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

Recently, we talked with executives from a number of these sortsof organizations. They differ in size, in services offered and inthe details of their agreements with their member agencies. Whatthey have in common is proof of the adage that there can bestrength (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 agenciesoperate within Texas, although the agency is considering expansionto nearby states. CAA's members collectively have more than 400employees and wrote close to $300 million in premium in 2003. TheHartford named CAA its southern region “agency of the year” in2003, according to Jim Whorton of Whorton Insurance Services inAustin, 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 ofall 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 shareboth in CAA and in CAA's premium finance company,” he said. Inaddition, Whorton said, each agency pays monthly dues equal to lessthan 1% of its P/C commissions. A small staff at CAA's corporateoffice in Austin handles day-to-day operations, while agencymembers volunteer for committees that run the organization.

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

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

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

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

CAA provides both general expertise and specific training formembers. “Several of our agencies have expertise in agencytechnology, and they're available to help other members with ITissues,” Whorton said. “We also have an automation committee thatstudies technology products both for the group and for individualmembers. In addition to IT support, we sponsor training seminarsfor producers and management at our agencies. We also providemarketing support, such as blast faxes and e-mails, for ourmembers.”

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

CAA has the first right of refusal to buy an agency if its ownerwishes to sell to an “outsider,” but not if the agency plans aninternal succession. “We have provisions in our operating agreementto value the agency if we choose to purchase it,” Whorton stated.“The provisions are fairly typical regarding a multiple of earningsand other factors, but the valuation process can vary greatly.” IfCAA purchased a member's book of business, Whorton said, individualcircumstances would determine if a new manager would be recruitedor 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 industrybecoming more and more refined in its taste,” said William (“Twig”)Branch of the Iroquois Group. “An increase in specialization bycarriers, combined with the continuing need for independent agentsto be generalists, is the market force that drives us.”

Since its founding in 1977, the group has grown to include morethan 1,400 independent-agency members. Membership has long beenconcentrated on the East Coast, but Branch said a recently signeddeal with the Independent Community Banking Association aims toexpand the group's presence in the Midwest. With final 2003 numbersnot yet in, Branch estimated that Iroquois members wrote $200million in premium through the group, a number he says representsbetween 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, andmembers operate as our sub-producers when they access the marketswe provide. By combining the business our members write, we createthe volume that makes the markets accessible.”

Branch referred to the group's operating agreement as the“partner plan” and said it includes separate schedules fordistributing commission and bonus money. “Commission earned throughour carriers is sent directly to us,” he said, “and we distributeit to our members, based on their volume. Our agreement usuallyinvolves us keeping around 20% of the premium and distributing theremaining 80% to our members. We also distribute our profit-sharingbonuses, 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 upthe two and providing training and other support to agency members.“Besides training our members to work with our carriers, we havewhat we call 'Iroquois Benefits,'” he said. “We have obtained alist of discounts and other deals we've negotiated with vendorsbecause of our volume, and we pass those along to our members.”

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

In addition to the split of commission and contingencies, Branchsaid, members pay a membership fee of $150 a month. They must havea high-speed Internet connection, but Branch said no particularagency management system is required. “Our accounting system is100% direct-bill from our carriers. Our members don't even reallyneed a computerized accounting system,” he commented, although mostof them have an agency management system, because it's part of theprofessional character we seek in our members.”

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

Branch explained that Iroquois members are free to leave thegroup with a minimum of restrictions. “Our members' relationship tous is somewhat like being our customers,” he said. “Depending onwhat state they're in, our members can leave by giving us between30 and 120 days' notice.” Branch said that the group experiencesabout a 10% annual turnover rate. “Most of those agencies arebought by other agencies outside the group,” he said. “Since wework with small agencies, they are often acquisition targets.”Members that leave the group are free to retain their group-placedbusiness, Branch said, but only if they move the business to newcarriers. “Our agreement does include a covenant not to compete,”he explained. “If an agency joins us and gets an appointment withone of our carriers and then leaves, they have agreed not to accepta direct appointment with that carrier. However, they remain freeto retain that business if they move it to another carrier that wedon't work with.”

