Deal sizes in terms of net reserves are now frequently surpassing the $1bn mark in the legacy space, as cedants look to both curb prior-year deterioration and release capital for redeployment in improved live market conditions.
This publication has recently reported on two processes which hit or exceed that threshold, including a £1.2bn ($1.4bn) transaction being sought by MS Amlin and a $1bn US casualty portfolio being brought to market by QBE.
This follows a string of $1bn-plus deals which have all been inked by individual legacy carriers in the past 18 months.
However, news of a mammoth portfolio of approximately A$6bn ($3.9bn) of run-off liabilities being potentially brought to market by an Australian state fund – which, if concluded, would be one of the largest single transactions to date – has reignited debate around legacy deal syndication.
To date, most legacy deals are concluded via a bid process, which results in one legacy acquirer securing the deal (although some are bilateral transactions). The biggest deal sizes are almost exclusively the domain of the largest players with the biggest balance sheets – including Enstar, Catalina, and the largely dormant Berkshire Hathaway and Swiss Re.
However, the increasing frequency of $1bn-plus deals has led to discussion in legacy circles around whether even the largest players can continue to absorb portfolios of this size on a regular basis – and whether greater collaboration across the market could also mean the more effective deployment of expertise and capital in the interest of clients.
While there have been a handful of partnership deals in the run-off space for smaller transactions, wider syndication of a legacy deal – like that seen in the live market – has not been attempted to date.
However, more recently sources have suggested that, for some larger transactions, brokers have started making enquiries into constructing club deals.
Insurance Insider conducted a wide canvass of legacy market sources, both on and off the record, to explore the argument for syndicated legacy deals, and what form they could take.
For the purposes of this article we put forward two types of deal syndication – the first being the formation of consortia of two or more players to bid on legacy deals, and the second a lead-follow type arrangement similar to that seen in the live market.
The overarching benefits
Not a single market participant disputed the theoretical benefits of deal syndication in run-off, for the market or for the cedant. In practice, there are more reservations.
In theory, syndicated legacy deals would reduce counterparty credit risk for the cedant, while also opening up the potential for bigger transactions to come to market.
In a lead-follow type situation, there is also potential for operational and expense gains, provided there is limited duplication of effort, some sources argued.
If syndicated deals eventually became a proven concept, there is the potential for greater volumes of business to come to the run-off space.
"The benefits to both sides are clear – risk diversification, lower costs and speed. Why isn’t the legacy market syndicated? Perhaps because it’s still evolving but this is the natural next step"
Marco CEO Simon Minshall
Meanwhile, the acquirers themselves would benefit from risk diversification and – provided they participate in deals more regularly – a smoother stream of revenue generation. One of the challenges that legacy companies face to date is the “lumpiness” of revenue which a deal-based model can bring.
R&Q, notably, has sought to address this challenge with the introduction of a sidecar and a fee-based model for its legacy business. The now-defunct Armour pursued a similar model, having previously operated effectively as a fund manager – originating deals and managing the run-off of books it acquired using primarily third-party capital.
“Syndication is commonplace in the live market, whether for complex or large risks or whole accounts,” said Marco CEO Simon Minshall. “The benefits to both sides are clear – risk diversification, lower costs and speed. Why isn’t the legacy market syndicated? Perhaps because it’s still evolving but this is the natural next step.”
A syndicated market would create a more sustainable market, because it offers a better competitive dynamic, Minshall continued.
"For the mid-market to compete on bigger deals, and to lock in the higher yields going forward, working together [to bid for deals] is potentially attractive right now"
Compre CEO Will Bridger
“Carriers would more likely walk away from unattractive deals because they know they’re going to see many others. The market as a whole could do bigger, more sustainable deals with less counterparty credit risk for the client.” The Lloyd’s run-off market is a perfect example of where deal syndication could work well, he added.
Collaboration on deals would also allow for the mid-market to compete with the largest players and break down the tiered market which is starting to emerge in the run-off space.
With interest rates currently on the rise, this is an opportune moment for carriers to benefit from higher yields on larger books of business.
“For the mid-market to compete on bigger deals, and to lock in the higher yields going forward, working together [to bid for deals] is potentially attractive right now,” said Compre CEO Will Bridger. “And, in principle, I think there's no reason why we shouldn't – especially where claims handling isn’t transferred from the cedant.”
Barriers to execution
However, there is an argument that these benefits are diminished for the largest players in the space – which can presently manage larger deal sizes alone, without the need to spread the risk.
Deals can also be structured where the ultimate limit at risk – and the capital required to support that limit – is lower.
There has therefore to date been little incentive for larger players to participate in shared deals with their legacy peers. However, as deal sizes consistently get bigger and more frequent, capital will increasingly become a determining factor in how the largest players choose to operate.
“This is a capital-intensive business,” said David Ni, chief strategy officer at Enstar. “We [Enstar] have been pretty efficient on it so far, but the big deals have a big impact on capital.
“So if a partnership could open up possibilities where we could lower the cost of capital, or be more capital efficient, while potentially being even more transactional in terms of the deals we take on, that could be interesting for us.”
Legacy acquirer sources told Insurance Insider that they felt the drive for syndicated deals would need to come from the brokers, acting in the interest of their clients.
However, broking sources in our canvass on the whole remained unconvinced of the need for deal syndication at present and said that, at a most basic level, there is enough capacity available in the space to meet client need.
A wave of a new entrants and private equity interest into the legacy market has created a space which is abundant with capacity for deals – and this has pressured pricing and returns.
