Specialty insurer is open for business

A startup insurance firm in Richmond activated its first policies Tuesday after getting an A- rating from a rating agency. And it hopes to be profitable by the end of this year.

The Kinsale Insurance Company, which has around  40 employees at the Paragon Place headquarters in Henrico County, hopes to grow in the specialty insurance industry, which sells insurance to companies that can’t get it from standard companies because of risk factors (for example, a physician who has been sued for malpractice several times).

Kinsale sells its policies through brokers and generally not directly to businesses looking for insurance products.

The company, which raised $80 million, sells the sort of policies that cover both property and businesses but that other companies don’t want to sell. Specialty insurance is the most profitable segment of the insurance industry, said Mike Kehoe, the founder and CEO.

“With high-risk accounts, if the underwriter knows what he or she is doing, it provides a high margin to the risk-bearer,” Kehoe said. “Companies get paid to take risk.”

Starting an insurance company is not a simple endeavor. The industry is highly regulated and a company must show cash reserves to cover claims. But adding another hassle for Kinsale was the fact that the company had to fight what Kehoe called a “nuisance” lawsuit from a local competitor.

For six years, Kehoe was the boss at James River Insurance. He helped get the company going in 2002 and helped it grow. He also helped sell it for $575 million in 2007. But James River said in a lawsuit that Kehoe committed espionage and unlawfully recruited its employees when he started Kinsale.

The case was settled in February when James River agreed to pay Kinsale $377,000. (You can read the settlement here). That’s less than the legal fees to fight the case, Kehoe said. Read more

Monday Q&A: What’s so special about insurance?

This time Mike Kehoe is running the entire show. After decades in the specialty insurance industry – which issues policies for businesses that can’t get it on the traditional market –  Kehoe, 43, is filling his 7,000 square foot office at Paragon Place with new employees, some of whom come from the other specialty insurers in Richmond. (There’s a bit of a niche industry here.)

So far there are 23 others, but still more furniture than workers in the sparse headquarters. The company is getting ready to officially launch early next year. And there’s nothing on the walls yet. (Kehoe subleased the space from Countrywide Financial for $9.51 per square foot/year, and that includes all of Countrywide’s furniture.)

Kehoe, who grew up in Richmond attending Benedictine High School, Hampden-Sydney and the University of Richmond’s Law School, chats with BizSense about entrepreneurship, and how to shrug off a lawsuit from his former employer.

Below is an edited transcript.

Richmond BizSense: Where did you get the name Kinsale?

Michael Kehoe: I played a round of golf in Ireland. It’s a nice sounding word. There is also a Kinsale in Virginia.

RBS: You made enough from the sale of your previous employer, James River Insurance, to retire. Why are you still working?

MK: I think I’m better at insurance than at golf. I enjoy working and think businesses is a lot of fun.

RBS: You raised $80 million. That’s a lot of money. How did that process go?

MK: You need a lot of capital to safeguard the policy holders. I did not have $80 million. We raised most of it from private equity funds that seek attractive returns over a seven to 10 year period by investing in startup companies. One was the local fund Virginia Capital Partners.

RBS: How hard was it to raise it?

MK: Given the disruption (in the financial markets), it is not an easy time to raise capital. But we have a track record of providing attractive returns for investors which gives those investors confidence in Kinsale and its management team. (James River went public and then was bought by a private equity group that included Goldman Sachs.)

RBS: Did the lawsuit that James River filed against you hurt?

MK: It slowed down our fundraising by about two weeks. After going through additional disclosure and legal processes we were back on track.

RBS: Why did you leave James River, which you helped to build?

MK: They were executing a strategy I didn’t have confidence in. They were getting into the reinsurance business which is a difficult and volatile business that can generate very large losses at times. Plus, this is a chance to run my own business.

RBS: Specialty insurance is sort of a niche industry in Richmond with a handful of firms. How does that help you?

MK: There are five of us, Max Specialty, Markel, James River, Colony and now Kinsale. And that’s an advantage. We expect to recruit from the other firms, as well as from outside Virginia.

RBS: The Markel Corp. has done great in this industry. And James River was sold for a premium. Why is the specialty insurance industry such a good business?

MK: This niche has the highest returns of any segment within the overall property casualty industry. With higher hazard policies, there is less competition. Then again, the business can be more volatile.

RBS: Can you explain exactly the sort of things you would insure?

MK: Both property and casualty coverages for a whole range of small and medium sized businesses. That can include all sorts of industries, from professional liability for lawyers, engineers, and doctors to commercial and residential contractors. But it’s for businesses that can’t get their coverage from standard carriers, like Nationwide or Travelers.

For example, we may write a policy for a surgeon who is high risk because of his area of practice like obstetrics or neurosurgery. Or maybe a doctor who went to school overseas.

RBS: Do you make most of your profits on the bulk of premiums you hold and invest? How does the business model work?

MK: We invest the premiums in a low risk way – no equities. We make money on the underwriting, meaning if we sell $10 million in premiums, we want our losses and our expenses to be less than $10 million.

RBS: And who is your customer?

MK: The companies that we insure, ultimately, but we sell through specialty brokers. If a Nationwide agent can’t get a business a Nationwide policy, they could consider us by contacting a specialty or wholesale broker.

RBS: What’s the marketing challenge for you?

MK: The insurance business is a very competitive one. As a new company we must establish a reputation for providing great service levels to our brokers as they seek to place higher risk coverage.

RBS: What’s your end goal with Kinsale?

MK: To build a great business, and get the investors and employees a great return on the cash they have committed. Our employees have equity-based compensation in addition to salaries, benefits and bonuses. The more valuable the business we build, the greater the wealth-building opportunity for them. It’s also great fun to compete – and to win.

Aaron Kremer is the BizSense editor. Please send news tips to Editor@richmondbizsense.com.

Insurance slugfest with accusations of espionage

A Richmond-based insurance company thinks its former CEO went rogue and broke his contract when he left to start a competing firm. The company wants its day in court and an injunction against the upstart.

The startup, meanwhile, says it followed all non-compete clauses and that it’s  ploy to drown it in legal fees before it can launch successfully.

For six years, Mike Kehoe was the boss at James River Insurance. He helped get the company going in 2002 and helped it grow. He also helped sell it for $575 million in 2007, pocketing $6.4 million in stock options and bonuses, according to the lawsuit. Read more