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Review & Outlook 2007, Insurance Agency Consultants: What were the most significant trends affecting agents and brokers in 2007? What must they do to succeed in 2008? What's the outlook for mergers and acquisitions?
American Agent & Broker Magazine, December 2007
Rob Lieblein, Managing Principal
Hales & Company
Harrisburg, PA
Q: What major issues have affected agents and brokers in 2007?
The age and talent issues are really beginning to affect the "Main
Street" broker. You have a lot of older people in the business, and the
talent pool of younger employees is pretty slim.
There is strong competition for producers. The large firms can pay top
dollar to recruit good producers from other agencies. Even though these
producers usually can't bring their clients with them, the agencies that
hire them will recoup their investment in time. Small, privately held
agencies don't have the luxury of being able to invest $100,000 to
$200,000 to attract seasoned producers, which is the going rate for
attracting them from other firms. Large brokerages have the capital to
guarantee compensation to proven producers until they can build new
books that will result in a long-term positive return on investment.
It's also difficult for small agencies to recruit seasoned account
managers and other employees.
Another issue is how agents will be affected by the switch some insurers
are making to supplemental commissions from contingent commissions, as
called for in their settlements with former New York Attorney General
Eliot Spitzer. No one is quite sure how this is going to turn out. The
issue is on a lot of agents' and brokers' minds, because the change
begins on Jan. 1 for some carriers.
It appears that our clients will be OK with this, but it's too early to
say for sure that the trade-off between the contingent commissions and
the supplemental compensation arrangements is going to be
dollar-for-dollar. For agencies that are growing, it appears that the
effect should be no worse than neutral.
A number of our clients are used to getting a big contingency check in
March or the beginning of April. Now their supplemental compensation
will be paid out monthly. We're trying to get a handle on this from a
strategic planning and budgeting standpoint.
Q: What can agents and brokers do to maintain or increase revenue and
profits in the soft market?
Become more focused on organic growth. Everybody is working harder to
generate new business—and probably smarter, whether it's via technology,
improved activity or other operational initiatives. The best-managed
agencies really focus on improving organic growth rates.
Agencies also have to focus on recruiting, training, managing and
retaining talent. If you have a chance to get a top-level person into
your agency, you'd better find a way to do it whether the timing is
right or not. Given market conditions, recruiting, training and
mentoring are going to be critical to an agency's success.
Agencies also have to leverage their producers' talent. This means
having account managers and CSRs who can fully support the producers'
books and allow them more time to sell.
With our clients, we've been preaching the need to recruit and manage
new producers. They start out young and inexperienced, and the odds they
will succeed greatly diminish if they're not properly managed. Not
enough agencies focus on true sales management. That encompasses not
only setting goals for producers, but monitoring their results,
analyzing why they win or lose cases and creating compensation plans
that give producers a strong incentive to sell new business.
I'm beginning to see more firms invest in sales managers. They're hard
to find, but more agency owners are saying, "I don't have the time to
manage these people, but I recognize that someone needs to."
Q: How big must an agency be to afford a dedicated sales
manager-someone who has no direct sales responsibilities?
I've seen sales managers in $2 million (revenue) agencies. In regard to
their compensation, I often see three components: a base salary, a
first-year override on commissions generated by new producers, and
incentive payments based on the agency achieving new-business production
targets. A fair share of the compensation should be based upon their
producers' results.
Q: What other issues will agents and brokers face next year?
It will be critical to look at organizational structure and
compensation. Underlining what I said earlier, a mission statement could
be: "Our mission is to establish an organizational structure that
results in exceptional quality service while allowing producers adequate
time to sell." The objective is to ensure that producers don't feel
their books of business—and therefore their compensation—are at risk, so
they can concentrate solely on selling.
Tied into that is making sure there are incentives for new business.
There also should be penalties for missing sales targets. For example,
if producers' average new-business commission is 50%, but a producer is
at 120% of plan, maybe he or she gets a "kicker"—increasing the
commission to 60%. On the flip side, if the producer is below 80% of
plan, maybe the commission falls to 40%.
Also, agencies need to be looking at the profitability of the different
lines of business they sell. You see many agencies either going to a
small-business unit or selling off small books of business, because
otherwise they're not profitable and they just tie up manpower.
I continue to believe that agencies should expand in their niches or
where they have competitive advantages rather than say, "We do
everything." You can be much more successful if you truly have a niche.
It's harder for other people to match you.
Q: What do you do if you're a small, rural agency and more or less
have to be a generalist?
You can be a generalist. But whether you have a market niche or a
service niche, you need something that makes you the agency of choice.
Not only will it help you from a financial standpoint, but also from a
recruiting standpoint.
One more thing: Owners and shareholders have to take a hard, honest look
at their agencies and their ability to succeed. Enhancing the value of
the agency should be everybody's goal. But if you can't do that, you may
be better off selling to a larger player. It doesn't have to be a public
broker; it can be a larger agency with the resources and abilities
necessary for growth.
A public company makes such decisions every day. You're either enhancing
your value or you're selling, because you have a fiduciary duty to
maximize value for your shareholders. I don't think it's any different
for a privately held company.
Q: What have you seen in mergers and acquisitions in 2007? What do
you expect in 2008?
Obviously, 2007 has been a tremendous year. By year-end, we expect we'll
be equal to or slightly ahead of last year, which was a record year.
Because of the age of many agency principals, we're seeing people say,
"Now's the time to get out," even if they have good agencies. People
recognize that we're either at or near the peak in regard to what buyers
are willing to pay.
I think people are also considering selling because of the potential for
current political trends to lead to an increase in the capital gains tax
rate. We're also seeing many more employee benefit firms being sold or
thinking of putting themselves on the market, because of concerns about
future health-insurance legislation, which is clearly on the horizon.
People are unsure of what that's going to do to them
long-term—particularly the agencies in the small-group market.
For higher-performing, better-run agencies with $5 million to $10
million in revenue, it's not unusual to see a total purchase price equal
to nine or even 10 times EBITDA. But maybe only 60% or 70% of that is
upfront. The higher the multiple, the more often we see an earn-out.
Yet, I'm also seeing the minimum amount paid at closing begin to creep
up. Last year overall deals increased but not the upfront money. Now
we're beginning to see even the upfront money increase, and that's
because of competition from the public brokers and private equity firms.
You obviously have—although I think it's a little exaggerated—a lot of
private equity money in the marketplace. It's driving the deals that are
$20 million-plus in revenue. The private equity firms have made a big
splash, but they are not buying your "Main Street" agency.
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