“Our brokers, through options or restricted stock, can reap the benefits of the contributions they make,” says Kahlbaugh, as he outlines plans to add on to the B&G acquisition his group made back in 2009 (a year before Fortegra's initial public offering).

This ability to offer such compensation is a key reason Kahlbaugh “expects [Fortegra] to be in the cadre of four or five companies that would be the dominant players [in the wholesale-brokerage space]. That's our plan and focus.”

OUTSOURCING SOLUTIONS

The chair, president and CEO of Fortegra offered this assessment to NU earlier this month, as he addressed questions about competing bidders for P&C wholesalers; B&G's ambitious goal of becoming a top 5 wholesaler; and the most obvious question: How does B&G fit in a group of insurance-services companies that began as a credit-insurance operation and later developed a technology-driven BPO segment providing policy-administration services, mainly to life insurers and financial-services firms?

“I get asked that a lot by investors,” Kahlbaugh reports. His response: “If you think about every one of our businesses, they're all outsourcing solutions in one form or fashion. Our value lies in making the transactions and processes we touch better for [business] customers and their end-market consumers.”

The BPO segment, for example, operating under the Consecta brand, is “a classic outsourcing model” under which insurance companies outsource underwriting and general administration functions to Fortegra.

Providing the link to P&C wholesale, he says, “The way we look at it is [that] underwriters are outsourcing market-management functions to us. They are asking us to manage the relationships with a variety of retailers that have a variety of needs, and to act as the conduit through which they interact with the marketplace.”

Describing the wholesale-broker activities of B&G, he says the firm can act “as a conduit through which information and transactions flow,” adding that B&G also manages programs and has the power to underwrite and bind business for some insurers. During a March investor presentation, Kahlbaugh reported that B&G represented more than 130 carrier markets and had 25 binding-authority contracts.

B&G BUY: ACTIVE PURSUIT OR OPPORTUNISTIC?

Asked whether Fortegra was actively seeking a P&C wholesaler when it purchased B&G from Willis two years ago, or if the opportunity just landed on his desk, Kahlbaugh says it was a little of both.

“We always wanted to be in P&C,” he says, noting that the firm made a conscious decision to pursue a wholesale-distribution model over retail. “Every time we've gone direct to the customer, we've not done very well. Our specialty is business-to-business. That's where we do best,” he says.

After looking around and being invited into the bidding process by the banker working on behalf of the seller, Kahlbaugh says the B&G asset had appeal for three strategic reasons. 

“They have a wonderful underwriting reputation. They had a really strong presence in California and Texas”—two key surplus-lines states. “And perhaps most importantly, there was a well-illuminated path to growth,” he says, explaining that B&G did not have a presence in New York and only a small one in Chicago and Florida. 

“The game plan was set for us to grow the enterprise,” he says.

B&G's GROWTH STRATEGY

Growth has come to the B&G platform in three ways: through stepped-up sales and marketing efforts, through innovative programs, and through novel acquisitions.

“We are reaching out to retailers throughout the United States and letting them know about the quality of our underwriting and our markets [carriers] in a regular and systematic way,” says Kahlbaugh, introducing a discussion of Fortegra's sales and marketing efforts on behalf of B&G. “That's different from what they were used to do,” he says, suggesting that B&G professionals were more accustomed “to wait for the business to fall in their laps.”

Last year, B&G added 600 new retailers—to a group that now includes more than 4,000 across the country—by just doing a better job “getting the word out” about B&G's underwriting reputation—one that was well known to its existing retailers, but not to any others.

“We either had a great reputation with retailers, or none at all,” Kahlbaugh says, noting that Fortegra decided to spend money to create a sales team—“not a team of underwriters, not brokers, but sales people who go in and articulate the B&G advantage in a way that's meaningful to the retailer.”

He reports that the team made 1,600 sales calls in the first quarter of this year—the target for every quarter. 

Referring to last year's recruiting success, he concedes that signing up 600 retailers does not mean B&G will get business from 600. “It's the 80-20 rule. You actually have 100 that produce for you.”

Beyond the sales efforts, Fortegra management has challenged B&G leadership to develop new and novel programs, such as insureyourwine.com—an online platform (profiled in NU's April 18, 2011 edition) that allows brokers and wine collectors to go to a website to cover wine collections against various perils. 

The idea, Kahlbaugh says, is to bring to bear Fortegra's enterprise-wide technology advantages in the P&C specialty marketplace. While the wine program is small, programs like this “have tremendous operating leverage,” he says, explaining that you put underwriting metrics into a system that operates 24 hours a day, seven days a week, “and nobody has to man it.”

Such ideas offer a solution to a profit-margin problem that all players in the P&C specialty space must face as a result of market cycles, he says. “When the market hardens, and business grows very rapidly, the traditional approach is you staff up…What we want to do is create more of a technology-driven environment, so that in certain programs, you can enjoy some operating leverage.”

STRATEGIC ACQUISITIONS

Kahlbaugh highlights Fortegra's March 2011 $37 million acquisition of eReinsure—a web-based platform for managing the placement of facultative-reinsurance risks—as a means of introducing new technology to the overall E&S brokerage platform.

“The [eReinsure] technology brings together willing buyers and sellers of facultative reinsurance, allows a certain negotiation flow, and documents all of that. Algorithms pull together willing buyers and sellers of common types of risks,” he explains.

Fortegra plans to “cross-pollinate the technology” into the E&S program business, “so that when a retailer sends in [a submission] over the Internet, the software will read what type of risk it is, drive it to the right program and then begin the electronic underwriting process.”

“It will enhance speed to market, it will enhance the speed of the return quote, and it will create more systemized and uniform underwriting approaches,” he says—something Kahlbaugh contends has always been a big struggle in E&S, where it's hard to get consistent underwriting data on a hodgepodge of fringe risks.

Kahlbaugh stresses that experienced underwriters also are helping B&G gain share in a soft market.

“What we're trying to do is shift the paradigm a little bit. In a soft market, you have to work hard on market share, [and] market share is a function of speed, responsiveness, quality of markets and quality of underwriting,” he says. Experienced underwriters add to B&G's competitive advantage because they can look at risks quickly, price them and get them back out. 

ADDING REGIONAL TALENT

Kahlbaugh also describes the thinking behind another acquisition—a premium-finance company called South Bay Acceptance Corp. that was added to the B&G platform last February. 

The ability to offer retailers a premium-finance option, in order to help customers dealing with the impact of a tough economy, gives B&G brokers an “extra arrow in their quiver,” he says.

Although B&G has not yet added another E&S broker to the group, Kahlbaugh says he views himself as an acquirer, rather than a target for hungry wholesalers already in the top five—a tier the top-20 B&G aspires to reach in time. 

“Our perspective is there are significant attractive opportunities…with small to midsize enterprises that are looking to join a larger, growing and public insurance-services business,” he says. 

What exactly is Fortegra looking for in a P&C specialty-producer acquisition that it would consider making?

“We're looking for regional agencies that are very well run, where the management wants to hang around and create something of national and international scale with us,” Kahlbaugh says. But, he admits, finding a company that meets all those criteria can be difficult. 

Often people interested in selling are looking for an exit strategy, he explains. “That's not attractive to us.”

“We're looking for management, talent and market skills because, in the end, the insurance business is about three things: capital, technology and people.”

“Capital is a commodity. It just depends what you want to pay for it. And the technology I can fix for them.” 

“But the skills of the people, their relationships with the markets, their relationships with the retailers—I can't replace that. That's always the difficult part of that equation.”