New owners refocus on the mid-size
commercial market, stressing value-added services
By Thomas A. McCoy
Litchfield Insurance Group executives being presented with the 2001 Marketing Agency of the Year award are (from left) Carol Zuck, chief operating officer; Daniel Kraut, president, Jim Fabiaschi, vice president; and Robert G. Phelan, chairman and chief executive officer. Tom McCoy, editor-in-chief, Rough Notes magazine (far right) presents the award.
The Rough Notes magazine editorial board gathers before the presentation of the Agency of the Year award. Standing (left to right) are: Roger Sitkins, The Sitkins Group, Fort Myers, FL; Tommy Huval, The Huval Companies, Lafayette, LA; Robert N. Kretzmer, Dygve-Kretzmer Insurance Services, Chantilly, VA; Michael J. Moody, Strategic Risk Financing, St., Thomas, VI; John Ashenhurst, Sound Internet Strategy, Deer Harbor, WA; Douglas Terrill, Marsh-Berry, Concord, OH; Robert G. Phelan, Litchfield Insurance Group, Torrington, CT; Chris McVicker, The Flanders Group, Pittsford, NY; JoAnna Gentry, Conseco Risk Management, Carmel, IN; John Love, AH&T Technology Brokers, Leesburg, VA; Wanda Shumaker, Conseco Risk Management, Carmel, IN; Jack Allen, CFR, Inc., Tulsa, OK; William Rothwell, UIS, Inc., Grand Rapids, MI; Scott Addis, The Addis Group, King of Prussia, PA; Len Strazewski, Columbia College, Chicago, IL; Ron Pitcher, Pitcher Insurance Agency, Palatine, IL.
Seated (left to right) are: Ron Lensing, RKFL, Little Rock, AR; Mike Weinberg, Gateway Insurance Agency, Fort Lauderdale, FL; Valarie Webster, The Flanders Group, Pittsford, NY; Lois Van Horn, Athens Insurance Center, Athens, GA; Steve Anderson, steveanderson.com, Franklin, TN; Wendy Bourdeau, Al Bourdeau Insurance Service, Farmington Hills, MI; Ted Pappas, The McLaughlin Co., Washington, DC.
The Litchfield Insurance Group of Torrington, Connecticut, which specializes in providing what its CEO Bob Phelan calls "Fortune 500 services" to middle market commercial clients, is the 2001 Rough Notes Magazine Marketing Agency of the Year. The heart of Litchfield's services is property/casualty-related, but those services also encompass a wide range of risk management, human resource counseling and employee benefits services.
"We try to make our organization a complete risk management resource to our clients," says Phelan. "I look at what a company such as Marsh or Aon would provide for its Fortune 500 clients, and we take those same concepts and ideas into the middle market."
As a result of that approach, the agency, which has about $4.5 million in annual revenue, maintains a retention rate of "close to 100% on the business we want to retain," says Jim Fabiaschi, agency vice president. "Our clients see us as trusted advisors."
Litchfield was featured as the Marketing Agency of the Month in May 2001, and thus was one of 11 agencies eligible for the Agency of the Year. "We are thrilled to be voted Marketing Agency of the Year," Phelan says. "It was especially meaningful because it was the past recipients of the Rough Notes Agency of the Month award who determined the winner." Rough Notes cover agencies from 1989 through 2000 (a total of 130 firms) were entitled to vote for the 2001 Marketing Agency of the Year.
Bob Phelan is a 25-year veteran of the agency business, but it's been only in the last four years that he has owned and managed an agency. He bought The Litchfield Group along with Fabiaschi and Chief Operating Officer Carol Zuck in 1998. Phelan and Fabiaschi had been producers with Litchfield before the purchase; Carol Zuck managed the internal staff. This energetic trio put their money where their dreams were and purchased the agency from Daniel Kraut, who had been Litchfield's CEO, and other stockholders. Kraut has stayed at the agency as president and now devotes 75% of his time to financial management and company relations and the remainder to managing his own book of business.
Phelan and his team purchased the agency via a 100% leveraged buyout--not an easy deal to do at the height of the soft market. As they looked around for sources of funds, he recalls, "It wasn't going well. Then Steve Ward, senior vice president of Royal & SunAlliance, offered to help. Royal agreed to guarantee our bank loan. Otherwise we couldn't have done it."
Walt Gdowski, president and CEO, The Rough Notes Company
This loan guarantee was the first under what became Royal & SunAlliance's Funded Growth program. Without it, Phelan adds, Litchfield's future could have been quite different. "It would have been hard for the agency to remain independent. We might well have been acquired by a bank or some other entity."
Three years prior to Litchfield's ownership change, the agency sold its personal lines business. In the process, it went from a large, sprawling and diverse firm ($7 million in revenues, 80 employees, and five offices throughout the state of Connecticut) to a much smaller, more focused one with only one office. Prior to shedding its personal lines, the agency had been one of the five largest writers of personal lines in the state, with 15,000 personal lines accounts. "The personal lines was profitable business, but it wasn't growing in policy count," Kraut says. "We were trying to be all things to all customers and devoting a lot of resources to it."
