Michael Mahaffey, Executive Vice President, Chief Strategy & Corporate Development Officer, Nationwide
Transcription:
Nathan Golia (Nate): (
Morning everyone, still see some people coming in, come on in from the exhibit hall. Let's get kicked off here for day two of DigIn. Thank you everyone for coming to New Orleans and hanging out with us. I thought yesterday went really well. A lot of good, really interesting stuff from our keynote speaker Linda Bernardi. And I know, in our track sessions as well, as well as our other sessions throughout the day, I'm gonna bring up Michael Mahaffey in just second from Nationwide. Thanks to Mike and Nationwide for being great supports to DigIn and always helping us out. Speaking this morning, we have another full day today. So I don't wanna take up too much time, I just wanted to announce that I do have dates and locations for next year's DigIn. So, some people, me, have said that DigIn in too many hot cities like Austin and New Orleans, it is going to be, June 5th through the 7th at the Marriott Marquee in San Francisco next year. So that will be our next year's DigIn. So you can start getting ready for that. Now we'll be back at this time of year in June, but in San Francisco, where hopefully it won't be a hundred degrees, I guess it's not a hundred degrees here. I live in Austin now, and I'm getting dispatches from home about how hot it is. Anyway, yes, we'll be in, San Francisco next year, June 5th through the 7th. I don't really have any other announcements, anything I wanna take away from Michael. So to bring Michael Mahaffey Chief Strategy and Corporate Development Officer for Nationwide. Thanks Mike.
Michael Mahaffey: (
Oh, is there a clicker? There we go.
Nathan Golia (Nate): (
There we go.
Michael Mahaffey: (
Thank you, Nathan. It is a pleasure to be here. I can't see anybody with all these lights, but, happy to be with you guys this morning. Happy to share a little bit of our story at Nationwide, I'm gonna take a longer lanes than a lot of people probably do. I'll start with just an introduction since I don't know most of you. I've been at Nationwide about 17 years and for in Nationwide terms, that's probably just crossing into middle aged. I think 5 to 10 years gets you past the early stages you get into middle aged. And there's a lot of folks that have been there 30, 35, 40 years. So, love the place. I think I've got the coolest job in the company just to level set. I came from consulting beforehand. They were a client. I joined them and I've never looked back. It's one of those few places where once I got there and it seemed weird at the time and it seems even weirder in today's environment, where I have said, I know I will retire from this place. So my current job, which I love, I have corporate strategy, which lets me take the long view of where we're going and why, I have digital and innovation. How are we gonna transform to get there? I have our corporate development team, which has M and A, who are we gonna do it with partnerships, strategic partnerships, our venture investments. So increasingly like most companies we're more interconnected with others as we do that. So all of those capabilities are part of my remit at Nationwide. Then logically, I also have Nationwide pet insurance, which is the largest pet I insurer in the world, certainly in the United States. And we just celebrated 40 years, this year. So high growth, high option value businesses. So that's just a little bit about me. My hope today is to give you some context about the journey we've been on, where we were, what we've tried to change, where we are today and how we think about things going forward. So let's jump right in. The first thing that's important in terms of context about Nationwide, and it is sometimes depending on your company, you're familiar with there are some differences I found in at Nationwide, we stay true to our roots. The title was a hundred years young. We're not quite a hundred years, but we will be celebrating our Centennial here, in just a few years. So we were founded in 1926, founded by farmers in central Ohio who thought they were being charged city rates for country driving. So they banded together, pooled their money and decided to ensure themselves and that mutual structure, which was born out of the heritage of cooperatives in the agriculture community, really lent itself to how that company was, how the company was formed. And so I think it'd be very difficult to start a mutual company today. But I actually think it is absolutely the right structure for a diversified scaled protection company for a lot of reasons. So I think it's a core part of the DNA of who we have been and who we intend to be, going forward. We're very proud of that mutual heritage. We think it gives us some advantages in terms of being able to take a long-term view. We think it gives us advantages in terms of focusing on a single stakeholder, which is the customer. So we're proud of that heritage. That heritage also gives us a remit, which we like to call more than a business. It is absolutely a business and it's an imperative that we run that business well and competitively and financially disciplined, but it also gives us the power of a purpose that we think, extends into the communities in which we live and work, making sure that, what we do in protection is valued. That it's valuable for our