Elephant hunting: Co-CEO Davis on Stone Point’s M&A strategy
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Elephant hunting: Co-CEO Davis on Stone Point’s M&A strategy

The executive gave his view on the (re)insurance landscape and the impact of PE on the sector.

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Following the completion of Stone Point’s recent $15.5bn deal to acquire Truist Insurance alongside CD&R, co-CEO Chuck Davis has outlined his PE firm’s considerations in assessing its next investment in (re)insurance, in an exclusive interview with Insurance Insider US.

With close to 50 years in the private equity space, Davis, the chief architect behind Stone Point’s elephant-hunting investment philosophy, said the term is in fact a misnomer.

“We’re hunting in the jungle, and we need to target what we’re hunting for, so we picked elephants,” Davis said. “I inappropriately named it elephant because we’re not looking for the biggest animal in the jungle, but we are looking for a specific target – 70 subsectors, insurance, underwriting, brokers, etc.”

Davis said his firm looks for people who are passionate and really capable in a specific area, who have deep domain experience – however the business plan and strategy is of course crucial.

“We can make a good situation better, but we can’t make a bad situation good,” Davis said. “And we look for alignment. People have to have their own skin in the game, because if you have money on the line with our investors, you’re more likely to jump out of bed in the morning.”

The process at Stone Point can be slow, and often entails a multi-year process of research, going to conferences, and meeting with management and their customers and suppliers before making an investment.

“It takes years,” Davis said. “We joke that we do in four years what McKinsey does in four weeks, and there’s some truth to that.”

Most recently, Stone Point alongside CD&R led an investor group to buy out the remaining 80% stake in Truist Insurance from banking giant Truist Financial for $15.5bn, equivalent to around 18x the company’s 2023 core Ebitda.

Stone Point first became a 20% shareholder last year at an enterprise value of $14.75bn, equivalent to ~14x adjusted Ebitda, with $9.75bn of common equity and $5bn of preferred equity issued to parent Truist.

The Truist deal “was a classic case of our proactive multi-year outbound targeted search,” Davis said. “We know the CEO of the bank, we’ve known him for years. We know the people who run the insurance brokerage, and we’ve known them forever.”

Davis was speaking to this publication before delivering a keynote speech at the St. John’s University’s School of Risk Management’s 2024 Insurance Regulation Conference in New York.

In a wide-ranging interview, the executive:

  • Claimed the influx of private equity has made capital “work harder” and created a faster dynamic in (re)insurance

  • Highlighted wholesale brokerages as a particularly compelling investment in today’s market

  • Warned against MGAs growing too fast, which in the past has led to company failures

Davis joined MMC Capital, the investment arm of Marsh, in 1998 after 23 years with Goldman, Sachs & Co. Marsh spun off MMC Capital, now known as Stone Point, in a management buyout in 2005 – a move driven after regulators, including the SEC and then-New York Attorney General Elliot Spitzer, raised questions of conflict of interest amongst brokers.

Stone Point has shown tremendous growth over its 25-year history. In that time, the company has raised more than $35bn in aggregate capital commitments to invest in more than 145 companies across 10 active verticals and 75+ sub-sectors in the financial services industry, with a strong focus on insurance.

In 2023, Stone Point made six new investments out of its ninth private equity fund, Trident IX, which has $9bn in total commitments. Investments included the launch of high-net-worth MGA Private Client Select and acquiring the initial 20% stake in Truist Insurance Holdings, before later striking the deal for the remaining stake earlier this year.

Stone Point’s focus on the insurance industry “is our heritage. Very few people have that focus. There are people who we call tourists who come and go, and that’s a dangerous thing to do,” Davis said.

He noted that the growth of private equity in the insurance space overall has changed the landscape of the market.

“It’s made capital work harder,” Davis said. “Now it’s more off balance sheet.” Third-party capital is moving towards insurance linked securities, cat bonds, parametric risks more than investing in the actual insurance companies, he explained.

