The FINANCIAL SERVICES Fact Book 2007

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Insurance Information Institute The Financial Services Roundtable to the Reader

Each year the Financial Services Fact Book, a partnership between the Insurance Information Institute and The Financial Services Roundtable, expands to reflect developments shaping the financial services sectors. This year’s book highlights a host of new trends, from baby boomer demographics to the general mobility of the U.S. population. Among the new charts in this our sixth edition: • State migration flows • Top baby boomer destination states • Income by region and age group • Investments in separately managed accounts • (401)k rollover rates • Health care financing • Health savings accounts, characteristics of owners • Top global asset managers • Asset manager mergers and acquisitions • Online auto insurance purchases • Insurance direct marketing This endeavor could not succeed without the help of many organizations, consultants and others who collect industry data and who have generously given permission to use their data in this book. However, the bulk of the work involved in collecting, integrating and interpreting the material was done by the Insurance Information Institute, which accepts editorial responsibility for the book. The Financial Services Roundtable and the Insurance Information Institute actively seek your advice, comments and suggestions for next year’s edition.

Gordon Stewart Steve Bartlett President President and Chief Executive Officer Insurance Information Institute The Financial Services Roundtable

Contents

Financial Services at a Glance...... V

Chapter 1: The Financial Services Industry...... 1 Overview...... 1 Assets...... 2 Mergers...... 3 Employment...... 5 Gross Domestic Product...... 6 Leading Companies...... 9

Chapter 2: Savings, Investment and Debt Ownership...... 11 National Savings...... 11 Investments...... 12 Household Assets...... 17 Educational Plans and Loans...... 21 Consumer and Business Debt...... 24 Consumer Debt...... 25 Bankruptcy...... 30 Consumer Fraud and Identity Theft...... 31

Chapter 3: Asset Management/Retirement Funds...... 33 Asset Management...... 33 Retirement Assets...... 34 Annuities...... 42 Mutual Funds...... 44

Chapter 4: Convergence...... 45 Financial Holding Companies...... 45 Bank Holding Companies...... 46 Banks...... 49 Insurance Companies...... 58

Chapter 5: Insurance...... 61 Overview...... 61 All Sectors...... 62 Property/Casualty: Financial...... 69 Property/Casualty: Premiums by Line...... 73 Property/Casualty: Specialty Lines...... 76 Property/Casualty: Reinsurance...... 81 Property/Casualty: Capital Markets...... 82 Life/Health: Financial...... 85 Life/Health: Premiums by Line...... 89 Health Insurance...... 91

Chapter 6: Banking...... 95 Overview...... 95 All Sectors...... 96 Commercial Banks...... 102 Thrift Institutions...... 110 Remittances...... 115 Credit Unions...... 116 Industrial Banks...... 120

Chapter 7: Securities...... 121 Overview...... 121 Capital Markets...... 129 Asset-backed Securities...... 133 Derivatives...... 135 Exchanges...... 137 Mutual Funds...... 139 Hedge Funds...... 142 Separately Managed Accounts...... 142

Chapter 8: Finance Companies...... 143 Overview...... 143 Assets and Liabilities...... 145 Profitability...... 146 Receivables...... 147 Concentration...... 150 Leading Companies...... 151

Chapter 9: Mortgage Finance and Housing...... 153 Mortgages...... 153 Home Ownership...... 161 Home Equity Loans...... 165 Leading Companies...... 166

Chapter 10: Technology...... 167 IT Spending...... 167 Electronic Commerce...... 169 Electronic Payments...... 171 ATMs...... 175

Chapter 11: World Rankings...... 177

Chapter 12: Demographics...... 183 Geographic Mobility...... 183 Income...... 187

Appendices...... 189 Summaries: Gramm-Leach-Bliley, Pension Plans, Insurance Accounting...... 189 Brief History...... 191 Financial Services Organizations...... 195 Company Index...... 202 Subject Index...... 205

I.I.I. and The Financial Services Roundtable Member Companies...... 212 I.I.I. and The Financial Services Roundtable Staff...... 215 I.I.I. and The Financial Services Roundtable Board Members...... 218

Chapter Head Financial Services at a Glance

• the assets of the financial services sector grew 7.8 percent to $49.0 trillion in 2005 from $45.4 trillion in 2004. • the financial services industry’s gross domestic product (GDP), excluding the real estate sector, reached $927 billion in 2004, accounting for nearly 8 percent of the national GDP. • Financial services employed 6 million workers in 2005, accounting for 5 percent of total U.S. employment in private industry. • Financial assets of the personal sector almost doubled to $34.2 trillion in 2005 from $18.6 trillion in 1995. This sector includes households, nonfarm noncorporate business and farm business. • household debt rose 11.7 percent and business debt rose 5.7 percent from 2004 to 2005. • Insurance fee income reported by banks rose to $4.6 billion in 2005 from $4.3 billion in 2004. • Investment fee income reported by banks rose slightly to $10.0 billion in 2005 from $9.8 billion in 2004.

ASSETS OF FINANCIAL SERVICES FINANCIAL SERVICES EMPLOYMENT SECTORS, 2005 BY INDUSTRY, 2005 ($ billions) (000)

Insurance Other $5,646.1 432.9 Banking Nondepository Other $11,710.2 credit $6,268.4 11% intermediation 7% Insurance 766.1 13% carriers 13% 24% and related 38% Securities, 13% activities Government-related 13% commodity contracts, 2,255.4 $6,482.6 21% investments 17% 783.2 29% Securities $10,466.9

Pensions Depository credit intermediation $8,410.0 1,774.4

Source: Board of Governors of the Federal Reserve System. Source: U.S. Department of Labor, Bureau of Labor Statistics.

www.financialservicesfacts.org The Financial Services Fact Book 2007 V Chapter 1: The Financial Services Industry

Overview

Before the Gramm-Leach-Bliley Financial Services Modern- • 1916 National Bank Act ization Act (GLB) was passed in 1999, competition among the limiting bank insurance various segments of the financial services industry was strictly sales except in small limited by law. GLB removed many of the Depression era bar- towns

riers that restricted competition. Now many of the leading • 1933 Glass-Steagall Act financial services companies are doing business across sectors prohibiting commercial as the convergence of products and services that began in the banks and securities 1970s continues to gather momentum. However, others have firms from engaging in chosen different paths. Some have elected to become specialists each other’s business

in their fields, in some cases shedding segments of the financial • 1956 Bank Holding services business they owned before the act was passed. Today, Company Act restricting financial services consumers have much the same kind of bank holding company choice as they do in other industries. They can select from an activities

ever broadening array of financial tools and a wide spectrum • 1995 VALIC U.S. of financial services distributors, from companies that aim to Supreme Court decision serve their customers’ multiple needs to those that specialize in allowing banks to sell one or two types of products. annuities When the act passed it was expected to spur massive cross- • 1996 Barnett Bank U.S. sector mergers. Mergers did occur but for the most part not Supreme Court decision among leading players. Banks bought specialized securities allowing banks to sell firms, accounting for 34 percent of securities industry mergers insurance nationwide between 2001 and 2005. Banks also bought insurance agencies • 1999 Gramm-Leach-Bliley and brokers, rather than insurance companies as had been pre- Act allowing banks, insur- dicted. Some of the largest insurance brokerages now belong ance companies and secu- to banks. Insurance companies applied for new thrift charters rities firms to affiliate and to open banks instead of buying existing ones. Moreover, the sell each other’s products arrangement that provided the major impetus for the passage • 2001 U.S. House of of GLB, Citigroup’s merger with Travelers Insurance Group, has Representatives Banking been dissolved. In 2002 the bank spun off the property/casualty Committee becomes insurance unit of Travelers, which was bought by the St. Paul the Financial Services Companies in 2003, and sold the life unit to MetLife in 2005. Committee

• 2002 Citigroup spins off its Travelers’ property/ casualty insurance unit

• 2005 Citigroup sells its Travelers’ life unit

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The Financial services industry The Financial services industry

Assets

ASSETS OF FINANCIAL SERVICES SECTORS BY INDUSTRY, 2004-2005 Assets of ($ billions, end of year) Financial Services Sectors, Sector 2004 2005 2001 Banking ($ billions) Commercial banking1 $8,496.6 $9,236.0

2 Insurance Savings institutions 1,649.0 1,788.7 $4,084.5 Credit unions 654.7 685.5 Banking $8,626.0 Other 11% Total 10,800.3 11,710.2 $4,190.2 23% 11% Insurance Government- 14% related 22% Life insurance companies 4,130.3 4,380.7 $5,141.2 19% Securities All other insurers 1,166.5 1,265.4 $7,981.2 Total 5,296.8 5,646.1 Pensions $6,982.6 Securities Mutual and closed-end funds 7,561.8 8,322.8 Securities broker/dealers3 1,844.9 2,144.1 2005 Total 9,406.7 10,466.9 ($ billions) Pensions

Insurance 4 $5,646.1 Private pension funds 4,472.9 4,613.3 Banking State and local govt retirement funds 2,572.0 2,721.7 Other $11,710.2 $6,268.4 11% 24% Federal govt retirement funds 1,024.0 1,075.0 13% Total 8,068.9 8,410.0 Government- 13% 21% Government-related related 17% $6,482.6 Securities $10,466.9 Government lending enterprises 2,870.4 2,805.1 Pensions Federally related mortgage pools 3,542.2 3,677.5 $8,410.0 Total 6,412.6 6,482.6 Source: Board of Governors of Other the Federal Reserve System. Finance companies 1,456.3 1,334.6 Real estate investment trusts 253.3 354.6 Mortgage companies5 32.1 32.1 Asset-backed securities issuers 2,413.6 3,059.1 Funding corporations 1,286.3 1,488.0 Total 5,441.6 6,268.4 Total All Sectors 45,426.9 48,984.2 1Commercial banking includes U.S.-chartered commercial banks, foreign banking offices in the United States, bank holding companies, and banks in U.S.-affiliated areas. 2Savings institutions include savings and loan associations, mutual savings banks and federal banks. 3Securities broker/dealers include investment banks. 4Private pension funds include defined benefit and defined contribution plans (including 401(k)s) and the Federal Employees Retirement Thrift Savings Plan. 5Data are for 1997 (latest data available).

Source: Board of Governors of the Federal Reserve System.

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The Financial services industry The Financial services industry

MERGERS

NUMBER AND VALUE OF ANNOUNCED FINANCIAL SERVICES MERGERS AND ACQUISITIONS BY SECTOR, 2001-2005 ($ billions) 2001 2002 2003 2004 2005 Deals Value Deals Value Deals Value Deals Value Deals Value Securities1 228 $14.6 172 $6.9 134 $12.5 135 $6.0 150 $17.7 Specialty finance2 104 24.1 113 24.5 87 20.3 141 18.5 105 58.2 Banks 206 32.1 180 8.6 220 63.8 221 117.9 225 19.3 Thrifts 55 8.5 53 9.0 50 8.7 57 13.6 35 9.8 Insurance 301 65.2 279 9.3 283 59.7 302 14.2 280 48.8 Life/health 40 58.6 20 2.7 27 14.1 23 3.5 20 21.7 Property/casualty 55 2.3 42 0.4 50 22.5 22 0.5 48 10.4 Brokers and agents 193 1.1 204 1.3 196 1.2 240 1.4 200 1.2 Managed care 13 3.2 13 4.8 10 21.8 17 8.8 12 15.5 Total 894 144.5 797 58.3 774 165.0 856 170.2 795 153.8 1Includes securities and investment companies, broker/dealers and asset managers. 2Specialty finance firms range from small finance companies to issuers of major credit cards. Source: SNL Financial LC.

NUMBER OF Announced FINANCIAL SERVICES MERGERS AND ACQUISITIONS, 2001-2005 n Securities 350 n Specialty finance n Banks/thrifts 300 n Insurance

250

200

150

100

0 2001 2002 2003 2004 2005

Source: SNL Financial LC.

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TThehe FFininaancinciaall sseervicrviceess ininddususttryry The Financial services industry

mergers

TOP TEN FINANCIAL SERVICES CROSS-INDUSTRY ACQUISITIONS ANNOUNCED IN 2005, UNITED STATES1 ($ millions) Rank Buyer Industry Country Target Industry Country Deal Value2 Bank of 1 America Corp. Bank U.S. MBNA Corp. Credit card U.S. $35,707.5 Washington Providian 2 Mutual Inc. Thrift U.S. Financial Corp. Credit card U.S. 6,854.8 Capital One 3 Financial Corp. Credit card U.S. Hibernia Corp. Bank U.S. 4,977.4 Pacific Mutual Boullioun Aviation Equipment 4 Holding Co. Insurance U.S. Services Inc. lender U.S. 2,650.0 Broker/ Goldfish credit 5 Morgan Stanley dealer U.S. card business Credit card U.S. 1,773.1 Investor Not 6 consortium classified U.S. UICI Life and health U.S. 1,715.3 7 HSBC Holdings plc Bank U.K. Metris Companies Inc. Credit card U.S. 1,542.6 General Not Inventory finance Equipment 8 Electric Co. classified U.S. business lender U.S. 1,400.0 Private equity Not GMAC Commercial Commercial 9 consortium classified U.S. Holding Corp. mortgage bank U.S. 1,300.0 Corporate trust and institutional 10 U.S. Bancorp Bank U.S. custody business Trust company U.S. 800.0 1List only includes transactions between different financial services sectors. At least one of the companies involved is a U.S.-domiciled company. List does not include terminated deals. 2At announcement. Source: SNL Financial LC.

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The Financial services industry TThehe FFininaancinciaall sseervicrviceess ininddususttryry

employment

EMPLOYMENT From 2001 to 2005 employment in the financial services industry averaged 5.4 percent of total U.S. employment.

EMPLOYMENT IN THE FINANCIAL SERVICES INDUSTRY, 2001-2005 (000) Non- Activities Securities, Insurance Depository depository related to commodity carriers Monetary credit inter- credit inter- credit inter- contracts, and related Funds/ Year authorities mediation mediation mediation investments activities trusts Total 2001 23.0 1,701.2 660.7 235.7 830.5 2,233.7 88.3 5,773.1 2002 23.4 1,733.0 694.9 258.0 789.4 2,233.2 85.4 5,817.3

2003 22.6 1,748.5 749.9 294.0 757.7 2,266.0 83.9 5,922.6 2004 21.8 1,751.5 756.9 308.7 766.1 2,258.6 85.4 5,949.0 2005 20.8 1,774.4 766.1 325.3 783.2 2,255.4 86.8 6,012.0

Source: U.S. Department of Labor, Bureau of Labor Statistics.

FINANCIAL SERVICES AS A PERCENT OF • Employment in private industry U.S. EMPLOYMENT IN PRIVATE INDUSTRY, 2001-20051 (Percent) grew from 110.7 million in 2001 to 111.7 million in 2005. 6% 5.5% 5.4% 5.4% 5.2% 5.3%

5 FINANCIA L SERVICES EMPLOYMENT 4 BY INDUSTRY, 2005 (000) Insurance carriers 3 and related activities 2,255.4 38% 2 Other 432.9 7%

1 Nondepository credit intermediation Depository credit 766.1 intermediation 13% 1,774.4 29% 0 Securities,commodity 2001 2002 2003 2004 2005 contracts, investments 783.2 13% 1Excludes real estate. Source: U.S. Department of Labor, Bureau of Labor Statistics. Source: U.S. Department of Labor, Bureau of Labor Statistics.

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The Financial services industry The Financial services industry

Gross Domestic Product

FINANCIAL SERVICES CONTRIBUTION TO GROSS DOMESTIC PRODUCT Gross domestic product (GDP) is the total value of all final goods and services produced in the economy. The GDP growth rate is the primary indicator of the state of the economy.

GROSS DOMESTIC PRODUCT OF FINANCIAL SERVICES, SHARES BY COMPONENT, INCLUDING REAL ESTATE, 2004

Federal Reserve banks, • When real estate trans– credit intermediation and related activities 19% actions (e.g., development, Securities, mortgages and related commodity contracts services, property sales and investments 7% and rentals) are included, Insurance carriers and related activities 11% financial services account– Real estate ed for 20.6 percent of the and rental and leasing Funds, trusts and other GDP in 2004, basically 62% financial vehicles 1% unchanged from 2003.

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

GROSS DOMESTIC PRODUCT OF FINANCIAL SERVICES, SHARES BY COMPONENT, EXCLUDING REAL ESTATE, 2004

Federal Reserve banks, • With real estate excluded, credit intermediation and Funds, trusts and other related activities the remaining financial ser- financial vehicles 50% vices industries contributed 2% 7.9 percent to the GDP in 2004, compared with Insurance carriers and related 8.1 percent in 2003. activities 29%

Securities, commodity contracts and investments 19% Source: U.S. Department of Commerce, Bureau of Economic Analysis.

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The Financial services industry The Financial services industry

Gross Domestic Product

GROSS DOMESTIC PRODUCT OF THE FINANCIAL SERVICES INDUSTRY, 2000-20041 ($ billions) 2000 2001 2002 2003 2004 Total GDP $9,817.0 $10,128.0 $10,469.6 $10,971.2 $11,734.3 Total financial services industry 1,931.0 2,059.2 2,141.9 2,260.4 2,412.9 Industry percent of total GDP 9.7% 20.3% 20.5% 20.6% 20.6% Finance and insurance $740.5 $782.6 $822.7 $885.2 $927.4 Insurance carriers and related activities 238.3 234.4 237.4 260.4 269.6 Federal Reserve banks, credit intermediation and related activities 319.0 360.1 417.4 451.8 464.7 Securities, commodity contracts and investments 67.7 70.2 48.4 53.3 70.9 Funds, trusts and other financial vehicles 5.5 8.0 9.5 9.7 22.2 Total real estate and rental and leasing ,190.5 ,276.6 ,319.2 ,375.2 ,485.5 Real estate ,082.1 ,169.7 ,215.9 ,268.6 ,374.7 Rental and leasing services and lessors of intangible assets 08.3 06.9 03.3 06.6 0.8 1Includes real estate and rental and leasing. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

FINANCIAL SERVICES SECTOR’S SHARE OF GROSS DOMESTIC PRODUCT, 2000-20041

Percent of total gross domestic product 2000 2001 2002 2003 2004 Finance, insurance, real estate, and rental and leasing 19.7% 20.3% 20.5% 20.6% 20.6% Finance and insurance 7.5 7.7 7.9 8.1 7.9 Federal Reserve banks, credit intermediation and related activities 3.2 3.6 4.0 4.1 4.0 Insurance carriers and related activities 2.4 2.3 2.3 2.4 2.3

Securities, commodity contracts and investments 1.7 1.7 1.4 1.4 1.5 Funds, trusts and other financial vehicles 0.2 0.2 0.2 0.2 0.2 Total real estate and rental and leasing 12.1 12.6 12.6 12.5 12.7 1Includes real estate and rental and leasing. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

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The Financial services industry The Financial services industry

Gross Domestic Product

FINANCIAL SERVICES VS. TOTAL U.S. GROSS DOMESTIC PRODUCT GROWTH, 2000-2004 ($ billions) Finance, insurance, real Total U.S. gross Percent change estate and rental Percent change Finance and Percent change Year domestic product from prior year and leasing from prior year insurance from prior year 2000 $9,817.0 5.9% $1,931.0 7.4% $740.5 8.9% 2001 10,128.0 3.2 2,059.2 6.6 782.6 5.7 2002 10,469.6 3.4 2,141.9 4.0 822.7 5.1 2003 10,971.2 4.8 2,260.4 5.5 885.2 7.6 2004 11,734.3 7.0 2,412.9 6.7 927.4 4.8

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

FINANCIAL SERVICES PERCENTAGE SHARE OF GROSS STATE PRODUCT, 20041 State Percent State Percent State Percent Alabama 5.6% Louisiana 4.0% Oklahoma 5.3% Alaska 3.5 Maine 6.9 Oregon 5.5 Arizona 8.6 Maryland 6.8 Pennsylvania 7.6 Arkansas 4.5 Massachusetts 11.9 Rhode Island 13.9 California 7.1 Michigan 5.9 South Carolina 4.9 Colorado 6.8 Minnesota 10.5 South Dakota 17.8 Connecticut 16.6 Mississippi 4.5 Tennessee 6.3 Delaware 33.0 Missouri 6.3 Texas 6.6 D.C. 5.6 Montana 5.2 Utah 9.2 Florida 7.3 Nebraska 8.4 Vermont 5.9 Georgia 6.4 Nevada 8.5 Virginia 6.7 Hawaii 4.8 New Hampshire 8.4 Washington 6.1 Idaho 4.3 New Jersey 8.4 West Virginia 4.0 Illinois 10.0 New Mexico 3.7 Wisconsin 7.4 Indiana 6.1 New York 16.7 Wyoming 2.8 Iowa 10.7 North Carolina 10.3 Total United States 8.32 Kansas 6.3 North Dakota 6.6 Kentucky 5.1 Ohio 7.7 1Excludes real estate. 2Differs from data shown elsewhere for total United States due to rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

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The Financial services industry The Financial services industry

LEADING COMPANIES

LARGEST U.S. FINANCIAL SERVICES FIRMS BY REVENUES, 2005 ($ millions) Profits as a percent of Rank Company Revenues Profits Revenues Assets Industry Employees Diversified 1 General Electric $157,153 $16,353 10% 2% financial 316,000 2 Citigroup 131,045 24,589 19 2 Banking 303,000 3 American Intl. Group 108,905 10,477 10 1 Insurance 97,000 4 Bank of America Corp. 83,980 16,465 20 1 Banking 176,638 5 Berkshire Hathaway 81,663 8,528 10 4 Insurance 192,012 6 J.P. Morgan Chase & Co. 79,902 8,483 11 1 Banking 168,847 7 State Farm Insurance Cos. 59,224 3,242 6 2 Insurance 67,943 8 Morgan Stanley 52,498 4,939 9 1 Securities 53,218 9 Merrill Lynch 47,783 5,116 11 1 Securities 54,600 10 MetLife 46,983 4,714 10 1 Insurance 65,500 11 Goldman Sachs Group 43,391 5,626 13 1 Securities 22,425 12 Wells Fargo 40,407 7,671 19 2 Banking 153,500 13 Wachovia Corp. 35,908 6,643 19 1 Banking 93,980 14 Allstate 35,383 1,765 5 1 Insurance 38,900 15 Lehman Brothers 32,420 3,260 10 1 Securities 22,919 16 Prudential Financial 31,708 3,540 11 1 Insurance 38,853 Diversified 17 American Express 30,080 3,734 12 3 financial 65,800 18 New York Life Insurance 28,051 1,422 5 1 Insurance 13,180 19 Hartford Financial Services 27,083 2,274 8 1 Insurance 30,000 20 TIAA-CREF 25,917 2,001 8 1 Insurance 6,038 21 St. Paul Travelers Cos. 24,365 1,622 7 1 Insurance 31,900 22 Mass. Mutual Life Ins. 22,799 1,446 6 1 Insurance 11,611 23 Nationwide 21,832 1,149 5 1 Insurance 34,740 24 Washington Mutual 21,326 3,432 16 1 Banking 60,798 25 Liberty Mutual Ins. Group 21,161 1,027 5 1 Insurance 39,072

Source: Fortune.

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The Financial services industry

Leading companies

There are 132 financial services firms among the Fortune 500. Together they had revenues of $1.8 trillion and profits of $222.0 million.

LARGEST FINANCIAL SERVICES COMPANIES BY SECTOR, 20051

Number of Share of total Share of Fortune 500 Revenues financial services Profits total financial Industry companies ($ millions) sector revenues1 ($ millions) services Banks

Savings 4 $33,318 1.8% $5,894 2.7%

Commercial 30 520,267 28.1 91,672 41.3

Insurance

Life and health 30 287,059 15.5 23,494 10.6

Property/casualty 40 542,177 29.3 47,359 21.3

Diversified financials 15 256,106 13.9 29,657 13.4

Securities 13 209,929 11.4 23,950 10.8

Total 132 1,848,856 100.0 222,026 100.0 1Based on companies in the Fortune 500. Source: Fortune; Insurance Information Institute.

10 The Financial Services Fact Book 2007 www.financialservicesfacts.org Chapter 2: Savings, Investment and Debt Ownership

0.0 0.2 0.4 0.6 0.8 1.0 National savings

SAVINGS, INVESTMENT AND DEBT OWNERSHIP Individuals and businesses seek to increase their assets through savings and investments. They also borrow to purchase assets or finance business opportunities. The financial services industry exists to manage these activities, bringing savers, investors and borrowers together, a process known as financial intermediation. The banking industry acts as an intermediary by taking deposits and lending the funds to those who need credit. The securities industry fulfills the role of intermediary by facilitating the process of buying and selling

corporate debt and equity to investors.0 The insurance industry safeguards the assets of its 20 40 60 80 100 120 140 policyholders, investing the premiums it collects in corporate and government securities. Finance companies provide credit to both individuals and businesses, funded in large part by issuing bonds, asset-backed securities and commercial paper.

NATIONAL SAVINGS Gross national savings is the excess of production over cost, or earnings over spending. Gross national savings grew in the late 1990s, fueled largely by increased saving by federal, state and local governments, but fell in the three years, 2000 to 2002. Beginning in 2002, total government saving turned negative due to federal personal income tax refunds and rising expenditures at all levels of government. In 2005, governments spent $313 billion more than they received, compared with $395 billion in 2004. Personal saving is the excess of personal disposable income over spending. Personal savings turned negative in 2005, dropping by 120 percent from the previous year.

GROSS NATIONAL SAVINGS, 2001-2005 ($ billions) $2,000 Total gross saving • National savings grew 1,500 Corporate saving by $68 billion from $1,544 billion in 2004 to $1,612 1,000 billion in 2005.

500 • National savings accounted Personal saving1 for 13 percent of the 2005 0 gross domestic product of Government saving $12.5 trillion. -500

2001 2002 2003 2004 2005

1Includes individuals (including proprietors and partnerships), nonprofit institutions primarily serving individuals, life insurance carriers and miscellaneous entities. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

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Savings, investment and debt ownership Savings, investment and debt ownership

investments

OWNERSHIP OF EQUITIES AND CORPORATE AND MUNICIPAL BONDS Equity and debt markets offer individuals and institutional investors the opportunity to participate in the development and expansion of publicly traded companies and municipalities. Equity investments provide an ownership interest in a company through stocks. Debt securities, generally bonds, represent money a corporation or municipality has borrowed from investors and must repay at a specific time and usually at a specific interest rate. Municipal bonds may be tax-exempt.

HOLDINGS OF U.S. CORPORATE EQUITIES, 2001-20051 ($ billions, amounts outstanding end of year) Percent change, 2001 2002 2003 2004 2005 2001-2005 Total $15,310.6 $11,900.5 $15,618.5 $17,389.3 $18,199.4 18.9% Household sector 6,720.9 4,997.2 6,215.5 6,406.2 6,088.9 -9.4 State and local governments 88.4 79.6 84.5 88.9 92.3 4.4 Rest of the world2 1,572.7 1,335.8 1,826.9 2,070.7 2,303.7 46.5 Commercial banking 8.9 3.5 15.1 20.3 24.2 171.9 Savings institutions 27.9 29.1 30.4 28.2 26.2 -6.1 Life insurance companies 811.3 708.9 919.3 1,053.9 1,154.1 42.3 Property/casualty insurance companies 173.9 152.3 182.7 201.8 206.6 18.8 Private pension funds 1,562.1 1,096.7 1,491.9 1,691.2 1,726.1 10.5 State and local government retirement funds 1,260.4 1,056.8 1,421.5 1,607.0 1,752.1 39.0 Federal government retirement funds 49.1 45.9 79.9 99.3 115.6 135.4 Mutual funds 2,836.1 2,188.0 3,051.6 3,693.5 4,173.8 47.2 Closed-end funds 31.1 33.7 52.3 81.5 104.6 236.3 Exchange-traded funds 83.0 98.2 146.3 217.7 281.0 238.6 Brokers and dealers 85.1 74.9 100.5 129.1 150.0 76.3 1Excludes mutual fund shares. 2Holdings of U.S. issues by foreign residents. Source: Board of Governors of the Federal Reserve System.

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Savings, investment and debt ownership Savings, investment and debt ownership

investments

HOLDINGS OF U.S. CORPORATE EQUITIES, 20051

Others 1.6% Insurance companies Households 7.5% 33.5% Public and private pension funds 19.7%

Mutual and closed-end funds Rest of the world2 25.1% 12.7%

1Market value, end of year; excludes open-end mutual fund shares. 2Holdings of U.S. issues by foreign residents. Source: Board of Governors of the Federal Reserve System.

HOLDINGS OF U.S. CORPORATE AND FOREIGN BONDS, 2001-2005 ($ billions, amounts outstanding end of year) Percent change, 2001 2002 2003 2004 2005 2001-2005 Total $5,332.3 $5,936.4 $6,713.7 $7,386.6 $8,049.8 51.0% Household sector 493.8 773.6 748.8 672.4 492.2 -0.3 State and local governments 95.5 104.6 111.1 116.8 121.3 27.0 Rest of the world1 1,115.9 1,267.0 1,497.0 1,751.3 2,102.5 88.4 Commercial banking 363.1 359.9 482.5 559.7 687.5 89.3 Savings institutions 83.9 79.9 71.1 58.9 80.0 -4.6 Life insurance companies 1,342.4 1,449.3 1,620.2 1,768.0 1,859.8 38.5 Property/casualty insurance companies 196.4 198.9 218.9 245.3 274.1 39.6 Private pension funds 294.6 307.3 315.5 331.3 342.0 16.1 State and local government retirement funds 279.7 217.3 193.2 203.4 200.4 -28.4 Federal government retirement funds 1.6 2.9 3.4 3.1 3.1 93.8 Money market mutual funds 222.5 228.1 258.7 261.0 258.3 16.1 Mutual funds 420.1 470.9 548.3 622.8 699.1 66.4 Closed-end funds 27.1 27.1 58.8 67.6 68.7 153.5 Exchange-traded funds 0.0 1.8 2.4 3.3 5.3 NA Government-sponsored enterprises 155.7 189.3 225.8 336.6 387.5 148.9 REITs 7.9 10.2 18.6 35.9 63.0 697.5 Brokers and dealers 161.3 192.0 228.3 252.2 337.5 109.2 Funding corporations 70.8 56.4 111.3 96.8 67.5 -4.7 1Holdings of U.S. issues by foreign residents. NA=Not applicable. Source: Board of Governors of the Federal Reserve System.

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Savings, investment and debt ownership Savings, investment and debt ownership

investments

HOLDINGS OF U.S. MUNICIPAL SECURITIES AND LOANS, 2001-2005 ($ billions, amounts outstanding end of year) Percent change, 2001 2002 2003 2004 2005 2001-2005 Total $1,603.7 $1,763.1 $1,898.2 $2,031.3 $2,232.0 39.2% Household sector 588.9 690.3 724.9 761.8 845.2 43.5 Nonfinancial corporate business 29.3 32.1 35.4 40.5 50.0 70.6 Nonfarm noncorporate business 3.5 3.4 2.7 3.1 3.7 5.7 State and local government retirement funds 4.0 4.1 4.4 4.6 4.8 20.0 Commercial banking 120.2 121.7 132.5 140.8 157.7 31.2 Savings institutions 4.5 5.5 6.3 7.1 8.6 91.1 Life insurance companies 18.7 19.9 26.1 30.1 31.7 69.5 Property/casualty insurance companies 173.8 183.0 224.2 267.8 301.2 73.3 State and local government retirement funds 1.7 0.9 1.0 1.7 1.6 -5.9 Money market mutual funds 276.7 278.5 292.1 313.8 337.1 21.8 Mutual funds 253.4 277.3 290.2 294.3 313.2 23.6 Closed-end funds 74.7 86.0 89.3 89.1 89.5 19.8 Government-sponsored enterprises 35.4 39.4 44.4 44.6 44.7 26.3 Brokers and dealers 19.0 21.0 24.9 32.0 43.0 126.3

Source: Board of Governors of the Federal Reserve System.

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investments

mutual fund investments The household sector holds the largest share of the $6 trillion mutual fund industry, according to the Federal Reserve. Mutual funds represent a substantial part of individuals’ financial holdings, according to the Investment Company Institute. In 2004 households held about 20 percent of their assets in mutual funds, excluding real estate and other property, up steep- ly from 6.9 percent in1990. See page 44 for further information on the mutual funds sector.

MUTUAL FUNDS BY HOLDER, 2001 AND 20051 ($ billions) 2001 2005 Amount Percent of total Amount Percent of total Household sector $2,834.5 68.5% $4,207.5 69.6% Private pension funds 862.1 20.8 1,252.0 20.7 State and local government retirement funds 184.3 4.5 241.3 4.0 Nonfinancial corporate business 113.0 2.7 165.5 2.7 Life insurance companies 88.3 2.1 131.2 2.2 State and local governments 28.3 0.7 28.2 0.5 Commercial banking 21.3 0.5 17.3 0.3 Credit unions 3.7 0.1 2.2 2 Total 4,135.5 100.0 6,045.1 100.0 1Open-end investment companies. Excludes money market mutual funds, exchange-traded funds and variable annuity funding vehicles. 2Less than 0.1 percent. Source: Board of Governors of the Federal Reserve System.

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Savings, investment and debt ownership Savings, investment and debt ownership

investments

OWNERSHIP OF FEDERAL GOVERNMENT DEBT The buying and selling of government securities is a crucial component of each of the financial sectors. Debt is issued and sold, based on the changing needs of the federal government. The average daily trading volume in U.S. Treasury securities has been rising steadily since 2000. By May 30, 2006 it had reached $585 billion, according to the Bond Market Association.

ESTIMATED OWNERSHIP OF U.S. PUBLIC DEBT SECURITIES, 1996-2005 ($ billions, end of year) Percent of total State and Foreign Mutual Banking U.S. local and funds/ institu- Insurance Pension monetary govern- inter- Year Total Individuals trusts1 tions2 companies funds3 authorities ments national Other4 1996 $3,755.1 23.8% 6.1% 7.6% 5.7% 9.4% 10.4% 6.8% 27.7% 2.5% 1997 3,778.3 21.2 6.2 7.8 4.7 9.6 11.4 6.3 30.5 2.2 1998 3,723.7 20.4 6.9 6.8 3.8 8.8 12.1 7.5 31.3 2.3 1999 3,652.7 23.2 6.3 5.6 3.4 8.7 13.1 8.4 29.0 2.4 2000 3,357.8 18.4 6.6 5.9 3.3 8.7 15.2 9.3 30.4 2.1 2001 3,352.7 14.0 7.7 5.7 3.2 8.2 16.5 9.8 32.7 2.2 2002 3,609.8 8.4 7.8 6.1 3.9 8.1 17.4 9.9 35.6 2.8 2003 4,008.2 11.3 7.1 4.8 3.4 7.2 16.6 9.1 38.3 2.3 2004 4,370.7 11.3 5.9 1.9 3.4 6.4 16.4 8.8 43.5 2.2 2005 4,678.0 8.6 5.6 1.4 3.4 6.0 15.9 9.7 47.0 2.3 1Includes mutual funds, money market funds, closed-end funds and exchange-traded funds. 2Includes commercial banks, savings institutions, credit unions and brokers and dealers. 3Includes state and local government, federal government and private pension funds. 4Includes nonfinancial corporate institutions, nonfarm noncorporate institutions and government-sponsored enterprises. Source: Board of Governors of the Federal Reserve System.

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Savings, investment and debt ownership Savings, investment and debt ownership

Household assets

ASSETS OF HOUSEHOLDS Where people save their money, how much they save and where they look for investment returns is influenced by many factors, including people’s appetite for risk, the state of the economy, the investment products available and incentives to save, such as tax advantages and matching funds provided by employers who offer retirement plans.

ASSETS AND LIABILITIES OF the personal sector, 1985-20051 ($ billions, end of year) Value Percent of total 1985 1995 2005 1985 1995 2005 Total financial assets $7,769.7 $18,632.5 $34,243.7 100.0% 100.0% 100.0% Foreign deposits 7.8 23.4 63.9 0.1 0.1 0.2 Checkable deposits and currency 382.5 646.8 455.2 4.9 3.5 1.3 Time and savings deposits 2,021.9 2,381.4 5,082.5 26.0 12.8 14.8 Money market fund shares 204.6 494.9 1,023.9 2.6 2.7 3.0 Securities 2,310.6 7,885.7 12,920.8 29.7 42.3 37.7 Open market paper 56.5 71.7 164.2 0.7 0.4 0.5 U.S. savings bonds 79.8 185.0 205.1 1.0 1.0 0.6 Other Treasury securities 211.8 672.4 257.5 2.7 3.6 0.8

Agency- and GSE2- backed securities 26.1 198.8 656.5 0.3 1.1 1.9 Municipal securities 396.3 539.7 848.9 5.1 2.9 2.5 Corporate and foreign bonds 97.0 526.9 492.2 1.2 2.8 1.4 Corporate equities3 1,229.5 4,347.5 6,088.9 15.8 23.3 17.8 Mutual fund shares 213.8 1,343.7 4,207.5 2.8 7.2 12.3 Private life insurance reserves 246.5 536.3 1,078.1 3.2 2.9 3.1 Private insured pension reserves 260.4 880.6 2,148.3 3.4 4.7 6.3 Private noninsured pension reserves 1,250.4 2,929.4 4,657.9 16.1 15.7 13.6 Government insurance and pension reserves 595.1 1,915.1 3,883.3 7.7 10.3 11.3 Miscellaneous and other assets 489.8 939.0 2,929.9 6.3 5.0 8.6

(table continues)

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Savings, investment and debt ownership Savings, investment and debt ownership

Household assets

ASSETS AND LIABILITIES OF the personal sector, 1985-20051 (Cont’d) ($ billions, end of year) Value Percent of total 1985 1995 2005 1985 1995 2005 Total liabilities $3,558.5 $6,613.1 $16,140.5 100.0% 100.0% 100.0% Mortgage debt on nonfarm homes 1,511.7 3,444.4 9,120.3 42.5 52.1 56.5 Other mortgage debt4 692.2 863.6 2,009.2 19.5 13.1 12.4 Consumer credit 610.6 1,168.4 2,188.7 17.2 17.7 13.6 Policy loans 55.5 96.9 107.0 1.6 1.5 0.7 Security credit 50.7 78.6 232.3 1.4 1.2 1.4 Other liabilities4 637.8 961.3 2,483.0 17.9 14.5 15.4 1Combined statement for household sector, nonfarm noncorporate business and farm business. 2GSE=government sponsored enterprise. 3Only those directly held and those in closed-end and exchange-traded funds. Other equities are included in mutual funds, life insurance and pension reserves, and bank personal trusts. 4Includes corporate farms. Source: Board of Governors of the Federal Reserve System.

U.S. HOUSEHOLD OWNERSHIP OF MUTUAL FUNDS, 1980-20051 (Percent of all U.S. households) 49.6% 50% 49.0% 47.9% 48.1% 47.5% 44.0%

40 37.2%

30.7% 30 27.0% 25.0%

10 5.7%

0 1980 1990 1992 1994 1996 1998 2000 2002 2003 2004 2005 Millions of U.S. households1 4.6 23.4 25.8 30.2 36.8 44.4 51.7 54.2 53.3 53.9 53.7

1Households owning mutual funds in 1980 were estimated from data on the number of accounts held by individual shareholders and the number of funds owned by households; data for 1980 and 1992 exclude households owning mutual funds only through employer- sponsored retirement plans; data for 1994 through 2005 include households owning mutual funds only through employer-sponsored retirement plans. The data for 1998 through 2005 include fund ownership through variable annuities. Source: Investment Company Institute.

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Household assets

FINANCIAL ASSETS HELD BY FAMILIES BY TYPE OF ASSET, 1998-2004

Trans- Certi- Retire- Any Percent of families action ficates of Savings Mutual ment Life Other financial owning asset1 accounts2 deposit bonds Bonds3 Stocks3 funds4 accounts5 insurance6 assets7 asset8

1998 90.5% 15.3% 19.3% 3.0% 19.2% 16.5% 48.9% 29.6% 15.3% 92.9% 2001 91.4 15.7 16.7 3.0 21.3 17.7 52.2 28.0 16.0 93.4 2004 91.3 12.7 17.6 1.8 20.7 15.0 49.7 24.2 17.3 93.8 By age of family head, 2004

Under 35 years old 86.4 5.6 15.3 9 13.3 8.3 40.2 11.0 14.5 90.1 35 to 44 years old 90.8 6.7 23.3 0.6 18.5 12.3 55.9 20.1 13.7 93.6 45 to 54 years old 91.8 11.9 21.0 1.8 23.2 18.2 57.7 26.0 18.3 93.6 55 to 64 years old 93.2 18.1 15.2 3.3 29.1 20.6 62.9 32.1 16.6 95.2 65 to 74 years old 93.9 19.9 14.9 4.3 25.4 18.6 43.2 34.8 20.9 96.5 75 years old and over 96.4 25.7 11.0 3.0 18.4 16.6 29.2 34.0 24.8 97.6 Percentiles of income, 200410

Less than 20 75.5 5.0 6.2 9 5.1 3.6 10.1 14.0 10.2 80.1 20 to 39.9 87.3 12.7 8.8 9 8.2 7.6 30.0 19.2 14.8 91.5 40 to 59.9 95.9 11.8 15.4 9 16.3 12.7 53.4 24.2 17.2 98.5 60 to 79.9 98.4 14.9 26.6 2.2 28.2 18.6 69.7 29.8 19.0 99.1 80 to 89.9 99.1 16.3 32.3 2.8 35.8 26.2 81.9 29.5 23.5 99.8 90 to 100 100.0 21.5 29.9 8.8 55.0 39.1 88.5 38.1 26.4 100.0 Percent distribution of amount of financial assets of all families

1998 11.4 4.3 0.7 4.3 22.7 12.4 27.6 6.4 10.3 100.0 2001 11.5 3.1 0.7 4.6 21.7 12.2 28.4 5.3 12.6 100.0 2004 13.2 3.7 0.5 5.3 17.6 14.7 32.0 3.0 10.1 100.0 1Families include one-person units. 2Includes checking, savings and money market deposit accounts; money market mutual funds; and call accounts at brokerages. 3Covers only those stocks and bonds that are directly held by families outside mutual funds, retirement accounts and other managed assets. 4Excludes money market mutual funds and funds held through retirement accounts or other managed assets. 5Covers IRAs, Keogh accounts and employer-provided pension plans. Employer-sponsored accounts are those from current jobs (restricted to those in which loans or withdrawals can be made, such as 401(k) accounts) held by the family head and that person’s spouse or partner as well as those from past jobs held by either or both of them. Accounts from past jobs are restricted to those from which the family expects to receive the account balance in the future. 6Cash value. 7Includes personal annuities and trusts with an equity interest, managed investment accounts and miscellaneous assets. 8Includes other types of financial assets, not shown separately. 9Ten or fewer observations. 10Ranges listed below represent percentiles rather than income levels. A percentile is a statistical ranking point. The 50th percentile represents the midpoint of all values. For example, at the 50th percentile half of the families in the ranking fall above this income level, and half fall below. Note: Latest data available. Based on surveys conducted every three years. Source: Survey of Consumer Finances, Board of Governors of the Federal Reserve System.

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Savings, investment and debt ownership Savings, investment and debt ownership

Household assets

NONFINANCIAL ASSETS HELD BY FAMILIES BY TYPE OF ASSET, 1998-2004

Equity Other in non- Any non- Percent of families Primary residential residential Business financial owning asset1 Vehicles residence property property equity Other asset Any asset 1998 82.8% 66.2% 12.8% 8.6% 11.5% 8.5% 89.9% 96.8% 2001 84.8 67.7 11.3 8.2 11.9 7.5 90.7 96.7 2004 86.3 69.1 12.5 8.3 11.5 7.8 92.5 97.9 By age of family head, 2004 Under 35 years old 82.9 41.6 5.1 3.3 6.9 5.5 88.6 96.5 35 to 44 years old 89.4 68.3 9.4 6.4 13.9 6.0 93.0 97.7 45 to 54 years old 88.8 77.3 16.3 11.4 15.7 9.7 94.7 98.3 55 to 64 years old 88.6 79.1 19.5 12.8 15.8 9.2 92.6 97.5 65 to 74 years old 89.1 81.3 19.9 10.6 8.0 9.0 95.6 99.5 75 years old and over 76.9 85.2 9.7 7.7 5.3 8.5 92.5 99.6 Percentiles of income, 20042 Less than 20 65.0 40.3 3.6 2.7 3.7 3.9 76.4 92.2 20 to 39.9 85.3 57.0 6.9 3.8 6.7 4.4 92.0 97.8 40 to 59.9 91.6 71.5 10.0 7.6 9.5 7.5 96.7 99.8 60 to 79.9 95.3 83.1 14.0 10.6 12.0 10.4 98.4 100.0 80 to 89.9 95.9 91.8 19.3 12.8 16.0 8.3 99.1 99.8 90 to 100 93.1 94.7 37.2 20.8 34.7 16.7 99.3 100.0 1Families include one-person units. 2Ranges listed below represent percentiles rather than income levels. A percentile is a statistical ranking point. The 50th percentile represents the midpoint of all values. For example, at the 50th percentile, half of the families in the ranking fall above this income level and half fall below. Note: Latest data available. Based on surveys conducted every three years. Source: Survey of Consumer Finances, Board of Governors of the Federal Reserve System.

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Savings, investment and debt ownership Savings, investment and debt ownership

Educational Plans AND loans

EDUCATIONAL SAVINGS PLANS AND LOANS To encourage households to save for college education, states • There were 8.2 million have developed Section 529 college savings plans, named after 529 plan accounts in a part of the Internal Revenue tax code that allows earnings to 2005, compared with accumulate free of federal income tax and to be withdrawn tax- 2.4 million in 2001, according to the National free to pay for college costs. Slow to gain acceptance initially, Association of State these plans are now growing fast. By the end of 2002, all states Treasurers. had such plans in operation. There are two types of plans: savings and prepaid tuition. Plan assets are managed either by the state’s treasurer or an outside investment company. Most offer a range of investment options.

DOLLARS INVESTED AND NUMBER OF 529 PLAN ACCOUNTS, 2001-2005

10 $90 85 9 80 $82.49 75 8 $64.69 70 7 65 60 Dollars $45.77 invested 1.0.08642 6 55 ($ billions) 50 5 45 $26.85 Number of 40 accounts (millions) 4 35 30 3

$13.58 25 Dollars invested ($ billions) Number of accounts (millions) 20 2 15 1 10 5 0 0 2001 2002 2003 2004 2005

Source: National Association of State Treasurers.

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Savings, investment and debt ownership Savings, investment and debt ownership

Educational Plans AND loans

tOP TEN 529 SAVINGS PLAN PROVIDERS BY ASSETS, 2005 ($ billions, end of year) Rank Provider Assets • The top 10 providers 1 American Funds $14.1 accounted for 88 percent of 529 plan 2 Vanguard 12.0 assets in 2005, 3 Fidelity 8.0 according to the 4 Alliance 6.4 National Association 5 TIAA-CREF 4.9 of State Treasurers. 6 Citigroup 3.7 7 Putnam 3.7 8 Merrill Lynch 3.6 9 T. Rowe Price 2.6 10 Wells Fargo 1.7 Top 10 Providers 60.8

Source: National Association of State Treasurers.

FEDERAL STUDENT LOANS The Stafford Loan Program is the most significant source of federal educational loans, accounting for over 10 million student loans in 2005. Stafford loans come directly from the federal government under the Ford Direct Loan Program (FDLP) or through the Federal Family Education Loan Program (FFELP), which makes federally guaranteed loans available through private lenders such as banks. The Stafford program provides subsidized loans (awarded on the basis of need, interest free up to six months after a student leaves college) and unsubsidized loans, which require students to pay interest even while in school. The FFELP made $21.7 billion in subsidized Stafford loans and $21.8 billion in unsubsidized Stafford loans available to students in 2005.

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Savings, investment and debt ownership Savings, investment and debt ownership

Educational Plans AND loans

TOP TEN ORIGINATORS OF FFELP LOANS, FISCAL YEARS 2004-20051 ($ millions) New guarantees Rank Lender name, city, state Fiscal year 2004 Fiscal year 2005 1 SLM Corporation (Sallie Mae), Reston, VA $4,208.7 $5,029.8 2 Citibank, Student Loan Corp., Pittsford, NY 3,422.7 3,346.1 3 Bank One, Columbus, OH 3,927.8 3,197.6 4 Bank of America, Los Angeles, CA 2,414.3 2,862.1 5 Wells Fargo Education Financial Services, Sioux Falls, SD 2,253.3 2,344.5 6 JP Morgan Chase Bank, Garden City, NY 2,549.4 2,160.8 7 First Union National Bank (Classnotes), Sacramento, CA 1,893.2 2,141.9 8 College Loan Corp, San Diego, CA 777.4 1,171.1 9 U.S. Bank, Milwaukee, WI 1,123.7 1,143.2 10 Access Group, New York, NY 1,062.0 1,074.8 1Federal Family Education Loan Program, available to the parents of dependent students. Includes Stafford loans (subsidized and unsubsidized) and PLUS loans. Excludes consolidation loans. Source: U.S. Department of Education, National Student Loan Data Service.

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Savings, investment and debt ownership Savings, investment and debt ownership

consumer AND business debt

CREDIT MARKET DEBT OUTSTANDING, OWED BY SECTOR, 1996-20051 ($ billions) Nonfinancial Year Household sector corporate business • Household debt rose 1996 $5,185.8 $3,092.3 11.7 percent from 2004 to 2005, 1997 5,490.9 3,382.3 compared with 5.7 1998 5,910.1 3,780.3 percent for business 1999 6,398.4 4,190.3 debt. Over the 10 2000 6,960.6 4,536.4 years, 1996-2005, household debt rose 2001 7,561.1 4,758.4 121.7 percent, 2002 8,297.3 4,783.4 compared with 2003 9,253.8 4,890.3 business debt, which 2004 10,292.0 5,064.8 rose 73.1 percent. 2005 11,496.6 5,354.1 1Excludes corporate equities and mutual fund shares. Source: Board of Governors of the Federal Reserve System.

DEBT GROWTH BY SECTOR, 1996-2005 (Percent change from prior year)

Federal government Home mortgage Consumer credit Corporate business 20% State and local governments 15

-5

-10 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Board of Governors of the Federal Reserve System.

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Savings, investment and debt ownership Savings, investment and debt ownership

consumer debt

DEBT HELD BY FAMILIES BY TYPE OF DEBT AND LENDING INSTITUTION, 1998-2004

Type of debt 1998 2001 2004 Total 100.0% 100.0% 100.0% Home-secured debt 71.4 75.2 75.2 Installment loans 13.1 12.3 11.0 Other residential property 7.5 6.2 8.5 Credit card balances 3.9 3.4 3.0 Other debt 3.7 2.3 1.6 Other lines of credit 0.3 0.5 0.7

Purpose of debt Total 100.0% 100.0% 100.0% Home purchase 67.9 70.9 70.2 Other residential property 7.8 6.5 9.5 Vehicles 7.6 7.8 6.7 Goods and services 6.3 5.8 6.0 Education 3.5 3.1 3.0 Investment, excluding real estate 3.3 2.8 2.2 Home improvement 2.1 2.0 1.9 Unclassifiable loans against pension accounts 1 1 1 Other 1.5 1.1 0.6

Type of lending institution Total 100.0% 100.0% 100.0% Mortgage or real estate lender 35.6 38.0 39.4 Commercial bank 32.8 34.1 35.1 Thrift institution2 9.7 6.1 7.3 Credit union 4.3 5.5 3.6 Finance or loan company 4.1 4.3 4.1 Credit and store cards 3.9 3.7 3.0 Brokerage 3.8 3.1 2.5 Individual lender 3.3 2.0 1.7 Other nonfinancial 1.3 1.4 2.0 Government 0.6 1.1 0.7 Pension account 0.4 0.3 0.3 Other loans 0.3 0.5 0.2 1Less than 0.05 percent. 2Savings and loan association or savings bank. Note: Latest data available. Based on surveys conducted every three years. Source: Survey of Consumer Finances, Board of Governors of the Federal Reserve System.

