In His Own Words: Q&A with Applied Underwriters’ Menzies on Buffet, California and ‘Pumping Entrepreneurial Power’

In His Own Words: Q&A with Applied Underwriters’ Menzies on Buffet, California and ‘Pumping Entrepreneurial Power’

2021-05-03 05:00:16

Steve Menzies, founder and president of Applied Underwriters Inc., is busy. Since he got his business back from Warren Buffett & # 39; s Berkshire Hathaway in 2019, he has bought businesses, established new subsidiaries, welcomed new teams of professionals and expanded his business at home and abroad. He describes it as building a & # 39; entrepreneurial power plant & # 39 ;. Insurance Journal had many questions for Menzies. What was it like working with Buffett and why did AU leave Berkshire? What is his big plan for the company and why expand now? And what about the disputes with regulators in California? Menzies agreed to answer questions about these and other matters in writing. The following is an unedited version of the questions and its answers.

In 2019 you bought Applied Underwriters Inc. and its subsidiary North American Casualty Co. again in a deal valued at $ 920 million that included the buyout of other shareholders, including the 81% stake held by Berkshire Hathaway since 2005. the deal to sell to Berkshire in 2005? What happened then? Did you start it, Berkshire?

Our story unfolded in an almost organic way, from our inception in 1994 to a deal for Berkshire to acquire a majority of equity in 2005, and to our buyback in 2019. In 2005 we were a hot property; in fact, AIG and other large companies have courted Applied for our remarkable growth and profitability. We had just started with an AM Best A rating for our subsidiary, California Insurance Company. Our initial, rather daring impulse was to go it alone, but our growth required capital. Shortly after arranging a large quota share with Berkshire, we suddenly found ourselves contemplating – and enjoying – an unsolicited offer from Berkshire to buy Applied, and within weeks we shook hands with Warren. We were already in Omaha having established our operations there six years earlier. We negotiated a fair settlement and retained a substantial economic interest in Applied which, it turned out in 2019, provided us with equity from which to initiate our buyback of the business. As an entrepreneur, I have long felt a sense of inevitability about such a buyback and have looked at the opportunities that independent ownership presents. Our acquisitions and market positioning over the past 18 months demonstrate the value of that transaction for Applied.

How were Applied Underwriters managed under Berkshire? I believe the business has grown. But were you satisfied with how things were going or frustrated? Did you have any ideas for expansion then?

Applied developed its own corporate culture within Berkshire. I had the privilege of reporting directly to Warren and had his ear and encouragement. I also had the advantage of its modus operandi; that is, Warren almost always makes the right investment and then leaves things to those who made it attractive at all. His way of working and ours were complementary, similar in most cases, and it all worked well. Personally, my relationship with Warren meant a lot to me – and it still does – and I found myself pursuing his approach to business objectively, but always respecting the courage of entrepreneurs. Gradually, as our footprint broadened nationally and deepened in the marketplace, our growth began to create a formal problem for Berkshire: we and the other Berkshire insurance companies all grew into competitors causing unproductive channel conflict. There was actually a bit of friction in the market, albeit polite and friendly, among allies, but Warren never intervened; he let the inevitable play out and, as is usual with him, everyone benefited.

What else can you tell us about Warren Buffett and your time at Berkshire? What do you think he and Berkshire learned from you and Applied Underwriters?

"Words move, examples enforce", so the saying goes. Warren set the standards of governance with great but subdued ambition for all Berkshire companies and showed strength through his innate humility and modesty – characteristics that produced compelling examples: a consummate capitalist and easily one of the leading paradigms of entrepreneurship in history. of business. operated with the utmost integrity. Our first handshake in 2005 became the foundation of a substantial, mutually beneficial relationship based on trust.

As for the second part of your question, I really can't speculate as to what my friends, former colleagues and partners at Berkshire may have learned from me, except that I took advantage of my good faith to Warren and never to some degree feared. daring and innovation within the business context. The Applied takeover was a rocket launch for us, not a comfortable landing.

Why and how did the deal to re-acquire Applied in 2019 come about? Did you start it, Berkshire?

