The recent completion by legacy solution specialists of a number of acquisitions in the live insurance space could be a watershed moment for the standalone run-off market. The original business concept of a run-off manager was a pure focus on legacy business - to achieve finality in legacy claims and manage the outstanding book of legacy business in the same cost efficient way that an insurer would manage a renewal book of business.
In the past 12 months, run-off players have deployed around USD1 billion of capital in acquiring live insurance entities, including paying a significant amount of goodwill. The reason for this apparent change in strategy is to become more competitive with reinsurers whose run-off divisions are able to offer rated reinsurance paper. Having the capital resources to complete a legacy acquisition are on their own not sufficient for some vendors, and the reputational risk associated with claims management strategies still remains an important factor.
Given the pressures in the reinsurance market, some reinsurers see legacy transactions as an opportunity to deploy capital at attractive returns. This opportunity is not solely predicated on a more aggressive investment strategy for the assets supporting reserves and a more aggressive claims settlement strategy for the reserves themselves. The ability to use one’s own rated paper to renew profitable parts of the run-off portfolio enhance deal economics and enable higher premiums to be paid. By contrast, a standalone run-off entity would need to partner with a live insurer to dispose of the renewal rights in a secondary transaction. This both increases the execution risk of the primary transaction and squeezes the economics for the run-off provider, reducing the acquisition price that can be paid.