Pricing discipline will be critical if the legacy market is to maintain its hard-fought reputation amid a surge in interest from carriers seeking solutions for prior-year books of business, R&Q’s group head of legacy M&A Paul Corver has warned.

Paul Corver R&Q

At a time when more run-off counterparties are entering the space in response to increased demand from carriers, Corver told The Insurer of his concerns that the current “competitive streak” in the sector may lead to “some unfortunate transactions being undertaken”. 

“Competition has increased but we can’t forget that the market has worked hard to develop a good reputation over the years to encourage live insurers to come and transact,” Corver said. “We have to make sure we maintain our discipline and reputation.”

Corver said the run-off sector was “markedly different” now compared to previous perceptions of a “toxic environment” with a focus on distressed and bankrupt entities. 

Once the preserve of a handful of players, the market has seen a swathe of new counterparties enter in recent years with established players also scaling up by attracting capital from private equity houses in response to an increase in appetite for legacy solutions among P&C players.

Corver said that as well as increased competition, legacy counterparties needed to be mindful of where the P&C market is in the cycle and the impact this has on the portfolios that brokers are bringing to the market.

Paul-Corver-PQ

“We’re coming out of a lengthy soft market where a lot of lines were underpriced in regard to premium,” he said.

In addition, Corver said the legacy market needed to be aware of the impact of social and economic inflation on prior-year books.

“Brokers are very actively working with clients to look at capital relief solutions and the removal of unwanted portfolios,” he said.

“We’ve got to be even more aware now of the incentives behind the party in undertaking a transaction as some may use it as a solution to a previously under-priced problem portfolio,” Corver added.

Corver said that there would inevitably be different motivators for parties looking to offload certain portfolios, with these needing to be “very carefully assessed” with strong due diligence undertaken. 

“Legacy acquirers need to be going in with both eyes wide open to make sure that they fully understand what it is they’re taking on,” he added.

Portfolio pipeline

Corver said that prior-year books of liability business – particularly US casualty portfolios – continued to be the mainstay of legacy transactions undertaken at R&Q and by other counterparties in the sector. 

“That’s not really a surprise because of the impact of social inflation and the soft market environment that was around for the last five or six years,” he said.

“So it’s inevitable that will cause some distress as losses come through and mature,” he continued.

While not “the main thrust”, Corver noted that portfolios with cyber exposures were  appearing in the market. 

He also pointed to longer-tail political and credit risk classes being present in portfolios recently marketed to legacy counterparties, which he said hadn’t traditionally been “a natural fit” for a legacy transaction due to the length of the unexpired period on some lines. 

Corver said while property portfolios were generally too short-tail for the legacy market to transact, there were “some opportunities out there”. 

Discussing the outlook for the legacy sector – which according to a recent PwC report saw a record $5.4bn of liabilities transferred to run-off specialists in H1 2022 – Corver described the market as “buoyant and competitive”. 

“It’s what you expect a mature market to look like,” he said. “We just have to ensure that we continue in the same vein.”