Interview: Oak Street Funding s Rick Dennen

Transcription

1 Interview: Oak Street Funding s Rick Dennen Rick Dennen is the founder, president and CEO of Oak Street Funding. Located in Indianapolis, Indiana, Oak Street is a family of diversified financial services companies offering commission-based commercial financing exclusively for insurance professionals and third-party loan servicing for financial institutions. Oak Street Funding is a K-Klub Member of the PIA Oregon/Idaho, PIA Washington/ Alaska, PIA Montana and in the PIA Group states of Alaska, Arizona, California and New Mexico. Weekly Industry News recently talked with Dennen about Oak Street Funding and about the insurance industry. Weekly Industry News: What does Oak Street Funding do? Rick Dennen: Basically and to put it simply we re a bank for insurance agents. We re not technically a bank, we re an insurance finance company but we lend to insurance professionals across the U.S. Currently, we re in 47 states and we ve lent over $350 million dollars. We will lend to a retail agent, brokers, program managers, MGAs and up and down the spectrum of the insurance industry. The same goes with loan size and that ranges from $10,000 to $10 million dollars. WIN: Is the interest rate I get from you lower than what I d get from a bank? RD: We look at it as a risk-based analysis. We will look at certain leverage metrics, at credit scores, at carrier ratings and a couple of other factors as to how a loan is priced up. We can be very competitive with a bank to much higher than a bank. But if it s much higher than a bank, then a bank wouldn t likely do that loan anyway. Here s an example. You might have somebody with a terrible personal credit score along with minimal collateral. A bank is absolutely walk away from that. For us it doesn t mean the loan cannot be structured and be a good loan though there is certainly more risk inherent in a deal like that. We have a proprietary piece of technology that has riskbased pricing models inherent in the system. So the system will calculate the risk and determine what the interest rate is going to be.

2 WIN: You re in 47 states so you must have thousands of clients. RD: Yes. We ve done about 2,000 loans in our 10-year history. Today we have about 700 active loans. WIN: What types of loans do you do? Rick Dennen RD: Just like a bank we ll do a variable rate loan, a fixed rate loan, and interest only for a period of time. We ll do straight amortizing loans. We have all the different structures that are necessary for a borrower. Oak Street Funding will also do loans for various purposes. One option is management capitalization whether it s an acquisition or purchase of a building, marketing or just general working capital. There are various uses for the funds but they do have to be used for commercial purposes and that s why we re a commercial lender. WIN: Why should I go to you instead of a bank? RD: Pretty easy answer. A bank is not going to understand insurance. Even more importantly, the banking regulators do not like cash flow lending. An insurance agency/ brokerage has a business that is enforced policies and they perform for a certain period of time. From that there s a predictable cash flow stream but they re not tangible assents. So number-one, a bank does not like lending to entities that do not have tangible collateral. We have the expertise and have actuarial models that are product interior specific, and very accurate relative to being able to predict future cash flow. That s how we will analyze a loan. We go back to evaluating its risk parameters and it s how we track collateral on a go-forward basis to make sure the loans are going to perform. To recap. A bank does not like cash flow lending, it does not like intangible asset lending, we ve got the expertise with 10-years of doing this. Plus, and beyond that, the group of people involved in this company have been in insurance on average in excess of 10-years. So we have the expertise and knowledge of dealing with insurance customers. A lot of time we are in competition with a bank for a loan, but we don t like to be in that competition. We tell our client if they want to get their financing from a bank, go ahead and do it. About 95% of the time that customer will come back to Oak Street in a couple of weeks and will tell us that they ve explained their need to X number of bankers

3 three and four times and they don t get it. And in the end they ll say, I need to move forward with you. WIN: Banks don t speak insurance. It s a language of its own. RD: And there are nuances within that language. The higher up you go and beyond just the retail agent and on to the wholesalers, to the MGAs, to the program administrators, there s more complexities in those deals. We have the expertise to evaluate the risk and the cash flow that banks do not. These are individuals that have very high net worth, and are very sophisticated entities with a lot of cash flow but a bank just won t lend to them. We re lending against the future commission stream that an agent or agency generates. What we re saying to the agents and agencies is that we understand their cash flow stream and that we determine how much we ll lend based on that. WIN: You do other things besides lending, right? Acquisition assistance, partnerships, etc.? RD: Acquisitions, recapitalization, bringing in new partners are 40% to 50% of our volume. Those are the larger dollars. We have smaller income from marketing, working capital and those kinds of needs. WIN: Are you seeing more mergers and acquisitions now that the recession has been declared over? RD: What I would attribute the increase in mergers and acquisitions to is the tax rate change and not the end of the recession. The recession, the bad economy, the lack of capital, and others like the soft market slowed things down in 2009, 2010, and In 2011 and 2012 the tax rate change and the cap rate started showing up on people s radar. The capital gains rate was increasing 8%. Therefore, if they sold on January 1 verses December 31st they d lose 8% on the deal. So I think there was an acceleration to get things done in Here we are in October of 2013 and our pipeline now is greater than it was a year ago when a lot of the tax rate changes were pushing through. It s coming back now. People have integrated those acquisitions into their businesses during the first half of the year and now they re back on their strategies of consolidations and acquisitions and those types of things.

