T H U R S D A Y ,  M A Y   8 ,  2 0 0 8 

Big “I” National News

P&C Trends
Agency Valuation --- Past, Present and Future
Forecast predicts a decreased value, more agencies on the market in the coming years.

In 2007, agency value was at an all-time high due to a demand for agency acquisitions that drove the average deal to more than seven times the EBITDA (earnings before interest, taxes, depreciation and amortization), according to a Marsh-Berry’s 2008 Insurance Agency/Broker Value Forecast. However, agency values are expected to decrease in the next few years as the soft market takes its toll on the industry.

“The seemingly unlimited demand by buyers and the shortage of agencies of scaled pushed agency value to a new level during the past 10 years. Public buyer demand has been driven in large by Wall Street pressure to grow revenue and earnings in the soft market,” the forecast says. “During 2007, almost every agency was marketable regardless of quality. During the next three years, buyers will become more selective and aggressiveness will be reserved for those that are of better than average quality, fold-ins, stand-alone acquisitions with revenue of at least $5 million or agencies with a unique specialty.”

Prior to the mid-90s agency value hovered between five and six times EBITDA, then between 1995 and 2007 the number of buyers spiked dramatically as banks started buying more agencies. However, since 1999, following the passage of Gramm-Leach Bliley Act, public brokers have been buying more of the market share from banks through enhanced pricing, flexible deal structures and aggressive prospecting.

Since January 1999, there have been more than 2,000 publicly announced insurance agency and brokerage transactions, according to Marsh-Berry, with an average of about 200 to 275 transactions per year. This number is expected to continue to grow in the coming years due to six key factors driving the number of agencies on the market:

1. More targets. The average agency in the industry is getting larger. Over time, a larger portion of the market is made up of agencies at or greater than $5 million, which is becoming the minimum revenue size for public brokers and banks to support as a branch office.

2. Agency ownership. Many cannot cash flow internal perpetuation because too many agency owners retain too large an ownership position for too long a time period. Perpetuation requires an orderly transition of stock over a long period of time. A regimented transition of ownership allows for stock of retiring shareholders to be acquired without placing a financial burden on any one individual within an agency. If the burden is too large, the agency generally decides to sell.

3. The soft market. The difficult rate environment, carrier tiering and the challenge of orchestrating sustainable growth is prompting many agencies to sell. In this current market, more agency owners are deciding they don’t have the stamina, personnel or capital resources to fund continued growth.

4. Political changes. The upcoming presidential election could play a role in the capital gains rate, which would create a dramatic increase in the number of sellers.

5. National health care. While the proposals of a national health care plane are still vague, retail agencies with a sizable book of business fear having commission income legislated off their income statements. Some agency owners feel a formalized plan could increase perceived risk and the uncertainty alone could reduce the value of health insurance business.

6. Decline in agency value. Valuations are at a current 30-year high given a raft of aggressive buyers chasing a limited number of sellers, however the recent boom in mergers and acquisitions could lead to a sharp increase in inventory compared to a diminished number of buyers, which would soften pricing for the average agency.

Maintaining value, despite these factors may be a challenge for agencies, but Marsh-Berry says developing the following attributes will improve an agency’s chance at weathering difficult times: strong new business production; institutionalized production staff/stratified ages; successfully executed organic growth strategy; best practices executive leadership; sustainable, strong profit margin; strong profitability prior to contingents; location in medium to high-growth area; agency differentiation and/or niche specialties; fold in or large enough for a stand alone office and corporate structure that enables an asset sale, proving the buyer with tax amortization.

*Editor’s Note: This is part two in a series covering projections from Marsh-Berry’s 2008 Insurance Agency/Broker Value Forecast. Next week’s edition of Insurance News & Views will discuss organic growth trends.

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




P&C Trends
One for the Record Books
First quarter 2008 posts the most catastrophe losses in nine years.

U.S. property-casualty insurers will pay homeowners and businesses approximately $3.35 billion for property losses sustained from nine catastrophes in the first quarter of 2008 --- the highest amount of any first quarter in the last nine years, according to ISO’s Property Claims Services (PCS) Unit.

