By Thomas A. McCoy tommccoy@in.net
Mergers of property/casualty insurance companies have had a sizable impact on independent agents in recent years. However, none of the deals done so far is likely to be any more important in defining the future of the independent agency system than SAFECO's acquisition of American States Insurance Company.
The $2.8 billion acquisition, which was effective October 1, creates the largest independent agency force company in the country: about 8,000 agents. The combined book of business is made up mostly of the traditional bread and butter accounts of independent agencies: personal lines--SAFECO's strength and small commercial--American States' strength.
"Obviously we believe in the independent agency system because we're spending $3 billion to put all our chips in that basket," says Boh Dickey, president and chief operating officer of SAFECO Corporation.
The acquisition comes at a time when several major insurance companies are experimenting with other ways to sell mainstream business--setting up alliances with non-industry organizations, while stressing niche products to their slimmed-down agency forces. SAFECO may look like something of a contrarian.
"We've been contrarians before," points out Randy Stoddard, president of SAFECO Property & Casualty. "A few years ago we stayed with the auto market when other companies didn't. Now the rest of the industry has gotten interested in auto business again."
SAFECO's acquisition itself differs markedly from some other P-C company mega-mergers of recent years. When Travelers acquired Aetna's P-C business and CNA acquired Continental, the firms being acquired were looking for a change in direction. The surviving companies needed to eliminate overlapping operations and forge new entities. SAFECO, on the other hand, intends to run American States essentially "as is."
The SAFECO executive team includes (clockwise from left): W. Randall Stoddard, president, SAFECO Property & Casualty; Richard E. Zunker, president of SAFECO Life; Boh A. Dickey, president and chief operating officer, SAFECO Corporation; and Roger E. Eigsti, chairman and CEO, SAFECO Corporation.
"The more you can offer your agents, the better off you are," explains Dickey. "What excited us from the beginning about American States was their strength in small commercial business. We didn't have that product line to offer our agents. They do a good job in it, and it rounds out the product line for our agents now so that we can sell total accounts."
Several companies reportedly bid to acquire American States, an Indianapolis, Indiana-based carrier which had been 83% owned by Lincoln National Corporation. American States also gives SAFECO complementary geographic diversification: SAFECO has a high concentration of business in the West; American States writes most of its business in the Midwest and East.
Because of these geographic differences, many agents of the two companies are just now learning about the new product offerings available to them and how the new piece of the company might help them. Prior to the acquisition, only about 800 agents had both of the insurers in their offices. Even those agencies representing both carriers often used SAFECO only for personal lines and American States for commercial.
The Maguire Agency in the Twin Cities area of Minnesota, writes about $20 million of total premiums, about 25% of it personal lines. Although American States is an important company for the agency in commercial lines, it writes very little personal lines with the company. "If SAFECO were to offer something attractive in personal lines, we might want to take a look at it," says Chuck Clysdale, agency principal.
What Clysdale and other American States agents like about the company's commercial lines operation is responsiveness from underwriting managers and others they deal with at American States.
"If we're working on a risk, we'll call or e-mail the company underwriter and ask if he'll take a look at possible credits," says Jim Bransford of Bransford Insurance Associates in Tampa, Florida. "He'll get right back to us, and say, 'I'll see what I can do.' The next morning we'll have an e-mail from the company with a quote."
"You have to be responsive in this competitive commercial lines market," adds Gary Lahr of the $11 million Lips & Lahr Agency in Bismark, North Dakota. "We like the way American States does business, and we'll keep our fingers crossed that it will continue as it has."
Lahr categorizes his agency as a generalist and writes 30% of his volume in personal lines. "SAFECO is strong in personal lines in the states to the west of us," he adds, "and that could be a positive thing for American States in North Dakota."
The acquisition has been well received in the investment community, as analysts praised the complementary nature of the companies' product lines and geographic focus. SAFECO successfully raised $680 million in a stock offering to help finance the acquisition. Now the process of actually putting together this large and far-flung operation begins.
All the agencies in the combined SAFECO-American States agency force that write less than $5 million in total commercial premiums (with all the companies in their office) will be offered a commercial appointment for the products underwritten by American States Business Insurance (ASBI). The focus of ASBI is on businesses with fewer than 50 employees.
Those writing more than $5 million in commercial premiums will be offered contracts in SAFECO Commercial, where the focus is on middle market business. "It's possible," Stoddard says, "that some agencies could have both ASBI and SAFECO Commercial contracts because they might have a small commercial unit in what is otherwise a large commercially focused agency.
