MetLife Near Deal for Citigroup Unit

Purchase Could be Valued
At Around $12 Billion;
Talks Could Still Unravel

By DENNIS K. BERMAN and THEO FRANCIS
Staff Reporters of THE
WALL STREET JOURNAL
January 31, 2005

MetLife Inc. is close to striking a deal for Citigroup Inc.'s Travelers Life & Annuity Co., say people close to the matter, in a deal that could be valued at around $12 billion.

An announcement is expected within a matter of days, these people add, though the negotiations could still come apart. A torrent of large transactions have flooded the stock market in the past week, as corporations have again regained comfort signing the kind of big-scale merger deals that had disappeared from the business landscape over the past three years.

Consolidation within the life-insurance industry has been widely predicted; less certain is how quickly, and how soon, that consolidation would play out. The rationale for such moves: Insurance companies can drive better profit margins by serving larger numbers of customers over essentially the same back-office systems and incrementally larger sales forces.

In anticipating this consolidation, Citigroup reasoned that it would be more prudent to sell its unit at an attractive price rather than take on the responsibility of consolidating itself, say people familiar with the matter.

As many as three other parties were interested in the unit, which is based in Hartford, Conn., according to a person familiar with the matter. A spokeswoman for Citigroup didn't return requests for comment last evening, nor did spokespeople for MetLife. MetLife's ambition for Travelers Life & Annuity, however, also signals another shift away from the concept of one-stop financial supermarkets -- a concept pioneered by Citigroup in the 1990s.

Citicorp.'s merger with Travelers, consummated in October 1998, was widely seen as the future of the insurance business. Among many in the industry, it became conventional wisdom that insurance would increasingly merge with banking or other financial companies.

But the trend never seemed to take off and in August 2002, Citigroup began to unwind the deal by spinning off its property-casualty insurance operations, Travelers Property Casualty. Last year, that company merged with St. Paul Cos., St. Paul, Minn., to become St. Paul Travelers Cos., one of the largest commercial insurers in the country. Citigroup Chief Executive Charles O. Prince has repeatedly told analysts in recent months that the world's largest financial-services firm intends to examine the sale of certain noncore businesses. In November, Citi sold off a truck-leasing unit to General Electric Co. for $4.4 billion. Five months earlier, Citi agreed to sell its European vendor-finance leasing operations to CIT Group Inc. Overall, Citigroup's life and annuities operations contributed $751 million in net income in 2003 on premiums of $3.7 billion. The unit sells life-insurance and annuity contracts to small businesses and individuals, as well as corporate-owned life insurance and group annuities used in retirement plans.

Meanwhile, life insurers are generally smaller and less efficient than their noninsurance competitors, including banks and mutual-fund managers, said Michael Barry, managing director for insurance at Fitch Ratings. Many have a deeply entrenched distribution system dependent on far-flung networks of agents, which is typically costlier than the direct-to-consumer models that other financial-services companies use.

"Even though there have been some improvements, they're still inefficient from an expense perspective," said Mr. Barry, who wasn't discussing any specific deal or companies.

By growing larger, companies hope to squeeze out more economies of scale and improve their margins. With a $30 billion market capitalization, MetLife has its hand in a range of products, from its core business selling individual and group life-insurance products and annuities to substantial asset-management and auto insurance. New York-based MetLife -- also known for its advertisements starring Snoopy and other Peanuts cartoon characters -- reported net income of $2.2 billion on revenue of $35 billion in 2003, the last full year available.

For much of its 135 years, MetLife was a mutual insurer, owned by its policyholders; in April 2000, the company transformed itself into a publicly held stock company. As of 4 p.m. Friday in New York Stock Exchange composite trading, MetLife shares were down 71 cents at $39.94, near their 52-week high; Citigroup shares were down 18 cents at $48.38, in the middle of their 52-week trading range.

Two deals announced in fall 2003 prompted some to predict a rapid uptick in life-insurance mergers. Manulife Financial Corp. completed its deal to buy John Hancock Financial Services for $12.88 billion in April last year. In May, after a fierce proxy battle, MONY Group Inc. shareholders approved the company's sale to AXA SA of France. Also last spring, Safeco Corp. announced the sale of its life and investments unit to investors led by White Mountains Group Ltd. for $1.35 billion.

Still, several analysts had recently expressed skepticism that life-insurance consolidation will pick up any time soon. In a Jan. 23 report to investors, Morgan Stanley insurance analyst Nigel Dally said there are too few likely sellers to maintain much of a short-term trend, "even though longer run, consolidation appears inevitable."