From Heritage to Acuity

Heritage Insurance's name change to Acuity could be described as a bit tardy.

That's because what now is Acuity is far from the same company in which Heritage's top two executives, who took over late in 1998, saw changes needed to be made.

Symptom number one of those problems was in Heritage's

"It cost us $10 million per year in hard and soft costs," says David Pauly, the company's executive vice president and chief operating officer, who was named to his position when Heritage named Benjamin Salzmann its president. "Today, we save annually $7.5 million on reduced turnover. And that can go back to reduced insurance prices, which makes us more efficient."

The company's annual employee turnover now is about 8 percent. Heritage was named the top family-friendly employer in Sheboygan County, and the company was named one of Fortune magazine's top 2,50 places to work in the U.S. "We want this to be a fun place to work," says Salzmann.

Symptom number two was not necessarily noticeable for someone in the insurance industry. Like every other company, Heritage generated entire forests of paper to create and maintain insurance policies.

Acuity now issues 90 percent of its policies within 24 hours through extensive computer use. The Association for Cooperative Operations Research and Development, which sets standards for the insurance industry, has honored Heritage for its Internet initiatives, and the National Professional Insurance Agents organization has awarded two certificates of excellence for Heritage's paperless commercial lines processing and Internet programs.

What now is Acuity - Heritage's mutual shareholders approved the name change in March - is far ahead of the rest of the insurance industry in pushing efficiency. The company has a ratio of 165 employees per $100 million of premiums, far below the industry average or 220 employees per $100 million. Acuity has not grown its employee count nearly as fast as its business has grown; revenue per employee reached $560,000, IS percent more than in 1999.

Heritage grew in written premiums by 21.5 percent, moving to 111th among U.S. property & casualty insurers, and the company's surplus increased by 6.5 percent at a time when the average P&C company surplus decreased by 3 to 5 percent. The company's premiums receivable reached almost $99 million in 2000, up 37 percent from 1999. It also received an upgrade of its financial health rating to A (Excellent) by A.M. Best, and it was rated one of the top 50 property & casualty companies in the U.S. by Ward Financial Group.

Heritage is coming off a year in which the company did better than almost any other property & casualty company. The company had a combined ratio essentially the cost of an insurance companys doing business, a combination of expense ratios and loss ratios - of 101. 7. A combined ratio of 100 means a company is breaking even in claims and business expenses; Heritage made its $11.9 million profit off its investments. The P&C industry had an average combined ratio of 110.3.

"By and large, the policy holder pays in money before they turn in claims," says Salzmann. "So we have some money that we can invest. So you've got your underwriting income or loss and you've got your investment income. For the property & casualty industry to go bankrupt, the industry has to break 110."

The property & casualty industry has been near that level largely because of stiff competition for business. That means lower premiums, which means good news for policyholders, but not necessarily good news for their insurers.

"Companies are failing now," says Salzmann. "Consolidations are occurring now."

"So the key is you're a consumer, there are three cars you can buy, each car costs $20,000," says Pauly. "You look at them all. The question is, does each company have the same cost structure? If a company can reduce costs, they can sell a car at $20,000 and make money in a commoditized market.

"Where we are is at the lower end of the expense scale. It's not just price, it's value; if a customer has a $1,000 policy, he can make changes over the Internet, he can get policy certifications on the Internet. He doesn't have to use an agent if he wants. It's all about choice."

"Let's say you choose one of those three cars, drive it off the lot, and you open up the newspaper that night to find out the company went out of business," says Salzmann. "How would you feel about it?

"It's so competitive, generating a return that makes shareholders happy - competitive pricing can't give a good return shareholders. We went through two decades of low prices."

One way to determine how customers feel about Acuity is to look at cancellation rates. Salzmann estimates the rate at which Acuity customers cancel policies - for reasons including dissatisfaction with Acuity or the sale or closing of a business - is about 3 to 5 percent. The industry average cancellation rate is about 20 percent.

What now is Acuity began life in 1925 as Mutual Auto Insurance Co. in the Town of Herman in Sheboygan County. The company changed its name for the first time in 1957 to Heritage Mutual Insurance Co., and three years later moved its offices from Franklin, northwest of Sheboygan, into Sheboygan. In 1962, the company's products expanded into fire, homeowners' and inland marine insurance, and commercial insurance was added in 1969. The company started writing policies outside Wisconsin in 1981, but it remains an exclusively Midwest company.

Acuity now sells automobile, homeowners, boat, motorcycle and umbrella liability insurance for individuals, and worker compensation, auto, property, general liability, garage, excess liability and umbrella, inland marine and crime insurance for businesses.

The culture at Acuity is as different as possible as the culture Salzmann, who has been at Heritage for 11 years, and Pauly, who has been at Heritage for 25 years, inherited at Heritage. Two examples: Employees were expected to be in their seats by the time bells rang, and work stations were supposed to be devoid of personal touches like family photos.

"It was a very multifaceted approach," says Wally Waldhart, Acuity's vice president of sales and communications, about changing Heritage's culture. "We came up with a suggestion committee to get suggestions from our employees, We eliminated set work hours and set up the most flexible work hours in the industry. We set up an employee activity committee for employee events. We have much more family-friendly work stations. "

One of the biggest initiatives Salzmann began when he became president was a major technology upgrade, part of what he saw as a way to improve Heritage's service. The company's vision statement includes the line "be the easiest insurance company to do business with."

