Bret Kugelmass
We're here today with Tom Dickson, who's the CEO of New Energy Risk. Tom, welcome to the Energy Impact.

Tom Dickson
Great, I'm thrilled to be here, Bret, thank you.

Bret Kugelmass
Thanks so much for taking the time. Super excited to get your perspective. I think what a lot of people don't realize in the energy space, when they say like, well, let's just put up a few solar panels or something, is that it's not that easy. There are actually many, many components to this clean energy transition that need to be thought out. A lot of them are technical and complex and financial nature. And so, we're super excited to have you here today to explore the insurance aspect as well. But before we do, we'd just love to learn about you, if you can tell us a little bit about your background, and how you got into the sector.

Tom Dickson
Sure, I'm happy to. You're right, I spent most of my career in the insurance and reinsurance business, really, at the intersection of insurance and finance, and really trying to explore and develop ways in which insurance can be effectively used to address financial risks and asset ownership over the long term. One of the things I found in my career is that insurance can be an incredibly effective tool, even though in many ways, the reputation of insurance is kind of old school and clunky. I experienced that as well, but I think that, for the right risk in the right way, it really has a very, very valuable and effective role to play and we can chat more about it. We have a particular kind of angle on that. And I think that my journey to New Energy Risk was really to take a lot of what I learned in my career and apply it specifically to the advancement of new energy technology to address, and obviously it's a major problem for all of us.

Bret Kugelmass
It's amazing. It's just so funny, I was at the start of the drone technology industry and I remember, when we did our first million dollar contract, and they asked us, Okay, well, what's your insurance policy? And at the time, since it was like a frontier tech space, there literally was nobody that had like a drone insurance policy. I was, literally at risk of this product of this deal collapsing, scrambling to call up insurers having no idea what I was doing. So, just to know that some people are out there now, thinking about addressing this need for the energy technology space is just like, I can't tell you what a relief that is. But before we get into your business model, and the nuances of it, why insurance? What interested you about insurance at the start of your career?

Tom Dickson
That's a good question. I got involved in insurance initially on the political risk insurance side, and that was really, I would say, grew out of my kind of academic interest. I studied international politics and economics and that was sort of an intersection there, and then political risk insurance kind of represented, for me, the kind of real world application of what had driven my academic interest. It kind of went from there. And I felt that that's an example of a pretty esoteric risk, but it has enormous impact on an owner and on financing.

Bret Kugelmass
What is political risk?

Tom Dickson
Political risk insurance will cover if you're - and this was a company called OPIC in the US, it was a quasi-government agency, it's called something different now. I think it's called-

Bret Kugelmass
Development Finance Corporation.

Tom Dickson
Right. Exactly. So, it changed its name. I think its mandates can change a little bit, but ultimately, it's backed, people view it as being backed by the full faith and credit of the government, although technically, I don't think it is. It's just viewed that way reputationally. But it really covers the risks of, if you're investing in the developing world, primarily risk of expropriation nationalization, contract frustration, meaning you have an agreement to sell your product, they just decide unilaterally they're just not going to do it anymore, or they decide they're not going to pay you for it, or you end up with a currency that's no longer convertible back to US dollars. Again, it's a pretty - I would say bespoke - coverage, you can't find it everywhere, it's so much specialists, but for me, the lesson I learned was, wow, if you can figure out how to analyze something, you can figure out how to structure an agreement around it and you can isolate that risk, and you have data to help you price it and control it, you can find a home for it. And it has a incredible can be handled in a in a way via insurance and that changes their business decision making. And it enhances their ability to scale their business, grow their business and go to new markets. That was a lesson I learned early on in my career, if you will,

Bret Kugelmass
So, with OPIC, how does it work? I mean, with a normal insurance policy, I kind of imagine, you pay a premium and they aggregate premium across many different people who are paying for the policy and then that's what goes to pay out in case new any of these risks do emerge. And then they've got a bunch of like fancy mathematicians in the background that are predicting these risks, so they can always pay up, they always have enough money on hand to pay up with the OPIC. Did they also collect premiums and fees from people who wanted to get involved in these projects? Or was this just like, the US government wanting to encourage business, so they're like, Yeah, we got it covered.

Tom Dickson
They did charge for it, and they had a very successful track record. And it sort of also speaks to the insurance industry. It is made up of sort of the law of large numbers, you collect smaller premiums from everybody, and you don't expect everybody to have a loss. This is also an example of that, and they develop a diversified portfolio across many, many countries. Part of their role also was that they spawned to some extent, the private market, because the private market would either partner with them, or they would look to their results, which were public and say, Wow, that's a market that we think we can play in. Now, as you as you may know, there's a version of OPIC at the World Bank. Many large insurance companies have groups that do it, frankly, many of them are alums from OPIC and other places, so it did have kind of a catalytic effect in the market, which I think was hoped for, but you never really know till you do it.

Bret Kugelmass
Okay, so you cut your teeth there, and then you've just been pioneering your own institution since, and is that the arc of your career? After a couple of years getting some experience you're just like, I'm going to lead these companies on my own?

Tom Dickson
Well, I wish I had that foresight when I was in my 20s. But from there, I joined a startup reinsurer that was sort of taking on the kind of reinsurance market and trying to essentially - this is back when this was newer - really integrate finance into reinsurance, which is really all about capital, and how can you most effectively deliver capital to the insurance kind of market, if you will, is a reinsurer. So, we formed, I was part of a team that formed a company that was ultimately bought by Zurich Financial Services. I was there for a long time, almost 15 years and became the Chief Underwriter and ultimately, the CEO there before it was sold. I stayed for the transition and then went on to do other things. But I was always trying to find ways in which you could really drive some innovation in the market, but always in the insurance and reinsurance market, which I learned that, if you do it carefully and do it correctly, it can actually be a great extension of what the core property and casualty market does. Ultimately, what I like to say is that, for the right risk - and the right risk tends to be a risk that is not traded, whereas there are a lot of risks that are traded, right? Credit risk gets traded every day, currency risk gets traded every day, commodity risk gets traded every day, the risk that your business burns down does not get traded every day, when you write that policy, you tend to keep it for the duration of that exposure. And so, the capital base and the way the insurance market functions is different, but it also was the most appropriate place for certain types of risks.

