Proactively Enabling Acquisitions
Two of Christopher Cancro’s insurance company clients acquired large peer companies, significantly increasing their respective revenue base and market share. As part of that process, both clients had to integrate coverage for the newly acquired entities into their existing errors and omissions programs.
Cancro was able to negotiate full prior acts coverage for the acquired entities’ E&O for no increase in premium. The key to achieving this result was leveraging the buying power of the new, larger combined entities and adopting a high-disclosure marketing approach that forced the carriers to underwrite the risk on the merits including specific line of business exposure, client loss history and go-forward retentions — rather than simply rely on the fallback response that acquisitions equaled premium.
“Chris is responsive, provides measured advice and shares valuable experience and information,” said a client in the insurance industry. “With his assistance, we renewed and expanded our management liability program in a prudent and cost-effective manner.”
“Chris Cancro is extremely diligent,” said another insurance company client. “He is persistent and tenacious on behalf of his clients and his understanding of products is extremely deep.”
“Chris Cancro is a valued and trusted partner,” said a financial institution client. “He consistently delivers effective and leading-edge solutions for our ever-evolving risk profile.”
Instilling Confidence Among Carriers
One of Edward Conlon’s private equity clients received an offer to purchase one of its portfolio companies. However, another party that was suing the PE firm in a securities case filed a temporary restraining order to stop the sale. The PE firm wished to immediately distribute sales proceeds to its limited partners before the trial ended, so Conlon helped create a very large tower insuring against an adverse judgment.
This entailed answering very difficult questions from multiple carriers, convincing them to get over the “blanket denial” of insuring against litigation outcomes by highlighting the best aspects of the risk profile, leveraging relationships for capacity, working through nine rounds of drafting the primary policy, and creating the quota-share manuscript policy from scratch.
The risk transfer permitted his client to monetize its internal rate of return and distribute proceeds to its limited partners without any caveats or holdbacks — and raise a new fund.
“We had a very difficult project and Ed and his team took it on and did not give up until they got it done,” the client said. “They did a great job.”
“Edward Conlon has given us great service,” said another PE client. “We had a really complex transaction, spinning off one division of a company at the same time we were merging with another company, and our risk profile changed. Ed helped prepare us through that, and that helped management through a very complicated process. He brought resources from his firm to help us rethink issues and stretch targets up front.”
Working with several London syndicates, Dennis Gustafson last year created Bank ExecShield, which offers coverage for civil penalties against bank directors or officers as long as they pay for the coverage themselves. This was in response to regulations stating that such penalties could neither be indemnified by the bank nor covered under the bank’s directors and officers policy.
Gustafson was also able to successfully negotiate a renewal for a client that had a $2.5 million claim. He recommended inviting competing carriers to the underwriter meeting, and after seeing all of the interested parties, the incumbent carrier offered a renewal with a mild rate increase. Gustafson was also able to place a new carrier on the excess layer at enough of a rate decrease to generate an overall flat renewal.
“By drumming up interest from other carriers, this keeps the incumbent carriers very price competitive,” said a bank client.
“Dennis has provided excellent customer service to AmeriNat this past year,” said Adrienne Thorson, chair and chief executive of AmeriNational Community Services. “As we transitioned into a new ownership structure in a very tightly regulated industry, Dennis walked us through step by step what needed to be done to ensure there would be no lapse in coverage.”
“Dennis is a dedicated, passionate, and knowledgeable insurance professional,” said Jeff A. Paolucci, chief financial officer at First Reliance Bank.
A Voyage Across the Pond
One of James Jackson’s clients, Aegon, conducted a request for proposals for its global errors and omissions policy placement, inviting three brokers to compete — including Willis Towers Watson, which has been Aegon’s broker since 2004.
As the lead broker and working closely with colleagues in both London and Bermuda, Jackson proposed restructuring the program out of the London market and reducing Aegon’s relatively high retention. The placement had previously been led from the U.S. market, as that’s where Aegon first purchased the policy and believed they had the greatest exposure.
Jackson and his team retained the business as a result of the proposed solutions. The placement was moved to London, incorporating several unique coverage enhancements, such as loss mitigation costs, that were previously unavailable to them. Aegon is now considering two retention options and two quoted towers presented by Jackson.
“We gave him a pretty significant challenge last year, moving a $300 million program from the U.S. to Europe with some 20 different carriers, and he did an amazing job for us,” said Barry White, Aegon’s global insurance manager.
“James Jackson has been extremely knowledgeable, both in relation to the insurance he places for us, as well as understanding us as a company and the risks we face,” said a client in the life insurance and annuity industry.
They Said It Couldn’t Be Done
Georgina Serio obtained regulatory coverage for one bank client that had a consent order in place, after the prior broker proclaimed that it couldn’t be done. Serio was then able to get the client’s executive liability premium reduced by $250,000, and saved the client more than 20 percent in its regular insurance program by including property owned by the bank that was not directly related to its business.
