sign in sign up
<<
Home , Bank of North America, Insurance, PNC Financial Services

04Fs.cover.FINAL 12/15/03 1:12 PM Page 1 (2,1)

s and

110 WilliamFINA Street NCIAL , NY 10038

(212) 669-9200 http//www.iii.orSERVg ICES Information FACT Institute The Financial Services Roundtable 20 0 4 04Fs.frontmatter.FINAL 12/15/03 12:41 PM Page i

T he FINA N C IAL SERV I C E S FACT BO O K 20 0 4

Insurance Information Institute The Roundtable 04Fs.frontmatter.FINAL 12/15/03 12:41 PM Page ii

TO THE READER

More people than ever before are benefiting from the products and services of the financial services : more people own houses, more people have funds, more people have transaction accounts. The Financial Services Fact Book, a joint venture of the Insurance Information Institute and The Financial Services Roundtable, has become a valu- able resource for those seeking to understand financial services. We hope this edition, which includes a new chapter on mortgage financing and housing, will further understanding of this key sector of our economy. This third edition of the Financial Services Fact Book includes new charts for all segments of the financial services industry. In particular, the chapter on mortgages and housing offers a fascinating glimpse into homeownership demographics in the and recent refinancing activity. To make it easier to navigate the book, we have modified the graphics at the top of the page. We have also added, in a separate index, the names of finan- cial services companies listed in the book. This endeavor to integrate information on trends in financial services with basic facts on the major industry sectors could not succeed without the help of many organiza- tions, consultants and others who collect industry data and who have generously given per- mission to use their data in this book. However, the bulk of the involved in collecting, integrating and interpreting the material was done by the Insurance Information Institute, which accepts editorial responsibility for the book. Your questions, comments and suggestions are most welcome. Please feel free to contact us.

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

©2004 Insurance Information Institute. ISSN 1537-6257 2004 04Fs.frontmatter.FINAL 12/15/03 12:41 PM Page iii

Contents

Financial Services at a Glance ...... V Chapter 1: The Financial Services Industry...... 1 Overview ...... 1 ...... 2 Consolidation...... 3 Employment ...... 5 Gross Domestic ...... 6 Convergence ...... 10 Leading Companies...... 13 Chapter 2: , and ...... 15 National Savings ...... 15 ...... 16 Debt...... 19 Household Assets ...... 21 Educational Plans and ...... 25 Consumer and Debt ...... 28 Bankruptcy ...... 30 Chapter 3: /Retirement Funds ...... 31 Retirement Assets...... 31 Annuities...... 36 Mutual Funds ...... 39 Chapter 4: Insurance ...... 41 Overview ...... 41 All Sectors ...... 43 Property/Casualty: Financial ...... 49 Property/Casualty: Premiums By Line...... 54 Property/Casualty: Specialty Lines...... 57 Property/Casualty: ...... 62 Property/Casualty: Markets ...... 63 Life/Health: Financial ...... 66 Life/Health: Premiums By Line...... 71 Life/Health: in Insurance ...... 73 Chapter 5: Banking ...... 75 Overview ...... 75 All Sectors ...... 76 Convergence ...... 81 Commercial Banks ...... 86 Thrift Institutions...... 92 Unions ...... 98 Industrial Banks ...... 102 04Fs.frontmatter.FINAL 12/15/03 12:41 PM Page iv

Chapter 6: Securities ...... 103 Overview ...... 103 Capital Markets ...... 111 Asset-backed Securities...... 115 Derivatives ...... 117 Exchanges...... 119 Mutual Funds ...... 121 Chapter 7: Companies ...... 125 Overview ...... 125 Assets and Liabilities ...... 127 Profitability...... 128 Receivables ...... 129 Concentration...... 132 Leading Companies...... 133 Chapter 8: Mortgage Finance and Housing...... 135 Mortgages ...... 135 Home Ownership ...... 139 Home Equity Loans ...... 143 Leading Companies...... 144 Chapter 9: ...... 145 IT Spending ...... 145 Electronic Commerce ...... 147 Electronic Payments ...... 149 ATMs ...... 151 Wireless Technology...... 154 Chapter 10: World Rankings ...... 155 Appendices ...... 159 Summary of Gramm-Leach-Bliley ...... 159 Glossary ...... 162 Brief History ...... 164 Financial Services ...... 167 Company Index ...... 173 Index ...... 176 III and The Financial Services Roundtable Member Companies ...... 182 III and The Financial Services Roundtable Staff ...... 184 III and The Financial Services Roundtable Board Members ...... 186 04Fs.frontmatter.FINAL 12/15/03 12:41 PM Page v

Chapter Head Financial Services at a Glance

• The financial services sector’s contribution to the gross domestic product (GDP) totaled 9.0 percent in 2001, the latest data available. The total GDP grew 2.6 percent in 2001, compared with 2000, while the financial services sector grew 6.1 percent.

• The assets of the financial services sector grew 0.8 percent from $37.6 trillion in 2001 to $37.9 trillion in 2002.

• Banks acquired 74 insurance agencies and 60 securities firms in 2002.

• In 2002, homeowners withdrew $97 billion in when they refinanced their mortgages.

• U.S. households’ financial assets rose 84.1 percent from $14.5 trillion in 1992 to $26.7 trillion in 2002.

• Household debt rose 10.0 percent, 2001-2002, and business debt rose 1.4 perce n t .

• From 1996 to 2002, the asset share of the top 10 companies grew in the following financial sectors: Property/ --- from 35 percent to 55 percent Life/ --- from 38 percent to 51 percent Commercial banks --- from 33 percent to 45 percent Savings institutions --- from 20 percent to 45 percent In the securities sector, the asset share of the top 10 companies fell from 61 percent to 53 percent during the same period (see chart below).

ASSET SHARE OF THE TOP TEN FINANCIAL SERVICES FIRMS, 1996-2002

Source: TowerGroup.

The Financial Services Fact Book 2004 V 04.01fs.FINAL 12/15/03 1:08 PM Page 1

Chapter 1: The Financial Services Industry

OVERVIEW

The financial services industry is changing, though perhaps not 1916 National Act as envisioned by many when the Gramm-Leach-Bliley Financial limiting bank insurance Services Modernization Act was passed in 1999, see appendix, except in small towns page 159. At that time, observers predicted that massive mergers would transform everything. Mergers did occur, but for the most 1933 Glass-Steagall Act pr o- part not among the leading players. Banks bought specialized hibiting commercial banks securities firms and insurance agencies, rather than insurance and securities firms from companies as had been predicted. Insurance companies applied engaging in each other’ s business for thrift charters to open new banks instead of buying existing ones. The arrangement that provided a major impetus for the 1956 Bank Gramm-Leach-Bliley Act partially dissolved in March 2002, Act restricting bank hold - when began to spin off Travelers’ property/casualty ing company activities insurance unit. 1980 Banks receive federal Nevertheless the convergence of products and services that authorization to combine began in the 1970s continues to gather momentum. Today most securities sales and invest - of the top financial services companies do business across sec- ment advisory services tors, offering their customers an ever-broadening range of finan- 1995 Valic U.S. Supreme cial tools, see chart, page 10. In 2003, Bank One Corp., based in Court decision allowing , said it would acquire key components of Zurich Life, banks to sell annuities

adding to its financial services oper- 1996 Barnett Bank U.S. ations. According to the Federal Deposit Insurance Corp., 3 per- Supreme Court decision cent of commercial and federally-insured savings banks were allowing banks to sell involved in insurance underwriting in the first quarter of 2003. insurance nationwide

Consolidation is increasing the size of the leading players in 1999 Gramm-Leach-Bliley Act most segments of the industry. In all sectors except securities, allowing banks, insurance the top 10 firms have increased their share of assets since 1995, companies and securities see chart page v, while the number of participants is shrinking, firms to affiliate and sell a trend that began before the passage of Gramm-Leach- each other’s products

Bliley. The number of commercial banks fell from about 25,000 2001 U.S. House of before World War I to 7,887 in 2002; securities and Representatives Banking dealers numbered 9,515 in 1987 and only 6,766 in 2002; life Committee renames itself insurance underwriters fell from about 2,200 in 1985 to 1,506 in the Financial Services 2001. The number of property/ casualty insurers, now number- Committee

ing 3,163, is expected to fall by 30 percent over the next decade. 2002 Citigroup spins off its Consolidation is occurring both within sectors and across sec- Travelers’ property/casual - tors, but at a slower pace than in the late 1990s. ty insurance unit

The Financial Services Fact Book 2004 1 04.01fs.FINAL 12/15/03 1:08 PM Page 2

THE FINANCIAL SERVICES INDUSTRY

ASSETS

ASSETS OF ASSETS OF FINANCIAL SERVICES SECTORS, BY INDUSTRY, 2002 FINANCIAL SERVICES ($ billions, end of year) SECTORS, 1997 Sector Assets ($ billions) Banking Commercial banking1 $7,342.5 Savings institutions2 1,357.4 Credit unions 560.8 Bank personal trusts and estates 807.9 Total $10,068.6

Insurance Life insurance companies $3,331.2 All other insurers 915.5 Total $4,246.7

Securities Mutual and closed-end funds $6,013.3 Securities /dealers3 1,335.4 Total $7,348.7 2002 ($ billions) Private funds 4 $3,657.7 State and local government pension funds 1,966.5 Total $5,624.2

Government-related Government lending enterprises $2,543.3 Federally-related mortgage pools 3,158.2 Total $5,701.5

Other Finance companies $1,185.1 investment trusts 92.8 Source: Board of Governors of the Mortgage companies 32.1 System. Asset-backed securities issuers 2,398.6 1,153.5 Total $4,862.1

Total All Sectors $37,851.8 1Commercial banking includes U.S.-chartered commercial banks, foreign banking in the United States, bank holding companies, and banks in U.S.-affiliated areas. 2Savings institutions include savings and associations, mutual savings banks and federal banks. 3Securities broker/dealers include investment banks. 3Private pension funds include defined benefit and contribution plans [including 401(k)s] and the Federal Employees Retirement Thrift Savings Plan.

Source: Board of Governors of the Federal Reserve System.

2 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.01fs.FINAL 12/15/03 1:08 PM Page 3

THE FINANCIAL SERVICES INDUSTRY

CONSOLIDATION

NUMBER AND VALUE OF ANNOUNCED BY SECTOR, 1998-2002 ($ billions)

1998 1999 2000 2001 2002 Deals Value Deals Value Deals Value Deals Value Deals Value Securities1 150 $7.6 149 $12.8 191 $67.8 213 $14.0 155 $7.8 Specialty finance2 239 34.8 212 19.2 157 37.5 97 23.4 104 23.6 Banks 411 265.2 283 68.9 213 90.2 206 32.1 178 8.6 Thrifts 93 23.9 74 7.5 67 4.4 55 8.5 51 9.0 Insurance 401 85.8 394 38.4 321 23.6 287 65.1 286 9.7 Life/health 82 29.4 53 16.4 52 13.3 43 58.6 30 3.2 Property/casualty 106 44.1 67 20.1 56 9.5 49 2.2 44 0.4 Brokers and agents 184 2.6 235 0.4 188 0.5 179 1.1 192 1.1 29 9.6 39 1.5 25 0.3 16 3.2 20 4.9 Total 1,294 417.3 1,112 146.8 949 223.5 858 143.1 774 58.7 1Includes securities and investment companies, broker/dealers, and investment advisers. 2Specialty finance firms range from small finance companies to major operations.

Source: SNL Financial LC.

NUMBER OF ANNOUNCED FINANCIAL SERVICES MERGERS AND ACQUISITIONS, 1999-2002 • In 2002, the number of financial services deals ■ Securities fell to 774 from 858 in ■ Specialty finance 2001. Deal value fell 59 ■ Banks/thrifts percent from 2001 to ■ Insurance 2002.

• The number of deals increased in only one sector, specialty finance.

Source: SNL Financial LC.

The Financial Services Fact Book 2004 3 04.01fs.FINAL 12/15/03 1:08 PM Page 4

THE FINANCIAL SERVICES INDUSTRY

CONSOLIDATION

VALUE OF ANNOUNCED FINANCIAL SERVICES MERGERS AND ACQUISITIONS, 1999-2002 • The value of insurance ($ billions) sector mergers and ■ Securities acquisitions in 2002 ■ Specialty finance ■ was $9.7 billion, down Banks/thrifts ■ $55 billion or 85 per - Insurance cent from 2001. The decline, which was the greatest among all the financial services sec - tors, was almost exclu - sively due to the drop in the /health insurance deals from $59 billion in 2001 to

$3 billion in 2002. Source: SNL Financial LC.

TOP TEN CROSS-INDUSTRY ACQUISITIONS ANNOUNCED IN 2002, UNITED STATES1

Deal value2 Buyer Industry Country Target Industry Country ($ millions) HSBC Holdings Plc Bank U.K. Household Specialty U.S. $14,861.2 International Inc. lender General Electric Co. Not classified U.S. ABB Ltd.’s Structured Specialty U.K. 2,300.0 Finance operations lender State Street Corp. Bank U.S. Part of Global Investment U.S. 1,499.4 Securities Services adviser Cendant Corp. Not classified U.S. Trendwest Resorts Specialty U.S. 977.8 Inc. lender General Electric Co. Not classified U.S. Australian Specialty Australia 894.9 Corp. Ltd. lender U.S. Bancorp Bank U.S. State Street’s Investment U.S. 725.0 corporate trust business adviser & Co. Bank U.S. Telmark LLC Specialty U.S. 650.0 lender General Electric Co. Not classified U.S. 50% of Monogram Specialty U.S. 531.0 Credit Services LLC lender Deutsche Bank AG Bank Germany RoPro U.S. Investment U.S. 490.0 Holding Inc. adviser General Electric Co. Not classified U.S. Deutsche Financial Specialty U.S. 450.0 Svcs.’ finance lender 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.

4 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.01fs.FINAL 12/15/03 1:08 PM Page 5

THE FINANCIAL SERVICES INDUSTRY

EMPLOYMENT

Over the three years, 2000 to 2002, employment in the financial services industry averaged 5.2 percent of total U.S. employment.

EMPLOYMENT IN THE FINANCIAL SERVICES INDUSTRY, 1998-2002 (000)

Non- Activities Insurance Depository depository related to Securities, carriers credit credit credit and Monetary interme- interme- interme- , related Funds/ Year authorities diation diation diation investments activities trusts Total 1998 21.7 1,708.9 615.7 207.3 692.2 2,209.4 76.9 5,532.0 1999 22.6 1,709.7 656.3 224.9 737.3 2,236.1 81.5 5,668.4 2000 22.8 1,681.2 644.4 222.3 804.5 2,220.6 84.8 5,680.4 2001 23.0 1,701.2 660.7 235.7 830.5 2,233.7 88.3 5,773.1 2002 23.1 1,738.2 690.1 254.0 800.8 2,223.1 85.6 5,814.9 Note: In June, 2003 the Bureau of Labor introduced employment data based on the North American Industry Classification System (NAICS), an organizational framework that groups companies into industries based on the activity in which they are primarily engaged. It replaces the Standard Industrial Code (SIC) system, which grouped firms with others producing or handling the same products.

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

FINANCIAL SERVICES EMPLOYMENT BY INDUSTRY, 2002 (000)

• The Department of Labor does not include real estate in financial activi - ties.

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

The Financial Services Fact Book 2004 5 04.01fs.FINAL 12/15/03 1:08 PM Page 6

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 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, 2001

• When real estate transac - tions (e.g., development, mortgages and related services, property sales and rentals) are included, financial services account - ed for nearly 21 percent of GDP in 2001, com - pared with 20 percent in 2000.

1Includes finance companies, mortgage bankers and brokers.

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

GROSS DOMESTIC PRODUCT OF FINANCIAL SERVICES, SHARES BY COMPONENT, EXCLUDING REAL ESTATE, 2001

•With real estate excluded, the remaining financial industries con - tributed 9 percent to the GDP in 2001, compared with 8.7 percent in 2000.

1Includes finance companies, mortgage bankers and brokers.

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

6 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.01fs.FINAL 12/15/03 1:08 PM Page 7

THE FINANCIAL SERVICES INDUSTRY

GROSS DOMESTIC PRODUCT

GROSS DOMESTIC PRODUCT OF THE FINANCIAL SERVICES INDUSTRY, 1997-20011 ($ billions)

1997 1998 1999 2000 2001 Total GDP $8,318.4 $8,781.5 $9,274.3 $9,824.6 $10,082.2

Total financial services industr y 1,569.9 1,708.5 1,798.8 1,976.7 2,076.9 Industry % of total GDP 18.9% 19.5% 19.4% 20.1% 20.6%

Depository institutions $273.9 $300.0 $330.3 $361.1 $359.8 Nondepository institutions 2 49.9 52.8 57.7 69.5 88.8 and commodity brokers 120.8 143.9 128.2 150.8 175.0 Insurance carriers 146.1 150.2 153.8 182.4 170.1 Insurance agents, brokers, and service personnel 51.3 56.4 61.5 61.6 66.5 Holding and other investment offices 7.7 23.4 16.8 27.7 45.0 Total real estate 920.1 981.6 1,050.5 1,123.7 1,171.7 Nonfarm housing services 679.1 718.7 766.9 811.4 845.1 Other real estate 241.0 262.9 283.5 312.3 326.6 1Includes real estate. 2Includes finance companies and mortgage bankers and brokers.

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

FINANCIAL SERVICES SECTOR’S SHARE OF GROSS DOMESTIC PRODUCT, 1997-20011

Percent of total gross domestic product 1997 1998 1999 2000 2001 Depository institutions 3.3% 3.4% 3.6% 3.7% 3.6% Nondepository institutions 2 0.6 0.6 0.6 0.7 0.9 Security and commodity brokers 1.5 1.6 1.4 1.5 1.7 Insurance carriers 1.8 1.7 1.7 1.9 1.7 Insurance agents, brokers, and service personnel 0.6 0.6 0.7 0.6 0.7 Holding and other investment offices 0.1 0.3 0.2 0.3 0.4 Total real estate 11.1 11.2 11.3 11.4 11.6 1Includes real estate. 2Includes finance companies and mortgage bankers and brokers.

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

The Financial Services Fact Book 2004 7 04.01fs.FINAL 12/15/03 1:08 PM Page 8

THE FINANCIAL SERVICES INDUSTRY

GROSS DOMESTIC PRODUCT

FINANCIAL SERVICES VS. TOTAL U.S. GROSS DOMESTIC PRODUCT GROWTH, 1991-2001 ($ billions) Percent Percent Percent Total U.S. change Finance, change change gross domestic from prior insurance from prior Finance from prior Year product year and real estate year and insurance1 year 1991 $5,986.2 3.2% $1,072.2 6.1% $383.1 11.2% 1992 6,318.9 5.6 1,140.9 6.4 415.7 8.5 1993 6,642.3 5.1 1,205.3 5.6 453.7 9.1 1994 7,054.3 6.2 1,254.8 4.1 463.4 2.1 1995 7,400.5 4.9 1,347.2 7.4 514.6 11.0 1996 7,813.2 5.6 1,436.8 6.7 565.2 9.8 1997 8,318.4 6.5 1,569.9 9.3 649.8 15.0 1998 8,781.5 5.6 1,708.5 8.8 726.9 11.9 1999 9,274.3 5.6 1,798.8 5.3 748.3 2.9 2000 9,824.6 5.9 1,976.7 9.9 853.0 14.0 2001 10,082.2 2.6 2,076.9 5.1 905.2 6.1 1Includes depository and nondepository institutions, security and commodity brokers, insurance carriers, insurance agents, brokers and service personnel, and holding and investment offices.

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

FINANCIAL SERVICES INDUSTRY SECTOR PERCENT OF GROSS DOMESTIC PRODUCT, 2001

1Includes insurance carriers and insurance agents, brokers and service personnel.

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

8 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.01fs.FINAL 12/15/03 1:08 PM Page 9

THE FINANCIAL SERVICES INDUSTRY

GROSS DOMESTIC PRODUCT

FINANCIAL SERVICES PERCENTAGE SHARE OF GROSS STATE PRODUCT, 2001 (Excludes real estate)

State Percent State Percent State Percent 7.6% Louisiana 4.7% Oklahoma 5.9% Alaska 3.2 Maine 7.3 Oregon 5.3 7.8 6.5 8.7 Arkansas 5.3 11.2 Rhode Island 15.3 7.1 6.3 5.1 7.3 Minnesota 9.5 South Dakota 16.0 Connecticut 15.2 Mississippi 5.4 7.2 34.6 7.9 6.7 District of Columbia 8.0 Montana 6.3 Utah 11.8 7.6 8.6 Vermont 6.1 7.3 Nevada 7.8 6.9 Hawaii 5.2 New Hampshire 10.0 5.6 Idaho 4.1 9.0 4.9 10.7 3.9 7.4 6.4 New York 20.1 Wyoming 3.7 Iowa 9.1 11.0 Total U.S. 8.9 6.5 North Dakota 7.8 5.5 8.9

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

The Financial Services Fact Book 2004 9 04.01fs.FINAL 12/15/03 1:08 PM Page 10

THE FINANCIAL SERVICES INDUSTRY

CONVERGENCE

CONVERGENCE • Competition is strongest in the areas of asset manage - Below are the top 10 companies, ranked by revenues, in each of ment and securities, wher e the major financial services sectors included in the . 43 out of 56 companies (Note: there are six savings institutions because only six offer products from each of savings institutions meet Fortune’s criteria.) The chart, which the two categories. is based on a survey conducted by the Insurance Information Institute in August 2003, does not differentiate between the “manufacturers” of a product and its “distributors.” The chart shows that the nation’s largest financial services companies are very diverse. While many are clearly becoming financial service supermarkets, selling a wide range of products outside their core business, some have chosen to specialize.

FINANCIAL PRODUCTS AVAILABLE THROUGH MAJOR FINANCIAL SERVICES COMPANIES (As of August, 2003)

Mo r t g a g e s / Asset man- credit cards/ Auto/ home- Li f e / ag e m e n t / Se c u r i t i e s / pe r s o n a l / ow n e r s health Co m m e rc i a l re t i r e m e n t Pe r s o n a l in v e s t m e n t Co m m e rc i a l bu s i n e s s Sectors1 in s u r a n c e in s u r a n c e in s u r a n c e An n u i t i e s fu n d s 2 ba n k i n g ba n k i n g ba n k i n g lo a n s 3 Diversified Financials General Electric XXXXX X X Fannie Mae X X Freddie Mac X X XX XXXXXX Household Int’l. Inc.4 XX X X X Marsh & McLennan XXX X X Capital One Financial X XX X Countrywide Financial XX XXX X XXX X CIT Group XX Securities Morgan Stanley Dean Witter X XX X X Merrill Lynch X XXXXXX Goldman Sachs Group X X (table continues)

10 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.01fs.FINAL 12/15/03 1:08 PM Page 11

THE FINANCIAL SERVICES INDUSTRY

CONVERGENCE

FINANCIAL PRODUCTS AVAILABLE THROUGH MAJOR FINANCIAL SERVICES COMPANIES (Cont’d) (As of August, 2003) Mo r t g a g e s / Asset man- credit cards/ Auto/ home- Li f e / ag e m e n t / Se c u r i t i e s / pe r s o n a l / ow n e r s health Co m m e rc i a l re t i r e m e n t Pe r s o n a l in v e s t m e n t Co m m e rc i a l bu s i n e s s Sectors1 in s u r a n c e in s u r a n c e in s u r a n c e An n u i t i e s fu n d s 2 ba n k i n g ba n k i n g ba n k i n g lo a n s 3 Lehman Brothers Holdings XXXXXX Bear Stearns X X Charles Schwab X XXXX X Franklin Resources XXXXX A.G. Edwards X X X X E* Group XX XXX X Legg Mason X XXXX X Commercial Banks Citigroup XXXXXXXX XX XXXXXX J.P. Morgan Chase XXXXXXXXX Wells Fargo XXXXXXXXX Corp. XXXXXXXXX Bank One Corp. XXX XXXXX FleetBoston XXXXXX U.S. Bancorp XXXXXXXXX MBNA X XX XX National City Corp. XXX XXXXX Savings Institutions XXXXXXXXX Corp. XXXX X Sovereign Bancorp XXXXXXXX Greenpoint Financial XXXXXXXXX Astoria Financial XXXXXXXXX Westcorp XXXXX (table continues)

The Financial Services Fact Book 2004 11 04.01fs.FINAL 12/15/03 1:08 PM Page 12

THE FINANCIAL SERVICES INDUSTRY

CONVERGENCE

FINANCIAL PRODUCTS AVAILABLE THROUGH MAJOR FINANCIAL SERVICES COMPANIES (Cont’d) (As of August, 2003) Mo r t g a g e s / Asset man- credit cards/ Auto/ home- Li f e / ag e m e n t / Se c u r i t i e s / pe r s o n a l / ow n e r s health Co m m e rc i a l re t i r e m e n t Pe r s o n a l in v e s t m e n t Co m m e rc i a l bu s i n e s s Sectors1 in s u r a n c e in s u r a n c e in s u r a n c e An n u i t i e s fu n d s 2 ba n k i n g ba n k i n g ba n k i n g lo a n s 3 Property/Casualty Insurance American International Group XXXXXXX X Insurance Cos. XXXXXXX X X XX XXXXXXX X Loews (CNA) XXXX Nationwide Insurance Enterprises XXXXX X X Hartford Financial Services XXXXX X Insurance Group XXXX Progressive X X United Services Automobile Assn. XX XXXX X Life/Health Insurance MetLife XXXXXXX Prudential XXXXXXX X New York Life Insurance X XX X Mass Mutual Life Insurance X XX X X TIAA-CREF X XX X XXXX X X UnumProvident XX John Hancock X XX X X Principal Financial X XXXX X 1Sectors defined by Fortune. 2Includes annuities, mutual funds and IRAs. 3Includes home equity and auto loans. 4Acquired by HSBC Group.

Source: Fortune; Insurance Information Institute.

12 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.01fs.FINAL 12/15/03 1:08 PM Page 13

THE FINANCIAL SERVICES INDUSTRY

LEADING COMPANIES

LARGEST U.S. FINANCIAL SERVICES FIRMS, 20021 ($ millions)

Profits as a percent of Rank Company Revenues Profits Revenues Assets Industry Employees 1 General Electric $131,698 $14,118 11% 3% Diversified financial 315,000 2 Citigroup 100,789 15,276 15 1 Banking 252,500 3 American Intl. Group 67,723 5,519 8 1 Insurance 81,000 4 Fannie Mae 52,901 4,619 9 1 Diversified financial 4,700 5 State Farm Insurance 49,654 -2,796 -6 -2 Insurance 76,938 6 Bank of America Corp. 45,732 9,249 20 1 Banking 133,944 7 J.P. Morgan Chase 43,372 1,663 4 0 Banking 94,335 8 Berkshire Hathaway 42,353 4,286 10 3 Insurance 146,500 9 Freddie Mac 39,663 5,764 15 1 Diversified financial 4,000 10 MetLife 34,055 1,605 5 1 Insurance 48,512 11 Morgan Stanley 32,415 2,988 9 1 Securities 55,726 12 Allstate 29,579 1,134 4 1 Insurance 40,300 13 Wells Fargo 28,473 5,434 19 2 Banking 127,500 14 Merrill Lynch 28,253 2,513 9 1 Securities 52,400 15 26,797 194 1 0 Insurance 54,086 16 New York Life 24,721 424 2 0 Insurance 7,500 17 American Express 23,807 2,671 11 2 Diversified financial 75,400 18 Wachovia Corp. 23,591 3,579 15 1 Banking 80,778 19 Goldman Sachs Group 22,854 2,114 9 1 Securities 19,739 20 Bank One Corp. 22,171 3,295 15 1 Banking 73,685 21 Mass. Mutual Life Ins. 20,247 1,430 7 2 Insurance 11,797 22 TIAA-CREF 19,791 -137 -1 0 Insurance 6,467 23 Washington Mutual 19,037 3,896 21 2 Banking 52,459 24 Loews (CNA) 16,898 941 6 1 Insurance 27,820 25 Lehman Brothers Hldgs. 16,781 1,031 6 0 Securities 12,343 1Ranked by revenues.

Source: Fortune.

The Financial Services Fact Book 2004 13 04.01fs.FINAL 12/15/03 1:08 PM Page 14

THE FINANCIAL SERVICES INDUSTRY

LEADING COMPANIES

TOP TWENTY-FIVE FINANCIAL SERVICES COMPANIES: NUMBER OF COMPANIES BY SECTOR, 20021

1Based on the revenues of the top 25 financial services companies included in the Fortune 500.

Source: Fortune.

TOP TWENTY-FIVE FINANCIAL SERVICES COMPANIES: REVENUES BY SECTOR, 2002 1 ($ millions)

1Based on the revenues of the top 25 financial services companies included in the Fortune 500.

Source: Fortune.

14 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.02fs.FINAL 12/15/03 12:49 PM Page 15

Chapter 2: Savings, Investment and Debt Ownership

NATIONAL SAVINGS

SAVINGS, INVESTMENT AND DEBT OWNERSHIP Individuals and seek to increase their assets through savings and investments. They also borrow to purchase assets or finance business opportunities. The financial servi c e s in d u s t r y exists to manage these activities, bringing savers, and borrowers together, a pr ocess known as financial intermediation. The banking industry acts as an interme d i a r y by taking deposits and lending the funds to those who need credit. The securities industry fulfills the role of interme d i a r y by facilitating the process of buying and selling corporate debt and equity to investors. The insurance industry safeguards the assets of its policyholders by invest- ing the premiums it collects in corporate and government securities. Finance companies pro- vide credit to both individuals and businesses, funded in large part by issuing bonds, commer- cial paper and asset-backed securities.

NATIONAL SAVINGS Gr oss national savings is the excess of production over cost, or earnings over spending. Gros s national savings grew in the late 1990s, fueled largely by increased by federal, state and local governments, but fell in 2001 and 2002, reflecting declining government saving. In 2001, total government saving dropped 40 percent from 2000 due to federal personal income refunds and reduced tax revenues at all levels of government, a result of the slowing economy. Go v e r nments spent more than they saved in 2002 as persistent economic weakness continued to erode tax receipts and increased demand for public assistance, and expenditures for securi- ty and military programs rose in the wake of the September 11 terrorist attacks. Personal sav- ing is the excess of personal disposable income over spending.

GROSS NATIONAL SAVINGS, 1997-2002 ($ billions)

•Total gross savings fell $89.5 billion from 2001 to 2002.

1Includes individuals (including proprietors and ), nonprofit institutions primarily serving individuals, life insurance carriers, and miscellaneous entities.

Source: U.S. Department of Commerce, Bureau of Economic Analysis. The Financial Services Fact Book 2004 15 04.02fs.FINAL 12/15/03 12:49 PM Page 16

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 in munici- palities. Equity investments provide an ownership interest in a company through stocks. Debt securities, generally bonds, represent money a or municipality has bor- rowed from investors and must repay at a specific time and usually at a specific . Municipal bonds may be tax exempt.

U.S. HOLDINGS OF CORPORATE EQUITIES, 1997-20021 ($ billions, value at end of year) Percent change, 1997 1998 1999 2000 2001 2002 1997-2002 Total $13,292.8 $15,548.5 $19,545.7 $17,606.5 $15,267.1 $11,833.9 -11.0% Household sector 6,219.9 7,023.3 9,017.4 7,402.9 6,077.9 4,327.1 -30.4 State and local governments 79.0 102.0 115.0 115.1 126.3 115.4 46.1 Rest of the world 2 952.9 1,250.3 1,611.5 1,625.5 1,533.8 1,350.4 41.7 Commercial banking 2.6 6.8 11.3 11.9 8.9 3.5 34.6 Savings institutions 23.3 24.5 23.8 24.2 27.9 29.1 24.9 Bank personal trusts and estates 362.2 360.1 407.3 356.8 280.7 217.1 -40.1 Life insurance companies 558.6 733.2 964.5 940.8 855.2 748.5 34.0 Other insurance companies 186.0 200.1 207.9 194.3 173.9 156.0 -16.1 funds 1,696.4 1,990.7 2,325.7 2,195.1 1,925.8 1,487.8 -12.3 State and local gov’t. retirement funds 1,084.8 1,233.9 1,343.2 1,335.1 1,221.9 1,004.3 -7.4 Mutual funds 2,018.7 2,506.2 3,376.7 3,226.9 2,836.1 2,188.4 8.4 Closed-end funds 49.8 47.4 40.6 35.0 30.7 33.3 -33.1 Exchange-traded funds 6.7 15.6 33.9 65.6 83.0 98.2 1,365.7 Brokers and dealers 51.9 54.4 66.9 77.2 85.1 74.9 44.3 1Excludes shares. 2Holdings of U.S. issues by foreign residents.

Source: Board of Governors of the Federal Reserve System.

16 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.02fs.FINAL 12/15/03 12:49 PM Page 17

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

INVESTMENTS

INSTITUTIONAL MARKET IN CORPORATE EQUITIES, 20021 ($ billions)

1Market value of holdings, as of December 31, 2002. Source: Board of Governors of the Federal Reserve System.

U.S. HOLDINGS OF CORPORATE AND FOREIGN BONDS, 1997-2002 ($ billions, end of year) Percent change, 1997 1998 1999 2000 2001 2002 1997-2002 Total $3,607.2 $4,187.4 $4,626.4 $5,022.9 $5,692.7 $6,220.6 72.4% Household sector 570.0 695.4 716.5 702.5 779.1 890.0 56.1 State and local governments 51.0 61.2 71.3 75.0 84.4 88.7 73.9 Rest of the world 1 501.6 607.8 752.1 920.6 1,126.3 1,292.8 157.7 Commercial banking 143.1 180.9 220.5 278.6 376.4 379.1 164.9 Savings institutions 58.7 88.6 111.9 109.4 83.9 79.9 36.1 Bank personal trusts and estates 31.1 28.5 39.8 44.9 38.3 35.6 14.5 Life insurance companies 1,046.0 1,130.4 1,173.2 1,222.2 1,342.4 1,451.8 38.8 Other insurance companies 159.5 171.1 181.1 187.5 196.4 197.9 24.1 Private pension funds 278.7 300.3 301.9 320.7 330.5 340.4 22.1 State and local gov’t. retirement funds 244.5 279.6 310.0 339.7 351.1 363.0 48.5 mutual funds 36.4 81.2 123.7 161.9 163.0 170.7 369.0 Mutual funds 273.8 339.0 368.2 361.9 420.0 470.9 72.0 Closed-end funds 26.0 30.5 31.7 29.2 25.1 25.3 -2.7 Government-sponsored enterprises 47.1 67.8 91.5 117.2 132.7 139.7 196.6 REITs 6.5 6.1 5.7 4.9 7.0 11.7 80.0 Brokers and dealers 100.0 81.4 93.4 112.7 161.3 192.0 92.0 Funding corporations 33.1 37.6 33.8 33.9 74.8 89.4 170.1 1Holdings of U.S. issues by foreign residents. Source: Board of Governors of the Federal Reserve System. The Financial Services Fact Book 2004 17 04.02fs.FINAL 12/15/03 12:49 PM Page 18

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

INVESTMENTS

U.S. HOLDINGS OF MUNICIPAL SECURITIES AND LOANS, 1997-2002 ($ billions, market value at end of year) Percent change, 1997 1998 1999 2000 2001 2002 1997-2002 Total $1,318.7 $1,402.9 $1,457.2 $1,480.9 $1,603.6 $1,770.6 34.3% Household sector 422.6 428.2 452.3 463.7 511.7 619.5 46.6 Nonfinancial corporate business 27.4 25.7 25.0 31.9 29.4 28.1 2.6 Nonfarm noncorporate business 3.2 2.8 2.7 2.4 2.6 2.8 -12.5 State and local governments 3.9 2.5 1.0 1.6 1.9 0.5 -87.2 Commercial banking 96.7 104.8 110.8 114.1 120.2 121.7 25.9 Savings institutions 2.1 2.5 3.0 3.2 4.5 5.5 161.9 Bank personal trusts and estates 90.7 89.5 100.3 99.1 95.6 100.9 11.2 Life insurance companies 16.7 18.4 20.1 19.1 18.7 21.2 26.9 Other insurance companies 191.6 208.1 199.0 184.1 173.8 189.5 -1.1 State and local gov’t. retirement funds 1.5 3.3 3.0 1.6 1.4 0.5 -66.7 Money market mutual funds 167.0 193.0 210.4 244.7 281.0 282.8 69.3 Mutual funds 219.8 242.6 239.4 230.5 253.4 277.4 26.2 Closed-end funds 57.4 59.2 67.6 64.7 75.6 85.9 49.7 Government-sponsored enterprises 5.2 9.2 10.6 8.8 14.8 13.2 153.8 Brokers and dealers 13.2 13.1 11.9 11.3 19.0 21.0 59.1 Source: Board of Governors of the Federal Reserve System.

U.S. HOLDINGS OF CORPORATE EQUITIES, 20021

1Market value of holdings, as of December 31, 2002. 2Holdings of foreign issues by U.S. residents. Source: Board of Governors of the Federal Reserve System.

18 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.02fs.FINAL 12/15/03 12:49 PM Page 19

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

INVESTMENTS/DEBT

MUTUAL FUNDS BY HOLDER, 1998 AND 2002 • According to the ($ billions) Securities Industr y 1998 2002 Association, in 2002, 75 Household sector $2,447.4 $2,625.3 percent of households’ Nonfinancial corporate business 95.5 90.5 liquid financial assets — State and local governments 21.3 26.0 those readily convertible Commercial banking 9.1 19.6 to cash — were in securi - Credit unions 3.6 3.5 ties products, and just 25 percent in bank Bank personal trusts and estates 344.7 303.1 deposits and CDs. In Life insurance companies 23.3 38.0 1975, 55 percent wer e Private pension funds 668.2 533.5 in bank deposits. Total $3,613.1 $3,639.4 Source: Board of Governors of the Federal Reserve System.

MUTUAL FUND SHARES BY HOLDER, 1998 AND 2002

1998 2002

Source: Board of Governors of the Federal Reserve System.

DEBT

OWNERSHIP OF FEDERAL GOVERNMENT DEBT The buying and selling of government securities is a crucial component of each of the finan- cial sectors. Debt is issued and sold, based on the changing needs of the federal govern- ment. This fluctuation is reflected in the surplus and deficit levels of the gross federal debt. The average daily trading volume in U.S. Treasury securities hit $226.6 billion in 1998, dropped in 1999, and began to rise again in 2000. By March 31, 2003, it had reached $387.7 billion, according to the Market Association.

