Maryland Primary Agent - March 2018

MARCH 2018 | MARYLAND

CONTEMPLATING

TOMORROW ARTIFICIAL REALITY IA&B FUTURES PROGRAM PRIVATE EQUITY OPTIONS

IN THIS

12 GOOD AND BAD OF PRIVATE EQUITY INVESTMENT

Depending on your agency’s position and your goals, certain transactions and perpetuation plans may be a better fit than others. Read expert opinions on the pros and cons of private equity investments and how the trend is impacting M&A activity overall.

19 THE FUTURE LOOKS BRIGHT

Whoever makes dire predictions for the independent agency system has not seen what we have: the energetic, passionate and bright group of young agents in the IA&B Futures Program.

20 RISK ADVISORY: ARTIFICIAL REALITY

This quickly evolving trends of artificial, augmented and mixed reality are in their infancy. But within the next one to two years, they have the potential to revolutionize our industry.

IN EVERY ISSUE 2 3 4 6 8 10 23 24 24 24

Chairman of the Board’s Message Claire-ification Preventing Errors & Omissions Coverage Corner State News IA&B Partners Pics & Posts Education Classified Ads Advertiser’s Index

JOIN US ON SOCIAL MEDIA

Periodical postage paid at Mechanicsburg, Pa. and at additional mailing offices.

Postmaster: Send address changes to Insurance Agents & Brokers, 5050 Ritter Road, Mechanicsburg, PA 17055.

Primary Agent (ISSN 1543-3110), Permit # 638-620, Issue # 2018-3, is published monthly by IA&B Service Group Inc., a subsidiary of IA&B.

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Copyright 2018. All rights reserved. No material may be reproduced in whole or in part without written consent of the publisher. The information in this publication is general in nature and not intended to serve as legal, accounting, financial, insurance, investment advisory or other professional advice as to any reader’s particular situation. Users are encouraged to consult with competent legal, financial, insurance, investment advisory and/or other professional advisors concerning specific matters before making any decisions. We disclaim any responsibility for any decisions or actions by readers. Statements of fact and opinion in Primary Agent are the responsibility of the authors alone and do not imply an opinion on the part of the officers or the members of IA&B. Participation in IA&B events, activities and/or publications is available on a non-discriminatory basis and does not reflect IA&B endorsement of the products and/or services.

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CHAIRMAN OF THE BOARD’S MESSAGE

BOARD OF DIRECTORS INSURANCE AGENTS & BROKERS

PERPETUATION PLANNING: A PUZZLE AND A MAZE

T

5050 Ritter Road | Mechanicsburg, PA 17055 800-998-9644 | IABforME.com

OFFICERS

Chair of the Board

John B. Hollister

Vice Chair of the Board

Craig S. Mader

he M&A market is cooking. Go to any agents’ conference or meeting, and you’ll hear rumblings about this agency hitting the market. Another one gobbling up everything in sight. This one selling to a bank. That one in talks with an agency from the other side of the state.

It can be a puzzle and a maze, determining the right thing for your agency and then making it happen. I know. I’ve lived it.

Perpetuation planning in general is a common stressor in independent agencies.

Sometimes it’s the family dynamics of transitioning ownership to the next generation. Other times it’s the struggles of merging offices with different technology standards and management styles. And often enough it’s financial worries that keep agency principals up at night.

Know that the IA&B Board of Directors and your agents’ association staff are aware of the M&A activity and its toll on agencies, and we’re determined to support members through their perpetuation planning – whatever route they take.

Give the March Primary Agent magazine a read for a glimpse, and then stay tuned as IA&B hones its product and service offerings in the months ahead.

Immediate Past Chair of the Board

Michael F. McGroarty Sr.

MEMBERS

Emory Stephen Burnett, CIC, ARM Wilmington, Del.

Richard F. Corroon, CPCU Wilmington, Del.

Michael P. Ertel Sr.+ Columbia, Md.

Ashley M. Fitzsimmons, CISR Forest City, Pa.

G. Greg Gunn, CIC* Lemoyne, Pa.

Bryan C. Hanes, JD Hagerstown, Md.

David C. King Lancaster, Pa.

Lisa A. Leach Goth, CIC New Bethlehem, Pa.

Elizabeth H. Martin, CIC Millersville, Pa.

Mark J. Monroe

West Chester, Pa.

All the best,

Joseph R. Pastor, CPCU, AAI Oil City, Pa.

Richard M. Rankin, CIC Lancaster, Pa.

April E. Ressler, CIC

John Hollister Chairman of the Board

Altoona, Pa.

D. Bradley Rosenkilde Jr. Hunt Valley, Md.

Tara S. Silfies, CPCU Bethlehem, Pa.

Glenn R. Strachan

Ft. Washington, Md.

Bryan S. Willey Dover, Del.

Lawrence A. Wilson, CIC, CPIA, CPCU, ARM** Newark, Del.

