Helping Philadelphia Insurance steer a profitable course are (back row, from left): Edward M. Horning, vice president, information technology; Christopher J. Maguire, senior vice president and chief underwriting officer; William J. Benecke, vice president of claims. Front row (from left) are: James J. Maguire, Jr., president and chief operating officer; James J. Maguire, Sr., chairman and chief executive officer; and Sean S. Sweeney, CPCU, RPLU, executive vice president.
What would you say if someone told you about an insurer that had a Best's Rating of A+ ... a completely debt-free balance sheet ... a Best's Capital Adequacy Relativity Ratio of 119% ... a Standard & Poor's rating of A for claims paying ability and financial security ... was ranked by Forbes as one of the Top 200 Small Companies in America ... and consistently posted a combined ratio under 90%?
Meet the Philadelphia Insurance Companies (PHLY: NASDAQ), a family-run enterprise that's deftly steering a tight ship through some very choppy seas while many competitors are manning the lifeboats and broadcasting distress calls.
What does it take to achieve a combined ratio of 88% while the property/casualty industry overall is posting figures well into the triple-digit "discomfort zone"? To find out, we'll talk with top executives of Philadelphia Insurance about the organization's mission, philosophy, product portfolio, marketing strategy, and partnerships with independent agents. We'll start with founder James J. Maguire, Sr., who today is chairman and chief executive officer of Philadelphia Consolidated Holding Corporation.
It all began in 1960, when Maguire ran a captive agency in Philadelphia for the old Insurance Company of North America (INA). "I was the sole proprietor," he recalls. "My wife was the secretary, and my oldest son (James, Jr., now president and chief operating officer) was in a playpen." In 1962 Maguire established the Maguire Insurance Agency, Inc., a captive underwriting manager that was the forerunner of Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company.
From there, the Philadelphia story is one of steady, carefully planned growth, and judicious selection and pursuit of profitable niche markets. "In 1978 we entered the risk-bearing business with a $2 million letter of credit, and in 1986 we decided to legitimize our fronting arrangement," Maguire explains. "Through an $18 million private placement with Wall Street, we purchased Philadelphia Indemnity and chartered Philadelphia Insurance as a surplus lines carrier." In 1980 Maguire formed Philadelphia Consolidated Holding Corporation; in 1993 he took the corporation public, with the family and employees retaining 45% of the stock; and in 1999 it acquired The Jerger Company, Inc., which subsequently was renamed Liberty American Insurance Group, Inc.
With some $600 million in assets, Philadelphia Consolidated is the parent company of these subsidiaries:
* Philadelphia Indemnity Insurance Company (PIIC), licensed as an admitted carrier in 48 states
* Philadelphia Insurance Company (PIC), a surplus lines carrier that is approved to write business in 37 states
* Maguire Insurance Agency, Inc., a captive underwriting manager for PIIC and PIC that is licensed in all 50 states
* Liberty American Insurance Group, Inc., the parent of four units: Mobile USA Insurance Company (MUSA), a Florida-domiciled property/casualty insurer that sells primarily personal automobile and mobile homeowners insurance in Florida, Arizona, and Nevada; Liberty American Insurance Company (LAIC), also domiciled in Florida, which sells mobile homeowners insurance to the residents of that state; Mobile Homeowners Insurance Agencies, Inc., a captive managing general agent that underwrites, markets, and administers claims for PIIC, MUSA, LAIC, and other insurers with which the agency holds contracts; and Liberty American Premium Finance Company.
Company founder James J. Maguire, Sr., serves as chairman and chief executive officer and continues to be actively involved in day-to-day management.
Carving out niches
A highly specialized niche underwriter, Philadelphia Insurance Companies has eight regional offices and 40 field offices across the country, and it's organized into four underwriting divisions:
* Specialty Lines: professional liability (errors and omissions for lawyers, accountants, insurance agents, and other miscellaneous professions); directors and officers liability for nonprofit, for-profit, and financial institutions; employment practices liability, fiduciary liability, kidnap/ransom coverage, insurance company errors and omissions, and excess liability
* Commercial Lines: commercial auto (primary, contingent, excess, interim, garage liability, and physical damage coverage for the automobile leasing and rental industry); commercial excess (excess liability for rent-a-car customers); and commercial package (commercial multi-peril policies for nonprofit social service agencies, health and fitness facilities, condominium and homeowner associations, specialized vocational and training schools, and day care centers)
* Specialty Property & Inland Marine: Ultimate Cover policy for large commercial property risks; inland marine products for most major classes of business, with a focus on construction coverages such as builders risk and installation floaters.
