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Risk Takers

  • Lori Chordas
  • December 2015
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Don Kramer gave up a senior partnership at Oppenheimer to start his own company. Then he did it again. And again. Ross Buchmueller left behind the security of AIG Private Client Group to launch Privilege Underwriters Inc., while other insurance entrepreneurs were nudged toward starting their own business by experiences, insights and ideas. In the following profiles, Best's Review spotlights some of the insurance industry's entrepreneurs.

After being carried off the floor of the New York Stock Exchange on a stretcher, Don Kramer knew he needed to make some changes.

He had a fabulous career as a partner at Oppenheimer, he was raising two kids in a lovely home on the course of Winged Foot Golf Club in Westchester County and his life, by all measures, was right on track.

Until he had a heart attack at the NYSE at age 36.

Kramer already knew the uncertainty of life; his father had died of a heart attack at age 40. So when he had his own heart attack four years younger than his dad, it wasn't just a wake-up call.

"It gave me a sense of urgency," he said.

Kramer left what was then Beekman Downtown Hospital in lower Manhattan intent on change. He started running and taking better care of himself. He also left his prestigious position at Oppenheimer to start his own company, Kramer Capital.

"I did very well at Oppenheimer," Kramer said. "Being a partner at Oppenheimer is nothing minor, but I felt this sense of urgency. Kramer Capital was my sense of urgency. I wanted to do something for myself."

Kramer Capital was the first in a series of companies Kramer has launched in a career that spans more than half a century. Though he didn't set out to be an entrepreneur, he is one of the most successful entrepreneurs in the industry. In addition to forming Kramer Capital--a management consulting firm that specialized in dealing with troubled insurance companies--he launched Tempest Re, Ariel Re and, most recently, ILS Capital Management.

"I guess I've been able to start more companies than almost anyone else," Kramer said. "But it just came about that way. When I started Kramer Capital originally, it just worked out.

"I wouldn't have bet any money when I started that I'd be 78 years old and still sitting here."

Early Signs

Looking back, Kramer has always had an entrepreneurial streak. Even as a child, the signs--literally--were there. One of his earliest jobs was making signs for a delicatessen. "I made the signs and they'd give me food," he recalled.

From his youngest days, he worked. He delivered groceries in Brooklyn, waited tables each summer at Catskills resorts and performed stand-up comedy in college.

"I've always been working. I just never thought of not working," Kramer said. "My summers, when everybody else went to camp, I worked. Every single summer right through college."

During his senior year at Brooklyn College, Kramer took a job at Oppenheimer as a billing typist, printing out confirmations of trades. That wasn't enough for him, though. "Being an overachiever, I wanted to be a figuration clerk. In those days we didn't have calculators. We had slide rules or an adding machine, so they figured the trades by hand."

He worked his way up to figuration clerk and when he graduated college at 20 in 1958, Oppenheimer offered him a position as a margin clerk. The job would come with a hefty salary increase, bumping his pay from $65 to $100 per week. He turned it down for a lower paying job.

"I told them I wanted to be an analyst, and they said, 'We have Leon Levy, our analyst, and we don't need two,'" Kramer recalled. "So I quit and took a $60 a week job at Moody's as a municipal bond analyst."

Nearly 10 years later--after a stint at brokerage firm Bache & Co. and after rising to the role of general partner at First Manhattan--Kramer returned to Oppenheimer, having been hired back by Levy, the co-founder of Oppenheimer mutual funds.

That was 1969 and Kramer had made a name for himself as an analyst covering the insurance industry.

"I was a pretty good stock picker," he said. "In those days, as an analyst you got paid for coming up with new ideas for institutions. So I'd go to Fidelity and all these mutual funds and tell them what I think about this stock or that stock.

"But what was really important is that I wasn't afraid to be negative when I had to be. That's how I got my name and my reputation in the business, which got me put on a list of the 'hatchet men of Wall Street.' I wasn't afraid to write the negative report."

Not all of Kramer's picks were home runs. While at Oppenheimer, he launched Oppco Re, a predecessor to the hedge fund reinsurers of today. With his knowledge of insurance and background in investing, Kramer thought starting an insurance company would be easy. He quickly found out it's not.

"I thought we could make money on the investments, because I had Oppenheimer Funds," he said. "We thought we'd create a fund, get $3 of invested assets, make 15% on each dollar and make 45%. And all we had to do was break even on underwriting. Well, we had no idea what we were doing. We had a brokerage firm that put us in all kinds of treaties, and we were losing our shirt."

It was a colossal failure but an extraordinary education.

