Way admits, however, that deals with unadvertised specialty agencies, with owners not keen to sell, are obviously among the hardest to make. “You're only up against the person who owns it, but he doesn't want to sell.” 

Way is the founder, former chair and CEO of Houston-based HCC Insurance Holdings, a publicly traded group of insurance company and underwriting agency subsidiaries, where he gained most of his experience, including buying more than 35 agencies. Way started HCC in 1974.

Like HCC, HIIG, which started four years ago, is a holding company for operating businesses rather than an investment vehicle. It currently has five subsidiaries: Imperium Insurance Co., Houston Specialty Insurance Co., Great Midwest Insurance Co., National Health Insurance Co. (a life & health company), and Bunker Hill Underwriters, which now includes CSI.

Way, a 40-year veteran of the industry, spoke to NU recently about his agency-acquisition appetite at HIIG going forward; a recent merger with an ailing carrier group; and his dead-certain views on the potential for a market turn. 

First, we asked about the October 2010 merger deal that linked HIIG, then called Southwest Insurance Partners, with Lightyear Delos Acquisition Corp.—a holding company for Delos Insurance Co., a N.Y.-based program-business carrier, and Naxos Insurance Co., a surplus-lines insurer—which was formed by private-equity firms Lightyear Capital and Trilantic Capital Partners.

Q: Why did you view the Lightyear Delos deal as a good opportunity?

Way: Lightyear Capital was looking for new management for their insurance operations. They had owned Delos, which we now call Imperium, for about five years, and they had some management difficulties. Their results were less than stellar. They were sort of perplexed as to what to do.

They didn't want to sell at a low point in the market, when valuations are not high and when the company results were not conducive to a good sale anyway. They asked us if we would be interested in having them contribute their insurance companies into our group so that we could manage them. And after lengthy discussions and due diligence, we agreed.

Q: Since results were “less than stellar,” have you terminated some of the Delos programs?

Way: We eliminated about 75 percent of their premium. We canceled the majority of their programs, and they're in runoff now.

We also terminated all of their senior management—every one of them. That's pretty bad, but the results were not worthy of those folks keeping their jobs.

Q: So what made the deal attractive?

Way: It's a great platform. We picked up an admitted insurance company with 50 licenses, and a surplus-lines company, which we didn't have, with 48 licenses. And frankly, we picked up cheap capital because after we strengthened their balance sheet by making them take a reserve charge, we then picked up the balance of their capital at cost.

Q: You have said that the market will not turn until there are some high-profile carrier failures. Assuming we're close to a turn, and that some carriers are having financial problems, would you have an interest in buying them?

Way: I'm not really a buyer of distressed insurance companies. That's sort of like running an orphanage. It's a good thing, but I'd just as soon let somebody else do it.

This particular situation [the Delos deal] suited us because it really helped our basic platform by providing us with things we needed.

Having said that, if there was a way to separate bad business from potential good business, it might be interesting. But it's extremely time-consuming. And in the end, the cheap capital becomes not so cheap when you have to deal with runoff issues.

As to the market-turn inference, we are not at the end of the soft market. We might see some increase in property rates, but there is no hope of casualty business [hardening]. You can quote me. There's no hope.

Rates aren't going up. In many cases, they are still going down. They are woefully low at this point, and if the industry didn't have the reserve releases we've been seeing over the last 18 months, we would already be seeing red ink.

Q: Are you interested in buying insurance carriers at all at this point?

Way: Sure. There are companies out there that have good platforms and good books of business that could be managed a little differently—companies that are a bit lost coming out of one of the greatest hard markets in 30 or 40 years—maybe ever.

If you've got a management team that's only good in a hard market, then what are you going to do most of the time? There are very few well-run insurance companies.

Q: Why was the CSI deal attractive?

Way: That's a typical acquisition that we would like to make. If you were to describe our perfect acquisition, you could almost describe CSI. It's an independent underwriting agency with a quality book of business that is very specialized. It has good results and people who would remain with the agency. That's a perfect package for us.

Q: Is there a particular agency size that you're targeting?

Way: We're very flexible. We would do deals as small as $10 million and as big as $500 million. We're not limited by size because we have access to lots of capital.

We could do a big deal if we had the inclination. But our sweet spot right now is in the $10-$20 million underwriting agency. We want their business, we want their distribution, and we want their talent.

Q: Are you seeing a lot of other opportunities that fit in that sweet spot, beyond CSI?

Way: There are a lot of underwriting agencies around. Unfortunately, there aren't as many good ones as you think. A lot of them that are out there are fighting for the same business—“stereotype business”—just general commercial lines.

In addition, many agency owners tend to have a higher opinion of their valuation than is realistic, with less business and lower profit contingencies contributing to margins in a soft market. So it's hard to make a deal with an agency unless they really have something that they specialize in, which you can pay a premium for. 

Q: Do you have any in the pipeline?

Way: We're probably always looking at two or three deals at any given time, but not too many of them come to fruition because either the price is wrong or it's not a good fit. People are under the misapprehension that a small deal is easier than a big deal, and in many cases it's quite the contrary. Dealing with a small business that's a little unsophisticated financially can be more time-consuming and difficult than dealing with a larger one that has more resources to turn to when they're in negotiations.

Q: Why would those agencies that really specialize choose HIIG over competing potential acquirers?

Way: We provide a place where entrepreneurs can sell their businesses and continue to run them, and not just disappear into a corporate mass.

These days when a privately owned agency is bought by a public company, they are showered with such tremendous amounts of regulations and rules, and they get lost. It's very hard to keep an entrepreneur—someone who has spent his life doing his business—interested and focused when all they have to do is answer more and more questions and send more and more memos.

Of course, we're regulated because we're in the insurance business, but we're not suffocated like a public company is.

Also, when we buy an agency, we're satisfied that the people in it know what they're doing, and we don't have to run their business for them. We give them plenty of room to do their thing. We provide them with more resources, capital, whatever they need to grow their business. But we don't get in their way.

It's important to understand that because if you lose the key people at the agency, then what did you really buy? There are no hard assets there. It's just people.

Over the years, in the agencies I have bought, the sellers have wanted to continue to grow their businesses, they want to continue to have jobs for their employees, and they want to work in an environment that doesn't totally overcome them. That's difficult to find. So we're sort of an oasis—a privately owned company that gets it.