IN THIS ISSUE 6
Message From The Earliest Adopter
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Report: Chart Goes To London!
CHART’s core principle is best articulated by the very definition of the word “Exchange” – to give something of value in order to obtain something of greater value.
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Report: CHART goes to London A contingent of 62 Agency and Vendor Partner representatives travelled to London on May 9 – 10, 2016 to participate in the First Annual CHART Goes To London (CGL) Event.
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Votes Shift To “Stay” As Impact Of Brexit Approaches Most polls have remained relatively even until mid-May where some polling sources report a shift toward a Stay vote. Chancellor George Osborne cites a Public Treasury analysis and says that a Leave vote would have an “immediate and profound shock.”
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Lloyd’s Council Member Takes New Role On May 13th, Lloyd’s of London announced that Henrique Meirelles will step down from his position on the Lloyd’s council due to his appointment as Brazilian Finance Minister.
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Chart Ojective #2: Expand Access To The London Market For U.S. Producers CHART Objective #2: At the core of the CHART Exchange is the idea of helping agents grow. The obvious way CHART inspires growth is by facilitating face-to-face communication with LondonRisk Takers...
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Could CHART help incubate and further innovate “straight-through processing” for “Tom”? In this article let’s further explore work being done for Delegated Authorities within TOM, propose a potential expanded role for CHART in this workstream, and finish with overall highlights on recent successes throughout the whole of the London Target Operating Model.
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The Early Adopters CHART Bill of Rights The basic principals by which CHART will grow and thrive.
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Allied World Launches Product Recall Insurance Products In N. America In April, Allied World Assurance Company Holdings, AG announced its Product Recall insurance products are available in Canada and the United States...
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W.R. Berkley Forms Berkley Insurance Asia W. R. Berkley Corporation (NYSE: WRB) announced on 5/11/16 the formation of Berkley Insurance Asia. Shasi Gangadharan has been named chief executive officer and Aaron Yip has been appointed chief operating officer.
News 19
Obama’s Visit To The UK: An Update on “Brexit”
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Last month President Obama traveled to the UK to warn voters about the negative consequences leaving the European Union could have. The June referendum is on the horizon and Britain’s exit could threaten the stability of Europe along with the global economy.
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Lloyd’s To Apply For Indian Reinsurance Branch Lloyd’s has a century-long relationship with India as a provider of offshore reinsurance.
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London Time Timing is everything, right? NetRate Systems believes there are exciting times on the horizon for Lloyd’s Risk Takers and their U.S.-based Coverholders. Lloyd’s is the world’s specialist insurance and reinsurance market.
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Insurance Noodle Granted Coverholder Status With Lloyds of London Insurance Noodle, the online, membership-based insurance placement platform, today announced its status as a coverholder with Lloyd’s of London
How To Value An Insurance Distribution Firm - A Comprehensive Analysis When valuing an insurance agency, you will take a deep dive into the company’s key operational and financial metrics, and determine which specific value drivers may be adjusted to increase the fundamental value of the company.
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Sean McGovern To Leave Lloyd’s To Join XL Catlin Sean joined Lloyd’s in 1996, became a member of the Executive Team in 2002 and was appointed to the Franchise Board in 2014. He is responsible for risk governance at Lloyd’s and legal, regulatory and Government affairs globally.
May-June 2016 VOLUME 1 - ISSUE 3 Publisher:
CHART Exchange Glenn W. Clark, CPCU
Membership Services Matt Basile
Advertising:
Tyler Cichewicz
Managing Editor: Tyler Cichewicz
Contributing Editor: Frank Huver
Subscriptions: Tyler Cichewicz
Layout, Design & Circulation:
Prefer to Read The CHART Exchange In PDF Format? Download PDF Version HERE
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CHART Exchange info@chart-exchange.com 3001 Philadelphia Pike Claymont, Delaware 19703 www.chart-exchange.com 302-765-6001 Last Issue:
Cover Image Credit: Creative Commons
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Message From The Earliest Adopter
HAVE A NEW PROGRAM OR PRODUCT IDEA?
That’s exactly why CHART’s Market Finder Facility was created.
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HART’s core principle is best articulated by the very definition of the word “Exchange” – to give something of value in order to obtain something of greater value. As you may already know, we became a permanent membership organization earlier this year. An annual dues structure was established to both allow us to begin recouping start-up costs, hire staff, and help us fund on-going administrative expenses.
Many insurance agencies come to CHART with a new program or product idea. The Market Finder Facility was established to help turn these concepts into a reality. Our Broker Partners possess the expertise, industry contacts, and access to the decision makers and markets needed to get the deal done.
The first step in the process involves completion of the Program Questionnaire. The format is designed to help the CHART team and our London partners better Membership dues represent Broker quantify the opportunity. the “contribution” current and prospective Coverholders are asked to make each year to What are the risk characteristics become a part of CHART. But of the target audience? what is the value proposition What insurance products/ for these agencies – what is coverages are required? Is the greater return they can there any historical premium expect? Over the next couple and loss history that can of months, we will be taking be used to forecast future a closer look at the numerous underwriting results? What the differentiators benefits that can be realized are by becoming a member of the (product, price, services, risk organization. In this edition management, claims process, of The CHART Exchange delivery, etc.) that separate Magazine, we will focus on us from others already in the marketplace. the Market Finder Facility.
6 March 2016
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Glenn W. Clark, CPCU Publisher & Earliest Adopter
Take some time to read through the “CHART Exchange.” We’d love to get your feedback and have you join us as an Early Adopter.”
www.chart-exchange.com
CHART Exchange
Many insurance agencies come to CHART with a new program or product idea. The Market Finder Facility was established to help turn these concepts into a reality. Our Broker Partners possess the expertise, industry contacts, and access to the decision makers and markets needed to get the deal done.”
Once this assessment has been completed, our team is ready to move on to the “matchmaker” phase. In this stage, the CHART broker partner capitalizes on their in-depth knowledge of the marketplace to identify those Member Syndicates with risk appetites and capabilities that are most compatible with the prospective program being submitted. The Member Syndicates have entrusted CHART to bring them real business opportunities. Our experts will then arrange appointments between agency personnel and the most likely Risk Taker partners to determine next steps. The true value of the Market Finder Facility becomes evident after there is mutual agreement to move forward on the submission. CHART Broker Partners can guide agencies through the process of securing Delegated Underwriting Authority (Coverholder status) from Lloyd’s of London. This guidance can take the form of business plan development assistance, provision of analytic/actuarial support, or providing explanations about the various compliance/ regulatory requirements that must be met. We have built a U.S. Programs Development team that can be engaged to enhance a submission (legal, claims, loss
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control, competitive analysis, actuarial, Alternative risk transfer mechanisms, etc.) for our members. Of course, not every program proposal presented to the Risk Takers will be accepted. CHART’S Broker Partners will ascertain the reasons for the declination and will work with the agency and CHART’s stable of expert services to help address the perceived deficiencies in the submission so that it can be strengthened for a future re-submit. We will note here that both the member agency and Risk Takers have the option of selecting the preferred London Broker of their choice to finalize the program submitted through the Market Finder Facility. There is no obligation to utilize one of CHART’s partner entities. The benefit to be highlighted in our next edition of The CHART Exchange Magazine: CHART’s Incubator Initiative.
Glenn W. Clark , CPCU
MAY-JUNE 2016
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CHART Exchange
REPORT: CHART GOES TO LONDON
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contingent of 62 Agency and Vendor Partner representatives travelled to London on May 9 – 10, 2016 to participate in the First Annual CHART Goes To London (CGL) Event. This group was joined at the meeting by 92 individuals representing 40 different Lloyd’s Syndicates. The event was scheduled to demonstrate how much of a catalyst CHART can be in driving new business growth in the U.S./London marketplace.
