Transcript
Kim Grathwohl
Hello, and welcome to OnPoint, a podcast by Oak Street Funding, where we sit with industry leaders to hear their stories and share their insights. I'm your host Kim Grathwohl with Oak Street Funding. Today I'm joined by John Henry, founder and CEO of DryStone Capital. For 24 years, he's proudly led DryStone. He is an innovator in program business, reinsurance, and all that is DryStone. With that said, John, tell me about yourself and your path to where you are today.
John Henry
Well, Kim, I'm an entrepreneur. I've started and had run three companies. The first was an agricultural biotech company. The second was an environmental investment bank. The third one is DryStone Capital, which is a property and casualty reinsurer.
Kim Grathwohl
Tell me about DryStone. And really specifically, why DryStone and what made you decide to start DryStone? What was your vision?
John Henry
Well, DryStone started out as an internet company. We were called eLawForum, which suggests we were an internet company, a dot com. My original vision was to use the internet to bring competitive sourcing to the delivery of legal services for corporations. As you know, competitive sourcing has swept through low value goods and high value goods and low value services, but it hadn't gotten up into high value services like the practice of law in corporate America. I think that billable hours is the root of all evil. I thought I could replace, my vision was to replace the seller's market with a buyer's market.
Kim Grathwohl
Wow. That sounds like you started on the same starting line with the likes of Bezos, and Zuckerberg, and that crew in what you did.
John Henry
That's exactly right. We were all on the same starting line when the gun went off on the internet boom. Amazon, and Facebook, and Google created huge internet consumer demand for products, social interaction, and information search. My partner Cloyd Laporte joined me several years after I started the company. We saved more than approximately a half- a- billion dollars in the Fortune 500 self- insured market. But after years of doing this, we failed to create a sustainable and reliable demand among our Fortune 500 clients for competitively priced legal services.
Kim Grathwohl
Yeah. Why didn't the corporations see your value?
John Henry
Well, the legal profession has a lot of prejudice and a lot of prejudice against competition. That proved to be too strong to overcome. The incentives in corporations aren't aligned for cost management. Legal departments are big bureaucracies.
Kim Grathwohl
At that point, what did you and Cloyd decide to do about that?
John Henry
Well, we migrated our business model from the self- insured Fortune 500 legal market to a more litigation- intensive insurance market. Once again, we were wildly successful in reducing litigation costs. This time, it's discontinued operations in insurance is called runoff. But our large insurance clients were also the self- insured market. They were most interested in controlling the outcome than in cost savings.
Kim Grathwohl
Were you thinking you were going to fail again?
John Henry
Yes.
Kim Grathwohl
What happened there?
John Henry
Yeah, we were headed straight over a cliff. Nothing like a hanging to focus the mind.
Kim Grathwohl
Oh, wow. What happened to turn things around, and really what does that mean?
John Henry
Well, we finally cracked the code. We simultaneously migrated from what I call a dead business to a live business. That means from a runoff discontinued operations to underwriting. We transformed ourselves, transitioned from being an agent to a principle at the same time.
Kim Grathwohl
Because of that, how fast did DryStone grow?
John Henry
Well, from a dead standstill in December 2019 to December last year, four years, we grew to over$ 400 million in premium, in program premium with a half- a- dozen employees. We're very profitable. We're probably twice as profitable as the industry.
Kim Grathwohl
Wow. I have to say, I remember when I first met with you and Cloyd, and met you folks. I want to say that was towards the end of 2020 and it was just over that hump. That is just amazing, an amazing story of growth. You got a lot of persistence, I'll give you that.
John Henry
Well, thank you. It took a lot of persistence. In the Bible they say, " He who puts his hand in the plow and looks back is not fit for the Kingdom of God." Cloyd and I did live through the valley of the shadow of death. But we never lost faith that we could create a lot of savings, we could generate a huge amount of money in terms of cost savings doing things the way we do it, which was differently. We kept just changing the business model at least a dozen times. It depends on how thinly you want to slice it. But for two decades, until we finally figured out how to create a self- sustaining business that would guarantee us repeat sales.
