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5 November 2018Analysis

MAC: the lessons learned

Moody’s provides credit ratings and financial software services. In 2002, Moody’s created its own captive insurance company: Moody’s Assurance Company (MAC), which provided coverage for a number of hard-to-place lines, such as terrorism and reputational risk.

The captive lost its captive insurance status within its domicile state, New York, due to an accounting issue where greater than half of its income was deemed to be derived from non-insurance sources.

With the help of insurance consultants, MAC reorganised its assets and Moody’s resumed treating premiums paid to MAC as payments to a valid captive insurance company.


In 2012, a former employee of Moody’s filed a whistleblower lawsuit against Moody’s alleging that MAC was fraudulently treated as a captive on various financial statements. The lawsuit survived a motion to dismiss largely because of aggressive and questionable accounting practices, such as a lack of sufficient capital to pay losses and a circular transfer of funds between MAC and Moody’s using promissory notes (related party loans).

These kinds of issues are fodder for the Internal Revenue Service, and the New York court upheld the lawsuit largely based on these issues.

Surviving a motion to dismiss means only that the whistleblower action gets a day in court and does not imply that Moody’s or MAC engaged in any impropriety. Nobody in the general public has enough information to assess whether MAC’s internal accounting practices were aggressive and compliant, overly aggressive and arguably non-compliant, or straight up fraudulent.

The eye of the beholder

MAC provides coverage for reputational risk and there is an argument that reputational risk is improper for a captive as it constitutes a moral hazard on the part of the parent company.

In theory, the parent company may be more inclined to engage in risky behaviour if it knows that it has reputational risk insurance in place from its captive. In short, reckless actions on the part of the insured may be insured through its captive. Taken to its logical conclusion, reputational risk should not be written through a captive as the insured’s excessively risky actions would create the peril giving rise to the claim.

This argument does not hold water. The linchpin of reputational risk hinges on what others think of the insured’s actions. There is no reputational risk if everyone thinks the insured’s actions were in keeping with modern business practices.

Thus, reputational risk exists to cover situations where there is a disconnect between the internal decision-making by management and what regulators and the general market think of those business practices. Consequently, some aggressive accounting positions may be considered excessively risky in the event of a loss in tax court. Yet, those same accounting positions may be considered perfectly fine in the event the company wins the very same case in court. In other words, reputational risk is in the eye of the beholder.

Moody’s and MAC may or may not have engaged in improper accounting practices with regard to the operation of its captive insurance company. Those issues will be ferreted out in court.

However, the concept of reputational risk does constitute a valid insurable interest for a captive insurance company. Few third party commercial carriers cover this risk, which is precisely why reputational risk is a great risk for a captive insurance company. Moody’s, whose principal value arises out of its reputation for issuing non-biased credit ratings, is an ideal candidate for such coverage.


The MAC lawsuit provides two lessons. The first is that proper administration of captive insurance companies is absolutely necessary. There are aggressive accounting positions and then there are non-compliant financial decisions.

Captive managers should understand whether their actions comply with generally accepted industry best practices or whether they are out in a grey area.

Based on the allegations against MAC, the lawsuit is not looking good. Related party loans and asset-shifting techniques to modify the income to MAC are exactly the ‘form over substance’ transactions generally vilified by the IRS. They may very well lose this case.

The second lesson, however, is that MAC provides great value to Moody’s. Had proper captive management been in place then it is entirely likely that MAC would continue to add value to the Moody’s corporate family.

There are numerous uninsurable risks perfect for captives: terrorism, coastal property windstorm, or outdoor cannabis crop insurance are a handful of other coverages that are very difficult to insure. These exposures, like reputational risk, can be mitigated through a properly administered captive.

From Moody’s we see yet another example of poor captive management services creating a lawsuit. Conservative captive management techniques provide the best value to the parent company in the long run.

Captive managers should review accounting and business practices that are routinely condemned by the regulators and steer clear. Even if the practice survives judicial scrutiny, the costs of court likely outweigh the benefits.

Matthew Queen is general counsel and chief compliance officer and general counsel at Venture Captive Management. He can be contacted at: