Premia-Standard Syndicate deal challenges Enstar RITC market stronghold

The entrance of Premia into the Lloyd’s reinsurance-to-close (RITC) market will provide additional competition in a space which is ripe with opportunity yet has few active players.

On Sunday this publication revealed Premia was set to acquire the Standard Syndicate, edging out a joint bid from legacy carrier Compre and Mike Millette’s ILS fund Hudson Structured Capital Management.

If the deal is consummated, Premia would take on Charles Taylor’s managing agency and the run-off liabilities associated with Standard Syndicate 1884, gaining access to the RITC market at Lloyd’s.

To date the capital supply and pricing for Lloyd’s legacy deals has been constrained by the relatively small number of participants.

The RITC market is dominated by Enstar, which executes transactions via Shelbourne Syndicate 2008, however RiverStone and Randall & Quilter are also active in the space. Berkshire Hathaway and Vibe remain in the market but have been largely dormant for years.

Shelbourne is believed to have more than £3bn ($3.7bn) of reserves, after signing four RITC deals with AmTrust for the 2016 and prior years of account for Syndicates 1206, 1861, 2526 and 5820, covering £650mn of reserves. 

Enstar has also signed major RITC deals with legacy Novae and Neon, which accounted for a collective £1.26bn of reserves.

The Lloyd’s market is seen by legacy acquirers as an area of opportunity, as syndicates seek to rid themselves of significant run-off liabilities generated by the Corporation’s performance gap process.

Defunct syndicates could be another source of business, with nine syndicates and special purpose arrangements discontinued for 2019 for a range of reasons.

Lloyd’s has more than £50bn of reserves. These for around a decade generated favourable development of broadly 6-9 points annually, but this crashed to 2.9 points in 2017 before recovering modestly in 2018 to 3.9 points.

Given the likelihood that the reserving position has continued to deteriorate as lower rates earn through and casualty loss inflation picks up, legacy transactions could become increasingly attractive to Lloyd’s businesses.

Such deals would give carriers finality around their underwriting results, and would also free up additional capital at a time when rates on inwards business are improving and trade capital availability shrinks.

Previously, Lloyd’s required RITC transactions to encompass all business for a single year of account, but with the Corporation seemingly now willing to consider partial or early RITC deals, a diverse pool of legacy liabilities could come to market.

The opportunity is seen as even more enticing by legacy carriers given that the glut of UK employers’ liability reserves has largely been sold off and continental Europeans still seem reluctant to sell their run-off in earnest.

As such, a number of legacy acquirers have shown interest in entering the RITC market.

Armour attempted a complex entry at the end of 2017 in tandem with a bid for the Neon legacy book, but was ultimately bested by Enstar. It subsequently was one of the underbidders for Munich Re’s smaller Lloyd’s business Beaufort.

Other legacy players, including Catalina and Darag, are also believed to have long-term ambitions to enter the Lloyd’s market.

Before entering the bidding for Standard Syndicate, Premia also made moves to enter the RITC space and had secured “shelf” approval from Lloyd’s to launch a syndicate of its own.

However, there are costs to doing run-off, and financial as well as regulatory barriers.

Run-off operators tend to have relatively high return hurdles due to the potential downside risks, and for many would-be sellers the increase in certainty or capital efficiency may come at a price.