Big I Virginia, Summer 2016

BIG I The

Official Publication of the Independent Insurance Agents of Virginia

Virginia Summer 2016

32 B

The Pressure to Get

I G byGChrisEBurandR

MERGERS AND ACQUISITIONS

What About IIAV & PIA?

by Robert Bradshaw, Jr.

WHEN MERGERS AND ACQUISITIONS DESTROY VALUE by Al Diamond p. 14

2

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Summer 2016 • THE BIG “I” VIRGINIA

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SUMMER 2016

BIG I The

Official Publication of the Independent Insurance Agents of Virginia

Virginia

The Big I Virginia is a publication of the Independent Insurance Agents of Virginia 8600 Mayland Drive, Richmond, VA 23294 Phone: 804.747.9300 / Toll-free: 800.288.IIAV (4428) Fax: 804.747.6557 E-mail: members@iiav.com / Website: www.iiav.com IIAV IS AN ORGANIZATION DEVOTED TO PROMOTING, ENHANCING, SERVING AND ASSISTING INDEPENDENT INSURANCE AGENTS.

The Big I Virginia is a publication of the Independent Insurance Agents of Virginia and is published quarterly

by Blue Water Publishers, LLC. The Independent Insurance Agents of Virginia, Inc. reserves the right in its sole discretion to reject advertising that does not meet IIAV qualifications or which may detract from its business, professional or ethical standards. IIAV and Blue Water Publishers, LLC do not necessarily endorse any of the companies advertising in the publication or the views of its writers. The publisher cannot assume responsibility for claims made by advertisers, content provided by the editor, or for the opinions expressed by contributing authors.

Inside this issue 6

Message from the Chairman of the Board - Monte Dise

8

Message from the State National Director - Robert Yergey

10

Message from the President and CEO - Bob Bradshaw

12

Mergers and Acquisitions - What About IIAV and PIA?

14

When Mergers and Acquisitions Destroy Value

19

The Pressure to Get Bigger

26

Young Agents Upcoming 2016 Events

28

Introduction to Agency Purchases and Mergers

34

Did You Miss the 2016 insurEXPO in April?

38

Agency Acquisitions and Due Diligence

IIAV Staff Bevin Anderson Communications/Media Director banderson@iiav.com Robert N. Bradshaw, Jr., MAM President & CEO rbradshaw@iiav.com cell (804) 929-4134 Teri Chester Executive Secretary/ Receptionist & Membership Coordinator tchester@iiav.com

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THE BIG “I” VIRGINIA • Summer 2016

Thank You Advertisers Agents Insurance Markets 17 Allstar Financial 22 Anderson and Murison 16 Atlantic Specialty Lines 11 Berkshire Hathaway/GUARD Insurance Cos. 20 Builders Mutual Insurance 23 Burns & Wilcox 9 Contractor Connection 29 FCCI Insurance Group 30 Grange Insurance 47 Harford Mutual 40 Hilb Group 41 IRMI 32 Interstate Insurance Management 48 Jackson Sumner & Associates 2 Johnson & Johnson 24, 25 MEMIC 31 Millers Mutual Group 7 Penn National Insurance 15 Preferred Property Program 13 Risk Placement Services 3 SIAA 33 Southern Insurance Company of VA 27 The Iroquois Group 5 For information on advertising please contact: Jim Aitkins, Blue Water Publishers, LLC 22727 161st Ave SE, Monroe, WA 98272 phone: 360.805.6474 / fax: 360.805.6475 jima@bluewaterpublishers.com

Joe Hudgins, CPCU Technical Consultant jhudgins@iiav.com cell (804) 929-4138

Danny Mitchell, AAI Vice President Business Development dmitchell@iiav.com cell (804) 929-4135

Marie Toney Sales Associate mtoney@iiav.com cell (804) 929-4136

Bonnie Joyce Insurance Administrative Assistant bjoyce@iiav.com

Susan E. C. Perkins Membership/Education Coordinator sperkins@iiav.com

Linda Loving, CIC, AISM, AIAO IIAV Chief Operating Officer & VFSC Executive Vice President loving@iiav.com cell (804) 929-4133

Carter Lyons IIAV Director of Education & Professional Development & VAIA Executive Director​ clyons@iiav.com

Bonnie J. Warren, ACSR, CPIW, DAE, RPLU Insurance Account Executive bwarren@iiav.com Marianna Wilson CIC, ​CRM, CPCU, ARM, RPLU, AIC, CPRHM​ Insurance Account Executive mwilson@iiav.com

EXCELLENCE Iroquois has been helping Independent Agents excel in Virginia since 1988.

Proudly saluting the agency members and carrier partners who have been recognized for Excellence by the IIAV over the years:

Past IIAV Board Presidents ‘88 Charles B. Gibson, Sr. ’89 James S. Day, Jr. ’99 James P. Bradner

IIAV Annual Award Recipients

Bankers Insurance LLC DeJarnette & Beale Ins Agency Chesapeake Insurance Agency/ TowneInsurance Agency

‘93 Dennis Winfree ’93 ‘95 ’96

‘00 C. Dwight West, III

‘96

’03

’98

‘04 ’05 ‘06 ’07 ’09 ’13

Bankers Insurance LLC Charles F. "Bill" Bullington McLean Insurance Agency Inc. Richardson Harris Boatwright Ins M. Stevens Harris Welch Graham Ogden Ins Inc. Thomas L. Welch Haun Magruder Inc. Michael F. Funkhouser Ford & Thomas Ins Agency Inc. Tyler W. Hancock Hubbard Insurance Agency Inc. Cruger S. Ragland, Jr. Short Ins Assoc Ltd/Trustpoint Robert T. Short

‘99 ’00 ‘03 ’04 ’08

Wood Insurance Agency, Inc. McLean Insurance Agency, Inc. Doug Megill.