Kim Grathwohl
I was just going to ask, how did you and how do you continue to differentiate yourselves in this industry where that it is a difficult thing to do in this industry?
John Henry
Yeah. Well, corporations are different than individuals. The ones that were really successful with the internet were based on the consumer. Corporations are a different animal. Once we became the buyer, we were able to control the sales channel for the first time. We were able to fire our customers. Our business took off like a rocket when we brought it inside. We became the consumer of our own services. I think Rob said that when he was going up, one of the executives said, " Wait a minute, this is all a means to an end." He understood that. He got that.
Kim Grathwohl
Yes, yes, he did. Take us through your growth journey and how you used capital? How do you use capital?
John Henry
Well, we differentiate ourselves. We pride ourselves on being the most invisible company in the most invisible industry. Insurance is invisible, but if we didn't have it the whole economy would stop. We're very invisible. The smartest people in the industry have been on the investment. Warren Buffet, exhibit A. Warren Buffet sells insurance so that he can use the float to finance his hot hand in the stock market. DryStone is not on the investment side, but we're on the meat and potatoes side of the insurance industry, which is claims settlement. We have a unique approach, which is more efficient to settling claims than the industry. So much so that other reinsurers in the syndicate ask us to manage the claims for them. We're not in any book in terms of quota share in any program business. We're not managing the claims for everyone.
John Henry
We’ve also got a new CFO, and then I've got another young 33- year- old guy who could have been CFO easily, but I made him AI director. All the AI stuff is numbers, so accounting background I think is the right background for AI director. We're just rivers of data and cash, which is data. We're going to automate the whole company. I think we can stay at eight employees and scale to a billion many times without any more employees. I think we have the opportunity to have 24/ 7 workers that we don't have to pay electrons. We can take a lot of headcount on the law firm side, and then on the accounting side we can scale without more people. All the data flows in and out, and the manipulation all can be automated. When the law firms spend 80, 90 percent of their time on an Easter egg hunt trying to get all the information, we can have all that populated like if you're driving a plane or a car, they'll have it all populated so they don't have the go waste a lot of time looking for information. I'm very excited about the AI, I think that could double or triple our profitability.
John Henry
The industry, all the smart people are on the investment side, we're on the claims side which is the most innovation- starved area in the economy. We're going to now bring... We use a lot less people. The way we do the different thing is we get rid of a lot of lawyers, but now we're going to really going to take a lot of them out. The AI thing could be huge in terms of profitability. I don't know whether it's going to be a double or a triple or more until we get into it. But I can see it clearly now. We were going to make a big investment in AI fund to try to jump into this and get our feet wet. Then I realized, " Oh my gosh, we can make much more money investing that in ourselves." Because it became real. We're a problem in search of the solution, and all these startups are solutions in search of a problem. Most of this Diamandis, Peter inaudible AI fund. They're all kids right out of MIT, and Stanford, and Harvard, and Cal Tech. They may know the technology better, but they don't know the industry. The specialization that Oak Street has done shows the value of knowing an industry. Why would I want to go teach a bunch of young kids what I need? Why wouldn't I just get that technology and build it myself? I don't want to have them go out and give it to everybody else. Anyway, I went through a process. But it started two years ago, Diamandis had said at Abundance360. He said, " There are two kinds of business. You're either going to be in AI or you're going to be out of business." That sounded pretty outrageous to me so I asked the guy that was the robot guy. He showed you what the robot's hands looked like when he's manipulating things, what the robot sees. I didn't want to be sacrilegious, because this is a secular religion out there. You got a lot of those. I got him aside and I said, " I'm building a lot of stone walls and I'd love you to build a robot to make build stone walls." He said, " Oh, no, we can't do that. That's not the low- hanging fruit. We can't go outside." I brought this up with our stone masons when they were here building this tower this winter. They're the least threatened people in the world, the stone masons. I can tell you, they don't think AI is going to put them out of business. But that was the first iteration. Then the second one was this invisible company we met which basically will come in and help you design a solution to your problem. That is more attractive then. I think what's going to happen to a lot of these young entrepreneurs is the same thing that happened to me in biotech and the internet. You got technology risk, you got product risk, you got sales risk, and then you get the money at the end. We don't have technology risk, product risk, sales risk, and we get the money upfront to float.
