Financial pioneers: the Gramm-Leach-Bliley generation of insurers and associations leads the way into banking for the health savings accounts newcomers.

Since the passage of the Gramm-Leach-Bliley Act of 1999, various insurers and insurance associations have blazed trails into the banking industry, seizing the parts of the business that worked for them and adapting practices to suit their needs. Today, most of these banks are still small, but a few have gained some heft, and their parent companies find they substantively help their core businesses. Recent legislation creating health savings accounts is drawing a new group of insurers into banking, novices that will need to find their own way among the promises and pitfalls of a different financial landscape. Oldsters and youngsters alike view their into banking as a way to make life easier for and help retain customers. Some of the adventurers are described on the following pages.

The bank will provide debit cards to insureds, but will look for a partner to offer a credit card. Credit cards provide insureds the ability to charge for services if they don't have enough money in their HSA, but expect regular future contributions into the account. Insureds will be able to invest funds in either a fixed-income account or a portfolio of mutual funds.

The association has filed for an industrial bank charter in Utah, which Voss said is experienced with this type of charter. An industrial charter allows for single-purpose banking, while a national charter permits a wide range of traditional products and services, she said. Staff members will be based in Utah and run the business as a virtual bank.

Industry experts project total enrollment in consumer-driven products to exceed 20 million by 2008, said Voss.

* State Farm Bank: Agents Play Big Role

State Farm Group had a head start among most individual insurance companies by gaining charter approval for its bank in the fall of 1998, before the passage of the Gramm-Leach-Bliley law. That's because law at the time allowed an insurer to hold a savings bank charter (technically, a unitary thrift holding company charter). State Farm Bank, which became operational in 1999, still operates under that charter.

The bank is a wholly owned subsidiary of State Farm Mutual Automobile Insurance Co., and its primary businesses are auto loans and certificates of deposit. "We've found through the years that if we have additional products and services to offer with our auto insurance, we increase our retention," said Stan Ommen, president and chief executive officer of the bank. "I can't think of a product that matches up more closely with our core business of auto insurance than an auto loan."

The bank currently has more than $12 billion in assets. That's enough to rank it in the top 90 banks in the United States by asset size out of more than 8,000 banks, Ommen said.

For many years before the bank, State Farm agents referred auto loan business to about 25 partner banks around the country. These referrals increased auto insurance retention, leading State Farm to conclude that a bank of its own, offering loans and other consumer-banking products, would increase retention even more Ommen said the bank also has done well with home equity loans and credit cards.

Although the bank has about 1.5 million accounts, Ommen said only about 4% of State Farm customers use the bank. "We'd like to see a lot more, but we also feel pretty good about how much we've done since we started," he said. "We're only seven years old, and we didn't really get our banking rolled out on a countrywide basis until about five years ago. So we think we've done pretty well, but there's obviously a lot of potential."

The bank has no branch offices, but Ommen does not consider it a virtual bank. That's because it markets primarily through State Farm agents in about 16,000 offices. "There is a physical presence to which people can go to talk to someone about State Farm Bank," he said. "Not a lot of business is enacted online. Most of our business comes through our agents."

Indeed, the biggest factor in growing the business has been the process of making agents comfortable with offering bank products. "It's something they hadn't been selling before," said Ommen. "We've had to demonstrate to them the value they see when bank products are included in a household, and we've had to make that process as easy as we can for agents to engage in that business." Agents receive a small commission for placing banking business, he said.

Bank products and services are open to anyone, and Ommen said about 15% of bank business is with non-policyholders. The bank advertises its CD rates in local markets, and most new customers are attracted by those ads.

One of the bank's newest products is the health savings account. Although State Farm does not manufacture high-deductible health plans, its agents sell them through a partnership with another company.

When they do, they are now able to offer the companion product, Ommen said.

In the long rtm, the bank will diversify the risk the State Farm insurance group bears as an underwriter enterprise. "But we're so small today compared to the insurance side" that this diversification process is in the early stages, said Ommen.

* NAMIC's Bank: Changes Under Way

The National Association of Mutual Insurance Companies formed Assurance Partners Bank in June 2000 to provide products and services exclusively to NAMIC members. The bank was slow to grow, however, with about $70 million in assets at the end of last year. In April 2005, directors merged it into a new holding company, Federal City Bancorp, with the intent of expanding its business to agents that serve NAMIC members. Starting this month, the bank's new name is American Partners Bank.

