By flying under the radar to take business that's not in fullview of large standard carriers, executives of specialty linesinsurance companies predict they'll continue to grow profits in2007.

While admitting that they don't expect to grow their top linesby leaps and bounds this year, publicly traded companies thatreported to Wall Street analysts this month described an array ofstrategies they say will carry them through a softening market.

Some said they simply won't grow premiums very much at all asthey strive to exercise underwriting discipline and maintain profitmargins. But many said they planned to put just a little more heftinto this year's premium figures--articulating strategies thatinclude developing new products, cross-selling across existingproduct segments, retaining more business rather than passing it toreinsurers, and outright acquisition of books and teams ofspecialty underwriters.

That task will be easier for the smallest players in thegroup--a message that became clear during a presentation byAmerican Safety Insurance Holdings at the New York Society ofSecurity Analysts' conference in mid-February.

"There's no question that the market is softening. Anybody whodoesn't admit that is fooling themselves," said Joseph Scollo,executive vice president and chief operating officer ofAtlanta-based American Safety, noting that rates in the lines ofbusiness that his company writes are down anywhere from 5-to-10percent.

"The difference is we're a small company. We write $200-plusmillion of premiums" in a year, he said. "For us to grow 5-to-10percent is very minimal in overall premiums--$10-to-$15 million. Wecan start up a new product line--write $5-to-$10 million, which hasvirtually no impact on the market, and for us that's growth. Formost companies, that's meaningless."

Such figures would do little for the largest specialtyinsurers--such as W.R. Berkley, Markel Corp., Argonaut Group andRLI Corp.--yet executives at those firms were equally unruffled bydeclining prices.

William Berkley, chairman and CEO of W.R. Berkley in Greenwich,Conn., reporting a 28 percent jump in net income for 2006, admittedto being a little disappointed that net premiums grew just about 5percent. But he predicted during an earnings call that hiscompany's premium would grow 5-to-8 percent in 2007.

"Business is good," he said, noting that the fourth quarter isalways more competitive than the rest of the year. "We see lots ofopportunities."

"Prices are going down. No question," he said, noting pricedrops of 5 percent on average across the company's various businessunits--which include specialty operations and regionalsubsidiaries. The figure is lower than those reported in variousindustry surveys, he added--chalking the difference up to the factthat "they're produced by agents frequently with self-fulfillingprophecies in mind."

The surveys are "directionally accurate," but there's reason foroptimism in the specialty lines sector, he said. "We think we havelots of [profit] margin in the business," he noted, recalling the"worst mistake" he ever made in running W.R. Berkley Corp.--haltinggrowth in 1988 when prices started to come down 10-to-12percent.

"We printed cards that said: 'Volume is vanity; profit issanity.' And I believed it," he said. "I still believe it."

But the question is whether there is profit in the business."And we think there's still a lot of profit as it's priced today,"in "some business," but "not in all business," he said--noting thathe expects not only to expand opportunistically, but also toproduce a comfortable 20 percent return this year.

The accompanying tables of earnings for a group of publiclytraded specialty insurers are a testament to the profitability ofthe business. Even in the fourth quarter of 2006, underwritingprofits were at record levels, with only one company--Toronto-basedKingsway--reporting a combined ratio over 100, which it attributedto prior-year development on program business at its LincolnGeneral subsidiary.

While Mr. Berkley did not provide hints as to whereopportunities for expansion exist, the company started up five newoperations in 2005 and 2006--including an aviation unit and aWeb-based workers' compensation unit--that put roughly $86 millionof premiums on the books last year.

New products fueled some of the growth at Markel Corp.,according to Chief Financial Officer Richard Whitt, who identifieda lumber program at Markel Insurance Company, specializedalternative risk-transfer programs at Markel Re, and higher ratesfor marine and energy lines (added in 2005) as contributors to a 6percent increase in gross written premiums.

During the company's earnings conference, CEO Tony Markeloutlined a formalized process for growing business in any phase ofthe market, which included the promotion of Senior Vice PresidentJohn Latham to work with Mr. Markel to focus on that task and tohead up a new Office of Business Development that will look atopportunities to make acquisitions, enhance existing products anddevelop new ones.

