Run-off’s evolution: Legacy market grows its influential
AM Best’s Dan Hofmeister explains how Bermuda’s legacy specialists are turning run-off from a dumping ground for difficult liabilities into a strategic ‘hygiene test’.
For years, run-off was viewed as a niche corner of the insurance industry, associated primarily with legacy liabilities, distressed portfolios and some of the market’s most difficult claims.
Today, that perception is changing. As social inflation continues to pressure casualty reserves, insurers seek greater capital efficiency and, as new forms of capital enter the market, run-off specialists are playing an increasingly influential role across the re/insurance value chain.
According to Dan Hofmeister, associate director at AM Best, the sector’s evolution has transformed it from a repository for unwanted liabilities into a strategic market that not only absorbs legacy exposures, but also provides a critical benchmark for reserve adequacy, claims management and underwriting discipline. For Bermuda, home to some of the world’s leading legacy specialists with a regulatory framework designed to facilitate complex transactions, that shift could prove particularly significant.
Market performing a ‘hygiene test’
Traditionally, run-off insurance was often viewed as a dumping ground for distressed and latent liability portfolios such as asbestos exposures, sexual misconduct claims and many broader legacy liabilities carrying the potential for what Hofmeister described as “real tricky loss reserve claims”.
For many market participants, run-off still carries “the perception that it’s just blocks of really bad business”. Yet that view is increasingly outdated as specialist legacy acquirers continue to evolve into strategic partners that help insurers optimise capital, streamline operations and refocus on their core business.
Hofmeister explained that the run-off market is “hard to characterise within this broader frame of insurance and reinsurance. It’s almost its own market”.
Because operating performance trends emerge over far longer periods than in traditional insurance businesses, AM Best places greater emphasis on balance sheet strength when assessing run-off companies. Particular attention is paid to reserve adequacy, liquidity and a company’s ability to withstand adverse reserve development.
Hofmeister noted that even when acquiring portfolios viewed as problematic by other market participants, run-off specialists are “repricing them as they come in”, meaning they are not necessarily exposed to the same challenges that originally affected the seller.
As AM Best expanded its coverage of specialist legacy carriers, Hofmeister said he was “shocked at how good those claim shops and their due diligence process actually are”, to the point that he believes many are “almost setting an industry standard”.
He goes further, suggesting run-off is increasingly serving as a form of market hygiene test. Supported by specialist talent and sophisticated due diligence processes, legacy carriers are performing a function that extends well beyond merely absorbing unwanted liabilities.
In that sense, the legacy market is providing an independent assessment of reserve adequacy, claims handling and latent exposures across the wider industry.
Given that run-off performance cannot be directly compared to other lines of business, Hofmeister stressed the importance of strategy and leadership. Unlike traditional insurers, where underwriting cycles and catastrophe events can quickly alter performance, success in run-off is often determined by management teams’ ability to source opportunities, walk away from unsuitable transactions and execute detailed due diligence processes.
He attributed much of the sector’s success to these specialist teams, noting their ability to secure deals, say no when necessary and manage complex transactions responsibly is a key differentiator.
Hofmeister also believes one of the most valuable functions of the sector is “looking deep into the claims processes, not just with how they’re setting reserves, but how they’re going about settling claims and giving that hygiene test to the market. I think that role will be necessary, especially given what we’re seeing with social inflation in the US”.
Considering that reality, he stressed: “I think it’s healthy for these companies to have relationships with the run-off carriers to at least sense check what they’re doing and make sure they’re not missing something.”
Social inflation pressures mount
That role is becoming increasingly important as casualty markets grapple with social inflation and uncertainty surrounding future loss trends.
Social inflation remains one of the greatest long-term questions hanging over casualty reserves. Efforts to reform litigation systems and address lawsuit abuse, excessive insurance litigation and runaway settlement costs have gained momentum in certain jurisdictions, particularly Florida and Georgia. But despite these initiatives, Hofmeister believes the industry remains divided over whether current pricing adequately reflects the underlying risk.
“I don’t think anyone expects social inflation to slow down in the near term, which is a bit disheartening. It does seem like we’ll probably head to casualty being unaffordable for the policyholder before we run into a situation where companies are actually going to full-scale pull back, because the rate keeps coming in,” he said.
According to Hofmeister, a major debate in the casualty market today centres on whether pricing is keeping pace with claims inflation.
He explained there is a growing divide between companies that believe current rate increases are sufficient and those that argue loss trends are still deteriorating faster than pricing can compensate for.
“Some companies will tell you the rate’s good enough, and some will tell you the loss trends are worse than the rate that’s being taken,” he said, adding that this remains surprising given the volume of rate increases already achieved across the market.
