Spring US insurance regulation. Barometer. From the publishers of

Transcription

1 Spring 201 n o g? s n i r l a l e a F af e d eds e n ket r rder a a h m y ors t a a g l le ts gu The obby re s interes to l otet it r to p From the publishers of INSIDE 0 Analysis Legay Barometer 1 US insurane regulation

2 You don t have to be the biggest to be The Best. Freeborn & Peters LLP What an we do for you? Insurane Regulatory Insurane Transations Reinsurane Dispute Resolution Insurane Insolveny Complex Commerial Litigation Real Estate Bankrupty Antitrust For more information please ontat: Mark Goodman, mgoodman@freeborn.om Joe MCullough, jmullough@freeborn.om 11 South Waker I Suite 000 I Chiago, IL I (12) I

3 EDITOR S LETTER Falling on deaf ears? The legay setor needs to lobby hard at a time when it faes multiple threats The legay market has never had muh lout with regulators, whih seems unjust when one onsiders that the setor effetively saved the baon of the Finanial Servies Authority after insurane industry regulation went awry in the 1990s. It seems therefore, that rather than allow itself to be demonised by the wider market and walked over by the regulator, this ruial setor should start lobbying harder for its own interests. Last year legay arriers were dealt a signifiant blow when the Prudential Regulation Authority announed that it planned to rak down on exit strategies, suh as the use of shemes of arrangement and apital extration. The argument then was that the new regulation was in the interests of poliyholder protetion. But now it is this very setor that needs protetion, and where is the regulator? In the past year an old enemy of the setor has reared its ugly head again and this time it has private equity baking. The threat omes from aggressive laimant law firms. While in their onventional form suh ompanies are well known to the industry, the new breed is venture apital-baked and ithing for a return on investment. The firms, and their finanial bakers, are hoping that the expeted return will ome from the pokets of insurers and run-off providers. The lawyers are effetively harvesting noise-indued hearing loss laims as a vehile for that muh-hoped-for return. In theory, laimants seeking ompensation for latent injury should not be a problem. But these are not normal laims and they re flooding in thik and fast. Industry insiders estimate that the average laim is settled for around,00 just a fration of the osts laimed by the law firms. Respeted defendant law firm Weightmans estimates that the laimant firms are seeking osts of more than 12,000 for ases that settled before litigation and over 20,000 in the ases that atually made it to ourt. And the law firms are being aggressive in their bid to make a return. In Marh, The Insurane Insider revealed that one suh firm, Roberts Jakson, had written to a number of insurers with signifiant UK employers liability books to put them on notie that it intended to begin issuing laims in bulk. The letter, sent late last year, aused insurers of being slow to respond to laims, as well as blaming rival law firms for logging up the system and taking up the time of laims handlers by bringing laims of no merit. But the bombardment of laims may have had one positive effet. It has eliited a rare joined-up response from the legay and live markets. The Assoiation of British Insurers (ABI) has expressed onern at the rise in the number of deafness laims issued in the past year, whih has buked the atuarial trend. The number of laims is thought to have risen from 6,000 in 2011 to more than 120,000 in 201. Introduing fixed reoverable osts is key if we are to get a grip on disproportionate legal osts that have led industrial deafness to beome the new ash ow for some laimant law firms, the ABI said. Last month, major UK insurer Aviva waded into the argument by alling for the government to lamp down on spurious industrial deafness laims filed by opportunisti laimant lawyers. The arrier, whih has a sizeable UK employers liability legay book, said 8 perent of industrial deafness laims failed to demonstrate any link to workplae noise-indued hearing loss. Aviva ritiised laimant lawyers for submitting weak ases and laiming osts that dwarf the atual damages. It remains to be seen whether the alls will fall on deaf ears, but the issue may now be out of the industry s hands and into those of the UK eletorate. Dan Asher Editor, Legay EDITOR-IN-CHIEF Mark Geoghegan mark@insuraneinsider.om EDITOR Adam MNestrie adam@insuraneinsider.om NORTH AMERICAN EDITOR David Bull david@insuraneinsider.om MANAGING NEWS EDITOR Charlie Thomas harlie.thomas@insuraneinsider.om FEATURES EDITOR Gavin Bradshaw gavin.bradshaw@insuraneinsider.om SENIOR REPORTERS Fiona Robertson fiona@insuraneinsider.om Karina Whalley karina@insuraneinsider.om REPORTERS Dan Asher dan.asher@insuraneinsider.om Jenny Messenger jenny.messenger@insuraneinsider.om PUBLISHING LTD RESEARCH ANALYST Himal Patel himal@insuraneinsider.om STAFF WRITER & RESEARCH ASSISTANT Winifred Okoha winifred.okoha@insuraneinsider.om COMMERCIAL DIRECTOR Spener Halladey spener@insuraneinsider.om ADVERTISING MANAGER Rob Hughes rob@insuraneinsider.om SALES EXECUTIVE Annie Lightholder annie@insuraneinsider.om MARKETING MANAGER Aimee Fuller aimee@insuraneinsider.om MARKETING EXECUTIVE Jennifer Lord jennifer@insuraneinsider.om EVENTS MANAGER Louisa Batts louisa@insuraneinsider.om EVENTS PRODUCER Helen MGuire helen@insuraneinsider.om EVENTS ASSISTANT Sarah Mills sarah@insuraneinsider.om PRODUCTION EDITOR Peter Williams peterw@insuraneinsider.om SUB-EDITOR Ewan Harwood ewan@insuraneinsider.om ART DIRECTOR Paul Sargent paul@insuraneinsider.om MANAGING DIRECTOR PUBLISHING LTD Peter Hastie peter@insuraneinsider.om rd Floor, 41 Eastheap, London ECM 1DT United Kingdom

