A profit center for agencies

An agency-owned premium finance unit boosts value and retentio

By Elisabeth Boone, CPCU

With the economy struggling, commissions declining, and competition continuing to put pressure on the bottom line, agency owners are exploring an array of options to offset declines in their traditional sources of income.

One such option is to form and operate a premium finance unit that can serve as a dynamic agency profit center.

But setting up a premium finance unit can take time away from the hundreds of tasks that agency owners face each day. The good news is that agencies of all shapes and sizes can reap the benefits of owning a smoothly functioning premium finance unit—without the time and hassles involved in setting it up and keeping it going.

That job is handled by the professionals at COST Financial Group, which works with agencies around the country to set up turnkey premium finance units. COST provides all management, accounting, and operational services for a per-account service fee. The agency chooses its own name for the finance unit and can present it to clients either as a subsidiary of the agency or as a stand-alone entity.

Based near St. Louis, Missouri, COST Financial was established in 1989 by David Gebhardt, whose background encompasses management responsibilities in underwriting and wholesaling as well as premium finance. Today Gebhardt serves as chairman and chief executive officer of the company; Jay Pursell is president and chief financial officer, and Gebhardt's son, Chris, is chief technology officer.

COST Financial's clients include retail independent agencies, agency associations, wholesalers and MGAs, and insurance carriers around the country. "We work with anybody that can produce premium finance business," Gebhardt says. "We have one client that is strictly a premium finance entity. He solicits the business, and we run his back room for him."

COST Financial was profiled in the August 2000 issue of Rough Notes ("Premium Finance = Profit Power"). We asked Dave Gebhardt to update us on key developments in his organization.

Challenge = opportunity 

"In today's climate, it's absolutely imperative for agencies to maximize profit potential from every conceivable aspect of their organization," Gebhardt asserts, and premium financing is an easy way to add to profits.

"According to the Urban Dictionary, 'low-hanging fruit' is defined as 'a target or goal that is easily achievable and that does not require a lot of effort,'" Gebhardt says. "Tapping into your existing book of business to capture profits that you are currently giving away is the very definition of picking low-hanging fruit. At COST Financial, we try to help agencies harvest that low-hanging fruit."

Although many independent agency owners get some kind of rebate from the premium finance companies they work with, Gebhardt remarks, "I don't think they're aware of the tremendous profit potential of owning their own premium finance company."

That profit potential, Gebhardt says, is between $30,000 and $40,000 on every $1 million of premium financed.

In addition to profit, Gebhardt points out, "The agency also gains control over the premium finance process, which allows it to render a higher quality of service to policyholders. The agency controls the down payment percentages, the number of payments, the interest rates to charge, the application or waiving of late charges, cancellations, reinstatements, and so on. They're not at the mercy of an outside premium finance company that will dictate terms to them and may treat their insureds poorly. That reflects negatively on the agency. When the agency controls the process, that's not an issue." 

A common misconception among agency owners, Gebhardt observes, is that owning a premium finance company is a risky proposition.

"A lot of agencies don't understand how minimal the risk is," he says. "If you get sufficient down payment from the insured and allow us to do our job in sending out late notices and cancellations, the risk is virtually nonexistent. The important thing is to structure the loan—and we structure every single loan—to maximize profit and minimize risk."

A well-run premium finance company not only generates profits for current agency principals, Gebhardt points out, but also enhances the agency's value in the eyes of prospective buyers when current owners are ready to sell.

"A client of ours told me they sold their agency for approximately seven times net earnings. They then negotiated the sale of their premium finance company and got the same multiplier for that," Gebhardt says. "Had they been giving that business to an outside premium finance company, they would have gotten nothing."

Accounting: keeping it simple

All the accounting functions are performed by specialists at COST Financial on behalf of its clients, leaving them free to run their business without having to handle the myriad details of premium financing.

"We keep our accounting systems as simple as possible," says Jay Pursell. "We explain to our clients that premium finance is a cash flow-sensitive business; you can picture it as a Ferris wheel of cash. You lend a dollar out, it's out for a period of time, and it comes right back in with a little more in each 'cart.' The faster the wheel turns and the more premium you finance, the more profit you'll make," Pursell explains.

