Sandell Re Ltd. Financial Condition Report For the twelve month (12) period ending 31st December 2016

Transcription

1 Sandell Re Ltd Financial Condition Report For the twelve month (12) period ending 31st December 2016 Sandell Re Ltd. (the Company ) was incorporated in Bermuda on 18th December 2014, and was licensed as a Class 3A insurer by the Bermuda Monetary Authority ("BMA") on 25th February 2015, to write all classes of general business insurance and reinsurance. The Company was also registered as a Segregated Accounts Company under the Segregated Accounts Companies Act 2000 effective 2nd December To date, the Company has only written reinsurance business with this license. That license restricts the Company to general reinsurance. 1. BUSINESS AND PERFORMANCE a. Name of Insurer Sandell Re, Ltd. ( the Company ) b. Supervisors Insurance Supervisor Bermuda Monetary Authority BMA House 43 Victoria Street, Hamilton Bermuda c. Approved Auditor Statutory Reporting KPMG Crown House 4 Par- la Ville Road Hamilton HM 08 d. Ownership Details The Company is a wholly owned by Sandell Holdings Ltd. ( Sandell Holdings ), a Bermuda exempted company. The common shareholders of Sandell Holdings are Castlerigg Master Investments Ltd, Castlerigg International Ltd and Sebah Finance SARL which holds all voting shares of Sandell Holdings.

2 e. Group Structure f. Insurance Business Written The Company is part of a panel of participating reinsurers supported by and providing reinsurance to one Bermuda reinsurer for all classes of property and casualty business. The Company had five retrocessions from the Bermuda reinsurer and one direct cession from a US Insurance Company to provide reinsurance services for commercial automobile ( commercial auto reinsurance ). The retrocessions from the Bermuda reinsurer included two quota share (QS) treaties covering workers compensation (WC), a loss portfolio transfer of construction defect liability and two novated contracts, the first one covering general liability (GL) (primarily construction defect) and the second workers compensation and auto liability(auto). (Reported in thousand units) Gross Premium Witten (GPW) by Segment Line of Business GPW 2016 GPW 2015 Workers compensation (QS) $13,267 $11,042 Loss portfolio transfer (LPT) - $6,513 Novation (WC, GL, auto) - $5,741 Commercial auto reinsurance $2,471 $127 Total $15,738 $23,423

3 (Reported in thousand units) Gross Premium Witten (GPW) by Geographical Region Region GPW 2016 GPW 2015 USA $15,738 $23,423 g. Performance of Investments & Material Income & Expenses for the Reporting Period Performance of Investments for the Reporting Period The Company utilizes an affiliated company; Sandell Asset Management Corp ( SAMC ) as its investment manager, with the primary focus of having a portfolio that is safe and has low volatility to support the reinsurance transactions written by the Company. In this regard the Company primarily invested in a combination of equities and bank debts. The balance of the portfolio was invested in derivatives which are more speculative investments so as to maximize returns. The Company s fair value of investment as of December 31, 2016 was as follows: (Reported in thousand units) Investments type EQUITY SECURITIES $14,613 $17,689 LOANS (BANK DEBTS) $20,018 $2,379 DERIVATIVE ASSETS (NET) $243 $75 TOTAL 34,874 $20,143 The Company s net investment income for the year ended December 31, 2016 was as follows: (Reported in thousand units) NET INVESTMENT INCOME $5,488 $1,120 Material Income and Expenses for the Reporting Period The main sources of revenue for the Company in 2016 were premiums and investment income. The premium income was primarily from the commercial auto liability reinsurance and QS treaties covering workers compensation. Investment income in 2016 increased by $4,368,000 mainly as a result of realized gains from the sale of investments.

