High Agency Valuations Not Going Away, MarshBerry Exec Tells Conference

Valuations of insurance agencies are as high as they have ever been, and there does not appear to be any lessening of interest among suitors, according to an industry mergers and acquisitions (M&A) consultant.

John Wepler, chairman and CEO of MarshBerrry, described an “explosive M&A market,” as he talked about the state of the industry at a May 25 conference that his firm held for about 500 agency executives in Las Vegas.

“Private equity has literally taken over the insurance brokerage business,” Wepler said.

Their interest in buying brokerages has helped drive up valuations, he added.

“I will tell you today valuations are at the highest point they’ve ever been,” he said, adding that there is virtually “no oxygen” left at the top.

According to him, 2016 agency valuations were on average 10.12 times earnings before interest, taxes, depreciation and amortization (EBITDA).

His answer to anyone who thinks the high valuations and interest in agencies are going away at some point?

“I don’t think it’s a fad,” he said. “There’s $114 billion in capital on the sidelines trying to get in.”

Wepler also touched on another topic of interest to the brokerage community: insuretech.

“It’s going to be a massive, massive disruption,” he said. “The insurance industry is ripe for innovation and disruption. I think you can expect disruption in every single type and size of account in your book of business.”

MarshBerry’s conference drew more than 500 insurance brokerage executives. A panel at the conference was moderated by Phil Trem, MarshBerry’s senior vice president. Panelists were: Melissa Cerny, area president of Arthur J. Gallagher & Co.; Ron Filice, president and CEO of Filice Insurance Agency; Eric Leavitt, CEO of Leavitt Group Enterprises Inc.; and Rod Socklov, executive vice president of ADB Insurance and Financial Services Inc.

The panelists shared how they improved efficiency and revenue and the challenges they’ve faced.

Leavitt said that 10 years ago, Leavitt’s managers decided that they needed to “wring out” some of the costs that were piling up. One of the biggest changes was to create a centralized service center for small personal and commercial accounts and automate the process. The center now offers service six days a week, 15 hours per day and has 70 people on staff, he said.

“After 10 years now, it’s tremendously successful for us,” Leavitt said.

Socklov talked about bringing added value to clients.

“The services that we’re now providing, that’s the differentiator,” Socklov said. “It’s not just about the rate anymore.”

Cerny, on the other hand, said she has come to loathe the idea of creating “value-added” services.

“It just becomes a commodity,” she said. She explained that brokers don’t know how to tell the story to clients about the value they are getting above and beyond normal services, and therefore the value-added proposition loses its value in helping to achieve client addition and retention.

“I just think we do it wrong a lot of time in our business,” Cerny added.

Leavitt, who said he feels that human capital management is one of the most crucial aspects of running his business, said it’s tough for the insurance industry to attract new people because it doesn’t have a reputation as being glamorous work.

One of Leavitt’s methods of bringing quality people into all-important sales positions is to look for people with sales experience and help them understand the insurance business rather than the other way around.

“It requires this kind of evergreen scheme of new people constantly coming in,” Leavitt said.

Cerny said her human capital management strategy has been to bring in people straight out of college at about $15 an hour and then help them build a career. Many start out in an assistant position and are then moved to marketing, and then into an account manager role, and so on up the ladder.

“We fire a lot of people in the first six months,” Cerny said. “Last six months, we almost never lose anyone.”

Filice added that, in retrospect, he should have fired more people.

“I kept a lot of people for many years that I shouldn’t have,” he said, adding that he finds that it’s tough to recruit new people that meet his “PHD” criteria.

He wasn’t referring to the advanced college degrees — PhDs — but those who are “Poor, hungry, driven.”

“I can’t find many PHDs,” he added. “In the health insurance business, it’s really, really difficult.”

Talent recruitment remains among the top concerns insurance brokers face, according to a poll of executives taken during the conference.

“Talent recruitment” was offered by 57 percent of executives as an answer to “What is the top challenge the industry faces in the next three to five years?”

Nearly one-in-four executives responded that technology is the biggest challenge they expected.

Meanwhile 15 percent of executives surveyed cited lack of new business production as the primary challenge.