Expanding its insurance services business in the U.S., on Dec 8, Wells Fargo Insurance Services Inc., a part of Wells Fargo & Co. (WFC) announced its strategic acquisition of two single office insurance companies. While the insurance brokerage firm iLeader Risk Management Solutions is based in Tampa, Florida, the employee benefits insurance brokerage firm Orca Bay Benefits, LLC is located in located in Mercer Island, Washington DC. The separate acquisitions closed on Dec 1, 2009 but the terms of the transactions remained undisclosed.
 
iLeader Risk Management Solutions has been serving customers since 2005, in the areas of risk management services and insurance brokerage solutions to industries such as healthcare, professional employee organization PEO/staffing, transportation, retail, hospitality and private equity. Wells Fargo has also retained three executive officers from iLeader.
 
Since 2001, Orca Bay provides employee benefits services to its customers. The services include healthcare reimbursement arrangements (HRAs), healthcare savings accounts (HSAs), individual and large group medical insurance plans, and a full range of value added benefits services.
 
We believe the two single office retail insurance brokerage acquisitions will not only boost Well Fargo’s operating leverage in the U.S., it will also strengthen its overall community banking structure, which accounts for almost 65% of the company’s revenues.
 
Moreover, Wells Fargo’s absolute and relative liquidity positions it above its peers such as Bank of America Corp. (BAC), Citigroup Inc. (C) and USB Bancorp (USB), mostly who are yet to step into retail insurance segment, to take advantage of opportunities arising from the changing market environment. If operated strategically, the company can cash on the huge prospects derived from the current sluggish economic environment where investors are keener on covering their risks rather than playing wild.
 
Wells Fargo’s insurance segment is extensively operated with the help of 9200 insurance professionals and 200 offices in 37 states. According to Business Insurance 2008, Wells Fargo Insurance Services, Inc. is the fourth largest insurance brokerage in the world and the largest bank-owned insurance brokerage in the U. S. It collects about $15.5 billion of risk premiums with expertise in property, casualty, benefits, international, personal lines, and life products. Wells Fargo Third Party Administrators and Wells Fargo Disability Management are also ranked as the third largest multi-line third party administrators that offer employee benefit, and property and casualty claims administration (Business Insurance).
 
Hence, we believe that after the meaningful Wachovia merger, Wells Fargo will also be able to capitalize on its inorganic growth from the two recent acquisitions. However, the terms and liabilities, if any, taken across from the respective retail companies are yet to be known. Alongside, since the two companies are smaller in size and areas of operation, it will be too early to state the deals as fruitful. These features points to the area of concern. Thus, we maintain our Neutral recommendation on the stock.
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