customers that we do so through employees that feel engaged, and are aligned to the purpose of the company and that through our success, we can give back to the communities in which we live and work. That purpose through time has pushed us into more and more categories of protection. So we started as an auto insurer, which then logically leads to home insurance and life insurance and annuities and retirement plans and life insurance and ENS insurance and professional liability lines and agriculture and pet, as I mentioned before, et cetera, et cetera, the point being, we do not define ourselves as an insurance company. We define ourselves more broadly as a protection company. And I think through that time period, we've moved into a more diversified portfolio than just about anybody else out there. And I think that's not unconnected to the fact that we're a mutual. I think it'd be sort of difficult, not for good or bad reasons, but it's sometimes difficult to maintain that diversification of a captive portfolio of diversified businesses, when capital markets can create that diversification themselves. So, all of those things are connected, but it's a logical grounding for the types of things that I'm gonna talk about. So let's talk about Nationwide by the numbers for those of you who aren't familiar, from those humble beginnings back in rural Ohio, we've grown, these are all from last year, $18.4 billion in claims paid, close to $53 billion in total sales across the enterprise, $2.8 billion in profits, just over $130 billion investment portfolio and just shy at $300 billion in total assets. And about $22 billion in total adjusted capital. What's interesting about those numbers is, despite all the things that have gone haywire in the world over the last several years by almost every one of those measures, 2021 was our best year ever. We grew faster, we were more profitable. We had stronger capital and then sort of underlying those things as important. It was our highest employee engagement year ever. Our customer retention and customer satisfaction numbers increased. And so all of those things are not because we whip saw and responded in the midst of the pandemic. Although I would say just like everybody in this room, we did, it's the culmination of a multi-year journey, a decade plus journey of getting after the fundamentals in a different way. And I will caveat all of it by saying we are nowhere near done. There's more runway ahead of us than behind us. And I think that's as true. That will be true forever with the pace of change in the world today. So just a little bit about Nationwide in our size. One of the things that we've learned in our journey is, we have roughly 24-25,000 employees, which is interesting because we've never been bigger. And yet our employee base has steadily shrunk naturally over time as our processes digitized, as our operations become more efficient, we can do more with less. But even with 24-25,000 people, what we've found is how do you get them all pointed in the same direction, rowing in the same direction and coordinating as a team. I mean, that mutuality is founded on the notion that we can do more together. That's only true if everybody can understand what we're supposed to be doing together. And so it is an exercise in simplification, not complexity. And so let me walk you through a page that we use, quite extensively internally. The first is our mission, our purpose. As the head of strategy, it was fascinating five years ago, my strategy team could all depict the mission in their own words. Our leadership team could depict the mission in their own words. Our board could depict the mission in their own words, but nobody could state the actual words of the mission and the meaning was there. The purpose was there. People could talk about what it meant to them, but it was 27 words written by committee to include everybody. We chiseled that down to its essence and tried to strip out all the jargon. We exist to protect people, businesses, and futures with extraordinary care. It doesn't have insurance in there. It doesn't talk about annuities or retirement plans or auto insurance, but it's something that 24,000 people I hope could repeat to you. If you happen to bump into a Nationwide associate, they'd be able to tell you that this is the mission of the organization. And it's very, very important. As luck would have it, we codified this in 2019, right before a massive global disruption event. And the power of a simple purpose meant more to our employees in that time period than at any other point. A vision where we're going, what are we aspiring to be the most trusted, the most caring, the most customer focused protection company. That's we had a lot of debates around that. That's three mosts will we ever get there? We don't know, but this should be a goal that drives us that compels us to always try to improve in these three critical areas we want, trust is a very difficult thing to earn and retain. But it's core to who we want to be. Care, connected back to the mission, we want to deliver protection with extraordinary care, and that should guide all of our actions and behaviors as it comes to the delivery of our products and services in the market. And then customer focused, again, tying back to that mutuality. At the end of the day, we exist for one stakeholder and one stakeholder on our customer. Now, we