14 September 2015 Insurance

DARAG launches R-pad: first sidecar for run-off business in EU

DARAG, the European run-off specialist, has formed what is effectively the first run-off sidecar within the EU using a protected cell company in Malta.

Arndt Gossmann, the chief executive of DARAG, said that the platform, which the company has named R-pad (Run-off pad) represents a natural evolution for the industry. Driven by Solvency II, more insurers are seeking to move discontinued business off their balance sheets while investors are increasingly realising the potential opportunities in this sector.

“We have noted that more and more private equity vehicles are interested in making direct investments into run-off. This platform allows third party investors to invest in a specific portfolio in a quick and easy way, without having to form or invest in a full insurer,” Gossmann said.

The management of the portfolio including claims handling would be done by DARAG, which would also take a minimum 10 percent stake in each deal, something Gossmann said would give both the cedant and investor reassurance the portfolio would be well managed. DARAG will also act as the ultimate guarantor on all the risks in the event of severe adverse claims development.

Gossmann said investors are increasingly grasping the benefits of investing in discontinued or run-off business. It is non-correlated with other risks and, because the risks are mature, it is easier to understand and price than many types of live business being written on an ongoing basis.

“But the barriers to entry are high because to invest in this space you effectively need an insurance company,” he said. “By using this protected cell structure on Malta, that we have called R-pad, they can do it in a quick and easy way.

“They capitalise the cell and receive shares in that. The cell then buys the portfolio but we manage the portfolio and also guarantee the structure. A deal can be turned around in not much more than four weeks.”

He said DARAG will use the R-pad in two circumstances initially. Firstly, if third party investors approach DARAG with a portfolio they want to invest in, DARAG can now facilitate such a deal using this structure.

Secondly, DARAG may also use the platform to structure very large deals in a more efficient way, whereby a portion of a portfolio may be retained by DARAG and a portion transferred to the R-pad where other investors may participate, including the original cedant on certain risks.

“Driving by Solvency II there is a growing number of very big deals coming to the market and this will allow us to offer a more efficient tailor-made approach to portfolio transfer,” Gossmann said.

Claus Stenbaek, managing partner of Keyhaven Capital, which acquired DARAG in April 2014, said that he forecasts strong growth in the run-off sector as, driven by Solvency II initially, it will become an increasingly sophisticated and mature market in Europe.

“We are a long term investor in companies and sectors where we see strong growth,” Stenbaek said. “We also like disruptive business models. Solvency II has been the catalyst but we believe portfolio transfer and more sophisticated solutions around that will become an increasingly mainstream in the European insurance markets.

“We think run-off as a balance sheet management tool will become integral to the way insurers operate in the future. Although it has been kick-started by regulation, it will now naturally develop well beyond that.”

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