"We don't go in setting any growth targets," he said. "We arebasically doing everything we can to increase submission flow,"identifying the December acquisition of the Prairie States agencyfrom Aon as another step that's been taken to assure growth.

"But we don't force growth. We try to increase deal flow--priceevery one the way we think it should be priced to achieve ourunderwriting results and, at end of the day, add them up," hesaid.

Assessing current market conditions, Mr. Markel said that strongproperty-reinsurance treaty rates for Jan. 1 indicated to him "aprobable continuation of the justifiably higher [primary] ratelevels achieved on cat- exposed properties" following the 2004 and2005 wind seasons.

"Tempering that, however, I am concerned about pressure on ratesin other sectors. We are seeing casualty rates continue tomoderately erode as well as property rates in non-cat prone areas,"he added. "That said, the bottom is certainly not falling out ofthe market. And suffice it to say that we've been here before."

Michael Stone, president and chief operating officer of RLIInsurance Company, had a more negative view of market conditions,but was equally confident of his company's ability to weatherchanges.

"Any reinsurers out there, your cedents aren't being asdisciplined as they have represented to you," Mr. Stone said duringa conference call, highlighting eroding market discipline thatextended to the property-catastrophe insurance market during thefourth quarter of 2006.

Peoria, Ill.-based RLI Corp., with net earnings of $134.6million in 2006, also recorded its 11th consecutive underwritingprofit, with a combined ratio of 84.1 for the year. But while grosspremiums rose 5.6 percent to $799 million overall for 2006, theyslipped 7.7 percent in the fourth quarter. And for the propertysegment alone, Mr. Stone reported gross premiums jumped 28 percentfor the full year, while shrinking 19 percent in the last quarter,with rates returning to 2004 pre-hurricane levels.

Still, he said the outlook is positive for growth at RLI in2007. "If you look back over the past couple of years, rates haveweakened a bit in casualty and we've pretty well held our own," henoted, adding that the firm has some new initiatives to entergeographic areas that it is not currently in.

At the analysts' conference, CEO Jonathan Michael agreed, notingthat RLI will expand niche products by "recruiting provenunderwriting talent--people that have a following"--and by goingout and acquiring underwriting teams.

As an example, he noted that RLI started a marine office in 2005through the acquisition of a team of employees that wrote nearly$30 million of that business for the company last year.

While there was some difference of opinion about how soft themarket is getting, it's certainly not hard, which is a cue forexecutives at Kingsway Financial to put the brakes on, accordingCFO Shaun Jackson.

Also speaking at NYSSA, Mr. Jackson said that "our view is thatthe time to grow is in a hard market. The time to stay pat andreally just preserve margins" is in a soft one. He noted that whileKingsway's premiums doubled in 2002 as the company seized hardmarket opportunities in its niches--trucking and nonstandardauto--in the United States, since 2003, gross premiums have hoveredbetween $1.9 billion and $2.0 billion.

Kingsway, which has a history of acquisitions, will continue toselectively pursue them, Mr. Jackson said. "In this market, wethink this is one of the best uses of our capital," he added,highlighting the recently announced deal for Mendota, a nonstandardauto writer, from Travelers--a deal that should add about $175million of premium annually.

"Also important for us is they're very strong in several stateswhere we have very little presence," such as California andColorado--one of the nation's most profitable nonstandard autostates. Even in states where there's overlap, he said Mendota isstrong in parts where Kingsway is not--noting, for example, thatKingsway writes business in Miami but not the rest of Florida whereMendota has a presence.

Growing casualty business in Florida and neighboring states isalso part of a growth plan at Southfield, Mich.-based North Pointe,which was forced to cancel 40 percent of its commercial propertypolicies in the state in June 2006, protecting the company's incomestream from volatility.

Explaining the situation at NYSSA, CEO James Petcoff said: "Wecouldn't buy enough reinsurance. And it sure occurred to me that ifwe don't think we can pay a claim in the event of a hurricane, thenwe probably shouldn't take anybody's money."

