Banks clamored for years for the right to underwrite and sell insurance, but few have proven adept at it. There are signs of progress, however, as some banks embrace the brokerage side and gain revenue.

By Lee Conrad
Since being granted the authority to underwrite and sell insurance in 1998, banks have excelled at neither. But now, some analysts say, the painful learning process is ending as banks make better decisions around acquiring and running these operations.

Increasingly, banks are focusing on the brokerage side of the business, as opposed to the underwriting side. According to a recent industry study, banks' total insurance revenue (brokerage and underwriting) slid 1.3 percent in 2006 from the previous year. But the brokerage portion (credit insurance, property/casualty, commercial, life and disability insurance) rose a robust 10.6 percent.

"The distribution side is getting much more attention than underwriting," says Jim Campbell, principal at insurance consultant Reagan Consulting. The distribution side of insurance, or selling, gives banks "more customer interaction, which is what banking has become all about-the chance to cross- sell. Underwriting does not offer that."

There have been some painful lessons for banks along the way. Citigroup's sale of Traveler's property and casualty's unit in 2004 to St. Paul's Cos., and its life and annuity business in 2005 to MetLife, undid the much ballyhooed merger that hailed the bank industry's entry into insurance. Citi's disenchantment with the industry and shedding of units is not unique, but it has left industry observers scratching their heads over why banks wanted to get into insurance in the first place. "It kind of makes you wonder what all the hubbub was about, doesn't it?" says Michael White, president of research firm Michael White Associates. "A lot of it was ego, to be the first one to do this," he says.

The results of two studies from White, in conjunction with the American Bankers Insurance Association and Symetra Bank Holding Co., show Citigroup as the No. 1 seller, with total insurance income at $3.2 billion in 2006, and brokerage income at $1.7 billion. It was followed by Wells Fargo, with total insurance income of $1.3 billion and brokerage income of $1.1 billion; Countrywide Financial, with $1.2 billion and $42.1 million, respectively; HSBC North America, with $1.1 billion and $51.3 million; BB&T Corp., with $813 million and $805 million; JPMorgan Chase, with $801 million and $401 million; Bank of America, with $542 million and $340 million;
Wachovia, with $470 million and $386 million; National City, with $169 million and $65 million; and Greater Bay Bancorp, with $165 million, from brokerage only.

Campbell says that banks' focus on brokerage makes sense. Beside the chance to cross-sell other products, selling insurance-as opposed to underwriting-offers that all-important recurring income. Plus, he argues that run properly banks can raise the margins of their insurance operations-which typically trail banking margins-to bank levels.

So far, however, there's no denying the fact that both big and small banks have had lackluster performances with insurance sales. Many banks overpayed for an agency and had unrealistic growth goals. "A lot of community banks have acquired [insurance agencies] poorly," Campbell says. "Too many of them have been hamstrung by their traditional local mindset and only considered an agency within their banking footprint." He recommends that banks cast a wider net for an agency that is a good fit, and he also recommends that community banks consider only agencies with at least $25 million in annual premiums, which parlays into about $2.5 million to $3.5 million in yearly revenue.

Usually, to be worthwhile, an acquisition must be fairly sizeable, but not always. Indiana, PA-based S&T Bank, a $3 billion bank, bought an agency in 2002 with $1.6 million in revenue; by 2006, under the bank's leadership, that revenue had jumped 175 percent to $4.4 million, says Tom Kiral, president of S&T's insurance group. He says bank referrals are the basis of banks' interest in insurance, but warns that they're not automatic. Bankers work hard to build trust with customers, and they do not want to risk harming that relationship by referring customers too quickly. "This isn't rocket science, but I'm blown away by the number of banks that make that mistake," he says.

For more information on this topic please visit www.dcgcorp.com.