David J. McManus, president of Artex Insurance Company, standing; and Peter J. Mullen, president of Artex Underwriting Managers Ltd., seated. McManus and Mullen direct the operations of the Bermuda-based Artex organization, which offers agency profit-sharing programs and rent-a-captive facilities.
A seemingly bottomless soft market ... insurer expense reductions ... challenges from direct writers and the Internet ...
Beset by a series of forces that are putting relentless downward pressure on their income, independent agents increasingly are seeking new avenues of growth and profit. One such avenue is programs that allow agents to receive a share of the profit on the business they place--an attractive option that traditionally has been available only to large brokers and their clients. Artex, a Bermuda-based facility partly owned by top broker Arthur J. Gallagher & Co., is now offering agency profit-sharing programs to smaller and mid-sized agents who have strong books of program business. In this article we'll learn why Gallagher established Artex, how it's organized, and how it partners with agents to produce and manage profitable business. We'll speak with Peter Mullen, president of Artex Underwriting Managers, and with David McManus, Artex Insurance Company president.
Established in 1998, Artex is an autonomous profit center that comprises three entities: Artex Insurance Company, a Bermuda-domiciled carrier whose primary function is to reinsure risk management programs in which the insured, sponsor, and/or agent share in both underwriting and investment income; Artex Underwriting Managers Ltd., which provides underwriting, accounting, and financial services to Artex Insurance; and Innovative Risk Services, Inc., based in Illinois, which provides sales and marketing services to retail brokers, including access to Artex.
Artex originally was formed--and still operates--as a rent-a-captive facility for qualified group, association, and single-entity clients. More recently, the organization has been courting an emerging market of significant size and promise: smaller and mid-sized agents and their clients in a variety of industries. "There are 44,000 agents in the marketplace, and the top 20 control less than 15% of the business," Mullen observes. "We're focusing on agents below the top 20, particularly on program business." Today, McManus notes, "There's a trend for mid-sized and smaller businesses to want the same options as larger businesses. In most cases these entities can't justify establishing a captive. Artex can bring the smaller agency tax and regulatory benefits that at one time were available only to Fortune 500 companies and their brokers."
The ideal agent
What kind of producer does Artex consider most desirable, and what types of risks does it entertain? "Our A-1 target is a retail agent with expertise in a specific class of business; that's fundamental to the success of the program," Mullen responds. "The business should be profitable from an underwriting standpoint. Also, the agent must have some financial wherewithal to satisfy the risk-taking element. Another important factor is strong agent-customer relationships." He continues, "We're looking for an agent who's been running a program for years and knows all about the class--and wants greater control over his or her business." A broad risk appetite is a hallmark of the Artex organization. "We'll look at almost any class of business so long as it's a homogeneous program, well managed, and profitable," Mullen says. "We'll also handle a heterogeneous block of small business that an agent controls, such as BOPs or small workers comp."
A number of factors might pique an agent's interest in an Artex agency profit-sharing program: the desire to capture more of the profit on a profitable book of business; downgrading of a current market, or service issues that indicate the need to move the business; the wish for unbundled claims service on a book of business; or the desire to diversify a book of business because of regulatory concerns.
How does it work?
To many agents, terms such as rent-a-captive, fronting company, and stop-loss reinsurance are the arcane jargon of an offshore insurance world that might as well be on another planet. One of Artex's aims is to demystify these and other concepts, and to show mid-sized and smaller agents the benefits they can offer. Once it has reviewed and approved an agent's block of business for a profit-sharing program, Artex enters into an agreement with the agent under which the agency will receive the underwriting profit and investment income on that business. Clients are issued a first-dollar policy from an A rated fronting carrier. "Fireman's Fund wrote our first program, and it now has a dedicated Artex unit; so does USF&G," Mullen says.
"We're looking for an agent who has been running a program for years and wants greater control over his or her business."
--Peter Mullen
"The nature of the agency profit-sharing program requires that we develop a close relationship with our fronting companies," Mullen says. "We need a carrier that knows how to handle rating and filing in multiple states. We work with a variety of companies that have this expertise. We're looking for maximum efficiency in each program, and we focus on building lasting relationships with the carriers our agents will be working with."
Once the program is in place, "The agent runs it as he would any traditional program, ensuring that all the program management efficiencies are there," McManus says. "There's no need to worry about offshore meetings, taxes, SEC issues, and the like. And the profit on the business--premiums net of expenses (fronting, reinsurance, third-party administrator for claims handling)--goes to the agent. The underwriting profit is his, and the net investment income is his." He offers an example: "If a book of business runs at a 50% loss ratio and makes a modest investment return of, say, 5% or 6%, an Artex program will deliver a pretax profit probably 20 times greater than a conventionally structured program. We simply offer a better mousetrap--a better way for the agent to build business. All this makes for a stronger agent, and we believe that the stronger the agent, the higher the level of service he can provide the client."
