Q&A with Ironshore’s Kelley: Why He Left AIG and His Plans for Ironshore

In December, 2008, Kevin Kelley left Lexington Insurance Co., the largest excess and surplus lines insurance company, after more than 30 years during which he helped the company become one of parent American International Group’s (AIG), and the industry’s, most profitable and respected enterprises. At Lexington, Kelley rose from being a senior underwriter in 1975 through a variety of roles before being elected president and chief executive officer in 1987. In 1997, he became chairman and chief executive officer.

In this expanded version of an interview with Insurance Journal’s Andrew Simpson that ran in the Oct. 5 issue of Insurance Journal magazine, this recognized leader in the specialty and surplus lines insurance industry discusses why he left AIG, his opinion of his longtime boss Greenberg, the trend toward syndication, where he sees market opportunities, the state of the industry and the economy, and what’s in store for Ironshore.

You were with AIG and Lexington for a long time, since 1975. You were at the top of the industry. What were your considerations in leaving there to join Ironshore last December?

Kelley: Well, number one, I think you have to take a look at why I may have left a fine organization like AIG. I quite frankly saw a very different company from the company that I had known for so many years, and thought it was going to be very difficult to restore the company to the position that it once held.

So, given that, I thought it was best to look elsewhere. Luckily for me I had a few options and probably could have created a few more, but what I saw in Ironshore was a company that was young, it was only two years old; it had created a foundation. Bob Deutsch and his team had really built something that I think could have been built upon, and I saw an opportunity to build a culture as opposed to transform a culture.

So, for all those reasons, Ironshore became a very good option for me, particularly given the fact that we had platforms in Bermuda, platforms in the United States, and at Lloyd’s through Pembroke, so I thought we had the right beginnings to really build a great organization.

What are your feelings about Mr. [former AIG CEO Maurice “Hank”] Greenberg and all that happened with his departure from AIG?

Kelley: Well, I think Hank was an extraordinary leader, and he was a leader on many different levels. He clearly led the global insurance company. He built it. He was very passionate about it. And that passion showed through with every meeting that anyone ever had with him. He was a very gifted strategist who also had the ability to be a superb operator, and those two characteristics are uncommon together. So he’s a very, in my view, unique talent, and unfortunately the company began to change rather dramatically after his departure.

Obviously Ironshore has hired a number of AIG execs, and has a working relationship with Mr. Greenberg’s C.V. Starr Co. So how much of Ironshore’s strategy is linked to what AIG can, or can’t, do now?

Kelley: It’s an element, but it’s not just AIG. We think the landscape is fundamentally changing in the property/casualty business, and it’s changed because of several companies that have had balance sheet challenges, and we think the fundamental trend that will continue to play itself out will be this trend to diversify and syndicate risk. We think clients really are increasingly concerned about counterparty risk and continuity risk, and as a consequence, they don’t want big blocks of capacity with one, two or three carriers. I think they want options and alternatives, and that’s the niche I think we’ll fit in the marketplace.

When you joined Ironshore, A.M. Best wrote that given your significant accomplishments in lines of business that Ironshore wasn’t targeting then, that they expected there’d be some change to Ironshore’s mix and strategy going forward. How have you changed Ironshore’s strategy?

Kelley: Well, it’s hard to say, because I wasn’t here when Ironshore’s initial strategy was being formulated, so it would be unfair for me to guess what that might be. What I saw was a company that had platform flexibility, and I saw an opportunity within this overall trend of de-risking or syndicating that created opportunities in several specialty markets. So that was the attraction, and that was the evolution of the strategy, and we continue to see gains made from playing that strategy as we saw it.

Can you summarize what you see as Ironshore’s target market in terms of industry sectors and account sizes today?

Kelley: Yes, we’re going to be a specialty property/casualty market. Our goal is not to be in 35 or 40 businesses. Our goal is to be in 12 to possibly 15 businesses that we think we can be good at, and so our goal is really not to solve all of the clients’ needs, but those needs that we think we can build a sustainable competitive advantage over time.

