00) UK Run-Off Survey Non-Life Insurance - 2011 PDF

RESTRUCTURING
The KPMG
UK Run-off survey:
Non-life insurance
October 2011
kpmg.co.uk
This highly regarded and insightful study of the UK run-off market is in its ninth
successful year. Based on a detailed analysis of insurance accounts, APH liabilities
still dominate legacy balance sheets and look likely to continue to do so for many
years. The majority of the market is now in the hands of run-off investors and
consolidators who are playing a long game, and the size of the market is beginning
to level out. That approach is being tested in the grip of an economic depression.
An even greater preoccupation for run-off insurers is the unabated pace of
regulatory change. Solvency II is at the heart of this and ARC has continued to lobby
for recognition of issues facing run-off companies. It is unsurprising that measures
continue to be taken by insurers before implementation of Solvency II to access
(currently) free capital through restructuring tools such as Part VII transfers and
schemes of arrangement: most recent instances of the latter have involved the
unravelling of complex underwriting pools. There appears to be some relief for run
off companies with proposals to exempt them from compliance if they terminate
their business fully within three years of the implementation of Solvency II, whether
that is 1 January 2013 or now more likely to be a year later. However, despite
urgings by ARC, I am disappointed with the level of support and cohesive action
among run-off companies and currently little is being offered to ease their regulatory
burden once transitional exemptions fall away.
With its valuable training programme and member networking events, ARC
provides a valuable resource to the whole insurance community. But as the
traditional run-off sector diminishes, either through closure or merger, it will
become increasingly more important for those companies with embedded run-off
to support the Association and the work it undertakes. ARC continues to provide
support to the sector and is again delighted to endorse this successful publication.
Paul Corver
ARC Chairman
ARC (Association of Run-off Companies Limited) is the UK market body for insurance and
reinsurance legacy management professionals. It is a limited company with its members as
shareholders. ARC has been in existence since 1998 and has in excess of 200 members.
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network
of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Contents
Foreword
1.
3. Lloyds of London
29
Key findings
3.1 Run-off at Lloyds
29
UK non-life insurance market
3.2 Management of
discontinued business
31
1.1 Current size
1.2 Change in size
4. Future prospects for the
run-off market
33
10
5. Conclusion
35
2.1 Solvent market
10
Chronicle of events
38
2.2 Insolvent market
25
2.3 Equitas
27
2. Company market
4 | THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE
Foreword
External forces are shaking up the insurance
industry and the run-off market
According to a recent poll of insurance
practitioners around the world, the
greatest challenges currently facing
the global insurance market are the
risks posed by the burden of wholesale
changes to regulation1. New rules over
solvency, conduct of business and
accounting soon to be implemented in
Europe, USA and other major insurance
markets are taking up significant
amounts of insurance leaders time and
utilising valuable resources, with the
prospect of a greater burden of
compliance going forward. Our
Solvency II team across KPMG Europe
LLP is increasingly providing support to
insurance groups in their preparations
for the implementation of Solvency II;
despite the recent announcement
regarding a proposed delay to its
implementation, there is little respite
on its impact for insurers.
Unless there are radical changes to
business strategies, few companies
in the UK non-life run-off market will
be wholly exempt from Solvency II,
notwithstanding some welcome
transitional arrangements that have
been proposed recently for companies
in run-off. Many of the respondents to
our survey point to the efforts that are
continuing to be made by run-off
executives with regard to Solvency II
and their attempts to limit the potential
adverse compliance costs on their
businesses. Of course, opportunity
comes with change and similar efforts
by active insurers may lead to the
disposal of underperforming and/or
capital draining lines of business, or
simply result in an overhaul of a groups
organisational structure. Some of
these portfolios may end up in the
hands of the run-off market.
There have been some dramatic events
in the insurance and reinsurance
markets over the past year but it is
testament to the strength of these
markets that the major natural
catastrophes, combined with difficult

economic, investment and regulatory
conditions have not, thus far, led to any
significant portfolios of business or
companies being placed into run-off in
the UK. It remains to be seen if this is
still the case should the economic
downturn persist or if the remainder of
the hurricane season is as challenging
as that which we have seen to date.
The UK run-off market is now very
mature and liabilities are relatively
stable with 2010 showing only a modest
reduction in size on that for 2009.
The monoline insurers, which entered
run-off in 2008 in the midst of the
financial crisis, introduced a new type
of run-off claim. These were associated
with complex financial instruments,
largely comprising derivatives of
mortgage assets, and these have
shown little movement in claim values
over the last year. There have been few
new run-offs and the vast bulk of the
market now resides in the hands of
entities whose business approach is
not to accelerate claims; or it is held
by insurers which wrote compulsory
employers liability insurance covering
asbestos and other personal injury
claims, which are difficult to accelerate.
Expectations are that these claims,
alongside those of the monoline
insurers, which together form the
bulk of the run-off market, will take
many years to run-off or otherwise be
dealt with.
Another major challenge to the
insurance market is presented by
depressed investment yields at a time
of increasing costs. It appears likely
that we will face a prolonged period
of low interest rates which our survey
respondents indicated will necessitate a
review of current run-off business plans
and strategies; duration, operational
efficiency and release of reserves/
capital will all be subject to greater
scrutiny. In some cases, these
THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE | 5
conditions are posing a fundamental

threat to the overall survival of the
business and radical changes may be
required: disposals, combining business
with others to extract synergy or
economies of scale and accelerated
run-off are just some of the potential
routes available to companies in the
industry. This creates opportunities for
the mergers and acquisitions sector,
which despite some concerns over the
availability of capital, has held up well in
the current climate. The recognition of
run-off expertise, particularly in London,
has also led to opportunities for run-off
practitioners to move into strategically
significant positions at active insurance
groups and to the growth of run-off
centres of excellence to provide
focused management of discontinued
lines of business across an entire
insurance group. We expect this trend
to continue.
There has been a small overall decrease
in the capital tied up in run-off. Proactive
management of legacy business has
enabled some surplus capital to be
extracted through reserve releases and
schemes of arrangement. KPMG has
continued to support companies to
extract value from their legacy business
and in 2010 we advised members of
the English & American pools on the
successful launch of the largest pool
scheme to date.
This is the ninth KPMG survey of the
UK non-life insurance market, a detailed
research and analysis into the nature of
the business and the challenges it faces
which is endorsed by ARC. We have
conducted interviews with leading
professionals in the market, who
comment on the current issues and
developments in the sector. I am
extremely grateful to these executives
who have kindly given up their time
to contribute to this survey.
1
2
Key findings
Total liabilities of the UK non-life
run-off market are estimated at
27.1 billion (2009: 29.7 billion).
Liabilities of the non-life run-off
market in the UK represent
approximately 13 percent of
the non-life market as a whole,
compared to 15 percent in 2009.
Total capital tied up in solvent UK
non-life companies in run-off is
approximately 3.9 billion (2009:
4.2 billion).
By the end of 2010, liabilities of UK
companies whose entire non-life
insurance business has been subject
to a solvent scheme of arrangement
totalled approximately 802 million
(2009: 527 million).
A total of 251 solvent schemes of
arrangement for non-life insurance
companies had become effective
by the end of 2010 (2009: 227).
There were seven Part VII transfers of
non-life portfolios in 2010, of which
six involved predominantly
discontinued business2.
Economic interest in over 70 percent
(2009: 65 percent) of the total solvent
run-off market is now owned by six
insurance groups.
Mike Walker
Head of
Restructurings
Insurance
Solutions Practice
KPMG LLP (UK)
October 2011
Centre for the Study of Financial Innovation: Insurance Banana Skins 2011
Insurance business transfers under Part VII of the Financial Services and Markets Act 2000
1. UK non-life insurance market
In this section we review the size of the

