OPERATIONAL SYNERGIES IN BANK/INSURANCE MERGERS:

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OPERATIONAL SYNERGIES IN BANK/INSURANCE
MERGERS DOES CROSS SELLING WORK? A
presentation to the EBR Forum
Milano 11 July 2002
Steven I. Davis
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• AGENDA
• the bank/insurance landscape
• the results so far
• the lesson of experience and critical success
  factors
• issues to be resolved

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1) THE BANK/INSURANCE LANDSCAPE
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The bank /insurance landscape

• cross-selling is only one objective of
  bank/insurance mergers. The others are
• financial power ability to do more and bigger
  deals!
• increase market share share of personal wealth
• access to new distribution channels independent
  agents or bank branches
• but its the most likely sure source of
  stockholder value!
• apply earnings multiplier to incremental revenues

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The bank /insurance landscape

• the theory of cross-selling to bank/insurance
  client bases
• lack of overlap between the two opportunity to
  sell to a new client base
• banks have client trust, regular contact with
  large client base why not sell them additional
  financial products?
• insurers have a separate distribution channel
  why not sell banking products to these clients?
  
• client profitability increases exponentially with
  number of products sold

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The bank /insurance landscape

• The result lots of European mergers/acquisitions
  in recent years!

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2) THE RESULTS SO FAR
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The results so far

• banks have been highly successful in selling life
  insurance in some markets - but not others!
• European banks share of life insurance
  distribution

SourceEuropean Fund Industry Directory
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The results so far

• penetration of the bank client base varies widely

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The results so far

• selling certain insurance products can be highly
  profitable

Source DIBC estimates
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The results so far

• Lloyds TSB shows what can be done
• share of 2001 operating profits
• non-life insurance sold through branches 19 of
  total
• all insurance and investment products (including
  Scottish Widows) 45 of total

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3) THE LESSONS OF EXPERIENCE
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The lessons of experience

• cultural differences have been a universal
  problem in achieving synergies

Source Deutsche Bank
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The lessons of experience

• banks selling insurance products
• banks are best at selling simple products to
  unsophisticated clients
• insurance is one of many products for busy bank
  salesman
• some insurance products sell well in tandem with
  loans - and can be highly profitable!
• buildings and contents insurance for mortgage
  loans
• whole life insurance to protect borrower during
  period loan
• endowment policies to pay off home loans
• and others dont
• auto insurance
• travel, pet, critical illness, etc.

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The lessons of experience

• insurance salesforce selling bank products
  generally a frustrating experience
• basic problem inadequate remuneration
• most salesmen are agents on commission, not
  salary
• affordable commissions on bank products are low
• a better solution is on-line banking
• keeps the revenue in-house
• lower cost to client.

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The lessons of experience

• national differences in penetration of bank
  clients driven by several factors
• nature of products (complexity, deposit-like or
  other)
• strength of competitive channels (IFAs in UK)
• strength of brand (of bank or insurer)
• where conditions favour them, banks have
  dominated life distribution
• natural advantage of low cost delivery
• similarity to bank deposits
• simple products (life insurance, private
  pensions)
• strong brand/reputation
• absence of strong IFA competition

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The lessons of experience

• distribution channels must be kept separate
• different brands
• different compensation structure
• different product design
• unhappy experience of KBC, Gjensidige, Credit
  Suisse

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The lessons of experience

• the conclusion cross-selling can - and does -
  work if the critical success factors are present
• the right compensation structure
• the right products and systems support
• absence of strong competitive channels
• a strong brand and reputation

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4) ISSUES TO BE RESOLVED
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Issues to be resolved

• does the bank need to manufacture the product?
• lots of divestitures - mostly of non-life
  manufacture
• key variables
• relative profit margin and return on capital
• ability to innovate, design and appropriate
  products
• issue of critical mass

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Issues to be resolved

• which brand to use?
• examples of UK banks
• how can insurers compete with bank distribution?
• do a deal with bank(s)?
• focus on complex, high cost products?
• in-house on-line bank (Egg)?
• reshape sales force