Building Profits On Agent-Company Ties

Paying contingencies in stock gives new meaning to skin-in-the-game catchphrase

Hatboro, Pa.

As Penn-America Insurance Company Chief Executive Jon Saltzman leads a visitor down an office corridor, he'll pause to point to a number of the individual framed photos that grace the two side walls. The photos make up a gallery of general agents who sell Penn-America's surplus lines products, and Mr. Saltzman will have a personal reflection or two to share about each agent whose photo catches his eye.

The CEO's personal knowledge of each of his company's 66 general agents is just one of the obvious signs that agency-company relations are a big deal at Penn-America.

“Our relationship with agents is our product,” Mr. Saltzman said, explaining that “a lot of underwriting has to do with where you're placed in an agent's office.” To get a chance to be used first, he said, a company can either provide “a franchise” for the agency or it can offer a really tough product, like nursing homes.

Penn-America doesn't write nursing homes. It offers “a fairly soft E&S product line”commercial lines coverages for the smallest of small businesses, each of which each bring in about $2,000 of premium on average, he continued. “Our whole goal in life is to serve an elite group of entrepreneurial general agents.”

Mr. Saltzman went on to provide details of what he means by “franchise”a term he tosses around often to explain what Penn-America provides in return for a chance to be number one in an agent's office. The keys to providing “franchise” value are “relative market exclusivity,” direct access to company management, and a contingent commission plan that allow agents to own stock in Penn-America, he said.

Penn-America usually has just two-to-four agents appointed in a single state, he said, explaining the concept of relative market exclusivity. “If you were an agent in a state with a lot of competitors, and they all had Penn-America, we wouldn't be offering you anything of value.”

Mr. Saltzman notes that general agents don't want absolute exclusivity. “If you only have one agent, they don't seem to respect you as much as if they have one other competitor with you,” he said, suggesting that a little bit of competition seems to psychologically motivate agents.

General agents like Len LoVullo of LoVullo Associates in Depew, N.Y., value a second component of Mr. Saltzman's “franchise” conceptmanagement accessibility.

“I can pick up the phone and talk to Jon at anytime,” said Mr. LoVullo, who is a former president of the American Association of Managing General Agents. “It's a nice situation,” he added, noting that while his agency's appointment as a Penn-America agent dates back to around 1990, the personal friendship between the LoVullo and Saltzman families goes back to the 1960s or 1970s.

Mr. Saltzman's father, Irvin Saltzman, founded the Delaware Valley Underwriting Agency in 1947 and formed the risk-taking company, Penn-America, in 1976. His son, Jon, who became chief operating officer of a struggling B-plus insurer in 1988, and president in 1989, said he built what is now an “A-minus” company writing over $200 million in annual gross premiums by reflecting on his general agency roots and thinking about the kind of company he would want to represent.

Agents “reach me at home when they need me, and they can reach our underwriting and marketing vice president, any of the top officers of the company or the managers of their regions, the claims vice president, or the IT head, at anytime,” he said.

“You're dealing with a culture of businessowners. And businessowners don't stop working at 5 o'clock, mentally,” he said, noting that typical late-night calls range from routine company issuessuch as: '”Why didn't Penn-America write this risk?”to one businessowner wanting to pick the brain of another over a problem he or she is having with an employee.

The only disadvantage Mr. LoVullo can think of for Penn-America is size. “But being smaller, they can change course and respond to the market faster,” he said, adding that for a general agency, being able to deliver fast answers to retailers is the essence of success.

“They are very in tune with the marketplace” and with their general agency customers, said Karin Branscomb, vice president of Quaker Special Risks in Worcester, Mass. Commenting on the positive aspects of her agency's 14-year relationship with Penn-America, she also highlighted the responsiveness of front-line underwriters and technology services provided by the company.

Patti Nunnally, president of Royal Oak Underwriters Inc. in Richmond, Va., summed up a 10-year relationship in a similar way. “They're good to their agents. They're easy to work with. They listen to what you say and they act on it,” she said.

