If ever there was a risky venture, it would be a rock concert to compete on the same day, in the same area, against Woodstock ’94. And if ever there was a family that would take such a risk it is the Rhulens, who run Frontier Insurance in Rock Hill, New York. Four siblings sank $2 million into Bethel ’94, positioning it as the true grass-roots alternative to the commercial con of Woodstock last summer. But ticket sales dragged. The concert was canceled at the last minute, and the siblings lost their investment.
When you gamble, you sometimes lose. For the Rhulens, Bethel’s risk was magnified because it was their first attempt to fund an event, instead of underwriting insurance. But in business if you carefully calculate risk, you can win most of the time. That’s how the Rhulens have parlayed a small insurance agency into a lucrative public company that is putting its competitors to shame. Frontier Insurance, led by patriarch Walter Rhulen, has grown wildly in revenue, and in value for its shareholders, because the family knows how to take risks— despite Bethel ’94.
To many family business owners, one of the greatest risks imaginable would be to “go public” in the first place. They might lose control of ownership, operations, and succession. But the Rhulens have kept firm control over Frontier, even though they now own only 26 percent of the stock. Not only that, they have dispassionately managed several other risky maneuvers that can easily trip up a family business: selling a major portion of the company, promoting a young successor over senior executives, placing numerous siblings in top management positions, and awarding shares to everyone in a large, extended family.
The Rhulens have succeeded by making market decisions in a very corporate manner, while making personnel decisions in a decidedly family manner. They’ve also found a way to promulgate the idea that it is the knowledge of the family’s leaders that has brought the company to where it is. No outsider, they maintain, can produce the key ingredients better. Proving that assertion to shareholders, top executives, and the board of directors, however, will fall to Walter’s son Harry, the heir-apparent.
Bungee jumping gamblers?
Frontier began as the Rhulen Agency in 1934, founded by Max Rhulen in Monticello, New York, 75 miles northwest of New York City. In time Max’s sons, Walter and Peter, his daughter, Joan, and Joan’s husband, Jesse, all came to work for him. In the 1960s Walter became president, and took over as chairman in the mid-1980s when Max retired. In 1981 the family created an operating company, Frontier Insurance, to underwrite the policies that the agency was selling.
The Rhulen Agency made a name for itself by catering to small clients in the region that larger companies were leery of, such as children’s camps. Eventually Rhulen became known nationally for insuring camps everywhere. Peter then made headlines by selling policies to thoroughbred owners and jockeys at nearby racetracks. Frontier made handsome profits from the premiums.
In 1986 the family spun off Frontier as an independent company. Walter resigned from the agency, which was left in Peter and Jesse’s hands, and took over as Frontier’s CEO. In 1989 the family sold the Rhulen Agency to Markel Corp. Only Walter, 63, remains; Peter and Jesse serve now as board members.
However, several members of the third generation have risen to top spots at Frontier. Walter’s son Harry, age 31 and the second of four children, is senior vice-president. Harry’s sister, Suzanne Loughlin, is managing attorney of Frontier’s in-house law firm. Harry’s brother Erik and cousin Jon Farrow hold management positions. Suzanne’s husband, Joe, is a company attorney.
Frontier is officially described as a national underwriter of specialty insurance products serving niche markets. What that means is Frontier underwrites insurance for high-risk clients who pay high premiums. Frontier’s revenues increased steadily in the mid-1980s and have skyrocketed from $63 million in 1989 to $139 million in 1993. Frontier’s profits have increased dramatically, at a rate much greater than the insurance industry average.
Despite its Wild West name, Frontier does not live dangerously. The company’s success is a result of Walter’s brilliance in ferreting out clients that other insurance companies won’t touch. By applying intense due diligence, he finds that many of these prospects aren’t so risky after all. And because Rhulen is small—for an insurance company—it can afford to underwrite little market segments.
Frontier’s list of clients is fun to ponder. It underwrites liability insurance for bungee jumping operators, white water rafting outfits, pest control companies, day care owners, archery products manufacturers, chiropractors, and motorcycle training schools. The bulk of its business is malpractice insurance for doctors and dentists. One of Frontier’s most unusual lines was opened just last year: insurance for “alternative risk physicians”—doctors who have lost their standard malpractice coverage due to problems with peer review, substance abuse, or excessive claims.
