THE HUB INVASION

From being almost a dentist to an independent broker to a consolidator — Rick Gulliver, president of The Hub Group Ltd., admits that his career has presented some interesting turns. In just over a year under Gulliver’s leadership The Hub Group has emerged as a major national contender on the broker consolidator front. The public-traded group recently reported its maiden half-year results, disclosing net earnings of $3.3 million on the back of total revenue of $35.2 million. This is just the beginning of a long expansion journey, according to Gulliver, who states the company has set an annual revenue target of at least $300 million with more than $2 billion in premiums to be held by the network’s Canadian and U.S. operations within the next three years.

Although The Hub Group’s Canadian operations have delivered a sassy first six-month performance, particularly in light of the market’s current tight conditions, it is the network’s advance into the U.S. market which has captured the insurance industry’s attention — on both sides of the border. The group recently acquired Chicago-based Mack & Parker Inc. with total annual revenue close to $20 million (Canadian dollars), which Gulliver says will form the base operation for further expansion into the U.S. (the president of Mack & Parker, Marty Hughes, has been appointed president of the group’s U.S. operations). On a bolder note, Gulliver expects the group’s U.S. interests will eventually account for more than $200 million CDN in revenue — roughly twice the size from an income perspective than that which he believes will be generated by the Canadian operations.

The bet with a lofty future

So, where, and how did Gulliver’s rise to fame and the concept of The Hub Group emerge? With that maverick glint to the eye, Gulliver says his entry into the p&c independent broker business came about from a bet with his father who owned a small brokerage in Wheatley, Ontario. At the time, he was studying to be a dentist without being overly convinced that this was the right career direction. “My father, who at the time wasn’t sure whether I had any direction at all, betted that I wouldn’t be able to succeed as a broker. I took him up on it, and slowly developed my own brokerage, eventually buying out my father’s business.”

Having established a modest presence in the market, Gulliver summarizes, new opportunities grew involving partnerships with several other brokerages in Trivest Insurance Network. Trivest was eventually transformed into Insurance Network Solutions (INS) which nearly culminated in a packaged deal being put together as a broker consolidator. “The problem,” Gulliver observes, “was that we had thirty brokers owning one company and not one company owning thirty brokerages. I knew we couldn’t evolve effectively work this way”. As a result, Gulliver and one of his partners, Brian Jeffrey of Knox Vicars McLean, joined forces in 1997 to establish a large independent brokerage called The Hub Group Inc. This decision, combined with good timing and a solid relationship with Fairfax Financial, set the stage for the birth of the new The Hub Group Ltd. Fairfax, which currently holds a 45% stake in The Hub Group (with the remainder of the issued stock held 40% by management and 15% by the public), had for some time been investigating the market with the view of either acquiring a majority stake in a public Canadian network consolidator or creating a new entity. Fairfax decided to follow the latter course, having identified Gulliver and team Hub as the appropriate instrument based on similar objectives and management approach. Discussions between Gulliver, Fairfax and several other brokerages began in the summer of last year, with the launch of The Hub Group as a public trading company following shortly after in February of this year. The rest, as Gulliver notes, is still recent history, with the group having already acquired over 25 brokerages across Canada in the past seven months.

The Hub touch

The Hub Group entered the broker consolidator fray with $104 million raised through its initial public offering (IPO) and from the interest acquired in the group by Fairfax Financial. To date, the group has spent roughly 50% of its acquisitional cash, leaving a sizeable war chest for the year ahead. And, as Gulliver points out, the group has maintained a positive ongoing cashflow from operations — the result being that, despite the present frugal stock market environment which may hinder the expansion of other consolidators, cash availability will not obstruct the network’s plans of expansion into the U.S.

The group will be looking to establish between 10 to 12 “hubs” across the U.S., with commission revenue of each of the operations averaging around $15 million, Gulliver says. The group’s approach is to identify fairly large operations (such as Mack & Parker) with relationships with other brokerages in the region. “We provide the financing enabling the hubs to grow. In so doing, we look for partners with an appetite for growth and existing relationships among independent brokers in their region, you might say part of expansion strategy is to piggyback on these relationships.”

One of the secrets of The Hub Group’s success in the Canadian market, according to Gulliver, is to avoid reinventing the wheel: “If an operation is successful, we stay out of the way in terms of its management style. Each hub has its own culture and way of operation.” This “hands off” management approach will be applied to operations acquired in the U.S., he adds, the main focus in establishing the hubs being those brokerages with existing self–supporting systems.

The group’s “decentralized management style” is key to remaining competitive, Gulliver notes. For instance, the group head-office in Toronto carries only a handful of employees thereby reducing the “national infrastructure cost” to the regional hubs.

Distribution and product strategy

Gulliver firmly believes that the future success of the brokerage market lies in packaging p&c, life and financial services products. This approach has become core to the group’s business strategy, he adds. The majority of the products/services the group has concentrated are property and casualty. “Our strategy is to bundle products across the financial services spectrum, and we’ve accumulated a core group of managing general life agents (MGAs) with expertise and relationships in the life side of the business. Although earnings from our life and health insurance in Canada is still relatively modest as a percentage of overall business, as a collective we are the largest MGA in Canada and our objective is to grow this end on the back of the property and casualty book.”

In addition, the group has also developed what Gulliver calls the “three key areas of distribution”, traditional retail, wholesale and call center operations. It currently owns three call centers in Canada. Securing exposure to the full distribution market, and therefore diversification and flexibility to approach and serve different needs, is proving a highly successful formula, Gulliver says. “In our business strategy we break down between basic retail, wholesale and direct-style distribution, and structure the business through these channels depending on the market’s needs. Again, this same approach will be applied in our U.S. expansion.”

On the home front, Gulliver says his primary task for next year will be integration of the Canadian operations so far acquired: “We’ve accumulated all of the necessary strengths of distribution, now it’s a case of integrating them, that will be our objective in Canada for 2000. We’ll definitely be slowing down on purchases in Canada next year but pushing aggressively on the acquisitional trail in the U.S.”