Looking Ahead from Year-End 2008

Take This Job and Love It

I have this feeling — don’t you? — that we will look back on this time as a pivot point of real significance. Often we don’t recognize a momentous event until later. But this time I think we can sense it as it’s happening. Surely we don’t know what’s coming exactly, but among the people I talk to and listen to, fewer are asleep at the switch than at any other precarious time I can remember.

Some among us take the position that nothing is new under the sun. These cool customers tell us not to get into a big huff. We’ve been down this road before, they say — just a few different wrinkles this time. Well, I’m thinking that what we have here is not just repertory theater with a few new sets. I think it’s a new play, or at least one that has not been produced for a long time.

In a minute I’ll narrow my scope from the nation and world to what we at BHBCo actually have some expertise in, the independent-agency business. But these comments on the big picture are important context. If ever a business was knitted into the fabric of our societal economics, it’s the property/casualty insurance business. Can you think of another that’s more so? Maybe the food business. Maybe the car business. But there is no doubt that the fortunes of the owners and employees of independent agencies are knitted inextricably into the “cloth of American life,” if that’s not too fancy. To say that this is a pivotal time, a new play, is not to say that we’re headed for really bad times necessarily but that there is the risk of that. These are consequential days.

Here’s the nub of what’s rolling around in my mind. If we get it wrong, then the party could be over. There is a good chance that we — President Obama, other elected officials, business executives, and heads of households — will get it right, will muddle through this recession ok, and will come out stronger and chastened. But there is the real chance that we will get it wrong. I fear that too many people in positions of responsibility, particularly elected officials, are not focused on being responsible. Too many are way out of touch with us.

The resources available to our national government are huge. But they are not limitless, either financially or in terms of the public’s willingness to go along civilly with what the government does. I have the feeling that we are pretty close to the limit of those resources this time around and that if we don’t get it right, then we could be in for, well, really bad times. We’ll just leave it at that for now.

Throw the Bums Out

One last thing on the national scene. I urge you to contact your elected representatives, especially those in the Congress of the United States (both House and Senate), and tell them that you expect them to give their undivided attention to getting it right, for the good of the country, no matter the short-term cost to their political careers. I don’t know about you, but I don’t want to hear one more statement by a politician in support of our troops if that politician is not prepared to make his or her own sacrifice as well. If your elected representatives think that our soldiers, sailors, flyers, and Marines are the only ones expected to put it on the line, then you should insist that they find new work. No exaggerating here. Throw the bums out.

Implications for Your Business

In your business, the first thing you should do is to acknowledge in your plans and budgets that the recession we are now in will affect your organization in the next year or two more than it has so far. P/C insurance agencies, and to some degree their carriers, enjoy a buffer between themselves and economic downturns. Part of the buffer is permanent, in the sense that luxury purchases get cut before essentials do, but some of the buffer is just a delay. Eventually the economic downturn will have its impact on receipts, payrolls, insured values, and so-called dislocations (polite-speak for failures, early retirements, and move-aways). I am sure this notion is not new to any of you, but the better planners among you may have buttoned up their business plans before this all began to sink in.

I’m not suggesting that you revise your plans for 2009-2010 with a better crystal ball. Instead, I suggest that you develop one or two scenarios that are more pessimistic than what is implied in your current business plan and budget and identify the actions that those scenarios would bring to the fore. We should have no problem getting the attention of those of you who are financially leveraged right now — say, from perpetuation or acquisition financing. Combining financial leverage with operating leverage has a way of being unsubtle.

Operating Leverage

Essentially all agencies have operating leverage. In the short and intermediate run, when revenues go down, you can’t reduce expenses enough to preserve profit margins. And when premiums go down from competition, losses don’t care. They have a mind of their own. And so most profit-sharing / contingent commission revenue goes down just at the wrong time. Those of you without significant financial leverage can ride this out but will still face some important decisions. For those with the combination of financial and operating leverage, the decisions won’t be optional. I am aware that none of this is pure revelation. But I have seen people get surprised at the size of the impact on profits of modest-sounding and modest-seeming changes in revenue. So plan for it.

A Great Time To Invest

A recession is defined by the experts as two consecutive quarters of reduced national income, or GDP. But I prefer the description given to me by a good-friend economist a number of years ago: a recession is a time when there is still plenty to do, but the means to finance it dry up. (In fact, he just used it again in a national investment-advisory newsletter*.) What that means to me is that a recession is a good time for investing in your business. Not an easy time because, after all, the means to finance it have dried up, at least partially. This is a full subject on its own and will be the topic of another piece, but I can summarize the financing sources traditionally available to independent agencies as these: cash from operations, especially contingent chunk-o’-money; vendor financing (for equipment and software); seller financing in acquisition and perpetuation transactions; carrier lending or related support; conventional business lending (some mortgaged, some not); and to a small extent, direct cash investment by employee perpetuators.

Of all those sources, the interesting ones to me right now are employeeperpetuators, carriers, and one commercial bank in particular — InsurBanc. I am a director of the bank, so I can’t argue with the fact that this is a plug. But I don’t bring it up for that purpose. It is simply a relevant fact that agencies have available to them a strong and growing bank dedicated to, and exceedingly well informed about, their industry.

Carriers are an interesting source of financing in a recession because their investment would be an active one, with long-term payoffs that go beyond the cost of funds. But creativity and commitment will be required of agencies seeking carrier involvement because I can’t imagine that a weak proposal or anything smacking of bail-out will be of interest to carriers looking to position themselves for future growth. A good route is one of combining carrier help and InsurBanc financing.

And, finally, we have direct investment by employee-perpetuators. In most cases these investors won’t have the resources to make really big investments (big in relation to agency value), but these investments can be the most productive capital of all. Remember the tag line, “Nothin’ says lovin’ like something from the oven”? Well, some version of that is called for here. Maybe, “Nothin’ says commitment like . . .” — c’mon help me here. Anyhow, commitment begets commitment, which spells long-term success.
* Jim Griffin, ING Investment Weekly, 12/8/08

Take This Job and Love It

Twenty years or so ago at a business valuation seminar, the presenter was making the point that when smaller private companies are valued, the line between owner compensation and profit is blurry and that we should be rigorous about distinguishing between the two. “If you go below here,” he said swiping his Magic Marker dramatically, “there’s no value. If you bought this company for any more than a dollar, all you would be buying was a job!,” he condescended. Even back then I knew that a job was more than chopped meat. But for the last couple decades, with very little interruption, things have been upward and onward in business valuations of all kinds. And for a few years recently, income expectations really jumped. Jobs were often seen as some anachronistic necessity. Anybody could get one of those.

This pattern of losing touch with what really causes income was not just a Wall Street phenomenon. We have seen a lot of it in the homely little world of insurance agencies, too. Maybe it’s time for agency owners to rediscover the value of being able to provide themselves with a good job.

Burke Ink, December 2008