Agents Look Long-Term For True Value

It is certainly no secret that agency values have rebounded strongly since they hit bottom in the early 1990s.

Agency values have jumped dramatically due to a combination of factors. Among these developments is the hardening property-casualty market, stratospheric public broker valuations, adoption of “best practices” management techniques, and increased competition among buyers. (For example, banks have bought more agencies than have the public brokers over the past five years.)

While most agencies have enjoyed a jump in value in recent times, what we find striking is how much value has been created by a handful of privately-held super-performers.

We recently analyzed a group of clients whose stocks actually outperformed the public brokers over the past decade (including the past three years, which have been home-run years for the public brokers.) Although we wont list their names, youre probably familiar with at least one of these agencies, since their success over the past decade has transformed them into regional powerhouses.

Despite their differences, these firms have some remarkable similarities in terms of their organizational priorities, ownership structure and leadership. In many ways, the high performers have swum against the tide of the industry. They have answered (by their actions) the following questions in the same way.

As you read the questions, you might want to answer each on behalf of your own agency.

What should be a higher priority in creating value, revenue growth or profitability?

The answer is revenue growth. Top-performing value-builders consistently give growth a higher priority than profitability. This might seem strange, since it is a well-known truth that agency value is directly correlated to profits (the higher the profits, the higher the value).

The issue is really one of timing. The value-builders recognize that to maximize profits (and value) in the future, they must invest heavily in growth today (which, of course, sacrifices current profitability). This runs counter to what many of their competitors are doing, having bought into the trap of equating current profit maximization with value maximization. In attempting to maximize current profits, many agency owners are sacrificing long-term growth.

Perhaps approaching this from a different angle might help.

What is the most common complaint about publicly-traded companies? The answer, many would agree, is that they are slaves to Wall Streets focus on near-term profits. Public companies have to spend so much time managing each quarters earnings that they sometimes miss the boat on bigger, more strategic opportunities to grow their stock value.

Thus, many otherwise great investments never get made because the payoff requires time, and public company investors wont stand for it. Public investor capital is very impatient; it requires a quick return, or a companys share value might plummet.

Ironically, many privately-held agencies, with such a heavy focus on maximizing current profitability, are running themselves like their publicly-traded competitors! The top value-builders, on the other hand, take advantage of the patient capital that is one of their most potent weapons, diligently investing in new people year after year, accepting the lower short-term margins in exchange for greater value in the future.

True or False: Widely-distributed stock ownership should be avoided since it makes it harder to grow the value of the stock.

The answer is false! It is always sad to find an agency owner who has bought into the mistaken notion that a reduction in his percentage of agency ownership equates to a reduction in his value. If ownership percentages are “invested” in key people wisely, an agency owner can achieve an enormous increase in his stock value, even while his percentage of ownership declines.

The top value-builders have learned that the opportunity to own a piece of the action is a powerful weapon in the battle for sales talent, and can be a great weapon for private agencies that are trying to compete against the public brokers to attract talented people.

True or False: Producers tend to make ineffective agency leaders.

The answer is false! While it is true that many producers have failed to make the leap from successful salesperson to effective leader, it is also true that it is nearly impossible to lead a sales organization if you are not an effective salesperson. Where many producers who aspire to agency leadership fall short is that they never learn to elevate their sales talent beyond simply selling insurance.

Effective agency leaders are most often successful salespeople who learn to elevate their performance from selling individual accounts to rainmaking (relational door-opening, where the close is left to somebody else), and then ultimately to organization-building.

Organization building is still essentially sales, but involves the “sale of the agency” to potential employee recruits and/or acquisition candidates. Every great agency has an effective organization-builder leading the way.

Investment advisers consistently note that the steady stock market investor is the one who prevails over the long run. Those who chase the latest trend always seem to get burned, while those who plow money into the market through thick and thin are handsomely rewarded.

The top value-builders, with their consistent reinvestment of profits back into their agencies, have demonstrated that this principle certainly applies to the insurance brokerage business. Is your agency willing to step up and meet the value-building challenge?

Kevin Stipe is a senior vice president and principal of Reagan Consulting Inc., an Atlanta-based management consulting firm that developed and produces the “Independent Insurance Agents of America Best Practices Study.” He may be reached at (404) 233-5545 or by e-ail at Kevin@reaganconsulting.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 1, 2002. Copyright 2002 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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Agents Look Long-Term For True Value

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