define customers as both the end consumer or business that buys our product and the partners that help us deliver that in the marketplace. Our strategy, the best strategies are the simplest strategies. And we are a complex company. We have three business portfolios within those portfolios, we have about a dozen planning units, some of those planning units are actually portfolios of sub companies. So we have literally dozens of P&Ls throughout the organization each with their own strategy. But at the group level, pre pandemic, we sat down and said, we don't have a crystal ball. We don't know where the world's going. We know the pace of change is quickening. We know volatility is increasing in almost every dimension, whether macroeconomic interest rates, global political change, et cetera. What are the key tenants that should serve us? Well, if we deliver on them in almost any scenario, we don't want to bet the proverbial farm on any one macroeconomic bet or one part of the portfolio we think will thrive, but what are the fundamentals we need to get right? And we started again with customer, we need to focus on the customer. And some of this candidly was getting back to the basics. Sometimes the bigger and more complex you get, the more distance you are from your customer. This was an attempt to flatten the organization and get all of us more connected to the customers we serve and how we serve them. The second operational speed and efficiency. This is a short way of saying, I'll say three things. One, there's no scenario likely where a lower cost isn't gonna be advantaged over a higher cost. I'll say few, there are few scenarios likely where lower cost won't advantage you. So we've got to find ways of getting more and more efficient taking cost out of the system. The second is agility. The pace of change will always quicken from here. Every year that comes at us will be faster than the year that we just finished. We could spend an hour on the pandemic and how quickened things got during those two years. But the point is, how do you take a diversified, midwestern mutual organization at the time 30,000 people and make it agile? That's a tough thing to do. If I throw out innovation back then most people would not have held up a large diversified, midwestern mutual insurance company as the poster child of innovation, I would assert that's precisely why we're knocking on the door of a hundred years. And we aim to be here for a hundred more. But we have work to do to increase our own agility. We are not the most agile in the marketplace, but we're getting better at it. And then third is speed. Agility is your ability to react to changing times and our assertion is that things will change in unpredictable ways for as far out as we think we can see. But once you detect that change, how fast are you at being able to do something with it, to implement the new technology, to change the product, to change the process, to change the customer journey in a way that's meaningful. So that's the second tenant of the strategy and the third, and this one's important. No matter what happens, manage our business for sustained financial strength. We are fundamentally in the business of protection and there are a lot of facets to how protection gets delivered, but a common facet is capital. Most of what we do is delivering financial resources at the time of need. And so we have short-term bets and we have long-term bets. We have short-term liabilities and long-term liabilities. We must run our company such that we will have the capital needed to continue to grow, to invest in these new technologies, but ultimately to be there when our customers need us most. And that, that requires a very careful balance between when you grow, how profitable you need to be when you grow and how you ensure you're earning enough for that growth in risk adjusted returns. And the last thing I'll say on that is it's different as a mutual, we cannot just go and reload in the marketplace by issuing new shares. When we want to raise capital, that is in some ways a disadvantage, there are things we can do. We can issue debt. We can buy reinsurance, we can hedge there's other ways in which we can augment our balance sheet, but at the end of the day, our best source of capital is retained earnings. And so we've got to manage our business so that we're earning the right return for the risk we're taking. And then underlying all of that is who are we at our core, who are the people that make up the culture of the organization and the values we focus on number one, we value people. We value all people, our customers, our communities, and our associates need to feel that who Nationwide is in the marketplace, we are customer focused. That is something we keep at the front and center because, the minute you think you are customer focused enough, someone else in the marketplace will leap frog you and anticipate a need you did not or get in front of the customers you serve with a better value proposition. We act with honesty, integrity, trust, and respect. And the last one we work together to deliver exceptional results, such a combination of two things that we emphasize back to the mutual heritage. We can do more together. There is power in the diversity of our portfolio. There is power when we can take the immense capabilities of our 24,000 associates and get them to align and