Author: jhyman@jeffhyman.net

The insurance distribution segment is made up of more than 30,000 brokerage agencies with many medium- to small-scale agencies. Many of are often lacking the financial or technology infrastructures of larger competitors, and in many instances, the agencies are populated with agents nearing retirement.

The average age of brokerage executives is 60 years old, and the U.S. Bureau of Labor Statistics indicated that nearly 700,000 insurance professionals currently are 55 years old or older. In addition, 400,000 brokerage employees are expected to retire within the next five years. In 2017, there were approximately 1.1 million insurance agents, brokers and service employees in the United States according to industry data.

Private Equity Growth

Private Equity backed funding is nothing new to the insurance brokerage segment, but it has been very prominent over the last seven years. Mergers and acquisitions of insurance agencies in 2017 totaled 604, a 31 percent increase over 2016 according to industry data. In 2017, private equity/hybrid buyers accounted for 382 transactions, 63 percent of the total, compared with 56 percent in 2016.

M&A activity in 2018 was very strong although I believe when the final numbers are reported for 2018, the number of acquisitions will be slightly less than 2017, but the private equity-backed acquisitions will most likely exceed 60 percent.

Early indications are that eight of the top 10 buyers in 2018 are private equity-backed firms compared to 2008 when only four of the top 10 had private equity funding.

In 2016, private equity-backed companies completed 55% of all broker acquisitions. Nine out of the top 10 acquiring companies across 2015 and 2016 were private equity-backed firms. Gallagher & Company was the only public company on the mega-buyers list.

Between January 01, 2010 and December 31, 2016, Gallagher completed almost 300 acquisitions. In 2017, Gallagher completed 39 transactions, more than half of which were within its US retail P&C and benefits operations, and in the first half of 2018, the company made 18 acquisitions, and 12 in the 2nd half of 2018.

You don’t have to look any further than Caledonia, Michigan-based Acrisure to see the positive impact from the right private equity funding partnership. Greg Williams, founder of Acrisure, has become the most prolific acquirer in the U.S. Williams and his team made over 100 acquisitions in 2018 and has made more than 400 acquisitions since 2013. Williams acquisition strategy has grown Acrisure’s annual revenue from $650 million to $1.5 billion in two years and increased the company’s enterprise value to more than $7 billion today from $2.6 billion in 2016.

Acrisure has plenty of “dry powder” after a $2 billion investment by GSO Capital Partners and Harvest Partners SCF LP, both based in New York City, and Switzerland-based Partners Group late last year, so I expect that Acrisure will be active in 2019.

Industry data indicates that private equity firms’ “dry powder’’—the amount raised by firms that is not yet invested—is slightly over $1 trillion, according to a report in December of 2017 by Preqin. This is a clear indication that there is plenty of private equity funding available and no obvious ending in sight for the continued M&A activity and valuations.

Should I sell or Not?

Private equity firms are the new bankers for insurance brokerages. The valuations right now are at an all-time high, and that’s good for the seller. While price is important, a strong culture fit is critical too.

The last four years has seen the value continue to increase. Looking back to 2015 activity, the average base selling price was a pro forma EBITDA multiple of 7.6x  and based on the early data on 2018 sales and my personal knowledge of over 90 closed deals; the multiple increased to about 8.71. That means that the potential maximum payout for the 2015 sellers could reach 10.31x and the 2018 sellers could see a pro forma EBITDA multiple of 11.01.

With over $1 trillion of “dry powder” available, the next few years will see a lot of M&A activities.

As an user of miEdge, I am very happy with the health & welfare, property & casualty, and retirement solutions that miEdge offers. The attached video will recap a meeting I had today with a national firm talking about their U.S. Strategy. They were impressed with my level of knowledge about their U.S. book of business, and understanding how they should attack certain other carriers and brokers book of business.

