Brown & Brown: Mid-Market Broking

This executive has 40 years of strategic experience and expertise in the property and casualty (P&C) space. He is currently responsible for managing NFP’s P&C operations and resources across the company. He previously served as Aon’s Global Chief Broking Officer and Executive Vice President in the company’s construction and infrastructure practice. Prior to that, he spent 25 years as Allied North America’s President and Chief Operation Officer.

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

I’m eager to hear what you have to say about the insurance brokerage business; you have a lot of experience in the industry. Could you give us an overview of your experience in the industry?

I started in the business and did a stint at Alexander & Alexander way before your time, but I ended up going into partnership with some individuals and we built a business starting in the 80s that focused on construction.

I just happened to see a list of top brokers from 1972 and Alexander & Alexander is number three. What’s also interesting about that list is out of the top 10 there’s only one that still remains, which is Marsh.

If you go through that list, Marsh took Johnson & Higgins out. Alexander & Alexander actually went out of business and was acquired by Aon. Then you have Corroon & Black which really was the genesis for Willis, Corroon. When you go through that list of the top brokers at the time, I think the number 20th broker was a broker called Walter Kay in New York City who might have been about $20 million and it's interesting how the business has evolved with the different acquisitions and what's gone on there.

I worked for Alexander & Alexander and then I actually ran their Long Island practice which was part of a spoke and hub so I was involved as the number two individual at Alexander & Alexander and I learned the corporate world which I decided wasn't for me. I ended up with a small business that, in 1987, were doing about $2.1 million, insuring contractors in New York, New Jersey and Connecticut.

I went in, had some equity, we built the company and over the next number of years into the 2000s we got the company up to $80 million of construction only commissions; 12, 13 offices. Our business really got involved more with international businesses because contractors were buying businesses in the United States. We were insuring businesses that were owned by Skanska which was Swedish, the Italians, the Spanish and our concern was that we didn't have a footprint in Europe though we did a lot of business with JLT. We actually tried to get JLT to merge. They wanted to merge with us once; we said no. Then we went back to them and they said it wasn't the right time. We sold to Aon in 2010.

What was your average commissions? What was the range you were doing then?

We were at $80 million of total commissions.

Per contract?

It varied because we had big accounts. We had very large accounts in some geographies and, in other geographies, they were smaller. We had accounts where we were earning $1 million of commissions and then we had accounts that we were earning $5,000 and it depended on the geography and where you were. Naturally, the accounts in New York were a lot larger from a commission standpoint and we made more. We did a lot of big projects, so we did the Arizona Cardinals. We did the Giants Stadium, things like that, so you made a lot of money on those projects, but they were 18 months, 36 months and you were done and you had to go get another project.

We sold to Aon. I was Aon’s chief global broker for construction. So the Aon US piece ran about $240 million of commissions and then we had Canada and the rest of the world. When you put it all together, we were roughly about $400 million of commission; not always property casualty but the bulk of it was. I was the individual that worked with the markets, coordinated what we did on tough placements, worked with international to make sure that we had connectivity on more of a global basis. So if you came to us and you were a Spanish contractor, we were able to handle you in Spain, in the United States and if you went to China, we could help you there.

I did that for seven years, at which point Aon decided it was time for me to retire. I had done my gig there, I guess, and I retired. At that point, I had actually become acquainted with NFP’s CEO Doug Hammond. We talked on a regular basis. He would call me to get my insight on the business. NFP was really more of a roll-up of benefit companies, life insurance companies. They had started to get property casualty. I told him I had retired and he asked what I was doing. I had offers from Willis and a couple of other markets. He said, why don't you come talk to us? So I went, I talked to him and he said why don't you come and work for us for a while? See what you could help me with, tell me what we're doing.

I spent a couple of months and I said, this is what your business is. This is what it should look like. He came back and he told me he’d like me to take over property casualty. That wasn't the deal. I was retired. Today I run NFP’s property casualty. When I got there, we were about a billion one. That was 2017 and property casualty was about $210 million. Today, our run rate gets us to about $650 million and in property casualty, we’re just under $2 billion. Some of that is naturally acquisitions and some of it is the acquisition of talent within the industry and building out a talent base. That's kind of my career in a small nutshell.

