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Solvency II rigors open P/C doors to specialty insurers

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LONDON, (Reuters) — Hit by tougher regulation and lower investment income, European insurers are looking to sell portfolios of general insurance business closed to new customers, such as employers' liability, medical negligence and motor policies.

The rise in capital buffers demanded by the Solvency II rules that took effect in January has prompted consolidation in the life and pensions market, but insurers are increasingly seeking to offload closed non-life business to specialist players.

"The stream of transactions has grown because of the activity around Solvency II," said Arndt Gossmann, chief executive of German insurer Darag A.G., referring to a European non-life sector that consultancy Pricewaterhouse Coopers estimates to be worth about 250 billion euros ($284 billion).

Sales of such portfolios could hit a record 5 billion euros this year, Mr. Gossmann said, estimating that deals worth 2.5 billion euros will be agreed or announced in the first half.

Mr. Gossmann, whose company focuses on managing closed non-life books, said that nearly 2 billion euros in such policies changed hands last year.

"There seems to be a reasonable pipeline for the rest of this year," said Andrew Ward, a director at PwC.

More than half of insurers in Western Europe expect to sell at least one closed insurance business in the next three years, a sharp rise from two years ago, a survey by consultants and insurance specialists Willis Towers Watson P.L.C. found.

'Stick to knitting'

In the British life sector, for example, Deutsche Bank A.G. plans to sell closed-book insurer Abbey Life Group A.G.. French insurer AXA recently sold its life business and Dutch group Aegon N.V. has sold a 12 billion pound ($17.3 billion) book of annuities, which pay policyholders a fixed income for life.

Mainstream insurers find closed portfolios a distraction from underwriting new business.

"Let's get rid of that and stick to the knitting," is the prevailing sentiment described by Paul Corver, head of mergers and acquisitions for U.K. and Europe at specialist non-life insurer Randall & Quilter.

Recent non-life deals include German insurer Allianz's transfer of $1.1 billion in closed U.S. books in a reinsurance deal with Enstar Group Ltd., covering employers' liability, construction defect, asbestos and pollution policies.

Allianz, which is jointly managing the portfolio with Enstar, declined to comment on whether more deals are likely. In the meantime, however, it is laying the groundwork for the central management of closed business across the group.

Insurers could sell portfolios outright or arrange reinsurance deals that exchange some of the risk for part of the premiums.

Previous sales have attracted several bidders, Mr. Gossmann said.

The economies of scale from which specialists benefit can help them to achieve annual returns of more than 10 percent from such portfolios.

Leading candidates

Several industry sources said that this is likely to attract private equity firms with the muscle to build a sizable presence in the sector.

They did not name specific investors, but private equity firms active in life insurance include Cinven Group Ltd. and J.C. Flowers.

Besides Darag, Enstar and Randall & Quilter, other specialist insurers include Catalina Holdings Ltd. and Axa Liability Managers.

One transaction in the works is the sale of U.S. insurer The Hartford Financial Services Group Inc.'s U.K. closed non-life business, two sources said.

One of the largest types of closed non-life business in Britain is employers' liability insurance taken out by companies to cover compensation for work-related accidents or illness.

Elsewhere in Europe, books for sale tend to include motor policies and protection taken out by medical staff against claims for malpractice, PwC's Mr. Ward said.

Zurich Insurance Group A.G. has a large U.K. employers' liability book, which industry sources said totals about 2 billion pounds and would be a candidate for divestment.

A Zurich spokesman said the company does not comment on market speculation.

British general and commercial insurer RSA Insurance Group P.L.C., which has been selling non-core businesses in a restructuring process over the past two years, also has 1 billion pounds in closed non-life business, though a company spokeswoman said it has no immediate plans to sell.

The main sticking point for some potential sellers is likely to be price.

Valuations can vary greatly, said Benjamin Lyon, associate at law firm Debevoise & Plimpton. The price will often depend on whether the acquisition slots into a buyer's solvency model in a way that cuts capital costs.

"The pricing will be driven by the purchaser," he said.