BANKS AND other institutions that provide financing to the insurance industry play an integral role in enabling agencies to expand their books of business. In the current insurance landscape, standing still is akin to going backwards, and any agency that isn’t continuously looking for ways to grow by making investments in its business could face a battle to survive.
The vast majority of insureds value having an agent at the end of a phone, but in reality, that value proposition may not be enough for an agency to maintain its business going forward. Money talks, and a lot of it is being spent right now on trying to encourage clients to transition their business to low-cost alternatives.
“Everybody is going after the agency clients: Close to $2 billion a year is being spent by the investment community on trying to work out how to disintermediate agents from their clients,” says Robert J. Pettinicchi, executive vice president of InsurBanc. “Money is being spent on trying to get access to the consumer that the agent controls, so savvy agents need to make investments in their business, technology and people.”
Investing in the future is a core driver of success in today’s market. While implementing strategies that enable organic growth should be a top priority, creating growth through acquisitions should also be a key consideration for ambitious agencies.
An acquisition has the potential to add strength to an agency by obtaining multiple growth drivers in one fell swoop, including qualified people, specialty business lines, and access to new markets and geographies.
“Some of those new staff members could also be future owners of the business,” Pettinicchi says. “An acquisition helps to grow your business and make it more valuable, but you could also create an embedded population of people who may be able and willing to buy it at some point.”
While borrowing funds to invest is a sensible option for most modern agencies, some owners seem to have an unhealthy approach to debt. Debt is not necessarily the enemy it is often painted out to be, and allocating funds for payments to former owners and outstanding loans is not uncommon.
However, Pettinicchi has noticed a worrying and growing trend among agency owners, who often focus on securing funds for the longest possible loan term, which is often not the most advisable strategy.
Before securing financing, agency owners should think about whether they are borrowing for the right purposes. In most cases, they should also attempt to borrow the money for the shortest reasonable timeframe.
“By repaying it on a faster basis, an agency effectively gives itself the ability to leverage, should it need to borrow again, go to market or capitalize on an opportunity,” Pettinicchi says. “I see that mistake being made – an agency owner may say a deal works for them if they can pay it over 15 years, but they should really be looking at what they can reasonably borrow over five to seven years. That’s an important consideration because, in two or three years, there may be another opportunity that the agency wants to take advantage of.”
Where to spend
Pettinicchi identifi es investments in human capital as the most effective way an agency can use its funds. Yet those investments come with specifi c complexities, and an agency needs to fi gure out how to hire producers who can actually produce within their environment and business model. Agency owners need to set up a program that appropriately compensates those who do produce and identifi es those who do not. The harsh reality is that those non-producers dissipate the value of an agency and keep it from reaching its potential.
“Depending on the fi ve-year plan of your business,” says Rick Dennen, founder, president and CEO of Oak Street Funding, “it may be time to assess your management team and make some necessary changes in poor performers and fi nd top talent to replace – you will be liberated.”
Investments in technology are also crucial. The modern consumer has far greater demands than ever before and expects to be able to communicate when they want via a method that suits their lifestyle. Technology investments also enable an agency to streamline their own internal processes, increasing efficiency and cutting expenditures. With insurtech and fi ntech fi rms putting more and more money toward separating agencies from their clients, investing in technology is no longer an option – it’s a base requirement.
“At this point in time, if you are not keeping pace with all of the technological advances and access to Big Data, you will quickly fall behind your competition,” Dennen says.
e adds that any insurance agency that isn’t growing is dying. “You have two choices,” he says. “Either you don’t have the energy to optimize the value of your business, and making changes or enhancements to get that value is not a priority, so you start exploring the sale process. Or you have the desire, but lack the road map or capital.”
The fi nancing provided to the industry today could easily be taken for granted. Traditionally, banks were not interested in lending money to agencies, particularly small and medium-sized ones, and financing in the space was largely private. The reluctance of traditional banks to fi nance investments in insurance agencies was one the key drivers behind the creation of InsurBanc 16 years ago.
It became clear to Pettinicchi and his partners that banks didn’t understand the value of lending to an insurance agency. They were slow to understand how agencies worked, how their cash flow was generated and how they created value. Luckily, that thinking has been turned on its head, and there are now several specialty lenders that provide financing to agencies.
In addition to financing acquisitions, InsurBanc also funds internal perpetuation deals. Although the seller in these deals is usually willing to accept a portion of the proceeds in payments over time, they are also increasingly eager to secure a significant chunk of the money upfront.
“Banks can provide that immediate liquidity that’s often needed to make these perpetuation deals happen,” Pettinicchi says. “There are different pieces to the financing puzzle, and banks certainly provide a really important piece.”
Any agency looking to secure financing from a bank needs to take steps to make itself an attractive, safe bet. That means getting serious about streamlining, documenting and striving to improve internal processes, people, finances and strategies.
“You don’t hide information from your doctor, therapist or your lawyer, and you need to approach a lender the same way,” Dennen says. “Transparency with your lender is the best way to uncover and determine what the best debt structure is for your business. Have your financials and strategic plan ready to share with the lender so they can assess what lending is available to you.”