Global Markets, More Products Can Help E&S Insurers Sail Through Soft Market

International business adds a "fourth style" of E&S business for Argo, he said, noting that in addition to the Heritage contingent, members of Argo's U.S. small binding authority and brokerage business teams from Colony Insurance also met with business partners at NAPSLO, as will members of Colony's professional liability team and Argo Specialty, which writes larger account U.S. casualty.

While Argo's expansion into Lloyd's may be the biggest change for the company this year, both Mr. Pilkington and CEO Mark Watson highlighted the August 2001 acquisition of Colony as the first building block of the international platform.

"We've done three transactions in the last seven years that have really helped shape what Argo Group is today, moving us toward our strategic vision of becoming a leading international specialty underwriter," Mr. Watson said, referring to the Colony, PXRE and Heritage deals.

"It's worth noting that when we acquired Colony in 2001," transforming a California workers' compensation specialist then known as Argonaut into an E&S insurer, "it had just finished writing $100 million in premium," he said. "Fast forward to today, and our E&S operations in the United States now generate over $700 million in gross written premiums."

The Argo executives believe enduring relationships with wholesalers and a "mature product mix" have enabled Argo's E&S operations to grow–and are now helping the company navigate a soft market.

"Colony has been in the E&S market for almost 20 years," Mr. Watson said, and as a result, "the majority of the E&S business we underwrite each year is produced by business partners we've had relationships with for decades, not years."

Mr. Pilkington confirmed that the bulk of Argo's 300 E&S broker relationships have been in place for 10-to-20 years, but said that not every broker represents every product. The average relationship involves five or six products, depending on a broker's expertise and business plans, he said.

Product diversification, he added, is not a new strategy at Argo Group. "We hear about competitors entering professional [liability] lines" as they seek growth opportunities, for example. "We've been there and have a fairly mature perspective," he said.

Argo's diverse U.S. E&S brokerage portfolio is about 20 percent property, with 80 percent of the business in casualty lines–including garage, transportation, industrial casualty and contractors, complemented by a professional division that writes allied medical, other E&O and environmental.

Mr. Watson said that while part of the attraction to Heritage was its reputation for being a specialist on the property side, the more compelling draw was the ability to give clients "more than one way to plug in and interact with us"–significantly expanding Argo's distribution platform in and out of the United States.

Mr. Pilkington, highlighting the impact of increasing globalization of U.S. business, said that "the reality for E&S brokers is what they were doing the last two years is changing. They have to modify their product offerings and modify how they provide their products. We think it's our job to collaborate with them to deliver on those opportunities."

Geographic expansion and product differentiation are relatively new strategies at American Safety Insurance Group, according to Joseph D. Scollo Jr., president and chief operating officer, who reviewed steps the company has taken to broaden beyond existing concentrations in the environmental and construction segments.

The process of adding five new product lines started in 2006, he said, noting that four were added by bringing on experienced underwriting teams, while a fifth–the addition of health care liability expertise–was accomplished with an acquisition.

"With the market beginning to soften, we knew we had to do something different," Mr. Scollo said. "The strategy has been to build smaller books of business in the soft market, which can be leveraged significantly when market conditions turn."

Product diversification is "really what's getting us through the soft market," he said, noting that the downturn in the housing cycle meant even more downward pressure on a portfolio with a heavy construction focus. Newer product lines have offset reductions from both impacts, he said.

The new products are:

o General and professional liability for long-term care facilities.

In February, American Safety acquired a Cleveland-based managing general agency specializing in traditional coverage and alternative risk-transfer for nursing homes and assisted living facilities.

"We got very comfortable with the risk because they had been taking risk on the business since 2000," Mr. Scollo said, explaining that the MGA had been taking 100 percent of the risk through a captive they owned.

o Monoline and package property for typical E&S risks–mostly habitational and vacant buildings. Mr. Scollo said the underwriting team brought on in June 2007 is not writing in catastrophe-exposed areas.

o Products liability.

