Malaysia constructs first run-off rules for AXA LM to complete Munich Re deal

On October 1, 2019, AXA Liabilities Managers (LM) completed its acquisition of the Munich Re non-life run-off portfolio in Malaysia.

It wasn’t a simple deal. The authorities in Malaysia were unfamiliar with this type of transaction as AXA LM’s run-off deal is understood to be the first in the country.

Sylvain Villeroy de Galhau, CEO of AXA LM, told SIRC Today that the deal itself was not particularly complex.

“It took more effort to complete because neither the regulatory organisations, BaFin and Bank Negara Malaysia, nor the High Court in Malaya, were familiar with anything of that sort, so it was unique for them.”

To ensure the run-off deal could gain regulatory approval, the High Court and regulator had almost to build the legal process as they went along.

“They had to put in place some structures and rules that were relevant for such a deal,” Villeroy de Galhau explained. “During the process they were extremely supportive and constructive, and open minded in the relationship with us.

“We could sense that they supported the idea of somebody acquiring run-off in the market as they see a need for that. It’s a sign that they see us as a solution rather than a problem.
“This situation was to be expected because my understanding is that we were the first to acquire run off in Malaysia,” he added.

“The acquired portfolio will be approached with a combination of firmness and fairness, adhering to the contractual obligations and commitments of the book, while also behaving in line with the values of AXA, as LM is part of the AXA group.
“We will make sure these liabilities are managed in line with the AXA culture.”

But although AXA LM is part of AXA, run-off acquisitions are funded only partly by the parent group. The majority of deals are funded by other investors.

“We are probably some kind of hybrid animal, because the pure run-off players are basically standalone boutique players that are not part of any large group.

“At the other end of the spectrum you have the reinsurers who can provide solutions to insurance companies whenever they have such portfolios in run-off. They sell retrospective insurance to take over the liability.

“AXA LM is in between. We belong to a group but use financial means that are independent from the group. It’s the best of both worlds,” he explained.

Feet on the ground
Villeroy de Galhau sees Malaysia and the Asian region as a whole as places that will bring opportunities, making a physical local presence “very important”.

“Although this was the first run-off deal, we already had a presence in Malaysia as part of the previous acquisition of a German company that had a branch there,” he said.
This was the acquisition of the international subsidiaries of German reinsurance run-off manager Global Re in 2014.

“It was not a portfolio transfer, we bought the companies and then we merged that company into a newly set up company. Alongside that came the branch.

“A local presence makes a big difference and helps a lot with how you manage the liabilities and claims,” he added.

“The relationship with regulators is also completely different. Being there and having the first of this kind of deal gives us opportunities.”

AXA LM expects to see more opportunities next year, Villeroy de Galhau said. But this was not necessarily the way the company viewed it a few years ago.

“When you look at the run-off market, you look at the insurance markets, and run-off is just a subset of this market. Sometimes it is the consequence of what is happening in the insurance market and the performance challenges that some players are facing.

“It’s fair to say the Asian insurance market, even though it’s growing fast and looks promising from an insurance perspective, is not the same size as the more traditional European, US or UK markets.

“This is why we didn’t necessarily see those markets as our top priority from the run-off perspective.”

AXA LM plans to leverage its Malaysian presence as a top priority. “Other countries will probably come slightly later. We definitely have enough to do in Malaysia,” he concluded.