Are they out of their minds? Not upon close analysis. Although bungee jumping is portrayed as loony, only a few deaths and serious injuries have occurred in the United States in more than two million jumps made since 1987. Frontier only underwrites doctors for malpractice who meet strict company requirements, and dentists who don’t perform surgery. Though the Rhulens are portrayed as gamblers, they make their money by carefully quantifying and managing risk.
When to get out
Part of that job is knowing when to cut losses. In recent months the business press has dramatized Frontier as a company that cold-heartedly drops lines of insurance, suggesting that the company generates fast revenues by writing many policies at high rates, only to jump ship when claims start to mount. “We won’t tolerate an unprofitable situation, even if it hurts market share or public perception,” Walter admitted to Family Business. “But we try to make it work first. Besides, we can’t just drop insureds in a reckless manner; we have to get out according to each state’s regulations.”
Walter, always calm, gracious, and soft-spoken, points out that Frontier has dropped only two lines of insurance in recent times. In the 1980s Frontier was the major underwriter of liquor-license liability insurance in New York State, with 4,000 clients and premiums surpassing $7 million annually. By the time it got out last year, Frontier was down to 400 clients and $1 million in premiums. Walter says that once Frontier demonstrated liquor liability could be profitable, other insurers stole market share by packaging restaurant insurance with liquor liability insurance. Frontier also has dropped much of its workers’ compensation insurance, which it wrote in numerous states for cotton gin operators and thoroughbred jockeys. Claims were rising but regulations prevented Frontier from increasing premiums. Now Frontier only covers cotton gin operators in Texas and jockeys in New Jersey.
More divestiture may be at hand as Frontier evaluates malpractice coverage in Florida. “Lately it has turned unprofitable,” Walter notes. “But we’re not saying, ‘Okay, let’s chuck Florida.’ We will examine the coverage by class of physician and county of practice to see what areas are hurting us. We will then ask, ‘What can we do to improve?’ If we can get a large rate increase, fine. If it seems hopeless because of regulations—say, for doctors in Dade County who do cardiac catheterization—we will get out.”
Selling a legacy
Frontier makes market decisions in a very corporate manner, “purely without emotion,” Walter’s son Harry says. But the Rhulens make personnel decisions personally. That’s how the company has survived the major transitions that could otherwise undermine a family business, and how the family has maintained control that might otherwise undermine a public company.
To fuel Frontier’s expansion, Walter took it public in 1986, right after it was spun off from the Rhulen Agency. The decision was made strictly by Walter, his brother, Peter, and his brother-in-law, Jesse, who together owned 80 percent of the company. “The entire family discussed the idea, but the three of us made the decision,” Walter says.
A similar approach was taken to selling the family legacy, the Rhulen Agency. “The agency was making a lot of money, so it was an attractive business to sell,” Walter explains. “Peter, Jesse, and I were heading in different directions. I wanted Frontier, they wanted to do less or retire. So the decision was fairly easy.”
Frontier has had two public offerings since; the latest in September 1993 raised $59 million. These decisions were made by Frontier’s board—but Walter, Peter, and Jesse held three of the five board positions (and still do). The rest of the family debated the offerings but “were not part of the decision-making process,” Walter notes. “Frontier is a public company. It is operated by the board.”
Decisions to take on new lines of business, however, are more dispersed. Small manager review committees screen new proposals and judge them against standard criteria the company has developed. Proposals that pass are moved along to a higher group of managers who have the right experience to analyze the risk factors. The few ideas that survive are presented formally to Walter, who gives the final yea or nay.
Each time a new line is contemplated department heads are asked for input. “I won’t say, ‘Yes, do it, or not,’ ” notes Gerald Steimers, president of Frontier’s subsidiary Pioneer Claim Management, which provides claims services. “But I will say, ‘Here are some potential problems.’” Steimers, who has worked for two other insurance companies, one similar in size, says the Rhulens are “much more open-minded” about managers’ input than the others.
Steimers also says the Rhulens are “much less conservative about risk and growth.” Why? Walter has a simple answer: “The guys who take risks tend to think they can manage them.” Harry echoes his father’s view. “High risk is only a perception. We target markets that are perceived to be difficult. Then we analyze how we can reduce risk and control it.” Walter approved underwriting of bungee jumping because an outside agent who had proposed the idea to Harry had developed a way to analyze whether operators had adequate safety procedures in place; Frontier only insures operators who meet the criteria.
