More insurance run-off and ILS investor initiatives expected – PwC

Capital markets and ILS investors will increasingly look to partner with run-off managers, in order to access the returns of non-life run-off insurance or reinsurance portfolios, according to consultancy firm PwC.

The European non-life insurance and reinsurance run-off market is expected to continue to grow. Currently PwC estimates that the non-life European legacy insurance market consists of run-off reserves worth €247 billion, an increase of €5 billion compared to last year.

Further growth is expected, particularly as Europe faces the new regulatory regime of Solvency II and insurers are now putting portfolios into run-off earlier than ever.

Dan Schwarzmann, head of solutions for discontinued insurance business at PwC, commented; “The European insurance run-off sector has seen plenty of activity and we are certain run-off liabilities will continue to grow. Solvency II implementation is promoting a sharper focus on capital and providing an impetus for insurers to assess the future of their non-core portfolios.

“The current vibrant M&A scene in the live insurance market should also create future activity in the run-off sector as merged companies focus much more on what books to discontinue. Our survey respondents indicate they expect to continue to see significant run-off M&A activity involving small-mid size portfolios (€10m-€100m) over the next few years and we believe there is also scope for larger deals to come to market.

“The run-off market has a history of innovation and, as liabilities continue to grow and run-off and legacy management moves higher up the list of priorities for Continental European Boards, we expect to see more creative ways of providing certainty and finality to run-off books.”

With the insurance and reinsurance run-off market expected to grow, it will present opportunities for capital market investors to step in, according to insights from PwC’s 9th annual survey of discontinued insurance business in Europe.

Among the significant developments expected in the future for the insurance and reinsurance run-off markets, is the increasing interest in run-off portfolios being shown by ILS investors and the capital markets.

It’s expected that run-off managers, who have the best view of the portfolios of discontinued insurance and reinsurance business as they are under their management, may increasingly look to partner with ILS investors in order to finance deals.

This may not be for the full life-time of the businesses liabilities, rather being for fixed terms that enable investors to finance the risk, benefit from the returns over the fixed period, safe in the knowledge that the run-off manager has a good handle on the liabilities and the rate they will run down at.

Bryan Joseph, partner at Pwc, explained what is seen to be driving this trend; “The search for additional yield by investors in this very low interest rate environment has increased their interest in alternative asset classes, among which is insurance.

“Purchasers of run-off portfolios have often used reinsurance as part of their bids in order to enhance their own yield and to meet the solvency requirements of the regulators. This provides them with solvency capital and therefore by definition is attached only in extreme scenarios.”

In a contained format, a run-off portfolio could provide attractive returns to investors, making the market a likely source of future opportunities for ILS investors and the capital markets.

“An asset providing suitable yields and the default characteristics that only arises in extreme scenarios is attractive to certain long term funds and one of the run-off providers has launched an ILS fund to concentrate on these risks specifically. That side of the market remains in its infancy but it is expected to expand as they become increasingly comfortable with writing this risk,” Joseph continued.

He is referring to the Credit Suisse Asset Management (CSAM) insurance-linked strategies team and sub-advisor ILS Investment Management (ILSIM) initiative, that saw a $576m fund being raised to back run-off portfolios managed by run-off specialist Armour Group Holdings Limited.

As the ILS market continues to innovate and the insurance and reinsurance sector recognises that ILS and the capital markets have both the appetite and the efficient capital to back run-off risks, the two markets are expected to increasingly work together.

Run-off insurance business is a huge opportunity, if structured in a way that allows investors to get in and out of the risks as suits their risk appetite. We can expect to see ongoing development of this niche market in years to come.

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