Stephanie Mocatta looks back at the landmark events of the past year in the run-off sector.
Do you remember January 2002? At that point, the market was still reeling from September 11, with thoughts of substantial rate increases on the one hand and potential insolvency on the other.
Below are a few of the highlights in the run-off arena during the course of 2002. Some entities only appear once, many suffered from the withdrawal of parental support and a few - for instance, the HIH Royal Commission - constantly entertained us. What follows is not in any way intended to be definitive, is purely personal and doesn't represent the views of Omni Whittington. But it might give some insight into the future and may even entertain you.
The year began well with Tony Markel's excellent speech to the Insurance Institute of London. While not specifically addressing run-off, he may have showed us the way the year was likely to go. Talking about Lloyd's, he said: "I feel there is still a pervasive institutional arrogance that belies logic and is totally unsupported by results." Mr Markel followed this with: "Results have been awful. Based on the estimates I have seen, the market has lost in the region of £6.5bn for the five-year period from 1995 ... hell, you got a clean slate in 1992 with the formation of Equitas and it took you less than a decade to totally screw it up again."
Fears for the prospects of Fortress Re had started late in 2001, following its exposure to aviation losses from September 11. Axiom Claims Consulting got a good start to the year when Nissan appointed Axiom as run-off manager for the Nissan share of the Fortress Re pool. The rest of the run-off market was pleased to be spared yet another competitive tender.
Also in January, the full implications of Enron's collapse started to dawn on re/insurers with professional liability books. Andersen's collapse was only months away.
While Bermuda was attracting capital hand over fist, Overseas Partners Ltd (OPL) quietly announced its exit from the reinsurance market. A week later, Scandinavian Re in Bermuda joined the ranks of companies in run-off when its parent company Sirius International said it was no longer regarded as "core business of strategic importance". The ultimate parent, ABB, had seen underwriting losses of $138m due to the increase in asbestos reserves and September 11 provisions.
The Run Off Centre was launched in March - the successor to city3k Debt Exchange. According to its website, "The Run Off Centre has been built by ri3k.... The name ri3k expresses the company's vision for an electronic infrastructure for the reinsurance and insurance industry in the Third Millennium." Surely something we all look forward to.
Omni Whittington had our fair share of good fortune when we were successful in the competitive tender for the run-off of HIH UK - a branch of the Australian operation.
Spectrum Syndicate Management was approved as a new Lloyd's managing agent and took over the management of the Crowe Lloyd's business. Richard Murphy, the managing director of Spectrum (and previously managing director of Crowe Syndicate Management Ltd) said, "Whilst we are obviously looking to find the right opportunity to manage new capacity, Spectrum intends to remain a small firm focussed on specialist areas where we can make a difference."
The administrators of KWELM announced a ninth payment of $175m to creditors, bringing the cash set aside for creditors to more than $2.2bn. The new payment levels are now between 32% and 48% across the individual companies.
Trenwick announced that it had placed its LaSalle operation in Bermuda into run-off and sold the property/catastrophe (p/c) reinsurance business to Endurance Specialty - the latter, one of the many Bermuda start-ups during the year.
Equitas and several London market companies began to voice their displeasure at the proposed $2.7bn asbestos settlement between PPG Industries (the parent to Pittsburgh Corning) and its insurers. Equitas could not clarify if this proposed settlement would be taken into account in the Equitas reserves.
In Australia, APRA, the regulator, drove the implementation of the General Insurance Reform Act. Brought in following the spectacular collapse of HIH, the Act increased the minimum capital requirement to A$5m and also increased regulatory requirements. As a result, ten insurers were put into run-off and a further 15 exited the market, mainly by giving their licences to the parent company and consolidating into larger groups. Some relief at last as Equitas did not increase its reserves for asbestos claims. Some observers said this is because of Equitas' much stricter approach to claims handling.
Excitement at last in the field of purchasing insurance companies in run-off. Tawa UK, the subsidiary of French investment firm Artemis which had been looking for targets since it was formed in May 2001, announced it had finally signed a binding share purchase agreement to purchase CNA Re London.
The result of the MA Scott v Copenhagen Re action: Mr Justice Langley sat to decide if the loss of the British Airways' aircraft which was destroyed in February 1991 at Kuwait airport during Operation Desert Storm could be aggregated with the loss of the KAC aircraft in August 1990 when the Iraqis stole them and repainted them with Iraqi Airways livery. The short answer was `no', and should enable significant unwinding of the LMX (London market excess of loss) spiral.
The Serious Fraud Office set up a unit in Minster Court (by the London Underwriting Centre) in the offices of failed UK insurer, Independent. The investigation, which had been underway for over a year, had been due to finish in September, but was now expected to last another six months.
In the US, Gerling Global Re Corp of Americas put its US p/c reinsurance business into run-off. In 2001, Gerling Re suffered a net loss of ¤583m, due to September 11 losses and losses from earlier years.
OIC (formally Orion Insurance and London & Overseas Insurance) increased the payment percentage on the scheme of arrangement from 33% to 38%. The next tranche of payments were to be made within 90 days.
Cox continued with its restructuring when it announced an agreement with Allianz Group to take on Cox's aviation business. The 2002 aviation portfolio would be reinsured in full by Allianz, mitigating against risk and run-off costs for Cox.
Monte Carlo month; the International Underwriting Association (IUA) visited the Rendez-vous de Septembre and sounded out support for its new affiliate membership category for run-off entities. IUA CEO Marie-Louise Rossi said: "The proposals reflect the fact that, with the development of the run-off sector, many of the players that are managing run-offs are important entities." I couldn't agree more.
Australian insurance group AMP began restructuring its UK operations, following a recent fall in share price. The new CEO, Andrew Mohl, announced the departure of five more senior executives and some wide-ranging restructuring, splitting the UK operations into `contemporary' and `mature' businesses. The Pearl aspects, the UK life operations, would be in the `mature' business.
A small glimmer of hope as BAI (formerly Builders Accident Insurance Company) announced an initial payment of 5% under the scheme of arrangement. Payments were to be made in the next few weeks.
The UK Companies Court sanctioned the first portfolio transfer of general insurance business under part 7 of the Financial Services and Markets Act 2000 (FSMA), the most important point being the transfer of the outwards reinsurances together with the transferring business.
HIH Australia again hit the headlines as the liquidator announced he would be suing the Australian government for A$5.6bn. Tony McGrath said, "The proceedings relate to the alleged negligence of APRA, and its predecessor, the ISC, in respect of the performance of their functions and duties as the Australian prudential regulator over a number of years. Of particular concern is the regulation of the FAI insurance companies by APRA and ISC."
Rumours and speculation abounded about Berkshire Hathaway's potential acquisition of ERC Frankona, in particular speculation that much of ERC's book would be put into run-off.
By Stephanie Mocatta
Stephanie Mocatta is a director at run-off specialist, Omni Whittington Insurance Markets.