Saturday, June 10, 2023

Coke’s Stacy Apter looking for insurance evolution, role for capital market platforms

  • Coca-Cola treasurer Stacy Apter speaks exclusively on the Global Captive Podcast about risk financing philosophy and captive strategy
  • Hard market prompted company to re-assess how it deploys captive balance sheet
  • Keen to see insurance market move to a more portfolio approach to underwriting
  • Role for capital markets and platforms in bringing insured and investors closer together

The hard market has led the Coca-Cola Company to lean further on its captive with treasurer Stacy Apter keen to see a move towards a more portfolio-based approach to risk transfer, from both the commercial insurance and capital markets.

Speaking in an extensive interview on the Global Captive Podcast Apter, vice president and corporate treasurer at the Coca-Cola Company, sets out the beverage giant’s risk financing philosophy and how it has evolved over the past five years.

Coke owns captives in its home state of Georgia and in Bermuda.

Apter said: “Our focus is being the most efficient structure that we can, and figuring out what makes sense for us to retain and where is the best price point for what we want to move into the external markets.”

The discussion also features Jason Flaxbeard, senior managing director at Brown & Brown, who works closely with Apter and Coke’s risk and insurance team, including Paul Berkemeier, director of global insurance.

Flaxbeard said the strategy they have developed is built around reducing volatility as much as possible “at the lowest potential cost”.

“We’ve created a metric that defines how that volatility is reduced,” Flaxbeard explained.

“And we look to spend risk transfer dollars in a place that is useful. Underneath that we fit the captive into the risk appetite structure that Coca-Cola has. And then we marry the two together to develop the most efficient programme that we possibly can. And it’s worked now for the last five years or so.

“The insurance market was very keen to work with us from a blended, integrated perspective and then the hard market hit and it moved us away from that particular structure.

“But we ended up looking at this in a different way as well. That hard market shift made us think about the efficiency of the insurance market itself versus the efficiency of Coca-Cola, and I would say that they’re two different things. The efficiency of Coca-Cola’s capital is much more liquid, much more available than anything we’ve seen in the insurance market.”

Apter said the approach to risk financing continues to evolve with Coke’s own modelling looking at the total basket of risks, both insurable and uninsurable, rather than considering it line-by-line as the commercial market does.

She said having the captive play an active role in pooling risks together from over 200 countries and across business units is a valuable tool to present to external markets when partnering with them.

“You have to write line by line just to meet the regulations and to have the certificates and the paper and everything that’s required from a regulatory standpoint,” Apter said.

“The captive is a mechanism to be able to pool that together.”

Through the hard insurance market, the beverage company has also had the option of being able to step back from rate rises and assess whether they want to take more risk into the captive, having had a good loss experience which has built a strong balance sheet.

“We have decent reserves that are built up into the captive that allows us to step back and say: ‘Should we be taking on more risk ourselves?’” Apter added.

“Is there really the value there to be paying the premium that is being asked for in the marketplace versus riding through with what has been built up in the captive and just take a harder look at what our risk appetite is.”

Capital markets play

Coca-Cola’s captives are not currently partnered with the capital markets to transfer risk on an aggregated, portfolio basis but it is an area that Apter continues to explore the potential for; using the captive to transform insurance risk into investible risk, as is already seen within Bermuda’s broader insurance-linked securities (ILS) market.

Apter recognises that the industry will not move overnight, but she is hopeful the capital and commercial insurance markets can evolve to a point where they are comfortable with what corporate risk looks like as a portfolio rather than segmented by the traditional business insurance lines.

“To have the ability to look at it across the full basket, either getting that from a capital market standpoint and leveraging through a captive structure, whatever that might look like, which I know is being done on a commercial basis,” she added.

“Being able to have that as something available to clients of our size so that it’s not the commercial markets, but truly private employers that would like to take advantage of the same efficiencies. I would like to see the markets evolve to that.”

Flaxbeard said he hopes the capital markets can come round to that way of thinking, but the current interest rate environment was pulling some people back with good risk-free returns appealing.

“If you think about capital efficiency, we’re hedging against uncertainty,” he explained.

“We don’t know what’s going to happen next year, the markets don’t know what will happen next year, but we have a way to finance that.

“You’ve got free cash flow that can be used to finance risk. The insurance market should really only be used when there’s uncertainty or you need a capital injection at a specific time.

“If we can raise capital elsewhere that may be cheaper, that’s what we’re going to do. And that’s what the investment markets need to see as well, but they don’t see it as that yet.  They’re trying to come at it and fit it into a model that they’ve got and I don’t think they’ve bent quite to our way of thinking just yet.”

A number of platforms have been developed in recent years that are looking to bring capital markets and large insureds, often through their captives, closer together and the duo have been looking at them closely.

“I’m excited about those markets,” Flaxbeard added.

“There are markets out there who are trying to transform that space by looking at the risk on an aggregated basis. We will do that if it’s efficient for us.

“The investors on the other side of those aggregators haven’t quite come to the table and appreciated how to underwrite that risk yet.”

Listen to the full 30-minute podcast interview with Stacy Apter and Jason Flaxbeard on the Captive Intelligence website here, or on any podcast app. Just search for ‘Global Captive Podcast’.