"You learn more from your mistakes than you ever learn from your successes," Kramer said. "Your successes could be accidental. You can revel in them. But when you make a mistake, you really learn a lot."

Branching Out

After his heart attack, Kramer felt it was time to apply that education to a business of his own. He retired from Oppenheimer but remained a limited partner. Oppenheimer had its offices on the 37th floor of 1 New York Plaza; Kramer took an office on the 40th and started Kramer Capital.

Kramer Capital became a leading firm in dealing with troubled insurance companies.

"I started it with my own money. I didn't have any outside investors," he said. "I brought in some very talented people and we did OK. We were specializing. We were getting fees for taking over troubled companies.

"Eventually, I thought, if I can rebuild insurance companies, why can't I build one for myself?"

The opportunity to do so came along in 1984. CIT Financial approached Kramer Capital for help with a struggling company called NAC Re. Kramer took over the business in an effort to avoid bankruptcy.

"The first thing I did was almost shut it down," he said. "The problem is, under New York law, if you shut it down, New York takes it over. So I had to run it with $2 million a year in premium just to keep it from going under."

In the meantime, Kramer raised $26 million to buy NAC Re. Backed by Dillon, Read; Oppenheimer and General Re, he took the company over and recruited a new management team, including former Gen Re executive Ronald Bornhuetter as chief executive officer.

"We built it into a sizable company," Kramer said.

By the time NAC Re was sold to XL for $1.2 billion in 1999, Kramer had long retired from the company and moved on to other ventures.

In 1993, in the wake of Hurricane Andrew, he raised $500 million--again partnering with Gen Re--to start Tempest Reinsurance Company in Bermuda. The name was a nod to Shakespeare, as well as a play on a word synonymous with storms.

"We had just finished a major loss and rates were high," Kramer said. "As we used to say, 'We're getting payback from other people's losses.' So I got Gen Re to partner with me. We raised $500 million and we formed Tempest."

Tempest started writing business just weeks before the Northridge earthquake of Jan. 17, 1994.

"For us we didn't have a big piece of it, so it was small," Kramer said. "Then on January 17th of the very next year, we had the Kobe earthquake, so I said to everybody, 'We're going to write a 364-day policy and leave out the 17th of January.' At which point, they never let me underwrite a piece of business ever again.

"I'm not capable of underwriting; I'm really not."

Kramer was joking about the policy, he said, but not about his underwriting ability. The lasting lesson from his Oppco Re failure was that good underwriting was crucial to success.

"That was my first real education in insurance risk, in terms of catastrophic risk," Kramer said of Oppco Re. "And that was worth more to me than anything else. Because then we came back and knew what to do when we started Tempest."

Kramer relied on Gen Re for underwriting expertise when launching Tempest.

"I couldn't ask for a better partner, or one that was more knowledgeable, than Gen Re," he said.

After two years of business, Tempest Re was acquired by Ace Ltd. Kramer stayed on as vice chairman under Brian Duperreault until 2005, when he retired.

Or, rather, attempted to retire.

While traveling in London, Kramer received a call from Russell Brooke, who had been the chief underwriting officer at Ace Tempest Re. "He said there was a company in Bermuda I could take over," Kramer recalled. "I said no, and I got on the Tube. When I came out the other end, I said, 'Let me call him back.' So I called Russell and wound up taking over the company, and that became Ariel."

Kramer raised $1 billion privately to launch Ariel Holdings, which was part of Bermuda's Class of 2005. Two years later, Ariel acquired Lloyd's syndicate Atrium Underwriting. And by 2009, it had grown that initial equity investment to $1.7 billion with Kramer as CEO. Kramer turned over the reins to George Rivaz and stayed on as nonexecutive chairman until selling Ariel Re to Goldman Sachs in 2012. "By that point I wanted to step down anyway," Kramer said.

That bid at retirement wouldn't last long.

Return to Roots

For the past two and a half years, Kramer has been building yet another insurance company--ILS Capital Management. This time, he is the sole investor, owning 100% of the company.

He has a team of 12 working in offices in Bermuda, London and Greenwich, Conn. They cherry-pick risks based on portfolio analysis.

"We're willing to take serious risk," Kramer said. "And our ability to manage the risk is based on portfolio analytics. I may write something which has a 15% return, and I may look at another piece of business that's equally attractive and I won't write it because it correlates to the one we write. So we try to write a portfolio of risks.

