Using your captive to release escrow funds

Frequently formed to ensure sufficient capital during hard insurance markets, captive insurance companies can also be used creatively to facilitate business opportunities, noted Paula Gentile of MGM Resorts International.

Gentile, senior vice president of risk management and general counsel for MGM, spoke at the 8th Annual Canadian Captives & Corporate Insurance Strategies Summit in Toronto on May 17.

Headquartered in Las Vegas, MGM owns condominium buildings, hotels and 14 casinos. MGM formed its captive in 2001, when hijacked commercial aircraft slammed into the World Trade Center buildings in New York.

At the time, MGM could not find insurers willing to insure its buildings for damage arising from terrorism. Also, domestic insurers were squeamish about underwriting property coverage for MGM, since U.S. legislation required them to insure fire following terrorist acts.

The company’s real estate holdings were worth $10 billion. “At the time, I was just a market saying, ‘I need at least $2 billion of all types of coverage in order to sleep at night,’” Gentile said. “I have to be able to replace my property if something catastrophic happens.”

MGM created a captive so that foreign, non-admitted insurance capacity could be used to insure the company’s property holdings without any commitment to terrorism coverage. Once formed, MGM used its captive creatively to promote business opportunities. This included providing surety bonds for the purpose of releasing money held in escrow accounts, thus saving money for MGM.

For example, Gentile cited MGM’s City Center Project, a 76-acre, mixed-use, urban complex in Las Vegas that includes 2,500 condo and condo-hotel units measuring a total of almost 17 million square feet. At the time, real estate values were such that people were paying $1,800 per square foot.

Under contracts with MGM, the condo unit buyers put 10% of their money down in escrow, representing tens of millions of dollars. MGM could not touch the money held in escrow until either: 1) the escrow was fully closed and the money was completely transferred to the seller; or 2) a surety bond was posted with the escrow.

“It occurred to us that it would be a very good idea if the company, the developer, could get the use of that [escrow] money in advance to apply towards the construction costs, which could save money,” Gentile said. “It saves you money on your loans, interest and your carrying costs.”

With the approval of the state insurance regulator, MGM’s captive provided surety bonds for the escrow deposits. “We saved a few million in fees,” Gentile noted. “We saved a lot more money than that in carrying costs and interest on our construction loans. That proved to be a great, money-generating activity.”