David Walsh: Graft and growth
David Walsh, CEO of CFC Underwriting, sat down with Catrin Shi to discuss how the combination of patience, failure and being “unashamedly nerdy”, built the biggest independent MGA in the UK
“We were probably about 15 years too early in the cyber market,” muses David Walsh, as we sit in his office at the CFC headquarters on Gracechurch Street in the City of London.
It’s a frank admission from the CEO of one of the most prominent and respected cyber writers in the London market. In recent years, the name CFC has become virtually synonymous with London market cyber – even though its specialty product suite is much broader.
“In 2000 we thought by 2002 everyone would be buying cyber,” Walsh says. “And in 2015, people in America started buying cyber; in the masses, not the original early adopters.
“And whilst we managed to get into other lines of business, clearly that was not the original business plan for CFC.”
Next year, CFC will celebrate its 20th birthday. In those two decades it has grown to a £330mn premium business. Earlier this year it brought in additional capacity providers in an extensive binders overhaul, giving it more headroom for growth. Walsh tells me that next year CFC is budgeting to write £400mn of business.
But financials aside, CFC’s image is remarkably un-insurance. It has a reputation for fun.
Its Halloween parties are infamous (if you don’t make an effort with the costume, don’t even bother turning up) and CFC-branded socks have turned out to be an unexpected social media hit. On its website, CFC proudly states that insurance is a serious business, but it doesn’t want to be too corporate or take itself too seriously.
So when I sit down with Walsh, I am keen to hear where it all began.
Walsh tells me he is in fact a broker by background. His first job was a UK professional indemnity broker at Marsh, before he went to work for David Howden who, at the time, was setting up a brokerage. Walsh was Howden’s 12th hire for the business.
But it wasn’t until Walsh took a work trip to Israel to set up an in-house underwriting arm for Howden that the concept for CFC was born.
“It was really when I was over in Israel that I got the technology bug,” Walsh says. “This was coming into the dotcom period and the Israelis were fantastically entrepreneurial as a nation. You had all this technology coming out of the army, particularly for internet security and IT security.
“So suddenly that was becoming a really interesting insurance challenge. I got the idea for coming back and setting up a cyber MGA.”
He came back the UK and – in his words – “tried” to resign from David Howden.
“He’s such an entrepreneur that he wasn’t having it and he said he’d invest in my new business,” explains Walsh. “Again, I had a lot of good luck because in the dotcom period young men like me – I was 29 at the time – could actually get wiser, older men to back them, to invest in their dotcom idea. InsurTech wasn’t a term [then] – we were a dotcom.”
ClickForCover.com was born but it wasn’t an easy ride from there.
Walsh says his downfall was trying to do three new things at once – and ultimately, nobody wanted to buy cyber, no-one wanted to buy it through the internet (not a trustworthy enough medium) and no-one wanted to buy from an internet service provider rather than a good old-fashioned broker.
“That idea failed and I think any wise person would probably tell you trying to change three things at the same time was probably a mistake,” Walsh continues.
“But of course what we learnt along the way was that the one bit of the three that was working was that actually customers – some customers, not that many at the time – wanted to buy cyber.
“So we repositioned ourselves, tried to think of a really boring name instead of ClickForCover – so we went to CFC, repositioned ourselves as an MGA and started selling cyber.”
CFC had moderate success under its relaunch, selling cyber to the first wave of dotcoms in the early noughties. At the time, there were only a handful of competitors in the space, such as AIG and Hiscox.
The firm has since diversified into 22 business lines including directors’ and officers’ liability, transactional liability and life sciences, but the commonality is that they all handle emerging risk.
“What we specialise in now is emerging risk and specialty,” Walsh says. “The fact that we were originally a technology company ourselves – we were a dotcom – [means] we’ve always had technology and innovation in our genes, and the areas where technology has affected society most is what we’re really interested in.”
The cyber business has also come a long way since the relaunch. Cyber accounts for around a third of CFC’s total premium, of which nearly 60% originates from the US. It is the market leader in cyber for Canada and Australia, and is in the top three both in the UK for cyber overall, and in the US for SME business.