* Personal Lines: mobile homes, personal umbrella, homeowners (including dwelling fire, wind, and flood)
A newly formed loss control unit performs risk assessment services for the company's commercial underwriting units both before and after coverage is bound. Using predetermined premium and hazard thresholds, the unit manages subcontracted and first-party risk evaluations.
"We're a growth-oriented company; our goal is to grow 15% a year," Maguire says. "We're a niche underwriter that offers value-added products and services to differentiate ourselves from competitors--and we do this in the context of strict underwriting and pricing discipline. In the last 10 years, we haven't had one unprofitable year."
--Sean Sweeney
Maguire, the father of eight children, is proud that five of his offspring have chosen to follow him into the business. Heading up the younger generation is oldest son James J. Maguire, Jr., who joined Philadelphia Insurance in 1996 as a vice president of underwriting after working for several years in the specialty lines business as both a broker and a company underwriter at CNA, Great American, and AIG. Last October he was named president and chief operating officer, with responsibility for overseeing all functional areas of the company.
The "10 reasons" rule
Underlining his father's commitment to specialty niche underwriting, Maguire declares firmly, "We're not a generalist like AIG or Chubb; we'll always have defined markets that we target, and we pride ourselves on offering a differentiated product in terms of both coverage and service. We have a rule here that for every new product we consider developing, we have to come up with 10 reasons why it's better than the competition. So we do extensive research on our competitors before we launch a product, and we try to come up with 10 enhancements that differentiate our product." In conducting product development research, Maguire explains, "We get feedback from our brokers, from our marketing people, and from our underwriters, many of whom have come from other companies and have worked with other agents and brokers in these markets. Everyone collectively gives us input about new opportunities and target markets we can go after, and everyone contributes to improving our products and the way we deliver them."
Another approach Philadelphia Insurance uses to differentiate itself is packaging. "In some markets, we see an opportunity to improve a product by packaging existing coverages so insureds can get everything they need in one policy instead of having to go to different markets," Maguire says. "A good example is our Executive Safeguard® policy. When we introduced this product in 1996, we were one of the very few markets that offered directors and officers, employment practices liability, fiduciary liability, and kidnap/ransom coverage all in one policy, with the ability to pick different limits and deductibles."
Product enhancement is just one of the ways in which Philadelphia Insurance seeks to differentiate itself from competitors. "A lot of the markets we've pursued have had delivery inefficiencies--for example, a product is being delivered through an MGA, so the retail agent is getting a substantially lower commission than if we could deliver the same product direct through retailers," Maguire comments. "So in some cases we go into product niches because our competitors are using a less efficient delivery system, and we're able to write direct through retailers and pay them 12% or 15% instead of the 7% to 10% they're getting from an MGA."
Niche marketing strategy
Heading up the marketing department at Philadelphia Insurance is Executive Vice President Sean Sweeney, a Maguire cousin who joined the company in 1979 and held a number of positions in field and regional sales management before coming to the home office in 1987. Asked to explain how the marketing department is organized, he says, "The real foundation of the department's organizational structure is the eight regional vice presidents. Their average tenure is about 14 years, so they really understand the niches we're involved with, and they've been a great catalyst for growth."
What factors does Philadelphia Insurance consider when deciding whether to enter a new niche market? "The first and most important factor is, do we think we can make an underwriting profit?" Sweeney responds. "We use Best's Hazard Index, and we couple that with actuarial support to see what the current pricing is and whether we can develop a combined ratio of 90% or less. The second thing we look at is whether the market is being underserved. Third, can we add coverage enhancements that will differentiate our product sufficiently? Finally, is the market big enough? In each market we target, we look for a minimum of 3,000 homogeneous exposure units to make our investment worthwhile."
How does Philadelphia Insurance position itself with respect to competitors? In addition to the product differentiation strategies described above, Sweeney says a key element of the Philadelphia Insurance "advantage" is the high degree of security it offers agents and policyholders. "Our capital structure is extremely solid, with a Best's Capital Adequacy Relativity ratio of 119, and that allows us to deliver pristine security to the independent agent who does business with us," he explains.
Agents as partners
Throughout the country, Philadelphia Insurance is an open market that is represented by some 4,000 independent agents, and the company is strongly committed to these retailers' success--not just philosophically but practically. "First, we want to help them develop a marketing plan to go after the niche customers we're interested in," Sweeney says. "Second, we want to give them sales training. Agents today are so busy and have so many responsibilities that they don't have time to develop a clearly defined marketing plan, and they certainly don't have the time to develop a sales training program. That's the responsibility of our field representatives. We don't want them to be typical field reps; we want them to go into the independent agent's office and immediately add value by establishing a sound marketing plan and helping the agent with direct mail, advertising, trade shows, and sales training."
