Hornbeam Insurance Targets Small-Scale Deals

After all the recent industry consolidation, just a handful of very large insurance companies dominate the service contract industry. And their retail and manufacturing clients also tend to be large companies, leaving an opening for an insurance underwriter aiming for small-scale deals.

On a clear day, Dan Tafel, the senior vice president of business development at Hornbeam Insurance Company, can see his old office building across the river in Indiana. “I spent 18 years there,” Tafel said of his former job at Service Net Solutions, an administrator of product warranty and service contract programs now owned by the American International Group Inc. But this summer, he and two colleagues left AIG to help launch a brand new venture owned by a legendary Louisville-based insurance company.

Tafel recalled that it started with a bourbon, shared with a friend three years ago during a trip to Florida. Tafel was talking with his friend how he saw a need for insurance underwriters and administrators to take on some of the smaller deals that the top extended warranty companies such as AIG were unable to do. And he talked about how Louisville had become such a hub for warranty talent, thanks to it being the home of GE Appliance Park and more recently to UPS Worldport.

His friend told him he should talk with the folks at the American Life & Accident Insurance Company of Kentucky, a well-established life insurance company that was informally looking for new opportunities in the industry. Tafel, who grew up in Kentucky, knew of the company from its famous television commercials.

Be Wise, Be Insured

American Life was founded in Louisville in 1906 by Dinwiddie Lampton (1885-1970). His son, Dinwiddie Lampton Jr. (1914-2008) was the longtime president of the insurance company, where he also starred in the company’s TV advertisements, dressed in a top hat and greatcoat, advising viewers to “be wise, be insured” from atop one of the horse-driven stagecoaches he collected.

His daughter Nana Lampton is now the chair of Hardscuffle Inc., the holding company that owns American Life. An avid environmentalist, Lampton had installed a “green roof” on the top of the company headquarters, in collaboration with Bernheim Arboretum & Research Forest, and the Turner Construction Company. She and Hardscuffle president and CEO Jerry Gerichs support local museums, theaters, and schools through the Snowy Owl Foundation Inc., which Lampton founded in 2010.

At this point, Tafel said he had no interest in leaving AIG. “I was mainly focused on the global team I helped develop and the larger growth opportunities with multi-national clients,” he said. “I was just interested in getting another insurance company involved in the market, because I saw that there was a vacuum to fill. The larger insurance companies were all passing on warranty opportunities that were below $5 million.”

Years before, when Tafel had started working at Service Net Solutions, one of the company’s first clients were the hundreds of small mom-and-pop retailers and dealers selling major appliances and consumer electronics, who wanted to add service contract programs to their offerings. But the industry had changed in the decades since, and now it was dominated by large insurance companies with large retail and manufacturing clients.

At the same time, Louisville was home to not only the entrepreneurs who started Service Net and its predecessor Accent Marketing Services, but also numerous people who had learned the service contract trade at GE Appliance Park (see last week’s newsletter for more). If Hardscuffle/American Life decided to get into the service contract business, the local talent pool was very deep.

“In my initial meetings with American Life, I spoke about the warranty industry talent in Louisville, and how that could help fuel the growth of an insurance company in warranty-related services,” Tafel said.

Warranty Chain Management

And so, Tafel began making some key local introductions, and even brought Gerichs to the Warranty Chain Management conference in Tucson in March 2017, so he could meet some of the industry experts located out of town. But even at that point he said he wasn’t so much looking for a new job as he was looking to fill a void he saw in the industry, where a handful of very large insurance companies worked primarily with very large manufacturers and retailers, leaving many of the smaller opportunities on the table.

“I set up six or seven meetings during that conference,” Tafel said, “to give him a ‘Warranty 101.’ My goal really was just to educate him. I told him I would introduce him to people who I believed could provide him with a well-rounded understanding of the warranty industry from different perspectives.” So he brought Gerichs to meet underwriters, service providers, and yes, even a warranty newsletter editor.

Eventually, the conversation turned towards Tafel actually helping to launch the new company. Tafel said he was intrigued, but was busy developing a global warranty team for AIG. Jerry Gerichs and Nana Lampton kept in touch with Tafel and after two more years of discussions, it came down to one question for Tafel: How many more opportunities like this are going to come my way?

“I’m an entrepreneur at heart,” Tafel said. Even though he worked for AIG, before 2012 it was Service Net: a small entrepreneurial company. Gradually, Tafel began to entertain the possibility of not only finding a company that could do that, but perhaps joining such a company. As an added bonus, that company was going to be based in his hometown.

This past summer, Dan Tafel, Kevin Callahan and Christopher Karo left AIG to launch Hornbeam, a new insurance company focused on the warranty and specialty insurance markets. Kevin Callahan was named as president and COO. Dan Tafel was named the senior vice president of business development. And Christopher Karo was named as secretary and general counsel.

