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Clifford Chance

Clifford Chance


Legacy sector set for growth as capital pressures on insurers intensify

Solvency II and a more active approach by regulators are forcing carriers to review and actively manage their non-performing lines of business.

Activity levels in the non-life run-off market continue to rise. According to PwC’s annual survey, in 2017 and 2018 combined there were 72 deals publicly announced, with slightly less than $50bn of estimated gross liabilities.

The most notable change has been the increase in activity in the US; and with the promise of greater use of portfolio transfers in the future. There has also been growth in continental Europe (notably Germany and Italy) after many years of predictions but limited execution.

This article explores the reasons, particularly legal and regulatory, behind the recent growth in this market – both sell-side and buy-side – and looks at the opportunities and challenges to the market in the future.

Why are more insurers looking to actively manage legacy business? This question can be best answered by quoting Zurich Insurance Group at the time of its recent transfer of its employers’ liability portfolio: “The sale… reflects our strategy to reduce exposure to legacy lines of business… and focus on actively managing capital allocation.”

A key point here is the phrase “active management”. In the UK and Europe there is little doubt Solvency II has had an impact on insurance groups’ desire to manage capital and resources as efficiently as possible.

Proactive regulation

However, it is not just Solvency II in and of itself. In many of the key EU jurisdictions, the regulatory approach has been proactive and requiring firms to retain a significant surplus to the solvency capital requirement. As a result, regulators have expected firms to review and actively manage non-performing lines of business. Lloyd’s approach to performance management has been widely reported and is a good example of this proactivity; directly leading to run-off opportunities.

In an extended soft market, there will inevitably be a focus on costs and on how management time is spent. There is also greater trust in the run-off providers to manage claims in a way that does not negatively impact policyholder relationships.

These are both reasons why the market has extended beyond the traditional lines of run-off business into, for example, employers’ liability and why it has the potential to develop further into all lines of business.

Activity levels in the US have increased – through both acquisitions and reinsurance – with the potential for more as portfolio transfer regimes are now coming into law in a number of states

As the supply of transactions has increased, there has been no apparent drop in demand from buyers. There are a number of legal tools now available in most jurisdictions to meet the circumstances and the seller’s aims, from adverse loss development cover to portfolio transfers to acquisitions.

Activity levels in the US have increased – through both acquisitions and reinsurance – with the potential for more as portfolio transfer regimes are now coming into law in a number of states. The experiences in the UK and European transfers have shown this process can be very effective and, with the appropriate checks and balances, mitigate potential risk to policyholders.

All of the above leads to increased confidence in the sector. In October last year, Catalina announced Apollo had committed an additional $700m in equity, an indication of two notable trends: i) buyers building up “war chests” for future acquisitions; and ii) private equity’s commitment to the sector.


The drivers of proactive regulation and the focus on capital and resource management show no sign of diminishing.

Brexit has, in a way, created further opportunities as insurers have been reviewing their structures and business lines – and, depending on the outcome of negotiations, there could be further restructuring to do.

A number of the run-off groups have established (or acquired) an EU insurer, with a number setting up in Malta and making use of the island’s protected cell company regime. This mitigates the risk of Brexit and the likely unavailability of Part VII for cross-border transfers into the UK.

The signs are regulators in the US and continental Europe are becoming become more confident in the legacy sector.

The market requires transactions – and to find growth in both geographies and business lines. As a market matures, one would normally expect to see new entrants and enhanced competition, which should be viewed as a healthy development.

This level of competition has been the case for some years in the more mature markets (particularly the UK) but this is a likely trend internationally.

Regulators should be willing to support new entrants into the legacy market – both when reviewing new authorisations and acquisitions.

All in all, the next five years is expected to see the continued growth and development of the sector.

This article first appeared in Insurance Day