First published in ITIJ 89, June 2008
The recent ‘for sale’ notice outside some of the UK’s most renowned insurers has led to speculation over the suitability of bank owners, and whether this is a sign of things to come. Milan Korcok asks: can banks afford to shed insurance?
When the Royal Bank of Scotland (RBS) floated the prospect of selling its insurance arms Direct Line and Churchill to help raise cash and stave off the effects of the global credit crunch, it raised concerns about the compatibility of the banking and insurance businesses. Was this acknowledgement of a worldwide trend, or just a temporary skirmish?
According to an analysis published by Reuters, some European banks are ‘turning cold’ on owning insurance units because of differing accounting and regulatory rules. While insurers tend to focus on creating long-term value, banks count on quick, current cash flow. They want the cash and they need it today. And in the midst of the current mortgage meltdown and credit crunch the banks see cash as king.
Besides RBS, there has been some speculation that Fortis NV might be interested in selling some of its non-life insurance business in Europe, and that Turkey’s Yapi Kredi Bank, and HBOS or Lloyds TSB might be open to bids for their insurance businesses, but none of them are even remotely thinking about fire-sale auctions as they consider these businesses quality assets. In fact, European insurers are turning out better earnings than are banks.
Analysts reckon that the sale of RBS’s insurance arms could raise between GB£6 billion and £7 billion pounds – a fair step on the way to the £12 billion RBS says it needs as a capital cushion in these cautious times. And though RBS chief executive Sir Fred Goodwin is thought to prefer keeping the insurance businesses, the possibility of a sell-off has whetted the appetites of several insurance giants – among them AIG (the world’s largest insurer by assets); Allianz SE, Europe’s biggest insurer; AXA SA; Spain’s Mapfre and Bankinter; Assicurazioni Generali SpA – and most alluringly, America’s celebrity billionaire Warren Buffett, the investment guru who heads private equity firm Berkshire Hathaway (which owns insurer giants Geico and General Re among many other headline enterprises) and who is considered by many reliable sources as the world’s richest man.
According to an article in The Independent, Aviva, Britain’s largest insurer, was also rumoured to be interested in RBS’s divestments, but has eliminated itself from any courtship ritual for Direct Line and Churchill. Philip Scott, Aviva’s finance director says such a deal just wouldn’t make sense considering that Aviva can do all the business it wants in the UK under its own brands Norwich Union and RAC, and that it makes no sense ‘to compete with ourselves’.
While insurers tend to focus on creating long-term value, banks count on quick, current cash flow.
Buffett, however, has been less sanguine about the prospect of picking off the RBS insurance businesses. Asked about the Churchill-Direct Line acquisition, Buffett told media: “We will look at the Royal Bank of Scotland’s divestiture of its insurance business, and a Berkshire Hathaway subsidiary is close to buying another medium-sized UK company. The UK economy is something we understand and feel comfortable with.” Buffet spent a good part of the month of May touring Europe on the hunt for new game, but as we went to print, confirmed that he was no longer interested in bidding for the bank’s insurance arm.
The lure of the East
Ironically, in Asia and North America, the allure of insurance business continues to tempt banks, whose emphasis on providing one-stop financial services remains a growth strategy. As a recent editorial in Asia Insurance Review noted: “(Asian) banks still open doors for insurance sales, and in some markets, insurers, especially life companies, bemoan the limited access they have to banks as the main reason curtailing growth … The secret is to get the partnership (between bank and insurer) right from day one and match the product to the right distribution model.” The editorial continues: “Even Japan, though a relative latecomer to this channel, is latching on fast, while India and China are becoming insurance giants through the help of banks in addition to agency channels.”
In India, the prospects for joint bank insurance ventures are on the upswing. According to The Times of India, over the past two years at least five joint ventures have been signed between Indian banks and foreign insurers, involving ten Indian banks. Among the banks planning to have an insurance arm are Canara Bank and OBC, while Mumbai-based Bank of India and Union Bank have agreed to a life insurance venture with Dai Ichi of Japan.
From the public sector, Bank of Baroda and Andhra Bank have entered into an agreement with Legal & General of the UK to set up a life insurance company. Punjab National Bank and Vijaya Bank are also looking at a life venture with Principal Financial of the US. India’s Insurance and Regulatory Authority IRDA has, however, stipulated that any Indian bank seeking license to enter the insurance sector will have to meet rigid international (Basel 11) capital requirements.