Stuart McFarland, chairman and chief executive officer, said the original bank didn't make the investments in technology or marketing needed for strong growth. And as a single-purpose, single-channel enterprise, it didn't have the luxury to grow in community markets or reach out to agents that serve NAMIC members.

A catalyst for the bank's restructuring was a late-2004 ruling by the federal Office of Thrift Supervision, McFarland said. The ruling, sought by State Farm, provided federal preemption of state banking and lending laws for agents and agencies deemed to be the exclusive agent of the bank. But it also was meaningful to NAMIC's bank in that it meant agents and agencies were no longer subject to state licensing and that banks could adequately compensate them for their work, such as referrals of clients for mortgage loans, said McFarland. "The selection and qualification of agents and agencies to become our exclusive partners is a large project," he said. "We're starting small with a select group, which we will build upon."

American Partners currently provides insured deposit accounts, business and consumer checking, credit cards and automatic teller machines. McFarland said he expects the bank to increase its assets to $300 million to $400 million in three or four years. The bank is under new management, has been recapitalized, and will focus on aggressively growing the commercial and residential mortgage business.

The bank had operated out of just one location in Carmel, Ind., but the new management team is headquartered in Maryland just outside the District of Columbia, where there are attractive retail and commercial markets for banking, said McFarland. The bank plans in May to open its first branch in Germantown, Md.

During the past six months, the bank has seen an increase in online interactivity, and McFarland expects that trend to continue.

* InsurBanc: Catering To Independent Agencies

The nation's largest agent trade group, the Independent Insurance Agents and Brokers of America, received approval for its new bank in late 2000 and opened it for business on April 30, 2001. It is a virtual bank conceived to provide banking solutions to agents and agencies.

"The Big I is very pleased with where InsurBanc has been and is today," said David Tralka, president and chief executive officer. "We have clients in 40 states. Originally, we rolled out in a couple of states in the Northeast."

As of late February, the Farmington, Conn.-based bank had assets just shy of $100 million. It has arranged for agents to make deposits with local banks at about 12,000 locations, and those dollars are swept overnight into their InsurBanc accounts. Customers manage their accounts online and can apply by phone or online for services such as mortgages, home equity credit David Tralka lines and commercial loans.

InsurBanc helps agents and agencies with capital for such needs as agency perpetuation, acquisitions and growth. "Because that's the type of lending we do every day, we think we know it better than anybody else, and we think we can get the right capital dollar amount and the right loan structures into the hands of our borrowers because we understand what they do all day long," said Tralka. Other lenders, for example, may want "tangible collateral," said Tralka, but InsurBanc looks beyond tangible collateral to client realtionships.

"In a lot of agency cases, there are not a lot of hard assets to be used as collateral, so you're looking at the cash flow that's generated by the agency through recurring revenues it gets from long-standing client relationships." he said. "We put value to that. We understand how that translates into enterprise value. And we find that once we've established commercial relationships with our clients, they'll look to us for traditional consumer banking needs."

Not a lot of independent agents use the bank, however. Tralka estimated the bank has fewer than 2,000 accounts. "We still have a lot of work to do across the country in spreading our word," he said. "Our biggest challenge is awareness. Once we have relationships with clients, they tend to think very positively about us, and our retention rate is very high."

A possible spur to growth may be that some agencies no longer want to do business with banks that become their competitors by selling insurance. "For that type of agency, we become a very viable alternative, said Tralka.

After Katrina, the Big I created a relief fund that InsurBanc administered. InsurBanc also created a loan program for agencies affected by the disaster. "We're nimble enough to bring solutions to the industry that perhaps others might not think about or might not be able to do," said Tralka. "If something like that happens again, we'll be ready."

* MetLife Bank: Strong Growth

MetLife Inc. says it was the first insurer to form a bank as a result of the Gramm-Leach-Bliley legislation. Its bank became a legal entity in 2001 and opened for business in November 2002. MetLife Bank is a national bank with $4.3 billion in deposits and more than $6 billion in assets.

Primary products are money-market accounts and certificates of deposit, including those used inside individual retirement accounts, where yields are slightly higher. The bank is piloting mortgages cities on the East Coast. "We're excited because it's another product that fits in nicely with our strategy," said Donna DeMaio, bank president. "We offer competitive rates, and MetLife has an auto and home insurance business. Many people are buying their first house or are starting a family, and they need life insurance, so the value proposition is starting to play out nicely."

