Supply and demand to drive legacy market expansion

Traditionally, undertaking a legacy deal would mean that something had gone wrong in the past. But there’s been a dramatic change in recent times, with the legacy market becoming a much more mainstream part of the insurance market, according to Ed Hochberg, head of global risk solutions at Guy Carpenter.

Hochberg joined the 1.1 Club, Intelligent Insurer’s online, on-demand platform for one-on-one interviews with industry leaders, to talk about the changing landscape of the legacy market and the work his team are doing in this area.

The legacy market has “come out of the shadows,” said Hochberg, who is confident that this market will continue to expand, driven from both the supply and the demand sides.

On the demand side, Hochberg noted that: “Previously there was really no quantifiable benefit to a transaction other than sticking the reinsurer with a loss.

“That changed dramatically as capital models evolved. Now the transactions are such that you don’t need to stick the reinsurer (or market) with a loss in order to win, because you can quantify clearly what the capital benefit is.”

On the supply side, there’s been a lot of interest in providing capital to this space.

“We have had several new entrants and some really high-quality people becoming part of that space, and that’s something I hope will continue. What we have not seen is irresponsible pricing. I think a lot of that is because in any given transaction, we might have many to approach, but they all have different appetites and you whittle down the players very quickly,” Hochberg said.

While he believes that legacy expansion is going to continue, the constraining factor is having people who can execute these types of transactions.

“However, I think it should grow at a nice pace and we should continue to see an expansion of the products and approaches within the legacy market,” he added.

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A win-win situation

Over the past two years, a lot of activity undertaken by Hochberg and his team has been focused on retroactive solutions, whether that has involved true legacy transactions or adverse development covers.

Hochberg explained that companies have different reasons for wanting these solutions, from being driven by merger and acquisition (M&A) activity, to having a desire to exit different classes of business and transferring those liabilities to someone else. Alternatively, they might be driven by a need to free up rating agency or regulatory capital that is tied up in supporting past underwriting.

“The problem for many of my clients is that they have capital constraints. Some of these are related to the way rating agencies are looking at them. Sometimes it’s because they’ve had rocky experiences in recent years and need to put the past behind them. That hangover is causing the perception and the reality of capital issues for them, and it’s preventing them from being able to take care of market opportunities,” he said.

Retroactive solutions can help where there’s an M&A or new management coming in. Often, new management would like to “wall off the past” and only talk about the future, continued Hochberg.

“A lot of the transactions, whether we do them via a loss portfolio transfer or adverse development cover, allow management to focus on the future and not have to worry quite so much about the past. When new management is coming in, that’s a huge advantage,” he added.

Accessing the legacy market can benefit companies that want to exit a line of business that is no longer core to their operation, but simply exiting the line doesn’t mean they’re out of the business. In many cases, they’ll be servicing those liabilities for years to come, and those liabilities will attract a fairly significant capital charge, noted Hochberg.

“If we can work out a transaction where a market is happy to take on that obligation and agree to manage those claims and handle the financial good or bad of what happens with those liabilities, it is often a big win for the company,” he added.

It’s also a win for the market that buys the liabilities, as it’s their stock in trade. “It truly is a win-win situation. You can enter into a transaction with a counterparty where they have a reasonable expectation of making a fair internal rate of return, and it’s still very valuable for the transferring entity.”

Provided that situation holds, Hochberg believes, the legacy market will continue to be a vibrant market that will attract parties to it.

To view the full 1.1 Club interview click here