Francis J. Huver, SVP, CFO
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contains many historical artifacts, like the 18th century Adam Room, the Lutine Bell, and the Loss Book. Participants were also able to view the oldest, most recognized insurance brand in the world in operation.
Many of the activities included in the two-day event were sponsored by a group of participating entities. At several points during the meeting, CHART personnel took time to thank the companies for Glenn Clark Moderates their support. Our sponsors: ANV, Brit, C.J. Coleman, DTW1991, Iris There were a number of business Insurance Brokers, JLT Re, Novae, meetings held on Monday and Wilson Elser. afternoon. Several agencies that began the process of establishing The agenda for the first day was new programs or product offerings a mix of business, fun, and team during the October 2015 CHART building. After the registration Event took advantage of their process was complete, meeting time in London to get together attendees were invited to be with their Brokers and Risk Taker part of a guided tour of Lloyd’s of Partners. Representatives from London. This architectural marvel two large agency networks – – designed by Richard Rogers and The Strategic Insurance Agency completed in 1986 – is one of the Alliance (SIAA) and Beyond most celebrated of its kind. Despite Insurance Global Network (BIGN) – its modern appearance, the facility also met with Syndicate personnel TABLE OF CONTENTS
www.chart-exchange.com
CHART Exchange Mr. Montanaro’s to discuss the benefits of doing demonstrated that we “scratched Following business with Lloyd’s. an itch” in the U.S./London presentation, representatives from C.J. Coleman and Jardine Lloyd marketplace. Thompson Group (JLT Re) took to The first day’s activities concluded with a cocktail reception At the conclusion of Glenn’s the podium to discuss the role of at the meeting venue. The presentation, Peter Montanaro the Broker within the U.S./London representatives from the U.S.-based was introduced. Mr. Montanaro is marketplace. They described their entities were joined by a number the Head of Delegated Authorities function as that of a relationship of Risk Taker personnel. Providing at Lloyd’s of London. He provided manager, intermediary between an informal environment within the audience with insights into the Agency and Risk Taker, and gatekeeper to capacity which these different groups can personally As noted in his presentation, and products. Time was also spent reviewing the interact and discuss new the unqualified success other value-added services business opportunities is of the inaugural Event last offered through Brokers, a hallmark feature of the analytics/ October – 330 participants, 152 including CHART Exchange. meeting appointments with Risk modeling, marketing, and The Tuesday session was Takers, and over two dozen new r e g u l a t o r y / c o m p l i a n c e advice. more business-oriented.
business opportunities surfaced –
Glenn Clark – CHART’s demonstrated that we “scratched We then turned the floor “Earliest Adopter” – served as the moderator for the an itch” in the U.S./London over to the audience. Agency representatives meeting. The morning marketplace.” were invited to share their session was structured for CHART experience with the Agencies and Vendor Partners in attendance. Glenn the benefits of becoming a the group. These testimonials opened the meeting with a brief Coverholder. Mr. Montanaro took served to underscore the fact overview of the group’s history. the time to explain the application that a number of new business He took a humorous, light- process that needs to be opportunities surfaced during hearted approach in describing undertaken in order for an agency last October’s event would not the challenges and obstacles to secure underwriting authorities have been presented to London encountered in turning the from Lloyd’s. This process markets if not for our organization. concept of CHART into a viable includes a review of business All Vendor Partners were also given membership organization. plans, regulatory status/licenses, time to describe the products and financial stability, staff expertise, services available to the CHART As noted in his presentation, and systems suitability. Finally, membership. the unqualified success of the inaugural Event last October – 330 participants, 152 meeting appointments with Risk Takers, and over two dozen new business opportunities surfaced – www.chart-exchange.com
Mr. Montanaro discussed the ongoing expectations for an agency once they achieved Coverholder status: Risk Taker reviews, external audits, continued compliance with Lloyd’s regulations, etc. TABLE OF CONTENTS
An exciting announcement was made to the group during this interactive session. Kevin O’Connor informed the attendees See Report: CHART Page 23 MAY-JUNE 2016
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News
IMPACT OF BREXIT APPROACHING: VOTES SHIFT TO “STAY”
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s of March 23rd, Britain’s polls regarding the June referendum, Brexit, are shifting toward a vote to ‘stay’ in the EU. However, since September 2015 polls show that the preferences to stay or leave vary from week to week.
a Public Treasury analysis and says that a Leave vote would have an “immediate and profound shock” resulting in 820,000 jobs lost within two years.
Leave vote argue that there is, “No underlying loyalty to the idea of Europe” and that there is a “massive democratic void.”
Though many of those who Supporters of support remaining in a Leave vote, the EU admit that the claims that the relationship between Despite the efforts of UK politicians cited study the EU and Britain is and business leaders warning of the attempts to not ideal, they insist negative effects that a Leave vote scare voters. that a Leave vote would have on Britain’s economy E c o n o m i s t could have a negative and Europe in general, polls have Patrick Minford of the UK challenges on Britain and the global economy. remained relatively even until mid- the analysis by saying that it fails to The referendum is set for June May where some polling sources account for the positive benefits of 23rd and as the date approaches report a shift toward a Stay vote. a Leave vote. the gravity of the vote will set in as both sides will push to sway those Chancellor George Osborne cites Other UK politicians that support a that are still undecided.
LLOYD’S COUNCIL MEMBER TAKES NEW ROLE
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n May 13th, Lloyd’s of London announced that, Henrique Meirelles will step down from his position on the Lloyd’s council due to his appointment as Brazilian Finance Minister.
John Nelson, Chairman of Lloyd’s, said: “Consequent upon his appointment as the Finance Minister in Brazil, Henrique has stood down as a member of the Council of Lloyd’s.”
“I would like to thank Henrique for Recently Meirelles was appointed his thoughtful insight and advice the position after serving on the during his term on the Council. Council of Lloyd’s since April 2013. We are delighted he has been 10
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appointed as Finance Minister in the Brazilian government. I want to congratulate him and we wish him every success in this new role.”
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Henrique Meirelles
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News
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AIG ANNOUNCES SHARES PRICING FOR PICC
merican International Group, Inc. announced today that it has priced the sale of 740 million ordinary H shares of PICC Property and Casualty Company Limited (PICC P&C) by means of a placing to institutional investors.
The ordinary H shares have not been and will not be registered under the Securities Act of 1933, as amended (the Securities Act), or any other applicable law, and may not be offered or sold in the
United States absent registration or an applicable exemption from the registration requirements of the Securities Act and any other applicable law.
