On the Fast Track
From its starting point in 2007, San Francisco-based Edgewood Partners Insurance Center (EPIC) is rapidly becoming one of the largest retail insurance brokers in the United States.
With initial funding from Stone Point Capital, the company’s founders received additional investment from the Carlyle Group in 2013.
With more than $175 million in revenue projected by the end of 2014, up from $75.l million in 2013, EPIC ranks among the top 20 retail insurance brokers in the country, and the company’s growth plan calls for an increase in revenue to more than $250 million by 2018.
Currently EPIC, a retail property and casualty insurance brokerage and employee benefits consultant, has more than 620 employees operating in California, Colorado, Connecticut, Georgia, Illinois, Massachusetts, New Jersey and New York.
In the past nine months, EPIC has made four acquisitions that added $50 million in annual revenue. Those acquisitions were:
• The McCart Group of Atlanta, one of the largest privately held insurance and risk management firms in Georgia, acquired on Jan. 9.
“As a 43-year-old company, The McCart Group had been approached many times over the years with offers to sell out to other, larger organizations,” said Jeff McCart, president of the company.
“Before EPIC, we were never seriously interested. But when John Hahn and Dan Francis (EPIC’s California-based co-founders) introduced their vision to build a national brokerage comprised of firms with specialized expertise who want to share their collective knowledge and resources to compete against the largest brokers, it was a game changer,” he said.
(Francis announced on Oct. 14 that he was leaving the company “to begin a new journey outside of insurance that will afford me the opportunity to further ‘give back’ and focus on some personal interests/worthy causes that have meant a lot to me over the years.”)
• On Jan. 21, EPIC announced it acquired the program business of Boston-based Altus Specialty Group.
• On July 22, the shareholders of Jenkins Insurance Services sold 100 percent of their shares to EPIC. Jenkins employs 160 people in Reno, Nev., and in California offices in Concord, Sacramento, San Jose, and Orange County.
• On Aug. 13, EPIC added the retail risk management and property/casualty team of Stamford, Conn.-based JLT Towers Re. This strategic build-out of a team serving large, complex risk management accounts is a product of EPIC’s broadening alliance, and partnership and collaboration with JLT/Towers Re.
“This team enhances EPIC’s risk management services and offerings for our middle market and upper middle market clients, expands our reach into the public entity sector and gives us additional depth to serve clients in metropolitan New York,” said EPIC co-founder and CEO John Hahn.
“The multi-prong approach of acquisitions and the aggressive recruiting of producers and service teams has enabled us to grow organically and strategically,” said Derek Thomas, chief strategy officer. “Our plan is to advance a similar model in key regions across the United States.”
Specific geographic areas eyed for growth potential include tier 1 and tier 2 cities in the Northeast, Mid-Atlantic, Midwest and Southeast, Thomas said.
“Our strategy is to maintain the local, client-specific success drivers of our new partners while providing them with access to broader national and global resources that can also be deployed for the benefit of their clients locally,” he said.
John Redett, managing director, financial services at The Carlyle Group, added: “We see tremendous opportunity for EPIC. Since we made our initial investment in late 2013, EPIC has already expanded its footprint into the Southeast and the Northeast, as well as bolstering its West Coast operations, product capabilities and client service strength.”
Whether it comes through additional acquisitions, geographic expansion or product growth, Carlyle supports an expansion of EPIC’s business in its effort to become a major national player, he said.
Hahn said the launch of the brokerage’s new growth phase, EPIC 2.0, “is off to a roaring start and we think the prospects for achieving our goal of $250 million in revenue in less than the original five-year plan are very favorable.”
On the Fast Track
EPIC has been on a fast-track growth pattern ever since it was launched in California in 2007, when Stone Point Capital and co-founders Hahn and Francis committed $100 million to create the groundwork for the current EPIC organization.
From the start, the company has had an investment structure that provided key employees, producers, acquired principals and executive management the opportunity to hold significant equity ownership stakes in the firm, said Francis, who serves as executive chairman.
The newly formed, California-based company went from zero to approximately $80 million in revenue in less than seven years, with average annual organic growth rates in excess of 10 percent, Francis said.
About midway through 2012, Hahn and Francis began taking a hard look at the company and its future prospects.
“When all was said and done,” Hahn said, “we believed we could build a super-regional/national platform through maintaining our entrepreneurial approach; improving our product and service offerings by acquiring and attracting high-quality, specialized talent; and offering successful regional broker owners and operators an opportunity to partner with us to build a national brokerage and consulting firm.”
After a thorough examination of the investor universe over the course of 2013, it became clear to EPIC that The Carlyle Group would be its best option to provide it with the additional capital required to execute EPIC 2.0 as well as offer it significant revenue potential through access to Carlyle’s portfolio companies, Francis said.
Over the course of 2013, EPIC began to restructure the company and build out its infrastructure in order to support the growth and expansion it anticipated would be necessary to drive EPIC 2.0.
“While doing so, we also began developing an M&A and talent pipeline that would serve as the foundation of our super regional strategy,” Hahn said.
