Run-off market readies for more deal activity
Carriers are keen to release capital from legacy business to pursue higher rates on new business, according to PwC’s Victor B. Nelligan.
By Garry Booth, Contributing Editor
It’s likely that PwC’s run-off team would have been busy discussing deals at this year’s Rendez-vous had it gone ahead. Transactions have remained surprisingly steady considering the disruption caused by COVID-19.
According to PwC’s quarterly summary, 12 deals were publicly announced in Q2: with a number of smaller value transactions, the overall total estimated liabilities transacting dropped from $2.1bn in Q1 2020 to $1.3bn in Q2 2020.
“It is possible there may have been a few more that would have completed without the lockdown as we know some deals have taken slightly longer to be signed and announced,” said Director Victor B. Nelligan. “But based on our discussions with market players there have been very few proposed deals that were paused altogether due to COVID-19 in general or the resulting lockdowns.”
Nelligan anticipates more restructuring for re/insurers in the near to medium term: “Where there is restructuring, I always see an opportunity for the run-off/legacy market – whether they take on the non-core business of a re/insurer undergoing restructuring, provide an Adverse Development Cover (ADC) or Loss Portfolio Transfer (LPT) to enable smooth restructuring/M&A or provide capital relief that allows a company to avoid major restructuring. The run-off/legacy market is very innovative, and can flex their solutions to meet clients' needs.”
The North American market will continue to be most active for a number of reasons, Nelligan says: “First, it is still the largest market based on our estimates of potential run-off liabilities ($364bn of a total global liabilities of $790bn, per our 2019 Global Insurance Run-off Survey), and therefore has the most scope for transactions.
“Second, reinsurance brokers in the U.S. in particular have become increasingly active over the last few years in the run-off/legacy space and are actively bringing legacy/run-off solutions to their clients as part of the wider suite of solutions for raising capital – this has been a great thing for the growth of the market. Finally, the potential for new solutions in the U.S. market (e.g. Division Statutes and Insurance Business Transfers), if successful, could lead to a significant rise in activity.”
The London market is also ripe for run-off activity, Nelligan reckons. At Lloyd’s, a number of different types of deals, including Reinsurance to Close, Loss Portfolio Transfers and Adverse Development Covers, have been announced over the last 18 months with a variety of counterparties.
“As the market hardens and the Lloyd's performance improvement drive continues, we anticipate seeing further deals and possibly some new entrants to that particular market. Like some recently reported deals that are in progress, some will be driven by the desire to release capital from legacy business in order to pursue higher rates on new business and others will be in the pursuit of total legal and economic finality for syndicates or lines of business that have gone into run-off,” Nelligan explains.
Restructurings have created a large number of share sales – particularly of captives in run-off, but also of subsidiaries of re/insurers that are non-core, Nelligan says: “They account for approximately 35% of the publicly announced deals from 2019 and 2020 year to date. The next two largest solution types are LPTs and Insurance Business Transfers (IBTs), both roughly 20% of publicly announced deals from 2019 and 2020 year to date.
“If the rumoured IBTs in the U.S. are successful, then I can certainly see an uptick in that type of solution as it will help to achieve both economic and legal finality. The run-off/legacy market is highly innovative, so I suspect we will also see many variations on LPTs and ADCs that will help clients with different situations.
Nelligan is confident that the run-off market is well-positioned to keep providing solutions as deal activity ramps up: “There have been a couple of new entrants to the market over the last two years, with the market incumbents also receiving significant investment. In total we estimate over $5bn of new capital has been invested in or raised by run-off/legacy players to pursue opportunities in the market.”