"One or two risks every year will go bad. And 98% of the risks will do well. The idea is to be good at it, and then one year you're going to get caught and have three things happen. It could be an earthquake, a hurricane, and a flood all at one time. But basically, we think that in 11 of 12 or 14 of 15 years, we'll generate superior returns."

ILS Capital Management was up 19% after its first year, Kramer said. And although he doesn't expect this year's return to be quite so high, he expects double digit returns if everything goes well for the balance of the year.

With ILS Capital Management, Kramer has come nearly full circle.

"This is going back to my roots in investing," he said. "It's almost a repetition of what I did in 1973, except I'm doing it right this time. Instead of doing it from the investment side, I'm doing it from the underwriting side."

Although Kramer has successfully built, bought and sold a handful of companies since Oppco Re, he still draws on the lessons he learned from that experience.

"I tell people I have a master's degree in finance and a doctorate in failure," he said.

If his resume is any indication, however, it seems the only thing Kramer truly has failed at is retirement.

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New Mutual Model

Veterans of public finance Robert P. Cochran and Sean McCarthy formed a mutual insurer solely devoted to insuring municipal debt.

When Robert P. Cochran and Sean McCarthy founded Build America Mutual in 2012, they were determined to follow a different course than the one that doomed many of their municipal bond insurance predecessors.

They had both witnessed firsthand what had happened as a result of the financial crisis, when the lure of insuring residential mortgage-backed securities had disastrous consequences. Industry leaders like Ambac, MBIA Corp. and Financial Guaranty Insurance Co. were stripped of their high ratings. What once was a $2.5 trillion business became a shell of itself and, where eight players vied for business, when BAM came along there was only one: Assured Guaranty Municipal Corp.

"There are a lot of lessons to be learned from that experience," McCarthy said of the turn that the industry took as a result of the crisis. "The first and most important thing to notice is that none of the original eight insurance companies that were writing financial guaranties failed because of their municipal bond exposure. They blew up, as made famous by the book The Big Short, because they got involved in highly levered subprime mortgage transactions," McCarthy said.

So Cochran and McCarthy started BAM with the intent of insuring municipal bonds and municipal bonds only. They decided from the outset to create a mutual structure that sidestepped many of the issues that led to the downfall of their stock company industry peers. Cochran is the company's managing director and chairman of the board and McCarthy is its managing director and CEO.

"We concluded that if we were going to go back into the municipal bond insurance business, we were not going to be able to sustain the highest credit ratings over time and attract the quality and quantity of capital necessary if the company was structured using a classic stock model because the economics simply would not support a 15% after-tax return, even on a projected future basis," McCarthy said.

"You couldn't attract capital without promising those returns and even if you did, you would then put yourself on a treadmill that ultimately would lead back to the same place that we had seen all the other companies come to, which is that you can only get to that by employing risky leverage or getting into other products outside the municipal world," McCarthy said.

The Beginning

The business landscape in which BAM was born is fundamentally different from the heyday of the financial guaranty industry. In the period before the financial crisis, it was common for municipalities to issue debt wrapped in the protection of a municipal bond insurer's guarantee of principal and interest repayment. It was a stable business model for these monoline companies: Receive a constant supply of insurance premiums in return for backing debt obligations that had very little default risk. Until 2007, no monoline insurer had ever been downgraded or failed to make a payment, according to a 2008 Wells Fargo white paper, Deterioration of Monoline Insurance Companies and the Repercussions for Municipal Bonds.

But later, everything changed. New financial innovations introduced by investment banks and hedge funds to hedge against credit risk threatened monolines' business models. In particular, credit default swaps--essentially insurance contracts against the default of a referenced bond--gained significant market share. The CDS market grew from less than $5 trillion in 2003 to more than $55 trillion by the halfway point of 2008, according to the International Swaps and Derivatives Association. Demand for collateralized debt obligations--packages of several types of debt sold in tranches of varying types of credit quality--likewise soared, to approximately $2.5 trillion in 2007. According to the Wells Fargo white paper, the premiums paid to insure CDOs were larger than those in the comparatively thin profit-margin business of municipal bond insurance.

"For the monolines, the lure of the market was too great to ignore. Besides, the higher credit profiles were systemically assessed by the rating agencies and securities firms to be of investment grade," the paper stated.

To varying degrees, all of the monolines were affected by their exposure to these new securitized models, and most problematically to exposures to structured finance credit default swaps in residential mortgages. The ratings of Ambac and MBIA, then the largest monolines, were downgraded, as were smaller monolines such as Security Capital Assurance Ltd., CIFG Guaranty, and Financial Guaranty Insurance Co.

