As Niches Disappear, E&S Execs Attack Cycle Challenges

Mr. Lala said the promise of new business opportunities instead develops mainly out of one-off responses to individual questions from retail brokers.

"In some offices, our underwriters literally get calls from brokers on accounts they're actually going to place somewhere else, but they want their opinions" on how a certain coverage provision is supposed to work, he said. He said LIU's underwriters are contacted because of their wealth of experience in the E&S casualty market.

Giving an example of a gray area of coverage that might prompt a broker's question in the current economic environment, Mr. Lala described a liability policy for a construction project for which the retailer wanted the statute of repose to be addressed by an endorsement.

In this particular situation, the project was being built in a state with a 10-year statute of repose, and the project owner was being named on the general liability policy of the general contractor. The agent, Mr. Lala said, wanted to make sure that if the general contractor went bankrupt in five years, the owner would still be protected.

(Editor's Note: Mr. Lala provided other examples of potentially uninsured risks that could emerge in a down economy in an article he authored for the NU's September issue of E&S/Specialty Lines Extra, "Tough Economy Heightens Risk Of Uncovered Business Exposures.")

Mr. Lala and other NAPSLO members told NU that the hard work of soft-market underwriting doesn't look like it will let up anytime soon.

"The only thing that has changed now in this market is that a higher percentage of accounts we lose or don't get are accounts that our wholesaler loses or does not get as well because the retailer has gone direct," Mr. Lala said.

"That has changed," he said. "Where a year or two ago, we might have lost the account to Arch or General Star or Admiral" or another E&S insurer, he said, today, LIU's branch managers report that "more times than not, it's going to the standard market directly–to retailers."

At the time of the NAPSLO meeting in early October, Mr. Lala said he was not witnessing any areas of hardening in E&S casualty business. "As a matter of fact, [at] midyear I would have said things were starting to stabilize. After that, pfft. I have no idea" what happened, he said.

The change was particularly frustrating for Mr. Lala because his group had gotten an early start on 2010 planning around midyear. "Then the market dipped down again….And looking at the whole United States, it was everywhere. It wasn't just a pocket here or there. It was widespread."

Giving a broker's perspective, Alan Kaufman, chairman, president and chief executive officer of Burns & Wilcox in Farmington Hills, Mich., told NU, "We don't see a recovery [soon]. Not until the economy recovers will we see a market change. There's not a hurricane. There's no compelling reason," in the absence of some carriers becoming insolvent, he said.

During a panel discussion at one of NAPSLO's educational sessions, Tim Turner, president of CRC-California in Glendale, said, "If you look back at the past three or four cycles, what preceded the market change was niche-hardening–loss leaders [for] regional carriers [where] the surplus lines market could provide solutions."

Likewise, fellow panelist Maureen Caviston, president of Partners Specialty Group in Stamford, Conn., pointed out that past cycles have included "pockets of hard markets." She cited the long-term care industry in the late 1990s and then the residential construction industry as two examples, noting that both became areas of opportunity for E&S market participants to respond to needs of buyers and retailers.

Mr. Turner said CRC continually searches for such pockets. "We're constantly trying to come up with a new solution, a new mousetrap. That can be niche-driven, geographically driven or class-driven."

In the absence of niches, Ms. Caviston said "service is a hot-button issue" for prospective customers. "They all know they can get cheap pricing pretty much anywhere, so it becomes more of a service issue.

"We're focusing on adding value," Mr. Turner said. "Clients demand it. We have to be innovative, we have to be faster, and we have to pay attention to their needs. That's what drives the whole machine for us."

Jim Keating, president of The Keating Group in Boston, said, "Where we try to differentiate is on the relationship side."

"For the most part, this business is becoming more streamlined and commoditized," he said during the education session. "The trust factor, the reliability factor within our retail agency base is where we strive to differentiate ourselves," Mr. Keating said.

Separately, Burns & Wilcox's Mr. Kaufman told NU his firm has stepped up its marketing efforts and is making significant investments in training and expansion though acquisitions and technology.