Like so many of the best trades, it had a natural, even an inevitable trait: no one had to push or fight the other against what seemed like a done deal for Applied. Again, internal channel conflicts had become problematic, Applied was not wholly owned – we had a significant economic share – so the impulse to take control of the business we built and developed was particularly strong. Warren & # 39; s annual letters referred to the creation of businesses within the walls of Berkshire, a successful approach. We were such an enterprise and had to move independently to new opportunities.

What was your role when Berkshire owned its shares? How has your role changed? Who are some of the people you rely on to carry out your ideas?

It was simple and straightforward: I was the captain of the ship that I created and piloted. We had attracted an impressive faculty, a kind of think tank known for its analytical insight, cultivated intellectual inclination and deep concentration. With leadership made up of professionals with highly diverse experience and excellent educational credentials in math, economics, philosophy and linguistics, our thought leadership is a competitive advantage and a point of pride. We have a team of 40 top managers with an average tenure of over 18 years with the company, which we believe demonstrates an intellectual challenge and satisfaction that is as important to such professionals as an excellent compensation program. A strong bank has enabled us to grow productively, and my role has evolved from essentially COO to today, as Chairman, primarily focused on business development.

So it looks like you have gone full steam ahead in expanding and diversifying Applied Underwriters since 2019. Did you have a plan to expand then, or did the idea come to you after you re-acquired it?

The acquisition engine was fired long before October 10, 2019. Long before that – we had experienced so much product demand that we could hardly help but innovate and find allies in key areas. We were more than ready to realize our growth plans that you have recently seen emerge. Since Applied is definitely not about industries per se, but rather about ideas, we bring many like-minded entrepreneurs to the table to extend the future of the industry and the direction of the market. We are now private and we have scale, a force that allows us to join potential partners at Applied at an enviably fast pace. We've built unparalleled infrastructure – we're building – some of it in traditional brick and mortar, like our stunning new headquarters in Omaha, but, more importantly, with brainpower and a culture of responsible, but no less aggressive, risk appetite. It happens in our intellectual mix; we don't, like many of our competitors, immediately jump to outside sources for ideas and implementation. As a result, we have become a magnet for the brightest and best thinkers, we believe, in the risk transfer industry. Interestingly, many of our new partners, and perhaps becoming the trend, testify that they are not valued or abused within the new business protocols, shifting the company's priorities and the safety-only mindset.

We may need a computer to keep track of all the movements you have made. You have acquired Florida Casualty, Centauri, Oklahoma P&C, Blue Ridge in the US Plus you have acquired a yacht MGA in the UK and established a subsidiary for Europe and the Middle East. At the same time, you have established Applied Specialty Underwriters. And expanded your D&O and Fine Arts teams. Did we miss something? What is your overarching vision for Applied Underwriters? What is your strategy?

It is not world domination, I can assure you, nor are we trying to do what we are not doing right; that's a fundamental belief at Applied. We intend to continue to capitalize on the many opportunities we find in our extensive networks and global transactions, as well as forging relationships with the increasing number of meritorious entities making their way to our door. We have developed a solid foundation for business development, such as acquiring businesses and ensuring their progress and success, and philosophically, we are open and even somewhat agnostic about the shape of an opportunity, but that openness is not a void. Transactions require special consistency for us to complement Applied's overall strategy and businesses; they need to be able to use our considerable resources effectively – by which I don't mean an idea of ​​economies of scale combinations. What I'm referring to is bigger. I mean the kind of intellectual capacity and knowledge that fits our blueprint and works to fuel the growth of large corporate institutions that do not compromise the entrepreneurial visions that have made them clearly successful in the first place.

How do all the pieces you acquired and started fit together?

In short, as part of a dynamic, pumping, well-functioning, entrepreneurial power plant. Our infrastructure is a support system that seeks to integrate naturally and productively and to fully and effectively serve the companies that join us. We sincerely appreciate the talent that our new partners and their businesses bring to our winning formula. That is why the amount of idea-displacing bureaucracy, defensive departments in silos and simply the inertia of the company cannot be found at Applied. We know what it is and what it does, and we smoke it out when it shows up. Our results testify to energy and a company that plays like a live orchestra instead of a tired recording.

Where do you see the future position of Applied Underwriters in the world of P&C carriers and specialty insurance? How do you want brokers and competitors to see Applied?