Kim Grathwohl
I like actually what you brought up though about the AI tech masterminds are one thing over here, but the application of your actual business, they have no idea about that. I could actually liken that back to the same thing with a debt partner or a banking partner that doesn't have any idea of how do insurance. They can do banking all day long, but do they understand your insurance business and what capital does for that? They don't. They have no idea. But we do. We actually understood what that capital does for your growth, and when and why it's important in the placement of it.
John Henry
Yeah. In other words, put it another way of saying the same thing is that if you're a general bank, it's hopeless. If you specialize in insurance, you got a shot. But then you guys had to go and spend a lot a time... It wasn't enough just to be insurance experts, because we were unique. We weren't a MGA, we weren't a law firm, we weren't a TPA. We don't do insurance the way most people do insurance.
Kim Grathwohl
Right.
John Henry
All that, you had to figure out in order to know what the numbers meant. Yeah. That's the problem. I think most of these companies are going to fail because they're going to be a solution in search of a problem. I think the big AI companies, there may be an Amazon, or a Google, or a Facebook in AI, but I think it's much more likely that the big home runs are going to be internal.
John Henry
It's what's going to differentiate us. Doing the claims differently allowed us to basically charge a fee. You put one innovation and it allowed us to do it for other people and charge a fee. Now the AI is the third layer of innovation. One after another. One home run leads to another.
John Henry
I will add, I was up in Kendall Square in MIT. This guy, he was very slick, he was at California, he put the charm offensive on me. I was going to go in the fund. I went up there, his headquarters, and then he said, " I just spend all day talking to the smartest people in the world." I think the C- students run the A- students, so that's not... I said, " You know, I always want to be the buyer, you want to control the sales channel." He didn't know what I'm talking about. They're going to put money in a bunch of kids who are going to go out and build the technology, and then hope they can build it into a product, and then they got to sell it, and then they got to collect. Now all those internet companies did that with the consumer and that went smoothly. But boy, it didn't go smoothly with the corporations. I think it was being Job about it, we were tested. We really had to believe in this to stay in the game we got so much in it. If I hadn't had Cloyd as a partner, it would have been overwhelmingly difficult. None of those guys, Bezos, or Zuckerberg, or Larry Page, Gates, none of those guys could have done DryStone. They couldn't have done it because they don't have all the scorch issue that I went through. They were more of a technology play, whereas our technology takes a different form.
Kim Grathwohl
Does the name DryStone factor into everything that you just built?
John Henry
Yeah. When I married my wife, I never talked about stone, I didn't have an lithic drive. But when I hit 50, I was playing golf and I was on the backswing, and my inaudible went out of my golf game into the landscape and I got really obsessed by stone. For the last 25 years, I've been really into stone. It just came out of nowhere. So I named the company after my hobby, DryStone. Because dry stone means not wet, no mortar. It means you're not using mortar. Mortar is not dry stone.
Kim Grathwohl
You're building something that it has to fit so well together on its own without stuff in it to hold it.
John Henry
Yeah.
Kim Grathwohl
How do you use data to finance in such rapid growth?
John Henry
Well, how do we use the capital? Yeah. Well, first of all, we probably ought to distinguish between different types of capital. There's equity capital and debt capital. The industry was built on equity capital. Wanting to do things differently, we decided to build it on debt capital. But we looked at equity capital and we decided not to go the route of doing private equity because that would have meant giving up control to outside investors who wouldn't understand our business nearly as well as us. We just spent too much blood and sweat to get here to give up control to outsiders. The debt route really was very attractive for that reason. We wanted to have the distinction of being the first insurance company to use debt exclusively to finance growth.