point at a problem and solve it. And we must deliver exceptional results. Mutuality is not an excuse for uncompetitive performance. So that on a page, you'll see this, if you go through Nationwide, this is in the hallways, it's in the elevators, it's a little too big to put on our badges, but the point is distill all this complexity down to the core essentials and get people rowing in the right direction. And I think we've had more clarity over the last three years building off of this than certainly in the 17 years where I've been at Nationwide. So I might tell you a little bit about the transformational journey. How did we get to 2021, which was our best year ever by almost every measure? If I look back over the last 5, 7, 10 years, there's a lot of things that have been in the works to drive us forward. The first is when I got here, we were a portfolio of brands. We had at least a dozen sub brands for our various sub companies, and that had served us well. But the reality is that was an accelerating point in some of the advertising wars in our category where the power of scaled brands mattered more and more. And we had one national scaled brand, why not extend it to the power of our whole portfolio. So we went through a process of retiring all of the individual brands and extending Nationwide the power of that brand, the N and the Eagle, the jingle that I'm sure all of you guys know by heart Nationwide is on your side and extending it to every, every category in the portfolio. And that was a huge uplift in terms of the bang for the buck. We get out of every dollar we spend on that brand. The second was systems modernization. So, this is an audience I don't need to tell this to, but the narrative in the public over the last 5 to 10 years was, the legacy carriers are saddled with antiquated systems and they can't be agile and they can't be digital, and they can't connect with new ecosystems. And that's why they're gonna fall to the wayside. When everybody that's new will come up with the Denovo systems that are fundamentally better. Well, 10 years ago, we started out on a journey to modernize those core systems. And as I said, we don't have one line of business. We've got a dozen, you could debate the merits of this and how heavy the lift was, but we modernized all of those core systems more or less in parallel. There was some sequencing to it, but we strapped on in round numbers, $5 billion of technology transformation over a decade that touched almost every underlying core system in the enterprise. And it was an extremely heavy lift but we're on the tail end of that now. And actually we have a much better modern digital chassis to harness the power across those portfolios, and certainly to make each of those individual businesses, competitive technologically, that's not something that's ever done. There's always a journey ahead of us there, but that systems modernization, I would assert as a public company. There's no way we would've been able to do that at that scale and in parallel in a public company. The second was the balance of growth capital in return. I talked about this as the third pillar of the strategy. There are periods where growth comes and growth can come in our industry sometimes at all cost, there are periods where, people retreat and focus on profitability. There are periods where the capital markets will lend you anything for nothing. And then there are periods where the money dries up and we've seen that whipsaw happen over the last two to three years where you've gone through a cycle. We've really been very intentional about trying to balance since we do not have outside investors, what is the right balance of growth and return? Candidly, we had gone through periods where we put the wrong growth on our books. This is an interesting category in that, the cost of the things we sell don't show up until later. And that's sort of the death nail of the insurance enterprise that grows with the wrong risks over a sustained period of time. You've seen those cycles in the industry. We had to be very judicious and balanced around when's the right time to grow. When are we well positioned to grow? Where are we not well positioned to grow? And then let's not fool ourselves into thinking we are by taking on a price that doesn't cover our cost of operations and our cost of risk. So we had a very intentional focus on that over the last 10 years. And then the next one was innovation. And I would say, we've gone through cycles of the formation of a small centralized innovation team, the Federation of those teams into multiple parts of the organization. Reassembling those into one shared service model but the intent of that shared service model, and it's a couple hundred people between a digital team and innovation teams that cover all of our businesses is not to centralize where innovation happens, but to spur innovation across 24,000 associates, we like to talk about innovation everywhere and part of everyone's job. The Webster dictionary definition of innovation is the introduction of something new. We would tack onto that, the introduction of something new that creates a benefit to those you intend to serve and this has been a cultural transformation as much as anything to spur people into smart risk taking you have permission to improve your process, to improve your product, to improve our internal operations. It