Upscale move: Citigroup's premium distribution channels attracted MetLife.

MetLife Inc.'s $11.5 billion acquisition of Travelers Life & Annuity from Citigroup Inc. and nearly all of Citigroup's international life business was scale-driven, say industry consultants. Key to that scale will be MetLife's access to Citigroup's "proprietary" distribution channels.

The deal, which will make MetLife North America's largest individual life insurer based on sales, "is setting the standard for scale," or size, in terms of capital structure, said John Nigh, mergers and acquisitions practice group leader at the Tillinghast business of Towers Perrin. "You are looking at a company that's as big as MetLife, and they clearly see that this is a scale-driven acquisition."

Related to the sale, financial services giant Citigroup and life insurance giant MetLife entered 10-year agreements under which MetLife would expand its distribution by making products available through some Citigroup distribution channels, including Smith Barney, Citibank branches and Primerica in the United States, and several international businesses.

MetLife's significant investment in technology allowed this deal to happen. "The really big synergy is from the technology perspective," said Nigh.

Over the past five years, MetLife spent about $1 billion a year on technology, said Robert H. Benmosche, MetLife's chairman and chief executive officer.

The money was spent on system integration, MetLife spokesman John-Calagna said. MetLife's companies are "under one system now, which makes it easier for us to then take whatever system they have, at Travelers, and make it part of ours," Calagna said.

Pending approval by both companies' boards, Citigroup would receive $1 billion to $3 billion in MetLife equity securities and the rest in cash; resulting in an after-tax gain of about $2 billion, subject to closing adjustments.

The main companies MetLife would acquire are Travelers Insurance Co., Travelers Life & Annuity Co. and Citi Insurance International, said Rob Henrikson, MetLife's president and chief operating officer. The transaction includes Travelers Life & Annuity's U.S. business and its international operations other than Citigroup's life business in Mexico.

Citigroup retains ownership of the well-known red umbrella logo. Travelers will share Snoopy with the MetLife group of companies.

MetLife is targeting opportunities for new revenue, said Craig Weber, senior analyst with Celent Communications in Boston, a technology research firm for the financial services industry. In particular, what MetLife gets is new distribution, which adds business for the company, Weber said.

The businesses MetLife is acquiring generated total revenue of $5.2 billion and net income of $901 million for 2004. The businesses bad total assets of $96 billion as of Dec. 31.

A huge part of the deal was the distribution advantage, Calagna said. "Smith Barney, Citibank branches all around the world, and Primerica--those are three terrific distribution channels," he said.

Equity analysts generally viewed the transaction as positive. Andrew Kligerman, an equity analyst with UBS, wrote in a research note that the deal thrusts Met into the "top three life and annuity market rankings in the United States given the scale of Travelers Life & Annuity and the limited overlap in both product and distribution channels." The deal also expands MetLife's operations to 16 countries, comprising 5% of combined earnings and "enhancing growth potential, but also integration complexity," he wrote.

Market conditions "have suddenly changed with this one transaction," Nigh said, noting that insurance underwriting was not Citigroup's core business, and so it sold the underwriting to MetLife, which now will have access to Citigroup's "preferred distribution" channels. "Who else is going to give you access to a 10-million-client customer base that you have preferred access to? I mean, it's huge," Nigh said.

This deal demonstrates a fundamental change in the financial services realm, Weber said. "Banks don't have to be in an ownership position; they don't have to be manufacturers" of insurance, he said. "If they want to play in insurance, there are plenty of insurance partners who are willing to manufacture insurance products for them."

As part of the approximately 12,000 active agents it has dealings with, MetLife maintains more than 5,000 career agents employed flail time in field operations around the United States. Travelers is known for bow it meets the needs of independent agents, something MetLife could develop over time, Weber noted.

"But by buying into it, they are really jumping up the curve quickly," he said. "Given the choice of where to place business, agents will gravitate toward whoever provides the best level of service, whoever makes their life easiest. Met certainly will have now the expertise and the scale to provide top-shelf service."

