Assumptions that banks and insurance underwriters could never team up went out the window in April when Citicorp and Travelers Group announced plans to merge.

The Federal Reserve's approval of the deal in September supplied banking companies with a framework-albeit a temporary one-for making such mergers work. Decades-old laws separating commercial banking from insurance and securities underwriting, which bankers had long attacked as outdated, suddenly seemed positively quaint.

But for all the excitement over its creation, Citigroup has yet to inspire a single imitator. Though the banking industry continues to press for financial modernization, including the power to underwrite insurance, no company is priming itself to jump into the business.

Even so, advocates of allowing banks into insurance underwriting bristle at the suggestion that the debate is largely academic.

"We feel that banks should be able to participate fully in the business of insurance," said Larry LaRocco, managing director of the ABA Insurance Association, an arm of the American Bankers Association. "Underwriting isn't just theoretical-it's a real power that we should be working for."

Then why are banks hanging back?

Bankers cite low returns on equity, unstable earnings, and the need for large commitments of capital as drawbacks of insurance underwriting. Among the most vocal of the doubters are the heads of banks' growing insurance sales groups.

As Glen Milesko, chairman of Banc One Insurance Group, sees it, the question is: "Do you really want to underwrite, or would you rather share the profits without the cost of capital and the risk of loss?"

While life insurance is at least known for its predictability, property and casualty underwriting is viewed as a highly risky business because natural disasters can wreck a company's earnings.

By contrast, the side of the insurance business that many banks are in- marketing policies and annuities-can generate juicy revenues from commissions and profit-sharing arrangements with underwriters, with little commitment of capital.

Vernon Hill, chief executive officer of Commerce Bancorp, Cherry Hill, N.J., is excited about his company's role as a broker of mostly property and casualty insurance for businesses and individuals.

"That's the cream of the business," he said. By contrast, "the underwriters earn substantially less returns, and they can have very erratic earnings swings."

Perhaps the greatest sticking point for many bankers is that life underwriters aren't as profitable as banks. Last year, life insurers generated an 11.92% return on equity; regional banks a 15.81% return; and money-centers a 16.19% return, according to Standard & Poor's.

Most of the difference in profitability is related to insurers' greater cost inefficiencies compared with banks, said Beth Morrow, a financial services analyst at Ernst & Young.

"The insurance industry hasn't been as consolidated as the bank industry," she said. "If you take those operations and integrate them into a bank company, you will depress stock prices."

To be sure, advocates of banks' entering the underwriting business see clear benefits.

For one, underwriting would give banks greater control in designing the insurance policies that they sell. "Right now, banks are selling products off the shelf, but if they don't like what they get from the underwriters, they don't have much of an alternative," said Michael Mayo, an analyst at Credit Suisse First Boston.

The few banks that do speak of entering life insurance underwriting- including BB&T Corp., Winston-Salem, N.C., and Wells Fargo & Co., San Francisco,-appear to be in no hurry.

Scott Reed, BB&T's chief financial officer, said his company would like to acquire regional life underwriters in the Southeast should legal and regulatory barriers fall.

"With life insurance underwriting, you get a steady flow of income coming from premiums, and we see this as a potential for the banking industry to replace some of the deposit flows that have been lost to the stock market and mutual funds," Mr. Reed said.

Banking companies are not entirely unfamiliar with the business of underwriting. Current law lets them underwrite credit-related life policies, a bank mainstay. And some have teamed up with insurance carriers to craft fixed and variable annuities, with the banks managing the investments and the insurers underwriting the policies that are "wrapped around" these mutual fund hybrids. The partners share in the revenues.

David DeGorter, president of First Union Insurance Group, said his bank's alliance with American General, a Houston insurer, for the sale of a proprietary fixed annuity lets the banking company generate money management fees in addition to brokerage commissions.

"We felt like we could leverage our size and create a stronger and deeper relationship with an underwriter," he said.

A number of bankers and industry observers believe that some banks might take a niche approach to underwriting-that is, buy a profitable piece of an underwriter rather than the whole company. Or a company might buy a small, highly profitable company that specializes in a particular line such as variable annuities, disability insurance, or long-term care, they said.

That way, according to Kenneth Kehrer, a bank insurance consultant, the "bank isn't locked into owning an insurance structure. They can go in and build the business or buy a piece of a business if it's particularly attractive to them."

Certainly, the need to sort out banks' role in underwriting insurance has gained momentum with the creation of Citigroup, which has both life and property-casualty components.

Limits on bank insurance activities established by the Bank Holding Company Act of 1956 are likely to be the subject of intense policy debate for the next two years. The Federal Reserve, in approving the merger that formed Citigroup, gave the company until October 2000 to bring its insurance underwriting businesses into compliance with the law. Meanwhile, Citigroup will be pushing Congress to enact legislation permitting banks and insurance companies to own one another.

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