A record year for U.S. insurance broker consolidation concluded with a deal that helps perpetuate a long-running trend.
In Fifth Third Bancorp's divestiture of Fifth Third Insurance Agency Inc. to Foundation Risk Partners Corp., as confirmed by S&P Global Market Intelligence, a rapidly growing, private equity-backed broker expanded its footprint and capabilities by taking on the former property and casualty insurance distribution business of a regional bank.
At the start of the century, regional banks emerged among the leading consolidators of the insurance distribution space as they sought to build financial services supermarkets following the passage of the Gramm-Leach-Bliley Act. The typical approach would have a bank purchase a relatively sizable insurance practice within its branch footprint as a foundation agency, then build that business out through subsequent bolt-on acquisitions.
Over time, and particularly in the aftermath of the global financial crisis, a number of banks opted to shift away from this approach. The emergence of numerous private equity-backed acquirers, which created greater competition for potential acquisition targets, may have hastened some of the retreats.
There were nine instances of banks selling U.S. insurance agencies and/or insurance books of business in 2020, including the Fifth Third transaction, compared to only six such acquisitions by banks or bank-owned brokerages. It marked the third straight year in which banks were net sellers of U.S. insurance distributors. Other notable 2020 sellers included People's United Financial Inc. and Associated Banc-Corp., with sales of their insurance agencies to the private equity-backed AssuredPartners Inc. and USI Insurance Services LLC, respectively.
In Fifth Third's case, the company included the insurance agency's sale within a multifaceted $200 million expense reduction program that included the rationalization of staffing, businesses, third-party vendor relationships and facilities. Executive Vice President and CFO James Leonard during a December 2020 investor conference said the bank had identified what he classified as "noncore, niche businesses" for divestiture, which also included its health savings account and 401(k) recordkeeping operations, the latter of which involved Great-West Lifeco Inc.'s Empower Retirement LLC as the buyer.
The bank confirmed in its fourth-quarter 2020 earnings release that it completed the insurance divestiture.
"That wasn't really providing the returns we're looking for, and we couldn't get the scale," Chairman and CEO Gregory Carmichael said during a Jan. 21 earnings conference call. Carmichael said that the bank was seeking to get out of those businesses that were "more hobbies" for Fifth Third.
Although the bank did not disclose the identity of the agency's acquirer, Foundation Risk Partners President and CEO Charles Lydecker confirmed to S&P Global Market Intelligence that his company purchased the business.
"This was a great opportunity for FRP to enhance our leadership ranks," Lydecker said, noting that his company would be adding locations in Louisville, Ky., and Cincinnati through the deal.
Lydecker said Foundation Risk Partners had grown to produce annualized revenues in excess of $300 million. The company was launched in 2017 by Warburg Pincus & Co., in partnership with a team of industry veterans, including Lydecker, a former Brown & Brown Inc. executive.
Fifth Third recorded $35.4 million in other insurance income during the trailing-12-month period ended Sept. 30, 2020, according to bank regulatory data compiled by S&P Global Market Intelligence. That ranked 22nd overall among bank holding companies, savings and loan holding companies, commercial banks and thrifts at the top-tier consolidated level.
Other insurance income, which is a measure of revenue from insurance product sales and referrals, accounted for only 1.2% of Fifth Third's noninterest income during the same period, well short of the double-digit percentages that were common among some similar depository institutions with sizable insurance agency operations like Truist Financial Corp., TowneBank, Cullen/Frost Bankers Inc., BancorpSouth Bank and Trustmark Corp. Other insurance income accounted for 4.8% of Huntington Bancshares Inc.'s noninterest income for the trailing-12-month period ended Sept. 30, 2020.
A Fifth Third spokeswoman noted that the bank retains other insurance assets beyond the divested P&C and employee benefits business.
Fifth Third Insurance Agency was incorporated under its current name in 1998. More recently, the bank identified insurance as a growth business, highlighted by separate acquisitions of R.G. McGraw Insurance Agency Inc. and Epic Insurance Solutions Agency Inc. in 2017.