One of the major issues facing a startup insurer, reinsurer, or a bank is the chicken and the egg problem of not being able to raise capital without a management team and not being able to afford a management team until the capital is raised. In the case of insurers and banks, it is virtually impossible to obtain a new license with a part-time, interim, or no management team and the ultimate management team must often be in situ, rather than merely committed, to even apply for many insurance or banking licenses.
Since most executives are unwilling to take a career risk when the outcome of a capital raise is uncertain, a startup often resorts to hiring executives that are unemployed, because they are often desperate enough to work cheaply and are unable to demand long term guarantees. However, the best people are usually employed and hiring the unemployed to lead may not augur well for the future of the financial institution.
In order to convince the best executives to quit their jobs and be part of a capital raising process, the Sponsor may have to offer compensation guarantees that can often exceed $25 million in order to offset the career risk (the top three executives in Third Point Re quit their jobs and were paid more than $29 million in its first year of operation, with significant additional guarantees for future years).
Our Executive Resources Program
Reinsurance is different from insurance and banking. A reinsurer can employ part-time or interim executives (or even have no staff and outsource everything) and still obtain a license. This allows standalone startups and Participating Reinsurers in the Multi-Strat Re program to use our Executive Resources program to address the chicken and egg problem and significantly reduce execution risk.
Our Executive Resources program consists of a number of people with high levels of experience in insurance, reinsurance, and banking who are familiar with the benefits of Structural Alpha and are willing to serve as full-time executives, Non-Executive Chairmen, and/or Non-Executive Directors for insurers, reinsurers, or banks that have been acquired or started and a number of similarly experienced individuals who are also willing to serve as part-time or interim CEOs and CFOs for startups.
While hiring full-time staff at the outset will usually make it easier to raise large amounts of startup capital relative to part-time, interim, or no staff, the financial guarantees and capital targets necessary to attract full-time executives actually sow the seeds for incurring far more failures than successes.
On the other hand, standalone startups and Participating Reinsurers in the Multi-Strat Re program which use our Executive Resources program to address the issue, should greatly increase the likelihood that a given startup will ultimately become as successful as Greenlight Capital Re and Third Point Re.
Each of our startups is required to have a CEO and CFO with relevant experience on day one. These two executives will also be board members. The primary purpose for having these two executives is to provide industry knowledge as part of proper governance for shareholders. In the case of Multi-Strat Re’s program, they also oversee each reinsurer’s relationships with Multi-Strat Re and other service providers who perform some or all of the functions that full-time staff would normally perform in a reinsurer.
The relationship between Multi-Strat Re and each Participating Reinsurer consists of a single contract each year and a capacity commitment that can be increased monthly within the year, but only decreased or eliminated for the following calendar year. While the CEO and CFO (and any board members of or advisors to the reinsurer) may review any and all of Multi-Strat Re’s files if physically present in Bermuda, governance and deciding the initial and increased capacity commitments only requires a part-time effort and Participating Reinsurer CEOs and CFOs will generally have other sources of income.
As such, Executive Resources for startups are most likely to either be persons with high levels of experience who are either retired and/or actively involved in other income generating activities that do not conflict with the startup and allow them to devote the time needed to oversee the startup on a part-time basis. Furthermore, provided that the Sponsors of given Participating Reinsurers have no objections, some of our Executive Resources might serve more than one reinsurer as its CEO and/or CFO.
In the majority of cases, the CEO and CFO will be interim executives until the startup feels that it can afford a full-time CEO and/or CFO, which will usually occur only after a successful 144A offering or an IPO. In other cases, the ultimate CEO and/or CFO may serve from the outset and his or her compensation might evolve from that appropriate for a part-time executive to compensation appropriate for a full-time executive in a comparably sized financial institution.
When the CEO or CFO is an interim executive, he or she will be expected to help find his or her full-time replacement within 6 months of a 144A or an IPO and become a non-Executive Director (although some might like the company enough to “unretire” or quit other activities and become full-time executives).
Of the 9 Bermuda reinsurers that have raised more than $4 billion of startup capital through a 144A offering or an IPO, 4 did so with a part-time, interim, or no CEO and/or CFO and the most recent one raised $175 million in November of 2013 with a (very) part-time CEO and an interim CFO. If the story is strong enough and the capital markets are receptive, Wall Street can raise significant amounts of capital for either a startup or early stage insurer, reinsurer, or bank.
Thus, a number of investment banks that can raise capital through a 144A offering or an IPO, like the concept of Structural Alpha, and are familiar with our Executive Resources program have agreed to this chicken and egg solution, provided that they like the interim executives and the asset manager and that the capital markets are receptive to 144As and IPOs.
When a Sponsor is ready to select a CEO and a CFO, he or she may engage either or both on his or her own or ask us for suggestions. If asked, we will provide information on the Sponsor to people in our Executive Resources program. We will then provide background information on each of our Executive Resources willing to be considered for a particular position and arrange for interviews with candidates the Sponsor wants to meet. The ultimate decision(s) on terms and compensation will be left to the Sponsor.
After launching, a Participating Reinsurer may decide that it can afford to bring some functions in-house and begin to hire full-time staff. This may occur prior to a 144A offering or an IPO, but will most likely occur within 6 months after a 144A or IPO, when the reinsurer can finally afford full-time staff.
