New E&S Insurance Operation Kinsale Launched In Growing Richmond Hub

In an interview with NU's E&S Extra, Mr. Kehoe and Senior Vice President Robert Neal listed several competitive advantages for the new insurance company, including:

o A very experienced staff.

o An entrepreneurial business culture supported by a compensation scheme that will make employees part owners of the company as the business grows.

o A bent toward using automation and quantitative approaches to underwrite risks coming to the E&S market.

"We are a company that's been in business three days, and we probably have as experienced an E&S staff as any company in the business," Mr. Kehoe said.

"Our employees are compensated like owners, with stock in the company. That has allowed us to attract a high-quality staff with tremendous E&S experience," he said, explaining that the 43 employees in place so far all hail from E&S competitors in the Richmond area.

Mr. Kehoe, who was president of Richmond-based James River Insurance Company until July 2008, also worked at Colony Insurance, a Richmond-based E&S unit of Argo Group, from 1994-2002.

"James River was sold to some New York hedge funds at the end of 2007, and in 2008 I left, sat out a year because of a non-compete, and then got Kinsale organized in June 2009," he noted, explaining that the attraction of the de novo startup is that it is "a really unique opportunity for employees to become owners of an insurance company in a limited way."

A stock-option like program is "typically a form of compensation that is much more prominent at an entrepreneurial startup than it is at a big, established firm," he said.

"In general, there's a little bit more risk being with a brand new startup. On the other hand, if you hire a group of really smart and experienced and motivated employees, and if everybody works hard to serve the customers, manage expenses and build the business, then the employees have an extraordinary wealth-building opportunity," he said.

Mr. Neal–who spent the early part of his career with W.R. Berkley Group, and later worked at Argo's Colony for 14 years, where he ultimately took on a position in business development for all three of Argo's specialty insurance operations (Colony, Argonaut Specialty and Argo Pro)–highlighted Kinsale's chief information officer, Bill Kenney, as a key contributor to the strength of the new organization.

"He's built two of the best IT systems I've seen in my career," according to Mr. Neal, referring to Mr. Kenney's prior positions at Colony and James River, adding that the CIO is in the process of putting his final touches into Kinsale's system.

"We do plan to use automation as part of our competitive strategy," Mr. Neal noted.

While Richmond competitors aren't necessarily less automated, Mr. Kehoe observed that "technology is always moving," adding that "as a new company, we're able to look around at the state of things in the technology area, and really put together a plan that puts us ahead…in terms of using not bleeding-edge technology and software, but certainly leading edge."

Mr. Kenney has a very experienced team below him, according to Mr. Kehoe, noting that "the combination of being able to build from scratch, take advantage of past experience–in some cases, past mistakes," puts the new company in an enviable spot.

"Automation is great for driving efficiency in an organization. It also enables us to collect an enormous amount of statistical information to drive a little bit more of a quantitative approach to the E&S business, which historically has been very qualitative," Mr. Kehoe said.

Mr. Neal, who added an unimpaired balance sheet to the list of competitive advantages for Kinsale, echoed Mr. Kehoe's sentiments about having experienced E&S underwriters on board.

"At the end of day, it is still a people business no matter how much technology there is out there," he said, noting that Kinsale's people have long-term relationships in the E&S business built up through the years. "That's going to be very essential to our plan," he added

LEGAL CHALLENGES

With Kinsale drawing from the local pool to develop that essential "people" component, the hiring activity created an early hurdle for the company before it officially opened its doors–a lawsuit filed against Mr. Kehoe, Mr. Kenney and other defendants brought by former employer James River. The suit alleged breach of contract, conspiracy, tortious interference and computer hacking.

Mr. Kehoe contends he didn't start hiring folks away from James River until three months after the non-compete clause of his contract with his prior employer had ended.

The litigation was settled on Feb. 18, 2010, with James River agreeing to pay Kinsale $377,000, and Kinsale agreeing to limit the number of employees it can hire away from James River over the subsequent nine-month period. Kinsale also agreed not to bind any James River renewals or policyholder cancellations for six months from the date of the settlement.

Asked about the early challenges in starting up a new company, Mr. Kehoe did not voluntarily offer the legal battle as his toughest hurdle, instead pointing to the struggle to raise capital.

"We are in a competitive part of the cycle,…our economy had gone through a massive convulsion," he said, pointing to the bursting of the credit bubble, the recession and the collapse of the real estate bubble in particular. "That has had a disproportionate impact in the E&S market, because a lot of the contracting classes have historically been [covered by E&S insurers]. So it's a tough time to get a company started from a capital perspective."

Investors who ultimately put up the $80 million in capital include Moelis Capital Partners, LLC and Virginia Capital Partners, LLC.

Kinsale describes New York-based Moelis as a private equity firm that specializes in investments in the middle market and has significant insurance and financial services industry expertise. Kinsale also said Richmond-based Virginia Capital Partners has investments in more than 30 enterprises with significant experience investing in E&S insurance companies.

Although Kinsale did not identify the other insurance investments of either PE group, Virginia Capital Partners lists a prior investment in Front Royal, an E&S carrier that was sold to Argo Group in 2001, and a prior investment in James River, which was sold to D.E. Shaw in 2007.