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Savings, investment and debt ownership Savings, investment and debt ownership

consumer debt

DEBT HELD BY FAMILIES BY TYPE OF DEBT, 1998-2004

Other Percentage of Home- residential Installment Credit card Other lines families holding debt1 secured property loans balances of credit Other Any debt 1998 43.1% 5.1% 43.7% 44.1% 2.3% 8.8% 74.1% 2001 44.6 4.6 45.2 44.4 1.5 7.2 75.1 2004 47.9 4.0 46.0 46.2 1.6 7.6 76.4

By age of family head, 2004 Under 35 years old 37.7 2.1 59.4 47.5 2.2 6.2 79.8 35 to 44 years old 62.8 4.0 55.7 58.8 1.5 11.3 88.6 45 to 54 years old 64.6 6.3 50.2 54.0 2.9 9.4 88.4 55 to 64 years old 51.0 5.9 42.8 42.1 0.7 8.4 76.3 65 to 74 years old 32.1 3.2 27.5 31.9 0.4 4.0 58.8 75 years old and over 18.7 1.5 13.9 23.6 2 2.5 40.3

Percentiles of income, 20043 Less than 20 15.9 2 26.9 28.8 2 4.6 52.6 20 to 39.9 29.5 1.5 39.9 42.9 1.5 5.8 69.8 40 to 59.9 51.7 2.6 52.4 55.1 1.8 8.0 84.0 60 to 79.9 65.8 4.1 57.8 56.0 1.8 8.3 86.6 80 to 89.9 76.8 7.5 60.0 57.6 2.6 12.3 92.0 90 to 100 76.2 15.4 45.7 38.5 2.5 10.6 86.3 1Families include one-person units. 2Ten or fewer observations. 3Ranges listed below represent percentiles rather than income levels. A percentile is a statistical ranking point. The 50th percentile represents the midpoint of all values. For example, at the 50th percentile half of the families in the ranking fall above this income level and half fall below. Note: Latest data available. Based on surveys conducted every three years. Source: Survey of Consumer Finances, Board of Governors of the Federal Reserve System.

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consumer debt

CONSUMER CREDIT FINANCE RATES BY INSTITUTION AND TYPE OF LOAN, 1996-2005 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Commercial banks New automobiles (48 months) 9.05% 9.02% 8.73% 8.44% 9.34% 8.50% 7.62% 6.93% 6.60% 7.08% Personal (24 months) 13.54 13.90 13.76 13.39 13.90 13.22 12.54 11.95 11.89 12.05 Credit card plans 15.63 15.77 15.71 15.21 15.78 14.87 13.40 12.30 12.71 12.50 Finance companies New automobiles 9.84 7.12 6.30 6.66 6.61 5.65 4.29 3.40 4.36 5.46 Used automobiles 13.53 13.27 12.64 12.60 13.55 12.18 10.74 9.72 8.96 NA NA= Data not available. Source: Board of Governors of the Federal Reserve System.

HOUSEHOLD DEBT-SERVICE PAYMENTS AND FINANCIAL OBLIGATIONS AS A PERCENTAGE OF DISPOSABLE INCOME, 1980-2005 Financial obligations ratio1 Household debt Year service ratio2 Total Renter Homeowner 1980 10.58 15.37 23.70 13.31 1990 11.98 17.37 24.69 15.50 2001 13.20 18.68 31.73 16.06 2002 13.27 18.53 30.81 16.10 2003 13.17 18.18 30.76 15.83 2004 13.17 17.97 29.22 15.87 2005 13.86 18.62 28.43 16.77 1The ratio of debt payments (estimated required payments on outstanding mortgage and consumer debt) to disposable personal income. 2The ratio of debt payments plus automobile lease payments, rental payments on tenant-occupied property, homeowners insurance and property taxes to disposable personal income. Source: Board of Governors of the Federal Reserve System.

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Savings, investment and debt ownership Savings, investment and debt ownership

consumer debt

CREDIT CARDS Bank cards, credit cards issued by banks, are the most widely held type of credit card, with 95.4 percent of cardholders having such cards in 2004. Balances on bank cards accounted for 84.9 percent of outstanding credit card balances in 2004, up from 82.1 percent in 2001, according to the Federal Reserve’s latest Consumer Finance Survey. Store cards were also popular, with 58.4 percent of cardholders having such cards in 2004.

FAMILIES WITH CREDIT CARDS, 2001-2004

2001 2004 All families Percent of all families with credit cards 76.2% 74.9% Percent of all families with credit card balance 44.4 46.2 Median amount of credit card balance1 ($000) $2.0 $2.2 Families with credit card balance By percentile of income Less than 20 percent 30.3% 28.8% 20 to 39.9 percent 44.5 42.9 40 to 59.9 percent 52.8 55.1 60 to 79.9 percent 52.6 56.0 80 to 89.9 percent 50.3 57.6 90 to 100 percent 33.1 38.5 Median amount of credit card balance1 ($000) By percentile of income Less than 20 percent $1.1 $1.0 20 to 39.9 percent 1.3 1.9 40 to 59.9 percent 2.1 2.2 60 to 79.9 percent 2.4 3.0 80 to 89.9 percent 4.0 2.7 90 to 100 percent 3.0 4.0 12004 dollars. Source: Board of Governors of the Federal Reserve System.

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consumer debt

UNDERGRADUATE STUDENT CREDIT CARD USAGE, 1998-2004

Undergraduate students 1998 2000 2001 2004 Percent who have credit cards 67% 78% 83% 76% Average number of credit cards 3.50 3.00 4.25 4.09 Percent who have four or more credit cards 27% 32% 47% 43%

Source: Nellie Mae.

CREDIT CARD LOSS RATES, 1996-20051 (Percent, end of year) Year Percent Year Percent 1996 4.65% 2001 6.42% 1997 5.34 2002 5.47 1998 5.10 2003 5.78 1999 4.38 2004 4.94 2000 4.68 2005 6.38 1Total loans and leases removed from balance sheet because of uncollectibility, less amounts recovered on loans and leases previously charged off, at FDIC-insured commercial institutions. Source: Federal Deposit Insurance Corporation.

TOP TEN CREDIT CARD ISSUERS BY OUTSTANDINGS, 2004-20051 ($ millions, end of year) Rank Company 2004 2005 1 Chase Card Services $135,370.0 $138,878.0 2 Citigroup Inc. 139,600.0 136,500.0 3 MBNA America 101,900.0 104,947.8 4 Bank of America 58,629.0 60,790.3 5 Capital One Financial Corp. 48,609.6 49,463.5 6 Discover Financial Services Inc. 48,261.0 46,936.0 7 American Express Centurion Bank 24,709.6 27,172.6 8 HSBC Credit Card Services 19,670.0 26,200.0 9 Washington Mutual Bank 18,100.0 19,472.0 10 Wells Fargo 15,070.9 17,393.0 1Based on responses to CID survey. Includes all credit card debt outstanding. Source: SourceMedia’s Card Industry Directory.

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Savings, investment and debt ownership Savings, investment and debt ownership

bankruptcy

BANKRUPTCY There are three major types of bankruptcies: Chapter 7 is a liquidation, under which assets are distributed by a court-appointed trustee and, if there are no assets, the debt is dis- charged and creditors receive nothing. Chapter 11 is a reorganization, used mostly for businesses, under which debts are restructured and a payment schedule is worked out. Chapter 13 is a debt repayment plan, under which debts are repaid in part or in full over a period of time, normally three years, under the supervision of a trustee. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Public Law 109-8), the most comprehensive revision to bankruptcy laws in 25 years, instituted a means test that requires people who earn above their state’s median income and can repay at least $6,000 over five years to file for bankruptcy protection under Chapter 13, which requires a repayment plan. (Under the previous law more debtors were eligible to file under Chapter 7, which has less stringent provisions.)

BANKRUPTCY PETITIONS FILED BY TYPE, 2002-2006 (Year ending March 31) Year Business Nonbusiness Total • From 2002 to 2006, 2002 39,845 1,464,961 1,504,806 business bankruptcies fell 11.4 percent. 2003 37,548 1,573,720 1,611,268 2004 36,785 1,618,062 1,654,847 • Nonbusiness bankruptcies, which account 2005 31,952 1,559,023 1,590,975 for the vast majority 2006 35,292 1,759,503 1,794,795 of bankruptcies, rose Source: Administrative Office of the U.S. Courts. 20.1 percent from 2002 to 2006.

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Savings, investment and debt ownership Savings, investment and debt ownership

consumer fraud and identity theft

CONSUMER FRAUD AND IDENTITY THEFT The Consumer Sentinel database, maintained by the Federal Trade Commission, contains almost two million consumer fraud and identity theft complaints that have been filed with federal, state, and local law enforcement agencies and private organizations.

IDENTITY THEFT AND FRAUD COMPLAINTS, 2003-20051

n Identity complaints n Fraud complaints 686,683 700,000 653,040

600,000 542,656 37% 255,565 38% 246,847 500,000 40% 215,177 400,000

300,000 406,193 63% 431,118 200,000 62% 60% 327,479 100,000

0 2003 2004 2005 1Percentages are based on the total number of identity theft and fraud complaints by calendar year. These figures exclude “Do Not Call” registry complaints. Source: Federal Trade Commission.

HOW VICTIMS’ INFORMATION IS MISUSED, 20051

Type of identity theft fraud Percent Credit card fraud 26% Other identity theft 25 Phone or utilities fraud 18 Bank fraud2 17 Employment-related fraud 12 Government documents or benefits fraud 9 Attempted identity theft 6 Loan fraud 5 1Percentages are based on the total number of complaints in the Federal Trade Commission’s Identity Theft Data Clearinghouse (255,565 in 2005). Percentages total to more than 100 because some victims reported experiencing more than one type of identity theft (20% in 2005). 2Includes fraud involving checking and savings accounts and electronic fund transfer. Source: Federal Trade Commission.

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Savings, investment and debt ownership

consumer fraud and identity theft

IDENTITY THEFT VICTIMS BY STATE, 2005 Victims per Victims per 100,000 Number of 100,000 Number of State population1 victims Rank2 State population1 victims Rank2 Alabama 58.7 2,675 31 Montana 42.5 398 44 Alaska 63.4 421 26 Nebraska 52.3 919 37 Arizona 156.9 9,320 1 Nevada 130.2 3,144 2 Arkansas 58.2 1,617 33 New Hampshire 49.2 645 41 California 125.0 45,175 3 New Jersey 75.5 6,582 14 Colorado 97.2 4,535 5 New Mexico 84.7 1,634 12 Connecticut 65.9 2,313 23 New York 90.3 17,387 8 Delaware 69.1 583 16 North Carolina 67.1 5,830 21 Florida 95.8 17,048 6 North Dakota 24.8 158 50 Georgia 87.3 7,918 9 Ohio 62.4 7,155 29 Hawaii 63.5 810 25 Oklahoma 67.7 2,403 18 Idaho 52.1 745 38 Oregon 81.7 2,973 13 Illinois 87.3 11,137 10 Pennsylvania 63.6 7,908 24 Indiana 67.0 4,201 22 Rhode Island 58.2 626 34 Iowa 36.7 1,090 47 South Carolina 56.8 2,416 36 Kansas 58.5 1,606 32 South Dakota 30.0 233 49 Kentucky 43.5 1,815 43 Tennessee 57.2 3,412 35 Louisiana 62.6 2,831 27 Texas 116.5 26,624 4 Maine 37.2 491 46 Utah 67.5 1,668 20 Maryland 86.6 4,848 11 Vermont 32.3 201 48 Massachusetts 62.5 3,999 28 Virginia 68.2 5,163 17 Michigan 70.5 7,139 15 Washington 92.4 5,810 7 Minnesota 58.7 3,015 30 West Virginia 37.3 677 45 Mississippi 49.9 1,458 40 Wisconsin 50.3 2,782 39 Missouri 67.6 3,920 19 Wyoming 44.0 224 42 1Population figures are based on the 2005 U.S. Census population estimates. 2The District of Columbia had 152.9 victims per 100,000 population and 842 victims. Source: Federal Trade Commission.

32 The Financial Services Fact Book 2007 www.financialservicesfacts.org Chapter 3: Asset Management/Retirement Funds

Asset Management

OVERVIEW Competition is intense in the asset management arena, with some companies providing complete asset management services while others offer specific products. One major aspect of asset management is planning for retirement. Retirement plans are generally administered by a bank, life insurance company, mutual fund, brokerage firm or pension fund manager. Because payouts are relatively predictable, pension funds invest primarily in long-term securities. They are among the largest investors in the stock market. Pension plan assets made up 17 percent of total financial services assets in 2005.

TOP TEN ASSET MANAGER DEALS ANNOUNCED IN THE UNITED STATES, 20051 ($ millions) Rank Buyer Target Seller2 Deal value3 1 Legg Mason Inc. Asset management business Citigroup Inc. $3,700.0 2 Legg Mason Inc. Permal Group Ltd. Sequana Capital 930.0 Corporate trust and institutional 3 U.S. Bancorp custody business Wachovia Corp. 800.0 Affiliated Managers 4 Group Inc. First Asset Management Inc. Investor group 250.0 Guggenheim Alternative 5 Bank of Ireland plc Asset Management LLC Guggenheim Partners LLC 184.0 Jones Lang 6 LaSalle Inc. Spaulding & Slye Advisors, LP 150.0 7 Fortis Bank SA/NV Dryden Wealth Management Ltd. Prudential Financial Inc. 144.0 Sanders Morris 8 Harris Group Inc. Edelman Financial Center Inc. 128.7 Allianz Aktiengesellschaft 9 Management group Cadence Capital Management LLC Holding 77.0 10 Brascan Corp. Hyperion Capital Management Inc. Hyperion Partners LP 50.0 Nuveen Santa Barbara Asset Investments Inc. Management Inc. 50.0 1At least one of the companies involved is a U.S.-domiciled company. List does not include terminated deals. 2If different from the target. 3At announcement. Source: SNL Financial LC.

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ASSET Management/retirement funds ASSET Management/retirement funds

retirement ASSETS

ASSETS OF PRIVATE PENSION FUNDS BY TYPE OF ASSET, 2001-20051 ($ billions, end of year) 2001 2002 2003 2004 2005 Total financial assets $3,916.3 $3,309.3 $4,027.4 $4,472.9 $4,613.3 Checkable deposits and currency 9.9 10.2 10.4 10.5 10.7 Time and savings deposits 143.5 148.0 150.4 152.4 156.7 Money market fund shares 80.5 82.8 84.4 85.1 87.0 Security repurchase agreements2 31.6 32.5 33.1 33.4 34.2 Credit market instruments 637.3 663.0 677.2 712.1 734.9 Open market paper 37.2 39.8 37.7 38.9 40.9 U.S. government securities 295.2 305.5 313.8 331.9 342.1 Treasury 80.5 85.1 86.5 91.4 94.2 Agency- and GSE3-backed securities 214.7 220.4 227.3 240.5 247.9 Corporate and foreign bonds 294.6 307.3 315.5 331.3 342.0 Mortgages 10.4 10.4 10.3 10.0 9.8 Corporate equities 1,562.1 1,096.7 1,491.9 1,691.2 1,726.1 Mutual fund shares 862.1 752.0 993.7 1,173.7 1,252.0 Miscellaneous assets 589.4 523.9 586.3 614.4 611.5 Unallocated insurance contracts4 339.7 270.7 333.7 369.3 377.7 Contributions receivable 121.9 122.0 120.6 118.2 114.9 Other 127.8 131.2 132.0 126.9 119.0 Pension fund reserves (liabilities)5 3,964.0 3,357.0 4,074.5 4,519.0 4,657.9 1Private defined benefit plans and defined contribution plans (including 401(k) type plans), and the Federal Employees Retirement System Thrift Savings Plan. 2Short-term agreements to sell and repurchase government securities by a specified date at a set price. 3Government-sponsored enterprise. 4Assets of private pension plans held at life insurance companies (e.g., variable annuities). 5Equal to the value of tangible and financial assets. These liabilities are assets of the household sector. Source: Board of Governors of the Federal Reserve System.

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ASSET Management/retirement funds ASSET Management/retirement funds

retirement ASSETS

ASSETS OF STATE AND LOCAL GOVERNMENT EMPLOYEE RETIREMENT FUNDS BY TYPE OF ASSET, 2001-2005 ($ billions, end of year) 2001 2002 2003 2004 2005 Total financial assets $2,206.6 $1,930.5 $2,344.0 $2,572.0 $2,721.7 Checkable deposits and currency 11.4 12.9 17.2 17.6 22.1 Time and savings deposits 1.8 1.7 1.4 1.8 1.9 Money market fund shares 15.4 15.5 12.6 9.6 9.5 Security repurchase agreements1 34.0 27.1 22.0 16.7 21.0 Credit market instruments 689.4 638.7 649.9 677.1 666.8 Open market paper 51.3 48.0 39.1 29.6 29.1 U.S. Government securities 335.8 351.5 396.2 422.9 416.1 Treasury 155.1 158.9 147.9 130.4 119.8 Agency- and GSE2-backed securities 180.7 192.6 248.3 292.5 296.3 Municipal securities 1.7 0.9 1.0 1.7 1.6 Corporate and foreign bonds 279.7 217.3 193.2 203.4 200.4 Mortgages 21.0 21.1 20.4 19.5 19.6 Corporate equities 1,260.4 1,056.8 1,421.5 1,607.0 1,752.1 Mutual fund shares 184.3 167.4 208.0 230.5 241.3 Miscellaneous assets 10.0 10.4 11.3 11.8 7.1 Pension fund reserves (liabilities)3 2,253.5 1,980.0 2,393.9 2,620.0 2,765.5 1Short-term agreements to sell and repurchase government securities by a specified date at a set price. 2Government-sponsored enterprise. 3Equal to the value of tangible and financial assets. These liabilities are assets of the household sector. Source: Board of Governors of the Federal Reserve System.

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ASSET Management/retirement funds ASSET Management/retirement funds

retirement ASSETS

TYPES OF RETIREMENT PLANS There are two basic types of pension funds: defined benefit and defined contribution plans. In a defined benefit plan, the income the employee receives in retirement is guaranteed, based on predetermined benefits formulas. A person’s earnings and number of years with the company may affect the benefits received. In a defined contribution plan, a type of savings plan in which taxes on earnings are deferred until funds are withdrawn, the amount of retirement income depends on the contributions made and the earnings generated by the securities purchased. The employer generally matches the employee contribution up to a certain level and the employee selects investments from among the options the employer’s plan offers. The Individual Retirement Account (IRA) is a tax-deductible savings plan for those who are self-employed, or whose earnings are below a certain level or whose employers do not offer retirement plans. Other types of retirement funds include profit-sharing and Keogh plans for the self-employed and employees of small businesses. Some people not in these categories may make limited IRA contributions on a tax-deferred basis. The Roth IRA, a special kind of retirement account created in 1997, may offer greater tax benefits to certain individuals.

DEFINED BENEFIT AND DEFINED CONTRIBUTION PLANS, 1990-20051 (Percent) Percent of all workers participating 1990-1991 1999 2000 2003 2004 2005 Defined benefit pension plans 35% 21% 19% 20% 21% 21% Defined contribution plans 34 36 36 40 42 42 1All private industry. Source: U.S. Bureau of Labor Statistics.

DEFINED BENEFIT PLAN FORMULAS Retirement benefits under defined pension plans vary, depending on the formula used to determine the benefits. Typically, benefits are based on a percentage of the participant’s “terminal earnings,” i.e., earnings at retirement. Several other options have been developed (see Appendix, page 189).

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retirement ASSETS

DEFINED BENEFIT PLANS: PRIMARY FORMULA, ALL EMPLOYEES, 20031

Pension equity • Among those workers 2% Cash balance covered by a defined benefit 21% Percent of plan, the share of cash terminal earnings balance plans rose from 43% 4 percent in 1997 to 21 Percent of percent in 2003. contribution formula 8% • 28 percent of workers in service-producing industries Dollar amount formula 17% covered by a defined benefit Percent of plan were in cash balance career earnings 10% plans, compared with 8 percent of workers in goods- producing industries. 1All private industry. Does not add to 100 percent due to rounding. Source: National Compensation Survey, 2003, U.S. Bureau of Labor Statistics.

RETIREMENT FUNDS ASSET MIX, 2005

private defined benefit plans private defined contribution plans • In defined benefit plans, the share of investments

Other Other in bonds rose from 2004 11% 15% to 2005, while the share Cash, etc. of investments in equities 10% Cash, etc. Equities Equities 5% 37% decreased. 38%

Mutual funds 11%

Mutual funds

37% Bonds Bonds 30% 6%

Source: Securities Industry Association.

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retirement ASSETS

INVESTMENT MIX OF PRIVATE DEFINED BENEFIT PLAN ASSETS, 2001-2005 ($ billions) Year Equity Bonds Mutual funds Cash items Other assets Total assets

2001 $724 $459 $149 $162 $192 $1,686

2002 457 475 131 167 180 1,409

2003 643 488 185 169 195 1,680

2004 720 513 206 172 200 1,811

2005 685 524 194 176 190 1,769

Source: Securities Industry Association.

INVESTMENT MIX OF PRIVATE DEFINED CONTRIBUTION PLAN ASSETS, 2001-2005 ($ billions) Year Equity Bonds Mutual funds Cash items Other assets Total assets

2001 $838 $141 $714 $141 $397 $2,231

2002 640 148 621 146 344 1,900

2003 849 152 809 147 392 2,347

2004 971 160 968 149 414 2,662

2005 1,041 170 1,058 153 422 2,844

Source: Securities Industry Association.

PENSION BENEFIT GUARANTY CORPORATION The Pension Benefit Guaranty Corporation (PBGC), a federal corporation created by the Employee Retirement Income Security Act of 1974, protects the pensions of over 44 million workers in about 31,000 private defined benefit plans through two separate insurance programs: a single-employer plan termination insurance program and a multi-employer plan. In 2005 Congress passed landmark pension reform legislation to close shortfalls in employers’ funding of defined benefit pension plans. The act requires employers to fully fund their plans in seven years, but gives some airlines in bankruptcy proceedings an extra 10 years to meet their obligations. The law also removes legal barriers to some cash balance plans and is, together with a recent federal court ruling concerning IBM, expected to spur the growth of such plans. The August 2006 ruling held that IBM’s cash balance plan did not discriminate against older workers.

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retirement ASSETS

PARTICIPANTS AND BENEFICIARIES RECEIVING PENSION BENEFIT GUARANTY CORPORATION PAYMENTS, SINGLE-EMPLOYER PROGRAM, 1980-2005 (000) 1,200

1,100 • More than 80 percent of all claims against 1,000 the PBGC have been 900 Deferred Payees recorded since 2000. 800 Payees in Year Claims from the airlines and steel industries 700 accounted for 75 600 percent of the claims 500 received from 2000 to 400 2005.

300 • In 2005 the PBGC

200 paid $3.7 billion in benefits to 698,000 100 defined benefit plan 0 participants. 1 2 3 4 5 6 7

1980 1985 1990 199 199 199 199 199 199 199 1998 1999 2000 2001 2002 2003 2004 2005

Source: Pension Benefit Guaranty Corporation.

IRA MARKET SHARES BY HOLDER, 2001-2005 ($ billions, end of year)

By holder 2001 2002 2003 2004 2005 • In 2005 most people’s IRAs were Commercial banking $160.1 $165.6 $166.0 $168.0 $170.5 held by mutual funds, followed Savings institutions 54.6 53.8 55.1 53.7 53.8 by “other self- Credit unions 39.9 43.3 46.8 47.7 49.3 directed accounts,” Life insurance generally brokerage companies 251.0 308.3 338.4 376.0 407.0 accounts in which Money market the investor has mutual funds 172.0 190.0 171.0 153.0 162.0 considerable control Mutual funds 961.3 822.0 1,095.0 1,279.0 1,432.0 over the direction of Other self-directed investments. accounts 980.1 950.0 1,118.6 1,258.7 1,392.4

Total 2,619.0 2,533.0 2,991.0 3,336.0 3,667.0

Source: Board of Governors of the Federal Reserve System.

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retirement ASSETS

IRA MARKET SHARES BY HOLDER, 2001 AND 2005

2001 2005

Commercial banking 6% Commercial banking 5% Other Other self-directed Saving institutions 2% self-directed Saving institutions 2% accounts 38% Credit unions 1% accounts 37% Credit unions 2% Life insurance Life insurance companies 11% companies 10% Money market Money market mutual funds 4% mutual funds 6%

Mutual funds 37% Mutual funds 39%

Source: Board of Governors of the Federal Reserve System.

401(K) ROLLOVER RATES Workers who leave their jobs can preserve their 401(k) assets by rolling over the funds into a qualified individual retirement account (IRA) or by keeping them in the 401(k) plan. A survey by Hewitt Associates found that in 2004, 55 percent of workers either maintained their balances in the original plan or rolled the funds over into an IRA; 45 percent took a cash distribution upon termination of employment.

401(K) PARTICIPANT CHOICES AT TERMINATION BY AGE, 2004 (Percent) Participant age Leaving money in plan Rollover Taking cash distribution 20 to 29 years old 19.5% 14.7% 65.8% 30 to 39 years old 29.6 21.8 48.6 40 to 49 years old 33.3 24.5 42.2 50 to 59 years old 39.5 29.8 30.7 60 to 65 years old 39.2 32.2 28.6 65 years old and over 44.2 26.5 29.4

Source: Hewitt Associates LLC.

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retirement ASSETS

ASSETS IN 401(K) PLANS, 1996-2005 ($ billions) Mutual fund Year 401(k) plan assets Other 401(k) plan assets Total 1996 $351 $710 $1,061 1997 480 784 1,264 1998 619 922 1,541 1999 813 977 1,790 2000 819 906 1,725

2001 798 884 1,682 2002 712 868 1,5801 2003 927 1,0502 1,9782 2004 1,096 1,1712 2,2672 2005 1,238 1,2052 2,4432 1Preliminary data not finalized by the U.S. Department of Labor. 2Estimated by the Investment Company Institute. Note: Components may not add to totals due to rounding. Source: Investment Company Institute.

AVERAGE ASSET ALLOCATION FOR ALL 401(K) PLAN BALANCES, 2004

Other 3% Money funds 4% Bond funds 10%

Balanced funds 10% Equity funds 46%

Guaranteed investment contracts and other stable value funds 12%

Company stock 15%

Note: Funds include mutual funds and other pooled investments. Source: Investment Company Institute.

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ANnuities

SALES OF FIXED AND VARIABLE ANNUITIES Fixed annuities guarantee that a specific sum of money will be paid each period, generally on a monthly basis, regardless of fluctuations in the value of the annuity issuer’s underlying investments. Variable annuity payments are based on the portfolio of stocks in which the issuer invests; therefore the monthly payment may fluctuate, depending on whether the value of the investments goes up or down. (See Chapter 5, page 89.) The equity index annuity is a hybrid annuity product. A specified rate of interest guarantees a fixed minimum rate of interest as with traditional fixed annuities. At the same time, additional interest may be credited to policy values based on positive changes, if any, in an established index such as the S&P 500. Policies are sold by licensed insurance agents and regulated by state insurance departments. Sales of index annuities reached a record $27.3 billion in 2005, up 64 percent from $23 billion in 2004, according to the Advantage Compendium.

INDIVIDUAL ANNUITY CONSIDERATIONS, 2001-20051 ($ billions) Year Variable Fixed Total • Fixed annuity sales fell 2001 $111.0 $74.3 $185.3 10.2 percent in 2005. 2002 116.6 103.3 219.9 • Total annuity sales fell 2003 129.4 89.4 218.8 1.9 percent in 2005, 2004 132.9 87.9 220.8 compared with an increase of 0.9 percent 2005 137.6 78.9 216.5 1 in 2004. Considerations are LIMRA’s estimates of the total annuity sales market. Source: LIMRA International.

ANNUITY DISTRIBUTION SYSTEMS Insurance agents, including career agents, who sell the products of a single life insurance company, and independent agents, who represent several insurers, account for over 40 percent of annuity sales. State and federal regulators require sellers of variable annuities, which are similar to stock market-based investments, to register with NASD and the Securities and Exchange Commission.

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ANnuities

SALES OF INDIVIDUAL ANNUITIES BY DISTRIBUTION CHANNELS, 2001 AND 20051 20012 2005 Independent Career agents Independent Career agents agents 19% agents 20% 22% 21%

Other Other 4% 5% Direct Banks Banks Direct response 19% response 20% 7% 7% Stockbrokers Stockbrokers 13% Financial planners/Independent 27% broker-dealers 16%

1Preliminary. 2Financial planner sales included with stockbrokers prior to 2003. Source: LIMRA International.

VARIABLE ANNUITY TOTAL SALES BY DISTRIBUTION CHANNEL, 20051

Captive agents Equity 35% 56%

Direct response 1% Regular investment firms 10% Independent NASD firms New York wirehouses 31% 10%

Banks/credit unions 13%

1As of December 31, 2005. Source: NAVA and Morningstar, Inc.

NET ASSETS OF VARIABLE ANNUITIES, 1996-2005 ($ billions) $1,400 $1,202.8 1,200 $1,124.2

1,000 $973.5 $956.5 $993.9 $885.8 800 $771.3 $795.6 $640.0 600 $502.4 400

200

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: NAVA and Morningstar, Inc. www.financialservicesfacts.org The Financial Services Fact Book 2007 43

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Mutual funds

MUTUAL FUND RETIREMENT ASSETS, 1996-2005 ($ billions) Employer-sponsored Year accounts1 IRAs Total retirement 1996 $584 $587 $1,171 1997 774 770 1,544 1998 985 969 1,954 1999 1,282 1,263 2,545 2000 1,256 1,236 2,492 2001 1,188 1,173 2,360 2002 1,053 1,052 2,105 2003 1,363 1,319 2,682 2004 1,588 1,497 3,084 2005 1,7762 1,6682 3,4442 1Includes 401(k) plans, 403(b) plans, 457 plans, Keoghs and other defined contribution plans without 401(k) features; does not include defined benefit plan mutual fund assets. 2Preliminary. Note: Components may not add to totals due to rounding.

Source: Investment Company Institute.

MUTUAL FUND RETIREMENT ASSETS BY TYPE OF PLAN, 20051 ($ billions)

Other retirement plans $217 • Of the total $3.4 6.5% trillion in mutual 403(b) plans fund assets held in $321 retirement plans, 69 9.3% percent were invested IRAs in equity funds, $1,668 48.4% including 58 percent 401(k) plans in domestic funds and $1,238 35.9% 11 percent in foreign funds. 1Preliminary. Source: Investment Company Institute.

44 The Financial Services Fact Book 2007 www.financialservicesfacts.org Chapter 4: Convergence

financial holding companies

OVERVIEW Spurred by the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLB), many leading financial services companies are now doing business across sectors. GLB permits banks, securities firms and insurance companies to affiliate with each other through the financial holding company (FHC) structure. FHCs can engage in activities other than banking as long as they are financial in nature. The most important of these are securities underwriting and dealing, insurance underwriting, insurance agency activities and merchant banking, a form of equity financing. The first step in electing FHC status is to become a bank holding company (BHC), a company that owns one or more banks. BHCs must meet certain eligibility requirements in terms of capital, management and community investment to become an FHC. GLB allows existing BHCs that have opted for FHC status to acquire full service securities firms and insurance companies. GLB also permits insurers and securities firms to buy a bank and thus become a BHC eligible for FHC status. One example is MetLife, which purchased a bank and became an FHC. GLB also allowed banks owned by BHCs to expand into financial services activities by creating financial subsidiaries. Income from these subsidiaries’ activities flows up to the BHC parent and is reported as income by the parent. But the activities permitted to these subsidiaries are not as broad as for FHCs. Financial subsidiaries of banks may not engage in insurance underwriting. In addition, they may not engage as a principal in providing or issuing annuities or in real estate development and investment, merchant banking or insurance investment activities. Before passage of GLB, BHCs could be involved in the securities business, but what they were permitted to do was strictly limited by law.

NUMBER OF FINANCIAL HOLDING COMPANIES, 2001-20051 • In 2005 the Federal (End of year) Reserve approved 2001 2002 2003 2004 2005 requests from 35 domestic bank holding Number of domestic FHCs2 567 602 612 600 591 companies and three Number of foreign FHCs3 23 30 32 36 38 foreign banks seeking Total number of FHCs 590 632 644 636 629 financial holding company 1To avoid double-counting, only the top-tier bank holding company in a multitier organization is status. included. 2Bank holding company whose ultimate parent is incorporated in the United States. 3Bank holding company whose ultimate parent is a foreign bank or other organization chartered outside the United States. Source: Board of Governors of the Federal Reserve System.

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bank holding companies

BANK HOLDING COMPANY INSURANCE BROKERAGE AND UNDERWRITING FEE INCOME, 2001-2005 Insurance brokerage fee income1 Reporting brokerage fee income Brokerage Mean brokerage Median fee income fee income brokerage Year Number Percent ($ billions) ($ millions) fee income 2001 1,129 62.8% $4.99 $4.4 $71,000 2002 1,235 63.9 5.86 4.7 65,000 2003 1,319 63.2 8.37 6.3 65,000 2004 1,408 62.7 9.63 6.8 65,000 2005 1,423 63.1 10.98 7.7 65,000 Insurance underwriting fee income2 Reporting underwriting fee income Underwriting Mean underwriting Median fee income fee income underwriting Year Number Percent ($ billions) ($ millions) fee income 2001 134 7.6% $32.37 $241.6 $312,500 2002 179 9.1 24.47 136.7 184,000 2003 109 5.1 25.13 230.5 484,000 2004 96 4.3 27.43 285.7 499,500 2005 94 4.2 33.08 351.9 467,500 1Income from nonunderwriting activities, mostly from insurance product sales and referrals, service charges and commissions, and fees earned from insurance and annuity sales. 2Income from underwriting activities. Source: Michael White’s Bank Holding Company Insurance & Investment Fee Income Report - 2006.

BANK HOLDING COMPANY INVESTMENT FEE INCOME, 2001-20051 Reporting investment fee income Investment fee Mean investment Median invest- Year Number Percent income ($ billions) fee income ment fee income 2001 1,005 55.9% $38.56 $38,363,297 $147,000 2002 1,101 57.0 39.24 35,644,486 143,000 2003 1,196 57.3 41.96 35,074,606 139,500 2004 1,256 55.9 45.69 36,378,205 151,000 2005 1,278 56.6 48.93 38,282,635 158,000 1Income from investment banking, advisory, brokerage, and underwriting fees and commissions. Source: Michael White’s Bank Holding Company Insurance & Investment Fee Income Report - 2006.

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bank holding companies

BANK HOLDING COMPANY MUTUAL FUND AND ANNUITY INCOME, 2001-2005 Reporting mutual fund and annuity income Mutual fund and Mean mutual Median mutual annuity income fund and fund and Year Number Percent ($ billions) annuity income annuity income 2001 895 49.8% $13.11 $14,648,515 $125,000 2002 986 51.0 13.96 14,158,153 137,000 2003 1,054 50.5 15.39 14,597,508 141,000 2004 1,103 49.1 17.22 15,614,549 153,000 2005 1,108 49.1 19.46 17,562,670 157,000

Source: Michael White’s Bank Holding Company Insurance & Investment Fee Income Report - 2006.

TOP TEN BANK HOLDING COMPANIES, 2005 ($ millions)

Rank Company Assets • The top 10 BHCs or 1 Citigroup Inc. $1,494,037 their parents all have FHC 2 Bank of America Corporation 1,294,312 status. This structure allows them to engage 3 JPMorgan Chase & Co. 1,198,942 in expanded financial 4 Wachovia Corporation 520,755 services activities. 5 Wells Fargo & Company 481,741 • To qualify for the Federal 1 6 HSBC North America Holdings Inc. 404,254 Reserve’s ranking of top 7 Taunus Corporation2 364,702 bank holding companies, 8 U.S. Bancorp 209,465 the BHC must not only qualify by asset size but 9 Suntrust Banks, Inc. 179,713 must also meet specified 10 Countrywide Financial Corporation 175,085 data filing requirements 1HSBC N.A. Holdings Inc.’s holder, HSBC Holding PLC, is an FHC. and be engaged in signifi- 2Taunus’ holder, Deutsche Bank, is an FHC. cant banking activities. Source: Board of Governors of the Federal Reserve System.

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convergence convergence

bank holding companies

TOP TEN BANK HOLDING COMPANIES IN INSURANCE UNDERWRITING NET INCOME, 20051 ($000) Net income Underwriting income as a percent of Insurance total bank holding 2005 Rank Bank holding company State underwriting Total company net income Assets 1 MetLife, Inc. NY $3,573,000 $4,713,856 75.80% $481,645,114 2 Citigroup Inc. NY 1,545,000 24,589,000 6.28 1,494,037,000 3 John Hancock Holdings (DE) LLC DE 850,441 858,831 99.02 101,335,209 4 Wells Fargo & Company CA 832,000 7,671,000 10.85 481,741,000 5 JPMorgan Chase & Co. NY 211,000 8,483,000 2.49 1,198,942,000 6 HSBC N. America Holdings Inc. IL 208,568 3,251,653 6.41 404,254,480 7 Countrywide Financial Corp. CA 176,998 2,528,090 7.00 175,085,370 8 Bank of America Corporation NC 83,654 16,885,724 0.50 1,294,312,241 9 Old National Bancorp IN 68,704 63,764 107.75 8,492,623 10 National City Corporation OH 34,952 1,985,229 1.76 142,410,520 1Ranked by 2005 insurance underwriting net income. Source: Michael White’s Bank Holding Company Insurance & Investment Fee Income Report - 2006.

TOP TEN BANK HOLDING COMPANIES IN INSURANCE BROKERAGE FEE INCOME, 20051 ($000) Insurance brokerage fee income Percent of Percent noninterest 2005 Rank Bank holding company State 2004 2005 change income, 2005 Assets 1 MetLife, Inc. NY $3,079,169 $4,128,752 34.09% 12.89% $481,645,114 2 Citigroup Inc. NY 1,616,000 1,291,000 -20.11 3.05 1,494,037,000 3 Wells Fargo & Company CA 966,000 977,000 1.14 6.74 481,741,000 4 BB&T Corporation NC 593,327 701,891 18.30 30.18 109,169,759 5 JPMorgan Chase & Co. NY 400,000 432,000 8.00 1.19 1,198,942,000 6 Wachovia Corporation NC 245,000 331,000 35.10 2.73 520,755,000 7 MBNA Corporation DE 200,536 256,015 27.67 3.47 61,862,462 John Hancock 8 Holdings (DE) LLC DE NA 236,188 NA 6.04 101,335,209 9 Bank of America Corp. NC 205,495 188,846 -8.10 0.71 1,294,312,241 10 Greater Bay Bancorp CA 128,451 154,502 20.28 73.02 7,125,412 1Income from nonunderwriting activities, insurance product sales and referrals, service charges and commissions, and fees earned from insurance and annuity sales. Ranked by 2005 insurance brokerage fee income. NA=Not applicable. Source: Michael White’s Bank Holding Company Insurance & Investment Fee Income Report - 2006.

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Bank holdng companies/banks

TOP TEN BANK HOLDING COMPANIES IN PROPRIETARY MUTUAL FUND AND ANNUITIES ASSETS UNDER MANAGEMENT, 2005 ($000) Proprietary mutual fund and annuities assets under management Percent 2005 Rank Bank holding company State 2004 2005 change Assets 1 MetLife, Inc. NY $386,800,000 $481,645,114 24.52% $481,645,114 2 Franklin Resources, Inc. CA 307,297,175 354,954,729 15.51 8,891,541 3 Bank of America Corp, NC 210,259,106 221,497,050 5.34 1,294,312,241 4 JPMorgan Chase & Co. NY 209,727,000 213,583,000 1.84 1,198,942,000 5 Mellon Financial Corp. PA 163,889,000 179,488,000 9.52 38,773,216 6 Charles Schwab Corp. CA 154,945,300 166,892,197 7.71 47,351,142 7 Taunus Corporation NY 93,767,408 121,506,000 29.58 364,693,000 8 PNC Financial Services Grp. PA 95,504,468 116,000,644 21.46 91,992,332 9 Wells Fargo & Company CA 82,102,000 112,492,000 37.01 481,741,000 10 Wachovia Corporation NC 106,428,000 103,855,000 -2.42 520,755,000

Source: Michael White’s Bank Holding Company Insurance & Investment Fee Income Report - 2006.

banks

BANK-PRODUCED INSURANCE PREMIUMS, 2000-20051 ($ billions) Percent change, 2000 2001 2002 2003 2005 2000-2005 Annuities $31.0 $37.1 $47.7 $51.6 $41.9 35.2% Commercial lines2 5.4 8.9 11.5 14.2 24.3 350.0 Personal property/casualty 3.7 4.1 5.0 6.3 7.7 108.1 Credit coverages 2.7 2.8 2.5 2.4 2.1 -22.2 Individual life/health3 2.1 2.3 2.8 3.6 4.1 95.2 Total 44.9 55.2 69.5 78.1 80.1 78.4 Annual growth 23.4% 22.9% 25.9% 12.4% 2.6% NA 1Estimated. Data not available for 2004. 2Includes commercial property/casualty and group benefits premium. 3Excludes accidental death and dismemberment. No adjustment is made for non-recurring premiums. NA=Not applicable. Source: American Bankers Insurance Association.

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convergence convergence

banks

• In 2005 bank insurance BANK INSURANCE PREMIUMS BY TYPE OF COVERAGE, 20051 premiums increased by 3 ($ billions) percent to an estimated Annuities $41.9 Credit insurance $2.1 52% $80.1 billion from $78.1 3% 3 Individual L/H $4.1

billion in 2003, according 5%

to the ABIA. Personal P/C $7.7 10%

• In 2005 banks accounted

for almost a quarter of total 2 Commercial lines $24.3 annuity sales, 7 percent of 30% commercial lines insurance 1Total estimated at $80.1 billion. 2 sales, and 3 percent of per- Commercial property/casualty and group benefits premiums. 3Excludes accidental death and dismemberment. No adjustment is made for nonrecurring premiums. sonal lines insurance sales. Source: American Bankers Insurance Association.

PRIMARY BANK INSURANCE DISTRIBUTION CHANNELS, 2005 (Percent) Property/casualty Life/health Personal Commercial Individual Group benefits Annuities Acquired agency 46.9% 49.5% 19.0% 39.5% 7.4% Alliance with carrier 3.5 1.8 3.0 1.8 3.5 De novo agency1 12.4 9.9 13.5 13.2 9.9 Joint venture2 14.2 16.2 17.0 23.7 20.8 Alliance with third-party marketer 4.4 4.5 11.0 4.4 13.9 Licensed bank employees 15.9 13.5 33.0 13.2 42.1 Other 2.7 4.5 3.5 4.4 2.5 Total 100.0 100.0 100.0 100.0 100.0 1Agency originated by the bank without acquisition of a platform agency. 2Joint venture or marketing alliance with an insurance agency. Source: American Bankers Insurance Association. BANK SALES OF LIFE INSURANCE: NEW (FIRST YEAR) PREMIUMS, 2001-2005 ($ millions) Year Sales • Bank sales of new life 2001 $452 insurance, which include single premium products, 2002 643 fell 20 percent in 2005, 2003 926 compared with a 40 2004 1,294 percent increase the 2005 1,033 previous year. Source: Kehrer-LIMRA.

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banks retirement ASSETS

BANK LIFE INSURANCE SALES, 2001-20051 ($ millions, weighted premium)

$350 • When based on a $288 300 $273 weighted premium formula $242 250 (see footnote), total bank $207 sales of life insurance 200 $155 fell 5 percent in 2005, 150 following a 19 percent

100 rise in 2004.

0 2001 2002 2003 2004 2005 1Sales are based on weighted premium, discounting 90 percent of single premium (one-time payment) products to approximate the expected value of premium flows to life insurance companies each year. Source: Kehrer-LIMRA.

BANK MARKET SHARE OF LIFE INSURANCE SALES, 2001-20051 (Percent, based on weighted premium)

3.0%

2.5 2.1% 2.1% 2.0% 2.0 1.8%

1.5 1.4%

1.0

0.5

0.0 2001 2002 2003 2004 2005

1Sales are based on weighted premium, discounting 90 percent of single premium (one-time payment) products to approximate the expected value of premium flows to life insurance companies each year. Source: Kehrer-LIMRA.

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banks

BANK SHARE OF Fixed annuity PREMIUMS, 1996-2005 ($ billions) Fixed annuity Fixed annuity Bank share Year premiums, total market premiums, banks (percent) 1996 $38.9 $10.3 26.5% 1997 38.2 10.0 26.2 1998 32.9 8.5 24.8 1999 42.1 12.5 30.0 2000 52.8 15.4 29.2 2001 71.5 27.4 38.3 2002 98.6 36.4 36.9 2003 81.6 32.0 39.2 2004 84.4 30.3 35.9 2005 73.0 22.5 30.8

Source: Kehrer-LIMRA . BANK SHARE OF VARIABLE ANNUITY PREMIUMS, 1996-2005 ($ billions) Variable annuity Variable annuity Bank share Year premiums, total market premiums, banks (percent) 1996 $72.5 $6.9 9.5% 1997 87.9 9.3 10.6 1998 98.6 11.2 11.4 1999 114.4 13.9 12.2 2000 137.7 15.6 11.3 2001 112.8 10.9 9.7 2002 119.3 12.5 10.5 2003 129.2 18.1 14.0 2004 133.5 18.0 13.5 2005 137.6 18.2 13.2

Source: Kehrer-LIMRA.

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banks

BANK SALES OF RETAIL MUTUAL FUNDS, 2001-20051 ($ billions) $40 $35.5 $36.5 $34.2 35 • Bank sales of retail mutual $32.0 $30.8 30 funds totaled $36.5 billion 25 in 2005. This marks a 20 2.8 percent increase from the previous year, but a 15 21 percent drop from 10 1998 when sales reached 5 a record $46.3 billion. 0 2001 2002 2003 2004 2005 1Estimated Source: Kehrer-LIMRA.

BANK INSURANCE/INVESTMENT FEE INCOME

BANK INSURANCE UNDERWRITING FEE INCOME, 2003-20051 Reporting insurance underwriting fee income Insurance Mean insurance Median insurance underwriting fee underwriting underwriting Year Number Percent income ($ millions) fee income fee income 2003 334 4.0% $628.5 $1,881,695 $12,000 2004 289 3.6 697.1 2,412,173 9,000 2005 242 3.0 653.2 2,699,335 8,000 1Banks have only been reporting insurance underwriting income separately from insurance brokerage fee income since 2003. Source: Michael White’s Bank Insurance & Investment Fee Income Report - 2006.

BANK TOTAL INSURANCE FEE INCOME, 2001-20051 Reporting insurance fee income Insurance Mean Median fee income insurance insurance Year Number Percent ($ billions) fee income fee income • From 2002 to 2005 2001 4,276 49.8% $2.98 $696,524 $21,000 banks bought 248 2002 4,359 52.0 3.49 801,687 19,000 insurance agencies. 2003 4,140 50.2 3.60 869,113 19,000 (See next page.) 2004 4,042 50.0 4.33 1,070,016 19,000 2005 3,926 49.3 4.58 1,167,700 18,000 1Income from underwriting and brokerage activities. Source: Michael White’s Bank Insurance & Investment Fee Income Report - 2006.

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convergence convergence

banks

BANK INVESTMENT FEE INCOME, 2001-20051 Reporting investment fee income Investment Mean Median fee income investment investment Year Number Percent ($ billions) fee income fee income • From 2001 to 2005, 2001 2,331 27.1% $9.16 $3,930,462 $54,000 banks bought an average of 54 securities firms 2002 2,338 27.9 9.11 3,895,962 58,000 each year. (See Chapter 7: 2003 2,331 28.2 10.16 4,357,725 61,000 Mergers and Acquisitions 2004 2,304 28.5 9.79 4,249,146 68,000 of U.S. Securities Firms.) 2005 2,245 28.2 9.97 4,440,339 77,000 1Income from investment banking, advisory, brokerage, and underwriting fees and commissions. Source: Michael White’s Bank Insurance & Investment Fee Income Report - 2006.

BANK MUTUAL FUND AND ANNUITY INCOME, 2001-2005 Reporting mutual fund and annuity income Mutual fund and annuity income Mean mutual fund Median mutual fund Year Number Percent ($ billions) and annuity income and annuity income 2001 2,132 24.8% $5.51 $2,585,624 $52,000 2002 2,161 25.8 5.83 2,699,706 60,000 2003 2,105 25.5 5.53 2,626,858 65,000 2004 2,067 25.6 5.62 2,718,866 77,000 2005 1,958 24.6 5.02 2,564,926 87,000

Source: Michael White’s Bank Insurance & Investment Fee Income Report - 2006.

BANK PURCHASES OF INSURANCE AGENCIES, 2002-20051 • The number of bank/ 2002 2003 2004 2005 agency deals decreased Number of deals 79 66 61 42 by 31 percent from Deal value2 ($ millions) $138.6 $613.0 $106.2 $185.7 2004 to 2005, but 1List does not include terminated deals. the value of those 2At announcement. deals increased by 75 Source: SNL Financial LC. percent.

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banks

TOP BANKS IN INSURANCE AND MUTUAL FUNDS

TOP TEN BANKS IN TOTAL INSURANCE FEE INCOME, 20051 ($000) Insurance fee income Percent of Percent noninterest 2005 Rank Bank State 2004 2005 change income, 2005 Assets 1 Citibank, N.A. NY $932,000 $968,000 3.86% 4.61% $706,497,000 Branch Banking and 2 Trust Company NC 604,876 700,498 15.81 37.42 80,226,832 3 MBNA America Bank, N.A. DE 200,536 256,015 27.67 3.56 58,516,899 4 Bank of America, N.A. NC 109,606 225,269 105.53 1.16 1,082,242,862 5 Chase Bank USA, N.A. DE 219,261 140,416 -35.96 2.21 75,051,579 6 Citibank (Delaware) DE 113,827 129,371 13.66 36.57 4,490,917 7 Wells Fargo Bank, N.A. SD 92,000 92,000 0.00 0.83 403,258,000 8 Union Bank of California, N.A. CA 77,874 80,258 3.06 9.66 48,678,662 9 Commerce Bank/North NJ 71,970 75,751 5.25 81.44 3,782,543 10 JPMorgan Chase Bank, N.A. OH 5,000 74,000 1,380.00 0.30 1,013,985,000 1Income from underwriting and brokerage activities. Source: Michael White’s Bank Insurance & Investment Fee Income Report - 2006.

TOP TEN BANKS IN INSURANCE UNDERWRITING INCOME, 2005 ($000) Insurance underwriting income Percent of Percent of total insurance noninterest 2005 Rank Bank State Total income income, 2005 Assets 1 Citibank, N.A. NY $136,000 14.05% 0.65% $706,497,000 2 Citibank (Delaware) DE 94,809 73.28 26.80 4,490,917 3 Wells Fargo Bank, N.A. SD 88,000 95.65 0.79 403,258,000 4 JPMorgan Chase Bank, N.A. OH 72,000 97.30 0.29 1,013,985,000 5 National City Bank of the Midwest IL 36,517 63.74 8.33 25,303,506 6 LaSalle Bank Midwest N.A. MI 35,697 93.90 7.50 38,640,057 7 Bank of America, N.A. NC 33,133 14.71 0.17 1,082,242,862 8 U.S. Bank N.A. OH 24,365 94.62 0.43 208,867,410 9 SunTrust Bank GA 24,008 84.20 0.92 177,231,290 10 Wells Fargo Financial Bank SD 21,630 100.00 38.47 2,462,640

Source: Michael White’s Bank Insurance & Investment Fee Income Report - 2006.

