Insurance Business Transfer – LTC Solvent Run-off Facility

A proven business model that can be used to form a Long Term Care Runoff Facility

Regulator Presentation

November 2017

Long Term Care Legacy Liabilities

An industry in crisis?

  • The insurance industry is faced with major challenges associated with long term care (LTC) legacy liabilities.
  • There is a crisis of confidence in the LTC industry among all constituents, including policyholders, regulators, investors, companies and reinsurers.
  • There is increasing concern about the reserve position of the LTC industry.
  • There have been transactions (proposed and executed) where companies are working to find ways to wall off their LTC liabilities under various structures including sale to firms with minimal financial support.
  • The Penn Treaty liquidation has had a major impact on the industry. Policyholders are losing benefits and there continue to be significant rate increases.
  • FIO is convening meetings on the “LTC crisis”
  • NAIC president Ted Nickel referenced the “LTC crisis” in recent talks.
  • The increasing demand for premium rate increases from a senior population that is confronted with major uncertainties about its coverage and premium charges, as well as the limitations of fixed incomes, exacerbates the situation.
  • Click here to download presentation

The Insurance Business Transfer

A proven business model that can be used by the (re)insurance industry to restructure (re)insurance business

The U.S. (re)insurance run-off market In search of finality

  • U.S. insurance companies with run-off business are looking for effective exit solutions to facilitate operational and capital efficiencies and gain legal finality.
  • Existing options are limited in their scope and effect (e.g. commutations, LPTs).
  • State regulators recognize the need for new restructuring tools and are responding to the industry’s needs.
  • We have engaged with key regulators to discuss new legislative initiatives.


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By Elizabeth Festa

Wednesday, July 19, 2017 5:01 PM ET

Click here to download the report.

State insurance regulators are considering a plan to create two long-term care insurance facilities, one solvent and one impaired, as part of an attempt to restructure the nation’s

formidable LTC liabilities, which outstrip available capital.
The proposal calls for a solvent facility consisting of a new, licensed insurer that assumes as-yet-untroubled LTC portfolios through a mechanism called an insurance business transfer,
and another facility that assumes impaired portfolios. Run-off industry experts formally presented the concept to the National Association of Insurance Commissioners’ Long-Term Care
Insurance Task Force during a July 19 conference call. Continue reading…

The case for expanding the Rhode Island IBT

By Luann Petrellis

Run-off & Restructuring

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October 17, 2016

Luann Petrellis  of Ernst & Young* says the Rhode Island Insurance Business Transfer should be opened to other lines of business besides P&C. Entire industries are being challenged like never before to open up, innovate and reinvent themselves. In a world where everything is changing, the biggest risk is standing still. This is as true for the insurance industry as it is for any other industry seeking to stay competitive in a growing global economy.

Continue reading…

Can U.S. insurance companies afford not to restructure?

The case for expanding the Rhode Island Insurance Business Transfer to other lines of business

Written by Luann Petrellis

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Entire industries are being challenged like never before to open up, innovate and reinvent themselves. In a world where everything is changing, the biggest risk is standing still. This is as true for the insurance industry as it is for any other industry seeking to stay competitive in a growing global economy.

The global game of (re)insurance is evolving at an accelerating pace. There are significant restructuring activities going on in the global and US market. In 2013, Fitch Ratings, when referring to accelerating restructuring in the life insurance industry, stated that there is an “ongoing trend in the industry where many insurers are taking steps to refocus operations and discontinue or divest businesses that have underperformed and/or no longer provide a strategic fit. Some of this product rationalization has also been driven by persistently low market interest rates, which have lowered the relative profitability of some traditional products while also lowering the cost of borrowing if debt is used to finance the acquisition of these businesses…. We expect this rationalization process will continue to create opportunities for both traditional players looking to strengthen existing core business, reinsurers with an expertise in block acquisitions, and nontraditional players (e.g., private equity)”

Continue reading…

EY and AIRROC survey of the US (re)insurance runoff market Summary of results

 Written by Luann Petrellis, EY Insurance Advisory practice

Click here to download the report.

