Deductible and Captive Retention Guarantee - “Letter of Credit Replacement”

The insurance market is often an unexplored source of credit capacity from highly-rated financial institutions. Exploring the markets’ capabilities can reduce costs and allow credit lines to be dedicated to generating higher rates of return.

What is deductible and captive retention security?

Insurance companies often require groups to provide security to cover the potential liability the insurer would have under an insurance deductible and captive retention. The insurance company may want to limit credit exposure should the company/captive become insolvent, as the insurer would be potentially liable for the claims under a deductible or retention. To protect against this they demand that the company provides third party security.

What type of security is acceptable?

Traditionally, trust funds and letters of credit (“LoCs”) have been an acceptable form of security. Since 2010, the insurance market has been providing Surety guarantees which are now acceptable to most major insurers in the UK. Both LoCs and insurance company (“Surety”) guarantees can be written on a similar basis, which includes:-

• On-demand, irrevocable and unconditional
• Extendable / evergreen

How does a Surety guarantee work?

• The insurance company (“Surety”) issues a deductible/captive retention guarantee to the insurer (“Beneficiary”) on behalf of the group (“Principal”)
• The Principal enters into a counter indemnity agreement; if there is a call on the guarantee the Surety has recourse back to the Principal (the same rights as a bank would have under an LoC)
• The Beneficiary receives an irrevocable unconditional guarantee, as security, from a Surety in lieu of an LoC

Why use Surety?

• Replacing LoC exposure and increasing facility headroom means banking lines can be dedicated to CAPEX, Acquisitions, etc.
• Surety guarantees are written as off-balance sheet instruments
• There are no facility fees or non-utilisation costs
• Surety guarantees are competitively priced
• Sureties have superb credit ratings (S&P “A” rated and above)
• Usually, no security/cash collateral is required apart from a corporate guarantee/indemnity

What companies can benefit?

Companies from all sectors which have:-

• A captive or large insurance deductible (preferably within Europe, may be able to consider North America and the rest of the world on a case by case basis
• Turnover in excess of €500m
• A substantial balance sheet and strong liquidity position

Note: This is for guidance only, we can also consider groups outside of these parameters.