J. Marshall Wolff, CIC, CPCU Easton, Pa.

* Pa. IIABA National Director ** Del. IIABA National Director + Md. PIA National Director

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MARCH 2018

Claire-ification IA&B Vice President - Advocacy Claire Pantaloni, CIC, CISR provided this month’s answer.

QUESTION: I want to do business under a different name for my agency: What do I need to do?

ANSWER:

Y

ou need to make sure the name is properly associated with your business. It stands to reason that any business operating under various names should be “traceable.” If a consumer complains about an entity, regulators and the Attorney General’s office must be able to locate that business.

As a result, whenever a business that is registered under a specific “legal name” (e.g. John Doe Insurance, LLC) wants to use a different or an additional name (e.g. Forward Thinking Insurance), it can do so. However, the agency must file that additional name with the state(s) where it operates.

That additional name is referred to as a fictitious name. The proper process generally includes registering the fictitious name with both: • the state agency managing business registrations (Secretary of State in PA, Department of Assessments and Taxation in MD, and Prothonotary’s Office in DE), and • the insurance regulator.

A fictitious name is also known as an assumed name, “trading as” name (T/A), or “doing business as” name (DBA), since it is a business name that differs from the name that is officially registered for your business (LLC, S-Corp, C-Corp, or

partnership). If you are a sole proprietor and want to use a fictitious name, you will also have to register it.

THE GOOD NEWS: IT’S EASY! While each state generally will have slightly different procedures, it is actually quite simple to file a fictitious name.

On our website, you can find the applicable process and relevant links for each of the three states. In the end, make sure you keep documentation that you filed the registration.

The Pennsylvania Insurance Department (in particular) has clearly indicated that they would not issue any specific document. Since the fictitious name is not displayed on the license, you will have no evidence that you registered the name. They suggest asking for confirmation in writing that the Department received the request for the fictitious name registration.

Ask our experts!

Have a question?

Rely on our team to find the answer.

Contact Claire: 800-998-9644 Ext. 604 ClaireP@IABforME.com IABforME.com

In 2017, one of the top violations identified by the Pennsylvania Insurance Department was failure to register the use of a fictitious name, … so this issue definitely needs attention.

To access the full guidance, go to IABforME.com/licensing/biz_entities.

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PREVENTING ERRORS & OMISSIONS

ARE YOU BEING HONEST WITH YOUR CARRIERS?

By Curt Pearsall, CPCU, AIAF, CPIA

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It probably goes without saying that the relationship between agents and their carriers is built on trust and honesty. Certainly, an expectation exists that submitted applications accurately reflect the true nature of the risk.

When a risk is written and the carrier subsequently finds out that the risk is not exactly as it was presented, it is not uncommon for the carrier to allege that it would not have written the risk had it known the correct information.

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The carrier then may consider pursuing litigation against the agency.

application with a significant amount of incorrect information.

In one errors and omissions case, the carrier alleged material misrepresentation asserting that it would not have issued the policy if it had been provided accurate information about the risk. The agency submitted a significant number of online applications to the carrier, and each time, the carrier declined to write the risk. Eventually, the agency managed to get the risk accepted by submitting an

A large property loss occurred, and the carrier ended up paying more than $1 million. This is when the carrier discovered that the application did not accurately represent the risk. The carrier was successful in its lawsuit against the agency.

MARCH 2018

As a producer, account executive, or customer service representative, you may be looking to write a specific account

that may not exactly meet the carrier guidelines. The issues possibly deal with loss history, amount of occupancy, square footage and/or the degree of protection, such as sprinklers or non-renewal history.

The list of possibilities is virtually endless.

The scenario could involve the agency looking to bend the truth, or possibly the agency producer does not know an answer on the application, so he or she guessed. Who will ever know?

This issue has been the central focus of many E&O claims, and more often than not, the agency caught the full brunt of the carrier’s consternation.

SOME KEY TAKEAWAYS • A best practice is to complete an application with the customer’s input. Ask all of the questions, and don’t presume to know the answer to any of them. Upon completion of the application, require the customer to review it, and then require his or her signature. This will confirm the accuracy of the information, even if a signature is not required.

• Don’t presume that you know the answers when handling follow-up questions from carriers. Write down the questions, and then contact the customer to secure the answers. If the customer answers your questions over the phone or in person, document those discussions in the agency file. Then, send a letter or email back to the customer that memorializes the discussion and the responses, and include a copy in your file.

those questions is crucial. Providing the customer with incorrect information is wrong.

There have been numerous situations where the carrier, upon finding that the agency misrepresented on the application, decided to terminate its relationship with the agency. Don’t expect a carrier to be understanding and accommodating if there has been a breach of honesty.

All agency sales staff should know honesty is the only way, and anything outside of that will not be tolerated.

Lying on an application to get an account written is wrong — dead wrong.

An anonymous quote summed it up best: “I’d rather be honest than impressive.”

Curt Pearsall, CPCU, AIAF, CPIA, provided this content on behalf of Utica National Insurance Group.

IA&B’s is the exclusive agent for the Utica E&O program in Delaware, Maryland and Pennsylvania. For questions regarding this article or your E&O coverage, contact IA&B at 800-998-9644 or IAB@IABforME.com.

