Things are going Joseph G. Havlick's way. He expects the Burbank-based insurance business that he founded eight years ago, Fairmont Financial, to bounce back from a difficult period in the early 1980s with record earnings for 1985.
While some of its competitors are retrenching, Fairmont is expanding into new markets in Colorado and Texas, and into new product lines such as surety bonds for the construction industry. And in its principal line of business, writing workers' compensation insurance for companies in California, Fairmont is flourishing.
In fact, securities analyst Robert W. Back of Rodman & Renshaw brokerage house in Chicago says Fairmont officials are "in the enviable position of having customers camping out on their doorstep."
Havlick, 55, who left Encino-based Zenith National Insurance to found Fairmont after he was passed over for a promotion, has prospered as well. According to a Fairmont prospectus, Havlick, the company's chairman and chief executive, received nearly $498,000 in salary, bonus and deferred compensation in 1984. That is more than twice the average pay for a chief executive of a California insurance company of about the same size, according to Ron Gerevas, managing partner of the Los Angeles office of Heidrick & Struggles, an executive compensation consulting firm.
The company's prosperous state of affairs, capped by a spectacular rise in the price of its stock during 1985, didn't come about by chance, Havlick insists. In the early 1980s, "when everyone was expanding, we were sort of sitting by, biding our time," he said. Specifically, Fairmont avoided the intense price competition in the workers' compensation business that eventually pushed out some competitors.
The workers' compensation business is regulated by the state Department of Insurance, which sets premium and benefit levels. Thus, for a particular category of business--the state defines more than 400 categories--all insurance firms might be expected to offer the same coverage rates. But in practice, it isn't quite that simple.
In the early 1980s, when premium rates were relatively high, many of Fairmont's competitors tried to attract new business by offering large discounts to the standard, state-set rates in the form of rebates paid to customers at the end of the policy year. These firms engaged in a classic price war, and they expected to cover much of their insurance claims by investing customers' premiums at very high returns.
When the prime rate was near 20% and money-market investments yielded big returns, such a strategy may have made sense. With today's much lower interest rates, however, it has become far more difficult for investment income to offset deficits from insurance operations. That, in turn, has prompted some of Fairmont's competitors to stop writing workers' compensation insurance.
The weakening of the workers' compensation business in California, which totaled $3.9 billion in premium revenue in 1984, is reflected in the rise in the industry's loss ratio, a key measure of financial performance. The ratio--the percentage of the premium revenue received by insurance firms that is paid out to disabled workers--climbed in California to an average of 70% in 1984 from 55% in 1981, according to Richard Roth, an assistant state insurance commissioner.
Fairmont, which in the early 1980s did not have a large bond and money-market portfolio to rely on for investment income, stayed away from the big customers who had the clout to demand big discounts. Instead, it concentrated on smaller clients who had no choice but to pay more, since all employers are required to provide workers' compensation coverage.
Still, Fairmont took its lumps. After earning a record $1.9 million in 1981, the company's profits fell to $1 million in 1982 and to a loss of $968,000 in 1983. Fairmont was growing, but expenses were rising faster than revenue. The company began to turn around in 1984, when it earned $1.1 million, and it is predicting profits for 1985 of $4.6 million to $4.8 million.
Besides charging healthy premiums--which the state helped bring about by raising rates more than 11% in early 1985--the most certain way to make money in the insurance business is to keep the number of claims low. That means finding clients who tend to file relatively few claims.
Havlick tries to accomplish that by avoiding certain kinds of customers. For example, Fairmont will insure upscale restaurants but not bars or restaurants that are essentially drinking places. The company will insure nicer coffee shops but not greasy spoons.
Havlick's reasoning is that a waiter in an upscale restaurant has a better--and safer--workplace than average and makes a good living from tips. If that waiter is injured on the job, he has a strong economic incentive to return to work as soon as possible, thereby minimizing his insurance claim.