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Fitch affirms Vale’s captive rating

Luke Harrison
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Fitch Ratings has affirmed the rating of mining giant Vale S.A.’s Singapore-domiciled captive, Monticello Insurance Limited’s, (MIL) as ‘BBB’ with a stable outlook.

The ratings agency said it considers MIL a core captive of Brazilian company Vale, and as a result the insurer’s rating is linked to the parent’s rating, as they generally receive an insurer financial strength (IFS) rating equal to the issuer default rating (IDR) of the parent.

MIL’s rating is driven by expected support from its ultimate parent Vale S.A. MIL is wholly owned by Vale Holdings B.V. (VHBV), which in turn is 100% owned by Vale S.A.

Fitch said Vale has provided reasonable financial support to MIL and appears to support its continued solvency and viability through revolving loan agreements and issues letters of credit (LOCs) to fronting insurers and provides timely capital injections when needed.

Reserve calculations are vetted by MIL’s main fronting companies and calculations were periodically reviewed by a third-party actuarial group, Marsh Canada.

The last major injections totalled $241m in 2012 and 2013, and since then, there has been no need for such support.

The captive’s parent does not have a formal investment policy, and the main investment is in the form of an uncommitted revolving inter affiliate loan facility to Vale S.A., which can be redeemed in the short term and the rest is mainly held in cash.

MIL’s net earned premium was 93.2% in December 2022. The ratings agency said the insurer is protected from extremely large losses through reinsurance contracts, and the large contracts are well diversified across an adequate number of mostly ‘A-‘ rated reinsurers or above.

In 2022, MIL showed a significant improvement in its profitability index, and the ROAE was positive at 18.5%. The insurer had profits of $48.7m in the last year.

Fitch said that despite the good performance in 2022, given the nature of the risks covered, MIL’s result is very volatile and may suffer large variations depending on the assessment of its provisions, which may result in a significant deterioration in the loss ratio.

MIL’s capitalisation remains strong and leverage is quite low.

“Capitalization and leverage ratios could be negatively affected by potential large losses; however, Fitch believes parental support would be forthcoming, if needed,” the ratings agency said.

Domicile Wars: Innovation, track record keeps Guernsey on top of European pile

Luke Harrison
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Domicile Wars: Innovation, track record keeps Guernsey on top of European pile
  • Guernsey has captive market has benefited from hard market conditions
  • Long history of innovation, captive focus makes Guernsey a domicile of choice
  • Domicile beginning to address concerns over talent pool
  • A UK captive regime could be a threat, if it was modelled on Guernsey, Bermuda

Guernsey’s drive to pioneer innovative captive legislation and its history of captive success have helped it take the crown as Europe’s largest, and fastest growing domicile in recent years.

However, the jurisdiction will have to battle certain challenges, such as attracting fresh talent and seeing off potential competition from increasing domicile options in the region, if it is to maintain this title.

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AM Best to review rated fronting carriers following Vesttoo fraud claims

Luke Harrison
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AM Best to review rated fronting carriers following Vesttoo fraud claims

Ratings agency AM Best said it will review all its rated fronting carriers in light of the fraud claims concerning Vesttoo and its collateral arrangements.

Vesttoo is an insurtech that connects capital market participants with (re)insurance risk and has recently been embroiled in claims regarding fraudulent collateral.

The ratings agency said: “With the recent published news reports on Vesttoo, an insurtech platform, AM Best is monitoring the rapidly evolving situation and reviewing its rated fronting carriers and other insurers that have material amounts of reinsurance counterparty credit risk and reliance on various forms of collateral. Based on this review, rating actions will be taken as warranted.”

AM Best said that that the level of collateral in a reinsurance transaction will be dependent on the cedant’s reinsurance counterparty risk appetite, as well as regulatory requirements.

When it assesses an insurance company’s balance sheet, AM Best said it considers factors including the quality of reinsurance, dependency on reinsurance and the appropriateness of the reinsurance programme.

The fronting market, particularly in the United States where growth has been rapid in recent years, driven by programme business more than captives, has been under scrutiny since AM Best revised its outlook for Trisura Group to negative from stable.

