Toxic liability. Troublesome operations. Offloading old business. Run-off books. These are some of the terms that are commonly used when talking about legacy transactions. But what if we were to think of retrospective as a capital management tool, one of many in the toolbox, instead?
Considering macroeconomic conditions and a turbulent interest rate environment, raising third party capital may not always be as simple or attractive as expected. A strategically thought-through legacy product, which is recurring in nature, and which unlocks dormant capital to fuel organic growth, presents itself as an attractive capital management solution in this context.
Just as companies assess their needs for prospective reinsurance protection to safeguard their balance sheets and shareholder capital, they should also review past decisions. Implementing an annual process to revisit and reassess actions taken some years ago can ensure a more strategic and efficient allocation of resources. Longer-term underwriting commitments can be distracting and tie up valuable capital which would be better deployed for profitable growth initiatives. Legacy isn’t a sign of unprofitable underwriting but rather a proactive step in managing liabilities and harmonising Regulatory and Rating agency relationships.
Our approach to legacy is designed to support the bottom line: helping our clients improve their capital position, coming out of any deal with more than just reinsurance capacity. We consider the client’s goals and identify if and where a legacy transaction is most suited to those strategic plans. Our transparent assessment of capital accretive solutions ensures that we advise the right product; our goal is creating value, not selling prepackaged solutions.
Large companies, funds and financial institutions have always called on diversified instruments to offset exposure, be it options, swaps or alternative derivative products. This allows them to buy themselves the ability to exit business while releasing capital that can be redeployed. We see legacy in the same way: we have a real opportunity to structure deals that create value for our clients and markets. A legacy product can be another way to hedge your performance and provide enhanced liquidity to shareholders.
In the past, we have seen underpriced deals in the legacy market that have ended up bringing with them a level of liabilities that was just too high. With more disciplined structuring, future transactions can provide a consistent flow of revenue and reserves. And it all starts with a long-term view, creating partnerships that make room for deals to have numerous iterations and multiple renewals, built using the bespoke approach that will best suit each carrier. Deals such as our recent transaction with Accelerant, where the legacy model is applied to live business, are one example of what the legacy market can do for carriers and providers alike.