4 A FAirFAx CompAny Run-off with integrity Industry leaders in delivering run-off solutions

5 ANALYSIS On the brink Dan Asher looks bak at another year in the legay market and asks whether it is on the brink of a fresh wave of live-to-legay transations The legay market has been baying for the next major aggregation disaster or signifiant restruture for years. However despite signifiant rumblings, a spattering of ompany failures and ontinuing hype around Solveny II, it s still more famine than feast for those run-off arriers that are hungry to aquire. And despite muh speulation in the pubs around Lime Street, the next $1bn employers liability book is yet to hit the market. But that ould be about to hange. The UK may be teetering on the brink of a mammoth sale, omparable only with the $7bn reinsurane deal that saw Warren Buffett s Berkshire Hathaway reinsure all of the old liabilities of Lloyd s. In Marh, The Insurane Insider revealed that five of the biggest insurers in the UK were exploring the sale of asbestos-heavy employers liability books with total gross liabilities of more than bn ($7.8bn). After making a number of informal approahes to the run-off market, Aviva appointed KPMG and Freshfields to run a formal tender proess for its UK employers liability book, whih had gross reserves of 1bn. It was thought that RSA, whih had a 1.2bn book, and Zurih, whih was holding 2bn of gross reserves, were both keen to get the asbestos liabilities off their balane sheets ahead of the implementation of Solveny II in January next year. Lining up behind them were Axa, with a 1.1bn book, and Allianz, whih had 200mn- 00mn of reserves. But with great size omes the need for an even greater balane sheet, whih ould prove a problem for the live players looking to rid themselves of their past liabilities. There are only a handful of legay players that would be able to swallow suh a large transation, whih limits the number of exit strategies open to the live players. Perhaps most obviously they ould look to Buffett, the Wizard of Omaha, to work his magi and underwrite what would effetively be a ompany market Equitas-like deal. But many in the setor have poohpoohed suh a deal as pure fantasy. They argue that it would be impossible to shepherd five diret ompetitors into a single tidy deal. Even more far-fethed is the suggestion that suh a deal ould be divvied up, with portions of it reinsured by smaller arriers in the run-off setor. If eah of the five books were to be sold and run-off individually, the field of potential aquirers would expand to inlude the likes of Swiss Re and Fairfax. Although the latter s reent $1.9bn move for Brit probably puts it out of the running for now. It is unlikely that Enstar would to be able to finane an agreement of this kind without deal-speifi baking from a third party, suh as a pension fund or sovereign wealth fund. And the same is probably true of Catalina and White Mountains, although the former an now potentially draw on the vast resoures of private equity titan Apollo. But Apollo may have some ompetition on its hands as more private equity players show an interest in the run-off market. Last year, Keyhaven Capital bought German legay arrier Darag, run by Arndt Gossmann. And more reently a new player has dipped its toe into the water. In April publily traded holding ompany HC2 aquired a $1.2bn legay book of longterm are and life reserves from US insurer Amerian Finanial Group. Alternative apital has saturated the live market for P&C over and now it s looking for a new way to make returns. This time next year we will more than likely be reviewing the effet that alternative apital has had on the legay setor.

6 LEGACY BAROMETER 201 LEGACY BAROMETER 201 Feast or famine? Despite slim pikings for run-off aquirers urrently, is the UK market on the brink of a huge sell-off? What type of legay ompany has the greatest ompetitive advantage in the urrent market onditions? 1. What type of legay ompany has the greatest An overwhelming majority of respondents seem to think it s not just about just size, but rather how you use it. Jointly, more than 70 perent of legay exeutives thought that publily traded ompanies with in-house run-off failities or large arriers had the best head start in the urrent market onditions Industry omment: Resolute attahed to Berkshire Hathaway presents a large legay portfolio, in turn presenting a large pool of potential lients for arbitration panellists. ne of the above. The best option is an entrepreneur-driven operation. Private legay buyer able to offer either asset or share purhase. Legay-to-live, with legay asset buyer power and in-house servie business. 2. Does your ompany plan to raise new Does your ompany plan to raise new apital for growth apital within within the next the next months to grow? months 2. Does 8.% your ompany plan to raise new (and for what purpose)? apital within 10.2% the next months to grow? The number of legay ompanies looking to raise more apital in the oming year has limbed 10 perent sine this time last year. And 0 perent of arriers that responded to the question said that new apital would be used to target aquisitions as we look ahead to Industry omment: Legay assets aquisition. Growth appears to be flowing from best management praties, elimination of ineffiienies and improved produt quality pereption. t for legay purhase. ompetitive advantage in the urrent market onditions? 1. What type of legay ompany has the greatest ompetitive advantage.4% in the urrent market onditions? 6.8% Publily listed, legay asset.4% buyer only Publily listed, legay asset 1. What type 6.8% of legay ompany has buyer the greatest with only servies business ompetitive advantage in the urrent Publily market listed, onditions? legay asset Legay to live players 0.% buyer with servies business.4% 40.7% Hedge Legay fund to live baked players 0.% 6.8% Publily listed, legay asset 40.7% Legay buyer only buyer attahed to large Hedge (re)insurane fund baked Publily listed, legay group asset 8.% buyer Legay with buyer servies attahed business to 10.2% Other large (re)insurane (explain your group answer) 8.% Legay to live players 0.% 10.2% 40.7% Other (explain your answer) Hedge fund baked Legay buyer attahed to large (re)insurane group 28.% 2. Does 0.0% your ompany plan to raise new apital within the next 28.% months to grow? 0.0% 41.7% 0.0% 28.% 41.7%. Has Continental Europe failed to live up to the hype of reent 41.7% years regarding its promise as. Has the next Continental big legay Europe market? failed to live up to the hype of reent years regarding its promise Has Continental Europe failed to live up to the hype as of the next big legay market? its promise as the next big legay market? 1.% Despite the overwhelming proportion of legay exeutives saying that Continental Europe. Has has Continental been a damp Europe squib, failed it may to ome live up as to a surprise to that know that optimism around the region is growing. Compared to last year, 1 perent fewer the hype respondents 1.% of reent said years the regarding ontinent its had promise failed to live up to the as the next big legay market? hype. 22.0% 62.7% Industry omment: 22.0% It s been a little like the millennium bug plenty of hype and little substane! 1.% 62.7% It is just taking longer than antiipated. Delay in implementation of Solveny II has been the major ontributor, but there has been relatively little movement toward outsouring or selling from the 22.0% ontinent. 62.7% 4. Is the trend of legay market players Don t doing know The two issues of language and reputation ontinue to keep these out of London. more business in the servies and live market Despite the odd sale, muh is still retained in-house. Resistane to the UK legay a 4. sign Is the of trend the strength of legay of market expertise players in the doing setor market players is strong. more the business weakness in of the the servies outlook and for live the market legay market? a sign of the strength of expertise in the setor or the weakness of the outlook for the legay market? 4. Is the trend of legay market players doing more business in the servies and live market a sign of the strength of expertise in the setor Strength of expertise or the weakness of the outlook for the legay market? Weakness of outlook Other (explain your answer) 6