Most of people in our Executive Resources program who are willing to serve as part-time executives are also willing and able to serve as non-Executive Directors, but some of the others are only willing to serve as non-Executive Directors, non-Executive Chairmen, and/or full-time staff.
Most of those who are only willing to serve as non-Executive Directors, non-Executive Chairmen, or full-time staff will only likely join the startup concurrently with a 144A offering or an IPO, when the startup will need to expand its board for governance purposes, hire full-time staff, and can afford to compensate them. It will be up to each startup to decide if and when it will need non-Executive Directors, non-Executive Chairmen, and/or full-time executives and whether or not it wants us to introduce it to candidates from our Executive Resources program.
While compensation for each executive or director is negotiable and may include payment of fees for their services from the beginning, some of our Executive Resources are willing to be solely compensated with warrants (and reimbursement for expenses) until a 144A offering or an IPO takes place.
This aligns those willing to do so with the initial shareholders and makes it easier to raise capital in a private placement when they appear to be solely compensated for long-term success, rather than accept the role to earn school fees or vacation money. Once a 144A offering or IPO takes place, each will be compensated like any other full time executive and/or a non-Executive Director in a public company.
When compensation is limited to warrants, the CEO will ordinarily earn a 10 year, at the money, non-dilutive 2% warrant on all capital raised for 5 years or until one month after the first successful 144A offering or IPO, whichever occurs sooner. The CFO will usually have a similar 1% warrant. Each 1% should be worth $3 to $4 million in 10 years for each $100 million of capital raised (10 year, at the money options to buy shares equal to 2% of Greenlight Capital Re were issued when GLRE raised slightly more than $200 million of startup capital in 2004 and were worth more than $9 million at the end of 2013).
The ultimate value of any warrants will largely be dependent on the amount of capital raised for each startup, whether or not it executes a 144A offering or an IPO, and a combination of leverage chosen, investment performance, and operating results. We assume that the typical startup will have $100 million in capital, will lever one time, and will execute at 144A offering or an IPO within 2 years of launch. Some may never get to that level or go public and some may be far larger or go public sooner.
Using $100 million as an average, and assuming that non-executive directors for public traded financial institutions are paid $100,000 to $200,000 per year, an interim CEO for our average startup could earn $7 to $10 million and an interim CFO $4 to $6 million over 10 years. If the capital is more than $100 million, the amounts can be much larger.
Even if the startup never gets to the $100 million level nor ever becomes publicly traded, an interim CEO and CFO should earn $400,000 and $200,000 respectively over 10 years for each $10 million of capital raised during the first year.
Prior to or during his or her first quarter of service, each person in the insurance or reinsurance sections of our Executive Resources program will need to attend our 2 day Advanced Seminar in Bermuda and spend the rest of the week meeting Multi-Strat Re’s staff and our other service providers. Each executive should also expect to spend another 5 days learning about the Sponsor’s investment strategy.
Afterwards, the time commitment should be roughly 3 days a quarter. Executives that serve more than one company will likely need an additional 5 days to learn about each new Sponsor’s investment strategy, and 1-3 additional days per quarter for each additional Participating Reinsurer in the Multi-Strat Re program for governance purposes (oversight of Multi-Strat Re’s activities will not have to be duplicated).
Persons with high levels of insurance or reinsurance experience or high level experience as investment bankers, auditors, or lawyers serving the insurance and reinsurance industries who are interested in joining our Executive Resources program or be considered for roles as full-time staff for standalone startups or Participating Reinsurers on the Multi-Strat Re platform should contact us in full confidence.
Our Recommended Service Providers
We are able to recommend a large number of lawyers, accountants, actuaries, insurance managers, consultants, MGAs, letter of credit issuers, banks, prime brokers, custodians, investment banks, PR firms, media firms, and executive recruiters that have worked with us in the past. Some combination of these Service Providers can often make the difference in the ultimate success of a given acquisition or startup.
While we are not wedded to any particular set of Service Providers in any category, those that we have satisfactorily worked with in the past are on our “Recommended Service Providers List” and we provide the names of each Service Provider that we can recommend to each acquisition or startup.
Notwithstanding that we provide all names on our “Recommended Service Providers List”, in the case of law firms and accounting firms, the Sponsor selects his current firm roughly one third of the time, asks us for a short list one third of the time, and has us select the law firm or audit firm one third of the time.
Thus, roughly 2/3rds of the time, the law firm or accounting firm is already on our list and the other 1/3rd of the time, we are able to add a new Service Provider to our list. In all other cases, we are generally asked to make up a short list or simply select the Service Provider and when we are asked, we always attempt to make the best match between a given company and prospective Service Providers.
Service Providers that would like to be added to our “Recommended Service Provider List” can do so in one of three ways. The best way is to bring us a client and work with us on a project. Assuming that the experience is satisfactory, the Service Provider will then be added to our list.
Lawyers, accountants, and prime brokers that jointly conduct Introductory Seminars with us will also be added to the list, because our experience has taught us that these generally yield a new client (and one or more projects which permit us to work together). In addition to generating significant additional revenues from existing clients, law firms, accounting firms, and prime brokers who jointly conduct Introductory Seminars with us are also likely to generate significant income from Sponsors who are currently using competitors that are not on our “Recommended Service Providers List”.
The third way to be added to the list is to demonstrate a serious interest in our model by attending one of our Advanced Seminars in Bermuda and passing a due diligence process with us afterwards.