Managing an Agency in a Troubled Economy

June 15, 2009

InsurBanc’s Pettinicchi on Agency Financing Options

Unlike many businesses, independent insurance agencies do not need to access credit on a daily basis. But when the time comes that an independent agency needs access to credit and cash, it is usually due to an event driven need, such as the working capital required to bring in producers, the money required to buy another agency or to open a branch office, or even to finance an internal perpetuation plan. So, if and when an agency needs credit, it needs to happen fast. In this interview with Insurance Journal‘s Andrew Simpson, InsurBanc’s Executive Vice President and Senior Lending Officer Bob Pettinicchi offers insurance agencies tips on how they can access credit when they need it, why it’s a good time to examine banking relationships and services offered to agencies, and why now more than ever is a good time for agency owners to invest in their own agency.

IJ: How does an agency protect its access to credit?
Pettinicchi: An agency, like other businesses, has to operate in a fiscally responsible manner by maintaining a good payment history on credit they have obtained, maintaining good personal credit standing for the owners of the agency, adhering to best practices, running their business like a business, collecting the receivables timely, paying their bills timely.

IJ: How important is an owner’s own credit rating to the operation of the business and their ability to access capital for the business?
Pettinicchi: Well, very often insurance agencies don’t have a longstanding record of borrowing money, so when they need to borrow money, a bank would not only look at the financial standing of the agency, but also the financial standing of the individuals that own it. Their propensity to make payments on a timely basis gives the bank a good indication of how well a business loan will be repaid. In the case of an agency, the agency principals are really the machinery that drives that agency. We expect those agency principals to stand behind their agency.

IJ: Would you ever recommend that an agency principal either loan money to its own agency or in the reverse, borrow money from its own agency?
Pettinicchi: Certainly, we would recommend that they don’t borrow from their agency. Usually you would like to see an agency principal get compensated in the form of a salary or a draw, but not a loan from the agency, because that ends up being an asset that is hard to quantify; it is not a strong asset of the agency. In the case of an agency principal lending money to an agency; that’s usually regarded as a good thing. It shows that the principal believes in the agency and usually moneys that are lent to an agency, they usually stay in that agency and would be repaid after other creditors are paid. So, it is like a form of capital.

IJ: What about cash management in these economic times? Is it more important for an agency to conserve cash now, and what can they do to improve upon that?
Pettinicchi: This is a great time for agency owners to examine their banking, specifically how they manage their daily depositing to a bank and their cash management. An agency principal should want to deal with a bank that is stable and that provides value and services for them; services that they really need like cash management, remote deposit taking, the ability to sweep funds into investment products (and) having ready, online access to information.

IJ: Do you think these services have been taken for granted in the past or not really paid attention to?
Pettinicchi: I think a lot of people take their banking relationship for granted and feel that they are getting the best deal from their bank if they are not paying much for it, or if they are getting free services. Truly nothing is free. There is a cost to everything, but a prudent agency will examine their banking relationship in the way their policyholders will examine their insurance from year to year. Don’t take the banking relationship for granted.

IJ: In these times, there are bound to be more ‘no pays’ and ‘slow pays’ for agents. Any advice on how to best handle accounts receivables in this economy?
Pettinicchi: Try to manage them carefully. Try not to extend terms to your clients. Avail yourselves to premium financing for those. Why be in the lending business? Leave it to the experts.

IJ: Agents have probably in the past not worried too much about the financial soundness of their banks. But given the financial situation today and so much talk about banks being in trouble, has that changed? Is that something that agents should be paying a little bit more attention to?
Pettinicchi: Well, you can’t help but pay attention to it because it is on the news constantly. An agency principal should want to deal with a stable institution, one that is going to be there for them, one that understands their business. Many banks right now are having significant financial problems because the quality of their loan portfolio is not doing as well as it should because of these times. … All of our clients are independent insurance agencies located around the country. As strong as that industry is, it represents the strength of our bank. The bank is only as strong as its clients.

IJ: So, actually having independent agents as customers insulates your bank somewhat?
Pettinicchi: To a degree, yes, absolutely.

IJ: The $700 billion bailout package, among other things, raised the FDIC limits. What does that mean for your customers?
Pettinicchi: That means that right now the limit that was $100,000 per account has been increased to $250,000 per account. Also, the limit was completely lifted on accounts that are noninterest bearing, such as business operating accounts. So, this should give agency owners a lot more confidence to deposit money in their bank, in particular at the increased coverage level on the noninterest bearing accounts.

IJ: So, that is a better situation for independent agents and customers of banks in general?
Pettinicchi: Agencies may hold a significant amount of money in a fiduciary capacity. You want to make sure that that money is absolutely safe.

IJ: What about investment strategies for agencies going forward, any advice?
Pettinicchi: I think that agency principals might want to think a little less about taking money out of their agency so they can invest it in the stock market. …

Look at opportunities to invest in their own business. If you think about it, their insurance agency is a perfect business in that they control it, they don’t have to report to the street quarterly results, and they could take a long-term perspective that many companies can’t take.

If you do the right things — you adhere to best practices, you have a strong sales culture, you keep your risk low and make sure that you run your business so that you can readily access credit, you will have opportunities.

IJ: Are you saying that one of the best investments for an agent might very well be his or her own business?
Pettinicchi: Oh absolutely.

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