EP 11 - Season 1 Finale – Bringing it Home w/ John Naughton and JJ Purdy

We made it! The end of the first season of 80/20 with ParetoHealth has us bringing it all back home, so join us for a trip down memory lane as we look at the history of ParetoHealth and some of the things that formed the company along the way.

From our beginnings 10 years ago as three people in a tiny office to where we are now, the story has been a great one. Listen to the episode to hear about the formulation of ParetoHealth’s core values, the impact of COVID-19, and some of our favorite moments from the past few years. The growth of our community, whether this is the core team, our Consultant partners, or the employers who simply wanted more out of healthcare, has been truly incredible.

Thank you all for the memories. More importantly, let’s look to the future. Together, there are almost no limits on what we can do.

What is 80/20 with ParetoHealth?

Health insurance, dissected. It’s a take-no-prisoners journey into the heart of health insurance co-hosted by two of its major disruptors. The Andrews (Cavenagh and Clayton of ParetoHealth) give you fresh insights and perspectives. Join them in their conversations with guests who are also transforming an antiquated industry and reshaping the way employers select and implement healthcare benefits.

[00:00:08.910] - Andrew Cavenagh
Welcome to 80/20 with ParetoHealth. I'm Andrew Cavenagh.

[00:00:12.180] - Andrew Clayton
And I'm Andrew Clayton.

[00:00:18.170] - Andrew Cavenagh
Hello and welcome to the season's finale of 80/20 with ParetoHealth. I'm Andrew Cavenagh, joined as always, and by always I mean sometimes, by Andrew Clayton. Today, we're going to flip the script a little bit. Today, instead of Clayton and I interviewing somebody, which is what we normally do, we're going to pass the baton.

[00:00:33.860] - Andrew Cavenagh
In our studio at ParetoHealth World Headquarters today, we're joined by John Naughton and JJ Purdy. And for those of you listening at home, or mom, that don't know JJ and John, JJ runs Garnet Captive Services and Elevate Insurance Service, our two associated or affiliated PNC companies. And John is a principal at Keystone Risk Partners, which manages the various Pareto captives. And both of them are actually owners of Pareto Captive as well.

[00:01:02.870] - Andrew Cavenagh
Welcome to the show. We're going to have them interview us. So this is me officially passing the baton to John and JJ. Treat us the way that we treat our guests, which is with utmost respect. A ton of respect.

[00:01:14.930] - John Naughton
I don't feel welcome, so that's about alright.

[00:01:16.250] - Andrew Cavenagh
That's about as excited as I can sound in general or on a podcast. So take it away.

[00:01:21.230] - John Naughton
Very good. I appreciate the two of you having us here. It's taken long enough to get us in the room. And as we sit on the 23rd floor, world headquarters-

[00:01:32.780] - Andrew Clayton
Originally, it was global.

[00:01:34.430] - Andrew Cavenagh
Now it's world?

[00:01:34.700] - Andrew Clayton
Now it's world.

[00:01:35.870] - Andrew Cavenagh
Universal Headquarters.

[00:01:38.180] - John Naughton
Let's put it this way. As we sit here today in this small conference room, part of the global headquarters, it's larger than the office space that the three, and then including the McKenna, the four of you occupied the first year that you were part of Pareto. Maybe that's a good place to get started, is to spend a couple of minutes and share a little bit about how did you find your way to the employee benefit group captive space? And then what those early days of Pereto actually look like.

[00:02:04.430] - Andrew Cavenagh
I don't think anyone really wants to hear a full history, but the quick history is that both Clayton and I were involved in PNC Group captives. Historically, client came to us and said, "Hey, you helped us with work comp, can't you help us with employee benefits as well?" And I think our initial response was, "No, it's illegal, we'll all go to jail. You can't combine benefits and things like that." Client called back and said, "Try a little harder, seven-letter word." Spent 150 grand on comp and spent a million bucks on benefits. So that was really the impetus, was like many things in our space, client-driven and reacting to a need.

[00:02:38.600] - Andrew Clayton
I think I would just add to that, that we have always enjoyed a healthy debate about what our environment should do better. So our environment in that instance is the insurance-based, health insurance-based. And if you look at it then, and hopefully we've collectively gained ground, not Pareto, but the industry as a whole, it was a giant world of have and have-nots. Those that are self-insured, and those that are fully insured. So we recognized that there was an opportunity to bring some of that have into the world of fully insured employers. Letting them access self-insurance, but bringing the property and casualty group buying dynamic to them.

[00:03:19.950] - Andrew Cavenagh
And in terms of early days in the office, for a while it was Clayton, McKenna, and I. And everyone did a little bit of everything. Clayton did very little of everything. McKenna and-

[00:03:31.180] - Andrew Clayton
I'm an idea man, John. I don't like to get my hands too dirty.

[00:03:34.580] - Andrew Cavenagh
McKenna did a whole lot of everything, hence the reason that we're here today. It's obviously changed. The company in many ways is very different today, and at the same time, I think the company is exactly the same. Still the same mission, trying to help the mid-sized employer with what is probably their biggest problem, which is health insurance, health care. We stick to our core values and our culture, but obviously bigger.

[00:03:56.660] - JJ Purdy
I remember those days while I was there and the server didn't have as much action. There weren't many interoffice emails because you guys would just yell back and forth and it would bother me, but also there weren't very many written files. This is just 10 years ago. I can't believe it was that long ago, or really that short of amount of time. So I'm wondering now, I don't have a good feel, how big are you now, size-wise? Number of employees? Number of clients? [crosstalk 00:04:23].

[00:04:23.150] - Andrew Clayton
Do you monitor all your investments with this level of diligence and know how big they are? [crosstalk 00:04:27].

[00:04:27.230] - JJ Purdy
I trust you that much.

[00:04:28.950] - Andrew Cavenagh
[crosstalk 00:04:28] years later, I'm going to ask you my first question.

[00:04:31.580] - John Naughton
And I'll jump on that in just a minute. In that, the first PNL that was done on Pareto was the end of year 2011. And I remember about a year ago, for some reason, finding that PNL. And there were two things that jumped out. Number one, there was no P.

[00:04:44.660] - Andrew Cavenagh
No revenue.

[00:04:45.320] - John Naughton
There was no P in that PNL. The second thing [crosstalk 00:04:48].

[00:04:48.380] - JJ Purdy
Back to my question, can one of you guys give an idea of size?

[00:04:52.340] - Andrew Clayton
Sure. I'll jump in on that. We last week passed 2000 members, which was a seminal moment for us. Pretty exciting. There was a build-up throughout the year knowing that we'd get there. And just for mom as a reminder, the member is an employer who has decided to become a client and really a member of the Pareto's community. So the 2000s was a big number for us. It was a really cool event for the team to be able to get their head around. You can't talk about it without it sounding a little bit braggadocious, but the reality is you-

[00:05:30.950] - JJ Purdy
It suits you.

[00:05:32.270] - Andrew Clayton
Thank you. I'm well-practiced. But it's a great reflection on the employers, their commitment, the way that they've laid the groundwork for others to follow, as well as our consulting partners. And there's a ton of incredible work done by our team here to enable and allow that to happen. So it was a really, really awesome moment. We are a hard-grinding company, and we attract those that want to work hard and want to work in a collaborative team environment. But every once in a while you want to stop and smell the roses, so you have a little reflection point on it.

[00:06:11.280] - John Naughton
How has COVID impacted the business?

[00:06:15.710] - Andrew Cavenagh
I think we could be here all day talking about what COVID's done to the business. I remember a town hall probably in February of 2020 where somebody raised their hand said, if you listened and said, remember that. And raised his hand and said, "What happens if this COVID thing gets serious?" And we scoffed at it. We're like, "Oh, don't be serious. This thing's not going anywhere-"

[00:06:37.270] - Andrew Clayton
Two weeks, we'll be back. [crosstalk 00:06:38].

[00:06:38.780] - Andrew Cavenagh
We've got laptops. All our servers are in the cloud. We're back in two weeks. And about three weeks later, the world shut down. Actually, the first instinct was panic, like it was for everybody. Putting everything aside on the personal level and just talking about work, is how many employers will go bankrupt, how many employees are going to lose jobs? And we modelled out all sorts of crazy downside scenarios. And obviously, that's not what we all know happened where employee accounts stayed high, people held on to their teams, certain businesses thrived. And we all adapted much more effectively than we thought we would.

