If business were a game of poker, insurance firms, consisting of agency and brokerage owners, have enjoyed a royal flush over the last several years. Strong economic performance, even when you account for the brief economic downturn in early 2020, a hard market across Property & Casualty (P&C) insurance, favorable interest rates and a slew of new acquirers have all kept owners in a strong betting position.
However, the tables may be starting to turn. The hard market is beginning to slow, and the economy is running hot. The era of cheap money is coming to an end and inflation will need to be controlled. While this may mean the next hand isn’t a royal flush, the fundamentals of our business remain strong.
If you run from the table, you’ll lose an opportunity to engage in short-term tactical decision making necessary for staying in business and maximizing value. If this is your game, ask yourself this: Do you have the desire, the stamina and the commitment to embrace and execute value-enhancing change?
How to Invest in a Down Market
Now, choose your insurance company investment strategy. Play your hand and either hold, fold or double down.
Hold
What happens if you hold? If you sit back on a hand of “this is how I’ve always done it,” you’ll suffer a decline in value. If you don’t seek predictable profitable growth to reinvest in the next generation or fail to plan for the next step in the succession of equity ownership, the average owner age will continue to increase and value will erode.
How does lack of reinvestment and an increasing owner’s age destroy value? Ultimately, the appeal and value of the business rests on growth and profitability. As the ownership group ages, potential buyers recognize there is a shorter time period during which they can count on key players staying in the game. The resulting weaker organic growth presents more risk to a buyer, which erodes an agency’s value. During the last 10 years, the weighted average owner age increased from 52.5 in 2009 to 54.2 in 2021.
Fold
While folding in cards usually implies a weaker hand, nothing is further from the truth in today’s acquisition market. Valuations are at a premium, deal terms are flexible, and sellers have the luxury of picking their partner. Valuation levels are eclipsing the heyday for Insurance firms that have a well-developed production staff, sales culture, expense control discipline and fortitude to make the tough decisions. Better-than-average Insurance firms are in high demand by every buyer segment. So, if your choice is to fold, there’s no better time.
Double Down
Doubling down is the best option for organizations with a longer-term time horizon and the foresight to plan, commit and execute a strategy to maximize value. In an environment where Insurance firms can capture premium values in a sale, those who are committed to remaining independent should immediately consider a multi-pronged approach that includes reinvestment in profitable growth and succession planning.
The first step to maximizing long-term value is rallying the executive team around the mantra of “accepting nothing less than best-in-class new business production and best-in-class profitability.” Believe it or not, gaining leadership’s support is the easy part. The second step, which is more difficult, is determining the operating structure required to attain predictable, profitable growth. The third step, implementation, is excruciating.
The final step, following through, is the toughest. The true test of an effective plan is maintaining conviction, perseverance and unwavering commitment — even when legacy players buck change and attempt to preserve the status quo.
Look for Hold, Fold or Double Down? – Part 2 tomorrow where we’ll discuss strategic planning to focus on four core initiatives: producer definition, accountability, reinvestment and equity ownership succession.
If you have questions about Today’s ViewPoint, or would like to learn more about how MarshBerry can help your firm plan for its future, please email or call Brian Refici, Vice President, at 440.769.0321.
MarshBerry 360 Forum – Registration Now Open!
Join MarshBerry for a day of learning, networking, and strategizing with leading growth consultants, analysts, and industry experts. Sessions are designed to help improve firm performance, earnings, value, and market resiliency. In addition, gain valuable insights, methodology and resources from MarshBerry’s team of in-demand industry speakers.
Seating is limited and reserved on a first-come, first-served basis. Reserve your spot now at www.MarshBerry.com/360.
