Agency Buyer, Seller Goals Often Differ

While independent agents who put their firms up for sale often want simply to maximize the profit from years of hard work in building a book of business, a buyers demands often center more on strategic goals–usually the growth potential an acquisition provides in terms of geography or product line, industry observers say.

Buyers can have a number of strategic objectives, pointed out Steven Reichman, executive vice president with NIA Group in Paramus, N.J., who is president of the Professional Insurance Agents of New Jersey. His agency, which has 15 offices in four states, buys other agencies with the aim of strategic growth.

“We are always trying to grow the business,” said Mr. Reichman. “Instead of using cold calls to grow the business, we buy [other agencies] because there is a relationship in place and it seems to have worked better for us over the years.”

However, purchasing for the sake of getting bigger is not “an effective way to buy,” he added. Instead, Mr. Reichman cited a number of strategic factors to consider when buying another agency, including:

To get into a location the agency is not in, but feels it needs a presence.

To pick up markets to gain business and the expertise that will allow the agency to grow in that line.

In rare cases, an acquisition can be made to pick up key employees or those who are trained and licensed in a particular area, or to gain access to a particular account with growth potential.

In this hardening insurance market, agency buyers are performing their due diligence more carefully, said Mr. Reichman. In some cases, if an agency is handling a particular class of business that can be classified as difficult, the buyer may want to walk away from the deal.

While the volume of mergers and acquisitions may appear to be slowing, John Wepler, senior vice president of mergers and acquisitions with Marsh Berry and Company, an insurance consulting firm in Concord, Ohio, suggested that it is only in a lull. He said that there are a large number of pent-up deals and predicted a record number of acquisitions in the next three months by banks and insurance brokers.

Most activity, Mr. Wepler predicted, will take place among insurance brokerages. Investors feel insurance brokerage firms are a good investment right now, with the hard market pushing up insurance rates and commission revenues. The increased M&A activity will allow brokers to take advantage of the rising value of their firms to raise capital, he said.

But independent agency value, Mr. Wepler added, is also on the rise, and is in fact at its highest in 21 years. While sellers can expect a good price, the hardening insurance market–which he predicted will last for the next three to four years–will continue to push revenues up, putting agents in a good position to make as many deals as they feel they need to.

“They are going to take advantage of the situation while the timing is right,” Mr. Wepler said.

Banks, Mr. Wepler observed, will also continue to look to diversify their income streams, with insurance agencies a prime target. With loan interest income dropping and insurance premium rates hardening, they still see insurance as a good alternative investment.

“Insurance is a safe harbor for banks,” he added.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 19, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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