Insurance Related Applications

Stronghold has developed a range of insurance related applications with applications to insurers and those needing coverage no longer available.

CAT Bond | Sidecar Alternative

• CAT Bond - Catastrophe Bond, developed as high-yield risk-linked investments that provide catastrophe risk protection to insurers, while offering returns to investors uncorrelated to conventional asset classes. CAT Bonds have become key instruments in alternative risk transfer markets, especially for natural disaster coverage.

• Sidecar - Developed as an insurance agreement referring to a reinsurance or risk-sharing arrangement in which a third-party investor provides capital to support a specific block of an insurer’s or reinsurer’s risks - typically on a quota share basis. These agreements can temporarily increase underwriting capacity, especially in high-risk or catastrophe-prone sectors like property or natural disaster insurance.

Stronghold solutions, can incorporate the functionality of CAT Bonds and Sidecars while providing attractive terms and conditions(principal protection, regulatory treatment, risk-adjusted return) unavailable in CAT Bonds and Sidecar agreements. Like CAT Bonds and Sidecars, Stronghold-designed bonds have low correlation to conventional asset classes.

Alternative to self-insurance

Insurers have deemed certain risks uninsurable, e.g., damage to above ground power lines in hurricane areas, wild fire damage, and other climate change aggravated risks.

The parties at risk have no alternative but to assume the risk if they intend to continue operating in the area at risk.

If the risk manifests due to substantial damage (e.g., to power lines from a Cat 5 hurricane), it can dramatically impact their financial position.

Example: A utility needing to manage hurricane risk purchases a bond. The Program sets up reserves to cover the principal guarantees and operating costs of the offering. Additionally, the Program operates an insurance program from within the protected cell. The initial capital of the performance investment serves as reserves against hurricane damage claims from the utility. The utility pays annual premiums to the protected cell adding to the Program’s capacity to pay claims.

If a hurricane event occurs, the Program can rapidly respond to cover (to the available limit) the utilities claims.
If a hurricane event does not occur (as example for 5 years) the utility can expect that the Program (due to the accumulation of paid premiums) can redeem the bond.

A Program can size to cover one or more hurricane events.

Mutual Insurer balance sheet enhancement

A mutual life insurer wants to expand its business but lacks access to equity markets (since it has no shareholders).

To proceed, conventionally, the mutual company would issue a $100 million surplus note, with a 30-year maturity and interest rate (typically a premium over 30 year US Treasuries). The funds count as surplus on its statutory balance sheet, improving its risk-based capital ratio. However:

The company must obtain regulatory approval before making interest or principal payments.

If the company becomes insolvent, surplus note holders rank behind policyholders in the claims hierarchy.

Risks include:

• The mutual company may defer payments or a regulator can deny payments during periods of financial stress.

• Subordinated status makes surplus notes riskier than senior debt.
  Typically unrated, subject to regulatory restriction, and illiquid in secondary markets.

Stronghold Solution

• A mutual company purchases a Stronghold-designed bond. The Program (i) sets up reserves to cover the principal guarantees and operating costs of the offering and (ii) purchases a surplus note from the mutual company.

• The Program can extend a flexible deferral of interest payments on the surplus note (which can incorporate a low loan maintenance payment) and accept a subordinate status.

• The associated bond’s Tier 1 capital treatment provides liquidity options.

• If the mutual company’s expansion of its business succeeds, the repayment of the surplus note can facilitate the redemption of the Program issued bond.

Acquisitions

Similar to the above described solution a stock insurance company that wants to raise cash to implement a specific business plan can engage in a Program. Rather than purchasing a surplus note, the Program would purchase preferred shares. Features include:

• No reliance on capital markets

• No dilution of shareholder’s interest

• Favorable accounting and regulatory treatment.