Doug 00:15
Welcome to Insurance Agency Insights, where we're committed to helping small and medium sized agencies achieve their business goals. We're your hosts, Doug Burke, investment banker and advisor to the insurance agency industry and with me is
Peter 00:28
Peter Friedman, CEO and President of AgileCap, a specialty lender focused exclusively on the insurance agency industry. At AgileCap, we believe agency owners can only take control the course of their business, when they have a thorough understanding of the financial aspects of their agencies. Over the last 20 years, through the ups and downs of the US economy, AgileCap has advised agencies on borrowing money, acquiring new businesses, and investing in their future. Every other week, we'll bring you insights on how finance and capital can and will impact your agency's future.
Doug 01:01
So Peter, we're recording this on the day that the press has anointed Joe Biden the president elect. We still have two Senate seats that are undecided in Georgia, I guess that are going to run off. So talk to us about what that means.
Peter 01:19
It's an interesting question. So, fundamentally, it comes down to the economy. I think the occupant of the White House is less important to the insurance agency world, other than your personal political beliefs, than the economy. Looking at the plan that the new Biden/Harris administration has put forward, they're going to tie those two things together. And the expectation is, very early on, whether it's even under the current Trump administration, there'll be a significant stimulus. It's not as large as the Democrats wanted, due to - as Doug alluded to - the uncertainty in the Senate. But the expectation is that there'll be a material, multi-trillion dollar stimulus plan that will jumpstart the economy through 2021. So I think it's less about who the occupant of the office is - of the presidency - and more about what is the economic stimulus, tax policy, things of that nature that will go through 2021, and beyond. The current state of M&A and insurance financials and and how these agencies have been doing is pretty strong, Actually. I would say for the most part, the agency world has survived, if not thrived, through the COVID period. Several functions that have caused that...fundamentally, people still need to keep their home and auto insurance in place, And they have. A variety of stimulus plans have delayed any material economic impacts to a wide variety of the US. And lastly, a byproduct of people being home more and much more available has been the ability for their insurance agent to connect with them, whether it's tweaking a policy or selling new policies or modifying - whatever the case may be - so it's an interesting time when the inclined is actually much more available. So will the election and the new Biden/Harris administration have material impacts? I think no and it's more about the economic stimulus coming through 2021, and then the rebound out of the pandemic.
Doug 03:30
Yeah, it's remarkable. The economy remains very, very robust. There is a lot of cash on the sidelines. Our interest rates are exceptionally low, thanks to the Federal Reserve Bank. And we've got this COVID situation, which you would think would be an overhang on things. But the economy seems to be fighting through it and, as you say, people need insurance, COVID or no COVID.
Peter 03:54
Yep, absolutely. And we've seen the M&A trend continue through this period, there were some laws and I would say the second quarter. There was a lot of good stimulus that came out through the back half of the second quarter through the third. And in the fourth quarter, we continue to see M&A continue to be strong. It's been an interesting time, we have a lot of motivated sellers, potentially towards the end of the year, and motivated buyers. And one of the things that we like to look at is a critical part of the M&A is due diligence. And there's an aspect of seller diligence - making sure they're the right buyer for their agency - but really, it's probably most critical as a buyer. They need to be understanding a wide variety of things, whether that's what the asset is they're buying. So what is the book, the carriers, industries, line? What are the financials of what they're buying, things of that nature; the people there...So there's lots of interesting aspects of diligence in this broader economic period that we're in that are very critical.
One aspect that we don't talk about a lot, to be perfectly honest, but it's critically important and it really shows up, not during the sale, but right after it, is how do you integrate these businesses? How do you bring them together? And one of the key pieces is the infrastructure. Today, we've invited Brad Ruben, the president and founder of Archway Computers to discuss that aspect of M&A. And the due diligence that probably many acquires should do, but many times that they don't. Archway is "the insurance for your agency's technology", I think is the term that they use.
