Cheered on by enthusiastic investors, some banks are expected to set their sights on acquiring insurance companies, while a handful of global insurers may be targeting U.S. banks.
The legislation would eliminate barriers that prevent banks, brokerages, and insurance companies from merging with each other. Analysts expect the legislation's greatest impact to be on bank-insurance mergers.
Despite the current formal prohibitions of the Glass-Steagall Act, which would be eliminated by the new law, banks have found ways around most technical obstacles to acquisitions of securities firms and have been aggressively acquiring them for some time. Chase Manhattan Corp., for example, recently announced a deal to buy Hambrecht & Quist Group, a boutique investment bank based in San Francisco.
"Banks have been gradually getting into the securities business for years so the real change is in the insurance sector," said H. Rodgin Cohen, a partner in the law firm of Sullivan & Cromwell and a legal expert on banking and financial markets.
"This opens the door for commercial banks and insurance underwriters to affiliate," he said.
Some bankers saw great hope in the legislation. "We're very excited about it," said John Kanas, chairman of $12 billion-asset North Fork Bancorp. of Melville, N.Y. "This brings together a whole new level of possibilities from the merger and operations sides."
Most bankers and analysts were substantially more subdued. "What this does is clean things up," said H. Furlong Baldwin, chairman of Mercantile Bankshares Corp. of Baltimore. "Those banks that are determined to broaden their product lines have already figured out how to do it."
The stock market showed more enthusiasm. Bank and insurance stocks were both up handsomely. Standard & Poor's index of life insurers rose 7.9% Friday, while the American Banker index of the 50 largest banks was up 3.6%, and the American Banker 225 rose 4.2%. The performance was better than the market as a whole. The Dow Jones industrial average rose 1.7%, and the S&P 500 was up 1.4%.
Among insurers that soared were Chubb Corp., up 6.4%, to $48.8125; Lincoln National Corp. 13.2%, to $47.1875; Reliastar 24.5%, to $42.625; and Torchmark Corp. 17.5%, to $30.6875.
"Good insurance franchises will sell at a premium,'' said Dick Barrett, managing director and co-head of financial institutions at Donaldson, Lufkin, & Jenrette Inc., the investment bank that itself is owned by AXA, a French insurance company.
Investment bank stocks also were up strongly in response to the bill. Lehman Brothers rose 11%, to $67.9375, and Merrill Lynch was up 7.2%, to $72.125.
A former banker who is now an insurance executive said banks are most likely to covet insurance companies that are particularly strong in annuities and life insurance, products that resemble bank deposits.
Analysts predicted that banks are far more likely to start acquiring insurance companies than the other way around, if only because their market capitalization is greater than that of most insurance companies.
Big, strongly capitalized European financial groups that already operate in both banking and insurance were cited as the most likely acquirers of large U.S. banks.
American International Group Inc., for example, the global insurance company that is second in worldwide in market capitalization, has already made substantial acquisitions in commercial finance and banking overseas. Other insurance companies are likely to consider buying smaller banks mainly as vehicles for gathering insured deposits.
Speaking to bankers earlier this week, Ernest T. Patrikis, senior vice president and general counsel at AIG, noted that some bank and insurance company products are virtually indistinguishable. "I really don't see any difference between a guaranteed investment contract and a deposit," Mr. Patrikis said.
Industry analysts said that though profitability in the insurance business is far lower than the 20% return on equity many banks earn, banks increasingly see insurance and accompanying businesses such as asset management as important vehicles for diversifying into new financial sectors.
"The combination of banks and insurance is a natural," Mr. Barrett said. He and others noted that many insurance companies are overcapitalized to achieve high credit ratings, and that their capital could be better allocated and returns on equity boosted by affiliating with a bank.
Secondly, banks already have in place a lot of the technology that insurance companies need, and a bank-insurance combination would offer substantial cost savings. Third, any bank that can cross-sell insurance and banking products will achieve major savings from the heavy cost of operating through independent insurance brokers.
"Until now banks have been locked into growing at the same speed as the economy," Mr. Barrett said. "The only way they are going to get superior growth is by adding on products, and this is a critical one."
Sean Ryan, an analyst for Bear, Stearns & Co., said in a report that passage of the bill more as a boon for fee-hungry investment bankers than anyone else.
"We call this the 'Investment Banker Full Employment Act of 1999'," Mr. Ryan said. "While some individual transactions may be sensible, in general, we are skeptical as we are of other cross-industry deals within the sector."
"Banks would be better served by focusing on distribution while leaving manufacturing to existing underwriters," Mr. Ryan said. Over time, banks will probably "exert increasing pricing power over underwriters" without "committing the capital the underwriting requires."
Mr. Ryan has his own list of potential mergers: Wells Fargo & Co. and Reliastar, both with substantial operations in Minneapolis; BB&T Corp. of Winston-Salem, N.C.; and Bank of America Corp. with Jefferson Pilot, all headquartered North Carolina. A third scenario is Amsouth, SouthTrust, or Regions Financial with Torchmark or Protective Life.
Karen Talley and Charles Keenan contributed to this report.
