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The market's bancassurance honeymoon begins to lose its glamour
Marci Klien looks at the reinvention of the financial services industry
'What is the point of adding insurance to the bottom line without being able to achieve any cost savings advantage?' IS THE market's honeymoon with the bancassurance mega-merger over? Well - yes and no. There seems to be a growing realisation that because it may work for FirstRand (the new giant from the merger of Anglo's First National Bank and Southern Life with RMB Holdings' RMB and Momentum), it will not necessarily work for others. The success of FirstRand itself is yet to be tested. Internationally the trend is for financial services groups to leverage cross-selling and cost-saving opportunities by joining retail banks with insurance companies. In April, insurance and stockbroking group Travelers merged with Citicorp to create the world's biggest financial services group with a market cap of $155-billion. This followed hot on the heels of the $8.5-billion acquisition of Swiss Insurer Winterthur by Credit Suisse, the $24-billion merger of investment bank Morgan Stanley with retail stockbroker Dean Witter and the $9-billion acquisition by Travelers of Salomon Brothers. But bancassurance mega-mergers are not the only answer, particularly for SA companies who have additional pressure to internationalise. There has always been an association between the major insurers and banks with the big life companies. Old Mutual, Sanlam and Liberty have relationships with, and significant holdings in, Nedcor, Absa and Standard Bank respectively. This means that many of the cross-selling opportunities have been in place, but not necessarily exploited, for some time. But there is also a growing call for financial services companies to return to a focus on core competencies and niche advantages, something many of them seem to have forgotten in the search to become bigger and bigger. The financial services industry has experienced a complete reinvention over the past year or two. Apart from FirstRand, now a R50-billion group, BOE has re-formed into another giant of the sector through a number of deals with NBS Boland and Christo Wiese. Talks between Liberty Life and Standard Bank (who have significant cross- holdings in each other) were first on and then off, and the market still awaits possible announcements on closer links between Old Mutual and Nedcor and between Sanlam and Absa. The two insurance giants are exploring several options ahead of their demutualisation and Sanlam has already taken some proactive steps, notably the sale of Sanlam Asset Management to Gensec to form a fund management company with R190-billion of managed assets. There has been much speculation, only vaguely denied, that Liberty, BOE and Fedsure are talking. Recently, Fedsure bought BOE's 28% stake in Norwich for more than R1-billion, bringing its stake to 60% from 32%. But analysts are starting to question the wisdom of what seems to be a rush to conclude deals. As one said: "More often than not, mega-deals are going to end up destroying value rather than creating it. Mergers generally don't deliver and those that lose out are those that do the taking over." According to the Financial Times, in more than 60% of mega-mergers, the share price of the purchaser drops. Analysts say each deal should be examined in isolation. "The merger of Momentum and Southern was an excellent deal in terms of eliminating costs," says one. "Similarly, the Fedsure/Norwich deal will result in significant cost savings." But there are two sides to every coin. While Anglo and RMB Holdings might have scored a coup with their life businesses, the presence of FNB in FirstRand changes the face of RMBH, which was an otherwise highly focused, top performing group. "Momentum/Southern makes sense," says the analyst. "In this case Southern is very focused in the mid-market and Momentum in the upper, and Southern can sell its products through FNB and take the 900 000 Southern policyholders on the same high quality system as Momentum's 450 000. There will be significant cost savings and improved returns. "But I can't say I am as positive about them taking over FNB at the same time. It will have to add value at the retail side and it makes the group so big and dominated by retail banking that it loses some of its glitz and glamour. I would prefer FirstRand remaining smaller and more focused." Although unlikely, there are rumours that FirstRand could be quietly looking for a buyer to take FNB.