Doug 05:38
Brad, can you tell us about Archway's service? With 24/7 support over 180 agencies, 4200. desktops, across at least - what - 25 states? Pretty remarkable breadth and reach in your practice.
Brad 05:51
Yeah, I mean, I've been automating agencies for 35 years. Archway I founded back in 2009, in the depths of the financial crisis...but I hear a lot of good businesses started there. We're an outsourced IT department. Like you said, 180 agencies. Providing them peace of mind. We act kind of like an insurance agency to their IT systems. If their IT systems don't work, if they have a data breach, they're out of business. Just like if my home burns down, and I don't have insurance - and my home DID burn down in a California wildfire - I'm in bad shape.
Doug 06:35
Oh, sorry to hear that, Brad.
Brad 06:37
Well, it was a good experience, because I became my customer's customer. And I discovered - not that I didn't know it before - but I discovered just how critical how important what honest, great work independent insurance agencies do.
Peter 06:57
Brad, maybe you could talk to our audience a little bit about, I think many people like to understand where things have gone well, and where they've gone poorly. So the highs and the lows, or maybe some train wrecks that you've seen along the way, that you could kind of enlighten people as to what to think about?
Brad 07:13
Well, I think what's of critical importance to independent agencies is cyber security, and cyber reg compliance. And what I can tell you is that the hackers have grown into huge criminal enterprises, where they're targeting independent insurance agencies, because they know those independent insurance agencies are insured, and will pay their ransoms and are invoicing their clients for large amounts of money. I know of an agency that their email was hacked, and the hackers are very, very smart about this. They watch, they wait, and then at an opportune time they send an invoice to one of their insureds for around $70,000 with the wiring instructions to their bank account, not to the agency's bank account or the company's bank account. So it's a real huge issue.
Peter 08:14
When you say they watch and wait, are they hacking into their systems and just watching the traffic as it goes by? And how do you address that?
Brad 08:24
Well, yes, some of the hackers are going in, and they're simply stealing their data, and encrypting their data for ransom. But the component of ransomware has been stepped up a little bit...well a lot...which is they used to just encrypt your data. So if you had good backups, it was a pain, but you could get all your information back. Recently, what they've done is they've upped the game by adding extortion to it. So before they encrypt your data, they steal your data. And then they say to the agency, look, if you don't pay the ransom, we're going to release all of your data on the dark web. And you're going to have a data breach where you're going to have to inform all of your clients and pays some pretty large fines. If we do this.
Peter 09:20
That sounds like no fun at all. As you've been brought into diligence where one agency is buying another that that has happened and how does one address it? Or how do you find out if that was the case in something you're about to buy?
Brad 09:34
Well, I mean, I think the way you find out is by asking questions about it. You know, have you ever been ransomwared? Has your IT firm ever been ransomwared because the hackers are targeting the IT firms because they know they can go through the IT firm's systems and get to their data. Forensically, you can find out as well. When somebody has been ransomwared, they leave these little note files behind and it is possible to find out that way.
Peter 10:04
Those are the extreme cases. What's the mundane? You're about to buy an agency, and what's the checklist of things that you should be thinking about, because I'll be honest, we talk to a lot of transactions. And IT rarely comes up as part of a point of discussion.
Brad 10:23
I think there's a number of things that are really critical. Knowing where the agency's data is, so that if the data is on the cloud, it's going to make it easier to integrate that data in their systems. Knowing the agency management system that they use, I always tell my clients, if you like a double root canal, you'll love switching agency management systems. It's expensive to switch agency management systems, because of the training requirements. At some of these agencies, their personnel have been on the same agency management system for over 20 years. If you're planning on, you know, integrating that staff, there's going to be a huge training, and probably pushback from some of the older members of the management system. I'd also want to know whether they have internal IT or they're using an outsource firm. And I'd like to understand what their long term agreements are. Many of the IT firms that we compete with, make their clients sign three year long term agreements, which don't have an out. And many of the acquiring IT, agencies have internal IT folks or have a methodology to this. So that can become problematic. And also, I've seen long term agreements and agency management systems that have been seven years. So if you're planning on trying to integrate their data together, I think it's super important that you know that.
