How CFOs can release liquidity from the insurance ‘collateral jail’ | Business Insurance

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Pressured by skyrocketing inflation and shrinking capital-raising opportunities, some CFOs are turning to an emerging financial instrument that frees up liquidity tied to “trapped” insurance collateral by removing letters of credit from the balance sheet.

Known as insurance collateral financing, the financing product is designed to solve a problem that has long plagued treasurers and finance chiefs who opt for so-called loss-sensitive policies to lower their workers’ compensation premiums, commercial vehicles and other company insurance. according to Stephen Roseman, CEO and founder of 1970 Group, a venture finance provider that began offering the product when the company launched in 2020.

While loss-sensitive policies lower premiums, insurers require companies to post collateral to cover the higher risk, and insured companies often use a bank letter of credit (LOC) or put cash on deposit to do so, that effectively reduces liquidity, Roseman said. he said.

To address that problem, 1970 Group works with a network of partner banks to issue letters of credit on behalf of the insured company and transfers the collateral requirement off the company’s balance sheet. “By working with us, you can immediately cancel your letter of credit with your existing bank, thereby restoring the full amount of the installation,” said Roseman. Companies can then redirect capital to address a variety of strategies, such as growing through acquisitions or, in today’s volatile environment, helping them address the cash flow issues they face, he said.

A $300 Billion Problem

“We estimate that there is $300 billion in collateral trapped, what is known in the industry as collateral prison or collateral handcuffs,” Roseman said in an interview, noting that loss-sensitive insurance is a cost-containment route that the market Middle and largest corporations take insurance costs as their grow. “Its a big problem. We are solving one of the most common pain points that exist in American companies.”

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Collateral financing normally has a term of one year which generally coincides with the annual policy that guarantees, rosary beads said. He declined to give a range of the hosting fee the group charges, but said it is tied to rates that are set according to a company’s credit profile, with lower investment grade companies paying more than investment grade. investment.

Roseman, a 25-year veteran of the finance and insurance industry, had long observed the unlocked potential of insurance warranties. He has held positions as chairman and board member of Spencer Capital Holdings and chairman of USA Risk Group, according to his LinkedIn. When the company was established in January 2020, it enjoyed an unexpected headwind as companies in stressed sectors struggled to find more liquidity.

“We didn’t plan for it when we set up the business, but the side effect of the pandemic was that it was a benefit.” Roseman said. At first, the demand came from hospitality companies. pressured by closed hotels, aerospace companies and retail. He later said that there was an increase in demand from energy companies. He now he sees again more demand in the midst of the uncertain macroeconomy and with insurance premiums along with the guarantee amounts required by operators on the rise.

“The appetite to learn about what we do has increased dramatically,” he said, adding that companies “need to find a way to mitigate some of this loss of liquidity to weather the storm.”

Rising insurance costs are among the many increasingly costly inputs CFOs face as they manage growing sales, general and administrative (SG&A) challenges. In the first quarter of 2022 Global commercial insurance prices increased 11% though the rate has moderated since reaching its recent peak of 22% in the fourth quarter of 2020, according to the Marsh Global Insurance Market Index.

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Brian Cohen, founder of managing general underwriting firm Arden Insurance Services, said he turned to 1970 Group to help him meet a similar collateral requirement in 2020. The move allowed him to grow his company rather than put up cash to meet warranty claims.