THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, August 11, 1996 TAG: 9608100473
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: 122 lines
With its stock price languishing, First Colony Corp. decided in June to shop for a suitor.
The Richmond-based life insurance company didn't have to search very hard.
In one of the biggest cash deals in the life insurance industry, a unit of General Electric Co. announced last week that it would buy First Colony for $1.8 billion.
GE Capital Services found First Colony attractive because it would enhance GE's existing lines of insurance, said Neal McGarity, a GE Capital spokesman in Stamford, Conn.
``They are strong in term life insurance. Their structured-settlement business is twice as large as ours, and they are in retirement annuities, where we have only a modest presence,'' McGarity said.
Annuities are insurance contracts that make regular payments, usually when a person retires. Structured settlements, which are often used in personal-injury lawsuits, provide regular payments to an injured person over their lifetime.
General Electric is much better known for producing light bulbs, power equipment, jet engines and locomotives. But its biggest source of earnings in recent years has been financial services, including commercial lending and equipment leasing. Last year, GE Capital's net income of $2.4 billion accounted for 36 percent of its parent's profits.
If it were a banking company, GE Capital would be the nation's fifth largest, right behind NationsBank Corp. in asset size.
After building up businesses in rail-car and jet leasing, credit-card lending, mortgage servicing and other activities, GE Capital has been pushing aggressively into insurance. In less than two years, it has acquired five life insurers with combined assets of $13.5 billion.
Its most recent purchase was in April, when it bought Life Insurance Co. of Virginia, whose assets totaled $9 billion. The First Colony transaction, due to be completed later this year, will bring $11 billion of assets to GE Capital.
The pending acquisition will have a negligible effect on First Colony customers, said Neal Kaplan, an analyst who follows First Colony for the Richmond-based brokerage firm Scott & Stringfellow Inc.
``I think First Colony will continue to be run as it has been because they're good,'' he said. Breaking up the company's operations would reduce the value that GE Capital is seeking, he said.
For First Colony's 12,000 shareholders, the pending transaction is a boon. The company's shares came public at $28 each in 1992, when First Colony was spun off by chemical manufacturer Ethyl Corp. They climbed to 37 7/8 in early 1993 before sliding into a sustained slump the following year.
By late May, they had recovered only modestly and changed hands for 26 3/4. In the wake of GE Capital's offer to pay $36.15 a share, First Colony's stock climbed to 35 last week. On Friday, it closed at 34 3/4.
First Colony has a high-quality investment portfolio and efficient operations, but its earnings have been hobbled by slow growth and heated competition for customers.
First Colony lacked the capital to grow quickly enough to satisfy some investors, said David West, an analyst with Davenport & Co. of Virginia, a Richmond-based brokerage firm. ``Their dilemma was `Do we go for growth and risk losing some customers who valued its high quality?' '' West said.
One of First Colony's assets has been a loyal following, especially among attorneys who buy its annuities for structured settlements, said David A. Schupp, a principal in Townsend & Schupp, a Hartford, Conn., insurance research and investment banking firm.
``This is a quality company that's had some lackluster earnings,'' said Schupp. ``But I would submit that it wasn't broke.''
And because of the heightened interest among baby-boomers in saving for retirement, First Colony's annuity business is especially valuable, he said.
GE Capital's shopping spree for insurance companies comes in the midst of an industry upheaval. The financial health of many life insurers has been sapped in recent years by the depressed values of their real-estate investments. The industry also has had to contend with unfavorable publicity over the unethical sales tactics of some agents.
Some more troublesome issues are the sluggish demand for life insurance, the companies' heavy expenses, and the competition from mutual funds, brokerage firms and banks.
``Competitively, life insurers are in an overall weaker state today than at any time in the recent past,'' the credit-rating company Standard & Poor's said last month in a report on the life insurance industry.
``Insurers have been slow to react to needed changes in product design, cost structure, and distribution methods,'' Standard & Poor's said.
So why is GE Capital attracted to life insurance?
One reason is the opportunity to make money by applying its rigorous financial controls, analysts said. Like its parent, GE Capital has earned a reputation for disciplined attention to costs and an aggressive pursuit of new markets.
In fact, GE has been able to accomplish something that scores of other companies have tried to do and failed - building a diversified financial-services company. Scores of large industrial and retailing companies jumped into financial services in the 1970s and 1980s, only to shed these operations when they became a drag on the core operations.
The long roster of failed diversification efforts includes:
Sears, Roebuck & Co., which bought the brokerage firm Dean, Witter, Reynolds in an effort to sell financial products to shoppers. Under pressure to boost its earnings from retailing, Sears eventually spun off Dean Witter and shed other nonretailing operations.
Xerox Corp., which acquired property-and-casualty insurer Crum & Forster Inc. and then mutual-fund group Van Kampen Merritt in the early 1980s. It also acquired brokerage firm Furman Selz Inc. but later sold all three.
American Express Co., which bought the brokerage firm Shearson Loeb Rhoads, investment banking firm Lehman Brothers, and Boston Co. during the 1980s. When it had difficulty integrating these companies, American Express sold them.
GE Capital's record isn't umblemished. Like many lenders, it suffered losses on leveraged buyouts during the 1980s.
More embarrassing were GE Capital's losses from the scandal-stained Kidder, Peabody & Co. One year after GE bought the brokerage firm in 1986, some of Kidder's employees were entangled in an insider-trading scandal.
In 1994, Kidder Peabody suffered heavy losses from fraudulent trades by the head of its goverment-securities trading desk. GE fired the trader and sold Kidder later that year to PaineWebber Group.
But GE Capital has had the financial resources and expertise to make most of its acquisitions work. And its emphasis on life insurance may be less risky than venturing into property and casualty insurance. In some court cases, property and casualty insurers have been held liable for pollution claims on policies written several decades ago, said Schupp of the Hartford research and investment banking firm.
``In life insurance, and especially in the annuity business, you can control your destiny better than you can in health or property and casualty insurance,'' he said. by CNB