Extracting Value For Smaller Captives 

Commutation, inwards or outwards, is probably the most frequently used tool in closing specific losses or contracts, complete insurance/reinsurance exposures and settling of disputes. The benefits of commutation are well known and understood. A commutation strategy can go a long way to closing an entire company, but finality can not always come from this alone. One such case is Mariner Reinsurance Company Limited (“Mariner”).

Mariner went into run-off in 1990 and, especially during 1994 and 1995, embarked on an exercise to commute its entire liabilities with a view to closing the company. This exercise was largely successful with estimates made at the time that 80% of liabilities had been commuted.

Part of the consideration for these commutations was the granting to the commuting companies (“Certificate Holders”) of an absolute interest in any assets of Mariner which remained at the point of liquidation.

The effect of this was that Mariner's parent had no further economic interest in the company. Mariner continued with its run-off, though as time passed by it fell off the radar of its managers and owner, and Mariner effectively became dormant. For a time it became a non-compliant reinsurance company under Bermudian laws and regulations.

It was at this point that KMS Insurance Management Limited (“KMS”) was asked to help manage the company and advise on its closure options.

The first action that KMS carried out was to restore the company to substantive compliance. KMS are now assisting in steps to close the company.

Currently, Mariner’s net assets are approximately US$750,000 so expensive reviews and solutions are not an option. An up-to-date review of Mariner’s records to establish whether any policyholders remain is likely to be disproportionatly expensive and possibly inconclusive. In any event, Mariner conducted such an exercise in the early 1990's to establish the identity of its most material policyholders. As a result of that earlier exercise Mariner entered into a series of full and final commutations.

Rather than repeating a similar (and expensive) exercise, Mariner believes it will be more expedient to establish its financial position through a well publicised consultation process rather than a detailed investigation of its historic records. Once the exercise is completed in early September 2008, a decision will be made on how to close the company.

Further details may be found on Mariner’s web pages at www.mariner.bm

In conclusion, the commutation strategy actively pursued in the early to mid 1990’s probably removed the company’s liabilities, but on its own did not bring finality and closure for Mariner. The company continued to incur Bermudian Government fees and other expenses, even during its dormancy, and the issue of releasing any surplus (if any) to the Certificate Holders was not addressed.

Damian Boyle
June 2008