Posted on 22 Sep 10
This week in “Face Time”, we’re featuring our interview with Bob Pettinicchi, Executive Vice President and Chief Lending Officer of InsurBanc, a federal thrift founded by the insurance industry specifically to serve independent agents and brokers nearly 10 years ago. InsurBanc, based in Farmington, Connecticut, conducts business in all 50 states. It knows the insurance agency business inside and out, and provides a full host of products and services that respond to an agency’s business and personal banking needs. We spoke with Bob about the critical need in building value in one’s firm when it comes to looking at agency financing, perpetuation, and mergers and acquisitions.
Bob has nearly thirty years in the financial industry, and directs all lending activities for InsurBanc. He developed and continually monitors InsurBanc’s loan policies and also chairs the bank’s Credit Committee. He designed the bank’s lending products for independent agents and, during his industry career, has managed lending and credit operations at both regional banks and specialty finance companies.
Annie George (AG): Bob, first tell us about InsurBanc, what makes it unique and what services do you offer to the insurance distribution system?
Bob Pettinicchi (BP): “We are a ‘community bank’ whose purpose is to provide financial services to the insurance distribution industry. If you walk through our front door, we look more like an insurance agency than a bank. We have about 22 people whose sole mission is to understand an insurance agency’s business and help the owner fulfill his financial goals. Much like an independent insurance agency does in its commitment to understanding a customer’s needs and providing a full range of products, we’re in the business of understanding our individual client’s [the agency] needs and offering a host of both business and personal banking services.
“We provide funding to agencies (including MGAs, wholesalers, independent agents) for acquisitions and perpetuation, working capital, producer development, debt refinance and owner-occupied real estate investments. On the consumer lending side, we provide residential mortgages, credit cards, business credit cards that agency principals and employees may need. In addition, the bank offers a comprehensive cash management system that is designed to offer efficiencies and flexibility to manage cash. This includes a full-featured online banking system including remote deposit and custom-designed deposit products.
AG: What is most fundamental to an agency when looking to perpetuate, merge, buy or sell?
BP: “An insurance agency must build value over time and if at some point the owner is going to look to harvest that value, he needs to nurture the business and run the operation in a manner that creates value. This value-building philosophy is the glue that holds the entire perpetuation plan or M&A together. It’s just like a business on Wall Street whose goal is to maximize shareholder value — it’s really no different for the closely held insurance agency. The goal is to build value, and you build value in the way in which you approach your business — with a sales culture that encompasses good organic growth, strong financial management and controls, hiring the right people on a regular basis and disassociating yourself from the people who aren’t working out well.
“Ask yourself: Are you bringing in the right people over time, hiring people you think can be owners? You also have to enable your people to be owners, either in the way they are compensated or by giving them an opportunity to buy-in whether through a deferred compensation plan or stock options. You need to give them some reason to come in and commit to the success of the agency. But this takes the right people with a plan to grow the business every day. Invest in people, in technology, and run the operation to build value so when the time comes to move on, you have people who are capable of taking over the reins, as well as equipped financially to be able do so.
“I can’t stress this enough: It’s all about creating value.”
AG: What is the most identifiable disconnect for agency owners between what they expect to happen in an agency sale and what is actually required?
BP: “The most identifiable disconnect is what the owner thinks his agency is worth, and whether the agency worth matches up with those looking to buy. It’s really no different than looking at selling your house. You have to list it close to what it’s worth.
“Typically, many agency owners come up with a value that’s been determined from conversations they’re having on the golf course or at social events, or based on what someone down the street received for his agency. But this doesn’t take into account all the terms and conditions of the sale. For example, there’s an agency we knew well that was recently sold to a public broker reportedly at a top price. But the principals were able to get this price because within two weeks of the acquisition, half of their staff was let go. There was no perpetuation considered in the sale. So if you’re in the same area with more or less the same premium and staff size, you may think you’re agency is worth that same price. But this can be misleading. You have to really know everything involved in the transaction to really know its value. It’s not just the price; it’s the terms. It’s what attached to it. It’s not what you earn, but what you keep.
“Insurance agency principals are also used to hearing multiples being tossed about, but an agency is not going to be worth top dollar if the owner has taken everything out of it, if the business hasn’t been growing steadily, and if the firm doesn’t have people who can step into the owner’s shoes once he/she leaves.
“Again, knowing what your business is worth ties back to running the business in a way that creates value. If you don’t do that, value diminishes right off the top. If you’re not replacing the business that’s being lost with good business, then you don’t have a way to keep the next generation interested and engaged and growing the business. They will end up leaving and taking the business with them.”
AG: What things can an agency do to improve creditworthiness, even if it’s not considering a sale at this time?
BP: “We have seen some underperforming agencies in recent years due to economic downturn and the soft market. Those who live for the bonus and haven’t adjusted their compensation during this time have found themselves not as creditworthy.
“You need sound financial management, to seriously embrace the fiduciary aspect of attending your business. We find some agencies get into trouble when they don’t do this very well. Stay in trust, be sure your accounts receivable and your cash exceed your carrier payables at all times if you’re collecting premiums on behalf of your insureds. Not doing so is an indicator of financial distress.
“Being profitable prior to receiving profit-sharing is important because you can’t always rely on that bonus. Agencies relying on profit sharing or building their budgets on the expectation of receiving profits have a huge hole to fill if they don’t receive payment. We have seen this happen a few times.
“We’ve also recently seen cases where agency principals invested in real estate or vacation properties and now find themselves having difficulty paying the mortgage. This shows a lack of responsibility, and impacts their personal credit score. This is very much a people business, a relationship business and a character business. You have to be able to show not only the ability to repay the loan but the propensity to repay the loan and how you manage your personal affairs is an indicator of that. We have seen a lot of deterioration in the personal credit of business owners because of what’s happened in the economy.”
Bob stresses that there is a great deal of valuable information and data available through Best Practices for agencies to assess how they’re doing in comparison to industry standards and high performers. “There is also a group of consulting companies specifically geared to the insurance industry that can help agencies improve efficiencies, their bottom line, their sales culture, operate in line with Best Practices, and conduct valuations. If an agency is able to go through the process of getting a professional valuation through one of these consulting companies it has a much clearer view of what’s needed for M&A activities and/or the deliverables needed to obtain bank financing.”
AG: What other things do you look at when considering making a loan to agency?
BP: “We look at the whole picture and determine if this is an agency we can work with. When we evaluate a prospective client for a loan, we look at the agency in the same way a valuation consultant does. What is its recurring cash flow? How does that cash flow compare to what’s required to repay a bank loan? Are the people that stand behind the business good risks?
“As a professional risk manager, you reduce risk and increase your ability to capitalize on opportunities when you have a financially sound agency and by maintaining your own individual creditworthiness.”
AG: What types of agency M&As have been happening in the industry?
BP: “There has been a fair number of large public and top 50 brokers in good financial position purchasing agencies. They are using their own cash or stock to make these acquisitions.
“We’re also seeing more movement with smaller companies. We work with small- to mid-sized operations, which are buying smaller agencies, benefit agencies, books of business, and some smaller banks and credit unions that have spun off or sold their brokerage operations.
“There is real opportunity for those who are smart, even in today’s economic climate and soft market. This is a unique business, with built-in recurring cash flow, that with a value-building philosophy and culture, the right people, controls, and metrics, can help turn an agency owner’s vision of prosperity into a reality.”
To learn more about InsurBanc*, please visit: www.insurbanc.com. And to contact Bob directly about all of InsurBanc’s service, just call him at 860.674.2310 or email at rpettinicchi@InsurBanc.com.
*Member FDIC, Equal Housing Lender