How would you lay out the competitive landscape of the industry? People talk about middle market and usually something between $20,000 and $3 million in premiums, but how do you segment it? Do you think about it in terms of verticals, national market?

It's a great question because a middle market account in New York, because of the rates, is going to generate more premium than it's going to generate in Texas or California or in other parts of the world. As long as I’ve been in business people get confused with trying to define middle market. I look at the business as being three groups. You and I went to college and you decided you were going to go into business and I'm a young guy and I'm going to sell you everything. You go, “I don't need fidelity because my brother and my wife are my partners and we're not going to steal from each other and I don't need employee practices liability. All I need is a liability policy and I need workers' comp and some other things.”

That's a relationship sale. The next level, as you become successful, is relationship with strategy. You and your family now become successful and you have five locations, whether they're restaurants, retail stores. But now you start to look at okay, what do I really need to protect my bottom line? So there’s still a relationship but it becomes strategic. To me that’s a middle-market account. When you look at middle-market what you have to look at is the account growing, what does the account need from you and how are you going to service their needs?

The next tranche that you get to, it's a strategic buyer. Listen, I like you. You're a good friend. We've known each other forever but I’ve got Marsh and Aon and Willis all telling me that I should be on a fee basis and they can talk about captives and analytics and you're a good guy but what are you bringing to the table? That becomes a strategic sell.

If I were to break the business down, I think the majority of the business is still in that relationship, smaller, middle-size accounts. Most brokers get to get a strategic relationship account, but most brokers never get to that big account unless their brother-in-law or their brother is the CEO and says, here, you can have my insurance. That’s the way I look at it. Then when you look within the top 10 agencies, if you think about it you can start to break where they fit.

A good example of that is if you think of Marsh; Marsh was a strategic buy. Marsh built out Marsh Agency which was that strategic relationship business and they kept them separate to this day, and they built a very successful platform doing that. If you look at other agencies, say Acrisure, Hub, even Brown & Brown, they're more on that relationship strategic but do they really have the wherewithal to bring all of their offices or all of their talent to that client?

You mentioned how it’s been interesting to see how the industry has evolved and the names of the top 10 have shifted around but in what other ways has this business really evolved?

Having my career and going to an NFP was very different and my very simple story is now probably 12 years ago. You and I had $750,000 and we wanted a solid investment; we could have invested in a medallion in New York City and made a lot of money and not really done much, went out to lunch and dinner.

At least if you sold before Uber came in?

That’s the point; did you see Uber coming? I think the industry is changing. If you look at this deal that Amazon just did with Marsh where they're selling to their businesses so if you're Amazon client, Amazon will give you the ability to buy a general liability umbrella through a panel that Marsh has put together. Marsh isn't going to be the broker. They're saying, you can go direct and Marsh will just put the thing together. What I would say to you is that the distribution model of insurance is evolving.

I think there's a lot of talk about artificial intelligence on underwriting. There's a lot of talk about what will happen to the market. I think there's always going to be a need for a relationship broker at a certain level but I do think that you could become more of a concierge type broker to smaller or middle-size accounts and then the larger accounts are buying your services. It's no different than say an internal block, tax time everybody goes running in, they do their taxes and they pay them X amount of money versus somebody who has a portfolio and needs an accountant that he talks to throughout the year and is willing to pay a certain amount of money. It’s no different than an investment firm.

I think that what's happening in the business is it continues to evolve. It's still an easy business to get into. You and I could go into business tomorrow. You could work out of Maryland and I could work out of New York, pick up a couple of accounts and you're in business, low overheads. Today all you need is a laptop and you’re in business. But I do think that the business will continue to evolve and the challenge is that businesses have to identify what they want to be. When you look at brokers, I think Marsh has identified what they want to be. In terms of Aon, if you look at the Willis transaction, I think they were looking at Willis to get them more into middle-market business and they missed the boat on that and that's why they didn't really get it.

