May 3, 2021— Steve Menzies, founder and chairman of Applied Underwriters Inc., is a busy man. Since he reacquired his company from Warren Buffett’s Berkshire Hathaway in 2019, he has been buying businesses, creating new subsidiaries, welcoming new teams of professionals and growing his firm domestically and internationally. He describes it as building an “entrepreneurial power plant.” Insurance Journal had many questions for Menzies. What was it like working with Buffett and why did AU leave Berkshire? What’s his grand scheme for the company and why expand now? And what about the disputes with California regulators? Menzies agreed to answer questions in writing on these and other issues. The following is an unedited version of the questions and his answers.
- In 2019, you re-acquired Applied Underwriters Inc. and its subsidiary North American Casualty Co. in a deal that was valued at $920 million and included the buyout of other shareholders including the 81% of stock held by Berkshire Hathaway since 2005. How did the deal to sell to Berkshire back in 2005 come about? What happened then? Did you initiate it, did Berkshire?
Our story unfolded in a way almost organically, progressing from our founding in 1994, to a deal for Berkshire to acquire a majority of the equity in 2005, and up to our buy back in 2019. Back in 2005, we were a hot property; in fact, AIG and other large companies courted Applied as a result of our stand out growth and profitability. We had just debuted with an AM Best A- rating for our subsidiary, California Insurance Company. Our initial, rather bold impulse was to go it alone, but our growth required capital. Shortly after arranging a large quota share with Berkshire, we suddenly found ourselves considering – and liking – an unsolicited offer from Berkshire to buy Applied, and within weeks, we shook hands on a deal with Warren. We were already in Omaha having located our operations there six years earlier. We negotiated a fair arrangement and retained a substantial economic interest in Applied which, it turned out in 2019, gave us an equity base from which we were able to launch our buy back of the Company. As an entrepreneur, I have long felt a sense of inevitability about such a buy back and have looked toward the opportunities that independent ownership hold. Our acquisitions and market positioning over the past 18 months show the value of that transaction for Applied.
- How was Applied Underwriters run under Berkshire? I believe the business grew. But were you satisfied with how things went, or frustrated? Did you have expansion ideas then?
Applied developed a corporate culture all its own within Berkshire. I had the privilege of reporting directly to Warren and had his ear and encouragement. I had the advantage, as well, of his modus operandi; that is, Warren almost invariably makes the right investment, and then leaves its affairs in the hands of those who made it attractive in the first place. His ways of operating and ours were complementary, similar in most cases, and it all worked well. On a personal note, my relationship with Warren meant a lot to me – it still does – and I found myself emulating his approach to business with objectivity, yet always with respect for the courage of entrepreneurs. Gradually, as our footprint became broader nationally and deeper in the market place, our very growth began to create a formulaic problem for Berkshire: we and the other Berkshire insurance businesses were all growing into competitors creating unproductive channel conflict. There was actually a bit of marketplace friction, albeit polite and friendly, among allies, but Warren never stepped in; he let the inevitable play out and, as is the customary outcome with him, everyone profited.
- What more can you tell us about Warren Buffett and your time with Berkshire? What do you think he and Berkshire learned from you and Applied Underwriters?
“Words move, examples compel,” so the saying goes. Warren set the governance standards with great, but tempered ambition for all of the companies in Berkshire and showed strength through his native humility and modesty – characteristics that provided compelling examples: a consummate capitalist and easily among the leading paradigms of entrepreneurship in business history, he operated with utmost integrity. Our first handshake in 2005 became the basis of a substantial mutually beneficial relationship based upon trust.
To the second part of your question, I really can’t speculate upon what my friends, former colleagues and partners at Berkshire might have learned from me, if anything, except that I profited by keeping good faith with Warren and never feared a degree of boldness and innovation within the corporate context. The acquisition of Applied was a rocket launch for us, not a comfortable landing.
- Why and how did the deal to reacquire Applied in 2019 come about? Did you initiate it, did Berkshire?
Like so many of the best transactions, there was a natural, even an inevitable quality to it – no one needed to push the other or try to fight what seemed like a foregone next stage for Applied. Again, internal channel conflict had become problematic, Applied was not wholly owned – we held a substantial economic share – so the impulse to control the Company we had built and developed was especially strong. Warren’s annual letters alluded to the creation of enterprises within Berkshire’s walls, a successful approach. We were such an enterprise and had to move into new spheres of opportunity independently.