"Our base commission rates are virtually identical between SAFECO and American States," says Stoddard. "We have a contingent bonus structure which rewards larger and more profitable relationships. It can be very significant. Our largest bonus last year was about seven figures."
Dick Zunker (left), president of SAFECO Life, chats with Randy Stoddard, president of SAFECO Property & Casualty.
To participate in the bonus compensation arrangements an agency must write $200,000 in premiums with the company. However, because SAFECO is assuming the contracts of a large number of small, rural agencies from American States, it has decided to allow these agencies three years to reach the $200,000 level and not withhold the bonus compensation from them during that time.
"It gives us time to consider whether to structure a different contract for these agents," Stoddard explains. "About a quarter of the American States agents are in rural areas, which we define as towns of less than 10,000 people that are not adjacent to metropolitan areas. They write about $400 million with American States and as a group they tend to be more profitable than other agents. So we're trying to expand the business we write through these agents."
If there is a question for American States agents about possible changes in direction, it would seem to be in personal lines. The American States combined loss ratio and expense ratio in personal lines last year was 109.3%; SAFECO's was 98.3%. Will it be difficult for SAFECO to assimilate American States' personal lines business or write new business through these agents?
"I hope not," Dickey says. "I'm pretty optimistic ... I like to think our expertise in personal lines is more than just taking the cream off the top. It's more matching the price with the risk. There probably will be a period of some getting used to (our procedures) for our agents, but I'm very positive in thinking that over a period of time we can pick that business up into SAFECO, make it prosper and not lose a lot of it and make those agents feel good about SAFECO too."
SAFECO has achieved its enviable personal lines loss ratio at the same time it has been meeting its goals for growth in personal lines. Five years ago they wrote $1.3 billion of personal lines and set a goal of $2 billion by 1997. They reached that goal by 1996. Five years ago, when they had 117 of their agencies using customer service centers, they set a goal of having 25% of their personal lines agencies using service centers by 1997. Today that number is just under 25%.
SAFECO offers the customer service centers to its agencies but does not make them mandatory. Those using the service centers receive a commission reduction of two percentage points on their personal lines business. "It does free up agents to sell more than they think it will, so the ones who use the service centers usually find it's very worthwhile," say Dickey. "But for those who want to do the service themselves, that's fine."
SAFECO receives high marks from its agents for their automation capabilities. Diana Solle, Missoula, Montana, branch manager of Western States Insurance Agency, says, "In automation SAFECO probably is tops of the five personal lines companies in our office. We enter policy information, upload it to the company and it's back to us the next day."
SAFECO plans to run both the American States' automation systems for small commercial business and the SAFECO systems for personal lines for two years. Eventually the company expects to merge the systems into one.
Life and financial services business is another important piece of SAFECO's post-acquisition strategy. Here too, SAFECO and American States products complement each other. "American States Life has written almost exclusively individual life business, especially universal life and term insurance," explains Dick Zunker, SAFECO Life president. "They wrote a very small amount of annuities, and no 401(k) business."
To the American States portfolio of basic life products, SAFECO Life adds a range of strong variable products. "Over the last two years an ever-increasing percentage of our sales has come from the variable sector," says Zunker. "In universal life and annuities our sales of variable products now outnumber our sales of traditional products. We've also recently launched an index-linked annuity that is having excellent response."
Because of the strong position American States occupies in the under 50-employee commercial market, SAFECO envisions new opportunities for business life insurance and 401(k) business. American States brings another asset to the table--a recently-developed work site marketing program. SAFECO plans to add its own financial services products to the life and disability products American States offers through work site marketing.
"We have a lot of financial stability and stability in management. We can partner with you, and you can count on us being there down the road."
Boh Dickey, President and COO of SAFECO Corporation
The question for SAFECO Life, as for other life companies marketing through the agency system, is whether P-C agents will take advantage of these opportunities. Zunker sees evidence that they will. "We think the old 80-20 rule--80% of your business coming from 20% of your producers--is changing considerably." As an example, he says, "We've just launched a 401(k) training seminar for agents and we had to double the number of workshops to accommodate the agents that wanted to attend them."
SAFECO, with its reputation for personal lines profitability, has always been a respected and important player in the independent agency system. By its own admission, it also has sometimes been seen as "dull, conservative or boring." With its acquisition of American States, it has become a much more important player in the independent agency system, and possibly not as "dull."
"What we want to say to agents is there are going to be a few very good surviving independent agency companies in the future and even fewer companies that will work with main street agents as we do," says Dickey. "So trust us, we have a lot of financial stability and stability in management. We can partner with you, and you can count on us being there down the road." *
©COPYRIGHT: The Rough Notes Magazine, 1997