Legacy market begins to bounce back after challenging start to 2024

Deal activity was down in the legacy sector in the first half of 2024 as several prominent run-off acquirers experienced major upheaval.

R&Q, a distressed legacy acquirer that was managing circa $1bn in reserves at the end of 2023, entered liquidation in June, after years of heavy legacy deteriorations and delays to the sale of its profitable fronting arm Accredited.

In August, Darag announced a deal to offload its North America and Bermuda entities to focus on its European operations. Darag Bermuda had also been hit by heavy losses in recent years, although it posted a profit in 2023.

With those exits came growth opportunities for other legacy acquirers. Fairfax Financial-owned RiverStone Group will acquire Darag’s North American and Bermuda units, with the deal expected to close by the end of 2024. At the end of 2023, Darag Bermuda had $56.9mn in reserves under management.

Marco Capital agreed to acquire Inceptum, a UK-based legacy insurer, from R&Q, and Enstar provided reinsurance for Accredited’s back-year liabilities as its sale to Onex was completed. The Insurer also revealed last month that Marco Capital had agreed to take on the management of R&Q’s Syndicate 1110 following the group’s liquidation.

Meanwhile, RiverStone International acquired Electric Insurance Company, a Massachusetts-domiciled carrier that RiverStone says provides it with the platform and operational capabilities to pursue further North American opportunities. Just two months later, the legacy acquirer took on $1.2bn of North American reserves in a loss portfolio transfer (LPT) with QBE.

Earlier in the year, Marco Capital unveiled Marco Re, a new legacy reinsurer that combines its Guernsey subsidiaries Humboldt Re and Kelvin Re. Each were originally ILS vehicles managed by Credit Suisse that went into run-off. Marco CEO Simon Minshall described the combined entity as “a powerful tool available to our clients seeking international P&C legacy solutions”.

Enstar is also set for a change of ownership. After 17 years as a New York-listed company, it will join almost all other legacy acquirers in being private equity-backed. Of the legacy acquirers that participated in deals tracked by The Insurer in 2023 and 2024, only RiverStone Group (part of Fairfax Financial), Markel’s State National, Quest Group (an owner-managed business) and Swiss Re are not backed by private equity.

However, the valuation of $5.1bn effectively priced Enstar at just under book value (0.94x second quarter book value) – a sign that private equity remains cautious on assigning premium franchise value to legacy operators.

Meanwhile, Compre announced extraordinarily good results for 2023, with a profit after tax of $279mn. This may have been particularly influenced by Compre’s $1.3bn LPT with SiriusPoint, one of its largest recent transactions.

Discernment slows H1 transaction activity

Legacy deal activity dropped in H1 2024, according to PwC. In a new report published today, it estimates that non-life run-off deals totalled $8.1bn in gross liabilities in 2022, and again in 2023. But H1 2024 saw just $1.4bn of gross liabilities transacted, less than a third of the equivalent period in 2023.

“There is consensus amongst market participants that reduced deal figures do not necessarily signify a reduction in opportunities,” PwC said, with no shortage of supply either. But deals were being “left on the table” as acquirers became increasingly discerning.

This comes at a time when US general liability and other casualty business have suffered adverse loss development, with concerns in the market about further reserve deterioration.

Lloyd’s in May announced a new requirement that syndicates would need to show in their 2025 capital submissions that they hold enough capital to withstand a 45 percent deterioration in their casualty reserves, with underwriters of legacy business among the most likely to be affected.

Casualty reserving was also the subject of a recent legal spat around a major legacy transaction. After Fleming delayed its acquisition of James River’s casualty reinsurer JRG Re, it was ordered by a court to complete it. After the deal did complete on 16 April, Fleming sued James River over claims of fraud, including an allegation that the specialty insurer had been inappropriately suppressing JRG Re’s reserves.

Some previously agreed legacy transactions outside of casualty have also fallen through this year. Viridium Group pulled out of a deal to purchase $20bn of reserves from Zurich Life Legacy, while Axa scrapped plans to sell its €16bn German life book to Athora.

Burst of activity in recent months

But the start of H2 has seen activity bounce back, with a surge in transactions which is set to see “overall deal numbers be in line with 2023”, PwC said in its September update.

Andrew Ward, liability restructuring partner at PwC UK, said: “A strong start to deal activity and investment in the sector during the second half of the year has helped the legacy market bounce back from a difficult period. Market conditions should continue to provide momentum as insurers continue to search for capital relief.

“A further knock on from the harder market conditions over the last few years should also see some better reserved portfolios coming to market. This may offer legacy acquirers opportunities to generate profits through proactive claims management – the traditional strong suit of the sector.”

Transactions so far in 2024

Many of the largest transactions that have completed in 2024 so far relate to casualty business, particularly the years which have been the subject of adverse loss development concern in the market.

QBE’s $1.6bn transaction with RiverStone International and Enstar is by far the largest, covering commercial liability and workers’ compensation business predominantly in North America. The deal transfers approximately 10 percent of QBE’s total net reserves.

PwC noted that the H2 bounce-back was primarily driven by the North American market. The $3bn+ of liabilities transferred in 13 deals relating to North America exceeds the total announced deals in 2023.

Program managers have been the cedants in two recent transactions: Accelerant’s $150mn deal with Compre and Accredited’s deal with Enstar as part of the break-up of R&Q. To manage aggregations, some program managers are looking to the legacy market to quota-share aggregate net exposures.

RiverStone International CEO Luke Tanzer told The Insurer TV in June that while legacy deals continue to be used for Lloyd’s reinsurance-to-close, discontinued lines of business and distressed portfolios, there is increased interest in using legacy transactions as a tool for strategic capital release.

“At least 60, maybe 70 percent of transactions in recent years have come about because people are looking for ways to release capital from within their own books in order to reutilise it.

“Obviously, with the economics currently being as they are, with capital being less available, more expensive, people are looking more [at] how they recycle their own capital, how they redeploy that capital in underwriting, particularly whilst the underwriting conditions remain favourable.”

While QBE’s $1.6bn LPT covers some business that has been discontinued, the inclusion of all its North America middle-market reserves up to 30 June 2024 suggests capital release was also a factor. QBE said the transaction is expected to deliver a ~$230mn net capital benefit.

QBE has made several legacy transactions related to business in North America in recent years, including a $1.9bn LPT with Enstar last year.

That is perhaps a sign of the “snowball effect” Tanzer described to The Insurer TV in June. “I think once people get confident in the sector, once they’ve done a transaction or two with us and can see what we can do and how we can assist them, then I think it’s going to be a snowball effect.”