Bill Trzos, president and CEO of San Diego-based managing general agency Cypress Point Insurance Services Inc. talked with Insurance Journal about the changing climate of California’s workers’ compensation insurance market and Cypress Point’s goals for 2005.
With a small original investment in 2001, Trzos has grown Cypress Point to over $125 million of gross written premiums through 2004. Prior to his position at Cypress Point Insurance, Trzos spent two years as vice president and underwriting manager for Arrowhead General Insurance Agency. He previously served in various underwriting and management roles at AIG, Liberty Mutual, Golden Eagle and Mutual of Omaha.
Insurance Journal: What is Cypress Insurance Services Inc.’s background?
Trzos: Originally I started in workers’ comp 10 years ago as an underwriter and worked my way up at various companies (Golden Eagle, AIG, Liberty Mutual) and I actually went to my first general agency, Arrowhead here in San Diego, in 1998 and helped form their workers’ compensation division. In early 2001 I departed Arrowhead and founded Cypress Point Insurance Services as a specialist in California workers’ compensation. I partnered with a retail producer who had a large block of homogenous business and the affiliation worked very well because that set a long track record of profitable results in specific industry segments like automotive services and horticultural areas.
We grew at a time in the California workers’ comp market that was pretty chaotic to say the least. In 2001 the market had seen up to 30 carriers that had gone out of business or that had been taken over by the Dept. of Insurance. But we were able to trade on the relationship that I had created with various carriers and reinsurers and an underwriting philosophy that was very conservative in nature. We focused in on the lighter end of the class of business that we were looking at. We stayed out of high concentration areas like Los Angeles and San Francisco which helped us post 9/11 eliminate the threat of catastrophic losses.
We were able to add carriers throughout 2002. We actually had 3 insurance companies that were writing for various programs. While other general agencies were starting to lose their markets, lose their authority, we were growing at a very chaotic time in the market. We finished 2003 with just under $100 million of written premium and we finished 2004 with about $125 million in written premium. The sun is shining for California workers’ comp right now. This is the time when an opportunistic company needs to catch that lining in a bottle and maximize that.
IJ: Have you seen some of your carriers that have never been in workers’ compensation come into the market?
Trzos: Yes. We’ve seen carriers that if they’ve never been in it, they’ve just dabbled in it. Our largest carrier, Berkshire Hathaway, is one of the biggest insurance companies in California, but they’ve never really made a push for writing workers’ compensation business. So this is a huge initiative for them. Warren Buffet and Arnold Schwarzenegger are close, and they’re just a great company to work with, so we’re pleased to be a partner of theirs.
IJ: Who are your other carriers and what is your toughest class of business to write right now?
Trzos: Clarendon National is our primary other carrier and we’re in negotiations with several other carriers for specialty workers’ compensation products. I don’t know that we would say that we have a toughest class. Construction is always a challenging class, but we feel like there’s opportunity there because the pricing is right so we’re not afraid of it.
IJ: You started writing first in California. What was the program you expanded with nationwide? When did you branch out and what percentage of your business is that particular class?
Trzos: That’s automotive services. That particular class overall is probably 15-20 percent of our business. In the other states, it’s probably less that 10 percent of our total premium volume. We write it with a particular broker who’s had a long track record of writing this class of business and focuses in on Midases and Jiffy-Lubes and franchise auto shops nationwide so we have a great relationship with those organizations and we’ll continue to grow there as well.
We expanded about 18 months ago and it’s been very successful, focusing on homogenous programs in that growth opportunity. We will continue to grow and diversify in the other states over the next three years.
We are a national general agency. We write in all states other than the monopolistic workers’ comp states for specialty programs. Our primary operation is California, with 90 percent of our written premium.
IJ: How do you find agents?
Trzos: With long relationships and classic marketing. Insurance at the end of the day is very much a relationship business. It’s about service and offering a fair product. I don’t believe by any means we’re the cheapest product on the street but we offer a fair price and we offer a fair commission to our producers and we try to work hard to maintain a long term relationship. That’s what we look for in a producer.
