Coastguards for captives

Is the economic downturn good news for R&Q as a legacy player? Is there an inverse correlation between economic performance and opportunities in legacy/run-off?

It is inevitable that any event that causes an economic impact on insurers’ balance sheets will give rise to opportunities for the legacy sector.

By removing or protecting legacy liabilities from deterioration we provide capital efficiency to the seller. The capital, or in some instances the collateral, that is released can either be distributed to shareholders, recycled to support new underwriting or simply used to bolster the balance sheet.

At times like this some people unkindly refer to the legacy players as vultures; I prefer to think of us as lifeboats providing a secure and safe passage out of a difficult situation.

How long has R&Q been active in the captives space, and how did you first get into it?

R&Q, established in 1991, was one of the first acquirers of run-off portfolios to appear, initially operating in Europe and North America.

Our first real foray into the captive insurance space was not until 2009 when we acquired the Guernsey-domiciled captive from the liquidators of the insolvent Woolworths retail chain.

The liquidators were realising assets of the group and wanted the capital that was trapped in the captive.

What makes working with captives different from working with other insurers in the legacy space? What do you need to succeed?

The obvious difference is that captives are created by companies that specialise in a wide range of industries, whether pharma, retail, transportation, etc. They are very knowledgeable about the sector in which the parent company operates but can have limited knowledge about insurance compared to a commercial insurer.

We therefore find that captive owners and boards are not as familiar with run-off or restructuring solutions as some commercial insurers. We have spent the last 10 years meeting, talking with and presenting to representatives from across the captives sector about how effective management of legacy liabilities can enhance and benefit the operation of an ongoing captive insurance operation.

How important is the captives business to R&Q?

The captive and wider self-insurance sector is very important for R&Q. We have completed over 100 transactions in the last 11 years across 35 different regulatory jurisdictions. Over 70 percent of these deals have been with captives, cells, workers’ compensation trusts or other self-insurance vehicles.

We use a wide array of structures including outright acquisition, retrospective reinsurance, novation, assumption agreements and deductible reimbursement policies, all of which have been adapted for captive insurance structures.

Do you specialise in certain types of captives or types of risk?

One benefit of operating in the captive insurance space is that we get good diversification of risk from the business that we assume. As mentioned above, captives are created by companies across a wide range of industries so while we may take on a lot of workers’ compensation risk, for example, the underlying exposures can vary enormously between different industries.

Most opportunities we see relate to long and medium tail exposures. It is inevitable as those are the liabilities that will take longer to mature and settle, and absorb capital or collateral requirements in the meantime.

This will therefore include classes such as workers’ compensation, commercial auto, general and public liability, medical malpractice and professional indemnity. R&Q has the knowledge and experience to assume these and other classes of business and if we lack that knowledge we have access to third party administrators and other service providers to support our transaction.

Is there more work to do explaining how legacy can help captives?

The captives sector understands legacy a lot better now than 10 years ago when we first started focusing on this space. Education is key to raising awareness of the benefits of effective legacy management, but the captive insurance sector is not that far behind the commercial insurer sector in that regard.

I have been working in the run-off space since 1990 when the insurance agency I worked for in London ceased underwriting due to the overwhelming volume of losses coming out of asbestos and pollution exposures in the US.

At that time a number of large insurers went into run-off, or even insolvency, on both sides of the Atlantic. Run-off became associated with failure and companies generally avoided mention of it, or that they had any. This was how R&Q started as the founders saw opportunities to take away those toxic liabilities and specialise in handling them.

It has taken many years for the insurance sector to fully appreciate the benefits and advantages of active management of legacy liabilities, whether in-house or through disposal to a specialist such as R&Q.

We now see many large commercial insurers, such as AIG, Zurich, Allianz and QBE transacting with the legacy acquirers.

“The captives sector understands legacy a lot better now than 10 years ago when we first started focusing on this space.”

How can captives and captive owners learn more about legacy management?

Two key market associations provide education and skills development in the legacy space. In the UK and Europe there is the Insurance and Reinsurance Legacy Association, of which I was chairman from 2009 to 2019; in the US there is the Association of Insurance and Reinsurance Run-Off Companies.

Both have been valuable resources for the insurance sector over the last 20 years and would provide equal benefit to those in the captive insurance sector who would like to increase their knowledge about effective management of legacy liabilities.

Another key source is to attend the various captive market conferences such as the Captive Insurance Companies Association, the Vermont Captive Insurance Association, the World Captive Forum and the Bermuda and Cayman events.

R&Q always attends such events and has developed long-lasting relationships across the sector. Education is key as it enables captives and their owners to make informed decisions about the management of their legacy.

That does not mean they have to transact with a legacy acquirer but simply have gone through the process to determine what route suits them. It is perfectly acceptable for the captive to continue managing its own legacy if that is the outcome of their analysis.

How much of R&Q’s work with captives involves repeat business versus one-off opportunities?

We are very fortunate to work with some great companies and people in the captives sector. We have had repeat business from a number of companies, such as AstraZeneca and AkzoNobel, although many like to remain anonymous. We also have referrals from non-executive directors where we have transacted with one company on which they are a board member and they say: “We did not know we could do this. I am on another board and they should consider a similar deal.”

One area of increasing interest is providing a rolling programme of assuming liabilities. We work with a number of captives where we assume liabilities over a certain age, say five years, and each year take on another tranche so that the captive is only ever carrying the liabilities from the last five underwriting years.

This is an effective way of recycling the capital from old years to support new years, or to avoid an increasing stack of collateral. R&Q takes on the collateral obligations associated with the assumed liabilities.

What advice do you have for captives thinking about working with a legacy/run-off provider?

The key advice is for the captive to be fully informed of the options available. R&Q has a very broad platform of solutions: within its group there are AM Best A-rated carriers in the US and Europe alongside consolidator vehicles in Bermuda, Cayman, Guernsey, the Isle of Man and Vermont.

We often see a captive or its representative come to us with a proposal which we do not believe is the right proposal for the captive. A key part of the transaction is having open dialogue with the captive to understand what it wants to achieve and then deliver the best solution to accomplish that.

R&Q is not the only legacy acquirer operating in the captives space, we have probably been doing it the longest, have the broadest capabilities and completed over 70 deals. A key determining factor for anyone transacting with the legacy market is the experience of the counterparty and its ability to deliver. Price is clearly a key consideration but so too are execution risk and reputation.

Key questions therefore are (i) have you done this before?; (ii) are you known to the regulator?; (iii) how will you handle the claims?; and, of course, (iv) how much will it cost me?

The legacy sector has developed considerably in recent years and many transactions are conducted giving benefit and efficiencies to the seller. The captives space is increasingly becoming aware of such benefits.