They may not command the multibillion-dollar premium figurestouted by competitors involved in the latest merger deals, butmarket clout is not necessarily synonymous with size, according toexecutives of several large independent wholesale brokers.

Executives of wholesale brokerage shops placing hundreds ofmillions in excess and surplus lines premiums that have not beeninvolved in this year's wave of mergers and startups say theydemonstrate their value to retail customers through deep expertisein specialty product lines such as directors and officers liabilityand property-catastrophe insurance.

In addition, Scott Smith,president of Hartford, Conn.-based S.H. Smith & Company, andDavid Pagoumian, president of Iselin, N.J.-based NAPCO, highlightedsimple steps–like delivering comprehensive analyses of quotealternatives–as keys to differentiating their operations for retailcustomers.

Mr. Smith said his privately held firm has continued to growearnings in soft-market conditions, albeit not at the double-digitclips that he believes private-equity owners demanded fromwholesalers involved in merger deals.

“I want to believe [we're growing] because we do our businessthe right way,” he said. Illustrating how it can be done the wrongway by example, he reported a recent experience he had in trying toput together a D&O program for a bank with a premium price tagof about $5 million.

The agent for a bank that is being acquired had been asked toput an extended reporting period policy in place, Mr. Smith said.After asking for a copy of the quote, “what I got was a string ofe-mails from this other broker,” he said. “Not a formal quote withterms and conditions,” but e-mails put together one after theother. “It was this guy said this, this guy said that, and here's acopy of the e-mails,” he said.

“I just find that appalling,” Mr. Smith continued. As acustomer, “if I were going to spend that kind of money, I wouldwant a document in front of me explaining everything,” he said,reporting that his firm routinely delivers that type of analysis onD&O programs.

With wholesaler quote documentation levels varying widely, “Ithink the reason we're growing is that we deliver consistentlyquality work,” Mr. Smith said.

As wholesalers, “we need to be aware of what the customerneeds,” he said. If a customer needs a thorough analysis of themarketplace made, then “we can put a spreadsheet together of allthe markets we went to, why we're recommending the proposal that weare, and why the others–including some that might be lessexpensive–should not be entertained because of huge gaps incoverage.”

At NAPCO, Mr. Pagoumian noted that his firm specializes inproperty-catastrophe insurance coverage. “We breathe and liveproperty-cat, and our higher cause is to be experts in propertyinsurance and related services,” he said.

“When information comes in to us, we analyze that in a verycomprehensive fashion. We go out of our way to explain to ourretail partners what all the exposures are” based on an array ofdifferent catastrophe modeling tools, he added.

“We're not just one of these brokers out there that is matchinga risk to the market and getting a quote. Taking a risk to marketis the very last phase of the process that we do,” Mr. Pagoumiannoted.

“We do a lot of the upfront work that enhances the riskmanagement process,” he said. The upfront modeling “allows us toanalyze a risk, make appropriate risk management decisions with ourretail partners, and then with that intelligence, we know how tosize up the right markets.”

Mr. Smith said private ownership allows his firm–which includesa property and casualty wholesale division, a professionalliability division, a managing general agency and a programsunit–to invest in product development.

For example, he said his firm recognized several years ago thatcyber liability and privacy exposures were very real, in the wakeof a multimillion-dollar exposure at a supermarket chain that hadcompromised personally identifiable customer information fromcredit card records. (See http://bit.ly/9lnAnV for more on databreach exposures.)

“We invested in a staff of people to become experts in that. Idon't think a lot of our competitors, who are crunching the bottomline so much, have the ability to bet on the long haul,” he said,referring to firms owned by private equity.

PE firms aim to take the money entrusted to them by investorsand deliver returns above alternative investment vehicles such asbank accounts or stocks. In some cases, they may be looking for asmuch as 20 percent per year to double their money over a five-yeartime horizon.

In the wholesale brokerage world, “we all know that even thoughwe can grow every year, it's not without a lot of struggle andstrain,” Mr. Smith said. “I would not tell you that we're growingat 20 percent a year. We haven't for a number of years.”