The Financial Services Fact Book 2004 19 04.02fs.FINAL 12/15/03 12:49 PM Page 20

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

DEBT

ES T I M A TED OWNERSHIP OF U.S. PUBLIC DEBT SECURITIES, 1993-20021 ($ billions, end of year)

Percent of total Mutual funds/ Banking Insurance Year Total Individuals2 trusts3 institutions4 companies 1993 $2,988.5 13.8% 11.2% 11.5% 7.8% 1994 3,148.2 19.1 9.9 9.4 7.6 1995 3,310.3 16.6 9.8 10.1 7.3 1996 3,479.9 19.7 7.3 8.2 6.2 1997 3,467.9 16.9 7.3 8.5 5.1 1998 3,372.7 16.3 8.0 7.5 4.2 1999 3,298.2 19.9 7.5 6.2 3.7 2000 3,019.7 14.9 7.9 6.6 3.6 2001 3,016.1 12.6 8.9 6.3 3.5 2002 3,254.3 11.5 8.9 6.7 4.1

Percent of total State and Foreign Pension U.S. monetary local and Year funds5 authorities governments6 international Other7 1993 10.8% 11.1% 10.0% 19.9% 3.8% 1994 11.1 11.6 7.4 20.1 3.7 1995 10.1 11.4 5.3 25.4 3.9 1996 9.9 11.3 4.6 30.2 2.7 1997 10.4 12.4 3.7 33.5 2.4 1998 9.8 13.4 3.1 35.1 2.6 1999 9.7 14.5 3.0 32.8 2.7 2000 10.1 16.9 2.7 34.0 3.3 2001 9.3 18.3 3.7 34.5 2.9 2002 8.7 19.3 3.7 34.9 2.0 1Includes all public debt securities except for savings bonds and state and local government series. 2Excludes U.S. savings bonds, of which $196.9 billion were outstanding as of March 31, 2003. 3Includes mutual and money market funds, closed-end funds, and bank personal trusts and estates. 4Includes commercial banks, savings institutions, credit unions, and brokers and dealers. 5Includes state and local government pension funds and private pensions funds. 6Excludes state and local government pension funds and state and local government series. 7Includes nonfinancial corporate institutions, nonfarm noncorporate institutions and government-sponsored enterprises.

Source: Board of Governors of the Federal Reserve System; Treasury Bulletin; The Bond Market Association.

20 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.02fs.FINAL 12/15/03 12:49 PM Page 21

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 , the state of the economy, the investment products available, as well as incentives to save, such as tax advan- tages and matching funds provided by employers who offer retirement plans.

ASSETS AND LIABILITIES OF HOUSEHOLDS, 1982-20021 ($ billions, end of year)

Value Percent of total 1982 1992 2002 1982 1992 2002 Total financial assets $5,412 $14,515 $26,696 100.0% 100.0% 100.0% Foreign deposits 2 16 56 0.0 0.1 0.2 Checkable deposits and currency 321 661 644 5.9 4.6 2.4 Time and savings deposits 1,442 2,352 3,784 26.7 16.2 14.2 Money market fund shares 180 352 1,136 3.3 2.4 4.3 Securities 1,289 5,129 9,281 23.8 35.3 34.8 Open market paper 30 30 35 0.6 0.2 0.1 U.S. savings bonds 68 157 195 1.3 1.1 0.7 Other Treasury securities 104 485 413 1.9 3.3 1.5 Agency securities 1 30 174 0.0 0.2 0.7 Municipal securities 171 579 622 3.2 4.0 2.3 Corporate and foreign bonds 24 271 890 0.5 1.9 3.3 Corporate equities2 833 2,869 4,327 15.4 19.8 16.2 Mutual fund shares 57 707 2,625 1.1 4.9 9.8 Private life insurance reserves 223 422 912 4.1 2.9 3.4 Private insured pension reserves 243 693 1,471 4.5 4.8 5.5 Private noninsured pension reserves 687 2,060 3,726 12.7 14.2 14.0 Gov’t. insurance and pension reserves 376 1,423 2,856 7.0 9.8 10.7 Investment in bank personal trusts 289 661 841 5.3 4.6 3.1 Miscellaneous and other assets 359 747 1,988 6.6 5.1 7.4 (table continues)

The Financial Services Fact Book 2004 21 04.02fs.FINAL 12/15/03 12:49 PM Page 22

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

HOUSEHOLD ASSETS

ASSETS AND LIABILITIES OF HOUSEHOLDS, 1982-20021 (Cont’d) ($ billions, end of year) Value Percent of total 1982 1992 2002 1982 1992 2002 Total liabilities $2,490 $5,600 $12,051 100.0% 100.0% 100.0% Mortgage debt on nonfarm homes 1,069 2,951 6,444 42.9 52.7 53.5 Other mortgage debt 2 472 894 1,461 19.0 16.0 12.1 Consumer credit 397 825 1,762 15.9 14.7 14.6 loans 54 73 107 2.2 1.3 0.9 Security credit 26 54 148 1.0 1.0 1.2 Other liabilities3 472 804 2,130 18.9 14.4 17.7 1Combined statement for household sector, nonfarm noncorporate business, and farm business. 2Only 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 per- sonal trusts. 3Includes corporate farms.

Source: Board of Governors of the Federal Reserve System.

U.S. HOUSEHOLD OWNERSHIP OF MUTUAL FUNDS, 1980-20021 (Percent of all U.S. households)

1Households owning mutual funds in 1980 and 1984 were estimated from data on the number of accounts held by individual share- holders and the number of funds owned by households; data for 1980 through 1992 exclude households owning mutual funds only through employer-sponsored retirement plans; data for 1994 through 2002 include households owning mutual funds only through employer-sponsored retirement plans. Data for 1998 through 2002 include fund ownership through variable annuities.

Source: Investment Company Institute.

22 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.02fs.FINAL 12/15/03 12:49 PM Page 23

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

HOUSEHOLD ASSETS

FINANCIAL ASSETS HELD BY FAMILIES, BY TYPE OF ASSET, 1995-2001

Certi- Any Trans- ficates Retire- Percent of families financial action of Savings Mutual ment Life Other owning asset1 asset2 accounts3 deposit bonds Bonds4 Stocks4 funds5 accounts6 insurance7 assets8 1995 91.0% 87.0% 14.3% 22.8% 3.1% 15.2% 12.3% 45.2% 32.0% 15.0% 1998 92.9 90.5 15.3 19.3 3.0 19.2 16.5 48.9 29.6 15.3 2001 93.1 90.9 15.7 16.7 3.0 21.3 17.7 52.2 28.0 15.9

By age of family head - 2001 Under 35 years old 89.2 86.0 6.3 12.7 NA 17.4 11.5 45.1 15.0 12.5 35 to 44 years old 93.3 90.7 9.8 22.6 2.1 21.6 17.5 61.4 27.0 12.6 45 to 54 years old 94.4 92.2 15.2 21.0 2.8 22.0 20.2 63.4 31.1 14.9 55 to 64 years old 94.8 93.6 14.4 14.3 6.1 26.7 21.3 59.1 35.7 23.6 65 to 74 years old 94.6 93.8 29.7 11.3 3.9 20.5 19.9 44.0 36.7 20.3 75 years old and over 95.1 93.7 36.5 12.5 5.7 21.8 19.5 25.7 33.3 18.5

Percentiles of income - 20019 Less than 20 74.8 70.9 10.0 3.8 NA 3.8 3.6 13.2 13.8 8.4 20-39.9 93.0 89.4 14.7 11.0 NA 11.2 9.5 33.3 24.7 13.2 40-59.9 98.3 96.1 17.4 14.1 1.5 16.4 15.7 52.8 25.6 15.3 60-79.9 99.6 98.8 16.0 24.4 3.7 26.2 20.6 75.7 35.7 17.5 80-89.9 99.8 99.7 18.3 30.3 3.9 37.0 29.0 83.7 38.6 21.5 90-100 99.7 99.2 22.0 29.7 12.7 60.6 48.8 88.3 41.8 29.2

Percent of amount of financial assets of all families 1995 100.0 13.9 5.6 1.3 6.3 15.6 12.7 28.1 7.2 9.2 1998 100.0 11.4 4.3 0.7 4.3 22.7 12.4 27.6 6.4 10.3 2001 100.0 11.5 3.1 0.7 4.6 21.6 12.2 28.4 5.3 12.5 1Families include one-person units. 2Includes other types of financial assets, not shown separately. 3Includes checking, savings, and money market deposit accounts, money market mutual funds, and call accounts at brokerages. 4Covers only those stocks and bonds that are directly held by families outside mutual funds, retirement accounts and other managed assets. 5Excludes money market mutual funds and funds held through retirement accounts or other managed assets. 6Covers 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 them. Those from past jobs are restricted to accounts from which the family expects to receive the account balance in the future. 7Cash value. 8Includes personal annuities and trusts with an equity interest, managed investment accounts and miscellaneous assets. 9Ranges 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. NA=Data not available. Note: Latest data available. Based on surveys conducted every three years.

Source: Survey of Consumer , Board of Governors of the Federal Reserve System.

The Financial Services Fact Book 2004 23 04.02fs.FINAL 12/15/03 12:49 PM Page 24

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

HOUSEHOLD ASSETS

NONFINANCIAL ASSETS HELD BY FAMILIES, BY TYPE OF ASSET, 1995-2001

Other Equity in Any Percent of families Primary residential nonresidential Business nonfinancial owning asset1 residence property property equity Other asset Total 1995 84.1% 64.7% 11.8% 9.4% 11.1% 9.0% 90.9% 96.3% 1998 82.8 66.2 12.8 8.6 11.5 8.5 89.9 96.8 2001 84.8 67.7 11.3 8.3 11.8 7.6 90.7 96.7

By age of family head - 2001 Under 35 years old 78.8 39.9 3.4 2.8 7.0 6.9 83.0 93.1 35 to 44 years old 88.9 67.8 9.2 7.6 14.2 8.0 93.2 97.4 45 to 54 years old 90.5 76.2 14.7 10.0 17.1 7.2 95.2 98.1 55 to 64 years old 90.7 83.2 18.3 12.3 15.6 7.9 95.4 98.2 65 to 74 years old 81.3 82.5 13.7 12.9 11.6 9.7 91.6 97.1 75 years old and over 73.9 76.2 15.2 8.3 2.4 6.2 86.4 97.8

Percentiles of income - 20012 Less than 20 56.8 40.6 3.1 2.8 2.5 2.9 67.7 85.3 20-39.9 86.7 57.3 5.4 6.7 7.1 6.1 93.1 98.3 40-59.9 91.6 66.0 7.9 6.7 8.8 6.2 95.6 99.8 60-79.9 94.8 81.8 14.2 7.2 12.0 8.9 97.8 100.0 80-89.9 95.4 90.9 19.7 12.1 18.7 9.4 99.4 100.0 90-100 92.8 94.4 32.8 23.9 38.9 18.0 99.5 100.0 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.

24 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.02fs.FINAL 12/15/03 12:49 PM Page 25

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

EDUCATIONAL PLANS AND LOANS

EDUCATIONAL SAVINGS PLANS AND LOANS To encourage households to save for college , all states have developed Section 529 college savings plans, named • There were 4.4 million after a part of the Internal Revenue tax code that allows earn- 529 plan accounts in ings to accumulate free of federal income tax and to be with- 2002, according to the drawn to pay for college costs tax-free. Slow to gain acceptance National Association of initially, these plans are now growing fast. There are two types State T reasurers. of plans: savings and prepaid tuition. Plan assets are managed either by the state’s or an outside investment compa- ny. Most offer a range of investment options.

DOLLARS INVESTED AND NUMBER OF 529 PLAN ACCOUNTS, 1999-2002

Source: National Association of State .

The Financial Services Fact Book 2004 25 04.02fs.FINAL 12/15/03 12:49 PM Page 26

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

EDUCATIONAL PLANS AND LOANS

TOP TEN 529 SAVINGS PLAN PROVIDERS BY ASSETS, 20021 ($ millions, end of year)

Rank Provider Assets • The top 10 providers 1 TIAA-CREF $3,138.7 control about 75 percent of assets, according to 2 Alliance Capital 2,597.3 Cerulli Associates. 3 2,326.3 4 American Funds 2,046.7 5 Putnam Investments 1,919.0 6 Merrill Lynch 1,294.1 7 Citigroup 1,124.7 8 Manulife2 400.0 9 American Express 378.9 10 T. Rowe Price 362.7 Top 10 Providers $15,588.4 1Ranked by assets. Excludes private label plans under a program manager. 2Estimated.

Source: Cerulli Associates.

FEDERAL STUDENT LOANS The most significant source of federal educational loans is the Stafford Loan Program, which accounted for 67 percent of all federally-supported student aid in 2001-2002. Stafford loans may come directly from the federal government under the Ford Direct Loan Program or through the Federal Family Education Loan Program (FFELP), which makes federally- guaranteed loans available through private lenders such as banks. The Stafford Loan Program provides subsidized loans (awarded on the basis of need, interest free up to six months after a student leaves college) and unsubsidized loans. The FFELP made some $30 billion in student loans available in 2001-2002 and is more than twice the size of the direct program.

26 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.02fs.FINAL 12/15/03 12:49 PM Page 27

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

EDUCATIONAL PLANS AND LOANS

TOP TEN ORIGINATORS OF FFELP LOANS, FISCAL YEARS 2001-20021 ($ millions)

New Lender name, City, State Fiscal year 2001 Fiscal year 2002 Bank One Ed. Finance Group, Columbus, OH $2,203.3 $2,680.7 , Corp., Sioux Falls, SD 2,167.0 2,541.6 J.P. Morgan , Garden City, NY 2,295.0 2,497.7 Sallie Mae, Reston, VA 1,383.5 2,317.0 Bank of America, Kansas City, MO 1,639.6 1,937.9 Wells Fargo Education Financial Services, Sioux Falls, SD 1,774.1 1,899.2 Wachovia Bank/Classnotes (Educaid), Sacramento, CA 1,248.7 1,553.8 National City Bank, Brecksville, OH 896.6 1,115.7 U.S. Bank, St. Paul, MN 798.6 931.4 National Corp., Pittsburgh, PA 538.6 618.5 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.

The Financial Services Fact Book 2004 27 04.02fs.FINAL 12/15/03 12:49 PM Page 28

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

CONSUMER AND BUSINESS DEBT

CONSUMER AND BUSINESS DEBT Compared with the 1990s, in 2002 business borrowing slowed but consumers continued to pile on debt.

CREDIT MARKET DEBT OUTSTANDING, OWED BY SECTOR, 1993-20021 ($ billions) Nonfinancial Household corporate Year sector business • Household debt rose 1993 $4,260.3 $2,523.9 10 percent from 2001 1994 4,574.5 2,655.0 to 2002, compared 1995 4,913.8 2,879.9 with 1.4 percent for business debt. Over the 1996 5,223.9 3,092.2 10 years, 1993-2002, 1997 5,556.9 3,382.0 business debt rose 1998 6,009.6 3,791.2 94.5 percent, com - 1999 6,507.8 4,204.0 pared with 98.4 per - 2000 7,072.7 4,538.9 cent for household 2001 7,686.4 4,841.1 debt. 2002 8,454.4 4,908.5 1Excludes corporate equities and mutual fund shares. Source: Board of Governors of the Federal Reserve System.

DEBT GROWTH BY SECTOR, 1993-2002 (Percent change from prior year)

Source: Board of Governors of the Federal Reserve System.

28 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.02fs.FINAL 12/15/03 12:49 PM Page 29

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

CONSUMER AND BUSINESS DEBT

DEBT HELD BY FAMILIES, BY TYPE OF DEBT AND LENDING INSTITUTION, 1995-2001

Type of debt 1995 1998 2001 Total 100.0% 100.0% 100.0% Home-secured debt 73.1 71.3 75.1 Installment loans 11.9 13.0 12.3 Other residential property 7.7 7.7 6.4 Credit card balances 3.9 3.9 3.4 Other debt 2.8 3.7 2.3 Other lines of credit 0.6 0.3 0.5

Purpose of debt Total 100.0% 100.0% 100.0% Home purchase 70.3 67.7 70.7 Other residential property 8.2 7.9 6.6 Vehicles 7.6 7.6 7.8 Goods and services 5.7 6.1 5.7 Education 2.7 3.4 3.1 Investment, excluding real estate 1.0 3.3 2.8 Home improvement 2.0 2.1 1.9 Unclassifiable loans against pension accounts 0.2 0.4 0.3 Other 2.2 1.5 1.1 (table continues)

The Financial Services Fact Book 2004 29 04.02fs.FINAL 12/15/03 12:49 PM Page 30

SAVINGS, INVESTMENT AND DEBT OWNERSHIP

CONSUMER AND BUSINESS DEBT/BANKRUPTCY

DEBT HELD BY FAMILIES, BY TYPE OF DEBT AND LENDING INSTITUTION, 1995-2001 (Cont’d)

Type of lending institution 1995 1998 2001 Total 100.0% 100.0% 100.0% Mortgage or real estate lender 32.8 35.5 38.0 Commercial bank 34.9 32.8 34.1 Thift institution1 10.8 9.7 6.1 4.5 4.2 5.5 Finance or loan company 3.2 4.2 4.3 Credit and store cards 3.9 3.9 3.7 Brokerage 1.9 3.8 3.1 Individual lender 5.0 3.3 2.0 Other nonfinancial 0.8 1.3 1.4 Government 1.2 0.6 1.1 Pension account 0.2 0.4 0.3 Other loans 0.7 0.3 0.5 1Savings 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.

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 busi- nesses, under which 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. Chapter 7 filings have risen in recent years, according to the Administrative of the U.S. Courts.

BANKRUPTCY PETITIONS FILED, BY TYPE, 1998-2002 (Year ending June 30)

Year Business Nonbusiness Total 1998 50,202 1,379,249 1,429,451 1999 39,934 1,352,030 1,391,964 2000 36,910 1,240,012 1,276,922 2001 37,135 1,349,471 1,386,606 2002 39,201 1,466,105 1,505,306

Source: Administrative Office of the U.S. Courts.

30 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.03fs.FINAL 12/15/03 12:53 PM Page 31

Chapter 3: Asset Management/Retirement Funds

RETIREMENT ASSETS

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. Re t i r ement plans are generally administered by a bank, life insurance company, mutual fund, brokerage firm or manager. Because payouts are relatively predictable, pension funds invest primarily in long-term securi- ties. They are among the largest investors in the . Pension plan assets made up 15 percent of total financial services assets in 2002.

RETIREMENT FUNDS, ASSETS AND ASSET MIX Retirement fund assets have dropped as stock market prices declined in recent years.

ASSETS OF PRIVATE PENSION FUNDS, BY TYPE OF ASSET, 1998-20021 ($ billions, end of year)

1998 1999 2000 2001 2002 Total financial assets $4,177.8 $4,630.4 $4,515.4 $4,173.5 $3,657.7 Checkable deposits and currency 5.7 6.6 7.1 6.1 6.5 Time and savings deposits 147.7 144.7 147.6 151.8 152.6 Money market fund shares 63.4 75.1 79.6 69.0 71.8 Security repurchase agreements 28.8 28.6 29.6 30.4 32.3 Credit market instruments 651.2 668.2 701.6 717.9 755.4 Open market paper 34.3 37.5 35.8 33.5 44.4 U.S. government securities 307.3 318.5 333.7 341.1 356.1 Treasury 112.5 109.8 108.4 104.2 113.6 Agency 194.8 208.8 225.2 236.9 242.5 Corporate and foreign bonds 300.3 301.9 320.7 330.5 340.4 Mortgages 9.3 10.3 11.5 12.8 14.5 Corporate equities 1,990.7 2,325.7 2,195.1 1,925.8 1,487.8 Mutual fund shares 668.2 753.8 733.6 651.5 533.5 Miscellaneous assets 622.2 627.7 621.3 621.0 617.8 Unallocated insurance contracts 2 384.6 393.5 378.4 369.0 362.8 Contributions receivable 114.9 110.1 111.3 112.6 113.9 Other 122.7 124.1 131.6 139.4 141.0 Pension fund reserves (liabilities)3 4,231.9 4,687.9 4,576.4 4,238.3 3,726.4 1Private defined benefit plans and defined contribution plans [including 401(k) type plans], and the Federal Employees Retirement System Thrift Savings Plan. 2Assets of private pension plans held at life insurance companies (e.g., GICs, variable annuities). 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. The Financial Services Fact Book 2004 31 04.03fs.FINAL 12/15/03 12:53 PM Page 32

ASSET MANAGEMENT/RETIREMENT FUNDS

RETIREMENT ASSETS

ASSETS OF STATE AND LOCAL GOVERNMENT EMPLOYEE RETIREMENT FUNDS, BY TYPE OF ASSET, 1998-2002 ($ billions, end of year)

1998 1999 2000 2001 2002 Total financial assets $2,054.1 $2,226.8 $2,289.6 $2,179.6 $1,966.5 Checkable deposits and currency 10.0 9.2 9.1 9.5 7.7 Time and savings deposits 2.0 1.7 1.1 0.6 0.7 Security repurchase agreements 37.5 40.4 44.7 45.3 45.5 Credit market instruments 704.6 751.4 806.0 788.4 804.9 Open market paper 37.5 40.4 44.7 45.3 45.5 U.S. government securities 360.1 376.4 398.5 365.7 364.3 Treasury 217.7 211.2 195.7 177.4 176.3 Agency 142.4 165.3 202.8 188.3 188.0 Municipal securities 3.3 3.0 1.6 1.4 0.5 Corporate and foreign bonds 279.6 310.0 339.7 351.1 363.0 Mortgages 24.1 21.5 21.5 24.9 31.6 Corporate equities 1,233.9 1,343.2 1,335.1 1,221.9 1,004.3 Miscellaneous assets 66.1 81.0 93.5 113.8 103.4 Pension fund reserves (liabilities) 1 2,085.4 2,262.3 2,331.5 2,226.4 2,016.1 1Equal 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.

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 stipulated in a , and is based on that person’s earnings and number of years with the company. In a defined contribution plan, a type of savings plan in which 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 invest- ments from among the options the employer’s plan offers. The Individual Retirement Account (IRA) is a tax- savings plan for those who are self-employed, or those whose earnings are below a certain level, or whose employers do not offer retirement plans. Others 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. There are several other types of retirement funds, such as -sharing plans and Keogh plans which are tax-deferred programs for the self- employed and employees of small businesses.

32 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.03fs.FINAL 12/15/03 12:53 PM Page 33

ASSET MANAGEMENT/RETIREMENT FUNDS

RETIREMENT ASSETS

RETIREMENT FUNDS ASSET MIX, 2002

Private Defined Benefit Plans Private Defined Contribution Plans

• In defined contribution plans, investments in equi - ties dropped while invest - ments in bonds increased from 2001 to 2002.

Source: Securities Industry Association.

INVESTMENT MIX OF DEFINED BENEFIT PLAN ASSETS, 1998-2002 ($ billions) Mutual Cash Other Total Year Equity Bonds funds items assets assets 1998 $987 $457 $101 $145 $195 $1,885 1999 1,157 468 129 152 196 2,102 2000 1,046 480 124 158 196 2,004 2001 889 479 108 153 189 1,818 2002 682 473 85 160 185 1,585

Source: Securities Industry Association.

INVESTMENT MIX OF DEFINED CONTRIBUTION PLAN ASSETS, 1998-2002 ($ billions) Mutual Cash Other Total Year Equity Bonds funds items assets assets 1998 $1,004 $159 $567 $135 $427 $2,292 1999 1,168 163 625 141 431 2,529 2000 1,149 186 610 142 425 2,511 2001 1,037 205 544 138 432 2,355 2002 806 238 448 148 432 2,073

Source: Securities Industry Association. The Financial Services Fact Book 2004 33 04.03fs.FINAL 12/15/03 12:53 PM Page 34

ASSET MANAGEMENT/RETIREMENT FUNDS

RETIREMENT ASSETS

IRA MARKET SHARES, BY HOLDER, 1998 TO 2002 ($ billions, end of year) By holder 1998 1999 2000 2001 2002 Commercial banking $151.5 $148.1 $157.0 $160.1 $165.6 Saving institutions 61.8 58.7 56.4 54.6 53.9 Credit unions 35.3 36.2 36.7 39.9 43.3 Life insurance companies 190.1 245.5 245.5 247.1 238.2 Money market mutual funds 116.0 137.0 143.0 161.0 177.0 Mutual funds 826.0 1,083.0 1,060.0 987.0 850.0 Other self-directed accounts 769.3 942.5 930.4 890.2 805.1 Total $2,150.0 $2,651.0 $2,629.0 $2,540.0 $2,333.0

Source: Board of Governors of the Federal Reserve System. IRA MARKET SHARES BY HOLDER 1998

• Money market mut- ual funds gained three percentage points of the IRA market between 1998 and 2002.

2002

Source: Board of Governors of the Federal Reserve System.

34 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.03fs.FINAL 12/15/03 12:53 PM Page 35

ASSET MANAGEMENT/RETIREMENT FUNDS

RETIREMENT ASSETS

ASSETS IN 401(K) PLANS, 1991-2002 ($ billions)

Mutual fund Other 401(k) Year 401(k) plan assets plan assets Total 1991 $46 $394 $440 1992 82 471 553 1993 140 476 616 1994 184 491 675 1995 266 598 864 1996 347 714 1,061 1997 471 793 1,264 1998 605 936 1,541 1999 793 1,0052 1,798 2 2000 799 9912 1,790 2 2001 770 9602 1,730 2 20021 687 8532 1,540 2 1Preliminary data. 2Estimated.

Note: Components may not add to totals due to rounding.

Source: Investment Company Institute.

AVERAGE FOR ALL 401(K) PLAN BALANCES, 2001

Note: Funds include mutual funds and other pooled investments.

Source: Investment Company Institute

The Financial Services Fact Book 2004 35 04.03fs.FINAL 12/15/03 12:53 PM Page 36

ASSET MANAGEMENT/RETIREMENT FUNDS

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 issuer’s underlying investments. Variable annuity payments are based on the portfolio of stocks in which the issuer invests so that the monthly payment may fluctuate, depending on whether the value of the investments goes up or down. Annuities may also be classified as immediate, which begin to pay as soon as the premium is received, or deferred, which accumulate assets before payments begin, generally at retirement, see also life insurance, pages 71-74. A hybrid annuity product is the equity index annuity, which guarantees a minimum return and at the same time offers an opportunity to benefit from increases in the equity index. Until recently, most index annuities were sold as fixed annuities. Beginning in 2002, equity index annuities were also sold as securities. Total sales in 2002 reached about $13 billion, according to the Advantage Group.

INDIVIDUAL ANNUITY CONSIDERATIONS, 1996-2002 1 ($ billions) •Variable annuity sales Year Variable Fixed Total rebounded in 2002, jumping 7.5 percent. 1996 $72.8 $38.0 $110.8 Sales in 2001 wer e 1997 87.9 38.2 126.1 down 19.1 percent from 1998 99.5 32.0 131.5 the previous year . 1999 121.8 41.7 163.5

• Fixed annuity sales grew 2000 137.2 52.7 189.9 by about 40.0 percent 2001 111.0 74.3 185.3 in both 2001 and 2002. 2002 119.3 103.8 223.1 Total annuity sales rose 1Considerations are LIMRA’s estimates of the total annuity sales market. 20.4 percent in 2002. Source: LIMRA International.

ANNUITY DISTRIBUTION SYSTEMS The difference in distribution channels between fixed and variable annuities is related to the nature of the product. Variable annuities are similar to stock market-based investments and therefore attract a different type of customer from fixed annuities, which tend to be associated with other fixed rate products such as certificates of deposit sold by banks. In addition, state and federal regulators require people who sell variable annuities to register with the National Association of Securities Brokers as securities dealers. Career agents, agents who sell mostly the products of a single life insurance company, are more likely to sell variable annuities than independent agents because they have stronger ties to the com- pany them.

36 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.03fs.FINAL 12/15/03 12:53 PM Page 37

ASSET MANAGEMENT/RETIREMENT FUNDS

ANNUITIES

SALES OF FIXED ANNUITIES BY DISTRIBUTION CHANNELS, 1995 AND 2002

1995 2002

• Over the seven-year peri - od, 1995-2001, banks increased their share of fixed annuity sales by 14 percentage points. By contrast, career agents’ share fell 14 percentage points.

Source: LIMRA International.

SALES OF VARIABLE ANNUITIES BY DISTRIBUTION CHANNELS, 1995 AND 2002

1995 2002

• Between 1995 and 2002, ’ sales of variable annu - ities grew 11 percent - age points.

Source: LIMRA International.

The Financial Services Fact Book 2004 37 04.03fs.FINAL 12/15/03 12:53 PM Page 38

ASSET MANAGEMENT/RETIREMENT FUNDS

ANNUITIES

ANNUITY ASSET GROWTH AND INVESTMENT MIX

TOTAL NET ASSETS OF VARIABLE ANNUITIES, 1992-2002 ($ billions)

Source: Info-One/VARDS.

VARIABLE ANNUITY ASSETS BY INVESTMENT OBJECTIVE, 20021

• The fixed income/gener - al account segment grew from 21 percent in 2001 to 30 percent in 2002.

1As of December 31, 2002.

Source: Info-One/VARDS.

38 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.03fs.FINAL 12/15/03 12:53 PM Page 39

ASSET MANAGEMENT/RETIREMENT FUNDS

MUTUAL FUNDS

MUTUAL FUND RETIREMENT ASSETS, 1992–2002 ($ billions)

Employer-sponsored Total Year accounts1 IRAs retirement 1992 $199 $237 $436 1993 285 322 607 1994 337 349 686 1995 464 475 939 1996 596 596 1,192 1997 779 775 1,554 1998 988 976 1,964 1999 1,281 1,264 2,546 2000 1,254 1,247 2,500 2001 1,188 1,189 2,377 20022 1,057 1,067 2,124 1Includes private defined contribution plans [401(k), 403(b), 457, and others], state and local government employee retirement funds, and private defined benefit plans. 2Preliminary data.

Note: Components may not add to totals due to rounding.

Source: Investment Company Institute.

MUTUAL FUND RETIREMENT ASSETS BY TYPE OF PLAN, 1992 AND 2002 ($ billions)

1992 20021

1Preliminary data.

Source: Investment Company Institute.

The Financial Services Fact Book 2004 39 04.03fs.FINAL 12/15/03 12:53 PM Page 40

ASSET MANAGEMENT/RETIREMENT FUNDS

MUTUAL FUNDS

MUTUAL FUND INDUSTRY NET ASSETS AND SHAREHOLDER ACCOUNTS, 1940-2002

Source: Investment Company Institute.

40 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:54 PM Page 41

Chapter 4: Insurance

OVERVIEW

The insurance industry safeguards the assets of its policyholders, ensuring that they or their families can get their lives back on and continue to contribute to the economy even after a . Insurance companies act as financial intermediaries in that they invest the prem i - ums they collect for providing this service. Insurance company size is usually measured by net pr emiums written, that is, premium revenues less amounts paid for rei n s u r a n c e . 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. For this reason, specific health insurance data are not included in this book. Insurance is a product that transfers risk from an individual or business to an insurance company. It differs from most products in that insurers must price and sell their before the full cost of coverage is known. In property/casualty insurance, claims may be more frequent and costly than anticipated and investment income may not fully offset the shortfall. In life insurance, expected returns from investments may not be sufficient to fund annuity contracts, especially fixed dollar annuities. If there is a downturn in the economy, policyholders may cancel life insurance policies before the company can recoup its selling expenses.

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 con- tinued state regulation of the insurance industry as being in the public interest, but there have been and continue to be challenges to state regulation. Some insurers and other groups, including banks, which can choose a federal or state charter, are developing propos- als for an optional federal regulatory system. 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. Personal lines of the prop e r ty/casualty insurance business, such as auto and homeowners insurance, and workers compensation, in commercial lines, are the most highly reg u l a t e d , la r gely because these coverages are generally mandated by state law or req u i r ed by banks and other lenders. The National Association of Insurance Commissioners develops model rul e s and regulations for the industry, many of which must be approved by state legislatures before they can be implemented.

The Financial Services Fact Book 2004 41 04.04fs.FINAL 12/15/03 12:54 PM Page 42

INSURANCE

OVERVIEW

How Statutory Principles and Generally Accepted Accounting Principles Differ In s u r ers are req u i r ed to use a special accounting system when filing annual financial rep o rt s with state regulators and the Internal Revenue Service. This system is known as statutory accounting principles (SAP). SAP accounting is more conservative than generally accepted accounting principles (GAAP), as defined by the Financial Accounting Standards Board, to en s u r e that insurers have sufficient capital and surplus to cover insured losses. The two sys- tems differ principally in matters of timing of expenses, tax accounting, the treatment of capi- tal gains and accounting for surplus. Simply put, SAP recognizes liabilities earlier or at a higher value and recognizes assets later or at a lower value. GAAP accounting focuses on a business as a going concern, while SAP accounting treats insurers as if they were about to be liquidated. SAP accounting is defined by state law according to uniform codes established by the National Association of Insurance Commissioners. Insurance companies rep o r ting to the Securities and Exchange Commission must maintain and rep o r t another set of figures that meet GAAP standards .

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) COMPARED WITH STATUTORY ACCOUNTING PRINCIPLES (SAP) GAAP SAP Sales Costs Accounted for over the period in which Accounted for immediately on the the premium is earned, i.e., the policy period. sale of a policy. Unearned Taxes on unearned income can be deferred Some taxes must be paid on a portion of income until the income is earned. unearned premium. Loss reserve Reserves held to pay known losses in future Loss reserves must be discounted for tax discounting need not be discounted for tax purposes. purposes. Reinsurance Net worth may include reinsurance payments Net worth cannot include potentially recoverables that may not be recoverable. unrecoverable reinsurance payments. Nonadmitted Certain assets, e.g., and equipment, Such assets cannot be included in net assets can be included in net worth. worth.

Taxes on Deferred taxes on unrealized capital gains Those anticipated taxes need not be unrealized cannot be included in net worth. deducted from net worth. capital gains Bonds Requires insurers to carry certain bonds Most bonds can be carried at fair market value. at their amortized value. Surplus notes Surplus notes, a highly subordinated form of Surplus notes can be carried as part of debt, must be carried as liabilities. policyholder’s surplus.

Source: Insurance Information Institute.

42 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:54 PM Page 43

INSURANCE

ALL SECTORS

MERGERS AND ACQUISITIONS

THE TOP TEN INSURANCE-RELATED MERGERS AND ACQUISITIONS REPORTED IN 20021 ($ millions)

Transaction Rank Seller Buyer value2 • The total number of 1 Trigon Healthcare Inc. Inc. $3,980.8 insurance-related mer g- 2 Government of Mexico MetLife Inc. 966.8 ers and acquisitions 3 Insurance Co. Prudential Financial Inc. 926.0 dropped from 391 deals 4 AmeriChoice Corp. UnitedHealth Group Inc. 517.0 worth $76.9 billion in 5 Long Miller & Associates Clark/Bardes Inc. 404.1 1998, to 295 deals worth $9.6 billion in 6 Hobbs Group LLC Hilb Rogal and Co. 242.6 2002. 7 Services Sammons Enterprises Inc. 238.0 8 Corp. Welsh Carson Anderson & Stowe 235.0 9 S.p.A. 220.0 10 ANFI Inc. Fidelity National Financial 135.2 1At least one of the companies involved is a U.S.-domiciled company. List does not include ter- minated deals. 2At announcement.

Source: SNL Financial LC.

PROFITABILITY

ANNUAL RATE OF RETURN, GAAP ACCOUNTING, PROPERTY/CASUALTY AND LIFE/HEALTH INSURANCE, 1995-2002

Year Property/casualty1 Life/health2 1995 8.7% 11.0% 1996 9.3 10.0 1997 11.6 12.0 1998 8.5 11.0 1999 6.0 13.0 2000 5.9 10.0 2001 -1.2 7.0 2002 2.2 1.0 1Return on average net worth, Insurance Services Office, Inc. (ISO). 2Combined stock and mutual companies from data reported by Fortune as calculated by the Insurance Information Institute.

Source: Insurance Services Office, Inc. (ISO); Fortune.

The Financial Services Fact Book 2004 43 04.04fs.FINAL 12/15/03 12:54 PM Page 44

INSURANCE

ALL SECTORS

PREMIUMS BY TYPE OF INSURER, 20011

1Gross direct premiums. Total premiums for 2001 were $1,003.9 billion. 2Includes , medical and dental , fraternal, lim- ited benefit plans, and all other insurance. 3Health organizations.

Source: National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibit- ed without written permission of NAIC.

U.S. NONLIFE AND LIFE GROWTH IN U.S. PREMIUMS, NONLIFE AND LIFE INSURANCE, INSURANCE, 2001 1992-2001

Nonlife Life 51% 49%

Source: , sigma, No. 6/2002

1Net premiums written, includes health insurance premiums written by commercial insurers.

Source: Swiss Re, sigma, various issues.

44 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:54 PM Page 45

INSURANCE

ALL SECTORS

EMPLOYMENT Data compiled by the U.S. Bureau of Labor Statistics show the insurance industry provided 2.2 million jobs in 2002.

EMPLOYMENT IN INSURANCE, 1993-2002 (000)

Insurance companies1 Insurance agencies, Life, health brokerages and Property/ and related Total Year and medical casualty Reinsurers services2 industry • Over the last 10 years, employment in the insur - 1993 790.4 568.9 39.2 684.0 2,082.5 ance industry (all sec - 1994 812.0 568.8 37.7 700.3 2,118.8 tors) has averaged 2.1 1995 807.4 552.0 36.3 712.6 2,108.2 percent of the total U.S. 1996 788.0 558.2 35.4 726.4 2,108.0 employment. 1997 797.4 566.9 35.1 744.1 2,143.6 1998 816.8 592.0 34.3 766.3 2,209.4 1999 815.3 603.9 33.5 783.4 2,236.1 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 785.4 586.3 30.5 820.9 2,223.1 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.

Note: In June 2003 the Bureau of Labor Statistics introduced employment data based on the North American Industry Classification System (NAICS), an organizational framework that groups companies into industries based on the activity in which they are primarily engaged. It replaces the Standard Industrial Code (SIC) system, which grouped firms with others produc- ing or handling the same products.

