Addressing a Corporate Structure Issue

Transcription

1 Addressing a Corporate Structure Issue BLENDED STRUCTURE Industry Manufacturing Motivation A manufacturer of safety products believed it had adequate insurance and cash flow to cover its silica claims, but management wanted added protection in case the limits were exhausted. It generated sufficient excess profits to fund a long-term structured insurance program; being a Subchapter S corporation, it would have had to distribute all of these excess profits to shareholders. In addition, management sought to benefit from the expected favorable loss experience. Structure A blended structure combining client funding and risk transfer Occurrence form, with no specific retroactive date, covering claims paid until limit of liability is exhausted, or policy commuted The company was provided the option of purchasing additional limits at a predetermined rate and subject to a maximum aggregate limit at any time within the first three years Term Three years Coverage(s) Silica bodily injury coverage Limit Initial aggregate up to $4 million with the option to purchase an additional $20 million in aggregate limits The policy reimburses the company for 100% of losses up to the experience balance $1 million per claimant, after which the policy provides $500,000 of limit per claimant Notional Exp. Balance $2.8 million; $14.3 million if additional limits purchased Provides annual policy limits that reimburse the company for paid claims not covered by existing insurance Provides protections that would otherwise be unattainable due to the company s corporate structure

2 Brand Protection Insurance (BPI) Coverage CUSTOMIZED RISK TRANSFER Industry Food and Beverage Motivation A multinational company wanted a long-term strategic solution to protect itself against certain costs, expenses, and lost profits caused by adverse publicity resulting from the actual or alleged contamination of any of its products, and the resulting damage to its brands. The traditional insurance market for this type of coverage is very volatile and generally narrow in scope. Structure A customized risk transfer solution Coverage triggered by widespread media reports of actual or alleged contamination of the insured s product, whether accidental or malicious, that would result in bodily injury upon use or consumption, and would indemnify the insured for the following types of subsequent losses: Loss of net profit Crisis containment costs (i.e., expenses associated with the recall, disposal and inspection of the insured s product, crisis management consultant costs) Brand rehabilitation costs (i.e., expenses for marketing efforts designed to reestablish positioning of the insured s brand to pre-incident levels) Term Five years Coverage(s) Brand protection insurance (BPI) Limit $100 million per occurrence and in the aggregate. $50 million per occurrence Protects the insured against the financial losses that can result from actual and alleged contamination of the insured s product, whether accidental or malicious Offers a multi-year solution with stable pricing over the entire policy period Enables the insured to have significant involvement in terms of managing a crisis

3 Construction Defect BLENDED STRUCTURE Industry Construction Motivation A homebuilder is required to have evidence of insurance. Market deterioration as a result of a highly litigious environment prompted the homebuilder to seek alternatives. Structure A blended structure combining client funding and risk transfer Term Five years Coverage(s) Claims made and reported General Liability including Products-Completed Operations (i.e., construction defects) Limit $5 million per occurrence; $5 million aggregate per year; $10 million aggregate for the policy term $500,000 Notional Exp. $6.075 million Balance Provides policy form modeled after standard ISO General Liability policy as requested by homebuilder Offers multi-year solution that allows company to insulate itself from vagaries of insurance market cycle

4 Difficult to Address Risks CUSTOMIZED RISK TRANSFER Industry Financial Services Motivation A global financial services institution had contractual obligations with its clients requiring that it purchase a certain level of Errors & Omissions (E&O) coverage. However, the company found that the insurance market was only prepared to offer it limited capacity at what it believed was exceedingly high retentions and premiums. Structure A customized risk transfer solution to provide proof of a certain level of insurance Term Four years Coverage(s) Claims made and reported Errors & Omissions, Fiduciary and Blanket Bond Limit Excess coverage over retentions; aggregate limits over the policy period of $100 million; the company participated on a quota share basis Variable; between $500,000 and $20 million per occurrence for E&O, Fiduciary and Blanket Bond Allows the company to continue business operations by cost-effectively filling the holes in its insurance program Provides desired retention and significant capacity Enables the company to maintain a considerable amount of control over claims handling