7 1.% 0.0% 22.0% LEGACY BAROMETER % 62.7% Is the trend of legay market players doing more business in the servies and live market a sign of the strength of expertise in the setor or the 4. Is weakness the trend of legay of market the outlook players doing for the more business in the servies and live market legay market?. Has Continental Europe failed to live up to a sign of the strength of expertise in the setor the or the hype weakness of reent of years the outlook regarding for the its promise legay market? The legay setor is torn on this issue. Almost half of exeutives surveyed said that as the next big legay market? diversifying away from the setor s ore ompeteny showed breadth of skillset, while the other half said they were either unsure of its signifiane or that it suggested the legay market had an unertain future. 1.% Strength of expertise Industry omment: Weakness of outlook Run-off has run-off; legay players have to move on It s due to the movement of larger legay aquirers into broader aquisition 22.0% 62.7% and business opportunities to feed their deal pipeline; plus opportunisti sales of troubled live market ompanies to legay aquirers due to low valuations by strategi aquirers. This trend is driven by reognising the benefit of diversifying and being able to provide servies while gaining greater ontrol throughout the proess.. Whih region do you expet to provide Neither answer fits. The legay market players fous on the live market beause they see the 4. an Is greatest opportunity the trend growth of to legay aquire opportunity market assets players unenumbered for the doing by legay liabilities not that they have a speial expertise or that the legay market is weak. legay more business market going the forward? servies and live market It s a sign that they are not making as muh as they originally thought on the legay deals a sign and of have the strength diffiulty of ompeting expertise against the setor ompanies like Berkshire Hathaway in that arena. So they are trying to streth beyond legay into ative or to the pik weakness off some of low-hanging the outlook fruit for the in that legay area. market? Both of the above. Traditional legay players have inherited a staff base with a high level of transferrable 12.1% skills but within a diminishing traditional legay market. Those transferrable skills are now being put to use within serviing the live/nearly live market. 19.0% The level of legay expertise, as refleted in the sophistiation of both pratitioners and proesses, has grown to where there is UK an exess of skills and systems. Many legay ompanies have the apaity to now proess and administer urrent business at harge rates smaller arriers Europe find attrative.. I would like to think that players are not only using the experiene gained but also new and modern tools for doing business in Strength US real-time. of expertise 29.% Both, but the strength of expertise in the legay setor means they are keen to expand into new 9.7% areas suh as MGAs. Weakness of outlook Asia Whih region do you expet to provide the greatest growth opportunity for the legay market going forward? Faith in the UK s potential as the largest growth market has more than doubled sine we ran the survey last year, when just 8 perent of respondents said the ountry boasted the best opportunities for run-off ompanies. But that gain omes. Whih at a prie: region it has do you stolen expet Europe s to provide share of the vote, whih, despite dwindling pessimism, has dereased. the greatest growth opportunity for the legay market going forward? Industry omment: There will be very little atual growth in any of the regions 12.1% The UK seems to have the best regulatory and legal framework to benefit the 19.0% legay market. UK There is more potential for run-off opportunities in the UK market given global risk. Europe The tax struture in plaes like Ireland is more favourable to onduting legay US operations and with several ompanies setting up shop there we will see an inrease 1. Would 9.7% 29.% you expet to see an inrease in the skilled workfore over the next few years that will make the region more Asia in private equity interest in the legay setor? ompetitive. 1.8% Europe has been slower to develop, but largely due to Solveny II implementation being pushed further bak. of 20 ative insolvenies and ountless omplex legay portfolios, the 14.0% requirement to deal with US legay issues isn t yet mathed by the desire from within the industry but it will ath on and ath Signifiant up. inrease The urrent greatest growth opportunity going forward will be China. 29.8% Slight inrease 4.4% Slight derease 41.7% How would you rate the legay setor's own readiness for Solveny II omplian 1. Would you expet to see an inrease 7