- What was your role when Berkshire owned its shares? How has your role changed? Who are some of the people you rely on to implement your ideas?
It was simple and clear: I was the captain of the ship that I created and steered. We had attracted an impressive faculty, a kind of think tank known for its analytical acumen, cultured intellectual bent and profound concentration. With leadership consisting of professionals with highly varied experience and excellent educational credentials in math, economics, philosophy, and linguistics, our thought leadership is a competitive advantage and point of pride. We boast a team whose top 40 managers have an average tenure of over 18 years with the Company, demonstrating, we believe, an intellectual challenge and satisfaction equally important to such professionals as an excellent compensation program. A strong bench has allowed us to grow productively, and my role has evolved from essentially being COO, to today, as Chairman, mainly focusing on corporate development.
- So it does appear you have been full speed ahead expanding and diversifying Applied Underwriters ever since 2019. Did you have a plan at that time to expand, or did the idea come to you after you reacquired?
The acquisition engine was fired long before October 10, 2019. Long before – we had experienced so much product demand that we almost could not help but innovate and find allies in key areas. We were more than ready to realize our growth plans that you have recently seen take form. Since Applied is decidedly not about lines of business per se, but instead about ideas, we draw many like-minded entrepreneurs to the table to protract the industry’s future and the markets’ directions. We are now private and we have scale, a force letting us join prospective partners to Applied at an enviably rapid pace. We’ve built – are building – a peerless infrastructure, some of it in traditional bricks and mortar such as our stunning new headquarters in Omaha, but, more significantly, with brainpower and a culture of responsible, though no less aggressive risk taking. It happens in our intellectual mix; we do not, as do many of our competitors, jump immediately to outside sources for ideas and implementation. As a result, we have become a magnet for the brightest and the best thinkers, we believe, in the risk transfer business. Interestingly, and perhaps becoming the trend, many of our new partners attest to being unappreciated or misused within the new corporate protocols, shifting corporate priorities and safety only mentalities.
- We may need a computer to tally up all the moves you have been making. You have acquired Florida Casualty, Centauri, Oklahoma P&C, Blue Ridge in the U.S. Plus you have acquired a yacht MGA in the UK and started a subsidiary for Europe and Middle East. At the same time, you have created Applied Specialty Underwriters. And expanded your D&O and Fine Arts teams. Did we miss some? What is your overarching vision for Applied Underwriters? What is your strategy?
It is not world domination, let me assure you, nor do we seek to do what we do not do well; that’s a fundamental belief with Applied. We do plan to continue to profit by the many opportunities that we find in our extensive networks and global dealings, and to cultivate relationships with those increasing number of creditable entities that find their way to our doorstep. We have developed a sound base for corporate development, such as acquiring companies and for ensuring their advancement and success, and, philosophically, we are open and even somewhat agnostic as to the form of an opportunity, but that openness is not vacuity. Transactions, to us, need a special nexus to complement Applied’s overall strategy and businesses; they need to be able to use our appreciable resources effectively – by which I do not mean some notion of economy of scale combinations. What I refer to is greater. I mean the kind of intellectual capacity and knowledge that fits our blueprint and works to give rise to the growth of great corporate institutions that do not compromise the entrepreneurial visions that made them distinctly successful in the first place.
- How do all of the pieces you have acquired and started up fit together?
In a few words, 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 service fully and effectively, the enterprises joining us. We genuinely appreciate the talent that our new partners and their operations bring into our winning formula. That is why the amount of idea-cloying bureaucracy, defensive silo-ed departments, and just plain corporate inertia are not to be found at Applied. We know what it is, and what it does, and we smoke it out if it appears. Our results evidence energy and a company playing like a live orchestra rather than a tired out recording.
- Where do you see Applied Underwriters positioned within the P&C carrier and specialty insurance world going forward? How do you want brokers and competitors to see Applied?