"Our competitors are not investing for one reason or another. So we have been able to grab a bit of market share," he said. "We are putting more money and emphasis into advertising, marketing, sales calls and hiring people."

"This is the time when you can get stronger. It's easier to get stronger in a weak market than a strong market," he said.

While Mr. Kaufman's strategy seemed unique in an environment where most executives said they were tightening their belts, he was quick to correct any misconception. "I wouldn't say we're not watching our expenses. We're very careful to [do so]. We have to. We're making sure that in certain cases, we do cut back."

"But where the opportunity exists, like in advertising, this is the time to grab," he said. "We're trying to dominate more, and it's been successful," he said.

Mr. Kaufman's firm has also been able to grab new talent from carriers, large retailers and some wholesale competitors where staff cutbacks or other problems have prompted job moves. "People are concerned about the stability of who they work for, where they're going and their ownership. Are they going to be sold?"

"There's turmoil all over the place," Mr. Kaufman said.

Training initiatives help the firm to retain its own employees and attract new ones, he said, sharing an article in the Detroit News, which described an online education portal at Burns & Wilcox called the Kaufman Institute. The institute allows employees to learn basic business skills and to advance at their own pace.

"With all that said, business is still not booming," he said, predicting flat revenue for his firm the year, or slightly up as a result of completed and potential acquisitions.

In contrast to most other executives, Mr. Kaufman did share examples of pockets of growth for his firm, including areas like high-valued personal property, professional liability and environmental coverages.

"High-valued property has not decreased. There's not a boom in houses, but people still have nice homes. They still need insurance," he said.

For the most part, however, these areas are growing because of focused advertising efforts and personal visits to spread the word out that the firm is targeting these areas.

"You have to have an army of people getting out there," he said. "Advertising by paper or e-mail is okay. It's important, but it's just the beginning. You've still got to get out there [to] build on your brand," he said.

Carrier executives also spoke about building on their brands and about new hires, but typically used words like "patience" and "discipline" to detail measured approaches for dealing with a continuing soft market.

Mr. Lala, who described LIU's unwavering strategy as downright boring, said his unit prides itself on consistency.

"We hire seasoned people, give them very broad authority, but we also do a couple audits each year to make sure everybody's on the same page," he added. "Hopefully, at the end of the day, if you ask wholesale brokers what do you like about LIU, it would be responsiveness, consistency, an experienced staff, financial stability of the company, [and the] ability to have loss control on the accounts even though we're an E&S facility," he said.

As for changes at LIU in the last year, he said, the most noteworthy was the opening of a Baltimore-based railroad facility last fall after hiring four very seasoned railroad professionals–two each from competitors Arch and Zurich.

Focusing only on smaller Class 2 and 3 railroads, the facility offers "the whole gamut" of liability coverages–freight lines, railroad protective (protecting a railroad from liability it incurs because of the work of contractors on or near the railroad right-of-way], liability for railroad contractors and a railroad product manufacturer's offering, he said.

"We weren't looking specifically for railroads. What we were looking for was a class that took a high degree of underwriting knowledge and experience [in which] competitors would be limited," he said.

At Chicago-based CNA, John Angerami, who was brought on board in April to expand the company's existing E&S capabilities, said the most recent change for the E&S unit now known as CNA Select Risk has been to consolidate transportation expertise from various locations into one office in Atlanta. "That obviously gives us tremendous operational efficiency. It also gives us the ability to ensure that we're implementing consistency in decisions that are made across the board," he said.

"In other areas, we're going in the opposite direction," said Mr. Angerami, who is resident in the Parsippany, N.J. office. For example, he said the E&S casualty division has added a couple of underwriters and "we've also just inked plans to begin building an East Coast and a West Coast casualty office as well." He said New York and Los Angeles are possible locations, but that ultimately, the exact sites will depend on where talented underwriters are found.

Mr. Angerami sees an advantage to be a small E&S player given current market conditions. "We can afford to mine for the opportunities in what's a relatively big market," he said, noting that A.M. Best put the size of the total U.S. market at $34.5 billion in an analysis distributed at the NAPSLO meeting.

