SECOND THOUGHTS: Tales of demergers, detours and determination

By | May 9, 2005

Crying?? There’s no crying in baseball.
— Tom Hanks in A League of Their Own

Bill Cadenhead had decided to sell his 73 percent stake in Cadenhead Shreffler Insurance in Bedford, Tex. to insurance giant Brown & Brown when he had second thoughts. He had been approached with an alternative proposition from an association colleague 300 miles away near San Antonio.

“At the age of 58, I was not ready to retire, but my business is much more attractive with me at my age then it will be when I am 62 and looking for a way to get out quickly. I was looking for a way to cash in on the equity I had built from a lifetime in the insurance business.”

Although he was ready to hook up with Brown & Brown, he saw the last-minute offer to associate with Insurance & Bonds as a true merger more in line with his personal and business values. The new deal meant Cadenhead would not have to answer to the whims of a regional manager or a board of directors of a national conglomerate.

The 300 miles between offices produced the added benefit of little or no duplication of responsibilities and no need to terminate employees. According to Cadenhead, combining assets and energies with Insurance & Bonds gave him the freedom to cash in at any time in the future as well as provide his employees with the incentive to strive toward an equity stake in the business. Cadenhead said thanks but no thanks to Brown & Brown. He signed the San Antonio deal on March 1, 2005.

Best of intentions
Like a marriage, mergers in the world of insurance agencies eventually come down to mutual levels of trust and compromise. “Both parties enter an agreement to sell or merge (an agency) with the best of intentions,” said Roger E. Thomas, of Thomas & Thomas Agency Consultants and Appraisers Inc. in Livingston, Tex. “Many of them are disillusioned and look at the combination of resources as a panacea. Unfortunately, many times the honeymoon can be over even before it begins.” Thomas declined to provide names or intimate details of marital discourse between newlywed agencies.

“The parties involved can be best friends, golf buddies or share similar business philosophies, but they rarely take into account the emotions that come into play when an agency changes management style,” said Thomas.

For some of the independent agencies, according to Thomas, the changes in the basic organization at the restructured agency may be the first change in managerial style the business has endured since first opening its doors.

“In most cases, you are talking about two strong-willed entrepreneurs who probably became independent insurance agents and opened their own shop (agency) because they did not want to take orders or follow the lead of somebody else,” explained Thomas. “Many times two agencies will merge operations without ever deciding on the roles each will play in the new organization.

“That’s when they call us to fix their problems. We do our best, but many times it’s already too late.”

Thomas recently served as the arbitrator for the disillusion of an agency merger. He blamed the failed agency union on personality conflicts and disagreements over a single style of management.

“The experiment can cost both parties in excess of a couple hundred thousands dollars, even if the ‘marriage’ lasts only a year,” said Thomas. “There is so much involved in a merger. The cost to move and set up new computer systems is only the tip of the financial iceberg.”

Both agencies are now thriving, happily doing business on their own and enjoying the single life, according to Thomas.

Pretty good average
Cadenhead in Texas may have had second thoughts about affiliating with a large institution but that’s not a common experience for what is the eighth largest insurance intermediary in the country. Brown & Brown, whose corporate office is in Florida, was established as a small provider of property and casualty insurance in 1939. The agency changed its small town philosophy in 1993 when it began buying up smaller agencies throughout Florida and the Southeast.

“We are a highly decentralized organization,” said Cory Walker, who has served as Brown & Brown’s chief financial officer since 1992. “We have 149 profit centers. That means we have 149 leaders who are committed to the overall success of our clients and shareholders.”

Of the nearly 150 acquisitions his company has made in the past dozen years, Walker says there have been “two or three” additions that did not work out. The disappointments were primarily based on agency principals who “lost the fire” after joining the larger corporation and longed to return to a state of independence.

“Two out of 150 is a pretty good average,” said Walker. “One situation was a $3 million mistake. The other was the case of a na├»ve owner. That mistake cost us quite a bit more.”

The Brown & Brown CFO credits the low divorce rate to comprehensive due diligence and a clear understanding of expectations.

Made in heaven
The marriage of two agencies in Oregon appeared to be made in corporate heaven. The brokers were good friends, the agencies were of similar size and each had generated roughly equivalent amounts of premium revenue over the past few years.

But the relationship was doomed from the start because of a vast difference in corporate cultures, according to Mary Eisenhart, a managing partner with Agency Management Resource Group of Lincoln, Calif.

“The situation looked so ideal that the parties rushed into an agreement for sale without examining the basic cultural differences in the way each did business,” said Eisenhart. “They agreed on an equitable division of positions and separation of responsibility. Each thought they were home free.”

