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Captive Insurer Established in Connecticut Offers Look at SOBC Corp. Process

New Management
November 30, 2016

In 2015, SOBC Corp., a US operating company domiciled in Delaware, formed and licensed SOBC Insurance Company Ltd., a sponsored captive insurance subsidiary in Connecticut. This offers an opportunity to learn from the SOBC Corp. leader about the acquisition process for distressed insurance companies and risk retention groups (RRGs). reached out to Stephanie Mocatta, president and CEO of SOBC Corp., who is based in London, to discuss SOBC and its US activities.

Thomas F.X. Hodson was initially named a director of the new subsidiary. Earlier this year, he accepted the position of general counsel for SOBC Corp. Mr. Hodson is also the president of the Connecticut Captive Insurance Association.

"SOBC is a private company that specializes in the acquisition and management of distressed insurance and reinsurance entities," according to Ms. Mocatta. Historically, and to date, it has completed 14 acquisitions. SOBC Corp. also provides risk financing, management, and claims services for loss portfolio transfers.

"The purpose of its Connecticut-sponsored captive is to support the transactions of the parent company in the acquisition of distressed insurance companies and RRGs." Ms. Mocatta continued. "SOBC Insurance Ltd. specializes in runoff contracts and provides reinsurance on companies that have been acquired by SOBC Corp. The advantage of the sponsored captive arrangement is that assets and liabilities of each acquisition can be segregated, protecting each cell while offering enhanced investment opportunity.

"In a way, you could say that we occupy a 'niche,' Ms. Mocatta continued. "SOBC Corp. looks at small opportunities, many in the RRG world, that are frequently overlooked. Typically, these are financially troubled RRGs with complex and difficult structures. The messier the problems are, the better we like it. SOBC is not turned off by the long-tail liability business of the United States. We also will acquire redundant captives that are in runoff."

Below, Ms. Mocatta outlines the process of acquisition.  

Before SOBC Corp. acquires an RRG, the first thing we are required to do is conduct a "due diligent" review of claims, underwriting, financial statements, investments, and loss reserves. ... Unique to RRGs are the membership agreement, ownership, structure, board governance, and the regulatory environment. For example, an RRG that has a large number of members makes it more of a challenge in obtaining approval for the acquisition. Also with RRGs, you typically will have only one regulator to deal with versus a licensed insurance company where you may be dealing with multiple state regulators.

Once SOBC has acquired a troubled RRG, there are a number of necessary steps in settling their issues.

Foremost, we need to write a business plan. We will periodically revisit the plan and adjust it as needed throughout the process. We have found this periodic update of the business plan to be invaluable especially with more problematic acquisitions. In these cases, it is sort of like the "Whack-A-Mole" game, as fast as we resolve one issue, another will turn up.

Next, we will focus on cleaning up the balance sheet.

First, we work on quickly settling claims. SOBC tries to use a pragmatic, balance sheet approach to claims settlement. This will help to reduce the uncertainty of the loss reserve on the balance sheet. If necessary, we will provide the liquidity to pay claims in order to move the plan forward. At the same time, SOBC will work diligently on any litigation to make sure settlement is fair to all parties, while trying to bring quick closure.

Second, we maximize reinsurance recoveries of claims. Because we have a UK operation, should the RRG have London reinsurers, we are able to work more closely with them.

Third, our goal is to make the investment portfolio liquid in order to meet the financial obligations of the RRG. SOBC has partnered with Sandell Re, which is a company that specializes in providing liquidity from investment portfolios. The aim is to reduce the investment risk of the acquisition.

Fourth, if the RRG management has staff, we try to keep as many as possible to help with the transition. Generally, we have found that about 75 percent of the staff are able to help "brilliantly" with the process. Their knowledge of the RRG and its members has proven helpful with past acquisitions.

Everything that we do when acquiring an RRG requires us to work with the state insurance department regulators. We need to separate acquisitions into two categories: those that have already been taken over by the state insurance department and those that have not.

In the first category, our direct contact will be mostly with the regulators. In the second category, we will still work closely with regulators, making sure to keep them up-to-date throughout the process. But, of course, in this type of acquisition, we are also working with the board of directors, membership, management, and other parties.

"Do you find being a UK company an advantage or a disadvantage in the US market?" asked Ms. Mocatta.

"I have actually found being partly based in the United Kingdom to be an advantage," she responded. "Because SOBC is an 'outsider,' we have no history and no baggage and lend an objectivity to the transactions. We also bring solid business experience and, yet at the same time, a new mind-set on settling claims and resolving balance sheet problems."

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