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Insurance Co.

8877 N. Gainey Center Drive

Scottsdale, Ariz. 85258

602-948-0505; fax: 602-483-6752

1996 1995

Gross premiums $1.15 billion $1.16 billion

Non-admitted 522,109,042 544,101,028

Commercial risks 88.9% 91.6%

Net premiums 323,980,100 305,706,248

Paid-in capital 6,027,200 6,027,200

Capital & surplus 192,819,964 182,829,817

Employees 1,066 1,059

Combined ratio 111.8% 113.5%

Rating agency 112.3% 113.5

Net income 8,517,936 5,024,180

Best's rating A+p A+p

S&P rating AA AA

Figures reported on a pooling basis.

Recognizing the need for innovation to ensure continued growth, Scottsdale Insurance Co.'s management has developed a new customer-oriented strategy that it hopes will enable the company to generate 25% of its revenue from new products and markets by the year 2002.

That's a pretty ambitious goal, as new products and services now contribute just 5% to the new business Scottsdale generates each year.

"Scottsdale is trying new things," stressed Bob Keul, vp-underwriting, pointing to a framed copy of the company's new mission statement hanging on his office wall, entitled "Business as UNusual."

This approach already has resulted in the creation of a marketing department, product redesigns and product introductions.

Mr. Keul estimated that because the surplus lines market is so soft, Scottsdale loses nearly 35% of its premium volume each year to non-renewals.

With that kind of turnover, the company is hustling to maintain its place as the third-largest U.S.-based surplus lines insurer.

Scottsdale's gross premiums written on a direct, non-admitted basis dropped about 4% in 1996 to $522.1 million.

"Until now we've been primarily reactive," he observed. "The industry is that way. We looked at everything that came in and considered it.

"But now, we want to be more focused so that we can go out and identify profitable opportunities. The difficulty is, we still have a lot of newly emerging competitors or else the standard market from where we all emerged is competing with us," Mr. Keul said, referring to the fact that many licensed insurers are competing for what was traditionally surplus lines business.

As a result of the competition from the standard market, Scottsdale is writing more business on admitted paper than ever before: Admitted business now represents 33% of the insurer's total $1.15 billion in 1996 gross premium volume.

"That's a reflection of the fact that 82% of Scottsdale's transportation business and 75% of the insurer's professional liability business is being written on an admitted basis," Mr. Keul explained.

Despite the growth of admitted paper, Scottsdale doesn't plan to become an admitted insurer, he said.

"We need to focus on our strengths and not pretend we're something that we're not" just to keep business that is lost to competitors because of price, he said.

But the composition of Scottsdale's business is changing in other ways as well, Mr. Keul observed.

The insurer, which started out as primarily a casualty underwriter, now writes more property than liability business.

For example, in 1997 contract property business is expected to represent about 29% of Scottsdale's entire book of business, while contract casualty constitutes just 24%.

Contract property and casualty business is written by general agents to whom the insurer has given binding authority. It includes both commercial and personal lines.

Contract property represented 27% of Scottsdale's total premium volume in 1996, up from 24% in 1995.

While contract casualty made up 28% of Scottsdale's total premiums in 1995, it dropped to 26% in 1996.

"Some of that was self-imposed," Mr. Keul said, explaining that Scottsdale has set a "walk-away" price below which it will not write certain risks.

For example, losses in the Northeast prompted Scottsdale to abandon one liability line, which Mr. Keul did not wish to identify publicly, in that region. This amounted to a $4 million loss in premiums for 1996.

And the insurer stopped writing coastal property business nearly three years ago.

"We won't write at a loss," he said, even if that means reducing the number of general agents to which it has given binding authority.

"We've stepped up producer management to make sure they aren't taking on loss-producing business," Mr. Keul said.

Now Scottsdale's management receives monthly loss runs charting the experience of the business each of its general agents brings in.

About 80% of Scottsdale's business comes from general agents with binding authority within certain guidelines the insurer has established. Among Scottsdale's top producers are: Burns & Wilcox Ltd.; E&S Group Inc.; Media/Professional Insurance Co. Inc.; Go Pro Underwriting Managers; Crump Insurance Services; J.J. Negley & Associates; and Hull & Co.