BOE's transformation started well in the deal with banking group NBS Boland, and it said it intended to have a significant insurance arm. But market talk is that discussions between Liberty and BOE are, at best, preliminary. "If there is any deal between BOE and Liberty, and this is doubtful, talks are at an early stage," says one analyst. But some believe BOE should look at consolidation and a return to its niche, strong performance recipe. "I am not sure why BOE wants a life arm," says one analyst. "What is the point of adding insurance to the bottom line without being able to really achieve any cost-savings advantage? If BOE wants to go ahead with insurance, and wants to tie up with someone in its A/B income target group, there is little choice but to link with Liberty or Sage." There are also suggestions that BOE may simply expand the existing BOE and NBS life operations, both of which are profitable and can show strong growth. But BOE has R2.8-billion to spend and may feel pressured to make an acquisition. One analyst feels BOE may be losing its focus. "BOE has either lost its way strategically or is hiding a light under a bushel. It bought a good banking operation in NBS, but where is the strategy? I like the idea of it focusing on expanding offshore." BOE could take a leaf out of the book of Investec, whose independent thinking has impressed the market. Investec turned its back on the bancassurance trend, preferring to take its core competencies offshore through the R3.6-billion offer to buy British investment bank Hambros plc. "The Investec strategy is easily the best strategy", an analyst says. "It is an investment banking business that shows it can grow at 35% per annum and can and will do the same in London, sticking to its skills. It is no accident that its share price outperforms BOE." A big question is what will happen to Sage, one of the few relatively large companies to remain "in play" for a takeover. Sage has close links with Absa (Absa has almost 14%), but Sage directors have been vague on possible alliances. "The obvious one to still do a deal is Sage," says one analyst, and speculation is that it will end up joining hands with one of the life companies. Sage directors have always spoken warmly about the close relationship with Absa. The more obvious speculation is that Absa and Sanlam would forge closer links, but analysts say this may not happen. "(Sanlam chairman) Marinus Daling is tightening up the focus there tremendously", says one. "Sanlam is outsourcing everything it can. If you can outsource asset management you can outsource anything." Analysts still expect a fair amount of restructuring at Sanlam, including retrenchments and new management, with a renewed focus on the core insurance business, possibly supplemented by offshore acquisitions. According to one analyst, overseas investors ask why they should buy Sanlam if it already has close to a third of the local life market. Where will the growth come from? Sanlam will have to look offshore or to bancassurance for this growth.
Another big question is what Liberty is up to. Both Standard and Liberty directors have spoken out against any merger, but it believed that Liberty Life CE Roy Andersen and Standard's Jacko Maree have developed a strong relationship. "It is difficult to pin this one down at the moment," says one analyst. "I would rather see Liberty selling off Standard than move closer, and Standard could be left in a lonely position. But it is doubtful if there are many buyers of Standard and there is little hope of externalising those funds." One analyst says Liberty needs to do something to improve perceptions around management, and it would obviously be good to diversify. There are indications that there is no deal between Liberty and Fedsure/Norwich. However, if Liberty felt that eliminating this combined competitor would be advantageous, it could easily buy for the right price. While the giants jostle for top positions in the heavyweight division, the most exciting developments are happening to the middle- and lightweights. Metlife, Aflife, and various other financial services groups are growing strongly with their emphasis not on bancassurance, but on servicing a rapidly growing emerging market and looking to Africa to expand. Daily there are announcements of new niche financial services groups, particularly in the insurance, merchant banking and asset management fields.
"There are exciting players popping up, but not in the old style," an analyst says. "There is definitely a return to the niche player." If it were not for the fact that the potential partner is usually a major shareholder, it is debatable whether Nedcor would really want to do a deal with Old Mutual, or Absa with Sanlam. There has been a lot of hype and, to some extent, a herd mentality about bancassurance. "But you cannot just go for size, you need strategies," says one analyst. "Why go from being a focused operation into a much slower growing retail operation?" Bancassurance can work, but it takes exceptional management and a lot of hard work. Cynics would argue that SA's financial services monoliths are not necessarily endowed with the former or used to the latter.
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