Ep321 Dave Walsh & Graeme Newman Kantara Capital: Pull, not Push

0:03Dave Walsh: I'm Mark Gagan and you're listening to the Voice of Insurance podcast, produced in association with Advantage Go, now part of Sapiens, enabling enterprise-scale underwriting through a single pane of glass. This podcast is a real treat and that's all down to today's guests. They're two of the most successful entrepreneurs of their generation, building MGA CFC into a multi-billion dollar global business based on consistent organic growth and year in year out market beating underwriting profitability. That's already good enough to be worthy of your attention, but that alone is not what makes this podcast a must listen.

0:40Dave Walsh: What makes this interview so compelling is that, yes, my two guests have been exceptional practitioners in their own right, but now they're able to sit outside the industry and look inwards from the point of view of expert investors. The icing on the cake is that they're not running a venture capital fund using other people's money. The only funds they are investing are their own, and this means that they can be brutally honest in what they say and how they say it. Dave Walsh and Graham Newman of Kantara Capital are now in the business of helping the best new firms in the MGA and broker space realise their potential.

1:13Dave Walsh: So listen on to find out what this exceptional duo have in their sights, and what their favourite and least favoured investment theses are. You're likely to be surprised by some of their strong convictions, and then cheered by their infectious enthusiasm, optimism and good humour. If you've ever wondered what it takes to make it on your own, listen on. This podcast is an encyclopedia of great ideas to get you started and it's one of the strongest interviews I've recorded in a very long time. Enjoy the podcast. Graham and Dave, welcome back to The Voice of Insurance but now with different hats on.

1:47Dave Walsh: Something I've been doing that I didn't used to do at the beginning of the podcast so seven years ago now was I didn't used to ask people to introduce themselves and now I've found that actually it is quite useful because not everybody listening knows everything about you or your career to date. So if my way of doing that is to run us through your career to date, well, first tell us how you got into insurance. Again, it's one of the things that often when you meet someone first time insurance, you get to that story of how did you get into insurance? So, you know, most people fell into it. We'll find out with you two.

2:14Graeme Newman: Okay, morning, Mark, Dave here. So my first job after uni was at Marsh. I was a UK professional indemnity broker there. Why did you apply to that job? Just through word of mouth, really. You just thought, well, you didn't know what to do.

2:26Dave Walsh: Or did you know? You certainly didn't know what to do. You didn't know that this was your career.

2:30Graeme Newman: Yeah, exactly. So I came out of uni quite headless, ruddled us, you know, all the usual losses. Yeah, I was there for four years, really enjoyed it. It was a good place to work. But then I was lucky enough to join Howden when, can you believe it, there were literally less than 20 people. So I was one of the really early starters at Howden. They're now 25 ,000. I was wondering, which office? Was that still St. Dunstan's? I thought you meant which office as in of their offices. Because I did a podcast with David, wandering around the different offices. Yeah, I know. I heard it. It was great. It was St.

2:56Graeme Newman: Dunstan's. So was the first one. Which was a fourth floor, I think, from memory, which probably had a capacity of 20 people. And was there still a Labrador, though? There were dogs coming and going. I think it was a Labrador. A Vinerama, I think. Called Flight, if I remember. Sadly departed now. Anyway, so joining Hound when it was such a small team, I went there to run PI, was a real eye-opener, actually. Because whilst Marsh was great, everything felt very institutionalized, as you can understand. And suddenly you join a founder, an entrepreneur in a tiny small team, and you realize you can take on the big guns.

3:25Graeme Newman: And that was really interesting. And then for me, I suppose the next big seismic moment was in 1999, the dot-com boom arrived and with it, the internet. And everyone was basically thinking, how the hell is this going to change our lives? And in the long run, no one knew what it was going to do, but everyone knew that everything was going to change. So I think that's actually quite interesting because here we are 27 years later. And it feels like we're in exactly the same space with AI, of course. So from my perspective, I became slightly obsessed by the fact that businesses were starting to take on new risks and there was no insurance policy to cover them for those risks.

4:01Graeme Newman: And Hiscox was sort of dabbling and experimenting with what they called cyber in the UK.

4:06Dave Walsh: Because they'd always been good at media stuff.

4:08Graeme Newman: Yeah, they came from media and tech. And AIG were doing the same in America for the same reason. But it felt a bit half-hearted, a bit typically insurance, all a bit scary, high rates, low cover, etc. So really, I set up CFC with the goal of really becoming the pioneers in the cyber market. And that was in 99. And then, of course, I was the CEO for 25 years from 1999 all the way through to 2024.

4:31Dave Walsh: Well, we will talk about Kantara, but we're going to talk to Graham first. What's your story? Well, unlike Dave, I wasn't born into insurance. I came from a completely different direction. so i started my life out as a consultant with deloitte consulting and i was working on large-scale cyber security projects so wildly wildly different so that was quite new what sort of date was that yeah so it's a branch this was late 90s yeah so late 90s early 2000s still early because i remember you know early i remember you know when someone gave you a floppy disk if you were very sophisticated you would scan it for a virus and that was it absolutely i was doing at the UK Ministry of Defence.

5:10Dave Walsh: So that was the kind of epicentre of cybersecurity. I think cybersecurity hadn't really become mainstream, think about it. So the Ministry of Defence was the place to be. And that was the kind of eye opener for me. And obviously, this was the dot com boom, as Dave said, it was the gold rush. So what were all the consultants doing then? They were all running off to set up their startups. They were all internet startups. And I thought, obviously, that was a little bit smarter. And therefore, it was about the picks and shovels. I thought, I'm going to do the picks and shovels. And all these new internet businesses are going to need cybersecurity.

5:39Dave Walsh: They're not just going to need cybersecurity, but let's merge this with this thing called insurance. My brother was in the insurance industry, so let's put these two things together, cybersecurity and insurance, call it a security warranty, and that's all we need to do. So that was the business plan. You invented cyber insurance. Well, I wouldn't want to claim that. Plenty of people lay claim to that. I was there in the early stages of trying to work out how to turn it from an insurance product into something that people would buy, but clearly I fell miserably because I was peddling away trying to do this and realised that in the early 2000s, nobody was even remotely interested in cyber insurance.

6:12Dave Walsh: They were barely interested in cyber security. So it wasn't trendy back then like it is now. Well, I suppose there wasn't enough commerce to protect. Yeah, and I suppose we could say on the trendy point, it was really, I suppose back then, people didn't pivot. Whereas I thought I'd best pivot and find a way to make some money. And I've summed all these new tech companies, right? Brand new tech companies, because they were doing something crazy. They were working on the internet. They were designing websites. and they were being increasingly asked by their customers for E &O insurance, but the insurance market, and there are parallels for today, the insurance market wasn't stepping up to the plate.

6:42Dave Walsh: So I had to find myself an innovative pioneering underwriter and I met Dave. Right. And as they say, the rest is history. I joined CFC when it was 10 people in a tiny little office on the fourth floor of Lloyd's, trying to sell cyber insurance, but principally selling tech E &O. And I went on the most incredible adventure of my life. It was almost 20 years working for what I still regard as probably the most exciting business in Europe, if not the world. And I learned a phenomenal amount. I wore lots of different hats and I ended up being the CEO of the main operating company at CFC, a position that I was very privileged to hold.

7:19Dave Walsh: And that was that. Right. You're right up to date now. Kantara, what's it all about? And I did look it up. Kantara is a sort of Indian enchanted mythical forest.

7:27Graeme Newman: Yes, in Sanskrit, I think it means enchanted forest. Obviously, we spent years, I think. Yeah, a bit of Googling, and that's what we came across, yeah. But what do you find in Enchanted Forest? Of course, in an Enchanted Forest, you might stumble across a unicorn, yeah.

7:41Dave Walsh: Yeah, yeah, so it's an analogy for what you do. This is venture capital, private equity, whichever you want to call it, or is it more, you would call it more venture capital than private equity?

