Academic journal article ABA Banking Journal

So You Want to Buy an Insurance Agency?

Academic journal article ABA Banking Journal

So You Want to Buy an Insurance Agency?

Article excerpt

You're not alone. As the pickings grow slimmer, you'll need to know what makes a good agency and how much you ought to pay for it

As banks look for opportunities to become broader financial services companies under the GrammLeach-Bliley Act, many are considering the insurance business. Banks haven't moved into the insurance underwriting business by buying insurance companies, as analysts initially predicted. Still, a record number are moving quickly to acquire insurance agencies, the traditional method of insurance distribution.

According to SNL Securities, banks acquired over 170 insurance agencies since 1997. Marsh Berry predicts that the number of transactions during 2000 and 2001 alone will exceed this number, and estimates that 40 of the nation's top 100 insurance agencies will be bank owned by the end of next year. Some regional banks, notably BB&T, Commerce of New Jersey, Summit, Peoples Bank, Huntington, Comerica, FNB, Wachovia, Hibernia, and Old Kent have set out to acquire agencies throughout their banking footprint to create a banking-insurance combine to drive revenue and earnings on both fronts. Should your bank buy into this business?

The second time around

Many banks have owned insurance agencies for decades, particularly in small town America in the Midwest, where the 1950s movement to prohibit banks and insurance agencies from affiliating never took hold. But these bank and agency combinations were generally affiliated through common ownership, and most did not operate as integrated businesses.

In the 1980s a few bank holding companies with grandfathered insurance authority, notably Norwest and First Bank System, embarked on ambitious plans to acquire insurance agencies in towns where they had bank branches. But by the early 1990s they were unwinding that strategy, selling the agencies at a loss, and writing down the experience on their books. In the postmortems that followed, it was generally conceded that banks had overpaid for agencies that had poor growth prospects, limited cross-sell potential, and management that never was comfortable as part of the bank's management team. In many of these acquired agencies, management had actually retired, but wouldn't admit it.

In the mid '90s, banks again began to acquire insurance agencies, with activity focused on first one state, then another, as the acquisition frenzy jumped from Michigan to New Jersey to Connecticut and Florida, and now Texas.

What's the attractiveness?

Clearly some banks perceive the acquisition of leading commercial insurance agencies to be of strategic importance. The primary drivers appear to be cross-selling insurance products to bank customers and the need to diversify net interest margin risk through growth in fee income. While each has contributed to the trend, some banks have also been attracted to the problem-solving selling platform that exists in these agencies and the consultative relationships they have built with their customers.

Commercial insurance agencies compete with banks for the "trusted advisor" role for middle market businesses. The better insurance agencies have built strong relationships with this country's leading middle market commercial businesses and their entrepreneurial owners.

Banks perceive strategic interest in these agencies as they provide an avenue for growth in the wealth management area of private banking, investments, estate planning, and trust, not to mention commercial lending. An acquisition of the right agency can be a means to broaden the financial solutions available to high net worth and commercial customers, enabling the bank to increase new client acquisition, profitability and retention.

The prospective elimination of pooling-of-interest accounting is certainly a factor in the recent rush of bank-agency deals. Banks are feverishly trying to close transactions with agencies that fit a consultative profile before their competitors do and while they are still available. …

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