How insurers can improve financial agility with a loss portfolio transfer (LPT)

Find out how an LPT can help an insurer clean up their balance sheet, achieve capital relief, and remove historical liabilities.

For insurance carriers and underwriters, managing capital efficiently while mitigating risk is more critical than ever. One effective strategy to achieve this is through a loss portfolio transfer (LPT), a solution that enables carriers to remove liabilities from their balance sheets, freeing up capital and resources. In this article, we’ll explore the related challenges you face as an insurance carrier or underwriter, why an LPT is such a valuable tool, and how Costero Brokers, with our deep expertise and connections within the reinsurance market, can guide you through a successful LPT.

Financial challenges facing insurance companies today

As an insurance carrier or underwriter, you are no stranger to the pressures of balancing profitability with regulatory requirements and capital management. Your key challenges in this will include:

• Cleaning up the balance sheet: One of your main concerns is likely to be cleaning up your balance sheet, particularly when legacy liabilities linger. Old claims or underperforming portfolios not only tie up capital but also cloud the true financial health of your company. This challenge is particularly acute when you need to present a clear, robust financial position, such as ahead of a merger, acquisition, or restructuring.
• Capital relief: In addition, capital relief is a crucial driver in your operations. With Solvency II and other regulatory frameworks demanding ever-increasing capital reserves, freeing up locked capital is essential to maintain competitiveness and invest in new opportunities. However, without the right strategies, this process can be slow and fraught with complications.
• Removing historical liabilities: Many insurance portfolios contain “long-tail” liabilities, where claims take years, or even decades, to fully settle. These historical liabilities not only present an unpredictable future financial burden but can also consume resources that could be better utilised elsewhere. Removing such liabilities can significantly reduce your risk exposure and provide peace of mind.

What Is a loss portfolio transfer (LPT)?

A loss portfolio transfer (LPT) is a financial transaction that allows you, as an insurance carrier, to transfer the liabilities of a specific portfolio to a reinsurer. This includes all future claims arising from the portfolio’s historical policies. In return, you pay a premium to the reinsurer, who then assumes the responsibility for managing and settling the claims.

Simply put, a loss portfolio transfer acts as a “reset button,” enabling you to offload your exposure to legacy liabilities, free up capital, and focus on more profitable aspects of your business.

Why should insurers consider a loss portfolio transfer?

As an insurer, if you’re looking at strategies to optimise your financial position, an LPT with a specialist reinsurer can provide several distinct benefits. Here’s why you should consider an LPT:

• Capital optimisation: By transferring liabilities to a reinsurer, you can immediately release capital that was previously locked up to cover those future liabilities. This can offer significant relief under regulatory frameworks like Solvency II, helping you meet capital requirements without having to raise additional funds.
• Removing volatility and risk: Old portfolios, particularly those with long-tail exposures, can introduce significant volatility to your financials. A sudden surge in claims can disrupt even the most carefully planned financial strategies. By transferring this risk to a reinsurer, you can mitigate the impact of unexpected claims and better stabilise your company’s future.
• Reduced administrative burden: Handling legacy claims can be resource-intensive, draining both your operational efficiency and financial performance. A successful LPT not only offloads the financial risk but also shifts the administrative burden of managing these claims to the reinsurer, freeing up your team to focus on more productive activities.
• Enhanced financial position for strategic moves: If your company is preparing for a sale, merger, or acquisition, cleaning up the balance sheet through an LPT can make you more attractive to potential buyers, partners or investors. It simplifies your financial picture and removes the uncertainty of legacy liabilities, which could otherwise hinder a successful deal.

How Costero can support you with your LPT

Working with an expert like Costero Brokers can make all the difference in executing a successful LPT. Here are some of the reasons why we’re your natural partner in this area:

• Expertise in loss portfolio transfers: Costero Brokers’ extensive experience with LPTs ensures that we can help you navigate the complexities of these transactions. We understand the intricacies involved, from negotiating with reinsurers to structuring deals that align with your specific financial goals.
• Strong relationships with reinsurers: We have close, established relationships with specialist reinsurers, including those at Lloyd’s of London and other key markets. These connections allow us to access the most competitive terms for your LPT, ensuring you achieve a solution that meets your objectives in terms of both cost and risk transfer.
• Tailored solutions: Every insurance carrier’s needs are different, which is why we take a bespoke approach to each LPT. We work closely with you to assess your portfolio, evaluate the risks, and present a range of potential solutions. Our goal is to help you find the right LPT structure that delivers both capital relief and operational simplicity.

How to start thinking and discussion about your LPT

If an LPT sounds like it could be beneficial, here are a couple of practical steps you can start with:

1. Identify potential portfolios for transfer: Begin by reviewing your current portfolios and identifying blocks of business that could benefit from an LPT. These are typically older portfolios with long-tail claims or those with a history of volatility.
2. Consider your company’s financial objectives: If your company is preparing for a sale, merger, or significant restructuring, an LPT could be a strategic solution. Your leadership team may not be aware of the advantages an LPT could offer, so starting a conversation around this can add real value.

Let’s talk about how an LPT can help you

Your company’s legacy liabilities don’t have to define your future, so let us help you clear the path forward. At Costero Brokers, we’re ready to support you towards a successful loss portfolio transfer. Whether you’re looking to clean up your balance sheet, optimise capital, or remove long-standing liabilities, we have the expertise and market access to deliver the right solution for you.

To learn more about LPTs and our services for global facultative and treaty insurance, and discuss your goals, please get in touch with our experts Mark Jesson and David Pratt at Costero Brokers.