GC’s Hochberg: More “mega” legacy deals in 2023 as hard P&C cycle drives demand

The legacy market will continue to grow in 2023 with more varied and larger portfolios being transferred to run-off counterparties as carriers look to optimise reserves and deploy capital in the hard P&C market, according to Guy Carpenter’s Ed Hochberg.

Speaking on The Insurer TV, Hochberg, head of global risk solutions at Guy Carpenter, said favourable underwriting conditions in the live market were continuing to create demand for legacy products.

“Companies are looking at their reserve portfolios as means to generate additional capital, by reducing the amount of capital that is devoted to the back books and then being able to deploy that for prospective opportunities,” Hochberg said.

“It's driving demand and I think we're going to continue to see that for the foreseeable future,” he added.

Hochberg said he was confident the legacy market would continue on an upward trajectory in 2023.

“If what we've seen recently is any indication, we will see the number of transactions grow in 2023,” he continued.

Hochberg said there was an expectation that more “mega transactions” would get done in 2023.

Indeed, just last week this publication revealed news of one such mega-deal, with RiverStone International and MS Amlin inking a reinsurance to close (RITC) and loss portfolio transfer with £1.2bn of reserves.

The RITC marked the largest of its kind ever undertaken at Lloyd’s.

Last week also saw the announcement that Enstar would assume net loss reserves of $1.9bn from QBE and provide $900mn of cover for adverse development on those ceded reserves.

Hochberg said he expects the trend of large transactions coming to market to continue as run-off solutions become “more mainstream” and larger companies grow more comfortable engaging with legacy counterparties.

Hochberg added that he believes there is a “sweet spot” for transaction size which he pegged in the $500mn to $1bn range.

“There isn’t any magic to it, but it's probably because if you bring a transaction of that size to the market, it's big enough that it will get players out of bed and there'll be enough legacy players that would be able to have a look at it and have the capacity to do it,” he explained.

However, Hochberg noted that there was a “constraining factor” when transactions get very large as the due diligence process becomes “quite complex”.

“It can take a very long time to execute those transactions, the longer that it takes to execute a transaction, the more involved the diligence process, the more execution risk there is,” he said.

“And so, there is this sort of diminishing return I think you get once you get to a very large, wide-scope type transaction,” Hochberg continued.

“That's not to say you can't do it – you can – it's harder, it can be more complex, the structuring of the deal might be more complex. So, that’s why my personal belief is sort of that $500mn to $1bn is really a kind of a sweet spot.”

Hochberg said he expects new and innovative types of portfolios to come to the market in 2023 as the legacy market continues to mature.

He added that a “recurring theme” in transactions is no longer getting certain liabilities off a balance sheet but rather a focus on capital management.

“I’d say 80 to 90 percent of what we do is really about capital management,” Hochberg said.

“A lot of capital is tied up in more recent underwriting years and it is natural that the transactions that we see today would have been underwritten in the last decade – that's where the capital is.

“[The market] is a function of all the things we've talked about. It is carriers trying to shore up their balance sheet to take advantage of the underwriting environment that exists.

“It has to do with the development and the maturity of the legacy market and their ability to respond to all different types of legacy risks of all shapes and sizes,” he added. “It's an exciting place to be right now.”

Investor appetite for legacy business

Hochberg said that for investors the legacy sector remains “relatively attractive” compared to other areas in the (re)insurance space.

He noted that investors in the run-off sector haven’t been exposed to some of the volatility that has been evident in the P&C market – especially in the property cat line of business.

“Whether it's the ILS space or just companies supporting insurers in general – they haven't had to deal with that part of it,” he said.

While the legacy market has seen some investors reassess their appetite – notably with Apollo shifting Catalina away from P&C to life transactions – on the whole, capital has continued to pour into the run-off market in recent years.

As this publication revealed last month, two major legacy players – Compre and RiverStone International – are both exploring the launch of sidecars to support their growth ambitions in the sector.

Compre – which is backed by private equity firm Cinven and fund manager British Columbia Investment Management Corporation – raised around $200mn of subordinated tier 2 debt in two tranches from a group of institutional investors in June last year.

RiverStone Europe was acquired by CVC Capital Partners from Fairfax Financial in August 2021 and subsequently rebranded to RiverStone International.

The deal saw CVC acquire Fairfax Financial’s interests in RiverStone Europe for an initial consideration of ~$750mn, with Fairfax receiving an additional $235.7mn when the deal closed through a contingent value instrument.

On Friday RiverStone International confirmed a new deal to bolster its capital base, securing $305mn XoL cover led by JP Morgan to support the underwriting of new Lloyd’s legacy transactions.

Recent entrants to the legacy space, including Oaktree Capital-backed Marco and Carrick, have both steadily been building out their platforms alongside established run-off players.

Earlier this month this publication revealed Carrick is running a process to find a new investor that could sit alongside Stuart Zimmer’s Sequentis.

The Insurer was also first to report that R&Q founder Ken Randall had returned to the $960bn+ market with a new venture backed by Miami-based asset manager 777 Partners.

Catalina founder and ex-CEO Chris Fagan and his former lieutenant Mayur Patel, who served as head of M&A at the Bermudian, are also exploring a return to the market, working with JP Morgan on a potential platform.

“I think it's relatively attractive compared to some of the other investments in the insurance sector right now,” Hochberg said.

“Whether that continues going forward it is hard to say, but it's certainly been the case over the last several months,” he continued.

Watch the 20-minute interview - which was filmed on Thursday 2nd February - with Guy Carpenter’s Ed Hochberg for more on: