Who’s Afraid of the Big, Bad Bank?

Welcome to the topsy-turvy world of banks in insurance. Since the Gramm-Leach-Bliley Act passed in 1999 and modernized the financial services industry, giving banks entrée for the first time into the insurance business, many banks have launched insurance distribution operations, some have passed on the opportunity and others got their feet wet but have since changed course. If there is one thing certain about banks in the insurance business, it’s that banks aren’t certain about the business at all.

“There are success stories of agencies owned by banks and horror stories of agencies owned by banks,” says Tom Baker’s son, Tom Baker III, president of the Tom Baker Insurance Agency, still wholly owned by the Round Top State Bank.

Ten years ago, the mere mention of banks in insurance sent shivers up and down the spines of independent agents. Today, it appears the “big, bad monster” never truly materialized. Instead, many banks have endured difficulties merging their transaction-centric business model with the relationship- focused model of insurance distribution. Large national bank holding companies like Citigroup and Bank of America that savored the prospect of selling insurance in the 1990s have since regurgitated parts of their insurance operations. Smaller banks like Citizens Bank also have shed insurance assets, in its case selling three insurance brokerage subsidiaries to broker Hub International, a highly acquisitive firm. Still others, like Wells Fargo, have built estimable insurance broking units via the acquisition of several large agencies.

So, what is the current status of banks in the industry? And, what are the experiences of agencies involved with banks in the recent years? The answers might surprise you.

Slow Revenue Growth
Overall, revenues from fee-based insurance sales— the factor driving banks into the agency business in the first place—are up only 1% in the first half of this year, according to the American Bankers Association. Still, that’s $21.7 billion that otherwise might have gone to independent agents, brokers and direct sellers of insurance. Moreover, the number of bank holding companies reporting insurance revenue increased from 61% in 2002 to 66% in 2007—meaning more banks in the game.

Within the ABA numbers, however, is a telling fact: The sale of bank agencies to non-banks (read: private equity firms and publicly owned insurance brokerages) represented roughly a $700 million loss in bank holding company insurance income. “When premiums were growing rapidly for banks, things were great, but in the current soft market—the first one that banks have experienced—fee income has slowed dramatically and, in some cases, is probably negative,” says Robert Hartwig, president and chief economist of the New York-based Insurance Information Institute.

The upshot, Hartwig projects, is to expect more banks to put their insurance assets on the block and fewer banks to pony up to the insurance business. With large brokerages like Hub eager to expand their operations and pay a fair market price for bank-owned agencies, many banks will be hard-pressed not to sell. “Boards of stock-owned bank companies will look at the revenue from insurance operations and realize it’s a slow-growing segment,” Hartwig says. “They’ll ask, ‘Why are we holding onto this thing that may take a long time to grow again?’”

He adds, “With the growing number of brokers out there that have become aggressive consolidators, the banks will have no trouble finding willing buyers.”

Back to the Future
Independent agencies and brokerages, as well as direct sellers of insurance, still account for the lion’s share of insurance sales across the country, despite the banks’ enlarged presence in the marketplace. According to the Big “I” Agency Universe Study, only 5% of all agencies, at present, are partially owned by banks, credit unions or bank holding companies, a percentage unchanged from the last study in 2004. Those numbers are likely to increase in the future as agencies confront business perpetuation challenges. The survey finds that if one or more current owners of an independent agency left the business, 5% would seek to sell the agency to a bank.

“Agency acquisition is the primary distribution platform for 75% of banks selling commercial property-casualty insurance and 7.2% of banks selling personal property-casualty and individual life-health lines,” says Jon Snowling, an ABA spokesman.

But Hartwig and others expect that during the ongoing soft market, the number of agency acquisitions by banks will fall and the number of agency divestitures by banks will rise. “The interest among banks in buying insurance agencies will be tepid over the next two to three years, when compared with the first half of the decade,” Hartwig predicts. “With new management heading up many banks, they’re just not going to want to hold onto low-performing and slow-growth assets.”

Take the case of Bouchard Insurance, an agency Roger Bouchard launched shortly after World War II. Before the ink had dried on Gramm-Leach-Bliley, First National Bank (FNB Corp. today) approached the agency principals, Roger’s sons, about selling the business. The deal closed in December 1999. At the time, the Clearwater, Fla.-based agency’s revenues were about $6 million, and it operated out of one office. “The bank had bought another agency in Pennsylvania and wanted me and my brothers to run the entire insurance operation in both states,” says Tim Bouchard, chief operating officer of Bouchard Insurance. “They promised us the freedom to do what we had done successfully before, and kept it.”

For the next four years, the brothers ran the twin insurance operations as if they owned them. The bank provided financial resources to expand the insurance footprint, and the Bouchards ran herd on several acquisitions—seven agencies in Florida and five in Pennsylvania. Before long, however, FNB began to have reservations about the insurance business. “Their expectations of cross-sell revenues were unrealistic,” Bouchard explains. “They had hoped to sell insurance products to people opening checking and savings accounts, and didn’t care how big those accounts were. That was a problem for us, however.”

A key driver of agency profitability is revenue per account, a concept at odds with the bank’s policy. “Here were these people opening an account with $100,” he says. “Writing a $50 policy didn’t make sense to us, and we knew we’d lose money on it.” To encourage its tellers to cross sell, the bank had developed an incentive plan to refer business to the insurance producers. “When we turned down the business, it obviously caused a lot of dissension within the bank,” Bouchard says. “After a year of doing this, things changed so that we worked instead with the loan officers, whose business model is closer to ours— more relationship-driven. It was successful and a solid 10% of new business for us came from bank referrals.”

