Early in 2000, John Connelly figured it was time to think about selling his insurance agency, Connelly Insurance Group Inc.
We were a stand-alone agency in an industry that banks and brokers were buying into, said Mr. Connelly, the president of the of Clearwater, Fla., agency, which sold $105 million of premiums last year. They had assets, and we had to see if we should partner up with one. 
Over the next 18 months, Mr. Connelly said, he met with a lot of banks. But in the end he decided he would rather not sell to one.
Instead, in August he sold the business to Brown & Brown Inc. of Tampa, the nations eighth-largest insurance agency, according to Business Insurance magazine.
Brown & Brown has 122 offices in 25 states; they have very good leverage on the insurance companies, Mr. Connelly said. Because of that, we can offer better pricing, broader coverages, or new coverages that a client might have a difficult time finding elsewhere.
A bank, outside of a select few, might have three or four agencies, he said. Theyre not going to have nearly the same pull with the insurer.
He added that banking companies with large networks of agencies such companies as BB&T Corp. in Winston-Salem, N.C., and Wells Fargo & Co. of San Francisco have already bridged the leverage gap.
Wells purchase last March of the big Chicago insurance agency Acordia Inc. brought its total of retail sales offices, in 38 states, to 176; their 2000 revenues totaled $630 million, Wells says. BB&T built its network by buying 69 agencies in the Southeast, its home region.
Theyre both big enough, and theyre going to continue to grow, Mr. Connelly said. But the smaller banks, those that cant afford to make acquisitions of that size theyll never catch up.
That is why, Mr. Connelly said, he turned down bigger offers from local banking companies.
He was not alone in doing so, said Albert A. Lloyd, a vice president at Marsh, Berry & Co., Inc., a Concord, Ohio, consulting firm that specializes in insurance agency acquisitions.
Historically, large commercial agencies such as Aon Corp., Marsh Inc., Willis Group, and Arthur J. Gallagher & Co. often called insurance brokers because of their size and ability to place coverage with just about any insurance carrier were the obvious fit for independent agents that hoped to sell their businesses.
But that all changed about three years ago, when banking companies entered the race, Mr. Lloyd said. Then such companies started landing the top agencies.
In 2000, according to data compiled by SNL Securities for Marsh Berry, banking companies bought 77 insurance agencies, while insurance brokers bought 66, Mr. Lloyd said.
But last year the pendulum swung back. Brokers bought 72 agencies; banking companies bought 59.
One reason for the reversal, Mr. Lloyd said, is that agencies are more comfortable selling to other buyers that have been in the business longer. Another reason perhaps the most important, he said is that the gap between what banking companies and other agencies offer has narrowed.
Brokers have stepped up to the plate and are out there bidding on some of the top agencies, Mr. Lloyd said. Theyre competing on the purchase prices now.
Historically, banks looked for what we call foundation agencies, the top agencies in a specific market, Mr. Lloyd said. And theyd pay top dollar for them.
According to Marsh Berry statistics, in the last three years banking companies paid 2.28 times revenue, on average, for the first agency they bought. In subsequent agency purchases, however, the same companies paid only 1.63 times revenue, on average.
This makes sense, Mr. Lloyd said. The first time around youre paying to get in youre paying for the expertise, the system, everything. You dont have to spend as much after the first purchase.
Last year the average price paid for an insurance agency was 1.71 times revenue. By offering less, banking companies have left the door open for larger insurance agencies.
Craig Whitehead, a senior consultant in Chicago with the Milliman USA actuarial and consulting firm, said he was not surprised that the bidding gap had narrowed last year.
In 2000 banks were so anxious to get into the business that they were making deals that only marginally made sense, Mr. Whitehead said. They stopped making those deals, while brokerages understood that they too had to broaden distribution.
Going forward, I expect well see parity because the economics are the same, Mr. Whitehead said. You make money the same way selling insurance whether youre a broker or a bank.
He also said he understood why some agency presidents preferred to sidle up to insurance brokers.
The insurance producer could end up in a management position at a brokerage, Mr. Whitehead said. In banking, often theyre looked upon as sales guys only, not product guys or planning guys. Obviously this is a generalization, and there are exceptions, but theres no doubt that many banks think this way.
Dean Vander Plas agreed, in general even though he recently sold his independent agency to a banking company. But such pigeonholing is not always the case, he said, and it isnt in this case.
In November he sold his Phoenix Group of Wisconsin Inc. in Ripon to Hometown Bancorp Ltd. of Fond du Lac, Wis. He remains Phoenixs president.
Ive been involved in budget decisions and the board of directors, Mr. Vander Plas said. Furthermore, he said, he didnt think of this as an issue, because I didnt want to end up in a management position at a brokerage, where I cant see my customers and sell insurance anymore.
Mr. Vander Plas said the synergies with Hometown Bank far outweigh anything Phoenix could have found with another agency.
The bank partnership is a good thing, because we see customers that we would have never seen otherwise, he said. Our three largest accounts this year have all been bank referrals. The lenders and our agents have formed a partnership that has been very successful.
Mr. Vander Plas also said that as a community bank, Hometown focuses more on customer relationships.
A bigger bank might look at people as a number, but a community bank cant afford to do that, he said. Were in the relationship business and so is the community bank.
Mr. Connelly disagreed. For all the times we talked to banks, we never heard, What is in it for the customer? he said. We heard all about how they could expand our businesses.
