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Posted On: May. 25, 1997 12:00 AM CST

TAMPA, Fla.-Ask just about anyone involved in the U.S. aviation insurance market what's new and they will say Stephen L. Way.

Mr. Way, chairman and chief executive officer of HCC Insurance Holdings Inc. in Houston, has been behind the purchase of several major players in the U.S. aviation insurance market in the past few months. He's even rumored to be considering the purchase of another major aviation insurer.

In response to that rumor, Mr. Way said he doubts his company will make any more major acquisitions in the aviation field, "but I wouldn't discount it 100%."

He said he believes that HCC in a short time has already achieved its goal: to become one of the four largest aviation insurance underwriters in the United States.

"We can say we are one of the big four because we is (sic) one," said Mr. Way during an interview with Business Insurance at the 21st Aviation Insurance Assn. conference in Tampa earlier this month. The other three are Associated Aviation Underwriters, in Short Hills, N.J.; and two New York-based companies, U.S. Aircraft Insurance Group and AIG Aviation Inc.

HCC, through its two Houston-based surplus lines subsidiaries Houston Casualty Co. and Trafalgar Insurance Co., specializes in general aviation, which includes non-airline commercial aviation and personal aircraft coverage; large property; and blue-water marine risks. These companies wrote about $225 million in 1996 gross premiums. Mr. Way's company does not write airline, major aircraft manufacturer or space business.

By becoming one of the major players in the general aviation market, "we want to bring some order back to the market. We want to make an underwriting profit," he said. "We won't increase rates (across the board), but there are parts of the business that need rate increases and parts of the business that you shouldn't write, you should decline."

Mr. Way, 48, says his company has made 10 acquisitions since the formation of HCC in 1973.

His largest to date and the first of a publicly held company is the acquisition of Frederick, Md.-based AVEMCO Corp., an underwriter of general aviation risks.

HCC and AVEMCO are merging in a stock-for-stock transaction of 8.5 million shares valued at about $220 million, according to Mr. Way (BI, April 7). AVEMCO Corp., which will continue to operate as a subsidiary, is the parent of AVEMCO Insurance Co. and U.S. Specialty Insurance Co. Those companies, both admitted insurers, wrote about $105 million in gross premiums last year. HCC projects the new merged company will write more than $250 million in gross premiums in general aviation business this year. Mr. Way said he expects the deal to close in June.

The AVEMCO merger brings HCC back into the U.S. general aviation market, according to Mr. Way.

HCC pulled out of writing U.S.-based aviation risks in 1991, "because the rates were stupid and the losses were growing," said Mr. Way. However, the company continued to write international general aviation, totaling $75 million in premiums last year.

Mr. Way said HCC decided to buy "the best company in general aviation in the U.S.," namely AVEMCO, because there are signs that aviation reinsurers have had enough of a soft market and may stop supporting competitive underwriting.

Mr. Way said he thought of buying AVEMCO's largest competitor, Dallas-based American Eagle Group Inc., at the same time as he bought AVEMCO. However, "after we looked, we left," said Mr. Way. The business and assets of American Eagle have been sold to American Financial Corp. following a $44 million loss at year end and a downgrade by A.M. Best Co.

Mr. Way decided instead to buy AVEMCO's next largest competitor, which was managing general agent Signal Aviation Underwriters Inc. in Dallas. The purchase, for about $20 million, was completed earlier this month.

While at the AIA conference, Mr. Way also was closing the purchase-for an undisclosed sum-of an MGA writing aviation business: Southern Aviation Insurance Underwriters in Alton, Ala.

Aside from the three major U.S. aviation underwriters and AVEMCO, the main competition in the domestic aviation market "are MGAs," said Mr. Way. Whether HCC will buy other MGAs besides Signal and Southern Aviation "remains to be seen," he said.

There will always be "responsible" competition from the major aviation insurers, but as the MGAs disappear, "we believe the profitability should return to the general aviation market," he added.

Born in England, Mr. Way still speaks with a bit of a British accent though he has lived in the United States longer than he lived in the United Kingdom. He is now an American citizen.

Mr. Way started in the insurance business in London in 1964 at the age of 15 working for broker Willis Faber, now Willis Corroon Group P.L.C. He worked for Stewart Smith for a short time, which eventually merged with Willis, and then left to become managing director of the aviation division of what is now known as Bradstock Group P.L.C.

In 1969, after traveling in the United States, he suggested that Bradstock open a North American office, but the company's board rejected the idea twice, according to Mr. Way. Exercising his entrepreneurial spirit, he moved to New York that year to set up Westminster Insurance Managers. He later sold Westminster to Aviation Office of America, which eventually became American Eagle.

By 1973 he had moved to Houston to set up his own MGA/surplus lines brokerage, Stephen L. Way International, specializing in aviation. But the company hit hard times in 1980 because MGAs received a bad reputation, and "if you were one, you had to be bad," he said.

Because SWI was losing business, the company of 10 employees was converted into an insurance company in 1981. It initially was called International Indemnity Co., with a capitalization of $850,000 but soon after became known as Houston Casualty Co. "Starting an insurance company from scratch back then was difficult; today it's impossible," said Mr. Way.

The first five years were tough until HCC received its first A.M. Best rating, said Mr. Way. By 1987, HCC had a B+ rating, $10 million in capital and about 25 employees, he said.

"I've had a lot of luck, but the first piece was in 1987" when banker J.P. Morgan & Co. Inc. agreed to invest $10 million into the company that would be repaid when HCC went public. "The name (of J.P. Morgan) on the balance sheet was probably more important than the money" because it meant that HCC must be a sound company, said Mr. Way.

The company went public in 1992, raising its capitalization to $100 million in two offerings. HCC had another stock offer in 1995 and two stock splits. After the AVEMCO purchase, HCC will have a market capitalization of about $1.3 billion.

HCC has never exceeded a 100% combined ratio in its history, due to several parameters set in the group, according to Mr. Way. The company does not write non-marine casualty business and therefore states that it has no exposure to environmental liability claims.

"We believe in an underwriting profit" and investment income as a bonus, said Mr. Way. As a result, HCC invests conservatively in such instruments as municipal bonds. "It's boring. It's reliable. It's safe," he said.

Aside from AVEMCO, Mr. Way said his company has made two other strategic acquisitions in its history:

IMG Insurance Co. of Amman, Jordan, in 1988 for an undisclosed sum, which gave HCC a "presence internationally" and sealed a longtime relationship with IMG General Manager Wasef Jabsheh. The company writes non-U.S. marine and energy business.

LDG Management Co., a managing general agency in Wakefield, Mass., in 1995 for 4 million shares valued then at about $70 million. LDG, with an office in London, specializes in accident and health business. Stephen Lockwood, founder and chairman of LDG, is now on the HCC board.

But there's one place where Mr. Way will not buy a company or invest in a syndicate and that's his native London. Lloyd's of London and the Institute of London Underwriters have not made a profit in seven years and many ILU companies and Lloyd's syndicates have gone out of business. Looking at the numbers, "tell me why I should buy? . . . What's this rush to buy London companies? I don't understand," he said.