David Warfield

The roster of insurance mergers and acquisitions in recent months has ranged from big agencies to small, national to local and well established to new players in the game.

The one thing they all have in common is that those selling agencies are looking to get the most out of them as the nation’s economy struggles to correct itself.

At age 55, David Warfield looked back at the last 20 years of running his family’s Hunt Valley, Md., insurance agency, Warfield-Dorsey, but also started looking to the future.

“You get tired,” Warfield told IFAwebnews.com. “It’s a lot to keep your hands around and I hadn’t been able to have a perpetuation plan with family members or an outsider. I felt it made sense to get a partner at a point where I could make a contribution versus selling and sitting on a beach. Plus, I had 30 people who counted on me for their livelihood and wanted career opportunities for them beyond me.”

In October 2008, Warfield sold the 114-year-old business to Lutherville, Md.-based HMS Insurance, bringing his staff and more than 4,000 clients in Maryland, Pennsylvania and Virginia into the new merged company.

As part of the deal, Warfield, along with brother Guy, took leadership positions at HMS and was secure in the fact that his staff “would have better career opportunities,” he said.

Retaining value

Like Warfield, more small agencies are finding new urgency in succession planning, weighing the likelihood of younger family members or fellow staff ready to carry the firm into the future.

Recognizing the effects of a recession and the aging of agency ownership in general, a wave of merger and acquisition activity has occurred to keep businesses going and clients linked to their trusted agents and brokers.

Warfield said he made the decision nearly a year ago, before the nation’s economic condition was officially declared a recession.

“It was fortuitous, but the insurance industry is resilient,” he said. “There is long-term business health and plenty of opportunities.”

The goal, Warfield and other experts say, is ensuring that an agency has value to a potential buyer.

Dave Evans, vice president of retirement and financial planning for the Independent Insurance Agents & Brokers of America Inc., says that a well-run agency with an efficient business plan can maintain solid value despite the economic downturn.

“The reality is, everyone understands at the end of the day that the major asset of an agency is the goodwill of the agency,” Evans said. “Buyers are looking at factors like how automated is the agency, what is the agency management system, and do they have contracts with producers. When you look at all of those different kinds of metrics, in any given year, there is probably reasonable value given.”

Attention, automation key elements

Warfield said his agency made a strong commitment to automation, from scanning polices and burning them to CDs for clients to making all endorsements via e-mail.

Those steps, he said, paid off.

“I think some appeal to HMS was that there were steps taken to try and use technology to be more efficient,” he said.

Gary Berger, president and CEO of HMS, agreed that the operations of the agency and expanding into new markets such as schools and non-profits were key factors in the acquisition, as was the agency’s standing in the industry.

“In our industry, good talent is scarce,” Berger said. “With the reputation of Warfield-Dorsey and the quality of their customer service, the synergy was very good.”

Warfield said a “publicly-traded national brokerage company” offered him more money for the agency, but that would have meant more shifts in operation and possible layoffs, “so for me, the financial component of the deal was at the bottom of the list of my priorities.”

Age isn’t just a number

Other agency owners may be going through what Warfield experienced.

According to the 2008 Agency Universe Study by the IA&B, the average age of an agent is 54, up from 53 in 2006.

Pressure to sell agencies is coming with changes to tax laws that take effect over the next few years; the capital gains rate is slated to increase from 15% to 20% after 2010.

Evans said that if agency owners are worried about the increase, they might look to sell prior to that becoming a reality.

“I do think that in 2009 and 2010 we will see more people looking to get some change off the table with selling some or all of their agency, especially if they in that age 55 and up age bracket,” Evans said.

As far as retirement goes, Evans said agency owners should assess their dependence on their agency’s value to maintain their standard of living. Agency owners who own their building have an advantage because they still could have money coming in through rent.

Other agency owners could reach an agreement with a buyer to stay on for a number of years to help with the transition of ownership, Evans said.

This story originally appeared in the March 2009 print edition of Insurance & Financial Advisor; part two of the series will appear in the April edition.