Talk about that building. In 2009 thus far anyway, Ironshore has launched one environmental unit and the energy proper unit, right?

Kelley: Yes, I think there’s really two ways to look at it. Adding businesses, number one, which we did when we brought the environmental team into the company. And then two, building businesses within businesses.

We had a very robust property business when we joined Ironshore in late December of 2008. We’ve changed that business somewhat. We’ve taken some volatility out of our exposure there and we’ve changed our limits profile, changed somewhat our risk appetite, changed our reinsurance strategy to lessen the volatility of that portfolio for us, that’s number one.

And then number two, we’ve added businesses like environmental, like our excess casualty business that we have a joint venture with C.V. Starr on. We have, in addition, added what I would call a surplus lines property/casualty operation in St. Louis. We’ve added a program opportunity.

So for all intents and purposes, we’re really in about 10 businesses now, which is about double the number of businesses we were in when I first joined. Notwithstanding that, a big focus of what we’ll be doing next will be adding businesses within businesses like the energy focus within our property business. And you’ll continue to see that strategy being played out in the months to come.

What strengths do you think you bring to Ironshore?

Kelley: Well, I think I’m a pretty good strategist. I think I have a pretty good sense of where markets are and where they’re likely to be moving towards in the next couple of years, and I think I’ve got a good eye for talent. I think I’m reasonably creative and enjoy innovation and enjoy being around creative people who can create. So that’s kind of what I bring. I think an overall view of things, and leadership to get people to do what they otherwise might not do.

Ironshore is diversified, but you still deal a lot with climate and catastrophe risks. How do you feel about the industry’s ability to properly price climate risk today?

Kelley: Well, I wouldn’t go so far as to call it climate risk. I think that’s a very, very broad term. I still think we’re in the property catastrophe business, and it’s very difficult to anticipate fully what nature might hold in store for us. But what I think you have to look at your exposure. You have to manage your exposure, and you have to be very diligent in trying to think about ways of either raising capital or having capital at hand should there be a major event. I think we are more focused on those issues, really, than anything else. Really taking a very practical view of catastrophe risk, and all with the eye that we want to be a market the next day post-event, because we think that’s what our clients really want.

The government has gotten involved in cat risks, at least residential. Do you worry about the government getting involved on the commercial side?

Kelley: Yes. I do think that that is a risk, and the real issue, I think, for the government, as well as for policyholders, is it’s one thing to create an obligation, to create a benefit, but it’s another thing to fund it, and it’s still another thing to pay on time when a bad situation like a hurricane or an earthquake occurs. I still think the private market mechanism is the best for that.

Does Ironshore have any interest in the residential side?

Kelley: At this point, we don’t.

You raised $300 million this past summer. How tough was it to raise that in today’s financial market?

Kelley: Well, it, I think, was a great certification of what we’re doing as a company. We raised $300 million, as you said, but probably even more importantly, we’ve had a premium-to-tangible book value at a time when many of our public peers were trading substantially below tangible book value. So to me, it wasn’t the amount as much as the price that we were able to achieve, which showed that certain capital providers believed in us, and it was a nice mixture of compliment.

We had a major new source of capital, GTCR from Chicago put in $200 million. Existing shareholders also put in substantial funds, and we had one of two new capital providers in addition to GTCR, so it was a nice collection of capital that we’re quite proud of.

Why do you think this is a good time to expand?

Kelley: I don’t think it’s a great time for everybody, but I do think it’s a great time for us. This is a great time to be building something, because number one, you can attract very good talent; number two, you can lease space at very low cost; and three, I think the market is showing all the signals for a cyclical change. And two, to go back to my original point, I think there’s an underlying trend here that the clients want to syndicate their exposure. So we’ll be able to take advantage of that underlying trend as well as, I think, be in a very good position to take advantage of a cyclical pricing change once that occurs.