 In early 2016, Ernst & Young LLP teamed up with AIRROC, the Association of Insurance and Reinsurance Run-Off Companies, to conduct a survey of industry experts on the current state of the US insurance runoff market and predictions for the future. The goal was to understand the key strategic objectives for companies with runoff business, how the runoff business is managed and options for dealing with the many challenges of runoff business.

The Survey primarily targeted members of AIRROC, the only US based non-profit association focusing on the legacy sector of the insurance and reinsurance industries. The survey respondents were predominantly senior executives and management of US-domiciled insurers and reinsurers with runoff business, as well as runoff acquirers and foreign carriers with US-domiciled policies in runoff. Respondents came from a variety of organizations, including midsized carriers and some of the largest international organizations.

From the survey responses, we identified five key findings.

Continue reading…

Legacy attracts new investors

The legacy sector offers expanding investment opportunities as more companies prepare to sell off non-core or non-performing portfolios while investors look for new outlets. Barbara Hadley reports

This could well herald a boom time for the legacy market; an increase in sellers, favourable regulatory climate and capital looking for somewhere to go. According to a Swiss Re Sigma report in 2015, acquisitions of property and casualty business placed in run-off have increased steadily since the financial crisis, particularly between 2011 and 2013. In particular, the Sigma report points to the UK being a core market for legacy acquisitions ‘given its favourable legal and regulatory climate’, for example schemes of arrangement and Part VII transfer mechanisms, but with the UK non-life run-off sector reaching maturity, ‘legacy acquirers are reportedly looking to expand in the US and Continental Europe, where the size of run-off portfolios are significant.’

The report suggests that the majority of the traditional run-off market acquirers ‘have a foothold in one or both of these markets.’ It adds that ‘surveys persistently suggest that more efficient capital management remains the most influential driver of run-off restructuring activities.’ A recent PricewaterhouseCoopers’ survey meanwhile stresses that regulation is also a key driver.

For Steve Gowland, CEO of specialist legacy acquirer Ashbrooke, the attraction and growth of the legacy market for acquirers going forward comes down to three sources: ‘(1) the increased flow of transactions that the dislocation provided by Solvency II is delivering; (2) the continuing low interest rate/ inflation environment, specifically in Europe; and (3) our expectation that future transactions will be increasingly driven by corporate finance/restructuring solutions rather than insurance/ claims management driven solutions.’

Whilst traditionally share purchases are more straightforward, ‘Solvency II is going to throw up some significant new capital requirement hurdles for acquirers in order to gain regulatory approval. This will have a significant impact on existing market participants’ operating and financial return models,’ says Gowland. ‘As a consequence we expect a large number of transactions to be portfolio transfers from live underwriting businesses or existing run-off companies to facilitate capital efficiency or a solvent liquidation exercise.’

In addition, he adds, ‘we expect a number of smaller scale, secondary buy-out opportunities from historic and existing run-off acquirers. This will represent investments that have been managed down in scale since the original purchase and now are below the size and return profile of the parent group. These transactions may come as portfolio transfers as a cleaning-up or solvent liquidation event for the run-off entity.’

He notes that, although Solvency II presents many operational challenges, ‘the transaction opportunities it is creating, in conjunction with its application across the EU, will actually level the playing field and make the regulatory and compliance issues that face acquirers more consistent and less complex.’

So with the legacy acquisition market on an upward trend it is now clearly on a wide range of investors’ radar. As PricewaterhouseCoopers points out (see p5, Yearbook & Directory): ‘We are currently experiencing a real boom in the type and number of investors who are interested in run-off books,’ citing private equity firms and pension funds in particular. Good examples are private equity firms CBPE Capital LLP, who acquired a majority stake in run-off specialist Compre last year, and Keyhaven Capital who bought into DARAG in 2014.

The Sigma report also draws attention to the how the range of potential acquirers and investors is expanding in the insurance M&A sector as a whole, which could be reflected in future legacy market investment.

