One line of insurance can bring many benefits to a US bank, but only if the business can grow.
Several banks active in the insurance industry have used mergers and acquisitions to develop this line of business and reap the benefits of income diversification and cross-selling opportunities. But others are looking to leave the industry and invest those resources elsewhere after realizing that growth without M&A is more difficult than it looks.
Three banks have sold at least two insurance-related units since 2015, according to data from S&P Global Market Intelligence: Wells Fargo & Co., First Community Bankshares Inc. and First Merchants Corp. Christophe McGratty, managing director and head of U.S. banking research for Keefe Bruyette & Woods, said in an interview that banks might choose to exit the business if their operations are small or if the business preferred to reallocate the capital elsewhere.
Banks operating insurance activities must be a niche player or a player of scale, Mark Fitzgibbon, head of financial services equity research at Piper Sandler, said in an interview. âThe guys in between are the ones who are really struggling to make the business thrive,â he said.
Berkshire Hills Bancorp Inc. is the latest US bank to offload insurance operations, a line of business described by analysts as subscale equities. Insurance represented 10.54% of Berkshire Hills non-interest income in the second quarter. While the company has “contributed significantly” to Berkshire’s earnings and income diversification, it has offered limited future growth, Janney Montgomery Scott analyst Jake Civiello wrote in an Aug. 25 note. .
âThe old Berkshire Hills was trying to be everything for everyone, and they bought a lot of businesses in many geographies across the spectrum,â Fitzgibbon said. Insurance, he added, “was never going to be a hugely profitable line of business for them.”
Watch an outing
Berkshire Hills hopes that the sale of Berkshire Insurance Group Inc. to Brown & Brown of Massachusetts LLC for $ 41.5 million will simplify its business model, improve efficiency, and support the bank’s strategic initiatives as part of its strategic transformation into course over three years, Berkshire Bank chairman and COO Sean Gray said in a statement.
Expenses associated with insurance business typically eat away at 72% of its revenue, Compass Point analyst Laurie Hunsicker wrote in an Aug. 31 note. According to management, Berkshire Hills plans to drop about half of the expense savings into bottom line and reinvest the other half in the business, such as hiring new loan teams, she wrote.
Wells Fargo sold six insurance brokers between 2015 and 2017, most of all US banks, and, like Berkshire Hills, currently working on a strategic transformation. In November 2017, the company announced its intention to withdraw from the life and health insurance business in order to simplify its product offerings, according to a Press release. Insurance contributed $ 80 million to the company’s $ 11.43 billion in total non-interest income in the second quarter, or just 0.7%.
Scaling up with mergers and acquisitions
While some banks seek to exit the insurance business, others wait behind the scenes.
TowneBank has entered into 11 deals for insurance brokers since 2015 to grow its business, and it is looking for more mergers and acquisitions with the aim of doubling its operations over the next five years, said Brian Skinner, President and CEO of Towne Financial Services Group, which contains all non-bank divisions.
“Insurance business in general is a kind of slow growing industry, so in order to make significant progress in this area, acquisition has to be part of your model, and it certainly is for us, âhe said in an interview.
For banks, an insurance line has a handful of benefits, such as income diversification. These counter-cyclical fee revenues “became more significant” during the COVID-19 pandemic when revenues got tight for the bank, Skinner said.
TowneBank’s insurance business reported $ 22.7 million in the second quarter, or 21.4% of the company’s total non-interest income.
Providing banking and insurance services can also lead to stronger relationships with customers, as the business can have a role in all aspects of a customer’s financial life cycle, Skinner said. Complementary business lines also present opportunities for cross-selling, Skinner and Fitzgibbon said.
Insurance is “synergistic “ To the banking business, Fitzgibbon said. “You need a mortgage, so you go To the Bank and they or they say, ‘Wchicken you to buy the to house, we can to have you the owners Assurance To a Well rate. We can wrap this all together and Make this easy for you.’ This sounds attractive attractive.”
Banks can also expand their insurance business through bank mergers and acquisitions.
Following Eastern Bankshares Inc.’s announcement of its acquisition of Century Bancorp Inc. in April, Eastern Bankshares Chairman and CEO Robert Rivers said on a conference call that his colleagues in insurance and Wealth Management were “very, very excited” about the cross-selling opportunities that the transaction would provide. to create.
Eastern Bankshares has acquired the largest number of insurance brokers of any U.S. bank since 2015, with 12 acquisitions during that period.