Bret Kugelmass
When you say reinsurance, that's like, insurance for insurance companies?

Tom Dickson
I couldn't say better. Yeah, it's writing massive insurance policies from a reinsurer to an insurance company.

Bret Kugelmass
That's so an insurance company is protected in case there's a sector wide phenomenon, like these very, like Black Swan style events that don't happen very often. You can't imagine why it would happen, but all of a sudden, out of nowhere, all of your policies that you've collected premiums for all come due at the same time.

Tom Dickson
It certainly plays that role. The other role it plays is to provide capital support to just a small insurance company who's really, really good at distribution and sourcing risks, but they just don't want to raise all the capital to do it. And so, then they're doing that, might be a relatively low hazard business, if you will. So it plays both those roles.

Bret Kugelmass
I see, almost like, a limited partner in an insurance company or something, like a backer?

Tom Dickson
in a way. So, if you were in a small niche market somewhere, and you didn't want to raise all the capital you need for that, you would raise 10% of the capital, and then you would go to the big insurers and say, I want 90% of my capital to come from you via reinsurance. It's just a more efficient and effective way to arrange the capital. We borrow on that too, in our business, where we have a dozen reinsurers who support what we do. And so, you've gained your trust and confidence over time.

Bret Kugelmass
Can you tell me about some of the main lines of business within the center group that Zurich, when they acquired it, they were really interested in? I understand reinsurance, but like reinsurance of what? Which types of policies, which types of companies were you backing?

Tom Dickson
Initially, we were looking at ways in which we could provide capital more efficiently that wasn't exposed to the big natural catastrophes. This is a little bit of around the insurance cycle. Insurance is a very cyclical business, kind of like real estate. You have periods of really strong performance, periods of lower performance when more capital comes to the market. Then, when the strong performance comes back up again, the market is somewhat capital constrained, but the prospects are really encouraging. Our role was to try to help mitigate and manage some of those kind of ups and downs of that cycle, and be a more flexible capital providers. We could provide capital when the market looked really good, but companies didn't have yet all the capital they needed to take full advantage of it.

Bret Kugelmass
I see, it's almost as if in the trading world, when they added the instrument of an option in order to kind of smooth out the real time nature of the transactions. It's almost as if you created a similar instrument for the insurance industry, which could help mitigate the impact of risk over time, rather than any specific type of risk.

Tom Dickson
Yeah, that's a good way to think about it. We were coming up with different structures, new structures. One of the things that, today, probably isn't selling much of an innovation, is that reinsurance is typically bought year by year, product by product. So, you will buy reinsurance for property, reinsurance for directors and officers insurance, reinsurance for liability. You buy them all separately. Our view was, why would you do that? Why wouldn't you just buy something in the aggregate, because you don't really care whether your loss was in one of those lines of business, you care about the ultimate financial impact. We kind of brought a different kind of aggregate approach to the delivery of reinsurance to the insurers and challenge them to think a little bit differently about why did they really buy insurance, what were they trying to achieve, and then come up with a structure that really met their needs, rather than just selling what the market wanted to sell, because that's the way they sold it for 100 years.

Bret Kugelmass
Got it. Take us to Meetinghouse. After you stayed on for a couple years through the transition, what was the new problem that you set out to solve?

Tom Dickson
Meetinghouse was an investment vehicle that I formed with a partner of mine from Center, and we were at the time investing in legacy portfolios of insurance and reinsurance risk, and then we kind of migrated as the market environment changed to looking at sort of niche providers of both underwriting expertise, as well as distribution. Our role was to partner with much larger pools of capital and investors who wanted industry expertise and potentially operating expertise, so when they saw an opportunity, they could jump in more quickly and more effectively, without frankly having to keep a staff on that had that expertise full time. We were compensated via the economics of the fund, and they were supporting that with their investment, but it was a small investment they could then leverage with co-investment beyond that. That was the business model that we adopted there.

Bret Kugelmass
I see. So, in this business, you're not providing any insurance products at all but you know so much about the insurance business that you're able to look at sub businesses and say, Hey, this is a good company and a really good idea and a good market, and if we give them a bit of extra capital, we could grow that business, increase the value of that business and make money for our shareholders. And your shareholders, in this case, were other bigger investors who knew you, trusted you, gave you some capital to manage and you ran it just like any investment fund would run.

Tom Dickson
That's correct. One of the things you learn in insurance is - I've learned - that it's always easier to respond to an opportunity if you're already in the market and you don't have to start, you've got relationships, you have a platform, you can execute on it, you just shorten the timeframe to respond. We offered that kind of insight, if you will, and the ability to leverage that and get to scale more quickly, if you will, because, either we had a small platform you could just, all you needed was capital to add to it, and or we knew people who you would want to bring in who have that expertise.

Bret Kugelmass
Great. Then is this when you got any exposure to the energy sector? Were any of these investments that you made or diligence or looked at involved in energy insurance?

Tom Dickson
Very limited, we actually were quite active in the energy market at Center, that was a big part of our business, because many energy companies are enormous risk takers in many different ways, as you know. They're taking a huge risk in their own exploration development, but they're also big risk takers of their own exposure. They have massive captives, they take enormous retentions on their risk, partly because they know it better than anybody.

Bret Kugelmass
And what is captives in retention mean? Can you spell out those terms for our audience?

Tom Dickson
A captive insurance company is an insurance company that companies set up, so that they can insure their own risk.

Bret Kugelmass
Self-insurance.