Gowland firmly believes that any future competition in the legacy market will be driven by new capital: ‘We expect this additional competition, both sustained and for specific, one-off situations, to come from: (1) existing re/insurance market participants undertaking a “live to legacy” play as a consequence of the need for capital efficiency and risk diversification in a Solvency II world; and (2) cash rich investors (eg. sovereign wealth funds, hedge funds etc.) driven out of bond holdings due to interest rate increases, specifically holders of US dollar denominated debt, chasing attractive investment opportunities.

‘The challenge for this new capital, however, will be finding the right management team with the appropriate experience and a business plan that offers something different. Otherwise increased competition, driven by capital only, will push up prices.’

In the medium to longer term, insurance linked securities (ILS) are a potential source of financing instrument in the legacy sector. The ILS market itself is growing rapidly; a study by the Institute of Insurance Economics at the University of St Gallen in June 2015 indicated that the ILS market could double within the next five years, from its current estimate of $44.7 billion to $87.3 billion by 2019.

‘The reason lies within the expansion of the investor base: pension funds and hedge funds alike appreciate the uncorrelated returns and relatively high yields … the average ILS portfolio amounts to $1.7 billion … respondents plan to increase their portfolios by over 9.5 per cent in the near future to an average of almost $1.9 billion,’ says the study. It notes that, although so far run-off business has not been considered for securitisation, this could be about to change.

Arndt Gossmann, CEO of DARAG, agrees: ‘We see an emerging potential in the securitisation even of special risks like run-off. Especially long tail run-off offers reduced volatility in a long term, non-correlated investment. So far, there are only a few experts among the sponsors who are familiar with the possibilities of all securitisation structures like microsecuritisation. Nonetheless, the demand on the investors’ side is increasing.’

Since the UK Government is anxious to make the UK a centre for ILS business, to the extent of tabling an amendment to the Bank of England and Financial Services Bill giving the Treasury the power to facilitate and regulate ILS business, this could well turn out to be a key source of capital for the legacy market.

Meanwhile Gowland warns against any move towards attracting inappropriate capital: ‘The relative ease or difficulty in raising capital is in understanding that an individual (or a class of) institutions’ pricing and risk appetite changes over time. Therefore, a significant competitive advantage for Ashbrooke is in understanding capital markets and factoring this into our transaction structures and pricing up-front, and not trying to raise money at historic prices from inappropriate sources.’

DirCover2016The Run Off & Restructuring Yearbook & Directory 2016 is here 

To read the full Yearbook & Directory including feature articles click here.

To search the online Directory of Service Providersclick here

Inside the Yearbook & Directory 2016:

Flexibility rules in the new normal
A new regulatory climate in the wake of the financial crisis means the legacy insurance market faces new challenges – but also new opportunities. Alan Augustin and Andrew Ward of PricewaterhouseCoopers analyse the new legacy landscape

Run-off after Solvency II
What next now Solvency II has arrived? Arndt Gossmann of DARAG reflects on the major opportunities ahead for legacy practitioners in Continental Europe

Legacy attracts new investors
There is a steadily growing interest in legacy business, spawning more buyers backed by a wider range of financing. Barbara Hadley reports

Secrets of a successful liquidation
The final winding up of the Legion Insurance Company last year represents a major run-off triumph say Gregg Frederick and Mike Palmer

The Insurance Act 2015 and the run-off market
All insurance and reinsurance contracts entered into from August this year will be subject to the Insurance Act 2015. David Kendall of Cooley (UK) LLP looks at the impact and implications for the legacy sector

Transfers bring new options for US market
Kevin Gill and Luann Petrellis reflect on how the Rhode Island Insurance Business Transfer initiative could emulate the success of the UK’s Part VII process

A-Z of service providers

Index of service providers

To read any of the articles in pdf format click the cover image



Luann PetrellisLuann Petrellis of Ernst & Young* explains what insurers and reinsurers need to know about the insurance business transfer regulations just enacted in the State of Rhode Island

Since 18 August 2015, insurers face a significantly changed landscape in the massive commercial insurance run-off market in the United States. Newly enacted amendments to Insurance Regulation 68 in the State of Rhode Island (RI) have the potential to invigorate and transform the US market. Similar run-off legislation had just that effect on the UK run-off market over the last several decades.