"We're not interested in technology as a starting point," he says. "We're interested in customer service, efficiency, how do you get customer service and efficiency. That translates back to technology. Technology is a slave to an insurance company. We have 90 percent of our personal lines applications turn into policies in 24 hours; the average for the insurance industry is 30 days.

"I think insurance lags most of the financial world in terms of automation. One reason is you keep track of so much information, and you have a lot of variation within a policy. If you look at the insurance industry, we're a technical leader; if you look across industries, it's another story."

Pauly describes Acuity's technology initiatives as "using technology as a tool - that tool, not only does it give greater customer satisfaction, but it has given us great increases in productivity."

The company now generates personal insurance policies with no paper at all. Auto and home policies are written completely on computer. "They can look at policy data while they can look at underwriting data while they can look at email while they can look at a picture of the home," says Salzmann of Acuity employees. "The Internet allows agents to look up all the policy information, look up claims information, calculate quotes for potential insureds."

About half of the company's commercial products also are being written on computer. Salzmann says commercial front-end work was "always viewed as a bastion that could never be broached with automation," because commercial policies involve a large amount of text and significant complexity. "To even build this system took almost a decade of work just to get to this last step."

The technology push extends to claims as well. The creation of an online claims system coincided with Heritage's closing all its remote offices. Heritage claims adjusters now work out of their homes and cars.

"When there's a call to our 800 number, if it's a simple claim, the check is cut before we're off the phone with them," says Salzmann. "If it's more complicated, we're firing a page off the Internet by Skytel satellite to a claims person driving down the road."

Security poses little concern because of the multiple tiers of security, including firewalls in several computer systems, and the fact that, according to Salzmann, insurance data is self-encrypting. While a credit card transaction involves a 16-digit card number, a four-digit expiration date and one date for the transaction, insurance data involves 3,000 characters and up to 20 different dates.

Acuity's interest in technology goes so far as designing Web sites for its own agents; so far, the company has designed more than about 200 Web sites, almost half of the companys agents. Those agents are independent agents, which means that those Web sites advertise not only Acuity, but its competitors.

"They're our business partners," says Salzmann. "We want to ensure the success of our business partners, because what comes around goes around. Almost all the Web sites we set up have our competitors on it also, because it isn't truly their Web sites unless they have all their offerings."

The property & casualty insurance industry is challenging in part because of the chance that one event can create a substantial drain on an insurer's finances. The May 11, 2000 thunderstorms that rolled through Manitowoc County resulted in $12 million in claims to Heritage.

That, however, is not as bad as the insurers that had to pay claims for, to cite one example, Hurricane Andrew in 1992. The more severe weather and other events, such as earthquakes, have convinced some property & casualty insurers to cancel their coast customers insurance companies usually cancel customers because of the insurance company's problems, not because of the insured party - and move into the Midwest, where all of Acuity's customers are.

"There are a lot of national companies who are coming around to the notion that the Midwest is a great place to do business," says Waldhart. "Unfortunately it's difficult to come in and do a good job because people who are here expect the best. We write a lot of commercial lines, and the business climate is great, the regulatory climate is excellent - you don't have the regulatory problems you have in California, New Jersey, Texas."

At the same time, insurance companies also are going out of business or being sold. The list of Wisconsin insurance companies that no longer exist on their own include Franklin Insurance of Sheboygan County, Northwest National in Milwaukee, Milwaukee Insurance and Midwest Indemnity of La Crosse. Employers Insurance of Wausau is on its third owner.

"Companies when they experience financial problems pull out of the state," says Pauly.

"They sold one thing - that was price," says Waldhart.

Each state sets its own rules for the insurance industry. "They're not all that different," says Pauly "Everybody has their different nuances, but it's not like you have to invent different insurance companies for different states."

Waldhart describes some states' regulations as "punitive," but not Wisconsin's.

"Wisconsin particularly is an outstanding state to do business in," he says. "The regulations here in Wisconsin and the [Office of the Commissioner of] Insurance is really a model for other states."

Acuity is not interested in selling to another company, and even if it was, the fact that the company is a mutual company - that is, policyholders own the company makes a sale virtually impossible. On the other hand, Acuity also is not interested in buying another insurance company. The company prefers to take business from its competition, rather than adding to its business by buying competition. The $341 million company is looking to grow to $400 million by the end of this year, $500 million by the end of 2002, and $1 billion by the end of 2007.

"Why buy what you can get for free?" says Pauly "If we truly believe we're doing better than the rest of the industry, then you're only buying something that would slow you down."

"A $100 million company is a big company," says Waldhart. "And we're going to have almost that much this year just by growth. And we didn't need to put up with all the baggage" a purchase would bring.

Additionally, he says, "We write such a broad range of business today, and we're not really looking to expand that."

Acuity is looking to expand outside insurance. The company owns Westland Savings Bank in Tomah, and is looking to do the reverse of what banks are starting to do, by branching out into providing financial services. That shows in Acuity's Web address, www.acuityfin.com.

"You take something like [Small Business Administration loans, it's good if you understand small business," says Salzmann. "And we sell a lot of business owner policies to small businesses. We know the marketplace; we know our customers. We can also offer financial services to insurance agents as customers.

"We have a strong bias for organic growth; we're not looking to acquire other companies. We have a strong bias to remember who we are. We look to continue to advance in automation. We sell a long line of diverse products. We're looking at delighting our customers through service improvements. With a growth rate of more than 20 percent, we want to manage growth, keep profitable and advance in technology."