“I want to believe [we're growing] because we do our business the right way,” he said. Illustrating how it can be done the wrong way by example, he reported a recent experience he had in trying to put together a D&O program for a bank with a premium price tag of about $5 million.

The agent for a bank that is being acquired had been asked to put an extended reporting period policy in place, Mr. Smith said. After asking for a copy of the quote, “what I got was a string of e-mails from this other broker,” he said. “Not a formal quote with terms and conditions,” but e-mails put together one after the other. “It was this guy said this, this guy said that, and here's a copy of the e-mails,” he said.

“I just find that appalling,” Mr. Smith continued. As a customer, “if I were going to spend that kind of money, I would want a document in front of me explaining everything,” he said, reporting that his firm routinely delivers that type of analysis on D&O programs.

With wholesaler quote documentation levels varying widely, “I think the reason we're growing is that we deliver consistently quality work,” Mr. Smith said.

As wholesalers, “we need to be aware of what the customer needs,” he said. If a customer needs a thorough analysis of the marketplace made, then “we can put a spreadsheet together of all the markets we went to, why we're recommending the proposal that we are, and why the others–including some that might be less expensive–should not be entertained because of huge gaps in coverage.”

At NAPCO, Mr. Pagoumian noted that his firm specializes in property-catastrophe insurance coverage. “We breathe and live property-cat, and our higher cause is to be experts in property insurance and related services,” he said.

“When information comes in to us, we analyze that in a very comprehensive fashion. We go out of our way to explain to our retail partners what all the exposures are” based on an array of different catastrophe modeling tools, he added.

“We're not just one of these brokers out there that is matching a risk to the market and getting a quote. Taking a risk to market is the very last phase of the process that we do,” Mr. Pagoumian noted.

“We do a lot of the upfront work that enhances the risk management process,” he said. The upfront modeling “allows us to analyze a risk, make appropriate risk management decisions with our retail partners, and then with that intelligence, we know how to size up the right markets.”

Mr. Smith said private ownership allows his firm–which includes a property and casualty wholesale division, a professional liability division, a managing general agency and a programs unit–to invest in product development.

For example, he said his firm recognized several years ago that cyber liability and privacy exposures were very real, in the wake of a multimillion-dollar exposure at a supermarket chain that had compromised personally identifiable customer information from credit card records. (See http://bit.ly/9lnAnV for more on data breach exposures.)

“We invested in a staff of people to become experts in that. I don't think a lot of our competitors, who are crunching the bottom line so much, have the ability to bet on the long haul,” he said, referring to firms owned by private equity.

PE firms aim to take the money entrusted to them by investors and deliver returns above alternative investment vehicles such as bank accounts or stocks. In some cases, they may be looking for as much as 20 percent per year to double their money over a five-year time horizon.

In the wholesale brokerage world, “we all know that even though we can grow every year, it's not without a lot of struggle and strain,” Mr. Smith said. “I would not tell you that we're growing at 20 percent a year. We haven't for a number of years.”

“We're privately owned, and we understand that we have chosen an industry that has cycles,” he continued. “While I'm pretty adamant about growing regardless of the cycle we're in, I don't expect 20 percent in these conditions.”

Pressured by outside investors, he said the other firms are forced to do away with expenses to try to grow their bottom lines in these conditions.

When a customer calls them about cyber privacy, “they'll put somebody on the phone, but [not] somebody who spends all day, everyday on that,” Mr. Smith said.

“We have a dozen other products like that here,” he said, giving the example of private school and college programs focused on the privacy issue, and special tuition-reimbursement coverage arranged last year in the wake of the H1N1 epidemic in the event that schools had to be quarantined.

DARK CLOUDS MOVE

Separately, executives of Swett and Cooper Gay, as well as AmWINS and Colemont, which teamed up for this year's two mega-mergers, say their deals have “raised the bar” for others–further diversifying their businesses, expanding footprints internationally and giving more resources and technology to employees to efficiently perform their daily work.

Against the backdrop of the merger wave, several startups have also made a big splash, including R-T Specialty and MarketScout Wholesale.

RTS is the wholesale broker division of Ryan Specialty Group, launched by former Aon Chief Patrick Ryan and Tim Turner, former president of CRC Insurance Services in California.

MSW, a new wholesale and consulting division of MarketScout, a Dallas-based electronic insurance exchange, is headed by industry veteran Glenn Hargrove.

All the noise, Mr. Pagoumian believes, is good for the distribution channel.

“The activity in that area would suggest that the wholesale platform is alive and well and that the dark clouds are gone,” he said, referring to troubles that have been looming since former New York Attorney General Eliot Spitzer's investigations of the insurance brokerage industry's abuse of contingency fees in 2004, in terms of bid-rigging and account steering.

“Wholesale has demonstrated itself through this period of adversity with not only the credit crisis, but even Spitzer,” he said, recalling that in the wake of Mr. Spitzer's investigations, the “alphabet-houses” (the big-three retailers–Marsh, Aon and Willis) sold their wholesale divisions.

First Joe Plumeri, CEO of Willis, said wholesalers were a conflict and Willis divested Stewart Smith, he noted. “Then there was a knee-jerk reaction” from the others, he said, recalling Aon's sale of Swett and Marsh's sale of Crump.

