Many agencies seem to be meeting these challenges by coming together with other agencies. In American AGENT & BROKER's 2004 readership survey, 22.4% of the respondents said they are part of an insurance agency “cluster” or network.

Recently, we talked with executives from a number of these sorts of organizations. They differ in size, in services offered and in the details of their agreements with their member agencies. What they have in common is proof of the adage that there can be strength (and success) in numbers.

Combined Agents of America
(www.combinedagents.com)

Created in Texas in 1998, Combined Agents of America (CAA) currently has 29 independent agency members. All member agencies operate within Texas, although the agency is considering expansion to nearby states. CAA's members collectively have more than 400 employees and wrote close to $300 million in premium in 2003. The Hartford named CAA its southern region “agency of the year” in 2003, according to Jim Whorton of Whorton Insurance Services in Austin, who currently serves as CAA's chairman of the board. Whorton describes CAA as a “closed MGA.” “We created CAA as an MGA, which was required in Texas for the way we operate,” he explained. “CAA provides its members with access to national carriers, profit-sharing and contingency bonuses and the shared expertise of all of its members.”

Whorton said that each member agency owns an equal share of CAA, regardless of its size. “Each agency must purchase an equity share both in CAA and in CAA's premium finance company,” he said. In addition, Whorton said, each agency pays monthly dues equal to less than 1% of its P/C commissions. A small staff at CAA's corporate office in Austin handles day-to-day operations, while agency members volunteer for committees that run the organization.

CAA helps its members reach bonus levels through “master contracts” with national carriers, Whorton stated. “Our 'master contracts' are agreements in which carriers consider our members' premium volume collectively, even though each member agency has its own separate contract with the carrier. This includes members who gain access to the carrier through us, as well as those who had a contract with one of our carriers before joining CAA,” he said.

When evaluating potential members, CAA considers such factors as the professional reputation of an agency's management, its loss history and its financial strength. Members must have one of several widely available agency management systems, which they use to report premiums and commissions to the CAA office on a quarterly basis. They also must list CAA as an additional insured on their E&O policies, Whorton said, adding that CAA requires a minimum $1 million limit and recommends that members have limits between $2 million and $3 million.

Whorton said CAA considers agencies of different sizes, depending on their location. “The size of our members currently ranges between $3 million and $20 million in annual premium,” he said, “and our model would benefit agencies writing up to $40 million.”

Contingencies and profit-sharing are distributed to members on a pro rata basis, according to how much premium each agency contributes to the total amount CAA writes with a carrier. Members are not required to do business with CAA's carriers or to use the premium finance company, although Whorton says it makes sense for them to do so. “The contingencies and profit sharing are the incentive for members to go through us,” he said.

CAA provides both general expertise and specific training for members. “Several of our agencies have expertise in agency technology, and they're available to help other members with IT issues,” Whorton said. “We also have an automation committee that studies technology products both for the group and for individual members. In addition to IT support, we sponsor training seminars for producers and management at our agencies. We also provide marketing support, such as blast faxes and e-mails, for our members.”

CAA does not own any of its members' expirations, Whorton said, and members are free to leave the group at any time. In the event of a change in agency ownership, he said, CAA may become involved, depending on circumstances. “We're committed to helping an agency perpetuate itself,” he said. “If an agency owner passes away or wants to retire, the owner's family members may not be completely ready to take over immediately. In that case, we're willing to step in and help them keep it going until they are ready to run it on their own.”

CAA has the first right of refusal to buy an agency if its owner wishes to sell to an “outsider,” but not if the agency plans an internal succession. “We have provisions in our operating agreement to value the agency if we choose to purchase it,” Whorton stated. “The provisions are fairly typical regarding a multiple of earnings and other factors, but the valuation process can vary greatly.” If CAA purchased a member's book of business, Whorton said, individual circumstances would determine if a new manager would be recruited or if the book would be transferred to an existing member. However, he added, such a purchase has never occurred.

The Iroquois Group
(www.iroquoisgroup.com)

“We exist primarily as the result of the insurance industry becoming more and more refined in its taste,” said William (“Twig”) Branch of the Iroquois Group. “An increase in specialization by carriers, combined with the continuing need for independent agents to be generalists, is the market force that drives us.”

Since its founding in 1977, the group has grown to include more than 1,400 independent-agency members. Membership has long been concentrated on the East Coast, but Branch said a recently signed deal with the Independent Community Banking Association aims to expand the group's presence in the Midwest. With final 2003 numbers not yet in, Branch estimated that Iroquois members wrote $200 million in premium through the group, a number he says represents between 5% and 6% of the agencies' total business.