The bank uses MetLife's three main distribution channels. One is through institutional customers, which traditionally offer group insurance to employees and now offer banking on a voluntary basis. Through advertising, it reaches out to the public. But at least half of deposits come through referrals from the agent channel. DeMaio said more than 3,100 agents actively work with the bank, including joint local advertising, mostly in newspapers. Customers like having the choice to call the bank's phone number in the ad or working with the agent. "So the bank is actually driving traffic into different agencies," DeMaio said. "I get calls all the time from agencies about how they love the bank and what it's done for their business."

The advertising attraction is that MetLife Bank, which has no mortar-and-brick expenses, offers rates that are usually three to five times that offered by other banks, and people learn they can invest with MetLife and still maintain their checking accounts at their local banks. MetLife Bank has more than 100,000 customers, 60,000 of which were new last year, and it doubled deposits in both 2004 and 2005. DeMaio said the average deposit is $24,000, double the national average for direct banks.

With 30% to 40% of transactions performed online or through the bank's call center, and the rest through agents, DeMaio said MetLife Bank can't be considered a virtual bank. And the agent percentage is growing. "They love it," she said. "If you're an agent in Richmond, Va., on the fourth floor of an office park building, and people are walking into the office because they saw a MetLife ad, it just doesn't get better than that for them."

* The Blues' Bank: A Healthy Fit

The Blue Cross and Blue Shield Association is moving into the banking business, now that its member companies are offering health savings accounts. HSAs must be coupled with high-deductible health plans, and the soon-to-be-launched Blue Healthcare Bank would integrate financial and medical information to make administration easier for both the plans and their customers.

Under HSAs, insureds may draw tax-free money from their accounts to pay for services not covered under their high-deductible plan. Most accounts are held in banks not affiliated with the health insurer. Currently, the 38 Blues plans have relationships with banks. The trouble with the arrangement is that bank statements show only the amounts withdrawn, not the reason for the payment, said Jody Voss, the association's executive director in business development. That causes confusion among patients, the health plan and health-care providers. And few patients are diligent enough to keep records that match payments with treatments.

When Blue Healthcare Bank becomes operational in January 2007, it will do just that, and Blues plans will automatically enroll their customers' HSAs, health reimbursement arrangements and flexible spending accounts with the bank. Parties will be able to view transactions online. Voss said the association expects the new bank will spur interest in the Blues' consumer-driven plans, which are offered in all 50 states. "We expect the simplification of the process and the one-stop shopping concept supported by the online tool sets will be attractive to consumers," she said.

Key Points

* The key for insurers to banking success is to specialize in an area related to their insurance businesses.

* Many successful models use insurance agents to bring business to insurer-owned banks.

* Trade associations' banks tend to support their members.

* Banks offering administration of Health Savings Accounts may make sense for health insurers.

Learn More

State Farm Mutual Automobile Insurance Co.

A.M. Best Company # 02479

Distribution: Exclusive agencies

Metropolitan Life Insurance Co.

A.M. Best Company # 06704

Distribution: Career agents, independent agents, wire houses, banks

For ratings and other financial strength information about these companies, visit www.ambest.com.

Exploring New Territory

The banks described below are among the major ventures initiated by
insurers and insurance trade groups.

                          Incorporation                    Customer
Bank                      Date             Assets *        Type

MetLife Bank              February 2001    $6 billion      Individuals
State Farm Bank           Fall 1998        $12 billion     Individuals
American Partners Bank    June 2000        $70 million     Member
                                                             companies
InsurBanc                 Late 2000        $100 million    Insurance
                                                             agencies
Blue Healthcare Bank      Pending          N/A             Individuals

                                              Primary
Bank                      Accounts            Service

MetLife Bank              100,000             Savings accounts
State Farm Bank           1,500,000           Auto loans
American Partners Bank    200                 Business banking
InsurBanc                 Fewer than 2,000    Business loans
Blue Healthcare Bank      N/A                 Health savings accounts

                          Parent
Bank                      Company

MetLife Bank              MetLife
State Farm Bank           State Farm
American Partners Bank    NAMIC
InsurBanc                 IIABA
Blue Healthcare Bank      BC & BS Assoc.

* Year-end 2005, estimated