“Private equity just makes the game move a little faster and makes the money work a little harder. The difficult thing is when there’s an imbalance, it disappears very quickly now.”

For example, if a major hurricane struck Miami the resulting market dislocation would result in “20 firms throwing money in. The speed with which the money moves in private equity is much faster today,” he said.

(Re)insurance opportunities

Davis, who also sits on Progressive’s board, quoted the carrier’s former CEO Peter Lewis as saying the only three things that matter in auto insurance are: price, price, and price.

“When insurance is a commodity, you can get it in 200 sources. It’s not the smartest person setting the price,” Davis said.

It doesn’t always make sense to invest in insurers if they’re not earning their cost of capital, he said.

“We’re looking for supply and demand imbalances, where the capital has got compelling opportunities. Because as you alluded to, most of the time, the insurance industry does not return the kind of numbers that our investors expect,” he said. “We only go into insurance when we’re compelled.”

Insurance brokers have proven to be solid investments “day in and day out,” Davis said, adding that wholesale brokerages have been a particularly compelling investment today.

Back in 2005, when brokers were facing Spitzer’s accusations of conflict of interest for receiving contingent commissions, the three big brokers agreed to exit their wholesale business to focus on their retail business.

Wholesale brokers have made a comeback, and have expertise, hustle, and “controlling the customer is controlling the markets,” Davis said.

“What [Ryan Specialty founder] Pat Ryan did is absolutely miraculous. Because when Spitzer came in and attacked the industry, all the big brokers got rid of their wholesalers. Marsh had Crump and Aon had Swett & Crawford. Now the wholesalers are coming back. And it's really three big ones: Ryan, who started from scratch, Amwins, and CRC, which is owned by us now, with Truist.”

While the growth in the MGA/MGU space has been strong, there’s still a danger of companies growing too fast and getting into trouble, like when Reliance and Frontier went insolvent from “giving away the pen,” Davis said.

There are more checks and balances, regulatory oversight and acumen in the market now, “but the Reliances, the Frontiers – it’s possible it can happen again. Because people just want to grow, they want to succeed. And as we were joking earlier, the more you write the better you feel,” he said.

From physical education to private equity

Davis’ career has had a varied journey to this point.

During the interview, he shared how he had failed out of college twice – he was too busy traveling around the world playing doubles with Yugoslav tennis pro Zeljko Franulovic to attend class – before finding himself fascinated by his father’s business.

Dudley Davis was president and CEO of The Merchants Bank in Burlington, VT, and the father and son spent hours together pouring over dot-matrix printouts of the bank’s P&L.

“I always liked numbers. I memorized baseball statistics as a kid,” Davis said. “As I was getting out of school, I said Dad, tell me what you do? What does the bank do?”

Davis studied the results, and realized the bank’s stock was underpriced. He began to buy it, until he became the largest shareholder in his early 20s. From there, he examined other Vermont banks’ balance sheets, and bought their stock, becoming the largest owner of several other Vermont banks.

chuck davis career timeline.png

He graduated from University of Vermont with a degree in PE – physical education, not private equity. He went on to earn an MBA from Columbia University. “I went from being in the bottom 2% of my class in VT to the top 2% at Columbia,” he said.

While attending an accounting training program in Boston, Davis recalls sitting in his $30-a-month rented room, using a yellow pad to tally by hand how his investments had compounded over time as the bank grew.

“I made 130 times my money. That was my ah-ha moment,” Davis said. “That investment grew because of compounding.”

Now at 75, Davis has no intentions of retiring. Jim Carey was recently promoted from president to co-CEO with Davis, while CIO Nicolas Zerbib and COO David Wermuth were both promoted to co-president.

“Nothing will change,” Davis said. “I haven’t made a decision in 25 years without the three of them. If there’s a fault in our strategy or to our structure, if it’s we can’t agree, we defer and sometimes we let things linger. “

“I have a lot of energy and I love this business and the people I work with. To me, it’s not a job. So I hope I’m here for a long, long time.”

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