First of Two Parts

Banks, for better of for worse, are not considered contenders to buy three top insurers that are widely seen as ripe for sale.

One broker says the three - Safeco, CNA, and St. Paul Cos. - will be gone by the end of next year. However, two years after the Citicorp-Travelers Group merger, which was supposed to start a trend for bank-insurance linkup, banks have been spectators as 15% of the 125 largest insurance companies in assets fell to mergers within their own industry.

Banks are marketing insurance products but have stopped short of buying insurance companies, whose premium growth is at a cyclical low and whose stock is down. "Insurance companies have worse multiples than banks, so I'd think a bank would stay away," said Sanford D. Elsass, managing director of Encore Capital LLC of Boston. "Perhaps a world-size bank like a Deutsche Bank or HSBC might get involved. But that's it."

Earlier this year analysts were saying that Citigroup Inc. had the capital to make more insurance acquisitions. And BB&T Corp. said it might be interested in buying a medium-size or small insurance company.

And last month Royal Bank of Canada announced it was buying Liberty Life Insurance Co. and Liberty Services Corp. as a way of getting into the U.S. market.

But analysts said U.S. banks are unlikely to come forward with bids for Safeco, CNA, and St. Paul.

Not surprisingly, spokespeople for the three companies denied that their employers were looking to be purchased.

But CNA could be a good fit for insurers trying to bolster their Main Street program business, which includes niche markets like landscapers, tire dealers, roofers, funeral homes, and bed-and-breakfasts. Mr. Elsass said.

A bank would not be the likeliest suitor, according to James Overholt, senior consultant and manager of financial services programs for Milliman & Robertson of Chicago. CNA sold its homeowners and auto lines to Allstate in mid-1999 for $1.2 billion, and its remaining commercial casualty lines are less attractive to banks, Mr. Overholt said.

"We aren't offering the same lines of insurance banks want to sell," CNA spokesman Clark Walter said.

Besides, he said, CNA, which had revenues of $16.4 billion and assets of $61.2 billion last year, does not have to listen to any offers. The firm is 87% owned by the Loews Corp., which is controlled by the billionaire Tisch family of New York, which has made it clear it will not sell the insurer, Mr. Walter said.

The Tisch family sold the CBS network to Westinghouse Electric Corp. in 1995. Robert Tisch is now a co-owner of the New York Giants of the National Football League.

"We have these rumors come up from time to time," Mr. Walter said. "But we'd rather not focus on speculation and focus on our core business of being a business, commercial property, and casualty company."

Safeco, which has $30.5 billion of assets, also denies it would sell. But Mr. Elsass said major foreign insurers like Royal Sun Alliance or Zurich could make plays.

"Royal doesn't have a presence west of the Mississippi, and Safeco would give them that," Mr. Elsass said. "Zurich uses independent agents, as does Safeco, so they could integrate Safeco into their strategy."

Le Roi Brashears, a spokesman for Safeco, said it is focusing on building itself up by improving distribution through independent agents.

"We've recently terminated relationships with a couple of hundred agents that were writing bad business," Mr. Brashears said. "We're also launching a program that will help the agents we have become more profitable."

The third merger candidate, St. Paul Cos. In Minnesota, had $38.9 billion of assets and $7.5 billion of revenues in 1999. Laura Gagnon, vice president of investor relations, said the company had no interest in selling, but admitted that if the right price came up, it would be considered.

"First of all, I think our stock is underrated, which could create a buying opportunity," Ms. Gagnon said. "We are 80% institutionally owned, so we'd have to listen."

But the company would expect offers from insurance companies, not banks, she said.

"The real question is: What would being acquired by a bank do for our competitive position?" Ms. Gagnon said. "I don't see anything. There is the distribution channel, but we already sell our commercial property and casualty lines through banks."

She added that most banks are looking to boost sales of personal insurance lines, which St. Paul does not offer.

HSBC, which has insurance operations in more than 20 countries, has said it wants to bolster its U.S. insurance operation. But Mr. Elsass said he would bet on stronger insurers to gobble up their weaker brethren and leave fewer buying opportunities for banks.

The consolidation in the insurance industry is already in motion. Another 10% of the top 125 insurers could fall by the end of next year, according to Mr. Elsass.

At the time of the megamerger that created Citigroup, John Reed, then chairman and chief executive of Citicorp, proclaimed, "It was a deal you simply had to do." Sanford Weill, who was chairman and chief executive of Hartford, Conn.-based Travelers, told reporters, "We are creating the financial institution of the future."

So far, however, banks have found they do not have to buy an insurer in order to meet customer's needs, Mr. Overholt said.

"Yes, there definitely will be consolidation," he said. "But I'd agree that insurance multiples are weak and banks are probably not going to be buying.

"Of course, if you wanted to buy immediately and buy into a diluted market, you could do it now."

But banks could probably find better ways to deploy their money, according to John Austin, a banking attorney in the Washington office of Thompson Coburn LLC, a St. Louis law firm. While some of Mr. Austin's clients have bought insurance agencies, the idea of purchasing an insurer has little appeal.

"If an insurer were to sell off the asset management part of their business, a bank might be interested," Mr. Austin said. "But a bank doesn't need to own the underwriting entity."

Lack of compatibility is another reason banks are not buying.

Though restrictions on affiliations between banks and insurers were lifted by last year's financial modernization law, the two businesses are not necessarily alike, said Edward Liddy, chairman, president and chief executive officer of Allstate Corp. of Northbrook, Ill.

"Banks will shy away from property and casualty insurance because investors don't like volatility," said Richard H. Klovstad, vice chairman and chief executive officer at PNC Insurance of Pittsburgh. "You can't predict when major storms or catastrophes occur in the P&C business, and bank investors won't appreciate that."

Though there are different skill sets involved in running banking and insurance companies, there also are enough similarities in their financial product focuses to keep them competing on the same turf, Mr. Klovstad added. Still, the valuation differences between banks and insurance companies will keep a slew of mergers from occurring, he said.

Thursday: Could a nascent rebound in the insurance business cycle foreshadow a change in bankers' attitude about insurance deals?

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