UK non-life run-off market.
Survey specifics
There are approximately 500 firms and Lloyds of London (Lloyds) managing
agents currently authorised by the Financial Services Authority (FSA)
to carry on general insurance business in the UK. Of this number, there
are approximately 450 companies for which publicly held information
is available. Our survey is based on an analysis of this publicly available
financial information, including regulatory returns submitted to the FSA,
utilising A.M.Best Bests Statement File UK and from audited statutory
accounts filed at Companies House.
This information has not, however, been verified or validated in any way
by KPMG LLP (UK).
A number of industry executives have provided commentary on the
run-off market. The views and opinions expressed are those of the survey
respondents and do not necessarily represent the views and opinions of
their organisations or KPMG LLP (UK).
This survey analyses the state of the UK non-life run-off market as at the end
of 2010, unless specifically described otherwise. As in our previous surveys,
UK non-life business of companies established in other EU countries has
not been included.
For the purposes of the survey, insurance companies classified as in run
off comprise those companies that have ceased to actively underwrite
new business. Whether a company has ceased underwriting has been
determined by reference to public announcements by the applicable
companies or in the absence of such information, by application of a
premium volume test. Due to the inherent delays in the reporting and
accounting of financial transactions in non-life insurance business, and in
particular reinsurance, premiums (including adjustment and reinstatement
premiums) may continue to be received long after a company ceases
underwriting. Nevertheless, premium income will, in general, reduce
substantially shortly after a company ceases underwriting.
Conversely, run-off at Lloyds comprises liabilities of open syndicate years
in respect of underwriting years from 1993 to 2008 inclusively. A syndicate
year remains open until its business is fully concluded or is transferred to
another syndicate or insurer. Underwriting years 2009 and 2010 are not
included as open syndicate years; under Lloyds Bye Laws, a syndicates
results are not finally determined until at least two years after the end of
each underwriting year.
Lloyds is not an insurance company but a society of members, both
corporate and individual, who underwrite in syndicates, on an annual joint
venture basis.
Unless otherwise stated, liabilities are expressed gross of reinsurance.
1.1 Current size
The UK non-life run-off market can be

divided into four distinct components
as shown in Table 2.
The gross liabilities of the UK non-life

run-off market in 2010 were 27.1 billion
(a nine percent reduction from
29.7 billion in 2009) representing
approximately 13 percent of the non-life
market as a whole, as shown in Table 1.
Table 1: Size of the UK non-life market
Total liabilities
( billion)
Percentage share
of market
Technical provisions
( billion)
Percentage share
of market
Active market
179.2
87%
141.4
86%
Run-off market
27.1
13%
22.8
14%
206.3
100%
164.2
100%
Total liabilities
( billion)
Percentage share
of market
( billion)
Percentage share
of market
12.2
45%
10.3
45%
Insolvent company run-off
9.0
33%
6.6
29%
Equitas (Lloyds 1992 and prior)
4.9
18%
4.9
22%
Lloyds (1993 onwards)
1.0
4%
1.0
4%
27.1
100%
22.8
100%
As at end of 2010
Total
Source: A.M. Best Bests Statement File UK, KPMG LLP (UK) 2011, Lloyds
Table 2: Main components of the UK non-life run-off market

As at end of 2010
Solvent company run-off
Total
The principal drivers of the nine percent

reduction in size of the run-off market
in the year to 2010 are:
The elimination of syndicate open
years in the Lloyds market from
18 in 2009 to 10 in 2010 through
the Reinsurance To Close (RITC)
process; and
Continuation of downward
management of run-off
insurance liabilities.
As we have previously reported, there is

a strong correlation between the size of
the run-off market and the UK sterling:
US dollar exchange rate because of the
large proportion of liabilities that arise
from claims originating from the US.
During 2010, UK sterling depreciated by
three percent against the US dollar, the
smallest annual change for three years.
Consequently, the size of the run-off
market is not distorted materially this
year by exchange rate movements.
Since 2004, the traditional UK non-life

run-off market has shrunk steadily apart
from one exceptional year when run-off
liabilities spiked in 2008 as a result
of the financial crisis and its impact
on specialist monoline insurers
(see Figure 1).
Has the size of the run-off market

stagnated, despite the advancements
made in run-off expertise and exit
mechanisms? We consider the future
prospects for the UK non-life run-off
market later in our survey.
Figure 1: Change in size of UK non-life run-off market3
With the exception of Lloyds the

UK non-life run-off market has become
very mature, consisting mainly of long
tail liabilities arising from latent claim
exposures.
50
Total liabilities ( billion)
Technical provisions for these liabilities

will remain for some time as the pattern
of claims presentations is a slow trickle
as opposed to a flood: asbestos related
claims are expected to drip feed into
the market for up to 40 or 50 years;
environmental cleanup takes many
years; professional indemnity and
D&O/E&O claims may take several
years to resolve through protracted
negotiations. Accelerated run-off
tools are not appropriate for some of
these claims especially if they are still
immature or are covered by compulsory
insurance. Liabilities will also remain
on the books of insurers and reinsurers
who elect to take a long term approach
to claims handling, dealing with claims
as they are presented.
60
1.5
40
16.0
30
13.2
10
10.6
10.4
4.6
4.4
7.2
7.5
9.5
2004
2005
9.1
4.8
5.2
Companies which have adopted a

more aggressive, shorter term run
off strategy have continued to make
progress. Many businesses have
been closed, or will close within the
next three years to take advantage of
proposed transitional exemptions from
Solvency II for run-off companies 4.
13.4
11.9
20
19.7
15.9
2006
4.4
9.3
5.9
9.1
5.3
12.2
2.5
9.0
4.9
2.9
2.5
1.9
1.0
2007
2008
2009
2010
Equitas
Lloyds
3.5
FX Rate
The total liabilities for Equitas for 2003 2005 (year end 31 March 2004 2006) are
discounted values taken from its audited financial statements. Thereafter, Equitas presented
its results on an undiscounted basis. The undiscounted liabilities for prior years were:
2004 7.7 billion, 2005 6.4 billion, 2006 6.4 billion.
4 Omnibus II Directive
UK sterling : US dollar exchange rate
1.2 Change in size
2. Company market
2.1 Solvent market

The largest component of the UK non-life
run-off market is solvent company run-off.
2.1.1 Change in size

At the end of 2010, the solvent company run-off market had total liabilities of 12.2 billion.
Total liabilities
( billion)
Percentage share
of market
( billion)
Percentage share
of market
12.2
45%
10.3
45%
9.0
33%
6.6
29%
Equitas (Lloyds 1992 and prior)
4.9
18%
4.9
22%
Lloyds (1993 onwards)
1.0
4%
1.0
4%
27.1
100%
22.8
100%
As at end of 2010
Total
This sector accounted for 45 percent of the total liabilities of the UK non-life
run-off market (2009: 45 percent). The change in the size of the solvent run-off
market since 2004 is shown in Figure 2.
Figure 2: Change in the size of the solvent run-off market
25
20
15
19.7
16.0
15.9
13.4
13.2
12.2
11.9
10
2004
2005
2006
2007
2008
2009
2010

Source: A.M. Best Bests Statement File UK, KPMG LLP (UK) 2011
The solvent run-off market has reduced

in size by nine percent in 2010; total
liabilities have decreased by 1.2 billion.
The decrease has been driven largely

by favourable prior year claims
development and the continuation
of downward management of run-off
insurance liabilities.
The reduction would have been greater

but for a large run-off entering the
market in the period under review:
HSBC Insurance (UK) Limited. As at
the end of 2010, its total liabilities were
approximately 380 million, comprising
entirely motor insurance business.
The company has since been sold to
Syndicate Holding Corp in 2011. Two
smaller run-offs have now also been
included in our statistics as a result of
these legacy portfolios being sold by live
operations to Enstar 5.
In March 2010, Enstar acquired British Engine Insurance Limited, a subsidiary of RSA
Insurance Plc. This company has been renamed as Knapton Insurance Limited. In May 2010,
Enstar acquired a portfolio of legacy business from Mitsui Sumitomo Insurance Company
Limited. The acquiring vehicle is Bosworth Run-Off Limited (50.1 percent owned by Enstar).
2.1.2 Capital
The overall decrease in trapped capital

in 2010 is driven by multiple reasons.
Companies continue to run-off liabilities
proactively and in a number of cases
have extracted surplus funds through
the payment of dividends or capital
reduction. Meanwhile, there have been
a small number of new run-offs included
in our analysis, in respect of business
that has recently been discontinued
or has otherwise become visible as a
result of disposal by a
live operation.
At the end of 2010, total capital tied

