Dutch Insurer Aegon to Buy Transamerica for $9.7 Billion

Dutch insurance titan Aegon said Thursday that it will acquire San Francisco-based Transamerica Corp. for $9.7 billion, the latest step in a global consolidation of the industry that has left the U.S. with few domestic powerhouses.

Aegon’s purchase, a combination of stock and cash, would make it the third-largest life insurance company in the U.S. by assets and among the top in the world.

The merger, prompted by increasing cost pressure in the life insurance market, raises the prospect for at least some layoffs at Transamerica’s operations in Los Angeles, which employ 1,800, and in Northern California, where it employs more than 100 at its San Francisco headquarters and elsewhere.

Aegon Chairman Kees Storm said the purchase would result in $150 million in annual savings after three years of streamlining expenses, even though other Aegon officials said job cuts would not be significant. Such cost savings are key in the insurance market, in which low prices have placed insurers’ profit margins under pressure.

Transamerica Chief Executive Frank C. Herringer said he did not expect “massive layoffs,” but that cuts could come from the firms’ life insurance and corporate offices. Transamerica’s life insurance unit is based in Los Angeles, where it has 1,500 employees in life insurance and 300 in investments, corporate and other units.

“I think the feeling is, people are still trying to figure out what this transaction means,” said Tom Cusack, chief executive of the life insurance unit. “Any time you make an announcement like this, people will be surprised. . . . They wonder what it means about their own particular jobs.”

Analysts said the purchase would complement the operations of both firms. Aegon would expand its penetration of the U.S. market--its U.S. unit already accounts for more than 50% of its pretax income.

Aegon officials hope the purchase would help them compete with their European rivals, France’s Axa and Germany’s Allianz, the world’s second-largest insurer. U.S. insurance giant American International Group Inc. remains the world’s largest overall underwriter, but the other top players in the global insurance market are all European.

Buying Transamerica also would provide new access to Canada and to Transamerica’s distribution network, which keeps a dominant position in the market of wealthy, older-than-55 policyholders.

Aegon also hopes the purchase would raise its profile in the U.S. While the firm sponsors a well-regarded computer chess tournament in the Netherlands, it has yet to achieve household-name status in America. With the proposed purchase, it would retain Transamerica’s brand name and base the combined firm’s U.S. operations at Transamerica’s landmark pyramid tower in San Francisco.

For its part, Transamerica takes on a deep-pocketed partner with international reach, one that would help it compete with the nation’s two largest life insurers, Prudential Insurance Co. and Metropolitan Life Insurance Co. Aegon also would take on $1.1 billion in Transamerica debt.

Herringer said the deal arose after he received a phone call from Aegon’s U.S. chief in October. The two men met for lunch and set the purchase in motion.

“The big are getting bigger,” Herringer said. “I think the smaller companies run the risk of being marginalized. Many of us wish that that would go away . . . but that is the reality we’re dealing with. Some sort of transaction is inevitable.”

Left up in the air is whether Aegon would retain ownership of Transamerica’s financial services units, which include commercial lending and real estate. While Aegon distributes life insurance and pensions through dozens of banks, it has kept its distance from financial services firms, unlike Citigroup Inc.

Aegon has posted average annual profit growth of 16.5% in the last 10 years, largely because of its strict adherence to its core life insurance operation, analysts said.

In fact, the firm has been so dedicated to pure life insurance that it recently sold subsidiary Worldwide Insurance, an auto insurer, to American Financial Group Inc.

“Those finance businesses are not part of the core of Aegon,” said Eric Berg, a managing director at CIBC Oppenheimer in New York. “Given Aegon’s recent history of divesting unrelated businesses, I would not be surprised to see [the financial services units] put up for sale.”

Herringer and Aegon officials said they had not made any decisions about whether to sell the financial services units.

Thursday’s announcement sent Transamerica stock soaring, up $15.25 to close at $72.88 a share on the New York Stock Exchange. Aegon’s U.S.-traded shares jumped $5.13 to close at $99.88, also on the NYSE.

Under its purchase offer, which is expected to be consummated in the summer, Aegon would pay 70% of the purchase in stock and 30% in cash. Aegon offered $78 per share, 35% above Transamerica’s closing price Wednesday.

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Insurers’ Stocks Soar

Aegon’s takeover offer for Transamerica lifted many other U.S. insurance stocks on Thursday, as traders bet on additional consolidation in the industry. Major stocks, listed alphabetically:

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52-wk. 52-wk. Thurs. Thurs. Stock Ticker high low close change Allstate ALL $52.38 $34.75 $38.56, +$2.31 Amer. General AGC 79.00 52.56 70.06, +3.88 Chubb CB 88.81 54.00 62.38, +2.38 Cigna CI 86.44 57.19 75.56, +0.50 Conseco CNC 58.13 21.94 29.00, +2.00 Hartford HIG 60.00 37.63 51.00, +0.56 Jefferson Pilot JP 78.38 52.81 70.25, +4.13 Lincoln Natl. LNC 98.88 67.00 88.38, +4.00 Progressive PGR 174.25 94.00 128.00, +0.38 Torchmark TMK 49.81 30.69 33.31, +0.94 Transamerica TA 63.25 45.75 72.88, +15.25 Unum UNM 62.50 41.75 48.19, +3.38

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Source: Reuters