Brad 12:01
I think that you should know a little bit about their phone system. And whether they're on some sort of old old, we call it "POT": plain old telephone system, or whether they've got a VOiP system that can be integrated with the management system. I think that's important. I think that, in terms of hardware, you want to know that they're not running any Windows 7 computers. Windows 7 is not really supported unless you pay extra money for that support. But you're going to be spending a lot of money on doing hardware upgrades, if that's the case. And then one of the things about post-COVID is what was their work from home plan, and how did that go? Right? We recognize now, as an industry, the insurance industry, just how important it is to be able to work from home. Nobody was really thinking about a global pandemic. They were thinking about hurricanes and earthquakes and floods and those sorts of things, and incorporating them into a work from home or a disaster plan. Now, I think that every agency has to consider working from home, that they're going to have older employees that may not ever want to come back into the office. And they need to do that securely. And they need to be cyber reg compliant as they do that.
Peter 13:39
in mind, your clients, your 4200 desktops and your 180 agencies that you support, have they all transitioned to working from home? Is it the vast majority? How has that process gone? What's the market like right now?
Brad 13:54
I don't have exact data for you for how many are working in the office versus working from home. If I were to give you a guess, I would say you know, it's probably around 50/50. It stretches across realms. There are some agencies, maybe 20%, that are completely working from home; maybe another 20% that are completely in the office. And then there's sort of more of this hybrid type mode, where they've got some people working from home, and they've got some people in the office and that probably is 60% or greater. And I would say that our agencies that were on the cloud to begin with - that took our advice, and stopped buying servers and housing their data in their office - were able to transition to the work from home, hybrid environment, much quicker. Those people that had voice over IP phone systems where they could be easily transferred to their mobile phones and not give up their numbers - meaning like when I call I call from an app, and it shows the company's phone number on the caller ID. So, again, I think most of our customers fared very well through all this. And the great majority who took our advice, it was very simple to do.
Peter 15:28
This is the hard part of the podcast in that we're going to ask you to predict the future. So we'll transition out of the pandemic environment, let's give it - your guess is as good as mine - but let's call it six to 18 months. Is this a fundamental shift in how agencies are run? Or is this a, we did a good job, we solved it, we're going back to the old model when the pandemic has been addressed...however you want to call it. What's your view of what agency world on the IT side looks like in the future?
Brad 16:01
Yes, so my view is, for the great majority of agencies, this was a game-changing event. And it's opened their eyes to the fact that working from anywhere is a secure possibility. And the younger their organization is, the more they want to have the flexibility to work from home. It wasn't me that said this. But some futurists have talked about the fact that everything that's happened in the last, say eight months was going to happen, but it was going to take five to 10 years. It just happened much quicker than any of us expected. And I think what some agency owners are recognizing is there's real advantages to being able to work from home; from being able to cut their real estate costs to being able to hire anywhere in the country, if not anywhere in the world. So no, I think this is a fundamental shift for the great majority of agencies. And I think the ones that haven't recognized that fundamental shift, well, they're going to be bought. And they're going to be bought by agencies that have figured this out.