The Canadian insurer had revealed a CAD 81.5m one-time write-down of reinsurance recoverables in Q4 resulting from its fronting of a US property and casualty captive programme.

Captive Intelligence published a long read in April explaining why the Trisura impairment is a cautionary tale for captive fronting business.

Brady Young, chairman of Concert Group, a fronting company focused on captive business, told Captive Intelligence at the time that there was risk of a race to the bottom as the fronting market booms.

“There has been huge growth over the past five years in the fronting of programme business, but a lot of that is not really captive fronting,” Young said.

“It is fronting for MGUs that might involve a captive as well, but I wouldn’t consider it classic captive fronting.

“In the programme fronting, the increased competition and growth does risk a race to the bottom with regards rates and operations.

Delaware DoI takes battle with IRS to Supreme Court

Luke Harrison
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Delaware DoI takes battle with IRS to Supreme Court

The Delaware Department of Insurance (DDOI) has appealed to the Supreme Court to stay proceedings and recall the mandate of the Third Circuit Court of Appeals, which would require the DDOI to provide the Internal Revenue Service (IRS) with specific 831(b) documentation.

In April the DDOI lost its latest attempt to block an IRS summons concerning 831(b) captives managed by Artex Risk Solutions and Tribeca Strategic Advisors, wholly owned by Artex, in the State.

The IRS originally issued its summons to the DDOI on 30 October, 2017 during its investigation into Artex and Tribeca, seeking filings and communications between the Department and the captive managers.

The United States Court of Appeals for the Third Circuit on 21 April affirmed the District Court’s decision that the McCarran-Ferguson Act does not protect the documents requested and the threshold for constituting the ‘business of insurance’ was not met.

“The issue is the order of the Third Circuit Court of Appeals affirming the decision of the United States District Court for the District of Delaware enforcing an IRS summons that requires the Department to violate Delaware insurance law,” the DDOI said in its appeal to the Supreme court.

The DDOI said that these courts found in error and that a state insurance regulatory statute did not reverse-preempt a federal statute having nothing to do with insurance regulation.

“This error raises “critical questions” of federalism that require Supreme Court intervention to settle the circuit split caused by the Third Circuit Court of Appeals’ interpretation of the McCarran-Ferguson Act.”

The DDOI argued that the Third Circuit’s precedential opinion and simultaneous issuance of the mandate will cause irreparable harm.

“It requires a state Insurance Commissioner to violate the express command contained in the insurance laws of his own state, an outcome that upends Congress’ stated purpose in enacting the McCarran-Ferguson Act,” the DDOI said.

Section 69203 of the Delaware Insurance Code is at the heart of this dispute as the provision prevents the Insurance Commissioner from releasing certain information provided by Delaware insurance companies in the licensing and financial examination process without a written agreement to hold that information confidential and “in a manner consistent with the statute”.

AZ captive closes its first $50m catastrophe bond

Richard Cutcher
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AZ captive closes its first $50m catastrophe bond

SageSure, a managing general underwriter focused on catastrophe-exposed property in the United States, and Arizona captive Anchor Re have secured a $50m catastrophe bond providing multi-year retrocessional protection against a series of US named storms.

The protection is for SageSure’s carrier partners SURE and SafePort and is Anchor Re’s debut catastrophe bond.

SageSure said the bond is unique unique in the insurance-linked securities (ILS) market because it is structured to use Property Claim Services (PCS) county-level catastrophe loss reporting in the trigger.

“We’re excited to see strong investor support for Anchor Re’s first catastrophe bond,” said Travis Lewis, director of Anchor Re.

“Anchor Re was formed to maximize capital and capacity efficiency, and this innovative catastrophe bond further bolsters the support it can provide for SURE and SafePort’s reinsurance programs.”

Anchor Re was established as a captive reinsurer in 2020 which provides scalable capacity exclusively for SageSure’s carrier partners. To date, Anchor Re has raised $100 million in capital.

Captive Intelligence reported yesterday that asset management giant Blackstone has used its Vermont-domiciled captive to sponsor a $250m indemnity catastrophe bond covering named storms and earthquakes in the United States and Canada.

On both cat bonds, Swiss Re Capital Markets acted as the sole structuring agent and bookrunner.

