By Leigh Howe

Financial and insurance services is a broad category covering banks, savings & loans, mortgage lenders, security brokers, investment advisors, life insurance, health insurance, and property insurance. 

Overall, the financial and insurance services industry remains strong and active.  Trends that have been affecting the industry as a whole include: 

º    Continued consolidation within and across sector lines as financial services, banks, and insurance companies expand into each other’s markets by offering a breadth of services. 

º    Widespread use of the Internet in the industry, from online banking to online trading services.  The growth in online financial services will continue well into the future and eventually become the primary distribution channel. 

º    Greater scrutiny and possibly new regulation will impact the industry due to the wave of accounting and stock market scandals.

Examining each sector within the industry reveals specific industry modes of operation and trends that will help us understand this diverse industry.

Banking. The U.S. banking sector is a highly fragmented market with thousands of competing players.  Banks fall into two main categories: money centers and regionals.  Money center banks tend to be located in major U.S. financial centers and are involved in international lending and foreign currency operation.  Regional banks tend to focus their activities in one or more geographic areas.   The major players in the industry include Citigroup, Bank of America, Wells Fargo, JP Morgan Chase, and Bank One.

º    Banks’ physical capital requirements include constructing and maintaining branch offices and appropriate technology. 

º    Consolidation activity will continue throughout the banking sector, though at a slower rate.  Consolidation allows banks to increase competitiveness, range of products, and geographic reach. 

º    Many banks will look internally for growth and to diversify their service offerings. 

º    Banks will also take an expense-cutting approach as companies streamline operations and take advantages of improved technology. 

º    The short-term outlook for banking is not particularly robust due the general economic slowdown that is leading to diminished credit quality and subdued loan growth. 

Thrifts.  Thrifts generally consist of savings & loans, savings banks, cooperative banks, and credit unions. The primary business of thrifts is to provide credit for residential housing, retail deposits and short-term borrowing to supply these funds. 

º    Like banks, the thrift sector is highly fragmented and continues to dwindle as consolidation continues.  The thrift sector generally includes small regional players, though a few large companies have emerged such as Washington Mutual, Golden West Financial, and Golden State Bancorp. 

º    Thrift profits vary inversely with the direction of interest rates, so 2001 was a good year for the thrift industry.  The uncertainty in the stock market increased deposits and reduced borrowing costs for most thrifts. 

º    The continued refinancing boom is not necessarily a good thing for the sector.  The winners in a refinancing boom are typically the mortgage banking firms. 

º    The outlook for thrifts is for a slight decline, though the sector is expected to post its second strongest year in 2002.

Diversified Financial Services.  This is a diverse, highly regulated sector but generally includes consumer finance companies, large financial conglomerates, and highly specialized service companies. 

º    Large companies dominate this sector as they are able to get the most products to the most people efficiently.  The competition is intense and reflects the commodity-like nature of most financial services. 

º    Globalization and consolidation will be the driving trend as this sector expects to continue to see healthy growth despite the weak economic conditions.  Credit card growth will help to drive that growth as credit card use proliferates.

Investment Services.  Financial planning services is a highly fragmented industry, though the investment banking sector is fairly consolidated under companies like Merrill Lynch, Morgan Stanley, Goldman Sachs, and Lehman Brothers. 

º    People costs are the major expense item for this sector as human beings, not machines, make investment decisions, sustain customer relations, and execute trades.  This sector rewards their employees with some of the highest wages in the business world.

º    The second largest expense is for technology and communication, followed by marketing and occupancy costs. Technological advances and financial innovation have become key factors in the industry’s recent developments. 

º    Additional prominent trends affecting this fast-paced sector include globalization and the growing demands of the baby boom generation.  However, the recent scandals and subsequent volatility of the stock market is increasing the risk aversion of investors.

º    This sector is forecast to resume growth following the dismal performance of 2001.

Life & Health Insurance.  Although there are nearly 2,000 life insurance companies in the United States, the business is dominated by just a handful, such as Metropolitan Life, Prudential, and Hartford Life. 

º    The life insurance sector was already grappling with a weakened demand for products when the terrorist attacks happened on September 11, 2001.  The sector recovered better than expected and was able to absorb the associated claims.  Another recent blow came when the Enron debacle hit.  Again, the recovery is expected to be swift. 

º    The demand for life insurance has risen slightly since the terrorist attacks and the sector continues to broaden their products and services as other financial services companies continue to encroach on their turf.  

º    The aging population is having an impact on the industry as baby boomers become more concerned with retirement saving. 

º    Life insurance remains a mature, relatively slow-growth business. The rate of recent growth will likely taper off as 2002 progresses.

Property Insurance.  The property insurance sector is highly fragmented, with thousands of companies vying for a share of the market.  However, a few companies are dominant players, such as State Farm, Allstate, Travellers, and AIG. 

º    The primary trends affecting most insurers are the escalation in premium rates and the increased threat of costly asbestos claims. 

º    In contrast to the other financial and insurance sectors, property insurance has seen a significant slowdown in merger activity.  September 11 and Enron left the sector little time and few resources to consider mergers or acquisitions. 

º    Slow growth is expected for this sector.