18 SAVING AN RRG www.captiveinternational.com
We had looked in detail at the claims and
the remaining live policies on the book, and
looked at the reserves, the claims handling
opportunities and the potential return and
decided it was an economically sound case,
although with significant potential downside
risk, for us.
Bluntly, the discount to net assets that the
seller accepted, combined with our ability
to manage run-off successfully, was our
opportunity for a profit.
At this point, I should also be fair to the
fronting company who worked with us—its
agreement was integral to this process. Its view,
a little like Montana’s, was that they wanted a
professional run-off company managing the
business to closure.
The elephant in the room
What about the fact that the company was now
a captive, not an RRG, and it did not have the
licences to do business in any of the 52 states
other than Montana?
The answer to this was a pragmatic approach
by MID. The company did have live policies when
we purchased it, but was not, obviously, writing
new business. Montana looked closely at the
risk retention legislation which essentially
stated “doing insurance business” in the 52
MID took the view that “doing insurance
business” meant underwriting but not paying
claims or managing the run-off. Their view, on
balance, was that they were prepared to have
the argument with states that took a different
view on the definition of doing insurance
business. For Montana this was a practical
approach that enabled a successful transfer.
Again, taking a simplistic view, and thinking
about state regulators—are they really going
to stop a captive from another state, when it
is trying to pay promptly the valid claims in
the home state, from paying those claims, just
because it might not be licensed there?
This solution was the product of several
parties working together—the seller, the buyer,
the front company and the regulator—to get to
the conclusion everyone wanted. It involved a
lot of time, cajoling, consulting and persuading
and I give credit to cleverer people than me in
I do believe that with an unerringly positive
approach—‘we can solve this’, rather than ‘you
can’t do that’—to what was essentially a big
cat-herding exercise led to a great outcome for
all concerned. l
Stephanie Mocatta can be contacted at:
Lloyd’s Names had unlimited liability: they
signed up to their last cufflink. Then came those
syndicate names that can still send a shiver of
fear down the spine of a few of us: Outhwaite,
Cuthbert Heath, and Merrett to name a few.
These losses were so large that those Names,
even with every cufflink piled up, could not
possibly make the payments.
It was at NewCo, where we had to work
out how to get enough money in to pay future
losses and the theoretical unlimited liability
of the Names did not help us, that I first came
across the myth of unlimited liability. The lesson
perhaps is that unlimited liability sounds great,
but doesn’t necessarily help.
Back to Montana and the unlimited liability
of the members of the RRG. Montana was
swapping a theoretical unlimited liability in
exchange for two things from SOBC Sandell:
• A professional company managing the run-off
whose significant interest was completing
the run-off solvently—so we could make
some money; and
• SOBC Sandell provided the LOC to make the
company liquid—without which nothing
could move or be settled.
Essentially Montana got cash now vs potential
future cash that it might never get and would
probably have to go to court for.
The seller sold at a discount to net assets
to SOBC Sandell as it did not have the skills,
or the desire to manage the run-off itself. As
the membership reduced, and the concurrent
premium reduced, the situation became more
acute for those remaining members, all with
Further, it did not have the financial resources
to put up the LOC or any other form of cash and
make the company liquid once more. Finally it
did remove the spectre of unlimited liability.
Why did SOBC Sandell buy the company?
was the product
the seller, the
buyer, the front
to get to the