Branch said that Iroquois sometimes becomes involved in agencyperpetuation, though the practice is not part of the operatingagreement. “We'll get involved in perpetuation if an agency asks usto,” he said. “Most frequently, we'll find another member who'sinterested in buying them.”

The Leavitt Group
(www.leavitt.com)

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

Leavitt Group Enterprises (LGE) owns 60% of each Leavitt Groupagency, with 40% owned by local co-owners and managers. Each agencyis a separate, independent corporation. Leavitt and his fivebrothers own 95% of LGE, which was founded in 1952. The remaining5% is owned by 38 individual co-owners and key employees. MarkLeavitt serves on the board of directors and is the group'saffiliation 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 incommission, with quite a variance among agencies. “We have agenciesin towns of all sizes,” he said. “Our smallest member is probably a$300,000 agency, and our largest earns a little more than $10million in commission.” Members contribute approximately 1% to 2%of their commission to a “home office allocation” that supports thegroup's central office operations. Contingencies are distributedback to the agencies, and the Leavitt Group maintains a masterE&O policy for all its agencies.

Leavitt said the group actively seeks acquisitions and considersan agency's financial strength, company relations and marketpotential. “We look for agencies in thriving communities, and wewant to see several years of an agency's financials,” he said.“Most important to us, however, is the quality of people in anagency and the relationships they already have with theircarriers.”

The group acquires about seven to 12 agencies a year, Leavittstated, in several types of transactions. “In some cases, we addagencies to our membership. We also acquire books of business toroll into our existing agencies.” Leavitt added that the group alsohelps establish “spin-off” agencies. “Sometimes a producerapproaches us with a half-million-dollar book of business and says,'I always wanted my own agency,'” he explained. “We'll help himdevelop 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 leavesthe agency. “The contract we sign when we first affiliate spellsout the process we would use, including how we would value theagency,” he said. “We've never decided not to buy when a co-ownerleft, but we keep the 'may-buy' for a reason. We don't want someonegoing 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 AgencyAssociation (LGAA), Leavitt said, which itself includes severalservice and profit-center entities. One of those is Agency Programsand Placement Services (APPS), which helps member agencies withmarket access. “Our members maintain their own contracts withcarriers as much as they can,” Leavitt said. “But when a memberdoesn't have the capacity to obtain an appointment with a largeregional or national carrier, they can access those markets throughAPPS.”

Allegiance Premium Finance, another unit of LGAA, has been bothhelpful and profitable for the group's members. “Last year we didabout $37 million in loans through Allegiance,” Leavitt said. “Inall, LGAA generated about $1.2 million in profits, which were thendistributed back to our agencies.”

The LGAA Service Division provides training, tech support andother services for its members. “LGAA runs a wide-area network thatinterconnects 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 softwareupgrades and backup services that otherwise would have to come fromthe system vendor.” Leavitt added that members pay a small fee,usually less than what they would pay for similar services on theopen market, to support LGAA.

Other service-division facets Leavitt described includeclassroom and Internet-based training for member agency employees,communication assistance, an annual agency conference, centralizedpayroll services and an intern program. “We do a lot of training tocreate a more professional environment for our agencies,” hesaid.

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

Networked Insurance Agents (NIA) ended 2003 with 690 independentagency members (affiliates) and plans to about 500 more by the endof the year. Affiliated agencies-600 of them in NIA's home state ofCalifornia-wrote $92 million in premium through NIA in 2003. Theorganization's expansion plans include most Western states, as wellas Texas, in 2004, with continued expansion across the country insubsequent years. Funding for NIA's growth comes from a majorfinancial institutional investor.

“Our principal role is to help smaller agencies whose premiumvolume can't support preferred market appointments,” said LeeJohnson, president of NIA. “We function as an underwritingplacement facility for our affiliates.”

