Pemco Insurance: A Northwest Profile

Insurance doesnt immediately come to mind as a tech-intensive industry, but as Pemco Insurance CEO Stan McNaughton describes it, technology influences everything in his business these days, from how the company and its customers talk to each other to how the company is organized and managed to how it handles real estate.

Yes, real estate. Pemco announced in January that it would sell its seven-story building perched along Inerstate 5 in Seattle just south of the Mercer Street exit, and move to new quarters on Dexter Avenue near Lake Union, possibly as soon as the end of this year. The reason behind the move is straightforward, McNaughton says. Pemco doesnt need that much space anymore. And the reason it doesnt need that much space is technology.

The insurance business, he says, is one in which the promise of the paperless office actually came true. When the current Eastlake building was designed 43 years ago, it was to be one of several buildings housing not just employees but also all the paper generated by customer accounts and accident claims. All our people were consolidated into one site because they needed to be next to the paper, McNaughton says. The paper in certain respects is kind of like a prison. It traps the information and only the person holding the paper can get the information.

The move to digital files frees Pemco from that paper prison and allows it to make some decisions about real estate. We had a lot of capital tied up in this building, he says. It needed to be renovated. If we renovated, we didnt need all the space, so we decided instead to sell the building and capture the gain.

Technologys influence is showing up in other ways, from the development of customer service centers in Lynnwood and Spokane to deciding where managers are assigned. The company recently printed the last paper edition of its customer newsletter, switching to email distribution exclusively.

Customer service has already made one big transition and is headed for another, thanks to technology. A fifth of Pemco households have an online activity with us, McNaughton says. That doesnt mean they do everything online, but they do something with us [online]. Its a growing number every day. As those transactions shift from the personal computer to a tablet or mobile device, the number of calls that Pemco handles every year is dropping, even though its customer base is growing. Customers are learning to do things for themselves, and its working for them, McNaughton explains. Its like another labor force.

Pemco has been spending close to $10 million a year to add technology services, but that expenditure has allowed it to cut other costs. For that reason, McNaughton notes, Well continue to keep our foot on the gas in terms of IT investment because were really seeing dramatic improvements in service quality. Were handling more policies with the same number of people.

The company has been dealing with those trends and shifts while its had a few major external issues on its plate. Calamity is a natural part of the insurance business, in the form of wildfires and windstorms and other claims-generating events, but to that was added the financial calamity of the Great Recession.

When youre in this business, you dont want to be betting too much with the market and Mother Nature at the same time, particularly if you have a lot of property lines like we do where you can have big storms come through, McNaughton says.
With the recession, Pemco found itself squeezed on both parts of its business: insurance and investments. The downturn really changed the economics of this business, McNaughton says. We no longer had interest income on our investment portfolios. We had to become more efficient.

That change forced a financial management switch to reduce reliance on investment income. We used to write insurance at a slight loss and make it up on that investment income, the CEO explains. Today, our goal is to price our insurance and compete at a rate that adds to the bottom line and strengthens the company so we can continue to grow. When the investment income comes back, thatll be a bonus, but our competition will have their investment income come back, too.

The recession also made growing the insurance side more challenging, with many consumers hunkering down, unwilling to switch companies. Our energy went into cross-sales, which means selling an additional product to existing customers. We came out with darn near every customer having two products, McNaughton says. In the past two years, Pemco has also seen a revival on the new-customer side.

One strategy for dealing with stagnant markets is to diversify by product line or geography. Pemco has resisted the first; if anything, its a less diverse company, its focus now almost entirely on personal lines insurance (home, car, boat, renters). Were not in commercial insurance; were not in medical, McNaughton adds. We know this business well and our people know it well and our people stay focused on it, and were relentless at always improving our customer service.

Pemco has actually jettisoned some businesses, including a life insurance company and several technology-services businesses (including one that processed credit and debit card transactions for other financial institutions). There was a time we were enamored with complexity, McNaughton recalls. Selling off those other operations left us to focus on growing the insurance company, which we have been [doing] coming out of the recession. Were growing deliberately, one policy at a time.

Some of those new policies are in Oregon, which Pemco recently entered and which provides some efficiencies, such as an overlap in marketing. (Its distinctive Northwest Profiles advertising campaign, which points out the idiosyncrasies of people who live here and how theyre a little bit different, just like Pemco, can easily be tweaked to absorb the Oregon zeitgeist.) Pemco is also licensed to do business in Idaho and McNaughton thinks it will eventually gear up operations there, but for the time being it has plenty of opportunity increasing share in Washington and Oregon. The company isnt out looking for acquisitions, necessarily, but would consider the right deal for a small carrier or someone elses book of business.

With $345 million in premiums for property and casualty insurance in the state in 2013, Pemco has a 3.8 percent share of the Washington market. Farmers Insurance Co. of Washington has 4.53 percent; among national carriers, State Farms auto insurer has a 6 percent share, while its fire-and-casualty operation is at 4.63 percent, according to the state insurance commissioners office.

In the lines of business it competes in, Pemco often ranks among the top three in the state for market share. Were quite big where we do compete, McNaughton says. We compete against national companies, but were a regional company. He hopes to build on that competitive position through a combination of marketing that emphasizes the companys Northwest presence and heritage while making sure customer service doesnt slip. The No. 1 way we always strive to get business is by serving the customers we have absolutely the best way we can, so they tell others. That is a major source of customers for us.

Neither the headquarters move of a few blocks nor the cautious expansion might seem terribly dramatic, and thats fine with McNaughton. We have no exit strategy, he says, noting that Pemco, founded in 1949 as Public Employees Mutual, will remain a mutual company owned by policyholders. We are growing this company and building this company to be around.

McNaughton also has no plans for dramatic moves of his own. At 64, he has been chairman, president and CEO of the firm for 16 years. His father, Stanley O. McNaughton, ran it for 28 years. I really enjoy what Im doing, McNaughton says. I enjoy the people I work with. Will they still have me? I guess thats for the board to decide.

He is comfortable enough with where Pemco is, with where its going and with the team running it that, should something happen to him, he adds, I might be missed, but the company would do great.