Executives of excess and surplus lines insurers, who areaccustomed to the rough rides of turbulent underwriting cycles, saythey will do more than hang on as the current soft market movesforward. Instead, as prices fall and competition heats up, they'llcount on the lessons of experience and continue to build on a widearray of expansion strategies to fatten their bottom linesregardless of market conditions, three E&S leaders toldNational Underwriter recently.

“The experience and continuity of our underwriting staff paysdividends in this kind of a soft environment,” said Anthony Markel,president and chief operating officer of Richmond, Va.-based MarkelCorp. “As they say in the Southwest, this ain't our first rodeo,”he added, repeating a remark he made to investors during hiscompany's second-quarter earnings conference call.

Mr. Markel–who reported a 32 percent jump in net income to$219.9 million through six months for his company, along with a 4percent drop in net premiums to $1.1 billion–summarized what he andhis company's underwriters have learned from past soft markets.

“It's not particularly complicated. If you start off with afundamental financial objective of a 20 percent return-on-equity,you have to have underwriting profits to produce that,” he told NU,noting that a 20-percent return goal has been in place for the 20years Markel has been a public company.

He noted that the level of needed underwriting profits can varyover the cycle because there is less pressure on underwriting whenhigher levels of investment returns are attainable. But “at no timecan you produce a 20 percent return without an underwriting profit.You can't do it with an underwriting loss at all,” he said.

Markel Corp. recorded a 20 percent annualized return for thesecond quarter, partially on the strength of a combined ratio of88. In New York, Navigators Group said its annualized return was 17percent, with a combined ratio of 87.8 for the quarter.

Like Mr. Markel, Navigators CEO Stan Galanski understands thevalue of having a cushion of investment income but believes havingan “underwriting culture” is paramount. Noting that Navigators'surplus has grown from $107 million in 2001 to nearly $550 milliontoday, he said higher surplus and loss-reserve levels have boostedinvestment income for his company.

“You don't want people to feel pressure to write business–thattheir jobs are on the line” if they don't make some budgetedproduction goals.

Both also point to the diversity of their E&S businesses asa factor allowing them focus on underwriting discipline overproduction.

“Depending on how you define them, we've got 75, 80, 90different products,” noted Mr. Markel. “There are always some in agrowth mode,” even though the company might “be forced to ride downvolume in others because of inordinate competition.” Having “abalanced platform,” he said, “allows us to be a little bit morecavalier in our commitment to underwriting profit than some of ourcompetitors.”

Mr. Galanski said that “a big part of our strategy is having theability to bob and weave–to find areas where we think there areopportunities, while not being afraid to shrink in others, and tobe very upfront with our staff; that it's okay to let businesswalk.”

“There are some niches that just don't make sense” right now, hesaid, highlighting increased competition for commercial contractorsliability business that he believes is pushing rates to inadequatelevels. “When you're fighting against standard lines carriers”jumping back into that market, “why bother?” he asked. “We'll takeour capital and go someplace else.”

“The residential market, we believe, is still priced at a levelthat's attractive. And then there are other geographicopportunities like here–New York contractors is still a trueE&S business,” he said, in an interview during the KeefeBruyette & Woods Insurance Conference in New York last month.“We're still in that market. The prognosis for that is good.”

Mr. Galanski attributes Navigators' ability to be flexible to adiversification effort that started back in 2001, and to adeliberate focus on technical pricing.

Diversification activities in the E&S business calledNavigators Specialty have included last year's addition of aprimary casualty unit in Chicago, which writes constructionbusiness east of the Rockies, as well as habitational and productsliability, and an excess casualty unit back in 2004.

“We didn't enter those businesses just as an opportunistichard-market play. We felt they were long-term businesses we wantedto be in,” he said, also noting that the expansion efforts changedthe overall complexion of E&S business. While only about 47percent of the Navigators Specialty book is in Californiaconstruction today, the comparable figure five years ago wasprobably 95 percent, he said.