“The primary benefit we offer our members is access to markets,” Branch said. “We hold the contracts for national carriers, and members operate as our sub-producers when they access the markets we provide. By combining the business our members write, we create the volume that makes the markets accessible.”

Branch referred to the group's operating agreement as the “partner plan” and said it includes separate schedules for distributing commission and bonus money. “Commission earned through our carriers is sent directly to us,” he said, “and we distribute it to our members, based on their volume. Our agreement usually involves us keeping around 20% of the premium and distributing the remaining 80% to our members. We also distribute our profit-sharing bonuses, based on profitability as well as volume.”

Eight employees work at the group's home office in Olean, N.Y., and 35 field agents visit member agencies and carriers, matching up the two and providing training and other support to agency members. “Besides training our members to work with our carriers, we have what we call 'Iroquois Benefits,'” he said. “We have obtained a list of discounts and other deals we've negotiated with vendors because of our volume, and we pass those along to our members.”

The group seeks agencies writing between $1 million and $10 million in annual premium. “Our agencies usually have a principal and at least one full-time customer service representative, and have been in business for at least five to 10 years,” Branch said. “We consider agencies that are already profitable for their carriers and that have good loss histories. We don't look for start-ups. Our agencies have at least reached the point where they operate from a stand-alone office. It's also important that an agency works with standard lines. We're not that interested in agencies that are focused only on non-standard lines of business.”

In addition to the split of commission and contingencies, Branch said, members pay a membership fee of $150 a month. They must have a high-speed Internet connection, but Branch said no particular agency management system is required. “Our accounting system is 100% direct-bill from our carriers. Our members don't even really need a computerized accounting system,” he commented, although most of them have an agency management system, because it's part of the professional character we seek in our members.”

Iroquois requires members to carry at least $500,000 of E&O insurance, and the group is a certificate holder in each case. “We don't require them to have us as an additional insured,” Branch stated, “because we don't want to 'water down' their own coverage.”

Branch explained that Iroquois members are free to leave the group with a minimum of restrictions. “Our members' relationship to us is somewhat like being our customers,” he said. “Depending on what state they're in, our members can leave by giving us between 30 and 120 days' notice.” Branch said that the group experiences about a 10% annual turnover rate. “Most of those agencies are bought by other agencies outside the group,” he said. “Since we work with small agencies, they are often acquisition targets.” Members that leave the group are free to retain their group-placed business, Branch said, but only if they move the business to new carriers. “Our agreement does include a covenant not to compete,” he explained. “If an agency joins us and gets an appointment with one of our carriers and then leaves, they have agreed not to accept a direct appointment with that carrier. However, they remain free to retain that business if they move it to another carrier that we don't work with.”

Branch said that Iroquois sometimes becomes involved in agency perpetuation, though the practice is not part of the operating agreement. “We'll get involved in perpetuation if an agency asks us to,” he said. “Most frequently, we'll find another member who's interested in buying them.”

The Leavitt Group
(www.leavitt.com)

“Our goal is to create, build and perpetuate independent insurance agencies. We buy a majority interest in an agency, and then bring resources necessary to help that agency grow,” said Mark Leavitt of The Leavitt Group, in describing the philosophy behind the structure of the Utah-based organization. With 75 affiliated agencies in 87 locations at the end of 2003, the Leavitt Group counted consolidated revenues of $76 million on $600 million to $650 million in written premium.

Leavitt Group Enterprises (LGE) owns 60% of each Leavitt Group agency, with 40% owned by local co-owners and managers. Each agency is a separate, independent corporation. Leavitt and his five brothers own 95% of LGE, which was founded in 1952. The remaining 5% is owned by 38 individual co-owners and key employees. Mark Leavitt serves on the board of directors and is the group's affiliation marketing director. Brothers Dane (president and CEO) and Eric (north area president) also serve on the board.

According to Leavitt, member agencies average $1 million in commission, with quite a variance among agencies. “We have agencies in towns of all sizes,” he said. “Our smallest member is probably a $300,000 agency, and our largest earns a little more than $10 million in commission.” Members contribute approximately 1% to 2% of their commission to a “home office allocation” that supports the group's central office operations. Contingencies are distributed back to the agencies, and the Leavitt Group maintains a master E&O policy for all its agencies.

Leavitt said the group actively seeks acquisitions and considers an agency's financial strength, company relations and market potential. “We look for agencies in thriving communities, and we want to see several years of an agency's financials,” he said. “Most important to us, however, is the quality of people in an agency and the relationships they already have with their carriers.”

The group acquires about seven to 12 agencies a year, Leavitt stated, in several types of transactions. “In some cases, we add agencies to our membership. We also acquire books of business to roll into our existing agencies.” Leavitt added that the group also helps establish “spin-off” agencies. “Sometimes a producer approaches us with a half-million-dollar book of business and says, 'I always wanted my own agency,'” he explained. “We'll help him develop the agency and add him to our membership.”