That’s how I would look at the business. Coverages are definitely changing. Coverage is more complex. I think that's one of the big issues that if you just think of cyber, employee practices liability, the SPAC market, D&O, these are all things that are evolving that I don't even understand the complexity of the claims. We have more severe weather. If you follow that pattern, you look at this past storm, what is the aggregation of claims? Are we really prepared for them? In the industry, brokers have to become more involved. We’re still more reactive. No one’s going to tell you what the new cyber claims are until after they get hacked.

What do you think is a competitive advantage for a broker? You’re all selling kind of the same thing, but how do you build a competitive advantage? Is it really in the relationships? What else could it be?

In order to build a competitive advantage, I think the first thing you have to do is identify who you are and what you want to be. If I want to service the small relationship business, what am I doing to differentiate myself? Do I have a good service center? Do I have the right people? Do I have a 24-hour service line? Do I recognize that people can only get me on Saturday and Sunday. People are getting home at 9 o'clock at night and they want to talk to somebody. What am I doing to differentiate myself in that model? I don't think anybody does to be honest with you, but if I want to go after the big accounts, I feel that there's an opportunity to go after the accounts that are looking for an alternative within Aon or Marsh or Willis. Do I have the services? Do I have captive? Do I have analytics? Do I have the market connections that I need or am I just playing the game?

I think that we all sell services. When I go in I tell people look, if you're looking for me to sell you liability insurance, you can go to anybody, but if you're looking for somebody that understands your business, has the market clout and is really coming with strategic ideas and has the team, that's what I want to accomplish. Again, if you go back to the three tranches that I talked about, I think that each one of them needs different disciplines to differentiate themselves in the market.

My differentiation, what I look at is understanding my business and making sure that I give the resources whether it's in say the high net-worth individuals for personal lines who need a lot of touch, whether it's a group program where people are saying, hey, look, my advisors are taking care of that. They'll put it in and you give them a group program, or whether it's transaction where you align yourself with different services beyond insurance.

You mentioned that Aon Willis Towers deal. I was reading through the legal brief and I’ll read you this part because I’m curious to know what your reaction is. It says, “The prevalence of post-employment non-compete and non-solicit clauses in the insurance brokerage industry including by Aon and Willis Towers serve as barriers to attracting clients away from the big three.” It also mentions, “Past attempts have shown that successful entry is difficult, for example several years ago a number of employees from one of the big three attempted to start their own commercial risk broking firm with a focus on serving large customers and despite having deep experience in the industry and existing relationships with many potential customers; this new venture failed.” It goes on to mention some others. What’s your reaction to that? Is that overblown because they were making a legal argument to block the merger which they were successful in or do you think it really is tough to get those clients away?

Being a business owner and building a business, you always want to make sure that you have some control as you're developing and building resources as to what people are doing. It's interesting, the only profession that doesn't have non-competes is the law profession where you could take your clients as a lawyer and go to anybody and nobody stops you. I think a non-compete is somewhat antiquated, so if you look at the history of Europe, Europe gives you a garden. Basically, if you decide to leave, I have to pay you anywhere from six months to a year and that gives me time to put my business in order. Now if I'm a good manager and I'm able to really institutionalize the relationship that you and I have and you're buying whatever carrier or broker it is, then you're happy with that.

But if my institutionalization is you and I as friends, when I leave, you're going to want to go with me. I think that, to some degree, Aon and these other brokers overplay that relationship. What they don't realize is they don't own the client because they haven't done anything to ingratiate the client to them, but they lose it because they lose the relationship with their employees.

The group that left in Miami to go to Marsh; Mike Parrish is a pretty astute individual. I know Mike and Michael Landa. These guys felt that they were being pushed aside, that Greg Case had an agenda, that he was trying to basically figure out 50% goes to Willis, 50% goes to Aon and those guys weren't happy.  They said, “Look, we got you where you are. All of a sudden we're not part of the deal.” So they left and now he's saying, “Well, we should stop them.” Wait a minute, you said there's unlimited competition, that there is no problem, but yet you want to stop. What I would say is that if you said to that group no, for the next somewhere between six months to a year, you have to allow us to get our feet under us, I think that's a fair statement, but not the idea to prevent them entirely.

That seems like hard to enforce anyway, wouldn’t it? What are you going to do? Take them to court?