Once the financing came together, Mr. Kehoe said the management team began to actually build the company in June of 2009. "We sold our first policy in the first week of March of 2010–nine months later," he said.

Asked about the risk of starting a new company during a soft market, Mr. Kehoe was undaunted, noting that a turn is inevitable within the next three years.

"Commercial rates peaked back in 2004 and started to trend downward, albeit from a very attractive level….When you think about seven years of rate declines in an environment where investment returns are quite modest and where loss costs are pretty steadily rising, you can make a strong argument that there is likely to be a transition in the market sometime in the next year or two or three," he said.

BROAD RISK APPETITE

Mr. Kehoe said the new company's focus will be on small- and medium-size commercial insurance buyers, with a typical policy premium that falls somewhere in the $10,000-to-$50,000 range.

A diversified product mix includes property and casualty coverages (both primary and excess, including specialties such as energy casualty and environmental), as well as health care liability and non-medical professional liability offerings.

Kinsale will not participate in the contract/binding authority or program markets–instead concentrating on individual risk business placed through surplus lines brokers.

"We like the individual risk business. It fits in with the fact that we are contrarian underwriters," Mr. Kehoe said. "We like higher-hazard accounts. We're looking at a very heterogeneous mix of business, so our underwriters have a lot of flexibility on how they can approach a given transaction."

As for wholesale partners, Mr. Neal said Kinsale's plan is to begin with a limited number of broker appointments and to keep them at a very manageable level. "We don't want to be on every street corner doing business," he said, noting that the initial corps consists of roughly 45 "very well-known, reputable brokers both on a national and a regional basis."

Most are members of professional organizations, he said, listing the Kansas City, Mo.-based National Association of Professional Surplus Lines Offices Ltd. and the Minneapolis-based Professional Liability Underwriting Society.

"The real thing is that there's been [some] connection with us. We know them from past lives, we've done business with them, [and] we like how they execute," he said.

Further explaining the business to be written through its distribution partners, Mr. Kehoe said "there's nothing that we'll have a hard and fast rule against writing."

In general, Kinsale has an appetite for "more distressed or challenging risks–businesses that have had some loss problems, perhaps just have high-risk operations, or they operate in a litigious venue," he said, also listing new companies with no track record as potential insureds.

"There are all sorts of reasons that business falls out of the standard market and into the E&S market. And even within the surplus lines community, Kinsale has a very healthy appetite for risk," he added. "We try to apply a combination of expert underwriting, adequate pricing and restrictive coverage in order to make those challenging risks a good opportunity for us as the risk-bearer, but [also] certainly, a good product for the insurance buyer for that business," he said.

Oldwick, N.J.-based A.M. Best, in support of its "A-minus" rating for Kinsale, also said it expects Mr. Kehoe and the management team to establish strong risk selection, underwriting, pricing and claim management controls to ensure adherence to the company's developed operating plan for serving the market for hard-to-place E&S risks.

Best added that Kinsale's growth over its first few years is expected to be maintained at a level that its capital base can adequately support.

"Upon A.M. Best's review, Kinsale's business plan appeared reasonable, considering prevailing market conditions," the rating agency statement said. Best noted, however, that positive rating factors are offset "by the considerable challenges and execution risk associated with a startup company, especially those commencing operations in the very competitive market for surplus lines business."

Best's announcement explained that Kinsale was formed via the purchase of American Healthcare Specialty Insurance Company from its ultimate parent, The Doctors Company, an Interinsurance Exchange, in a deal finalized on Feb. 5, 2010. AHSIC was renamed Kinsale Insurance Company effective Feb. 11, 2010.

THE NEXT SCOTTSDALE

Although AHSIC is domiciled in Little Rock, Ark., Kinsale's headquarters is in Richmond–and management has no plans to operate in any offices outside of Richmond for the foreseeable future, Mr. Kehoe said.

Is Richmond the new Scottsdale of the E&S business?

"Maybe in a modest way," Mr. Kehoe responded, going on to give some the history of Richmond in the E&S business:

o Markel is the largest E&S company based in the Richmond area.

o Colony Insurance grew out of the risk management department of a Fortune 500 company conglomerate called Figgie International. It spun off an E&S company subsidiary in the early 1990s, which was later acquired by Argo Group.

o Max Specialty–an E&S company headquartered in Richmond, owned by Max Capital of Bermuda–was launched by Markel veteran Steve Vaccaro in 2007. (Max Capital is merging with Harbor Point Limited and will be named Alterra Capital when the merger is complete.)

o James River was formed by defectors from Colony Insurance, giving rise to a fourth E&S carrier in Richmond.

"Once you have the talent pool, I guess that's just capitalism at work," said Mr. Kehoe, noting that managers at Kinsale spun off from James River, Colony and Markel to form the fifth risk-bearing E&S company in Richmond.

There are also wholesale brokers and MGAs in the region, he noted. In fact, NAPSLO lists more than a dozen entities with a Richmond/Glen Allen location in membership directory, and two dozen for Scottsdale by NU's count.

Kinsale is already currently eligible to write E&S business in 31 states and the District of Columbia, and the company is applying for eligibility in the remaining states.