SOBC Corp
The captive market is seeing more and more run-offs. SOBC Corp will be there to get them on the right track, say Tom Hodson and Stephanie Mocatta
How commonly are captive run-offs occurring in the current financial climate? Today, is it more of a business decision or a financial one?
Tom Hodson: Captives, by their nature, are organised as a risk management solution for a single parent or small group of parents. The captive’s continuing ability to cover loss is paramount to the parent’s, or parents’, ability to successfully manage risk. As a result, insolvencies in the captive market are rare.
Most captives in run-off are the result of a business decision by the owner. The business reasons to close a captive vary, but can include a change in strategic direction by the company, a change in market conditions, or a change in regulatory climate. For example, in 2008, as the US stock markets declined, captive owners found it increasingly difficult for investment income to support their underwriting. In some cases, competing needs for capital meant the captive could no longer be supported, and was placed in run-off.
In addition to captives in run-off, one of the areas that SOBC Corp is focused on is buying ‘old year’ liabilities from captive owners. In many fronted programmes, owners are required to ‘stack’ collateral, which, depending on the tail of the business and the terms demanded by their fronting carrier, could get very expensive. SOBC Corp will look to relieve captive owners of their old year liabilities, allowing the release of collateral to be applied to future years.
Where companies are acquiring additional captives through mergers or acquisition, are you seeing a higher demand for captive run-offs?
Stephanie Mocatta: One of the most exciting areas of potential growth for SOBC Corp is in the acquisition and run-off of ‘redundant’ captives. As captive insurance is popularised and more and more companies manage risk through captive programmes, there is a growing market in companies owning two, three or more captives acquired through mergers and acquisitions.
For many of those companies, insurance is not their primary business, and SOBC Corp can be a helpful resource, assisting them in effectively and efficiently dealing with any legacy business acquired through mergers and acquisitions.
How would you best describe the run-off acquisition service that SOBC Corp provides?
Hodson: SOBC Corp provides a much-needed filler for a gap in the run-off acquisition market—the acquisition of smaller or significantly distressed insurance entities.
Many of the major players will only look at companies of a significant size, or those where there is a potential for a quick return—in terms of run-off. Our capital structure is such that the management team owns 50 percent of the company and our capital is mainly from high net worth individuals with a very long-term horizon—the majority have invested through pension funds.
This means we are able, with our committed management team, to take a long view on insurance run-offs and to provide finality for clients with difficult, litigious or complex books of business.
We also pride ourselves in acquiring companies outright—we do not ask for any warranties or indemnities on the insurance liabilities.
SOBC Corp recently acquired Insuratex in Bermuda. What other markets have you entered, and why?
Mocatta: SOBC Corp is primarily focused on the US, Bermuda and the Caribbean. The US market is a significant size, around 75 percent of the world’s insurance premiums, with a very large percentage of smaller companies that fit within our target area.
There are around 2,750 property and casualty companies in the US and an estimated additional 6,500 captives and risk retention groups. We provide an exit solution for those smaller companies where finality is the ultimate goal.
The Bermuda market also offers us good opportunities, particularly in the captive area. There are a large number of captives that have entered the Bermudian market over the years, some of which are officially in run-off, others are dormant. Again the major players will look at the larger companies, but will not deal with the smaller or more troubled companies that are our target market.
The Caribbean market, certainly in some of the jurisdictions, mirrors Bermuda. Many of the islands have long been captive domiciles and have captives that either are, or perhaps should be, in run-off.
SOBC Corp is extremely pleased to have Harry Whitcher as one of our directors and shareholders.
Whitcher was a regulator in both Bermuda and the British Virgin Islands (BVI) and brings excellent knowledge of these jurisdictions and also of the cross-border regulation issues.
Have you considered entering the UK and Europe?
Hodson: We will always consider opportunities in the UK can Europe, however, our experience suggests it is unlikely to be a significant market for SOBC Corp. This is for a number of reasons:
In addition to Insuratex, how many other captive entities have you acquired?
Mocatta: SOBC Corp is a relatively new company—we formed in mid-2014 and completed our capital raise in mid-2015—Insuratex is our first acquisition as SOBC Corp. However, SOBC does build on the experience and reputation of a prior company, SOBC Limited (which was UK domiciled).
SOBC Limited made five acquisitions—one Bermudian, two in New York, one in Pennsylvania and one in Louisiana. The Pennsylvania acquisition was actually an insurance company, but acted as a captive.
SOBC Corp does see the captive market as a significant opportunity for future run-off acquisitions.
Do you have any other acquisitions in the pipeline for 2016?
Hodson: We have signed sale and purchase agreements on two further entities; these are now going through the change of control process. Both are onshore in the US.
We have a number of additional targets where we are doing due diligence, some of which are captives and risk retention groups.
Our business plan is to acquire multiple small entities. We are prepared to look at some very small opportunities. As we conduct our due diligence in-house we are able to commit the time necessary to look at the smaller entities and can quickly see if a deal will be possible.
