Financial Institutions Insurance Association
meeting showcases a variety of approaches
By Thomas A. McCoy
Insurance agents and bankers could hardly be more different: Agents are entrepreneurial and sales-oriented. Bankers are procedures-oriented, bottom-line-focused, number crunchers. Since the passage of the Gramm-Leach-Bliley Act two years ago, giving banks wide authority to sell insurance, bankers and agents are increasingly being thrown together, either as competitors or partners. What kind of impact are banks having on the insurance market place? Where will their plans ultimately take them? Can insurance agents and bankers--seemingly such strange bedfellows--operate under common ownership and succeed?
These are among the questions we wanted to explore by attending the 14th annual meeting of the Financial Institutions Insurance Association (FIIA) in April. Two of the core constituencies of the FIIA are bankers and insurance agents. The meeting provided both frank recognition of their differing perspectives and excitement about the potential for joint opportunities.
Not all of the bank executives attending the FIIA meeting are all that interested in the property/casualty side of the business. Banks have a lot more revenue on the credit life, disability and annuity side, where banks' own personnel are more suited to the sales process. They tack on coverage as a loan is being written or offer an annuity to a large depositor. According to a study by the American Bankers Insurance Association, 69% of bank insurance premiums for the year 2000 were annuities.
Bank of America, the nation's largest bank in terms of deposits, derives 5% of its revenue from insurance, although its property/casualty business is minimal. Catherine S. Kenworthy, senior vice president, insurance services, for Bank of America, says, "We try to take advantage of the 'windows' which allow us entrance to customer needs."
The loan transaction "window" is critical to the success of a new Bank of America product called BPP (Borrowers Protection Plan). It is aimed primarily at younger loan customers, covering involuntary unemployment, disability and accidental death--with variations for a single individual and two individuals. "We used consumer focus groups to design the product," says Kenworthy.
So far, BPP, launched less than a year ago, has been successfully sold on 25% of the loans originated in Bank of America banking centers. That volume alone will generate $113 million in lifetime fees. Cancellation rates on the plan are in the low, single digits.
The FIIA program included a discussion of the insurance sales efforts of much smaller banking institutions: PFCU (a Philadelphia-based credit union) and Bridgewater Savings Bank of Bridgewater, Massachusetts. Both of these institutions have gotten into the property/casualty insurance business within the last year via outsourcing. They contracted with Banc Insurance Services, a Massachusetts company that handles company contracts and back-office operations for six community banks and a credit union in the Northeast.
Keith Graveline, who runs the insurance operations for Bridgewater Savings Bank, says: "We see our property/casualty sales as our future revenue stream. The immediate revenue comes from the annuity and term life sales."
Banc Insurance Services targets institutions with assets of at least $100 million and expects to expand into the Midwest and Southeast by this fall, according to its president, Jeff Cheskey. "We'll concentrate in the 18 states that have a strong concentration of community banks and credit unions."
A different category of banks in insurance, and a far more substantial one in terms of property/casualty premiums written, is banks that have bought agencies and operate them as wholly owned subsidiaries. The insurance sales strategies of these institutions are more mysterious. One senses that it will take a while for those strategies to gel, as bankers and insurance agents learn to overcome the cultural gulf between them.
At the FIIA, both bankers and producers with bank-affiliated agencies stressed that it is important to have good communication between the two sides. We talked to one southern agent whose firm had been purchased within the last two years by a regional bank that has 33 branches in six cities. "We spend a lot of time visiting the loan officers in the branches," he explained. "We educate them and try to coordinate our efforts with what they do."
Edward Kiessling, CPCU, who runs Commerce National Insurance Services, a New Jersey-based bank-owned firm, agrees that it's crucial to have good communication between the bank's loan officers and the insurance agents. "If you can't leverage existing relationships, your inherent advantage melts away," he says. "It's also important for the bank's chairman to be solidly committed to the insurance business."
"Our people wouldn't fit with a Marsh, Aon or Gallagher. With Greater Bay Bancorp, our employees can and will make a difference."
--Frederick J. de Grosz, President and CEO, ABD
Asked about compensation to the bank personnel who assist in the insurance sales process, Kiessling says, "There is nothing specific paid for each piece of business." But he said bank personnel are paid bonuses at the end of the year based on the role they have played in generating insurance sales.