ISO declared nine events from January to March as catastrophes, including a February explosion at a sugar refinery in Georgia that was declared a catastrophe for the workers’ compensation losses. (The PCS Unit does not have an estimate for the losses incurred from the event so it is excluded from its findings.) The other eight catastrophes, defined by PCS as an event that causes $25 million or more in insured property losses, generated 615,000 in claims in 22 states --- including seven caused by severe weather (wind, hail, flood and tornadoes) and one caused by a winter storm.

“The remaining eight events still represent the greatest frequency in the first quarter since 1999 --- tied with eight events declared in 2005,” says Gary Kerney, assistant vice president, PCS. “The insured property loss, however, remains the largest in the last decade.”

Claims in personal lines produced 56% or $1.9 billion of the total $3.35 billion in first quarter losses, while commercial property losses equaled 31% or approximately $1 billion. Losses from insured vehicles totaled approximately a half billion dollars or 13% of the total loss.

The first catastrophe of the year was a winter storm in January that caused approximately $745 million in insured property damage in 13 states, damaging 177, 000 personal and commercial properties and vehicles. The most expensive event of the quarter occurred in February when an outbreak of severe weather from Texas to Ohio caused $955 million in damages or 120,000 losses in eight states.

Among the 22 states sustaining losses from the catastrophes, the five with the largest insured property losses were: Georgia ($610 million), Tennessee ($535 million), California ($300 million), Texas ($270 million) and Arkansas ($223 million).

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




P&C Trends
Storm Season Preparation
Recommendations agents can give to customers getting ready for the upcoming hurricane season.

With forecasters predicting an above-average hurricane season for 2008, coastal regions throughout the country are at risk of being hit by a major storm. According to Colorado State University Forecasters Dr. William Gray and Philip Klotzbach, the U.S. can expect approximately 15 storms, including eight named hurricanes, this season. The best way for independent agents to help customers prepare for these potential storms is to encourage them to have a disaster plan and now is the time to prepare, according to the Insurance Information Institute (III).

“Those living near the coastline should plan for a hurricane by keeping their insurance up to date, and by having an evacuation plan,” says Jeanne Salvatore, senior vice president at the III. “In the event of a disaster you may have just minutes to gather your family and important papers and get out of your house, possibly for good.”

The III has compiled a list of six steps for agents to pass along to customers about gearing up for this year’s storm season:

1. Review insurance coverages. Speak to your agent to make sure you have enough and the right kind of coverage. If you have made a major alteration or improvement to your home or have made significant purchases, it’s important to notify your agent of these changes because the increased value must be reflected in your policy. Also ask about flood insurance since it is not covered under the standard homeowners policy. Coverage for flood damage is available through the National Flood Insurance Program and can be purchased through your agent.

2. Arrange for evacuation ahead of time. Identify where to go in the event of an evacuation and have more than one option, if possible. Keep phone numbers and addresses of these locations on hand, and if you have a pet make sure to check ahead of time that animals are welcome. Also, map out the primary route and a back-up route to take in the event of an evacuation and have a map of the area readily available.

3. Create a home inventory. A home inventory of all personal property will ensure that you’ve purchased enough insurance to replace loss possessions. It can also speed up the claims process and substantiate losses for income tax purposes. (The III provides a free software application to create a home inventory at www.knowyourstuff.org.)

4. Plan what to take. In the event that you are forced from your home for several weeks, having essential items (such as medicines, pet food, computers hard drives/laptops and “comfort items” like a child’s favorite toy) will alleviate some of the stress of an evacuation.

5. Gather important documents. Keep important documents in a safe place where they are easily accessed. In the event of an evacuation, be sure to take the following documents with you: insurance policies, home inventory, prescriptions, birth and marriage certificates, passports, drivers license or personal identifications, social security cards, recent tax returns, employment information, wills, deeds and bank and savings information.

6. Take the 10-minute challenge. Find out if you ready to evacuate by taking a real-time test. Give yourself 10 minutes to get you, your family and belongings into the car and on the road safely.

