As the "new kid on the block," American Wholesale
puts its clout to work for independent agents
By Elisabeth Boone, CPCU
Ernie Telford (seated), chairman, and Steve DeCarlo, president and chief executive officer, of American Wholesale Insurance Group, based in Charlotte, North Carolina.
Have you ever watched a race car driver zoom from zero to 100 miles per hour in first gear? If so, you have a pretty good idea what it's like to be American Wholesale Insurance Group. Established last year through the merger of several successful specialty wholesalers, AMWINS zoomed to the top of the chart to become the nation's third largest surplus lines wholesaler, with combined premiums in excess of $800 million. Made up of nine operating companies, AMWINS is also the largest independently owned wholesale brokerage organization in the country and is solely dedicated to serving retail independent agents and brokers.
Spearheading the formation of American Wholesale were two highly respected insurance industry veterans: Ernie Telford, chairman, and Steve DeCarlo, president and chief executive officer. Why did they decide to establish AMWINS, and what did they see when they looked at the market?
"It was a real meeting of the minds between me and Steve," Telford says. "I owned MTS Insurance Services (a West Coast wholesale and surplus lines broker) and had recently purchased a majority interest in New Century Global (a managing general agency and wholesale brokerage), and I was looking for a way to put these two companies together. I believed there was an important space in the market to fill: a large, independently owned wholesaler with buying clout to serve the independent agency and brokerage community. I'd known Steve for years; when I told him about my idea, I found out he wanted to do the same thing. He suggested we join forces so we could expand volume and complete our mission a lot faster."
Maintaining its own independence and working exclusively with independent retail producers are at the heart of the AMWINS philosophy. Its commitment to retailers is clearly articulated in the AMWINS motto, Because Independence Matters, and in its mission: To support retail agents by providing product and risk management solutions through highly skilled brokers and underwriters.
"If you look at the top five wholesalers in the country, the others are owned by publicly traded retail brokers or a bank, but the bank also owns a retail brokerage," Telford says. "We wanted to offer independent agents an alternative: an independent wholesaler with buying clout that wouldn't compete with them on the retail side. We know, because they tell us, that independent agents don't want to fill the treasuries of their competitors. We also believed that other wholesalers would want to connect with an organization that embraces that philosophy and would create an environment where wholesalers could continue operating as entrepreneurs and building their own businesses under the umbrella of our wholesale buying power." In this endeavor, Telford asserts, "Steve and I were on the same page from day one."
"AMWINS gives us the national critical mass to leverage our market influence to the benefit of our various program constituencies."
--Larry Bitner, President, Americana Program Underwriters
Steve DeCarlo directs overall operations for American Wholesale. He joined American Wholesale from Royal & SunAlliance USA (RSA), where he was a founding officer of Royal Specialty Underwriting, Inc. (RSUI), serving as executive vice president and chief financial officer, respectively. In 1998, DeCarlo assumed senior vice president responsibilities for business insurance operations for RSA USA.
"Ernie and I are such fans of the wholesale industry," DeCarlo says. "I've watched it evolve, and I really admire people like Ernie who created the wholesale organizations around the United States. These people did it on their blood, sweat, and tears, and they put together a great industry. To be an independent wholesaler with enough scale to truly support the retail community is a great achievement. If we can obtain enough capital to compete with the retailers that own wholesalers, we see that as a big contribution to the marketplace. For me, it's a thrill to work with Ernie because we think alike: How can we help retailers? Retailers have needs; how can we support retailers? It's fun!"
Adds Telford: "We also know from our conversations with insurance company executives that the marketplace is looking for alternative distribution channels. Wholesalers are aggregators, and insurers like the idea of a powerful new wholesale operation coming on board that is not owned by the '800-pound gorillas.' So far as product development, if we build a national platform, we believe the markets will use us for distribution." The hard market, Telford continues, is proving to be a boon for the new wholesaler. "Now that rates are up, there's a huge amount of new capital coming into the business, and it's looking for distribution channels," he points out. "We believe American Wholesale will be a beneficiary of that trend."
