Vernon W. Hill, chairman of Commerce Bancorp, has been on an acquisition binge for the past two years. But the objects of his affection aren't other banks-they're independent agencies that sell mostly property and casualty insurance.

Commerce, a $4.3 billion-asset company based in Cherry Hill, N.J., has bought four such agencies since August 1996. And Mr. Hill expects at least three more deals by yearend.

"To succeed in the property and casualty business, you need scale, expertise, and accounts," he said. "You can only get that from buying."

Commerce Bancorp is not alone. Emboldened by a March 1996 Supreme Court ruling that reined in the states' ability to limit bank insurance activities, banks bought 17 insurance agencies last year, up from four in 1992, according to Kenneth Kehrer, a Princeton, N.J.-based bank insurance consultant. Most of those agencies were property and casualty specialists, he said.

Though most banks that enter the insurance business focus on life insurance and annuities, dozens now sell policies covering homes, automobiles, businesses, even government agencies. The banks see these policies as a natural way to expand existing relationships, particularly with small and midsize businesses.

A handful of regional and community banks are finding that the best way to succeed in this most untraditional of banking businesses is to buy local agencies outright.

Banks such as Commerce Bancorp and BB&T Corp., Winston-Salem, N.C., are leading the charge, cobbling together large-scale modern agencies through acquisitions and becoming dominant players in their respective markets.

Others, including Webster Financial Corp., Waterbury, Conn., and Hibernia Corp., New Orleans, are about to enter the market following recent purchases. Still others are thinking about entering the business.

"We are getting a lot of folks from banks calling, asking us about how we got into the business," said H. Wade Reece, president of BB&T's Insurance Services subsidiary. "There clearly is a heightened interest."

To be sure, buying an agency isn't the only route for banks that want to build their insurance business. Some of the leaders in the field- BankAmerica Corp. and Chase Manhattan Corp., for example-have opted for marketing agreements with property and casualty brokers or underwriters capable of selling directly to the banks' customers.

But observers expect the acquisitions to continue apace. So far this year, at least six banks have announced deals for agencies, American Banker has found.

"The regulatory atmosphere is fairly good and the only thing that is holding banks back are their appetites for getting into something new," said Kathleen W. Collins, a Washington-based attorney who represents the Financial Institutions Insurance Association.

Banks view property and casualty insurance as a way to provide additional financial services to their customers while picking up more fee- based income in the process. In that regard, this business follows the same strategic imperative as the sale of mutual funds, annuities, or life insurance.

In addition there is what bank insurance consultant Valerie Jordan calls the "natural affinity" between traditional bank products, such as mortgages and commercial loans, and corresponding insurance policies such as homeowner's and commercial property and casualty. Such tie-ins create cross-selling opportunities, she says.

Finally, there are decent profits to be had, particularly for established agencies. Commerce Bancorp's Mr. Hill said that he expects any agency he purchases to be generating 20% of its sales in net income. He said that his insurance operation is generating those returns.

Bankers who have launched insurance agencies downplay one traditional concern about banks selling personal property and casualty: that rejected claims could cause angry customers to take their wrath out on the bank, thereby jeopardizing an existing relationship far more valuable to the bank than an insurance policy.

(By contrast, according to this wisdom, a life insurance policy only pays out upon death and is therefore less likely to create problems for the bank.)

"It's rare that a contested claim would result in someone saying that Comerica should be responsible," said Andrea Martin president of Comerica's insurance operation. "I can think of one case where that's happened in the two years we have been in this business."

Some bankers have even chosen to give their insurance operation a separate brand identity in order to create some distance from the rest of the bank.

For most banks that have entered into the property and casualty business, the bulk of their revenues and profits are coming from opportunities to cover the property and liability needs of small and medium-size businesses, hospitals and government agencies-not individuals.

And these "commercial lines," which bring in larger premiums and commissions, involve a level of expertise that generally can't be obtained without buying an existing agency, said Mr. Kehrer.

"The insurance needs of the trucking industry are dramatically different than the insurance needs of the publishing industry," he said. "It takes relationships with a lot of different underwriters to handle all of those specialities."

But major challenges lie ahead for banks, which currently market less than 1% of all the property and casualty insurance sold in the United States.

For one, overcapacity in the property and casualty insurance industry has led to falling premium prices and commissions in recent years. Ms. Martin, for example, says that Comerica's property and casualty revenues have remained fairly flat, even though she has brought on new business.

Added Mr. Reece: "Because of the soft market, this is a tough time to be entering this business."

And though some observers talk of the cross-selling opportunities that exist between the property and casualty insurance and the bank's traditional businesses, many still remain skeptical.

"There is conceptual logic to the synergies argument, but the reality hasn't matched the theory," said Jeffrey Sawyer, an insurance industry consultant with Deloitte & Touche. "Consumers aren't prone to buy all their financial products in one place."

And Ms. Martin, who has one of the most developed bank agencies in the country, is inclined to agree with him. "It's easier to talk about cross- selling than to see results."

That could explain why banks such as Norwest Corp. and U.S. Bancorp's predecessor, First Bank System, have de-emphasized the property and casualty business in recent years, while others have chosen to remain on the sidelines. The number of bank-purchases of insurance agencies jumps dramatically from 1995 to 1996, but the frequency of these deals has leveled off recently.

"When I think about a bank entering at this stage, they would have to be extremely good," said Mr. Sawyer. "They would need extremely good systems and extremely good management, because they are competing against others who through scale have the advantage already."

But this kind of talk isn't deterring a number of regional bankers, who think their companies are nimble enough to turn property and casualty insurance sales into a business that contributes significantly to earnings.

James C. Smith, the chief executive officer of Webster Financial Corp., a $10 billion-asset thrift holding company, expects that recent acquisition of an independent agency will contribute 5% to the bank's bottom line in a few years.

"This is consistent with our objective of being the provider of a full range of financial services to our customers," he said.

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