John Wepler brings to light the most disturbing aspects of insurance brokerage — the Ugly Denial of Reality.
This week, MarshBerry’s Today’s Viewpoint explored The Good, the Bad and the Ugly. The Good is that the insurance brokerage industry is better positioned than most to weather the current economic crisis. The Bad is we’ve identified at least some of the underlying risks that could hurt individual brokers and possibly the industry. Today, we cover the most disturbing aspects of insurance brokerage, the Ugly Denial of Reality. Specifically, MarshBerry has witnessed too many clients and prospects adopting a nonchalant attitude toward financial and operational preparedness should the economic downturn be prolonged and/or deepen dramatically. While you should hope for the best, you should also plan for the worst. We can all rationalize reasons to remain positive, but no one really knows where this all will land.
It’s Time to Take your Head Out of the Sand
As described earlier this week, insurance carriers are granting up to 60-day deferrals on premium payments for consumers and small businesses without coverage cancellation. Depending upon the carrier, broker commissions could be delayed until cash is received by the carrier. There is also the possibility that many small businesses may not survive an extended hiatus with little to no revenue collections during the next few months. These scenarios could result in reduced commissions to insurance brokers. When MarshBerry asks whether individual brokers are creating contingency plans in case actual cash flows are materially less than budget, we often hear: “Oh, we are going to look into that issue soon.” What? You plan to stress test your future earnings and consider contingency plans soon?
The Time for Contingency Planning is RIGHT NOW!
If cash commissions are delayed 60-90 days, can you weather a cash shortfall? The last I looked, 90 days is one quarter, or 25% of your revenue. For those highly leveraged, will you be faced with a liquidity scenario that could morph into a solvency issue if revenue dries up for a significant period? To avoid such draconian outcomes, MarshBerry suggests the following analysis:
- 1. How do your actual YTD and most recent monthly (March) cash receipts compare with budget? How do they compare with Q1 2019 receipts?
- 2. How does a deferral of all non-essential spending affect your cash flow modeling for April to June 2020? Or April to September 2020? Which unnecessary expenditures can be permanently removed from your 2020 budget?
- 3. Have you analyzed expected cash receipts if some, or all, of your clients defer premium payments until the end of May or end of June or later?
- 4. Will across the board salary reductions need to be considered? If not companywide, which employees will be least affected by a (temporary?) payroll cut?
- 5. If you conclude that a workforce reduction of some kind must occur, when will you implement the change? How prepared are you to swiftly make changes?
- 6. Have you applied for the government EMFLA/CARES legislation recently approved by the Trump Administration? What cuts will you make if you are allocated less than the amount you applied for? What contingencies have you put in place if demand is oversubscribed, the government does not allocate more funds and your allocation is limited?
- 7. If you have a material amount of debt on your balance sheet, how will a 50% reduction in EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) affect your debt covenants? What could happen to your debt service coverage ratio? If you are operating at a four times EBITDA leverage ratio, such a reduction could take your ratio into the eight times zone, which would bump you into a highly leveraged category.
- 8. Have you spoken with your lender about debt covenant relief in a scenario where commission receipts are delayed 60-90 days?
These decisions need to be made today, to avoid a bigger crisis down the road. Leadership in these uncertain times is often defined by preemptive moves, decisiveness and conviction when faced with difficult choices. Making these tough decisions without adequate preparedness almost never results in a positive outcome. At best, one could expect survival, if decision making is put off even by a week or two. Proactively developing contingency plans today, irrespective of when or if you need to pull the trigger, could set the stage for a successful 2020 financial outcome, not just merely survival, as the economy recovers.
If you have questions about Today’s ViewPoint or would like to learn more about potential risks to your business, please email or call John Wepler, Chairman & CEO at 440.392.6572.
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Marsh, Berry & Co., Inc. and MarshBerry Capital, Inc. do not provide tax or legal advice. Tax and legal professionals should be consulted separately before making any decisions that may have tax or legal ramifications. Any references to tax implications in this presentation should not be interpreted as the provision of tax advice.
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