Decentralized model
Bringing together several wholesale operations, each with its own leadership, philosophy, products, and markets, is no easy task. American Wholesale is structured to capitalize on the strengths of its associated companies while allowing each one to operate with maximum flexibility and independence.
In conversations with potential candidates for acquisition, Telford observes, a common theme emerges. "There's a moment in business development when the principals realize the operation is getting big and they need to bring more management resources to the table. This is what we can help those business leaders do. Also, in this hard market, wholesalers are being deluged with new business, and they need to add more people to service those clients." Adds DeCarlo, "We can provide support services on a bigger scale and more economically, and let the principals keep doing what they do so well."
At AMWINS, "We have a very decentralized business model," DeCarlo says. "We value the entrepreneurs in these organizations; when we acquire a company, the entrepreneurs don't leave. We want the entrepreneurs to continue to run the business, and we support them with technology and other services. What we don't do from the center is sell. All sales are handled by the individual wholesalers, who offer highly specialized products to clearly defined markets." For example, he says, "One of our firms is involved in high-level brokerage transactions, with accounts worth as much as $5 million. We own another business whose only market is woodworking operations, mostly in the southeastern United States. It doesn't make sense to have those people interact every day, so our sales are decentralized, but we like to 'sell' to our retail community the fact that we have the resources of a team like Ernie's as well as other entities with different niches and expertise."
Now we can go to our retail independent agent clients and show them a much broader array of products and markets . . . they can come to us for all their needs.
Ron Benigno, Executive Vice President, MTS Insurance Services
American Wholesale's eight-member support team is based in Charlotte, North Carolina, and provides marketing, legal, actuarial, financial, and technological services to member companies. "Our decentralized model lets us be closer to the customer," DeCarlos explains. "Our nine companies are located throughout the United States, so they're accessible to retailers all over the country."
Cross section of wholesalers
The companies that comprise AMWINS represent an impressive cross section of the specialty wholesale market in both the property/casualty and life, health, and benefits arenas. The group also includes a premium finance facility.
Americana Program Underwriters. Operating since 1978 from its headquarters in Camp Hill, Pennsylvania, AmPro specializes in program/affinity management. The company administers 15 programs and has underwriting authority and policy issuance capability for seven major carriers. Programs include underground storage tanks, public entities, solid waste haulers, pizza franchises, physicians, private schools, child care centers, and fire sprinkler contractors.
MTS Insurance Services. Founded in 1980 by Ernie Telford and his partners, and based in Los Angeles, MTS is one of the largest independent wholesale and surplus lines brokers on the West Coast. MTS provides blending coverage packages for both small and larger insureds, working with markets in London, Europe, and Bermuda. MTS property teams handle large and hard-to-place accounts with multi-layered placements in these catastrophe-prone areas: Alaska; California; East Coast, Florida, Texas, and Caribbean wind exposures; New Madrid earthquake fault (mid-south United States); and the Northwest. The MTS casualty team arranges placements for difficult liability exposures.
New Century Global. Founded in 1977 and located in New York City, this managing general agency and wholesale broker has offices in California, Connecticut, New Jersey, Texas, and Virginia. It writes property, miscellaneous professional liability, umbrella, and financial products, and offers a casualty/public entity program, global alternative programs, and an armored car cash in transit program.
Specialty Programs & Facilities Managers, Inc. Based in Pasadena and established in 1997, SPFM operates throughout California and administers insurance programs for property owners and managers of residential and commercial real estate. SPFM seeks relationships with high-caliber agents and brokers who specialize in the real estate arena.
Woodus K. Humphrey & Co. Founded in 1984, this specialty managing general agency arranges property and casualty insurance for woodworking operations located primarily in the southeastern United States. Humphrey is based in Shreveport, Louisiana, and has field offices in six states that specialize in furniture manufacturing, pallet plants, sawmills, truss manufacturing, wood chip mills, and wood treating plants.
The Benefits Group. TBG, with headquarters in Metuchen, New Jersey, is a wholesale operation that serves brokers in the New York metropolitan area. The company has contracts with more than 20 carriers that offer group health, dental, life, disability, and voluntary products.