7:48Graeme Newman: Well, neither really, yes. I suppose maybe it's worth stepping back to it.

7:52Dave Walsh: You get people money who need money to start businesses, right? Well, they've already started a business, but they need it to really accelerate the business.

7:58Graeme Newman: I suppose the story was after we left CFC and we both left at the same time, so that was nice. And we'd been deeply immersed in insurance, as you know, for over 30 years. It felt quite natural to look around and see what else we could do and felt a little bit early to retire. It looked at all sorts of things from green energy, nursing homes, even, would you believe it, it looked at a couple of football clubs that we might get involved in. And after a while, we came to what you might think was the fairly obvious conclusion, and I don't know why it took us so long, that we actually know quite a lot about insurance and not a lot about anything else, more importantly.

8:33Graeme Newman: And so we decided to set up a joint family office, which is what Kantara is, focused on financial services, but obviously particularly insurance, and particularly given our journey, MGAs, which is obviously something we particularly love. So it's your money?

8:44Dave Walsh: Yes, so it's our money, yeah. Right, good, because that was one of my questions that I was going to ask you, where do you get the money from, or is it some massive fund on behalf of these huge institutional investors? No, no, very deliberately. And that's the beauty, really, Mark. We decided, we did look earlier on, I kind of thought, do we set this up as a fund and take third-party money and have LPs, so third-party investors? And I think we both very quickly came to the conclusion that it was actually far more interesting if we put our own capital to work. And it gives us a ton of flexibility, right?

9:10Dave Walsh: Because we don't have to meet other people's timetables. We're not answering to third-party LPs and worrying about fun time horizons and distribution time horizons. And, yeah, continuation vehicles and God knows what. It just means we can be super flexible. I think in investing, surely that's a big advantage, right? If you can be flexible. And there's no better motivation, surely, as also to provide for your family, which is why everyone goes to work. Exactly. And it's interesting, right? And actually, if we can fund this through our own capital and we believe in what we're doing, why wouldn't we?

9:39Dave Walsh: In terms of what we're doing, really, we're looking at, just to give you a bit of, I suppose, a sense of kind of scale about this, it's trying to make somewhere between two and four investments a year, which I know doesn't sound a lot, but there's an extraordinary funnel you have to work through to get to that number to execute on. Clearly, that depends on the current environment. We can dial it up or down depending on what's available. And with those individual investments, this is going to be a broad range, but we're looking to deploy somewhere between 500 ,000 and 5 million into each individual investment.

10:07Dave Walsh: Be that 100 % in equity or a mixture of equity and debt, it's rarely 100 % debt because these early stage businesses, the debt risk looks very much like the equity risk. And we look to take large minorities or relatively small majority positions and very much look to align ourselves with the founders of those businesses. And by that, I mean, unlike a lot of other funds, we're not taking fees or charging fees to our portfolio companies. Our incentivization is simply on the equity upside. And in that sense, we're very much aligned with the founders, be that their time horizons and their liquidity needs, as well as the way they want to run the businesses.

10:44Dave Walsh: So in what sort of stage are these businesses, you're not a sort of startup boot camp, you want people who already know how to run a business and have managed to start one up and have had that discipline and kind of know what they're doing.

10:55Graeme Newman: Yeah, we think there's a real funding gap at exactly that stage you just mentioned. Real startups, as an insurance industry, you don't need a load of capital. So they tend to get by with friends and family money or there's quite good networks of EIS and SEIS investors, which is obviously tax efficient for the startups. And then, of course, larger businesses have access to PE and debt and everything else. Whereas there is this zone of early stage businesses. They've got their team. They've got sales. They've kind of proven their product market fit. If they're an MGA, they've got capacity. So they've got all those things in place.

11:28Graeme Newman: And they've got a sensible business plan that says we're just going to carry on, industrialize, professionalize, grow a steady lick. And that's the perfect business for us. So actually, it's not really VCs that like to see hockey sticks. It's more of a steady state business that just needs a bit of growth capital to get to profitability. That's what we absolutely love. And I think there's a bit of a dearth of finance at that stage because it's too big for friends and family, too small for PE. It's actually, to be fair, the area that Brian Marsh has been very successful in for a very long time.

11:56Graeme Newman: So he's fairly alone in that market. Yes, yes.

11:58Dave Walsh: And anyway, listen, we had Dan Topping on the podcast not that long ago. I really enjoyed it because, again, for a long time, that business was kind of in a fairly unique position of one. Of course, you were a beneficiary as a youthful howling. employees yeah one of the probably one of the greatest investments of all time exactly back in 94 they invested in howden yeah yeah absolutely so i take it it sounds like you're going to get really involved because it's a big deal for you with these businesses a large minority is like you know 30 40 type or just over 50 so you are controlling the business potentially we get

12:29Graeme Newman: involved as much as or as little as the founders would like us to be involved and i think it's very much driven by them everything's pull not push we actually quite differently from many people like us who don't necessarily want to see on the board, for instance. We're actually very happy just being in the background, really just shaping the direction,

12:46Dave Walsh: you know, more than anything else and helping out where we can, whether that be through technology, whether it be through capacity relationships, whether it be through structuring. These businesses all have slightly different needs. I think, you know, we can help with that, whether it be the finance and the engineering. I do think we understand the MGA model pretty well. And that's something where I think we can answer.

13:05Graeme Newman: And of course, we've been operators from literally, as Graham said, he started when we were 10 staff at CFC, I was obviously number one. We took it from that to being thousands of people in all sorts of offices in God knows how many countries and billions of premiums. So we've seen that journey of professionalization, industrialization.

13:22Dave Walsh: Should we think of you as first and foremost, when you think of your investments, MGA is going to be right in the sweet spot straight away? Absolutely. Absolutely. Yeah. And brokers,

13:33Graeme Newman: absolutely.

13:34Dave Walsh: Yeah. Although you've always had, with CFC, always had a great reputation for your early adoption and perfection of technology in insurance. So again, is tech, insure tech, is that something you'd be looking at as well? And then you've got one business, I think, on your roster, really, that's quite software-related very much. Yeah, very much. Maybe I just paused because I really hate the word insure tech. Yeah, I mean, it probably just came through its 10-year anniversary now. It needs to be retired, right? I think it is no longer a useful descriptor. is a bit like talking about e-tailers when you're talking about retail startups.

14:11Dave Walsh: No one says that, right? Because you kind of assume if someone's setting up a retail operation, they're going to have a digital strategy. And it's the same in insurance. If you're setting up an insurance business, I'd rather hope you've got a strong technology strategy that sits behind it. So that's not the distinguishing mark. I think to me, there are insurance startups and there are technology startups that have an insurance use case. And I think they're two very different things with two very different funding models and two very different approaches. And I think that's the more important. I suppose there's tech ones.

14:38Dave Walsh: They've got a fantastic funding architecture, you know, from Silicon Valley and all around the world. You know, there are people who've been funding tech for the last 30 years who know exactly how to do it. Probably don't want to compete with them. I mean, you're not going to be able to. Well, that's it. It's very much the venture capital game. Even though we are investing in early stage businesses and therefore people might on the outside assume, okay, we're venture stage. So we look like venture capitalists. Dave's absolutely right. The model that we want is that P compounding model, because let's face it, it's what we're used to.

15:08Dave Walsh: We're used to a business that basically over a 25-year horizon compounded at 20 or 30 % a year. And if you do that, it's big numbers fast, right? So that's how you create a multi-million pound business. So that's where we're at. Venture capital is obviously looking for that. How do we deploy a large amount of capital with hyperscalers for hockey stick growth, which works between talking about global technology platforms with very broad customer appeal? I'm not sure it works that well when you're talking about insurance businesses and specifically not that well when you're talking about niche monoline MGAs.

