XL – GreyCastle deal brings more third-party capital to life reinsurance

The transaction announced yesterday by XL Group that Bermuda based GreyCastle Holdings is acquiring its subsidiary XL Life Reinsurance (SAC) Ltd for $570m in cash, brings more third-party investors into the life reinsurance market.

GreyCastle Holdings Ltd., which we do not at this time know very much about, formed and registered in Bermuda in early April. Interestingly the backers of GreyCastle Holdings are largely investors of the type increasingly found in the insurance-linked securities (ILS) market, specifically large family offices and university endowments .

These are long-term investors, the kind of investors that ILS managers like to attract to their funds and strategies as they tend to have a long-term commitment to asset classes. Also these types of investors are increasingly looking for returns which have a low-correlation with broader economic indicators, which of course insurance and reinsurance business ranks very highly as providing.

The transaction, once completed, will see XL Life Reinsurance (SAC) Ltd, which will then be owned by GreyCastle, reinsure the majority of XL’s life reinsurance business via a 100% quota share reinsurance agreement.  XL said that this covers a substantial portion of its life reinsurance reserves.  XL’s life reinsurance business has been in run-off since 2009.

“While complex, as driven by the nature of our life reinsurance businesses and our objective of maximizing value for XL shareholders, the real benefit of this transaction is clear and simple: XL has now dealt with the vast majority of its life reinsurance business, and has thereby taken another strong step forward in its drive to deliver top-quintile return on equity and book value growth from its core property and casualty operations,” said Mike McGavick, CEO of XL.

So XL has found a way to remove the majority of its life reinsurance business off its books, while a group of institutional investors have found a way to access and run-down a large portfolio of life business, likely at an attractive price. The GreyCastle Holdings investors will realise any remaining value from the underlying life reinsurance business, likely targeting an ILS type return we would imagine.

For XL this is perhaps a very savvy strategy, enabling it to bring third-party capital into its own business sphere enabling it to free-up capital while offloading the liability for much of the remaining life business to the capital markets. As XL, and other insurers, ramp up their use and management of third-party capital we could see more of these types of transactions in future.

More benefits for XL were described by Peter Porrino, EVP & CFO; “This transaction meaningfully reduces the risk profile of the Company, which gives us additional flexibility to pursue capital management initiatives, including an expectation of buying back an additional $300 million of shares in 2014 over amounts previously contemplated.”

The investors and management behind GreyCastle will likely have spent a significant amount of time analysing the life reinsurance portfolio to ensure it is likely to return the investors a profit. This is yet another interesting example of institutional type investors and third-party capital accessing the returns of the reinsurance business in a low-friction manner.