[00:07:12.830] - Andrew Cavenagh
I think if you'd asked me that question a year or two years ago, I would have said very, very little impact. Sales were a record year that year, et cetera. If I look at it now I'd say the one thing that stands out is that we hired and trained a lot of people via Zoom. And that's hard to do. And because of that, our hit ratio on new team members was lower than it would have been. I think some of the people didn't get the training they needed because you just couldn't join in person. So I think some swings and misses on on team members that just weren't right for us and we weren't right for them. And that's how it has to work. If it's not a win-win, it cannot work. So I think that's one of the things that we got a little bit wrong.

[00:07:51.110] - Andrew Clayton
I'll put aside the human, the medical, that impact of it, and just focus on the business for a second.

[00:07:58.070] - Andrew Cavenagh
Hang on a sec, you're going to put aside the emotional stuff and focus on facts?

[00:08:03.650] - Andrew Clayton
Sure.

[00:08:04.100] - Andrew Cavenagh
Okay.

[00:08:04.490] - JJ Purdy
Don't make him mad.

[00:08:05.780] - Andrew Clayton
[inaudible 00:08:05]. Yes. The team responded incredibly well, and Cavenagh brought it up earlier. But we went from office, office, office all the time to being virtual immediately. And that transition happened way better than if we said, "Okay, we're going to transition to virtual over the next nine months over the next year and a half." The fact that we needed to do it, the team was incredible.

[00:08:32.360] - Andrew Clayton
And it goes back to, I think, Cavenagh hit it on earlier, about find the right people. People that are passionate about what they do. They want to show up, and they want to be interested, they want to be committed. But there are lots of tiers and all that other stuff. Anyway, I'll just say that I was not responsible for tucking the kids in that night. Maybe an easy way to summarize it.

[00:08:53.150] - JJ Purdy
So along those lines, you guys [crosstalk 00:08:55].

[00:08:56.380] - Andrew Cavenagh
If we want to break down the amount of work that Clayton does [inaudible 00:08:58]. Is this the right time to talk about what share he pulls or not?

[00:09:01.800] - JJ Purdy
Hmm. Yeah, I think it is. Let's move on.

[00:09:04.880] - John Naughton
Maybe do that in a rapid-fire round.

[00:09:06.940] - JJ Purdy
Yeah, we have a couple things. Interaction with your members and your brokers is pretty important, and COVID probably put a hamper on that for a little while. But maybe you could reflect on your favorite interaction with a captive member or broker. You guys do meetings every year, at one of those meetings.

[00:09:30.880] - Andrew Cavenagh
My favorite part of what we do is interacting with the employers and seeing some of the impact that we've had a part in having. So if I boil it down to one interaction, I would say the board meetings. We had our captive board meetings last month in Nashville, first part of October. And the way our boards are structured is the majority of the board members are the captive members. And I love it. It's a small room. We typically invite former board members as well as board members in training. So you've got 15, 20 people.

[00:09:59.570] - Andrew Cavenagh
And the first part of it is really granular. We walk line by line through the income statement where any money was spent. We then go to the balance sheet. We spend some time talking about investments. And you think about investments, I think in total the captives have to $250 million of assets. These are no longer small companies that we're talking about. We then have the outside actuary jump on the line and walk the board through every part of the analysis that came up with the reserves there on the balance sheet.

[00:10:29.750] - JJ Purdy
This is your favorite interaction?

[00:10:31.040] - Andrew Cavenagh
It is.

[00:10:31.430] - JJ Purdy
Okay.

[00:10:32.570] - Andrew Cavenagh
We're getting to it. You didn't ask me what I thought their favorite attraction was. This is my favorite interaction, and I'll tell you why in just a second. And then we have the outside auditor jump online, because these aren't cells. These are individual companies with real financials, real bank accounts, and that sort of thing. And the reason that I love it is that once in a while-

[00:10:50.840] - Andrew Clayton
By the way, they've always been real companies with real bank accounts and stuff.

[00:10:54.170] - Andrew Cavenagh
I'm implying there are some others that aren't real companies. They're sort of subdivisions. They don't have their own financial statements, they don't have their own actuary. And that's why I'm pointing it out, is that it's so granular. Because we hear in the marketplace once in a while like, "Oh, you're not transparent." And it's so silly that if anyone could sit in on these meetings and listen, it is so detailed, so granular.

[00:11:15.020] - JJ Purdy
I pity the fool that is-

[00:11:16.040] - Andrew Clayton
Sorry ladies, he's spoken for. He is not available.

[00:11:21.380] - Andrew Cavenagh
That's actually funny out of Clayton. So moving past that, then the next part of the board meeting is just where are we going? And that's where all the big ideas start flowing. Petri dishes around cost containment. What should we do? So I think that's my favorite part of all the interactions, is that it's a fairly small group talking about the meaty stuff. And I just wish we could have a camera in there and let everyone see what happens in those meetings because it's a testament to the companies that they have helped create.

[00:11:50.250] - Andrew Clayton
I got three relatively quick ones for you, JJ. First one is the first members' meeting, which you referenced, was going on 10 years ago. And just to have people actually show up, be invested, be there. We've always hoped that we're on the right side of the fight. But the fact that they were so committed to moving forward as a community was overwhelming.

[00:12:17.940] - Andrew Clayton
The second is the latest member meetings are 400, 500, 600 people, and they're incredibly difficult to run. Our team does a wonderful job of setting them up and working on logistics. But we also then hear from folks, members that have been around for a couple of years, and they'll say, "Wow, this is really incredible." And to hear from their eyes about the growth, and the strategy, and the commitment, and the consistency in what we're trying to do, and the performance is great.

[00:12:48.660] - Andrew Clayton
And the last one is, Cavenagh is a dynamic personality up on stage, and he loves to take the airwaves. But allowing some of the other team members and see their growth in presenting, dominating the stage, taking control, and seeing them shine has been absolutely spectacular. So it's a great source of pride, enthusiasm for us.

[00:13:23.570] - John Naughton
Thinking about outside of Pareto here and externally, what's the thing that you're most proud of over the past year? External, not Pareto-focused. Not internally focused. Could be a consultant, could be some other third-party value that they've provided.

[00:13:37.630] - Andrew Cavenagh
Again, you're catching me spur of the moment. But I think, and some of it might be what I've heard in the last couple of months, we've had lots of our consultant partners analyze the savings of their members, and they're a bunch that come to mind. But one of my favorite ones is one of our partners who did an analysis, and they have a lot of clients, I don't know the number is 25, 50 different employers in the various captives. And over the last seven years, those employers' costs have been flat. So flat is a word you don't hear, and seven years flat is insane.

[00:14:12.700] - Andrew Cavenagh
And you go past that and they've seen what we, being geeky here a little bit, but positive externalities where the workers' compensation rates are going down because they've put a good benefit plan in place that more employees then opt into. And that means that the employees aren't submitting what are really health care claims under work comp. So hearing about that, it's staggering, and absolutely one of my favorite external things that we've seen occur recently.

[00:14:44.700] - JJ Purdy
Besides your demons, Clayton, what keeps you up at night?

[00:14:51.660] - Andrew Cavenagh
Is this going to be a marriage counseling session or is this-

[00:14:54.830] - Andrew Clayton
That might hit the cutting room floor. It's a great question, and I don't know that it's any one thing. If I had to put one answer out there, one thing, it would be, are we moving the team forward at the pace that they're ready to move? And are we making enough opportunities for them to continue to advance? Outside of that, it's every issue that comes up under the sun.

[00:15:23.240] - Andrew Clayton
There's not very few waking moments when it's not on our brain. And that's not a complaint at all. It's just a little bit of how we're wired. And I think you need to be wired a little bit on the, I don't want to say obsessive side of things, but outside of that it's did we do this one account right? We have 2000, but the next one is so important that I am so zonally focused on making sure we get that one right. Did we get to the right spot from a relationship standpoint? Did we push back and defend our principles correctly and conveying them accurately?

[00:15:58.820] - Andrew Clayton
So all of those things go into every interaction, everyday matters. But at the end of the day, is it are we moving the ball forward in a way that we be proud of in the same way that we wanted to start 10 years ago?