Tom Dickson
Self-insurance, it's just a vehicle to do that that has a lot of efficiencies, it also allows them to aggregate risk across their company and then they go to the reinsurance market, where all the big pools of capital, so that's what they use that for.

Bret Kugelmass
I see. So, something like a utility that manages, let's say, transmission corridors or something that are just hugely expensive, have some sort of risk - you know, trees fall down, lightning strikes, wildfires, all that type of stuff - but because they've got such intimate knowledge, and because the capital is so high, and because they've got a big balance sheet anyway, they decide, Listen, we can't take this product out to market, we'll get ripped off, or nobody's gonna understand it, or price it perfectly, but we still have to insure it. Let's build up our own little organization in house, we'll give it a subsidiary name, and give it its own little balance sheet, operating budget, and just kind of make sure that we've kind of taken care of the risk, but it's still all under our umbrella.

Tom Dickson
Yeah, and they also want to manage the claim. If an event happens, they're the best ones to go out and fix it, rather than outsource that to another insurance company. There are a lot of features that make a lot of sense for their own business.

Bret Kugelmass
Got it. Okay, so you got exposure through that. So, why, a few years ago, did you decide this was the topic, this was the sector that you wanted to really get involved in at this point?

Tom Dickson
Well, a business partner of mine, who is the founder of New Energy Risk, who I'd known for a long time, he was an engineer by background - the guy's name is Tom Hutton, he was a founding CEO of RMS that was one of the premier property cat analytics companies, and I met him then because my former company was an investor in RMS.

Bret Kugelmass
Another Stanford founder, the founder of RMS.

Tom Dickson
Exactly, you're exactly right. We kept our relationship over the years, I moved back to the Bay Area. He was noodling on this idea, having come off the board of XL Insurance that I knew well, and we were sort of debating the idea, could we find a way to take his understanding of data and engineering, my background in underwriting and structuring insurance, and apply it to what we both considered to be one of the biggest pressing challenges we could think of, and that was climate change and the energy transition, new energy technology emerging. And our view was, the critical thing we thought we could address, was the concern about performance of the new technology. Would customers integrate it, would people want to buy and own it make it part of their operations? Could you secure, cost effective long term debt associated with the potential cash flow? All of that boiled down to, would it work? And would it work over a long enough period of time at the right cost? We said, aha, if we can figure out a way to help mitigate and transfer that risk, and what we thought was the insurance markets right place to send that, if we can isolate it and get data to do it, that would be a breakthrough.

Bret Kugelmass
I guess I'm wondering how it makes sense economically? Because if the company that has this new technology has some sort of performance risk associated with it, and now they've got to pay the premiums, how come the debt or equity providers don't take that money themselves, rather than have it go to an insurance company? I only asked that, because the infrastructure investors, on both the debt and equity side that I know, they know the business, they know the energy business. And they hire engineering firms to help diligence the deals. So, what is the new expertise that you guys bring that's able to kind of, I guess, make it worth the fees?

Tom Dickson
It's a great question. It's a question we challenged ourselves with too, because we wanted to validate, what was our value proposition, right? You can have a lot of conversations, but ultimately, can you build a business around this? And what we found was that, you're right, there are great engineering firms out there and frankly, we partner with them on most of what we do. We have our own internal engineering as well. They're really good, no doubt about it. Then the owners, the equity investors, they're prepared to take the risk, because they believe in the business and they believe in the technology. Where the rub comes in is that, when they're selling their technology to a customer, and they're saying you should integrate this into your operations and rely on it to produce energy in whatever form this is, they're like, great, I'd love to do it, but what if it doesn't work? And the owner says, no problem, here's my warranty, I'll fix it. And they say, great, I love that, tell me a little bit about yourself. Well, I'm kind of new, I'm venture-backed, IP backed, I'm not making money right now, because I'm a startup. And they're like, uh, that's a problem-

Bret Kugelmass
Yeah, your warranty is worth toilet paper to them.

Tom Dickson
-because I need to rely on you, because this is an asset that has a lifespan, you're telling me 20 years. How do I square that, or I'm going to borrow to finance the acquisition of this asset? And the lender asks me all those questions and they come back and they say, No, we can't finance that unless, somewhere, there is an investment grade kind of backstop to that. We're really solving that kind of last piece of the puzzle. It isn't a question that you can't understand the risks, you can't underwrite. The question is, who has a mandate to take that risk? The lenders typically don't, they won't take technology risk, it's outside their mandate. The customer, it's outside of his or her mandate, as well. And so, it kind of becomes a hot potato, and is a real obstacle to the growth in achieving scale for what really is a worthy technology. So, that's what we're trying to fix.

Bret Kugelmass
Yeah, it's amazing. I kind of led you into that, but I see huge value in it just because, as someone who has been part of the sales process, you only want to have to convince your customers so many things. To convince your customer to buy the product is hard enough, but then to also convince them that you've sufficiently mitigated their risk. If you try to do both of those things at the same time, it might kill the deal, just because it's like, do I, I don't really have to do this. It's a new technology, do we have to get involved? And they won't say no, it'll just drag on and then eventually will stop taking your emails. But instead, if you come with a policy ready to go, from a grade A insurer, they can then actually sleep at night, actually have peace of mind about the performance risk, and then just the only question that they have to focus on is, do I want this asset?

Tom Dickson
Right, you're right, exactly right. You don't want to have to answer too many things and have a distraction when you're trying to explain why your technology is better, how well it's going to perform, the impact it will have on their operations, and you have to keep circling back to, Yeah, I get that, but you're like, Okay, I don't want to keep circling back to that. So, we can provide a crisp answer to that and take it off the table right at the outset, and then it's all about how great the technology is, and what's gonna happen.