15:40Dave Walsh: Yet that funding model has crept into insurance. It crept into insure tech. And as a result of it, rather sadly, I think there's a growing long list of founders that have built really, really good businesses. But from an investment point of view, those businesses haven't returned. And they haven't returned because they raised too much capital, took too long to create critical mass. And as a result, the return on those investments underwhelmed venture capitalists who need very, very large returns to cover up the high failure rate. That's their business model. That's not our business model at Cantara.

16:14Dave Walsh: We're modeling a very low failure rate because what we love about insurance businesses is the repeatable renewable income. If you take the intermediary space, it is capital light. Why turn a capital light business into a capital intensive business when you don't need to, which generates cash flow? And so we're seeing these businesses emerging now. We're actually in one funding round. They can take one funding round and build a business that gets to cash flow positivity, profitability, and then grows out of that. And they aren't businesses that lack ambition. These are businesses that ultimately target billions plus in premium, which is achievable.

16:49Dave Walsh: If you compound 30 % a year over 10 years. I can't do the maths right now. I think it gets... No, no, but I would agree with you because you don't need external funding. If you're producing tons of profit and you're reinvesting that all the time, that's fine. And it can be very distracting for founders. What do you need the money for? And the founders get distracted by having to constantly raise. And we've seen that as well. The founders constantly spending... When the founder's spending all their time looking to raise the next round of funding, it becomes very distracting.

17:12Graeme Newman: Well, there's a common misunderstanding of CFC. There was£400 ,000 worth of growth capital on day one. From that moment onwards, there's never been a penny of growth capital. Everything's been done under the cash flow. all the rounds that people read about in the newspapers are effectively money out rounds, not money in rounds. Because remember that the crucial point being CFC has been 99 % organic growth, whereas most of the businesses that you see grow fast in the insurance market tend to be. So obviously, if you're buying companies for a living, you need to create a new war chest every few years to do that.

17:42Graeme Newman: But that's not CFCs.

17:43Dave Walsh: Obviously, it must be a great position now you get to see all these interesting new ideas. Is there any kind of theme or trend behind all of those ideas i know there's something i find when i'm looking at my job is to look at things and see what's happening it's amazing with there are trends particularly as now the now hopefully retired insurtech i have to think something else to say insurance technology investments amazing how quickly and how faddy those things can be you know where you move from everyone's saying that they're doing embedded to doing parametric to doing whatever and then now of course it has to be dot ai otherwise you're not anywhere everything's got an ai native it's all native man.

18:18Dave Walsh: It's a damn side better than it all being blockchain. I missed out on blockchain. That was a good 18 months of my life wasted. I'll never get back. But is it just the nature of the world? Why are things faddy? They shouldn't be because they're fundamentally, particularly insurance, it should be. It's quite boring. You might think so, Mark.

18:38Graeme Newman: I mean, in a very good way, boring. I think we're all human beings. Human beings do tend to think a little bit in a herd. Of course we do. That's not the harshest criticism of people. You get FOMO if you're not doing what everyone else is doing.

18:50Dave Walsh: I suppose sometimes they might just say it because that's how you get money. If I say embedded, I get$50 million. If I don't say embedded, I don't get$50 million. That's a cynical view. And there are plenty of business plans, let's be clear, that have been engineered around that. And hopefully we're good enough at discerning those ones and the meaningful ones. And so within, say, MGAs, are there any particular trends or particular classes where they're getting away and they're finding new niches?

19:14Graeme Newman: I think the big trend in MGAs is, you know, historically, as you know, and if you think back to CFC's early days, it fits the narrative well. MGAs were really niche, monoline, a great degree of specialization in that line. And that's how they got capacity from their carriers, Lloyds or otherwise. That was really MGAs 25 years ago. Beyond that, there were sort of what they might call program administrators in America or scheme managers in the UK. and they were really backed by carriers for distribution, maybe a little bit of local knowledge, but basically distribution. MGA has grown as a market relatively slowly for that 25 years ago.

19:52Graeme Newman: More recently, it's grown, as you know, very fast. Now MGA is right about$160 billion. That's doubled in the last six years. And I think there's been just this growing acceptance of MGA. It's absolutely fine to outsource your pen to an MGA. And actually, therefore, there's a load of MGA now that we're seeing, starting up, which are cross-class on day one, or their plans to be cross-class on day one. And actually, they look almost a bit more like a little syndicate used to look like, but in an MGA wrapper. So I think that's been quite interesting. Yeah.

20:22Dave Walsh: And I think just to kind of butt in there, which I think is quite different to what we're seeing in the US. And maybe, again, this is the lens on what we see as investment submissions. But I think in the US, we're seeing a lot of these AI native, either brokers or carriers, those businesses that are going to disrupt the industry. it's all rather reminiscent of the kind of 2015 insure tech wave, which is we're building this from the ground up. They're all intent on building 100 % of their own proprietary tech stack. So the kind of carrier or MGA submissions that we see will all be building their own policy administration system.

20:55Dave Walsh: They're all building their own workbench. And I think that's really different actually to the London market style businesses that we're seeing. You seem much more prepared to partner with third party tech firms, at least to kind of license that what I call a commodity layer of the technology stack, and then build on top of that rather than kind of reinventing the wheel and starting from scratch. And actually the focus on the London businesses seems to be much more about more traditional underwriting to build that platform. And in many ways, I see that as the excitement of the London model. It's not hugely capital intensive.

21:30Dave Walsh: It is based first and foremost on building out an insurance business. It's about partnering with innovative technology companies to mean that your capital therefore goes a lot further. And I've always said and I've always thought it. London is the Silicon Valley of insurance. We're in a really, really unique place here. I think it's the only place in the world that truly understands global insurance, that understands that global insurance landscape. Where we've got a platform, let's face it, through Lloyds, which is by far the best platform in the world to build an insurance business on top of.

22:02Dave Walsh: We've got this true talent base of people that understand global insurance. I think some of the most exciting insurance startups over the next 10 years are going to be here. And that's why it's super exciting kind of doing what we're doing right now. I'm glad. I don't want to have to fly too fast and go and meet all the exciting people. Don't need to go on that. I just like getting on the underground and, you know, popping in and saying hello. No, that's really good. It's also odd that people would ever want to think you need to reinvent the wheel when there's so many technology providers. And I suppose, you know, if you're going to start the business from scratch, of course, you want to be AI native, but there are going to be plenty of AI native policy admin systems.

22:36Dave Walsh: And in the end, as long as it can be interrogated and it keeps a record of everything that was done and that you can rip it out and get rid of it quickly and you're not stuck with it, that you can extract everything you need out of it in 30 seconds and put it onto the new one. If that one becomes obsolete, that's probably the only consideration you actually need for any kind of the kind of core plumbing kind of systems. Why would you waste your time? Just because you can vibe code it doesn't mean that you need to. You referenced one of our portfolio companies earlier, Mark Recorder. And I think it's an incredible business.

23:04Dave Walsh: When you look at what they've done, and this is where I think AI really comes into play. You look at what they were able to achieve with what by historical standards certainly was a very, very small engineering team. And by historical standards, actually very, very little capital. Using agentic engineering techniques, they were able to build out a kind of broker management system. There was a feature parity with a main incumbents who built their platforms out over 20 years, which is absolutely extraordinary. So the economics of software engineering are changing and they're changing rapidly. But I don't think that means that everybody goes, great, because I can bi-code it, I will.

23:38Dave Walsh: It makes much more sense so that those businesses share that cost out across a number of businesses and then build the stuff on top. But you do need that underlaying infrastructure. You don't grow your own food. You go to supermarket. Just for a chef. Well, I mean, I do occasionally, but I do try it. The herbs don't look very good. The potatoes are a bit weird in shape. But as a business, you wouldn't say, oh, we're an insurance broker, but come try these potatoes. That's the reason why you'll stay. Or that we've got our own water spring. You know, people come, we offer all our guests our own water.