At the same time, Hardscuffle announced that it had acquired the Rutgers Enhanced Insurance Company, moved it to Louisville, and renamed it as the Hornbeam Insurance Company. The name Hornbeam, which Nana Lampton chose for the company, refers to a type of tree known for its strength, deep roots, and longevity. Carpinus caroliniana, the American Hornbeam (also known as the musclewood tree) and Carpinus betulus, the European Hornbeam, or Yoke Elm, are the most common species.

Entrepreneurial Atmosphere

Callahan, who was one of the co-founders of both Service Net and Accent Marketing Services in the 1990s, said he was looking forward to getting back into that entrepreneurial type of atmosphere. “And Hornbeam allows me to do that, to try and build something up again,” he said.

“When we started Service Net and we separated from Accent, we had four or five employees,” Callahan recalled. “We grew it to 400.” And then AIG acquired Service Net in early 2012, and it became part of a huge insurance company. Callahan stayed with AIG for seven additional years, and said the acquisition was positive for both Service Net and AIG. But he much preferred the days when he was building a new company, literally from the ground up.

“If you look at the warranty business over the last 15 or 20 years, there’s been a lot of consolidation,” Callahan said. Insurance underwriters bought third party administrators (e.g. AIG and Service Net), and sometimes each other (e.g. Assurant and The Warranty Group). And they began to focus primarily on just the largest nationwide retail chains as clients, leaving the mom-and-pop end of the industry to … well, no one.

“There’s really no insurance company out there now that’s tailored to servicing and supporting those mid-tier warranty players. So I see Hornbeam as being that insurance provider who has significant experience in the warranty business, but who is really focused on that mid-market, where a lot of our big competitors aren’t doing that anymore,” he added. “That’s where I think the big opportunity is for Hornbeam: supporting those clients that are $5 million or less, who aren’t really getting the attention or support that’s needed from those big players.”

So will Hornbeam someday follow the same path as AIG, Asurion, AmTrust, Allstate, and other “A-Team” members, and acquire a third-party administrator? Not so fast, Callahan said. Just getting the nationwide insurance underwriting capability up and running takes a significant amount of time and money. In the U.S., the insurance business is regulated on a state-by-state basis, so just getting the business registered and licensed to sell extended warranties in 50 states and the District of Columbia is a daunting task.

“At some point, Hornbeam may need to get into the administration business, but in the startup phase, we’re going to use third parties until we can get our insurance company established. We need to get a property and casualty license in all 50 states,” Callahan said. “That’s the main priority.”

Ironically, having a well-established parent company such as Hardscuffle, which bought and then renamed Rutgers as Hornbeam, is likely to help speed that process, Callahan noted. Before approving a new application, insurance regulators will look for “seasoning,” he said, which is basically a track record in the industry. Hardscuffle, American Life, Rutgers, and now Hornbeam, can point to such a track record.

Christopher Karo, Hornbeam’s general counsel, is the one filing all that paperwork with the state departments of insurance. “Hardscuffle hired me before they hired anybody else,” Karo said, in order to get a head start on all the regulatory work that would be needed. “I was the first employee.” His first task was to redomicile the Rutgers Enhanced Insurance Company in Kentucky, and rename it the Hornbeam Insurance Company. “So I’ve been here just about six months, working on the licensing for the insurance company,” he said.

Karo actually got his first taste of the service contract industry while working as an attorney at the Florida Office of Insurance Regulation. Then he went into private practice, at a law firm that represented several national clients that were in the service contract business as well.

Frost Brown Todd

“In 2006, I moved up from Florida to Lexington, and started working with Greg Mitchell at Frost Brown Todd,” Karo said. And he brought several service contract-related clients with him. Most of the work related specifically to Service Net had to do with regulations and compliance, he said. “We had folks in the Louisville office of Frost Brown Todd that did some of the general corporate work, and I think managed the litigation for Service Net. They had folks internally that were handling a lot of their licensing, but from time to time they would have questions about how certain regulations worked in certain states, or for certain types of products. So we would assist as needed.”

“We hired Chris,” Mitchell recalled. “He was working with another firm at the time. He came into our group, to principally help me in supporting our extended warranty service contract business as a regulatory attorney.” While at Frost Brown Todd, Karo worked on the Service Net account as outside counsel, and then after the AIG acquisition went through, as inside counsel for AIG Warranty.

“AIG acquired Service Net in January 2012, and I joined in June,” Karo said. AIG was running Service Net primarily out of its New York office, but the company determined that they really needed someone local in Jeffersonville to handle some of the legal work. And based on the work he was doing for Service Net while with Frost Brown Todd, “it was a pretty natural fit,” he said.

James Mostofi, who is now the global head of business development in the Warranty and Services Division of AIG, also got his first taste of the service contract business while working as an attorney at Frost Brown Todd. “I was a mergers and acquisitions lawyer working in the Louisville office,” Mostofi recalled.

