Run-off: An insight into the biggest ever run-off startup

In January 2017, the largest ever startup re/insurer dedicated to run-off was launched on Bermuda with more than $500 million in capital. The launch of the company was taken by many as representing an indication of the growing importance and anticipated growth of the legacy market globally.

Premia Holdings was listed as a class 4 property/casualty reinsurer and will focus on providing run-off solutions. It raised $510 million from founding investors including Kelso & Company, a private equity firm, its co-investors, and an affiliate of re/insurer Arch Capital Group.

Bill O’Farrell, Premia’s CEO, says that the company’s backers felt there would be a growing demand for the services of such a company in what is also a burgeoning market.

“The startup capital was driven by a couple of things,” says O’Farrell.

“The investment community recognised that run-off is a viable reinsurance niche market that’s underserved today and there are growing opportunities for a dedicated specialist player in this business.

“Second, I believe we’ve put together a compelling value proposition with a team that is deeply experienced in reinsurance, investment banking, actuarial science, claims and has a strong track record of success. These attributes, coupled with Arch’s sponsorship, clearly attracted our investment partners.”

A segmented market

When Premia was launched O’Farrell said that the P&C run-off market needed a specialist solutions provider.

“In terms of where Premia fits into that market, if I were to segment the market, I’d say that there are now only two other established specialist run-off reinsurers in the P&C middle market space: Enstar and Catalina.”

At the larger end of the scale is Berkshire Hathaway, focusing on very large transactions, and at the smaller end of the scale there are a number of companies that are forced to focus on smaller deals.

Compared to the traditional reinsurance market, there are a limited number of competitors in this niche,” he says.

“That makes sense because it is a smaller market and requires specialised knowledge. Nonetheless, we are hearing from brokers and ceding companies alike that there is a strong desire for markets in the middle market space and greater opportunity for more capital to be deployed on transactions that are above the $100 million mark, but usually below the $500 million mark, in total reserves ceded.

“Between those two numbers, $100 and $500 million, we believe we offer a compelling value proposition of a strong balance sheet, engaged management team and deep understanding of the business.

“There’s certainly strong competition but there are simply not very many other spaces in the reinsurance marketplace where you have just a handful of reinsurers. Most lines of business have 25-plus competitors in them, so to have a space where the competition is four to six markets and often below that is attractive,” he adds

A number of factors are combining to drive further growth in the run-off/legacy market.

The first is that capital efficiency is becoming more important to the industry and, as such, re/insurers want to become more capital-efficient so that they can increase their rate of return and focus all their energy on their core business in this very competitive marketplace.

In addition, the greater transparency of capital costs and the drag run-off operations can have on a company’s returns has many of them looking to find a solution to address their non-core business.

O’Farrell also points out that as insurance mergers and acquisitions (M&A) activity picks up, Premia believes that buyers and sellers will seek to enhance the competitiveness of their bids by agreeing to sell or reinsure operations that will not be core to the new combined company.

“While this may be relatively narrow market niche, it is one that is under-served today—and that’s why Premia thinks it’s the right place for it to be.

“I am setting up a reinsurer to focus on traditional reinsurance, but I wouldn’t suggest that right now is the ideal time for a new market participant,” he says.

For the run-off market however, he thinks now is shaping up to be a good time to bring in a new company, given where the active market is today, the increased regulatory capital requirements, more insurance M&A, rising interest rates and a lack of dedicated specialists already in the place.

Ahead of its own time

It could be argued that Premia has come a little early to the space, but O’Farrell thinks it’s being more proactive than reactive in this regard.

“Traditionally reinsurers have generally been set up after an event—there’s a crisis, and then capital pours in to address the issue. We believe that Premia is at the tipping point of this business and as a consequence the company thinks that there is definitely going to be more opportunity coming down the road.

“That said, even if the tailwinds we foresee don’t emerge, we firmly believe that there will be sufficient opportunity for Premia Re,” he says.