A number of observers point to emerging opportunities in the energy sector, green construction, and technology. Would you agree that those are areas with opportunities?

Kelley: Well, I think that what you have to be cognizant of today is that opportunities avail themselves in all shapes and sizes, and it doesn’t play to your timetable, it plays to an independent timetable. So what you have to do as an executive is listen, be open to ideas from brokers and/or clients, and as an opportunity, a bona fide opportunity arises, be able to commit our resources and capital to it so that you can realize it and grow. What I’m amazed at, quite frankly, is that since I joined this company, we see things that constantly that I haven’t seen before, so I get encouraged by that.

Some think that pricing is about to turn, the cycle might be changing. Do you think that?

Kelley: Yeah, I do. I think, number one, catastrophe reinsurance costs are up, and I don’t see them coming down in turn. Two, the industry has used up a lot of its redundant casualty reserves, so a lot of the current reported combined ratios still have a significant amount of reserve takedowns which – -and that well is drying up. So I think we’ll begin to see in subsequent quarters much higher combined ratios coming out of the industry. Three, I think we’ll see very, very low interest rates over the next several quarters, and probably, most importantly, this will be the third straight year, I believe, that the industry has shrunk. So that’s going to put pressure on cash flows, particularly as paid-to-lost ratios continue to move up.

So I think all the signs are there for a pricing cycle change. The big bogey sitting over all of it is the economy and lack of economic–or I should say reduction in economic activity, which is reducing exposures, and I think that’s a big driver for the reduction in that written premium. I think all those things point to a stronger market moving forward with the biggest challenge, I think, being the economy, the national economy and the global economy.

Speaking of the economy, but more directly the Wall Street meltdown and the financial scandals, how have you seen those affect the surplus lines and specialty business? Do you think there are opportunities there?

Kelley: Yeah, I do. I think that the financial institution market on a global basis is in the area where there’s some potential for opportunity, but you have to, one, be experienced, and two, have the right client so you can work with that client. I think there may be some opportunities there on the D&O side as well as some of the other lines, because I think there’s less interest in the financial institution world than there clearly was a year or so ago. That’s not just here in the United States, that’s in the UK and that’s really a global phenomenon.

Are there particular economic segments to look to for signs of a recovery from the recession, before others?

Kelley: Well, you would hope construction picks up because of federal stimulus. You would hope that that’s how it would manifest itself. You would hope that housing does indeed begin to regain — but it’s all about jobs. And while we’re seeing less unemployment, we’re still seeing unemployment. And you can’t have growth and economic activity without people being employed. We’re operating at a substantial reduced capacity from an economic standpoint. We’re operating somewhere in the area of 70 percent of our economic capacity, so until we see that beginning to pick up, we’re not going to see the overall growth in the gross domestic product that we’ll need to substantially reduce unemployment.

Is Ironshore creating jobs?

Kelley: Oh, we’re hiring, yeah. That’s one of the advantages. We will double the employees by the end of the year from about 170 to 350.

Speaking of jobs, the jobs wholesalers do, working with companies like yours. Do you see the way brokers and surplus lines carriers work together changing in the years ahead?

Kelley: I think it’s all about value creation. When it’s all said and done, what my shareholders and board want from me is for me to figure out ways of creating value for the organization, and I think that is true for all elements of our distribution, MGAs, wholesalers, and retail producers. So they very much have to look at the world maybe somewhat differently than I do, but when it’s all said and done, to the extent they create value, they create opportunity within their companies.

This underlying trend I mentioned, this trend towards syndication, I think, is a boon for wholesale brokers as well as any intermediary, because that’s how value is created, knowing that the right mix of markets to offer clients so that over time the client gets the best deal from the marketplace. So I think there’s a phenomenal opportunity for all brokers at this point in time.

And is this a time when Ironshore would be looking to work with more brokers?

Kelley: We are; we love brokers.

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