What Happened To Convergence Deals?
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.