"For our retail and wholesale agency clients, we have very limited ledger accounts. The financial statements are compact in nature; cash and receivables are the primary assets. Payables based on what you've financed, and possibly a loan from the bank, are the primary liabilities."

COST Financial's clients appreciate the simplicity of its accounting procedures and statements, Pursell says. "It allows agency owners who may not be accustomed to reading complex financial statements to keep abreast of what's going on in their premium finance unit. All of our accounting reports are available to the client at any time," Pursell points out. "The client can log in with a password and pull up any report on demand. We keep it simple so the agent can do what he or she does best: sell insurance."

At a time when banks are holding tightly to their cash and being extremely conservative about lending it, Pursell says COST Financial has been able to establish relationships with some financial institutions that are eager to provide financing for its clients. "This is great for us, and it's great for our clients," he asserts.

Automation revolution

The COST Financial concept remains essentially the same, Dave Gebhardt says, "But from an automation standpoint, we're light years ahead of where we were in 2000. As much as the states will allow us, we've gone completely paperless, so it's much easier for our agency clients to access the system and do the work they need to do."

Going paperless not only enhances the speed and efficiency of processing transactions, Gebhardt notes, but also reduces expenses. "We pass those savings on to our clients," he says.

Chris Gebhardt explains: "The system we run to manage our clients' premium finance companies is completely Web based, so there's no software to install and nothing they have to do on their end.

"We've developed a customized software package for COST Financial that allows us to run all of our clients' finance companies from a single system," Chris continues. "This gives us a higher degree of automation that has dramatically increased our efficiency and improved our service to clients. Our system keeps each client's data separate, but it's much more streamlined on our end than it was back in 2000," he explains.

"One of the nice things about our new system is that the client can do everything from any Internet-connected computer—prepare quotes, submit finance agreements, change contract terms, check account status, and review financial reports," Chris says. "We've tried to make our system as paperless as possible, which means that the turnaround time is much faster on booking the business and getting the contract into our system because there's no need to fax or mail documents."

As Jay Pursell mentioned, Chris says, "The system is real time, so if we post a payment or input information on an account, our client can see this activity reflected immediately."

A "Reports on Demand" feature in the system allows the client to get an instant "snapshot" of any aspect of its premium finance operation for any time period.

"For our agencies and their CSRs, we've developed what we call our Virtual Filing Cabinet," Chris says. "This is a paperless solution for document storage. For any piece of paper we generate for a particular contract, a copy of that document is stored in the system.

"This has really changed the way our clients interact with us," Chris remarks. "In the old days the client would call us and we'd have to pull something out of a paper file and fax it or scan it for e-mailing. With this feature in our new system, both we and our clients are saving a lot of time."

COST Financial also operates a Web site for insureds who finance their premiums, Chris says. "The insured can log in and look at account status, payments made, due dates, and other details. The insured also can make a payment online if our client chooses to make that option available. We can accept credit card or ACH (Automated Clearing House) payments at no cost to our clients. They appreciate being able to offer this convenience to their insureds, and it also helps prevent cancellations," he comments.

Jump in

"This is a great time for agents to get into the premium finance business," Dave Gebhardt declares. "With interest rates as low as they are now on lines of credit, the agency that owns a premium finance company can either pass on those competitive rates to its clients or increase its profits substantially by lending at a higher rate.

"When the market does harden, the profits from premium finance are going to skyrocket," Gebhardt says. "The agencies that have already established their units will be positioned to capitalize in a big way as premiums increase."

Low risk, control of the process without the hassles, and the creation of an attractive profit center—all of these factors, Gebhardt believes, make owning a premium finance company a win for agents.

"Recently I was talking with a senior loan officer at one of the banks we work with," he says. "He understands our process, and he asked me: 'Why doesn't every agent do this?'"

For more information:

COST Financial Group

Web site: www.costfinancial.com