The material contained in this article is for information purposes only and is not for purposes of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.

EXPECT MORE FROM AN E&O AGENT THE RISK management insight provided monthly in this column is just a taste of what the IA&B Agency offers its customers: a serious E&O program, not just a policy.

Our agency is staffed by licensed E&O experts who can customize coverage to your needs. We are a full-service agency, helping to strengthen your business with award-winning loss-control seminars, manuals for compliance and legal expertise for tough questions. In fact, you get the benefit of having an entire association— dedicated to independent agents— on your side.

Insurance Placement Specialist David Wertz is ready to get to know your agency and deliver the kind of personalized service you give your own customers. Contact him to begin the conversation.

David Wertz IA&B Insurance Placement Specialist 800-998-9644 Ext. 506 DavidW@IABforME.com IABforME.com/E&O

In addition to being honest with your carriers, being honest with your clients is equally important. When customers ask questions with a goal of better understanding their insurance program, how the producer chooses to answer

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COVERAGE CORNER

IS A VICE PRESIDENT A CORPORATE OFFICER?

By Jerry M. Milton, CIC

S

ergey Aleynikov was a vice president of Goldman Sachs & Co. (GSCo), a subsidiary of Goldman Sachs Group, Inc. (GS Group). GS Group’s bylaws required it to indemnify and advance expenses, including attorneys’ fees, incurred by a person who is or was a director or officer of the corporation, or its subsidiary, in defense of any legal proceedings that arise because of that person’s position as a director or officer.

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After Aleynikov left GSCo, he was charged and convicted in federal court for theft of trade secrets and transportation of stolen property in interstate commerce, resulting from his taking of a confidential computer code. The conviction was reversed on appeal, and Aleynikov was acquitted. Aleynikov was then indicted in New York state court for theft of the computer code. While the state court case was pending, Aleynikov sued GS Group, seeking indemnification for the legal fees

MARCH 2018

and expenses he incurred in the federal criminal case and advancement of legal fees and expenses in the ongoing state criminal case.

Many states have passed statutes that provide directors and officers with advancement and indemnification rights.

When a director or officer is sued, the corporation advances defense expenses and then seeks reimbursement under Coverage B (Side B) of its Directors And Officers (D&O) Liability policy. These

statutory protections do not apply to all employees of the company – they usually apply only to the directors and officers.

GS Group alleged that Aleynikov did not qualify as an “officer” of GS Group and denied his claim. If Aleynikov, as vicepresident of GSCo, was considered an “officer,” he was entitled to advancement of over $2 million in defense expenses.

However, if he was not considered an “officer,” he would be forced to bear those expenses on his own.

The Delaware Third Circuit began its analysis by examining the company’s bylaws and concluded that these bylaws were ambiguous as to whether a vicepresident qualified as an “officer.”

Since the court considered the bylaws ambiguous, the Third Circuit was faced with the difficult question of determining how to resolve the meaning of “officer” within the corporation’s bylaws.

This question took center stage in a recent decision by the Third Circuit in the case of Aleynikov v. Goldman Sachs Group.

The court explained that under Delaware law, “when one side of a contract was unilaterally responsible for the drafting of the contract, courts construe ambiguous terms against the drafter.” Since it was undisputed that the company unilaterally drafted the bylaws, the ambiguity as to whether a vice president is an “officer” should therefore be construed against the company, right?

Not necessarily. Keep reading. The Third Circuit determined the scope of the rights of an “officer” under the contract, but did not determine who was entitled to those rights. In other words, the court decided what rights an “officer” had, but they did not clarify who was an “officer.”

Without this determination, the case was remanded to the district court to consider the meaning of the term “officer.”

This case could impact certain policies of insurance – specifically the Commercial General Liability (CGL) and Directors And Officers Liability (D&O). Some insurers could rely on Aleynikov as grounds to deny coverage for those individuals who may fall in a gray area with respect to officer status.

For example, is an assistant vicepresident an “officer?”

All companies, and their attorneys, should review their bylaws to ensure that their definition of “officer” is clear and unambiguous and will apply to intended individuals.

Y’all take care!

Jerry M. Milton, CIC, teaches and consults on industry issues. The legal profession recognizes him as an expert on insurance coverages. He also serves as our education consultant, working with our CISR, CIC and continuing education programs. Catch him at one of our upcoming seminars: IABforME.com/education.

CLARIFYING CUSTOMER ROLES PROTECT YOUR E&O by clearly defining roles and insisting upon documentation.

While it’s not uncommon to discuss insurance issues with someone who’s not an officer of the company, things can get sticky if that person requests policy changes and/or signs documents.

Up-front verification of that person’s authority to accept certain policy conditions, make changes and sign insurance documents can prevent problems (i.e. the customer claims the employee who signed an insurance document had no authority to do so) down the road.

Visit IABforME.com for sample delegation-of-authority language and an explanation of who should approve that delegation based on business type.

Or give our Advocacy team a call to discuss your options.