Top national brands such as MetLife, John Hancock-Manulife and Prudential "have an awful lot of clout in the market, wide distribution, very well-regarded brands," Weber said. However, "it's hard to compete against a well-known brand, a company that has excellent financial quality. That's really going to win the day for a lot of consumers."

Top Life Seller MetLife: The Biggest Gets Bigger

Citigroup: Bancassurance Hopes Dashed

The 1998 Citicorp/Travelers merger was the catalyst for the Gramm-Leach-Bliley Financial Services Modernization Act Congress passed in 1999. The law tore down Depression-era barriers between insurers, bankers and securities firms. Supporters of GLB expected to create a brave new world in U.S. financial services that would replicate Europe's bancassurance model of all products under one roof.

However, The Citicorp/Travelers merger began to unravel in 2002 when Citigroup spun off Travelers Property Casualty Corp. The dismantling continued on Jan. 31, 2005, when MetLife Inc. announced it was buying most of Citigroup's life insurance operations.

Travelers Life & Annuity

Select financials, 1999-2003

Total Premiums Written ($ Billions)

1999      2.48
2000      3.50
2001      3.48
2002      3.05
2003      2.83

Operating Return on Equity (%)

1999       -7.4
2000      -15.8
2001      -18.0
2002      -50.7
2003       22.5

Note: Table made from line graph.

After the Deal

Selected rankings by line, including
the purchase of Citigroup's life
business by MetLife. *

Individual Annuities ($ Billions)

Group                 Net Premiums Written

Hartford Life               $16.44
MetLife/Citigroup            15.46
AIG Life                     10.54

Capital and Surplus ($ Billions)

Group                 Net Premiums Written

MetLife/Citigroup           $19.67
AIG Life                     17.82
TIAA Group                   10.24

* Based on year-end 2003 A.M. Best data

Note: Table made from bar graph.

Through the Years

* 1812: With $2 million of capital, City Bank of New York, now Citibank, opened for business in New York City.

* 1960: The red umbrella becomes a visible symbol of Travelers, Company writes its first billion dollars of new life insurance.

* 1987: Jerry Tsai transforms American Can Co. (founded 1901) into Primerica. Smith Barney investment firm is added to Primerica.

* 1988: Commercial Credit acquires Primerica Corp., a publicly held financial services corporation which includes Smith Barney, American Capital Management & Research and A.L. Williams.

* 1991: Commercial Credit purchases 58 consumer branches and $380 million in loan receivables from Landmark Financial Services. Under new management, A.L. Williams is renamed Primerica Financial Services.

* 1992: Primerica Corp. forms a strategic alliance with Travelers Corp. by investing $722.5 million for a 27% interest in the company.

* 1993: Primerica acquires the retail brokerage and asset management operations of Shearson Lehman Bros. from American Express and combines them into Smith Barney. On Dec. 31, Primerica purchases the remaining 73% of Travelers Corp. common stock and changes its name to Travelers Inc.

* 1995: Travelers Insurance completes the sale of its group life and related businesses to Metropolitan Life insurance Co.; the two companies form a new health-care company, MetraHealth Cos.

* 1998: All Citicorp and Travelers Group divisions merge to become Citigroup Inc.

* 2000: Citigroup qualifies as a financial holding company, among the first to take advantage of the new Gramm-Leach-Bliley Financial Services Modernization Act signed by President Clinton in November 1999.

* 2002: Travelers Property Casualty becomes a separate company, though Travelers Life & Annuity remains part of Citigroup. Subsequently, Travelers Property Casualty merges with St. Paul Cos.

* 2003: Charles 0. Prince succeeds Sanford I. Weill as chief executive officer of Citigroup.

* 2005: MetLife Inc. announces its acquisition of Travelers Life & Annuity from Citigroup for $11.5 billion.