Speaking to Monte Carlo Today, Kelly Superczynski, head of capital advisory at Aon’s Reinsurance Solutions, explained that the legacy market is now recognised as an “efficient capital management tool”.

“These deals are now regarded as capital optimisation tools. It’s no longer ‘the company has an underperforming book of business and we need to cede it off because we’re worried about the adverse loss development’,” said Superczynski.

She added: “This is an efficient way for firms to free up capital and navigate potential volatility so they can invest in other areas of opportunity. These legacy markets are allocating a great deal of capital to be able to take these portfolios and invest them—it’s an asset yield play.”

According to Superczynski, in the past three years Aon has worked on a host of material deals that have transferred more than $4 billion of liabilities. Over the longer term, the Aon team has transferred $8 billion of liabilities into the legacy market.

“It’s helping our traditional carrier clients to make better business decisions by relieving them of the burden of holding on to legacy liabilities that aren’t enabling them to build their books of business,” she said.

The current investment yields and volatility of the markets “don’t seem to be having a near-term impact on the appetite of the legacy providers and the capital coming into the space”, she explained.

“We think this trend is going to continue and that’s why we’re investing pretty significantly in it. We believe that industry capital supporting dedicated legacy specialists exceeded $21 billion in 2022, which is a large increase on the $6 billion seen in 2016. There’s substantial capital coming into the space.”

The number one question

Superczynski addressed the macroeconomic conditions challenging the market.

“If you look at the Q2 results, you’re seeing that companies are taking a hit to their equity positions because of mark-to-market,” she said.

Mark-to-market is an accounting rule which values investments such as securities and accounts based on the daily value of the asset.

Superczynski added: “Even where companies and jurisdictions don’t have mark-to-market, the rating agencies still evaluate the assets in their assessments and subsequent ratings, meaning that there can be an unrealised loss that potentially puts strain on companies’ capitalisation.”

Additionally, the S&P capital model is expected be re-released in the near future. Superczynski expects that this might “increase capital requirements for certain risks and require companies to hold more capital than they did this time last year”.

On the biggest capital challenge facing reinsurers, Superczynski said: “Without a doubt, capital optimisation is the number one question we’re being asked today. Every client, no matter how big or small, is asking: ‘how do we optimise our capital?’.”

Against a backdrop of decelerating rates (depending on the sector) and rising and volatile loss costs in the near future, return on equity (ROE) is under pressure. Superczynski urged carriers to focus on their ‘E’ in order to maintain ROE to support their valuations.

“This is really about matching risk and capital; how do you match the pool of risk you have with the appropriate source of capital and build greater business resilience?” she asked.

Aon is helping clients to rethink their access to capital, leveraging solutions outside traditional debt, equity, and reinsurance, and using third-party capital sources as well as other kinds of vehicles and tools such as captives, reciprocals, legacy, and joint ventures.

Superczynski concluded: “There are still motivated investors that are interested in diversifying opportunities and protecting their downside, and that’s resulting in lots of investment entering the sector in different ways, from new companies and managing general agents to full stacks and reciprocals.”

Kelly Superczynski is head of capital advisory at Aon’s Reinsurance Solutions. She can be contacted at: kelly.superczynsji@aon.com