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11:50am EDT March 21, 2006
Alan Spachman had a boss he just couldn’t see eye-to-eye with.

Spachman couldn’t agree with his boss’s ideas, nor could he change them, so rather than compromise, he left the company to start his own. But instead of offering typical insurance coverage, he decided to focus on small, specialized niches whose needs were ignored by most insurance companies.

“We wanted to operate in business markets that were underserved by the mainstream insurance companies,” says Spachman. “These markets were usually too small, too remote and just too different to attract the attention and interest of the larger household name companies. They are smaller markets, but we are a smaller company.”

When Spachman started National Interstate Corp, he provided passenger transportation insurance. Over time, he expanded into other niches, such as recreational vehicle and marine insurance. By going after these smaller markets, Spachman could essentially eliminate competition by offering customized coverage that other insurance companies couldn’t.

In 2004, National Interstate reached $171 million in revenue, and Spachman continues to grow his company by expanding into new niches, maximizing revenue in existing ones and adding new services.

Finding a niche
Just because a niche is underserved doesn’t mean it will be a good business opportunity. Spachman says the first step in finding the right niche is to pick an industry, such as the personal auto industry, and then find a subset of people in that industry who aren’t having their needs met by traditional insurance companies.

In the case of the personal auto industry, Spachman focused on owners of motor homes and travel trailers.

“A lot of companies won’t write coverage for those units because they are so different, unique, unusual, and the market opportunity is limited compared to standard personal auto,” says Spachman. “There are really just a handful of companies who write specialty insurance products for recreational vehicle enthusiasts.”

Because the majority of insurance companies focus on traditional insurance needs, it is not difficult for National Interstate to find niches that need customized insurance. In fact, many niche opportunities are presented to Spachman by outside brokers and agents.

“We have developed a reputation for being innovative and creative and responsive to market opportunities,” says Spachman. “Agents, brokers and consultants will come to us and say, ‘Would you consider this unique insurance opportunity?’ Most we don’t do, because we find something about it that we think is unfavorable, but every once in awhile we find one that we think we can support, and it becomes a successful business opportunity for us.”

Spachman mainly relies on his employees to find new niches and explore the possibilities.

“We always have two or three product opportunities on the drawing board,” says Spachman. “Part of the management here is to decide when we can enter a new market, what the opportunity is and whether our infrastructure — our ability to perform the business that we are already in — is ready to take on more.”

To prepare the infrastructure for new niches, National Interstate is constantly growing its accounting, IT and claims settlement capabilities. If the infrastructure isn’t ready to support the new niche, it will fail. So although there are plenty of opportunities to expand into new markets, Spachman has to safeguard against taking on too much too fast.

“You grow too fast when the infrastructure starts to deteriorate or isn’t as responsive or capable as it has historically been,” says Spachman. “When we see it starting to tax our infrastructure, we back off on the top-line growth. We might wait to introduce a new product until the rest of the company can catch up with us.”

Spachman has grown National Interstate between 15 percent and 25 percent each year. He says he can maintain that kind of growth over a long period of time, but anything beyond 25 percent would be too difficult to manage several years in a row.

And even when a good growth opportunity is identified, Spachman has to wait for exactly the right time to enter the market.

For example, in 1994, National Interstate employees identified a key niche — the Hawaiian transportation market — that would contribute to the company’s growth. There was an obvious need for a company to write transportation insurance in Hawaii because the only insurance available was through the Joint Underwriting Association, an organization of insurance companies that provides insurance for markets that otherwise would have no coverage.

“Much of the insurance business is cyclical in nature, meaning that the insurance companies that participate in the markets tend to raise or lower their prices to maintain or gain market share,” Spachman says. “The best time to enter a new market is when the market is hard, when competition is limited, prices are high, profit opportunities are plentiful. There are lots of things you have to consider when you are thinking about entering a brand new insurance business.”

Spachman concluded that for National Interstate to be successful in Hawaii, he would have to open an office there because Hawaiians tend to buy locally. But the transportation insurance market alone was not large enough to support a separate office. Spachman knew there was an opportunity in Hawaii, but it wasn’t a good time to take advantage of that opportunity.

The right time turned out to be a year later, in late 1995, when many insurance companies were downsizing or withdrawing from lines of business. One of those companies specialized in small business insurance, and Spachman took over where that company left off. By writing insurance for both transportation risks and small commercial businesses, National Interstate had the support and clients necessary to warrant opening an office in Hawaii. Today, National Interstate is the leading writer of transportation insurance in Hawaii, Spachman says.