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

The Financial Services Fact Book 2004 45 04.04fs.FINAL 12/15/03 12:54 PM Page 46

INSURANCE

ALL SECTORS

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, END OF YEAR 2001

Blue Cross/ Blue Shield, Life/ Property/ limited benefits, 1 2 3 • According to the State health casualty HMDI HMO Fraternal Other National Association of Alabama 14 25 3 3 1 1 6 Insurance Commissioners Alaska 0 7 1 0 0 0 0 (NAIC), there wer e Arizona 315 51 12 8 0 1 11 3,163 property/casualty Arkansas 41 12 1 5 0 2 13 companies in the United California 31 152 NA NA 6 10 20 States in 2001, com - pared with 3,215 in Colorado 12 23 12 13 2 3 9 2000. Many are part of Connecticut 33 75 2 8 1 1 12 larger organizations. Delaware 46 84 6 6 2 0 0

• The life/health insurance D.C. 4 9 1 6 1 0 2 industry consisted of Florida 24 109 30 32 0 5 1 1,506 companies in Georgia 19 36 1 14 0 0 36 2001, compared with Hawaii 4 32 5 5 0 0 71 1,549 in 2000, accor d- Idaho 6 11 2 2 0 0 2 ing to the NAIC. Illinois 83 202 18 9 18 0 116 Indiana 43 75 0 16 3 5 41 Iowa 30 57 1 4 1 0 127 Kansas 14 31 1 9 0 2 0 Kentucky 11 10 7 7 0 0 17 Louisiana 65 35 1 13 2 3 28 Maine 3 14 3 3 0 0 10 Maryland 13 50 16 14 0 1 2 Massachusetts 18 57 3 11 3 2 0 Michigan 18 68 16 28 2 0 10 Minnesota 18 53 3 11 8 1 0 Mississippi 32 17 0 7 4 2 8 (table continues) 46 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:54 PM Page 47

INSURANCE

ALL SECTORS

DOMESTIC INSURANCE COMPANIES BY STATE BY TYPE, END OF YEAR 2001 (Cont’d)

Blue Cross/ Blue Shield, Life/ Property/ limited benefits, State health casualty HMDI1 HMO Fraternal2 Title Other3

Missouri 37 57 7 18 2 3 123 • The number of Blue Montana 3 4 3 4 0 1 13 Cross/Blue Shield, limit - Nebraska 23 41 6 5 1 0 37 ed benefits and HMDI companies dropped to Nevada 2 7 10 6 0 0 14 323 in 2001 from 334 New Hampshire 4 35 2 4 1 0 3 in 2000. New Jersey 7 73 3 12 4 2 0 • Fraternal companies New Mexico 1 7 5 6 0 0 0 totaled 132 in 2001, New York 108 203 14 28 6 10 136 compared with 145 the North Carolina 7 53 2 18 0 2 15 prior year . North Dakota 4 18 4 1 0 0 15 • companies Ohio 44 125 5 24 14 12 51 numbered 98 in 2001, Oklahoma 31 53 5 9 1 5 0 compared with 100 in Oregon 3 17 26 0 0 3 90 2000. Pennsylvania 37 200 18 25 27 6 0 Rhode Island 5 20 3 3 0 0 2 South Carolina 13 28 1 6 0 2 0 South Dakota 2 17 2 4 0 1 26 Tennessee 18 29 3 18 1 2 40 Texas 179 240 5 54 10 4 20 Utah 18 13 6 7 0 1 0 Vermont 2 402 2 1 0 0 3 Virginia 15 19 5 18 0 2 23 Washington 13 26 21 4 2 3 0 West Virginia 2 4 1 2 0 0 11 Wisconsin 31 175 18 21 9 0 101 Wyoming 0 2 1 1 0 0 0 Countrywide 1,506 3,163 323 533 132 98 1,265 1Limited benefit plans cover only specified accidents or sicknesses; hospital, medical and dental indemnity (HMDI) plans provide stipu- lated payments to an insured person during hospital confinement, for virtually all costs related to hospital stays, other medical expens- es, and for dental services and supplies. 2Fraternal groups provide insurance plans for their members. 3Includes county mutuals, auto services companies and specialty companies. NA=Data not available. Source: Insurance Department Resources Report, 2001, published by the National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibited without written permission of NAIC. The Financial Services Fact Book 2004 47 04.04fs.FINAL 12/15/03 12:54 PM Page 48

INSURANCE

ALL SECTORS

WORLD LIFE AND NONLIFE WORLD INSURANCE MARKET INSURANCE PREMIUMS, Outside the United States, the insurance industry is usually clas- 2001 sified as life and nonlife, or . The latter includes every form of insurance except life. Reinsurance, insur- ance for insurance companies, is purchased by both life and Nonlife nonlife insurers. 40% The number of countries in the survey of world insurance Life 60% premiums below, conducted by Swiss Re, increased from 66 in 1992 to 89 in 2001. To be included, countries must have had reli- able data and direct premiums of over $100 million from 1992 to 1998, and over $150 million thereafter. Source: Swiss Re, sigma, No. 6/2002

WORLD LIFE AND NONLIFE INSURANCE PREMIUMS, 1992-2001 (Direct premiums written, U.S. $ millions)

• Over the 10-year period, 1 1992 to 2001, total Year Nonlife Life Total world insurance premi - 1992 $697,503 $768,436 $1,465,939 ums grew 64.3 percent. 1993 792,087 1,010,490 1,802,731

• Nonlife premiums grew 1994 846,600 1,121,186 1,967,787 38.9 percent over the 1995 906,781 1,236,627 2,143,408 same 10 years, while life 1996 909,100 1,196,736 2,105,838 business grew 87.3 per - 1997 896,873 1,231,798 2,128,671 cent. 1998 891,352 1,275,053 2,166,405 • In 2001, the inflation- 1999 912,749 1,424,203 2,336,952 adjusted growth rate 2000 926,503 1,518,401 2,443,904 from 2000 for the total 2001 969,074 1,439,177 2,408,252 world insurance market, 1Includes accident and health insurance. at 1.0 percent, was the lowest since 1980. Life Source: Swiss Re, sigma, various issues. premiums dropped 1.8 percent, while nonlife pr e- miums grew 5.4 percent. These changes were cal - culated using local cur - rencies.

48 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 49

INSURANCE

PROPERTY/CASUALTY: FINANCIAL

PROPERTY/CASUALTY INSURANCE Property/casualty insurance covers the property and liability losses of businesses and indi- viduals. 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 of business, nearly four times greater than the next largest line, homeowners. Property/casualty insurance com- panies 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 person- al banking and mutual funds. Because property/casualty losses are more volatile than those in life insurance, proper- ty/casualty insurers invest largely in high-quality liquid securities which can be sold quickly to pay for claims resulting from a major hurricane, or man-made disaster such as the destruction of the World Trade Center.

ASSETS AND LIABILITIES OF NONLIFE INSURANCE COMPANIES, 1998 AND 20021 ($ billions, end of year)

1998 2002 Total financial assets $876.4 $915.5 Checkable deposits and cash 4.0 25.9 Security repurchase agreements2 42.7 38.6 Credit market instruments 521.1 554.1 U.S. government securities 140.0 164.7 Municipal securities 208.1 189.5 Corporate and foreign bonds 171.1 197.9 Commercial mortgages 2.0 1.9 Corporate equities 200.1 156.0 Trade receivables 61.5 78.8 Miscellaneous assets 47.0 62.1 Total liabilities 543.1 635.5 Taxes payable 15.4 25.6 Miscellaneous liabilities3 527.7 609.9 1Nonlife insurance includes every form of insurance except life. 2Short-term agreements to sell and repurchase government securities by a specified date at a set price. 3Largely reserves, i.e., money held to pay known and anticipated claims.

Source: Board of Governors of the Federal Reserve System.

The Financial Services Fact Book 2004 49 04.04fs.FINAL 12/15/03 12:55 PM Page 50

INSURANCE

PROPERTY/CASUALTY: FINANCIAL

CAPITAL AND SURPLUS A property/casualty insurer must maintain a certain level of capital and surplus to under- write . This capital is known as “capacity.” When the industry is hit by high losses, such as after the World Trade Center terrorist attack, capacity is diminished. It can be restored by increases in net income, favorable investment returns, reinsuring more risk, and/or raising additional capital. 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). Some lines of insurance do produce a steady underwriting profit, but others record combined ratios (costs in excess of premiums) that are above 100 year after year. In 2002, the combined ratio was 107, which means insurers paid out $1.07 for every dollar in earned premium. The difference is generally cov- er ed by investment income from a number of sources, including capital and surplus accounts, money set aside for loss res e r ves and unearned premium res e r ves, and capital gains.

PROPERTY/CASUALTY INSURANCE INDUSTRY INCOME ANALYSIS, 1998-2002 ($ billions)

1998 1999 2000 2001 2002 • In 2002, net income Written premiums $281.6 $286.9 $299.7 $323.5 $369.0 after taxes bounced back Percent change 1.8% 1.9% 5.3%1 8.0% 14.1% to $2.9 billion, from a net Earned premiums $277.7 $282.8 $294.0 $311.5 $348.2 loss of $7.0 billion in Losses incurred 175.3 184.6 200.9 234.5 237.7 2001, the industry’s first Loss adjustment expenses incurred 36.5 37.7 37.8 40.9 44.8 ever net aftertax loss. Other underwriting expenses 77.9 80.3 82.6 86.4 94.3 Policyholder dividends 4.7 3.3 3.9 2.4 1.9 Underwriting gain/loss -16.8 -23.1 -31.2 -52.6 -30.5 Investment income 39.9 38.9 40.7 37.7 36.7 Miscellaneous income/loss 0.2 -1.4 0.4 1.1 -0.9 Operating income/loss 23.4 14.4 9.9 -13.8 5.3 Realized capital gains/losses 18.0 13.0 16.2 6.6 -1.1 Federal income taxes/credit 10.6 5.6 5.5 -0.2 1.2 Net income after taxes 30.8 21.9 20.6 -7.0 2.9 1ISO adjusted the growth rate to mitigate distortion caused by a significant insolvency.

Source: Insurance Services Offices, Inc. (ISO).

50 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 51

INSURANCE

PROPERTY/CASUALTY: FINANCIAL

ASSETS The chart below shows financial assets held by property/casualty insurers.

PROPERTY/CASUALTY INSURER FINANCIAL ASSET DISTRIBUTION, 2002 ($ billions)

1997 1998 1999 2000 2001 2002 Total financial assets $843.5 $876.4 $875.1 $866.1 $863.0 $915.5 Checkable deposits and currency 4.2 4.0 4.3 3.7 13.1 25.9 Security RPs1 35.2 42.7 28.3 38.3 30.2 38.6 Credit market instruments 515.3 521.1 518.2 509.4 518.4 554.1 U.S. government securities 161.9 140.0 136.2 136.2 146.3 164.7 Treasury 91.1 70.4 60.6 52.1 52.0 63.0 Agency 70.8 69.7 75.5 84.1 94.2 101.7 Municipal securities 191.6 208.1 199.0 184.1 173.8 189.5 Corporate and foreign bonds 159.5 171.1 181.1 187.5 196.4 197.9 Commercial mortgages 2.2 2.0 1.9 1.6 1.9 1.9 Corporate equities 186.0 200.1 207.9 194.3 173.9 156.0 Trade receivables 59.9 61.5 63.6 64.6 69.9 78.8 Miscellaneous assets 42.8 47.0 53.0 55.8 57.5 62.1 1RPs are repos (repurchase agreements).

Source: Board of Governors of the Federal Reserve System.

PROPERTY/CASUALTY INSURER FINANCIAL ASSETS, 1997-2002

Source: Board of Governors of the Federal Reserve System.

The Financial Services Fact Book 2004 51 04.04fs.FINAL 12/15/03 12:55 PM Page 52

INSURANCE

PROPERTY/CASUALTY: FINANCIAL

TOP TWENTY U.S. PROPERTY/CASUALTY COMPANIES, BY REVENUES, 2002 ($ millions)

Rank Group Revenues Assets 1 American International Group $67,723 $561,000 2 State Farm Insurance Cos. 49,654 117,811 3 Berkshire Hathaway 42,353 169,544 4 Allstate 29,579 117,426 5 Loews (CNA) 16,898 75,509 6 Nationwide 15,949 129,565 7 Hartford Financial Services 15,907 182,043 8 Liberty Group 14,544 55,827 9 Progressive 9,294 13,564 10 USAA 9,222 38,203 11 Chubb 9,140 34,114 12 St. Paul Cos. 8,918 39,920 13 7,065 34,656 14 American Family Insurance Group 5,145 10,840 15 Fidelity National Financial 5,083 5,246 16 First American Corp. 4,704 3,398 17 American Financial Group 3,750 19,500 18 Auto-Owners Insurance 3,514 8,175 19 3,440 10,271 20 Allmerica Financial 3,419 26,518

Source: Fortune.

52 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 53

INSURANCE

PROPERTY/CASUALTY: FINANCIAL

DISTRIBUTION CHANNELS Property/casualty insurance was 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 , telephone, or via the are called “direct writers.” In the 1990s, these distinctions blurred as insurers began to use multiple channels to reach potential customers. In the 1980s, banks began to explore the possibility of selling insurance through inde- pendent agents, usually buying agencies for that purpose, see pages 70,76 and 84. Other dis- tribution channels include sales through professional organizations and workplaces. The sale of insurance via the Internet, either at proprietary Web sites or at so-called “insurance malls,” remains a very small portion of total sales. Most Internet sales are of “commodity” insurance products, i.e., auto, some homeowners, term and whole life, and other relatively simple coverages that do not require much explanation or customized risk analysis. The Independent Insurance Agents & Brokers of America says that in 2000 (latest data available) on average personal property/casualty insurance accounted for 53 percent of agencies’ insurance revenues. Commercial lines accounted for 39 percent of revenues, life and health insurance for 5 percent, and for 3 percent.

MARKET SHARE, PERCENT OF COMMERCIAL LINES AND PERSONAL LINES, 1999-20001

Commercial lines Personal lines 1999 2000 1999 2000 National agency companies 47.48% 47.50% 14.50% 14.59% Regional agency companies 26.07 25.75 18.87 19.08 Captive agency companies 26.13 25.29 58.79 57.83 Direct response companies 0.32 1.46 7.85 8.49 1Based on direct premiums written.

Source: Independent Insurance Agents & Brokers of America, Inc.

The Financial Services Fact Book 2004 53 04.04fs.FINAL 12/15/03 12:55 PM Page 54

INSURANCE

PROPERTY/CASUALTY: FINANCIAL/PREMIUMS BY LINE

PROPERTY/CASUALTY INSURANCE INDUSTRY CONCENTRATION According to the Insurance Services Office, Inc., concentration in the property/casualty insurance sector increased from 229 in 1980 to 312 in 2002 on the Herfindahl scale, used to measure market concentration. The U.S. Department of Justice classifies any score under 1,000 as unconcentrated. A score of 10,000 represents a .

MARKET SHARE TRENDS BY SIZE OF INSURER, 1982-20021

1Based on net premiums written. Source: Insurance Services Office, Inc. (ISO).

PREMIUMS BY LINE

DIRECT PREMIUMS WRITTEN BY LINE, PROPERTY/CASUALTY INSURANCE, 1997 AND 2001 1

1997 2001 Direct Direct premiums premiums written Percent written Percent Lines of insurance ($000) of total ($000) of total Private passenger auto Liability $72,136,812 25.3% $76,248,477 23.1% Collision and comprehensive 43,811,122 15.8 56,411,503 17.4 Total private passenger auto 115,947,934 41.9 132,659,980 41.0 Commercial auto Liability 13,795,530 5.0 17,447,356 5.4 Collision and comprehensive 5,134,156 1.9 6,789,611 2.1 Total commercial auto 18,929,686 6.8 24,236,967 7.5 (table continues)

54 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 55

INSURANCE

PROPERTY/CASUALTY: PREMIUMS BY LINE

DIRECT PREMIUMS WRITTEN BY LINE, PROPERTY/CASUALTY INSURANCE, 1997 AND 2001 1 (Cont’d)

1997 2001 Direct Direct premiums premiums written Percent written Percent Lines of insurance ($000) of total ($000) of total $5,103,894 1.8% $6,596,038 2.0% Allied lines 3,492,944 1.3 4,702,433 1.5 Earthquake 920,385 0.3 1,128,761 0.3 Farmowners multiple peril 1,458,547 0.5 1,783,964 0.6 Homeowners multiple peril 29,184,284 10.6 37,644,373 11.6 Commercial multiple peril 21,080,907 7.6 25,860,300 8.0 Ocean marine 2,117,315 0.8 2,364,405 0.7 Inland marine 7,267,788 2.6 9,606,701 3.0 Accident and health 2 10,084,955 3.6 14,022,307 4.3 Workers compensation 29,974,055 10.8 38,875,408 12.0 Medical malpractice 1,210,103 0.4 7,607,893 2.4 Other liability3 23,136,648 8.4 31,490,752 9.7 Products liability 2,068,098 0.7 2,550,260 0.8 Aircraft 1,459,074 0.5 1,895,374 0.6 Burglary and 133,849 0.0 130,916 0.0 Boiler and machinery 800,100 0.3 932,467 0.3 Fidelity 884,978 0.3 927,727 0.3 2,952,316 1.1 3,613,918 1.1 Credit 463,827 0.2 620,550 0.2 Mortgage guaranty 2,793,824 1.0 4,129,924 1.3 Financial guaranty 1,210,103 0.4 2,159,443 0.7 Other lines4 6,203,666 2.1 12,532,800 3.4 Total, all lines $293,853,688 100.0% $368,073,661 100.0% 1Before reinsurance transactions. 2Premiums from certain insurers that write primarily health insurance but file financial statements with state regulators on a property/casualty rather than life/health basis. 3Coverages protecting against resulting from negli- gence, carelessness, or failure to act. Some examples are contingent liability, errors and omissions, environmental and umbrella and . 4Includes international, space and miscellaneous coverages.

Source: National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibited without written permission of NAIC.

The Financial Services Fact Book 2004 55 04.04fs.FINAL 12/15/03 12:55 PM Page 56

INSURANCE

PROPERTY/CASUALTY: PREMIUMS BY LINE

DIRECT PREMIUMS WRITTEN BY LINE, PROPERTY/CASUALTY INSURANCE, 20011 ($000)

DIRECT PREMIUMS Burglary and theft $130,916 WRITTEN, Credit 620,550 PERSONAL AND COMMERCIAL LINES, Fidelity 927,727 2001 Boiler and machinery 932,467 ($ billions) Earthquake 1,128,761 Commercial Farmowners multiple peril 1,783,964 lines $197.8 Aircraft 1,895,374 Financial guaranty 2,159,443 53.7% Ocean marine 2,364,405 46.3% Products liability 2,550,260 Personal lines Surety 3,613,918 $170.3 Mortgage guaranty 4,129,924 Allied lines 4,702,433

Fire 6,596,038 Medical malpractice 7,607,893

Inland marine 9,606,701 Other lines2 12,532,800 Accident and health3 14,022,307

Commercial auto 24,236,967 Commercial multiple peril 25,860,300

Other liability4 31,490,752

Workers compensation 38,875,408 Homeowners multiple peril 37,644,373

Private passenger auto 132,659,980

1Before reinsurance transactions. 2Includes international, space and miscellaneous coverages. 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 , carelessness, or failure to act. Some examples are contingent lia- bility, errors and omissions, environmental pollution and umbrella and liquor liability insurance.

Source: National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibited without written permission of NAIC.

56 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 57

INSURANCE

PROPERTY/CASUALTY: SPECIALTY LINES

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 creditwor- thiness 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, 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, 1993-2002

Direct premiums written Annual Year ($000) percent change 1993 $2,247,299.2 NA 1994 2,353,113.4 4.7% 1995 2,471,961.8 5.1 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

NA=Data not available.

Source: Surety Association of America.

The Financial Services Fact Book 2004 57 04.04fs.FINAL 12/15/03 12:55 PM Page 58

INSURANCE

PROPERTY/CASUALTY: SPECIALTY LINES

TOP TEN SURETY COMPANIES, 2002 ($000)

Rank Group Direct premiums written 1 Travelers Property Casualty Corporation $522,288.1 2 The St. Paul Companies 450,448.8 3 CNA Insurance Companies 360,372.3 4 Zurich Group 260,158.2 5 ACE USA Group 202,140.8 6 Chubb Group of Insurance Companies 172,651.4 7 Safeco Insurance Companies 164,611.3 8 Liberty Mutual Group 150,209.4 9 Kemper Insurance Companies 122,815.8 10 Insurance Group 122,075.1

Source: Surety Association of America.

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 spe- cial category of surety covering the risk involved in financial transactions. It became a sepa- rate line of insurance in 1986. The companies that insure bonds are specialized, highly-capitalized companies that tra- ditionally have the highest rating. The insurer’s high rating attaches to the bonds, lowering the riskiness of the bonds to investors. With their credit rating thus enhanced, municipali- ties 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 , generally about 2 to 3 percent, in exchange for the security that provides. The leading 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.

58 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 59

INSURANCE

PROPERTY/CASUALTY: SPECIALTY LINES

FINANCIAL GUARANTY INSURANCE INCOME STATEMENT, 1998-2002 ($ millions)

1998 1999 2000 2001 2002 • In 2002, U.S. municipal Premiums written $1,569 $1,520 $1,572 $2,161 $3,037 bonds was the largest sector insured by finan - Net premiums earned 933 1,013 1,042 1,274 1,648 cial guaranty insurers, Net investment income 962 942 1,025 1,189 1,282 up 33 percent from the Other income 163 -9 -8 2 8 previous year, according Losses and loss expenses to Fitch Ratings. incurred 213 43 42 76 191 Insurance on U.S. munic - Other underwriting expenses 356 367 441 447 548 ipals accounted for 45 Net income before taxes 1,489 1,536 1,576 1,942 2,199 percent of all insurance, Income taxes 311 327 315 500 572 written and outstanding, Net income 1,178 1,209 1,261 1,442 1,628 by financial guaranty insurers. Source: Association of Financial Guaranty Insurors. • In 2002, insurance on asset-backed securities, which accounted for 38 1 TOP SEVEN FINANCIAL GUARANTY INSURERS, 2002 percent of financial guar - (Adjusted gross premiums written, $ millions) anty insurance written and outstanding, fell 1 U.S. U.S. Rank Company municipal nonmunicipal International Total percent from 2001. 1 MBIA $419 $288 $346 $1,053 2 Ambac 418 257 299 974 3 FSA 222 354 120 696 4 FGIC 135 30 0 165 5 XL Capital Assurance 23 51 57 131 6 Radian Asset Assurance 65 30 7 102 7 ACA 16 0 4 20 Total 1,298 1,010 821 3,142 1Ranked by adjusted gross premiums written. Based on companies covered by Fitch Ratings.

Source: Fitch Ratings.

The Financial Services Fact Book 2004 59 04.04fs.FINAL 12/15/03 12:55 PM Page 60

INSURANCE

PROPERTY/CASUALTY: SPECIALTY LINES

CREDIT INSURANCE FOR -TERM TRADE RECEIVABLES Credit insurance protects the policyholder, the product seller, against the risk of a cus- tomer’s protracted default on its 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. (Export credit insurance is provided by private insurers under the sponsorship of the Export-Import Bank, a federal agency.)

CREDIT INSURANCE, 1997-2001

Direct premiums written1 Annual percent Year ($000) change 1997 $463,827 4.9% 1998 485,957 4.8 1999 463,674 -4.6 2000 511,144 10.2 2001 620,550 21.4 1Before reinsurance transactions. Source: National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibited without written permission of NAIC.

TOP TEN CREDIT INSURANCE COMPANIES, 20011 Direct premiums written Market Rank Group ($000) share 1 EULER American Credit Ind. Co. $141,372.8 22.78% 2 Household Finance Corp. 56,996.2 9.18 3 CNA Ins. Group 55,691.2 8.97 4 ACE Ltd. 52,790.4 8.51 5 Royal & Sun Alliance USA 45,042.5 7.26 6 Radian Group 40,695.2 6.56 7 Swiss Re Group 37,926.6 6.11 8 White Mountains Group 35,074.1 5.65 9 Zurich Ins. Group 31,197.3 5.03 10 Great American E&S Ins. Co. 22,368.8 3.60 1Ranked by direct premiums written.

Source: National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibited without written permission of NAIC.

60 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 61

INSURANCE

PROPERTY/CASUALTY: SPECIALTY LINES

MORTGAGE GUARANTEES Private (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, purchased by the borrower, 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 less than 20 percent. With PMI, therefore, prospective homeowners with only enough cash for a 10-percent down payment can buy a home imme- diately rather than waiting to save enough to pay 20 percent.

MORTGAGE GUARANTY INSURANCE, 1999-2002 ($000)

1999 2000 2001 2002 Net premiums written $3,008,562 $3,324,382 $3,656,387 $3,789,257 Net premiums earned 3,039,180 3,299,936 3,649,250 3,835,948 Losses 588,041 483,285 681,539 831,973 Expenses 782,925 700,929 806,767 899,493 Underwriting income 1,668,214 2,115,722 2,160,944 2,104,483

Loss ratio 19.35% 14.65% 18.68% 21.69% Expense ratio 26.02 21.08 22.06 23.74 Combined ratio 45.37 35.73 40.74 45.43 Source: Mortgage Insurance Companies of America.

TOP SEVEN PRIVATE MORTGAGE INSURANCE COMPANIES, 20021

Direct premiums written Market Rank Group ($ billions) share 1 Mortgage Guaranty Insurance Corp. $83.50 24.8% 2 PMI Mortgage Insurance Company 60.53 18.0 3 United Guaranty Corp. 51.09 15.2 4 Radian Guaranty Inc. 48.66 14.4 5 GE Capital Mortgage Insurance Corp. 46.10 13.7 6 Republic Mortgage Insurance Co. 34.81 10.3 7 Triad Guaranty Insurance Corp. 12.36 3.7 1Ranked by direct premiums written.

Source: Inside Mortgage Finance Publications, Inc.

The Financial Services Fact Book 2004 61 04.04fs.FINAL 12/15/03 12:55 PM Page 62

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 , expand its business, limit losses and stabilize cash flow, among other things. In addition, the reinsurer, 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 represent a layer of risk such as losses within certain limits, say $5 million to $10 million, for which a premium is paid, or a shar- ing of both losses and profits for a certain type of business. Reinsurance is an . About 75 percent of the reinsurance business that comes from U.S. insurance companies is written by non-U.S. reinsurers. Some invest- ment banks are now setting up reinsurers as part of a move to develop alternative risk financing deals such as catastrophe bonds.

TOP TEN U.S. PROPERTY/CASUALTY REINSURERS, 20021

Net premiums written Rank Company ($ millions) 1 General Reinsurance Corp. $3,631.6 2 Employers Reinsurance Corp. 2,853.2 3 National Indemnity Co. 2,666.3 4 Transatlantic Reinsurance Co. 2,219.8 5 Everest Reinsurance Co. 2,119.2 6 Odyssey America Reinsurance Co. 1,439.2 7 Swiss Reinsurance America Corp. 1,283.0 8 American Reinsurance Co. 1,169.4 9 Converium Reinsurance North America Inc. 1,064.1 10 Berkley Insurance Co. 940.5 1Ranked by net premiums written.

Source: Standard and Poors.

62 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 63

INSURANCE

PROPERTY/CASUALTY: CAPITAL MARKETS

THE OF INSURANCE RISK Insurers and reinsurers typically issue catastrophe bonds through an issuer known as a spe- cial purpose 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 disas- ters 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 public fund has been launched in for individual investors.

CATASTROPHE BOND TRANSACTIONS, 2002

Special Risk amount purpose vehicle Sponsor ($ millions) Peril Risk location Redwood Swiss Re $194.0 Earthquake California Capital II Swiss Re 6.0 Earthquake California St. Agatha Re Lloyd’s - Syndicate 33 33.0 Earthquake California, New Earthquake, K3 230.0 hurricane, wind U.S., Japan, Europe Residential Re 2002 USAA 125.0 Hurricane East/Gulf Coast, Hawaii Fujiyama Ltd. Nissay Dowa 68.0 Earthquake Tokyo, Tokai (Japan) 2.1 Earthquake Tokyo, Tokai (Japan) Pioneer 2002 Ltd. Swiss Re 85.0 Hurricane North Atlantic 50.0 Windstorm Europe 30.0 Earthquake California 40.0 Earthquake Central U.S. 25.0 Earthquake Japan 25.0 All of the above All of the above Pioneer 2002 Ltd. (Sep. takedown) Swiss Re 5.0 Windstorm Europe 20.5 Earthquake California 1.8 Earthquake Central U.S. (table continues)

The Financial Services Fact Book 2004 63 04.04fs.FINAL 12/15/03 12:55 PM Page 64

INSURANCE

PROPERTY/CASUALTY: CAPITAL MARKETS

CATASTROPHE BOND TRANSACTIONS, 2002 (Cont’d)

Special Risk amount purpose vehicle Sponsor ($ millions) Peril Risk location Pioneer 2002 (Dec. takedown) Swiss Re $8.5 Hurricane North Atlantic 21.0 Windstorm Europe 15.7 Earthquake California 25.5 Earthquake U.S. 30.6 Earthquake Japan 3.0 All of the above All of the above Vivendi S.A. Studio Re Ltd. (through Swiss Re) 150.0 Earthquake Southern California 25.0 Earthquake Southern California Source: Guy Carpenter.

WEATHER-RELATED HEDGES -related derivatives and insurance allow such businesses as ski resorts, oil and gas distributors, and others that may experience large swings in annual sales due to weather conditions, to their weather-related risk. Developed initially by an energy company in the late 1990s and now being offered by insurers and reinsurers (the insurers of insurance companies), 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 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 an . These policies generally have a dual trig- ger, 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 , such as policies that protect against specific events being cancelled by poor weather, and different from catastrophe bonds, see previous page.

64 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 65

INSURANCE

PROPERTY/CASUALTY: CAPITAL MARKETS

GLOBAL WEATHER RISK PRODUCTS, VALUE AND NUMBER OF CONTRACTS, 1998-2002 1 • According to a survey by Year Notional value ($ millions) Number Weather Risk Manage- 1998 $1,836 695 ment Association and 1999 3,003 1,285 PricewaterhouseCoopers, from 2001 to 2002, the 2000 2,517 2,759 number of transactions 2001 4,339 3,397 in the global weather 2002 4,188 4,517 market grew by 33 per - 1Based on companies responding to a survey conducted by PricewaterhouseCoopers for the cent and the value of Weather Association. those transactions Source: PricewaterhouseCoopers. decreased 4 percent.

PARTICIPANTS IN THE 2003 WEATHER RISK MANAGEMENT ASSOCIATION SURVEY1 • In the North American market, the industry’ s Participation by main line of business largest, there were 2,217 Banking 3 contracts, a decline of 18 Energy 7 percent over last year’ s Insurance 5 2,712 contracts. The Other 4 number of contracts in the European and Asian Participation by location of respondent markets increased 90 Asia 6 percent and 85 percent, Europe 5 respectively, during the North America 7 same period. Other 1 Total 19 1Based on companies responding to a survey covering 2002/2003 conducted by PricewaterhouseCoopers for the Weather Risk Management Association.

Source: PricewaterhouseCoopers.

The Financial Services Fact Book 2004 65 04.04fs.FINAL 12/15/03 12:55 PM Page 66

INSURANCE

LIFE/HEALTH: FINANCIAL

LIFE/HEALTH INSURANCE The primary business of life/health insurance companies is no longer traditional life insur- ance, but the underwriting of annuities — contracts that guarantee a fixed or variable pay- ment over a given period of time. Nevertheless, the sale of such life insurance products as whole life and term life policies in particular 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 pri- marily in government and corporate bonds, but also in mortgage loans (mostly commer- cial). Besides annuities and life insurance, life insurers may offer other types of financial services such as asset management.

ASSETS AND LIABILITIES OF LIFE INSURANCE COMPANIES, 1998 AND 2002 ($ billions, end of year)

1998 2002 Total financial assets $2,769.5 $3,331.2 • Growth in total assets of Checkable deposits and currency 5.4 32.6 life insurance companies Money market fund shares 110.4 163.8 has slowed in recent years, from an average Credit market instruments 1,828.0 2,286.5 annual rate of 10.9 per - U.S. government securities 288.4 383.8 cent, 1996-1999, to Open market paper 73.4 74.8 2.5 percent, 2000- Municipal securities 18.4 21.2 2002. Corporate and foreign bonds 1,130.4 1,451.8 Policy loans 103.8 105.5 Mortgages 213.6 249.4 Corporate equities 733.2 748.5 Mutual fund shares 23.3 38.0 Miscellaneous assets 69.2 62.0 Total liabilities 2,599.7 3,144.2 Loans and advances 2.5 5.1 Life insurance reserves 684.7 912.1 Pension fund reserves 1 1,248.1 1,471.4 Taxes payable 14.9 22.1 Miscellaneous liabilities 649.5 733.5 1Excludes unallocated contracts held by private pension funds which are included in miscella- neous liabilities.

Source: Board of Governors of the Federal Reserve System.

66 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 67

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 liabil- ities (unearned premiums and reserves for unpaid claims) are subtracted from assets (earned premiums, investments, reinsurance). The life/health insurance industry’s net income fell to $15.3 billion in 2001, down $10.6 billion or 40.9 percent from 2000. Net income was down $10.8 billion or 41.5 percent from 1997.

LIFE/HEALTH INSURANCE INDUSTRY: SELECTED OPERATING DATA, 1997-2001 ($ millions)

1997 1998 1999 2000 2001 Premiums and annuity considerations1 $257,079.2 $270,019.7 $272,659.5 $303,288.6 $479,108.1 Net investment income 132,712.2 133,032.9 135,374.2 139,192.2 142,134.9 Federal and foreign income taxes2 8,332.1 7,484.8 8,228.8 7,135.4 4,834.3 Net gain from operations 3 32,173.5 26,492.2 31,133.0 31,607.6 24,454.4 Net realized capital gains/losses4 2,225.2 2,878.2 2,201.9 1,356.0 -4,364.7 Net income 26,066.7 21,885.7 25,106.2 25,828.2 15,255.4 Dividends to stockholders -12,685.2 -16,263.5 -12,287.4 -14,669.0 -25,977.1 Capital and surplus (end of year) 174,217.9 197,502.3 203,383.6 218,842.1 226,760.4 1Life and accident and health policies and contracts. 2Incurred (excluding tax on capital gain). 3After dividends to policyholders and before federal income taxes. 4Less capital gains tax and transfers to the interest maintenance reserve (IMR).

Source: National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibited without written permission of NAIC.

The Financial Services Fact Book 2004 67 04.04fs.FINAL 12/15/03 12:55 PM Page 68

INSURANCE

LIFE/HEALTH: FINANCIAL

ASSETS The chart below shows financial assets held by life/health insurers.

LIFE/HEALTH INSURER FINANCIAL ASSET DISTRIBUTION, 1997-2002 ($ billions)

Asset type 1997 1998 1999 2000 2001 2002 Total financial assets $2,514.8 $2,769.5 $3,067.9 $3,135.7 $3,224.6 $3,331.2 Checkable deposits and currency 8.1 5.4 5.5 5.0 36.8 32.6 Money market fund shares 92.8 110.4 133.8 142.3 185.3 163.8 Credit market instruments 1,751.1 1,828.0 1,886.0 1,943.9 2,074.8 2,286.5 Open market paper 65.9 73.4 75.8 71.2 59.3 74.8 U.S. government securities 312.1 288.4 287.1 293.5 307.2 383.8 Treasury 85.5 71.3 62.8 58.1 53.7 70.9 Agency 226.7 217.0 224.4 235.4 253.5 312.9 Municipal securities 16.7 18.4 20.1 19.1 18.7 21.2 Corporate and foreign bonds 1,046.0 1,130.4 1,173.2 1,222.2 1,342.4 1,451.8 Policy loans 103.7 103.8 99.0 101.9 104.1 105.5 Mortgages 206.8 213.6 230.8 235.9 243.0 249.4 Corporate equities 558.6 733.2 964.5 940.8 855.2 748.5 Mutual fund shares 38.4 23.3 43.3 48.1 44.3 38.0 Miscellaneous assets 65.7 69.2 34.9 55.6 28.1 62.0

Source: Board of Governors of the Federal Reserve System.

LIFE/HEALTH INSURER FINANCIAL ASSETS, 1997-2002

Source: Board of Governors of the Federal Reserve System.

68 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 69

INSURANCE

LIFE/HEALTH: FINANCIAL

TOP TWENTY U.S. LIFE/HEALTH INSURANCE GROUPS AND COMPANIES, BY REVENUES, 2002 ($ millions)

Rank Group Revenues Assets 1 MetLife $34,055 $277,385 2 Prudential Financial 26,797 292,746 3 New York Life Insurance 24,721 117,228 4 Mass. Mutual Life Ins. 20,247 94,267 5 TIAA-CREF 19,791 261,588 6 Northwestern Mutual 15,916 102,935 7 AFLAC 10,257 45,058 8 UnumProvident 9,560 45,260 9 Services 8,911 97,864 10 Principal Financial 8,868 89,861 11 Guardian Life of America 8,136 29,856 12 Conseco 6,148 6,905 13 Thrivent Financial for Lutherans 5,618 44,823 14 Lincoln National 4,636 93,133 15 Ins. 4,353 15,203 16 Pacific LifeCorp 3,816 57,305 17 Jefferson-Pilot 3,480 30,609 18 Torchmark 2,738 12,361 19 Phoenix Companies 2,453 25,246 20 Unitrin 2,298 7,706

Source: Fortune.

The Financial Services Fact Book 2004 69 04.04fs.FINAL 12/15/03 12:55 PM Page 70

INSURANCE

LIFE/HEALTH: FINANCIAL

DISTRIBUTION CHANNELS Life insurance was once sold primarily by career life agents, captive agents that represent a single insurance company and by independent agents who represent several insurers. Now life insurance company products are also sold by direct mail, telephone, and the Internet, directly to the public. In addition, in the 1980s, insurers began to market annuities and through banks and financial advisors, professional organizations and workplaces. A large portion of variable annuities, which are based on stock market perfor- mance, and a small portion of fixed annuities, are sold by stockbrokers.

MARKET SHARE, LIFE/HEALTH INSURANCE DISTRIBUTION, 2001 1

PIE CHART

1Based on the top 25 life/health groups. Source: LIMRA International.

WORKSITE LIFE INSURANCE SALES, BY LINE OF BUSINESS, 2002 1

•Worksite sales of life and health insurance products doubled from $2 billion in 1997 to $4 billion in 2002, according to a survey by Eastbridge Consulting Group.

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.

Source: Eastbridge Consulting Group, Inc.

70 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 71

INSURANCE

LIFE/HEALTH: PREMIUMS BY LINE

PREMIUMS BY LINE The dominant products of life insurers are the annuity and life insurance. Annuities 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, for as long as the annuitant lives, regardless of fluctuations in the insurer’s underlying investment returns. With variable annuities, fluctuations in the insurer’s invest- ment 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. 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 sold by stockbrokers and its underwriters and agents must register as securities dealers with the Securities and Exchange Commission.

LIFE/HEALTH INSURANCE INDUSTRY PREMIUM, BY LINE, 1997 AND 2001 ($000)

1997 2001 Net premiums Net premiums Lines of insurance written Percent of total written Percent of total Life $117,214,776 28.0% $138,907,465 23.8% Annuity considerations 47,987,556 11.4 164,140,022 28.1 Accident and health 94,113,979 22.4 110,184,296 18.9 Deposit-type contract funds1 159,946,211 38.1 84,685,778 14.5 Other considerations NA NA 86,389,884 14.8 Total, all lines $419,262,523 100.0% $584,307,446 100.0% 1New statutory accounting rules effective 2001 bring statutory accounting principles closer to generally accepted accounting principles. This change requires life insurers to report deposit-type contracts as liabilities, not revenues, resulting in a decline in 2001 of net pre- mium reported for deposit-type contract funds.

NA=Data not available.

Source: National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibited without written permission of NAIC.

The Financial Services Fact Book 2004 71 04.04fs.FINAL 12/15/03 12:55 PM Page 72

INSURANCE

LIFE/HEALTH: PREMIUMS BY LINE

TOP TEN WRITERS OF VARIABLE ANNUITIES, BY NEW SALES, 2002 ($ millions)

Rank Company New sales 1 TIAA-CREF $12,772.6 2 Hartford Life Insurance Company 10,397.9 3 AIG/SunAmerica/VALIC 7,657.3 4 Aegon/Transamerica 6,569.0 5 MetLife/NEF/Gen Am/MLI 6,384.3 6 Equitable Life Assurance Society of the U.S. 6,299.7 7 ING Group of Companies 5,560.0 8 Nationwide Life Insurance Company 4,394.3 9 Pacific Life Insurance Company 4,257.8 10 Lincoln National Life Insurance Company 3,990.4

Source: AnnuityNet/VARDS.

TOP TEN PRODUCERS OF EQUITY INDEX ANNUITIES BY TOTAL SALES, 20021 ($ millions)

Rank Company Total sales 1 Life $3,417.2 2 Midland National 2,293.7 3 Amer Equity 1,476.3 4 North American Life 819.1 5 AmerUs Group 656.7 6 397.9 7 Keyport Life (Sun) 344.7 8 Jefferson-Pilot 274.6 9 ING USG 244.9 10 Lafayette Life 199.7 1Excludes companies that declined to be featured in ranking.