Unbundling offers flexibility
A key to the success of Artex's agency profit-sharing programs, Mullen believes, is that services are offered on a truly unbundled basis. "We look at all the components of a program and find the best fronting company, forms, filings, and rating flexibility," he explains. "Then we look at the best combination of reinsurance protection available to meet the agent's risk tolerance. For the agent who wants to take only minimal risk, we arrange more reinsurance. For agents with a higher risk tolerance, there's a bigger gap between the loss reserves held by Artex and the point where the aggregate reinsurance will stop losses. In the higher risk situation the gap might be 20% to 25%, whereas for lower risk it might be between 5% and 10%."
--David McManus
By offering services on an unbundled basis, McManus points out, Artex gives the agent two key advantages: flexibility and control. "Artex is not owned by any insurance company," he notes. "If you go to a carrier-owned rent-a-captive, you generally get their fronting, reinsurance, and claims department. If one of these elements doesn't work, you have to dump them all. We believe the core of a successful agency profit-sharing program is unbundling. We bring together the most efficient parties and put the agent in control. With Artex, the agent is in charge. He can move any part of the program--fronting company, reinsurer, third-party administrator--without disturbing the rest of the program. In fact, our slogan is 'It's time to take control.' True unbundling keeps everyone honest."
Face of the competition
Who's competing for the agents and clients that make up Artex's target market? "Our competitors are generally not other rent-a-captive facilities; our competitors are first-dollar programs with purportedly unbundled services and a dividend element," Mullen responds. "Our competitors are carriers that are trying to protect their business by first saying they will unbundle their services and then simply rebundling the pieces using their own facilities," McManus adds. "We believe we offer a number of advantages over these competitors. First, Artex had its genesis in the insurance agency world. We're owned by an agency, so we know what agents want and we can identify with their problems. Second, although we don't often talk about our association with Gallagher, that relationship gives us a lot of clout. We have the best of both worlds: We have a focused non-Gallagher strategy; but in building a program, we can access services from Gallagher, including truly global access to reinsurance markets. Third, we offer true unbundling of services, so agents have the flexibility to make decisions in the best interests of their clients."
"Market neutral" concept
The capacity crisis of the mid-1980s was the force that fueled the exponential growth of the alternative market, the broad category to which Artex belongs. As the market started to soften, industry observers wondered whether the business that had left the traditional market in search of solutions would return to it when rates and terms eased up. The answer was a resounding "No." Not only has the vast majority of business that found a home in the alternative market remained there, but also that market continues to expand and now accounts for some 40% of total U.S. premium volume.
"The attraction of our programs transcends hard and soft markets," McManus remarks. "The whole point of our programs is to redistribute profits. In the traditional market, the insurer keeps all the profits. In a soft market, there's less profit to capture. Many carriers are willing to enter the 'risk-free' fronting market. As the pendulum swings, fronting becomes a more specialized service. Reinsurance is a percentage of the original premium; as that premium rises, the reinsurance premium doesn't have to rise as much. Many agents and clients say, 'I'd never have gone into a captive if not for the hard market--but it was the best thing I ever did.' If the market hardens, insurers may reject good programs; that's an increased opportunity for Artex.
"Our programs are market neutral because when prices are artificially low, reinsurance is cheap. When prices rise, there's more profit to capture. Every agent knows how soft the market was in 1998--but in that year, 308 captives were formed; in fact, there's been a steady increase in captive formation over each of the last five years, despite the soft market. Whether single entities or groups, clients are seeing that this is a long-term trend and a solution that makes sense."
Taking control
We asked Mullen and McManus to comment on the trends they see shaping the future of Artex and its agency profit-sharing programs.
"There's a trend toward markets wanting to deal directly with clients," Mullen observes. "Traditional companies are forming small business centers; this in effect cuts the agent out of the loop. Five years later, he may find he has no connection with that business."
"The squeeze is on the agent," McManus adds. "The company says, 'I'll pay you 20% and do all the work for you.' The agent must say, 'I got these customers, and I won't give them up.' The challenge to agents is to find a way to capture a bigger piece of the pie. We believe Artex is the best way to do that."
"When you squeeze the agent, you hurt the customer, because the agent is the primary point of contact with the customer," McManus continues. "We want to make the agent stronger by recognizing what's often overlooked: The agent finds the customers and gets them to part with the dollars, then has to turn the vast majority of it over to everyone else. The agent's profit margin, when expressed as a percentage of premium, is probably around 1% to 2%. At Artex, our focus is agents who want a more meaningful percentage of the premium they bring in. We offer these agents control of their business--and the opportunity to earn a profit equivalent to 10% to 20% of premium rather than 10% to 20% of the commission."
Artex not only helps agents earn profits on the business they produce; it also can aid them with retirement planning. "In our programs, we try to manage the process so it interfaces with the agent's retirement planning," McManus explains. "We're working with agents to build profits for them offshore; this is their retirement. We'll also guide them in dealing with retirement planners to obtain advantageous tax treatment for their offshore income."
What's the bottom line? "At Artex, we see the agent as our client," Mullen says. "We look for ways to profit with the agent rather than from the agent." *
For more information:
Artex Underwriting Managers
Sofia House, 48 Church St.
P.O. Box HM 2000
Hamilton HM HX, Bermuda
E-mail: peter_mullen@ajg.com
Phone: (441) 296-6429
Fax: (441) 292-8231
©COPYRIGHT: The Rough Notes Magazine, 2000