Ahead of the run-off game

In January Premia Holdings was created on Bermuda. At the launch it was described as the largest ever startup re/insurer dedicated to run-off, with its more than $500 million in capital being an indication of the growing importance and anticipated growth of the legacy market globally.

The company is listed as a class 4 property/casualty reinsurer and will focus on providing run-off solutions. It raised $510 million from founding investors including Kelso & Company, a private equity firm, its co-investors, and an affiliate of re/insurer Arch Capital Group.

“The startup capital was driven by a couple of things,” says Bill O’Farrell, Premia’s CEO.

“The investment community recognised that run-off is a viable reinsurance niche market that’s underserved today and there are growing opportunities for a dedicated specialist player in this business.

“Second, I believe we’ve put together a compelling value proposition with a team that is deeply experienced in reinsurance, investment banking, actuarial science, claims and has a strong track record of success. These attributes, coupled with Arch’s sponsorship, clearly attracted our investment partners.”

A segmented market
When Premia was launched O’Farrell said that the P&C run-off market needed a specialist solutions provider.

“In terms of where Premia fits into that market, if I were to segment the market, I’d say that there are now only two other established specialist run-off reinsurers in the P&C middle market space: Enstar and Catalina.”

At the larger end of the scale is Berkshire Hathaway, focusing on very large transactions, and at the smaller end of the scale there are a number of companies that are forced to focus on smaller deals.

“Compared to the traditional reinsurance market, there are a limited number of competitors in this niche,” he says.

“That makes sense because it is a smaller market and requires specialised knowledge. Nonetheless, we are hearing from brokers and ceding companies alike that there is a strong desire for markets in the middle market space and greater opportunity for more capital to be deployed on transactions that are above the $100 million mark, but usually below the $500 million mark, in total reserves ceded.

“Between those two numbers, $100 to $500 million, we believe we offer a compelling value proposition of a strong balance sheet, engaged management team and deep understanding of the business.

“There’s certainly strong competition but there are simply not very many other spaces in the reinsurance marketplace where you have just a handful of reinsurers. Most lines of business have 25-plus competitors in them, so to have a space where the competition is four to six markets and often below that is attractive,” he adds.

A number of factors are combining to drive further growth in the run-off/legacy market.

The first is that capital efficiency is becoming more important to the industry and, as such, re/insurers want to become more capital-efficient so that they can increase their rate of return and focus all their energy on their core business in this very competitive marketplace.

In addition, the greater transparency of capital costs and the drag run-off operations can have on a company’s returns has many of them looking to find a solution to address their non-core business.

O’Farrell also points out that as insurance mergers and acquisitions (M&A) activity picks up, Premia believes that buyers and sellers will seek to enhance the competitiveness of their bids by agreeing to sell or reinsure operations that will not be core to the new combined company.

“While this may be relatively narrow market niche, it is one that is under-served today—and that’s why Premia thinks it’s the right place for it to be.

“I am setting up a reinsurer to focus on traditional reinsurance, but I wouldn’t suggest that right now is the ideal time for a new market participant,” he says.

For the run-off market however, he thinks now is shaping up to be a good time to bring in a new company, given where the active market is today, the increased regulatory capital requirements, more insurance M&A, rising interest rates and a lack of dedicated specialists already in the place.

Ahead of its own time
It could be argued that Premia has come a little early to the space, but O’Farrell thinks it’s being more proactive than reactive in this regard.

“Traditionally reinsurers have generally been set up after an event—there’s a crisis, and then capital pours in to address the issue. We believe that Premia is at the tipping point of this business and as a consequence the company thinks that there is definitely going to be more opportunity coming down the road.

“That said, even if the tailwinds we foresee don’t emerge, we firmly believe that there will be sufficient opportunity for Premia Re,” he says.

“The last 10 years have been a pretty good market for reinsurers and yet the industry has still produced a number of meaningful reinsurance run-off transactions that have allowed companies such as Enstar and Catalina to produce attractive returns on their legacy business.

“Bermuda has a number of attractive features: it is an established reinsurance community, made up of very talented individuals who are true reinsurance professionals. It also has an efficient business environment and an established and well regarded regulatory framework. These facts led Premia to conclude that Bermuda was the right choice for it.

“There is also the possibility that others will come into the run-off market, not just in this sector but also on Bermuda.”

Whenever Arch Capital does something, it generally attracts others to look at the idea more closely given its track record—and Arch Capital is one of Premia’s main sponsors.

There are questions as to how run-off fits with an active reinsurance operation, just how many specialists can the market support and how many management teams are out there that can or should attract investor support, but O’Farrell thinks that one of the unique things about Premia is that it has a good mix of success in both run-off and the live market and that it also has deep contacts in both areas.

“There are not a lot of people out there who can match that sort of experience, coupled with terrific sponsors,” he says

According to O’Farrell, Premia expects to do a significant amount of business in the US, and the company is currently looking at where to place its operating company there, although it has a service company already formed in the US.

“Re/insurance in the US is regulated on a state-by-state basis so you generally don’t need all 50 states to approve a transaction, but for reinsurance run-off a company generally needs approval from the cedant’s domiciliary state,” he says.

“Something like a bulk transfer can trigger approvals needed from a few other states but generally it is way more efficient than needing all 50 states. That does make it easier for companies to execute run-off reinsurance transactions—if Premia was trying to sell new insurance products across the country, then it would have to go through the process to get approval from 50 different states.

“Our long-term vision for Premia is to be the number one run-off specialist in the minds of our clients and brokers. Premia’s long-term objective isn’t necessarily for it to be the biggest, but to be the best in class,” he says.
“It’s difficult to say that we’re going to write ‘x’ amount this year and ‘y’ amount next year and here’s what’s going to happen at 4/1 and then at 7/1 and 1/1. It’s not that sort of business and it doesn’t lend itself to those sorts of growth projections,” he concludes.

“Nonetheless, I’m am confident that within our first 18 months, we will have done a number of significant transactions that will affirm our position as one of the leading providers of solutions within the run-off market, both internationally and within the US. And we are excited to get after it.”