Holding Co. Buys Startup Carrier Employers Direct

Alleghany Corp. announced Monday that it reached an agreement to purchase Employers Direct, a Californiaworkers' compensation carrier that was launched by investors in the bleakest days of the state's market meltdown.  
  
Employers Direct Chief Executive Officer Jim Little and his fellow investors made a deal to sell the four-year-old company for $195 million. That's $65 million more than the company's book value and three times the original $55.3 million in investment capital that Little and partner Ronald Groden raised to launch Employers Direct in 2003.   
  
"We believe that (Employers Direct's) unique operating model has good growth prospects, and the addition of a workers' compensation insurer to our existing portfolio of insurance companies will provide balance to our risk portfolio," said Alleghany President/Chief Executive Officer Weston M. Hicks in a press release announcing the purchase.  
  
Alleghany is a publicly-traded holding company with $1.2 billion in revenues in 2006. The company also owns Darwin National Assurance Co., Resurgens Specialty Underwriting, Capitol Transamerica Corp. and Alleghany Properties, which sells commercial and residential real estate in the Sacramento, Calif., region.  
  
Little said the California market has made a remarkable transformation since the 2002, when he and Groden were raising money to launch Employers Direct. At that time workers' comp rates were skyrocketing after the liquidation of 26 carriers. Many other companies had abandoned the California market.  
  
Nonetheless, Swiss Re and Golden State Capital believed a turn around was coming and invested along with Little and Groden to launch a new carrier to fill the vacuum.  
  
Employers Direct started selling policies on Jan. 1, 2003. A little more than a year later, the state Legislature passed Senate Bill 899 and cinched a return on that investment.  
  
"These reforms have really worked," Little said. "We keep thinking that maybe we're going to hit the bottom, but every time the (Workers' Compensation Insurance Rating) bureau has come out with a new number the loss ratios have come down more. We see it in our own book. It's not fun to see the rates come down like that, but on the other hand it's not like the 1990s, when your rates were going down but your costs were going up."  
  
Today Employers Direct, based in the Los Angeles suburb of Agoura Hills, writes $130 million in workers' comp policies to 740 customers with 130,000 employees. The average premium for each policy is $180,000, Little said.  
  
The company sells directly to employers --hence its name --instead of using agents or brokers to bring in business.  
  
Little said Employers Direct will continue operating under that model after Alleghany closes on the deal, which is expected in the third quarter of this year.  
  
Little said he and the other owners sold the company primarily to get financial strength, issuer credit and debt ratings from organizations such as A.M. Best. Many customers, especially large construction companies, won't purchase policies from companies without ratings, he said.  
  
A.M. Best announced after the sale that ratings for Alleghany and its subsidiaries will not change because of the announced purchase agreement.  
  
Little and Groden, who is executive vice president of Employers Direct, will remain on with the company after the sale. Little said both of them are invested in the company as part of the purchase agreement. They will not realize full value from the transaction unless the company continues to grow.