4 The Company s main expenses were as follows: (Reported in thousand units) Expenses LOSSES AND LOSS ADJUSTMENT $12,685 $20,659 ACQUISITION COSTS $1,294 $906 GENERAL AND ADMINISTRATION $1,539 $488 h. Any Other Material Information In October 2016, the Company entered into a sale and purchase agreement to acquire 50% of the equity of a UK Holding Company which owns a Bermuda insurer. Thereafter the Company and the UK Holding Company entered into a corporate joint venture to undertake new insurance business. 2. GOVERNANCE STRUCTURE The Company has developed a governance structure that is proportionate to the nature, scale and complexity of its business model and is aligned to the Company s risk profile. a. Board and Senior Executive Board and Senior Executive Structure, role, responsibilities and segregation of responsibilities. The Board of Director s (the Board) has the prime responsibility for the sound and prudent management of the Company. The Board meets on a regular basis (at least quarterly) and have a schedule of matters reserved for its approval. The Boards oversight role includes the development of strategy and major policies, review of Management performance, the financial statements and major acquisitions & disposals, and the establishment and maintenance of systems of internal control and corporate governance. The Board consists of 5 directors; 2 executive directors, 1 non-executive director, 1 independent non-executive director and 1 director from the company s Principal Representative in Bermuda. Executive decisions and oversight is delegated to the board sub committees. These committees are: Underwriting & Claims committee responsible for analyzing and vetting all (re)insurance submissions. Risk & Compliance Committee - responsible for oversight of corporate governance practices, reviewing the Company s risk appetite and risk strategy, overseeing and monitoring implementation of the risk appetite, and overseeing the design, completeness and effectiveness of the risk management framework. Finance & Audit committee - The scope includes reviewing the adequacy of the corporate accounting and financial reporting processes, quality and integrity of the Company s financial reports, discussing with external auditors the nature and scope of the audit, and reviewing the effectiveness of the internal control system. The investment committee will be comprised of 3 individuals from Sandell Asset Management Corp. responsible for establishment and oversight of the investment policy and objectives of the Company, monitoring investment performance and results, and reporting to the Board.

5 i. Remuneration Policy The Company s remuneration policy follows the group s corporate policy that provides a fixed base salary along with an annual performance-based bonus which varies in accordance with both the company's and individual's performance. ii. Pension or Early Retirement Schemes for Members, Board and Senior Employees The Company provides its employees with pension benefits through a defined contribution pension programme. Both the Company s and employee s pension contributions are invested in a pension scheme administered by a third party advisor. The Company does not have early retirement schemes. iii. Shareholder Controllers, Persons who Exercise Significant Influence, the Board or Senior Executive Material Transactions There are no material transactions to note. b. Fitness and Proprietary Requirements i. Fit and Proper Process in assessing the Board and Senior Executive The Company appoints members of the Board based on the individual s expertise and work experience, role within the Company as well as professional judgment. ii. Board and Senior Executives Professional Qualifications, Skills and Expertise Below are details of the Board qualifications, skills and expertise: Tom Sandell Executive Director Tom Sandell founded Sandell Asset Management Corp. in January 1998 and is the Chairman and CEO. He has been involved in the securities industry since May Mr. Sandell joined Bear Stearns in 1989 to establish the proprietary international risk arbitrage operation and left in 1997 as a Senior Managing Director and co-head of the Risk Arbitrage department. Mr. Sandell also headed equity research at Group Delphi in Paris. Mr. Sandell has an MBA in Finance from Colombia Business School. Richard Ecklord Executive Director Rick Ecklord joined Sandell Asset Management Corp in Mr. Ecklord is a Senior Managing Director and Partner, with primary responsibility for trading and technology. Mr. Ecklord worked for Spear, Leeds & Kellogg/Goldman Sachs, Inc as a trader from He also worked with Renata Trading LLC as an option trader in Mr. Ecklord graduated from The Citadel, The Military College of South Carolina in Victoria Benevides Executive Director Victoria Benevides is a (re)insurance professional with extensive experience in the Bermuda reinsurance industry. Victoria worked as an insurance officer in the underwriting and risk management of AIG from 1999 to She has also worked as an underwriter for General International Ltd in 2002 and for XL Insurance from 2002 to 2009,subsequently she worked as a Commercial Insurance Manager and Director for Chubb Atlantic Indemnity Ltd from 2009 to Victoria has an MBA with a focus on International Business from the Webster University. Michael Morrill Director Michael Morril is currently a Director at Ironshore Insurance. Michael is a seasoned (re)insurance professional with extensive experience in the Industry. In the recent past Michael was Deputy Chairman

