ABA Banking Journal - September 2010 - (Page 34)
feature story | banks in insurance The relevance challenge According to the 2010 Michael White–Prudential Bank Insurance Fee Income Report, nearly two-thirds of U.S. bank holding companies participated in the insurance brokerage business in 2009. In fact, more BHCs sold insurance products last year than sold mutual funds, annuities, or securities. But the aggregate contribution was insignificant as insurance brokerage accounted for less than 2% of all non-interest income for the banking industry last year. Bottom line—many banks are only dabbling in the insurance business. There are, however, exceptions to this rule. Few banks have had more success in the insurance brokerage business than has The Adirondack Trust Company (ATC), a community bank in Saratoga Springs, N.Y., with assets of $857 million. ATC entered the insurance brokerage business through an agency acquisition in 2001 and has continued to grow the business since. In 2009, ATC reported $10.7 million in insurance brokerage revenues, representing more than two-thirds of its total non-interest income. By comparison, deposit service fees were a minor contributor. According to Charles Wait, chairman and CEO of ATC, “It would be fine with me if insurance was 90% of our noninterest income. It requires little infrastructure, the risks are relatively low, and the bottom line has exceeded our expectations.” And Adirondack Trust is not alone. More than 30 BHCs earned at least 30% of their total 2009 noninterest income selling insurance, more than 50 earned at least 25% and more than 60 earned at least 20%. What do most of these BHCs have in common? They are relatively small. In fact, of the 50 BHCs that earned the highest percentage 34 | ABA BANKING JOURNAL | september 2010 exhibit 1 Primary objective for selling insurance Increase noninterest income 62.8% expand offerings to customers 27.4% attract new customers 2.0% other primary objectives 7.8% translates to $375 million of noninterest income. In order for the insurance brokerage business to represent 20% of this non-interest income (a working definition of “relevance”), it would need to generate $75 million in annual revenue. If so, it would be among the 50 largest insurance brokers in the U.S. By comparison, only $3 million in insurance brokerage revenue is required to represent 20% of non-interest income for the smaller bank. Due to the challenges of building scale, achieving financial relevance is inversely correlated with bank size. Smaller banks hold the advantage. But just because relevance is more attainable for a community bank, doesn’t ensure it will be realized. Many community banks have failed to build their insurance business to relevant scale, often due to a lack of planning. Nearly twothirds of the banks participating in the 2010 ABIA survey have not even defined a targeted percentage of their non-interest income to be derived through insurance sales. Without a target to guide their strategies, banks that sell insurance are at risk of falling short of financial relevance, and perhaps even joining the ranks of the dabblers. The capital challenge While community banks hold an advantage over larger banks in achieving financial relevance, the smallest community banks may be at a disadvantage when it comes to the capital challenge. Consider the following example. Assume a bank with $250 million in assets is contemplating an agency acquisition strategy. As applied above, the financial relevance test (20% of non-interest income) indicates the bank would need to acquire an agency with at least $750,000 in revenue. But the of their 2009 non-interest income from insurance brokerage, 39 have assets between $500 million and $2 billion. Smaller banks are having more success achieving financial relevance because the insurance brokerage business is highly fragmented and building scale is difficult. To illustrate, assume two banks with assets of $25 billion and $1 billion, respectively. Further assume that, for both banks, total noninterest income is equal to 1.5% of assets. For the larger bank, this
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