M&A Roundtable: Quarterly Update - Part 3
By Alliant Specialty
In the final of the 3-part market update series, Jonathan Gilbert, Alliant Mergers & Acquisitions, sits down with Dan Schloss and Paul Cleveland to discuss the current state of the property & casualty market, as well as projections for the remainder of the year.
You are listening to the Alliant M&A round table, providing insights and expertise on the unique risk management needs associated with private equity firms. Here is your host, Jonathan Gilbert.
Jonathan Gilbert (00:21):
Welcome back. And thanks for joining again. We are now going to turn to Dan Schloss and Paul Cleveland, who are going to talk about the property and casualty insurance market and what we're seeing for private equity owned companies across the United States and internationally. I'm going to start with Dan and ask just to give a quick overview of the current state of the property insurance market and some of the opportunities and challenges that we're seeing for various companies that are owned by private equity firms.
Dan Schloss (00:47):
Thanks, John. So, for the past 18 months, we've been experiencing a hardening property market, which has largely been driven by catastrophic events, such as wildfire, flood, hurricanes, freezing temperatures across Texas and general uncertainty with what's going on with the pandemic, BI losses and things of that nature. Heading into the third quarter the market is starting to stabilize slightly, as carriers are looking for a way to reduce the volatility on their books. That being said, it's giving way to a two-tiered market. One for the more profitable, straightforward risk, light manufacturing, well-protected sprinkler, low hazard operations in low-risk catastrophic zones. You know, we are starting to see some more opportunity there, where markets are looking for rates from flat to 10 to 15% increases. And the second tier, which is for the more challenging occupancies, which would include things like food processing, chemical manufacturing, un-sprinkler locations, or CAT exposed properties. And there, we're still seeing a very hard market with rate increases, looking as high as 25 to 30% upon renewals. And that's because there's a lot of markets right now that are dropping out of these areas and kind of constricting capacity within these areas. So we're seeing the markets that are staying in this looking for increased rates and tightening up terms and conditions across the board.
Jonathan Gilbert (02:14):
And Paul, just to ask you a question as well, on, on property insurance, you, what do you see as the, you know, reliant on risk engineering reports, uh, risk control initiatives, that portfolio company that are only taking and, you know, how is that impacting the underwriter view of a risk?
Paul Cleveland (02:30):
Yeah, no, thank you for having me. Good question. It's more in play than it's ever been in the property market. The risk control and engineering is a must, for most carriers, regardless of first tier or second tier risk as Dan was mentioning. They want to see that the wrecks are completed or addressed in a timely manner. And frankly, if insureds are not, adhering to these wrecks, it's going to make it even more difficult and even a good risk can be pushed into that second tier for some risk engineering issues. If they are, whether it's low-hanging fruit or very difficult, expensive engineering reports.
Jonathan Gilbert (03:09):
And Paul just given your geography, how have the wildfires out west in California, and you've seem to exported to other states as well, like Colorado impacted underwriters and certain risks, whether they're exposed to, you know, wildfire risks or not.
Paul Cleveland (03:25):
Yeah, it's made it very challenging. Anything that's in a wildfire area or wildfire zone is going to be without a doubt adhere to regardless of the fire protection that they might have. They could have the great sprinkler systems and all that stuff, but just mere fact that they're sitting in a wildfire zone makes it very challenging. What we're finding is from an underwriting standpoint is the carriers are reluctant to put up any significant rate. So, more than likely you're not going to find yourself with the opportunity to put together a ground up program. That'll probably bleed in some sort of a quota and layered program. You know, I think the most important thing is, and I guess this probably should have been brought up earlier is we want to make sure in the property market, especially for the tough risk that we get out early, so we can address all these issues in a timely manner. So we're not scrambling at the end.
Jonathan Gilbert (04:19):
Appreciate that Paul, that's helpful. I think a key takeaway is starting early in the process, much like other lines of insurance that it's just the lines on tactical underwriting. At the insurance carriers has increased dramatically from a year ago, five years ago. And so just being prepared and starting early is critical at a minimum. Dan, just to turn back to you, what do you see as the average renewal rate in tier one category and the not so desirable tier two category, you know, from insurance carriers in terms of renewal rate year over year.
Dan Schloss (04:49):
On the tier one risks. If you know, they're really good, we're seeing rates from flat to 10 to 15%, if it checks off all those boxes that, Paul kind of mentioned earlier, it risks controls well, as well they've taken care of subjectivities and it's a fairly low hazard class. On the tier two side it really ranges varying depending on class of business. It's kind of hard because there's not really a one size fits all approach with that. But for those two tier two classes, we're seeing increases 25 to 30%. And even north of that for some of the tougher risks, as you have to share and layer those programs, minimum premiums, reinsurance treaties are all coming into affect, faculty to reinsurance, which has also taken a dramatic increase over the past year. You know, all these factors are driving those rates up on those tier two risks.
Jonathan Gilbert (05:42):
Appreciate that, Dan let's hope for a quiet hurricane season as we're just approaching or just into the beginning of it this year and we'll be monitoring that very closely. Just shifting gears, a little bit why don't we shift to primary casualty insurance, which for those listings would include workers, compensation, general liability and auto liability insurance and Paul Cleveland, just to turn to you, you know, what do you see as kind of the current state of the market for those lines of coverage? How does industry impact the view from an underwriting standpoint? If you can give us a few words on that it would be great.
