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The news comes following a deal facilitated by the Federal Deposit Insurance Corp. for Citigroup to take control of Wachovia's five depository institutions, paying $2.16 billion in stock and assuming roughly $53 billion of Wachovia's senior and subordinated debt. The deal includes a loss-sharing agreement with the FDIC in which Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, and the FDIC absorbing any losses beyond that.
The Insurance Services group, the 12th-largest insurance brokerage according to Best's Review's ranking of global insurance brokers, will remain under the umbrella of Wachovia's holding company, along with broker-dealer and investment management companies A.G. Edwards & Sons Inc. and Evergreen Investments Inc.
Citigroup's New York-based Citibank N.A. reported insurance brokerage earnings of $743 million through the first two quarters, the largest of any bank holding company, according to Radnor, Pa.-based bank insurance consultant Michael White Associates. However, Citigroup -- which spun off Travelers Property/Casualty in 2002 and sold its Travelers Life & Annuity units to MetLife Inc. in July 2005 -- has publicly acknowledged it is looking to move its remaining insurance assets. Those include Primerica Life Insurance Co., which had $5.9 billion of assets under management at year-end 2007, according to an A.M. Best credit report.
MWA President Michael White told BestWire that Wachovia's remaining insurance brokerage assets could provide a takeover target for other brokers or bank insurance operations, but that it would be difficult to assess the value of business until more details are available about how the break-up of brokerage and retail banking will play out.
"Part of the issue is, to what degree did so-called 'affiliated,' yet freestanding, insurance agencies owned by Wachovia have marketing agreements within Wachovia branches, and what the impact of those marketing agreements will be with the Wachovia banking apparatus sold to Citi," White said. "They had just sold off their one life insurance estate-planning operation, but to the extent that they have other free-standing operations, presumably, there's good value there."
According to MWA, bank insurance brokerage earnings through the first six months of 2008 were $2.12 billion, up 6.4% from $1.99 billion in the first half of 2007.
Hit hard by mortgage loan and credit-related losses, Wachovia forced former Chief Executive Officer Ken Thompson to resign in June (BestWire, June 2, 2008). Robert K. Steel, former under secretary of the U.S. Treasury for domestic finance, was named president and CEO in July.
As part of the Wachovia sale, Citigroup also grants the FDIC $12 billion in preferred stock and warrants. The FDIC said Wachovia did not "fail" and that it does not anticipate claims against the deposit insurance fund.
"I agree with the FDIC and the Federal Reserve that a failure of Wachovia would have posed a systemic risk," Treasury Secretary Henry Paulson said in a statement. "The FDIC's actions help to mitigate potential systemic risk to our financial system. As I have said before, in this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy."
(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com)
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