Borne out of Hurricane Andrew's destruction, Vanguard Fire & Casualty is a response to a tight homeowners market
By Phil Zinkewicz
Vanguard Fire & Casualty Company executives are (left to right) Michael L. Toffoli, president/chief operating officer; Thomas R. Jones, Jr., secretary/treasurer; L. Alan Lund, chairman/chief executive officer; and George Nenezian, director.
Imagine that you're in your home and that you're huddled on the floor with your wife and children, all of you with mattresses pulled over your heads. Outside the rain and wind sound like something out of a Gothic novel, only much scarier because there's no book to shut and put down to catch your breath. Windows shatter and, when the wind invades the house, walls are ripped apart and debris flies all over the place. But you can't see it because you're still taking refuge beneath the mattresses, your only protection from the chaos that engulfs your home. Hours go by so slowly that time loses all meaning until, finally, it's all over and, thankfully, you're safe.
That was the experience of L. Alan Lund, chairman and chief executive officer of Vanguard Fire & Casualty of Winter Park, Florida, during the horrific onslaught and ultimate devastation of Hurricane Andrew in 1992. Lund's house, located in Homestead, Florida, where Hurricane Andrew hit, was totally destroyed. He and his family had to stay at his friend's house for several weeks until other arrangements could be made. His friend and colleague is Tom Jones. Both he and Lund lived in Homestead, and both head up T.R. Jones & Co., one of the largest privately held independent insurance agencies in South Florida.
In 1992, Florida's worst natural catastrophe, Hurricane Andrew, caused unimaginable devastation.
"I've lived in South Florida all my life, so I am used to hurricanes and coastal storms," says Lund. "But Hurricane Andrew was something way off the charts. We didn't evacuate because our house was not in a mandatory evacuation area. We had no forewarning that the hurricane would strike right where we lived."
During the months immediately following the catastrophe, T. R. Jones & Co. was a very busy company. "Hurricane Andrew was really a test of our credo, which is to meet and exceed the expectations of our clients," says Jones. "We serviced 5,000 customers, processed approximately 10,000 claims, and our companies distributed more than $350 million. Using this benchmark, we constantly strive to maintain and exceed this level of service."
But something else happened in the wake of Andrew. Jones, Lund and another agent, George Nenezian, recognized that South Florida was about to enter a time of a homeowners insurance availability crisis. The property/casualty insurance companies operating in the state had been hit with billions of dollars in losses, and 11 insurers became insolvent as a result. The state's department of insurance also saw that crisis times were ahead for the state's homeowners and almost immediately set up a residual market for homeowners insurance. That market, the Joint Underwriting Association (JUA), was intended to provide interim relief for those who could not obtain insurance from the voluntary market because insurers were withdrawing from Florida in significant numbers.
Tom Jones is president of T.R. Jones & Co., one of the largest privately held independent insurance agencies in southern Florida.
"Hurricane Andrew was really a test of our credo, which is to meet and exceed the expectations of our clients."
-- Tom Jones, T.R. Jones & Co.
But the Florida department of insurance did something further. It set up a special program where insurers would receive incentives for depopulating the JUA. That led Jones, Lund and Nenezian to set up a JUA "take-out" insurance company, and Vanguard was born. Other JUA take-out companies were set up in Florida, but they were started by deeper pocket organizations, including subsidiaries of Zurich and Travelers. But Vanguard was started up by the three agents, with only a
$6 million bank loan and a manuscripted reinsurance form, which protected against numerous small losses or one giant one. Today, Vanguard remains the only agent-owned insurance company in the state writing windstorm coverage for homeowners.
"We're the only agent-owned company, in the sense that the owners of the company are still agents actively involved in the agency business," says Michael L. Toffoli, president of Vanguard. As president, Toffoli handles Vanguard's day-to-day operations. His background is in finance and accounting and he came to Vanguard after being chief financial officer for the state's JUA. "There were several companies taking business out of the JUA," he says. "I was able to see close up what they were doing right and what they were doing wrong. When I was offered the opportunity to head up Vanguard, I realized at once that the agency background of the principal owners and my background at the JUA were a perfect match."
Toffoli attributes the opportunities that Vanguard now enjoys to timing, for the most part. "Just before Hurricane Andrew hit, insurance companies in the state were at a point where they had been writing homeowners business for years, and competition had forced rates to artificially low levels for the exposures that existed. After Andrew hit, it was difficult for those companies to receive approval from the insurance department to raise rates. By law, the JUA, since it was a residual market, had to have rates higher than the regular market. We took business out at those JUA rates, which was much more in line with the exposures. We've done well. We had about $5.5 million in surplus at the start of operations and $9 million at the end of 2001."
T.R. Jones & Co. Executive Vice President Alan Lund lost his house in Homestead, Florida, during Hurricane Andrew.
