In order to be a step ahead of the competition it is best to be proactive. One can do this by understanding and exploiting current and future trends. It is easy to predict trends by understanding recurring cycles and applying that knowledge to the current insurance marketplace.
So let’s determine what 2014 will most likely be like for insurance agents, brokers and wholesalers. The following is a list of major industry trends that need to be factored into the business plans of agents, brokers, wholesalers and insurance companies.
Hard Market is Here
The current trend is the market continues to harden. This really began sometime in the second half of 2013. The past hard market was firmly in place from about 2000 through 2003. Prior to this 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, since about 2007.
With hard markets, there is a lot of work quoting for not a lot of reward in increased premiums and thus, commissions. In order 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.
Improved Profit Margins
Agencies will become more productive as the market continues to harden. This will be done through the staff handling the same accounts, while adding new revenue because of 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. Because insurance carriers are not as automated as agencies, often a lot of the burden falls on the agents.
Revenue per employee should be $125,000 or higher. Spread (which is the difference between revenue per employee and compensation per employee) needs to be $30,000 or higher.
National M&A Want Mid-Market
A new avenue for independent agencies that are for sale and a twist in the M&A marketplace is that a number of national brokers are now focusing on the middle market arena and have specific capital to do so.
Aside from Brown & Brown, HUB, Marsh and Arthur J. Gallagher there are some new players in the middle market, including equity firms and venture capitalists, such as Madison Partners, which bought National Financial Partners (NFP) after they bought Thoits in San Jose, Calif., and Hellman & Friedman, which acquired a majority interest in HUB International.
Another equity firm, Kohlberg & Co., acquired a majority interest in Risk Strategies Inc. headquartered in Boston, with large offices in Chicago and San Francisco South Bay.
National brokers are acquiring to keep growing and adding volume. The pace is eventually unsustainable, but will continue through 2014. In fact, the reason they are in this mid-market 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 having 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, such as Assured Partners.
Agency Value Is Increasing
The value of agencies is finally increasing because of today’s improving economy and the ability to get credit lines from banks.
However, there is still some misunderstanding about price. 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, since “value” in the past was usually based primarily on revenue already on the books.
Sellers today get prices in the 1.0 to 1.6 times range, if there is at least close to a 20 to 30 percent profit margin. As a multiple of EBIDA (earnings before interest, depreciation and amortization) are in the 5.5 to 6.5 range. Before 2008 some firms got in the 2 to 3 times revenue (mostly from banks).
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 2.0 times revenue this actually ends up being a “price” closer to 1.25 to 1.4 times revenue, projected three years out.
The goal of some 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. The infusion of these well-capitalized buyers is impacting the ability of smaller agencies to do acquisitions.
Capital Gains & Income Taxes
It is not much of a prediction to say that taxes will go up further. It is widely known that Congress and President Obama had only temporarily extended the Bush tax laws. The new federal capital gains rate as of January 2013 went from 15 to 20 percent. It is still predicted that it could go higher, maybe 25 to 35 percent. Personal income taxes also went up to 39.6 percent for the higher income brackets.
Small to Mid-sized Agency Options
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.
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. This option is becoming much more popular for agency owners than selling out. Then the cluster members can become the perpetuation plan for retiring principals of agency owners in the cluster.
Producer Dilemma Continues
Most agency owners will agree that it is very hard to find good, loyal, hard-working insurance producers. Producers that are available don’t produce or may be problems. The ones that do produce are often unaffordable or they want ownership in the agency.
Perpetuation plans are held in abeyance when it is hard 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.
Account executive roles can 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.
These are some of the key trends brokerage owners should pay attention to for the coming year. If agency owners understand these trends they can exploit them. It will require planning and good communication in-house with producers and staff. Understanding how current trends will affect the firm is the first step. Managing the agency in a way that exploits these trends will lead to success.
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