M&A Roundtable: Quarterly Update - Part 2
By Alliant Specialty
Second in the 3-part market update series, Jonathan Gilbert, Alliant Mergers & Acquisitions, sits down with Tim Crowley to discuss the current state of the private equity market, as well as projections for the remainder of the year.
You are listening to the Alliant M&A Roundtable, providing insights and expertise on the unique risk management needs associated with private equity firms. Here is your host, Jonathan Gilbert.
Jonathan Gilbert (00:20):
Well, welcome back everyone and thank you for joining the Alliant M&A insurance market update podcast. And we're excited to turn to our next chapter, which will be with Tim Crowley from the Alliant Management Professional Solutions Group who's going to discuss some of the challenges in today's market, what we're thinking about for the balance of the year and what we've seen in the recent past, across our platform of portfolio companies owned by private equity firms. You know, like cyber insurance has been a very challenging market in 2021, in addition to impacts from COVID, there are other headwinds that are faced in the market. You know, Tim, why don't you give us a quick overview of what we're seeing in the market today and kind of Q2 and Q3 and what companies should be thinking about for the rest of the year.
Tim Crowley (01:04):
Thanks, John. The marketplace for management liability insurance in 2021 for PE sponsored portfolio companies remains challenging. However, there are some signs for optimism. In Q2, the marketplace did start to stabilize a bit. We're still seeing increases in premiums, but not to the magnitude or levels that we had seen last year, and even in Q1 of 2021. I think one of the key reasons for that is that there are a few new entrants, specifically on the excess placements. So, new capacity coming into the market to provide competition in those spaces, but on a primary basis, we are actually starting to see some differentiation at the insurance carrier level when they're analyzing policy holders’ applications. And by that, I mean, in 2020, especially in response to the pandemic for certain industry sectors, there was just kind of broad strokes increases or minimums that insurance carriers were imposing on their clients. In 2021 during the summer, so far, we've started to see insurance carriers more differentiate between the various risks and applying debits and credits to their underwriting models to get a little more competitive on their renewal proposals. For the most part in the retention spaces, those are remaining relatively flat, and which is more of a function of the position that the insurance carriers mostly raise those of over the last two or three years. The one exception I may say is employment practices liability based on the industry class and the location of your employees. We still are seeing increases in some cases for state specific retention levels, specifically in states, such as California, where the insurance carriers may be looking to increase that retention applicable to those in employees. Furthermore, underwriters are asking some additional questions on the composition of your employee base, specifically response to the impact of COVID and your return-to-work plans. As we sit here in the summer of 2021, you know, most clients have started some return-to-work plans, which may or may not be changing in the, in the upcoming environment, but the underwriters are asking questions regarding protocols and procedures for how employers determine which employees go back to work and how often and where they work. So those are some of the key things we're seeing as we see year in kind of early to mid Q3.
Jonathan Gilbert (03:21):
If you had to put a number on it, what do you see as the average renewal rate up or down for private equity owned portfolio companies?
Tim Crowley (03:28):
Yeah, I mean, on an average, I'd probably say it's somewhere between 15 and 25%, but we're starting to get a little bit lower than that. Like I said, there's a little more differentiation based on your specific business and exposures. So, in some cases we're seeing 10 to 15, but, you know, in some cases based on the industry sector, it's, it's going a little higher. So, you know, it's somewhere between 10 and 25%, but probably 15% to 20%, if I had to get more narrow. And, you know, from an underwriting perspective, one of the key driving factors, that the underwriters use to establish their renewal premiums, you know, is some of the, to COVID most operationally, financially and employee wise, and carriers are continuing to scrutinize the financial impact for the last, 18 months or so, but also looking forward, including revenue, streams, deposits, usage of capital, things of that nature.
Jonathan Gilbert (04:14):
Then just on that topic of COVID given that we're still in this pandemic that doesn't seem to be ending, how does the market continue to react to COVID? How has it changed the underwriting premium results or availability of insurance?
Tim Crowley (04:27):
Yeah, I mean, the underwriters are certainly asking questions, those three or four questions that every carrier is going to ask for both operationally and employee, again, and depending on the sector, depending on those responses, they may ask some follow up questions. In some cases, it may be best to work with your clients either in writing, but probably, preferably maybe, over the phone to just talk about the strategies they employ to navigate the pandemic and the execution on those strategies. And a lot of times that can generally get the underwriters a little more comfortable with the risk in certain cases where maybe the pandemic has impacted the business a little more substantially, you may see underwriters add some specific coverage terms related to COVID, whether it be a separate retention or some exclusionary language, and that should be viewed very carefully with your brokerage team.
Jonathan Gilbert (05:11):
As you look into the second half of Q3 going into the fourth quarter, what can private equity own companies do to prepare for renewals and have the best possible outcome, in addition to hiring Alliant as their broker?
Tim Crowley (05:23):
Yeah, John, I think some of the impact of COVID on kind of the brokerage approach is really somewhat of a getting back to basics or fundamentals, right? In the more soft market years, we could get applications back relatively late in the process and still drive some pretty competitive results. In this market, we continue to suggest an early and proactive approach to the brokerage process. So, you can get an earlier position on what the incumbent underwriters are thinking, and then kind of develop a more proactive marketing approach if necessary. And as I mentioned earlier, at least in Q3 into Q4, there is a bit more competition, policies were renewing in Q2, right after the start of the pandemic last year, there was a little bit of a beggars can't be chooser market. In this market, we should have some different levels of optionality, and the earlier you can establish, you know, which buttons to push and which insurance carriers to focus on. We'll just try for better results for the portfolio companies and therefore their PE sponsor.
Jonathan Gilbert (06:20):
Well, thanks Tim much appreciate, and I think the key takeaway is similar to cyber insurance - start early and maybe brace for some bumps in the road, but no major hurdles from a coverage renewal standpoint, which is good to hear and good to hear things are leveling off in the management liability insurance marketplace. Well, thank you all for listening today. We appreciate you taking the time to listen to Alliant M&A quarterly update on the state of the market. We work with private equity firms, nationwide and hundreds of portfolio companies. We're a team over 50 people nationwide and continue to be a leader in the private equity community. So, appreciate you taking time to listen to what we see is going on in the marketplace.
Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.
Thanks for your message.
We’ll be in touch shortly.
News & Resources
M&A Roundtable: Securing the Deal - Managing Cyber and IT Risk in M&A
Cyber threats continue to be a heightened area of focus for buyers as well as rep and warranty insurers. It is now more important than ever to have a coordinated approach to Cybersecurity and IT due diligence; insurance due diligence; as well reps and warranties insurance.
M&A Roundtable: Why Cyber and IT Due Diligence Is Critical For Private Equity Firms
With the continuing rise in cybercrime – and ransomware in particular – the Reps and Warranties Insurance (RWI) process can be an intense part of cyber security due diligence.