"It was predominantly their exposure to SF CDOs that determined just how much trouble they got themselves into," according to the Wells Fargo white paper. "It was the rapid deterioration in SF CDO asset values that pushed their business models over the brink and into negative excess capital reserves. In other words, they didn't have enough cash to cover potential losses. The actual numbers of mortgage defaults went well beyond what the models projected, and the monolines that participated more heavily in the SF CDO guarantee business were the ones that got burned the most," according to the white paper.

"CDO technology, by creating a diversity of pools across different industries and different geographies had a value because if there was going to be an economic strain on Florida real estate companies, it probably wasn't going to affect pharmaceutical companies in Seattle," said McCarthy, who as then chief operating officer of Financial Security Assurance witnessed firsthand what was going on with the industry.

"But it turns out that applying that technology to subprime mortgages was a mistake because they correlated 100%. First, whether they were in Key West or Los Angeles, subprime mortgage borrowers all behaved similarly. Second, the step that really caused damage in the industry was taking subordinate pieces of a pool of transactions and then re-hypothecating them into new securities. They were trying to squeeze that concentrated risk into a diamond, but what they were really doing is creating a nuclear weapon that had tragic results," McCarthy said.

FSA and Assured Guaranty Ltd. limited their exposure to the structured finance CDO business and subprime residential mortgage-backed securities, and thus survived the industry's restructuring in relatively good shape, according to Wells Fargo. Assured Guaranty acquired FSA in 2009.

Getting Started

In the aftermath of the financial crisis, Cochran and McCarthy joined together and contemplated their next move. Veterans in public finance, they first met in the late '70s when Cochran was a public finance lawyer at Kutak Rock and McCarthy was an investment banker at E.F. Hutton's public finance group.

"I was at FSA at the beginning and Sean joined us very quickly after we formed the company," Cochran said. "The founder of FSA, Jim Lopp, died tragically and unexpectedly of a heart attack at age 51 in 1990. At that point, I became CEO of FSA and Sean very quickly became the number two guy in the company and we ran FSA together for nearly 20 years," Cochran said.

In 2011, the two formed Hudson-Greenwich Partners LLC, named after the two streets each lived on in the Tribeca section of New York City. After months of extensive research, they created a business model that's embodied in Build America Mutual.

"We weren't initially committed to the idea of creating a new financial guaranty company. We just knew that between us we had 40-50 years of experience in municipal finance and insurance and we wanted to figure out whether there was something we could do that would be new and interesting and unique to our skills and something that we felt was worth putting the next stage of our lives into," Cochran said.

Eventually, their analysis led them to the conclusion that creating a mutual bond insurance company 100% owned by policyholders was a financial model that would enable a monoline company to sustain itself without relying on insuring nonmunicipal debt.

"In New York, there hadn't been a new mutual insurance company formed in 40 years, so to make BAM a reality we had to satisfy two different regimes: the mutual insurance regime and the financial guaranty regime, which is more technical in the way it was regulated, and combine the two together," Cochran said. "We had to do that for our home state regulator here in New York, and then the other 49 states and the District of Columbia. There was a tremendous amount to be done and our team was building it from whole cloth," Cochran said.

"The activity of raising money to build public infrastructure, which is something we desperately need to do in this country, is a positive synergy here," Cochran said. "If we could create something that is essentially collectively owned by the municipalities of America and therefore is able to deliver its product at the lowest possible cost with the highest possible level of safety for investors who buy the bonds that we guarantee, that's a mission worth spending the rest of our careers to accomplish," he said.

The new company received its initial $600 million of startup capital from White Mountains Insurance Group, a financial services holding company. HG Re Ltd., a Bermuda special purpose insurer provides first loss reinsurance protection for policies underwritten by BAM.

They attracted a board of directors consisting of themselves; Raymond Barrett, chairman and CEO of White Mountains Insurance Group; Richard Ravitch, the former lieutenant governor of New York and co-chair of the New York State Budget Crisis Task Force; Edward G. Rendell, former governor of Pennsylvania; Robert A. Vanosky, private investor and former head of the public finance division of RBC; and Allen Waters, director, president and CEO of Sirius International Insurance Group.

Relatively quickly after opening its doors, BAM closed its first deal, insuring the York Suburban School District's $10 million debt offering. They also obtained the sponsorship of the National League of Cities, which made BAM its preferred provider of financial guaranty insurance on debt for its member municipalities. NLC is an advocacy organization that represents 19,000 cities, towns, and villages, and encompasses 49 state municipal leagues.