4 WIN: You do a lot of financing in this industry. From your point of view, how healthy is the insurance industry? RD: It is a healthy industry for a couple of reasons. We track the carriers quite heavily. And we haven t seen a whole lot of downgrade in the carriers providing products for agents. The second sign is the market hardening a bit. That s been occurring with different products over the last 12-months. That means the carriers are increasing premiums. When the premiums are increased, the agent receives that same percentage of increase. The agents revenue stream is growing. The third thing is the economy is getting a little better. The retention rate for agents on customers is probably a little bit higher since not as many businesses are going out of business. As the premiums go up they re the agents making more money. All those things point to a pretty healthy market for agents and brokers. WIN: Did the financial institution reforming Dodd-Frank Act hurt you at all? RD: No, it did not. I think the overall regulation on the banking industry has probably helped us. The last thing a bank executive wants is the regulators to assess their mortgages. If the regulators go beyond the surface and dig deeper and want to see the rest of the portfolio, they find this intangible assets lending and cash flow lending. And when they look at the financial statements of an agency and there are no assets on the books, the regulators are going to start raising red flags. We saw a lot of loans in 2011 and 2012 when banks said to the customer, You ve been a very good customer. You ve been with us four years. You ve never been delinquent, we ve never had a problem but we need to get rid of this loan. Then they [the customer] would come to us and we would look it over. They told us the bank would just not hold the loan anymore. There is just a lack of understanding either inside the bank, or with the regulators. The banks were saying this is just not something they wanted in their portfolios. All of that regulatory oversight that came into the markets in the last four years, has been a positive for us. It pushes back to expertise which is one of our core competencies. WIN: Last question. What s the future hold for you? How do the next three to five-years look?

5 RD: A hardening market, a better economy, more persistency, better carrier health are good for an agent and that s good for us. When I started the business back in 2003, 70% of insurance agents were 56 years of age or older. Now between 50% and 60% of the agents are 70-years of age or over. So there is going to be a lot of succession planning, and management recaps and consolidation in the industry in the future. The carriers are kind of pushing for it. For Oak Street that means we ll continue to put good and fair deals out to our customers and be consistent in our approach in how we lend, the amounts we lend and who we re lending to. We re very focused on the insurance industry. We haven t gone down some financial paths like premium financing and others. Instead we ve focused on just getting better at what we do. WIN: This isn t a trick question but sometimes we like to ask it. Is there a question that we should have asked you that we didn t? RD: Not that I know of. You ve pretty much covered our business and seem to understand what we do. As a last thought, though, and as I look around my desk and at the things I m working on, what strikes me is that this is a people business. That s where we spend a lot of time. And we take a lot of pride and effort in who we hire. We train our employees about 245 hours a year. We do a lot of leadership work with them. We do a lot of personality analysis. That has resulted in a lot of success. For me, it s a talent business and that s consistent with insurance professionals as well, and even beyond insurance to any business. Success is based on who is running the operation day to day. Who is talking to customers. If they re good and happy people, and trained properly, then your customers are going to feel the same way as well. I spend 60% to 70% of my time each day on people. WIN: That said, that is the big difference between you and a bank. Banks are bottomline, bottom-line, bottom-line. Most banks are looking at ways to not loan you money rather than to loan you money. RD: An interesting stat is that I came out of public accounting in the big four. We were dead last one year. The profitability wasn t there. We had an individual come in who led us in leadership, development and hiring. He brought in a consulting company to do

6 that. By the third year we were the number-one ranked office in the country. We held that for three-years, and during that three-year cycle we became the most profitable. That s a huge testament. That was in Fast-forward that to now. The first hire that I made was a woman in that person s consulting firm. We knew we needed to grow. But that starts with people. So we ve doubled in size since then. At the same time, we ve protected the culture. We spend a lot of time streaming and looking at people. It has paid off. In 2012 we were named one of the best companies to work for in Indianapolis. It s something I m very proud of and that the people here are proud of. To learn more about Oak Street Funding go to