Specialised risk financing provider 1970 Group has pioneered a solution called Insurance Collateral Funding to help release trapped liquidity on corporations’ balance sheets, this publication can reveal.
The solution enables companies of all sizes to transfer their insurance collateral requirements, freeing up more capital to deploy to business operations and investment opportunities.
New York-based 1970 Group actually began providing the Insurance Collateral Funding solution to corporations in 2020 but has not publicly announced it before now. It works with companies in the US and Canada across all business sectors, with a core focus on workers’ compensation, commercial auto and general liability.
Stephen Roseman, chairman and CEO of 1970 Group, told this publication that the demand his company has seen since formally entering the market in Q4 2020 has exceeded expectations.
Due to insurers’ requirements that collateral be set aside to cover deductibles, companies often tie up substantial amounts of capital by putting cash in escrow or more typically by signing letters of credit directly with banks, which reduces the amount available under their credit facility to run and grow their business.
The solution is designed to fill a gap in the market produced by many companies lacking easy access to alternative funding solutions.
Roseman said brokers often state that their clients need help in addressing this insurance collateral pain point.
The continuing increases in commercial insurance prices are driving more companies to adopt high deductible plans and insurance providers to require more collateral, he said.
The solution utilises a capital structure backed by partnerships with leading banks, investors and distribution partners.
1970 Group works with a network of partner banks to issue letters of credit on a company’s behalf in order to satisfy insurer requirements.
The collateral requirement is then transferred from the company’s balance sheet. This frees up the insured’s credit facility, providing them access to liquidity and expanding their leverage capacity.
An additional benefit is the insured’s accounting choice to structure the solution as an on-balance sheet or off-balance sheet financing.
Roseman – who has 25 years of securities, investment management and insurance industry experience – said the solution sits at the intersection of the needs of the five parties involved: insureds, brokers, carriers, bank partners and capital partners.
“I would say probably besides the company, who’s ultimately the beneficiary, those who are most excited about this are the risk advisors, the brokers, because they are solving an acute problem for clients that had heretofore not really been solvable in this way,” he said. “This is something their clients are very vocal about.”
Roseman said that placing cash in an escrow account or taking out surety insurance are other options for solving the insurance collateral issue but are incomplete solutions.
He noted that brokers and sponsors have tried to solve the problem previously but that “it’s easier said than done”.
“We believe this is going to be the go-to-market strategy for all of corporate America in loss sensitive programs inside of the next five years,” Roseman said.
He added: “It is just a better solution for managing your balance sheet. When you’re a CFO or a treasurer of a company, let alone the CEO with whom the buck stops or the board who has fiduciary responsibility, you look to optimise your balance sheet.”