Embracing Insurance

Life was already pretty sweet for the Bouchard brothers when FNB Corp. came to call in August 1999. The three men had bought their Clearwater, Florida-based insurance agency from their father in 1991 and the business was going great guns. Selling out was the last thing on their minds, so they were surprised when Peter Mortensen, chairman of FNB, a $4-billion regional bank headquartered in nearby Naples, and Gary Tice, then its president and COO, said they were was interested in buying their agency.

“What we really thought they wanted to talk about was a joint venture,” says the oldest brother, Rick Bouchard. “We weren’t interested in selling because we had been successful growing the business.”

Mortensen and Tice’s sales pitch was simple and to the point. FNB wanted the Bouchard agency to become the platform for a significant business operation that would be assembled through subsequent acquisitions. More importantly, FNB wanted the Bouchards to spearhead that effort. “They had no reason to sell,” says John M. Wepler, a senior vice president at Marsh, Berry & Co., a Concord, Ohio-based consulting firm that advised FNB on the transaction. “But FNB said, ‘This isn’t about sellingu00e2u20ac”it’s about buying. This isn’t the end of your career; it’s the beginning. We want to build something here.’”

Build something they haveu00e2u20ac”and in a hurry. In a little over two years FNB has acquired nine insurance agencies in Florida and Western Pennsylvania, where the company’s largest community banking operations are located. That blitzkrieg of deals has propelled it to number six among bank-owned insurance agencies in the U.S., behind such giants as Citigroup, Wells Fargo & Co., and BB&T Corp.

True to its word, FNB has let the Bouchard brothers run the show. “When we acquired the Bouchard agency we acquired three brothers who ranged in age from 35 to 47,” says Kevin Hale, an executive vice president and their direct report at FNB. “They’re all very aggressive, enthusiastic, and eager to stay in the business. They happen to be great managers as well, so I think this has been a real windfall for us.”

FNB is not alone in targeting insurance agencies for acquisition. Pressure from narrowing margins has led an increasing number of banks to acquire a piece of the insurance distribution system. Expanding into insurance makes sense: It’s a fee-based business that lessens a bank’s reliance on net interest income, and it fits in nicely with a relationship banking strategy aimed at middle-market companies and their wealthy, entrepreneurial owners.

But the banking and insurance agency businesses are very different, and banks won’t succeed unless they approach the market with a well-defined strategy. Bank management and directors need to understand why they’re acquiring an agency and have realistic expectations for how quickly they’ll be able to exploit a variety of cross-sell opportunities. Most important of all, they need to pick the right partner. “We tried to buy agencies that have really young people who want to stay in the business and grow even more,” says Mortensen.

FNB has an unusual operating structure. It is essentially two disparate banking groups: one in Pennsylvania and Ohio, where FNB has its deepest roots, and the other along the West Coast of Florida. In seeking to diversify outside the Northeast, where banking markets offered only modest growth, the company took the unusual step of leaping all the way to Florida where growth opportunities were much better. FNB acquired four Florida banks in 1997, including two that had been formed by current FNB President and Chief Executive Officer Gary L. Tice.

FNB’s unusual expansion move was facilitated by a personal relationship between Tice and Mortensen. Tice, a native of Pennsylvania, had once worked for Mortensen at First National Bank of Pennsylvania, one of FNB’s subsidiary banks, before moving to Florida in 1977. When Mortensen, then FNB’s CEO, was looking to expand out of the Northeast in the late 1990s, he reconnected with Tice. Tice became CEO in January 2001, and in March the banku00e2u20ac”which had maintained dual headquarters in Pennsylvania and Floridau00e2u20ac”consolidated that location in Naples. Today it operates two banks apiece in Pennsylvania and Ohio and six in Florida.

The driving force behind FNB’s insurance strategy was Mortensen, who had long seen insurance brokerage as a logical business for the bank to expand into, but had hesitated because it wasn’t clear whether a confusing jumble of federal and state laws would permit it to do so. “We never thought of the insurance agency business as being something other than closely related to banking,” says Mortensen. “We were mentally prepared for the fact that it would be a logical thing to do.”

Like most banks in recent years, FNB was feeling the effect that margin compression was having on its profitability. “It was becoming increasingly difficult to earn a [higher] amount of income every year from traditional banking,” says Hale. “In order to grow revenues you have to look to noninterest income revenue sources. We felt that the insurance business was just a natural for us because the business is really very similar to banking. And virtually all bank customers have insurance needs.” Hale adds that FNB also considered expansion into fee-based financial planning and residential real estate brokerage, but chose banking because it “was more aligned with banking.”

