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TURNING CASH FLOW INTO CASH Oak Street Funding helps agencies collateralize their revenue stream By Dennis H. Pillsbury
One of the interesting problems that agencies often face is that, despite an impressive bottom line, there may not be a large amount of cash on hand for growth, emergencies or other contingencies. The business is dependent on cash flow and, unlike insurance companies, doesn’t have enormous capitalization. While insurance companies often depend on investment income from billions of dollars of assets, surplus and reserve funds, insurance agencies have to carefully husband their cash flow to pay current expenses and, hopefully, to realize a profit at year end. And, because of this lack of tangible assets, agencies often find it difficult to borrow funds when there is a need for cash for acquisitions, buy-outs or other working capital. As one agent noted, “Banks want to buy us, but they won’t lend us money.” Oak Street Funding, Carmel, Indiana, was formed in June 2003 to help agents overcome this difficulty. And, it is interesting to note that banks initially provided Oak Street with $15 million because “they liked what we were doing,” says Richard (Rick) S. Dennen, president and CEO. More recently, on March 28, 2005, Oak Street Funding announced the closing of a $50 million syndicated bank group credit facility, led by JP Morgan Chase Bank, N. A. Clearly there was a need for a company that would lend to agencies as evidenced by the fact that Oak Street Funding already has 127 closed loans to agents and 335 applications in the system for around $80 million in loans. The closed loans represent nearly 75,000 individual insurance policies and $11.7 million in renewal commissions. I met with Rick in his office. He explained how the company came into being. “I was brought in by Oak Street Mortgage LLC, to help them diversify their revenue stream. The mortgage business is cyclical and Oak Street wanted revenue sources that were not subject to the same cycle as the mortgage market. One of the markets we looked at was insurance agencies. There were many others as well,” he added, pointing to a large filing cabinet drawer that contained some of the research on various markets that Oak Street investigated. “Insurance agencies are a perfect fit for us,” he continued. We are a cash flow business that lives and dies by the value we provide to customers. That value isn’t recognized by banks, but it is recognized as an asset by us.” Once it was decided that insurance agencies were a viable target, Oak Street had to find a way to determine the risk inherent in making a loan with the cash flow from a book of business as collateral. “We created software to predict the future cash flow stream,” Rick said. The software takes information from the book of business that is being used to collateralize the loan. Oak Street looks at the carriers underwriting the book, incorporating the A.M. Best rating into the tabulation. It also looks at the individual agent’s credit rating, the commission revenue from the book, the origination date for certain products in the book, information in D&B, whether the agency is part of the Better Business Bureau, how much of the cash flow is being collateralized, the length of the loan, and so on.
“We used an outside actuarial firm to help us with the insurance-specific aspects,” Rick pointed out. This includes information on the expected renewal of a particular type of policy underwritten by a particular insurance company. For example, one of the first loans made by Oak Street was collateralized by a book of long term care policies underwritten by an A rated company. The agent’s personal credit rating was not strong, but the book was solid because long term care products are almost always renewed and because the company underwriting the book had a long history in that particular line of business. The software takes all these factors into account and then determines the appropriate terms for the loan based on the calculated risk of the collateral. Again, returning to the example, Oak Street originally came up with a relatively high rate of interest on the loan because the agent wanted to collateralize almost 100% of the cash flow from the book of business and because he wanted a fixed rate. They worked with the agent to reduce the rate by suggesting he reduce the amount being requested and changing the loan to a variable interest rate. “In essence,” Rick noted, “the agent has the opportunity to determine his or her own interest rate by working with us on the various parameters of the loan.” Once the loan is secured, the agent provides Oak Street Funding with a first priority security interest in the book of business that is being used to collateralize the loan. The agent keeps the customers; Oak Street keeps track of the policies. The commission check is reconciled in the automated system and, in the case of books of business that may produce commission that is in excess of the amount needed to pay off the loan, a check for the difference is sent to the agent. “I have to credit Steve Alonso (chairman and CEO of Oak Street Financial Services, Inc., and its subsidiary, Oak Street Mortgage) for predicting three years ago what was going to happen in the mortgage market and deciding to find a creative solution to the cycle. Oak Street Mortgage is a great partner. The people there are very smart and very ethical. They’ve worked together for 15 plus years in different companies and have grown thanks to the talented people that Steve has brought in.” “Oak Street Funding has the same model,” Rick continued proudly. “We hire talented people and let them make their own decisions. They don’t have to come running to management every time a question comes up. We encourage them to make creative decisions in working with agents. If the loan is over a certain size, naturally, we require a face-to-face with the agent. This is a relationship business and that’s really the best way to gauge a potential client. They rely on providing value-added service to clients and so do we. If we get a good ‘feel’ for a prospect, then there’s probably a fit there.” You don’t have to sit down too long with Rick before you realize that he enjoys what he’s doing. His voice is bright with enthusiasm. As he admitted, “We have a passion for the business.” This passion has been transformed into a company that is dedicated to understanding insurance agency operations so it can provide agents with the capital they need for mergers, acquisitions, succession planning, working capital or other exigencies. * For more information: |
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