As banks seek to enter the insurance underwriting business, the nation's largest thrift is calling it quits.

Washington Mutual Inc. said Wednesday it will sell its life insurance subsidiary to Safeco Corp., a Redmond, Wash.-based insurance company.

Safeco will pay $140 million for WM Life Insurance Co., which manufactures, sells, and manages fixed and variable annuities. It will also distribute its own annuities through Wamu's retail branch network in six western states and Florida.

The deal, which comes on the heels of Wamu's July 1 acquisition of Great Western Bank, is likely to bolster the Seattle-based thrift's bottom line, analysts said. It would allow Wamu to reap fee income from selling a wide range of annuities but to avert the expense of creating new products and managing insurance assets.

"They get the best of both worlds," said Thomas O'Donnell, an analyst at Smith Barney Inc. in New York. "They get income, and they don't have the management responsibilities."

WM Life, which was formed by Washington Mutual in 1986, had assets of $1.1 billion in 1996. Its acquirer, Safeco, has $20 billion of assets.

Yesterday's agreement could be a wake-up call for other banks that are considering getting into the underwriting business once regulatory restrictions are lifted. Wamu and a handful of other banks are allowed to underwrite life insurance now under grandfather clauses in financial services laws.

Analysts and industry experts were split on whether the deal will discourage banks from underwriting insurance.

"I'd predict with the fall of Glass-Steagall, you're going to see the opposite happening-that banks will get into the business," said Bob Baranoff, a spokesman for Limra, a life insurance trade group in Windsor, Conn. "Probably you're going to see them buying insurance companies."

Banks can make money by underwriting if the business is large enough, said Mr. Baranoff. "It's a question of scale," he said.

But David Kaytes, a consultant with First Manhattan Group, said that scale is hard for most banks to achieve.

As distributors, banks "have a certain advantage because of their customer relationships," he said. "But as underwriters, they are subscale. Underwriting is a scale-driven business."

The acquisition is expected to be completed in the fourth quarter following approvals by state insurance regulators and federal antitrust regulators.

Talbot Financial Corp., a Safeco subsidiary based in Albuquerque, will provide training, marketing assistance, and other annuity distribution and consulting services for Wamu's consumer retail branch network. Wamu will initially sell fixed annuities only.

"The agreement with Safeco should add to Washington Mutual's future fee income, while enabling our company to redeploy the capital previously invested in WM Life," Wamu chairman Kerry Killinger said in a statement.

Mr. Killinger added that the deal will help the thrift meet its aggressive performance goals. Wamu in 1995 said it would post at least an 18% return on common equity and an annualized 15% increase in earnings per share through 2000.

Roger Harbin, a senior vice president at Safeco Life Insurance Co., Safeco's insurance arm, said the deal will vastly extend the company's distribution.

"Wamu is now the largest thrift institution in the country and the 11th- largest bank organization of any kind with 1,200 branches and four million customers," he said. "That's a large potential market for Safeco products."

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