In spite of the impact of an economic recession and theunraveling of one major competitor, the property-casualty insurancebusiness–and the specialty insurance market, in particular–remainstrong, according a specialty carrier executive.

The overall capital position of the p-c industry has declined 25percent at most, said Jonathan Michael, president and chiefexecutive of Peoria, Ill.-based RLI, giving his own estimate inview of recent analysts' reports of around 20 percent.

The aggregate overall decline is mainly caused by losses in theinvestment portfolios of individual insurers, “but compare that towhat has gone on in the overall stock market–a 50 percent drop.We're not anywhere near that,” said Mr. Michael, an accountant bybackground, referring to the plunge in market indices from thebeginning of 2008 to the low points being recorded around the dateof an early March interview with National Underwriter.

“I want to emphasize that the property-casualty industry remainsvery strong,” he said, indicating that he was talking aboutstandard companies, E&S carriers and admitted specialtyinsurers alike. “With few exceptions–and some of them are bigexceptions, I admit that–this industry is very strong today,” hesaid.

For the most part, he said, the p-c industry was not subject tothe financial meltdown that occurred in other financial servicescompanies.

“The amount of leverage that we're able to generate on ourbalance sheets is significantly less than life insurers, banks andinvestment banks,” he noted. “From that standpoint, we haven't hadthat meltdown and we shouldn't be painted with that same broadbrush.”

Mr. Michael speaks from a position of strength. RLI–which writesboth excess and surplus lines and admitted specialty insurancethrough its operating subsidiaries–not only has an “A-plus” ratingfrom A.M. Best, but has reported 13 consecutive years ofunderwriting profits, with an 84.2 combined ratio for the mostrecent year, that being 2008.

The track record landed RLI on NU'srankings of “Profit Champions”–a list last published byNational Underwriter magazine in late 2007 to distinguishinsurers whose 12-year average combined ratios were the 50 lowestamong 184 p-c insurance organizations analyzed by NU. RLIranked No. 11 on the list, with a 12-year average of 92.9 at thetime, managing to profit over a period spanning hard and softmarkets.

Mr. Michael spoke to NU'sE&S/Specialty Lines Extra after returning from the midyeareducational conference of the National Association of ProfessionalSurplus Lines Offices, Ltd., held in Palm Springs, Calif. Hereported that the hot topics at individual meetings between carrierand wholesale broker members of NAPSLO were their struggles withthe soft market and AIG's impact.

Offering his perspective a few days before the furor overbonuses paid to American International Group executives begandominating the headlines, Mr. Michael said the fate of AIG–and itsLexington Insurance Company, in particular–dominated NAPSLOconversation because Lexington is by far the largest E&Sinsurer.

“It's somewhat of a conundrum that AIG's troubles are creatingopportunities [for other E&S insurers], but at the same time,the government propping up that failing enterprise means that itwill bleed a slow death, in my view,” he said, referring togovernment bailout funds for AIG, which now exceed $170billion.

“I don't think that's good for anybody. It's not good for thetaxpayer. It's not good for the insureds for sure, and it's notgood for the industry [because] in the end, guaranty funds…may haveto end up paying for some of their failures,” he said, admittingthat he was delivering “a cynic's view of what could happen.”

As for the opportunities, he said that while E&S carriersare witnessing attempts by AIG and others to hold on to renewalbusiness with attractive policy terms and prices, “at the sametime, we're seeing some insureds, risk managers, agents and brokerswho are saying, 'Enough is enough.'”

“Wholesalers look to a company like RLI to provide a stablemarket throughout all cycles. They appreciate that we are notfollowing the market down, that we're sticking to our guns, [andhave] underwriting and claims talent available throughout allmarket cycles,” he said, referring to the 30-plus-year commitmentRLI has made to the E&S industry.

Particular areas of opportunity include longer-tail liabilitylines like professional liability and excess casualty, “where thecustomer and the agent and the broker have just decided that theyare going to seek higher-quality paper,” he said. “I did hear thatloud and clear from everybody I met with at NAPSLO.”

Conversely, as has been the case historically, “there willalways be customers seeking the lowest prices,” he added–notingthat price sensitivity is traditionally more apparent inshort-tailed lines like property.

Asked specifically about the impact of distressed competitors onoverall market conditions so far in 2009, he said, “I don't want tomislead you.” In addition to attempts by struggling companies tohang onto renewals, “you have [new] competition attempting to gainfootholds for business. That combination makes for a softermarket,” he said.

On balance, however, “I just don't think in this industry thatthe sky is falling,” he added.

MARKET FORECAST

Weighing in the factors that might produce a market turn thisyear, Mr. Michael highlighted a drop in investment income alongwith the depletion of capital.

Investment income, which started to decline late last year, willcontinue to drop in the first quarter, he said. “Companies arereinvesting at lower interest rates on called- or maturedinvestments,” he said. “We are also seeing companies holding on tocash–waiting to see what's going to happen.”

