by Kevin Stipe, March 2001

National Underwriter

It was just a few short years ago that independent insurance agents were being referred to derisively as the "buggy-whip" makers of the late 20th century.  Critics of the industry suggested it was only a matter of time before independent agents would be bypassed altogether by customers who didn't want or need them, preferring instead to deal directly with insurance companies, or with a faceless Internet intermediary.

Boy, what a difference a couple of years and 3,000 points off the Nasdaq can make!  Today, much of the technology bravado is melting away like an ice-cream cone on a hot sidewalk.  But the lingering memory of the doom-and-gloom talk remains fresh enough to keep most agents from becoming smug.  In fact, many remain deeply concerned about the future.  They wonder, is independent distribution of insurance going to survive through another generation?

That's the $64,000 question that agencies are evaluating today in order to decide whether to sell to a 3rd party or remain independent.  If you find yourself pondering your own agency's future, here are some things to consider.

1.   The independent agent's value proposition has been tested, and has earned a passing grade.  It wasn't long ago that local bookstores (i.e. Barnes & Noble) appeared headed for serious trouble.  The dot-coms (i.e. Amazon.com) were going to use price, selection and ease-of-doing-business to poach the local bookstores' customers.  From a transactional efficiency stand-point, Amazon was positioned to be the clear winner.

We have since come to find, however, that much of a local bookstore's value proposition to customers goes beyond simply selling books.  Barnes & Noble, for example, has worked hard to create an "experience" with perceived value for its customers.  Walk into a Barnes & Noble bookstore and you will find overstuffed chairs to lounge in while you peruse your favorite magazine and sip a cup of coffee from the in-house Starbucks.  You might find yourself going back simply for the enjoyment.

While few agency principals see a day when customers will hang out in their agencies for the sake of the "experience," we now know better than ever (thanks in part to the Internet) why people prefer to use agents.  Agents are able to cut through the bewildering maze of insurance policies and options in ways that computers simply cannot.  The "consulting" part of being an agent is where the value has been trending for years and is where it will increasingly reside in the future.  As such, those positioned as consultants will prosper.  On the other hand, the future looks ominous for those who simply link up buyer and seller, since those agencies will be fighting a losing battle for the marketshare that will naturally migrate to the Internet, 1-800 providers and other efficiency-driven business models.

2.   Investors are bullish on insurance broker stocks.  When trying to predict the future of an industry a significant piece of evidence is the stock performance of its publicly traded market leaders.  After all, ivory tower speculation is one thing; the investment of real cash is quite another. 

Based on the recent performance of the public brokers, investors appear to believe strongly in the value proposition they offer.  Over the past three years, as a group the stocks of Marsh, Arthur J. Gallagher, Hilb, Rogal & Hamilton and Brown & Brown have appreciated by 156% (compared with 26% for the S&P 500.)  The average multiple of annual revenue increased over that period from approximately 2.1 to 3.5!  Some of the mystery surrounding the acquisition premiums being paid for agencies diminishes when you consider these figures.

3.   Private broker financial results are improving dramatically.  Driven by faster revenue growth and steady profit margins, many private agencies are experiencing financial returns not seen since the mid-1980's.  A few years ago, our firm developed the Reagan Value Index (RVI), modeled after the Dow Jones Industrial Average, to measure the shareholder returns generated by a hypothetical portfolio of 30 of our appraisal clients.  Since 1997 the RVI has shown a picture of steadily increasing returns.  During the 1998 to 2001 time frame, the RVI private broker stocks increased in value by 45%, which of course falls short of the public brokers' 156%, but looks pretty good compared to the 26% of the S&P 500.

While the fortunes of private brokers could of course turn around, it appears that the greatest current threat to them is a potential downturn in the overall economy.  And if we do enter a significant recession, there will be few businesses that represent a "safe-harbor" investment anyway.  A downturn in the stock market (as opposed to a downturn in the overall economy) will not have a dramatic impact on private agency stocks since their values are linked to internal cash flow rather than stock market multiples, which tend to fluctuate from year to year.

But the performance bar is rising.  With the continued success of the public brokers, the aggressive acquisition of key agencies by banks and the emergence of a new breed of super-regional private brokers, the stakes for remaining in the business as a privately held independent agency are steadily increasing.  And the resulting need for reinvestment in the business has never been higher.

So if you've been kicking yourself for not dumping those technology stocks when the Nasdaq was trading around 5,000, take heart: You're a better investor than you think.  That "old economy" insurance agency stock you've owned all those years is really starting to pay off.  And the long-term indicators look good, if you've got the patience, discipline and will necessary to keep building.

Kevin Stipe is Senior Vice President and Principal of Reagan Consulting, a financial and management consulting firm serving the insurance distribution system.  For more information on Reagan Consulting, visit their website at www.reaganconsulting.com.