why is selling run-off the best option?. axa... · “typical” portfolio €100m gross / €70m...

WHY IS SELLING RUN-OFF THE BEST

OPTION?

8th April - Cologne

Sylvain Villeroy de Galhau

Executive Vice President at AXA Liabilities Managers in Paris, CEO AXA Liabilities Managers UK, Vorstand Hochrhein Internationale Rückversicherung AG (Deutschland)

In charge of Business Development and Acquisitions for AXA Liabilities Managers

Previously CFO of AXA Liabilities Managers

INTRODUCTION

AXA Liabilities Managers

Specialist acquirer of non-life run-off portfolios, in particular reinsurance

Integrated €8bn reserves in >20 portfolios, incl. former AXA RE

~300 specialized run-off employees in Paris (headquarters), Zurich, New York, London, Ipswich

2 I Cologne I 8 April 2016

1 THE OPERATIONAL CHALLENGES

17/04/2016

It takes more than a back-office team

4 I

Holistic view of legacy portfolio

Active legacy management

Passive legacy management

• Head of legacy management or Chief Liability Officer

• Solvency capital management

• Specific asset – liability and risk management

• Tailored HR/ people approach

• Active claims and litigation management

• Commutations/ schemes

• Retrocession/ reinsurance collection

• Administration (accounting, investments, Hr..)

• Claims Payment

Cologne I 8 April 2016

A truly active approach needs several specific ingredients

Specific expertise in key long-tail risks, e.g. asbestos, D&O, and

general liability teams including former underwriter from original time

period

Skills in

key risks

Senior management with independence from active business and

significant time focused on active run-off techniques, e.g.

commutation negotiations or regulator interactions

Management

attention

Commutations and claims teams with specific market and language

skills in key locations, e.g. London market

Presence in

key locations

Proactive, financial management approach on run-off portfolio, not

passive, follow-the-fortune back-office admin attitude

Active run-off

mindset

Employees with experience in specific active run-off techniques, e.g.

commutations, litigation, specific actuarial expertise

Experienced

specialists

Clear mid-term action plan on how to actively manage portfolio,

e.g. prioritization of key litigations, commutations, …

Portfolio

strategy


Should one build up the resources internally?

Number of FTEs in run-off management

Time

Suitable for

active run-off

techniques

Not suitable

for active run-

off techniques

or quality

issues

Current

run-off team

How to

involve

them?

Additional FTEs

for proactive

techniques

Ready to

invest in

specialized

recruiting?


Key operational Challenges

7 I

… risk management, governance,

reporting, compliance…

same constraints as ongoing business

Motivation

Focused Teams

Legacy IT systems

Aging Teams

Accountability

+


2 THE FINANCIAL CHALLENGES

Solvency II

9 I

Solvency II capital requirements significantly higher than Solvency I for run-off portfolios

Characteristics of “typical” portfolio

€100m gross / €70m net non-life reinsurance reserves

Asset mix based on average continental reinsurers standards (e.g. 75% of assets in AA bonds)

2 scenarios

Diversified = Legacy portfolio part of larger active entity

Stand alone = Separate legacy entity Solvency II Solvency I

Diver-

sified

Diver-

sified

Stand

alone

Stand

alone

0

Minimum solvency capital requirements in €m

Buffer to reach 150% solvency ratio SCR

30 5.1

37 44

25 3.4


Solvency II

10 I

Expected consequences on run-off

• Lines of business with poor Capital requirement / Profitability mix will be under strategic pressure

• Capital likely to be reallocated to the most profitable lines of business

Business put in run-off

Restructuring

• Legal restructuring will be used to move run-off to the most favourable capital environment

• Capital optimisation techniques likely to be used (internal or external reinsurance, use of internal models, combining portfolios to increase risk diversification, etc.)

Divestment

• Selling / Portfolio transfer is the only option that allows full redeployment of capital to ongoing and growing business

• Solvency II is expected to trigger more M&A transactions


Low interest rate environment

11 I

This challenge is not only relevant for life insurers

Run-off owners no longer cover

their expenses with investment

income

Global pressure on expenses

across the business (active and

run-off)

More financial risks to take in

order to keep a stable

financial income

It is not attractive any more to keep a

run-off book only for its investment

income


3 THE OPTIONS

The 4 main options

Overall assessment Only for very

large legacy

portfolios

Selective

support in case

of own team

For small

remaining

portfolios

For most

small/medium

legacy portfolios

Build up

own team

Third-party

administration

Reinsurance

solution

Portfolio

sale

Full

None

Value creation through

active legacy management

Full finality (no more risk)

Quick capital release

Reduction in required

management focus

Low, quick one-off effort

Feasibility for small- /

medium legacy portfolio


Sale most attractive option

Fulfilled

Not fulfilled

Fulfilled Not fulfilled

Full finality

with quick

capital release

Proactive approach without high

management attention required

Third-party

administration Build up

own team

Reinsurance

solution

14 I

Portfolio

sale


4 NON TRADITIONAL RUN-OFF

Run-off can also be defined differently

Traditional vs. non-traditional Run-off

Non-traditional Run-off

Old UWY

Operational Challenges of

managing old UWY (possible

old IT system, HR challenge)

Financial Challenge of

Solvency II capital requirements

due to higher volatility in older

UWY

Traditional Run-off

Discontinued business

Operational Challenges of

managing the business in-

house (old IT system, build HR

team)

Financial Challenges of

Solvency II capital requirement

& interest rate returns

Old UWY have similar operational and financial challenges as

discontinued business. Could old UWY be carved out and divested?

There is a reputational challenge to be overcome (selling ongoing

client relationships, but with the right Buyer this may be overcome.

Cologne I 8 April 2016 16 I

Any Questions?


Thank you

why is selling run-off the best option?. axa... · “typical” portfolio €100m gross / €70m...

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