up in solvent UK non-life companies in
run-off was approximately 3.9 billion
(2009: 4.2 billion), excluding Lloyds
vehicles and companies with run-off
portfolios that are combined with other
live business.
The net assets figure as calculated
for regulatory solvency purposes is
2.7 billion (2009: 3.2 billion).
Table 4: Capital tied up in the solvent run-off market
Capital in solvent companies
2004
( billion)
2005
( billion)
2006
( billion)
2007
( billion)
2008
( billion)
2009
( billion)
2010
( billion)
4.0
4.8
4.9
4.6
5.4
4.2
3.9
Efficient and innovative capital reduction

strategies are incredibly important to
run-off companies and their investors.
Plans to achieve capital efficiency via
group restructuring in preparation for
the imminent implementation of
Solvency II have continued during 2011.
For example there are very large internal
reorganisations being proposed by
Aviva, RBS Insurance and RSA groups
by means of a series of Part VII transfers.
For the time being, the effects of
Solvency II on capital have yet to be
felt by the run-off market. This is
discussed further in the Section 2.1.3:
Management of discontinued business.
2.1.3 Management of
discontinued business
Run-off strategy
Since we started this annual survey
in 2003, with the assistance of the
tremendous insight from participating
run-off executives we have observed
a number of significant changes
to the nature of the UK run-off
market and companies approach
to the management of their
discontinued operations.
The strategies adopted by run-off
companies have changed in response
to market events; to changes
in regulation; to the state of the
worldwide economy; and from the
development of run-off expertise
and tools available to assist with
the management and closure of
legacy business.
The size of the run-off market has

shown a small decline, and a number
of survey respondents expect it to
continue to shrink slowly in the future.
It would appear that the opportunities
available, in the London Market in
particular, for short term rewards have
been largely exploited. The long term
hold appears to be the strategy of
choice for the owners of the liabilities
in the UK non-life run-off market. Aside
from the monoline casualties of the
2007/8 financial crisis, over 70 percent
of the liabilities in solvent run-off in the
UK now reside with companies that
appear to have adopted a longer term
strategy for their run-off. These liabilities
are principally held with organisations
that are managing an orderly run-off of
their business in house, have obtained
stop loss reinsurance cover or are with
run-off acquirers whose objectives

are to make greater returns over
the longer term from investment
income, and from savings in claims
and administration costs.
The longer term strategy relies on
balance sheet strength to withstand
any volatility or escalation in latent
claims and on future investment income
being sufficient to cover run-off costs,
borrowing costs on finance used for
acquisitions and annual dividend
expectations from investors.
This strategy is coming under threat
from a number of sources.
Depressed investment values and
yields continue to put pressure on
companies to find alternative ways to
support and justify the longer term
strategy. In addition, monetary policy
and inflationary pressures are increasing
run-off and claims costs. If this situation
continues, which is a genuine possibility
given the looming threat of a double-dip
recession, then pressure on cost control
and cash flow management will
increase and, according to Alan Quilter,
Chief Operating Officer of R&Q, some
run-off companies may need to change
their strategies if these conditions
persist. John Wardrop, Partner, KPMG
in the UK states these conditions have
led to improved cash flow management,
but there is plenty of room for
companies to improve their practices
still further.
Some run-off companies may

need to change their strategies
if these conditions persist
Alan Quilter, R&Q
Cost reduction
Run-off companies continue to look
for ways to reduce costs. Many of
our survey respondents spoke of their
review of outsourcing options for
certain functions of their business.
Will Bridger, Managing Director
Acquisitions at Compre, says that
some functions are outsourced
currently in order to keep cost efficient,
although this situation also has to be
monitored from a risk management
perspective.
Jason Richards, Managing Director Claims, Accounting and Liability

Management at Swiss Re, is one of a
number of respondents seeking to
reduce the administrative burden of
run-off and cut claims costs in particular:
Because Swiss Re has transparency
on its costs, we know that run-off costs
are huge. Swiss Re is trying to get the
industry to improve market practice
with regard to claims. Legacy claims
represent the majority of all of our
claims and accounting activity and
a market-wide initiative would
improve efficiency.
The environment for service providers
is equally tough. While Bridgers
comments with regard to outsourcing
above may suggest a little hope for
service providers, he tempers those
comments somewhat: there is little
net new business to be outsourced;
everyone is competing for the same
contracts. The owners of the significant
liabilities in run-off are largely dealing
with their run-off in-house and, as
predicted in our previous survey, the
difficult conditions for service providers
to the UK run-off market has led to
continued consolidation. This is
considered further in the Section
2.1.4.3: Mergers and acquisitions.
The practice of run-off

Within the UK, we are starting to see
a necessary transformation in the
practice of run-off. Klaus Endres, Head of
Business Development and Acquisitions
at AXA Liabilities Managers, notes that
the UK has a wealth of experience and
useful run-off tools but its market is
mature and shrinking. The expertise
gained in London is highly valued and
there are opportunities in active
insurance groups for consulting and
specific roles for run-off practitioners.
We have observed a growing acceptance
of run-off on the Continent and many
large groups have created the position
of Head of Run-off.
Simon Hawkins, Head of Run-off at

QBE European Operations in London,
comments that his role is quite different
to that of management of a pure run-off
company. The initial challenge is to
define what run-off means and then
embed the priorities of run-off
management within the organisation.
He suggests that run-off will become
an integrated part of how a company
approaches claims and liability
management generally.
The UK has a wealth of

experience and useful run-off
tools but its market is mature
and shrinking.
Klaus Endres, AXA Liabilities
Managers
In addition, a number of larger groups

have already created, or are in the
process of considering, a run-off centre
of excellence for the management of
legacy business across the group.
Run-off is increasingly becoming a cost
or profit centre in large groups who are
keen to access the benefits that focused
management of discontinued lines of
business can generate. It is anticipated
that many of these centres of excellence
may either be located in the UK and/or
will feature UK run-off practitioners in
prominent positions within them.
Solvency II
As discussed in the Foreword, the
greatest challenges currently facing the
global insurance market are the risks
posed by the burden of changes to
regulation. The UK run-off market is no
different; all of our survey contributors
testify to the significant resources in
their firms devoted to preparing for
Solvency II. Those respondents who
sit within larger active underwriting
groups appear to have been far less
affected by all the work that is being
undertaken with regard to Solvency II.
Although the principle of proportionality
set out in the Solvency II Directive
discussed further at the end of this
section should reduce the burden
of full implementation on pure run-off
companies/groups, it still occupies the
focus of run-off executives. According
to Luke Tanzer, Managing Director of
RiverStone UK, it places a significant
strain on resource, particularly for
those smaller companies needing
or wanting to obtain Internal
Model approval.
For some, however, there appears
to be a silver lining. Simon Hawkins
says that Solvency II is driving a
number of significant projects across
QBE European Operations on data
and management information, which
has already increased the quality
and availability of legacy data, thus
improving decision-making for run-off
portfolios. Ken Randall, Chairman and
CEO of R&Q agrees, but with a note
of caution: there are concerns that
some of this effort may go to waste
and the full benefits of Solvency II will
not be realised by run-off companies.
He continues, the FSA has given little
guidance on how Solvency II should be
applied to run-off companies and that
makes it more difficult to plan ahead.
We are not being given much warning.
Some elements of Solvency II are
already familiar to UK companies
and should, therefore, be more
straightforward to implement. The
quantitative analysis required under
Pillar 1 for example, has been rehearsed
for a number of years through the