Accent Marketing and later Service Net Solutions were among his clients. Greg Mitchell, who was based in the nearby Lexington, Kentucky office of Frost Brown Todd, worked on regulatory and insurance matters. Tim Meenan, who besides running the industry trade group known as the Service Contract Industry Council also had his own law firm, also did state insurance department compliance work for Service Net.

“It was a collective effort between various parts of the firm,” Mitchell said. Mostofi handled the financial side, and Mitchell did the regulatory and compliance side, for both product warranties and service contracts. He said the regulations can change from one U.S. state to the next, and can also change depending on whether the coverage is a home warranty, a vehicle service contract, or an extended warranty for a consumer product. And of course, it differs from one country to the next as well.

Mergers & Acquisitions

Mostofi said that before he became a lawyer, he was a certified public accountant, so the M&A work was an opportunity for him to work on both the financial and the legal sides of the service contract industry. He worked on the acquisition of Accent Marketing by MDC Partners Inc., as well as the parallel spin-off of Service Net. He also worked on behalf of the co-founders to re-acquire Service Net from Kemper Insurance a few years later. “And after that transaction was completed, they asked me to join them to be their CFO and general counsel.”

In 2010, he moved to New York and took a position with AIG’s Warranty Division. Two years later, AIG acquired Service Net. Mostofi said AIG determined that it needed to own an administrator, and Service Net was one of the top candidates.

“When I got there, I realized that we were an underwriter only, and that we would be more competitive if we got together with a quality administrator,” Mostofi said. “I looked at several either to acquire or to build, but the best one that I certainly had an affinity to was Service Net.”

Karo worked as associate general counsel for AIG for seven years, until the opportunity to help launch Hornbeam Insurance came up. Like Tafel and Callahan, he said the entrepreneurial urge was just too strong to ignore.

“I was able to get in on the ground floor of building a company from the beginning,” he said. “And that kind of entrepreneurial opportunity is not something that somebody in my position usually gets. And so I found that very enticing and exciting, particularly at this point in my career.”

Karo said he worked at the Florida Office of Insurance Regulation for five years, in private practice for six years, at Frost Brown Todd for six more years, and then at AIG for seven years. So he felt it was time to switch to something more entrepreneurial. But just as Tafel said, Karo noted that there was no reason for him to leave AIG, other than the opportunity to start something new.

“Being an attorney, and especially a regulatory attorney, you’re really more of the support staff,” he said. “You’re right there, and obviously the regulatory pieces are important, but you’re really supporting the business.” It’s not usually the position from which an entrepreneurial role appears. So it’s not an opportunity one would let pass by.

“I would say that generally, attorneys who don’t practice within this industry don’t really understand it,” Karo said. “I think it’s confusing even for a lot of attorneys in the insurance space, because most states that regulate service contracts do so under the department of insurance umbrella. But they don’t really treat it as insurance. And the regulatory schemes exempt it from much of the provisions that would govern agents and insurance companies and such.”

However, not all states are the same, Karo added. “If you understand the industry, you basically have your three pillars of consumer goods, home warranty, and motor vehicles. And in any given state, all three may be regulated the same, or all three may be regulated differently, or not at all. It provides an opportunity for some expertise in an area that a lot of folks don’t really understand.”

At this point, Karo said he’s been doing this regulatory work for so long that someone could name a state and he could probably quote the chapter of the law. “That stuff is just stuck in my head,” he said.

Tafel said the four areas of focus for Hornbeam Insurance will include:

  1. Traditional extended warranty programs for manufacturers and retailers,
  2. Home protection services augmented by connected homes and other technologies,
  3. Commercial warranties and performance guarantees, and
  4. Other specialty insurance services.

In many ways, it’s as if the Hornbeam team are reviving the entrepreneurial spirit of the early days of Service Net some 20 years later, except now it’s an entrepreneurial insurance company rather than an entrepreneurial administrator. And it’s just a few doors down Main Street from the building that was home to Accent Marketing and Service Net before they moved across the river to Jeffersonville.

Hornbeam Open House

On October 10, American Life, Hardscuffle, and Hornbeam Insurance hosted an open house for about 70 people in their headquarters. On the one hand it was an opportunity to introduce Hornbeam to the Louisville community. On the other hand, it was an opportunity for that community of warranty experts to reminisce about their common roots, how their careers in the warranty and service contract industry were so intertwined, and how the Louisville branch of the family tree of warranty experts was growing a new branch.

“It was one of the first times that we’ve had a lot of warranty companies come together,” Tafel said. Representatives from AIG, OnPoint Warranty, Frost Brown Todd, Accentf(x), and Greater Louisville Inc. attended, along with a former mayor (Jerry Abramson) and several other notables.

“It had the Who’s Who of the community there,” Mitchell said. “Ms. Lampton is the consummate host. She is a special lady. So it’s quite wonderful to see that coming together, and the opportunities that it brings.”