There are many reasons why companies sell and dispose of liabilities in run-off. These include:

  • Capital constraints
    • Insurance and reinsurance groups continue to experience increasing demands on capital driven by regulatory and rating agency requirements
    • Disposing of run-off liabilities releases capital to be re-deployed in their core business
    • Solvency II is causing a high level of focus on capital allocation across business lines in Europe
  • Management time
    • Run-off is rarely profitable for live insurers and re-insurers and absorbs management time better used elsewhere
    • Disposing of legacy liabilities allows groups to focus management resource on growth and expansion opportunities rather than on legacy operations
  • Risk
    • Selling legacy liabilities gives a clean exit to an existing risk for the seller
    • Live reinsurance businesses carry a different cost structure and often may not have the right expertise to expedite early finality
    • Commuting old policies is difficult for live businesses as cedants are often current trading partners
  • Perception
    • Publicly listed business will often have their share price held back by the perception of a problematic pool of claims because of legacy issues
    • Legacy liabilities which have caused reserve deterioration in the past are often perceived as ‘risky’ and disposal eliminates this perceived risk
    • The arbitrage achieved in selling to a buyer like Catalina focused on these liabilities can be significant
  • Certainty & a better economic outcome
    • Sellers of discontinued businesses value both early release of capital and the certainty associated from a clean exit to a trusted counter-party
    • Retaining legacy liabilities on balance sheet has a cost associated with the capital needed. Selling to a buyer like Catalina will almost always result in a better economic outcome for the seller and the buyer