A decade ago, banks began entering the insurance distribution business with high hopes for cross-sales. Terms like “one-stop shopping” and “financial services supermarket” were often used by banks as the rationale for buying agencies.

The fully integrated model (banking-investments-insurance) was projected to generate cross-sales that would, at least, make agency acquisitions highly accretive for banks and, at best, transform the financial services industries.

But these high hopes have not been fully realized. Banks that have achieved cross-selling success have found it to be meaningful, but not transformational. Cross-sales have provided supplemental agency growth and have helped to secure targeted commercial lending relationships. Both are worthy contributions, but neither is a sufficient reason to acquire agencies.

Before we address the impact of this realization, however, consider that for most banks that sell insurance today, the primary motivation is not cross-selling–it is growth of fee income.

The 2006 American Bankers Insurance Association's “Study Of Leading Banks In Insurance” surveyed over 500 banks. Of those selling insurance, only one-third indicated “cross-sales” as their main objective. By comparison, more than half cited “growth of fee income” as the goal.

As banks continue to try to diversify their revenues, insurance commissions are especially attractive because of their renewing nature.

These findings suggest two conclusions:

o First, if fee income contribution is the measure of success in bank-insurance, community banks may ultimately be the most successful.

o Second, expect the composition of the bank-insurance industry to shift over the next few years as some large banks exit while smaller banks enter.

Consider the following.

o Some Large Banks Will Divest Agencies:

To date, large banks have captured most of the bank-insurance headlines. Primarily through acquisition, many large banks have developed significant agencies. This includes 13 banks that each own an insurance agency among the 50 largest in the United States. Median assets for these 13 banks are more than $40 billion.

Bank of America is one of these 13 banks. But earlier this year, BOA announced it was exploring a possible divestiture of its insurance agency. Although the agency generates tens-of-millions of dollars in annual fee income and is among the 30 largest U.S. insurance agencies, BOA considers it expendable.

Why? Because in 2006, BOA produced tens-of-BILLIONS of dollars in fee income, of which its insurance agency contributed less than 1 percent.

Granted, as one of the largest banks in the country, BOA is an extreme example. But the point holds true for other large regional and money-center banks.

Income from insurance sales may never be a material contributor to fee income for these big banks. As other banks reach this conclusion, expect additional high-profile divestitures to follow.

o More Community Banks And Small Regionals Will Acquire Agencies:

While large banks have acquired agencies, small banks have lagged behind. The ABIA study found that 65 percent of surveyed banks larger than $10 billion in assets currently sell commercial property-casualty insurance–with most of them having entered the business through an agency acquisition.

However, this rate drops to only 43 percent of banks in the $1-to-$10 billion asset category, and to less than 21 percent in the $0.5-to-$1 billion asset category.

But the study also found indications this gap may be closing. For example, more than 11 percent of the surveyed banks in the $1-to-$10 billion asset category plan to enter the commercial property-casualty business–the highest rate found in all the asset categories. The second highest rate–nearly 6 percent–was found in the $0.5-to-$1 billion asset category.

So, why are smaller banks entering the business as some larger banks exit? Because for community and small regional banks, the fee-income contribution from an agency acquisition can be much more meaningful.

For example, assume a community bank with $1 billion in assets generates $10 million in annual fee income. Further assume this bank acquires an agency with $5 million in revenues. The bank would immediately increase its fee income by 50 percent, with the agency contributing one-third. This example is reality for dozens of community banks that earn between 30 percent and 70 percent of their fee income through insurance sales–and this list is growing.

Does this suggest smooth sailing ahead for community banks in insurance? Not necessarily. Several challenges will need to be overcome.

o First, community banks should be prepared to invest enough capital.

Buying too small will not only reduce the fee-income contribution but will also put the bank at risk of failure to meet the constantly increasing premium expectations of the carriers.

Most banks should target to reach a minimum of $3 million in annual commission income within the next five years. Depending on their level of organic growth, this might require $5 million or more in invested capital.

o Second, some community banks will not find a high-caliber agency to acquire within their geographic footprint.

A common mistake for community banks has been to buy a small local agency that lacks the leadership, markets and production capability to be an effective platform. Rule of thumb: If the agency doesn't have the horsepower to lead you to your $3 million-within-five-years target, keep looking.

Many community banks that intend to enter the insurance business will be thrown off course by either the capital requirement or by a lack of quality acquisition candidates, so don't expect community banks to reach the 65 percent participation level any time soon–nor should they.

The insurance distribution business is not for every bank. But for those community banks committed to insurance as a key component of their fee-income strategy, the impact can be significant. In the end, these community banks may be the winners in bank-insurance.

Special Reports /

Will Community Banks Win The Bank-Insurance Business?

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