The purchase of distressed debts is not a new thing. Losses generated in the 1990’s by rocketing APH exposures and the dawn of a new era of litigation saw billions of dollars of additional liability flood the market, and the run-off industry as we know it was born. Today, it is estimated that the value of non-life European run-off stands at around €247bn and this is anticipated to rise to €300bn by 2019. (Source: PWC Survey of Discontinued Insurance Business in Europe 2015).
Since the mid-1990’s distressed debt traders and private equity firms have been quick to buy direct creditor class and general (reinsurer) creditor class claims due from established well-known insolvencies. With access to annual statements and a degree of patience, buyers have enjoyed sizeable returns through higher value, “sit and wait” transactions. In the last five years, competition in the field has increased as consistently low interest rates have seen private equity firms considering the more technically specialized world of reinsurance distressed debts as a way to boost yields.
Investors were quick to see the long-term potential offered through buying debts due from insolvent estates, while creditors were happy to relinquish their claims for the comfort of extinguishing administration costs and receiving an immediate cash benefit.
In the London Market, as the insolvencies developed, more sought finality. Not content with just existing as an insolvent run off, there was a tidal strategic shift toward physically closing companies. The situation in the UK was helped at a regulatory level by Schemes of Arrangement providing a court approved process for administering and finalising an insurance company’s insolvency. As of January 1st 2015 over seventy-five Solvent Schemes of Arrangement and a further 50-plus insolvent companies had entered into some form of closure process, whether Scheme of Arrangement or provisional liquidation.
Since the mid-1990’s distressed debt traders and private equity firms have been quick to buy direct creditor class and general (reinsurer) creditor class claims due from established well-known insolvencies.
Schemes of Arrangement, however, only dealt with assumed liabilities. Some reinsurance balances were settled via offset into a creditor’s claim and, though many Scheme Managers employed extensive commutation strategies for both assumed and ceded business, nearly all found that, following a bar date, there was still a block of uncollected, uncommuted reinsurance assets remaining – known commonly as a residual reinsurance book. In order for the company to close, these residual reinsurance debts had to be dealt with and only two solutions were available – write off or sell. Most decided to sell.
This provided debt traders with an additional opportunity beyond just buying debts due from an insolvent company’s dividend stream. The sale of residual reinsurance books became big news with up to fourteen separate debt traders bidding within a single tender process.
For the full article, refer to page 10 in the Summer 2016 issue. https://www.airroc.org/assets/docs/matters/airroc%20summer%202016%20vol%2012%20no%202.pdf