Run-off: An indication of a thriving market
A confluence of influences that have been gaining momentum for a number of years is combining to drive more insurers and reinsurers to consider run-off or the divestment of business as a viable strategic option. This, in turn, is leading to a rapid uptick in mergers and acquisitions (M&A) that have this as their driver.
Several factors are driving this change. In part, the 2008 financial crisis created a catalyst for change in the industry due to low interest rates and pressures from investors for returns. This forced more parent companies to look to retrench and, as a result, more re/insurers started to put blocks of business into run-off or look for exit strategies.
This trend was true in the US and in many areas of Europe as domestic carriers looked to reduce risks and focus on their core businesses and improve return on equity (RoE). Some of the bigger players have started to move business into run-off to help them achieve this.
Meanwhile, the dynamic in Europe has been further changed by the introduction of Solvency II. This has also resulted in insurers throughout Europe spending more time focusing on run-off business in order to restructure and optimise capital.
More focus on legacy
It appears quite likely that we are seeing only the beginning of the true implications of Solvency II on the market. As the framework becomes more embedded across the whole of Continental Europe it is expected to drive a continued focus on legacy portfolios.
Equally, it appears that, while some of the bigger and more sophisticated players factored Solvency II into their planning early and had established a strategic plan ahead of the legislation coming into force, many smaller players are still getting to grips with the full implications of the legislation.
Many experts predict that as more medium-sized and smaller insurers gain a full understanding of the implications of the regulation on their capital and the way different types of risk are weighted under the legislation, even higher levels of run-off could result in the coming years.
Equally, as the soft insurance market and the low interest rate environment show no signs of abating, these wider market dynamics are combining with the implications of Solvency II to force more companies to consider all strategic options, run-off coming into the mix more frequently in these strategic discussions.
Many believe that, as such, run-off is becoming a natural part of the insurance cycle. Live insurers increasingly understand that run-off is an area where costs can be controlled, operational efficiencies achieved and value extracted to recycle capital to support core business.
In turn, all this has created a vibrant and competitive market for specialist consolidators, which are also evolving and becoming more sophisticated as they improve their data systems, claims expertise and operational functions allowing them to acquire and manage new portfolios of business relatively quickly and easily.
This has also meant that the sector has attracted investment from far more sources, with private equity, banking and pension fund investors all getting involved.
More deals on the way
Deals taking place in the run-off sector now represent a bigger proportion of overall deals in the industry.
According to an April 2017 AM Best report, European Mergers and Acquisitions: Consolidation is the Trend, in the European insurance sector, M&A subsided in 2016 after having reached high levels over 2014 and 2015. Yet 6 percent of deals in 2016 represented run-off deals in some form and, if experts are correct, this percentage will increase in 2017.
In the real world, these market forces are driving more deals with significant transactions in this space hitting the headlines on almost a weekly basis and startups being formed with the sole purpose of buying and managing large portfolios of business in run off.