Kim Grathwohl
How did you hear about Oak Street?
John Henry
Well, we heard about Oak Street through Target Markets, that's a big part of a whole thing is Target Markets reinsurance. We were introduced to you by Stonybrook Capital. You really came up on the radar strong because of your specialization in insurance.
Kim Grathwohl
What made you decided to work with Oak Street or choose Oak Street as that partner?
John Henry
Well, because of your insurance expertise, Oak Street understood what our numbers meant. A lot of banks, they don't specialize in insurance. They have no idea what the numbers mean and Oak Street did. We liked the quality of the people. We enjoyed working with you and Rob Roach. You guys took the time to understand our business in great depth, not superficially. Because we're what my friends who are marketing experts use the phrase" purple cow," we're a purple cow, meaning we're unique, that meant a major commitment on your part and our part to reach that level of understanding. A lot of appreciation I think flowed from that.
Kim Grathwohl
You know what, I think you said it. There was a lot of dedication and a lot of discipline that we took on both sides to really understand your business, and really to make sure that in understanding your business, that it was aligned with Oak Street. You folks took the time to understand who were. There was a lot of meetings and a lot of visits. It took a lot of time. But at the end, it was worth it, I do believe.
Is there an example that you can share where you felt that Oak Street went above and beyond to deliver what you and your team needed?
John Henry
Yeah, absolutely. Yeah. The strong relationship that we developed over three years really paid off. The first thing we did was we cleaned up our past in order to do our future. We used the initial credit lines for stock buybacks to buyout our minority shareholders. Cloyd and I are the two shareholders of the company. That went very smoothly, but that wasn't very dramatic. In the end of 2024, there was a lot of time sensitivity to completing additional debt facilities. Our teams, the Oak Street team and the DryStone team, worked really closely together with a high level of efficiency in a very short time. It almost felt like a symphony, it was at a crescendo- like bolero at the end. Anyway, as you know, our close relationship with you and Rob allowed us to give us everything you needed to gain senior management approval in a timely fashion.
Kim Grathwohl
Yeah, it was like a symphony. Being here, it helped that stress level as well because things need to get done by the end of the year. It was memorable, I would give you that. Would you do business with us again, with Oak Street again?
John Henry
Oh, absolutely. The hands- on approach, the strong professionalism, the track record are all tremendous, great value to us. We're eager to open the next phase of our relationship here in 2025. We're going to begin shortly actively discussing our plan how we're going to double our business in the next three years. We expect to reach a billion in program premium by December '28, that's our goal.
Kim Grathwohl
Well, we sure hope that you do recommend us, and what we do and what we can do to others in the industry. We'd be very appreciative. With that, is there anything else you'd like to add about our relationship, the full banking relationship with have with not only Oak Street, but with our parent company First Financial Bank? One, it's really a holistic, true enterprise relationship that we've been able to capture. Any thoughts on that? Any closing thoughts?
John Henry
I think Oak Street and First Financial really are and look like what a great bank should be. I suppose, by contrast to the too big to fail banks, who are most interested in gambling in the derivatives market than financing the growth companies that are going to be the backbone of our economy. Now I didn't mention earlier but I probably should that when we went up, we went through a $15 million limit at the Oak Street. People may not be aware of that, but the subsidiary level, Oak Street, you can go up to 15 million, then above that you're into the parent. We went into the next layer of 10 million on top of that. That was what last fall was about. Anyway, it's a team effort now, of Oak Street and First Financial, the whole thing, and us, to be our growth partners. I plan on doing this for a long time. It's going to be a long term relationship.
Kim Grathwohl
I hope so. Well, John, thank you so much for your time today. Again, thank you for being a great partner.
John Henry
Thank you.
Kim Grathwohl
Appreciate it. Thank you.
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