Lincoln Financial completed its $7.5 billion acquisition of Jefferson-Pilot on Monday, creating one of the largest life insurers in the U.S. The Philadelphia insurance broker/dealer paid $1.8 billion in cash, with rest of purchase price coming in the form of its common stock.
The deal is primarily aimed at diversifying Lincoln’s business mix and lowering costs, say analysts, who speculate that, as often happens in mergers of related businesses, those cuts could include getting rid of any overlap in the advisory force of the combined firms. Lincoln Financial and Jefferson Pilot, which is located in Greensboro, North Carolina, have around 2,000 financial advisors each.
“There are two benefits to this deal,” says Suneet Kamath, an analyst with Sanford C. Bernstein & Co. “Life insurance is a scale business to begin with. The bigger your block of assets, the lower your expenses. Two, Jefferson Pilot has always been an industry leader in terms of expense reduction -- so you could argue that they’ve got some expertise in doing that.”
Eric Fitzwater, an analyst for mergers and acquisitions consultant and research firm SNL Financial, says he expects that once the firm gets into cost-cutting mode, it will set new profitability and revenue thresholds for its advisors. “Once they do that, they can get an assessment of what the standard is, who’s above, who’s below,” says Fitzwater. “And what sort of geographic areas have potential, and sort of clean house.” Lincoln has already been in restructuring mode, and has lately lost some key advisors.
Dennis Gallant, an analyst with Gallant Distribution Consulting, says that divestiture of the distribution arm is also an option. “We’re starting to see a mindset of separating those [manufacturing and distribution], and we’re dealing with a regulatory environment that’s not as favorable to it as well,” says Gallant. “The fiduciary issues, compliance issues, rising cost of distribution across the board, weighs heavily on firms as to whether they want to be in distribution or not.” Insurers tend to be more dependent on in-house distribution than, say, wirehouses, because insurance is such a technical product, but more and more third-party advisors are offering insurance these days.
Lincoln’s strength lies in life and annuities and 401(k) and 403(b) offerings, while Jefferson Pilot’s strength is in life and fixed annuities, including equity indexed annuities, and group life and disability. The merged company, to operate under the name Lincoln Financial Group, ranks number two in total life sales in the U.S., number one in universal life sales, and number five in variable annuity and variable universal life. The product lines of the two companies will remain separate during 2006 but will be combined in 2007.
Fitzwater said he doesn’t see the acquisition being a catalyst for other deals in the insurance business. “I just don’t see it being significant enough,” he says. As far as the valuation goes, he said that at less than two times book, it’s not far off from what life insurance companies are trading for on the public market. “It looks like Lincoln didn’t overpay,” he says.