“Swiss Re Capital Markets is proud to have structured and placed SageSure’s innovative second and subsequent event cover for its captive reinsurer,” said Jean-Louis Monnier, head of ILS at Swiss Re.

“This fourth issuance under the Gateway Re program is designed with structural features that are accretive to ILS investors, while it provides valuable sideways coverage for Anchor Re. The continued success of the franchise reaffirms SageSure’s presence as a prominent ILS sponsor and investors’ confidence in SageSure and the Gateway Re program.”

Blackstone captive sponsors Swiss Re structured cat bond

Richard Cutcher
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Asset management giant Blackstone has used its Vermont-domiciled captive to sponsor a $250m indemnity catastrophe bond covering named storms and earthquakes in the United States and Canada.

Swiss Re Capital Markets structured and placed the issuance of the insurance-linked securities under Wrigley Re Ltd, a Bermuda exempted company licensed and registered as a special purpose insurer.

Gryphon Mutual Property Americas IC, a Vermont-domiciled real estate captive owned by Blackstone and managed by Aon, is the sponsor of the catastrophe bond.

It is said to be the first corporate catastrophe bond covering named storms on an indemnity basis, and the first corporate catastrophe bond covering multiple countries.

“Swiss Re Capital Markets is proud to have set a milestone with the structuring of Blackstone’s first indemnity issuance,” said Jean-Louis Monnier, Head of ILS at Swiss Re.

“This transaction is the result of a collaboration between Blackstone and ILS investors to develop a new solution that fits the challenges of an asset manager and expands the boundaries of the ILS market. It is a milestone in the ILS market’s path to realize its potential as an efficient provider of peak peril capacity.”

The $100m Series 2023-1 Class A notes provide protection on an indemnity per occurrence basis for named storms in the US and Canada and an indemnity annual aggregate basis for earthquakes in the US excluding California and Canada.

The $150m Series 2023-1 Class B notes provide protection on an indemnity annual aggregate basis for earthquakes in California.

Both classes of notes have a three-year risk period starting 28 July, 2023 and introduce an innovative risk-based premium adjustment mechanism to adjust for changes in risk in the covered real estate portfolio.

French equalisation provision one of several considerations for captive prospects – Laurent Bonnet

Luke Harrison
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French equalisation provision one of several considerations for captive prospects – Laurent Bonnet

French captive prospects will be looking at various factors when choosing a captive domicile other than just the availability of a competitive equalisation reserve, according to Laurent Bonnet, head of captive and alternative risk transfer solutions at Marsh France.

Before the French legislature passed the country’s long-awaited captive decree, there was a lot of discussion and focus on the terms of the equalisation provision.

However, Bonnet said the provision is generally not considered one of the key factors in a company’s domicile analysis.

“The equalisation provision is one specific aspect which on its own is not the key to the captive, it’s just one element of the captive domicile analysis,” he told Captive Intelligence.

“It’s not a revolution as this type of equalisation provision already exists in Luxembourg and has been in place for 40 years now. It’s not a big change and it just puts France on the same level as Luxembourg.”

Bonnet highlighted the pandemic as a key driver for France’s captive legislation, in order to help French companies improve their resilience by reserving funds to better face the financial impact of such events.

Oliver Wild, president of Amrae, also highlighted the Covid-19 crisis as an importance factor in helping the French government appreciate the need for greater resilience structures in an exclusive interview on the Global Captive Podcast earlier this month.

Further details of the country’s new captive regime were published in June, including confirmation that a 90% equalisation reserve can be utilised by captive reinsurance companies.

Bonnet said when he has discussions with a company’s tax officer in meetings with clients, they realise that tax is a very limited topic and “it’s not a critical element in the domicile analysis”.

“There’s so many considerations for a group that has billions in turnover and when compared to the group, the size of the captive in quite limited and there is so much tax consideration that the equalisation provision is a small part of the global analysis,” he explained.

Bonnet revealed he is aware of some French captives that might not use the equalisation reserve as it is not compulsory like it is in Luxembourg.

“It is my understanding that some French captives might not use the equalisation reserve as for their tax officer it doesn’t make sense at the captive level,” he said.

