by Kevin Stipe & Jim Campbell, March 1999

National Underwriter

Been invited to lunch with your banker lately?  If you have, chances are you finished talking about your agency's traditional banking needs before you finished your appetizer.  Then it was on to "the real reason I invited you to lunch" which is that "we're looking at getting into the insurance business and believe your agency would be a good fit."

Like most others, you've probably been watching from a distance as the banks-in-insurance concept has plodded along over the past decade.  Slowly but surely, certain banks have made some inroads.  Today three of Business Insurance's Top 20 brokers are bank-insurance operations.  But despite the notable achievements of some, questions have continued to linger about whether banks will be real players in the insurance brokerage business.

Until recently, most information regarding the actual strategies and performance of bank-insurance operations was anecdotal, with little available in the way of real research. In October 1998, Reagan & Associates, in conjunction with the Association of Banks-in-Insurance, conducted the first annual Study of Leading Banks-In-Insurance.  The purpose of the study was to identify the existing size and scope of the bank-insurance market, to identify their entry and growth strategies, and to examine the actual results they are achieving.

The study revealed some surprising findings about banks that sell insurance:

- The number of banks selling insurance is large and growing rapidly.  Including the 6% of banks planning to enter the market this year, now roughly 75% of banks are selling insurance products and of these products, annuities and credit life represent a shrinking percentage, with over 40% of banks selling products other than annuities and credit life.

- The product mix is increasingly commercially focused.  It has long been assumed that banks would focus mainly on "commodity" products that can be mass marketed to their existing customers.  However, a greater number of banks are selling commercial lines (34%) than personal P&C (30%). 

- Acquisitions are heating up and are now the preferred entry strategy for P&C business.  Although joint ventures have been widely publicized as a preferred approach to coexistence and cooperation between banks and agencies, they are actually quite rare, with banks currently focusing on acquisitions as a way to quickly establish a presence in the business.  P&C profit margins are simply too thin to be split between two parties, making most joint ventures sound better than they really are.

How large will the bank-insurance distribution channel become?  To provide a glimpse of the future, it may help to look at a recent historical comparison.  Fifteen years ago the securities brokerage business was widely dispersed with some real similarities to today's insurance brokerage community.  With the elimination of certain regulatory restrictions, banks began looking carefully at the securities business as a strategic fit to enable them to transition into diversified financial services providers.  At first, it was only the "early adopters," but before long, most of the largest banks were getting into the action.  Today, few large securities firms remain independent, most having affiliated with a bank.

Will this happen in a similar way in our business?  Yes, the trickle of acquisitions is now building into a downpour, much the way it did 15 years ago.  However, there is an interesting difference between the securities brokerage acquisition trend and the insurance brokerage acquisition trend.  The securities brokerage acquisitions were done mostly by national or super-regional banks (i.e. the banking version of the Business Insurance Top 100 list) with smaller banks staying out of the acquisition fray.  This means that the vast majority of banks were thus "left out" because, like the insurance brokerage business, the vast majority of banks are quite small. (The asset size distribution among the roughly 11,000 banks and the revenue size distribution among the roughly 40,000 independent agencies are remarkably similar.)

The bottom line is this: the smaller and medium sized banks that were left out of the securities brokerage acquisition trend of the past 15 years are the very banks that are now moving full-tilt into the insurance brokerage business.  And in many ways, the match between the two makes good business and economic sense.

Many agency owners are finding bank deals difficult to pass up.  An offer of a premium price, coupled with an attractive deal structure (often a tax-free exchange of publicly-traded bank stock) is understandably hard to resist, especially in light of the decline in agency values that many experienced during the early 1990's.

Our experience in representing both banks and agents in many of the largest bank-agency transactions to date has provided some key insights into how banks are analyzing and valuing potential agency acquisitions.  Here are a couple of important issues to keep in mind if you are considering selling your agency to a bank.

1.   There are strategic buyers and financial buyers, and discerning which one you're talking to is important.  Strategic buyers believe that due to the strategic importance of entry into the insurance business, a premium price is worth paying as long as a deal is not dilutive to their shareholders.  Financial buyers, on the other hand, are less committed to getting into the business and are thus looking for deals that make money from day one.  As such, it goes without saying that it is more desirable to sell to a strategic rather than a financial buyer.  Find out which type you are talking to early on so that you understand their perspective and can respond most appropriately. 

2.   Think investment value rather than fair market value.  Investment value is the value of your business to a specific, interested third party and is thus generally higher than the abstract term "fair market value."  When speaking with a bank, listen closely to determine precisely what they are trying to accomplish through the purchase of your agency.  Recognize that your ability to sell insurance to their existing customer base alone can justify a premium price (which will vary greatly depending on the bank's unique demographic profile.)

These are exciting times in our business.  After years of hearing doubts regarding the real value (or lack thereof) of being in the business of "distribution," it is gratifying to see today's flood of interest in insurance brokerage by outsiders.  It seems that banks and other recent entrants to our business have concluded that distribution, or more descriptively, the ability to develop and nurture customer relationships has enduring value.

Kevin M. Stipe and James M. Campbell are senior vice presidents and principals of Reagan & Associates, an independent Atlanta-based management consulting firm working with independent agents, banks and insurance companies.  For information, visit their website at www.reagan-assoc.com or call at 404.233.5545