Have Agency Acquisitions Paid Off ForBanks?

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Wild-card issue is expectations for cross-sellinginsurance to banking customers

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Michael Phelps had raised enormous anticipation heading into the2004 Olympic Games in Athens. The superstar swimmer was hoping tobreak, or at least tie, the record seven gold medals won by MarkSpitz in 1972.

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But his dreams ended after only his third race. Earning only onegold medal in his first three attempts, the opportunity for sevengolds was lost. Ultimately he won a total of eight medals,including six golds, matching the record for the most medals won ata single Olympics. But having fallen short of expectations, had hesucceeded or failed? According to one report, “he may paradoxicallybe considered as the loser.”

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Mr. Phelps achievements in Athens were remarkable, but as hisstory reminds us, the line between success and failure is oftendrawn by expectations.

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Beginning in the late-1990s, the banking industry became one ofthe most aggressive acquirers of insurance agencies. Since then,banks have been second only to insurance brokers in the number ofagency acquisitions completed, consistently announcing 50-to-80deals annually.

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But have these acquisitions been successful? For most, theanswer is yes. To gain some perspective, lets revisit theexpectations that led banks into the agency acquisition fray in thefirst place.

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Was shareholder value increased?

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To see the light of day within a bank, an investment opportunitymust pass two tests. First, it must add to earnings per share.Second, it must produce acceptable returns on invested capital.Banks that acquire agencies expect their investments to pass bothtests and to grow shareholder value.

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Have these transactions produced the anticipated results? Inmost cases, they have. Agency acquisitions are generally accretiveto earnings per share starting in the first year and produce solid(if not eye-popping) returns that usually reach double-digitsbetween the third- and fifth years.

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For most banks, these results are in line with theirpre-acquisition expectations. In fact, the 2004 American BankersInsurance Association “Study Of Leading Banks In Insurance” reportsthat, of 49 surveyed banks, over 80 percent are experiencingfinancial results that meet or exceed their pre-acquisitionprojectionsand nearly 90 percent of these banks plan to continueacquiring agencies.

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Did non-interest income grow?

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A second expectation for banks that buy agencies is growth ofnon-interest income. It has become practically a mantra of thebanking industry to grow non-interest income to diversify revenuesources and reduce vulnerability to fluctuations in interest ratespreads. To this end, banks are pushing deeper into investmentbrokerage, asset management, mortgage origination, insurancedistribution and other fee-based businesses.

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Property-casualty insurance distribution is especiallyattractive because its annuity nature provides a more predictablecash flow. The potential for a steady flow of fee income isirresistible to most banks, but what about the results? Have theseacquisitions really contributed to the quest for non-interestincome?

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The results are mixed. The ABIA study found that some bank-ownedagencies are producing more than 20 percent of the banksnon-interest income, while others are producing less than 2percent. Some community banks and small regional banks havesignificantly altered their revenue profile through agencyacquisitions.

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For larger banks, however, the contribution to non-interestincome can be a mere drop in the bucket. Either way, the impact ispredictable, based on the volume of insurance revenues acquired, sodisappointment is rare.

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Was there cross-selling of insurance to bank customers?

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Banks have long understood that the more products they sell to acustomer, the longer they will retain that customer and the moreprofitable the customer relationship will be. Therefore,cross-selling for banks is both a defensive strategy (retainrevenues) and an offensive strategy (grow revenues). Banks thatacquire agencies expect them to contribute to these strategies. Dothey?

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Consider this. The average Wells Fargo customer has purchasedmore than five products from the bank. The banks goal is to raisethis average to eight. They understand that increases in theaverage number of products per customer produce both higherretention rates as well as new revenue.

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But dont look for insurance sales to lead the way. Why? Becausethe vast majority of customers at Wellsand at virtually everybankare individuals or small businesses, which is not exactly thesweet spot for most big commercial insurance agencies.

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Measured as penetration of a banks total households, or even itstotal commercial lending base, insurance cross-selling has beenabysmal. In most cases penetration rates are less than 1percent.

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On the other hand, many bank-owned agencies are producingimpressive results selling commercial lines solutions to targetedcommercial-lending customers. On average, these cross-sales areadding about two percentage points of annual growth for the agency,and are often contributing 20 percent or more of annual newproduction. Bottom line: Forget about overall penetration rates andfocus instead on the sweet spot–target customer penetration.

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Lets return to our original question: Have agency acquisitionspaid off for banks?

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Expectations for investment performance have generally been metor exceeded, and non-interest income contributions are mixed butrarely a surprise. On the strength of these two measures, mostagency acquisitions would be deemed a success.

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The wild-card issue is expectations for cross-selling. Thoseexpecting high penetration of the core customer base, resulting inincreased overall customer retention rates, have been disappointed.But those who expected insurance cross-sales to bank customerswould strengthen key commercial relationships have been pleasedashave those who expected cross-selling to leverage the stand-alonegrowth of the agency.

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One conclusion is clear: The banking industry will remain activein the agency market and will be a growing segment of the insurancedistribution system. By learning from the results of the past sevenyears, we all have the opportunity to better set our expectationsfor the years ahead, and it is against these expectations that thefuture success of bank-insurance will be measured.

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Jim Campbell is a principal and senior vice president of ReaganConsulting in Atlanta, where he leads the firms bank consultingpractice. He may be reached at [email protected]. ReaganConsulting developed and produces the IIABAs “Best Practices”study.

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Caption for swimmer Michael Phelps shot:

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The fact that some fans were disappointed when Olympic swimmerMichael Phelps last year won six gold medals, falling one short ofMark Spitzs record, shows the line between success and failure isoften drawn by expectations.


Reproduced from National Underwriter Edition, March 10, 2005.Copyright 2005 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.


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