“Troubled” Vt. captive insurance company?

Is a Vermont captive insurance company is jeopardy? Vermont is business home of one of the larger groups of captive insurance companies in the World. The Cayman Islands is the second largest,Bermuda number one .

Captives are financial risk management insurance companies which insure investments of a parent companies. Burlington based Customer Asset Protection Company, known as Capco has drawn some attention in several newspaper articles and from U.S. Senate regulators recently regarding its ability to cover its obligations to the now bankrupt Lehman Bros. .Capco is owned by financial giants Morgan Stanley, Goldman Sachs, JPMorgan, Wells Fargo banks and smaller brokerage firms.

New York Times reports

“It has become clear that this entity is thinly capitalized Senate Finance Committee, Robert Menendez wrote in a letter to Treasury Secretary Geithner.

Capco, he said, potentially posed “systemic risk.” Capco was created in 2003 by Lehman and 13 other banks and brokerage companies as a kind of marketing tool. The pitch was that while Capco would not insure customers against investment losses, it would compensate them if the firms failed. Capco promises to provide virtually unlimited coverage above the $500,000 offered by the Securities Investors Protection Corporation and its equivalent in Britain.

The New York State insurance department reviewed some industry estimates and  Capco could face nearly $11 billion in claims but has only about $150 million with which to meet them.  

Vermont Deputy Commissioner of Captive Insurance David Provost said to the Burlington Free Press that he believes those figures are inaccurate, but could not elaborate, citing privacy regulations. No one mentioned when the last audit was performed.

In an article about the state of South Carolina’s concerns with its own captive insurers it was noted that yearly audits are desirable but the frequency of audits in Vermont can be flexible. Vermont’s captive law allows the state to expand the examination period from three to five years if the captive has been audited, and the division has used that flexibility to smooth its examination load.

All this should make for an interesting 24th Annual meeting of captive insurance professionals in Burlington on August 11-13 titled Building Better Captives.

http://www.nytimes.com/2009/07…

http://www.businessinsurance.c…

http://www.burlingtonfreepress…

4 thoughts on ““Troubled” Vt. captive insurance company?

  1. I am practicing above my pay grade here but it seems that whether or not there is a problem with CAPCO will depend on CAPCO’s reinsurance provisions.  How much risk did it lay off in the reinsurance markets and are the companies that reinsured that risk well rated and able to honor any claims?  How much risk did it retain for itself and are its assets enough to cover the retained risk.  These are the questions I would ask

  2. Maurice “Hank” Greenberg, former chairman of American International Group, has agreed to pay $15 million to settle regulators’ allegations of improper accounting transactions at AIG, a U.S. Securities and Exchange Comission  official said.

    …………

    The complaint lists “three primary areas of fraud” from 2000 through 2005: “Transactions with General Re Corp. in which AlG purportedly increased its loan loss reserves; transactions with Capco Reinsurance Co. Ltd., a special purpose entity AIG created and used to conceal underwriting losses by converting them improperly to capital losses; and (3) transactions to misstate net investment income or capital gains.”

    http://www.tradingmarkets.com/

  3. I am not sure that AIG’s Capco Reinsurance Company Ltd has anything to do with CAPCO although they are confusing similarly named.  It sounds like AIG’s Capco was an SPE formed with the intent of fudging around with AIG’s financials not provide reinsurance to the broader market.  I think there are lots of entities named CAPCO in the world which will just make it harder to figure all of this out.  

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