10 October 2007

Non-life insurance run-off market contracts by over 14%, according to survey

• Total liabilities in UK non-life run-off have decreased by £5.5 billion;
• Capital tied up in UK non-life run-off has increased to £4.9 billion.

London, EMBARGOED until 00.01 Thursday 11 October, 2007: 2006 was a year of significant change in the UK non-life insurance run-off market, according to the findings of the KPMG/ARC Run-Off Survey – Non-Life Insurance 2007. This is the fifth edition of the report which is produced annually by KPMG LLP (UK), and commissioned by the Association of Run-Off Companies Ltd (‘ARC’).

Proactive management of existing run-off portfolios, absence of new run-offs and the weak US Dollar combined to bring down total estimated liabilities in the UK non-life run-off market (including Lloyd’s syndicates) by over 14 percent to £32.7 billion at the end of 2006, a reduction of £5.5 billion on £38.2 billion at the end of 2005. As a percentage of total liabilities, run-off now represents 18 percent of the non-life market as a whole, slightly less than in 2005.

Mike Walker, partner in the KPMG Restructuring Insurance Solutions practice commented:

“For the first time in the five years that we have been producing the survey, we have identified a significant contraction in the size of the UK non-life run-off market. The £5.5 billion decrease in total liabilities enforces the view that the UK is a centre for the pro-active management of runoff. It also reflects a growing appetite for finality.”

The success delivered by run-off specialists has attracted a number of new investors to the run-off market, which is testified by the landmark acquisition of Equitas by Berkshire Hathaway. The challenge for stakeholders will be generating, accessing and utilising the surpluses tied up in legacy portfolios.

Walker continues “With over £418 million liabilities of non-life insurance business subject to solvent schemes of arrangement to the end of 2006, we have witnessed a threefold increase on the previous year, demonstrating the continued support for this exit mechanism.”

Steve Goodlud a Director in the KPMG Restructuring Insurance Solutions practice said:

“Our survey also demonstrates that the popularity of Part VII transfers, like solvent schemes, is continuing and these are widely used finality tools for stakeholders. There have been 20 Part VII transfers for non-life portfolios in 2006 alone, 13 of which were predominantly discontinued business. This is more than the total number of Part VII transfers involving non-life portfolios completed prior to 2006. The ability to include the reinsurance asset as part of the transfer has made them very attractive as a reorganisation tool.”

“The survey, which includes Lloyd’s business but excludes the UK business of companies from other EU countries, found the total liabilities of the Lloyd’s syndicates’ open years in run-off shrunk to £5.2 billion. Goodlud continues “Lloyd’s has continued to innovate its approach to run-off liabilities, including amending the ‘reinsurance to close’ rules and adopting the Part VII transfer mechanism. However, we are yet to see solvent schemes at Lloyd’s.”

Philip Grant, Chairman of ARC concluded:

“This survey shows that the legacy management sector in the UK is doing a tremendous job of closing out discontinued business portfolios. However, it must now build on that success by expanding its offering into new areas. The new lines of legacy business will not be the same as the toxic portfolios of old. To preserve the brand and reputation of their original carriers they will need a different, less aggressive approach to management. They will also run off more quickly, which means service providers will have to rethink pricing structures and resourcing. Adapt or die is the watchword of every business sector. Given the nature of our work, legacy management professionals have less excuse than most for failing to recognise this need.”

You can access the survey by clicking here