Evaluating Bank Opportunities

by Carol Hammes

Faced with shrinking profit margins from their traditional products and services, financial institutions have been searching for ways to expand their activities and help cover some of the overhead. Selling insurance as part of a full financial services package seemed to be a logical choice for this expansion. Banks and savings & loans that could legitimately be in the insurance business started out selling Life insurance and annuities, with many of them doing pretty well at it. Some of these 4,000+ banks also tried to tap the Property/Casualty market, frequently with much less success. About 15 years ago, other banks, hungry for diversification and envious of their competitors, began to invent elaborate ways to get around the existing regulations. A number of joint marketing entities began to spring up, involving banks, insurance companies, and sometimes independent agents. For a variety of reasons, most of these ventures lasted no more than a year or two and few survived into the 1990s.

Meanwhile, throughout the last two decades, national and state agents' associations have waged a battle on the political front to keep the large national banks out of direct insurance sales and underwriting. And they were largely successful in their endeavors-until 1996, when the Supreme Court's infamous Barnett decision changed both the playing field and the players. Now the national banks and seemingly every other financial institution can sell insurance if they want to. Several states continued the battle, but with the announcement of the compromise legislation in May of 1997 in Illinois, a lot of the steam was taken out of the sails of the few remaining holdouts. Agents associations quickly changed their stance to 'If you can't beat 'em, join 'em,' and started providing guidelines for their members on how to structure an alliance with a bank.

Insurance companies have also embraced the opportunity to increase market share. Some (like CNA, whose executives believe that by the year 2000 half of all banks will be selling some type of insurance) have published instructions for agents on how to get a piece of the action. Others, while continuing to provide agents with the option of developing a bank marketing program themselves, are also going into direct bank insurance sales. The ITT Hartford deal with First Chicago is just one example.

Conning & Co. expects banks to build their existing 2% Personal Lines insurance market share up to almost 15% within 10 years. Another study by Datamonitor says that banks could account for 23% of the insurance distribution (including Life and annuities) by 2001. Independent agents of all sizes are now faced with another set of opportunities and threats. Should they do a deal with a bank? If they decide not to jump on this bandwagon, will their competition do it? What impact will that have on growth and profit potential? A few agency principals took a look at their business plans and were able to decide quickly that this marketing approach was not for them. Most owners, however, are remaining open to what their companies and/or local banks are proposing. And many are seriously weighing their options, both from a positive marketing perspective as well as from a more defensive posture.

To be sure, the potential of being able to tap into the banks' credibility factor to solicit insurance from a warm list of prospects is certainly alluring-kind of like shooting ducks in a barrel, right? In the midst of the excitement, though, it's easy to forget that this is simply another group of leads, albeit hopefully more qualified than a list that you could buy from some third-party marketing service. Most of the banks trying to sell Property/Casualty coverages to their customers have found out that trying to solicit insurance from their customers is definitely not as simple as they thought it would be. The anticipated 'synergy' is, in fact, more a dream than a reality-so much so that a number of banks have recently decided to opt out of the insurance business, watching in amusement as their competitors jump in head first.

In a nationwide survey taken in April 1996, more than four in every 10 Americans polled indicated that it was not very likely that they would purchase insurance policies from their bank. So out of 10,000 bank customers, only 6,000 are actually prospects. Our guess is that at least another 1,000 of the bank customers are not potential insurance customers because they have no property to insure, have bad driving records, meet their Life and Health insurance needs through work, or have no money to invest in annuities. This leaves no more than 50% of the bank's customer list as potential targets for cross-selling opportunities.

So far, this still looks pretty good. It's certainly a lot of leads. But that's all that they are-leads. Most agencies already have a large group of untapped leads that are much warmer than the bank's customer list. The average Personal Lines customer buys four policies, and independent agents only have 1.5 of them. Agents who have not done a good job of rounding out their own accounts have even less chance of rounding out the bank's accounts. Sending out stuffers in the monthly statements, putting a sales agent/phone/CRT in the bank lobby, or getting referrals from tellers and loan officers is not going to sell insurance unless there is substantial follow-up by qualified sales personnel and unless the agency has products and pricing that are reasonably competitive. As with any prospects, you will need to touch the bank's customers an average of at least three times before you make the sale.

