Bermuda: the go-to domicile for run-off

Bermuda’s unique position as a jurisdiction, having equivalence with both Solvency II in the EU and recognition by the US National Association of Insurance Commissioners (NAIC), has made it the go-to domicile for what is a burgeoning run-off sector. The top dozen global players all now have a presence in Bermuda, making it a world leader in yet another area of risk transfer.

That is according to James Ferris, partner in the advisory unit of PwC Bermuda and one of the authors of a new report examining the health of the sector globally. PwC’s latest Global Insurance Run-off Survey analysis indicates that the growth in legacy activity predicted in the last edition of the same survey has materialised, boosted by significant investment in both new and existing legacy players.

Within that global picture, Bermuda is playing an ever-more important role.

“Around a dozen of the top run-off consolidators are based here and it is attracting more interest all the time,” Ferris says.

“A key driver is the NAIC and Solvency II equivalence, because that means companies can target business in those two key markets, but on top of that they know the regulator is accessible and willing to examine businesses based on their merits in a holistic way, rather than using a one-size-fits-all approach.

“That benefits the run-off companies, who also appreciate the depth of knowledge around this sector that is now prevalent in Bermuda, both in the regulator and in terms of the service providers operating on the Island.

“Run-off is now an important pillar of Bermuda’s risk transfer landscape alongside traditional reinsurance, insurance-linked securities, and the life/long-term sector, that has also grown a lot in recent years.”

“We see strong demand for Bermuda-specific legacy solutions in the coming years.”

He notes that one insurance and reinsurance legacy specialist established its Bermuda operations last year and also raised capital; another’s Bermuda entity was established in 2020 and has been increasing its deal flow.

“We expect further establishment of Bermuda entities from run-off players in 2021 pointing to the Bermuda Monetary Authority’s becoming a significant regulator in respect of run-off operations globally, as well as group supervisor of significant amounts of US and UK/European liabilities,” Ferris notes.

“With this critical mass, we expect the Bermuda market stakeholders to continue developing the next generation of innovation, keeping Bermuda at the forefront of legacy solutions.”

The growth of the run-off sector is driven by a few factors, Ferris explains. Private equity money is increasingly targeting the sector, backing existing players and startups, driving a greater number of deals in the process. This sits alongside a greater understanding within insurers of capital optimisation strategies and the normalisation of the idea of using run-off as a strategic option.

“There is a better understanding that using run-off can be a good strategic option and improve returns. In the UK and the EU, Brexit has also been a driver for companies reorganising their operations, which in turn has prompted a discussion around how to best manage their different operations.

“This has led in turn to more Part VII transfers [the UK regulation that enables books of insurance business to be transferred],” he says.

Growing in the US

On a global basis, Ferris adds, while the UK and the EU continue to see a steady flow of deals, driven by the normalisation of run-off as part of an insurer’s business strategy, the biggest growth of all is expected from the US market.

At present, only two states have implemented insurance business transfer (IBT) legislation (similar to a Part VII), limiting the suite of options that US insurers have to manage legacy and run-off business.

Should more US states consider IBT legislation this may trigger exponential growth in run-off deal activity, much of which could end up in Bermuda entities.

“There are other ways of managing legacy business by using reinsurance, or outright sale of entities, and we see these transactions occurring, and an IBT is another tool that can be used which can provide legal finality without a sale of the legal entity.

“With legal finality, the seller can release capital that may have been supporting the legacy liabilities to invest in more new underwriting,” Ferris says.

He notes that US states are looking closely at what has transpired in the EU/UK since the Part VII legislation was introduced. There has so far been no significant criticism or concerns, which is in part due to the robust regulatory and legal requirements that protect policyholders, which may be encouraging for US states considering implementing similar legislation.

He adds that in 2020 a Bermuda-domiciled consolidator completed its first US IBT—an encouraging sign. Bermuda has not as yet developed its own framework for IBT akin to the Part VII process, something which may be required in time to support the industry, he suggests.

Another driver of growth in the coming years could be the hard market the industry is enjoying. He suggests that although any impact might be subtle, higher rates could prompt companies to consider which lines of business are capital-intensive and decide to shed those in favour of more profitable business. This could drive more run-off deals.

“We see strong demand for Bermuda-specific legacy solutions in the coming years as the 2021 renewal season suggests pricing of new contracts is hardening, which will put those reinsurers with capital-intensive legacy business in the spotlight.

“To maximise investor returns, established insurers should be looking at ways to effectively pass legacy liabilities into the run-off market and recycle the capital into more profitable underwriting,” he says.

The global survey by PwC predicts that legacy deal activity will remain at record highs, with the US and Lloyd’s markets continuing to be particularly busy. Respondents further indicate that they expect the sector to be heavily influenced by factors such as increased levels of capital availability and hardening live market conditions, which will ensure a strong supply pipeline over the next two years.

The majority of survey respondents believe the global legacy market is growing. They identified the key drivers of this being a desire to release capital, followed closely by disposing of non-core business and achieving early finality. The survey found that 93 percent of respondents believe new capital will continue to be made available to legacy market players in the current hardening market.

Overall, PwC estimates that the global non-life run-off reserve has increased to $864 billion, a 9 percent increase since the previous edition of the survey. The North America region continues to dominate, with reserves of $402 billion.

UK and Continental Europe markets have a combined reserve of $302 billion. Run-off liabilities in other key territories, including Asia, the Middle East and South America, have combined liabilities of $160 billion.

James Ferris is a partner in the advisory unit of PwC Bermuda. He can be contacted at: james.ferris@pwc.com