Tough risks, smart solutions

Newcomer James River Insurance brings energy and expertise to the wholesale market

By Elisabeth Boone, CPCU

Michael P. Kehoe (left) is President/CEO of James River Insurance Company, and John G. Clarke, CPCU, is Director of Marketing.

Talk about timing: When James River Insurance Company opened for business in July 2003, the hard market already was beginning to soften—not the best news for a new entrant into the wholesale market. These days, though, many brokers are considerably less willing to trust their clients’ specialty risks to the whims of the standard market, even when prices are tantalizingly low. And James River, like other recent entrants into the excess-surplus market, is positioning itself to be a stable, savvy market for some very difficult classes.

James River Insurance is a subsidiary of James River Group, Inc., which purchased the insurer’s predecessor, Fidelity Excess and Surplus Insurance Company, from American Financial Group. James River Insurance has policyholder surplus of $57.5 million and is rated A-/VII by Best’s. Domiciled in Ohio, the insurer operates from its headquarters in Richmond, Virginia, and is authorized to write business on a nonadmitted basis in 48 states and the District of Columbia.

James River’s senior management team is a diverse group. Serving as president and chief executive officer of James River is Michael Kehoe, who most recently was vice president of brokerage underwriting for Colony Insurance Group, the surplus lines subsidiaries of Agronaut Group, Inc. Other former Colony executives who moved to James River are Edward Desch, senior vice president and chief financial officer; William J. Kenney Jr., chief information officer and senior vice president-administration; and Brian Haney, vice president and chief actuary. Serving as senior vice president-claims is Ann Marie Marson, who most recently held the same position at ACE USA. John Clarke is director of marketing; his background includes serving as senior vice president and chief product development officer for Wyndham Partners Consulting, a division of Renaissance U.S. Holdings, and as a vice president of Markel Corporation.

A market in flux

“In mid-2003, most casualty and many professional liability lines were in the second half of the all-too-short hard market cycle,” Clarke says. “The commercial property market was already suffering a renewed round of rate cutting accompanying a flood of new capacity in the marketplace.” Prior experience in the E&S market and strong prospects for growth, he says, led James River into the market in 2003.

The mission and operating philosophy of James River Insurance reflect its commitment to its three classes of stakeholders: investors, brokers, and insureds. “Like most companies, our overall mission is to deliver consistently high returns on equity to our investor shareholders by building the most profitable E&S company in the business,” Kehoe says. “Operationally, we want to provide fast, efficient, creative solutions to small to medium account business that requires a true underwriter’s touch, often in tough and higher hazard classes of business.”

With a keen focus on underwriting profit, James River Insurance writes brokerage, individual risk business through 10 underwriting divisions, each organized around a specific industry group or coverage. (See box at right.) Brokers are appointed specifically to each division based on their areas of expertise. James River works almost exclusively with wholesale brokers; in some instances the insurer places specialty risks on behalf of selected retailers.

“We believe we can give a higher level of service, provide more expert solutions, and be better underwriters by having our staff organized by industry segment or coverage type,” Clarke says. “Most of the brokers we work with are similarly organized, at least into teams that focus on casualty, property, professional liability, energy, or another market segment.”

To support its underwriting, James River Insurance has arranged a variety of reinsurance treaty structures. Its roster of reinsurers includes BF Re (Berkley Insurance Company); XL Re (XL Reinsurance America, Inc., and XL Insurance [Bermuda], Ltd.); Employers Re; QBE Re; Everest Reinsurance Bermuda, Ltd.; Aspen Re (Aspen Insurance [UK] Ltd.); Partner Re of the U.S.; and various Lloyd’s syndicates.

Choosing niches

The market segments that James River Insurance targets are general casualty, manufacturers and contractors, excess casualty, primary and excess property, professional liability (primarily lawyers and architects and engineers), and allied health care. Kehoe says, “We chose these segments because we knew them well, had enjoyed success with them in the past at different companies, realized there was a need in the marketplace, and, most important, were able to attract great people to lead our various teams.

“We will continue to expand our product portfolio as we can attract the talent to build it,” Kehoe says. “In 2004 we added an energy division that focused initially on the oil and gas industry. This year we’re expanding into mining. Also in 2004 we started an environmental liability division with an initial focus on contractors pollution coverage, and a health care division that targets nonstandard physicians malpractice.”

Assessing current conditions in the marketplace, Kehoe says, “Certainly there is more competitive pressure now than a few years ago, in terms of both new market entrants and standard admitted markets returning to gather in some of the business they cast off a few years ago. Commercial property has been under pressure since early 2003, although it seems as if the slide in rates may have slowed a bit,” he remarks. “The reality for James River is that we wrote only some four-tenths of 1% of the total surplus lines placements in the U.S. during 2004. We’re pretty optimistic about our upside potential!” he says with a chuckle.

