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A striking feature of the run-off sector recently has been an upsurge in the sale of portfolios or companies in run-off. Owners are increasingly eager to get run-offs off their books, and the pool of potential buyers has expanded as service providers have seen an advantage in purchasing run-offs instead of just managing them.

The concept of a third party buying up discontinued business in order to shut it down is not of course new. For some years companies such as Tawa, Castlewood and Ruxley have specialised in acquiring run-offs, convinced that they can extract some profit from the deal. The buyer could be expected to sell at a discount in exchange for an end to liabilities and the acquiring company would rely on its expertise, eg. in claims management, exit strategies and reinsurance recoveries, to bring about accelerated closure.

Observing the success of these specialist acquirers, sometimes referred to as 'vulture funds', many outsourced management service providers concluded they were missing a trick here, and that acquiring rather than managing was a game they could play as well. Some such as Omni Whittington have been in the run-off acquisition market for some time, while others such as Axiom have only recently found themselves in a position in which to join the buyers, in the latter case after a management buyout backed by Royal London Private Equity.

Nick Eddery-Joel, director – corporate solutions with Axiom Consulting, sums up the attraction of acquiring run-offs as, quite simply, 'the opportunity to create and realise value by the imposition of specialist management skills.' He says Axiom favours companies or portfolios with 'long tail stable liabilities'. The extent of reinsurance protection on the portfolios, he adds, is 'not an issue as long as the security is good and there is an opportunity to commute.'

As to IBNR, 'it's not the amount of IBNR that is an issue but the extent to which the vendor believes that the IBNR is sufficient,' says Eddery-Joel. 'This is not normally a problem as actuarial reports will substantiate the reserving position. At the end of the day, IBNR or free capital is the same money but in different pots. I would rather surplus funds were kept as shareholder funds and not IBNR.'

John Winter, Chief executive of Ruxley Ventures, says owning the discontinued business enables Ruxley to deploy 'specially developed systems and an expert team of specialists to deliver appropriately timely finality,' under what Ruxley calls its policyholder finality programme (PFP).

'Achieving swift finality is fundamental to the success of closure initiatives, as this delivers considerable savings in terms of legal and administrative expenses, so directly benefiting policyholders by releasing monies to fund payment in full of claims,' observes Winter. 'The policyholder consultation process that underpins the PFP model also means policyholders are equipped to make an informed decision as to whether they wish to elect to settle their liabilities in a consensual court approved arrangement.'

Just as the number of parties interested in buying run-offs has increased, fortuitously the opportunities for purchases seem to have grown too. 'There has been an increase in the number and size (in particular) of portfolios for sale,' notes Winter. 'Potential vendors are companies with forward driven strategies which wish to resolve the issue of their discontinued portfolios and associated legacy issues.'

Eddery-Joel agrees that the market for acquisitions is growing: 'There is now more awareness that there are investors willing to acquire run-off entities,' he says. 'Reasons for selling remain as before, and range from a desire to simply rid the company of a problem, to extracting some value through a sale.'

Spring 2005

Selling like hot cakes

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