Enter the collateral trust For many years, our group has been travelling the country


meeting with brokers, captive managers and treasurers to explain the collateral trust alternative, how it works, and what its benefits and limitations are. Our discussions invariably gravitate to the issue of carrier acceptance. Although we don’t and can’t speak for the carriers, we do offer up generalities on what we have seen. Fortunately for us, our group only works on insurance-related collateral trusts, which has allowed us to focus exclusively on this special market. This specialised focus has helped us better understand the carriers and their individual requirements. When evaluating the trust option, it’s important to note that a trust requires a tri-party agreement, which consists of a grantor—the entity actually funding the trust; the trustee—which would be the bank asked to administer the fiduciary duties associated with the trust; and the beneficiary—the entity requiring the collateral. Once all three parties have signed the trust agreement, the trustee provides wire instructions, the trust is funded, and it’s done.


Like any business decision, there are benefits and limitations that


must be weighed when analysing the trust option. The benefits include significant cost savings, depending on a few factors such as the collateral amount and your cost of credit, favourable accounting treatment and ease in adjusting the collateral amount over the life of the programme. To be clear, the trust must be funded with investment- grade financial assets. For captives that have cash-collateralised LOCs, the trust is usually a very easy decision. I say this because the


The insurance trust team at Wells Fargo has great relationships with


most of the carriers asking for collateral for these programmes. We clearly understand that the carriers have to look at the situation before they allow for alternatives to LOCs. Some of the factors the carriers look at when deciding on which collateral options to allow for include:


1) Collateral amount: Some carriers prefer to see a significant collateral amount before they will entertain the idea. When the collateral


same cash that is being used to collateralise the LOC can be placed in a trust, thus eliminating the LOC fee completely.


The carriers’ perspective


For reasons mentioned earlier, carriers have been more willing to accept trusts in lieu of LOCs than they were in years past. That said, it’s important to note that carriers don’t patently accept these trusts from everyone. Acceptance of the trust by the carrier is usually decided on a case-by-case basis, with several factors determining the decision.


A few carriers might charge a nominal fee to help cover the cost of establishing these trusts and monitoring them for compliance. These fees, along with the bank’s trust fees, are, generally speaking, still considerably less than most LOC fees—often 80 to 90 percent less.


I have had a few clients interested in a trust, only to find out that the


carrier wouldn’t allow for it in its situation. For this reason, I always preface trust discussions with this comment: it is solely up to the carrier to decide if a trust will be allowed. You should approach it first before getting too far down the road in setting one up.


Montana Naturally Captivating


Montana has been a captive domicile since 2001 and enjoyed another successful year in 2010. We boast a dedicated and experienced regulatory team that is responsive to the developing captive landscape and one that is open to new ideas. Our captive laws continue to evolve to keep current with industry innovations. Recently, our captive laws were updated to include provisions for incorporated cell formations.


Montana has much to offer your captive entity, so why not come visit us at our website: www.csi.mt.gov or contact Steve Matthews our Captive Coordinator at 406-444-4372.


32 US Captive . April 2011


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