Our strength has always been the end result of an insurance policy concluded with us: we genuinely care about our clients and our claimants, some of whom are injured employees, for the livelihoods of our brokers and for the actual insurance industry itself. . We feel privileged to be a part of it and choose to invest in it again and again. I regularly repeat to our employees that I am firmly convinced that our company has a good soul. I meant it and mean it, and our professionals have embraced that mindset in what we do. As this continues in the years to come, our brand will become, I believe, increasingly the standout brand, clearly bright and sincerely appreciated for the respect we show to plaintiffs, brokers, the industry and the general public.

In terms of industry perception, we are pleasantly driven by a fresh spirit of free enterprise. Likewise, we look to our brokers for loyalty, for meaningful local market share, for their customer care and for their ability to understand and use our constantly refined and innovative products. We value agents and brokers and prove it daily.

Are there more acquisitions in the offing? Are you going to launch new units and teams?

Yes for both. Watch out for more news.

Why is now a good time to expand into the P&C and specialty businesses? Where do you now see the greatest opportunities for non-life insurance?

We strategically examine almost every deal that comes our way, and we are open to new P&C activity, especially as reactionary and evolving business priorities become reality. We have few competitors who have the same business systems for mutually beneficial relationships. With strong partner companies such as Applied, industry participants could see the present as the beginning of a new Roaring 20's, with high valuations and financial risks reaching new stratospheres with many zeros added to valuations. Provided they are aware that all good things come to an end, now is a very good time to be in the business and project growth.

Where are the legal issues with the California Insurance Department? When and what will the resolution be? Have these fights inhibited what you hope to do?

I am advised not to comment on legal issues, but I can say that we have not been treated the way we are, or for that matter, any financially sound A-rated insurer should be. Our attorneys and several opinion leaders believe that we suffer most from the bare regularity, the arbitrary use of power to favor any part of the legal profession, and the routine abuse or outright absence of proper, legal make creditable decision and action. It goes beyond regulation as required by law, and we will demonstrate that fact and the underlying motivations. I mean, ask yourself, why would an insurance department try to narrow down one of the few home grown insurance success stories, an A + rated insurer rated highly by all California agencies, and a long track record of business? and suppress. in the state? It has been applied that intensified during the 2001 workers' compensation crisis, which has written cases in hard-to-place categories and locations, and has occasionally fought the CDI, but has never gone beyond the bounds like the recent actions of the CDI seem to have gone to observers in the industry and the legal community. The CDI oversees a state insurance system that is in dire straits – it doesn't make sense to us, or anyone else, that they would stumble a large and needed company. The motivation I'm sure will show up eventually, but so much tax money will be wasted and so much opportunity in the consumer market will have been missed. California Insurance Company has served our fellow citizens in a very responsible way, especially when California needed us. Now the CDI's agenda seems to run counter to the interests of the public.

You started Applied in 1994, right? What keeps you going? Do you ever think about retiring?

No. I haven't thought of it. This is a revitalizing exercise every day, especially with the talented people around me at Applied and in the company, and with the opportunities available to those who are highly engaged and willing to learn new things and work smart and hard . For me, coming to the office is not a chore – I get energy from the positive, collegial attitude I encounter there. We work, we think, we thrive together, and our pursuit is fueled by a degree of creativity that I have not seen anywhere else in comparable companies' C-suites.

What else do we need to know about Steve Menzies and Applied Underwriters?

The facts are simple enough. My resume is one of professional leadership here at Applied and one of voluntary philanthropic leadership. It is an obligation I welcome. The Steve Menzies Global Foundation (see, describes the way I see society improving, from hostage rescue to educational partnerships in the poorest countries. I focus on areas that are underserved that can benefit the most from my specific professional expertise. For me, advocacy only makes sense with dedication, personal involvement and sustained financial commitment.

Earlier in this interview you asked about Warren and my progress. I haven't used a keyword that made a difference for him and I hope for my businesses: discipline. The discipline of leadership at Applied is guided by that good soul trait that I think will set our brand apart; the discipline of personal success is, in my opinion, the exercise of intelligence, carefully and consistently applied through constant study and learning, to improve our world. I can't think of a better purpose for a company or anyone.

To take over


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