Unit sales recast wholesale market

The landscape of the excess and surplus lines industry has changed dramatically over the past year.

The placement of E&S business is no longer dominated by the world's largest retail brokers but is instead ruled by independent wholesalers and in many cases their private equity owners.

As a result of retail brokerage giants Aon Corp.'s and Marsh Inc.'s divestitures last year, Swett & Crawford Group and Crump Insurance Services Inc., respectively, debut on this year's list of Business Insurance's largest U.S. wholesale insurance brokerages as independent firms.

And Willis Group Holdings Ltd.'s 2005 sale of Stewart Smith Group to independent wholesaler American Wholesale Insurance Group Inc. has propelled AmWINS to the top spot among the nation's largest wholesalers, succeeding perennial leader Swett.

The divestitures not only have created new growth opportunities in the E&S market as Marsh, Aon and Willis seek new wholesale relationships, they also have generated much interest among private equity firms wanting to capitalize on the market dislocation stemming from New York Attorney General Eliot Spitzer's investigations into broker compensation, wholesalers note. Those investigations raised questions over whether a retail brokerage's ownership of wholesale operations creates conflicts of interest for those firms.

Unprecedented change

"It's a very exciting time in our business. I've never seen this many changes," said Glenn Hargrove, president and chief executive officer of Dallas-based Crump, which Marsh sold to private equity firm J.C. Flowers & Co. L.L.C. late last year.

"Never in the history of the E&S wholesale space has there been this kind of activity around financial sponsors," said M. Steven DeCarlo, president and CEO of AmWINS.

Pegasus Capital Advisors L.P., the Cos Cob, Conn.-based private equity firm that owned a majority interest in AmWINS, sold its interest in the wholesaler last October to Parthenon Capital L.L.C.

But it's more than divestitures that have created opportunities in the marketplace, wholesalers say. The difficult property catastrophe market also is creating growth opportunities, although wholesalers say they are working harder than ever to place business as capacity remains scarce and pricing is often prohibitively expensive.

Acquisitions plus growth

As a group, the nation's 10 largest wholesalers saw premium volume grow an average 12.3% in 2005, according to Business Insurance's rankings. Acquisitions and solid organic growth played a big role in many of the firms' growth in 2005, they said.

In addition, several of the wholesalers point to their strong recruiting efforts, new sales and development programs, and their team-based approach to servicing clients' accounts as key growth drivers.

Overall, the wholesalers say they are bullish about their opportunities in the market.

"It's a great time in the wholesale world," said John Hahn, president of San Francisco-based BISYS Commercial Insurance Services Inc. "For us, when you have the three largest brokers in the world getting rid of their wholesalers, that business is up for grabs and we're pretty excited about it. I think you'll see us from the brokerage side adding capabilities and resources that will align us well with Marsh, Aon and Willis so we can capitalize on that new business opportunity and become relevant for them."

"For us, we were the independent one. We didn't do any business with Marsh, Aon or Willis," said AmWINS' Mr. DeCarlo. While the acquisition of Stewart Smith gave AmWINS the opportunity to work with Willis, "we've also had great opportunity with Marsh and Aon to professionally and honorably earn their business and that creates growth," he said.

Mike Johnson, vp-business development at Birmingham, Ala.-based CRC Insurance Services Inc., said the wholesaler is seeing more growth opportunities not only from Marsh, Aon and Willis, but also from its core group of top 100 retail broker clients that are writing more business that used to be "the domain" of the top three.

While the world's three largest retail brokerages have divested their wholesale brokerage interests, other retail brokerages continue to own and operate wholesale units.

"Pat Gallagher has publicly stated that he likes this business and it's a business he's going to continue to stay in and grow," said Joel Cavaness, president of Itasca, Ill.-based Risk Placement Services Inc., which is owned by the world's fourth-largest retail brokerage, Arthur J. Gallagher & Co.

"It doesn't make a difference to us" that Risk Placement Services is owned by Gallagher, Mr. Cavaness said. "We do business with Gallagher retail just like a lot of our competitors...and we fight for that business just like they do."

While CRC is owned by banking giant BB&T Corp., which also owns BB&T Insurance Services Inc., the world's seventh-largest retail brokerage, CRC executives say that the only affiliation the two firms have is the same parent.

"There is a very clear distinction there and that was part of the business model that was built when BB&T acquired CRC in '02," said Thomas Curtin, president and CEO of CRC. "We were very aware that being owned by a retail insurance agency was not something CRC wanted to do or be a part of, so we are owned by a financial services company and we think that distinction is significant."

Hard work required

In addition to opportunities created by ownership changes during the past year, the difficult property catastrophe market also is bringing wholesalers more opportunities, yet they are working harder than ever to capitalize on it.

"It's very difficult to find capacity. We're having success, but it's not without a lot of hard work. It's definitely a struggle," said Neal Abernathy, president and CEO of Atlanta-based Swett & Crawford. "For me to say that we're meeting the needs of every customer at a price they are willing to pay would be incorrect."

"There's minimal capacity, so we're seeing a lot more opportunity, yet we have to work five times as hard--putting five times more time and five times more resources on each account--just to get it placed," BISYS' Mr. Hahn said. "Then you're seeing buyers buy less limits and increasing their deductibles."

"I think if we have a stormless year, we'll have a little more normalization to the marketplace and next year will be real bullish for everybody on the wholesale side and it will be a little easier to put deals together. But right now, it's vicious," he said.