A Bank-in-Insurance Strategy That Cuts Against the Grain

Sometimes the best way to gain an edge is to turn to a business line that rivals habitually overlook.

That appears to have been the kind of strategy First Mid-Illinois Bancshares in Mattoon had in mind when it bought the Illiana Insurance Agency in Philo, Ill., for an undisclosed price last week.

Granted, lots of banks have purchased insurance agencies in recent years, but they tend to favor commercial insurance that can be jointly marketed with business loans.

The $2.1 billion-asset First Mid-Illinois made an offbeat pick: a retail-based firm focused primarily on selling Medicare plans, long-term health insurance and other types of medical coverage to seniors.

Illiana makes sense for First Mid-Illinois because its "demographics skew a little older," said Clay Dean, the chief executive of its insurance unit, First Mid Insurance Group. Illiana is also expected to deliver clients to whom the bank can offer mortgages, loans and wealth management services.

"They're walking in the door with thousands of potential customers for the bank," Dean said.

First Mid-Illinois is no stranger to insurance. It reported $1.6 million in noninterest income from commissions in the first nine months of this year. Dean described the business as "fairly balanced," with homeowner, personal lines and individual health plans in addition to property/casualty policies.

Banks typically prefer to focus on products such as property/casualty coverage and employee benefits since they are a natural fit for businesses, said Michael White, president of Michael White Associates, an insurance consulting firm in Radnor, Pa.

Agencies with commercial-oriented products "are, by and large, the more typical targets for a community bank," White said. It is rare to see a bank target an agency dedicated to life or health insurance, he added.

Of course, there are reasons why banks gravitate to commercial policies. Property/casualty accounts, for instance, are typically larger and produce bigger commissions. Personal lines, by contrast, are typically service-intensive and, as a result, cost more to offer.

Still, White described First Mid-Illinois' acquisition of Illiana as astute.

"This was really savvy," White said. "It's an excellent idea and should help diversify [First Mid-Illinois'] business and help address the needs of a large customer base. … I like the way they were thinking outside the box."

If nothing else, the move is timely, given the unprecedented changes in the health insurance marketplace.

"With the Affordable Care Act and other changes, it's extremely confusing, even for very sophisticated customers," Dean said. "People really need help navigating the complexities of Medicare. It's a very fluid and dynamic healthcare and insurance market."

Insurance is a big business for banks. Through September, they reported $2.6 billion in insurance-related noninterest income, according to the Federal Deposit Insurance Corp.

Generally speaking, insurance is a popular niche M&A option for some banks. The deal for Illiana, for example, came less than two months after TowneBank in Suffolk, Va., agreed to buy three agencies around Richmond, Va.

But banks face heightened competition in bidding efforts. Many are being boxed out as private-equity firms target specific agencies. Though insurance agencies rarely generate high returns, they produce steady profits.

"There's so much private-equity money chasing property-and-casualty firms," Dean said. "Only a handful are selling to banks. The private-equity guys have inflated valuations so much, it's difficult to keep up."

White agreed. "There's no question there's been a large influx" of private-equity money, he said. While banks are still able to pursue smaller agencies, private-equity investors have made it more difficult for them to compete in purchasing larger firms, White said.

There are still opportunities for sharp-eyed banks to find the right fit and affordable valuations, according to Dean. Things work even better when — as was the case with Illiana — the target "is not the type of agency a private-equity firm would want," he said.