ABA Banking Journal - April 2008 - (Page 41)

Community Banking BANKS + INSURANCE continues from page 33 Instead, Cornell said, as the insurance staff succeeded, and began referring some of their clients over to the banking side, the banking officers began to see opportunities for cross-pollination. Living together before marriage Barry Seigerman started his insurance agency from scratch, with his wife, in 1975, and has 43 years experience in insurance sales. Understandably, he has a suspicion about hopes for instant success for banks in the insurance business. Indeed, Seigerman said he never would have entertained the idea of selling his agency, but for the fact that he has sat on the Smithtown Bancorp, Inc., board since 1993. (The $1.1 billion-assets holding company is parent of The Bank of Smithtown, Hauppauge, N.Y., headed by ABA Chairman Brad Rock.) Even so, when the company decided to try insurance, Seigerman didn’t just sell. His agency, Seigerman-Mulvey Co., Inc., joint ventured with the banking firm for three years, “to see if it made sense to get married or not.” The joint venture entity sold insurance products and services and financial investment services to bank employees and customers. Results were encouraging enough for the “wedding” to be announced in mid2004 and to take place in August the same year, the agency becoming Smithtown Insurance Agents and Brokers, Inc. The deal was structured as an “earn out.” That is, the holding company paid the principals $1 million at closing and agreed to pay them 120% of the agency’s net income for the first three years after acquisition. Since the acquisition, agency revenues and deposit service-charge income have been the bank’s two largest sources of noninterest income. Seigerman warned bankers interested in expanding into insurance against expecting his business to behave like lending did (until recently), with volume rising from quarter to quarter. He says that while insurance sales expense is pretty much a constant, insurance sales volume can fluctuate from month to month, and the reasons for a shift can sometimes defy identification. This up and down doesn’t please stock analysts—Smithtown Bancorp is publicly traded—but it is a fact of life in the business. Or, as he said he tells Brad Rock, “I don’t know why, sport. Tell me, why did kamikaze pilots wear crash helmets?” This can make projections of volume and flow difficult to project from previous business levels, according to Seigerman, something that goes against some bankers’ instincts. At one point he showed the audience a pie chart of the agency’s sources of income, by type of insurance. Commercial lines accounted for nearly 45% in 2006, with personal lines coming in second at 20%. Seigerman explained that 2006 was a banner year for commercial insurance, though “we don’t consider personal lines a stepchild at all.” Also, customer payment patterns differ from year to year. Seigerman gave some tips for starting. One is to understand where money is made in insurance. “Commissions are the main source of income, but not the only one,” said Seigerman. There are various fees, for instance, and more and more work on the commercial lines involves risk-management consulting, rather than sales. In a related vein, Seigerman pointed out that the ideal strategy for building agency earnings is to maintain existing customers and to build new ones. He compared this to building a pyramid from the top down, such that the base of the agency’s business grows wider and wider. Because commissions are billed annually, the wider the base, the more revenues. “That’s unique to insurance,” he said. Another recommendation is to find the right way to enter the business. There are different ways to set up an insurance operation and Seigerman recommends setting up some type of joint venture rather than jumping in with both feet. This helps the bank test both it’s potential partner/acquisition and the way it is entering the business. One last warning Seigerman had for bankers was not to expect more than 15% of an agency’s growth to come from bank referrals, with the remainder coming from organic growth. Right now his organization has been seeing a 12% rate. “My expectation is that we will never see 40%,” he said. Keeping expectations real Indeed, if there was a theme for the entire discussion, it was that banks attracted to insurance must be realistic. S&T’s Thomas Kiral said that bankers should think of bank referrals as a supplement to an agency’s internal growth, though the numbers he shared were much higher than Seigerman’s. And Kiral considers his organization rather successful at exploiting synergies, mind you. The key to it, he said, is constant communication between the banking and insurance operations. But volumes do tend to swing. Kiral presented the following results, the amount of business referred by the bank to the agency, expressed as a percentage of written new business: 2003, 18%; 2004, 23%; 2005, 54%; 2006, 35%; and 2007, 47%. Kiral is an insurance veteran and spent many years in the field prior to coming to his bank and its agency in mid-2001. He had spent 16 years as a vice-president and producer for a large independent agency. S&T Bancorp, $3.4 billion-assets and based in Indiana, Pa., acquired Evergreen Insurance Associates, Inc., a multi-line insurance agency, in 2002. Kiral said that the agency, which had specialized in commercial lines property and casualty policies made additional agency acquisitions in 2005 and 2006, using Evergreen as the “platform agency” for S&T Insurance Group, LLC, the bank subsidiary. The acquisitions were folded into Evergreen. Kiral believes that granting an insurance agency subsidiary broad but balanced autonomy is very important. “Always recognize,” he warned, “that the agency is first and foremost a sales organization.” Producers are expected to come up with plans, each year, for increasing their business, with each being responsible for a piece of the overall agency sales goal. Kiral reports directly to the president of the bank and the holding company and makes his own periodic updates to the board of directors. Taking advantage of the bank connection, for Kiral, means having producers spend a good deal of time with lenders, to see which customers really represent decent opportunities. In 2007 the agency achieved a ratio of 60% of quotes made turning into sold business—the “hit ratio”—and insurance producers clearly want to keep their own ratios up. “We can’t be everything to everybody,” said Kiral. BJ ABA BANKING JOURNAL/APRIL 2008 41 http://www.bankofsmithtownonline.com http://www.bankofsmithtownonline.com http://www.stbank.com

Table of Contents Feed for the Digital Edition of ABA Banking Journal - April 2008

ABA Banking Journal - April 2008 Contents Editor's Column You Can't Beat Wal-Mart: Or Can You? Snapshot: Non-Interest Income Shoulders More Weight ABA National Conference for Community Bankers Report 100th Anniversary: Then & Now ABA Resources ABA Chairman's Position Banks Plus Insurance: How to Make It Work Pass the Aspirin 2008: Year of Rich Internet Apps? Tough Time For That IPO Your Audience Needs to Know Who You Are Telepresence: Costly But Very Cool Webnotes Better Websites Mean Tougher Compliance Mailbox Banker's Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - April 2008

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