24:06Dave Walsh: And I think that's right, Mark. And obviously, I'm saying that. Clearly, there are exceptions to every rule. So I don't want to overly generalise. But the reality is the vast majority of these insurance businesses, certainly founded by insurance people, people with insurance backgrounds, there's now wealth. Dave, when you started CFC, I don't think there were any providers out there that could have given you an off-the-shelf platform to build a global MGA on top of. Now I can think of maybe 20 or 30 providers. There are all the big MGA conferences and just wander around the exhibition hall. There are about 20 or 30 people who will certainly help you out.

24:35Dave Walsh: You could finish by the end of the day and have the whole thing bought and ready to go. This is interesting. Yes, of course, I remember that time, you know, 30 years ago when you go specifically to MGA because I remember what it used to be in your building. It used to have it was called World Wide Weather. they knew exactly what you were going there for weather insurance, you know, Pluvius and all this stuff, and they knew what they were doing. So it was very clear. But now you're saying that, I mean, we've had one company that's now kind of very high-profile way, has bifurcated its underwriting from its capital.

25:01Dave Walsh: Do you think that's going to happen more? And is that what you're saying? 30 years ago you said, a generalist MGA is stupid. Maybe it only works because it has distribution that we didn't have before, but otherwise you're just adding 10 points of cost and everything for no particularly good reason. I'd pay 10-point extra cost for incredible expertise in a new class of business, a weather underwriting that I don't really understand. And I know this person's got a PhD and whatever, and they're really clever, and they've got a whole team of people. And I understand why I'm paying the 10 points for that.

25:27Dave Walsh: But now you're saying you can divorce underwriting, the skill of underwriting from capital, and therefore it doesn't add any new friction. It doesn't cost any extra to do it that way. Absolutely. I mean, let's say there is no doubt. Do you think technology is actually one of the things that's helping the trend? Because there's no extra friction. Yeah. I'm not sure it's necessarily technology. I think there's become this broader acceptance. We have got a bifurcation of capital and underwriting. And I think if you take it right down to its basic principles, it's because fundamentally you want two different things.

26:01Dave Walsh: So capital wants scale and it wants diversification. And underwriting wants focus and specialism. They're two very different things. So it's entirely logical that they sit at two separate parts of the insurance value chain. And if you think about it, that's just going right back to the Lloyd's roots. So that's exactly how this all started. Capital was separate to underwriting. And what we've seen, you see that trend. The analogy is overplayed quite often. You see the trend in the fund management industry, right, of the active fund managers. So there's a wave of passive managers. Why? Why? Because the active managers weren't able to deliver greater alpha, so higher return than the fees they were charging.

26:45Dave Walsh: So you can't do that, but you just move your capital to low cost trackers. And we've seen that to a certain degree in insurance. There were people charging active rates when really what they were was high cost access to passive insurance. So there is this shift that is recognizing that. That weirdly, I think it might have come out of a simple rebranding. So if you remember, Mark, we always used to call it blind follow. The rebranding genius was we called it smart follow. And it suddenly became socially acceptable, right? And everybody started doing it. And obviously, I'm being a little facetious, but there is more than a grain of truth to that.

27:21Dave Walsh: So this whole process, this bifurcation, really comes down to, well, actually, it's two things. So do you believe in the smart, the smart follow? And by that, do you believe that the capital allocators, for want of a better expression, can actually get access to a scaled, diverse portfolio of insurance business that's profitable and not adversely selected against and deliver that at a lower cost to the capital, which means freeing up some of the economics to share? If both of those things can be achieved, and I'm not convinced we're there right now, but if both those things can be achieved, then I think this becomes a very, very big secular trend, not some cyclical fad.

28:04Dave Walsh: Yes, I mean, we'll find out now that the market's got much softer. We'll find out quite quickly where it goes. And believe me, I am an optimist, as Dave will tell you. I'm an optimist at all these things. I said with some of those pioneering facilities have already been through one soft market and come through the other side. But critically, I don't think it's just technology that has liberated that and made it possible. I think it's a shift in mindset and approach. And obviously there are lots of interesting vehicles that are growing up to facilitate this. All layers of the insurance value share from insurance, where I suppose we've always been more familiar with it.

28:34Dave Walsh: The facilitisation has always been a theme. So we become more comfortable with it. And yes, some technology has been applied to that, which makes it easier, definitely makes it better. But obviously the reinsurance world is seeing as well now, maybe more for the first time, hence a bit of kickback against it. MGA is a kind of consortium anyway, isn't it? It 100 % is. The MGA model is the definition of that. It's the bifurcation of underwriting using third-party capital. And I like to think in a way that maybe CFC, we sparked some of this, right? So if you look at what CFC did, and one, it did establish the fact that you could create a really valuable business as an MGA.

29:10Dave Walsh: Your job as investors to look sort of, you know, five, 10, 15 years ahead of what, where do you think we're going? Obviously that London syndicated insurance market that we know very well we've all lived in. Obviously, there's obviously going to be leaders because you need leaders to set the price and terms. And if those leaders all have massive consortia behind them, it seems very sensible that they would. The broker placing to that leader has got a large kind of ballast type. 30 or 40 % of their portfolio is already going into the broker facility. The leader is taking a big line because they've got a consortium behind them now.

29:42Dave Walsh: And then there's also, there are some now digital initiatives. I did have Clyde Bernstein, really interesting chat with him, particularly around that middle ground, where a lot of people are there and there are enablers, enabling people to articulate any remaining underwriting appetite and digitize some of that appetite to automate as much of that middle ground as possible. So if someone comes to you and said, hey, I've got an MGA, I really want to be a kind of manual follow underwriter. I presume you'd say, no, that's the right place to be.

30:10Graeme Newman: It's kind of old school.

30:12Dave Walsh: That is not going to be around. Do you think it's going to be around in 15 years' time?

30:15Graeme Newman: any manual follow yeah i mean we're going we're at the end of the foreseeable well it's kind of one of your jobs is to say you want to be minimizing that don't you no but you're i suppose the bottom line is there is this growing gulf between leaders or people who trying to produce alpha and followers people who are quite happy on a low-cost basis to get a very diversified pool of beta yeah and the more effectively those two markets evolve the more it'll happen and And maybe there'll never be a second leader ever again one day. I think there's a few things. I mean, at the moment, it doesn't feel like the economics are necessarily fairly applied.

30:55Graeme Newman: But you slightly assume as a good capitalist that over time, the perfect market will dictate there'll be the right amount of leaders and the right amount of followers. And leaders will get paid for the extra work that they do. Because ultimately, someone's running the beta facility, whatever it is, and they'll be paid more or less if they pick the right alpha.

31:12Dave Walsh: The leader's being paid by getting the premium that they've actually quoted, whereas the beta's already getting leader minus something.

31:18Graeme Newman: Yeah. But at the moment, it feels like most of the extra economics tend to go to the facility organiser, whoever that might be, whatever type of entity, whether it's an exchange or a broker or whatever, and the customer. And it's not really going to the leader. And you could argue that that's what's lacking. But you just feel as the market shakes out and as it evolves, that that might come. But let's be blunt about it.

31:37Dave Walsh: in most industries, and certainly true of the insurance industry, the closer you are to controlling that customer relationship and the people who control the customer relationship tend to be king. And a lot of the economic rent tends to flow to that end of the value chain. And let's be honest, that's exactly what we're seeing right now. So the value accretes pretty much to the owner of the customer relationship. It would be nice to obviously for a healthy market to see more of that flow to the actual capital. But what does that mean? It means that everybody in the middle has to be obsessed with the value that they are providing.

32:10Dave Walsh: And that, for me, is the key. You can't operate in the middle of that chain and not be absolutely on your game. So today's point, you have to be adding a lot of value, a lot of alpha, as they say in that. So you have to be really much better at pricing, selection, product development. You've got to really understand the niche that you're going into, and I think that's key. But it's always the mantra that we've had was building out an MGA. And just being faster. Is that also still very important? I mean, just being the one who gets back to the broker quicker. Come on, at 5.10, everyone's going very fast.