Of the company's 4,000 independent agents, some 70 are Preferred Agents who enjoy an array of benefits in exchange for meeting defined volume and quality criteria. To become a Preferred Agent, a retailer must agree to produce more than $500,000 in premium over a 12-month period, at a loss ratio that is acceptable to the company. Further, the agent must have the ability to increase volume to $1 million by participating in the marketing plan laid out by Philadelphia Insurance.
"There are a lot of benefits to being a Preferred Agent," Sweeney comments. "We give them protection on broker of record letters, so if we got a broker of record from a non-preferred agent, we would protect our Preferred Agent. We offer a profit-sharing arrangement under which we split the underwriting profit 50-50 with the Preferred Agent. We have a stock purchase program where the Preferred Agent can buy our stock via commission deduction at a discount of up to 10% off the market price. We also provide leads, and our field representative accompanies the Preferred Agent on calls and helps him or her make the presentation. Further, these agents have access to our Internet-based PATH internal tracking system, so they can go online and view real-time policy, billing, endorsement, loss, and claims status on their accounts. We assign a claims examiner to each Preferred Agency who is responsible for its customers. We provide leads from advertising and trade shows. Finally, every couple of years we hold a conference that is dedicated to our Preferred Agents."
As these benefits make clear, "We really want a business partnership that produces an underwriting profit," Sweeney asserts. "Over the last 10 years, I don't know of many companies that have consistently had a combined ratio under 90%. There are 4,200 companies in Best's Reports, and only a handful have achieved that kind of result. We do it through our partnership with the Preferred Agent." For 2000, the company plans to develop 16 new Preferred Agent partnerships with production goals of approximately $40 million in gross written premium.
Underwriting by the numbers
As you might expect, Philadelphia Insurance leaves nothing to chance when it comes to underwriting management, both at the home office and in the field. Senior Vice President and Chief Underwriting Officer Christopher Maguire joined the company in 1987 as an underwriting trainee and was named to his current position at the beginning of the year. His primary responsibility is to ensure the profitability of all underwriting divisions and to meet the company's underwriting goals. He also manages the Code of Business Conduct, which specifies the time within which quotes must be provided, policies and endorsements issued, renewals processed, and questions from the field answered. What's more, he is responsible for reinsurance, loss control, and rating operations.
Not surprisingly, the Philadelphia Insurance underwriting philosophy is carefully articulated and clearly communicated throughout the organization. In fact, Maguire says, "It's on everyone's desk. Our underwriting approach is to be a niche-driven company that focuses on account profitability first and makes sound underwriting decisions based on individual, account-specific hazards and risks. Many companies are willing to write business just to keep their agents happy. We try to keep agents happy by writing profitable business and by applying stringent standards of loss control." To achieve this goal, "Our underwriters have to be facilitators. They must understand the risk and add value. We're fanatical about getting loss information on each account and about writing insurance to value. We want to expand our writings in each niche without hurting the company."
Underwriting doesn't stop once an account has been placed on the books, Maguire emphasizes. "We continuously underwrite each account. We're in constant contact with our claims department, and we review each risk on a monthly basis. If there's an issue, we communicate it to the agent and the insured. We work with our customers all year long. Each month we receive a report on any account that has a loss ratio over 50%. We're aware of every account that could adversely affect a line or niche of our business."
Field underwriting initiative
In a major initiative, Philadelphia Insurance is moving toward the decentralization of underwriting into its regional offices around the country. "We want to have our field people handle new business and let the home office take care of renewals and any new business overflow," Maguire explains. "Over the next 12 months, our goal is to have one underwriter from each division located in each of our eight regional offices. Automation"--specifically, the internal PATH tracking system--"lets us move a lot of functions to the field," he notes. "PATH has made a big difference to our agent customers--especially our Preferred Agents."
"Before anything else, we are underwriters," Maguire declares. "We are committed to what we do, and we plan to be here for a long time. We are a financially strong company with family management that has a big stake in our results, and we think that sets us apart from the rest of the market."
Claims: a tight ship
As you might expect, a company that has a laser-like focus on profitable underwriting is equally attentive to all aspects of its claim operation. Senior Vice President William Benecke, a 10-year veteran of Philadelphia Insurance, heads the claims department and serves as director of loss management functions. "We are significantly involved with the underwriting department to help manage our products," he explains. "We also help educate underwriters about legal trends so the company can respond appropriately when changes occur."
