Picking up the pieces when insurers run into trouble

Dubliner Karl Wall has spent 30 years guiding insurance firms through their final days. Now he is seeking to raise $100 million for a new venture

Karl Wall must be a glutton for punishment. The Dubliner is leaving his role on the board of Nasdaq-quoted reinsurance and run-off specialist, Enstar, to start again. Wall is seeking to raise about $100 million from private equity backers in New York and Chicago for a new business that will specialise in taking over and winding up insolvent insurers.

He admits that no-one starts out in life dreaming of a career in this field, where you are effectively working to put yourself out of a job. “The whole idea of working for a company that is going out of business, and you are putting it out of business, is counter-intuitive to what people consider a career,” he says.

Nevertheless, he has spent more than 30 years guiding insurance businesses through their final days in both London and New York. So much so that recently, the Association of Insurance and Reinsurance Run-Off Companies (AIRROC) gave him its man of the year award.

What he does is work with insurance companies whose operations have been discontinued and whose business is being run-off. “These companies have policies, so we simply manage their claims,” he explains. “Depending on what type of business they were in, they could be short tail, like the property business, or long tail like asbestos, environmental or workers’ compensation.”


The practice is more common in the US, UK and Bermuda, but less so on mainland Europe. "The likes of the Swiss, the Germans and the French like to hold on to their companies more, they are much more concerned about reputational risk, so they prefer to keep things in-house and try to fix it themselves," he says. "But that's not a good use of capital if someone is willing to pay you and take it off your hands."

For the most part, companies end up in this situation because they have gone under. In some cases, they may be operations that are no longer needed as a result of a merger or takeover, or it may simply be one line of business in an otherwise profitable group that has run into trouble.

“It’s a combination of different things,” he notes. “Back in the eighties, it was because they – insurance companies – went out of business, they were mismanaged. A whole slew of them in the US and Bermuda all tanked because they mismanaged their business, they underpriced it.”

Wall observes that a common theme has run through the businesses with which he has dealt over the past three decades. “It’s greed – that’s what usually causes this stuff,” he says.

He draws parallels between what happened to the US insurance sector in the 1980s and the sub-prime crisis that triggered the financial meltdown from which most western countries are still recovering. In this case, managing general agents took the place of the mortgage brokers.

“Managing general agents wrote business, but they had no incentive to write proper business,” he says. “They were paid commissions, therefore volume was the name of the game.” They just assumed that the risks they were underwriting would be passed on to reinsurers, but it did not always work like that.

"The problem is that once the losses start coming in, the reinsurers start wondering what caused them," he warns.

A 1990 Congress report – Failed Promises – condemned the industry's excessive underpricing, rapid expansion and over-reliance on people who had no incentive to pay attention to the risks they were underwriting. It also found that companies "engaged in unnecessary, extensive and complex reinsurance".

Eleven years later, another report found similar problems, while the pattern appeared to repeat itself all over again with the mono-line insurers who provided cover for sub-prime mortgages.

Wall has encountered more than just recklessness. A number of years ago, he says that he was involved in a case where, following a forensic audit, it emerged that the insurer had manipulated the excess agreements so that the reinsurer actually lost money while the company made a profit. The sum involved was $100 million.

Not surprisingly, a lot of the problems caused end up in court and once a company goes under and a run-off specialist steps in, it has few friends.

“You really have a fight on your hands,” he says. “You have to manage the company with the resources that you have because you’re not getting any more. You have to cut overhead, you have to run an efficient operation, manage your investments and work out your liabilities.”

Wall ended up in the business by accident. An accountant, he went to Paris in the early 1980s and began working for a construction business. There he met a businessman and run-off specialist, Shaker Youssef, known as something of a pioneer in the sector, who hired him to work on turning around a US business called Providence Capital that was being managed in the London market.

He then moved to the US, where he worked on American Centennial Insurance, the country's sixth largest insurer, which was in serious trouble in 1985 and the rate at which its liabilities were flooding in threatened to bring down its publicly-quoted parent, Beneficial Finance.

"So in 1987, we did a management buyout because the public company had to achieve finality," he explains. "Along with that we also acquired a company in the UK, Consolidated Insurance, that was a credit insurer. The idea was to give it a soft landing, to manage our way out of the liabilities and the exposures, and to grow the other business. We ended up selling the credit insurer to GE Capital. "

In the 1990s, he worked with Swiss Re on the privatisation of the Texas State Workers' Compensation Facility and subsequently was part of an investor group that acquired General Accident of Puerto Rico. In 2005, he joined Enstar, where he became president and chief executive officer, a role he held until deciding to step back last year and become non-executive chairman.

Enstar specialised in acquiring and managing insurance and reinsurance companies in run-off. One of the last deals in which he was involved was its takeover of Torus Insurance Holdings for $250 million and placed in run-off. The group more recently acquired an underwriting and reinsurance business and said that it is moving into "live" insurance.

There are a few developments in the US that Wall believes will create the next wave of underwriters that end up in run-off. One is Obamacare, the US president’s plan to make health cover available to all citizens. “There’s a lot of capital entering that space and the whole idea of 40 or 45 million uninsured Americans is getting everybody excited and they want a piece of that action, some people are going to get it right and some people are going to get it wrong,” he says.

Another is a relatively new phenomenon, insurance-linked funds, used to draw cash from the capital markets that is then used to underwrite risk. This is becoming increasingly common and could lead to overcapacity in the market, driving down premia and leaving insurers vulnerable.

Charles Goldie, a member of the global management executive at reinsurer PartnerRe, warned last month that the extra capital flowing into the market, combined with little scope for mergers, which help take out capital, could either force companies to go the run-off route or turn them into likely takeover targets for operations that specialise in this.

That is why he is talking to private equity firms, which he says are eager to hear more. He points out that what they are looking for is straightforward: “Double-digit returns, 15 to 20 per cent, and they want their money out in three to five years”. Given that insurance run-off is a finite process and aims to deliver returns of this nature, he says it should suit investors of this nature.

He is looking to raise a minimum of $100 million. “The plan will be to have a minimum of two to four investors, and then as you advance as you get going there’s the opportunity to bring in others on one-off opportunities.”

Wall’s decision to move on seems largely down to the fact that he misses being at the coalface. “When you become CEO you don’t do any deals any more, you’re too busy dealing with corporate governance,” he says.

"I much prefer doing transactions. There are still plenty of opportunities out there."

CV: Karl Wall
Karl Wall
Position: Leaving his role as chairman of Nasdaq-listed run-off and reinsurance specialist, Enstar, to set up shop on his own.
Why is he in the news? The Dubliner is seeking to raise $100 million from private equity houses in New York and Chicago to invest in a new insurance run-off venture.
Background: From Kilmacud in Dublin, he trained as an accountant while studying at night in the College of Commerce. He moved to Paris in the early 1980s and from there to London, where he began working in insurance run off, and subsequently to the US where he now lives.
Family: Siblings in Dublin and family in the US.
Something you might expect: He's a leading member of his industry's representative body, the Association of Insurance and Reinsurance Run-Off Companies.
Something that might surprise: He has a private pilot's licence.