One needs to understand and exploit current and future trends in order to be proactive. It is easy to predicate trends by understanding recurring cycles and applying that knowledge to the current insurance marketplace.
So what will 2013 be like for insurance agents, brokers and wholesalers?
The following is a list of major industry trends that need to be factored into business plans.
Soft Market Not Quickly Going
The current trend is toward a hardening market. The past hard market was firmly in place from about 2000 through 2003. Prior to that almost a whole generation had lived under soft market conditions! The current soft market has been in various lines in various regions for a number of years. It hit most lines across the country since 2007, and it seems to have no real end in sight. It was predicted to end in 2012, but until recently it hadn’t.
A hardening market will mean a lot of work quoting for not a lot of reward in increased premiums and thus, commissions. To keep revenues up, agencies will still need to sell more – either cross sell or sell additional coverages to new customers. Value-added services should be offered and a fee charged, to increase revenue. Many agencies have been giving away these value-added services for free for years. People don’t often appreciate free, nor do they see the value.
Improved Profit Margins
In addition to adding new revenue streams, agencies will become more productive if the market hardens. This will be done through the staff handling the same accounts, but adding new revenue because of the increased rates. Also, there should be improved automation and streamlining of the work that is done. Paperless systems are becoming the norm in many firms today. Insurance companies will be pressured to follow the lead from agencies and become more automated, as well. It is ridiculous that carriers are not more automated. Because of this, often a lot of the burden then falls on their agents.
Agency Ownership and M&A
A new twist in the mergers and acquisitions marketplace is that the national brokers are now focusing on the middle market arena and have specific capital to do so. Aside from Brown & Brown, Hub and A.J. Gallagher, which have been there already, there are some new players in the middle market, such as USI and Marsh. These national brokers are acquiring to keep growing and adding volume. The pace is eventually unsustainable, but will continue through 2013. The reason they are in this arena is that many of the larger independent agencies have already been bought up or do not intend to sell.
Today there is also a lot of capital still coming into the marketplace via new brokerages starting up from players that have left agencies, especially those that sold to banks. These new buyers have the cash to pay sellers a large down payment and offer an earn-out based on performance or growth. Private equity players wanting to get into the insurance business are also looking for good platform agencies to expand and become players in certain regions. Assured Partners is one example.
New Brokerage Players
There are also players, like Integro and EPIC in the acquisition mode. Firms like NFP (National Financial Planners) and CBIZ that have been more active in the benefits and financial services arenas are looking to get into the property/casualty insurance marketplace and have the capital to do so. There still continues to be no shortage of buyers of independent agencies.
Agency Value Declining
Today’s economic conditions and the inability to get credit lines from banks has led to declining agency values. There is also a big misunderstanding about what are the “real prices” being offered. Many of the deals have a sizable portion of the “price” based on earn-outs for future performance. This confuses the understanding of “value” on the marketplace, because “value” in the past was usually based primarily on revenue that was already on the books.
Sellers are no longer getting prices from two to three times revenue (mostly from banks) like was happening before 2008 and before the stock market crash. Today, prices are more in the 1 to 1.50 range, which has been the historic “typical” price range. As a multiple of EBIDA (earnings before interest and depreciation) prices are in the 5.0 to 6.5 range.
In the earn-out portion of the “price,” the seller is expected to grow the business, not just maintain it. Terms based on future growth should be discounted when determining value based on cash today. So, if in the off chance that an agency “gets” 1.75 to 2 times revenue this actually ends up being a “price” closer to 1.25 to 1.4 times revenue, projected three years out.
The infusion of well-capitalized buyers is impacting the ability of smaller agencies to do acquisitions. The prices being paid yesterday and today do not always cash flow, especially with the lower revenues from the soft market. However, the buyers are more intent on looking at cash flow when pricing is set. Small- to mid-size independent firms will be doing fewer acquisitions.
There is still a good deal of activity within the smaller agency community in the form of mergers and acquisitions. Small- to medium sized independent agencies merge or acquire today for the purpose of being a “better” firm, not just to be a “bigger” firm.
The goal of some of these new stronger brokerages is to become a local or regional force against the national brokers. There could also be attempts to bring enough brokerages together to go public or sell out to an interested deep pocket.
Baby boomers have now reached around 66 to 68 years of age. This is a new tier of owners that needs to retire, which will peak in the next one to five years. Because of the competitiveness in the marketplace, it is getting difficult for smaller agencies to perpetuate internally. Often, it seems that the next generation does not have both the management and financials skills to pull it off. These are the firms that will either merge with a peer agency or sell to a large firm with deep pockets, and a well-structured management team.
Taxes Increasing in 2013
It is not much of as prediction to say that taxes will go up. It is widely known that Congress and President Obama temporarily extended the Bush tax laws. It is probable that the current federal capital gains rate will go from 15 percent back to 28 percent, or higher, maybe 35 percent when the tax law runs out. Personal income taxes will most likely go up, especially for the higher income brackets.
Owners that are contemplating selling the business have two choices. First, sell before the tax rates go up for as much down-payment as possible to lock in lower tax rates. For those that are not quite ready to sell, but choose to sell now, this will require the acceleration of preparing the agency to sell and realigning one’s financial goals and expectations.
The second option is to remain an owner for now and sell after 2013. Because of the higher tax rates, anyone selling their business after 2013 will need to grow the business by more than the tax increase to net the same amount of after tax proceeds they would have received before the tax increase.
Small- to Mid-sized Agencies
Many small- to medium-sized firms cannot individually maintain the number of quality markets they need to compete today with larger firms. Consolidators, networks and clusters provide that service, so the agency can compete on equal footing with the “big boys.”
Clusters vary in size, style, capability and appearance. Generally speaking, the individual agency can maintain some, if not all their autonomy. These entities can also be a way for new people opening their own agencies to own their own firms. Some cluster organizations even provide perpetuation for their members within the group or umbrella entity.
The Producer Dilemma
Most agency owners will agree that it is very difficult to find good, loyal, hard-working insurance producers. Producers that are available don’t produce. The ones that do produce are unaffordable or they want ownership in the agency.
Perpetuation plans are held in abeyance when it is difficult to find these good producer players, especially with any management talent. The lack of good producers is a perennial problem and will remain so from now on. There needs to be a shift in perception for the traditional producer role to be split into a pure sales role and an account technical service role.
Many firms today are adopting the account executive role to ease the burden of the workloads of the owners and non-owner producers with large books. The account executive approach costs the agency less money and provides the service staff more room for advancement in the organization. AEs usually still have service staff to delegate day-to-day service work on an account.
No one knows for sure the impact of the current legislation and the affect on the value of firms with health books of business due to Obamacare. There is still much uncertainty what the implementation will result in due to the ambiguities in the language of the bill that was passed and the complexity of the system. Many business owners are preparing for the worst and some are letting employees go or cutting them back to part-time all across the country.
A Final Thought
If agency owners understand these trends, they can exploit them. It will require planning and good communication in-house with producers and staff. Everyone needs to focus on new sales and continued expense controls. Those who plan and take action can more likely predict the future.