“I met her several years ago when our bank was ‘troubled,’” the client said. “We had been told that the bank could not get regulatory insurance coverage because of its condition. She said, “Come to New York City with me, make a presentation to 12 underwriters and I will get you regulatory coverage.’”
“I did what she asked and she delivered what she promised,” the client said. “Plus she got us kidnap and extortion coverage and cyber coverage without increasing our premiums over the previous year’s cost. At our next renewal, she was able to reduce our cost about $250,000.”
For Pacific National Bank, which was also operating under consent order, Serio not only was able to obtain coverage, but she was also able to reduce the renewal premium by 35 percent.
“Ms. Serio really had to step up to the plate and diligently work with the carriers to ensure she could secure the appropriate coverage under reasonable terms,” said a client.
Attuned to New Solutions
One of Timothy Sullivan’s financial services clients was buying a bank. After analyzing all of the exposures, Sullivan aggressively pre-negotiated the additional directors and officers policy premium for the acquisition that would be due upon closing of the transaction. This was on top of achieving a significant reduction in the D&O premium for the client, as well as numerous meaningful coverage enhancements, resulting in overall premium savings.
Sullivan also successfully negotiated the inclusion of prior acts coverage for the acquiring bank under the client’s banker’s professional liability program, at a very competitive cost. Moreover, he was able to successfully secure market leading coverage for his client that no other BPL insurer was willing to offer for a financial services firm of that type and size.
Sullivan was also able to negotiate a comprehensive program for the client’s employment practices liability program using the same Bermuda market as the acquiring bank. The cost savings enabled the client to more than double its limits. Indeed, the client increased limits across all lines of coverage, and Sullivan was able to secure all new layers without the requirement of warranty letters.
“Tim is extraordinarily responsive across all management professional liability lines of coverage,” said Arlene Lasagna, senior vice president, corporate insurance at CIT Group Inc. “He gives meaning to the concept of collaboration.”
Representations and warranties insurance is part of just about every M&A, and Joshua Halpern’s clients are fortunate he brings his knowledge in that area along, as well as his experience as a practicing attorney.
As one executive said, getting a policy isn’t the challenge. It’s getting a policy that fully protects the organization — typically in a short timeframe.
The company required “a very complex rep and warranty placement” for an acquisition. “Josh did a phenomenal job in terms of keeping everybody focused, delivering within the timeline we required, and winning the confidence of our M&A group. They were quite pleased with the job Josh did,” said Bob Cerutti, vice president, global risk management, Tyco.
Alcoa Inc., which was acquiring a company from a private equity firm, counted on Halpern “to take the reins on what needed to be done,” said Debra Samuel, manager, insurance risk management.
“He was available all hours and throughout the weekend. He went above and beyond what I am used to from a broker serving an account. It’s one thing for a broker to say we have the ability to do something, but it’s another thing for them to actually execute and do it,” she said.
“I have a comfort level in knowing he knows what he is doing,” Samuel said.
The complexity of private equity transactions can be daunting, requiring strategic insights, in-depth knowledge and responsiveness to client needs. Tony Palumbo excels in the field.
David Schultz, treasurer of Optimas OE Solutions, took on a new role with the company when it was purchased by a private equity firm. Breaking the program off from the selling company was a complex operation. The company also had to rely on Palumbo to help manage its recall exposure in a difficult environment.
“He made the effort to learn the exposure and get decent pricing from the underwriter, and fine-tune it so the coverage was more applicable,” he said. “Tony did a really nice job of pulling together a good solution. He understands the risk, meeting our needs and timing,” Schultz said. “He made my job easy.”
Paul Bamatter, partner and CFO of American Industrial Partners, called Palumbo “an exceptional human being.”
Palumbo and the Lockton team “are an extension of the AIP family. We treat them as a partner. They have large latitude to make decisions on our behalf. They really look after us.”
Part of that was flying into Mexico to help with supply chain and business interruption issues the day after a hailstorm.
“You don’t always get that kind of service from brokers,” he said.
A Trusted Adviser
With his background as a tax lawyer and deep understanding of the tax and transaction risk insurance market, Dan Schoenberg’s clients depend on his insights and customer service as well as his technical knowledge. One policy crucial to M&As is representations and warranties coverage.
“Reps and warranties is a totally different type of animal,” said one PE executive. “You are an adviser to both sides of the deal. It’s one of the loneliest places to be. You can’t break trust with either side or you will blow up your ability to do deals in the future.
“It takes a very unique talent and personality to survive these types of placements,” the executive said, noting that Schoenberg worked with him on “a monster deal” that included a $385 million limit on the policy. But Schoenberg invests just as much time and energy on every placement no matter what the size.