Bonnet said one important element for prospective French captive owners is being able to set up a captive at the same address as the headquarters of the company.

“It’s much easier for all the C-suite, or the head of the operation department, or the people involved in the risk to be part of the refinancing vehicle than having a captive based elsewhere,” he said.

Two new captives have already been formed in France this year, Limagrain and Naval Group having applications approved in June, while two new captives were formed in 2022, before the new legislation was in place.

Bonnet said that there is a lot of interest in captive formations in France, “but I don’t know how many will move to the second stage of applying for a licence”.

“There is a lot of expectation from smaller companies thinking that it’s going to be the solution of every issue, but in the end it’s just a self-insurance vehicle,” he said.

He noted that we could expect seven new captives this year and around the same number next year.

“So, we should reach 30 captives in the coming years,” Bonnet added.

NRRA criticises Nevada Bill, seeks dialogue with Commissioner

Luke Harrison
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New Nevada legislation, which disallows liability insurers from using eroding policy limits, which reduce policy limits by defence fees and costs for all insurance companies in the state, has been criticised by the National Risk Retention Association (NRRA).

Policies likely affected by the new law, and related cost and unavailability concerns, include D&O, cyber, fiduciary, errors and omissions, general liability, excess, personal liability, and possibly other policies – including property.

“This legislation will be cause for concern not just for risk retention groups, but also for the entire insurance industry,” NRRA said.

Assembly Bill 398, sponsored by the Nevada Justice Association passed by a vote of 19 to 1 before the Senate, and will become effective 1 October, 2023.

NRRA said it will have more to report on the Bill after communications with the Commissioner and after it has followed-up with a number of the other industry associations that are contemplating action in response.

Anthony Liolios, government relations and PAC specialist at Lockton, said numerous business and insurance industry groups have warned the Nevada Governor and Insurance Commissioner that the new law will make liability coverage unobtainable due to unavailability or excessive cost.

“It remains uncertain how exactly the new law will apply,” Liolios said. “The broad language in the Bill and legislative history suggest a wide array of policies are subject to the DWL prohibition.”

Liolios noted that Nevada’s Division of Insurance has been asked to exempt surplus lines policies.

“Such an exemption could result in availability of coverage options even if that coverage is still more expensive than what is currently available,” he said.

Market hedging, non-aviation risks driving captive conversations among airlines

Luke Harrison
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Market hedging, non-aviation risks driving captive conversations among airlines
  • Profile of all-risk, hull war make captive utilisation unsuitable for most airlines
  • Broader business risks, for larger airlines, can make captive feasible
  • Internal buy-in and capital commitment common stumbling block for captive projects
  • Third party, customer lines a profit opportunity for airline captives

Captive formation activity has been slow going for airlines, with large, established carriers benefitting from long-term utilisation but entry to market presenting significant obstacles. There are signs, however, that new formations could be around the corner.

While it is not uncommon for aviation companies to have captives, a large proportion have utilised them to write non-aviation risks.

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Captive Intelligence provides high-value information, industry analysis, exclusive interviews and business intelligence tools to professionals in the captive insurance market.

SRS Luxembourg appointed manager of DEME Group captive

Luke Harrison
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0
SRS Luxembourg appointed manager of DEME Group captive

SRS Luxembourg has been appointed captive manager for DEME Reinsurance SA, providing all-inclusive management and consulting services from 1 July, 2023.

DEME Reinsurance was originally established in 2011 and is owned by DEME Group, a large contractor in offshore energy, environmental remediation, dredging and marine infrastructure.

“We are delighted to work with SRS going forward and together further develop the DEME captive,” said Lodewijk Beeckaert, DEME’s insurance director.

The company also engages in offshore wind, marine infrastructure, green hydrogen, and deep-sea mineral harvesting.

“We are delighted to start providing all-inclusive management and consulting services to the DEME Group,” said Maxime Schons, SRS Luxembourg managing director.

“Deme Reinsurance is the typical captive we love to work with, because key concepts are well captured: risk diversification, long-term captive optimization, and risk financing planning, use of technology, overseen by talented people.”

Strategic Risk Solutions opened its Luxembourg office in August 2020, led by Brian Collins and Schons.

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