was selling its life and annuities division to MetLife, America's second-biggest life insurer, for $11.5 billion. The price is hardly dear. MetLife is paying less than 13 times last year's earnings for a vast book of business and access to Citigroup's huge distribution network. Citigroup clearly wants to be rid of insurance. Having spun off Travelers' property and casualty arm in 2002, it has largely dumped a business that not long ago it sought to expand.

Citigroup says that insurance has worse growth prospects and a lower return on capital than its other businesses. Fine—but that argument implies that it should concentrate on credit cards, Smith Barney and consumer finance, and quit everything else, including retail banking. The question is why Citigroup should frown on insurance in particular. It might point to MetLife's own return on equity of only 11%, compared with Citigroup's 19%. But MetLife's low number is partly an illusion. Its earnings have grown by 22% a year since it announced its demutualisation in 1999, faster than Citigroup's more than decent 14%, according to Value Line, a stock-analysis firm. Its book value has grown dramatically, holding down its return on equity. The financing of this week's purchase should by itself improve the figure.

Both Citigroup and MetLife pointed to the consolidation of America's insurance industry as a justification for the deal. Mergers are indeed taking place: last spring, Manulife Financial bought John Hancock for $10 billion, and MetLife has made a number of tiny deals. However, scale is no guarantee of success. A study of 79 insurance companies by SNL Financial, a research firm, concludes that there is no correlation between size and returns.

After the deal, several commentators remarked that it amounted to an admission by Citigroup that banks may be ill-suited to selling insurance. Whether they are or not is hard to say. The evidence from America is shaky because until Citicorp and Travelers came together, joint ownership had not been generally permitted for 60 years. An exception existed for Wells Fargo, a San Francisco bank, which is apparently succeeding. Citigroup itself has a Mexican operation, Banamex, that has done so well selling banking and insurance that it was excluded from the MetLife deal. In Europe, where the combination is more common than in America, there have been both successes and failures.

Indeed, Citigroup has not done at all badly out of insurance, despite its own glum assessment. In the fourth quarter, insurance provided a better return than the group's huge capital-markets businesses, which are certainly not for sale. Citigroup did have trouble selling property and casualty insurance: an effort to push auto policies on to credit-card holders failed. But it quit that business in 2002. Life insurance should have been an easier fit, being more closely related to the investment products sold by the company's brokers.

So why should Citigroup sell? Possibly, it is trying to steer clear of potential conflicts of interest, or the appearance of them. In the past three years the firm has undergone one investigation after another stemming from its mishandling of conflicts between its own interests and those of its clients—most obviously, in its investment bank. In insurance, there is a possible problem when a financial adviser, who has a fiduciary duty to a client, is tempted to push an in-house product that would generate not only a sales fee but also a running management charge.

Annuities—in essence, life policies strapped on to mutual funds—are one common example of how this might arise. Typically, the clarity of the products is poor; the fees are high. Regulators are looking into annuity sales, so any prudent firm might be worried. Similar conflicts exist when brokerage firms push proprietary mutual funds. Citigroup's asset-management operations happen to produce lower returns than insurance. It would not be a shock if they were sold too.
Charles Prince, Citigroup's chief executive, has denied that the deal was motivated by regulatory concerns and said that the asset-management unit was not for sale. It would have been hard for him to say anything else. The market, though, thinks that Citigroup has made a good deal, despite the low price it has received and its fair performance in the life business. Citigroup's shares, embattled of late, popped up; MetLife's, as those of purchasers are wont to do, went down.

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