Bank One Sees Big Revenue Potential In Zurich Life Deal

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Why buy the cow when you just need the milk?

Thats the objection often raised when a bank proposes acquiring an insurance company. There are easier ways for a bank to get into the insurance business, many experts argue, such as by simply contracting with insurance carriers to distribute their products.

Obviously, top executives of Bank One Corp., Chicago, beg to differ.

Late last month, they announced they had agreed to acquire most of the U.S. life insurance and annuity business of Switzerland-based Zurich Financial Group. The bank will pay $500 million for Zurich Life Insurance Company, Schaumburg, Ill.

One reason to buy this particular cow is that it produces much more than milk, says the head of Bank Ones investment unit.

“Bank One expects a significant jump in its insurance business,” says Dave Kundert, chairman and CEO of Bank One Investment Management Group, which will oversee Zurich Life.

The acquisition “gives us the ability to be a manufacturer as opposed to a middle man,” as well as “additional distribution and product capabilities we dont have today,” Kundert observes.

Zurich “gives us a full-blown manufacturing chassis of insurance and 403(b) products, and we are more interested in that than in just distributing insurance products,” he explains.

Another big plus is that Zurich Life already is registered in all 50 states, so Bank One doesnt need to undergo endless state-mandated paperwork in order to expand its insurance operations.

“Plus, we get 40,000 reps to get access to a big distribution system beyond Bank Ones bricks and mortar,” Kundert says. Those agents will give the bank an important new marketing channel for the banks own line of financial products, he notes.

In addition to helping the bank boost sales of its line of mutual funds, Zurichs agent network will give it instant access to the lucrative teachers annuity market, where so far it has not been a player. Zurichs line of 403(b) retirement plan products, Kundert points out, is already distributed to almost a third of the school district payroll systems in the United States. Those products will produce an estimated $80 million in revenue next year, Bank One estimates.

One knock sometimes heard about banks buying insurance companies is that they generally expect higher profits than insurers normally produce.

But return on equity from the Zurich Life purchase is “not a concern” to Bank One, says Kundert.

“Were very comfortable with the financial aspects of the deal,” he explains. “It creates leverage points in terms of creating synergies with our own existing capabilities that will allow us to improve return.”

Bank One has targeted a 17% internal rate of return from the Zurich Life unit, he says. Part of that would largely be due to the ability of Bank One to generate new sales of Zurich Lifes products through the banks 1,800-branch network.

In addition, the bank may achieve significant savings by moving outsourced investment management advice in-house. Bank One expects the acquisition will provide it with sufficient internal investment expertise to enable it to handle the companies combined $11.7 billion in assets under management, Kundert discloses.

Currently, the bank outsources the management of $6.4 billion in assets to Deutsche Bank Group.

Zurichs products also appeal to all ends of the banks customer base, from low and middle income to affluent clients, he adds.

In addition to annuities, those products include 490,000 brokered term life policies in-force, with potential 2004 revenue of $280 million, according to a Bank One estimate.

Direct-to-consumer term life sales comprise 275,000 Zurich Life policies, with another $150 million in projected revenue in 2004.

Additional Zurich products consist of universal life, business-owned life insurance and other annuities, with an estimated total of $120 million in revenue next year, the bank says.

Bank One intends to phase out the Zurich name over the next 12 months, Kundert says, and brand its products with the banks name.

Bank One and Zurich Financial announced the deal at the end of May and expect to close in the third quarter.

Once its completed, Bank One would be the first U.S. bank holding company to buy an insurance carrier since Citigroup Corp. bought Travelers Group in 1998.

John Sharpe and Jim Harlin will split responsibilities for managing the acquired firm, says Kundert. Sharpe will become chairman of Zurich Life, and Harlin will be president of Banc One Insurance Group. Both men will report to Kundert, who, in turn, reports to Jamie Dimon, the banks chairman and CEO.

Sharpe and Harlin were hired last fall by Glen Milesko, then president of Banc One Insurance Group, specifically to help explore insurer acquisition possibilities, Kundert says. They took over the group in December when Milesko resigned for undisclosed reasons.

Gale Caruso will retain her existing position as president and chief executive of Zurich Life.


Reproduced from National Underwriter Edition, June 23, 2003. Copyright 2003 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.