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Acordia Inc.

120 Monument Circle,

Indianapolis, Ind. 46204-4903;

317-488-6666; fax: 317-656-3050;


1996* 1995

Premium volume $3.29 billion $4.84 billion

Gross revenues $343,860,000 $555,064,000

Brokerage: Retail 66.3% 34.34%

Wholesale 6.3% 6.24%

Reinsurance 0.2% 0.13%

Personal 10.6% 10.58%

Services 14.5% 46.76%

Investment income 1.5% 1.3%

Other 0.6% 0.65%

Employees 3,600 6,638

Rev./Employee $95,517 $83,619

Offices 100 87

* 1996 numbers have been restated

The management of Acordia Inc. is engineering a buyout of its predominately property/casualty insurance brokerage business, severing an eight-year ownership by Anthem Insurance Cos. Inc.

The two companies decided to part ways following a strategic analysis during 1996 that resulted in Anthem's decision to focus its business exclusively on health care.

To pave the way, Anthem, a mutual insurer that had floated Acordia's stock in 1992, this month repurchased the 33.2% of Acordia's outstanding common stock. Anthem is re-absorbing Acordia's health care business.

Frank C. Witthun, who became chief executive officer of Acordia in late 1996, expects the MBO to be completed in early August.

One lead investment banking group is supporting the MBO, Mr. Witthun said.

Anthem had announced earlier this month that it was in negotiations with a "financial buyer" for Acordia's property/casualty brokerage business, but the two had significant differences regarding terms of the transaction, including the purchase price. The prospective buyer's original indication of interest was $335 million, subject to various assumptions and contingencies, but Anthem said discussions at that time indicated the price would be less than that (BI, July 7).

Mr. Witthun, in New York last week negotiating with the lead investor, said all differences have been resolved, but he would not discuss the details.

The new Acordia will be a privately held broker focused predominately on property/casualty insurance products for the middle-market with $343.9 million in revenues and 3,600 employees.

The Indianapolis-based broker no longer will be the sole administrator of or be an exclusive channel to Anthem's health care products, which generated $326 million of Acordia's $661 million in 1996 gross revenues. Anthem, however, will remain one of Acordia's biggest markets for health care, Mr. Witthun noted.

Acordia appears in this year's Business Insurance rankings if it were operating as a stand-alone property/casualty insurance broker.

Compared with that same book of business, Acordia's predominately property/casualty revenues increased an acquisiton-fueled 21.8% in 1996 from $282.3 million the year before.

"It really was a situation where the marketplace drove the decision to separate the companies," stressed Mr. Witthun, who succeeded L. Ben Lytle, who remains CEO of Anthem.

"For the first four or five months of 1996, a process occurred where Anthem really looked at its business, its strategy and its future, and we in turn looked at Acordia's strategy and future and collectively came to a conclusion that the businesses had to be pulled apart," explained Mr. Witthun.

"The dream that Ben Lytle had for Acordia made all kinds of sense at the time," Mr. Witthun said.

Acordia was formed in 1989 by Anthem to serve as its administrative and distribution arm. Acordia diversified into property/casualty insurance with the purchase of Robinson-Conner Inc. in 1991.

However, "the health business has gone through a sea change, and having it as part of a brokerage operation that is separated off into a lot of decentralized companies simply made no sense long-term. It's not that the strategy was in any way wrong, it's that the marketplace changed and it was incumbent upon good CEOs at that point then to make the decisions necessary to deal with the reality that we are in now."

For Acordia, "we have gone through the process of spinning ourselves off, separating our business, and setting up the management of the company-a company that is a national property/casualty insurance broker that focuses on the mid-market," Mr. Witthun said.

The broker targets middle-market companies, or those with 150 to 4,000 employees or revenues of $10 million to $400 million.

"Even though the name of the specific investor in the new Acordia is probably interesting to some people, it's probably not that interesting to management at this point," he said, declining to identify the lead investor.

Mr. Witthun added that Acordia's network of regional companies remains client-focused despite all the change and uncertainty.

"We've restructured the company, in the sense of getting the Anthem-related business out of the company, but the (brokerage side) is still the same company it's been for six years. We don't see any reason why anybody should become inwardly focused right now for any reason, other than to keep doing business as it is," he said.

"Those operations have always been focused on servicing clients and selling new business, and that hasn't changed," he said.

Mr. Witthun points out, however, this would be a very different story if Acordia were acquired by another industry player.

"I learned you can never say never about anything," he said. "But at this time, there is no intent to sell this company to an industry buyer."

While the separation from Anthem nearly cuts Acordia's revenues in half, it still maintains the No. 7 spot among the world's largest insurance brokers with $343.9 million in revenues.

In spite of the lower revenues, Acordia retained its position because of the disappearances of Alexander & Alexander Services Inc. and Johnson & Higgins due to acquisitions earlier this year. The new Acordia was leapfrogged by Arthur J. Gallagher & Co. and Jardine Lloyd Thompson Group P.L.C. in the rankings.

"At one time, half our revenues were tied to highly labor-intensive, service-based third-party administration business," Mr. Witthun said. "Taking that business out dramatically changes what was the old Acordia."

The old Acordia also was structured differently. When Acordia was formed in 1989, it was built as a network of individual Acordia companies located in mid-sized cities, instead of a central corporate structure with sales offices around the country. Each Acordia company was able to deliver property/casualty coverage and managed health care services and had its own board of directors as well as a CEO who had strong incentives to grow the company.

The new Acordia will continue to be a holding company, but rather than having 35 Acordia companies, the broker has seven regional operations plus a stand-alone, multistate excess and surplus lines operation, American E&S Insurance Brokers.