6 AXIS Reinsurance Group ( ) and Chairman, CEO and President Gerling Global Reinsurance Corporation of America in New York in Michael was also the Chief underwriting Officer North America for Transatlantic Reinsurance Company. Michael has an MBA in Finance from Fordham University in New York. Paul Sikuku Director Paul Sikuku is a Vice President at Aon Insurance Managers (Bermuda) responsible for the day to day management of commercial (re)insurance companies. Paul has worked for Aon for 10 years and previous worked for Deloitte as an auditor is a qualified accountant. Paul has a degree in Electrical & Electronics Engineering. c. Risk Management and Solvency Self-Assessment iii. Risk Management Process & Procedures to Identify, Measure, Manage and Report on Risk Exposures The Company was licensed to reinsure transactions written by a specific Bermuda reinsurer as a part of a panel of reinsurers writing retrocessions from the Bermuda reinsurer. The company has relied on this reinsurer to provide, among other services, risk management services. As it moves away from the reinsurer s platform The Company is developing a risk register to identify measure, manage and report on all material risks. The risk register will assess the risks on both an inherent basis (before controls) and a residual basis. iv. Risk Management and Solvency Self-Assessment Systems Implementation The Company s risk management framework is implemented and integrated into its operations through the systems, processes and procedures, and controls developed by management proportionately applied cognizant of the Company s current risk profile. v. Relationship Between Solvency Self-Assessment, Solvency Needs & Capital, and Risk Management The Company s Commercial Insurer Solvency Self-Assessment ( CISSA ) is a formal guide that outlines the Company s strategy, short and longer term business goals, and the quality and quantity of capital needed to support these plans. CISSA seeks to identify and measure all material risks, and aids in the decision making process regarding which risks it can eliminate, transfer or retain within its agreed risk appetite and tolerance. The goal of the Company s risk management strategy is to control and to achieve as much as possible a reduction in the Company s risk exposure. Upon considering several stress tests CISSA facilitates the identification of contingent sources of capital support, if required, to ensure that the Company continues to achieve agreed strategic objectives. The overall risk appetite statement of the Company is to keep the Company s solvency ratio above 135% of the ECR at all times. Should capital levels fall below 135% of ECR, the risk and compliance committee will present actions and timeframes for returning to this target to the Board. vi. Solvency Self-Assessment Approval Process The Company s Solvency Self-Assessment Report is prepared by the Risk & Compliance committee in consultation with the Underwriting & Claims committee. The assessment is provided to the Board for approval with a focus on keeping eligible own funds above 135% of the Enhance Capital Ratio (ECR) at all times. (Risk appetite).

7 d. Internal Controls i. Internal Control System The Company has appointed an Insurance manager to manage the Company and places reliance on the Insurance managers' internal controls. ii. Compliance Function The Company currently utilizes the Compliance expertise of the appointed management company. e. Internal Audit Internal audit serves the Board and management of the Company as an independent, objective assurance and special projects provider activity designed to add value, independently audit, control and improve the organization s operations. Initially Alan Gray LLC will assume the internal audit function for the underwriting side of the business. In addition Senior Management of SAMC maintains a very active role in oversight of every Sandell entity. f. Actuarial Function The Company has appointed Alan Gray, LLC as our actuarial specialist. Amy Waldauer from Alan Gray, LLC is the approved Loss Reserve Specialist (LRS). Alan Gray, LLC for setting provisions for both premiums and loss and loss expenses best estimates and the risk margin. These are also reviewed by KPMG actuaries to ensure they fall within a reasonable range. g. Outsourcing i. Outsourcing Policy and Key Functions that have been Outsourced The Company is developing an outsourcing policy that will outline Board delegation regarding various functions. The Company utilizes specialists and contractors as outsourcing partners to assist in the day-today management and other key services including; audit, actuarial services, corporate secretary and insurance management. The Company has agreements in place with its outsourcing partners. h. Other Material Information No other material information to report. 3. RISK PROFILE a. Material Risks the Insurer is Exposed to During the Reporting Period The Company s main risk categories are: a) Underwriting risk and reserving risk the risk of loss arising from inadequate pricing or of adverse change in the value of insurance liabilities due to inadequate provisioning assumptions. This risk is mitigated by the Underwriting committee who are responsible for analyzing and vetting all reinsurance transaction in conjunction with Allan Gray. b) Investment risk - the risk of loss or of adverse change in the financial situation resulting, directly or indirectly, from fluctuations in the level and in the volatility of market prices of financial instruments. The Company has outsourced investment management services to Sandell Asset Management (SAM), who also manage and mitigate the investment risk. c) Operational risk - the risk of loss arising from inadequate or failed internal processes, personnel or systems, or from external events. Business process risk, compliance risk, information systems risk, and fraud risk are outsourced to third parties. Outsourcing risk would thus be the major risk in the operational risk category.

