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Geof McKernan, CEO of NSM Insurance Group, co-founded the company as a retail brokerage in 1990. Since then, it has developed into a specialty managing general agent offering programs ranging from professional liability for architects and engineers to pet insurance. Last year, the Conshohocken, Pennsylvania-based company was sold by its prior owner White Mountains Insurance Group Ltd. to Carlyle Group Inc. in a deal that valued it at $1.78 billion. Mr. McKernan recently spoke with Business Insurance Editor Gavin Souter about how the investment affects NSM’s strategy and the state of the specialty insurance market. Edited excerpts follow.
Q: What does the Carlyle deal mean for NSM?
A: It means we’re able to continue to grow the business organically as well as invest in people, IT and acquisitions. Then we’re going to continue to grow the business not only through internal growth but through acquiring specific industry niches, and we can also acquire more significantly higher EBITA businesses.
Q: About how many acquisitions have you made over the years?
A: We’ve made over 25 acquisitions over the last 32 years.
Q: Obviously, we’re in a different era in terms of interest rates, etc. What difference will that make to your growth ambitions and your acquisitions?
A: It’s not going to slow us down at all. Carlyle is a large private-equity firm, and we have both the cash and the appetite to keep growing, and we will. We will buy businesses prudently and we’ll continue to be aggressive with businesses that we want to acquire.
Q: Have you seen much change in valuations over the past year?
A: We’ve seen some valuations come down and we’ve definitely seen a slowdown in what’s coming to market. It’s also put some of our competitors on the sidelines.
Q: You have operations in London as well. Do you see opportunities for growth there?
A: Very much so. We’re very bullish on growing in the U.K. and also in Western Europe.
Q: Most insurance buyers would say it’s still a difficult market. How would you characterize the market from your specialty point of view?
A: This is the hardest insurance market I’ve seen in 40 years, and it continues to be that. Obviously, capacity is at a premium, and what we strive to do is use capacity prudently and partner up with quality insurance carriers. You want carriers that are with you in the short term as well as the long term, and that’s important to us.
Q: Are there any areas of the market that you see as being more difficult than others?
A: The property cat business is probably the hardest market anybody’s seen, and it continues to be hard, especially in areas like California and Florida. Commercial trucking is still a hard market. Professional liability in certain areas can be hard where the capacity is less available. Carriers want to be in business to make money, so they use capacity where they get the best return. We understand that.
Q: We’ve just seen a very difficult reinsurance renewal. Did that affect your programs?
A: It affected us in property cat in that it didn’t allow us to get as much capacity as we would have liked, but, because we have so many different programs, we can also pivot and focus more on other things where there isn’t a capacity constraint.
Q: As you say, you are looking to expand. Where do you see opportunities?
A: I’m agnostic to the niche. I look for opportunities that are sustainable and renewable, whether it be in professional liability, commercial auto or other areas like warranty.
Q: What’s your experience been in finding the expertise for your various programs?
A: There’s been a lot of musical chairs around people. We go after strong talent — talent is our No. 1 investment — and we’ll continue to do so. We also have a very, very strong internship program that’s over 12 years old, so we grow a lot of our talent ourselves and that’s done phenomenally well for us.
Q: Looking ahead, how do you see the market panning out over the next 12 to 18 months?
A: I think it will remain a hard market; things aren’t changing. You have to remember that, on a worldwide basis, carriers have not done great, so they are looking to get their returns back because of wildfires, hurricanes, floods and all the geopolitical risks. So, that all affects the capacity, and I don’t think the market’s going to go soft anytime soon.
Q: It’s been this way for some time, so how long do you see it going on for?
A: It’ll continue because they just haven’t had the returns they would want, and that’s caused prices to increase, period.
Q: Do you see signs of more capacity coming in?
A: Inklings of it, but we’ll have to wait until after the summer to see what’s really happening. The reinsurance renewals were really tough for a lot of insurers, and I don’t think that’s eased off yet, so we’re going to have to wait and see and get through hurricane season.
Q: What else do you see happening in the market?
A: The business is going to go into the carriers that can innovate, the MGAs that continue to innovate and provide product. You’ve got to provide more than just the price: It’s product, service, having a response time that’s really quick, and having an easy way to do business. So, we’ve invested a lot in technology so our customers can come to us whether it’s six o’clock in the morning or 10 o’clock at night. We think that’s critical going forward.