So ...Why is Farmer's Buying Metlife?

[Fletch_Insures88]

We've discussed these acquisitions in our meetings recently. We all agree that eventually the captive market will dry up and transition to independent. They know the consumer is changing. May not happen in 10 years, but I definitely believe I'll see it in my life time.

 

[ehall2]

I'm surprised MetLife has lasted this long in property & casualty. P & C is as different as night and day in insurance. Some years you make a profit in P & C and some years you lose as much as you made for many years. Prudential was in the P & C business for many years and found they needed to stick to life insurance. In 1992, I think it was hurricane andrew that wiped out Prudential's P & C company. They had to take 50 million out of the life company to be able to pay claims. 50 million was a lot of money in 1992. The executives had a meeting to determine if they were going to stay in P & C or exit and handle life only. They decided to stay in P & C but a few years later gave up. MetLIfe has never been competitive in P & C and never could decide what they wanted to do. They tried captive agents in the 90's but that didn't work. They have been marketing through independent agents for years. Farmers marketed through captive and independent agents for several years and then decided to go with captive's in every state. When I started my independent agency in 1998, Farmers was one of the first companies I got a contract with and they were competitive but they eventually left Georgia and came back with captive agents.

 

[EugeneM]

The MetLife business to be acquired includes 2.4 million policies, $3.6 billion of net written premiums in 2019 for 4 BILLION!!! WTF talk about a covid discount...

Appears to be a growth play. Apparently Zurich has some high growth goals, this acquisition will help supplement their organic growth. Probably by cross selling existing products to the newly acquired audience.

 

[ehall2]

I doubt this will supplement growth by cross selling. There will be a lot of people who may not be happy with MetLife but wouldn't go through the trouble of moving will now see this as a change to move to another company. I experienced this when I bought an agency in 1978.

 

[Allen Trent]

The MetLife business to be acquired includes 2.4 million policies, $3.6 billion of net written premiums in 2019 for 4 BILLION!!! WTF talk about a covid discount...

Appears to be a growth play. Apparently Zurich has some high growth goals, this acquisition will help supplement their organic growth. Probably by cross selling existing products to the newly acquired audience.

Not sure if it is much of a discount or not. If I recall, they had Expense ratio issues & those were forecasted to get even worse with the price war beginning in the personal lines PC. Last I saw when they were looking to sell was they had a Combined ratio of 97%, leaving on 3% underwriting profit. $110M Underwriting profit takes a long time to recover $4B investment. $2.2B in surplus might kick out another $100M in investment earnings

Would need to see the Met Life lapse rate to see how long it will take to recover the $4B investment (maybe only a net purchase cost of $1.8B if the $4B purchase included retaining the surplus.

My guess is Farmers figures they can absorb some of the operational expenses into their current operations & bring down the expense ratio.

low interest rate environment at same time of ever escalating technology costs are making these acquisitions both necessary & riskier

time will tell if it was a good move or not

 

[EugeneM]

Makes sense Allen. Crazy what a low yield environment we are in right now with safe investments like bonds. Insurance companies probably going to have to get creative.

 

[rousemark]

Makes sense Allen. Crazy what a low yield environment we are in right now with safe investments like bonds. Insurance companies probably going to have to get creative.

Just watched the SNL End of the Year Celebration. It was stated that SNL had a record profit of $57 million in this era of low yield environment. Wonder what they would have done in this was like the late 70s, early 80s?

 

[Allen Trent]

Just watched the SNL End of the Year Celebration. It was stated that SNL had a record profit of $57 million in this era of low yield environment. Wonder what they would have done in this was like the late 70s, early 80s?

Bingo. Great year for equities which are in their portfolio, but they don't normally use historical average yields in their product pricing & proformas. Had the equities markets been flat or heavily down, I think we may have seen alot more downsizing of expenses, layoffs, carriers for sale or shutting down lines of business.

The other lingering issue is that life carriers tend to hold a fair amount of commercial mortgages. With office space being in lower demand due to work from home, retail suffering due to shutdowns & finally the strong healthy businesses able to refi via banks at lower rates, the commercial mortgages returns could suffer with higher defaults

 

[ehall2]

A 97% combined ratio isn't bad for P & C companies. Most product managers, the guys who develop the policies and rates, shoot for a combined ratio of 95%. Some companies require the product manager to have a 95% or 96% combined ratio to keep their job.

 

[Allen Trent]

A 97% combined ratio isn't bad for P & C companies. Most product managers, the guys who develop the policies and rates, shoot for a combined ratio of 95%. Some companies require the product manager to have a 95% or 96% combined ratio to keep their job.

agree, but when buying a company, you have to make a bigger profit to recover the money invested. Otherwise, the money would have been better invested in assets with better returns or buying other companies in industries with a higher profit margin. No one would likely be putting out $4B to get a return of only 3% on average & risk huge losses in bad loss ratio years.