[00:16:16.050] - JJ Purdy
Anything from you Cavenagh? I heard you talk about your clients during COVID, and sounded like you actually cared about the members of the captives.

[00:16:23.310] - Andrew Cavenagh
I care. That's my slogan. I care.

[00:16:25.590] - JJ Purdy
Is that something that keeps you up at night?

[00:16:27.150] - Andrew Cavenagh
Caring?

[00:16:30.090] - JJ Purdy
[inaudible 00:16:30].

[00:16:31.980] - Andrew Cavenagh
I think the thing that keeps me awake at night is really I worry about are we executing, and that we're not... We're lucky in the position that we're in, that we don't need to solve cancer. We don't need to put a person on the moon. What we need to do is execute because we have this fantastic opportunity, fantastic group of consultants and captive members. So are we executing at the pace and to the degree which we should?

[00:17:01.900] - Andrew Clayton
It's great to outrun the rest of the market, but are we running at the same pace that we expect ourselves to run?

[00:17:10.000] - JJ Purdy
It's great to show some humility.

[00:17:15.710] - John Naughton
We should talk about core values. You spent a lot of time talking about core values, what Pareto stands for. Why don't you spend a minute and walk through the four core values?

[00:17:25.590] - Andrew Cavenagh
Why don't you walk through them, and then I'll walk through how we got them?

[00:17:29.790] - Andrew Clayton
Sure. So core values are-

[00:17:32.490] - Andrew Cavenagh
They is four.

[00:17:33.360] - Andrew Clayton
There are four of them. Let's [crosstalk 00:17:34].

[00:17:36.480] - Andrew Cavenagh
If you walk outside, they're written on the wall.

[00:17:36.480] - John Naughton
These are important.

[00:17:38.610] - Andrew Clayton
Thankfully, they're on one hand. Yes. See the field. Get it done. Get it done right. Is this a quiz? I'm doing okay so far?

[00:17:49.050] - John Naughton
Two more.

[00:17:49.710] - Andrew Clayton
Fire in the belly, and for the greater good. Hopefully, they're pretty self-explanatory.

[00:17:57.520] - JJ Purdy
What's your favorite, Clayton?

[00:17:59.950] - Andrew Clayton
Mine is fire in the belly.

[00:18:01.660] - JJ Purdy
All right. [crosstalk 00:18:01]. What are they? What do they mean?

[00:18:07.150] - Andrew Clayton
And then I'll start to a certain extent. Like the fire in the belly, though, is if you have that and you somehow have a moral compass that's pointing in the right direction, the others should be attainable or should be achievable.

[00:18:25.330] - Andrew Cavenagh
You want to walk through what they are real quickly? So sees the field is looking down the road. Not just looking at your feet. And all of these things have multiple layers. So just starting with the captive member, it's the employer who says, "I want to go here," and recognizes that they have to put a plan together to get to there. For the company, it's seeing down the road. It's-

[00:18:45.670] - Andrew Clayton
I call it seeing around the corner before you get there. You've been around the corner before, know and understand what's going to happen.

[00:18:52.870] - Andrew Cavenagh
Fire in the belly is easy. We all want to do more. And it's growing individually. It's making sure that Pareto continues to do more.

[00:19:01.580] - Andrew Clayton
And it's a big difference between wanting more and doing more. Wanting is easy.

[00:19:06.680] - Andrew Cavenagh
Roll up the sleeves. That is a core value of everybody in this company. Anyone that comes into it or our captive members, roll up the sleeves, pick up a shovel, and do work. There's no room in our world for people that just talk. And get it done, get it done right. That's quantity and quality. Do a lot of work and do it really well. We want people to know that when something comes from Pareto, it's of the highest quality. So I'll just very, very quickly tell the story of how we came up with those. And obviously, you guys know this.

[00:19:35.730] - Andrew Clayton
We have four, by the way, you hit on three.

[00:19:37.950] - JJ Purdy
Greater good.

[00:19:39.270] - Andrew Cavenagh
Greater Good, I missed that one. Shocking that's the one I forgot.

[00:19:41.670] - Andrew Clayton
Weird.

[00:19:44.100] - Andrew Cavenagh
I thought you did that for the greater good. And this is true. It's that anyone does anything. And I think that that is anyone who joins our firm recognizes that everybody here is willing to help everyone grow. And then for the greater good is obviously the undercurrent of a captive. It's a bunch of employers coming together as captive members for the greater good. In some ways, it defines our company.

[00:20:06.450] - Andrew Clayton
We have a-

[00:20:06.990] - Andrew Cavenagh
Despite the fact that I forgot it. In terms of how we came up with them... And I'm telling you guys this, but JJ, you were obviously there. Is that JJ- [

[00:20:15.990] - JJ Purdy
You were there.

[00:20:16.770] - Andrew Cavenagh
I was there. As an outsider, JJ agreed to MC the session and he told us, tomorrow, come to the management meeting, and I want you to tell me the names of three people that if you were to start a company you want by your side. And the only rule was it has to be somebody that somebody else in room must know and somebody else knows. It can't be my Aunt Caroline. Not that Aunt Caroline wouldn't be fantastic at helping us run the company. But so the next day, JJ sets up at the whitboard. He says Cavanagh you go first. Who's one person that you would want by your side when you started a company? And inverably-

[00:20:51.360] - John Naughton
Weird that it wasn't Clayton.

[00:20:54.690] - Andrew Cavenagh
Yeah, he was four. He was fourth on the list. I'm sure the first word out of my mouth was probably McKenna, and he wrote McKenna's name on the board. And then next was, so why McKenna? I'm like, well, she's smart is crap. She works for a tail-off... Trying to do all this without swearing here which is not normally how I tell this story. Super smart, willing to do anything, willing to help anybody learn. And so JJ wrote those five attributes below McKenna's name. And we went around the room doing that until everybody in the room, and there were probably five or six of us on the management team at that point.

[00:21:30.030] - Andrew Cavenagh
So 18 names. Each of the 18 names have, let's call it five attributes underneath them, that would be 90-ish. Something like that. Some number, some big number. Then JJ erased the names of the individuals because the people don't matter, and what mattered is what we cared about.

[00:21:48.690] - Andrew Cavenagh
So then we clustered all those different things because there was tons of commonality, and just distilled those down into four things. We did a smart thing, which was we didn't instantly run out and say, here are the 15, I mean 10, Commandments. That's an age check.

[00:22:04.500] - JJ Purdy
You passed.

[00:22:06.210] - Andrew Cavenagh
And instead we held those internally for about three months to make sure we got them right. And we tried to look at the company every day through the lens of those four core values. And at the end of that three months, we agreed that we got them right and brought those into the company. A long-winded story. I don't mean to accidentally compliment JJ but he did a great job that day.

[00:22:26.180] - JJ Purdy
He came up with that process on his own, which was the most impressive part.

[00:22:29.060] - Andrew Cavenagh
The fifth core value is never compliment somebody on the team to their face.

[00:22:33.440] - Andrew Clayton
That's yours.

[00:22:35.090] - John Naughton
And if you're going to make fun of somebody, always do it to their face.

[00:22:37.430] - Andrew Cavenagh
Absolutely.

[00:22:39.460] - Andrew Clayton
Doesn't matter if somebody gets hurt just as long as it's funny, yeah. The core values in their beauty, the simplicity of them are spectacular in the sense that we get lots of questions, decisions, things that we need to go through. You can just reference the core value and say, is this consistent? Does it match our core values?

[00:23:03.530] - Andrew Cavenagh
I also think that, and we can move on in a second. But the core values, you get business decisions at a time. Should we accept this B or should we do X, should we do Y? My instant reaction is let's apply the core values to this decision, and it is amazing how often it ends up pointing in the right direction.

[00:23:23.300] - John Naughton
All right. This one's going to be challenging. It's going to require a little bit of humility, so this should be real interesting. What is the thing that you did at Pareto, without a lot of thought, that has turned out to be brilliant?

[00:23:38.000] - Andrew Cavenagh
I'd like to think that we don't do a lot of things with zero thought. But the quick thing that comes to mind is that we thought, "Okay, we're growing. We struggle to hire people from Cigna and Aetna, and when we do it's C-plus players. Let's build our own farm team. Let's go to the well." So two years ago, we started our associate program where we hired 20 college graduates. We didn't even know what they would do in the company and brought them into the company, tried to teach them the basics of insurance, basics of captives and all of that. And we repeated it last year. For the last two years, we have hired roughly 40 people graduating from college, and it has been stellar. It's been fantastic.

