Randall & Quilter Investment Holdings
While the pages of captive magazines are full of ways to instigate self-insurance, less is known about what to do when things do not go as planned. Paul Corver of Randall & Quilter is the man with a way out
What are some of the more common reasons that a captive would need to use an exit strategy?
They arise from a number of circumstances. It could be where there has been corporate restructuring at the parent level, perhaps through M&A activity, which leaves a corporate with more captives than it requires. It could also be for the opposite reason, such as divestment activity where the group holding company has got rid of a large part of its operation but retained its captive. The captive is therefore insuring the risk of part of the business that it no longer owns, so this leads it to dispose of the captive.
There could be a scenario where there is a change of direction in a company’s approach to risk taking and it decides to dispense with having a captive and enter the commercial insurance market for taking a risk. We have seen that in a number of private equity-owned operations. They think: “We bought a company to make widgets, not to be insurance providers, so let’s get rid of the insurance aspect.”
In changes of domicile it can be easier to dispose of a captive than move an existing one. This can be driven by changes in regulatory process, tax or some other corporate rationale.
The insolvency of the parent can also require an exit strategy. One of the first accounts we acquired was the Woolworths captive. After the Woolworths group had gone into insolvency, its captive had assets trapped that Woolworths needed to get some value for.
Who are the main people that take advantage of exit strategies?
Randall & Quilter (R&Q) has been acquiring run-off portfolios for 20 years and only in the last four have we started focusing on captives. We think there are opportunities available because the captive owners within large companies are not in the insurance industry and, therefore, are not familiar with what options are available to them. Perhaps captive owners are sat thinking there is no alternative to a protracted run-off or a buy-back with fronting company, if there was a fronting arrangement.
Looking at trends in the run-off world, when a market develops, the sellers tend to be more willing to go into the marketplace. One or two sole traders gives a market less viability and the fact that there are more players in this business usually means a better result for the seller.
This, in turn, prompts more corporates to think about what they are doing because there is value to be had in realising the surplus capital of an entity or pruning out unwanted liabilities. This means either disposing of the captive completely or trimming it down to make it a fitter operation going forward. The marketplace being there emphasises the fact that these are not one off activities.
Does what happens in the wider financial environment affect the exit strategy market?
A lot of entities have had strain on their balance sheet, not necessarily from the liability side but from the asset side, where investment returns have been lower or perhaps some investments have gone south.
Four years ago, when the credit crunch was really starting to bite, we saw interest from corporations that were struggling financially but saw that they had assets trapped in their captive and were interested in the realisation of that. When the economic environment is not good, there are attractions for corporates to realise the capital they have.
Also, when there is a soft market and rates are softening across the board and continue to do so, it becomes more attractive to put risk back into the commercial market and therefore cease using a captive for a period until the market hardens again.
There could be slack periods where a captive has been operating for a number of years and then goes quiet and goes back into operation and it is that period where, prior to going back into operation, the captive owner could say, “let’s look at those liabilities we carried five years ago to see if we still want to carry them”.
Are regulators more conscious of exit acquisitions?
The regulators we deal with have been fairly curious about what we do and the approach we take. They want to be comforted that the transaction is not somehow going to endanger the underlying policyholders or cedents, and also would not want anything that would tarnish the reputation of the domicile.
We provide a valuable service by sweeping up and consolidating the residual end-of-life captives, so they do not become a problem in the future.
Some we have acquired would be facing an insolvency position within a few years without additional capital being put in by the parent. To an extent, we are cleaning up the tail end of the insurance cycle by taking in these captives.
We do not get any leads from the regulators but we have a good relationship with them. We speak to them frequently if we are in a transaction and in most jurisdictions we will get pre-approval on the change of control.
Where they have become used to R&Q, they are often willing to approve a transaction before we have even executed it with the vendor. This is good for the vendor as well because that requirement is ticked off and they do not have to wait for that approval before getting the proceeds of the sale.
So is the speed of a transaction one of the most important aspects?
We like to operate as quickly as possible, regardless of the financial strength of the party that we are acquiring. If things don’t improve with time, a long, drawn out process means that that you have to keep an eye on that business for a longer period of time.
It is quicker to sweep in, do a thorough due diligence and crack on with the legal agreement as expeditiously as possible.
You do sometimes run into issues with access of claims records, particularly where front companies are involved.
Also, if the captive is a small piece of a large corporate body, it can take a while for relevant approvals and processes to happen on the corporate side.
If the size of a company can limit the exit speed, can it also limit the amount of options available?
Quite often the options are to sell, transfer or novate certain parts of a captive. Corporates could also look for a reinsurance solution, though that does not give them an exit as such, as they are still in the chain, albeit financially protected.
It really comes down to the motivations of the corporate seller and what they want going forward. If they want to get rid of the captive then a sale is the obvious choice. If they want to keep it but they want to remove some of the uncertainties, long-term liabilities or perils written then they would look towards a transfer or novation process.
That then brings in other parties that have to be consulted, whether that is a regulator for a transfe r or a front company for a novation.
This will then draw out the process. As a result, I do not think it is the size of the company that influences its options but, more likely, it is the business plan of the vendor.