Hubbard-Lash Insurance Agency Dick Lash.

Builders Mutual Karen “Sue” Loan.

DeJarnette & Beale, Inc. James Day. Richardson-Harris-Boatwright Stevens Harris.

MetLife Auto & Home Tracy Blumberg.

Hanover Insurance W. Morris Skeen.

James R. “Judge” Parker. Donegal Insurance Group Haun-Magruder, Inc. Michael F. Funkhouser.

Chesapeake Insurance Agency/ James P. Bradner.

TowneInsurance Agency

‘08 Steve Franklin.

Berkshire Hathaway Guard Insurance Group

’10 Monty Dise.

Asset Protection Group, Inc. Hanover Insurance Straus, Itzkowitz & LeCompte Insurance Agency Inc.

‘10 Donald Bragg. ’12 Pettus LeCompte.

The

®

IROQUOIS Group

To learn more about how Iroquois could further strengthen your agency, contact Matt Ward at 804-320-6984 or mward@iroquoisgroup.com

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Summer 2016 • THE BIG “I” VIRGINIA

5

Chairman of the Board

MONTE DISE mdise@apgroupinc.com

E

elected&installed

ven though each new incoming IIAV chairman knows the day will arrive and prepares for the term facing him/her, when that day finally arrives the realization strikes home that there is so much to accomplish and so little, precious time available. As your new IIAV Chairman first I would like to thank our Immediate Past Chairman, Jason Angus, for his diligence and hard work as Chairman during the past year. His service was inspiring; under his leadership the Association thrived; and we are in a terrific position to move forward.

larger agencies, IIAV is very much aware of the increasing number of new, start-up, and emerging agencies. This presents a very real and exciting opportunity for IIAV to continue to grow.

Starting off this year we are facing what is surely to be a record-breaker for Merger & Acquisition activity across the nation. Last year’s activity nationally saw the highest level of agency acquisitions and mergers and the numbers revealed thus far this year suggest a rate that will prove even greater. The reasons are not that complicated. The depressed economy during the past decade has forced many agency “sellers” to put off an acquisition or merger until the “numbers” improved. Also, depressed premiums and revenues have begun to reverse and agencies are better poised to receive attractive offers from buyers. Add to this the continued availability of “cheap” financing, the many “sellers” who’ve not necessarily been on the market and others who’ve been waiting for the right opportunity, simply cannot realistically afford to pass up some of the offers being presented.

But there are many other areas in our business with which to be concerned. In the most recent IIAV newsletter, my primary goals and ambitions for this year were revealed.

Below is a short list of just some of them:

Your association is doing much to help agencies acquire and become acquired. Many --- especially smaller firms --- will request guidance, ideas, and suggestions as they progress with negotiations.

4. Educate the public on insurance and Independent Agents’ important roles within the insurance-buying process and the unique service we provide.

Even though the rate of M&A activity in Virginia has escalated and greatly decreased the actual number of

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THE BIG “I” VIRGINIA • Summer 2016

We are doing even more to assist newly forming agencies --- especially one-person firms --- to become established, gain meaningful market access, providing assistance with avenues, training and education, and are provided efficient and affordable marketing and management tools.

1. Retain and grow membership to sustain our association, as the times they are changin’. We do this by offering value. What is value to our members and thinking outside of the box? E&O, Risk Management/ CE, Legislative come easily to mind.

2. Be even more pro-active in legislative issues including health care reform at the Bureau of Insurance and other legal/political levels.

3.

Support the Young Agents efforts.

Having revealed all of this, I am enormously grateful for the opportunity to serve and I relish the task before me as what will surely be a most successful year.

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State National Director

Robert Yergey

ryergey@towneinsurance.com

A

s IIAV’s new State National Director, I will have the privilege of representing our Virginia agency members at the national level. This responsibility is both challenging and rewarding and I am very much looking forward to this.

I’d be terribly remiss if I did not acknowledge and thank Jim Bradner for his long service as IIAV’s State National Director.

Over the years Jim has done a remarkable job not only keeping the association well informed of national issues but also of communicating IIAV’s issues to the national team.

Certainly the acceleration of agency buying and selling is at the forefront of many national discussions. Even though there are approximately 27,000 independent insurance agencies comprising our national association across the country, the effect of agencies buying up and merging one another causes your association to examine its offerings and offers the opportunities to present new values to members.

As if carefully monitoring M&A activity weren’t enough there are many very important national issues currently facing us.

Nationally, we are continuing to push for a system of multistate licensing through NARAB II to ease the burden for those of us licensed in states other than Virginia.

The average age of agency principals continues to rapidly rise.

It now stands at about 58 years old. That’s the “average”. It is rare but not uncommon for some agencies continuing to operate led by principals exceeding 80 years or more in age.

Some just love to work. Others are positioning their agencies for the right opportunity to buy or sell. Despite the best laid plans, a few agencies have not prepared well for perpetuation or the plans originally crafted have had to be suddenly altered.

As you are certainly aware, there are many reasons for the increased rates of agency Merger & Acquisition. But straying a bit deeper into the weeds, many smaller agencies simply are struggling to secure and/or maintain adequate producer and service personnel. This ongoing issue is not overlooked at either the national or state level. Programs such as INVEST have been successful in not only introducing what our industry has to offer to those in high schools and colleges/universities but encouraging young individuals to seriously consider our business for a career choice. At the state level, IIAV has many education and training programs designed for new hires. Its most recent program, Polestar, provides modules of affordable online training, is accessible via IIAV’s website. Contact IIAV’s Education Department if you’d like more information about this exciting new service.

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THE BIG “I” VIRGINIA • Summer 2016

With growing agencies and the evolution of mega-agencies and niche-agencies, specialty E&O markets need to be secured and available with an eye toward higher available limits, special endorsement capabilities, and specialized underwriting.