Vanguard is also in an enviable position vis a vis its reinsurance contracts, according to Toffoli. At a time when many insurers, at January reinsurance renewal time, were hit with huge increases in their reinsurance contracts, coupled with much more restricted coverages, Vanguard's situation is different, according to its president. "Our reinsurance renewals come on June 1 of this year, so we have more time to monitor the situation. In addition, we always stay in close contact with our reinsurers and, so far, they're saying that they are getting sufficient rates from us, given our exposures. So we're not expecting any significant rate increases. Also, there has been some $13 billion in new capital that moved into Bermuda for catastrophe reinsurance, so pricing in this area is likely to remain steady."
What lies ahead for Vanguard? According to Toffoli, the company's strategy is to diversify. "We were one of the last take-out companies to obtain business from the JUA," he says. "Therefore, we didn't have the chance to put together a really diversified portfolio in terms of geographic mix. We're heavily concentrated in 'hot spots' in Florida, such as Dade, Broward and Palm Beach counties. Our strategy has been and continues to be to diversify our portfolio of risk in other areas of Florida."
Insurance agent and Vanguard Director George Nenezian started the insurance company with Jones and Lund.
And, that's exactly what Vanguard has been doing. In June 2001, Vanguard successfully completed the transition of 12,000 homeowners policies from Miller Casualty Insurance Co., of Fort Worth, Texas. In October 2000, the two companies entered into the agreement, which was then subject to the fulfillment of certain conditions. Under the terms of the agreement, all 12,000 policyholders were to be transferred to Vanguard by June 2001. As part of the agreement, Vanguard offered the approximately 2,500 agents servicing the business to continue to do so at their existing commission rates.
"The transfer of the 12,000 Millers policies to Vanguard went very smoothly," says Toffoli. "We were able to offer Millers a positive solution that caused no interruption in their policyholders' coverage, while ensuring that the agents continued to receive their normal commissions. The execution and implementation of this agreement represents a significant milestone in our company's history."
The commitment to agency forces is part of Vanguard's strategy, and understandably so since Vanguard itself is owned by working agents, according to Toffoli. Recently that commitment was demonstrated even more in an agreement between Bankers Insurance Group of St. Petersburg, Florida, and Vanguard. In November 2001, according to the agreement, Vanguard announced that it will acquire 67,000 policies from Bankers' property and casualty personal lines. With the addition of these policies, Vanguard is positioned to nearly double in size during 2002, said Toffoli.
Mike Toffoli's background in finance/accounting as well as his experience at the state's JUA made him a perfect match for Vanguard.
"We're the only agent-owned company, in the sense that the owners of the company are still agents actively involved in the agency business."
-- Mike Toffoli, President,Vanguard Fire & Casualty
Vanguard will absorb the wind-inclusive Florida policies in the homeowners, dwelling fire and condominium lines written by two of Bankers' property and casualty subsidiary carriers. These carriers will retain the ex-wind policies. To transfer the business, Bankers will non-renew policies with effective dates on or after February 25, 2002. With each non-renewal, Vanguard will offer a replacement policy.
Bankers President Robert G. Menke said that the arrangement with Vanguard is part of a "comprehensive corporate restructuring." Citing today's volatile insurance marketplace, Menke said the move "will both strengthen Bankers financially and reduce our catastrophe exposure. At the same time, it will provide business continuity for our agents and continued coverage for our policyholders."
But what is really interesting, and what speaks well for both Vanguard and Bankers, is that the arrangement came about in a way to safeguard Bankers' agent forces. "It is true that there were other bidders for Bankers' business," says Toffoli. "But some of them were non-agent friendly and Bankers, to its credit, wanted to make certain that its agents were treated fairly."
T.R. Jones & Co. principals and Vanguard Fire & Casualty founders, Tom Jones and Alan Lund wear two hats--as agents and insurers.
Lund adds: "As independent agents, we are not only committed to our policyholders, but also to our extensive network of independent insurance agents. We understand their challenges and motivations. Bankers' agents' contracts for the affected policies have been assigned to Vanguard with the same terms and conditions. If they are not already part of the Vanguard family, we welcome the new agents into our fold and they will receive our highest level of service. The transfer of these policies from Bankers to Vanguard is a positive transition for everyone," says Lund.
While Vanguard remains strong in its commitment to the Florida market, the company is planning further expansion into other southeastern states. The only obstacle was that the company could not obtain an A.M. Best rating until it completed its third year of operations--which it has now. Once the company receives a rating from Best's it will move on selectively up along the East Coast and Gulf Coast, says Toffoli. *
For more information:
Vanguard Fire & Casualty
Phone: (407) 622-2297
E-mail: info@vanguardfc.com
Web site: www.vanguardfire-casualty.com