The company’s first two non-California deals closed mid-2013 with the launch of a national real estate practice with Kathleen Felderman in Denver and Jonathan Griffiths in San Francisco, and a closing of a deal in New York with Safe Harbor, which brought another property and casualty, risk management, employee benefits and private client services consulting firm into the fold. Safe Harbor was led by Tom O’Neil, who is now EPIC’s West Coast region president.
Currently, EPIC has several new deals in due diligence and a robust acquisition pipeline, with other possible deals in various stages of discussion and evaluation, said Thomas.
“And we are actively looking for other potential partners,” he said.
“In addition to targeted geographic expansion,” Thomas added, “our plan is to identify and recruit production and service teams who have proven track records in growth oriented industry sectors.”
Disrupting Insurance Distribution
As more insurance distribution channels are being created, the potential disruption of the ordinary course of business for underwriters and brokers increases.
One of those channels, although details are hazy, involves Overstock.com Inc., a Utah-based e-commerce site that survived the dot-com bust by selling dying Internet companies’ inventories.
Since April 2014, Overstock.com has sold insurance, including auto, property, liability and workers’ comp for businesses, through an exchange where consumers receive live quotes, pick which the coverage they like, and then have a policy bound for them.
“Overstock’s mission is to offer high-quality products at low prices in order to save people money, and the launch of our insurance tab fits this mission beautifully,” Dave Nielsen, Overstock.com’s senior vice president, said in an email.
Or as the slogan on the Overstock insurance site says, “We Do the Work, You Do the Saving.”
But who is really doing the work … a.k.a., the underwriting?
Apparently, the underwriters’ names had been confidential, but when we asked Nielsen, he shared some of them: 21st Century, Progressive, Safeco and American Strategic (ASI).
Overstock.com is “seeing good traffic” on the site, Nielsen said, and he’s expecting to “see [sales] continually increasing month over month” as the company adds more products.
The logistics of claims and other policy-servicing depends on the carrier, Nielsen added. Overstock services some accounts in-house; others it transfers directly to carriers. But no matter what, policyholders contact Overstock first.
Most of the insureds probably care little about the identify of the underwriters, said Denise Garth, partner and chief digital officer at consultancy Strategy Meets Action (SMA).
As far as the insurance buyer goes, they’re a customer of Overstock.com.
“[Overstock is] definitely the channel where it’s been sold, and it’s the channel where the customer is going to go to for service,” Garth said.
And it’s just one channel of many it seems that are on the verge of disrupting well-tread insurance distribution networks.
In particular, according to a report from London-based market risk and consulting firm Finaccord, as many as 281 retail brands around the world are selling insurance, up from 232 retailers in 2010.
Global names like Walmart, Tesco, Marks & Spencer, and Carrefour are “leveraging” their brands and huge customer bases to sell mainstream insurance products, said Finaccord Director Alan Leach.
“They can supplement the thin profit margin that they can earn from their core business by selling financial services,” Leach said.
They wield data they already collect on their customers to empower cross-selling. If they know which of their customers buy pet food, they know which of their customers to market pet insurance to.
At this point, however, this trend of retailers selling insurance is “not so much” in the United States, Leach said, and in many cases, they’re selling personal lines products to consumers. (Walmart does offer an auto-insurance exchange in 19 U.S. states.)
Impact on Industry
But retailers are just one group the traditional insurance world must confront.
Some observers, like Garth, argue that this trend doesn’t just put the insurance distribution process at stake, but affects the industry’s business model as a whole.
Some of the savviest, brawniest, data-driven companies in the world are coming. Alibaba, of the recent record-breaking IPO, launched an online insurance platform in 2013 called Leyebao, aimed at Alibaba’s online store owners and their employees. Google forayed into the insurance space in the U.K. in 2012, with a car insurance comparison tool.
They’re coming because consumers apparently want them to.
“Competition in the insurance industry could quickly intensify as consumers become open to buying insurance not only from traditional competitors such as banks but also from Internet giants.” — Michael Lyman, global managing director, insurance industry practice, Accenture
In its report on this new competitive landscape, SMA cited an Accenture study that found that two-thirds of respondents would consider buying insurance from organizations other than insurers. About 23 percent said it could be Google or Amazon; 14 percent said retailers.
“Competition in the insurance industry could quickly intensify as consumers become open to buying insurance not only from traditional competitors such as banks but also from Internet giants,” said Michael Lyman, global managing director for management consulting within Accenture’s insurance industry practice, when he announced the Feb. 2014 research.
The disruption will not be as black and white as an Alibaba launching an insurance company or Walmart taking jobs away from Main Street agents. The invaders seem to care less about the means than the end result.
“They want to own a customer for a lifetime,” Garth said.
Their success at that could leave insurers as mere “manufacturers” of insurance products, and agents and brokers as mere customer service representatives, for the companies that will own consumer loyalty and lifetime customer value.
