by Kevin Stipe, November 2008

National Underwriter

Are you optimistic about the future?  With the turmoil in the economy hitting unprecedented levels in October, it is easy to get swept up in pessimism.  Here are some low-lights from October, 2008:

• The U.S. stock market suffered its worst single-month performance in 21 years (since the crash of 1987)
• Global stock markets experienced the largest loss of equity capital ever recorded ($6.79 trillion (yes, that's trillion with a t!))
• U.S. stock market volatility was higher and more gut-wrenching than any month since November, 1929
• U.S. consumer confidence suffered its steepest monthly drop ever recorded

Certainly, we are all feeling the angst that comes from going through such a tumultuous time.  Yet, for insurance agents and brokers, the news isn't all bad.  Here are five reasons for insurance agents and brokers to be optimistic, even as the economy appears to be sliding into what may be an extended recession.

1. Insurance is a need, not a want.  With the horror stories coming from Wall Street and Washington, D. C. in October, consumer confidence was deeply rattled.  Individuals and businesses responded quickly by cutting their spending anywhere possible.  As in past recessions, spending cuts are not being distributed equally:  Spending on wants is being cut dramatically in order to preserve cash to spend on needs.  For those who make their living providing goods or services to satisfy consumers' wants, the immediate future looks grim.  On the other hand, since insurance brokers provide something their clients need, their future appears far brighter.

As in the past, insurance buyers will demand an ever-increasing level of value from their broker.  They will also expect their broker to justify every dollar he/she is paid.  But this has been happening already.  The most professional brokers have been winning market share by excelling in these areas and will further distance themselves competitively as this trend accelerates due to economic pressure.

2. Insurance broker stocks are continuing to dramatically outperform the overall market.  After years of beating the S&P 500, one might expect insurance brokers to finally begin to stagger.  After all, for the ten years leading up to 2008, the publicly-traded brokers more than tripled the returns of the S&P 500, growing at a compound annual growth rate of 13.7% versus the S&P 500's 4.2%.  But that was prior to October's stock market swoon.  Get this:  For the first ten months of 2008, the S&P 500 was down a staggering 34%, while the publicly traded commercial insurance brokers were down only 8.7%, as can be seen in the nearby chart.

What does this mean?  Investors remain bullish on public broker stocks because they believe brokers will weather economic storms better than most other industries.  One analyst recently added two of the major brokers to its "top picks" list due to a belief that the soft market is beginning to show signs of abating.

For privately-held agency owners, the story is also a good one.  We are projecting that the firms comprising our Reagan Value Index (the "RVI" is a proprietary database of approximately 30 large agencies we appraise each year) will grow by 2%-3% in 2008, which is the lowest return for the RVI recorded since it was established in 1994.  But as low as that is, don't lose sight of the fact that it is an increase!  As bad as a 2%-3% increase looks by historical standards, it will still be the highest performing investment owned by most agency principals in 2008.

 

3.  Talent flows are shifting toward the insurance industry.  Let's face it - for years the insurance industry has suffered from a perception that other segments of the economy are more exciting and lucrative.  As a result, the tide of talent has flowed away from the insurance industry.  Today, the landscape is shifting dramatically.  The relative stability and the honest professionalism of our industry are attracting the attention of many who wouldn't have considered it in the past.  Today a real opportunity exists to affordably attract some extremely talented professionals from industries such as real estate, financial services, telecommunications and technology.

To capitalize on this, agency principals will need to step up their recruiting efforts in the coming months.  The winners will be those brokerages with leadership capable of articulating a career-vision to potentially impact players from outside our industry. 

4. Acquisitions are returning as a means of growth for private brokers.  For years, local privately-held agencies have been priced out of acquisitions by well-capitalized public brokers and banks.  With a shrinking number of publicly-traded insurance brokers, and many banks now on the sidelines struggling with their own capital constraints, the number of hungry, premium-paying buyers is contracting.  At the same time, the demographics of our industry remain largely as they were - there are thousands of baby-boomer-owned agencies that will need to find a buyer or strategic partner over the coming decade.  So who will fill the gap?

Privately-held agencies will emerge as a serious competitor for acquisitions over the next few years.  As public brokers become more selective and direct their efforts toward a smaller number of key targets, privately-held agencies will find themselves able to compete by offering sellers a compelling combination of an attractive private company culture, along with a competitive (but not necessarily a premium) valuation.

5. Many agency principals are up to the task of managing through difficult times.  You may have heard the quote making the rounds today that "a downturn is a terrible thing to waste."  The concept behind this quote is that an economic downturn can open doors to change that remain firmly shut when times are good.  When times are difficult, changes that are naturally resisted by employees or carriers or vendors or owners - or perhaps all four - become much easier to make.  Have you been holding out on fixing some element of your brokerage operation?  Perhaps you've been waiting for an easier time to implement changes.  In reality, for many agency principals, these difficult economic conditions may have created the perfect opportunity to act decisively.

Today the future looks more uncertain - and in many ways, more ominous - than at anytime in recent memory.  The good news for insurance brokers is that despite the scary economy, there are plenty of reasons to be encouraged.  For those brokers that continue to steadily invest in growth opportunities - both by hiring as well as opportunistically acquiring, the future remains bright.  As has always been the case, tomorrow's most successful brokers will be those that confidently and effectively capitalize on the opportunities (disguised as challenges) presented by the marketplace.  How will you respond?