trending Market Intelligence /marketintelligence/en/news-insights/trending/a7dfjj8fv4ft1p4rtlyezq2 content esgSubNav
In This List

Insurer exits banking 7 years after expanding through M&A

Podcast

Street Talk Episode 87

Blog

A New Dawn for European Bank M&A Top 5 Trends

Blog

Insight Weekly: US banks' loan growth; record share buybacks; utility M&A outlook

Blog

Banking Essentials Newsletter 2021: December Edition


Insurer exits banking 7 years after expanding through M&A

An insurance company that dramatically increased its banking footprint amid high-profile retreats by certain peers from the depository business has opted to change course and refocus on its core property and casualty operations.

Donegal Mutual Insurance Co. and Donegal Group Inc. have agreed to sell Donegal Financial Services Corp., the bank holding company they jointly own, and Mount Joy, Pa.-based subsidiary Union Community Bank to Northwest Bancshares Inc. for approximately $85 million in cash and stock.

Union Community Bank, which reported total assets and deposits of $577.1 million and $490.4 million, respectively, as of March 31, emerged from a $25.2 million May 2011 transaction through which Province Bank FSB, Donegal Financial's then-banking subsidiary, acquired the majority outstanding stake in the former Union National Financial Corp. that it did not already own. Union National Financial was the parent of Union National Community Bank, an institution with $454.6 million in total assets as of March 31, 2011. Province Bank had $97.6 million in assets at that point.

Donegal Group at the time said the deal was aimed at increasing the scale of the organization's Lancaster County, Pa.-focused banking operations and enhancing the value of its banking investment, which began during the post-Gramm-Leach-Bliley Act era of financial services convergence. Though that legislation is most closely identified with the activities of Citigroup Inc., which offered a range of life, annuity and P&C products through its then-Travelers and Primerica subsidiaries, numerous insurance companies responded by obtaining charters to operate banking institutions for the purposes of cross-selling products to their policyholders.

Donegal Group identified convergence as a key competitive challenge in its 2000 annual report, where it noted that Province Bank opened that year with a single branch located in the insurer's headquarters.

Province Bank's products "will be marketed to our local community and current insurance customers through agent referrals and direct marketing," then-Donegal Group President Donald Nikolaus wrote in his 2000 letter to shareholders. The insurer anticipated that its independent agency distribution network would assist in the marketing of banking products while those agents would also benefit from their newfound ability to offer customers a broader range of products.

"While the long-term implications of the convergence of financial services are still unclear," Nikolaus added, "we are pleased to have the ability to provide financial products to our agents and customers alongside our traditional insurance products, and we hope to develop an additional revenue stream from this segment of our business."

Donegal Group had plenty of company in that line of thinking in 2000, but its expansion efforts a decade later came as many insurers' banking plans had changed. After agreeing to buy Union National Financial in 2010, Nikolaus emphasized that the transaction was opportunistic in nature and said that banking would remain a relatively small component of the company's overall business. By then, the conventional wisdom around the industry was that the convergence play was not quite the game-changer that some had anticipated. And with heightened regulation emerging in the aftermath of the financial crisis, banking for some insurers became as much of a burden as a strategic benefit.

The likes of MetLife Inc., W. R. Berkley Corp., Wisconsin Physicians Service Insurance Corp., Pacific Mutual Holding Co., Ameritas Mutual Holding Co., New Jersey Manufacturers Insurance Co. and The Hartford Financial Services Group Inc., among others, have sold banking units in whole or in part. Others, including Allstate Corp., Guardian Life Insurance Co. of America, Shelter Mutual Insurance Co., Western & Southern Mutual Holding Co. and Kemper Corp., opted to voluntarily dissolve their banking businesses. Several insurers that retain banking subsidiaries have converted them into non-depository trust institutions or otherwise dramatically downsized the scope of their operations.

The banking strategies of several other insurers, United Services Automobile Association, State Farm Mutual Automobile Insurance Co. and Mutual of Omaha Insurance Co. in particular, have remained intact. And it was only a year ago that TIAA dramatically accelerated its banking expansion through the completion of its acquisition of Everbank Financial Corp.

Those examples, however, have increasingly served as exceptions to the rule.