Specifically, the new regulations provide expanded options for the management of run-off liabilities and, for the first time, bring finality to legacy liabilities. This article will outline the high-level impacts of the changes for insurers and reinsurers, including both the challenges and opportunities, and highlight a few effective steps they can take to ensure those firms considering the use of the new restructuring options establish a foundation for success.

A challenging landscape

The new regulation reflects the significant and longstanding challenges facing companies with commercial run-off business, including:

  • Access to exit mechanisms
  • Maintaining reputation
  • Capital constraints
  • Operational costs
  • Adverse loss development
  • Adverse impact to a company’s rating
  • Lack of skilled resources

In response to these challenges, larger insurance groups are rethinking organisational structures with a view to maximising the efficiency of capital deployed. However, both smaller property and casualty companies and large international insurance groups face a continual need to optimise capital deployments, as well as to efficiently manage run-off liabilities. Thus, the market is clearly ready to consider new tools and approaches to address the challenges of run-off businesses. These new RI regulations present an opportunity for firms to adopt such approaches.

Pursuant to Rhode Island Gen. Laws Section 27-14.5, the RI Department of Business Regulation has amended Insurance Regulation 68, providing for ‘Insurance Business Transfers’ (IBT), which are defined as the ‘transfer of liabilities and assets in accordance with the procedures delineated in this Regulation.’ The amendments provide a carefully monitored, transparent process for the transfer of some or all of a company’s commercial run-off liabilities to a newly formed or re-domesticated RI company through a department-approved and court sanctioned novation process, which brings finality to the legacy exposures of the transferring company.

The IBT also provides an effective restructuring tool for insurers or reinsurers. IBTs can be used to:

  • Combine similar business from two or more subsidiaries, putting all into a single company.
  • Transfer business between third parties.
  • Separate out different books of business and place them into separate companies.

As a public policy matter, the amendments fill a huge void in the current regulatory environment for run-off business and are beneficial to all parties involved in the IBT transaction. The transferring and assuming companies receive value relative to their long term interests and finality through the statutory novation effected by the court order. The policyholders and/or reinsureds in the transferring business benefit from the focused management of the assuming company and the oversight of the RI Department of Insurance (RI DOI).

Currently, the assumption and novation regulations in the US are restrictive and significantly limit the options available to owners of run-off companies to pay their obligations to policyholders and terminate their exposure to future liability. As a consequence, capital is trapped and unable to be deployed for more beneficial purposes. The importance of the IBT transaction is the ability to provide a fair solution that balances the needs of all the company’s stakeholders. The RI amendments allow companies with run-off business to distance themselves from these liabilities in a fully transparent manner, while also providing security to policyholders. The key is a closely monitored transfer process that must be reviewed and approved by the RI DOI as well as judicial authorities.

Consistent with the strong policyholder protections in US law, the amendments include provisions that address policyholder concerns. For instance, the statute has specific notice requirements for policyholders and other specified parties. Also, the IBT approval process requires:

  • Extensive disclosure of financial information of the assuming company.
  • An expert report that will evaluate the impact to transferring policyholders and non-transferring policyholders.
  • An independent evaluation by the RI DOI.

Most importantly from the standpoint of policyholder protection, there is complete judicial review of the IBT plan. Before the transaction will be approved, the assuming company must present evidence to the court that the transfer does not have a material adverse effect on policyholders.  Any party who feels adversely affected by the transfer can make a representation to the court for consideration. Once approved, the assuming company is subject to the continuing authority of the Rhode Island Insurance Department.

