How do excess and surplus lines carriers ensure they have anunderwriting profit? A hard market always helps in that it bringsin more cash for the same risks, while also attracting new insuredslooking for the kind of flexible terms and conditions that admittedcompanies might not be willing to supply.

In flat or softening insurance markets, however, the trick forE&S and specialty companies is to maintain the nimbleness thatallows them to grow profitable lines while the getting is good--andwhile other lines turn sour.

Mark Watson III, chief executive officer of the Argonaut Group,put it bluntly at the recent New York Society of Security Analystsinsurance forum, when he told of encounters with industry criticsfor whom hindsight is 20-20.

"How funny is it today that people want to know why you are notin California, whereas just a couple of years ago people wonderedwhy you ever thought California was a good place to write workers'compensation?" he said.

For Mr. Watson, "getting out of things that we decided we werenot quite good at," or those areas that didn't promise to "generatean acceptable profit over an underwriting cycle," has been a keystrategy.

To give some idea of the critical importance of having a soundgrowth strategy, Mr. Watson noted that last year 85 percent of thebusiness was from either start-ups or acquisitions. Californiaworkers' comp made way for a string of E&S acquisitions,beginning in 2001 with the purchase of Richmond, Va.-based Colony,helping the company show impressive gains in 2005.

Over the past five years, Argonaut's total assets have more thandoubled--from $1.6 billion to $3.4 billion--while gross writtenpremium jumped 43 percent.

Mr. Watson said the company's target markets remains small andmidsized businesses, and specific industries such as grocers. "Welike to partner up with our insureds and help them manage theirrisk."

Mistakes cost money, but at this point Mr. Watson remainscomfortable with his reserving in light of legacy obligations fromCalifornia workers' comp, asbestos and environmental liability.

For full-year 2005, the San Antonio-based company reported thatgross premiums topped $1 billion for the first time, along with netincome of $80.5 million--a 12 percent increase over 2004.

Last year was also record-breaking for Houston-based HCCHoldings. Chairman and founder Stephen Way said it was the bestyear in the company's history despite $57.5 million in hurricanelosses. "In 2005, we still achieved a 15 percent return-on-equityand grew shareholders equity by 28 percent," he noted.

While last year's catastrophes have had some companies loadingup on reinsurance, HCC has taken the opposite tack by increasingretained risk, which has been one of the factors in the 36 percentincrease in net earned premium to $1.4 billion last year.

Bank of America analyst Brian Meredith said HCC'sbetter-than-expected underwriting results and lower-than-expectedoperating expenses helped it report net operating income of 57cents per share-- 12 cents higher than his estimate of 45cents.

Specialty premiums rose 46 percent in fourth-quarter 2005. HCCexpects this area "to continue to see good growth in 2006 due tothe Illium deal" (see below) and other investments in 2006, Mr.Meredith noted.

Last October, HCC announced the acquisition of Illium InsuranceGroup Ltd.--a London-based entity that owns a Lloyd's managingagency running Syndicate 4040, specializing in U.K. third-party andemployers' liability. At the time, Mr. Way called the deal "aplanned increase in our London market presence, and one whichprovides a Lloyd's platform with licenses to facilitate expansionof our international operations outside of the United States andEurope."

Mr. Meredith noted that the company's increased retained riskcould prompt some earnings volatility, and will lead to flatteningof gross premiums as the company becomes choosier about the risk ittakes on.

At Peoria, Ill.-based RLI Corp., CEO Jonathan Michael alsohighlighted his company's "nimbleness" as he reviewed record 2005profits in 2005 of $107 million, compared to $73 million in2004--along with a 21.6 percent return on equity and 86 combinedratio.

"Part of the resiliency of RLI's business plan is that we havethe ability to enter lines of business that look promising, as wedid with RLI Marine in the second quarter of 2005," Mr. Michaelsaid. "This nimbleness means we can also--as we sometimes haveto--exit a business that is not performing up to expectations."

In 2005, that business turned out to be property construction,which contributed greatly to the property segment's $8.3 millionunderwriting loss for the year. A 110 combined ratio contrastedsharply with the 2004 figure of 79.2, which was also impacted bystorm losses.

Surety, however, proved to be a profit center last year, twoyears after RLI and other carriers had to rewrite that book aftersome severe losses.

Mr. Michael said RLI's underwriters are reporting new businessopportunities along the Gulf Coast as competitors restrictactivities, but reinsurance costs are sure to rise, which will haveto be factored against a more favorable pricing environment.

Columbus, Ohio-based ProCentury--still small enough that it canexpect to report 10 percent growth even in a soft market--willcontinue to rely on a diversification strategy in 2006, accordingto CEO Edward Feighan.

The company raised $100 million from an initial public offeringin 2004 on the tail of the hard market "that was the driving forcefor us to seek that capital," he said. "It gave us the opportunityfor some very significant top line growth that year, about 32percent, knowing by the end of 2004 we were starting to see a verydifferent market."

Targeting small-to-midsized businesses, he said, "we are not thecheapest in the market, nor the most expensive. But we believe[there] is an opportunity for us to compete, grow and prosper basedprimarily on our ability to serve the marketplace and generalagents who represent us."

Market forces helped shift some of ProCentury's book away fromproperty in the softer market, while Mr. Feighan said that in thecasualty sector, the insurer moved away from some of thelonger-tail lines in the manufacturers and contractors areas,shifting its emphasis to the shorter-tail owners, landlords andtenants, as well as other more premises-based covers.

"We don't have an appetite for cat coverage. We do, however,rely on having a much-diversified book of business," he said.