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Exchange rates and monolines drove rise in run-off The reasons for this dramatic increase, says the survey, are largely due to the monoline insurers and the drastic reduction in their financial guarantee market – accounting for £7.1 billion of run-off – plus of course the impact of the 27 per cent change in the dollar and 24 per cent change in the euro exchange rates against sterling. Although overall the survey points to the fact that the run-off market escaped relatively lightly in the recession, there is no doubt that the impact of depressed investment income – and substantial investment write downs on the balance sheet – is taking its toll. This, plus the liquidity constraints and pressure on capital, is definitely leading towards a change of run-off strategy in the future, said Goodlud. Darryl Ashbourne (right) of KPMG commented on the findings of the survey when it came to the different strategies to extract capital, There is clearly continuing interest in schemes of arrangement and Part VII transfers, however. Up to the end of 2008 there were a total of 177 schemes, although that figure includes 82 separate entities in the EW Payne pool scheme. Notwithstanding the outcome of the Scottish Lion scheme which is still pending with a court hearing today (14th October), the survey indicated that schemes would continue to be used as an effective exit strategy in the right circumstances. As far as Part VIIs are concerned, the survey findings suggest that from now on they will be used more as an external rather than internal mechanism; this is probably because most internal restructurings have been completed and now companies are looking to divest themselves of redundant portfolios to third parties. The impact of Solvency II is definitely expected to bring greater challenges to the run-off sector; regardless of the Directive’s stance on run-offs, the FSA has made it clear that it will be applying Solvency II to UK run-off companies without the exemptions relating to age or size of run-off. However, the survey responses showed that companies are ‘well engaged’ in the compliance process, said Goodlud – a process which, he points out, will cost the entire UK insurance industry £50 billion, according to a recent announcement by the ABI, which is roughly equal to the market’s capitalisation. As for new business emanating from Solvency II, the survey predicts another wave of transfers/restructurings before 2012 including the ‘identification of under performing business.’ The survey noted changes in run-off buying trends, with the Unionamerica sale representing the high point of buyer interest, following which there has been less buyer interest and lower prices. KPMG’s John Wardrop also suggests that some former acquirers may even leave the market. But, he stressed, although prices are low, the amount of business on offer is growing and so ‘the trick is to align the price to availability.’ As far as run-off management company consolidation is concerned, Wardrop says that there are a number of drivers present at the moment, including economies of scale and the wish to expand into new areas – which may mean we see more unions along the lines of Axiom/CTC and PRO/Tawa. Related story: Non-life UK run-off grows by 30 per cent |
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As Steve Goodlud (pictured, left) of KPMG explains: ‘A large proportion of run-off claims come from overseas – particularly the APH claims – and so companies reporting in sterling are facing a significant distortion of results.’ So, for example, he points out in the case of Equitas its liabilities rose to £5.9 billion at its year end March 2009 compared to £4.5 billion at year-end 2008 – the highest in the seven years of the survey.
pointing out that commutations, for example, are seeing far more activity: ‘Commutations are more attractive at the moment with companies pushing at an open door with counterparties who are facing capital liquidity issues.’ Ashbourne also stressed that, for many companies surveyed, the process of commutation is seen as relatively straightforward and less costly than other tools.
