This growth reflects a number of factors, including the fundamental underlying increase in insurance business being transacted across the world and the knock-on effect for policies entering run-off, either through natural expiry or strategic exits as insurers discontinue non-core or unprofitable business. It is estimated that over 50% of the growth since PwC’s last survey has emanated from North America.

The past 18 months have seen high levels of deal flow for all transaction sizes, but PwC notes an increasing number of transactions valued at over $300 million (£257m). These deals have been driven by strong demand from insurers for capital relieving legacy solutions, supported by a plentiful supply of capital from investors, which acquirers have used to take on larger and more diverse portfolios.

While PwC estimates that insured liabilities have reached $960bn (£822.5bn), it also highlights material legacy liabilities held on the balance sheets of manufacturing companies and other non-insurance corporations, estimated to be $68bn (£58.2bn) in size globally. Established run-off acquirers and new bespoke entrants are increasingly targeting this sector as corporations look to gain finality for long running asbestos and environmental exposures that continue to be a drag on financial performance.

While significant opportunities exist, the legacy sector also faces some challenges, and increased uncertainty as a result of inflation will be a factor for acquirers in valuing reserves and pricing transactions. The highly competitive nature of the environment means that maintaining pricing discipline is critical when assessing opportunities to generate target returns.

Andrew Ward, liability restructuring partner at PwC UK, commented: “As the sector has successfully demonstrated for some time now, pro-active run-off management can free up the capital tied up in legacy books and allow live insurers to focus on writing core profitable business.

“We see further opportunities for run-off acquirers as insurers assess portfolios in line with strategic objectives and the ongoing inflationary environment may be a catalyst for more activity as insurers look to alleviate capital pressures associated with retaining non-core books.

“However, the run-off market itself is not immune and is likely to face similar pressure on its reserves, meaning players will need to be creative and strategic in how they operate in this environment.”

Competition and pricing trends

99% of respondents to PwC’s survey said the market has medium or high levels of competition, and the growing number of players and availability of capital in the market means many deals are becoming increasingly competitive. In some instances, acquirers are being forced to show more flexibility with their pricing strategies in order to compete.

However, PwC notes that acquirers’ underwriting discipline has generally remained strong and this continues to be vital for the market’s reputation and continued development. The vast majority of survey respondents believe that acquirers are currently pricing legacy deals at target unleveraged internal rates of return of between 10% and 17%. This continues to represent an attractive outcome and is likely to lead to further investment in the sector.

Mr Ward continued: “The market is seeing an unprecedented number of opportunities across all segments from very large loss portfolio transfers to small captive sales and increasingly, corporate liability deals. We are seeing greater levels of segregation and specialisation amongst the acquirers as a result and whilst competition in the $100m (£85.5m) to $300m (£257m) deal size range is fierce, there is plenty to keep everyone busy.

“The momentum we’ve seen over the past three years shows no sign of subsiding. The ongoing professionalisation of the sector, supported by strongly capitalised buyers will see the sector thrive as long as pricing discipline is maintained. Overall the future is bright and we should expect to see deal numbers rise and the size of deals grow.”

New targets and lines of business

Survey respondents selected general liability, property and casualty, and workers’ compensation as the lines of business most likely to attract interest in 2022. Motor and financial lines make up the top five, reflecting the growing appetite for younger and shorter tail exposures.

There remains a great deal of untapped potential in the US and European markets, especially with many insurers and reinsurers currently assessing what business is core and non-core. Elsewhere, the market is slowly beginning to see increasing awareness and acceptance of run-off solutions in new geographies and new classes of business.

Mr Ward concluded: “The run-off market continues to evolve and establish itself as part of the mainstream insurance sector. Deal activity in the third quarter has been encouraging, with activity in all of the major markets and a number of acquirers transacting.

“We are seeing an ever more diverse range of risks reaching the run-off market, including far more recently underwritten business and the pipeline looks strong for the foreseeable future.”