5 Financial Lines Coverage BLENDED STRUCTURE Industry Financial Services Motivation A financial services institution wanted coverage for numerous financial lines exposures, and the coverage sought was broader than the traditional market offered. The company also wanted limits both in excess of existing policies and on a primary basis for certain differences in conditions. Structure A blended structure combining client funding and risk transfer Term Two years Coverage(s) Claims made and reported Errors & Omissions, Directors & Officers, Fiduciary, Blanket Bond Limit $200 million in the aggregate over the policy period Notional Exp. $95 million Balance Variable; between $50,000 and $50 million per occurrence Allows the company to have multi-year coverage and pricing Includes coverage for several difficult-to-insure exposures Provides coverage-specific retentions and significant capacity Enables the company to maintain considerable control over claims handling

6 Multi-Line Aggregate Program CUSTOMIZED RISK TRANSFER Industry Technology Motivation A technology company had difficulty finding the capacity it desired for several different exposures. It also wanted a multi-year solution. Structure Customized risk transfer program covering a basket of different client exposures that were otherwise difficult to insure Term 5 years with the right to extend for an additional 10 years Coverage(s) Patent Infringement, Directors Defense Expenses, Employment Practices Liability, Errors & Omissions, Product Recall Limit Claims made and reported with a substantial aggregate limit for all of the coverages $50 million Provides multiple coverages under one policy Offers substantial policy limits for coverages that were otherwise unavailable Allows the company significant claims control Provides multi-year stability

7 Multi-Year Professional Liability BLENDED STRUCTURE Industry Technology Motivation A large multinational technology company had significant professional liability losses over the previous five years. Losses exceeded the limits of its annual errors and omissions coverage for at least one of those years, and there was a significant risk of recurrence. As a result, the company was facing higher retention requirements and increased premiums upon renewal. Structure A blended structure combining client funding (layer A) and excess risk transfer (layer B) Master policy issued to the parent company and policies issued to local subsidiaries by local AIG insurers Program designed to be reinsured to the parent company s captive under a single contract for multiple reinsureds; the captive would then retrocede all liability to AIG Term Coverage(s) Three years Professional Liability Limit Layer A: 30 million per occurrence excess 20 million SIR; 30 million annual aggregate; 60 million in the aggregate over the policy period Layer B Limit: 20 million per occurrence excess Layer A; 20 million annual aggregate; 40 million in the aggregate over the policy period Notional Exp. Balance SIR of 20 million per occurrence 30 million funded over a three year period Provides the opportunity to fund the primary layer over three years while having the full limit available from policy inception Includes a higher, more cost efficient attachment point for the risk transfer layer Provides multi-year coverage, creating price stability Allows for the potential to benefit from favorable loss experience

8 Offering Dual-Trigger Credit Protection CUSTOMIZED RISK TRANSFER Industry Insurance Mutual Motivation A mutual insurance company with exposure to major catastrophic losses can demand retrospective premium adjustments from its mutual insureds in the event of significant erosion of capital due to the occurrence of multiple catastrophic losses. The mutual wants to protect its insureds from the risk that certain sub-investment grade insureds would be unable to satisfy their requirement to pay their retrospective premium exposure. Structure A customized risk transfer program Upon the event of a covered retrospective premium demand that the obligee is unable to meet due to bankruptcy or insolvency, the policy will indemnify the mutual insurer Term Two years Coverage(s) Dual Trigger Credit Protection Limit The lesser of: (a) the amount of the obligee s actual retrospective premium adjustment, or (b) the maximum individual retrospective premium adjustment Targets coverage to the mutual insurer s specific need, thereby providing a more cost efficient solution than traditional credit protection with less targeted triggers and broader coverage than the insurer needs Offers a cost-efficient solution to members of the mutual against the risk of additional premiums required to cover insolvent members