Bret Kugelmass
In practice, is it really that comforting - let's say to a debt provider who normally would not touch a new technology - can you really give them a policy and make them forget that it's a new technology? Let's say, it's like a new type of solar panel. Let's say they're used to doing the silicon stuff, you buy it from these guys, this worked 100 times before, no technology risk. And now, someone comes to you with this weird film that has a new material and new chemistry and listen, it's going to make electricity twice as inexpensively, but there are zero examples of this thing running for more than a year on a laboratory bench prototype. Are they actually willing, is a debt provider actually willing to overlook that risk if you give them a good enough insurance policy?

Tom Dickson
The true answer is, yes. I mean, in our experience, and we've supported $2 billion of investment in these technologies, so, absolutely. Part of the reason is that we spend a lot of time making sure that the insurance policy actually addresses the risk they're worried about. Rather than say, Oh, you must need this kind of policy, we have that conversation with them. And so, we actually structure the policy such that it guarantees the right level of performance that, if it's not met, and we're filling in the gap, that enables the owner to cover operating expenses and service debt, if you will, or just stand behind the warranty, which has the knock-on effect of that. We spend a lot of time to make sure that there's not a gap.

Bret Kugelmass
I see, so what you're doing is, you're looking at the technology and you're looking at the concerns of the customer, or the debt provider, and their concern actually might not be that the thing just doesn't work. They're just concern might be that it breaks down every three years for six months, and so then you're able to structure a policy saying, Well, okay, how much does that really cost you in terms of your business? And what are the ways that we can accelerate the maintenance to get it back on track, if necessary, and how much money is required for that, and you're getting real nuanced with the type of risk? Is that essentially what you do?

Tom Dickson
Yeah, we do, that's why we have engineers on our staff. We end up getting access to really detailed operating data, design data, so that we can understand it, and typically, a little bit like your comment about you don't keep ask answering this question, right? We're being asked this question. For the lenders, the easiest thing for us to give them to support our customers, they say, Give me a policy that covers 100% of my exposure. I know that the only time that ever happens is if this thing is a dud from day one, which will not happen, but then I have to explain why I only have 50% coverage. In fact, we try to design something that says, we'll cover you for the entire amount of your exposure, nobody thinks that's going to happen, but that's the easiest and simplest thing for us to give you that achieves the objective. So, the real risk might be 10% of that, or whatever it might be, but it's really important for them to be able to have that comfort, and it's almost like the seal of approval. Just to get back to one of your other questions, Bret, you're right, engineers are out there, financiers are out there. What we have done is really built a system, we're all under one roof, we go from engineering data, to understanding the application of the customer, to understanding how they may be financing it or how they're relying on the warranty, to then creating an insurance policy that runs through all that. And that's what really is unique. It's all that under one roof, carefully selected team to kind of go through that process. Each of those processes exist somewhere else out there, but not under one roof driving towards that one ultimate objective.

Bret Kugelmass
This might be a silly question, but do you guys cover liability exposure up to really high amounts in case like, let's say it's a new type of wind turbine, and the thing ends up creating a fire, a forest fire, a field fire, and that's like a billion dollars in exposure - can you guys protect someone to a billion dollars?

Tom Dickson
We tend to isolate the performance risks, so we tend not to cover the conventional property and liability that is typically insured elsewhere, sometimes by our own insurance partners. We can help place that with an understanding of what the technology is, but our core is the performance insurance, but we understand that's one part of the broader insurance kind of need, if you will, and so we can facilitate that, but that's not kind of embedded in our business.

Bret Kugelmass
I see. So just to be clear, you guys focus on performance of the asset.

Tom Dickson
Right.

Bret Kugelmass
Great. Okay. I mean, that's perfect. That's good to know, especially with these newer technologies. That's the big concern.

Tom Dickson
And there are offshoots to that. We're also rolling out a suite of products that protect lenders that include, business interruption, and even cyber in some cases, but your examples you're using are sort of wind and solar, for example. We do very little in those markets, that's where we started. We're focused now on what I would say more frontier technologies.

Bret Kugelmass
Let's talk about it. What kind of technologies do you guys- and sorry, another quick question. Do people come to you? Or do you typically look out across the frontier tech space and hand out business cards? How does the business connection happen?

Tom Dickson
We do all the above. We love talking to entrepreneurs and innovators and their investors and backers. That's a fun part of what we do. We do, in our kind of ecosystem, we develop a network that includes early stage investors and technology developers. We also work through the insurance brokers who are out there, typically, that's for more established firms and technologies. We work with lenders, and then larger investors, and well, some of the larger construction firms, EPCs out there. We need to touch all of those parties, because you really have to understand how they all view this, and what are they worried about and concerned about? All of them are potential customers, deal referral sources. It's important for us to really be part of that network.

Bret Kugelmass
Okay. Now, to the fun stuff. What type of technologies do you guys play with?

Tom Dickson
I would say we kind of cut our teeth in the fuel cell market, which has now become more mainstream. But, a decade ago, it was not, even though it's a technology that has been around for a long time. A lot of what we do is working with technologies that are being used for different applications at different scale, and so they're just not familiarity with them in the customer market or the financing market. That's an exciting area for us, a very kind of fruitful area for us. Those assets also operate for a long time, and so you have to be able to support that for a long time.

Bret Kugelmass
Give us an example.

Tom Dickson
One of our biggest customers is Bloom Energy, a Silicon Valley based company, they're now public. They provide fuel cells across a wide range of industrial clients, if you will, from energy providers to big box retail stores to hospitals. It's all distributed energy that runs on natural gas, or hydrogen now, or bio gas. It's resilient, it's low cost, it doesn't go through the conventional transmission distribution lines of the grid, so it survives events that the grid doesn't survive, so to speak, and it's not exposed to the cost increases from maintenance of that infrastructure, if you will. They've been a long-standing client of ours, both domestically and internationally. So, that's been a really exciting evolution as their technologies improved and new applications have rolled out. We play the conventional role that I described, which is to give comfort to their customers, and to the lenders who are helping finance the ownership and operation of those assets.