FNB’s board, according to Mortensen, was very concerned that any agency acquisitions be accretive to earnings per share. The board also wanted to make certain that managers at the bank and the agencies would be able to take advantage of synergies between the two operations. The greatest risk of this expansion strategy, adds Mortensen, was “underachievement if [the agencies] didn’t perform like we thought they would.” The capital requirements of the agency business are low and, unlike insurance companies, agencies do not take underwriting risk. “When you get down to the bottom line, the insurance agency business is not very risky,” Mortensen says.

The company’s first deal was actually a small agency in Pennsylvania that it acquired in August 2000, followed several months later by its purchase of the Bouchard agency. FNB now owns two agencies in Pennsylvania and six in Florida, all in markets where it also has banking operations. About 35% of the agencies’ business is derived from selling personal lines coverage including homeowners and car insurance; the rest comes from placing commercial lines coverage for middle-market companies, which is more lucrative. “From a pure business perspective, commercial lines are much more profitable [because] the average commission per account is much higher than it would be in a personal account,” explains Hale. “And it’s probably better for our bank because we tend to do a lot of commercial business.”

Rick Bouchard, 49, is president of the bank’s insurance operation and younger brother Tim is chief operating officer. FNB is in the process of consolidating the agencies eight different identities under the Bouchard name. And while it is still a new business for the company, the agency operation reported net income of $1.6 million in 2000, which comprised 3.8% of FNB’s consolidated net income of $42.8 million. Insurance commissions and fees totaled $18.6 million last year and accounted for 33% of the company’s noninterest income. In the first six months of 2001, insurance fees and commissions totalled $17.1 million, 44% of the bank’s noninterest income for the same period.

FNB’s insurance agents have been successful in cross-selling insurance to the bank’s solid base of middle-market corporate customers, and Rick Bouchard says it has referral management and tracking systems in place that helps him oversee the process. He also says that agents are receiving on average between 60 and 70 referrals a month from FNB branch bankers, who have specific referral goals and receive a $25 bonus for every referral that results in a potential customer receiving a quote on an insurance policy. The process is working so well that FNB agencies have had to add agentsu00e2u20ac”who are often referred to as producersu00e2u20ac”and back-office support personnel to handle the volume of referrals.

“The insurance producers are absolutely overwhelmed by our ability to generate referrals of good quality business,” Hale says.

The insurance operation will do about $30 million in premium volume this yearu00e2u20ac”a figure that Hale wants to grow to $50 million within three years. He estimates that 30% of that growth will be organic. The rest, obviously, will have to come through additional acquisitions. FNB is looking for more agencies to acquire in Florida, and also in Pennsylvania where, last June it acquired Promistar Financial Corp., a $2.4 billion community bank located in Johnstown. “We’re working on a plan right now to figure out how we’re going to offer insurance services to the customers in the 82 additional offices that we’re acquiring,” says Hale. Most if not all will come through one or more agency acquisitions.

Interest among banks in the insurance agency business has soared since passage of the Gramm-Leach-Bliley Act in 1999, which, among its many provisions, allowed all bank holding companies to own insurance companies and agencies. This has resulted in a feeding frenzy as banks are buying agencies in record numbers. In 2000, 63 insurance agencies were purchased by banks, compared to 40 in 1998 according to SNL Securities. A similar, though less expansive, merger boom occurred in the mid-1990s when various states liberalized their laws and permitted banks to acquire agencies. Wepler says there were a lot of me-too deals, many of which failed because the banks “jumped on the bandwagon without knowing why they were getting into the insurance business.” Bank managements lacking a well-defined and realistic strategic planu00e2u20ac”and knowing little about the business itselfu00e2u20ac”often destroyed rather than created value with their acquisitions.

“Banks have to have clarity within themselves as to why they’re doing this,” says Jim Campbell, a senior vice president at Atlanta-based Regan Consulting, which also helps banks design and execute their agency acquisition strategies. Five years ago, says Campbell, many banks were motivated primarily by their desire to have another fee-based product to sell. While they still want to increase their fee income, many banks today see insurance as playing a crucial part in a relationship banking strategy that is customeru00e2u20ac”rather than productu00e2u20ac”driven. “They see a strong need to serve their customer’s needs in a different way,” he says. “They need to be able to address a broader range of needs, and you can’t do that if you’re ignoring insurance.” Campbell says this shift in thinking is important because it means that many banks are being driven by strategic rather than purely financial considerationsu00e2u20ac”thus their short-term expectations are likely to be more realistic. And that’s good, he adds, “because for most banks, insurance is not going to be a significant source of revenue in the early years.” |BD|