Newsletter Sign-up

Managing Director
Willis
New York

The Hedge Master

When it comes to managing risk, perhaps one of the best questions you can ask yourself is, "What is the cost of doing nothing?"

That's the question that Partho Ghosh, managing director and global head of Willis' Financial Products, Structured Risk Solutions and his teammates asked themselves in trying to manage the windstorm risks of a major energy supplier with operations in the Gulf Coast.

What that question ended up producing was WHIP, or Willis Hurricane Load Protection, a risk management solution that uses index-based triggers to tone down the volatility on the energy provider's balance sheet.

In the previous year, the utility had gone through transmission hell. Hurricanes had knocked out its transmission and distribution lines, resulting in $100 million in financial penalties from customer sales contracts that called for the utility to be penalized if it couldn't deliver power. The utility needed a solution. It couldn't pony up those fines with any kind of regularity and expect to stay in good stead with investors.

Ghosh, holder of an M.B.A. from Cornell University and a master's of philosophy specializing in international monetary economics from the University of Cambridge, proved to be just the man for the job.

The Salomon Brothers and Enron veteran had experience in creating index-based solutions for utilities. In partnership with the client, Ghosh and his team developed an index-based hedge that required action on all of three triggers to produce a payout.

One, a Willis' propriety tool would have to determine whether a hurricane or some portion of it had actually entered the area where the utility had operations. Two, the demand in the power pool would have to fall below a certain threshold. And third, the price for electricity would also have to fall below a certain threshold.

In this case, the payout wasn't triggered. But that's not really the point, Ghosh said.

"Our understanding is that when the IPP (Independent Power Producer) bought this regulated utility, one of the implicit arguments to Wall Street was that the IPP's expertise in managing risk would prevent this kind of loss from happening again," Ghosh said.

That means that money spent on maintaining lines of credit and other costly backups for business interruption could be reinvested in the business instead.

"For most risk management products, you are not trying to get a return on your investment. You are trying to keep bad things from affecting your earnings," Ghosh said.

And in the energy business, as opposed to some, you are delivering a material product, not simply trading. And that means you have to reduce the volatility that can come from business interruption.

And this index-based solution does away with the need for an adjuster. Because the payout is determined by third party data, there's no need for someone to parse the language of a contract and make a judgment call.

"So, basically these index-based products are really good at covering very nuanced forms of business interruption," Ghosh said.

"Because all three triggers were index-based we could go to institutions beyond the traditional insurance markets."

According to press releases, the solution for the client--Princeton, N.J.-based NRG Energy Inc.--that Ghosh was instrumental in developing ended up accessing an entire menu of financial services including insurance, reinsurance, retrocession, banking, hedge funds and over-the-counter derivatives.

"Partho is exceptional," is how Phil Ellis, the London-based CEO of Willis Structured Solutions described him.

"He is able to bridge capital and insurance markets, speaks both languages and is just very, very smart," Ellis said.

"Add to this an iron constitution (he's a martial arts expert) and you get a resilient, strong professional," Ellis said.

--Dan Reynolds

Managing Partner
Spring Consulting LLC
Boston

A Captive Genius

Which are more remarkable, the quirks of U.S. tax laws, or the lengths to which the private sector has to go to thrive in spite of them?

It's a loaded question, for sure.

Into that breach has stepped Karin Landry, a managing partner with Boston-based Spring Consulting Group LLC, who devised a system that used a captive to help a utility client protect the assets of its nonunionized workforce's retiree health benefits. In doing so, she has been part of what is now a patented Spring Consulting risk management solution that saved her client more than $50 million.

"She is an amazing person, certifiably brilliant," is the way that Robert Schmid, the chief operating officer for Energy Insurance Services, based in Greenville, S.C., described her.

"She has got one of those unique minds that is able to take information and synthesize it?good ideas are not just born, you have to massage them," Schmid said.

U.S. accounting laws that developed in the 1990's required companies to disclose the pension and health benefit obligations they had to retirees. The reasoning was that investors needed to know how much of a risk burden was growing in those areas to be able to determine whether the company was a good bet.

But along with that type of transparency came a taxation exposure. In one column, Landry's client had its unionized employees, whose retirement health benefit fund could grow without being hectored by taxation. In the other column were the utility's nonunionized workers, whose retirement health benefit asset growth was taxable as unrelated business income.

"In the current situation a union plan can prefund a liability that they have for retiree medical and the assets if it is a collectively bargained benefit grow without being subject to any kind of tax. And in a non-bargain population if you set money aside in a fund for the non-bargain group those assets would be subject to unrelated business income tax and over time the taxes on that lower the overall return," she said.

"So what companies look at doing are investing in assets that have less than a tax impact and one of the things that they look at as an asset class that they want to invest in is insurance," Landry said.

"By using a trust in conjunction with a captive and a fronting company, they can save quite a bit of money by funding their retirement medical funding needs in that manner," Landry said.

"I think that one of the things that we have done is that we have seen a need in the area to fund both active and retiree medical benefits," Landry said. "Spring just received a patent on using a captive to do that but we have always been involved in strategies to help companies save money on funding their benefits and strategies to fund it in a tax efficient manner and I think we have done quite a lot of work around there," she said.

According to his nominating materials for this award, John Cassell, a senior partner with Spring Consulting, said that Landry's solution for her client measured the value of the assets on a net present value basis, versus a pay-as-you-go basis, and benchmarked financial results both quarterly and annually. It was the first program of its kind to be funded through a captive, Cassell said.

"One of the most efficient ways for an organization to purchase insurance is to do it in conjunction with their captive," Landry said.

"So that is kind of the whole that is what we patented in a nut shell."

Landry, who received a degree in finance from Babson College and did graduate work at Northeastern, considers her background in the insurance field to be a bit of a patchwork. Before coming to work for Spring Consulting she was the head of the U.S. insurance and financial services practice for Watson Wyatt. Prior to that she was that company's Eastern region head for employee benefits.

Landry may be blessed in that she has the technical expertise and the experience to devise innovative solutions, but also has the personal touch to maintain relationships.

"She is just one of those unique people who is both bright and interesting and she can boil down technical copy so it can be understood by noninsurance people," Schmid said.

"These are highly technical products and she makes them understandable and she does it with a smile on her face. Obviously she delivers but she delivers in a way that you don't find objectionable."

--Dan Reynolds