[00:24:24.620] - John Naughton
It is brilliant because did you know what you wanted to do when you graduated from college?

[00:24:28.160] - Andrew Cavenagh
I wanted to own an NBA team. It hasn't worked out very well. No, I had no idea what I wanted to do.

[00:24:33.500] - John Naughton
It's [inaudible 00:24:33].

[00:24:33.920] - Andrew Cavenagh
No one knows. I won't say no one, but a lot of people don't know. And it's been invigorating having the young crew, and I call them kids and stuff like that, which I shouldn't, but it's been fantastic having them around.

[00:24:45.620] - Andrew Cavenagh
When we started the program, the thought was they would spend almost a year in training. And three months in, and this is a cool thing, is that the departments were like, we need people right now. And we have all these people that are really talented, we need them right now. Let's get them into underwriting, let's get them into account management. And watching that team grow has been fantastic. So I'd say that's my number one thing that we did again, not on a whim, but it wasn't hyper-analyzed, that has been fantastic.

[00:25:13.340] - JJ Purdy
All right, so next question. Not expecting to predict the future of health care because you will. So just focus here narrowly. What do you expect to see over the next two to three years in the employee benefit captive space?

[00:25:25.120] - Andrew Clayton
We're trying to spread the word without being too... Flame the fire, or blow wind on the fire to accelerate it. But the reality is, from a employer standpoint, you're going to deal with inflation. You're likely going to be hit with the recession. On top of that, you have medical inflation, which isn't just standard medical inflation. You have increasing RX cost, you have medical care that's been deferred that's now coming to fruition. You got all those and you have a post-PPP environment, and PPP was a huge impact to a lot of medium-sized privately held businesses where they were able to weather the storm and some of the pain that they would have felt from typical fully insured renewals, they didn't feel as much. So all of that's coming to a head at a unique time. We're seeing the impact absolutely for January 1st of 2023, but over 23, 24 and beyond, that's going to continue to hit.

[00:26:32.590] - Andrew Clayton
We've been a big force within the self-insured space for employers that are obviously looking for better long-term stability, protection against the increasing cost and volatility. I expect a fully insured transition to be a huge, huge, huge opportunity in growth avenue for us as we go forward.

[00:26:54.960] - Andrew Cavenagh
So I don't disagree with whatever it was that he just said, but these are the things that I would point out. Is that the demand for captives will grow exponentially. You've got gene therapy, you've got increasing claims, all the stuff that Clayton just said. So demand for caps will go up. There will be a new group captive, or group captive manager, every day. They're growing on trees these days. Everyone's like, "We're a group captive manager. We manage PNC captives, let's be benefit managers." So that will grow.

[00:27:24.390] - Andrew Cavenagh
As part of that, they're going to fail and they're going to see some of these captives that are literally one claim away from failing. They get a haemophiliac, they get a dialysis claim, and they're under water. They have 20 members. They have $10 million in premium, completely or wholly insufficient to withstand volatility. And the flip side of that is that Pareto will do well. And it's almost with, not regret, but guilt that I say that.

[00:27:50.730] - Andrew Cavenagh
So we have and will continue to merge, acquire other captives. We will buy captive managers where people have come to the realization that they all started these things and they have the 10 million bucks of premium like, oh no, one haemophiliac and everyone's rates go up by 20% per year. So there'll be consolidation. So that's what I would predict is, massive growth, new entrants, some failures and a bunch of people merging and people like Pareto acquiring other entities.

[00:28:19.880] - Andrew Clayton
Growth in the industry is great. Look, we want other people in the space. We welcome, if it's referred to as competition, great. But let's go, we're confident in who we are and what we do. To his point though, our fear is that they stumble and they can't get out of the gate and they can't get the critical mass, and we don't want that for employers or consultants.

[00:28:41.510] - JJ Purdy
On the PNC side, 10 to $15 million in premium is scale. The problem is trying to correlate that over to an employee benefit group captive, where it simply is just not enough.

[00:28:52.580] - Andrew Cavenagh
Exactly.

[00:28:55.480] - JJ Purdy
I heard Grumpy Cap. So let's clarify. Your nickname is a Grumpy Cap, Cav.

[00:29:00.670] - Andrew Cavenagh
Are you looking at Clayton or are you looking at me?

[00:29:01.810] - JJ Purdy
I'm looking at you. How did you get it?

[00:29:03.610] - Andrew Clayton
So here's the deal. It's a little inside baseball, but at Pareto, everybody has a nickname, and the nickname in general is the polar opposite of your personality. And so I'm Grumpy Cap because I'm this effusive, outgoing person. And so what's the opposite of that? It's Grumpy Cap. So that's how I got my name.

[00:29:22.960] - John Naughton
Clayton, You seem to be... We're just going to roll right through that.

[00:29:25.510] - JJ Purdy
Roll right past that, yeah.

[00:29:29.470] - John Naughton
You seem to be all over LinkedIn these days. Some of the posts actually seem reasonably intelligent. Just wondering, who writes those for you?

[00:29:37.630] - JJ Purdy
First of all, great question. It takes a village to raise a Clayton, is a short version.

[00:29:43.390] - JJ Purdy
I love that the question isn't did you write it? It's just, Who wrote it?

[00:29:46.990] - Andrew Clayton
Yeah, the only way to ask the question. It's been.

[00:29:51.000] - JJ Purdy
You're not sure?

[00:29:52.040] - Andrew Clayton
No, no. Kate from our marketing team have been assisting with some of my phrasing. I'll put it that way. I have not been, this is going to shock you, a historic, huge Linkedin fan until about a year and a half ago. And the push by Kate in our marketing team, has been spectacular. I've actually really, really enjoyed the environment, the community. And for people that I used to judge as... Your comments JJ, earlier about let's exercise some humility and things like that. I've gotten to know a bunch of people that might have demonstrated a little bit of hubris on LinkedIn, are really good genuine folks that are pushing our collective narrative forward.

[00:30:40.570] - John Naughton
I'd love to see your search history on there.

[00:30:44.210] - Andrew Clayton
Yeah. Well, that's neither here nor there.

[00:30:46.430] - Andrew Cavenagh
So I think one of things that's safe to say, I've known Clayton, worked together, been friends for 25 years or something crazy like that now.

[00:30:53.390] - Andrew Clayton
Colleagues.

[00:30:54.140] - Andrew Cavenagh
Colleagues.

[00:30:54.830] - Andrew Clayton
Yep.

[00:30:56.630] - Andrew Cavenagh
And if it's more than three paragraphs long, he neither read it nor wrote it. That is 100% guaranteed.

[00:31:06.000] - Andrew Clayton
So what I'd like to offer here is that I'm a great editor. Original content, not my thing. But editing, Spectacular.

[00:31:16.110] - JJ Purdy
So next question. Cav, you missed this year's spring meetings due to an injury, an athletic encounter, care to elaborate?

[00:31:24.360] - John Naughton
Woah is me.

[00:31:24.360] - JJ Purdy
The injury, the recovery.

[00:31:26.640] - Andrew Cavenagh
So the injury was that I fell skiing. I was on a triple black diamond. I tore my rotator cuff skiing, and I had surgery the day of our first members' meeting and I missed it. And it was my birthday. On my birthday had surgery, drugged up, and then I got all the videos from everybody in San Diego. I don't know if there was literally a sadder moment in my life where I was missing that, because as much as I have the reputation as being Grumpy Cap, I love being around our captain members, I love being around our consultants. I just don't like talking to anybody. So missing that was tough on me, and then what was even tougher is that Flat Cavenaugh went to all the meetings and Flat Cavenaugh-

[00:32:08.850] - Andrew Clayton
Dominated.

[00:32:09.600] - Andrew Cavenagh
Dominated.

[00:32:10.290] - Andrew Clayton
He was super popular. So we missed him, and it was different, certainly, absolutely not having him there. I would say part of the question earlier though, is one of the great things was having everyone else elevate, step up. And from the members' perspective, well they missed him personally because of all the obvious personal emotional connection.

[00:32:36.870] - Andrew Cavenagh
Personality, we connect.

[00:32:41.400] - Andrew Clayton
They were great meetings and we're looking forward to the triumphant return.

