Banks Fill Capital Shortfalls with Agency Sell-off

U.S. banks made a major bet in buying up hundreds of insurance agencies over the past few decades, which has given banks an important source of capital when they needed it.

Banks invested billions of dollars and a tremendous amount of energy in the acquisition and integration of insurance agencies over the past quarter-century. The trend peaked nearly 20 years ago, and banks have rapidly divested their insurance businesses in recent years.

In late February, one of the last bank-owned insurance agencies, and the largest, Truist Insurance, was sold to a private equity group for a reported $15.5 billion.

“Most notably this notes the near complete exit of banks from the insurance business,” The Hales Report said on Feb. 20. It added, “After this transaction and 9 bank-owned sales in 2023, bank ownership in insurance brokerage is negligible.”

When the Floodgates Opened

Banks and other financial institutions had been prohibited from offering insurance products by the Glass-Steagall Act reforms passed by Congress in 1933 in response to the economic and banking crises of the 1920s and 1930s. With only a few grandfathered exceptions, banks were effectively barred from the insurance business.

That landscape did not change until 1999—prompted by the 1998 merger of Travelers Insurance and Citigroup bank, a violation of the Glass-Steagall Act that was remedied by a temporary waiver from the Federal Reserve. Congress provided a permanent solution, passing the 1999 Financial Services Modernization Act, which eliminated most restrictions that previously prohibited a financial organization from acting as any combination of a commercial bank, an investment bank, and/or an insurance company. It also affirmed that states would maintain the authority to regulate insurance and insurance agencies, setting the stage for future stress and confusion over which entities held the proper authority to regulate bank-owned insurance operations.

By 2006, roughly 650 banks had bought more than 1,100 insurance agencies at a total cost of about $4.7 billion, insurance industry consultant MarshBerry said at the time. Among the buyers: BB&T, now known as Truist, headquartered in Winston-Salem, North Carolina; Eastern Bank in Boston, Massachusetts; Huntington Bank in Columbus, Ohio; Encore Bank in Houston, Texas; and BancorpSouth in Tupelo, Mississippi.

“Leading banks in insurance brokerage continue to realize strong financial and operational performance,” the MarshBerry Report stated in 2006. “Financial success for leading bank-owned agencies has become an almost certainty and is led by strong organic growth figures.”

Banks desired to offer checking, savings, mortgage, and insurance services, earning a greater percentage of household and business assets. Client stickiness, or so the thinking went, would increase with the number of products purchased.

Had this amalgamation produced a significant banking presence in the distribution of personal, business, and group benefit insurance products, the landscape for independent insurance agencies could look quite different today. The strength, muscle, and reach of a financial institution with hundreds of thousands of customers would have made it much more difficult for an unaffiliated insurance agency to succeed in a community or region.

But it wasn’t as simple as buying an insurance agency and then profiting.

A Firsthand View

I was working for independent insurance agency Stewart Sneed Hewes in Gulfport, Mississippi, in June 1999 when it was bought by BancorpSouth, headquartered 303 miles away in Tupelo. We became BancorpSouth Insurance, later becoming Cadence after our parent bank changed its name to Cadence Bank. Cadence Insurance was subsequently bought by Gallagher in November 2023.

There were many reasons, or so it seemed at the time, for banks and insurance agencies to join forces: cross-selling opportunities, consolidation of backroom functions to reduce expenses, and one-stop financial shopping for customers, to name a few. Banks’ “goal was to increase non-interest income, which the stock market rewarded, and to improve the stickiness of bank relationships through cross-selling,” says Wayne Walkotten, an executive vice president at MarshBerry.

But insurance professionals at bank-owned agencies often must compete for attention and resources with other branches of the parent firm, says Donna Jermer, chief marketing officer for Insuritas, which operates embedded virtual insurance agencies in dozens of banks and credit unions. The bank’s marketing office regularly does not have the resources to give an insurance operation the attention needed “for creative exploration of data or understanding of the unique sales process involved in insurance,” she adds.

“Promoting insurance to a bank customer involves a distinct approach compared to the customary strategies employed by a bank’s marketing department,” Jermer says. “Often constrained and dictated by entrenched processes and templates centered on advertising products such as checking or savings accounts, they may overlook the intricate nuances and specialized marketing strategies essential for effectively engaging bank customers to consider an insurance product.”

As early as 2006, MarshBerry took an even more dire view on cross-selling for insurance agencies and banks.

“Cross-selling is a pipe dream,” the consultancy stated in its analysis “Banks in Insurance: A Comprehensive Look at the State of the Bank – Insurance Brokerage Industry.” But it wasn’t all doom and gloom: “Conceding the fact that financial institutions have failed to capture initial cross-sell penetration goals to date, bank insurance distribution is still evolving,” the analysis said.