Our strong suit has always been the end result of an insurance policy brokered with us: we care in earnest for our customers and for our claimants, some of whom are injured workers, for the livelihood of our brokers, and for the actual insurance industry itself. We feel privileged to be a part of it and do choose to invest in it again and again. I regularly reiterate to our staff that I believe deeply that our company has a good soul. I meant it and mean it, and our professionals have espoused that line of thinking in what we do. As this comes through over the years ahead, our brand, I believe, will be increasingly the stand out brand, distinctly bright and genuinely esteemed for the respect that we show to claimants, brokers, the industry, and the general public.
As far as the industry’s perception, we are pleasantly driven by a fresh spirit of free enterprise. Similarly, we look to our brokers for loyalty, for meaningful local market share, for their client care, and for their ability to understand and utilize our constantly refined and innovative products. We value agents and brokers and prove it daily.
- Are more acquisitions ahead? Will you be launching new units and teams?
Yes to both. Watch for more news ahead.
- Why is now a good time to expand into the P&C and specialty business? Where do you see the biggest opportunities for P&C insurance now?
Strategically, we examine almost every deal that comes our way, and we are open to new P&C business, especially as reactionary and shifting corporate priorities become reality. We have few competitors who have the same entrepreneurial systems for mutually beneficial relationships. With strong partnering companies like Applied, participants in the industry might see the present as the beginning of another Roaring 20’s, with high valuations and financial risk reaching new stratospheres with many zeros added to valuations. Provided one is mindful that all good things do come to an end, now is a very good time to be in the business and be projecting growth.
- Where do legal issues with California Insurance Department stand? When and what will be the resolution? Have these battles inhibited you in what you hope to do?
I am advised not to comment on legal matters, but I can say that we have not been treated as we, or for that matter, any A rated, financially sound insurer should be. Our attorneys and several opinion leaders have shared the view that we are bearing the brunt of bald-faced regulatory overreach, an arbitrary use of power to favor a segment of the legal profession, and the routine misuse or outright absence of proper, legally creditable decision making and action. It is beyond regulation as the law provides for it, and we will demonstrate that fact and the underlying motivations. I mean, ask yourself, why would an insurance department try to restrict and suppress one of a very few a home-grown insurance success stories, an A+ rated insurer with top ratings by all of California’s agencies, and a long record of service to businesses in the state? It was Applied that stepped up in the workers’ compensation crisis of 2001, that has written business in hard to place categories and locations, and has fought the CDI on occasion, but has never gone out of bounds as the recent actions by the CDI appear to observers in the industry and legal community to have gone. The CDI oversees a state insurance system that is in difficult straits – it doesn’t make sense to us, or to any one for that matter, that they would trip up a great and needed company. The motivation I’m sure will come out in the end, but so much taxpayer money will be wasted, and so much opportunity in the consumer market place will have been missed. California Insurance Company has served our fellow citizens quite responsibly, especially when California needed us. Now, the CDI’s agenda seems counter to the public’s best interests.
- You started Applied in 1994, right? What keeps you going? Do you ever think of retiring?
No. No thought of it. This is a revitalizing exercise every day, especially with the talented people around me at Applied and in the business, and with the opportunities available to those who are deeply engaged and willing to learn new things and to work smart and hard. For me, coming to the office is not a chore – I’m energized by the positive, collegial attitude I find there. We work, we think, we thrive together, and our endeavor is fueled by a degree of creativity I have not seen elsewhere in the C-suites of comparable businesses.
What else should we know about Steve Menzies and Applied Underwriters?
The facts are easy enough. My CV is one of professional leadership here at Applied and one of volunteer philanthropic leadership. It is an obligation that I welcome. The Steve Menzies Global Foundation (see boldthinkers.org), sets out the way I see society being bettered, from hostage rescues, to collaborations in education in the poorest countries. I focus on areas that are underserved and can most benefit from my particular professional expertise. For me, advocacy only becomes meaningful with dedicated, personal engagement as well as sustained financial commitment.
Earlier in this interview, you asked about Warren and about my progress. I did not use a key word that has made the difference for him and I hope for my undertakings: discipline. The discipline of leadership at Applied is guided by that good soul characteristic that I feel will distinguish our brand; the discipline of personal success in my view is the exercise of intelligence, applied carefully and consistently through constant study and learning, to the task of bettering our world. I cannot think of a better goal for a company or for anyone.
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