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SCOTTSDALE INSURANCE CO.

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8877 N. Gainey Center Drive, Scottsdale, Ariz. 85258;

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

1997 1996

Gross premiums $1,114,198,849 $1,146,643,486

Non-admitted $491,060,055 $522,109,042

Commercial risks 88.3% 88.9%

Net premiums $327,032,443 $323,980,100

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

Capital & surplus $211,078,908 $192,819,964

Employees 1,087 1,066

Combined ratio 104.3% 111.8%

Rating agency 105.0% 112.3%

Net income $17,528,408 $8,517,936

Best's rating A+XVP A+XVP

S&P rating AA AA

Scottsdale Insurance Co. is developing new coverages and programs, encouraging cross-selling of products and investing in technology to attract more business from customers and agents.

Those efforts all are designed to combat a slowdown in premium growth in the surplus lines market that has affected Scottsdale and other surplus lines insurers coping with heavy competition.

Scottsdale's gross premiums written on a direct, non-admitted basis were $491.1 million in 1997, about 6% below 1996's level.

Despite the decline, the surplus lines subsidiary of Nationwide Group holds on to its spot as the third-largest surplus lines insurer.

Premiums "are down a little bit because of the continued soft market," explained President R. Max Williamson.

For surplus lines insurers, "the competition still is, day-in, day-out, the standard market," added Bob Keul, vp-underwriting.

In fact, Scottsdale isn't even trying to compete on price when pitted against admitted insurers.

"If the competition's admitted, then we're out the door," said Mr. Williamson.

As a result of the competition from the admitted market, Scottsdale is writing more business on admitted paper than ever before: Admitted business now represents 34% of Scottsdale's total $1.11 billion in 1997 gross premium volume.

The composition of Scottsdale's business is changing in other ways.

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

For example, contract property business now represents about 29% of Scottsdale's entire book of business, while contract casualty comprises just 24%. Those percentages are nearly the opposite of the insurer's mix of business as recently as 1995. Contract business is risks written by general agents to which the insurer has given binding authority. It includes both commercial and personal lines.

Scottsdale hopes its stability as a market will help it lure back some of the business it has lost to competitors in the soft market.

"What we hope is that companies will decide to get out of certain classes of business that we have historically been a market for," said Mr. Keul. "That business can come gravitating back to us. Maybe it went away from us for a while. . . .We're trying to maintain a consistent market with good availability and not get in and out of business. That really is difficult for a customer."

In fact, Mr. Williamson said, "we're seeing little signs of change" in the marketplace.

Those signs include some insurance companies withdrawing from certain lines of business and others moving to rein in expenses, he said.

"That says something that they're making their first step toward trying to improve their combined ratio. They start with expenses and then right behind that will be the underwriting revisions," he explained.

Scottsdale itself has cracked down on expenses related to claims handling in an effort to cut costs over the past two years. It also has redoubled efforts to enforce deductibles and take advantage of subrogation opportunities where possible. So far, the expense control effort is paying off big.

The insurer's combined ratio improved to 104.3% in 1997.

Thanks in part to that more aggressive expense control, Scottsdale's net income has jumped to $17.5 million in 1997, up 105% from 1996.

"At the end of the day, if you look at the numbers, 1997 was the most profitable year in the history of the company," pointed out Mr. Keul.

In response to the competitive market, Scottsdale has developed a range of new programs to attract business.

The insurer now provides up to $25 million in property coverage for petrochemical plants and oil refineries, a coverage it introduced in 1997.

"We'll probably do $10 million or more (in premiums) this year," Mr. Keul estimates.

In addition, between $1 million and $5 million in limits are available for these risks introduced last year:

* Tire recappers, or retreaders, property and liability.

* Auto recovery property and liability.

* Architects and engineers professional liability.

* Ocean marine cargo.

* Home inspectors' liability.

* Wind farms property for windmills generating electricity.

* Exercise and health studios property and liability.

Scottsdale also will entertain business it might not have considered before. For example, "we're looking at sports equipment manufacturing, condos, vacant property, forestry associations, national golf associations, ice skating rinks and amusement parks," Mr. Keul said. "Stuff that before came to us and wasn't our cup of tea, now we're looking at and saying 'Is there a way we can do it?' The market today asks for that."

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

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.

Fortunately for Scottsdale, the reinsurance market is still soft, enabling the company to keep just 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 increasingly is emphasizing cross-selling by offering ancillary coverages to existing clients. For example, the insurer is offering more transportation coverages to its casualty clients.

"We're trying to package more business, provide property and casualty together," Mr. Keul explained. "Demand today is to package that."

For the most part, "we're still a contract company, which means a majority of our business is written by general agents, and it historically has been monoline," Mr. Keul explained.

About 90% of Scottsdale's business comes from managing general agents and program managers that market specific lines of business, such as professional liability. The remainder is generated by brokers.

Among Scottsdale's top producers are: Burns & Wilcox Ltd.; Media/Professional Insurance Co. Inc.; Go Pro Underwriting Managers; Crump Insurance Services; J.J. Negley & Associates; Hull & Co.; and Colonial General Insurance, which is operated by Rollie Wiegers, Scottsdale's founder.

Scottsdale added about 10 brokers in 1997, bringing to 165 the total number of general agents and brokers with which it does business.

"We're still aggressively looking for opportunities there," Mr. Keul said, adding that Scottsdale is primarily interested in adding producers that will aggressively market its business.

Another area in which Scottsdale is continuing to focus on improvement is technology. "We're on a real technology kick," Mr. Williamson explained. "We're trying to work smarter, more efficiently and improve productivity to make it easier to do business with us, but also less costly."

"We're trying to go paperless," he said. "That's a big movement on our part, a big change."

For example, today when an agent issues a policy and mails or faxes it to Scottsdale, "it goes through an imaging process" so that "every underwriter, every accounting person, every claim person, whoever needs access to a policy file instantly has access to that file" via their desktop computer," Mr. Williamson explained.

At the same time, technology "is helping us redo the workflow to be more productive and efficient," he said, adding that such efficiencies enable Scottsdale to handle more business.

By year-end, all underwriting departments will be paperless, he predicted.

"The next step is the agency interface so that the policy comes to us electronically. One of the challenges we have is that we have agents who are very sophisticated and others who are very unsophisticated," when it comes to technology, Mr. Williamson said.