Doug 17:19
The bad if you're on a legacy client server system, and you're not in the cloud, and you want to sell your company, or you're trying to deal with a work from home workforce. What do you do? What's the it migration, when we call archway up? What's the steps,
Brad 17:37
it's pretty simple, we need to understand where you're at, technologically, right now... where you want to go, you know, and we'll give you some advice on where you should go on that. And then we'll come up with a plan to get there. But huge components of this. I mean, you can't talk about moving to the cloud, without talking about Microsoft Office 365, which has become a huge part of many agencies. Nobody hosts their emails on hardware in their office anymore. They've moved that to Office 365, OneDrive and SharePoint, which are included in all of the versions of Office 365 have turned into a really great products, for being able to share information, for being able to work from anywhere and know that that information has been updated anywhere they work from. Now, one other thing that some agencies are taking a look at, and we've been sort of at the forefront on is a product called Amazon Web Services, where not only is your data in the cloud, but your infrastructure, your computers are in the cloud, which means you can take any sort of machine, whether it's a Chromebook, or an iPad, or even an iPhone or a PC, or what's called a zero client, and have access to your Windows desktop anywhere on the planet. And it's much easier for your IT firm, if they're trained in AWS to support, it allows you to do some pretty slick things. Like it's possible to get a virus on your Amazon Web Services desktop. And we call that "DAS: desktop as a service". It's possible to get a virus. My engineers have the ability to just roll back your machine to where it was an hour ago or a day ago or a week ago or somewhere in between, with the click of a mouse.
Peter 19:45
So that's really interesting. And to some extent, it's going back to the good old days where you just had a screen on and a keyboard on your desk, but I don't know if they were good or old. So here's the fundamental question, how much does all this cost and you go to acquire an agency. What should you budget for that? Because we know what to budget for legal and for tax support and how to cut costs, and we know all this stuff. But I would say very rarely Is there a budget to say, you bought an agency with a different agency management system or - to Doug's point - they were not updated technology. How should one think about this when they're budgeting this?
Brad 20:24
Well, that's a great question. I don't have like a super easy answer for that. But here's what I would say, you got to take a look at your current agency management system costs, and you got to take a look at the agreement. And whether they're on the same agency management system you are, and sort of factor that in, how long are they on that agreement, you need to take a look at their equipment, and either budget $1200 per PC, for the machines that may be out of warranty, etc, that are going to be needed to be replaced, or bundle, you know, between $35 and $50 a month, for a desktop in the cloud in Amazon Web Services. I think you should plan on about $20 per month, for Office 365. There's a version of Office 365 called E3 and I won't get into all the details on that. I think that you should engage your IT vendor to say, "Hey, we're about to acquire this agency. Do an audit of what they've got right now and tell us what it's going to cost to get it integrated into our systems."
Peter 21:38
And I would assume that you do that, right. And, you know, let's call it a five person agency acquiring a five person agency, what's the cost to say, "Hey, we're about to buy this thing, it's gonna close in three weeks. Do an assessment of the IT infrastructure and what it's going to cost me to put things together?" Is that something you guys do?
Brad 21:56
Yeah, we do that for our clients for free. You know, we bill per month per workstation. So this is an opportunity for us to grow organically within our group of clients. So we do this all the time. And what we do is sort of two phases, right? We do sort of a technology review, where we audit the technology that they have, and what we think needs to be changed or modified, etc. And then we also do a bill review, where we take a look at their bills and their agreements. And then we're able to sort of - with those two things - basically come up with a number for our client, as to what it's going to cost.
Peter 22:43
And if you weren't a client of yours, and you wanted to engage you guys, for the first time, is this a free service, or you're gonna charge? Because it sounds awesome when you guys do and it's a critical piece of the modern business world. So...
Brad 22:57
We would do this as a free service. I feel like the insurance industry is a really small world. So the more sort of goodwill that I get, I get it back in spades. Maybe that's me being a crazy Californian and but I believe in Karma, even after my home burned down. The point is, is that yes, we will do this at no charge.
Doug 23:20
What about if someone's had a data breach in the past, and you're looking to acquire them as a buyer? What should you think about?
Brad 23:28
Well, I think there's two types of hacking events. There's ransomware event where there was no data exfiltration, right? And then you've got a data exfiltration, where their email was compromised, etc. I'd want to know, number one, whether they filed an insurance claim. Because if they did, most likely there was a cyber firm that came in and sort of audited things and was able to tell this was what they got, this is what they did. So that you know whether there's any further litigation that could happen or claims that could be made, post acquisition. You guys are probably the experts on this, whether the acquiring agency is assuming those sorts of liabilities or not.