BrokerNetUSA. Based in Warwick, Rhode Island, this facility is a general agent for Blue Cross and Blue Shield of Rhode Island. The company gives retail agents access to products, programs, and affinity and association plans in these areas: COBRA, dental, FSA administrative services, group health, group life, long-term disability, and retiree medical.
NEBCO. Located in Warwick, Rhode Island, NEBCO is a general agent for Blue Cross and Blue Shield of Rhode Island and also is a GA for Coordinated Health Partners, offering group health and dental benefits through independent brokers in the state. Through other carrier relationships, NEBCO markets group life and disability, voluntary products, and individual term life and long term care. NEBCO designs, implements, and administers insurance programs nationwide for affinity groups, associations, Chambers of Commerce, employer/employee groups, and unions.
Bonnie M. Molaschi, CPCU, AU, is branch manager of MTS Insurance Services' Santa Ana office.
Capitol Payment Plan. This premium finance facility, located in Albany, New York, operates nationwide. Target personal lines clients are auto (one-year policies), homeowners, and motorcycle (one-year policies). In commercial lines, targets are auto, BOP, builders risk (one-year policies), fire, package, professional liability, restaurants, SMP, trucking, and umbrella.
Broad base of retailers
With eight strong wholesale operations under its umbrella, it's not surprising that American Wholesale does business with a large volume of retail independent agents and brokers around the country; currently the number stands at about 4,000--and, DeCarlo remarks, is growing every day. "What a great thing it is to say to our retail clients, 'We're just here to help retailers, to support the independent retail community.' It's a great banner to be waving. When we say, 'Because Independence Matters,' it has more than one meaning. Not only are we independent of being owned by a large retailer, but also we're independent of the insurance companies. We want our retail clients to know we're going out to several different markets to get the best deal we can for them. That's a big advantage, because some of our competitors are owned by insurance companies."
What's more, Telford notes, AMWINS has the markets and capacity to compete with the world's biggest wholesalers. "Recently, for example, we were called on to buy coverage for $500 million of property values in the world market. We know how to do that. We have the buying clout to let retail independent brokers go head to head with the top national wholesalers."
The various AMWINS entities, DeCarlo points out, represent different approaches to wholesaling that don't overlap or compete with each other. "For example, Ernie's firm, MTS, can go all around the globe to handle high-level risks with complex needs," he says. "BrokerNetUSA in Rhode Island is strictly a life and health wholesaler. The people at MTS don't have to worry that the people in Rhode Island are going to start selling their products." By expanding through acquisitions, DeCarlo explains, AMWINS can grow vertically by adding wholesalers that complement its existing units and fill market niches. AMWINS also is looking at ways to put more products on the table for its retailer clients. And, Telford notes, "We have some geographic areas we're trying to fill--the Midwest, Chicago, Atlanta--and those will be our areas of concentration as we move forward." DeCarlo sums up: "Our goal is to give our retailers a common experience of how they attach to American Wholesale. We want it to be a 'Wow' for our professionalism."
Pulse of the market
With premiums of over $800 million and growing, American Wholesale clearly needs to have its finger firmly on the pulse of the market. Key executives in its operating units share their insights into trends in program business as well as conditions in the property and casualty markets.
Programs. Larry Bitner, president of Americana Program Underwriters, has nearly 30 years of insurance brokerage and risk management experience. At Americana, he directs the design, implementation, and administration of property and casualty programs for association, affinity group, and captive clients. Americana was created in 1999 when Bitner purchased Sedgwick Affinity Group Services from Marsh & McLennan. Americana is a hybrid MGA/program administrator that operates in all 50 states.
"Of our 15 programs, our four most opportunistic in the current market are environmental industry associations, which is a refuse haulers program; Domino's Pizza, for whom we've been the endorsed broker for 12 years; our environmental unit, which includes EnviroGuard, AutoGuard, MuniGuard, and health care pollution liability products; and our fire suppression contractors program," Bitner says. "On our refuse haulers program we currently have unlimited capacity with the full support of our market, Zurich. Over the last two years, competition in this market has greatly diminished with few competitors left. Our average price increase on this business in 2002 was 28%, and for 2003 we expect an average increase of around 15%."