Scottsdale also is cracking down on claims handling by enforcing deductibles, by taking advantage of subrogation opportunities and by adding seven claims staff members, bringing the employee total to 1,066, according to Mr. Keul.

That effort and an improved return on investment has increased Scottsdale's net income to $8.5 million in 1996 from $5.0 million in 1995.

The insurer's combined ratio also improved to 111.8% last year from 113.5% in 1995.

Scottsdale's new vision statement rededicates the insurer's commitment to providing quality products and service while improving efficiency and profitability. The statement includes a provision for generating 25% of its revenues by 2002 through new products and markets.

To achieve these objectives, Scottsdale has made several changes in its product offerings.

For example, while the same $10 million in capacity is available for all product liability lines, the new umbrella liability capacity was increased to $25 million from $10 million as of Jan. 1, 1997

"In the old days, Scottsdale never wrote more than $10 million," he explained. "But that's the old market. In the new market, risk managers are demanding more coverage. This helps us keep their business."

The soft reinsurance market allows the company to keep between $500,000 and $1 million of each risk.

While Scottsdale primarily buys treaty reinsurance for the extra capacity, it will find facultative reinsurance when necessary, according to Mr. Keul.

Scottsdale's reinsurance is placed by Aon Re Inc. of Chicago. Its principal reinsurers are: Chartwell Reinsurance Co., Folksamerica Reinsurance Co., Kemper Reinsurance Co., PMA Reinsurance Corp., St. Paul Fire & Marine Insurance Co., Skandia American Reinsurance Co., Trenwick America Reinsurance Corp. and Zurich Reinsurance Centre Inc.

In another first, Scottsdale this year created a marketing department and hired Jay Lughes, formerly with First Financial Insurance Co. of Burlington, N.C., to head it.

Mr. Lughes, who has an MBA in marketing, will build an in-house marketing team whose objective will be to help Scottsdale deliver better products and services.

Part of Mr. Lughes' job will also include tracking regulatory changes in the various markets to look for opportunities, according to Mr. Keul.

As part of its new marketing thrust, Scottsdale is looking to launch some "package" policies to provide ancillary coverages to existing clients.

One example would be to cover the personal risks of the members of law firms to which it provides professional liability coverage, Mr. Keul said.

The insurer also may begin marketing existing programs to new clients.

Among Scottsdale's other new product offerings are:

Managed care errors and omissions coverage, with $1 million in primary limits and excess coverage available.

A livestock dwelling program, which provides $1 million in limits to cover chicken coups in the Southeast and pigsties on a national basis.

A Public Entity Package, or "PEP" policy for small to medium-sized municipalities and counties. The program currently covers entities with populations below 5,000, but Scottsdale plans to expand the program to communities with populations of up to 25,000. The program provides up to $1 million in primary limits with umbrella coverage available to cover such diverse risks as transportation, public official liability and boiler and machinery.

$1 million in easement coverage for the International Right of Way Assn.

$1 million in medical malpractice coverage for members of a physicians and surgeons risk purchasing group in Florida.

$1 million or more in consumer warranty liability coverage for manufacturers.

$1 million in limits for children's soccer liability and camp liability.

Scottsdale continues to write transportation coverages; professional liability coverage; general, excess and umbrella liability coverages; and property insurance.

The insurer still is investigating the possibility of introducing an Internet risks policy similar to the media/professional program it now offers, according to Mr. Keul.

Besides Mr. Keul, Scottsdale's other principal officers are R. Max Williamson, president; Gordon Eugene McCutchan, secretary; and Michael Dean Miller, treasurer.

Scottsdale has an A.M. Best Co. rating of A+p and an AA rating from Standard & Poor's Corp. Both ratings are unchanged from 1995.

Scottsdale, a unit of the Nationwide Group, is an approved non-admitted insurer in all states except Arizona, Delaware and Ohio, where it operates on an admitted basis.