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convergence convergence

banks

TOP TEN BANKS IN INSURANCE BROKERAGE FEE INCOME, 2005 ($000) Insurance brokerage fee income Percent of Percent noninterest 2005 Rank Bank State 2004 2005 change income, 2005 Assets 1 Citibank, N.A. NY $657,000 $832,000 26.64% 3.97% $706,497,000 2 Branch Banking and Trust Co. NC 592,857 695,437 17.30 37.15 80,226,832 3 MBNA America Bank, N.A. DE 200,536 256,015 27.67 3.56 58,516,899 4 Bank of America, N.A. NC 107,382 192,136 78.93 0.99 1,082,242,862 5 Chase Bank USA, N.A. DE 212,902 140,416 -34.05 2.21 75,051,579 6 Union Bank of California, N.A. CA 77,874 80,258 3.06 9.66 48,678,662 7 Commerce Bank/North NJ 71,970 75,751 5.25 81.44 3,782,543 8 Compass Bank AL 43,442 73,295 68.72 11.08 30,785,932 9 Fifth Third Bank OH 66,437 67,029 0.89 3.46 57,612,849 10 BancorpSouth Bank MS 56,323 59,541 5.71 30.51 11,773,662

Source: Michael White’s Bank Insurance & Investment Fee Income Report - 2006.

TOP TEN BANKS IN INVESTMENT FEE INCOME, 20051 ($000) Investment fee income Percent of Percent noninterest 2005 Rank Bank State 2004 2005 change income, 2005 Assets 1 JPMorgan Chase Bank, N.A. OH $2,590,000 $3,543,000 36.80% 14.39% $1,013,985,000 2 Bank of America, N.A. NC 1,538,483 2,321,200 50.88 11.97 1,082,242,862 3 Wachovia Bank, N.A. NC 611,000 579,000 -5.24 8.49 472,143,000 4 The Bank of New York NY 381,673 413,000 8.21 11.15 85,868,000 5 Wells Fargo Bank, N.A. SD 302,000 334,000 10.60 3.01 403,258,000 6 U.S. Bank N.A. OH 262,921 273,298 3.95 4.84 208,867,410 7 First Tennessee Bank, N.A. TN 153,837 162,427 5.58 11.81 36,292,580 8 Fifth Third Bank OH 140,785 154,455 9.71 7.97 57,612,849 Manufacturers and 9 Traders Trust Co. NY 108,829 111,983 2.90 12.21 54,391,344 10 Comerica Bank MI 96,390 111,566 15.74 11.15 53,577,319 1Income from investment banking, advisory, brokerage, and underwriting fees and commissions. Source: Michael White’s Bank Insurance & Investment Fee Income Report - 2006.

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banks

TOP TEN BANKS IN MUTUAL FUND AND ANNUITY INCOME, 2005 ($000) Mutual fund and annuity income Percent of Percent noninterest 2005 Rank Bank State 2004 2005 change income, 2005 Assets 1 Bank of America, N.A. NC $875,768 $1,577,308 80.11% 8.13% $1,082,242,862 2 Wachovia Bank, N.A. NC 574,000 558,000 -2.79 8.18 472,143,000 3 JPMorgan Chase Bank, N.A. OH 446,000 430,000 -3.59 1.75 1,013,985,000 4 Wells Fargo Bank, N.A. SD 245,000 308,000 25.71 2.78 403,258,000 5 U.S. Bank N.A. OH 262,921 273,298 3.95 4.84 208,867,410 6 The Bank of New York NY 206,428 210,000 1.73 5.67 85,868,000 7 Fifth Third Bank OH 124,391 149,060 19.83 7.69 57,612,849 8 PNC Bank, N.A. PA 754,762 105,323 -86.05 6.41 82,876,683 9 KeyBank N.A. OH 11,864 79,926 573.69 4.92 88,960,716 10 Branch Banking and Trust Co. NC 62,170 61,353 -1.31 3.28 80,226,832

Source: Michael White’s Bank Insurance & Investment Fee Income Report - 2006.

TOP TEN BANKS IN PROPRIETARY MUTUAL FUND AND ANNUITIES ASSETS UNDER MANAGEMENT, 2005 ($000) Proprietary mutual funds and annuities assets under management Percent 2005 Rank Bank State 2004 2005 change Assets 1 Bank of America, N.A. NC $123,095,553 $221,497,050 79.94% $1,082,242,862 2 JPMorgan Chase Bank, N.A. OH 209,727,000 213,583,000 1.84 1,013,985,000 3 Wachovia Bank, N.A. NC 104,577,000 103,855,000 -0.69 472,143,000 4 U.S. Bank N.A. OH 56,532,570 55,134,266 -2.47 208,867,410 5 The Northern Trust Co. IL 44,379,964 54,197,517 22.12 44,864,893 6 State Street Bank and Trust Co. MA 31,369,849 30,757,128 -1.95 87,888,150 National City Bank 7 of the Midwest IL 17,201,379 17,816,207 3.57 25,303,506 8 The Bank of New York NY 13,742,788 14,930,000 8.64 85,868,000 9 Mellon Bank, N.A. PA 13,156,000 14,808,000 12.56 25,025,855 10 KeyBank N.A. OH 13,580,869 13,200,448 -2.80 88,960,716

Source: Michael White’s Bank Insurance & Investment Fee Income Report - 2006.

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convergence convergence

insurance companies

INSURANCE COMPANIES A number of insurance companies have entered the banking arena by establishing thrifts, which are savings institutions chartered by the Office of Thrift Supervision (OTS). In addition, a small number of insurance companies, including MetLife, have obtained financial holding company status that allows them to engage in banking activities.

INSURANCE COMPANIES THAT OWN OTS-REGULATED THRIFTS BY ASSETS ($000) Insurance company Thrift owned State Thrift assets1 Stichting Cumulatief Preferente2 ING Bank, FSB DE $53,128,800 United Services Automobile Assoc. USAA Federal Savings Bank TX 19,653,232 American Express Company American Express Bank, FSB UT 15,544,610 State Farm Mutual Auto Ins. State Farm Bank, FSB IL 12,218,679 American International Group AIG Federal Savings Bank DE 2,037,344 Principal Financial Group Principal Bank IO 1,265,143 ACACIA Life Insurance Company Acacia Federal Savings Bank VA 1,239,590 The Allstate Corporation Allstate Bank IL 1,000,266 Alfa Corporation MidCountry Bank IL 789,014 First American Corporation First American Trust, FSB CA 662,111 First Command Financial Plan First Command Bank TX 549,313 Prudential Financial Inc. Prudential Bank & Trust, FSB CT 546,590 FB Bancorp Farm Bureau Bank, FSB NV 433,842 Thrivent Financial for Lutherans Thrivent Financial Bank WI 416,595 New Jersey Manuf. Insurance N.J.M. Bank, FSB NJ 322,711 Illinois Mutual Life Insurance Bankplus, FSB IL 303,756 Grange Mutual Casualty Co. The Grange Bank OH 275,513 First Bancshares Inc. First Home Savings Bank MO 237,131 Ohio Farmers Insurance Co. Westfield Bank, FSB OH 222,238 American Sterling Corporation American Sterling Bank MO 195,392 Polish National Alliance of the U.S. Alliance FSB IL 189,033 ACUITY Acuity Bank WI 180,948 Shelter Mutual Insurance Company Shelter Financial Bank MO 133,554 Nationwide Mutual Insurance Nationwide Trust Company, FSB OH 108,026 WR Berkley Corporation InsurBanc CT 93,822 Modern Woodmen of America MWABank IL 82,552 (table continues)

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insurance companies

INSURANCE COMPANIES THAT OWN OTS-REGULATED THRIFTS BY ASSETS (Cont’d) ($000) Insurance company Thrift owned State Thrift assets1 Donegal Mutual Insurance Co. Province Bank FSB PA $76,628 Guard Financial Group Guard Security Bank PA 75,667 Kansas City Life Insurance Co. Generations Bank MO 61,013 Western & Southern Fin. Group Fort Washington Trust Company OH 48,010 Country Life Insurance Company Country Trust Bank IL 28,802 Cuna Mutual Insurance Society Members Trust Company FL 23,469 New York Life Insurance Co. New York Life Trust Company, FSB NJ 20,618 Teachers Insurance and Annuity TIAA-CREF Trust Company, FSB MO 16,253 Massachusetts Mutual Life The MassMutual Trust Company CT 14,395 The Northwestern Mutual Life Northwestern Mutual Trust Company WI 12,006 AXA Assurances lard Mutuelle Frontier Trust Company, FSB ND 11,746 The Guardian Life Insurance Guardian Trust Company, FSB NY 7,078 The Auto Club Group Auto Club Trust, FSB MI 4,072 ACE Limited INATrust, FSB DE 3,412 Mennonite Mutual Aid Assoc. MMA Trust Company IN 3,074 1As of December 31, 2005. 2Non-U.S. parent. Source: Office of Thrift Supervision, U.S. Department of the Treasury.

LEADING INSURERS, LIFE INSURANCE SALES THROUGH BANKS, 20051 ($ millions, weighed premiums) Rank Company 2004 2005 1 Nationwide $22.8 $33.1 2 Transamerica 36.6 29.3 3 Hartford 24.8 29.0 4 Liberty Life 13.7 15.1 5 AIG/American General 13.2 15.0 6 MetLife/Travelers 17.8 13.5 7 John Hancock/Manulife 16.8 12.6 8 Allstate Financial 31.7 11.9 9 Lincoln National 6.1 10.6 10 Great West Life 11.9 10.1 1Ranked by 2005 weighted premiums, which discount 90 percent of single premium (one-time payment) products to approximate the expected value of premium flows to life insurance companies each year. Source: Kehrer-LIMRA. www.financialservicesfacts.org The Financial Services Fact Book 2007 59

convergence

insurance companies

TOP TEN WRITERS OF FIXED ANNUITIES SOLD THROUGH BANKS, 2005 ($ millions) Premiums Rank Company 2004 2005 1 AIG/American General $8,793 $6,270 2 Allstate Financial 3,618 2,699 3 New York Life 2,432 2,468 4 Transamerica 1,860 1,417 5 Genworth 1,443 1,408 6 Jackson National 1,576 1,215 7 Chase Life 195 682 8 John Hancock 347 662 9 Principal 742 649 10 Western-Southern 831 632

Source: Kehrer-LIMRA.

TOP TEN WRITERS OF VARIABLE ANNUITIES SOLD THROUGH BANKS, 2005 ($ millions) Premiums Rank Company 2004 2005 1 Hartford $5,452 $4,470 2 Pacific Life 2,310 2,800 3 AXA 1,629 1,642 4 Nationwide 1,298 1,065 5 John Hancock 446 1,020 6 RiverSource Annuities 735 797 7 ING 663 772 8 AIG/SunAmerica 864 682 9 MetLife Investors 742 632 10 Allstate Financial 449 616

Source: Kehrer-LIMRA.

60 The Financial Services Fact Book 2007 www.financialservicesfacts.org Chapter 5: Insurance

overview

OVERVIEW The insurance industry safeguards the assets of its policyholders by transferring risk from an individual or business to an insurance company. Insurance companies act as financial intermediaries in that they invest the premiums they collect for providing this service. Insurance company size is usually measured by net premiums written, that is, premium revenues less amounts paid for reinsurance. The insurance industry is divided into two groups, life/health and property/casualty. Many large insurers offer both property/casualty and life/health insurance and a number are expanding into other financial services sectors, including banking and mutual funds. About 20 percent of the life/health sector’s premiums consists of accident and health products, including a small amount of “pure” health insurance, such as coverage from HMOs. Due to the massive involvement of the federal government in health care financing, pure health insurance data are hard to isolate and generally not compatible with other insurance data.

REGULATION All types of insurance are regulated by the states, with each state having its own set of statutes and rules. The McCarran-Ferguson Act, passed by Congress in 1945, speaks of continued state regulation of the insurance industry as being in the public interest, but there have been, and continue to be, challenges to state regulation, including proposals for a federal role in creating a more uniform system and allowing insurers the choice of a federal or state charter similar to banks. State insurance departments oversee insurer solvency, market conduct and, to a greater or lesser degree, review and rule on requests for rate increases for coverage, among other things. The National Association of Insurance Commissioners develops model rules and regulations for the industry, many of which must be approved by state legislatures before they can be implemented.

ACCOUNTING Insurers are required to use statutory accounting principles (SAP) when filing annual financial reports with state regulators and the Internal Revenue Service. The SAP system is more conservative than generally accepted accounting principles (GAAP), as defined by the Financial Accounting Standards Board. GAAP standards are widely used by most industries in the United States. (See Appendix, page 190 for a comparison of the two systems.)

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insurance insurance

ALL sectors

DISTRIBUTION Property/casualty and life insurance policies were once sold almost exclusively by agents— either by captive agents, representing one insurance company, or by independent agents, representing several companies. Insurance companies selling through captive agents and/or by mail, telephone or via the Internet are called “direct writers.” However, the distinctions between direct writers and independent agency companies have been blurring since the 1990s, when insurers began to use multiple channels to reach potential customers. In addition, in the 1980s banks began to explore the possibility of selling insurance through independent agents, usually buying agencies for that purpose. (See Chapter 4: Convergence, page 49.) Other distribution channels include sales through professional organizations and through workplaces.

DIRECT MARKETING REVENUE Each year the Direct Market Association (DMA) looks at revenue generated by a variety of direct marketing channels, including direct mail, telephone, the Internet, email and direct response television, radio and newspaper advertisements. The latest study estimates that direct marketing strategies generated 11.2 percent of insurance sales in 2005, up from 10.4 percent in 1999. The DMA expects direct marketing-driven insurance sales—for the property/casualty and life/health sectors combined—to grow at a compound annual rate of 7.1 percent from 2004 to 2009.

DIRECT MARKETING ADVERTISING SALES IMPACT FOR INSURANCE CARRIERS AND AGENTS, 1999-20091 ($ billions) Compound annual growth (percent) 1999 2003 2004 20052 20092 1999-2004 2004-2009 Total industry sales $369.17 $429.86 $455.59 $479.55 $616.42 4.3% 6.2% Direct marketing- driven sales 38.25 46.75 50.41 53.67 71.14 5.7 7.1 Direct marketing percent of total sales 10.4% 10.9% 11.1% 11.2% 11.5% NA NA Direct marketing advertising expenditures $5.20 $5.63 $6.06 $6.70 $8.80 3.1 7.8 1Includes insurance of all types including life/health and property/casualty. 2Estimated. NA=Not applicable. Source: Direct Market Association.

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insurance insurance

all sectors

MERGERS AND ACQUISITIONS

THE TOP TEN INSURANCE-RELATED MERGERS AND ACQUISITIONS REPORTED IN 20051 ($ million) • The number of insurance Rank Buyer Target Deal value2 mergers from 2001 to Travelers Life & Annuity 2005 ranged from a high Co./CitiInsurance of 301 in 2004 to a low 1 MetLife Inc. International Hldgs. $11,500.0 of 191 in 2005. During 2 UnitedHealth Group Inc. PacifiCare Health 7,996.5 the same period, the 3 Lincoln National Corp. Jefferson-Pilot Corp. 7,556.3 value of deals fluctuated from a high of $65.2 P/C business of GE 4 Swiss Reinsurance Co. Insurance Solutions Corp. 6,800.0 billion in 2001 to a low 5 WellPoint Inc. WellChoice Inc. 6,618.4 of $9.3 billion in 2002. 6 Pacific Mutual Holding Co. Boullioun Aviation 2,650.0 • Insurance deal value rose from $14.2 billion 7 Investor consortium UICI 1,715.3 in 2004 to $32.7 billion 8 Berkshire Hathaway Inc. Medical Protective Corp. 825.0 in 2005. The number of 9 UnitedHealth Group Inc. John Deere Health Care Inc. 500.0 deals fell from 301 in 10 General Motors Corp. MEEMIC Insurance Co. 327.0 2004 to 191 in 2005. 1At least one of the companies involved is a U.S.-domiciled company. List does not include terminated deals. 2At announcement. Source: SNL Financial LC.

PROFITABILITY

ANNUAL RATE OF RETURN, GAAP ACCOUNTING, PROPERTY/CASUALTY AND LIFE/HEALTH INSURANCE, 1996-2005 Year Property/casualty1 Life/health2 Year Property/casualty1 Life/health2 1996 9.3% 10.0% 2001 -1.2% 7.0% 1997 11.6 12.0 2002 2.2 1.0 1998 8.5 11.0 2003 8.9 9.0 1999 6.0 13.0 2004 9.4 11.0 2000 5.9 10.0 2005 9.4 13.0 1Return on average net worth, ISO. 2Combined stock and mutual companies from data reported by Fortune as calculated by the Insurance Information Institute. Source: ISO; Fortune.

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PREMIUMS BY TYPE OF INSURER, 20041

Limited benefits 0.1% Fraternal 0.5% All other 0.9% Title 1.2%

Health2 18.7% Life/health 42.9%

Property/casualty 35.7%

1Gross direct premiums. Total premiums for 2004 were $1,269 billion. 2Blue Cross/Blue Shield, HMOs and hospital, medical and dental indemnity. Source: National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibited without written permission of NAIC.

GROWTH IN U.S. PREMIUMS, PROPERTY/CASUALTY AND LIFE INSURANCE, 1996-2005 (Percent change from prior year)

1Net premiums written, excluding state funds. 2Premiums and annuity considerations for life/health insurance companies. Includes deposit-type funds beginning in 2001, a statutory accounting change that increased annuity considerations. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

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U.S. PROPERTY/CASUALTY AND LIFE INSURANCE PREMIUMS, 2005

Property/ Property/ Life casualty casualty Life55% 45% 55%

Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

EMPLOYMENT IN INSURANCE, 1996-2005 (000) Insurance companies1 Insurance agencies, brokerages Life, health Property/ and related • Over the last 10 years, 2 Year and medical casualty Reinsurers services Total industry employment in the 1996 788.0 558.2 35.4 726.4 2,108.0 insurance industry (all 1997 797.4 566.9 35.1 744.1 2,143.6 sectors) has averaged 2.1 percent of total U.S. 1998 816.8 592.0 34.3 766.3 2,209.4 employment in private 1999 815.3 603.9 33.5 783.4 2,236.1 industry. 2000 808.8 591.6 32.3 787.8 2,220.6 2001 807.7 591.3 31.4 803.2 2,233.7 2002 791.1 590.0 31.7 820.4 2,223.2 2003 789.0 608.6 31.0 837.4 2,266.0

2004 764.4 604.4 29.8 860.1 2,258.6 2005 752.6 601.4 29.8 871.7 2,255.4 1Described by the Bureau of Labor Statistics as “direct insurers.” 2Includes claims adjusters, third-party administrators of insurance funds and other service personnel such as advisory and insurance ratemaking services. Source: U.S. Department of Labor, Bureau of Labor Statistics.

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U.S. INSURANCE COMPANIES An insurance company is said to be “domiciled” in the state that issued its primary license; it is “domestic” in that state. Once licensed in one state, it may seek licenses in other states as a “foreign” insurer. An insurer incorporated in a foreign country is called an “alien” insurer in the U.S. states in which it is licensed.

DOMESTIC INSURANCE COMPANIES BY STATE BY TYPE, 2004 Limited Risk Property/ benefits retention State Life/health casualty Health1 Fraternal2 Title plan3 group Other4 Alabama 13 23 5 1 1 6 1 2 Alaska 0 7 2 0 0 0 0 0 Arizona 238 48 10 0 1 7 13 38 Arkansas 36 11 7 0 2 0 0 14 California 28 129 NA 6 10 0 0 17 Colorado 10 19 18 2 3 3 2 9 Connecticut 31 71 7 1 1 0 0 0 Delaware 38 80 8 2 0 2 1 4 D.C. 3 9 8 1 0 0 18 22 Florida 18 106 26 0 5 19 1 412 Georgia 23 38 12 0 0 0 0 38 Hawaii 3 17 5 0 0 0 18 129 Idaho 4 11 6 0 0 0 0 1 lIIinois 72 176 10 17 0 14 1 99 Indiana 39 66 13 3 6 3 7 38 Iowa 25 55 8 1 0 1 2 115 Kansas 14 27 6 0 2 2 0 1 Kentucky 10 8 8 0 0 6 0 23 Louisiana 55 35 11 2 3 0 0 29 Maine 2 23 6 0 0 0 0 0 Maryland 8 46 18 0 1 6 0 0 Massachusetts 19 55 13 2 2 0 0 0 Michigan 24 65 44 2 0 2 0 5 Minnesota 12 48 17 6 1 0 0 95 Mississippi 24 17 4 3 3 0 0 1 (table continues)

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DOMESTIC INSURANCE COMPANIES BY STATE BY TYPE, 2004 (Cont’d) Limited Risk Property/ benefits retention State Life/health casualty Health1 Fraternal2 Title plan3 group Other4 Missouri 34 50 25 2 3 0 0 111 Montana 3 4 4 0 1 0 0 23 Nebraska 28 37 4 1 0 4 1 34 Nevada 3 9 5 0 0 10 0 53 New Hampshire 3 31 5 1 0 0 0 0 New Jersey 6 82 4 4 2 0 0 11 New Mexico 1 9 5 0 0 3 0 0 New York 86 192 52 6 10 4 29 238 North Carolina 6 66 14 0 2 0 0 0 North Dakota 3 18 4 0 0 1 0 15 Ohio 38 137 16 13 11 7 0 44 Oklahoma 29 52 0 0 5 0 0 13 Oregon 3 14 20 0 3 0 0 103 Pennsylvania 35 197 31 25 5 11 0 0 Rhode Island 3 23 6 0 0 1 0 0 South Carolina 13 33 9 0 2 0 41 178 South Dakota 1 19 6 0 1 0 0 19 Tennessee 14 20 14 1 2 4 1 18 Texas 158 233 52 8 4 0 1 19 Utah 17 9 7 0 1 5 0 2 Vermont 2 16 2 0 0 0 73 453 Virginia 14 17 17 0 2 5 1 19 Washington 10 23 18 2 2 3 0 0 West Virginia 2 5 5 0 0 0 0 11 Wisconsin 32 182 24 9 0 12 0 115 Wyoming 0 2 2 0 1 0 0 0 United States5 1,309 2,700 638 121 98 141 211 2,571 1Blue Cross/Blue Shield, HMOs and hospital, medical and dental indemnity (HMDI) plans that provide stipulated payments to an insured person during hospital confinement for virtually all costs related to hospital stays; other medical expenses; and for dental services and supplies. 2Fraternal groups provide insurance plans for their members. 3Limited benefit plans cover only specified accidents or sicknesses. 4Includes county mutuals, farm mutuals, auto services companies and specialty companies. 5Includes territories and possessions. NA=Data not available. Source: Insurance Department Resources Report, 2004, published by the National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibited without written permission of NAIC.

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WORLD INSURANCE MARKET

WORLD LIFE AND NONLIFE Outside the United States, the insurance industry is usually INSURANCE PREMIUMS, classified as life and nonlife, or general insurance. The latter 2005 includes every form of insurance except life. Reinsurance, insurance for insurance companies, is purchased by both life and nonlife insurers. In 2005 world insurance premium volume, including the Nonlife life and nonlife sectors combined, totaled $3.4 trillion, up 2.5 42% Life 58% percent from 2004, according to a survey of world insurance premiums conducted by Swiss Re. The United States, with $1.15 trillion in premiums, was the largest insurance market in 2005, followed by Japan and the United Kingdom with $476 billion and

Source: Swiss Re, sigma, No. $300 billion in premiums, respectively. 5/2006.

WORLD LIFE AND NONLIFE INSURANCE PREMIUMS, 1996-2005 (Direct premiums written, U.S. $ millions) Year Nonlife1 Life Total • From 1996 to 2005 total 1996 $909,100 $1,196,736 $2,105,838 world insurance premiums grew 62.7 percent. Nonlife 1997 896,873 1,231,798 2,128,671 premiums grew 59.7 1998 891,352 1,275,053 2,166,405 percent. Life business grew 1999 912,749 1,424,203 2,336,952 64.9 percent. 2000 926,503 1,518,401 2,444,904 • The inflation-adjusted 2001 969,945 1,445,776 2,415,720 growth rate from 2004 to 2002 1,098,412 1,534,061 2,632,473 2005 was 2.5 percent for the total world insurance 2003 1,275,616 1,682,743 2,958,359 market, compared with 2004 1,397,522 1,866,636 3,264,158 2.3 percent from 2003 to 2005 1,452,011 1,973,703 3,425,714 2004. These growth rates 1Includes accident and health insurance. were calculated using local Source: Swiss Re, sigma, various issues. currencies.

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property/casualty: financial

PROPERTY/CASUALTY INSURANCE Property/casualty (P/C) insurance covers the property and liability losses of businesses and individuals. These losses range from damage and injuries resulting from car accidents to the cost of lawsuits stemming from faulty products and professional misconduct. In terms of premiums written, private auto insurance is by far the largest single line, nearly four times greater than the next largest line, homeowners multiple peril. Property/casualty insurance companies tend to specialize in commercial or personal insurance, but some sell both, and a number of companies are expanding into other financial services sectors, including personal banking and mutual funds. Because property/casualty losses are more volatile than those in life insurance, P/C insurers invest largely in high-quality liquid securities, which can be sold quickly to pay for claims resulting from a major hurricane, earthquake or man-made disaster such as a terrorist attack.

PROPERTY/CASUALTY INSURER FINANCIAL ASSET DISTRIBUTION, 2001-2005 ($ billions) 2001 2002 2003 2004 2005 Total financial assets $859.9 $939.8 $1,060.4 $1,166.5 $1,265.4 Checkable deposits and cash 13.1 25.9 34.6 25.9 19.3 Security RPs1 30.2 44.4 52.8 63.1 72.8 Credit market instruments 518.4 558.3 625.2 698.8 780.8

U.S. government securities 146.2 174.4 180.1 183.4 202.8 Treasury 52.0 61.2 64.7 71.3 79.5 Agency- and GSE2-backed securities 94.2 113.2 115.4 112.1 123.3 Municipal securities 173.8 183.0 224.2 267.8 301.2 Corporate and foreign bonds 196.4 198.9 218.9 245.3 274.1 Commercial mortgages 1.9 2.0 2.1 2.4 2.7 Corporate equities 173.9 152.3 182.7 201.8 206.6 Trade receivables 69.9 74.8 79.3 79.6 80.3 Miscellaneous assets 54.4 84.1 85.7 97.2 105.6 1Short-term agreements to sell and repurchase government securities by a specified date at a set price. 2GSE=government-sponsored enterprise. Source: Board of Governors of the Federal Reserve System.

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CAPITAL AND SURPLUS A property/casualty (P/C) insurer must maintain a certain level of capital and surplus to underwrite risks. This capital is known as “capacity.” When the industry is hit by high losses, capacity is diminished. It can be restored by increases in net income, favorable investment returns, reinsuring more risk and/or raising additional capital. The P/C insurance industry is cyclical. When there is excess capacity, usually because of a high return on investments, premiums tend to decline as insurers compete for market share. As premiums decline, underwriting losses are likely to grow, reducing capacity and causing insurers to raise rates and tighten conditions and limits. Property/casualty insurers rarely show an overall underwriting profit, i.e., a net gain from premiums after costs of sales, dividends to policyholders, loss payments and loss adjustment costs (which include litigation costs). When the combined ratio (costs in excess of premiums) is over 100, the difference is generally covered by investment income from a number of sources, including capital and surplus accounts, money set aside for loss reserves and unearned premium reserves, and capital gains. In 2005 the combined ratio after dividends was 101.4, which means insurers paid out 101.1 cents for every dollar in earned premium. In 2004, at the peak of the insurance cycle, the combined ratio was 98.5.

P/C INSURANCE INDUSTRY INCOME ANALYSIS, 2001-20051 ($ billions) 2001 2002 2003 2004 2005

• In 2005 net income Net written premiums $323.5 $369.7 $404.4 $424.1 $425.7 after taxes was $43.0 Percent change 8.0% 14.3% 9.4% 4.9% 0.4% billion, the highest level Earned premiums $311.5 $348.5 $386.3 $413.8 $417.7 recorded for the industry. Losses incurred 234.5 238.8 238.7 247.8 256.3 However, adjusted for Loss adjustment inflation, 2005 net expenses incurred 40.9 44.8 50.0 53.1 55.1 income was 4 percent Other underwriting expenses 86.4 93.8 100.7 106.8 110.3 less than the previous Policyholder dividends 2.4 1.9 1.9 1.7 1.9 peak of $36.8 billion, Underwriting gain/loss -52.6 -30.8 -4.9 4.3 -5.9 posted in 1997. Investment income 37.7 37.2 38.6 40.0 49.5 • The industry’s surplus Miscellaneous income/loss 1.1 -0.8 0.0 -0.3 0.9 reached a record $437.9 Operating income/loss -13.8 5.6 33.8 44.0 44.5 billion at year-end 2005. Realized capital gains/losses 6.6 -1.2 6.6 9.1 9.7 Incurred federal income taxes/credit -0.2 1.3 10.3 14.6 11.2 Net income after taxes -7.0 3.0 30.0 38.5 43.0 1Data in this chart may not agree with similar data shown elsewhere due to different sources. Source: ISO.

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TOP TWENTY U.S. PROPERTY/CASUALTY COMPANIES BY REVENUES, 2005 ($ millions) Rank Group Revenues Assets 1 American International Group $108,905 $853,370 2 Berkshire Hathaway 81,663 198,325 3 State Farm Insurance Cos. 59,224 159,669 4 Allstate 35,383 156,072 5 Hartford Financial Services 27,083 285,557 6 St. Paul Travelers Cos. 24,365 113,187 7 Nationwide 21,832 158,258 8 Liberty Mutual Insurance Group 21,161 78,824 9 Loews (CNA) 15,363 70,676 10 Progressive 14,303 18,899 11 Chubb 14,082 48,061 12 USAA 11,980 51,038 13 Genworth Financial 10,504 105,292 14 Fidelity National Financial 9,669 11,105 15 First American Corp. 8,062 7,599 16 American Family Insurance Group 6,864 14,637

17 Safeco 6,351 14,887 18 Erie Insurance Group 5,104 13,057 19 Auto-Owners Insurance 5,014 11,729 20 W.R. Berkley 4,997 13,896

Source: Fortune.

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DISTRIBUTION CHANNELS Property/casualty (P/C) insurance companies can be grouped into two main categories, based on their main distribution channel: agency writers, whose products are sold by independent agents or brokers, representing several companies; and direct writers, which sell their own products through captive agents, by mail, telephone, the Internet and other means. In 2004 direct writers accounted for 46 percent of p/c net premiums written, according to A.M. Best. Independent agents and brokers in the U.S. play a much more significant role in the commercial lines market than direct writers, accounting for more than two-thirds of commercial lines premiums. By contrast, independent agents and brokers account for about one-third of personal lines premiums. Traditionally, there has been a distinction between agents and brokers, with agents (whether captive or independent) representing the insurance company and brokers representing the client. It is the broker’s responsibility to seek out appropriate insurance coverages for the client and obtain the best overall price, terms and conditions. Recently, the line between agencies and brokers has blurred, with intermediary firms operating as brokers and agents, depending on their jurisdiction and the type of risk.

TOP TEN COMMERCIAL INSURANCE BROKERS OF U.S. BUSINESS BY REVENUES, 20051 ($ millions) Rank Company Brokerage revenues1 1 Marsh & McLennan Cos. Inc. $5,200.02 2 Aon Corp. 2,674.0 3 Arthur J. Gallagher & Co. 1,202.0 4 Willis Group Holdings Ltd. 1,053.1 5 Wells Fargo & Co.3 959.4 6 Brown & Brown Inc. 775.5 7 BB&T Insurance Services Inc. 757.4 8 Hilb Rogal & Hobbs Co. 646.2 9 USI Holdings Corp. 504.3 10 Wachovia Insurance Services Inc. 425.1 1Companies that derive more than 20 percent of revenues, generated by U.S.-based clients, from commercial retail brokerage. 2Business Insurance estimate. 3Includes Acordia Inc. and Wells Fargo Inc. Source: Business Insurance, July 17, 2006.

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PROPERTY/CASUALTY INSURANCE INDUSTRY CONCENTRATION According to ISO, concentration in the property/casualty insurance sector increased from 229 in 1980 to 343 in 2005 on the Herfindahl scale, which is used to measure market concentration. The U.S. Department of Justice classifies any score under 1,000 as unconcen- trated. A score over 1,800 means an industry is highly concentrated.

MARKET SHARE TRENDS BY SIZE OF INSURER, 1985-20051 (Percent)

60% 53.0% 1985 49.6% 1995 50 45.5% 2005 40 29.5% 28.1% 30 26.4% 24.9% 22.1% 20.9% 20

0 Top 4 insurers 5th to 50th largest insurers All other insurers 1Based on net premiums written. Source: ISO.

Premiums by line

NET PREMIUMS WRITTEN BY LINE, PROPERTY/CASUALTY INSURANCE, 2004-20051 ($000) Percent change Percent of Lines of insurance 2004 2005 2004-2005 total, 2005 Private passenger auto Liability $92,936,565 $94,645,760 1.8% 22.1% Collision and comprehensive 64,697,014 64,922,222 0.3 15.2 Total private passenger auto 157,633,579 159,567,982 1.2 37.3 Commercial auto Liability 19,569,829 19,832,301 1.3 4.6 Collision and comprehensive 7,149,217 6,946,014 -2.8 1.6 Total commercial auto 26,719,046 26,778,315 0.2 6.3 Fire 8,050,779 7,933,899 -1.5 1.9 Allied lines2 8,202,019 8,191,576 -0.1 1.9 (table continues)

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PROPERTY/CASUALTY: PREMIUMS BY LINE

NET PREMIUMS WRITTEN BY LINE, PROPERTY/CASUALTY INSURANCE, 2004-20051 (Cont’d) ($000) Percent change Percent of Lines of insurance 2004 2005 2004-2005 total, 2005 Earthquake $1,098,441 $1,106,653 0.7% 0.3% Farmowners multiple peril 2,118,097 2,266,571 7.0 0.5 Homeowners multiple peril 49,980,417 53,013,230 6.1 12.4 Commercial multiple peril 29,074,586 29,668,133 2.0 6.9 Ocean marine 2,828,685 2,946,374 4.2 0.7 Inland marine 7,940,003 8,246,499 3.9 1.9 Accident and health3 9,767,317 9,577,392 -1.9 2.2 Workers compensation 36,734,514 39,734,079 8.2 9.3 Medical malpractice 9,124,240 9,734,417 6.7 2.3 Other liability4 39,752,695 39,103,126 -1.6 9.1 Products liability 3,401,867 3,561,119 4.7 0.8 Aircraft 2,179,992 1,985,858 -8.9 0.5 Burglary and theft 138,307 120,188 -13.1 5 Boiler and machinery 1,572,195 1,582,965 0.7 0.4 Fidelity 1,309,344 1,216,803 -7.1 0.3 Surety 3,817,245 3,819,541 0.1 0.9 Reinsurance6 13,698,580 6,589,802 -51.9 1.5 Credit 806,381 936,108 16.1 0.2 Mortgage guaranty 4,323,071 4,454,711 3.0 1.0 Financial guaranty 2,133,599 2,097,489 -1.7 0.5 Other lines7 3,336,327 3,148,329 -5.6 0.8 Total, all lines 425,741,326 427,381,174 0.4 100.0 1After reinsurance transactions, excluding state funds. 2Includes multiple peril crop and federal flood. 3Premiums from certain insurers that write primarily health insurance but file financial statements with state regulators on a property/casualty rather than life/health basis. 4Coverages protecting against legal liability resulting from negligence, carelessness, or failure to act. Some examples are contingent liability, errors and omissions, environmental pollution and umbrella and liquor liability insurance. 5Less than 0.1 percent. 6Only includes nonproportional reinsurance, an arrangement in which a reinsurer makes payments to an insurer whose losses exceed a predetermined amount. 7Includes international and miscellaneous coverages. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

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PREMIUMS WRITTEN BY LINE, PROPERTY/CASUALTY INSURANCE, 2005 ($ billions)

Burglary and theft $0.12 Burglary and theft $0.13

Credit 0.94 Boiler and machinery 1.19

Earthquake 1.11 Credit 1.21

Fidelity 1.22 Fidelity 1.35

Boiler and machinery 1.58 NET Premiums Earthquake 1.69 Direct Premiums Written1 Written2 Aircraft 1.99 Farmowners multiple peril 2.41

Financial guaranty 2.10 Total: $427.4 billion Total: $481.8 billion Aircraft 2.93 Farmowners multiple peril 2.27 Ocean marine 3.38 Ocean marine 2.95 Financial guaranty 3.66 Other lines3 3.15 Products liability 4.48 Products liability 3.56 Surety 4.53 Surety 3.82 Other lines3 4.56 Mortgage guaranty 4.45 Mortgage guaranty 5.19 Reinsurance4 6.59 Fire 9.28 Fire 7.93 Accident and health6 10.51 Allied lines5 8.19 Medical malpractice 12.10 Inland marine 8.25 Inland marine 12.67 Accident and health6 9.58 Allied lines5 13.50 Medical malpractice 9.73 Commercial auto 30.61 Commercial auto 26.78 34.53 Commercial multiple peril 29.67 Commercial multiple peril

Other liability7 39.10 Workers compensation 46.01

7 Workers compensation 39.73 Other liability 54.12

Homeowners multiple peril 53.01 Homeowners multiple peril 57.85 Private passenger auto 159.57 Private passenger auto 163.88 0 10 20 30 40 50 60 0 10 20 30 40 50 60

1 2 3 After reinsurance transactions, excluding$ statethousands funds. Before reinsurance transactions, excluding state funds. Includes international and miscellaneous coverages. 4Only includes nonproportional reinsurance, an arrangement in which a reinsurer makes payments to an insurer whose losses exceed a predetermined amount. 5Includes multiple peril crop and federal flood. 6Premiums from certain insurers that write primarily health insurance but file financial statements with state regulators on a property/casualty rather than life/health basis. 7Coverages protecting against legal liability resulting from negligence, carelessness, or failure to act. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

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SURETY BONDS Some kinds of insurance provide financial guarantees. The oldest type, a personal contract of suretyship, dates back to biblical times, when one person would guarantee the credit- worthiness or the promise to perform of another. Surety bonds in modern times are primarily used to guarantee the performance of contractors. A surety bond is a contract guaranteeing the performance of a specified obligation. Simply put, it is a three-party agreement under which one party, the surety company, answers to a second party, the owner, creditor or “obligee,” for a third party’s debts, default or nonperformance. Before it issues the bond, the insurer investigates the background and financial condition of the contractor to satisfy itself that the firm is capable of doing the job as set out in the contract. If the contractor fails to perform, the surety company is obligated to get the work completed or pay for the loss up to the bond “penalty.” Surety bonds are generally required on large federal, state and local public works projects.

SURETY BONDS, 1996-2005 ($000) Year Direct premiums written Annual percent change 1996 $2,656,150.9 7.5% 1997 2,769,298.9 4.3 1998 2,918,747.5 5.4 1999 3,401,012.3 16.5 2000 3,490,219.5 2.6 2001 3,473,100.6 -0.5 2002 3,756,651.5 8.2 2003 3,934,236.2 4.7 2004 4,265,934.3 8.4 2005 4,509,415.71 5.7 1Preliminary. Source: Surety Association of America. Reprinted with permission. Further reprint or redistribution is strictly prohibited without written permission of SAA.

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TOP TEN SURETY COMPANIES BY DIRECT PREMIUMS WRITTEN, 20051 ($000) Rank Group Direct premiums written 1 St. Paul Travelers Group $885,169.9 2 CNA Insurance Group 382,001.1 3 Zurich Insurance Group 368,251.7 4 Safeco Insurance Group 309,506.3 5 Chubb & Son Inc. 234,054.3 6 Liberty Mutual Insurance Group 209,928.4 7 Hartford Fire & Casualty Group 180,810.5 8 Arch Capital Group 109,005.4 9 HCC Surety Group 102,925.4 10 International Fidelity Insurance Co. 86,612.3 1Preliminary. Source: Surety Association of America. Reprinted with permission. Further reprint or redistribution is strictly prohibited without written permission of SAA.

FINANCIAL GUARANTY INSURANCE Insurers also provide other financial guarantees which help expand the financial markets by increasing borrower and lender leverage. Starting in the 1970s, surety bonds began to be used to guarantee the principal and interest payments on municipal obligations. This made the bonds more attractive to investors and at the same time benefited bond issuers because the insurance lowered their borrowing costs. This kind of surety bond became known as “financial guaranty insurance.” Initially, financial guaranty insurance was considered a special category of surety covering the risk involved in financial transactions. It became a separate line of insurance in 1986. The companies that insure bonds are specialized, highly-capitalized companies that traditionally have the highest rating. The insurer’s high rating attaches to the bonds, lower- ing the riskiness of the bonds to investors. With their credit rating thus enhanced, municipalities can issue bonds that pay a lower interest rate, enabling them to borrow more for the same outlay of funds. Investors typically have to sacrifice some yield, generally about 2 to 3 percent, in exchange for the security that bond insurance provides. The leading municipal bond insurers have diversified since their inception and now provide insurance and reinsurance for corporate bonds and other forms of credit as well as for foreign government and corporate borrowings. They have also become insurers of asset- backed securities, pools of credit default swaps, and other structured financial transactions.

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FINANCIAL GUARANTY INSURANCE INCOME STATEMENT, 2001-2005 ($ millions)

• In 2005 municipal bonds 2001 2002 2003 2004 2005 was the largest sector Direct premiums written $2,161 $3,037 $3,995 $3,769 $3,758 insured by financial Net premiums earned 1,274 1,648 2,124 2,275 2,474 guaranty insurers, Net investment gain 1,189 1,282 1,301 1,420 1,411 accounting for 46 percent of total par (face value of Other income 2 8 3 0 6 bond) insured volume. In Losses and loss 2004 it represented 45 expenses incurred 76 191 189 372 327 percent of the total. Other underwriting expenses 447 548 671 770 765 • In 2005 insurance Net income before taxes 1,942 2,199 2,568 2,553 2,799 on U.S. asset-backed securities accounted for Income taxes 500 572 722 620 715 40 percent of total par Net income 1,442 1,628 1,846 1,933 2,084 insured volume, compared Source: Association of Financial Guaranty Insurors. with 43 percent in 2004.

TOP TEN FINANCIAL GUARANTY INSURERS BY DIRECT PREMIUMS WRITTEN, 2005 ($000) Rank Company Direct premiums written Market share 1 Ambac Assurance Corporation $950,477 26.0% 2 MBIA Insurance Corporation 933,170 25.5 3 Financial Security Assurance Holdings Ltd. 752,416 20.6 4 Financial Guaranty Insurance Co. 392,257 10.7 5 XL Reinsurance America Inc. & Affiliates 197,741 5.4 6 Radian Guaranty Inc. 183,055 5.0 7 Aca Financial Guaranty Corp. 89,218 2.4 8 CIFG Assurance North America Inc. 84,408 2.3

9 ACE American Insurance Co. 71,072 1.9 10 First Nonprofit Mutual Insurance Co. 2,182 1 1Less than 0.1 percent. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

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CREDIT INSURANCE FOR SHORT-TERM TRADE RECEIVABLES Credit insurance protects the policyholder (the product seller) against the risk of a customer’s default on the business’s obligation to pay for goods or services or its insolvency. Credit insurance covers outstanding receivables over and above the level of losses for which a company would typically set up bad debt reserves and often is sold with a large package of credit management services. Credit insurance facilitates financing, enabling insured companies to get better credit terms from banks.

CREDIT INSURANCE, 2001-2005 ($000) Year Direct premiums written Annual percent change 2001 $620,554 21.3% 2002 731,798 17.9 2003 801,826 9.6 2004 1,053,996 31.4 2005 1,207,292 14.5

TOP TEN CREDIT INSURANCE COMPANIES BY DIRECT PREMIUMS WRITTEN, 2005 ($000) Rank Company Direct premiums written Market share 1 Euler American Credit Indemnity Co. $177,695 14.7% 2 Stonebridge Casualty Insurance Co. 140,174 11.6 American National Property & 3 Casualty Co. & Affiliates 130,622 10.8 4 Old Republic Insurance Group 105,512 8.7 5 American International Group 65,105 5.4 6 First Colonial Insurance Company 60,359 5.0 7 Atradius Trade Credit Insurance Co. 55,405 4.6 8 Arch Capital Group Inc. 41,132 3.4 9 Coface North America Insurance Co. 39,570 3.3 10 OneBeacon Insurance Group 39,271 3.3

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insurance insurance

property/casualty: specialty lines

MORTGAGE GUARANTY INSURANCE Private mortgage insurance (PMI), known as mortgage guaranty insurance, guarantees that, in the event of a default, the insurer will pay the mortgage lender for any loss resulting from property foreclosure up to a specific amount. PMI, which is purchased by the borrower but protects the lender, is sometimes confused with mortgage insurance, a life insurance product that pays off the mortgage if the borrower dies before the loan is repaid. Banks generally require PMI for all borrowers with down payments of less than 20 percent. Another specialized insurance product, title insurance, protects property owners against losses arising from title disputes. (See Chapter 9: Mortgage Finance and Housing, page 161.)

MORTGAGE GUARANTY INSURANCE, 2001-20051 ($000) 2001 2002 20032 20042 20052 Net premiums written $3,656,387 $3,789,257 $3,482,519 $3,411,062 $3,480,174 Net premiums earned 3,649,250 3,835,948 3,385,414 3,476,019 3,454,232 Losses 681,539 831,973 870,861 1,336,605 1,251,554 Expenses 806,767 899,493 787,649 820,268 842,483 Underwriting income 2,160,944 2,104,483 1,375,427 1,319,146 1,360,195 Loss ratio 18.68% 21.69% 25.72% 38.45% 36.23% Expense ratio 22.06 23.74 22.62 24.05 24.21 Combined ratio 40.74 45.43 48.34 62.50 60.44 1As reported by members of the Mortgage Insurance Companies of America, representing seven private mortgage insurance companies. 2Includes six private mortgage insurance companies. Data for 2003-2005 not strictly comparable with earlier data. Source: Mortgage Insurance Companies of America.

TOP TEN MORTGAGE GUARANTY INSURANCE COMPANIES BY DIRECT PREMIUMS WRITTEN, 2005 ($000) Rank Company Direct premiums written Market share 1 Mortgage Guaranty Insurance Corp. $1,381,092 26.6% 2 Radian Guaranty Inc. 928,073 17.9 3 PMI Group 822,450 15.8 4 American International Group 714,485 13.8 5 General Electric Mortgage Ins. Group 557,574 10.7 6 Republic Mortgage Insurance Co. 511,780 9.9 7 Triad Guaranty Insurance Group 207,260 4.0 8 CMG Mortgage Ins. Co. 67,444 1.3 9 Southern Pioneer Property & Casualty Ins. Co. 334 1 10 Citigroup Affiliated Property & Casualty Ins. 38 1 1Less than 0.1 percent. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC. 80 The Financial Services Fact Book 2007 www.financialservicesfacts.org

insurance insurance

property/casualty: reinsurance

REINSURANCE Reinsurance is essentially “insurance for insurance companies.” It is a way for primary insurance companies to protect against unforeseen or extraordinary losses. Depending on the contract, reinsurance can enable the insurer to improve its capital position, expand its business, limit losses and stabilize cash flow, among other things. In addition, the reinsurer, drawing information from many primary insurers, will usually have a far larger pool of data for assessing risks, information that can help the primary insurer. Reinsurance can take a variety of forms. It may cover a layer of risk within certain dollar limits, say losses between $5 million to $10 million, for which a premium is paid, or a sharing of both losses and profits for certain types of business. Reinsurance is an international business. According to the Reinsurance Association of America, 52 percent of the reinsurance business purchased by U.S. insurance companies in 2005 was written by non-U.S. reinsurers. This represents transactions between unaffiliated companies and includes only premiums paid to professional reinsurers.

TOP TEN U.S. PROPERTY/CASUALTY REINSURERS BY GROSS PREMIUMS WRITTEN, 2005 ($000) Rank Company Gross premiums written 1 Swiss Reinsurance America Corp.1 $4,382,204 2 XL Reinsurance America Inc. 4,362,262 3 American Re-Insurance Corp.2 3,760,896 4 National Indemnity Company 3,677,513 5 Transatlantic/Putnam Reinsurance Co. 3,507,751 6 Everest Reinsurance Company 3,237,305 7 GE Insurance Solutions3 2,976,949

8 Odyssey America Re/Odyssey Reinsurance Corp.4 2,399,484 9 Berkley Insurance Co. 1,826,507 10 General Reinsurance Corp.5 1,721,458 Total U.S. reinsurers 42,225,700 1Excludes part of Swiss Re Group’s business. 2Includes American Re-Insurance Company, American Alternative Insurance Corporation, and the Princeton Excess & Surplus Lines Insurance Company. Excludes Am Re’s loss portfolio reinsurance treaty with its parent, Munich Re. 3Includes GE Reinsurance Corporation and Employers Reinsurance Corporation. 4Includes Odyssey America Reinsurance Corporation, Clearwater Insurance Company, Hudson Insurance Company, Hudson Specialty Insurance Company, and Clearwater Select Insurance Company. 5Includes business shared with National Indemnity and Columbia Insurance Company. Source: Reinsurance Association of America.

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insurance insurance

property/casualty: capital markets

THE SECURITIZATION OF INSURANCE RISK Insurers and reinsurers typically issue catastrophe bonds through an issuer known as a special purpose vehicle or reinsurer, a specialized company set up specifically for this purpose. The bonds pay high interest rates and diversify an investor’s portfolio because natural disasters occur randomly and are not associated with economic factors. Depending on how the bond is structured, if losses reach the threshold specified in the bond offering, the investor may lose all or part of the principal or interest. There is growing interest in securitizing life insurance company portfolios and a catastrophe bond public fund has been launched in Europe for individual investors. A February 2006 study by Guy Carpenter found unprecedented growth across the catastrophe bond market in 2005, largely driven by U.S. hurricane activity. The catastrophe bond market recorded total issuance of $1.99 billion in 2005, a 74 percent increase over the $1.14 billion issuance in 2004 and 15 percent higher than the previous record of $1.73 billion issued in 2003. The devastation caused by Hurricane Katrina has likely resulted in a total loss to the KAMP Re 2005 Ltd. issuance, a $190 million transaction, marking the first significant loss to a publicly disclosed catastrophe bond.

CATASTROPHE BOND TRANSACTIONS, 2005 ($ millions) Special purpose vehicle Sponsor Risk amount Peril Risk location Oil Casualty Avalon Re Ltd. Insurance, Ltd. $405.0 Liability Worldwide Cascadia Ltd. FM Global 300.0 Earthquake Northwest U.S. Atlantic & Western Re Limited PXRE 300.0 Multiple U.S./Europe Atlantic & Western Re II Limited PXRE 250.0 Multiple U.S./Europe Kamp Re 2005 Ltd. Zurich1 190.0 Multiple U.S. Residential Re 2005 USAA 176.0 Multiple U.S. Aiolos Ltd. Munich Re 128.7 Windstorm Europe Champlain Ltd. Montpelier Re 90.0 Multiple U.S./Japan Aura Reinsurance plc AXA Cessions 88.4 Windstorm Europe Arbor I Ltd. Swiss Re 63.0 Multiple U.S./Europe/Japan 1Transaction sponsored through Swiss Re. Source: Guy Carpenter; MMC Securities Corp.

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property/casualty: capital markets

WEATHER-RELATED HEDGES Weather-related derivatives and insurance allow such businesses as ski resorts, oil and pro- pane gas distributors, and others that may experience large swings in annual sales due to weather conditions, to hedge their weather-related risk. Developed initially by an energy company in the late 1990s and now being offered by insurers and reinsurers, weather derivatives typically are indexes derived from average temperatures, snowfall or rainfall. Weather derivatives come in the form of options or swaps. A weather option is a trade that pays an agreed upon amount at a specific time, based on the occurrence of certain weather conditions, such as summer temperatures more than five degrees below average. A weather swap is an exchange of funds between two entities likely to experience different conditions. Money changes hands for every point above or below a certain threshold. Contracts can be tailored to meet specific needs. Companies can also buy a weather insurance policy. These policies generally have a dual trigger, one weather-related, such as “heating degree days,” and the other based on reduced sales or some other economic indicator. These products are treated differently from derivatives in terms of accounting and taxation. Weather-related hedge products are different from other kinds of weather insurance, such as policies that protect against specific events being canceled by poor weather. They are also different from catastrophe bonds. (See The Securitization of Insurance Risk, page 82.)