“Dan is very diligent and responsible,” said one company executive. “He is always there and very professional. He is consistent in his willingness to help his clients.”
In another transaction, Schoenberg structured, negotiated and secured a tax insurance policy in the hundreds of millions that involved nearly a dozen carriers for a company that reorganized and sold a unit to a private equity firm.
“We were pleased with the diligence, the follow-through and execution,” said the company finance executive.
Unraveling the Complications
Getting reps and warranties insurance is especially difficult for private equity funds focusing on health care. Insurers are wary of the risk, especially with the exposures related to regulatory compliance. Plus, health care’s revenue is complex for organizations dealing with Medicare and Medicaid.
When Triton Pacific Capital Partners were selling a health care company, they relied on Matthew Heinz to take care of an R&W carve-out on the health care side. “Matt was a very thoughtful guy,” said Joe Davis, managing partner. “He’s smart and his legal background as an M&A lawyer by training was very helpful. “It was very clean, a right-down-the-fairway deal,” he said. “Plus he is easy to work with.”
On another private equity firm’s “complicated transaction,” Heinz was able to place reps and warranties coverage in an expedited timeframe, even though the transaction included some ongoing litigation, said the PE executive.
“There was a little bit of hair on it, but we ended up in a very good place,” he said. “Matt offers great customer service and responsiveness. Also, I think he has a pretty calm, poised disposition particularly when we are in a very stressful environment. He has a strong understanding of the product but he also understands his clients’ needs as well.”
With his mix of expertise and experience – as a lawyer, underwriter and broker – he is able to offer clients sophisticated advice on the structure and substance of coverage and transaction liabilities.
A Phenomenal Result
Joe Roberta helped Paradigm Precision, a PE portfolio company, revamp its entire insurance program last year.
“He knocked it out of the park,” said Patrick Barrett, director, global EHS and risk management. “He helped transition us into a deductible program with $900,000 in savings. He freed up a tremendous amount of cash and with private equity, cash is king.”
Roberta, Barrett said, “did a phenomenal job of helping us go to market to get better pricing and better terms. He cut our total cost of risk by about 50 percent.
“Usually when you hear from a broker, it’s something that’s gone wrong, but Joe is really plugged into our business. He keeps in touch,” he said. Roberta also was instrumental in helping Paradigm insure two acquired European companies last year. “Joe did a great job navigating the waters there and getting us good results.”
For Morgan’s Hotels, Roberta negotiated a buyout with a former casualty insurer, said Steven Benjamin, director of risk management. “I don’t think too many other brokers would have been able to get that done,” he said.
Benjamin noted that all of his brokers are excellent. “Whoever is not working well for me is probably not going to be working on my account for too long.”
But of all those top-notch brokers, he puts Roberta “at the top as far as 2015 goes. … He cleaned up a lot of financial issues with current and past casualty programs. And there was a lot of collateral hanging in the balance,” he said.
Cleaning Up the Mess
In one complicated deal, Edward Todd was able to obtain “insurance pricing for a messy carve-out with a lot of messy pieces which was below what the company was paying,” said one private equity executive. “You never find that.”
“He is a great adviser and sounding board,” the executive said. “He is extremely professional, accountable and online 24/7 if you need him. He clearly understands, to a painstaking detail, the underlying products.
“His expertise and confidence got us big savings,” the executive said.
The treasurer of a privately held company said much the same.
“We are a very acquisitive company,” the executive said. “Ed has saved us quite a bit of money by pointing out specific things in stock purchase agreements that could be negative to us post-acquisition. He identified certain risks where we have been able to reduce our offer as a result of certain things he pointed out. Nothing gets past him. He has stepped up to the plate and done a lot more sometimes than the fee that we pay him warrants.”
Another PE executive said that Todd and his team assessed the exposures involved in a very complicated transaction and offered various strategies to address potential risks.
“He needed to understand the project at a very granular level. Ed and his team did a great job. He also did great benchmarking work across not only our portfolio but at comparable companies and projects so we were comfortable with the exposure level they were recommending.”
Searching for Stability in Cyber Space
As headline-grabbing breaches crack systems and tarnish reputations of major retail, healthcare and financial companies, the need for cyber insurance has become increasingly apparent.
Given the constantly changing nature of cyber risk and the market landscape, creating a stable, sustainable cyber insurance business demands a prudent approach, with an eye on the long road.
“We’ve seen carriers jump in and out, wanting to take advantage of a new opportunity, but perhaps underestimating the risk,” said Danielle Librizzi, Senior Vice President, Head of Professional Liability, Berkshire Hathaway Specialty Insurance (BHSI).
“As cyber exposure became more tangible to carriers, in-force coverage was tested and many made radical changes to pricing and availability of coverage. BHSI is committed to entering the cyber market in a thoughtful and sustainable way. We want to be there for our customers as the risks continue to evolve.”
