Enstar launches KaylaRe, a “differentiated total return reinsurer”

Bermuda based insurance and reinsurance group Enstar has launched a new $620m total return reinsurer named KaylaRe Ltd., alongside investment manager Hillhouse Capital Management, Ltd. and financial services equity investor Stone Point Capital LLC.

KaylaRe, a Class 4 Bermudian reinsurance company, launches with $620 million of equity capital, $300 million of which has been contributed by Enstar itself, $270 million from funds managed by Hillhouse Capital Management, Ltd. and $50 million from funds managed by Stone Point Capital LLC.

Hillhouse is a Chinese investment firm with over $25 billion of capital under management. The manager had already taken a stake in Enstar earlier this year, according to reports, so it appears that the relationship was always set to be much deeper.

KaylaRe will operate a strategy seeking to underwrite a diversified range of specialty reinsurance on a global basis, and will target risk-adjusted returns that outperform the market over the cycle by utilising a diversified asset allocation as well as selective underwriting.

As a total return reinsurer, KaylaRe will leverage the investment management skills of Hillhouse, who will act as the primary investment manager to the reinsurer, as well as a range of other investment managers with who the reinsurer will engage.

The aim will be to outperform on the asset side of the reinsurance business, as well as delivering an underwriting profit, to enable a higher total return for the reinsurance firm than would be seen at traditional carriers.

Initially, to build up the all important premium float that a total return strategy demands, KaylaRe has entered into a 35% reinsurance quota share agreement with StarStone, Enstar’s global insurance underwriting subsidiary, as well as loss portfolio transfer agreements with Enstar for certain legacy business.

By leveraging Enstar’s underwriting platform in this way, KaylaRe has likely been able to deploy a significant amount of its capacity immediately, bringing in the premium float that Hillhouse and the other asset managers need to start making the asset side of the business work.

KaylaRe is also expected to develop and underwrite its own business as well and will opportunistically underwrite third-party premium, as well as continuing to participate in future Enstar legacy transactions.

So KaylaRe will be market facing, but will also help to enhance Enstar’s own underwriting efficiency by providing another balance-sheet against which it can place suitable risks. Enstar will be the exclusive underwriting manager for the reinsurer.

Nick Packer, one of the co-founder’s of Enstar, has been appointed Chief Executive Officer of KaylaRe. Since 2001 Packer had served as Enstar’s Executive Vice President and Joint Chief Operating Officer since 2001 and StarStone’s Executive Chairman and Chief Executive Officer since 2014. He will remain on the StarStone board as a non-executive director.

Dominic Silvester, Enstar’s Chief Executive Officer, commented on the launch; “KaylaRe brings Enstar together with partners Hillhouse and Stone Point to create a unique global reinsurer. KaylaRe has great performance potential, and a dynamic and proven leader in Nick Packer, who has been a core contributor to Enstar’s growth and success. He has shown tremendous commitment to our investment in KaylaRe, and, while he will be greatly missed at Enstar, I look forward to working closely with him in his new role.”

Nick Packer said; “KaylaRe is a differentiated total return reinsurer, and it is an honour to lead this company from its inception. Through Enstar, we have long-term access to a high-quality, diversified portfolio of low volatility specialty insurance risks and supporting infrastructure. Further, the additional investment and support of Hillhouse and Stone Point provide KaylaRe with the capability to create substantial incremental value for shareholders through market cycles.”

What differentiates KaylaRe is perhaps the access to Enstar sourced legacy business, quota shares with StarStone, as well as a strategy to become increasingly market facing and to underwrite third-party reinsurance business as well.

It’s not that dissimilar to how other total return reinsurers operate, but with Enstar’s pedigree behind it KaylaRe will be very interesting to watch over the coming years.

Of course, KaylaRe is the second total return, or investment oriented reinsurance strategy, that Enstar has been linked with, after its Aligned Re Ltd. reinsurer partnership planned with hedge fund UBS O’Connor LLC.

KaylaRe will benefit all three of the key investors, offering potential profits and other benefits as well.

Enstar gains access to additional underwriting capacity which can add efficiency to its own capital and business model, fee income for being reinsurance manager, as well as a share of the profits generated on both sides of the balance sheet as well.

Hillhouse gains access to a pool of longer-term capital from the reinsurance premium float, as well as fees for being the investment manager and profit share as a key investor. The strategy has also helped Hillhouse to further diversify its capital outside of China, with the insurance and reinsurance industry a major target for many Chinese investment conglomerates.

Stone Point Capital benefits from a shrewd investment backing a total return reinsurer which has as much chance as any of outperforming, which is aligned with its other investments that back reinsurance and third-party capital ventures in the insurance space.

Differentiated? With access to legacy, quota share and live reinsurance business, and an investment strategy drawing on more than one manager, perhaps. But under the hood the strategy remains the same as other total return vehicles, seek to outperform on both sides of the balance sheet and add efficiency to the underwriting platform.

Give the current state of the underwriting environment, the potential to juice up returns and add efficiency at the same time is a very valuable trait of any reinsurance strategy.

Join Artemis in New York on February 3rd 2017 for ILS NYC