Q&A: Risk and reward

Tornadoes ravaging the South, earthquakes and a nuclear disaster in Japan and a still struggling economy: It’s a tough time to be in the riskiest part of the insurance business.

But add one more challenge for that industry: dropping prices for the riskiest policies.

Kinsale, a new Richmond-based specialty insurance company (the niche of the insurance business that write policies for the riskier and sometimes more obscure insurance such as medical malpractice), just finished its first year. And it’s picking its clients very carefully.

Mike Kehoe, the founder and president, chatted with BizSense about the insurance business, why sales were a bit lower than expected and why it’s good business to give employees stock ownership. Below is an edited transcript.

Richmond BizSense: You just finished your first year as an insurance business in a very turbulent time. Are you already paying out claims for some of the disasters we’re seeing on TV?

Michael Kehoe: So far we haven’t had any losses. We target high-risk business. So higher risk goes with higher margins. But no, not yet.

RBS: The challenge for lots of startups we write about — at least in the first few years — is getting the word out. It might be a great product, but if people don’t know it or think of it, sales are slow. How have you dealt with that?

MK: We’ve got an experienced team of people here. Every single underwriter came out of established company (such as Colony, Markel or James River). We don’t have an underwriter with less than eight years of experience. And we deal with brokers all over the country, individuals that we’ve had relationships with going back 10, 15, 20 years. That has made marketing dramatically easier.

RBS: How did the first year go?

MK: We have 48 employees, sold $18 million in premiums and are approved to write business in 41 states plus the District of Colombia. We hope to be in all 50 states by Labor Day.

RBS: New businesses can take years to turn a profit. Are you guys profitable yet?

MK: Not yet. We expected to lose money the first year in business. We had all these expenses from day one. And it takes while for revenue to pick up. We expect to have our first monthly profit in the second half of 2011.

RBS: This is not your first time through this drill. You built another similar insurance company at James River and sold it. What has surprised you in your first year this time?

MK: We wrote less premium volume than I anticipated. That was a function of a highly competitive market and our disciplined approach. We expected to write $40 million. We did $18 million. The level of competition for business was a little more intense than I thought it would be. Property casualty, especially commercial property and commercial lines, is a very cyclical business. There are periods where prices rise and then fall. Right now prices have been falling for eight consecutive quarters.

RBS: What was the biggest challenge?

MK: Staying patient with the underwriting. Being a disciplined underwriter when there is lots of competition takes a lot of effort. It’s easy for an insurance company to grow very rapidly if it cuts prices. But the consequence of that could be poor financial results when those claims get paid out.

RBS: How was that different from your run at James River?

MK: At James River, we opened during a period of very limited competition. So the first year in business at James River, we wrote $80 million. In periods where prices rise, you write a lot of business, and in periods where the prices fall, you wait for the right opportunity to come along.

RBS: How’s it going building your staff?

MK: Steady. For most part, we were staffed to open in March 2010, and it’s more or less the same crew. We will hire maybe seven or eight people this year, mostly in underwriting and some claims professionals.

RBS: You have an unusual employee stock ownership plan. What’s your reason for offering stock to almost all the employees and not just management?

MK: We want everyone to build wealth over time, just like owners. Most insurance companies don’t give employees equity. If they have a good year, there is a bonus. We do all that, too. In addition, each of our employees gets a material amount of restricted stock. They will build wealth along the way.

RBS: Did you do that at James River?

MK: No, just senior managers. James River’s stock option plan at the end of 2007 paid out $51 million. It was a huge payday. Our goal is to do even better.

RBS: Why the offering to, say, underwriters?

MK: I think the same incentive exists for an HR person, accountant or software developer as it does for the president of the company. It’s a great way to attract talented people to a brand new company.