We’re transforming AIG into a leaner, more profitable and focused insurer.” Upon the closing of the placing, which is scheduled for May 5, 2016, and is subject to customary closing conditions, AIG will receive gross proceeds of approximately US$1.25 billion, based upon a purchase price of HK$13.08 (approximately US$1.69) per share. Thereafter, AIG will hold a position of approximately 111 million shares, representing 0.75 percent of the total issued share capital of PICC P&C. “We’re transforming AIG into a leaner, more profitable and focused insurer,” said Peter D. Hancock, President and Chief Executive Officer of AIG. “By continuing to derisk our position in PICC P&C, we are enhancing our financial flexibility. We continue to greatly value our strategic partnership with PICC P&C.” www.chart-exchange.com
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CHART Exchange
CHART OBJECTIVE #2: EXPAND ACCESS TO THE LONDON MARKET FOR U.S. PRODUCERS WHO MAY NOT CURRENTLY BE MAXIMIZING ITS POTENTIAL by Tyler Cichewicz, Managing Editor
have for business. More importantly, they are able to carry the practice forward, facilitating HART Objective #2: At the core of the CHART contact between others and benefiting from the Exchange is the idea of helping agents grow. reciprocated behavior. The obvious way CHART inspires growth is by 4. They are ambassadors for their profession. Good facilitating face-to-face communication with London agents reflect joy, commitment, love to teach others, Risk Takers where ideas and products can take root and and are goals driven. develop. The less obvious – but equally important - way 5. Program agents are especially creative. These agents CHART helps agents grow is by promoting the traits and are always looking for ways to build a competitive habits of the most successful insurance professionals, advantage for their agency, clients, and carriers. so that others can learn and apply those techniques in Some of the most creative programs were born in their own business. the U.S. but could not find a market. They found a home in the oldest and most innovative insurance In today’s insurance world, competition is the brand in the world: London! marketplace rather than ‘the other guy.’ Over the years, CHART’s “Earliest Adopters” have amassed common The guiding theme of CHART is exchange: to give up traits of the most successful agents and agencies something of value for something of greater value. by building a previous Successful agents The guiding theme of CHART is recognize this theme association and being involved in leading industry exchange: to give up something and cater to it in their groups. For expediency’s sake, of value for something of greater value.“ day-to-day business, here is a list of the top five: CHART is a community
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1. The best agents never stop learning. They always seek to improve their knowledge, contacts, and skill level. 2. Elite insurance professionals enjoy being with like-minded individuals. A good agent serves as a protector, advisor, and a key partner in any client’s risk management and financial place. Great agents recognize others like themselves and together lift up the profession. 3. Good agents appreciate the benefit of networking because they recognize the value new connections 12
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founded on it. Whether you are a current Coverholder hungry to do more business in London, a potential Coverholder looking to develop a program, or a vendor partner who brings unique value to the U.S/London equation the CHART Exchange welcomes you. Become a member today and maximize your potential by accessing the London market and connecting with successful agents/agencies.
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Wilson Elser Consulting
COULD CHART HELP INCUBATE AND FURTHER INNOVATE “STRAIGHTTHROUGH PROCESSING” FOR “TOM”?
The London Insurance Market Business Process and Technology Advisory
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ontinuing on the theme from our discussion in the prior issue of the CHART-exchange publication on London Market modernization, in this article let’s further explore work being done for Delegated
Authorities within TOM, propose a potential expanded role for CHART in this workstream, and finish with overall highlights on recent successes throughout the whole of the London Market Target Operating Model (TOM).
Hilton Doubletree Hotel on Pepys Street in the City of London, we heard TOM-related comments directly from Peter Montanaro, the TOM Champion for Delegated Authority, on 10 May 2016. As you may have noticed during his overall Lloyd’s Coverholder Department For those of us who were able presentation, Peter elaborated to attend the Chart Goes to on aims to (a) further reduce the London (“CGL”) event at the amount of duplicative requests
About the Author - Jesse R. Viani (an American citizen) is a practicing consultant and the Director of Insurance Business Services at Wilson Elser Consulting, a consultancy established in both New York, NY and London UK which offers advisory services and other insurance business solutions to clients all over the world. Prior to assuming this role, Jesse managed client relationships and oversaw complex international software and service implementations, as Global Account Executive, at one of the world’s largest information, software, and service companies. Previously, Jesse was a valued employee and manager at the Am Law 100 law firm Wilson Elser Moskowitz Edelman & Dicker LLP where he led the firm’s e-Business department, overseeing more than 150 successful client billing software implementations. Before joining Wilson Elser, Jesse was a Director of Operations and Systems for American International Group (AIG), working in the Claims Litigation Management department (now known as the AIG Legal Operations Center), where he managed the carrier’s relationships with various software companies, legal bill review vendors and other consultants. Jesse graduated magna cum laude from the Pennsylvania College of Technology with a bachelor of science degree and was a juris doctor candidate at Seton Hall University School of Law 14
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Wilson Elser Consulting
and improve transparency of data the overall process and let’s act and modernization agenda. and information to all relevant accordingly where it makes sense stakeholders in the delegated to do so. As an example thought, More specifically, a savvy group authority process, (b) continue while we endeavor to help new U.S. of London risk takers, vendor improving the coordination and coverholder relationships blossom partners, potential coverholders, streamlining of coverholder audits and as we accelerate the London coverholders and their London and next steps, and (c) introduce delegated authority new business brokers could pool together standards for on-going compliance cycle, we may want to keep a close through our platform to advance excellence through service level eye on TOM during our journey. By or accelerate the efforts of Project agreements and Tomorrow and deliver By [keeping our eye on TOM], we other centralization additional London opportunities. minimize our chances of investing Market straight-through in technology, process, and/or human processing success. As we know, all of these resources that only solve for yesterday’s What do we mean goals are very relevant to CHART and will market and we maximize our chances of by straight-through impact our collective positioning ourselves for the London Market processing? To a large future experience as of tomorrow.” degree, we mean the a result of the London evolution of passing Market TOM. Additionally, Peter doing so, we minimize our chances insurance risk data, premium raised the topic of London Market of investing in technology, process, data, and claims data between efforts to improve and expand the and/or human resources that coverholder, broker, and London insurance community’s creation, only solve for yesterday’s market risk taker(s) in various monthly usage, and adoption of common and we maximize our chances spreadsheets and in various data standards (see also the of positioning ourselves for the formats (which is mostly what ACORD website) happens today in the delegated London Market of tomorrow. authority community) to a Among other benefits, the As we know, legacy solutions modernized process where expansion and usage of ACORD likely contributed to some of the XML-formatted data messages XML data sets will allow the competitive challenges presented are automatically passed and delegated authority community in “London Matters” by Boston distributed to relevant parties to continue driving towards Consulting Group to the London through automated interfaces our collective vision of straight- Market Group (LMG). That 2014 and in accordance with previously through processing of the risk, report inspired the opportunity agreed international insurance premium, and claims data within for TOM and Project Tomorrow in standards. the London Market. As we the first place (see my last CHART heard from Peter, work is already article for reminder details). Among other advantages, this underway on these funded, Speaking of Project Tomorrow, modernized process means (a) market-sponsored, and/or market- another possibility for more no re-keying of data and reduced supported initiatives. advanced TOM engagement possibility of human errors, (b) by CHART would be active reduced compliance risks, (c) While this work moves forward, participation in the incubation and greater end-to-end insurance let’s also continue to think about testing of the market’s innovation See TOM Page 21 how we might contribute to www.chart-exchange.com
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THE EARLY ADOPTERS
BILL OF RIGHTS PREAMBLE The CHART Exchange begun and held at the City of Philadelphia, between Monday the twelfth and Wednesday the fourteenth of October, two thousand and fifteen. RESOLVED by the Coverholders, Prospective Coverholders, Risk Takers, and Vendors assembled, that the following Articles be proposed as amendments to the Declaration of Interdependence. ARTICLES in addition to, and Amendment of the Declaration of Interdependence, proposed by the Early Adopters and ratified by the Coverholders, Prospective Coverholders, Risk Takers, and Vendors attending the CHART Exchange event. FIRST AMENDMENT (Freedom of commerce and peaceable assembly). The CHART Exchange will foster growth in the U.S./London market by providing a forum through which Risk Takers and Coverholders can interact with domestic insurance agencies in the pursuit of new business opportunities. The event shall also provide a series of workshops moderated by CHART’s Risk Taker and Vendor partners. All attendees are expected to peaceably assemble at these sessions to expand their skillset and show support for the presenters. Participants shall be respectful of the efforts put forth by the moderators by not setting appointments during the times allotted for workshops. Ample time has been provided before and after scheduled events for holding individual meetings. CHART attendees are expected to follow the precepts of the “Golden Rule”: do unto others as you would have them do unto you. Individuals must be supportive and respectful of other participant’s efforts before presuming the same treatment from them. SECOND AMENDMENT (Right of attendees to bear business cards). Participants will be protected against spam and other forms of solicitation through the judicious and limited distribution of attendee lists. Business can best be conducted across long distances by first establishing the partnership through personal interaction. Participants shall network with others in attendance as a means of identifying new opportunities. THIRD AMENDMENT (Protection from enduring non-business activities). The CHART Exchange shall not schedule golf outings, formal dinners, or other social events, as these serve to distract attendees from the core purpose of getting business done. All participants are given the freedom to make their own plans after meeting hours. FOURTH AMENDMENT (Protection from unreasonable constraints on attendee time). The CHART Exchange shall be respectful of all attendees by making optimal use of the time they have allotted to participate in the event. Meetings shall start promptly at 8:00 AM. The agenda shall provide content designed to facilitate growth within the U.S./London market.
