Expect another strong year for the legacy deal marketplace, say a panel of experts during an audience interactive session at the 2022 AIRROC Legacy Transactions & Networking Forum. Mayer Brown LLP Partner, David Alberts, chaired the panel that included Edward S. Hochberg, Head of Global Risk Solutions, Managing Director, Guy Carpenter, Laura Pearson, Senior Manager, PwC, Kelly Superczynski, Global Head of Capital Advisory, Aon, and Vikram Sidhu, Partner, Mayer Brown LLP. The interactive format allowed the audience – both in the room and online – to respond to questions via their phones, with the panelists providing their reactions and opinions in real time to audience responses. The focus of the session was on the current legacy deal landscape, including insurance business transfers, corporate divisions, traditional legacy transactions, and what to expect in the market over the next year. A replay of the presentation can be found in the AIRROC On Demand library.
Laura kicked off the discussion by delineating the size of the legacy liabilities market. According to the PwC 2022 Global Insurance Run-off Survey, global run-off reserves are estimated at $960 billion, representing an increase of 11% over the previous year. The key drivers are the increase in premium written over the last 10 years and with respect to North America, the emphasis on reserve strengthening due to social inflation, macroeconomic conditions and the volume of claims. While this is certainly an exciting time for the market, the shear magnitude of the legacy liabilities market does not always translate to deal flow with all of these reserves coming to market.
Nonetheless, deal activity remains high and the momentum is expected to continue. Kelly explained that as the market has evolved, confidence in the process and accounting for structuring deals has grown with substantial capital coming into the space. The robustness of the market is driven by the recognition that legacy is an effective capital management tool, with the stigma that has previously been associated with run-off having now been removed. There is a greater understanding of the value that can be unlocked, with capital markets that want to support it. The more capital, the more players creates a greater diversity of deals both in size and scope. Edward agreed that there is an increased diversification in the types of liabilities transacted. The roster of recent deals are not the traditional liabilities with full on transfer of claims servicing which run-off has been most closely associated with, but rather the diversity of transactions runs the gamut with different capital oriented solutions. The acceleration in deals is not just limited to those reported in the public domain; the number of private deals that fall under the radar is comparable or even more accelerated.
On the supply side, the trend line of deals coming to market mirrors the trend line of the amount of capital coming into the market. Committed capital to the legacy market is at an all-time high. It is estimated that $10 billion of new capital has entered the legacy market in the last thee years. The capital flowing in is from sophisticated providers, such as asset managers, investment firms and hedge funds looking to deploy assets and extract value out of books of business. As the market matures, it creates unique investment opportunities for these firms.
Another topic that the audience was surveyed on centered on the biggest areas of opportunity for the non-life run-off market beyond traditional mature legacy books. The panel reacted to the audience response that ranked recent underwriting years and corporate liabilities as the biggest opportunity. Vikram commented that on the supply side he definitely sees an increase in more recent vintage of underwriting years coming to market. Transactions involving more recent underwriting years present challenges, such as how to handle additional premium and the adjoining accounting issues, claims handling and claims cooperation issues and the likelihood of ongoing business relationships. The maturity of the market and the flexibility of the market mechanisms to accommodate the needs of both buyers and sellers on these types of broader issues help facilitate these deals.
Regulatory developments are fueling the US legacy market with several states embracing insurance business transfer mechanisms. While the US is poised to have continued growth in the legacy market, the dust has to settle on IBTs and division laws in the US as the regulatory framework needs to build out. Even so, there is strong market interest in these emerging tools.
The audience was also surveyed on whether they are integrating new technological innovations into their legacy business. The legacy sector has been somewhat of a laggard in adopting new technologies as data and technological issues are continuously identified as one of the key operational challenges.