No, you pay them. Under the non-compete, they’re going into court. That's the fight. Under the non-compete what you try to do is if it's big enough, you try to get a TRO to stop them in their tracks and then you basically sit down and you try to negotiate with the people that took them for an agreement to pay. If you look at Alliance, Alliance is known for basically going in, taking huge teams of people, taking all the business and then fighting it out in court. The real question it comes down to is, what does it cost me in court versus what it costs me to buy a business. I think today with the non-compete, it's cheaper to steal people, end up paying in court for settlement versus paying 12 to 13 to 14 times to buy business.

That’s one thing I learned following the industry is you realize how incestuous it is. The guys at Acrisure or former Brown & Brown guys, they all kind of move.

It's the same thing if you think about the legal profession or even the accounting profession. You get to a certain level and, in your business, there's a certain group of people where you’re all the same level, so you decide to leave or somebody decides to leave, you kind of all hang out together.

In your experience, you’re running pretty substantial businesses. Would a big risk to you be that you have a top producing team that all decides to walk or does that not often happen?

I've had it happen to me but I could go back and I know why it happens. Probably 50% of the reason it happens is because you don't listen to people or you do the wrong thing and people see that they don't have the opportunity and they have an opportunity someplace else. In building Allied, I only lost one group of people. I lost five or six and, actually. I didn't lose any business and six to eight months later they all got fired and I hired one of them back because they overestimated what they thought they could do.

That’s the other thing is it’s not completely costless. You move but it doesn’t automatically move, everybody follows you and there are costs you incur, so it’s not that easy.

We’ve taken people at various times. I think every agency does.

There was one other thing from the Aon-Willis Towers brief which I’m curious for your reaction. It says, “If you are in, your chances of getting the next renewal are extremely high and that is because you know the people, you know exactly what to pitch, you know their history, you know what they like, don’t like.” I heard this incumbent advantage thing tossed around and some people say it’s important and others say no, not really. If you’re not doing a good job with the account it doesn’t matter that they’re with you. If they’re already talking to somebody else you’ve already failed to some extent, so what’s your reaction to that?

No one goes to market, in theory, because they're paying too much money. They go to market because somewhere during the relationship period something has gone off track, whether a claim wasn't handled properly, they weren't happy with your renewal strategy, they weren't happy with the team or the response. The incumbent always has a better shot at retaining business because of the historical data and the knowledge of the account. You have to look around and say, who has that now? Who is the incumbent? Is it the carrier? Is it the insurance company? Is it the brokerage team or is it the company at large? The more people I get involved in an account to touch it, the better it is because they see that there's more people; but if the only relationship is between the producer and the client, well, if you're going to leave, I'm going to take my insurance with you because I have comfort.

If it's a big account, it's very hard sometimes to move those accounts because you're embedded in the company. Where those accounts move is where they're with a medium sized broker and that broker doesn't have the talent or hasn't got the ability to bring the right people to the party so to speak.

Yes. They just step up into the big leagues with the Aons and Marshs.

They keep going on about the relationship but if I don't talk to you about a captive, if I don't talk to you about what limits you should have, if I don't talk to you about analytics as you're growing your business, you look at that and say well, what am I doing? If I stay at the smaller level, that’s okay.

This is maybe a good spot to get your take on Brown & Brown, primarily in the middle market brokerage area. What do you think of them as a firm or a competitor?

I give Brown & Brown a lot of credit. I think Hyatt Brown has built a great company. I don't see them participating in the upper middle market or in the large accounts. From a company standpoint, I think they run their business as a roll-up of a bunch of agencies throughout the United States, but they haven't gone from an acquirer to someone who's consolidated to look at the value-added proposition. I think that their producers still run their business in the smaller way and that they haven't really looked at leveraging those relationships. I think they've got a great footprint but they haven't done anything to say, how do I bring that to scale, in my mind.

In that space there’s a lot of acquisitions and a lot of private companies rolling up brokerages as well. Were you involved in doing acquisitions as well in your career?

