The Anatomy of a Transaction
A reflection on the legacy market journey and what delivers success for all stakeholders.
Transparency emerged as a recurring theme to a successful legacy transaction during the educational session, “The Anatomy of a Transaction” moderated by AIRROC’s Executive Director, Carolyn Fahey, at the October networking forum in Jersey City. Offering insights from their respective roles in the legacy sector as acquirer, lawyer, broker and investment manager, the panel consisted of Will Bridger, CEO of Compre, Dan Gerber, Partner & Chair of the Insurance Solutions Group at Gerber Ciano Kelly Brady LLP, Linda Johnson, Head of Legacy Practice at TigerRisk Partners, and Kevin Sarafilovic, Managing Director at British Columbia Investment (BCI) Management Corporation.
The increasing attraction of the legacy sector for investors prompted Carolyn to begin the session with the question, “What makes us such a good investment?” From an investor’s perspective, Kevin Sarafilovic described three main drivers attracting investors: growth within the sector, a viable long-term investment portfolio, and an attractive risk adjusted return. From the sector side, successfully closing out claims quickly, efficiently, and ultimately for less than the initial held reserves along with adequate pricing is necessary to offset the weaker investment returns from a prolonged low interest rate environment.
On creating the dynamics for a successful transaction, the best deals were identified as those where the cedants have done their own pricing, are transparent with the data, and are clear on their objectives. In contrast, when the data is more challenging and there is a lack of transparency, the price will be higher. On developments in transaction structure, the panel noted an increase in ADC activity over the last 12 months with such transactions being more capital driven as opposed to LPTs, which tend to be more cost and operational driven. Great opportunities also exist with the momentum in the regulatory space involving IBTs and Division laws. The consensus among the panelists were that these legislative options offer more flexibility and serve as another part of the toolkit for an entity to think about structuring their business. More recently, interest from a broader spectrum of potential legacy sellers looking to test the sector do so with little or no experience in securing legacy transactions. As a result, there will be more emphasis on brokers to facilitate this educational component with their clients to achieve successful transactions.
In response to the changing players in the legacy sector, the panel discussed the fundamental importance of dedicated and disciplined participants with a solid track record who are also committed to protecting the seller’s reputation. When dealing with complex legacy portfolios, disciplined underwriting, proper pricing, and diversification are essential. For some companies, part of getting it right is solely focusing their resources on legacy deals alone rather than in conjunction with a live underwriting environment. As for added capital, with the trillions of capital in the insurance/reinsurance market, the legacy sector can play its part in recycling capital. Going forward, with continued growth and competition on the horizon, investor backed sidecars have the potential to play a key role in the legacy sector.
Acknowledging the legacy sector’s incredible display of resilience as it continues to emerge and evolve in a post-pandemic economy, Will Bridger anticipates the next five years to be very exciting and expressed a commonly shared sentiment among those active in the sector, “it’s a fascinating place to be.”
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