The legacy market has switched into overdrive in the last 18 months. Following a busy year of capital raises, start-ups, people moves and - of course - transactions, re-Insurance.com has partnered with the UK-based legacy trade association Irla to take the pulse of the sector with a comprehensive survey of its members and our readers.
Key highlights from the 2018 survey:
- Focus on book disposals by smaller (re)insurers:
- Brexit may cause temporary hiatus
- Regulatory pressure to collateralise
- Interest expected in back year motor books
- Lloyd’s RITC interest high
- Scepticism about Rhode Island jurisdiction
Despite a number of start-ups including Quest’s $300mn Bermuda run-off vehicle, which is backed by US investment house Mangrove Partners and was revealed by this publication, the overwhelming majority of respondents said the legacy market could sustain the current hunger of acquirers.
While some expected consolidation in the sector and complained of climbing prices for legacy books, others said that competition was good for the sector.
One respondent commented: “As with all markets consolidation to some degree is inevitable, but the scale of the market is such that there is room for many players,” commented one respondent.
“This is an immature sector with potentially an inbuilt imbalance in relation to bargaining power: the transferor is selling a proposition upon basis of information they hold, whilst the transferee has to make a judgment that undercuts the similar gambles of aggressive competitors,” said another.
But they added: “At some point the tide will go out and some players will find themselves naked.”
In early 2017, AIG revealed that it had created a mammoth Bermuda-based legacy vehicle to house around $37bn of its run-off liabilities.
The move was seen by many as yet further evidence of a shift in the way boards of live-market companies view and treat their legacy liabilities.
And that trend is expected to continue. More than half of those that responded to our survey said that they expected to see other carriers follow AIG’s strategy.
While the majority of (re)insurers manage their own liabilities, respondents predicted that those with significant legacy books will take a more strategic approach to managing them.
One respondent said that carving out legacy liabilities was the most effective way of maximising the benefit that can be extracted from run-off assets.
“Otherwise it will always play second fiddle to underwriting if managed in the originating divisions,” that person said.
“I expect some large carriers will want to manage their legacy in-house, with selected books put out to market over time, like Zurich have done,” another said.
But while there was a general perception that most business will continue to be managed in house there was widespread optimism that the number of transactions will rise - with the focus on smaller carriers.
Exactly 80 percent of respondents said that they expected an uptick in the number of deals over the next year. However many predicted a divergence in the approach taken by larger carriers compared to the smaller (re)insurers, which was expected to lead to a reduction in the aggregate value of deals signed in 2018 and beyond.
A number of people said they were planning for an increase in the number deals for smaller carriers that do not have the resources or knowhow to manage their liabilities in house. Meanwhile, one person said larger carriers were likely to continue to explore retroactive solutions.
Another said that the bulk of deals for UK employers’ liability books had already been done, which would see the value of deals from the country diminish. However many predicted that while Brexit was likely to provide a short term stumbling block it could well lead to a number of disposals in the long run.
“The transactions will continue in frequency yet diminish in capital volume,” another said.
“I would expect to see some regulatory intervention in the EU, specifically on collateralisation of bidders,” they went on, but added: “Brexit may precipitate a pause.”
And many agreed. Almost 70 percent of respondents said that there would be more hurdles to disposals and transfers after the UK Leaves the EU.
“I think there may be short-term challenges but the market and regulatory regime will respond to ensure transaction activity can continue relatively unrestricted,” one person said.
But many pointed to the uncertainty around Brexit, with one describing it as “a mess”, adding that transitional arrangements were going to make it a difficult to do any cross-border transfers.
Asked about the preferred method for managing run-off liabilities, respondents were a lot more mixed. Just over a third said disposal was the best option for live carriers with legacy books, meanwhile a fifth said that a loss portfolio transfer was the preferred method.
Those that selected “other” mostly pointed to a combination of managing in-house with disposals and reinsurance arrangements as carriers saw fit.
In terms of classes of business that are expected to offer the most opportunities for legacy carriers going forward, motor came out on top, while respondents were torn between the staples of asbestos, pollution and health risks or workers comp books as those that yield the second most opportunities.
And over half of respondents said there is more to come with 55 percent of people saying that they expect more failures globally in 2018, following the collapse of CBL in New Zealand, which took down Denmark’s Alpha and Gibraltar’s Elite.
More opportunities are expected in Lloyd’s too with almost three quarters of people predicting an uptick in the number of reinsurance to close (RITC) deals coming to market over the next year.
Most said that was likely to be driven by the market’s abysmal 2017 loss, but others suggested that Brexit would play a factor while another said recent syndicate sale rush may have an impact.
On the other side of the pond, however, people were less optimistic about the prospects of Rhode Island’s Insurance Business Transfer legislation with 62 percent of respondents saying they did not expect a deal to be completed in the state over the next year.
As a result, 58 percent of respondents said the jurisdiction was likely to be overtaken by another state as the venue of choice for run-off deals in the US, with the bulk of people pointing to Oklahoma as a contender.
“Oklahoma has new novation legislation,” one said, adding: “More states are seeing opportunities to make money.”
Our survey was conducted over a two week period in the run up to the annual Irla Congress in Brighton, which takes place this week. 112 market professionals - representing many of the leading legacy acquirers, managers and advisers - contributed to the survey.