By Wayne A. WalkottenIt is impossible to grow plants in a garden without seeds, water and fertilizer. Likewise, it can be difficult to grow your insurance business without a similar level of tender, loving care. I am pleased to report that the insurance business of many banks is blooming—and with a little more care, the investment can thrive.
While some financial institutions have divested their insurance operations, we have seen that other committed banks continue to acquire and focus on this line of business. However, bank acquisition activity has not recovered to pre-financial crisis levels. From the 65 announced transactions in 2006, the last several years have hovered around 20 per year, with 19 announced transactions in 2014, according to SNL Financial.
As an alternative to buying an agency, many banks have purchased individual producer books from other organizations. These deals, often referred to as “lift-outs,” can be a positive way to bring in new producers, but the hiring company must be comfortable with the past production record of the producer, their contractual relationships with their prior employer and any book of business the producer hopes to bring aboard.
Many bank-insurance ventures began with the acquisition of an existing agency and a focus on the cross-selling of insurance to bank customers and the growth of wallet share. As shown in the nearby chart, prior to the financial collapse, bank-owned agencies were growing at a rate faster than the average agency, but since 2011 have lagged the average.
MarshBerry’s studies show that the basis for strong organic growth is a well-managed producer staff, including investment in new producers. In our experience, due to post-transaction pressure, many bank-owned insurance organizations fail to grow and are not reinvesting in the next generation. This pressure often comes from both sides of the deal. First, the investing bank is focused on managing the acquired agency’s profit and hitting quarterly and annual earnings targets, and at the same time, the selling shareholders are attempting to maximize profits and their performance-based transaction payments. Both sides of the deal often resist further investment in new producers and technology.
Without reinvestment in people and technology the business will likely not grow. Existing insurance platforms that brought sophisticated client services to its bank partners were often well suited for continued growth. However, more demanding prospects and clients, coupled with an increased level of competition and complexity, challenged firms to continue reinvestment.
MarshBerry consultants recommend that a typical agency invest 3-8 percent of revenue in new production talent depending on the existing ages of the production staff. If the organization has procrastinated on this investment over the past several years, this reinvestment may need to be at a higher rate, necessary for both the perpetuation of talent on the existing books of business and the youth necessary to drive higher levels of new business.
Many firms rely on acquisitions for growth, but it should not be the sole growth strategy. Start with reinvestment and let sales management, the appropriate resources and support staff drive sales success. Such nurturing will allow your insurance business to enjoy stronger long-term returns on your agency investment.
Wayne A. Walkotten, CPA, CVA, is EVP at MarshBerry. MarshBerry offers one hour of free consulting to American Bankers Insurance Association member banks.