Leavitt said that each agency shareholders' agreement contains a “may buy” provision for LGE in the event the minority owner leaves the agency. “The contract we sign when we first affiliate spells out the process we would use, including how we would value the agency,” he said. “We've never decided not to buy when a co-owner left, but we keep the 'may-buy' for a reason. We don't want someone going to Cancun for a vacation, deciding he really likes it there, and calling us to say, 'I'm out, start sending the checks.'”

Member agencies collectively own Leavitt Group Agency Association (LGAA), Leavitt said, which itself includes several service and profit-center entities. One of those is Agency Programs and Placement Services (APPS), which helps member agencies with market access. “Our members maintain their own contracts with carriers as much as they can,” Leavitt said. “But when a member doesn't have the capacity to obtain an appointment with a large regional or national carrier, they can access those markets through APPS.”

Allegiance Premium Finance, another unit of LGAA, has been both helpful and profitable for the group's members. “Last year we did about $37 million in loans through Allegiance,” Leavitt said. “In all, LGAA generated about $1.2 million in profits, which were then distributed back to our agencies.”

The LGAA Service Division provides training, tech support and other services for its members. “LGAA runs a wide-area network that interconnects all our agencies and provides access to our systems,” Leavitt said. “Most of our agencies use (AMS) AfW as the 'platform' for their management system, and LGAA for such services as software upgrades and backup services that otherwise would have to come from the system vendor.” Leavitt added that members pay a small fee, usually less than what they would pay for similar services on the open market, to support LGAA.

Other service-division facets Leavitt described include classroom and Internet-based training for member agency employees, communication assistance, an annual agency conference, centralized payroll services and an intern program. “We do a lot of training to create a more professional environment for our agencies,” he said.

Networked Insurance Agents
(www.nia-ins.com)

Networked Insurance Agents (NIA) ended 2003 with 690 independent agency members (affiliates) and plans to about 500 more by the end of the year. Affiliated agencies-600 of them in NIA's home state of California-wrote $92 million in premium through NIA in 2003. The organization's expansion plans include most Western states, as well as Texas, in 2004, with continued expansion across the country in subsequent years. Funding for NIA's growth comes from a major financial institutional investor.

“Our principal role is to help smaller agencies whose premium volume can't support preferred market appointments,” said Lee Johnson, president of NIA. “We function as an underwriting placement facility for our affiliates.”

Johnson explained that a force of nine “territorial sales vice presidents” (TSVPs) are responsible for recruiting, training and supporting member agencies, who usually write $5 million or less in annual premium. “We have some affiliates with as many as 10 agency employees, and that's a pretty good-sized agency for us,” he said. “Many of our affiliates have between one and three producers and the same number of support staff members.” He added that NIA carefully screens potential members, using consistent criteria. “We require prospective affiliates to submit information about all their current carrier appointments, including the premium they've written and their loss histories,” he said, “as well as proof of their E&O coverage, a copy of their licenses, their agency plan and individual references.”

Agencies that join NIA pay a monthly fee of about $150 to $175, depending on territory, and agree to a commission split on accounts they write through NIA's insurance companies. “We share commission with our affiliates on a scheduled basis, by type of policy,” Johnson stated. “Affiliates typically receive two thirds of the total commission from the carrier, which sometimes appears even higher, because our volume earns us high commission rates from our carriers.” Johnson also noted that NIA has begun an incentive plan for agency members. “We offer affiliates a plan that guarantees them up to 2% of their written premium, based on their growth, size, retention and hit ratio,” he said. “Agencies can earn this bonus even if NIA doesn't earn contingencies from its carriers.”

Johnson said NIA requires its affiliates to carry at least $1 million of E&O coverage, but they aren't required to name NIA as an additional insured. “We provide members access to two 'A+' rated carriers for their E&O,” he said, “but we don't require them to go through those carriers. We also have a hold-harmless agreement with our affiliates.”

While the organization has few technology-related requirements for its members, Johnson said NIA is quickly working to provide more high-tech services to affiliates that can make use of it. “We can accept business by e-mail, fax or U.S. mail,” he commented. “At the same time, we plan to develop a specific 'agent portal' for each of our affiliates, that will allow them to submit applications, work on quotes and look up the status of each of their accounts online. We expect to have this in place shortly.”

In addition to its automation project, Johnson said NIA provides several levels of support for its affiliates. “Our territorial sales vice presidents provide marketing support and product training within their territories, and we send out a weekly marketing publication to all members,” Johnson explained. “We also provide accounting services for all business written through NIA, and we sponsor three annual conventions that last year attracted about 1,000 agency employees. We frequently include courses for CE credits at these conventions, and we use the conventions as an opportunity for our affiliates to meet some of the key people from the many preferred carriers we work with. Because of their size, most of our affiliates might not have this type of opportunity on their own.”

