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

“The amount of leverage that we're able to generate on our balance sheets is significantly less than life insurers, banks and investment banks,” he noted. “From that standpoint, we haven't had that meltdown and we shouldn't be painted with that same broad brush.”

Mr. Michael speaks from a position of strength. RLI–which writes both excess and surplus lines and admitted specialty insurance through its operating subsidiaries–not only has an “A-plus” rating from A.M. Best, but has reported 13 consecutive years of underwriting profits, with an 84.2 combined ratio for the most recent year, that being 2008.

The track record landed RLI on NU's rankings of “Profit Champions”–a list last published by National Underwriter magazine in late 2007 to distinguish insurers whose 12-year average combined ratios were the 50 lowest among 184 p-c insurance organizations analyzed by NU. RLI ranked No. 11 on the list, with a 12-year average of 92.9 at the time, managing to profit over a period spanning hard and soft markets.

Mr. Michael spoke to NU's E&S/Specialty Lines Extra after returning from the midyear educational conference of the National Association of Professional Surplus Lines Offices, Ltd., held in Palm Springs, Calif. He reported that the hot topics at individual meetings between carrier and wholesale broker members of NAPSLO were their struggles with the soft market and AIG's impact.

Offering his perspective a few days before the furor over bonuses paid to American International Group executives began dominating the headlines, Mr. Michael said the fate of AIG–and its Lexington Insurance Company, in particular–dominated NAPSLO conversation because Lexington is by far the largest E&S insurer.

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

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

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

“Wholesalers look to a company like RLI to provide a stable market throughout all cycles. They appreciate that we are not following the market down, that we're sticking to our guns, [and have] underwriting and claims talent available throughout all market cycles,” he said, referring to the 30-plus-year commitment RLI has made to the E&S industry.

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

Conversely, as has been the case historically, “there will always be customers seeking the lowest prices,” he added–noting that price sensitivity is traditionally more apparent in short-tailed lines like property.

Asked specifically about the impact of distressed competitors on overall market conditions so far in 2009, he said, “I don't want to mislead you.” In addition to attempts by struggling companies to hang onto renewals, “you have [new] competition attempting to gain footholds for business. That combination makes for a softer market,” he said.

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

MARKET FORECAST

Weighing in the factors that might produce a market turn this year, Mr. Michael highlighted a drop in investment income along with the depletion of capital.

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

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

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

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

“We really are, on most accounts, seeing a bottoming out on the property side,” he said, noting that when markets like transportation also reach a bottom, “then I will believe the hard market is on the way.”

Responding to the question of whether capital declines at standard companies could drive more specialty business back to the surplus lines market, Mr. Michael agreed that the standard companies “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, is not happening yet, he said. Instead, reports of changed appetites of individual standard companies come in sporadically. “We hear anecdotally that [a] company is being less aggressive or they've pulled out,” he said.

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

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

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

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

On the casualty side, in addition to pulling in a bigger share of directors and officers business that moves away from market leader AIG, Mr. Michael highlighted RLI's recent foray into the architects and engineers professionals segment. In addition, a new fidelity unit now complements existing surety business.

RLI created the New York-based fidelity division last June to focus 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 are likely to result in claims.

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

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

“We have been in the executive products business since with 1982, but we've never really been in real 'professional professional'–architects and engineers, lawyers, accountants, and the like. We're a specialty niche player and we believe those are markets we ought to be at least interested in. If we can attract teams of people to RLI that are experienced and well qualified to write that business, then we ought to do it,” he said, noting that the first opportunity came in the design segment.

DIFFERENT STROKES

Mr. Michael referred to RLI's “catchy tagline, 'Different Works,' to explain how he believes the company is able to attract and retain quality talent. “It is not just a tagline. It's really our operating philosophy,” he said.

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

During a 2007 interview that took place just as the “Different Works” marketing campaign kicked into high gear, Mr. Michael and Chief Operating Officer Michael Stone explained that it was designed to call attention to tradition of empowerment and RLI's longstanding profit-sharing plans.

“Most of our business leaders want to run their own business. They would like to run their own insurance companies. The problem is 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 their skill”–running their businesses as they see fit, making all decisions from choosing locations of their offices to setting underwriting guidelines.

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

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