Bankers shopping for insurance agencies often focus on price when they should be assessing whether they have found a good match, experts at an industry conference said.
Many bankers also fail to grasp basic distinctions between business lines, said James Overholt, a senior consultant at Milliman & Robertson Inc. in Chicago. For instance, he said, it's not unusual for a bank chief executive officer to ask the principal of an acquired property and casualty agency, "How are you going to sell life insurance?"
Avoiding pitfalls when buying an agency was a hot topic at the Financial Institutions Insurance Association's annual conference here last week. Speaker after speaker warned that failure to recognize and address strategic issues can quickly contribute to a drop in agency performance under bank ownership.
The comments were timely because banking companies are on something of a buying binge. For instance, BB&T Corp. of Winston-Salem, N.C., has bought four agencies since January. F&M Bancorp of Frederick, Md., recently announced a letter of intent to buy an agency, as did Peoples Holding Co. of Tupelo, Miss.
John M. Wepler, principal and vice president of merger and acquisition services at Marsh, Berry & Co. in Concord, Ohio, said his company spotted some sobering numbers.
Though the top 25% of bank-owned agencies are posting growth rates of about 8%, the category overall has "not performed admirably compared to other agencies," Mr. Wepler said.
The average bank-owned agency in the company's data base showed pro forma pretax profit of 21.9% of revenues before its acquisition but dropped to 13.1% afterward, he said. And this is happening as banks remain hungry for agency deals.
"For every announcement that you hear about, we estimate there are two or more about to be announced," he said.
As the brisk deal pace continues, banks need to spend the time to examine basic suitability before considering pricing, speakers said.
David Mishkin, a senior associate at Michael White Associates in Radnor, Pa., suggested that bankers begin by simply walking around and observing how the agency works.
In due diligence, he said, prospective buyers should consider how the numbers would look if the principals left and took the top 50 accounts with them.
In addition, Mr. Mishkin said, if the agency already does business with the bank, it should subtract those commissions from the books. "It has to be able to sustain itself on its own to be a good deal for you," he said.
A bank has to be comfortable with an agency before it will trust the insurance firm with its own customers, he added. Passing along those customers is "where your profitability comes from."
There are peculiarities of agencies that banks should be aware of, Mr. Mishkin said. Many agencies that are excellent performers show zero profits on their books because they want zero taxes, he said. Principals typically rent their office space at a premium from another corporation they also own. And they might issue agents company-owned cars and use other strategies to keep taxes down.
Only after considering a variety of business questions should a banker discuss price, Mr. Mishkin said. And whatever the price, banks should involve principals in the risk of the business. Tying the purchase price to continuing performance can help maintain the entrepreneurial spirit, he said.
Marsh Berry data show that just 14.3% of banks held back some of the purchase price to guarantee retention of a few accounts, collection of accounts receivable, and coverage of future liabilities. About 58% of bank deals have been tax-free exchanges, Mr. Wepler said, and 41% have been cash purchases.
For her part, Linda Clifford, national commercial sales director for the Hartford insurance company, suggested that giving agencies operating autonomy is crucial to success.
Ms. Clifford has first-hand knowledge of a bank acquisition, having owned the Belleview, Fla., agency that Barnett Banks Inc. bought in 1993. That deal led to a landmark Supreme Court decision opening the door for banks to buy insurance agencies.
"I've been bought and sold by a bank, so I know how the cultures clash," Ms. Clifford said. The most important thing for a bank-owned agency, she said, is to "keep it by itself (to) operate on its own."