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Global runoff market's deal pace continues unabated as new opportunities emerge

The market for closed nonlife insurance business is heating up as new opportunities present themselves on a range of fronts, according to market participants. But any newcomers tempted by rising deal volume may find it tough to break in.

When a company stops writing a line of business or ceases underwriting altogether, the business or company enters run-off. No new premiums are collected, but claims from existing business are paid from reserves until all have been settled. For long-tail lines of business, such as casualty, that process can take decades, draining capital and resources. A market of specialist run-off acquirers has built itself up to cater to nonlife insurers and reinsurers that need to off-load old liabilities. Big names include Enstar Group Ltd., Catalina Holdings (Bermuda) Ltd. and Berkshire Hathaway Inc.'s National Indemnity Co.

Lasting legacy

Consulting firm PwC in its 2019 annual market survey estimated that there were $791 billion worth of nonlife run-off liabilities, up 8.4% on the $730 billion it estimated in its prior-year survey. North America is the biggest market, accounting for $364 billion of the latest total, while Europe accounted for $292 billion.

There has been a steady flow of run-off transactions over the last few years. PwC said there were 47 publicly announced deals in 2019, totaling approximately $9.5 billion of estimated gross liabilities. There were 34 deals in 2018, accounting for $9 billion of liabilities.

The market should remain active in the coming years. Alan Augustin, a director in PwC's deals business, said in an interview that the market for transactions "is as busy now, if not busier than it has been over recent years."

Barry Gale, partner and head of insurance run-off at consulting firm KPMG, said volumes have increased "massively" over the last few years. That surge is due in part to insurers' increased appreciation of the capital relief triggered by off-loading old liabilities and, for some business, attractive pricing, Gale said in an interview.

As the track record of the specialist run-off acquirers has grown, so has insurers' comfort with entrusting them with their old liabilities. Paul Corver, group head of M&A at Randall & Quilter Investment Holdings Ltd., said the run-off acquisition market "has really started to gain traction as ... an acceptable tool to deploy" in the last three or four years. Many companies in the past had been wary of selling old liabilities from a reputational perspective, but Corver believes the industry is now mostly "over that hurdle."

Lloyd's playing key role

A number of companies have looked to exit unprofitable lines of business to improve performance in the last few years, and run-off acquirers have been the beneficiaries. The performance drive at Lloyd's of London has been a major source of interest.

PwC's Augustin said that Lloyd's was "a really important market" for run-off buyers, adding that some players who do not have a Lloyd's platform have been looking to get into the market via run-off transactions. For instance, in announcing the approval to set up a new Bermuda-based reinsurer, Europe-based Compre said the new company was "consistent with the group's plans for strategic expansion into the U.S. and Lloyd's legacy markets."

Prices in many silos of the insurance and reinsurance industry are rising, presenting opportunities to write new business at attractive rates, and selling old liabilities can be a way to free up capital. KPMG's Gale said freeing up capital internally through run-off sales "makes a load of sense."

The COVID-19 pandemic is bringing a slew of additional claims, and the capital markets volatility triggered by the outbreak could erode insurers' capital bases, providing further impetus to look at exiting old liabilities.

Waking the giant

The U.S. market is also becoming more active. A common approach there is to first transfer old liabilities to the specialist run-off market through a loss portfolio transfer deal. That is then followed by a legal transfer of the business later to give the seller a complete exit. This is now becoming more possible in the U.S. as several states, including Oklahoma, Rhode Island and Vermont, now have insurance business transfer legislation in place.

R&Q entered a loss portfolio transfer reinsurance deal with Phoenix, Ariz.-based Repwest Insurance Co. in April, and intends to go through with a business transfer using Oklahoma's legislation.

"I think that will open up a lot of opportunities once companies start seeing that they can get that full finality on those liabilities and not just economic," Corver said.

Gale said that, if the transactions awaiting approval in the U.S. are sanctioned, there should be "significant growth" in transfer-type deals in the country.

Opportunities in the run-off market have piqued investors' interest, giving acquirers additional funding to expand. In December 2019, OMERS, the pension plan for Ontario's municipal employees, announced it was buying a 40% stake in Fairfax Financial Holdings Ltd.'s RiverStone Insurance (UK) Ltd. More recently, R&Q in April received $100 million of new equity from investors Brickell Insurance Holdings and Hudson Structured Capital Management. Hudson Structured has also reportedly invested £23.2 million in Compre.

High hurdles

The deal-flow potential in the market could attract new acquirers. Augustin said PwC is "working closely with a couple of new entrants." Gale added that there are "a number of organizations" looking to enter, with one or two "getting close to raising very significant sums to be significant players within this market."

Starting up in a market where the incumbents have built reputations and track records over decades will not be easy. Alex Roth, group chief strategy officer at Malta-based run-off buyer DARAG Group Ltd. acknowledged that there was space for new entrants. But for a "pure start-up player, even with capital backing, it will be very challenging to get into the market," he warned.