Individual Capital Assessment process
introduced by the FSA in 2004. Some
respondents, however, pointed to
different approaches appearing to be
taken by different regulators. Klaus
Endres observes that the Continental
European experience generally is
that, except for the largest insurance
groups, the standard formula approach
is encouraged by regulators, whereas
in the UK, the FSA seems to prefer that
firms develop bespoke internal models.
However, the principle of proportionality
remains open to question and is still
being grappled by regulators, firms and
consultants.
Philip Grant, Chairman of Ambant,
believes that Pillar 2 [governance
and management] is currently the
neglected pillar, with most attention
having been focused on the more
quantitative components of Pillar 1.
In our view, continuing compliance
with Pillar 2 will prove to be the most
enduring Solvency II challenge for UK
insurers.
Pillar 3, largely relating to reporting
requirements, is already driving a
number of significant projects in the run
off arena. The proposed Part VII transfers
for RSA and Aviva, for example, both
discussed in Section 2.4.1.2 are driven
by Solvency II and will address a number
of Pillar 3 considerations.
A revised draft of the Omnibus II
Directive with regard to transitional
arrangements for insurance companies
in run-off under Solvency II may be
the source of some comfort going
forwards. The draft currently envisages
full exemption from Solvency II
requirements for run-off companies that
can show they plan to close within three
years of the implementation of Solvency
II, or five years if that process is
conducted under a formal reorganisation
measure or winding up. Companies
that are part of a group will not be able
to avail themselves of this exemption
unless the entirety of the group has also
ceased writing new insurance business.
Mike Walker welcomed the draft

directive. The run-off sector has been
lobbying for Solvency II concessions for
some time, arguing that the costs of
implementation are disproportionate for
their businesses. There will be run-off
companies that will still need to comply
with Solvency II and it is also not clear
what additional evidence supervisors
will require to support the progress that
is being made towards terminating
activity. However, the new transitional
arrangements will clearly be welcomed
by the vast majority of the run-off sector.
As a consequence of the new provisions
we are also likely to see run-off entities
revisiting schemes of arrangement and
other finality options in an effort to
benefit from the new run-off exemptions.
The full benefits of Solvency II

will not be realised by
run-off companies.
Ken Randall, R&Q
2.1.4 Exit solutions
2.1.4.1 Solvent schemes
While run-off executives have been

focusing heavily on the challenges
outlined in the previous section,
exit mechanisms have continued
to be used for discontinued business.
These include solvent schemes,
Part VII transfers and sale.
Schemes continue to be a popular

mechanism for companies to achieve
finality. Table 5 plots the number of
solvent schemes of UK insurance
businesses over time, both by entity and
by pool/business portfolio, represented
by the calendar year in which the
schemes became effective. There have
been a total of 251 solvent schemes for
individual entities to the end of 2010,
an increase of 24 on 2009. This is a
result of the schemes for the English &
American Underwriting Agency Pools
(EAUA Pools), the Camomile Pool
and for Minster Insurance Company
Limited and its related business. When
considered on a pool or portfolio basis,
the 2010 year end aggregate total
is 59 (2009: 56).
Table 5: Solvent schemes of UK non-life business

Number of solvent
schemes
2004
and prior
2005
By entity
30
24
By pool/portfolio
20
2007
2008
2009
2010
Total
27
87
50
24
251
10
59
2006
Source: KPMG LLP (UK) 2011
There is a continuing appetite for using

schemes of arrangement to achieve
finality especially as a means to close
complex underwriting pools. The
scheme mechanism offers an attractive
option for both pool participants
and pool creditors to terminate
their relationships en-masse. The
alternative is likely to be either individual
commutations between each relevant
pool member and each creditor which
can be very time consuming, costly
and administratively burdensome
to complete (even if possible), or
continuation of the pool run-off, which
again can involve a disproportionate
administrative effort for the values
involved for each party. Mike Walker
continues to see interest from pool

participants for exit solutions and the
experience we have now gathered from
promoting the successful pool schemes
for the WFUM pools, the EW Payne
pools, the Trimark pools and the largest
pool scheme to date for the EAUA
pools, has been invaluable in being able
to provide clients with practical and well
thought through propositions.
Many solvent schemes have included
UK business of overseas companies
and the mechanism is seen as a useful
tool for such companies which do not
have similar provisions within their own
jurisdictions.
Table 6: Changes in total assets and total liabilities following bar dates for UK companies subject to solvent schemes6
As at end of 2010
Total assets
( million)
Total liabilities
( million)
Net assets
( million)
Year end immediately preceding bar date
1,652
802
850
Latest audited balances following bar date
1,112
164
948
Increase/(reduction)
(540)
(638)
98
Increase/(reduction)
(33%)
(80%)
12%
The USA has had provisions since

2002 in the State of Rhode Island
for the restructuring of solvent
insurers. These provisions share
many similar features to UK
schemes although they are more
restrictive in their application. It
was not until 2010, however, some
eight years after the legislation
came into effect, that the first
US insurer, GTE Reinsurance
Company, applied successfully
to use the provisions. Observers
will follow the implementation of
the GTE scheme with interest to
see whether this begins a trend
followed by other US insurers.
Table 6 highlights the change in assets

and liabilities of UK companies subject
to solvent schemes by comparing
year end results before and after
the respective scheme bar dates.
Our analysis reveals that UK solvent
schemes with a 2010 or prior bar date
have generated an increase in net
worth of approximately 98 million after
the elimination of 638 million (or 80
percent) of their liabilities. On a relative
basis the increase in net assets (or net
worth) of these businesses following
the launch of the scheme averages
12 percent (2009: 11 percent).
For the purpose of verification, the analysis of solvent schemes is restricted to accounts filed for solvent schemes of UK companies with bar
dates falling on or before 31 December 2010 and excludes companies where only certain parts of the business have been subject to a scheme.
Non-UK companies have been excluded from the analysis. As a result of the limitation in the scope of this analysis a number of solvent schemes
have been excluded. However, the impact of all solvent schemes on the liabilities of UK companies is reflected in the overall size of run-off as at
the end of 2010.
2.1.4.2 Part VII transfers

and reinsurance
From December 2001, when the
Financial Services and Markets Act
2000 took effect, to the end of 2010,
there have been 96 Part VII transfers of
non-life portfolios, of which 50 involved
predominantly or entirely business
in run-off (see Table 7).
Of the seven Part VII transfers of non

life business in 2010, there were two
external Part VII transfers of legacy
business to third parties. Tenecom
(part of the Berkshire Hathaway Group)
acquired a run-off portfolio from Aviation
& General Insurance Company and
Enstar acquired a run-off portfolio from
Mitsui Sumitomo Insurance Companys
UK Branch.
The remaining five Part VII transfers
were all used for the purpose of internal
group reorganisation and maximising
capital efficiencies. Of these, two
portfolios held by UK insurers were
transferred to UK branches of overseas
group companies and as a result will no
longer be regulated directly by the FSA.
Table 7: Number of Part VII transfers in the UK non-life insurance market

Dominant
portfolio
2004
and prior
2005
2006
2007
2008
2009
2010
Active
11
12
Run-off
13
Total
18
16
20
15
12
Cumulative
18
34
54
69
81
89
96
Source: KPMG LLP (UK) 2011, Sidley Austin LLP
Part VII transfers continue to be used as

a tool for the reorganisation of run-off
liabilities, something which has become
more and more important as the
implementation of Solvency II draws
nearer. Although activity in 2010 was
relatively consistent with 2009, 2011
has been a very busy year. RSA, RBS
Insurance and Aviva have all recently
proposed to reduce substantially the
number of regulated entities in their UK
group structure by means of a series of
Part VII transfers. This has been driven
by planning for Solvency II, to achieve
greater simplification of reporting and
governance, to achieve significant
administrative cost savings and to
maximise capital efficiencies.
More internal restructuring of insurance

groups by means of Part VII transfer is
expected before the implementation of
Solvency II. By that time, we anticipate
that the total number of UK authorised
non-life insurance companies will have
reduced considerably.
Insurance companies
The level of sales activity for either
insurance companies in run-off or run-off
portfolios was quite buoyant in 2010,
although it appeared to slow in 2011.
This follows a period of prolonged
activity which commenced in 2008.
This lack of recent sales activity should
not, however, be viewed as an indicator
that the run-off sector is currently
inactive or that it is not restructuring
or developing in line with market or
regulatory developments. Indeed, as
discussed above, there has been
considerable internal restructuring
through the use of Part VII transfers.
This internal restructuring has inevitably
forced these groups to look more
closely at the composition of their
business, and in particular their run-off
business, as well as its ongoing
2.1.4.3 Mergers and acquisitions
structure and management. It remains

to be seen, however, whether this will
ultimately lead to more external sales of
portfolios or other restructuring, such as
schemes of arrangement, to achieve
finality as the groups determine whether
or not maintaining such business is a
disproportionate burden in terms of
management and capital requirements.
Table 8: UK M&A transactions in 20107

