The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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Kevin Kelley When Kevin Kelley joined Ironshore as CEO in December 2008 he was taking a step into the unknown.

The Bostonian was the highest-profile member in an exodus of executives from American International Group (AIG) following its US government rescue three months earlier.

As CEO of surplus lines giant Lexington Insurance, he had built a multi-line, multi-billion dollar market leader with the weight of the world's biggest insurer (by market cap) and its enviable central resources and reinsurance buying power behind it.

What he left to join was a relatively small two-year-old Bermudian property specialist whose underwriting chief, Les Rock, had just departed, while ratings agencies were beginning to challenge its reinsurance protection and diversification strategy.

But in little over two years since, Ironshore has transformed into a multi-line insurer that now boasts platforms in Bermuda, London, Dublin and the US and a staff headcount that has gone from 170 to 450, including several other high-profile arrivals from Lexington and AIG.

It has also more than trebled its gross written premium from $385mn in 2008 to $1.2bn in 2010.

Sitting down with Kelly in Ironshore's Boston offices, IQ is in the presence of an individual who clearly thrives on new challenges.

"Ironshore's book of business grew 40 percent in 2010 alone"

Most notable in a room illustrating a passion for sporting achievement (and a strong rivalry with New York) are pictures of massed marathon runners.

Kelley came to the sport late, taking up marathon running as he turned 50 in the wake of 9/11, pledging to run one every year through the decade.

So it should be of little surprise that his response to the crisis engulfing AIG was to take a leap of faith away from the company he had served since joining as a senior underwriter in 1975 to a new challenge at an insurer looking to grow in soft market conditions.

He refutes the suggestion that his move to Ironshore was motivated by a desire to recreate Lexington away from AIG.

"It's not relevant," he states. "Ironshore will not mirror anything. We're building Ironshore."

By way of example he contrasts Ironshore's expansion into directors' and officers' and professional liability - which now accounts for 30 percent of its business - with what was a "very small" book of business at Lexington.

But he does point to the depths that AIG sunk to - accompanied to a lesser extent by the likes of XL Capital and The Hartford - as evidence of a shift in industry dynamics that has provided a rationale for growth opportunities at a company such as Ironshore.

"I think the overarching opportunity for us is that clients truly do want to manage their counterparty risk very differently post-credit crisis," he explains.

Consequently, the insurer has been given a "much wider door" to enter than it would otherwise have been, as pre-2008 buyers were less concerned about concentrating risk with a smaller number of large counterparties.

"Syndication of risk has, of course, always been strong in Bermuda and London, but even in the US syndication has become much more popular over the last couple of years," Kelley observes.

Rapid build-out
Ironshore's book of business grew 40 percent in 2010 alone - but the rate is not surprising given the rapid build-out of product lines over the last two years.

Despite the property focus - in 2008 around 90 percent of the company's business came from a property book - Ironshore had already laid foundations for diversification.

In 2007 it launched its IronPro professional liability division, headed by former AIG executive Greg Flood, as well as construction unit IronBuilt.

By early 2008 the company had also launched two US subsidiaries - Ironshore Indemnity and Ironshore Specialty Insurance Company - which gained AM Best A- ratings to write IronPro and IronBuilt products and support its newest launch, IronHealth.

And five months before Kelley's arrival, Ironshore made its entry to Lloyd's with the acquisition of Pembroke Syndicate 4000.

Since Kelley took the reins the addition of new business lines has continued apace.

An entry into US marine business written through its Lloyd's platform was followed by the launch of an environmental platform headed by Joe Boren and John O'Brien - the management team of the largest player in the sector, AIG Environmental.

Another senior AIG exec, Geoff Smith, joined to build an excess liability facility, while a momentous 2009 also incorporated the launch of aviation, energy and life sciences divisions.

Expansion of the range of healthcare, specialty casualty, and other liability lines continued in 2010, along with entry into space insurance and personal lines in the high net worth sector.

So far, however, the growth of Ironshore's portfolio has retained a significant US flavour.

At present 75 percent of its underwriting is US-focused, with only 25 percent "pure" international - which is largely written through Pembroke Syndicate 4000.

Kelley says there is no set target for a shift towards international business, as the growth strategy is to "find opportunity and go for it".