Source: The Advantage Group.

72 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.04fs.FINAL 12/15/03 12:55 PM Page 73

INSURANCE

LIFE/HEALTH: PREMIUMS BY LINE/BANKS IN INSURANCE

CREDIT LIFE INSURANCE Credit life insurance, which is 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 the borrower dies. The face value of a credit life insurance policy decreases as the loan is paid off until both equal zero. When loans are paid off early, premiums for the remaining term must be returned to the policyholder. Credit accident and health is a similar product that makes monthly payments in the event the bor- rower becomes disabled.

CREDIT LIFE AND ACCIDENT AND HEALTH INSURANCE DIRECT PREMIUMS WRITTEN, 1998-2001 1 ($000) Accident Year Life and health 1998 $1,994,001 $1,790,393 1999 1,970,566 1,724,447 2000 1,849,525 1,675,211 2001 1,627,984 1,543,073 1Group and individual. Source: National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibited without written permission of NAIC.

BANKS IN INSURANCE

LEADING INSURERS, LIFE INSURANCE SALES THROUGH BANKS, 20021 ($ millions) Percent change Rank Company 2002 from 2001 • Bank sales of life insur - 1 Nationwide $38.1 26% ance rose 42 percent in 2 Hartford 17.0 12 2002, based on overall 3 CUNA Mutual 15.2 13 premiums, and 34 per - 4 Liberty Life 11.2 19 cent, based on “weighted 5 10.0 NA premiums,” a formula 6 Aegon 9.9 90 that gives recurring pr e- 7 AIG 9.7 14 mium products mor e weight than single premi - 8 Great West 7.8 95 um products. 9 CGU Life 7.6 94 10 Allstate 6.1 -8 1Ranked by 2002 weighted premium, which is 100% of first-year recurring premium plus 10% of single-premium sales. NA=Not applicable. Source: Kenneth Kehrer Associates. The Financial Services Fact Book 2004 73 04.04fs.FINAL 12/15/03 12:55 PM Page 74

INSURANCE

BANKS IN INSURANCE

TOP TEN WRITERS OF FIXED ANNUITIES SOLD THROUGH BANKS, 20021 ($ billions)

Rank Company Sales 1 AIG/American General $8,575 2 Aegon/Transamerica 5,142 3 Nationwide 2,244 4 John Hancock 2,189 5 Jackson National 2,085 6 Allstate Life Group 1,973 7 GE Companies 1,763 8 Sun Life Financial 1,637 9 Lincoln National 1,254 10 Western-Southern 1,205 1Ranked by total 2002 sales.

Source: Kenneth Kehrer Associates.

TOP TEN WRITERS OF VARIABLE ANNUITIES SOLD THROUGH BANKS, 20021 ($ billions)

Rank Company Sales 1 Hartford $3,176 2 Nationwide 1,398 3 American Enterprise 1,125 4 AIG/SunAmerica 833 5 Pacific Life 674 6 Aegon/Transamerica 664 7 AXA 605 8 Allstate Life Group 521 9 ING/ 335 10 Travelers 307 1Ranked by total 2002 sales.

Source: Kenneth Kehrer Associates.

74 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 75

Chapter 5: Banking

OVERVIEW

OVERVIEW Banking, the largest sector within the financial services industry, includes all depository insti- tutions, 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 rec e i v e fr om depositors to make loans and mortgages to individuals and businesses, seeking to earn mo r e 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 page 11. They ar e also moving into the insurance business, selling annuities and life insurance products in pa rt i c u l a r , often through the purchase of insurance agencies. Banks can be federally or state ch a rt e r ed. Except for industrial banks, only data for federally charte r ed institutions are includ- ed here.

REGULATION Consumers rely on banking institutions to maintain their savings for ret i r ement, emerge n c i e s and other situations that cannot be financed out of current income. The concept of depository insurance was introduced during the Great Depression, when many people lost their lifetime savings, to res t o r e confidence in the banking system. Under the program administered by the Federal Depository Insurance Corporation (FDIC), which is an independent agency within the federal government, deposits in commercial banks and thrifts are insured for up to $100,000. The FDIC is also charged with liquidating failing banks or disposing of their insured liabilities by selling them to a solvent institution. The FDIC regulates the activities of insured banks and sets guidelines for their investment po r tfolios to safeguard the assets of depositors. The Office of Thrift Supervision perfo r ms a similar function for savings and loan associations, and the National Credit Union Administration does much the same for credit unions. The Federal Reserve system was established by Congress in 1913 to regulate the according to the needs of the U.S. economy. The Federal Reserve attempts to do this by changing bank res e r ve req u i r ements 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. When the Federal Reserve buys Trea s u r y bills, res e r ves in the federal banking system rise. When it sells, res e r ves in the system shrink. This tends to push up interest rates and theref o r e the cost of credit. Because of banks’ sensitivity to in t e r est rates, Federal Reserve policy has a major impact on the banking sector.

The Financial Services Fact Book 2004 75 04.05fs.FINAL 12/15/03 12:55 PM Page 76

BANKING

ALL SECTORS

TOP TEN BANK AND THRIFT DEALS ANNOUNCED IN 20021

Deal value2 Rank Buyer (Location) Target (State) ($ millions) 1 Citigroup, Inc. (NY) Golden State Bancorp Inc. (CA) $5,807.1 2 M&T Bank Corp. (NY) Allfirst Financial Inc. (MD) 2,880.0 3 Banknorth Group, Inc. (ME) American Financial Holdings, Inc. (CT) 743.4 4 Marshall & Ilsley Corporation (WI) Mississippi Valley Bancshares, Inc. (MO) 510.0 5 Royal Group, Plc (U.K.) Commonwealth Bancorp Inc. (PA) 498.1 6 Royal Bank of Scotland Group, Plc (U.K.) Medford Bancorp Inc. (MA) 281.9 7 BB&T Corporation (NC) Regional Financial Corporation (FL) 274.6 8 Umpqua Holdings Corp. (OR) Centennial Bancorp (OR) 221.1 9 Fifth Third Bancorp (OH) Franklin Financial Corporation (TN) 218.7 10 Group (Netherlands) VIB Corp. (CA) 212.7 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 that is involved is a U.S.-domiciled company. List does not include terminated deals. 2At announcement.

Source: SNL Financial LC.

BANK PURCHASES OF INSURANCE AGENCIES, 1999 - 2002 1

• In 2002, the 1999 2000 2001 2002 number of Number of deals 66 77 63 74 bank/agency deals Deal value2 ($ millions) $121.7 $141.9 $393.4 $124.6 increased by 17 1List does not include terminated deals. 2 percent from At announcement. 2001, but the Source: SNL Financial LC. value of those deals decreased 68 percent.

76 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 77

BANKING

ALL SECTORS

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 regu- latory mandates.

PROFITABILITY OF SAVINGS AND COMMERCIAL BANKS AND CREDIT UNIONS, 1998-2002

Return on equity Return on average assets Year Savings banks Commercial banks Credit unions 1998 11.40% 13.93% 0.95% 1999 12.20 15.31 0.94 2000 11.60 14.02 1.02 2001 13.10 13.09 0.96 2002 12.36 14.53 1.08

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

NET INCOME OF SAVINGS INSTITUTIONS, COMMERCIAL BANKS AND CREDIT UNIONS, 1993-2002 ($ millions)

• Commercial banks saw their net income grow 22.3 percent in 2002, compared with 2001. Net income increased 14.2 percent for savings institutions and 19.9 percent for credit unions.

1FDIC-insured. 2Federally insured state-chartered credit unions.

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

The Financial Services Fact Book 2004 77 04.05fs.FINAL 12/15/03 12:55 PM Page 78

BANKING

ALL SECTORS

ASSETS Although assets of credit unions are very small in relation to those of commercial banks, they are growing faster.

FINANCIAL ASSETS OF BANKING INSTITUTIONS, 1980-2002 ($ billions, end of year)

Commercial Savings Credit Year banking institutions unions • Assets of credit unions grew 27.2 percent 1980 $1,482 $792 $68 from 2000 to 2002, 1990 3,338 1,323 217 faster than commercial 1998 5,629 1,089 392 banks at 13.5 percent 1999 5,983 1,151 415 and savings banks at 2000 6,469 1,218 441 11.4 percent. 2001 6,829 1,299 506 2002 7,343 1,357 561

Source: Board of Governors of the Federal Reserve System. CREDIT MARKETS Until about 1950, commercial banks dominated the credit market. Commercial banks’ cred i t market share continues to decrease, falling from 16.1 percent in 1998 to 15.8 percent in 2002. While depository institutions continue to be the leading holders of credit assets, asset shares of federal mortgage pools, governm e n t - s p o n s o r ed corporations and ABS issuers have risen.

CREDIT MARKET ASSET HOLDINGS, 1998-20021 ($ billions, end of year) Percent of 1998 1999 2000 2001 2002 2002 total Total credit market assets held $23,433.8 $25,598.4 $27,344.4 $29,397.8 $31,725.2 100.0% By financial sectors: 17,624.1 19,385.4 20,996.4 22,750.9 24,561.6 77.4 Monetary authority 452.5 478.1 511.8 551.7 629.4 2.0 U.S.-chartered commercial banks 3,761.4 4,080.0 4,419.5 4,610.1 5,003.9 15.8 Foreign banking offices in the U.S. 504.5 487.4 511.3 510.7 516.9 1.6 Bank holding companies 26.5 32.7 20.5 24.7 27.8 0.1 Banks in U.S.-affiliated areas 43.8 48.3 55.0 65.0 71.6 0.2 Savings institutions 964.7 1,032.4 1,088.6 1,131.4 1,166.8 3.7 Credit unions 324.2 351.7 379.7 421.2 463.9 1.5 Bank personal trusts and estates 194.1 222.0 222.8 194.7 195.6 0.6 (table continues)

78 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 79

BANKING

ALL SECTORS

CREDIT MARKET ASSET HOLDINGS, 1998-20021 (Cont’d) ($ billions, end of year) Percent of 1998 1999 2000 2001 2002 2002 total Life insurance companies $1,828.0 $1,886.0 $1,943.9 $2,074.8 $2,286.5 7.2% Nonlife insurance companies 521.1 518.2 509.4 518.4 554.1 1.7 Private pension funds 651.2 668.2 701.6 717.9 755.4 2.4 Public pension funds 704.6 751.4 806.0 788.4 804.9 2.5 Money market mutual funds 965.9 1,147.8 1,290.9 1,536.9 1,511.6 4.8 Mutual funds 1,028.4 1,076.8 1,097.8 1,223.8 1,365.4 4.3 Closed-end funds 98.4 106.9 100.6 107.4 116.7 0.4 Exchange-traded funds 0.0 0.0 0.0 0.0 3.7 0.0 Government-sponsored corporations 1,252.3 1,543.5 1,807.1 2,114.3 2,320.9 7.3 Federal mortgage pools 2,018.4 2,292.2 2,491.6 2,830.1 3,158.2 10.0 ABS issuers 1,219.4 1,413.6 1,585.4 1,877.3 2,128.9 6.7 Finance companies 645.5 742.5 850.5 844.8 862.0 2.7 Mortgage companies 32.1 32.1 32.1 32.1 32.1 0.1 Real Estate Investment Trusts 45.5 42.9 35.8 42.5 65.6 0.2 Brokers and dealers 189.4 154.7 223.6 316.0 344.4 1.1 Funding corporations 152.3 276.0 311.0 216.7 175.1 0.6 By the federal government 219.0 258.0 265.3 271.3 280.1 0.9 By others, domestic 3,312.6 3,600.5 3,461.6 3,421.2 3,535.9 11.1 By others, foreign 2,278.2 2,354.6 2,621.1 2,954.4 3,347.6 10.6 1Excluding corporate equities and mutual fund shares.

Source: Board of Governors of the Federal Reserve System.

COMMUNITY DEVELOPMENT LENDING, 2002 1 ($000)

Number Amount of loans Lending by of loans ($000) affiliates development loans Asset size of lender Number Percent ($ millions) Total Percent Total Percent Number Percent extending extending Less than $100 111 0.4% $138,430 0.5% 95 4.8% 27 2.2% $100 to $249 571 1.9 233,928 0.8 165 8.3 70 5.6 $250 to $999 8,718 28.5 3,747,971 13.5 1,218 61.3 723 58.4 $1,000 or more 21,154 69.2 23,689,850 85.2 508 25.6 419 33.8 Total 30,554 100.0 27,810,179 100.0 1,986 100.0 1,239 100.0 Lending by all affiliates 396 1.3 913,524 3.3 30 2.4 1As per the Community Reinvestment Act (CRA), enacted in 1977 to encourage banks to help meet the needs of the in which they operate, including low and moderate income neighborhoods.

Source: Federal Financial Institutions Examination Council.

The Financial Services Fact Book 2004 79 04.05fs.FINAL 12/15/03 12:55 PM Page 80

BANKING

ALL SECTORS

EMPLOYMENT EMPLOYMENT IN THE BANKING INDUSTRY, 1993-2002 (000)

Commercial Savings Credit Year banks banks unions Total • In 2002, the number of 1993 1,308.7 295.1 156.6 1,760.4 employees in credit unions rose 3.1 per - 1994 1,297.4 277.7 161.7 1,736.8 cent from 2001. Over 1995 1,281.7 251.5 167.1 1,700.3 the same period ther e 1996 1,275.1 242.6 173.7 1,691.4 was a 2.1 percent rise 1997 1,277.9 237.3 181.3 1,696.5 in employees in com - 1998 1,286.0 234.6 188.3 1,708.9 mercial banks and a 1999 1,281.2 232.6 196.0 1,709.8 1.8 percent increase in 2000 1,250.5 229.2 201.5 1,681.2 employees in savings institutions. 2001 1,258.4 233.6 209.2 1,701.2 2002 1,284.7 237.9 215.6 1,738.2

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

BANK BRANCHES Consolidation in commercial banking has substantially reduced the number of these insti- tutions, but has not reduced consumers’ access to their deposits as the number of commer- cial bank branches and ATMs continues to grow. However, there are fewer savings institu- tions than in 1990, both in terms of banks and branches. In addition, since 1990, the num- ber of credit unions has dropped by 5 percent.

BANKING OFFICES BY TYPE OF BANK, 1990-2002

1990 1998 1999 2000 2001 2002 All banking offices 96,951 97,367 98,442 97,745 98,593 98,339 Commercial banks 62,346 70,150 71,664 71,784 73,027 73,454 Number of banks 12,329 8,756 8,563 8,297 8,062 7,870 Number of branches 50,017 61,394 63,101 63,487 64,965 65,584 Savings institutions 24,445 16,222 16,150 15,645 15,582 15,197 Number of banks 2,815 1,690 1,642 1,589 1,534 1,467 Number of branches 21,630 14,532 14,508 14,056 14,048 13,730 Credit unions 10,160 10,995 10,628 10,316 9,984 9,688

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

80 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 81

BANKING

ALL SECTORS/CONVERGENCE

ASSETS OF FOREIGN BANKING OFFICES IN THE UNITED STATES, 1998-20021 ($ billions, end of year) 1998 1999 2000 2001 2002 Total financial assets $806.5 $750.9 $789.4 $791.9 $801.1 Reserves at Federal Reserve 1.0 1.4 0.5 0.6 1.2 Total bank credit 568.7 543.0 610.2 603.0 615.0 U.S. government securities 152.2 166.9 166.7 154.5 178.3 Treasury 84.8 94.5 94.0 103.8 116.7 Agency 67.4 72.4 72.7 50.7 61.6 Corporate and foreign bonds 46.9 42.4 50.7 81.3 81.6 Total loans 369.6 333.8 392.8 367.2 355.2 Open market paper 0.3 0.6 0.6 0.0 0.0 Other bank loans 282.4 260.0 274.6 256.1 237.5 Mortgages 20.4 15.9 17.1 17.9 19.0 Security credit 66.5 57.2 100.5 93.3 98.7 Customers’ liability on acceptances 2.2 1.6 1.6 1.0 0.6 Miscellaneous assets 234.5 204.9 177.1 187.2 184.2 1Branches and agencies of foreign banks, Edge Act and Agreement corporations and American Express Bank.

Source: Board of Governors of the Federal Reserve System.

CONVERGENCE

BANK SALES OF LIFE INSURANCE: NEW (FIRST YEAR) PREMIUM, 1999 - 2002 ($ millions)

• Bank life insurance sales 1999 $225 increased by 42 percent 2000 345 in 2002, compared with 2001 452 the previous year, and by 2002 642 31 percent in 2001,

Source: Kenneth Kehrer Associates. compared with 2000.

The Financial Services Fact Book 2004 81 04.05fs.FINAL 12/15/03 12:55 PM Page 82

BANKING

CONVERGENCE

BANK SALES OF INSURANCE AND MUTUAL FUNDS Financial services firms are increasingly selling products traditionally associated with other financial services sectors. This trend is most visible in the banking industry.

TOP TEN THRIFTS, ANNUITY SALES, 20021 Annuity sales Rank Thrift ($ millions) 1 Washington Mutual Bank $3,177.5 2 Citibank (West), FSB2 875.2 3 Sovereign Bank 449.5 4 Guaranty Bank 427.9 5 Greenpoint Bank 423.8 6 Astoria FS & LA 305.9 7 World Savings Bank, FSB 258.6 8 Commercial FB, FSB 196.9 9 Webster Bank 174.2 10 Citibank, FSB 152.7 1Ranked by annuity sales. 2Formerly California Federal Bank in 2001.

Source: Singer’s Bank Investment and Insurance Data, www.singerpubs.com.

TOP TEN BANKS AND THRIFTS, INCOME FROM MUTUAL FUND AND ANNUITY SALES, 2002

Income from mutual funds and annuities1 Rank Bank ($ millions) 1 Bank of America NA $686.0 2 Mellon Bank NA 629.4 3 Wachovia Bank NA 590.0 4 PNC Bank NA 526.0 5 Fleet NA Bank 405.0 6 JPMorgan Chase Bank 334.0 7 Washington Mutual Bank, FA 210.5 8 Bank of New York 207.4 9 Citibank NA 155.0 10 Suntrust Bank 126.6 1Ranked by income from the sale and servicing of mutual funds and annuities. This is primarily gross commissions, but it may also include investment advisory fees.

Source: Singer’s Bank Investment and Insurance Data, www.singerpubs.com.

82 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 83

BANKING

CONVERGENCE

BANK SALES OF MUTUAL FUNDS, 1997-2002 ($ billions) • Bank sales of retail mutual funds were up 7.8 percent from 2001 to 2002.

Source: Kenneth Kehrer Associates.

BANK INSURANCE PREMIUMS, BY TYPE • In 2002, bank insurance OF COVERAGE, 20021 ($ billions) premiums increased by 26 percent to an esti - mated $69.5 billion from $55.2 billion the previ - ous year, according to a survey conducted by the American Bankers Insurance Association.

• IIn 2002, sales of credit coverages dropped to 4 percent of bank premi - ums, down from 10 per - cent in 1997.

1Total estimated at $69.5 billion. 2Commercial property/casualty and group benefits premium.

Source: American Bankers Insurance Association.

The Financial Services Fact Book 2004 83 04.05fs.FINAL 12/15/03 12:55 PM Page 84

BANKING

CONVERGENCE

Commercial lines premiums have increased from 10 percent of total bank insurance premi- ums in 1997 to about 16 percent in 2002.

ESTIMATED BANK-PRODUCED PREMIUMS, 1997-2002 ($ billions)

Percent change, 1997 1998 1999 2000 2001 2002 1997-2002 Annuities $18.8 $19.6 $24.2 $31.0 $37.1 $47.7 153.7% Commercial lines1 2.8 4.0 4.4 5.4 8.9 11.5 310.7 Personal property/casualty 2.0 2.9 3.1 3.7 4.1 5.0 150.0 Credit coverages 2.8 2.9 2.9 2.7 2.8 2.5 -10.7 Individual life/health 1.3 1.5 1.8 2.1 2.3 2.8 115.4 Total $27.7 $30.9 $36.4 $44.9 $55.2 $69.5 150.9 Annual growth NA 11.6% 17.8% 23.4% 22.9% 26.0% NA 1Includes /casualty and group benefits premium.

NA=Not applicable.

Source: American Bankers Insurance Association.

BANK INSURANCE DISTRIBUTION CHANNELS

PRIMARY BANK DISTRIBUTION CHANNELS, 2002 (Percent)

Property/casualty Life/health Personal Commercial Individual Group benefits Acquired agency 65.1% 65.7% 33.8% 57.9% De novo1 19.3 14.8 24.5 17.9 Joint venture2 9.2 11.1 11.9 12.6 Third-party marketer 2.8 4.6 9.3 6.3 Carrier direct 3.7 3.7 20.5 5.3 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. .

84 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 85

BANKING

CONVERGENCE

TOP TEN FINANCIAL HOLDING COMPANIES WITH SECURITIES SUBSIDIARIES, 2002 1 ($ millions, end of year) • Under Gramm-Leach-Bliley , Rank Company Assets FHCs may engage in secu - 1 Citigroup Inc. $1,097,190 rities underwriting, deal - 2 J.P. Morgan Chase & Co. 758,800 ing, and market-making 3 Bank Of America Corporation 660,458 activities, as well as oth - 4 Wells Fargo & Company 349,259 ers of a financial natur e as long as they do not 5 Wachovia Corporation 341,839 pose a substantial risk to 6 Bank One Corporation 277,383 the and soundness 2 7 Taunus Corporation 209,578 of the institution. 8 Fleetboston Financial Corporation 190,589 • The average asset size of 9 U.S. Bancorp 180,027 financial holding compa - 10 ABN AMRO North America Holding Company 139,605 nies (FHCs) as of March 1Ranked by assets. 2003 was $11.1 billion, 2Taunus’ Deutsche Bank division is an FHC. according to the Financial Source: Board of Governors of the Federal Reserve System; Federal Financial Institutions Examination Council. Market Center . • FHCs accounted for 19 percent of all U.S. finan - TOP TEN FINANCIAL HOLDING COMPANIES, INCOME FROM cial sector assets as of MUTUAL FUND AND ANNUITY SALES, 2002 ($ millions) March 2003, according to the Income from mutual Center. Rank funds and annuities1 1 Citigroup Inc. $2,185.0 2 Franklin Resources, Inc. 1,706.6 3 Wachovia Corp. 1,373.0 4 Charles Schwab Corp. 1,088.6 5 Metlife, Inc. 1,004.0 6 Corp. 743.7 7 PNC Financial Services 735.7 8 FleetBoston Financial 701.0 9 Bank of America Corp. 686.0 10 U.S. Bancorp 428.9 1Ranked by income from the sale and servicing of mutual funds and annuities. This is primarily gross commissions, but it may also include investment advisory fees. Source: Singer’s Bank Investment and Insurance Data, www.singerpubs.com.

The Financial Services Fact Book 2004 85 04.05fs.FINAL 12/15/03 12:55 PM Page 86

BANKING

COMMERCIAL BANKS

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’ revenue stream comes from many sources including check writing, and trust account management fees, investments, loans and mortgages. Some banks are begin- ning to receive revenue from consumers’ use of Internet banking services. The number of small commercial banks continues to drop while the number of larger banks grows. There were 318 fewer commercial banks with assets of less than $100 million in 2002 than in the previous year, but 120 more in the $100 million to $1 billion asset size, and five more in the $1 billion or more category.

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

ASSETS OF FDIC-INSURED COMMERCIAL BANKS, 2002

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.

86 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 87

BANKING

COMMERCIAL BANKS

ASSETS AND LIABILITIES OF FDIC-INSURED COMMERCIAL BANKS GROUPED BY ASSET SIZE, 2002 ($ millions, end of year) By asset size Total Less than $100 commercial $100 million to $1 billion Foreign banks million $1 billion or more offices Number of institutions 7,887 4,168 3,314 405 132 Total assets $7,075,212 $211,267 $869,517 $5,994,429 $752,618 Cash and funds due from depository institutions 383,876 12,675 40,715 330,487 93,625 Noninterest-bearing 264,796 8,968 32,195 223,632 NA Interest-bearing 119,081 3,706 8,520 106,855 NA Securities 1,333,888 50,647 200,109 1,083,132 NA sold and re-repos1 312,066 11,513 30,319 270,234 NA Loans and , net 4,083,045 127,081 555,470 3,400,493 NA Plus: allowance for losses and allocated transfer risk reserve 76,957 1,871 8,296 66,790 NA Loans and leases, total 4,160,001 128,952 563,766 3,467,283 288,857 Assets held in trading accounts2 396,879 1 118 396,760 105,133 Bank premises and fixed assets 79,235 3,884 15,528 59,823 NA Other real estate owned 4,444 336 1,219 2,889 NA Intangible assets 124,830 580 5,046 119,203 NA All other assets 356,948 4,550 20,991 331,408 NA Total liabilities, limited-life prefer red stock, and equity capital $7,075,212 $211,267 $869,517 $5,994,429 NA Total liabilities 6,427,288 187,759 783,565 5,455,964 $876,987 Deposits, total 4,689,519 178,302 707,074 3,804,143 658,033 Noninterest-bearing 936,556 27,423 110,097 799,036 33,320 Interest-bearing 3,752,963 150,879 596,977 3,005,107 624,713 Federal funds purchased and repos3 571,296 1,635 20,822 548,839 NA Trading liabilities 243,977 0 1 243,976 NA Other borrowed money 598,231 6,233 46,377 545,622 33,068 Subordinated notes and 94,734 14 514 94,206 NA All other liabilities 229,531 1,576 8,777 219,178 NA Total equity capital $647,924 $23,507 $85,951 $538,465 NA Perpetual 6,002 29 183 5,790 NA Common stock 30,142 3,289 7,365 19,488 NA Surplus 320,189 9,243 33,208 277,738 NA Undivided profits 291,592 10,946 45,196 235,449 NA 1Re-repos are security resale agreements, reverse repos. 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. 3Repos are repur- chase agreements. NA=Data not available.

Source: Federal Deposit Insurance Corporation.

The Financial Services Fact Book 2004 87 04.05fs.FINAL 12/15/03 12:55 PM Page 88

BANKING

COMMERCIAL BANKS

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. These guidelines have a similar impact on the banking industry that statutory accounting practices have on the insurance industry — to promote solvency, see page 42.

DEPOSITS, INCOME AND EXPENSES OF FDIC-INSURED COMMERCIAL BANKS, 1998-2002 ($ millions, end of year)

1998 1999 2000 2001 2002 Number of institutions 8,756 8,562 8,298 8,062 7,871

Total deposits (domestic and foreign) individuals, partnerships, corps. $3,257,578 $3,389,920 $3,704,684 $3,951,529 $4,186,738 U.S. government 7,182 7,486 8,513 12,281 30,0744 States and political subdivisions 136,715 150,539 160,216 172,282 196,841 All other 253,576 255,5573 275,611 207,226 237,574 Total domestic and foreign deposits 3,655,051 3,803,501 4,149,024 4,343,318 4,651,228 Interest-bearing 2,940,157 3,104,980 3,397,412 3,476,424 3,719,342 Noninterest-bearing 714,893 698,521 751,613 866,894 931,886 Domestic office deposits Demand deposits 582,632 523,089 526,612 570,692 525,802 Savings deposits 1,341,997 1,413,398 1,559,684 1,870,009 2,197,498 Time deposits 1,158,565 1,211,639 1,356,315 1,273,363 1,270,357 Total domestic deposits 3,083,194 3,148,126 3,442,611 3,714,064 3,993,657 Transaction 746,442 679,575 672,062 737,699 701,299 Nontransaction 2,336,752 2,468,551 2,770,549 2,976,365 3,292,358 Income and expenses Total interest income 359,588 363,981 424,448 398,737 353,947 Total interest expense 177,972 173,471 222,182 185,706 119,127 Net interest income 181,616 190,510 202,266 213,031 234,820 Total noninterest income (fees, etc.) 123,405 143,994 152,724 157,021 171,479 Total noninterest expense 193,157 203,056 214,923 221,406 231,686 Provision for loan and losses 22,114 21,5801 29,734 43,020 47,846 Pretax net operating income 89,750 109,868 110,332 105,625 126,767 Securities gains (losses) 3,091 175 -2,278 4,437 6,396 Income taxes 31,905 39,224 37,736 36,571 43,909 Net extraordinary items 507 169 -32 -240 -70 Net income 61,443 70,988 70,286 73,252 89,184

Source: Federal Deposit Insurance Corporation.

88 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 89

BANKING

COMMERCIAL BANKS

INVESTMENT MIX SECURITIES OF FDIC-INSURED COMMERCIAL BANKS, 2002 ($ millions, end of year)

By asset size1 Total Less than $100 commercial $100 million to $1 billion banks million $1 billion or more Securities (debt and equity) $1,333,888 $50,647 $200,109 $1,083,132 Securities held-to-maturity (amortized cost) 97,491 9,132 29,049 59,310 Securities available-for-sale (fair value) 1,236,397 41,515 171,060 1,023,822 By security type:2 U.S. Treasury securities and U.S. agency and corporation obligations 909,769 38,519 144,973 726,277 U.S. Treasury securities 63,898 2,537 8,783 52,578 U.S. government agency and corporation obligations 845,871 35,981 136,190 673,699 Securities issued by states and political subdivisions 102,590 9,344 36,979 56,267 Other domestic debt securities 3 129,956 2,246 13,171 114,540 Foreign debt securities 3 64,364 4 249 64,111 Equity securities 22,538 471 3,764 18,303

Other items: 2 Pledged securities 677,522 17,957 84,682 574,883 Mortgage-backed securities 702,134 13,041 73,214 615,879 Certificates of participation in pools of residential mortgages 458,010 9,444 46,180 402,386 Issued or guaranteed by the U.S. 448,512 9,424 45,995 393,093 Privately issued 9,497 19 185 9,293 Collateralized mortgage obligations 163,234 3,396 23,962 135,876 Issued by FNMA or FHLMC (includes REMICs) 357,325 7,005 34,403 315,917 Privately issued 91,188 2,420 11,592 77,176 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.”

Source: Federal Deposit Insurance Corporation.

The Financial Services Fact Book 2004 89 04.05fs.FINAL 12/15/03 12:55 PM Page 90

BANKING

COMMERCIAL BANKS

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 busi- ness is held by a relatively small number of big banks.

COMMERCIAL BANKS’ CONCENTRATION, NUMBERS AND ASSETS, 1997 AND 2002 ($ billions, end of year)

By asset size Less than Percent $100 Percent $1 billion Percent More Percent $100 of million to of to $10 of than of Total million total $1 billion total billion total $10 billion total banks 1997 Number of banks 5,853 64.0% 2,922 32.0% 301 3.3% 66 0.7% 9,142 Total assets $267.8 5.3 $727.7 14.5 $902.6 18.0 $3,116.7 62.1 $5,014.8 Total deposits 230.4 6.7 602.1 17.6 624.6 18.3 1,964.6 57.4 3,421.7 Return on assets 1.18 NA 1.34 NA 1.36 NA 1.18 NA 1.23 Return on equity 10.91 NA 13.98 NA 14.92 NA 15.30 NA 14.70 2002 Number of banks 4,168 52.8 3,314 42.0 325 4.1 80 1.0 7,887 Total assets $211.3 3.0 $869.5 12.3 $936.7 13.2 $5,057.7 71.5 $7,075.2 Total deposits 178.3 3.8 707.1 15.1 639.6 13.6 3,164.5 67.5 4,689.5 Return on assets 1.02 NA 1.33 NA 1.53 NA 1.32 NA 1.33 Return on equity 9.08 NA 12.85 NA 14.88 NA 15.06 NA 14.53 NA=Not applicable.

Source: Federal Deposit Insurance Corporation.

TOP TEN U.S. COMMERCIAL BANKS, BY REVENUES, 20021 ($ millions) Rank Company Revenues 1 Citigroup $100,789 2 Bank of America Corp. 45,732 3 J.P. Morgan Chase 43,372 4 Wells Fargo 28,473 5 Wachovia Corp. 23,591 6 Bank One Corp. 22,171 7 FleetBoston 15,868 8 U.S. Bancorp 15,422 9 MBNA 10,431 10 National City Corp. 8,728 1Ranked by revenues.

Source: Fortune.

90 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 91

BANKING

COMMERCIAL BANKS

TOP TEN U.S. COMMERCIAL BANKS, BY ASSETS, 20021 ($ millions)

Rank Company Assets 1 The Chase Manhattan Bank $622,388 2 Bank of America, NA 565,382 3 Citibank, N.A. 498,676 4 318,870 5 Bank One, NA 217,537 6 Wells Fargo Bank, NA 183,712 7 Fleet National Bank 179,362 8 Firstar Bank, NA 176,050 9 Suntrust Bank 115,149 10 HSBC Bank USA 86,416 1Ranked by assets.

Source: Board of Governors of the Federal Reserve System.

TOP TEN U.S. BANK HOLDING COMPANIES, 20021 ($ millions)

Rank Company Assets 1 Citigroup Inc. $1,097,190 2 J.P. Morgan Chase & Co. 758,800 3 Bank of America Corporation 660,458 4 Wells Fargo & Company 349,259 5 Wachovia Corporation 341,839 6 Bank One Corporation 277,383 7 Taunus Corporation 209,578 8 FleetBoston Financial Corporation 190,589 9 U.S. Bancorp 180,027 10 ABN AMRO North America Holding Company 139,605 1Ranked by assets.

Source: Board of Governors of the Federal Reserve System.

The Financial Services Fact Book 2004 91 04.05fs.FINAL 12/15/03 12:55 PM Page 92

BANKING

THRIFT INSTITUTIONS

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 , thrifts may belong to the Federal Home Loan (FHL) Bank System. In exchange for holding a ce r tain percentage of their assets in mortgage-backed securities and residential mortg a g e s , 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 2002, due mostly to acquisitions by or conversions to commercial banks or state-char- tered savings banks, the number of thrifts had fallen to 974.

SELECTED INDICATORS, FDIC-INSURED SAVINGS INSTITUTIONS, 1998-2002

1998 1999 2000 2001 2002 Return on assets (%) 1.01% 1.00% 0.92% 1.07% 1.16% Return on equity (%) 11.35 11.73 11.14 12.33 12.36 Core capital (leverage) ratio (%) 7.85 7.86 7.80 7.77 8.05 Noncurrent assets plus other real estate owned to assets (%) 0.72 0.58 0.56 0.65 0.69 Net charge-offs to loans (%) 0.22 0.17 0.20 0.28 0.29 Asset growth rate (%) 6.06 5.52 5.99 8.17 3.24 Net interest margin (%) 3.10 3.10 2.96 3.20 3.35 Net operating income growth (%) 7.71 16.62 3.05 6.65 5.46 Number of institutions reporting 1,690 1,642 1,589 1,534 1,467 Percentage of unprofitable institutions (%) 5.27% 8.28% 8.56% 8.67% 6.68% Number of problem institutions 15 13 18 19 17 Assets of problem institutions ($ billions) $6 $6 $7 $4 $3 Number of failed/assisted institutions 0 1 1 1 1

Source: Federal Deposit Insurance Corporation.

92 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 93

BANKING

THRIFT INSTITUTIONS

OTS-REGULATED THRIFT INDUSTRY INCOME STATEMENT DETAIL, 1998-2002 ($ millions, end of year)

1998 1999 2000 2001 2002 Interest income $54,900 $57,006 $64,199 $65,233 $55,455 Interest expense 33,402 34,104 40,925 37,618 25,468 Net interest income before provisions for losses 21,497 22,902 23,275 27,615 29,986 Provision for losses for interest bearing assets 1 1,585 1,312 1,659 2,532 2,853 Net interest income after provisions for losses 19,912 21,590 21,616 25,083 27,134 Non-interest income2 9,897 9,063 10,023 13,137 14,122 Non-interest expense 18,210 17,706 19,238 22,591 22,999 Net income before taxes and extraordinary items 11,599 12,947 12,400 15,629 18,256 Taxes 3,940 4,729 4,382 5,696 6,431 Other3 -90 10 -4 269 4 Net income 7,569 8,228 8,014 10,202 11,829

Other items: Preferred and common stock cash dividends 5,671 4,836 4,131 4,823 6,644 Reinvested earnings4 1,898 3,392 3,883 5,379 5,184 Net income of profitable thrifts 8,059 8,508 8,560 10,826 12,560 Net losses of unprofitable thrifts -490 -280 -546 -611 -732 1Loss provisions for non-interest-bearing assets are included in non-interest expense. 2Net gain (loss) on sale of assets is reported in non-interest 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 pre- ferred and common stock cash dividends from net income.

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

The Financial Services Fact Book 2004 93 04.05fs.FINAL 12/15/03 12:55 PM Page 94

BANKING

THRIFT INSTITUTIONS

BALANCE SHEET OF THE FEDERALLY-INSURED THRIFT INDUSTRY, 1998-2002 ($ millions, end of year)

1998 1999 2000 2001 2002 Number of thrifts 1,687 1,640 1,590 1,532 1,467 Assets Cash and invested securities $92,300 $98,271 $97,724 $123,721 $129,654 Mortgage-backed securities 207,061 221,723 213,826 196,512 209,691 1-4 family loans 518,055 530,225 574,341 597,867 609,170 Multi-family development 54,469 55,591 56,797 58,990 62,267 and land loans 23,370 29,073 34,832 38,397 37,448 Nonresidential loans 47,840 53,418 59,765 63,140 72,721 Consumer loans 52,581 62,099 65,286 69,421 68,805 Commercial loans 21,040 26,534 34,420 36,754 41,887 Real estate owned 1,578 1,125 1,003 1,050 1,092 Other assets 69,390 70,875 84,641 113,157 126,739 Total assets 1,087,684 1,148,934 1,222,635 1,299,009 1,359,474

Liabilities and equity Deposits 704,531 707,097 738,234 797,822 879,134 FHLB advances 143,081 231,449 261,495 254,271 216,454 Other borrowings 127,306 95,770 98,250 111,140 103,835 Other liabilities 18,339 19,659 21,098 26,158 31,372 Total liabilities 993,257 1,053,975 1,119,077 1,189,391 1,230,795 Equity capital 94,427 94,959 103,558 109,618 128,679 Total liabilities and equity 1,087,684 1,148,934 1,222,635 1,299,009 1,359,474

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

94 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 95

BANKING

THRIFT INSTITUTIONS

INVESTMENT SECURITIES OF FDIC-INSURED SAVINGS INSTITUTIONS, 1993-2002 ($ millions, end of year)

U.S. Treasury, States U.S. U.S. agencies agencies and and political Other debt Year Treasury and corporations corporations subdivisions securities 1993 $26,456.4 $188,449.3 $214,905.8 $1,858.0 $50,378.4 1994 26,933.4 207,526.2 234,459.6 1,940.4 47,248.4 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 6,933.8 199,772.4 206,706.2 2,095.9 31,430.9 1998 4,264.0 217,847.7 222,111.7 3,171.0 35,217.8 1999 2,997.8 232,787.7 235,785.5 3,599.2 42,954.2 2000 2,136.5 223,581.8 225,718.3 3,831.6 42,697.3 2001 3,260.0 231,187.8 234,447.8 4,486.6 45,500.3 2002 2,792.0 240,509.6 243,301.6 5,715.6 39,781.3 Less: Less: Memo: Equity contra trading Total investment mortgage- Year securities accounts1 accounts securities2 backed securities 1993 $7,956.6 $-1,116.5 $1,727.2 $274,488.0 $197,742.0 1994 6,413.0 -595.6 415.5 290,241.6 213,992.5 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 10,169.2 1.7 1,816.7 292,785.5 203,372.0 2002 11,438.5 0.9 1,581.0 298,655.1 209,676.2 1Balance in account that offsets another account. Reserves for loan losses, for example, offset the loan account. 2Book value.