Bret Kugelmass
Now, Bloom has been around for a while, I think I remember when they did a deal with Walmart or something. They've had some big customers, and they had machines that have been out there for a long time. So, I can see how it's actually pretty easy, probably at this point, to predict the performance risk of these devices, though, maybe not so much when they like change the chemistry a little bit or come out with a new generation, but at least you've got some data. How do you do it when you have zero data on a new company, they're doing their first installation? How do you guys price that risk?

Tom Dickson
That's a great question. When we first started with Bloom 10 years ago, almost 10 years ago, they were a different company than they were now, I mean, incredibly knowledgeable and expert, but we end up having to extrapolate usually on two kind of axes, if you will, Bret. One is over time, so we may have pilot test data that is a year, 18 months, two years, and we're being asked to support something for five years or 10 years or even longer. That's a real challenge, so we have to dig into the details of the design, the engineering, what drives degradation? Can you really extrapolate that? And so, we have to be careful about that and conservative, but we have to provide a product that has value. Often, someone would say, Well, I really need you to go out 10 years, and I have 18 months of data, We're like, yeah, that's gonna be too much, we can give you five now and let's work on that. That's the best we can do and we'll work together to get that to 10. There's a lot of that iteration with our clients, because it's not without risk for sure, and so we're trying to find that that right balance between what we can provide that has value but not taking a crazy risk.

Bret Kugelmass
Other than fuel cells, which I think are pretty well known and well understood at this point - of course, there's always innovation and yes, 10 years ago, they were brand new - what are some of the things that are coming around the last two or three years that wet your appetite?

Tom Dickson
There are a handful of segments. The area that we've spent a lot of time in, and we've spent a fair bit of time in all these, we have to have a track record in the bio gas, the biofuel space, which is really a waste conversion or a kind of a waste chemical conversion process. It's either gasification or pyrolysis and you're taking anything from household waste to agricultural waste, and converting it into some form of low carbon fuel. It could be natural gas that you've refined to put in the pipeline, it could end up being a transportation fuel, where some of the other technologies just don't work as well. For example, you know, we support a company called Fulcrum Bioenergy that converts municipal solid waste, household garbage, into synthetic crude that gets refined to be aviation fuel. If you think about that whole food chain, right, no pun intended, you end up with, in the aviation market, it's hard to get the aviation market not to use a hydrocarbon fuel. You can't put a bunch of batteries on a plane and have it fly from here to Hong Kong, right? That's gonna end badly. They need to use fuel, at least right now, for long haul flights and so, that has to be low carbon fuel. So, you're taking something that would otherwise emit carbon as it decomposed and capturing that and then creating a low carbon fuel. That's a big part of what we do in that space. It's a very diverse space, as you may know, in terms of what's the waste that's being used as feedstock, and what are the outputs? We're very experienced in that market, we know a lot of the vendors, a lot of the investors, a lot of the processes, but it's also, it's a new application for technologies and processes that have been around for a long time. It's just they haven't been used historically to take household waste and make aviation fuel. Right, that's new.

Bret Kugelmass
So, what are the risks associated with each new type of biofuel plants as they switch from their input source? Is it essentially the same process, they just have to tweak the parameters of however, they're getting it into a state that it can be homogenous and fuel like and transport it? Or is it like, every time you switch from corn husks to garbage to tree clippings, that they have to create a new reactor that has like new reagents and new chemistry? How different are these systems?

Tom Dickson
The feedstock impact is really quite different. If you design a facility, that's gasifying garbage on Monday, on Tuesday, you can't walk in and shove a bunch of corn stalks in the front end. I mean, I'm not an engineer, but I spend a lot of time with engineers, so I feel like I can respond a little bit. The chemistry is different, the profile of that is different, the way you prepare it is different. So, you tend to create an exception, or digesters, which are totally different kind of processing technology that can take a much- you can add sort of co-feeds into it. That's not a combustion process, if you will, it's a slow decomposition with bacteria, and so that's a much more kind of forgiving process. For the others, it's really quite specific to feedstock, so regulating feedstock is really, really important. We sometimes we take that risk, sometimes we don't, depending on how big a risk it is. Many of these places that have feedstock as a supply, they have a secure source of that, although it is a risk, we do underwrite and provide that as part of our coverage.

Bret Kugelmass
I see. So, the performance risk, in the case of these biofuels plants isn't that the equipment will just stop working or something like that? Or maybe it is, but like, that's not the big risk. The bigger risk is, what if the economy shifts, people aren't producing as much garbage, and you still need to provide power, or let's say, the laws change, and they're like, nope, now that has to be recycled, and all of a sudden your supply runs short. Is that the type of risk that you guys evaluate in the sector?

Tom Dickson
We evaluate all those risks, and where the risk balance sort of sits depends on what the facility is. If you're taking household garbage, you're probably not going to run out of that in terms of the organic compound, that is what you really want to create fuel. And so, that's not a risk people are too worried about. It's a risk, for example, that people are worried about, if you have manure from a dairy, for example, you could have disease that would kill the cattle, and therefore that would be a risk and your feedstock goes where you have no output, or just means you have to pay more for it, or there's more transportation to get it to your facility. So, it kind of depends on what the process is.

Bret Kugelmass
Let's dive into that case, for example, because that's fascinating to me. Did the people who want the policy, do they say, Hey, protect us against this type of thing that may impact the supply, such as a disease? Or do they say, protect us against everything, we don't care what happens and then you and your team have to get on a whiteboard and brainstorm, Okay, this might happen to the cattle or this might happen or political risk or social risk or legal risk, and then come up with like different statistics for each and then aggregate that and then put in a lumped policy?

