What could happen in the insurance agency world over the next several weeks, months, years?

In this first episode, Peter is joined by Doug Burke, investment banker and advisor to the insurance industry, to discuss the US economy during this pandemic period and how it impacts the insurance agency industry in particular. There are some potential positives for insurance, as it tends to be a "recession muted" industry. And there are some potential downsides, as some sectors of insurance are more economically fragile. Peter shares insights into the possible timing of a recovery, and thoughts about what agencies can do to shore up their business during this uncertain economic time. 

Transcript

spk_0:   0:14
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 adviser to the insurance agency industry. And I'm with...

spk_1:   0:28
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 of the course of their business when they have a thorough understanding of the financial aspects of their agency. Over the last 20 years, through the ups and downs of the U. S. 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 in the future.

spk_0:   1:03
Peter, as we are all working in a new world today, I think it would be good for us to jump into what do you see going on in the U. S. economy that impacts the insurance agency industry explicitly. 

spk_1:   1:17
Well, I see a few themes that are going to impact the general economy but will specifically affect agencies. The first is with the recession and joblessness. Then the government's reaction and how they're lending to facilitate the recovery from the recession. And the last piece we'll talk about is that we really are in uncharted territory, and so, there's a lot of open questions. The first on the recession and joblessness. Big numbers are affecting small businesses and large businesses all over the United States. How that situation will flow through the economy is generally an unknown, but it involves numbers that we have never seen before and they have reached into the economy quickly. The March unemployment numbers were only a little over 4%. But the expectation is that, when the full impact of this quarantining and social distancing that we're experiencing happens, we would expect unemployment rates higher than 10%. These are numbers that have not been seen in decades. It's just a new world. The next issue is the government's response. The Payroll Protection Plan and the Economic Injury Disaster Loans that are being rolled out by the SBA are taking up a lot of air in the news, but ultimately it's uncertain whether there will be sufficient capital dedicated to these programs. Will the funding save jobs? There's a lot of uncertainty. When will this stop? We'll talk a little bit more about that later, but that's really a big, unknown factor that's driving a lot of open problems and questions.

spk_0:   2:49
So, Peter, what metrics and factors are you looking at to determine what could happen in the insurance agency world over the next weeks, months and even years?

spk_1:   4:14
There's a couple of things that we look at, really. The first thing is the historical context, in the 2008 recession. That's the most recent one. We can look at some prior ones, but that's the one that we look at for the greatest example of the impact to the insurance industry. There are differences between now and then, though. For instance, the speed of the reduction in economic activity in this recession is unprecedented, and significantly faster than what we've seen before. But when we look at the recession in 2008, the impact on the insurance industry was limited, and so we can take a little bit of comfort out of that. We'll talk more about that later.  The second focus is - I know we all see the stock market going up and down wildly on a daily basis, if not hourly - but in reality, we need to look at the economic activity, not the stock markets. And so we need to focus on what is happening in YOUR region. Because the way the Coronavirus is impacting the United States and the world, as well, is on a regional basis. It has peaked at different times in different regions. Currently, New York is at or very close to the peak. Others, especially rural areas or smaller cities, are not seeing the impact. So I would say that you really want to look at the economic impact in your region and avoid looking at that stock market, and maybe your portfolio and the impacts it's having on your 401K.

spk_0:   4:16
So what are some of the potential positive things for insurance agency people to think about during these difficult times?

spk_1:   4:25
We're quite fortunate in that an insurance agency is generally "recession muted", it doesn't feel the full impact of a recession, primarily because the products we sell are regulatorily required. As an example, auto insurance is required by your state, homeowners insurance is required by your mortgage company - and most of us have mortgages. So you have a product, especially in the personal realm, that is a required product, and that's quite fortunate. On the commercial side, there's some more flexibility. Small businesses may make the decision to stop their insurance, but generally speaking, it is also required by landlords, investors, other people of that nature. The second factor, is kind of a bonus...it's that, for insurance agencies, the majority of your costs are variable. You don't have big investments in factories or equipment or training - significantly - or things of that nature. You don't have high fixed costs. And so, in troubled times, you can try to make your expenses be in line with your revenue. If there's a 20% decline in revenue, you can make some - sometimes difficult decisions with personnel - but you also have other decisions you can make, and you have a lot more control. So you have, essentially, a variable cost structure that you can modify as your revenues change. Another factor that I think has been a positive for the insurance agency industry is that over the last 10 plus years, insurance carriers across the board have forced us to become much more digital in nature. And, although that is a threat in the long term, as it potentially could cut out the traditional insurance agent, it is a competitive advantage that we've all been relatively easily able to move over to remote operations - and without major disruption. That's appreciated by the clients, it's appreciated by the carriers. It's appreciated AND it's really been a competitive advantage against industries that are not able to remotely operate. The last piece, and I think this is the soft one that we'll talk about a little bit more later, is that insurance agencies are relationship-based. You've built your business on the connection with the person, the business, the people in your region or town - for the most part - and that's a critical thing in this environment, where relationships and the connections on 1-to-1 are so strained that people are looking to build and maintain those relationships. So I think there are lots of good things that will help the insurance agency world through these troubling times.

spk_0:   6:58
So what are some of the areas of concern or potential negatives for our listeners to think about during these times?