Maintaining family control
Besides tightly controlling major decisions, the Rhulen family has maintained control over the public company in several ways.
“We’ve put people into jobs we thought they’d do well,” says Walter, “for the good of the company and the good of the family.” He believes family placements can be justified because “we start with the assumption that a family member has an interest in the company that goes far beyond just employment. They will do their job better than an outsider and will be more reliable. The company is intertwined with their lives.”
The greatest move Walter made to ensure that Frontier will continue under family control was to establish a successor early. He handpicked Harry and groomed him. Harry earned a college degree in insurance, an MBA, and a law degree, covering the three major aspects of the underwriting business. No other family member has such training. Harry has worked at Frontier for six years.
Walter explains the choice matter-of-factly. “The successor is picked by me. I have selected my son Harry, because he has the capabilities to run this business. I couldn’t imagine this company being run by someone who wasn’t family. My board of directors is satisfied.” Completing the move to keep family control is now up to his son. “Harry will have to prove to the board he’s the right guy,” Walter says. “That’s something I can’t help him with.”
The board might be able to find an outsider who has equivalent training. But that’s where the family knowledge, the mystique of Walter, is invoked, and Harry invokes it well. “I have to make the public sector believe I am better than anyone else in the world for the job,” he says, in a cocky, loud manner that is notably more abrupt than his father’s. “I still have a lot to learn, but I’ve grown up in the business, and I have worked side-by-side with my father for four years. I understand why he makes the decisions he does. I know why Frontier is successful. I’m the only person who knows that.”
Now director of operations, which includes oversight of the human resources function, Harry has won the favor of employees by instituting some popular policy changes. Under his urging, quittin’ time is now 1:30 p.m. every Friday of the year. He designated “casual dress” for summer Fridays, too. “Harry felt it would help the atmosphere,” Walter says glumly. “I’m getting used to it.”
Harry also has been smart about maintaining the personal connections Walter has established with important outsiders. “People ask me, ‘Why do you want to know your father’s cronies?’ One of the big mistakes I see children make is to not learn who their father’s key contacts are. I need to meet them, to know them, even though they’re twice my age.” Harry notes that his friend Bill Wrigley, whose father runs Wm. Wrigley Jr. Co., the chewing gum empire in Chicago, has taken the same strategy, and has run into other scions who are skeptical that the older generation’s cronies can help them.
The Rhulens also make a point to remind the world that the company’s success is due in large part to the groundwork laid by the old family agency. In insuring thousands of camps, the Rhulen Agency won the loyalty of local agents nationwide. These agents are now the people who bring prospective niches to Frontier, about three proposals a week. “We tell the agents that although we may not write a program, if we do we will stand by you because we were in your shoes,” Harry says.
Putting stock in family
It is interesting to note that similar tactics are being played out now at Ford Motor Co. The Ford family owns a greater share—40 percent—of the company stock, and there has been no family leader since Henry Ford 2nd stepped down 15 years ago. But in September, Ford’s board announced that William Clay Ford Jr., Henry 2nd’s nephew, would chair a board committee that oversees all important financial and strategic decisions. William Jr. also will be a leading spokesman, making him the family’s first public figure in years. Only 37, William Jr. is leapfrogging senior executives after carefully orchestrated training. No Ford family member can claim unique knowledge in running an auto maker today, yet in an analysis of William Jr.’s appointment The Wall Street Journal stated that Ford Motor has stood apart because the family has always provided eccentric, brilliant leaders who could also capture headlines.
To satisfy high-ranking outsiders, Henry 2nd took pains to establish a succession plan for nonfamily executives. He also made it clear that one of their crucial tasks was to manage the family’s wishes. William Jr. still will have to satisfy stockholders, a job that will be tougher for him than for Harry. Even though it is listed on the New York Stock Exchange, Frontier has fewer than 1,000 shareholders of record. Many live in Sullivan County or are employees. Frontier’s payroll of 360, its dedication to its employees, and the taxes it pays to the county have engendered loyalty.
Great performance will help, too. Through the 1980s growth in both Frontier’s revenues and earnings reached almost 60 percent compounded annually. Profit for 1993 increased 26 percent over the prior year. Income per share has almost doubled in the last five years, and book value has tripled. In July 1994, Value Line, the highly regarded stock analysis service, wrote that “We have no reason to believe the stellar earnings performance will be interrupted any time soon.” As long as the Rhulen family can keep this up, investors will be happy.
