Nick Stimpson: The consolidation side of it is an inevitable consequence of a developing and evolving market in a sense. With products being as they are in the market, I think there will be more consolidation over time because I suspect that pressures will be brought to bear on them. It will be interesting to see what happens. I suspect there are probably too many players at the moment. I also think it is an inevitable consequence of an evolving market.
David Vaughan: Many of the units around the London market are to do with run-off, which are basically legacy with the run-offs being negotiated. Very few people in the early days consolidated. You went into run-off, you created a run-off management team and that was their future. You still see these groupings, and you can work out the histories, but most of the markets are very mature. We were talking about maturity in the market and I think this will be one of the indications when we start getting scale and the average size of a transaction gets larger. They are relatively small here at the moment. I think the smaller ones basically have been done through schemes or other things, but there will be a move onto bigger units where there can be economies of scale and more resources. I think we will see huge consolidation. I cannot see the market continuing as it is at the moment because it is too fragmented.
Maik Wandres: This raises the question that we had earlier about who benefits from the growing run-off market. If we look at this on a Europe-wide level, I think it was mentioned previously that Europe may well be an area of growth for our market. The question is whether the expertise from this market is more likely to go to other European markets, or whether we will see more portfolio transfers into London. It is interesting for me because I can look at this both from the perspective of working in the London market and having worked in Cologne. The problem is that in some ways London is often seen as a shark pond. You had naïve capital coming in and a lot of people got burnt. In fact, I read a very interesting quote recently that a French baron said in 1965: “Never trust a Frenchman in love; never trust an Englishman in business.” I think that reflects how many mainland European companies think, and that means they are probably very protective of their portfolios.
Tom Riddell: Perhaps it should be a lake of sharks, not a pond. [Laughter]
Ian McKenna: I have heard people say many times in Continental Europe, “You gave us this rubbish business 20 years ago and now you are coming back 20 years later to take it back so you can make a profit from it”. My own personal view is that the way Part VIIs are going, and in terms of the interest we are seeing in this market from Far Eastern and European countries, people still perceive us, in spite of the comments you made, as a centre of excellence. We have a sophisticated legal and regulatory system, we have the people with expertise and experience at doing these things, and I think there is a measure of trust here as well.
Rhydian Williams: If foreign jurisdictions see that there is a benefit from having a benign closure regime, what is to stop them developing their own?
Ian McKenna: It simply takes time. Again, speaking as a lawyer, we have all been in jurisdictions on a disputed insurance claim where you are in front of a judge who says, “What is an insurance contract? What is a reinsurance asset?” Again, I am very conscious that I am beating a drum for the English courts and judges, but the fact is they are sophisticated and know what they are talking about.
David Vaughan: What is to stop global players coming into this market? I think this discussion is showing that most of the players at the moment are probably in the London market because it has the activity. Eventually it has to become a global place. There is nothing to stop someone having a London operation, a Cologne operation, an operation on the East Coast of America where many of the run-offs are, and in Bermuda and Asia. Presumably, when this business really gets going you will see those types of units that service the whole world, wherever there is a run-off. It is always very difficult to just move a portfolio without keeping that access into the knowledge, especially underwriters.
Nick Stimpson: I also wonder about the extent to which solutions can be offered geographically, and whether you can have the key service operations located around the world. We are seeing that in the processing side with the live market, where cost efficiency is being driven in certain geographical areas, such as Mumbai in India. Assuming you have satisfied the local regulatory situation, why can you not have a centre of excellence for calculating the reinsurance group recovery located in one part of the globe?
Lee Brandon: You see that with live companies, and the logic is that as they got into run-off, they might as well do that. That is where you may get consolidation and you may get people buying up local entities to give them a global network. My comments earlier were focused on London market consolidation, although I still think there is a lot more talk about it than actually happens. Someone mentioned the capital, but there is so much potential capital at the moment that it is not being deployed. We have talked about how run-off is booming, but we are not really solving the problems. It is just passing the parcel.
Sean McDermott: The capital is definitely there and the deals are there. You are dealing with complicated regulated vehicles and it does take time. Doing Part VII transfers takes time. Increasingly, one sees that the isolated individual entities have been largely dealt with through schemes and that takes time. We are seeing that with portfolios from Japan, for instance. The other factor is how proactive the live market is in dealing with it. They are increasingly dealing with this work because they see Solvency II coming up. The number of Part VIIs there are within groups being tidied up into one balance sheet.
Beth Rees: I would support what Sean says. In my experience, in the last 15 months, we have seen a number of Part VIIs in relation to portfolios or firms in run-off, but there are significantly more Part VIIs that are taking place on the live side, both in the retail market and in the wholesale market. One of the reasons, as was said, is to tidy up the group balance sheet. I get the feeling that in a strange way the run-off side of the market has lagged behind embracing this particular tool.