PARTICIPANTS IN THE 2005 WEATHER RISK MANAGEMENT ASSOCIATION SURVEY1

Participation by main line of business Participation by location of respondent Banking 3 Asia 6 Energy 4 Europe 4 Insurance 4 North America 7 Other 6 Total 17 Total 17 1Based on companies responding to a survey conducted by PricewaterhouseCoopers for the Weather Risk Management Association; excludes Chicago Mercantile Exchange trades. Source: PricewaterhouseCoopers.

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insurance insurance

property/casualty: capital markets

GLOBAL WEATHER RISK PRODUCTS, VALUE AND NUMBER OF CONTRACTS, 2001-20051 ($ millions) Year Notional value Number of contracts • According to a survey by the Weather Risk 2001 $2,517 2,759 Management Association 2002 4,339 3,937 and Pricewaterhouse- 2003 4,188 4,517 Coopers, from 2004 2004 4,578 3,162 to 2005 the number of 2005 8,363 4,057 transactions in the global 1Based on companies responding to a survey conducted by PricewaterhouseCoopers for the weather market increased Weather Risk Management Association; excludes Chicago Mercantile Exchange trades. by 28 percent. The value Source: PricewaterhouseCoopers. of those transactions increased by 83 percent.

WEATHER CONTRACTS TRADED AT THE CHICAGO MERCANTILE EXCHANGE, 2001-2005 ($ millions) Year Notional value Number of contracts • The Chicago Mercantile Exchange (CME) is a key 2001 NA 131 component of the weather 2002 $191 4,446 risk management industry. 2003 1,700 19,094 Weather contracts traded 2004 2,200 122,000 on the CME totaled 867,000 in 2005, seven times the 2005 36,000 867,000 NA=Data not available. number traded in 2004. Source: Chicago Mercantile Exchange.

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insurance insurance

Life/Health: financial

LIFE/HEALTH INSURANCE The primary business of life/health insurance companies is no longer traditional life insurance, but the underwriting of annuities—contracts that guarantee a fixed or variable payment over a given period of time. Nevertheless, the sale of such life insurance products as whole life and term life policies remains an important part of the business. Life insurance is essentially an investment of savings that offers a tax-free sum to the beneficiary at some point in the future. Life insurers invest the premiums they collect primarily in government and corporate bonds, but also in mortgage loans (mostly commercial). Besides annuities and life insurance, life insurers may offer other types of financial services such as asset management.

LIFE/HEALTH INSURER FINANCIAL ASSET DISTRIBUTION, 2001-2005 ($ billions) 2001 2002 2003 2004 2005 Total financial assets $3,224.6 $3,335.0 $3,772.8 $4,130.3 $4,380.7 Checkable deposits and currency 36.8 35.3 47.3 53.3 53.8 Money market fund shares 173.3 159.8 151.4 120.7 118.6 Credit market instruments 2,074.8 2,307.8 2,488.3 2,661.4 2,773.7 Open market paper 59.3 74.0 55.9 48.2 37.7 U.S. government securities 307.2 409.4 420.7 435.6 455.9 Treasury 53.7 78.5 71.8 78.5 81.1 Agency- and GSE1- backed securities 253.5 330.9 348.9 357.1 374.8 Municipal securities 18.7 19.9 26.1 30.1 31.7 Corporate and foreign bonds 1,342.4 1,449.3 1,620.2 1,768.0 1,859.8 Policy loans 104.1 105.1 104.5 106.1 105.8 Mortgages 243.0 250.0 260.9 273.3 282.7 Corporate equities 811.3 708.9 919.3 1,053.9 1,154.1 Mutual fund shares 88.3 76.6 91.7 114.4 131.2 Miscellaneous assets 40.1 46.8 74.7 126.6 149.4 1GSE=government-sponsored enterprise. Source: Board of Governors of the Federal Reserve System.

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insurance insurance

life/health: financial

CAPITAL AND SURPLUS Capital, in a publicly owned life insurance company, is the shareholders’ equity. In a mutual company, capital is retained earnings. Surplus in both cases is what is left when basic liabilities (unearned premiums and reserves for unpaid claims) are subtracted from assets (earned premiums, investments, reinsurance). The life/health insurance industry’s net income rose to $34.3 billion in 2005, or 6.5 percent, from $32.2 billion in 2004.

LIFE/HEALTH INSURANCE INDUSTRY: SELECTED OPERATING DATA, 2003-2005 ($ millions) 2003 2004 2005 Premiums and annuity considerations1 $500,234.2 $531,160.4 $518,526.9 Net investment income 142,912.9 145,544.9 148,985.9 Net gain from operations2 39,113.2 41,146.1 40,171.4 Federal and foreign income taxes3 7,890.5 10,002.6 9,016.2 Net realized capital gains/losses -4,668.3 1,039.8 3,184.6 Net income 26,554.4 32,183.3 34,339.8 Dividends to stockholders -10,958.9 -12,995.8 -21,692.3 Capital and surplus (end of year) 223,771.1 237,014.2 239,742.7 1Life and accident and health policies and contracts. 2After dividends to policyholders and before federal income taxes. 3Incurred (excluding tax on capital gain). Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

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life/health: financial

TOP TWENTY U.S. LIFE/HEALTH INSURANCE GROUPS AND COMPANIES BY REVENUES, 2005 ($ millions) Rank Group Revenues Assets 1 MetLife $46,983 $481,645 2 Prudential Financial 31,708 417,776 3 New York Life Insurance 28,051 153,952 4 TIAA-CREF 25,917 399,161 5 Mass. Mutual Life Insurance 22,799 138,365 6 Northwestern Mutual 19,221 133,057 7 AFLAC 14,363 56,361 8 UnumProvident 10,437 51,867 9 Guardian Life of America 9,377 36,880 10 Principal Financial 9,010 127,035 11 Assurant 7,498 25,366 12 Thrivent Financial for Lutherans 6,190 54,932 13 Lincoln National 5,488 124,788 14 Pacific Life 4,840 86,977 15 Conseco 4,327 31,557 16 Western & Southern Financial 4,314 29,021 17 Jefferson-Pilot 4,220 36,078 18 Mutual of Omaha Insurance 4,051 16,441 19 Torchmark 3,126 14,769 20 Unitrin 3,048 9,198

Source: Fortune.

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insurance insurance

life/health: financial

DISTRIBUTION CHANNELS Life insurance was once sold primarily by career life agents, captive agents who represent a single insurance company, and by independent agents who represent several insurers. Now life insurance company products are also sold directly to the public by mail, telephone and the Internet. In addition, in the 1980s insurers began to market annuities and term life insurance through banks and financial advisors, professional organizations and workplaces. A large portion of variable annuities, which are based on stock market performance, and a small portion of fixed annuities, are sold by stockbrokers. In 2004 affiliated (i.e. captive) agents accounted for 36 percent of new individual life insurance sales, according to research by LIMRA.

LIFE INSURANCE DISTRIBUTION (NEW INDIVIDUAL LIFE PREMIUMS), 20041

Other 11% Independent agents 53%

Affiliated agents 36%

1Based on LIMRA International estimates. Source: LIMRA International.

WORKSITE LIFE INSURANCE COMPANY SALES BY LINE OF BUSINESS, 20051 Life 24%

• Worksite sales of life and Long-term care 2 health insurance in 2005 2% Disability 20% were $4.4 billion, up from Other 3% $4.2 billion in 2004. Dental 9%

Cancer/critical illness Accident 12% 15% Hospital indemnity/ medical supplement plans 15%

1Worksite marketing is the selling of voluntary (employee-paid) insurance and financial products at the worksite. The products may be on either an individual or group platform and are usually paid through periodic payroll deductions. 2Short-term and long-term disability. Source: Eastbridge Consulting Group, Inc.

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insurance insurance

life/health: premiums by line

PREMIUMS BY LINE The dominant products of life insurers are annuities and life insurance. Annuities offer a lifelong income or an income for a specific period of time. They fall into two major categories: fixed and variable. Fixed annuities, sometimes called fixed dollar annuities, guarantee that a specific sum of money will be paid in the future, generally a monthly benefit, regardless of fluctuations in the insurer’s underlying investment returns. With variable annuities, fluctuations in the insurer’s investment earnings over time affect the amount of funds available for benefit payments. Once payments start, they may be fixed and guaranteed or vary according to current investment earnings or combine the two payment features. An equity- indexed annuity is a fixed annuity with interest linked to a stock index such as the S&P 500. The big growth in annuity sales began in the 1970s when investors began demanding returns that better reflected inflation and stock market values. This demand resulted in the variable annuity, an instrument so closely aligned to the stock markets that it is now also sold by stockbrokers and its underwriters and agents must register as securities dealers with the Securities and Exchange Commission. Credit life insurance is a form of decreasing term insurance that protects creditors such as banks. Credit accident and health is a similar product. Sales of both products have declined since 1999.

LIFE/HEALTH INSURANCE INDUSTRY PREMIUM BY LINE, 2004 AND 2005 ($ millions) 2004 2005 Net premiums Net premiums Lines of insurance written Percent of total written Percent of total Industrial life $208.9 1 $129.4 1 Ordinary life 107,489.9 20.1% 108,711.2 20.5% Ordinary individual annuities 167,472.0 31.4 162,760.5 30.7 Credit life (Group and individual) 1,150.7 0.2 1,258.0 0.2 Group annuities 104,537.3 19.6 110,084.3 20.8 Group life 27,678.3 5.2 29,088.3 5.5 Accident & health group 85,495.9 16.0 79,303.4 15.0 Accident & health credit 1,156.5 0.2 1,135.4 0.2 Accident & health other 38,674.1 7.2 37,343.7 7.0 Total, all lines 533,863.6 100.0 529,814.0 100.0 1Less than 0.1 percent. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

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insurance insurance

life/health: premiums by line

CREDIT LIFE INSURANCE Credit life insurance, a form of decreasing term insurance, protects creditors such as banks. The borrower pays the premium, generally as part of the credit transaction, to cover the outstanding loan in the event he or she dies. The face value of a policy decreases as the loan is paid off until both equal zero. When loans are paid off early, premiums for the remaining term are returned to the policyholder. Credit accident and health, a similar product, provides a monthly income in the event the borrower becomes disabled.

CREDIT LIFE, AND CREDIT ACCIDENT AND HEALTH INSURANCE DIRECT PREMIUMS WRITTEN, 1996-2005 ($000) Year Credit life Credit accident and health 1996 $1,903,407 $1,702,375 1997 1,969,079 1,897,056 1998 1,998,488 1,798,194 1999 1,971,462 1,724,729 2000 1,849,655 1,675,327 2001 1,632,806 1,551,697 2002 1,251,275 1,331,639 2003 1,046,474 1,119,672 2004 1,150,233 1,156,579 2005 1,257,714 1,135,355 Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

TOP TEN WRITERS OF VARIABLE ANNUITIES BY NEW SALES, 2005 ($ millions) Rank Company New sales 1 TIAA-CREF $13,551 2 MetLife 12,486 3 Hartford Life Insurance Company 11,375 4 AXA Financial/MONY 10,585 5 Lincoln National Life Insurance Company 8,411 6 AIG/SunAmerica/VALIC 7,944 7 John Hancock Life Insurance Company 7,914 8 ING Group of Companies 7,833 9 Pacific Life Insurance Company 7,197 10 Prudential/America Skandia 7,102 Source: VARDS/Morningstar. 90 The Financial Services Fact Book 2007 www.financialservicesfacts.org

insurance insurance

life/heal th: premiums by line/Health insurance

TOP TEN PRODUCERS OF EQUITY INDEX ANNUITIES BY TOTAL SALES, 2005 ($ millions) Rank Company Total sales Market share (percent) 1 Allianz Life $8,792.2 32.36% 2 American Equity 2,689.0 9.84 3 AmerUs Group 2,392.0 8.80 4 Old Mutual 2,382.8 8.77 5 ING 2,034.3 7.49 6 Midland National Life 1,211.9 4.46 7 Jackson National Life 1,037.8 3.82 8 Sun Life 1,007.4 3.71 9 EquiTrust 802.0 2.95 10 Jefferson-Pilot 776.7 2.86

Source: The Advantage Compendium.

HEALTH INSURANCE According to the U.S. Census Bureau’s latest health insurance survey, 15.7 percent of the U.S. population lacked coverage in 2004, the same percentage as the previous year.

THE NATION’S HEALTH CARE DOLLAR: 2004 WHERE IT COMES FROM1

Private health Other private insurance 7% 35% Other government programs 13%

Out-of-pocket payments 13% Medicare Medicaid 17% and SCHIP2 16%

1Does not add to 100 percent due to rounding. 2State Children’s Health Insurance Program. Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group.

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insurance insurance

Health Insurance

HEALTH INSURANCE COVERAGE STATUS AND TYPE OF COVERAGE BY SELECTED CHARACTERISTICS, 2004 (000) Some type Covered by Not covered of health at any time insurance Own Direct- during during Private Employment employment purchase Government Total the year the year insurance based based insurance health plan Total 291,155 45,820 245,335 198,262 174,174 91,709 26,961 79,086 By age Under 18 73,821 8,269 65,553 48,462 44,892 237 4,166 21,922 18 to 24 27,972 8,772 19,200 16,229 12,966 5,122 1,495 4,022 25 to 34 39,307 10,177 29,130 25,765 24,027 18,151 2,266 4,578 35 to 44 43,350 8,110 35,240 31,883 29,824 21,335 2,773 4,680 45 to 54 41,960 6,260 35,700 32,414 30,088 22,141 3,215 4,847 55 to 64 29,532 3,936 25,596 22,174 19,872 14,907 3,066 5,442 65 and over 35,213 297 34,916 21,336 12,505 9,817 9,979 33,595 By region Northeast 54,018 7,106 46,913 38,548 34,634 18,034 4,317 14,560 Midwest 64,868 7,737 57,131 48,546 42,480 21,675 6,644 16,474 South 105,061 19,262 85,799 67,419 59,518 32,109 9,162 29,684 West 67,208 11,715 55,493 43,750 37,542 19,892 6,837 18,368

Source: U.S. Census Bureau, Current Population Survey, 2005 Annual Social and Economic Supplement.

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insurance insurance

health insurance

HEALTH SAVINGS ACCOUNTS Established in late 2003 by the Medicare Modernization Act, health savings accounts (HSAs) are designed to give consumers financial incentives to manage their own health expenses. An individual’s HSA must be coupled with a high-deductible health plan (HDHP). HSA funds may be used to cover current and future health care costs.

HEALTH SAVINGS ACCOUNT ENROLLMENT • The number of people 1 (COVERED LIVES), 2004-2006 covered by HSA/HDHP September 2004 March 2005 January 2006 products was almost 3.2 million in January Individual market 346,000 556,000 855,000 2006, more than triple Small group market 79,000 147,000 510,000 the coverage reported in Large group market 13,000 162,000 679,000 March 2005, according Other group2 NA 88,000 247,000 to a survey by America’s Other3 NA 77,000 878,000 Health Insurance Plans. Total 438,000 1,031,000 3,168,000 • 5 percent of workers 1Includes health savings accounts (HSAs) and high deductible health plans (HDHPs). had access to health 2Enrollment data for companies that did not break down their group membership into large savings accounts in and small group categories. 2005, according to 3Enrollment data for companies that did not provide a breakdown of enrollees by market the Bureau of Labor category. Statistics’ National NA=Data not available. Compensation Survey. Source: America’s Health Insurance Plans.

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insurance

Health Insurance

LONG-TERM CARE INSURANCE • According to the National Long-term care (LTC) insurance pays for services to help indi- Association of Insurance Commissioners (NAIC), viduals who are unable to perform certain activities of daily liv- 193 insurers wrote ing without assistance, or require supervision due to a cognitive LTC insurance in 2004. impairment such as Alzheimer’s disease. Earned LTC premiums totaled $8.8 billion in PERCENT OF WORKERS WITH ACCESS TO LONG-TERM CARE 2004, according to the INSURANCE, PRIVATE INDUSTRY, 2003-2005 NAIC. Establishment size 2003 2004 2005 1 to 99 workers 3% 4% 4% 100 or more workers 20 20 21 Total 11 11 11

Source: U.S. Department of Commerce, Bureau of Labor Statistics.

TOP TEN LONG-TERM care INSURERS BY NUMBER OF LIVES COVERED, 2004 Number of Direct premiums Market Rank Company covered lives earned share1 1 General Electric Capital Assurance Co. 802,213 $1,193,854,545 13.15% 2 John Hancock Life Insurance Co. 577,798 719,279,584 9.47 3 Unum Life Insurance Co. of America 573,948 363,026,783 9.40 4 Continental Casualty Co. (CNA) 526,604 588,035,322 8.63 5 Bankers Life & Casualty Co. 363,984 471,601,868 5.96 6 Metropolitan Life Insurance Co. 353,225 320,827,070 5.79 7 Conseco Senior Health Insurance Co. 195,275 317,538,315 3.20 8 IDS Life Insurance Co. 187,429 233,672,412 3.07 9 Aetna Life Insurance Co. 185,235 73,116,028 3.04 Life Investors Insurance 10 Company of America 169,337 201,698,543 2.77 1Based on number of covered lines. Source: National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibited without written permission of NAIC.

94 The Financial Services Fact Book 2007 www.financialservicesfacts.org Chapter 6: Banking

overview

OVERVIEW Banking, the largest sector within the financial services industry, includes all depository institutions, from commercial banks and thrifts (savings and loan associations and savings banks) to credit unions. In their role as financial intermediaries, banks use the funds they receive from depositors to make loans and mortgages to individuals and businesses, seeking to earn more on their lending activities than it costs them to attract depositors. However, in so doing they must manage many risk factors, including interest rates, which can result in a mismatch of assets and liabilities. Over the past decade, many banks have diversified and expanded into new business lines such as credit cards, stock brokerage and investment management services. (See Chapter 4: Convergence, pages 49-57.) They are also moving into the insurance business, selling annuities and life insurance products in particular, often through the purchase of insurance agencies. Banks can be federally or state-chartered.

REGULATION The Federal Reserve was established by Congress in 1913 to regulate the money supply according to the needs of the U.S. economy. The agency attempts to do this by changing bank reserve requirements and the discount rate that banks pay for loans from the Federal Reserve system and by increasing or decreasing its open-market operations, the buying and selling of federal securities. The Federal Depository Insurance Corporation (FDIC) was created in 1933 to restore confidence in the banking system following the collapse of thousands of banks during the Great Depression. Under the program administered by the FDIC, which is an independent agency within the federal government, deposits in commercial banks and thrifts are insured for up to $100,000. In addition, the FDIC is charged with liquidating failing banks or dis- posing of their insured liabilities by selling them to a solvent institution. The agency also provides separate coverage for retirement accounts, such as individual retirement accounts (IRAs) and Keoghs. A 2006 law increased the coverage for retirement accounts from $100,000 to $250,000. Since 1863, banks have had the choice of whether to be chartered by the national government or the states. Under the National Bank Act, national banks are chartered and supervised by the Office of the Comptroller of the Currency (OCC), part of the Treasury Department. State-chartered banks are subject to some federal regulation if they are members of the Federal Reserve System or insured by the Federal Deposit Insurance Corporation (FDIC). Thrift institutions, including savings and loans associations and savings banks, are regulated and supervised by the Office of Thrift Supervision (OTS), another agency in the U.S. Treasury Department. The National Credit Union Administration serves a similar function for federal credit unions. State credit unions are supervised by state regulators.

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banking

all sectors

TOP TEN BANK AND THRIFT DEALS ANNOUNCED IN 20051 ($ millions) Rank Buyer (Location) Target (State) Deal value2 1 Capital One Financial Corp. (VA) Hibernia Corp. (LA) $4,977.4 2 Sovereign Bancorp Inc. (PA) Independence Community Bank Corp. (NY) 3,591.2 3 Wachovia Corp. (NC) Westcorp (CA) 3,416.7 4 TD Banknorth Inc. (ME) Hudson United Bancorp (NJ) 1,898.7 5 Zions Bancorp. (UT) Amegy Bancorp. Inc. (TX) 1,709.7 6 BNP Paribas Group (France) Commercial Federal Corp. (NE) 1,339.2 7 Marshall & Ilsley Corp. (WI) Gold Banc Corp. Inc. (KS) 714.7 8 BB&T Corp. (NC) Main Street Banks Inc. (GA) 621.4 9 Compass Bancshares Inc. (AL) TexasBanc Holding Company (TX) 459.2 New York Community 10 Bancorp Inc. (NY) Atlantic Bank of New York (NY) 400.0 1Deals where the entire operation of the bank or thrift is acquired by the buyer, including all property, assets and charters. At least one of the companies involved is a U.S.-domiciled company. List does not include terminated deals. 2At announcement. Source: SNL Financial LC.

TOP TEN FEDERALLY CHARTERED AND STATE-CHARTERED BANKS BY ASSETS, 20051 ($000) Rank Federally chartered bank Total assets State-chartered bank State Total assets Bank of America, 1 National Association2 $1,082,242,862 SunTrust Bank GA $177,231,290 JPMorgan Chase Bank, State Street Bank 2 National Association2 1,013,985,000 and Trust Company MA 87,888,150 3 Citibank, National Association2 706,497,000 The Bank of New York NY 85,868,000 Wachovia Bank, 4 National Association2 472,143,000 Regions Bank AL 81,074,402 Wells Fargo Bank, Branch Banking 5 National Association2 403,258,000 and Trust Company NC 80,226,832 6 Washington Mutual Bank3 330,706,384 Merrill Lynch Bank USA UT 60,367,705 7 U.S. Bank, National Association2 208,867,410 Fifth Third Bank OH 57,612,849 HSBC Bank USA, 8 National Association2 150,679,481 North Fork Bank NY 57,044,790 9 World Savings Bank, FSB3 124,384,506 Bank of the West CA 55,157,645 Manufacturers and 10 Citibank (West), FSB3 121,453,671 Traders Trust Company NY 54,391,344 1As of December 2005. 2Chartered by the Office of the Comptroller of the Currency. 3Chartered by the Office of Thrift Supervision. Source: Federal Deposit Insurance Corporation.

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PROFITABILITY In their efforts to maximize profits, commercial banks and other depository institutions must balance credit quality and future economic conditions with liquidity needs and regulatory mandates.

PROFITABILITY OF SAVINGS banks, COMMERCIAL BANKS AND CREDIT UNIONS, 2001-2005

Return on equity Return on average assets Year Savings banks Commercial banks Credit unions 2001 12.33% 13.08% 0.96% 2002 12.36 14.46 1.07 2003 13.66 15.31 0.99 2004 10.87 13.74 0.92 2005 10.38 12.91 0.85

Source: Office of Thrift Supervision; Federal Deposit Insurance Corporation; National Credit Union Administration.

NET INCOME OF SAVINGS INSTITUTIONS, COMMERCIAL BANKS AND CREDIT UNIONS, 1996-2005 ($ millions)

$130,000 • In 2005 the net income Commercial banks1 120,000 growth for commercial Savings institutions1 110,000 banks rebounded to Credit unions2 100,000 9.2 percent, following 90,000 2.1 percent growth 80,000 the previous year. 70,000 Net income of savings 60,000 banks rose by 9.1 50,000 percent, compared with 40,000 30,000 1.1 percent growth in 20,000 2004. However, net 10,000 income of credit unions 0 fell 3.1 percent in 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2005, following a 2.4 1FDIC-insured. percent rise in 2004. 2Federally insured state-chartered credit unions. Source: Federal Deposit Insurance Corporation; National Credit Union Administration.

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ASSETS FINANCIAL ASSETS OF BANKING INSTITUTIONS, 1980-2005 ($ billions, end of year) Year Commercial banking Savings institutions Credit unions • Assets of commercial 1980 $1,481.7 $792.4 $67.6 banks grew 8.7 percent 1990 3,337.2 1,323.0 217.2 from 2004 to 2005, 2000 6,468.7 1,217.7 441.1 faster than savings banks, at 8.5 percent, 2002 7,329.4 1,349.5 560.8 and credit unions, at 2003 7,810.4 1,465.4 617.3 4.7 percent. 2004 8,496.6 1,649.0 654.7 2005 9,236.0 1,788.7 685.5

Source: Board of Governors of the Federal Reserve System.

CREDIT MARKETS Until about 1950, commercial banks dominated the credit market. While depository institutions continue to be the leading holders of credit assets, asset shares of federal mortgage pools, government-sponsored corporations and asset-based securities issuers have risen gradually over the past two decades.

CREDIT MARKET ASSET HOLDINGS, 2001-20051 ($ billions, end of year) Percent of 2001 2002 2003 2004 2005 total, 2005 Total credit market assets held $28,904.1 $31,233.7 $34,092.2 $36,963.1 $40,229.9 100.0% By financial sectors 22,198.3 23,885.1 25,862.5 27,743.6 29,928.3 74.4 Monetary authority 551.7 629.4 666.7 717.8 744.2 1.8 U.S.-chartered commercial banks 4,610.1 5,003.9 5,361.7 5,909.7 6,410.0 15.9 Foreign banking offices in the U.S. 510.7 516.9 485.8 506.1 648.3 1.6 Bank holding companies 24.7 27.8 36.4 36.4 32.2 0.1 Banks in U.S.-affiliated areas 65.0 66.3 76.9 90.8 100.2 0.2 Savings institutions 1,133.2 1,166.6 1,292.6 1,485.4 1,615.9 4.0 Credit unions 421.2 463.9 514.5 556.5 595.4 1.5 Life insurance companies 2,074.8 2,307.8 2,488.3 2,661.4 2,773.7 6.9 Nonlife insurance companies 518.4 558.3 625.2 698.8 780.8 1.9 (table continues)

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CREDIT MARKET ASSET HOLDINGS, 2001-20051 (Cont’d) ($ billions, end of year) Percent of 2001 2002 2003 2004 2005 total, 2005 Private pension funds $637.3 $663.0 $677.2 $712.1 $734.9 1.8% Public pension funds 734.2 696.5 714.0 745.9 743.3 1.8 Money market mutual funds 1,584.9 1,567.1 1,471.3 1,346.3 1,336.2 3.3 Mutual funds 1,223.8 1,368.0 1,505.7 1,622.8 1,751.1 4.4 Closed-end funds 108.5 117.1 153.3 164.5 166.2 0.4 Exchange-traded funds 0.0 3.7 4.5 8.2 15.0 0.0 Government-sponsored corporations 2,099.1 2,323.2 2,559.7 2,605.9 2,540.8 6.3 Federal mortgage pools 2,831.8 3,158.6 3,489.1 3,542.2 3,677.5 9.1 ABS issuers 1,602.6 1,792.5 2,004.6 2,330.2 2,954.4 7.3 Finance companies 846.4 867.6 951.8 1,081.4 1,146.7 2.9 Mortgage companies 32.1 32.1 32.1 32.1 32.1 0.1 Real estate investment trusts 48.0 71.8 97.5 200.1 286.9 0.7 Brokers and dealers 316.0 344.4 424.1 394.9 486.0 1.2 Funding corporations 223.8 138.7 229.6 294.0 356.6 0.9 By the federal government 278.6 288.2 285.6 289.5 288.7 0.7 By others, domestic 3,756.8 3,924.5 4,311.3 4,539.8 4,725.9 11.7 By others, foreign 2,949.0 3,424.1 3,918.4 4,679.7 5,575.7 13.9 1Excluding corporate equities and mutual fund shares. Source: Board of Governors of the Federal Reserve System.

EMPLOYMENT IN THE BANKING INDUSTRY, 2001-2005 (000) Year Commercial banks Savings banks Credit unions Total • Within the banking 2001 1,258.4 233.6 209.2 1,701.2 industry, employment 2002 1,278.1 239.6 215.3 1,733.0 at credit unions grew 2003 1,280.1 246.3 222.1 1,748.5 fastest in 2005, up 4.1 percent from 2004 1,280.8 243.2 227.5 1,751.5 2004. 2005 1,297.9 239.6 236.9 1,774.4

Source: U.S. Department of Labor, Bureau of Labor Statistics.

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BUSINESS LENDING BY LOAN SIZE AND SIZE OF BANK, 20061

Value of loans ($ millions) Size of loans ($000) Large banks2 Small banks $1 to $99 $1,563 $1,367 $100 to $999 6,997 2,569 $1,000 to $9,999 13,305 1,383

$10,000 and over 18,511 NA 1Based on a sample of 348 domestically chartered commercial banks, as of February 6-10, 2006. 2As of March 31, 2003, assets of large banks were at least $3.7 billion. NA=Data not available. Source: Board of Governors of the Federal Reserve System.

COMMUNITY DEVELOPMENT LENDING The Federal Community Reinvestment Act requires commercial banks and savings institutions with total assets of $1 billion to report data regarding their small business, small farm and community development lending. In 2005 a total of 1,103 lenders, including 891 commercial banks and 212 savings institutions, reported on their originations and purchases of small business and small farm loans. In aggregate they had originated about 8 million small business loans, totaling $282 billion. About 40 percent of the loans went to firms with revenues of $1 million or less.

COMMUNITY DEVELOPMENT LENDING, 20051 ($ billions) Size of loans Loans to firms $100,001 to More than with revenues of $100,000 or less $250,000 $250,000 All loans $1 million or less Total Percent Total Percent Total Percent Total Percent Total Percent Originations $101.7 36.0% $47.3 16.8% $133.3 47.2% $282.3 100.0% $132.6 47.0% Purchases 0.9 45.0 0.2 10.0 1.0 50.0 2.0 100.0 2.8 13.8 Total 102.6 36.1 47.5 16.7 134.2 47.2 284.3 100.0 132.9 46.7 1As per the Community Reinvestment Act, enacted in 1977 to encourage banks to help meet the needs of the communities in which they operate, including low and moderate income neighborhoods. Source: Federal Financial Institutions Examination Council.

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BANK BRANCHES Consolidation has substantially reduced the number of commercial banks but has not reduced consumers’ access to their deposits as banks continue to add branches and the number of ATMs continues to grow. However, there are fewer savings institutions than in 1990, both in terms of banks and branches, and the number of credit unions dropped by 14 percent from 1990 to 2005.

BANKING OFFICES BY TYPE OF BANK, 1990-2005 1990 2001 2002 2003 2004 2005 All banking offices 94,115 97,147 97,082 97,753 99,679 101,592 Commercial banks 62,346 73,027 73,454 74,518 76,974 79,663 Number of banks 12,329 8,062 7,870 7,752 7,614 7,511 Number of branches 50,017 64,965 65,584 66,766 69,360 72,152 Savings institutions 21,609 14,136 13,940 13,866 13,691 13,234 Number of banks 2,815 1,534 1,466 1,411 1,345 1,304 Number of branches 18,794 12,602 12,474 12,455 12,346 11,930 Credit unions 10,160 9,984 9,688 9,369 9,014 8,695

Source: Federal Deposit Insurance Corporation; National Credit Union Administration.

ASSETS OF FOREIGN BANKING OFFICES IN THE UNITED STATES, 2001-20051 ($ billions, end of year) 2001 2002 2003 2004 2005 Total financial assets $791.9 $801.1 $734.0 $570.0 $679.5 Reserves at Federal Reserve 0.6 1.2 0.9 0.7 0.9 Total bank credit 603.0 615.0 607.1 598.8 782.4 U.S. government securities 154.5 178.3 86.7 83.1 78.8 Treasury 103.8 116.7 34.2 30.0 27.9 Agency- and GSE2-backed securities 50.7 61.6 52.5 53.1 50.9 Corporate and foreign bonds 81.3 81.6 160.9 178.5 261.9 Total loans 367.2 355.2 359.6 337.1 441.7 Other bank loans 256.1 237.5 220.4 226.8 287.5 Mortgages 17.9 19.0 17.2 16.9 19.4 Security credit 93.3 98.7 121.9 93.4 134.8 Customers’ liability on acceptances 1.0 0.6 0.6 0.7 0.8 Miscellaneous assets 187.2 184.2 125.5 -30.2 -104.6 1Branches and agencies of foreign banks, Edge Act and Agreement corporations and American Express Bank. 2Government-sponsored enterprise. Source: Board of Governors of the Federal Reserve System. www.financialservicesfacts.org The Financial Services Fact Book 2007 101

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FINANCIAL LITERACY PROGRAMS The Consumer Bankers Association periodically surveys U.S. banks on their programs aimed at improving the financial literacy of their clients and the American public at large. In 2005 there were 46 respondents, 56 percent of which had assets of over $20 billion.

FINANCIAL LITERACY PROGRAMS BY TYPE, 2003-20051 (Percent) Type of program 2003 2004 2005 • The average financial literacy budget for General financial literacy 98% 100% 100% banks was $5.4 Mortgage/homeownership financial literacy 96 96 96 million in 2004; the Targeting predatory lending issues 72 78 70 median budget was College-based 26 50 36 $31,500. 1Based on respondents to annual surveys by the Consumer Bankers Association. Source: Consumer Bankers Association.

COMMERCIAL BANKS Commercial banks vary greatly in size from the “money center” banks located in the nation’s financial centers that offer a broad array of traditional and nontraditional banking services, including international lending, to the smaller regional and local community banks engaged in more typical banking activities, such as consumer and business lending. Commercial banks receive revenue from many sources including check-writing, trust account management fees, investments, loans and mortgages. A growing number of banks also receives revenue from consumer use of Internet banking services. The number of small commercial banks continues to drop while the number of larger banks grows. There were 196 fewer commercial banks with assets of less than $100 million in 2005 than in the previous year, but 63 more in the $100 million to $1 billion asset size range and 30 more in the $1 billion or more category.

ASSETS AND LIABILITIES A bank’s assets and liabilities are managed in order to maximize revenues and maintain liquidity. The lending sector’s susceptibility to changes in interest rates, domestic and international economies, and credit quality can make revenue streams unpredictable. Banks hold substantial amounts of U.S. Treasury and government agency obligations, which are highly liquid, although the asset mix includes equity as well as other asset classes.

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ASSETS OF FDIC-INSURED COMMERCIAL BANKS, 2005

Securities 17%

Other assets1 Loans and leases 15% 59% Federal funds 5% Total cash 4%

1Includes assets held in trading accounts, bank premises and fixed assets, other real estate owned, intangible assets and all other assets. Source: Federal Deposit Insurance Corporation.

ASSETS AND LIABILITIES OF FDIC-INSURED COMMERCIAL BANKS GROUPED BY ASSET SIZE, 2005 ($ millions, end of year) By asset size Total commercial Less than $100 million $1 billion Foreign banks $100 million to $1 billion or more offices Number of institutions 7,527 3,459 3,593 475 123 Total assets $9,039,674 $180,118 $1,000,883 $7,858,673 $1,053,392 Cash and funds due from depository institutions 399,613 9,370 39,764 350,480 111,339 Noninterest-bearing 276,307 6,480 31,929 237,897 NA Interest-bearing 123,307 2,889 7,834 112,583 NA Securities 1,572,274 42,789 203,251 1,326,234 NA Federal funds sold and re-repos1 443,515 8,952 29,728 404,835 NA Loans and leases, net 5,311,672 110,527 673,854 4,527,292 NA Plus: allowance for losses and allocated transfer risk reserve 68,673 1,569 8,855 58,249 NA Loans and leases, total 5,380,346 112,096 682,709 4,585,541 341,542 Assets held in trading accounts2 498,996 4 188 498,804 199,373 Bank premises and fixed assets 91,710 3,444 18,552 69,713 NA (table continues)

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ASSETS AND LIABILITIES OF FDIC-INSURED COMMERCIAL BANKS GROUPED BY ASSET SIZE, 2005 (Cont’d) ($ millions, end of year) By asset size Total commercial Less than $100 million $1 billion Foreign banks $100 million to $1 billion or more offices Other real estate owned $4,008 $223 $1,042 $2,743 NA Intangible assets 302,975 $628 8,031 294,316 NA All other assets 414,911 4,182 26,473 384,256 NA Total liabilities, limited-life preferred stock and equity capital 9,039,674 180,118 1,000,883 7,858,673 NA Total liabilities 8,127,022 158,652 900,552 7,067,818 1,307,735 Deposits, total 6,073,333 149,728 813,657 5,109,949 920,632 Noninterest-bearing 1,203,765 26,547 138,474 1,038,745 50,397 Interest-bearing 4,869,568 123,181 675,183 4,071,204 870,235 Federal funds purchased and repos1 667,545 1,783 24,815 640,947 NA Trading liabilities 251,531 0 0 251,531 NA Other borrowed money 755,941 5,914 52,835 697,192 77,480 Subordinated notes and debentures 122,237 5 713 121,519 NA All other liabilities 256,435 1,223 8,533 246,679 NA Total equity capital 912,652 21,466 100,331 790,855 NA Perpetual preferred stock 5,287 26 205 5,056 NA Common stock 32,355 3,486 8,831 20,038 NA Surplus 529,608 8,988 42,177 478,443 NA Undivided profits 345,402 8,966 49,118 287,318 NA 1Short-term agreements to sell and repurchase government securities by a specified date at a set price. 2The foreign office component of “assets held in trading accounts” is only available for institutions with $1 billion or more in total assets or $2 billion or more in off-balance sheet contracts. NA=Data not available. Source: Federal Deposit Insurance Corporation.

DEPOSITS In the depository process, banks pay interest to depositors and gain income by lending and investing deposits at higher rates. Banks must balance the generation of revenue from these deposits with the maintenance of liquidity, according to FDIC guidelines. The impact of these guidelines on the banking industry is similar to that of statutory accounting practices on the insurance industry—both serve to promote solvency. (See Appendix, page 190.)

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DEPOSITS, INCOME AND EXPENSES OF FDIC-INSURED COMMERCIAL BANKS, 2000-2004 ($ millions, end of year) 2000 2001 2002 2003 2004 Number of institutions 8,297 8,062 7,870 7,752 7,614 Total deposits (domestic and foreign) individuals, partnerships, corps. $3,704,679 $3,951,067 $4,186,619 $4,480,989 $5,010,268 U.S. government 8,513 12,284 30,077 5,104 4,631 States and political subdivisions 160,217 172,725 197,000 227,377 235,243 All other 275,611 207,227 237,502 272,960 295,912 Total domestic and foreign deposits 4,149,020 4,343,302 4,651,199 4,986,429 5,546,054 Interest-bearing 3,397,412 3,476,414 3,716,908 4,034,942 4,501,120 Noninterest-bearing 751,608 866,888 934,290 951,488 1,044,934 Domestic office deposits Demand deposits 526,608 570,700 525,908 516,911 540,247 Savings deposits 1,559,684 1,869,985 2,197,372 2,497,488 2,772,510 Time deposits 1,356,315 1,273,353 1,270,343 1,231,382 1,367,959 Total domestic deposits 3,442,607 3,714,038 3,993,623 4,245,781 4,680,716 Transaction 672,058 737,691 701,302 715,974 745,080 Nontransaction 2,770,549 2,976,347 3,292,321 3,529,807 3,935,636 Income and expenses Total interest income 424,144 398,490 353,739 331,955 343,168 Total interest expense 222,258 185,702 119,119 94,228 96,049 Net interest income 201,886 212,788 234,620 237,727 247,119 Total noninterest income (fees, etc.) 153,805 157,720 171,873 185,878 183,374 Total noninterest expense 215,636 221,988 232,200 244,480 256,032 Provision for loan and lease losses 29,741 42,968 47,816 34,501 25,921 Pretax net operating income 110,313 105,552 126,478 144,624 148,541 Securities gains (losses) -2,278 4,437 6,392 5,583 3,614 Income taxes 37,729 36,544 43,807 49,061 48,739 Net extraordinary items -32 -240 -69 427 67 Net income 70,274 73,205 88,993 101,573 103,483

Source: Federal Deposit Insurance Corporation.

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INVESTMENT MIX

SECURITIES OF FDIC-INSURED COMMERCIAL BANKS, GROUPED BY ASSET SIZE, 2005 ($ millions, end of year) By asset size1 Total commercial Less than $100 million $1 billion banks $100 million to $1 billion or more Securities (debt and equity) $1,572,274 $42,789 $203,251 $1,326,234

Securities held-to-maturity (amortized cost) 130,151 7,120 28,062 94,969 Securities available-for-sale (fair value) 1,442,124 35,669 175,189 1,231,265 By security type2 U.S. Government securities 1,057,930 33,505 149,978 874,447 U.S. Treasury securities 53,250 1,847 6,594 44,809 U.S. Government obligations 1,004,680 31,658 143,384 829,638 Securities issued by states and political subdivisions 122,542 7,994 41,129 73,420 Asset-backed securities 69,459 15 665 68,779 Other domestic debt securities3 217,346 973 9,465 206,908 Foreign debt securities3 91,546 5 107 91,433 Equity securities 13,451 298 1,907 11,247 Other items2 Pledged securities 866,198 16,989 95,756 753,452 Mortgage-backed securities 897,141 8,337 64,388 824,417 Certificates of participation in pools of residential mortgages 595,115 6,553 42,023 546,540 Issued or guaranteed by the U.S. 576,374 6,534 41,827 528,012 Privately issued 18,742 18 196 18,527 Mortgage-backed pass-throughs Issued by FNMA4 and FHLMC5 544,931 5,423 35,906 503,602 Issued by GNMA6 31,443 1,111 5,921 24,411 Collateralized mortgage obligations and REMICs7 153,553 1,643 18,619 133,290 1Grouped by asset size and insurance fund membership. 2Includes held-to-maturity securities at amortized cost and available-for-sale securities at fair value. 3Institutions with less than $100 million in total assets include “foreign debt securities” in “other domestic debt securities.” 4Fannie Mae. 5Freddie Mac. 6Ginnie Mae. 7Real estate mortgage investment conduits. Source: Federal Deposit Insurance Corporation.

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CONCENTRATION As a result of consolidation over the past two decades, small banks are dropping in number and in percentage of assets and deposits held. A large share of the nation’s banking business is held by a relatively small number of big banks.

COMMERCIAL BANK CONCENTRATION, NUMBERS AND ASSETS, 2001 AND 2005 ($ billions, end of year) By asset size Less than $100 $1 billion Greater $100 Percent million to Percent to $10 Percent than $10 Percent Total million of total $1 billion of total billion of total billion of total banks 2001 Number of banks 4,486 55.5% 3,194 39.5% 320 4.0% 80 1.0% 8,080 Total assets $221.6 3.4 $819.4 12.5 $915.4 13.9 $4,612.8 70.2 $6,569.2 Total deposits 187.7 4.3 668.4 15.2 625.0 14.2 2,910.5 66.3 4,391.6 Return on assets 0.91 NA 1.20 NA 1.31 NA 1.13 NA 1.16 Return on equity 8.07 NA 12.24 NA 13.77 NA 13.43 NA 13.10 2005 Number of banks 3,459 46.0% 3,593 47.7% 391 5.2% 84 1.1% 7,527 Total assets $180.1 2.0 $1,000.9 11.1 $1,074.6 11.9 $6,784.0 75.0 $9,039.7 Total deposits 149.7 2.5 813.7 13.4 754.4 12.4 4,355.5 71.7 6,073.3 Return on assets 1.01 NA 1.32 NA 1.37 NA 1.31 NA 1.31 Return on equity 8.28 NA 13.03 NA 12.74 NA 13.07 NA 12.91 NA=Not applicable. Source: Federal Deposit Insurance Corporation.

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TOP 25 U.S. COMMERCIAL BANKS BY REVENUES, 2005 ($ millions) Rank Company Revenues 1 Citigroup $131,045 2 Bank of America Corp. 83,980 3 J.P. Morgan Chase & Co. 79,902 4 Wells Fargo 40,407 5 Wachovia Corp. 35,908 6 U.S. Bancorp 16,596 7 Capital One Financial 12,085 8 National City Corp. 11,036 9 SunTrust Banks 10,886 10 Bank of New York Co. 8,312 11 PNC Financial Services Group 7,896 12 BB&T Corp. 7,832 13 State St. Corp. 7,496 14 Fifth Third Bancorp 7,495 15 KeyCorp 6,695 16 Regions Financial 6,124 17 Mellon Financial Corp. 5,728 18 Marshall & Ilsley Corp. 3,963 19 M&T Bank Corp. 3,738 20 Comerica 3,668 21 Northern Trust Corp. 3,554 22 North Fork Bancorp. 3,484 23 Popular 3,451 24 Synovus Financial Corp. 3,415 25 AmSouth Bancorp. 3,396

Source: Fortune.

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TOP 25 U.S. COMMERCIAL BANKS BY ASSETS, 2005 ($ millions) Rank Company City, State Assets 1 Bank of America, National Association Charlotte, NC $1,082,243 2 JPMorgan Chase Bank, National Association Columbus, OH 1,013,985 3 Citibank, National Association New York, NY 706,497 4 Wachovia Bank, National Association Charlotte, NC 472,143 5 Wells Fargo Bank, National Association Sioux Falls, SD 403,258 6 U.S. Bank National Association Cincinnati, OH 208,867 7 Suntrust Bank Atlanta, GA 177,231 8 HSBC Bank USA, National Association Wilmington, DE 150,679 9 Keybank, National Association Cleveland, OH 88,961 10 State Street Bank & Trust Co. Boston, MA 87,888 11 Bank of New York New York, NY 85,868 12 PNC Bank, National Association Pittsburgh, PA 82,877 13 Regions Bank Birmingham, AL 81,074 14 Branch Banking and Trust Company (BB&T) Winston-Salem, NC 80,227 15 Chase Bank USA, National Association Newark, DE 75,052 16 Countrywide Bank, National Association Alexandria, VA 73,116

17 LaSalle Bank, National Association Chicago, IL 71,061 18 National City Bank Cleveland, OH 69,482 19 Bank of America, National Association USA Phoenix, AZ 62,983 20 MBNA America Bank, National Association Wilmington, DE 58,517 21 Fifth Third Bank Cincinnati, OH 57,613 22 North Fork Bank Mattituck, NY 57,045 23 Bank of the West San Francisco, CA 55,158 24 Manufacturers and Traders Trust Company Buffalo, NY 54,391 25 Comerica Bank Detroit, MI 53,577

Source: Board of Governors of the Federal Reserve System.

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thrift institutions

Savings and loan associations and savings banks fall into the category of thrift institutions. Thrifts were originally established to promote personal savings through savings accounts and homeownership through mortgage lending, but now provide a range of services similar to many commercial banks. Savings banks tend to be small and are located mostly in the northeastern states. Like other banking institutions with a significant portion of mortgages on their books, thrifts may belong to the Federal Home Loan (FHL) Bank System. In exchange for holding a certain percentage of their assets in mortgage-backed securities and residential mortgages, these financial institutions may borrow funds from the FHL Bank System at favorable rates. Thrifts are declining in number. At their peak in the late 1960s, there were more than 4,800. But a combination of factors has reduced their ranks significantly. These include sharp increases in interest rates in the late 1970s, which immediately raised the cost of funds without a similar rise in earnings from thrifts’ principal assets, long-term fixed-rate mortgages. In addition, the recession of the early 1980s increased loan defaults. By year-end 2005, due mostly to acquisitions by or conversions to commercial banks or other savings banks, the number of thrifts had fallen to 1,305.

SELECTED INDICATORS, FDIC-INSURED SAVINGS INSTITUTIONS, 2001-2005

2001 2002 2003 2004 2005 Return on assets (%) 1.07 1.16 1.28 1.17 1.15 Return on equity (%) 12.33 12.36 13.66 10.87 10.38 Core capital (leverage) ratio (%) 7.77 8.06 8.05 9.53 9.86 Noncurrent assets plus other real estate owned to assets (%) 0.65 0.69 0.62 0.45 0.57 Net charge-offs to loans (%) 0.28 0.29 0.30 0.27 0.25 Asset growth rate (%) 8.17 3.20 8.47 14.77 8.61 Net interest margin (%) 3.20 3.35 3.27 3.16 3.07 Net operating income growth (%) 6.63 5.61 23.05 8.13 8.50 Number of institutions reporting 1,534 1,466 1,411 1,345 1,305 Percentage of unprofitable institutions (%) 8.80 6.82 5.81 6.47 5.52 Number of problem institutions 19 17 10 8 8 Assets of problem institutions ($ billions) 4 3 1 1 2 Number of failed/assisted institutions 1 1 0 1 0

Source: Federal Deposit Insurance Corporation.

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thrift institutions

OTS-REGULATED THRIFT INDUSTRY INCOME STATEMENT DETAIL, 2001-2005 ($ millions, end of year) 2001 2002 2003 2004 2005 Interest income $65,233 $55,456 $51,479 $55,872 $72,288 Interest expense 37,618 25,468 20,659 21,301 33,464 Net interest income before provisions for losses 27,615 29,988 30,820 34,572 38,824 Provisions for losses for interest bearing assets1 2,532 2,854 2,190 2,601 2,857 Net interest income after provisions for losses 25,083 27,134 28,629 31,970 35,967 Noninterest income2 13,137 14,132 18,516 20,106 23,845 Noninterest expense 22,591 22,999 25,766 30,500 34,316 Net income before taxes and extraordinary items 15,629 18,266 21,379 21,576 25,495 Taxes 5,696 6,437 7,634 7,631 9,079 Other3 269 8 -3 19 -1 Net income 10,202 11,837 13,742 13,963 16,416 Other items Preferred and common stock cash dividends 4,823 6,660 10,843 NA NA Reinvested earnings4 5,379 5,177 2,903 NA NA Gross profits of profitable thrifts 10,830 12,570 14,020 14,312 16,619 Gross profits of unprofitable thrifts -628 -733 -278 -348 -203 1Loss provisions for noninterest-bearing assets are included in noninterest expense. 2Net gain (loss) on sale of assets is reported in noninterest income. 3Defined as extraordinary items, net of tax effect and cumulative effect of changes in accounting principles. Extraordinary items are material events and transactions that are unusual and infrequent. 4Reinvested earnings is the portion of a corporation’s earnings distributed back into the business. It is calculated by subtracting preferred and common stock cash dividends from net income. NA= Data not available. Source: U.S. Department of the Treasury, Office of Thrift Supervision (OTS).

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thrift institutions

BALANCE SHEET OF THE FEDERALLY INSURED THRIFT INDUSTRY, 2001-2005 ($ millions, end of year) 2001 2002 2003 2004 2005 Number of thrifts 1,532 1,467 1,413 1,345 1,305 Assets Cash and invested securities $123,721 $156,662 $167,839 $129,432 $133,849 Mortgage-backed securities 196,512 209,660 206,454 234,309 242,636 1 to 4 family loans 597,867 608,993 678,486 845,363 919,101 Multifamily development 58,990 63,065 71,991 81,041 90,152 Construction and land loans 38,397 37,437 40,695 46,887 57,058 Nonresidential loans 63,140 71,884 79,711 85,121 87,318 Consumer loans 69,421 68,704 77,850 91,279 110,997 Commercial loans 36,754 42,228 52,087 60,035 66,191 Real estate owned 1,050 1,516 1,500 1,285 1,137 Other assets 113,157 98,812 97,495 117,011 128,962 Total assets 1,299,009 1,358,961 1,474,109 1,691,764 1,837,401 Liabilities and equity Deposits 797,822 878,655 925,294 991,387 1,067,845 FHLB advances 254,271 216,445 234,329 291,938 325,647 Other borrowings 111,140 107,542 153,646 190,712 205,921 Other liabilities 26,158 27,707 22,110 28,668 31,622 Total liabilities 1,189,391 1,230,349 1,335,379 1,502,706 1,631,034 Equity capital 109,618 128,612 138,730 189,058 206,367 Total liabilities and equity 1,299,009 1,358,961 1,474,109 1,691,764 1,837,401

Source: U.S. Department of the Treasury, Office of Thrift Supervision.

