Association-Owned Banks Provide Financing For Agency Acquisition Deals

During the two years that InsurBanc has been in existence, it has "booked close to $15 million and made about 40 loans relating to agent and broker mergers and acquisitions," noted Mike Herlihy, the bank's president and chief executive officer.

"These have been all kinds of combinations," he added, "including larger firms absorbing smaller ones, as well as smaller firms absorbing larger ones."

InsurBanc has $26 million in deposits and $40 million in total assets, according to a statement on its Web site.

Debt consolidation requests that may stem from mergers and acquisitions are also a key part of InsurBanc's business. Mr. Herlihy explains: "The firm might owe retiring principals various sums financed at different interest rates and terms. It is more advantageous to consolidate that into one payment with the same terms and rate."

InsurBanc makes loans throughout the country, and an agency or brokerage firm does not have to be a member of IIABA to obtain financing, according to Mr. Herlihy. However, he noted that most clients are members of the Alexandria, Va.-based association, since much of the bank's marketing is through that channel.

On the insurer side, The National Association of Mutual Insurance Companies owns Assurance Partners Bank, based in Carmel, Ind. The bank is capitalized with $12.5 million in funding from 262 NAMIC member companies in 35 states and Canada, according to a statement on the bank's Web site.

Jim Rush, president and CEO of the bank, said that there has been $1.4 million in loans for agency and brokerage firm mergers and acquisitions, with the average loan being in the neighborhood of $100,000.

Explaining the need for the specialized knowledge that an insurance company association brings to the table, Mr. Rush noted: "This type of financing does not fall within the conventional wisdom of most bankers, many of whom think in terms of tangible assets and hard collateral.

"With insurance agents and brokers, it is really the history of the firm and the portfolio of clients that are the collateral. Commission income and the ability to retain business are also considerations."

Agency and brokerage firm financing "is a model that is different from what most banks are used to working with," Mr. Rush continued. "They are more comfortable doing real estate and other types of loans with cash flows and amortization schedules they are familiar with. It is a 'comfort zone' issue. This type of business is outside of their ordinary decision matrix."

InsurBanc's Mr. Herlihy also stressed his bank's insurance industry specialization as a key competitive advantage.

"Our value proposition is not necessarily in the interest and payment terms offered," which Mr. Herlihy points out are "competitive, but not necessarily better than other banks."

"InsurBanc's strength is our willingness to grant the loan," Mr. Herlihy said. "We base decisions on what the agency will look like after the acquisition. And because of our niche focus, we are better than other banks at determining that. Our board [of directors] is from this [the insurance] industry and understands the industry," he said.

Mr. Herlihy went on to point out that traditional commercial banks may not understand the valuation and cash flow of insurance agency and brokerage firms. For instance, agencies may be valued at a multiple of annual commissions, and a big part of their value is in accounts receivable, he indicated.

"Other banks tend to look at tangible assets, but an agency really has its main asset in its accounts receivable." Mr. Herlihy said. "We recognize that the true value of an agency is its client list and book of business."

Mr. Rush of Assurance Partners Bank added that many banks have not come up with a valuation system for agent and broker acquisitions because they do not see enough of these types of transactions to justify developing this in-house expertise.

As respects the current hard market, InsurBanc's Mr. Herlihy said that market conditions have affected agency valuations in a positive way.

"Revenue for agents is generally up, so the value of their agencies has increased. The hard market has not dampened merger and acquisition activity," Mr. Herlihy said.

Mr. Rush said that the current hard market pricing environment in the insurance industry "drives up the income stream projection" for agents and brokers, but does not otherwise affect the ability to merge and acquire.

Assurance Partners Bank will consider any agent or broker as a client, not necessarily ones that do business with NAMIC-member insurers, Mr. Rush said.

In addition to the association-owned banks, several insurance companies have gotten into the banking business, but have not yet penetrated the mergers and acquisitions market.

For instance, banks owned by Bloomington, Ill.-based State Farm Insurance Companies and West Trenton, N.J.-based New Jersey Manufacturers Insurance Company concentrate on consumer banking services such as personal checking accounts, home mortgages and credit cards, according to spokespeople from those companies and information on their Web sites.

There are also commercial banks that will lend money to agents and brokers for making acquisitions, with these banks treating such financing as they would any other loan transaction, said InsurBanc's Mr. Herlihy.

He added that certain of these commercial banks, such as BB&T Corporation, based in Winston-Salem, N.C., and Wells Fargo & Company, based in San Francisco, Calif., have themselves been quite active in acquiring insurance agencies and brokerages.

Reproduced from National Underwriter Edition, June 9, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.