The first question municipal CFOs and counsel ask is “What about risk?”

While it is generally perceived that Insurance companies are in the business of taking risk, their actual business is managing risk. While there is technically risk involved in every transaction there are a number of important factors that limit any downside in insurance underwriting:

1. •Insurance companies generally know the risks of every type of insurance.
   

2. •Different syndicates carry different levels of risk(e.g. hurricane insurance is high risk, life insurance very low risk).
   

3. •You can choose which types of risk you wish to underwrite.

1. •You can re-insure risk(parcel it out to other syndicates).
   

2. •You can purchase a “stop loss” policy limiting your downside.
   

3. •You can purchase insurance against having to pay out on an insurance policy.

A profitable history

Business and individuals have been successfully pledging their assets to insurance companies in exchange for underwriting revenues for several hundred years.

Insurance averages a third the volatility of

the S&P 500

Some insurance carries

“no risk”

Credit enhancements are a unique type of financial product. Assets are placed on an insurance company’s balance sheet, but are not used to underwrite insurance. The company uses them to demonstrate better liquidity ratios to investors and regulators. This enhanced financial security translates to a lower cost of capital for the firm and a higher rating within the industry. In addition to reducing capital costs, a higher rating gives the firm access to more business and increases their profit margins.

Credit enhancement products, like CLOCS, typically yield 7-8% annual premiums, payable in advance. Since the assets are not used to underwrite and insurance they are not at risk.

Other methods of producing income from existing assets come under the category of Contingent Capital. Some are not suitable for all investors.

Risk

Return

Sample Risks and Returns