Specialty personal lines proves profitable for young insurer

By Brett Hanavan

McGraw 2

McGraw Group/Pacific Specialty Insurance Company executives include: (seated, from left) Brian J. McSweeney, executive vice president/general counsel; Michael J. McGraw, president/CEO; (standing, from left) Richard L. Fowler, CPCU, chief financial officer; Susan Valencia, vice president/underwriting; Tim Summers, executive vice president/government relations and product development; and Brian Weaver, vice president/sales and marketing.

Family tradition has been portrayed through the years in a number of art forms, including television series about people with the last names of Walton, Huxtable and Wilder. Family tradition is as important in today's society as ever. It is championed in rock and roll via the current "Family Values Tour," and among sports teams that adopt the We Are Family song made popular by Sister Sledge. Sports teams and rock stars, after all, strive for the kind of togetherness that is present in a family unit.

The family unit is alive and well

Just ask Mike McGraw, president and CEO of Pacific Specialty Insurance Company, how important the traditional nuclear family unit is. He'll tell you it is thriving. McGraw's father was a self-made entrepreneur and successful businessman who left a top-level position at age 46 to start what was then the McGraw Group, but later evolved into Pacific Specialty Insurance Company (PSIC).

Based in Menlo Park, California, a southern west bay suburb of San Francisco, McGraw Group moved to this location in 1989. It also has a Southern California satellite office that houses about 80 employees located in Anaheim, California.

McGraw says that Menlo Park is essentially operations headquarters for management of claims, management information systems, product development, and accounting departments.

Underwriting and higher level underwriting decisions, processing, customer service and data entry are all managed in Anaheim.

Pacific Specialty Insurance Company is the flagship of the McGraw Group of Affiliated Companies. The carrier strives to be a leader nationwide in writing motorcycle and personal watercraft coverage. PSIC also offers automobile, homeowners, boat, motor home, mobile home, and commercial products. It is rated A (excellent) by A.M. Best Company and is admitted in all states except Vermont and New Hampshire.

The company offers the following personal lines products in California, Texas, Georgia and Arizona: auto, motorcycle, umbrella, personal watercraft, mobile home and homeowners. Motorcycle and automobile programs also are available in Hawaii, and motorcycle coverage is available in Michigan, Indiana, Ohio, New York and Pennsylvania. In addition, mobile home coverage is offered in South Carolina. Personal watercraft is written in all states.

McGraw 1 Mike McGraw continues the tradition that began in 1976 when his father, Jack, founded the McGraw Group.

The McGraw Group, started by Mike McGraw's father, Jack, in 1976, became primarily a carrier in 1989, and absorbed all agency business into it. Now it boasts several entities under its hat.

* McGraw Insurance Services, founded in 1976, is a managing general agent surplus lines broker, Lloyd's correspondent, and the exclusive affiliated program administrator of Pacific Specialty Insurance Company. It is perhaps best known as a large writer of motorcycle insurance in the western United States. It is also one of the largest writers of personal watercraft insurance.

* McGraw Commercial Insurance Services is very much like its personal lines counterpart in that it is a managing general agency and surplus lines broker. However, it specializes in niche commercial package products, including used automobile dealers, beauty shops, nail salons, cleaning and landscaping contractors, agriculture, and service station packages.

* Western Service Contract Corporation, also part of the McGraw organization, is an independent motorcycle and personal watercraft service contract provider. Western Service Contract Corporation offers additional protection beyond the manufacturer's warranty. Together with Western's Gap Protection Program, Western's F&I products allow licensed motorcycle and personal watercraft dealers to establish long-term relationships with their customers beyond the initial sale of the unit by providing this extended coverage.

* Pacific Loan Administrators, a premium finance loan administrator, provides an additional financing source and flexible payment schedule for insureds.

"We focus on one theme," McGraw says. "That is to provide the broadest line of personal lines products offered by a carrier. We have a detailed and very broad range of products. So, when it comes to personal lines we call ourselves the 'one spot.' We've been slowly expansive. We offer what we term core, one-spot products focused in Arizona, California, Georgia, and Texas. We offer a personal watercraft program in every state and we're slowly rolling out a motorcycle product in every state."

PSIC's roots are in specialty personal lines. "We've always been the largest writer of motorcycle insurance in California," McGraw says. "After starting out as an insurance agency, we founded the insurance carrier portion of the company in 1989. In 1994, we began exclusively offering insurance contracts. Everything was rolled into the carrier company. We went from that slowly and added personal watercraft, jet skis, etc., and specialized type risks."

McGraw says that the group eventually entered the homeowners market heavily, in the wake of opportunity that occurred following the 1994 Northridge, California, earth-quake. He says that Pacific Specialty is now one of the top 25 writers of homeowners protection, based on written premium, in California.

PSIC is unusual in that it willingly and openly provides insight into the size of its book of business. It's right there on the company's Web site, with no secrets and no fancy presentations. PSIC's annual direct premiums written exceed $60 million. Total assets are $115.5 million with a policyholder surplus of $57.5 million.

McGraw says that the company's five-year average pretax return on equity and revenue measures 60% and 30% respectively. He says it is evidence of the company's stable operating profitability led by profitable underwriting operations.

McGraw 4 Mike McGraw (seated) credits his executive team with contributing to family values and family success. Two members of the team are Tim Summers (standing, left) and Brian McSweeney.

McGraw clearly bases his company's success on pride in quality underwriting, saying that the focus on underwriting through good times and bad is what has helped achieve ongoing, consistent success.

PSIC writes all its business through independent agents. And with California being its home and a major part of its market, there have been some challenges here. But who in the independent agent system doesn't face challenges that tend to rise and decline?