Additionally, morphing carrier activities are blurring the lines between captive and independent agents. Our association needs to be well equipped and ready to properly reacting to these changing agency environments.

Other market issues requiring our careful attention include those dealing with terrorism insurance and other evolving insurance trends that we’ve witnessed in recent years such as unmanned flying aircraft, driving-for-hire coverages (i.e. Lyft, Uber); cyber and data breach liability; driverless autos; Airbnb; and so much more.

Not to be overlooked is the ever-expanding Trusted Choice brand. More and more agencies are reaping the benefits of Trusted Choice. However, often referrals and leads reach our member agencies without the realization or recognition that such leads and referrals were generated from Trusted Choice. Much more needs to be done to improve this valuable program.

As this year continues, please let me know how I might be of more assistance to you. This will undoubtedly be another exciting and productive year for us all.

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President and CEO

Robert N. Bradshaw, Jr., MAM rbradshaw@iiav.com

IIAV’s Fiscal year

I

– A look back and a look ahead.

like to say that IIAV is 118 years young and we’re always evolving. From the association of fire policy agents to the Trusted Choice Independent Agents we are today much has happened.

This past year we have remained strong despite the M&A activity. Membership stands strong with IIAV predominately representing agencies with 5 or less employees but we have a number of members who count their employees in the hundreds. Our membership represents a wide range of industry mix while still being primarily property/casualty agents, our members are specialists in work comp, life/health and employee benefits.

Our education programs remain strong and we now easily reflect a technology driven society with most education participants attending webinar driven classes. Personally I still prefer to conduct the classes I teach the “old fashioned” up close and personal way. One of these days no doubt we’ll evolve to conduct a “skyped” type class where we can see everyone in the class through the Internet and have face to face discussions.

I’m pleased to say that through our sister organization – the Virginia Financial Services Corporation – we are second to none in the agency protection business. You will not find a more qualified, experienced and technical staff in the agency E&O business then Linda Loving, Bonnie Warren and Marianna Wilson followed by Doug Palais – our general counsel – who was described to me by a carrier as the most successful agent defense attorney in the country. It’s not unheard of to have a member say that they want to have Doug on their side.

And of course our legislative efforts continue to be the most active of any agent association in the Commonwealth.

This year we introduced two bills on behalf of our agent members and in support of small business but we worked intensely on close to 100 pieces of legislation. IIAV members are kept fully informed of the legislative process and have the most effective agent lobbyists of any insurance association both on the state and federal level.

We’re also doing some things differently. Our EXPO was a

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THE BIG “I” VIRGINIA • Summer 2016

great success and while it generated more agent attendees, it didn’t generate the numbers we expected. Having said that, a number of our company partners/exhibitors were extremely pleased by the program and over 80% of the agent attendees rated the EXPO as either good or excellent. I believe that we can continue to mix it up by building on our strengths, holding another EXPO in 2017 and then the traditional convention in Virginia Beach in 2018.

And finally by the time this magazine is published, IIAV will have held it’s first electronic balloting in the history of the association. Not only will the membership have voted on our leadership but also a bylaws amendment.

In order for IIAV to provide you with the tools and services you need for the future, we also need to move into the future.

You can’t say, “stop the world, I want to get off.” Our profession, our industry and the nation at large is moving forward and fast and we want to help you and your agency not only keep up but to succeed. We need to look at the “new way of doing things,” making sure that our industry resources and regulations keep up. We’re also doing everything possible both through IIAV and our sister organization, the Virginia Association of Insurance Agents, to bring new life to our industry through our visitations with high schools and colleges and in working closely with the VCU RISC Department.

IIAV’s future – your future – looks pretty awesome and I’m honored to help the association move forward in providing the assistance you need and want. So, keep us on your speed dial. IIAV is your association and we are all an extension of your staff, so don’t hesitate to contact anyone at the IIAV office if you need assistance.

I was “amused” that another association portrayed IIAV as charging members for the phone calls and requests for assistance. Nothing could be farther from the truth. Our primary and sole responsibility is to help you as an IIAV member in any way shape or form to the best of our ability.

We’ve never charged for a phone call and never will.

IIAV is YOUR association. Keep us on your speed dial. And I look forward to seeing you in the coming year.

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Mergers and Acquisitions

What about IIAV and PIA?

Robert N. Bradshaw, Jr., MAM IIAV President & CEO

W

e talk about agency mergers all the time and I guess no such discussion should be without one about IIAV and PIA. It’s an issue that was brought to my attention quite quickly when I came on board IIAV 15 years ago.

It seemed then like a timely discussion as I replaced IIAV long standing association executive Ted Smith and PIA’s executive Elsie Reamy announced that she was going to retire. Seemed like the timing was perfect.

But as they say….it takes two to tango.

While our young agents today probably have no idea the distinction, years ago IIAV was an organization that represented agents who sold through stock companies and PIA was an organization that represented agents who sold through mutual insurance companies. That distinction is clearly not relevant today. Then PIA was perceived as an organization that represented “small” agencies and IIAV represented “large” agencies. Not 12

THE BIG “I” VIRGINIA • Summer 2016

sure who came up with that given that 77% of IIAV members have 5 licensed professionals or less in the agency.

When I came on board IIAV, the company representatives were anxious to discuss credit scoring with me and the agency members were asking “When are IIAV and PIA going to merge?” That led even to a motion from the IIAV Board to pursue merger discussions with PIA. After a couple of joint meetings it was decided that we would hold a joint convention and if it went well, we would pursue discussions on consolidation.

By all reports the convention in Williamsburg was an overwhelming success. Unfortunately the PIA Board decided – while they liked joint meetings – they didn’t want to discuss the merger of the two organizations.