32:41Dave Walsh: If that's what we mean by speed, I think people got a bit obsessed with that, because let's face it, once upon a time, it's not true anymore. You might ask for a quote and have to wait two or three weeks for someone to come back. I don't think that really is the case in most lines of business now. And therefore, the marginal gain of going from, oh, I quoted in two hours to quoting one hour in 15 minutes. I don't think that's the game anymore. Yeah, you won't win. The speed to market, again, in insurance, I think sometimes is less obvious or less valuable than it is in some other industries. You take the tech industry, it's all about the network effect.

33:11Dave Walsh: You want to build out that platform faster than anybody else because it's a bit of a winner-takes-all market. That is why you see venture capital putting lots of capital into entities to hyperscale. I don't think insurance is like that. Insurance often benefits the follower. Someone else pays to create the market. That cyber market that we spent a lot of time having to build, people came in 17 years later, at the right time, we were able to take advantage of that. So, and we say this a lot, insurance is different. What sort of investments are you getting most excited about at the moment? The sort of things that are coming across your desk and people you're meeting with right now?

33:45Graeme Newman: So, first off, obviously, I mean, we said it already, insurance intermediaries. Are there any classes that are really kicking off? We particularly like businesses that are doing something a little bit different, whether that's the way they distribute, the products they're selling, a number of things. But it's also a theme of, hey, the London market's going through a bit of dislocation with what's going on over in the US at the moment with Howland's, etc. Therefore, hey, I'm an independent London broker. So there's nothing wrong with that. Sometimes just being opportunistic is a good thing. That's being opportunistic and that's absolutely fine.

34:13Graeme Newman: But we don't necessarily love that kind of model. We actually, I think we kind of said it already, really, back to it's the business at the right stage that's got a nice position in its market. It knows what it wants to do. It's not having to try anything particularly different from what before. It's back to just professionalization, industrialization, getting some scale in there and building it out. These are the businesses we love. Invariably, they'll be smart users of technology. Of course, they will in 2026, but that's just a part of it. Yeah.

34:39Dave Walsh: That's just table stakes today. Exactly. Yeah. Yeah. Okay. What about things you're worrying about? What are the threats you think, you know, when you've made that investment, you're thinking, right, okay, for example, obviously, AI has been everywhere the last 24 months. And that's come from not being a question I ask anyone to being one of the standard questions I ask everyone by the end of a podcast. I've got to talk about it. We can't not talk about it. For example, we've had gyrations in all the big broker share prices because someone says, oh, someone was able to do insurance quote on Claude or wherever it was.

35:08Dave Walsh: and then it was like very large broker, 40 billion market cap broker losing about 5 billion of market cap in a couple of days and then everyone forgetting about it. So AI is worrying some investors. Is it worrying you? And obviously after that, I'll ask about all the opportunities that you think are going to be within AI. Well, it doesn't have to be about AI specifically, but AI is obviously the one we're talking about all the time now in terms of what a threat is, what is it going to do? What is it going to do to some of your investments? and does that make you worried?

35:39Graeme Newman: But as you said, so brokers were downgraded this year, mainly because of fears of their moat being eroded by AI. I mean, let's face it, also they're probably downgraded just because the market was soft. Yeah, yeah, that as well. That was part of a general downgrade. But it's really interesting, I think, because a lot of these things go back to the previous time it was like this, which was 1999, the dot-com boom. Back in 1999, and you'll remember this, Mark, insurance brokers and estate agents were top of the list of jobs that are going to be made or done by the internet, yeah? And, you know, it rung true.

36:07Graeme Newman: didn't it? Why would we need an insurance broker? Why would we need an estate agent? You know, you've got Rightmove, you don't need an estate agent, you go on Rightmove, you find the household out. And there are more insurance brokers alive today, or sorry, working today, I should say, alive today as well. And there are more estate agents than there ever have been before. So I do think brokers are underestimated by the public markets generally. And generally speaking, I think brokers are going to end up being AI winners because ultimately they own that customer relationship. They're trusted by the customer and they own that relationship.

36:35Graeme Newman: It's a phrase I think And Graham's usually answered a different question already today. They have the most powerful place in the value chain. Let's be clear about that.

36:43Dave Walsh: I'm not sure I'd want to sort of tip all my data into Claude or whatever and ask it, you know, what sort of limit I should be buying on my oil rig. That Marsh broker, that Willis broker, that Aeon broker, Hound broker will be able to tell you pretty well and they'll tell you exactly what you should get, what you could get. But the thing that'll come, won't it, Mark? That'll come. But the people that will take advantage of that are the brokers. They've got the big data set. It's like they're set on enormous treasure troves of data. It reminds me very much of what you've seen in the legal industry, right?

37:09Dave Walsh: And I think the legal industry is ahead of the insurance industry in this sense because they had a couple of big startups that were doing this, Harvey and Lagora, great examples. And what they did, rather than kind of upending the entire legal industry, they became tools that really empowered the lawyers. And I think the same is happening. The big brokers who've got really, as we said, really tight broker relationships, who sit on enormous treasure troves of data, AI should be helping them to organize that and surface it and create greater insights, and they will use that. They will find their businesses becoming more efficient, more effective, and their power will only grow in that sense.

37:46Dave Walsh: It was interesting, we've got one broker in our portfolio, Whetstone. When I look at them, are they worried for one millisecond that their business is going to suddenly be disrupted because Anthropica is going to become an insurance broker, OpenAI become an insurance broker, or a tech company that's got no insurance credentials whatsoever is going to pop up and use that as a new mechanism? they just see unbounded upside from it they just see the ability to take advantage of that to build better customer relationships to create greater efficiency for their organization so they're seeing real ai optimism and i think that's a kind of broad point you asked about kind of what we worry about as investors and i think the things i worry about the same things that make me excited what a time to be alive we are literally living through the greatest technological change in human history and i probably said that 20 years ago in the internet came back but it's different like we're not talking about incremental change.

38:34Dave Walsh: We're talking about a quantum leap change. This is orders of magnitude and it's changing things and we're here. But to assume that new is suddenly going to overtake old or small is more agile than big, I don't think it's that simple. There'll be AI winners, there'll be AI losers, but small has advantages as does big. And it's like working out who is going to win is, sorry, this is a terrible answer from an investor. It's really, really difficult to work out who the winners will be. It sounds like they might all win in their own way. Well, yeah, I think the businesses that will win are those who do the best job of architecting their businesses around this new technology and do it more efficiently and more effectively than others.

39:14Dave Walsh: So maybe rather than assuming that Aon Marsh, Willis all lose, I think it's much better to think of is I think one of them will do this much better than the others and they'll become very big winners. And I think that's what we're going to see.

39:27Graeme Newman: Yeah, so we're going to say brokers are AI winners. It's a generic generalist. But yeah, I mean, I suppose you could argue over the last 25 years, you know, the winners in any industry have been the ones who've harnessed technology better than the others. There are other ways you could win or lose. Technology is one of them. And maybe looking forward, just technology is a bigger one than it was before.

39:46Dave Walsh: And obviously at the moment, when I talk to the standard carrier CEOs or any MGA CEOs or broker CEOs on the podcast, you know, we've got to the stage where instead of asking them about what they were experimenting with now, of course, the assumption is they have already experimented. with and are now implementing and using AI and asking, say, where are they getting the best gains from? Most of it's sort of, you know, things you'd expect. AI ingestion, maybe we'll start on the claim side a little bit as well, but certainly ingestion of all the submissions. As investors, what are your bets in terms of the most productivity gains or the quantum leaps that you're hoping to see?