The cultural difference that eventually led to the demerger of the two agencies focused squarely on the type of clients each office served and the style the support personnel employed to deal with clients. One office thrived on high production from low-cost auto insurance, while the other catered to the needs for high-priced property insurance and umbrella policies for a select group of pampered clients. One office was highly automated, while the other office resisted automation and continued to keep hard copy records in paper files.

Eisenhart explained that the customer service representatives in each office could not adjust to the style or the type of coverage written at the other office. As a result, the marketing efforts–and the book of business–did not expand beyond the comfort zone of each individual CSR.

“One of the most important factors in any merger is the level of technology in each office,” said Eisenhart. “There is a certain level of confidence, and sometimes a level of arrogance, that comes with advanced software and the tools available with an integrated office.

“On the other hand, there is a certain level of comfort with paper records. In either case, people are afraid to give up what they have and are inherently afraid of change.”

Five year fallout
Back in the early 1990s, Avery Sinclair and a few of his “friendly competitors” in and around Syracuse, N.Y. joined forces to form the Central New York Insurance Agents Group Inc. The idea behind the merger was to create more clout for the clients.

“Back then, we all thought bigger was better,” remembered Sinclair.

The experiment lasted only five years before the partners decided to go their separate ways.

“There was no animosity,” said Sinclair. “We just had different ways of doing business. Some of the partners wanted to sell out, while others of us were happy doing business the way we had always done business.”

Four of the five agencies were started by the fathers of the brokers in each office, with some businesses dating back as far as 1929.

The conglomeration was a contractual arrangement on paper only. Each broker maintained his own name and location. All five offices were already on the same computer system. There was profit sharing, but the commission structure in each office remained unchanged.

“We may have had a better chance at success if we were all in one central location with branch offices in different parts of the county,” Sinclair reflected. “But too many of us either owned our own buildings or were tied to long-term leases. The bottom line was that we were all probably too old to change. Some of the partners just wanted to get out and play golf.”

Sinclair attended the retirement party of one of his ex-partners in January, leaving him as the only agency of the five still in business. Since going back on his own, Sinclair and Andrews has grown from two to seven producers.

“There is no way I could sell out to a bank now and start taking orders from some young bank executive who is just learning about insurance,” said Sinclair. “I’ll just keep serving my clients. I’ll probably never retire. My wife would never know what to with me around the house all day.”

3-for-3 in Conn.
Dave Sinclair, owner of Sinclair Insurance Group in Wallingford, Conn., and no relation to Avery, is beyond having second thoughts about the agency business. He’s into his third, and he says his last, agency.

Given some of his experiences, it would be understandable if Sinclair had just left the business and never returned. But he came back…twice.

He opened his first agency in 1971 as a Nationwide agent. He became one of the company’s most successful agents by building an impressive book of commercial business. His book included some very large commercial accounts such as Ames Department stores, Northeast Utilities, a Virginia municipal account and more. He was one of only 300 Nationwide agencies writing national accounts.

But that success story ended in 1987 when Nationwide decided to exit commercial lines. Sinclair took his pay out of his last year’s earnings from Nationwide for the business but was he not certain what to do for his next job. Then Nationwide began canceling the accounts he had built up. He did an about-face and decided to go into the same business for himself as an independent agent, using his pay from Nationwide as capital. He got back all of the Nationwide business he had written but now he had it as an independent agent, including giant Ames Department stores, worth $48 million in premium, as a major account.

“I got all my business back as an independent agent plus they paid me for it!” Sinclair exclaims.

Once again, he concentrated on large commercial accounts. He opened satellite offices in Pennsylvania and Virginia. Business boomed, reaching more than $65 million in volume. He enjoyed the luxury of several carriers rather than just one but came to learn the hard way that having a small number of very large accounts is as precarious as having only one insurer. In 1991, bad luck struck again. Ames Department stores filed for bankruptcy and a large Virginia municipal account fell victim to political changes in that state. Also, his second leading producer decided to return to Texas. He was essentially back to square one.

He could have left the business and nobody would have blamed him but Sinclair decided he had one more shot in him. He pared down his remaining accounts to a mere $75,000 in revenue and started all over again by purchasing a $600,000 agency in Wallingford. By 1995, he had built his agency up to about $3 million in premium but he did not feel safe.

“In 1995 I’m sitting there with about $3 million, debt free. I’m looking at the marketplace and thinking carriers do not want small agencies. You’d better get big if you want to still be in business. So we started more aggressive acquisition program,” Sinclair said.

Sinclair has not had any second thoughts lately. Through a total of 21 acquisitions, he has built his current agency into one that generates about $80 million in property casualty premium and even more in group benefits premium.

“This is my last agency, I hope,” Sinclair said.

Aznoff is the former editor of the National Underwriter publication, Insurance West. He now makes his home in Bellevue, Wash. and works as a freelance writer. He can be contacted at

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Insurance Journal West May 9, 2005
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