Lee Brandon: I agree. It might well give us an opportunity, because once you have Part VII’d all your portfolios for capital and regulatory efficiency into one balance sheet, it is then one big amorphous mass, and it is harder to get those out again into a specialist. In theory, you ought to be doing this at one time and saying, “That is something we do not want so we will exit from it. We will pass it to these guys as there is no ongoing relationship. We will Part VII it here.” I suspect that many of the live companies are missing a trick.
Nick Stimpson: There is almost a blind eye being turned. I suspect much of that will come back to data quality, which we have only touched on. I tend to question the quality of a lot of the data that is available, and in many cases it seems to me there is little transparency because the data just gets shovelled together. It is fundamentally a concern.
Rhydian Williams: Deals are being done though; for example, Bear Stearns and Minster have changed hands. Does this go back to your point, David, that scale is going to be an issue and we will see bigger deals and larger chunks of business being transferred?
David Vaughan: I think there are deals in the pipeline coming into the market. People are far more sophisticated about what they are prepared to sell. I think they go through thinking, “Should we do a scheme?”, “Should we do a Part VII?” or “Should we transform within our group something that we can sell?” You are also going to get to the next generation of run-offs. We have had a plethora of APH-exposed run-offs changing hands, and relatively few 2001 run-offs. There is a whole lot from Lloyd’s, where I think RITC is certainly becoming more active, whereas two years ago I think there was probably no one, apart from Berkshire Hathaway, who was prepared to provide capacity. Everyone is looking at different aspects. Europe seems to have a huge attraction for people, while America is relatively untouched.
Mark Simpson: The issue of prices also comes into it. There is a mismatch of expectation. The seller is comparing it to other solutions and thinking about whether they can realise more money from another exit mechanism.
David Vaughan: There is a comparator for pricing because most people are comparing a scheme as a comparator nowadays. Can they do it themselves? What is the timescale? What is the risk? What will be the hits that you get? They might lose a bit on reinsurance, they might possibly have to pay a bit of a premium, or buy out people. People now have a benchmark and it has become more of an active market where there is more transparency of the options.
Lee Brandon: With Minster, the speculation was that it was on the market for a long time before the deal was done. There was so much capital around and potentially there were so many expectations. Presumably, those expectations changed or new capital wanted to come in and buy its way into the market and was willing to pay a higher price. It could be that the benchmark has changed. Someone I met at a conference from a major US buyer basically said that their benchmark was 30% discount on assets – and that was a good deal. That comes back to the point about the direct comparison with schemes. Schemes can often be a better exit solution, slightly longer, but a better return.
David Vaughan: How long do you think they will take? Is it two years, three years? How much publicity do you get in the meantime? Certainly, there is some uncertainty there in terms of the delivery.
Lee Brandon: I agree. I think schemes will take longer. I do not know, but I would not have thought the Bear Stearns acquisition would have taken the length of time it has.
Peter Hartley: I think you will find the due diligence took a hell of a long time. They even counted the chairs!
Beth Rees: From the regulatory perspective, in terms of the actual change in the whole process, it has been expressed by a number of senior figures within the FSA that if there is a business need to do so, that change of control process can take place quite quickly. A number of you around the table have experienced that. It is the due diligence that takes the time, and the pricing.
David Vaughan: At the moment, there is also the issue in the market, as everyone alludes to, that there is quite a bit of capital that is seeking a home because other opportunities have probably been exhausted. There has been a slight credibility problem too. How much of that capital really knows the business model, the risks involved, and whether they have someone aligned who has done it before and delivered? There are a few transaction risks there.
Tom Riddell: And have they got a contingency back up? When TAWA buys something and intends to scheme it, if the law changes, they will still do something else. They will still run it aggressively. Whereas if it is just a capital provider with no insurance, they buy it thinking they are going to scheme it in two years, then they cannot scheme it, so what do they do next? I think what is needed in capital is for them to be aligned with someone who knows what they are doing.
David Vaughan: What worries me is that many people with hedge funds tend to look at a relatively short timespan, perhaps three or four years. If we are talking about if you cannot get the scheme going, it would be more like two or three. What do you do during the time when everyone knows you are going to do a scheme? What does that do to your business economics? I wonder how proven it is going to be and whether we are going to see some sad stories coming out.
Lee Brandon: Some of the new capital we have talked to are saying they are looking at a longer timescale because they realise that schemes are not a quick exit in most cases, certainly for bigger deals. Tom’s point is very valid about whether they have really thought it through and have a contingency plan. I am not so sure. However, I think there is a recognition that the timescales have gone out.
David Vaughan: The run-off space is attracting quite a lot publicity. You are seeing the Alea situation at the moment: someone has made a bid and the minority shareholders are putting it in the market again. It is getting wider and it will be interesting to see what happens on that situation.
Rhydian Williams: No doubt, it is going to be as stimulating going forward as it has been in the past, and as unpredictable as ever. Thank you all very much for your contributions today.