NAPSLO's incoming president, Marshall Kath, sees a new source of turbulence on the horizon for commercial businesses, but his firm and the association he'll soon lead are continuing to move ahead on an even keel.
Mr. Kath, chief executive officer of Dallas-based Colemont, concluded an early September interview by noting that NAPSLO annual meeting registrations were on pace to match last year's level of over 3,000. In addition, Colemont is on track to produce about the same volume of business it did last year--roughly $1.4 billion.
Earlier in the same interview, however, he predicted further instability for the U.S. economy, with a new wave of securities defaults--this time from commercial mortgage-backed securities--pushing the hoped for recovery further into the future and spawning implications for the insurance industry.
Mr. Kath spoke to NAPSLO Daily a few days before President Obama spoke on Wall Street to mark the one-year anniversary of the fall of Lehman Brothers. Lehman's collapse became a reality on the first business day after the weekend closing of the 2008 NAPSLO annual meeting--a meeting themed "Navigating Change."
"There's really no way of talking about the [insurance] industry landscape without talking about what's happened in the financial world over the last year," Mr. Kath said. "We went into the weekend wondering if Lehman would make it."
No federal intervention came that Monday morning, and the fates of other financial institutions soon spiraled downward in rapid succession, he recalled, recounting problems at Bear Stearns, Merrill Lynch, American International Group, Washington Mutual and Wacovia. "A lot of that was driven by the meltdown on the residential real estate side, [which] rippled through products, jobs and everything else."
"If that's the landscape, then the hardest thing to try to predict and navigate through is the question of what will happen to our customers," the insurance brokerage CEO said, explaining the difficulties of navigating changes that weren't remotely contemplated when last year's meeting was planned.
"On one hand, insurance is something that has to be purchased every year." Working against that, however, is the fact that business volume for the businesses this industry insures "is just off, and it's off significantly," Mr. Kath said.
"They don't have the same sales receipts. They don't have the same payrolls." Those decreased exposure bases mean they pay less for casualty insurance. "We've seen that come cascading through in the last year," as insurers and brokers watched casualty premiums plunge as a function of both declining exposures and competitive rates.
While property-catastrophe rates "hung up there," buoying property premium volume overall, Mr. Kath expects exposure issues to start playing out soon on the property side as well.
As companies shut down operations or vacate space, commercial buildings will have less occupancy, and CMBSs are going to default, mirroring what's already played out on the residential side, Mr. Kath predicted. "That's the next wave where you're going to see a lot of financial angst."
A lot of the commercial real estate has loans due this year or in the next two years. "You have to have a normally functioning credit market to deal with those, and we don't right now," Mr. Kath said.
"Where all this ends up is you'll see lower values on commercial property." That's what is "coming to a theatre near us," bringing a potentially negative impact to insurers and brokers as they write property coverage, he said.
GROWING COLEMONT
Mr. Kath draws an ability to connect dots between industries from a religious attention to business news, reading four daily financial newspapers and a half-dozen business magazines in addition to industry trade publications. "It gives me a better understanding of what our customers face," he said.
The habit, however, was one he got into long before he was CEO of an insurance brokerage. "I did not have the benefit of getting an MBA, so I felt I had to learn and read my way through" what others knew based on their work toward advanced business degrees, Mr. Kath said.
Although not an MBA, Mr. Kath is a certified public accountant, who began his career at Arthur Andersen, later moving on to work in private equity and then to become the fourth employee of Heath Insurance Brokers, a U.S. affiliate of London-based Heath Lambert, which became known as Colemont after a management buyout of the U.S. firm from Heath in 2005.
Mr. Kath doesn't know if he's the first NAPSLO president who is a CPA rather than a broker or underwriter. To tackle his first industry job as CFO at start-up Heath back in 1992, broking and underwriting skills weren't necessary, he said. Nor were they necessary when he stepped up to the CEO role in 1996. "My charge was to build a business," he said, noting, however, that good brokers and underwriters have been successful at that also.
The building efforts of Colemont's management team took the firm from placing roughly $17.5 million in premium in 1992 to over $1.0 billion in 2004, just before the MBO. Late in 2004, Colemont began to build a business beyond the United States, taking an initial expansion step to London through connections with some former Heath Lambert colleagues.
Today, Colemont has 15 global network offices in places like Mexico, the former Soviet Union, parts of South America and Europe. Mr. Kath said the global expansion strategy not only gave Colemont geographic diversification, but product diversification also, noting that at each non-U.S. location, Colemont operates as a retail broker, a reinsurance broker or both.
In Chile, for example, the retail operation produces accounts most often placed in the local Chilean insurance marketplace. But those local insurers have treaty and facultative reinsurance needs. So there's a Colemont reinsurance office there to help the insurers with reinsurance placements, he said, adding that those might go to London or Miami.
While worldwide operations have helped Colemont grow overall during a soft market, Mr. Kath said U.S. operations are flat year over year. "On any given day, [the figure] might be down 0.7 percent or up 0.3 percent," he said, reporting daily updates of a graph of premiums and revenues on Colemont's Intranet site.
"That's monstrously huge in this environment," he said, referring to the fact that the numbers are not sliding down with p&c rate levels.
To what does he attribute this?
"We're just maniacal about sales," Mr. Kath said, declining to divulge much more about that recipe for avoiding declining production numbers.
"Retailers are our customers. It's all about them," he offered later, noting that wholesaler opportunities arise from listening to the retailers--and to the needs of their customers, the ultimate buyers of insurance.
"On a broad product line basis, there are no big new categories that have really emerged. [Instead], we [have] become more focused, more granular about opportunities."
"They do become more specific," he said, noting, for example, that Colemont is helping individual trucking firms that are required to carry insurance but challenged to be able to pay for it in a down economy. Considering variables like cash flows and claims history, Colemont and its carriers rework insurance programs so they are more appropriately structured for the current environment, he said.
DEVOTING TIME TO NAPSLO
Soon after Mr. Kath took on the task of building Colemont, he took on his first task for NAPSLO as well--as an instructor of financial topics for the Advanced School.
Mr. Kath was actually volunteered for the teaching job by Gene Eisenmann, who was NAPSLO's president for the 1994-95 term and Colemont's CEO at the time.
"It ended up being a wonderful opportunity to get involved," Mr. Kath said, noting that he continued teaching the course for 13 years. "There's just a powerful duality to industry involvement. You get to both learn and give back. I have cherished that reality for NAPSLO and my involvement with it," he said, referring also to roles he's had on the NAPSLO Education committee and the Legislative PAC group.
Mr. Kath is not a member of any other industry associations. "That, for me, is a purposeful decision. NAPSLO is, in my opinion, the voice for wholesale insurance brokerages. Nothing against AAMGA, CIAB or PLUS, but for what we do as wholesale brokers, NAPSLO is it," he said.
Asked about the challenges he and other NAPSLO leaders will take on in the coming year, he pointed to three broad "value propositions"--legislative, education and networking.
Convention attendance figures bear out the value of the latter, he said, noting that 2,600 members were registered by early September.
"That's a really strong number at this stage of the cycle. It's a tremendous tribute to the need for and the strength of networking, and [to] what members get done at the annual convention."
