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UK run-off liabilities increase 30 percent in 2008

The total liabilities of the UK non-life run-off market increased by approximately 30 percent to an estimated £37.4bn at the end of 2008, according to the seventh annual KPMG run-off survey of UK non-life companies.

KPMG explained that the increase in liabilities was largely a result of the pronounced fall of the UK pound against the dollar and euro, supplemented by the demise of the monoliner financial guarantee insurance market, which added £7.1bn in new run-off liabilities in 2008.

Total capital tied up in solvent UK non-life companies in run-off also increased by almost £1bn to a record high of £5.4bn. Of this, KPMG said around 75 percent is attributable to new entrants to the run-off market from financial guarantee businesses.

Speaking at a press conference to launch the survey findings, KPMG executives explained that like the live insurance market, the legacy sector had ridden the global financial crisis comparatively well, although they cited reduced investment income and a lack of liquidity as major factors moving the market.

KPMG noted that as the credit crunch bit hard, the contraction in the availability of finance increased overall demand for commutations. In particular, (re)insureds hitherto happy to keep high quality (re)insurance recoverables on their books became increasingly amenable to offers of settlement, as working capital became harder to come by.

These circumstances meant that those keen to offer settlements were "pushing at an open door," explained Darryl Ashbourne, a director at KPMG Restructuring Insurance Solutions.

However, the financial squeeze has also dampened pricing in the run-off acquisitions sector which, along with lower prospective investment returns, makes it unlikely there will be a return to the heady pricing of deals such as Enstar's December 2008 purchase of Unionamerica Holdings.

The report also said it expected the trend towards consolidation in the run-off management sector - evinced by CTC's May takeover of Axiom and Tawa's recent swoop for PRO Insurance Solutions - to continue. This is because managers are looking for economies of scale as the large legacy books that financed their foundation and development begin to mature.

However, KPMG's overall outlook for the sector was upbeat, with preparations for Solvency II cited as a major driver of future restructuring.

The firm said that the advent of the new regime means that companies will look to maximise returns on capital and either sell off non-performing books or place them in run-off. In addition, they will look to consolidate small legacy portfolios currently held within live books into more capital efficient company-wide run-off vehicles.

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