Press Coverage:
Vulture Culture?

"Now, more than ever, you need a reinsurer who knows what it takes to be successful" advised C.N.A Re in a 2001advertisement campaign. But fellow US carrier St Paul may demur after its Lloyd's based subsidiary sued a C.N.A Re successor company earlier this year in the UK High court over an alleged unwillingness to pay claims.

In fact, while the advertisements were still being displayed C.N.A. announced it was placing its subsidiary C.N.A. Re UK Ltd - then one of London's largest reinsurers - into run-off. In late October 2002, Tawa UK Ltd, a newly formed company ultimately owned by the entrepreneur Francois Pinault, acquired the reinsurance operation including some ?2.6bn of gross reserves after the UK regulators, the FSA, approved the transfer. But less than six months later and the renamed entity CX RE is already defending at least one claim for non-payment of claims and has attracted one formal complaint over its service levels.

CX RE is an example of a growing trend - the purchase of run-off accounts financed by institutions, funds or entrepreneurs who, in some instances, have little interest in underwriting. Are they vultures circling the industry for distressed carriers to exploit? Or are they a welcome addition? Capitalist angels, bringing finality and certainty to both policy holders and owners for an honest reward?

Either way, it's becoming big business. Experts estimate industry-wide run-off liabilities have grown to some $250bn - with more than $70bn in reinsurance - and are continuing to grow at around 10 percent per annum. In recent times, a number of well known names have placed all or some of their operations into run-off, including the aforementioned C.N.A. Re, Royal Re, St Paul, Overseas Partners Ltd, Scandinavian Re, General Re and Copenhagen Re. Indeed the largest ever run-off of a reinsurance group appears to be nearing completion, following Gerling Global Re's recent victory in the German Administrative Courts.

The traditional way for a carrier to exit its liabilities was to either manage run-off in-house or buy reinsurance. Indeed, the relative simplicity of the latter makes it a popular method for a (re)insurer to close its exposure.

The acknowledged master is Berkshire Hathaway, Warren Buffett's giant investment combine which has shown an appetite for assuming (re)insurers? unwanted long-tail exposures. A typical example occurred in 2000 when it reinsured the London market exposures of Aviva plc, the newly formed UK insurer created by the merger of Commercial Union and General Accident. In a transaction structured by the reinsurance brokers Benfield, Berkshire Hathaway subsidiary National Indemnity agreed to provide $2.5bn in reinsurance protection for the discontinued lines, while sister company General Re provided a further $570mn of cover for 2000 and prior year exposures on existing lines.

But there are limits to reinsurance as Nigel Montgomery, an insurance reconstruction expert with leading law firm DLA, explains: "Reinsurance is not true finality. Cover will be finite and you remain liable to your policyholders; also the due diligence can be protracted and there is always a danger of reputational damage because, while the policy remains in your name, the claims management is likely to be out of your control."

Nevertheless, there are ways in which a company can achieve true finality - albeit at a cost. "If a company has decided to exit, for whatever reason, then it has a number of options. It can maintain the status quo by managing the run-off from its own balance sheet or it can purchase a reinsurance programme. Yet in both cases the liabilities ultimately remain with the company," reveals Montgomery. "But true finality can be achieved by a solvent scheme of arrangement - an economically viable and self controlled process - or by a regulatory approved sale to a third party," he continues.

And there are a growing number of parties prepared to buy. In addition to Pinault's Tawa UK Ltd and Artemis Group, companies such as Renaissance Capital, Dukes Place (eg NW Reinsurance), Ruxley (eg City and General) and Castlewood (eg River Thames) are all committed to acquiring run-off books - if the deal is right. Most recently a new name entered the fray: Litigation Control Group. Formed in London by Lloyd's ex head of debt collection Philip Holden, the firm acquired Trenwick International from its Bermudian parent Trenwick Group Ltd in August. Nor is interest limited to the P&C sector. Swiss Re, the world's second largest reinsurer, has formed a vulture fund Admin Re to purchase books of life and health policies in run-off. In the summer, the firm revealed that it had paid $240mn to acquire Zurich Life, one of Zurich Financial Services? UK life assurers.

Should this growing trend be welcomed? Certainly some caution that there can be downsides to selling to third parties. Indeed Graham McKean, the co-founder of the independent international brokers the BMS Group, is concerned that CX RE may be going too far in resisting legitimate claims which could affect the reputation of the London market as a whole: "The FSA agreed the sale of a significant London market company to a French entrepreneur. If any run-off company indulges in slow-pay or no-pay, regardless of the merits of the claim, there is significant reputation risk for the London Market" he explained.

Certainly St Paul appears to feel the same way. On the 18 June 2003 its Lloyd's based subsidiaries F&G Underwriters Ltd and Camperdown UK Ltd (both capital providers to the St Paul Syndicate 314) filed a complaint in the UK Royal Courts of Justice against CX Reinsurance Company Ltd to claim damages for the defendant's alleged "failure, in breach of quota share reinsurance contracts contained in and/or evidenced by Aon policy nos LT9830401, LT0030402 and LT0030404, to indemnify the claimant in respect of sums due under those contracts which currently total $2,588,400".

St Paul would not comment further but according to Philip Singer, the former PwC partner, chief executive of CX Re and a director of TAWA Associates, the St Paul dispute is a run of the mill disagreement which it inherited from the acquisition. "It is a long standing dispute that has finally gone to litigation. There is nothing particularly sexy or controversial about it" he told IQ.

Singer does acknowledge, however, that the dynamics of CX RE have changed because it no longer underwrites: "The company is now in run-off. This means it now has a different relationship with brokers, cedants and its reinsurers. If an active underwriter has an issue, then it can often be sorted between the parties at renewal, rather than allow that problem to get in the way of claims payment. As a company in run-off, we don't have that luxury".

Nonetheless, Singer emphasised that if the claim is valid then CX RE will pay it.

"We expect that our reinsurers, with whom we no longer have a continuing relationship as regards renewals, will need to be satisfied that any claims made upon them by CX RE are properly payable and the way to ensure that, is to ensure that the underlying claims are properly payable. We're simply applying the same standards to our cedants that our reinsurers will apply to us. Once we are satisfied they are valid contractual claims, then they will be paid."