by Jim Campbell, January 2006

National Underwriter

A decade ago, the bank-insurance debate was in full swing. The looming question was, “How will banks impact the insurance distribution system?” Today, much of that debate has been settled. More than twenty of the top 100 U.S. agencies are now bank-owned, and they produce greater than 10 percent of all independent brokerage revenue. Many banks of various sizes, are now actively and successfully engaged in selling insurance. Reasonable conclusion: banks are a significant and permanent piece of the insurance distribution system.

On the doorstep of the second decade of bank-insurance, the debate has morphed. The focus has shifted from macro-impact (i.e., the impact of banks on insurance distribution) to micro-impact (i.e., the impact of insurance distribution on banks). The new, more relevant questions are:

1. Will insurance sales be economically relevant to banks?
2. If so, how is this economic relevance achieved?
3. Which banks will benefit the most?

Emerging evidence suggests the economic impact of insurance sales will be significant for many banks, and already is for some. But let’s take a closer look. A study of the 100 largest U.S. banks provides some answers to each of these questions.

Economic Relevance

Of the motivations for banks to sell insurance, the greatest is revenue diversification. Insurance commissions offer banks a source of highly-sought-after non-interest income (NII). Better yet, insurance commissions provide renewable NII, as retained accounts produce commissions and fees year-after-year. So, the first test of economic relevance is contribution to NII. Here’s the evidence. Among the 100 largest U.S. banks, eleven now earn more than 10 percent of their NII through traditional insurance brokerage. And this excludes sales of annuities, credit insurance, title insurance and some individual life/health products.

More noteworthy, the median insurance brokerage revenue for these eleven banks is $45 million, and contributes nearly 21 percent of total NII. Among these banks, contributions to NII range from 10 percent to a whopping 32 percent.

Another test of economic relevance is contribution to the bank’s earnings per share (EPS). Assuming a 15 percent net income margin, the median EPS contribution of insurance brokerage for these eleven banks is $0.08. The range is $0.03 to $0.19 per share.

With these contributions, we can safely conclude that these eleven banks find selling insurance to be economically relevant. How did they cross the relevance threshold?

How Achieved

Few will be surprised to learn that all eleven banks built their insurance brokerage business through acquisition. The old debate over alternative strategies (i.e., buy, build or align) has yielded to the following conclusion: banks that are serious about developing a property/casualty and group health insurance brokerage business should acquire. What may be surprising is the thoughtful and deliberate way in which these banks have gone about it.

All eleven banks have completed a series of acquisitions over several years. In short, they are methodical, serial acquirers of agencies. They are executing disciplined strategies for identifying and pursuing agencies that match their acquisition profile.

Another consistent characteristic of these banks is tenure in the insurance business. Most were, if not at the vanguard, at least early adaptors of bank-insurance. Ten of these eleven banks completed their first agency acquisition by 2000 and have been building their brokerage business for more than five years.

Which Banks

Are all banks able to build an economically significant insurance brokerage business? Thus far, bank size has been a factor. The assets of the eleven banks range from less than $10 billion to greater than $100 billion, but with a median of only $17 billion. The median assets rank is 61st, well below the midpoint on the Top 100 list. If we divide the top 100 banks into thirds according to assets, we get the top third (i.e., banks ranked 1st to 33rd), the middle third (i.e., banks ranked 34th to 67th) and the bottom third (i.e., banks ranked 68th to 100th). Only one of the eleven is in the top third. Six are in the middle third and four are in the bottom third.

Bottom line: our eleven banks are mostly regional banks rather than larger money center banks. Although some of the largest banks (e.g., Wells Fargo and Wachovia) are significant and well-known insurance brokers, they are not yet on the list of those that earn 10 percent of NII through insurance sales. Their size makes the 10 percent threshold challenging, though not unattainable.

Conclusions

Analysis of the top 100 banks helps clarify both the macro-impact and the micro-impact of bank-insurance. It reminds us of the changes of the past decade. And it offers clues about the future. At least one of ten of these 100 largest banks (and one of six on the lower two-thirds of the list) has achieved economic relevance in insurance brokerage. Each has done so by methodically acquiring and integrating agencies over a period of years, usually more than five. For each, contributions to NII are significant, and the value delivered to shareholders is strong. Expect these regional banks to continue to develop their brokerage businesses, through both organic growth and acquisitions. And expect some of those regional banks still on the insurance sidelines to reconsider.

Community banks, though smaller and generally well below the top 100 list in assets, should take note. These banks are the most dependent upon the interest margin, and most in need of further diversification into sources of non-interest income. Yet their participation in bank-insurance continues to lag well behind that of larger banks. Some community banks have tried unsuccessfully to sell insurance through a joint venture or other alliance. Others have shied away for various reasons. Their lack of familiarity with the insurance business, concerns over scale or critical mass requirements, and stories of struggles by other banks are the primary reasons for reluctance. But the successes among the top 100 banks will erode some of these concerns. Look for a wave of community banks to enter the insurance brokerage business over the next three years, many intending to execute the same strategy of persistent, disciplined agency acquisitions that the regional banks have followed.

Jim Campbell is a principal and senior vice president of Reagan Consulting, Inc., where he leads the firm’s bank-consulting practice. He may be reached at 404-233-5545 or at jim@reaganconsulting.com. Reagan Consulting is an Atlanta-based financial and management consulting firm serving the independent insurance distribution system.