Agency’s growth strategy driven by giving away profits to charities

Having bought insurance agencies for years when he was chief financial officer with the former Covenant Group, Joe Grochmal knew that finding an agency that would actually grow after the acquisition was next to impossible.

“We used to describe them as a melting ice cube. You bought the ice and all of a sudden it starts going away. You lose customers and you get a few customers that move into town and maybe other agents would go get those, too. So you had to figure out ways to build ice onto that thing or what you bought just melted away from you over time,” recalls Covenant’s former executive.

He thinks he knows why agencies have trouble achieving organic growth. “There’s no differentiator between agencies. There’s no differentiator in product. There’s no difference in the story. And most agencies don’t have big sales forces; they may not have any.”

So when he began considering entering the insurance agency business on his own, Grochmal decided to first solve the mystery of how to differentiate an agency from its peers. “I was thinking how do we get customers to want to come to us? The thought I had at the time was, ‘Well, I think we need to touch their deepest concerns.'”

His mind jumped to “deepest concerns” because as he was mulling the insurance agency business, he and his wife had also been discussing ways they might do good deeds for the western Massachusetts towns where they grew up and raised their family.

Then came the pretzel. By his own admission, he’s “addicted” to Newman’s Own pretzels, proceeds from which along with those of salad dressing, popcorn, coffee and other foods go to support charities designated by actor Paul Newman. “I sat and I was looking at that bag and I thought, ‘Wow, wouldn’t it be interesting if we built a network of insurance agencies that touch those deepest concerns by providing financial support to charities, to non-profits, that enhance or enrich the local services in those areas. That was it, that’s how it all came together. I sat there that day and thought an awful lot about how would you do that. How would you go about taking that next step?”

Profits to charity

The next step — after finishing the pretzels — turned out to be GoodWorks Insurance Agency, an independent agency that commits half of its profits to local charities utilizing a unique social contact with its insureds and the local communities in which it operates.

With Grochmal as chief executive officer, the agency has already opened two offices — one in the Berkshire town of Great Barrington, Mass., and a second in Granby, Conn. — and has plans for more in those two states and eastern New York, before going national.

Initial sales have focused on personal auto and homeowners, but within weeks the agency had also moved into life and disability. It has close to 20 property/casualty and benefits companies signed up. Within its first few months, GoodWorks had also worked out a brokerage arrangement with broker Hilb Rogal Hobbs Co. to handle large commercial accounts.

Patent pending

The differentiator for GoodWorks is its written charitable contract. It is signed by GoodWorks and a handful of individuals, including board members, who each gave $1, making it a legally binding document.

Under the pact, GoodWorks promises to donate 50 percent of its annual operating profits (excluding investment earnings) or $15,000, whichever is greater, to charities involved in education, health care or safety programs in local communities. The three page contract also promises transparency in all of the agency’s financial dealings.

It’s an enforceable contract, meaning policyholders, competitors, residents in any town where GoodWorks operates may pursue remedies for any breach.

The group had lawyers research charitable organization laws to clear the concept. They also checked states’ anti-rebating laws and came away confident the model is legal.

Grochmal determined the categories of non-profits to receive the monies based on what he felt the “deepest concerns” are for most people: education, health care and safety.

The contract builds on what is generally regarded as the hallmark of the independent agency system, namely an agency’s tie to its local community, and also addresses the wider issue of the industry’s public image.

“I thought this is an industry that’s had its issues with consumers, issues of trust, right?” says Grochmal. “People have a perception that the insurance industry accumulates these greedy pools of assets and then tries hard not to pay claims. I really don’t think that’s true. I’ve been an observer of the business for a long time and there are a lot of capable people trying to sell a product that you don’t know the price of sometimes for years after you sold it. You don’t know what it cost you to make it. That’s pretty hard. I think in the face of that, and our desire to do good things, we decided that we need to go to an extreme almost of proving to the communities and the world that we intend to do these good things.”

The contract is so unique and central to the mission of GoodWorks that the founder is seeking to have it patented under the name GIFT Marketing System. “I think proper risk management in a company like ours says, ‘We have this unique tool. If we let it be available to everybody in the world, everybody in the United States, at some point somebody’s going to abuse it. And when they do, it won’t just reflect on them, it’s going to reflect on us.’ So I think this is proper corporate risk management in the face of a world where the Wall Street Journal reads like a rap sheet to protect our business model for ourselves and the communities that we try to serve.”

Raising capital

Given his past disappointment with agency acquisitions, Grochmal decided his best route would be to start a new agency not buy one. The first order of business was getting the funding to get off the ground.

Grochmal is familiar with raising capital, having been a principal in the Connecticut venture capital fund management firm, Schupp & Grochmal LLP, which he ran with David Schupp, and prior to that was a founder of Northington Partners, a specialty investment bank focused on the insurance industry.

Calling upon contacts and friends and utilizing a Connecticut tax credit program that he himself helped create, Grochmal signed up about 20 investors and raised $1.6 million in his first round by the end of 2004.

