New unit to reinsure Penn National run-off book

Specialist run-off buyer Tawa has set up a special-purpose reinsurer to cover US insurer Penn National Insurance against adverse development in a discontinued portfolio of lead paint exposures.

The new reinsurer, QX Re, will provide reinsurance for a book of lead paint exposures written by Penn National, primarily between 1991 and 1997 for real-estate properties in and around Baltimore.

The maximum reinsurance liability arising from the reinsurance contract of $100m has been collateralised by a trust fund in QX Re which has been financed by the reinsurance premium received and an equity injection from Tawa of in aggregate $90m. An increased bank facility of $27.5m has been obtained to part finance the equity injection. Tawa plc has also provided a group guarantee to the trust fund which is triggered in certain circumstances.

In addition, Penn National has entered an adminitrative insurance agreement with Tawa subsidiary PRO US, a run-off services provider. Under the agreement, PRO US will manage the adjustment of claims, the collection of related reinsurance receivables, the pursuit of subrogation or other recoveries and any other required services relating to the reinsured portfolio.

"This newly-created reinsurance vehicle is an innovative way for us to assume this discontinued portfolio, when a company transfer was not possible," said Tawa's head of US operations, Marvin Mohn, in a statement.

Kenneth Shutts, CEO of Penn National Insurance, added: "The transaction we have announced with Tawa provides us with reinsurance coverage so that we have effectively put lead paint liability exposures behind us. This reinsurance transfer will allow us to move forward to concentrate on our core book of business, which continues to perform well, without the drag that lead paint has had on earnings."