spk_1:   7:05
Yeah, so I think there's a couple things. One is entire sectors of the industry are going to be under pressure. Most specifically, restaurants, hospitality, travel and leisure. If your agency focuses on a sector that is disproportionately impacted - you know, for some reason you ensure things related to the cruise industry, as an example - you're going to have major impact. So it's a very big risk that you may or may not have in your agency, as an example. Maybe cruises don't apply, but something like substandard auto - there's a sector of the population that may not need their vehicles anymore during this period of time, if they're not working, so they may cancel their insurance. So there are sectors that are at risk inside the insurance agency world... any discretionary products or things of that nature...and you should look at your portfolio of clients and policies you write and say, "What am I at risk for?", and try to understand, you know, what could happen over the coming months to impact your top line revenue and think about some decisions that you could make on your expenses. The last thing is, of the last decade or so, as we've come out of the 2008 recession, the broader economy, as well as the insurance agency world has seen some strong growth and that's just going to stop. We might be 'recession muted', as we spoke about earlier, but at the end of the day, growth most like is going to stop for an extended period of time: anywhere from 12 to 24 months. And so, any investments you were thinking about making, or in the process of making, you're going to have to make the tough decisions and most likely stop those.

spk_0:   8:34
So, do you have any insights on the timing of a recovery? 

spk_1:   8:39
l think we've got to look at it in a three-phased approach. The first one is kind of the "Emergent" or "Urgent Phase" that we're currently in right now...where everything is grinding to a halt. It really started in mid-March. It varies, state by state, inside the U. S. But we've gotten anywhere from 8 to 12 weeks from sometime in March, where we're just trying to get our hands around this. The testing, the immediate response to the health problems that are happening across the United States, are going to occur. Once you get through that urgent phase, I think you're looking at 10 to 14 weeks of "Stabilization" where the public health measures in the economic intervention have begun to take hold and the engine of response is turning. And it's during this phase where we start to see the light at the end of the tunnel and we can start making plans for a "Recovery Phase", which is for that period and beyond. So I think between mid-March to May or June is the "Urgent Phase". Then you're looking at 10 to 12 weeks - let's call it 2 to 3 months during the summer - of "Stabilization Phase", where some activities and the groups and gatherings will come back. In the "Recovery Phase", obviously people want to keep that as short as possible, but my theory is that you're looking at September - 12 to 18 months thereafter - till we get back to where we were as early as January.

spk_0:   9:58
So what are some other risks that are out there that you have not mentioned?

spk_1:   10:03
So on a macro level, I think they're probably three things that you, as an insurance agency owner, should think about. One is carrier stability and their risk. At the end of the day, for the most part, carriers are financially stable, as you look at the ratings and the their economic plans and their financial standings. There are some areas of concern that if you have, as an example, lots of small carriers in your portfolio -especially maybe Florida homeowners or things of that nature - they're going to be under significant pressure during this time period. And so you want to look at the carriers that you use and use with your clients and understand, are there risks there? And should you prepare for that in someway or another? The second piece is the service providers. So you also use small businesses as your vendors. Whether that's your landlord, your AC management system provider, things of that nature. They're going to be under immense pressure, and you may be 'recession muted', but they may not be. And so you need to start thinking about your clients, your customers, as well as your vendors - and that's one area of potential risk. The last one - and this is a real macro one - in 2008 we saw the financing markets, the ability for the banks to lend, seize up. And that had significant ramifications throughout the United States. We're not seeing that, but everyone's very aware that that could be a real risk. And so we want to keep our eyes open to what are the banks doing, how are they responding, and what's the government doing?

spk_0:   11:35
So what tactics do you recommend that insurance agency owners do for the next several weeks or months?

spk_1:   11:40
I think there are two things you want to look at over the next....let's call it month to two months. And then, after we get into the "Stabilization" and "Recovery Phase", there are some other actions you want. The first is, because insurance is a relationship-based industry, you really want to connect with all your customers as much as possible. You'll want to reach out, you'll want to be there for them, you'll want to do what you can in order to strengthen that relationship. Understand the risk that they have and how you can may be able to address them, work with them, whatever the case may be. The last one - we talked about already - is cutting expenses. Look, in times of uncertainty, it's important to preserve cash. That may involve things that you normally would be spending on, potentially. Things like bonuses for employees or growth initiatives. You're going to have to defer things of that nature. So over this "Urgent/Emergent Phase" that we're in, and into the "Stabilization Phase", you really want to connect with your clients and preserve cash. Once we're in "Stabilization" and into the "Recovery", I think you, as a strong agency owner, want to look at how you take advantage of this situation. For those who may not be as stable as you are, you want to look for opportunities. Whether that's investment in growth and marketing, whether it's acquisitions, or things of that nature. If you've taken the time to build and maintain a stable business, you really want to use that leverage in order to grow your business going forward.

spk_0:   13:02
Well, thank you, Peter. This has been very insightful and helpful. Our next topic will be, "How to Work with a Lender in Times of Trouble".

spk_0:   13:09
Thanks, Doug.  I appreciate the time. I'd ask that everyone would follow us on Twitter @agilecapfunds or Facebook @agilecap or online at www.agilecapfunds.com. And sign up for our newsletters and other information that we'll be publishing going forward. We look forward to speaking with you soon. Again, stay safe, stay sane during these difficult times.