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FIFTH AMENDMENT (Due process and freedom from self-aggrandizing participants). The CHART Exchange shall recognize that all attendees are experts within their particular field of endeavor: risk evaluators/underwriters, product distributors, service providers, etc. As such, the meeting will be deemed as an assembly of peers. All participants are expected to check their egos at the door as part of the event registration process. Business casual shall be the dress of the day. SIXTH AMENDMENT (Judgment of new ideas by a trial of peers). All attendees shall have the right to submit their new business/marketing ideas for consideration within the Shark Tank/Dragon’s Den competition. Submissions shall be evaluated based on the innovative nature of the idea, viability of the product, and premium potential. Style points will also be awarded for the originality of the presentation itself. The winner shall be determined jointly by a panel of experts and the other attendees. The grand prize: $10,000 (£6,400). The Shark Tank/Dragon’s Den competition is sponsored by Iris Insurance Brokers. SEVENTH AMENDMENT (Civil treatment for all attendees). All participants shall have the right to expect civil treatment from all other event attendees. Moderators shall be shown respect by not having to compete with individually scheduled appointments during the times allotted for workshops. All attendees shall be granted the freedom of not having to be recipients of spam or other solicitations due to limited distribution of participant lists. Each Early Adopter is considered a full partner. EIGHTH AMENDMENT (Freedom from cruel and unusual keynote speakers). The CHART Exchange shall not retain the services of celebrity speakers to deliver speeches unrelated to the growth of the U.S./London market. Tuesday’s keynote address shall be presented by Jeff Tobe, a nationally sought after for his expertise in improving corporate profits by changing the customer experience and retaining great talent. Wednesday’s opening remarks shall be provided by Mark Cloutier, CEO of BRIT Insurance Holdings. Mr. Cloutier has extensive experience within the various aspects of the insurance transaction: as a risk-taker, product distributor, and as a vendor supporting the industry.
NINTH AMENDMENT (Enumeration of rights shall not be construed as anything critical of the great forces that build our profession). CHART recognizes the valuable role other association groups (AAMGA, NAPSLO, PLUS, TMPAA, IIABA, Trusted Choice, etc.) play within the U.S./London market. CHART shall honor the contributions these fine organizations already make and facilitate dialogue amongst risk takers, established Coverholders, U.S.based insurance agencies, and vendor partners as a means of surfacing new business opportunities. Further, the CHART Exchange shall elevate the role London Brokers play in mage credit: Lloyd’s of London the insurance transaction. Once an agreement on a new concept discussed at the meeting has been reached, risk takers and/or insurance agencies shall be encouraged to select the broker of their choice in order to transform it into a formal agreement. TENTH AMENDMENT (Powers of Risk Takers, Coverholders, Potential Coverholders, and Vendor Partners). Except for the Amendments articulated in the CHART Exchange Bill of Rights, attendees are free to pursue new business opportunities amongst themselves. Carpe Diem – Seize the Day!
News
ALLIED WORLD W. R. BERKLEY LAUNCHES FORMS BERKLEY PRODUCT RECALL INSURANCE ASIA INSURANCE PRODUCTS IN NORTH AMERICA
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. R. Berkley Corporation (NYSE: WRB) announced on 5/11/16 the formation of Berkley Insurance Asia. Shasi Gangadharan has been named chief executive officer and Aaron Yip has been appointed chief operating officer. The appointments are effective immediately. This new operating unit will begin offering specialty n April, Allied World Assurance Company commercial insurance coverages to clients in North Holdings, AG announced its Product Recall Asia and Southeast Asia through offices in Hong insurance products are available in Canada Kong and Singapore, respectively, subject to relevant and the United States, as part of the Global Crisis regulatory approvals. Management Division. The Product Recall insurance offers both First Party and Third Party coverage and it allows clients to mitigate the risk of recall expenses, adverse publicity and damage to brand reputation, business interruption costs and insureds’ defense costs.
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Todd Germano, Executive Vice President, Allied World Global Crisis Management Division, commented, “We’re delighted to bring this important coverage to the North American market. Our specialized underwriting approach allows us to provide product recall coverage solutions to meet clients’ needs.” Tom Mangan, Vice President, Product Recall, is an industry veteran with over 30 years of insurance experience. He will lead the product recall underwriting team and serve Canada and the United States from Allied World’s New York office. Tom added, “We have great bench strength on our team and clients can reach out directly to myself or Sean O’Dea, Underwriter, Product Recall, to learn more about how these products can help provide financial protection for their business.”
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Proud supporters of CHART
Serving coverholders’ needs since the 1930s … and into the future Bespoke solutions Packaged lines Enhanced commissions Web-based platforms US domiciled marketing office Access us through 170 Lloyd’s brokers
AtriumUw
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Atrium Underwriters Ltd
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News
OBAMA’S VISIT TO THE UK: AN UPDATE ON ‘BREXIT’
by Tyler Cichewicz, Managing Editor
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ast month President Obama traveled to the UK to warn voters about the negative consequences leaving the European Union could have. The June referendum is on the horizon and Britain’s exit, dubbed Brexit, could threaten the stability of Europe along with the global economy.
visited in late April, where he urged British voters to remain in the EU. “The United States wants a strong United Kingdom as a partner, and the United Kingdom is at its best when it’s helping to lead a strong Europe,” Obama said.
Obama also referenced the recent terrorism in Europe and the affects the attacks have had on the world, but Sean McGovern, Chief Risk Officer at Lloyd’s of London, most directly on Europe. As one of the EU’s leading spoke on behalf of the insurance giant and weighed producers, Obama encourages remaining in the EU to the pros and cons of leaving the EU. also promote stability in this unforeseeable times. “Whether it is June or some later date-what would a vote to leave actually mean,” McGovern said in a speech to the Insurance Institute of London. “We would clearly enter a period of considerable uncertainty.” Though Britain’s relationship with the EU is imperfect, some large businesses, like Lloyd’s, believe the benefits of the EU outweigh the costs.
President Obama received some backlash for his comments on Britain’s affairs from those that support leaving the EU. However, most political analyst say that is to be expected and that Britain’s view of Obama will be unaffected.