Up until I got to NFP, we went after talent. I was a firm believer that I acquire talent and that's how we built Allied. We didn't buy any businesses. We went after teams of people who had an expertise and we brought them in. For Aon, the only acquisition was the acquisition of my firm and I was involved with that but from the other side no.

As I've been with NFP for the last four years, yes, I've been involved in looking at agencies and acquiring and I think, in that light, one of the big challenges in the acquisition model is everybody touts that they're going to get to a 30% margin when they buy them. I think what people fail to realize is, I don't know that you ever get to a real 30% margin. The reason I will say that is that, if you look at a book of business and I have $1,000, that $1,000 has a retention rate and a rollover rate. The retention rate is how much of that business do I really keep? If I have eight accounts, do I really keep all eight accounts or do I lose a couple?

The rollover is the additional cost between changes in exposure and changes in rate. It’s pretty well industry proven; I've never met anybody who doesn't tell me they have a 97% rollover rate and when you get down to it, most people are in the 88% to 90% range. The rollover is where today the rates have gone up and exposure's gone up, so my retention might be 88% but because my rate has increased and my exposures have increased, it goes up. A typical example is if you take personal lines, I'm sure that when you get your homeowners, the value went up of your home and the premium goes up.

They don’t keep every account, so what happens is if their retention is 88% but the rate is increasing at 3% to 5% and they bring that up at 5%, then your rollover rate is coming in at probably 92%, 93%. You’re still losing 7% of your business so, in order to grow your business, if I'm at 88% I need to grow by 12%. Some of that 12% will be taken up by my rate increase and my exposure increase. Where people get confused is they go, I'm growing at 5%. If you’re growing at 5%, you’re really going backwards.

I think what you have to look at again is like a Brown & Brown, what are those numbers and is it better to buy and are they really getting the value that they think they're getting when they buy those agencies?

You talked about acquiring teams. That reminds me, if there’s teams that move around a lot, is that a negative? At what point do you look at a broker and say, this will become a liability or black marker in some way?

I would agree. When I look at a team, I'm looking at how they got there. The group that left Aon had been there for 20 years. Teams that I'm looking at have had longevity with the company and the company has not either acknowledged what they want to do or where they're going.

A lot of these are still private and Ryan Specialty went public recently. I don’t know how much you know about that firm.

I know Pat Ryan and Tim Turner. I think Pat Ryan had to go public because Pat Ryan was the bigger stockholder and Pat’s close to 80, so what was his exit strategy? The exit strategy made perfect sense. I think that he's built a great business. He was a great acquirer of businesses. He acquired and acquired and acquired. Greg Case took Aon from an acquisition company to a consolidator and if you look at the stock, the stock was selling at $42 in 2011 and his stock is selling at almost $300 today because he leveraged all of the businesses and got real economies of scale in what they did.

Ryan, of course, is specialized in wholesale. That’s a different business; maybe you could talk a little bit about that because Brown & Brown has a wholesale business and I know there’s a lot of retailers who don’t have wholesale because of perceived conflict of interests. What’s your take on wholesale?

I think the challenge is, if you want to be in the wholesale business then you have to truly be a wholesaler. Let me qualify this. There's a difference between being a wholesaler and an MGA. So a managing general agent has one program that they underwrite and they drive that. I think that's a good business. I think being a wholesaler, where you’ve got brokers coming to you and you're trying to place business with a myriad of carriers and you're trying to get that done, I don't see that as being something that is viable in a brokerage business. If you're going to be a broker, then put all your resources in brokerage. I won't do business with CRC because they're owned by Truist and Truist owns McGriff, so why would I do business with them when I could do business with Amwins and R-T who are true wholesalers?

What about the distinction between binding and non-binding?

I think people overplay that. I think the idea that, if you're an MGA, the theory is if you're a managing general agent or a managing general underwriter, you have binding authority; that's different. No wholesaler has binding authority for all the carriers they do business with. They only have binding authority if they have the pen or the relationship on a product or a program. If I have a construction account and I give it to a wholesaler, they're going to go out and market it to a dozen different carriers. Now they might have an MGA program that they're going to get a quote from and they have more connectivity and more control over that program.

So you’re saying the binding authority goes with the MGA?

Correct, it goes with the MGA.