8 d) Liquidity risk - the risk of not be able to meet obligations when obligations come due to the lack of sufficient liquid assets or the inability of selling assets without incurring significant losses or the difficulty of raising capital when needed. Compliance with the Bermuda Monetary Authority liquidity policy is monitored and any breaches are reported. b. Risk Mitigation in the Organisation The Company mitigates identified risks through the Risk & Compliance committee which has oversight of corporate governance practices, reviewing the Company s risk appetite and risk strategy, overseeing and monitoring implementation of the risk appetite, and overseeing the design, completeness and effectiveness of the risk management framework. c. Material Risk Concentrations The main material risk concentration exposure the Company has is the exposure on its investment portfolio (market/credit risks). Concentration risk is actively managed by Sandell Asset Management Corp or its designee, who have received an exclusive right to manage the Company s assets within the constraints of the Company s investment guidelines as established and maintained by the Company s board. d. Investment in Assets in Accordance With the Prudent Person Principles of the Code of Conduct In addition to the Investments of the Company being managed by Sandell Asset Management Corp. The Company has an investment committee comprising of individuals from SAMC with oversight of the investment policy and objectives of the Company. The committee monitors investment performance and results, and reports to the Board. e. Stress Testing and Sensitivity Analysis to Assess Material Risks As part of the Bermuda Capital Solvency Requirements, the Company performs various stress tests on an annual basis to ensure regulatory requirements can be met. In line with BMA stress testing guidelines the company performed Financial Market Scenarios stress test in relation to inflation shocks, underwriting scenarios stress testing and worst case annual aggregate loss scenario. 4. SOLVENCY VALUATION a. Valuation Bases, Assumptions and Methods to Derive the Value of Each Asset Class The Company has used the valuation principles outlined by Bermuda Monetary Authority s Guidance Note for Statutory Reporting Regime for the reporting period s statutory filing. The economic valuation principles outlined in this document are to measure assets and liabilities on a fair value basis (which is the value that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between open market participants at the measurement date). The fair value principles used for the assets are as follows: Cash and Cash Equivalents includes cash time deposits and investments maturing within three months. The fair value of these holdings is determined by using mark to market valuation, or quoted market prices in active markets for similar assets with adjustments to reflect differences if mark to market valuation is not possible, or mark to model valuation otherwise. Fixed Income Securities are valued in accordance with mark to market principles where possible or quoted market prices in active markets for similar assets with adjustments to reflect differences if mark to market valuation is not possible. For fixed income securities that are not actively traded

9 and for which similar assets are also not actively traded, the Company uses pricing services to prepare inputs to assist the Company with mark to model valuations. Equities and investment funds - includes common stock and preferred shares and are valued using the quoted market prices. Accounts Receivable and Premium Receivable are recorded at a fair value and balances due in more than one year have been discounted at the relevant risk free rate. Derivative instruments- are valued at quoted market prices. In the absence of an active market, prices are based on observable market inputs. b. Valuation Bases, Assumptions and Methods to Derive the Value of Technical Provisions Insurance technical provisions are valued based on best estimate cash flows, adjusted to reflect the time value of money using a risk-free discount rate term structure with an appropriate illiquidity adjustment. In addition, there is a risk margin to reflect the uncertainty contained inherent in the underlying cash flows which is calculated using the cost of capital approach and a risk-free discount rate term structure. The discount rate term structures are prescribed by the Bermuda Monetary Authority for each reporting period. The best estimate for the loss and loss expense provision is calculated by using United States Generally Accepted Accounting Principles (US GAAP) reserves as the starting point and then performing a series of adjustments: Removal of prudence margins. Incorporation of events not in data (ENID). Discounting of cash flows. At 31st December 2016, the total Technical Provisions amounted to $26.7 million comprising the following: Best Estimate Loss and Loss Expense Provision $21.2 million Best Estimate Premium Provision $2.6 million Risk Margin $2.9million c. Description of Recoverables from Reinsurance Contracts Not applicable d. Valuation Bases, Assumptions and Methods to Derive the Value of Other Liabilities Similar to the valuation principles for assets, the Company s liabilities follow the valuations principles outlined by Bermuda Monetary Authority s Guidance Note for Statutory Reporting Regime which values liabilities at a fair value basis. All other liabilities are valued on a GAAP basis and settlements not expected to be settled within a year, are discounted using the prescribed discount rates provided by the Bermuda Monetary Authority as at 31st December In the absence of an active market, prices are based on observable market inputs. e. Any Other Material Information No additional material information to report.

