Academic journal article ABA Banking Journal

Next Round Will Go to the Small Banks: Changed Landscape Now Favors Community Banks to Pick Up the Slack in Agency Acquisitions

Academic journal article ABA Banking Journal

Next Round Will Go to the Small Banks: Changed Landscape Now Favors Community Banks to Pick Up the Slack in Agency Acquisitions

Article excerpt


A decade ago, the banking industry was captivated by its prospects in the insurance brokerage business. And rightly so. Years of battling for the opportunity to sell insurance were finally paying dividends.

To seize this opportunity, banks began aggressively buying insurance agencies. By 2000, banks were the most active acquirers in the market, completing 78 deals, or nearly 40% of all agency deals announced that year. Among those leading the way into the promised land of insurance sales were large banks including BB&T, Wells Fargo, First Tennessee, and Citizens Financial Group. Expectations soared.

Today, however, the landscape has changed, and bank insurance momentum has slowed (Exhibit 1). The capital crisis that has gripped the banking industry over the past couple of years has made agency acquisitions difficult for some banks. However, the beginning of the slow-down pre-dates the full force of the credit crisis and can be traced to a sequence of setbacks that unfolded over the past half-decade.

Soft prices sap momentum

The first setback for bank-insurance began in 2004 as property and casualty insurance pricing began to soften. As softening prices slowed agency growth and suppressed investment returns, bank boards began to reassess their agency acquisition strategies. Enthusiasm for more deals waned. By 2005, the banking industry's share of the agency acquisition market had plummeted to 21.1% or roughly half its peak level reached three years earlier.

The following year, as banks tried to mount a comeback in the agency acquisition market, they encountered a second setback. The competitive situation had changed. The public insurance brokers, needing to supplement their woeful organic growth in a persistent soft market, were highly-motivated buyers. In addition, private equity was on the hunt and willing to pay premium prices. With the increased aggression of these two segments, banks had lost the pricing advantage they previously held and were finding it more difficult to compete for deals. Many announced they would forego agency acquisitions until the return of a more favorable market.

Insurance potential questioned

The third setback began to emerge by late-2006 and was in full-bloom by 2007. During this time, banks, including several leaders of the bank-insurance movement, were questioning the results of their efforts in insurance. Although most acquired agencies were performing at least reasonably well, some had failed to contribute meaningfully to the overall performance of the bank. They were deemed "ancillary," "non-core," or "nonessential." Ultimately, some banks divested, among them Bank of America, Union Bank of California, Capital One, and Webster Bank, all of which sold insurance agencies that were among the 100 largest in the U.S.

Unlike the first two setbacks, which were driven largely by market cycles, this third setback hit at the core of bank-insurance, questioning the potential for insurance sales to make a relevant contribution to the banking industry. The 2008 American Bankers Insurance Association (ABIA) Study of Banks in Insurance found that, for 66.2% of surveyed banks, the primary objective for selling insurance is to "increase noninterest income." This suggests that, in order to be relevant to the performance of the bank, an insurance agency must make a material contribution to the bank's noninterest income growth. Clearly, some banks were determining that, for them, this threshold was unattainable.

Relevance is relative

But what about other banks? Was this an indictment of bank-insurance generally or was it still possible for other banks to achieve the objective of meaningful noninterest income growth through insurance sales? The 2009 Michael White-Prudential Bank Insurance Fee Income Report sheds some light on these questions. Analyzing data from approximately 9,500 commercial banks and 1,000 bank holding companies, this report provides the percentage of noninterest income each of these BHCs derived from insurance brokerage fee income, a metric referred to as "noninterest income (NII) concentration. …

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