Johnson said affiliates own the renewals to business they write through NIA, and that agencies can leave the group with appropriate notice. “We have no ownership of the agencies that affiliate with us,” he said. “They are free to leave with 60 days' notice.” He added that affiliates who leave can even continue to place their NIA business through the organization. “If an agency is in good standing when they leave us, they can leave their accounts in place, for a fee that's usually about two additional points of commission,” he said.

NIA's operating agreement with its affiliates also contains provisions for assisting agencies with perpetuation plans. “Our agreement contains a provision for NIA to acquire an agency's book of business if an affiliate principal dies or becomes incapacitated, but this is only at the option of the affiliate,” Johnson said. “We also have funds earmarked for agency owners who may want to retire or step back a bit, and who may wish to sell us their equity and then stay on as the manager of the agency.”

Strategic Independent Agents Alliance
(www.siaa.net)

hen Jim Masiello wanted to expand the reach of his New Hampshire-based insurance agency in 1983, he did so by creating the Satellite Agency Network, which consisted of smaller “satellite” agencies aggregating around one “master agency.” The success of that plan-175 independent agencies throughout New England, writing a collective $205 million in premium in 2003-led Masiello to employ the strategy on a national basis in 1996 as the Strategic Independent Agents Alliance. By the end of 2003, SIAA had grown to include more than 1,400 agencies in the U.S. and Canada, writing a total of $3.1 billion in premium.

SIAA's structure revolves around two types of agencies, the larger “master agency” and the smaller “independent strategic member” agency. “The 62 master agencies we currently work with are effectively functioning as 'hub' agencies, and they agree to recruit our independent strategic members,” Masiello explained. “When we enter into an agreement with a master agency, we give them an exclusive territory, and we give them training that includes a list of prospects and a customized direct-mailing program.” Masiello said that each SIAA exclusive territory has about 500 strategic member prospects.

Masiello said master-agency prospects must have good relationships with their carriers. He said they “run the gamut” in terms of premium volume. “Most of the smaller master agencies write between $8 million and $9 million, and some larger ones are closer to $60 million,” he said. Master agencies recruit smaller ones that fit what Masiello calls the “one-to-nine” criteria. “That size-one to nine employees-tells us pretty quickly what an agency writes in volume, since we're familiar with the agency's market area,” he said. He added that both master agencies and strategic members must annually provide SIAA with a certificate of their E&O insurance.

Master agencies function roughly similar to an MGA for their strategic members, Masiello said. “The master agency works to get direct appointments with national and large regional markets for the strategic members,” he said. “You could liken that to the function of an MGA, except our master agencies have access to a large number of markets and products, rather than specializing.”

Masiello mentioned “Access Plus” as a program that can be of particular help to small agencies. “Access Plus is for programs that I call 'onesies' or 'twosies,'” he said. “An example is the small agency that has a personal relationship with someone who owns a car dealership. The small agency wants to write just that one account, but doesn't have access to a market for it. The master agency does, and will write that account for the strategic member for a small fee.”

In addition to market access, Masiello said, SIAA provides master agencies and strategic members with technology and other support. “All our master agencies use a master agency management system we've developed,” he said. “The system has reporting and accounting functions and tracks premium volume by carrier.” He added that while strategic members don't use a uniform agency management system, SIAA obtains “deep discounts” on a number of widely used systems.

Masiello said SIAA provides training for both types of agencies. “We set up about six sales and product training sessions a month for our master agencies,” he said. “They can participate through their phones and computers.” In addition, Masiello said, SIAA maintains a Web site that provides 600 to 700 leads a month for strategic members.

All payments to the master agencies and SIAA itself are determined by the growth of the strategic member agencies, Masiello said. “Everything we do is premised on growth,” he said. “When a strategic member grows, the master agency and SIAA are paid a small portion of the growth and receive a small piece of ownership in the growth.” He stated that when SIAA receives contingency and profit-sharing payments from carriers, it retains a small percentage of the bonuses and distributes the rest of them to the master agencies and strategic members.

SIAA members sign individual agreements that include an obligation to remain a member for a defined period, Masiello said, adding that SIAA sometimes helps with perpetuation, too. “We don't purchase an agency if local ownership is exiting the insurance industry,” he said. “But we will broker a deal if we can help one of our members. For example, when the ownership of one of our master agencies was ready to sell, we brokered the sale of the agency to another one of our master agencies. That helped us and the master agency that made the purchase, but it also helped our independent strategic members that had been served by that master agency.”

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