When written in Chinese the word crisis is composed of two characters. One
represents danger or challenge and the other represents opportunity. With
all the uncertainties facing independent agencies as we move into 2013, this
can be seen as a time of both challenges and opportunities.
Agency perpetuation is a problem for most agencies. In a recent study
sponsored by The Insurance
Journal, it was found that over 50 percent of agency
owners were concerned about perpetuation. 2013 may be a year of opportunity
for such owners seeking internal ownership transfer. This is because of a
variety of factors:
- Credit is expected to be cheap because the Fed intends to keep interest levels low in an attempt to promote growth in the economy;
- Credit should be readily available for good credit risks because many banks are seeing their low cost of money as a justification to increase
- Low interest rates for buyers means they can afford to pay more for the same ownership purchase; and Affordability may also be enhanced by an expected 4 percent average industry increase in property casualty renewal pricing for 2013.
Add all of this to the fact that agency values are again at a high point
where they are not likely to stay. With pro forma EBITDA multiples for
agency purchases sometimes being 7 or 8 times, this should encourage some
senior owners to consider selling now, before prices begin to fall.
For most agencies, market pricing had been a big problem for several years
and has only recently become a neutral or positive factor. 2013 may present
some opportunities for agencies that understand what is in the process of
happening and capitalize on it. Rates are continuing to rise and they are
likely to continue rising for only a few years. This is because most of the
recent "harder" market cycles have lasted about 3 years and then have been
followed by about 9 years of softer pricing. No one can predict the future,
but it is a good bet that the rising prices and their favorable impact on
agency revenue and profit will be short lived.
This could make 2013 a good year to invest in actions that may have up-front
costs but provide long term benefits to the agency and its owners. Adding
producers, purchasing books of business, purchasing a building to occupy,
expanding geographically to an area with growth potential, investing in
social media or better technology, etc. may be what's needed for the long
term and what could be more affordable if accomplished in the short term.
Many agency owners are concerned about the erosion of their business from
forces like the changing buying and communicating habits of consumers.
Every day more consumers become used to purchasing online, communicating
digitally and price shopping electronically. Every publication read by
agents talks about the threats and possible opportunities tied to digital
marketing, mobile marketing, search engine optimization or social media.
For agency owners who aren't yet ready to completely "dive in," 2013 may be
the time to finally accept that generalist insurance
products will continue
to be targets for digital competitors and every agency should also develop
some specialty program or expertise to promote. Specialty business presents
an immense opportunity for agencies. On the whole, program business
continues to expand dramatically. In 2011, program business hit an all-time
high at $24.7 billion in gross written premiums, up by 9% from the prior
year. This was during a time when generalist property casualty business
grew by about 4%. This data is according to the "State of Program Business
Study" conducted by the Target Markets Program Administrators Association
(TMPAA). Across industries, program administrators recorded their largest
revenues in the following sectors: government, nonprofit, education,
construction and transportation. TMPAA describes "program business" as
products targeted to a specific niche market or class. The
targets generally represent a group of similar risks that can be written
through a single carrier that has differentiated its offering in product
features, risk management or price. The products are delivered by
specialists having developed expertise in that market.
Economy and Taxes
The economy and the uncertainty about taxes have everyone concerned. Although Congress finally averted the worst of the “fiscal cliff”, hard decisions creating long term solutions on spending and taxes have once again been postponed. There is danger for an agency owner in not having the confidence to feel he or she is operating in a somewhat predictable economy and tax structure.
However, in such uncertain times, there are opportunities as well. For the
feint hearted, the uncertainty can lead them to pull in their horns and do
nothing. For the opportunistic agencies, they can refuse to let good
opportunities pass them by. They will seek out the opportunities. In many
cases the opportunities may be to fix things that are broken or simply
better "position" their agencies for long term prosperity. For example 2013
can represent a good time to do the following:
- Address non-performing personnel;
- Invest in new networking opportunities that will give the agency access to new prospects;
- Create alliances that generate new revenue sources;
- Refine the agency's rewards and recognition systems to be sure they are motivating the results and behaviors that will be needed in the coming years; or
- Improve service offerings to really differentiate from the competition.
Patient Protection and Affordable Care Act (PPACA)
A big part of PPACA (Obama Care) is the creation of online health insurance
"exchanges." In theory, effective 1/1/2014 (for accounts having under 100
lives) "navigators" who are part of the state (or federally run) insurance
exchanges, will explain options to the consumer to enable educated decisions
to be made. This causes problems for agencies that write employee benefits
accounts, since they have been earning commission and fees for performing
this role and now are likely to see a sizable portion of that revenue
diminish or even disappear. But, this problem may yield opportunities for
well positioned agencies.
Voluntary Benefits Sales
In 1965, when the US introduced Medicare to provide major medical insurance
for all seniors, a significant demand was created for insurance
to fill the
gaps in coverage left by that federal program. Medicare supplements became
hugely popular. The same occurred in Japan when they introduced national
health care. A high percent of recipients of their national health care
program purchased privately provided voluntary benefits. This has the
potential to create many opportunities for the right agencies.
The National Association of Health Underwriters (NAHU) foresees that agents
will still have a role in helping to walk consumers through the changes and
determine their eligibility for tax credits. NAHU feels this will be
especially so in cases where the consumers are in the many "opt out" states
(ones having the federal-government-run exchanges handle their residents).
Acquisition of Benefits Agencies
Right now, employee benefits agencies that write lots of small accounts are
selling for low multiples of revenue. This could be an opportunity to
acquire (or merge with) a benefits agency at a very low cost. Such an
acquisition could position the surviving agency for aggressive benefits
consulting opportunities involving mid-sized to large account business. It
could also position them for strong sales in voluntary benefits business
involving all size accounts. It may, in some cases, also add younger talent
to a P&C agency and improve their ability to internally perpetuate down the
road. It's interesting to note that some major insurance
aggressively buying benefits agencies. In 2012, Arthur J Gallagher and
Digital led the pack in the acquisition of benefits agencies, each having
made several benefits-only agency acquisitions.
The key to success in 2013 will be to avoid standing still and waiting.
Agency owners need to move fast in recognizing and addressing problems while
taking action to capitalize on long term opportunities that face them.