Legacy reserves hit new record as underwriters look to portfolio management

The boom in the use of legacy services for the run-off of businesses and non-core risk classes has seen global non-life run-off reserves exceed US$1 trillion for the first time.

In a new report PwC UK said the figure had been breached as the company said after a few years of hard market conditions across geographies and lines of business, it believed the market will continue to grow.

It added business that has recently entered run-off was expected to be more profitable than business written during the softer years between 2014 to 2018, implying a lower loss ratio compared to previous estimates. PwC’s estimate of the total run-off reserves in absolute terms continues to increase, primarily driven by inflation.

With estimated global gross liabilities transacted in 2023 mirroring that of 2022, respondents to PwC UK’s survey of non-life legacy insurance market participants expect the strong pipeline of global deals to continue in 2024 and beyond.

Rebecca Wilkinson, Corporate Liability Restructuring Director, PwC UK, said: “The market has evolved significantly – from a focus on finality and removing underperforming business, to concentrating on capital relief and removing non-core lines of business. While we expect this to continue, many of the survey respondents we spoke to are confident that legacy activity will also be increasingly prompted by strategic restructuring. We see a scenario emerging where the legacy market becomes a facilitator for value-creation strategies if M&A activity picks back up in the live market.”

While PwC UK expects economic inflation to return to average pre-2019 levels by April 2024, there remains considerable uncertainty around the impact on claims inflation. As a result of insurers seeking ways to transfer this risk, run-off consolidators have been presented with new acquisition opportunities.  Inclusion of inflation risk within a transaction’s risk premium is more important than ever, as inflationary impact was cited by survey respondents as one of the top three risks for a consolidator to consider when assuming a run-off portfolio.

PwC UK’s global run-off estimate of $1.014 trillion is based on insured liabilities only with corporate liabilities estimated at $73 billion, a $5 billion increase since the previous survey was published in September 2022. This estimate is specific to traditional long-tailed claims related to US asbestos, pollution and similar UK and European health hazards.

Survey respondents were asked to identify what the top motivating factors for non-life run-off transactions were five years ago, are today, and what they might be in five years’ time. Capital relief was selected by only 10% of respondents for 2018 but was the most popular selection for both 2023 (34%) and 2028 (27%), highlighting the change in insurers’ perceptions of the role of the run-off market. The market is expected to continue to evolve, with strategic restructuring and capital relief predicted as the most popular motivating factors for non-life run-off transactions in 2028.

Survey respondents identified General Liability, Motor and Financial & Professional Liability as the top three most attractive lines of business. The latter two placed outside the top three in PwC’s 2022 survey, showing a growing appetite for younger exposures and more diverse portfolios in the run-off market.

Last year saw a total of 30 publicly announced non-life run-off transactions, with an estimated combined $8.1 billion of gross reserves transferred to legacy market participants. The market had a record-breaking first quarter in 2023, which saw 11 deals involving three $1 billion plus sized transactions, followed by a quieter remainder of the year, with four, six and nine deals executed in each subsequent quarter, respectively.

Each quarter of 2023 saw fewer transactions than in 2022, with the exception of Q1 where deal volume was the same. Q1 2023 outperformed Q1 2022 in terms of estimated gross liabilities transferred.

The notion of fewer but larger deals has been an emerging trend. With an average disclosed deal size in 2022 of around $165 million, compared with around $260 million in 2023, sellers to the legacy market are increasing their focus towards deals which deliver capital relief at scale.

Andy Ward, Corporate Liability Restructuring Partner, PwC UK, concluded: “The Legacy Market continues to evolve. While deal numbers have reduced compared to prior years the same volume of liabilities have been transacted year on year, clearly illustrating a trend towards increased deal sizes. There is greater separation in the market as it matures and acquirers increasingly focus on their sweet spots ranging from deal size to liability type.

“We remain convinced that the market will continue its development and is better placed than ever before to support the live market in achieving strategic priorities such as efficiently releasing and redeploying capital and securely carving out non-core portfolios.”