While he does not view the situation as catastrophic, he believes the real challenge lies in determining whether current casualty business will remain profitable over the long term.
The implication for the legacy sector is significant. Today’s casualty portfolios could become tomorrow’s run-off transactions, particularly if social inflation continues to outpace pricing assumptions.
Hofmeister warned that “without wide-scale reform, the disconnect will keep happening”.
New capital, structures and questions
After years of conversation, the casualty ILS market has seen an uptick with the first dedicated fund launched in 2021 and big players, including Everest via Annapurna Re sidecar, now entering play. Hofmeister views some of these developments cautiously.
“The only way I see casualty ILS making sense for the market is if you’re doing some kind of asset play within that structure,” he said.
Part of his concern stems from the relationship between available capital and long-tail liabilities: “The idea of assets looking for liabilities isn’t the most reassuring concept,” he explained.
As increasing amounts of private equity and private credit seek opportunities within insurance, Hofmeister believes there is a risk that capital availability could begin driving transactions rather than the underlying liabilities themselves.
As a result, the emergence of fronting arrangements within the legacy sector is attracting attention.
Historically, large run-off transactions were undertaken primarily by well-established and highly capitalised specialist acquirers. However, new structures are appearing, including transactions involving fronting carriers and non-traditional balance sheets.
While innovation has long been a hallmark of the Bermuda market, Hofmeister questioned whether all participants fully appreciate the risks involved.
“I’m not sure to the extent that these fronts understand the risks they’re undertaking here,” he said.
The concern is not unique to run-off. Fronting arrangements have generated debate across both the insurance and reinsurance sectors. However Hofmeister believes the issue carries additional significance when dealing with complex long-tail liabilities and reserves that might already have experienced adverse development.
He noted that some recent transactions have involved substantial reserve transfers moving on to balance sheets that are less familiar to the broader market.
“Fronting in the run-off sector has raised flags, where you have reserves that have been problematic, and all of a sudden they’re going to balance sheets we don’t know,” he said. “I think that could be highly concerning if it goes south.”
The question facing the market is whether these new sources of capital and transaction structures are improving efficiency and capacity, or introducing new counterparty risks that might only become apparent over time.
Bermuda’s enduring advantage
While the risks facing the run-off market continue to evolve, Bermuda’s position as a global centre for legacy transactions appears firmly established.
Hofmeister was unequivocal in his assessment of the island’s regulatory environment.
“The BMA, of all the markets out there today, is probably the premier one in terms of striking balance between innovation and oversight,” he said, describing it as “a real stand-up regulator”.
The reason Hofmeister feels so strongly about the strength of Bermuda as a hub for run-off, besides having Solvency II equivalence and being a US National Association of Insurance Commissioners (NAIC) reciprocal jurisdiction, is due to the regulator’s willingness to work with companies to develop the right solutions.
“I think the BMA’s willingness to work with these re/insurers is definitely facilitating business a lot better, and whenever you make transactions like those seen in run-off, that tend to be complicated and nuanced, it’s going to be highly criticised, so it’s beneficial to have a strong regulator backing it,” he said.
He referred to Bermuda’s unique concentration of talent, capital and risk expertise as a melting pot. The island’s ecosystem allows insurers, reinsurers, ILS participants and legacy specialists to operate within close proximity, helping facilitate transactions that often take years to complete.
That concentration of expertise is particularly valuable in run-off, where success depends heavily on understanding claims development, reserve uncertainty and transaction structuring.
Run-off itself has become an increasingly attractive destination for specialist talent. Given the technical expertise required, Hofmeister described the sector as a “revolving door of good talent”, producing leaders who regularly move into senior positions across the wider insurance and reinsurance market.
Concluding on Bermuda’s strengths, Hofmeister noted that “you probably couldn’t do a lot of the business that runs through Bermuda in a UK-regulated, or even a US-regulated, environment”.
As casualty pressures persist and the industry constantly seeks efficient ways to manage legacy liabilities, the importance of the run-off sector is only likely to grow. Yet the market is entering a new phase. While social inflation and reserve uncertainty continue to create opportunities for specialist acquirers, the emergence of casualty ILS structures, private capital and new fronting arrangements are introducing fresh questions about where risk ultimately resides.
For Bermuda’s legacy market, the challenge will be balancing innovation with the discipline, scrutiny and due diligence that have become the sector’s defining strengths.
Dan Hofmeister is an associate director at AM Best. To find out more about AM Best, visit web.ambest.com
To read the full issue of Bermuda Risk Review 2026, click here.
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