INSURANCE

Financial services refer to services provided by the finance industry.

The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. As of 2004, the financial services industry represented 20% of the market capitalization of the S&P 500 in the United States.

The term "financial services" became more prevalent in the United States partly as a result of the Gramm-Leach-Bliley Act of the late 1990s, which enabled different types of companies operating in the US financial services industry at that time to merge. In the USA almost every company now which previously described themselves as a bank, insurance company, or brokerage house, now describes themselves in some way as a financial services institution.

Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its holding company simply to diversify its earnings. Outside the U.S., e.g., in Japan, non-financial services companies are permitted within the holding company. In this scenario, each company still looks independent, and has its own customers, etc.

In the other style, a bank would simply create its own brokerage division or insurance division and attempt to sell those products to its own existing customers, with incentives for combining all things with one company.

A "commercial bank" is what is commonly referred to as simply a "bank". The term "commercial" is used to distinguish it from an "investment bank", a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity).

BANKING SERVICES

The primary operations of banks include:

• Keeping money safe while also allowing withdrawals when needed.
• Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post.
• Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business).
• Issuance of credit cards and processing of credit card transactions and billing.
• Issuance of debit cards for use as a substitute for checks.
• Allow financial transactions at branches or by using Automatic Teller Machines (ATMs).
• Provide wire transfers of funds and Electronic fund transfers between banks.
• Facilitation of standing orders and direct debits, so payments for bills can be made automatically.
• Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account.
• Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly.
• Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check.
• Notary service for financial and other documents.

PRIVATE BANKING

The providing of banking services to very wealthy individuals and families. Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking services.

Services are provided by a bank or a division of a financial services company.

This table displays the results of the Ultra high net worth (US$30m+) category of the 2006 private banking awards.

Note: Ranking: 'n' denotes 'nominated'.

CAPITAL MARKET BANKS

Capital market banks underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured finance products.

Prominent amongst them include:

• Barclays Capital
• Citigroup Global Markets (formerly Salomon Brothers)
• Credit Suisse First Boston
• Deutsche Bank
• Goldman Sachs
• ING Group
• JPMorgan Chase
• Lehman Brothers
• Merrill Lynch
• Morgan Stanley
• Needham & Company
• Nomura
• UBS
• Gleacher Shacklock
• D.A. Davidson & Co.

BANK CARDS

Bank cards include both credit cards and debit cards. Bank Of America is the largest issuer of bank cards:

• American Express
• Barclaycard
• Capital One
• Discover Card
• HSBC
• Intelligent Finance
• MasterCard
• Washington Mutual
• VISA

CREDIT CARD MACHINE SERVICES AND NETWORKS

Companies which provide credit card machine and payment networks call themselves "merchant card providers".

These include:

• BA Merchant Services (Bank of America)
• First Data Corporation
• Heartland Payment Systems
• US Bank
• PBZ Card
• Barclays
• HSBC
• HBOS (Halifax Bank of Scotland)
• RBS (Royal Bank of Scotland)

ASSET MANAGEMENT

Asset management is the term usually given to describe companies which run collective investment funds.

The following is Global Investor’s 2005 ranking of the top 10 investment managers by assets under management.

HEDGE FUND MANAGEMENT

Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades.

Prominent hedge funds include:

• BlackRock, Inc.
• Bridgewater Associates
• Caxton Associates
• Citadel Investment Group
• Deutsche Bank
• Renaissance Technologies
• SAC Capital Partners
• Soros Fund Management
• Man Investments

CUSTODY SERVICES

Custody services and securities processing is a kind of 'back-office' administration for financial services. Assets under custody in the world was estimated to $65 trillion at the end of 2004.

Firms engaged in custody services include:

• State Street Corporation
• The Bank of New York Mellon
• JPMorgan Chase
• PNC Financial Services Group
• Kas Bank

INSURANCE BROKERAGE

Insurance brokers shop for insurance (generally corporate property and casualty insurance) on behalf of customers.

Significant companies in this sector of the financial services market include:

• IBS Insurance Broking Services
• Aon Corporation
• Marsh & McLennan Companies
• Wachovia
• Wells Fargo
• Hiscox

INSURANCE UNDERWRITING

Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance brokers, and stock brokers. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance, retirement insurance, health insurance, and property & casualty insurance.

