BMS’ Mory Katz tells The Insurer that all existing long-tail reserves are potential opportunities to utilise a growing range of run-off products, as insurers look to legacy solutions as part of their overall capital management strategy.
How big is the US run-off opportunity for legacy consolidators and intermediary/advisory firms like BMS?
The annual PwC survey estimates the amount of non-life legacy liabilities in the US to be approximately $350bn. It is not clear how much of that amount is addressable in the short term for acquirers or brokers, however it is clearly a large amount. At BMS we consider all existing long-tail reserves to be a potential source of these transactions depending on our client’s needs and situation. This applies even to lines of business they intend to continue writing on a live basis. These transactions can be structured for reserves from a date prior, or even a range prior. Without any doubt, this is an active, growing market and capital is flowing into it at a fast rate.
Where are you seeing the strongest demand from your clients for legacy solutions?
The most common forms of legacy reinsurance products are loss portfolio transfers (LPTs) and in- or out-of-the-money adverse development covers (ADCs). An LPT may include a transfer of operations, claims handling and IT. Clients with long-tail casualty reserves find these products especially helpful for stabilising results, improving their BCAR scores and freeing up capital for other purposes, including acquisitions or growth. In a case where an LPT transfers operations, there are additional benefits. These may include reduced distraction, avoiding diminishing scale in claims and an ability to demise expensive or outdated systems.
How has the perception of run-off changed in the insurance company boardroom?
The stigma some associated with legacy is gone. Legacy has evolved over the past few years from a way to rationalise troubled or discontinued business to a technique that is part of a company’s overall capital management, operations and IT strategy. Legacy is now a way to significantly improve a company and respond to the increasing granularity of the capital adequacy standards in the regulatory process. At BMS we consider all existing reserves to be potential opportunities to utilise run-off products. The march towards an insurance business transfer process in the US as well as the proliferation of division statutes has also stimulated interest in these techniques.
What part do data and analytics play in identifying and evaluating potential legacy transactions?
This is one of the most important emerging fields in legacy and is an area where BMS has first-rate capabilities and a competitive advantage. If you think of a legacy transaction as a form of insurance on a company’s reserves, like any insurance the best time to buy it is before you need it while it is both less expensive and more readily available. Data and analytics are the key to identifying such situations and assisting our clients in understanding the long-term benefits of these transactions. At BMS we have the ability to advise clients how these solutions can help their business by showing actual “before and after” results and analytics. It is also the case that claims handling is benefiting from advanced analytics and data, which lowers the cost of these transactions.
How do you work with your colleagues on the live side of the business to identify and pursue opportunities for legacy transactions?
The philosophy at BMS is to bring the entire capabilities of the organisation to the client to help them with their reinsurance and capital needs. This means live reinsurance, capital markets through our registered subsidiary, analytics, and now increased focus and specialisation in the legacy space.
What other innovations are you seeing in the legacy market?
Over the past few years, capital has flowed into the legacy space. This means new acquirers have been formed and funded by large equity firms. Over a half a dozen have entered in the past two to three years with billions to invest. The new firms are specialists in legacy and in many cases it is their only business. As a result, they are attracting top talent, are extremely sophisticated and creative at structuring and are thinking and investing for the long term. I am also aware that new products are being developed to service niche markets. BMS has extensive contacts with run-off acquirers and knows their capabilities and appetites.
There is no reason ILS, hedge funds and other vehicles cannot invest alongside or through carriers and acquirers. Increasingly there is an interest in syndicating transactions to spread risk.
What impact is lower for longer interest rates having on the legacy sector?
There is no doubt that lower interest rates affect the price of a transaction since the earnings expected by the assuming company on the float is an important part of the price indication. However, the lower future investment return implied by these rates is already present for the ceding company. As you can see from the dramatic increase in activity in this space, the rate environment has not slowed down the pace. That means that someday when rates rise again, the pace may increase even further.
Uniform process and regulatory acceptance to drive IBT in US legacy market
Uniformity of the process and regulatory acceptance are vital if insurance business transfers (IBTs) are to become a mainstream solution for run-off liabilities in the estimated $350bn US legacy market, according to BMS senior consultant Mory Katz.
As previously reported, in October 2020 Enstar completed the first ever IBT in the US between two run-off subsidiaries using a legislative framework established in Oklahoma for such transactions.
A second IBT structured by rival Randall & Quilter has since secured approval from the Oklahoma Insurance Commissioner for what would be the first transaction between separate parties.
Katz had an active role in the emergence of IBTs as managing director at Pro Global and CEO of its US subsidiaries, including ProTucket, which in 2018 became the first Rhode Island domestic insurer set up to provide IBTs under the state’s Solvent Run-Off Act.
ProTucket was established with the support of Swiss Re, which would reinsure the transferred business.
“The company was created because it was obvious the US market was going to benefit from the mainstream use of these techniques. A few years later it is clear we were a bit early, but right.
“The first IBT has been finished in Oklahoma where there is a similar law and a second is under way. It won’t be long until these tools are used commonly in the industry,” he told The Insurer in an interview.
In order for the solution to gain the level of widespread acceptance of Part VII transfers in the UK there will need to be greater uniformity in the IBT process and regulatory acceptance, however.
Katz noted that in the UK there have so far been over 275 Part VII transfers without a single failure.
In contrast with a single national regulator approving such transactions in the UK, the US regulatory system is driven at the state level.
“Although current IBT laws only require the transferring and receiving regulators to formally approve, in practice it is very important that all regulators feel comfortable with the process.
“The regulators have embraced this process dutifully balancing their responsibilities to the public with the need for this mechanism in the US,” the executive noted.
That has led to two working groups being established at the National Association of Insurance Commissioners, with the National Conference of Insurance Legislators and various trade associations also active.
“In just the past two years alone, the thinking has changed from whether this process will be commonplace in the US to when it will be,” Katz observed.