Contact us:

Claire Pantaloni, CIC, CISR Vice President - Advocacy 800-998-9644 Ext. 604 ClaireP@IABforME.com

Don Bankus Legal & Corporate Affairs Director 800-998-9644 Ext. 603 DonB@IABforME.com IABforME.com/cl_granting_authority

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ONWARD & UPWARD: A MESSAGE FROM JASON ERNEST I have the honor of speaking at the Pennsylvania Association of Mutual Insurance Companies annual spring conference, where I’ve been asked to present the state of the union for independent insurance agents to over 100 company executives. I’d like to give you a preview of my presentation, “What It Takes to Win as an Independent Insurance Agent.”

Because this conference will be held at Penn State University, my alma mater, I figure I’ll harken back to my some of my math classes there. A winning agency can be defined by the following equation: P = (AT - ST) * 100 In this equation, P is production – the singular way to measure success in an independent agency.

Production is determined by first taking administrative time (AT) and subtracting sales time (ST).

By this I mean, how much time an agency spends on new businessgenerating activities, versus time on any non-sales related activities (HR administration, compliance, as well as processing a renewal book and servicing existing clients).

Then multiply the difference by the constant 100, which represents new business effort.

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Like golf, the goal of the equation is a low score. Realistically, the best AT - ST score an agency can accomplish is 2 (51 percent AT versus 49 percent ST). An agency devoting more than 50 percent of its time to new sales-related activity would collapse due to the inability to address necessary administration. However, I’m afraid most agencies sit at 80 percent administrative time and 20 percent sales time. And moving forward, that’s going to be a tough ratio to support.

Of the countless agencies I have observed, the winning ones devote above 30 percent of their time to generating new business. They put full effort into using that time wisely: using technology smartly, developing a niche market, developing a strong marketing brand. They differentiate themselves against the competition. Ultimately, they also have the talented, competent employees in place to write the business.

A recent independent agent survey (“Agent For The Future”) conducted

by Safeco Insurance revealed that agents spend approximately 70 percent of their time on non-sales related activity. Conversely, that

MARCH 2018

leaves 30 percent for quoting or prospecting new business.

Surveyed agents shared that they want to be at 42 percent sales time (26 percent quoting and 16 percent prospecting) in the future.

I believe these agent responses are spot on. To be a winning agency now, and in the future, the agency must shift its focus. Applying my equation above – a winning agency should be able to show 60 percent administrative time, versus 40 percent sales time, at 100 percent effort. Do that, and you’re going to win this game called insurance.

To accomplish this, an agency must take immediate measures to curtail its administrative time. I’m not suggesting you cut administrative tasks; instead do them smartly and efficiently.

1. Invest in technology. Enjoy time savings through digital signatures, a paperless agency, and an effective website.

2. Seek experts for administrative tasks. For example, why spend several days laboring over a HR or compliance issues, when you can invest in an expert that could provide an immediate solution?

STATE NEWS

MIND RULES FOR MIXING FUNDS

3. Ensure that your staff is giving the effort. This is the constant 100 in my equation.

You can have the best intentions of significant sales time, but if the staff effort isn’t there, your work will be lost. I am seeing great things out of the new generation of insurance professionals; tap into their energy.

The good news is, you’re reading this as an IA&B member. We can help with numbers 1, 2 and 3 above. Our specialty is making your administrative tasks easier to do. Or in some cases, we can do them for you. Regardless, do what it is you do well – sell insurance. And take a serious look at how you handle the other stuff.

Jason Ernest, Esq. IA&B President & CEO

Changes to the regulation that governs agents’ fiduciary duties (i.e. proper handling of premium funds) took effect at the beginning of the year.

Commingling now is a thing of the past … unless you only hold funds for no more than five days. General guidelines: • If you remit to the carrier premiums that are received by the agency within five business days of receipt, you can still hold the funds together.

• After five business days, you must segregate premium funds and agency operating funds.

the agency contract specifically addresses the agency’s right to interest earned. (See our updated online resource for a sample letter.)

IABforME.com/MD_fiduciary

HOW TO COMPLY WITH NEW SICK LEAVE LAW Paid sick leave is now the law, after the legislation ping-ponged between the Maryland General Assembly and Gov. Larry Hogan. To help members comply with the new law, we worked with our HR consultant to develop a Q&A. The online resource answers:

• A consent letter from carriers to commingle funds is no longer valid.

To whom does the law apply and how?

• You may combine the premium funds of one carrier with the premium funds of another carrier in a single premium fiduciary account, as long as the carriers have not required individual segregation of their premiums.

How much sick time does the new law require?

• The agency will need to secure written consent from the carrier to be able to withhold interest earned on the fiduciary account – unless

What does the law generally require?

When does this go into effect?

What else do I need to know?

What if you’re in a county that already has a sick-leave law?

What if I award PTO rather than sick time?

What should I do right now?

IABforME.com/MD_sick_leave

WELCOME NEW MEMBER A F SZABO INSURANCE AGENCY INC., Waldorf, Md.

