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14 September 2017
London
Reporter Becky Butcher

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Run-off specialists gearing up for increased flows

Transaction volumes in the run-off market will continue to grow because of an influx of capital and increased amounts of buyers and sellers of legacy reserves, according to Andrew Beecroft, head of M&A advisory of GC Securities.

Beecroft suggested that the specialist legacy market is “gearing up in anticipation of more run-off deals".

He said: “We have seen several new entrants into the space, such as the Arch-backed run-off vehicle Premia Re and the establishment of a run-off platform by Fosun.”

He noted that this year there have been some “notable transactions”.

In July, Amtrust Financial Services bought $400 million adverse development coverage from Premia, while at the start of 2017, AIG struck a deal with Berkshire Hathaway in which Berkshire agreed to take on up to $20 billion in long-tail liabilities written prior to 2015.

However, Beecroft suggested that the current flow of legacy run-off business may not be meeting demand, and competition over deals is strong. He suggested that run-off specialists are positioning themselves in anticipation of increased flows in the enduring competitive market.

He said: “As the current competitive market continues, run-off entities expect more companies to discontinue unprofitable lines of business, and if the claims environment heats up, or even normalises, this might put more business under stress.”

Increased sophistication around proactive capital management is also driving increased use of legacy solutions.

“The nature of capital modelling and assessment has developed significantly over the last decade. The markets are driving towards a better assessment of risk capital requirements, largely propelled by rating agencies and regulation, in particular Solvency II,” Beecroft explained.

“Within the dynamic of strong competition amongst legacy capital to provide solutions, the once daunting economics of discharging past liabilities has become an analysis of cost of capital and operational arbitrage between the live market and the legacy market. This is set to continue and will create a broader set of transaction outcomes”

Beecroft predicted that the weight of appetite for legacy risk, combined with insurers seeking active capital solutions in a challenging market, will propel strong market activity.

He explained: “The broad expectation of a strong run-off market going forward contrasts with rumours that a number of owners of run-off operators have an appetite to exit the market and others are diversifying into live markets. This may suggest some of the traditional run-off market players are less optimistic than the broader market sentiment.”

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