He noted that the level of needed underwriting profits can vary over the cycle because there is less pressure on underwriting when higher levels of investment returns are attainable. But “at no time can you produce a 20 percent return without an underwriting profit. You can't do it with an underwriting loss at all,” he said.

Markel Corp. recorded a 20 percent annualized return for the second quarter, partially on the strength of a combined ratio of 88. In New York, Navigators Group said its annualized return was 17 percent, with a combined ratio of 87.8 for the quarter.

Like Mr. Markel, Navigators CEO Stan Galanski understands the value of having a cushion of investment income but believes having an “underwriting culture” is paramount. Noting that Navigators' surplus has grown from $107 million in 2001 to nearly $550 million today, he said higher surplus and loss-reserve levels have boosted investment income for his company.

“You don't want people to feel pressure to write business–that their jobs are on the line” if they don't make some budgeted production goals.

Both also point to the diversity of their E&S businesses as a factor allowing them focus on underwriting discipline over production.

“Depending on how you define them, we've got 75, 80, 90 different products,” noted Mr. Markel. “There are always some in a growth mode,” even though the company might “be forced to ride down volume in others because of inordinate competition.” Having “a balanced platform,” he said, “allows us to be a little bit more cavalier in our commitment to underwriting profit than some of our competitors.”

Mr. Galanski said that “a big part of our strategy is having the ability to bob and weave–to find areas where we think there are opportunities, while not being afraid to shrink in others, and to be very upfront with our staff; that it's okay to let business walk.”

“There are some niches that just don't make sense” right now, he said, highlighting increased competition for commercial contractors liability business that he believes is pushing rates to inadequate levels. “When you're fighting against standard lines carriers” jumping back into that market, “why bother?” he asked. “We'll take our capital and go someplace else.”

“The residential market, we believe, is still priced at a level that's attractive. And then there are other geographic opportunities like here–New York contractors is still a true E&S business,” he said, in an interview during the Keefe Bruyette & Woods Insurance Conference in New York last month. “We're still in that market. The prognosis for that is good.”

Mr. Galanski attributes Navigators' ability to be flexible to a diversification effort that started back in 2001, and to a deliberate focus on technical pricing.

Diversification activities in the E&S business called Navigators Specialty have included last year's addition of a primary casualty unit in Chicago, which writes construction business east of the Rockies, as well as habitational and products liability, and an excess casualty unit back in 2004.

“We didn't enter those businesses just as an opportunistic hard-market play. We felt they were long-term businesses we wanted to be in,” he said, also noting that the expansion efforts changed the overall complexion of E&S business. While only about 47 percent of the Navigators Specialty book is in California construction today, the comparable figure five years ago was probably 95 percent, he said.

Very quickly, both new units are becoming core businesses of the company, he said, noting that they are also helping to build toward a strategic goal–”to have Navigators Specialty be one of the top-25 E&S companies in the United States.” (In 2006, gross premiums for Navigators Specialty were $311 million, and the bulk of that was E&S, Mr. Galanski said.)

KNOW WHEN TO WALK AWAY

Turning to more technical aspects of dealing with a soft market, Mr. Galanski said Navigators is in the process of rolling out a three-year strategy to its employees called: “Prospering In A Softening Market.” Although he didn't reveal all the details of the internal initiative, Mr. Galanski said “managing the cycle for Navigators has meant investing in infrastructure and taking technical price monitoring very seriously.”

Technical price monitoring means going beyond measuring renewal rate changes, which “can give false comfort,” he said–noting, for example, that when an underwriter reports flat renewal rate changes, that doesn't capture rates for risks that were not renewed.

Those non-renewed risks may have been written more competitively by another insurer, and “in order to write new business, that same underwriter may price new business more competitively than existing business,” he said. “So we're looking beyond renewal rate changes,” comparing prices charged to technical–that is, actuarially sound–rates, he said, allowing the company to know when to reduce its commitment from certain risks.

“You want to get that right because you can walk away too early and leave a lot of good business on the table, or [you can] walk away too late and [end up with] tens of millions of underwriting losses that could have been avoided,” he said.

Mr. Markel agreed. “We don't want to lose any business, and we will respond downwardly rate-wise where appropriate,” he said. “But all our underwriters know they're not going to get beaten up by management if volume drops–if they can effectively say that they did everything they could to hold onto the business at appropriate levels.”

“It ain't their first rodeo either,” he said.

Applying lessons of past “rodeos,” the response of Markel's underwriters and management team to a soft environment is simple, he said. “You step-up marketing efforts–getting out to agents and insureds to generate more opportunities at the plate. And you step up new-product development efforts to mitigate dependence on existing products,” he added, noting that new products can come through acquisitions.

“We have gained a reputation in the industry as a company that is absolutely willing and interested” in acquisitions, he said, noting that the company's long history of successes dates back to its first major acquisition in 1987–of professional liability underwriting manager Shand Morahan.

