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The value proposition: a start-up managing general agency with a strong track record and private equity elbows into a crowded buyers' market.

Endeavour Capital has spent the past four years waiting to seize the right insurance-focused investment opportunity.

Their patience now stands a better-than-decent chance of paying off in spades.

The private equity firm has thrown in with industry veterans Pat Kilkenny and Bob Kimmel to form K2 Insurance Services LLC, marking Endeavour Capital's foray into the niche insurance market space.

Armed with $60 million in equity capital, the San Diego, Calif.-based managing general agency has outlined a growth strategy that calls for acquiring three MGAs in the first few years, and cultivating three more niche segments as well.

That approach may not be overreaching, considering the business acumen of Kilkenny and Kimmel.

Kilkenny built Arrowhead General Insurance Services Inc. into a wholesale agency with $1 billion in premium before selling his interest in 2006.

Kimmel has been a reinsurance broker for 20 years. He joined this new venture from Guy Carpenter & Co. in mid-July, where he was an executive vice president focused on the MGA segment.

"It's become clear to us," said Leland Jones, a partner at Endeavour Capital, "and clear to the number of potential investments that we're talking to, that they see the value that Pat and Bob can bring through their industry relationships, and that's a real plus for us."

The foundation for the new business also builds on a 16-year relationship Kilkenny and Kimmel have developed, one that dates back to Kimmel's days as a reinsurance broker at E.W Blanch Co. Kimmel would match up what he called "orphaned underwriters" with Arrowhead.

He joined Guy Carpenter when it acquired John B. Collins Associates Inc. in March 2009. But he said the private sector "always held favor with him, and the opportunity to start a small private company with Kilkenny had even greater sway.

"We kind of had a reverse situation,' Kimmel said. "We didn't decide to go partner and find the money. I'd say the money found us and that's a good situation."

A Flexible Approach

What they now will have to find are MGAs that fit within a targeted acquisition profile, which includes those that are looking for a partnership that will help them grow. Kimmel said flexibility will be important.

"We're giving people an opportunity to continue to grow well and not just sell their companies," Kimmel said. "If they want to sell their company, we'll look at that, too. But we're offering an opportunity to learn from our experiences and build off our relationships."

Kimmel described small MGAs writing $50 million to $100 million in premium as good fits. The goal, he said, is to grow K2 into a company with $35 million to $45 million in net income, "which means you would have to write from between $600 million to $800 million in premium."

Initial target markets include nonstandard auto, workers' compensation, medical professional liability and commercial property with diversity being important for the overall mix. Timing will depend on the market, and the willingness of potential sellers to pull the trigger.

"What we'll do is acquire part or all of an MGA, as long as we have a controlling interest," Kimmel said. He said a monoline MGA might find appeal in the partial acquisition scenario, especially under a scenario that enables that seller to carry stock into K2.

Presently, many would-be sellers are hesitant to pull the trigger on a sale. That's due to difficult market conditions of the past few years that have compressed their revenue and especially their earnings, according to Skip Hagerty, managing director and partner at investment banking firm Philo Smith & Co. that specializes in insurance mergers and acquisitions. However, Hagerty said an MGA that has managed to hold things together from a profitability standpoint could do quite well in a sales scenario right now.

"There are a lot of interested buyers but not a lot of other sellers, so sellers could get a solid earnings multiple ha a sale," Hagerty said. "Second, if the market and the economy do turn, a seller could do quite well on the earn-out portion of their deal."

Hagerty said the uncertainty over the future of the capital gains tax is also in the backdrop and weighing on potential sellers' minds. If it looks like it will jump to 23.8% in 2013 as expected, "we might see a sudden influx of sellers in the second and third quarter of 2012 wanting to get a deal done before year-end," Hagerty said.

Meanwhile, given the soft market, MGAs and even managing general underwriters who produce specialty books of business with low loss ratios continue to be appealing to carriers.

"If a carrier believes it can capture the underwriting profitability, the MGA/MGU is conceivably worth much more to them than it would be to another broker," Hagerty said.

Christopher Hughes, director of insurance distribution for the investment bank Merger & Acquisition Services, concurred that buyer demand is strong for MGAs and program administrators, especially in the niche product lines such as marine business or specialty medical professional liability.

He said it marked a turn from the financial crisis of 2008 that "stopped many deals in their tracks."

Key Points

* The Team: Endeavour Capital goes in with industry veterans Pat Kilkenny and Bob Kimmel to form K2 Insurance Services LLC.

* The Plan: Growth strategy calls for acquiring three MGAs in the first few years, seeking those that fit within a targeted acquisition profile.

* The Outcome: Establishing longterm relationships with carriers that generate an underwriting profit.

MAKING THE CLIMB

K2 Insurance Services LLC will partner two industry veterans with a versatile investment firm.

[ILLUSTRATION OMITTED]

Pat Kilkenny, CEO Kilkenny is the former chairman and CEO of Arrowhead General Insurance Services. The company generated $1 billion in premium. He sold his interest in 2006. Kilkenny then served as the University of Oregon's athletic director until June 2009.

[ILLUSTRATION OMITTED]

Bob Kimmel, President Kimmel started as a reinsurance broker at E.W. Blanch & Co. He later joined John B. Collins Associates Inc., which was acquired by Guy Carpenter & Co. in 2009.

Endeavour Capital

Private equity fund founded in 1991 with focus on Western U.S. Target industries include food and consumer, transportation and logistics, education and training, niche manufacturing and business, and now insurance services. Firm has more than $1 billion in capital under management and is currently investing from a $475 million fund.

Audio:

Listen to the entire interview with Bob Kimmel at www.ambest.com/audio.
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Title Annotation:Agent/Broker: Specialty Producer
Author:Slavin, Al
Publication:Best's Review
Geographic Code:1USA
Date:Oct 1, 2011
Words:1072
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