STAYING THE COURSE

THE BALTIMORE SUN

In an age when fire protection can be bought over the Internet and billion-dollar insurance companies are merged and sold like commodities, Baltimore Equitable Insurance is a throwback to another era.

Founded when George Washington was president, the 12-employee firm has shunned diversification and stuck to selling an obscure type of homeowners insurance offered by only a handful of large companies in the United States.

It has rarely advertised, existing mostly on word of mouth. Agents still visit clients, taking pains to carefully measure homes and assess risks. With $101 million in assets, it sticks to a conservative investment strategy, maintaining a large surplus for such a small company and earning an A-plus rating from A.M. Best Co., a ratings service that is the industry's benchmark.

But despite 209 years of conservative predictability, the company has successfully seen local homeowners through the Battle of Baltimore in 1814, the Great Baltimore Fire of 1904, the Great Depression, two world wars and, in the past year, the dual devastation of a record snowstorm and Tropical Storm Isabel.

Its classic "fire mark" - a plaque showing two clasped hands - is fastened to the front of thousands of Baltimore homes and buildings, telling passers-by that the structure is protected by the city's oldest homeowners insurance company.

"It's really a dinosaur; it truly, truly is," said Sharon V. Woodward, who became the company's first female president and treasurer in January 1999. " ... It just works, and if it's not broke, don't fix it."

Aside from appointing a woman president, the closest the company has come to radical change came this week, when it left its offices in a historic landmark building at the intersection of Eutaw and Fayette streets and moved into a glass-enclosed high-rise at 100 N. Charles St.

It had been in the previous location since 1889, but had to move because it had run out of space and remodeling proved to be impractical.

Other than the address, nothing has changed about the company's only product: the perpetual policy. Instead of paying an annual premium, Baltimore Equitable customers, who own the company, pay a large deposit when they initiate coverage.

The company holds on to that sum - typically thousands of dollars - for as long as the policy is in effect, but returns the entire premium if the policy is ever canceled. The refund is guaranteed regardless of how many claims the company has paid on the policy.

The company gains by investing the money in stocks and bonds and pocketing the profits, which it uses to build its surplus and pay claims. It has never paid a dividend.

Like all insurance companies, Baltimore Equitable's portfolio took a hit when the stock market plunged last year. But it has since recovered the 7 percent it lost.

Perpetual policies have never gained mass appeal, though they have been around since Colonial times. The company has just under 6,000 policyholders, a number that has held fairly steady for the past five years.

"A lot of people don't want to tie up their money," said Jerry Rosenbloom, professor of insurance and risk management at the Wharton School of Business at the University of Pennsylvania. "I don't think it's been very well understood. But I think there's nothing inherently wrong with it and the advantage is that it [the policy] goes on forever. You don't have to pay annual premiums."

The cost varies depending on the location and value of the house. Typically, homeowners pay a set amount for every $1,000 of home value. The company adjusts its rates on new policies in keeping with inflation and claims costs. But once a policy is written, the rate paid by the customer remains the same for life.

Currently, a typical $200,000 house in Baltimore County would require a one-time deposit of about $9,800. As the home increases in value, the homeowner must purchase additional coverage to keep pace with the replacement cost of the house.

People who buy perpetual policies tend to be older and more affluent, a prerequisite given the large upfront payment. Those people also tend to be more likely to equip their homes with burglar alarms and other preventative measures, which helps cut down on claims.

But such policies have their drawbacks, too. Companies that sell conventional policies can raise premiums annually if costs go up. Baltimore Equitable doesn't have that luxury, since its policies remain in effect at the original price for as long as the homeowner chooses.

For that reason, perpetual policy underwriters tend to be more choosy about whom they insure.

"It's a very difficult product to price, because if you make a mistake and set the price wrong, you're stuck with it forever after," said Mark Browne, professor of insurance and risk management at the University of Wisconsin-Madison. "It's like a marriage, a lifetime commitment."

So far, Baltimore Equitable has never failed to pay a claim or return a deposit, despite suffering through some of the city's most difficult moments.

The company was founded in early 1794 by a group of prominent citizens who wanted to emulate The Philadelphia Contributorship, a similar company founded by Benjamin Franklin and other Philadelphia notables of that era.

Franklin's company still exists, though it has largely moved away from selling perpetual policies.

Baltimore Equitable faced perhaps its greatest test in 1904, when it paid $2 million in claims to 455 homeowners after fire destroyed entire neighborhoods. In today's dollars, that amounts to about $40.2 million.

The loss illustrated the perils of having policyholders concentrated in one geographic area, a weakness that continues to trouble the company to this day.

In 1994, about 90 percent of Baltimore Equitable's customers were located in the Baltimore metropolitan area. In an interview with The Sun that year, Steve Bernhardt, then president of the company, boasted that the lack of geographic diversity was a plus, since Baltimore rarely experiences floods, tornadoes and earthquakes.

"Hurricanes don't strike the Baltimore metropolitan area," he added.

He was wrong.

As it moved into its new offices this week, the Baltimore Equitable staff was busy fielding dozens of calls from homeowners hurt by the remnants of Hurricane Isabel. Despite being downgraded to a tropical storm by the time it hit Maryland, Isabel damaged thousands of homes and caused millions of dollars in damage. The disaster comes just months after the company paid out more than $600,000 in claims resulting from last winter's snowstorm.

Woodward said losses from Isabel will probably be less than the snowstorm, but the combination of both events in one year will have a large impact on the small company. "We've never been hit twice in one year like this before," she said.

To limit exposure to such disasters, the company has steadily pursued clients in Pennsylvania. The geographic push, which was required in order for the company to maintain its A-plus rating with Best, began in 2001 with a rare radio advertising campaign.

"The geographical diversity of Baltimore Equitable's policies has been an ongoing project since I took over," Woodward said.

The campaign worked so well that the company had to stop advertising because it couldn't risk writing more policies, which show up as liabilities on the company's books.

Today, about 50 percent to 60 percent of the company's customers are in the Baltimore area, with the rest coming from other Maryland counties and Pennsylvania.

By spreading its risk into Pennsylvania, the company is poised to survive its third century in business, said Rosenbloom, the Wharton professor.

"Anybody who can stay in business that long in the unpredictable business of insurance is doing pretty good," he said.

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