Holding joint meetings without the prospect of merger discussions makes absolutely no sense. We are frequently pressed by both members and companies

“to at least hold joint conventions.” You have to agree that there’s a value proposition here. Fundamentally the two associations have different cultures for their meetings and conventions. From my perspective IIAV tries to bring the very best, nationally renowned speakers together for the IIAV conventions and PIA seems to see how many “free” speakers they can get to their conventions. Additionally 95% of the IIAV convention attendees are the decision makers within their agency. And frankly at this point, holding a joint convention or meeting with PIA makes about as much sense or likelihood of Travelers and Hartford doing joint sales meetings.

On another matter related to dues, I have a simple philosophy: Like it or not, prices go up. In working in the association management profession for over 36 years, I’ve seen plenty of associations that pride themselves on not having a dues increase year after year until an enormous increase is needed to catch up. IIAV has managed with structured increases albeit small incremental ones year after year. For the past three years our smallest of members have had no dues increase as they are in the least position to absorb those costs. Some of our largest members who are very much in the acquisition game, have had greater structured increases but even they come out ahead.

If one group wants to dance and another doesn’t – no matter the overall interest – it just doesn’t make sense to force the issue or berate one party over the other.

So to a great extent the IIAV/PIA is a case study for merger/acquisition discussions. First there has to be two willing partners. The benefits of mergers must make sense to the overall customer base. To some degree you would even want the customer base to support such a merger. And there should be no financial surprises.

Finally and most recently, IIAV has reviewed the tax

returns for PIA and is concerned about some of the 7.5X4.625 figures and especiallyProgram concernedad over their on-going General JGS Umbrella deficit years. We have always run IIAV in a financially responsible manner – I believe – even during the scary years of 2007/2008/2009. We slashed and burned our expenses and stopped doing things that were not financially beneficial to the membership.

We hear our members and company partners call encouraging the two agent organizations to merge. We hear you loud and clear.

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Summer 2016 • THE BIG “I” VIRGINIA

13

When Mergers and Acquisitions

Destroy Value

By Al Diamond

H

alf or more of all mergers and acquisitions result in decreased values of the combined entities. How can that happen? Here’s a recent example in which we were called upon to value a combined operation after an acquisition....

Every large agency we know is involved in acquisitions or wants to be. Most medium size agencies are seeking acquisitions or mergers to strengthen themselves. Many smaller agents find themselves continuous targets of other agencies acquisition marketing, getting some welcomed and other unsolicited offers that sometimes sound too good to be true.

What we don’t hear is that 50% to 65% of all mergers and acquisitions actually result in decreased values of the remaining or combined entities. How can that happen?

Here’s a recent example in which we were called upon to value a combined operation after an acquisition: A $3 Million (value, not income) agency purchases a $1 Million (value) agency. One year later the combined business is valued (the same way each was valued previously, based on the entities future earnings potential).

It is valued at $3.5 Million, a $500,000 loss of value in one year.

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THE BIG “I” VIRGINIA • Summer 2016

WHY?

To find out why these happen, we collected what some of our clients told us when they invited us to help them re-connect with growth, profit and value AFTER each implemented a business combination (merger or acquisition).

So much time was taken by management in the consolidation that we forgot to sell some insurance.

In the attempt to “integrate” one organization into a larger organization we destroyed the creativity and chased way the innovators that attracted us to the acquisition in the first place.

We never communicated properly with our employees and with our customers. We knew what we wanted to do in the merger, but we never shared our goals and strategies with the folks who we count on most to make us successful.

We consistently searched for and found weaker or failing companies that we could get at a bargain. They imbued us with their negativity. It turns out that it wasn’t such a bargain after all.

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We were two companies, both facing their own institutional problems, that merged creating a single, larger troubled company.

How do you avoid this scenario and still grow through mergers and acquisitions?

Plan your organizational growth STRATEGICALLY. Don’t even consider merging or acquiring unless you have determined that it fits your long term goals as an organization. What’s “long term”? At least five years and often 10 years. Does it make any sense to take on the responsibility for a merger or acquisition if you have just a few years before you want to retire? It may sound great to retire with a larger book of business under you, but are you ready for the work of integration at your stage in your career? Do you have the staff to handle a transaction now and again when you retire? Do you have your own perpetuation plan in place? However if you have a cogent Strategic Plan that identifies the market trends that you are pursuing (product, carrier, lines of business, geography) and expansion through merger and/or acquisition will help you reach those goals, then go for it!

The only agencies who should be considering mergers or acquisitions are ones who already understand their customers’ needs and are meeting them. Don’t lead with your weaknesses, lead with your strengths. An agency ready to acquire or merge has customer retention rates consistently above 90% (better at 95%). This means that you have strong customer loyalty and they “want” to stay with you. You lose them when they retire, die or sell their businesses. An agency ready to buy and merge experiences growth through referrals and wants to multiply their referral strategy by forming similar relationships with a whole new set of customers for whom they can offer similar services.

Benchmark yourself. Do you know how you stack up against similar sized agencies (overall, or in your State)?

Do you keep records of your own productivity growth historically? If you don’t know yourself, how will you know if an association with another firm improves or decreases your metrics? We’ve known for years that we pay attention to what we measure. So if all we look at is commission dollars, we might beat ourselves unmercifully when our revenues decline in a period of soft insurance economy during which the market depresses by 10% or more in a given year. Agencies that pay attention to their own metrics understand and react to market fluctuations but measure the real signs of growth or shrinkage, customer counts.

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THE BIG “I” VIRGINIA • Summer 2016

Are you like the Buggy Whip manufacturer who bought up other failing buggy whip manufacturers as the automobile gained leverage on the personal transportation industry or could you expand into other categories of your industry?

