INSURANCE IS CLOSE TO SHORE
Cover Story
Andrew Singer

WE OFTEN HEAR as an explanation of why ‘bank insurance' ventures founder that the bank ‘side' doesn't understand insurance—and, for that matter, the insurance ‘side' can't fathom banking. There is a ‘culture' gap,' in other words, that appears unbridgeable.

But this isn't a problem at Shore Bancshares (Easton, MD), a $1 billion banking company with 15 branches in Maryland and Delaware.

Shore may be unique among banks in insurance in that its bank CEO is a former insurance agency principal, while its insurance chief, Terry M. Mead, used to be a commercial banker.

In 2007, Shore Bancshares, which owns Talbot Bank and several other community banks, more than doubled the size of its insurance unit with two agency purchases. This came in the midst of a ‘soft' property and casualty (P/C) insurance market at a time when other banks were pulling back from insurance.

A cyclical business

Unusual timing? Shore's six-year relationship with Avon Dixon, its foundation agency, has been a "successful marriage," Shore Bancshares CEO W. Moorhead Vermilye explained in a recent interview. He recognizes that the insurance business is cyclical, and that it will have its ‘hard' and ‘soft' markets (i.e., when P/C insurance premiums rise and fall, respectively) "But if you have a good agency, it will come out of the soft market stronger." He doesn't look at his agency investment(s) on a day-to-day basis, but on a long-term basis.

In 2007 Shore Bancshares more than doubled the size of its insurance unit—this at a time when other banks were pulling back from insurance.

When a bank purchases an insurance agency, it is buying "talent," above all, Vermilye told us. "We try to make the environment attractive to them." Their intent is to keep the acquired agency personnel on board after an acquisition. One way Shore does this is by "staying out of their hair," says Vermilye, who owned an insurance agency in Easton before switching to banking. "We try not to micromanage the business."

Vermilye recognizes that in the current soft market, it's going to be difficult for insurance unit heads, like Mead, to make their numbers.

Some CEOs simply say, "Grow [the business] 10 percent" over the next year, adding: "You figure out how to do it." But as Vermilye notes, "that's not practical in a soft [insurance] market."

The agency acquisitions were announced in October: TSGIA, Inc. & Subsidiaries (Salisbury, MD), a regional wholesale insurance operation with 40 employees, which generates more than $6.5 million in annual gross revenue; and Jack Martin & Associates, Inc. (Annapolis, MD), a marine insurance agency with 12 specialists and $2.0 million in annual revenue. In 2006, Shore's two existing insurance producer firms, The Avon-Dixon Agency, LLC and Elliott Wilson Insurance, LLC, generated about $6.7 million in insurance revenues.

Edward A. Dickerson, CEO of TSGIA, which offers specialty products for independent insurance agencies in the mid-Atlantic region, will also serve as CEO of a newly formed wholesale insurance subsidiary of Shore Bancshares. It will be managed separately from the company's group of retail insurance subsidiaries, under Mead.

The bank's ‘hands-off' stance with regard to insurance isn't just because Vermilye is a former insurance agency owner, however. It's also how he manages his bank holding company. He lets the CEO of each affiliate run the business without any interference from the holding company.

Why insurance?

Still, why should a bank CEO be interested in insurance at all? "We bought Avon Dixon as an investment—not as a vehicle to cross-sell insurance," says Vermilye. He has been more than pleased with the return on that investment.

In a strategic sense, the company is looking to have as many fee income-producing affiliates as possible as a hedge against volatility, whether from an inverted yield curve, a soft insurance market, or some other market circumstance beyond the company's control. Simply put, "insurance is another way to diversify income," says Vermilye.

Insurance accounted for 53 percent of all noninterest income at Shore Bancshares in 2006, which was ninth among the top 100 banks in insurance in this ratio, according to Who's Who in Bank Insurance. Insurance also contributed 13 percent of all bank revenues. Insurance made less of an impact, however, on corporate profits. The insurance sector had $600,000 in net income in 2006, up from $480,000 in 2005, contributing 4.4 percent of the parent company's $13.6 million in net income.

Vermilye would like to raise Shore Bancshares's ratio of noninterest income to revenues to the 35-40-percent range. It is now at about 25 percent. How long might that take? That's hard to say, answers Vermilye. If Shore purchases another bank, that changes everything; it could suddenly drop the ratio back to 25 percent. But the basic goal remains: income diversification.

Hence the agency acquisitions—despite a difficult insurance market and the recent ‘driving up' of agency prices by private equity firms. "We're buying personnel," adds Vermilye, and the price of the agency reflects the talent it has to offer. "The success of Avon Dixon is reflective of the people still there."

Personal relationships played a role in the latest round of acquisitions. In the case of TSGIA, Inc., Mead and the agency principal had been friends for 20 years. "He's 51 now, and he wants to stay in the business for 10 more years," Mead explains. As part of Shore Bancshares, he can continue to manage the business and has an exit strategy at an appropriate time. As for the banking company, "it's another way to diversify within the insurance business"—for example, wholesale versus retail insurance. It all works because "he [Dickerson] trusted us and wants to work another 10 to 15 years." That said, they had "been talking for two years" before the deal was consummated.

Shore Bancshares may be unique among banks in insurance in that its CEO is a former agency principal, while its insurance chief was a commercial banker for 10 years.

Success in such matters comes down to the people involved, emphasizes Mead, who in his more than 20 years in the business has made some seven or eight insurance agency acquisitions. In each case, "the key players stayed with us over time."