You wouldn’t have binding authority if you weren’t the MGA?

No. Normally, you don’t. What they will tell you is, I’ve got a great relationship. I’ve got this, I have that. That’s good.

Is that wholesale, in general, a tough business to get into?

I think the problem with wholesale is that you need to have some kind of specialization. You need to differentiate yourself more. If I'm looking for a wholesaler, why would I go to a Brown & Brown when I can go to an R-T or an Amwins that has billions of dollars and they have real clout and real expertise?

So scale really matters there?

Scale really matters there. That’s a scale game.

It doesn’t matter so much on retail or the others.

It does but remember, the wholesale business, where the market gets hard and people aren't going to write every one to the wholesale, what you find is that brokers become dependent and lazy on a wholesaler. I think any business has to look at how much business they're placing in a wholesaler and should it be in a wholesale market?

I’ve heard this before too where they get lazy with a wholesaler, so they get something and the insurance company start taking losses on it but they stick with it because the wholesaler basically has volume.

If I underwrite my book, if I've got a hundred million dollars with an insurance company and I've got some losses, they're willing to ride it out a little bit longer than if I don't. A small broker who’s got a bad account will run to a wholesaler because he feels the wholesaler has leverage. It's just like making a loan. You're going to lend money to somebody, you're going to have a bad loan every now and then, but you might ride it out because you've got enough positive loans who are paying you.

Yes. I think wholesale is interesting too because it seems as if there’s all these new evolving risks, such as cyber and climate change, and that seems to wind up in wholesale or E&S market. How significant do you think those new evolving risks will be going forward as opportunities for brokers or not?

I think that the brokers that have the expertise in those areas like cyber, that's where that'll differentiate. I think a small local broker who is trying to sell cyber, if I were them, I would say to somebody, go to somebody who knows cyber because I don't have the expertise. I think that those lines of business, you're going to see MGAs developed. There are some MGAs around cyber, there's some MGAs around employee practice liability. I think that's a good market.

The idea of running around to five markets or 10 markets trying to get quotes, I think that's a tough business. If you look at Worldwide, who I thought was an excellent wholesaler, they realized that they had to sell; or All Risk which was an excellent wholesaler. They both realized that they needed to scale. If you think about those mergers or those acquisitions, those were pretty good firms. They had good talent, good people. They wanted bigger, they wanted scale.

Do you think we’ll see more of these private insurance brokers go public?

I don't know. We were a public company and I worked for a public company. I think there's a lot of embedded costs in being a public company and I think you have to have a certain mindset. I think that if you want to go public, you've got to really look at the team of people you have. Are they capable of living in that world? I think that's the difference. I think a lot of brokers being private, it’s a little bit of a different world. You're not reporting every quarter to the stockholders. You're not worried as much about some of the growth patterns. You’re looking at things differently.

Being at Aon, every quarter you had to substantiate where you were. Every quarter you were worried about were you going to make the year end. At the end of the year, you were worried about the first quarter and the second quarter already. I think private companies do worry about it but they just think about it differently. I think that you need individuals who either understand that or don't. I don't know that a CFO for a private company can be a CFO for a public company.

If you’re thinking 10 years forward and what the insurance brokerage industry looks like, do you think it looks similar as it does today? In what ways do you think it changes? Any important things come to mind that you think might change?

I think you're going to see continued aggregation or buying of agencies. I think, depending on what happens with capital gains and estate tax, that's going to affect this industry because the majority of these people are privately owned businesses. I think you see a frenzy right now; people are panicking because they want to get out, without a doubt. If capital gains go up and the state tax changes, I think a lot of these businesses are going to look at themselves and say wait a minute, I should get out earlier or what do I do?

You're going to still see a consolidation. I don't have the stats but I don't know how many people are really going in and developing new agencies. What I see more of is people are going in trying to develop an MGA or some kind of IT product around the insurance business.

Do you think technology is more of a threat or an opportunity for the brokerage business? It seems like brokerage would also benefit from using the technology.

