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Pat Kilkenny and Bob Kimmel put the K’s in K2 Insurance Services five years ago. That’s when they began using their combined 60 years of insurance experience to work buying up and developing businesses with the backing of investment firm Endeavour Capital.
San Diego-based K2 Insurance is today a fast-growing family of two specialty insurance companies and 10 business units offering both commercial and personal lines.
Through acquisitions and investments, K2 has developed a network of MGAs to manage, underwrite and distribute products on behalf of its carriers, including Aegis Security Insurance Co., which K2 acquired in 2013. Aegis Security is licensed in all 50 states and specializes in manufactured homes, other low-value dwellings and motorcycles. It also underwrites surety bonds and accident and health.
K2’s first acquisition was in 2012 when it bought a majority stake in Midwestern Insurance Alliance, which specializes in workers compensation for transportation risks. Later that same year, K2 invested in a new Texas MGA, Mission Select Insurance Services, which focuses on residential property.
Along the way K2 has also formed Aegis General Insurance Agency, Allied Public Risk and Vikco Insurance Services. This past March, it acquired High Point Underwriters of New Jersey, which with Midwestern Insurance Alliance is offering a national workers’ compensation and occupational accident insurance program.
The two prove experience matters.
Kilkenny previously ran and owned Arrowhead General Insurance, an industry leading general agency he took private and helped build from $5 million in annual premiums to more than $1 billion in written premiums.
Kimmel was executive vice president and MGA practice leader at Guy Carpenter before teaming with Kilkenny to launch K2.
Kilkenny, CEO, and Kimmel, president, both put company culture on top of a short list of firm-wide qualities they believe are responsible for driving K2’s growth.
The pair spoke with Insurance Journal publisher Mark Wells about their past, their company and its future. Following is a profile of K2 and its leaders Kilkenny and Kimmel. This has been edited for brevity.
Wells: [When you came to Arrowhead] the state of the industry was a little different then. Could you talk a little bit about the differences and how they’ve changed and what’s going on right now?
Kilkenny: It was part of a publicly traded company that myself and an employee group took private in ’86, I believe it was, and hyper-focused on nonstandard auto, single state, single program. Did that pretty aggressively until ’95.
Following the Northridge Earthquake, we decided that we had a lot of the key elements to get in the property business and leverage some of our infrastructure and assets at that point. It was a totally different time and place. No technology. Companies didn’t really invest in technology back then.
I was 33 at the time. I think I was the senior person in our ownership group, too, which shows what a young, fairly long horizon that we had to build a business. We weren’t really thinking about anything other than trying to do things the right way.
In any business you have to figure out how to distinguish yourselves, and we felt technology was a way that we could do something different than our peer group. We invested heavily in technology. It was in the personal auto business. At one point we had 250,000 policies in force. We’d grown pretty significantly.
The business was becoming really, really competitive and we were really having a hard time trying to figure out how to earn margins even with good technology. We felt like we had some leverageable assets with distribution technology and some of the product skill sets that we had, mathematicians, actuaries, people like that.
Northridge happened. The first year after Northridge we insured 60,000 homes from a dead start, taking a really aggressive pricing strategy to fill a niche in the market. We had great success doing that.
We were deemed as being a firm that could be opportunistic, respond to marketplace opportunities. We started filling other niches after that and became a multiline, multistate.
Wells: Bob, you were involved as a reinsurance broker with Arrowhead. What made you decide to get into the business?
Kimmel: My relationship with Pat was always as a reinsurance broker, and most of the time, that was market finding. They would need a new set of paper or want to get an additional set, and that’s how we helped Arrowhead grow.
We’d introduce them to an underwriter at a company, they’d form a division of Arrowhead to build around that person. We’d bring in the paper, then we’d probably bring reinsurance support behind that. Through that, I got to know Pat quite well. We were successful together doing that, and built a friendship.
When he got out of the business and I got into the program practice group at Carpenter, we still remained friends and kept talking about what we were seeing in the marketplace, and again, it was a challenging time in 2009 and 2010, with the economy just coming back from 2008 meltdown. Anyway, we decided to get together and try to aggregate or roll up these MGAs. That’s what we’ve done.
Wells: Let’s jump to the current state of affairs right now. What kind of environment are you working in in the industry?
Kilkenny: I’d say from the time that I’ve been in the business until now, it’s about as difficult as I’ve seen … it’s overcapitalized, people are stepping on the same rake they’ve been stepping on in cycles over the years. It just doesn’t seem like there’s the discipline there should be in the business, in a mature business. It’s harder to distinguish yourself than it probably has ever been.
Having said that, Bob and his leadership team have done a fabulous job of identifying some opportunities, some people, and been able to have those disciplines and been able to get the rate levels that we need in order to generate the profitability, and grow, which has been really commendable.
I love the culture. A lot of similarities to Arrowhead from what we had over the years. Very entrepreneurial, silo oriented, where we will give people tools and resources, and quite frankly get out of their way, let them build their businesses.