Building a marine insurance business

With regard to the marine insurance agency, Jack Martin & Associates, Inc., things happened quicker. Mead first heard about the merger possibility in May at Reagan Consulting's annual Mergers and Acquisitions conference in Atlanta.

(Reagan Consulting, along with the Independent Insurance Agents & Brokers of America, regularly honors elite insurance agencies in its Best Practices Study. Avon Dixon has been "a best practices agency for six years," Mead reports.)

Avon Dixon has long been one of the three top marine insurance agencies in the mid-Atlantic region. Jack Martin & Associates, a family-owned business founded in the 1920s, was another. (Shore Bancshares's banks and agencies operate in mostly rural areas. There is not a lot manufacturing, but "there is a lot of activity around the water," notes Mead.)

On a Friday at the May conference, Mead was talking with the agency's principal. On Monday they had lunch together. By the end of the week they were reviewing Jack Martin's financial information.

The Jack Martin acquisition more than doubled the size of Shore's marine-related book of business. Damon Hostetter, who had been managing the organization, will remain with Shore.

Including Jack Martin, commercial property/casualty (P/C) insurance now accounts for 65 percent of the insurance business, personal lines 25 percent, and employee benefits 10 percent. There is no push to raise or increase one line of business over another, according to Mead.

Still, given the soft insurance market, it is not a bad idea to have some diversification within the insurance segment. In this respect, a benefits business and a personal lines business can help out.

After all, a recent industry survey suggested that commercial P/C brokerage was down 14 percent nationally from June to August, and 15 percent lower in September. Mead's commercial lines business is down only 1 percent this year (2007), so Mead figures he is doing 14 percent better than the national average. In any event, personal lines are up for the year, "and our new commercial lines business is up 30 percent compared with the previous year," says Mead.

The marine insurance business, alone, will account for 18-20 percent of all agency revenues when the second marine agency is fully absorbed.

Jumping to a new industry

From owning an insurance agency in Easton, CEO Vermilye became a director of Talbot Bank in 1977, president of Talbot Bank in 1988, and CEO of Shore Bancshares, the holding company, in 2000. "I made the right decision," he says, on the industry switch.

For a bank/insurance venture, it helps if a bank CEO knows something about insurance, but "it's not a requirement," says Vermilye.

That said, banking and insurance "are about as different as night and day," he adds. Insurance operates as a sales culture, while banking traditionally is a service culture. But now, he observes that is changing.

"Banking will be more of a sales culture than it has been in the past. Until the last four or five years, bankers were order takers," basically, says Vermilye. "But now the competition is such that they have to hit the street and bring in business."

Insurance is competitive on a day-to-day business. Banking often is not. An agency typically has several large commercial accounts that could fly away at any moment—with a corresponding plummet in revenues. A bank usually "has less than a handful of accounts that could have a meaningful effect on the bottom line," says Vermilye. There are typically more bank clients, and they usually ‘stay put' more than is the case with insurance brokerage clients.

Insurance chief Mead was a commercial bank lender for 10 years. In 1984, he pried a commercial account away from another bank for his institution—the insurance agency Avon Dixon. Avon Dixon became Mead's bank client for the next three years. Mead was a friend of one of the agency's principals who, in 1987, convinced Mead to change careers—to move from banker to insurance producer. Mead found the ‘risk-taking' of the insurance industry attractive. He eventually became the agency's president, and six years ago, as noted, the agency was purchased by Vermilye's Shore Bancshares.

Cross-selling

Even though Avon Dixon is primarily an investment to Shore Bancshares, and the so-called synergies of banking and insurance are downplayed, Vermilye does think that there are some opportunities for cross-selling insurance. "It is possible. It is a question of leadership."

Vermilye notes that the organization recently was "fortunate" to bring in as CEO of its largest operating bank affiliate an individual "who is totally sales oriented." If a CEO understands the insurance sales culture, he or she is much more likely to establish goals in areas like cross-selling.

What does it mean to establish goals? A banker's job evaluation, for example, might depend in part on how well he/she is doing with insurance referrals.

Along these lines, the bank has worked in the past year to set up monthly meetings of insurance reps and loan officers. These can take place at the regular marketing meetings in the loan offices, Mead says; they can be critical to building relationships with bankers.

'Banking will be more of a sales culture than it has been in the past. Until the last four or five years, bankers were order takers,' says Vermilye. 'But now the competition is such that they have to hit the street and bring in business.'

Some loan officers have come to appreciate that insurance often makes the bank-client relationship stickier, adds Mead. Conversely, if a commercial client is buying insurance elsewhere, there is always the chance that the client might be lured away by another lender. There's the convenience factor, too. Clients often recognize advantages in one-stop shopping.

The agency has no target number with regard to cross-selling. At present, bank referrals account for less than 10 percent of new business, Mead said.

More acquisitions?

Asked if Shore Bancshares anticipates more agency acquisitions on the immediate horizon, Vermilye answers: "We might take a break. We have to digest what we have." But that isn't written in stone. "If the right deal comes along, we might jump at it," he allows.

What is the key to making the whole thing work? "Make sure that you have the right people doing the job," says Vermilye.

Mead recalls that when Shore first made overtures to the then-independent Avon Dixon agency six years ago, Mead and his colleagues didn't even know the name of the prospective suitor. One thing that the bank made clear even before it disclosed its identity, however, was that it would leave the agency alone from a management standpoint. "They said that they would leave us alone to do what we do best. And they did exactly what they said they would do."

In Mead's view, this type of "respect" from the parent institution is critical if the relationship is to succeed.