Treasury & Risk - December 2010/January 2011

COMPANIES ARE NEGOTIATING WITH INSURANCE CARRIERS TO REDUCE THE
AMOUNT REQUIRED TO BE SET ASIDE, AND LOOKING FOR ALTERNATIVES TO LCS.
Collateral Concessions
THE CFO OF A $4 billion cleaning company that had $175 million tied up as col-
lateral for its insurance coverage recently found himself across the table from the
chief credit officer and chief actuarial officer of his company’s carrier. His goal: Get
the insurer to agree to reduce that collateral requirement, which ate up 75% of the
company’s credit revolver. Marsha Linton, national practice leader for Wells Fargo
Insurance Services USA, who was helping this company negotiate its policy
requirement by $20 million in the
first year and another $17 million
in the second year.

renewal, says that by conducting a “thorough review” of the company’s financials as well as its third-party actuarial calculations and vetted loss projections, the CFO was able to convince the carrier to reduce its collateral

“You should do your own
actuarial analysis,” he says, “and
get a sense of what the carrier is
going to ask for. Push the carrier
to disclose its own analysis. Often
they don’t want to, because often
it’s not very defensible.”
Companies also need to pres-
ent their own, independent credit
analysis, Fay says.

Insurers require collateral to guard against the risk the insured company might fail to pay future premiums or retained losses, particularly in the event of a bankruptcy. But increasingly, companies confronting the need to conserve cash and maximize access to credit and facing a relatively soft insurance market are challenging carriers’ collateral demands. In many cases, they can win significantly better terms.

Letters of credit (LCs), the most common form of collateral, have become more costly since the financial crisis in 2008. Another approach some companies are taking is to substitute other forms of collateral for LCs.

The key is dealing with a company’s insurance needs strategically, says Jim Fay, a managing director at Corporate Risk Solutions in Atlanta. “This is not something you should start thinking about 90 days before your renewal date,” Fay explains, suggesting companies start to prepare six months in advance.

Tim DeSett, executive vice president for financial solutions at Lincoln Financial, says insurers are often willing to accept bonds instead of LCs. He cites the case of a company Lincoln advised that was able to replace one-third of its LC collateral with surety bonds. “That is an off-balance-sheet transaction,” DeSett says, noting that LCs get reported on the balance sheet as a liability, besides being generally costlier than surety bonds.