A Renaissance In U.S. Energy
America’s energy resurgence is one of the biggest economic game-changers in modern global history. Current technologies are extracting more oil and gas from shale, oil sands and beneath the ocean floor. Domestic manufacturers once clamoring for more affordable fuels now have them. Breaking from its past role as a hungry energy importer, the U.S. is moving toward potentially becoming a major energy exporter. “As the surge in domestic energy production becomes a game-changer, it’s time to change the game when it comes to both midstream and downstream energy risk management and risk transfer,” said Rob Rokicki, a New York-based senior vice president with Liberty International Underwriters (LIU) with 25 years of experience underwriting energy property risks around the globe. Given the domino effect, whereby critical issues impact each other, today’s businesses and insurers can no longer look at challenges in isolation one issue at a time. A holistic, collaborative and integrated approach to minimizing risk and improving outcomes is called for instead.
Aging Infrastructure, Aging Personnel
The irony of the domestic energy surge is that just as the industry is poised to capitalize on the bonanza, its infrastructure is in serious need of improvement. Ten years ago, the domestic refining industry was declining, with much of the industry moving overseas. That decline was exacerbated by the Great Recession, meaning even less investment went into the domestic energy infrastructure, which is now facing a sudden upsurge in the volume of gas and oil it’s being called on to handle and process.
“We are in a renaissance for energy’s midstream and downstream business leading us to a critical point that no one predicted,” Rokicki said. “Plants that were once stranded assets have become diamonds based on their location. Plus, there was not a lot of new talent coming into the industry during that fallow period.”
In fact, according to a 2014 Manpower Inc. study, an aging workforce along with a lack of new talent and skills coming in is one of the largest threats facing the energy sector today. Other estimates show that during the next decade, approximately 50 percent of those working in the energy industry will be retiring. “So risk managers can now add concerns about an aging workforce to concerns about the aging infrastructure,” he said.
Increasing Frequency of Severity
Current financial factors have also contributed to a marked increase in frequency of severity losses in both the midstream and downstream energy sector. The costs associated with upgrades, debottlenecking and replacement of equipment, have increased significantly,” Rokicki said. For example, a small loss 10 years ago in the $1 million to $5 million ranges, is now increasing rapidly and could readily develop into a $20 million to $30 million loss.
Man-made disasters, such as fires and explosions that are linked to aging infrastructure and the decrease in experienced staff due to the aging workforce, play a big part. The location of energy midstream and downstream facilities has added to the underwriting risk.
“When you look at energy plants, they tend to be located around rivers, near ports, or near a harbor. These assets are susceptible to flood and storm surge exposure from a natural catastrophe standpoint. We are seeing greater concentrations of assets located in areas that are highly exposed to natural catastrophe perils,” Rokicki explained.
“A hurricane thirty years ago would affect fewer installations then a storm does today. This increases aggregation and the magnitude for potential loss.”
On its own, the domestic energy bonanza presents complex risk management challenges.
However, gradual changes to insurance coverage for both midstream and downstream energy have complicated the situation further. Broadening coverage over the decades by downstream energy carriers has led to greater uncertainty in adjusting claims.
A combination of the downturn in domestic energy production, the recession and soft insurance market cycles meant greatly increased competition from carriers and resulted in the writing of untested policy language.
In effect, the industry went from an environment of tested policy language and structure to vague and ambiguous policy language.
Keep in mind that no one carrier has the capacity to underwrite a $3 billion oil refinery. Each insurance program has many carriers that subscribe and share the risk, with each carrier potentially participating on differential terms.
“Achieving clarity in the policy language is getting very complicated and potentially detrimental,” Rokicki said.
Back to Basics
Has the time come for a reset?
Rokicki proposes getting back to basics with both midstream and downstream energy risk management and risk transfer.
He recommends that the insured, the broker, and the carrier’s underwriter, engineer and claims executive sit down and make sure they are all on the same page about coverage terms and conditions.
It’s something the industry used to do and got away from, but needs to get back to.
“Having a claims person involved with policy wording before a loss is of the utmost importance,” Rokicki said, “because that claims executive can best explain to the insured what they can expect from policy coverage prior to any loss, eliminating the frustration of interpreting today’s policy wording.”
As well, having an engineer and underwriter working on the team with dual accountability and responsibility can be invaluable, often leading to innovative coverage solutions for clients as a result of close collaboration.
According to Rokicki, the best time to have this collaborative discussion is at the mid-point in a policy year. For a property policy that runs from July 1 through June 30, for example, the meeting should happen in December or January. If underwriters try to discuss policy-wording concerns during the renewal period on their own, the process tends to get overshadowed by the negotiations centered around premiums.
After a loss occurs is not the best time to find out everyone was thinking differently about the coverage,” he said.
Changes in both the energy and insurance markets require a new approach to minimizing risk. A more holistic, less siloed approach is called for in today’s climate. Carriers need to conduct more complex analysis across multiple measures and have in-depth conversations with brokers and insureds to create a better understanding and collectively develop the best solutions. LIU’s integrated business approach utilizing underwriters, engineers and claims executives provides a solid platform for realizing success in this new and ever-changing energy environment.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.