On the Domino's program, Bitner continues, "We have no limitation on capacity with our partner, Fireman's Fund; and we have only one competitor, which is a surplus lines market. We write on an admitted basis in all states. We saw dramatic price increases in 2002--almost 50%. We expect increases to moderate in 2003, but they may still average 12% or more." The primary risk factor in the Domino's program, Bitner explains, is the non-owned auto exposure; this, he says, accounts for the significant rate increases and the scarcity of competition.
In Americana's environmental unit, which writes pollution liability products, "Again we have no capacity limitations; and so far as competition is concerned, Kemper Environmental recently sold the renewal rights to its book to Zurich and is going out of the business," Bitner says. "With Kemper leaving the market, we have limited competition on a state-by-state basis, primarily AIG and Colony. We're seeing only modest price increases--less than 20%--and we expect no change in that over the next 12 months."
Americana's fire suppression contractors program is brand new. "This is a very distressed class, and we do have constricted capacity with our market, which is QBE," Bitner says. "There are very few competitors, and most of those are surplus lines writers. In 2002 the class experienced dramatic price increases, approaching 100%, and in 2003 we should be able to bring more pricing sanity to the market."
Why did Bitner decide to bring his company into the American Wholesale organization? "When I created Americana Program Underwriters, I wanted to find a partner that shared my vision of the new, aggressive, entrepreneurial MGA/wholesale facility," he responds. "American Wholesale Insurance Group demonstrated a focused commitment to the ideals I thought could lead to a dominant leadership role in this industry. I have not been disappointed. AMWINS gives us the national critical mass to leverage our market influence to the benefit of our various program constituencies."
What challenges does Bitner see ahead for the program business, and how will being part of American Wholesale help Americana respond those challenges? "We are blessed by the fact that we do not have capacity issues constraining our growth," he replies. "Our primary challenge is to maintain our various markets' continuing faith in our underwriting integrity and our commitment to the industries we serve. Being part of the AMWINS family gives us both the credibility of the country's largest independent wholesaler and the unprecedented opportunity to exercise the influence of our various sister companies, each of which dominates its own market segment."
Property. It's no secret that the property insurance market today is a tremendous challenge for independent agents. Ron Benigno, a 19-year veteran of MTS Insurance Services, is responsible for the firm's large property insurance brokerage and also assists other American Wholesale offices with large property accounts. Benigno brings to the organization both depth and breadth of experience in the domestic, London, and Bermuda markets.
"Originally at MTS we handled mostly large property risks, but later we made the strategic decision to establish middle markets," Benigno says. "It's been extremely successful, and now we're able to cover anything from very small exposures to mega accounts on a $1 billion scale."
He adds, "Our industry has become a lot more sophisticated since I began my career almost 30 years ago. We on the property side now make computer models of catastrophic exposures like Florida windstorms and California earthquakes," he says. "It's even possible to create computer models of terrorist activity in certain areas. The data from these models give insurers and reinsurers a much clearer picture of property exposures, and we believe that helps promote rate stability in the market."
Even before joining forces with American Wholesale, Benigno says, MTS purchased the RMS system so it could model data for insurers. "Modeling is a long and difficult process for companies because they have to do it on such a large scale," he comments. "To save them time, we input our data into files that our companies can put into their systems and use to generate their own models. This helps a company determine more quickly whether our risk fits its parameters and those of its reinsurers."
How did the World Trade Center terrorist attacks affect the property market? "After 9/11, a lot of capacity came into the marketplace chasing the returns available on higher premiums," Benigno says. "Bermuda started to become a factor between September 2001 and January 2002. At that time we were able to place terrorism coverage, although it was a very difficult placement. Since then, the market has settled on a course and is operating at optimum capacity on our placements. On January 2003 renewals, we saw that some additional property capacity was coming into the market, and that has had a stabilizing impact on rates. In the domestic market, depending on the risk, increases are averaging 5% to 10%, and on the very good risks we're seeing a leveling off. We heard much the same thing on our visits to London and Munich earlier this year, and also from Bermuda. We'll have to see, as the year goes on, what will be the longer term effects of this new capacity coming into the market; but for right now, flattening would be a good outcome."