40:22Dave Walsh: Kind of hoping that you're looking a bit further than just the kind of, hey, I can get 12 % more productivity out of my broker. Yeah, well, this in a way is my worry, Mark. I think in this industry, and it's not just the insurance industry. You know, incremental gains. It's like that sort of David Brailsford thing, where eventually it's still a bike. It's not a rocket ship, is it? It's still a bike. It's just a fast bike. You totally get it. And I think it's not just the insurance industry, by the way, that thinks like this. I think this is true of lots of industries outside of maybe tech. But I do worry, Mark, to this point, that I think the level of AI literacy in senior execs in this industry is incredibly low.

40:59Dave Walsh: I think it's fair to say that most have a consumer level understanding of AI. In other words, use ChatGBT, super advanced, use a bit of Claude, and I can see what it can do. And that lends itself to what we're seeing, which I think are pretty performative pilots of pretty basic stuff, right? You called it out, and we're doing a bit of document ingestion. oh my God, have you seen, we're using AI to read emails and to work out sentiment. And my God, actually in our credit control department, we'd be able to pre-draft some human in the loop emails. I just think we're going about it the wrong way.

41:33Dave Walsh: That is not what we should be doing as an industry. The reality is most of these pilots are being built on top of legacy infrastructure, legacy tech infrastructure, a hodgepodge of different systems that don't talk to each other, big data silos, and an organizational structure, an employee base that works in a certain way without any of that changing. We're dropping a pilot and wonder why it's suddenly not delivered an extra 20 % to the bottom line. We know, we can see it. We know that AI can massively transform the way that we process information and store data and summarize data and respond to people and it's like, we know that works.

42:09Dave Walsh: We don't need to be doing pilots. As an industry, what we need to be doing is re-architecting our businesses and our systems around this technology. That is the key. And it's difficult because that is a big task. If you're a large carrier, that is a big and expensive undertaking. And this is what I was trying to say earlier. The ones that make that bold leap and accept that that's what they need to do today, like that's what you should be doing today, you should be building your infrastructure, which by the way, starts with a data layer that is well-structured and that is going to be accessible to your inevitable pool of AI agents.

42:42Dave Walsh: If you have that, you have the foundations that can build on top of. We're seeing these models change all the time and improve all the time. What will be possible in two or three years' time? I don't know, but it's going to blow your mind. But if your organisation isn't ready for that, you're in real trouble. Because if that AI agent's going to the green screen mainframe thing in the basement somewhere and asking it a thousand questions every five seconds, the thing's not going to be able to It won't work. It won't work. It won't be connected to your internal tools that you need it to be connected to.

43:11Dave Walsh: It won't have the right level of security around it. You won't have thought about the script. You won't have the right level of audit log around it. So you'll be scrambling at that point to do all that because you wasted your time building nonsensical pilots. Well, the kind of lipstick on a pig idea. Indeed. That is an analogy for what's going on. Make it look all right for five minutes, but fundamentally if it's still a pig. Remarkably, I think it needs people to be bold. And I think it needs the senior execs to be truly AI literate. is not good enough to just assume that someone else in your organisation is going to do that or will leave that to the technology department.

43:41Dave Walsh: Because it's board level stuff. Because it's a huge amount of investment and potential disruption and risk as well. Yeah, and risk. And it's not about just finding quick wins. If you don't do it right, your whole company could fall over. Exactly. Back to that competitive point, I think you're going to find yourself way behind in the competitive risk. Yeah, needing to own that risk. Yeah. What about one of the big questions? Again, if I'm oversimplifying, if you say the history of CFC is, well, they grabbed cyber by the tail and took them on this amazing ride. and obviously to lots of other classes of business as well.

44:09Dave Walsh: But that's the sort of headline that you'd say as a journalist, that's your preference, cyber underwriter, CFC. Obviously, on the casualty side, what's the next asbestos? And on the sort of more positive side, we'll say, well, what's the next cyber? AI, as a new class of business, as a new emerging casualty peril, liability peril, is being tattered by some as perhaps being the next cyber. But there's a big debate going on. so I want to hear where you're on it. You should be very close to this bit. I'm hoping for strong opinions from you on this. It's quite a Marmite or, you know, black and white type debate, but there's a ton of grey in between as well.

44:45Dave Walsh: Yeah. Juan, do you think it's going to emerge into this, a new standalone class of casualty business because it doesn't quite fit anywhere else and therefore needs to have its own standalone product? Or to summarise, the other side would be, it's far too embedded in everything we're doing. So in general liability and professional indemnity classes, you kind of have to accept that your lawyer is using AI. And you kind of hope they are because they're going to be quicker and hopefully make less mistakes as well and be more efficient and be cheaper as well. So therefore, it's so embedded in everything we do.

45:14Dave Walsh: It's a bit like trying to exclude telephones or electricity or the use of computers,

45:18Graeme Newman: which we didn't exclude. Yeah, I would agree with that. I mean, I'm surprised how many words have been written so far. I mean, I think the important question shouldn't be, will AI become a separate class of insurance? It's, should AI become a separate class of insurance? From the customer perspective, is clearly the most important perspective. They want fewer insurance policies. They want less chance for there to be gaps within cover. And when they have a claim, they want to know which policy it sits under. I was really glad to see Marsh's announcement a couple of days ago in the press coming out strongly on the side of the customer and saying they'd take a strong line against any carriers wanting to exclude AI.

45:53Graeme Newman: That just feels right to me. And I think the bottom line is... But also, it's the practicality of it.

45:58Dave Walsh: So what if you exclude it? Exactly. When it came down to a claim, how would you prove it was AI that caused the loss and therefore it's not covered rather than a human?

46:06Graeme Newman: The bottom line is we've got to stop thinking of AI, giving it human characteristics. Ultimately, it's just software. We can't exclude software. It's painfully ridiculous in my eyes.

46:16Dave Walsh: Dave's spot and right. And this is one that I struggle watching the LinkedIn kind of wars rage on this. I see people constantly anthropomorphizing. That's hard to say. I thought it was going to be. I'll stick with human characteristics. Dave's point is the most important point here. AI, when you show back, it's a very broad catch-all term. It is just software. Large language models are extraordinarily large data sets, numbers, lots and lots of numbers, wrapped in mathematical algorithms. That's software. Increasingly, what gives them value, what we talk about as agents, are the harnesses. Think Claude Code, think Codex, think ChatGPT.

46:56Dave Walsh: The harnesses are software applications. If you think as an industry, we should be turning around to our clients and say, we're going to exclude your use of software from our policies. We're not going to have a business. If you can't write a lawyers E &O policy and say, well, we're going to exclude any claims that rises the result of using Harvey or Ligora, 80 % of lawyers use those tools. You can't turn around on the tech E &O policy and say, oh, we exclude your use of cursor or clawed code. It's patently absurd. So I think you had Chris and George from CFC on the podcast, right? And I think anyone who's not listened to that should listen to that because I think they had it spot on right.

47:32Dave Walsh: Key points, you need to think about two separate things. The businesses using AI in some shape or form, which will be all businesses. Yes. And the businesses which are selling AI tools to others. And manufacturers, obviously. So those using it, I really think it's hard to exclude it from their base policies because this isn't a new risk. It's just a new tool. It's presenting itself in a new way so that policies that exist work today. The insurance policies work. It's just an underwriting appetite point. So for those who are selling tools to others, there's an established market. It's the tech E &O market.

48:02Dave Walsh: We said this in the very beginning with the introduction. I remember that's where my business started from. New technology came about and the tech E &O market was the one reacting to it. That market's got a 25-year track record now of responding to new technologies and providing E &O cover to that. So I think that market is wrapping around that. There is a thin slither in the middle at the moment to our businesses that are using AI. So AI native firms that are using AI to deliver services. So think about those, what we used to call BPOs, business process outsourcing firms. Capita, Circo. And they buy miscellaneous E &O insurance.