It is still early to weigh the effects Lloyd’s Chairman, John Nelson, commented saying, of Obama’s speech, but two polls indicated, on April “We [Lloyds] would have to restructure bits of 24th, that support for leaving the EU had slightly risen our business, which would probably mean more above a vote to stay. Still, the polls indicate that British representative offices to qualify within the EU, which voters are virtually divided on Brexit with 46 percent in would be expensive.” favor of leaving and 44 percent for staying. Nelson added, “It would diminish our attraction as a market to invest in if we were not part of the EU.”
The referendum will be held on June 23rd. The implications of leaving the EU are being voiced by other foreign countries, but ultimately the decision President Obama expressed a similar opinion when he will come down the Britain. www.chart-exchange.com
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THE PARTNER MEANS EVERYTHING VENTURE INSURANCE PROGRAMS速 is proud to be an Early Adopter of the CHART-Exchange and a partner in expanding and improving the U.S./London marketplace. For over 20 years, Venture has been a leader in the design, administration and marketing of quality insurance programs to select niche industries. We work exclusively through insurance agents & brokers to provide specialty coverage for the golf and country club industry, city and social clubs; resorts and hotels, hunting & fishing lodges, specialty commercial marine and other hospitality related industries.
| MARKETING@VENTUREPROGRAMS.COM | 800-282-6247 EXT 300
Wilson Elser Consulting
Continued From Page 15
“TOM” processing efficiency, and (d) faster and more effective management information and improved analytics. This is quite achievable. By way of example, an Australian coverholder (and their London constituents) already made this happen on certain insurance business and with particular data sets almost a year ago using market resources available today and I have led successful projects like these in other international insurance contexts throughout my career. As a result, it should be easy to see that our collective on-going attention to these subjects and supporting the London Market’s modernization agenda from the CHART platform while improving our own business outcomes has never been more compelling. In the same spirit of attention to these topics, I would like to close by sharing some brief general updates on additional progress being made throughout TOM’s other workstreams in recent weeks.
Delegated Authority because many of these efforts interrelate and build on the success of one another. Specifically, the Central Service Refresh Program (CSRP) launched a new service and channel that allows an early adopting broker to submit premium data using ACORD-approved messages for London Market processing. Additionally, the Placing Platform Limited (PPL) workstream showed off their first electronic placement of insurance software platform through their 3-day “open house” demonstrations in the Lloyd’s of London Coffee Shop. Both of these workstreams also have 2016 priority among the totality of 15 TOM initiatives overseen by the LMG. Thanks for reading. Please feel free to contact our consultancy (contact information below) to discuss any of the above advisory updates or ideas, share feedback, and/or inquire about other opportunities.
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About Wilson Elser Consulting
Operating as a subsidiary consultancy and a global insurance Although we have not yet discussed business solutions provider from details on other TOM initiatives Wilson Elser, the internationally in past CHART publications, it is distinctive U.S. law firm with important to begin appreciating nearly 800 lawyers and 30 offices the continuously growing throughout the USA and 1 office in momentum of TOM outside of London, Wilson Elser Consulting www.chart-exchange.com
offers unique professional experience, advisory services, management solutions and other non-legal advice and business insights to insurance markets, carriers, and any organization involved in the application of enterprise risk, governance, legal and compliance management; legal operations and legal spend management; claims litigation management; insurance operations and systems; and third-party vendor/expert management by guiding our clients to champion change and generate business value through process, technology, and analytics. For more information, please contact Mr. Jesse R. Viani, Director of Insurance Business Services at +1 (212) 915-5298 or jesse.viani@wilsonelser.com
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News
LLOYD’S TO APPLY FOR INDIAN REINSURANCE BRANCH
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Lloyd’s, the world’s specialist insurance and reinsurance market, today announced its intention to apply for a reinsurance branch based in Mumbai following IRDAI’s publication of the regulations governing the Lloyd’s market earlier this week.”
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loyd’s has a century-long relationship with India as a provider of offshore reinsurance. An onshore branch will provide Indian reinsurance brokers with local access to Lloyd’s unmatched underwriting expertise and innovative reinsurance solutions for complex and specialist risks, including agriculture, infrastructure and disaster management.
throughout this process and into the future to ensure the framework evolves to meet the needs of a modern, international insurance sector, which will be essential in supporting the continued sustainable growth of India’s economy.” Vincent Vandendael, Lloyd’s Director of Global Markets added: “We have a long history of supporting India and we look forward to this new phase in our relationship. Lloyd’s underwriters will work closely with brokers and clients to craft policies that meet specific needs and gaps in the market. We look forward to helping to create a world-class insurance and reinsurance market in India as we have done elsewhere in the world.”
John Nelson, Chairman of Lloyd’s said: “As an international insurance and reinsurance market, Lloyd’s can bring unique benefits to India. We believe a Lloyd’s presence will contribute to the development of a more diverse reinsurance market, which is fundamental to the stability and future growth of the Indian economy. Lloyd’s will also help to position India as a centre for insurance, reinsurance and Lloyd’s recently announced associated services. the appointment of Shankar Garigiparthy as its new Country “Whilst there are elements in the Manager for India commencing 1 published regulations which may April 2016. Shankar Garigiparthy impact the ability of our market brings over 23 years’ experience to perform to its full potential in to the role, most recently leading India, we are nonetheless pleased regulatory relationships for Lloyd’s that the regulatory framework has in Singapore and across South now been published, enabling East Asia. Arun Agarwal, General us to submit an application for a Representative for Lloyd’s in India reinsurance branch. since 2011, continues in his role supporting Shankar and providing “We look forward to continuing his expert guidance and counsel to our close dialogue with IRDAI Lloyd’s. TABLE OF CONTENTS
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CHART Exchange Continued From Page 23
REPORT: CHART GOES TO LONDON
1.3% of the $1.1 trillion of insurance business placed domestically. Glenn explained that CHART can help facilitate expansion within the U.S./London marketplace through the identification of new production opportunities. Our model complements – not competes against – existing distribution structures currently in place.
that Thomas J. Ridge would deliver the keynote speech at the Second Annual CHART Exchange event in Baltimore MD. Mr. Ridge served as the first Secretary of the U.S. Department of Homeland Security. He was also twice elected Governor of Pennsylvania, occupying that position from 1995 to 2001.
Glenn then articulated CHART’s Risk Taker strategy for 2016: to recruit 15 – 20 committed Syndicates for membership in the organization. The targets would be those firms seeking to expand their U.S.-based premium production through the Delegated Underwriting Authority model.
The morning’s activities concluded with a presentation by Jonathan Swann from CFC Underwriting. This group is the largest independent, specialty MGA in the U.K. Mr. Swann articulated his agency’s capabilities and risk appetites.
At the end of Glenn’s presentation, several Agency and Vendor Partner members of the audience were asked to repeat their CHART testimonials for the benefit of the Risk Taker representatives. A select number of Syndicate personnel also stood up to share their experience at the first CHART The meeting resumed after meeting. lunch. A number of Syndicate representatives joined us for the We wrapped up the Tuesday afternoon session. meeting with an invitation to the Syndicates to become members of Glenn Clark initiated the the CHART Exchange. By joining proceedings with a review of how the organization, these Risk Takers the CHART model could benefit would be able to become active London Risk Takers. The discussion participants at the Second Annual started with a simple statistic: Event scheduled to take place on Lloyd’s wrote $15 billion in U.S.- October 3-5, 2016 in Baltimore, based premium last year – only MD. www.chart-exchange.com
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Glenn Clark initiated the proceedings with a review of how the CHART model could benefit London Risk Takers. The discussion started with a simple statistic: Lloyd’s wrote $15 billion in U.S.based premium last year – only 1.3% of the $1.1 trillion of insurance business placed domestically.”