I think it's definitely an opportunity for those who understand it. I think it's definitely a threat for those who don't want to invest in it. When I tell you we were an $80 million agency and we were doing very well, the question was, what was it going to take us to get to the next level? What were the capital investments? Were our partners willing to make less for a bigger piece of the pie? That always becomes the question. If you're a publicly traded company, you can invest. It's a lot easier if you look at publicly traded companies versus the private equity firms at their ratios of debt and all of that, so it's always easier to raise capital if you're a publicly traded company. I believe you can maneuver a lot quicker if you're a privately traded company than publicly traded, in my mind.

At this stage of my career, I look back and think it's a phenomenal business. I still think it's a great business to get involved in and I think that it's finally coming into its own as maybe people are looking at it more as a profession than it once was. You went to a cocktail party, you sold insurance, everybody walked away from you because they thought you were going to sell them a life policy. As somebody once said to me, if you think about it, we're the only business that without us, there is no economy.

Everybody needs it. That’s one of the reasons I love it. It has a lot of characteristics; it generates a lot of cash, customers are sticky and reliable, people have to have it. It automatically adjusts as prices of things go up, so commissions go up. Then you look at the publicly traded insurance brokers; they’ve all been outstanding long-term investments, so I agree. Are there any risks that we should look out for? I guess it will continue to be a good business.

What I would say is, there's a couple of risks. The first risk is the ability to acquire and keep talent. The business doesn't have talent. It's really depleted of talent. With COVID, the way the world is changing, no one really knows what's going to happen or what we look like in a year, but I think that one of the big risks in this business is the ability to get talent and to keep talent, and I think if you acquire businesses, what you have to understand is you're really not getting talent. You're buying businesses that are looking for an exit strategy and most of the businesses you're buying, they're the size and the scope of where they were because they never invested in talent. It was a single proprietor, maybe his family, maybe a partner but very few of them have really good talent hitting the ground.

I would say maybe in the top hundred brokers there's talent in those agencies, but a lot of the smaller agencies, it's a one man show. I think that's a risk.

I know a lot of the publicly traded insurance brokers will disclose their retention of their top talent and they’ll say 97% of their top 50 producers and all that kind of thing, so it speaks to what you’re saying.

Yes. The question is, how do you define talent? You're defining them as your producers. That's just sales. Do you really have talent, meaning do you have people that understand cyber? Do you have people that understand transportation? What's the talent that you have? Not that a producer isn't talented, don’t get me wrong, but they're selling. Do you have the services and the capabilities to have those producers to be successful? That's the challenge and producers by the way, they're easy to keep because everybody pays around the same commission percentages, so the reason you lose producers is because they can't write the business they want.

The other challenge that I think you have in the business is the ability of technology. How well does your company understand technology? Are they using a CRM system? Are they using Salesforce? Do they really understand what it's costing to write a piece of business? Do they understand what their retention is? I think that in the business, it's not a complicated business and you can do well if you have intelligence. The point is, if you want to get to the next level to really understand your business today, do you know where you want to be? I think if you ask most businesses, I think they struggle with that. They'll all tell you how great they are, but if you say to them what's your plan? We're going to continue to acquire. Okay. What are you really acquiring?

What is your retention? What is your rollover? Where do you see yourself going? What differentiates you? Why are people coming to you? Those are all the things that I ask my guys. When we have our meetings they show me the numbers. That's great. I know what the numbers  are already. I want to know where we’re going. I don't need to look in the rearview mirror. I want to know what you're doing for next year; what's your plan?

The market is definitely becoming soft now. If you think about it, at the beginning of the year, Pat Gallagher said what a hard market it was and how is it going to be in a hard market? He's already recanting that. Amwins just came out and said that the umbrella market isn't increasing as rapidly as it was; no kidding. I'm already telling my guys at our executive committee, I said the market's going down in January. They said how do you know that? I said because it's going down and I explained why. They all thought I was crazy.

Why did you say it would go down?

Three things. I think one, carriers put huge reserves whether they admitted it or not for COVID and the COVID claims didn't materialize. Two, capacity is at an all-time high. You have more cash available looking for investments. Three, you have companies coming out like [inaudible 0:56:18] came out with Vantage. You have other companies coming out, so there's more people coming into the business.

