by Jim Campbell & Robbie Smith, January 2001

National Underwriter

For the past several years, the banking industry has steadily grown its presence in the property/casualty insurance distribution business.  Though banks still hold a relatively small share of the distribution market, their share is growing and will continue to grow.  Early bank-insurance efforts often focused on life/health distribution and conventional wisdom held that banks might shy away from property/casualty products.  But conventional wisdom was proved wrong once again as banks began moving more aggressively into property/casualty distribution in the late 1990s.  In fact, the 2000 ABI Study of Leading Banks-In-Insurance reported that, of the surveyed banks currently distributing general lines insurance products, 63% are distributing both life/health AND property/casualty products.

As banks have pursued property/casualty distribution, many have concluded that an acquired agency is the preferred platform on which to build.  Consequently, agency acquisitions by banks have increased steadily, from fewer than 20 in 1997 to more than 70 in 2000, for a total of more than 200 acquisitions since 1997.  All indications suggest this trend will continue.  However, before we conclude that agency acquisitions are the right strategy for every bank, it is worth considering the results produced by these unions. 

The bank-insurance industry is emerging with mixed results.  This is most evident in the area of agency acquisitions.  Some bank-owned agencies are producing impressive earnings (well above the average EBITDA margin for the industry) and are providing strong support for the argument of synergy between banks and agencies.  In other cases, however, the opposite is true.  Many bank-owned agencies are struggling, performing at levels below their historical performance, and well below the projections of the pre-acquisition pro forma.

Although several factors can influence the post-acquisition performance of an agency, it is increasingly clear that one factor is critical.  Put simply, success in a bank-owned agency requires effective integration management.  Why is integration management so relevant to the fate of a bank-owned agency?  Let's start with the obvious.  First, the integration management process is critical to successful mergers and acquisitions in all industries, and can make or break most deals.  Furthermore, the many cultural differences between banking and insurance have been well-documented as capable stumbling blocks if not effectively managed. 

But the most critical issue, though perhaps less apparent, is the issue of economic leverage generally required to justify an acquisition.  For "within industry" (e.g., bank buying bank) transactions, the leverage often comes through cost reductions.  Eliminating redundant staff and operations raises the profit margin on the acquired business, validates the notion of economies of scale and justifies the purchase premium paid.  Unfortunately, a bank that acquires an insurance agency will find few redundant operations to eliminate and, therefore, must create leverage on the top line.  This leads to two disturbing truths.  First, successful cross-selling is an economic requirement for bank-owned agencies to validate the premium prices which are generally paid to acquire a quality firm.  And second, few banks or agencies can boast of a rich history of cross-selling success.  Therefore, why would the merger of these organizations suddenly solve the cross-selling mystery?  Experience has shown it won't unless it is actively managed within the context of a comprehensive, disciplined integration strategy.  In the absence of such a strategy, the acquisition becomes a distraction to the agency, sometimes causing performance to tumble from historical levels, and to fall well below the pro forma levels used for pricing purposes.

So what does integration management entail?  To begin, let's establish a minimum threshold.  Speeches by senior management, newsletters, and pep rallies can all be useful elements within your integration strategy, but they are not enough.  A thorough integration strategy will address communications, training, and recognition and reward programs.  Integration management will include financial, operations, and product plans for each product line you will distribute.  It will establish clear targets, effective management tools (e.g., reporting), and accountability that extends several layers deep into both organizations.  And it will address the sensitive issues that can undermine your integration if left open.  These issues include treatment of revenues within the bank's internal accounting system (i.e., who gets hard dollar and soft dollar credit for insurance sales), as well as the tendency among bank relationship managers to deny access to their customers due to fears of jeopardizing the overall customer relationship.

Organizationally, the integration strategy should be developed and directed by an integration team that includes members of both the bank and the agency.  The actions of the integration team should be overseen and endorsed by the bank's senior management.

Effective integration management will not overcome a fundamental mismatch of organizations, a poorly structured transaction, or the acquisition of a weak agency.  What it can do is optimize the potential of the relationship.  The bank CEO who completes an agency acquisition as if checking an item off a "to do" list, then quickly turning attention to other business, will be disappointed.  As the bank-insurance industry continues to sort out the winners from the losers, one message is clear:  The key is in the follow through.  Don't underestimate the need for hands-on integration management if you intend to succeed.

James M. Campbell and Robert C. Smith are principals of Reagan Consulting, Inc., an Atlanta based management consulting firm that serves the insurance distribution system.  Additional information about Reagan Consulting is available at www.reaganconsulting.com.