“We're getting there,” Mr. Cavaness said, reporting on a recent expansion that brought RPS's Northeastern standard lines strategy to the Southeast.

“It's exciting to us to be able to provide standard lines business to the smaller independent agents to give them a competitive advantage,” he said. He explained that RPS is essentially giving the small retailers, which are too small to support contracts with national standard carriers, more products to sell that they can't get access to on their own.

As for the broader strategy of bringing everything RPS has available to customers across the nation, Mr. Cavaness said implementation steps include “studying the various parts of the country, finding the places where the need exists and then basically opening offices.” In some cases, RPS will hire locally to staff the offices, but it also intends to give current team members opportunities to relocate if they would like to advance their careers to higher positions, he said.

New office launches and acquisitions have both been dual mainstays of a growth strategy that has propelled RPS from a Chicago-based entity with four employees to one that now employs 900 people.

“Our growth has been very solid,” Mr. Cavaness said, “and we will continue to grow it exactly the way we've done it for the past 13 years—opening new offices, hiring new people, and doing mergers where the combination of our firm and the merger firm make sense for them and for us,” he said. Deal activity hinges on finding “a good strategic and cultural fit,” he added.

“One of the benefits of being a larger firm is that we do have the resources and ability to continue to take the money we make and reinvest it into our business in both of those ways,” he said.

While acquisition and organic growth are still equally important strategies, Mr. Cavaness explained that RPS completed fewer mergers last year than it had done historically simply because it's a very tough time for some firms to sell.

In December 2010, RPS's parent company, Arthur J. Gallagher & Co., announced just one wholesale deal—RPS's acquisition of wholesaler Continental Excess & Surplus, trading as Continental/Marmorstein & Malone in Paramus, N.J., and its affiliate, All Risk/CESI, LLC of New York City. In contrast, between 2000 and 2008, RPS completed 20 deals, averaging more than two each year.

For some, “it just doesn't economically make sense right now. In a very deep and prolonged soft market, they have not done as well as they might have six or seven years ago. So people have a tendency to hold off,” he said.

What about the prospect of being involved in a mega-merger, akin to the combinations of Colemont and AmWINS or Swett and Cooper Gay—two headline events for the surplus lines industry last year?

“We have never done a bigger deal. That's not to rule us out from doing one, however,” Mr. Cavaness said. “The bigger deals that have been on the market really didn't seem to fit our culture.”

Asked whether he thought there would be more large mergers in the surplus lines industry this year, Mr. Cavaness said, “Absolutely I do.”

“There has been a lot of investment in the wholesale business by private equity and others who typically want to monetize their investments within a period of time. [They] hope to make some money in the business, and they will continually look for an exit strategy. If one pops up, they will be more inclined to take it,” he reasoned.

EXTERNAL CHALLENGES

Mr. Cavaness spoke to NU recently in advance of his participation on a panel of surplus lines executives at the 2011 Mid-Year Leadership Forum of the National Association of Professional Surplus Lines Offices, Ltd. The NAPSLO meeting is set to be held Feb. 23-26 at Naples Grande Beach Resort in Naples, Fla.

Mr. Cavaness, a member of the board of directors of the Kansas City, Mo.-based group, and two other E&S executives—Tony Markel of Markel Corp. and Kevin Westrope of Westrope—are scheduled to share their visions of leadership and views on current challenges, including the issues that keep them up at night.

Giving NU a preview of the event, Mr. Cavaness said that what he worries about most these days are hidden, game-changing external events that force broker leaders to turn their focus away from the internal day-to-day tasks of running their businesses, referring to the type of unforeseen situation that existed across the industry in the middle of the last decade when regulators launched investigations of broker relationships and contingent commission agreements.

 Mr. Cavaness said: “We operate in an environment that we all still feel and felt at the time was proper.”

“The amount of effort and time that really was expended in trying to show what everybody was doing was proper takes your focus away from running your business,” he said.

More generally, he said, “It's not easy to run a business these days. You've got to deal with things like Sarbanes-Oxley, what's going on with federal surplus lines reform—trying to weave your way through 50 jurisdictions of government—and making sure that none of the balls get dropped,” he said.

“When you're in a firm that's fairly large and you have a lot of people doing a lot of different things, you want to make sure nothing falls through the cracks.”

Mr. Cavaness described some of the processes in place at RPS to prevent that from happening. “We have a very strong professional standards program that we audit every single quarter to make sure that we're operating properly,” he said, noting that risks of all operations—“everything from technology to underwriting to finance”—are assessed from an audit perspective to RPS's professional standards.

“We conduct those [reviews] on a self-audit basis every quarter within every office,” he said, adding that physical audits of roughly 50 percent of each office are completed every year. “So on a two-year rotation, we actually do physical audits of each location.”

Anticipating some other questions that might be discussed at the NAPSLO Forum, NU also asked Mr. Cavaness to share his observations on conditions in the property and casualty insurance market and the pace of economic recovery in United States.

RPS's president said he sees small improvements in both areas from his vantage point.

He described the market as one undergoing “a slight flattening out,” rather than broad change. “There's no longer a 'free-for-all' of price cuts, but on certain individual accounts there are still pockets of craziness—prices dropping 40 percent on isolated large accounts.”

On the flip side, he reported that there is a slight lack of capacity for smaller accounts in the wind zones. “We're seeing a little bit of pullback, especially in the London market in wind capacity because of changes coming about with the RMS [Risk Management Solutions] model and the impact on their cost of reinsurance,” he said.

Beyond that, he said the market remains unchanged. “The insurance companies do still perform fairly well. The results look to be pretty decent,” he said, noting that there hasn't been any large U.S. catastrophe causing carrier financial results to deteriorate. “The market is what it is, and we're just going to continue to find ways to get out there and battle it out,” he concluded.

Turning to the economy, Mr. Cavaness reported that the managing general agencies within the RPS organization are starting to see additional start-up businesses coming into the submission flows, which may be a positive sign for economy recovery.

He also said that in the workers' comp line, RPS is no longer seeing the levels of return premiums that were typical eight-to-18 months ago.

“I wouldn't call it dramatic change, but certainly there is change,” he said.