Originally published on InsuranceDay

Losing its biggest capacity provider at the end of last year was a huge blow for managing general agent K2 International, but in the current market environment, under new ownership, things can change quickly, the underwriting platform’s two co-heads argue

The past two years have been profitable as well as transformative for London market managing general agent (MGA) platform K2 International, which saw its operating margins increase from low single digits in 2020 to almost 30% last year.

The platform, which generated gross premium income of $210m in 2022, is coming under new ownership because its parent company, California-based K2 Insurance Services, is in the process of being acquired by Warburg Pincus, the world’s fifth-largest private equity firm. K2 Insurance Services was previously owned by Lee Equity Partners, a much smaller player in the private equity space.

But it has also been a challenging time for K2 International, particularly in terms of delivering on its programme of “dynamic expansion”. The aim of the programme, announced in 2020, was to significantly increase the operating scale and territorial scope of the business through a combination of organic growth and the acquisition of specialist underwriting teams and MGAs.

David Carson, head underwriter of K2 Cat, the firm’s property catastrophe risk division, points to structural issues during the past two years in the property catastrophe market, which accounts for a significant proportion of K2 International’s premium income. Over the past 30 years, Carson says, there has been an estimated $830bn in insured property catastrophe losses in the US, with nearly 40% of those losses occurring in the past five years. K2 Cat focuses mainly on traditional property catastrophe reinsurance and targets regional insurers in the US, Japan, Canada and the Caribbean.

As things stand, demand is vastly outstripping supply, and Carson estimates a shortfall of property catastrophe reinsurance capacity in the market of between $20bn and $50bn. “We are currently in the hardest market since 1993, which, from an underwriting point of view, is fantastic. Rates have gone up significantly. Terms and conditions have been tightened considerably,” he says. “The only problem is there is so much fear in the investment community it is difficult to attract new capital into the market.”

Capital challenges

Pressures on existing capital providers mean they too are having to think carefully about where their capital is best deployed. For example, Hong Kong-based re­insurer Peak Re, K2 Cat’s largest capacity provider, terminated its nine-year relationship with the platform at the end of last year. “The decision was much more about the challenges it faces as a business and its desire to retrench from certain areas of the re­insurance market than our performance, results or service,” Carson says.

“In fact, K2 Cat’s results in 2022 were very good and made a significant contribution to K2 International’s overall result. But clearly, the timing is not great and losing Peak Re is a blow,” he adds.

“We are currently in the hardest market since 1993, which, from an underwriting point of view, is fantastic… The only problem is there is so much fear in the investment community it is difficult to attract new capital into the market”
_{David Carson}

Carson anticipates as a result of Peak Re’s withdrawal, K2 International’s premium income will be reduced from $210m in 2022 to $175m this year. But he also points out that in the current market environment and with a new owner such as Warburg Pincus, which is heavily invested in the global reinsurance sector, things can change quite quickly. “That figure can go up dramatically,” Carson adds. Warburg Pincus’s other investments include Aeolus Re, Arch Capital, Cox Insurance Holdings, McGill and Partners, Renaissance­Re and Somers Re, among others.

K2 International was set up in 2020 out of the successful parts of the troubled Pioneer Underwriters’ businesses, which were later acquired by K2 Insurance Services, an independent MGA and specialty risk programme management services group.

The transaction, which was K2 Insurance Services’ first outside the US (where it owns 21 MGAs, writing more than $1.5bn in premium income in 2022), included Pioneer’s property catastrophe, property direct and facultative, financial institutions and marine insurance and reinsurance books of business. This means K2 International is an important part of its parent company’s ambitious international expansion plans, which include building one of the biggest MGA franchises in the world.

Carson and Richard Coello, managing director of K2 Financial, the company’s financial lines division, are responsible for K2 International on a day-to-day basis, reporting to Bob Kimmel, chief executive of K2 Insurance Services in San Diego.

Expansion

Despite the current headwinds, the objective for Carson and Coello is to double the size of the business over the next five years. This includes extending the number of MGAs operating on the K2 International platform beyond the present three: K2 Cat, K2 Financial and K2 Property D&F.

To this end, K2 International has completely rebuilt its operating infrastructure. This includes, Carson says, the installation of a new policy administration system and data warehouse, as well as a substantial upgrade of the technology that powers the actuarial, claims management and other back-office support services provided by the platform.

This is at the same time as the overall K2 Insurance Services Group is looking to increase overall annual premium income from $1.5bn to $3bn over the period. “That is a pretty aggressive expansion plan,” Coello says. “But, with the support of Warburg Pincus, together with our acquisition and organic growth plans, everyone within the group sees that as a very achievable aim.”

The fact K2 International will be under new ownership from the end of March has already generated numerous enquiries from underwriters and capacity providers in recent months, according to Coello. “This is more activity than we’ve seen in the three years since we have been part of the K2 brand. It’s difficult not to notice we are moving to a new owner with more than $80bn in assets under management [AUM] from an owner with an AUM of $2bn,” Coello says. “We anticipate being pretty busy.”

_{“This is more activity than we’ve seen in the three years since we have been part of the K2 brand. It’s difficult not to notice we are moving to a new owner with more than $80bn in assets under management from an owner with an AUM of $2bn. We anticipate being pretty busy”
Richard Coello}

While Covid-19 has driven up rates in the financial institutions market and made K2 Financial a more visible presence to capacity providers, the flipside was the pandemic created an extremely uncertain environment for the market as a whole, which made investors nervous.

“Nobody knew how long it would go on for, what the impact on the economy would be and what all of that meant for financial institution claims,” Coello says. “It was not unlike a major catastrophe event, particularly in terms of the uncertainty of how big the losses could be. Financial institutions is traditionally a longer-tail line, so you don’t necessarily know the answer to that question for some time afterwards.”

Narrow focus

K2 Financial, however, focuses exclusively on financial institutions risks, specifically small to mid-market investment managers. It does not write banks and other large financial institutions, including insurance companies, nor does it write asset managers that are listed in the US or are consumer-facing to avoid the risk of class actions.

K2 Financial’s business is not high-premium, Coello says, “but it is highly complex and requires significant underwriting skill, which makes it very difficult to commoditise it in any way.” The team provides tailored coverages through a range of insurance products, including professional indemnity/errors and omissions cover, directors’ and officers’ (D&O) liability and crime insurance.

Coello is clear F2 Financial will never be an index underwriter that tries to reflect the financial institutions market. “We are very clear we only write distinct parts of the FI world. And I think that resonates with our capacity providers who, despite the uncertainty of Covid, have joined us because of our good track record and our understanding of the risks in that space which enables us to outperform the market. A lot of our backers are looking for outperformance.”

But the business, which currently generates a premium income of around $60m, is quite mature, according to Coello. “We have a very good market in that space and we can sustain it for the long term. But it is not clear how much bigger we can grow that book.”

To address the issue, K2 Financial hired underwriter Toby Smith from AIG last year to write small to medium-sized fintech risks as a second pillar to its financial institutions business. “We are not rushing to be the biggest market. Again, it is all about selection for us. But we see fintech as the future,” Coello says. “The financial services sector of tomorrow is going to look completely different from what it is today.”

Coello is also looking at a commercial D&O opportunity. Indeed, across the platform, K2 International is currently looking at around 10 business plans, according to Coello. These include potential acquisitions and new teams of underwriters in new product lines that could potentially come on to the platform as additional business, beyond the existing three MGAs currently operating under the K2 International umbrella.

“We feel we are now over the uncomfortable years, if you want to call it that. We are now looking forward, with a lot more confidence in the outlook for our business. It is extremely exciting times,” he adds.