Tom Dickson
A little bit of both. We often are asked, Can you just cover me no matter what? And unfortunately, the answer to that is usually no, either because it's incredibly difficult to evaluate everything that could happen, and we'd have a hard time getting support for that as an underwriting proposition, so we tend to then try to isolate the risks and define them in a way that we want data to support it, right? So, we're not really in the habit of taking a flyer and saying, Well, I don't know a whole lot of things could happen, we just don't know what it could be. That's a different proposition. And you probably, you might write that for a year, you wouldn't do that for 10 years, because so much change during that time. We tend to isolate the risks into either buckets where we have data to support it, or someone says, Look, this is what I really want, because they're responding to what their customers are saying, or to what a lender is saying, they're saying, great, I got it, I'm not worried there's no more garbage, you're not worried you can't sell where the price is going to drop too much. I'm really worried about, if I shove all this stuff in one end, am I going to get what I want at the back end, at some efficiency conversion rate, if you will. There is a risk that it flat out doesn't work, or that it's poorly designed, or the materials choices were wrong, or you thought the shredder work this way, and it keeps breaking down every six hours and you can't keep it operating. I mean, there's a lot of components of risk there. We're really digging into each of those and saying, how do they really impact output and performance? And therefore what's insurable? So, we spent a lot of time on that.

Bret Kugelmass
And how much of that do you guys do in-house versus subcontract to engineering partners? What is that relationship like and what's the division of responsibilities?

Tom Dickson
We do most of that in-house, but we're using the data and the analysis that's been done kind of in an independent engineering report. We look at raw data and then we - because we've now seen, we look at a couple 100 things a year, and we've been doing that for years now, so we know a lot of what's out there in the market and how the technology works and so forth.

Bret Kugelmass
That was my next question, because, and I just find this with anyone who like builds up enough experience over time, you start to see certain patterns, and you start to be able to make your decisions with higher accuracy and a lot more quickly, did you guys feel like there was a certain point in the learning curve, one year in, two years in, five years in, where you're just able to do this pattern matching and be like, okay, it's a totally new type of plant, but I remember in this market when they did this, and they cared about those risks and the way we solved this problem was, we called up this engineering firm, got this data, compared it to this other data and this formula, and then boom, let's do it overnight, instead of like, okay, it's gonna be three months of like, let's figure this out.

Tom Dickson
Yeah, you're right, we do a lot of what we refer to as pattern recognition, because you recognize certain hallmarks or certain technologies or certain point of its own maturity, or they're trying to use it in a certain way and now they have enough data to support that, or the scale up isn't quite as large as it used to be. We certainly are doing that and we refined our process over time, that, both to our customer and to our capital providers, is an organized, thoughtful step by step process that we've used over and over and over again. That's what I think makes us a good partner in the front end, but also it allows us to gain the trust and confidence on the back end. That's why, when we look at biofuels, and we're looking at carbon capture, we're looking at storage, we're sort of seeing that, even though it's different technology, we're really using the years of experience we have and recognize where we would fit in, what's our value proposition, and what can we offer in those markets?

Bret Kugelmass
Then how do your reinsurers price your premiums? Is it just your track record? Hey, we collected this much in fees, and we did this much in payouts, here's 10 years worth of data, we're pretty good at this, now our premiums are lower. Is it as simple as that?

Tom Dickson
In a way. What we present is - and this is the output of this sort of multi step process I described - we're producing metrics on a proprietary techno economic risk model that we use, it integrates everything I described. And that produces metrics that insurance companies are used to seeing: probability of loss, a distribution of outcome, stress testing on key risk drivers. So, we've gained their confidence over the years where they've done diligence on our team and our process and our track record, so that we present a new risk, it's in a consistent format, they understand that. And if it's a brand new one, we probably spend more time on them with it than if it's the tenth one in a series of things that we've done and we have that specific track records.

Bret Kugelmass
Do you guys have to put together one of those reports for each new policy that you take on to your backer?

Tom Dickson
We do.

Bret Kugelmass
So, you don't just, so there's no, just, we've done this enough, we have a base rate and our backers, you really do have to provide that thorough analysis to get checked over by a third party every time do you even get your insurance component?

Tom Dickson
Yes, we do, and it's a great process for us internally. Even if we didn't have to do it externally, we would do it internally to make sure that we had kind of our own decision-making and vetting and peer review and so forth along the way.

Bret Kugelmass
Yeah, that makes sense. I was just thinking - and because my knowledge of insurance is just very basic - well, what if a home insurance company, every time that they wanted to get their reinsurance policy, they had to take every homeowner and be like, Well, here's what the roof looks like and then bring it to their insurer, that would be crazy. But you guys are doing way less deals than that and you have to do that anyway, for your own internal processes.

Tom Dickson
Yeah. And the transactions tend to be large. So, it's a different frequency and pattern, if you will. That's just part of the process. It is true that, if we're working with a technology vendor over and over again, the sixth one is a different, it's sort of like well, you saw the last one, here's what's different about this one. And so, it does become a smoother, more rapid process of that.

Bret Kugelmass
Can we talk numbers? Obviously, don't give away anything proprietary, but I am curious, just kind of your rough orders of magnitude. If it's an energy producing asset that produces, let's say, $10 million in power a year, what would the approximate performance risk be? What would the premiums be? And I understand it could vary wildly between different technologies and readiness level, but just kind of like just general, like, what types of figures are we talking about here?

Tom Dickson
Maybe a good way to frame this is that we tend to support limit or size of insurance relative to the value of the asset, so relative to the purchase price. If you're a technology vendor, you're selling your asset at cost x, or you're putting together a project and looking at recourse financing, we're covering the debt portion of that. That's how we tend to think about the total amount, if you will. That is related to the cash flow potential of the asset, because you have to have revenue to pay off your acquisition, like any other commercial asset. For us, those tend to be anywhere from $20 million to $400 million, depending on the size and the scale,

Bret Kugelmass
The cost of the asset, you're saying is 20 million, 400 million?

Tom Dickson
The cost of the asset, and then our insurance spans that whole range, several 100 million dollars down to 10s of millions of dollars on the low end.