Most of our readers are insurance agencies. Have you looked to your merger or acquisition appetite for other dimensions in our industry beyond personal and small commercial lines property/casualty insurance? If not, consider Dimension Extension within your strategy for growth.

Don’t acquire or merge beyond your physical (or staff) capabilities to manage that growth.

We encounter agencies every year that acquired or merged with the “hope” that they would gain the skills and talent to manage the resultant organization because they knew their own weaknesses. If you don’t have the strength to integrate and manage the combined operation, do your Due Diligence (including long term employment commitments) for the management and other talents needed to bolster your organization.

Define your technical competence before you venture into acquisition. We recently encountered a young Personal Lines agent who had the means and desire to acquire. But A&M Assoc Ad VA PRINT.pdf 1 10/20/15 12:33 PM he wasn’t computer literate enough to understand his own

The only agencies who should be considering mergers or acquisitions are ones who already understand their customers’ needs and are meeting them. basic agency management system. Nor did he have (or understand) the need for Internet presence for agencies expecting to remain in the personal lines business for more than one more generation. The more technically competent you are and the more you understand the relationship between internet technology and the customer in a service industry like ours, the more likely you are to make and implement successful acquisitions.

The world is changing – quickly. You needn’t change to continue your career. But you can’t grow by acquisition or merger without a deep understanding of technological strategies around customer portals and remote access service.

There is a subset of large, medium and smaller agencies whose owners and drivers are prepared to plan for growth instead of following every scent toward potential acquisition or merger “prey”. The untrained ‘nose’ may

find the scent may turn into a vicious odor once they pounce on their target. But if you take the time (before you acquire or merge) to strategically plan for your growth; if you understand and please your current customers; if you know your own metrics and benchmark yourself to assure that you are efficient and effective enough to enjoy value growth in a merger or acquisition; if you have examined your products and what will be the successful insurance products (or financial security products) of the future; if you have strong management and staff and if you are technically savvy, you are well prepared to enter the fray. Seek a merger or acquisition and gauge your success in the baseline terms of value to you over time.

Otherwise, gain knowledge and get assistance BEFORE the acquisition or merger to keep from following a proverbial “skunk” down a hole (your worst case scenario occurs if you actually catch it).

Reprinted from the PIPELINE, the national newsletter for agency principals. The PIPELINE is published by Agency Consulting Group, Inc., a leading consulting firm for independent agents in the U.S. for over 20 years. Call 800-779-2430 for information about the content of any of these articles or PIPELINE subscription Information: E-mail: info@agencyconsulting.com Website: www.agencyconsulting.com Copyright 2010 by Agency Consulting Group, Inc. Used with permission.

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THE BIG “I” VIRGINIA • Summer 2016

The pressure to get bigger and perform at higher levels more consistently is causing agencies to make significant, occasionally fatal, mistakes.

The Pressure to Get Bigger

By Chris Burand

B

eing the owner of an average independent insurance agency can be fun but maybe not as fun as it used to be. Agents are feeling considerable pressure to grow, to compete harder, to advertise more, to offer more services, and to invest more in their futures than ever. The days of building an annuity type business and then sitting back, taking company trips and making golf course sales are bygone. The demands for more, more, more of everything creates insecurity, anxiety, sometimes paralysis, and often frustration.

Another result I am seeing frequently is more business mistakes. The pressure to get bigger and perform at higher levels more consistently is causing agencies to make significant, occasionally fatal, mistakes. Any time someone tries harder more mistakes should be expected. To paraphrase the well-known quote, “How do I define a mistake free day? As a day I didn’t try hard.” Congratulations to all those people making mistakes because they are trying hard.

Some mistakes are better than others though. One bad mistake being made with some regularity is how agen-

cies are focused on getting bigger for bigger’s sake. I’ll be clear. Bigger is absolutely not, in and of itself, better. Bigger without quality is just a bigger disaster finding a place to happen. Bigger requires more quality because by definition, bigger agencies will have more pieces and people, more to go wrong, so if quality systems are not built in front of size occurring, failure is far more likely. Not the right kind of mistake to make.

Companies and agencies are focusing on bigger partially because they are both making a huge communication error, internally and externally. Both are using the term, “volume” when they really mean “growth.” I consult for insurance companies, clusters, and agencies and I see all of them making this mistake. Even at the highest levels I see executives and leaders making this mistake. I hear these people saying they need more volume from agents when what they really mean is they need more growth. More volume is the result of more growth but volume comes second. Volume is denominated in dollars. Growth is denominated in percentages. The terms are not, whatsoever, interchangeable.

Summer 2016 • THE BIG “I” VIRGINIA

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Think of a cow. The stockyard says it needs a 1,000 lb. steer in six months. A 1,000 lb. steer does not just materialize.

The rancher begins with a calf and grows the calf to 1,000 pounds. The pounds are the volume. The speed with which the calf gains weight is growth.

A company may say it wants more volume but volume does not just materialize either (though I truly am not sure some company people understand this because some seem to think agents can just snap their fingers and place $1 million volume whenever they want). Volume is created by growing sales, one sale at a time.

A serious problem has been created by the misuse of the word “volume.” When companies say they want more volume, agency owners form clusters to “give” companies more volume. Agency A with $1 million with Company Z, Agency B with $500,000 with Company Z, and Agency C with $750,000 with Company Z form a cluster and “give” Company Z $2.25 million in volume. $1 million goes to $2.25 million with three signatures and the changing of agency codes. The agencies gave the company volume, exactly what the company requested. The company obviously is no better and arguably worse because now the cluster may have some leverage and may qualify for more profit sharing, and the company does not get a dime for

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better results. But, they got what they requested.