Learn more about membership by contacting IA&B Vice President – Membership Tim Wonder.

800-998-9644 Ext. 351 | TimW@IABforME.com IABforME.com/membership

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PARTNERS PROGRAM

Connecting & through IA&B’s Partners Program.

Supporting

2018

Elevating agents

The IA&B Partners Program allows companies to support and connect with independent insurance agents and brokers in Pennsylvania, Maryland and Delaware. Through their sponsorship, Partner companies allow IA&B to offer the programs and services that help member agencies succeed.

Partners Program

Calling all companies

Your support helps independent agents succeed and their agencies become more profitable — a win for your company and the independent agency channel. What’s more, you will find more value than ever before from our revamped Partners Program.

Among the IA&B Partners are the following Platinum- and Gold-level sponsors.

ACUITY Agency Network Exchange LLC Chubb Donegal Insurance Group Insurance Agents & Brokers Service Group Millers Mutual Group Penn National Insurance Plymouth Rock Assurance The Main Street America Group

Learn more by visiting IABforME.com/Partners or by contacting Jess McWilliams at 800-998-9644, option 503, or JessicaM@IABforME.com.

MARCH 2018

M PAR NU TI M PA R NU TI

PARTN LD O PARTN LD O

PART ER LV R PART E LV

SI

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G G

Berkley Mid-Atlantic Group Keystone Insurers Group MMG Insurance Company Mutual Benefit Group Progressive Zenith Insurance Company

PL PL A A

Offering sincere thanks

PLATINUM PARTNER Insurance Agents & Brokers proudly recognizes Penn National as one of its Platinum Partners.

IA&B Platinum Partners dedicate the hightest level of sponsorship to our organization.

Penn National Insurance

PLatinuM PARTNER

Headquarters: Harrisburg, PA

Personal & Commercial Commercial Only Partners Mutual Insurance An Affiate of Penn National Insurance Headquarters: Milwaukee, WI

Branch Offices

WE’RE IN THE PEOPLE BUSINESS At Penn National Insurance, our employees have one common focus: building relationships. From listening and responding to our agents’ feedback to mentoring a newly employed staff member, we believe that it is our relationships on all levels that make our company stand out from the rest.

Relationships are critical to our business model, because we believe that the independent agent channel provides the absolute best means of delievering our services and products. We want to be our agents’ first choice in providing their clients with insurance coverage and we promise delivery of superior services when needed.

Our Mission

We help people feel secure and make life better when bad things happen.

FEATURED PARTNER Penn National Insurance HEADQUARTERS Harrisburg, Pennsylvania A.M. BEST RATING A- (Excellent) OUR EXECUTIVE TEAM Christine Sears president & CEO Robert Brandon executive vice president & COO Jacquelyn Anderson senior vice president, CFO/treasurer Karen Yarrish senior vice president, secretary & general counsel

We focus our time, attention, and resources on delivering superior financial strength and stability, a comprehensive product portfolio, and most of all, doing what’s right for policyholders.

OUR STRENGTHS A regional insurance company serving 11 states with a broad range of commercial and personal insurance products. We employ approximately 850 people in offices in Harrisburg, Pa. (headquarters), and offices thoughout our territory. We have earned Best Places to Work designations in Insurance, IT, Pennsylvania and two regional programs.

Resources to be there when you need us. We have a Financial Strength Rating of A- (Excellent) from the A.M. Best Company, with total assets of over $1.7 billion. With local presence in the communities in which we do business, we are ready to serve our policyholders in time of need and our agents in growing their business.

Creating a superior customer experience. Our commitment to continuous, seamless automation enhancements allows our agents and policyholders to interact with us effortlessly.

In our communities. Both in employees who give of their time and financial resources and corporate-wide philanthropy, our company exemplifies the spirit of volunteerism and giving back to the community, including $3 million to public schools during the last decade.

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GOOD

AND BAD

OF PRIVATE EQUITY INVESTMENT IN INSURANCE AGENCIES

By Stephanie Jones

Consider all of your options – and the repercussions – before you sell to a private equity firm. Depending on your agency’s position and your goals, certain transactions and perpetuation plans may be a better fit than others. On the following pages, experts weigh in on the pros and cons of private equity investments and how the trend is impacting M&A activity overall.

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I

t takes a lot of capital for an insurance agency to grow, acquire, merge or partner with another agency, and increasingly, private equity firms are stepping up to the plate to supply that funding.

Although the number of reported mergers and acquisitions in the insurance distribution system in the U.S. and Canada fell slightly in recent years — from 456 in 2015 to 449 in 2016 — both years represent an increase from 2014 when 359 agency/ brokerage M&As were reported, according to Chicago-based Optis Partners, which specializes in investment banking and financial services.

A report issued in January 2017 by Optis Partners, its “December 2016 Agent/Broker Merger & Acquisition Update,” shows that more than half of the transactions in both 2015 and 2016 involved private equity investment. The report covers only agent/broker M&As that were publicly reported and recognizes that not all such transactions are reported.

