by Robbie Smith, February 2000

National Underwriter

The trade press has been filled over the course of the last two years with announcements regarding banks entering the agency business, with a high percentage entering through a joint venture or the acquisition of a local or regional agency.  The passage of Gramm-Leach-Bliley and the move by the banking industry to become "full-service financial services supermarkets" has led many banks to aggressively consider the alternatives available to them for entering the insurance business.

A recent study conducted by Reagan Consulting for the Association of Banks-in-Insurance found that almost two-thirds of all banks entering the property and casualty and group/life insurance business have done so through acquisition or joint venture with a local and regional agency.  For the banks that have already gone down the road of acquisition or joint venture, a number of important lessons have been learned.

- If doing an acquisition, banks have found that it is better to slightly overpay for a really good agency than to buy a poor agency at a "great" price.  The pricing and the terms and conditions for the purchase of an agency has varied significantly, but have generally fallen in the relatively predictable range of between 1.25 and 1.75 times historical revenues.  After the transaction, the buyers of the poor agencies realize that they have acquired a "wasting asset" that requires a great deal of bank management time. The good agencies have the sales culture, support staff, systems and procedures, and automation to continue to prosper in the bank. 

- Cross selling has generally been slower to materialize than most have projected.   The ability to cross sell insurance to existing bank customers has a major impact on the overall economic return to the bank.  While banks should not pay insurance agencies for the cross sell potential that the bank brings to the table, the cross sell potential has given the banks reasons to "stretch" on other pricing assumptions.  When the cross-sell is slow to materialize and other pricing assumptions do not hit the projections, the bank finds that it is not receiving a reasonable return on investment.  A high percentage of joint ventures and acquisitions have failed to hit on the first and second year revenue and profit projections.  Be conservative in your cross-selling projections to ensure appropriate pricing.

- Variable pricing (or "earn-outs") keeps the sellers' heads in the game.  The ABI Study of banks in the insurance business show that only 18% of all acquisitions had some variable pricing element.  The most successful acquirers of agencies have found that placing some of the percentage of the acquisition on an earn-out basis (as little as 10% and as much as 40%) helps ensure that the financial and operational results are achieved.  The first two years after the acquisition are the most essential in integrating the bank-insurance cultures.  The sellers should have a great deal of the responsibility for ensuring a successful integration, and the variable pricing helps ensure the seller's commitment to success.

- The most successful bank/agency relationships have taken full advantage of the agency's sales culture, and the insurance activities are supported from senior management of the Bank.  The sales culture of a good insurance agency can be a welcome addition to banks as they attempt to become more new business oriented.  The development of incentive compensation for bank employees for insurance referrals and a strong emphasis on insurance products from the bank's senior management are crucial elements of success.

- Significant improvements in operating margins have been difficult to achieve.  The commercial and personal property and casualty business has generally had relatively low operating margins, especially in light of the sustained soft insurance pricing.  When the assumptions used in developing the pricing for the purchase of an agency project improvements in the operating margins, most banks have been unable to achieve the improvements.  Be realistic regarding your ability to achieve improvements in operating margins, especially in the commercial and personal property and casualty areas.  Even under bank ownership, certain lines of insurance will remain low margin business until the insurance pricing improves or agencies find more efficient ways to service clients.

- Banks have sometimes "partnered" with the wrong agency.  As is true with banks, agencies have different levels of ability in different product lines and demographic segments of the marketplace.  A bank in a retirement area with a large concentration of elderly customers may find that the large casualty-oriented agency is a poor partner.  If the bank has a large number of relatively small commercial customers, evaluate the abilities of the agency in the small commercial insurance area.  Make sure that the insurance carriers represented by the agency and the abilities of the agency staff will maximize the potential for return to the bank.

- Finally, and perhaps most importantly, a dime's worth of planning pays a dollar's worth of return.  Many banks have failed to do an adequate job up front in considering the alternatives available to them in the marketplace for selling insurance products and the potential economic returns.  Expectations regarding cross-sell potential, penetration of new product lines to existing customers, or the referral of bank services to insurance clients have consistently created lofty expectations only to achieve marginal results.  Senior management of the bank should have reasonable expectations regarding the economic returns in the insurance business, and the individuals responsible for the insurance initiatives should be held accountable for the results.

The integration of the insurance and banking community to form a fully integrated financial services industry will continue to occur over the course of the next few years.  However, not all banks will elect to pursue insurance distribution as a core part of their business.  Developing the appropriate expectations and a comprehensive game plan for the integration of the insurance business into the banking business must be done to ensure success.