Mr. Pagoumian said wholesalers struggled with an issue he refers to as “distribution credibility” in the post-Spitzer era. In the “age of transparency,” insureds were asking, “Who is on my [placement] deal? What are you making on my deal?” In some cases, they were finding out that a wholesaler was on their deal for the first time, he said. “So everyone was being asked what value do you bring to the table?”

Mr. Pagoumian has written a whitepaper to address the misconception that more parties to a transaction add to the cost with another layer of commissions, arguing that specialists can actually deliver more economically sound insurance programs–broad coverage at lower premium costs.

When you're using a specialist who has done the same thing a thousand times, “his experience of repeatability brings efficiencies to the table,” he said.

(The whitepaper, “Wholesale-nomics,” is available on NAPCO's website at http://www.napcollc.com/articles/WholesalenomicsWhitePaper.pdf and on the website of the National Association of Professional Surplus Lines Offices, Ltd. at http://www.napslo.org/imispublic/PDF/Publications/Wholesale-nomics.pdf.)

Beyond the whitepaper, specialty wholesalers like NAPCO have simply demonstrated their value–and the recent merger and startup activity is further proof “that wholesale is still a very vibrant distribution channel for insurance.”

“It's all good,” said Mr. Pagoumian, who like Mr. Smith and other wholesalers say the “word on the street” is that venture capital money wanted higher returns than the soft-market environment could produce and wanted out of their investments–prompting some of the deals.

“But the fact that there is the next capital provider that believes in the wholesale platform demonstrates to me that we're still ready to rock and roll,” he said.

NOT CATCHING THE WAVE

Wholesalers interviewed by NU said they are rocking and rolling without any particular pressure to find merger partners–instead finding opportunities emerging from the activity occurring around them.

Even in a market where retailers have been paring down the lists of wholesalers they work with, Mr. Smith said his firm can demonstrate clout. Taking the example of umbrella liability, he said that with less capital than the mega-wholesalers, his firm does not just demonstrate access to the same umbrella markets but promises to deliver “the best kind of access.”

That can result from being the biggest wholesaler for a top insurance company market in a region or from being one of the top-10 in the country, he said.

He conceded that alphabet houses and second-tier retailers have talked about whittling down lists of wholesale partner choices to the biggest three property and casualty insurance wholesalers.

“The interesting thing about this theory is that the quality of the people [at these wholesalers]–just because they're big–is uneven,” he said. “There are some very good brokers at each of those firms, but they're not great everywhere.”

He added that “we're still small enough where we have standards across the board. An agent calling here should get the same kind of quality from everybody that answers the phone. It's not like I have never had chances to sell before, and it's not like I'm never going to sell. But getting bigger to get bigger doesn't interest me. Getting bigger to get better does interest me.”

Like Mr. Smith, Matt Nichols, president of All Risks Ltd. in Hunt Valley, Md., said private ownership gives his firm some freedom to invest in people and product development. “We're hiring aggressively. We're building new programs. We're building our brokerage teams. We're putting those people on board throughout the entire country, and we see 2011 as the year to getting back to growing,” he said.

He believes some new startups emerged as a consequence of M&A activity. In some situations, brokers who were working at a firm involved in a deal may now find themselves working at an organization they had previously left to join a competitor, he said. “When they end up back at the old place because of an acquisition, you have some normal attrition where people don't want to work there.”

“It ultimately gets back to what defines the E&S marketplace–this entrepreneurship where you're always going to have people trying to figure out how to build a business or run a business. Once they do that, you're going to have people branching out and wanting to do it on their own due to an assortment of circumstances,” he said.

All Risks–which has been privately held for 46 years and has maintained a stable team of executives and top-level sales people during the soft market–views activity outside its doors as an opportunity to pick up more business from existing retail clients. In particular, Mr. Nichols said business comes from retailers who do not want to start working with another wholesaler when the individual brokers they worked with jump ship to launch or join a startup.

He believes M&A will continue in 2011, as some wholesalers without perpetuation plans seek buyers. “After the last two years, there are some folks that maybe right-sized in their mind what the multiples are in order to sell their operations,” he said. “The big boys are going to still determine that this is the one way they can assure themselves of growth.”

Undaunted by talk of deals that tout global expansion benefits, Mr. Nichols said All Risks is “keeping it basic” and sticking to growth opportunities in the 50 U.S. states and Washington, D.C. “The opportunity to grow simply by doing what we do is larger than any opportunity that's out there.”

The company already has a diverse platform that is one-third binding authority, one-third brokerage and one-third programs with a sprinkling of personal lines, he said.

“Frankly, even though we're one of the largest independent wholesalers in the country, we are a rounding error in terms of what makes up the entire U.S. wholesale marketplace from a volume standpoint,” he said. International business, he believes, “can be a very strong distraction and certainly could be a significant financial drain if not done right from the get go.”

Mr. Pagoumian said NAPCO feels no immediate compulsion to join the merger wave either, even though the organization does get approached with such opportunities because of its recognized property-catastrophe expertise. “The pressure I have is figuring out how to become even better at what we do so we can continue to stay ahead of the pack in our world,” he said.

“If the right story comes along, then that should be considered. But so far on our end, our story is maintaining our independence, growing organically [and engaging in a series of] small-scale experiments relating to our part of the industry,” he said, describing an in-house property valuation tool as one example.

The tool will put a library of responses to past property valuation questions given by NAPCO experts in the system, giving brokers the ability to sort those by industry, size and other characteristics as they attack future valuation questions.