8 LEGACY BAROMETER 201 Do you expet to see an uptik in approahes by run-off buyers to put live ompanies 1. What type of legay ompany has the greatest 6. Do you expet to see an uptik in ompetitive advantage in the urrent market onditions? approahes by run-off buyers to into run-off? put live ompanies into run-off? The setor is.4% again divided down the middle on this issue, whih marks a signifiant shift from 6.8% last year when perent Publily of respondents listed, legay said asset they expeted to see an buyer only 1. What uptik type in approahes of legay ompany and just has over the a third greatest said they would expet the number to 6. Do you 1.% expet to see an uptik in Publily listed, legay asset ompetitive go down advantage or stay the same. in the Interestingly, urrent buyer market with the onditions? servies number business of respondents who were approahes by run-off buyers to put live ompanies into run-off? 1. What undeided type of has.4% legay doubled. ompany has Legay the greatest to live players 6. Do you expet to see 42.4% an uptik in 0.% ompetitive advantage 40.7% in the urrent Publily market listed, onditions? legay asset approahes by run-off buyers to 6.8% Industry omment: Hedge buyer only fund baked put live ompanies into run-off? 1.% There may be.4% an uptik, but I do Publily not think listed, it will legay be a dramati asset inrease. 42.4% Legay buyer attahed to The soft 6.8% market and low interest large buyer Publily with listed, servies legay business asset buyer rate environment (re)insurane group 8.% only may make live ompanies more valuable dead 10.2% than alive. Legay to live players 1.% 42.4% 0.% 40.7% Other Publily (explain listed, your legay answer) asset It is wiser to be viable and a live ompany Hedge buyer with than fund servies in run-off. baked business I see legay books of business from Legay Legay live ompanies to buyer live attahed players being offered for sale and 42.4% to 42.4% Don t know 0.% 2. Does transferred your ompany by Part 40.7% VII plan transfers. to raise new large (re)insurane group 7. Are you more or less optimisti about 8.% Hedge fund baked apital Generally within the underwriting next performane months to grow? in the live market is pretty strong at least ompared the outlook to the mid for 90s. legay That M&A said, than there you will always be a need to 10.2% review underwriting performane Legay Other of multi-line (explain buyer attahed risk your arriers answer) to and it s possible segments would were be % put months into run-off ago? as opposed to whole ompanies. large (re)insurane group 8.% 1.7% 1.7% 10.2% Other (explain your answer) 2. Does Are your you ompany more plan or to raise less new optimisti about the outlook for 7. Are legay you more M&A or less optimisti than you about were 12 apital 0.0% within the next 28.% months to grow? the outlook for legay M&A than you months ago? 1.% were 12 months ago? Muh more optimisti 2. Does your ompany plan to raise new 7. Are you more or less optimisti about Stagnation is the new normal in the legay spae, with more and more of the 1.7% 0.0% apital within the next months to grow? the outlook 1.7% for legay M&A than you Somewhat more optimisti setor s top exeutives resigning themselves to the fat that it s going to get srappy. were 12 months ago? This 0.0% year, 41.7% the number 28.% of respondents who expet the outlook to improve is down by 10 perent on last year. 1.% 1.7% 1.7% Somewhat pessimisti.% Muh more optimisti 0.0% Muh more pessimisti Somewhat more optimisti Industry 0.0% 28.% omment: Don t know 1.% Muh Large onsolidation of run-off business allows for disparity in leverage influening About more the same optimisti. Has Continental 41.7% Europe failed to live up to 0.0% the hype the number of reent of available years regarding arbitrage its panellists and their appearane of objetivity. Don t promise Somewhat Somewhat more pessimisti optimisti know as the We next have big seen legay more market? than half a dozen opportunities in 2014/1..% 8. What will reate the next legay market? About 41.7% Muh more the same pessimisti.6% Somewhat pessimisti.% 9.%. Has Continental Europe failed to live up to Muh more pessimisti the hype 1.% 9.% Cat losses of reent years regarding its promise Asbestos as the next big legay market? 8. What 18.% will reate the next legay market? Soft market (widening terms). Has What Continental will Europe reate failed the to live next up to legay market? the hype of reent years regarding its promise Sports legay 22.0%.6% as the There next ould big legay be a future market? for legay after all. Almost 40 perent of exeutives said that the urrent soft 9.% 62.7% 8. What will market reate the onditions 8.9% next legay are likely market? Fraking to spark the next 11.1% generation 1.% of legay laims as underwriters offer widening terms as they vie for 9.% Cat losses Cyber Asbestos business in an inreasingly ompetitive market..6% 18.% 9.% M&A Soft market (widening terms).6% PPOs 1.% 9.% Cat losses 1.9% Sports legay 22.0% Industry omment: Asbestos Cumulative head 62.7% 18.% 8.9% Fraking trauma laims seem Don t to know be expanding eah year (first National 11.1% Soft market (widening terms) Cyber 4. Is Football the trend League, of legay then market National players Collegiate Athleti Assoiation football and now Sports legay 22.0% doing 9. What will happen to the number of M&A more other business sports). in the 62.7% servies and live market legay opportunities.6% 8.9% one Solveny Fraking II 11.1% PPOs a sign With of the strength onsolidation of expertise of larger in reinsurers the setorongoing, many smaller reinsurers won t omes 1.9% into fore in 2016? Cyber or the be weakness able to support of the themselves outlook for with the premium legay market? and will fall into the legay market. M&A Soft markets hurt the entire book, lose down alternative underwriting.6% PPOs 1.9% 4. Is opportunities, the trend of legay and set market the weak players apart doing from the strong. 9. What will happen to the number of more business loss is likely in the to servies reate the and next live legay market market but regulatory hanges might. legay 21.1% opportunities one Solveny II a sign of the strength of expertise in the setor omes into fore in 2016? Traditional asbestos losses derived from industry. Asbestos ontamination through or 4. Is the the weakness trend of of legay the outlook market for players the legay doing market? 9. What will happen to the number of Inrease more shools business and in offies the servies will provide and live a new Strength market wave of of expertise laimants. legay opportunities one Solveny II Derease a sign I m of stiking the strength with M&A of expertise if the definition Weakness the setor is expanded of outlook to MAD (merger, aquisition and divestiture). omes into GE fore provides in 2016? 68.4% a glimpse of a group Stay the reognising same when or the a hange weakness in strategi of the outlook diretion for is the warranted Don t legay know market? and I expet the mega-arrier groups will be willing to shed produt lines and geographi markets if they 21.1% an satisfy regulators and market pereptions. It s almost always at losses ombined with other fators, suh as emergene of toxi torts (as in the late 80s) or, more reently, Inrease the softening market. Strength of expertise 21.1% Derease Weakness of outlook % Stay the same Don t Strength know Inrease of expertise 12. The live market has seen a wave of Derease onsolidation. Whih region do you expet to provide Weakness of outlook over the past year. Do you expet to see a similar trend

