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To Buy or Sell... THAT is the Captive Question

Andy Hulme, SRS EVP of Underwriting 
January 19, 2024

A Primer on Buying and Selling a Captive Insurance Company

The decision to buy or sell a captive insurance company isn’t made that often but can be a significant strategic opportunity under the right conditions. For potential buyers, acquiring a captive can mean diversifying risk portfolios, tapping into established underwriting capabilities, or expanding into new markets. Sellers, on the other hand, might consider this route for reasons including consolidation, capital release, or a strategic shift away from certain risk profiles.

If you’re considering purchasing a captive, the first steps are assessing the captive's financial health, understanding its risk profile, its state of regulatory compliance and valuating its assets and liabilities. This assessment helps determine the captive's true market value. A thorough due diligence process will examine closely all aspects of the captive – from its financial records, its claims experience, to its governance history.

If you’re considering selling your captive, you will need to have a comprehensive document repository and a clean set of financial records to present. These are the most important tools to help potential buyers understand the captive's operations, its governance and financial health.

Throughout the buying or selling process, managing relationships with stakeholders, including regulators and existing managers, is vital for a smooth transition.

Why Buy or Sell a Captive?
One common reason to sell a captive is market/industry consolidation. Companies that acquire multiple captives through mergers or acquisitions may find overlaps in coverage. Selling redundant captives can streamline operations and reduce overall costs and capital consumption.

In other cases, selling a captive might better align with a change in a company’s strategic direction. This is especially true if certain risks are no longer relevant to the direction of the business or if there's a need to free up capital for other purposes.

On the buying side, acquiring a captive can provide opportunities to expand into new jurisdictions (perhaps benefiting from alternative legislation - i.e. cells, or alternative markets such as Insurance Linked Securities), or acquire legacy portfolios to diversify existing coverages.

Getting it Done: Cell Structures and Transformers
For captive owners exploring short-term objectives or specific risk profiles, utilizing cell structures or transformers to support their captives can be a strong strategic move. Cell structures, allowing legal segregation of assets and liabilities, offer a flexible and cost-effective way to manage diverse risks. Transformers, on the other hand, enable captives to bridge traditional insurance with capital markets, providing innovative risk transfer mechanisms.

Insights for Captive Owners
The decision to buy or sell a captive insurance company carries significant strategic weight. Throughout the process, never forget the importance of reputation management. In both buying and selling, foreseeing and managing reputational risks is essential for all stakeholders.

From the outset a clear exit strategy or end goal is needed for the captive. Developing this type of strategic vision can help guide decisions on whether to maintain, consolidate, or sell the captive. Captives with long-tail liabilities add complexity to the deal and must be carefully managed to ensure a clean transfer. As an example, coverages like workers' compensation typically have claims that pay out for many years, potentially decades.

Experts and Advisors are Needed.
Navigating the complexities of buying or selling captives, especially in sectors with extensive and long-term liabilities like pharmaceuticals, chemicals or energy and mining requires expert guidance. Boards of Directors will be looking for the input from professional advisory firms like SRS. They can offer expertise a corporate CFO or risk manager may not have, such as stakeholder management, regulatory compliance, and advice for strategic restructuring of captive insurance companies, all of which help ensure a smooth transaction.

Hold on, or let go?
Whether you're considering expanding your risk management capabilities or streamlining your corporate structure, it’s important to understand the nuances of the captive insurance market. The sale or acquisition of a captive insurance company isn’t just a financial decision; it's a strategic maneuver that can positively impact a company's risk management profile and performance. With careful planning, clear objectives, and expert guidance, captive insurance owners can develop new capabilities for their future risk management strategies.

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