Five years ago, Sunmark Federal Credit Union ($372M; Latham, NY) was dabbling in property casualty insurance when the opportunity to acquire an insurance agency presented itself from an unexpected source. One of Sunmark’s members, a woman with her own insurance agency located up the street from the credit union’s headquarters, was retiring and wanted to sell her business.
“She approached us because she felt we would take good care of her clients,” says Richard Anthony, vice president of Sunmark, and president of SIS Insurance & Financial Services, the credit union’s wholly owned subsidiary.
Anthony was a licensed insurance agent when he joined Sunmark in 2005, and his employment meant the credit union could sell insurance directly to its members even before buying the members’ insurance agency, Hallmark Services, Inc.
“Purchasing Hallmark was a way to supercharge our insurance business,” says Sunmark CEO Bruce Beaudette. “We haven’t looked back.”
Since making the acquisition in 2007, Sunmark more than doubled the size of the agency’s business from 1,600 clients at the time of the sale to 4,500 clients today. During the first 10 months of 2012, the agency generated $450,000 in total revenue and a $75,000 profit after expenses.
“We made about $15,000 in net income in October alone,” Anthony says.
The agency is selling so many new policies that it plans to hire more staff. “It’s a growing business, and it ties in perfectly with what we do, which is auto loans and mortgages,” Anthony says.
The success of Sunmark’s first acquisition is all the more remarkable because the credit union negotiated the deal without the help of an outside consultant. The first discussion with the seller was informally over coffee. Then Anthony and Beaudette got to work evaluating the business, analyzing the books, and making sure there were no outstanding liabilities or lawsuits.
“We looked at cash flows, tax returns, loss ratios, and renewal rates,” Anthony says. “We contacted every single insurance carrier and made sure that they would do business with a credit union because there are some that won’t.”
Sunmark executives even observed how the owner interacted with clients to get a feel for the agency’s customer service.
“We wanted to make sure it would be a good fit,” Beaudette says.
After carefully researching the business, Sunmark paid 1.5 times the book value for Hallmark, planning to recapture that investment over eight years. Instead, Sunmark did it in three. The average payback period for credit unions acquiring insurance agencies is six-and-a-half years, with a 9% to 15% after-tax return on the investment, says Tom Linn, executive vice president with MarshBerry, a financial services company that has brokered deals for credit unions.
Sunmark’s rapid investment payback is a testament to the credit union’s strategy for growing the business. Because property insurance has narrower profit margins than other financial services such as title insurance, Sunmark’s executives understood the key to the acquisition’s profitability was high volume, and they capitalized on the new insurance lines that Hallmark supplied. Besides offering auto and homeowner’s policies, the agency also sold personal liability, identity theft, workman’s compensation, and long-term care insurance. Sunmark’s marketing team began cross-selling its offerings to members and agency clientele, and an emphasis on customer service helped retain 89% of Hallmark’s policyholders in the first year. Over time, Sunmark added insurance carriers, expanding the number from six to more than 25.
In one sense, the acquisition paid off in a big way just after the first year, when the financial crisis hit. What could have been awkward timing actually proved to be fortuitous. Like grocery stores and car repair shops, insurance is a recession-resistant business.
“When the recession hit, we weren’t making the same number of loans, but we had this good off-balance sheet revenue that helped greatly,” Beaudette says.
But Sunmark also stumbled along the way by trying to run the agency as an incidental powers activity, selling the insurance directly to clients instead of through a credit union service organization. Sunmark could sell insurance this way only if the agency’s entire customer base became credit union members. If Sunmark had set up the business as a CUSO, the standard would have been divided in half, with only 51% of the agency’s clients needing to join the credit union.
“We naively thought we could get every one of Hallmark’s clients to become a Sunmark customer,” Beaudette says.
Although Sunmark actively courted the agency’s clients and even signed on many of them as members, the 100% standard was just too stringent to meet, and Sunmark found itself noncompliant with a regulatory headache on its hands. To resolve the problem, it set up SIS Insurance, Hallmark’s new name, as a CUSO. Problem solved. But, Beaudette admits, by establishing the CUSO after the fact, “we did things backward.”