Do bank stockholders benefit from acquisitions of P/C agencies? The answer? Yes, if there’s appropriate due diligence, perfect implementation, and the price meets realistic expectations. When these three conditions come together, as so many players seem to expect, banks can make fantastic returns by acquiring P/C agencies. However, the results to date strongly suggest that these conditions rarely — if ever — occur simultaneously. This second in a four-article series will focus on the cultural issues in building the bank- agency relationship. (Part I here.)
EMPLOYEES AND THEIR SKILLS
Insurance is always, first and foremost, a personal relationship business. When buying an insurance agency, an acquirer is buying renewal commission revenue that will last for x years and, hopefully, sales and service people with the ability to keep those renewal commissions while also generating new commissions.
What types of sales and service skills are coming with the deal? First, think about the agency owner(s). Are they essential to sales and/or management? The answer, 90% of the time, is 'Yes, very much so.' Even if they aren’t actively selling new accounts, they still have the relationships. This means that you need to ask yourself why they’re thinking about selling their agency and be sure that all the owners agree.
Consider what the average owner gets by selling. According to an article in the National Underwriter by Gerald Vigneron, managing director of North Bridge Advisors, Inc., banks are usually paying two times annual commissions for agencies with $500,000 to $1 million in commissions. Agencies with $500,000 to $1.75 million revenue average $511,251 revenue per owner. If they sell for 2.0 times revenue (not commission, so this is a very high-end price), they make $1,038,604 each. Since they currently earn an average $146,642 in compensation and profits (excluding benefits and perks), they only make 7.08 years’ salary. If they sell stock rather than assets (thus lowering the tax rate on the sale), the tax savings equal another 1.6 years’ salary. Adding back benefits and perks at a conservative estimate of 5% of revenues, the sales price per owner/annual compensation plus profits ratio drops to 5.3 years.
Good salespeople are born risk takers. Why would they sell for five years’ salary if they still plan to work hard? They probably wouldn’t sell unless they have specific concerns. Perhaps they think the agency will otherwise fail (which the prospective buyer would hopefully uncover through due diligence). Or they might want to retire quickly (then where is their future motivation?). Or perhaps they lack confidence in the future, particularly with the insurance marketplace changing so dramatically. If this is the case, then new management must help the owners regain their confidence. Without it, the sales force won’t succeed in selling and the growth predicated by the purchase price won’t materialize.
Also, consider the non-owner producers. As mentioned earlier, unless an experienced producer generates at least $250,000 in premium, the acquirer probably can’t count on the producer to grow the agency, no matter how many leads they receive. As a result, the acquirer will need to rebuild the sales force from the get-go. Does your bank have the skill to develop a successful insurance sales force from ground zero?
Another skill set is technical. These skills are becoming more critical because insurance companies have lost so many people with good technical expertise. This increases the burden on insurance agency personnel — and will be critical for banks selling insurance. Suppose the insurance agency doesn’t or can’t (in this tough marketplace) offer adequate coverage to a commercial client with whom the bank has a loan. The client has a claim and declares bankruptcy and/or files an E&O suit against the agency/bank. If the company goes bankrupt, the bank finds itself with a loan that it caused to go bad. Based on the hundreds of agencies I’ve visited, I’d estimate that more than 90% of all customers have never even been offered the coverages they need, much less purchased them. When buying an agency, make sure the employees have the technical skills required to keep your clients solvent.
CULTURE CLASH
Cultural differences play a key role in the failure of most acquisitions. This is because the buyer’s expectations, and thus the price they pay, usually depend on how the buyer relates to their employees and customers and how the buyer expects customers and employees to respond to the inevitable changes. Reactions rarely meet these expectations.
I worked for Cigna Insurance after INA’s infamous acquisition of 'little' Aetna. Even 10 years after the merger, INA people sat apart from 'little' Aetna people in many company lunchrooms. The epitome of their cultural differences was summed up by one person who said, 'Little' Aetna people know wine. INA people don’t.' Do you think these people were as productive as they would’ve been without such significant cultural differences?
Cultural differences between banks and insurance agencies are often extremely significant. One of the more obvious differences is compensation. Some consultants and bankers believe they can buy an agency and make money by slashing agency staff wages to those of bank tellers. This is a huge cultural issue because agency CSRs generally require more skills and professional training than bank tellers — so they should be paid more. I know one agency/bank manager that doesn’t believe this and pays accordingly. He has great profit margins and a constantly declining customer count. By paying low, his profits are high, but he doesn’t pay enough to retain quality employees. At his current pace, he will run out of customers within four years.
Insurance agencies are sales organizations built around the producers and their service staff. The producer’s and support personnel’s sales spirit keeps the agency alive. An easy way to crush this spirit is to limit what the producers can make. Many banks have made the mistake of capping producer compensation so that the producers don’t make more than the bank president. This is a key cultural issue because insurance agencies understand the importance and nature of the producer and there’s no room for satisfying the president’s ego by making them the highest paid person. Without good producers and adequate service and support staffs, no agency exists.
Another cultural difference is that insurance must be sold. People go to auto dealerships wanting to buy a car. People visit Dell’s Web site to buy a laptop. People go to banks for a loan. People don’t go to insurance agencies wanting to buy insurance. The only reason people buy insurance is because they have to. Insurance is the only product/service people ever buy and hope they don’t use. Insurance gives the buyer nothing except a piece of paper unless they suffer some loss first. It’s like hiring an attorney in a frivolous lawsuit. We hate paying the attorney, we gain nothing from it, we still lose, and our only goal is to minimize our loss. This is why insurance must be sold.
It’s also why good producers are so important. They tend to be loose cannons who do things their own way, to one extent or another. Crush this spirit and sales will vanish or diminish significantly. Of the thousands of insurance salespeople I’ve met, complacent producers always produce complacent sales.
Explaining a sales culture and its importance to people who haven’t personally experienced it is difficult. The tendency is to think, 'I understand and I can do that.' Saying is easier than doing. For example, a few years ago a regional bank, Hibernia acquired a large regional agency, Rosenthal. By all measures Rosenthal was an exceptionally good agency. According to the grapevine, Hibernia paid two times revenue, mostly cash, for this strong agency with a strong culture. According to a press release recently issued by a new Hibernia manager, the results haven’t been promising. It doesn’t appear that the bank was able to maintain, much less capitalize on, that strong sales culture (and hence the new manager was hired).
Recent studies prove that banks are having a difficult time maintaining the sales culture they’re buying. According to a study by Marsh-Berry appearing in the February 26, 2001 issue of Best Week, bank owned agencies were only growing by .3% versus the industry average of 5.2%. Also, their EBIDTA was only 67% of industry average. In other words, bank-owned insurance agencies are writing less business less profitably. The mismatch of cultures most often leads to worse results rather than better results.
These results don’t mean that banks can’t do well after acquiring an agency. However, both parties need to recognize the significant cultural differences — and if both parties are to maintain their strengths after the acquisition, these probably can’t be (and shouldn’t be) eliminated. For the greatest success, the post-acquisition plan must build on the cultures of both agency and bank.
The next article in this series will focus on implementing the bank-agency operation.