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Letters of Credit & Trusts – What One Needs to Know. June 2008. Panelists. Session Coordinator: Kate Robinson AON (Bermuda) On behalf of letters of credit : Colin Freeman Barclays Isle of Man Simon Van de Weg Bank of Butterfield On behalf of reinsurance trusts :
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Letters of Credit & Trusts – What One Needs to Know June 2008
Panelists Session Coordinator: Kate Robinson AON (Bermuda) On behalf of letters of credit: Colin Freeman Barclays Isle of Man Simon Van de Weg Bank of Butterfield On behalf of reinsurance trusts: Bob Rich Bank of New York Robert Quinn Wells Fargo Moderator: Xina Stewart Comerica Bank
Ease of Initial Set Up • Language negotiation • Number of parties involved • Availability of knowledgeable service providers
Ease of ongoing administration Change in LC provider – Who blinks first? Change in Trustee Stacking LC’s Effect on parent company’s credit line Earnings allocation for group captives covering multiple policy years
Investment Options • Trusts • Do beneficiaries accept all the options allowed in the reg? • LC’s • Advance rates? • Non-US investments accepted?
Costs • Trusts • Legal review • Annual banking fees • Collateral monitoring fees • Letters of credit • Annual LC fees • Renewal • Amendment • Custody charges
Portfolio Monitoring • Required? • Additional cost? • Who’s responsible?
Control of Assets • Release of excess collateral • Income payments • What happens if one of the parties to the trust becomes insolvent?
General Comparison L o C114/Rein. Trusts Advantages: Safety Less costly Accessibility Satisfy NY Insurance regs Constant value Low maintenance Simplicity Inexpensive to administer Liquidity Tr assets usually valued $ for $
General Comparison (continued) L o C114/Rein. Trusts Disadvantages: Some assets discounted TTEE seeks indem from grantor Custody Fees Bene includes info re trust in its finan reporting to regulators Credit exposure Possible exposure to NRA withholding on dividends May require a confirming Equity investments restricted bank
General Comparison (continued) L o C114/Rein. Trusts Custody: Collateral held by Trust includes custody, L/C issuing bank no additional fees incurred.
General Comparison (continued) Permitted Investments for Letters of Credit: • Cash $ for $ • AA or higher can be $ for $ • AA- or lower accepted on margin (75-95%) • Equities accepted on margin (70)%
General Comparison (continued) Permitted investments for 114/reinsurance trusts as per the NYS Reg • Obligations of the U.S. Government or any agency or instrumentality thereof, any territory or possession of the U.S., any state or any other governmental unit in the U.S. • Debt or equity securities issued in the U.S. by U.S. corps • Euroclear eligible securities issued or guaranteed by a U.S. Corp • Deposits of a U.S. bank or a U.S. branch of a foreign bank • All of the above instruments must meet A or better rating • Shares of registered investment companies invested in the above.
General Comparison (continued) L o C114/Rein. Trusts Duration: 1 year with evergreen Unlimited, unless otherwise clause specified Docs: L/C agreement Standard Reg 114 Tr +collateral aggr. agreement Timing: 5-30 days 10-30 days to negotiate w/US cedent (bene) Fees: 15-125 bp for 3-15 bp + poss Admin Fee for collateralized LC ($5-10,000) depending on size of trust
Audience Questions • ??????????????????????????????
