ZURICH - The proposed merger of Zurich Insurance Co. with the financial services business of B.A.T. Industries P.L.C. may form one of the world's top 10 money managers. But it's largely a retail play.
The merger will propel newly formed Zurich Financial Services Group - to be 55% owned by Zurich shareholders and 45% by B.A.T. shareholders - into the elite of the world's money managers, with a combined $342 billion in assets, based on year-end 1996 data.
Of that, $262 million represents assets from the Zurich Group, including the pending acquisition of New York-based Scudder, Stevens & Clark Inc. Nearly $80 billion would stem from assets run by B.A.T. Financial Services, which would be spun off from the parent company. Some $200 billion of the combined total represents externally managed assets.
It's clearly retail distribution that's driving the deal. The addition of B.A.T.'s 14,000 sales agents in its U.S.-based Farmers Group Inc. subsidiary will provide a third means of distribution for financial products developed by the combined operations of Zurich Kemper Investments Inc. and Scudder.
The Zurich Kemper arm sells mutual funds to 2.5 million retail investors through intermediaries, while Scudder - whose pending acquisition was announced last June - offers no-load funds marketed directly to about 2 million investors.
Meanwhile, the addition of B.A.T.'s Threadneedle Asset Management, London, will provide L35 billion ($57 billion) in assets, about 90% of which represents retail and pooled pension accounts gathered by B.A.T.'s Allied-Dunbar and Eagle Star insurance subsidiaries. (Another $25 billion is managed by Farmers.)
"I think it puts together a powerful retail structure in the U.S., the U.K. and the Continent," on both the investment and the insurance side, said David Puddle, senior vice president, Putnam Europe Ltd., London.
Zurich also should benefit from the evolving market for financial services in Europe. As the demand for retail savings products, including defined contribution plans, develops, insurance companies, with their historic strengths on the Continent, will be well-placed, Mr. Puddle said.
Global capabilities
One big question, however, is how and when the global asset management capabilities will be merged, now that Threadneedle will be added to the mix.
After months of discussions, Zurich Insurance and Scudder are close to deciding how they will integrate the international operations of the former Kemper - acquired by Zurich in 1995 - and Scudder, whose $867 million purchase is slated to be made final in the fourth quarter.
What has emerged so far is that the former Kemper's highly prized London-based global bond team, headed by Managing Director Gordon Johns, will remain in place. However, the management of international equities has yet to be decided. Scudder's New York-based operation, run by Nicholas Bratt, director-global equity group, is viewed as the leader in that area, with some $26 billion in international equities. But that doesn't necessarily mean Kemper's international equities team - headed by Managing Director Dennis Ferro - will lose out.
Rather, one source suggested the London office might take responsibility for European-based products marketed to European clients. However, that still doesn't resolve how the combined firm will deal with competing international equity products.
Scudder also has a separate unit specializing in insurance assets, running some $2.5 billion. Both Zurich Kemper and Scudder run $1 billion-plus portfolios for Equitas Holdings Ltd., the reinsurance company backing pre-1993 liabilities for Lloyds of London syndicates.
Threadneedle's role
While a combined Scudder and Zurich Kemper is expected to provide a platform for global investments, Threadneedle is expected to provide penetration into the U.K. institutional and retail market.
Since the formation of Threadneedle three years ago, inheriting assets from B.A.T.'s Allied Dunbar Assurance P.L.C. and Eagle Star Life Assurance Co. Ltd. subsidiaries, the new team has managed to turn performance around. Under Chief Investment Officer Simon Davies, for example, Eagle Star's U.K. equity fund ranked fifth out of 75 funds for the 12 months ended June 30. In contrast, the fund was in the bottom 20% for the 12-month periods ended June 30, 1994 and 1993.
While an eventual consolidation is likely, there might remain separate investment teams for some time to come. The deal itself is not expected to close until the third quarter of 1998.
"All of the asset management business . . . I believe will be brought together over time," said Rolf Huppi, chairman and chief executive officer of the Zurich Group.
Manduca's savvy
However, no one discounts the potential role for Threadneedle CEO Paul Manduca, a politically savvy and well-regarded fund manager who previously headed money manager Touche Remnant and had negotiated its merger with Henderson Administration, since renamed Henderson Investors.
Said one source: "He is an extremely affable, pleasant sort of guy, but he has a well-honed ability to make sure he gets himself into place."
Mr. Huppi said he expects London to be at the center for ZF Group's European investment operations, and that it's "likely that Threadneedle will be at the core" of that center.
Mr. Manduca acknowledged B.A.T. is the smaller player in the global picture. Zurich's U.S. businesses "are considerably bigger than anything that B.A.T. has in fund management," he said.
