Old Rhode Island’s New Pawtucket: Big Plans to Stay Small

Investors Plan Small, Focused Writer of Homes, Including on Coasts, in Mass., R.I., N.Y.

The investors in line to revitalize the 157-year old Pawtucket Mutual Insurance and its subsidiary Narragansett Bay Insurance companies plan to rebuild the firms by staying small and focusing on coverage for middle market homeowners, including coastal risks, in Massachusetts, Rhode Island and on New York’s Long Island.

The four investors, who have formed Providence Insurance Managers LLC, are putting up $5 million for the names, licenses and Maple Street office building in Pawtucket; they will also assume about any outstanding claims. Their group includes a former insurance executive with more than 35 years of insurance industry experience and local businessmen with backgrounds in media, investments and insurance.

Their plan is to write policies beginning in January 2006 through a network of about 20 to 30 smaller independent insurance agents. They hope to attract agencies that previously represented the companies and also win back former policyholders, some of whom will be offered discounted premiums.

Court approval

Pawtucket Mutual and Narragansett have been under state control since May 2003 and state officials have been looking for a buyer since then. A number of potential suitors expressed interest over the months as business slipped away and surplus eroded. Now after two years, the PIM business plan has won the endorsement of state regulators, although the court overseeing the rehabilitation of the two insurers must still approve it. The group hopes to close next month.

There are no policies remaining in the companies whose combined direct written premium reached its peak of $95 million in 2002, and whose policyholder surplus peaked at $49 million in 1998.

All remaining claims and liabilities will be all shifted to one of the companies, leaving a clean slate at the other so management can pursue a rating from insurance company rating organizations like A.M. Best, according to the plan.

The investors plan a second round of financing by the end of this year which they see raising from $25 million to $50 million in additional capital.

PIM’s Steffey

PIM’s founder Stewart H. “Nick” Steffey will serve as president and chief executive officer of the companies. Steffey’s 35 years insurance career has included executive stints at Chubb, Cigna, AFIA and Liberty Mutual. His accomplishments include the start-up and building of Liberty International Holdings, Inc. (a subsidiary of the Liberty Mutual Group) into a $1 billion company from 1993-1998. After that, he started Boston International Capital, a consulting firm for small and medium-sized insurance companies. He created PIM this year to take advantage of the Pawtucket Mutual opportunity.

Steffey is not looking to recreate his previous large insurance carrier environment. His aim is to keep Pawtucket and Narragansett small and focused. He would be happy to write about $15 million to $20 million in business after one year and $50 to $75 million after five years. He defined the market as homes valued between $175,00 and $800,000.

To accomplish these goals, the PIM business plan calls for the utilization of real time home valuations, state-of-the-art catastrophe modeling and easy web-based access and binding for agents.

Coastal homes

“We want to be really good at homeowners,” Steffey told Insurance Journal. Steffey believes that using the right technology and agents, his company will be able to write coastal and other risks that are turned away by larger insurers, which too often view almost any home in a state with a coast as an undesirable property.

“The key to the model is to look at each location as a separate risk,” Steffey said. This includes separating the catastrophe-related premium from the non-catastrophe premium in coastal locations, he added.

Steffey has a simple vision of how he would like his companies to be perceived down the road. “Good value for the money and easy to use,” is how he sums it up.

There are about 18 employees left out of the 180 who were on board at the time the state took over. Steffey aims to retain some top managers from the old regime, including Vincent DelNero as chief operating officer, Ray Deschennes as vice president of marketing, Linda Prevost as vice president for underwriting, Al Cavalho as head of systems, and Paul Liberty as vice president for claims.

Pawtucket’s licensing

Pawtucket Mutual, established in 1848, is a property and casualty insurance company domiciled in Rhode Island and licensed to sell insurance in 11 states. Its wholly owned subsidiary, Narragansett Bay, founded in 1981, is licensed in four states. Steffey’s plan is to only use three of those licenses for now: Massachusetts, Rhode Island and New York.

The companies’ business prior to the rehabilitation was sold through 415 independent agents and was comprised of 85 percent personal lines and 15 percent small commercial lines. But Steffey’s new plan is to concentrate on homeowners and personal umbrellas, with only a relative handful of 20 to 30 agencies.

State takeover

After closely monitoring Pawtucket Mutual’s deteriorating financial performance for more than 18 months, state officials took action in early 2003. Judge Michael Silverstein, Providence Superior Court, issued the order granting Marilyn Shannon McConaghy, who was then the director of the Department of Business Regulation, the authority to take over and attempt to revitalize the companies.

“The department and management of the companies believe that the action was necessary and appropriate in order to stabilize the financial condition of the companies and protect the rights of policyholders, claimants, creditors and the general public,” McConaghy said at the time.

The takeover marked the first such state action since the collapse of American Universal Insurance Co. in 1991, when it was placed in state receivership.

In an unusual move early in the process, McConaghy sought and the Rhode Island Superior Court gave advance approval of the right to convert Pawtucket Mutual to a stock company on an expedited basis if a buyer was secured. The Superior Court’s approval enabled the company to be marketed as a stock company. Steffey said that condition is valued by his investors.

Financial performance

Despite continued efforts of management, the financial performance of the company had been worsening for the past five years before the DBR stepped in. According to the DBR, statutory surplus decreased from $34.8 million on Dec.31, 2000 to $15.3 million on Dec. 31, 2001. By the first quarter of 2003 surplus had further deteriorated to the level of $8.5 million.

The company’s problems stemmed from capital depletion, poor investment income and weather-related losses.

The Pawtucket Group’s strength, according to A.M. Best and other industry observers, rested in its strong independent insurance agency force.

Meeting agents will be a priority, according to Steffey. “We want to talk to our old friends, some of the agents who used to represent us,” he said.

“In its 157 year history, Pawtucket Mutual did well for about 150 years,” noted Steffey. “Then they lost their underwriting discipline and suffered from poor investments and didn’t raise rates as they should have. We will be bringing it back to its roots.”

Pawtucket roots

Those roots are in Pawtucket, where Steffey wants to keep them “We want to be a local player,” he added. “It’s a great town.” He noted that Pawtucket is home to Slater Mill, the first American factory to successfully produce cotton yarn with water-powered machines. He’s already got his season tickets to the Pawtucket Red Sox.

He is enthusiastic as well about the state. “The regulatory environment here is fantastic,” he said.

Steffey will be on the lookout for other acquisitions or partnerships. While he wants to keep Pawtucket Mutual and Narragansett small, he would like to expand PIM.

“We hope it’s a platform for other insurance opportunities,” explained Steefy. “Not a roll-up but maybe we can help a company that might be stuck from a technology or capital standpoint.”

He said he envisions PIM being a $400-$500 million regional insurer with a “carefully crafted” stable of specialty companies within five years.