As the cost of commercial property and casualty (P&C) insurancecontinues to rise in 2024, businesses are increasingly opting for high-deductible insurance programs to help cope with ever-rising premiums. Instead of severely restricting their cash flow by handing over millions of dollars in cash as collateral to cover the deductibles owed to their insurers in these plans, the vast majority of companies obtain letters of credit from their banks to serve as the collateral. However, one side effect of this is that much of a business' bank credit line can be made inaccessible by these letters of credit. A company's capital is made unavailable for activities that would otherwise run or grow the business, such as expanding operations or making acquisitions.
With insurance premiums rising rapidly over the past decade due to elevated claims costs and more stringent underwriting, most companies will continue to focus on how to manage premiums to keep them low. The adoption of high-deductible plans with their accompanying use of letters of credit for collateral, has created an insurance collateral dilemma, where an ever-increasing amount of credit line capital, currently estimated in the hundreds of billions in the United States alone, is essentially frozen by this collateral, resulting in foregone economic value and the lowering of corporate returns on capital.
This is a particularly attractive solution for companies held by private equity funds. As these companies are more likely to be highly leveraged, access to financing is critical, and the prospect of credit lines significantly consumed by insurance collateral can, in some cases, impact strategic plans and investor returns. Many CFOs are aware of the problem, but, until recently, there was almost nothing they could do to solve it.
With many businesses operating under the weight of this problem, entrepreneur and insurance and financial services veteran Stephen Roseman saw the need for a solution. In 2020, Roseman founded the 1970 Group and created a solution for companies operating in the US and Canada. Known as Insurance Collateral Funding, it solves the trapped capital problem associated with loss-sensitive worker's compensation, commercial auto, general liability, and medical professional liability insurance programs.
Prior to founding the 1970 Group, Roseman had more than two decades of experience in insurance and financial services. In addition to holding roles at Oppenheimer Funds, Thesis Capital, and Calamos Investments, Stephen served as President of Spencer Capital Advisors, President and CEO of USA Risk Group, and Chairman of the Board for SouthWest Dealer Services.
Through its off-balance sheet financing solution, 1970 Group provides a client with a substitute letter of credit that fully satisfies its collateral requirement and releases previously trapped capacity in its credit line, effectively restoring the insured company's balance sheet to its fullest potential. While insurance collateral funding is not a silver bullet for all of a company's liquidity challenges, it is a valuable tool in its arsenal.
1970 Group works with all leading insurance brokers in the US and Canada. According to the company, they are offering brokers a solution to help their corporate clients with this long-standing collateral problem.
Once a client begins working with 1970 Group, their underwriting team evaluates the company's financial health and insurance risk factors. It typically takes 45-90 days for the new collateral to be in place.
With geopolitical events and economic uncertainties confronting corporations, strong cash flow and unrestrained access to credit lines is more important than ever. While the increased liquidity created by Insurance Collateral Funding can help companies grow, it can also serve as a key source of incremental financing to manage through business cycle fluctuations. Regardless of purpose, 1970 Group delivers on its mission to help corporate America unlock capital that would otherwise be trapped in insurance collateral.