Bret Kugelmass
I see. So, when you're insuring for performance, it could be as much as the asset itself, the performance that you insure for?

Tom Dickson
It's typically not the full asset value, it's typically some portion of it. If you're buying a piece of equipment, your investment isn't just a piece of equipment, it's all the other stuff, you need to make it work and put it in place, and so forth. Then the equipment vendor is only warranting its part of that, so we like that for a couple of reasons. A, we just want it back, the minimum we need to make it work, which is usually the warranty or the debt. We also want to make sure there's strong alignment. We want to make sure that, if something goes wrong, somebody else is very, very motivated to fix it before they pick up the phone and say, Hey, I've got a claim. Because you want the claim to be when something is really, really not working for a long period of time, not a maintenance contract, if you will.

Bret Kugelmass
Yeah, exactly. So, just back to those numbers for a second, let's say that the asset's $100 million, let's say it spits out $10 to $15 million in a value year, what are we looking at for a premium to ensure against, let's say against like, total, like the owner just gives up on it. It's been out of commission for six months, and he can't fix it. What does that policy look like?

Tom Dickson
The way we think about the compensation for taking that risk is really - and we do this very transparently with everybody involved - we say, well, let's look at the before and after picture. We want to understand how you value the insurance. We know how we think it should be valued, but let's look at what impact this has on your cost of financing or your growth rate or whatever it might be. And so we typically say, Let's see if we can't share in that value. It has to be better with the insurance than without the insurance, because you won't buy it. And we don't want to sell you something that we have to keep convincing you over and over again and you just grudgingly paying for. It's got to have an impact that you really want to have. Typically, that means that we're saving, we have to save several 100 basis points for it to make it worthwhile for them a year on their financing costs or their growth rate. Otherwise, it's just not worth it.

Bret Kugelmass
What if it's not that simple? What if it's not just about saving 3% IRR? What if it's like, they will not do the deal unless this insurance happens, they think there's a big risk that this thing is going to break down, because it really is a brand new fuel cell, new chemistry, and they just want that kind of protection, what does that look like?

Tom Dickson
There's always next best, right? So, if that were the case, and they said, there's absolutely no way I'm going to do this unless in the bank I have $50 million that I can go grab, if it doesn't work, right, there's always an alternative. And so we say, let's think about what that alternative is, as crazy as it might be and let's agree on what that is, and then we'll say, how much better is this than that? If the answer is, Well, we could save you $10 million - I'm totally making the numbers up - we would say, Well, let's share that $10 million, because you're way better off with this. Over time, we would look to be compensated as a share of that. We can't take risk that it does or doesn't materialize, because we have people who took the risk, so you'll have to pay a premium reflecting some part of that value. So, that's the conversation we have and to date, once you work through that, we come to a landing where they say, Yeah, I get it, this actually is better. It's an appropriate reward for the risk taker. That's sort of how we approach it, so, it's not a, let me look at your price list and kind of go down the thing and see, okay, this by 110, this is two or whatever it might be, it's a more interactive process.

Bret Kugelmass
Got it. How do you guys think about deal size? Is the bigger the better and you've got some sort of minimum, like, Listen, this has to be in the $10 million range asset value to even make it worth our while?

Tom Dickson
It certainly is scalable for us, we like to do bigger things. On the one hand, we also, if it's our very first thing, and we may not want that to be the biggest thing we've ever done, if it's a brand new technology, because it is risky, and we don't want to expose our partners, the first one, you may see let's do a smaller one, get our feet wet, and then ramp up from there. So, it kind of depends on the market. In the biofuel market, we feel very strongly we have a good understanding of that. Same is true in fuel cells and storage. Carbon capture is, as you know, on the horizon in terms of actual investment in that market, which we're super excited about, but those projects are big by design, they have to be, and so, it kind of depends on what the technology is, and is it modular, is it a full scale up? What are the risks were taking? And ultimately, there is a minimum, which is just, you want it to be big enough for everyone to care enough about it. On the downside, it's probably - not downside, on the lower end - we're looking at capital investment that probably needs to be in the 10 or $20 million. Doesn't have to be there on day one, but over time, they hope to build to that level, in order for it to make sense for everybody to roll up their sleeves and work on it.

Bret Kugelmass
Yeah, that makes sense. What are some things that you've stepped away from, that are just like a little too out there, like in terms of new energy technologies that have been brought to you?

Tom Dickson
That's a really good question. I would say things that we've- when I think about us stepping away from something, usually what that means is "not yet". It means that, I think this is promising, but it's too early, we'd like to see more testing, more data. And there's a lot of technology, for example, on the storage side, long duration storage, for example, that is new, we've actually underwritten it, and it's emerging and they're now operating and been operating. and so they're getting thousands of hours of performance, but those are long, long, asset lives. That's one where many times you've said, not just yet, but let's check in six months, 12 months down the road, and so we have a good handle on that now, because we started that three years ago. There's a lot of investment going in there. I would say that that was true of carbon capture as well. Two years ago, we spent time with some of the leading technology providers there and now, we're at a point where that's matured enough on a testing basis, where we've developed confidence that we believe we can fully address the risk associated with performance and carbon capture and also the kind of associated tax recapture risk if it doesn't work, which is part of the new legislation that's been put in place to support those. I would say it's more of a "not yet", you know, there are certainly things in the nuclear space that are kind of "not yet". There are things in fusion, for example, there are things that are using waves and tides to generate energy, those are a little bit too early to know if they're going to be viable and that we can get our arms around data for those. So I would say, unless - I mean, take me as an example - if I'm not an engineer, I come with some cockamamie idea, that might be flat out no, because it'd be like, yeah, Tom, you don't really know what you're doing. But assuming it's not me and my bag of tricks, it's really a thoughtful thing. It's often, we'd love to work with you, let's figure out the pathway to help you over the next 12, 24 months.