Diverse, Evolving Risks
Cyber exposure – and coverage — have been evolving, posing different risks and underwriting challenges for different industries. The technology, financial services and healthcare industries illustrate the diverse issues that must be considered in order to provide effective, financially sustainable cyber solutions.
The technology sector was the first cyber battleground, and technology E&O forms included some cyber coverage by virtue of the nature of the risk. “There’s inherent cyber coverage for third party liabilities in E&O,” Librizzi said.
While coverage is widely available, tech companies pose challenges to underwriters because of their unique position in the cyber “supply chain.” These companies provide software, hardware and cloud services; virtually every organization in the world is dependent on a tech provider of some stripe. If an insurer is covering both the provider and its clients, the aggregate risk should be monitored closely.
Think of a DOS attack on a cloud provider that prevents all of its clients – which could include anyone from a bank to a retailer or transportation company — from accessing stored customer or corporate data or running cloud-based service apps. That single attack could bring business in multiple industries to a grinding halt, potentially causing business interruption and E&O losses.
The tech industry hasn’t seen a large scale event like this yet, but it isn’t waiting around for one to strike before addressing the underlying risk. Controlling and accounting for the aggregate exposure will mold the direction that coverage development takes.
“Our combined form, introduced in October, 2015, is a comprehensive solution that includes first and third party cyber coverage as well as traditional E&O coverage,” Librizzi said.
However, that approach may not be appropriate for other industries. Financial Institutions, for example, may seek a dedicated cyber only policy which does not include traditional E&O coverage.
While banks typically have strong protocols for network security and privacy, they also have a much greater exposure in massive stores of customer data. Financial Institutions are looking to address liability in the form of class action lawsuits or heavy regulatory investigations and fines emanating from cyber, and may not want to compromise their traditional E&O limits.
“Additionally, given the increased reliance on outsourced providers for technology solutions, we have started to see the introduction of sub-limited coverage for dependent business interruption and payment card industry (PCI) fines and assessments as enhancements to coverage,” Librizzi said. “We might see those sub-limits go to full coverage as competition gets heavier.”
Other industries, which may not be as advanced as financial institutions in addressing cyber threats, have suffered more from a lack of robust cyber coverage that can keep up with increasing exposure.
Healthcare, for example, has seen a surge of cyber attacks since hospitals and other health systems went electronic. To a hacker, healthcare providers represent a warehouse of valuable personal identifiable and protected health information.
Email addresses from healthcare systems typically are white-listed and less likely to get caught in a spam filter, giving hackers incentive to obtain access and gain control of a healthcare provider’s network in order to launch phishing attacks.
After some high-profile breaches in 2015, Human Health Services and the Office for Civil Rights came under scrutiny for not doing enough enforcement of HIPPA. Fines imposed by regulators increased dramatically over the past decade, and seem poised to only get higher.
“They’ll be ramping up enforcement of regulations in 2016, and that’s only a peek of what’s on the horizon,” Librizzi said.
The burgeoning of healthcare’s cyber exposure has challenged the insurance industry to better understand the nature of the risk and how best to secure hospital systems. Coverage for this sector remains the most difficult to write effectively.
BHSI understands the need for different customers to have different solutions. Some customers desire a dedicated cyber policy that does not include traditional E&O coverage. BHSI’s Network Security and Privacy stand-alone policy is designed to address the needs to those customers.
“The cyber exposures and coverages needs of healthcare, financial services and technology are on different timelines and will look very different in the future,” Librizzi said.
Even in more mature markets, the conflation of commercial and personal cyber risk will challenge insurers going forward. Most existing cyber products don’t cover property damage and personal injury; as the risks emerge and the Internet of Things becomes more pervasive, the coverage will have to evolve as well.
“We must always be thinking about what is on the horizon from a risk and coverage perspective – our technology driven society demands it,” Librizzi said.
Anticipating challenges and adapting to each industry’s needs has been a cornerstone of BHSI’s approach to cyber. It’s careful and measured approach has also helped the specialty insurer build an arsenal of experts and ancillary services to help clients better grasp and mitigate their exposure.
“We know the importance of really understanding the risk and communicating it clearly to our customers,” Librizzi said. “We don’t bury our coverage in a pile of definitions, and we provide the expertise to help insureds stay ahead of the next big breach.”
To learn more about BHSI’s professional liability products, visit http://www.bhspecialty.com/.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, medical stop loss and homeowners insurance. The actual and final terms of coverage for all product lines may vary. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has offices in Atlanta, Boston, Chicago, Fort Lauderdale, Houston, Los Angeles, New York, San Francisco, San Ramon, Stevens Point, Auckland, Brisbane, Hong Kong, Melbourne, Singapore, Sydney and Toronto. For more information, contact [email protected].
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.