is never gonna happen through a centralized chief innovation officer, but they can be a catalyst and they can provide shared services. And when we talk about innovation, it's not just sitting in a room and white boarding up the new product. It's engaging with partners. It's engaging with ventures. We started a venture portfolio in 2017 with a $100 million a year, a little over a year ago. We upped that to $350 million. We have about 30 companies in the portfolio. Most of whom we've struck partnerships with, we like most are getting more and more interconnected through digital strategic partnerships in terms of co-creation of value with others in the value chain, all of that is under the remit of innovation. And so we think this is a critical part of how we need to evolve as an organization, simply because the pace of change and the opportunity to create new value is different than it was five years ago. And it'll be different five years from now. Operational speed and efficiency, I won't go into detail on this one, other than we've spent a lot of time surveying our associates to say, are we moving fast enough? And as the answer comes back, not yet, we find ways of saying, how do we flatten the organization? How do we take out bureaucracy? We've talked a lot about this notion of decision velocity and we candidly say, are we clear on the decisions we're making? And are we tracking how long it actually takes to make a decision? Are we clear on who gets to make decisions? Are we tackling the notion that nobody knows who can say yes, but everybody can say no. And I won't say we're done with that yet, but these are cultural things that are necessary for everything that's above. I mentioned mission clarity. This helps as we're navigating change, the more change you introduce into a system, the more important the foundational underpinnings are for associates to know, I know why I'm here, and I know what we're doing and then last broken record customer focus all of this to do a better job of creating value for the customers we serve. So that's the journey to date in a nutshell, bearing incredible fruit. It's a very different organization than it was three years ago. It's certainly a different organization when I came on board 17 years. And as exciting as any of that is I think the flywheel that we've spun up that points to where I think we'll be five years out, is even more encouraging than what we've been able to achieve so far, but strong clouds on the horizon. Nothing that you guys aren't all familiar with, you think about what's happened over the last two to three years. If I had paint, I used to be chief risk officer at Nationwide. And I'm fond of saying if I had gone to our board in 2019 and said, I have a stress scenario that I've imagined that I'd like to run as part of our Strat planning process. And here it is, we're gonna have a pandemic. And that pandemic is gonna last two years. And restaurants will close. Boarding events will close most travel will cease. Most companies will have to empty their offices and send employees to work from home. This is gonna go on for two years. But also in this scenario, the stock market will reach all time highs. Most consumers will navigate through this and actually be in a better financial position at the end of it than they were at the beginning of it. There will be a shortage of skilled employees and companies will have a difficult time retaining employees and inflation will set in terms of wages. People would've said, how on earth are you coming up with a scenario that would never happen in a two year pandemic? And yet here we are, that's exactly what happened. That's what happens when you pump $2 trillion into the system to recover. Governments around the globe, fought this with every tool they had in their arsenal. And now I think we're worried about it may have been too much. And so all of that monetary stimulus that flowed its way through the system, coupled with the supply change supply chain disruptions that went with that, set the conditions for massive spikes and inflation, which we're seeing. And I actually think the pendulum could swing the other way and you're seeing signs of it, right? Target saying, oops, we're overstocked. Amazon's saying, oops, we overbuilt in terms of capacity. All of that, coupled with dynamic swings in consumer preferences in terms of where they wanna spend their money. So some very interesting times in terms of trying to predict where are things going next that leads to market volatility, which we have seen in capital markets, both public and private capital markets, set that against the backdrop of geopolitical polarization, very difficult to see how things play out from here or stabilize from here or things revert to what people used to consider normal. Population migrations, where people are living, that trend that has accelerated over the last two years, we expect to continue, connected to this notion of a shifting work, workforce and workplace. Where does work get done? Where can work get done? Should you go back to the office? Should you not go back to the office? Do you work for a company that embraced flexibility or did they tolerate flexibility? And that is the great resignation, which you're starting to see signs of as the great reentry where does the balance of power sit between the employee and the employer? All of these things we think