How E&S Brokers Thrive and Survive in Today’s Soft Market

By | February 1, 2008

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 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 standard markets that at the moment standard carriers are overzealous about writing business that 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 the softening market environment,” he added.

How to ride out the soft market and its challenges remains 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, one of 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.

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 said.

“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.”

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 Steve DeCarlo, AMWins.

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,” said Abernathy.

“I think from our perspective, private equity investments have been very positive for us,” he said. “It caused us to look at everything we do. … Everything that 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 commented. “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 private equity did enter the insurance industry with hopes for a good return on investment.

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

To read the complete article, see Insurance Journal’s Jan. 28 print issue.

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