LEGACY
Something old, lots new: exciting times in the legacy market
The legacy market is growing fast, but this could be just the beginning. New territories, new lines, and new solutions are fuelling growth as run-offs leave behind their reputation as a last resort.
The legacy market is booming. In 2021, consultant PwC’s Global Insurance Run-off Survey showed brisk business being done. It is estimated that the global run-off reserve has increased from approximately $791 billion to $864 billion.
As PwC’s global insurance leader Jim Bichard put it at the time: “The legacy market has never been as active as it has been since our last survey, from a deals perspective, but also from a legacy management perspective within groups.”
That momentum carried on into 2022: PwC’s latest figures show the total value of executed deals in the non-life legacy market for the first quarter of the year surged 28 percent on the same period in 2021 to $4.2 billion.
To discuss what’s driving this, Intelligent Insurer brought Bichard together with a selection of other experts from the market: Tom Booth, group chief executive of DARAG; Will Bridger, chief executive officer of Compre Group; and Andrea Piatti, managing director for global risk solutions in EMEA at Guy Carpenter.
Bouncing back and beyond
Much of the increase in activity reflects the sector’s recovery from the COVD-19 pandemic. DARAG focuses primarily on continental Europe. According to Booth there was a “lull” during the pandemic as carriers concentrated on other matters, and brokers and legacy providers had fewer opportunities to get out to the market and “rattle cages”.
“We’re now seeing the benefit of people being able to get in front of clients and provide transactions to the market,” he said.
But the market is not just recovering ground but breaking into new areas. First, it’s been bolstered by increased activity in the life sector—a relatively new area for run-off, which traditionally focused on non-life lines.
“We’ve seen a number of transactions in last year with big organisations coming out of the life parts of their business, usually gaining a real benefit in terms of both valuation and capital,” said Bichard.
“We’ve seen a number of transactions in last year with big organisations coming out of the life parts of their business.”
Jim Bichard, PwC
Second, it’s breaking into new territories. Compre Group is active in continental Europe, Lloyd’s and the US. It’s the last that provides the greatest scope for growth, and in April, it hired David Presley from Swiss Re for a newly created role of North America CEO.
“Europe will always be our heartland as a group, but the North American market is huge,” said Bridger.
“The addressable market just gets bigger and bigger,” agreed Bichard. Even in the UK, the market is just “scratching the surface”, he added. Moreover, these trends, in part, reflect a more fundamental shift in the view and use of run-off.
“It’s becoming a valid portfolio management tool as opposed to some sort of admission of failure,” he said. “Previously it was thought of as something that you do for business you don’t want any more because it’s a problem or was bad business, whereas more and more organisations now realise it’s a smart optimisation tool that allows you to release capital to invest in other areas.”
Bridger agreed: “Run-off or legacy or whatever you want to call it is no longer about distress or discontinued business; it is all about capital and cost-efficiency.”
The result is a “convergence” of live and legacy business in the property and casualty market. Compre, for instance, has just underwritten its first transaction with a historical but also a prospective component, taking on a book of business through a forward flow arrangement.
“We’re seeing innovation and creativity around structuring deals as we seek to provide solutions for our clients,” said Bridger. “It’s a fascinating place to be right now.”
According to Piatti, that’s also changing the relationship between reinsurers and legacy acquirers.
“Reinsurance companies seem to be becoming more partners of the legacy market than competitors,” he said. “We have been in a number of conversations where the question was, can a Swiss Re, Munich Re, or other large reinsurer help facilitate a run-off transaction?”
“It is all about capital and cost-efficiency.”
Will Bridger, Compre Group
A new insurance cycle
The final thing driving activity in the legacy sector is capacity. Attractive returns have seen new entrants and capital coming into the industry. While that can create pressure for players in terms of pricing (see Legacy part 2), it’s unlikely to limit the market’s growth any time soon. In fact, it further fuels it, said Bridger.
“There’s a demand for bigger and bigger deals in the legacy market, and more capital means more capacity.”
Bichard agreed: “Capital coming in allows transactions to happen that probably wouldn’t have otherwise. It’s cyclical: the more comes in, the more transactions are achievable.”
How long that will continue is uncertain, but most panellists think there’s a very long way still to run. The programme market in the US alone—with $60 billion in annual premium—provides massive opportunities for growth, according to Bridger.
“It’s a vast market with the potential to fuel the legacy market for decades to come,” he said.
In many respects, said Piatti, the legacy market is reminiscent of another that’s seen massive growth in recent years: insurance-linked securities (ILS).
“It probably can be compared to the ILS market a few years back. It went from being a niche in certain programmes on tier one perils such as US wind and US quake to becoming an integral part of the cat market,” he said. “There is no reason why legacy should not become something very similar.”
For all the recent changes, there’s an expectation that the best is yet to come.
“The next five years are going to be very exciting for the whole legacy market. I’m looking forward to it,” Bridger concluded.
To view the full discussion click here
Image from Shutterstock / DONOT6_STUDIO