In retrospect, some banks found that having an independent unit that somehow overlapped when there was a perceived mutual benefit ended up never creating full synchronicity.

Shared ownership of banking and insurance businesses does have benefits, though, according to Saundra Strong, associate general counsel from 2014 to 2021 for BancorpSouth/Cadence Bank, “if all go in with eyes wide open to the regulatory side and issues stemming from that. It is critical to have a discussion and approach in place and up front.”

One upside to bank ownership is upward mobility and other professional opportunities presented to many agency employees, says Beverly Choppin, former Cadence Insurance CFO. “Bank ownership provided a platform enabling our acquired foundation agencies and their people to think bigger and benefit from a structured environment providing opportunities,” she says, referring to her experience at Cadence. “Our colleagues were able to grow and accomplish more as their responsibilities grew across state lines, while they could learn and become more sophisticated in their planning and strategies. People could become better managers and leaders.”

Banks Reverse Course

Banks owned 16% of the largest 100 U.S. insurance agencies in 2006, but that was just about the peak for this business model. The numbers dropped as private equity firms entered the market and ran up insurance agencies’ valuations. In 2007, according to The Hales Report, 7% of insurance agencies or brokerages were owned by private equity; that increased to 23% in 2018 and 35% in 2022. Meanwhile, from 2007 to 2022, banks declined as a percentage of insurance agency owners from 15% to 1%.

“Headwinds to bank ownership included pressure on balance sheets during the Great Recession and failure of cross-selling to meet expectations,” observes Walkotten. Banks also failed to sustain growth by recruiting new talent and replacing insurance professionals as they moved to another company or retired, he says. To grow, insurance agencies must consistently bring in and train new production talent. It can cost well into six figures to train a new producer, who might need three years to build a book that is accretive to the agency.

Banks were not able to offer ownership opportunities for successful producers and tenured management staff, creating an additional hurdle to hiring and retaining first-rate talent.

“Over the past decade, significant investment in broker tools and resources that enhance the client experience became necessary for insurance agencies competing in the middle market,” says Mark Crites, a partner at Reagan Consulting. “Data analytics platforms, CRM systems, and other value-added capabilities can make the difference in winning. Relationships still matter, but harnessing data (in real time) has upped the game.”

Specifically, related to a bank-owned agency, Crites clarifies that “banks run under totally different business models. With banks’ own pressures driven by enhanced regulatory scrutiny and balance sheet concerns…they couldn’t cede enough dollars to their insurance operation to keep pace.”

In early 2022, the Federal Reserve began a series of quarterly increases to the discount rate. Higher discount rates make it more costly for banks to borrow from the Fed. As a result, banks had to increase loan rates to customers, squeezing net interest margins while facing reduced demand for higher interest rate consumer loans. Within
the same period, occupancy in commercial buildings dropped due to the COVID-19 pandemic and still do not appear likely to rebound to earlier levels. As a result, bank commercial loan portfolios faced increased risk of delinquencies or foreclosures.

In this environment, insurance agencies became increasingly valuable assets to banks. In short, banks needed cash on their balance sheets and less risk. Selling their insurance agencies became an attractive option.

“COVID, inflation, and the threat of recession occurred over the same period of time that valuations of insurance agencies skyrocketed. Many banks have chosen to divest their insurance business and have been rewarded with significant returns on their investment,” Walkotten says. “Those staying the course are facing pressure to recruit new talent, improve long-term incentives for key employees, and focus on organic growth rather than acquisition.”

Announcements from Cadence Bank, Eastern Bank, Truist Financial, and Five Star Bank on sales of their insurance brokerages within several weeks of one another in late 2023 and early 2024 may offer additional illumination into the underlying reasoning for the divestures.

In a Sept. 19, 2023, press release on its roughly $510 million sale of Eastern Insurance to Gallagher, Eastern Bank said, “The transaction is being made to recognize the valuation premium of Eastern Insurance, while allowing Eastern to focus on the growth and strategic initiatives of its core banking business.” In Cadence’s press release on Oct. 24, 2023, the bank said unloading its same-named insurance agency “will allow Cadence to capitalize on the valuation premium and reinvest the capital into its strategic transformation efforts and growing its core banking franchise.”

Truist and Five Star made similar announcements, reflecting the need to strengthen their capital position and focus on core banking business.

Note the sellers’ emphasis on agency valuation and reinvesting capital. The value of insurance agencies had increased to an unprecedented level. Banks needed capital to shore up their financial statements. If banks had found it difficult to accretively merge insurance agencies into their business model, they nonetheless owned a valuable asset that could be sold at the opportune time to maximize returns.

With ongoing capital pressures on regional and community banks that still hold insurance agencies, we are likely to see more sell-offs this year.