THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, July 3, 1995 TAG: 9507010331
SECTION: BUSINESS WEEKLY PAGE: 14 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY TOM SHEAN, BUSINESS WEEKLY
LENGTH: Long : 190 lines
A year after joining his father's Virginia Beach insurance agency, Jim Kitchin was running the business.
It was 1972, and intense competition for sales of property and casualty insurance was unknown in Virginia.
That's because state law, which was later changed, barred insurance companies from freely altering their rates in response to market conditions.
Selling insurance in those years ``was a service and personality business,'' recalls Kitchin, who bought his father's agency in 1975.
Two decades later, the environment is dramatically different. Many independent agencies are struggling to hold down their overhead while meeting the demands of insurance companies for higher premium volumes.
Earlier this year, Kitchin decided the pressures had become too great and that the outlook for his agency, The Kitchin Group Ltd., was too uncertain.
On Saturday, he folded his business into Hilb, Rogal and Hamilton of Tidewater, a Virginia Beach unit of insurance-agency holding company Hilb, Rogal and Hamilton Co. in Richmond. Howard Gill, a property and casualty agent who works with Kitchin, also joined Hilb, Rogal and Hamilton.
``Sometimes I felt that I hadn't succeeded, but this was a good move for me and my clients,'' Kitchin said. ``I'll be able to run my business inside Hilb, Rogal and Hamilton's.''
Kitchin's move was part of a continuing wave of insurance-agency consolidations. Throughout the country, the number of independent agencies has declined to fewer than 46,000 from 53,500 in 1987, according to the Independent Insurance Agents of America, a trade association based in Alexandria.
One reason for the consolidations is the sluggish growth in premiums for property-and-casualty insurance. Despite several expensive catastrophes in recent years, American insurers still compete aggressively for new business, which has held down the rates for many types of insurance. That, in turn, has depressed the commissions that agents earn on the insurance they sell.
Meanwhile, thousands of businesses that were hit by soaring rates in the early 1980s have found less expensive alternatives to conventional insurance. These include self-insurance programs, which enable companies to cut insurance costs by accepting a higher deductible.
In addition, many companies have banded together to form ``captive'' insurance companies and ``risk-retention groups'' to deliver forms of self-insurance.
On top of the sluggish growth in premiums has been the loss of business to direct writers, agents who work with a single company. Allstate, State Farm, and Nationwide are some of the insurance companies that rely on direct writers for sales.
Independent agents, who often do business with several insurance companies, generated only 32 percent of the 1993 premiums for personal lines of insurance like homeowner's and auto insurance, according to a study by the Independent Insurance Agents of America.
For commercial lines of insurance, the erosion has been less severe. In 1993, independent agents accounted for a 72 percent share of premiums.
Since early June, Jim Kitchin has been preparing a bid for the insurance business of a local heating-and-air-conditioning contractor.
First, he compiled an inventory of the contractor's property, motor vehicles, and payroll by types of employees. Then he wrote a narrative for the insurance company about the contractor's business: where it's been, where it's going, and what types of insurance losses it has sustained in the past.
``This is a pretty straightforward account,'' Kitchin said.
But in today's price-sensitive environment, he is worried that his estimate might be too high to win the contractor's business.
One advantage to joining a much larger agency is the ready access to a safety engineer and other specialists, said Kitchin. A safety engineer in Hilb, Rogal and Hamilton's Virginia Beach office may be able to find ways that the contractor could reduce his risks, which would reduce his insurance premiums.
Whatever advantages are available in a larger agency, some independent agencies have resisted selling out. To continue doing business on their own, they are casting a broader net for customers and promoting new types of insurance.
For years, Henderson & Phillips Insurance has lined up insurance for local museums, including the Chrysler Museum and MacArthur Memorial in Norfolk and the Mariners' Museum in Newport News. Last fall, the Norfolk-based agency stepped up its pursuit of art and museum insurance by forming Henderson Phillips Fine Arts.
The new unit, with one agent in Los Angeles and another in Arlington, seeks business from museums and art collectors throughout the country.
This line of insurance is lucrative because ``it doesn't have the level of day-to-day competition that we run into in our commercial accounts,'' said F. Dudley Fulton, Henderson & Phillips' president and chief executive officer. ``There are a limited number of insurance brokers and insurance carriers to handle it.''
Henderson & Phillips also expects to build on its experience at providing liability insurance for underground storage tanks and environmental hazards. The agency is using this background to sell liability insurance to engineering firms, testing laboratories, contractors and others who come in contact with these hazards.