With Litchfield transformed into a sleek and focused commercial agency, its new owners began introducing valued-added services to bond them more tightly to their clients. "Many companies in our target market (50 to 1,500 employees) have human resource departments that developed out of their accounting departments," Carol Zuck notes. "They don't have enough time to stay current with employment law."
So the agency contracted with a human resources attorney to provide the employees of these clients with answers to employment questions and free up HR departments for other tasks. Client companies have access to the human resources attorney via a 24-hour per day hotline. The attorney also publishes a quarterly newsletter dealing with HR problems and solutions and, in addition, can put on half-day seminars for Litchfield clients or do individual in-house counseling if necessary.
Editorial board members Ron Lensing (left) and Scott Addis (center) are joined by Tad Krug of RKFL in Little Rock, Arkansas. Krug received an honorable mention for The Rough Notes Company's Community Service Award.
Litchfield now has taken HR services one step further, training its own staff to provide HR services in-house. "We recently sent 10 of our people to Florida for eight days of training in human resources compliance issues (8 a.m. to 6 p.m.)--followed by two days of further training in Connecticut," says Phelan. "The training was developed by an insurance agency which spent nine years developing a program dealing with federal government compliance. This training represents a huge financial commitment and time commitment to bring additional services to our clients." As part of this training program Litchfield also will receive quarterly updates on HR issues which it can pass along to clients as government regulations change.
Performing compliance audits for agency clients serves two purposes, Jim Fabiaschi explains. It assures them that they are meeting federal regulations for laws such as the American with Disabilities Act and the Family Leave Medical Act. "More importantly, it helps them deal with employment practices issues." For example, he notes that Connecticut law requires all companies with 50 or more employees to have a written policy on sexual harassment.
The climate in which employers operate makes these services essential, Fabiaschi continues. "In our area there's an attorney running a radio commercial which says something like, 'If you've been dismissed from your job, you probably are entitled to be compensated.' We make sure that our clients' procedures are airtight, so they are impervious to employment practices lawsuits."
Rough Notes magazine staffers (left to right) are Elisabeth Boone, associate editor; Evelyn Egan, editorial assistant; Nancy Doucette, senior editor; Linda Lange, graphic designer; and Elaine Tolen, assistant editor.
Litchfield also has safety consultants, both in-house people and outsiders--again, providing the type of services that the large national brokers offer. The agency also devotes significant agency resources to claims reviews with clients. "I recently went with our claims staff for a half-day meeting with one of our accounts," says Fabiaschi. "We talked to them about the impact of claims on their premium, and the client appreciated that kind of attention."
As in all agencies, some accounts are a lot more service-intensive than others. "We have one account where I personally visit them once a month," Kraut says. "The agency has a total of around 2,000 total contacts per year with this client according to our service records. That includes employee benefits work, claims reviews and loss control services, as well as routine phone calls."
One niche that can require a lot of personal contact is municipal business. Litchfield insures more than 20 towns and school boards, and when new public officials are elected or appointed, they must be educated about insurance issues. "Generally, municipalities go out to shop a lot," says Kraut. "Ours don't because of the amount of time we spend with them and the services we provide."
The team of 30 people at Litchfield complement each other with a wide range of talents and specialties. Jim Fabiaschi is a CPA who joined Litchfield in 1985 as the controller. "After three years of signing paychecks bigger than mine I decided to become a producer," he says.
His accounting background has proven to be a good fit with his production responsibilities. "Many CFOs and CEOs we deal with in writing their business have a CPA background, so I can see things from their perspective. I used to audit municipalities when I was with Deloitte Touche, so I'm familiar with their financial concerns."
Two insurance agency consultants and members of the Rough Notes editorial board: Doug Terrill (left) and John Ashenhurst.
Fabiaschi's CPA background also provides him with a strong orientation toward directors and officers liability. "D&O is interesting because every company's policy is different," he says. "It also is a challenging risk, particularly for public companies in this economy after what has happened to stock prices."
Having a non-producer, COO Carol Zuck, as part of the ownership team provides Litchfield with some strengths that many agencies do not have. "This agency sees itself as a solutions provider, rather than an organization that sells insurance," says Zuck. In that tradition, she says, "We tell our employees the goals of the agency, and then we say, 'come to me with a solution.' Our employees are paid well, and they earn it. The attrition we have is good attrition."
Board members John Love (left) and Jack Allen are joined by Anne Phelan, wife of Litchfield Insurance Group CEO Bob Phelan.
Evidence of the staff's efficiency is shown in its revenue per support staff person: $287,000. "Our goal is to increase that by 5% to 10% per year as we grow," says Zuck.
The Litchfield principals believe the agency support staff is a significant contributor to the agency's impressive retention rate. "Our staff has really bought into the idea of 'wow-ing' the client," says Fabiaschi. "They're not just reactive. They're proactive." Zuck adds, "We had a producer leave the agency a year or so ago, and one client's first question was, 'The account manager isn't going anywhere, is she?'"