[00:32:47.100] - John Naughton
Yep, a lot of folks on stage. Clayton, another one for you. Arsenal or Tottenham?

[00:32:53.780] - Andrew Clayton
Don't even bring that. Come on, that's not even a question.

[00:32:56.480] - John Naughton
We're simply just emphasizing-

[00:32:57.860] - Andrew Clayton
Understood.

[00:32:58.310] - John Naughton
The obvious.

[00:32:59.150] - Andrew Clayton
Understood, Yes.

[00:32:59.930] - John Naughton
Next question.

[00:33:03.740] - JJ Purdy
Let's go back to that. You like fifth-place teams?

[00:33:08.540] - Andrew Clayton
I like hard working-

[00:33:11.090] - Andrew Cavenagh
Arsenal.

[00:33:12.140] - Andrew Clayton
Hardscrabble-

[00:33:12.140] - Andrew Cavenagh
Arsenal.

[00:33:13.130] - Andrew Clayton
Please.

[00:33:15.860] - Andrew Cavenagh
They outworked you guys so much.

[00:33:19.360] - Andrew Clayton
Their fanship.

[00:33:21.910] - Andrew Cavenagh
Whose fanship?

[00:33:23.530] - JJ Purdy
He likes to watch Champions League.

[00:33:25.300] - Andrew Cavenagh
Yes.

[00:33:26.470] - JJ Purdy
Plans for the World Cup, will you just have it aired in the in the office on weekdays?

[00:33:31.600] - Andrew Clayton
Absolutely. The team are big sports fans and so we don't yet know what we'll do. But World Cup comes once every 16 years, and... It's actually every four. JJ I'm just kidding.

[00:33:45.030] - JJ Purdy
Well, the US doesn't make it that often.

[00:33:47.430] - Andrew Clayton
The US is in this one and they have a great team. They need to play Aaronson though. Let's go, Philly Pride. Aaronson needs to start. So yeah, we'll do something. We'll have competitions, we'll have polls, we'll do something. But I think that's one of things that I love about our team, is that we say work hard and play hard. But the play hard gets overexaggerate. It's not really play hard that much. But a game on in the background, having a poll around that. We're all people, we all have stuff outside of work and the fact that some of those things can overlap can be great. So really looking forward to the World Cup and what we can do in the office to celebrate it and watch it.

[00:34:19.320] - JJ Purdy
So soccer is one of them, and you touched on a couple others as we talked for a bit. But anything else that you do specifically from a team standpoint, camaraderie? We played a little bit of ping pong before we came in, that sort of thing.

[00:34:32.730] - Andrew Cavenagh
Was that camaraderie? Is that what we call that?

[00:34:34.860] - JJ Purdy
You may call it a loss, but is anything else that you guys do

[00:34:40.740] - Andrew Cavenagh
It's generous of you to count that as a loss.

[00:34:42.960] - Andrew Clayton
First movers advantage. I like that. I've got the mike.

[00:34:47.190] - Andrew Cavenagh
The team does lots of things with one another. But the thing that comes to mind the most is that our crew, there are 16 different fantasy football leagues. People are staying here playing ping pong and there's just lots of things that happen organically within the team and I think that's cool is that like work doesn't have to be your friends, It really doesn't. But if you can really like the people we work with, it makes it that much more enjoyable.

[00:35:10.920] - Andrew Cavenagh
I put something on LinkedIn the other day that three people saw, which really rings true to me, which is I love what I do, I love with whom I do it, and I love why we do it. And with whom is really, really important. And I think our team really enjoys one another, outside of I don't think they like Clayton that much. But but outside of that, it's great.

[00:35:29.400] - Andrew Clayton
So when we started this thing 10 years ago, I was 25.

[00:35:33.900] - Andrew Cavenagh
11.

[00:35:36.270] - Andrew Clayton
11 years. I was 25 years old and so I got invited to a lot more of the softball leagues and those types of things. Now, 10 years later, being 48, I'm not quite invited to as many.

[00:35:46.680] - JJ Purdy
48? Aren't you 55?

[00:35:48.050] - Andrew Clayton
God, don't. Yeah, there's a liver in there that's [inaudible 00:35:50]

[00:35:51.790] - Andrew Cavenagh
Screaming to get out.

[00:35:52.530] - Andrew Clayton
Yes. But to see all the camaraderie, the connectivity. In some ways we try to stay in the wallpaper and stay out of it to let everyone else enjoy each other.

[00:36:06.400] - John Naughton
A lot of good energy around here. We walked around a little bit before the podcast.

[00:36:10.120] - Andrew Clayton
Nice for you to spend time walking around your investment. Appreciate that.

[00:36:13.210] - John Naughton
Yeah, just checking up on it.

[00:36:14.740] - Andrew Cavenagh
Once in 11 years.

[00:36:16.630] - John Naughton
Seeing what's in the fridge mostly. I was a little disappointed. Any good practical jokes that you can talk about over the years?

[00:36:27.250] - Andrew Cavenagh
So yes. With a team that loves one another, there come practical jokes. So to come to mind. And the reality is I'm going to blow one of these tonight because one of the people in the room doesn't know about the practical joke.

[00:36:41.880] - Andrew Clayton
My head's on a swivel.

[00:36:42.840] - Andrew Cavenagh
And it should be. The first is that in the FMC office we have one of those fancy automated coffee machines where you press buttons and it does stuff. And so one of our crew put a speaker underneath it. And then they would sit in what we call the bullpen, and when someone would come up, they had an iPhone connected to it and they would talk underneath it. And someone would press, I want a latte. "Do you really want a latte?" And there were several people that thought the coffee machine was actually speaking to them. And the only mistake we made is not having all of this on video. It was absolutely... I don't know if it's Punked, which also dates me, or something even older than that. But fantastic.

[00:37:21.840] - JJ Purdy
This is the Seinfeld episode where Kramer was the movie hotline, where you could tell people what they wanted hear.

[00:37:27.810] - Andrew Cavenagh
Why don't you just tell me what you want?

[00:37:29.490] - JJ Purdy
Rochelle? Rochelle?

[00:37:33.210] - Andrew Cavenagh
The other is that there's a long jump contest in the office. So the way it works is there is a line on the floor. Sorry, broad jump. Not long jump, broad jump. And you jump as far as you can, and wherever you land, you put a sticky on the wall next to you. And so there's a cluster of stickies. And Clayton who despite what he just said, he really perceives himself to be an incredible athlete, despite the fact that he was both a catcher and a punter. He is always two feet short of the cluster, let alone winning. And what he didn't know for the longest time, and I don't know if I'm revealing this right now or not, is that they always move the line on him so that he was never close to getting to where everyone else was. And he would get so frustrated that he was not near anybody else. He is the worst broad jumper in the company.

[00:38:24.000] - Andrew Cavenagh
Talk about externalities. This has caused a lot of issues in Clayton's life.

[00:38:27.150] - John Naughton
Oh, I feel bad for Michelle.

[00:38:28.600] - Andrew Clayton
I'm going to send you my therapy bill. This is ridiculous.

[00:38:32.070] - Andrew Cavenagh
I feel bad for Michelle.

[00:38:32.880] - Andrew Clayton
And my trainer bill. They've been telling me talking about explosive tactics.

[00:38:37.820] - JJ Purdy
Honestly, did you know this tonight or not?

[00:38:40.650] - Andrew Clayton
This is ridiculous.

[00:38:43.290] - Andrew Clayton
So you guys have been here for a while, you've seen it from the beginning. What are a couple of moments that jump out at you? What are some things that you say, Hey, neat. Interesting, Or also, what are some things that we've stumbled with along the way?

[00:38:58.560] - John Naughton
Having watched your progression through office moves, I think that that's to me, the cadence in terms of the growth of Pareto and your customer base and your consultant base. I can I can look at that, in terms of the moves that you've made. Starting with three of you in two offices. Sierra Center first floor, sierra Center upstairs, FMC. That's how I track the progression and it's been amazing to watch and be a very small part of it.

[00:39:32.600] - JJ Purdy
Yeah, I'll get serious finally for once and say that you guys actually really care about what you do. And right from the beginning, you could hear Clayton yelling across the hallway when something didn't go right. That type of passion and caring about what you're doing and belief in what you're doing has come through the whole way, the last 11 years. I don't think it's diminished.