Henderson & Phillips, like Hilb, Rogal and Hamilton, also expects to tap what it sees as greater demand for coverage of legal costs from sexual harassment and wrongful termination lawsuits.
``The use of employment-practices liability insurance started out slowly because it was high-priced, and some thought it was just for big companies,'' Fulton said. However, smaller companies have been hit with such suits and are seeking the insurance, he said.
Throughout the 1980s, Henderson & Phillips grew by acquiring smaller agencies and opening additional offices. But heated competition and rising overhead prompted the agency to close four of its nine offices between 1990 and 1993 and to reduce its workforce by a quarter.
Today, the company has 125 employees and seven offices, including the Arlington and Los Angeles offices of its art insurance unit.
Henderson & Phillips has not sworn off acquisitions, but it is pursuing growth by generating additional revenues internally, Fulton said
To develop its sales force, the agency hired Charles J. Cralle, the former president of The Ware Co. insurance agency in Virginia Beach, last March. Cralle had worked at Henderson & Phillips for 13 years before joining Ware Co. in 1988.
Within the next 12 months, Henderson & Phillips will hire at least two additional agents to concentrate on sales of commercial property and casualty insurance, Cralle said.
When he was shopping for an acquirer, Kitchin decided that Hilb, Rogal and Hamilton's size would be an asset rather than a hindrance. That's because he didn't want to become part of another agency only to have that agency seek a buyer a few years later.
``Hilb, Rogal and Hamilton is a publicly traded company, and they're big. They'll be here'' for years, the 45-year-old Kitchin said.
With $133.6 million of U.S. revenues in 1993, Hilb, Rogal and Hamilton ranked No. 15 among the nation's insurance agencies and brokers, according to a July 1994 list compiled by the trade magazine Business Insurance.
Hilb, Rogal and Hamilton's strategy has been to acquire independent agencies in small and medium metropolitan areas and then centralize many of their administrative tasks. Since 1984, the company has made 135 acquisitions, including a handful in Hampton Roads.
Vernell H. Hogan, president of the Hilb, Rogal and Hamilton of Tidewater subisidary, had been a principal of the BAL Group, a Virginia Beach agency that joined Hilb, Rogal three years ago.
BAL Group's principals decided to make the move because the prospects for finding successors were uncertain, Hogan said. As part of Hilb, Rogal and Hamilton, ``we remain autonomous and have the same ability to choose who we will do business with,'' he said.
Lowery D. (Tuck) Finley III left another Virginia Beach agency, Lowery D. Finley & Co., for Hilb, Rogal in 1993. One reason for doing so was the rising volume of premiums that insurance companies were demanding from independent agencies.
``Once it was $250,000. Now it might be $250,000 to $1 million a year,'' said Finley. ``It's very painful for the small agent.''
Despite its size, Hilb, Rogal and Hamilton hasn't escaped the competitive pressures that have prompted many smaller agencies to seek a buyer. For the past five years, Hilb, Rogal's revenues have been virtually flat.
``Much of the problem is the continuing weakness in the insurance pricing environment,'' said Neal Kaplan, an analyst with the Richmond-based securities firm Scott & Stringfellow Inc. ``You have to keep doing so much more business just to stay in place.''
To bolster its earnings in the face of flat revenues has required Hilb, Rogal and Hamilton to improve its efficiency. And that has prompted the company to shed some of its acquisitions. During 1994, the company divested five offices and consolidated a handful of others.
``Three offices were less than profitable, and we didn't see any prospect for turning them around,'' said Diane Fox, a Hilb, Rogal senior vice president in Richmond. ``Another was marginally profitable, but it was in an area where we did not see how we could increase our market share.'' ILLUSTRATION: [Color cover illustration by John Earle]
Color staff photos by Beth Bergman
Insurance of museums is lucrative because it doesn't have the level
of day-to-day competition that we run into in our commerical
accounts." says F. Dudley Fulton, right, Henderson & Phillips'
president and chief executive officer. Senior vice president Charles
Cralle, left.
Graphic
Henderson & Phillips Insurance
[Revenues]
For copy of graphic, see microfilm
Hilb, Rogal and Hamilton's strategy has been to acquire independent
agencies in small and medium metropolitan areas and then centralize
many of their administrative tasks. Company agent lowery D. Finley
III, right, and president of Hilb, Rogal, and Hamilton of Tidewater
Vernell H. Hogan, left.
Staff graphic by John Earle
Hilb, Rogal and Hamiliton
[Revenues]
For copy of graphic, see microfilm
KEYWORDS: INSURANCE INDUSTRY by CNB