‘Little Things’ Add Up to Profitable Growth for Eastern Alliance

Michael L. Boguski well remembers the day Eastern Alliance Insurance was launched.

It was July 7, 1997, the first weekday after the July 4th holiday. Boguski, president and chief operating officer of the company, walked up the stairs with Bruce M. Eckert, chief executive officer, to their new office over a tattoo parlor in the quaint Pennsylvania city of Lancaster. They were the company's first two -- and only two -- employees.

"It was a true entrepreneurial experience," Boguski said. "We had limited capital. We were an unrated company with no customer base, no agency base. It was just important to come in every day and build the organization."

And build it they did.

Eastern Alliance Insurance, a monoline workers' compensation writer, has grown since those early days to write $110 million in direct premiums at year-end 2009, according to BestLink, which provides online access to A.M. Best's Global Insurance & Banking Database.

Today, the Eastern Alliance Insurance Group consists of four underwriting companies: Eastern Alliance Insurance Co., Allied Eastern Indemnity Co., Eastern Advantage Assurance Co. and Employers Security Insurance Co. They operate under the holding company Eastern Insurance Holdings Inc. (NASDAQ: EIHI).

The group, which now has a Best's Financial Strength Rating of A (Excellent), has outperformed the industry on several fronts.

While direct written premiums for workers' comp writers in the industry fell 27%, from $55.95 billion in 2005 to $40.68 billion in 2009, Eastern Alliance's direct written premiums have grown 27% from $87.1 million in 2005 to $110.7 million in 2009, according to BestLink.

Eastern Alliance has also outperformed the industry in profitability, posting a five-year average combined ratio of 76, which is 32 points better than the five-year industry average combined ratio of 108.1.

Boguski, who's been tapped to succeed Eckert as CEO on Jan. 1., said the company pays close attention to underwriting, including inspecting a client's financial state. The company also emphasizes aggressive claims and risk management.

"The strong underwriting performance reflects management’s commitment to maintain sound pricing, a proactive return-to-work program and utilization of 'compromise and release' agreements. This approach has allowed EAIG to close claims more quickly and at a lower average cost than the typical workers’ compensation writer," A.M. Best Co. said in June when it upgraded the company's financial strength rating (BestWire, June 8, 2010).

Company founder Eckert, who had a background in saving distressed companies, saw an opportunity to write workers' comp for small businesses in rural and suburban Pennsylvania. "In the 1980s and 90s, a lot of the larger companies were trying to drive efficiencies by having regional claims hubs. The idea that you can have a claims hub in Atlanta and insist that you knew what was going on in Elizabethtown, Pa., or Oldwick, N.J., is just not believable," Eckert said. "Workers' comp is a local business. You need to know the local agent, the job environment, the local businesses, the local physicians, the local attorneys."

So Eckert chose to establish the company in Lancaster, not far from where he was born. About 10 years before, he had already launched Eastern Re, a Cayman Island-based quota share reinsurer that became the first segregated portfolio company after Cayman approved the law to allow segregated portfolios.

"The simple strategy that I convinced Mike to sign up for was to focus on small businesses, and to focus on delivering very professional services to those small businesses," Eckert said.

To get started, the two approached agencies and asked them to invest $25,000 in the start-up company.

"Having the financial tie into our company aligned our interests," Eckert said. Plus, he said, Eastern Re already had a track record.

"Agents viewed the need for a stable workers' comp market as something that would be important to them," Boguski said.

"Whether it's a hard market or a soft market, we wouldn't have our rates go up 50% or down 50%," Eckert said. "We may lose some business in times like today, where we will just walk if someone says they'll do it for 20% less."

The consistency has earned the company a loyal following, Boguski said. "By delivering on our early commitments -- having a stable underwriting platform -- that gave us the basis to build the company," he said.

When the company went public, agents owned about 5% of the business. "It's been a very collaborative effort, a collegial effort," Eckert said.

Today the company has three regional offices -- Lancaster, Charlotte, N.C., and Indiana -- plus two satellite offices in Nashville and Western Pennsylvania.

Eckert said the company's success isn't due to any single thing, "but a lot of little things."

Instead of expanding into other lines of business, the company has grown geographically and by expanding its workers' comp product offerings, Boguski said. "We believe these initiatives provide the company with sustainable competitive advantages," he said.

The company writes 350 classes of workers' comp business and is now licensed in 24 states. It has 175 employees and 127 agencies representing it.

"It's been quite a ride," Eckert said.

To see the entire interview with Boguski and Eckert, go to http://www3.ambest.com/ambv/media/video.aspx?rc=177638.

(By Meg Green, senior associate editor, BestWeek: [email protected])