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




L&H Trends
A Conversation about Sole Proprietorship
Independent agents can help business owners solve their insurance equation.

Independent insurance agents have large numbers of sole proprietorships as customers in both their commercial and personal lines books. But do you really know how many sole proprietorship customers you come into contact with regularly?

According to tax returns filed with the Internal Revenue Service, 71% of all businesses are sole proprietorship. By definition, sole proprietorships are owned by one person (unincorporated businesses owned by more than one person are partnerships).So what are the implications and opportunities for independent insurance agents?

Most sole proprietorships are established because it the simplest business structure. Also, sole proprietorships are easy to run as there are no boards that have to be consulted and sole proprietorship owns the entire business. Lastly, the sole proprietorship has its profits taxed only once as personal income. There are also disadvantages of sole proprietorship, the biggest being that the sole proprietor has unlimited liability for all debts and liability of the business. This means the owner’s wealth is at risk and his or her personal assets can be seized to satisfy debts and pay for any liability. It can also be more difficult to obtain financing and raise capital as a sole proprietorship. And, from an income tax standpoint, a corporate form of ownership may allow for more income tax flexibility.

Since there are hundreds of thousands of small businesses, there is a great opportunity for independent insurance agents to assist the sole proprietor in dealing with the risk retention-risk transfer equation. Professional liability insurance is critically important for all businesses, but especially for sole proprietorships. Many sole proprietors don’t realize they may have professional liability to consider in addition to the usual liability of slips and falls. Many small business owners don’t foresee having professional liability exposure and underestimate the possibility and expense of suit defense costs, even if they prevail. Independent insurance agents are also well positioned to assist sole proprietors with providing health and retirement benefits, which when provided through the business, can lower their payroll taxes and income tax burden. Sole proprietors also have a more acute need for life insurance to provide income replacement to dependents since the business technically ceases with the death of the owner and is often sold at a fraction of its value.

So how can agents assist their sole proprietor customers in dealing with these issues? Step one is to ask customers whether they own a business. Second, an agency can educate customers about the issues sole proprietors face and how they can provide help to deal with these challenges.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.




Forms & Substance
Rethink How You Open
Start sales calls off right and set yourself apart from the competition by leading with a good opening.

Most salespeople take how they open a sales call for granted and many hardly think about it at all --- this is a mistake.

The opening is a place to differentiate yourself and get your calls, especially first calls, off to a great start. This requires taking the time to plan how you will open. Although it takes a small amount of time, you create the foundation of the entire call with your opening.

There are five important things that need to be done in an opening and salespeople who master these will have a competitive advantage over their competition.

1. Don’t forget about rapport. Prepare for rapport. In addition to what you prepare, look for rapport cues. Be sensitive to customer signals, but don’t bypass rapport. People buy from people they like when all else is fairly equal (and sometimes when it is not).

2. Rethink your purpose. Instead of saying, “I am here to tell you about us and what we do in …” say, “I am here to learn more about your objectives and share with you what we do in …” (for a first meeting) or “Before I discuss what I have prepared, I'd like to learn about …”

3. Leverage your preparation. Say, “In preparation for the meeting, I have … ( an example: discussed X with our specialists, researched …).” This will help you gain credibility and more time.

4. Summarize. Give the prospect a 30 to 60-second overview of what your company/group does and check if there are any questions. Tailor it to the prospect.

5. Lead out of the opening by going into to needs versus the presentation. When you are ready to wrap-up the opening, do so with a question that lets the prospect know you will be asking questions. This will also help you gain client cooperation. Remember, you have already let the client know you prepared for the meeting, so this will help the client want to give you information. For example, “So that I can focus on what the priorities are for you, may I ask a few questions about … before I share with you what I have prepared?” Then you are at a point where you can question, listen and be persuasive when you present.

These opening steps may seem like small points. In fact, many, if not most, salespeople miss several of them. When you open the call effectively, you open the dialogue. By giving a great opening, you will get a lot more in the remainder of the call!

To read this and other sales articles online, click here.

Linda Richardson (www.richardson.com) is the Founder and Chairman of Richardson, a global sales training business.