Agency Mergers Likely To Pick Up In Tough Economy, Soft P&C Market

Agents and brokers struggling to grow in a shrinking economy cannot expect to see revenue bolstered by hardening commercial insurance prices anytime soon. So those without a new direction or alternative strategy to maximize shareholder value might want to consider selling their businesses, a consultant for the producer sector suggested.

The insurance industry is coming off its worst year in decades, noted Rob Lieblein, managing partner with Hales & Company, during his opening remarks here last week at the first of four seminars around the country on “Charting a New Course: Creating and Enhancing Shareholder Value.”

This year will be better, but only relatively so, because in terms of shrinking revenues–thanks to a contracting economy and premium declines in a persistently soft insurance market–”the base can't get any lower,” Mr. Lieblein added at the seminar, presented by Hales & Company and sponsored by Summit Business Media, National Underwriter and American Agent & Broker.

Part of the problem, he noted, is that the industry is “living by many flawed legacy” principles that lack a viable strategy for growth and maximizing shareholder value.

He said producers who fail to recognize they need a new and better strategy for growth in a brutal economy will not succeed, and “if you can't, you might as well sell.”

Growth is essential to the future viability of independent agencies, as more of them top $2 million in premium volume, with the result that smaller agencies will not be in a position to compete, Mr. Lieblein advised.

Agencies are mistaken, he said, if they have any expectation that a hard market will turn up to help them out of their financial doldrums any time in the near future.

A more realistic expectation is that there will be no upturn until 2011, and that producers cannot expect to see additional cash flow from rate increases until 2012, Mr. Lieblein counseled.

“We are not going to be there anytime soon,” he predicted.

In terms of merger and acquisition activity, Audra Szollosy, senior vice president at Hales, said that while economic factors may have pointed to more consolidation in the marketplace, the reality is that 2009 was one of the least active in close to a decade.

She said a lot of that had to do with producers “hunkering down and concentrating on their own business as they figured out all the negative factors.”

Meanwhile, one of the hot merger areas–employee benefits–took a hit because of uncertainty generated by the health care reform debate, as producers struggle to figure out where they will fit into the emerging system, Ms. Szollosy noted.

While M&A activity remains quiet, she said that many of the primary acquirers of agencies are saying their pipeline is full and they expect to see more acquisition activity during the second half of the year.

“There appears to be a lot of irons in the fire, and activity is expected to pick up,” according to Ms. Szollosy.

Dan Price, vice president at Hales, said one factor that has affected M&A market activity is the increased time it takes to do due diligence. This is primarily because buyers are carefully evaluating an agency's worth, especially in the face of decreased profit margins amid an economic downturn.

Later this year, he said, there will be an increase in acquisition activity among the publicly traded brokers as they will need to show revenue growth to investors.

He also predicted the value gap will continue to grow between high-performing agencies and other firms, making it more difficult for deals to be done for those who believe they should get a higher price.

Meanwhile, insurance agencies need to abandon the idea that providing value-added service will be enough of a differentiator for them to survive and thrive in today's competitive insurance environment, Mr. Lieblein warned. Indeed, he said value-added service is something that all customers have come to expect.

He compared the idea to the hotel industry, where no matter what chain you go to, services are being upgraded everywhere, and additional amenities have become second-nature for many travelers.

The same is true for insurance agencies, so to stand out they need to offer a 'unique experience,'” according to Mr. Lieblein.

Agents and brokers need to elevate themselves to trusted advisors, he explained, so they become “strategically important to the client–to advance their goals and objectives and become hard to replace.”

One important key to this is changing an agency's culture, he suggested.

Altering compensation levels can make a big difference in driving producers to concentrate on sales, and making the support staff an intrinsic partner in the account through the use of commissions.

“Compensation can control behavior,” Mr. Lieblein noted.

The point about compensation is especially important for handling employee benefit books of business, he noted, because changes will need to come to a system that is broken.

The old school of thought–routinely passing increases in benefits costs along to employers and employees–will not be viable in years to come as health care expenses continue to escalate.

Brokers who do not shift into a cost-control mode will see their books deteriorate and commission fall over the years, and eventually they “will become irrelevant,” he said.

Those that survive will take on a new model of delivering benefits, concentrating on analytics and getting people to take more responsibility for their health.

He acknowledged how difficult this will be for some, although with changes mandated by the federal government, he said he expects to “see some winners out of all this.”

Differentiation was a theme throughout the conference, which Mr. Lieblein observed can add substantially to the worth of an agency if it is looking to be acquired.

One major differentiator for an agency is to have a unique brand, according to a pair of executives from Aartrijk–Maureen Wall Bentley, executive vice president, and Laurie Donohue, vice president of agency and broker marketing.

“What is brand? Think reputation–it is what people think of you,” said Ms. Wall Bentley, explaining that a strong brand can help gain market share while also assisting in recruiting, and “can turn your customers into raving fans.”

By developing a brand, according to Ms. Donohue, “it makes people know exactly what you stand for.”

In establishing a brand, agencies need to consider factors such as location, phone etiquette, dress and the type of promotional materials they use for their agency. It is also essential that they consider updating their image periodically–changing tag lines and reviewing logos, for example.

Another differentiator, suggested David Paul, principal with ALIRT Insurance Research LLC, is establishing the agency as a valued advisor by providing customers with unique analytics about the carriers with which they place coverage.

The conventional way has been to simply pass along A.M. Best ratings, but Mr. Paul proposes that agencies should go beyond ratings and begin their own research on companies, collecting publicly available information concerning loss ratios and reserve deterioration to steer clients away from failing insurers.

“There are ways for you guys to get this information and predict what will happen,” he said. “This will make you look like geniuses.”