Gaining an edge

James River Insurance distinguishes itself from competitors by first tackling “a wide array of business classes that are considered pretty tough and require creativity on the part of the underwriter and broker,” Clarke says. “Second, we focus on small to medium-sized accounts, typically in the $10,000 to $100,000 premium range. Third, and somewhat atypical in the E&S market, we get called on for solutions at the last minute in a placement search, and we’re able to deliver fast. We are striving to build a culture where smart underwriters work with brokers to find solutions for business the standard markets cannot do or cannot do well,” he says.

Another advantage for James River is that, as a newly established entity, it is free of the legacy issues that burden many insurers. American Empire Surplus Lines Insurance Company (AESLIC) and its parent, Great American Insurance Company, reinsure James River Group, Inc., et al., for all liabilities arising from any operations of Fidelity Excess and Surplus Insurance Company (the predecessor of James River Insurance) prior to its purchase by James River Group, Inc.

“Legacy issues break down into a number of categories: balance sheet ‘gremlins’ like old environmental, asbestosis, or construction defect claim reserves; operational issues like legacy computer systems, old paper files, and entrenched procedures and culture; and marketing issues like established brokerage and agency agreements and market positioning,” Kehoe explains. “Not having to deal with any of these issues gives us a tremendous opportunity to build an organization for the market reality that we see today and coming in the future. It gives us extraordinary flexibility and control.”

John Clarke and Mike Kehoe (front row, left to right) with James River’s Division Managers: Trip Morano (to Mike’s left), (second row, left to right) Rich Kern, Crileen Kixmoeller, Eric Taylor, (third row, left to right) Stuart Samuel, Brenda Craig, CPCU, and Ed Neuberger.

Finding broker partners

“We work primarily with wholesale brokers because they add tremendous value in sales and distribution, aggregating business, and filtering submissions to us that they think we’ll be able to be helpful on,” Clarke says. “We do have a select few retail brokerage appointments in place in some of our specialty lines. Efficiency is the key driver.”

He continues, “Our appointments are true ‘brokers,’ not underwriters in a general agency who from time to time need to take an account to the broker market because they cannot handle it internally. Most of our brokers are engaged full time, or close, in broking business,” he notes.

“We look to contract with offices with which we can do a regular and consistent flow of business,” Clarke says. “This is especially important to retail agents and brokers because it means that a wholesale broker working with James River immediately knows our appetites and how to get deals done efficiently. This is too often ignored by retailers and some wholesalers who advertise that they can ‘get to almost any market.’ Maybe, but they can’t do it efficiently or very effectively,” he asserts. “In addition to getting their business placed efficiently,” he adds, “our brokers also get a market in James River that isn’t appointed everywhere.”

Paper free

James River Insurance is in the enviable position of being entirely paperless. “This goes back to not having any legacy issues,” Kehoe explains. “One way we forced ourselves to go paperless from the start was not to build a file room, not to set up paper files, and not to have filing staff. It’s the sink or swim approach. It’s also helpful when you design your systems, electronic file room, and procedures to support a paperless workflow from the beginning. There are always times when it’s easier to print something out and look at it, but we’re working to make those instances few and far between,” he says.

“As far as dealing with our brokers, virtually all submissions and any other sort of correspondence come to us electronically,” Kehoe continues. “We do not have fax machines spitting out paper or teams of data entry operators re-keying data. Almost everything that arrives in physical form is dropped through a high-speed scanner and converted to a digital image. We deliver all policies to the broker in pdf format. Brokers can now log on through our Web site to check for submission clearance, to register and submit new business, attach submissions, check submission status, and a host of other functions,” he notes. “We are working on a number of projects now to allow insureds to directly review their policies online and perform other functions that traditionally involve the retail broker, then the wholesale broker, then an underwriter. The goal is efficiency, which gives underwriters the focus to underwrite and brokers the focus to sell. By striving to be super efficient, we can provide better service and lower costs, which lowers premiums, which allows us to write more profitable business. It’s a highly beneficial cycle,” Kehoe declares.

“We want to provide creative solutions to accounts that require a true underwriter’s touch, often in tough and higher hazard classes of business.” —Mike Kehoe

Changing times

In today’s wholesale market, it’s abundantly clear that, as the Bob Dylan classic says, “The times they are a-changin’.” In the wake of the Spitzer investigations, the mega-brokers are no longer so sure they want their empires to include major wholesale brokerages. “As we sit here, Willis has announced that it will sell Stewart Smith to American Wholesale Insurance Group (AmWINS),” Clarke observes. “Aon has announced that it’s looking to spin off Swett & Crawford, but nothing has been finalized. Marsh has said nothing about any intention to sell its Crump unit, although it is certainly the subject of some speculation,” he comments.

Looking ahead, Kehoe says, “I think we’ll see a number of trends in the market. We’ll see individual brokers within some of these firms move and try to take business with them. The very fact that within our industry we have an organization like AmWINS come from virtually nowhere a couple of years ago to become the second largest wholesale broker in the U.S. is a phenomenal demonstration of how dynamic this side of the industry is,” Kehoe declares. “It’s very exciting.” *