Solvency II’s continued capital pressure on European insurers is boosting run-off to new levels, according to Arndt Gossmann, chief executive of German run-off specialist Darag.
The EU directive’s implementation since January has put the topic of legacy books on the front burner of strategic decision-making for insurers across Europe, he has argued, now that discontinued business has to be backed by equity capital, too.
“This year, we expect the total volume of run-off deals to reach an all-time high of €4bn,” said Gossmann, also anticipating that subsequent years will also see “dynamic growth”.
Driven by Solvency II, Darag noted the volume of run-off transactions has already grown by a factor of eight, to a total of €1.7bn from 2013 to 2014.
That growth continued in 2015, especially in transaction volume terms, fuelled by the increase in discontinued business held by European insurers.
According to a 2015 study by consultant PwC on run-off, the legacy business has grown by over 20% since 2008, to reach €247bn.
Darag estimated €80-90bn of existing run-off could qualify for a portfolio transaction or a share deal of the types pursued by Darag with insurers keen to shed themselves of the legacy business.
Rather than tailing off after Solvency II coming into effect, Gossmann said the level of run-off activity continues to rise, offer a quick way for firms to release capital amid slim underwriting results and flagging returns on equity to shareholders.
“The big international insurers continue to optimize their capital management under Solvency II. We expect to see the first in a streak of single run-off transactions worth 1 billion euro in 2016”, said Gossmann
“In order to have an impact on the balance sheet of global players, however, the volume of those deals has already become bigger and will continue to grow”, he added.
Gossmann linked run-off market demand to the increase in re/insurance sector mergers and acquisitions (M&A) activity.
”Since 2015, run-off is increasingly viewed as a rather natural element of large M&A transactions, and the industry will continue to do so, given that international corporations restructure not only single portfolios, but also entire business regions and entities, so as to improve their competitiveness”, he said.