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By JACK ROBERTS, who consults with brokers, program administrators, insurance carriers and publishing companies

To borrow from Charles Dickens, it may be the best of times and the worst of times for program administrators.

Program administrators, along with everyone else in the insurance markets, endured seven years of a soft market with declining prices and aggressive competition.

Whether conditions will change very soon is anyone's guess, and there's not much sign of any hardening, even with a series of expensive catastrophe's for which insurers and reinsurers are on the hook to pay claims.

Because of market conditions, as one program administrator said, "Just to stay even, you need to replace at least 20 percent of your existing business with new customers. That's how competitive it is out there."

Meanwhile, during the past few years there has been significant consolidation within the program space. Historically, program administrators have been entrepreneurs and, as the entrepreneur becomes successful, they often look to sell the operation or merge with a larger firm.

With the soft market, however, with declining or flat brokerage revenues, multiples have declined from three years ago. But, buyers look like they are returning to the market.

Bill Mecklenburg, chairman, president and CEO of Redwoods Managers, said "There's still a lot of activity in the market. But the activity is higher today on the buy side." There remains, he said, a lot of capital on the sidelines waiting to be deployed and investors favor specialty acquisitions such as program administrators.

From the point of view of the investor, the most attractive prospects are program administrators "with historic underwriting profits combined with current earnings," he said. That will bring a higher price from buyers than the current market.

Mecklenburg's firm has an unusual investment strategy: buying minority positions, watching the investment grow and offering help to build the businesses.

A program administrator is a broker with a contract with an insurance carrier to sell, usually exclusively, a particular product or group of products to a specialized, niche market.

Usually the program contract is national or regional in geographic reach. The key characteristic of a successful program administrator is underwriting skill.

To be a program administrator, the broker must have binding authority--the pen, if you will--and the ability to write coverage directly for the insurance carrier.

"Program administrators are really underwriters," said Jeremy Hitzig, CEO of Distinguished Programs Group in New York and the president of the Target Markets Program Administrators Association (TMPAA). "To be successful, they must be rigorous in what they underwrite."

Balanced against the underwriting ability is the access and credibility among the retail brokers that service that market. "The key to success is being a strong distributor and an excellent underwriter," Hitzig said.

Distinguished Programs Group's niche is real estate, condominiums, New York and East Coast brownstones and other related property. The company operates programs for carriers Chartis, Great American and Ironshore.

"We like to insure things that would fall outside of the kind of real estate usually handled by the typical carrier," he said. For example, Distinguished Programs Group is a large writer of directors' and officers' (D&O) coverage for condominium associations.

Retail brokers, if they want access to the carrier backing the program, must come to Distinguished Programs because it is the only broker that can place coverage for a niche market through its carrier.

Today, Hitzig said, his firm is solely devoted to program distribution, with no retail brokerage. It's a wholesale broker, and for a carrier, program distribution is a way to outsource much of the underwriting and distribution to a very profitable market segment, even in a soft market.

Managing general agents, though similar to program administrators, may represent more than one insurance carrier to the same niche market.

Jino L. Masone, head of marketing, programs and direct markets, for Zurich North America Commercial, is a long-time player in the program space. "To be a successful program administrator, there is nothing that beats experience--experienced underwriting and claims experience."

Zurich looks at a program administrator as "basically operating a proprietary program with a single carrier. That program fits into the box defined by the carrier. With our program administrators, we want to outsource most of the underwriting to the program administrator," he said. Zurich is among the largest program carriers, operating about 70 programs throughout the United States.

There are no really good figures on the size of the program business market, and the TMPAA has hired the insurance research firm Advisen to document the size and the dynamics of the program business market.

The Argo Group is the sponsor of the research. Results are expected in the fall.

David Hampson, national partner for Willis Programs, is a fairly typical program administrator.

He was previously a principal with Kendall Insurance, once the largest independent retail broker in New England. Kendall made its name insuring the ski resort business. In 1989, the company was acquired by Coroon and Black, which eventually became part of Willis.

"We trace our program roots back 49 years," Hampson said, "to an insurance program now known as MountainGuard designed for the ski resort business in North America. The MountainGuard program continues to be the signature program in Willis' program operations. Chartis (and its predecessor AIG) has been the carrier on the ski program since its inception in 1962.

Willis itself is another example of a growing trend: greater emphasis by the larger national brokers on program business operations.

Typically, in the past, program administration was the home of the broker entrepreneur. And there are still many entrepreneurs in the program business brokerage, but there has been a movement for larger brokers to acquire program administrators, along with an increasing number of mergers among program administrators themselves.

Willis, for example, added to its program business operation with its acquisition of HRH in 2008.

"We're still on the lookout for those well-positioned acquisitions in the program space." Hampson said, adding that senior management at Willis views program business as a good growth opportunity. Hampson's program practice currently manages 31 different programs.

Hitzig's Distinguished Programs Group is also a player in the acquisition market. "We're looking for opportunities to build our organization through a program of acquisitions," he said. "Our core business has come through the soft market well positioned. With the current market, we believe it's an attractive time to make acquisitions."

Even the carriers are in the broker acquisition business for both program administrators and specialized managing general agents.

The Argo Group's Alteris organization acquires both managing general agents and program administrators. Argo also manages programs through its commercial operations.

Alteris will buy out a managing general agent or program administrator and let it continue to operate under the Alteris banner. In a sense, Argo uses its capital similar to a private equity firm that invests in insurance and insurance brokers.

"What we look for," said Hilbert Schenck II, president of Alteris, is for "a facility that underwrites and issues policies, and sometimes also handles claims administration."

Alteris' programs tend to be regional and national. "The No. 1 advantage of the program platform is that we can get into a line of business much more quickly when we partner with someone who has the expertise and experience," he said.

"MGAs and program administrators tend to be much more nimble than insurance companies," he said. "They understand the risks of the class better and know the attributes of a good risk."

Not only should a program administrator bring a strong or growing market share in a particular niche, but the portfolio of risks ought to be very profitable because of the broker's expertise, he said.

The conventional wisdom is that the effect of the soft market on the program business isn't as pronounced as it is on the rest of the industry. That presents program opportunities to carriers if you can identify the right markets, said Zurich's Masone.

Crop insurance, for example, has been a fine business for the past few years, he said. Not only that, but collateral protection or "forced placed insurance for financial institutions has been going like gang-busters."

That said, program administrators have hardly been immune from the soft prices. More carriers are entering new markets increasing competition and lowering premium prices, and that's making it a challenge for program administrators and MGAs, which focus on underwriting and profitability.

"We understand that top-line growth isn't always a good thing," said Schenck of Alteris. "You have to make sure the carrier's interest and the broker's interest are aligned. We are willing to ride out a market with our MGAs and program administrators.

"We look for producers that control blocks of business," he also said. "Those portfolios should perform better." And, he added, in terms of the soft market, "I think we're bouncing along the bottom right now."

Hitzig said the soft market and the weak economy have had a huge impact on the program business because total insurance exposures in all lines are down. But that also means it's time to focus inward on improving service delivery and processes.

"In most of our programs we could hold the line on price and we posted six percent organic growth," Hitzig said.

"Everyone is facing a soft market," Mecklenburg said. "I think it is less pronounced in the program space. There are fewer competitors and if you are truly niched you have the opportunity to differentiate your service through policy language and lend value through risk management, claims administration and really understanding the true risks of the market."

May 1, 2011

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