O’Hara close to launching major new insurance product

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Former XL CEO Brian O’Hara is close to opening the door to what he believes could be a significant new line of business for the Bermuda insurance market.

Through a Bermuda company called Front Street Advisors Ltd, Mr O’Hara and his partners have been working on creating a form of insurance that would allow banks to count the intangible assets of their borrowers, such as intellectual property, as collateral, thereby easing their capital requirements.

Speaking at the Insurance Day Summit in Hamilton yesterday, Mr O’Hara said partners involved in the initiative had been working on a model based on the idea for two decades. The group has been in talks with underwriters on the Island in a series of meetings over the past year, he revealed.

Bermuda was the one place with the concentration of talent and capital necessary to bring the idea to fruition, he said.

The Financial Times reported this week that some banks have been exploring whether they can use intellectual property assets to reduce their estimated losses in the case of a loan default.

The difficulty of putting a dollar value on trademarks and patents, for example, has always been an obstacle. An insurance contract through which the insurer agreed to buy the intangible assets for a fixed price in the event of a loan default could help to apply a value to them.

The advantage for banks is that it could help them reduce the risk weight of the loans in question and thus reduce the amount of capital to be allocated.

Such an insurance product could gain traction in an increasingly knowledge-based economy, in which an ever larger proportion of the assets of companies are in the form of ideas rather than tangible assets like buildings and hardware. This is particularly true of technology and biotech firms.

Also, banks would welcome the chance to ease capital requirements at a time when regulators are requiring them to hold more capital.

The FT reported that one such deal was close to being submitted to the US Federal Reserve for regulatory approval.

Front Street Advisors Ltd was incorporated on March 3 last year, according to the Registrar of Companies.

Mr O’Hara retired four years ago after 14 years as CEO of XL, having been the insurer’s first employee 26 years ago. He told delegates that his new company was dedicated to innovative ideas for the insurance industry.

“One idea is that insurers can insure intangible assets on the bank loan portfolio that can provide collateral credit that heretofore does not exist and then lighten up the capital expense on the banks,” Mr O’Hara said.

“When I looked at it a year ago, it’s complicated, had never been done before, very daunting. But I thought if ever this can come together, there’s only one place it could happen — and that’s Bermuda.

“What we’re talking about with this product is that if you don’t have at least $1 billion or $2 billion of capacity, then there’s no point even beginning.

“There is nowhere else that you can get a variety of companies with that kind of capital and that kind of expertise and the collaborative DNA that could get their minds around the complexity and challenges of investing something new like this.

“So I started rounding up groups of underwriters last year and had three or four meetings. My partners have been developing this model for 20 years. We’ve socialised and educated a group of underwriters here on the Island to the point that we’ve developed a lead. We’ve done thousands of hours of due diligence.

“On the other side we have a bank — I can’t go into names because of confidentiality agreements.”

He hinted that the product envisioned was close to becoming a reality, saying “in American football parlance, we’re in the red zone”.

“If we get over the goal line, we might have developed a large, significant line of business for the Bermuda market and, at the same time, helping out the economy and the banks, who have a high cost of capital,” he said.

“There’s nowhere else in the world that you can walk around in one square mile and talk to billions of dollars of capacity and develop something of this nature and size.”

He added that he was also looking at a new model for run-off of discontinued lines of business, revolving around a new legal approach to run-off.

“To make it work, a special purpose vehicle would be ideal to post collateral to give comfort to the run-off company that it would work and with reinsurance behind it, if it doesn’t work,” Mr O’Hara said.

Bermuda introduced a new classification of ‘special purpose insurer’ in late 2009, which has been used primarily for the formation of sidecars and catastrophe bonds, but Mr O’Hara saw possibilities for a wider range of uses.

Mr O’Hara touched on the growing convergence between the capital markets and the insurance industry.

“There’s a new arm developing in the Bermuda market that we call ‘Hedge Re’, where you have a merger of the capital investment market and the underwriting market. It’s something we’ve talked about for decades but it’s taking place right in front of our eyes now, big time.

“That’s where the action is taking place. It’s unlikely we’re going to see another class like 2001 or 2005, because there is ample capacity of underwriting platform and talent embedded in Bermuda already. It’s all about capital.

“Even after last year with the huge losses in the market, it didn’t hit the capital. We have plenty of capital for the normal challenges but to meet the peak risk challenges, we need capital that can come and go and that’s what the beauty of the sidecar is.”

Asked what were the biggest threats to Bermuda, Mr O’Hara said: “As Pogo [a comic strip character] said, ‘We have met the enemy and they are us’.”

He said he had attended a dinner with Premier Paula Cox at Camden on Tuesday evening with many other business leaders. There had been some “missteps” over the past year, he said, but he was pleased to see the Government was taking account of the business view.

“We have to be careful that we don’t kill the goose,” he said.

The new Solvency II rules being introduced by the European Union, which will bring enhanced capital and corporate governance requirements, had been seen by some as “an opportunity to put Bermuda out of business”, he said.

That was not the way it had turned out, thanks to the efforts of the Bermuda Monetary Authority and its collaboration with the industry on enhancing insurance regulation moving the Island towards equivalence.

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