A Bountiful Harvest.

MetLife's bank buy is the first fruit of financial-services reform. Industry analysts say more mergers are on the horizon.

Almost a year after Congress adopted reforms to remove the regulatory walls separating banks and insurers, MetLife Inc.'s planned purchase of Grand Bank is the biggest proof to date that the Gramm-Leach-Bliley Act is bearing fruit, experts said.

Insurers didn't wait for the adoption of the financial-services reform before branching out into financial services, buying thrifts and trusts across the United States. However, the act "put a stamp of approval on things that had already been going on," said Maitland Lammert, an equity analyst with Edward Jones.

"More than unleashing a torrent of activity, it continued a trend that had already started," she said, citing the 1998 merger of Citicorp and Travelers Group Inc.

The adoption of Gramm-Leach-Bliley hasn't created a flood of insurance and bank mergers, but they're increasing from a trickle to a small stream.

Recently, MetLife Inc. said it would acquire Grand Bank N.A. of Kingston, N.J., to provide additional services for its customers. The purchase will help MetLife break into retail banking, a spokeswoman said.

The company did not disclose terms of the agreement, but it said the one-office bank reported total assets of about $80 million, deposits of $52 million and shareholder equity of $7.3 million as of June 30. The acquisition is subject to approval by federal banking regulators and should be completed in 2001.

The acquisition is significant, because it marks one of the first times an insurer has bought a bricks-and-mortar bank, said Adam Klauber, an equity analyst with Cochran Caronia.

"A bank usually brings a customer base with it, and that's where some of the real upside can be gained," Klauber said. "If bank customers are walking into a bank, you'll be able to sell them a variable annuity. You can leverage the products you already have, which you can't do with a thrift charter."

Peter Fitzgerald, senior manager of the bank and regulatory section at Deloitte & Touche, New York, said he was unaware of another such purchase.

Robert Tortoriello, an attorney with Cleary, Gottlieb, Steen & Hamilton and an expert on financial-services reform, said MetLife's move into this kind of banking wouldn't have been possible a year ago.

"Now, MetLife's announced its intention to operate a real bank," Tortoriello said. "MetLife must have a phenomenal business plan that required a bank, because they have taken a great leap into federal reserve regulation that they haven't before."

Enhanced Value

The equity markets reward these companies for their diversity of earnings, plus their enhanced distribution channels, he said.

The three most highly valued publicly traded insurers have in some form embraced the convergence of banks and insurance, Klauber said. Citigroup's stock has been trading at roughly 26 times its 1999 earnings and AIG at 27 times its 1999 earnings. American Express, which also sells life insurance, has been at 32 times its 1999 earnings. The typical insurance company's stock trades at an average of 12 to 13 times its earnings, while banks tend to trade at around 14 to 15 times their earnings, Klauber said.

More Mergers to Come

The convergence of insurance and banks into the new blended area called financial services is likely to continue, experts said, although it may take time for larger mergers to come together.

The new branchless bank combines the best of community banking with the savings of an Internet bank, said Mike Quails, president of newly chartered Insurors Bank of Tennessee, which is a new joint venture between Insurors of Tennessee, a chapter of the Independent Insurance Agents of America and a banking institution.

"The agents are the local connection. It's the same relationships a local bank has, but without the overhead," Qualls said. "Internet banks are highly efficient, but faceless. This is a combination of both."

Some insurers, such as Nationwide and Hartford Life, are selling products through partnerships with banks. Others, including American International Group, Aetna Guardian and ING Group, have received charters to open a thrift. In all, about 33 insurers received permission to open a thrift between 1997 and February 2000, and another 10 applications were pending, according to the Office of Thrift Supervision. Other insurers have a limited-purpose bank, which is limited to a specific focus, such as credit cards.

However, thrifts are limited in that only one-third of their business can be commercial accounts, while banks allow more flexibility. Thrifts are regulated by the Office of Thrift Supervision, while banks can face both state and federal regulation.

A Long Mating Dance

Financial-services reform may have made it easier for banks and insurers to mix their businesses, but the two conservative industries don't move quickly, said Brian Smith, a Washington, D.C.-based attorney with Mayer, Brown & Platt.

