Michael Feeney established The Agents Alliance to help agency owners increase the value of their firms.
What do you get when you combine a perennially soft market, pressured independent agents in search of profitable strategies, and a seasoned industry veteran with a novel and exciting idea? Welcome to The Agents Alliance, an organization that's dedicated to helping agents achieve a larger share of the profits on the business they produce and own. In this article we'll meet Michael Feeney, a successful insurance executive who came out of retirement to oversee the development of The Alliance, and we'll learn about the group's principles, objectives, and structure.
Feeney's name may be familiar to agents who have done business with CoverX Corporation, an underwriting management firm founded in 1972 that specializes in program and niche business. After building CoverX into a successful national organization, Feeney and his partner moved into the Bermuda captive scene, where they began underwriting on their own behalf in the late 1970s. To capitalize on the market dislocation of the mid-1980s, they formed two domestic insurers, and in 1991 they acquired a third domestic specialty insurer. Along the way, Feeney established a number of regional claims and risk management companies, as well as a national management facility for public entity self-insurance pools.
Birth of a brainstorm
The idea for The Agents Alliance, Feeney explains, came to him during a May 1997 meeting of Insurance Marketing & Management Services. "I was part of a panel discussion on the problems and opportunities facing agents," he says. "The participants were executive officers of insurers and reinsurers, with one exception--me. I was the exception because I was the only member of the panel who had actually been an independent agent." During a question and answer period after the panel discussion, Feeney was asked a number of questions by agents. The first was, what could independent agencies do to survive and prosper in the years ahead? The second question was whether Feeney thought it was still possible to make the transition, as he had, from agency owner to insurance company owner.
"I responded that agents could best ensure their survival by exercising more control of their client base, but that could happen only if they were able to take control of the underwriting function," Feeney says. "That's what we did in the 1970s when we formed CoverX."
He went on to explain that CoverX began to operate much like an insurer, except that it didn't have a capital base or licenses. "Like an insurance company, we began consolidating and underwriting business from multiple agency sources," he says. "Once we had control of underwriting, we were able to leverage the value of our business into a captive insurance arrangement wherein we had virtually no money at risk but received the lion's share of the underwriting profit and investment income. With the success of the captive venture, we were able to capitalize two domestic companies, which later were merged, and purchase a third insurer. Having control of those facilities allowed us to take advantage of other opportunities that presented themselves, and a number of those opportunities proved to be extremely profitable."
From agent to company owner
Agents attending the IMMS panel discussion were intensely interested in how Feeney's organization had gone from agent to company owner, he says, and they wanted to know if it could still be done. "I wanted those agents to realize how easy it could be to make the transition from agent to company owner if they had a defined agenda, would make a commitment to act in concert, and knew how to assemble the pieces of the puzzle to get the job done," Feeney says. "I knew that if those agents could build such an operation, they would have a tremendous advantage in the marketplace. With just a minimal capital outlay, the group could develop an underwriting facility that could very easily evolve into an insurance company, exactly as we did at CoverX."
At the same time, Feeney continues, "I realized that an agency group would be in the best possible position to build a better underwriting model, one centered on the idea that the future will likely belong to those who are able to most effectively stratify commercial business by class and subclass. If in fact the agency group developed a successful model, in the years ahead it would probably find itself in a dominant position for the classes it was underwriting."
Feeney's comments at the IMMS session on how agents could protect their existing client base, expand revenue opportunities for their agencies, and create new avenues of wealth for themselves are the foundation of The Agents Alliance.
Underwriting efficiency is critical
The challenge for independent agents, as Feeney sees it, is to refuse to be put out of business by the inefficiencies of the companies they represent. "At The Agents Alliance, our number one job has been the development of a more efficient underwriting/marketing model, and we have accomplished this task," he says. "Enormous resources are being invested in attempts to wrest control of the client base from the agent--and this includes efforts by many of the companies agents now represent. Unfortunately, too many insurers refuse to critically evaluate their own business plans, preferring to regard the agency system as the source of their problems. Far from being the problem, we're convinced that independent agencies, acting in concert, will be the salvation of many of these companies," Feeney declares.
The Agents Alliance, Feeney emphasizes, is in no way a threat to the agency-company relationship. In fact, he believes that an agency group, by consolidating specific classes of business through a modern, efficient underwriting facility, will be the salvation of many insurers.
"We need their capital and licenses, and they need our customers." Feeney says. "What we're after is a true partnership between agency and company."
"As the underwriting officer of one of our companies, suppose I were approached by a group of agents with a $20 million book of stratified business who said, 'We agents will provide the marketing, underwriting, and customer service support. You, the company, can help build the underwriting template. What we want in exchange is a share of the underwriting profit and investment income.' My response," Feeney says, "would be that this is an ideal relationship for both the agency group and the company. The company gets a controlled book of low-expense business; the agents, in addition to commissions, will be building an income stream based on underwriting profit and investment income." What's more, he points out, "Generating an underwriting profit and investment income from business controlled by an agency group would have tremendous appeal in the investment community.
"To make that income stream a reality, he explains, "We've developed a facility that allows our agents the economic benefits of owning an insurance company without their having to place capital at risk."