48:34Dave Walsh: Then SaaS came along. So that was a technology wrapper around those services to provide those services. And the tech E &O market joined up with the MISC E &O market. And we had a product that worked for that. This is no different. So we already have existing markets. We already have existing products. It's just a standard underwriting challenge. It's an underwriting approach. We've changed what the nature of the risk is going to be. Severity and frequency are going to change. And so what? And not all necessarily for the worse either. So take autonomous vehicles. Autonomous vehicles are now safer by definition on the roads than human drivers.

49:06Dave Walsh: So AI doesn't mean the risk gets worse. It can also mean the risk gets better. Of course, your standard old solicitors claim would be they forgot to file the thing on time or whatever it was. That was a bog standard claim, like a trip and fall version for solicitors, presumably. That doesn't happen. It shouldn't happen. And once you've implemented this system, that's never going to happen again. Of course, there could be some hallucination if you cited a load of case law that doesn't exist. Fine. Or you cited a ton of the wrong case law. Yeah, and the humans can do that too. Yes, exactly. Exactly to your point, Mark.

49:34Dave Walsh: I think these aren't new risks. The profile of risk is changing. What is our job as underwriters? If it is not to understand and react to that. So the underwriters could be looking at the guardrails. You still own the risk. If you may get it wrong, it's still your fault.

49:45Graeme Newman: So that's the challenge for the insured, for the business, isn't it? is to manage the new risks around the new technology. Good. And the challenge for the underwriter is to have the appetite to cover those things. And there might be certain businesses that are flying very close to the wind and very few people have the appetite to cover that. But that's for a good reason in the same way that yesterday they were flying too close to the wind in a different way. Yeah, exactly.

50:08Dave Walsh: I think there's very few people screaming at the podcast right now saying, look, we get that. We're not trying to exclude it all. And I think a lot of the hype and a lot of the noise has actually come out of again I hate to knock VCs again on this but it's kind of funders trying to find new areas of insurance and trying to set up fuel so you see a lot of noise about how this is a new class because what they desperately want it to be a new class and my view simply should actually those people are building those kind of businesses in an MGA frame actually we better serve to those into technology services that can provide into existing insurance companies to help them understand the risk better not building a separate class of insurance will there be any products I mean I I suppose, you know, trying to ensure the efficacy of the AI.

50:47Dave Walsh: But this is always... Sounds too murky to me. But this has always been... I remember these debates in the very early days of cyber. That product guarantee. Yeah, exactly. We've been talking about that for 25 years. Exactly. First party cover for software errors, right? That has always been a discussion. But to be honest with you, I don't think there's been the customer appetite to buy that.

51:05Graeme Newman: So you're kind of covering management incompetence there. Managers don't tend to buy insurance for their own incompetence.

51:10Dave Walsh: I get it. It's a business risk. I mean, there's some won't, right? It's just how big is this market going to be? So, yeah, I can see hypothetically there might be some products. It's a tiny product. Exactly. It's a niche product.

51:21Graeme Newman: People are trying to draw a parallel with what they call silent ants. I mean, interestingly, you could argue that back in 1999 when cyber was new, that the crime market should have stepped in, could have or should have stepped in, and tried to take that space. As you remember, Mark, the crime market was really quite traditional. There was that computer crime policy. Exactly. It was a 90 KFA 81, wasn't it? I can't remember. I thought that was a version of the BBB. Yeah, sorry, but there was a version for that like that for crime. And it was a pretty state market. Now, crime has moved from being offline to online over the last 25 years, and they could have ridden that wave, but they didn't.

51:57Graeme Newman: But I think the big difference is there was this asset class, data, that was growing super fast since everyone started putting everything online and digitizing everything. It's growing super fast, and it was massively underinsured. So actually, it was probably right a new class evolve because there was a new asset. It wasn't new because everyone's always had data, but it was a new asset in terms of being a material asset. Aon would always do that presentation, how 100 years ago or whatever it is, you were 20 % intangible and 80 % tangible, and it's flipped to the other way around. So this is a new material asset that every business sits on.

52:31Graeme Newman: So it needs a new type of insurance to protect that. So that's why cyber evolved. AI is different. It's a tool. There's never been a new class of insurance created because there's a tool. As rightly mentioned, the telephone earlier. Tools. Yeah, tools. I'm sure on the day that people started entering into large contracts over the telephone, there were a bunch of underwriters sitting around going, cool, blimey, this is a bit worrying because there's no record of exactly what was spoken. Exclude telephone calls. But they didn't exclude it.

52:58Dave Walsh: It didn't create a new class of insurance. It just changed the nature of that risk. Exactly. You said, well, I hope you're not transacting business over the phone without having some record of what you're both agreeing on.

53:07Graeme Newman: And everyone's accepting the fact that both people's phone notes are going to look quite different.

53:10Dave Walsh: It would have made the risk worse, definitely, at the time, because, you know, before you had everything was in writing, you signed the same document. But you deal with it because you're an underwriter who's interested in still having a job tomorrow. It's a risk factor, not a new class of business. That's good. I think we've sorted that out. That's the end of that argument. Let's put it to bed. I think people largely agree. Just lots of people talk cross-purposes and mean slightly different things.

53:30Graeme Newman: And as Graham says, there's quite a lot of people with vested interest who want a new market.

53:34Dave Walsh: Everyone wants a new market. You know, it's fun. All right. One thing more mundane, it seems like the valuation, just the economics of investing at the moment in intermediaries, obviously, we had a bit of a high watermark. In fact, you were probably responsible for it back at CFC. But these are all probably, they're all related to the price of debt and interest rates, et cetera. At the moment, we seem to be down to multiples being paid for, multiples of EBITDA or multiples of earnings or whatever, for intermediary businesses, including MGAs, seem to have come down a bit off some of those peaks.

54:06Dave Walsh: Do you think that's putting it on a more sustainable footing? Is it easier for you to invest now that you don't have to be asked to pay such high prices?

54:12Graeme Newman: I think as you said earlier, the listed brokers, which is I think what you're talking about, there was a downgrading that was partly just a market-wide downgrading. There was worries around the moat because of AI, of course. So as a result, it got downgraded. My hunch is it'll come back because as we've said earlier, generally speaking, brokers are in a pretty good position. They own a customer relationship and they're highly trusted by the customer. AI is probably not their biggest fear.

54:36Dave Walsh: I think the question is, is investing easier because people have got more realistic?

54:39Graeme Newman: You get more for your money now. You're sort of looking at the listed layer, and we're coming in at the very small business layer. So it's slightly different. Yeah, there's a mix there.

54:49Dave Walsh: You're so early stage, it doesn't matter because you're hoping it's going to be 50 times by the time you finish. But the reality, maybe this is why, I suppose, we are less inclined to invest in pure startups. Because if you look at the area where actually valuations are hardest to pitch, it's the pure startup stage. Like, let's face it, the startup stage, everybody thinks their business is going to have a hockey stick. Everybody thinks it will take far less time than it actually does to deliver something. And therefore, you could argue that the point at which people's valuation are least realistic is on day one.

55:20Dave Walsh: After two or three years of trying to do something, you realize it's far harder than you thought. And the expectation valuation comes down. That's why we like to invest in that stage, because I think there are more realistic entry valuations at that point. We obviously hope to be able to build businesses that massively grow their valuation. So there is some valuation arbitrage that the exit multiple ideally is higher than the entry multiple. But let's see. That's a new game that we're playing. So let's see if we can figure it out. I spent some time in sort of a penny stock investing. So how did that go, Mark?

55:48Dave Walsh: No, I was the editor of publications that sort of told you what stocks, you know, where the tipsters could make their tips and stuff. I mean, one of the best ones, one of the tipsters has been around for a really long time. Best sort of analogy he said about it. What's Mark? What's the definition of a gold mine? Well, I'll tell you, it's a hole in the ground with a liar standing next to it. So, yeah, I hope you don't meet too many liars standing next to a hole in the ground saying there's gold in there. We'll try to avoid those holes. We just need a couple of hundred million to actually get the gold out because we have to build a railway and we've got to, you know, we've got to dig a lot of big holes.

