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Deal moves liabilities from Lloyd's


LONDON—The first transfer of a book of nonlife business from a Lloyd's of London syndicate to outside the market is expected to be followed by other similar deals.

The recent shift of a book of U.K. auto insurance policies is likely to be the first of many as the London-based insurance market seeks to reduce its hefty liabilities from syndicates in runoff, experts say.

But such actions, which transfer the assets and liabilities from a Lloyd's syndicate to an insurance company outside the market, are expected to be limited to non-U.S. casualty business. Deals that involve complex casualty claims or U.S. policyholders are highly unlikely, according to Steve McCann, the London-based head of runoff business at Lloyd's.

Earlier this month, auto insurer Highway Insurance Holdings P.L.C. received court approval to transfer the business of its Lloyd's syndicates 37 and 2037 to a non-Lloyd's insurance company, Highway Insurance Co. Ltd. The transaction, which transferred the liabilities and assets of syndicate 37 and 2037 to Brentwood, England-based Highway, used a Part VII transfer mechanism.

A Part VII transfer is a court-sanctioned transfer of assets and liabilities from one insurer to another.

The Highway transaction puts only a small dent in Lloyd's sizable liabilities for open years, reducing the market's gross liabilities by just £50 million ($101.0 million). But while the number is small, the deal is important strategically as it shows Lloyd's is prepared to work with managing agents to allow Part VII transfers out of the market, Mr. McCann said.

World Trade Center and U.S. casualty claims have left Lloyd's with a large runoff legacy, according to experts.

Lloyd's has a huge amount of business in runoff and cannot afford to be idle about that business, said Paul Murray, director at nonlife actuary EMB Consultancy L.L.P. in London.

Gross liabilities for Lloyd's business in runoff at the end of last year were £4.7 billion ($9.26 billion), although this was down from £7.0 billion ($11.97 billion) at the end of 2005.

And according to Lloyd's, more business in runoff is likely to be soon transferred outside the market.

"We are expecting another Part VII transfer of Lloyd's business—similar to Highway in that it will be mainly U.K. business," said Mr. McCann.

And the Highway deal was not the first to use a Part VII transfer to move business out of the Lloyd's market. In 2002, Lloyd's allowed the Lloyd's life insurance business of Crowe Life to be transferred to Sterling Life Ltd., an unrelated non-Lloyd's insurer.

Lloyd's is now much more comfortable with Part VII transfers, according to Mr. Murray. "Lloyd's will be very selective about any transfers as it is fiercely protective of its reputation." It has been careful as it has chosen less volatile books—the first transaction was life and Highway was motor, he said.

Part VII transfers are not a panacea for Lloyd's runoff liabilities, said Mr. McCann, and they can go ahead only if the syndicates meet tough criteria.

"Highway was a book of direct U.K. motor business, and this is a world away from almost all other syndicates in runoff with casualty exposures," Mr. McCann said.

The three biggest issues for Lloyd's runoff liabilities are claims stemming from the terrorist attacks of Sept. 11, 2001, in the United States; personal accident spiral claims; and U.S. general liability claims, he added.

But Lloyd's does not think that Part VII transfers currently are suitable for U.S. casualty business, Mr. McCann said. " We cannot say never forever, but we have had legal advice that says there are real and material issues around Part VII transfers that involve U.S. policyholders and that would have to be overcome," he said.

In a bid to tackle the open-year liabilities, Lloyd's recently "tweaked" its rules to make it easier and less expensive for a third party to underwrite reinsurance to close. Reinsurance to close is the traditional way in which Lloyd's syndicates draw a line under the liabilities of a certain syndicate year of account, by reinsuring 100% of those liabilities into a new year of account, another syndicate or a third-party syndicate.

There is a great deal of interest in underwriting third-party reinsurance to close at Lloyd's, according to Mr. McCann.