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Analysis
LONDON TIME
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iming is everything’, right? NetRate Systems believes there are exciting times on the horizon for Lloyd’s Risk Takers and their U.S.-based Coverholders. Lloyd’s is the world’s specialist insurance and reinsurance market. Headquartered out of Okemos, MI, NetRate has been delivering technology solutions to streamline the workflow of rate, issue and report for U.S.-based MGA’s, Program Administrators and Carriers since 1998. NetRate takes a keen interest in supporting Lloyd’s Coverholders, their brokers and risk takers with distribution and processing systems aligned with the future goals of the London market. NetRate is a Preferred Vendor Partner in the CHART Exchange. Domestic MGA’s and Program Administrators with an interest in doing business with the London market can become a Coverholder by securing a delegated authority contract with Lloyd’s. The timing may be attractive to capitalize on opportunities in the London marketplace for a multitude of reasons.
This article will focus on two: 1) optimizing the business processes with technology improvements, and 2) optimizing the business relationships through a new business exchange, CHART. 24
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Business process improvements errors to be addressed much more through technology. Project quickly while providing a more Tomorrow is a Lloyd’s initiative “pro-active” view of the overall underway designed to enable business activity. The initial straight-through processing of pilot was tested successfully with risk bound data between MGA’s property data, and the standard and London for can be amended Coverholder Lloyd’s makes to include data business. For the requirements for it clear one of other classes of most part, the the intentions business. current process for submitting moving forward is to grow risk information by seeking an increased Other long-term under binding initiatives and number of relationships a u t h o r i t y commitments in their distribution arrangements are underway, requires a channels; and in part, such as “TOM” significant through diversification. or The London amount of Target Operating Glenn Clark, earliest manual effort Model which is a adopter in CHART, has and duplication. core component taken this challenge of the longThe new model term market as a “rallying cry” and conceptually modernization The CHART Exchange requires no reproposal put keying on the (Coverholders and Risk in place by the p a s s - t h r o u g h Takers) was born January London Market of information Group (LMG) 2015.“ to brokers and to make it syndicates in London. Under this easier to do business in London. scenario, the MGA has one place Key words and phrases have to send the data and the London generated excitement among market has one place to receive the participants; such as, “one the data, so that information gets touch data capture on behalf of to the right place much faster. carriers and brokers,” which gather attention and focus on improving Delivery of monthly bordereau business processes. can change to weekly, daily or real-time in frequency allowing See LONDON TIME Page 26 TABLE OF CONTENTS
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All together in an accessible anywhere, easy to use platform. “We have one source for our rating, quoting, pulling data for proposals and updating any information once coverage is bound and the policy is issued... ...NetRate solved our workflow nightmare.”
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For More Information, Contact NetRate Systems at 517.347.4900
www.NetRate.com
NEWS
Continued From Page 24
in a way that has not been commonplace until now. The CHART Exchange appears to be an excellent forum to dovetail into Lloyd’s growth plans where risk takers can be introduced to new US-based producers who are also seeking ways to grow business. Business plans are Today, Coverholders, brokers presented, decisions are made and insurers spend valuable and the participants will engage time on business processes their chosen London Broker to that will soon be automated facilitate the relationship. with better workflow through technology. This will allow more One important component of time for professionals at all levels; the Lloyd’s tribunal process for Coverholder, Broker, and Carrier, a new Coverholder involves to focus on key business objectives the discussion of systems and while leveraging technology processes in place for business to streamline workflow and performance, reporting and workflow intelligence. These compliance. Selection and improvements have excellent utilization of a high-functioning, potential to positively impact the integrated system with bottom line for all involved. complementary attributes is a great starting point. Business relationship building through CHART. Lloyd’s makes A turn-key, cloud-based solution it clear one of the intentions specifically designed for the moving forward is to grow by Program Administrator and seeking an increased number of Coverholder insurance sector relationships in their distribution can reduce the hours needed channels; and in part, through to process and win business. diversification. Glenn Clark, While every delegated authority earliest adopter in CHART, has relationship is unique by program taken this challenge as a “rallying and the combination of partners, cry” and The CHART Exchange there are common themes to (Coverholders and Risk Takers) strive for, including increasing was born January 2015. accuracy, underwriting success, reporting, compliance and audit CHART is a business forum efficiency. through which current and potential U.S.-based Coverholders can personally NetRate delivers a system interact with Risk Takers to have platform to support these new London-centric discussions efforts. Web-based solutions that
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deliver functionality including components for portal workflow, submission, underwriting, rating, issue/forms management and reporting fit nicely in the Londoncentric plans of the future. Many of these processes exist today in homegrown solutions or legacy systems where integration and single entry is cumbersome or non-existent.
About the Author: Mark Stroop, Sales Executive at NetRate, has helped MGA’s, Carriers and Agencies with technology solutions that streamline the process of generating new and renewal business for 20+ years. About NetRate: The NetRate Systems, Inc. solutions include cloud-based portals that contain high performance submission, underwriting, rating, easy quote and policy document generation, data analytics and integration with 3rd parties for the Property and Casualty insurance marketplace, primarily in the MGA, Program Administrator, and small/medium carrier environment. NetRate products include nationwide rating of ISO® General Liability, Property, Business Auto, Crime, Inland Marine, BOP, as well as NCCI Workers Comp. NetRate also offers custom programming of all lines of business, including Professional Liability. For more information, go to www.netrate. com. www.chart-exchange.com
NEWS
INSURANCE NOODLE GRANTED COVERHOLDER STATUS WITH LLOYD'S OF LONDON
New status gives the online insurance placement platform underwriting authority for the insurance giant
"We're honored by Lloyd's decision to appoint us," said Ralph Blust, President of Insurance Noodle. "And we're excited to pass the benefits along to our member agents. One of the biggest benefits of being a coverholder is the ability to build HICAGO, May 19, 2016 / unique insurance products quickly PRNewswire/ -- Insurance for our member agents." Noodle, the online, membership-based insurance Lloyd's is the world's specialist placement platform, today insurance and reinsurance market, announced its status as a bringing together an outstanding coverholder with Lloyd's of London. concentration of underwriting As one of only 1,080 coverholders in expertise and talent. It is often the the United States, Insurance Noodle first to insure emerging, unusual, is now authorized to underwrite and complex risks. and insure accounts on behalf of certain Lloyd's underwriting Insurance Noodle already offers syndicates. its members greater access to a
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Insurance Noodle has offered insurance agents immediate access to its stable of top-rated insurance carriers since its inception. The company's position as a Lloyd's coverholder represents a significant step forward in its evolution as an insurance industry leader. The position grants Insurance Noodle access to the Lloyd's brand, its member syndicates, financial security, and A+ ratings. Noodle gains the ability to manufacture exclusive and unique products and to distribute those products through its member agents. www.chart-exchange.com
wide range of business classes. As a coverholder at Lloyd's, Insurance Noodle can now build bespoke products for its members. "If our agents present a market opportunity our carriers are not inclined to consider, we can turn to Lloyd's and develop a product to address it," said Blust. "This gives us and our members a significant edge in the marketplace." For more information about Insurance Noodle's products and capabilities, go to www. insurancenoodle.com. TABLE OF CONTENTS
About Insurance Noodle Insurance Noodle established itself as a pioneer in online quoting in 2001. Since then, it has provided independent agents with online access to insurance products and services through a single-entry, multi-carrier, multi-line, webbased portal. Insurance Noodle was formerly a subsidiary of Willis Group Holdings, PLC. For more information, visit Insurance Noodle's website.
