amount is on the small side (say $300,000), LOCs might actually be less expensive than a trust (even in this market). The reason: a $300,000 LOC might cost a captive $3,000 per year. The trust would likely cost about that much, and the carriers often don’t like to incur the extra effort required to establish a trust if the client doesn’t stand to gain anything.
2) Financial standing: If the financial standing of the grantor is precarious, the carrier may not want to have a trust in place, thinking a Chapter 11 filing might be on the horizon.
3) Client is no longer with the carrier: Since the trust is considered a concession by the carrier, it takes more time to set up and monitor. Some carriers are reluctant to spend time and capital on programmes in run-off.
Other factors are considered too, such as the overall relationship with the client and the banks involved.
Preferred trustees Most carriers have a list of preferred or required trustees they use
for these trusts. Of course, Wells Fargo is on nearly all of those lists, but the important thing to remember here is that if a carrier tells you which banks they would like you to use, they have good business reasons for doing so. The carriers already know that the banks they have approved are experienced in the nuances of insurance and reinsurance trusts. They know that their preferred banks ‘know what they are doing’. Additionally, the preferred trustees have already
negotiated the agreement with the carriers, which will save a lot of time and legal expense.
Investment strategy within trusts
When considering a trust, keep in mind that the investment income belongs to the depositor. However—and this is a big however—the trust should not be used as a way to maximise investment return. Trying to maximise return means that the trust money is invested in things that are a little more risky and a little more volatile in their day-to-day market value, and because of this fact, most carriers only allow for very safe and liquid investments within the trust. The trust should be viewed as an option to eliminate credit costs, while maintaining the assets on your books and collecting the conservative investment income.
Finally While we can’t say that the trust is the perfect option for everyone,
it is a great option for most. It will save most of your LOC fees, free up your credit availability and, unlike LOCs, does not need to be renewed each year. The big question, and the one that I can’t answer, is whether or not your carrier will accept one for your programme. But that is an easy phone call to your underwriter.
Mike Ramsey is vice president, Wells Fargo Collateral Trust. He can be contacted at:
michael.r.ramsey@wellsfargo.com
US Captive . April 2011 33
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