I owe thanks to Mark Smith and Darin Vick at miEdge for their partnership with me over the last three years. The access to accurate and current data gives me, and other miEdge users The Ultimate Unfair Advantage over those who are not willing to invest in their business. Trust me, if you are not using miEdge, other brokers and carriers who are will be knocking on the doors of your accounts soon with a wealth of intelligence.

Thank you Mark Smith and Darin Vick!

Last week my post, Aflac: Behind the Numbers created emails and phone calls from many different people in regards to lapses and persistency. We all understand that lapse policies is a part of our industry, no matter what product segment we may be in. That being said, there are expectations and certain actuarial assumptions that are used when products are filed in each state.

Below is the definition listed in Aflac’s glossary regarding persistency.

Aflac definition of persistency – Percentage of premiums remaining in force at the end of a period, usually one year. For example, 95% persistency would mean that 95% of the premiums in force at the beginning of the period were still in force at the end of the period.

One of the emails I received last week said, “ Mr. Hyman, is it possible that Aflac has had more lapsed premiums in a year than they had sales?” So here is my answer after carefully researching Aflac’s SEC filings.

Aflac has had a very long history of high lapsed policies. I went back to 1993 and reviewed my data from SEC filings that showed the following data –

Sales year, annualized premiums in force beginning of year, new sales premium (including conversions), premiums lapsed and annualized premiums in force, end of year.

For 2017, annualized premiums in force was $5,896 billion
New sales, including conversions, of $1,552 billion
Premiums lapsed was ($1,525) billion
Annualized premiums in force, end of year was $6,052 billion

In 2016, annualized premiums in force was $5,760 billion
New sales of $1,482 billion
Premiums lapsed ($1,479)
Annualized premiums in force, end of year $5,896

In 2015, annualized premium in force was $5,668 billion
New sales of $1,487 billion
Premiums lapsed ($1,526)
Annualized premiums in force, end of year $5,760 billion

Since 1993, Aflac U.S. has had the following:
New Sales Premium – $26,491,000,000
Premiums Lapsed – $23,139,000,000 (87.34% of new sales premiums)

Since 2009, premiums lapsed exceeded new sales premiums in 2009, 2010, 2013, 2014 & 2015.

Aflac had $6,052 billion of inforce premium at the end of 2017. A 1% improvement in persistency is worth $60 million in premium. I reviewed Aflac’s pretax rate for each year since 1993. Based on 2017’s pretax rate of 19.8%, a 1% improvement in persistency equals about $12 million in pretax profits.

Last year, Aflac’s persistency was 77.5% (before inclusions). The ideal persistency would be 82.5%. A 5% improvement in persistency is equivalent to an additional $300 million a year in premium and about $60 million in additional pretax profits.

I am confident that Aflac will get this under control and over a period of time, we will see a big improvement in persistency.

As I sit here on this final day of 2017, I pause to take time to look back on the previous 12 months to evaluate my experiences and to think about how to get a jump start on 2018. I hope that you will benefit from me sharing some thoughts on how you can make 2018 a historic year for yourself.

STUDY YOUR POSITIVE AND NEGATIVE EXPERIENCES
Take time reflecting, in order to remember and write down every experience that stood out in the past year. Write down both positive and negative experiences because I know that I have learned from both. No one individual, organization, or even sector is immune from the disruptive changes at play. A few years back taxi drivers, photo technicians, music/video stores, and travel agents may have been the early face of this disruption narrative — but today even those with seemingly steady careers within traditionally stable sectors like banking, financial services, insurance, and other areas – are faced with disruption.

WHAT SURPRISED YOU IN 2017?
Reflect on the surprises that came your way – and then on how you responded. What do you notice about your ability to adapt and pivot within the unexpected? Those who are open-minded, innovative, nimble and quick are better primed to seize opportunities and work with change. Those who are a part of the “status quo” will be left behind and looking in from the outside.