Commerce National has grown into one of the 10 largest bank-owned agencies in the country by acquiring independent agencies. The insurance operations, in 14 states from New York to Delaware, produce $60 million in annual revenue and account for 7-8% of the earnings of their bank parent, Commerce Bancorp. Kiessling, who joined the company two years ago after a 17-year career with two national insurance brokers, says Commerce National is positioned now to compete with those national brokers.
If there is a poster child for potential success in this emerging phenomenon of bank-owned agencies, it may be the new ABD-Greater Bay Bancorp entity created at the start of this year in the San Francisco area. ABD is the largest privately owned agency west of the Mississippi River, and its merger with Greater Bay Bancorp, an amalgamation of 11 banks in the San Francisco Bay area, turns out to be the second largest bank-agency combination in the country in terms of purchase price. (Wells Fargo's merger with Acordia, in May 2001, remains the largest.) In terms of insurance revenues Greater Bay Bancorp is estimated to rank fourth behind Wells Fargo, BB&T and Wachovia.
However, what is intriguing is not the size of the ABD/Greater Bay combination, but the possibility that the two organizations may actually be professionally compatible. Although the bank is a publicly held company with 45 offices, and $7.9 billion in assets at the end of 2001, it is still a community bank--only the 14th largest bank in California in terms of deposits. Greater Bay focuses on serving mid-sized businesses and stresses community involvement.
"We delight in taking business away from big banks that have forgotten what customer service is all about," says Duncan Matteson, chairman of Greater Bay Bancorp. Matteson says it found in ABD a company with "the same kind of client relationship culture that we have."
The compatibility factor was equally important to Frederick J. de Grosz, president and CEO of ABD, who has known Matteson for 30 years. "Our people wouldn't fit with a Marsh, Aon or Gallagher," says de Grosz. With Greater Bay Bancorp, he says, "Our employees can and will make a difference." All the approximately 550 employees that were at ABD before the merger are still there, de Grosz adds.
In measuring the potential success of such a bank/agency combination one can look at the deal in two stages. The first is putting together the deal in a way that lays the foundation for future financial rewards for stockholders and employees. The second is getting the gears of the two organizations to mesh.
The first stage has already been completed. As of mid-April, the financial objectives seem to have been met. ABD's 85 shareholders had become Greater Bancorp stockholders, and they and the other bank stockholders were rewarded with a 45% increase in the share price of Greater Bancorp stock--an increase of $500 million in the bank's market capitalization.
Matteson speculates that a key reason for the stock appreciation is that investors tend to pay a substantial premium for banks that have fee income in the range of 35% to 40% of revenues. With the acquisition of ABD, Greater Bay Bancorp's fee revenues rose from 12% to 30% of revenues. "Our goal is 40%," says Matteson."
As for ABD's merger objectives, like many agencies that decide to be acquired, it was looking for a solution to its perpetuation needs. "We also wanted to continue to be able to attract bright people and have capital for agency acquisitions," says de Grosz. About half of the agency's 27% annual growth rate over the last five years has been generated from acquisitions.
But central to the whole decision to go forward with the merger, de Grosz says, was the conviction that bank and agency personnel could work together. "Greater Bay's clients are similar to ours."
Although it's early, so far, the synergies of the merger appear to be working. Referral business is flowing back and forth between the two organizations.
"We've brought in $1 million in new revenues from bank clients," says de Grosz.
"I think the bank may be as big a beneficiary of business as the agency," says Matteson. He says ABD already has brought some "huge" accounts to the bank.
Matteson says the bank is setting up a compensation program to reward executives who refer business to ABD. "Each one of our relationship managers are reviewing clients to refer, and (based on that activity) they will be well compensated at year end."
Attending the FIIA meeting leaves one wondering what the delivery system for financial services, including property/casualty insurance, will look like in a few years. There may be some innovative alliances formed, and others that will prove to be amateurish. As the turbulent history of marketing over the Internet has proven, the mere capability of delivering a product in a new way does not guarantee sales success.
The pace of change can be fast. Already in the last four years we've seen Citigroup acquire Travelers and then spin off the property/casualty company. At the insurance agency level too, there'll probably be some heads spinning.
It should be quite a ride. *