Loss ratios are not as bad as everybody said they will be. Every carrier is talking about the greatest returns that are happening in the last two years. So what's happened? Some might say that nobody was on the road, but we still had good experience; significant capacity. The craziest thing about this business is I write an account for $100,000 of premium, some other genius comes in that’s going to write it for $90,000 because they think they're smarter than the other carrier and this guy's going to make less money for saving the guy $10,000, so it's a crazy business.

But what I would say to you is the reason I saw this is because I've lived through enough of these blips that, as soon as prices get to a certain point, somebody always thinks they can make money if it comes in less and they've stored their capital and now they have to put it to use.

With the insurance brokers also, isn’t there a dynamic there where when the rates go up it’s not automatic that the insurance brokers make more because customers change their coverages a little or they’ll adjust some things to get the number lower? Isn’t there a little dynamic there?

There is. What basically happens is, as the market goes up, a company might buy less umbrella. Instead of maybe $300 million, they'll buy $250 million. They might look at a deductible where they had a $25,000, it might go to a $50,000. Then they might dispose of assets, meaning they might have a large fleet of vehicle and you say we’re insuring these vehicles but the vehicle is 20 years old, are you really using it? By and large, when rates go up brokers will do well.

The other thing you have to realize is that rates don't always go up on the same trajectory. So if I've got a big property account and I'm trying to buy a billion dollars of property, that rate's going to go up; but if I've got a small factory and it's $2 million, is that rate going up the same proportion as the bigger account? No. So you don't see those same increases.

Does it work in the other way when the rates come down? Do brokers have other ways to adjust?

When rates go down, the first thing they try to do is sell you more coverage. If you look at the market, there's four tracks on a market. I think it’s a competitive market, it's a non-restrictive market, it's a restricted market and then you have to go into each matter, each way. When you have a very competitive marketplace, coverage is available, prices are available, capacity’s available. Anybody can be a successful broker in that. When you’re going from a competitive market to a restricted market, that's where the bigger brokers, the more sophisticated brokers do well because they understand what's happening. When you're in that restricted market with coverage restricted, capacity is restricted, pricing is not an issue; that's where a big broker throws their weight around.

As soon as the market starts going back down, everybody can participate. Why? Because the market's gone down. Hey, I can save you 10% on your renewal. Really? And next thing you know I’ve got a new piece of business. The smarter brokers have to recognize that you're going to make more money now but what is that money really if you're not controlling your expenses, your comp expense which is your largest expense? That's a big challenge.

I think the challenge is, what do we look like in, I guess, 18 months? Do we need all the offices that we have? What does our T&E look like? How do we engage with our clients? I don't know that anybody has the answer. Jamie Diamond wants everybody back in their office. Citibank says we'll take anybody who doesn't want to come back. Who's right? I don't know. Insurance is a people business. We can only last on Zoom so long in my mind.

You mentioned talent. A lot of these places will have their own little universities where they teach people. Brown & Brown has Brown & Brown University, I think Ryan has their own university too where they train people, so what are your opinion on those and what they do?

I think that's smart. The first thing that they're teaching them is they’re teaching them their culture and not so much teaching them the business as much as who we are at Brown & Brown or who we are at R-T. I think that's the first step to retaining good people. Do they buy into your culture? Then you teach them the business. We’ve done it, I've done it in different stages of my career. I always hired young people to be interns who came out of my neighborhood and I heard my partners do the same thing and a lot of them are still in the business.

I think that's something that you should be doing, but I think you have to start them as interns, to be honest with you. You hire those individuals as interns and you let them work in your company.

You know Goosehead Insurance?

I’ve heard of them but I can’t tell you why.

It’s a relatively new publicly traded broker but my understanding is their strategy is a lot what you’ve described. They bring in very young people. I don’t understand it very well.

Goosehead, I’ll have to look at that one. I think it's a great industry. I'll give you one last thing: I do think the industry will change. I think the industry has changed dramatically over the last three years. I think you're going to see significant changes. The question is, who's going to be the ones that really are going to be the risk takers? Who are going to say, I think I can change this business by doing this? I keep trying to change what we're doing and I think we're successful in what we're doing but we'll see.