STEWART SMITH GROUP INC.

26 Century Blvd., Nashville, Tenn. 37214; 615-872-3030;

fax: 615-872-4408

1997 1996

Premium volume $302,866,000 $366,169,000

Gross revenues $28,590,000 $28,728,000

Employees 216 216

Commercial lines 100% 100%

Admitted business 40% 40%

Non-admitted 60% 60%

Stewart Smith Group Inc. is taking several steps to combat conditions that led to the broker's 17.3% drop in premium volume last year.

Gary H. Cooper, chairman and chief executive officer, attributes the premium decline to the soft market and the amount of business being taken by admitted insurers.

To counter those factors, the Nashville, Tenn.-based wholesaler is vying for more business from its parent company, Willis Corroon Group P.L.C.; fostering teamwork; and developing new products.

Stewart Smith dropped one spot to fifth place in Business Insurance's ranking of the largest U.S-based surplus lines brokers, based on premium volume of $302.9 million.

Gross revenues edged down 0.5% to $28.6 million.

The market has not changed this year, Mr. Cooper said. "We still have the same marketplace if not even softer than 1997," he said. "The surplus lines industry is still facing a shrinking opportunity base."

For the first half of 1998, Stewart Smith reached more than $180 million in premium volume, about 2.9% above last year's first half, and about $13 million in gross revenues, about 5% above the same period last year. For the full year, Mr. Cooper estimates greater than $310 million in premium volume and about $29.5 million in gross revenues.

Stewart Smith is looking hardest for growth at its parent company, Willis Corroon Group P.L.C. In fact, Mr. Cooper lists expanding that relationship as a priority for the wholesaler. "We have to earn business there just like with the rest of our clients," he said.

Willis has never mandated that its retail operation use its sister wholesaler for surplus lines coverage, Mr. Cooper said. "If we can't offer the best service and pricing, we shouldn't get the business."

About 22.5% of the surplus lines broker's revenue came from Willis Corroon last year, representing about $94 million in premium volume, Mr. Cooper said. That percentage has climbed since 1990, when the broker did almost no business with its parent, he said. He estimates that this year, about 28% of revenue will come from the parent company.

Willis is "a logical place to look for additional business" in a tough market, Mr. Cooper said. Secondly, "it certainly brings more potential profit into Willis as a group."

Willis Corroon may help Stewart Smith in another way if a July proposal by Trinity Acquisition P.L.C. to acquire a majority stake in the world's fourth-largest brokerage becomes reality. Trinity is a consortium led by U.S. private equity firm Kohlberg Kravis Roberts & Co. L.P. The consortium includes insurers and Willis Corroon management.

Mr. Cooper said Stewart Smith is excited about the potential opportunity to obtain capital for growth and to take a long-term view of business. The broker is open to opportunities to acquire other brokerages and hire teams that may be looking for new positions as a result of consolidation.

Teamwork is another approach the surplus lines broker is taking to succeed in a tough market. It now rewards group efforts across geographic borders rather than just the efforts of specific offices or individual brokers. Stewart Smith previously did not have a structure to credit team efforts that overlapped its 14 offices.

The philosophy Mr. Cooper wants to impart to the broker's 216 employees is "Let's all succeed together."

Stewart Smith last year began to assemble teams of employees across the company that have expertise in a certain line of business. The teams enable a client dealing with the wholesaler in any area of the country to tap specialists throughout the wholesale brokerage. Teams were formed in construction, executive risk and property. An environmental practice team is being formed. The teams are under the direction of Chief Operating Officer Mark Smith, who also is president and CEO of Stewart Smith East.

Mr. Cooper said the wholesaler also hopes to launch new programs by year end, but he wouldn't give details.

Late last year, Stewart Smith launched an employment practices liability program centered in the Farmington, Conn., office for the fast-food industry. Executive Risk Insurance Co. underwrites the coverage.

A contractors' general liability program written by Philadelphia-based Legion Insurance Co. and backed by London market reinsurers is expected to generate between $14 million and $15 million in premium this year, mainly from home builders, Mr. Cooper said. 1997 was the first full year of the program.

The success of the contractors program, centered in the Glendale, Calif., office, is spurring the broker to expand its offerings in the construction area and delve into new casualty areas, he said. Last year, 45% of Stewart Smith's premium volume was generated by casualty coverage, including primary general liability, automobile liability, excess liability and umbrella liability; 28% by D&O and E&O; 25% from property; and 2% from aviation liability and medical stop-loss.

D&O grew last year, but Mr. Cooper said the percentage of D&O business likely will drop this year due to competition from the admitted market. "I think D&O is getting hit hardest by the soft market," he said. "Pricing is going way downhill."

Stewart Smith's D&O team is "well recognized," he said, adding that staff expertise is the reason for clients to choose the wholesaler in that line.

Property, which also grew last year and could represent more than 25% of 1998 business, is another line with which clients readily associate Stewart Smith.

Mr. Cooper wants to generate more business beyond D&O and property. "Were not growing in the casualty area like we could or should," he said.

The wholesaler retained about 70% of its business last year, which is standard for the broker in this soft market, Mr. Cooper said.

Stewart Smith generates 95% of its premium volume as a wholesale broker, 3% as an MGA and 2% as a Lloyd's of London coverholder.

Large independent retail brokers in major metropolitan areas continue to be Stewart Smith's client base.

Last year, the wholesaler placed about 60% of its premiums with non-admitted insurers and 40% with admitted insurers, the same mix as in 1996. Among those insurers it has increased its business with recently are CIGNA Corp., ACE USA, Executive Risk and Royal Specialty Underwriting Inc. Stewart Smith's other markets include General Star Management Co.; American International Group Inc. units, including National Union Fire Insurance Co. of Pittsburgh, Pa.; RLI Insurance Co.; Zurich American Insurance Co.; Reliance Group Holdings Inc.; and HSBC Gibbs Ltd.

To keep clients aware of its activities, Stewart Smith has begun distributing a newsletter in print and electronic versions.

Stewart Smith subsidiaries are: Stewart Smith East, which is based in New York and has offices in Bernardsville, N.J., Philadelphia, and Farmington; Stewart Smith Mid America Inc., based in Chicago; Stewart Smith Southeast, based in Nashville with an office in Tampa, Fla.; Stewart Smith Southwest, based in Dallas; Stewart Smith West, based in Glendale, Calif. with offices in Phoenix and San Francisco; Stewart Smith Specialty Risks Inc., based in Southfield, Mich.; and McAlear Associates Inc., based in Grand Rapids with an office in Cleveland. The environmental practice is centered in McAlear Associates.

The individuals holding the president and chief executive officer position at subsidiaries, in addition to Mr. Smith, are: David Martin, McAlear Associates; James Compton, Stewart Smith Southeast; Elliott Jones, Stewart Smith Mid America; and Fred Anderson, Stewart Smith West. Fred Curatolo is chief operating officer of Stewart Smith East; and George Clarke is executive vp of Stewart Smith Specialty Risks. Connie Steinmetz is chief financial officer of Stewart Smith Group.

Stewart Smith is a member of NAPSLO.