BusinessWeek: January 10, 2000

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 Industry Outlook 2000 -- Finance

Insurance

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Insurance

CHART: Insurance: Prognosis 2000

TABLE: Positives and Negatives


Heard of any deals lately that combine a bank, an insurance company, and a brokerage under one roof? The silence since the 1998 Citicorp-Travelers merger has been deafening. It took an act of Congress to keep the megamerger that created Citigroup intact. But now that Congress has repealed Depression-era laws that held banks, brokerages, and insurance companies apart, these companies have more freedom to tie all sorts of complicated knots.

Will they? Industry experts are divided. Some, such as analyst Andrew Kligerman of Schroder & Co., say banks will snap up life-insurance companies. "Financial-services reform will trigger two, maybe three meaningful deals in 2000" of at least $1 billion in value, he says. A few life insurers will merge, too, creating brawnier global competitors.

There are good reasons for this. Total insurance-industry revenue growth has been stuck in mid-single-digits since 1995, according to data from Standard & Poor's DRI; similarly, sales for 2000 should come in at a paltry 5% above 1999's figure of $365.7 billion. Mergers offer a chance for cross-pollination among financial-services companies.

But not everyone buys this reasoning. In the words of an executive at one of the nation's top-10 banks, why would a banking company generating returns on equity of 22% and above want to buy a life insurance company with a mediocre 15% ROE?

SLOW GROWTH. There's a much broader consensus about the logic for mergers in the industry's property and casualty segment. While the life industry at least has annuities to push revenue growth, this sector hardly has anything going for it. S&P analysts see zero growth for 2000. And talk about limp ROEs--the business of insuring cars and homes and companies is generating average returns of 7%. Premiums will grow less than 1%. And insurers in this highly fragmented industry can't raise prices because of competition. Incredibly, this has been the same story for maybe a dozen years. Companies haven't had the clout to raise prices since 1986.

Just when it couldn't get much worse, it does. In December, industry figures showed that P&C companies' income was down 24%, or $5.6 billion, for nine months of 1999 because of increased underwriting losses and declining investment income. Consultants such as Robert W. Stein, national director of Ernst & Young's financial-services practice, warn that these companies don't have an adequate cushion to handle additional losses. And losses may escalate--particularly at companies that scrambled to pick up new business by taking on more risk. Moody's Investors Service and Standard & Poor's both take a poor view of the industry. Says Stein: "Some radical restructuring is probably necessary."

On the life insurance side, much of the action is going to focus on three companies that are switching from mutual ownership to stock ownership: John Hancock Mutual Life, Metropolitan Life, and Prudential. "I think that will depress stock prices," says Stein. "You're going to have $50 billion of new stock entering a market that's already depressed."

If there is a bright light in all this gloom, it's the hope that the Internet may force these companies--many of them still in a technological Paleolithic Age--to get current. Dominick Cavuoto, a partner at KPMG specializing in financial services, says he's been talking with a number of life insurance companies that are planning to invest "fifties and hundreds of millions of dollars" this year in new technology. Projects will include infrastructure for selling insurance online. To date, most of the Internet companies that boast about their online insurance offerings don't actually sell without first hooking up consumers to an agent on the telephone. In other words, there isn't an E*Trade of the insurance business--yet. Maybe this will be the year.

By Pamela L. Moore in Greenwich, Conn.

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TABLE

Positives and Negatives

POSITIVES

-- Investments in Net technology will cut costs, speed sales, and allow entry into online banking and other new businesses.

-- Financial-services reform will trigger mergers among insurers and banks, creating bigger global competitors.

NEGATIVES

-- Intense competition in the fragmented property-casualty business will inhibit rate increases and a return to profitability.

-- Underwriting losses are likely to accelerate, especially at `prop-cas' firms that took on risk to capture new business.

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