GERALD C. VIGNERON
Small-bank advantage

As the baby boomer owners of small insurance agencies plan for retirement, industry analysts say community banks should jump on the insurance sales bandwagon and take advantage of a lucrative business opportunity.

An insurance firm owner planning for retirement presents the perfect means for banks to enter the insurance business, and with many in the populous baby boomer generation beginning to think about the future of their businesses, the opportunities for banks will likely never be greater than during the next few years, according to industry watchers.

“Take a [baby] boomer in his late 50s who doesn’t quite want to retire but wants to make plans for the disposition of his agency … in comes the bank and [the bank] needs the executive leadership of the current owners, but are willing to put up the cash to buy the guy out now,” said Gerald C. Vigneron, managing director of North Bridge Advisors in Concord and consultant for banks and insurance agencies.

Vigneron, who negotiated the sale of his own insurance agency in 1998, said banks are used to buying out agencies at the moment the principal of the agency is ready to retire, but nowadays, banks should pursue acquiring local insurance companies before the owner exits the business.

“When the principal retires, the heart and soul of the agency retires,” said Vigneron.

But while opportunity for the acquisition of insurance agencies will be as prevalent throughout the nation, the incentive for Massachusetts banks to pursue such a strategy is, perhaps, not as great as in other states. In the Bay State, the bank insurance law is more restrictive than the federal law with respect to the sale of insurance, making acquisition of insurance firms less attractive here, said Kevin Kiley, executive vice president and chief operating officer at the Massachusetts Bankers Association.

“We have provisions that are more onerous in Massachusetts than they are in a lot of other jurisdictions,” said Kiley.

Currently, Bay State bank tellers are prohibited from informing a customer that the bank sells insurance during a teller transaction unless asked by the patron. Banks also are prohibited from listing or informing consumers of insurance products while they are filling out a loan application and restricted from giving employees monetary bonuses for making insurance referrals.

The MBA, still contesting the provisions of the state’s bank insurance law, asked the U.S. Office of the Comptroller of the Currency to preempt those three specific provisions. While the OCC in March 2002 agreed with the MBA’s request, the ruling applies only to federally chartered banks. The association has since been seeking parity for state-chartered banks, which are under the jurisdiction of the state’s Division of Banks.

According to industry insiders, the MBA is set to file suit against the DOB, claiming that federal law should take precedence and preempt the state’s bank insurance laws. Sources told Banker & Tradesman the MBA is enlisting banks around the commonwealth to support the case, and the association will file the suit within the next month. The MBA did not return a call asking about the potential suit.

“These provisions limit our ability of competing in the marketplace,” said Kiley. “This is only restricting the manner in which insurance sales take place.”

While some states have abolished the anti-affiliation laws, some in the insurance brokerage industry fear that once the anti-affiliation law is abolished, the insurance industry would be endangered by the increased competition from banks. One local attorney, however, said that is not the case.

“The banks didn’t buy out all the independent agencies and the independent agencies have continued to prosper,” said Kevin Handly, a banking attorney in the Boston office of Goulston & Storrs. “There have been a few banks that have acquired insurance agencies, but there are also a few banks that have started de novo insurance aspects of the banks.”

In 1999, Stoneham Savings Bank began to pursue the insurance arena as a means of diversification and adding to the products the bank offers to customers, according to Richard Donovan, president and chief operating officer of the $286 million-asset community bank.

Donovan said the bank began discussions about acquiring insurance agencies and chose to look at insurance agencies that would be likely to already have Stoneham Savings customers on board at the agency.

Since 2000, Donovan said the bank acquired Robert F. O’Neill Insurance Agency in Stoneham and the New England Heritage Insurance Agency in Wakefield.

“This benefits [the bank] in terms of retaining customer relationships,” said Donovan. “The relationships have gone OK and we are looking to grow [the insurance business] over the next five years and increase its size, which will increase the revenue for the bank.”

According to Vigneron, banks entered into a wave of insurance agency buyouts in the 1990s but in many instances, banks did not have a clear understanding of what owning an insurance agency entailed. Now, he said, banks are sitting back and learning from the mistakes of others before entering into acquisition negotiations and community banks have the greatest advantage.

“Banks are now more sophisticated,” said Vigneron. “I believe that smaller communitybased banks have an edge over large banking institutions when they get into insurance, particularly the property and casualty service. A smaller bank tends to have those kinds of long-term relationships with their customer.”

Broader Horizons

Bob Collins, president of Coakley Pierpan Dolan & Collins Insurance Agency, a subsidiary of Hoosac Bank in North Adams, said the benefits of a bank-insurance agency partnership make a profitable relationship for both entities.

“We had insured the bank for many years and they were very familiar with our agency. When the actual [merger] discussions came out … we were cool to the idea, but eventually we started seeing the benefits like security in a volatile market and access to the capital of the bank, which allowed us to look into areas that we may not have otherwise looked. It’s the capital, and being part of a larger organization, which gives you more strength,” said Collins.

As part of the negotiations, Collins was put on the bank’s board of directors and, he said, Hoosac continues to let the insurance agency operate independently.

“There has not been interference on the bank’s part in telling us how to run the agency. The bank owns the profits, we fund our own things through our own activities and we haven’t needed to use the capital from the bank, yet,” said Collins. “The only difference is that our financials go over [to the bank] once a month.”

Differences aside, Collins said that even after an acquisition, while the bank officially and legally owns the company, the insurance agency still operates much as it did prior to the acquisition.

“We’re all structured a little differently, but we have the benefits of backroom services at the bank, and the cultures are very different,” said Collins. “We don’t want to all become the same entity, but that is the strength – separate companies can utilize the strengths of one another.”

Vigneron said insurance agencies have more options for selling and managing their business than they did in the past, and as a result, banks have a larger share of the market to acquire.

“Historically, agencies have been traded within the industry, and this ability of banks to get into the business has really changed the landscape,” said Vigneron. “Now, if you want to sell your agency, there is more than just your competitor to sell to. You can sell to the bank.”

At the American Bankers Insurance Association in Washington, D.C., Managing Director Ken Reynolds said the biggest opportunity for growth in the insurance sales field belongs to community banks.

“Community banks are now buying agencies and they have a benefit in that they have a footprint that is similar to the geographic location that the agency serves,” said Reynolds. “It has become much more common today for community banks to enter the market … the community bank has a tighter relationship with the customer and even the big banks wouldn’t disagree with that.”

According to Kiley, existing customer relationships often do give banks an advantage and banks should embrace the idea of extending insurance sales to existing and future customers.

“Gramm-Leach-Bliley broadened the horizons of banks to engage in a whole range of activities,” said Kiley. “Insurance is a growing part of a business line for banks in Massachusetts and nationally. It’s not going to be the core function, but it will be one of the lines of businesses that banks need.”