Bob’s been able to do that with the team here in Solana Beach. He can give you a lot more detail on the silos.
Wells: Bob, let’s talk about the silos.
Kimmel: We currently have two insurance companies and 10 business units, almost equally split between commercial and personal lines.
Also, when we bought Aegis it had a tremendous mobile home book of business that we’ve been able to grow, probably we were at about $30 million then, now we’re about $45 million, growing at least 20 percent a year in that space by hiring new leadership and focusing on marketing and relationships.
Our other biggest unit is our work transportation or truck drivers. Other than that, we’ve got a public entity business that started with zero and has gone to about $40 million of premium. We’ve got a surety book of business that’s about $25 million, mainly focused on the contract surety business.
We’ve got an accident and health division that we’ve just staffed up with good leadership last year. We let that sit idle when we purchased Aegis, and now we’re trying to ramp that up. We were a $12 million, we’ll probably get to about $20 million next year.
We have a division in Texas focused on personal property. We’ll do about $25 million of personal property there, really low-value dwelling. We’ve got an earthquake book of business, commercial earthquake, we’ll write about $25 million of that business this year.
We started a new division in Northern California. We just focused on residential personal property in California. We just hired a recreational team to go after RVs, boats, and yachts.
Wells: Eighty percent of Insurance Journal readers are probably independent agencies throughout the country. What’s the advantage that K2 can offer these people?
Kilkenny: We’re fabulous business partners because we’re entrepreneurial. If somebody comes to us with an opportunity where they can grow their franchise, because agents have the same darn problem we have, they have to figure out how to distinguish themselves. We have a hybrid in that we’ve got a capital base that we can leverage.
Bob has an incredible Rolodex with branches internationally that we can lever up in a safe and sane way and grow and expand in those kinds of areas and give them outsized margins by being a very efficient partner of theirs. Our food chain’s very short because of that. We don’t have layers. We’re able to do all those kinds of functions within our group.
Wells: Technology and different aspects of technology are suddenly taking the insurance industry by storm. Can you talk about that?
Kilkenny: I think a lot of it is appropriate. It allows predictive modeling, although some of your older underwriters that have the same hair color I do probably take some exception to it. But I think it’s like a lot of things in life, it will morph. People bring value. Technology brings value. Figure out how to coexist together, and I think that’s the nice part about this culture we have here.
We have a few people we brought in. Our CIO originally was the CIO at Arrowhead, but the plan was to bring him in and get him out in a year or two, but that helped us with the disciplines we needed. Our general counsel was our general counsel at Arrowhead, yet our CFO here is maybe 31 years old. It’s a great combination of people that are willing to listen.
Listening is pervasive here, it’s very important. Energy’s really important too, a lot of hard work. I think it’s a powerful combination, and it’s exciting. The character of the people is A-plus. It’s something that you can’t compromise and feel really good about. I think some people sell a little short on business opportunities versus sustainability, I guess maybe would be a way to put it.
Kimmel: I’ll talk a little bit on the efficiency side. We’ve got commercial business, personal lines business. Our smallest account’s probably $400. Our largest account’s a $4-million account.
The $4-million account does not need much technology. It needs old school underwriting, looking at the application, understanding the risk. The $400 account needs to be totally automated. The agent’s making $40 on that account. If he picks up the phone, talks to you three times, we’ve lost it, he’s lost it.
We’re focusing so much more technology on our smaller transactional accounts, and we’re getting there.
Wells: Anything you’d like to add?
Kimmel: The only thing I want to add is kind of where we see ourselves heading. Obviously, we’ve got some great platform companies, and they’re going to have tremendous organic growth. Like I said, we’re growing about 20 percent-plus a year.
The nice thing about being a hybrid, we have a balance sheet, we have an A-rated insurance company, so it allows us to go out and talk to reinsurance brokers and insurance executives and talk about ideas.
This morning we were talking about cyber. Maybe we can incubate a cyber program on our paper, heavily reinsure with someone else. It gives us a leg up on all our other MGA competitors who they’ll hire somebody, they’ll go look for paper, they don’t find paper, they end up probably having to terminate somebody.
We have that security that we give them a long-term commitment, and we always have our A-rated paper to fall back on which has been a really nice comfort blanket.
Kilkenny: I would offer one other thing that I think’s very important. At Arrowhead and also K2 there’s altruism. Giving back’s always been something that’s been very important to us. We had a foundation at Arrowhead that ultimately morphed into something by the name of the Lucky Duck Foundation.
We have an event once a year. This year it’s on Oct. 3. We give away north of a million dollars to charity from our one-day event every year to three local charities: Father Joe’s Villages, which is a continuum for the homeless; Helen Woodward’s, which is an animal shelter which does amazing things for people with animals, young, the old, people who have issues.
Also with Challenged Athletes, which is a national charity that provides prosthetic devices primarily for wounded soldiers, it’s something we’re quite proud of. It’s not necessarily an industry gathering, but when you go to the event I’d say half the people in the building have association with the insurance industry.