In addition to its municipal model, BAM made transparency a fundamental building block of the company. The company publishes three-page credit summaries for every transaction it insures, known as Obligor Disclosure Briefs or ODBs, and makes them freely available on its website. These disclosures are meant to "assist broker dealers in meeting disclosure rules for secondary market transactions," according to a press release accompanying the company's formation. They also help investors monitor the underlying credit quality of their investments and help BAM's issuer-members because well-informed investors typically pay up for bonds that are backed by transparent financial disclosures.

"The role we're playing helps the underlying issuer meet their obligations to put timely financial disclosure into the market in a clear, standardized form, and it helps the regional dealer be able to easily pull a report that he or she can deliver to their investors that summarizes the issuer's financial position and provides a summary of the nature of the demographic and economic environment," McCarthy said.

According to The Bond Buyer, the century-old daily that covers the municipal bond industry, BAM in its first year took 39% of the total insured market by par amount. Today, the competition is tougher with National Public Finance Guarantee Corp. and the two Assured Guaranty companies (Assured Guaranty Municipal Corp. and Municipal Assurance Corp.) competing for business.

"I think that if you had asked us three years ago where we would be today, we would have thought we might have insured more volume. But I don't think we could have imagined that we would have created the great company that we feel we have today in terms of the people, the systems and the market acceptance," Cochran said.

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From the Ground Up

PURE Insurance's founder applied lessons learned from creating another insurance startup to build a competitor dedicated to the high net worth market.

Ross Buchmueller was at the helm of AIG Private Client Group in 2005 when he was bitten by the entrepreneurial bug to create another insurance organization focused on America's wealthiest clients.

After all, he was anything but a novice in that space. "Underwriting high net worth insurance is the only thing I've ever done since I got out of college," said Buchmueller, who began his career at the Chubb Corp. after graduating from Trinity College in Hartford, Connecticut.

Buchmueller is no stranger to the world of insurance startups. In 1999, he was approached by AIG's former CEO, Maurice "Hank" Greenberg, to create a company division dedicated to providing property/casualty insurance to elite customers. Today, AIG Private Client Group offers insurance for everything from homeowners and private collections to kidnap and ransom and workers' compensation for domestic staff.

After serving six years as AIG Private Client Group president, and after Greenberg left AIG in 2005, "I was pretty sure that I wasn't going to spend the rest of my career at AIG," Buchmueller said. "I was fortunate that private equity sponsors approached me and said if I ever wanted to have my own insurance company they would support me."

In 2005, he began laying the groundwork for a new high net worth provider, Privilege Underwriters Reciprocal Exchange (PURE).

Privilege Underwriters Inc., the holding company for the PURE Group of Insurance Cos., including the member-owned PURE, was founded in 2006 and was initially capitalized through investments including management and Trident III, a private equity fund managed by insurance investor Stone Point Capital, according to the company's 2014 annual report.

In 2006, when Buchmueller launched PURE, "there were only a handful of companies focused on what people refer to as the top 1% of wealthiest Americans," Buchmueller said. "It was a large, growing, yet relatively underserved market, and we felt we had an expertise and knowledge advantage in that space."

The opportunity to work with independent agents and brokers, "many of whom have in common their love for owning their own business," also spurred PURE's genesis, he said. "I found that to be infectious and inspiring. So when given the opportunity, I seized it."

Lessons Learned

While developing PURE, Buchmueller applied many of the lessons learned from AIG Private Client Group's founding. "There's no question that the experience of having done everything before, along with recognizing the mistakes we made and the things that went well, were extremely valuable when creating PURE," he said.

"At AIG, we basically built everything from scratch, except the balance sheet. And there was extraordinary autonomy to build all aspects of the business--from technology, claims and marketing to underwriting and product design," he said. "We also had the advantage of being part of the then world's largest insurance company."

His long career in the high net worth market also made PURE's creation process a natural fit. Buchmueller's team, which includes former Chubb and AIG executives Jeffrey Paraschac and Martin Hartley, had "a really deep understanding of the category and what clients' needs are and the way in which we could build products and services," he said.

"We also had the benefit of having a clean slate," he added.

"The greenfield advantage is probably even bigger than we thought. That offers the ability to have modern technology, a way to capture data exactly in a way you want to see it, the ability to build products without worrying about regulatory restrictions because you're not disrupting anyone since you're starting from scratch, and the ability to attract people and build the culture exactly the way we want it," Buchmueller said.

"It's hard to change the tires on a moving car. So when you start from scratch you have a massive advantage."

Coordinating interests also proved helpful.

