For Smart Money, Bet's on Insurance

For all the talk of high-rolling investor interest in silver or bonds or high technology, the field that most excites smart-money people today is an enormous yet little-known industry: insurance.

Insurance is the engine behind Warren Buffett's Berkshire Hathaway holding company. Auto insurer Geico is one of his original and most successful holdings. "What does excite us is our insurance business," Buffett writes in his annual report to shareholders.

Insurance is the linchpin of the financial services powerhouse Sanford Weill has put together at Travelers Group, which now includes investment brokerages Salomon Smith Barney, lenders Commercial Credit and Travelers property-casualty and life insurance. Insurance is the vehicle onetime home builder Eli Broad chose for his major expansion into retirement savings with SunAmerica.

Insurance is the field of American International Group and its chairman, Maurice "Hank" Greenberg, a shrewd veteran of global finance who in recent weeks fought and lost a battle to acquire American Bankers Group, a Miami-based credit card insurer with a low-cost online and telephone sales operation. Yet so compelling is the business that after he lost the acquisition to Henry Silverman's Cendant, which bid $3 billion, Greenberg vowed he would create an operation similar to American Bankers at AIG. Supporting his insights, General Electric's GE Capital division, the biggest force in U.S. finance, is acquiring companies that sell life insurance online and over the phone, dispensing with agents.

Yet insurance is the field that over a century and a half has made more sales agents rich, and still does so today. An outstanding example is Patrick G. Ryan, who has become a billionaire as Aon, the Chicago-based insurance brokerage he founded 34 years ago, has grown through 50 acquisitions to become a $6-billion-revenue giant. Finally, insurance is a field--as represented by all of the above companies--that Wall Street rewards with new highs practically every day. Something more than normal bull market enthusiasm is going on.

What's the appeal? Cash, consolidation and perhaps a hedge against disaster. It's a business of taking in premiums today, paying out claims later, Buffett explains. "In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money."

Losses ultimately paid out may exceed premiums, but that loss can be more than made up by investment earnings--especially in these years of bull markets.

Thus insurance is a money-spinning business and has been since agents in the 19th century collected small sums each week from industrial workers to ensure a benefit for their families in case they became disabled or died.

It has been a cash business since Edward Lloyd, 17th century coffeehouse owner, founded Lloyds of London, where high-rolling investors took premiums to insure cargoes bound for the East. It is a business with a quality of romance.

But it is a field changing dramatically today. Mergers are creating larger entities because scale is needed to serve global companies, handle outsize risks and build a distribution system to sell insurance, explains analyst Gary Ransom of Conning & Co., a Hartford, Conn., investment firm that specializes in insurance issues.

An example are the international insurance brokers, Aon and its remaining rival, Marsh McLennan, which have tripled in size in this decade and taken on new capabilities. Marsh McLennan owns the Putnam investment management firm and the Mercer group of management consultants. Aon has subsidiaries that underwrite insurance and reinsurance, so they can offer big companies a full line of services.

"The idea is to become a consultant for all the risk-management needs of the 1,000 largest companies," says Aon President Michael O'Halleran.

Some giants are getting out. Aetna sold its property-casualty and life insurance lines to concentrate on health insurance, where it's struggling. But Aetna remains in life insurance in Latin America, where it is finding a growing business in retirement services. "As middle classes grow, so do demands for financial services," says Aetna Chairman Richard Huber, a former banker in Latin America.

Retirement is, above all, key to the shift of life insurance from traditional policies that paid at death to policies designed to provide income through long years of retirement.

Eli Broad saw the trend coming 15 years ago and focused Los Angeles-based SunAmerica on retirement savings. The company specializes in variable annuity policies, which can invest in mutual funds and will build up income tax-deferred because the vehicle is an insurance policy. Annuities are very popular, and SunAmerica has grown rapidly to $5 billion in annual revenue and $30 billion in assets under management.

But variable annuity policies have their critics. Tax experts point out that when the tax-deferred income is paid to retirees, it is taxed as ordinary income, not capital gains. Also, with the creation of the new Roth IRA, most people will be able to save tax-free.

Yet sales of variable annuities continue to grow. Are retirement savers gullible tools of insurance salesmen?

"Not really," says analyst Michael Blumstein of Morgan Stanley. "People simply like the policies because they earn investment income on a tax-deferred basis--it's like the three basic drives are food, sex and tax deferral."

In any event, more basic to SunAmerica is the distribution force of 9,000 affiliated financial planners and 65,000 brokers that Broad has put together to sell its retirement savings products.

With every banker and broker plus the giant mutual insurance companies Metropolitan, Pacific, Prudential, New York Life and others competing for the retirement savings of 76 million baby boomers, the fight will be for "shelf space," Broad says. He reckons SunAmerica's sales force will get it a place on the shelf of public awareness.

Such marketing and distribution ability is precisely what AIG and Cendant were fighting for and what thousands of insurance companies worldwide are seeking these days. Therefore look for many more mergers and acquisitions in this venerable industry.

And insurance has one more attraction for smart businesspeople. "It was 1971," Broad recalls when his Kaufman & Broad home-building firm was looking to diversify in finance. "We looked at the 1930s and found that banks went under and brokerage firms failed but insurance companies survived."

Indeed, insurance companies thrived in bad times because people let policies lapse, leaving previous premiums with the insurers, and borrowers defaulted on commercial real estate loans, handing over farms and buildings to insurance company lenders.

A business with a growing future and a hedge against the past--is it any wonder smart money favors insurance?

James Flanigan can be reached by e-mail at jim.flanigan@latimes.com

For the Record Los Angeles Times Saturday April 4, 1998 Home Edition Business Part D Page 3 Financial Desk 1 inches; 25 words Type of Material: Correction Life insurance--Aetna Inc. remains in the life insurance business. It was incorrectly stated in James Flanigan's column Sunday that Aetna had sold its life insurance operation.
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