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Agencies are in a very tough spot. They cannot compete on price in the M&A environment, and they are in the midst of a softening P&C rate environment.

MARCH 2018

— Phil Trem, Senior Vice President, MarshBerry

This widespread investment activity by PE firms has driven up both demand for agency acquisitions and the amount being paid for them. Experts differ on whether that’s a good thing.

“Recently private equity firms have driven the demand in the marketplace, which has had a positive effect on the multiples in the industry. Their involvement has contributed to the increase in the average multiple paid on deals over the last five years,” said Phil Trem, senior vice president at the Ohio-based consulting firm, MarshBerry.

However, the higher multiples, which may run as high as three times revenue, can make it tough for agencies to compete if they are looking to expand through acquisitions and don’t opt for the private equity route, said Chris Burand, principal at Burand & Associates in Pueblo, Colo., and a faculty member of the Academy of Insurance, an Insurance Journal affiliate.

“The amount that private equity is paying is so much higher than what a regular agency can cash flow if they were to buy an agency that it’s created a very disparate marketplace. And that’s really an issue in the industry on many levels,” Burand said.

“Let’s say the agency down the street wants to do a merger with a friendly competitor. They cannot cash flow three times, so a dilemma is created there. Does somebody sell to private equity for three times or do they keep things friendly and local, and take care of all their employees and clients, but for a much, much lower price tag?”

HOW TO FIND YOUR WAY THROUGH AN M&A TURN TO IA&B when you’re faced with tough decisions about your agency’s future. Our Advocacy team is happy to talk through your options and, when necessary, point you to the appropriate resources and consultants.

Be sure to visit IABforME.com as well. Our online resources include an explanation of valuation methods, a list of valuation and perpetuation consultants, and more.

Contact us:

Claire Pantaloni, CIC, CISR Vice President - Advocacy 800-998-9644 Ext. 604 ClaireP@IABforME.com

MarshBerry’s Trem also acknowledged the competitive stress that PE investment has placed on independent agencies.

“Agencies are in a very tough spot right now. They cannot compete on price in the M&A environment and they are in the midst of a softening property and casualty rate environment,” he said.

Still, private equity firms bring a lot to the table.

“Some of the equity players really do invest quality money in agencies that they buy in the sense that they invest in IT and they invest in high quality people and they invest in higher quality of services to the clients,” Burand said.

Don Bankus Legal & Corporate Affairs Director 800-998-9644 Ext. 603 DonB@IABforME.com IABforME.com/agency_perpetuation

The model works especially well for agencies seeking to expand through acquisitions or consolidation.

Grand Rapids, Mich.-based Acrisure is one such company that has benefited from PE-backed funding. Genstar Capital Continued on page 16

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Continued from page 15

If they plan it out, if they use foresight, [agency] owners can still make a lot of money upon retirement. And they can do so with the knowledge that their people and their clients and their legacy will live on.

— Chris Burand, Principal, Burand & Associates acquired the firm in 2013 and worked with Acrisure’s management to expand the agency’s geographic footprint, along with its product and service offerings. Announcing a management-led buyout of the company from Genstar last year, Acrisure reported that under Genstar’s ownership, it acquired more than 138 retail insurance brokerages and generated industry-leading organic growth.

Another thing that makes the market attractive is that it’s so fragmented.

Confie Seguros, a large, national personal lines and commercial insurance broker based in Huntington Beach, Calif., has worked with two private equity partners since its inception in 2008 and has completed more than 120 acquisitions so far. Co-Founder and Chairman Mordy Rothberg said Confie currently is partnering with Abry Partners in Boston, and has set the goal of completing 35 more acquisitions in 2017.

Private equity builds the financial relationships and capital structures that allow the firms in which they invest to make acquisitions they might not otherwise do if the money were to come out of the owners’ pockets, Clark said.

“When a company is looking to raise capital there are various different forms of capital and the reason why we prefer private equity over going public, as an example, is that when you partner with private equity, instead of managing the business quarter to quarter they have a longer term approach to the business,” Rothberg said.

Typically, private equity investors are not interested in operationally managing the business. Instead they partner with the agency’s senior management to add value, he said. “With the right partner, the private equity model works really well.”

Ryan Clark, president and managing director of the private equity firm, San Francisco-based Genstar Capital, said the insurance distribution sector is attractive to private equity investors for a couple of reasons.

Insurance agencies and brokerages “are fundamentally good businesses. By that, I mean they have high levels of recurring revenue. They have strong profitability and good cash flow characteristics. The credit markets like insurance brokerages as well, so there is ample debt available for growth.”

“Private equity firms seek out fragmented markets where there are consolidators,” he said. “With our capital and with a strong management team we can act as one of the consolidators or aggregators in the marketplace to build a market-leading business.”

NOT FOR EVERYBODY While PE investment in insurance distribution channels can result in a great outcome for many agency owners who want to grow their firm quickly or just cash out, it’s not appropriate in all cases, some say.

Private equity “has its place but it’s certainly not for everybody,” said David Macknin, president and CEO of the Chicago-based brokerage Alper Services.