Since late last year, Markel has completed three acquisitions–an agency known as Prairie States in December, a unit of MGA Black/White specializing in social services in April, and Cambridge Alliance, a Vermont-based agency specializing in investment advisors E&O in August. Prairie States develops professional liability products that are distributed through 30,000 State Farm agents, with Markel participating as a reinsurer, according to Mr. Markel.

Markel created an office of business development last year, which looks for acquisition opportunities. It also develops agency management best practice guidelines for all of Markel's subsidiaries, and looks for cross-selling opportunities between them. “But the real rubber meets the road with marketing efforts” at the individual subsidiaries, Mr. Markel said.

“We've really challenged them to step-up their games–to get more travel, get more proactive with respect to agency relations, challenge service efforts and more,” he said.

While marketing teams may look to forge new relationships, “the real payback is in … getting more business out of existing clients.” In some cases, he said, these wholesalers may not be aware of new products; in others, they may be sensitive to issues that need to be addressed.

RELATIONSHIP BUILDING

At Navigators, Mr. Galanski said, “our distribution has fundamentally changed over the last half dozen years.” Historically, the company's largest producers had been multinational brokers handling global marine business, but when Navigators took the first step toward becoming a diversified specialty insurer in 2001–adding a directors and officers liability team which is now the core of the Navigators Professional business unit–wholesalers and retailers specializing in D&O were added to the mix.

“As our E&S business grew, almost by definition, our wholesale relationships expanded,” he said. “Today, if you look at our top-25 producers for Navigators Specialty, it's driven by wholesale. That's a big change because we didn't have that kind of footprint in the surplus lines business five years ago–and what we had was California-oriented,” he added, noting that the expansion of specialty business beyond West Coast construction led to appointments of wholesalers with whom the company didn't have business relationships before.

Navigators' most recent specialty initiative is the launch of a program division, announced in May.

“Our company started as an MGA”–New York Marine Managers–which operated a marine pool on behalf of other insurers, noted Mr. Galanski. “When you grow up as an MGA, you realize there are good MGAs out there with track records of making profits.” He pointed out that the marine pool's combined ratio was 78 over a 30-year period.

While he said that Navigators already has six or seven relationships with program managers, the new program initiative is designed to institutionalize quality controls and to cultivate new opportunities. “What strikes you is that some of the good quality controls that you have by having a program unit aren't necessarily going to happen by accident, that there is a protocol–best practices–to running a program unit.”

“As you might expect, the best programs don't move regularly,” he added. “You want to be in a position to react quickly and competently when a good opportunity does present itself.”

Building a program-business initiative is also part of the strategy in place at Liberty International Underwriters, according to Scott Bayer, senior vice president of the liability division in New York. Mr. Bayer noted that Liberty has successfully landed three programs since Executive Vice President Ted Nienburg was appointed a little over a year ago–an expanding regional liquor liability program now in nine states, a small painting contractors program on the West Coast, and a small national products liability program.

Noting that LIU is on the hunt for more, he said, programs that will be considered “are well-controlled niche businesses with homogenous exposures that are preferably existing books with large amounts of data,” adding that premiums should fall in the $2 million-to-$10 million range, if not higher.

“I don't have a number set in my head” for the number of programs Liberty would like to add, he said. “We're just open to new opportunities.”

Beyond the program initiative, Mr. Bayer said “the philosophy of opening up offices and expanding our geographic base has continued at LIU,” referring to an expansion effort that began in 2004, with the addition of offices in Chicago and San Francisco to complement existing offices in Boston and New York.

At the beginning of this year, he said, LIU opened a Los Angeles office for primary and excess liability business, and in September a casualty presence was added to an existing LIU office in Dallas that had previously only written first-party coverage. He termed the Los Angeles opening “a roaring success” based on submission activity.

“When we opened in San Francisco three years ago, we wanted to be closer to our clients and to have a presence in the largest surplus lines state in the country,” he said. More recently, the company “realized we needed to be closer to Southern California-based clients,” suspecting that there was some business that still wasn't coming its way from San Francisco.

That's been confirmed, he said, noting that Los Angeles has seen 400-to-500 submissions, while at the same time there's been no decrease in the number of submissions to the San Francisco office.

In spite of opening new offices, Mr. Bayer said the number of overall relationships with wholesalers has stayed at about 150. “But what we find is that when we open up the offices, we see opportunities from those existing relationships that we didn't tend to see otherwise,” he said.

“We're closer. We tend to see them more often. We're in their backyards. We're on their mind more often,” he added, noting that can help to put LIU first on their list. Instead of shipping business across the country, “we're right across the street.”

At Markel, geographic expansion has taken the E&S insurer further than many of its competitors, with the opening of an underwriting branch in Singapore.

“We saw it as a wonderful way to underscore our commitment to the Lloyd's platform,” said Mr. Markel, noting that Lloyd's opened a trading floor in Singapore a few years ago. It is also a way “to get our foot in the water in the Far East, and to transport some of our technical abilities,” he said, noting that the plan is to start with marine and professional liability.

“I don't think you can be in insurance–or any venture–worldwide without recognizing that the Far East is a power to be reckoned with,” Mr. Markel said.