The deal also provides access to Citigroup distribution channels for 10 years

By Steven Tuckey

MetLifes $11.5 billion acquisition of Travelers Life & Annuity announced last week will push the company to the No. 1 ranking in individual life insurance sales in this country as well provide valuable new distribution outlets.

But most rating agencies and analysts are giving the deal only two cheers while they sort through just how it will all be financed.

MetLife and Citigroup, parent of Travelers L&A, also have entered into a 10-year distribution agreement in which MetLife will have access to such Citigroup distribution channels as Smith Barney, Citibank branches and Primerica in the U.S., along with a number of international businesses.

The boards of both companies have approved the transaction set for completion this summer.

In addition to the top life insurance sales spot, the deal also will make MetLife the largest retirement plan provider based on sales and largest provider of group annuity plans, according to Sanford Bernstein. It also would be close to the top of the industry in individual annuity sales.

For MetLife Chairman and CEO Robert Benmosche, the transaction represents the big move Wall Street has been waiting for ever since the companys demutualization in 2000 set the stage for it.

“The distribution agreements will provide us with the broadest distribution network in the industry,” Benmosche said.

For Citigroup, the deal represents one of the first major moves in the post-Sanford Weill era as CEO Charles Prince attempts to get out of the slow growth business of underwriting insurance and deploy capital in ventures where high teens growth prospects are the norm.

MetLife estimates the transaction will increase its earnings per share by about 4% to 6% next year.

Under the terms of the deal, Citigroup will receive $1 billion to $3 billion in MetLife equity securities and the balance in cash. The company may finance the cash portion through a combination of cash on hand, debt, mandatory convertible securities and selected assets sales. The ultimate plan will depend on market conditions and the relative attractiveness of funding alternatives.

Sanford Bernstein analyst Suneet Kamath estimates the price paid by MetLife represents a 25%-30% premium based on normalized Travelers L&A financials. He asserted the advantage gained by MetLifes new entry into numerous distribution channels as well as foreign markets will be counter-balanced by the limitations it is putting on its financial flexibility.

“Said another way, MetLife is putting a lot of its eggs in one basket,” he said in a research note to investors.

Both Standard & Poors and Moodys placed MetLife on CreditWatch with negative implications as a result of the deal.

S&P analyst Kevin Ahern said “the uncertain effect various amounts of debt financing could have on MetLifes ongoing cash and fixed charge coverage” was a cause of concern along with the execution risk any deal of this magnitude brings.

Moodys said the projected increase of MetLifes financial leverage to 29% along with increased exposure to Triple-X reserves associated with Travelers universal life business will be watched carefully.

But Fitch ratings analyst Martha Butler said that after taking into account the “worst case scenario” her agency felt any of the outlined financial maneuvers proposed by MetLife to complete the deal would not put undue stress on the company.

She also particularly likes the relatively low expense savings projection of $150 million. “This was not dependent on a lot of expense synergies but rather distribution all the way,” she said.

The deal will give MetLife a new presence, particularly in Japan and Australia, in keeping with Benmosches long-stated aims of expanding overseas. But that also represents some of the greatest integration risk, as it will be with joint venture partners who must approve their new partners.

UBS analyst Andrew Kligerman called the expansion of MetLife into 16 countries, with those operations comprising 5% of the combined companys earnings, the deals “wild card that enhances growth potential but also integration complexity.”

In contrast, Kamath noted that the Citigroup operations MetLife will inherit in Japan will be those of the No. 2 seller of variable annuities in that country, where MetLife had no significant presence. “In our opinion the annuity market in Japan has higher growth prospects than those of the U.S.,” he wrote.

But in the end, the success of the deal will likely hinge on the 10-year distribution deal. For the first 5 years MetLife will be the sole product provider for Citigroup in distribution channels where Travelers L&A currently has exclusivity, such as Primerica. Kamath said such relationships accounted for 10% of Travelers L&A life insurance distribution and 20% of annuity sales.

“Separately, MetLife and Travelers L&A appear to have limited overlap in terms of distribution,” Kamath wrote. “So, in addition to paying for access to Citigroups proprietary channels, MetLife is also paying for access to a host of new distribution relationships through which it can sell products that Travelers L&A currently does not offer.”

Regarding annuities, Kamath said the fact that Travelers L&As mix favors faster growth variable products should favorably impact MetLifes growth prospects. “As the owners of the assets retire, MetLife and other insurers will attempt to sell them payout annuities that convert existing savings into monthly income streams,” he said. “Given that MetLife now will have Travelers L&As annuity assets in-house, we feel it stands a better chance to retain those assets in the payout phase.”

MetLife will acquire businesses that generated revenues of $5.2 billion and net income of $901 million in 2004. Those businesses had total assets of $96 billion last year. In the first 9 months of 2004, MetLife had total revenues of $29 billion, operating income of $2 billion and net income of $2.2 billion. MetLifes assets under management as of Sept. 30, 2004, were $375.5 billion.


Reproduced from National Underwriter Edition, April 29, 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.