How has joining American Wholesale benefited MTS Insurance Services and its clients? "Originally MTS was an MGA, and at about the time I joined the firm in 1984 it has become a surplus lines broker," Benigno explains. "At that time we had just a couple of markets and it was hard going, so I'm very proud of how we've grown. Joining American Wholesale is an extension of that growth process. Now we can go to our retail independent agent clients and show them a much broader array of products and markets. We have program expertise on the East Coast through Americana, plus underwriting expertise around the country and premium finance capabilities with Capitol Payment Plan. Independent agents don't have to deal with alphabet houses that compete with them on the retail side; they can come to us for all their needs."
Casualty. Drawing on years of strong underwriting casualty and program experience, Bonnie Molaschi helps develop leading-edge casualty solutions inside American Wholesale. Molaschi is manager of the Orange County, California, branch of MTS Insurance Services, which last year produced over $130 million in wholesale premium. The office specializes in arranging coverage for public entities, property owners/managers, course of construction, and construction-related risks.
"My primary task is to grow our casualty business, because MTS historically was very heavy in property production," Molaschi says. "I'm working to support some centers of influence for construction, where we write everything from small artisans to large home builders; we also handle management liability, excess workers comp, transportation, and general casualty business. We also write a lot of habitational business, both property and casualty, including hard-to-place products liability and municipalities. Basically, we write any kind of commercial risk that's nonstandard or hard to place. It can be because of the class of business or because the insured has had losses. On construction and habitational risks there are concerns about mold and water damage losses; even if they're small, carriers don't want these risks anymore."
Molaschi sees important benefits in the alliance of MTS and American Wholesale, and she's particularly enthusiastic about the actuarial support she receives from the support team. For example, she says, "We need to replace one of the carriers on an existing program. I did a five-year loss analysis, and I'm working with our actuary to develop a presentation for insurance carriers."
Commenting on current conditions in the casualty market, Molaschi says, "We're still suffering from the lingering effects of the long soft market. We have a tremendous need for tort reform. We still have construction defect issues--one estimate puts the loss ratio at about 300%--the mold problem, asbestos concerns, and the medical malpractice crisis. Malpractice litigation is making its way eastward from California, and that coverage has a 10-year tail, so there's a lot of concern about how those losses will develop."
Compounding these woes, Molaschi points out, insurance carriers are not getting the returns on investment they were enjoying in the late 1990s. Overall, she remarks, "Things are looking pretty grim. Rate hikes don't seem to be keeping up with developing losses, and there's concern that a number of carriers are inadequately reserved. In January Morgan Stanley said the industry was under-reserved by about $120 billion. I think we're all waiting for the other shoe to drop."
In light of constricted capacity and lack of price competition in the casualty market, Molaschi says, "We're seeing much greater use of high retentions or deductibles; we're seeing people buy lower limits; and underwriting is much stronger. Insurance carriers are focusing on terms of coverage, and our carriers like the fact that we do a lot of loss analysis and careful scrutiny of contract wording." What's more, reinsurance capacity is eroding in some lines, such as construction.
To retain markets in this challenging environment, Molaschi comments, "We need to be specialists, and we need to add value. We do this through our relationships with retailers and our expertise in the lines of business we handle."
Tough times, smart solutions
Seldom have times been tougher in the property/casualty market, and seldom have so many weighty issues placed such a huge burden on the industry. By opening its doors at this critical juncture and bringing its specialized expertise and buying clout to a beleaguered market, American Wholesale is creating an exciting new path for the independent retail community.
A big reason the AMWINS model is succeeding, DeCarlo believes, is "We're not trying to be all things to all people: an insurer, a retailer, a reinsurer, an M&A firm. We're totally focused on what we do: being a wholesaler for retailers." *
For more information:
American Wholesale Insurance Group
Gregg Calestini
Chief Marketing Officer
Phone: (704) 554-4850, Ext. 204
Web site: www.amwins.com