[00:40:03.950] - JJ Purdy
That's something that I am impressed by. It makes me believe I don't need to check up on my investment, Clayton. I believe in you because you believe so heartily in what you're doing. It makes me believe, too.

[00:40:17.780] - Andrew Clayton
Thanks, buddy. You also should thank your parents for giving you a voice for radio. You got a nice voice. I know you guys all well enough to know that you grew up with siblings and teams and all the stuff that you care about tremendously. At some point when you leave college, you leave that environment, you're wondering, how do I...

[00:40:37.710] - Andrew Cavenagh
After seven years.

[00:40:38.730] - Andrew Clayton
After seven years. But you're wondering how do I replace that? Or how do I find that? And being able to replace that incredible drive and desire to be a part of something. It's wonderful to find that. So I appreciate that I found that in what we do and you guys.

[00:40:59.370] - JJ Purdy
I thought you were going to say something nice about Cavenagh there.

[00:41:02.380] - Andrew Clayton
I tried to.

[00:41:03.670] - John Naughton
So the thing that you're most proud of, we talked about external and Cavenagh talked about it, that for six or seven minutes, words that I...

[00:41:11.950] - Andrew Cavenagh
Incredibly eloquent.

[00:41:13.050] - JJ Purdy
I kind of zoned out for a while. How about internally with your team? Things you're most proud of?

[00:41:19.180] - Andrew Cavenagh
Clayton and I will both probably get emotional. Typical for him, not typical for me. I think about the internal things and it's our team. We talk about stakeholders. You've got shareholders, you have captive members, you have consultants in our team. I think it's the team that hits me the most.

[00:41:38.620] - Andrew Cavenagh
So I look at people that have developed inside the company. Nick Milligan, somebody in the industry that we know, shout out to him, was in the office a couple weeks ago when we were talking, and I said to him, "I don't think McKenna gets the appreciation that McKenna deserves" in that there is literally no one else in the industry that has overseen an organic growth from zero to what is going to approach a billion dollars in stop loss premium while knock on wood, because we always knock on wood and talk about results, with underwriting profitability.

[00:42:11.620] - Andrew Cavenagh
Nobody else can put that on their resume. I don't mean that McKenna has done that by herself. The stop loss carriers have played a role. Her entire team has played a role, but literally nobody else as an executive can say billion dollars or gaming growth, profitable stop loss. And it's just unsung in the industry. And so the team in general is what I would say internally.

[00:42:37.480] - Andrew Clayton
She'd also knife you for bringing it up, which is.

[00:42:43.000] - Andrew Clayton
[crosstalk 00:42:43] Ithink that sums it up and I can talk about others, but I think that sums it up in terms of what we're thankful for. I've said it repeatedly but you take this team, we're very, very lucky to be able to be in the space that we are and hopefully having an impact and hopefully improving what the employers, the consultants, and ultimately the employees go through.

[00:43:12.960] - Andrew Clayton
But this team, you can apply them to it doesn't matter the industry and it's domination nation. You start there and everything else is easy.

[00:43:22.920] - Andrew Cavenagh
Two more cases that I think are really important. One is Sarah. So Sarah joined us as an intern and then became maybe our first account manager, then the manager of account manager, and Sarah Crownshaw. Fantastic. And the other is P Rog. So P Rog is in some ways my favorite story because it it highlights what's wrong with corporate America, is that P Rog was...

[00:43:49.010] - Andrew Clayton
He's not what's wrong with corporate America.

[00:43:50.930] - Andrew Cavenagh
I will clarify. Well, he may be, but we don't know that yet. We're going to find out. But Patrick is an example where he was referred to us by somebody else who said, "oh, we can't hire him because we have all these rules why we can't hire this person, but we think he's a fantastic person. You should meet with him."

[00:44:08.390] - Andrew Cavenagh
And we met with him and again, the company this time is eight people, nine people. It's tiny. We met with them, we're like, yes, he is fantastic and we have absolutely no idea what you might do for us, but we need to hire him.

[00:44:20.780] - Andrew Cavenagh
I won't go into the whole chapter and verse about Patrick, but it's gone from no idea what you're gonna do tomorrow to now manages all the sales associates and you couldn't find somebody that embodies our core values more than Patrick and Sarah and McKenna.

[00:44:37.550] - Andrew Clayton
As you guys have kids and all those type of things, you always lean like if something terrible happens now.

[00:44:44.720] - John Naughton
That's not how most people think.

[00:44:46.460] - Andrew Clayton
No, no. But you have The Guardian and then all that stuff and all the people that Cavenagh referenced are at the top of this. If some terrible stuff happens, who can I trust? And there's a long, long list that we entrusted the community. There's a long list of people here that you'd say everything's going to be okay at the end of the day.

[00:45:09.360] - Andrew Cavenagh
Can we set a goal that we can make Clayton cry before this podcast is over?

[00:45:13.080] - Andrew Clayton
I am fighting it back. I'm fighting it back and you were close earlier.

[00:45:19.670] - Andrew Cavenagh
That's not true.

[00:45:20.520] - Andrew Clayton
That's dust. That's dusty.

[00:45:22.770] - JJ Purdy
That's all. Oh, yeah. So, yeah, we want to talk about it's great living in the past, and Clayton's search history on LinkedIn isn't a test of that. But how about the last year? What are you most proud of internally with the team? You guys have grown a lot. You talked about during COVID you were doing virtual interviews. Now you're back in-person. What are you most proud of for the team in the last year?

[00:45:55.720] - Andrew Cavenagh
It's going to weave together several things that we said, obviously lots of metrics that we've achieved this year. But I go back to the growth of the team. That people are playing a really, really big and important role today that they weren't playing a year ago. And honestly, we didn't expect them to play.

[00:46:12.340] - Andrew Cavenagh
I won't name names because we've named a bunch of names, but at some point someone said to me, so-and-so is doing a fantastic job and it's opened up all of these opportunities. So I think it's... I know it's redundant, but it's really important. It's that people are growing within the organization and therefore, the organization is growing. We are in a people business, and I couldn't be more proud of the new team members that are driving us forward.

[00:46:41.200] - John Naughton
What does Pareto look like in the next 2 to 3 years? You've gotten to this point primarily, certainly in the early years with Philadelphia based talent. But as the company grows and you continue to look for best in class hires, what is the company look like in terms of footprint over the next 2 to 3 years?

[00:46:59.680] - Andrew Cavenagh
We have, and I'll get the stats directionally correct, 150-160 team members today, 100 of whom are in Philadelphia. So we already have, some percentage, 40% that aren't in Philly, some big number. We have an office in Salt Lake City. We have a lot of people distribute around the country. So I think over time that continues in that we are looking for a very unique type of team member. And you're not going to find all of those in Philly.

[00:47:28.180] - Andrew Cavenagh
So I think training of associates, will remain in Philly, Philly will remain our core, we're Philly through and through. But you'll have team members all around the country which will start to replicate where our clients are, where our consultants are. So I think it spreads throughout the country.

[00:47:46.300] - JJ Purdy
Why did you start Pareto?

[00:47:48.040] - Andrew Cavenagh
I think the easy thing to say is that it was something that was necessary. And I think there's an element of truth to that. Right? No insurance company, no insurance entity, no insurance policy has ever been created until there is a need. Take cyber as the example. Cyber policy didn't exist 10 years ago. A need arises because there's all these things, right?

[00:48:11.110] - Andrew Cavenagh
So in some ways we arose because of a need. But that's a general statement. I said like, which I make fun of my daughter for saying all the time, but now she's wearing off on me, in a good way.

[00:48:27.280] - Andrew Cavenagh
But I think that the captive industry specifically has always been the innovative part of the industry. How do we solve things that no one else can solve? And they have solved lots of different things. And the captive industry applied themselves to employee benefits and said, we can solve this.

[00:48:43.330] - Andrew Cavenagh
I think that's what it comes down to, is that there is a need. There was the, I don't want to say intellect because I give Clayton too much credit. But as you know, John, we first did this inside a big insurance company and working inside of a big insurance company isn't always ideal.

[00:49:00.190] - Andrew Cavenagh
Legal agreements prohibit me from saying anything more than that about working inside certain big insurance companies. But it needed to be entrepreneurial, it needed to have oxygen to let it grow and that's why we started Pareto, is that employers needed it. Couldn't happen in any other environment and we were here and happy to be a part of it.