Lessons learned from the UK

A similar process [known as Part VII transfers] has been available in the United Kingdom for many years and has resulted in hundreds of successful transfers of business. Building upon the UK process, the RI amendments permit more efficient management of transferred books of business, and allow dedicated capital and focused solutions to be applied to run-off liabilities. While providing a reasonable framework for transfers of insurance business, the amendments also provide sufficient safeguards for policyholder protection resulting in fair outcomes for all involved parties.

How it works

The IBT process is initiated by the assuming company submitting an IBT plan to the RI DOI for approval. The requirements, as stipulated by the regulation, include an expert report that opines on the potential impact to various groups of policyholders and an approval of the transfer by the domiciliary state of the transferring company. Once the RI DOI has approved the plan, the assuming company may file a petition with the Providence County Superior Court for approval of the transfer. The assuming company must comply with the broad notice requirements set forth in the statute, which include notifying all policyholders at their last known address.

Once approved by the court, the IBT results in a DOI-approved and court-sanctioned novation of the transferred policies, releasing the transferring company from liability under the transferred policies. While loss portfolio transfers and reinsurance provide some economic finality, the IBT will provide economic and legal finality to the transferring company.

Good planning and project management of an IBT are essential to navigating certain risks and potential stumbling blocks in the process. Early contemplation of potential obstacles can make a significant difference. For companies promoting the transfer, the objective must be to minimise risk of objection and to achieve regulatory and court approval of the transaction. Therefore, companies should invest time identifying potential challenges that may be raised by various parties. Once these have been identified, companies should devise a strategy to address potential objections.

Effective approaches are likely to include:

  • A communication plan designed to clearly define the business being transferred, the purpose of the transfer and the impact on potential objectors. The communication plan must also flesh out as early as possible the concerns of potential objectors which can then be addressed, if necessary, on a one-to-one basis.
  • A strategy for addressing the concerns of and engaging potential objectors to secure their support, which may include amendments to operational and/or capitalisation plans.
  • A contingency plan for dealing with key objectors, who are unlikely to support the transfer, which may include commutation, novation or exclusion from the transfer.

How the RI IBT differs from Vermont’s Legacy Insurance Management Act (LIMA)

While all the differences between the IBT and Vermont’s LIMA are beyond the scope of this article, it is important to point out some key distinctions between the two transfer processes.

The LIMA approval process is solely regulatory. The approval of the transfer is effected by the Final Order of the Vermont Insurance Commissioner. In contrast, the RI IBT process requires an independent review and approval of the RI Insurance Department as well as review and approval by the Superior Court for Providence County, RI.

Unlike the IBT, which is broad in scope, a LIMA transfer is restricted to closed blocks of non-admitted commercial property and casualty insurance business. Also, under LIMA, to be considered a ‘closed block’, all such business is required to have been expired for not less than 60 months and have no active premiums yet to be paid. The requirement that qualifying reinsurance must have no active unpaid premium outstanding may create a practical impediment against including reinsurance in the transfer, in light of the possible long tail of premium payments under some contracts. Under the IBT there is no requirement that there be no active premiums to be paid, avoiding the potential problem of disqualifying reinsurance from the transfer.

The IBT process impacts a court-ordered novation of all transferring policies and reinsurance agreements providing the potential for economic and legal finality for the transferring company.  The Final Order issued pursuant to LIMA effects a statutory novation of only those policies and reinsurance agreements in the closed block that have not been excluded from the transfer by opt out or otherwise, significantly limiting the ability of the LIMA transfer to provide finality.

Bottom line

The experience of the UK run-off market has proven that a well-designed IBT process can be an effective restructuring tool for insurers and reinsurers, while still providing adequate protections for policyholders. Now, for the first time, US insurers can achieve finality with respect to their run-off businesses, which will help them address challenges related to the optimal use of deployed capital.

* The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP or the global EY organization. Luann Petrellis provides insurance advisory services in connection with the RI Amendments to Insurance Regulation 68 for Ernst & Young LLP in New York. She can be reached at