56:19Dave Walsh: It's about 10 miles down. We'll do our best to avoid those if we can. What about your own ambitions? I think you kind of maybe answered it right at the beginning by saying you're a family office. So I suppose the great family offices, they perpetuate through the generations. Is that what you want to build? Something you can hand on to the family? Yeah, I don't think any of them want to work in insurance. You don't necessarily sell it to someone else because it's kind of yours. It's already yours. You've already made it.

56:43Graeme Newman: Yeah. No, I mean, I suppose our ambition is, as you know, we're operators by nature. We're not sort of from the investment community originally. I think we just love the idea of becoming the most founder-friendly investors in this relatively small part of the market that we've spent a lot of time in. And we've learned that already there's a fairly common set of things that our founders would quite like help in. And as that increases, maybe we'll try and be more helpful in providing those services.

57:10Dave Walsh: It could be a sort of fractional. Yeah. But I suppose, well, presumably, it's just you two at the end, isn't it? Yes, absolutely. So you're going to be hiring, presumably as you grow, you'll be hiring more people. We'll have AI to do that, Mark. Well, AI is not much use, actually, for helping founders grow their business. It's not very good. you're people who are a bit more like you perhaps maybe people a bit 20 years younger than you or

57:32Graeme Newman: something yeah i mean i think at the moment we have optionality over all these things and you know we built up a network of people who can help businesses without necessarily having to employ them which is actually lovely i mean as you know hopefully we're all living a little bit longer nowadays there's quite a lot of people in that semi-retired space who've actually got a long track record of doing things very well for big businesses sitting at home now actually really liking the odd project to get involved with for a day, a week or whatever it is to help out with these sorts of much smaller firms and actually bringing them right back to their roots and really enjoying that people in that sort of mid fifties or sixties or whatever.

58:05Graeme Newman: So yeah, we're sort of building out that network and that's a bit of fun. As I say, as that's required more by our portfolio companies, that's great. Always, I don't hesitate to add on a pull, not push basis. Having run one of these businesses, you don't love these things being pushed on you. So I think that's as far as our ambition is for now. I think the bottom line is like everything in life you want to have fun being an operator in this business for over 30 years we had a lot of fun it's a great industry as you know mark and actually we're learning fast that this is a lot of fun as well you spend very powerful time actually compared to you know what could sometimes be the drudge of running a big business and having a thousand meetings you have to go to you know yeah yeah you you only go to the good ones don't you

58:48Dave Walsh: well they're all important aren't they and one thing i was just i was looking through the questions that I'd printed off for myself. And one one was, what's the biggest turnoff for you? What's the thing that almost immediately sort of shuts you down when you find that you meet someone for the first time, maybe it will look good on paper and you meet them. What's the big turnoff? What's something that just shuts you down? Or you most politely make your excuses and leave? I don't know. I think I said it before, I'm not a big fan of those VC style funding models and insurance. I get a turnoff and I'm told that we're hyper pre-seed and they'll be raising 18 more rounds and some point in 2050, they'll be looking to break even.

59:24Dave Walsh: Obviously, slightly exaggerated, but not wildly exaggerated on that front. Those businesses that plan to lose money over any reasonable planning horizon, and there are quite a few that propose that aren't interesting. Now, I get that if you're building a business with heavy R &D, where there are a bunch of strategic buyers that want to buy the R &D off you, yet it makes sense to lose money forever. Just don't think that's true, and that's not why we invest in insurance markets. So That's the thing that the minute that hits the table, it puts me off, along with one that just is riddled with AI and blockchain all over it for no good reason, right?

59:56Dave Walsh: So just ones which you called it out earlier, Mark, those people have engineered a story to try and fit a hypothesis they think you might have. But that doesn't feel right. Yeah. You'd rather hear the real story. Exactly. And the real rationale for why they might exist.

1:00:09Graeme Newman: There'll be lots of, I mean, BrewDog's probably one of the most public examples of that. You know, the crowd funders, as they're called nowadays, hardly saw a penny at that whole journey. And, you know, this is the series A, B, C, D, sort of West Coast of America approach to life, isn't it? And winner takes all that sort of stuff. As we know in insurance, the winner doesn't take all. From the carrying perspective, if you've got 10%, maybe I'll go with 15 % market share, you've done extremely well. And that's even when you segment the market right down to, I do, I don't know, lawyers, E &O in the UK.

1:00:43Graeme Newman: or of a certain size, if you've got to 15%, you've done well. It's not just Windows and Apple and then Apple and Android, is it? It doesn't work like that. Suddenly six billion people buy your phone, you know.

1:00:54Dave Walsh: Yeah, exactly. I think I've run out of things to ask you about. So is there anything you want to add before we go? Something I forgot to ask you. I think you asked all the difficult questions, Mark.

1:01:03Graeme Newman: I suppose maybe just as a personal sign off, you know, it was a great privilege to work in insurance for over 30 years. And I think we always knew that, Graham, didn't we? But interestingly, it's only once you step outside of it, and maybe you feel this as well a little bit, that you actually, you look around and you look back and you look up and you look down and you realize it really is the best industry out there, whether you're an investor or whatever. So now I have to say, just personally speaking, I'm really enjoying sitting back and having an even greater privilege of sitting back, looking from afar and hopefully just help to shape a few really interesting businesses in this space, really.

1:01:37Graeme Newman: Yeah, I think I echo that sentiment.

1:01:39Dave Walsh: In this country, we have a really horrible habit of knocking the UK and knocking the insurance industry. And Dave's absolutely right. We've all worked in it. It's one of the most fantastic industries there is out there. And in the UK, we've got something we should be really proud of. We are the leaders in global insurance. In the UK, it's an industry we should be super proud of. We've got the best platform, the best talent. I think the reality is we're going to, over the next 10 years, build some of the best global insurance businesses here. And it's something we should be proud of, something we should be excited about.

1:02:07Dave Walsh: and I'm super happy to still be part of it.

1:02:10Graeme Newman: And sorry, can I just add your first question? And I know why you asked it was, how did you get into insurance? Because you want the answer to be from all of your interviewees. I fell into it because I didn't know what I wanted to do. No, no, it's not always that. No, no, but you know that a lot of people, and I said that, you asked me and you double asked me and that's what I said. But what's actually fascinating is I didn't think any of my three children would want to be in insurance. They made that pretty damn guy as they've grown up and watched their dad and their mum, I should say, of course, as you know.

1:02:35Graeme Newman: But actually it's great. I've got two kids at university now and one by one, all their friends and them are starting to realise insurance is pretty much top of the list of things they should get into. Everyone says that we've done a terrible job. Actually, over the last 25 years, maybe we've got there.

1:02:50Dave Walsh: Now, actually, just the only answer is it's harder to get in than it used to be. We were insiders. We could tell our kids about it

1:02:55Graeme Newman: and they were the only ones who knew. But I'm telling this as having heard, you know, friends of my daughter particularly, it's one of the biggest employers now.

1:03:02Dave Walsh: Yeah.

1:03:03Graeme Newman: You know, banks are employing, consultants are employing of course they are but not in the numbers they used to yeah well that's

1:03:09Dave Walsh: great well thanks for a minute i just only hope one of those companies yet to be formed one of the founders of that company yet to be formed is listening now and you've inspired them to get on because if they get to the right stage they'll hopefully come onto your radar and you can help them now's the time mark now's the time thanks a lot well i hope you enjoyed today's episode if you did don't forget to subscribe or leave a like or a review or recommendation on whatever podcast platform you used to access this program. These really help get the word out. Before we go, just a quick reminder that advertising slots are available here and in other places in the Voice of Insurance podcasts.

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1:04:25Dave Walsh: voice of insurance is produced by me mark gagan music was written by anna gagan and produced by