OHaras insurance project could generate $1b in premiums for Bermuda market
Former XL CEO Brian OHara says he and his business partners are on the goal line as they seek the go-ahead from regulators to pursue a new product that has the potential to generate $1 billion in premiums for the Bermuda insurance market.
Speaking at the Ernst & Young P&C Insurance Outlook event this week, Mr OHara said regulators had been examining the proposal of his group, Front Street Advisors Ltd, for insuring the intangible assets of banks.
Were on the goal line, Mr OHara told a 200-strong audience at the Fairmont Hamilton Princess.
Weve been educating the underwriting industry here in three or four meetings over the last year and the banks.
The bank capital management people are a little leery of going into their regulator and are wondering what sort of reaction theyre going to get.
Mr OHara said the top regulatory lawyer in Washington, DC, was working to educate the regulators on the new product.
They say theyre making good progress, so we think we may be getting the green light before too long and be able to contribute a new product to the market, he said. We have lead established, with a $200 million line.
To make this of any relevance to the top ten banks in the US, youve got to bring $1 billion to $2 billion of capacity. We think we can generate that amount on the right terms — call it $50 million to $60 million premium times ten banks — then youre talking about half a billion dollars of premium.
As you move down the banking chain, I could see how it could become a $1 billion product line in the no-too-distant future.
He said the project had been a year-and-a-half in the making and started when a group of people approached him with an idea to insure banks intangible assets.
The bank gets collateral credit for tangible assets like equipment, so if we insure those banks intangible assets, they should get more collateral credit and reduce the capital charge to the bank, Mr OHara said.
At the same time it creates a new product line for the insurance industry thats uncorrelated and is without most of the risk that is in the business right now.
Particularly since after the crisis, insurance companies balance sheets have reduced their exposure to financial credits dramatically, so theres no real overlap and the timing is great.
He added that the product could come into play in a liquidation, which he added was a pretty rare event for creditworthy corporations, since most bankruptcies ended up in reorganisation.
Intangible assets could include intellectual property and brands, while tangible assets include plant and equipment.
Mr OHara cited the case of Twinkies manufacturer Hostess Brands as a good example of the value of intangible assets.
Theres no way in this liquidation that theyre going to get the insured value of their truck fleet, or the insured value of their plant and equipment, but the big assets they have are the brands, he said. The vultures are circling to bid on them.
The Financial Times reported earlier this year 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.
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