BANCORPSOUTH'S THREE 'FOUNDATION' AGENCIES

Cover Story - Summer 2007 | By Andrew Singer

W. James Threadgill, Jr. (l) & Markham R. McKnight (r)

"We are also pleased with the performance of noninterest revenue, which increased to 59 percent of net interest revenue, led by significant growth of our insurance business," [emphasis added] said chairman and CEO Aubrey Patterson, who added that insurance commission revenue "was up 21.3 percent for the first quarter of 2007 compared to the first quarter of 2006."

Revenue growth has been dramatic over the past six quarters—about 20 percent.

Collectively, the three agencies comprise BancorpSouth Insurance Services (BIS), based in Baton Rouge, Louisiana. BIS is headed by Markham McKnight, who came to BancorpSouth in 2003. The agencies are:

• Mississippi-based Stewart Sneed Hewes, acquired in 1999, is one of the 50 largest insurance agency/brokerage operations in the United States.
• Wright and Percy, Louisiana's oldest and largest insurance agency, is based in Baton Rouge, Louisiana.
• Ramsey, Krug, Farrell & Lensing is headquartered in Little Rock, Arkansas.

A special circumstance

While recent insurance revenue growth is encouraging, it is not likely to continue, at least at the same torrid pace, McKnight cautioned in a recent interview. It is primarily attributable to growth in BIS's Mississippi and Louisiana operations in the aftermath of Hurricane Katrina. "System wide, I expect growth to flatten out over the next 12 months," says McKnight.

The recent rise in property insurance rates and rebuilding activity in the Gulf Coast area is now slowing, and returning to normal. McKnight has seen a "crack in the dike" over the most recent eight weeks (he told us in June), with a significant drop in property insurance rates.

That said, another storm could change everything. "We're in a very fluid area."

At present, the agency is significantly ahead of budget in 2007 due to the unexpected building in the Gulf Coast, but "if the slide of the last six weeks continues, we could be on budget on the nose" at the end of 2007, said McKnight.

A commercial P/C operation

BIS is primarily a commercial property and casualty (P/C) operation. Commercial P/C accounts for 70 percent of the business, compared with employee benefits (20 percent), and personal lines (10 percent). Employee benefits is the fastest growing area.

The bank's insurance business has 360 employees, of whom 85 are producers. Annual revenues are about $70 million, with annual premium in the $800 million range.

BancorpSouth's insurance business began in the late 1990s with the institution's acquisition of Stewart Sneed Hewes (Gulfport, MS). BancorpSouth's network of community banks was primarily centered in Mississippi at that time. The bank aspired to be more diversified and less dependent on net interest income. That was a major impetus behind the purchase of Stewart Sneed, which operates on Mississippi's Gulf Coast.

Since then, the bank has expanded into Arkansas, Louisiana, Alabama, Tennessee, and most recently—with its acquisition of Signature Bank—Missouri.

The business had "a lot of success" in the early 2000s, recalls McKnight, and the bank made a bigger push for noninterest income. "That did have a lot to do with expanding" insurance, he says. More agencies were acquired, one of which was Wright and Percy (McKnight was an owner).

A common culture

Linking up with the bank was relatively easy because McKnight already knew many of the people at Stewart Sneed. They had "a lot in common culturally," he recounts.

"Some mergers work, some don't," he says. "Where they don't work, more often than not it's a clash of cultures." Here there were two groups with common goals, values, and ways of doing business. "As long as you have the customer in mind, you'll get to the right decision."

The two agencies—Stewart Sneed, and Wright and Percy—were next-door neighbors, but they really didn't compete against one another on a daily basis. Stewart Sneed did have a few agents who occasionally "did some fishing over here"—that is, in Louisiana, says McKnight. But the competition wasn't bitter. Principals at the two agencies attended the same association meetings. They got to know the Stewart Sneed people.

"It's good to compete against a good agency," says McKnight. It isn't that much fun, by contrast, to compete against an agency that takes shortcuts—cutting across the best interests of the customer, for example. "Every time we went up against Stewart Sneed, we knew they did it the right way."

In 2003, Wright and Percy sold its business to BancorpSouth.

