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Safeco And Fortis To Shed 'Non-Core' Businesses

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Safeco And Fortis To Shed Non-Core Businesses


Recent announcements from Safeco Corp. that it is selling its life and investment business unit and from Fortis, Inc. that it will spin off its non-core U.S. insurance operations suggest that companies are refocusing their energies on core strengths, analysts say.

John Nigh, a principal with Tillinghast-Towers Perrin, New York, speaking on the issue of focusing on core operations, says if a company is not achieving scale or sufficient return, that is a good reason for refocusing.

However, caution is needed because “inherent volatility” may be created since different businesses within a company can immunize other lines of business in a downturn, Nigh continues.

Given the growing need for scale and market presence, companies are saying, “lets pick our spots,” says Bob Donohue, a vice president and senior credit analyst with Moodys Investors Service, New York.

The plans of both companies follow announcements that AXA Group, Paris, intends to purchase MONY Group, New York, (see NU, Sept. 22) and that Manulife Financial Corp., Toronto, will buy John Hancock Financial Services, Boston (see story on page 48).

In the case of Safeco, the Seattle-based company said its plans to sell its life and investments business unit is part of a new corporate structure that will focus on selling property-casualty insurance products through a network of independent distributors supported by a common sales, service and technology platform.

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, according to the company.

Proceeds will also be used to reduce Safecos debt to a level appropriate for the companys new size, and a small amount will be used to support ongoing business needs, the company added.

The life business generated $237 million in operating earnings on $2 billion in revenue in 2002.

The company says it wants to be more competitive at a time when insurance companies investment income is depressed due to historically low interest rates. It also wants to position the company for when the positive pricing environment in the property-casualty sector peaks.

As part of these changes, Safeco is targeting expense reductions of $75 million by the end of 2004. A fourth-quarter restructuring charge is anticipated.

A report prepared by UBS, New York, stated that the sale was a positive because the business was not core, was not generating impressive ROEs and had likely reached peak earnings.

The report notes that “in a scenario where Safecos life business fetches its GAAP book value excluding unrealized gains, the company would receive about $1.75 billion.” And, it continues, “if debt plus convertibles to total capital were to stay around 30%, we estimate the company will need to extinguish $550 million in debt before releasing $1.2 billion to shareholders in the form of a share buyback and/or a special cash dividend.”

Fortis says it is also focusing on core operations, and will spin off its “non-core” U.S. insurance operations with an initial public offering intended for 2004.

The divestment anticipated by Fortis will be gradual, allowing the company to benefit from appropriate market conditions, the company says.

Fortis says it will focus on its European operations but will continue in the U.S. in selected banking businesses that operate on a global platform such as global markets, asset management, information banking and certain corporate banking businesses.

The U.S. insurance operations will be renamed Assurant, Inc., and will include health, pre-need and benefits such as disability, dental and life insurance.

Moodys Donohue says that from the parents perspective, the U.S. operations of Fortis share no particular synergies.

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.