Burford to exit ATE and look to build secondary market for third-party funding

Bogart: lack of correlation between returns and business cycle

Bogart: lack of correlation between returns and business cycle

Burford Capital has announced that it is leaving the after-the-event (ATE) insurance market after announcing strong results for its litigation investment business – but it is looking to help create a secondary market in third-party funding.

In its interim report for the first six months of 2016, the AIM-listed company also predicted that it would benefit from litigation arising from Brexit and the weakening sterling exchange rate.

Burford entered the ATE market in 2012 and continued after the Jackson reforms, “although at levels far below our pre-Jackson volume”.

However, its underwriter, Munich Re, “has notified us that it is moving its insurance business to a new operating platform, and for us to continue to write new business would require a significant investment in technology and systems to be able to utilise that new platform”.

The report said: “We have concluded that the level of attractive demand for new UK after-the-event insurance is insufficient for us to make that investment, and we will thus cease writing new insurance business at the end of the year.

“We will, of course, continue to manage the insurance business we have already written, which as we discussed in our most recent annual report is expected to contribute many millions of dollars of future income to Burford, further augmenting the terrific return on investment the Firstassist acquisition has already delivered for us.”

ATE insurance accounted for $5.1m of Burford’s $76m income for the first half of 2016 – down from $6.5m in the same period last year.

The overall income figure was up 88%, driven by a 110% increase in income from litigation investment to $64m. Burford recorded a 117% increase in operating profit to $62m and a 123% increase in profit after tax to $53m. It generated $99m in cash proceeds in the period.

The company also made a record level of new commitments to investments – $193m – more than 90% of which was in portfolio and complex structures, rather than individual cases.

The report revealed that Burford has also started to lay off its risk by selling off portions of its investments to third parties.

It said: “We do think that some secondary market activity is likely to develop as more capital becomes aware of litigation finance and we intend to be in the vanguard of establishing such a market.

“We view the ability to originate transactions and then sell participations in them as a way of managing risk (especially in larger or riskier investments) and enhancing capital efficiency as well as potentially opening up additional avenues for us to earn income.

“Thus, in the current period, we closed one secondary market transaction, in which we sold a portion of our investment to a third-party investor at a gain and at a price that suggested the value of the majority of the investment that we retained was worth more than its carrying value, and we had an offer (which we did not accept) to sell a portion of another investment at a similarly enhanced value.

“That third party market activity resulted in valuation adjustments because it established arms-length values for the assets concerned.”

The report said Brexit has a “generally positive impact” on the company.

“Substantively, Brexit will give rise to significant uncertainty for businesses, and demand for legal services tends to flourish during periods of uncertainty, boosting our business collaterally. There is likely to be more litigation as a result of Brexit, and there is no catalyst for any reduction in the volume of litigation.

“There is also no negative impact on any pending or future litigation from the UK’s potential or actual exit from the EU except for some possible additional complexity around enforcing English court judgments in Europe, although we expect any such issues to be resolved through negotiation and if not to be a boon for our judgment enforcement business.

“A further substantive positive is that the decline in the value of sterling makes UK courts and arbitral institutions (and the UK lawyers who practise in them) somewhat more economically competitive globally, which we would expect to be good for our business. Burford is also generally a beneficiary of a weaker sterling rate of exchange with the United States dollar.

“Given the recent decline in the value of the GBP, especially against the USD, Burford’s USD-denominated income, assets and dividend payments will be worth more to shareholders given that our equity is quoted in GBP.”

Burford chief executive Christopher Bogart said: “During one of the most volatile financial market periods for many years, Burford has continued to grow strongly and profitably, significantly enhancing shareholder value. Together these results underscore our ability to generate cash from litigation finance investments without regard to economic or market conditions, underscoring the lack of correlation between Burford’s returns and the business cycle.”

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