Source: Federal Deposit Insurance Corporation.

The Financial Services Fact Book 2004 95 04.05fs.FINAL 12/15/03 12:55 PM Page 96

BANKING

THRIFT INSTITUTIONS

THRIFT INDUSTRY MORTGAGE LENDING ACTIVITY, 1993-2002 ($ millions)

Mortgage-backed Mortgage portfolio Mortgage Mortgage loans securities Mortgage as a percent of Year refinancing outstanding outstanding portfolio total of total assets 1993 $57,319 $446,670 $119,570 $566,240 73.08% 1994 20,939 449,820 127,554 577,374 74.59 1995 12,808 446,930 125,457 572,388 74.24 1996 19,020 486,640 110,977 597,617 77.68 1997 19,512 483,288 103,815 587,103 75.60 1998 51,665 491,968 93,322 585,290 71.62 1999 41,983 506,963 94,759 601,722 69.69 2000 24,622 556,958 93,106 650,064 70.03 2001 125,889 578,974 92,360 671,333 68.66 2002 218,586 599,700 90,060 689,760 68.66

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

TOP SIX U.S. THRIFT COMPANIES, RANKED BY REVENUES, 2002 ($ millions)

Rank Company Revenues 1 Washington Mutual $19,037 2 Golden West Financial 3,744 3 Sovereign Bancorp 2,492 4 Greenpoint Financial 1,768 5 Astoria Financial 1,374 6 Westcorp 1,233

Source: Fortune.

96 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 97

BANKING

THRIFT INSTITUTIONS

TOP TEN U.S. THRIFT COMPANIES, RANKED BY ASSETS, 20031 ($ millions)

Rank Company Assets1 1 Washington Mutual, Inc. $268,298 2 Golden West Financial Corporation 68,406 3 Sovereign Bancorp, Inc. 39,524 4 GreenPoint Financial Corporation 21,814 5 Astoria Financial Corporation 21,698 6 Guaranty Bank2,3 17,471 7 Hudson City Bancorp, Inc. (MHC) 14,145 8 E*TRADE Bank3,4 13,877 9 Webster Financial Corporation 13,468 10 Commercial Federal Corporation 13,081 1As of February 11, 2003. Rankings 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 $500 million at announcement. Combined asset and deposit values are summations of the most recent figures reported by each merging company and assume no divestitures or accounting adjustments. 2Subsidiary of Temple-Inland Inc. 3Assets as of September 30, 2002. 4Subsidiary of E-TRADE Group Inc.

Source: SNL Financial LC.

MAJOR INSURERS THAT HAVE APPLIED FOR BANK CHARTERS, JANUARY 1, 1997-AUGUST 29, 2003 1

Applicant Bank entity Allstate Insurance Co. Allstate Federal Savings Bank American Financial Group Inc. Great American Savings Bank American International Group Inc. AIG FSB AmerUs Group AmerUs Home Equity Bank F.A. CNA Financial Corp. CNA Trust Corp. Conseco Inc. Conseco Bank FSB First American Financial Corp. First American Trust FSB Guardian Life Insurance Co. Guardian Trust Co. FSB Hartford Group The Hartford Bank Massachusetts Mutual Life Insurance Co. The MassMutual Trust Co. Metropolitan Life Insurance Co. Metlife Bank & Trust Co. FSB MONY Group Inc. Advest Bank & Trust Co. (chart continues)

The Financial Services Fact Book 2004 97 04.05fs.FINAL 12/15/03 12:55 PM Page 98

BANKING

THRIFT INSTITUTIONS/CREDIT UNIONS

MAJOR INSURERS THAT HAVE APPLIED FOR BANK CHARTERS, JANUARY 1, 1997-AUGUST 29, 20031 (Cont’d)

Applicant Bank entity Nationwide Insurance Nationwide Trust Co. FSB New York Life Insurance Co. New York Life Trust Co. FSB Northwestern Mutual Life Insurance Co. Northwestern Mutual Trust Co. Phoenix Home Life Mutual Insurance Co. New Trust FSB Principal Life Insurance Co. Principal Bank State Farm Mutual Auto Insurance Co. State Farm Bank FSB Teachers Insurance & Annuity Association TIAA-CREF Trust Co. FSB United Services Automobile Association USAA Federal Savings Bank 1Based on companies in the 2002 Fortune 500 that filed applications with the Office of Thrift Supervision between January 1997 and September 2003.

Source: The Office of Thrift Supervision; Fortune.

CREDIT UNIONS Credit unions, generally set up by groups of individuals with a common link, such as mem- bership in a labor union, are not-for-profit financial 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. New federal rules have made it easier for credit unions to expand. In 1934, President Roosevelt signed the Federal Credit Union Act into law, authorizing the establishment of federally-chartered credit unions in all states. The purpose of the fed- eral law was “to make more available to people of small means credit for provident [provi- sions for the future] purposes through a national system of 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 35 federally-insured corporate credit unions, which provide investment, liquidity and payment services for their members.

98 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 99

BANKING

CREDIT UNIONS

FEDERAL CREDIT UNIONS AND FEDERALLY-INSURED STATE CHARTERED CREDIT INSTITUTIONS, 1980-2002 (end of year) 1980 1990 1995 2000 2001 2002 Operating credit unions Federal 12,440 8,511 7,329 6,336 6,118 5,953 State 4,910 4,349 4,358 3,980 3,866 3,735 Number of failed institutions 239 164 22 29 22 15 Members (000) Federal 24,519 36,241 42,163 43,883 43,817 44,611 State 12,338 19,454 24,927 33,705 35,532 36,336 Assets ($ millions) Federal $40,092 $130,073 $193,781 $242,881 $270,125 $301,238 State 20,870 68,133 112,861 195,363 231,280 255,838 Loans ($ millions) Federal $26,350 $83,029 $120,514 $163,851 $170,326 $181,767 State 14,852 44,102 71,606 137,485 152,014 160,881 Savings ($ millions) Federal $36,263 $117,892 $170,300 $210,188 $235,202 $261,819 State 18,469 62,082 99,838 169,053 201,807 222,377 Source: National Credit Union Administration.

CREDIT UNION MEMBERS, 1980-2002 • From 1980 to 2002, feder - (000) al and federally-insured state credit union assets grew from $61 billion to $557 billion. In 2002, assets increased $56 bil - lion, or 11 percent, from 2001.

• There are cur rently fewer than 500 nonfederally- insured state chartered credit unions.

Source: National Credit Union Administration.

The Financial Services Fact Book 2004 99 04.05fs.FINAL 12/15/03 12:55 PM Page 100

BANKING

CREDIT UNIONS

ASSETS AND LIABILITIES OF CREDIT UNIONS, 1998-2002 ($ billions, end of year)

1998 1999 2000 2001 2002 Total financial assets $391.5 $414.5 $441.1 $505.5 $560.8 Checkable deposits and currency 9.1 26.4 26.7 36.8 38.4 Time and savings deposits 23.4 16.6 15.5 23.0 24.5 Federal funds and security repos 6.8 9.3 4.0 2.5 1.7 Credit market instruments 324.2 351.7 379.7 421.2 463.9 Open market paper 0.4 1.9 1.2 2.4 3.6 U.S. government securities 71.5 70.9 69.2 88.0 105.1 Treasury 13.1 9.6 8.2 7.4 7.8 Agency 58.4 61.3 60.9 80.6 97.3 Home mortgages 96.9 111.0 124.9 141.3 159.4 Consumer credit 155.4 167.9 184.4 189.6 195.7 Mutual fund shares 3.6 2.5 2.2 3.7 3.5 Miscellaneous assets 24.3 8.0 12.9 18.3 28.7 Total liabilities 355.3 376.1 398.1 458.9 509.0 Shares/deposits 349.0 366.7 389.1 450.2 496.9 Checkable 43.0 45.4 51.3 54.7 59.7 Small time and savings 287.5 299.8 312.7 361.3 394.4 Large time 18.5 21.6 25.1 34.1 42.8 Other loans and advances 1.1 3.4 3.4 4.9 6.9 Miscellaneous liabilities 5.2 6.0 5.6 3.8 5.1

Source: Board of Governors of the Federal Reserve System.

100 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.05fs.FINAL 12/15/03 12:55 PM Page 101

BANKING

CREDIT UNIONS

CREDIT UNION DISTRIBUTION BY ASSET SIZE, 20021

Number of Percent change Assets Percent change Asset size ($ millions) credit unions from Dec. 2001 ($ millions) from Dec. 2001 $0 - $.2 233 -12.7% $29 -11.2% $.2 - $.5 415 -10.9 144 -10.3 $.5 - $1 573 -13.1 420 -14.0 $1 - $2 808 -9.9 1,184 -10.4 $2 - $5 1,525 -8.0 5,113 -8.6 $5 - $10 1,578 -1.1 11,487 -0.3 $10 - $20 1,430 -1.4 20,479 -1.2 $20 - $50 1,599 -0.9 51,266 -1.3 $50 - $100 796 4.7 55,895 3.6 $100 - $200 504 6.1 70,063 4.6 $200 - $500 374 7.2 115,101 5.3 More than $500 206 24.8 243,507 26.4 Total 10,041 -3.0 574,687 11.7 1From Credit Union Call Reports.

Source: National Credit Union Administration.

TOP TEN U.S. CREDIT UNIONS, 20021 ($ millions)

Rank Company Assets 1 Navy $17,573.4 2 State Employees’ 9,789.7 3 Pentagon 5,175.3 4 Boeing Employees’ 4,402.4 5 The Golden 1 4,275.1 6 United Employees’ 4,138.2 7 Orange County Teachers 4,005.7 8 American Airlines 3,882.7 9 Suncoast Schools 3,529.0 10 Kinecta 2,996.8 1Ranked by assets.

Source: National Credit Union Administration.

The Financial Services Fact Book 2004 101 04.05fs.FINAL 12/15/03 12:56 PM Page 102

BANKING

INDUSTRIAL BANKS

INDUSTRIAL BANKS Industrial banks, known originally as state-chartered loan companies, were formed in the early part of the 20th century to make consumer loans and offer deposit accounts as part of a move to secure credit for blue collar workers. Many later merged with commercial banks and although 12 states still have industrial bank-charter options on their books, most of the remaining industrial banks now exist in a few states, mainly in the west. Many serve markets such as real estate lending and automobile loans. The banks are not regulated by the Federal Reserve and may be owned by firms in other financial services businesses such as banks, finance companies, credit card issuers, securities firms or by nonfinancial businesses such as automakers and department stores. Legislation being considered by Congress would greatly expand the powers of industrial banks.

TOP TEN FDIC-INSURED INDUSTRIAL BANKS, 20021 ($000)

Total Rank Bank City State assets 1 Merrill Lynch Bank USA Lake City UT $68,117,478 2 American Express Centurion Bank Midvale UT 18,758,816 3 Fremont Investment & Loan Anaheim CA 6,363,082 4 Morgan Stanley Bank West Valley City UT 4,243,920 5 USAA Savings Bank Las Vegas NV 3,917,904 6 Mill Creek Bank Salt Lake City UT 3,042,016 7 GE Capital Financial Inc. Salt Lake City UT 2,327,566 8 Providian Bank Salt Lake City UT 1,748,383 9 Imperial La Jolla CA 1,602,490 10 BMW Bank of North America Salt Lake City UT 1,094,686 1Ranked by assets.

Source: Federal Deposit Insurance Corporation.

102 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.06fs.FINAL 12/15/03 12:57 PM Page 103

Chapter 6: 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 adviso- ry services, as well as . 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, pri- marily 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, whereas brokers act as intermediaries for investors who wish to purchase or sell securities. Dealers make money by selling at a slightly higher price than they paid. Like underwriters/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), estab- lished 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 compa- nies disclose their financial information to provide transparency, ensuring that potential investors have access to key information needed for investment decisions. A new regulation was passed in 2000 to give individual and institutional investors equal access to critical investment information. A company must now make announcements about earnings and other substantial market-moving news to both groups of investors, not just institutional investors and stock market analysts. The National Association of Securities Dealers: The National Association of Securities Dealers (NASD) is a self-regulated body which was developed under the National Recovery Act of 1933. The NASD has created greater transparency in over-the-counter (OTC) markets by automating and providing greater access to pricing and other key information with the national electronic stock market quotation system (NASDAQ).

The Financial Services Fact Book 2004 103 04.06fs.FINAL 12/15/03 12:57 PM Page 104

SECURITIES

OVERVIEW

MERGERS AND ACQUISITIONS The value of the top ten mergers and acquisitions deals in the securities industry dropped by $2.6 billion in 2002, compared with 2001. However, banks continued to target securities firms .

TOP TEN SECURITIES AND INVESTMENT FIRMS MERGERS AND ACQUISITIONS, 20021

Deal value2 Rank Buyer Industry Target Industry ($ millions) 1 State Street Corp. Bank Global securities services Investment $1,499.4 of Deutsche Bank AG adviser 2 Ameritrade Holding Broker/ Datek Online Holdings Corp. Broker/ 1,403.2 Corp. dealer dealer 3 U.S. Bancorp Bank Corporate trust Investment 725.0 business of State Street Corp. adviser 4 Westpac Banking Bank Assets of BT Financial Group Investment 570.4 Corp. Ltd. adviser 5 Instinet Group Inc. Broker/ Island ECN Inc. Broker/ 507.3 dealer dealer 6 Deutsche Bank AG Bank RoPro U.S. Holding Inc. Investment 490.0 adviser 7 Nationwide Mutual Insurance 94% of Gartmore Investment 352.2 Insurance Co. Global Invts. Inc. adviser 8 E*TRADE Group Inc. Broker/ Tradescape Broker/ 280.0 dealer subsidiaries dealer 9 Corp. Bank Passive equity/fixed income Investment 260.0 business of Deutsche Bank AG adviser 10 Fahnestock Viner Broker/ US Oppenheimer private client/asset Investment 240.1 Holdings Inc. dealer management divisions adviser 1 At least one of the companies involved is a U.S.-domiciled company. List does not include terminated deals. 2 At announcement. Source: SNL Financial LC. MERGERS AND ACQUISITIONS OF U.S. SECURITIES FIRMS, 1997-20021

• Bank purchases of securities firms accounted for 38 per - cent of security indus - try mergers and acqui - sitions from 1997 to 2002.

1At least one of the companies involved is a U.S.-domiciled company. List does not include ter- minated deals. Source: SNL Financial LC.

104 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.06fs.FINAL 12/15/03 12:57 PM Page 105

SECURITIES

OVERVIEW

PROFITABILITY • According to the Securities Securities industry profitability, at 8 percent in 2002, was at its Industry Association, rev - lowest since 1994. enues of the U.S. securities industry dropped to $149 SECURITIES INDUSTRY PRETAX RETURN ON EQUITY, billion in 2002, a 39.2 per - 1993-2002 cent decline from a recor d high of $245 billion in 2000.

• Pretax net income dropped to $6.9 billion, down 67.1 percent from the record of $21.0 billion set in 2000.

Source: Securities Industry Association.

SECURITIES INDUSTRY PRETAX PROFITS, 1993-2002 ($ billions)

Source: SNL Financial LC.

The Financial Services Fact Book 2004 105 04.06fs.FINAL 12/15/03 12:57 PM Page 106

SECURITIES

OVERVIEW

BROKER/DEALERS There are four categories of broker/dealers. The largest is the National Full Line (NFL), which are full service broker/dealers with an extensive national and international network system. NFL broker/dealers are also known as wirehouses, a term that harks back to when only the largest firms had access to high speed communications. Primarily head- quartered in New York City, they command the largest share of revenues and employees. Many NFL firms have substantial investment banking operations. Another category is regional brokers. Operating on a somewhat smaller scale than their New York City counterparts, 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. The third category of broker/dealers, known as New York City-based, is made up mostly of broker/dealer subsidiaries of U.S. and foreign banks and securities organizations, exclud- ing those that fall into other listed categories. The last of the four groups is discounters. Discounters are broker/dealers primarily engaged in the discount brokerage business.

SECURITIES INDUSTRY PRETAX RETURN ON EQUITY BY FIRM CATEGORY, 1993-2002

Large National investment Total Year Full Line bank Regional NYC-based Discounter firms1 1993 28.4% 23.8% 43.7% 17.1% 39.1% 27.1% 1994 4.8 -7.2 21.7 -2.5 26.4 3.3 1995 20.3 11.5 33.8 17.3 38.5 20.9 1996 28.2 26.2 40.2 17.3 42.6 29.1 1997 32.8 23.4 32.8 12.8 37.4 27.9 1998 26.1 16.4 13.7 -1.0 29.7 17.9 1999 32.5 28.0 21.2 4.7 46.3 25.6 2000 32.9 24.6 24.9 10.7 48.6 26.5 2001 11.5 20.9 9.5 4.1 2.5 12.2 2002 11.3 10.8 2.6 4.3 -0.9 8.0 1Total firms, a proxy for total industry, consists of all New York member broker/dealers doing public business. Although small in number, this group accounts for between 60 percent and 80 percent of revenues, capital, assets, and other financial parameters of all broker/dealers in the United States.

Source: Securities Industry Association.

106 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.06fs.FINAL 12/15/03 12:57 PM Page 107

SECURITIES

OVERVIEW

SECURITIES INDUSTRY INCOME STATEMENT, 20021 ($ millions)

Revenue 2002 Expenses 2002 Commissions $27,569.4 Total compensation $53,095.3 Listed equity on an exchange 16,705.8 Registered representative compensation 21,210.6 Listed equity (OTC) 2 1,562.5 Clerical employee compensation 28,484.2 Listed options 1,332.3 Voting officer compensation 1,820.0 All other 7,968.8 Other employee compensation (FOCUS IIA Only) 1,580.5 Trading gain (loss) 13,650.4 Total floor costs 4,505.3 From OTC market making 1,179.0 Floor brokerage paid to brokers 1,252.2 From OTC market making in listed equity 11.6 Commissions and clearance From debt trading 14,193.3 paid to other brokers 1,955.1 From listed options market making -225.7 Clearance paid to non-brokers 911.7 From all other trading -1,496.2 Commissions paid to Investment account gain (loss) 174.2 non-brokers (FOCUS IIA Only) 386.3 Realized gain 417.1 Communications expense 4,499.0 Unrealized gain -218.6 Occupancy and equipment costs 6,444.6 Underwriting revenue 13,178.5 Promotional costs 1,849.1 Equity underwriting revenue 3,226.5 Interest expense 48,439.8 Margin interest 5,992.2 Losses from error accounts and bad debts 468.0 Mutual fund sale revenue 5,882.5 Data processing costs 2,459.1 Fees, asset management 12,485.0 Regulatory fees and expenses 905.7 Research revenue 156.4 Non-recurring charges 715.9 revenue 4,957.4 Other expenses 18,373.5 Other revenue related to the Total expenses $141,755.3 securities business 55,338. Pre-tax net income 6,918.9 Other revenue 9,290.2 Federal income tax (tax benefit) 1,653.3 Total revenue $148,674.2 Income (loss) from unconsolidated 1New York Stock Exchange members doing a public business. subsidiaries 1,093.5 2Over the counter equities not listed and traded on an organized Extraordinary gain (loss) -5.2 exchange. Cumulative effect of accounting changes -1,914.2 Source: Securities Industry Association. Net income $4,439.7

The Financial Services Fact Book 2004 107 04.06fs.FINAL 12/15/03 12:57 PM Page 108

SECURITIES

OVERVIEW

ASSETS AND LIABILITIES OF SECURITIES BROKER/DEALERS, 1998-2002 ($ billions, end of year)

1998 1999 2000 2001 2002 Total financial assets $921.2 $1,001.0 $1,221.4 $1,465.6 $1,335.4 Checkable deposits •Total assets of security and currency 25.4 28.7 30.3 47.1 44.2 broker/dealers dropped Credit market 8.9 percent in 2002, to instruments 189.4 154.7 223.6 316.0 344.4 $1.3 trillion, from $1.5 Open market paper 28.0 26.0 39.2 48.2 43.5 trillion in 2001. U.S. government securities 66.7 23.3 60.4 87.6 87.9 Treasury 15.8 -42.6 -3.3 9.8 -3.9 Agency 50.9 66.0 63.7 77.8 91.8 Municipal securities 13.1 11.9 11.3 19.0 21.0 Corporate and foreign bonds 81.4 93.4 112.7 161.3 192.0 Corporate equities 54.4 66.9 77.2 85.1 74.9 Security credit 152.8 227.9 235.1 196.4 148.2 Miscellaneous assets 499.3 522.8 655.1 821.0 723.7 Total liabilities 866.8 932.8 1,150.4 1,383.1 1,246.7 Security repos (net) 208.2 245.2 302.2 353.2 344.2 Corporate bonds 42.5 25.3 40.9 42.3 40.6 Trade payables 18.9 30.9 35.9 39.2 37.4 Security credit 419.5 448.7 587.6 629.5 590.6 Customer credit balances 276.7 323.9 412.4 454.3 412.7 From banks 142.8 124.8 175.2 175.2 177.9 Taxes payable 1.3 2.2 2.1 1.9 1.3 Misc. liabilities 176.4 180.5 181.7 317.0 232.5 Foreign direct investment in U.S. 10.7 10.9 19.1 14.5 9.4 Due to affiliates 353.5 415.5 454.2 501.1 527.9 Other -187.8 -245.8 -291.6 -198.6 -304.8

Source: Board of Governors of the Federal Reserve System.

108 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.06fs.FINAL 12/15/03 12:57 PM Page 109

SECURITIES

OVERVIEW

SECURITIES INDUSTRY EMPLOYMENT, 1997-2002 (000)

1997 1998 1999 2000 2001 2002

Securities, commodity contracts, investments (total industry) 636.1 692.2 737.3 804.5 830.5 800.8 Securities and commodity contracts brokerages and exchanges 460.2 495.5 519.4 565.7 576.9 538.7 Securities brokerage 284.2 306.2 321.5 350.1 355.1 328.6 Other financial investment activities 175.9 196.7 217.9 238.8 253.6 262.1 Miscellaneous intermediation 19.6 21.7 23.1 24.2 24.3 25.3 Portfolio management 66.8 75.2 83.1 91.4 97.1 98.7 Investment advice 51.8 58.0 65.6 72.4 79.1 86.5 All other financial investment activities 37.7 41.8 46.1 50.8 52.9 51.6 Source: U.S. Department of Labor, Bureau of Labor Statistics.

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

SECURITIES INDUSTRY CONCENTRATION BY TOTAL REVENUE, 1992, 1997 AND 20021

1New York Stock Exchange member firms doing a public business.

Source: Securities Industry Association.

The Financial Services Fact Book 2004 109 04.06fs.FINAL 12/15/03 12:57 PM Page 110

SECURITIES

OVERVIEW

SECURITIES INDUSTRY CONCENTRATION BY TOTAL CAPITAL, 1993-20021 ($ billions)

Year Top 10 Next 15 Rest of industry Capital 1993 63.4% 18.0% 18.6% $56.3 1994 60.9 18.7 20.4 56.8 1995 59.3 18.1 22.6 64.3 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 1New York Stock Exchange member firms doing a public business.

Source: Securities Industry Association.

TOP TEN U.S. SECURITIES FIRMS, BY REVENUES, 2002 ($ millions)

Rank Company Revenues Percent change from 2001 1 Morgan Stanley $32,415 -25.9% 2 Merrill Lynch 28,253 -27.2 3 Goldman Sachs Group 22,854 -26.6 4 Lehman Brothers Hldgs. 16,781 -25.1 5 Bear Stearns 6,891 -20.8 6 Charles Schwab 4,480 -15.2 7 Franklin Resources 2,519 7.0 8 A.G. Edwards 2,364 -16.7 9 E*Trade Group 1,902 -7.8 10 Legg Mason 1,579 2.8

Source: Fortune.

110 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.06fs.FINAL 12/15/03 12:57 PM Page 111

SECURITIES

OVERVIEW/CAPITAL MARKETS

TOP TEN U.S. SECURITIES AND INVESTMENT COMPANIES, BY ASSETS, 2002 ($ millions, end of year) Rank Company Assets 1 Merrill Lynch & Co., Inc. $462,000 2 Morgan Stanley1 420,000 3 Alliance Capital Management L.P. 386,579 4 Goldman Sachs Group, Inc. 1 348,000 5 Citigroup Global Markets Holdings, Inc. 310,200 6 BlackRock, Inc. 272,841 7 Franklin Resources, Inc. 257,735 8 Federated Investors, Inc. 195,353 9 Legg Mason, Inc. 184,700 10 T. Rowe Price Group, Inc. 140,600 1As of November 30, 2002.

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 are the recent 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 net- works, principally in money market centers such as Chicago and San Francisco; participate in both national and international markets; and serve mainly institutional investors.

The Financial Services Fact Book 2004 111 04.06fs.FINAL 12/15/03 12:57 PM Page 112

SECURITIES

CAPITAL MARKETS

CORPORATE UNDERWRITING, 1997-2002 ($ billions)

Value of U.S. corporate Number of U.S. corporate underwritings Year Debt Equity Total Debt Equity Total 1997 $1,163.9 $153.4 $1,317.3 10,435 1,619 12,054 1998 1,715.6 152.7 1,868.3 12,322 1,200 13,522 1999 1,768.0 191.7 1,959.8 12,722 1,201 13,923 2000 1,646.6 204.5 1,851.0 11,980 961 12,941 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

Source: Securities Industry Association.

EQUITY AND DEBT OUTSTANDING, 1993-2002 ($ billions, end of year)

Total U.S. Corporate Corporate government Municipal Year equities bonds securities bonds • Over the period 1993 1993 $6,296.9 $2,346.8 $5,216.9 $1,377.5 to 1999, the value of 1994 6,318.2 2,504.0 5,665.0 1,341.7 corporate equities 1995 8,474.8 2,848.1 6,013.5 1,293.5 tripled, reaching a high of $19.5 trillion 1996 10,276.4 3,209.4 6,389.9 1,261.8 at the end of 1999. 1997 13,292.8 3,607.2 6,625.9 1,318.7 By contrast, from 1998 15,548.5 4,187.4 7,044.2 1,402.9 year-end 1999 to 1999 19,545.7 4,626.4 7,564.9 1,457.2 year-end 2002, the 2000 17,606.5 5,022.9 7,702.6 1,480.9 value of equities out - 2001 15,267.1 5,692.7 8,323.6 1,603.6 standing dropped 39.5 percent. 2002 11,833.9 6,220.6 9,135.2 1,770.6 Source: Board of Governors of the Federal Reserve System.

112 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.06fs.FINAL 12/15/03 12:57 PM Page 113

SECURITIES

CAPITAL MARKETS

MUNICIPAL BONDS Municipal bonds represent a small part of all government debt, about 3 percent, and aver- age daily trading volume runs between $8 billion and $10 billion. Nevertheless, the bonds play a significant role in portfolios because their yield is tax-free. The principal and interest on revenue bonds are paid out of revenues of the local govern- ment 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 specializing in insuring municipal bonds. Municipal bonds are usually sold in blocks to securities dealers, who either submit com- petitive 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, 1992-20021 ($ billions)

General Total Revenue bonds obligation bonds municipal bonds • The rise or fall in the Year Value Number Value Number Value Number number and value of 1992 $151.6 6,232 $81.5 6,159 $233.1 12,391 municipal bond issues 1993 195.6 6,633 92.3 7,030 287.9 13,663 each year is determined 1994 104.2 5,408 57.7 5,358 161.9 10,766 largely by prevailing inter - 1995 95.2 4,874 59.8 4,957 155.0 9,831 est rates. As rates fall, the number and value of 1996 115.7 5,272 64.5 5,538 180.2 10,810 municipal bond issues 1997 142.6 5,790 72.0 5,786 214.6 11,576 tend to rise. In 2002, the 1998 187.0 7,150 92.8 7,251 279.8 14,401 number of underwritings 1999 149.2 6,342 69.8 5,914 219.0 12,256 rose 6 percent from 2000 129.7 5,310 64.3 5,149 194.0 10,459 2001, while the value 2001 181.8 6,413 101.8 6,822 283.5 13,235 jumped by 25 percent. 2002 230.0 6,475 125.4 7,498 355.4 13,973 1Excludes taxable municipal bonds and bonds with maturities under 13 months.

Source: Thompson Financial Securities Data; Securities Industry Association.

The Financial Services Fact Book 2004 113 04.06fs.FINAL 12/15/03 12:57 PM Page 114

SECURITIES

CAPITAL MARKETS

PRIVATE PLACEMENTS Investment banks may distribute new security issues in a public offering to individual and institutional investors or they may arrange for the sale of all the securities of an issuer to a single such as a bank or insurance company or a small group of them through .

PRIVATE PLACEMENTS, 1997-2002 ($ billions)

Value of U.S. private placements Number of U.S. private placements Year Debt Equity Total Debt Equity Total 1997 $286.3 $80.4 $366.7 2,925 670 3,595 1998 376.9 89.5 466.3 3,555 526 4,081 1999 368.8 77.7 446.5 3,285 462 3,747 2000 358.7 124.4 483.2 2,879 661 3,540 2001 510.5 80.6 591.1 2,063 809 2,872 2002 303.0 40.7 343.7 1,766 569 2,335

Source: Thompson Financial Securities Data; Securities Industry Association.

FOREIGN HOLDINGS OF U.S. SECURITIES, 1993-2002 ($ billions, end of year)

Year Stocks Corporate bonds Treasuries1 Total 1993 $373.5 $273.3 $702.4 $1,349.2 1994 397.7 311.4 757.7 1,466.8 1995 527.6 369.5 996.1 1,893.2 1996 672.4 433.2 1,222.4 2,328.0 1997 952.9 501.6 1,375.1 2,829.6 1998 1,250.3 607.8 1,412.8 3,270.9 1999 1,611.5 752.1 1,380.6 3,744.2 2000 1,625.5 920.6 1,471.4 4,017.5 2001 1,533.8 1,126.3 1,594.4 4,254.5 2002 1,350.4 1,292.8 1,789.3 4,432.5 1Includes agency issues.

Source: Board of Governors of the Federal Reserve System.

114 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.06fs.FINAL 12/15/03 12:57 PM Page 115

SECURITIES

CAPITAL MARKETS/ASSET-BACKED SECURITIES

U.S. HOLDINGS OF FOREIGN SECURITIES, 1993-2002 ($ billions, end of year)

Year Stocks Bonds Total 1993 $543.9 $230.1 $774.0 1994 627.5 242.3 869.8 1995 776.8 299.4 1,076.2 1996 1,002.9 366.3 1,369.2 1997 1,207.8 427.7 1,635.5 1998 1,476.2 462.6 1,938.8 1999 2,026.6 476.7 2,503.3 2000 1,832.4 500.6 2,333.0 2001 1,564.7 486.8 2,051.5 2002 1,304.8 467.6 1,772.4

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, 2002 ($ billions)

Amount outstanding Percent of total • Home equity loans Credit card $397.9 25.8% accounted for 18.6 per - cent of asset-backed Home equity 286.5 18.6 securities outstanding in CBO/CDO1 234.5 15.2 2002, up from 10.5 per - Automobile 221.7 14.4 cent in 1995. Other 215.4 14.0 Student loan 74.4 4.8 Equipment leases 68.3 4.4 Manufactured housing 44.5 2.9 Total 1,543.2 100.0 1Collateralized bond obligations/collateralized debt obligations.

Source: The Bond Market Association.

The Financial Services Fact Book 2004 115 04.06fs.FINAL 12/15/03 12:57 PM Page 116

SECURITIES

ASSET-BACKED SECURITIES

ASSET-BACKED SECURITY SOURCES, 1998 AND 2002

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, 1985-2002 ($ billions, end of year)

Agency Consumer Student Business Trade Year securities1 Mortgages loans loans loans receivables Total 1985 $10.1 $24.7 $0.0 $0.0 $0.0 $2.4 $37.2 1990 103.0 68.5 76.7 0.0 4.3 17.4 269.9 1995 132.9 278.2 211.6 1.0 29.6 55.7 709.1 1996 137.8 326.3 265.8 6.3 37.7 80.7 854.6 1997 142.3 406.2 313.1 14.1 62.1 128.1 1,065.8 1998 180.2 563.0 372.4 17.9 85.9 165.9 1,385.4 1999 220.4 656.1 435.1 19.4 82.6 187.0 1,600.6 2000 224.7 739.8 500.1 29.9 90.9 220.0 1,805.4 2001 267.0 885.9 580.3 30.7 113.3 245.9 2,123.2 2002 336.8 1,024.1 621.4 35.8 110.8 269.7 2,398.6 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.

116 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.06fs.FINAL 12/15/03 12:57 PM Page 117

SECURITIES

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 assets against changes in 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 agree- ments between two parties. Futures contracts traded on U.S. exchanges grew 35 percent in 2002, compared with 2001, accounting for the largest increase of the past 10 years. Credit derivatives are contracts that lenders, large bondholders and others can purchase to protect against the borrower defaulting on bonds. Credit 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 . According to the International Swaps and Derivatives Association (ISDA), credit default swaps, which ISDA began to survey at mid-year 2001, grew 134 percent to $2,148.5 billion at the end of 2002 from the $918.9 billion reported in June 2001. Bond insurers write coverage for credit default swaps.

NUMBER OF FUTURES CONTRACTS TRADED ON U.S. EXCHANGES, 1993-2002 (millions) Non- Interest Agricultural Energy Foreign Equity Precious precious Year rate commodities products currency indices metals metals Other Total 1993 173.8 56.7 45.6 30.8 15.0 14.7 2.1 0.4 339.1 1994 248.7 58.7 49.7 29.7 20.6 15.7 2.7 0.4 426.3 1995 223.6 63.5 47.2 23.2 20.7 14.1 2.5 0.5 395.3 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 0.7 629.0 2002 418.8 79.2 92.1 23.5 221.5 12.4 2.9 1.0 851.3

Source: Futures Industry Association; Securities Industry Association.

The Financial Services Fact Book 2004 117 04.06fs.FINAL 12/15/03 12:57 PM Page 118

SECURITIES

DERIVATIVES

NUMBER OF OPTIONS CONTRACTS TRADED ON U.S. EXCHANGES, 1993-2002 (millions)

Foreign Interest Year Equity Stock index currency rate Futures Total • The number of options 1993 131.7 87.7 13.1 0.1 81.9 314.5 contracts traded on U.S. 1994 149.9 121.1 10.1 0.2 100.9 382.2 exchanges increased by 1995 174.4 107.9 5.0 0.1 94.2 381.5 4.7 percent from 2001 to 2002, compared with 1996 198.6 92.4 3.2 0.1 102.0 396.2 a jump of 15.5 percent 1997 269.6 78.2 2.6 0.1 111.1 461.5 in 2001, and 32.0 per - 1998 325.8 74.8 1.8 0.1 127.5 530.0 cent in 2000. 1999 444.8 62.3 0.8 1 115.0 622.9 2000 665.3 53.3 0.5 1 103.1 822.2 2001 701.1 79.5 0.6 1 168.2 949.4 2002 679.4 100.6 0.4 1 213.1 993.6 1Less than 50,000 interest rate contracts traded. So u rc e s : Options Clearing Corporation; Futures Industry Association; Securities Industry Association.

GLOBAL DERIVATIVES MARKET, 1993-20021 ($ billions, end of year)

Year Exchange-traded Over-the-counter (OTC) Total 1993 $7,761 $8,475 $16,236 1994 8,898 11,303 20,201 1995 9,283 17,713 26,996 1996 10,018 25,453 35,471 1997 12,403 29,035 41,438 1998 13,932 80,318 94,250 1999 13,522 88,202 101,724 2000 14,278 95,199 109,477 2001 23,798 111,178 134,976 2002 23,874 141,737 165,611 1Notional principal value outstanding. Data after 1998 not strictly comparable to prior years.

Source: Bank for International Settlements.

118 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.06fs.FINAL 12/15/03 12:57 PM Page 119

SECURITIES

EXCHANGES

EXCHANGES Exchanges are markets where sales of securities are transacted. Most stock exchanges are markets where stocks are traded through competitive bidding in a central location. The oldest exchanges in the United States are the (NYSE) and the American Stock Exchange (AMEX). The National Association of Securities Dealers operates a national electronic stock market, the NASDAQ, for over-the-counter (OTC) securities. Securities traded in the OTC market are generally those not listed by major exchanges. They include technology and small company stocks, asset-backed securities, and U.S. governm e n t and corporate bonds. In contrast to organized exchanges, business in the OTC market is car- ried out through dealers in diffe r ent locations who buy and sell NASDAQ securities. Th e r e 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, ar e markets where both futures and options on financial and agricultural products are traded. Advances in technology have enabled exchanges to keep up with the demands of growing investor participation. Exchanges are transacting increasingly large volumes of , especially in times of heavy market activity due to unexpected news about earnings or interest rates, or other announcements that can cause sudden swings in value. In the past decade, the use of the Internet, for trading as well as investment research, and the tremendous growth in institutional and individual investor participation have helped set trading records for the equity market.

EXCHANGE LISTED COMPANIES, 1993-2002 Year NASDAQ NYSE AMEX 1993 4,611 2,361 869 1994 4,902 2,570 824 1995 5,122 2,675 791 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

Source: Securities Industry Association.

The Financial Services Fact Book 2004 119 04.06fs.FINAL 12/15/03 12:57 PM Page 120

SECURITIES

EXCHANGES

The volume of shares traded on the New York Stock Exchange in 2002 rose 18 percent from 2001, while the average share price dropped 17 percent.

EXCHANGE ACTIVITIES, 1993-2002 NYSE AMEX NASDAQ Regional Reported Value of Value of Value of Value of share shares Share shares Share shares Share shares volume traded volume traded volume traded volume traded Year (millions) ($ millions) (millions) ($ millions) (millions) ($ millions) (millions) ($ millions) 1993 66,923 $2,283,390 4,582 $56,737 66,540 $1,350,100 9,809 $284,569 1994 73,420 2,454,242 4,523 58,511 74,353 1,449,301 9,514 279,514 1995 87,217 3,082,916 5,072 72,717 101,158 2,398,214 11,446 355,879 1996 104,636 4,063,655 5,628 91,330 138,112 3,301,777 12,289 414,201 1997 133,312 5,777,602 6,170 143,230 163,882 4,481,691 14,809 573,212 1998 169,745 7,317,949 7,280 287,929 202,040 5,758,558 19,888 753,110 1999 203,851 8,945,205 8,231 477,822 272,605 11,013,192 27,794 1,147,556 2000 262,478 11,060,046 13,318 945,391 442,753 20,395,335 40,058 1,716,869 2001 307,509 10,489,323 16,317 817,042 471,217 10,934,572 42,990 1,206,088 2002 363,136 10,311,156 16,063 642,183 441,706 7,254,595 87,394 963,542 Source: Securities Industry Association.