Agency owners are “solving” their “volume” problem but not their growth problem. Companies need growth regardless of their volume today. The reason is because surplus is at an all-time record. Based on the official books, this industry has never had so much surplus. In some ways and in some markets, not enough business exists to absorb all the surplus. Ignoring the solutions of giving surplus back to shareholders or mutual policyholders, wasting the money on acquisitions, or throwing amazing parties, the only way a company can use the surplus is to grow premiums more quickly. Insurance companies today are not that different from private equity. Private equity gets to lock up investor funds for so long and if they do not use that money on acquisitions, they need to give it back. Since they’re paid for investing the money, some might have a conflict of interest since investing in bad acquisitions might pay better than returning investor funds when good acquisition targets do not exist.

A cluster never solves the growth problem. Put a bunch of agents that cannot grow on their own in a cluster and odds are growth will deteriorate even more because now with “volume” they feel less pressure to grow. Over and over I see clusters creating complacency but they give

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the companies “volume.” Sooner or later companies will finally figure out they have been asking for the wrong results. I am already seeing isolated instances where they are canceling contracts. For agency owners who absolve their completely understandable fears by joining clusters for volume’s sake, the comfort is false, kind of like alcohol – good while it lasts.

The situation really is no different for agencies buying other agencies. They give the carriers volume but not growth and my data shows their actual growth goes to zero or worse too.

Take four agencies that cannot grow on their own forming a cluster for volume’s sake. They will represent more companies than they did when on their own but the total volume does not change. Best Practices and every study I’ve seen for 25 years shows that agencies with too many companies grow more slowly and are less profitable. Less growth and profit result in a lesser agency value.

I really do feel for agency owners in this tumultuous time of companies demanding ever more and using the wrong language in their demands. Because surplus is so high, they need growth and they want the same growth rate, the same growth percentage whether the book is $500,000 or $5,000,000. This is because they need X% growth on their

total book. This leads to more mistakes in their communications. Think about the $2.25 million cluster example.

They could not grow on their own but they did not need to grow that much either because their books were small.

5% on $500,000 is only $25,000. But 5% on $2.25 million is $112,500. How much is each of the four going to contribute to that requirement?

In the face of pressure, mistakes are made. Doctors have to be sure they treat the illness and not the symptoms. The one mistake to not make is treating the symptom, inadequate volume, as the illness. The illness is lack of growth.

Growth cures the volume.

Chris Burand is president of Burand & Associates, LLC, an insurance agency consulting firm. Readers may contact Chris at (719) 485-3868 or by e-mail at chris@burand-associates. com.

NOTE: None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.

Copyright 2015 by Chris Burand. Reprinted with permission.

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THE BIG “I” VIRGINIA • Summer 2016

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Introduction To Agency

PURCHASES and MERGERS

By Judi Newman

T

he differences between “purchases” and “mergers” is so great that one is forced to wonder how they became so closely related in agency management literature. The two activities are fundamentally different in almost every respect. The motivations in the case of a merger are usually different from those in an agency purchase. In addition, the valuation procedures are, or should be, different. The end result is clearly different.

Although it has become traditional for writers to discuss “purchases” and “mergers” together, the combination is curious in many ways. The two activities are fundamentally different in almost every respect.

The motivations in the case of a merger are usually different from those in an agency purchase. In addition, the valuation procedures are-or at least ought to bedifferent. The end result is clearly different. Indeed, the differences between “purchases” and “mergers” is so great that one is forced to wonder how they became so closely related in agency management literature.

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THE BIG “I” VIRGINIA • Summer 2016

One possible explanation is that while agency purchases and agency mergers are fundamentally different in most respects, there is a similarity in the sense that both involve the transfer of agency ownership. In a way, a merger is a special type of sale, in which each agency owner exchanges exclusive ownership in his or her agency for partial ownership in a new and larger agency. A more likely explanation for the common treatment of the two subjects is that both have traditionally been viewed as a means of achieving a more rapid rate of growth than can be achieved through organic growth.

For whatever reasons the subjects of agency purchases and mergers have traditionally been linked together and more often than not are discussed together.

Although there is the thread of similarity noted above, we consider them to be different animals and will, except on rare occasions such as this, discuss them separately.

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THE RATIONALE FOR PURCHASES AND MERGERS Before proceeding to a discussion of the technical aspects of purchases and mergers, it might be worthwhile to reflect briefly on the various reasons that mergers and purchases take place. There is a tendency on the part of some observers to assume that the motivation for every purchase or merger is the same, and that the conditions surrounding these activities are fairly standard. Actually, there are a variety of reasons that agency owners buy, sell, and merge.

Reasons Agency Owners Sell The reasons that an agency owner might decide to sell are fairly limited, and therefore relatively obvious. In general, the willingness to sell an agency interest stems from the desire to convert the agency into more liquid assets for retirement or some other purpose. In some instances, the surviving spouse of an agency owner obtains the agency as a result of their death. Having no desire to enter the business, and being unwilling to trust the management and operation of the agency to the remaining employees, the surviving spouse looks around for a willing buyer.

In general, there are five basic circumstances that motivate an agency owner to sell: •

Failure to operate the agency successfully and a desire to get rid of the agency and try another field of endeavor.

•

Advancing age and the desire to transfer ownership in order to retire from the operation of the agency.

•

Death of a principal and passage of the ownership interest to a spouse and/or children who do not want to operate the agency.

•

The opportunity to cash in the agency for more liquid assets, but continue as an employee of the new owner. This frequently takes place when an existing agency is sold to a national broker or some other agency.

•

Boredom, weariness, frustration, lead to the desire to simply escape the ownership responsibility.

Although the reason that the seller has elected to dispose of the agency may be of importance in the valuation of the agency and the negotiation of the price to be paid,

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suffice it to say at this point that in each of the above listed situations, the desire to dispose of the agency is generally strong.

