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Mergers and acquisitions among ongoing insurance sector companies are triggering more interest in runoff transactions to seal off old liabilities, and the trend has been boosted by legislation in various states seeking to simplify the process.
Legislation passed in 2018 in Oklahoma led to the first transaction being approved in the state last year and several other states have either enacted or are considering enacting similar laws.
Oklahoma’s Insurance Business Transfer Act provides a mechanism “for insurers to absolutely transfer blocks of insurance business to another insurance company,” according to the Oklahoma Insurance Department.
The law allows for insurers to achieve contractual finality on the policies being sold or transferred as well as allowing for court, insurance department and independent review and approval of all transactions in the interest of policyholder protections.
The first successful transaction under the Oklahoma law was completed in October 2020 when a court approved Providence Washington Insurance Co.’s plan to transfer substantially all the insurance and reinsurance business underwritten by PWIC to Yosemite Insurance Co. of Oklahoma.
The deal included the liabilities associated with those policies as well as $38.5 million transferred from PWIC to Yosemite as consideration for assuming the liabilities. Both PWIC and Yosemite are wholly owned subsidiaries of Enstar Group Ltd.
The law was modeled on Part 7 transfers in Europe, according to Oklahoma Insurance Commissioner Glen Mulready, who as a state legislator prior to becoming commissioner co-authored the legislation.
Mr. Mulready said the completion of the first deal was “an historic moment.” Another transaction is working its way through the approval process at the court level, and there has been further interest in additional transactions, he added.
Each proposed transaction must be reviewed and approved by an independent expert, the state insurance commissioner’s office and the courts.
“The sole intent of each one of those steps is to ensure policyholders are not materially adversely impacted,” Mr. Mulready said. Impetus for the initiative was born of a conversation at a meeting of the National Association of Insurance Commissioners about runoff transactions, he said.
Total global reserves for runoff business increased to $864 billion in 2020, a 9% increase over 2019, according to PricewaterhouseCoopers LLC, which tracks the sector.
The United States is the largest runoff market, with an estimated runoff reserve of $385 billion, and North America is the largest region at $402 billion, followed by Europe at $302 billion, according to PwC.
“We support (IBTs) as another possible tool for our companies to use to complete transactions,” said Carolyn Fahey, executive director of the Association of Insurance and Reinsurance Run Off Companies.
Other states with laws or regulations addressing runoff transactions include Rhode Island, whose law predates Oklahoma’s but which has yet to see its first transaction, and Vermont.
Arizona, Connecticut, Georgia, Illinois, Iowa, Michigan and Pennsylvania have introduced various measures allowing insurers to divide, according to information from AIRROC.
The laws and state initiatives help bring attention to runoffs and “help more people look at runoff and help understand what runoff is,” Ms. Fahey said.
The hardening property/casualty market also has a bearing on the runoff market.
“There’s a lot going on in the legacy market right now, and part of the reason why is companies are looking to free up capital to focus on core business, for example,” Ms. Fahey said. “As insurers look at the hardening market and ways to free up capital, we believe they will look at legacy transactions as a way to do that.”
Mergers and acquisitions activity in the insurance sector was strong in 2020 despite COVID-19 and is expected to remain robust in 2021 as rising commercial insurance rates bolster earnings, making insurers attractive targets, and “deployable capital” remains abundant, analysts and others say.