Each regional operation consists of several states with several offices, except Ohio and California, which represent their own regions due to the amount of business Acordia generates there. Each region has a president or regional head, instead of its own CEO and board of directors.

Acordia has been in the process of regionalizing its operations since 1995 (BI, July 22, 1996), but the process was completed this year.

In addition to restructuring the company, Acordia plans on moving its headquarters out of Anthem's building in downtown Indianapolis by the end of the year. The broker will stay in Indianapolis and is in negotiations with a landlord over office space.

Anthem took Acordia public in 1992, raising $49 million after receiving authorization for an initial public offering of up to 5.5 million shares of Acordia stock. The shares were sold at an initial price of $14.50.

In June, Anthem, which owned 66.8% of the broker, announced its tender offer for all of Acordia's remaining outstanding common stock at $40 per share (BI, June 9). In 1996, Acordia stock ranged from $27.75 to $33.63 a share. On July 9, the last day Acordia shares were publicly traded, the share price closed at $39.88. Acordia traded this year as high as $40.13.

Prior to the restructuring, Acordia reported 1996 net income of $29.9 million, up 26.7% from 1995, on gross revenues of $661 million, up 19% from $555.1 million in 1995.

While Acordia is only half its previous size, its predominately property/ casualty brokerage business remains very much the same.

"We do risk management, we represent numerous markets, we have clients nationwide and we sell and service property and casualty, workers comp and health and benefit insurance and insurance programs," Mr. Witthun said.

"And we still have a focus on a mid-market client base in secondary cities. We're convinced that market share is very important to be successful in our business, and we've really found that those cities that allow us to have significant market share are not New York, Chicago or Los Angeles," he said.

Being located in midsize cities allows the broker to have the local expertise to respond to the needs of clients, executives say.

"We're just more hands-on with our clients," Mr. Witthun said.

At the same time, Acordia's size allows it to have the expertise in a wide variety of specialized coverages and to have the resources and relationships with a variety of insurers necessary to meet clients needs.

"Because Acordia has been very sales-oriented and new client-focused, it always has been looked upon as an alternative to the alphabet houses," Mr. Witthun said.

Though Acordia's strategy is to focus on the mid-market, in many cities where it is the largest broker, it ends up writing large account business that requires international expertise and risk management expertise.

"We plan to continue to grow that business, just like we plan on continuing to grow our mid-market business," Mr. Witthun said.

Substantial international growth may come from of an acquisition or in reciprocal brokerage arrangements, Mr. Witthun said. In 1996, only 2% of gross revenues was generated by non-U.S. clients.

Acordia was well on its way to increasing its international exposure with the 1995 formation of ExcelNet, a joint reciprocal arrangement among Acordia, Dale-Parizeau Inc. of Montreal, CECAR of Paris, Bain Hogg Group of London, Inchcape Insurance Services of Hong Kong and Boels & Begault of Brussels, Belgium.

The network, however, fell victim to brokerage consolidation in 1996 and 1997 when Bain Hogg, Boels & Begault and Dale-Parizeau sold to Aon Group Inc. and CECAR sold to Marsh & McLennan Cos. Inc.

"The first thing we've done, and what you always do in a sales organization where clients are No. 1, is we have made sure that those clients that require international presence and expertise are well taken care of," Mr. Witthun said. "We've worked with various agents and brokers in the (European Union) countries and in the Far East to continue to seamlessly handle the business that needs to be handled. That seems to be working just fine, because there are a lot of very, very good agents and brokers outside North America that are more than happy to work with us to the benefit of our clients and do it in a very professional way.

"Having said that, we would very much like to find a way to put together a network very similar to what we had with Bain Hogg..*.*.We have been in the past six months looking at various opportunities to do that with partners that do not have a North American presence. But we will only do that if the individual offices that make up the network will be of the quality and the caliber of what we currently have or did have under ExcelNet," he said.

"We feel we should be successful in putting together another network very similar," he said, adding that he also does not rule out the possibility of international growth by acquisition.

"There are considerable opportunities outside of North America from an acquisition standpoint and we plan to be fairly aggressive in those areas in the near future," he said. He pointed to such areas of interest as Latin America, the European Union and the Far East.

Acordia also will continue with its acquisition strategy in the United States.

In 1996, Acordia acquired six brokers: Flat Top Insurance Agency in Charleston, W.Va.; Rothschild, Bell & Walseth Agency Inc. in Minneapolis; Reagar-Harris Inc. in Louisville, Ky.; Potts, Davis & Co. of Salem, Ore.; Chamberlain & Flowers Inc. of Bluefield, W.Va.; and Northwestern Agencies Inc. of Portland, Ore.

Acordia's acquisition strategy continued into 1997 with the purchases of Bush, Cotton Insurance Agency Inc. in Seattle; Dorsey Insurance Group in West Palm Beach, Fla.; and Simons & Rose Insurance Agency Inc. in Miami.

"We plan on continuing to grow. We've always grown every year, and we plan to continue to grow both internally and externally for the rest of 1997 and into 1998," Mr. Witthun said. "I think there is a lot of opportunity in a lot of areas in the country where we can provide added value to clients that the alphabet houses cannot," he said. "We plan on being very aggressive in exploiting that leverage we feel we have and to continue on our game plan."

The 1996 cash compensation paid to the five highest-paid Acordia officers, including salaries and bonuses, as reported in the prospectus, follows:

Frank C. Witthun $624,987

Michael B. Henning $357,469

Keith A. Maib $251,263

Robert S. Schneider $298,149

L. Ben Lytle $127,232