Mr. Phelps achievements in Athens were remarkable, but as his story reminds us, the line between success and failure is often drawn by expectations.

Beginning in the late-1990s, the banking industry became one of the most aggressive acquirers of insurance agencies. Since then, banks have been second only to insurance brokers in the number of agency acquisitions completed, consistently announcing 50-to-80 deals annually.

But have these acquisitions been successful? For most, the answer is yes. To gain some perspective, lets revisit the expectations that led banks into the agency acquisition fray in the first place.

Was shareholder value increased?

To see the light of day within a bank, an investment opportunity must pass two tests. First, it must add to earnings per share. Second, it must produce acceptable returns on invested capital. Banks that acquire agencies expect their investments to pass both tests and to grow shareholder value.

Have these transactions produced the anticipated results? In most cases, they have. Agency acquisitions are generally accretive to earnings per share starting in the first year and produce solid (if not eye-popping) returns that usually reach double-digits between the third- and fifth years.

For most banks, these results are in line with their pre-acquisition expectations. In fact, the 2004 American Bankers Insurance Association “Study Of Leading Banks In Insurance” reports that, of 49 surveyed banks, over 80 percent are experiencing financial results that meet or exceed their pre-acquisition projectionsand nearly 90 percent of these banks plan to continue acquiring agencies.

Did non-interest income grow?

A second expectation for banks that buy agencies is growth of non-interest income. It has become practically a mantra of the banking industry to grow non-interest income to diversify revenue sources and reduce vulnerability to fluctuations in interest rate spreads. To this end, banks are pushing deeper into investment brokerage, asset management, mortgage origination, insurance distribution and other fee-based businesses.

Property-casualty insurance distribution is especially attractive because its annuity nature provides a more predictable cash flow. The potential for a steady flow of fee income is irresistible to most banks, but what about the results? Have these acquisitions really contributed to the quest for non-interest income?

The results are mixed. The ABIA study found that some bank-owned agencies are producing more than 20 percent of the banks non-interest income, while others are producing less than 2 percent. Some community banks and small regional banks have significantly altered their revenue profile through agency acquisitions.

For larger banks, however, the contribution to non-interest income can be a mere drop in the bucket. Either way, the impact is predictable, based on the volume of insurance revenues acquired, so disappointment is rare.

Was there cross-selling of insurance to bank customers?

Banks have long understood that the more products they sell to a customer, the longer they will retain that customer and the more profitable the customer relationship will be. Therefore, cross-selling for banks is both a defensive strategy (retain revenues) and an offensive strategy (grow revenues). Banks that acquire agencies expect them to contribute to these strategies. Do they?

Consider this. The average Wells Fargo customer has purchased more than five products from the bank. The banks goal is to raise this average to eight. They understand that increases in the average number of products per customer produce both higher retention rates as well as new revenue.

But dont look for insurance sales to lead the way. Why? Because the vast majority of customers at Wellsand at virtually every bankare individuals or small businesses, which is not exactly the sweet spot for most big commercial insurance agencies.

Measured as penetration of a banks total households, or even its total commercial lending base, insurance cross-selling has been abysmal. In most cases penetration rates are less than 1 percent.

On the other hand, many bank-owned agencies are producing impressive results selling commercial lines solutions to targeted commercial-lending customers. On average, these cross-sales are adding about two percentage points of annual growth for the agency, and are often contributing 20 percent or more of annual new production. Bottom line: Forget about overall penetration rates and focus instead on the sweet spot–target customer penetration.

Lets return to our original question: Have agency acquisitions paid off for banks?

Expectations for investment performance have generally been met or exceeded, and non-interest income contributions are mixed but rarely a surprise. On the strength of these two measures, most agency acquisitions would be deemed a success.

The wild-card issue is expectations for cross-selling. Those expecting high penetration of the core customer base, resulting in increased overall customer retention rates, have been disappointed. But those who expected insurance cross-sales to bank customers would strengthen key commercial relationships have been pleasedas have those who expected cross-selling to leverage the stand-alone growth of the agency.

One conclusion is clear: The banking industry will remain active in the agency market and will be a growing segment of the insurance distribution system. By learning from the results of the past seven years, we all have the opportunity to better set our expectations for the years ahead, and it is against these expectations that the future success of bank-insurance will be measured.

Jim Campbell is a principal and senior vice president of Reagan Consulting in Atlanta, where he leads the firms bank consulting practice. He may be reached at [email protected]. Reagan Consulting developed and produces the IIABAs “Best Practices” study.

Caption for swimmer Michael Phelps shot:

The fact that some fans were disappointed when Olympic swimmer Michael Phelps last year won six gold medals, falling one short of Mark Spitzs record, shows the line between success and failure is often drawn by expectations.

Reproduced from National Underwriter Edition, March 10, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.