We have spent the last 18 years observing banks try to institute and maintain viable and profitable marketing programs and agency operations either individually or in conjunction with independent agencies. It's always much harder than anyone (bankers or agents) had thought it would be, and the success rate is downright pitiful. Having said that, we're also convinced that the right kind of cooperative effort can be very rewarding for everyone concerned, including the consumer whose needs you are both trying to meet. To be successful in this type of venture, it's necessary for the decision makers to develop an initial detailed marketing plan, to set reasonable expectations, and then to structure the organization to help accomplish those goals. Top executives must be flexible and creative. Most important, they and all of the personnel involved must be willing to do business in an entirely different manner than either the bank or the agency has done in the past.

Agents who decide after a careful review that they want to go ahead with some sort of relationship with a bank have four basic structuring options, some with a number of variations:

• sell the agency to a bank
• buy an agency from a bank with continuing rights to the customer connections
• act as a sales/service agent for an existing bank agency
• set up a joint marketing venture with a bank that is just getting into the insurance business

Banks are a very good source of buyers for larger insurance agencies right now, and although most of them are no longer paying the top-dollar amounts they once did, they still might be willing to offer more than another insurance agency buyer would. Income and earnings are critical factors in determining price for both sets of buyers. Banks might be willing to pay a premium to get insurance expertise, skilled personnel, turnkey procedures and automated systems, and carrier relationships. Financial institutions have the added advantage over many other potential buyers in that they're often willing and able to offer a guaranteed price up front and/or stock swaps that provide tax deferrals for the selling principals.

Selling to a bank can be an attractive option for agencies with more than $2 million in revenues that are having trouble maintaining a viable management and ownership perpetuation plan. Firms of this size that have principals under age 55 who want to be a vital part of the new marketing strategy are prime acquisition targets for those banks that are actively searching for agencies to buy. Because of their need for insurance experience and knowledge, lucrative employment contracts for the selling principals and their producers may be part of the total package. And the employee benefits programs in most banks are 25% to 30% of payroll. There can also be interesting non-monetary considerations. For example, if the people in the selling agency have been in the insurance business for more than 20 years, they may be suffering from a little bit of boredom or burnout. An opportunity to be at the forefront of a different type of marketing program can give them a new lease on their professional lives.

Unfortunately, not every bank acquisition of an insurance agency is a marriage made in heaven. There are almost always adjustment problems for entrepreneurial agency owners who sell their ownership and then agree to work for a buyer. After all, once you've called all the shots, it's hard to defer to others. The significant differences between the insurance agency environment and the bank bureaucracy with its almost constant meetings and long list of rules can bring on additional culture shock in this type of merger. Sometimes serious disagreements erupt over decisions both small and large. Brilliant marketing plans have fallen by the wayside while the parties duke it out.

Often at the heart of the issue is the fact that many bankers still have a problem with the concept of selling. Due to the dramatic changes in the banking industry over the past 10 years, bank executives have come to realize that they must learn to 'sell' their financial services and products. But they're often still order-takers at heart. Everyone knows it when the CEO of the bank holding company only pays lip service to the new sales environment, and this lack of commitment will pervade the entire bank and, eventually, the acquired insurance agency operation. On paper at the beginning of the program, it sounds fine to pay insurance producers 40% of the first-year commissions for new accounts and 20% for renewals. But when it turns out that a good insurance salesperson starts to make more than the bank's branch managers, bank executives can tend to get very nervous.

The unique relationship between an independent insurance agency and its suppliers is also hard for bank executives to understand. The attention that must be paid to meeting premium volume commitments while maintaining low loss ratios, sometimes at the expense of individual pieces of business, can become a real stumbling block. A good loan risk is not necessarily a good insurance risk. And sometimes a loss simply is not covered by the insurance policy, and no amount of pressure on the company is going to change that. The potential for jeopardizing the bank's relationship with some of its customers is a real concern, particularly if the bank's personnel blame the agency for the problem because they don't clearly understand the insurance underwriting requirements imposed by company relationships.

Banks located in towns with populations of less than 5,000, savings & loans located in certain states, and grandfathered bank holding companies that have been selling Property/Casualty coverages for years may decide that they no longer want to be bothered with something that produces such a low return on equity. A number of these books are heavy in Homeowners, Farmowners, and Fire policies, since most of the accounts came from mortgage customers and were never expanded. Agencies anxious to get more premium dollars to feed their companies can find a wealth of additional sales opportunities in these monoline books. They can also land some significant rollover bonuses with their carriers by consolidating the small chunks of premium that the bank agency has routinely placed with county mutuals.