Paul Cleveland (06:17):
Okay. So the, the auto market is still problematic. It's very challenging overall we're seeing anywhere between 10 to 20% rate increases depending upon your loss history. A lot of it is being driven by the higher non known auto exposure that that clients would have. There's more scrutiny over that risk they're requiring supplemental apps to be completed so that they would can dig into the actual exposure. In addition, they want to make sure that the insureds have protocols in place for any employees that are driving their vehicles on personal business to ensure that the employees have their own insurance and making sure that they have proper limit to accompany those of their insurance.
Jonathan Gilbert (07:03):
Appreciate that. Paul, you know, Dan, recognizing that the pandemic is still ongoing, you know, how has COVID 19 continue to impact insurers to your risks? Have you seen any meaningful changes over the last six, nine, twelve months, given that we're still well in the pandemic?
Dan Schloss (07:22):
Great question, John, and while there's still some uncertainty with what's going on with the pandemic, I think what we found is it hasn't dramatically changed a lot of the ways that the carriers are acting outside of putting some additional exclusions on policies that protect them against claims that arise out of communicable disease or things of that nature. You'd think the worker's compensation market would've taken larger hit, but it's remained fairly stable throughout. Oftentimes insurers now are asking for a COVID 19 questionnaire, which is basically something saying, how are you protecting your employees? What preventative measures are being taken and that's before they even start underwriting the risk. So, I think we'll continue to see that on the workers' compensation side, specifically, as I mentioned before, when we were talking about property, business income and business interruption, continue to be a focus on how that could be affected from that front, whether it's supply chain issues, a shortage of workforce or things of that nature.
Jonathan Gilbert (08:21):
Yeah. Dan, that was great commentary relative to COVID 19. As we shift toward the excess liability market. What's the current state of that market? How do you see renewals progressing? How does it vary by industry? Would love to give the listers just a quick update on what you're seeing in that space.
Dan Schloss (08:38):
Sure, and last year was a really volatile year for access liability. They were calling it a correction of the marketplace last year, where essentially underwriters were saying that they were deploying too much capacity at too little rate. So, there was a lot of adjustments in that marketplace last year, where a lot of times you were seeing the rates increase and the capacity cut in half. We're seeing less of that this year. It looks like the correction has mostly taken place. So, we're not seeing those huge increases year over year. However, there are still some industries trucking and large fleets being one of them that are still problematic as capacity has been greatly decreased in those areas. A number of markets have pulled out of that space altogether, which is constructing the capacity and bringing rates upwards.
For large trucking fleets it's still a challenge to fill out towers. Nobody wants to really get on the first 10 million dollars of coverage because they're seeing nuclear verdicts with these heavy vehicles on the roads. And that's where they foresee a lot of the risk. You know, that being said, you're having to break up the umbrella into smaller chunks and minimum premiums come into play. And those lines of coverage are getting more expensive, continue to get more expensive for those risks, with heavy vehicles, trucks, things of that nature. Hopefully we are seeing a few new markets that are putting their toe into the water. So hopefully that will start to stabilize soon. But as of now, we're, we're still seeing 10% increases in some instances, despite the big jump last year.
Jonathan Gilbert (10:10):
Thanks Dan, and Paul given that I think a common theme, for both primary casually and excess casually, it seems to be a company's makeup relative to vehicle count, fleet size certainly, as well as there's a lot of investment by private equity firms, including our clients into the transportation industry. You know, how important is the use of telematics in vehicles for, one just safety overall and certainly for you, the eyes of the underwriters, and how they view risk of a particular portfolio company.
Paul Cleveland (10:40):
Great question. It's very important. The more controls that you have in place specifically with the auto is going to be beneficial. Having people drive and not checking their insurance and making sure that license are valid and run MBRs. And that's very much frowned upon these days. Dan mentioned it there's a lot of, nuclear verdicts, 10, 20, 30 million losses, especially in around the auto industry, whether you're a trucking company or a banking firm that has a salesperson that gets an accident. Having controls in place is going to help us to get you the best deals and coverages out there and open up the marketplace. Like Dan said, there's a limited amount of carriers that are going to write these risks nowadays. So, the more that an insured is proactive from a risk management standpoint, the more opportunity they're going to have to have better terms, conditions and pricing
Jonathan Gilbert (11:41):
Appreciate that. Paul. Dan, and then Paul love to get your comment here, here as well. In terms of private equity firms, a lot of times, and a lot of our clients had the buying power equal to that of a fortune 100 or 500 company based on the premium spend. How have you seen and how are we structured differently? And how can firms go further to leverage that buying power into the marketplace to, you know, maintain individual coverage for the portfolio companies, but really leverage the spend across the portfolio which may be 10, 15, 20 companies or more.
Dan Schloss (12:18):
I'll take that one. So, just to start off all of the, you know, private equity M&A business goes through Paul and myself, which makes us a bit unique from some of the other insurance brokers out there. It enables us to employ a number of tactics that are helpful in getting the best terms and conditions in the marketplace. And one of them certainly is aggregating and leveraging risk wherever possible, whether that's through common effective dates, common insurance carriers, or master insurance programs for lines like property or product recall. We can take advantage of economies of scale and push the insurance markets through things that they wouldn't otherwise do to get better terms and conditions and lower rates.
Jonathan Gilbert (13:00):
Thanks, Dan. Well, thank you all for listening today. We appreciate you taking the time to listen to Alliant M&A, a quarterly update on the state of the market. We work with private equity, 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, I appreciate you taking time to listen to what we see is going on in the marketplace. And for more information, please visit www.alliant.com.
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.
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