Financial Convergence Falls Short Of Hype
By Susanne Sclafane
NU Online News Service, June 3, 10:34 a.m. EDT, New York?The realities of financial services convergence–the coming together of banks, insurers and securities firms–hasn’t lived up to years of hype that’s surrounded the concept, according to insurance company executives.
“There has been so much over-promising in this area that even where there has been success, it’s been viewed as minimal,” observed Art Ryan, chairman and chief executive officer of Newark, N.J.-based Prudential Financial. He was the first of three high-profile executives to respond to a question about financial convergence during the Standard & Poor’s annual insurance conference yesterday.
Ramani Ayer, chairman and CEO of The Hartford Financial Services Group, said his view is that “manufacturing and distribution don’t combine well at all.”
“I believe that if you manufacture a product, you should maximize your shelf space,” he said, noting that the Hartford sells through 450 banks. “I’d rather be No. 2 on a bank shelf than be the proprietary product” for a single firm.
“Running a manufacturing business requires a whole different set of skills and disciplines and management team than running a distribution system. So in the long run, much-touted gains from cross-sales and other things won’t be borne out,” he said.
American International Group Chairman Maurice Greenberg weighed in saying that he believed that the situation was different in different parts of the world, noting that in some countries, banks are the biggest distributors of investment and life insurance products. In Italy, for example, banks are bigger distributors of investment products than insurers, he said.
“But owning a bank cuts you out of distributing through every other bank,” he said.
Mr. Ayer noted that if an insurer tried to just push its own product alone through a financial supermarket-type model, it would “risk suitability issues.”
“I would agree with the notion that simply having your own proprietary distribution is not the answer,” Mr. Ryan said, noting that while Prudential used to have over 20,000 life agents that sold only Prudential products through most of its history, that strategy didn’t work in the 1990s–and wouldn’t work going forward.
Mr. Ryan noted, however, that if an insurer doesn’t own any distribution, it will never have “control of the client.”
“I do think there is a risk of ignoring the ownership of distribution totally,” he said.
Mr. Greenberg countered that AIG has 150,000 agents in Asia that only sell AIG products, while in the United States the independent financial advisors of AIG’s SunAmerica, in its broker-dealer operation, sell AIG’s products and everyone elses. “It depends on the part of the world you’re talking about.”
In general, Prudential’s Mr. Ryan said that for financial services convergence to work, it has to be demand-driven–the client must want it, as opposed to building the model around what the organization wants to sell. In addition, it has to make good business sense from the supplier’s point of view.
“Loss leaders don’t work. You’ve got to have scale,” he said. He referred to a deal announced in February in which Prudential’s securities brokerage operations were folded into those of Charlotte, N.C.-based Wachovia. (See NU, Life and Health edition, Feb. 24.) “At the end of the day, it is economically better for our company to be a 40 percent owner of the third-largest retail broker than a 100 percent owner of the 10th largest,” he said.
The executives also discussed the environment for insurance company acquisitions, addressing the question of whether problems of reserve adequacy and other insurer balance sheet issues might discourage buyers.
“There will always be acquisition opportunities,” Mr. Greenberg said, citing the buyer’s capitalization and resources, and the issue of whether or not there’s an attractive candidate as key factors determining when deals will get done.
“There will be more consolidation,” he said, listing certain factors that make it necessary for some companies to sell–”a decade of price erosion, a tort system that is out of control, inadequate capital on the part of many companies [to enable] them to take advantage of current price increases, [and] low interest rates.”
“There is a scenario where many companies have to find a buyer to take advantage of the opportunities.”
Mr. Ayer referred to what he called “consolidation going on at the street level.” He said good companies are seeing business come their way as a result of a flight to quality, prompting a focus on growing their current business instead of acquiring.
He said also that producers are “repositioning” portfolios quickly as “business hits the street” in response to rating agency actions. Rating agencies “crater” companies “a lot faster” than in the past, he noted.
On the life insurance side, Mr. Ryan noted that a part of an acquisition slowdown has resulted from a disappearance of buyers. “The Europeans have had problems for the last few years. They were the buyers” in the recent past, “at prices that were interesting,” he said.
Commenting on a deal announced just days ago, in which Bank One said it would acquire some parts of the life insurance business of Zurich Life from Zurich Financial Services, the executives didn’t see any trend developing.
“Jamie Dimon thought he had a good deal,” Mr. Greenberg said, referring to Bank One’s chair and CEO. “He thought it fit into his model. This is a free country,” Mr. Greenberg commented.
Mr. Ryan said he believes that most bankers are more interested in distributing product, rather than manufacturing.