Then, another problem emerged. As a public company, FNB determined it was best to grow the insurance agency side of the house through acquisitions, as opposed to the agency’s traditional organic growth via hiring new producers. Bouchard explains that investing in new producers and resources are listed as “current expenses” on financial statements, whereas employing stock to buy agencies is immediately accretive “and looks better in the short run for the next quarter,” he says. “Our whole idea toward growth was organic—hiring new producers and adding new resources to create value-added services for customers. But, this was in direct opposition to how the bank reported its quarterly earnings.”

The divide eventually proved too wide to breach. In January 2004, the insurance operations in Pennsylvania and Florida split apart when Fifth Third Bank in Cincinnati bought FNB of Florida. “Fifth Third had sold off its insurance operations to Hub a few years before, and we knew they’d want to spin off the Florida insurance operations,” Bouchard says. “At the time we were only about 5% of the bank’s revenue and were really under the radar.”

The brothers bought back the agency that December. Five years earlier, they had presided over a $6 million-revenue agency from a single office. In 2004, the new Bouchard Agency tallied $30 million in revenues from several locations. “It turned out well for us, obviously,” Bouchard says. “We’re also growing organically again. Whereas the return on equity from the agencies we acquired for the bank was 10%, our return on investment from our new producers is well over that.”

Marital Challenges
The cultural issues separating banks and insurance agencies seems to be the predominant reason many bank-agency marriages end up in divorce court. “Banks tend to be more bureaucratic because their business environment, since they’re highly regulated, tends to be stable,” says Rick Bonderant, director of agency management resources at the Independent Insurance Agents of Texas. “While occasionally they have bumps with respect to changing regulatory and economic market factors, for the most part they’re pretty steady when it comes to serving their clients. Agencies, on the other hand, operate under much more unpredictable conditions, involving constantly changing carrier appetites for business, customer predilections and market volatility. Consequently, agencies tend to be more organic or fluid. They have to be able to respond to changes quickly. When you merge these divergent cultures together, you often have friction.”

Bonderant knows from experience. In 2001, he sold his agency to Frost Bank, a large publicly owned bank in Fort Worth, Texas. Although he stayed on at the bank for three years to continue running the agency’s operations, when his earn-out deal concluded, he left Frost Bank for the Big “I” of Texas.

Bud Wilson, chairman emeritus of Wilson Insurance Agency Inc. in Chula Vista, Calif., sees a similar culture clash. “Agents and bankers are both very jealous of their client base—the people they individually have brought into the fold as customers,” he says. “For a bank to come in and say ‘I’ll treat your customers as well as you do’ creates anxiety. That’s why the smarter, more successful banks with insurance operations are the ones that let the former agency principals continue to run the shop. They often find it’s better to consider the insurance operation a separate profit center.”

Wilson was one of the major combatants in his state when the early banks-in-insurance battles first reared. Today, he is surprised that more banks aren’t in the insurance business. “Our mantra from the ’70s through the ’90s was ‘keep banks out of insurance,’” he recalls. “We were successful in California, but things turned against us at the national level. We just couldn’t put together the coalitions to stave off the banking industry. Nevertheless, I thought they would have far more penetration (into insurance) than they do. In fact, we all thought they would completely overpower us. I think many banks simply realized they didn’t know how to run a retail insurance business.”

Banks’ Future Involvement
While several banks have changed their minds about insurance distribution, InsurBanc Executive Vice President Robert Pettinicchi believes most banks will stay in the business and others not currently selling insurance eventually will join their number. “The prize to be gained is the affluent insurance client who ends up being a great funds management prospect or jumbo mortgage candidate,” he says. “That’s where the rubber meets the road.”

Tom Baker III agrees such cross-sell opportunities involving wealthier prospects give the banks-in-insurance model its appeal. “Our current parent has served the elite and affluent in this area since 1912,” he explains. “Generation after generation has lived off the land here. These people have a tremendous work ethic and are so rock-ribbed they’re embarrassed to file a claim. You can’t beat that.”

This time around the relationship between the bank and the agency is a winner. “So far things are working out just fine,” Baker says.

Russ Banham (bzwriter@aol.com) is an IA senior contributing writer.

Parting the Dark Clouds
As it turned out, Gramm-Leach-Bliley had a silver lining for independent insurance agencies and brokerages: it prompted the Big “I” to form InsurBanc. The bank is a prime funding source for agencies acquiring other agencies, including bank-owned agencies. The latter seems to be a growing trend.

“When banks first got into the insurance business at the turn of the millennium, the hard market made the revenue opportunities very attractive,” says Robert Pettinicchi, InsurBanc executive vice president. “The pressure on banks, then and now, was to get away from solely spread income like interest and do things more fee based like insurance. But, insurance is cyclical and cycles change. The investment (in insurance distribution) today just isn’t as attractive as it was before—but it is to a public broker.”

Private equity money has changed the paradigm. “Many private equity firms are willing to pay and even overpay banks for their insurance agencies, and in some cases the banks are willing to sell an operation they’re no longer certain about for a good yield,” Pettinicchi explains. “It’s the same idea with brokers, whose business model makes it attractive to buy up agencies. This is all about earnings per share and stock price. These agency acquisitions can be immediately accretive (to earnings).”