Fleming Re Q&A: Recycling and optimising capital through legacy

Eric Haller, CEO of Fleming Re, on the e­fficiencies of the reinsurer’s Planned LPT solution to provide maximum benefits for captive owners in the run-off market

 

Captive Review (CR): What are the primary motivations for captives seeking a run-off solution and have these drivers changed over the last few years?

Eric Haller (EH): There’s an old maxim about boat ownership – the two happiest days of a boat owner’s life are the day they buy it and the day it is sold.

Similarly, for captive insurance companies, the happiest days are when it’s incorporated and covering risks for the parent company or group and then when its liabilities are reduced/exhausted and capital can be released.

Much like having a dedicated mechanic for a boat, it’s important to have a trusted resource to ensure timely and efficient transactions to create maximum benefit for captive owners.

The last few years have certainly seen an increase in the number of transactions focused on capital solutions to address liquidity and solvency issues with the run-off industry an obvious market to address these issues.

We expect this to remain as the primary driver for the foreseeable future.

CR: Do you see the market becoming more efficient in terms of process and capital planning?

EH: Absolutely. Captives are increasingly looking for bespoke solutions – one size doesn’t fit all especially across risks, geographies, time frames and different motivations for engaging a run-off provider.

There are various legacy liability exit and liquidity solutions that can be tailored to clients’ needs. Given regulatory and rating agency capital frameworks, insurance companies and captives are required to maintain a significant amount of capital for keeping liabilities on the books.

This capital is ‘locked up’ when it could be better utilised writing new policies, initiating a dividend, reinvesting in the company, supporting a rating agency review, or engaging in strategic M&A.

Customised solutions to unlock this capital can include novation, entity acquisition, adverse development cover (ADC), excess of loss policies, deductible reimbursement policies and loss portfolio transfer.

At Fleming, we have developed a solution we call Planned LPT – a planned and pre-priced loss portfolio transfer at the inception of a captive. This is an example of the more efficient processes we are providing for our clients.

With Planned LPT, companies don’t have to wait for liabilities to age out – they can count on an upfront, guaranteed solution and, if desired, we will provide predictable and ongoing capital relief for managing reserve build-up and long-term liabilities.

CR: What are the benefits of your Planned LPT Solution?

EH: The benefit of nurturing an ongoing relationship between Fleming and the client is important on several fronts. On top of the traditional benefits of a legacy transaction, the Planned LPT solution will also create transaction efficiencies, reduce time and other frictional costs of one-off transactions and provide an ongoing tool to enhance capital management.

It is these types of innovative solutions that will continue to drive new processes and efficiencies to cater to this growing market.

CR: Is the Planned LPT solution applicable for other areas of the market such as the casualty insurance linked securities (ILS) sector?

EH: The capital markets have been providing capacity for the insurance industry for years through CatBonds and insurance-linked securities. This has created efficiencies, facilitated growth for the insurance industry, and provided another source for non-correlated returns and diversification benefits for the capital markets.

Due to this symbiotic relationship, both industries have flourished. Until recently, most of the non-life liabilities supported by the capital markets have been property catastrophe liabilities.

These have been attractive for their relatively short duration but have been suboptimal due to the binary nature of the investment outcome.

Additionally, trapped capital has been a challenge in certain circumstances. The insurance-linked securities market has grown rapidly over the last decade and we are now seeing a convergence with the run-off market and the emergence of the casualty insurance-linked securities market.

When we started Fleming, we wanted to change the paradigm for legacy providers. In addition to other strategic initiatives, we wanted to develop a solution to facilitate access to casualty liabilities for the capital markets.

This solution, as previously mentioned, is our proprietary Planned LPT solution. Our insurance-linked securities structures will incorporate our Planned LPT solution, which will define loss portfolio transfer pricing at a future date. This will provide some significant flexibility to manage the tail risk.

In general, casualty insurance risks have low to moderate correlation with the capital markets and lower volatility relative to property catastrophe business.

Historically, capital markets have not embraced these liabilities due to the longer duration. Our Planned LPT solution helps make these risks more accessible by shortening duration, providing liquidity to investors at any point in time, and further, will allow tranching of the casualty liabilities. This is a significant proprietary benefit that will make this very attractive to investors.

CR: Are there any other areas you are focused on that can bring additional benefits to counterparties?

EH: Technology is becoming an increasingly versatile and important tool in our business that allows for more efficient ways to ingest and enhance data. The advantages of using technology are very diverse and include enabling users to improve data analytics, draw additional insights and, ultimately, make better decisions for our clients.

Technology as a tool is only as good as the people that use it and ensuring it has accurate, reliable data is critical. Experienced professionals with the appropriate expertise will continue to be the most important part of the infrastructure – technology can assist in making them more efficient and effective.

The run-off market is positioned to introduce significant innovations to the overall insurance industry and implement positive change over the next decade, and Fleming Re is excited to continue to influence that evolution.

Fleming Re is a Bermuda-based Class 3A insurance company whose management has a deep track record in providing a full range of reinsurance structures and finality solutions for legacy liabilities, and providing flexible and comprehensive liquidity and risk transfer alternatives to all entities in the middle-market insurance sector.

12 August 2024
5-6 November 2025

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