A matter of control
As we approach the new millennium, Feeney observes, "A revolution is under way in the insurance industry; and, as in all business revolutions, those who are farsighted and prepared will profit by understanding, shaping, and controlling market forces. What is unique about current market conditions are the very high values being placed on viable books of business. In this era of rapid consolidation, we see insurers and reinsurers buying competitors for as much as four times book value or three times annual premium writings," Feeney comments. "But for agencies, it's a radically different story. They're still being valued at only 1 to 1.5 times annual commission income. That's a huge disparity. The reality is that enormous wealth has been created from business produced and owned by independent agents, without those agencies receiving any part of the financial bonanza."
The Agents Alliance, Feeney explains, is a group of independent agents whose aim is to rectify the valuation disparity. Currently operating as an unincorporated association, The Alliance is based on the premise that whoever controls the underwriting and customer service functions will control the client base. The Alliance's stated objective is to "assemble the resources that independent agents will need to survive and prosper in today's highly competitive and rapidly changing business world." Without control of these resources, Feeney believes, agents very likely will lose control of their client base.
Financing The Alliance
The Agents Alliance is not structured as a profit center, so members don't pay a flat annual fee. Instead, they're allocated a pro rata share of operating expenses on a quarterly basis. Any revenue The Alliance generates will either be used to offset expenses or distributed to members. Feeney believes the group will generate a double economic windfall for its members. First, he foresees an increase in agency revenue. He also sees substantial value being added for agency owners by the creation of new ventures and additional revenue streams. "I'm convinced this group has the potential for substantial equity growth," he asserts. "If I didn't believe we had the ability to at least double the value of the business produced by agency owners, I wouldn't have gotten involved."
The premium dollars generated by the producing agency often spawn a host of revenue for parties usually unrelated to the agency, Feeney points out. These include MGA overrides, underwriting service fees, claim management fees, risk management services, and reinsurance brokerage. "Whenever practical, we will create organizations that add value to our members' agencies," Feeney says. "At CoverX/First Mercury, we always looked for opportunities to generate additional revenue from the business we produced."
A united front
Despite the power of direct response insurers, Feeney believes strongly that personal lines can continue to be a big money-maker for independent agents. The huge American personal lines market, he says, holds enormous opportunities for Agents Alliance partners. "With all the hoopla about direct response, almost everyone has lost sight of the fact that nearly 90% of personal lines business is being placed through local agents," Feeney comments. While admitting that direct response companies have a decided expense advantage, Feeney contends that "The expense problem in the American agency system does not lie with local agents. The problem is with the companies they represent. I know this is heresy in today's insurance world, but a successful model is operating that exactly proves this point. More than 50 agencies are now using this model, which eliminates the duplication of effort between companies and agencies. Everything is done at the agency level, including all the underwriting, which is template driven. The net result is minimal company staff and very healthy agencies offering products that compete successfully with those of direct response insurers."
To keep personal lines business and increase their share of it, Feeney says, "Independent agents must embrace technology. I see our agents joining together in a large network, under one banner, increasingly driven by the Internet, with one advertising message, and with an eye toward maintaining and expanding their control of the business."
Despite the success of the direct response companies, he notes, "There's one big lesson to be learned from their success, and that is that large national service centers generally provide lousy service. A big reason for the success of our model is that it affords demonstrable efficiencies in servicing business at the local level."
The Agents Alliance intends to employ a similar model for commercial lines, Feeney says. "An agency group can be a significant, if not dominant, player in almost any market segment in which it chooses to compete, provided the agents are willing to invest some time and a little money and consolidate the business they write through their own underwriting facility," Feeney asserts. "To develop a viable program, you need business, underwriting expertise, and a company partner. One hundred agents with an average of only $50,000 per agent would have $5 million in premium. That's enough business to get a program started. With the resources of our agents as a starting point and a 7% to 10% underwriting expense allocation, plus back-end profit sharing as an inducement, we could go out and buy the very best underwriting talent available. The participating agents might have to guarantee $200,000 to $300,000 in startup costs, but that amounts to only $2,000 or $3,000 each--a small price to pay for the opportunity to control a profitable program."
Embracing technology
A serious problem facing the independent agency, Feeney believes, is the outdated information systems of many agency companies. "Property and casualty insurers were among the first to automate, and in many cases they've been the last to update," he remarks. "Their systems originally were designed to serve their accounting and financial reporting needs, but they're seriously limited in the underwriting and marketing areas."
At The Agents Alliance, Feeney says, "Designing an underwriting operation based on the stratification of business by class has allowed us to explore the best way to use current technology. I'm convinced that whoever is first able to assemble a meaningful risk profile and loss data for a specific class, then manipulate that data with modern database technology, will have a big advantage in building underwriting templates--and that means a long-term competitive advantage in the marketplace." At The Agents Alliance, he says, "We're not interested in simply competing in specific classes. Our intention is to dominate those classes in which we choose to participate."
Looking ahead
What does the future hold for this bold fledgling organization? "The ideal organization," Feeney says, "would have 300 to 500 agents--agents with the vision to see that they can, in fact, control their own destiny. Not only do we welcome individual agencies, but also we're particularly interested in sharing our vision with existing agency groups. The American agency system has always been the repository of bold and imaginative talent. The challenge today is to lead that talent in new and profitable directions." *
The author
Elisabeth Boone, CPCU, is a copy manager for a major health sciences publisher based in St. Louis. She is a former member of the editorial staffs of Best's Review and American Agent & Broker.
©COPYRIGHT: The Rough Notes Magazine, 1999