"It's a long mating dance" between banks and insurers, Smith said. Some banks, hesitant to leap into underwriting themselves, find it easier to dip their toes into insurance through an alliance with an established insurer or by purchasing an agency or broker. John Wepler, vice president, mergers and acquisitions, of Marsh, Berry & Co., said 77% of the consulting company's 48 transactions under way in June were related in some way to the banking industry.

An alliance between the two industries "is like being engaged. You get to know the other person a whole lot better. With a little bit of luck...it may lead to a more formal corporate merger," Smith said.

Ron Panko contributed to this article.

NAIC Looks to Reconstitute Insurance Regulation

George Nichols III

The head of Kentucky's Department of Insurance since April 1996 and the current president of the National Association of Insurance Commissioners. He is chairman of the NAIC's Executive Committee, Financial Services Modernization Task Force and International Committee.

Without a concerted effort from the National Association of Insurance Commisioners, the fast-changing financial-services industry could leave the unwieldy state-based regulatory system in the dust. Not only has last fall's financial modernization legislation paved the way for insurers, banks and securities dealers to cross over into each other's lines of business, but the rise of the Internet has given companies marketing opportunities that instantly transcend state boundaries. Meanwhile, huge foreign companies have made inroads into the United States, and insurers have continued to struggle with market-conduct lawsuits.

Normally, state regulators at an NAIC meeting might have felt good if they had reached consensus on one major issue. But the rapid changes in the marketplace and growth of globalization and technology, coupled with the Gramm-Leach-Bliley financial modernization law, drove regulators to "take a much larger, comprehensive view of trying to implement change for insurance regulation,' said George Nichols III, NAIC president and Kentucky insurance commissioner. At their spring meeting in March, NAIC members signed a statement of intent to demonstrate their commitment to the new agenda.

Nichols answered questions about issues scheduled for consideration.

Q: What do you mean by "national treatment of companies?"

We're looking at the whole licensing process and regulatory oversight of a company. We could create a national license for all 50 states. As a result, we would have the ability to have a group of regulators oversee a company's national activities or form some similar structure to do that. This would be our response to companies that want a federal charter. There are some big insurers that should be treated like a national company. That would also apply to companies outside the country. We're in the process of developing a document that describes how a foreign insurer could come in and do business in the U.S. We've tried to look at every entity that might want to be involved in insurance. Banks, for example, might want to get in.

Q: Gramm-Leach-Bliley set a November deadline to address privacy issues. How are you coming on that?

We have drafts out using input we've received from interested parties. There is agreement among the commissioners to implement privacy guidelines from our perspective on the same timelines as Gramm-Leach-Bliley, which was extended to July of next year. Our regulation would be two-pronged. For financial information, we want to be consistent with federal regulators, but with some recognition that property/casualty insurers may use third parties in their normal course of business. We think financial information should be an "opt-out" for consumers and that health information should be an "opt-in."

Q: What do you have in mind for speeding new insurance products to market?

We have to have the necessary structure--the qualifications and skill sets--to review company filings in a timely and efficient manner for products that insurers want to market nationally. We're attempting to incorporate our work on model-law rate and filings forms for property and casualty products. Also, we want to find a way to get all state insurance departments up on our electronic rate form, SERFF [State Electronic Rate and Form Filings].

Q: Gramm-Leach-Bliley knocked down the barriers between the insurance, banking and securities businesses, which can complicate regulation. One of your agenda items is to coordinate with federal regulators. How is that coining?

We'll be discussing where we are in that process. The feds have put out a letter to their examiners about oversight of a financial-services company and the role they will play. We'll discuss that in a number of meetings coming up with the Fed [Federal Reserve Bank], the OCC [Office of the Comptroller of the Currency], the FDIC [Federal Deposit Insurance Corp.], the SEC [Securities and Exchange Commission] and the OTS [Office of Thrift Supervision].

Q: Where are you on market-conduct issues?

We will try to assess what kind of structure, system and approach we should take in order to maintain the integrity of regulation and consumer protection. We'll also look at an 0CC review of various pre-emptions and we'll be discussing a rule that federal regulators have submitted on bank sales of insurance.

The agenda also has a "definition of insurance" item. What's that all about?

It's a provision that says insurance regulators can define what constitutes insurance, what we believe is a comprehensive list of insurance definitions. We want to make sure the lines are clear, that under the concept of functional regulation, here's where I start and stop and the next regulator picks up.

-- Ron Panko