Purchaser
Target
Date
Purchase price
Liabilities
(excluding
capital and
reserves)
Net assets/
(liabilities)
British Engine Insurance
March 2010
28.8 million
159.5 million as at
31 December 2009
35.1 million as at
31 December 2009
La Licorne Compagnie
de Reassurances
April 2010
3.2 million
8.3 million
3.7 million
Scottish Lion
April 2010
Undisclosed
46.1 million
12.3 million
Enstar
Mitsui Sumitomo
Insurance Company UK
Branch run-off portfolio
May 2010
Undisclosed
US$117.5 million
Compre
London & Leith Insurance

Company
June 2010
2.4 million
0.5 million
4.2 million
Island Capital
August 2010
US$7.4 million
initial consideration
up to US$40.0
million deferred
consideration
US$20.6 million
US$28.1 million
Aviation & General

Insurance Company
Canadian Run-off portfolio
September 2010
Undisclosed
Not available
Not available
Berkshire Hathaway
Aviation & General

Insurance Company
Run-off portfolio
December 2010
Undisclosed
Approx. 0.6 million
Approx. 0.6 million
Tawa
Oslo Reinsurance (UK)
December 2010
4.0 million
2.8 million as at
31 December 2010
5.2 million as at
31 December 2010
Enstar
R&Q
Berkshire Hathaway
Tawa
Global Re
This table includes all those acquisitions that we have identified where either the purchaser or the acquired company or portfolio is UK based.
Table 9: UK M&A transactions in 20118

Purchaser
Milestone Capital
Partners
Swiss Re
Syndicate Holding
Corp.
Target
Date
Purchase price
Liabilities
(excluding
capital and
reserves)
Net assets/
(liabilities)
Investment in acquirer
Compre
February 2011
Undisclosed
60.4 million
23.0 million
Zurich Specialties
London
June 2011
Book value
US$950 million
HSBC Insurance (UK)
July 2011
68.5 million
377.4 million
97.0 million
Although the number of sales

transactions has been relatively low
since we last reported, so far in 2011
there have been two large deals. Zurich
Financial Services Group sold the bulk
of its run-off company, Zurich Specialties
London, to Swiss Re at book value and
this included liabilities totalling some
US$950 million. This follows Zurichs
stated strategy to divest its non-core
business and release and redeploy the
associated capital (estimated to total
approximately US$360 million over
time). HSBC sold HSBC Insurance (UK)
to Syndicate Holding Corp. Unlike many
disposals of traditional run-off portfolios,
HSBC Insurance (UK) is a motor insurer
that went into run-off in 2009. Motor
insurance has been a troubled area for
many insurers in recent years and there
have been several sales of live portfolios
as some operators have sought to
withdraw from the market. Given the
continued difficulties in the motor
market it would not be surprising if the
HSBC transaction is the forerunner of
other similar deals in this area.
Despite the relatively small number of
transactions in 2011 most of the major
run-off acquirers or consolidators are still
active in the market and they report that
they are looking at many opportunities.
Nigel Rogers, CEO of RITC Syndicate
Management, comments that their
challenge is to find a business that
meets their requirements and even then
a lot of due diligence is required before
a decision is made. He adds that its
a case of kissing a lot of frogs before
finding the prince. Luke Tanzer agrees

many of the most attractive targets
have already been sold or reinsured to
close and the remainder have smaller
expected margins. This requires a
thorough approach to due diligence
and disciplined pricing of acquisitions.
Most commentators believe that there
are opportunities out there but target
selection and pricing must be right.
Although there are still numerous
parties who express interest in
acquiring run-off business, there are
in reality only a few players who can
actually consummate a deal, especially
a larger transaction requiring substantial
funding. The funding challenges facing
run-off acquirers are recognised by
the banks which are generally taking
a more cautious approach in the wake
of the banking crisis. Paul Johnson,
Director Insurance, Barclays Corporate
reports that Barclays continues to
have appetite for leveraged finance in
this sector. Management must have
credibility, a proven track record in
generating good returns on captital,
and an ability to bring equity backing
to potential acquisitions.
Nevertheless, Ken Randall comments
that although they have the capital
to support larger acquisitions, the
competition for these (amongst the
serious players) is stronger. Nigel
Rogers believes that there is limited
competition in the market but what
there is can be quite damaging. There
only needs to be one person doing the
wrong business to ruin it for everyone
else and some are overpaying. Will

Bridger of Compre believes most
opportunities will in future derive from
the Continental European market and
further that they will take the form of
portfolios rather than companies. He
adds a word of warning, however, that
to be able to get work in Europe you
need to be based there its a case of
local people managing local business.
The key is understanding the local
market and culture.
The international theme is an important
one as most of the larger UK run-off
consolidators and providers have
expanded their operations into overseas
markets in recent years. They all
recognise the need to expand their
service offering and this has taken
the form of extending the breadth of
services into both the live and run-off
markets as well as geographic spread.
Different organisations favour different
international markets, but Continental
Europe, USA and the traditional offshore
captive centres are currently the most
popular. Few, if any, of the UK-based
run-off operators have so far ventured
into Asia, the Middle East, Africa or
South America.
Its a case of kissing a lot of

frogs before finding the prince.
Nigel Rogers, RITC
Syndicate Management
This table includes all those acquisitions that we have identified where either the purchaser or the acquired business is UK based.
Consolidation across the

European market will
accelerate in the light
of Solvency II.
Jason Richards, Swiss Re
On the Continent the run-off

market is large but still partially
immature, experience and
tools are currently being
developed. In the USA, the
market is huge but run-off
transaction tools are limited
and there are barriers to entry.
Klaus Endres, AXA
Management must have

credibility, a proven track
record in generating good
returns on captital,
and an ability to bring
equity backing to potential
acquisitions.
Paul Johnson, Barclays
Klaus Endres identifies some of the

challenges of venturing overseas by
commenting that on the Continent
the run-off market is large but still
partially immature, experience and
tools are currently being developed.
In the USA, the market is huge but
run-off transaction tools are limited
and there are barriers to entry.
Nevertheless, Jason Richards expects
that consolidation across the European
market will accelerate in the light of
Solvency II.
The need to diversify has been a
common theme among many run-off
operators. Alan Quilter comments that
R&Q established a strategy a few years
ago to diversify the group and believes
now that this positions them well for
opportunities that flow from changes
in the market and the underwriting
cycle. Philip Grant adds that there is
still over-supply in the service provider
market for traditional run-off business
and that their response has been to
diversify into non-traditional legacy and
live business areas, where margins are
better and competition is less suicidal.
He concludes that the answer lies in
diversity and that they aim to reduce
their dependence on London and look
to the UK provincial market for sources
of business.
As in prior years the activity that has
taken place has led to a further
concentration of insurers in run-off
being owned by several run-off market
consolidators. Virtually all the acquisitions
noted in Table 8 and Table 9 were made
by recognised run-off acquirers.
still the largest run-off. In addition over

70 percent (2009: 65 percent) of the
total is now owned by six groups, three
of which are monoline insurers which
collectively represent over 15 percent
(2009: 15 percent) of the market.
It is difficult to determine from the
published details of sale transactions
that have taken place whether the
decline in prices (relative to the value
of net assets acquired) identified last
year has continued. This is because
only limited financial details have been
provided for many of the deals but the
indicators are that prices achieved are
continuing at a level equating to a
slight discount to net asset value.
The implementation of Solvency II was
anticipated to trigger a growth in the
amount of M&A activity in the run-off
market. As mentioned previously,
however, this has not yet materialised
but it has been a catalyst for internal
reorganisation and it is still possible
that M&A activity will increase as we
get closer to Solvency II. The nearer
the implementation date, the more the
market is likely to move in favour of the
buyer as either an increase in the supply
depresses prices or advantage is taken
of stressed sellers. Time will tell if this
proves to be the case but this may in
part depend upon the sanctions the FSA
may impose on any authorised insurers
who fail to comply with Solvency II.
Based on the technical provisions at

