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New ownership said to be sought for all-grown-up Gerber Life

A business that decades ago provided a new and diverse revenue stream for a baby food manufacturer has become a relatively obscure noncore activity for its current owner.

When Nestlé SA announced in February that it had initiated a strategic review of Gerber Life Insurance Co., company executives told the audience at an investor conference that the process involved a subsidiary that "you might not have been aware that we had."

But while the insurer's lines of ownership may not have been well-known to investors in a global food and beverage conglomerate, its mass marketing for the Gerber Grow-Up Plan juvenile whole life insurance policy has made the company something of a household name to cable television viewers in the United States.

The $67.5 million in advertising expenses Gerber Life allocated to its life insurance business in 2017 represented nearly 88.9% of the company's direct first-year premiums in the ordinary and group life lines and 14.3% of its total direct life premiums, including renewals.

Among the individual U.S. life entities for which 2017 data was available as of March 29, only Colonial Penn Life Insurance Co. had a higher ratio of life-related advertising expenses to first-year and/or single-premium direct ordinary and group life premiums at 117.5%. Colonial Penn is arguably best known for television advertisements featuring game-show host Alex Trebek.

Other companies that are active in the juvenile whole life business, such as Mutual of Omaha Insurance Co.'s United of Omaha Life Insurance Co. and Physicians Life Insurance Co., also produced ratios of ad spend to first-year and single-premium direct life business that were well in excess of the industry average. Only United of Omaha Life and New York Life Insurance Co. among individual life entities allocated more in advertising costs to the life business lines than Gerber Life in absolute dollar terms in 2017.

Gerber Life generated first-year direct ordinary life premiums of $75.9 million in 2017, an increase of less than 0.4% from 2016. It marked the company's slowest rate of growth in that measure of business volume since 2010, when first-year premiums fell by 9.7%. Direct ordinary life renewal premiums rose 9.9% in 2017, however, which allowed Gerber Life to generate overall expansion in direct ordinary life premiums of 8.2% on a year-over-year basis.

Though Gerber Life's volume of first-year ordinary life premiums has exhibited volatility over time, falling as much as 20.3% and rising as much as 51.2% on year-over-year bases in the past decade, its overall direct ordinary life writings have been much more consistent. In the past 20 years, including 2017, its total direct ordinary life premiums rose at an average annual rate of 7.6% and never rose by less than 1.1% during that stretch.

In addition to the life business, Gerber Life also produced direct premiums of $365.1 million and $108.5 million in the group and other accident-and-health lines, respectively, in 2017. Its total across product lines was $945.2 million, an increase from $907.7 million in 2016.

Gerber Life offers accident-and-health products to employer groups, which the company said mostly consists of medical stop-loss coverage. The other accident-and-health business includes accidental death and dismemberment, vision, dental and Medicare supplement.

Gerber Products unveiled Gerber Life in the late 1960s, according to a subsequent report in The New York Times, to provide diversification at a time when the U.S. birth rate had been declining. A series of M&A transactions resulted in Gerber Products becoming part of pharmaceutical company Novartis in the 1990s, and Novartis ultimately sold Gerber to Nestlé in 2007.

"We have been a good owner of that business," said Nestlé CFO François-Xavier Roger during his appearance at the February investor conference. "[But] that's clearly a business that is noncore to us, even if we developed it nicely. That's a regulated insurance business, which is not something that we are especially expert into."

Nestlé announced the strategic review, including a potential sale of Gerber Life, on Feb. 15. A March 28 Insurance Insider report, citing unnamed sources, said that Nestlé's investment banking firm had been offering the business at about $1 billion.

Gerber Life had $3.70 billion of net admitted assets and $300.7 million of capital and surplus as of Dec. 31, 2017.

While Gerber Life boasts a unique business portfolio, a deal involving a medical stop-loss insurer closed recently as HCC Life Insurance Co. paid $295 million in cash to acquire American International Group Inc.'s operations in that line. The Tokio Marine Holdings Inc. unit said that the operations it acquired produce annual gross premiums written of about $300 million.