9 22.0% 62.7% Europe US 48.2% What will happen to the number of legay 9.7% opportunities 29.% one Solveny II omes into fore in 2016? 4. Is the trend of legay market players doing Asia 9. What will happen to the number of more business in the servies and live market legay opportunities one Solveny II Overwhelmingly legay exeutives think the implementation of Solveny II is going to be a boon for run-off aquirers. But respondents were less a sign of the strength of expertise in the setor omes into fore in 2016? or the ertain weakness about of the the setor s outlook preparedness for the legay market? Industry omment: Inreased apital requirements may trigger more aggressive positions to inrease apital through inreased/imaginative reovery efforts. A fair amount of ompanies will not Strength be able of expertise to omply and will deide to run-off their operations. Weakness of outlook It will drive live ompanies to fous on ore lines of business and divest unprofitable or non-ore lasses. 1. Would you expet to see an inrease It will fore a strategi appetite throughout Europe, whih will prompt the US to 1.8% follow suit, if not on a federal legislation basis then ertainly via the boardroom. It should inrease as the modelling will enourage insurers to dispose 14.0% of nonompliant branhes/subsidiaries. 29.8%. Whih region do you expet to provide the greatest growth opportunity for the legay market going forward?.6% How would you rate the legay setor s own readiness for 7.1% Solveny II ompliane (where 1 is 12.1% extremely poor and 10 inredibly How would you good)? rate the legay setor's own readiness for Solveny II ompliane (where 1 is extremely poor and 10 inredibly good)? (p4 *2) There is learly 19.0% some unertainty about the setor s readiness ahead of Solveny II s implementation UK in However, whatever the level Europe of preparedness, it seems to be widely agreed that the US new legislation 9.7% 29.% will provide an opportunity Asia for the setor as live arriers look to use their apital more effiiently under the new regime.. Whih region do you expet to provide the greatest growth opportunity for the legay market going forward? 12.1% 19.0% Industry omment: I ve seen little onern for Solveny II ompliane in the run-off ommunity. Many ompanies are under-reserved. In my experiene with the legay setor there is often onfusion about the book of business that was purhased and what liabilities are atually known. Given this I have less faith in those ompanies abilities to be ready for ompliane..6% 1.9% Sports legay LEGACY BAROMETER Legay ompanies have been enjoying the delays in Solveny II and have not fully dealt with the apital requirements. There is more pain to ome. The legay market has only limited exposure to deal with as premiums are usually all reeived, investments alloated and there are only losses to onern them, making Solveny II an easier proposition Inredibly than undervalued for a live entity. 1 Probably less ready than live ompanies. 2 Speaking from the US perspetive only, it is unlikely that apital requirements 1. Would you expet to see an inrease whih express the onept too big to fail will be rigorously applied to the legay setor as the exposures are retrospetive and not prospetive The soft market has seen the widening of wordings. in private equity interest in the legay setor? I believe that Solveny What effet II and do whatever you expet the this US to equivalent have on the will legay prove to be are prospetive by intent. 1.8% market in the medium term? 6 It is a rae against the lok. 7 Most of the serious players are geared up already. It is atually easier to attain Solveny II ompliane with no ative underwriting. 8 My onern is 14.0% the speed of the Finanial Condut Authority. Signifiant inrease % Inredibly overpried 10 Slight inrease 41.1% More opportunities % 20 Fewer opportunities % Slight derease UK in private equity interest in the legay setor? 4.4% Extremely poor Inredibly good10 18.% 11.1% Signifiant inrease Slight inrease Slight derease 21.1% 8.9% 68.4% Asbestos Soft market (widening terms) 12. The live market has seen a wave of onsolidation over the past year. Do you expet to see a similar trend Fraking of onsolidation of ompanies in the legay market? Cyber 7.1% M&A PPOs Inrease Derease Stay the same 12. The live market has seen a wave 41.1% of onsolidation over the past year. Do you expet to see a similar.4% trend of onsolidation of ompanies in the legay market? 48.2% 44.6% 1. Do regulators understand the run-off market? 44.6% 1. Do regulators understand the run-off market? 14. The soft market has seen the widening of wordings. What effet do you expet this to have on the legay market in the medium term? More opportunities Fewer opportunities On a sale of 1 to 10 where do you urrently rate the priing of legay books of business (where 1 is inredibly undervalued and 10 inredibly overpried)? (p *1) How muh of a onern is the inrease in private equity-baked law firms? (p6 *).6% t very onerning How would you rate the legay setor's own readiness for Solveny II ompliane (where 1 is extremely poor and 10 inredibly good)? (p4 *2) 6 9