31 December 2010, the economic
interest in over 44 percent of the total
UK solvent run-off is now owned by
recognised market acquirers. Berkshire
Hathaway is the largest with over
37% of the solvent company market
including Equitas, which is currently
Service providers
As in prior years there has continued to
be consolidation in the run-off service
provider market and several deals were
concluded in 2010/11.
Table 10: UK Broker and service provider transactions in 20109
Purchaser
Target
Date
Purchase price
Net assets/
(liabilities)
R&Q
JMD Specialist Insurance Services
January 2010
2.0 million
0.2 million
R&Q
Reinsurance Solutions
September 2010
US$10.0 million
R&Q
Excess & Treaty Management Corporation
September 2010
$1 on a debt free
basis
Warrior Square Recoveries
October 2010
(0.3) million
(0.1) million
Senator Insurance
Services
Table 11: UK broker and service provider transactions in 20119

Purchaser
Tawa
Tawa/Skuld/Paraline
consortium
Target
Date
Purchase price
Net assets/
(liabilities)
Chiltington International
September 2011
Undisclosed
0.8 million
Whittington Insurance
Markets
September 2011
Undisclosed
0.7 million
I dont see how some smaller

businesses can survive in
the current economic and
regulatory environment.
Ken Randall, R&Q
Details of the acquisitions which we

have identified are detailed in Table
10 and Table 11. The acquisitions have
tended to broaden the range of services
of acquirers. This diversification provides
benefits by expanding the markets
available to the service providers while
also allowing cost savings through
integration in areas such as systems,
offices and personnel. There is also
the attraction for some smaller service
providers to join larger groups as this
provides more security while also
mitigating the increasing regulatory
burden they are currently facing. Ken
Randall comments that he doesnt
see how some smaller businesses can
survive in the current economic and
regulatory environment.
Although further consolidation and

diversification within the main service
providers is likely to continue, there
will inevitably be periods of less
activity while previous acquisitions
are fully integrated and the benefits
of acquisitions can be realised. As in
all areas of business some deals will
prove to be better than others but the
value that can be achieved is largely
dependent upon how well the key
personnel are incorporated as this is
usually the major asset of any service
business. The challenge is, therefore,
to develop opportunities while still
retaining staff morale and maintaining
or improving existing client service
and goodwill.
This table includes all those acquisitions that we have identified where either the purchaser or the acquired business is UK based.
2.2 Insolvent market

In this survey, the insolvent
run-off market comprises the
liabilities of both failed UK
insurers and the cost to the
industry as a result of these
failures through the Financial
Services Compensation
Scheme (FSCS).
2.2.1 Size
The insolvent company element of the
UK non-life run-off market continues
to be a significant component of
this sector.
The insolvent run-off market marginally
decreased in size from 9.1 billion in
2009 to 9.0 billion in 2010.
The size of the insolvent market is
unlikely to change significantly until the
larger estates finally close or unless
reserving for APH losses is significantly
revalued. During 2010 one of the largest
insurance insolvencies, English &
American Insurance Company Limited
successfully launched a cut off or
closure scheme of arrangement for the

vast majority of its business.
A change will occur of course if there
are significant new insolvencies, of
which there were none in the year.
The largest insurance insolvencies
that remain Chester Street Insurance
Holdings Limited, Independent
Insurance Company Limited and BAI
(Run-Off) Limited all have significant
exposures to direct asbestos claims
arising under protected policies10. There
is little prospect of these estates closing
until a solution is agreed with the FSCS,
which will eventually take over the run
off of protected business.

As at end of 2010
Total liabilities
( billion)
Percentage share
of market
( billion)
Percentage share
of market
12.2
45%
10.3
45%
9.0
33%
6.6
29%
Equitas (Lloyd's 1992 and prior)
4.9
18%
4.9
22%
Lloyd's (1993 onwards)
1.0
4%
1.0
4%
27.1
100%
22.8
100%
Total
Figure 3: Change in the size of the insolvent UK non-life company run-off market
12
10
10.6
10.4
9.5
9.1
9.3
9.1
9.0
2007
2008
2009
2010
2004
2005
2006

10 Total liabilities of Chester Street, Independent and BAI (Run-Off) were approximately 5.6 billion at the end of 2010.
2.2.2 FSCS
The insurance sub-scheme of the
Financial Services Compensation
Scheme (FSCS) and its predecessor
under the Policyholders Protection
Board (PPB) is funded (on a cash flow
basis) by levies raised against active UK
insurers plus recoveries from insolvent
estates. The FSCS is a statutory fund
for customers of authorised financial
services firms from which customers
may receive compensation if a firm is
unable, or is likely to be unable to pay
claims against it.
Levies raised and compensation
payments made since 1990 in respect
of non-life insurance are summarised
in Table 13.
The total amount of compensation paid

to protected policyholders of failed UK
insurers in the year to 31 March 2011
was 61.6 million (2009: 59.8 million).
The largest spend was in respect of
employers liability claims against
Chester Street Insurance Holdings
Limited and compensation costs of this
estate incurred by the FSCS in 2010/11
were 39.5 million.
In 2010/11, a levy of 43.9 million was
charged to insurers compared with a
levy of 66.7 million charged in 2009/10.
This levy is calculated by taking into
account the amount of compensation
paid in the previous year plus an
estimate of compensation to be paid in
the following 12 months.
Table 13: Payments and levies by the FSCS and the PPB (non-life)11
Industry levy
( million)
Compensation payments
( million)
PPB 1990-2001
341.5
418.7
FSCS 2001-2011
440.2
778.5
Total
781.7
1,197.2
Payments and levies
Source: FSCS Annual Reports (2002-2011), PPB Annual Reports (1990-2001)
One of the largest casualties of the

PPI market is Welcome Financial
Services Limited, which was
declared in default on 2 March
2011. To assist in its handling of
claims, the FSCS arranged to
use Welcomes claims-handling
capabilities. KPMG advised
Welcome on its restructuring
which was achieved by means of
a scheme of arrangement: KPMG
was subsequently appointed
as the Scheme Supervisor. The
Welcome scheme provides for
payments to the FSCS to fund
compensation and the associated
costs for handling PPI claims in
respect of policies sold on or after
14 January 2005.
The FSCS has been more active in 2010

compared to previous years dealing with
claims against non-life intermediaries,
particularly compensation for mis-selling
of Payment Protection Insurance (PPI).
Almost all of the new claims in the
General Insurance Intermediaries sub
class relate to PPI. Total compensation
paid in the year to 31 March 2011 was
35.8 million (2009/2010: 12.3 million).
The FSCS has forecast that claims will
increase and in 2010/2011 a levy of
57.2 million was charged to the market
(2009/2010: 8.0 million).
11 Analysis excludes recoveries from insolvent estates.
2.3 Equitas
Whilst we do not chart specific company

details from the UK non-life run-off
company market in our survey, Equitas,
as the largest single component, is worth
individual comment.

Total liabilities
( billion)
Percentage share
of market (%)
( billion)
Percentage share
of market (%)
12.2
45%
10.3
45%
9.0
33%
6.6
29%
4.9
18%
4.9
22%
1.0
4%
1.0
4%
27.1
100%
22.8
100%
As at end of 2010
Total
Figure 4: Development of run-off at Equitas

18
1000
16
900
14
800
700
12
600
10
500
400
300
200
100
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Claims discount
Reinsurance discount
Discounted liabilities
Discounted reinsurers
share of technical
provisions
Headcount
Undiscounted liabilities,
wholly reinsured
Source: Equitas Limited accounts (1998-2011) and Resolute Management Services Limited accounts (1998-2010)
Headcount (number)
Figure 4 shows the reduction of the

liabilities of Equitas run-off since its
inception. Equitas total liabilities
have reduced by 0.4 billion in the
year to March 2011 to 4.9 billion
(2009: 5.3 billion). The reduction in
these reserves has been driven by
claims payments, as well as exchange
gains during the financial year:
its technical provisions are largely
denominated in US dollars. This
trend is consistent with movements
in prior years.
Resolute Management Services Limited

reported revenues of 28.4 million in the
year to March 2010 (2009: 33.6 million).
There is a continuing downward trend in
headcount: the average number of staff
for the year ended 31 March 2010 was
133 (2009: 157).
In March 2007, Equitas entered into a

transaction by which Equitas liabilities
were reinsured by National Indemnity
Company, a member of the Berkshire
Hathaway Group. The second phase
of the transaction, the Part VII transfer
of the original liabilities to another
Equitas special purpose vehicle, Equitas
Insurance Limited, was completed in
June 2009 and means that Members at
Lloyds are no longer liable under English
and EEA law for any future claims by
policyholders on their 1992 and prior
business. Resolute Management
Services Limited is responsible for
the management of run-off for Equitas
Insurance Limited.
3. Lloyds of London
In existence as new Lloyds

since 1993, the markets
discontinued business is largely
free of the APH liabilities that
plague the company market.
3.1 Run-off at Lloyds

The Lloyds market is currently the
smallest component of the UK non-life
run-off sector. Lloyds defines liabilities
in run-off being those attributable to
syndicate underwriting years that
remain open, having not been closed
via Reinsurance to Close (RITC).This
survey has also consistently applied
this definition in reporting run-off
liabilities at Lloyds.
At the end of 2010, the total liabilities

of Lloyds non-life insurance syndicates
in run-off were 1.0 billion (2009:
1.9 billion) across 10 open syndicate
years (2009: 18 open years). The gross
technical provisions of Lloyds open
year syndicates have decreased by
0.8 billion over the year.

