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Cash-strapped owners mull closing captives to tap capital

Economy, soft market hit alternative risk sector


Economic problems coupled with a continued soft traditional insurance market are tempting some captive owners to shut down the facilities to access cash tied up in capital, several captive experts say.

In other cases, captive and risk retention group owners are ratcheting down the operations as they take advantage of bargain prices offered by insurers for traditional coverage, they say.

Particularly hard-hit are captives and RRGs whose parents or members are involved in industries challenged most by the recession, such as construction and trucking.

The trend ranges across domiciles, demonstrated in such developments as 2009 being the first year of a net loss in the number of risk retention groups since 2000, with 18 RRGs ceasing operations and eight new formations last year.

In 2009, “We formed 39 (captives), we closed down 36,” said David F. Provost, deputy commissioner of captive insurance in the Vermont Department of Banking, Insurance, Securities and Health Care Administration in Montpelier.

“About a third of those were due to mergers or acquisitions one way or another and a lot of them were banks,” Mr. Provost said. For “about a third, the business purpose of the captive no longer made sense.”

In that latter group, in some cases captive parents sought access to the capital that was committed to the captive. “Some of those that dissolved, it was just that: It was a grab for the cash,” Mr. Provost said.

In the past, captive owners often kept captives open even when they were not using them as an alternative to insurance markets in the belief that they would need the facility in the future. But now, some companies are closing captives on the understanding that they can easily establish a new captive if they need to, Vermont's Mr. Provost acknowledged.

“What I heard this year is, "It's so easy to start a new captive now, if we have to, we'll be back. Today we need the cash,'” Mr. Provost said.

For those who've formed a captive once, with the increased experience and sophistication of captive regulators and service providers, it probably is easier to obtain a new license than it was several years ago, Mr. Provost said.

“It only takes a couple weeks,” he said. “I wouldn't call it a commodity, but it's a lot easier to start a captive today than it was 20 years ago.”

Among single-parent captives managed by Strategic Risk Solutions, several parents are looking to tap the captive's capital, said Brady Young, managing director and president at the Concord, Mass.-based captive manager. But, in some cases, he said, parents essentially suspend operations instead of closing the captive.

“They leave the minimum amount of capital in it,” Mr. Young said, and seek a waiver of audit requirements from regulators if possible, allowing them to cut expenses in the captive operation.

Mr. Young said he's also seen some groups take the same approach. “They're saying, "If the members really don't need us right now, let's keep this thing alive and ratchet down expenses,'” he said. “Instead of following the market into the ground...why not let members take advantage of the soft market.”

The poor economy is also affecting captive formations, experts say.

Delaware licensed eight new captives in 2009 and dissolved two single-parent captives, which contrasts with its net gain of 22 captives in 2008. “It is indicative of the economy,” said Steve Kinion, director of captive and financial insurance products in the Delaware Department of Insurance. “Also, we haven't seen commercial insurance rates really rise.”

Gary Osborne, president of USA Risk Group in Montpelier, Vt., said the pressure some captives are feeling is a fairly recent development. “Six months ago I didn't really see it, but in the last couple of months we've been seeing more,” he said.

Captives and risk retention groups linked to the most hard-hit industries are finding the economic environment particularly difficult.

For example, in December, two Arizona-domiciled trucking industry captives managed by USA Risk Group—Thureus Insurance Group Inc. and Astraea Risk Retention Group Inc.—were placed into receivership. The captives were part of a group of companies owned by holding company Piel Corp. providing coverage to Piel unit Arrow Trucking Co. and its affiliates.

Mr. Osborne said USA Risk contacted the Arizona Department of Insurance after hearing from claimants unable to reach Arrow, which apparently had ceased operations.

“Arizona...jumped right in and took possession,” Mr. Osborne said. Christina Urias, Arizona's insurance director, has been named receiver of the two companies, and Mr. Osborne said at this point it appears there should be an orderly runoff.

“We've got a couple others that are struggling,” Mr. Osborne said, though adding, “I don't think there's any ticking time bombs.”

“I've got a couple we're watching closely with regulators,” he said, with those captives reviewing their positions and trying to decide whether to go into runoff.

The economy's impact on its members is forcing Washington-domiciled ProBuilders Specialty Insurance Co. RRG to wind up its business, according to its manager.

“Obviously, the revenue of our insureds, which are builders, is decreasing,” said Bill Tepe, chief financial officer at NationsBuilders Insurance Services Inc. in Atlanta, which manages the ProBuilders RRG. “And that's the biggest impact on our premiums.”

With the downturn in construction activity, the decline in the RRG's premiums was “pretty amazing,” Mr. Tepe said. “With the decline in premiums, we thought it would be better to place the company in runoff,” he said.

Mr. Young of SRS noted that the economic downturn and soft market conditions are hitting group captives in multiple ways.

Many potential group members can't or don't want to commit the necessary capital to the captive, he said. Meanwhile, traditional market insurers “are fighting tooth and nail to keep them...cutting prices to the bone, even below what it should be, to keep them out of the groups,” Mr. Young said.

In addition, as with ProBuilders, the exposure base on which groups generate premiums is down. “In some cases, premiums are down 50% or more,” Mr. Young said.