STOCK MARKET PERFORMANCE INDICES, 1993-2002 (End of year) Year DJIA1 S&P 500 NYSE Composite AMEX Composite2 NASDAQ Composite 1993 3,754.09 466.45 2,739.44 477.15 776.80 1994 3,834.44 459.27 2,653.37 433.67 751.96 1995 5,117.12 615.93 3,484.15 550.00 1,052.13 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 1Dow Jones Industrial Average. 2Amex Market Value Index through 1994; Amex Composite Index thereafter.

Source: Securities Industry Association.

120 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.06fs.FINAL 12/15/03 12:57 PM Page 121

SECURITIES

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 had doubled in size. According to data from the Investment Company Institute, the trade association for the mutual fund industry, nearly one out of two American households owned mutual funds in 2002. Mutual funds are regulated by the Investment Management Act of 1940, which stipu- lates that all investment advisers disclose to investors the methods and investment guide- lines of their funds. Institutional fund managers have a substantial presence in the securi- ties markets as they trade and manage the securities within the mutual funds they oversee.

• At year-end 2002, MUTUAL FUND INDUSTRY NET ASSETS, NUMBER OF FUNDS AND mutual funds account - SHAREHOLDER ACCOUNTS, 1985-2002 ed for 21 percent of the U.S. retirement Total net assets Number of Number of Year ($ millions) funds shareholder accounts market, or $2.1 tril - lion. This amount repr e- 1985 $495,385.1 1,528 34,098,401 sented about one-thir d 1990 1,065,190.2 3,079 61,947,955 of all mutual fund 1995 2,811,292.2 5,725 131,219,221 assets. 1996 3,525,800.8 6,248 150,045,888 • Mutual funds own 20 1997 4,468,200.6 6,684 170,264,389 percent of all U.S. cor - 1998 5,525,209.3 7,314 194,073,595 porate equity . 1999 6,846,339.2 7,791 226,412,794 2000 6,964,667.0 8,155 244,748,546 2001 6,974,975.9 8,307 248,759,332 2002 6,391,570.8 8,256 250,981,045

Source: Investment Company Institute.

The Financial Services Fact Book 2004 121 04.06fs.FINAL 12/15/03 12:57 PM Page 122

SECURITIES

MUTUAL FUNDS

MUTUAL FUND INDUSTRY NET ASSETS BY TYPE OF FUND, 1985-2002 ($ billions) Taxable money Tax-exempt 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 1996 1,726.0 252.6 645.4 762.0 139.8 3,525.8 1997 2,368.0 317.1 724.2 898.1 160.8 4,468.2 1998 2,978.2 364.7 830.6 1,163.2 188.5 5,525.2 1999 4,041.9 378.8 812.5 1,408.7 204.4 6,846.3 2000 3,962.0 346.3 811.1 1,607.2 238.1 6,964.7 2001 3,418.2 346.3 925.1 2,012.9 272.4 6,975.0 2002 2,667.1 327.4 1,125.1 1,997.2 274.8 6,391.6

Source: Investment Company Institute.

MUTUAL FUND INDUSTRY NET ASSETS BY TYPE OF FUND, 2002

Source: Investment Company Institute.

122 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.06fs.FINAL 12/15/03 12:57 PM Page 123

SECURITIES

MUTUAL FUNDS

NUMBER OF MUTUAL FUNDS BY TYPE, 1985-2002

Taxable money Tax-exempt 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 1996 2,570 466 2,224 666 322 6,248 1997 2,951 501 2,219 682 331 6,684 1998 3,513 525 2,250 685 341 7,314 1999 3,952 532 2,262 702 343 7,791 2000 4,385 523 2,208 703 336 8,155 2001 4,717 484 2,091 689 326 8,307 2002 4,756 475 2,036 679 310 8,256

Source: Investment Company Institute.

NUMBER OF MUTUAL FUNDS BY TYPE, 2002

Source: Investment Company Institute.

The Financial Services Fact Book 2004 123 04.06fs.FINAL 12/15/03 12:57 PM Page 124

SECURITIES

MUTUAL FUNDS

TOP TEN MUTUAL FUND COMPANIES, 20031 ($000)

Rank Company Total net assets 1 Fidelity Investments $749,790,982 2 Vanguard Group 632,585,655 3 Capital Research & Management 409,073,727 4 Merrill Lynch Investment Managers 188,073,891 5 Federated Investors 186,267,592 6 Morgan Stanley 180,487,477 7 Franklin Templeton Investments 176,552,270 8 Putnam Funds 164,790,610 9 157,229,607 10 SchwabFunds/U.S. Trust 156,630,360 1As of May 2003. Includes members of Investment Company Institute only. Ranked by assets.

Source: Investment Company Institute.

124 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.07fs.FINAL 12/15/03 12:58 PM Page 125

Chapter 7: Finance Companies

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. The sector is twice as large as the credit union sector, about the same size as thrifts and one-fifth as large as com- mercial banks. Accounts receivable, or receivables, rather than assets or revenues, determine a company’s standing within the industry. Finance companies are diverse. Captive finance companies, which are affiliated with motor vehicle or appliance manufacturers, finance dealer and consumer purchas- es 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 furni- ture; 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 com- panies 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. There is no federal registry of the number of companies.

TOP TEN SPECIALTY LENDER MERGERS AND ACQUISITIONS, 20021 Deal value3 Buyer Industry Target2 ($ millions) HSBC Holdings Plc Bank Household International Inc. $14,861.2 General Electric Co. Not classified4 ABB Ltd.’s Structured Finance operations 2,300.0 Cendant Corp. Not classified5 Trendwest Resorts Inc. 977.8 General Electric Co. Not classified4 Australian Guarantee Corp. Ltd. 894.9 Wells Fargo & Co. Bank Telmark LLC 650.0 General Electric Co. Not classified4 50% of Monogram Credit Services LLC 531.0 General Electric Co. Not classified4 Deutsche Finl. Svcs. inventory finance 450.0 Affiliated Computer Svcs. Inc. Not classified6 AFSA Data Corp. 410.0 Investment adviser Hanvit Leasing and Finance Co. 327.9 General Electric Co. Not classified Time Retail Finance Ltd. 209.8 1At least one of the companies involved is a U.S.-domiciled company. List does not include terminated deals. 2The target industry is spe- cialty lender. 3At announcement. 4Classified as “Diversified financial” by Fortune Magazine. 5Classified as “Miscellaneous” by Fortune Magazine. 6Classified as “Computer and data services” by Fortune Magazine.

Source: SNL Financial LC.

The Financial Services Fact Book 2004 125 04.07fs.FINAL 12/15/03 12:58 PM Page 126

FINANCE COMPANIES

OVERVIEW

FINANCE COMPANY EMPLOYMENT, 1998-2002 (000)

1998 1999 2000 2001 2002 Nondepository credit intermediation 615.7 656.3 644.4 660.7 690.1 Credit card issuing 134.3 140.8 144.0 144.4 131.8 Sales financing 98.2 105.3 111.3 113.2 112.0 Other nondepository credit intermediation 383.2 410.3 389.1 403.1 446.3 Consumer lending 78.1 83.6 88.4 94.3 99.6 Real estate credit 232.6 250.8 223.4 231.2 269.9 Miscellaneous nondepository credit intermediation 72.6 75.9 77.3 77.6 76.8

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

NUMBER OF FINANCE COMPANIES, 1996 AND 2000 (As of June 30)

• There was a 20.5 Size of company by net assets, $ millions 1996 2000 percent drop in the num - ber of finance companies $20,000 and more 30 1 11 from 1996 to 2000, $1,000-$19,000 33 2 57 with the smallest entities $200-$999 54 61 declining by 25 percent. $50-$199 87 57 $10-$49 138 128 Less than $10 895 670 Total 1,237 984 1$5,000 or more. 2$1,000 - $4,999.

Source: Board of Governors of the Federal Reserve System, based on Survey of Finance Companies 2000.

126 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.07fs.FINAL 12/15/03 12:58 PM Page 127

FINANCE COMPANIES

ASSETS AND LIABILITIES

ASSETS AND LIABILITIES OF FINANCE COMPANIES, 1998-20021 ($ billions, end of year)

1998 1999 2000 2001 2002 Total financial assets $852.7 $1,003.0 $1,137.9 $1,155.7 $1,185.1 Checkable deposits and currency 22.8 25.3 27.9 30.8 33.8 Credit market instruments 645.5 742.5 850.5 844.8 862.0 Other loans and advances 340.9 395.1 458.4 447.0 455.3 Mortgages 121.2 145.8 172.3 161.3 174.5 Consumer credit 183.3 201.5 219.8 236.6 232.3 Miscellaneous assets 184.4 235.3 259.5 280.1 289.3 Total liabilities 856.6 994.6 1,159.5 1,179.6 1,239.1 Credit market instruments 625.5 695.7 776.9 776.7 814.4 Open market paper 233.3 230.4 238.8 158.6 141.5 Corporate bonds 365.6 429.9 502.2 567.4 624.9 Other bank loans 26.5 35.4 35.9 50.8 48.0 Taxes payable 7.3 8.1 9.1 10.2 11.6 Miscellaneous liabilities 223.8 290.7 373.5 392.6 413.1 Foreign direct investment in U.S. 37.2 49.8 65.3 71.5 67.9 Investment by parent 34.3 87.8 102.5 99.2 88.2 Other 152.3 153.1 205.6 221.9 257.0

Consumer leases not included above2 96.6 102.9 108.2 103.5 83.3 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.

The Financial Services Fact Book 2004 127 04.07fs.FINAL 12/15/03 12:58 PM Page 128

FINANCE COMPANIES

ASSETS AND LIABILITIES/PROFITABILITY

SOURCES OF FINANCE COMPANY FUNDING, 1996 AND 2000 (As of June 30)

Amount Percentage change, ($ billions) 1996-2000 Share of total Average Category 1996 2000 Cumulative annual 1996 2000 Liabilities $725.7 $1,113.4 53.4% 11.3% 89.0% 88.4% Bank loans 17.7 32.8 85.7 16.7 2.2 2.6 Commercial paper 169.6 224.3 32.3 7.2 20.8 17.8 Debt due to parent 56.3 95.1 68.9 14.0 6.9 7.6 Debt not elsewhere classified 319.0 483.7 51.6 11.0 39.1 38.4 Other 163.2 277.5 70.1 14.2 20.0 22.0 Capital, surplus, and undivided profits 89.7 145.7 62.4 12.9 11.0 11.6 Total 815.4 1,259.0 54.4 11.5 100.0 100.0

Securitized receivables 122.4 198.1 61.9 12.8 13.1 13.6 Total managed assets 937.8 1,457.1 55.4 11.6 100.0 100.0

Source: Board of Governors of the Federal Reserve System, based on Survey of Finance Companies 2000.

PROFITABILITY

BUSINESS AND CONSUMER FINANCE COMPANIES, RETURN ON EQUITY, 1998-2002 1

Business finance companies Consumer finance companies return on average equity 2 return on average equity 3 Year Median Average Median Average 1998 14.53% 13.25% 17.67% 20.55% 1999 9.02 -4.76 17.98 11.24 2000 9.85 -1.48 18.67 6.37 2001 9.31 2.03 10.94 -29.90 2002 5.22 -5.14 18.81 20.89 1Net income as a percentage of average equity. 2Consists of 26 publicly-traded commercial finance companies including niche and diversified commercial and equipment finance com- panies. Does not include GSEs, finance REITs, or mortgage and real estate companies. 3Consists of 29 publicly-traded consumer finance companies including auto finance, credit card, niche and diversified consumer com- panies and pawn shops. Does not include GSEs, finance REITs or mortgage and real estate companies.

Source: SNL Financial Services M&A DataSource.

128 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.07fs.FINAL 12/15/03 12:58 PM Page 129

FINANCE COMPANIES

RECEIVABLES

TOTAL RECEIVABLES AT FINANCE COMPANIES, 1998-2002 1 ($ billions, as of March 2003)

1998 1999 2000 2001 2002 Total $907.0 $1,030.4 $1,185.6 $1,246.6 $1,270.2 Consumer2 370.0 409.8 464.4 513.3 513.1 Real estate 150.3 174.0 198.9 207.7 216.5 Business 386.7 446.6 522.3 525.6 540.6 1Includes finance company subsidiaries of bank holding companies but not of retailers and banks. 2Includes previously unreported assets beginning in 2000.

Source: Board of Governors of the Federal Reserve System.

TOTAL RECEIVABLES AT FINANCE COMPANIES, BY CATEGORY, 1998 AND 2002 1 1998 2002

1Includes finance company subsidiaries of bank holding companies but not of retailers and banks. 2Includes previously unreported assets.

Source: Board of Governors of the Federal Reserve System.

The Financial Services Fact Book 2004 129 04.07fs.FINAL 12/15/03 12:58 PM Page 130

FINANCE COMPANIES

RECEIVABLES

BUSINESS RECEIVABLES AT FINANCE COMPANIES, 1998-2002 ($ billions, end of year)

Percent of total

1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 Total $389.9 $449.6 $525.0 $527.9 $542.7 100.0% 100.0% 100.0% 100.0% 100.0% Motor vehicles 64.8 69.4 75.5 54.0 60.7 16.6 15.4 14.4 10.2 11.2 Retail loans 19.5 21.1 18.3 16.1 15.4 5.0 4.7 3.5 3.0 2.8 Wholesale loans1 32.8 34.8 39.7 20.3 29.3 8.4 7.7 7.6 3.8 5.4 Leases 12.5 13.6 17.6 17.6 16.0 3.2 3.0 3.4 3.3 2.9 Equipment 212.2 238.7 283.5 289.4 292.1 54.4 53.1 54.0 54.8 53.8 Loans 59.2 64.5 70.2 77.8 83.3 15.2 14.3 13.4 14.7 15.3 Leases 153.0 174.2 213.3 211.6 208.8 39.2 38.7 40.6 40.1 38.5 Other business receivables2 63.9 87.0 99.4 103.5 102.5 16.4 19.4 18.9 19.6 18.9 Securitized assets3 49.0 54.5 66.5 81.0 87.5 12.6 12.1 12.7 15.3 16.1 Motor vehicles 29.2 31.5 37.8 50.1 50.2 7.5 7.0 7.2 9.5 9.3 Retail loans 2.6 2.9 3.2 5.1 2.4 0.7 0.6 0.6 1.0 0.4 Wholesale loans 24.7 26.4 32.5 42.5 45.9 6.3 5.9 6.2 8.1 8.5 Leases 1.9 2.1 2.2 2.5 1.9 0.5 0.5 0.4 0.5 0.4 Equipment 13.0 14.6 23.1 23.2 20.2 3.3 3.2 4.4 4.4 3.7 Loans 6.6 7.9 15.5 16.4 13.0 1.7 1.8 3.0 3.1 2.4 Leases 6.4 6.7 7.6 6.8 7.2 1.6 1.5 1.4 1.3 1.3 Other business receivables2 6.8 8.4 5.6 7.7 17.1 1.7 1.9 1.1 1.5 3.2 1Credit arising from transactions between manufacturers and dealers, that is, floor plan financing. 2Includes loans on commercial accounts receivable, factored commercial accounts, and receivable dealer capital; small loans used pri- marily 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.

130 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.07fs.FINAL 12/15/03 12:58 PM Page 131

FINANCE COMPANIES

RECEIVABLES

CONSUMER RECEIVABLES AT FINANCE COMPANIES, 1998-2002 ($ billions, end of year)

1998 1999 2000 2001 2002 Total consumer 1 $372.5 $412.7 $468.3 $518.1 $518.4 Motor vehicle loans 113.5 129.2 141.6 173.9 160.2 Motor vehicle leases 96.6 102.9 108.2 103.5 83.3 Revolving2 31.9 32.5 37.6 31.5 38.9 Other 37.9 39.8 40.7 31.1 33.1 Securitized assets3 Motor vehicle loans 54.8 73.1 97.1 131.9 151.9 Motor vehicle leases 12.7 9.7 6.6 6.8 5.7 Revolving 5.5 6.7 19.6 25.0 31.1 Other 19.6 18.8 17.1 14.3 14.0 1The level of consumer credit outstanding in 2000 includes previously unreported assets, and thus represents a break in this series. 2Excludes revolving credit reported as held by depository institutions that are subsidiaries of finance companies. 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, 1998-2002 ($ billions, end of year)

1998 1999 2000 2001 2002 Total real estate $150.3 $174.0 $198.9 $207.7 $216.5 One- to four-family 90.0 108.2 130.6 120.1 135.0 Other 31.2 37.6 41.7 41.2 39.5 Securitized real estate assets 1 One- to four-family 29.0 28.0 24.7 40.7 39.7 Other 0.1 0.2 1.9 5.7 2.2 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.

The Financial Services Fact Book 2004 131 04.07fs.FINAL 12/15/03 12:58 PM Page 132

FINANCE COMPANIES

CONCENTRATION

• The top 20 companies TOTAL RECEIVABLES AT TOP TWENTY FINANCE COMPANIES, increased their share of 1996 AND 2000 ($ billions, as of June 30) nonsecuritized con - sumer loans by 3.0 Twenty largest finance companies 1 percentage points and All finance Share of all finance companies Amount company receivables nonsecuritized real 1996 2000 1996 2000 1996 2000 estate receivables by 3.9 percentage points Total $749.1 $1,119.6 $524.9 $770.3 70.1% 68.8% between 1996 and Owned 626.7 921.5 459.1 639.9 73.3 69.4 2000. Business 305.7 441.9 194.5 232.0 63.6 52.5

• The top 20 companies’ Consumer 240.6 321.8 203.5 281.8 84.6 87.6 share of securitized Real estate 80.4 157.7 61.1 126.1 76.0 79.9 loans grew 12 percent - Securitized 122.4 198.1 65.8 130.4 53.8 65.8 age points during the Total net assets 815.4 1,259.0 615.9 962.5 75.5 76.4 same period. 1Based on total net assets.

Source: Board of Governors of the Federal Reserve System, based on Survey of Finance Companies 2000.

TOTAL OWNED RECEIVABLES AT THE TWENTY LARGEST FINANCE COMPANIES, 1996 AND 2000 ($ billions)

1996 2000

Source: Board of Governors of the Federal Reserve System.

132 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.07fs.FINAL 12/15/03 12:58 PM Page 133

FINANCE COMPANIES

LEADING COMPANIES

TOP TEN U.S. CONSUMER AND COMMERCIAL FINANCE COMPANIES, 20021 ($ millions)

Rank Company Total managed receivables2 1 General Electric Capital Corporation $233,086.0 3 2 Ford Motor Credit Company 202,528.3 3 Citigroup Inc. (Credit Card) 130,400.0 4 Household International Inc. 107,495.8 5 MBNA Corporation 107,257.8 6 SLM Corporation 79,557.0 7 First USA, Inc. 74,000.0 8 American Express Company 73,800.0 9 Capital One Financial Corporation 59,746.5 10 Discover Bank 51,565.1 1 Ranked by total managed receivables. Excludes mortgage and real estate companies. 2On-balance sheet receivables and loans sold that are still serviced and managed. 3On-balance sheet receivables.

Source: SNL Financial LC.

TOP TEN U.S. CONSUMER FINANCE COMPANIES, 20021 ($ millions)

Rank Company Total managed receivables2 1 Ford Motor Credit Company $170,891.1 2 Citigroup, Inc. (Credit Card) 130,400.0 3 MBNA Corporation 107,257.8 4 Household International, Inc. 107,032.8 5 SLM Corporation 78,355.0 6 First USA, Inc. 74,000.0 7 American Express Company 73,800.0 8 General Electric Capital Corporation 65,408.0 3 9 Capital One Financial Corporation 59,746.5 10 Discover Bank 51,559.6 1Excludes mortgage and real estate companies. 2On-balance sheet receivables and loans sold that are still serviced and managed. 3On-balance sheet receivables.

Source: SNL Financial LC.

The Financial Services Fact Book 2004 133 04.07fs.FINAL 12/15/03 12:58 PM Page 134

FINANCE COMPANIES

LEADING COMPANIES

TOP TEN U.S. COMMERCIAL FINANCE COMPANIES, 20021 ($ millions)

Rank Company Total managed receivables2 1 General Electric Capital Corporation $167,678.03 2 General Motors Acceptance Corporation 45,246.03 3 CIT Group Inc. 40,182.8 4 Ford Motor Credit Company 31,631.2 5 International Lease Finance Corporation 25,660.33 6 FleetBoston Financial Corporation (Equipment) 18,408.0 7 Caterpillar Financial Services Corporation 17,030.0 8 IBM Credit LLC 13,230.7 9 John Deere Capital Corporation 12,755.9 10 Boeing Capital Corporation 10,933.8 1 Excludes mortgage and real estate companies. 2On-balance sheet receivables and loans sold that are still serviced and managed. 3On-balance sheet receivables.

Source: SNL Financial LC.

134 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.08fsFINAL 12/15/03 12:59 PM Page 135

Chapter 8: Mortgage Finance and Housing

MORTGAGES

Mortgage financing has become an increasingly important element in the economy, involv- ing a wide range of financial institutions from commercial banks, thrifts and credit unions to finance companies, life insurers and government-sponsored corporations like Fannie Mae. In 2002, home mortgage debt outstanding alone amounted to $6.5 trillion. 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 11.6 percent in 2002 from the previous year. In the home mortgage sector, commercial banks’ and savings institutions’ mortgage holdings rose 12.7 percent, credit unions’ holdings rose 12.8 percent, and finance companies’ holdings rose 12.4 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 mort- gage originator to make additional mortgages available. Mortgage-backed securities are sold by asset-backed securities (ABS) issuers. 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, 1997-2002 ($ billions, end of year)

1997 1998 1999 2000 2001 2002 Total mortgages $5,201.1 $5,712.5 $6,316.6 $6,890.3 $7,600.8 $8,486.0 Home 3,978.3 4,362.9 4,787.2 5,205.4 5,738.1 6,460.0 Multifamily residential 300.1 331.5 369.1 405.0 453.3 498.4 Commercial 832.7 921.6 1,057.9 1,171.0 1,293.0 1,401.8 Farm 90.0 96.6 102.3 108.9 116.3 125.8

Source: Board of Governors of the Federal Reserve System.

The Financial Services Fact Book 2004 135 04.08fsFINAL 12/15/03 12:59 PM Page 136

MORTGAGE FINANCE AND HOUSING

MORTGAGES

HOME MORTGAGES BY HOLDER, 1997-20021 ($ billions, end of year)

1997 1998 1999 2000 2001 2002 Total assets $3,978.3 $4,362.9 $4,787.2 $5,205.4 $5,738.1 $6,460.0 Household sector 86.5 85.3 84.2 83.2 82.2 81.2 Nonfinancial corporate business 29.8 27.1 20.2 21.4 23.1 24.2 Nonfarm noncorporate business 7.0 10.0 9.0 8.7 9.7 11.0 State and local governments 65.8 69.1 72.6 76.3 80.1 84.1 Federal government 19.1 18.8 18.4 17.7 17.1 16.2 Commercial banking 745.5 797.0 879.6 965.6 1,023.9 1,222.5 Savings institutions 520.7 533.5 548.2 594.2 620.6 631.4 Credit unions 86.0 96.9 111.0 124.9 141.3 159.4 Bank personal trusts and estates 3.0 2.8 2.2 2.3 2.5 2.3 Life insurance companies 7.2 6.6 5.9 4.9 4.9 5.3 Private pension funds 5.7 5.8 6.7 7.8 9.2 10.9 State and local gov’t. retirement funds 5.6 8.4 7.5 7.5 8.7 11.1 Government-sponsored enterprises 194.3 199.6 189.3 205.1 225.3 270.7 Federally related mortgage pools 1,788.1 1,970.2 2,234.7 2,425.6 2,748.5 3,063.7 ABS issuers 310.7 405.2 455.0 499.8 591.2 691.9 Finance companies 67.5 90.0 108.2 130.6 120.1 135.0 Mortgage companies 21.8 21.8 21.8 21.8 21.8 21.8 REITs 14.0 14.8 12.4 7.9 7.9 17.4 Home equity loans included above2 416.2 476.7 532.8 630.6 699.4 829.1 Commercial banking 174.0 176.9 189.5 235.0 258.6 303.3 Savings institutions 55.5 55.9 59.7 72.8 77.9 78.5 Credit unions 29.0 29.7 33.4 40.7 44.9 48.1 ABS issuers 90.2 124.2 141.9 151.5 197.8 264.3 Finance companies 67.5 90.0 108.2 130.6 120.1 135.0 1Mortgages on 1-4 family properties. 2Loans made under home equity lines of credit and home equity loans secured by junior . Excludes home equity loans held by mortgage companies and individuals.

Source: Board of Governors of the Federal Reserve System.

136 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.08fsFINAL 12/15/03 12:59 PM Page 137

MORTGAGE FINANCE AND HOUSING

MORTGAGES

1-4 FAMILY HOME MORTGAGE ORIGINATIONS, 1991-2001 • According to Inside ($ millions) Mortgage Technology , Adjustable rate the online retail mor t- Refinance mortgage (ARM) gage lending business Year Total volume share share1 grew 4.7 percent in the 1991 $562,074 31% 23% first quarter of 2003, 1992 893,681 47 20 even though originations 1993 1,019,861 52 20 as a whole were down 1994 768,748 24 39 4.7 percent over the 1995 639,436 21 33 period. An estimated $45 billion of retail mor t- 1996 785,233 29 27 gages were processed in 1997 858,070 29 22 significant measur e 1998 1,511,070 50 12 through the Internet. 1999 1,306,000 34 22 2000 1,047,000 19 25 2001 2,079,500 59 12 1ARM share is percent of total volume of conventional purchase loans.

Source: HUD Survey of Mortgage Lending Activity; Mortgage Bankers Association of America; Federal Housing Finance Board.

The Financial Services Fact Book 2004 137 04.08fsFINAL 12/15/03 12:59 PM Page 138

MORTGAGE FINANCE AND HOUSING

MORTGAGES

MORTGAGE STATUS AND REFINANCING ACTIVITY OF HOMEOWNERS, 2001 ($000)

Most recent mortgage Mean Mean Mean Mean Share of interest mortgage home loan-to- mortgage Distribution rate1 amount1 equity1 value ratio debt2 Homeowners with mortgages 62.8% 7.33% $100.2 $110.4 54.0 100.0% Never refinanced 50.9 7.55 94.8 85.1 57.6 47.0 Have refinanced 49.1 7.09 105.8 135.7 50.5 52.8

Refinancers Last refinanced in 2001 or early 2002 46.6 6.82 128.8 110.7 61.6 30.8 Those who took cash out 44.8 6.85 125.9 104.8 62.9 13.6 Last refinanced at an earlier time 53.4 7.30 84.2 159.2 40.3 21.4 1Average. 2Percentages may not sum to 100 because of rounding and a small number of missing observations.

Note: All survey data are based on weighted observations.

Source: Surveys of Consumers, of Michigan Survey Research Center.

CASH OUT HOME MORTGAGE REFINANCING, 1993-20021 (Billions of 2002 dollars)

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

Source: Freddie Mac.

138 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.08fsFINAL 12/15/03 12:59 PM Page 139

MORTGAGE FINANCE AND HOUSING

MORTGAGES/HOME OWNERSHIP

MORTGAGE DELINQUENCY AND FORECLOSURE RATES, 1980-2002 (Percent, annual average)

Delinquency rates Foreclosure rates Conventional VA FHA Conventional VA FHA Year Total loans loans loans Total loans loans 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 1996 4.3 2.8 6.7 8.0 1.0 0.7 1.6 1.6 1997 4.3 2.8 6.9 8.1 1.1 0.7 1.8 2.0 1998 4.4 2.9 7.1 8.5 1.1 0.7 1.8 2.2 1999 4.0 2.5 6.8 8.6 1.0 0.7 1.8 2.2 2000 4.0 2.6 6.9 9.1 0.9 0.6 1.4 1.8 2001 4.6 3.0 7.7 10.8 1.0 0.7 1.2 1.9 2002 4.6 3.1 7.9 11.5 1.1 0.8 1.5 2.5

Source: Mortgage Bankers Association of America.

HOME OWNERSHIP

SNAPSHOT OF HOUSING IN AMERICA, 2001-2002 2001 2002 Percent change Homeownership rate 67.8% 67.9% 0.1% New home sales 908,000 units 976,000 units 7.7 Existing home sales 5.3 million units 5.6 million units 5.7 Existing home price (median) $153,193 $161,043 5.1 Home equity $7.3 trillion $7.6 trillion 4.1 Mortgage debt $5.5 trillion $6.1 trillion 10.9 Mortgage refinancing $1.1 trillion $1.4 trillion 27.3 Residential fixed investment $442.4 billion $462.4 billion 4.5 Remodeling $160 billion $164 billion1 2.5 1Estimated.

Note: All dollar figures are in 2002 dollars.

Source: Board of Governors of the Federal Reserve System; Bureau of Economic Analysis; Mortgage Bankers Association of America; Census Bureau.

The Financial Services Fact Book 2004 139 04.08fsFINAL 12/15/03 12:59 PM Page 140

MORTGAGE FINANCE AND HOUSING

HOME OWNERSHIP

MEDIAN SALES PRICE OF EXISTING SINGLE FAMILY HOMES, • The national median price 1968-2002 for existing single family homes increased to Median Percent Median Percent $182,100 in July, 2003, Year sales price change Year sales price change a 12.1% increase from 1968 $20,100 NA 1986 $80,300 6.4% the previous year, and the 1969 21,800 8.5% 1987 85,600 6.6 average price rose to $229,000, a 10% rise, 1970 23,000 5.5 1988 89,300 4.3 according to the National 1971 24,800 7.8 1989 89,500 0.2 Association of Realtors 1972 26,700 7.7 1990 92,000 2.8 (NAR). 1973 28,900 8.2 1991 97,100 5.5 • Regionally, prices of exist - 1974 32,000 10.7 1992 99,700 2.7 ing homes in July 2003 1975 35,300 10.3 1993 103,100 3.4 were 17.6% higher in the 1976 38,100 7.9 1994 107,200 4.0 South than in July 2002, 1977 42,900 12.6 1995 110,500 3.1 16.3% higher in the 1978 48,700 13.5 1996 115,800 4.8 Northeast, 11.7% higher in the West and 5.1% 1979 55,700 14.4 1997 121,800 5.2 higher in the Midwest. The 1980 62,200 11.7 1998 128,400 5.4 NAR projects that nation - 1981 66,400 6.8 1999 133,300 3.8 ally prices will increase by 1982 67,800 2.1 2000 139,000 4.3 5.5% to 6% in 2003 and 1983 70,300 3.7 2001 147,800 6.3 then 4% to 4.5% in 2004. 1984 72,400 3.0 2002 158,200 7.0 1985 75,500 4.3 NA=Data not available.

Source: National Association of Realtors.

BARRIERS TO HOME OWNERSHIP

According to an online survey of consumers conducted in March 2003 by the Mortgage Insurance Companies of America, the biggest hurdles that renters face in trying to buy a home are: ■ coming up with enough money for the down payment: 51 percent ■ being able to make a long-term commitment to owning a home: 19 percent ■ making the monthly mortgage payment: 10 percent ■ credit problems: 8 percent ■ finding the right home/location: 5 percent ■ other: 7 percent

Source: Mortgage Insurance Companies of America.

140 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.08fsFINAL 12/15/03 12:59 PM Page 141

MORTGAGE FINANCE AND HOUSING

HOME OWNERSHIP

U.S. HOME OWNERSHIP RATES BY RACE AND ETHNICITY, 1996-2002 1996 1997 1998 1999 20001 20012 2002 3Q2 United States 65.4 65.7 66.3 66.8 66.2 66.6 68.0 Whites 71.7 72.0 72.6 73.2 72.4 72.9 71.6 Blacks 44.5 45.4 46.1 46.7 46.3 46.8 47.1 Hispanics 42.8 43.3 44.7 45.5 45.7 46.7 48.3 Asians/others 51.5 53.3 53.7 54.1 53.3 54.4 54.1 12000 Census enumeration. The 2000 Decennial Census and Home Vacancy Survey provide different homeownership rates. Home Vacancy Survey numbers are calibrated to the 1990 Decennial Census. Pre-2000 statistics are based on the Home Vacancy Survey. 2Based on the 2000 Census adjusted by the rate of change in the Home Vacancy Survey’s ownership rates between 2000 and 2001.

Source: 2000 Census, Housing Vacancy Survey; Freddie Mac.

HOME OWNERSHIP RATES BY REGION, 1990-20021 (End of year)

Year United States Northeast Midwest South West 1990 64.1% 62.8% 67.8% 65.7% 58.3% 1995 65.1 61.6 70.1 67.5 59.0 1996 65.4 62.3 70.8 67.6 58.9 1997 65.7 62.7 70.4 67.8 59.8 1998 66.4 62.0 71.5 69.0 60.4 1999 66.9 63.2 72.5 69.1 60.6 2000 67.5 63.2 73.1 69.8 61.6 2001 68.0 64.0 73.5 70.1 62.3 2002 68.3 64.9 73.3 70.3 62.6 1The percentage of households that are homeowners based on the total number of households.

Source: U.S. Census Bureau.

The Financial Services Fact Book 2004 141 04.08fsFINAL 12/15/03 12:59 PM Page 142

MORTGAGE FINANCE AND HOUSING

HOME OWNERSHIP

SELECTED CHARACTERISTICS OF HOMEOWNERS, 1995 AND 2001 (000) Percent change, 1995 2001 1995-2001 Total owner occupied units 63,544 72,365 13.9% By race White 56,507 62,552 10.7 Black 5,137 6,327 23.2 Other1 1,900 3,486 83.5

Hispanic2 3,245 4,734 45.9

By household income $0-$14,999 10,319 9,579 -7.2 $15,000-$29,999 13,909 11,854 -14.8 $30,000-$49,999 14,568 14,385 -1.3 $50,000-$99,000 18,169 23,543 29.6 $100,000 or more 6,579 12,903 96.1 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.

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

HOME OWNERSHIP RATES BY INCOME, 2001

Source: 2001 American Housing Survey.

142 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.08fsFINAL 12/15/03 12:59 PM Page 143

MORTGAGE FINANCE AND HOUSING

HOME OWNERSHIP/HOME EQUITY LOANS

CONVENTIONAL HOME PURCHASE LOANS BY RACIAL/ETHNIC IDENTITY AND INCOME OF BORROWERS, 1993-2002 (Percent change)

1993- 1996- 1997- 1998- 1999- 2000- 2001- 1993- 1994 1997 1998 1999 2000 2001 2002 2002 Racial/ethnic identity American Indian 23.8% -1.0% 17.1% 59.1% -5.5% -40.8% 21.5% 64.9% Asian 18.6 12.7 14.8 16.9 10.3 4.2 21.9 146.5 Black 54.7 2.6 13.4 12.5 1.3 -7.8 14.1 133.4 Hispanic 42.0 -2.1 22.3 21.8 14.1 11.8 25.0 244.8 White 15.7 2.0 14.9 1.5 -4.8 -0.5 6.3 43.2 Income 1 Less than 80 27.0 2.3 24.8 14.9 -1.8 -0.9 12.1 119.3 80-99 19.1 2.3 19.8 6.3 -0.9 3.5 12.9 91.7 100-119 15.7 2.3 19.7 3.9 -0.2 4.2 11.6 79.8 120 or more 12.5 6.7 15.9 3.9 4.4 2.4 6.7 80.8 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, 1997-20021 ($ billions, end of year)

1997 1998 1999 2000 2001 2002 Total $416.2 $476.7 $532.8 $630.6 $699.4 $829.1 Commercial banking 174.0 176.9 189.5 235.0 258.6 303.3 Savings institutions 55.5 55.9 59.7 72.8 77.9 78.5 Credit unions 29.0 29.7 33.4 40.7 44.9 48.1 ABS issuers 90.2 124.2 141.9 151.5 197.8 264.3 Finance companies 67.5 90.0 108.2 130.6 120.1 135.0 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.

The Financial Services Fact Book 2004 143 04.08fsFINAL 12/15/03 12:59 PM Page 144

MORTGAGE FINANCE AND HOUSING

HOME EQUITY LOANS/LEADING COMPANIES

SUBPRIME RESIDENTIAL LENDING ACTIVITY IN THE UNITED STATES, 1998-2002 ($ billions) • In 2001, 44 percent of Year Dollar volume Year Dollar volume the home equity loan mar - 1998 $150 20011 $170 ket was subprime, mean - 1999 160 20021 210 ing that bor rowers’ credit 1Projected. 2000 140 ratings were A- or lower . Source: www.dismalscience.com; Inside Mortgage Finance; Freddie Mac.

LEADING COMPANIES TOP TEN MORTGAGE FINANCE COMPANIES, 2002 ($ millions) Total managed Rank Company mortgaged receivables1 1 Washington Mutual Bank (Mortgage) $723,100.0 2 Wells Fargo Home Mortgage Inc. 570,312.0 3 Countrywide Financial Corp. 452,405.0 4 Chase Manhattan Mortgage Corp. 429,020.0 5 General Motors Acceptance Corp. 418,351.0 6 Bank of America Consumer Real Estate Lending 264,500.0 7 ABN AMRO Mortgage Group Inc. 184,456.0 8 National City Mortgage Co. 123,099.2 9 CitiMortgage Inc. 118,629.7 10 Cendant Mortgage Services 115,847.0 1On-balance sheet receivables and loans sold that are still serviced and managed. Source: SNL Financial LC.

TOP FIVE SUBPRIME RESIDENTIAL LENDERS, 2002-20031 ($ millions) Subprime volume Percent Market Rank Location 2002 2003 change share2 1 Household Financial Services 3,4 Prospect Heights, IL $4,800 $6,620 37.9% 22.2% 2 CitiFinancial Baltimore, MD 4,412 4,773 8.2 16.0 3 New Century Financial Corp. Irvine, CA 2,656 4,700 77.0 15.8 4 Washington Mutual Seattle, WA 4,089 4,538 11.0 15.2 5 Ameriquest Mortgage Corp 3 Orange, CA 2,414 4,200 74.0 14.1 Top 5 Totals: 18,371 24,831 35.2 83.3 1First quarter. 2Based on estimated subprime production of $73.74 billion in first quarter 2003. 3Estimate. 4Household was sold to HSBC in March 2003. Source: Thomson Media.

144 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.09fsFINAL 12/15/03 1:07 PM Page 145

Chapter 9: Technology

IT SPENDING

IT SPENDING (IT) has transformed the financial services industry, making avail- able many products and services that would have otherwise been impossible to offer. New features range from asset-backed securities, personal cash management accounts and auto- mated teller machines that were introduced in 1970s to more recent such as online banking. At the same time, IT has improved efficiency and reduced labor costs.

INFORMATION TECHNOLOGY SPENDING BY U.S. COMMERCIAL BANKS, 2003-2007 1 ($ billions) • IT spending by commer - cial banks is expected to grow slowly through 2007, from a total of $33.8 billion in 2003 to $38.2 billion in 2007, a compound annual growth rate of 3.3 percent, according to TowerGroup.

1Estimated.

Source: TowerGroup.

INFORMATION TECHNOLOGY SPENDING, BY TYPE OF INSURANCE COMPANY, 1993-2001 ($ billions)

Source: TowerGroup.

