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Venture capitalists eye brokerage opportunities Newly formed, venture capital-backed Kinloch Holdings targets middle market buyers By Phil Zinkewicz Earlier this year, one of the panels at Standard & Poor’s annual insurance conference discussed the change in the way new capital is coming into the insurance industry as well as the impact of that new capital on industry competition. Constantine Iordanou, president and CEO of Arch Capital Group, said that prior to 1992, new capital came into the marketplace to support existing capital. After that, said Iordanou, capital markets became more willing to capitalize new entrants into the business than to assist existing companies, thereby creating new competition. Martin J. Sullivan, president and CEO of American International Group, said that capital markets are entering the insurance arena because insurers are now pricing their products properly and making underwriting profits as a result. “But what will happen a few months or a year down the line?” he asked. “Given the legal climate, what I’m writing today may be the subject of an investigation five years from now.” There is no doubt that new capital is coming into the property and casualty insurance market every day, and most of it is providing new competition for the traditional insurance market. Much of that new capital resides in Bermuda in the form of captive insurance companies. Even in the retrocession reinsurance arena, new capital has arrived in the form of “side cars,” financial vehicles that use the corporate structures and the talents of traditional reinsurers to grab a share of the retrocession market. For the most part, venture capital has come into the business of insurance on the underwriting side, but there is evidence that the venture capitalists are not ignoring the brokerage side of the insurance business. A recent example was the announcement in October of the launch of Kinloch Holdings, a newly formed insurance brokerage holding company that will focus on delivering insurance coverages and risk management services to middle market insurance buyers. Northaven Management, Inc., and CCP Equity Partners are leading the equity syndicate, with ING Capital LLC leading the debt financing. CCP Equity Partners, formerly Conning Capital Partners, is a private equity firm providing growth capital to financial services and health care services companies. Northaven Management, Inc., is a public and private equity investment firm that specializes in the financial services industry. Kinloch Holdings is the brainchild of Robert Lockhart, former president and chief operating officer of Hilb Rogal & Hobbs (HRH), the seventh largest insurance broker in the United States. As president of HRH, Lockhart led the company through a period of extraordinary change. He oversaw the integration of recently acquired Hobbs and the acquisition of eight other insurance brokers. He developed and implemented a strategic plan and new organizational structure that created national practice groups, leveraging synergies across the company. During his tenure, revenues grew from $450 million to $620 million, net operating income increased from $61 million to $84 million, and annual business increased 20%. Lockhart’s plan for the newly formed Kinloch is to grow the company through acquisition, targeting brokers with a strong regional presence or product focus. “Once a ‘platform’ company is in place, Kinloch will systematically build a full regional hub by rolling in smaller firms and producer teams with complementary products and services,” Lockhart told Rough Notes. “Our fundamental business proposition is to organize around the needs of the client rather than traditional profit center structures. We want to create a free flow of talent in order to maximize deliverables to clients.” Kinloch’s first hub will be in the New York Metropolitan area. In September, Kinloch purchased the Long Island-based Genatt Associates, a leading New York broker with specialized expertise in the real estate, construction, transportation, health care and hospitality industries. In 2005, Genatt’s revenues were in excess of $26 million. Lockhart says that he expects revenues to reach $75 million in a year’s time. Genatt will serve as the group’s platform company in the Northeast, Lockhart said. “I chose Genatt, quite simply, because the agency has the finest transactional capabilities I’ve ever seen,” says Lockhart. “Their market relationships are outstanding, they have significant lines of insurance specialization and they are relentless competitors.” The venture capitalists involved in Kinloch applaud the acquisition. John Clinton of CCP Equity Partners said: “Genatt is an ideal platform for Kinloch. They are a highly successful organization that knows how to deliver value to clients, consistently grows the business and creates a working environment that attracts outstanding people. Their brand commands tremendous respect in the marketplace.” James Zech of Northaven Management, Inc., sees Genatt as a model for future Kinloch acquisitions. “Like Kinloch, they understand what middle market insurance buyers want—people who can solve problems and bring a personal touch to the business.” Genatt views joining forces with Kinloch as a way to broaden its horizons and take their business to a new level. “Over the years, we’ve been approached by eight of the top ten brokers and most of the major banks,” says Les Genatt. “While they bring significant resources to the table, there was never a meeting of the minds. With Kinloch, we have the opportunity to be in on the ground floor of building a powerful, client-focused organization with people who share our entrepreneurial values and definition of success.” Says Lockhart: “We chose New York to begin our brokers’ hubs because it is a client-rich environment with a good number of specialist agencies for us to acquire. Genatt will be our anchor. Initially, we’re looking at the North Atlantic corridor to set up our platforms. Boston and Chicago are definite possibilities. In terms of coverages, we’re looking at professional liability, directors & officers liability and environmental liability. We also have capabilities in the health care area, where we will be looking at specialties such as medical malpractice. Genatt has been able to generate relationships with some very good markets, such as AIG, Hartford, Chubb, Travelers and the Greater New York Insurance Co. We hope that agencies in the Greater New York area reach out to us.” Patrick Linnert and Wayne A. Walkotten of Marsh, Berry & Co., an organization that monitors financial services industry transactions, say that what Kinloch is doing is not new in terms of approach. “For the last decade, banks have bought agencies and set them up as ‘foundation’ organizations to merge in other agencies,” says Linnert. “What is new is that this insurance broker is being capitalized by venture capitalist funds.” But, Walkotten says, other private equity firms are eying the insurance broker market. “Right now, in the insurance industry, it is a sellers’ market and that’s attractive to private equity firms. And, there are a good many acquisitions taking place in the broker market. Hub International has been the most active to date in terms of acquisitions. Also active, are Brown & Brown, USI and HRH.” Rough Notes asked Walkotten what will happen if more private funding works its way into the insurance industry, both on the brokers’ side and on the underwriting side. “Well, of course, that would mean more competition and we all know that competition tends to bring prices down. That could make future acquisitions less attractive to private equity firms.” * For more information: |
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