Exit Alternatives for
Captive Owners
December 3, 2013
Presented by:
Ray Dowling – Dowling Advisors, Inc.
Scott Penwell – Rhoads & Sinon LLP
Pedro Reis – Cayman Islands Monetary Authority
Agenda
– Strategic Reasons for Considering Exit
– Exit Alternatives: Pros and Cons
– Sale
– Novation/Commutation
– Loss Portfolio
– Legal Considerations
– Regulatory Considerations
– Q&A
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Strategic Reasons to Consider Exit
– Mergers of two underlying companies with captives and only need one
captive moving forward
– Soft Market
– Reduction of Risk
– Cost Prohibitive to Run-off Captive
– i.e admin costs are high compared to limited risk in the captive
– Reduce Capital Requirements
– Eliminate Non Core Troubled Business/Run-off Liabilities
– Mergers where the Acquiring Company does not like a particular book
of business
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Exit Alternatives – Pros/Cons
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Sale of Captive:
Pros
Cons
– Upon completion of sale, risk to
the underlying insured is
eliminated completely
– Upfront deal costs are likely the
highest of all three alternatives
– Regulatory Approval Necessary
– Eliminate future run-off costs of
the entity
– In many instances the Purchaser
has the same future costs to runoff the entity as the Seller would
and must price such in its offer
– If an ongoing entity could
potentially price a multiple based
on the future profits of the
business
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Exit Alternatives – Pros/Cons
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Loss Portfolio Transfer Insurance:
Pros
Cons
– Still on the underlying risk to the
insured if Reinsurer cannot satisfy
obligations
– Limited Regulatory Approval
– i.e. Not necessary to get novations
of each underlying insured
– Credit exposure to to reinsurance
recoverable
– Limited Administrative Costs
– Cannot release all capital and
dissolve captive since technically
still on risk
– Loss portfolio transfer reinsurance
agreements are fairly standard
– Potential retroactive accounting
implications if GAAP reported
entity
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Exit Alternatives – Pros/Cons
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Novation/Commutation:
Pros
Cons
– Upon completion of
novation/commutation, risk to the
underlying insured is eliminated
completely
– Approval necessary from each
underlying insured
– Upfront admin cost will likely be
higher with novation
– Can dissolve entity and release all
capital and eliminate all future
run-off admin costs of the captive
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Legal Considerations
A. Regulatory Dispositions
B. Schemes of Restructuring
C. Voluntary Plans
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Legal Considerations
i.
Sale of Captive
a)
Documentation – Stock Purchase Agreement
b)
Buyer & Seller Issues
- Pricing
- Representations & Warranties
- Due Diligence
c) Interested Parties
i.
Fronting Company
ii.
Captive owner/insured
iii.
Reinsurers
iv.
Regulators
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Legal Considerations
ii.
Novation/Commutation
a)
Documentation – Commutation Agreement
b)
Assignor/assignee issues
- Pricing
- Due Diligence
c)
Interested parties
i)
Fronting Company
ii) Reinsurers
iii) Regulators
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Legal Considerations
iii.
Loss Portfolio Transfer
a)
Documentation – Sale Agreement
b)
Buyer/Seller issues
- Pricing
- Representations & Warranties
- Specific Policies
c)
Interested Parties
i)
Fronting Company
ii)
Reinsurers
iii)
Regulators
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Legal Considerations
iv. Other Structures
a) Protected Cell Companies
b) Eastern Atlantic Model
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Regulatory Considerations
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Sale of Captive:
– Provide CIMA with detailed information regarding the sale such as:
- rationale, BOD resolution
- due diligence on new shareholder(s) and new directors, if applicable
- changes to the business plan, if any
- changes in service providers, if any
- future plans for the captive
- impact on captive’s financial statements
- approval from other domicile, if re-domiciling captive
- other information as may be requested.
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Regulatory Considerations
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Loss Portfolio Transfer Insurance:
– Provide CIMA with detailed information regarding the transfer such as:
- rationale, BOD resolution
- business plan change approval request, detailing LPT
- information on counterparty, which will be accessed by CIMA
- future plans for the captive
- impact on captive’s financial statements
- LPT agreement
- Insurance liabilities remaining in the captive after transfer, if any
- other information as may be requested.
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Regulatory Considerations
Click to edit Master title style
Novation/Commutation:
– Provide CIMA with detailed information regarding the operation such as:
- rationale, BOD resolution
- business plan change approval request, detailing operation
- information on counterparties, which will be accessed by CIMA
- future plans for the captive
- if operation involves another jurisdiction
- impact on captive’s financial statements
- novation/commutation agreement
- Insurance liabilities remaining in the captive after operation, if any
- other information as may be requested.
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