North Pointe--which has built its franchise around claimshandling and writes specialty admitted products mainly throughindependent agents in liability niches such as liquor liability andbowling centers--will seek to expand geographically and through newproduct offerings in 2007.

To expand specialty commercial lines beyond the Midwest, NorthPointe added an office in Sacramento, for example, Mr. Petcoffsaid, adding that new products could include workers' comp coveragefor bars and restaurants, which is not offered today.

Mr. Petcoff said North Pointe will also seek to expand itspresence in the broad area of hospitality and entertainment, givingthe example of a move to write roller skating centers in April 2006as the type of natural evolution he envisions.

Roller skating centers are a similar type of risk to bowlingcenters, he noted, adding that the expansion exemplified thecompany's philosophy when adding a new line. While the total marketfor roughly 4,000 skating centers nationwide is about $30 million,"if we write one-third of that market, the $10 million ismeaningful to us."

CFO Brian Roney said such a figure "may seem very small to amiddle manager at Chubb," but to North Pointe, "it's thatproverbial fly below the radar" that can insulate the specialtyinsurer in a softening market. He added that skilled claimshandling can make such small segments very profitable for smallspecialty insurers.

At San Antonio-based Argonaut, CEO Mark Watson has seen asimilar evolution at his firm--which, among other distinctions, isthe largest writer of grocery stores and coal mines. "Our expertiseis in mining, not just coal mining," he said at NYSSA, noting thatthe Select Markets division of the group, which targets specificindustries, is focusing now on a gravel mine opportunity inFlorida.

Similarly, when the grocery industry began consolidating, themanagement team of Argonaut's Grocers subsidiary repositioned thecompany "as not just an insurer of grocery stores, but retailbusiness." Last November, the company carved out a new niche amongfurniture stores that sit within the same strip centers as thegrocery stores it already writes, he said, noting that theirproximity means similar risk profiles.

"That isn't going to shoot the lights out and generate $300million of premium, but it might generate $30-to-$100 million," hesaid. "It's all those base hits that we just keep connecting."

He also highlighted cross-selling opportunities between thegroup's largest segment--E&S--and admitted segments.

For example, he noted that an E&S employment practicesliability product is now available to grocery store accounts, whilea dry cleaning program came from the E&S platform, which wroteonly environmental exposure, opening an opportunity to offerremaining coverages in another unit of the company.

Like almost every other executive reporting to investmentanalysts, Mr. Watson said acquisitions were a possibility for hisfirm, reporting that some potential targets that were rejected lastyear--because they had overly ambitious expectations about thevalue of their businesses--are now back to talk again.

Frank Bramanti, CEO of Houston-based HCC Holdings, which hasbeen an active acquirer of specialty insurers and agencies over theyears, said his company continues to be on the hunt for deals, andthat some small ones are in the pipeline.

"We're going to look at larger acquisitions which the companyreally hasn't done in the past. We can make great use of a $30-,$40-, $50 million acquisition, but it's probably not going to movethe needle very much," he said.

"If we're truly in the beginning of a soft market, there aregoing to be public companies out there whose shares are going to becoming under pressure," he added.

HCC is one of several specialty companies that reported highernet premium growth than gross premium gains in 2006, by retainingmore business rather than passing it on to reinsurers. Otherspursuing such strategies included Richmond-based Markel; ChapelHill, N.C.-based James River; and Atlanta-based AmericanSafety.

While American Safety has yet to report its full-year 2006results, the company was probably the most aggressive in terms ofreducing reliance on reinsurance--with a net-to-gross ratio of 68percent through nine months compared to 58 percent for the sameperiod in 2005.

In addition, CEO Stephen Crim said 43 percent growth in grosspremiums through nine months was mainly attributable to existingenvironmental and construction businesses, but that productdiversification is also part of the plan. In 2006, for example, thecompany added nonconstruction liability and umbrella products toits lineup.

Like others, Mr. Crim said his company would selectively pursueacquisitions, adding that specific targets will be MGAs that givethe company the ability to produce some fee income as well as getthem into new product lines, in addition to specialty insurancecompanies, books of business and underwriting teams.

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