Some well known insurers include:

• Allianz
• Allied Insurance
• Allstate
• AIG
• Aviva
• AXA
• Berkshire Hathaway
• Chubb Corporation
• CGNU
• Independent Order of Foresters
• Geico
• MetLife
• Mutual of Enumclaw
• Nationwide Insurance
• New York Life
• Safeco
• State Farm
• Zurich Financial Services

REINSURANCE

Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses.

Firms in this sector include:

• Berkshire Hathaway
• Lloyd's of London
• Munich Re
• Swiss Re
• Aon
• Towers Perrin

Stock brokers (private client services) and discount brokers

Stock brokers assist investors in buying or selling shares. Primarily internet-based companies are often referred to as discount brokerages, although many now have branch offices to assist clients. These brokerages primarily target individual investors.

Examples of discount brokerages include:

• Ameritrade
• Charles Schwab
• Edward Jones
• E-Trade
• Fidelity Investments
• Scottrade
• Tradeking
• FolioFN
• Sharebuilder
• Zecco.com

Full service and private client firms primarily assist execute trades and execute trades for clients with large amounts of capital to invest, such as large companies, wealthy individuals, and investment management funds.

Examples include:

• Deutsche Bank
• Goldman Sachs
• Merrill Lynch
• Morgan Stanley
• Smith Barney
• UBS AG

Private equity funds are typically closed-end funds, which usually take controlling equity stakes in businesses that are either private, or taken private once acquired. Private equity funds often use leveraged buyouts (LBOs) to acquire the firms in which they invest. The most successful private equity funds can generate returns significantly higher than provided by the equity markets.

Venture capital is a type of private equity capital typically provided by professional, outside investors to new, high-potential-growth companies in the interest of taking the company to an IPO or trade sale of the business.

An angel investor or angel (known as a business angel or informal investor in Europe), is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.

A financial services conglomerate is a financial services firm that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc.

A key rationale for the existence of such businesses is the existence of diversification benefits that are present when different types of businesses are aggregated i.e. bad things don't always happen at the same time. As a consequence, economic capital for a conglomerate is usually substantially less than economic capital is for the sum of its parts.

The financial services industry constitutes the largest group of companies in the world in terms of earnings and equity market cap. However it is not the largest category in terms of revenue or number of employees. It is also a slow growing and extremely fragmented industry, with the largest company (Citigroup), only having a 3 % US market share. In contrast, the largest home improvement store in the US, Home Depot, has a 30 % market share, and the largest coffee house Starbucks has a 32 % market share.

Each year, BusinessWeek and Interbrand publish their 100 Best Global Brands study, ranking the financial value of brands.

The following are the financial services companies in this list, ranked by this study for 2006:

Glossary for reading financial services reports:

• Asset sensitive - a financial institution that has a negative duration of equity may also be described as having a positive gap or as being asset sensitive.
• Charge-offs - written off debt.
• Cost of funds - the cost of loan capital, the cost of funding assets; free liabilities include interest free checking accounts.
• Cost-to-Income Ratio (CIR, C/I ratio) - An important measure of the efficiency of financial institutions, this refers to their operating expenses divided by their operating revenues.
• Diversification - In portfolio management, refers to the variety of securities within a portfolio in terms of its geographical or sectoral spread, or in terms of its credit quality. In general, risk is reduced as portfolio diversification increases.
• Equity-Linked Annuity - An annuity paying a fixed minimum rate, qualifying for bonus payments linked to the performance of an equity benchmark such as the S&P500.
• Liability sensitive - the inverse of asset sensitive.
• Operating leverage - a simple indication of a firm' s earnings strength; usually measuring the operating income as a percentage of gross income.

• NCL - net credit losses - cost of charge-offs, written off debt.
• NCL rate - net credit loss rate - the percentage of the lending portfolio that is not expected to be repaid.
• NII - net interest income - interest income less interest cost.
• NIM - net interest margin - margin between interest income and interest cost.
• NPA - non performing assets - interest bearing assets not paying interest.