Specialty Brokers Exploit Specialized Skills As Competitors Join Merger Wave

They may not command the multi-billion-dollar premium figures touted by competitors involved in the latest merger deals, but market clout is not necessarily synonymous with size, according to executives of several large independent wholesale brokers.

Executives of wholesale brokerage shops placing hundreds of millions of excess and surplus lines premiums that have not been involved in this year's wave of mergers and startups say they demonstrate their value to retail customers through deep expertise in specialty product lines, like directors and officers liability and property-catastrophe insurance.

In addition, Scott Smith, president of Hartford, Conn.-based S.H. Smith & Company and David Pagoumian, president of Iselin, N.J.-based NAPCO, highlighted simple steps--like delivering comprehensive analyses of quote alternatives--as keys to differentiating their operations for retail customers.

Mr. Smith said his privately held firm has continued to grow earnings in soft market conditions, albeit not at the double-digit clips that he believes private equity owners demanded from wholesalers involved in merger deals.

"I want to believe [we're growing] because we do our business the right way," he said. Illustrating how it can be done the wrong way by example, he reported a recent experience he had trying to put together a D&O program for a bank with a premium price tag of about $5 million.

The agent for a bank that is being acquired had been asked to put an extended reporting period policy, Mr. Smith said.

After asking for a copy of the quote, "what I got was a string of e-mails from this other broker," he said. "Not a formal quote with terms and conditions," but e-mails put together one after the other. "It was 'this guy said this, this guy said that, and here's a copy of the e-mails,'" Mr. Smith said.

"I just find that appalling," he continued. As a customer, "if I were going to spend that kind of money, I would want a document in front of me explaining everything," he said, reporting that his firm routinely delivers that type of analysis on D&O programs.

With wholesaler quote documentation levels varying widely, "I think the reason we're growing is that we consistently deliver quality work," Mr. Smith said.

As wholesalers, "we need to be aware of what the customer needs," he said. If a customer needs a thorough analysis of the marketplace, then "we can put a spreadsheet together of all the markets we went to, why we're recommending the proposal that we are and why the others--including some that might be less expensive--should not be entertained because of huge gaps in coverage."

At NAPCO, Mr. Pagoumian noted that his firm specializes in property-catastrophe insurance coverage. "We breathe and live property cat, and our higher cause is to be experts in property insurance and related services," he said.

"When information comes into us, we analyze that in a very comprehensive fashion. We go out of our way to explain to our retail partners what all their exposures are" based on an array of different catastrophe modeling tools.

"We're not just one of these brokers out there that is matching a risk to the market and getting a quote," Mr. Pagoumian said. "Taking a risk to market is the very last phase of the process that we do," he said.

"We do a lot of the upfront work that enhances the risk management process," he said. The upfront modeling "allows us to analyze a risk, make appropriate risk management decisions with our retail partners, and then with that intelligence, we know how to size up the right markets."

Mr. Smith said private ownership allows his firm, which includes a property-casualty wholesale division, a professional liability division, a managing general agency and a programs unit, to invest in product development.

For example, he said his firm recognized several years ago that cyber liability and privacy exposures were very real, in the wake of a multi-million-dollar exposure at a supermarket chain that had compromised identifiable personal customer information from credit card records.

"We invested in a staff of people to become experts in that," he said. "I don't think a lot of our competitors, who are crunching the bottom line so much, have the ability to bet on the long haul," he said, referring to firms owned by private equity.

Private equity firms aim to take the money entrusted to them by investors and deliver returns above alternative investment vehicles such as bank accounts or stocks. In some cases, they may be looking for as much as 20 percent per year in order to double their money over a five-year time horizon.

In the wholesale brokerage world, "we all know that even though we can grow every year, it's not without a lot of struggle and strain," Mr. Smith said. "I would not tell you that we're growing at 20 percent a year. We haven't for a number of years."

"We understand that we have chosen an industry that has cycles," he continued. "While I'm pretty adamant about growing regardless of the cycle we're in, I don't expect 20 percent in these conditions."

Pressured by outside investors, he said the other firms are forced to do away with expense to try to grow their bottom lines in these conditions.

When a customer calls them about cyber privacy, "they'll put somebody on the phone, but [not] somebody who spends all day, every day on that," Mr. Smith said.

"We have a dozen other products like that here," he said, giving the example of private school and college programs focused on the privacy issue, and special tuition-reimbursement coverage arranged last year in the wake of the H1N1 epidemic in the event that schools had to be quarantined.