10 22.0% 62.7% LEGACY BAROMETER 201. Has Continental Europe failed to live up to the hype of reent years regarding its promise as the next big legay market? 4. Is the trend of legay market players doing more business 1.% in the servies and live market a sign of the strength of expertise in the setor or the weakness of the outlook for the legay market? 22.0% It will ome as no surprise that very few legay exeutives think legay books are 62.7% underpried and Don t we an know probably assume that the few that said they were are probably on the sell side. The vast majority of respondents said books of business were erring on the Strength of expertise priey side. Weakness of outlook 4. Is the trend of legay market players doing more business in the servies and live market a sign of the strength of expertise in the setor or the weakness of the outlook for the legay market? How muh of a onern is the inrease in private equity-baked law firms? (p6 *) 12. The live market has seen a wave of onsolidation. Whih region do you expet to provide over the past year. Do you expet to see a similar trend the see greatest a growth similar opportunity trend for of the onsolidation among t very ompanies onerning 1 of onsolidation in 21.1% the legay of ompanies market? in the legay market? 2 legay market going forward? Inrease Opinion is divided almost down the Strength middle of on expertise this question, but in a year that has 4 seen XL aquire Catlin, Fairfax purhase Derease Weakness Brit, of and outlook Axis make a bid for PartnerRe, it is 7.1% perhaps surprising that more legay 68.4% Stay the same 12.1% Don t players know are not prediting a spillover effet in 6 the run-off sphere. 19.0% 7 8 UK % Industry omment: Europe Very onerning 10 Most of the onsolidation has probably happened now. US % Legay markets are 29.% % not driven by the same eonomies of sale, and seem to have Asia 12. The live market has seen a wave of onsolidation. Whih suffiient region aess do you to funding. expet to provide over the past year. Do you expet to see a similar trend the It s greatest been growth happening opportunity for years. for Look the at the number of attendees at various run-off of onsolidation of ompanies in the legay market? legay onferenes market going forward? As a pending derease it is a matter of eonomies of sale. It is more ost effetive to onsolidate 1. Do regulators operations understand that are shrinking. the run-off market? 7.1% one wants the exposures legay ompanies urrently have. Pooling 12.1% of apital and mitigating the need and expense of finanial reporting of multiple entities militates towards onsolidation. Different drivers: 19.0% no sales (no premiums) and onsolidation of legay business doesn t have the effet of eliminating ompetition. UK Available apital and low interest rates will ontinue to make investment in legay an attrative proposition. 44.6% Europe The hype to go for the legay market will be leveraged by the hallenges and risks of it, and the importane of the strength of the market player will fore partiipants to onsolidate or US to go out of business. 48.2% 9.7% 29.% Asia Do the regulators understand the run-off market? 2.% Somewhat pessimisti Sports legay 8.9% Muh more pessimisti Fraking % Cyber 6 M&A 7.6% PPOs 8 1.9% 8. What will reate the next legay market? 9 Inredibly good10.6% 9.% 9. 0 What will happen 10to the number 1 of 20 9.% Cat losses legay opportunities one Solveny II 2 0 omes into fore in 2016? Asbestos 18.% Soft market (widening terms) On a sale of 1 to 10 where do you urrently rate the priing of legay books of business (where 1 is inredibly undervalued and 10 inredibly overpried)? On a sale of 1 to 10 where do you urrently rate the priing of legay books of business (where 1 is inredibly undervalued and 10 inredibly overpried)? (p *1) Sports legay Inredibly undervalued 1 8.9% Fraking % 21.1% Cyber M&A 4.6% Inrease PPOs 1.9% 6 Derease % Stay the same What will happen to the number of Inredibly overpried 10 legay opportunities one Solveny II omes into fore in 2016? The live market has seen a wave of onsolidation over the past year. Do you expet to Industry omment: 1. Do regulators understand the run-off market? Some do, but most do not. 1. Would you expet to see an inrease I just don t think they have the interest in understanding it. 14. The soft market has seen the widening of wordings. in private equity interest in the legay setor? What effet do you expet this to have on the legay If they did, they would require reserve strengthening. I don t believe 1.8% market in the medium term? they do as there should be more oversight on these deals and ompanies should be held to standards for proessing laims and making payments. The run-off markets take advantage of the lak of oversight to set their 14.0% own rules on what they pay and when Signifiant they pay inrease it and many times it is not in line with 29.8% the original intention of the ontrat. Slight inrease 41.1% Part VII transfers and solvent shemes of arrangement have been permitted by More opportunities the regulators. The fat that standards About are the not same entirely separate for run-off versus ongoing entities 4.4% isn t an indiation Slight that regulators derease do not understand run-off..4% Fewer opportunities 1. Would There you is little expet or no to proportionality see an inrease displayed by the regulators and they tend 14. The soft market has seen the widening of wordings. in private to work equity on a very interest mehanial in the legay proess setor? that does not assist understanding of the What effet.6% do you expet this to have on the legay different 1.8% risks involved in legay in the slightest. market in the medium term? I believe they have a good understanding but they aren t sympatheti enough to the requirement for losure instead of ontinuous run-off. Shemes, solvent or otherwise, have largely been seen as a suess, so it s bemusing as to why the Prudential Regulation Authority has taken a restritive view to their ontinued 14.0% use. How would you rate the legay setor's own Signifiant readiness inrease for Solveny II ompliane (where 1 is extremely poor and 10 inredibly good)? (p4 *2) 29.8% 10 Slight inrease % More opportunities.4% Fewer opportunities