“We're privately owned, and we understand that we have chosen anindustry that has cycles,” he continued. “While I'm pretty adamantabout growing regardless of the cycle we're in, I don't expect 20percent in these conditions.”

Pressured by outside investors, he said the other firms areforced to do away with expenses to try to grow their bottom linesin these conditions.

When a customer calls them about cyber privacy, “they'll putsomebody on the phone, but [not] somebody who spends all day,everyday on that,” Mr. Smith said.

“We have a dozen other products like that here,” he said, givingthe example of private school and college programs focused on theprivacy issue, and special tuition-reimbursement coverage arrangedlast year in the wake of the H1N1 epidemic in the event thatschools had to be quarantined.

DARK CLOUDS MOVE

Separately, executives of Swett and Cooper Gay, as well asAmWINS and Colemont, which teamed up for this year's twomega-mergers, say their deals have “raised the bar” forothers–further diversifying their businesses, expanding footprintsinternationally and giving more resources and technology toemployees to efficiently perform their daily work.

Against the backdrop of the merger wave, several startups havealso made a big splash, including R-T Specialty and MarketScoutWholesale.

RTS is the wholesale broker division of Ryan Specialty Group,launched by former Aon Chief Patrick Ryan and Tim Turner, formerpresident of CRC Insurance Services in California.

MSW, a new wholesale and consulting division of MarketScout, aDallas-based electronic insurance exchange, is headed by industryveteran Glenn Hargrove.

All the noise, Mr. Pagoumian believes, is good for thedistribution channel.

“The activity in that area would suggest that the wholesaleplatform is alive and well and that the dark clouds are gone,” hesaid, referring to troubles that have been looming since former NewYork Attorney General Eliot Spitzer's investigations of theinsurance brokerage industry's abuse of contingency fees in 2004,in terms of bid-rigging and account steering.

“Wholesale has demonstrated itself through this period ofadversity with not only the credit crisis, but even Spitzer,” hesaid, recalling that in the wake of Mr. Spitzer's investigations,the “alphabet-houses” (the big-three retailers–Marsh, Aon andWillis) sold their wholesale divisions.

First Joe Plumeri, CEO of Willis, said wholesalers were aconflict and Willis divested Stewart Smith, he noted. “Then therewas a knee-jerk reaction” from the others, he said, recalling Aon'ssale of Swett and Marsh's sale of Crump.

Mr. Pagoumian said wholesalers struggled with an issue he refersto as “distribution credibility” in the post-Spitzer era. In the“age of transparency,” insureds were asking, “Who is on my[placement] deal? What are you making on my deal?” In some cases,they were finding out that a wholesaler was on their deal for thefirst time, he said. “So everyone was being asked what value do youbring to the table?”

Mr. Pagoumian has written a whitepaper to address themisconception that more parties to a transaction add to the costwith another layer of commissions, arguing that specialists canactually deliver more economically sound insurance programs–broadcoverage at lower premium costs.

When you're using a specialist who has done the same thing athousand times, “his experience of repeatability bringsefficiencies to the table,” he said.

(The whitepaper, “Wholesale-nomics,” is available on NAPCO'swebsite at http://www.napcollc.com/articles/WholesalenomicsWhitePaper.pdfand on the website of the National Association of ProfessionalSurplus Lines Offices, Ltd. at http://www.napslo.org/imispublic/PDF/Publications/Wholesale-nomics.pdf.)

Beyond the whitepaper, specialty wholesalers like NAPCO havesimply demonstrated their value–and the recent merger and startupactivity is further proof “that wholesale is still a very vibrantdistribution channel for insurance.”

“It's all good,” said Mr. Pagoumian, who like Mr. Smith andother wholesalers say the “word on the street” is that venturecapital money wanted higher returns than the soft-marketenvironment could produce and wanted out of theirinvestments–prompting some of the deals.

“But the fact that there is the next capital provider thatbelieves in the wholesale platform demonstrates to me that we'restill ready to rock and roll,” he said.