In the space of just over 10 years, the legacy market has gone from something similar to a duopoly to a space with upwards of 10 players, including eight or nine that can be relied on to compete very consistently for assets.
“I think on some of these bigger transactions [a syndicated deal structure] could be interesting,” said Ben Canagaretna, managing director for corporate advisory and solutions at Acrisure Re. “If [a lead-follow model] opens the door for more capital, which means more supply and lower pricing – all things being equal – then that could increase competition.
“But I don’t think there is necessarily a real need for it now, frankly, because like I said, on the deals we've worked on there is adequate number of interest parties to get the deals done. And you don’t really hear much around failed transactions these days – just ones that are poorly run which can lead to suboptimal outcomes for the client.”
"I don’t think there is necessarily a real need for it now... on the deals we've worked on there is adequate number of interest parties to get the deals done"
Ben Canagaretna, managing director for corporate advisory and solutions at Acrisure Re
“I don’t think there is necessarily a real need for it now... on the deals we've worked on there is adequate number of interest parties to get the deals done.”
Brokers speaking anonymously to this publication also said they failed to see how multiple legacy acquirers would be able to come to a consensus on pricing in order to collaborate on deals.
One broker pointed out that they had seen instances where the submitted pricing for a bid can range to the highest bid being double or more of that of the lowest bid. Part of the challenge here is that each carrier prices its internal rate of return on deals differently, and depending on the makeup of their portfolio, can price in varying levels of diversification benefit.
However, there has also historically been cultural challenges to effective deal syndication – namely that the run-off space is a niche community which has typically contained fierce competition, and at times, proud egos.
“At times in the past there has been an element of schadenfreude when things go wrong at rivals, and a sense that everyone thinks that they are the best at everything – which isn’t really possible,” one legacy source said. “But I think that is changing.”
The number-one thing clients are looking for is quality security at good value, explained Linda Johnson, partner at TigerRisk. The second-most important aspect is simplicity.
"But overall, [with syndicated deals] I think we are trying to solve a problem which doesn’t exist"
TigerRisk partner Linda Johnson
“Clients are doing these transactions to free up executive time. And as soon as you multiply from one to two counterparts, you've multiplied the amount of required executive time. It’s an extra layer of complication.
“So in order for a syndicated transaction to be preferential it is going to have to be better value, and the administrative burden cannot be excessive.”
She continued: “If you stand back and look at the rational evaluation of what is missing in this marketplace, it’s missing talent.
“There is a Ferris wheel where everybody's switching companies, and that's because we just don't have good pipeline of talent coming up the system. If you [as an investor] want to invest in this space, and you want great talent, then lead-follow is a great system. But overall, [with syndicated deals] I think we are trying to solve a problem which doesn’t exist.”
Consortia over lead-follow?
A number of legacy market participants told Insurance Insider both on and off the record that they thought the likeliest form of deal syndication would come in the form of bid consortia, with a number of acquirers coming together to submit a joint bid for a portfolio.
Sources largely agreed that the above collaboration was a more probable first step in the syndication of run-off risk, rather than a lead-follow structure which mimicked the live market.
Most sources felt legacy business was too nuanced and complex for the development of a lead-follow market, given that carriers would feel the need to “shadow” on due diligence, eroding much of the efficiency benefit the model could afford. The divergence in pricing across the market was also cited as another key barrier.
The creation of bid consortia would not be a huge step forward from the partnership deals – such as those between R&Q and Axa LM – seen in the past, although some sources suggested that this could be extended to three or more parties in one consortium.
However, crucially, it would require prior agreement on who would “lead” the consortium on pricing and claims handling. In turn, this would need rivals to acknowledge competitors’ strengths in different areas of expertise.
When questioned on how the consortia partners would find alignment on pricing, Compre’s Bridger said: “Everybody has a slightly different perspective on risk. But a second view on a book of business is not a bad thing, either.”
As examples, sources pointed to Compre’s track record in executing asbestos deals, Enstar on workers’ compensation and Darag’s specialism in European motor.
Enstar’s Ni said: “We have partnered with a number of counterparties, so it is in our DNA, but not yet with another legacy carrier to date.
“The first consideration for us is values have to align. Our perspective is, this is a long-term game, we have to be repeat players and good citizens within the industry. When we take something on, we need to be responsible for the outcome.”
He continued: “The second element we would consider is if they had capabilities in certain areas where we don’t have boots on the ground, or that niche of expertise. There might be actually pockets of expertise we see as valuable that could come together.”
Darag CEO Tom Booth also stressed that syndication could be really compelling if each party brought a skill set to the table others did not have.
"I do think as a market we need to be more collaborative than we have in the past, and I think there are a new breed of leaders who are willing to consider that"
Darag CEO Tom Booth
“There’s a subset of deals whereby, for example, we [Darag] don’t have the risk appetite for the whole deal given the potential concentration risk, and we show it to a partner with a bigger balance sheet because they can provide some of the funding alongside us.
“They [then] have access to new types of deals which we are able to source from our local network or on a bilateral, repeat business basis.”
A yet more attractive set of opportunities could be whereby each party acknowledges they wouldn't take the whole cross-class portfolio because they don't have the expertise for a certain part of the book, Booth continued.
“You can then split it between the parties and there is a natural division of who handles what based on your specialism, and then you price it competitively collectively based on prior experience and best-in-class claims handling.”
He concluded: “I do think as a market we need to be more collaborative than we have in the past, and I think there are a new breed of leaders who are willing to consider that. If we can work as a marketplace and actually improve the way that we do things, and the value proposition to the client, that is a real positive.”
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