are catalyst for accelerating what we had been tracking pre pandemic as long term trends. This is our view of macro trends that can impact our industry winner take most economy, right? You look at the S and P 500, the top 10 players in the S and P 500 command north of 30% of the entire value of the index. That's a higher and higher concentration of as scribe value. Now that's probably deflated a little bit in the last couple of months, across industries, the power of personalization and ease technology driven the rise of the platform based enterprise, where they're connecting parts that create ecosystems that are very difficult to unseat when somebody creates the right size, scale and scope to deliver value, that's hard to replicate. The evolution of work, which I've talked about not just in terms of the makeup of our economy, but the contributions, the nature of the skills and where those skills can be deployed to create value and shifting centers of influence. Like, you can't yet say gone are the days where all the power and decisions rested in the coasts, but candidly with population migrations and work from anywhere. I think you're seeing the emergence of new centers of gravity in terms of where people invest and that's amplified by this notion of the shifting role of the corporation. What is the role of the company in society? What are the expectations of your associates? What are the expectations of your employees and the customers you serve the rise of ESG, or as we talk about it, corporate sustainability, are you more than a business? Do you have an obligation to contribute to the public good? How do those things interplay with your brand and the perception of trust and whether you can attract and retain the right talent? Those things have shifted. And then of course, in our business, wouldn't be complete without talking about the changing climate and the implications that has not just on the price of risk, but whether insurance is the right solution to that risk, whether it can be the right solution to that risk, whether it's insurance provided by the private sector or the public sector. Quickly, since I'm almost out of time, we used to talk about why are most of the large players in our space near a hundred years old? How can that be with such a large chunk of the economy that commands so much potential profitability? Why are they all a hundred years old? Why hasn't disruption really unseated those incumbents? And it used to be, there were three things that I would point to data carrier that's been around a hundred years, has a lot of data on what the price of risk is. Regulatory, it's a very complex regulatory environment and like it or not, that's a barrier to fast navigation. And then the third would be capital. It's a capital intensive business. We used to say two kids in a garage, can't go and ensure all the coastal homes in Florida, but those things have changed. Irreversibly. Those are no longer the barriers they used to be. Data's omnipresent and growing more omnipresent, more complex. The challenge is not, can you get the data it's, can you make use of the data and the legacy data is less valuable than the data that will be here five years from now, the regulatory landscape, there's a session tomorrow I saw on the agenda. They are moving to try to keep up. They never will, but they'll get faster. And so their job will be to find ways of admitting innovation, that results in a better system. And then the last, the evolution of the capital markets capital flows far more freely today than it did even just 10 years ago. And so good capital will migrate to good ideas and it will do so with greater and greater efficiency. So you can't rely on those barriers. And so I'll just quickly leave you with a quick list of things that we're thinking about as we go forward, the difference between thinking about insurance and the true notion of protection. What does that mean in terms of your focus on the evolution of products and experiences, the conundrum between speed and agility, which you could say advantage is the small versus the power of size, scale, and scope, which could advantage the big, the reality is you have to master both, we think a lot about the difference between specialization and diversification. Can you be all thanks to all people? No, but can you operate a diverse portfolio with advantage? Yes, but those individual businesses have to be individually competitive. How do you balance the short and the long term making investments for something that may pay off 5 or 10 years out, but meeting your stakeholder expectations today, the difference between going it alone and doing it yourself versus partnering? I think most of us in the room would conclude that partnering is more and more a part of how businesses operate the war for talent won't go away. Even if employment dynamics shift, there will still be skills in short demand. And then the last I'll come back to the power of purpose. We think that's more and more important. I've probably used up 30 seconds more than I was supposed to, but I will stop there. Thank you all for your time. I hope you got something out of it. And, thanks for joining
Nathan Golia (Nate): (
Thank you, Mike. Yes, it's funny, cause, I had a bunch of questions for you based on your last couple slides. We'll handle them in an article. Thank you so much.
Michael Mahaffey: (
Thank you.