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Analysis
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HOW TO VALUE AN INSURANCE DISTRIBUTION FIRM
he purpose of this article is to provide an overview of how insurance distribution firms are valued, and to give you a sense of current market conditions. Objectives
may be adjusted to increase the fundamental value of the company. The objective is to maximize earnings, and growth potential for the firm. The key metric for all insurance valuations is Pro-Forma EBITDA.
recurring, or extraordinary factors of the business exist that can be adjusted in order to lead you to your Pro-Forma Income Statement and EBITDA.
Once you have arrived at the “Pro • Valuation Methodology Forma” EBITDA, a market based • Overview of the Pro-Forma Insurance agencies are valued at multiple is applied to the EBITDA to Income Statement a multiple of EDIBTA (Earnings, arrive at a value for the firm. • Current Market Environment Before Interest, Taxes, Depreciation, • Deal Structures- Components Amortization). The term “Pro Adjusting the and Examples Forma” is used to describe EBITDA Pro-Forma Income Statement • Asset Vs. Stock Sale from “normalized” or “adjusted” The Pro-Forma Income Statement financials from the buyer’s is where most privately-held When valuing an insurance agency, perspective. To get the Pro-Forma businesses and insurance agencies you will take a deep dive into the EBITDA, you would first look at the adjust their expense structure to company’s key operational and Income Statement that reflects where it is more personal to the financial metrics, and determine the earnings of the firm. Then you owner. which specific value drivers would see what personal, non- Begin with the most recent income
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histopher M. Hughes serves as Managing Director of Insurance Distribution for Merger & Acquisition Services, specializing on insurance agencies, MGAs, MGUs, E&S agencies, wholesalers, and ancillary insurance businesses. Mr. Hughes comes to Merger & Acquisition Services, Inc. with over 10 years of insurance and legal experience, working on engagements with Property / Casualty and Life / Health insurance distribution businesses. He previously served as an advisor for a boutique firm in CT where his exclusive focus was on insurance distribution companies. In addition, Mr. Hughes spent 7 years as a senior product manager for Hartford Financial Services Group (“HIG”) with full P&L accountability for specialty products, and as director of HIG’s internal retained asset and structured settlement departments. Prior to The Hartford, Mr. Hughes practiced commercial litigation in Boca Raton, Florida. Mr. Hughes was honorably discharged from active duty in the United States Marine Corps (USMC) in 1992, after serving with E Company, 2nd Battalion, 8th Marines, 2nd Marine Division. While in the USMC, he served as an infantryman in the 1991 Northern Iraq operations: Provide Comfort, Encourage Hope, and Force Hope. Mr. Hughes has earned a J.D. degree from Northern Illinois University, a M.B.A. from the University of Connecticut, and a B.A. from the University of West Florida. 28
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Analysis
statement and take a look at the Owner Salary and Corresponding Expenses – Is there an owner operator? An absentee owner who owns multiple agencies? Is there a market value being applied to the owner’s salary – is it too high/too low or right where market is? Is there corresponding expenses – taxes or employee benefits for the owner? If so, make adjustments accordingly. Next, you can take a look at Excess/Redundant Staffing – Is there some form of family member(s) or employees who have been there for a long time that are not necessary to the business?
The chart below illustrates an example of a Pro-Forma Income Statement with Adjustments made
If so, maybe prospective buyers can take those employees out or replace them. Looking at Extraordinary and/or Nonrecurring Income – Was there one large life insurance non-recurring commission received, that happened only once? Make that adjustment. (A. Adjust out non-operating interest income, B. Normalize Owner’s Compensation to Market Looking at your Extraordinary Salary C. Adjust out excess spouse compensation, D. Normalize Employee Benefits reflecting and/or Non-recurring B & C above, E. Normalize Payroll taxes from Owner/Excess Comp, F. Adjust Country Club and Expenses, was there a new Personal Travel, G. Adjust Family Car and Boat Expenses, H. Adjust Excess Rent paid to Owner, I. service system put in place Adjust out all Non-Operating Expenses (Acquisition Amort)) that was a one-time expense? a 8.0X multiple to this $500,000 will be adjusted out. Was there college expense(s) for adjustment makes the valuation the owner’s kids? Any expenses After you make all adjustments increase by $4 million. that are personal to the owner of to Pro-Forma, you can see in the the business are non-necessary chart above that the total expense Above, you can also see the EBITDA to operate a business and a small statement goes from 4.2 million margin is 37.3%. As for EBITDA adjustment can be made to the dollars down to 3.6 million dollars; margins, insurance agency’s pro-forma. In addition, all non- EBITDA goes from 1.7 million typically have margins anywhere operating expenses Depreciation, dollars to 2.1 million dollars, which Amortization, Interest, and Taxes is a $500,000 increase. Applying See Agency Valuation Page 30 www.chart-exchange.com
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Analysis
Ratios & Loss Ratios, Key Personnel Producers, and Contracts (Non-competes, Carriers) all can impact the valuation.
Continued From Page 29
AGENCY VALUATION between 30-40% which is the normal range. Anywhere above 45% perhaps becomes unrealistic to expect the buyer to think they can run the company at such a high EBITDA margin. When the margin is much less than 30%, you can take a look at more expenses to trim to get the margin to a normal range. Well run agencies with a 37% EBITDA margin create a high premium in the market place.
Growing agencies are worth more and higher EBITDA multiples will be applied versus agencies that are flat or shrinking. Profitability of an agency is a big driver – looking at the above chart where the multiple of revenue is applied; the multiple of revenue is the revenue divided by the valuation. Multiple of revenue is purely derivative of what the valuation is when doing multiple of an EBITDA calculation and dividing it by your revenue. The whole relationship is driven by EBIDTA margin. The lower the margin is, the lower the multiple of revenue; the higher the margin is, the higher the multiple of revenue.
Client Concentration could have a negative effect on a valuation when a company has one big client that constitutes 15 to 20 percent or in some instances even 30 or 40 percent of entire agency’s revenue. This likely presents a risk factor since the higher revenue concentration with one client will lower the valuation and will also drive more earn-out type scenarios with The above chart shows the multiple of EBITDA with agency that specific client remaining a client. Current Independent Agency Valuation Multiples
revenue at less than $2 million, midsize agencies with $2 million$10 million, and platform-type scale agencies greater than $10 million.
Mix of business can also affect your valuation; for example companies who have strong cross-sells between clients where they offer Property & Casualty, Applying the above Agency’s adjusted EBITDA to a market Employee Benefits, Life & Health and financial services multiple, you can see that for an agency with $5.775 million in revenue and $2.184 million in EBITDA, the valuation range would could sell a number of clients different types of services. This in general will raise the valuation and be $17.5 to $18.5 million. will give a company more lifetime value from a buyers prospective. Retention Ratios & Loss Ratios are both Valuation Range Example factors that have impact on the valuation; higher retention ratios equate to a stronger valuation. Loss ratios – For instance for valuing MGAs or MGUs; a significant amount of revenue can be derived from a profit-sharing component and relationship with carrier. As for Management, valuations are higher Valuation Drivers There are other factors that can affect the applied when there is a management team (key personnel/ valuation multiple other than just size and scale. producers) and infrastructure are part of the agency Growth of the agency (Organic & M&A), Profitability, transaction. Client Concentration & Nature of Relationships, Size and Scale of Operations, Mix of business, Retention Services or Products (niches being more desirable) 30
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Analysis gives competitive advantage in the marketplace. Systemization (internal systems) can impact the valuation in a positive manner when an agency management system is already in place (CRM, accounting, etc.). In terms of Contracts, Producers non-compete and non-solicits are a big driver for valuations. If those contracts are not in place and key producers are able to walk out the day after the sale, it will most definitely have a negative impact on the value of an agency. Carrier contracts should be all up to date and beneficial from you and your buyer’s prospective.
