Talent, Discipline: Keys To Profit Success

Tranguarda commercial p-c specialty company focusing on the transportation industryis wholly owned by SIRVA, a publicly traded Chicago-based relocation company whose service providers include brands like Allied, Global and North American Van Lines.

"The basis for our sustained profitability is very simply risk selection," Mr. Writt said. "Our rates are competitive, but we do a better job selecting risks." Declining to go into the proprietary specifics of the firms underwriting criteria that separate the good risks from the bad, he said only that the firm uses "a very granular and detailed" underwriting approach. "You have to be disciplinedand stick with it," he said.

Mr. Writt also noted that high renewal rates among long-term customerssome that have been with the company 10 years or moremeans that the insurer has a lot of familiarity with its customer base. Much of the firms success, he said, "has to do with mining the data that we have."

For some competitors, the ability to select risks may be more restricted, he speculatednoting, for example, that one specialty insurer is ultimately owned by moving agent customers. They almost operate like an association captive, he said.

Other competitorsnational multiline insurersperiodically enter and exit the fragmented, underserved market, he said, warning: "You can lose a lot of money unless you go in with your eyes wide open."

Beyond moving and storage operations, he said that half the firms volume is general freight. In the general freight market, Transguards focus is on independent contractors, he said, noting that such risks come through an affiliatethe National Association of Independent Truckers. "Owner-operator business is a little more profitable; moving and storage is a little more competitive," Mr. Writt said.

NUs independent comparison of line-of- business results for Transguard and some specialty and multiline competitors reveals that Transguards commercial auto combined ratios are somewhat better than competitors in both groups. For the specialists, greater participation in lines such as workers compensation and non-truck liability drive their all-lines combined ratios higher.

Transguardwhich wrote 80 percent of its business in commercial auto in 2003 (with most of the remainder in inland marine)has just recently entered the workers comp arena, Mr. Writt reported, adding that a large percentage is reinsured. How will Transguard ensure that the book remains profitable as it expands?

Where "were writing a new product, were extending it to existing customerscustomers we know. We will also offer to new customers products that we know," he said. In other words, "we try to stay within the strike zone. Otherwise you find yourself guessing."

In addition, he said, "we dont write workers comp on a monoline basisonly as part of a packageand we limit it to states we feel comfortable in."

Like many insurers among our top-tier performers from 1998-2003, Transguard reported a worse combined ratio (96.0) for the first nine-months of 2004 than it did for the six prior years (averaging 84.3), but still beat the industry nine-month combined ratio of 97.9.

RLI: Broader Vision, But Specialty Focus

RLI has come a long way since the 1960s, when RLI was one of the first insurers of contact lenses. But the strategy is still to operate as an insurer of unique specialty risks, according to Jonathan Michael, president and CEO of RLI Corp. "Theyre products that have better risk rewards than standard lines products," he said.

These days, not a single product but a portfolio of 15 products is a key to achieving the better-than-average combined ratios that shareholders have come to expect, he said. "When one product has a down year, the overall portfolio should produce an underwriting profit," he asserted.

Mr. Michael explained that two flagship companies write business for the groupRLI Insurance Co., which is admitted in all 50 states, and Mt. Hawley, which is approved for surplus lines in all 50 states. Another company, RLI Indemnity, "really is a fledging company that will allow us some options in providing different tiers in an admitted market," he noted.

Products written, he said, include personal umbrella, commercial umbrella and RLIs largest productprimary general liabilitywhich is written exclusively on surplus lines paper. Other specialties are earthquake in California, commercial fire, professional liability and trucking business.

"I think what distinguishes RLI from the rest of the industry, including other specialty carriers, is that we are relentlessly focused on our peoplein hiring the absolute most talented people in the business," Mr. Michael said. "I like to say, at RLI, we dont have any 90-day wonders at the underwriting desk. Our underwriters have 15, 20, even 30 years of experience. Most of our products are written by our own underwriters, so were not giving the pen away."

Demonstrating an "unrelenting focus on profitability" rather than premium volumea notion he contends "many companies pay lip service to"Mr. Michael said RLI aligns the incentives of underwriters with underwriting profit. "Theres no incentive for our underwriters other than to produce profitable business Thats how our bonus system works for them," he said. "As a result, our underwritersour product vice presidentsare the highest-paid people in the company and are among the highest-paid underwriters in the industry."

While having a portfolio of products helps mitigate the problems of bad years in a single line, Mr. Michael said that ultimately each product must stand on its own. "We dont have any loss leaders."

RLI is very careful about new product introductions, watching results carefully and making changes when necessary, he said. Plus, "were not afraidif we have toto get in and get out of a particular product line," he said, noting that there must be evidence of a long-term profit possibility to stick with a product.

Giving an example, Mr. Michael noted that RLI entered the aviation market in the early 1990s and exited that market in the mid-90s, enjoying three years of profitability in the interim, but "there were too many companies in the market. It became apparent to us that small aviation was a line of business [where] we either had to a consolidator or be consolidated. We chose to be consolidated."

