Insurance Revival: For Banks Still on the Fence about Insurance Brokerage, the "Reviews" Have Started Coming in, and They Portray an Improving Picture

Recent headlines have been filled with troubling economic news. GDP growth has slowed and concerns of a double-dip recession have increased. S&P announced the historic downgrade of the U.S. credit rating and the equities markets have been on a wild roller-coaster ride. Add to these concerns a list that includes a troubled housing market, mounting regulatory pressures, and more. It's enough to give us all a few sleepless nights. But as we press on, can good economic news be found anywhere? There is at least one bright spot. The insurance brokerage industry has faced its own share of challenges over the past few years, but recent trends suggest recovery is underway and likely to continue. Evidence of recovery is found not only in the industry at large, but also within the results reported by banks. According to the Michael White--Prudential Bank Insurance Fee Income Report, banks generated a record-high level of insurance brokerage income in the first quarter of 2011, beating the previous quarter by more than 10% and beating the first quarter of 2010 by nearly 20%. For banks that are already significant players in insurance, is good news. But fewer than one-in-five banks fall into category. Despite a high overall bank-insurance participation rate (approximately two-thirds of banks report earning some level of insurance brokerage income), most banks are only fringe participants. In fact, when it comes to insurance, most banks remain undecided. So, for those in the undecided camp, is now the time to commit? The following trends suggest it may be. Organic growth is returning In 2009, the seemingly impossible happened. Organic growth for insurance agents and brokers turned negative. According to the Reagan Consulting Organic Growth & Profitability Survey, organic growth for privately-held insurance agencies fell from an anemic 1.7% in 2008 to -2.0% in 2009. There were two culprits. One was softness in commercial property and casualty pricing and the second was a contracting economy, the latter causing reduced exposures plus widespread return premiums. By 2010, however, organic growth crept back into positive territory, at 1.9%. More encouraging, the recovery has accelerated in 2011 with growth through the second quarter at 3.3% and projected growth for the year, at 4.5%. Although growth has clearly not yet returned to the robust level the industry is waiting for, the trend is positive. A return to negative GDP growth could cause the recent progress to stall. Otherwise, look for organic growth rates for insurance brokers to continue to climb. P&C price softening has eased Supporting the organic growth recovery is an improving pricing environment. Commercial property & casualty premiums rates historically cycle through alternating periods of increases and decreases. Periods of increasing rates, called markets, provide powerful tailwinds that can super-charge organic .growth. Conversely, the decreasing rates of a can create headwinds that suppress growth. The current soft market began in the first quarter of 2004, a painfully-long 7.5 years ago. Recently, however, the Council of Insurance Agents & Brokers issued an encouraging report suggesting the end of the soft market may be in sight. In fact, this report showed that, during the second quarter of year, for the first time in more than seven years, pricing was essentially flat. Though few are forecasting an imminent hard market, a period of stability in rates would be welcome relief and would pave the way for continued improvement in organic growth rates. [ILLUSTRATION OMITTED] Profit margins are increasing As organic growth rates for private insurance brokers were falling, so were profit margins. From 2005 through 2009, the median EBITDA (earnings before interest, taxes, depreciation and amortization) margin declined each year. By 2009, the median margin was 16. …

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