The Financial Services Fact Book 2004 145 04.09fsFINAL 12/15/03 1:07 PM Page 146

TECHNOLOGY

IT SPENDING

INFORMATION TECHNOLOGY SPENDING, BY TYPE OF INSURANCE COMPANY, 1991 AND 2001 1991 2001

Source: TowerGroup. INFORMATION TECHNOLOGY SPENDING BY U.S. SECURITIES FIRMS, 2003 • The two largest com - ($ billions) ponents of IT spending Operations by securities compa - Institutional sales and trading $7.3 nies in 2003 wer e Brokerage - back office 7.0 institutional sales and Retail brokerage 5.4 trading operations and Asset management 4.4 back office operations, Clearing and custody 1.5 each accounting for roughly one-third of Total $25.6 total spending. Source: Celent Communications.

INFORMATION TECHNOLOGY SPENDING BY U.S. SECURITIES FIRMS, 2003

Source: Celent Communications.

146 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.09fsFINAL 12/15/03 1:07 PM Page 147

TECHNOLOGY

ELECTRONIC COMMERCE

ELECTRONIC COMMERCE Using advanced information technology, banks have transformed some of their core ser- vices, such as personal banking. Consumers can now conduct many banking activities over the telephone and online as well as in traditional branch offices. The use of personal com- puters to conduct has increased as consumers have become more comfort- able with making routine purchases online. By 2005, about one-third of households are expected to use online banking services.

FINANCIAL AND OTHER ONLINE ACTIVITIES, UNITED STATES, 2000-2002 • A TowerGroup survey of 2000 2002 households not using online Millions Millions Percent banking found the main bar - of of increase Percent users Percent users 2000-2002 rier was security concerns (26 percent). Twenty-two Bank online 17% 14 32% 37 164% percent said they were not Buy or make a reservation for travel 36 31 50 59 90 comfortable with banking Buy a product 48 41 62 73 78 online and 21 percent said Participate in online auction 15 13 20 22 69 they prefer red to do busi - ness face to face. Play a game 34 29 37 42 45 Buy or sell stocks 12 10 12 14 40 Get hobby information 76 65 77 90 38 Get financial information 44 37 42 49 32

Source: Pew Internet & American Life Project Surveys, March 2000, January 2002, May-June 2002, June-July 2002, September 2002.

The Financial Services Fact Book 2004 147 04.09fsFINAL 12/15/03 1:07 PM Page 148

TECHNOLOGY

ELECTRONIC COMMERCE

BANKS OFFERING INTERNET LENDING, 2000-2005

Source: Celent Communications.

BANKS OFFERING INTERNET BANKING, 2001-2003

Assets 2001 2003 More than $70 billion 100% 100% $30 billion - $70 billion 100 100 $15 billion - $30 billion 95 100 $10 billion - $15 billion 93 100 $6 billion - $10 billion 57 87 $5 billion - $10 billion 39 75 Less than $5 billion 27 53

Source: Celent Communications.

TOTAL AND E-COMMERCE REVENUE, SECURITIES AND COMMODITY CONTRACTS, 2000-2001 ($ millions) E-commerce as a percent Revenues Percent change, of total 2000 2001 2000-2001 revenues Total E-commerce Total E-commerce Total E-commerce revenues revenues 2000 2001

Total selected finance 1 $338,071 $5,976 $293,981 $3,754 -13.0% -37.2% 1.8% 1.3% Securities and commodity contracts, intermediation and brokerage 232,798 5,664 195,667 3,570 -15.9 -37.0 2.4 1.8 1Includes securities and commodity contracts intermediation and brokerage, portfolio management, and investment advice.

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

148 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.09fsFINAL 12/15/03 1:07 PM Page 149

TECHNOLOGY

ELECTRONIC PAYMENTS

ELECTRONIC PAYMENTS Over the past quarter-century, electronic alternatives to the traditional way of paying bills by check have revolutionized payments infrastructure. While credit cards continue to con- tribute the largest share, newer choices such as PIN and signature debit and Automated (ACH) payments have grown rapidly. Debit cards have become increasingly popular in large part because of the availability of more secure forms of signature. ACH payments were launched in the early 1970s as a reliable and efficient alternative to the check. The ACH electronic funds transfer system continues to expand, with larger vol- umes transacted each year and new types of payments transacted. In fact, ACH payment can now be initiated by telephone or on the Web. Electronic Benefits Transfers give con- sumers more flexible access to Social Security, Veterans’ Pensions and other benefits dis- bursed by the federal government.

TOTAL ESTIMATED VOLUME AND DOLLAR VALUE OF ELECTRONIC PAYMENTS, 2000

Transaction Dollar Average volume volume payment Electronic payment instrument (millions) ($ millions) value General purpose credit cards 12,300.2 $1,072,555 $87.20 Private label credit cards 2,748.6 162,819 59.24 Offline debit (signature-based) 1 5,268.6 209,980 39.85 Online debit (PIN-based) 3,010.4 138,151 45.89 (ACH) 2 5,622.0 5,674,851 1,009.40 Electronic Benefits Transfer (EBT)3 537.7 13,744 25.56 Total 29,487.5 $7,272,100 $246.62 1Debit card transactions that require the customer’s signature as a means of authentication. 2Allows and debits to be processed between financial institutions. 3Allows a recipient to authorize transfer of government benefits from a federal account to a retailer account to pay for products received.

Source: Board of Governors of the Federal Reserve System.

The Financial Services Fact Book 2004 149 04.09fsFINAL 12/15/03 1:07 PM Page 150

TECHNOLOGY

ELECTRONIC PAYMENTS

CHECK VS. ELECTRONIC PAYMENTS, 2000-2005

Source: Global Concepts, Inc.

NUMBER OF CHECK AND RETAIL ELECTRONIC PAYMENT TRANSACTIONS, 1979-2000

Retail ACH 1 Credit car d Debit car d Check

1Automated Clearing House, an electronic payments network allowing credit and debit payments between depository institutions.

Source: Board of Governors of the Federal Reserve System.

150 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.09fsFINAL 12/15/03 1:07 PM Page 151

TECHNOLOGY

ATMs

ATMs The growth of online banking, electronic payments and deposits, and (ATM) usage has been driven by customer demand for greater convenience. ATMs were introduced in the mid-1970s. By 2003, there were some 371,000 in the United States, more than 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 supermarkets, 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, 1997-20031

Year Total ATMs Off-premise ATMs Percent off-premise 1997 165,000 67,000 40.6% 1998 187,000 84,000 44.9 1999 227,000 117,000 51.5 2000 273,000 156,000 57.1 2001 324,000 193,000 59.6 2002 352,000 220,100 62.5 2003 371,000 238,000 64.2 1ATMs located away from branches. Source: ATM & Debit News.

BANK REVENUES FROM ATM TRANSACTION FEES, 1995-2001 ($ billions)

Source: Celent Communications.

The Financial Services Fact Book 2004 151 04.09fsFINAL 12/15/03 1:07 PM Page 152

TECHNOLOGY

ATMs

ANNUAL PIN-BASED VOLUME, 1993-2003 1 • The first U.S. ATM (millions) Year ATM volume POS volume2 Total volume was installed in 1971 at the Citizens & 1993 7,705 430 8,135 Southern National 1994 8,454 624 9,078 Bank in . 1995 9,689 775 10,464

•ATM maintenance 1996 10,684 1,096 11,780 costs, including cash 1997 10,980 1,600 12,580 replenishment, servic - 1998 11,160 2,000 13,160 ing, telephone costs 1999 10,889 2,428 13,317 and rent, range from 2000 12,840 3,107 15,947 $12,000 to $15,000 2001 13,584 3,648 17,232 a year. 20023 10,598 4,926 15,524 20033 10,828 5,944 16,772 1PIN (personal identification number) volume. Annualized projections based on March data for 1999-2003, June data for 1997-1998, August data for 1996 and September data for all other years. 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. 3Adjusted to eliminate double-counting caused by two networks reporting a transaction. After 2001, transactions are reported only by the authorizing network.

Source: ATM & Debit News.

A JUNE 2003 STUDY BY THE SHOWS: ■ The percentage of banks that charge their customers for withdrawals from their own ATMs remained sta- ble at about 3 percent from 2001 to 2002. However, the percentage of banks that charge their deposi- tors for cash withdrawals from ATMs owned by other banks dropped about 10 percentage points to 70 percent. Some 90 percent charged for cash withdrawals by noncustomers, about the same as in 2001. ■ Ninety-three percent of banks and savings and loan associations (S&Ls) offered ATM services in 2002, up 2.5 percentage points from 2001. ■ In 2002, 10.3 percent of banks and S&Ls charged an annual fee for ATM services, a decrease of 0.4 percentage points from the previous year. The average fee was $11.65. ■ In 2002, 4 percent of banks and S&Ls charged a fee to issue an ATM card (on average $6.39), a rise of 0.5 percentage points from 2001. The average charge rose $1.88. ■ In 2002, banks and S&Ls that charged their depositors for withdrawals using “foreign” ATMs imposed an average fee of $1.14, about the same as in 2001. Banks that imposed surcharges on noncustomers using their ATM services charged an average $1.36 in 2002, up 3 percent from 2001.

152 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.09fsFINAL 12/15/03 1:07 PM Page 153

TECHNOLOGY

ATMs

ATM TRANSACTIONS, 1993-2003 1

Average monthly ATM Total transactions2 Year transactions Terminals (millions) 1993 6,772 94,822 642.1 1994 6,459 109,080 704.5 1995 6,580 122,706 807.4 1996 6,399 139,134 890.3 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 2,509 352,000 883.23 2003 2,432 371,000 902.33 1June data for 1993-1998, March data for 1999-2003. 2Total network transactions include all deposits, withdrawals, transfers, pay- ments, and balances 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. 3Adjusted to eliminate double-counting caused by two networks reporting a transaction. After 2001, transactions are reported only by the authorizing network.

Source: ATM & Debit News.

TOP TEN ATM OWNERS, 2002-2003 1 Number of ATMs Rank Owner 2002 2003 1 Bank of America 12,000 2 14,200 2 2 American Express 7,400 7,1003 3 U.S. Bancorp 6,108 6,663 4 Wells Fargo 6,488 6,353 5 Wachovia 4,675 4,560 6 Cardtronics NA 4,500 7 Bank One 5,141 3,700 8 PNC 3,283 3,556 9 FleetBoston 3,750 3,500 10 E•Trade 420 2 3,000 1January data. 2Estimate. 3AmEx sold 1,704 of these ATMs to Cardtronics in August 2003.

NA=Data not available.

Source: ATM & Debit News.

The Financial Services Fact Book 2004 153 04.09fsFINAL 12/15/03 1:07 PM Page 154

TECHNOLOGY

WIRELESS TECHNOLOGY

WIRELESS TECHNOLOGY Despite the popularity of wireless such as cell phones and personal digital assistants, the number of consumers using them to conduct financial services transactions has been declining since 2001. At the same time, wireless networks are rapidly becoming a cost-effective alternative for providing network connectivity in business organizations. To security concerns, in February, 2002 the Federal Deposit Insurance Corporation issued guidelines on managing risks associated with wireless networks and wireless cus- tomer access.

INFORMATION TECHNOLOGY SPENDING ON WIRELESS RETAIL FINANCIAL SERVICES IN NORTH AMERICA, 1998-20021 ($ millions) • In an August 2001 report, Forrester Research found that while more than 40 million Americans wer e both online and owned a device that could conduct wireless transactions, bar e- ly 1 percent of consumers conducted financial transac - tions using a wireless device. 1Includes banking and securities. 2Estimated.

Source: Celent Communications.

WIRELESS BANKING AND BROKERAGE USERS, 1998-20031 (Number of units)

1Wireless devices include cell phones and personal digital assistants (PDAs) such as Palm Pilots. Laptop-based applications are not included. 2Estimated.

Source: Celent Communications.

154 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.10fs.FINAL 12/15/03 1:06 PM Page 155

Chapter 10: World Rankings

FINANCIAL SERVICES

WORLD’S LARGEST FINANCIAL SERVICES FIRMS, 20021 ($ millions)

Profits as a percent of Rank Company Revenues Profits Revenues Assets Country Industry 1 General Electric $131,698 $14,118 11% 3% U.S. Diversified financial 2 Allianz 101,930 -1,103 -1 0 Germany Insurance 3 Citigroup 100,789 15,276 15 1 U.S. Banking 4 ING Group 88,102 4,255 5 1 Netherlands Insurance 5 American International Group 67,482 5,519 8 1 U.S. Insurance 6 AXA 62,051 897 1 0 France Insurance 7 Insurance 61,175 927 2 0 Japan Insurance 8 Assicurazioni Generali 53,599 -713 -1 0 Italy Insurance 9 Fannie Mae 52,901 4,619 9 1 U.S. Diversified financial 10 Deutsche Bank 52,133 375 1 0 Germany Banking 11 Credit Suisse 52,122 -2,126 -4 0 Banking 12 Group 51,980 1,022 2 1 Germany Insurance 13 BNP Paribas 51,127 3,115 6 0 France Banking 14 State Farm Insurance Cos. 49,654 -2,796 -6 -2 U.S. Insurance 15 49,533 -802 -2 0 U.K. Insurance 16 Bank of America Corp. 45,732 9,249 20 1 U.S. Banking 17 43,598 503 1 0 / Banking Netherlands 18 J.P. Morgan Chase & Co. 43,372 1,663 4 0 U.S. Banking 19 Dai-ichi Mutual Life Insurance 43,134 464 1 0 Japan Insurance 20 Berkshire Hathaway 42,353 4,286 10 3 U.S. Insurance 21 UBS 42,330 2,271 5 0 Switzerland Banking 22 Zurich Financial Services 40,638 -3,430 -8 -1 Switzerland Insurance 23 HSBC Holdings 39,730 6,239 16 1 U.K. Banking 24 Freddie Mac 39,663 5,764 15 1 U.S. Diversified financial 25 Crédit Agricole 36,745 2,172 6 0 France Banking 1Ranked by revenues. Based on an analysis of companies in the Global Fortune 500.

Source: Fortune.

The Financial Services Fact Book 2004 155 04.10fs.FINAL 12/15/03 1:06 PM Page 156

WORLD RANKINGS

INSURANCE

TOP TEN GLOBAL PROPERTY/CASUALTY INSURANCE COMPANIES, BY REVENUES, 20021 ($ millions)

Rank Company Revenues2 Country 1 Allianz $101,930 Germany 2 American International Group 67,482 U.S. 3 Munich Re Group 51,980 Germany 4 State Farm Insurance Cos. 49,654 U.S. 5 Berkshire Hathaway 42,353 U.S. 6 Zurich Financial Services 40,638 Switzerland 7 Allstate 29,579 U.S. 8 Millea Holdings 24,038 Japan 9 Swiss Reinsurance 22,109 Switzerland 10 Royal & Sun Alliance 19,700 U.K. 1Ranked by revenues. Based 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 excludes deposits; includes con- solidated subsidiaries, excludes excise taxes.

Source: Fortune.

TOP TEN GLOBAL LIFE/HEALTH INSURANCE COMPANIES, 20021 ($ millions)

Rank Company Revenues Country 1 ING Group $88,102 Netherlands 2 AXA 62,051 France 3 Nippon Life Insurance 61,175 Japan 4 Assicurazioni Generali 53,599 Italy 5 Aviva 49,533 U.K. 6 Dai-ichi Mutual Life Insurance 43,134 Japan 7 Insurance 36,305 Japan 8 Prudential 35,819 U.K. 9 MetLife 34,104 U.S. 10 Aegon 29,445 Netherlands 1Ranked by revenues. Based on an analysis of companies in the Global Fortune 500.

Source: Fortune.

156 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.10fs.FINAL 12/15/03 1:06 PM Page 157

WORLD RANKINGS

REINSURANCE/BANKS

TOP TEN GLOBAL REINSURERS, 20021 ($ millions) Net reinsurance Rank Company premiums written Country 1 Munich Re Group $24,924.3 Germany 2 Swiss Re Group 21,600.0 Switzerland 3 Berkshire Hathaway Re Group 13,083.0 U.S. 4 Hannover Re Group 8,526.4 Germany 5 Employers Re Group 7,892.0 U.S. 6 Lloyd’s 6,808.6 U.K. 7 SCOR Re Group 4,693.4 France 8 Allianz Re Group 4,584.7 Germany 9 Gerling Global Re Group 2 4,463.3 Germany 10 XL Re Group 3,544.2 1Ranked by net reinsurance premiums written. 2Ceased underwriting new business in the nonlife reinsurance market in October 2002; this business is now in run-off. Life reinsur- ance business will be continued in a new company, Gerling Life Reinsurance GmbH.

Source: Standard & Poors.

TOP TEN GLOBAL COMMERCIAL AND SAVINGS BANKS, 20021 ($ millions)

Rank Company Revenues Country 1 Citigroup $100,789 U.S. 2 Deutsche Bank 52,133 Germany 3 Credit Suisse 52,122 Switzerland 4 BNP Paribas 51,127 France 5 Bank of America Corp. 45,732 U.S. 6 Fortis 43,598 Netherlands 7 J.P. Morgan Chase & Co. 43,372 U.S. 8 UBS 42,330 Switzerland 9 HSBC Holdings 39,730 U.K. 10 Crédit Agricole 36,745 France 1Ranked by revenues. Based on an analysis of companies in the Global Fortune 500.

Source: Fortune.

The Financial Services Fact Book 2004 157 04.10fs.FINAL 12/15/03 1:06 PM Page 158

WORLD RANKINGS

SECURITIES/DIVERSIFIED FINANCIAL

TOP FOUR GLOBAL SECURITIES FIRMS, 20021 ($ millions)

Rank Company Revenues Country 1 Morgan Stanley $32,415 U.S. 2 Merrill Lynch 28,253 U.S. 3 Goldman Sachs Group 22,854 U.S. 4 Lehman Brothers Hldgs. 16,781 U.S. 1Ranked by revenues. Based on an analysis of companies in the Global Fortune 500.

Source: Fortune.

TOP SIX GLOBAL DIVERSIFIED FINANCIAL COMPANIES, 20021 ($ millions)

Rank Company Revenues Country 1 General Electric $131,698 U.S. 2 Fannie Mae 52,901 U.S. 3 Freddie Mac 39,663 U.S. 4 American Express 23,807 U.S. 5 Household International 14,672 U.S. 6 Marsh & McLennan 10,440 U.S. 1Ranked by revenues. Based on an analysis of companies in the Global Fortune 500.

Source: Fortune.

158 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 159

Appendices

SUMMARY OF THE GRAMM-LEACH-BLILEY ACT

The Gramm-Leach-Bliley Act (GLB) was signed into law on November 12, 1999, culm- inating almost a decade of efforts to pass such a measure. The legislation essentially ended regulations that prevented companies in the various financial sectors from engaging in each other’s businesses. The law repeals major sections of the Glass-Steagall Act of 1933, the of 1956 and other federal banking laws. The following explains some of the law’s provisions.

Financial Holding Companies GLB expanded permissible activities for bank holding companies, entities that control one or more commercial banks, by creating a new type of financial services company, the financial holding company (FHC). Under the act, securities firms, banks, insurance com- panies and other entities engaged in financial services may affiliate under an FHC umbrel- la and cross-sell an affiliate’s products within a regulatory system overseen by the Federal Reserve Board. An FHC may engage in many financial activities, including any future activity the Federal Reserve, in conjunction with the Secretary of the Treasury, considers to be finan- cial in nature, incidental to finance, or complementary to a financial activity as long as it does not pose a substantial risk to the safety and soundness of the institution. More than 500 bank holding companies elected to become FHCs within the first 12 months that the option was available.

Commercial (Nonfinancial) Business Prior to the passage of GLB, banks and others had been concerned about the possibility of commercial entities such as big retail stores entering the banking business. While a finan- cial firm engaged in nonfinancial activities is not required to divest itself of these activities for at least 10 years if they do not constitute more than 15 percent of its business, the act bars expansion of such activities by mergers and nonfinancial company ownership of co m - me r cial banks. In addition, while existing thrift nonfinancial activities are protected by a grandfather provision, commercial companies are prohibited from buying thrifts. Securities firms may continue existing nonfinancial business activities on a limited basis for a limited time.

Regulation All financial services activities are essentially regulated by the agency that oversaw such transactions before the passage of the law. Thus, whether insurance is sold by a bank or insurance company, the sale is regulated by the states. This is known as “functional regula- tion.” Functional regulation particularly addressed the fears of some insurers that the sys- tem of state regulation of insurance would be summarily disbanded and replaced by a fed-

The Financial Services Fact Book 2004 159 04.11fs.appendFINAL 12/15/03 1:09 PM Page 160

APPENDICES

SUMMARY OF THE GRAMM-LEACH-BLILEY ACT

eral regulatory framework. At the same time, forms of federal regulation have support from many from within the insurance industry and state vs. federal regulation is one of its most controversial subjects.

National Banks National banks are commercial banks with a national as opposed to state charter. Those that meet the GLB’s capitalization and management requirements may establish financial operating subsidiaries. These subsidiaries can sell any financial product and assume the risk as dealer for most financial products. However, national banks may not underwrite insurance (except credit-related insurance) or engage in real estate development, real estate investment, or merchant banking because these are riskier businesses requiring more capi- tal and more safeguards to protect that capital. Merchant banking, an investment bank activity in which the bank raises funds or lends its own capital for a period to finance a transaction, may be allowed starting in 2004. National banks may continue to underwrite municipal revenue bonds, an activity that was not barred under Glass-Steagall. Independent banks, which are not affiliated with multibank holding companies, and which are also known as community banks because they are locally owned and operated, may sell financial products through joint ventures with other bank and thrift institutions.

Insurance GLB’s response to the concern of banks and insurance agents that regulatory agencies cre- ate a level playing field for the sale of insurance products is a framework to resolve dis- putes over regulatory practices and how a new product should be classified — as an insur- ance or a banking product. GLB sets up procedures for resolving these disputes. In addition, federal regulators must establish consumer protection regulations for banks selling insurance. In case of conflict with state laws, only federal standards stricter than state laws pre-empt those laws.

Securities General bank exemption from registration with the Securities and Exchange Commission (SEC) as a broker has been replaced with a list of specific exempt activities such as trust and custodial activities, employment benefit plan management, and others. Banks can con- tinue to create and trade in derivatives, swaps and other similar securities products. The SEC, in consultation with the Federal Reserve Board, is authorized to rule on whether a specific product is a security which can only be sold by a broker/dealer affiliate.

Privacy The issue of privacy, which tended to divide consumer groups wanting tight restrictions on personal information from financial services companies seeking broad access for cross-

160 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 161

APPENDICES

SUMMARY OF THE GRAMM-LEACH-BLILEY ACT

marketing purposes, was partially resolved through compromise. Financial institutions may share customer information with affiliates and joint venture partners, but are barred from disclosing customer account numbers or access codes to unaffiliated third parties for mar- keting purposes, with certain narrow exceptions necessary for the conduct of the customers’ business or compliance with regulations. Other customer information may be shared with third parties, but customers must be informed and have the right to bar such sharing. Any attempt to gain private customer information by fraud or deception is made a federal punishable by up to five years in prison.

SUMMARY OF THE GRAMM-LEACH-BLILEY FINANCIAL SERVICES MODERNIZATION ACT OF 1999

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

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

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

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

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

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

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

Source: TowerGroup.

The Financial Services Fact Book 2004 161 04.11fs.appendFINAL 12/15/03 1:09 PM Page 162

APPENDICES

GLOSSARY

Assets: Something that has commercial Credit: The promise to pay in the future in order to or exchange value owned by an individual or business. buy or borrow in the present. The right to defer pay- In the insurance industry, state laws require a conserv- ment of debt. ative valuation of assets. Insurance companies are not Demand Deposit: Customer assets that are held in a allowed to list some assets whose values are uncertain, checking account. Funds can be readily withdrawn by such as furniture, fixtures, debit balances, and check, “on demand.” accounts receivable that are more than 90 days past due. Depository Institution: Financial institution that obtains its funds mainly through deposits from the Bank Holding Company: A company that owns or con- public. Includes commercial banks, savings and loan tr ols one or more banks. The Federal Reserve has associations, savings banks, and credit unions. responsibility for regulating and supervising bank hold- ing company activities, such as approving acquisitions Derivatives: Contracts that derive their value from an and mergers and inspecting the operations of such com- underlying financial asset, such as publicly-traded panies. This authority applies even though a bank securities and foreign currencies. Often used as a owned by a holding company may be under the primary hedge against changes in value. su p e r vision of the Comptroller of the Currency or the Direct Premiums: Property/casualty premiums collect- FD I C . ed by the insurer from policyholders, before reinsur- Basis Point: Unit of measure used to describe ance premiums are deducted. Insurers may share some interest rates and bond yields. One basis point equals direct premiums and the risk involved with their rein- 0.01 percent. surers.

Bond: A security that obligates the issuer to pay inter- Earned Premiums: The portion of premium that est at specified intervals and to repay the principal applies to the expired part of the policy period. amount of the loan at maturity. Insurance premiums are payable in advance, but the insurance company does not fully earn them until the Capital: In the insurance industry, shareholder’s equity policy period expires. (for publicly-traded insurance companies) and retained earnings (for mutual insurance companies). Each state Equity: In investments, the ownership interest of share- has its own requirements. There is no general measure holders. In a corporation, stocks as opposed to bonds. of capital adequacy for property/casualty insurers. Federal Funds: Reserve balances that depository : The market in which corporate equity institutions lend each other, usually on an overnight and longer-term debt securities (those maturing in basis. In addition, Federal funds include certain other more than one year) are issued and traded. kinds of borrowings by depository institutions from each other and from federal agencies. Collateral: Property that is offered to secure a loan or other credit and that becomes subject to seizure on Futures: Agreement to buy a security for a set price at default. (Also called security.) a certain date. Futures contracts usually involve com- modities, indexes or financial futures. Combined Ratio: Pe r centage of each premium dollar a pro p e r ty/casualty insurer spends on claims and expens- Intermediation: The process of bringing savers, es. When the ratio is over 100, the insurer has an under- investors and borrowers together so that savers and writing loss. investors can obtain a return on their money and bor- rowers can use the money to finance their purchases or projects through loans.

162 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 163

APPENDICES

GLOSSARY

Liability Insurance: Insurance for what the policy- Secondary Market: Market for previously issued and holder is legally obligated to pay because of harm outstanding securities. caused to another entity. Securities Outstanding: Stock held by shareholders. Liquidity: The ability and speed with which a security Surplus: The remainder after an insurer’s liabilities are can be converted into cash. subtracted from its assets. The financial cushion that Money Supply: Total supply of money in the economy, protects policyholders in case of unexpectedly high composed of and deposits in sav- claims. ings and checking accounts. By changing the interes t Swaps: The simultaneous buying, selling or exchange rates the Federal Reserve seeks to adjust the money sup- of one security for another among investors to change ply to maintain a strong economy. maturities in a bond portfolio, for example, or because Net Premiums Written: See Premiums Written. investment goals have changed.

Options: Contracts that allow, but do not oblige, the Time Deposit: Funds that are held in a buying or selling of property or assets at a certain date for a predetermined period of time at a set interest rate. at a set price. Banks can refuse to allow withdrawals from these accounts until the period has expired or assess a penal- Over-the-counter (OTC): Security that is not listed or ty for early withdrawals. traded on an exchange such as the New York Stock Exchange. Business in over-the-counter securities is Transparency: A term used to explain the way infor- conducted through dealers using electronic networks. mation on financial matters, such as financial reports and actions of companies or markets, are communicat- Premiums Written: The total premiums on all policies ed so that they are easily understood and frank. written by an insurer during a specified period of time, regardless of what portions have been earned. Net pre- Treasury Securities: Interest-bearing obligations of the miums written are premiums written after reinsurance U.S. government issued by the Treasury as a means of transactions. borrowing money to meet government expenditures not covered by tax revenues. Marketable Treasury securities Primary Market: In the securities industry, the market fall into three categories — bills, notes and bonds. for new issue securities where the proceeds go directly Marketable Treasury obligations are currently issued in to the issuer. book entry form only; that is, the purchaser receives a Prime Rate: Interest rate that banks charge to their statement, rather than an engraved certificate. most creditworthy customers. Banks set this rate Underwriting Income: The insurer’s profit on the according to their cost of funds and market forces. insurance sale after all expenses and losses have been Private Placement: Securities that are not registered paid. When premiums aren’t sufficient to cover claims with the Securities and Exchange Commission and are and expenses, the result is an underwriting loss. Under- sold directly to investors. writing losses are typically offset by investment income.

Re p u r chase Agreement (Repo): Ag r eement between a Volatility: A measure of the degree of fluctuation in a buyer and seller where the seller agrees to rep u rc h a s e stock’s price. Volatility is exemplified by large, frequent the securities at an agreed upon time and price. price swings up and down. Re p u r chase agreements involving U.S. government Volume: Number of shares a stock trades either per day securities are utilized by the Federal Reserve to control or per week. the money supply.

The Financial Services Fact Book 2004 163 04.11fs.appendFINAL 12/15/03 1:09 PM Page 164

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 , 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 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, , 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, marks origins of The New York Stock Exchange. Bank of America is first listed stock. 1809 Rhode Island was the scene of first . 1849 New York passed first general 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 , limiting bank insurance sales except in small towns, passed. 1920 Financial options introduced. 1924 First mutual funds established in . 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 sav- ings and loans institutions. 1933 Glass-Steagall Act, separating banking and securities industries, passed by Congress. Federal Deposit Corporation, guaranteeing accounts up to $2,500, opened. Securities Act of 1933, to regulate registration and offering of new securities, including mutual funds, to the public, passed.

164 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 165

APPENDICES

BRIEF HISTORY

YEAR EVENT

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. 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 in Alaska. 1972 Money market mutual funds introduced. 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. private industry 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.

The Financial Services Fact Book 2004 165 04.11fs.appendFINAL 12/15/03 1:09 PM Page 166

APPENDICES

BRIEF HISTORY

YEAR EVENT

1980 Depository Institutions Deregulation and Monetary Control Act provided universal requirements for all financial institu- tions, 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 sub- sidiaries to combine the sale of securities with investment advisory services. 19 8 2 Ga rn - S t . G e r main 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 com- mercial bank holding companies to engage in a variety of securities activities on a limited basis. 1989 Financial Institutions Reform, Recovery and Enforcement Act, providing government funds to insolvent savings and loan institutions (S&Ls) from the Resolution Trust Corporation and incorporating sweeping changes in the examina- tion and supervision of S&Ls, established. Savings Association Insurance Fund, deposit insurance fund operated by the FDIC, established. 1990 J.P. Morgan permitted to underwrite securities. 1992 ’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. 1996 Barnett Bank U.S. Supreme Court decision allowed banks to sell insurance nationwide. 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 discrimi- nate against foreign-owned firms. 1998 Citibank and Travelers merged to form Citigroup, a firm engaged in all major financial services sectors. 1999 Financial Services Modernization Act (Gramm-Leach-Bliley Act) allowed banks, insurance companies and securities firms to affiliate and sell each other’s products. Restructured the Federal Home Loan Bank System. 2001 U.S. House of Representatives Banking Committee renamed itself the Financial Services Committee. 2002 Citigroup spun off its Travelers’ property/casualty insurance unit. 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 sharehold- ers. Strengthens the oversight of corporations and their accounting firms.

166 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 167

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.

Alliance of American Insurers • 3025 Highland Pkwy, Suite 800, Downers Grove, IL 60515. Tel. 630-724- 2100. Fax. 630-724-2190. http://www.allianceai.org — Trade association of property/casualty insurers pro- viding educational, legislative, promotional and safety services to its members.

A.M. Best Company, Inc. • Ambest Rd., Oldwick, NJ 08858. Tel. 908-439-2200. Fax. 908-439-2237. http://www.ambest.com — Rating organization and publisher of books and periodicals relating to the insur- ance industry.

American Association of Health Plans • 1129 20th St., NW, Suite 600, Washington, DC 20036-3421. Tel. 202-778-3200. Fax. 202-331-7487. http://www.aahp.org/ — Supports the health maintenance organization industry. (M e r ging with the Health Insurance Association of America in 2004.)

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, includ- ing 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 furthering the pol- icy and business objectives of banks in insurance.

American Council of Life Insurers • 101 Constitution Ave, NW Ave., Washington, DC 20001-2133. Tel. 202- 624-2000. Fax. 202-624-2317. 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. 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., NW, Suite 1000, 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.

Annuitynet/VARDS • 2350 Corporate Park Dr., Sixth Fl., Herndon, VA 20171. Tel. 703-234-0150. http://www.annuitynet.com/aboutus/index.asp — Software technology and research data firm that helps annuity manufacturers, distributors, and financial advisors implement new technology and business prac- tices in the sale and servicing of annuities.

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. Tel. 800-224-9889. Fax. 800-375-5543. http://www.b a i . o r g — A professional organization devoted exclusively to improving the perfo r - mance of financial services companies through strategic res e a r ch and information, education and training.

The Financial Services Fact Book 2004 167 04.11fs.appendFINAL 12/15/03 1:09 PM Page 168

APPENDICES

FINANCIAL SERVICES ORGANIZATIONS

Bank for International Settlements • Centralbahnplatz 2 and Aeschenplatz 1, 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 sta- bility.

Bank Insurance Market Research Group • 154 E. Boston Post Rd., Mamaroneck, NY 10543. Tel. 800-373- 7723. Fax: 914-381-6947. 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 aug- mented by analysis of government data.

Bank Insurance & Securities Association • 303 West Lancaster Avenue, Suite 2C, 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 exec- utives from the securities, insurance, investment advisory, trust, private banking, retail, capital markets, and commercial divisions of depository institutions. Formed by the merger of the Bank Securities Association and the Financial Institutions Insurance Association.

Bond Market Association • 360 Madison Ave., New York, NY 10017. 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.

Celent Communications • 183 State St, 5th Fl., Boston, MA 02109. Tel. 617-573-9450. Fax. 617-573-9455. http://www.celent.com/contact.htm — Research and dedicated to technology in the finan- cial service industry.

College Savings Plan Network • PO Box 11910, Lexington, KY 40578-1910. Tel. 877-277-6496. Fax. 859- 244-8053. http://www.collegesavings.org/about.htm — The College Savings Plans Network is as an affiliate to the National Association of State Treasurers. The Network serves as a clearinghouse for information among 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.

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. 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.

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.

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.

168 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 169

APPENDICES

FINANCIAL SERVICES ORGANIZATIONS

Federal Deposit Insurance Corporation (FDIC) • Division of Finance, 550 17th St., NW, Washington, DC 20429-9990. Tel. 202-736-0000. http://www.fdic.gov — FDIC’s mission is to maintain the stability of and public confidence in the nation’s . 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. 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/default.htm — 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.

Financial Services Coordinating Council • 101 Constitution Ave., NW, Suite 800, Washington DC 20001. Tel. 202-624-2192. Fax. 202-624-2414. 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, representing the diversified finan- cial services industry. Financial Services Forum • 745 Fifth Ave., Suite 1602, New York, NY 10151. Tel. 212-308-3420. Fax. 212- 308-7383. http://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 , NW, Suite 500 South, Washington, DC 20004. Tel. 202-289-4322. Fax. 202-289-1903. 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 Ratings • 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.

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 organiza- tions that have an interest in the futures market.

Health Insurance Association of America • 555 13th St., NW, Suite 600 East, Washington, DC 20004-1109. Tel. 202-824-1600. Fax. 202-824-1722. http://www.h i a a . o r g/ — Central source of health insurance informa - tion, responsible for , government relations, legislation and res e a r ch on behalf of the private co m m e r cial health insurance industry. (Merging with the American Association of Health Plans in 2004.)

The Financial Services Fact Book 2004 169 04.11fs.appendFINAL 12/15/03 1:09 PM Page 170

APPENDICES

FINANCIAL SERVICES ORGANIZATIONS

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.

Insurance Services Office, Inc. (ISO) • 545 Washington Blvd., Jersey City, NJ 07310-1686. Tel. 800-888- 4476. Fax. 201-469-1472. http://www.iso.com — Provides statistical information, actuarial analyses and con- sulting, policy language, and related information and technical services to participants in the property/casu- alty insurance market. Through its Property Claim Service unit, ISO also provides claims information.

International Finance and Commodities Institute • 2, Cours de Rive, 1204 Geneva, Switzerland. Tel. 41-22- 312-5678. Fax. 41-22-312-5677. http://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 10020-2302. Tel. 212-901-6000. Fax. 212-901-6001. http://www.isda.org — The association’s primary purpose is to encour- age 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. Founded in 1940, its membership includes 8,414 mutual funds, 489 closed-end funds, and eight sponsors of unit investment trusts.

Kenneth Kehrer Associates • PO Box 7346, Princeton, NJ 08542-3852. Tel. 609-924-8766. http://www.kenkehrer.com/ — Leading consultant to banks on improving their insurance and securities pro- grams. Conducts studies of sales penetration, profitability, compensation, and compliance.

LIMRA • 300 Day Hill Rd., Windsor, CT 06095-4761. Tel. 860-688-3358. Fax. 860-298-9555. http://www.limra.com/ — Principal source of life insurance industry sales and marketing statistics. LOMA (Life 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.

Moody’s Investors Service • 99 Church St., New York, NY 10007. Tel. 212-553-1658. Fax. 212-553-4062. http://www.moodys.com — Global credit analysis and financial information firm.

Mortgage Bankers Association of America • 1919 Pennsylvania Ave., NW, Washington, DC 20006-3438. Tel. 202-557-2700. Fax. 202-557-2700. 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://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.

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.

Michael White Associates • 823 King of Prussia Rd., Radnor, PA 19087. Tel. 610-254-0440. Fax. 610-254- 5044. http://www.indexannuity.org/ — Consulting firm that helps clients plan, develop and implement bank

170 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 171

APPENDICES

FINANCIAL SERVICES ORGANIZATIONS

insurance sales programs. Conducts research on bank insurance trends.

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.

National Association for Variable Annuities • 11710 Plaza America Dr., Suite 100, Reston, VA 20190. Tel. 703-707-8830. 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 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 ser- vice disability income, and hospitalization and major medical health insurance.

National Association of Independent Insurers • 2600 River Rd., Des Plaines, IL 60018. Tel. 847-297-7800. Fax. 847-297-5064. http://www.naii.org — Trade association of fire, property/casualty and surety insurers. National Association of Insurance and Financial Advisors • 2901 Telestar Ct., PO Box 12012, Falls Church, VA 22042-1205. Tel. 703-770-8100. Fax. 703-770-8224. http://www.naifa.org/ — Professional associ- ation representing health and life insurance agents.

National Association of Mutual Insurance Companies • 3601 Vincennes Rd., PO Box 68700, , IN 46268. Tel. 317-875-5250. Fax. 317-879-8408. http://www.namic.org — Trade association of property/casualty mutual insurance companies.

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 Association of Securities Dealers • 1735 K St., NW, Washington, DC 20006. Tel. 202-728-8000. Fax. 301-590-6506. http://www.nasd.com/ — Largest securities industry self-regulatory organization in the United States. Facilitates capital formation by creating the markets of choice — operated and regulated to achieve the most liquid, cost-efficient, technologically advanced, and fair securities markets in the world — for the benefit and protection of investors.

National Credit Union Administration • 1775 Duke St., Alexandria, VA 22314-3428. Tel. 703-518-6300. Fax. 703-518-6671. http://www.ncua.gov — An independent agency in the executive branch of the federal govern- ment responsible for , insuring, supervising and examining federal credit unions.

National Council on Compensation Insurance 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. Tel. 312-781-1300. Fax. 312-781-1467. http://www.nfa.futures.org — Industry-wide self-regulatory organization for the com- modity futures industry.

