Robert Quinn

Vice president, collateral trust division, Wells Fargo Insurance Trust

With LOC prices still going up, it is time to do something about it, says Robert Quinn.

As I sit in my hotel room after an outstanding CICA (Captive Insurance

Companies Association) conference, I am reflecting on some of the more interesting conversations that I had here. The booth traffic was great, and the speakers at the conference were not only informative but also (for me, at least) very entertaining. In fact, I moderated a panel discussion on collateral alternatives that seemed to have been very well received. Peter Rapciewicz from Chartis and Mike Ramsey from my team at Wells Fargo participated and did their respective firms proud. Other than my usual attempts at silly humour, I won’t comment much on my participation…but I would like to comment on what I observed.

CICA 2010

Attendance at the conference and the ‘collateral alternatives’ session

was very strong (stronger than most other sessions I have delivered). That was a clear indication to me that collateral, in all of its forms, is of great concern for captive owners and corporate treasury groups. Unfortunately, for those that follow my articles and have seen some of my presentations, there were no ‘smack-downs’ at this one.

I have always believed that evaluating how well a session is going is

best measured by audience participation. I have attended sessions where you could hear crickets singing after the speakers asked: “Are there any questions?” This one was different.

While the panelists did, in fact, discuss all of the alternatives (and did

so fairly), the questions were nearly all centred on the one alternative that seems to be gathering so much attention—the insurance trust. I suspect that since nearly everyone currently uses letters of credit (LOCs), there aren’t many mysteries out there about them (except for maybe why they cost so much!). But the number of questions about trusts, how they work and the benefits of using them has compelled me to repeat them here, together with the answers that we gave.

First, what is an insurance trust?

Rather than post LOCs to their insurance carrier to cover their collateral requirements, insurance trust users simply place their

captive’s cash or cash equivalents into a trust account at Wells Fargo and pledge the trust to their carrier. When they do this, the trust is the collateral and the need for the LOC is eliminated—and so are the fees for said LOCs.

What is the least expensive collateral alternative?

Without going too far into it, I will say that using a trust in lieu of an

LOC will likely save you most, if not all, of your LOC costs. When the audience was asked how much they generally pay for their LOCs, most said around 75 to 100 basis points (BPS). But some actually admitted to 200 and 300 BPS for their LOCs (special note: those LOCs that are in the lower range are usually cash-collateralised). How an LOC-issuing bank issues LOCs on a fully collateralised basis for that kind of money is beyond me. But hopefully the readers of this article, and the attendees at the CICA session, have come to realise that there is a better, less expensive and more efficient way to do this.

If you use a trust in lieu of an LOC, then the costs are often 90 percent

less than that of an LOC. In some situations, the savings are more; though in some, they are not as much. But in nearly all situations, the savings are enormous. And in this day and age, every bit helps.

How is my ability to earn a rate of return affected by the alternatives?

This subject comes up, without fail, at every session I either deliver

or attend. LOC-issuing banks will tell you that while LOCs do cost more than insurance trusts, the LOC collateral account will allow for more aggressive investments, therefore negating the extra cost of the LOC.

Well, there is more to it than that. The real issue isn’t what the

captive could invest its money in (whether a trust or LOC collateral account). The real question is what is the captive investing in. My assertion is this: a captive might earn more money investing in sub- investment grade bonds, dot-com stocks and the like (assuming they aren’t taking losses, which are often big on such investments). But

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