Total liabilities of the UK non-life run-off market increased by approximately 30% to an estimated £37.4bn in 2008, up from £28.3bn in 2007. This equates to 18% of the non-life market as a whole, according to the seventh KPMG Run-Off Survey of non-life companies.
KPMG said the increase in the value of liabilities was primarily a result of the demise of the financial guaranty insurance market and the fall of UK sterling against the US dollar and Euro currencies.
Total capital tied-up in solvent UK non-life companies in run-off also increased by almost £1bn, of which around 75% is attributable to new entrants to the run-off market from financial guaranty businesses.
John Wardrop, partner in KPMG’s Restructuring Insurance Solutions practice said: “Our research tells us that capital efficiency continues to be a priority for the UK run-off market. Depressed investment income due to low interest rates means companies in run-off are under pressure to make their businesses more efficient.
“The size of the UK run-off market could have been significantly larger had there not been approximately £1.8bn of claims paid through commutations and other settlements, signifying the continued desire of the industry to maximise the value of and access trapped capital.”
The survey highlights the continued use of the scheme of arrangement mechanism; 87 were sanctioned in the year, including 82 companies involved in the EW Payne pools schemes. KPMG said this demonstrated ‘strong support for this finality tool’.
Despite the recession, it added that interest remains high in mergers and acquisitions in the run-off market. However the availability of capital and finance has been restricted and some buyers have had to be more selective.
Mr Wardrop added: “The sale of Unionamerica Holdings marked a high point in the UK M&A market where the purchase price of some US$300m exceeded the net assets acquired. However, shortly after this transaction was concluded the impact of the financial crisis in the UK began to bite. There are still a number of London Market legacy portfolios available for sale, providing the price expectations of both buyer and seller can be met in the current financial climate”.
The survey also reaffirms the market opinion that Solvency II is high on the agenda for businesses in run-off. Steve Goodlud, director in KPMG’s Restructuring Insurance Solutions practice noted that: “Insurance groups are undertaking a host of projects on or around Solvency II, in particular seeking to create efficient capital structures”.
Mr Wardrop concluded that “the landscape for legacy business continues to develop in response to economic and regulatory pressures. This continues to present opportunities as well as challenges for the market.”