The third agency, Ramsey, Krug (Little Rock, AK), with deep roots in Arkansas, was acquired in August 2003, filling out the bank's primary footprint.

'Some mergers work, some don't says McKnight. 'Where they don't work, more often then not it's a clash of cultures.'

Brand recognition

All three agencies had brand recognition within their regions, which went back decades. They were market leaders, says McKnight, and all were built in a similar way. "We found the fit to be comfortable."

Each, too, had its particular strengths. In Arkansas, Ramsey, Krug developed a strong business with hospitals and medical professionals, "so we draw on them in Louisiana," too, he says. Stewart Sneed has a strong surety operation and does a robust business with municipalities.

They're trying to identify best practices within the overall agency system and build on that.

There have been some recent moves to integrate the three agencies more. A new pharmacy consulting business will soon be marketed through all three agencies, but it will be based and serviced in Louisiana. Called BancorpSouth Pharmacy Benefits Consulting, Inc., it is targeted at businesses with self-funded health benefits plans. BIS will help analyze and identify a client company's pharmacy costs—scrutinize pharmacy usage and where money is spent, for example—and by negotiating and consolidating business through a single provider, obtain discounted drugs for participants (employees) in the company's benefits plan. They'll be partnering with nationally known drug retailers, says McKnight.

Employee benefits will increasingly be run out of BIS's Louisiana headquarters; they aim to develop a single profit center, which should be up and running by the beginning of 2008. There are some labor-intensive processes attached to employee benefits, so much can be said for developing a specialized team in this area. There's no need to replicate it through all three agencies. They'll have one common 'silo' situated in Baton Rouge, because Wright and Percy (based there) has the most-developed employee benefits operation among the three foundation agencies.

There are other instances of integration. Each quarter, BancorpSouth Insurance Services conducts a 'Producer Roundtable' that is attended by about 20 'top-tier' producers across the business. McKnight attends. Mostly he listens. What resources do producers need? How can they become more effective? "These guys are my customers," he comments.

Some useful ideas have come out of these sessions. One idea was to hire a marketing manager to represent the agency at the regional level—not just on the state level.

Chris Boone of Jackson, Mississippi, was named chief marketing officer of BIS in October 2005. He helps to 'tell the story'—how the three agencies interact with one another—and he makes plans where there is a need to consolidate contracts, among other things.

Another idea that came out of the 'Roundtable' was for combining the sales management function at the three agencies. This is still a work in progress. Smaller groups within the roundtable also do things like evaluate software packages. They are currently looking at a chat-room software package, one that enables a producer to alert other agents when events arise—for example, that the producer is calling on a steel components manufacturer, and would a team member be able to attend (not just property and casualty specialists, but also producers with expertise in surety and employee benefits).

Overall, McKnight says that he has been "encouraged" by that idea—that is, of "getting producers to work together. "I feel we can do a good job sending out the right group of people."

Not focused on bank leads

McKnight was asked about insurance leads from the bank. "Does it account for a large portion of our business? No," he answers.

The subject often arises in discussions with his bank insurance peers, he allows. A colleague at another institution has had much success drawing new business from bank leads. But why, then, did McKnight's growth rate exceed that of his colleague's, he wondered.

He is somewhat skeptical that a steady stream of bank leads will necessarily result in sustained and significant agency growth.

McKnight notes that BIS has a number of specialty insurance programs. One is designed for pest control contractors, another for landscape contractors. These specialty programs are accessed by all three agencies. "I don't care if they are bank customers or not," says McKnight of the potential business prospects for these services. The bank probably doesn't have many customers who can make use of such services, in any event.

If BIS were to work more with the bank, they would have to do more selling over the telephone, "because the typical bank customer is a retail customer," he says. That is not necessarily the most profitable customer for a commercial P/C agency.

It is ironic that much of BIS's recent growth is the result of unusual—indeed, tragic—circumstances, i.e., Hurricane Katrina.

Indeed, the agency might squander its energies if it works too closely with the bank. When BancorpSouth purchased its three commercial insurance businesses, it was really taking on the type of producer that would be less-productive when put behind a desk, trawling for retail business, notes McKnight.