Very quickly, both new units are becoming core businesses of thecompany, he said, noting that they are also helping to build towarda strategic goal–”to have Navigators Specialty be one of the top-25E&S companies in the United States.” (In 2006, gross premiumsfor Navigators Specialty were $311 million, and the bulk of thatwas E&S, Mr. Galanski said.)

KNOW WHEN TO WALK AWAY

Turning to more technical aspects of dealing with a soft market,Mr. Galanski said Navigators is in the process of rolling out athree-year strategy to its employees called: “Prospering In ASoftening Market.” Although he didn't reveal all the details of theinternal initiative, Mr. Galanski said “managing the cycle forNavigators has meant investing in infrastructure and takingtechnical price monitoring very seriously.”

Technical price monitoring means going beyond measuring renewalrate changes, which “can give false comfort,” he said–noting, forexample, that when an underwriter reports flat renewal ratechanges, that doesn't capture rates for risks that were notrenewed.

Those non-renewed risks may have been written more competitivelyby another insurer, and “in order to write new business, that sameunderwriter may price new business more competitively than existingbusiness,” he said. “So we're looking beyond renewal rate changes,”comparing prices charged to technical–that is, actuariallysound–rates, he said, allowing the company to know when to reduceits commitment from certain risks.

“You want to get that right because you can walk away too earlyand leave a lot of good business on the table, or [you can] walkaway too late and [end up with] tens of millions of underwritinglosses that could have been avoided,” he said.

Mr. Markel agreed. “We don't want to lose any business, and wewill respond downwardly rate-wise where appropriate,” he said. “Butall our underwriters know they're not going to get beaten up bymanagement if volume drops–if they can effectively say that theydid everything they could to hold onto the business at appropriatelevels.”

“It ain't their first rodeo either,” he said.

Applying lessons of past “rodeos,” the response of Markel'sunderwriters and management team to a soft environment is simple,he said. “You step-up marketing efforts–getting out to agents andinsureds to generate more opportunities at the plate. And you stepup new-product development efforts to mitigate dependence onexisting products,” he added, noting that new products can comethrough acquisitions.

“We have gained a reputation in the industry as a company thatis absolutely willing and interested” in acquisitions, he said,noting that the company's long history of successes dates back toits first major acquisition in 1987–of professional liabilityunderwriting manager Shand Morahan.

Since late last year, Markel has completed three acquisitions–anagency known as Prairie States in December, a unit of MGABlack/White specializing in social services in April, and CambridgeAlliance, a Vermont-based agency specializing in investmentadvisors E&O in August. Prairie States develops professionalliability products that are distributed through 30,000 State Farmagents, with Markel participating as a reinsurer, according to Mr.Markel.

Markel created an office of business development last year,which looks for acquisition opportunities. It also develops agencymanagement best practice guidelines for all of Markel'ssubsidiaries, and looks for cross-selling opportunities betweenthem. “But the real rubber meets the road with marketing efforts”at the individual subsidiaries, Mr. Markel said.

“We've really challenged them to step-up their games–to get moretravel, get more proactive with respect to agency relations,challenge service efforts and more,” he said.

While marketing teams may look to forge new relationships, “thereal payback is in … getting more business out of existingclients.” In some cases, he said, these wholesalers may not beaware of new products; in others, they may be sensitive to issuesthat need to be addressed.

RELATIONSHIP BUILDING

At Navigators, Mr. Galanski said, “our distribution hasfundamentally changed over the last half dozen years.”Historically, the company's largest producers had beenmultinational brokers handling global marine business, but whenNavigators took the first step toward becoming a diversifiedspecialty insurer in 2001–adding a directors and officers liabilityteam which is now the core of the Navigators Professional businessunit–wholesalers and retailers specializing in D&O were addedto the mix.

