New Specialty Lines Players Not Afraid To Buck Softening P-C Market Trend

Turmoil in the industry has created opportunities for professionals looking to do things a different way, according to executives of a new wholesale brokerage.

John Addeo and Chris Treanor, with the backing of Stone Point Capital LLC, formed New York City-based Mercator Risk Services, entering the business with a belief they can succeed with a team approach and a compensation plan that is free of broker commissions.

"For the past couple of years, there has been a lot of turmoil in the industry," Mr. Treanor said. "There have been a lot of new people, turnover and start-ups–both in brokerage and [at] carriers. As the landscape moves, it creates a lot of opportunity for people who have specialty niches to establish themselves."

Mercator (Latin for "wholesale," according to its Web site) focuses on six industry segments–transportation, medical products, construction, real estate, large-risk business and private equity.

While the large-risk segment may include a wide variety of niches, Mr. Treanor said there is a special skill set in how you structure large deals in terms of financing and other concerns that Mercator brings to the table.

Of course, the "Big Three" brokers–Marsh, Aon and Willis–also specialize in large risks. Still, Mr. Treanor said large risks might approach Mercator for specific industry expertise and market access.

He feels that Mercator will make its mark in the industry with a fairly radical new compensation structure in which wholesale brokers work for a salary and bonus rather than commission.

"Wholesalers have traditionally relied on production-based commissions to compensate individual producers," he said.

But such an approach creates an "independent contractor" mindset and limits collaboration, resource development and information-sharing, he contends. "In today's increasingly complex environment, customers require the best resources to be brought together to solve their problems."

A team approach that brings more "smart people" to a problem, rather than just one individual, makes a better model, he said, noting that salaries and bonuses are paid at the expense of the overall group.

Despite the fact that the entire broker compensation scandal centered on how such payments were divided up, Mr. Treanor said his model was not developed in response to the uproar that ensued. "You can argue that individual commissions to people are a conflict of interest, but that is not why we did it," he said. "We did it because we think it is the natural evolution of any professional service firm."

The company, which employs 30 wholesale brokers for the six categories, is taking a cautious approach to expanding. For example, Mr. Treanor described the caution involved in not jumping at the prospect of a "hot" broker who may be looking for a new home and could spearhead a new category of expertise and business.

"The key is we would want to build resources around him and bring him in at the right time," Mr. Treanor said. "And we don't ask him to go out and find that business. We would source that out ourselves."

So it becomes less about buying a book of business and more about building a competency they think strategically fits their company. "A person like this might not fit in because a lot of traditional wholesalers might not want to work in a team environment," he said.

The chairman of the new entity, John Addeo, previously was the co-founder and chief executive officer of Alliant Resources Group. Prior to that, he was president of USI Holdings Corp.

Mr. Treanor has nearly two decades of insurance experience. Most recently he served as CEO of Marsh's worldwide placement operations.

Greenwich, Conn.-based Stone Point Capital serves as the manager of the Trident Funds, which have raised more than $3 billion in committed capital for funds that make investments in insurance, employee benefits and financial services industries.

Stone Point Capital, and its predecessor operations, previously led the formation of ACE Ltd., XL Capital and AXIS Capital Holdings Ltd., among others.

Reported by Steve Tuckey

ROCKHILL INSURANCE: New Surplus Lines Insurer Takes Cautious Route

Sixty days after opening for business, the boss of the nation's newest surplus lines insurance operation said it is doing fine, "but we're crawling"–and that's according to plan. With $145 million in capital, Rockhill Insurance doesn't want to be seen as coming into the market and "causing disarray" because it failed to make intelligent use of its cash, explained Terry Younghanz, Rockhill's president and CEO.

The company, he explained, has no production goals and is focused instead on an annual return above 12 percent. Because the firm is privately held, he explained, the operation has a platform to use capital where it is most needed.

Mr. Younghanz and Richard T. Parks, the company's senior vice president and chief marketing officer–interviewed at the mid-winter meeting of the National Association of Professional Surplus Lines Offices, Ltd. last month in Phoenix–voiced the view that too much capital on hand could force bad, top-line-driven decisions.

Rockhill–the first surplus start-up to arrive on the scene in three years–decided that rather than be an all-lines operation, it will function as a specialty operation going after niche business, Mr. Younghanz said.

