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Services to Support Private Equity

Mergers and acquisitions continue apace, driven by low interest rates. But the risks involved are broad and complex.
By: | May 2, 2016 • 5 min read

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The year 2015 was a record for mergers and acquisitions, driven by an
environment of low interest rates, low organic growth and shareholder pressure for value.

For private equity firms, those conditions presented opportunities for expansion, but also made it more challenging to deliver high returns for investors year after year. A quiet IPO market adds to the pressure, robbing firms of their traditional exit strategy.

“IPOs launched within the past two years have been trading lower than their initial offering price,” said Andy Peterson, head of private equity for Zurich Global Corporate in North America.

“Scale does matter, and it’s been increasingly hard to go it alone. Mergers and acquisitions are ways to help spur growth.”

Activity in the private equity field remains high, and increased fundraising in 2015 means there is cash ready to keep M&A at the forefront of conversations in the deal room in 2016.

The risks involved in bringing two companies together are broad, complex and can diminish the value of any deal without proper mitigation. With far fewer IPOs, private equity firms are holding onto their portfolio companies longer, increasing their exposure.

Zurich_SponsoredContent“The right carrier partner can provide value at every step of the investment cycle — deal generation, due diligence, postacquisition and exit — through a mix of insurance products and enterprise risk solutions.”
— Andy Peterson, Head of Private Equity for Zurich Global Corporate in North America

Insurance not only protects PE firms from liability shouldered by acquired companies, but also acts as an asset to bring to a negotiation.

The right carrier partner can provide value at every step of the investment cycle — deal generation, due diligence, post-acquisition and exit — through a mix of insurance products and enterprise risk solutions.

“Zurich has the best-in-class capabilities to support our customers’ goals at every phase,” Peterson said.

Enterprise Risk Solutions

Enterprise risk solutions help private equity firms conduct due diligence more thoroughly, and can help them decide whether to continue with a deal or pull the plug.

Many of Zurich’s most valuable risk management insights relevant to private equity decision-makers come together in its proprietary Zurich Risk Room, an online aggregation of data that customers can reference as they research target companies, their industries and the risk exposures they may present at home and abroad. The tool can help customers identify the correlation between various risks and test assumptions before making a strategic decision.

“For example, a private equity customer is considering an acquisition in Germany. They can use tools in the Zurich Risk Room to create a flood map and determine flood exposure at the property. That could either bolster their confidence in the acquisition or convince them not to go through with the deal because the risk is too high,” Peterson said.

Zurich Onsite is another innovative tool that is changing the game for risk engineering solutions provided to many customers. The tool increases the transparency of the whole risk assessment process, and enables customers to obtain better insights from site visits than ever before.

These insights enable more informed conversations with the risk engineer during visits, prompting quicker action on risk improvement actions and helping businesses deliver on their loss prevention strategies.

Sophisticated Structures

Once a deal gets the green light, PE firms familiar with the utilization of captive insurers may be positioned to leverage that experience to manage many and perhaps all of their risk portfolios. Building a self-insured structure for an entire portfolio within a captive can deliver a high degree of flexibility while providing coverage for the risks that a firm could inherit from its assets. In effect, a captive helps minimize risk and maximize financial freedom.

“How we structure a program will differ depending on a client’s unique goals and risk appetite, but captives provide a way to pull an array of risks under one roof,” Peterson said.

International Capabilities

Companies looking to expand globally face additional challenges with local regulatory and compliance requirements. While North America still leads the way in terms of investment and deal generation, Europe is not far behind and Asia is gathering steam. Additionally, emerging markets offer more and more opportunities for companies to establish an international footprint.

“Your insurer has to have the capability to write local policies back to a U.S. master policy, and doing that well is a daunting task,” Peterson said.

He noted that Zurich is one of a few carriers with the international capabilities to support expansion and acquisitions abroad.

The information in this publication was compiled from sources believed to be reliable for informational purposes only. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication. We undertake no obligation to publicly update or revise any of this information. This is intended as a general description of certain types of insurance and services available to qualified customers through the companies of Zurich in North America, provided solely for informational purposes. Nothing herein should be construed as a solicitation, offer, advice, recommendation, or any other service with regard to any type of insurance product underwritten by individual member companies of Zurich in North America, including Zurich American Insurance Company, 1400 American Lane, Schaumburg, IL 60196. The policy is the contract that specifically and fully describes the coverage, terms and conditions. Coverages and rates are subject to individual insured meeting our underwriting qualifications and product availability in applicable states. Some coverages may be written on a nonadmitted basis through licensed surplus lines brokers.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Zurich. The editorial staff of Risk & Insurance had no role in its preparation.




Zurich Insurance Group, Ltd is an insurance-based financial services provider with a global network of subsidiaries and offices in North America and Europe as well as in Asia Pacific, Latin America and other markets.

More from Risk & Insurance

More from Risk & Insurance

Alternative Energy

A Shift in the Wind

As warranties run out on wind turbines, underwriters gain insight into their long-term costs.
By: | September 12, 2017 • 6 min read

Wind energy is all grown up. It is no longer an alternative, but in some wholesale markets has set the incremental cost of generation.

As the industry has grown, turbine towers have as well. And as the older ones roll out of their warranty periods, there are more claims.

This is a bit of a pinch in a soft market, but it gives underwriters new insight into performance over time — insight not available while manufacturers were repairing or replacing components.