[00:49:20.480] - Andrew Clayton
Our parents did a good job of giving us enough self-confidence. I'm half joking, but we thought we were right, at the end of the day. That's why this started. So Cavenagh's description is absolutely correct. Inside, a big insurance company, couldn't get air, couldn't get breath. We couldn't grow it to the extent that we needed to.

[00:49:40.610] - Andrew Clayton
But at the end of the day, we thought we were on the right side of the fight, and that was enough for us to say, we'll take all the risk, we'll take all the opportunity to just put our foot in the ground and see if we can grow.

[00:49:55.580] - Andrew Clayton
I referenced the 10 year anniversary of our members meeting and seeing those folks in the room and seeing a total of 40 people there, including consultants, including Pareto folks, including employers, it was mind blowing for the fact that we actually might be right on this thing.

[00:50:18.740] - Andrew Cavenagh
It's not lost on us that Pareto's success, which is driven by our consultants, our captive members, is a direct result of where the world exists today. That world is crappy for a mid-sized employer. So there are some of this that is bittersweet, which is we exist, we excel because mid-sized employers don't have other options.

[00:50:48.060] - Andrew Cavenagh
We are that option. And I want to make sure that that we take a moment to pause to say that it's screwed up for employers and we are thrilled that we can be one of the solutions for them. But it's also an indictment of where the country is relative to health care and relative to health insurance and so I just don't want that to be lost on anybody that we're not blind to that.

[00:51:09.660] - JJ Purdy
First member meeting was really was more... We'll call it a prospect slash consultant meeting. Sheraton 2012, I believe.

[00:51:18.920] - Andrew Cavenagh
May 13th.

[00:51:19.690] - JJ Purdy
May of 13th. There were 40 people in the room.

[00:51:23.890] - Andrew Clayton
95.

[00:51:25.240] - JJ Purdy
Okay. 95. But it's like Woodstock. A thousand claimed they were there. But it was it was truly an intimate group. Two of you upfront. Telling the story. Sharing a vision. At that time, what was the ultimate goal of Pereto?

[00:51:41.770] - Andrew Cavenagh
I don't know that in some ways the Pareto goal...

[00:51:44.110] - Andrew Clayton
One more year.

[00:51:46.630] - JJ Purdy
Cash flow positivity, right? That was the goal. Pay the bills. We started the company with a basic premise that we can help the mid-sized employer, right? It's that simple on some levels. And so our goal was to do that.

[00:52:03.760] - Andrew Cavenagh
People ask me all the time, did you imagine 10 years later, Pareto would have a billion dollars in stop loss premium. If you'd asked me 50-50 bet. Would I bet billion dollars? Not a chance, right? You would have taken me under on that.

[00:52:16.390] - Andrew Cavenagh
But if you would have asked me what do I dream about, then it would have been 5 billion, right? That's the way the world works. That's the way that entrepreneurs work is that you're constantly reaching for something greater than what you have. We dreamed of big things, and that hasn't changed. Our dreams today are big. We want to help more and more employers reduce the cost of health care, reduce the volatility.

[00:52:39.190] - JJ Purdy
So, guys, how many captives do you have active?

[00:52:42.730] - Andrew Cavenagh
We have four benefit captives active today.

[00:52:47.220] - JJ Purdy
So I feel like you guys have been taking a little credit for starting these captives. Are you the only ones involved in the risk of that?

[00:52:58.080] - Andrew Cavenagh
No. And if we came across as if we have done all of this, then shame on us. We took a risk to start Pareto but that risk was really borne by me, by the employer. And so let's talk about who else took risks when we started the program.

[00:53:15.750] - Andrew Cavenagh
We have a couple of founding members. So July 1st of 2012, two members, Lowes and Manley Enterprises. Brian, I forget what your company was completely name, but close enough that said, look, we don't know completely what you guys have in mind, but we know enough that we're we're in it with you. At the same time, consultants, right? We have not built this on our own and I want to be crystal clear of that. So the founding captive members, the consultants that said, look, there has to be a better way.

[00:53:48.640] - Andrew Clayton
Bobby Ball, what's up?

[00:53:50.520] - Andrew Clayton
Incredibly important to getting this thing off the ground, which then led to the growth. So, yeah, I need to make sure that we're not coming across as having too much arrogance about what we've done.

[00:54:02.050] - Andrew Clayton
Now, I would just add to that the members that joined early said I'm a community of zero, but I believe in what you're doing. They came out from different perspectives, the two. Lowes had been involved in a property casualty captive for years and had predictably great success, and Manley had not been involved but looked at their escalating health care costs, hated it, hated the process, hated the frustration, hated the game that was being applied to them and said, we need to do something different.

[00:54:38.020] - Andrew Clayton
So they both joined. And kudos to the both the consulting partners for their support and giving them a little nudge and say, it's going to be okay. I believe in these guys.

[00:54:49.120] - John Naughton
Well, Field of Dreams. Built it and he will come type of thing.

[00:54:52.330] - Andrew Clayton
Clayton loves to tell the story of Manley in particular, where we have a fish on the hook, so to speak. We think we might have a deal here. And we went to the meeting at Brian's, at Brian's operation, and we said we're looking for employers that have slapped their hand on the table that said, "dammit," not to swear but "dammit, I'm tired of what I have." I want something different.

[00:55:15.760] - Andrew Clayton
Brian looked at us and said, "Damn it, I've hit my hand on the table so many times my hand hurts. Give me something different." All that part of it is true, even if the words aren't true. But that's where Clayton tells the story, which is that I continued to talk for 20 more minutes about.

[00:55:31.570] - Andrew Clayton
Deliver the point. But the important part of that is that was employer number one or member number one, and we actually never got to his final terms. And he said, "I'm in. I know my consultant, I know Bob, I know that Bob speaks highly of you guys, I spent time with you and I know what you're about. I know the challenge in front of us. My terms are going to be good enough. Let's go for it."

[00:55:58.930] - Andrew Clayton
I know this is Swan, and I believe in Bob, and I believe in you guys. Let's go. And so he took a huge risk.

[00:56:06.190] - John Naughton
That probably...

[00:56:06.690] - Andrew Clayton
And.

[00:56:07.370] - John Naughton
Embolden you guys about it. Is that why Clayton thought he was over six foot? [crosstalk 00:56:11]

[00:56:13.040] - Andrew Clayton
I started that meeting at five nine. I ended at six three. Yeah.

[00:56:16.870] - Andrew Clayton
But you're absolutely right, Jack attack. To be able to be in that meeting and see an employer say, "I don't need to know what the worst case scenario is because I know my my best case is way better than anything else. And I also know my worst case is exactly where I am today." That was incredible.

[00:56:39.970] - Andrew Clayton
Well, let's say that in a different way. Nothing that we have done has been Pareto only. Everything we have done has involved the captive members. Our consultants are stop loss carriers.

[00:56:54.970] - Andrew Clayton
It's possible that we're the face on stage, but there are a whole group of people that have led to the success. There are a lot of people that have been involved in the success of the captive members, which is why Pareto exists.

[00:57:09.250] - John Naughton
It goes a little bit to why I think insurance isn't an efficient market because the buyer actually has more information than the seller. And it's not often in a market that happens.

[00:57:24.250] - Andrew Clayton
Who's our prototypical employer? I get asked the question often, which is, well, why won't people just fake X, Y, and Z in terms of cost containment? It goes back to the structure, which is the people that join our program are pissed off with the fully insured options. They're pissed off that they don't have data, they're pissed off, they don't have control.

[00:57:45.820] - Andrew Clayton
So they seek our program because they want control and they want data and therefore they're completely unlikely to want to sort of skate through and fake things. These are people that are real. When I think about our clients, they're real. They want to make change in their company and they want to be around other people that want the same.

[00:58:07.420] - Segment 3: John
You used the term consultant. You never used the term broker.

[00:58:11.740] - Andrew Clayton
It's a very conscious decision on our part to use the word consultant. In some ways we use it to acknowledge the people that we partner with. We also use it to try to elevate some of the newer folks to our community.

[00:58:28.060] - Andrew Clayton
A broker to us is somebody that is really good at going out and whether intended or not, working on behalf of the carrier. So getting quotes, getting opportunities, acting almost as a pawn for their proactive efforts.

