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

In an interview with NU, 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 during a March interview.

"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.

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." He said "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.

In addition to driving efficiency in the organization, automation will enable the insurer to collect a great deal of statistical information–information that will "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 the 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 said.

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 New York-based Moelis Capital Partners, LLC and Richmond-based Virginia Capital Partners, LLC–PE firms with prior experience investing in insurers 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.