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INVESTMENT SECURITIES OF FDIC-INSURED SAVINGS INSTITUTIONS, 1995-2004 ($ millions, end of year) U.S. Treasury, agencies and corporations States and U.S. agencies political Other debt Year U.S. Treasury and corporations Total1 subdivisions securities 1995 $18,409.4 $213,365.2 $231,774.6 $1,947.1 $47,418.3 1996 10,236.4 202,507.5 212,744.0 2,066.6 39,410.1 1997 32,506.9 174,199.3 206,706.2 2,095.9 31,430.9 1998 24,199.7 197,912.0 222,111.7 3,171.0 35,217.8 1999 27,035.2 208,750.3 235,785.5 3,599.2 42,954.2 2000 24,368.5 201,349.8 225,718.3 3,831.6 42,697.3 2001 45,077.4 189,370.4 234,447.8 4,486.6 45,500.3 2002 35,411.0 207,856.0 243,267.0 5,716.0 39,778.8 2003 52,090.5 208,869.3 260,959.8 6,534.7 37,603.6 2004 34,399.8 201,036.6 235,436.4 7,159.2 64,485.5

Less: Less: Total Memo4 contra trading investment mortgage-backed Year Equity securities accounts2 accounts securities3 securities 1995 $7,469.9 -$537.2 $607.6 $288,539.6 $215,661.4 1996 8,647.9 -357.3 946.6 262,279.3 193,021.1 1997 9,380.7 27.1 914.6 248,672.0 180,645.4 1998 10,974.2 23.0 1,956.5 269,495.3 207,287.4 1999 10,077.8 1.2 1,028.1 291,387.4 221,713.2 2000 10,484.8 1.4 758.6 281,972.1 212,652.7 2001 10,166.3 1.7 1,816.7 292,782.6 203,372.0 2002 11,427.6 0.9 1,581.0 298,607.5 209,660.5 2003 10,678.1 0.4 1,276.5 314,499.3 206,453.8 2004 10,372.1 0.0 8,772.1 308,681.1 234,309.2 1Components may not add to total. 2Balance in account that offsets another account. Reserves for loan losses, for example, offset the loan account. 3Book value. 4Represents mortgage-backed securities, included in other columns, on a consolidated basis. Source: Federal Deposit Insurance Corporation.

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thrift institutions

THRIFT INDUSTRY MORTGAGE LENDING ACTIVITY, 2001-2005 ($ millions, end of year) Mortgage-backed Mortgage portfolio Mortgage Mortgage loans securities Total mortgage as a percent of Year refinancing1 outstanding outstanding portfolio total assets 2001 $125,889 $578,974 $92,360 $671,333 68.66% 2002 218,585 599,747 90,232 689,979 68.69 2003 368,546 787,734 91,891 879,625 80.51 2004 240,807 878,715 157,125 1,035,841 79.27 2005 250,181 980,023 172,565 1,152,588 78.73 1Full year. Source: U.S. Department of the Treasury, Office of Thrift Supervision.

TOP TEN U.S. THRIFT COMPANIES RANKED BY ASSETS, 20061 ($ millions, as of March 31) Rank Company Assets 1 Washington Mutual, Inc.2 $354,411 2 Golden West Financial Corporation 127,556 3 Sovereign Bancorp, Inc.3 83,560 4 ING Bank, FSB4 53,1295 5 E*TRADE Bank6 33,0125 6 Hudson City Bancorp, Inc. 29,676 7 New York Community Bancorp, Inc.7 29,2845 8 Lehman Brothers Bank, FSB8 22,4815 9 Astoria Financial Corporation 22,238 10 IndyMac Bancorp, Inc. 21,4525 1Rankings account for all bank and thrift acquisitions that were announced or completed subsequent to the buyer’s most recent financial reports and were valued in excess of $200 million at announcement. Combined asset values assume no diversification or accounting adjustments. 2Reflects Washington Mutual Inc.’s pending acquisition of Commercial Capital Bancorp, announced April 23, 2005. 3Reflects Sovereign Bancorp Inc.’s pending acquisition of Independence Community Bank Corp., announced October 24, 2005. 4Subsidiary of ING Direct, NV. 5Assets as of December 31, 2005. 6Subsidiary of E*TRADE Financial Corporation. 7Reflects New York Community Bancorp’s pending acquisition of Atlantic Bank of New York, announced October 10, 2005. 8Subsidiary of Lehman Brothers Holdings Inc. Source: SNL Financial LC.

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thrift institutions/remittances

TOP Four U.S. THRIFT COMPANIES BY REVENUES, 20051 ($ millions) Rank Company Revenues 1 Washington Mutual $21,326 2 Golden West Financial 6,662 3 Sovereign Bancorp 3,565 4 Indymac Bancorp 1,765 1Based on an analysis of companies in the Fortune 500. Source: Fortune.

REMITTANCES The flow of money from immigrants to their families back home usually takes the form of money transfers, commonly referred to as remittances. They include money orders, hand delivered cash, wire transfers and unlicensed informal means. About 75 percent of Latin American remittances came from the United States in 2005.

REMITTANCES to LATIN AMERICA 2004-2005 ($ millions) Percent change Country 2004 2005 from prior year Mexico $16,613 $20,034 20.6% Brazil 5,624 6,411 14.0 Colombia 3,857 4,126 7.0 Guatemala 2,681 2,993 11.6 El Salvador 2,548 2,830 11.1 Domican Republic 2,438 2,682 10.0 Peru 1,360 2,495 83.5 Ecuador 1,740 2,005 15.2 Honduras 1,134 1,763 55.5 Jamaica 1,497 1,651 10.3 Other 6,308 6,610 4.8 Total1 45,800 53,600 17.0 1Total may not equal sum because of rounding. Source: Inter-American Development Bank/MIF.

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remittances/credit unions

REMITTANCE TRANSFER MECHANISMS TO LATIN AMERICA AND THE CARIBBEAN, 2005 • 54 percent of (Percent) 60% remittances to Latin 49.46% America and the 50 Caribbean are distributed 40 37.86% through a bank, cooperative, credit union, 30 microfinance institution, 20 or other type of deposit institution according to 10 6.96% 3.34% a 2006 Inter-American 1.25% 0.54% Development Bank/MIF 0 Commerical Cooperative, Micro- Exchange Retail Post study. bank credit union, finance house/ store office savings bank institution1 casa de (bodega,etc.) cambio

1Nontraditional banks and finance companies serving low-income clients, including regulated and unregulated nonprofit organizations. Source: Inter-American Development/MIF.

CREDIT UNIONS Credit unions, generally set up by groups of individuals with a common link, such as membership in a labor union, are not-for-profit financial cooperatives that offer personal loans and other consumer banking services. Originating in Europe, the first credit union in this country was formed in Manchester, New Hampshire in 1909. Credit unions now serve more than 80 million people in the United States. In 1934 President Roosevelt signed the Federal Credit Union Act into law, authoriz- ing the establishment of federally chartered credit unions in all states. The purpose of the federal law was “to make more available to people of small means credit for provident [provisions for the future] purposes through a national system of cooperative credit...” In 1970, the National Credit Union Administration, which charters and supervises credit unions, was created along with the National Credit Union Share Insurance Fund, which insures members’ deposits. Individual credit unions are served by 31 federally insured corporate credit unions, which provide investment, liquidity and payment services for their members.

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credit unions

FEDERAL CREDIT UNIONS AND FEDERALLY INSURED STATE-CHARTERED CREDIT INSTITUTIONS, 1980-2005 (end of year) 1980 1990 2000 2003 2004 2005 Operating credit unions Federal 12,440 8,511 6,336 5,776 5,572 5,393 State 4,910 4,349 3,980 3,593 3,442 3,302 Number of failed institutions 239 164 29 13 21 15 Members (000) Federal 24,519 36,241 43,883 46,155 46,858 47,914 State 12,338 19,454 33,705 36,273 36,710 36,896 Assets ($ millions) Federal $40,092 $130,073 $242,881 $336,612 $358,704 $377,826 State 20,870 68,133 195,363 273,572 288,296 300,871 Loans outstanding ($ millions) Federal 26,350 83,029 163,851 202,898 223,878 249,521 State 14,852 44,102 137,485 173,236 190,377 208,734 Shares ($ millions) Federal 36,263 117,892 210,188 291,485 308,318 321,831 State 18,469 62,082 169,053 236,856 247,804 255,588

Source: National Credit Union Administration.

CREDIT UNION MEMBERS, 1980-2005 (000) • From 1980 to 2005 83,568 84,810 90,000 82,428 federal and federally 77,588 insured state credit union 80,000 assets grew from $61 70,000 billion to $679 billion. In 55,695 2005 assets increased 60,000 by $32 billion, or 4.9 50,000 percent, from 2004. 36,857 40,000 • There are currently fewer 30,000 than 500 nonfederally 1980 1990 2000 2003 2004 2005 insured state chartered Source: National Credit Union Administration. credit unions.

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credit unions

ASSETS AND LIABILITIES OF CREDIT UNIONS, 2001-2005 ($ billions, end of year) 2001 2002 2003 2004 2005 Total financial assets $505.5 $560.8 $617.3 $654.7 $685.5 Checkable deposits and currency 36.8 38.4 41.5 40.2 38.1 Time and savings deposits 23.0 24.5 26.4 26.3 21.8 Federal funds and security repos1 2.5 1.7 1.6 4.1 6.7 Credit market instruments 421.2 463.9 514.5 556.5 595.4 Open market paper 2.4 3.6 1.6 1.9 1.3 U.S. government securities 88.0 105.1 124.4 126.0 117.2 Treasury 7.4 7.8 8.9 9.0 7.7 Agency- and GSE2- backed securities 80.6 97.3 115.5 117.0 109.5 Home mortgages 141.3 159.4 182.6 213.2 245.6 Consumer credit 189.6 195.7 205.9 215.4 231.3 Mutual fund shares 3.7 3.5 4.1 3.1 2.2 Miscellaneous assets 18.3 28.7 29.2 24.4 21.2 Total liabilities 458.9 509.0 560.3 595.1 621.6

Shares/deposits 450.2 496.9 544.9 574.6 595.5 Checkable 54.7 59.7 67.4 74.9 79.9 Small time and savings 361.3 394.4 424.0 439.7 453.0 Large time 34.1 42.8 53.6 60.0 62.6 Other loans and advances 4.9 6.9 9.1 11.4 14.7 Miscellaneous liabilities 3.8 5.1 6.3 9.1 11.4 1Security repurchase agreements; short-term agreements to sell and repurchase government securities at a specified date and at a set price. 2Government-sponsored enterprise. Source: Board of Governors of the Federal Reserve System.

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credit unions

CREDIT UNION DISTRIBUTION BY ASSET SIZE, 20051 (End of year) Asset size Number of Percent change Assets Percent change ($ millions) credit unions from Dec. 2004 ($ millions) from Dec. 2004 $0 to $0.2 179 -3.2% $21 -6.5% $0.2 to $0.5 312 -9.3 108 -9.6 $0.5 to $1 428 -5.3 316 -6.9 $1 to $2 643 -5.3 953 -5.7 $2 to $5 1,227 -7.3 4,142 -8.2 $5 to $10 1,357 -4.0 9,873 -5.0 $10 to $20 1,304 -4.1 18,681 -4.2 $20 to $50 1,528 -2.9 49,068 -2.8 $50 to $100 799 -2.2 56,054 -2.5 $100 to $200 537 1.1 75,864 1.1 $200 to $500 426 1.2 131,963 1.1 $500 to $1,000 164 9.3 111,318 8.8 More than $1,000 107 8.1 242,028 11.9 Total 9,011 -3.6 700,390 4.8 1From Credit Union Call Reports. Source: Credit Union National Association.

TOP TEN U.S. CREDIT UNIONS BY ASSETS, 20051 ($ millions) Rank Company Assets 1 Navy $24,644.4 2 State Employees’ 12,916.5 3 Pentagon 8,091.5 4 The Golden 1 6,180.7 5 Boeing Employees 6,137.9

6 Orange County Teachers 5,961.1 7 Suncoast Schools 5,004.5 8 Alliant 4,378.8 9 American Airlines 4,011.9 10 Security Service 3,975.6 1Federally insured credit unions. Source: National Credit Union Administration.

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industrial banks

INDUSTRIAL BANKS Industrial banks, also known as state-chartered industrial loan companies (ILCs), were first formed in the early part of the 20th century to make consumer loans and to offer deposit accounts, as part of a move to secure credit for low and moderate income workers. Their growth was spurred by a 1987 federal banking law modification that gave nonbanking companies a way to own FDICs-insured industrial banks. Assets of ILCs increased by over 3,500 percent—from $3.8 billion in 1987 to over $140 billion in 2004, according to a Government Accountability Office study. ILCs are regulated by the FDIC and by their state chartering agency. There were 61 FDIC-insured ILCs, with total assets of $150 billion, as of December 2005. Most are headquartered in Utah and California. Five other states—Colorado, Minnesota, Indiana, Hawaii and Nevada—also charter industrial banks. ILCs have broad banking powers and may be owned by firms in other financial services businesses such as finance companies, credit card issuers and securities firms, or by nonfinancial businesses such as automakers and department stores. Some regulators oppose the access to the financial services industry that ILCs provide to nonbanks. In 2003 California and Colorado passed laws that prohibit nonfinancial firms from owning ILCs.

TOP TEN FDIC-INSURED INDUSTRIAL BANKS BY ASSETS, 2005 ($ millions) Rank Bank State Total assets 1 Merrill Lynch Bank USA UT $60,367.7 2 UBS Bank USA UT 18,585.8 3 American Express Centurion Bank UT 15,933.0 4 Fremont Investment & Loan CA 11,316.4 5 Morgan Stanley Bank UT 8,674.9 6 USAA Savings Bank NV 7,099.6 7 GMAC Commercial Mortgage Bank UT 4,872.5 8 GMAC Automotive Bank UT 2,429.5 9 Beal Savings Bank NV 2,420.2 10 Lehman Brothers Commercial Bank UT 2,127.2

Source: Federal Deposit Insurance Corporation.

120 The Financial Services Fact Book 2007 www.financialservicesfacts.org Chapter 7: Securities

overview

OVERVIEW The securities industry consists of securities brokers and dealers, investment banks and advisers, and stock exchanges. Together, these entities facilitate the flow of funds from investors to companies and institutions seeking to finance expansions or other projects. Firms that make up the securities sector may specialize in one segment of the business or engage in a wide range of activities that includes brokerage, asset management and advisory services, as well as investment banking. As part of their asset management activities, some firms sell their own and others’ annuities. Investment banking involves the underwriting of new debt securities (bonds) and equity securities (stocks) issued by private or government entities to finance new projects. Investment banks buy the new issues and, acting essentially as wholesalers, sell them, primarily to institutional investors such as banks, mutual funds and pension funds. Investment banks may also be called securities dealers or broker/dealers because many also participate in the financial market as retailers, selling to individual investors. The primary difference between a broker and dealer is that dealers buy and sell securities for their own account, whereas brokers act as intermediaries for investors who wish to buy and sell securities. Dealers make money by selling at a slightly higher price than they paid. Like underwriters and wholesalers, they face the risk that the securities in their inventory will drop in price before they can resell them.

REGULATION Securities and Exchange Commission: The Securities and Exchange Commission (SEC), established by Congress in 1934, regulates the U.S. securities markets. Its mission is to protect investors and maintain the markets’ integrity by enacting new regulations and interpreting and enforcing existing laws. A component of the Securities Act of 1933 is the requirement that publicly held companies disclose their financial information to provide transparency, ensuring that potential investors have access to key information needed for investment decisions. The Sarbanes- Oxley Act enacted in 2002 further increases the accountability of the boards of publicly held companies to their shareholders. NASD: Originally known as the National Association of Securities Dealers, NASD is a self-regulatory body created by amendments to the Securities Exchange Act of 1934. The organization serves as the primary private-sector regulator of America’s securities industry. Nearly all brokerage firms doing business in the United States are required by law to be members.

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MERGERS AND ACQUISITIONS The value of the top 10 mergers and acquisitions deals in the securities industry grew by $9 billion in 2005, after falling by $6 billion in 2004.

TOP TEN SECURITIES AND INVESTMENT FIRMS MERGERS AND ACQUISITIONS, 20051 ($ millions) Rank Buyer Industry Target Industry Deal value2 Citigroup’s asset 1 Legg Mason Inc. Asset manager management business Asset manager $3,700.0 2 Ameritrade Holding Corp. Broker/dealer TD Waterhouse Group Inc. Broker/dealer 2,734.5 3 Nasdaq Stock Market Inc. Broker/dealer Instinet Group Inc. Broker/dealer 1,878.0 4 E*TRADE Financial Corp. Broker/dealer BrownCo LLC Broker/dealer 1,600.0 5 Legg Mason Inc. Asset manager Permal Group Ltd. Asset manager 930.0 Corporate trust and 6 U.S. Bancorp Bank institutional custody business Trust company 800.0 7 E*TRADE Financial Corp. Broker/dealer Harrisdirect LLC Online broker 700.0 Houlihan Lokey Howard 8 ORIX Corp. Specialty lender & Zukin Inc. Broker/dealer 500.0 9 Merrill Lynch & Co. Inc. Broker/dealer DSP Merrill Lynch Broker/dealer 500.0 Thomas H. Lee 10 Partners LP Asset manager Cargill Investor Services Inc. Broker/dealer 400.0 1At least one of the companies involved is a U.S.-domiciled company. List does not include terminated deals. 2At announcement. Source: SNL Financial LC. MERGERS AND ACQUISITIONS OF U.S. SECURITIES FIRMS, 2001-20051

250 • Bank purchases 220 Bank buyer of securities firms 200 Total accounted for 170 34 percent of 150 146 131 134 securities industry 100 mergers and 64 63 acquisitions from 51 50 48 44 2001 to 2005.

(See also Chapter 4: 0 Convergence.) 2001 2002 2003 2004 2005

1Does not include terminated deals. Source: SNL Financial LC.

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OVERVIEW

PROFITABILITY

SECURITIES INDUSTRY PRETAX RETURN ON EQUITY, 1996-20051 (Percent)

35% • According to the 29.1% 30 27.9% Securities Industry 25.6% 26.5% 25 Association, the securities industry’s 20 19.1% 17.9% return on equity was 15 14.6% 10.0 percent in 2005. 12.2% 10.0% 10 8.0% 8.0% • Revenues of the U.S.

5 securities industry rose 42.8 percent from 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2004 to $228.8 billion 1New York Stock Exchange members doing public business, a proxy for the securities industry. in 2005, but they were Source: Securities Industry Association. 6.7 percent lower than the record high of $245.2 billion in 2000.

SECURITIES INDUSTRY PRETAX PROFITS, 1996-20051 ($ billions)

$25 • Pretax profits in 2005 $21.0 totaled $9.4 billion, 20 down 31.4 percent $16.3 $16.8 from $13.7 billion in 15 $13.7 $12.2 2004 and down $11.6 $11.3 $10.4 $9.8 $9.4 billion, or 55.2 percent, 10 $6.9 from the record $21

5 billion profits of 2000.

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1New York Stock Exchange members doing public business, a proxy for the securities industry. Source: Securities Industry Association.

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overview

BROKER/DEALERS The Securities Industry Association (SIA) groups broker/dealers into four categories. The first, and largest category, major firms, consists of national full line companies, which are full service broker/dealers with an extensive national and international branch network system. This category also includes large investment banks and the largest U.S. broker/dealer subsidiaries of global financial holding companies. The major firms provide a broad array of financial services and products to households and institutions. The second category is regional brokers. Operating on a somewhat smaller scale than the major firms, they offer a range of investment services based on their size and business specialty. Because of their regional expertise, these brokers participate in underwriting securities for businesses that are centered in their region. New York City (NYC) area regionals, the third category, are mostly broker/dealer subsidiaries of U.S. and foreign banks and securities organizations, excluding those that fall into other listed categories, and are generally institutionally oriented. The fourth category is discounters, broker/dealers primarily engaged in the discount brokerage business. Only a small percentage of the companies in these four categories are included in the “total firms” column of the chart below. “Total firms” consists of all New York Stock exchange broker/dealers doing public business. It is used by the SIA as a proxy for the total industry as it accounts for approximately 60 percent of revenues, capital and assets of all brokers/dealers in the U.S.

SECURITIES INDUSTRY PRETAX RETURN ON EQUITY BY FIRM CATEGORY, 1996-2005 (Percent) Year Major firms Regionals NYC area regionals Discounters Total firms1 1996 27.1% 40.2% 17.3% 42.6% 29.1% 1997 27.8 32.8 12.8 37.4 27.9 1998 21.1 13.7 -1.0 29.7 17.9 1999 30.3 21.2 4.7 46.3 25.6 2000 28.6 24.9 10.7 48.6 26.5 2001 16.4 9.5 4.1 2.5 12.2 2002 11.0 2.6 4.3 -0.9 8.0 2003 23.0 13.0 0.8 14.5 19.1 2004 16.6 12.9 2.3 4.2 14.6 2005 8.5 14.4 1.6 0.4 10.0 1New York Stock Exchange member firms doing public business, a proxy for the securities industry. Source: Securities Industry Association.

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SECURITIES INDUSTRY INCOME STATEMENT, 20051 ($ millions) Revenue Commissions $25,612 Trading gain (loss) 17,007 Investment account gain (loss) 1,559 Underwriting revenue 17,261 Margin interest 11,272 Mutual fund sale revenue 7,163 Fees, asset management 15,268 Research revenue 132 Commodities revenue 1,053 Other revenue related to the securities business 111,762 Other revenue 21,730 Total revenue 229,819

Expenses Total compensation $59,953 Registered representative compensation 23,156 Clerical employee compensation 34,308 Total floor costs 5,234 Communications expense 4,344 Data processing costs 2,725 Occupancy and equipment costs 5,087 Promotional costs 1,512 Interest expense 121,061 Losses from error accounts and bad debts 306 Regulatory fees and expenses 1,193 Nonrecurring charges 275 Other expenses 18,684 Total expenses 220,373 Pretax net income 9,446 1New York Stock Exchange member firms doing public business, a proxy for the securities industry. Source: Securities Industry Association.

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ASSETS AND LIABILITIES OF SECURITIES BROKER/DEALERS, 2001-2005 ($ billions, end of year) 2001 2002 2003 2004 2005

• Total assets of securities Total financial assets $1,465.6 $1,335.4 $1,613.0 $1,844.9 $2,144.1 broker/dealers increased Checkable deposits and currency 47.1 44.2 47.2 62.9 55.5 16.2 percent from $1.8 trillion in 2004 to $2.1 Credit market instruments 316.0 344.4 424.1 394.9 486.0 trillion in 2005. Open market paper 48.2 43.5 49.4 48.0 55.6 U.S. government securities 87.6 87.9 121.5 62.7 49.9 Treasury 9.8 -3.9 37.8 -44.6 -51.1 Agency- and GSE1- backed securities 77.8 91.8 83.7 107.3 101.0 Municipal securities 19.0 21.0 24.9 32.0 43.0 Corporate and foreign bonds 161.3 192.0 228.3 252.2 337.5 Corporate equities 85.1 74.9 100.5 129.1 150.0 Security credit 196.4 148.2 182.5 264.0 232.3 Miscellaneous assets 821.0 723.7 858.8 994.0 1,220.4 Total liabilities 1,440.8 1,315.2 1,583.6 1,812.6 2,108.5 Security repos2 (net) 353.2 344.2 477.9 527.1 736.0 Corporate bonds 42.3 40.6 47.0 62.2 62.4 Trade payables 39.2 37.4 28.2 36.0 43.0 Security credit 629.5 590.6 688.8 773.9 797.9 Customer credit balances 454.3 412.7 475.4 578.3 567.4 From banks 175.2 177.9 213.5 195.6 230.5 Taxes payable 1.9 1.3 1.8 2.2 1.9 Miscellaneous liabilities 374.6 301.0 340.0 411.1 467.3 Foreign direct investment in U.S. 72.2 77.9 81.0 84.4 86.5 Due to affiliates 598.6 621.6 678.5 731.4 835.0 Other -296.1 -398.5 -419.5 -404.6 -454.2 1Government-sponsored enterprise. 2Security repurchase agreements: short-term agreements to sell and repurchase government securities at a specified date and at a set price. Source: Board of Governors of the Federal Reserve System.

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overview retirement ASSETS

SECURITIES INDUSTRY EMPLOYMENT BY FUNCTION, 2001-2005 (000) 2001 2002 2003 2004 2005 Securities, commodity contracts, investments (total industry) 830.5 789.4 757.7 766.1 783.2 Securities and commodity contracts, brokerages and exchanges 576.9 528.3 493.3 492.7 499.6 Securities brokerage 355.1 321.1 294.2 292.2 295.4 Other financial investment activities 253.6 261.2 264.3 273.5 283.6 Miscellaneous intermediation 24.3 23.7 23.8 23.2 23.2 Portfolio management 97.1 97.9 98.9 105.3 113.1 Investment advice 79.1 89.0 93.7 100.0 108.5 All other financial investment activities 52.9 50.7 48.0 44.9 38.8

Source: U.S. Department of Labor, Bureau of Labor Statistics.

CONCENTRATION As in the banking and insurance sectors, the largest companies are increasing their share of total revenue and capital, reversing a trend in the 1990s when second-tier companies were gaining at the expense of the top 10.

SECURITIES INDUSTRY CONCENTRATION BY TOTAL REVENUE, 1995, 2000 AND 20051 (Percent)

80%

70 68.2% 1995

60 2000 51.2% 50.8% 50 2005 40

30 26.3% 24.0% 24.8% 23.0% 20 17.0% 14.8% 10

0 Top 10 Next 15 Rest of industry 1New York Stock Exchange member firms doing public business, a proxy for the securities industry. Source: Securities Industry Association.

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overview

SECURITIES INDUSTRY CONCENTRATION BY TOTAL CAPITAL, 1996-20051 (Percent) Capital Year Top 10 Next 15 Rest of industry ($ billions) 1996 58.5% 18.8% 22.7% $70.7 1997 55.5 21.5 23.0 92.5 1998 57.1 21.8 21.1 105.7 1999 56.6 22.7 20.7 121.5 2000 53.8 23.1 23.2 141.5 2001 56.3 22.3 21.4 148.8 2002 59.6 22.4 18.0 144.6 2003 62.1 20.8 17.2 156.6 2004 63.9 20.0 16.1 173.6 2005 63.6 20.9 15.5 189.6 1New York Stock Exchange member firms doing public business, a proxy for the securities industry. Source: Securities Industry Association.

TOP TEN U.S. SECURITIES FIRMS BY REVENUES, 2005 ($ millions) Rank Company Revenues 1 Morgan Stanley $52,498 2 Merrill Lynch 47,783 3 Goldman Sachs Group 43,391 4 Lehman Brothers Holdings 32,420 5 Bear Stearns 11,552 6 Charles Schwab 5,151 7 Franklin Resources 4,310 8 A.G. Edwards 2,612 9 ETrade Financial 2,551 10 Legg Mason 2,490

Source: Fortune.

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overview/capital markets

TOP TEN U.S. SECURITIES AND INVESTMENT COMPANIES BY ASSETS UNDER MANAGEMENT, 2005 ($ millions, as of March 31, 2006) Rank Company Assets 1 Legg Mason, Inc. $854,700 2 AllianceBernstein L.P. 625,158 3 Morgan Stanley 625,0001 4 Goldman Sachs Group, Inc. 593,0001 5 Merrill Lynch & Co., Inc. 589,000 6 Franklin Resources, Inc. 490,134 7 BlackRock, Inc. 464,070 8 T. Rowe Price Group, Inc. 293,700 9 Federated Investors, Inc. 210,517 10 Affiliated Managers Group, Inc. 202,261 1As of May 31, 2005. Source: SNL Financial LC.

CAPITAL MARKETS

INVESTMENT BANKING Investment banks underwrite securities for the business community and offer investment advice. The type of equity deals they bring to market reflects a variety of factors including investor sentiment, the economy and market cycles. Examples of how these market factors drive this segment of the securities business include the rise and retreat of technology stocks; the varying levels of initial public offerings, where new stock issues are first offered to the public; and fluctuations in merger and acquisition activity. The largest U.S. investment banks are located in New York City. They have branch networks, principally in money market centers such as Chicago and San Francisco. They participate in both national and international markets and serve mainly institutional investors.

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capital markets

CORPORATE UNDERWRITING, 2001-2005 ($ billions) Value of U.S. corporate underwritings Number of U.S. corporate underwritings Year Debt Equity Total Debt Equity Total 2001 $2,365.4 $169.7 $2,535.1 14,449 766 15,215 2002 2,427.2 154.0 2,581.1 9,841 731 10,572 2003 2,733.6 156.3 2,889.9 8,819 829 9,648 2004 2,656.2 202.7 2,859.0 7,857 1,056 8,913 2005 3,020.3 190.4 3,210.7 7,248 856 8,104

Source: Thompson Financial Securities Data; Securities Industry Association.

EQUITY AND DEBT OUTSTANDING, 1996-2005 ($ billions, end of year) Total U.S. government Year Corporate equities Corporate bonds securities Municipal bonds 1996 $10,279.6 $3,240.2 $6,390.9 $1,261.8 1997 13,292.8 3,559.0 6,627.6 1,318.7 1998 15,547.3 4,088.6 7,046.6 1,402.9 1999 19,522.8 4,409.0 7,568.7 1,457.2 2000 17,627.0 4,760.8 7,704.8 1,480.9 2001 15,310.6 5,332.3 8,341.8 1,603.7 2002 11,900.5 5,936.4 9,146.1 1,763.1 2003 15,618.5 6,713.7 1,0116.3 1,898.2 2004 17,389.3 7,386.6 10,596.3 2,031.3 2005 18,199.4 8,049.8 10,954.3 2,232.0

Source: Board of Governors of the Federal Reserve System.

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capital markets

MUNICIPAL BONDS Municipal bonds are debt obligations issued by state or local governments to raise funds for general government needs (general obligation bonds) or special projects (revenue bonds). The average daily trading volume almost doubled from $8.8 billion in 2000 to $16.9 billion in 2005 and reached $22.4 billion for the first half of 2006. The bonds play a significant role in investment portfolios because their yield is tax-free. The principal and interest on revenue bonds are paid out of the revenues of the local government operation that issued the bonds, e.g., the municipal transportation authority. General obligation bond principal and interest are backed by the “full faith and credit” of the local government and paid for out of the municipality’s general revenues. The principal and interest of many general obligation bonds are insured by companies that specialize in insuring municipal bonds. Municipal bonds are usually sold in blocks to securities dealers, who either submit competitive bids for the bonds or negotiate a sale price. Negotiation is the prevailing form when the issuer is new to the financial markets or when the issue is particularly complex. Negotiation enables the underwriting dealer to become familiar with the issuer and the bonds and to help the municipality structure a complex issue.

NUMBER AND VALUE OF LONG-TERM MUNICIPAL BOND UNDERWRITINGS, 1996-20051 ($ billions) General Revenue bonds obligation bonds Total municipal bonds Year Value Number Value Number Value Number • In 2005 the number 1996 $115.7 5,272 $64.5 5,538 $180.2 10,810 of municipal bond 1997 142.6 5,790 72.0 5,786 214.6 11,576 underwritings was 1998 187.0 7,150 92.8 7,251 279.8 14,401 up 5.0 percent from 2004. The value of 1999 149.2 6,342 69.8 5,914 219.0 12,256 underwriting rose by 2000 129.7 5,310 64.3 5,149 194.0 10,459 14.1 percent over the 2001 181.8 6,413 101.8 6,822 283.5 13,235 same period. 2002 230.0 6,475 125.4 7,498 355.4 13,973 2003 236.9 6,607 142.4 8,006 379.3 14,613 2004 227.1 5,881 129.2 7,190 356.3 13,071 2005 261.4 6,066 145.0 7,659 406.4 13,725 1Excludes taxable municipal bonds and bonds with maturities under 13 months. Source: Thompson Financial Securities Data; Securities Industry Association.

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capital markets

PRIVATE PLACEMENTS Private placement is the sale of stocks, bonds or other securites directly to an insitutional investor such as an insurance company. If the purchase is for investment purposes, as opposed to resale purposes, the transaction does not have to be registered with the Securities and Exchange Commission, as public offerings do.

PRIVATE PLACEMENTS, 2001-2005 ($ billions) Value of U.S. private placements Number of U.S. private placements Year Debt Equity Total Debt Equity Total 2001 $510.5 $80.6 $591.1 2,063 809 2,872 2002 307.1 40.5 347.5 1,779 568 2,347 2003 489.4 28.8 518.2 2,630 533 3,163 2004 515.9 29.6 545.5 2,719 552 3,271 2005 532.3 57.5 589.8 2,859 505 3,364

Source: Thompson Financial Securities Data; Securities Industry Association.

FOREIGN HOLDINGS OF U.S. SECURITIES, 1996-2005 ($ billions, end of year) Year Stocks Corporate bonds Treasuries1 Total 1996 $672.4 $433.2 $1,215.4 $2,321.0 1997 952.9 501.6 1,362.6 2,817.1 1998 1,250.3 607.8 1,394.0 3,252.1 1999 1,611.5 752.1 1,358.6 3,722.2 2000 1,643.2 920.6 1,462.8 4,026.6 2001 1,572.7 1,115.9 1,629.9 4,318.5 2002 1,335.8 1,267.0 1,933.5 4,536.3 2003 1,826.9 1,497.0 2,191.7 5,515.6 2004 2,070.7 1,751.3 2,661.8 6,483.8 2005 2,303.7 2,102.5 3,131.9 7,538.1 1Includes agency issues. Source: Board of Governors of the Federal Reserve System.

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c apital markets/asset-backed securities

U.S. HOLDINGS OF FOREIGN SECURITIES, 1996-2005 ($ billions, end of year) Year Stocks Bonds Total 1996 $1,006.1 $481.4 $1,487.5 1997 1,207.8 543.4 1,751.2 1998 1,475.0 594.4 2,069.4 1999 2,003.7 548.2 2,551.9 2000 1,852.8 572.7 2,425.5 2001 1,612.7 557.1 2,169.8 2002 1,374.7 705.2 2,079.9 2003 2,079.4 874.4 2,953.8 2004 2,520.1 916.7 3,436.8 2005 2,966.0 933.6 3,899.6

Source: Board of Governors of the Federal Reserve System.

ASSET-BACKED SECURITIES Asset-backed securities (ABS) are bonds that represent pools of loans of similar types, dura- tion and interest rates. By selling their loans to ABS packagers, the original lenders recover cash quickly, enabling them to make more loans. The asset-backed securities market has grown as different types of loans are securitized and sold in the investment markets. Asset- backed securities may be insured by bond insurers.

ASSET-BACKED SECURITIES OUTSTANDING, 2005 ($ billions) Amount outstanding Percent of total • Home equity loans Home equity $551.1 28.2% accounted for 28.2 Credit card 356.7 18.2 percent of asset-backed CBO/CDO1 289.5 14.8 securities outstanding in 2005, up from 24.8 Automobile 219.7 11.2 percent in 2004 and Student loan 153.2 7.8 12.8 percent in 1996. Equipment leases 61.8 3.2 Manufactured housing 34.5 1.8 Other 288.7 14.8 Total 1,955.2 100.0 1Collateralized bond obligations/collateralized debt obligations. Source: The Bond Market Association.

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asset-backed securities

ASSET-BACKED SECURITY SOURCES, 2001 AND 2005

2001 2005

Trade receivables Business loans 3%

6% 1 Business loans Trade receivables Agency securities 3% 6% 3%

1 Agency securities Mortgages Consumer loans 11% 42% 20%

Mortgages 71% Consumer loans 35%

1Securities of federal mortgage pools backing privately issued collateralized mortgage obligations (CMOs). In CMOs, mortgage principal and interest payments are separated into different payment streams to create bonds that repay capital over differing periods of time. Source: Board of Governors of the Federal Reserve System.

ASSET-BACKED SECURITY SOURCES, 1996-2005 ($ billions, end of year) Agency Business Trade Year securities1 Mortgages Consumer loans loans receivables Total 1996 $114.8 $285.6 $272.1 $37.7 $60.1 $770.3 1997 92.1 349.4 317.4 62.1 81.0 901.9 1998 115.8 478.8 389.4 85.9 85.0 1,154.9 1999 154.1 552.3 448.4 82.6 67.2 1,304.6 2000 163.8 610.7 521.3 89.8 83.3 1,468.9 2001 182.8 711.9 599.7 108.3 96.5 1,699.2 2002 253.5 796.9 637.1 105.0 89.6 1,882.1 2003 322.6 967.1 611.0 103.9 83.2 2,087.8 2004 211.9 1,427.6 585.5 105.3 83.4 2,413.7 2005 105.2 2,144.4 618.2 86.6 104.7 3,059.1 1Securities of federal mortgage pools backing privately issued collateralized mortgage obligations (CMOs). In CMOs, mortgage principal and interest payments are separated into different payment streams to create bonds that repay capital over differing periods of time. Source: Board of Governors of the Federal Reserve System.

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derivatives

DERIVATIVES Financial derivatives are contracts that derive their value from the performance of an underlying financial asset, such as publicly traded securities and foreign currencies. They are used as hedging instruments to protect against changes in asset value. There are many kinds of derivatives including futures, options and swaps. Futures and options contracts are traded on the floors of exchanges. Swaps are over-the-counter, privately negotiated agreements between two parties. The number of futures contracts traded on U.S. exchanges more than tripled between 2000 and 2005, from 492 million in 2000 to 1.7 billion in 2005. Credit derivatives are contracts that lenders, large bondholders and others can purchase to protect against the borrower defaulting on bonds. Credit derivative products can take many forms, such as credit default options, credit limited notes and total return swaps. Large banks use credit derivatives to manage their credit risk. According to the International Swaps and Derivatives Association, credit default swaps doubled from $8.4 trillion at the end of 2004 to $17.1 trillion at the end of 2005. Bond insurers write coverage for credit default swaps.

NUMBER OF FUTURES CONTRACTS TRADED ON U.S. EXCHANGES, 1996-2005 (millions) Non- Interest Agricultural Energy Foreign Equity Precious precious Year rate commodities products currency indices metals metals Other Total 1996 212.5 74.9 47.2 22.6 22.2 14.9 2.3 0.8 397.4 1997 244.6 74.9 52.9 26.6 25.8 15.4 2.4 1.1 443.7 1998 279.2 73.3 63.8 27.0 42.4 13.8 2.5 1.2 503.2 1999 240.7 73.0 75.1 23.7 46.7 14.5 2.9 1.3 477.9 2000 248.7 73.2 73.1 19.4 62.8 10.2 2.8 1.3 491.5 2001 342.2 72.3 72.5 21.7 107.2 9.6 2.9 0.7 629.2 2002 418.8 79.2 92.1 23.5 221.5 12.4 2.9 1.0 851.3 2003 509.6 87.9 91.9 33.6 296.7 16.9 3.2 3.1 1,043.0 2004 704.2 101.8 109.5 51.1 330.0 21.3 3.3 2.9 1,324.0 2005 870.5 116.4 140.5 84.8 406.8 23.4 4.0 6.5 1,652.9

Source: Futures Industry Association; Securities Industry Association.

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derivatives

NUMBER OF OPTIONS CONTRACTS TRADED ON U.S. EXCHANGES, 1996-2005 (millions) Stock Foreign Interest Year Equity index currency rate Futures Total • The number of options 1996 198.6 92.4 3.2 0.1 102.0 396.2 contracts traded 1997 269.6 78.2 2.6 0.1 111.1 461.5 on U.S. exchanges increased by 27.3 1998 325.8 74.8 1.8 0.1 127.5 530.0 percent from 2004 to 1999 444.8 62.3 0.8 1 115.0 622.9 2005, compared with 2000 665.3 53.3 0.5 1 103.1 822.2 an increase of 30.3 2001 701.1 79.6 0.6 1 168.2 949.4 percent in 2004 and 1 13.7 percent in 2003. 2002 679.4 100.6 0.4 213.1 993.6 2003 789.2 118.3 0.3 0.1 221.7 1,129.5 2004 1,032.4 149.3 0.2 0.1 289.2 1,471.2 2005 1,292.2 211.8 0.2 0.1 368.0 1,872.2 1Fewer than 50,000 interest rate contracts traded. Source: Options Clearing Corporation; Futures Industry Association; Securities Industry Association.

GLOBAL DERIVATIVES MARKET, 1996-20051 ($ billions, end of year) Year Exchange-traded Over-the-counter (OTC) Total 1996 $9,880 $25,453 $35,333 1997 12,202 29,035 41,237 1998 13,932 80,318 94,250 1999 13,553 88,202 101,755 2000 14,278 95,199 109,477 2001 23,764 111,178 134,942 2002 23,816 141,665 165,481 2003 36,740 197,167 233,907 2004 46,592 251,499 298,091 2005 57,816 284,819 342,635 1Notional principal value outstanding. Data after 1998 not strictly comparable to prior years. Source: Bank for International Settlements.

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securities securities

exchanges

EXCHANGES Exchanges are markets where sales of securities and commodities are transacted. Most stock exchanges are auction markets where stocks are traded through competitive bidding in a central location. The oldest stock exchanges in the United States are the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX). There are also seven regional exchanges and others that specialize in commodities and derivatives. The Chicago Mercantile Exchange and the Chicago Board of Trade, for example, are markets where both futures and options on financial and agricultural products are traded. Stocks are also traded in dealer markets. Most transactions in a dealer market are between principals acting as dealers for their own accounts rather than between brokers acting as agents for buyers and sellers. One example is the NASDAQ, the first electronic stock market, introduced in 1971 by NASD, an industry self-regulatory organization originally known as the National Association of Securities Dealers. NASDAQ was spun off in a series of transactions in 2000 and 2001. NASDAQ’s dealer markets have come to more closely resemble auction markets. As with auction markets, companies must meet size and earnings requirements to trade on NASDAQ. Over-the-counter (OTC) stocks are another segment of the securities market. Securities transactions are conducted through a telephone and computer network connecting dealers, rather than on the floor of an exchange. OTC stocks, which number around 3,000, are traditionally those of smaller companies that do not meet the listing requirements of NYSE, AMEX or NASDAQ. OTC trading rules are written and enforced by NASD. The Dow Jones Industrial Average, a price-weighted average of a collection of industrial stocks, was introduced in 1896 and is still widely used as an indicator of stock prices today.

EXCHANGE LISTED COMPANIES, 1996-2005 Year NASDAQ NYSE AMEX 1996 5,556 2,907 751 1997 5,487 3,047 771 1998 5,068 3,114 770 1999 4,829 3,025 769 2000 4,734 2,862 765 2001 4,109 2,798 691 2002 3,663 2,783 698 2003 3,333 2,755 700 2004 3,271 2,768 725 2005 3,208 2,767 812

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exchanges

The volume of shares traded on the New York Stock Exchange in 2005 reached a new record of 403.8 million shares, rising 10 percent from 2004. The average share price rose 11 percent.

EXCHANGE ACTIVITIES, 1996-2005 NYSE AMEX NASDAQ Reported Value of Share Value of Share Value of share volume shares traded volume shares traded volume shares traded Year (millions) ($ millions) (millions) ($ millions) (millions) ($ millions) 1996 104,636 $4,063,655 5,628 $91,330 138,112 $3,301,777 1997 133,312 5,777,602 6,170 143,230 163,882 4,481,691 1998 169,745 7,317,949 7,280 287,929 202,040 5,758,558 1999 203,851 8,945,205 8,231 477,822 272,605 11,013,192 2000 262,478 11,060,046 13,318 945,391 442,753 20,395,335 2001 307,509 10,489,323 16,317 817,042 471,217 10,934,572 2002 363,136 10,311,156 16,063 642,183 441,706 7,254,595 2003 352,398 9,692,316 16,919 563,438 424,745 7,057,440 2004 367,098 11,618,151 16,636 590,652 453,930 8,727,498 2005 403,764 14,125,304 16,013 608,093 448,175 9,965,442

Source: New York Stock Exchange, Inc.; American Stock Exchange LLC; The Nasdaq Stock Market, Inc.; Securities Industry Association.

STOCK MARKET PERFORMANCE INDICES, 1996-2005 (End of year) Year DJIA1 S&P 500 NYSE Composite AMEX Composite NASDAQ Composite 1996 6,448.27 740.74 4,148.07 572.34 1,291.03 1997 7,908.25 970.43 5,405.19 684.61 1,570.35 1998 9,181.43 1,229.23 6,299.93 688.99 2,192.69 1999 11,497.12 1,469.25 6,876.10 876.97 4,069.31 2000 10,786.85 1,320.28 6,945.57 897.75 2,470.52 2001 10,021.50 1,148.08 6,236.39 847.61 1,950.40 2002 8,341.63 879.82 5,000.00 824.38 1,335.51 2003 10,453.92 1,111.92 6,440.30 1,173.55 2,003.37 2004 10,783.01 1,211.92 7,250.06 1,434.34 2,175.44 2005 10,717.50 1,248.29 7,753.95 1,759.08 2,205.32 1Dow Jones Industrial Average. Source: Securities Industry Association.

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mutual funds

MUTUAL FUNDS A mutual fund is a pool of assets that is managed by professional investment managers. Embraced as an investment vehicle by those who do not want to actively manage their investment accounts but who believe they can earn higher returns in the securities markets than through traditional savings bank products, mutual funds have experienced tremendous growth over the past two decades. In 1940 there were only 68 funds and about 300,000 shareholder accounts. By 1980 there were 564 funds and 12 million accounts. From 1985 to 1990, by most measures, the industry doubled in size. According to data from the Investment Company Institute, the trade association for the mutual fund industry, nearly half of all American households owned mutual funds in 2005. Mutual funds are regulated by the Investment Company Act of 1940, which defines, among other things, the responsibilities of mutual fund companies to the public and requirements regarding financial reporting, governance and fiduciary duties. Mutual fund managers have a substantial presence in the securities markets as they trade and manage the securities within the funds they oversee.

MUTUAL FUND INDUSTRY NET ASSETS, NUMBER OF FUNDS AND SHAREHOLDER ACCOUNTS, 1985-2005 Number of Total net assets shareholder accounts Year ($ billions) Number of funds (000) • At year-end 2005 mutual 1985 $495.39 1,528 34,098 funds accounted for 1990 1,065.19 3,079 61,948 24 percent of the U.S. 1995 2,811.29 5,725 131,219 retirement market, or $3.4 trillion. This amount 2000 6,964.63 8,155 244,705 represented about 40 2001 6,974.91 8,305 248,701 percent of all mutual fund 2002 6,390.36 8,244 251,125 assets.

2003 7,414.40 8,126 260,701 • Mutual funds own 23 2004 8,106.94 8,041 269,479 percent of all U.S. 2005 8,905.17 7,977 277,713 corporate equity.

Source: Investment Company Institute.

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securities securities

mutual funds

MUTUAL FUND INDUSTRY NET ASSETS BY TYPE OF FUND, 1985-2005 ($ billions, end of year) Tax-exempt Taxable money money Year Equity funds Hybrid funds Bond funds market funds market funds Total 1985 $111.3 $17.6 $122.6 $207.5 $36.3 $495.4 1990 239.5 36.1 291.3 414.7 83.6 1,065.2 1995 1,249.1 210.3 598.9 630.0 123.0 2,811.3 2000 3,961.9 346.3 811.2 1,607.2 238.0 6,964.7 2001 3,418.2 346.3 925.1 2,012.9 272.4 6,974.9 2002 2,662.5 325.5 1,130.5 1,997.2 274.8 6,390.4 2003 3,684.2 430.5 1,247.8 1,763.6 288.4 7,414.4 2004 4,384.1 519.3 1,290.4 1,602.9 310.4 8,107.0 2005 4,940.0 567.3 1,357.3 1,706.5 334.0 8,905.2

Source: Investment Company Institute.

NUMBER OF MUTUAL FUNDS BY TYPE, 1985-2005 Tax-exempt Taxable money money Year Equity funds Hybrid funds Bond funds market funds market funds Total 1985 562 103 403 348 112 1,528 1990 1,099 193 1,046 506 235 3,079 1995 2,139 412 2,177 674 323 5,725 2000 4,385 523 2,208 703 336 8,155 2001 4,716 483 2,091 689 326 8,305 2002 4,747 473 2,035 679 310 8,244 2003 4,599 508 2,045 662 312 8,126

2004 4,547 510 2,041 639 304 8,041 2005 4,586 505 2,015 595 276 7,977

Source: Investment Company Institute.

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mutual funds

MUTUAL FUND INDUSTRY NET ASSETS NUMBER OF MUTUAL FUNDS BY TYPE OF FUND, 2005 BY TYPE, 2005

Equity funds Equity funds 58% 56% Tax-exempt money Tax-exempt money market funds market funds 4% 3% Hybrid funds Hybrid funds 6% 6%

Bond funds Taxable money 15% market funds 8% Taxable money Bond funds market funds 25% 19%

Source: Investment Company Institute.

TOP TEN MUTUAL FUND COMPANIES BY ASSETS, 20061 ($000) Rank Company Total net asssets 1 Fidelity Investments $1,076,150,618 2 Vanguard Group 966,552,831 3 Capital Research & Management 940,017,157 4 Franklin Templeton Investments 295,371,716 5 Columbia Management Group 219,084,255 6 J.P. Morgan Chase & Co. 215,708,274 7 Morgan Stanley 209,578,825 8 OppenheimerFunds/MassMutual 204,595,868 9 TIAA-CREF 193,976,639 10 Federated Investors 190,607,755 1As of June 30, 2006. Includes members of Investment Company Institute only. Source: Investment Company Institute.

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securities

hedge funds/separately managed accounts

HEDGE FUNDS Hedge funds are private investment pools subject to the terms of investment agreements between the sponsors of, and investors in, the hedge fund. While mutual funds typically have a minimum opening investment of about $1,000, hedge fund investors are often required to have a minimum investment of $1 million.

ASSETS OF HEDGE FUNDS, 1950-20061 $1,120.0 ($ billions) $1,200 $1,009.0

1,000

800 $592.0

600 $408.0

400 $221.0 $130.0 $76.0 200 $50.0 $0.1 $3.0 $20.0 0

7 4 7 8 9 0 1 2 3 4 5 6 60 74 9 9 0 0 0 0 993 995 99 00 00 00 1950 19 1971 19 198 1992 1 199 1 1996 1 19 19 2 20 2 20 2 20 20 1All data are for January. Source: Hennessee Group LLC.

SEPARATELY MANAGED ACCOUNTS Separately managed accounts (SMAs) are professionally managed portfolios of individual securities that can be tailored to investors’ needs. According to the Money Management Institute, SMA assets under management increased 17.5 percent in 2005 to $678.1 billion.

separately managed accounts INDUSTRY ASSETS UNDER MANAGEMENT, 2001-2005 ($ billions)

$700 $678

600 $575 $497 500 $400 $399 400

300

200

100

0 2001 2002 2003 2004 2005

Source: Money Management Institute, Dover Financial Research.

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overview

OVERVIEW Finance companies, which supply credit to businesses and consumers, are often categorized as nondepository institutions, along with mortgage bankers and brokers, because they make loans without taking in deposits. They acquire funds to make these loans largely by issuing commercial paper and bonds, and securitizing their loans. As financial intermediaries, finance companies compete with banks, savings institutions and credit unions. In terms of assets, the sector is twice as large as the credit union sector, about the same size as thrifts and one-fifth as large as commercial banks. Accounts receivable—the amount of money that is owed to a business—rather than assets or revenues, determine a company’s standing within the industry. Finance companies are diverse. Captive finance companies—which are generally affiliated with motor vehicle or appliance manufacturers—finance dealer inventories and consumer purchases of their products, sometimes at below-market rates. Consumer finance companies make loans to consumers who want to finance purchases of large household items such as furniture, make home improvements or refinance small debts. Business finance companies offer commercial credit, making loans secured by the assets of the business to wholesalers and manufacturers and purchasing accounts receivable at a discount. Increasingly, finance companies are participating in the real estate market but, according to the Federal Reserve, despite their expansion in this area, they still account for a very small share of the total. They also offer credit cards and engage in motor vehicle, aircraft and equipment leasing.