The agency staff is encouraged to pursue professional education, particularly degrees emphasizing risk management such as ARM and CRM, and more than 50% of the agency's staff either has a professional designation or is working on one. "We would love to see our account managers become risk management consultants," says Zuck.
One employee who is headed in that direction is Debbie Kuhne, Litchfield's director of client services. "Aside from visiting clients to do claims reviews, she spends a large portion of her time doing HR compliance audits," says Zuck. Kuhne was the commercial lines manager in the agency's Waterbury office. With the sale of the personal lines business and closing of that office, she came into the main office as director of client services.
One of Litchfield's specialties is high-tech business. The Connecticut corridor between New York City and Boston is home to a sizable number of dot.coms, software developers, and manufacturers of computers and semi-conductors. Litchfield is a member of the Connecticut Tech Council, which includes hundreds of companies. At the Council's recent "Fast 50 Awards" (for the fastest growing tech companies in the state) the top two winners and three of the top five winners were Litchfield clients.
"We continue to target the technology sector, even though it has been hurt by the recession," says Phelan. "Many of our technology clients have operations in various parts of the United States and abroad. We are rapidly increasing our expertise in covering all the international operations of our clients, both in the property/casualty as well as benefits areas. We are members of a nationwide broker network called RiskProNet International. RiskProNet has recently formed a partnership with an international broker network called IBA. This affiliation allows us to service our clients as they expand their operations across the globe."
Aside from insuring tech companies, Litchfield is focusing on another technology opportunity--managing any company's technology risks. "Cyberliability and network security are big risks," Phelan says. "But as with our other services, we think it's important to approach
it from a risk management standpoint, rather than solely
from an insurance perspective.
"We see network security as a bigger problem than evidence would indicate because when a company is damaged by a violation of network security, it may cover it up. We tell companies we're in the disaster business. After a disaster you fix the damage, but that doesn't mean your customers would come back to you. For example," Phelan continues, "If Amazon.com or another e-commerce site were down for a week, customers would go somewhere else."
Litchfield's largest market niche is construction. During these hard market conditions, their safety consulting services are particularly valuable. Many construction firms are facing large premium increases and in extreme cases, non-renewal. Litchfield is able to customize a safety program, sell it to the underwriter and help a client avoid a large premium increase. "Combined with our claim management services, we have a one-two punch that can turn a marginal account into a star-performer in a two-to three-year period," says Phelan.
The use of captives is part of Litchfield's strategy for dealing with the hard market. "It's appealing to be able to offer a client the opportunity to base its cost on claims experience and receive a dividend for good experience," says Fabiaschi. "Right now about 5% of our business is in captives, and that could jump to 10% fairly quickly."
Editorial board members Linda Ferguson with Ted Pappas (center) and Mike Weinberg.
For the new ownership of The Litchfield Group who started out with a sizable firm but also a sizable debt, it's been important to be able to measure their financial progress in relation to their peers. Litchfield has been a member of Marsh Berry's APPEX group which uses financial ratios to help the agency do just that.
"We received the Commercial Lines Profit Center award from APPEX," says Dan Kraut. "Even though we pay people higher than average salaries, we're in the mid-90th percentile in employee marginal profitability (revenue per employee divided by pay per employee).
We also excel at collecting money," Kraut points out. "The account managers, not the producers, are the collectors. Our goal is to have 5% over 30 days and nothing over 60 or 90 days. Our bad debt write-offs are miniscule."
Litchfield also ranks in the top 25% in EBITA (earnings before interest, taxation and amortization) among APPEX agencies.
Phelan and his management team will soon be laying another brick in the foundation for the agency's future growth. They plan to hire two to three producers on the property/casualty side, and they hope to hire another on the benefits side. At least one of these producers will come directly from the May 2002 graduating class of a New England college.
"We are thrilled to have the college graduates coming in," says Zuck. "I haven't seen a lot of young salespeople entering the business in a long time. An agency needs seasoned producers, but it also needs younger ones to provide an opportunity for perpetuation."
"Younger producers should help us in working with technology-related accounts," adds Phelan. "I'm looking forward to the excitement of being around recent college graduates as they adapt to this dynamic, challenging, fun business."
Phelan says another short-term goal is "to increase income by 20% this year without adding to our servicing staff. The reason we'll be able to grow this year is that we provide value-added services. These services make such a difference in a hard market. If clients are going to pay a lot, we can give them a lot." Because of these services--the HR compliance audits, safety consulting, the claims reviews and all the means Litchfield agency uses to discover and serve clients' needs-- "in the last six months we've been writing a lot of business on a broker of record letter. Our goal for 2002 is to acquire accounts almost exclusively via broker of record."
In accepting the 2001 Marketing Agency of the Year award for The Litchfield Insurance Group, Phelan reflected on the somber events of September 11. He reminded the audience of leading agents and industry executives how fortunate they are to be part of an industry that exists for the purpose of rebuilding, providing security and making people's dreams possible. *