Thinking differently pay$ off for Litchfield insurance group

Rough Notes, May 2001 by Pillsbury, Dennis

Connecticut agency shifts focus to provide "Fortune 500"-type services to middle market clients

The Litchfield Insurance Group, Torrington, Connecticut, is a new, old agency that has become successful through a philosophy of "thinking differently"

It traces its beginnings to 1917 ....

It traces its beginnings to 1975 ....

It traces its beginnings to 1998 ....

Like many agencies today, Litchfield has had to change to meet the changing needs of its clients and has had many "beginnings." The agency decided that its competitive edge would be to provide innovative "Fortune 500"-type insurance solutions to middle market companies. "We wanted to drive down long-term costs for our clients and develop a loyal clientele that stayed with us because of our value-added services," says Bob Phelan, chairman and chief executive officer. The agency's retention rate is consistently 95% or higher.

Of course, the agency's historical roots are important. It is known and respected and has built up a solid reputation since it began doing business in 1917. "That's been a key component of our success. We have a fabulous reputation. We're the gold standard in our marketing area," Daniel Kraut, president, notes. "But, equally important was the period from 1975 to 1990, when the agency purchased more than 20 other agencies to move from a small local agency to one with five branches and 80 employees," Dan adds. And then came another milestone-the dramatic "migration from a traditional insurance broker to a non-- traditional broker."

The impetus for that change was the purchase of the agency by Bob Phelan and three associates in 1998. A new logo was adopted that emphasized the new direction in which the agency focused solely on middle market commercial lines. The logo on their business cards placed a blue dot over the "i" in Litchfield, with everything else black. The blue dot is carried over to the opposite side of the card, where it is enlarged and contains the agency's new motto: "We think differently."TM

Bob started in the insurance business in 1977 when he joined his father's agency after graduation from college. Bob's father started that agency in 1955, the year Bob was born and, interestingly, purchased an accounting system from Rough Notes that same year. Litchfield purchased that agency in 1993.

Dan Kraut joined Litchfield in 1973, became president in 1982 and was involved in many of the acquisitions. When Litchfield was started in 1917 as a small insurance agency, most of its money came from making loans to local residents and businesses. "We actually have some of the original $2,000 mortgage loans and business loans that were made at that time," Dan says. Up until 1995, the agency remained a typical property/casualty agency, writing all kinds of business. In addition to its book of commercial lines accounts, the agency had a large book of personal lines that involved 15,000 households in the area.

"The personal lines department was very profitable," Dan remembers, "but it was shrinking in policy count. We tried a lot of different approaches to reverse that trend, including a sales center. It was still growing from a premium and commission standpoint, but we were concerned about the lack of policy count growth. Still, we had no intentions of selling the business because of its profitability. That was until we got a call from a consultant who asked if we were interested in selling. We said .no" but were willing to look at his proposal. The offer proved to be one we just couldn't refuse. The sale actually took care of a lot of concerns. We had some outside stockholders at the time and this was an opportunity for them to receive some value. It also made it easier for Bob and his team to purchase the agency in 1998."

It also changed the complexion of the agency dramatically. Litchfield suddenly became a smaller, but more focused agency, concentrating on commercial business. In 1998, Bob Phelan, Carol Zuck (chief operating officer), James Fabiaschi (vice president) and Ed Sparkowski (vice president) purchased the agency and tightened the focus even further. Today, the agency focuses solely on providing middle market businesses between 50 and 1,000 employees with a wide range of insurance products and value-added services encompassing both property/casualty and employee benefits. The agency has clients with operations in 22 states and 25 foreign countries. It has 27 employees and revenues of $4 million. To help focus the staff on the new orientation as consultants to this market, Bob says, "I came up with an acronym to focus our new company's efforts: RISK-Results, Innovation, Speed, Knowledge. These are the deliverables to our clients."

The purchase was a 100% leveraged buyout. "The only reason we were able to do it was that we got help from Royal & SunAlliance," Bob notes. "Steve Ward, the local vice president for the company at the time and now area president-Middle Market Northeast, was convinced that we had a good plan and convinced Royal & SunAlliance to help out. It was the first time the insurer ever did this. After our deal, they created a formal program-the Funded Growth Program-that provides financing for mergers and acquisitions. To facilitate our deal, Royal went to First Union Bank in Charlotte. First Union loaned us the money and Royal unconditionally guaranteed the loan. It really meant a lot to have a business partner who believed in us and our future."