NOT CATCHING THE WAVE

Wholesalers interviewed by NU said they are rocking androlling without any particular pressure to find mergerpartners–instead finding opportunities emerging from the activityoccurring around them.

Even in a market where retailers have been paring down the listsof wholesalers they work with, Mr. Smith said his firm candemonstrate clout. Taking the example of umbrella liability, hesaid that with less capital than the mega-wholesalers, his firmdoes not just demonstrate access to the same umbrella markets butpromises to deliver “the best kind of access.”

That can result from being the biggest wholesaler for a topinsurance company market in a region or from being one of thetop-10 in the country, he said.

He conceded that alphabet houses and second-tier retailers havetalked about whittling down lists of wholesale partner choices tothe biggest three property and casualty insurance wholesalers.

“The interesting thing about this theory is that the quality ofthe people [at these wholesalers]–just because they're big–isuneven,” he said. “There are some very good brokers at each ofthose firms, but they're not great everywhere.”

He added that “we're still small enough where we have standardsacross the board. An agent calling here should get the same kind ofquality from everybody that answers the phone. It's not like I havenever had chances to sell before, and it's not like I'm never goingto sell. But getting bigger to get bigger doesn't interest me.Getting bigger to get better does interest me.”

Like Mr. Smith, Matt Nichols,president of All Risks Ltd. in Hunt Valley, Md., said privateownership gives his firm some freedom to invest in people andproduct development. “We're hiring aggressively. We're building newprograms. We're building our brokerage teams. We're putting thosepeople on board throughout the entire country, and we see 2011 asthe year to getting back to growing,” he said.

He believes some new startups emerged as a consequence ofM&A activity. In some situations, brokers who were working at afirm involved in a deal may now find themselves working at anorganization they had previously left to join a competitor, hesaid. “When they end up back at the old place because of anacquisition, you have some normal attrition where people don't wantto work there.”

“It ultimately gets back to what defines the E&Smarketplace–this entrepreneurship where you're always going to havepeople trying to figure out how to build a business or run abusiness. Once they do that, you're going to have people branchingout and wanting to do it on their own due to an assortment ofcircumstances,” he said.

All Risks–which has been privately held for 46 years and hasmaintained a stable team of executives and top-level sales peopleduring the soft market–views activity outside its doors as anopportunity to pick up more business from existing retail clients.In particular, Mr. Nichols said business comes from retailers whodo not want to start working with another wholesaler when theindividual brokers they worked with jump ship to launch or join astartup.

He believes M&A will continue in 2011, as some wholesalerswithout perpetuation plans seek buyers. “After the last two years,there are some folks that maybe right-sized in their mind what themultiples are in order to sell their operations,” he said. “The bigboys are going to still determine that this is the one way they canassure themselves of growth.”

Undaunted by talk of deals that tout global expansion benefits,Mr. Nichols said All Risks is “keeping it basic” and sticking togrowth opportunities in the 50 U.S. states and Washington, D.C.“The opportunity to grow simply by doing what we do is larger thanany opportunity that's out there.”

The company already has a diverse platform that is one-thirdbinding authority, one-third brokerage and one-third programs witha sprinkling of personal lines, he said.

“Frankly, even though we're one of the largest independentwholesalers in the country, we are a rounding error in terms ofwhat makes up the entire U.S. wholesale marketplace from a volumestandpoint,” he said. International business, he believes, “can bea very strong distraction and certainly could be a significantfinancial drain if not done right from the get go.”

Mr. Pagoumian said NAPCO feels no immediate compulsion to jointhe merger wave either, even though the organization does getapproached with such opportunities because of its recognizedproperty-catastrophe expertise. “The pressure I have is figuringout how to become even better at what we do so we can continue tostay ahead of the pack in our world,” he said.

“If the right story comes along, then that should be considered.But so far on our end, our story is maintaining our independence,growing organically [and engaging in a series of] small-scaleexperiments relating to our part of the industry,” he said,describing an in-house property valuation tool as one example.

The tool will put a library of responses to past propertyvaluation questions given by NAPCO experts in the system, givingbrokers the ability to sort those by industry, size and othercharacteristics as they attack future valuation questions.