Private Equity’s Market Influence
and the potential earn-out could be worth less. From a promissory note point of view—a promissory note is seller financing. For example, the buyer can put a certain amount of cash at closing, say $10 million then have $500,000 guaranteed for the next five or so years. In this case, the Earn-Out is more variable then the Promissory note since future payments will be based on the growth or lack thereof. Employment/Producer and Non-compete Agreements also come into play as it relates to the valuation to any deal. Let’s say if the overall amount of the deal is $15 million then some portion of that will be carried toward employment/ producer and non-compete agreements.
The valuations for insurance distribution firms are, and have been, at an unprecedented peak over the past The chart below shows an example of 3 offers from 3 different buyers. two years, and the outlook remains strong. Currently the market is priced at a 50% premium to normal market conditions over the average valuation from the last 30 years. The driver of this valuation premium is the private equity new buyers using low interest rate debt to fuel acquisitions. Private equity groups and publicly traded brokers have created an expensive and competitive landscape for insurance distribution assets over the past 2 to 3 years. While valuations have leveled off – there is no indication of lower valuations in the short term. From a seller’s standpoint, now is the time to sell an agency unless you are growing at 20The first offer is an Earn-Out that is paid at end of 25% year over year and expect to continue. the 3rd year and for example, is paid if Revenue Deal structure meets 10% CAGR (Compounded Annual Growth A deal structure can take many forms, but these Rate). Looking at the chart above, if the agency are the most common to every offer that is made grows, you can end up with $5 million; but if the or received. There could be an Upfront Payment in agency does not grow, you could end up with either Cash or an Equivalent. The equivalent of cash nothing. This offer is very attractive to growing is when the company is bought by a larger broker agencies but comes with downside if growth is not and the company offers privately held stock or public realized. stock that is the equal amount of cash. There are also often times an Upfront Component with an Earn-Out The second offer is an offer where all Earn-Out or Upfront Component with a Promissory Note. The payments are guaranteed and there is Promissory difference is that an Earn-Out is based on the future Note component. This is guaranteed that $500,000 performance of the agency after the transaction. The agency could grow and meet certain targets where it becomes a larger potential earn-out, or on the other See Agency Valuation Page 32 side; the agency could shrink or lose certain clients www.chart-exchange.com
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AGENCY VALUATION
out or promissory note period and typically keeps specific assets and/or liabilities. The Buyer has a stepped up basis in assets to depreciate over 15 years which creates a real economic advantage for the Buyer which in turn can translate to an economic valuation of the seller to do an asset transaction rather than a stock sale.
will be given. The overall multiple of EBDITA and the overall payment is less than the first example, In a stock valuation, usually, all obligations are transferred including all however there is no risk liabilities (known and unknown) associated with future growth Almost all and contingent liabilities. They as it relates to the agency’s independent are bought by the Buyer and value. A principal risk a seller insurance there is no step up in basis (lower takes in this example is the credit worthiness of the buyer agencies are sold as Asset value to the buyer, and lower to ultimately pay the note to transactions. In general, the price to the seller). As a result the seller. Buyer is buying the assets of this, about 90% of Insurance Agency transactions are Asset of the insurance agency. transactions. The third offer is Earn-Out The Buyer sometimes Payment scenario where a buyer looks at the average of assumes general liabilities Conclusion This article explains in a the next 2 years of the EBITDA but normally those do general sense how insurance multiple less the cash paid at not transfer to the Buyer, distribution firms are valued, closing. For a growing agency, you get the valuation of the unless specifically provided common adjustments to the for. The Seller maintains income statement, current future growth over the next two years and apply it to the general their corporate existence market conditions, and common deal structures. Every business EBITDA. The EBITDA should be generally through the and every deal is different, and higher, since there is growth. earn-out or promissory strategic buyers can derive This assumes 5% EBITDA note period and typically more value from a transaction Growth each year. The Earn-out than pure EBITDA plays. Further, could increase if there is growth keeps specific assets the facts and circumstances of or decrease of retention or and/or liabilities.� each deal can pose risk/reward revenue goes down. scenarios that can vary greatly from one party to the next. In the end analysis, Asset Sale vs. Stock Sale Almost all independent insurance agencies are valuation has a degree of subjectivity specific to sold as Asset transactions. In general, the Buyer each party to the transaction. is buying the assets of the insurance agency. The Buyer sometimes assumes general liabilities but Please look forward to our next article on the normally those do not transfer to the Buyer, unless Merger & Acquisition Process. specifically provided for. The Seller maintains their corporate existence generally through the earn- Christopher M. Hughes 32
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NEWS
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SEAN MCGOVERN TO LEAVE LLOYD'S TO JOIN XL CATLIN
Following Sean’s departure, Peter Spires will take over as General Counsel. Hilary Weaver, Head of Internal Audit will take on the role of Chief Risk Officer on an interim basis.
ean joined Lloyd’s in 1996, became a member of the Executive Team in 2002 and was appointed to the Franchise Board in 2014. He is responsible for risk governance at Lloyd’s and legal, regulatory and Government affairs globally.
global regulatory environment. As a member of the leadership team Sean has also provided sound counsel and loyal service.
a modern, global, and energised market continue to be at the heart of the world’s insurance and reinsurance capability."
“I am delighted his talents are not being lost by the London Market and we wish him every success in the future.”
With immediate effect and in order to protect commercial confidentiality, Sean McGovern will no longer be involved in syndicate-specific Lloyd’s announced on May 18th activity. He will go on that Chief Risk Officer and General garden leave in July, and take up his new role in Counsel, Sean McGovern, will be November 2016.
During his time at the Corporation, Sean has played a key role in the development of the Lloyd’s Market. In particular, he has leaving the Corporation, after twenty years maintained and of service, to take up the position of Chief Following Sean's expanded Lloyd’s departure, Peter Spires licence network Compliance Officer and Head of Regulatory will take over as General globally, developed and Government Affairs at XL Catlin.” Counsel. Hilary Weaver, strong and transparent Head of Internal Audit relationships with regulators, Sean McGovern, Chief Risk Officer will take on the role of Chief Risk played a vital role in ensuring and General Counsel, said: “Lloyd’s Officer on an interim basis. With Lloyd’s readiness for Solvency II has played a tremendously twelve years’ experience at Lloyd’s and deepened trading links in the important role in my professional and, prior to that over a decade at US market during his tenure as life to date. While I am excited to be KPMG, Hilary is well acquainted Director, North America between taking on a role of this significance with the challenges, opportunities 2010 and 2012. at XL Catlin, leaving Lloyd’s was and risks facing Lloyd’s and the not an easy decision to make. I insurance sector. Inga Beale, Chief Executive Officer am extremely proud of what we at Lloyd’s, said: “Sean’s contribution have achieved in the time that I Olly Reeves will continue to be to Lloyd’s over the last 20 years has have been here and I would like to the primary market contact for been immeasurable. Well respected thank everyone in the Corporation all matters relating to risk, while across the Corporation and market, and the Market for their support. Rosemary Beaver will continue in Sean has worked closely with I am particularly grateful to Inga her role as Head of International regulators, both in the United Beale and John Nelson for their Regulatory Affairs, liaising with Kingdom and beyond to ensure sound judgment and energetic regulators across the globe. that Lloyd’s thrives in the new leadership. I look forward to seeing 34
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