"That's what led us to a reciprocal model and the sense of mutuality," Buchmueller said. "Wealthy families at that time were demanding an alignment of interests. Their wealth managers were fee-based, without conflicts or using other incentives to do anything other than what was in the best interest of their clients. It became a requirement when serving wealthy people to eliminate strife and to promote transparency, so we began looking at ways in which the insurance industry structurally creates conflict."

That gave rise to the idea of mutuality, he said. "There are the beautiful, old-fashioned mutuals that operate with policyholders at the center of the equation. Sure they have other stakeholders, but they try to find alignment with them. We felt if we combined our expertise advantage and our clean slate along with a strong alignment of interests we could create a lasting competitive advantage."

Reciprocal insurance companies, such as PURE, resemble mutual companies. Whereas a mutual insurance company is incorporated, the reciprocal company is run by a management company, referred to as an attorney-in-fact. A reciprocal exchange is a group of individuals who agree to exchange contracts of insurance (policies) and share their insurance risks among themselves, according to PURE's website. PURE policies are nonassessable.

Along with its reciprocal exchange structure, PURE's service-focused culture makes it unique among its competitors, Buchmueller said.

"We made the decision to formally become a purpose-driven organization. What that means is not only do we understand what we do and how we do it but we also understand why we're here. We formally adopted the purpose of helping our members become smarter, safer and ultimately more resilient so they can pursue their passions with greater confidence. All of our employees not only know how to do their jobs but they also know why. For us, culture and purpose ended up being just as important as mutuality, expertise and having a greenfield advantage."

That's playing out in the company's numbers. In 2014, direct premiums increased to more than $350 million, marking the eighth consecutive year the company achieved a growth rate of at least 40%, according to the company's annual report. For 2014, Privilege Underwriters Reciprocal Exchange had a combined ratio of 102%, according to A.M. Best's Bestlink.

In June, the company said it agreed to recapitalize with equity investments from funds managed by Stone Point Capital, global investment firm KKR and the management team. Financial terms of the transaction were not disclosed. As part of the transaction, funds managed by Stone Point will maintain a majority stake in Privilege, while KKR will acquire a minority stake.

In August, the company was named to the Inc. 5000--Inc. Magazine's 34th annual list of fastest-growing private companies.

The company is also growing its geographic footprint. PURE's roots began in Florida and quickly expanded across the United States. Today, the White Plains, New York-based company serves clients in 49 states and hopes to soon expand into Idaho to become a national carrier.

Putting Plans in Action

Buchmueller points to innovation as a critical force when it comes to creating an industry startup.

"The whole category of insurance probably hasn't seen the kind of disruption that other industries have, so it's essential that we innovate," he said. "What I found great about working at AIG was a bold spirit of innovation where the company is willing to try things, didn't worry about only what others are doing and placed a strong emphasis on execution.

"Innovation without execution is just a white board filled with ideas," he said.

His innovative spirit hasn't gone unnoticed. In 2014, Buchmueller was named EY Entrepreneur of the Year, which recognizes outstanding entrepreneurs who demonstrate excellence and extraordinary success in such areas as innovation, financial performance, risk and personal commitment to their businesses and communities.

PURE, for instance, created a claim tracker inspired by Domino's Tracker , Buchmueller said. Just as the pizza tracker allows customers to know when their pizza is baked and when it will be delivered, "we can show you where your claim stands," Buchmueller said. "I don't think we have more or better ideas than everyone else; it's just that we get them done."

Buchmueller advises anyone wishing to embark in the startup process to plan decisions carefully.

"The decisions you make early on are essential and create your own legacy problems," he said. "We have a plaque in our office with a quote from Albert Einstein that says: 'The world we have made, as a result of the level of thinking we have done thus far, creates problems we cannot solve at the same level at which we have created them.' The world is more complicated today. If you don't think something through, make a mistake and say you'll figure it out later, it's going to take much more later on to try to resolve it, if it can be solved at all."

Don't put off tomorrow what you can do today, he said. "It comes down to the simple idea of 'Ready. Aim. Fire.' It isn't just that you will aim later; it's that you spend a lot of time in 'ready.' We encourage people to spend time in ready mode so they know what they're going to do, can ensure that they're thinking everything through, are designing the company in the right way and are picturing what success will look like," he said.

"Then when you get into action, surely you'll have to adjust and can do the aiming later," he said. "The problem is often people don't spend enough time in 'ready.'"

Buchmueller also suggests startup visionaries continually ask questions.