“We have three kinds of investors in our company. We have people who run divisions of insurance companies who are investors personally. We’ve got a few of those. We’ve got a few investors who run investment banks that focus on the insurance industry — few of those out there. And then we have this whole other group that focuses — that I would describe as philanthropists — people who look at us as an engine for giving,” he maintains.

In March 2004, Schupp & Grochmal created an investment vehicle named Noble View in North Canaan, Conn., with the intention of investing in GoodWorks. Locating Noble View in Connecticut enabled it to take advantage of the Insurance Reinvestment Tax Credit Program, which the state adopted to encourage small insurance start-ups and specialty insurance businesses to help recover insurance jobs lost to consolidation in the early 1990s.

Schupp & Grochmal was able to offer investors tax credits equal to their investments. It is one of only six fund managers approved by the state to offer these tax credits. The other approved fund managers include Conning & Co., Dowling & Partners Securities, Northington Partners, Prospector & Partners and Stamford Financial Group. Among the more than 21 firms that have received $184 million in tax-credit eligible investments made through the program are Guilford Specialty, OneBeacon Professional Partners, Berkley Administrators of Conn., Target Capital Partners and Insurance News Network.

The insurance tax credit program has been criticized by the state’s Department of Economic and Community Development, which argues that the program is flawed because it does not require that the benefits to the state match or outweigh the costs. It has no effective minimum job creation requirement and no cap on the amount of tax credits. It’s also “too broad” in its definition of insurance-related firms, in the opinion of Mike Lettieri, who oversees the program for DECD.

Taxpayers have paid from $172,000 to $1.1 million for each job created under the act, DECD has figured out. In the case of GoodWorks, its filing indicates it hopes to create 90 jobs, although it need only create one to continue to qualify for tax credit status because it is a new company.

DECD’s beef is with the law and not with GoodWorks. The state agency signed off on Grochmal’s venture as meeting the program’s requirements. Grochmal said he is using the tax program for its intended purpose.

Having raised $1.6 million to fund the start-up, Grochmal and Peter Gay, his chief operations and chief financial officer, set about building the agency network. Gay formerly served as the operations manager of a $3 million independent insurance agency, worked at Travelers and before that managed a $100 million Aetna loan fund for independent agents.

Part of the GoodWorks strategy is to locate an agency by first finding the right person to run it, which they do by raiding other agencies. As Grochmal puts it, “[W]hen we go into a local community, we like to hire the best people from existing agencies. We’d like to hire people that aren’t owners. And we want them to be real partners with us.”

Finding employees

They target employees of existing agencies with 10 to 30 years of experience. “[T]hey have two incredibly important assets. One is they’ve solved customer problems for a long time. They were the people who got the call, to explain the dec page, you know. And they explained it well. And the second thing is that they’ve interacted with carriers on the same basis. They know what carriers to call for certain kinds of risk. … And that’s the cornerstone of every local office. If we can’t get that person, we’re probably not going to put an office there.”

GoodWorks offers equity to its employees, although Grochmal contends the idea of being affiliated with a business that is doing good for the community is what really wins over people. “I think that even if we didn’t give equity away, I’m virtually certain we’d still be able to hire these people because of the strength of the story,” he adds.

He acknowledges that his hiring strategy could strain relations with other agents but doesn’t appear concerned.

“I don’t talk to them, to be honest with you. We haven’t had any conversations with local agents. Some of them are friends of mine that I’ve known from playing golf over the years; we’re members of the same club,” he noted.

Grochmal had been more concerned about carriers’ response, but winning them over has been easier than expected. The agency has already signed with The Hartford, St. Paul Travelers, Chubb, Arbella, Litchfield Mutual, National Grange Mutual and Progressive’s Drive — close to 20 insurers in total at a time when new agency appointments by insurers are rare.

To help it handle large national and specialty commercial risks, GoodWorks has set up a national accounts division and entered into a “preferred not exclusive” brokerage agreement with Hilb Rogal Hobbs Co. (HRH), the eighth largest insurance broker. Grochmal had also talked with Marsh and Aon about the idea but they said no.

Some have suggested to Grochmal that the charitable model will work only in well-to-do communities such as Westport and Greenwich, Conn., or Newton, Mass. But Grochmal, who grew up in blue collar Chicopee, Mass., doesn’t buy that.

“I don’t believe that. I think it works everywhere. I think we’ll be in urban areas, we’ll be in the suburbs, we’ll be in college towns. I think that, you know, the only thing that we ever have to deal with is: is there enough of a base of population to support our business plan?”

Wherever he and GoodWorks may go next, Grochmal speaks like a man who is in a good place now.

“I feel good about this every day. We’re really challenged because we have more opportunities than I ever imagined, but it’s very uplifting. It just feels good. It’s amazing to get up and think of what good you can do every day. It’s a wonderful feeling.”