What Happened To Convergence Deals?

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Is the convergence of banking and insurance in the U.S., widely ballyhooed just a few years ago, at an end?

Actually, some experts would put the question another way.

“Did it ever get started?” asks Robert Grieb, managing director, Bank Insurance and Securities Association, Wayne, Pa.

“If you asked me four years ago, I would have named several insurance companies that I thought would be bought by banks,” says Grieb. “But it never happened. Everyone has had enough on their plates for the past few years.”

Convergence “certainly hasnt happened, and its unlikely there will be very much convergence,” asserts James Campbell, a bank-insurance consultant with Reagan & Associates, Atlanta.

Craig Weber, senior analyst with Celent Communications, Boston, believes convergence is “a slow evolution.” He doesnt expect to see a large volume of deals involving banks buying carriers.

Some believe, however, that mergers and acquisitions between banks and insurance companies will continue when they appear to make sense.

That seems to be the case, they say, with Bank One Corp.s plans to buy the U.S. life insurance business of Zurich Financial, approved by federal regulators early this month. They point to Zurichs annuities business as a perfect fit for Bank Ones markets.

But between Citigroup-Travelers in 1998 and Bank One-Zurich Financial, there have been few such deals, aside from some quiet acquisitions of thrift institutions by carriers, to enable their agents to offer credit cards and other banking services to customers.

The Gramm-Leach-Bliley Act of 1999 scrapped Depression-era regulations designed to keep banks, insurers and other financial industries out of each others businesses. When GLB was enacted, insurance and banking analysts widely predicted a flurry of interindustry deals.

Now some think that if banks buy insurers, it will be on a selective basis.

“Citibank-Travelers is not easily copied,” observes Kevin Ahern, a director for Standard & Poors, New York. “Banks will be selective, and insurance acquisitions will be based on characteristics that fit their situations. [Insurer] product lines must fit their hurdle rates.”

Bjorn Turnquist, analyst, SNL Securities, Charlottesville, Va., notes that convergence mostly has taken the form of bank acquisitions of agencies, particularly on the property/casualty side.

“The insurance industry typically has a lower return on equity than banks,” he says. “Economically, its not terribly attractive for banks.”

In addition, there is some philosophical conflict between the two industries, according to Turnquist.

“You see in the insurance business some volatility and risk,” he points out. “Thats not compelling for banks.”

Theres also a difference in the ways the two industries handle customer relations, Turnquist says.

“Banks have direct point contact with the customer,” Campbell notes. “Agents or brokers are in contact with their clients, but carriers themselves dont offer the strategic value of bringing you closer to the customer. So acquisition of carriers is not a powerful case for banks.”

What could make insurance companies attractive acquisition targets is the need for banks to manufacture financial products that offer alternative profit opportunities to products based on interest-rate spreads, says Grieb of BISA.

Large banks will acquire insurers, “but its not going to be a situation where you have 10 deals a year,” he says.

Banks interested in underwriting insurance have found they can partner with carriers, rather than acquire them, he points out.

“Youre already seeing it in joint ventures and in private-label products in annuities,” says Grieb.

He cites Aegon USA and AIGs American General subsidiary as among companies already partnering with banks to sell private label insurance.

Nevertheless, such partnerships ultimately could lead some banks to acquire an insurer, he says.

“There will be a point that some acquisition makes sense if they may want to get into the business in a big way,” Grieb says.

Weber of Celent Communications believes the only banks likely to go after carriers will be top-tier institutions.

In addition to Bank One and Citigroup, he cites the Bank of New York, KeyCorp in Cleveland, and Wachovia Corporation in Charlotte, N.C., as possible acquirers.

“Those types of players are anxious to diversify some of their income where they might be able to get some leverage owning an insurance carrier,” Weber says. “Diversification of income is a compelling reason to buy a carrier.”

But Weber thinks banks need to assimilate existing insurance programs before going on the road to acquisition.

“They have plenty of work left to do,” he says.

Citigroups divestiture of Travelers p-c units, for example, shows there are still legitimate questions about whether its wise for a bank to buy an insurer, Weber says.

“There are plenty of ways for an arrangement to go south,” he says. “One of the keys is how two corporate cultures are brought together.”

There are two ends of the insurance market where banks might do well, he says. On the high end are affluent and private banking clients, where products like second-to-die life insurance would serve the needs of many.

On the low end, banks can offer products like annuities and life insurance to the same client base that invests in their certificates of deposits.

Banks may find a better fit for insurance by looking at distribution strategies rather than underwriting, he adds.

“Underwriting is a pretty big leap,” he says. “You really have to want to be a player to do so.”

John Pottridge, chief executive of Pottridge & Associates, Alexandria, Va., agrees.

“There arent many banks that want to be in the underwriting business because of the risks involved,” he says. “Banks are by nature risk averse and have to be, because they are more heavily regulated than insurance carriers. Banks are not quite willing to use available capital to get into underwriting. They are looking for stable fee income, revenue not tied to fluctuating interest rates.”

Unrealistic expectations for convergence were widespread when GLB was enacted, Pottridge believes, and not all acquisitions worked.

Still, he predicts, convergence will continue. “I think we will see the emergence of a financial service industry, and it will be good for the economy,” he says.

Pottridge expects much of the convergence to take the form of agency acquisitions, however. And even here, he expects a slowdown in the immediate future.

One reason is that some early insurance agency transactions proved to be overpriced in relation to returns for the acquiring banks, he believes. Now banks are looking for the best agencies in their area, and there are few that havent already been snapped up.

“There will be a lack of candidates,” says Pottridge. “Agency ranks will begin to diminish.”

Agency and brokerage acquisitions will continue to be part of the plans of some banks, Campbell of Reagan Associates believes.

“They will continue to be aggressive in acquiring agencies and increasing their presence on the brokerage side,” he says. “They are understanding better how to do that. Youre going to see banks paying an increased role in distribution, primarily in commercial property/casualty and in high-end life/health insurance to more affluent customers,” he says.

Turnquist notes that banks agency acquisitions have declined this year.

“The best ones have been gobbled up in the past five years,” he says. “As the markets pick up, you may see agency acquisitions pick up as well. But huge acquisition sprees are not going to happen. I think weve seen the high point.”

Weber, however, thinks more acquisitions are coming.

“Agencies will be bought,” he says. “We will see big deals in the next year or so.”

Aside from banks buying agencies, there may be some continued acquisitions of thrift institutions by insurance companies. Yet such acquisitions have virtually dried up.

The federal Office of Thrift Supervisions reports insurers filed a total of 45 applications to establish or buy a depository institution from 1997 through 2000.

Since then, activity has fallen sharply.

In 2001, there were no applications from insurance carriers to buy thrift institutions, OTS reports. Not until late in 2002 did the agency approve a thrift charter for an insurer, Ameritas Life Insurance Company, Lincoln, Neb., which acquired Acacia Federal Savings Bank, Falls Church, Va.

Yet insurers like State Farm that have bought thrifts have developed a significant banking operation, notes Grieb of BISA.

“Ultimately, we will see more of this [type of acquisition] but not like on the agency side,” he predicts.


Reproduced from National Underwriter Life & Health/Financial Services Edition, July 28, 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.