10 5. CAPITAL MANAGEMENT a. Eligible capital i. Capital Management Policy and Process for Capital Needs, How Capital is Managed and Material Changes During the Reporting Period The primary capital management objective of the Company are to maintain a strong capital base to support the development of its business and to meet regulatory capital requirements at all times. It strives for an appropriate capital structure that efficiently allocates the risk to the capital. To maintain a strong capital base, the Company identifies, assesses, manages and monitors the various risk sources it faces in the course of business both currently and as anticipated over a year planning horizon. This process culminates in an assessment of the capital necessary to maintain solvency at the threshold targeted by management given the firm s risk profile. ii. Eligible Capital Categorised by Tiers in Accordance With the Eligible Capital Rules At the end of the reporting period, the Company s Eligible Capital was categorized as follows: (Reported in thousand units). Tier 1: $55,033 All the capital is Tier 1, the highest quality capital, consisting of capital stock, contributed surplus, and statutory surplus. iii. Eligible Capital Categorised by Tiers in Accordance to the Eligible Capital Rules Used to Meet ECR and MSM Requirements of the Insurance Act At the end of the reporting period, the Company s Eligible Capital for its Minimum Margin of Solvency (MSM) and Enhanced Capital Requirement (ECR) was categorised as follows: (Reported in thousand units) Minimum Margin of Solvency Enhanced Capital Requirement Tier 1 $55,033 $55,033 iv. Confirmation of Eligible Capital That is Subject to Transitional Arrangements Not Applicable. v. Identification of Any Factors Affecting Encumbrances on the Availability and Transferability of Capital to Meet the ECR The Company has entered into contracts with cedants that require the Company to partially collateralise estimates of its obligations calculated by the cedant. Assets are held in trust accounts for the benefit for the cedant. These assets are released to the Company upon the payment of the obligations. vi. Identification of Ancillary Capital Instruments Approved by the Authority

11 Not Applicable. vii. Identification of Differences in Shareholder s Equity as Stated in the Financial Statements Versus the Available Capital and Surplus Other than the impact of employing statutory-based technical provision valuation techniques, there are no significant differences between GAAP shareholder equity and available statutory capital and surplus. b. Regulatory capital requirements i. ECR and MSM Requirements at the End of the Reporting Period At the end of the reporting period, the Company s regulatory capital requirements were assessed as follows: Reported in thousand units Minimum Margin of Solvency Enhanced Capital Requirement $3,731 $14,925 ii. Identification of Any Non-Compliance with the MSM and the ECR The Company was compliant with the MSM and ECR requirement at the end of the reporting period. iii. A Description of the Amount and Circumstances Surrounding the Non-Compliance, the Remedial Measures and Their Effectiveness iv. Where the Non-Compliance is not Resolved, a Description of the Amount of the Non-Compliance c. Approved Internal Capital Model i. Description of the Purpose and Scope of the Business and Risk Areas Where the Internal Model is Used Not applicable - the Company have not applied to have its internal capital model approved to determine regulatory capital requirements. ii. Where a Partial Internal Model is Used, Description of the Integration with the BSCR Model iii. Description of Methods Used in the Internal Model to Calculate the ECR iv. Description of Aggregation Methodologies and Diversification Effects

12 v. Description of the Main Differences in the Methods and Assumptions Used for the Risk Areas in the Internal Model Versus the BSCR Model vi. Description of the Nature & Suitability of the Data Used in the Internal Model vii. Any Other Material Information 6. SUBSEQUENT EVENTS No subsequent events to report

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