Reasons Agency Owners Buy Apart from the special case in which an individual who does not own an agency seeks to purchase one and become an entrepreneur, the rationale for most agency purchases (and most agency mergers) is growth. Often, agency acquisitions are a fundamental part of the agency’s strategic plan for growth. In other cases, the opportunity to require a book of business arises and the decision is made to acquire it.

Agency acquisitions can aid the agency in growing by providing four elements required for growth: ·

Premium Volume

·

Talents

·

Markets

·

Accounts

In some instances, the sole motivation is the acquisition of premium volume. In other instances, the acquisition may also include the acquisition of additional personnel

employed by the agency being acquired. Less frequently, but nevertheless a factor in some instances, is the desire to acquire additional markets. Finally, some acquisitions have been prompted by the desire of the buyer to obtain particular accounts written by the agency to be acquired.

Reasons Agencies Merge As already noted, mergers are fundamentally different from purchases. In the case of an agency purchase, the agency owner acquires ownership of someone else’s agency. In a merger, the principal obtains part ownership in an agency, but at the same time gives up ownership of his or her individual agency. The separate agencies of the individuals disappear, and a new agency comes into existence, owned by one or more individuals.

In general, the motivations that lead to a merger is often more varied. In general, however, mergers are motivated by the desire of the merging parties to achieve one or more of the following benefits: ·

Size

·

Complementary talents

·

Shared responsibility

·

Perpetuation

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SIZE A merger, like the purchase of an agency, is a form of growth. With a purchase, an individual ownership in the agency increases. In the case of a merger, this is not necessarily the case. While a larger agency is the result, the proportionate ownership of the agency means that each party’s holding is essentially the same as before the merger, but it is pooled in common ownership. This means only, that without the increased investment that the purchase of an additional volume would require can achieve the advantages of size.

COMPLEMENTARY TALENTS More often than not, the purpose of a merger is to increase the range of skills that will generally increase the rate of growth. There are situations where the purchase of another agency may not provide the solution to the problems of an agency owner, but a merger may. Often two or more agencies that have been successful in achieving satisfactory growth through other means will merge, and thereby generate effects which flow from the multiple talents of the principals.

SHARED RESPONSIBILITY For some agents, one of the principal benefits gained

from a merger is the opportunity to share the managerial burden. The individual who operates a single-principal firm bears a heavy responsibility of management. While there are advantages to running the show, the solitude in decision-making and the lack of someone with whom to discuss major decisions can weigh heavily on the individual who must be responsible for everything. Many agents who have merged cite the sharing of responsibility as one of the positive benefits of the move.

PERPETUATION Mergers are also often viewed as a solution to the problem of agency perpetuation. One of the basic problems facing every agency owner is that of eventually finding someone willing to purchase his or her agency. This dilemma is one of the most common reasons for the popularity of mergers, since a merger creates a ready market for an agency interest in the form of the other principals in the merged firm. The greater the number of owners in a given agencyother things being equal-the greater the ease in disposing of an ownership interest. Although the relationship between an agency purchase and perpetuation is less direct, agency purchases may also be of some benefit in this area. Greater size permits an agency to support an increased number of producers, and thereby provides a

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THE BIG “I” VIRGINIA • Summer 2016

potential market for the ownership of the agency. Clearly, however, the more direct solution to the problem of perpetuation is merger rather than purchase of agencies.

SUMMARY While the principal motivation of some agents in seeking a merger is the opportunity to share responsibility and the burden of management with others, there are others who prefer not to share the managerial control. For this latter group, merger is not an acceptable alternative, regardless of the benefits.

It has often been said that a merger is like a marriage. In many ways this is truer than most people realize. As in the case of a marriage, considerable thought goes on before the actual “walking down the aisle.” There is a period of courtship, and then the wedding. The parties move into one office or the other, or perhaps to a new “home.” All of the agency’s accounts and friends bring flowers, just as at a wedding. There is even a honeymoon period. Eventually things settle down and, as in the case of most marriages, everything is different from the way the participants imagined it would be. Sometimes the “marriage” ends in divorce. Still, the benefits have seemed worth the risk to many agency owners.

This article was provided by Judi Newman of Phaze II Consulting, Inc. publisher of the Master Agency Manager (MAM). The Master Agency Manager is a one of a kind resource for virtually all aspects of managing an independent insurance agency. It is intended to serve as a guide to basic managerial techniques essential to any organization, and contains information on a wide range of general management issues. In addition, it also serves as a source of information on specialized topics directly related to the operation of an independent agency. Emphasis throughout MAM is on the “how” of management practices, as opposed to the “why.”

Make MAM a habit by making MAM the first place you look when confronting an agency problem or beginning a new project.

For more information on the Master Agency Manager, contact Judi Newman at 1-800-222-8716 or via email at judinewman@ aol.com to learn about this valuable management resource.

Copyright 2000 by Phaze II Consulting, Inc. Used with permission.

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Did You Miss the 2016 insurEXPO in April???

For those of you who just could not attend our first, newly-formatted insurEXPO in Richmond in late April, you missed a wonderful two days of terrific speakers, presenters, social functions and exhibition.

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Well, we accomplished all of this. By keeping event focus mainly on exhibition time with our company partners and vendors, agents had the choice of visiting with exhibitors on one and/ or two days. Over 70 exhibitors greeted eager agents.

Our event welcomed a 10% increase in independent licensed agent attendance. Additionally, thanks to the wonderful and generous support from Jackson Sumner, a live feed of much of the presentations was available, with well over 200 additional agents viewing the programs remotely.

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“ . . . my role within AmTrust is to find Virginia agents who write local and intermediate (<200 miles) trucking.

