An esteemed panel discusses the relatively new legal frameworks that provide legal finality and a further exit solution in addition to the well tested and accepted Loss Portfolio Transfer mechanism.
For the optimistic, passionate and inquisitive IBT enthusiasts, the last panel of the Education Day in Jersey City this year must have been an hour of apprehension, excitement, fulfillment and pleasure all rolled into one. The debate among five esteemed leaders of our industry was equally thought provoking and optimistic as it was confirmatory of the fact that even though we have all the elements for a successful transfer, we are still lacking the most important ingredient of all……a transaction! PK Paran of DLA Piper led a stellar panel of executives who have been in the forefront of finality transactions for decades and who have led some of the largest and most complex transactions in our market.
The overwhelming conclusion of the discussion was that the relatively new legal frameworks that provide legal finality are a welcome and perhaps necessary additional tool, which would deliver the industry with a further exit solution in addition to the well tested and accepted Loss Portfolio Transfer mechanism. There is often the misunderstanding that one mechanism can only exist to the exclusion of the other or indeed, that European players are “preaching” for legal finality as the one viable exit mechanism. This is a simplification of what is being discussed here: one need only look to the plethora of European transactions over the last decades to see that the two can happily co-exist and parties choose whichever structure suits their needs depending on the portfolio in question, the entity, the seller’s requirements, whether capital relief, legal finality or claims management is the motivation behind the initiative, to name a few.
What is it that is holding the US industry back?
Fear? Uncertainty? Inertia? Conservative approach? The discussion we had in Jersey City would lead me to believe that that answer must be yes to all four! We tend to like to operate within our comfort zone, which is perhaps an oxymoron given that we are in the business of taking risk.
Or it is policyholder protection and the need to ensure that claimants are served in the same way by the acquirer as they were by the domestic insurer they chose when taking their policy out? The regulatory and judicial processes in place ensure that both the commissioner in question as well as the state court will review the transaction in detail before this is sanctioned. They most importantly have the benefit of the report provided by the Independent Expert. The IBT legal framework provides a far more stringent review than a share sale, and yet, parties are engaged in company sales routinely and such transactions conclude successfully, equally routinely. An IBT is the sale of a part of a company as opposed to the entire legal entity. Why is it so different? And why does it raise issues that a sale does not?
The acquirer’s solvency is of course a key consideration as is its ability to manage the portfolio post transfer. The acquirer’s solvency is thoroughly checked by the regulator and the court in the course of the approval process and any questions are resolved prior to the transfer being sanctioned.
The business plan provided in the course of the transaction also provides details of how the acquirer will handle the portfolio once transferred onto its balance sheet, whether this will be done in-house or outsourced.
There is an absence of equivalence among the US states. How can we overcome this? At this point in time, only two states have statutes that provide for legal finality. A handful of states have enacted division statutes through which a company can separate a legacy portfolio that it wants to handle differently. The difficulty with the absence of a uniform system means that we do not have a level playing field and therefore, states without IBT statutes may not see the need or point of allowing portfolios from their state transferring to Rhode Island or Oklahoma. We hear concerns regarding policyholder protection, how the guaranty funds of each state will protect policyholders transferred to another state, and how this may affect the insurance industry of the various states. Would that not be resolved if there were equivalence and trust among the state regulators that all states would protect policyholders with the same diligence and rigor? The Covered Agreement provides for equivalence and reciprocity between the US and the EU. Surely, if there can be regulatory trust between Continents, there can also be equal trust between states?
Whatever the reason or combination of reasons that we have yet to celebrate a first transaction, all stakeholders need to have more engagement from the broking community, as they can best advise their clients in terms of how they can improve their capital structures and internal operations. This, in turn, will open a more constructive dialogue as to how the legacy community can provide an additional tool in the broking community’s solution box.
We need our regulatory community, each and every regulator to trust their industry and each other. A robust industry can only exist if it can operate cross-border knowing that policyholders will be protected in every state, by every regulator, no matter who may assume their policies, as insurance is not just a financial transaction. Insurance provides a social service to the public: I will be there for you if something goes wrong. The only qualification is if that “something” is covered by the terms and conditions of the policy. It’s not subject to the insurer not transferring the policy to another; it’s not subject to the insurer not becoming insolvent; it’s not subject to the insurer being sold to another; it’s not subject to the insurer re-domiciling to another state.
Legacy acquirers, like the risk carriers with which they transact, are insurers and reinsurers themselves. No matter what their capital backing may be, private equity or other, they are part of the insurance industry and subject to the same regulatory and legal framework. This is a point often forgotten in our discussions and one, which is very relevant in the deliberations of all stakeholders.
A healthy industry is one that evolves with the times, one that embraces new solutions and one that is fully engaged and supports all its stakeholders as failure of any individual part of the industry sheds doubt on the robustness of the whole. It is worth pointing out that the legacy community can boast zero failures during the decades of operating and acquiring legacy portfolios or companies from the insurers, which wished to dispose of them for their own strategic reasons. The industry as a whole, sadly, cannot claim such record. Should we allow further failures and simply proceed I very much hope that we are very close to seeing the first successful transaction, which will no doubt be the first of many, in time. Just some food for further thought and the wish that we may have a first transaction before Christmas! Along with that positive thought, I would like to take this opportunity to say a huge thank you to Dinos Iordanou, Former President and CEO, Arch Capital Group, Brian Snover, SVP and General Counsel, Berkshire Hathaway, Will Bridger, CEO, Compre Group, James Bracken, CEO, Fortitude Re and Ali Rifai, General Counsel and Interim CEO, Zurich Legacy Solutions for giving us their valuable time and input. It was a unique discussion and we, as AIRROC, very much hope to continue to build on what has been great momentum. We are committed to continuing to provide a forum for such discussion as well as to supporting the NAIC in this area, as needed.
And finally, the usual disclaimer…….the opinions stated in this article are my personal views and do not represent the views of the round-table participants.