Michael Terelmes of Compre Group moderated a panel on which Keith Kaplan, Chief Liquidation Officer for Bedivere Insurance Company (in Liquidation) and R&Q Reinsurance Company (in Liquidation), Jim Wrynn, a Senior Managing Director at FTI Consulting, and Bruce Baty, a partner with Norton Rose Fulbright US LLP discussed the process of liquidation and its impact on the runoff industry.
The panel first identified red flags that could signal that a company is in financial distress, which include:
- A mismatch between inbound and outbound reinsurance on Schedule F.
- Financials that trend toward the low end of an actuarial range.
Next, the panel outlined the liquidation process.
- Supervision, which remains confidential, and the regulator provides guidance on running the business.
- Rehabilitation, where the regulator takes over the company, displacing management and replacing the Board. Systems are shut down, and banks and financial institutions are notified. At this stage, the rehabilitator attempts to determine whether rehabilitation is possible. Depending on the feasibility, the rehabilitator may be looking to sell off the better pieces of the business. The rehabilitator will also be talking to the guaranty funds to put processes in place for the Funds’ access to claim files in the event of a liquidation.
- Liquidation, which is governed by applicable statute in each state. Here, claims payments are transitioned to the guaranty funds as quickly as possible; however, it generally takes 60-180 days before claims payments are re-started. The liquidator will also reach out to the insolvent estate’s reinsurers, as the reinsurance contracts have now become contracts of liability, rather than contracts of indemnity, and likely represent the most significant asset of the estate.
Finally, the panel discussed the impact of liquidations on the runoff industry:
- Financially distressed insurers and reinsurers enter into transactions to provide capital relief, including LPTs, ADCs, and other structured reinsurance deals.
- There is a market for distressed portfolios.
- Some companies work to put themselves in a position to sell a clean corporate shell to another entity, which then can take advantage of the distressed company’s licensing.
A video replay of this presentation is available on the AIRROC On Demand platform.
