Enstar helps insurers offload bad business

Enstar's legacy of second chances

October 20, 2024 3:24 PM

Analyst looking at charts and graphs on her two computer screens

The Enstar Group is a global insurance group with over 30 years experience specializing in legacy or "run-off" transactions. This specialization helps insurers shed unprofitable or unwanted lines of business, such as books of claims, to shift their strategic focus, and can entail reinsurance, elimination of reserve risks, providing expansion capital, resolving liabilities and more. Enstar has worked with AIG, Argo, Aspen, BorgWarner and others to eliminate risk, improve solvency, build capital and resolve liabilities. Insurtechs also can use legacy transactions to pivot to serve a different function or need.

Chloé Paillot of Enstar — Chloé Paillot, chief transaction actuary at Enstar.

Chloé Paillot, chief transaction actuary at Enstar, and her team, evaluate potential transactions for their impact on reserves and capital. Digital Insurance spoke with Paillot about how actuary functions in this legacy specialization are evolving, pricing and modeling needs, and data and technology concerns.

This interview has been edited for clarity.

How have the tools available for legacy transactions improved?

When I started, there were not that many tools out there. If we look at what happened over the last five to 10 years, we've seen a large number of new tools coming up. With more tools, there's more competition that brings new products, which is great, but what really helps is leveraging more of the data, accessing it quickly, and giving the actuary more time to do the modeling. This has really changed the way the actuarial profession works.

What is Enstar’s role in the legacy or run-off sector?

Effectively, the runoff market is a key pillar of the overall insurance value. We look at transferring some blocks of liabilities. It can be reinsurance protections on some portfolios or larger, and you can go all the way to a full acquisition of a company. It has a lot of different objectives for companies. One is getting some certainty on older loss reserves. It can protect your P&L from movement from reserves.

Another key use is capital management, as a way to release capital. That's also a way to redeploy capital for growth areas. It can also help with regulatory rating agency capital. We've seen more helping with the wider strategic objectives of a company. An example of that is M&A, where legacy can help get a clean balance sheet at the time of an M&A. That can be very appealing. It's providing quite powerful tools in that chain.

Why will legacy functions remain important? Why will insurers continue to need to conduct them?

The drivers are actually very varied. It is a tool for different objectives, and depending on where the market needs are, that will vary. That's very much adaptable to when [the] market [is] looking. One we have seen a lot of is that use for capital management. That's an example of a shifting use of legacy as the needs evolved. We had a hardening of rates. Companies wanted to redeploy their capital to maximize those growth areas and legacy ended up being a good solution for this. So it's very versatile. The way Enstar structures our deals uses cedents [parties to insurance contracts], and then structuring a rate to meet that particular objective, which will vary. Sometimes it will be more capital, but there is some room to maneuver to achieve that goal.

What are the needs for pricing and modeling when you're working on these transactions or deals?

The need to price a deal is going to go a lot to data, and a large element of your deal is to understand the underlying risks that are being looked at, being transferred. For this, we need to understand the historical losses, form our views of how much we think those will cost in the future, then assess the capital impacts and investment returns to be deployed. The key data is very much around loss.

What are the important aspects for data that Enstar uses?

It is really important to understand the basis of the data, to understand with the counterparty, where it's coming from, if there are any limitations. For that, that's why we do carry out some due diligence to really understand claims operations.

It is about having access to as much data as we can, to form a view of what is manageable within the timeframe of the due diligence.

What technological changes do you anticipate, or where will Enstar develop and implement new capabilities?

If we look on the due diligence side to help in pricing the transactions, we generally do see some opportunities with using more AI in that space. That's a way to focus the efforts of the experts we have in the areas that matter the most. If you look at digesting large amounts of data when we're looking at due diligence, we spend the time on what is of the highest value. On the actual model side, that can help us get a first view of financial modeling before we deploy the expertise. We do see a lot of opportunities in there, but that stays very much in conjunction with human experts and the expertise in there to really form a view and get to the most important place, the quickest, while still using experts.

Does generative AI have a place in this as well? What's its potential?

Gen AI has benefits for legacy markets though automation of a number of processes. The impact of AI is going to be more limited on the legacy market than in the wider insurance industry. In the insurance industry, there are clearly a lot of opportunities out there, and you can look at it in different buckets that could be just making the most use of additional data, more data, real time data, predictive modeling, analytics and that. That can impact the whole chain in insurance. We also have automated a number of processes that can impact the customer. There are different lenses to it. Clearly, a lot of opportunities for the future.

How is the legacy or run-off space growing? Is Enstar’s business increasing?

Yes, it's definitely increasing, because we've seen more and more larger deals being publicized, companies seeing the positive impact of such deals and realizing that it is genuine. It's quite a wide tool. It's not just for finality on problematic books. The most powerful solution is very much the capital management element. Re-deploying capital is very attractive.

It's capital management, it's an efficient way of looking at your capital. We have demonstrated over the years the ability to transact on very large transactions as well, and those really have clearly a very large impact on companies and capital positions.