Three companies make big moves in a soft marketMay 28, 2010 6:00 AM
by Ed Crews
Photos by Clement Britt
Since Thomas Rutherfoord Inc. was founded in Roanoke in 1916, many companies have expressed an interest in buying or merging with it. But Virginia insurance brokerage told potential suitors it was not for sale.
That changed when Rutherfoord’s leaders heard a pitch from the Marsh & McLennan Agency, a subsidiary of Marsh Inc., a leading international insurance broker. This proposal allowed Rutherfoord to keep its culture, its autonomy and its employees. The deal also provided the company with the chance to grow well beyond its current annual revenues of $81 million.
So, Rutherfoord said “yes,” and Marsh & McLennan acquired the nation’s 32nd largest brokerage firm in March. Thomas R. Brown, Rutherfoord’s vice chairman, still finds it hard to believe that the deal happened after so many years of being independent. “You might just say that the stars just aligned right,” Brown says during an interview in his Richmond office.
Interestingly enough, Rutherfoord is not the only state insurance firm favored by fate lately. In recent months, Kinsale Insurance Co., an underwriter, and Hilb Group, a brokerage firm, opened for business in Richmond.
This flurry of insurance industry activity poses one big question. Why now? The economy remains shaky. Funds are hard to find. Business activity is low. Unemployment is high. The recession may not be over, and the recovery may be weak. In short, the future doesn’t look all that bright. That is, unless, you’re the leaders of Rutherfoord, Kinsale and Hilb Group. “We think this is absolutely the best time in the last 30 years to build a mid-market insurance company,” says Robert J. Hilb, Hilb’s president.
Rutherfoord’s Brown voiced a similar opinion: “It’s a matter of seeing opportunities. It’s also about bucking the trend a little bit. It’s like realizing that now is the best time to buy a house. You may have a soft insurance market and a soft economy, but when the economy expands, you have a windfall.”
In fact, officials at all three firms say they were thinking strategically when they made their moves. Take Kinsale, for example. Led by Michael P. Kehoe, its founder and president, the company will issue insurance policies in “excess and surplus” lines. This involves providing insurance when other companies won’t. For example, Kinsale might furnish malpractice insurance to a lawyer who lost and then regained his license. Or, the firm might write policies for importers of Chinese-made children’s furniture, garage gate manufacturers or property owners in areas prone to floods, earthquakes or hurricanes.
Kinsale focuses in three areas: casualty, property and specialty. The latter addresses professional liability as well as needs in allied health care, health-care and life sciences. Kinsale joins a growing group of specialty insurers in Richmond, including James River Insurance, Max Specialty Insurance, Colony Insurance and Markel Corp.
Kehoe says his company opened in March after about nine months of preparation. Raising funds was a challenge complicated by a lawsuit filed by Kehoe’s former employer, James River Insurance. It alleged that Kehoe illegally used its data and lured away employees. A federal judge dismissed the suit with prejudice. In a settlement, James River agreed to pay Kinsale $377,000 while Kinsale agreed not to sell policies to James River renewal customers for six months and to temporarily limit the number of James River employees it hired.
Despite the obstacles, Kinsale began with $66 million in hand from investors. “We had a compelling business opportunity and a good track record,” Kehoe says. “The combination was fairly persuasive.” (One of its backers is Virginia Capital Partners, a Richmond-based venture capital firm whose investments include Virginia Business magazine.)
Kehoe started the company during the worst economic downturn since the Great Depression because he says his business model provides for resilience in recession and vigor in recovery.
That model has several key components. First, Kinsale aims to keep costs low, in part by relying on computerization. Second, the company’s 44-member team has lots of experience. Third, compensation ensures that employees have a stake in success. “Our model is unique. We compensate employees with stock,” Kehoe says. “All of us are owners, so we bring more enthusiasm to work than our competitors do.”
Looking ahead, Kehoe expects to grow the company and anticipates a stock offering at some point to help fuel further expansion.
Like Kinsale, the Hilb Group is a new firm. Hilb recently launched the company after gaining considerable insurance experience, including time spent with Hilb, Rogal and Hamilton and Lloyd’s of London. Hilb’s father, Robert H. Hilb, founded Hilb, Rogal and Hamilton and now serves as chairman of the Hilb Group. During the past year, Hilb has refined his business plan, raised money and assembled a team of experienced executives. His goal is to build a strong brokerage company based in Richmond. The Hilb Group will focus on the East Coast. The company’s growth will come from acquisitions of existing agencies and hiring individuals with specialized knowledge and skill. Hilb is pursuing acquisitions in New York, Philadelphia, Charlotte, Hartford and Tampa. If all goes well, the first deals may occur this summer.
Hilb says he is starting his company now because basically it’s a buyers market. The insurance market is soft, acquisition activity is low and cash is hard to get. For those who can raise funds, however, good deals are available, and Hilb is seeking them.
Starting a business now is not for the faint-hearted. Nonetheless, Hilb believes that a good base built now can lead to strong growth when the economy rebounds. The nature of insurance also makes him optimistic. “Insurance? You’ve got to have it whether times are good or bad,” Hilb says. “You can’t drive without it, and you shouldn’t own a house without it. As the economy starts to recover, companies will add people, and sales will go up. And, people’s need for insurance will go up, too.”
Projecting ahead, Hilb expects the company will be in a position within 10 years to go public or pursue a merger or sale.
While the Rutherfoord transaction involves companies much larger than Kinsale or Hilb Group, the motivation remains the same. The timing was perfect. Marsh & McLennan is building a national presence in the middle-market insurance business, which includes firms outside the Fortune 1000. (Its parent company, Marsh, serves the needs of larger firms around the globe.) The quickest way to build Marsh & McLennan Agency was to buy existing dominant companies, like Rutherfoord.
Rutherfoord was intrigued by the possibilities, Brown says. Uppermost was the chance for big growth. The company has 10 offices stretching from Philadelphia to Mobile, Ala. It plans to continue expansion through organic growth and acquisitions.
Brown reports the relationship is off to good start. He’s optimistic that Rutherfoord ultimately will be much larger and will enjoy much greater financial success than it could alone. Both companies, he says, are discovering how much more they can do together than they could do separately. As he put it: “We’re learning from them and they’re learning from us.”