Volume 20

Partners' Perspective

2012 Equity Risk Partners Year in Review: "Occupy Wall Street Edition"  


We are the 99%! We are the 99%! 

Every decade or so, an ideal rises up, catches the consciousness of the nation, receives much fanfare amidst the proclamations of doom and destruction, morphs into something else, and then eventually peters out and things return to normal.

No, we’re not speaking of Occupy Wall Street. We are speaking of the hard market underwriting cycle of the insurance industry, of course.

The average business professional has dealt with crises like the Mexican Peso, Internet Bubble, Housing Bubble, Sovereign Debt; the hard market underwriting cycle is just the latest thing to cause our collective hand-wringing. But, don’t worry too much. Just like the police eventually show up and clear all the tents out of the park, the hard market will come and go. The insurers will overplay their hand, public support will die down and things will get back to "normal".

Now that we’ve taken a breath and calmed down, let’s take a look at the State of the Market – 2012.

Given the theme of this year’s discussion – Occupy Wall Street – we should, of course, start with Wall Street.The biggest coverage issue associated with Wall Street is Executive Liability – aka D&O. This is the coverage that the shareholders (99%) pay for to protect the “fat cats” from any implications arising out of their evil schemes to control the world.

  • D&O pricing for publicly traded companies has begun to gradually increase. The recent spate of significant IPO’s and their inherent volatility will likely lead to further price firming.
  • Security Class Action Settlements increased in 2011from 2010 and are up significantly from 2008
    • 2011 Average Class Action Security Settlement = $40,100,000
    • 2010 Average Class Action Security Settlement = $36,300,000
    • 2009 Average Class Action Security Settlement = $37,200,000
    • 2008 Average Class Action Security Settlement = $28,000,000
  • Private D&O continues to flatten out with renewals at expiring or with slight premium increases
  • The D&O market continues to have excess capacity
  • Fiduciary Liability market remains soft

The Employment Practices Liability (EPL) market has started to see changes, especially for California locations (I wonder why?)

  • General increase in premium, retention and, at times, less favorable policy language
  • We continue to see an increase in notices of EPL claims from our clients

General Partnership Liability (GPL) market is beginning to change. Capacity is not an issue, yet.

  • Pricing has been flat to slightly higher on most GPL renewals
    • larger funds / funds with claims are seeing a more significant premium / retention increases
  • Most clients are renewing with their incumbent carrier
  • Carriers are less willing to negotiate policy enhancements as they were at this time last year
  • Carriers continue to see an increase in claims from the economic fallout:
    • Distressed portfolio companies and bankruptcies
    • Government investigations (SEC, DOJ, attorneys general)
    • General increase in regulatory oversight (Dodd-Frank Act)
    • Carriers are demanding more underwriting information for renewals

Of course, the Wall Street “fat cats” became such in the first place as a result of all the deals they do. Those deals are increasingly insured through Reps and Warranties policies.  Equity Risk placed 18 such policies in 2011.

 

  • Utilization rates have increased due to a confluence of events:
    • Improved pricing and policy terms available
    • New capacity in the market driving competition among insurers
    • Increased interest in hedging risk by private equity firms and strategic investors
  • Rates and policy terms continue to show improvement. We are seeing rates in the range of 2% - 3% of limits purchased on most R&W insurance placements.
  • Increase in cross-border deals has fostered the use of R&W to hedge risk in foreign jurisdictions
  • We are seeing deals take longer to get to the closing table and an increase in aborted bids
  • Use of transactional insurance as fund “wind-down” insurance by removing latent indemnification exposures and allowing distribution of final assets to limited partners without risk of claw backs.

 

The dissenting opinion to Occupy Wall Street says we need to focus on the “job creators” – those small businesses that are the backbone of the U.S. economy.  We surveyed our small business accounts and have not yet seen much pricing increase from 2011 – approximately 3% - 5% (unless you made the mistake of housing your business in downtown Oakland right next to the protestors;  then, you might see some slightly higher pricing). Carriers have not yet pulled back on their appetite for different types of small business risks, although we expect a gradual pullback throughout 2012 and into 2013. 

