HUB AND SPOKES

Rough Notes, Jan 2004 by Boone, Elisabeth

A decentralized structure and focused growth strategy make HUB International a powerful contender

If you're familiar with the airline industry, you know that the major carriers operate on a so-called "hub and spoke" system under which operations are based at one airport and a smaller presence is maintained at other locations at which flights are offered.

The hub and spoke approach is proving to be a highly successful strategy for leading North American brokerage HUB International Limited, which was formed in 1998. Since then the firm has acquired more than 90 brokerages in the United States and Canada and has established a strong presence in the northeastern, midwestern, and western United States and in the Canadian provinces of Ontario, Quebec, and British Columbia.

Through a combination of acquisitions and organic growth, HUB increased its revenue from $38.7 million in 1998 to $220 million in 2002. The trailing 12-month revenue as of September 30, 2003, was $271 million, with 85% of the growth attributable to acquisitions. Targeting middle market business, HUB uses multiple distribution channels to provide property, casualty, life and health, employee benefits, investment, and risk management products and services from more than 120 locations across North America. Through partnerships with more than 250 insurance carriers, HUB writes business on both an individual and group basis for a wide variety of risks. (For a complete listing, see the sidebar on page 122.)

HUB is organized with a corporate office and 11 larger regional offices called hubs. These hubs manage and acquire smaller brokerages (fold-ins) that expand the hubs' geographic reach and market share. The hub structure allows the firm to respond quickly to regional market variations and client needs while at the same time centrally managing growth and profitability.

Regional powerhouses

What were the motivating factors behind the creation of HUB International in 1998? "At that time, we recognized that there was a growing number of public brokers in North America, and a significant number of banks were entering the insurance marketplace," explains Bruce Guthart, president of HUB's U.S. operations and formerly president of Kaye Group Inc., HUB's New Yorkbased brokerage. "In addition, agencies were challenged with investing in and managing emerging technologies. HUB's strategy was designed to take advantage of these developing trends, offer an alternative to the traditional mega broker model, and take HUB agencies to a new level," he continues. Other factors were issues of succession, access to capital, access to markets and strength in the marketplace, and the synergies that could be generated through consolidation.

In Canada, the 11 original brokerages were consolidated, and subsequently HUB acquired more than 45 additional agencies; all of these have been consolidated and are managed through four operating hubs for property and casualty business. A fifth hub is a wholesale life and mutual fund operation.

"Our approach has been to develop regional powerhouses, and thus the name HUB," says Richard Gulliver, president of HUB International. "Our strategy from day one has been to establish a strong core of operating capabilities in one center and then to buy agencies and fold them into regional hubs. In doing so, we seek whatever strengths we can gain from critical mass and leveraging scale."

U.S. footprint

HUB International next turned its attention to expanding into the United States. HUB completed its first acquisition in late 1999, bringing in Mack & Parker, Inc., of Chicago and its president, Martin Hughes. Hughes now serves as chairman and chief executive officer of HUB International and also is chairman of Mack & Parker. Hughes was instrumental in bringing on board Bruce Guthart.

"Our U.S. operation is similar to that in Canada, using a regional strategy," Guthart says. "The firms that we look to acquire as hubs are those where the management team has developed a successful operating strategy in that part of the country and knows that region. We don't want to come in after the acquisition and restructure the firm; the reason we acquired it is that its people know how to run the operation. We want to perform functions that they may not be large enough to handle independently, like supplying financial management and capital for acquisitions, providing information technology support and other back-office functions, developing a long-term strategy, and enhancing their insurance company relationships. We want to handle these functions so that each regional hub can continue to focus its resources on being a sales organization, because that's what our business is all about: selling business and servicing clients."

This approach, Guthart says, helps differentiate HUB from its competitors in the U.S. marketplace. "We can go into a new region and offer a large brokerage firm an opportunity to use our platform in that part of the country," he says. "For example, when we acquired a firm in Boston, it was our first New England operation. We let the principals know that we were impressed with what they were doing and we liked their management team. We did not intend to reduce their staff. We intended to take over their back-office functions and allow them to focus on sales and service. In addition, we would provide capital to acquire other agencies in their region and merge them into the hub operation."