Johnson explained that a force of nine “territorial sales vicepresidents” (TSVPs) are responsible for recruiting, training andsupporting member agencies, who usually write $5 million or less inannual premium. “We have some affiliates with as many as 10 agencyemployees, and that's a pretty good-sized agency for us,” he said.“Many of our affiliates have between one and three producers andthe same number of support staff members.” He added that NIAcarefully screens potential members, using consistent criteria. “Werequire prospective affiliates to submit information about alltheir current carrier appointments, including the premium they'vewritten and their loss histories,” he said, “as well as proof oftheir E&O coverage, a copy of their licenses, their agency planand 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 accountsthey write through NIA's insurance companies. “We share commissionwith our affiliates on a scheduled basis, by type of policy,”Johnson stated. “Affiliates typically receive two thirds of thetotal commission from the carrier, which sometimes appears evenhigher, because our volume earns us high commission rates from ourcarriers.” Johnson also noted that NIA has begun an incentive planfor agency members. “We offer affiliates a plan that guaranteesthem up to 2% of their written premium, based on their growth,size, retention and hit ratio,” he said. “Agencies can earn thisbonus even if NIA doesn't earn contingencies from itscarriers.”

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

While the organization has few technology-related requirementsfor its members, Johnson said NIA is quickly working to providemore high-tech services to affiliates that can make use of it. “Wecan accept business by e-mail, fax or U.S. mail,” he commented. “Atthe same time, we plan to develop a specific 'agent portal' foreach of our affiliates, that will allow them to submitapplications, work on quotes and look up the status of each oftheir accounts online. We expect to have this in placeshortly.”

In addition to its automation project, Johnson said NIA providesseveral levels of support for its affiliates. “Our territorialsales vice presidents provide marketing support and producttraining within their territories, and we send out a weeklymarketing publication to all members,” Johnson explained. “We alsoprovide accounting services for all business written through NIA,and we sponsor three annual conventions that last year attractedabout 1,000 agency employees. We frequently include courses for CEcredits at these conventions, and we use the conventions as anopportunity for our affiliates to meet some of the key people fromthe many preferred carriers we work with. Because of their size,most of our affiliates might not have this type of opportunity ontheir own.”

Johnson said affiliates own the renewals to business they writethrough NIA, and that agencies can leave the group with appropriatenotice. “We have no ownership of the agencies that affiliate withus,” he said. “They are free to leave with 60 days' notice.” Headded that affiliates who leave can even continue to place theirNIA business through the organization. “If an agency is in goodstanding when they leave us, they can leave their accounts inplace, for a fee that's usually about two additional points ofcommission,” he said.

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

Strategic Independent Agents Alliance
(www.siaa.net)

W

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

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

Masiello said master-agency prospects must have goodrelationships with their carriers. He said they “run the gamut” interms of premium volume. “Most of the smaller master agencies writebetween $8 million and $9 million, and some larger ones are closerto $60 million,” he said. Master agencies recruit smaller ones thatfit what Masiello calls the “one-to-nine” criteria. “That size-oneto nine employees-tells us pretty quickly what an agency writes involume, since we're familiar with the agency's market area,” hesaid. He added that both master agencies and strategic members mustannually provide SIAA with a certificate of their E&Oinsurance.

Master agencies function roughly similar to an MGA for theirstrategic members, Masiello said. “The master agency works to getdirect appointments with national and large regional markets forthe strategic members,” he said. “You could liken that to thefunction of an MGA, except our master agencies have access to alarge number of markets and products, rather thanspecializing.”

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

In addition to market access, Masiello said, SIAA providesmaster agencies and strategic members with technology and othersupport. “All our master agencies use a master agency managementsystem we've developed,” he said. “The system has reporting andaccounting functions and tracks premium volume by carrier.” Headded that while strategic members don't use a uniform agencymanagement system, SIAA obtains “deep discounts” on a number ofwidely used systems.

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

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

SIAA members sign individual agreements that include anobligation to remain a member for a defined period, Masiello said,adding that SIAA sometimes helps with perpetuation, too. “We don'tpurchase an agency if local ownership is exiting the insuranceindustry,” he said. “But we will broker a deal if we can help oneof our members. For example, when the ownership of one of ourmaster agencies was ready to sell, we brokered the sale of theagency to another one of our master agencies. That helped us andthe master agency that made the purchase, but it also helped ourindependent strategic members that had been served by that masteragency.”