Though a few top banks have done well owning and operating insurance agencies, most banks fail in their insurance endeavors, according to a consultant who advises in such deals.

John Wepler, senior vice president, mergers and acquisition services at Marsh Berry & Co. in Concord, Ohio, detailed the problems and pitfalls of bank-agency mergers in a speech at the Financial Convergence conference in New York this week.

His firm's data show that sales at the average bank-owned agency shrink 0.3% in the first year after the agency is acquired. In comparison, the average independent insurance agency's sales grew 6.9% in the 12 months ended Sept. 30th, 2000.

Numerous factors explain this failure to thrive, Mr. Wepler said.

Generally, he said, when a high-performing bank decided to get into insurance, it found the highest-performing agency in its market area and bought it.

"The best candidate probably has no interest in selling to a bank" and will need to be persuaded that being purchased is best for the agency and its staff, Mr. Wepler said. He added that agencies that are openly for sale are not necessarily the best ones to buy.

The other point of failure was that once a bank bought an agency it did not maintain the sales culture, Mr. Wepler said.

He said that in the insurance industry "you have to kill to eat" - agents must sell aggressively to make any money at all. Bankers are not used to this, but they will seriously hurt sales if they do not give agents motivation and autonomy.

A complaint he hears often from bank-owned agencies is that banks are too bureaucratic. Agents say, "Once upon a time we actually sold insurance. Now we just go from meeting to meeting," according to Mr. Wepler.

Banks can bolster growth at their agencies as well as in more traditional business lines by focusing on small-business clients and offering them a range of financial services and high-quality advice, he said.

Successful agencies "dominate the commercial middle market with a high-touch wealth management consultative approach," he said. Historically, "small" accounts can become very profitable when business owners buy all their financial services from their bank, he said.

The most important indicator of success is a well-chosen first purchase, Mr. Wepler said. He calls this the "foundation transaction" and said banks that selected high-quality agencies to begin their agency systems fared better overall than banks that made bad choices, even if later purchases were better than the first.

Marsh Berry's work with agencies and banks on structuring mergers and acquisitions has given Mr. Wepler first-hand knowledge.

In many markets, he said, an agency is considered the top performer because it serves many large clients and is well respected. For example, he said, Wachovia chose well when it bought DavisBaldwin Inc. of Tampa last September.

In fact, banks looking for agencies should focus on commercial lines, he said, and if they are interested in personal lines, they should build these operations internally.

Mr. Wepler also said banks should avoid agencies with low-cost, commoditized lines, like auto insurance, that can be handled more easily by insurance companies that sell directly. Instead, he said, banks must buy agencies that have a strong consultative background and market them to wealthy and commercial clients.

To evaluate an agency, a bank needs to look at its earnings and judge how much revenue each agent is generating and how profitable the insurance contracts are, Mr. Wepler said. This is not always easy because, for tax purposes, many agency owners pull out earnings in perks for themselves and their employees, he said.

Despite the potential problems, Mr. Wepler said acquisitions will continue, especially in areas where high-quality agencies remain available, such as the West Coast, Texas, and New York City.

He predicted "a massive number of transactions in the first quarter and second quarter" in these areas.

In addition, he said, he thinks that banks will see more competition to buy strong agencies from securities firms and large, publicly traded insurance brokers.

Insurance agencies lack "enough capital to invest in their future," Mr. Wepler said, and smart bankers will use their capital to buy top agencies while they are still available.

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