offshore to onshore, self-managed to managed current...
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Offshore to Onshore, Self-managed to ManagedCurrent Trends in Captive UtilisationA Case Study
Richard Storey & Paul SykesWednesday, June 17, 2009London
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Agenda
Introductions to Aon Gibraltar and Tate & Lyle plc
Insurance Philosophy & Programme Structures
January 2006: Captive Project Scope
The decision processes
Captive feasibility, management, domicile selection & historical TP exposures
Transition Route Map
The Problems and The Solutions
Aon Global Risk Consulting Today
AA
ERM
RF
RC&E
Captives
• Tremendous resources: +2,000 professional staff
• 90 locations across 50 countries
• #1 Insurance Company Manager globally
• #1 Insurance Company Manager in Gibraltar
• #1 White Rock PCC
• Writing into 30 EEA territories
• 30+ clients
• Major clients include: Tate & Lyle
GE
Littlewoods
Intercontinental Hotels
Arriva
Astra Zeneca
Eurotunnel
Novartis
Sara Lee
Open Market Insurers
(5)
Captives
(5)
PCCs (2)
Cells (18)
Aon Gibraltar
Aon Gibraltar – Current Portfolio
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Introduction to Tate & Lyle
World Leading manufacturer ofrenewable food and industrial
ingredients
Founded in 1921with operationsin 24 countries – Europe,America, South East Asia
6,488 employees servicingapproximately 6,000 customers
with products from 50 majormanufacturing facilities
Turnover £3.42 billion andOperating Profit £286m for year
ending April 2008
Tate & Lyle
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Our Products and Markets
• Sweeteners – cane sugar, cerealsweeteners
• Acidulants – citric acid• High intensity sweeteners - Sucralose• Stabilisers – specialist starches
Products
• Food• Beverage• Pharmaceutical and Personal Care• Industrial (e.g. paper industry)• Animal Feed
Markets
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The Business Environment
Key Customers
• Coca Cola• Pepsi• Kraft• Cadbury• Mars• Unilever• Nestle• Major supermarket
chains
Competitors
• Sugars:ABF (British Sugar)TereosNordzucker
• Sweeteners:ADMRoquetteDanisco
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Financials
Division Sales Profit
to 31 March 2009
Sugars £ 1,048 m £ 12 m
Ingredients Americas £ 1,797 m £ 181 m
Ingredients Europe £ 539 m £ 51 m
Sucralose £ 169 m £ 72 m
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Group Insurance Philosophy
To purchase externalinsurance only for the
major losses/catastrophes
To maintain the higheststandards of risk
assessment and control
To effect long termrelationships with suppliers
to reduce cost of riskvolatility
To self insure for themajority of insurable risk
using our Captive toformalise risk transfer within
Tale & Lyle
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Global Property Programme
Deductible $250kCombined PD/BI
TALIG drop down deductible – non ranking
TALIG $10m each loss/$12.5m aggregate
(Only losses above $250k rank)
Zurich45%
HDI-Gerling22.5%
$10m
$500m
Working Deductibles
GreatLakes15%
Axa17.5%
Global Property Damage/Business Interruption Programme - Detailed view
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Global Liability Programme
1st Global Excess Layer($45m over $5m)
2nd Global Excess Layer($50m over $50m)
$50m
$100m
ACE
North America UK and Rest ofWorld
* Working Deductibles-£ 20,000, but €30,000 for Amylum-£100,000 for Third Party Recall
Primary $5m
3rd Global Excess Layer($50m over $100m)
$150m
XL Insurance
TALIG $200k eachloss/$1,249,500 aggregateWorking Deductibles*
4th Global Excess Layer($50m over $150m)
$200m5th Global Excess Layer
($50m over $200m)
$250m
Global Casualty Programme - Detailed Structure
Working Deductibles
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January 2006 – Captive Transition Begins
Self managed captive,long established in
Bermuda – Tate & LyleReinsurance (TLRe)
Parent company thirdparty exposures for
divested business units inrun-off
TL Re historically wrotepure TP business acrossa number of insurance
lines
Ongoing programme ofcommutations in progress
to close historical thirdparty contracts whereeconomically feasible
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Project Scope: The Mission
Do we need a captive?
Reduce cost of managing captive by considering bothoutsourced management & domicile
Achieve final closure of all TP exposures – “de-risk”
Select new captive domicile which closely fits T&L’soperational requirements
Deliver all of the above within max 18 months timeframe
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The Captive Decision Process:Self-managed or Managed?
Outsource to managed to reduce operating costs:Outsource to managed to reduce operating costs:
• Overheads – staff, premises, operational
• Specialist skills & expertise
• Scale & flexibility
• Corporate Governance & compliance
• Local & international knowledge & relationships
Select partner to work with to achieve project objectivesSelect partner to work with to achieve project objectives
• Aon Global Risk Consulting
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The Captive Decision Process:Domicile?