TOP TEN SPECIALTY LENDER MERGERS AND ACQUISITIONS, 20051 ($ millions) Rank Buyer Buyer’s industry Target Deal value2 1 Bank of America Corp. Bank MBNA Corp. $35,707.5 2 Washington Mutual Inc. Thrift Providian Financial Corp. 6,854.8 3 Pacific Mutual Holding Co. Insurance Boullioun Aviation Services Inc. 2,650.0 4 Nelnet Inc. Specialty lender Assets of Chela 2,409.0 5 Morgan Stanley Broker/dealer Goldfish credit card business 1,773.1 6 HSBC Holdings plc Bank Metris Companies Inc. 1,542.6 7 General Electric Co. Not classified Inventory finance business 1,400.0 8 Private equity consortium Not classified GMAC Commercial Holding Corp. 1,300.0 9 JPMorgan Chase & Co. Bank Collegiate Funding Services Inc. 683.7 10 General Electric Company Not classified Belk credit card operations 500.0 1At least one of the companies involved is a U.S.-domiciled company. List does not include terminated deals. 2At announcement. Source: SNL Financial LC.

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finance Companies finance companies

Overview

FINANCE COMPANY EMPLOYMENT, 2001-2005 (000) 2001 2002 2003 2004 2005 Nondepository credit intermediation 660.7 694.9 749.9 756.9 766.1 Credit card issuing 144.4 133.8 132.5 125.2 121.4 Sales financing 113.2 109.0 107.7 107.3 104.4 Other nondepository credit intermediation 403.1 452.1 509.8 524.5 540.4 Consumer lending 94.3 99.0 103.4 105.4 111.4 Real estate credit 231.2 277.0 330.7 341.0 349.9 Miscellaneous nondepository credit intermediation 77.6 76.2 75.7 78.1 79.1

Source: U.S. Department of Labor, Bureau of Labor Statistics.

NONDEPOSITORY CREDIT INTERMEDIATION INDUSTRY, 1997 AND 20021 1997 2002 Establishments2 Annual payroll Establishments2 Annual payroll (number) ($000) (number) ($000) Nondepository credit intermediation 47,556 $22,660,754 48,660 $36,271,640 Credit card issuing 588 1,782,651 673 2,287,469

Sales financing 8,143 6,163,041 7,008 8,961,052 Other nondepository credit intermediation 38,825 14,715,062 40,979 25,023,119 1As defined by the U.S. Census Bureau, includes firms primarily engaged in extending credit or lending funds raised by credit market borrowing. The group includes credit card issuing firms, sales financing firms, and establishments that make cash loans or extend credit through credit instruments other than credit cards and sales finance agreements. All data based on the 1997 North American Industrial Classification System (NAICS). 2An establishment is a single physical location at which business is conducted, as opposed to a firm or company, which may consist of one or more establishments under common control. Data in this chart may not be comparable to other Census Bureau data shown elsewhere in this chapter. Note: Latest data available. Based on surveys conducted every five years. Source: U.S. Department of Commerce, U.S. Census Bureau.

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assets and liabilities

ASSETS AND LIABILITIES OF FINANCE COMPANIES, 2001-20051 ($ billions, end of year) 2001 2002 2003 2004 2005 Total financial assets $1,158.9 $1,192.6 $1,384.8 $1,456.3 $1,334.6 Checkable deposits and currency 30.8 33.8 37.1 40.6 44.2 Credit market instruments 846.4 867.6 951.8 1,081.4 1,146.7 Other loans and advances 447.0 455.3 457.5 471.7 504.2 Mortgages 161.3 174.5 198.9 242.9 284.9 Consumer credit 238.1 237.8 295.4 366.8 357.7 Miscellaneous assets 281.8 291.3 395.9 334.3 143.6 Total liabilities 1,182.7 1,246.9 1,469.5 1,599.5 1,535.1 Credit market instruments 779.2 821.4 939.6 1,057.4 1,023.4 Open market paper 158.6 141.5 136.3 163.9 147.3 Corporate bonds 569.9 631.9 747.1 828.3 809.4 Other bank loans 50.8 48.0 56.2 65.2 66.7 Taxes payable 10.2 11.6 13.2 15.0 17.1 Miscellaneous liabilities 393.2 413.9 516.7 527.1 494.6

Foreign direct investment in U.S. 68.6 57.8 71.3 69.9 73.6 Investment by parent 99.2 88.2 99.9 118.2 126.9 Other 225.4 267.9 345.5 339.0 294.2 Consumer leases not included above2 103.5 83.3 70.0 62.5 70.6 1Includes retail captive finance companies. 2Receivables from operating leases, such as consumer automobile leases, are booked as current income when payments are received and are not included in financial assets (or household liabilities). The leased automobile is a tangible asset. Source: Board of Governors of the Federal Reserve System.

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profitability

BUSINESS AND CONSUMER FINANCE COMPANIES’ RETURN ON EQUITY, 2001-20051 Business finance companies Consumer finance companies return on average equity2 return on average equity3 Year Median Average Median Average 2001 9.18% 16.12% 21.71% 5.62% 2002 4.51 13.62 25.03 33.83 2003 7.58 3.03 20.96 28.65 2004 9.55 13.34 20.75 21.11 2005 9.39 7.14 19.40 19.97 1Net income as a percentage of average equity. 2Consists of 22 publicly traded commercial finance companies including niche, diversified commercial and equipment finance companies. Does not include goverment-sponsored enterprises (GSEs), finance REITs, mortgage or real estate companies. 3Consists of 27 publicly traded consumer finance companies including auto finance, credit card, niche and diversified consumer companies and pawn shops. Does not include GSEs, finance REITs, mortgage or real estate companies. Source: SNL Financial LC.

NONDEPOSITORY CREDIT INTERMEDIATION INDUSTRY REVENUES, 1997 AND 20021 ($000) 1997 2002 Nondepository credit intermediation $229,213,945 $384,011,947 Credit card issuing 24,503,307 34,505,552 Sales financing 78,133,239 121,489,478 Other nondepository credit intermediation 126,577,399 228,016,917 1As defined by the U.S. Census Bureau, includes firms primarily engaged in extending credit or lending funds raised by credit market borrowing. The group includes credit card issuing firms, sales financing firms, and establishments that make cash loans or extend credit through credit instruments other than credit cards and sales finance agreements. All data based on the 1997 North American Industrial Classification System (NAICS). Note: Latest data available. Based on surveys conducted every five years. Source: U.S. Department of Commerce, U.S. Census Bureau.

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finance Companies finance companies

receivables

TOTAL RECEIVABLES AT FINANCE COMPANIES, 2001-20051 ($ billions, end of year) 2001 2002 2003 2004 2005 Total $1,262.6 $1,286.4 $1,336.9 $1,417.0 $1,480.8 Consumer 527.6 532.7 554.3 578.4 585.3 Real estate 207.1 210.6 229.4 268.2 308.3 Business 527.9 543.0 553.1 570.4 587.3 1Includes finance company subsidiaries of bank holding companies but not of retailers and banks. Includes owned receivables (carried on the balance sheet of the institution) and managed receivables (outstanding balances of pools upon which securities have been issued; these balances are no longer carried on the balance sheets of the loan originator). Source: Board of Governors of the Federal Reserve System.

TOTAL RECEIVABLES AT FINANCE COMPANIES BY CATEGORY, 2001 AND 20051 2001 2005

Business Consumer Business Consumer 41.8% 41.8% 39.7% 39.5%

Real estate Real estate 16.4% 20.8%

1Includes finance company subsidiaries of bank holding companies but not of retailers and banks. Includes owned receivables (carried on the balance sheet of the institution) and managed receivables (outstanding balances of pools upon which securities have been issued; these balances are no longer carried on the balance sheets of the loan originator). Source: Board of Governors of the Federal Reserve System.

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receivables

BUSINESS RECEIVABLES AT FINANCE COMPANIES, 2001-2005 ($ billions, end of year) Percent of total 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 Total $527.9 $543.0 $553.1 $570.4 $587.3 100.0% 100.0% 100.0% 100.0% 100.0% Motor vehicles 54.0 60.7 74.9 91.6 113.8 10.2 11.2 13.5 16.1 19.4 Retail loans 16.1 15.4 18.2 18.4 19.2 3.0 2.8 3.3 3.2 3.3 Wholesale loans1 20.3 29.3 40.3 46.2 62.9 3.8 5.4 7.3 8.1 10.7 Leases 17.6 16.0 16.3 27.0 31.7 3.3 2.9 2.9 4.7 5.4 Equipment 289.4 292.1 277.6 264.8 271.4 54.8 53.8 50.2 46.4 46.2 Loans 77.8 83.3 74.6 70.6 72.5 14.7 15.3 13.5 12.4 12.3 Leases 211.6 208.8 203.1 194.3 198.9 40.1 38.5 36.7 34.1 33.9 Other business receivables2 103.5 102.5 105.0 115.3 118.7 19.6 18.9 19.0 20.2 20.2 Securitized assets3 81.0 87.8 95.6 98.6 83.4 15.3 16.2 17.3 17.3 14.2 Motor vehicles 50.1 50.2 48.4 44.8 28.8 9.5 9.2 8.8 7.9 4.9 Retail loans 5.1 2.4 2.2 2.2 2.7 1.0 0.4 0.4 0.4 0.5 Wholesale loans 42.5 45.9 44.2 40.6 26.0 8.1 8.5 8.0 7.1 4.4

Leases 2.5 1.9 2.1 2.0 0.1 0.5 0.3 0.4 0.4 0.0 Equipment 23.2 20.2 22.1 23.6 24.4 4.4 3.7 4.0 4.1 4.2 Loans 16.4 13.0 12.5 11.5 11.6 3.1 2.4 2.3 2.0 2.0 Leases 6.8 7.2 9.6 12.1 12.8 1.3 1.3 1.7 2.1 2.2 Other business receivables2 7.7 17.4 25.1 30.2 30.2 1.5 3.2 4.5 5.3 5.1 1Credit arising from transactions between manufacturers and dealers, also known as floor plan financing. 2Includes loans on commercial accounts receivable, factored commercial accounts, and receivable dealer capital; small loans used primarily for business or farm purposes; and wholesale and lease paper for mobile homes, recreation vehicles and travel trailers. 3Outstanding balances of pools upon which securities have been issued; these balances are no longer carried on the balance sheets of the loan originator. Source: Board of Governors of the Federal Reserve System.

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receivables

CONSUMER RECEIVABLES AT FINANCE COMPANIES, 2001-2005 ($ billions, end of year) 2001 2002 2003 2004 2005 Total consumer $527.6 $532.7 $554.3 $578.4 $585.3 Motor vehicle loans 173.9 160.2 197.0 230.0 194.6 Motor vehicle leases 103.5 83.3 70.0 62.5 71.2 Revolving1 31.5 38.9 37.6 40.5 54.2 Other2 32.7 38.7 60.9 96.3 114.4 Securitized assets3 185.9 211.5 188.8 149.0 150.9 Motor vehicle loans 131.9 151.9 132.8 109.9 123.7 Motor vehicle leases 6.8 5.7 5.5 4.8 4.2 Revolving 32.9 39.9 38.3 24.5 15.1 Other 14.3 14.0 12.2 9.8 7.9 1Excludes revolving credit reported as held by depository institutions that are subsidiaries of finance companies. 2Includes student loans, personal cash loans, mobile home loans and loans to purchase other types of consumer goods such as appliances, apparel, boats and recreation vehicles. 3Outstanding balances of pools upon which securities have been issued; these balances are no longer carried on the balance sheets of the loan originator. Source: Board of Governors of the Federal Reserve System.

REAL ESTATE RECEIVABLES AT FINANCE COMPANIES, 2001-2005 ($ billions, end of year) 2001 2002 2003 2004 2005 Total real estate $207.1 $210.6 $229.4 $268.2 $308.3 One- to four-family 120.1 135.0 152.2 190.1 232.3 Other 41.2 39.5 46.7 52.7 52.4 Securitized real estate assets1 45.8 36.2 30.5 25.3 23.7 One- to four-family 40.1 33.0 26.7 21.8 18.9 Other 5.7 3.2 3.8 3.5 4.8 1Outstanding balances of pools upon which securities have been issued; these balances are no longer carried on the balance sheets of the loan originator. Source: Board of Governors of the Federal Reserve System.

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concentration

NONDEPOSITORY CREDIT INTERMEDIATION INDUSTRY: CONCENTRATION BY LARGEST FIRMS, 1997 AND 20021 Revenues Number of Amount establishments2 ($000) As a percent of total 1997 2002 1997 2002 1997 2002 All firms 47,556 48,696 $229,213,945 $403,912,619 100.0% 100.0% 4 largest firms 2,569 3,280 71,574,042 166,726,453 31.2 41.3 8 largest firms 3,820 7,511 98,222,537 206,873,695 42.9 51.2 20 largest firms 7,971 10,706 130,024,484 263,953,166 56.7 65.3 50 largest firms 14,301 14,490 160,501,398 315,239,859 70.0 78.0 1As defined by the U.S. Census Bureau, includes firms primarily engaged in extending credit or lending funds raised by credit market borrowing. The group includes credit card issuing firms, sales financing firms, and establishments that make cash loans or extend credit through credit instruments other than credit cards and sales finance agreements. Data for 1997 based on 1997 North American Industrial Classification System (NAICS). Data for 2002 based on 2002 NAICS. 2An establishment is a single physical location at which business is conducted, as opposed to a firm or company, which may consist of one or more establishments under common control. Data in this chart may not be comparable to other Census Bureau data shown elsewhere in this chapter. Note: Latest data available. Based on surveys conducted every five years. Source: U.S. Department of Commerce, U.S. Census Bureau.

NONDEPOSITORY CREDIT INTERMEDIATION INDUSTRY: CONCENTRATION BY LARGEST FIRMS BY SECTOR, 1997 AND 20021 ($ billions) Revenues of top 50 firms as a percent of total 1997 2002 Nondepository credit intermediation industry 70.0% 78.0% Credit card issuing 99.4 99.8 Sales financing 79.8 88.8 Other nondepository credit intermediation 72.2 80.3 1As defined by the U.S. Census Bureau, includes firms primarily engaged in extending credit or lending funds raised by credit market borrowing. The group includes credit card issuing firms, sales financing firms, and establishments that make cash loans or extend credit through credit instruments other than credit cards and sales finance agreements. Note: Latest data available. Based on surveys conducted every five years. Source: U.S. Department of Commerce, U.S. Census Bureau.

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leading companies

TOP TEN U.S. CONSUMER AND COMMERCIAL FINANCE COMPANIES, 20051 ($ millions) Rank Company Total managed receivables2 1 General Electric Capital Services Inc. $333,780.0 2 Citigroup Inc. (credit card) 164,205.0 3 General Motors Acceptance Corporation 154,764.0 4 Ford Motor Credit Company 153,000.0 5 JPMorgan Chase & Co. (credit card) 144,835.0 6 SLM Corporation 124,024.0 7 Capital One Financial Corp. 92,922.7 8 American Express Company 88,500.0 9 HSBC Finance Corporation 62,973.0 10 Bank of America (credit card) 61,178.6 1Ranked by total nonmortgage managed receivables. Excludes mortgage and real estate companies. 2On-balance sheet nonmortgage receivables and loans sold that are still serviced and managed. Source: SNL Financial LC.

TOP TEN U.S. CONSUMER FINANCE COMPANIES, 20051 ($ millions) Rank Company Total managed receivables2 1 Citigroup Inc. (credit card) $164,205.0 2 JPMorgan Chase & Co. (credit card) 144,835.0 3 Ford Motor Credit Company 130,787.0 4 SLM Corporation 122,870.0 5 General Motors Acceptance Corporation 108,408.0 6 Capital One Financial Corp. 92,922.7 7 American Express Company 88,500.0 8 General Electric Capital Services Inc. 83,901.03 9 Bank of America (credit card) 61,178.6 10 HSBC Finance Corporation 60,953.0 1Ranked by total nonmortgage managed receivables. Excludes mortgage and real estate companies. 2On-balance sheet nonmortgage receivables and loans sold that are still serviced and managed. 3On-balance sheet receivables. Source: SNL Financial LC.

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leading companies

TOP TEN U.S. COMMERCIAL FINANCE COMPANIES, 20051 ($ millions) Rank Company Total managed receivables2 1 General Electric Capital Services Inc. $190,479.03 2 General Motors Acceptance Corporation 66,033.0 3 CIT Group Inc. 48,053.6 4 International Lease Finance Corporation 35,239.43 5 Caterpillar Financial Services Corporation 26,484.0 6 Ford Motor Credit Company 22,213.0 7 Bank of America Corporation (equipment) 17,474.03 8 John Deere Capital Corporation 14,664.5 9 Residential Capital Corporation 13,588.5 10 U.S. Bancorp (equipment) 12,436.03 1Ranked by total nonmortgage managed receivables. Excludes mortgage and real estate companies. 2On-balance sheet nonmortgage receivables and loans sold that are still serviced and managed. 3On-balance sheet receivables. Source: SNL Financial LC.

152 The Financial Services Fact Book 2007 www.financialservicesfacts.org Chapter 9: Mortgage Finance and Housing

mortgages

Mortgage financing has become an increasingly important element in the economy, involving a wide range of financial institutions from commercial banks, thrifts and credit unions to finance companies, life insurers and government-sponsored enterprises like Fannie Mae. In 2005 home mortgage debt outstanding amounted to $9.1 trillion, up from $5.6 trillion in 2001. Demographic factors such as the size of various age groups within the population and changes in disposable income, interest rates and the desirability of other investment options influence the residential mortgage market. The commercial market has expanded in response to business growth. Overall, the mortgage market grew 14.0 percent in 2005 from the previous year. In the home mortgage sector, the combined mortgage holdings of commercial banks and savings institutions rose 11.8 percent, the holdings of credit unions rose 15.2 percent, and those of finance companies rose 22.3 percent. The term mortgage origination refers to the original transaction, the point at which the homeowner purchases the mortgage, in person or online, from a financial services company such as a bank. Mortgages may be sold and packaged as securities, which frees up funds for the mortgage originator to make additional mortgages available. Mortgage-backed securities are sold by asset-backed securities (ABS) issuers. The sale transfers the risk of default from the originator to the ABS buyer. The bank that originates the mortgage does not always “service” the mortgage itself. It may sell the servicing of the mortgage, which includes collecting and processing monthly payments, to another company. The servicing business of many of the leading mortgage originators is much larger than their origination business.

TOTAL MORTGAGES OUTSTANDING, 2001-2005 ($ billions, end of year) 2001 2002 2003 2004 2005 Total mortgages $7,422.6 $8,244.4 $9,234.4 $10,472.4 $11,942.2 Home 5,571.3 6,244.2 7,024.1 8,016.2 9,149.0 Multifamily residential 447.8 486.7 557.3 612.2 674.5 Commercial 1,285.6 1,388.1 1,519.6 1,702.1 1,967.9 Farm 117.8 125.5 133.5 141.9 150.9

Source: Board of Governors of the Federal Reserve System.

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mortgages

HOME MORTGAGES BY HOLDER, 2001-20051 ($ billions, end of year) 2001 2002 2003 2004 2005 Total assets $5,571.3 $6,244.2 $7,024.1 $8,016.2 $9,149.0 Household sector 94.9 103.6 113.1 123.5 134.8 Nonfinancial corporate business 23.0 24.9 26.1 27.3 28.5 Nonfarm noncorporate business 9.9 9.6 9.6 11.2 13.1 State and local governments 66.4 63.7 67.7 71.1 73.9 Federal government 17.1 16.2 15.3 14.8 14.4 Commercial banking 1,023.9 1,222.2 1,347.0 1,568.0 1,776.5 Savings institutions 620.4 631.1 702.8 874.5 954.6 Credit unions 141.3 159.4 182.6 213.2 245.6 Life insurance companies 4.9 4.7 4.4 5.0 5.2 Private pension funds 4.6 2.8 1.7 1.4 1.4 State and local govt retirement funds 6.9 6.8 6.3 6.8 7.1 Government-sponsored enterprises 225.6 271.1 363.3 362.9 354.1 Federally related mortgage pools 2,748.5 3,063.7 3,366.9 3,416.5 3,546.8 ABS issuers 433.4 487.5 605.4 1,004.4 1,591.7

Finance companies 120.1 135.0 152.2 190.1 232.5 Mortgage companies2 21.8 21.8 21.8 21.8 21.8 REITs 8.7 20.1 37.8 103.7 147.1 Home equity loans included above3 514.0 580.3 681.7 884.0 1,048.7 Commercial banking 258.6 303.3 366.0 483.6 549.1 Savings institutions 77.9 78.5 95.6 121.2 151.6 Credit unions 44.9 48.1 51.8 64.0 76.3 ABS issuers 12.5 15.4 16.1 25.1 39.1 Finance companies 120.1 135.0 152.2 190.1 232.5 1Mortgages on 1 to 4 family properties. 2Not updated by the Federal Reserve System since 1997. 3Loans made under home equity lines of credit and home equity loans secured by junior liens. Excludes home equity loans held by mortgage companies and individuals. Source: Board of Governors of the Federal Reserve System.

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mortgages

One to Four FAMILY HOME MORTGAGE ORIGINATIONS, 2001-2005 ($ billions) Government- Adjustable rate • Adjustable rate mort- sponsored mortgage gages, loans in which the 1 Year Total volume enterprise share (ARM) share interest rate is adjusted 2001 $1,900 42% 12% periodically according 2002 2,696 45 17 to a pre-selected index, accounted for 31 percent 2003 3,629 52 19 of home mortgage origina- 2004 2,776 35 34 tions in 2005, up from 20052 2,747 34 31 12 percent in 2001. 1ARM share is percent of total volume of conventional purchase loans. 2Projected by Freddie Mac. • The share of government- sponsored enterprises Source: HUD Survey of Mortgage Lending Activity; Mortgage Bankers Association; Federal Housing Finance Board; Freddie Mac. dropped from 42 percent to 34 percent during the same period.

MORTGAGE STATUS AND REFINANCING ACTIVITY OF HOMEOWNERS, 2005 Owner occupied housing units Homeowners with mortgages Mortgages currently on property None, owned free and clear1 24,776,000 Regular and/or home equity mortgage2 48,394,000 Regular mortgage 44,652,000 Home equity lump sum mortgage 4,385,000 Home equity line of credit 10,044,000 Line of credit not reported, no regular or lump sum 1,694,000 Refinancers Units with a refinanced primary mortgage 17,685,000 Primary reason: to receive cash 2,375,000 1Free of regular mortgages, which include all mortgages not classified as home equity or reverse. 2Figures may not add to total because more than one category may apply to a unit. Note: Latest data available. Based on surveys conducted every two years.

Source: U.S. Department of Commerce, U.S. Census Bureau; U.S. Department of Housing and Urban Development, Office of Policy Development and Research.

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mortgages

REVERSE MORTGAGES Reverse mortgages are special mortgages that allow homeowners over age 61 to sell their homes to a bank in exchange for monthly payments, a lump sum or a line of credit. The Home Equity Conversion Mortgage (HECM) is the federally insured reverse mortgage product. It is insured by the Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development. In 2005 HECMs accounted for about 90 percent of all reverse mortgages.

REVERSE MORTGAGES: ANNUAL ORIGINATION VOLUME FOR HOME EQUITY CONVERSION MORTGAGES (HECMs), FISCAL YEAR 2001-2005

50,000 43,131 40,000 37,829

30,000

20,000 18,097 13,049 10,000 7,781

0 2001 2002 20031 2004 2005

1The U.S. Department of Housing and Urban Development ran out of insurance authority and could not insure additional HECMs during the last two weeks of September 2003 (the last month in FY 2003). Source: National Reverse Mortgage Lenders Association.

INTEREST-ONLY MORTGAGES In interest-only mortgage arrangements, the borrower pays only the interest on the capital for a set term. After the end of that term, usually five to seven years, the borrower either refinances, pays the balance in a lump sum or starts paying off the principal, in which case the monthly payments rise. The vast majority of interest-only mortgages are adjustable rate mortgages (ARMs), according to First American LoanPerformance. ARMs, in which the interest rates fluctuate with changes in a market index such as the Treasury Bill rate, accounted for 31 percent of home mortgages in 2005, according to the Federal Home Loan Board. Another mortgage innovation, the payment option loan, lets the borrower make minimum payments that are lower than the interest due on the loan and roll the balance into the amount owed. Payment option loans accounted for nearly 10 percent of mortgage originations in 2005.

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mortgage finance and housing mortgage finance and housing

mortgages

INTEREST-ONLY MORTGAGES AS A PERCENT OF ALL MORTGAGE ORIGINATIONS, 2001-2005 (Percent) • Interest-only Year Purchase Refinance Total mortgages accounted for 37 percent of 2001 1.6% 1.6% 1.6% adjustable rate 2002 6.0 6.5 6.3 mortgages (ARMs) in 2003 13.4 8.8 10.4 2005, according to 2004 30.9 16.6 22.9 the Federal Housing Finance Board. 2005 32.6 20.4 26.2

Source: First American LoanPerformance.

CASH OUT HOME MORTGAGE REFINANCING, 1996-20051 ($ billions)

$250 $244

200

150 $147 $142

$111 100 $83

50 $40 $37 $26 $17 $21 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2

1Represents homeowners’ cash withdrawals from home mortgage refinance transactions. Includes prime conventional loans only and are net of retirement of outstanding second mortgages. 2Estimated. Source: Freddie Mac.

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mortgages

MORTGAGE DELINQUENCY AND FORECLOSURE RATES, 1980-2005 (Percent, annual average) Delinquency rates Foreclosure rates Conventional Conventional Year Total loans VA1 loans FHA2 loans Total loans VA1 loans FHA2 loans 1980 5.0% 3.1% 5.3% 6.5% 0.3% 0.1% 0.4% 0.5% 1985 5.8 4.0 6.6 7.4 0.8 0.5 0.9 1.0 1990 4.7 3.0 6.4 6.7 0.9 0.6 1.3 1.4 1995 4.3 2.8 6.5 7.6 0.9 0.6 1.3 1.4 2000 4.4 2.9 6.9 9.1 1.1 0.8 1.4 1.8 2001 5.1 3.6 7.7 10.8 1.3 1.1 1.2 1.9 2002 5.1 3.6 7.9 11.5 1.5 1.2 1.5 2.5 2003 4.7 3.4 7.9 12.2 1.3 1.1 1.6 2.8 2004 4.5 NA 7.3 12.2 1.2 NA 1.5 2.7 2005 4.4 NA 7.0 12.5 1.0 NA 1.2 2.4 1Veterans Affairs. 2Federal Housing Administration. NA=Data not available. Source: Mortgage Bankers Association of America.

GOVERNMENT-SPONSORED ENTERPRISES Government-sponsored enterprises (GSEs) are corporations created by Congress to assist groups of borrowers such as homeowners, mortgage lenders and farmers gain access to capital markets. Three GSEs—the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal Home Loan Bank (FHLB) system—stand behind more than $4 trillion worth of mortgages, or more than three-quarters of the single-family mortgages in the United States, according to a 2004 Federal Reserve Report. Fannie Mae, established in 1938 to increase the availability and affordability of home mortgages, purchases and sells conventional residential mortgages as well as those insured by the Federal Housing Administration. A similar organization, Freddie Mac, chartered in 1970 to increase the supply of funds that mortgage lenders make available to homebuyers, buys mortgages from banks and other lenders, packages them into securities and sells them to investors. The FHLB system, established in 1932 to provide a source of funds to community financial institutions, provides loans and various services to its members, which include savings and loan associations, savings banks and insurance companies. The Farm Credit System was established by Congress in 1916 to provide American agriculture with a source of dependable credit at competitive rates of interest. A related entity, the Federal Agricultural Mortgage Corporation (Farmer Mac), was established to attract new capital for the financing of agricultural real estate and to provide liquidity to agricultural lenders.

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mortgages

FANNIE MAE FINANCIAL HIGHLIGHTS, 2004-2005 ($ millions) 2004 2005 Percent change Business balances and growth Gross mortgage portfolio, end balance $904,555 $727,545 -19.6% Outstanding MBS1, end balance 1,402,761 1,598,079 13.9 Book of business, end balance 2,307,316 2,325,624 0.8 Business volumes Lender-originated issues 527,146 481,260 -8.7 Fannie Mae MBS1 purchases 64,604 15,628 -75.8 MBS issues acquired by others 462,542 465,632 0.7 Business volume 725,189 612,272 -15.6 Mortgage portfolio commitments, purchases and sales Net retained commitments 256,144 35,469 -86.2 Purchases 262,647 146,640 -44.2 Mortgage portfolio sales 16,449 113,295 588.8 Liquidations Mortgage portfolio liquidations 240,201 211,416 -12.0 Outstanding MBS1 liquidation2 374,688 368,067 -1.8 1MBS=Mortgage-backed securities. 2Unpaid principal balance of MBS guaranteed by Fannie Mae and held by investors other than Fannie Mae. Source: Federal National Mortgage Association.

FREDDIE MAC SELECTED BALANCE SHEETS RESULTS, 2004-2005 ($ millions, end of year) 2004 2005 Dollar change Total assets $795,284 $806,222 $10,938 Senior debt, net due within one year 282,303 288,532 6,229 Senior debt, net due after one year 443,772 454,627 10,855 Subordinated debt, net due after one year 5,622 5,633 11 Miscellaneous liabilities1 30,662 29,290 -1,372 Minority interests in consolidated subsidiaries 1,509 949 -560 Stockholders’ equity 31,416 27,191 -4,225 1Includes (a) Due to Participation Certificate investors, (b) Accrued interest payable, (c) Guarantee obligation, (d) Derivative liabilities, at fair value, (e) Reserve for guarantee losses on Participation Certificates and (f) Other liabilities, as presented on our consolidated balance sheets. Source: Federal Home Loan Mortgage Corporation. www.financialservicesfacts.org The Financial Services Fact Book 2007 159

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mortgages

FARM CREDIT SYSTEM SELECTED FINANCIAL INFORMATION, 2003-2006 ($ millions, end of period) December December December June 2003 2004 2005 2006 Gross loans $92,790 $96,367 $106,272 $112,765 Cash, federal funds and investments 23,287 24,164 28,427 31,524 Farm Credit Insurance Fund assets 2,033 2,164 2,062 2,181 Total assets 116,844 124,850 139,886 150,224 Systemwide debt securities 94,242 99,107 112,719 122,256 Total capital 18,923 21,389 22,774 23,535 Net interest income 2,919 2,994 3,246 $1,730 (Provision for loan losses) loan loss reversal -99 1,208 1 14 Net income 1,825 2,993 2,096 1,161 Capital as percentage of assets 16.2% 17.1% 17.1% 15.7%

Source: Federal Farm Credit Banks Funding Corporation.

FARMER MAC SELECTED FINANCIAL DATA, 2001-2005 ($000, end of year) Summary of financial condition 2001 2002 2003 2004 2005 Cash and cash equivalents $437,831 $723,800 $623,674 $430,504 $458,852 Investment securities 1,007,954 830,409 1,064,782 1,056,143 1,621,941 Farmer Mac guaranteed securities 1,690,376 1,608,507 1,508,134 1,376,847 1,330,976 Loans, net 198,003 963,461 983,624 882,874 799,516 Total assets 3,415,856 4,222,915 4,299,650 3,846,817 4,340,619 Notes payable Due within one year 2,233,267 2,895,746 2,799,384 2,620,172 2,587,704 Due after one year 968,463 985,318 1,136,110 862,201 1,403,598 Total liabilities 3,281,419 4,039,344 4,086,396 3,609,965 4,092,487 Stockholders’ equity 134,437 183,571 213,254 236,852 248,132 Selected financial ratios Return on average assets 0.50% 0.56% 0.59% 0.69% 0.67% Return on average common equity 12.19 15.00 15.32 14.85 13.14 Average equity to assets 4.06 4.16 4.66 5.53 5.92

Source: Federal Agricultural Mortgage Corporation.

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mortgage finance and housing

mortgages/home ownership

TITLE INSURANCE Title insurance protects the owner of property or the holder of a mortgage against loss in the event of a property ownership dispute.

TITLE INSURANCE, 1996-2005 ($000) Net premiums Annual percent Net premiums Annual percent Year written change Year written change 1996 $5,540,316 NA 2001 $9,853,991 26.1% 1997 6,028,528 8.8% 2002 13,004,547 32.0 1998 8,204,514 36.1 2003 17,036,591 31.0 1999 8,729,087 6.4 2004 16,789,620 -1.4 2000 7,817,051 -10.4 2005 18,288,746 8.9 NA=Data not available. Source: American Land Title Association.

home ownership

SNAPSHOT OF HOUSING IN AMERICA, 2004-2005 2004 2005 Percent change Homeownership rate 69.0% 68.9% -0.1% New home sales1 (units) 1.2 million 1.3 million 6.7 Existing home sales1 (units) 6.0 million 6.2 million 3.4 Existing home price1 (median) $195,200 $219,600 12.5 Home equity $10.0 trillion $11.2 trillion 12.1 Mortgage debt $7.9 trillion $8.7 trillion 10.3 Mortgage refinancing $1.5 trillion $1.4 trillion -10.5 Residential fixed investment $697.0 billion $756.0 billion 8.5 1Single-family. Note: All dollar figures are in 2005 dollars. Source: U.S. Department of Commerce, Board of Governors of the Federal Reserve System; Bureau of Economic Analysis; Mortgage Bankers Association of America; Census Bureau.

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home ownership

In August 2006 the national median existing-home price fell to $224,000, down about 2 percent from the previous year. This marked the first such decline in over a decade. The median represents a typical market price where half of the homes sold for more and half sold for less.

MEDIAN SALES PRICE OF EXISTING SINGLE FAMILY HOMES, 1970-2005 Average annual Average annual Year Median sales price percent increase1 Year Median sales price percent increase1 1970 $23,000 NA 2000 $143,600 4.5% 1975 35,300 8.9% 2001 153,100 6.6 1980 62,200 12.0 2002 165,000 7.8 1985 75,500 4.0 2003 178,800 8.4 1990 96,400 4.9 2004 195,200 9.2 1995 114,600 3.5 2005 219,600 12.5 1From prior year shown. NA=Data not available. Source: National Association of Realtors.

SELECTED COSTS OF OWNING A HOME, 2005 Median monthly cost Monthly costs including all mortgages plus maintenance costs $853 Selected costs Electricity 71

Piped gas 71 Fuel oil 104 Property insurance 52 Selected utilities and fuels Water paid separately 35 Trash paid separately 19 Bottled gas paid separately 42 Other fuel paid separately 17 Mortgage principal and interest 767 Real estate taxes 127 Routine maintenance in last year 27 Note: Latest data available. Based on surveys conducted every two years. Source: U.S. Department of Commerce, U.S. Census Bureau; U.S. Department of Housing and Urban Development, Office of Policy Development and Research.

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home ownership

U.S. HOME OWNERSHIP RATES BY RACE AND ETHNICITY, 2001-20051 (Percent) 2001 2002 2003 2004 2005 All households 67.8% 67.9% 68.3% 69.0% 68.9% Whites 74.3 74.7 75.4 76.0 75.8 Blacks 47.7 47.4 48.1 49.1 48.2 Hispanics 47.3 47.0 46.7 48.1 49.5 Asians/others 54.2 54.5 56.0 58.6 59.2 1The percentage of households that are homeowners. Source: U.S. Department of Commerce, Census Bureau.

HOME OWNERSHIP RATES BY REGION, 1990-20051 (Percent, end of year) Year United States Northeast Midwest South West 1990 63.9% 62.6% 67.5% 65.7% 58.0% 1995 64.7 62.0 69.2 66.7 59.2 1996 65.4 62.2 70.6 67.5 59.2 1997 65.7 62.4 70.5 68.0 59.6 1998 66.3 62.6 71.1 68.6 60.5 1999 66.8 63.1 71.7 69.1 60.9 2000 67.4 63.4 72.6 69.6 61.7 2001 67.8 63.7 73.1 69.8 62.6 2002 67.9 64.3 73.1 69.7 62.5 2003 68.3 64.4 73.2 70.1 63.4 2004 69.0 65.0 73.8 70.9 64.2 2005 68.9 65.2 73.1 70.8 64.4 1The percentage of households that are homeowners. Source: U.S. Department of Commerce, Census Bureau.

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home ownership

SELECTED CHARACTERISTICS OF HOMEOWNERS, 2003 AND 2005 (000) Percent change, 2003 2005 2003-2005 Total owner occupied units 72,238 74,931 3.7% By race White 63,126 65,023 3.0 Black 6,193 6,471 4.5 Other1 2,300 2,704 17.6 Hispanic2 5,106 5,752 12.7 By household income $0 to $14,999 8,481 8,637 1.8 $15,000 to $29,999 11,381 10,724 -5.8 $30,000 to $49,999 14,513 14,385 -0.9 $50,000 to $99,000 23,692 25,831 9.0 $100,000 or more 14,171 15,353 8.3 1Other=American Indian, Eskimo, Aleut, Asian and Pacific Islander. 2Hispanic is considered an ethnic origin rather than a race and is tallied separately. Hispanics may report themselves as any race. Note: Latest data available. Based on surveys conducted every two years. Source: U.S. Department of Commerce, U.S. Census Bureau; U.S. Department of Housing and Urban Development, Office of Policy Development and Research.

HOME OWNERSHIP RATES BY HOUSEHOLD INCOME, 2005 (Percent)

100% 93% 87% 79% 80

56% 60

0 Under $50,000- $80,000- $120,000 $50,000 79,000 119,000 and over

Source: U.S. Department of Commerce, U.S. Census Bureau; U.S. Department of Housing and Urban Development, Office of Policy Development and Research.

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home ownership/home equity loans

CONVENTIONAL HOME PURCHASE LOANS originated BY RACIAL/ETHNIC IDENTITY AND INCOME OF BORROWERS, 2000 AND 2004 2000 2004 Amount Amount Number ($000) Number ($000) Racial/ethnic identity American Indian/Alaska native 19,820 $2,142,632 45,375 $7,490,749 Asian 152,715 28,443,810 294,450 72,161,164 Black or African American 180,445 18,325,591 384,629 54,658,382 Hispanic or Latino 225,539 25,394,266 633,131 104,393,913 White 2,666,849 364,542,146 4,294,703 752,749,161 Income1 Less than 50% 229,326 13,984,099 309,383 24,930,411 50% to 79% 574,299 48,612,367 998,626 106,773,047 80% to 99% 407,703 43,012,170 747,388 98,950,912 100% to 119% 380,762 46,705,060 693,755 106,035,836 120% or more 1,572,914 302,235,704 2,810,867 660,896,916 Income not available 95,585 15,608,764 252,385 48,738,935 1Percentage of metropolitan area median. Metropolitan area median is the median family income of the metropolitan area in which the property related to the loan is located. Source: Federal Financial Institutions Examination Council.

HOME EQUITY LOANS

HOME EQUITY LOANS BY HOLDER, 2001-20051 ($ billions, end of year) 2001 2002 2003 2004 2005 Total $514.0 $580.3 $681.7 $884.0 $1,048.7 Commercial banking 258.6 303.3 366.0 483.6 549.1 Savings institutions 77.9 78.5 95.6 121.2 151.6 Credit unions 44.9 48.1 51.8 64.0 76.3 ABS issuers 12.5 15.4 16.1 25.1 39.1 Finance companies 120.1 135.0 152.2 190.1 232.5 1Loans made under home equity lines of credit and home equity loans secured by junior liens, such as second mortgages, which are subordinate to another mortgage. Excludes home equity loans held by mortgage companies and individuals. Source: Board of Governors of the Federal Reserve System.

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home equity loans/leading companies

SUBPRIME LOANS Subprime loans are offered to applicants with an incomplete or less than perfect credit record. The subprime interest rate is generally higher than the prevailing rate because of the additional risks involved in lending to less creditworthy applicants. A list of subprime lenders developed by the Department of Housing and Urban Development (HUD) is one way to measure the size of the market. Each year HUD examines public data on home loans, as reported under the federal Home Mortgage Disclosure Act, to identify lenders that specialize in subprime loans. The number of lenders on the list increased from 51 in 1993 to 222 in 2004.

NUMBER OF SUBPRIME LENDERS, 1995-2004 Year Number Year Number • The annual dollar volume 1995 103 2000 197 of subprime loans grew from $35 billion in 1994 1996 143 2001 188 to $530 billion in 2004, 1997 210 2002 183 according to industry 1998 249 2003 221 estimates. 1999 256 2004 222

Source: U.S. Department of Housing and Urban Development.

Leading companies

TOP TEN MORTGAGE FINANCE COMPANIES By managed receivables, 2005 ($ millions) Total managed Rank Company receivables1 1 Countrywide Financial Corporation $1,111,089.6 2 Wells Fargo Home Mortgage Inc. 1,005,410.0 3 Washington Mutual Bank 708,845.9 4 General Motors Acceptance Corporation 654,610.0 5 Chase Manhattan Mortgage Corp. 601,000.0 6 CitiMortgage Inc. 403,208.0 7 Bank of America Consumer Real Estate Lending 368,400.0 8 ABN AMRO Mortgage Group Inc. 200,000.0 9 National City Mortgage Company 169,557.0 10 PHH Mortgage Services Corporation 157,302.0 1On-balance sheet receivables and loans sold that are still serviced and managed. Source: SNL Financial Services LC.

166 The Financial Services Fact Book 2007 www.financialservicesfacts.org Chapter 10: Technology

it spending

IT SPENDING Information technology (IT) has transformed the financial services industry, making available many products and services that would have otherwise been impossible to offer. The features of these products and services range from asset-backed securities, personal cash management accounts and automated teller machines (introduced in the 1970s) to more recent innovations such as online banking. At the same time, IT has improved efficiency and reduced labor costs.

It Spending of the U.S. FINANCIAL SERVICES INdustry by sector, 20061 • TowerGroup estimates ($ billions) that the consumer Securities and lending business will investments $32.2 spend $3.85 billion 26% on IT in 2006, as Banking mortgage and home $52.5 43% equity lenders update Total: their processing $122.9 billion systems.

Insurance $38.2 1Estimated. 31% Source: TowerGroup.

IT SPENDING BY TYPE OF PROPERTY/CASUALTY INSURANCE COMPANY, 2001-20051

� Personal lines companies � $35,000 Commercial lines companies � Balanced lines companies 30,000

25,000

20,000

15,000

10,000

5,000

0 2001 2002 2003 2004 2005 1Information technology expense per total company full-time employee. Source: Ward Group.

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it spending

IT SPENDING AS A PERCENT OF GROSS PREMIUMS WRITTEN BY TYPE OF PROPERTY/CASUALTY INSURANCE COMPANY, 2001-2005

� Personal lines companies � Commercial lines companies 6% 6.0% � Balanced lines companies 5.6% 5.1% 5 4.9% 4.8% 4.5% 4.3% 4.5% 4 4.0% 3.6% 3.6% 3.1% 3.2% 3.0% 3.2% 3

0 2001 2002 2003 2004 2005 Source: Ward Group.

IT SPENDING BY LIFE, ANNUITIES AND HEALTH INSURANCE COMPANIES, 2001-20051

� Life companies � Annuities companies $50,000 � Health companies

40,000

30,000

20,000

10,000

0 2001 2002 2003 2004 2005 1Information technology expense per total company full-time employee. Source: Ward Group.

IT SPENDING AS A PERCENT OF total PREMIUMS WRITTEN BY LIFE, ANNUITIES AND HEALTH INSURANCE COMPANIES, 2001-2005

6% � Life companies � Annuities companies 5 � Health companies 4.7% 3.9% 4 3.6% 3.7% 3.4% 3.4% 3.6% 3.1% 2.9% 3 2.3% 2.4% 2 1.5% 1.5% 1.2% 1.4% 1

0 2001 2002 2003 2004 2005 Source: Ward Group. 168 The Financial Services Fact Book 2007 www.financialservicesfacts.org

technology technology

Electronic commerce

ELECTRONIC COMMERCE Using advanced information technology, banks have transformed some of their core services, such as personal banking. Consumers can now conduct many banking activities over the telephone and online as well as in traditional branch offices. As people have grown more comfortable making routine purchases online, there has been a corresponding increase in their use of the Internet to manage their personal finances.

GROWTH IN ONLINE BANKING, 2000 AND 20051 March 20002 February-March 20053 • In 1998, 13 percent of All Internet users 17% 41% Internet users said they Sex had banked or paid bills Men 18 41 online. By 2005, 41 Women 17 41 percent of Internet users said they had banked Race online. Whites 17 43 Blacks 19 25 Hispanics 20 40 Age 18 to 29 19 40 30 to 49 18 48 50 to 64 16 35 65 and over 3 27 1The percentage of those in each group with Internet connections who have tried online banking. For example, in March 2000, 17 percent of all Internet users had done online banking. 21,690 Internet users. 31,450 Internet users. Source: Pew Internet & American Life Project Survey.

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electronic commerce

Online AUTO Insurance Consumers are increasingly researching and purchasing auto insurance on the Web. The total number of auto insurance quotes submitted online by consumers increased by 24 percent in 2005 versus the previous year, and insurance policy purchases jumped by 29 percent during the same time period, according to a survey by comScore Networks, an Internet analytics firm. Direct insurers, the largest online insurer segment with 61 percent of the market share of online quotes, saw a 23 percent increase in quotes submitted in 2005. Quotes submitted at aggregator sites, which offer quotes from several insurers, increased by 11 percent.

HOW CONSUMERS BOUGHT THEIR CURRENT AUTO INSURANCE POLICY, 20051

Comparative Other Internet site 4% 2% • A 2005 survey conducted by Celent found that 15 Carrier Internet site 11% percent of respondents had purchased their most Telephoned recent auto insurance Agent insurance carrier policy online. 63% 20%

1Based on an August 2005 survey. Source: Celent Communications.

E-COMMERCE AND TOTAL REVENUES, SECURITIES AND COMMODITY CONTRACTS, 2003-2004 ($ millions)

Value of revenues E-commerce Percent change as a percent of 2003 2004 2003-2004 total revenues Total E-commerce Total E-commerce Total E-commerce revenues revenues 2003 2004 Securities and commodity contracts, intermediation and brokerage $225,299 $5,934 $250,080 $6,871 11.0% 15.8% 2.6% 2.7%

Source: U.S. Department of Commerce, Bureau of the Census.

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technology technology

electronic payments

ELECTRONIC PAYMENTS Over the past quarter-century, electronic alternatives to the traditional way of paying bills by check have revolutionized the payments infrastructure. While credit cards continue to con- tribute the largest share, newer choices such as personal identification number (PIN) and signature debit and automated clearing house payments have grown rapidly. Debit cards have become increasingly popular in large part because of the availability of more secure forms of signature. Electronic benefits transfers give consumers more flexible access to Social Security, Veterans’ Pensions and other benefits disbursed by the federal government. The growth of electronic payments has been accompanied by a precipitous drop in the number of check payments in the U.S., according to the Federal Reserve, which reports that the number of check payments fell from 42 billion in 2000 to 37 billion in 2003.

NUMBER OF NONCASH PAYMENTS, 2000 AND 2003 (billions) Compound annual 20001 20031 growth rate, 2000-2003 Total noncash payments 72.5 81.2 3.8% Check 41.9 36.7 -4.3 Credit card 15.6 19.0 6.7 ACH2 6.2 9.1 13.4 Offline debit 5.3 10.3 24.9

Online debit 3.0 5.3 21.0 EBT3 0.5 0.8 15.4 1Estimate. 2Automated clearing house. 3Electronic benefits transfer. Source: Federal Reserve System.

DISTRIBUTION OF THE NUMBER OF NONCASH PAYMENTS, 2000 AND 2003 2000 2003

1 EBT1 1% EBT 1% Online debit 4% Online debit 7% Offline debit 7% Offline debit 13% Check ACH2 Check 45% 9% 57%

Credit 2 ACH Credit card 11% 22% card 23%

1Electronic benefits transfer. 2Automated clearing house. Source: Federal Reserve System.

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electronic payments

NUMBER OF ELECTRONIC PAYMENTS, 2000 AND 2003 (millions) Compound annual growth rate, Payment instrument 2000 2003 2000-2003 General purpose credit cards 12,300.2 15,212.1 7.3% Private label credit cards 3,300.6 3,753.2 4.4 Signature debit 5,268.6 10,262.9 24.9 PIN debit 3,010.4 5,337.9 21.0 ACH1 6,211.3 9,061.8 13.4 EBT2 537.7 826.8 15.4 Total 30,628.8 44,454.7 13.2 1Automated clearing house. 2Electronic benefits transfer. Source: Federal Reserve System.

VALUE OF ELECTRONIC PAYMENTS, 2000 AND 2003 ($ millions) Compound annual growth rate, Payment instrument 2000 2003 2000-2003 General purpose credit cards $1,072,555 $1,409,744 9.5% Private label credit cards 204,771 283,758 11.5 Signature debit 209,980 426,671 26.7 PIN debit 138,151 204,251 13.9 ACH1 18,564,758 25,072,327 10.5 EBT2 13,744 21,567 16.2 Total 20,203,959 27,418,318 10.7 1Automated clearing house. 2Electronic benefits transfer. Source: Federal Reserve System.

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electronic payments

AVERAGE ELECTRONIC PAYMENT VALUES, 2000 AND 20031 Payment instrument 2000 2003 Value change, 2000-2003 General purpose credit cards $87.20 $92.67 $5.47 Private label credit cards 62.04 75.60 13.56 Signature debit 39.85 41.57 1.72 PIN debit2 45.89 38.26 -7.63 ACH3 2,988.85 2,766.82 -222.03 EBT4 25.56 26.08 0.52 Total 659.64 616.77 42.87 1Data are averages and will not add to total. 2Includes cash back. 3Automated clearing house. 4Electronic benefits transfer. Source: Federal Reserve Bank of Atlanta/Dove Consulting.

AUTOMATED CLEARING HOUSE NETWORK Payments through the Automated Clearing House (ACH) Network, a nationwide electronic fund transfer system, include direct deposit of payroll, Social Security benefits and tax refunds, as well as direct payment of consumer bills, business-to-business payments and Federal tax withholdings. Annual ACH payment volume has doubled in the last five years, spurred by consumers’ use of the Internet for financial activities.

ESTIMATED VOLUME AND DOLLAR VALUE OF AUTOMATED CLEARING HOUSE ELECTRONIC PAYMENTS, 2004-2005 • Internet-initiated ACH Percent payments grew by 38.9 2004 2005 change percent to 1.34 billion Transaction volume transactions in 2005, according to NACHA, Commercial 11,057,304,313 12,981,214,920 17.40% the electronic payments Government 951,668,590 976,026,834 2.56 association. Total 12,008,972,903 13,957,241,754 16.22 • Direct deposit is the Dollar value ($000) most widely used ACH Commercial $25,512,997,303 $27,883,656,947 9.29 payment, accounting Government 2,912,190,206 3,155,855,448 8.37 for over 4.4 billion payments in 2005. The Total 28,425,187,509 31,039,512,395 9.20 average direct deposit Source: NACHA - The Electronic Payments Association. was $1,290.

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electronic payments

NUMBER AND VALUE OF CREDIT CARD TRANSACTIONS, 2000 AND 2003 Compound annual growth rate, 2000 2003 2000-2003 Number (billions) 15.6 19.0 6.7% General purpose 12.3 15.2 7.3 Private label 3.3 3.8 4.4 Dollar value ($ trillions) $1.3 $1.7 9.9 General purpose 1.1 1.4 9.5 Private label 0.2 0.3 11.5 Average value $82.0 $89.0 2.9 General purpose 87.0 93.0 2.1 Private label 62.0 76.0 6.8

Source: Federal Reserve System.