IJ: What do you think of California Governor Arnold Schwarzenegger’s workers’ comp reforms? How is SB 899 going to open things up for you in the marketplace?
Trzos: The reform is long needed in California. Eight to 10 years of soft pricing and no controls on the medical costs in the industry has just devastated it. In 2004 the first round of reform passed and by all accounts it’s been a rousing success.
We’re actually seeing now in 2005 new entrants getting into the market and capacity coming back, albeit still very slow. California is a $20 billion market for workers’ compensation so there are a lot of opportunities for new players and existing players that want to expand. We write over $100 million of premium but that’s only a thimble of the ocean of opportunity that we have. We currently have carriers who are very excited about California and very opportunistic so we look to grow with them and add new partners as well.
IJ: Do you see other states that you will expand into that are enacting reforms that are similar to California?
Trzos: I wouldn’t say that, each state is in a different environment by itself. California is unique because of the size and the scope of the environment. Politically it is definitely a different animal than some of the other states.
Our goal would be to expand geographically in the Western region from the adjoining states on a broad scale. Certainly we’re writing nationally on one program but we’ll continue to expand in opportunity states where we think profits can be made. That has been our goal since inception, going for underwriting profit. We’ve been a unique general agent where our average premium size is a little bit larger than others. Our average premium size is close to $75,000. We write a very broad segment of business. We write construction, we write agricultural, we’ll write horticultural, we’ll write trucking risks. We’ll do a large variety of things, but we’ll also do mainstream, like manufacturing, light mercantile and professional services. We run the gamut of what we’re interested in doing.
IJ: Do you see more competition coming into the market in tougher states?
Trzos: The competition in California is starting to come back in. Some of the numbers that very reputable carriers like Zenith and Republic and Preferred Employer, what they’re posting, in the low 90 combineds, and I believe that Zenith posted an 88 combined in 4th quarter of 2004, makes it very attractive for capital to come into the state.
There have been several new companies formed following the reform and the adequacy and the rates. Many people are seeing this as an opportunity. Being such a large market helps that.
State Fund, who has about 50 percent of the market, they’ve made 15 points return on their money over the last three years so they’ve done very well.
IJ: Do you think that State Fund’s 50 percent market share will go down?
Trzos: I think that number will be reduced. State Fund does not want to lose that business, but their charter is to be an available market. They are not supposed to have 50 percent [of the market].
IJ: Tell me about your recent affiliation with Arrowhead. What is your plan for the upcoming year?
Trzos: With our recent affiliation with Arrowhead, our plan is to grow our premium to about $240 million.
Writing online is one of the key initatives in 2005. Arrowhead has a huge ability to touch producers through their Arrowhead exchange product, which allows producers to enter information and submit applications online. We’ll be looking to use that product as well.
In the last few months, the partner that I formed Cypress Point with, we have parted ways amicably and Arrowhead shareholders have replaced his interest in Cypress Point. So in a time in California workers’ comp when there’s a great opportunity to grow with the reforms that have concluded and rates that are fairly adequate, I felt it was a great time to partner with someone with the resources of Arrowhead.
We’ve done pretty well in a short period of time but where we were lacking in the back room operations and the information systems and the distribution and the accounting, were all of the barriers that really prevent a smaller company from taking it to the next level. So having been at Arrowhead and worked with the people like Pat Kilkenny in the past, with a great reputation in the marketplace, this affiliation is going to be an enormous success for both of us. Arrowhead has not really been in the workers’ comp space for the last 3 years, so this is a big entree for them as well.
IJ: How will you double your premium?
Trzos: That will come with our affiliation with Arrowhead. We’ll be building out our infrastructure and our IT and our ability to touch more brokers and expand our premium base. We have our underwriting, the risk management and the claims management piece which is primed for enhancement so we’re rock solid there. It’s the service aspect and the bread and butter of any company that’s going to help us double that premium that we’re currently writing.