Volume 15

Partners' Perspective

Portfolio - Lite: Group Marketing

Private equity firms are always looking for ways to take advantage of cost sharing among their portfolio companies - whether it is buying raw materials, telephone rate plans, or insurance.

For many years, some insurance advisors have been promoting the concept of a portfolio insurance program. A true portfolio program consists of a single policy for each line of coverage for the entire portfolio. This creates issues concerning: (1) the correct named insured; (2) ability to add or delete portfolio companies throughout the year; and (3) sharing of limits of liability across all companies. As we have discussed previously in this forum, a true portfolio program for property and casualty insurance is a difficult and time consuming process to undertake. In many instances, the private equity firm would rather not suffer the aggravation for a potential of 15%-25% in premium savings.

Equity Risk Partners has successfully utilized a Group Marketing approach as an effective proxy for a true portfolio program. The thought process is that if a broker can deliver an entire portfolio of companies to one insurance carrier, that carrier should provide a significant premium discount based on their ability to underwrite all of these companies "simultaneously independently." This Group Marketing approach addresses the above mentioned issues without sacrificing significant premium savings.

The following describes two specific examples where Equity Risk Partners has instituted Group Marketing programs and achieved premium savings for our private equity firm and their portfolio companies:

Case Study #1 - Executive Liability

Executive Liability (D&O, Employment Practices, Crime, Fiduciary Liability) is one of the most important coverages that our private equity clients buy. They also require their portfolio companies to obtain and maintain this coverage. It represents the easiest way to achieve leverage through the portfolio.

ABC Capital's portfolio consisted of 6 consumer products companies; with revenues ranging from $25M to $200M and employees ranging from 25 to 250. The PE firm required that each of their portfolio companies purchase D&O at the close of every deal. However, no basic requirements were provided to the companies. As a result, the portfolio companies had different limits of liability, different carriers (some poorly rated financially), and different deductibles. Not surprisingly, our PE client didn't even know if all the companies had the correct coverage in place.

Upon our review of the portfolio, we discovered that some companies only had coverage for D&O with no coverage for Employment Practices or Fiduciary Liability. Also, most of the companies only carried a limit of $1M. After taking over each company's D&O coverage on a Broker of Record letter, we extended certain policies so that all policies were utilizing the same Effective Date. Equity Risk Partners was able to achieve a 13% savings and improved coverage terms across the portfolio. The highlights are as follows:

  • The Group Marketing approach resulted in a total premium of $107,100 - a 13% reduction from the $123,300 paid prior to Equity Risk Partners involvement
  • All companies obtained a separate limit of $3M for D&O, Employment Practices Liability, and Fiduciary Liability
  • No increase in deductibles
  • All companies were now on the same effective date
  • Companies could be easily moved in and out of the program
  • Automatic runoff coverage now provided for each company upon divestiture from the portfolio.

Case Study #2 - Property & Casualty Program

XYZ Capital specializes in working with struggling companies throughout the United States. Their portfolio encompassed a large tanning company, a textile company, two paper mills, and a seafood processor - very different companies with very different exposures.

XYZ wanted to simplify everything associated with the insurance placement for their portfolio companies. Early on, XYZ utilized the services of a handful of different advisors for insurance. This lead to confusion at renewal, as well as with add-on acquisitions. They decided to work exclusively with Equity Risk Partners and explore the Group Marketing process.

The biggest hurdle was effecting a common renewal date for all five portfolio companies. Equity Risk Partners accomplished this by staggering the policy terms so that each company's policy expired on an agreed upon date. Therefore, during our first year as XYZ's broker, some companies had a short term policy and some had a longer term policy. During the initial marketing of this program, we laid out for the insurance companies our desire to ultimately market all of these companies together. Due to the very high exposure to loss of these types of companies, many carriers declined to participate. However, we were able to source a number of interested parties - mainly due to the attraction of writing five companies at once.

Upon completion of our 2nd year marketing efforts (during the first year we got all companies on a new effective date) we were able to:

  • Decrease the overall premium of the portfolio by 16% - to a total premium amount of $1,550,000 from $1,839,231
  • Provide blanket property limits for high risk properties
  • Improve many coverage terms

The Group Marketing approach enables private equity firms to leverage their insurance buying power and still keep each portfolio company's coverage separate and consistent. In order to do this correctly and effectively, a private equity firm needs the services of a broker that not only knows insurance but also knows private equity.