"The professionals we have and [those] we're going to get are technically proficient, they have relationships with producers, and we're not out there just trying to gobble up market share. We really are out there rifle shooting and trying to find accounts that we think are good opportunities," he said.

Gary Dubois, president and CEO of two-year-old Valiant Insurance, a specialty insurance unit of Bermuda-based Ariel Holdings in New York, said his company is also growing selectively around the United States by hiring experienced personnel.

As the time of the 2008 NAPSLO meeting, he recalled telling NU that Valiant's management team had intentionally slowed down hiring a bit–"to reassess where we thought the market was going" and to ensure expenses would be aligned with potential revenues.

A year later, "we've worked through that….We're now looking to make some selective hires and continue an appropriately intelligent rate of growth for the company," he said, highlighting the mid-September opening of an Atlanta office staffed by four experienced E&S primary and excess casualty underwriters who were formerly with Markel Corporation.

Scott Bayer, senior vice president-casualty for Valiant, said Susan Ross, who now manages the Atlanta office, not only brings more than 25 years of experience to the role but also contacts throughout the country. "That provides us with a tremendous resource to build upon the team we have," he said, referring to four existing casualty underwriters based in New York.

While Mr. Bayer said the Atlanta-based team has wholesale contacts "from Texas to Chicago to California," Mr. Dubois said "select strategic openings" of more offices around the United States remain possible.

"The Midwest and West Coast would be natural evolutions for us, [but] you can't force the issue," he said. "It's all about quality. You've got to be able to bring quality people into the organization. They've got to be available. We're out there. We're talking to folks," he said.

"We're not active. We're not passive. We're aggressive," Mr. Dubois said. "We are letting folks know that we are open to having those conversations," he said, noting that active pursuit of new hires is tempered by market conditions.

"As soon as you force an expense side of the equation, then you've got to generate revenue to meet those expenses. So it's got to be a natural fit that makes sense and that is accretive in relatively short order." He contrasted the situation where "the right people come together at the right time" to a less likely scenario, in which executives would say that "it's time to open up in Chicago or San Francisco" and embark on a talent search to staff those locations.

The other big news out of Valiant in September was an announcement that the company would relocate its headquarters to a larger space–one that would allow the New York workforce to double in size over the next three years.

"I think that's a realistic expectation in light of current market conditions," Mr. Dubois said. "If the market deteriorates from where it's at currently, we'll slow that pace down. If it starts firming, then we'll be able to take advantage," he said.

"We're trying to maintain the maximum degree of flexibility," he said, noting that the challenge of starting up Valiant during a soft market has confirmed the appropriateness of a "patient disciplined approach."

That strategy "served us tremendously well, because we didn't overextend. Had we done so, we'd be in trouble right now," he said. "We stuck to our game plan," he said, noting that the near-term game plan assumes a similar market environment. "If there's upside potential down the road, [then] it's easier to turn up the volume [than] to dial it down," Mr. Dubois said.

Having written business in earnest for only two quarters in 2008, Mr. Dubois confirmed that premium volume through six months of 2009 is a little over Valiant's volume for the entire year of 2008. (According to data retrieved from the annual statement database of NU's data affiliate, Highline Data, Valiant wrote just over $26 million in direct premiums through six months vs. $22 million in 2009.)

"We will have considerable growth over 2008, but it's not something we're uncomfortable with. We think it's been intelligent growth," Mr. Dubois said, noting that another key development for Valiant, which writes both admitted and nonadmitted specialty business, is the fact that Valiant now has "virtually national capability on a surplus lines basis, something [it] did not have a year ago."

Mr. Bayer said Valiant is continuing to take a limited distribution approach to business on the E&S side. "We have limited resources within New York and Atlanta. We have great people, great paper and a great balance sheet, but I don't have a hundred people ready to service a countrywide open-market brokerage opportunity," he said.

Still, he said, the distribution network is pushing out across the country from its early concentration in the Northeast. "One of the best marketing tools we have is when we write a piece of business, because [that means] somebody loses a piece of business," he said, noting that the event usually results in a call from a wholesaler.

Related article: "Tough Economy Heightens Risk Of Uncovered Business Exposures."