However, the establishment of a Dublin-based European platform in January this year points to growth on the continent, while exploratory trips to Asia may lead to further expansion of the company's global footprint.

Despite an increasingly feverish M&A climate, Kelley says that Ironshore has not been attracted by the "for sale" signs littered around the (re)insurance sector.

"We're open to M&A and we see a lot of things. But so far the things we have seen we don't want, while the things we like are either not for sale or not for sale at a price that we find attractive at this point," he says.

"Things can change, but we're only going to buy for strategic reasons - not just to get access to capital. I'd rather have our people looking at opportunities to build our own company rather than fixing someone else's problem."

Instead, growth has largely been organic, as Ironshore has built its portfolio to 13 classes of business.

Monitoring brokers
For the Ironshore CEO, a key tool in taking growth opportunities and managing underwriting discipline during tough market conditions is monitoring submission flow from brokers.

"I spend an inordinate amonut of time finding out submission activity per line.

If we get that activity up we will continue to write more business because we'll be able to be more selective," he explains, adding that submissions in the first quarter of 2011 are likely to be 50 percent up on the prior-year period.

But rather than relying on bringing in underwriting teams to write new classes, Ironshore has actively pursued a strategy of entering into relationships with other carriers or managing general agencies to expand its book.

There has been strong collaboration with CV Starr - the insurer headed by former AIG chief Hank Greenberg - including the Iron-Starr Excess Agency joint venture that focuses on financial lines. There has also been an agreement with Starr Aviation and Starr Space to underwrite on Ironshore paper. In another partnership Ironshore Environmental has secured access to higher-rated Berkshire Hathaway paper for longer-term environmental insurance placements.

"We strongly believe in partnerships," explains Kelley. "We don't want to be in 40 businesses. There will be times when we see an opportunity in a business but we don't want to hire 50 people to enter it."

"It's making better use of capital," he argues. "I think there's going to be more of that kind of arrangement. It goes back to the notion of syndication, where you have leaders and people who want to be part of that leadership group without the significant commitment of people to that class of business."

The theme of partnership also extends to the company's relationship with its reinsurers.

Ironshore enters into the third renewal of its quota share relationship with Swiss Re this year - an arrangement where it cedes 40 percent of its property book to the reinsurance giant.

Ironshore secured the cover under pressure from AM Best, as the ratings agency expressed its concerns that it would diversify too quickly at a time where capital was stretched by a property portfolio that had significant net exposure.

"Our property portfolio had a very unfriendly reinsurance programme in place so it was important for us to come up with a reinsurance programme that was more capital friendly and would allow us to diversify the route we wanted to," Kelley explains.

The company takes a "flexible" approach to buying reinsurance - and employs a similar strategy around its capital base.

An initial $1bn of equity capital was pumped into the insurer at its launch in December 2006, under founding chairman, the late Bob Clements. Ironshore then bolstered its balance sheet with a $300mn equity raise in September 2009 and a $250mn debt issue last May. At the time, Kelley said the latter was an opportunistic move amid attractive debt market conditions.

Investable assets are now around $2.3bn with pure shareholders' equity of $1.5bn - plus the $250mn debt.

This position of strength allows Ironshore to fund 2011 growth plans without any additional capital raising, he says.

Nevertheless, he is "always talking" with capital sources and potential partners to enable the company to respond nimbly to new opportunities that might arise.

But with the company entering the fifth full year of its life, are conversations with its existing investor base - which includes the likes of Irving Place Capital, GTCR, Calera Capital - turning to an exit strategy?

Kelley bats the suggestion away, stating that the main focus of management and investors is return on equity (RoE).

"I'm here for the long haul, but nevertheless a lot of my personal wealth is going to be driven by RoE so I want to continue to drive that," he says. The alignment of that focus with underwriting is helped by the fact that employees hold 9 percent of Ironshore shares.

"We're very different from most PE-started companies as we've spread the equity pretty evenly among key employees.

I think our people tend to think more like our investor group than at most organisations," Kelley suggests.

As an exile of the AIG "identity" that led so many of its senior employees to become near lifetime servants before the bond was destroyed in September 2008, the idea of ownership is crucial.

"Our culture revolves around ownership and innovation. Owners act very differently from employees. If we can also think differently about things we can lead without having the biggest market share," he concludes.