XL offloads $22bn of run-off life exposure via reinsurance with RGA

XL Group has continued its downsizing of the life insurance aspects of its business, as it seeks to increase the focus on property casualty underwriting in the wake of its acquisition of Catlin, announcing a reinsurance deal with Reinsurance Group of America Inc.

“Over the past few years, through a series of strategic steps, we have made XL Catlin a stronger and more disciplined company focused on our core property & casualty operations.  This transaction will remove the vast majority of risk associated with our remaining run-off life exposures and we’re pleased to make today’s announcement as just one more step taken toward delivering and creating increasing value for clients and shareholders,” commented Mike McGavick, CEO of XL.

Demonstrating the attraction that companies like RGA have for large blocks of closed but still in-force life insurance policies, the company will reinsure around $22 billion of life insurance value in force, equating to approximately 290,000 policies. RGA will also administer the life business on XL’s behalf following a short transition period, the announcement said.

“This transaction supports RGA’s strategy of deploying capital by acquiring run-off life insurance blocks,” stated Anna Manning, President, RGA. “Our deep expertise and understanding of the life reinsurance market has provided us with the tools to secure an innovative solution for XL. We are pleased to announce the completion of the transaction.”

XL said that the reinsurance deal includes all of its U.S. Term Life reinsurance policy reserves and cedes to RGA 80% of the remaining life reinsurance premiums that were not included in the 2014 sale of its life reinsurance subsidiary, XL Life Reinsurance (SAC) Ltd. to investors led by GreyCastle Holdings, a deal that featured third-party capital.  XL’s life reinsurance business has been technically in run-off since 2009.

XL said that it expects to record a net GAAP loss of approximately $34 million associated with the transaction and that at September 30th 2015 there were total U.S. GAAP policy benefit reserves relating to this block of life reinsurance business of approximately $258 million.

For XL Group and XL Catlin this transaction cleans up the business profile and enables it to exit the majority of its life reinsurance business cleanly, with a total transfer of the policies in force and the administration of them.

Making a small loss on the deal seems a reasonable price to pay for RGA to administer this block of life business, enabling XL to move on and increase its new property casualty focus.

With the life business now all but closed, it is going to be interesting to see how XL as a group and XL Catlin in particular will work with third-party and ILS capital, to help it to grow the property casualty focus.

With a dedicated ILS asset management platform in place in New Ocean Capital Management in Bermuda, as well as the third-party capitalised Catlin special purpose syndicates at Lloyd’s it is going to be interesting to see how investors can participate in the firms growth and P&C focus.

Meanwhile RGA continues to accumulate life risks on its books, which suggests it will also continue to underwrite longevity reinsurance to offset the mortality exposure. In the past some of these closed life blocks could have been securitised, but that seems to have fallen from favour given the competitive nature of traditional life reinsurance capacity right now.