A lower level of industry investment income “puts more pressureon the underwriting side, and that tells me the market ought to belooking at a turn,” Mr. Michael observed. “When I say a turn, Idon't believe given all we know right now it is going to be a 1984market turn, or even a post-9/11 market turn,” he added, referringto huge price hikes, including some 100 percent increases for somelines during past cycles.

“I think there will be a fairly small correction, but acorrection across all lines,” he predicted.

This time around, he said, insurer combined ratios are “nowherenear as bad as they were” during the prior periods, “even on a realbasis,” estimating that “when all the dust clears,” the industrycurrent accident-year combined ratios might now be as high as 110across all lines. Comparable ratios, he noted, were significantlyhigher than that in 1999, 2000 and 2001, as well as in 1984.

“We really are, on most accounts, seeing a bottoming out on theproperty side,” he said, noting that when markets liketransportation also reach a bottom, “then I will believe the hardmarket is on the way.”

Responding to the question of whether capital declines atstandard companies could drive more specialty business back to thesurplus lines market, Mr. Michael agreed that the standardcompanies “will allocate their capital where they see it best fits,and that usually means in their own backyard.”

A large-scale movement away from what doesn't fit, however, isnot happening yet, he said. Instead, reports of changed appetitesof individual standard companies come in sporadically. “We hearanecdotally that [a] company is being less aggressive or they'vepulled out,” he said.

Mr. Michael said he expects RLI's business mix to change thisyear–with some changes driven by an economic recession and othersby design.

“For industries like construction, and in particular, generalliability for construction accounts, we expect business to be offquite a bit,” he noted, referring to the impact of the recession.As a result, the mix will tilt from liability to property, hesaid.

RLI's gross premiums for casualty business in 2008 were $403.3million, accounting for 59 percent of the $681.2 million total,while property premiums of $200.8 million made up 29 percent. Theremainder was surety business.

“We expect–not immediately, but over time–that our surety bondbusiness will be up because of the stimulus,” Mr. Michael said,referring to potential impact of the American Recovery andReinvestment Act signed into law by President Barack Obama inFebruary.

On the casualty side, in addition to pulling in a bigger shareof directors and officers business that moves away from marketleader AIG, Mr. Michael highlighted RLI's recent foray into thearchitects and engineers professionals segment. In addition, a newfidelity unit now complements existing surety business.

RLI created the New York-based fidelity division last June tofocus on both financial fidelity and commercial crime insurance.“Given the scandals that have occurred, [customers are]particularly keen to look at quality markets,” Mr. Michael said,referring to the Madoff Ponzi scheme and similar scandals that arelikely to result in claims.

Because RLI has not been a major player in the fidelity segmentto date, or in the professional liability segment for financialinstitutions, Mr. Michael does not expect RLI to see significantnumbers of claims from the financial crisis generally, or fromMadoff in particular.

Explaining RLI's most recent expansion in the professionalliability insurance arena–into the architects and engineers niche,with the launch of the RLI Design Professionals division inNovember–he suggested there could be more in the future.

“We have been in the executive products business since with1982, but we've never really been in real 'professionalprofessional'–architects and engineers, lawyers, accountants, andthe like. We're a specialty niche player and we believe those aremarkets we ought to be at least interested in. If we can attractteams of people to RLI that are experienced and well qualified towrite that business, then we ought to do it,” he said, noting thatthe first opportunity came in the design segment.

DIFFERENT STROKES

Mr. Michael referred to RLI's “catchy tagline, 'DifferentWorks,' to explain how he believes the company is able to attractand retain quality talent. “It is not just a tagline. It's reallyour operating philosophy,” he said.

“We offer underwriters a unique opportunity to write businessand to really be in charge of their own destiny with thecompensation opportunities that we present them and by empoweringthem to make the underwriting decisions,” he explained.

During a 2007 interview that took place just as the “DifferentWorks” marketing campaign kicked into high gear, Mr. Michael andChief Operating Officer Michael Stone explained that it wasdesigned to call attention to tradition of empowerment and RLI'slongstanding profit-sharing plans.

“Most of our business leaders want to run their own business.They would like to run their own insurance companies. The problemis they don't have any money. They have skills, contacts,relationships,” Mr. Stone said.

RLI, he said, provides the capital, infrastructure, licenses,technology and claims support, and enables them “to work at theirskill”–running their businesses as they see fit, making alldecisions from choosing locations of their offices to settingunderwriting guidelines.

Mr. Michael highlighted the simplicity of the firm's incentivebonus plan, distinguishing it from others that might exist. “We paya piece of the underwriting profit, period. And on different books,we can develop the business for up to eight years and pay it outover that time period,” he said, noting that even if underwritersretire, they can still get paid post-retirement.

More recently, during the March 2009 interview, Mr. Michael saidthe recipe of giving experienced underwriters freedom to write thebusiness they specialize in and rewarding them with slices of theunderwriting profit pie has helped shield the company from talentmovements reported on a daily basis throughout the specialtymarketplace. “When people come to work here, it's a destination forthem,” he said.