WHAT DID THIS TEACH YOU?
My experience in life is that every experience for better or worse can be a ‘teacher’ if we use it well. How did you grow in 2017? What insights, knowledge, skills were gained or reinforced the last 12 months? Reflect on skills related to self awareness, trust, adaptability, resourcefulness, resilience. These core internal skills are critical today and in the year(s) ahead.

WHAT DID YOU DO THAT YOU SHOULDN’T HAVE DONE?
What did you spend a lot of time on? Was it a priority? Was it in your strength zone? Was it something only you could do, or should you have delegated it? What will you do differently in 2018?

WHAT DID YOU NOT DO THAT YOU SHOULD HAVE DONE?
What did you not do that should have been a priority in 2017? What key action didn’t you do that would have had a major impact? What will you do differently in 2018?

WHAT DID YOU DO THAT HELPED YOU GROW MORE THAN ANYTHING ELSE?
Is it repeatable? Do you want to make it a regular habit? How can you break it down into manageable “nuggets” to make it happen again in 2018?

2018 – THE YEAR AHEAD:

WHERE DO YOU NEED TO GO IN 2018?
What’s next for you professionally and personally? While you may not know the precise answers yet, keeping this question in your mind will keep you on your toes so that you can plan and be better prepared for opportunities. To quote the great Wayne Gretzky, “Skate to where the puck is going, not where it has been.”

HOW WILL YOU EVOLVE IN 2018?
While you can’t predict the whole year, it’s a good idea to start your strategy in developing and indentifying new skills, experiences and knowledge that will help you grow in 2018. Visualize yourself at the end of 2018 and ask yourself if you would be happy with your visualization?

WHAT ARE YOUR TOP GOALS FOR 2018?
Now it’s time to be specific and concrete about your 2018 goals. Goals – if meaningful, relevant and backed up with a plan — can provide focus, direction, a sense of purpose, and energize you with new motivation. How can I top last year’s accomplishments? How can I exceed my expectations, as well as the expectations of others? Don’t settle for good when great is a possibility.

I wish you a healthy, happy and a great 2018!

Yan Wang, the former CFO of VitalSmarts, didn’t survive Mao’s China by taking outlandish risks such as questioning those in positions of authority. As our CFO, she did impeccable work with the highest ethical standards. But challenging the status quo was deeply unsettling to her — especially if it meant critiquing the actions of one of our company owners.

She was literally trembling one day when she suggested to my colleague Al that the few dollars he was bringing home from selling copies of our book at public events was hardly worth the time it took our accounting team to process them. She fumbled around the issue until Al said, “So what are you suggesting I do, Yan?” She gulped an enormous amount of air and finally confessed, “It would be smarter to just give them away.” Al agreed. Yan was almost always right. It just took a while to figure out what her opinion was.

Fast-forward a decade. Our company had grown tenfold, and so had Yan. She had become the backbone of accountability in our company. No one, including major shareholders, was off-limits when it came to maintaining standards and creating a culture of fiscal stewardship. Her team was at the forefront of identifying ways to maximize our margins.

Yan’s story is not uncommon. Our research shows that 97% of people can readily identify a career-limiting habit they have. We’re unreliable, lack empathy, avoid conflict, or fear risk. While we’re clear that our weaknesses cost us both personally and professionally, few of us make any progress in turning them into strengths. In fact, managers report that after giving people feedback in a performance review, fewer than 10% of them look any different a year later. But it doesn’t have to be that way. Like Yan, we can make substantial change in relatively short order. The key to improving most weaknesses is to:

Identify Crucial Moments

Chronic weaknesses are usually not due to simple cognitive or behavioral gaps in our abilities. When you’re sitting in your office with a daunting presentation to prepare, and you keep checking your inbox and returning calls instead, it isn’t because you are bad at prioritizing. Rather, you are playing out a deeply habitual and practiced response to feelings of anxiety, inadequacy, or fear. Most of our bad habits have this same nature; more is going on than meets the eye. The way to make progress is to identify the nature of the moments that provoke these ineffective responses. Pay attention to the times, places, social circumstances, moods, physiological states, or risk perceptions that incite you to act in ways that lead to bad results. These are your crucial moments. The good news about crucial moments is that they shrink the size of your problem. Change seems daunting when you think it requires eternal vigilance. In fact, it’s usually about handling a few minutes per day better than you have in the past.