American Safety's entrance into non-construction liability lines came when a team of four underwriters joined in July 2006, staffing up a Middletown, N.J. office.

Mr. Scollo said the team, which also wrote construction, helped to diversify the construction book geographically. Prior to bringing them on in 2006, the book was heavily concentrated out West, where residential contractors had a significant need for E&S paper.

o Excess/ umbrella.

American Safety expanded its capability to write excess/umbrella over both its policies and other carriers' primary policies for products liability and construction risks in mid-2006.

o Assumed reinsurance, launched in Bermuda in early 2007.

American Safety Insurance Holdings is a Bermuda-based company that had a reinsurance company in its portfolio, Mr. Scollo noted. Since bringing on some experienced reinsurance underwriters, the company has tried to fill a niche ignored by very large reinsurers–focusing, instead, on reinsurance for small captives, risk-retention groups and small specialty insurers, he said.

Like American Safety, Liberty International Underwriters has been looking to acquire expertise in areas that haven't captured the attention of competitors, and to focus LIU's existing expertise in the contractors, products and premises segments on tougher classes, according to Rob Lala, senior vice president in the casualty division.

"We prefer not to get into the 'slug-it-out, keep-reducing-the-price, keep-giving- more-terms-for-no-premium-battles,'" Mr. Lala said. "We let those go and…look for classes where there is not as much competition," he added, giving the example of crane operators in the contracting segment.

In the products arena, LIU is looking at discontinued products and products recall exposures that present themselves, he said.

Taking advantage of rate and form freedom of the E&S market, LIU experts can determine the appropriate premium for these hard-to-place accounts, Mr. Lala said, noting that LIU is also very diligent about rate monitoring for renewals.

In addition, to ensure renewals that are lost to undercutting competitors aren't replaced with cheap new business, "we attack that [with] two underwriting audits per year,"–one product-line specific, conducted by Mr. Lala and other U.S. team members, and another performed by a global audit team from offices around the world.

The audits ensure everyone "is on same page" with pricing, as well as in terms of opportunities LIU underwriters are accepting or declining, he explained.

To grow, Mr. Lala said LIU is seeking– and has brought on–underwriting talent in new areas, giving the example of a just-hired team of global risk management experts for products recall, products contamination, and kidnap and ransom and extortion coverages. According to LIU, the new team will offer a package of first- and third-party coverages together with crisis risk management.

At NAPSLO, Mr. Lala said he's talking to his casualty team members about synergies with the new team and about client-sharing possibilities. "Our products liability clients, who currently buy recall and contamination [coverage] from some other competitor, no longer have a reason to do that," he said.

Also adding to LIU's current capabilities is a team of underwriters that writes a package of coverages–general liability, errors and omissions and pollution–for contractors who do environmental cleanup.

In addition to adding new underwriting teams, both Mr. Lala and Mr. Scollo said their companies differentiate themselves from competitors by offering superior service to wholesale broker partners, which may mean reducing the number of relationships for existing products.

"In no way, shape, or form will LIU or I say we're going to reduce business with one of the big wholesale names," Mr. Lala said. "But if there's a particular [LIU] office that's not seeing any opportunities from the local office of big wholesaler in its region, they can…have those discussions–[asking], "How come we see 200 submissions a month and we don't have any binders?"

"There is a cost of doing business, and we've got to be a little smarter now in how we spend our time," he said.

Mr. Scollo said American Safety demonstrates its commitment to broker customers by holding roundtable sessions with them–one for each product line–seeking ideas on how to improve products and service. The company then assigns underwriter "owners" to follow through, spearheading initiatives and writing follow-up letters to roundtable participants to report on implementation progress.

"Rather than figuring out what needs to be done based on what we think, we're asking our customers–letting them help us decide where we should be focusing," according to Mr. Scollo.

Beyond that, the company is internally focused on controlling expenses, he said.

"We've formed a committee within the company that is going through each product line and reviewing business processes–looking at where we've been inefficient, trying to improve business processes, and then laying technology solutions over those" in preparation for the market turn, he noted.