THE COMPASS NEEDLE POINTS TO INSURANCE
Andrew Singer

From its Birmingham, Alabama, origins, Compass Bancshares has ventured far a-field in recent years. Today, the $28 billion (assets) banking company operates in six (mostly Sun-Belt) states. And where the bank has roamed, the insurance agency has followed.

Since 2000, when it completed its initial insurance agency acquisition—the Texas Insurance Agency, based in San Antonio—Compass Bancshares has bought nine insurance agencies. The most recent acquisition (announced in January) was the Warren Benefits Group, LP, a Houston, Texas-based firm that specializes in employee benefits.

The aim has been to expand only within the Compass Bank footprint. Still, that is a fairly large contour. Compass has 385 bank branches, including 139 in Texas, 89 in Alabama, 73 in Arizona, 42 in Florida, 32 in Colorado, and 10 in New Mexico. It divides its activities into nine major geographical markets. The insurance unit is looking to have agencies in all nine major markets, and then it will expand into secondary markets.

Compass is likely to make three more agency acquisitions this year, according to Leonard Kline, president of Compass Insurance Agency (Houston), in a recent interview. It is presently on course to realize $62.9 million in insurance revenues in 2005, he says, which would be about a 19-percent gain compared with 2004.

Seeking more fee income

Compass’ insurance ‘initiative’ was formally developed about three-and-a-half years ago. The idea was not only to increase product lines for the existing clientele, "but also to increase non-interest income," he says.

Kline was brought in after the program was up and running—but not yet extensive; Compass had a single, $4 million agency at the time. Senior management realized that if they were to grow the business significantly, they really required an insurance specialist to run things. Kline is a 25-year veteran of Marsh & McLennan, one of the world’s largest insurance brokerages.

The program has come a long way in a short time. In 2004, the Compass Insurance Services Group had $52.96 million in revenues, up 16 percent from $45.49 million in 2003. (Revenues were $21.59 million in 2002 and $4.29 million in 2001. See chart on page 12.) Insurance revenues account for about 11 percent of all non-interest income at the holding company.

Primary and secondary agencies

Kline refers to the agencies in major markets as foundation agencies. They have the executive management and infrastructure to manage themselves and grow internally. This contrasts with the secondary agencies, where Compass is often looking only to buy a book of business, and the agency principals may be looking for an exit strategy—so they can retire to Florida, for instance.

Kline was asked for examples of what he considers a major market versus a secondary market. In Florida, it might be the difference between a Jacksonville (major) and a Gainesville (secondary). In Colorado, it might be a Denver (major) versus a Boulder (secondary). Compass already has agencies in such major cities as San Antonio, Dallas, Denver, Houston, Phoenix, Tucson, and Birmingham.

Compass will also be looking to add some insurance specialties that they don’t have in sufficient abundance. One is employee benefits. As is the case with commercial property/casualty (P/C), employee benefits offer a renewable product for the provider; the annual commissions can provide a sort of annuity for the bank. All middle-market businesses have to offer benefits to employees, after all, and these products cross-sell well with commercial bank customers. Employee benefits is an area that has experienced strong growth rates in recent years, too. The Warren Benefits Group acquisition was Compass’ second employee benefits firm.

Compass aims to have an insurance agency in each of its nine major markets. It is on course to generate $62.9 Million in insurance brokerage revenues in 2005

In its major markets, Compass is looking to acquire insurance agencies with revenues between $4 million to $5 million. Agency prices are fairly reasonable these days, Kline says. He doesn’t expect prices to drop, however, because there is more competition for agencies.

Once Compass identifies an agency for acquisition, it has to sell the existing agency principals on Compass. How to do this? They highlight the bank’s solid management, its "stellar financial record," its good benefits for Compass employees, and its strong cross-sell culture that includes referrals to the insurance unit, says Kline.

Referrals

Compass has assigned one individual to oversee sales management for all the agencies, says Kline. This manager, based in Houston, is responsible for driving referrals from the bank to the local agency, and acts as a "conduit and a translator between the two organizations," he says. Banking and insurance have different selling cycles and different selling styles. The Houston-based manager helps bankers to understand exactly what makes a good insurance prospect. She can advise the bank whether or not the agency has the insurance expertise necessary to handle a certain type of business. She often assists with seminars that bring together bankers and producers in various Compass markets.

'The biggest challenge is keeping the good people we have and atracting additional good people.'

When a banker makes a referral, it is usually made directly to the local insurance agency. But sometimes the banker may have questions about the process; in that case, the individual can call the insurance sales manager in Houston.

