By Leslie Scism and Julie Steinberg 

Swiss insurer Zurich Insurance Group AG said it would acquire MetLife Inc.'s car and home insurance business for $3.94 billion in cash, a move that will substantially boost the size of its Farmers business in the U.S.

The deal reflects a push by big car insurers to gain more scale to pay for advertising and as technological change is coursing through the car- and home-insurance industry. For MetLife, the divestiture sheds a relatively small unit at what analysts say is a premium price.

An important part of the deal is that Farmers, which traditionally has relied on agents for sales, will offer its policies through employee-benefits programs run by MetLife. This will diversify the way Farmers distributes policies, while MetLife will earn commissions on those Farmers sales. The deal will enable MetLife to continue to focus on selling a diverse array of products to workers enrolled in its benefit programs.

Zurich, through its subsidiary Farmers Group Inc., will contribute $2.43 billion to the deal, while Farmers Exchanges, its U.S. partner, will pay $1.51 billion. Zurich earns fees for certain administrative and management services provided to Farmers Exchanges.

The transaction will make Farmers the seventh-largest insurer in the U.S. by property-casualty premium volume, up from ninth, the company said. Pro forma premiums would be $24.2 billion from $20.5 billion previously based on 2019 data, it said. Its percentage market share will increase to 5.5% from 4.4%, said David Havens, a managing director at Imperial Capital LLC.

"There's no question that auto insurance is increasingly becoming a scale play -- in part because auto insurance itself is undergoing a rapid technology-driven transformation," said Robert Hartwig, a professor of insurance at the University of South Carolina's Darla Moore School of Business.

In one recent sign of that transformation, General Motors Co. last month said it would begin to market car insurance based on data from onboard computers that will help size up risks posed by drivers. The GM pact is with a unit of American Family Insurance.

Farooq Hanif, an analyst with Credit Suisse, said the deal would help Farmers make better use of its large annual expenditures for quirky advertising to compete against companies including Allstate Corp., Berkshire Hathaway's Geico unit, Liberty Mutual Insurance, Progressive Corp. and USAA, all big advertisers as well.

Farmers long has had a heavier presence on the West Coast than other parts of the country, and the deal will provide it access to many more customers in parts of the country where it doesn't have as many agent relationships, Mr. Hanif said. Farmers said the acquisition would turn it into a top-10 seller of personal insurance lines in the northeastern U.S., up from 24th now.

Jeff Dailey, chief executive of Farmers Group Inc., said, "It really is a scale game if you think about advertising and pricing with more data....The more data you have in general, the more sophisticated your pricing can be."

He said the acquisition also would better diversify the company's risk exposure beyond catastrophe-prone California and Texas.

For MetLife, the deal comes as the insurer has focused on expanding offerings in its big business of selling employee-benefits programs to companies, including life and dental insurance. It recently agreed to purchase a vision insurer, on the heels of a deal involving pet insurance.

MetLife says its employee-benefits unit serves 3,800 employers and there are 37 million employees at these companies who are potential car- and home-insurance purchasers.

MetLife Chief Executive Michel Khalaf said the transaction would allow the company to streamline and focus on its core businesses. The company plans to buy back $3 billion in common stock, it said Friday.

Some analysts expect growth in sales of car and home insurance through benefits programs as more consumers opt to buy insurance without going through agents. MetLife spun off most of its U.S. retail life-insurance operations in 2017 through the creation of Brighthouse Financial, so it doesn't advertise nationally to individual consumers. Instead, in the U.S., it targets corporate buyers. MetLife also has a large international life-insurance business.

Insurers globally have been reconsidering their operations in the face of expected continued growth of technology such as "telematics" for sizing up the risk of drivers. They are also grappling with the impact of low interest rates on their investment portfolios, a situation heightened by the Covid-19 pandemic. Besides the push for scale, some are pruning units where they can't make enough money to compete.

Last month, a Canadian and Danish insurance consortium agreed to buy the U.K.'s RSA Insurance Group PLC for GBP7.2 billion, equivalent to $9.6 billion. And earlier this year, Allstate Corp. agreed to acquire peer National General Holdings Corp. to expand its reach.

Bankers say more deals are in the offing.

Consolidation in the insurance industry extends beyond property-and-casualty. Private-equity firm KKR & Co. in July said it would buy retirement and life-insurance company Global Atlantic Financial Group Ltd. for more than $4.4 billion.

Write to Leslie Scism at leslie.scism@wsj.com and Julie Steinberg at julie.steinberg@wsj.com

 

(END) Dow Jones Newswires

December 11, 2020 13:30 ET (18:30 GMT)

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