11 The soft market has seen the widening. Whih region of do you wordings. expet to provide What effet do you expet this to the greatest growth opportunity for the 14. The soft market has seen the widening of wordings. legay market going forward? have on the legay market in the medium term? What effet 12.1% do you expet this to have on the legay 1. Would you expet to see an inrease in private equity interest in the legay setor? market in the medium 19.0% term? 7.1% 1.8% 12.1% UK 19.0% Industry omment: Europe UK 44.6% Broader interpretation 14.0% of the wording results in quiker and larger payments and Europe US an result in fewer disputes. Signifiant inrease US 9.7% 29.% 48.2% 9.7% 29.% Asia Asia There 29.8% will be more disputes as definitions Slight inrease beome broader, and that will lead to 41.1% More opportunities delays in settlement and possibly more ompanies going into run-off..4% 1. Do regulators The loosening of terms in reent times is more onerning than the soft market Fewer understand opportunities the run-off market? priing. There is 4.4% a question of rating Slight adequay derease based on the priing, but we may find it ompounded with the additional risk that is being taken on board via broader terms and onditions..6% More opportunities should ome in the long term. The urrent eonomi limate is not going to hange for some years and this means the soft market will go on for some time. Companies that are widening wordings and overs (e.g. overage of finanial guarantee business or providing add-ons suh as yber risk overs for How would you rate the legay setor's own readiness for Solveny II ompliane (where 1 is extremely poor and 10 inredibly good)? (p4 *2) free) in order to retain market share are likely to pay the ost 1. Would for it you in expet three to see to an five inrease years. in private equity interest in the legay setor? Widening wordings equals more sope for disputes, less ontrol of risk and lower profitability all key fators in reating market run-off. in the medium term? Extremely poor 1 2.4% 1. Would you expet to see an inrease Would you expet to see an inrease in private 4.4% equity Slight dereaseinterest in the legay setor? 1.8%.6% Industry omment: 4 The poor return on apital will find some mug punters It still not fully understood, but it is trending up. How would you rate the legay setor's own readiness for Solveny II ompliane (where 14.0% 1 is extremely poor and 10 inredibly good)? (p4 *2) One ompanies 6figure out how Berkshire Hathaway makes money on these types Signifiant inrease of deals it will be the flavour of the month for private equity investors, similar to ILS. 29.8% Slight inrease Low interest rates 7and massive sums of investable funds Extremely are driving poor apital 1 providers to the legay 8 setor. Until interest rates rise, we will ontinue to 2 see private equity interest in the legay market. 4.4% Slight derease major insurer 9went insolvent during the finanial risis of 2008/9, enabling 4 investors to see that the insurane ompany struture is more robust than had been expeted. 6 We re already a few years into this but antiipate ontinued albeit slowed 7 growth. Investors are looking 0 for alternative ways of getting returns Unless priing improves there isn t a suffiient differential in legay returns 9 on revenue to justify the inherent risk in inreased investments. How would you rate the legay setor's own readiness for Solveny II omplia There is always interest, but exit routes are limited and Inredibly so as some good10 enter, e.g. Close Bros, others exit, e.g. Milestone On a sale of 1 to 10 where do you urrently rate the priing of legay books of business (where 1 is inredibly undervalued and 10 inredibly overpried)? (p *1) nredibly good10 How muh of a onern is the inrease in private equity-baked law firms? ly undervalued bly overpried 10 a sign of the strength of expertise in the setor or the weakness of the outlook for the legay market? 29.8% 1.8% 14.0% Strength of expertise Weakness of outlook Signifiant inrease Slight inrease 21.1% LEGACY BAROMETER %. Whih region do you expet to provide the greatest growth opportunity for the legay market going forward? in private equity interest in the legay setor? Extremely poor Inredibly good10 omes into fore in 2016? Inrease Derease Stay the same 12. The live market has seen a wave of onsolidation over the past year. Do you expet to see a similar trend of onsolidation of ompanies in the legay market? 14. The soft market has seen the widening of wordings. What effet do you expet this to have on the legay 41.1% More opportunities Fewer opportunities On a sale of 1 to 10 where do you urrently rate the priing of legay books of business (where 1 is inredibly undervalued and 10 inredibly overpried)? (p *1) Inredibly undervalued Inredibly overpried How muh of a onern is the inrease in private equity-baked law firms? (p6 *)

12 SA UBS OU VE CR R 1IBER 00 S S Risk 17 June 201 The Banking Hall, London, ECV ND In a ompat two hour format, a four-strong panel of leading industry exeutives will over the hot topis of 201, inluding: Florida renewals debrief are urrent priing levels sustainable? Reinsurane onsolidation how big is big enough? Convergene outlook how far along is the industry in its reshaping proess? Speakers inlude: Andre Perez CEO and founder of Horseshoe Group Niklaus Hilti Head of Insurane Linked Strategies, Credit Suisse AG #ConvergeneLondon Sponsored by How to reserve your plae Delegate rate 24 Subsriber rate 14 (All pries are exluding VAT) To register your attendane ontat Jennifer Lord on jennifer@insuraneinsider.om / +44 (0)

