5 June 2015Accounting & tax analysis

Matching capital with captives

The rapid growth of asset manager-sponsored reinsurers (AMSRs) in Bermuda in recent years will be of great benefit to captives that correctly leverage the capacity and risk appetite of these firms.

That is the view of Bob Forness, chairman and chief executive officer of MultiStrat Re, the privately held speciality Bermuda reinsurer. MultiStrat has recently enhanced its focus on captives and run-offs by acquiring a specialist company in this area, Annapolis Consulting Group (ACG).

ACG is an international consultancy providing loss portfolio transfer (LPT) services for captives and corporate self-insureds seeking liquidity, collateral relief or ‘tail solutions’ for their runoff claims portfolios.

The firm specialises in the resolution of costly legacy claims and captive run-offs, and strengthens MultiStrat in the US and Bermuda.

ACG provides an array of solutions for captives that are looking to finalise historic blocks of business so as to more effectively focus on the future. The firm works with clients throughout North America holding a wide variety of legacy claim portfolios including workers’ compensation, automobile liability, general liability and professional liability, to name just a few. For captives with reserve portfolios in the $2 to $50 million range, LPT options have historically been quite limited. By combining forces, MultiStrat and ACG are now able to deliver the resources, capital, collateral and reinsurance capacity necessary to resolve a common problem faced by captive owners.

“We have found that MultiStrat Re and ACG provide efficient solutions for past year exposures. They deliver innovative solutions to give portfolio finality whille helping enhance surplus,” says Jeremy Brasier of RFIB Bermuda.

The deal includes three of ACG’s most experienced executives: Sean Logan and Christopher Ridge, who will remain with ACG in the US, and Lawrence Dixon, who will be joining MultiStrat Re in Bermuda.

ACG specialises in helping companies with captives or self-insured programmes that, for a variety of reasons, are looking to close out old underwriting years or close down a captive or self-insured programme completely.

Forness says that MultiStrat Re sees great opportunities in this sector. The company will offer both ongoing and retrospective reinsurance for captives/programmes of all types, and will design cost-effective solutions specifically to help companies with the final closing process.

MultiStrat benefits from the aggregate capital and capacity of the AMSRs on its platform. Using its own capital, accessing capital from its participating reinsurers, and working with third party investors, MultiStrat and ACG will be able to acquire captives and deliver finality solutions to this market.

ACG’s expertise, knowledge and relationships are critical in this endeavour. ACG analyses prospective captive and self-insured client run-off claim portfolios to isolate those that can be substantially improved through application of ACG’s particular skillsets and closure methodologies.

For certain run-off acquisitions, the risks will be isolated using segregated account-type structures. Logan says the company will match the risks with the risk appetites of its clients.

"MultiStrat and ACG are now able to deliver the resources, capital, collateral and reinsurance capacity necessary to resolve a common problem faced by captive owners."

“This is a specialist team we are acquiring with great knowledge of this sector,” Forness says. “The business will be transaction-focused targeting individual captives and books of business. We will structure the reinsurance solutions needed to offer the finality these clients need.”

The business of placing captives into run-off and reinsuring the remaining risks is nothing new, Forness says. But with its new experienced team of experts in the field, it will match this demand with the relationships it has with AMSRs in Bermuda.

“The only way this business can work is with the right skillsets and a professional approach. We have those things now,” he says.

Through the life cycle

This is not the only way in which captives and AMSRs can and should work together, however, Forness says. All captives have a life cycle and this form of reinsurance capacity is very relevant at several stages of that.

“When a captive is first formed, it often needs a partner for its risk protection needs. As it grows, it will need a partner to help build capacity for growth, often through the use of quota share reinsurance. As the captive builds a sizeable book of business over time, it may need loss portfolio reinsurance to enhance regulatory surplus and reduce collateral strain. Finally, as the captive is wound down, it may be looking for run-off reinsurance and finality solutions.”

He says the emergence of AMSRs offers captives a new range of options. Using a different business model, they offer fully collateralised solutions at a cost that is often either very competitive or clearly cheaper than traditional reinsurers can offer.

“Captives have many needs for reinsurance and these structures offer an alternative,” Forness says. “While AMSR offerings are similar in many ways, they also have certain unique attributes that make them different. First, AMSRs look to generate total returns from both underwriting and asset management. In so doing, an AMSR may be able to charge less for its underwriting capacity in part due to the enhanced results generated from its investment activities. This gives them a potential price advantage.

“Second, the coverages provided by an AMSR like MultiStrat Re are secured by collateral. While relationships are always important in reinsurance, security, service and price are also highly valued. In terms of security, we arrange collateral issued by highly rated banking institutions.

“The collateral is in the form of a trust or letter of credit that fully complies with regulatory requirements. For many, this collateral in the form of a contingent bank guarantee may be preferential to a promise to pay. Other buyers may prefer rated companies. So the security offered is a very meaningful differentiator, depending on one’s perspective. To date, our clients have accepted collateral quite positively.”

Forness argues that price is increasingly important to captives and thanks to a growing acceptance of collateral-backed policies driven largely by the growth of the insurance-linked securities markets, MultiStrat Re can provide price-competitive and secure capacity.

When this ability of AMSRs is translated into an appetite for run-off type captive business, the possibilities become even more appealing. Forness is excited about the recent deal to acquire ACG and he sees even more synergies between captives and AMSRs emerging in the future.

Bob Forness is the chief executive officer of MultiStrat Re. He can be contacted at: bob@multistrat.bm