K2 International eyes MGA acquisitions with Warburg Pincus ownership on horizon
28 February 2023
K2 International has emerged from a cost-cutting phase after its mid-pandemic spin-off from Pioneer to K2 and is now hoping to act as a consolidator for more MGA teams to join its platform, with imminent backing from Warburg Pincus.
The private equity firm, also the main investor in McGill and Partners, agreed to buy K2 Insurance Services in December, just over two and a half years after K2 International had been formed. The deal is expected to close by the end of Q1.
K2 International was set up in May 2020 after US MGA K2 bought part of the former Pioneer business, transferring across three underwriting units: D&F, financial lines and property cat.
In an exclusive interview, K2 International managing director Richard Coello told Insurance Insider that the international platform is a key growth focus for K2 in future. “We’re only just beginning”.
The executives are hoping to attract underwriting teams to build up new lines of business organically, as well as looking at acquisitions, where Coello is hoping that expectations of a dampening down of M&A fever will allow the firm to find targets at “more reasonable levels”.
Offering lead underwriters “ownership” of their business in some form, tying their remuneration into a portion of their own P&L account and insulating them from other teams’ results will be a key part of K2 International’s pitch to would-be recruits.
Another plank of its pitch is that belonging to K2, with its extensive US franchise, gives a distribution edge to London market underwriters wanting to access markets across the Atlantic. “It’s a huge advantage for any underwriters whose products have a need for access to the US,” Coello said.
K2 said it did not have in mind any specific business lines in which it would target new hires.
Coello said that this reflected K2’s practice of organising its MGA segments by industry groups of target cedants, rather than strict lines of business. For example, its K2 financial team does not offer the full suite of typical financial lines products but rather targets coverage sought by hedge funds and other investors, and in the US, K2 has a golfing team that effectively specialises in property coverage, but focusses its pitch on golfing clients.
In terms of target hires, the firm would prefer underwriters who already have capacity lined up. In terms of whether K2 would consider developing in-house vehicles to retain risk, the executives said this was an issue for group leadership to consider.
Cost-cutting after spin-off
K2 International’s current three areas of specialty business have experienced differing fortunes since the split from Pioneer.
The financial unit, led by Coello, has grown to a $60mn premium base across 1,000 policies, serviced by a team of seven. This is the largest it has been on all metrics, albeit from a smaller start, with plans to target fintech providers for the next strand of its growth.
Covid “supercharged” rate increases that have prevailed in this line of business since 2018, although this was changing, Coello said. “We’re starting to see that peak and [rates trail] flatter right now.”
Its D&F unit, which has backing from Everest Re and writes LatAm and Caribbean risks, has a $30mn premium base and an ongoing “good loss ratio” performance with the prospects of D&F demand rising as treaty coverage becomes more expensive.
In contrast, the harder treaty market has made it more challenging to raise fresh capacity to support its larger property cat unit, after the loss of Peak Re’s support at year-end 2022 as the Asian reinsurer grappled with the fallout from a ratings downgrade of its parent Fosun.
Cat head underwriter David Carson said that the situation for cat underwriters in recent months has been one of “perverse irony” in that capital providers would likely return in a couple of years when the market is softer.
“We need them now”, he said. But he added that the door to capital provision “seems to be opening a bit more” and that the firm was hopeful on bringing in new support after the 1 January renewals showed clear momentum on rate gains and the emergence of a “collective market backbone”.
There’s often no collective backbone [in the cat market] – now there is
David Carson, cat head underwriter, K2 International
Overall, K2 International’s premium base is around $220mn, down from the $250mn projected for 2022, and representing around 15% of the group’s $1.5bn managed premium.
But Coello said that the platform’s focus has been on net income in the past couple of years since moving out of Pioneer, and that it has lifted its margins from the low single digits to 25% over the past few years.
This reflects a strict focus on expense control. “We had to take a platform that was supporting 18 teams [and make it fit for one hosting three],” Coello said.
From combing through IT spend to office costs and rebuilding its policy admin system, “there was a methodical process”. K2 International has also set up its own new data warehouse.
Your long-term relationships aren’t going to be long-term if you don’t perform
Richard Coello, managing director, K2 International
MGA runway
Despite the hardening market, the two see ongoing runway for growth in the MGA space. This partly reflects the potential offered by these platforms to strongly tie an underwriter’s incentives to their own portfolio performance, without being influenced by broader corporate outcomes.
“People are more willing to look at it as a genuine alternative career.”
On the corporate side, more carriers are also looking to “get in on the action” with fee income, they said, citing examples such as Arch’s Castel purchase in 2019 via its acquisition of Lloyd’s carrier Barbican.
However, Carson said that while many MGAs claim to be “underwriting-led”, not all are living up to this.
“There’s some that think they’re selling widgets,” he said, adding that K2 tries to avoid “chopping and changing [capacity] suppliers”.
“Your long-term relationships aren’t going to be long-term if you don’t perform,” added Coello. But he also noted that there can be a valid reason for MGAs to serve primarily a distribution role, particularly for far-flung regions.
These relationships just need to be understood as such by the capacity providers, he added. “But [it won’t work] if [the provider is] being told you’re getting risk selection.”