As at end of 2010
Total liabilities
( billion)
Percentage share
of market
( billion)
Percentage share
of market
12.2
45%
10.3
45%
9.0
33%
6.6
29%
4.9
18%
4.9
22%
1.0
4%
1.0
4%
27.1
100%
22.8
100%
Total
Figure 5: Change in the size of the Lloyds non-life run-off market

8.0
120
6.0
100
7.2
7.5
80
5.0
5.2
19.7
4.0
60
3.0
40
2.9
2.0
2.5
20
1.0
1.9
1.0
Total number of
syndicate open years
7.0
2004
2005
Lloyds liabilities
2006
2007
2008
2009
2010
Number of syndicate open years
Non-life run-off liabilities at Lloyds

totalling 1.5 billion were removed
during 2010 through RITC transactions
involving nine syndicates and 16 years
of account, leaving 0.4 billion held
in open years. The balance of run-off
liabilities at the end of 2010 of 0.6
billion is made up of four syndicates
new to our survey, whose 2008 year of
account remained open.
The RITC process, revitalised since
2006 following a relaxation of the rules
on the treatment of RITC capital has
proven to be a success. Most of the
liabilities that comprised Lloyds run
off have been reinsured through RITC.
Steve McCann, Head of Open Years
at Lloyds, is pleased to report that all
RITC vehicles have made money and
those syndicates have been able to
release profits and capital.
We have also assessed the liabilities

at Lloyds that are not captured
within its definition of run-off but that
nevertheless related purely to inactive
business. A reasonable estimate of
this is the liabilities of the main RITC
purchasers which have reinsured
run-off liabilities.
As at 31 December 2010, there were
approximately 1.5 billion (2009 1.1
billion) run-off liabilities held within
active RITC acquirer syndicates, of
which 1.3 billion represents gross
technical provisions (2009: 1.0 billion).
Table 16: Reinsurance to close (RITC) transactions in 2010

RITC agent
Former managing agent
RITC transactions in 2010
Capita Managing Agency Limited
Syndicate 5500 closed into Syndicate 2008
Flagstone Syndicate Management Limited

(formerly Marlborough Underwriting
Limited)
Shelbourne Syndicate Services Limited

(internal RITC)
Capita Managing Agency Limited
Travelers Syndicate Management Limited
RiverStone Managing Agency Limited
Whittington Capital Management Limited

Riverstone Managing Agency Limited
(internal RITC)

Novae Syndicates Limited

(internal RITC)

R&Q Managing Agency Limited

(internal RITC)
Shelbourne Syndicate Services Limited
Novae Syndicates Limited

R&Q Managing Agency Limited
Source: Lloyds 2011
3.2 Management
of discontinued
business
Following reconstruction and renewal of

the Lloyds market and the formation of
Equitas, Lloyds effectively freed itself
of exposures to traditional APH liabilities
when it started business as new Lloyds
in 1993. By that time insurance policy
wordings in the London Market largely
excluded cover for such claims, except in
relation to compulsory employers liability
insurance. Steve McCann has confirmed
that the prohibition at Lloyds on taking
on pre-1993 liabilities remains.
Consequently run-off at Lloyds has a
much shorter duration compared to
the company market. This reflects the
strategy adopted by run-off players at
Lloyds. According to Nigel Rogers,
pricing [of acquisitions] is the key and
our aim is to close claims quickly and
early and crystallise profit. At the
moment, interest rates and the
investment environment remain low.
While claims are still open there is
little gain to be made on holding

investments longer. Close early and
get your money out.
Solvency II remains a priority for Lloyds
and the market is pressing ahead with
plans for implementation on 1 January
2013 regardless of the proposed
delay announced by the European
Commission. Lloyds has issued guidance
on implementation to all syndicates and
Steve McCann advises that Lloyds
expects 100% compliance with Solvency
II by the market.
All syndicates including RITC syndicates
have to meet this challenge. Extra
resource and money is being spent trying
to meet the Lloyds timescale, says
Nigel Rogers. However, he questions the
relevance of Solvency II to run-off and
believes that run-off companies have
little to gain from Solvency II; few of the
outputs are useful.
4. Future prospects for

the run-off market
There will always be run-off
but the nature of run-off
is changing.
The traditional run-off market
(substantially comprising London
Market APH liabilities) which largely
emerged in the 1980s and 1990s is
slowly being dealt with through a
combination of schemes of arrangement,
commutations and claim payments.
However, there remains, as the survey
reveals, a considerable value of run-off
liabilities still on the books of UK
insurers. Based on the current rate
of erosion of these liabilities it can be
expected that the run-off of these books
will continue for some 20 years or more.
Why is it then that, despite these
recognised and now well used and
understood techniques for accelerating
run-off, there is still such a long tail?
Part of the answer lies in the regulatory
and political environment. Certain
liabilities such as those made under
employers liability policies or other
compulsory insurance classes cannot
be accelerated. Other liabilities are
held by insurers who have a strategy of
maintaining the run-off over its natural
life with no acceleration, in order to
maximise investment returns on the
matching assets. Some liabilities are
held by insurers who are still not actively
managing their run-off liabilities and
finally there are liabilities which are
tied up in insolvent estates where there
are issues which may be delaying final
payments to creditors. Clearly there
are only certain components of this
traditional run-off that are capable of
acceleration, absent some change in
legislation or regulatory provisions,
but even these will require a change in
approach or strategy from the relevant
insurers. Accordingly it is likely that,
notwithstanding efforts by many parties
to accelerate and close down run-off
portfolios, traditional run-off
may continue for many years.
Traditional run-off is, however, gradually

being replaced in part by new types of
run-off. These tend to be shorter tail and
are across various business classes and
as a result have different characteristics.
Current total run-off balances now
include substantial reserves for
monoline business as well as motor.
Three or four years ago, these types of
run-off would not have featured in the
total run-off balances, or at least not to
any material degree. The run-off industry
is adapting to the changing face of
run-off not only by adapting skills to
deal with new types of run-off but also
by diversification into other areas.
Solvency II has brought into sharp focus
the need for insurers to fully manage
the risks within their business and for
them to apply appropriate amounts of
capital to manage each of these risks.
This approach means that liability
management is now a central part of
the risk management function of many
insurers. The impact of this is that the
definition of run-off is becoming much
more blurred. Whereas in the past this
tended to comprise mainly risks on
policies which expired many years ago,
nowadays many insurers include much
more recent business within run-off,
including in some instances nonrenewed business (ie less than one year
old). The impact of this can be positive
as it can lead to techniques, skills and
practices that have been developed in
relation to traditional run-off being
applied to more recent business.
This period of the UK run-off market
has been neatly summarised by Graham
Jackson, General Manager of IRB Brasil
Resseguros S.A. in London, who
suggests that the Golden Age of
run-off is over. There will still be run-off
of course, but with less distress.
5. Conclusion
The total size of the UK non-life

run-off market decreased by
approximately nine percent on
the previous year and is now
estimated at 27.1 billion of
total gross liabilities at the
end of 2010.
The UK non-life insurance market is

levelling out and the bulk of it now
looks set for the long haul.
Exit mechanisms continue to allow
many books to be closed out early and
profitably; those that remain are (or may
soon be) owned by run-off acquirers
seeking greater long term gains. That
strategy is now under threat from two
serious challenges facing the industry:

