To Thrive and Survive

E&S brokers seek new ways to grow, prosper in today’s changing market

For excess and surplus lines brokers, identifying available insurance markets not sought by the standard market may be the key to surviving and thriving in the soft market.

The answer to growth in a soft market is simple, says Alan Kaufman, chairman, president and CEO of national insurance wholesaler Burns & Wilcox.

“You roll up your sleeves (and) write more business,” Kaufman said. “We’re competing with a market, standard companies, companies that normally would not be in writing special or unique business,” Kaufman said. “They’re stepping in and writing that business and there’s nothing you can do about that.” Kaufman admits that at the moment standard carriers are overzealous about writing business they ordinarily would not touch. “Not until that business turns out to be unprofitable for them will they back away,” he said.

And it may be a number of years before standard markets back away from traditional E&S business, says Chris Treanor, president and CEO of Mercator Risk Services, a wholesale broker with offices in California, New York, Georgia, Florida and Illinois.

“We’re just at really the start of the soft market,” Treanor said. “The soft market really started in 2004; the property market caught up in 2006, but with the combined ratios in the 80s and the 90s, there’s still a long way (to go).”

If people expect this market’s going to change any time soon, short of a catastrophe, they’re wrong, Treanor said. “So I think we all have to be thinking about how we can ride out the next three to five years anyway, in this softening market environment,” he added.

How to ride out the soft market and its challenges is a question that brokers, managing general agencies, wholesalers and carriers all appear to be contemplating.

“It’s a severe challenge to grow in this market,” said Neal Abernathy, president and CEO of Swett & Crawford, the nation’s oldest insurance wholesaler. “But I think you do it by expanding your product line, looking for new opportunities, (and) new businesses to get into,” he advised.

Part of the Swett & Crawford strategy to surviving the soft market has been expansion.

“We have opened up several new offices — satellite offices of existing offices — where we put producers in branches where we weren’t before,” Abernathy said. The company also hired a number of new brokers and underwriters in 2006 and 2007.

“You have to be looking for ways to grow and you have to invest in people,” Abernathy continued.

He advised that in a challenging market like today, E&S brokers have to invest in acquisitions and new products as well in order to grow. But such investments do not come without a cost, he added.

“All require capital,” he said. And where there’s capital there must be a return on that investment, he added. “But the only way you’re going to grow in this market is to invest and keep doing what you’re doing.”

Targeting the Right Accounts

Identifying prospects that the standard market does not or will not write is key for E&S broker survival in any soft market, says one E&S expert. Even so, that target market keeps changing in today’s competitive environment.

Burns and Wilcox’s Kaufman says that when the market started to soften, most standard insurers wouldn’t touch business under $100,000 in premium. But that price dwindled fast, he said. “Then it went down to $75,000, $50,000 and $25,000 as an average premium.” Now standard markets are targeting accounts with even lower premiums, according to Kaufman.

In order for E&S brokers to survive in this market they must find business that standard carriers are not interested in writing and that knowledge comes from solid marketing efforts, he said.

“There are pockets around the country … like Louisiana for instance … where standard companies are not interested in coming in and writing business,” Kaufman said. “Coastal property is still very much needed by businesses” and E&S companies like Burns & Wilcox are strong at writing catastrophic business, he said. Kaufman added his company has already stepped-up marketing efforts in that area.

Pockets of Opportunity

“There are always pockets of opportunity in our business,” Mercator’s Treanor added. “You just have to recognize them and seize on them as soon as you find them,” he said. “You have to be nimble; you have to be creative; and you have to bring expert solutions.”

Treanor says that Mercator’s strategy for the soft market focuses on three things: expertise, customer service and efficiency.

“We try to bring expertise to every transaction,” Treanor said. “If we’re not adding incremental, intellectual capital to the deal — something that the retail broker doesn’t have — then you’re always vulnerable.”

On top of expertise is customer service, he said.

“If you’re not making the retail broker look better just in terms of doing things as well or better than he’s doing them himself or herself, then you’re not adding value,” Treanor noted.

Lastly, Treanor says that efficiency increasingly plays a more relevant role in today’s soft market.

“Retail brokers are facing the same market cyclicality and they’re facing the same earnings pressure that the wholesalers and the companies are,” he said. “You’ve got to be efficient and you’ve got to interject efficiency into the transaction,” Treanor advised. “If I can do something quicker, cheaper and easier than my retail broker customer, then he’s going to be more inclined to let me do it because that’s going to be accretive to his earnings, and it’s going to be accretive to mine.”

In the end, efficiency, customer service and expertise are key factors to surviving, “but, all in all, you’ve got to always be looking ahead for the next opportunity,” Treanor said.

Financial Backing to Survive

Finding the capital needed to grow challenges every business, including E&S brokers. One trend felt throughout the industry in recent years has been the reliance on outside capital to fund new ventures and promote growth.

An increasing amount of private equity capital has moved into the E&S business over the last three to five years, said Steven DeCarlo, CEO of AmWINS Group Inc., a wholesale broker with 35 offices nationwide.

Some believe the financial interest from outside investors has been a plus for the industry, but others are not so sure.

“Private equity is involved in a number of the larger brokerage firms,” Swett & Crawford’s Abernathy said.

“I think from our perspective, private equity investments have been very positive for us,” Abernathy noted. “It caused us to look at everything we do. … They’ve challenged us and we’ve evaluated all of our processes: the way we approached business, how we want to grow, how we want to make our investments, everything has been challenged,” Abernathy continued. “I think it’s had a very positive impact on us and on the industry.”

Burns & Wilcox’s Kaufman was less enthusiastic about the positive impact of private equity investments on the E&S industry.

“I don’t think it’s been positive because unfortunately the market, which is not a result of private equity, has turned south,” Kaufman said. “The rates that everyone is achieving are substantially down, which means the brokerage commissions are substantially down. Their income, and consequently their return (on investment), is down.”

Kaufman said that private equity has pushed a number of consolidations throughout the industry. “I don’t think the consolidation has affected the rates,” he said. “Rates have come down not because of private equity,” he said. But even so, private equity did enter the insurance industry with hopes for a good return on investment, he added.

“The returns aren’t there currently,” Kaufman said, noting that he predicts private equity’s short-term view will lead them out of the insurance business because of those bleak returns.

“I don’t have a crystal ball but it’s pretty much a consensus that ’08 is going to be a very difficult year,” he said. “The returns won’t be there, and consequently there will have to be either more acquisitions made in order to show a short-term return, or there will be some sales.” He cautioned that a short-term acquisition could have an inflated short-term value, something he predicts the industry is sure to see.

But DeCarlo argues that private equity is really no different than other capital.

“We use private equity capital, we use debt capital; we could use public capital if we got to that stage,” DeCarlo said. “It is a changing time, but it’s still insurance; it’s still E&S insurance.”

DeCarlo says he finds it troubling that some may be worried about the fact that private equity is a short-term play. “The companies are not short-term plays,” he said. “The capital may be short, but we’ll replace it with other capital.”

He says it’s not as much about where the capital comes from as much as it is about the employees that work in the E&S industry, the retail agents they support, and the markets they try to feed. “I think people have gotten a little enamored by this new capital source,” he said, noting that it’s no different than someone who might have mortgaged his house or built a franchise on his own nickel.

Topics Agencies Excess Surplus Market