1. Set up new captive insurer in selected domicile, or
2. Migrate existing Bermudan captive to new domicile, or
3. Remain in Bermuda
Pursue parallel strategies until ALL subjectivities arePursue parallel strategies until ALL subjectivities areremoved to safeguard minimum project objectives…removed to safeguard minimum project objectives…
Domicile Selection – SWOT Analysis
Bermuda
Gibraltar
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Strengths Weaknesses Opportunities ThreatsCould avoid having to incur expenseof migration or New Co formation andutilise a single existing vehicle
Geographically inconvenient and maylimit Tate & Lyle head office’s activeinvolvement
Involvement of White Rock Gibraltaras alternative EU front
Even with a NewCo potentialregulatory conflict between run offand ongoing business objectives
Flexible capitalisation and otherregulation
Cannot offer EU writing withoutfronting
Availability of substantial loan-backarrangements
Combination of professional captivemanagement and existing staffaccount know-how
Strengths Weaknesses Opportunities ThreatsCan provide direct writing into EU Subject to more stringent EU
capital/solvency requirementsPotential saving in fronting costs(circa $150,000)
Uncertain tax situation
Could migrate TL Re Achieves Newco without legacyissues
Risk of losing front company supportif direct write in EU
Reasonable ease of access Possible to loan-back to parent Resistance of regulator to futuremigration of historical liabs
Domicile Selection – SWOT Analysis
Guernsey
Malta
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Strengths Weaknesses Opportunities ThreatsGeographically convenient Cannot offer EU writing without
frontingInvolvement of White Rock Gibraltaras alternative EU front
Resistance of regulator to futuremigration of historical liabilities
Ease and speed of incorporation orcould migrate TL Re
Does not offer significant technicalbenefits over Bermuda
Achieves NewCo without legacyissues
Good captive management expertise Ability o use partly paid capital tocontribute to risk gap
Strengths Weaknesses Opportunities ThreatsCan provide direct writing into EU Subject to more stringent EU
capital/solvency requirementsPotential saving in fronting costs(circa $150,000)
Risk of losing front company supportif direct write in EU
Reasonable ease of access Immature captive domicile and lesstested regulation
Achieves NewCo without legacyissues
Resistance of regulator to futuremigration of historical liabilities
Uncertainty over allowance of loan-backs
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TP Exposures Decision Process
Furthercommutation
(at what price?)
Novation
Reinsuranceto close*
Run-offexposure to
closure*
Sale of TL Recaptive equityto third partypurchaser
*Notselected
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Flexible Forms of Captive Buyouts
Fronting Company Fronting CompanyFronting Company
Insurance Company(assumes captive’s
obligations)Captive Captive Captive
Captive(Assets & Liabilities)
Reinsurer
ReinsuranceLPT
ReinsuranceLPT
NovationLPT
NovationLPT
CommutationLPT
CommutationLPT
CaptivePurchaseCaptive
Purchase
Reinsurer £
Parent
liabilitiesliabilities
liabilities
Closure of TP Exposures – SWOT Analysis
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Run Off
Commutation
Strengths Weaknesses Opportunities Threats
Does not need agreementof third parties
Time taken to reach closure Potential for favourable finalsettlements
Detioration beyond current reserves
Risk Premiums avoided Ongoing operating cost andmanagement time
Exposure to notifications or changingregulations
Only valid claims are paidand policyholders get theactual benefits of theirpolicies
Does not give certainty withcontinual risk to furtherdeteoriation
Increased risk of failure of reinsurers astime passes
Strengths Weaknesses Opportunities Threats
Allows certain closure ofpolicies and underwritingyears
Not all ceding companiesinsurers will agree toacceptable terms
Cost of release may be belowpresent reserve values
Heavy reliance of the efficiencyof the commutation team
Value for policyholders andshareholders recognisedearlier
May involve high cost toagree release
Can novate the rump of anyrun off in situation
Unless all cedants agree termsrun off will take as long as lastpolicy to be closed
May prove difficult to directinsureds where thepolicyholders are no longerpart of the Tate & Lyle group
Can become increasingly difficultto agree commutation termsonce the large balances areremoved
Closure of TP Exposures – SWOT Analysis
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Novation
Reinsurance
Strengths Weaknesses Opportunities Threats
Allows certain closure ofunderwriting years
May involve high cost to novate Cost of release may be belowpresent reserve values
Exposures within the portfolio may not beacceptable to any new insurer
Agreement of insureds andcedants should be relativelyeasy to obtain for a qualityreplacement (reinsurer)
Requires good qualityinformation to be able to attracta new insurer
Certain exposures do not have an aggregatecap and they are unlikely to attract a newre(insurer)
Difficult to attract a new re(insurer)to smallportfolios
Strengths Weaknesses Opportunities Threats
Greatest flexibility ofstructures e.g. stop loss atvarious attachments orstructure insurances
My involve high cosy tonovate particularly if portfolioincludes high risk business
Potential to include profit share tocapture upside of claimsdevelopment
Exposures within the portfolio may not beacceptable to any new reinsurer
