Run-off or legacy business is a common part of the (re)insurance industry but has yet to gain traction in Asia. We seek to understand what run-off actually is, and what it means for the Asian (re)insurance industry.
Catalina Holdings’ acquisition of Asia Capital Re (ACR) last December was the first major run-off transaction in Asia. While this may pose questions for Asia’s (re)insurance industry, Catalina chairman and CEO Chris Fagan recently told Asia Insurance Review that across the more developed insurance and reinsurance markets in Bermuda, Europe and North America, run-off acquisitions are a normal part of the industry.
“There is always a rational reason why businesses decide to offload some - or in many instances all - liabilities to a run-off specialist like Catalina,” he said. “The specific reasons may vary, but they can include regulatory requirements, capital release, portfolio rationalising, loss of rating or material downgrade, changes in business strategy or the pursuit of greater operational efficiencies.”
There are two main structures for run-off transactions. Either acquisition of an entire company, which was the case for Catalina’s transaction with ACR, or portfolio transfers which typically involve a specific portfolio or class of business in a (re)insurer’s portfolio. For instance, if an insurer wants to exit the marine sector in a specific market but still maintain its other lines of business in the same market, it could sell the marine book as a portfolio transfer to a specialist such as Catalina.
Companies like Catalina are able to acquire such books of legacy business and manage them in run-off to finality via their most appropriate platform – for example, Catalina acquired ACR in part to act as a platform from which to add additional Asian run-off business in the future. These ‘platforms’ allow run-off specialists to acquire new portfolios and to administer policies, as there is still a need for an insurer to handle the policies and ensure that policyholders continue to receive service.
However, as no new business is written, the policies eventually run their course and the book ends. Without the need for underwriters and the significant resource this requires, run-off businesses can run lean and highly efficient operations.
Why Asia?
Asia is the growth market of the world, so it seems counter-intuitive for Catalina to think that there is good opportunity for them to do business here. After all, if (re)insurers are growing, why would they be in run-off?
Mr Fagan pointed out that even in growing markets, run-off specialists play an important and valuable role in keeping these markets healthy. For example, the acquisition of legacy portfolios provides a ready-made solution for regulators wanting to avoid distress in the market. They also provide a clean exit for owners from existing and future liabilities and the release and redeployment of substantial and unproductive capital, thereby supporting a more efficient market.
Run-off specialists also offer a neat solution for those looking to exit less profitable business. There have already been several examples, such as Aviva’s exit from Hong Kong, FWD’s exit from Singapore’s group medical business and ArgoGlobal’s exit from Asia. These companies saw that the growth prospects in the region did not meet their expectations for profitability.
A PwC survey on run-off prospects published in September 2019 also noted that Asia represents the most likely emerging legacy market to develop outside of the UK, Europe and the US over the next five years:
“The Asian run-off market has experienced the largest growth in our estimate of liabilities, increasing by 26% from $80bn to $101bn. Much of that growth is attributable to the motor and health insurance markets,” the survey said. “An Asian legacy market appears to have significant potential in terms of size and the existence of well-understood restructuring tools including schemes of arrangement and business transfers that feature in territories such as Hong Kong, Singapore and Malaysia. However there remains uncertainty as to whether legacy restructuring will become widely utilised in the near term.”
In PwC’s publication, Swiss Re senior portfolio manager Adam Horridge said, “What we might call the ‘run-off market’ in Asia is extremely diverse, reflecting its wide array of developed and developing markets, levels of experience and transfer mechanisms available. Run-off books are often ‘greener’ (i.e. less mature with limited loss experience data) than Europe and the US, with companies changing strategy and restructuring more often. This is especially evident in the high growth markets, representing a key motivation for transactions.”
Ultimately, while transactions like Catalina’s acquisition of ACR was the first major run-off deal in Asia, we can expect to see more in the coming years. In this respect, in time the Asian (re)insurance market is likely more closely to align with what is currently seen in Europe and the US. A