RenaissanceRe's joint venture (JV) with Reinsurance Group of America (RGA) will bring a diversifying stream of asset management earnings to the Bermudian's third-party capital management arm, while also giving it access to a wider pool of investors.
Bermuda-headquartered life reinsurance vehicle Langhorne Re, unveiled last week, has initial capital commitments of $780mn and will target in-force life and annuity blocks.
Because of low interest rates and regulatory developments such as Solvency II, sources said the JV has identified closed blocks of liabilities on the balance sheets of global life insurers amounting to hundreds of billions of dollars.
The market opportunity stems from the increased capital required to support those closed blocks of policies as they run off over decades.
Many life insurers and pension plans would rather re-deploy capital currently supporting run-off liabilities to more profitable lines of business, sources explained.
"Closed books are eating up a lot of capital. If an insurer decides to stop writing fixed annuities it has to reserve capital to support that block. But it's not earning return on equity on new and growing business, it's just supporting business that is running off.
"They want to transfer that block to someone else and free up capital. It's a very similar concept to P&C run-off," said a senior industry source.
Because Langhorne Re is a Bermudian entity, it is likely to be able to offer competitive alternative solutions for assuming blocks of business by leveraging the island's zero corporation tax regime.
By investing assets supporting assumed liabilities in transactions over the long term, the vehicle will be able to benefit from the tax-free compounding effect as the closed blocks run off over time.
It will be able to pass some of the value of those enhanced deal economics to clients looking to offload the liabilities, which could give Langhorne Re a competitive advantage over some of the existing players in the space.
Langhorne Re has initial capital commitments of $780mn and is structured as a closed-end fund, with the potential for additional investment over the next year which sources said could top out at around $1bn.
Commitments will be drawn down from investors as and when deals are put on the books.
It is thought that RenRe and RGA's combined commitment accounts for under a third of the total raised to date, with the bulk of capital coming from outside institutional investors, including pension plans.
The scale of the opportunity means there is likely to be scope for a second, third or fourth Langhorne Re vehicle with new fund launches if the JV is successful in executing deals on the start-up.
That could conceivably mean the JV partners end up with $5bn or $6bn of capital under management supporting closed-block transactions.
RGA - the largest standalone life reinsurer globally with a $10bn market capitalisation - will originate and administer closed blocks of policies for Langhorne Re.
RenRe will provide third-party capital management expertise, risk management oversight, be involved in the asset management of the vehicle and act as a fully aligned co-general partner in what will be its sole life reinsurance vehicle.
Langhorne Re will not, however, take a hedge fund reinsurance approach with an alternative strategy around investment management.
Instead it will employ more of an asset-liability matching approach, running off the capital over time with the aim of generating a higher internal rate of return than could be achieved by the original insurer if it kept the blocks on its own balance sheet.
RenRe and RGA will split management fees and profit commission 50:50, with the level of fees and commissions charged thought to be within the standard range for fund managers.
The start-up's board is also understood to have equal representation between the JV partners.
As well as providing a diversifying stream of asset management earnings, the JV is likely to broaden RenRe's access to investors who may also be interested in putting funds behind its other third-party capital businesses.
Sources said "cross-pollination" of investors could work the other way too, with those already accessing property cat risk through the reinsurer's various structures potentially interested in backing future Langhorne Re iterations.
Langhorne Re is the latest example of RenRe entering into partnerships inside and outside its traditional P&C heartland as it looks to diversify revenue streams, allocate capital efficiently and leverage its third-party capital management expertise.
The Bermudian reinsurer has been a pioneer of JVs and third-party capital management in the property cat space, which has given it a significant source of asset management earnings.
But it has also branched out beyond the P&C sector, including into the mortgage reinsurance segment, both as a writer of deals for counterparties including Fannie Mae and Freddie Mac and through its successful investment in Essent Guaranty.
RenRe declined to comment on this article.