On the other hand, RLI has also exercised patience with products, such as its stand-alone personal umbrella product written over other companies paper. "That went along for a number of years without profitability. But we nurtured it for five or six years" in the late 1980s and early 1990s, working on getting the technology right and making necessary underwriting changes, he noted.

RLI also had some struggles"like everyone else did in 1997-2000″with commercial umbrella, Mr. Michael said. Here again, RLI "stuck with it," but made "fairly significant underwriting changesand, in fact, [we] are not writing nearly as much business as we were before. Were focused more on writing primary umbrellas today," he said, noting, in particular, that RLI reduced the limit it was putting out and exited heavy commercial auto exposure.

With respect to new product introductions, Mr. Michael said theres another important tenet in RLIs strategy. "We have to have the people in place before we write the policy. So were not just out there leading with our noses," sniffing out market opportunity, he said.

RLI, ranked number 10 among NUs Profit Leaders with a six-year average combined ratio of 93.7, posted an even better result for the first-nine months of 2004a nine-month ratio of 91.5.

Philadelphia Insurance: Looking For Niches In Niches

At 10-points under breakeven, it was hard to beat Philadelphia Insurances six-year average combined ratio of 90.4 on NUs Profit Leaders rankings, and only three other commercial-lines insurers did.

Although it is distinguished as the organization with the broadest product mix in the top four, Cole Henry, vice president of the commercial lines division for Philadelphia Insurance, still describes a precision focus on very narrow niches when he explains the groups stellar underwriting results.

"We really embrace a culture of specialization. Were strictly a niche carrier. We dont try and be all things to all people at all," he said. "Were not a line-of-business niche player. Were a class-of-business niche player," he added, using the habitational business area to explain the degree of specialization that sets Philadelphia apart.

Habitational, a class that many specialty insurers participate in, "encompasses a huge spectrumapartment buildings, private homes, condominiums," he said. "In that big realm, weve niched ourselves. Well only write residential condominiums, homeowners associations and the owners risk of a mobile home park. We wont write apartment buildings. We wont write tenement housing."

Running through more examples of risks on the insurers "do" and "dont" lists, he said the group wont write Main Street hardware stores, restaurants or hospital liability, but will write property for hospitals and office buildings.

Why not Main Street hardware stores? "Thats not one of our niches," he said. "We pick our spotsidentify the subset of the spot we want to play in," he said, noting also that a lot of other insurers write hardware stores, some with online businessowners packages. "Theres no specialization or expertise to bring to the table to differentiate ourselves. So why go there?"

"We want to be experts in our chosen fields," he said, highlighting expertise in the social services, non-profit segment that dominates the commercial lines book, "and we want to be a market force in our chosen fields, as well."

Like RLIs Mr. Michael, Mr. Henry repeated strong messages about expertise and discipline. "One clich? we embrace is: Dont put a hole in the boat," meaning that underwriters dont want to pick up exposures that sink overall profits, he said. "We have no asbestos. We have no contracting risks, so we dont have any latent construction defects sneaking up. We have no long-tail products liability."

Another concept that Philadelphia underwriters embrace is "evolutiona never-ending process of change. Are we in a market we shouldnt be in? Are there markets we should be in that were not?" he said, citing typical questions that come up as they reexamine approaches.

Mr. Henry noted, for example, that while Philadelphia Insurance has always written in the non-profit social services sector, it had stayed away from mental health organizations until doing extensive research into the mental health segment a few years ago.

On the other hand, "a niche that we were in and figured wed better get out of quickly was liability for nursing homes," he said. "The tort environment changed and changed the whole playing field for nursing homes. Rather than sit around and see what happened, we were proactive," he said. (Philadelphia Insurance was one of the first insurers to announce its exit from the market late in 1998. See NU, Nov. 8, 1999.)

Recently, the Bala Cynwyd, Pa.-based group announced several product launches, including a monoline employment practices liability policy and a package for allied health providers (optometrists, speech therapists, dieticians, and the like).

"Very often when we enter a new area, its an outcropping of one were already in," said Mr. Henry, explaining that the insurer expects to maintain overall profitability, because these new areas are not entirely new. "We are a big [directors and officers liability insurance] writer, and within one of our D&O policies, we have EPL coverage, he added, noting that EPL claims from the businesses Philadelphia is willing to write havent hurt results.

"We tend to split off and grow our niches here and there," he said, further explaining that an underwriting division handling the recreational activity niche is now writing martial arts studiosan outgrowth of its experience with health-and-fitness clubs that offer marital arts classes.

"Sometimes well hire underwriters that have expertise from past lives," Mr. Henry added, noting that Philadelphia is looking at small municipalitiesa new areabecause three underwriting executives came to the company, each with 25-plus-years of experience in municipal business.

"When we go into something new, we start slowlywith a very conservative underwriting box," Mr. Henry said. "I cannot stress enough the discipline. We know exactly where we want to play. And if we dont want to play, we dont go there."

Reproduced from National Underwriter Edition, January 27, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.