Enstar backing Aligned Re Ltd., hedge fund reinsurance start-up

Enstar Group is backing a new hedge fund reinsurance style start-up named Aligned Re Ltd., which the firm will act as reinsurance manager for while also contributing $100 million of funding. The Aligned Re investment strategy is to be managed by UBS O’Connor LLC.

Enstar is a specialist in the acquisition and management of legacy or run-off insurance and reinsurance businesses, as well as operating active underwriting firms through the Atrium and Torus brands.

For some time the market has been aware that Enstar was working on a hedge fund or investment oriented reinsurer start-up. Now some more details have come to light in an SEC filing from the firm.

Enstar has agreed in principle to act as the reinsurance manager for the newly formed Bermudian reinsurance, Aligned Re Ltd. The next stage is a capital raise, which sources suggest will involve both institutional and retail third-party investors, although with retail investors likely to be of the high-net-worth variety.

Enstar said that Aligned Re is expected to be funded with third-party capital contributions, alongside a  $100 million investment that the firm has made itself and possibly other contributions from other affiliates.

UBS O’Connor LLC is slated to act as investment manager for Aligned Re, taking on the management of the float generated from its underwriting activities. The firm is an absolute return investment manager, with around $5.7 billion managed across non-traditional strategies including in Global Long/Short Equities, Credit Long/Short, Merger Arbitrage and Convertible Securities programs.

Aligned Re is expected to get most of its business via existing Enstar entities, including StarStone (previously the Torus brand). Insurance and reinsurance focused private equity investor Stone Point Capital is an investor in StarStone and is also expected to be investing in Aligned Re.

So Aligned Re will be able to select business to underwrite that matches with its investment strategy needs from StarStone subsidiares, which are expected to purchase reinsurance from Aligned Re through quota share agreements. Other Enstar run-off subsidiaries are expected to enter into loss portfolio transfer agreements with Aligned Re as well.

So acquiring new risk to underwrite should be no trouble for Aligned Re, making it a very attractive play for Enstar and investors. It gives Enstar an internal (and efficient) reinsurance platform that can take on risks from its live underwriting platforms and from run-off books, while the business ceded can be targeted to match the needs of the investment manager UBS O’Connor’s strategy.

That should make the ability to generate float more efficient, provide quality business with a sub-100 combined ratio where possible, allowing the investment strategy to provide the additional performance necessary to satisfy investors return requirements.

Enstar will be able to write more risk on the front-end, through its various platform, safe in the knowledge that it has an efficient source of reinsurance capital on tap. Meanwhile Aligned Re will aim to outperform, thanks to an investment oriented strategy, enabling Enstar to benefit more in return on its investment as well.

Enstar EVP and Joint COO Nicholas A. Packer has been appointed as Chief Executive Officer of Aligned Re. Packer, also CEO of StarStone, will continue to serve in his existing roles as well until December 31, 2016. Aligned Re will consider hiring additional executives during the ramp-up period of its operations, Enstar said.

The Insider said that as much as $750m to $1 billion could be sought from the current capital raise for Aligned Re.

If Aligned Re can operate at a sub-100 combined ratio, while UBS O’Connor provides an attractive return on assets invested, the vehicle could be an attractive investment opportunity for those seeking to access the returns of reinsurance and alternative asset strategies.