13 LEGACY The shadow of federalisation Mark Goodman asks how federal regulation of insurane in the US might affet legay business O n 12 Deember 201, the US Federal Insurane Offie (FIO) issued a report on how to modernise and improve the regulation of insurane in the ountry. The report suggests a number of areas for improvement of state regulation of the industry, and reommends that if the states fail to aomplish neessary modernisation reforms, then the US Congress should strongly onsider diret federal involvement. The FIO suggests that federal involvement in the regulation of insurane ould either take the form of diret regulation by the national government (either in addition to or instead of state regulation) or ould involve the federal government setting ertain standards that the states would implement. The FIO report has not yet led to any regulatory hanges. However, the report s disussion of possible diret or indiret federal regulation raises again the question of how suh a hange in the struture of the US insurane regulatory system would affet the industry. While there is urrently no proposed legislation to overturn the state-based regulatory system, over the past few deades various proposals alling for regulation of the insurane industry by the US federal government have reeived serious disussion, and in some instanes insurane industry support. The US insurane industry, inluding the run-off segment, is primarily regulated by the 0 states (and the Distrit of Columbia) and not by the national government. This situation is a result of both history and the federal system of law in the US. Without going through the long and onvoluted history, suffie it to say that Congress has deided that the business of insurane will remain primarily the subjet of state regulation and that no federal law will apply to the industry unless the law speifially provides otherwise. In other words, while the federal government has the power to regulate insurane as a form of interstate ommere, it has hosen to forbear from exerising that power exept in instanes where it speifially delared a lear intention of doing so. Nevertheless, while we speak of the insurane industry being regulated by the states and not by the federal government, there learly has been a reeping federalisation of ertain aspets of the industry over the past few deades. The Gramm-Leah-Bliley At (1999) adopted onsumer privay protetions that diretly apply to the personal lines insurane market. The Health Insurane Portability and Aountability At (1996) prohibited pre-existing onditions in health insurane when a person moves from overage under one group poliy to another group poliy. Various federal insurane and reinsurane shemes, overing terrorism, rop and flood insurane, diretly affet and in some ases ditate the terms of insurane overage offered to onsumers. Most reently, the Affordable Care At (2010), also known as ObamaCare, has fundamentally hanged the struture and operation of health insurane in the US. The point is that even under the urrent state-based regulatory system, there are many 1

14 LEGACY aspets of the regulatory sheme that are ontrolled by or at least influened by the federal government. However, one important limitation on the manner in whih the federal government an diret state regulation needs to be kept in mind. The basi rule in the US is that the federal government annot tell the states what to do. This rule is a produt of the fundamental onstitutional struture of the US. The US Supreme Court, in a series of ases known as the antiommandeering ases, has ruled that the federal government annot mandate that the states adopt or enfore any partiular state regulatory regime, and that the federal government annot require that the states enfore or implement a federal regulatory regime. This onept was reinfored, and some would say expanded, in the Supreme Court s 2012 deision upholding the Affordable Care At but ruling as unonstitutional the provisions of that law that purported to require states to expand Mediaid overages. What does the antiommandeering onept mean for potential federal regulation of insurane? It means that the federal government an diretly regulate the industry itself, and suh federal regulation would supplant and preempt onfliting state regulation. It also means that short of diret federal regulation, the federal government an indiretly regulate the industry by threatening the states, i.e. telling the states to adopt partiular regulations or the federal government will take over and supplant the states. This was the approah taken reently in order to update insurane produer liensing by the states, through a federal law that adopted a federal liensing sheme that would have sprung into being had a super-majority of states not updated their produer liensing laws. This was also the approah taken in the Dodd-Frank At provisions that updated surplus lines and redit for reinsurane rules, by ditating that 14 any state law inonsistent with ertain standards would be pre-empted by federal law. The federal government an also bribe the states (i.e. if states adopt partiular regulations, then the federal government will give them money) and even ajole and embarrass the states (e.g. write reports like the FIO study). What the federal government annot do is to treat the states as if they were instrumentalities of the federal government rather than separate sovereign governmental bodies. Therefore, the idea that the federal government an just adopt insurane regulatory standards that will then be If the federal government were to take over the finanial regulation of insurers but leave market ondut and onsumer protetion to the states, the industry ould fae a worst of both worlds senario implemented by the states has some huge onstitutional hurdles. Given this limitation, what form might federal regulation take and what might it mean for run-off? We an expet that if the states do not adopt and implement international apital standards like those imbedded in Solveny II, then there will be pressure on the federal government to either diretly take over or at least threaten to take over the setting of apital and reporting standards onsistent with Solveny II. There is speulation that these apital standards may require many ompanies to inrease the amount of apital they maintain to support their reserves, whih ould provide a strong inentive to sell or outsoure disontinued bloks and run-off operations in order to free up apital for urrent operations. If the federal government gets involved in regulating the finanial solveny of insurers in the US, then Mark R Goodman is a Partner in the Corporate Pratie Group of Freeborn & Peters LLP we an expet that it also will want to ditate or ontrol how insurers that are in finanial distress are resolved. Currently, insurane ompanies (as opposed to their non-insurer holding ompanies) annot be debtors under the Federal Bankrupty Code. Instead, insurers in finanial distress are resolved under the rehabilitation and liquidation provisions of state insurane laws. It is important to note that there are fundamental differenes between these state rehabilitation and liquidation laws and the Federal Bankrupty Code. Under state law, there are no voluntary insolveny proeedings, no debtor-inpossession onept and the primary fous is to protet poliyholders rather than getting the insurer bak on its feet or solving its finanial problems. In ontrast, under the Bankrupty Code, the debtor an initiate the proeedings and may be able to remain in ontrol of its business and assets, and the primary fous in a Chapter 11 proeeding is getting the ompany bak on its feet and bak in business. What this means for run-off is that if the Bankrupty Code were to be made available to insurers, then they might have the option of a Chapter 11 reorganisation to restruture their debts, inluding legay liabilities, as an alternative to run-off. Finally, if the federal government were to take over the finanial regulation of insurers but leave the market ondut and onsumer protetion regulation to the states, then the industry ould fae a worst of both worlds senario. Currently, the politial pressure on state regulators to keep pries low and to impose onsumer-friendly market ondut regulations is tempered by the pressures on regulators to preserve the solveny and finanial health of the industry. If finanial regulation is taken over by the federal government, then there may be less restraint on state regulators in adopting onsumeradvantageous rules and interpretations. This may inrease the number of ompanies interested in exiting lines of business, but may also inrease the diffiulties of managing run-offs.