Doug 24:20
Brad, you used the phrase "cyber red", which sounds really scary to me. What does that mean? I understand this is like a whack a mole game of bad guys always trying to do conniving things against the good guys here.
Brad 24:35
What I was saying was "cyber regs". So each state has cyber regulations that you need to follow in order to be compliant. We, as an IT firm, we follow New York cyber regs, because they're the strictest and they're sort of coming across the country. So I don't know Iowa's cyber reg laws. I have clients in Iowa, we make sure they follow the New York cyber regs, because they may be doing business there. But it's almost like the song "New York, New York", if you can make it there, you can make it anywhere. I'll avoid singing it to you guys. That's certainly one part of it. And the second part of it is their cyber insurance. If they're not doing things like multi factor authentication, there are checkmarks on an agency cyber insurance policy, that they're going to be checking off, and could be denying the claim if they don't do the things that they said they were going to do on their technology.
Peter 25:43
Interesting. Wow. Brad, is there something we've forgotten to ask about or, you know, stuff we haven't covered? Because this is - to Doug's point, free is awesome - but also, it's amazingly insightful, because it's something so many people just don't even think about.
Brad 25:59
Yeah, for sure. For sure. I would just say that, you know, there's sort of two parts of IT. for me. The boring part, which is sort of keeping the lights on, keeping our agency's cyber reg secure and compliant. But then there's the fun part, which is, if I were to get on a soapbox, I would say, all these agency management systems, it's a lie. They're not agency management systems. They're backoffice systems. And we get really excited and interested about some of the technology that can be used for agencies to grow their business. Because it's our belief - my belief - that an agency's primary job, primary focus should be production, and should be selling insurance. And these agency management systems do basically nothing. So what we like to introduce our agency principles to is technology that we've seen other best practices agencies use to increase their book of business and increase their close rates.
Doug 27:16
Okay, Brad, we're living in the future now. What are the tools and technology to automate an insurance agency for the future that you would recommend today?
Brad 27:24
Well, I would recommend Office 365, Amazon Web Services, having a good CRM package, a sales management tool package, and having the ability for your people to work from anywhere, and that requires an entire technology stack. One last thing that I really didn't touch upon, and I really should have is, you can have all the technology in the world, but if you don't have people trained properly, it doesn't matter. Meaning if your person gets fished, which means they give up their credentials, it doesn't matter if you bought a million dollar firewall. So what we do for our clients is we do security awareness testing, which what that really comes down to is we fish, or we send fake emails to our clients, to see if their people will give up their credentials. And then they have a situation where we can say, hey, this person got fished, no harm, no foul, but we need to train that person up so that they don't get fished by the real hackers.
Peter 28:45
That's got to be a tough conversation.
Brad 28:48
Well, it's an interesting conversation for the agency owner. But these hackers are really clever. Their business is doing this. And they're getting more and more clever all the time. So we just have to keep testing and training our folks so that they don't fall for this stuff.
Peter 29:11
Right. Thank you so much. I really appreciate the time today. And I think this is such good advice and something so often overlooked.
Brad 29:21
Well, thank you so much for inviting me. I really appreciate the podcast and I love sharing this information. I hope you can hear the passion in my voice.
Doug 29:31
Hey Brad, how can people find you and Archway?
Brad 29:34
So our website is www.myarchway.com. They can call me at 805-469-4510. They can also email me: Brad@myarchway.com.
Peter 29:54
Great and, to our listeners, thank you for listening. We look forward to offering you more Insurance Agency Insights in our next next podcast. Until then, please follow us on Twitter @agilecapfunds or on Facebook @agilecap; online at www.agilecap.com where you can sign up for more information and newsletters and see other podcasts that we can bring to you. During these difficult times, please stay safe and sane. And we look forward to speaking to you again very soon.