Bret Kugelmass
And you mentioned nuclear, some of the things out there. We spend a lot of time looking at the nuclear space and we also see the full range of different like, Hey, I'm going to change everything about the reactor technology and new fuel that has never been used before, a new set of materials that relies on, all the way to, Hey, we're just building a smaller version of what's already existed. Within the nuclear sector, have you kind of figured out what your line is specifically there? Will you insure or get involved with organizations that are using kind of really standard systems, but just reconfigured at a different size?

Tom Dickson
We honestly haven't been approached with that. We've had some very early approaches on the fusion side, those also tend to be smaller scale in some ways. But it's not an area that we have internally a lot of expertise. We have done something on the nuclear side as it relates to nuclear medicine, which are not totally different technologies, but different outcomes and different processes. They don't represent risk of runaway reaction and so forth. I would say nuclear is sort of for us, it's sort of a wait and see attitude there. We think we can have a role, but we haven't really figured out what it is, because we don't have enough experience or enough kind of inbounds if you will, to know what that is yet.

Bret Kugelmass
Nuclear medicine is interesting. There are a couple of companies, just even in Wisconsin, I think, that are really kind of pioneering some of the new medical isotope production technology spaces. How did you diligence medical nuclear, from an engineering perspective?

Tom Dickson
That's an example where we used in-house, but we also brought in experts, consultants, which we do when we have something that is really, really specialized. We can't have an expert on our staff in everything. So, that was a case where we worked with the company, and a really great insurance broker who knew us from other things and said, Hey, I don't know, I think maybe this would be something you should take a look at. And we did, we got more and more interested, as we looked more and more at it. We ended up with a great opportunity and a great result there.

Bret Kugelmass
How did you find - I'm very interested in people's processes - how did you find the third party technical subject matter experts to help you look at the technology? Did you just Google nuclear engineering firms, or, how did you find the right one?

Tom Dickson
We really used our network. We have engineers on staff that are very experienced, and and in that world, you can certainly find the right people, many of whom had worked at some of the funded nuclear labs, Lawrence Livermore, places like that.

Bret Kugelmass
That's I was gonna ask, if it was a scientific laboratory, if that's how you figured out.

Tom Dickson
Exactly. There's a very deep network that our internal engineering team has, and so you can generally find people relatively easily that have the kind of expertise you're looking for, and then the questions are, are they available? Do they kind of get a sense of how you're operating and how you're evaluating your mission, and so forth?

Bret Kugelmass
Great. Then what's the process to just to cover all of your bases, when a company wants to come to you, with a new technology, do you guys have a set thing where it's like, okay, week one, you meet everybody, week two, we do a deep dive, week three- do you have something like that?

Tom Dickson
We do have a process that we go through, there are probably, I don't know, I'm guessing maybe four or five stages to it. It's a very iterative process. While we've refined that over time, we're not bound to it. It sort of starts with the initial kind of meeting, at some point, you have to have an NDA, because they're going to share things that are proprietary. Then we're just going a level deeper every time and we're doing an assessment of both their viability to get to a close from a commercial perspective, because we always want to make sure that they have what they need to be successful, so that we don't do all work and then they're like, yeah, that was great, except our business just can never get to that point and we have a role in that. And then we're really doing a deeper and deeper dive, from a technology perspective, always coming back and saying, are we heading in the right direction to produce something that you really do want? We know what the target is, the target might move a little bit along the way, but that's what we're doing and ultimately, we come to settlement on, this is a term sheet that if we can deliver this, this is what you want. And then we just wanted, we have that kind of coming back together again, and then we craft and design the policy, we arrange capacity for it, and then that's sort of when everything really comes together. That process may take, we say it can take us as little as 60 days, as long as 90 days to get there, which is not a long period of time in terms of project development. The more things we've seen, we can accelerate that. In the fuel cell market, for example, much quicker, because we know the technology, we have a track record in it. But usually, we say it's a 90 day process when we have the data that we need. The data collection exercise usually takes longer than anybody thinks, just because it does.

Bret Kugelmass
90 days in the energy space is nothing, literally everything else that you're going to do is going to drag on forever. So, if somebody contacts you as they're getting ready to go to market, 90 days is plenty of time.

Tom Dickson
Right? You're exactly right. And so, we try to figure out, when do we really engage? We want to engage, not two years before they're going to go to the market, but 91 days before they're going to go to market. Right? That's part of the conversation that we have with our with our prospects and customers.

Bret Kugelmass
Absolutely. This has been a great and wide-ranging conversation. Are there any final thoughts that you want to leave our audience with?

Tom Dickson
I guess that, what we like to say is that - I'm glad you asked a question about, do you say no - we're usually not yet. So, we love to interact with entrepreneurs. And what we've found is that, when we are able to announce our transactions publicly, the reaction we get is, If only I'd known I could have done that, If only I'd known that was available, I would have done the following things, I would have had a bigger project a better project, I would have got there more quickly. We want to talk to kind of everybody, if you will. We're pretty quick to give a response. We want to help people dream what they can do and implement what's worthy. As I said, we're looking in storage and carbon capture and going deeper into all the segments we're in. And so, we're excited. There are so many tail winds in the market is, as you know, it's just an exciting time to do this and we're hoping that we can have a major impact on the energy transition with our clients.

Bret Kugelmass
Amazing. Just one thing that I've kind of pulled out of this conversation with you that I really appreciate is how so much of the work that you're doing is revolved around getting things done faster. Whether it's your time, the issue of policy, or more importantly, the focus that you put on helping your clients get done what they need to do faster, because at the end of the day, it's your clients that are really helping bring us through this clean energy transition, which the whole world needs so much. And you guys are just an absolutely critical part of that. So, thank you for that. Thank you for your time. This has been great. So, Tom Dickson, that's the end.

Tom Dickson
Really great. Thank you appreciate it, Bret.