XS Reserve: A versatile liquidity tool

What is XS Reserve?

It won the prestigious US Business Insurance magazine's "Innovation in Risk Finance" award in 2016, judged by Fortune 500 Risk Managers. It is, essentially, an insurance-backed term loan with similar characteristics to bank letters of credit and overdrafts. It enables corporate treasurers to fully fund, ex-ante, a defined contingent obligation (such as a credit risk retention) on Day 1. But unlike an LC, it can be funded over a typical period of 2-3 years, spreading costs for treasurers. It helps reduce all-in financing costs. Increasingly, it can be viewed as a new tool in a company's risk and cash flow management and financing strategy.

How does it work?

During negotiations for a company's insurance and/or financing transaction, we work with insurers and/or funders to establish the preferred level of retained risk to that transferred. The retained risk is then funded, ex-ante, with the company contracting with the insurer to build an XS Reserve by paying equal monthly installments, typically over a 3 year period. These installments accumulate in a secured bank account on the insured’s balance sheet as a cash asset, or in an offshore captive. The full contract value can be assigned to a funder to support an increased advance rate, enabling the company to access more cash on Day 1 whilst providing the funder with more interest income. The insurer, in return receives more stable income. Any unclaimed funds at the end of the contract term are released back to the company. They could then be recycled as collateral for future transactions that support risk management objectives or used for whatever purpose decided.

How can an XS Reserve be best utilised?

1) To build a cash reserve against a possible loss

Making cash available to fund losses at a time when standby liquidity facilities are harder to raise.

2) Reducing all in financing costs

XS Reserve not only reduces sunk insurance costs, it can also support increased advance rate achieved on asset-backed loans or securities, often secured by trade receivables. Every 1% of an eligible asset unfunded must instead be funded by the company's equityholders who will therefore expect a return on their capital.

3) To fund a ‘risk gap’

Providing a more economic method of fully funding the ‘risk gap’ in a captive insurance company compared to L/C’s or other alternatives.

4) To release bad debt reserves

Releasing a portion of aggregate bad debt reserves by using the timing risk advantage of XS Reserve. This creates a contingent fund at a point in time whilst the actual installments will only become payable over a period of years, replacing the reserves with a funded retention.