Asked to describe the claims department's mission and philosophy, Benecke responds: "To be prompt and fair, and to serve as an educator. Many people run to lawyers because they're not educated in how insurance works. If we can reach them quickly and treat them fairly, everyone benefits." He elaborates: "I tell our claims staff that the claims department is the final execution of the company's promise to provide protection. If we can make good on our mission, develop a sense of comfort with the policyholder and the agent, we can create the kind of loyalty that goes a long way toward improving retention."
In contrast to the underwriting department, which increasingly is moving toward decentralization, Benecke says the claims department is highly centralized. "The claims process is managed from our home office. The claims expertise is here," he says. His department is organized into five "types of loss" units, each directed by a manager who has the experience to handle product-specific claims. Claims examiners likewise have product-specific training, and Benecke says the company's adjusters have an average of 14 years' experience. "They know their products, and they have ownership," he says. "They work with underwriters as a team to assess risks and develop information about particular products."
The Philadelphia Insurance claims department, he points out, has a lower pending ratio than the industry average. "Because of downsizing and consolidation, many companies have a high pending ratio; they're always putting out fires," he observes. "A lower pending ratio gives us more time to think and make better decisions." What's more, he adds, "There's a high level of communication within our department. We have weekly unit meetings, biweekly meetings with unit managers, a monthly department meeting, and regular meetings with product underwriters. We think this kind of interaction sets us apart from our competitors."
Technology is key
To help manage its tightly focused niche business, Philadelphia Insurance is committed to developing state-of-the-art automated systems that speed processing time and give agents, employees, and policyholders easy access to needed information. Ed Horning, a 12-year veteran of the company, is vice president of information technology. Asked to define his department's mission, he says, "We want to use leading edge technology to deliver quality business solutions to all of our user groups." The IT department is organized into three units: technical services (help desk, telecommunications, security); Internet services (Internet administration: wide area network, intranet, extranet, servers, voice mail); and applications (front end: input systems and back end: billing, commissions, statistical reporting).
In the applications group, Horning explains, business analysts interact with user groups throughout the company to identify their needs, then translate their requests into "tech speak" for the group's programmers. In addition to technical training, he comments, "Most business analysts have a background in one of our user departments--underwriting, accounting, policy service--so they've walked in the users' shoes and understand their needs and challenges."
Going "Web-centric"
"Our biggest push is to give our agents and employees functional use of the Internet," Horning says. "We want to use the World Wide Web for everything: training, communicating information, ordering supplies. Our goal is to be a Web-centric company with everyone using a browser instead of individual applications." To this end, "We're exploring the use of video on the Web, so we can provide training for agents in their own offices instead of flying them here," he says.
From a marketing standpoint, Horning says, "Our goal is to make all forms and applications available on our Web site so they can be downloaded to the agent. We'll use hyperlinks to related sites like A.M. Best, American Chambers of Commerce Executives, and sponsored carriers." What's more, "We've established a 'virtual storefront' for prospects on propertyandcasualty.com for prospects so they can receive information on our products and link to our Web site at www.phlyins.com. Our marketing manager, Tara Maguire, then forwards the information requests to our salespeople, who subsequently make contact with the prospect and deliver the desired information. Links on our Web site make it easier to do one-stop shopping via browser, so the user has just one interface instead of 20. We're trying to take the mystery out of the Internet and make it easy to use."
Both internally and externally, Horning says, "Communication is the key to success. We have strong support from upper management for our initiatives to create an accessible, user-friendly Web environment for everyone: employees, agents, and customers."
A port in the storm
Amid the turmoil of today's property/casualty environment, Philadelphia Insurance sees exciting opportunities, especially those created by the ongoing pace of consolidation. "Every time there is consolidation, the new owners have a different appetite for risk, and that seems to open a door for us," says marketing chief Sean Sweeney. "We know what we want and we are solid and consistent in our markets. As the marketplace changes, the stability we provide creates a port in the storm for the independent agent. Over the next three years we anticipate more consolidation that will play into the hands of a nimble niche underwriter such as ourselves."
President and Chief Operating Officer James Maguire, Jr., agrees about the opportunities consolidation offers his company. "Agents are looking for other places to put business," he observes. "We'll be there to supply the capacity and meet their needs."
The last word goes to Chairman, Chief Executive Officer, and founder James J. Maguire, Sr., who says enthusiastically, "We're bullish about the future and the opportunities it offers us as a disciplined niche marketer." *
The author
Elisabeth Boone, CPCU, has more than 25 years' experience as an insurance journalist.
For more information
Philadelphia Insurance Companies
One Bala Plaza, Suite 100
Bala Cynwyd, PA 19004
Phone: (800) 759-4961
Web site: www.phlyins.com