What's New in Cybertalk?

By Jean Gora
June 2001

Note: CyberTalk is a column that appears monthly in LOMA's Resource, the magazine for insurance and financial services management. To see more contents of the magazine and to see how to subscribe, click on RESOURCE MAGAZINE.

Bank Insurance: Is it Big Yet?

As part of an effort to discover how far banks have penetrated into the U.S. insurance business, CyberTalk occasionally examines what various Internet sites reveal on that subject. This month, CyberTalk examines insurance brokers with bank-owned parents as listed in Business Insurance in July 2000 and compares the U.S. brokerage revenue listed there with the insurance revenue listed by their bank parents in their SEC Form 10k filings covering the year 2000. (See the SEC Web site at www.sec.gov.)

To show the importance of the bank’s insurance business to its overall activities, this CyberTalk also lists the banks’ assets at the end of 2000 and the banks’ market capital on April 28, 2001. (See the Web site of Market Guide: www.marketguide.com). These facts appear in the accompanying table. It should be noted that the activities of many of the brokers listed here are not confined to property & casualty insurance. They also handle life insurance business as well.

Click here for the table with all this comparative information.

When examining the data, several interesting facts emerge:

• Approximately eight of the top 100 brokers listed in Business Insurance in 2000 are bank-owned. Thus, the well-publicized acquisitions of insurance agencies by banks are beginning to turn the banks into major players in the insurance brokerage business. Because the brokers frequently do not have the same names as their bank parents, it is likely that bank ownership is greater than revealed there.

• Some have assumed that banks would avoid involvement in property & casualty insurance because it is not closely related to banking. Instead, they have believed that banks would focus on insurance products with savings elements because of their similarity to bank savings products. They overlooked the fact that most banks provide loans and deposit products to small businesses and middle-market corporations. These firms have insurance needs that extend beyond life insurance and annuities. It is unclear how the revenue of the brokers listed in the table is distributed between life and property & casualty products.

• Bank mergers continue to contribute to the scale of banks’ insurance brokerage operations; one bank with insurance brokerage operations merges with another. The table shows two bank mergers, one the acquisition of Summit Bancorp by FleetBoston and the other the acquisition of Old Kent Financial by Fifth Third Bancorp. Fifth Third already has its own insurance agency. FleetBoston did not.

• Some banks with very large insurance brokers of their own are buying others that are even larger. Wells Fargo Insurance, who is eighth on Business Insurance’s list, bought Acordia, which is fifth.

• Typically, the banks report greater insurance revenue in their 2000 financial statements than their brokers’ reported in their 1999 information. Thus, either their business grew or the figures reported by the brokers in 1999 did not include all of the insurance activities conducted by the bank. Banks that acquire multiple brokers may not consolidate them into a single brokerage operation.

• It is difficult to use SEC data to gauge of the scale of the insurance activities conducted by some of the largest banks; these banks typically report insurance revenue as part of segments that have a broader scope. For example, Mellon Bank reports its insurance revenue in its Regional Consumer Banking segment that also includes consumer lending and deposit products and direct banking. HSBC Holdings, one of the largest financial services conglomerates in the world, does not report its U.S. insurance revenue separately.

• The assets of banks typically represent their loan portfolios and serve as a widely used indicator of bank size. The disparity between the size of the banks’ assets and the revenue generated by their insurance businesses in 2000 and their business brokers in 1999 suggest that insurance sales continue to represent a rather minor line of business at even the banks with the greatest insurance business. The income statements of the banks confirm this fact. For example, in the case of Wells Fargo, it represented only 1.5 percent of the bank’s total interest and non-interest income. It was only 4.6 percent of Wells Fargo’s non-interest income. In the case of BB&T, the insurance revenue generated in 2000 represented only 2.8 percent; however, it was 18.7 percent of the bank’s non-interest income. Thus, for most banks, insurance remains a sideline, although an important contributor to non-interest income in some cases.

• Activities of the smaller banks on this list suggest that some community banks are not passively waiting to be acquired by large banks (or insurance companies). Rather, they too are trying to build diverse retail operations in limited geographical areas by buying other community banks and insurance agencies in the same area. FNB Corporation is a prime example of this phenomenon. It operates in 151 offices in Pennsylvania, southwestern Florida, northern and central Tennessee, eastern Ohio, and southwestern Kentucky. In 2000, it acquired another community bank in Florida, and over the past several years, it has bought eight insurance agencies in its major markets of Florida and Pennsylvania. Because people continue to seek relationships with banks that have convenient branch offices, well-located community banks offering diverse services appear to have continuing viability even as banks consolidate. About 1,000 community banks started operation in the second half of the 1990s, a period during which tremendous bank consolidation also occurred. The community-bank-cum-insurance-agency model may revitalize both community banks and local insurance agencies.

• The market capitalization of HSBC Holdings and Wells Fargo & Co. is great enough for either one to acquire an independent U.S. insurance company if it chooses to do so.

See previous issues of CyberTalk in the CyberTalk Archives.