In an effort to become comprehensive financial service providers, some large insurers have taken an aggressive approach by forming their own banks.Banks, on the other hand, have carried out insurance expansion more conservatively-mainly through the acquisition of large agencies to drive insurance-product distribution through the bank branch.

In May, Bank One Corp., the nation's sixth-largest bank with assets of $287 billion, raised the stakes of most banks' foray into insurance when it inked a letter of intent to acquire Schaumburg, Ill.-based Zurich Life Insurance Co., an operating unit of Zurich Financial Services.

By virtue of the acquisition, Chicago-based Bank One goes beyond its insurance distribution-centric focus and enters the underwriting side of the business. When the $500 million cash deal closes in September, New York-based Citigroup Inc. will be the only bank holding company larger than Bank One to market and sell its own insurance products.

Dealmaker's background

The deal should not come as a total surprise to insurance or bank industry observers. Jamie Dimon, the chairman and CEO of Bank One, once served as a top executive with Citigroup, which acquired Travelers Insurance in 1998.

In 2002, Travelers' property/casualty unit was spun off in a $5 billion initial public stock offering.

Dimon's exposure to the insurance business coupled with the financial strength of Zurich Life-and factoring in Zurich's desire to scale back its life underwriting portfolio-made the Bank One-Zurich Life deal more logical, industry observers say.

"While this is our first investment in the manufacturing side of insurance, we paid a fair price for a company with a clean balance sheet, terrific front- and back-office efficiencies and a reputation for being a solid provider of term insurance and other life products," Thomas Kelly, a spokesman for Bank One, says. "It's an excellent platform for Bank One to compete in the life insurance world."

As part of the deal, Bank One assumes ownership of about 40,000 Zurich Life producers, who will now be able to bundle life and annuity products with Bank One's flagship banking products. Bank One is not a complete stranger to distributing insurance: The company has an internal network that's licensed to sell third-party annuities and specialized life insurance products to its 50 million credit card holders, Kelly says.

Now, the company can combine these competencies with Zurich Life's term insurance, universal life, fixed and variable annuities and business-owned life insurance. Zurich Life will be renamed to leverage the Bank One brand, Kelly says.

The Zurich Life deal also could be the first of several to come in the future, as Dimon, speaking at the May press conference announcing the deal, declared that "it would be hard to do just one (deal)," says Kelly.

Zurich's plans

While Zurich Life had not officially been placed on the selling block, Zurich Financial executives were poised to shift gears to become a more prominent player in the property casualty insurance market, says Ned Lockridge, executive vice president and corporate development officer for Zurich Life.

The global giant owns Los Angeles-based Farmers Insurance Group, which would be a stepping-off point to bring in additional P&C assets.

"The sale was designed to generate risk-based capital and direct the proceeds toward the U.S. property/casualty market. Overall, we had been looking to bolster our cash reserves," explains Lockridge.

Zurich Life, meanwhile, has not divested its entire life underwriting portfolio. The company plans to retain Kemper Investment Life, a $500 million business, and also plans to keep in house Seattle-based Farmers New World Life, says Lockridge.

Due to the pending nature of the sale, Lockridge could not provide additional details, such as how long Zurich Life had been a sale candidate or the level of upper and middle-management upheaval that will occur during the transition phase.

Lockridge also could not comment about whether other suitors in the life insurance sector had made a play for Zurich Life.

Because of the magnitude of the deal, industry analysts say it will be interesting to see whether Bank One can optimize cross-selling and up-selling opportunities for insurance.

The fact that the company has experience in the insurance business helps to a degree-Bank One sold more than $3 billion in variable annuities in 2002 through its 3,000 insurance-licensed employees. The products were sold within 1,800 branches-mainly to credit-card customers.

Another key is that Bank One's insurance operations will be managed by two executives-John Sharpe and Jim Harlin-who developed vast insurance experience while at Citigroup, Kelly states.

Ultimately, Bank One estimates the Zurich Life deal will add $50 million to its 2004 net income, he says.

Nevertheless, banks such as Bank One might face a challenge as they increase their stake in insurance. Banks have long cultivated their skills in processing transactions, while insurers have done a better job understanding the needs of their customers.

As a result, there's a belief that insurers with banking programs have a better shot at cross-selling across the entire financial services spectrum than a bank would with insurance.

Product customization

However, insurers that have developed distribution alliances with banks have not necessarily been successful at customizing products for a particular bank's customer base.

"Insurance companies had never been real successful at providing customized insurance products to banks, but this deal could change that shortcoming," says Craig Weber, an analyst with Celent Comunications Inc. Boston.

"I think you'll see more insurance products that are developed for Bank One's bank customers than you would if Zurich was only distributing products to Bank One," he says.

Weber adds that this deal also could be the precursor of many more bank/insurance mergers to come.

"Over the next three years, you'll see a bunch of earthshaking deals involving banks getting into the underwriting side of insurance," says Weber.

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