Even in Canada, which has rigid prohibitions against banks selling insurance out of branches, banks are slugging it out and, as some experts perceive, skirting the laws to get their hands on insurance business in the face of highly restrictive laws. Canada’s Bank Act outlaws the promotion of most types of insurance in bank branches – the only such law in the developed world. The Act comes up for review every five years – the last one was in 2006 – and to date the prospect of allowing banks to sell insurance products in their branches has been repeatedly knocked down by a Parliament influenced by lobbying groups representing consumer organisations, and particularly independent insurance brokers.
A Canadian bank can own an insurance subsidiary and an insurance company can own a banking subsidiary, but they can’t use their branch networks to sell most kinds of insurance. In response to laws they thought would be changed by now, Canada’s big five banks, led by the Royal Bank of Canada (RBC), the nation’s largest, have begun setting up ‘near branches’ – virtual satellite operations, right next door to their bank branches. These satellites not only sell auto, home, travel even some life insurance, but are free to refer their customers next door to the bank’s full range of financial products, accounts, mortgages, credit, investment products and so on. Meanwhile, employees in the actual bank branches can’t refer customers for insurance products next door, not even with a sly wink and nod. The exception to this prohibition in bank branches is travel insurance, which is freely promoted in brochures and can be bought in the branch and is widely promoted in all banking online exposures. Many of these travel insurance products sold by the banks, however, are underwritten and administered by third parties, even other banks. They are not, necessarily, in-house products per se.
over the past two years at least five joint ventures have been signed between Indian banks and foreign insurers.
Neil Skelding, chief executive officer of RBC Insurance, refers to these offices as being ‘a piece of drywall away from being part of the branch’. These insurance outlets must have separate doorways although they can share a hallway with the bank branch. So long as they’re separate, they’re legal. (They can’t even share basic information about their customers). But the value of proximity is clear: Skelding says 50 per cent of the clients who come into these insurance satellites are not even RBC bank clients – when they first come in. Customers with more complex insurance needs are referred to an RBC Insurance office. The other Canadian banking giants, Bank of Montreal, Toronto Dominion, Scotiabank and CIBC, are hot on the heels of RBC in developing their own ‘near branch’ locations.
And though the current credit crisis has hit Canadian financial institutions just as it has others, selling off their insurance subsidiaries, insurance lines, products or distribution channels is just not in their play book.
Symbiosis in the States
In the United States too, it has only been since 1999 (when Congress repealed a 66-year-old law prohibiting the intermingling of banks and other financial services) that commercial banks, securities houses and insurers have been able to cohabit each others businesses. Some state chartered banks had already begun to break down these restrictions through state legislative changes. But it was the repeal of the Glass-Steagall Act of 1933 that broke the dam for federally chartered institutions. When it was being debated, Senator Charles Schumer of New York said that if repeal was not passed, “We could find London or Frankfurt or, years down the road Shanghai, becoming the financial capital of the world.” Repeal of the Glass-Steagall Act in effect brought US banking into closer conformity with the universal systems common in many European and Asian countries.
And despite the mortgage meltdown and credit crisis, which had its genesis in America, few American banks are showing evidence of selling off their insurance businesses to raise cash and regain capital strength. An exception is Union Bank of California – a regional player that has announced it will be selling its insurance subsidiary, Union Bank Insurance Service to BB&T Insurance of Raleigh, North Carolina). But even this was not seen as a crisis deal so much as ‘a cautious approach’, by its CEO Masaaki Tanaka.
In fact, according to an 8 May report by Bank Insurance Market Research Group (BIMRG), banks with some insurance activity had 44 per cent higher median net income in 2007 than those that did not. Andrew Singer, managing director of BIMRG said the data suggests that pursuing a diversification strategy – of which insurance brokerage is often a key part – may have paid off for banks in 2007, ‘particularly at a time when banks’ traditional income sources are under pressure’. An insurance agency business, he said, can ‘help smooth out earnings and act as a hedge against interest rate volatility’. Canada’s Neil Skelding, of RBC puts it more succinctly: “It is a terrific potential growth business for the banks.”
Canada’s Bank Act outlaws the promotion of most types of insurance in bank branches – the only such law in the developed world.
Overall, reported the BIMRG, the median net income of 7,878 operating banks and savings banks was $1.07 billion in 2007. The median at 3,596 banks and savings banks that reported some insurance activity was $1.54 billion.
Certainly there have been unhappy matches between bankers and insurers in the US as elsewhere in the world, most of them dealing with operational incompatibilities between the two forces. But if the situation of the UK’s RBS is to be a harbinger of evolving relationships between banks and insurers, is not due to the inability of bankers and insurers to mesh their operations so much as it is a grab for cash.