The agency has to play its strengths. McKnight's top producer has only 20 accounts. (Other producers have several hundred accounts.) But these 20 are big, profitable relationships, including industrial construction and marine accounts. They are unlikely to get many large marine accounts from bank leads, given the nature of the bank's business.

Also, many of BIS's commercial accounts are sophisticated insurance buyers. A commercial bank is not likely to influence where and how they should buy their insurance coverage, he suggests.

There are certain risks entailed in cross-selling, too. If McKnight has a surety prospect, and he refers that prospect to the bank for a line of credit, and that credit line is eventually denied, "Do you think he's going to do surety business with me?" asks McKnight. Both bankers and insurance producers have a natural tendency to be "protective," he suggests.

Good banking customers are not necessarily good insurance customers, and vice versa. That said, BIS makes an effort to recommend insurance customers to the bank.

Some bank areas, of course, are fertile referral sources. The bank often provides useful employee benefits leads. "They are often able to identify businesses with 25, 50, or 100 lives," for instance, he notes.

That said, the insurance business doesn't get an enormous number of leads from the bank, and bank referrals are unlikely to be the lifeblood of the business anytime soon, says McKnight. Or, if it is, "They're going to have to get someone smarter than me to figure that out."

A paradox

It is ironic that much of BIS's recent growth is the result of unusual—indeed, tragic—circumstances. There is still much rebuilding activity in the Hurricane Katrina-ravaged Gulf Coast, and there have been big increases in premiums required to cover property—a 600-percent increase in some property insurance rates, according to McKnight.

He acknowledges that this presents "something of a paradox." What was a disaster for the Gulf Coast that led to an insurance squeeze on its local businesses is a boon for the insurance agency.

Good brokers are often empathetic when it comes to their customers, comments McKnight, and it isn't always easy to deliver a rate increase to a client that the broker knows is struggling. "It comes at an emotional cost."

He observes that BancorpSouth's Arkansas agency, whose customers were largely unaffected by the hurricane, had suffered rate decreases of 30 percent. Revenue growth in that region has been flat at best. (Indeed, most of the country—beyond the Gulf Coast—has been experiencing a 'soft' market marked by depressed premium rates and, consequently, lower agency commissions.)

Autonomous operations

As noted, the three agencies still operate with a lot of autonomy. If BancorpSouth does make a small agency acquisition in Arkansas, that business would be folded into Ramsey, Krug, the Arkansas-based agency. If they acquire a Louisiana-based agency, it would become part of Wright and Percy. And so on.

The bank appears comfortable with this state of affairs. They run a network of community banks, after all, "so they're comfortable with the local management model," says McKnight.

The bank still sees much value in the branding of three different agencies, although that could change in 10 years, he concedes. There's no push to re-brand everything as BancorpSouth Insurance Services. "I'm not being pressured by the bank along any front," says McKnight. The bank's stance from the beginning (2003) has been, "We're here to listen to you and to take your guidance on insurance."

The bank appears content to enjoy the steady stream of fee income that the insurance agencies produce.

McKnight reports to the bank's vice chairman, Jim Threadgill, whom he calls "an insurance producer at heart. "He is also a banker." Threadgill is in charge of developing the bank's noninterest income sources. He has been a big help if and when McKnight is looking to do an acquisition, or needs other types of support. "He's my greatest resource."

McKnight expects future insurance growth to be primarily "organic," but he can envisage acquisitions, particularly in some of the new areas where the bank is expanding, such as Alabama, Florida, and Missouri.

"It's natural that we would look into those areas." Any prospective agency would have to be a good 'cultural' fit, however. That said, it's not likely they'll become an aggressive agency acquirer like some of their bank peers—BB&T Corporation, for example.

McKnight was asked about the key to working for a bank. "For me, it was finding the right partner. We never found the right fit until these guys came along"—that is, BancorpSouth. The principals at Wright and Percy weren't looking to sell. But it's all worked out.

He now sees himself as a lifer. "I'm 52 years old," says McKnight. "I hope to retire at this organization."

Andrew Singer is editor-in-chief and publisher of Bank Insurance & Securities Marketing magazine. He can be reached at asinger@bisanet.org