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Acquisitions End Two Noted Bank Insurance Programs

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Acquisitions End Two Noted Bank Insurance Programs


Recent acquisitions by big banks have brought an end to two respected bank-insurance programs, industry observers say.

On Oct. 28, the Federal Reserve Board approved the application from Citigroup Inc., New York, to buy Golden State Bancorp, Sacramento, Calif., including its California Federal Bank subsidiary.

The next day, the Office of Thrift Supervision in Washington approved Citigroups application to set up a new federal savings bank, Citibank (West), FSB, to acquire Cal Fed.

Earlier this year, Washington Mutual Inc., Seattle, closed on its purchase of the Dime Savings Bank, New York, effectively ending another aggressive bank insurance program.

Citigroup and Washington Mutual both sell large volumes of annuities and life insurance products and will continue to do so at the acquired institutions, observers note. The question, however, is one of approach.

Cal Fed and Dime were both noted for penetrating a high ratio of their customer base with insurance sales, notes Kenneth Kehrer, head of Kenneth Kehrer Associates, a Princeton, N.J., bank insurance consulting and research firm.

“In both mergers, insurance isnt the dog. Its the tail,” observes Kehrer. “Life insurance is a supplemental business. The [acquisition] decisions are being driven by the investment business.”

Kehrer says Cal Fed and Dime had “two of [the] finest insurance sales programs in country. Dime is one of the leaders in selling life insurance through banking staff; Cal Fed a leader in selling life insurance through brokers and financial advisors.”

Both banks had a significant influence on other banks insurance sales programs, Kehrer adds.

“On the other hand, both Citi and Washington Mutual also have excellent programs, but they do things differently. Life insurance is not as important as investment sales to these two banks,” he says.

That is because in general, insurance is only 5% to 10% of investment sales revenue in banks, he adds.

Another consultant was less generous in his appraisal of Citis approach to insurance.

“Citi doesnt know how to extend the Cal Fed program into its program, so theyll just shoot it,” he commented.

Both Cal Fed and Dime had noted success in highly profitable single-premium insurance sales, a fact that was influential on other financial institutions, notes Kehrer.

In data released early this year, Kehrer reported that single-premium products in banks increased 278% last year over sales in 2000, reaching $328 million. Kehrer attributed much of that increase to the influence of Cal Fed and Dimes programs on other banks.

One notable difference between the Citi and Cal Fed approach to insurance is that Cal Fed integrated insurance sales into its investment unit, while Citi manages insurance and investments separately, according to a source at Cal Fed.

“We had always leveraged the investment rep,” this source explained.

Roughly 14% of Cal Feds broker-dealer revenue was from insurance, the source continued.

Most of the senior executives at Cal Fed, including its insurance team, will be leaving when the deal closes in about two weeks, sources say.

Insurance sales at both institutions took a sharp dive once the acquisitions were announced, these sources say.

At Cal Fed, insurance sales for the year-to-date had hit close to $40 million by June, when the acquisition was announced. But since then, the bank has scarcely sold $10 million, according to a source familiar with the banks insurance program.

At Washington Mutuals former Dime branches in New York, insurance sales so far are well below last years level of $50 million, another source says.

Almost all of senior management of Cal Fed bank insurance program will be laid off, a source says.

Citi has offered jobs to all of the banks financial consultants, but a number of them have left already, the source adds.

“All insurance specialists have been told they have jobs,” the source says, “but they dont know what that job will be.”

At press time, spokesmen for Washington Mutual and Citibank had not returned phone calls seeking comment.

In July, Citigroup laid off 1,000 brokers after acquiring Associates First Capital Corporation in Irving, Tex. But the layoffs were due to the company dropping sales of single-premium credit life insurance, for which Associates had been investigated by the Federal Trade Commission for violation of truth-in-lending laws.

One company affected by the Cal Fed acquisition is Liberty Life Assurance Company of Boston, a subsidiary of Liberty Mutual Insurance Group. A source at Liberty says an agreement with Cal Fed to sell Libertys Legacy Link single-premium immediate annuity is now in limbo.

Reproduced from National Underwriter Life & Health/Financial Services Edition, November 4, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.