In one instance, Mr. Saltzman said that listening to an idea that came from an agent meant changing the company's contingent commission plan to allow agents to accept some or all of their contingency payments in the form of Penn-America Group stock. (Penn-America Groupa parent companywas formed and began trading on the NASDAQ exchange in 1993. Now listed on the New York Stock Exchange, the share price is just over $13.)

“What's the current parlance? Skin in the game? Well, our agents have skin in the game,” he said, referring to the alignment of financial interests that stock ownership creates.

Agents are rewarded for growing books of profitable business with anywhere from one-to-nine extra commission points, determined on the basis of a three-year rolling calendar-year loss ratio (including a provision for incurred-but-not reported-losses).

They can choose to take that extra commission in Penn-America Group stock, but it's not mandatory, Mr. Saltzman said, noting that he is extremely gratified that agents requested this option. In a typical year, he said 25-to-50 percent of the contingents are paid out in stock, adding that agents own about 3 percent of the shares in total. According to Mr. Saltzman, the largest agent owns over 80,000 shares of Penn-America stock.

“I have several agents that put [the stock] in their 401(k) plans for employeesThat's quite a responsibility. But think about the tie that we have to one another when that happens,” he said.

To Mr. Saltzman, another important “piece of franchise” is technology.

“Every company has technologyBut it's how you use technology that creates franchise [value],” he said. While he boasted that Penn-America built the first intranet in the E&S market?Penn-Link?allowing agents to share data with the company, and that Penn-Link was created entirely with “sweat-equity,” he seemed proudest of his firm's ability to implement a vision that allows for flexibility in the way agents communicate with the insurer through technological means.

“The thing about franchise is you don't force them to do it your way. You take whatever their data is?the way they want to send it to you?and you find a way to receive it,” he said, adding that the bureaucracy that gets in the way of ties with agents elsewhere is non-existent in his Hatboro headquarters.

Mr. Saltzman also said that, back when Web sites were new, Penn-America designed 30 sites for its agents, and still hosts about 10 of them?”with other insurance companies' stuff on them, by the way.”

“We're not scared of competition. Agents need a portfolio of companies in their offices,” he added.

“We believe that one of our roles is to be non-pushy consultants in the technology area,” he said, noting that while Penn-America is small by insurance company standards, it has a good amount of resources relative to the average agent.

While Mr. Saltzman said his company's average general agency relationship lasts 10 years and that, historically, no agent has voluntarily sought to terminate a contract, he admits that not every agency relationship is successful. Last year, Penn-America terminated three contracts, he said, noting that loss ratio issues that persist for a period of years might prompt a termination.

“We're patient with our business partners,” he said, noting that a single-year loss ratio problem wouldn't be an issue.

How does an agent get to be included among the select few appointed by Penn-America? “The canned answer is, you choose them by experience and reputation,” he said, adding that those ingredients take on added importance in the E&S business. “There's an advantage to having a family that's been in the business for 57 years,” he said, noting that in a universe of about 500 firms that know each other, nearly everyone in the E&S community is known to his family, or to someone in management.

“But we still have to go out and audit,” he said, which involves not just pulling 50-to-100 files, but talking to the people in the agency office?not just the principals, but the underwriters and clerical folks who “will tell you what's really going on.”

Another part of the appointment process involves bringing the agency staff that will be handling the business into Penn-America's Hatboro headquarters “to sit down with their regional underwriters, kick around ideas [and determine] if philosophies are in synch.”

“Like Reagan said to Gorbachev, 'We trust, but we verify,'” he noted. “The most disappointing thing?knowing as many people as my family does?is when you go through this process and someone you know turns out not to have a very good shop. Essentially, it's a relationship-ender.”

According to Mr. Saltzman, the appointment process can take as little as three months, “if the agent is very motivated.” But it can last years for some, he said, noting that the “relative market exclusivity” concept means that some agents pass muster easily, but have to wait for an opening in a particular region.

“Choosing the right agents is the most important underwriting decision you make, by far,” Mr. Saltzman said.

Reproduced from National Underwriter Edition, June 11, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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