Business Breakdowns
· Matt Reustle, Aaron Cohen
[00:00:00] S0: Yeah. To your point, I think FedEx might still be integrating the TNT acquisition from 10 years ago. It's a little different when there's hard assets and infrastructure and logistics networks involved, where technology and incorporating some of those systems, not only could it be a bit lower of a hurdle, but it proves to add a lot of value as well. [00:00:00] S1: The flip side on that, Matt, is people are used to doing things a certain way. And we talked about the importance of people and they go home every night. And a lot of times brokers are set in their ways and they're older and later in their career and they don't want to learn a new system. So you have to make sure that you're buying a business where people are going to embrace that change. Otherwise you could break it by forcing the integration on people who don't want to do it, aren't willing to do it, or just happy using pencil and paper.
· Aaron Cohen, Matt Reustle
[00:00:00] S1: The flip side on that, Matt, is people are used to doing things a certain way. And we talked about the importance of people and they go home every night. And a lot of times brokers are set in their ways and they're older and later in their career and they don't want to learn a new system. So you have to make sure that you're buying a business where people are going to embrace that change. Otherwise you could break it by forcing the integration on people who don't want to do it, aren't willing to do it, or just happy using pencil and paper. [00:00:00] S0: Yeah. Producers historically have found ways to write their own rules when it comes to managing systems. But keeping a clear mantra intact and getting people to follow protocols, I can imagine, is just insanely interesting here. The general market, when you think about revenue growth for any of these businesses—you mentioned that diversification is incredibly positive. What does the trend line look like when you think about an insurance business and top-line growth? If I were to use GDP growth as the standard and either being above or below that as being a line of demarcation, do you have a mental framework of what you expect organically insurance businesses to grow?
· Aaron Cohen
[00:00:00] S1: Yes, I believe it's inflation plus—don't ask me plus what. But for us, what we've seen, especially we're always talking P&C right now, property and casualty insurance, is the other thing that's driving it besides inflation, which of course inflation is just the underlying results of your assets being worth more, your business and services growing. The other thing this industry is enduring right now is social inflation. So social inflation is a very nice word for large jury verdicts. If you are going to insure a bunch of trucks—and I keep using that example because we've done a lot of trucking in the past—and you get a fender bender and someone hurts their neck, and all of a sudden a jury awards that person $20 million. They didn't have to take off more than two weeks of work. And these jury verdicts are getting enormous. And I think juries are being more sympathetic to consumers relative to the big bad companies—I'm saying in jest. And so you have social inflation that's really impacting it. The other thing that's growing premiums, which isn't great, is new risks. So there's cyber risk. So how do you price that? That's a whole new industry that's being brought into the insurance sector. Then if you're underwriting schools, crime in schools, if you're underwriting an office building, we see these horrible, horrible tragedies that went on in Manhattan yesterday that are unspeakable. But then from a business perspective, and you're insuring those people in that risk, price is going to go up because these things are happening. So those are the things unfortunately that are driving this industry to grow and at a bit faster than inflation.
· Matt Reustle, Aaron Cohen
[00:00:00] S0: Yes. And acknowledging the dynamics that are causing it and just putting those to the side to focus on the impact that that would have for an insurance brokerage business. Is it right to just think if premiums are growing, the brokers are capturing a percentage of those premiums, therefore that is top line growth? Is that the most simplistic way to think about it? [00:00:00] S1: That is fair and that's for the small and mid-sized world. So I'd separate that from if you think about the Fortune 500, they have really smart actuaries and insurance experts who are determining what type of insurance they need. They're going to the large broker houses and they're paying a fee, and the broker house is getting a fee. The traditional mid-market SME, et cetera, PNC World, where private equity has been incredibly successful for the last 20 years, that is commission. Yes. So as premiums go up, the revenue of that insurance broker goes up. So it's a wonderful business because we don't have to ask our clients for raises, we don't have to change our price. We just get a percentage paid by the carrier back to us of their premium. [00:00:00] S0: Out of curiosity, is there a threshold where you move from the percentage to the fee? Is there a number that's involved there that you have mentally?
· Matt Reustle, Aaron Cohen
[00:00:00] S0: Out of curiosity, is there a threshold where you move from the percentage to the fee? Is there a number that's involved there that you have mentally? [00:00:00] S1: There's not a number, but it's big. If you think about any type of growing business and a management team and a board of directors who are trying to set strategy and allocate capital, you have to be pretty big to say the next $5 million. I want to build an insurance department at this organization. So it's truly the largest of the largest corporations. [00:00:00] S0: And you mentioned some of the new risks coming into the system. One of the things that I often think about is cybersecurity and whether it's just the trend line of what's happened in the cloud and now we have AI, but it's something that in theory should be more and more in focus going forward. Does that category fall under this bucket as well? Does it tuck into a large insurance broker's operations, or would that sit outside?
· Aaron Cohen
[00:00:00] S1: No, this absolutely tucks into all the insurance brokers that we've been talking about today. If you have a business, you need cyber insurance. Absolutely. And the irony is this is the first type of risk that I believe is very different than any other risk in insurance, which is why it's really hard for carriers to underwrite it. And I love talking about this, and I get up on a little bit of a soapbox. Most other risks that you think about, property damage, slip and fall, et cetera. Once the carrier or the insurance broker hears about the risk and the event, it's done, it's behind you, the fire happened, your manufacturing facility burned down, it's done. Cyber is real time. You call your insurance broker, you call your carrier, and you say, someone is in our systems, we've had a breach. So carriers who obviously have to minimize their loss exposure, they have to be proactive and be prepared to move very quickly to help the insured exit or end this breach situation. So it's a very, very different risk than any other risk this industry has ever seen, which is why people are struggling with underwriting it, pricing it appropriately. And you're seeing some carriers have pretty adverse loss ratios because it's a very, very different outcome than any other risk in this industry.