"What I find, not only in myself but also in the people who work here, is that they're curious," he said. "They never stop asking, 'Why?' 'Why not?' or 'What's possible?'" he said. "When we interview potential new hires and sense they have little curiosity they usually won't be a good fit here. You have to marry that with an ability to get things done because it's not enough to brainstorm; you also have to do things and make an impact with them."

Persistence and resilience also are key when building an insurance organization, Buchmueller added. "You need to recognize that things don't always work the first time or the way you want. You can't expect things to all go perfectly. If the only thing you see is what's right in front of you then you're probably going to miss a fatal flaw or the inspiration for something great."

Finally, remove obstacles, Buchmueller said. "Great people make all the difference. In that first period of time when you're getting started and interviewing many people, the temptation is to just hire them because there's much work to get done," he said.

"We were very selective, particularly in our early days, and that was a challenge because we wanted to find great people," Buchmueller said. "However, not everyone wants to quit their job and go work for a startup. The best people may be hard to recruit; the easy ones to recruit probably aren't those you want to engage with."

Buchmueller credits his team of nearly 400 employees as a critical component of PURE's success. Each member is asked to uphold what he calls "The PURE Principles": Practice membercentricity to create an exceptional member experience and alignment of interests; use empathy, creativity and urgency to be exceptional; do the right thing and never compromise integrity or transparency for the sake of a shortcut; be a team player; be obsessed with getting better; and have fun.

The Road Ahead

The good news for anyone interested in creating an insurance startup is that capital for great ideas is plentiful, Buchmueller said.

"But the process is always harder than you think and it never works like you want," Buchmueller said. "So it's helpful to surround yourself with others who have done it before so they can help guide you through the natural roadblocks.

"I had the benefit at AIG of many people who tried different things over the years. Here I had the advantage of having done this before," he said. "It's hard to build a startup, but there have been more and more successful ones lately, especially on the distribution side. It would be great to see even more fresh ideas in the sector going forward."

As Buchmueller reflects on the past, he's also excited about what lies ahead. "I think as boring as it sounds, if we do the same things over the next 10 years that we did over the first decade--focusing on service and our culture and being methodical in the way we grow the business--then we'll do just great."

Learn More

Privilege Underwriters Reciprocal Exchange

A.M. Best Company # 013816

Distribution: Independent agents

For ratings and other financial strength information visit

www.ambest.com

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Intangible Beginnings

Steel City Re co-founder Nir Kossovsky brings heavy-duty quantitative skills while co-founder Peter Gerken brings nearly four decades of insurance experience. Together they set out to put hard numbers around intangible risk.

Nir Kossovsky stared down at a lifeless body and thought about people's behavior.

"What makes people do certain things?" Kossovsky, a former deputy coroner for Los Angeles, wondered. "How do they behave differently when they think an environment is safe or unsafe?"

Those were natural questions for a coroner, and they were the same questions Kossovsky found himself asking years later when he founded Steel City Re with former Marsh executive Peter Gerken.

Steel City Re is a managing general agency that develops reputational assurance products that provide companies with protection against the loss of reputational value. The company was formed out of a common interest in intangible assets.

Gerken and Kossovsky met in the early 2000s through a professional group. At the time, Gerken was running the intellectual property practice at Marsh while Kossovsky was chief executive officer of the Patent and License Exchange, a company he founded after launching his second career as a business entrepreneur.

After their initial meeting, Gerken and Kossovsky stayed in touch, chatting from time to time about their shared interest in intangible assets. When Gerken left Marsh in 2005, the two began seriously considering a venture together.

"We finally said, 'We really ought to do something together,'" Gerken said. "And we knew what we wanted to do. The idea was to look at intangible risk and how that intangible risk could be handled within the insurance arena or the commercial marketplace.

"The marketplace didn't know how to handle this," Gerken said. "They said, 'Well, it's intangible.' Sure, that's an easy answer. But what about a solution? There weren't really solutions in the marketplace at the time for the downside risk when intellectual assets or intangible assets might become impaired. So we set out to build a solution."

Quantifying the Intangible

With Kossovsky bringing the heavy-duty quantitative skills and Gerken bringing nearly four decades of insurance experience, they set out to put hard numbers around intangible risk.

Kossovsky's interest in intangibles stemmed from his own intellectual property. After spending 10 years as a professor at UCLA Medical School, he had checked off most of the bucket list items for a faculty member, publishing more than 200 scholarly articles and earning 20 patents for inventions in the medical field. So he left his tenured position to earn an MBA and start his own intellectual property exchange. He left the Patent and Licensing Exchange to form Topcap, an intangible asset management consultancy.