It has more than 50 cyber underwriters and has built bespoke software for the cyber business – including a pioneering platform that can provide a quote for a cyber risk from a single piece of data.
CFC has just completed the first piece of M&A in its history, and this is again focused on building out its value proposition in cyber.
The acquisition of Texas-based cyber incident response company Solis Security is aimed at bolstering CFC’s large in-house cyber claims and incidence response teams.
“Both the frequency and the severity of cyber claims is growing, and cyber is a really competitive, really crowded market with new competitors still joining. It’s seen as a sexy place within insurance so of course competition is going to be tough,” explains Walsh.
“It felt to us that the endgame is simply that we’ve got to be the best at handling claims. We’ve got to be able to get our customers back up and running faster than any of our competitors. And we’ve got to be able to do that cheaper than any of our competitors.”
Solis was previously an outsource partner for CFC but bringing them in-house means all interests are aligned, Walsh says.
“You might face 100 claims that are actually quite similar,” he explains. “If the business that’s handling those claims is in the house, we can build a tool to automate that process and handle it at literally a tenth of the cost of one of our competitors. We’ve had over 1,500 cyber claims in the last 12 months. So we’ve got scale in the claims process now and we can really invest in it.”
I ask Walsh why he doesn’t use the money to scale up CFC, broaden out into new lines or acquire fresh talent – a route many MGAs take when they reach a certain stage of maturity. CFC also has private equity backing from Vitruvian, which bought into the firm in 2017, valuing it at a bar-raising 15x forward Ebitda.
“We still grow organically, more than 20% a year, which is great,” Walsh says. “[For] any business that can grow at 20% or 30% a year organically, why would we waste our time looking at M&A which drains you of cash and brings on loads of risk, when we can just grow in a much more low-risk, thoughtful and methodical way – but growing out of our current business lines?”
Private equity perks
The deal with Vitruvian was not to build a war chest for acquisitions, therefore, and in fact Solis was acquired out of less than one year’s cash flow, according to Walsh.
“You can never say never to anything in life, of course, but right now we’re still not in the business of wanting to do the sort of M&A that our industry does,” the executive says.
Walsh says that CFC was careful in its choice of private equity partner for this reason.
“There were some – and we spoke to a lot – who came and said ‘we’ve got a great vision for CFC. We see this as being the platform that we could take on the world; you should buy the biggest MGA in America, the biggest in Europe the biggest in Australia, smash it all together and be the global super-MGA’,” he says.
“We felt there was just a whole load of risk around that and, ultimately, [in] buying MGAs – the quality of whose books we wouldn’t really know, even after whatever level of due diligence. So we weren’t interested in that model.”
Vitruvian, in contrast, is happy to stand back and just be an investor, with available capital should CFC need it. And Walsh explains that growth is not the sole reason CFC looks to change backers every five years.
“We do deals every five years because we really like re-cutting our equity every five years. We provide an exit for our investors, find a mini-exit for our staff, and we can re-cut the equity so we get more staff shareholders,” he explains.
Staff ownership at CFC has grown from 16% originally to 60% today, with over 140 staff shareholders with minimum of £100,000-worth of equity in the business.
The ability to offer equity ownership is really powerful tool in creating culture and momentum in a business, Walsh explains.
He adds: “One thing I unashamedly copied from the Hyperion business model was that you’ve always got to try and employ cleverer people than yourself, who can do the job better than yourself. And then really reward them properly with shares because that’s the only way to get people’s hearts and minds, properly long term.”
Growth brings excitement to the business and to people’s jobs, he says. In stagnant businesses, people’s jobs also become stagnant.
“But growth for us always been a self-generated desire. We’ve had three sets of investors, they’ve all enjoyed the growth as well but we do it for ourselves. And we’re shareholders as well, we do it for ourselves.”