“It makes sense in a lot of situations … those being if the agency principals are looking to generate the highest return on the investment they made in the business regardless if they’re a founder or a PE buyer who’s now a seller, or a consolidator who’s now a seller. If the motivation is maximizing return for whomever, the PE play makes perfect sense,” Macknin said.

It works well for agencies like Confie Seguros that want to grow through consolidation, Rothberg said. But “an agency that’s doing two to three million dollars of EBITDA (earnings before interest, tax, depreciation and amortization), that might not be somebody that wants to start a private equity backed company,” he added.

Macknin said there are agency operators, and he counts Alper Services’ management as one of them, that have no interest “in having outside money impact how we conduct our business.”

Continued on page 18

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MARCH 2018

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He said an agency that seeks to grow without using private equity dollars “should look at the medium and long term, not just at the short and medium term. One needs to have a focused strategy for your growth, and then explain it and live it.”

A profitable agency would presumably have retained earnings that could be “clearly deployed and reinvested” into the agency and the existing personnel, and to bring in new people, he said.

When it comes to mergers and acquisitions between agencies, Macknin stresses one driver above all others. “I would say you absolutely need to have a strategic plan as to what you’re trying to do, who you’re trying to bring in. The characteristic that I believe should drive it is culture. Culture, culture, culture. … It cannot be overstated. … It’s got to be something you live. Your culture should be defining you, how you carry yourself as an individual as part of a firm,” Macknin said.

people that can actually get out there and make sales. And hold them accountable for doing so.”

Both Macknin and Burand advocate internal perpetuation plans for agencies that want to grow organically.

“If they plan it out, if they use foresight, the owners can still make a lot of money upon retirement. And they can do so with the knowledge that their people and their clients and their legacy will live on,” Burand said.

However, it takes a considerable amount of planning — operationally and strategically — to make it happen. “What I see occur way to often is that planning doesn’t happen until it’s way too late,” Burand said.

For Burand, it’s not clear that private equity is the solution for achieving organic growth.

Likewise, MarshBerry’s Trem said agencies should relentlessly focus on “predictable, profitable, organic growth.” That strategy will not only enhance the firm’s valuation, it will “position them to have a choice for their long-term perpetuation.”

“In the majority of cases that I’ve seen I don’t think private equity achieves organic growth,” he said. “If an agency wants to achieve organic growth it has to invest in a growth strategy.

There’s a number of those out there. But they involve hiring quality people that can make sales and making those people accountable for that. That’s the real key. You’ve got to invest in

This article was first published by Insurance Journal online on Feb. 12, 2017, and in the Feb. 6, 2017, edition of Insurance Journal magazine (as “Is Private Equity Investment in Insurance Agencies Always a Good Thing?”). Copyright 2018 Wells Media Group Inc.

Find your (Carrier) Match Introducing

the match hub for IA&B members and Partner companies IABforME.com/AppointmentLink

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MARCH 2018

The Future Looks Bright I f you believe what you read in trade publications, the independent agency system is a dying industry. The talent is retiring, and new blood is either nowhere to be found or impossible to manage.

But whoever makes these dire predictions has not seen what we have: the energetic, passionate and bright group of young agents in the IA&B Futures Program. The program is devoted to developing today’s young agents into tomorrow’s leaders. Participating producers hail from small family shops and large urban businesses alike, and despite their differences, they share a commitment to the independent agency system.

The Futures Program now boasts well over 200 active members in its Facebook group and will mark 2018 with the 3rd Annual Futures Conference – a conference borne of young agents’ desire for professional development and networking opportunities.

Stay tuned as the Futures Program continues to grow and support the next generation of independent insurance agents. And trust us: The future looks bright.

SAVE THE DATE 3rd Annual Futures Conference Sept. 25-26, 2018 2 9 16 23 30

3 10 17 24

4 11 18 25

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MEET THE 2018 FUTURES TASK FORCE

The IA&B Boards of Directors charged this task force with providing input on the program content for the annual Futures Conference, as well as other areas related to young agents and industry perpetuation.

Megan Ashmead Pacella Ashmead Insurance Associates Colmar, Pa. Greg Bennett Famous & Spang Associates Harford, Md. Caleb Brown Saleme Insurance Service Altoona, Pa. Sarah Brown Keller Brown Insurance Services Shrewsbury, Pa. Travers Downes Williams Insurance Agency Inc. Rehoboth Beach, Del. Ashley Fitzsimmons Fitzsimmons Insurance Agency Forest City, Pa.

19

TECHNOLOGY UPDATE

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MARCH 2018

R I S K A DV I S O RY:

ARTIFICIAL, AUGMENTED AND MIXED REALITY

By Rick Morgan, Cindy Donaldson, Steve Anderson for Agents Council for Technology

This quickly evolving trends of artificial, augmented and mixed reality are in their infancy. But within the next one to two years, they have the potential to revolutionize the way insurance producers interact with their clients.

Read on for a primer on the technologies – and their implications.