By either buying or agreeing to manage the bank agency's expirations, a local agency can tap into this sales potential, ride on the coattails of the bank's credibility, and set up an aggressive marketing program to write insurance for other bank customers and members of the community. When the agency is located in the same town and operations can be merged, the price to be paid or the management fee to be charged should reflect the economies of scale. In such a case, the expirations could be purchased on a retention basis at something as high as 40% a year for four years. Or the management fee paid by the bank to the agency could be as low as 70% of the commissions generated each year. If separate locations must be maintained, the operating costs will be higher and the price/fees must be adjusted accordingly.

A reasonable commission split also must be negotiated for future business produced off of the bank's referrals and customer list. A key part of the contract will be to clarify who owns the new policies produced by the joint venture and also to provide for each party to have the right of first refusal to buy the other's accounts. When the agency is merely managing the bank's book of business, it's possible to set it up so that the bank and the agency each own 50% of the new business, although that can get cumbersome if either the bank or the agency is sold to another party. Perhaps a cleaner way of doing this (and something that would work in a situation in which the bank sold its book to the agency) would be to set up a vesting program for the bank, much like the ones that many agency producers have. In addition to receiving a percentage of the commissions as the accounts are produced, the bank could 'vest' in deferred commissions to be paid by the agency at the end of the relationship.

Many independent agencies don't have the opportunity to associate with or buy an existing bank agency, and some may not want to invest the time and energy trying to change an existing bank agency into a marketing machine. For them, structuring a joint venture with a bank may be the most viable option. This type of arrangement can be attractive to a bank that doesn't want to make the capital outlay to buy an agency or lacks the expertise to start one from scratch. Recognizing that the bank can go to an insurance company directly, an agency interested in doing such a deal must be able to demonstrate to the bank why the 'middle man' should be involved.

Unfortunately from a financial point of view, the advantage is often difficult to find. The average independent agency has a pro forma profit of around 18% before bonuses to owners. If you have to split the profit with some other entity, each party only gets 9%. And that's only after the first several years, when the setup costs are sure to outstrip the return. The best you can hope for is break even in the third year. If both parties are accruing ownership at 50%, the increasing equity value might be enough to offset the low level of annual return. But most of the time, in order to make the dollars work out, the marketing program must be set up so that it will increase the commissions written much faster than 6% growth rate in the average agency. And the sales/servicing operation must be structured so that it can produce a much higher profit margin than seen in a traditional insurance agency environment.

The key is to identify which markets you'll try to reach and to develop a program that provides the most cost effective way to do it. In most cases, a traditional type of agency can be used to handle medium-size to large commercial referrals from the bank's loan officers, while a telemarketing/direct mail approach will be the best choice for Personal Lines and small Commercial Lines, where there's simply not enough margin available to warrant having both producers and service reps.

All parties also must agree that to do this profitably, you won't be in a position to write insurance for every single bank client. There must be no more than three insurance companies involved and preferably only one that will give you a consistency agreement so that you don't have go searching for a new carrier every year. The company should have an 800 number for direct claim reporting and routine servicing. It might even be worth giving up a couple of points of commission to use their service center. There should be complete upload and download as well as online quoting and policy issuance. Premium payments should be through automatic account debit or via credit or debit card. If the agency maintains the servicing duties, the service reps should take calls as 'first available' rather than having actual account assigned to them.

Sales should also be handled as efficiently as possible. Alert bank customers to the availability of the insurance products through leaflets in monthly statements, a computer terminal and phone in the bank lobby, request for quote at the ATMs, and on the bank's Web site. Follow-up calls should be made after each inquiry or expression of interest and at least every six months thereafter. Once a policy is written, sales reps should have specific goals to write additional coverages for the accounts within the first 12 months. Be conservative in your projections. Some of the best results we've ever seen in a bank/agency program were:

• 4% of bank customers expressed an interest in Personal Auto with 50% eventually (in three years) converted to a sale
• 6% return on Homeowners, with 40% sold
• Of those who purchased one policy, almost 12% bought another within the next year