Great-West Lifeco unloads healthcare division

Great-West Lifeco has sold off its “underperforming” U.S. healthcare division so it can focus its stateside efforts on growing its financial services business.

The Winnipeg-based insurance giant’s U.S. subsidiary, Great-West Life & Annuity Insurance Co., has agreed to offload Denver-based Great-West Healthcare to CIGNA Corp. for $2.25 billion US.

Ray McFeetors, Great-West’s CEO, says the company started receiving inquiries about the availability of its health-care division within weeks of acquiring Boston-based Putnam Investments Trust for $4.6 billion last winter.

He says the healthcare arm was “growth-challenged” and strategically didn’t fit with its core businesses of wealth accumulation, asset management and income protection, so the company decided to test the waters.

“All assets have a price that will clear the market. At some point, everything is for sale,” he says. “We met with a number of interested parties, and it was clear early on that CIGNA was a motivated buyer. They were in need of some growth and hadn’t made an acquisition for some time.”

He notes the deal was hammered out in New York at the beginning of November. “Once CIGNA appeared with a price we found acceptable, it made sense to sell it,” McFeetors says. “Selling is every bit as much of a strategic decision as buying.”

The deal for Great-West Healthcare, which provides a variety of medical, dental, vision, life and disability coverage to about 5,200 employer groups and 2.2 million members across the U.S., is expected to close in the first half of 2008.

McFeetors says the American healthcare business is consolidating and its division was losing ground to larger players that were able to negotiate substantial price concessions from its hospital clients by offering more medical procedures to them.

“That prevents us from growing; we’re not as competitive,” he says. “We want to earn a profit and cover our expenses, but we couldn’t do that in a lot of cases. We couldn’t get growth, and we were losing membership. We had done very well in terms of income over the last several years [with the health-care division], but you could see it was not a long-term winning strategy.”

On the flipside, McFeetors says the demographics in the U.S. point squarely to financial services being one of the businesses of the future.

“A lot of people as they age accumulate wealth. They need support, investment opportunities and investment management,” he notes. “That’s the growth area, and we think that’s going to continue for a considerable period of time.”

GWLA’s assets under management had grown to $127 billion US at the end of September, up from $87 billion US at the end of 2005. Lifeco has $336 billion in assets under administration in the U.S.

McFeetors says the healthcare division contributes about 8% of Lifeco’s worldwide net income, compared to about one-quarter of its profits that come from its financial services business.

He says the proceeds from the CIGNA sale will be put toward paying off the Putnam deal. And the market should prepare itself for a steady diet of buying from Lifeco as McFeetors says the company has an “insatiable” demand for growth through acquisition.

“That’s part of our business and always will be, while I’m around anyway. If a large deal presents itself, we have the ability to raise equity, borrow money or both,” he says. “We’ve always had a great desire to grow by acquisition. We’ll do more in 2008. The fact we have a sale [of the insurance division] doesn’t change that attitude.”

Lifeco’s divestiture has been largely well received in the U.S. financial services industry, says Bob Wuelfing, president of RG Wuelfing & Associates, a Connecticut-based consulting firm to the retirement and investment management industries.

“Most organizations view it as good news because Great-West is saying the retirement market provides attractive growth. Great-West is saying they want to stake their future in that market,” he says.

Wuelfing says even though Lifeco has seriously focused on growing its U.S. businesses only during the past few years, it is already a significant player in the financial services market south of the border. It is now the fourth-largest retirement records keeper of 401k accounts and other defined contribution accounts.

Wuelfing also says he expects Lifeco to continue to take a deliberate approach on the acquisition trail in the U.S.

“I don’t think they would go out on a spending spree and outbid people for deals. It’s a very focused company. If there’s a deal out there that meets their strategic objectives, they’re certainly well positioned to look at it,” he says.

McFeetors notes that Lifeco still earns about one-half of its revenue from Canada, with the remainder split between the U.S. and Europe. He adds it is possible foreign markets will one day make the biggest contribution to its top and bottom lines.

“It’s not going to happen in the foreseeable future. We’re going to earn more than $1 billion in Canada this year. The first year I was president [1992], we earned $48 million,” he says.

Renée Alexander is a Winnipeg-based freelance writer.

(11/28/07)