National Home Equity Mortgage Association • 3833 Schaefer Ave., Suite K, Chino, CA 91710. Tel. 800- 342-1121. Fax. 909-590-8128. http://www.nhema.org/ — Association committed to keeping consumers informed and able to take advantage of the benefits afforded by home equity mortgages.

The Financial Services Fact Book 2004 171 04.11fs.appendFINAL 12/15/03 1:09 PM Page 172

APPENDICES

FINANCIAL SERVICES ORGANIZATIONS

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 insti- tutions, 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. Fax. 312-977-0611. http://www.optionscentral.com — Nonprofit asso- ciation created to educate the investing public and brokers about the benefits and risks of exchange-traded options.

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.

Securities Industry Association • 1425 K St., NW, 7th Fl., Washington, DC 20005-3500. Tel. 202-216-2000. Fax. 202-216-7119. 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 firms that collects, standardizes and disseminates all relevant cor- porate, financial, market and M&A data plus news and analytics for the industries it covers: banking, spe- cialized financial services, insurance, real estate and energy.

Society of Financial Services Professionals • 270 S. Bryn Mawr Ave., Bryn Mawr, PA 19010-2195. Tel. 610- 526-2500. http://www.financialpro.org/ — Advances the professionalism of credentialed 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. Fax. 212-438- 7290. http://www.standardandpoors.com — Monitors the credit quality of bonds and other financial instru- ments 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 organi- zation for surety companies. Thomson Financial • Metro Center, One Station Place, Stamford, CT 06902. Tel. 203-969-8700. Fax. 203- 977-8354. http://www.thomson.com/financial/financial.jsp — Complete source for integrated information and technology applications in the global financial services industry.

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.

Weather Risk Management Association (WRMA) • 1156 15th St., NW, Suite 900, Washington, DC 20005. Tel. 202-289-3800. Fax. 202-393-9741. http://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 finan- cial weather products.

172 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 173

Company Index

A Auto-Owners Ins., 52 152 A.G. Edwards, 11, 110 Aviva, 155, 156 Clark/Bardes Inc., 43 ABB Ltd.'s Structured Finance AXA, 73, 74, 155, 156 CNA, 58, 60, 97 operations, 4, 125 Commercial FB, FSB, 82 ABN AMRO, 85, 91, 144 B Commercial Federal Corp., 97 ACA, 59 Bank of America Corp., 11, 13, 27, Commonwealth Bancorp Inc., 76 ACE, 58, 60 82, 85, 90, 91, 144, 153, 155, 157 Conseco Inc., 69, 97 Advest Bank & Trust Co., 98 Bank of New York, 82 Converium Reinsurance North Aegon, 72, 73, 74, 156 Bank One Corp., 1, 11, 13, 27, 85, America Inc., 62 Aetna, 74 90, 91, 153 Countrywide Financial Corp., 10, Affiliated Computer Services Inc., Banknorth Group, Inc., 76 144 125 BB&T Corp., 76 Credit Suisse, 155, 157 AFLAC, 12, 69 Bear Stearns, 11, 110 Crédit Agricole, 155, 157 AFSA Data Corp., 125 Berkley Ins. Co., 62 CUNA Mutual, 73 Allfirst Financial Inc., 76 Berkshire Hathaway, 13, 52, 155, Alliance Capital, 26, 111 156, 157 D Allianz, 72, 155, 156, 157 BlackRock, Inc., 111 Dai-ichi Mutual Life Ins., 155, 156 Allmerica Financial, 52 BMW Bank of North America, 102 Datek Online Holdings Corp., 104 Allstate, 12, 13, 52, 73, 74, 97, 156 BNP Paribas, 155, 157 Deutsche Bank AG, 4, 104, 155, 157 Ambac, 59 Boeing, 101, 134 Deutsche Financial Services, 4, 125 Amer Equity, 72 BT Financial Group, 104 Discover Bank, 133 American Airlines [credit union], Dreyfus Corp., 124 101 C American Enterprise, 74 Capital One Financial Corp., 10, American Express, 10, 13, 26, 102, 133 E 133, 153, 158 Capital Research & Management, E*Trade Group, 97, 11, 104, 110, American Family Ins. Group, 52 124 153 American Financial, 52, 76, 97 Cardtronics, 153 Employers Re Group, 62, 157 American Funds, 26 Caterpillar Financial Services Corp., Equitable Life Assurance Society of American General, 74 134 the U.S., 72 American International Group, Cendant Corp., 4, 125, 144 Erie Insurance Group, 52 (AIG), 13, 52, 72, 73, 74, 97, Centennial Bancorp, 76 EULER American Credit Ind. Co., 155, 156 CGU Life, 73 60 American Reinsurance Co., 62 Charles Schwab Corp., 11, 85, 110 Everest Reinsurance Co., 62 AmeriChoice Corp., 43 Chase Manhattan, 91, 144 Ameriquest Mortgage Corp., 144 Chubb Group of Ins. Companies, F Ameritrade Holding Corp., 104 52, 58 Fahnestock Viner Holdings Inc., AmerUs Group, 72, 97 CIGNA Corp., 43 104 Anthem Inc., 43 CIT Group Inc., 10, 134 Fannie Mae, 10, 13, 155, 158 Aon, 10 Citibank, 27, 82, 91 Federated Investors, Inc., 111, 124 Assicurazioni Generali S.p.A., 43, CitiFinancial, 144 FGIC, 59 155, 156 Citigroup, 1,11 ,13, 26 ,76, 85, 90, Fidelity Investments, 26, 124 Astoria Financial, 11, 82, 96, 97 91, 111, 133, 155, 157 Fidelity National Financial, 43, 52 Australian Guarantee Corp. Ltd., 4, CitiMortgage Inc., 144 Fifth Third Bancorp, 76 125 Citizens & Southern National Bank,

The Financial Services Fact Book 2004 173 04.11fs.appendFINAL 12/15/03 1:09 PM Page 174

First American Financial Corp., 52, H Lincoln National Life Insurance 97 Hannover Re Group, 63, 157 Co., 69, 72, 74 First American Trust FSB, 97 Hanvit Leasing and Finance Co., Lloyd's, 33, 63, 157 First Union National Bank, 91 125 Loews (CNA), 12, 52 First USA, Inc., 133 Hartford Financial Services, 12, 52, Lone Star Funds, 125 Firstar Bank, NA, 91 97, 58, 72, 73, 74 Long Miller & Associates, 43 Fleet National Bank, 91, 82 Hilb Rogal and Hamilton Co., 43 FleetBoston Financial Corp., 11, 85, Hobbs Group LLC, 43 M 90, 91, 134, 153 Household Finance Corp., 60 M&T Bank Corp., 76 Ford Motor Credit Co., 133, 134 Household Financial Services, 144 , 26 Fortis, 155, 157 Household Intl., Inc., 4, 10, 125, Marsh & McLennan, 10, 158 Franklin Financial Corp., 76 158 Marshall & Ilsley Corp., 76 Franklin Resources, Inc., 11, 85, HSBC, 4, 91,125, 155, 157 Massachusetts Mutual Life Ins. Co., 110, 111 Hudson City Bancorp, Inc. (MHC), 12, 13, 69, 97 Franklin Templeton Investments, 97 The MassMutual Trust Co., 97 124 MBIA, 59 Freddie Mac, 10, 13, 155, 158 I MBNA Corp., 11, 90, 133 Fremont Investment & Loan, 102 IBM Credit LLC, 134 Medford Bancorp Inc., 76 FSA, 59 Imperial Capital Bank, 102 Mellon Bank, 82, 85 ING Group, 72, 74, 155, 156 Merrill Lynch, 10,13, 26, 110, 111, G Instinet Group Inc., 104 124, 158 Gartmore Global Invts. Inc., 104 International Lease Finance Corp., MetLife, 12, 13, 43, 69, 72, 85, 97, Gen Am, 72 134 56 General Electric/GE, 4, 10, 13, 61, Island ECN Inc., 104 Midland National, 72 74, 102, 104, 125, 133, 134, Mill Creek Bank, 102 155, 158 J Millea Holdings, 156 General Motors Acceptance Corp., J.P. Morgan Chase, 11, 13, 27, 82, Mississippi Valley Bancshares, Inc., 134, 144 85, 90, 91, 155, 157 76 General Reinsurance Corp., 62 Jackson National Life, 72, 74 MLI, 72 Gerling Global Re Group, 157 Jefferson-Pilot, 69, 72 Monogram Credit Services LLC, Global Securities Services, 4 John Deere Capital Corp., 134 4, 125 Golden State Bancorp Inc., 76 John Hancock Financial Services, MONY Group Inc., 97 Golden West Financial Corp., 11, 12, 69, 74 Morgan Stanley Dean Witter, 10, 96, 97 13, 102, 110, 111, 124, 158 The Golden 1 [credit union], 101 K Mortgage Guaranty Ins. Corp., 61 Goldman Sachs Group, Inc., 10, 13, Kemper Insurance Companies, 58 Munich Re Group, 155, 156, 157 110, 111, 158 Keyport Life (Sun), 72 Mutual of Omaha Ins., 69 Great Amer E&S Ins. Co., 60 Kinecta [credit union], 101 Great American Savings Bank, 97 N Great West, 73 L National City, 11, 27, 90, 144 GreenPoint Financial Corp., 11, 96, Lafayette Life, 72 National Indemnity Co., 62 97 Legg Mason, Inc., 11, 110, 111 Nationwide, 12, 52, 72, 73, 74, 98, Greenpoint Bank, 82 Lehman Brothers Holdings, 11, 13, 104 Guaranty Bank, 82, 97 110, 158 Navy [credit union], 101 Guardian, 69, 97 Liberty Life, 73 NEF, 72 Liberty Mutual Insurance Group, New Century Financial Corp., 144 12, 52, 58 New London Trust FSB, 98 New York Life, 12, 13, 69, 97, 98

174 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 175

Nippon Life Ins., 155, 156 SLM Corp., 133 Association (USAA), Nissay Dowa, 63 Sovereign Bancorp, Inc., 11, 96, 97 12, 52, 63, 98, 102 North American Life, 72 Sovereign Bank, 82 UnitedHealth Group Inc., 43 Northern Trust Corp., 104 The St. Paul Companies, 52, 58 Unitrin, 69 Northwestern Mutual, 12, 69, 98 State Employees' [credit union], UnumProvident, 12, 69 101 US Oppenheimer, 104 O State Farm, 13, 52, 58, 98, 101, 155, Odyssey America Reinsurance Co., 156 V 62 State Street Corp., 4, 104 VALIC, 72 Orange County Teachers [credit Sumitomo Life Ins., 156 Vanguard Group, 124 union], 101 Sun Life Financial Services, 43, 74 VIB Corp., 76 SunAmerica, 72, 74 Vivendi S.A., 64 P Suncoast Schools [credit union], Pacific Life, 69, 72, 74 101 W Pentagon [credit union], 101 Suntrust Bank, 82, 91 Wachovia Corp., 11, 13, 27, 82, 85, Phoenix Companies, 69 Swiss Re, 48, 62, 63, 64, 156, 157 90, 91, 153 Phoenix Home Life Mutual Washington Mutual, 11, 13, 82, 96, Ins. Co., 98 T 97, 144 Pittsburgh National Corp., 27 T. Rowe Price Group, Inc., 26, 111 Webster Bank, 82 PMI Mortgage Ins. Co., 61 Taunus Corp., 85, 91 Webster Financial Corp., 97 PNC 82, 85, 153 Teachers Insurance & Annuity Wells Fargo & Co., 4, 11, 13, 27, 85, Principal Bank, 98 Association, 98 90, 91, 125, 144 Principal Financial, 12, 69 Telmark LLC, 4, 125 Welsh Carson Anderson & Stowe, Principal Life Ins. Co., 98 Thrivent Financial for Lutherans, 43 Progressive, 12, 52 69 Westcorp, 11, 96 Providian Bank, 102 TIAA-CREF, 12, 13, 26, 69, 72, 98 Western-Southern, 74 Prudential, 12, 13, 43, 69, 56 Time Retail Finance Ltd., 125 Westpac Banking Corp. Ltd., 104 Putnam, 26, 124 Torchmark, 69 White Mountains Group, 60 Tradescape, 104 World Savings Bank, FSB, 82 R Transamerica, 62, 72, 74 Rabobank Group, 76 Travelers Property Casualty Corp., X Radian, 59, 60, 61 1, 58, 74 XL Re Group, 157 Regional Financial Corp., 76 Trendwest Resorts Inc., 4, 125 XL Capital, 59 Republic Mortgage Ins. Co., 61 Triad Guaranty Ins. Corp., 61 RoPro U.S. Holding Inc., 4, 104 Trigon Healthcare Inc., 43 Z Royal & Sun Alliance USA, 60, 156 Zurich Financial Services, 155, 156 Royal Bank of Canada, 43 U Zurich Group, 58 Royal Bank of Scotland Group, Plc, U.S. Bancorp, 4, 11, 85, 90, 91, 104, Zurich Ins. Group, 60 76 153 Zurich Life, 1 U.S. Bank, 27 S U.S. Trust, 124 Safeco Ins. Companies, 52, 58 UBS, 155, 157 Sallie Mae, 27 Umpqua Holdings Corp., 76 Sammons Enterprises Inc., 43 United Airlines Employees [credit SchwabFunds, 124 union], 101 SCOR Re Group, 157 United Guaranty Corp., 61 Skandia Ins. Co., 43 United Services Automobile

The Financial Services Fact Book 2004 175 04.11fs.appendFINAL 12/15/03 1:09 PM Page 176

Subject Index

401(k) plans, asset allocation, 35 volume, 152 Automated Clearing House (ACH) payments, 149 A automated teller machines. See ATMs American Stock Exchange (AMEX), 119 annuities B asset growth, 38 bank and thrift deals, top ten, 76 considerations, 36 bank branches, by type of bank, 80 distribution channels, 36-37 bank holding companies, top ten, 85, 91 fixed, 71 Bank Holding Company Act of 1956, 1, 159 sales of, 36-37 bank insurance, distribution channels, 84 producers of, top ten, 72 banking industry. See also banks; commercial banks sales, by financial holding companies, 85 assets, 2, 78, 86-87 variable, 71 concentration, 90 sales of, 36-37 employment, 80 writers of, top ten, 72 IT spending, 145 acquisitions. See mergers and acquisitions wireless technology users, 154 asset-backed securities (ABS), 115 bankruptcies, by type, 30 insurance on, 59 banks sources, 116 annuity sales, top ten, 82 assets, v in insurance, 73 banking, 2 mutual fund income, top ten, 82 banking institutions, 78, 86-87 Barnett Bank U.S. Supreme Court decision, 1 broker/dealers, 108 brokerages, wireless technology users, 154 by industry, 2 brokers and dealers, 106 credit market, 78-79 assets and liabilities, 108 credit unions, 77, 78, 100, 101 business debt, 28 distribution life/health insurance, 68 C property/casualty insurance, 51 catastrophe bonds, 63-64 family, 23, 24 Chicago Board of Trade, 119 FDIC insured commercial banks, 86-87 Chicago Mercantile Exchange, 119 finance companies, 127 college savings plans, 25-26 foreign banking offices, in U.S., 81 providers, top ten, 26 government-related, 2 commercial banks insurance, 2 assets, 86-87 life insurance companies, 66 branches and offices, 80 pensions, 2 by asset size, 90 private pension funds, 31 consolidation, 80 retirement funds, 33 credit market share, 78-79 government employees, 32 employment, 80 securities, 2 FDIC insured, 86 ATMs, 151 deposits, income and expenses, 88 deployment, off premise, 151 securities, 89 Federal Reserve Bank Study, 152 information technology spending, 145 owners, top ten, 153 liabilities, 86-87 transaction fees, bank revenues from, 151 net income, 77 transactions, 153 profitability, 77

176 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 177

return on average assets, 77 defined contribution plans, 32 top ten asset allocation, 33 by asset, 91 depository insurance, 75 global, 157 deposits, 88 by revenues, 90 derivatives, 117 community development lending, 79 global market, 118 consolidation, 1. See also mergers and acquisitions distribution channels, annuities, 36-37 , 28 bank insurance, 84 convergence, 10, 81 life/health insurance, 70 corporate bonds, U.S. holdings, 17 property/casualty insurance, 53 corporate equities diversified financial firms, top six, global, 158 and debt, 112 institutional investor market, 17 E ownership, 16 educational savings plans and loans, 25-26 U.S. holdings, 16, 18 top ten, 26 corporate underwriting, 112 electronic commerce, 147 credit insurance, 60 securities firms, 148 credit insurance companies, top ten, 60 electronic payments, 149-150 credit life insurance, 73 employment, banking industry, 80 credit life and accident and health, direct premiums finance company, 126 written, 73 financial services industry, 5 credit market, 78-79 insurance industry, 45 credit unions, 98-101 securities industry, 109 assets and liabilities, 100 equity index annuities, 36 branches and offices, 80 producers, top ten, 72 distribution by asset size, 101 exchange activities, 120 employment, 80 exchange listed companies, 119 members, 99 net income, 77 F profitability, 77 Federal Credit Union Act, 98 return on average assets, 77 Federal Depository Insurance Corporation (FDIC), 75 state chartered vs. federally chartered, 99 federal educational loans, 26-27 top ten, 101 Federal Family Education Loan Program (FFELP), 26-27 D originators, top ten, 27 debt federal government debt, ownership of, 19 business, 28 Federal Home Loan (FHL) Bank System, 92 consumer, 28 Federal Reserve system, 75 corporate equities, 112 FFELP. See Federal Family Education Loan federal government, 19 Program, 27 growth, 28 finance companies, 125-134 household, 28 assets and liabilities, 127 ownership, 15 concentration, 132 public, 20 debt securities, 16 defined benefit plans, 32 asset allocation, 33

The Financial Services Fact Book 2004 177 04.11fs.appendFINAL 12/15/03 1:09 PM Page 178

employment, 126 rates by region, 141 funding sources, 128 homes, single family, median sales price, 140 number of, 126 households profitability, 128 assets, 21-22 receivables, 129-132 debt, 28 top companies, 133-134 lending institutions, 30 financial guaranty insurance, 58-59 purpose of, 29 income statement, 59 type of, 29 financial guaranty insurers, top seven, 59 liabilities, 21-22 financial holding companies, top ten, 85 housing. See homeownership financial intermediation, 15 financial services companies. See also other I individual sectors Individual Retirement Account (IRA), 32 asset share, top ten, v market shares, 34 commercial banks, 11 industrial banks, 102 diversified financials, 10 information technology (IT), 145-146 financial products available, 10-12 spending on wireless technology, 154 life/health insurance, 12 insurance, 41 property/casualty insurance, 12 assets, 2 savings institutions, 11 bank sales of, 82 securities, 10-11 employment, 45 U.S., largest, 13 number of companies, 46 world’s largest, 155 regulation, 41 fixed annuities, 71 insurance agencies, bank purchases of, 76 writers of, top ten, 74 insurance companies, applications for thrift foreign banking offices, in U.S., assets, 81 charters, 97-98 foreign bonds, U.S. holdings, 17 information technology spending, 145-146 futures contracts, 117 insurance industry, property/casualty insurance, income analysis, 50 G world market, 48 generally accepted accounting principles (GAAP), 42 insurance premiums, banks, by type of coverage, 83 Glass-Steagall Act of 1933, 1, 159 insurers, sales through banks, leading, 73 government securities, ownership of, 19 International Swaps and Derivatives Association government-related, assets, 2 (ISDA), 117 Gramm-Leach-Bliley Financial Services Modernization Internet, 53 Act, 1, 159-161 Internet banking, 148 gross domestic product (GDP), v, 6-8 Internet lending, 148 financial services industry, 7-8 investment banks, 111, 114 gross national savings, 15 Investment Management Act of 1940, 121 gross state product, financial services share, 9 investments, 15

H L history, financial services, 164-166 liabilities home equity loans, 143 broker/dealers, 108 home purchase loans, 143 credit unions, 100 homeowners, characteristics of, 142 FDIC commercial banks, 86-87 homeownership, 139 finance companies, 127 barriers to, 140 life insurance companies, 66 rates by income, 142 life insurance, bank sales of, 81 rates by race and ethnicity, 141 sales, leading writers, 73

178 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 179

sales through banks, 73 by type of funds, 122 worksite sales, 70 number of, by type, 123 life insurance companies, assets and liabilities, 66 ownership of, U.S. household, 22 life/health insurance, 66 retail, bank sales of, 83 asset distribution, 68 retirement assets, 39 companies sales, 85 global, top ten, 156 shareholder accounts, 40 U.S., top twenty, 69 distribution channels, 70 N net income, 67 NASDAQ, 103, 119-120 net premiums written, 71 National Association of Securities Dealers (NASD), 103, operating data, 67 119 National Bank Act, 1 M national banks, 160 market share, commercial lines, 53 National Credit Union Administration, 98 personal lines, 53 National Credit Union Share Insurance Fund, 98 property/casualty insurance, 54 National Full Line (NFL), 106 McCarran-Ferguson Act, 41 National Recovery Act of 1933, 103 mergers and acquisitions, 3-4 New York City-based broker/dealers, 106 banking-related, 76 New York Stock Exchange (NYSE), 119, 120 by sector, 3-4 nonlife insurance, assets and liabilities, 49 number of, 3 nonlife insurance. See also property/casualty insurance value of, 3-4 cross-industry, top ten, 4 O insurance-related, top ten, 43 Office of Thrift Supervision, 75 securities firms, top ten, 104 online activities, 147. See also electronic commerce; specialty lender, top ten, 125 information technology, Internet value of, 4 options contracts, 118 mortgage finance companies, top ten, 144 mortgage guaranty insurance. See private mortgage P insurance (PMI) pension funds, types of, 32 mortgage lending, thrift industry, 96 pensions, assets, 2 mortgage market, 135 premiums mortgages, by holder, 136 banks, by type of coverage, 83 delinquency and foreclosure rates, 139 by type of insurer, 44 originations, 137 credit life and accident and health, 73 refinancing, 138 direct written, world, 48 total outstanding, 135 growth in, 44 municipal bonds, 16, 59 property/casualty, 54-56 insurers, 58 privacy, 160 number and value of, 113 private mortgage insurance (PMI), 61 municipal loans, U.S. holdings, 18 private mortgage insurance companies, top seven, 61 municipal securities, U.S. holdings, 18 private placements, 114 mutual funds, 121 profitability, commercial banks, 77 assets, 2 credit unions, 77 bank sales of, 82 finance companies, 128 by holder, 19 insurance, 43 companies, top ten, 124 savings banks, 77 net assets, 40 securities industry, 105 by number of funds, 121 property/casualty insurance, 49

The Financial Services Fact Book 2004 179 04.11fs.appendFINAL 12/15/03 1:09 PM Page 180

asset distribution, 51 property/casualty insurance companies, capital and surplus, 50 global, 156 combined ratio, 50 property/casualty reinsurers, 62 companies, top 20, U.S., 52 reinsurance companies, global, 157 concentration, 54 savings banks, global, 157 direct premiums written, by line, 54-56 securities and investment firms, by asset, 111 distribution channels, 53 securities firms, 110 income analysis, 50 global, 158 property/casualty insurance companies, top ten, global, specialty lender mergers and acquisitions, 125 156 subprime residential lenders, 144 property/casualty reinsurers, top ten, 62 surety companies, 58 thrift companies R by asset, 97 rankings by revenues, 96 ATM owners, 153 thrifts, annuity sales, 82 bank and thrift deals, 76 thrifts, mutual fund income, 82 bank holding companies, 85, 91 U. S. financial services firms, 13 banks, annuity sales, 82 U.S. property casualty companies, 52 banks, mutual fund income, 82 variable annuities, sales through banks, 74 college savings plans, 26 variable annuities, writers of, 72 commercial banks rate of return by asset, 91 life/health insurance, 43 by revenues, 90 property/casualty insurance, 43 global, 157 real estate, gross domestic product, 6 credit insurance companies, 60 receivables at finance companies, 131 credit unions, 101 regional brokers, 106 cross-industry acquisitions, 4 regulation, 159 diversified financial firms, global, 158 banking, 75 educational savings plans and loans, 26 securities industry, 103 equity index annuities, producers of, 72 reinsurance, 62 FFELP loans, originators, 27 companies, top ten, global, 157 finance companies, 133 residential lending activity, 144 financial guaranty insurers, 59 retirement funds, 31-33 financial services companies, 155 return on average assets by sector, number of companies, 14 commercial banks, 77 by sector, revenues, 14 savings banks, 77 fixed annuities, sales through banks, 74 return on equity. See profitability industrial banks, 102 insurance-related mergers, 43 S leading insurers, sales through banks, 73 savings, 15 life insurance sales, 73 savings banks, branches and offices, 80 life/health insurance companies employment, 80 by revenues, 69 net income, 77 global, 156 profitability, 77 mergers and acquisitions, securities industry, 104 return on average assets, 77 mortgage finance companies, 144 savings institutions mutual fund companies, 124 FDIC insured, 92 private mortgage insurance companies, 61 top ten, global, 157 Section 529 college savings plans, 25 providers, top ten, 26

180 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 181

securities, 160-161 T assets, 2 thrift industry, 93-98 FDIC insured commercial banks, 89 balance sheet, 94 U.S., foreign holdings, 115 income statement, 93 Securities Act of 1933, 103 investment securities, 95 Securities and Exchange Commission (SEC), 103, 160 mortgage lending activity, 96 securities firms, information technology spending, 146 top companies by asset, top ten, 111 by asset, 97 global, top four, 158 by revenues, 96 U.S., top ten, 110 thrift institutions, 92 securities industry thrifts, annuity sales, top ten, 82 assets, 2 Treasury bills, 75 concentration, by capital, 110 concentration, by revenues, 109 U employment, 109 U.S. House of Representatives Banking Committee, 1 income statement, 107 U.S. House of Representatives Financial Services, 1 mergers and acquisitions, top ten, 104 U.S. public debt securities, ownership of, 20 pretax return on equity, 106 U.S. Treasury securities, average daily trading, 19 profitability, 105 top companies V global, 158 Valic U.S. Supreme Court decision, 1 U.S., 110, 111 variable annuities, 71 short-term trade receivables, 60 writers of, top ten, 72, 74 Stafford Loan Program, 26 state by state tables W domestic insurance companies, 46-47 weather risk products, 65 gross state product, 9 weather-related hedges, 64-65 state insurance departments, 41 wirehouses, 106 state-chartered loan companies. See industrial banks wireless technology, 154 statutory accounting principles (SAP), 42 World Trade Center terrorist attacks, 50 stock market performance indices, 120 subprime residential lenders, top five, 144 surety bonds, 57 surety companies, top ten, 58

The Financial Services Fact Book 2004 181 04.11fs.appendFINAL 12/15/03 1:09 PM Page 182

I.I.I. Member Companies

ACE USA Selective Insurance Group Allstate Insurance Group State Farm Mutual Automobile Insurance American Agricultural Insurance Company Company American International Group, Inc. Swiss Reinsurance America Corporation American Re-Insurance Company The and Fire Insurance Co., Ltd. Atlantic Mutual Companies Travelers Property Casualty Bituminous Insurance Companies Trenwick America Reinsurance Corporation Chubb Group of Insurance Companies Unitrin Property and Casualty Insurance CNA Group CUMIS Insurance Society, Inc. USAA De Smet Farm Mutual Insurance Company Utica Group of South Dakota Westfield Group Dryden Mutual Insurance Company XL Global Services Erie Insurance Group XL Insurance Company, Ltd. Farmers Group, Inc. Zurich North America Foundation Reserve Insurance Company GE Employers Reinsurance Corporation GEICO Associate Members Allegany Co-Op Insurance Company The Harford Mutual Insurance Companies ChamberBiz Insurance Agency Services, The Hartford Financial Services Group LLC Holyoke Mutual Insurance Company Farmers Mutual Fire Insurance of Kaye Insurance Associates, Inc. Tennessee Liberty Mutual Group Livingston Mutual Insurance Company Lloyd’s Mutual Assurance Society of Virginia Marsh, Inc. Randolph Mutual Insurance Company MetLife Auto & Home Slavonic Mutual Fire Insurance Association Millville Mutual Insurance Company Sompo Japan Research Institute, Inc. Nationwide The Norfolk & Dedham Group OneBeacon Insurance Group Prudential Property & Casualty Insurance Company SAFECO Insurance Companies The St. Paul Companies, Inc. Scor U.S. Corporation

182 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 183

The Financial Services Roundtable Member Companies

ACE INA Holdings, Inc. Fifth Third Bancorp Minnesota Life Insurance AEGON USA, Inc. First Commonwealth Financial Company Insurance Corporation National City Corporation Company of North America First National of Nebraska, Inc. National Commerce Financial Corporation First Tennessee National Corporation American General Finance Corporation Nationwide Corporation FleetBoston Financial Corp. Northern Trust Corporation AmSouth Bancorporation Ford Motor Credit Company Old National Bancorp Aon Corporation Fortis, Inc. The PNC Financial Services Associated Banc-Corp Fulton Financial Corporation Group, Inc. AXA Financial, Inc. General Electric Company Provident Financial Group, Inc. BancorpSouth, Inc. GMAC Financial Services Providian Financial Corporation BancWest Corporation The Goldman Sachs Prudential Financial Inc. Bank of America Corporation Group, Inc. , Inc. Bank of Hawaii Corporation Guaranty Financial Services RBC Centura Banks, Inc. The Bank of New York Harris Bankcorp, Inc. Company, Inc. Hibernia Corporation Regions Financial Corporation BANK ONE CORPORATION HSBC USA Inc. (Household Riggs National Corporation BB&T Corporation International Group, Inc.) Sky Financial Group, Inc. Capital One Financial Hudson United Bancorp The St. Paul Companies, Inc. Corporation State Farm Insurance The Charles Schwab Incorporated Companies Corporation ING Americas Charter One Financial, Inc. Jefferson-Pilot Corporation SunTrust Banks, Inc. The Chubb Corporation J.P. Morgan Chase & Co. Synovus Citigroup Inc. KeyCorp Union Planters Corporation , Inc. LaSalle Bank Corporation UnionBanCal Corporation City National Corporation Legg Mason, Inc. U.S. Bancorp Comerica Incorporated M&T Bank Corporation United Bankshares, Inc. Commerce Bancshares, Inc. Marshall & Ilsley Corporation UBS Compass Bancshares, Inc. MassMutual Financial Group USAA Countrywide Financial MBNA Corporation Wachovia Corporation Corporation Mellon Financial Corporation Waddell & Reed Financial, Inc. Credit Suisse First Boston Mercantile Bankshares Washington Mutual, Inc. Cullen/Frost Bankers, Inc. Corporation Wells Fargo & Company Edward Jones Merrill Lynch & Co., Inc. Whitney Holding Corporation F.N.B. Corporation MetLife, Inc. Zions Bancorporation Fidelity Investments Zurich North America

The Financial Services Fact Book 2004 183 04.11fs.appendFINAL 12/15/03 1:09 PM Page 184

Insurance Information Institute 110 William Street New York, NY 10038 Tel. 212-346-5500. Fax. 212-732-1916. http://w w w. i i i . o r g

Pre s i d e n t – Go r don Stewart

Senior Vice Pres i d e n t – Pr ograms and Operations – Ca r y Schneider Senior Vice President and Chief Economist – Ro b e r t P. Hartwig, Ph.D., CPCU Vice Pres i d e n t – Public Affa i r s – P.J. Crow l e y

Fact Book Senior Vice President and Editor – Issues Analysis – Ruth Gastel, CPCU Vice President – Information Services and Research – Madine Singer Publications Editor – Neil Liebman Research and Production – Mary-Anne Firneno Web and Information Services Manager – Shorna Lewis Production Assistant – Dolores Sanchirico

Media Offices Washington, D.C. Media Office: Vice President – Carolyn Gorman Tel. 202-833-1580. Fax. 202-223-5779.

West Coast Media Offices: Insurance Information Network of California: Executive Director – Candysse Miller Tel. 213-738-5333. Fax. 213-738-7556. Northern California: Communications Specialist – Omar Morales Tel. 925-969-2223. Fax. 925-969-2188.

Insurance Information Institute Representatives

Special Counsel William E. Bailey Tel. 617-884-2461. Fax. 617-884-2593.

Davis Communications William Davis, Atlanta Tel. 770-321-5150. Fax. 770-321-5150.

Chartrand Communications David V. Chartrand, Kansas City Tel. 913-768-4700. Fax. 913-768-4900.

184 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04.11fs.appendFINAL 12/15/03 1:09 PM Page 185

The Financial Services Roundtable 1001 Pennsylvania Avenue, NW Suite 500 South Washington, DC 20004 Tel. 202-289-4322. Fax. 202-289-1903. http://www.fsround.org

President and Chief Executive Officer – Steve Bartlett Executive Director and General Counsel – Richard M. Whiting Senior Vice President for Meetings – Karen L. Wise Senior Vice President for Government and Public Affairs – Lisa S. McGreevy Vice President of Insurance, Technology and International Affairs – Andrew Barbour Vice President of Banking and Securities – Irving E. Daniels, Jr. Vice President for Tax and Judicial Policy and Counsel – Scott E. Talbott Research Director & Chief Regulatory Counsel – John A. Beccia III Director of Communications – Kate Ennis Director of Government Affairs, Housing Policy Council – Paul Leonard Director of Membership Services – Marti K. Finkelman Director of Information Services – Susan L. Gentry Director of and Administrative Affairs – Carrie M. Neckorcuk Government Affairs Administrator – Janice Preston Clarke Government Affairs Manager – Joel T. Kopperud Front Office Manager & Assistant for Meetings – Christine B. Phelps Manager of PAC Operations, Media Relations and Research – Jonathan E. Smith Government Affairs Assistant – Katie Stevens Assistant for Membership and Information Services – Kristen M. Washington Senior Executive Assistant to the Executive Director – Kim A. Wheelbarger Executive Assistant to the President – Nancy G. Wilkins

The Financial Services Fact Book 2004 185 04.11fs.appendFINAL 12/15/03 1:09 PM Page 186

THE FINANCIAL SERVICES ROUNDTABLE

OFFICERS Martin G. McGuinn, Chairman, Mellon Financial Corporation Donald J. Shepard, Chairman-Elect, AEGON USA, Inc. Edward B. Rust, Jr., Immediate Past Chairman, State Farm Insurance Companies James E. Rohr, BITS Chairman, The PNC Financial Services Group, Inc. Timothy C. Coughlin, Treasurer, Riggs National Corporation

DIRECTORS William F. Aldinger, Household International, Inc. John W. Bachmann, Edward Jones James Dimon, BANK ONE CORPORATION John D. Finnegan, The Chubb Corporation Lawrence K. Fish, Citizens Financial Group, Inc. Rufus A. Fulton, Jr., Fulton Financial Corporation Frederick W. Geissinger, American General Corporation Charles K. Gifford, FleetBoston Financial Corporation Russell Goldsmith, City National Corporation Bruce L. Hammonds, MBNA Corporation L. Phillip Humann, SunTrust Banks, Inc. Thomas A. James, Raymond James Financial, Inc. Carl E. Jones, Jr., Regions Financial Corporation D. Paul Jones, Jr., Compass Bancshares, Inc. William G. Jurgensen, Nationwide Kerry K. Killinger, Washington Mutual, Inc. Kenneth D. Lewis, Bank of America Corporation E. Stanley O’Neal, Merrill Lynch & Co., Inc. Aubrey B. Patterson, Jr., BancorpSouth, Inc. David A. Stonecipher, Jefferson-Pilot Corporation G. Kennedy Thompson, Wachovia Corporation Robert B. Willumstad, Citigroup, Inc.

186 The Financial Services Fact Book 2004 www.financialservicesfacts.org 04Fs.cover.FINAL 12/15/03 1:12 PM Page 2 (2,1)

INSURANCE INFORMATION INSTITUTE Martin D. Feinstein, Chairman, President & Chief Executive Officer, Farmers Group, Inc., Chairman Brian Duperreault, Chairman & Chief Executive Officer, ACE Limited Edward M. Liddy, Chairman, President & Chief Executive Officer, Allstate Insurance Company Maurice R. Greenberg, Chairman & Chief Executive Officer, American International Group, Inc. Albert J. , President-Domestic Operations, American Re-Insurance Company Klaus G. Dorfi, Chairman & Chief Executive Officer, The Atlantic Mutual Companies Gregory Ator, President, Chief Executive Officer & Chairman of the Board, Bituminous Insurance Companies John D. Finnegan, President & Chief Executive Officer, The Chubb Corporation Stephen W. Lilienthal, Chairman & Chief Executive Officer, CNA Financial Corporation Jan R. Van Gorder, Senior Executive Vice President, Erie Insurance Group Ronald R. Pressman, Chairman, President & Chief Executive Officer, GE Employers Reinsurance Corporation Olza M. Nicely, Chairman, President & Chief Executive Officer, GEICO J. Daniel Hickey, President-North American Treaty Reinsurance, Gen Re Salvatore D. Zaffino, Chairman & Chief Executive Officer, Guy Carpenter & Company, Inc. Ramani Ayer, Chairman & Chief Executive Officer, The Hartford Financial Services Group, Inc. Edmund F. Kelly, Chairman, President & Chief Executive Officer, Liberty Mutual Group Lord Levene, Chairman, Lloyd’s Catherine A. Rein, President & Chief Executive Officer, MetLife Auto & Home William G. Jurgensen, Chief Executive Officer, Nationwide John Cavoores, President & Chief Executive Officer, OneBeacon Insurance Group Roger L. Desjadon, President, Chairman & Chief Executive Officer, Prudential Property & Casualty Insurance Company Michael S. McGavick, President & Chief Executive Officer, Safeco Corporation Jay S. Fishman, Chairman & Chief Executive Officer, The St. Paul Companies, Inc. Gregory E. Murphy, Chairman, President & Chief Executive Officer, Selective Insurance Group Vincent J. Trosino, President, Vice Chairman & Chief Operating Officer, State Farm Mutual Automobile Insurance Company Andres Beerli, Chief Executive Officer-Americas Division, Swiss Re Douglas G. Elliot, Chief Operating Officer, Travelers Property Casualty Donald G. Southwell, President & Chief Operating Officer, Unitrin, Inc. General Henry Viccellio, Jr., President-Property & Casualty Insurance Group, USAA J. Douglas Robinson, President & Chief Executive Officer, Utica National Insurance Group Roger McManus, President, Westfield Insurance John Amore, Chief Executive Officer, Zurich North America 04Fs.cover.FINAL 12/15/03 1:12 PM Page 1 (1,1)

THE FINANCIAL SERVICES FACT BOOK

• Unique and comprehensive guide with more than 200 graphs and

charts on insurance, banking, securities, finance companies, 110 New Y mortgage financing and on financial services as a whole. (2

• Key to understanding how the financial services sectors both ht work together and compete with each other. •Valuable tool for the media, corporate executives and researchers.

PUBLISHED JOINTLY BY:

• Insurance Information Institute • The Financial Services Roundtable 110 William Street 1001 Pennsylvania Avenue, NW New York, NY 10038 Suite 500 South www.iii.org Washington, DC 20004 www.insurance.info www.fsround.org

Insurance Information Institute ww w. f i na nc ia l s e r v ic e s fa c t s. o r g The Financial The online source for Services Roundtable the new, comprehensive Financial Services Fact Book 2004 ISSN 1537-6257 2004 2