However, even when the infrastructure is ready, a new niche is identified and the timing is right, success in that niche is not guaranteed. Spachman learned that firsthand when National Interstate entered the truck insurance market by acquiring a company in suburban Chicago.

“It was a mistake,” says Spachman. “We were unsuccessful in getting the management of that company to manage that business the way we manage our business, to take our approach. We couldn’t teach those dogs new tricks.”

It took Spachman about a year to realize that the acquisition was hurting, not helping, his business. Rather than waste any more time or money, he fired everyone and brought what was left of the business back to his Richfield-based headquarters. He then hired people who he had previously worked with and were familiar with National Interstate’s culture and had experience with truck insurance.

Although Spachman’s actions were drastic, he succeeded in turning the truck insurance business around, and that experience will affect how he grows his company in the future.

“We are certainly leery of (acquisitions),” says Spachman. “We view acquisitions as not the preferred way to grow because of the difficulties we had in the past. We prefer to grow by organic growth.”

Expanding coverage
Spachman’s growth strategy for National Interstate also focuses on expanding the company’s existing product lines by providing existing clients with more coverage and going after new clients.

National Interstate might start off by offering basic insurance coverage, and as it learns more about that niche and becomes more well-known by clients, it can provide more services and expand its influence on those customers. Spachman’s employees focus on a single niche or a single type of insurance to ensure that they are really tuned in to what that market’s needs are.

“It becomes their whole reason for being here,” says Spachman. “By having these people focus on a small market opportunity, we can bring some intensity to their focus. If we were organized along traditional, functional insurance lines, like claims, marketing, underwriting, that kind of thing, it would be difficult to provide enough intense focus on a particular product line to succeed.”

National Interstate also makes it a point to constantly market to new clients in existing niches to show them how their needs can be better met.

“Every one of these different niches that we enter has its own marketing strategy,” says Spachman. “We don’t use a single strategy for everything. Some are very similar, but we basically try to sell our products to customers in ways that are most comfortable for the customer.”

That might be through agencies owned by National Interstate, brokers, captive agents, independent agents or the Internet. Spachman says that he uses one or more of those strategies depending on his analysis of the end user.

For example, he uses independent agents and the Explorer RV Agency, a captive agent, to sell insurance to motor home and travel trailer owners. The independent agents specialize in selling insurance to RV owners and generally have relationships with RV manufacturers, dealers and travel clubs.

But as times change and more and more people are turning to the Internet, a growing percentage of National Interstate’s RV business is coming from the Explorer RV Agency, which sells insurance coverage through its Web site.

No matter what approach Spachman takes, quality is what matters, so he makes sure that his employees are communicating to clients and potential clients every step of the way, starting with the marketing. So even though Spachman uses brokers and agents, he doesn’t rely on them to communicate his message, and customers appreciate that they are dealing with National Interstate employees firsthand.

“(Customers) know who is accountable for providing good service and they know who can fix it if they’re not getting it,” says Spachman. “That’s a good feeling for a large commercial risk that pays a lot of money to their insurance company and demands service and expects it.”

However, Spachman ran into a problem when he couldn’t find enough qualified employees to help run his company.

“Contrary to popular belief, Northeastern Ohio is not an easy place to attract people from other parts of the country to come to,” says Spachman. “We’ve has limited success in getting someone to move from, say, Dallas, Texas. Those are the downsides. The positives are we are blessed with good educational facilities; local colleges around here are plentiful.”

Spachman made the strategic decision to hire promising graduates and provide them with the training they need to be successful at his company. Career Track is a three- to four-year program in which participants develop skills in one of three core areas: claims, IT or underwriting.

“At the end of the program, they are an experienced professional, and now we have someone that we can build on and may be a candidate for a future project manager job,” says Spachman. “That strategy was initiated here a little bit out of necessity, but it was a preference, too. It was a way for us to find high-potential people and develop their skills and their approach to work in a way that matched our needs and our culture.”

This hiring strategy has worked well for Spachman as he continues to grow his company by moving into new niches, adding new services and attracting new clients.

“Every business and most personal exposures need insurance,” says Spachman. “We always have opportunities to grow. This is a huge industry, and we are a very small participant in it.”

HOW TO REACH: National Interstate, (800) 929-1500 or www.nationalinterstate.com