Bethel’s silver lining
Even with the establishment of Harry as heir-apparent, Frontier might have had a potential sibling rivalry on its hands. But the Bethel concert adventure went a long way to defining the role of each member of the third generation, and establishing the succession rite.
Originally, concert promoters approached Walter to be a major financier. He referred them to his children. At first glance, the siblings said no. “We didn’t think we could control enough of the operation to limit the risky investment,” Harry explains. So the promoters handed over the reins. The four siblings—Suzanne, Harry, Eric, and Anthony—formed SHEA Entertainment, drew up a $5 million budget, and committed the first $2 million, all personal money. They started an advertising campaign, hired help, got permits. But when it became clear they weren’t going to sell enough tickets, the sibling partners decided not to invest the remaining $3 million.
Harry maintains the sobering experience was worth far more than the money lost. “In 10 weeks we built and dismantled a multimillion dollar corporation. The teamwork we exhibited was fantastic. That will help us immensely. We learned that when you form committees, or teams, each one has to have a strong leader who then delegates.”
The project “also established the succession issue for us,” Harry continues. “I was the commander-in-chief. They had their jobs and they didn’t want mine. We all recognized we had our places, and that we were competent in them.”
Because the Bethel attempt was so highly publicized in the media, it also gave the siblings their own identities. “It brought all of us exposure that was independent of Frontier,” Harry says. “Instead of us being ‘Walter’s children,’ we were Suzy and Harry and Eric and Anthony. Already people who used to call Walter—even though they knew they’d be transferred to us—now call us directly.”
family and nonfamily risk
Harry sees no threat from the immediate family executives, most of whom meet at Walter’s house each Sunday for brunch. “We don’t hesitate to tell each other what we think,” Harry says. “We curse each other out. Then 10 minutes later we’re joking. Outsiders cringe when they hear it.”
Besides siblings, however, every spouse, child, and grandchild in Walter, Peter, and Joan’s families owns stock that has been gifted by the second generation and Max Rhulen’s estate. Harry’s daughter, born in August, held shares before she was five weeks old. Such an extended group of family shareholders can bring trouble. Aware of this, Harry says he wants to start a family council. “Undoubtedly there are jealousies and doubts out there, even if they are subconscious,” Harry says. “I want to get them out.” The council, he says, will allow other family members to express their feelings, and hear what’s happening, on a regular basis.
Attracting and keeping senior nonfamily executives could prove more tricky. Walter says he has always told prospective managers, “You’re dealing with a family business that happens to be a public company.” But Frontier’s own managers indicate more thought may be needed in the future.
Steimers, the head of Frontier’s claims subsidiary, notes, “I’m as far as I can go in the company. As long as new challenges continue to come along—and as long as I’m treated fairly—I won’t want to work anywhere else.”
Finance vice-president Dennis Plante says, “I’d like to think some day I could be ‘The Guy’ here, but knowing that is not likely can be a demotivator.” However, he says, “It is more important that I can continue to have an impact on this company—and get a good paycheck. Senior people need fulfillment.”
Plante says the family’s leaders have not always appreciated this need, but adds, “They’re becoming enlightened.” Part of the reason, Plante notes, is that the senior nonfamily managers have said, “ ‘Hey, you’ve got to pay attention to us, because we know what we are doing.’ We have also indicated we want to participate more in big decisions.”
Plante is confident that Harry and the other Rhulen executives will lead Frontier capably—as long as they can maintain consensus. “Sometimes there is conflict between them, and for the rest of us that can be aggravating. If there is any potential that the family won’t agree on leadership, then the company is better off choosing a smart, nonfamily person to run the place.”
Changing for the future
Now that Frontier has made a name as an aggressive company that finds lucrative niches, it is beginning to be approached by institutions whose members require insurance that poses some risk. As a result, the company expects net premiums written in 1994 to increase by roughly 50 percent over 1993.
Frontier also is penetrating medical and dental malpractice markets through affinity groups and professional associations, a strategy its competitors have not successfully copied. Last year Frontier received the endorsement of the Academy of General Dentistry, with 33,000 dentists nationwide, for professional liability coverage. This year it received the endorsement of the American Society of Internal Medicine.
