Offshore to Onshore, Self-managed to Managed Current...

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

5

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

7

The Business Environment

Key Customers

• Coca Cola• Pepsi• Kraft• Cadbury• Mars• Unilever• Nestle• Major supermarket

chains

Competitors

• Sugars:ABF (British Sugar)TereosNordzucker

• Sweeteners:ADMRoquetteDanisco

8

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

9

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

10

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


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


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Novation

Reinsurance


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


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


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Solvent Scheme Arrangement

Sale


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


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

26

“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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