Building on a current strength, Risk Placement Services Inc.(RPS) aims to give agent and broker clients more local access toits broad array of product offerings in 2011, according to theleader of the nationwide specialty brokerage.

“What RPS has set out to do over the next few years is to be ina position to provide independent agents and brokers—both large andsmall—a smorgasbord of everything that we do,” Joel Cavaness,president of RPS, told NU in a recent interview, sharing astrategy aimed at leveraging a competitive edge of productdiversity.

“The goal is to make it all available…inevery place we operate—standard lines, small surplus linesbusiness, large surplus lines, and any of the various programs thatwe offer—to put that in such a way under one house in various partsof the country so agents are able to access all parts of RPS, notjust one,” he said.

It's a tall order for the Itasca, Ill.-based organization, whichhas more than 50 offices around the nation and offers an array ofspecialty products ranging from aviation to professional liabilityto transportation to workers' compensation, as well as ninecategories of programs including those targeting the allied health,beauty services, bicycle and high-tech industries.

“We're getting there,” Mr. Cavaness said, reporting on a recentexpansion that brought RPS's Northeastern standard lines strategyto the Southeast.

“It's exciting to us to be able to provide standard linesbusiness to the smaller independent agents to give them acompetitive advantage,” he said. He explained that RPS isessentially giving the small retailers, which are too small tosupport contracts with national standard carriers, more products tosell that they can't get access to on their own.

As for the broader strategy of bringing everything RPS hasavailable to customers across the nation, Mr. Cavaness saidimplementation steps include “studying the various parts of thecountry, finding the places where the need exists and thenbasically opening offices.” In some cases, RPS will hire locally tostaff the offices, but it also intends to give current team membersopportunities to relocate if they would like to advance theircareers to higher positions, he said.

New office launches and acquisitions have both been dualmainstays of a growth strategy that has propelled RPS from aChicago-based entity with four employees to one that now employs900 people.

“Our growth has been very solid,” Mr. Cavaness said, “and wewill continue to grow it exactly the way we've done it for the past13 years—opening new offices, hiring new people, and doing mergerswhere the combination of our firm and the merger firm make sensefor them and for us,” he said. Deal activity hinges on finding “agood strategic and cultural fit,” he added.

“One of the benefits of being a larger firm is that we do havethe resources and ability to continue to take the money we make andreinvest it into our business in both of those ways,” he said.

While acquisition and organic growth are still equally importantstrategies, Mr. Cavaness explained that RPS completed fewer mergerslast year than it had done historically simply because it's a verytough time for some firms to sell.

In December 2010, RPS's parent company, Arthur J. Gallagher& Co., announced just one wholesale deal—RPS's acquisition ofwholesaler Continental Excess & Surplus, trading asContinental/Marmorstein & Malone in Paramus, N.J., and itsaffiliate, All Risk/CESI, LLC of New York City. In contrast,between 2000 and 2008, RPS completed 20 deals, averaging morethan two each year.

For some, “it just doesn't economically make sense right now. Ina very deep and prolonged soft market, they have not done as wellas they might have six or seven years ago. So people have atendency to hold off,” he said.

What about the prospect of being involved in a mega-merger, akinto the combinations of Colemont and AmWINS or Swett and CooperGay—two headline events for the surplus lines industry lastyear?

“We have never done a bigger deal. That's not to rule us outfrom doing one, however,” Mr. Cavaness said. “The bigger deals thathave been on the market really didn't seem to fit our culture.”

Asked whether he thought there would be morelarge mergers in the surplus lines industry this year, Mr. Cavanesssaid, “Absolutely I do.”

“There has been a lot of investment in the wholesale business byprivate equity and others who typically want to monetize theirinvestments within a period of time. [They] hope to make some moneyin the business, and they will continually look for an exitstrategy. If one pops up, they will be more inclined to take it,”he reasoned.

EXTERNAL CHALLENGES

Mr. Cavaness spoke to NU recently in advance of hisparticipation on a panel of surplus lines executives at the 2011Mid-Year Leadership Forum of the National Association ofProfessional Surplus Lines Offices, Ltd. The NAPSLO meeting is setto be held Feb. 23-26 at Naples Grande Beach Resort in Naples,Fla.

Mr. Cavaness, a member of the board of directors of the KansasCity, Mo.-based group, and two other E&S executives—Tony Markelof Markel Corp. and Kevin Westrope of Westrope—are scheduled toshare their visions of leadership and views on current challenges,including the issues that keep them up at night.

Giving NU a preview of the event, Mr. Cavaness saidthat what he worries about most these days are hidden,game-changing external events that force broker leaders to turntheir focus away from the internal day-to-day tasks of runningtheir businesses, referring to the type of unforeseen situationthat existed across the industry in the middle of the last decadewhen regulators launched investigations of broker relationships andcontingent commission agreements.

 Mr. Cavaness said: “We operate in an environment thatwe all still feel and felt at the time was proper.”

“The amount of effort and time that really was expended intrying to show what everybody was doing was proper takes your focusaway from running your business,” he said.

More generally, he said, “It's not easy to run a business thesedays. You've got to deal with things like Sarbanes-Oxley, what'sgoing on with federal surplus lines reform—trying to weave your waythrough 50 jurisdictions of government—and making sure that none ofthe balls get dropped,” he said.

“When you're in a firm that's fairly large and you have a lot ofpeople doing a lot of different things, you want to make surenothing falls through the cracks.”

Mr. Cavaness described some of the processes in place at RPS toprevent that from happening. “We have a very strong professionalstandards program that we audit every single quarter to make surethat we're operating properly,” he said, noting that risks of alloperations—“everything from technology to underwriting tofinance”—are assessed from an audit perspective to RPS'sprofessional standards.

“We conduct those [reviews] on a self-audit basis every quarterwithin every office,” he said, adding that physical audits ofroughly 50 percent of each office are completed every year. “So ona two-year rotation, we actually do physical audits of eachlocation.”

Anticipating some other questions that might be discussed at theNAPSLO Forum, NU also asked Mr. Cavaness to share hisobservations on conditions in the property and casualty insurancemarket and the pace of economic recovery in United States.

RPS's president said he sees small improvements in both areasfrom his vantage point.

He described the market as one undergoing “a slight flatteningout,” rather than broad change. “There's no longer a 'free-for-all'of price cuts, but on certain individual accounts there are stillpockets of craziness—prices dropping 40 percent on isolated largeaccounts.”

On the flip side, he reported that there is a slight lack ofcapacity for smaller accounts in the wind zones. “We're seeing alittle bit of pullback, especially in the London market in windcapacity because of changes coming about with the RMS [RiskManagement Solutions] model and the impact on their cost ofreinsurance,” he said.

Beyond that, he said the market remains unchanged. “Theinsurance companies do still perform fairly well. The results lookto be pretty decent,” he said, noting that there hasn't been anylarge U.S. catastrophe causing carrier financial results todeteriorate. “The market is what it is, and we're just going tocontinue to find ways to get out there and battle it out,” heconcluded.

Turning to the economy, Mr. Cavaness reported that the managinggeneral agencies within the RPS organization are starting to seeadditional start-up businesses coming into the submission flows,which may be a positive sign for economy recovery.

He also said that in the workers' comp line, RPS is no longerseeing the levels of return premiums that were typical eight-to-18months ago.

“I wouldn't call it dramatic change, but certainly there ischange,” he said.