The imminent implementation

of Solvency II has occupied
significant management attention
and corporate resources, as
insurers seek to limit the burden
of regulatory compliance and to
maximise capital efficiency; and
Investment performance remains

very low, putting pressure on run-off
companies to cover their costs
by making greater operational
efficiencies.
Capital tied-up in (or net worth of) UK

run-off companies has reduced as
some companies have accessed this
capital through commutation, release of
reserves, schemes of arrangement or
other exit solutions. Use of such tools
will be critical to run-off investors going
forward as they seek to extract value
from run-off business.
Activity in the run-off acquisition market
has been mixed. M&A is expected to
increase as insurance groups refine
their structures ahead of Solvency II.
Unsurprisingly consolidation in the
run-off services sector continues at a
pace as service providers continue to
adapt to the changing demands of the
marketplace.
Acknowledgements
We would like to thank all who contributed to the
production of this report, in particular:
Philip Grant, Ambant

Paul Corver, ARC
Klaus Endres, AXA Liabilities Managers
Paul Johnson, Barclays Corporate
Will Bridger, Compre Holdings
Graham Jackson, IRB Brasil Re
Simon Hawkins, QBE
Nigel Rogers, RITC Syndicate Management
Luke Tanzer, RiverStone UK
Alan Quilter, R&Q
Ken Randall, R&Q
Steve McCann, The Society of Lloyds
Jason Richards, Swiss Re
2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
THE KPMG UK RUN-OFF

RUN-OFF SURVEY
SURVEY:: NON-LIFE INSURANCE | 37
Chronicle of events
2010
Run-off transactions
R&Q acquires JMD
Specialist Insurance
Services
Enstar and Allianz

Global Corp &
Speciality AG (UK)
100% quota share
agreement
FEB
JAN
Minster scheme
effective
R&Q acquires La
Licorne
Enstar completes
acquisition of
British Engine
Berkshire Hathaway
completes acquisition
of Scottish Lion
MAR
Asbestos working party

revises UK asbestos
liabilities estimates
Scottish Lion appeal
overturns initial ruling
Judge rejects
challenges in Scottish
pleural plaque judicial
review
Government
announces
compensation for
pleural plaque
sufferers
Chilean earthquake
APR
Enstar acquires Mitsui

Sumitomo portfolio by
Part VII transfer
Compre acquires
London & Leith
Insurance Company
DARAG acquires
HVAG
MAY
JUN
ABI announces
establishment of ELTO
Quinn Insurance
Ltd (Ireland) ceases
underwriting in the UK
Iceland volcanic ash

cloud
BP Deepwater
Horizon oil spill
FirstCity Insurance
Group Limited in
Administration
WTC respiratory suits

settlement reached
Tokio Marine Europe

Insurance scheme
becomes effective
Liberty Mutual
acquires parts of Irish
insurer, Quinn
Zurich Specialties
agrees reinsurance
by Swiss Re
NICO reinsures the

bulk of Chartis (AIG)
US asbestos liabilities
Goldman Sachs
reinvests in Enstar,
becoming the
groups largest single
shareholder
Ageas transfers
run-off portfolio to
Swiss Re
Other events
2011
Run-off transactions
Catalina Holdings
acquires Glacier Re
Enstar purchases
Clarendon Insurance
from Hannover Re
DARAG takes over the

non-life portfolio of
Quantum Insurance
Milestone Capital
Partners invests in
Compre
Sompo Japan
transfers UK branch to
Transfercom
FEB
JAN
Government
announces
compensation for
pleural plaque
sufferers
Australian floods
Chilean earthquake
Egypt Start of
revolution
Libya Start of
civil war
Other events
MAR
Japan earthquake which

triggers destructive tsunami
Syria Start of civil disorder
APR
MAY
JUN
Omnibus II directive
proposes transitional
exemption from
Solvency II to run-off
companies
Camomile Pool
scheme sanctioned
R&Q acquires AM
Associates Insurance
Services
Tawa acquires Island
Capital
Novae Part VII transfer

scheme sanctioned
R&Q acquires RSL
from Marsh
Catalina Holdings
acquires Western
General Insurance
JUL
AUG
Berkshire Hathaway
agrees reinsurance
of CNA asbestos
liabilities
Scottish Lion
judgement on
disclosure of
valuations for voting
Tawa announces
partnership with
Lincoln General in
the US
Grafton Europe
accepted transfer of
legacy years liabilities
from Morrison captive
Tawa purchases Oslo

Reinsurance UK
Aviation & General
transfers its remaining
liabilities to Tenecom
EAUA Pools scheme

becomes effective
SEP
Pakistan flooding
GTE Reinsurance
commutation plan
approved (Rhode
Island)
Aviation & General

transfers Canadian
legacy portfolio to
Global Re
Hurricane Igor
New Zealand
earthquake
(Christchurch)
OCT
NOV
QIS 5 submission
deadline for solo
entities
DEC
Australian floods
Alumina plant disaster,

Hungary
USA storms and floods
OCT
NOV
Tunisia Start of
revolution
Highlands UK scheme
sanctioned
HSBC sells HSBC

Insurance (UK) to
Syndicate Holding Corp
Tawa, Skuld and

Paraline consortium
announces acquisition
of Whittington UK
Tawa announces
acquisition of
Chiltington
JUL
AUG
Hurricane Irene
UK Riots
SEP
DEC
Texas wildfires
Typhoon Talas, Japan
Contact us
For further information on this survey, contact KPMGs
Restructuring Insurance Solutions practice:
Mike Walker
Partner
KPMG LLP (UK)
Tel: +44 (0) 20 7694 3198

e-Mail: mike.s.walker@kpmg.co.uk
John Wardrop
Partner
KPMG LLP (UK)
Tel: +44 (0) 20 7694 3359

e-Mail: john.wardrop@kpmg.co.uk
Darryl Ashbourne
Director
KPMG LLP (UK)
Tel: +44 (0) 20 7311 8787

e-Mail: darryl.ashbourne@kpmg.co.uk
Steve Goodlud
Director
KPMG LLP (UK)
Tel: +44 (0) 20 7694 3067

e-Mail: steve.goodlud@kpmg.co.uk
www.kpmg.co.uk
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual
or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information
is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.
of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the
United Kingdom.
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
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RESTRUCTURING

3.1 Run-off at Lloyds

UK non-life insurance market

1.1 Current size

1.2 Change in size

4. Future prospects for the

2.1 Solvent market

2.2 Insolvent market

4 | THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE

catastrophes, combined with difficult

THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE | 5

conditions are posing a fundamental

6 | THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE

1. UK non-life insurance market

In this section we review the size of the

THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE | 7

8 | THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE

1.1 Current size

The UK non-life run-off market can be

The gross liabilities of the UK non-life

Insolvent company run-off

Equitas (Lloyds 1992 and prior)

Lloyds (1993 onwards)

Table 2: Main components of the UK non-life run-off market

The principal drivers of the nine percent

As we have previously reported, there is

THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE | 9

Since 2004, the traditional UK non-life

Has the size of the run-off market

Figure 1: Change in size of UK non-life run-off market3

With the exception of Lloyds the

Technical provisions for these liabilities

Companies which have adopted a

Solvent company run-off

Insolvent company run-off

UK sterling : US dollar exchange rate

1.2 Change in size

10 | THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE

2.1 Solvent market

2.1.1 Change in size

Insolvent company run-off

Equitas (Lloyds 1992 and prior)

Lloyds (1993 onwards)

Total liabilities ( billion)

Solvent company run-off

THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE | 11

The solvent run-off market has reduced

The decrease has been driven largely

The reduction would have been greater

12 | THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE

The overall decrease in trapped capital

At the end of 2010, total capital tied

Table 4: Capital tied up in the solvent run-off market

Capital in solvent companies

Efficient and innovative capital reduction

THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE | 13

The size of the run-off market has

14 | THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE

run-off acquirers whose objectives

Some run-off companies may

Jason Richards, Managing Director Claims, Accounting and Liability

THE KPMG UK RUN-OFF SURVEY: NON-LIFE INSURANCE | 15