Consolidation In Financial Services Could Lead To Spinoff Of Insurance Units
The past two decades have seen the lines blurred between insurance, commercial and investment banking. The current financial crisis has seen the end to independent investment banking firms but it may also see a number of insurance units split off from larger financial conglomerates.
The sale of Wachovia to Citigroup will only include it’s banking services and leave it’s insurance unit as a stand alone entity. It remains to be seen how the insurance unit will fare on it’s own but there is the fact that it will no longer be held down by the troubled mortgage assets from the parent bank holding company.
Wachovia Insurance Services is not included in the deal, according to Vince Scanlon, a spokesperson for Wachovia. Wachovia Insurance Services employs 1,300 people in 34 offices in 15 states and Washington D.C.
We have seen some consolidation in the insurance industry as was the case when Liberty Mutual acquired Safeco. However the fact that Standard & Poors lowered their credit rating after a review of the acquisition may make firms second guess acquiring some of their weaker brethren.
At a time when capital is difficult to obtain, any downgrade of credit is not something companies will enter into lightly. It is a different story in commercial banking because when acquiring another bank, the buyer also acquires that bank’s deposit base.
As was the case with Wachovia, because a number of large banks already have their own insurance units, it is quite possible that further consolidation in commercial banking could lead to a number of independent insurance units when it is all said and done.
This could very well lead to a stronger insurance industry overall in the end as they tend to fare better in economic downturns relative to other financial service sectors.
