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The paper stands out because it shows, unlike other earlier research, that property and casualty insurance companies offer larger diversification gains to banks than life insurance companies.The authors first summarize previous literature that examined motives for combining bank and other financial services.The bank products are to be sold by the independent insurance agents that own their own agencies. The article describes how insurers can use the banks' customer base to reach new customers.
The author acknowledges that the extent to which different business activities are fundamentally distinct induces a tradeoff between diversification gains and loss of efficiency.
The research considers life insurance, property/casualty insurance, securities, and commercial firms as potential matches for firms and concludes that potential diversification gains arise from almost all combinations involving banking and insurance.
The authors investigate how the passage of the Financial Services Modernization Act of 1999 (FMA) affected stock prices of banks, thrifts, finance companies and insurance companies.
The study looks at stock excess returns across sectors and company size.
Diversification benefits and product complementarities (i.e. mortgage and mortgage insurance, auto financing and auto insurance) seem to be the prime motives.
However, some earlier research also suggests that there are few linkages between bank services ands underwriting services in terms of customers, outlets, or other characteristics that generate efficiencies.Underwriting will stay with the insurers but selling may go both ways by insurance agents or bank employees.Insurers have founded banks to offer banking products.The article projects that banks would add 5-10 percent to their after tax profits if "they aggressively pursue their insurance opportunity." The author develops a pro forma statement for banks selling 12 different insurance items.This panel discussion on bank marketing suggests more direct interaction with customers by direct mail or personal contact.One hundred and thirty five applications were made between Jan.1, 1997 and May 31, 2001.Insurance banks have an uphill battle to convince their customers to establish a bank account because it is hard to determine when and why an insurance customer needs a bank account.They measure the valuation effects resulting from the merger announcement among those commercial banks and financial services firms most likely to be affected and conclude that commercial banks, insurance companies, and brokerage firms have all experienced positive and significant valuation effects upon the announcement of the Citigroup merger.However, the authors find that the valuation effects are more favorable for brokerage firms than for commercial banks and for insurance companies.Analysis of abnormal returns surrounding the merger show that life insurance companies and large banks experienced significant stock price increases, while the returns of stocks of smaller banks, health insurers, and property/casualty insurers remain relatively unchanged.This paper analyses which types of mergers are likely to be most productive for banks and other financial firms in the United States.