[00:58:45.520] - Andrew Clayton
A consultant is someone that says, "Stop, pause, let me work on your behalf, employer." as opposed to Carrier. "I am going to give you advice on what's best for you over the next 3 to 5 years."

[00:58:59.230] - Andrew Clayton
A broker does a great job of having their team develop a super fancy spreadsheet with lots of different colors, lots of different opportunities. And then can circle the bottom right hand corner that has the cheapest opportunity.

[00:59:13.560] - Andrew Clayton
And that's a very obviously simplistic and biased and jaded and callous view of it. But I would say that we bang our head against the wall. The biggest challenge we have in the industry is that we spend time trying to convert or trying to educate a broker.

[00:59:33.450] - Andrew Clayton
At the end of day, the industry is getting better. There are more and more consultants, there are more and more people that are standing up doing the right things, understanding that their pathway forward is the success of their client, not the success of the carriers.

[00:59:48.240] - Andrew Cavenaugh
To quote both Snoopy and Charles Dickens, it was the best of times, it was the worst of times. That's the way that we think about insurance brokers, right? There are a huge number that are just plain out knuckleheads. All they do is build a spreadsheet. It's one year, what's priced, that's all I can do. They don't do anything different than their competition. There's that small select group, and that's the group that we strive to work with, which are consultants. They're saying, "Okay, where are we going three and five years from now? What is the game plan to get there?"

[01:00:18.000] - Andrew Cavenaugh
I think that's really important to delineate between the two, because brokers suck and consultants are fantastic. Employers need consultants and that's who we work with. That balance between actually providing multi-year stability is what the captive does. Brokers miss that point, consultants get that point.

[01:00:37.950] - Andrew Cavenaugh
The crazy thing is the employers absolutely get that. If you ask an employer, "What do you want? Do you want cheap four years in a row and then a complete kick in the teeth for year five, or do you want something stable?" What employer doesn't want stable? It's almost ridiculous or embarrassing. The consultant that believes in himself and adds value and isn't about price...

[01:00:58.350] - Andrew Cavenaugh
Because everyone can get price. That's the stupid thing, is that the brokerage industry if they don't stop where they're going, they're going to drive themselves into being replaced by AI or a bot or whatever it is, because just getting a price, a cheap price, and sticking it on a spreadsheet and that passing as consulting advice is flawed. Whereas the consultant that looks and says, "What are we doing 3-5 years? How do we make your employees happy? How do we make you happy? How do we get stability?" will thrive. That's who we try to partner with.

[01:01:29.100] - John Naughton
Those consultants, they are the frontline visionaries. What have you done over time to arm those frontline consultants in their fight against traditional insurance brokers? Has that changed?

[01:01:45.180] - Andrew Cavenaugh
I don't know that what we have given them has changed. What we have given them is the only thing that the industry can give them, which is the ability to do something different. Every consultant, every broker has Bluegrass. They have all the fully insured carriers. What we give them is something different, and we give them something that matters. If you think about our clients, as I said earlier, they're the clients that have slapped their hands on the desk and said, "Damn it, we want something different."

[01:02:14.880] - Andrew Cavenaugh
The consultants that we deal with are the same way. They're so frustrated with the corner they've been backed into in spreadsheets. All they want is the ability to do right by their clients and to actually offer a value as opposed to a fancy spreadsheet. That's why I think we have this simpatico relationship with our consultants, is that it's a win-win. It's a win-win-win, right? It goes back to why we need the company, that everybody's winning. The client, the consultant, Pareto, is that everybody is better off.

[01:02:44.040] - John Naughton
Consultants, they're your front line, Pareto folks. Curious just to what you do to arm them with information, but also collectively how you make sure that they're part of a common community as well.

[01:03:00.180] - Andrew Cavenaugh
We talk about our captives and the member-to-member experience of the employers. Until they join the captive, they don't really have a peer group. Our consultants are the exact same way. It's one of our favorite things to see, is that we deal with a consultant that has two employees to the biggest national firms. But within all of those organizations, the people that we work with are unique, and we love bringing them together and we love seeing the camaraderie and the idea sharing that happens amongst that group. It's open, it's organic, and there's nothing better.

[01:03:36.270] - Andrew Cavenaugh
So I won't sit here and say that we arm them with anything. We give them our captive product, which obviously we think is great. I think one of the coolest things they get is access to that community of their peers. By peers, it's their true peers, people that give a damn about the employer. Just like the captive. I think that's the best thing we can possibly do for the consultants.

[01:03:57.950] - John Naughton
What's a typical employer and has that changed over time?

[01:04:01.900] - Andrew Cavenaugh
The typical employer has not changed. By that, I mean that the number one thing we care about is the mentality of the employer. It is the employer where the CEO has slapped his or her hand on the desk and said, "Damn it, I want something different. I want control, I want data, and I'm not willing to give control over what is in many cases my second biggest expense to big insurance companies." That is our typical employer and that hasn't changed.

[01:04:31.390] - Andrew Cavenaugh
You look at then moving one step past that. Every industry is now represented by the captive. I don't care if it's manufacturing, wholesale, distribution, nonprofit, pseudo-governmental entity. We have everything. And then you look at employer size, it has changed, where I think our average group was probably 120 employees when we started, and that's grown a little bit to about 170. But that's still that 50-750 sweet spot where I know I want something better, but I can't quite get it on my own. That's our typical client.

[01:05:05.650] - Andrew Cavenaugh
When we underwrite, yes, we look at losses and expected claims and all of that stuff. But the number one thing is, what is the mentality of the employer? Do they want something better for their company and for their employees?

[01:05:17.740] - JJ Purdy
I want to thank you guys for having us here. It's been great, mostly just to see Clayton lead.

[01:05:22.580] - Segment 4: Andrew Clayton
John, it's been a great 10 years. Let's make it another 10 years before you check in on your investments. Been spectacular, yeah. Really enjoyed it.

[01:05:31.760] - John Naughton
Pick up your parting gift on the way out. That was his chance at being serious. I echo what JJ just said. It's been a joy to watch from afar what has been created there. There were a couple of you at the starting line, but the race is still on and you've amassed quite a group. We're excited to see where this thing continues to go.

[01:05:56.000] - Segment 4: Andrew Clayton
Well, we appreciate that. In reality, we're not worthy of the good fortune. The good fortune starts absolutely with the team and the community. We're beyond lucky to be able to be here. I don't have much else to say besides that. But I want to thank you guys for being here. And thank you guys for being here from the start, too. Not every decision you make is an easy one when you think about investing and committing and and being part of something like this. Absolutely additive. At the end of the day, I'll go to bed and I'll-

[01:06:45.050] - JJ Purdy
Cry again.

[01:06:46.510] - Segment 4: Andrew Clayton
I will. [crosstalk 01:06:46] I'll go to bed tonight thinking, "Why me?" in a positive way, so thank you.

[01:06:54.800] - JJ Purdy
Love you, buddy.

[01:06:56.700] - Segment 4: Andrew Clayton
You're okay.

[01:06:58.260] - Segment 4: Andrew Cavanaugh
John and JJ, thank you for joining us today. Appreciate you taking over the reins of of being the interviewer as opposed to the interviewee. I'd say that's not easy. But past your willingness to do this today, we appreciate the fact that you guys are investors in Pareto. There are, with any company, high points and low points, and you guys have always been there through the low points too to encourage us. That's what I think more than anything that I would thank you for.

[01:07:25.050] - Segment 4: Andrew Cavanaugh
Particularly early on is that we needed, at some levels, convincing or reinforcement or confidence that we were going on the right path, and you guys have always been there for us, and I appreciate that. JJ, I've got some other investments that if you're willing to do, zero due diligence. Would love to have you put some money into it.

[01:07:44.760] - JJ Purdy
If Clayton cries about it, I'm in.

[01:07:55.070] - Segment 4: Voiceover
Thanks for listening to today's episode of 80/20 with ParetoHealth. We love hearing from you. If you have a question or an episode suggestion, please drop us an email at [e-mail]. That's 8-0-2-0 at paretohealth.com. Dive deeper into 80/20 by visiting us at paretohealth.com/podcast. Lastly, make sure you follow us on Apple Podcasts, Google Podcasts, or Spotify so you don't miss an episode.