Rockhill focuses on three lines. One is an umbrella product providing protection for middle-market business–primarily small-commercial contracting and manufacturing.

The other two lines include insurance for homebuilders in five states where the law attaches extended liability for construction defects, and protection for commercial properties in wind-prone areas.

Their ability to focus on the wind-prone business meant that the arrival of Hurricane Katrina made the firm's opening "extremely lucky with our timing," Mr. Younghanz said, noting that their company had no trouble attracting brokers and has contracted with 52 of them.

"We turn down three to every one we appoint," Mr. Younghanz said, explaining that "we want them to feel an appointment with them is worth something."

The firm, which seeks to hire underwriters with the best track records, now has 30 employees. In addition to its Kansas City, Mo., headquarters, it is leasing new space for staff in Kansas City, as well as Atlanta, Chicago and San Francisco.

Mr. Younghanz said he expected that in the future the surplus lines business will see entries from the London market with various syndicates seeking a U.S. presence–and filtering down some capital that has been directed at the reinsurance market.

His company–which morphed from being a managing general underwriter–was able to secure funding, he said, because his track record was appealing to investors.

His extended background with numerous firms includes 12 years at RLI, where he was senior vice president and managing general underwriter, and a stint with GE Commercial Insurance as chief underwriting officer.

Reported by Dan Hays

XL: Through 'Natural Evolution,' XL Expands E&S Presence

XL Capital Ltd. Insurance, which already has a sizable specialty operation, has decided to set up a new E&S unit through which contracted wholesale brokers will serve midsized and large businesses.

John DiBiasi will head up the new Exton, Pa.-based operation and hopes to use his three decades of industry experience to make it happen.

London-based XL Insurance Chief Clive Tobin called the move a "natural evolution" of XL Insurance Operations. "Our Bermuda and Dublin origins very much reflect an E&S culture," he said.

Mr. DiBiasi looks forward to developing strong, ongoing relationships with his contracted brokers, some of whom he might have known in his previous incarnations as executive vice president of underwriting at Scottsdale, Ariz.-based Nautilus Insurance Company.

"I hope to get millions of dollars of business from any broker I sign up. It is just not going to be a one-shot deal for one piece of business," he said.

In fact, some of the wholesalers he has been talking with, he says he has known for up to 20 years, and has previously appointed them to two other carriers.

The new operation will focus on brokerage accounts bringing in anywhere from $25,000-to-$250,000 in premium per account. Mr. DiBiasi and his team will avoid writing business in the some 200 specialties that XL covers in its other units, but will instead gain them entr?e into that area.

With the Insurance Services Office having classifications for an estimated 1,600 types of business, from abrasive wheel manufacturing to zoos other than not-for-profit, the new operation will have plenty of areas to choose from even if you exclude the XL specialty areas.

Mr. DiBiasi wants to avoid having wholesale brokers under contract in too confined a geographical area. "I want them to feel that they are special. I do use the term franchise value and in that sense no McDonald's would want to operate within blocks of each other," he said.

As for the reason XL is making this move now, Mr. DiBiasi could not point to a specific factor. "There is always a good time in the market for any company that focuses on service and relationships," he said.

Maybe setting up shop three years ago, in the midst of the hard market, would have been more ideal. "In the end, this is a long-term play. If we can bring good service and strong relationships, that [strategy] works in all marketplaces, and we can build a good base over the next several years. When the next hard market comes we will be in an excellent position," he said.

The new unit will start with general liability coverage, and within six months will introduce property coverage, "and some miscellaneous coverages that go along with that," he noted.

The E&S market itself has grown considerably over the years, going from about 4 percent of total commercial lines in 1984, according to A.M. Best, to about 14 percent 20 years later.

Numerous factors have contributed to this growth. "There is no longer the specialized training of underwriters, and so a lot of the expertise in underwriting has really moved to the E&S marketplace," Mr. DiBiasi explained.

New technologies used by insurers call for this kind of specialized expertise. Of "the five people I have hired for the branch, the least experienced [has] over 20 years" of experience, he said.

As for the future, Mr. DiBiasi sees his unit opening maybe five or six branches, with the each unit having a like amount of underwriters.

Reported by Steve Tuckey