Despite the importance of the investment management business in the recent spate of high-profile bank megamergers, insurance companies also are looking at money management as an important piece their business.
Just like banks and brokerages, insurers are trying to become diversified financial service providers driven by fee-based businesses rather than transaction-based retailers of insurance products. While previously better known as providers of annuities and stable value products, insurers are emerging as multiproduct financial services firms.
"The definition between financial services companies and insurance companies is starting to blur," said H. Thomas McMeekin, executive vice president and chief investment officer of Lincoln National Corp., the Fort Wayne, Ind., insurance company parent of Lincoln Investment Cos.
Insurers are diversifying the management behind their own assets as well as the products they offer through acquisitions and subadvisory relationships. According to an annual review of the investment management industry from Berkshire Capital Corp., New York, insurance companies were buyers in five out of the 54 transactions announced last year; only banks and institutional managers were more active buyers of money management firms. And six of the 35 transactions announced during the first half of 1995 were acquisitions by insurance companies, according to a midyear analysis by Investment Counseling Inc., West Conshohocken, Pa. Some of the largest were insurance company acquisitions, such as the $2 billion purchase of Kemper Corp. by Zurich Insurance Group.
Additionally, insurers buy in large quantities. Over the last year, insurance companies have been buyers in several high-profile acquisitions:
Lincoln National Corp. acquired Delaware Management Holdings, the Philadelphia holding company parent of Delaware Investment Advisers and Delaware Management Co., in April for $301 million in cash and the assumption of $209 million in debt.
Phoenix Home Life Mutual Insurance Co., Hartford, and Duff & Phelps Corp., Chicago, agreed to a reverse merger of Phoenix Securities Corp., the insurer's money management subsidiary, with Duff & Phelps Corp. The merged company, renamed Phoenix Duff & Phelps Corp., will have $35 billion in assets and will be 60% owned by Phoenix Home Life. The $266 million transaction is expected to close in October, according to a Phoenix Home Life spokesman.
General American Life Insurance Co., St. Louis, last month merged its subsidiary, General American Investment Management Co. (GAIMCO) with Conning & Co., a Hartford, Conn., money manager specializing in insurance assets. The two firms formed a holding company called Conning Asset Management Co. with about 100 clients and more than $35 billion in assets.
Massachusetts Mutual Life Insurance Co. acquired David L. Babson & Co. to merge it with Mass Mutual subsidiary Concert Capital Management Inc. into an independent firm with more than $11 billion in assets under the Babson name.
Insurers also are looking within. Insurance companies are examining how they manage their own assets, said Gus Catsavis, managing director of Asset Consulting Group, Inc., St. Louis. He noted his firm was recently hired by Security-Connecticut Corp., an Avon, Conn., insurance company, as a general consultant for the company's internal assets.
There are two main reasons for the surge in activity: The retirement planning market is becoming less dependent on the annuities - which used to be the insurers' bread and butter - and the investment management business more than ever has become one of scale and distribution.
Insurance companies are realizing they need to become diversified financial services companies, said Michael Albanese, vice president with A.M. Best Co., New York.
In acquiring Delaware, Lincoln wanted to broaden its asset-gathering capability and diversify its sources of revenue, said Lincoln's Mr. McMeekin. The company wanted to diversify from income driven by risk premiums to fee-based income, which is rewarded with higher multiples by the stock market, he said.
Demographic forces and the proliferation of 401(k) plans have given insurers a boost in their efforts, and their distribution networks have given them an advantage, but experts note mutual fund companies and banks are hot on their heels.
"There's also another issue looming in the background: potential reform - if not outright repeal - of the separation of financial services, particularly in banking," said Mr. Albanese. Bank consolidation is creating stronger competitors with a similar distribution advantage, and that further raises the ante of what it takes to be competitive, he said.
Additionally, experts say insurance companies are bound to undergo a round of consolidation similar to the one now taking place in banking, which will further add to the competitive pressure. Bulking up is a good protection against being taken over, and acquisitions tend to be the most attractive way to build an operation of scale quickly.
Between its own assets and the subsidiaries it has acquired, Lincoln has more than $72 billion under management. Lincoln itself has $30.7 billion in internal assets and approximately $4 billion in outside assets it manages for insurance companies, individuals and pension funds. Besides Delaware, Lincoln also owns Lynch & Mayer Inc., a growth equity manager, and Vantage Global Advisors, a quantitative manager, both based in New York. Lynch & Mayer has about $7 billion under management, Vantage another $3.5 billion and Delaware approximately $27 billion.
"I firmly believe we have to have more than a $100 billion under management before the turn of the century for us to be a big player in the business - and you need to be big in this business," said Mr. McMeekin.
As experts warn, distribution will be an essential component in the growth - and survival - of financial services companies. Insurance companies, with their armies of agents and offices around the country, are a ready-made distribution system waiting for products.
"The key ingredients for success used to be top-tier investment performance, and now you have to add distribution to the top-tier investment performance. It's a key ingredient for success," said Mr. McMeekin. "It's going to get more competitive, more so than it is now."
The acquisition of Delaware by Lincoln gives the insurer a chance to leverage the distribution channel of its nearly 2,000 agents and relationships with brokerages and other financial companies to distribute Delaware's separate account and mutual fund products. At the same time, Lincoln expects to benefit from Delaware's management expertise in its own offerings such as 401(k) products and mutual funds.
Delaware will remain separate from Lincoln and its investment process will remain fully intact, but management is working on a marketing plan to integrate their offerings and expect to have a plan in place by the end of the year, said Mr. McMeekin. Not only could Delaware act as subadviser for the Lincoln Advisor Funds, the insurer's mutual fund family, but Vantage or Lynch & Mayer could also act as subadvisers for Delaware's fund family, he said.
Additionally, the company continues to look at acquisitions in investment styles that complement its holdings, said Mr. McMeekin.
Insurers will continue to be strong buyers in the future, said Mr. Albanese. Most insurance companies are already looking for acquisitions now, he said.
"When you look at any of the majors in that business, their feelers are always out for that kind of business," said Mr. Albanese.