9 Overcoming an Obstacle to an M&A Transaction CUSTOMIZED RISK TRANSFER Industry Private Equity Fund Motivation A private equity fund (the seller) was negotiating the sale of a portfolio company. The portfolio company had lawsuits pending with a combined potential exposure of $30 million which the buyer was unwilling to assume without an escrow account. The private equity fund did not want to provide an escrow fund because they believed the lawsuits were without merit and they did not want to delay the distribution of cash from the sale. Although the portfolio company had several insurance policies in place that addressed this risk, the terms, conditions, and limits did not provide adequate protection to the buyer. Structure A customized risk transfer program designed to ensure that all exposures resulting from pending lawsuits would potentially be covered Term Until settlement or final adjudication of the specified pending legal actions Coverage(s) Excess Litigation Protection for specified pending legal actions Limit $30 million aggregate and in excess of current insurance policies $5 million, except when the aggregate amount that the insured is obligated to pay is less than $20 million Eliminates the need for seller to tie up large amounts of capital in escrow Provides coverage for the buyer against adverse litigation risk

10 Product Recall BLENDED STRUCTURE Industry Manufacturing Motivation A U.S. manufacturer sought coverage for products recall to satisfy the requirements of its trading counterparties. The price available in the traditional market was not acceptable to the manufacturer. Structure Term A blended structure combining client funding and risk transfer Three years Coverage(s) Product Recall, Coverages A (expenses) and B (liability damages) Limit $10 million per occurrence and $20 million in the aggregate $1 million per occurrence Notional Exp. Function of the deposit premiums (including additional deposits) less loss payments Balance plus interest credited $6 million Meets coverage requirements for difficult to insure layers and products Offers efficient blend of self-funding and risk transfer Provides significant return of premium if losses are low Offers stable pricing over multiple years Allows the insured to benefit from favorable loss experience

11 Residual Value Insurance (RVI) for Commercial Real Estate CUSTOMIZED RISK TRANSFER Industry Commercial Real Estate Motivation Commercial real estate owners obtain RVI to improve the terms of their financing. Generally, lenders require owners to obtain RVI to mitigate the risk that an owner will fail to make the final balloon payment on a loan. Structure Customized RVI policy issued to the property owner with the lender as loss payee RVI limited to commercial real estate leased to credit-worthy tenants Third party property appraisal required Upfront one time premium charge based on the policy limit Term Equal to the term of the loan (typically 15 to 25 years) Coverage(s) RVI coverage insures payment of the balloon payment to the lender at the end of the loan term based on a specified value Limit Maximum limit of $100 million None Reduces overall financing costs for the property owner Facilitates obtaining a higher loan to value ratio Reduces the amount of equity the owner needs to contribute to the financing of the building Facilitates loans qualifying for more favorable NAIC accounting treatment, thereby increasing the pool of potential lenders

12 Structured Insurance for an Energy Company BLENDED STRUCTURE Industry Motivation Energy A large international company with significant property assets had recently suffered very large Property Damage and Business Interruption (PDBI) losses following a natural catastrophe. The client found that coverage in the traditional market was not obtainable at previous rates and that availability of coverage in future years was uncertain. Structure A blended structure combining client funding and risk transfer Guaranteed maximum premiums scheduled across the term The structure allows for the majority of premium to be returned to the insured in the event of no or low loss experience Term Three years Coverage(s) Limit Notional Exp. Balance Property Damage & Business Interruption (PDBI) $300 million per occurrence; $600 million annual aggregate; $900 million term aggregate $175 million per occurrence, $350 million annual aggregate, $700 million term aggregate Function of the deposit premium less loss payments plus interest credited $30 million minimum; up to $75 million annually Ring fences funds for specific risks Locks in multi-year pricing and capacity Offers access to significant risk transfer capacity Provides certainty that coverage will be available in future years Is an economically efficient solution

13 Disclosure AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit our website at All products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Products or services may not be available in all countries, and coverage is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. Certain property-casualty coverages may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds, and insureds are therefore not protected by such funds. Insurance coverage is account specific and is governed by actual policy language. This presentation does not constitute an offer to sell any of the insurance coverage or other products or services described herein. We do not provide legal, credit, tax, accounting or other professional advice, and you and your advisors should perform your own independent review with respect to such matters as they relate to your particular circumstances and reach your own independent conclusions regarding the benefits and risks of any proposed transaction or business relationship. American International Group, Inc. All rights reserved. American International Group, Inc. (AIG) is a leading global insurance organization serving customers in more than 100 countries and jurisdictions. AIG companies serve commercial, institutional, and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange. Additional information about AIG can be found at YouTube: LinkedIn: C031615