The Role Of Life In A Merger

THE ROLE OF LIFE IN A MERGER

Recently, we discussed the role and potential of Life/Health production in agency clusters. Related but different factors are involved in the buying, selling, and merger of P/C agencies. Looking at the role of Life production through the eyes of each participant is not an academic exercise for most independent P/C agencies, because chances are great that your agency will be a player in at least one such transaction within the foreseeable future.

Looking back, nearly one-third of all independent agencies are gone, merged, acquired, or closed from two decades ago. Looking ahead, a merger and acquisition pattern is firmly established as a way to grow. Also, the number of major carriers has decreased, each carrier asking agencies for an increasing block of business, and there are fewer competing carriers in the agencies. Large blocks of business are going to direct writers, captive companies, risk retention, and other kinds of pools, and there are other forms of leakage from the agency system. In short, the surviving agencies will be strong despite competition, due in part to mergers and acquisitions.

Consider two nearly identical P/C agencies that are about to merge. The most important point is not to overlook the Life factor (including Group, Medical, Disability, and related categories) when evaluating the agencies and their potentials. Sometimes the Life block of business is entirely omitted from the merger discussion because one or more of the principals want to write Life outside the merged business, or because a separate Life/benefits corporation (perhaps with other stockholders) will function separately. Whatever the reasons or conditions, a serious look must be given to the Life situation, because the Life business (or lack of it) has important effects on the P/C book. Life business should be viewed for its effects on:

How much of the agency's total income was derived from Life business? How much from single-premium products or others with no renewal commissions? How much was higher first-year commission? What about commissions in the second, third, fourth, and subsequent years?

How likely are existing policies to continue renewing? (The answer to the last question calls for agents of insureds, types of policies in force, their vulnerability to lapse or replacement, degree of contact with insureds, and other factors.) How likely are the Life carriers to continue paying renewal commissions?

Are the contracts vested? If so, does the contract permit breaking of the contract, or termination, with loss of vested renewals? If so, under what conditions? Are renewal commissions contingent on (a) a minimum amount of new production each year; (b) a minimum amount of commissions per month or other period, with forfeiture of all renewals if that minimum is missed; or © any other conditions that must be met?

Is there a lien on commissions? Is there an agreement to share any part of the commissions with brokers or sub-brokers, P/C producers, managers, or other parties? Can commissions be sold or assigned, with or without company permission? To what extent was prior commission income made up of special or nonfixed sources such as production or persistency bonuses, overhead allowances, educational or development allowances, contests or special awards, and so on?

Some of the answers to these questions will, in turn, hinge on more questions. Are the existing policies competitive in concept and price to current products? Are the carriers financially sound and well-rated? Do the files show regular reviews of the accounts and the clients' needs? Do the files show account- rounding and cross-marketing for Life, Medical Expense, Disability Income, equities, and other financial-services products? Or is there a gaping hole for others to fill?

Are competitors writing business on other family members or business associates? If policies were replaced, were they written in the agency or by an outsider? Is the clientele largely solid and steady, or largely volatile, as to occupations, mobility (leaving your area), family status (divorce, marriage, or remarriage and moving), or potential for advancement and financial growth? Is the clientele vulnerable to plant closings or industry shrinkage?

By the time these questions have been considered about income, a picture should be taking shape. The potential is unlimited. A relatively good job of Life sales is preferred to a poor job as the base for potential. It's easier to sell the second policy in a family than to sell the first, and the third is easier than the second.

In the merger, then, part of the value of Life potentials will depend on answers to such questions as:

If not, will he/she/they compete or try to take away existing clients? To what extent is a noncompete/anti-piracy contract a factor? Will the merged entity's new location present a problem to Life production or retention? Would a new Life producer face problems calling on old clients? Would social, political, organizational, religious, ethnic, or language differences play a role, either positive or negative?

Does the existing book of Life business depend largely on unique factors (such as special products or special markets) that may disappear? Does it rest on projections of dividends, interest, or other financial events that may not materialize?

What is the mix of variable, Universal, and interest-sensitive products? Participating? Nonparticipating? Traditional Whole Life? One-year, five-year, reducing, and other term? IRA, Keogh, and personal retirement plans? Corporate pension plans?

What is the mix of death benefits under $100,000? $150,000 to $500,000? $500,000 to $1 million? $1 million to $5 million? Over $5 million? Is there consulting or fee-based business? If so, is it long- or short-term?

A study of Life commission statements can reveal much more about a book of business than, say, a study of P/C commissions. And a study of client files will also speak clearly about past and potential business.

The Life potential of a P/C agency is worth at least as much as its P/C book. The merging principals ought to pay close attention to the Life story. If all these questions above aren't answered in detail, at the very least the principals should get a good sense, a 'feel,' for the picture that the answers would paint.

It would pay to have a consultant's view of the Life picture and perhaps an evaluation of the Life books and potentials as part of the merger transaction. Without attention to Life, a P/C merger is missing its most valuable asset.