In the opening session of the 2021 Runoff Deal Market Forum, Laura Pearson, Liability Restructuring Manager, PwC UK and Linda Johnson, Head of Legacy Practice, TigerRisk Partners, described the sizzling hot runoff market. Their PowerPoint slides contain a wealth of information on the state of the market and the deals transacted in 2020 and the scorching hot trends in 2021. A replay of the presentation as well as the slides can be found in the AIRROC On Demand library.
While 2020 deal making was not as high as 2019, it was extremely strong, given the impact of COVID. This strength demonstrates the resilience of the market and the ability of parties to exercise flexibility in the due diligence process to close deals without being in the same room. We also saw more counter-parties acquiring books of business creating a more active market place and many repeat sellers which shows confidence in the market. Laura described the latest numbers for 2021: 14 deals as of the beginning of June with a value of $7 Billion. The numbers reflect a very strong start for the year which Laura thinks will continue, leading to a very strong year. She also sees an increased diversification in the types of liabilities transacted, which shows a growing confidence in the process of structuring deals as a normal part of the insurance cycle. The variety of structures shows the flexibility of the market mechanisms to accommodate the needs of both buyers and sellers.
Laura’s overview of the geographical location of market deals showed that North America accounted for over 50% of the deals in 2020, and in 2021 so far had $2.1 Billion of the earlier mentioned $7 Billion (containing one very large deal). The UK and Continental Europe have a combined reserve of $302 Billion. She also pointed out that Bermuda was poised to have continued growth in the legacy market; a number of new start-ups were set up and it will be interesting to see if the demand and growth will be there over time for them to mature.
Linda agreed that there is a lot of “smart money” entering the runoff market, despite COVID. Legacy management is the new normal and the market reflects that specialized legacy management adds value. Industry leaders seem to know that if you want to build your business, this is one of the tools to get value out of reserve balances. Division laws in the US are also creating some great opportunities. Linda provided an overview of trends in this space and a summary of key buyer considerations. TigerRisk has invested in rating agency tools and knowledge as to how rating agencies view these transactions. She also reviewed the deal trends and how specialized investment strategy can draw value out of books of business. Are there types of claims that are not appropriate for these transactions? Her answer: “no”. When asked specifically about long-term care, she responded that the issue with long-term care is the accounting— because the reserves are done on a discounted basis. So, while that may be a huge opportunity, it is also a huge challenge.
Her subsequent slides provided an overview of structuring variables, the accounting impact, and a review of public data on sample reserve covers that shows amazing consistency in how these deals are structured. Is there a good mix of counterparties? Yes. Not just the larger players, but also a range of smaller counterparties able to do a variety of deals. Linda quoted a Standard & Poor’s article that talked about the benefits of reserve covers for the industry. Her slides provided so much information that time constraints prevented her from reviewing all of it, but she highlighted how CFOs need to understand how value is created and how it will impact a company’s capital structure. One thing buyers need to understand is how the process works and how specialized claims handling can be the “secret sauce” of making a transaction work. New participants to this space should understand the timeline and how to have key decision makers educated and onboard so they are ready when critical decisions need to be made.
Do they think the deal climate will change and not be as hot? They both agreed that volatility in the claim environment means it may take time to see how it plays out, but the current deal climate shows that parties continue to find win/win situations and those opportunities are fueling the flames of the current hot market.