With such growth, Frontier’s reputation will ride more on the company name and less on the first name of the CEO. Walter Rhulen was Frontier; Frontier will rapidly become more than Harry Rhulen. However, as a public company in a regulated industry, Frontier’s long-term viability hinges on its ratings from insurance industry analysts and regulators, who are keenly interested in how secure the firm will be once Walter retires. “I am very closely watched by a lot of people who are looking to see if I screw up,” Harry acknowledges.
Some analysts are satisfied. “The new generation is coming on in a most promising fashion,” writes Lloyd Barriger, a stock broker and insurance analyst who lives near Rock Hill, in the Sullivan County Democrat. Others are not so sanguine. William Yankus, vice-president of insurance investment firm Conning & Co., commented in Investor’s Business Daily: “[Walter’s] the guy that masterminded the operation. [Harry] hasn’t given any evidence that he can run the company.” A former Frontier director, Michael Chasanoff, now a property developer in New York, told the same newspaper that he had resigned from Frontier’s board in 1991 because, “There was no room for outside directors who would be more objective.”
Harry also will have to change his father’s management style, according to Frontier’s top nonfamily executives. “Walter has a lot of gut that takes him in the right direction,” says Dennis Plante, senior vice-president of finance. “Harry will need to use more of a group approach. More participatory management will be better, and necessary—the company is simply bigger.”
Harry concurs. “My father is typical of most entrepreneurs. He likes to control as much as he can himself. He should probably delegate more. I’m comfortable with delegating.”
Some aspects of decision-making will change under Harry. “I will not be as autocratic as my father,” he says. But father and son agree the company’s approach to leadership will stay the same. “Everyone here has the opportunity to influence my decisions,” Walter says. “I try to build consensus. But I also have a gyro that’s been spinning for 40 years and it knows where it’s going. I will not allow consensus to take me off track.”
“This is not a democracy,” Harry confirms. “We discuss matters openly but the decisions are handed down. That’s the only way to run a company that is growing this quickly.”
Harry has a little time to solidify his position. Walter is in the second year of a five-year contract with Frontier. Until he steps down, he is firmly in control. “A business is a product of its leadership,” he says flatly. “I am the leader.”Frontier Insurance Co.
Business: Underwriting insurance for a range of high risk businesses and professionals.
Location: Rock Hill, NY.
Revenue: $139 million (1993).
Employees: 360.
Founded: 1934, as the Rhulen Agency, by Max Rhulen.
Family employees: Walter Rhulen, president and chairman; son Harry, senior vice-president; daughter Suzanne Loughlin, managing attorney; son-in-law Joe Loughlin, attorney and secretary; son Erik, vice-president; nephew Jonathan Farrow, vice-president; son Anthony, trainee.
Ownership: Publicly traded on New York Stock Exchange; Rhulen family owns 26 percent of shares.
Board: Walter, brother Peter, brother-in-law Jesse, and two outsiders: Lawrence O’Brien, Douglas Moat.
Claim to fame: Maintains rapid revenue growth by taking risks considered excessive by rest of industry. Also, has managed to retain control of the firm after going public.
The House that Harry built
One big test in the careful plan to establish Harry Rhulen’s rise to power involved construction of Frontier’s new headquarters. Throughout its rapid growth in the 1980s Frontier remained based in a former supermarket in Monticello, New York. “My office was in the old freezer,” Walter notes. “I had no windows.” By 1989 Frontier had taken over six other buildings within a block, and too many of its 150 employees spent their days walking the streets.
It was time to relocate—and to make a statement. After considering sites in Florida, Colorado, and southern California, Walter decided to move a few miles up the road to Rock Hill, to the great relief of the local employees and stockholders. He made it publicly clear that, for the good of Sullivan County, his family wanted the company to stay put.
He also put Harry in charge of overseeing construction of the new 120,000 square-foot facility. It is a gleaming brick-red and glass fortress perched high on a hill overlooking Route 17, the major highway across southern New York. Inside, natural light streams in everywhere. An open, central staircase rises beneath a large dome skylight, connecting all departments on all three stories. On the third level, a wide hallway from the central stairs, with dark inlaid hardwood floor, leads to Walter’s office on the right and Harry’s on the left, with an imposing marblesque reception station situated between the two. Both executives have fruit-wood conference tables in their offices and wall-length windows that offer an inspiring view overlooking Lake Louise Marie and the Catskill Mountains.
“I built this building,” Harry is quick to tell a visitor. Clearly, no expense was spared in showing the world that Harry Rhulen could do great things. – M.F.