The legacy sector offers expanding investment opportunities as more companies prepare to sell off non-core or non-performing portfolios while investors look for new outlets. Barbara Hadley reports.
This could well herald a boom time for the legacy market; an increase in sellers, favourable regulatory climate and capital looking for somewhere to go. According to a Swiss Re Sigma report in 2015, acquisitions of property and casualty business placed in run-off have increased steadily since the financial crisis, especially between 2011 and 2013. In particular, the Sigma report points to the UK being a core market for legacy acquisitions ‘given its favourable legal and regulatory climate’, for example schemes of arrangement and Part VII transfer mechanisms, but with the UK non-life run-off sector reaching maturity, ‘legacy acquirers are reportedly looking to expand in the US and Continental Europe, where the size of run-off portfolios are significant.’
The report suggests that the majority of the traditional run-off market acquirers ‘have a foothold in one or both of these markets.’ It adds that ‘surveys persistently suggest that more efficient capital management remains the most influential driver of run-off restructuring activities.’ A recent PricewaterhouseCoopers’ survey meanwhile stresses that regulation is also a key driver (see Figure 1).
For Steve Gowland, CEO of specialist legacy acquirer Ashbrooke, the attraction and growth of the legacy market for acquirers going forward comes down to three sources: ‘(1) the increased flow of transactions that the dislocation provided by Solvency II is delivering; (2) the continuing low interest rate/ inflation environment, specifically in Europe; and (3) our expectation that future transactions will be increasingly driven by corporate finance/restructuring solutions rather than insurance/ claims management driven solutions.’
Whilst traditionally share purchases are more straightforward, ‘Solvency II is going to throw up some significant new capital requirement hurdles for acquirers in order to gain regulatory approval. This will have a significant impact on existing market participants’ operating and financial return models,’ says Gowland. ‘As a consequence we expect a large number of transactions to be portfolio transfers from live underwriting businesses or existing run-off companies to facilitate capital efficiency or a solvent liquidation exercise.’
In addition, he adds, ‘we expect a number of smaller scale, secondary buyout opportunities from historic and existing run-off acquirers. This will represent investments that have been managed down in scale since the original purchase and now are below the size and return profile of the parent group. These transactions may come as portfolio transfers as a cleaning-up or solvent liquidation event for the run-off entity.’
He notes that, although Solvency II presents many operational challenges, ‘the transaction opportunities it is creating, in conjunction with its application across the EU, will actually level the playing field and make the regulatory and compliance issues that face acquirers more consistent and less complex.
For the full article, refer to page 26 in the Spring 2016 issue. https://www.airroc.org/assets/docs/matters/airroc%20matters%20spring%202016%20vol%2012%20no%201.pdf