Yan became aware that her crucial moment was when she felt a need to disagree with someone with greater organizational power. She was pretty blunt with peers and direct reports, but speaking up to the owners of the company contradicted every instinct. She felt encouraged when she realized that she didn’t struggle with candor in general — only in those specific circumstances.

Design Deliberate Practice

The Swedish psychologist Anders Ericsson has shown that our learning curve steepens the most when we engage in what he calls deliberate practice. These are brief episodes of intense focus where we practice a skill under relatively real conditions. If these intense practice episodes are coupled with immediate feedback, learning accelerates even more. Psychologist Albert Bandura refers to this as guided mastery and found that we can overcome profound emotional barriers to success if we engage in this kind of skill rehearsal under circumstances with the right mix of safety and challenge.

Once you identify your crucial moments, do what Yan did: Identify moderately challenging situations where you can practice the target skill. For Yan, simply framing these occasions as “practice” lowered the stakes and increased her motivation to attempt them. Following each attempt, she did a mental debrief, rating her effectiveness and stress level. Over time, she found the first rating went up and the second went down, which gave her a greater sense of competence and confidence for the next round. She was careful not to jump into the deep end of the pool at her first attempt. She began by challenging business owners who were late in turning in their expenses. Later she addressed concerns about their spendthrift tendencies — something she felt even more anxiety about.

An important element of deliberate practice is the focus on a discrete skill. Yan studied up on skills for crucial conversations and decided to focus on one: creating safety. She opened a conversation by making an overt reference to the common purpose she hoped she shared with the person she was confronting. In her first attempt, she found this gave her a sense of confidence by suggesting a script with which to begin. But her confidence grew even more when she saw how it put the other person at ease and reduced defensiveness.

Develop Emotional Competence

Be sure your plan includes development of skills for managing the inevitable emotions that accompany confronting a weakness. Simply forcing yourself to attempt a terrifying or uncomfortable behavior is not a success in and of itself; provoking these unpleasant emotions will simply reinforce that this is an act to be avoided. You must seek out tactics you can use to make the unpleasant act more pleasant, or at least manageable. By doing so, you gradually retrain your brain to change its formula for predicting how you’ll feel in your crucial moments.

Yan found that her emotions calmed if she took a moment to clarify her motives prior to opening a crucial conversation with a more powerful person. Before scheduling the conversation, she paused, took a deep breath, and asked, “What do I really want?” Historically, her desire was to avoid conflict with powerful people, but this conflicted with her deeper values. As she pondered what she really wanted, she connected with her desire to be a person of integrity and strength. This awareness helped her subordinate her fears to something more important — and quieted them significantly. It gave her a feeling of focus and determination.

One of my most cherished memories of Yan is the day she let me know that I had wronged her. She told me with great conviction that I had been unfair in the stock award she had been given, relative to others in the firm. She tactfully expressed her disappointment and laid out her case for a different calculation. I ultimately agreed with her argument. But more important, I was struck that the person who admonished me that way was markedly different from the one who trembled out a suggestion to Al just a few years earlier.

You can change your own career-limiting habit if you identify your own crucial moments, seek out brief and intentional opportunities for deliberate practice, and build skills in addressing emotional barriers to your progress. Don’t let fear or inertia hold you back.

Joseph Grenny is a four-time New York Times bestselling author, keynote speaker, and leading social scientist for business performance. His work has been translated into 28 languages, is available in 36 countries, and has generated results for 300 of the Fortune 500. He is the cofounder of VitalSmarts, an innovator in corporate training and leadership development.