The majority of Lloyd’s businesses (77 percent) are considering legacy portfolio disposals, with more than half of firms based in western Europe (53 percent) expecting to make at least one sale in the next three years, according to Willis Towers Watson’s most recent annual insurance M&A survey*.
This represents a 42 percent rise in respondents interested in divesting operations compared to two years ago.
“Changing market conditions and the rise of a handful of well-capitalized legacy business acquirers have continued to ramp up interest in portfolio disposals,” said Andy Staudt, director at Willis Towers Watson. “We are aware of six to eight sizable firms across Europe with capital to spend, who are now in active competition for legacy deals.”
Willis Towers Watson noted that these deals not only include portfolios that are in run-off, but also those that no longer complement the overall strategic direction of a business or where the long-tailed nature of the claims requires specialist management skills.
“This competition, together with the upward trend in insurance M&A activity in the last two years, has created opportunities for firms with prospective legacy portfolios and shifted the focus in the legacy market on to disposals,” said Steve Mathews, director at Willis Towers Watson.
“Supply-side push effects, such as the increased certainty about Solvency II’s impact on capital, seem likely to bring more deals to the table compared to recent years. Legacy portfolios also eat up a lot of capital for a relatively low return, which means putting a book of business into run-off is now increasingly a strategic choice,” he added.
However, disposal may not offer the right balance of capital release, complexity, or cost for all insurers, and may even introduce other business risks, the company said.
For those insurers considering disposal as an option, Willis Towers Watson recommended the consideration of all options “that maximize the value of run-off and non-core operations, such as outsourcing, proactive run-off and reinsurance.”
“There are a number of ways to deal with legacy books. The cleanest exit is through a sale, but reputational risk remains a concern for many insurers, especially when handing long-term customers to another company that may be aggressive in pursuing settlements,” said Staudt.
* The 2015 survey of senior insurance executives was conducted by Willis Towers Watson M&A Risk Consulting in conjunction with Mergermarket.
Source: Willis Towers Watson