Charles Long, area SVP, renewable energy, Arthur J. Gallagher

“There is a lot of capacity in the wind market,” said Charles Long, area senior vice president for renewable energy at broker Arthur J. Gallagher.

“The segment is still very soft. What we are not seeing is any major change in forms from the major underwriters. They still have 280-page forms. The specialty underwriters have a 48-page form. The larger carriers need to get away from a standard form with multiple endorsements and move to a form designed for wind, or solar, or storage. It is starting to become apparent to the clients that the firms have not kept up with construction or operations,” at renewable energy facilities, he said.

Third-party liability also remains competitive, Long noted.

“The traditional markets are doing liability very well. There are opportunities for us to market to multiple carriers. There is a lot of generation out there, but the bulk of the writing is by a handful of insurers.”

Broadly the market is “still softish,” said Jatin Sharma, head of business development for specialty underwriter G-Cube.

“There has been an increase in some distressed areas, but there has also been some regional firming. Our focus is very much on the technical underwriting. We are also emphasizing standardization, clean contracts. That extends to business interruption, marine transit, and other covers.”

The Blade Problem

“Gear-box maintenance has been a significant issue for a long time, and now with bigger and bigger blades, leading-edge erosion has become a big topic,” said Sharma. “Others include cracking and lightning and even catastrophic blade loss.”

Long, at Gallagher, noted that operationally, gear boxes have been getting significantly better. “Now it is blades that have become a concern,” he said. “Problems include cracking, fraying, splitting.

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“In response, operators are using more sophisticated inspection techniques, including flying drones. Those reduce the amount of climbing necessary, reducing risk to personnel as well.”

Underwriters certainly like that, and it is a huge cost saver to the owners, however, “we are not yet seeing that credited in the underwriting,” said Long.

He added that insurance is playing an important role in the development of renewable energy beyond the traditional property, casualty, and liability coverages.

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine. Weather risk coverage can be done in multiple ways, or there can be an actual put, up to a fixed portion of capacity, plus or minus 20 percent, like a collar; a straight over/under.”

As useful as those financial instruments are, the first priority is to get power into the grid. And for that, Long anticipates “aggressive forward moves around storage. Spikes into the system are not good. Grid storage is not just a way of providing power when the wind is not blowing; it also acts as a shock absorber for times when the wind blows too hard. There are ebbs and flows in wind and solar so we really need that surge capacity.”

Long noted that there are some companies that are storage only.

“That is really what the utilities are seeking. The storage company becomes, in effect, just another generator. It has its own [power purchase agreement] and its own interconnect.”

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine.”  —Charles Long, area senior vice president for renewable energy, Arthur J. Gallagher

Another trend is co-location, with wind and solar, as well as grid-storage or auxiliary generation, on the same site.

“Investors like it because it boosts internal rates of return on the equity side,” said Sharma. “But while it increases revenue, it also increases exposure. … You may have a $400 million wind farm, plus a $150 million solar array on the same substation.”

In the beginning, wind turbines did not generate much power, explained Rob Battenfield, senior vice president and head of downstream at JLT Specialty USA.

“As turbines developed, they got higher and higher, with bigger blades. They became more economically viable. There are still subsidies, and at present those subsidies drive the investment decisions.”

For example, some non-tax paying utilities are not eligible for the tax credits, so they don’t invest in new wind power. But once smaller companies or private investors have made use of the credits, the big utilities are likely to provide a ready secondary market for the builders to recoup their capital.

That structure also affects insurance. More PPAs mandate grid storage for intermittent generators such as wind and solar. State of the art for such storage is lithium-ion batteries, which have been prone to fires if damaged or if they malfunction.

“Grid storage is getting larger,” said Battenfield. “If you have variable generation you need to balance that. Most underwriters insure generation and storage together. Project leaders may need to have that because of non-recourse debt financing. On the other side, insurers may be syndicating the battery risk, but to the insured it is all together.”

“Grid storage is getting larger. If you have variable generation you need to balance that.” — Rob Battenfield, senior vice president, head of downstream, JLT Specialty USA

There has also been a mechanical and maintenance evolution along the way. “The early-generation short turbines were throwing gears all the time,” said Battenfield.

But now, he said, with fewer manufacturers in play, “the blades, gears, nacelles, and generators are much more mechanically sound and much more standardized. Carriers are more willing to write that risk.”

There is also more operational and maintenance data now as warranties roll off. Battenfield suggested that the door started to open on that data three or four years ago, but it won’t stay open forever.

“When the equipment was under warranty, it would just be repaired or replaced by the manufacturer,” he said.

“Now there’s more equipment out of warranty, there are more claims. However, if the big utilities start to aggregate wind farms, claims are likely to drop again. That is because the utilities have large retentions, often about $5 million. Claims and premiums are likely to go down for wind equipment.”

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Repair costs are also dropping, said Battenfield.

“An out-of-warranty blade set replacement can cost $300,000. But if it is repairable by a third party, it could cost as little as $30,000 to have a specialist in fiberglass do it in a few days.”

As that approach becomes more prevalent, business interruption (BI) coverage comes to the fore. Battenfield stressed that it is important for owners to understand their PPA obligations, as well as BI triggers and waiting periods.

“The BI challenge can be bigger than the property loss,” said Battenfield. “It is important that coverage dovetails into the operator’s contractual obligations.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]