From Zero to 200 in 5: The Rise of Kansas City-based Ascension Insurance

Len Kline and his business partners, the private equity firms Parthenon Capital and Century Capital Management, had an ambitious goal when they created Kansas City, Mo.-based Ascension Insurance Inc. in late 2007. They would grow Ascension from zero revenue to $200 million in five years by acquiring select agencies in dynamic areas of the country.

Kline readily admits that the drastic economic downturn that occurred after Ascension made its first acquisition in January 2008 has added unexpected challenges in reaching that goal. But so far the company is on track. Its tenth agency acquisition in July 2009 – 18 months or about one-third of the way into the projected timeline – brought the company’s revenues up to $70 million, or appproximately one-third of the way to the monetary goal.

Kline, who is a third-generation insurance broker, hails from Kansas City. His family sold its Kansas City-based agency in the ’70s to the Marsh & McLennan operation there and Kline ran the Marsh office for a number of years. He subsequently left Marsh and moved to Houston to start up the Compass Insurance division of Compass Bank. He led Compass Insurance for about four years, during which time it grew from a zero to $70 million operation.

At that point, Kline figured Compass was unlikely to “grow much past that size because of the limitations that we had relative to the bank footprint,” and was eager to apply what he’d learned at Compass in building his own insurance operation. “I was lucky enough to run into some people from Parthenon and Century Capital who wanted to do kind of the same thing I wanted to do, which was build an agency through acquisitions that does not have a limiting geography or footprint,” Kline explained.

Ascension was created to bring together premier middle market insurance agency operations from around the country. The company acquired four agencies in 2008 and has purchased six more in 2009. Kline says they are currently looking at four other agencies.

He said they don’t limit themselves to specifics when they are looking at potential agencies to acquire. “We’re looking for agencies that have management that do not want to go away after the purchase,” he said. “That want to continue to grow out of the footprint or the market that they are in, using our capital and our expertise. And we would like them to have some type of a specialty business if that’s possible. Because we find that business in many, many cases is more profitable and has better retention. … And we’d like them to be in dynamic areas – areas that grow faster than the national average and who have other opportunities for us to consolidate.”

He added that for a hub operation they look at agencies that have somewhere between $7 million and $40 million in revenue. Many of their acquisitions so far have been in California and the Southeast and the Kline says they will continue to look in those markets.

“We’re also going to be looking in the Texas market. I think Texas is a great market and I think Arizona is a great market. We presently have a small operation in Yuma, but it would be great to have something in Phoenix. And Texas is a very exciting market. There’s a lot of opportunity there,” he said.

After the economic hurdles of the past two years, Kline believes the rate of mergers and acquisitions in the insurance industry will increase in 2010. One thing that has changed during the past couple of years, Kline said, are the expectations of agency owners who are interested in selling their agencies.

“Until about a year ago a lot of the owners were under the perception that they could still get seven to eight times earnings, or EBITDA (earnings before interest, taxes, depreciation and amortization),” Kline said. “That perception is now down closer to five to seven. And most of them now understand that the market has moved.

“Now that the big banks have stepped out of the picture from an acquisition standpoint, compounded by the fact that most of the large consolidators, like a Gallagher, or a Hub or a Brown & Brown, have really slowed down their acquisitions, the supply has outpaced the demand. And so those multiples have come down and most of the owners now understand that,” he said.

“There’s a perception that if they want to get a larger multiple they either have to perform very well on their earnout or they have to perhaps wait for quite a long time,” Kline added. “Because I don’t think those multiples are moving up in the very near future. And I think in 2010 … again that supply will outpace demand because a lot of these owners are concerned about capital gains, which will probably change January 1^st of 2011.”

Editor’s note: Look for an expanded version of Insurance Journal’s interview with Ascension’s Len Kline in Insurance Journal magazine in early 2010.

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