"Intangible assets are the drivers of value that have no home on a company's balance sheet," Kossovsky said. "It's things like safety, security, quality, sustainability, ethics, innovation--the things that differentiate companies one from another in a substantive way and explain much of the operational success or failure, but are invisible on a company's balance sheet.

"Those differentiating elements are the things that underlie a company's reputation. Those enumerated intangibles are a major source of value in most companies. Solving that challenge of putting numbers around reputation was the intellectual challenge Peter and I took on."

As Kossovsky and Gerken worked through their idea of building an insurance solution for intangible risks, they contemplated what the largest, most valuable intangible asset is to a corporation. "The answer was reputation," Gerken said.

Taking a behavioral economics approach, they began to consider how company stakeholders behave when they think there's risk or when their expectations for the company are not met.

"The reputation-to-risk question was reframed in our minds as: How do you measure the consequences of threats to the expectations of stakeholders?" Kossovsky said. "The next step in our thinking was to break down the subject into more subjective elements. Disappointed stakeholders destroy value by becoming disloyal customers, disengaged employees, distracted suppliers, distrustful creditors, dismissive investors and determined litigators and regulators."

As he thought through the correlation between expectations and behavior, Kossovsky saw a clear thread emerge between his past and his present.

"We overcame the challenge of valuing reputation by fusing principles of behavioral economics with the rigors of financial accounting," he said. "This ties back to my interest as a deputy coroner and pathologist. What drives people to behave a certain way?"

Putting numbers around that was the first challenge. To quantify the risk, Steel City Re began capturing data weekly on 7,500 public companies and used that information to create its proprietary Reputational Value Metrics, which it describes as "indexed measures of reputational value evidenced by the telltale signatures left by stakeholder behavior."

Getting that model off the ground was a lengthy process.

"We had a pretty significant gestation period early on," Gerken said. "It wasn't easy. But we knew the most important thing was to build good metrics. We needed metrics that would be reliable, that would be repeatable and would be reproducible."

Fruits of Labor

At first, Gerken and Kossovsky, who used their own money to get Steel City Re off the ground, simply sold their data to companies. But in 2012 they were approached by Kiln, a Lloyd's syndicate, with an offer that would allow them to enter the insurance space.

"The best way to start in the insurance industry and get into the marketplace is with another company providing the risk capital, which for us was Kiln," Gerken said. "We were also at the time working with Aon Benfield, and still are, as a Lloyd's broker and they put together a $100 million facility led by Kiln putting up $25 million of the $100 million."

With insurers providing the capital and Gerken and Kossovsky providing the subject matter expertise, Steel City Re went from an advisory firm with aspirations of becoming a reinsurer to being a managing general agency.

With their Reputational Value Metrics as a basis, they developed a Reputation Assurance product that protects against reputational value losses. The product includes tools for managing enterprise reputation risk, funds for directors' and officers' personal reputation protection and funds for enterprisewide loss indemnification.

"Our Reputational Value Metrics allow an almost real-time measurement of reputational value," Gerken said. "Those metrics allow companies to measure, monitor and manage that."

Companies receive a weekly intelligence report on their reputational metrics, which serves as an early warning signal of potential reputational damage.

Because it considers its Reputation Assurance to be a seal of approval, Steel City Re does not sell its product to just anyone.

"Our product has been described as a warranty on governance," Kossovsky said. "More likely than not, a company will not qualify by our objective measures of reputational volatility. For a firm to qualify for coverage and for us to accept the risk is basically us saying we believe this firm is in a state of control and that its governance systems are above average."

Although Steel City Re does not bear the risk for its product, it still hopes to become a risk-bearing entity.

"The Re is aspirational," Gerken said. "At some point in time we will reinsure their risk, not as a traditional reinsurer but more as a captive, where we would take a piece of the risk. We see that not so much as a transition but as an evolution."

Gerken said entrepreneurial life is not easy, but it is certainly rewarding. "It's addictive," he said. "At the same time it's challenging. It was challenging operating without a salary but with the opportunity for equity, knowing that when it all works well, it'll work very well. That's the incentive.

"For us, we have not looked back," Gerken said. "We are constantly building and trying to get more companies in the pipelines, selling our metrics, making our insurance sales. And we are firmly focused on looking forward. We've done something very unique here. There's nothing else out there that's like our products."

By Lori Chordas, senior associate editor, Best's Review: Lori.Chordas@ambest.com and

by Angelo Lewis, Senior Associate Editor, Best's Review. and

by Kate Smith, senior associate editor, Best's Review


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