PE Firms Upend Insurance Market for Legacy Liabilities

Law360 Insurance Authority / Ganesh Setty

  • September 8, 2023

There's a burgeoning, highly competitive market between private equity firms and industrial companies looking to remove legacy liabilities off their books, upending the role of traditional insurers and raising questions over the level of regulatory oversight in the market, attorneys tell Law360.

While varying from case to case, the general structure of these transactions is straightforward. An industrial company looking to shed asbestos claims or environmental cleanup costs separates its operating assets from a subsidiary holding those legacy liabilities. The company adds in an agreed-upon pool of cash into the subsidiary, often in the hundreds of millions. The private equity company then acquires the subsidiary, invests the cash paid by the "seller" of the liabilities, and generates an investment return, settling any corresponding claims made by injured third parties thereafter.

"It's scary as hell. If the private equity company has chosen its investments wrongly, then they lose money and they'll exit, and they'll leave the policyholder and the claimants hanging," Robert Horkovich, insurance recovery attorney and managing shareholder of Anderson Kill PC, told Law360. "Meanwhile in the insurance industry, you've got insurance commissioners looking at capital, loss ratios and reserves. Nobody is looking at that with private equity companies."

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Robert M. Horkovich
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