The Insurer TV: Split RITCs – the next evolution of Lloyd’s legacy?

Split reinsurance-to-close (RITC) transactions at One Lime Street have the potential to become as common as Part VII transfers in the UK company market with the support of both Lloyd’s and the Prudential Regulation Authority (PRA).

In the latest edition of The Insurer TV’s analysis programme, Prospective, Randall & Quilter (R&Q)’s group head of M&A Paul Corver discussed the potential for split RITCs at Lloyd’s to transform the transferral of legacy risks for syndicates.

With legacy transactions becoming increasingly sophisticated, Corver highlighted that “interests were changing” in the Lloyd’s market, with insurers looking beyond traditional RITC solutions, despite being a mechanism that has prevailed for “decades, if not centuries”.

Corver pointed to recent transactions at Lloyd’s that R&Q has undertaken with Hamilton and RenaissanceRe.

He suggested that some transactions could be followed by a split RITC, which would in effect mimic a Part VII transfer.

“Once a syndicate has laid off its risk and disposed of its liabilities through an ADC/LPT combination they can eventually do a split RITC and physically move those liabilities out to the receiving syndicate,” Corver said.

However, before such mechanisms can become commonplace regulatory approval is required.

“The challenge really is with Lloyd’s, Corver said. “We know it is something both Lloyd’s and the PRA are looking at and trying to get to grips with,” he continued.

“Both have an interest in the process to ensure that split RITCs can become as prevalent in the Lloyd’s market as Part VII transfers are in the company market.”

Given the uncertainty in the market stemming from Covid-19, Corver said split RITCs could present the “ideal” solution for Lloyd’s syndicates looking to dispose of certain portfolios.

“There may be a prevalence for open years coming forward for 2019 and 2020 years of account which are heavily exposed to Covid,” he said.

“If there was a way that syndicates could package up and move on the areas of concern and RITC the balance…then that could resolve some issues that may otherwise arise.”

Lloyd’s activity

Lloyd’s has been a hotbed of legacy activity in recent years and one of the most active markets globally.

As The Insurer has tracked, a host of transactions have been undertaken over the course of the past three years.

This has in part been driven by the remediation work at One Lime Street that began under the stewardship of former performance management director Jon Hancock.

The uptick in activity has also been spurred on by syndicates looking to release capital against a backdrop of more favourable market conditions and more recently by the Covid-19 pandemic.

Click below to watch the full episode of Prospective, where we explore the key drivers behind the increasing number of restructuring deals and heightened interest in the market, how solutions are evolving, new entrants and scale-ups as well the sector’s outlook.