Bankers aren’t always clear about who or what comprises a good prospect. They tend to rank customers by the client firm’s profitability, Kline notes. That works well enough when it comes to lending. But it isn’t always appropriate for insurance. A certain business could be quite profitable; but if it has relatively few employees, it might not really be a good prospect for the insurance agency. Insurance brokers tend to rank potential clients by size and risk exposure. One can sell a lot of employee benefits, after all, to a manufacturing firm with 500 employees. One might sell fewer to a real-estate partnership with less employees. Referrals usually have the biggest impact in the employee benefits and commercial P/C areas.

In all of Compass’ insurance agencies, insurance producers meet with relationship managers (RMs), that is, loan officers. Together, they go over the banker’s client list and try to determine who might be a good insurance prospect. This process is supervised in Houston, but it is conducted locally. Many relationship managers and insurance producers work well together naturally, says Kline. Still, the process needs to be monitored. Today, Kline’s agents won’t make an insurance call on a banking client without the relationship manager. "That has really turned our program around," says Kline.

Does it take much prodding to get the relationship managers to make referrals? They get bonus "credits," and other recognition, explains Kline. The referral stream has been generally good. He does not see a need to license RMs so that they can share in insurance commissions, a step a few other banks have taken recently. (See "Eastern Bank Sets an Independent Insurance Course" in the Winter 2005 issue of BISM.) Such a step would require more time and expense, and securing P/C licenses for the loan officers might not even make the program more productive, he suggests. At the end of the day, it may simply be a case of ‘too many cooks in the kitchen.’

Kline would eventually like to see 25—30 percent of new business coming from bank referrals. How long will it take to reach that mark? "Some of our agencies are doing that now," he says. Still, it might require a few years, systemwide, to reach that level.

A size requirement

Compass, like many other large banks that have embraced insurance, is really looking for high-ticket accounts. Indeed, they have a size requirement. Potential agency clients must be able to generate $50,000 in annual premiums, or $5,000 to $7,000 in annual revenues.

The business must be profitable and of the sort in which Compass is able to present a "differentiated solution," says Kline. Compass does write some ‘small-business’ insurance, but mostly this is "non-touch," and is run through a service center. "Our agencies don’t really go after business that size." Compass Insurance has its own accounting unit, its own CFO, and its own human resources (HR) unit. "We hired our own HR team, did our own pay grades, [and wrote] our own job descriptions," says Kline, "because it is so different from the bank." (The agency does use the bank’s benefits plan, however.) It also has its own compliance officer, something that will be "critical moving forward," says Kline. The agency employs AMS Services’ Sagitta management system, "a good system to manage workflow."

Not all of the agencies are the same in terms of expertise, although each is profitable, says Kline. Some are strong in construction, others in medical malpractice. The potential client profile varies depending on the agency’s particular talents and depth.

Some education of senior bankers is required if all of this is to work, Kline notes. Senior bank management has to appreciate that star insurance producers—those with the largest books of business, who are already earning the most in terms of compensation—are critical when it comes to growing the agency. Compass Insurance has one producer with a $1 million book of business, who is reaping $300,000—$400,000 annually in new business. The institution can’t stifle such individuals. (Banks have had some experience along these lines recently with mortgage brokers, who are also richly compensated compared with traditional bankers.)

There is a size requirement. Potential insurance clients must be able to generate $50,000 in annual premiums, or $5,000 to $7,000 in annual revenues.

As with most large, bank-owned agencies, most revenues come from commercial lines property and casualty insurance (63—65 percent), with a substantial share, too, from employee benefits (25 percent). Personal lines insurance, mostly sold to higher-end clients, accounts for about 10—12 percent of revenues.

Looking ahead, Kline would like to see employee benefits account for a larger share—30—40 percent—with commercial P/C at 50—60 percent, and personal lines at 10—15 percent. The "VIP" personal lines business can grow quickly, he notes.

Kline would like to see internal growth of 8—10 percent in the next year, although he concedes that will be "tough" in the current soft market.

‘A logical extension’

"The biggest challenge is keeping the good people we have and attracting additional good people," says Kline. They don’t want to change the local texture of the agencies. Not only has Compass kept all the principals of acquired agencies—it hasn’t lost any major producers, either.

That suits him just fine. "We’ve maintained internal management" in every instance, he says. "We’re looking for a full infrastructure. I don’t want to have to run these businesses from Houston."

Compass, like other publicly held banks, appreciates that insurance can increase an institution’s fee income/revenues ratios. This in turn can raise a bank’s market capitalization. According to John Wepler, executive vice president of MarshBerry (Concord, OH), speaking at the BISA’s Annual Convention in March, the average price-earnings (P/E) ratio for banks not in insurance in 2004 was 14.1. The average P/E ratio for banks in insurance was 16.5.

Referring to Compass’ most recent agency purchase in January, D. Paul Jones, Jr., Compass Bancshares’ chairman and chief executive officer, said, "This acquisition is a logical extension of our business plan to increase fee-based revenues."