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Agency Acq and Due Diligence

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uisitions Accessing the True Earnings Potential of Any Acquisition or Merger Potential

By Al Diamond

W

e are currently assisting one of our clients in an acquisition. The target agency appears to be a good fit with our client. The agency wants to sell to our client. But, for some reason, the acquisition target is reluctant to provide any detailed data for analysis and due diligence in the formation of a fair and cogent offer by our client. The target agency has sought our client’s offer with little or no solid data. Has this ever happened to you?

We are currently assisting one of our clients in an acquisition. The target agency appears to be a good fit with our client. The agency wants to sell to our client. But, for some reason, the acquisition target is reluctant to provide any detailed data for analysis and due diligence in the formation of a fair and cogent offer by our client.

The target agency has sought our client’s offer with little or no solid data. Has this ever happened to you?

Summer 2016 • THE BIG “I” VIRGINIA

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The price of an agency is based on, but not limited to, its Market Valuation. Extended terms, retention contingency and many other variables can extend (or contract) price offered based on a static valuation.

In this case, the agency in question wanted more for their asset than the valuation constructed by their own expert.

So they wanted my client to ‘make an offer’. However, they didn’t see why we needed anything but their financial information. As far as they were concerned, it provided the information needed regarding their revenue and expense performance. And, in most agents’ opinions that is the primary need when purchasing another agency.

After 20 or so years of buying and selling agencies, I can assure you that MUCH more information is needed before spending hundreds of thousands (or millions) of dollars for a book of business, for a location and personnel or for an entire agency corporation.

The agency in this example didn’t understand that we need as much data as their valuer needed to form a complete picture of the operation, retention potential, carrier position and stability, book of business and its profitability (for contingency considerations) and a myriad of other issues. They also didn’t understand that the price of an agency is based on, but not limited to, its Market Valuation. Extended terms, retention contingency and many other variables can extend (or contract) price offered based on a static valuation.

So, by not providing that information, they stymied a very serious buyer from providing a fair price for their business.

HOW WAS RESOLVED?

THIS

ISSUE

We created a proforma cashflow analysis from the financial data provided and extended an offer, albeit vague, for the agency based upon the conduct of due diligence after the acceptance.

Pricing and terms were discussed, 40

THE BIG “I” VIRGINIA • Summer 2016

but assumptions were also covered in the Letter of Intent that would not otherwise have been needed if all agency information were provided at the outset of the process. If the assumptions were proven inaccurate, the buyer had the right to amend the offer prior to closing.

Both the buyer and seller would have preferred a nice ‘cut and dried’ offer and acceptance but Due Diligence could not be avoided. Either it would be done before the offer or between the offer and closing. Court cases have often blossomed in cases in which anomalies and inaccuracies are identified long after the contract is closed. The worst case scenario is in cash deals where the actual statistics or facts of the agency are different than represented.

SO WHAT IS “DUE DILIGENCE”?

Due Diligence is the analysis of all phases of an agency’s operation from a buyer’s standpoint.

Yes, financial information is important. If you have historical data (five years) for commission income and total revenue and can determine how that revenue flowed (retention of accounts, hard market increases, pure growth, book of

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business acquisitions), you can then estimate the effect of the future on that revenue flow to determine how it will react in the hands of the buyer.

Similarly, expenses are to be analyzed to determine what recurring expenses will be assumed by the buyer versus non-recurring or personal expenses that will be eliminated by a change of ownership.

The net result will be a profit (earnings, after tax effect has been taken) stream that will be used as the basis of value and price.

Now, the non-financial Due Diligence can begin.

Our assessment of risk that adds or subtracts from a Market Value estimate is based on these categories. Our valuation analysis includes between ten and twenty questions asked for each of these categories to determine risk and value potential. We urge all agents either using professional help in acquisitions or performing their own assessments of value potential of an acquisition to at least consider each of these areas within the Due Diligence that will permit you to assess the true earnings potential of any acquisition or merger potential.

Copyright 2004 by Agency Consulting Group, Inc. Used with permission.

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THE BIG “I” VIRGINIA • Summer 2016

WE BREAK OUR DUE DILIGENCE INTO 17 SEGMENTS: 1.

Profitability – Pro-forma earnings potential

2.

Revenue Growth – Both historical and potential growth

3.

Account Concentration – Book of Business analysis by line including volumes and loss ratios

4.

Carriers and Markets – Similarities, differences and complimentary and conflicting carriers with historical loss ratios, growth trends and specialties

5.

Compensation – How are employees and producers compensated compared to your own

6.

Specialization – Areas of specialty, relationship of specialty to departing owners and to purchaser’s agency

7.

Retention – Historically - measured by Customers, Policies, Premium and Commissions

8.

Performance vs. Industry and your own agency – Productivity (Revenue, Compensation and Spread per employee and expense ratios)

9.

Organizational Structure – compare and contrast to your own

10.

Succession Plan – Are there senior managers and/or their replacements in place?

11.

Personnel Quality – evaluation of existing personnel

12.

Receivables – condition of historical as well as current receivables and Bad Debt potential

13.

Training and Professional Development – of employees

14.

Size and Stability – Are there economies of scale possible?

15.

Liquidity – Especially in corporate purchases, an evaluation of Balance Sheet liquidity ratios are a must

16.

Automation and Other Systems – Procedures and systems in place, manual and automated and the degree of training and acceptance of them

17.

Marketing and Sales – Advertising and marketing efforts carried out – sales professionalism and aggressiveness

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Interstate has the coverage your clients need for waterfront property.

• • • • • •

Property limits up to $20 million + TIV GL limits to $10 million + Excess flood Equipment breakdown Wind Buyback HO6 (coastal condos)

High in-house authority. Quick quotes.

Contact: Jeffrey McDonough jeffm@interstate-insurance.com Send submissions to: submissions@interstate-insurance.com

RIGHT POLICY • RIGHT PRICE • EVERY TIME 800.759.7779 | www.interstate-insurance.com