If the insurance market were a political campaign (where does he get his inspiration?), it would embark on a whistle stop tour from New York (a “blue state” as a result of a lack of reasonable purchase price multiples) through the “red states” of the Midwest (seeing red over a lingering lack of credit) to the Silicon Valley (“blue” over improving IPO’s being offset by California’s budget woes).

As always, our political process is underserved by the extreme wings of either party. On the “right”, you have the corporate fat-cats, otherwise known as the mega insurance brokers. In keeping with their platform, they put the needs of their largest corporate clients ahead of the middle market. Resources and personal attention follow the same path as the tax breaks – to the biggest contributors.

On the “left”, you have the special interest groups, a.k.a. the local agencies and regional brokers. In keeping with their platform, they are beholden to every constituency in an attempt to level the playing field for all.

As is usually the case, a reasonable alternative to the extremes appears before the electorate. The reasonable alternative is born of humble beginnings and remembers its roots. Yet, the reasonable alternative also recognizes that anything is possible in America (cue Star Spangled Banner) and it creates a bona fide American success story.

Equity Risk Partners has just completed the third year of its remarkable journey – a 412% compound annual growth rate and achieving profitability during the worst period for private equity in history. Equity Risk Partners is the only alternative.

Yet, if drafted, we will not run. If elected, we will not serve. That is because we are having too much fun building the only full service insurance brokerage focused exclusively on the private equity industry and its portfolio companies. Have you experienced Equity Risk Partners, yet? If not, then you probably do not get your urgent calls returned immediately. If not, then it’s likely that your portfolio company has disappeared into the abyss known as “local service”. If not, then your portfolio company is being represented by a marketing department it has never met.

We know what it is like to be a portfolio company. Heck, we are a portfolio company. We know what it is like to have to make payroll. We know what the “hard market” was all about – our insurance premiums increased, too! Most of all, we keep our campaign promises.

Now back to our program...

Continuing with our political theme, the following campaign slogans define the state of the insurance market in 2004:

“There Is No Floor in 2004”

And so it begins...

“We hope you enjoyed your recent visit to the hard market. Please visit us again soon.”

No significant catastrophe losses in 2003; An improving equity market; 30 or so months of significant premium increases and an itchy trigger finger; All add up to early signs of a softening market. As we will explore, several factors will prevent a quick return to the late 1990’s. But, the fundamentals are moving towards a buyers’ market.

“Beware of the Military Industrial Complex”

“Gee, Grandpa, is it really true that all of the p/c insurance is written by only four insurance companies?”

“No, Sonny, it only appears that way. When I was your age, the insurance industry was populated by many thriving insurance companies all competing based on their ability to more selectively pursue a reasonable premium in return for taking a reasonable risk. Nowadays, these kids - with their liabilities hanging out and their balance sheets on backwards - are all about consolidation. Why, I remember the days when a portfolio company was able to have a dozen insurers quote on their insurance program.”

“Wow, was that in the olden days?” “Yep, the year 2000.”

“D&O Is The Ticket – If You Stick With It”

2003 was a relatively calm year for D&O as compared to 2002. While the public company D&O market remains firm on the premium, as well as on the terms and conditions front, private company D&O and General Partners Liability began to soften somewhat in 2003. We believe both trends – firm public and softening private – to continue in 2004. We actually had one underwriter (who has since entered the Underwriter Protection Program) consider a multi-year policy before coming to his senses and laughing in our faces.

“Are You Better Off Today Than You Were Four Years Ago?”

If you are the property insurance market, the answer is no. However, you are better off than you were two years ago. The insurance industry has a technical term for the state of the property market – squishy. Not too hard; Not too soft; And, unlike Goldilocks, not just right, either.

The lack of major catastrophes in 2003, coupled with no significant terrorist attacks, have lifted the property market for 2004. Underwriting discipline is still tight and capacity remains below late 1990’s levels. However, the property market – driven somewhat by the fact it had the greatest swing after 9/11 – has had the most improvement of the major lines of coverage. Be careful, though. We are one major event away from a return to 2002 hard market levels.

“Have Pity On Liability”

The liability markets – auto, general, professional, excess – deserve your pity. They are so confused. They cannot make up their minds as to whether they want to be hard or soft. There are, and will continue to be, large swings in pricing and terms from risk to risk and, for a given risk, from insurer to insurer. There is not a good “rule of thumb” for the liability risks. As such, the annual renewal process takes on increased importance. Each risk must be strenuously marketed. Each submission must be complete and timely. Portfolio company involvement in the process is imperative. Then, cross your fingers and hope that the underwriter overlooks the hump on your back in favor of your charming personality.

“Workers Of The World – Unite!”

In workers’ compensation, each state has a different fee structure for repairing the hump on your back. Some states do not even recognize humps as a covered claim. As a result, the workers’ compensation market continues to be a mine field of explosive consequences – high benefits, escalating rates, and fewer creative options. The best defense against rising workers’ comp costs is a good offense – safety programs, senior management involvement, active claims management, diligent audits of payroll, class codes, and loss runs, and timely renewal marketing, including face to face meetings with underwriters.

Under separate cover, Equity Risk Partners will be releasing a white paper on the State of the Workers’ Compensation market.

“ERP - For The New Century”

2004 offers the voters a chance to continue the policies of the current administration or an opportunity to change direction. But, at this point in the process, it is too early to predict which path they will choose. Similarly, 2004 represents a cross roads for the property/casualty industry. Will the industry continue on the path of the “current administration” or will an outsider lead a change of direction and a “middle class tax cut”(premium reduction)? Only after all of the votes (losses) are counted will we know for sure.

But, we think you should expect the outsider to prevail.

As always, we thank you for your continued support and consideration.

Michael C. Marcon
President
Equity Risk Partners, Inc.