"We've overcome our biggest challenge in California, and that is achieving an underwriting profit," says McGraw. "Getting the right premium for the developed, true exposure is a tried-and-true concept," he adds. "This success has distinguished us from others. We have a five-year combined ratio that at one time was in the 70s but now still is successfully in the low 80s. We're one of the most profitable in the U.S. by margin."

With an underwriting focus solidified in its yearly business plan, McGraw Group's underwriters consider virtually every risk on a detail-by-detail basis, assuring that it gets appropriate premium for the true exposure. According to McGraw, its pricing has been steady throughout the ups and downs in the overall market.

"When the market is soft, we'll write less premium," he says. "You build loyalty through good times and bad, and there is a certain amount of loyalty and respect among independent agents and organizations like ourselves."

Right now all things are looking up, but every time we go through a cycle, we still get bigger and bigger, and fewer agents leave us. It speaks for our professionalism and customer service. This is a sign of that loyalty," McGraw adds. "A certain percentage will always go to established direct writers or the youthful Internet, but we're trying to close those margins."

McGraw 3 Mike McGraw describes his executive team as "disciplined and focused." Shown here are team members Brian Weaver (left), Susan Valencia and Richard Fowler.

McGraw appreciates this loyalty that he, his family and his management team and their employees have striven to build. After PSIC was established, he says, it lost maybe 70% of its agents during the first cycle; during the following cycle, about 50%; but in the most recent, the number has reduced to about 30%.

"This is a sign that agents and their customers begin to appreciate the value of a good long-term stable market," McGraw says.

Family tradition

Mike explains that his father, Jack, had been president of El Dorado Insurance in Palo Alto, a workers comp company, when he decided to go out on his own in 1976. He was 46 years old at the time. "My mother said, 'If you work half as hard for yourself as you did for this company, you'll be a huge success.'" So Jack McGraw went from the corner office on the 15th floor to having an office in the basement for his start-up. Mike's mother joined the fledgling company in the late '70s and continued to work there until Jack's retirement in 1994.

John McGraw, Mike's brother, worked for the McGraw Group until 1996. According to Mike, John is an entrepreneur with the vision, desire, and management execution skills to start companies and turn them over to others to run. He says it was "brother John" who had the drive to make the business successful in the first place. After leaving PSIC in 1996, he went on to become the chairman of the California Republican Party. He is currently an entrepreneur in technology-based applications for the insurance industry.

Jack also has another child, Ann [McGraw Morrical], who worked for the McGraw Group but ultimately retired to be a mom. She and her husband adopted a baby girl in 2001.

Mike McGraw is grass roots and legacy to the heart. He started with the company working in the file department when he was 11 years old. "I worked there every summer," McGraw added. "There is not a job in the company I haven't done."

McGraw also compliments his current management team for contributing to family values and family success. To him, they are friends and trusted associates. Working closely within the Menlo Park confines are Tim Summers, the executive vice president, product development; Brian McSweeney, executive vice president, general counsel; Brian Weaver, vice president, sales and marketing; Susan Valencia, vice president underwriting (Anaheim office); Rick Fowler, vice president, chief financial officer; and Don McAllister, vice president, management information systems.

"I get satisfaction from watching the executive team work," McGraw adds. "They are so disciplined and focused which has led to our success. I can't thank them enough. It has all aided in the profitable bottom line and allowed us to never have a year when we've lost money."

"We see ourselves as insurance people who are good at underwriting," McGraw says. "Cycles are getting shorter and the typical independent agent realizes it is way too costly to move business when markets soften. And, because we are not willing to lose money in business, at end of the day, we can focus on our premium-paying customers and appreciate that they do not all have the attitude of price sensitivity. Eighty percent of independent agent customers are looking for value, even if they know they might not be paying the absolute lowest." He quickly adds, "However, no one wants to feel he is being gouged either.

"The perception is dying that all customers always have to find the lowest rates," McGraw adds. "The industry has progressed in this area. Slowly but surely markets fluctuated and suddenly some cycles were so close together that it made customer attitudes say, 'Maybe next year I'll get a better deal.'"

McGraw and PSIC are quick to recognize independent agents as their customers. During the 1990s, several insurers seemingly forced agents to do business with them in the manner that the carrier enforced. Out of that came standardization, internal software/
agency programs, comparative raters, and the ability to transact business over the Internet.

"We've even taken the attitude that we must be cutting-edge, with technology, but if an agent doesn't want to use our fantastic, quick Internet system then he or she shouldn't have to," McGraw said. "Sure, it would be nice for all agents to be on the technological level to log on to receive a quote and bind coverage, have money swept from its or the customer's account. The Internet is all incredibly efficient. The reality is that the Internet is used only 5% of the time with us. But, we want to focus on methods that are comfortable for them. If it drives business, we make that process available. It is whatever our customer wants. We're not going to dictate how to do business. They can do it how they feel comfortable. We're supposed to be doing what they want."

Currently, McGraw plans to roll out its "One Spot," core campaign to two or three new states in the United States every year and half. McGraw said it is currently looking closely at doing business in Michigan, Ohio, and Pennsylvania, in the fall of 2002.

McGraw concludes by stating that if the system is not broken you should work to maintain it, not to fix it. Consistent underwriting and correct, accurate pricing are at the core of its business values.

And what about the family business future? McGraw says that Chairman Jack's three shareholders, John, Mike, and Ann, have the potential for future generations on the management team. There are nine grandchildren working their way through various levels of the educational system, and they could eventually take over the reins.

"The farm system is alive and healthy," McGraw adds. "It is eight girls and a boy there, so hopefully one of them will step to the forefront in the future." *

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