PwC’s Global Insurance Run-Off Survey
The global non-life run-off market continues to grow, with estimated liabilities rising 11% to $960 billion USD since the beginning of 2021, according to PwC’s latest Global Insurance Run-off Survey.
A spokesperson said, “This growth reflects a number of factors, including the fundamental underlying increase in insurance business being transacted across the world and the knock-on effect for policies entering run-off, either through natural expiry or strategic exits as insurers discontinue non-core or unprofitable business. It is estimated that over 50% of the growth since PwC’s last survey has emanated from North America.
Significant deal activity
“The past 18 months have seen high levels of deal flow for all transaction sizes, but PwC notes an increasing number of transactions valued at US$300m plus. These deals have been driven by strong demand from insurers for capital relieving legacy solutions, supported by a plentiful supply of capital from investors, which acquirers have used to take on larger and more diverse portfolios.”
Joseph Gordon, Director, Advisory, PwC Bermuda, said, “Established players are using their Bermuda reinsurance carriers to undertake a number of significant transactions. This has been in part driven by insurers and reinsurers seeking to use run-off solutions to manage risk, free up capital and improve returns.
“As a leading domicile for non-life run-off insurance and legacy solutions, the island remains attractive as a hub for run-off acquirers with ready-made infrastructure and resources complemented by a regulatory environment that has a track record in supporting the sector.
“We expect further establishment of Bermuda entities from run-off players in and beyond 2022 with the Bermuda Monetary Authority [BMA] continuing to set the standard for regulation in respect of run-off operations and Bermuda run-off reinsurers continuing to set the pace with run-off transactions that are both innovative from a structuring perspective and of a scale that the market has not seen before.”
Damian Cooper, Partner, Insurance, PwC Bermuda, said, “The pipeline of legacy deals looks strong for the foreseeable future as the market continues to evolve, experience significant deal activity, and attract large scale investment – further embedding itself as an integral part of the re/insurance life cycle.”
The spokesperson said, “While PwC estimates that insured liabilities have reached $960bn, it also highlights material legacy liabilities held on the balance sheets of manufacturing companies and other non-insurance corporations, estimated to be US$68bn in size globally. Established run-off acquirers and new bespoke entrants are increasingly targeting this sector as corporations look to gain finality for long running asbestos and environmental exposures that continue to be a drag on financial performance.
“While significant opportunities exist, the legacy sector also faces some challenges, and increased uncertainty as a result of inflation will be a factor for acquirers in valuing reserves and pricing transactions. The highly competitive nature of the environment means that maintaining pricing discipline is critical when assessing opportunities to generate target returns.”
Andrew Ward, Liability Restructuring Partner, PwC UK, said, “As the sector has successfully demonstrated for some time now, pro-active run-off management can free up the capital tied up in legacy books and allow live insurers to focus on writing core profitable business.
“We see further opportunities for run-off acquirers as insurers assess portfolios in line with strategic objectives and the ongoing inflationary environment may be a catalyst for more activity as insurers look to alleviate capital pressures associated with retaining non-core books.
“However, the run-off market itself is not immune and is likely to face similar pressure on its reserves, meaning players will need to be creative and strategic in how they operate in this environment.”
Competition and pricing trends
The spokesperson said, “99% of respondents to PwC’s survey said the market has medium or high levels of competition, and the growing number of players and availability of capital in the market means many deals are becoming increasingly competitive. In some instances, acquirers are being forced to show more flexibility with their pricing strategies in order to compete.
“However, PwC notes that acquirers’ underwriting discipline has generally remained strong and this continues to be vital for the market’s reputation and continued development. The vast majority of survey respondents believe that acquirers are currently pricing legacy deals at target unleveraged internal rates of return of between 10% and 17%. This continues to represent an attractive outcome and is likely to lead to further investment in the sector.”
Andrew Ward said, “The market is seeing an unprecedented number of opportunities across all segments from very large Loss Portfolio Transfers to small captive sales and increasingly, corporate liability deals. We are seeing greater levels of segregation and specialisation amongst the acquirers as a result and whilst competition in the US$100m to US$300m deal size range is fierce, there is plenty to keep everyone busy.
“The momentum we’ve seen over the past three years shows no sign of subsiding. The ongoing professionalisation of the sector, supported by strongly capitalised buyers will see the sector thrive as long as pricing discipline is maintained. Overall the future is bright and we should expect to see deal numbers rise and the size of deals grow.”
New targets and lines of business
The spokesperson said, “Survey respondents selected general liability, property and casualty, and workers’ compensation as the lines of business most likely to attract interest in 2022. Motor and financial lines make up the top five, reflecting the growing appetite for younger and shorter tail exposures.
“There remains a great deal of untapped potential in the US and European markets, especially with many insurers and reinsurers currently assessing what business is core and non-core. Elsewhere, the market is slowly beginning to see increasing awareness and acceptance of run-off solutions in new geographies and new classes of business.”