The biggest change facing these businesses will be in Workers’ Compensation – especially in California.  We expect to see pricing increases in the 10% - 15% range. The Workers’ Compensation results are not favorable for most of the carriers.  Very few markets are willing to entertain mono-line Workers’ Compensation placements.  Many insurance carriers are filing for rate increases, particularly in California, Florida, and New York. Continued increases in medical costs and the shrinking workforce, coupled with the historical soft rates are impacting carriers.

 It is now time to give a nice shout out to Mitt Romney and thank him for the wonderful PR he has delivered for the private equity industry. Unfortunately, it is time for us to “pull a Mitt” and discuss Property Insurance. 

  • Rates are transitioning in the property market due to frequent catastrophic losses in the U.S., Japan, New Zealand, and Australia. 2011 was the worst year for insured property losses in history.
  • Risks in areas exposed to wind, earthquake, or flood or companies that have had significant losses will likely see increases up to 15%.
  • Non-catastrophe exposed property should expect flat to 10% rate increases.
  • Without catastrophe perils, the insurance companies are seeking 2% - 5% increases.
  • With catastrophe perils, carriers want 15% - 20% maximum increases and propose decreased limits with increased retentions.

Just like Occupy Wall Street attracted the fringe protests (I enjoyed seeing the “No Blood for Oil” signs at the Occupy marches), all lines of property/casualty insurance are linked. 

Let's look at the current state of General Liability, Auto Liability and Umbrella Liability:

  • Primary rates remain mostly level due to ample capacity in the casualty marketplace
  • Clients with adverse experience will see less favorable rates (5% - 15%)
  • Clients can expect flat to slight rate increases (2% - 5%) for risks that are performing well
  • The carriers are pushing to write the general liability and automobile liability lines to support writing the property and Workers’ Compensation lines.

So, I am walking down the main street of Colorado Springs one fine fall evening after a nice dinner at a local restaurant when I come upon a commotion in the town square.  It was an Occupy Wall Street protest… in Colorado Springs, CO!!!  Just when I thought I had seen it all… 

In a similar fashion, here are other interesting things we are “seeing” in the marketplace:

  • Excruciating underwriting for the majority of the clients, resulting in extra time committed to the renewal process.
  • Carrier appetite has diminished – even for clients that have stellar experience within moderate classes of business
  • Carriers are reacting negatively to installment premiums being received late.
  • Catastrophe peril modeling has changed – we need to allow at least two weeks for the carriers to obtain their data for locations in high hazard areas. Many carriers have not yet changed over to the new modeling, but they will be mandated to do so in order to be in compliance with their filings.

Do you ever wonder how we got to this point? What was the trigger for the Occupy Wall Street movement? When was the tipping point?  hat snapped? Well, before you start asking those same questions next year about all your insurance price increases, we thought we would give you the answers now.  Here are the criteria necessary for a “market turn” (courtesy of Barclays and I.I.I.):

  • Sustained period of large underwriting losses – inevitable, we are in the early stages
    • Apart from Q2:2011, overall P/C underwriting losses remain modest
    • Combined rations (ex-Q2 CATs) still in the low 100s versus 110+ at onset of last hard market
    • Prior year reserve releases continue to reduce underwriting losses and inflate ROEs
  • Material decline in surplus/capacity – we entered into 2011 at record high but have since fallen
    • Surplus hit a record $565 billion as of 3/31/11
    • Fell by 1% in Q2 2011
    • Little excess capacity remains in reinsurance markets
    • Weak growth in demand for insurance is insufficient to absorb much excess capacity
  • Tight reinsurance market – this is somewhat in place
    • Much of the global “excess capacity” was eroded by catastrophes worldwide
    • Higher prices in Asia / Pacific regions
    • Modestly higher pricing for US risks
  • Renewed underwriting and pricing discipline – we see some firming, especially in property / Workers' Compensation 
    • Commercial Lines pricing trends turning up from flat in some lines (property, Workers' Compensation)
    • Competition remains intense as many seek to maintain market share

That should bring you up to speed on the State of the Market for 2012. Please feel free to contact your Equity Risk Partners professional with questions, concerns, or opportunities (we wouldn’t mind being in the 1%). And as always, we appreciate your continued support of Equity Risk Partners.