T

ake it from Facebook’s Mark Zuckerberg: “[Virtual reality] is the next major computing and communication platform.” As for augmented reality? It has the capability to enable discussions, provide remote access and create – all in an immersed, realistic virtual environment.

WHAT IS IT? Virtual reality (VR), which can be referred to as immersive multimedia or computer-simulated reality, replicates an environment that simulates a physical presence in places in the real world or an imagined world, allowing the user to interact in that world. VR is the umbrella term for all immersive experiences. Examples include gaming, training, education and training simulations.

Augmented reality (AR) is an overlay of content on the real world, but that content is not anchored to or part of it. The real-world content and the computer-generated content are not able to respond to each other. Examples are in retail (makeup mirrors, furniture and remodeling), house-hunting, Pokémon, travel and medicine.

Mixed reality (MR) – sometimes referred to as hybrid reality – is the merging of real and virtual worlds to produce new environments and visualizations where physical and digital objects co-exist and interact in real time. MR can sometimes

incorrectly be referred to as AR, and vice-versa. Examples include training for pilots and astronauts, as well as use in education.

BROAD IMPLICATIONS / USES As VR/AR/MR become the laboratories of the future, our reality will become intertwined with them. These technologies have applications across many spectrums of our lives, including: • Education and training • Loss control • Advertising • Retail sales • Visual design creation • Gaming • Model and prototype creation • Niche market creation

MEMBERSHIP DELIVERS MORE LET US be your lifeline in the sea of technological advances. We pledge to keep our members informed about the latest technologies and how they impact the insurance industry.

Education – through our timely professional development opportunities, as well as our member communications (Primary Agent magazine, Agent Headlines e-newsletter, and social media accounts) – is part of our brand promise.

Look to us for cutting-edge training, information and resources:

IABforME.com/education IABforME.com/news

21

TECHNOLOGY UPDATE

For example, with education alone, the level of immersion that virtual reality provides for its user is the reason that it offers such potential for eLearning. By immersing learners in their learning experience, the hope is that those learners will become fully engaged with the material.

ECONOMIC IMPACT(S) The explosive growth in the user-base of VR will quickly create a large consumer demand for haptics (touch transmission) devices, resulting in a significant demand for design and manufacturing jobs. At the same time, VR and AR will enable boosts in operational efficiencies within some industries resulting in reduced workforces.

INSURANCE INDUSTRY IMPLICATIONS Specifically for insurance agents, VR/AR/MR may have wideranging effects.

Positive impacts • Marketing opportunities (e.g. showcase example of exposures/coverage)

RECOMMENDED ACTIONS While still in its early stages, augmented reality can be used to add video or images to printed materials, therefore creating a personal connection to potential or existing customers.

It’s also worth reviewing your current customer base for possible impacts and investigating niche markets for insuring VR and AR delivery systems and to ensure adequate coverages.

EVOLVING TECHNOLOGY CAUTION Imagine 10 years ago trying to envision the way we use cellphones today. It’s impossible. Likewise, this is the promise VR holds today.

VR at its best shouldn’t replace real life, just modify it, giving us access to so much just out of reach physically and economically.

Yet the evolution of this trend is difficult to envision in its entirety today.

Adapted with permission from an Agents Council for Technology risk advisory, “Changing Nature of Risk.”

• New categories of exposure and loss (think: Pokémon) • Product demonstration • Claim processing / loss control / loss site re-creation (i.e. Zurich field engineers using smart glasses) • Real-time estimates on water/fire/CAT losses, using AR • Education/training (for consumers and insurance employees alike) • Market intelligence, underwriting discipline and overall strategy assistance • Possible cost containment for exposures such as workers’ comp Negative impacts • Increased claims, particularly in the areas of privacy and security • Cybersecurity exposure • Technology costs for smaller carriers trying to compete with larger ones using virtual and augmented reality • Health concerns (i.e. motion sickness, cyber sickness, sim sickness) • End user’s over-reliance on the accuracy of data • Laws and regulations lagging behind technology

22

MARCH 2018

PICS & POSTS “A huge shout out to Insurance Agents & Brokers for helping me break out of my comfort zone two and a half years ago. You guys are the best!”

- Ash Fitz sharing her interview in the Agency Nation podcast, “Are you physically expanding your comfort zone?”

Keep up with industry happenings – and share your own news! We want photos of your agency’s milestones, community involvement and fun. Submit them via email (KarenR@IABforME.com) or tag them on social media (Facebook, LinkedIn or Twitter) using #IABpics.

“We’re on board in tandem with @IA_and_B.” - @EndersInsurance commenting on IA&B’s ‘We’re moving onward and upward in 2018’ tweet

“Love seeing our member agents crush social media like this! Great vlog, Nate Bunty. #convernate (#nobeerintheoffice)” - Insurance Agents & Brokers sharing Heritage Insurance Agency’s video

“We’ve had a busy few months at our office….

Check out the back half of our building: razed and ready for a tenant. #spreadtheword” - Insurance Agents & Brokers posting on LinkedIn

#IABpics 23

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MARCH 2018

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