Fred Pomerantz, Goldberg Segalla, and Connie O’Mara, O’Mara Consulting, had an opportunity to pose questions on the topic of rating run-off reinsurers to key players in the business: Gerry Glombicki, a Director of Fitch Rating Agency; Brian Johnston, a Senior Vice President and Chief Operating Officer of SOBC Corporation; Andrew Rothseid, President and CEO of RunOff Re.Solve LLC; and Martin Mankabady, a Partner of Clyde & Co in the UK.
Fred Pomerantz: How do Runoff’s managers and potential purchasers value a Runoff book of business?
Brian Johnston: I would say that, depending on the line of business and the risk profile that is inherent in the Runoff book that you are trying to value, the key is the ultimate claim reserves. So the key document to review is the actuarial report and to understand what the actuary’s estimates ultimately are going to be. You can audit the case reserves in the due diligence, but the negotiation on the price is going to be on the actuarial report.
Second, part of the valuation will be on the unadjusted loss expenses on an annual basis, which is known as the runoff provision in the UK. You need to estimate how long the potential purchaser thinks it will take to run off that book of business. Then apply a net present value to the estimate that will be in addition to the value of the claims.
Andrew Rothseid: I think Brian is correct, that as a general matter the expense associated with running off the book of business together with the projected reserves and projected liabilities of the business are two significant factors.
There are other factors as well that I think mesh with those that are important for runoff acquirers. What is the nature of the underlying liabilities? And how will the runoff acquirer be able to terminate its exposure to those underlying liabilities while honoring the policyholder obligations, maintaining solvency, and determining whether there’s an exit strategy alternative available to it?
How does the book of business align with the runoff acquirer’s existing portfolio of business? Is there a synergy that allows for savings on the ULAE expense?
What jurisdictions does the company operate in and how does that affect the assets side of the balance sheet as it relates to certain lines of business? For instance, Workers’ Compensation liabilities and Workers’ Compensation trust funds that have to be funded in various jurisdictions.
What type of reinsurance goes along with the portfolio once it’s acquired? And how does that reinsurance affect the operation of the business and the profitability that the acquirer may see or expect to see over a period of time? What jurisdictions does it operate in and what regulatory issues may arise as a result of those issues?
And finally, is this the book to be acquired in an area that has significant exposure to reserve development; or is it an example of the types of exposures we’ve seen in recent years acquired by runoff consolidators where the underlying platform is insufficient to sustain ongoing underwriting, but doesn’t have the significant legacy drive of liabilities such as you would see in traditional asbestos pollution and health hazard risks? And, therefore, is there an asset-rich balance sheet that is available to be acquired simply because the business can no longer survive with an underwriting platform?
For the full article, refer to page 6 in the Summer 2015 issue. https://www.airroc.org/assets/docs/matters/airroc%20matters%20summer%202015%20vol%2011%20no.%202.pdf