NUMBER AND VALUE OF DEBIT CARD TRANSACTIONS, 2000 AND 2003 Compound annual growth rate, 2000 2003 2000-2003 Number (billions) 8.3 15.6 23.5% Offline debit 5.3 10.3 24.9 Online debit 3.0 5.3 21.0 Dollar value ($ trillions) $0.3 $0.6 21.9 Offline debit 0.2 0.4 26.7 Online debit 0.1 0.2 13.9 Average value $42.0 $40.0 -1.3 Offline debit 40.0 42.0 1.4 Online debit 46.0 38.0 -5.9

Source: Federal Reserve System.

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technology technology

ATMs

ATMs The growth of online banking, electronic payments and deposits, and automated teller machine (ATM) usage has been driven by customer demand for greater convenience. ATMs were introduced in the early 1970s. By 2005 there were some 396,000 ATMs in the United States, almost four times the number of bank and thrift branches. ATMs increasingly are being installed in places where consumers may want access to their money such as super- markets, convenience stores and transportation terminals. The ATM business consists of three major entities: ATM cardholders’ banks, the ATM network that links banks in other locations and the owners of the ATM machines, which may or may not be banks. Most banks allow customers to withdraw money from their own bank’s ATMs free of charge but charge a fee to other banks’ customers. These charges help offset the cost of ATMs and fees banks must pay to the ATM network system.

OFF-PREMISE ATM DEPLOYMENT, 2002-20061 Year Total ATMs Off-premise ATMs Percent off-premise • The first ATM in the 2002 352,000 220,000 62.5% United States was 2003 371,000 238,000 64.2 installed in 1971 at 2004 383,000 263,000 68.7 the Citizens & Southern National Bank in 2005 396,000 266,000 67.2 Atlanta. 2006 395,000 260,000 65.8 1ATMs located away from financial institution branches. Source: ATM & Debit News.

ANNUAL PIN-BASED VOLUME, 2002-20061 (millions) Year ATM volume POS volume2 Total volume 2002 10,598 4,5003 15,0983 2003 10,828 5,0063 15,9713 2004 11,030 6,274 17,304 2005 10,524 8,210 18,734 2006 10,104 10,082 20,186 1PIN (personal identification number) volume. Adjusted to eliminate double-counting caused by two networks reporting a transaction. 2POS (point of sale) is a retail payment system that allows funds to be transferred electronically from a customer’s account to a retailer, for example from a debit card. 3Restated based on revised data provided by some electronic funds transfer networks.

Source: ATM & Debit News.

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technology

atms

ATM TRANSACTIONS, 1997-20061 Average monthly Total transactions Year ATM transactions Terminals (millions) 1997 5,515 165,000 910.0 1998 4,973 187,000 930.0 1999 3,997 227,000 907.4 2000 3,919 273,000 1,070.0 2001 3,494 324,000 1,132.0 2002 2,509 352,000 883.22 2003 2,432 371,000 902.32 2004 2,400 383,000 919.22 2005 2,214 396,000 877.02 2006 2,131 395,000 842.02 1Total network transactions include all deposits, withdrawals, transfers, payments, and balance inquiries performed on ATMs in the network, whether or not those transactions are switched through the network data center, as well as point of sale transactions on network terminals. 2Adjusted to eliminate double-counting caused by two networks reporting a transaction. Source: ATM & Debit News.

TOP TEN ATM OWNERS, 20061

Number of ATMs Rank Owner 2005 2006 1 Bank of America 16,732 16,733 2 Cardtronics 4,500 10,000 3 J.P. Morgan Chase & Co. 6,650 7,310 4 U.S. Bancorp 6,780 7,164 5 Wells Fargo 6,275 6,200 6 7-Eleven 5,300 5,341 7 Wachovia 4,412 5,179 8 Washington Mutual 3,350 3,743 9 PNC 3,644 3,600 10 Citibank 2,811 3,100 1January data. Source: ATM & Debit News.

176 The Financial Services Fact Book 2007 www.financialservicesfacts.org Chapter 11: World Rankings

financial services

WORLD’S LARGEST FINANCIAL SERVICES FIRMS BY REVENUES, 20051 ($ millions) Profits as a percent of Rank Company Revenues Profits Revenues Assets Country Industry Diversified 1 General Electric $157,153 $16,353 10% 2% U.S. financial 2 ING Group 138,235 8,959 6 1 Netherlands Insurance 3 Citigroup 131,045 24,589 19 2 U.S. Banking 4 AXA 129,839 5,186 4 1 France Insurance 5 Allianz 121,406 5,442 4 NA Germany Insurance Belgium/ 6 Fortis 112,351 4,896 4 1 Netherlands Banking 7 Crédit Agricole 110,765 7,434 7 1 France Banking American 8 International Group 108,905 10,477 10 1 U.S. Insurance 9 Assicurazioni Generali 101,404 2,384 2 1 Italy Insurance 10 HSBC Holdings 93,494 15,873 17 1 U.K. Banking 11 Aviva 92,579 3,211 3 1 U.K. Insurance 12 BNP Paribas 85,687 7,271 8 NA France Banking 13 UBS 84,708 11,257 13 1 Switzerland Banking 14 Bank of America Corp. 83,980 16,465 20 1 U.S. Banking 15 Berkshire Hathaway 81,663 8,528 10 4 U.S. Insurance 16 J.P. Morgan Chase & Co. 79,902 8,483 11 1 U.S. Banking 17 Deutsche Bank 76,228 4,385 6 NA Germany Banking 18 HBOS 75,799 5,870 8 1 U.K. Banking 19 Prudential 74,745 1,359 2 NA U.K. Insurance 20 Dexia Group 72,814 2,532 3 NA Belgium Banking 21 Credit Suisse 72,193 4,694 7 NA Switzerland Banking

22 Royal Bank of Scotland 71,164 9,998 14 1 U.K. Banking 23 Zurich Financial Services 67,186 3,214 5 1 Switzerland Insurance 24 Société Générale 64,442 5,524 9 1 France Banking 25 Nippon Life Insurance 61,158 1,813 3 NA Japan Insurance 1Based on an analysis of companies in the Global Fortune 500. NA= Data not available. Source: Fortune. www.financialservicesfacts.org The Financial Services Fact Book 2007 177

world rankings world rankings

insurance

TOP TEN GLOBAL INSURANCE COMPANIES BY REVENUES, 20051 ($ millions) Rank Company Revenues2 Country Industry 1 ING Group $138,235 Netherlands Life/health 2 AXA 129,839 France Life/health 3 Allianz 121,406 Germany Property/casualty 4 American International Group 108,905 U.S. Property/casualty 5 Assicurazioni Generali 101,404 Italy Life/health 6 Aviva 92,579 U.K. Life/health 7 Berkshire Hathaway 81,663 U.S. Property/casualty 8 Prudential 74,745 U.K. Life/health 9 Zurich Financial Services 67,186 Switzerland Property/casualty 10 Nippon Life Insurance 61,158 Japan Life/health 1Based on an analysis of companies in the Global Fortune 500. Includes stock and mutual companies. 2Revenues include premium and annuity income, investment income and capital gains or losses, but exclude deposits; includes consolidated subsidiaries, excludes excise taxes. Source: Fortune.

TOP TEN GLOBAL PROPERTY/CASUALTY INSURANCE COMPANIES BY REVENUES, 20051 ($ millions) Rank Company Revenues2 Country 1 Allianz $121,406 Germany 2 American International Group 108,905 U.S. 3 Berkshire Hathaway 81,663 U.S. 4 Zurich Financial Services 67,186 Switzerland 5 Munich Re Group 60,256 Germany 6 State Farm Insurance Cos. 59,224 U.S. 7 Allstate 35,383 U.S. 8 Millea Holdings 30,030 Japan 9 Swiss Reinsurance 28,093 Switzerland 10 Hartford Financial Services 27,083 U.S. 1Based on an analysis of companies in the Global Fortune 500. Includes stock and mutual companies. 2Revenues include premium and annuity income, investment income and capital gains or losses, but exclude deposits; includes consolidated subsidiaries, excludes excise taxes. Source: Fortune.

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world rankings world rankings

insurance

TOP TEN GLOBAL LIFE/HEALTH INSURANCE COMPANIES BY REVENUES, 20051 ($ millions) Rank Company Revenues2 Country 1 ING Group $138,235 Netherlands 2 AXA 129,839 France 3 Assicurazioni Generali 101,404 Italy 4 Aviva 92,579 U.K. 5 Prudential 74,745 U.K. 6 Nippon Life Insurance 61,158 Japan 7 Legal & General Group 56,385 U.K. 8 CNP Assurances 48,475 France 9 MetLife 46,983 U.S. 10 Dai-ichi Mutual Life Insurance 44,598 Japan 1Based on an analysis of companies in the Global Fortune 500. Includes stock and mutual companies. 2Revenues include premium and annuity income, investment income and capital gains or losses, but exclude deposits; includes consolidated subsidiaries, excludes excise taxes. Source: Fortune.

TOP TEN GLOBAL REINSURERS BY NET REINSURANCE PREMIUMS WRITTEN, 2005 ($ millions) Net reinsurance Rank Company premiums written Country 1 Munich Re $22,602.8 Germany 2 Swiss Re1 21,203.6 Switzerland 3 Berkshire Hathaway Re 10,041.0 U.S. 4 Hannover Re 9,190.8 Germany 5 GE Insurance Solutions1 6,697.0 U.S. 6 Lloyd’s 6,566.8 U.K. 7 XL Re 5,012.9 Bermuda 8 Everest Re 3,972.0 Bermuda 9 Reinsurance Group of America Inc. 3,863.0 U.S. 10 PartnerRe 3,615.9 Bermuda 1In 2006, Swiss Re acquired GE Insurance Solutions. Source: Standard & Poors.

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insurance

TOP TEN GLOBAL INSURANCE BROKERS BY Brokerage REVENUES, 2005 ($ millions) Rank Company Brokerage revenues1 Country 1 Marsh & McLennan Cos. Inc. $10,000.0 U.S. 2 Aon Corp. 6,522.0 U.S. 3 Willis Group Holdings Ltd. 2,194.0 U.K. 4 Arthur J. Gallagher & Co. 1,350.6 U.S. 5 Wells Fargo & Co.2 959.4 U.S. 6 Jardine Lloyd Thompson Group plc 881.8 U.K. 7 Brown & Brown Inc. 775.5 U.S. 8 BB&T Insurance Services Inc. 757.4 U.S. 9 Alexander Forbes Ltd.3 682.4 South Africa 10 Hilb Rogal & Hobbs Co. 658.0 U.S. 1Gross revenues generated by insurance brokerage, consulting and related services. 2Includes Acordia Inc. and Wells Fargo Insurance Inc. 3Fiscal year ending 3/31. Source: Business Insurance, July 17, 2006.

TOP TEN GLOBAL REINSURANCE BROKERS BY REINSURANCE REVENUES, 2005 ($000) Rank Company Reinsurance revenues Country 1 Aon Re Global $920,000 U.S. 2 Guy Carpenter & Co. Inc. 838,000 U.S. 3 Benfield Group Ltd. 589,810 U.K. 4 Willis Re 565,000 U.K. 6 Jardine Lloyd Thompson Group plc 155,826 U.K. 5 Towers Perrin 153,300 U.S. 7 Cooper Gay (Holdings) Ltd. 92,7501 U.K. 8 BMS Group 75,253 U.K. 9 Gallagher Re 75,000 U.K. 10 John B. Collins Associates Inc. 52,035 U.S. 1Fiscal year ending September 30. Source: Business Insurance, November 6, 2006.

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world rankings world rankings

banks/securities

Banks

TOP TEN GLOBAL COMMERCIAL AND SAVINGS BANKS BY REVENUES, 20051 ($ millions) Rank Company Revenues Country 1 Citigroup $131,045 U.S. 2 Fortis 112,351 Belgium/Netherlands 3 Crédit Agricole 110,765 France 4 HSBC Holdings 93,494 U.K. 5 BNP Paribas 85,687 France 6 UBS 84,708 Switzerland 7 Bank of America Corp. 83,980 U.S. 8 J.P. Morgan Chase & Co. 79,902 U.S. 9 Deutsche Bank 76,228 Germany 10 HBOS 75,799 U.K. 1Based on an analysis of companies in the Global Fortune 500. Source: Fortune.

Securities

TOP FIVE GLOBAL SECURITIES FIRMS BY REVENUES, 20051 ($ millions) Rank Company Revenues Country 1 Morgan Stanley $52,498 U.S. 2 Merrill Lynch 47,783 U.S. 3 Goldman Sachs Group 43,391 U.S. 4 Lehman Brothers Holdings 32,420 U.S. 5 Nomura Holdings 15,835 Japan 1Based on an analysis of companies in the Global Fortune 500. Source: Fortune.

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world rankings

diversified financial/asset management

diversified financial

TOP FOUR GLOBAL DIVERSIFIED FINANCIAL COMPANIES BY REVENUES, 20051 ($ millions) Rank Company Revenues Country 1 General Electric $157,153 U.S. 2 Freddie Mac 36,526 U.S. 3 American Express 30,080 U.S. 4 Countrywide Financial 18,537 U.S. 1Based on an analysis of companies in the Global Fortune 500. Source: Fortune.

Asset management

TOP TEN GLOBAL ASSET MANAGERS BY ASSETS UNDER MANAGEMENT, 2005 ($ millions) Total third-party assets Rank Company under management 1 Barclays Global Investors $1,400,491 2 State Street Global Advisors 1,367,269 3 Fidelity Investments 1,299,400 4 The Vanguard Group 852,000 5 JPMorgan Asset Management 782,646 6 Capital Research & Management Company 756,791 7 Deutsche Asset Management 723,366 8 Northern Trust Global Investments 589,800 9 UBS Global Asset Management 536,000 10 Alliance Capital Management 516,000

Source: Global Investor’s annual GI 100 survey of the world’s largest managers by third-party assets under management; http://www.globalinvestormagazine.com. Contact [email protected] for permissions.

182 The Financial Services Fact Book 2007 www.financialservicesfacts.org Chapter 12: Demographics

geographic mobility

GEOGRAPHIC MOBILITY Geographic mobility trends (people moving from one community to another) have a key impact on a particular area’s demographic, social and economic composition. For this reason, federal, state and local governments, as well as private industry, pay close attention to who moves and why, when planning for needed services, facilities and businesses.

GENERAL MOBILITY RATES, 1999-2004 (000) Movers • Between 2003 and As a percent of total movers 2004, 39 million Different county Movers U.S. residents, or Total Non- Total Same Same Different from 13.7 percent of the 1 Years population movers movers county state state abroad population, moved. The 1999- majority stayed within 2000 270,219 226,831 43,388 56.2% 20.3% 19.4% 4.0% the same county. 2000- 2001 275,611 236,605 39,007 56.2 19.4 20.0 4.5 2001- 2002 278,160 237,049 41,111 57.7 19.6 18.9 3.8 2002- 2003 282,556 242,463 40,093 58.5 19.3 19.0 3.2 2003- 2004 284,367 245,372 38,995 57.8 20.1 18.8 3.3 1Civilian noninstitutional population. Source: U.S. Census Bureau.

MOBILITY BY REGION, 2004 (000) Movers Different Different Different Different Non- Total Same county, state, same division, region and Region Total1 movers movers county same state division2 same region abroad Northeast 53,084 47,827 5,257 2,959 955 610 103 630 Midwest 63,924 55,877 8,047 4,794 1,657 712 125 759 South 102,021 86,828 15,193 8,449 3,252 1,548 326 1,618 West 65,337 54,840 10,497 6,350 1,978 821 438 910 1People age 1 and over. 2The Census Bureau divides the 50 states into 9 divisions. Source: U.S. Census Bureau.

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Demographics demographics

geographic mobility

STATE BY STATE MIGRATION FLOWS, 1995-2000 Largest inflow Largest ouflow State came from Size of inflow went to Size of outflow Alabama Georgia 48,597 Georgia 54,238 Alaska California 12,518 Washington 16,635 Arizona California 186,151 California 92,452 Arkansas Texas 41,132 Texas 37,988 California Texas 115,929 Nevada 199,125 Colorado California 111,322 California 56,050 Connecticut New York 75,945 Florida 47,224 Delaware Pennsylvania 28,317 Pennsylvania 16,659 D.C. Maryland 27,404 Maryland 64,393 Florida New York 308,230 Georgia 157,423 Georgia Florida 157,423 Florida 99,225 Hawaii California 32,321 California 44,192 Idaho California 35,529 Washington 26,214 Illinois California 67,970 1 1 Indiana Illinois 84,760 1 1 Iowa Illinois 32,317 Illinois 28,695 Kansas Missouri 53,622 Missouri 58,785 Kentucky Ohio 49,328 1 1 Louisiana Texas 57,289 Texas 86,283 Maine Massachusetts 19,436 1 1 Maryland 1 1 Virginia 79,242 Massachusetts New York 72,805 Florida 68,058 Michigan Ohio 47,634 Florida 74,949 Minnesota Wisconsin 51,512 Wisconsin 51,692 Mississippi Louisiana 33,011 Tennessee 26,397 Missouri 1 1 Kansas 53,622 Montana 1 1 Washington 14,909 Nebraska Iowa 20,503 Iowa 20,130 Nevada California 199,125 California 60,488 (table continues)

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Demographics demographics

geographic mobility

STATE BY STATE MIGRATION FLOWS, 1995-2000 (Cont’d) Largest inflow Largest outflow State came from Size of inflow went to Size of outflow New Hampshire Massachusetts 60,731 Massachusetts 33,572 New Jersey New York 206,979 Florida 118,905 New Mexico Texas 41,760 Texas 49,566 New York New Jersey 97,584 Florida 308,230 North Carolina New York 100,727 South Carolina 65,189 North Dakota Minnesota 19,177 Minnesota 26,450 Ohio Florida 47,389 Florida 90,833 Oklahoma Texas 73,359 Texas 83,477 Oregon California 131,836 Washington 82,641 Pennsylvania 1 1 Florida 92,385 Rhode Island Massachusetts 27,015 Massachusetts 24,190 South Carolina North Carolina 65,189 North Carolina 61,237 South Dakota Minnesota 11,532 Minnesota 14,087 Tennessee Florida 52,918 Georgia 45,483 Texas California 182,789 California 115,929 Utah California 60,389 California 31,843 Vermont New York 11,026 New York 9,052 Virginia Maryland 79,242 North Carolina 89,149 Washington California 155,577 California 95,469 West Virginia Ohio 21,431 Ohio 25,801 Wisconsin Illinois 80,569 Minnesota 51,512 Wyoming Colorado 10,444 Colorado 14,039 1No flow was statistically the largest. Source: U.S. Census Bureau.

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Demographics

geographic mobility

TOP TWENTY BOOMER MIGRANT DESTINATION STATES, 20031 Boomer Boomer • While baby boomers— Rank State migrants Rank State migrants people born between 1 Florida 139,372 11 North Carolina 29,261 1946 and 1964—are 2 California 100,081 12 Washington 27,998 predominantly moving to 3 Texas 65,477 13 Tennessee 27,433 Southern and Western 4 Arizona 56,913 14 Nevada 26,616 states, some larger states in the Northeast, 5 Virginia 42,838 15 South Carolina 26,017 such as New York and 6 Pennsylvania 36,194 16 Maryland 24,318 Pennsylvania, are also 7 New York 34,835 17 Ohio 23,156 magnets. 8 New Jersey 31,036 18 Colorado 22,118 9 Illinois 31,000 19 Michigan 22,020 10 Georgia 30,390 20 Massachusetts 20,363 1Number of state-to-state migrants aged 42 to 60. Source: MapInfo Corporation analysis of the Census Bureau’s American Community Survey data.

LARGEST METROPOLITAN STATISTICAL AREAS, 1990 AND 2000 Population 1990 to 2000 change Rank Metropolitan Statistical Area1 April 1, 1990 April 1, 2000 Number Percent New York-Northern New Jersey- 1 Long Island, NY-NJ-PA 16,846,046 18,323,002 1,476,956 8.8% 2 Los Angeles-Long Beach-Santa Ana, CA 11,273,720 12,365,627 1,091,907 9.7 3 Chicago-Naperville-Joliet, IL-IN-WI 8,182,076 9,098,316 916,240 11.2 4 Philadelphia-Camden-Wilmington, PA-NJ-DE 5,435,468 5,687,147 251,679 4.6 5 Dallas-Fort Worth-Arlington, TX 3,989,294 5,161,544 1,172,250 29.4 6 Miami-Fort Lauderdale-Miami Beach, FL 4,056,100 5,007,564 951,464 23.5 7 Washington-Arlington-Alexandria, DC-VA-MD 4,122,914 4,796,183 673,269 16.3 8 Houston-Baytown-Sugar Land, TX 3,767,335 4,715,407 948,072 25.2 9 Detroit-Warren-Livonia, MI 4,248,699 4,452,557 203,858 4.8 10 Boston-Cambridge-Quincy, MA-NH 4,133,895 4,391,344 257,449 6.2 1Defined by the U.S. Office of Management and Budget. Metro area categories include adjacent counties that have a strong social and economic relationship, as measured by commuting. Source: U.S. Census Bureau.

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demographics

Income

INCOME BY REGION AND AGE GROUP, 2003-2004 Number (000) Median money income1 Median market income2 Percent Percent Characteristic 2003 2004 20033 2004 change 20033 2004 change All households 112,000 113,146 $44,483 $44,389 -0.2% $41,983 $41,648 -0.8% By region Northeast 21,017 21,137 47,998 47,994 0.0 44,963 44,727 -0.5 Midwest 25,643 25,911 45,934 44,657 -2.8 43,186 42,239 -2.2 South 40,742 41,159 40,893 40,773 -0.3 37,767 37,813 0.1 West 24,598 24,939 48,078 47,680 -0.8 46,170 45,388 -1.7 By age of householder Under 65 years 88,951 90,012 51,520 50,923 -1.2 50,045 49,606 -0.9 15 to 24 years 6,610 6,686 27,780 27,586 -0.7 25,414 25,051 -1.4 25 to 34 years 19,159 19,255 45,983 45,485 -1.1 44,330 43,683 -1.5 35 to 44 years 23,222 23,226 56,523 56,785 0.5 55,988 56,157 0.3 45 to 54 years 23,137 23,370 61,861 61,111 -1.2 61,640 60,962 -1.1 55 to 64 years 16,824 17,476 50,537 50,400 -0.3 48,497 48,682 0.4 65 years and over 23,048 23,135 24,426 24,509 0.3 13,420 13,570 1.1 1Income before deductions for taxes and other expenses; does not include lump sum payments or capital gains. 2Money income plus realized capital gains and losses and rate of return on home equity less work expenses; does not include government cash transfers. 3Expressed in 2004 dollars. Source: U.S. Census Bureau.

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Demographics

Income

HOUSEHOLD INCOME BY STATE, 2002-2004 Average median Average median State income, 2002-20041 State income, 2002-20041 Alabama $38,111 Montana $35,201 Alaska 54,627 Nebraska 44,623 Arizona 42,590 Nevada 46,984 Arkansas 33,948 New Hampshire 57,352 California 49,894 New Jersey 56,772 Colorado 51,022 New Mexico 37,587 Connecticut 55,970 New York 44,228 Delaware 50,152 North Carolina 39,000 D.C. 43,003 North Dakota 39,594 Florida 40,171 Ohio 44,160 Georgia 43,217 Oklahoma 38,281 Hawaii 53,123 Oregon 42,617 Idaho 42,519 Pennsylvania 44,286 Illinois 45,787 Rhode Island 46,199 Indiana 43,003 South Carolina 39,326 Iowa 43,042 South Dakota 40,518 Kansas 43,725 Tennessee 38,550 Kentucky 37,396 Texas 41,275 Louisiana 35,523 Utah 50,614 Maine 39,395 Vermont 45,692 Maryland 56,763 Virginia 53,275 Massachusetts 52,354 Washington 48,688 Michigan 44,476 West Virginia 32,589 Minnesota 55,914 Wisconsin 47,220 Mississippi 33,659 Wyoming 43,641 Missouri 43,988 United States 44,473 1The 3-year average median is the sum of 3 inflation adjusted single-year medians (2002-2004) divided by 3, expressed in 2004 dollars. Source: U.S. Census Bureau.

188 The Financial Services Fact Book 2007 www.financialservicesfacts.org Appendices

Summaries

SUMMARY OF THE GRAMM-LEACH-BLILEY FINANCIAL SERVICES MODERNIZATION ACT OF 1999 Titles of the Act Provisions

Allows banks, securities firms, insurance companies TITLE I: Affiliations among Banks, Securities and other firms engaged in financial services to affiliate Firms and Insurance Companies under a financial holding company (FHC) structure.

Specifies that all financial activities will be functionally regulated by the relevant regulatory body: banking (Federal Reserve), securities (Securities and Exchange TITLE II: Functional Regulation Commission) and insurance (state regulators).

Covers state regulation of insurance, redomestication of mutual insurers, National Association of Registered Agents and Brokers, rental car agency TITLE III: Insurance Regulation insurance activities and confidentiality.

Prohibits unitary savings and loan holding companies from engaging in nonfinancial activities TITLE IV: Unitary Thrift Holding Company Provisions or affiliating with nonfinancial entities.

Requires all financial institutions to disclose to customers TITLE V: Privacy their privacy policy for nonpublic information.

Establishes a new capital structure for FHLBs, TITLE VI: Federal Home Loan Bank increases access to funds for smaller member (FHLB) System Modernization banks, and discusses regulatory changes.

Addresses ATM fee reform, the Community TITLE VII: Other Provisions Reinvestment Act and other regulatory improvements.

Source: TowerGroup.

summary of DEFINED BENEFIT PLAN FORMULAS

Benefits are based on a dollar amount per month for Dollar amount formula each year of service recognized by the plan.

Benefits are based on a percentage of an average of career Percent of career earnings earnings for every year of service recognized by the plan.

Benefits are based on employer and, occasionally, employee Percent of contribution contributions. Benefits equal a percentage of total contributions.

Each participant is allocated an account that receives credits on an annual basis: a pay credit, generally based on a percentage of compensation, and an interest credit, based on a fixed interest rate or linked to an Cash balance index such as the Treasury bill rate. The accounts are portable.

For each year of work, employees are credited with a percentage applied Pension equity to their final average earnings. Generally disbursed as a lump sum.

Source: U.S. Department of Labor, Bureau of Labor Statistics.

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Tahepp eFnindaicnciesal services industry

Thrifts Summaries

summary of GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) COMPARED WITH STATUTORY ACCOUNTING PRINCIPLES (SAP)

GAAP SAP Accounted for over the period in which the premium is earned, Accounted for immediately Sales costs i.e., the policy period. on the sale of a policy. Taxes on unearned income can be Some taxes must be paid on a Unearned income deferred until the income is earned. portion of unearned premium. Reserves held to pay known losses in future need not be Loss reserves must be Loss reserve discounting discounted for tax purposes. discounted for tax purposes. Net worth may include reinsurance payments that Net worth cannot include potentially Reinsurance recoverables may not be recoverable. unrecoverable reinsurance payments. Certain assets, e.g., furniture and equipment, can be Such assets cannot be Nonadmitted assets included in net worth. included in net worth. Deferred taxes on Taxes on unrealized unrealized capital gains cannot Those anticipated taxes need not capital gains be included in net worth. be deducted from net worth. Requires insurers to carry certain Most bonds can be carried Bonds bonds at fair market value. at their amortized value. Surplus notes, a highly subordinated form of debt, Surplus notes can be carried as Surplus notes must be carried as liabilities. part of policyholder’s surplus.

Source: Insurance Information Institute.

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The Financial services industry Appendices

brief history

YEAR EVENT 1601 First insurance legislation in the U.K. enacted. Modern insurance has its root in this law concerning coverages for merchandise and ships.

1735 Friendly Society, first insurance company in the U.S., established in Charleston, S.C. The mutual insurer went out of business in 1740.

1759 First life insurance company, established in Philadelphia by the Synod of the Presbyterian Church.

1762 Equitable Life Assurance founded. Was the world’s oldest mutual insurer until it failed in 2001.

1782 Pennsylvania chartered first bank in the U.S.

1790 The federal government refinanced all federal and state Revolutionary War debt, issuing $80 million in bonds. These became the first major issues of publicly traded securities, marking the birth of the U.S. investment markets.

1791 Secretary of the Treasury, Alexander Hamilton, established First Bank of the United States.

1792 Insurance Company of North America, first stock insurance company, established.

The Buttonwood Agreement, pact between 24 brokers and merchants to trade securities on a common commission basis, marked the origins of the New York Stock Exchange. Bank of America was first listed stock.

1809 Rhode Island was the scene of first bank failure.

1849 New York passed first general insurance law in the U.S.

1850 Franklin Health Assurance Company of Massachusetts offered first accident and health insurance.

1863 Office of the Comptroller of the Currency established in the U.S. Treasury Department. Authorized to charter banks and issue national currency.

1875 American Express established first pension plan in the U.S.

1880 First corporate surety company established.

1890 First policies providing benefits for disabilities from specific diseases offered.

1898 Travelers Insurance Company issued first automobile insurance policy in the U.S.

1909 St. Mary’s Cooperative, first U.S. credit union, formed in New Hampshire.

Massachusetts passed first state credit union law.

1911 Group life insurance for employees introduced.

1913 Federal Reserve established to replace J.P. Morgan as lender of last resort.

1916 National Bank Act, limiting bank insurance sales, except in small towns, passed.

1920 Financial options introduced.

1924 First mutual funds established in Boston.

1929 Stock market crash. Nearly 10,000 U.S. banks failed.

1932 Federal Home Loan Bank Act established Federal Home Loan Bank System to act as central credit system for savings and loans institutions.

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appendices

Brief History

YEAR EVENT 1933 Glass-Steagall Act, separating banking and securities industries, passed by Congress.

Federal Deposit Insurance Corporation, guaranteeing accounts up to $2,500, opened.

Securities Act of 1933 passed. Regulated registration and offering of new securities, including mutual funds, to the public.

1934 Securities Exchange Act passed. Authorized Securities and Exchange Commission to provide for fair and equitable securities markets.

Federal Savings and Loan Insurance Corporation established by Congress to insure savings and loans deposits. Replaced by Savings Association Insurance Fund in 1989.

Federal Credit Union Act of 1934 authorized establishment of federally chartered credit unions in all states.

1936 Revenue Act of 1936 established tax treatment of mutual funds.

1940 Investment Company Act set structure and regulatory framework for modern mutual fund industry.

1944 National Association of Investment Companies, predecessor to the Investment Company Institute, formed and began collecting statistics.

1950 First package policies for homeowners insurance introduced.

1955 First U.S.-based international mutual fund introduced.

1956 Bank Holding Company (BHC) Act, putting multiple bank holding companies under federal supervision, passed. Stipulates that nonbanking activities of BHCs must be “closely related to the business of banking.”

1960 Bank Merger Acts of 1960 and 1966 set standards for mergers and placed them under federal authority.

1961 Banking industry introduced fixed-rate certificates of deposit.

1962 Keogh plans, providing savings opportunities for self-employed individuals, introduced under the Self Employed Individuals Tax Retirement Act.

1968 Mortgage insurance introduced.

Federal flood insurance program established with the passage of the National Flood Insurance Act. It enables property owners in communities that participate in flood reduction plans to purchase insurance against flood losses.

1970 U.S. government introduced mortgage-related securities to increase liquidity.

National Credit Union Administration created to charter and supervise federal credit unions.

National Credit Union Share Insurance Fund created by Congress to insure members’ deposits in credit unions up to the $100,000 federal limit. Administered by the National Credit Union Administration.

1971 Municipal bonds insured for first time in arrangement between American Municipal Bond Assurance Corporation (predecessor to Ambac Assurance Corporation) and Borough Medical Arts Building in Alaska.

NASDAQ, the first electronic stock market, was introduced by NASD, then known as the National Association of Securities Dealers. NASDAQ was spun off in 2000.

1972 Money market mutual funds introduced.

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Appendices

brief history

YEAR EVENT 1974 Automated teller machines (ATMs) widely introduced.

Employee Retirement Income Security Act (ERISA) set minimum standards for pension plans in private industry; established the federal Pension Benefit Guaranty Corporation to protect pension benefits.

1975 SEC deregulated broker commissions by eliminating fixed commissions brokers charged for all securities transactions.

1976 First individual variable life insurance policy issued.

1977 Banking industry introduced variable rate certificates of deposit.

Community Reinvestment Act passed to encourage banks to meet credit needs of their local communities.

1978 International Banking Act limited the extent to which foreign banks could engage in securities activities in the U.S.

1979 Congress created the Central Liquidity Facility, credit union lender of last resort.

1980 Depository Institutions Deregulation and Monetary Control Act provided universal requirements for all financial institutions, marking first step toward removing restrictions on competition for deposits.

The Office of the Comptroller of the Currency and the Federal Reserve authorized banks to establish securities subsidiaries to combine the sale of securities with investment advisory services.

1982 Garn-St. Germain Depository Institutions Act authorized money market accounts and expanded thrifts’ lending powers.

Stock market futures contracts introduced.

1983 Federal government introduced collateralized mortgage obligations.

Bank of America bought discount securities broker, Charles Schwab. Schwab reacquired the discounter in 1987.

1987 Federal Reserve ruling interpreting Section 20 of Glass-Steagall as permitting separately capitalized affiliates of commercial bank holding companies to engage in a variety of securities activities on a limited basis.

1989 Financial Institutions Reform, Recovery and Enforcement Act established, providing government funds to insolvent savings and loan institutions (S&Ls) from the Resolution Trust Corporation and incorporating sweeping changes in the examination and supervision of S&Ls.

Savings Association Insurance Fund, deposit insurance fund operated by the FDIC, established.

1990 J.P. Morgan permitted to underwrite securities.

1992 European Union’s Third Non-Life Insurance Directive became effective, establishing a single European market for insurance.

1994 Riegle-Neal Interstate Banking and Branching Efficiency Act allowed bank holding companies to acquire banks in any state and, as of June 1, 1997, to branch across state lines.

1995 U.S. Supreme Court ruled in NationsBank vs. Variable Annuity Life Insurance Company that annuities are not a form of insurance under the National Bank Act, thus allowing national banks to sell annuities without limitation.

Private Securities Litigation Reform Act of 1995 enacted to reduce the number of frivolous securities fraud lawsuits filed.

1996 Barnett Bank U.S. Supreme Court decision allowed banks to sell insurance nationwide.

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appendices Appendices

Brief History

YEAR EVENT 1996 Section 20 of Glass-Steagall amended to allow commercial bank affiliates to underwrite up to 25 percent of revenue in previously ineligible securities of corporate equity or debt.

1997 The Financial Services Agreement of the General Agreement on Trade in Services provided framework to reduce or eliminate barriers that prevent financial services from being freely provided across national borders, or that discriminate against foreign-owned firms.

1998 Citibank and Travelers merged to form Citigroup, a firm engaged in all major financial services sectors.

1999 Gramm-Leach-Bliley Financial Services Modernization Act allowed banks, insurance companies and securities firms to affiliate and sell each other’s products.

2001 U.S. House of Representatives Banking Committee renamed itself the Financial Services Committee.

2002 J.P. Morgan Chase introduced an annuity, becoming one of the first banking companies to underwrite an insurance product under the Gramm-Leach-Bliley Act.

Sarbanes-Oxley Act enacted to increase the accountability of the boards of publicly held companies to their shareholders. Strengthened the oversight of corporations and their accounting firms.

President Bush signed the Terrorism Risk Insurance Act (TRIA), whereby private insurers and the federal government share the risk of future losses from terrorism for a three-year period.

2003 State regulators and the Securities and Exchange Commission (SEC) launched investigations into late trading and market timing in the mutual funds and variable annuities industries.

Fair and Accurate Credit Transaction Act (FCRA) enacted to provide uniform rules for banks, insurers and others who use credit information, and to provide credit fraud and identity theft protections.

2004 New York Attorney General Eliot Spitzer, the Securities and Exchange Commission, and a number of state regulators launched investigations into insurance industry sales and accounting practices.

2005 Federal Bankruptcy Prevention and Consumer Protection Act was enacted to tighten rules for personal bankruptcy.

Citigroup sold off its Travelers’ life insurance unit, following the spin off of its property/casualty business in 2002. This dissolved the arrangement that led to the passage of the Gramm-Leach-Bliley Act in 1999.

Congress passed legislation extending TRIA to December 2007. The act, originally passed in 2002 to provide a federal backstop for terrorism insurance losses, had been set to expire at the end of 2005.

2006 President Bush signed the Federal Deposit Insurance Reform Conforming Amendments Act of 2005, which merges the Bank Insurance Fund and the Savings Association Insurance Fund into the new Deposit Insurance Fund, increases the deposit insurance limit for certain retirement accounts from $100,000 to $250,000, and indexes that limit to inflation.

Congress passed landmark pension reform legislation to close funding shortfalls in the nation’s defined benefit system. The act also provides tax incentives for workers to enroll in individual retirement accounts, secures the legality of cash balance pension plans and permits automatic enrollment in employer-sponsored defined contribution pension plans such as 401(k)s.

Massachusetts became the first state to pass a universal health insurance law.

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Appendices

Financial services organizations

Advantage Group • 1610 Des Peres Rd., Suite 370. St. Louis, MO 63131. Tel. 314-984-0028. Fax. 314-984-0068. http://www.indexannuity.org/ — Provides research and consulting services to insurance companies and financial service firms in all aspects of index annuities. A.M. Best Company, Inc. • Ambest Rd., Oldwick, NJ 08858. Tel. 908-439-2200. http://www.ambest.com — Rating organization and publisher of books and periodicals relating to the insurance industry. America’s Health Insurance Plans • 601 Pennsylvania Avenue, NW, South Building, Suite 500, Washington, DC 20004. Tel. 202-778-3200. Fax. 202-331-7487. http://www.ahip.org — National trade association representing health insurance plans providing medical, long-term care, disability income, dental supplemental, stop-gap and reinsurance coverage. American Bankers Association • 1120 Connecticut Ave., NW, Washington, DC 20036. Tel. 800-BANKERS. Fax. 202-663-7543. http://www.aba.com — Represents banks of all sizes on issues of national importance for financial institutions and their customers. Brings together all categories of banking institutions, including community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks. American Bankers Insurance Association • 1120 Connecticut Ave., NW, Washington, DC 20036. Tel. 202-663-5163. Fax. 202-828-4546. http://www.theabia.com — A separately chartered affiliate of the American Bankers Association. A full service association for bank insurance interests dedicated to further- ing the policy and business objectives of banks in insurance. The American College • PO Box 1513, 270 S. Bryn Mawr, PA 19010. Tel. 1-888-AMERCOL. Fax. 610-526-1465. http://www.theamericancollege.edu — An independent, accredited, nonprofit educational institution that provides graduate and professional education, primarily on a distance learning basis, to people pursuing career growth in the field of financial services. American Council of Life Insurers • 101 Constitution Ave, NW Ave., Washington, DC 20001-2133. Tel. 202-624-2000. http://www.acli.com/ — Trade association responsible for the public affairs, government, legislative and research aspects of the life insurance business. American Financial Services Association • 919 18th St., NW, Suite 300, Washington, DC 20006-5517. Tel. 202-296-5544. Fax. 202-223-0321. http://www.americanfinsvcs.com — The national trade association for market funded providers of financial services to consumers and small businesses. American Insurance Association • 1130 Connecticut Ave., Suite 1000, NW, Washington, DC 20036. Tel. 202-828-7100. Fax. 202-293-1219. http://www.aiadc.org/ — Trade and service organization for property/ casualty insurance companies. Provides a forum for the discussion of problems and provides safety, promotional and legislative services. Association of Financial Guaranty Insurors • c/o TowersGroup, 15 West 39th St., 14th Fl., New York, NY 10018. Tel. 212-354-5020. Fax. 212-391-6920. http://www.afgi.org — Trade association of the insurers and reinsurers of municipal bonds and asset-backed securities. Bank Administration Institute • One N. Franklin, Suite 1000, Chicago, IL 60606-3421. Tel. 888-284-4078 or 312-683-2464. Fax. 800-375-5543 or 312-683-2373. http://www.bai.org — A professional organization devoted exclusively to improving the performance of financial services companies through strategic research and information, education and training. Bank for International Settlements • PO Box CH-4002, Basel, Switzerland. Tel. 41-61-280-8080. Fax. 41-61-280-9100. http://www.bis.org — An international organization which fosters cooperation among central banks and other agencies in pursuit of monetary and financial stability.

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Bank Insurance & Securities Association • 303 West Lancaster Avenue, Suite 2D, Wayne, PA 19087. Tel. 610-989-9047. Fax. 610-989-9102. http://www.bisanet.org — Fosters the full integration of securities and insurance businesses with depository institutions’ traditional banking businesses. Participants include executives from the securities, insurance, investment advisory, trust, private banking, retail, capital markets and commercial divisions of depository institutions. Bank Insurance Market Research Group • 154 E. Boston Post Rd., Mamaroneck, NY 10543. Tel. 914-381-7475. http://www.singerpubs.com — Provides market research and investment sales data to the bank and insurance industries, based on in-depth surveys of depository and insurance entities augmented by analysis of government data. Bond Market Association • 360 Madison Ave., New York, NY 10017-7111. Tel. 646-637-9200. Fax. 646-637-9126. http://www.bondmarkets.com/ — Represents securities firms and banks that underwrite, trade and sell debt securities, both domestically and internationally. Certified Financial Planner Board of Standards, Inc. • 1670 Broadway, Suite 600, Denver, CO 80202-4809. Tel. 303-830-7500. Fax. 303-860-7388. http://www.cfp.net — Group whose mission is to create awareness of the importance of financial planning and the value of the financial planning process and to help under- served populations gain access to competent and ethical financial planning. College Savings Plans Network • PO Box 11910, Lexington, KY 40578-1910. Tel. 859-244-8175. Fax. 859-244-8053. http://www.collegesavings.org — The College Savings Plans Network is an affiliate of the National Association of State Treasurers. The Network serves as a clearinghouse for information on college savings programs. Commercial Finance Association • 225 W. 34th St., Suite 1815, New York, NY 10122. Tel. 212-594-3490. Fax. 212-564-6053. http://www.cfa.com — The trade group of the asset-based financial services industry, with members throughout the U.S., Canada and around the world. The Committee of Annuity Insurers • c/o Davis & Harman LLP, 1455 Pennsylvania Avenue, NW, Suite 1200, Washington, DC 20004. Tel. 202-347-2230. Fax. 202-393-3310. http://www.annuity-insurers.org/about- CAI.aspx — Group whose goal is to address federal legislative and regulatory issues relevant to the annuity industry and to participate in the development of federal tax and securities policies regarding annuities. Commodity Futures Trading Commission • Three Lafayette Centre, 1155 21st St., NW, Washington, DC 20581. Tel. 202-418-5000. Fax. 202-418-5521. http://www.cftc.gov — Independent agency created by Congress to protect market participants against manipulation, abusive trade practices and fraud. Conference of State Bank Supervisors • 1155 Connecticut Ave., NW, 5th Fl. Washington, DC 20036-4306. Tel. 202-296-2840. Fax. 202-296-1928. http://www.csbs.org — National organization that advocates on behalf of the nation’s state banking system. Conning Research and Consulting Inc. • One Financial Plaza, Hartford, CT 6103-2627. Tel. 888-266-6464. Fax. 860-299-2482. http://www.conning.com — Research and consulting firm that offers a growing array of specialty information products, insights and analyses of key issues confronting the insurance industry. Consumer Bankers Association • 1000 Wilson Blvd., Suite 2500, Arlington, VA 22209-3912. Tel. 703-276-1750. Fax. 703-528-1290. http://www.cbanet.org/ — The Consumer Bankers Association is the recognized voice on retail banking issues in the nation’s capital. The DMA Financial Services Council • 1120 Avenue of the Americas, New York, NY 10036-6700. Tel. 212-768-7277. Fax. 212-302-6714. http://www.the-dma.org — Integrates the direct marketing concept with mainstream insurance and financial services marketing to create a strategic business synergism; a division of the Direct Marketing Association (DMA).

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Financial services organizations

Eastbridge Consulting Group, Inc. • 50 Avon Meadow Lane, Avon, CT 06001. Tel. 860-676-9633. Fax. 860-677-4233. http://www.eastbridge.com — Provides consulting, marketing, training and research services to financial services firms, including those involved in worksite marketing and the distribution of individual and employee benefits products. Employee Benefit Research Institute • 2121 K Street, NW Suite 600, Washington, DC 20037-1896. Tel. 202-659-0670. Fax. 202 775-6312. http://www.ebri.org — The Institute’s mission is to advance knowl- edge and understanding of employee benefits and their importance to the U.S. economy. Federal Deposit Insurance Corporation (FDIC) • Division of Finance, 550 17th St., NW, Washington, DC 20429-9990. Tel. 202-736-0000. http://www.fdic.gov — The FDIC’s mission is to maintain the stability of and public confidence in the nation’s financial system. To achieve this goal, the FDIC has insured deposits and promoted safe and sound banking practices since 1933. Federal Financial Institutions Examination Council • 2000 K St., NW, Suite 310, Washington, DC 20006. Tel. 202-872-7500. Fax. 202-872-7501. http://www.ffiec.gov/ — A formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal Reserve System. Federal Reserve • 20th St. and Constitution Ave., NW, Washington, DC 20551. Tel. 202-452-3000. http://www.federalreserve.gov — Central bank of the United States, founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Financial Markets Center • PO Box 334, Philomont, VA 20131. Tel. 540-338-7754. Fax. 540-338-7757. http://www.fmcenter.org/ — An independent, nonprofit institute that provides research and education resources to grassroots groups, unions, policymakers and journalists interested in the Federal Reserve System and financial markets. The Financial Planning Association • 4100 E. Mississippi Ave., Suite 400, Denver, CO 80246-3053. Tel. 800-322-4237. Fax. 303-759-0749. http://www.fpanet.org/ — Group whose primary aim is to foster the value of financial planning and advance the financial planning profession. Financial Services Coordinating Council • 901 7th St., 2nd Fl., Washington, DC 20001. Tel. 202-315-5100. Fax. 202-315-5010. http://www.fsccnews.com — A coalition, including the American Insurance Association, the American Council of Life Insurers, the American Bankers Association, the Securities Industry Association and the Investment Company Institute, that represents the diversified financial services industry. Financial Services Forum • 745 Fifth Ave., Suite 1602, New York, NY 10151. Tel. 212-308-3420. Fax. 212-308-7383. http://www.financialservicesforum.org — An organization of 20 chief executive officers of major U.S. financial services firms dedicated to the execution and coordination of activities designed to promote the development of an open and competitive financial services industry. Financial Services Industry Council • 2000 Pennsylvania Ave. NW, Suite 6000, Washington, DC 20006. Tel. 202-777-5000. Fax. 202-777-5100. http://www.financialservicesindustrycouncil.com — A unique forum for insight into the financial services industry. Members gain access to the strategies and practices of the world’s leading financial institutions. The Financial Services Roundtable • 1001 Pennsylvania Avenue, NW, Suite 500 South, Washington, DC 20004. Tel. 202-289-4322. Fax. 202-628-2507. http://www.fsround.org/ — A forum for U.S. financial industry leaders working together to determine and influence the most critical public policy concerns related to the integration of the financial services industry. Fitch Credit Rating Company • One State Street Plaza, New York, NY 10004. Tel. 212-908-0500. Fax. 212-480-4435. http://www.fitchratings.com/ — Assigns claims-paying ability ratings to insurance companies.

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Financial services organizations

Futures Industry Association • 2001 Pennsylvania Ave., NW, Suite 600, Washington, DC 20006. Tel. 202-466-5460. Fax. 202-296-3184. http://www.futuresindustry.org — Association representative of all organizations that have an interest in the futures market. Global Association of Risk Professionals • 100 Pavonia Ave., Suite 405, Jersey City, NJ 07310. Tel. 201-222-0054. Fax. 201-222-5022. http://www.garp.com — International group whose aim is to encourage and enhance communications between risk professionals, practitioners and regulators worldwide. The Hedge Fund Association • 2875 NE 191st Street, Suite 900, Aventura, FL 33180. Tel. 202-478-2000, Fax. 202-478-1999. http://www.thehfa.org — An international not-for-profit association of hedge fund managers, service providers and investors formed to unite the hedge fund industry and add to the increasing awareness of the advantages and opportunities in hedge funds. Highline Data LLC • One Alewife Center, Suite 460, Cambridge, MA 02140. Tel. 877-299-9424. http://www.highlinedata.com/ — An information and data services company comprised of two principal product lines: National Underwriter Insurance Data Services and Highline Banking Data Services. Independent Insurance Agents & Brokers of America, Inc. • 127 S. Peyton St., Alexandria, VA 22314 Tel. 800-221-7917. Fax. 703-683-7556. http://www.independentagent.com — Trade association of independent insurance agents. Insurance Information Institute • 110 William St., New York, NY 10038. Tel. 212-346-5500. Fax. 212-791-1807. http://www.iii.org/ — A primary source for information, analysis and referral on insurance subjects. International Finance and Commodities Institute • 2, Cours de Rive, 1204 Geneva, Switzerland. Tel. 41-22-312-5678. Fax. 41-22-312-5677. http://www.riskinstitute.ch — Nonprofit foundation created with the objective of promoting global understanding of commodity trading as well as financial futures and options. International Swaps and Derivatives Association • 360 Madison Ave., 16th Fl, New York, NY 10017. Tel. 212-901-6000. Fax. 212-901-6001. http://www.isda.org — The association’s primary purpose is to encourage the prudent and efficient development of the privately negotiated derivatives business. Investment Company Institute • 1401 H St., NW, Washington, DC 20005. Tel. 202-326-5800. Fax. 202-326-5874. http://www.ici.org — The national association of the American investment company industry. ISO • 545 Washington Blvd., Jersey City, NJ 07310-1686. Tel. 800-888-4476. Fax. 201-748-1472. http://www.iso.com — Provider of products and services that help measure, manage and reduce risk. Provides data, analytics and decision-support solutions to professionals in many fields, including insurance, finance, real estate, health services, government and human resources. Kehrer-LIMRA • 300 Day Hill Rd., Windsor, CT 06095-4761. Tel. 860-298-3910. Fax. 860-298-9555. http://www.kehrerlimra.com/ — Consultant to banks on improving their insurance and securities programs. Conducts studies of sales penetration, profitability, compensation and compliance. The Life and Health Insurance Foundation for Education • 2175 K Street NW, Washington, DC, 20037- 1809. Tel.202-464-5000. http://www.life-line.org/ — Nonprofit organization dedicated to addressing the public’s growing need for information and education about life, health, disability and long-term care insurance. LIMRA International • 300 Day Hill Rd., Windsor, CT 06095. Tel. 860-688-3358. Fax. 860-298-9555. http://www.limra.com/ — Worldwide association providing research, consulting and other services to nearly 850 insurance and financial services companies in more than 60 countries. LIMRA was established to help its member companies maximize their marketing effectiveness.

