Hurricane Losses Could Lead To More Run-Offs

More companies are expected to put some lines into run-off in the coming months following hurricane losses, according to Philip Grant, chairman of the Association of Run-Off Companies, a U.K. run-off trade group.

More companies are expected to put some lines into run-off in the coming months following hurricane losses, according to Philip Grant, chairman of the Association of Run-Off Companies, a U.K. run-off trade group. He also believes some of the Bermudian start-ups may exit the market through run-off once rates soften.

“The hurricane season is such that it doesn’t necessarily manifest problems immediately,” says Grant. “Companies might be mulling over their year-end results now and perhaps making decisions not to go forward in some lines of business. I would expect there may be further run-offs announced in the next month or two as the reporting season gets underway.”

The start-ups doing business in Bermuda are targeting large profits following rate increases of up to 400% in U.S. catastrophe and offshore energy lines. But Grant expects the start-ups’ investors to be decisive once rates start to fall. “These are not especially patient people. They may want to exit lines, and I think they will in the short to medium term,” he says.

Hedge funds and private equity investors typically have a firm idea of the time they want to spend in a market and the amount of money they want to earn, says Grant. “As we have seen in the past, once the private equity house is not getting the return it wants, and wants to deploy its funds somewhere else, it will try to exit very quickly,” he says.

But he observes a difficulty with insurance and reinsurance. It is not easy to exit other than by sale. “There may not be willing buyers in a soft market,” warns Grant. “Some will choose to exit by structured run-off, others by share sale.”

Ipe Jacob, partner at U.K. accounting firm Grant Thornton, agrees that more run-offs are likely. He attributes this to the change in perception of run-off. Run-off once had a negative image and was stigmatized, but is now increasingly being seen as a sound strategic move. “People can come in and out of the market much more easily now with run-off, without cost to their reputation,” he says.

But Grant warns that run-off needs to be handled professionally if it is to succeed. “If is not handled well, it can damage balance sheets and reputations,” he says. “Big companies are now waking up to the idea that the best way to do it is as quickly and as openly as possible.”