Legacy market shows resilience

Legacy insurance, once the preserve of distressed companies, has evolved into a vital risk and capital management tool for re/insurers, with Bermuda-based companies at the forefront.

This evolution was graphically demonstrated by the decision in July by investment firm Sixth Street and other investors to acquire Bermuda-based industry leader Enstar for $5.1 billion.

That decision, through which publicly-traded Enstar will be taken private, demonstrates how sophisticated investors rate the value of legacy insurers. 

PwC, which has been tracking the growth of the sector for 15 years, said in its Global Insurance Run-off Survey 2024: “When the first edition of this survey was published, the term ‘run-off’ evoked images of distress for insurance companies, often related to the tidal wave of asbestos claims that once threatened the London and Lloyd’s Markets.

“The idea of the legacy market developing into a core element of the insurance lifecycle, providing an outlet for insurers to safely dispose of non-core business lines and generate capital relief seemed a long way off.”

That day has come. According to PwC’s 2024 Survey: “We estimate that global non-life run-off reserves are $1,014 billion, a 6 percent ($53 billion) increase since our last Survey. This is the first year our estimate exceeds $1 trillion. This Survey’s estimate is based on data as at YE2022, and the last estimate was based on data as at YE2021.” 

Bermuda is widely considered to be the leading domicile for legacy solutions, according to PwC.

Major players in the sector include Enstar, Compre, RiverStone International and BMS Group. They came together in April this year to form the Insurance and Reinsurance Legacy Association (IRLA) Bermuda chapter with the goal of amplifying the sector’s voice on regulatory and other issues.

IRLA estimates its members manage $30 billion of property and casualty insurance liabilities in Bermuda while employing more than 100 people on the Island.

PwC predicted that the segment would continue to prosper, adding: “We expect business that has recently gone into run-off to be more profitable than business written during the softer years of 2014 to 2018. 

“This may result in greater potential reserve releases, and an accompanying incentive for insurers to accelerate those releases through legacy solutions.”

In 2023 there was a flattening of activity in the market, with a total of 30 publicly announced non-life run-off deals, with an estimated $8.1 billion of combined gross reserves transferred to legacy market participants. In 2022 49 deals were valued at the same value—$8.1 billion.

2023 included a record-breaking first quarter, with Enstar, RiverStone and Compre each announcing $1 billion deals. A further 19 deals were announced in the rest of the year. 

A central role

PwC Bermuda partner Matt Britten said much of Bermuda’s success in the sector is due to the role of the Bermuda Monetary Authority. 

“There has been an increased appreciation from cedants and legacy acquirers of the benefit of having the same regulator on both sides of a deal,” he said. “Live insurers will typically incorporate their business and their underwriting platform in Bermuda.

“As a result the risks underwritten will be in the same jurisdiction as acquirers who buy these portfolios, consolidate their risk, and expand accordingly.”

Britten noted a lack of tangible new capacity entering the Bermuda market in 2023 , which he attributed to competition for capital and changing deal structures and deal motivations, including the increase in capital relief and more bespoke deals.

It is too early to say whether 2024 will continue that trend, but the market remains active while there have also been signs of consolidation.

DARAG, which specialises in captive insurance legacy insurance solutions, announced in August that it was selling its Bermuda and North American operations to RiverStone to focus on its European business.

Enstar, which signed a $1.9 billion deal with QBE in 2023, agreed a further loss portfolio transfer of $376 million in August with the global insurer. In June, it agreed to a $1.7 billion adverse development cover agreement with Insurance Australia Group.

Bermuda-based Carrick, which set up a Cayman subsidiary later in the year, signed a loss portfolio transfer with Brazilian insurer IRB(Re). Carrick was itself bought by Northlight QIAIF in January.

Compre acquired two portfolios of European casualty and motor liabilities in January valued at €200 million ($222 million).

Many companies are seeking to expand into new regions, with Enstar looking to continue to grow in the UK and Europe, while RiverStone, owned by Fairfax, bought Massachusetts insurer Electric Insurance Company to increase its US footprint. 

A number of market participants have withdrawn in the last 24 months. R&Q Insurance Holdings, which had a programme management business and a legacy business, went into voluntary 

liquidation as a means of effecting the sale of its programme management business.

Catalina Re transitioned from the legacy business to the life re/insurance business in 2023.

Tax matters

The introduction of Pillar II, the Organisation for Economic Cooperation and Development’s (OECD) global minimum tax, could also affect the legacy sector in Bermuda and the Cayman Islands, which to date are taking different approaches, PwC said.

Bermuda will introduce a 15 percent Corporate Income Tax in 2025, while Cayman has decided not to.

“Bermuda’s Corporate Income Tax system will allow the Bermudian authorities to collect tax revenues which, without such a regime being put into place, would be collected by tax authorities in other jurisdictions,” said PwC UK director Sarah Robinson.

“In contrast, the Cayman Islands has decided not to implement a corporate tax system despite international pressure, seeing it as a significant challenge to its reputation for being flexible and business-friendly.”

Robinson said some companies in scope might be able to continue to pay no tax for their Cayman operations, depending on their structure, but others were likely to be subject to “top-up” taxes in other jurisdictions, effectively being taxed on their Cayman earnings.

She warned: “The Cayman Islands’ decision could also expose them to the risk of being considered as a non-cooperative jurisdiction by the OECD and other international bodies, which could result in sanctions, reputational damage and reduced access to global markets and investors.”

Many observers are optimistic that Bermuda companies will continue to play a key role in the legacy market they helped to pioneer. 

“We expect Bermuda will continue to play a significant role in the growth and evolution of the legacy market due to the depth of talent and also its regulator,” Britten said in a PwC report in September 2023. 

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