For more than a decade, Raynor McCullough, an independent insurance agent based in Barrie, Ont., had searched for the right successor for his book of business.
Having begun building his practice in 1953, McCullough began contemplating a succession plan — and a buyer for his business — in the 1980s. Selling an insurance business, he knew, was about shifting the relationships and finding someone to service them.
“For me, it wasn’t about the money,” McCullough says. “I really wanted someone who was going to look after my clients and grow the business into their own.”
McCullough took several younger advisors under his wing over the years in the hope of finding a successor. In 1996, it became evident that Shirley Sawyer, a front-desk team member in McCullough’s office, had the perfect mix of organizational skills and community involvement that would make her a natural successor for the business.
Later that year, McCullough and Sawyer entered into a five-year arrangement, in which McCullough would be paid in annual increments and could still work with his favourite clients. Meanwhile, Sawyer could learn the ropes and take time to build her own relationships with the business’s clients.
In November 2001, McCullough Financial Services Inc. was renamed McCullough & Sawyer Financial Services Inc. The two principals spent a significant amount of time meeting with clients together.
“We met with everyone face to face to assure them that the transition wouldn’t change the level of service they were receiving,” McCullough says. The firm did not lose a client as a result of the transition.
While the process of buying or selling a book of insurance business can be a lengthy task, it doesn’t have to be a daunting one. Whether you are the buyer or the seller, there are certain considerations that will help keep you on the right track:
Determining Fit
The seller is most likely interested in getting the best price for his or her book of business and ensuring his or her clients are well cared for. The buyer is interested in new opportunities to sell to his or her target market.
“A transition won’t be successful,” says Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. in Campbellville, Ont., “unless the market that the seller is dealing in is a target market that the buyer has been looking to reach.”
To determine fit, Geller suggests segmenting the client base by age and products. For example, a younger agent selling mainly living-benefits products such as critical illness and long-term care insurance probably wants to stick to a younger market of clients who are in their 40s and 50s. “Buying a book of clients that are over 65 won’t make the most sense,” Geller says. “However, if [the buyer of the business] is selling a lot of retirement products, such as annuities, it might be the perfect fit.”
Similarly, a buyer should be mindful of having client processes that are in line with those of the business’s seller, says James Kraft, vice president, financial planning services, with Toronto-based BMO Life Assurance Co., a division of Bank of Montreal. “An advisor who prefers to communicate via email may not be a good fit for taking over a business whose clients were used to dealing with someone face to face.”
To confirm a business fit, Geller suggests, the seller and buyer should go on a few “dates” before settling into an arrangement. “Go on a few cases together,” he says, “and get a good feel of each other’s ways of dealing with complex transactions.”
> Future Value Of Existing Relationships
Unlike selling a book of investment business, in which the price of the book is based on the value of the assets under management, the sale price of a book of insurance business lies in calculating how much future value an advi-sor can get out of existing clients, Kraft says: “You are really buying the relationships and the opportunity to create new business using those relationships.”
The price of a book of insurance business ranges between the price a buyer would pay for the existing contracts and trailers he or she would receive if he or she entered the business and did nothing and the amount that buyer would pay for the future value of those client relationships.
The key to determining that value is a concept called “convertibility” — a measure of the term or temporary contracts the seller has that can be converted into permanent policies.
Says Kraft: “Whether you are the seller or the buyer, calculating convertibility is critical to determining the future [cash-flow] value of the relationships.”
How Clients Are Served
Although insurance advisors and investment advisors earn trailing commissions on existing business, the level of service to maintain AUM differs. Investment advisors do not have to fill out new paperwork to maintain investments as long as those investments stay within the same vehicles; insurance advisors must continually service policies to keep them in effect.
For example, servicing a life insurance contract requires that the advisor check on the client’s health every few years and ensure that the client is still eligible for the policy the client is paying into.
“Insurance companies pay out trailers,” Geller says, “with the expectation that those contracts require upkeep.”
Because trailer commissions decline over time on insurance policies, Kraft says, the buyer of a book of insurance business needs to take that into account when determining a price. “You want to ensure you can still maintain a level of service,” he says, “even if that client does not end up generating new business.”
Some managing general agencies give insurance advisors options on how the advisors receive their trailers. For example, the advisor can receive all of his or her commissions on a policy up front or take increments annually.
“I would rather buy a book of business in which the agent was taking [incremental] trailer fees,” Geller says. “This means they took service into account, and you know they were servicing contracts consistently.”
The buyer also should measure the seller’s “persistency” when the buyer is checking for client commitment, Geller adds. Persistency is the proportion of new policies sold that remain in effect after the sell date for a significant amount of time.
“I would want to see a persistency of close to 100%, where the contracts were still in effect over 24 months,” Geller says. “You don’t want to buy a book whose business is a flash in the pan.”
Because each policy’s trailer fee declines over time, insurance advisors can’t expect to sell their books of business at the same high premiums as investment advisors can get.
Kraft offers this advice to sellers: “Selling your book of business should be about your own retirement planning.”
Adds McCullough, “Don’t be greedy. It’s about finding someone who has as much interest in your clients’ retirement as in their own.”