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Financial services organizations

LOMA (Life Office Management Association) • 2300 Windy Ridge Pkwy., Suite 600, Atlanta, GA 30339- 8443. Tel. 770-951-1770. Fax. 770-984-0441. http://www.loma.org — Worldwide association of insurance companies specializing in research and education, with a primary focus on home office management. Michael White Associates • 823 King of Prussia Rd., Radnor, PA 19087. Tel. 610-254-0440. Fax. 610 254-5044. http://www.bankinsurance.com — Consulting firm that helps clients plan, develop and implement bank insurance sales programs. Conducts research on bank insurance trends. Moody’s Investors Service • 99 Church St., New York, NY 10007. Tel. 212-553-1658. http://www.moodys. com — Global credit analysis and financial information firm. Mortgage Bankers Association of America • 1919 Pennsylvania Ave., NW, Washington, DC 20006-3404. Tel. 202-557-2700. Fax. 202-721-0167. http://www.mbaa.org/ — Represents the real estate finance industry. Mortgage Insurance Companies of America (MICA) • 727 15th St., NW, 12th Fl., Washington, DC 20005. Tel. 202-393-5566. Fax. 202-393-5557. http://www.micanews.com — Represents the private mortgage insurance industry. MICA provides information on related legislative and regulatory issues, and strives to enhance understanding of the vital role private mortgage insurance plays in housing Americans. Museum of American Financial History • 26 Broadway, Rm. 947, New York, NY 10004. Tel. 212-908-4110. Fax. 212-908-4601. http://www.financialhistory.org — An affiliate of the Smithsonian Institution, the museum is the nation’s only independent public museum dedicated to celebrating the spirit of entrepreneurship and the democratic free market tradition. NASD • 1735 K St., NW, Washington, DC 20006. Tel. 301-590-6500. http://www.nasd.com/ — Securities industry self-regulatory organization. The group registers member firms, writes rules to govern their behavior, examines them for compliance and disciplines those that fail to comply. Also provides education to industry professionals and investors, and support to member firms in their self-compliance activities. National Association for Variable Annuities • 11710 Plaza America Dr., Suite 100, Reston, VA 20190. Tel. 703-707-8830. Fax. 703-707-8831. http://www.navanet.org — Promotes the growth, acceptance and understanding of annuity and variable life products to retirement-focused Americans; provides educational and informational resources. National Association of Federal Credit Unions • 3138 10th St. North, Arlington, VA 22201-2149. Tel. 703-522-4770. Fax. 703-524-1082. http://www.nafcunet.org/ — Trade association that exclusively represents the interests of federal credit unions before the federal government and the public. National Association of Health Underwriters • 2000 N. 14th St., Suite 450, Arlington, VA 22201. Tel. 703-276-0220. Fax. 703-841-7797. http://www.nahu.org/ — Professional association of persons who sell and service disability income, and hospitalization and major medical health insurance. National Association of Insurance and Financial Advisors • 2901 Telestar Ct., PO Box 12012, Falls Church, VA 22042-1205. Tel. 703-770-8100. http://www.naifa.org/ — Professional association representing health and life insurance agents. National Association of Investment Professionals • 12664 Emmer Pl., Suite 201, St. Paul, MN 55124. Tel. 952-322-4322. http://www.naio.com/ — Promotes the interests and the image of its financial profes sionals members, and encourages and facilitates higher levels of competency in members so that they may better serve the investing public. National Association of Mutual Insurance Companies • 3601 Vincennes Rd., Indianapolis, IN 46268. Tel. 317-875-5250. Fax. 317-879-8408. http://www.namic.org — Trade association of property/casualty mutual insurance companies.

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Financial services organizations

The National Association of Personal Financial Advisors • 3250 North Arlington Heights Road, Suite 109, Arlington Heights, IL 60004. Tel. 847-483-5400. Fax. 847-483-5415. http://www.napfa.org/ — Organization of fee-only financial planning professionals serving individuals and institutions. National Association of Professional Insurance Agents • 400 N. Washington St., Alexandria, VA 22314. Tel. 703-836-9340. Fax. 703-836-1279. http://www.pianet.com — Trade association of independent insurance agents. National Credit Union Administration • 1775 Duke St., Alexandria, VA 22314-3428. Tel. 703-518-6300. Fax. 703-518-6660. http://www.ncua.gov — An independent agency in the executive branch of the federal government responsible for chartering, insuring, supervising and examining federal credit unions. NCCI Holdings, Inc. • 901 Peninsula Corporate Circle, Boca Raton, FL 33487. Tel. 561-893-1000. Fax. 561-893-1191. http://www.ncci.com/ — Develops and administers rating plans and systems for workers compensation insurance. National Futures Association • 200 W. Madison St., Suite 1600, Chicago, IL 60606-3447. Tel. 312-781-1300. Fax. 312-781-1467. http://www.nfa.futures.org — Industrywide self-regulatory organization for the commodity futures industry. National Home Equity Mortgage Association • 1301 Pennsylvania Ave. NW, Suite 500, Washington, DC 20004. Tel. 800-342-1121. http://www.nhema.org/ — Association committed to keeping consumers informed and able to take advantage of the benefits afforded by home equity mortgages. National Reverse Mortgage Lenders Association • 1625 Massachusetts Ave. NW., #601, Washington, DC 20036. Tel. 202-939-1784. http://www.nrmlaonline.org — The national voice for lenders and investors engaged in the reverse mortgage business. The group educates consumers about the opportunity to utilize reverse mortgages and trains lenders to be sensitive to the needs of older Americans. Office of Thrift Supervision • 1700 G St., NW, Washington, DC 20552. Tel. 202-906-6000. Fax. 202-898-0230. http://www.ots.treas.gov/ — The primary regulator of all federal and many state-chartered thrift institutions, which include savings banks and savings and loan associations. Options Industry Council • The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, IL 60606. Tel. 888-678-4667 or 312-463-6193. Fax. 312-977-0611. http://www.optionscentral.com — Nonprofit association created to educate the investing public and brokers about the benefits and risks of exchange-traded options. Pension Research Council • The Wharton School of the University of Pennsylvania, 3620 Locust Walk, 3000 Steinberg Hall - Dietrich Hall, Philadelphia, PA 19104-6302. Tel. 215-898-7620. Fax. 215-898-0310. http://prc.wharton.upenn.edu/prc/prc.html — Organization committed to generating debate on key policy issues affecting pensions and other employee benefits. Property Casualty Insurers Association of America • 2600 River Rd., Des Plaines, IL 60018-3286. Tel. 847-297-7800. Fax. 215-968-0703. http://www.pciaa.net — Serves as a voice on public policy issues and advocates positions that foster a competitive marketplace for property/casualty insurers and insurance consumers. Securities and Exchange Commission • 450 Fifth St., NW, Washington, DC 20549. Tel. 202-942-7040. http://www.sec.gov/ — Primary mission is to protect investors and maintain the integrity of the securities markets.

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Financial services organizations

Securities Industry Association • 120 Broadway, 35th Fl., New York, NY 19271-0080. Tel. 212-608-1500. Fax. 212-968-0703. http://www.sia.com/ — Association bringing together the shared interests of securities firms to accomplish common goals. SNL Financial LC • One SNL Plaza, PO Box 2124, Charlottesville, VA 22902. Tel. 434-977-1600. Fax. 434-977-4466. http://www.snl.com — Research firm that collects, standardizes and disseminates all relevant corporate, financial, market and M&A data as well as news and analytics for the industries it covers: banking, specialized financial services, insurance, real estate and energy. Society of Financial Services Professionals • 17 Campus Blvd., Suite 201, Newtown Square, PA 19073-3230. Tel. 610-526-2500. Fax. 610-527-1499. http://www.financialpro.org/ — Advances the professionalism of cre- dentialed members with state-of-the-art resources to serve their clients’ financial needs. Standard & Poor’s Rating Group • 55 Water St., New York, NY 10041. Tel. 212-438-2000. http://www.standardandpoors.com — Monitors the credit quality of bonds and other financial instruments of corporations, governments and supranational entities. Surety Association of America • 1101 Connecticut Ave., NW, Suite 800, Washington, DC 20036. Tel. 202-463-0600. Fax. 202-463-0606. http://www.surety.org — Statistical, rating, development and advisory organization for surety companies. TowerGroup • Two Charles River Place, 63 Kendrick St., Needham, MA 02494-2708. Tel. 781-292-5200. Fax. 781-449-6982. http://www.towergroup.com/ — Research and advisory firm focused exclusively on the global financial services industry. Vards/Morningstar, Inc. • 225 West Wacker Dr., Chicago, IL 60606. Tel. 312-696-6000. Fax. 312-696-6015. http://corporate.morningstar.com — Software technology and research data firm that helps annuity manufacturers, distributors, and financial advisors implement new technology and business practices in the sale and servicing of annuities. Weather Risk Management Association (WRMA) • 1156 15th St., NW, Suite 900, Washington, DC 20005. Tel. 202-289-3800. Fax. 202-393-9741. http://www.wrma.org — The goal of the WRMA is to serve the weather risk management industry by providing forums for discussion and interaction with others associated with financial weather products. Ward Group • 11500 Northlake Dr., Suite 305, Cincinnati, OH 45249-1662. Tel. 513-791-0303. Fax. 513-985-3442. http://www.wardinc.com — Management consulting firm specializing in the insurance industry.

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Company Index

Note: Company names in charts in Arbor I Ltd., 82 C this book may vary. They appear as Arch Capital Group, 77, 79 Cadence Capital Management LLC, printed in the original source. Arthur J. Gallagher & Co., 72, 180 33 Assets of Chela, 143 Capital One Financial Corp., 4, 29, 7-Eleven, 176 Assicurazioni Generali, 177, 178, 179 96, 108, 151 Assurant, 87 Capital Research & Management A Astoria Financial Corporation, 114 Company, 141, 182 A.G. Edwards, 128 Atlantic & Western Re, 82 Cardtronics, 176 ABN AMRO Mortgage Group Inc., Atlantic Bank of New York, 96 Cargill Investor Services Inc., 122 166 Atradius Trade Credit Insurance Cascadia Ltd., 82 Aca Financial Guaranty Corp., 78 Co., 79 Caterpillar Financial Services Acacia Federal Savings Bank, 58 Aura Reinsurance plc, 82 Corporation, 152 ACACIA Life Insurance Company, 58 Auto Club, 59 Champlain Ltd., 82 Access Group, 23 Auto-Owners Insurance, 71 Charles Schwab Corp., 49, 128 ACE American Insurance Co., 78 Avalon Re Ltd., 82 Chase, see JP Morgan Chase ACE Limited, 59 Aviva, 177, 178, 179 Chubb, 71, 77 ACUITY, 58 AXA, 59, 60, 82, 90, 177, 178, 179 CIFG Assurance North America Inc., Acuity Bank, 58 78 Aetna Life Insurance Co., 94 B CIT Group Inc., 152 Affiliated Managers Group Inc., 33, BancorpSouth Bank, 56 Citigroup, 1, 9, 23, 29, 33, 47, 48, 55, 129 Bank of America, 4, 9, 23, 29, 47, 48, 56, 63, 80, 96, 108, 109, 122, AFLAC, 87 49, 55, 56, 57, 96, 108, 109, 143, 151, 166, 176, 177, 181 AIG, 9, 58, 59, 60, 71, 79, 80, 90, 177, 151, 152, 166, 176, 177, 181 CMG Mortgage Ins. Co., 80 178 Bank of Ireland plc, 33 CNA, 71, 77, 94 Aiolos Ltd., 82 Bank of New York, 56, 57, 96, 108, CNP Assurances, 179 Alexander Forbes Ltd., 180 109 Coface North America Insurance Alfa Corporation, 58 Bank of the West, 96, 109 Co., 79 Alliance Capital Management, 182 Bank One, 23 College Loan Corp, 23 Alliance FSB, 58 Bankers Life & Casualty Co., 94 Collegiate Funding Services Inc., 143 AllianceBernstein L.P., 129 Bankplus, FSB, 58 Columbia Management Group, 141 Alliant, (Credit Union), 119 Barclays Global Investors, 182 Comerica, 56, 108, 109 Allianz, 33, 91, 177, 178 BB&T, see Branch Banking and Commerce Bank/North, 55, 56 Allstate, 9, 58, 59, 60, 71, 178 Trust Company Commercial Federal Corp., 96 Ambac Assurance Corporation, 78 Beal Savings Bank, 120 Compass Bank, 56, 96 Amegy Bancorp. Inc., 96 Bear Stearns, 128 Conseco, 87 American Airlines, (Credit Union), Belk credit card operations, 143 Conseco Senior Health Insurance 119 Benfield Group Ltd., 180 Co., 94 American Equity, 91 Berkley Insurance Company, 81 Cooper Gay (Holdings) Ltd., 180 American Express, 9, 29, 58, 120, Berkshire Hathaway, 9, 63, 71, 177, Country Life Insurance Company, 59 151, 182 178, 179 Country Trust Bank, 59 American Family Insurance Group, BlackRock, Inc., 129 Countrywide, 47, 48, 109, 166, 182 71 BMS Group, 180 Crédit Agricole, 177, 181 American International Group, see BNP Paribas, 96, 177, 181 Credit Suisse, 177 AIG Boeing Employees, (Credit Union), Cuna Mutual Insurance Society, 59 American National Property & 119 Casualty Co. & Affiliates, 79 Boullioun Aviation Services Inc., 4, D American Reinsurance Corp., 81 63, 143 Dai-ichi Mutual Life Insurance, 179 America Skandia, 90 Branch Banking and Trust Deutsche Bank, 177, 181, 182 American Sterling, 58 Company, 48, 55, 56, 57, 72, 96, Dexia Group, 177 Ameritrade Holding Corp., 122 108, 109, 190 Discover Financial Services Inc., 29 AmerUs Group, 91 Brascan Corp., 33 Donegal Mutual Insurance Co., 59 AmSouth Bancorp., 108 Brown & Brown Inc., 72, 180 Dryden Wealth Management Ltd., 33 Aon, 72, 180 BrownCo LLC, 122 DSP Merrill Lynch, 122

202 The Financial Services Fact Book 2007 www.financialservicesfacts.org

Company Index E Golden West Financial, 114, 115 Jefferson-Pilot, 63, 87, 91 E*TRADE, 114, 122, 128 Goldfish credit card business, 4, 143 John Deere, 63, 152 Edelman Financial Center Inc., 33 Goldman Sachs Group, 9, 128, 129, John Hancock, 48, 59, 60, 90, 94 EquiTrust, 91 181 Jones Lang LaSalle Inc., 33 Erie Insurance Group, 71 Grange Bank, 58 Euler American Credit Indemnity Grange Mutual Casualty Co., 58 K Co., 79 Great West Life, 59 Kamp Re 2005 Ltd., 82 Everest Reinsurance Company, 81, Greater Bay Bancorp, 48 Kansas City Life Insurance Co., 59 179 Guard Financial Group, 59 Keybank, 57, 109 Guard Security Bank, 59 KeyCorp, 108 F Guardian Life Insurance, 59, 87 Farm Bureau Bank, FSB, 58 Guardian Trust Company, FSB, 59 L FB Bancorp, 58 Guggenheim, 33 LaSalle Bank, 55, 109 Federated Investors, Inc., 129, 141 Guy Carpenter & Co. Inc., 180 Legal & General Group, 179 Fidelity Investments, 141, 182 Legg Mason, 33, 122, 128, 129 Fidelity National Financial, 71 H Lehman Brothers, 9, 114, 120, 128, Fifth Third Bank, 56, 57, 96, 108, Hannover Re, 179 181 109 Harrisdirect LLC, 122 Liberty Life, 59 Financial Guaranty Insurance Co., Hartford, 59, 60 Liberty Mutual Insurance Group, 9, 78 Hartford Financial Services, 9, 71, 71, 77 Financial Security Assurance 77, 90, 178 Life Investors Insurance Company Holdings Ltd., 78 HBOS, 177, 181 of America, 94 First American, 58, 71 HCC Surety Group, 77 Lincoln National, 59, 63, 87, 90 First Asset Management Inc., 33 Heath Lambert Group, 180 Lloyd’s, 179 First Bancshares Inc., 58 Hibernia Corp., 4, 96 Loews, see CNA First Colonial Insurance Company, Hilb Rogal & Hobbs Co., 72, 180 79 Houlihan Lokey Howard & Zukin M First Command, 58 Inc., 122 M&T Bank Corp., 108 First Home Savings Bank, 58 HSBC, 4, 29, 47, 48, 96, 109, 143, Main Street Banks Inc. (GA), 96 First Nonprofit Mutual Insurance 151, 177, 181 Manufacturers and Traders Trust Co., 78 Hudson City Bancorp, Inc., 114 Company, 56, 96, 109 First Tennessee Bank, N.A., 56 Hudson United Bancorp, 96 Marsh & McLennan Cos. Inc., 72, First Union National Bank, 23 Hyperion, 33 180 FM Global, 82 Marshall & Ilsley Corp., 96, 108 Ford Motor Credit Company, 151, I Massachusetts Mutual Life, 9, 59, 87 152 IDS Life Insurance Co., 94 MassMutual Trust Company, 59, 141 Fort Washington Trust Company, 59 Illinois Mutual Life Insurance, 58 MBIA Insurance Corporation, 78 Fortis, 33, 177, 181 INATrust, FSB, 59 MBNA, 4, 29, 48, 55, 56, 109, 143 Franklin Templeton, 49, 128, 129, Independence Community Bank Medical Protective Corp., 63 141 Corp., 96 MEEMIC Insurance Co., 63 Freddie Mac, 182 IndyMac Bancorp, 114, 115 Mellon, 49, 57, 108 Fremont Investment & Loan, 120 ING, 58, 60, 90, 91, 114, 177, 178, Members Trust Company, 59 Frontier Trust Company, FSB, 59 179 Mennonite Mutual Aid Assoc., 59 Instinet Group Inc., 122 Merrill Lynch, 9, 96, 120, 122, 128, G InsurBanc, 58 129, 181 Gallagher Re, 180 International Fidelity Insurance MetLife, 1, 9, 48, 49, 59, 60, 63, 87, GE (General Electric), 4, 9, 63, 80, Co., 77 90, 94, 179 81, 94, 120, 143, 151, 152, 177, International Lease Finance Metris Companies Inc., 4, 143 179, 182 Corporation, 152 MidCountry Bank, 58 General Motors Acceptance Midland National Life, 91 Corporation (GMAC), 4, 63, J Millea Holdings, 178 120, 151, 152, 166 JP Morgan Chase, 9, 23, 29, 47, 48, MMA Trust Company, 59 General Re, 81 49, 55, 56, 57, 96, 108, 109, 141, Modern Woodmen of America, 58 Generations Bank, 59 143, 151, 166, 176, 177, 181, Montpelier Re, 82 Genworth, 60, 71 182 Morgan Stanley, 4, 9, 120, 128, 129, Gold Banc Corp. Inc., 96 Jackson National, 60, 91 141, 143, 181 Golden 1, (Credit Union), 119 Jardine Lloyd Thompson Group P.L.C., 180

www.financialservicesfacts.org The Financial Services Fact Book 2007 203 Mortgage Guaranty Insurance Corp., Providian Financial Corp., 4, 143 Teachers Insurance and Annuity, 59 80 Province Bank FSB, 59 TexasBanc Holding Company, 96 Munich Re Group, 82, 178, 179 Prudential, 9, 33, 58, 87, 90, 177, Thomas H. Lee Partners LP, 122 Mutual of Omaha Insurance, 87 178, 179 Thrivent Financial for Lutherans, MWABank, 58 PXRE, 82 58, 87 TIAA-CREF, 9, 59, 87, 90, 141 N R Torchmark, 87 N.J.M. Bank, FSB, 58 Radian Guaranty Inc., 78, 80 Towers Perrin, 180 Nasdaq Stock Market Inc., 122 Regions Bank, 96, 108, 109 Transamerica, 59, 60 National City, 48, 55, 57, 108, 109, Reinsurance Group of America Inc., Transatlantic/Putnam Reinsurance 166 179 Co., 81 National Indemnity Company, 81 Republic Mortgage Insurance Co., Triad Guaranty Insurance Group, 80 Nationwide, 9, 58, 59, 60, 71 80 Navy, (Credit Union), 119 Residential Capital Corporation, 152 U Nelnet Inc., 143 Residential Re, 82 U.S. Bancorp, 4, 33, 47, 108, 122, New Jersey Manuf. Insurance, 58 RiverSource Annuities, 60 152, 176 New York Community Bancorp, Royal Bank of Scotland, 177 U.S. Bank, 23, 55, 56, 57, 96, 109 Inc., 96, 114 UBS, 120, 177, 181, 182 New York Life, 9, 59, 60, 87 S UICI, 4, 63 Nippon Life Insurance, 177, 178, 179 Safeco, 71, 77 Union Bank of California, N.A., 55, Nomura Holdings, 181 Sanders Morris Harris Group Inc., 56 North Fork, 96, 108, 109 33 UnitedHealth Group Inc., 63 Northern Trust Co., 57, 108, 182 Santa Barbara Asset Management Unitrin, 87 Northwestern Mutual, 59, 87 Inc., 33 UnumProvident, 87, 94 Nuveen Investments Inc., 33 Security Service, (Credit Union), 119 USAA, 58, 71, 82, 120 Sequana Capital, 33 USI Holdings Corp., 72 O Shelter Financial Bank, 58 Odyssey America Re/Odyssey Re Shelter Mutual Insurance Company, V Co., 81 58 Vanguard Group, 141, 182 Ohio Farmers Insurance Co., 58 SLM Corporation (Sallie Mae), 23, Oil Casualty Insurance, Ltd., 82 151 w Old Mutual, 91 Société Générale, 177 W.R. Berkley, 58, 71 Old National Bancorp, 48 Southern Pioneer Property & Wachovia, 9, 33, 47, 48, 49, 56, 57, Old Republic Insurance Group, 79 Casualty Ins. Co., 80 72, 96, 108, 109, 176 OneBeacon Insurance Group, 79 Sovereign Bancorp, Inc., 96, 114, Washington Mutual, 4, 9, 29, 96, OppenheimerFunds/MassMutual, 115 114, 115, 143, 166, 176 141 Spaulding & Slye Advisors, LP, 33 WellChoice Inc., 63 Orange County Teachers, (Credit St. Paul Travelers Cos., 1, 9, 63, 71, WellPoint Inc., 63 Union), 119 77 Wells Fargo, 9, 23, 29, 47, 48, 49, 55, ORIX Corp., 122 State Employees’, (Credit Union), 56, 57, 72, 96, 108, 109, 166, 119 176, 180 P State Farm, 9, 58, 71, 178 Westcorp, 96 Pacific Life, 60, 87, 90 State Street Bank and Trust Co., 57, Western & Southern Financial, 59, Pacific Mutual Holding Co., 4, 63, 96, 108, 109, 182 60, 87 143 Stichting Cumulatief Preferente, 58 Westfield Bank, FSB, 58 PacifiCare Health, 63 Stonebridge Casualty Insurance Willis Group Holdings Ltd., 72, 180 PartnerRe, 179 Co., 79 World Savings Bank, FSB, 96 Pentagon, (Credit Union), 119 Sun Life, 91 Permal Group Ltd., 33, 122 Suncoast Schools, (Credit Union), X PHH Mortgage Services 119 XL Re, 78, 81, 179 Corporation, 166 SunTrust Bank, 47, 55, 96, 108, 109 PMI Group, 80 Swiss Re, 63, 81, 82, 178, 179 Z PNC, 49, 57, 108, 109, 176 Synovus Financial Corp., 108 Zions Bancorp., 96 Polish National Alliance of the U.S., Zurich, 77, 82, 177, 178 58 T Popular, 108 T. Rowe Price Group, Inc., 129 Principal, 58, 60, 87 Taunus Corporation, 47, 49 Progressive, 71 TD Waterhouse Group Inc., 96, 122

204 The Financial Services Fact Book 2007 www.financialservicesfacts.org Subject Index

401(k) plans transactions, 176 asset allocation, 41 volume, 175 rollover rates, 40 auto insurance, online, 170 Automated Clearing House (ACH) network, 173 A automated teller machines. See ATMs American Stock Exchange (AMEX), 135, 136 annuities B bank holding companies, 47, 49 baby boomers, migrant destinations, 186 considerations, 42 bank and thrift deals, top ten, 96 distribution channels, 42, 43 bank holding companies, 46-48 fixed, 42, 89 insurance brokerage income, 46 bank share, 52, 32 investment fee income, 46 writers of, top ten, 60 mutual fund and annuity assets, 49 net assets, 43 mutual fund and annuity income, 47 writers of, top ten, 90 top ten, 47, 49 variable, 42, 43 underwriting fee income, 46 bank share, 52 Bank Holding Company Act of 1956, 1 writers of, top ten, 60, 90 bank insurance acquisitions. See mergers and acquisitions distribution channels, 50 asset-backed securities (ABS), 133-134 fee income, 53, 54 sources, 132 banking industry. See also banks; commercial banks asset management, 33 assets, 2, 98, 102, 103 assets, v concentration, 106 401(k) plans, 41 employment, 99 banking, 2 IT spending, 167 banking, 98, 102, 101, 103-104 regulation, 95 broker/dealers, 126 banking offices, by type of bank, 101 by industry, 2 bankruptcies, by type, 30 commercial banks, top 25, 109 Bankruptcy Abuse Prevention and Consumer Protection credit market, 98-99 Act of 2005, 30 credit unions, 118, 119 banks, 95 distribution annuity income, top ten, 57 life/health insurance, 85 federally chartered, top ten by assets, 96 property/casualty insurance, 69, 72 fixed-annuity premiums, 52 family, 19, 20 in insurance, 50, 53-56 FDIC-insured commercial banks, 103-104 insurance fee income, V, 53 finance companies, 2, 145 top ten, 55 foreign banking offices, in U.S., 101 investment fee income, v government-related, 2 top ten, 56 household 19, 20 mutual fund income, 54 insurance, 2, 69, 72, 85 top ten, 57 mutual fund industry, 139, 140 proprietary mutual fund and annuities assets, top pensions, 2 ten, 57 personal sector, 17-18 purchases of insurance agencies, 54 private pension funds, 34 retail mutual fund sales, 53 retirement funds, 34-35, 36-38, 44 state-chartered, top ten by assets, 96 government employees, 35 underwriting income, 53 securities industry, 2, 124 top ten, 55 ATMs, 175 variable annuity premiums, 52 deployment, off premise, 175 Barnett Bank U.S. Supreme Court decision, 1continues owners, top ten, 176

www.financialservicesfacts.org The Financial Services Fact Book 2007 205 broker/dealers, 124 credit cards assets and liabilities, 126 balance due, 26 business debt, 24 issuers, top ten, 29 business lending, 100 loss rates, 29 business receivables at finance companies, 148 online transactions, 174 use of by families, 28 C credit derivatives, 135 captive finance companies, 143 credit life insurance, 89, 90 cash out home mortgage refinancing, 157 credit insurance, 79 catastrophe bonds, 82 credit insurance companies, top ten, 79 Chicago Board of Trade, 137 credit market, 98-99 Chicago Mercantile Exchange, 84, 137 debt outstanding, 24 college savings plans, 21-23 credit unions, 116 providers, top ten, 22, 23 assets and liabilities, 118 commercial banks branches and offices, 101 assets, 102, 103 distribution by asset size, 119 branches and offices, 101 employment, 99 by asset size, 104, 107 members, 117 concentration, 107 net income, 97 consolidation, 101 profitability, 97 credit market share, 98-99 return on average assets, 97 deposits, 105 state chartered, 117 employment, 99 top ten, 119 expenses, 105 FDIC-insured, 103 D deposits, income and expenses, 105 debit card transactions, 174 securities, 106 debt IT spending, 167-168 business, 24 liabilities, 102, 103 consumer, 24 net income, 97 corporate equities, 130 profitability, 97 families, 25-26 return on average assets, 97 federal government, 16 securities, 106 growth, 24 top ranked household, V, 24 by assets, 109 ownership, 11 by revenues, 108 public, 16 global, 181 debt securities, 16 community development lending, 100 defined benefit pension funds, 36-37 consolidation. See mergers and acquisitions plan formulas, 36, 189 consumer credit, by institution and type of loan, 27 defined contribution plans, 36, 38 consumer debt, 24 asset allocation, 38 consumer finance companies, 143 depository insurance, 95 top ten, 151 deposits, 104 consumer fraud, 31 derivatives, 135 consumer receivables at finance companies, 149 global market, 136 convergence, 45 direct marketing, insurance, 62 corporate bonds, 128 Direct Marketing Association (DMA), 62 U.S. holdings, 13 discount broker/dealers, 124 corporate equities distribution channels and debt, 130 annuities, 42, 43 ownership, 12 bank insurance, 50 U.S. holdings, 12, 13 life/health insurance, 62, 88 corporate underwriting, 130 property/casualty insurance, 62, 72 credit accident and health insurance, 90 diversified financial firms, top four, global, 182

206 The Financial Services Fact Book 2007 www.financialservicesfacts.org E financial guaranty insurance, 77-78 educational savings plans and loans, 21-23 income statement, 78 top ten, 22 financial guaranty insurers, top ten, 78 electronic commerce, 169 financial holding companies revenues, 170 number of, 45 electronic payments, 171-174 top ten, 47 average values, 173 financial intermediation, 11 number of, 172 financial literacy programs, 102 value of, 172 financial services companies Employee Retirement Income Security Act of 1974, 38 assets, V, 2 employment diversified financials, global, 182 banking industry, 99 employment, V, 5 credit unions, 99 largest, 9 finance company, 144 by sector, 10 financial services industry, V, 5 by revenue, U.S., 9 insurance industry, 65 by revenues, world, 177 securities industry, 127 mergers, 3-4 equity index annuity, producers, top ten, 91 fixed annuities, 89 exchange activities, 136 bank share, 52 exchange listed companies, 137 sales, 42 writers of, top ten, 60 F Ford Direct Loan Program, 22 Fannie Mae. See Federal National Mortgage Association foreign banking offices, in U.S., assets, 101 farm credit system, financial information, 160 foreign bonds, U.S. holdings, 13 Farmer Mac. See Federal Agricultural Mortgage fraud, consumer, 31 Corporation Freddie Mac. See Federal Home Loan Mortgage Federal Agricultural Mortgage Corporation (Farmer Corporation Mac), financial data, 160 futures contracts, 135 Federal Credit Union Act, 116 Federal Depository Insurance Corporation (FDIC), 95 G federal educational loans, 22-23 generally accepted accounting principles (GAAP), 61, Federal Family Education Loan Program (FFELP), 22 190 originators, top ten, 23 geographic mobility, 183. See also migration federal government debt, ownership of, 16 Glass-Steagall Act of 1933, 1 Federal Home Loan (FHL) Bank System, 110, 158 government securities, ownership of, 16 Federal Home Loan Mortgage Corporation (Freddie government-related financial services, assets, 2 Mac), balance sheets, 159 Government-sponsored enterprises (GSEs), 158-160 Federal National Mortgage Association (Fannie Mae), Gramm-Leach-Bailey Financial Services Modernization financial highlights, 159 Act, 1, 45, 189 Federal Reserve system, 95 gross domestic product (GDP), 6-8 FFELP. See Federal Family Education Loan Program financial services industry, V, 6-8 finance companies, 141 growth of, 8 assets and liabilities, 145 gross national savings, 11 commercial, top ten, 152 gross state product, financial services share, 8 concentration, 150 consumer, top ten, 149 H consumer and commercial, top ten, 149 health care dollar, sources, 91 employment, 144 health insurance, 91-92 establishments, 144 coverage, 92 mergers, 143 health savings accounts, 93 profitability, 146 hedge funds, 142 receivables, 147-149 Herfindahl scale, 73 return on equity, 146 history, financial services, 191-194 top companies, 151-152 home equity loans, 165 finance rates, consumer credit, 27 home purchase loans, 165

www.financialservicesfacts.org The Financial Services Fact Book 2007 207 home mortgages, 153-157 insurance premiums homeowners, characteristics of, 164 bank produced, 49 homeownership, 161 banks, by type of coverage, 50 costs of, 162 life/health, by line, 89 median sales price, 162 property/casualty, by line, 73-74, 75 rates by income, 164 world, life and nonlife, 68 rates by race and ethnicity, 163-165 insurance underwriting, by bank holding companies, rates by region, 163 46, 48 homes, single family, median sales price, 162 insurers, life sales through banks, leading, 59 households interest-only mortgages, 156, 157 assets, 17-18, 19, 20 International Swaps and Derivatives Association debt, V, 24 (ISDA), 135 credit card, 28-29 Internet, 72, 169-170 finance rates, 27 Investment Advisers Act, 140 lending institutions, 25 investment banks, 129 percent of disposable income, 27 Investment Company Act of 1940, 139 purpose of, 25 type of, 25, 26 K income Keogh plans, 36, 95 by region and age group, 187 by state, 188 L liabilities, 17-18 Latin America, remittances, 115-116 share of mutual fund industry, 15 liabilities housing. See homeownership broker/dealers, 126 HSA. See health savings accounts credit unions, 118 FDIC commercial banks, 102, 103-104 I finance companies, 145 identity theft, 31 personal sector, 17-18 victims by state, 32 life, annuities and health insurance companies, Individual Retirement Account (IRA), 36 IT spending, 168 market shares, 39, 40 life/health insurance, 85 industrial banks, 120 annual rate of return, 63 information technology (IT), 167-168 asset distribution, 85 insurance, 61 capital and surplus, 86 assets, 2 companies bank sales of, 50 global, top ten, 179 brokers, commercial, top ten, 72 U.S., top twenty, 87 distribution channels, 50, 72 net income, 86 domestic, by state, 66-67 operating data, 86 employment in, 65 life insurance health, 91-92 bank sales of, 50, 51 market share trends, 73 distribution channels, 88 mortgage guaranty, 80 premiums, world, 68 property/casualty, top ten, 71 sales through banks, leading insurers, 59 regulation, 61 worksite sales, 88 insurance agencies, bank purchases of, 54 long-term care insurance, 94 insurance companies top ten companies, 94 domestic, by state, 66-67 information technology spending, 167-168 M thrifts owned by, 58-59 McCarran-Ferguson Act, 61 insurance industry, property/casualty medical savings accounts, See health savings accounts asset distribution, 69 Medicare Modernization Act, 93 income analysis, 70 world market, 68

208 The Financial Services Fact Book 2007 www.financialservicesfacts.org mergers and acquisitions, 1, 3-4 nondepository institutions, concentration, 150 banks, 96 nonlife insurance. See also property/casualty insurance by sector, 3 assets, 69 asset manager, top ten, 33 global, top ten companies, 178 number of, 3 premiums, world, 68 value of, 3 financial services companies O cross-industry acquisitions, top ten, 4 Office of Thrift Supervision, 58, 95 insurance-related, top ten, 63 Office of the Comptroller of the Currency, 95 securities firms, top ten, 122 online auto insurance, 170 specialty lenders, top ten, 143 online banking, growth in, 169 metropolitan areas, largest, 186 online payments. See electronic payments migration, state by state, 184-185, 186 options contracts, 136 migrant destinations, baby boomers, 186 over-the-counter (OTC) stocks, 137 mortgage finance companies, top ten, 166 mortgage guaranty insurance. See private mortgage P insurance (PMI) Pension Benefit Guaranty Corporation (PBGC), 38, 39 mortgage lending, thrift industry, 114 legislation, 38 mortgage market, 153 pension funds, assets, 2, 34 mortgages premiums by holder, 154 by type of insurer, 64 delinquency and foreclosure rates, 158 direct written originations, 153, 155 credit insurance companies, top ten, 79 refinancing, 157 financial guaranty, top ten, 78 total outstanding, 153 world, 68 municipal bonds, 12 growth in, 64 insurance, 77 life, 89-90 number and value of, 131 net written, by line, 73-74, 75 municipal loans, U.S. holdings, 14 private mortgage insurance (PMI), 80 municipal securities, U.S. holdings, 14 private mortgage insurance companies, top ten, 80 mutual funds, 139 private placements, 132 assets, 2 profitability, commercial banks, 97 bank holding company income, 47 credit unions, 97 top ten, 49, 141 finance companies, 146 bank sales of, 53 insurance, 63 by holder, 15 savings banks, 97 companies, top ten, 140 securities industry, 123, 124 net assets property/casualty insurance, 69-84 by number of funds, 139 annual rate of return, 63 by type of funds, 140, 141 asset distribution, 69 number of, by type, 140, 141 capital and surplus, 70 ownership of, U.S. household, 18 combined ratio, 70 retail, bank sales of, 53 companies, top 20, U.S., 71 retirement assets, 44 top ten, global, 178 concentration, 73 N distribution channels, 72 NASD, 121, 137 income analysis, 70 NASDAQ, 137 information technology spending, 167-168 National Bank Act of 1916, 1, 95 market share trends, 73 National Credit Union Administration, 95, 116 net premiums written, by line, 73-74, 75 National Credit Union Share Insurance Fund, 116 premiums, 65 national full line companies, 124 growth in, 64 New York City-area regionals, 124 profitability, 63 New York Stock Exchange (NYSE), 137, 138 reinsurers, top ten, 81 noncash payments, distribution of, 171

www.financialservicesfacts.org The Financial Services Fact Book 2007 209 R mergers and acquisitions rankings financial services cross industry, 4 ATM owners, 176 insurance-related, 63 asset manager deals, 33 securities industry, 122 asset managers, global, 182 specialty lenders, 143 bank and thrift deals, 96 metropolitan areas, 186 bank holding companies, 47, 48, 49 migrant destinations, baby boomers, 186 banks mortgage finance companies, 166 annuity income, 57 mortgage guaranty companies, 80 insurance brokerage fee income, 56 mutual fund companies, 141 insurance fee income, 55 nonlife insurers, global, 179 investment fee income, 56 private mortgage insurance companies, 80 mutual fund income, 57 property/casualty insurance companies proprietary mutual fund and annuities assets, by revenues, U.S., 71 57 global, 178 underwriting income, 55 property/casualty reinsurers, 81 college savings plans, 22 reinsurance companies, global, 179, 180 commercial and savings banks, global, 181 savings banks, global, 181 commercial banks securities firms by assets, 109 by assets, 129 by revenues, 108 by revenues, 128 global, 181 by total capitol, 128 commercial finance companies, 152 global, 181 commercial insurance brokers, 72 mergers and acquisitions, 122 consumer and commercial finance companies, 151 specialty lender mergers and acquisitions, 143 consumer finance companies, 151 state-chartered banks, by assets, 96 credit card issuers, 29 surety companies, 77 credit insurance companies, 79 thrift companies credit unions, 119 by assets, 114 diversified financial firms, global, 182 by revenues, 115 educational savings plans, 22 U.S. financial services firms, 9 equity index annuities, producers of, 91 U.S. life/health companies, 87 federally chartered banks by assets, 96 U.S. property casualty companies, 71 FFELP loans, originators, 23 variable annuities finance companies, 151-152 sales through banks, 60 financial guaranty insurers, 78 writers of, 60, 90 financial services companies, global, 177 rate of return by revenues, 9 life/health insurance, 63 by sector, number of companies, 10 property/casualty insurance, 63 by sector, revenues, 10 real estate cross-industry acquisitions, 4 gross domestic product, 6 fixed annuities, sales through banks, 60 receivables, 147-149 global insurance companies, 177-182 regional brokers, 124 industrial banks, 120 regulation insurance brokers, commercial, 72 banking, 95 insurance companies, thrift assets, 58-59 insurance, 61 insurance-related mergers and acquisitions, 63 securities industry, 121 leading insurers, sales through banks, 59 reinsurance, 81 life insurance sales, 59 brokers, top ten, global, 180 life/health insurance companies companies, top ten, global, 179 by revenues, 87 property/casualty reinsurers, top ten, U.S., 81 global, 179 remittances, 115-116 long-term insurers, 94 transfer mechanisms, 116 retirement funds, 33-41

210 The Financial Services Fact Book 2007 www.financialservicesfacts.org retirement plans, types of, 36 domestic insurance companies, 66-67 return on average assets, credit unions, 97 gross state product, 8 return on equity. See profitability household income, 188 revenues, largest U.S. financial firms, 9 identity theft victims, 32 reverse mortgages, 156 migration, 184-185 Roth IRA, 36 state insurance departments, 61 state-chartered loan companies. See industrial banks S statutory accounting principles (SAP), 61, 190 Sarbanes-Oxley Act, 121 stock market performance indices, 138 savings, 11 student credit card usage, 29 savings banks student loans, 22, 23. See also education savings plans branches and offices, 101 and loans employment, 99 subprime loans, 166 net income, 97 surety bonds, 76 profitability, 97 surety companies, top ten, 77 top ten, global, 181 savings institutions T FDIC insured, 110 thrift industry top ten, global, 181 balance sheet, 112 Section 529 college savings plans, 21 income statement, 111 providers, top ten, 22 investment securities, 113 securities, 121 mortgage lending activity, 114 asset-backed. 133-134 top companies assets, 2 by assets, 114 FDIC insured commercial banks, 106 by revenues, 115 foreign, U.S. holdings, 133 thrift institutions, 110 U.S., foreign holdings, 132 owned by insurance companies, 58-59 Securities Act of 1933, 121 title insurance, 161 Securities and Exchange Commission (SEC), 121 securities firms, 121 U by assets, top ten, 129 U.S. public debt securities, ownership of, 16 by revenues, top five, 181 U.S. Treasury securities, average daily trading, 16 global, top five, 181 IT spending, 167 V U.S., top ten, 128 VALIC U.S. Supreme Court decision, 1 securities industry variable annuities, 52, 60, 90, 91 assets, 2, 126 brokers/dealers, 124, 126 W concentration, by capital, 128 weather risk products, 84 concentration, by revenues, 127 weather-related hedges, 83 employment, 127 income statement, 125 liabilities, 126 mergers and acquisitions, top ten, 122 pretax return on equity, 123 profitability, 123, 124 top companies global, 181 U.S., 128, 129 separately managed accounts (SMAs), 142 short-term trade receivables, 79 specialty lenders, top ten, 143 Stafford Loan Program, 22 state by state tables

www.financialservicesfacts.org The Financial Services Fact Book 2007 211

I.I.I. Member Companies title

ACE USA Nationwide Acuity New York Life Insurance Company Aegis Insurance Services Inc. The Norfolk & Dedham Group Allianz of America, Inc. North Point Insurance Group Allstate Insurance Group Ohio Mutual Insurance Group American Agricultural Insurance Company OneBeacon Insurance Group American International Group, Inc. Palisades Safety and Insurance Association Atlantic Mutual Companies Pennsylvania Lumbermens Mutual Auto Club South Insurance Company Insurance Company Beazley Group plc Plymouth Rock Assurance Corporation Bituminous Insurance Companies Safeco Insurance Companies Chubb Group of Insurance Companies St. Paul Travelers Church Mutual Insurance Company Scor U.S. Corporation CNA SECURA Insurance Companies CUMIS Insurance Society, Inc. Selective Insurance Group De Smet Farm Mutual Insurance Company State Farm Mutual Automobile Insurance of South Dakota Company Dryden Mutual Insurance Company The Sullivan Group Erie Insurance Group Swiss Reinsurance America Corporation Farmers Group, Inc. TIAA-CREF Foundation Reserve Insurance Company The Tokio Marine and Fire Insurance Co., Ltd. GEICO Unitrin Property and Casualty Insurance Gen Re Group Germania Insurance USAA Grange Insurance Companies Utica National Insurance Group GuideOne Insurance Westfield Group The Hanover Insurance Group Inc. W. R. Berkley Corporation The Harford Mutual Insurance Companies XL Global Services The Hartford Financial Services Group XL Insurance Company, Ltd. Holyoke Mutual Insurance Company Zurich North America James River Group, Inc.

Liberty Mutual Group Associate Members Lloyd’s Allegany Co-op Insurance Company Marsh Inc. Farmers Mutual Fire Insurance of MetLife Auto & Home Tennessee Millville Mutual Insurance Company Livingston Mutual Insurance Company Missouri Employers Mutual Insurance Mutual Assurance Society of Virginia Munich Reinsurance America, Inc. Randolph Mutual Insurance Company Sompo Japan Research Institute, Inc.

212 The Financial Services Fact Book 2007 www.financialservicesfacts.org

I.I.I. Member Companies titlehe Financial Services Roundtable Member Companies

ACE INA Holdings, Inc. Fifth Third Bancorp AEGON USA, Inc. First Commonwealth Financial Corporation Affiliated Managers Group, Inc. First Horizon National Corporation Allianz Life Insurance Company of North Ford Motor Credit Company America Fulton Financial Corporation Allied Capital Corporation General Electric Company The Allstate Corporation Genworth Financial American Express Company GMAC Financial Services American International Group, Inc. (AIG) Guaranty Financial Services AmSouth Bancorporation H&R Block, Inc. Aon Corporation Harris Bankcorp, Inc. Associated Banc-Corp HSBC North America Holdings, Inc. Assurant, Inc. Huntington Bancshares Incorporated AXA Financial, Inc. ING BancorpSouth, Inc. John Deere Credit Company BancWest Corporation JPMorgan Chase & Co. Bank of America Corporation KeyCorp Bank of Hawaii Corporation LaSalle Bank Corporation The Bank of New York Company, Inc. Legg Mason, Inc. Barclays Capital, Inc. Lincoln National Corporation BB&T Corporation M&T Bank Corporation Capital One Financial Corporation Marshall & Ilsley Corporation The Charles Schwab Corporation MassMutual Financial Group The Chubb Corporation MasterCard Incorporated Citigroup Inc. Mellon Financial Corporation Citizens Financial Group, Inc. Mercantile Bankshares Corporation City National Corporation Merrill Lynch & Co., Inc. Comerica Incorporated National City Corporation Commerce Bancshares, Inc. Nationwide Compass Bancshares, Inc. New Century Financial Corporation Countrywide Financial Corporation Northern Trust Corporation Cullen/Frost Bankers, Inc. The PNC Financial Services Group, Inc. Edward Jones Popular, Inc. Federated Investors, Inc. Principal Financial Group Fidelity Investments Protective Life Corporation

continues

www.financialservicesfacts.org The Financial Services Fact Book 2007 213 The Financial Services Roundtable Member Companies

Prudential Financial Inc. UnumProvident Corporation Raymond James Financial, Inc. U.S. Bancorp RBC Centura Banks, Inc. United Bankshares, Inc. Regions Financial Corporation UBS Sky Financial Group, Inc. USAA Sovereign Bancorp, Inc. Wachovia Corporation State Farm Insurance Companies Waddell & Reed Financial, Inc. State Street Corporation Washington Mutual, Inc. SunTrust Banks, Inc. Wells Fargo & Company Synovus Western & Southern Financial Group TD Banknorth Inc. Whitney Holding Corporation TIAA-CREF Zions Bancorporation Toyota Motor Credit Corporation Zurich Financial Services UnionBanCal Corporation

214 The Financial Services Fact Book 2007 www.financialservicesfacts.org Insurance Information Institute 110 William Street New York, NY 10038 Tel. 212-346-5500. Fax. 212-732-1916. http://www.iii.org

President – Gordon Stewart President Elect – Robert P. Hartwig, Ph.D., CPCU Senior Vice President – Programs and Operations – Cary Schneider Senior Vice President – Public Affairs – Jeanne Salvatore

Research Vice President – Global Issues – Claire Wilkinson Vice President – Economics and Risk Management – Dr. L. James Valverde, Jr. Economist – Dr. Steven N. Weisbart, CLU

Fact Book Vice President – Information Services and Research – Madine Singer Managing Editor – Neil Liebman Research and Production – Mary-Anne Firneno Director – Web and Information Services – Shorna Lewis Senior Editor – Andréa C. Basora Production Assistant – Charlene Lewis Special Consultant – Ruth Gastel, CPCU

Media New York: Vice President – Communications – Loretta Worters Director – New Media – John Spagnuolo Director – Media Relations – Michael Barry

Washington, DC: Vice President – Carolyn Gorman Tel. 202-833-1580. Fax. 202-785-4676.

West Coast: Insurance Information Network of California: Executive Director – Candysse Miller Tel. 213-624-4462. Fax. 213-624-4432. Northern California: Communications Specialist – Tully Lehman Tel. 925-969-2223. Fax. 925-969-2188.

Representatives Special Counsel – William E. Bailey, Ph.D., CPCU Tel. 617-884-2461. Fax. 617-884-2593. Davis Communications – William J. Davis, Atlanta Tel. 770-321-5150. Fax. 770-321-5150. continues

www.financialservicesfacts.org The Financial Services Fact Book 2007 215 The Financial Services Roundtable/BITS 1001 Pennsylvania Avenue, NW Suite 500 South Washington, DC 20004 Tel. 202-289-4322. Fax. 202-628-2507. http://www.fsround.org

The Financial Services Roundtable President and Chief Executive Officer – Steve Bartlett Executive Director and General Counsel – Richard M. Whiting Senior Vice President of Government Affairs – Scott E. Talbott Vice President for Insurance, Technology and International Affairs – Andrew Barbour Government Affairs Specialist – Paul J. Begey CCF Project Manager – Keosha D. Burns Government Affairs Administrator – Janice Clarke Vice President for Banking and Securities – Irving E. Daniels, Jr. Communications Manager – Shannon Finney Controller – George D. Forsberg, CPA Senior Director of Information Services – Susan L. Gentry Event/Office Assistant – Deirdre Graham Membership Assistant and Webmaster – Blake Grimm Research Director and Senior Regulatory Counsel – Margaret (“Mitzi”) Moore Vice President of Human Resources and Administration – Carrie M. Neckorcuk Assistant to the President – Cindy G. Nettles Community Build Day Manager and Public Affairs Assistant – Shirley Nycum Deputy Director of Meetings and Events – Christeen Phelps-Butler Vice President of Meetings and Events – Sharon Salter Government Affairs Specialist – Peter Burkett Sandel Vice President for Public Affairs – Jennifer Smith Director of Membership Services – Kristen M. Washington Senior Executive Assistant to the Executive Director – Kim A. Wheelbarger Receptionist/Front Desk Coordinator – Lenora Wright-Williams

216 The Financial Services Fact Book 2007 www.financialservicesfacts.org HPC (Housing Policy Council) President – John Dalton Vice President of Government Affairs – Paul M. Leonard Executive Director, HOPE, Government Affairs Manager – Katie Stevens Government Affairs Assistant – Ryan Caruso

ITAC (Identity Theft Assistance Center) Executive Director – Anne Wallace Program Administrator – Sharon Smith

AFC (Agents for Change) Executive Director – Peter Ludgin

BITS Chief Executive Officer – Catherine A. Allen Senior Director – Tanya Bailey Executive Assistant – Wattie Bennett Senior Consultant – Faith Boettger Senior Director – John Carlson Senior Director – Cheryl Charles Controller – George D. Forsberg, CPA Senior Consultant – Ward Holland Director – John A. Ingold Vice President of Human Resources and Administration – Carrie M. Neckorcuk Director – Ann Patterson Project Manager – Matt Ribe Senior Consultant – Gary Roboff Director – Heather Wyson

www.financialservicesfacts.org The Financial Services Fact Book 2007 217 THE FINANCIAL SERVICES ROUNDTABLE

OFFICERS James H. Blanchard, Chairman, Synovus Thomas A. James, Chairman-elect, Raymond James Financial, Inc. G. Kennedy Thompson, Immediate-past Chairman, Wachovia Corporation William A. Osborn, BITS Chairman, Northern Trust Corporation Norman R. Bobins, Treasurer, LaSalle Bank Corporation

DIRECTORS Ralph W. Babb, Jr., Comerica Incorporated Christopher M. Condron, AXA Financial, Inc. James Dimon, JPMorgan Chase & Co., Executive Committee Member Kenneth R. Dubuque, Guaranty Financial Services Richard D. Fairbank, Capital One Financial Corporation John D. Finnegan, The Chubb Corporation Frederick W. Geissinger, American General Financial Services, Inc./AIG J. Kenneth Glass, First Horizon National Corporation Phil Gramm, UBS Investment Bank Jerry A. Grundhofer, U.S. Bancorp Thomas E. Hoaglin, Huntington Bancshares Incorporated Carl E. Jones, Jr., Regions Financial Corporation Richard M. Kovacevich, Wells Fargo & Company Kenneth D. Lewis, Bank of America Corporation Edward M. Liddy, The Allstate Corporation Don J. McGrath, BancWest Corporation Henry L. Meyer, III, KeyCorp Angelo R. Mozilo, Countrywide Financial Corporation David R. Nissen, General Electric Company, Executive Committee Member E. Stanley O’Neal, Merrill Lynch & Co., Inc. Thomas A. Renyi, The Bank of New York Company, Inc. James E. Rohr, The PNC Financial Services Group, Inc. Edward B. Rust, Jr., State Farm Insurance Companies Arthur F. Ryan, Prudential Financial Inc. Donald J. Shepard, AEGON USA, Inc. David C. Weinstein, Fidelity Investments Robert G. Wilmers, M&T Bank Corporation Mark A. Zesbaugh, Allianz Life Insurance Company of North America

218 The Financial Services Fact Book 2007 www.financialservicesfacts.org