But how do you continue growth and maintain that fast-paced, start-up feel in a business? (As a side note, you walk into CFC’s offices and they feel impossibly tech – think soft-furnished breakout booths, expansive LED flatscreens on the wall, wood-panelled roof terrace and impressive coffee-making facilities.)
“We got to a stage in our evolution, [where] we found ourselves slowing down in the same way large insurers tend to slow down,” Walsh says.
“And we took a step back and said ‘we’re becoming like one of those large insurers, we’re getting slower at delivering product, what the hell can we do about that? Do we just chuck another 10 or 20 people into the products team?’ That didn’t feel like the right answer.”
The CFC head says the focus on technology keeps the company nimble – whether it is for customer information, interface or efficiency, or the speed with which CFC can bring products to market. Walsh admits the firm is “unashamedly nerdy” about finding efficiencies.
“We’ve got to be quicker than all of our peers ultimately, all of our competitors. I don’t think we need to necessarily be disrupters, we just need to be quicker than everyone else, always be a smoother wheel,” he adds.
“I suppose we put a lot of energy into trying not to fall into the same traps that some people have fallen into. But that doesn’t mean I can tell you we’ll be 10 times the size we are now and what we’re going to look like. We’re all human beings here just like everyone else.”
The MGA market
The discussion moves to the MGA market and the recent trend among paper providers – particularly in Lloyd’s – to be more savvy and scrupulous about who they give away their pen to. Alignment of interests has become a more pressing subject than ever between MGAs and traditional carriers.
We delve into the topic of what the MGA of the future might look like and Walsh believes that ultimately, an MGA has to tick all the boxes.
Underwriting, clearly, is a major part of this discussion and Walsh tells me that CFC has declined nearly 100,000 risks in the past 12 months.
“I’m sure the marketing and business development teams don’t particularly like that stat,” he grins. “But I like it. We’ve chosen to decline those risks for good reasons.”
Consistency is also key, and CFC tries to keep its product offering stable, Walsh goes on to explain.
“We try not to enter and exit classes left, right and centre, willy-nilly; what we’re trying to do is always be really critical of each book of business we write and to permanently change the weighting. Looking deeper into the data and working out we want to actually withdraw from that portion of the book and growing into that portion of the book. That’s a constant job here.”
Distribution, again, is a big box tick – and Walsh explains that around 90% of the business his firm writes would not otherwise find its way to London.
“So we’re not competing with our own carriers on their doorstep like some people do. We compete locally.”
It’s all well and good, I challenge, for CFC to be saying when it has the scale, capital backing and capabilities it will execute on all of these, as well as design new products and build new tech platforms. What about those outfits that are just two men and a spreadsheet?
“There is still a market for two people and a spreadsheet,” Walsh counters. “As long as you’ve got a real deep-seated specialism, you’ve both got 20 years’ expertise in your class or sub-class, you’re bringing something to the party.”
The tough job is to grow from a monoline MGA to the next level, he continues.
“At the end of the day, if you’re two people and a spreadsheet, it’s a pretty volatile business model. The law of small numbers is you can have a very volatile book and suddenly it doesn’t look too rosy.
“So you’ve got the volatility of the start-up phase and then you’ve got the complexities of trying to build out, and I think most people completely underestimate the complexities of building it out. It took us 20 years, let’s be honest.”
The interview is drawing to a close, so it feels like a good time to ask – what’s the one piece of advice you would give to those two ambitious people with their spreadsheet?
“You’ve got to be patient,” Walsh says. “And you have got to graft. Between 2000 and 2010, for us to stay alive and grow we had to get out there. So we went out there and we have 2,800 broker offices round the world who we trade directly with from here right now.”
He laughs: “I think we thought we were all meant to be billionaires by about 2003. The reality is Marsh, Aon and Willis – quite rightly, they’ve got their customers’ fortunes at heart – are not falling over themselves to do business with you.
“It’s been hard work and it’s been a long journey. And we’ve had all the luck we could have along the way.”
This article was first published in the Winter 2019 issue of Insider Quarterly