Can provide greaterfinancial certainty andprotection against reservedeterioration
Does not extinguish originalliabilities so not absolutecertainty
Funds held in trust or supporting letters ofcredit may not be available to payreinsurance premiums
Suitable to partial portfolioexposures
Unlikeloly to release TL Refrom collateral obligations
Insufficient information may exist to attracta new (re)insurer
Administrative burden of runoff remains
Difficult to attract a new (re)insurer to smallportfolios
Closure of TP Exposures – SWOT Analysis
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Solvent Scheme Arrangement
Sale
Strengths Weaknesses Opportunities Threats
Timescales to finally muchshorter than under run-off (6-12 months)
Policyholders may receive morethan they would under run off
Liabilities may be settled forsignificantly less than would berequired under a commutation saleor novation
Reputation issue (particularly for firstparty business) if the terms of thescheme are aggressive
Aims to be fair andtransparent to all creditorsthrough once off valuation ofliabilities
Does not bind pure debtors (i.e.reinsurers without cessions to thecompany)
Creditors failing to submit claims by thedeadline may not receive payment
Value for policyholders andshareholders recognisedearlier
Not suitable for all classes (e.g.compulsory insurances in the U.K.if relevant)
Requires good information regardingoriginal (re)insureds
Strengths Weaknesses Opportunities Threats
Finally can be achieved in asmall timeframe (3 – 6months)
Cost may be prohibited especiallyif the range is limited
Possible to novate certainexposures to an ongoing vehicleprior to sale
Buyer may not accept all liabilities underthe sale and require indemnities
Avoid costs of liquidation Buyers usually require a heavydiscount on the net assets of thecompany
May be more attractive in somecircumstances to receive proceedsas a capital gain rather thanincome
Buyer may not require warrantiesregarding the company to be sold
Reputational risk if buyer pursuesaggressive closure strategy
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“Mission” Dependencies
TL Re
TALIG
MainInsurers
BermudaInsurer
Gib FSC
BMA
Aon Gib
Purchaser
Bank
AON
T & L
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Transition Route Map
Newco creation in Gibraltar & novation of 1st party T&L business
Treatment of historical US liabilities
• Proposed commutation of workers comp, GL & Auto liability exposures to original cedinginsurer
Sale of Bermuda captive containing residual TP exposures
• Negotiate a price and any indemnities to achieve final sale of TL Re shares to Bermudanpurchaser
Successful project launch to consist of three inter-related stages
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A Question of Status“Go/No-Go for Launch”
TL Re Sale Agreement - GO
Novation Agreements - GO
Commutation Agreement - GO
Contract with Aon Gibraltar - GO
Re-assignment of LOC - GO
Gibraltar FSC Licence - GO
BMA Permission - GO
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“Houston - We have a problem…”
Major BermudaInsurer reverses
decision tocommute
historic liabilityrisks
Major BermudaInsurer reverses
decision tocommute
historic liabilityrisks
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“Ok guys – Lets work the problem“Failure is not an Option”
Idea emergesfor White Rock
Cell in Bermudato “warehouse”historic liabilityrisks in place ofCommutation
Idea emergesfor White Rock
Cell in Bermudato “warehouse”historic liabilityrisks in place ofCommutation
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Splashdown
Project proceeds asplanned:
• TALIG formed in Giband novationscompleted
• US risks successfullynovated to T19 WhiteRock PCC in Bermuda
• Legally binding sale ofTL Re completed andsale proceedsreturned to T&L Group
Post Completion Learning Points
No clearly identifiable path to simultaneously achieving all objectivesNo clearly identifiable path to simultaneously achieving all objectives
Conflicting methodologies proposed (hence application of Twin-track approach)Conflicting methodologies proposed (hence application of Twin-track approach)
Difficulty of performing appropriate levels of due diligence resulting in regulator being unable tocommit to hard deadlinesDifficulty of performing appropriate levels of due diligence resulting in regulator being unable tocommit to hard deadlines
Challenges of completing multiple novations with ceding insurers to scheduleChallenges of completing multiple novations with ceding insurers to schedule
Collateral reassignmentCollateral reassignment
Challenge of coordinating with Group insurance deadlines & obtaining agreement on new reinsurancestructures & captive securityChallenge of coordinating with Group insurance deadlines & obtaining agreement on new reinsurancestructures & captive security
Failure to agree commutation of historical US 1st party business undermining entire transition strategyFailure to agree commutation of historical US 1st party business undermining entire transition strategy
Sale price dependent on novation prices (impact on captive net asset value)Sale price dependent on novation prices (impact on captive net asset value)
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Offshore to Onshore, Self-managed to ManagedCurrent Trends in Captive UtilisationA Case Study
Richard Storey & Paul SykesWednesday, June 17, 2009London
G I B R A L T A RINSURANCE SEMINAR
17TH June 2009
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