“As our E&S business grew, almost by definition, ourwholesale relationships expanded,” he said. “Today, if you look atour top-25 producers for Navigators Specialty, it's driven bywholesale. That's a big change because we didn't have that kind offootprint in the surplus lines business five years ago–and what wehad was California-oriented,” he added, noting that the expansionof specialty business beyond West Coast construction led toappointments of wholesalers with whom the company didn't havebusiness relationships before.

Navigators' most recent specialty initiative is the launch of aprogram division, announced in May.

“Our company started as an MGA”–New York Marine Managers–whichoperated a marine pool on behalf of other insurers, noted Mr.Galanski. “When you grow up as an MGA, you realize there are goodMGAs out there with track records of making profits.” He pointedout that the marine pool's combined ratio was 78 over a 30-yearperiod.

While he said that Navigators already has six or sevenrelationships with program managers, the new program initiative isdesigned to institutionalize quality controls and to cultivate newopportunities. “What strikes you is that some of the good qualitycontrols that you have by having a program unit aren't necessarilygoing to happen by accident, that there is a protocol–bestpractices–to running a program unit.”

“As you might expect, the best programs don't move regularly,”he added. “You want to be in a position to react quickly andcompetently when a good opportunity does present itself.”

Building a program-business initiative is also part of thestrategy in place at Liberty International Underwriters, accordingto Scott Bayer, senior vice president of the liability division inNew York. Mr. Bayer noted that Liberty has successfully landedthree programs since Executive Vice President Ted Nienburg wasappointed a little over a year ago–an expanding regional liquorliability program now in nine states, a small painting contractorsprogram on the West Coast, and a small national products liabilityprogram.

Noting that LIU is on the hunt for more, he said, programs thatwill be considered “are well-controlled niche businesses withhomogenous exposures that are preferably existing books with largeamounts of data,” adding that premiums should fall in the $2million-to-$10 million range, if not higher.

“I don't have a number set in my head” for the number ofprograms Liberty would like to add, he said. “We're just open tonew opportunities.”

Beyond the program initiative, Mr. Bayer said “the philosophy ofopening up offices and expanding our geographic base has continuedat LIU,” referring to an expansion effort that began in 2004, withthe addition of offices in Chicago and San Francisco to complementexisting offices in Boston and New York.

At the beginning of this year, he said, LIU opened a Los Angelesoffice for primary and excess liability business, and in Septembera casualty presence was added to an existing LIU office in Dallasthat had previously only written first-party coverage. He termedthe Los Angeles opening “a roaring success” based on submissionactivity.

“When we opened in San Francisco three years ago, we wanted tobe closer to our clients and to have a presence in the largestsurplus lines state in the country,” he said. More recently, thecompany “realized we needed to be closer to SouthernCalifornia-based clients,” suspecting that there was some businessthat still wasn't coming its way from San Francisco.

That's been confirmed, he said, noting that Los Angeles has seen400-to-500 submissions, while at the same time there's been nodecrease in the number of submissions to the San Franciscooffice.

In spite of opening new offices, Mr. Bayer said the number ofoverall relationships with wholesalers has stayed at about 150.“But what we find is that when we open up the offices, we seeopportunities from those existing relationships that we didn't tendto see otherwise,” he said.

“We're closer. We tend to see them more often. We're in theirbackyards. We're on their mind more often,” he added, noting thatcan help to put LIU first on their list. Instead of shippingbusiness across the country, “we're right across the street.”

At Markel, geographic expansion has taken the E&S insurerfurther than many of its competitors, with the opening of anunderwriting branch in Singapore.

“We saw it as a wonderful way to underscore our commitment tothe Lloyd's platform,” said Mr. Markel, noting that Lloyd's openeda trading floor in Singapore a few years ago. It is also a way “toget our foot in the water in the Far East, and to transport some ofour technical abilities,” he said, noting that the plan is to startwith marine and professional liability.

“I don't think you can be in insurance–or any venture–worldwidewithout recognizing that the Far East is a power to be reckonedwith,” Mr. Markel said.