KaylaRe contribution grows at Enstar, as total-return strategy scales

by Artemis on May 23, 2017

The contribution made by total return reinsurance vehicle KaylaRe Ltd. to insurance and reinsurance specialist Enstar is growing, as the strategy begins to scale up offering efficiency benefits across the business for the firm.

Enstar launched KaylaRe in late 2016 with a $620 million equity capital raise, including $300 million from Enstar itself, $270 million from funds managed by Hillhouse Capital Management, Ltd. and $50 million from funds managed by Stone Point Capital LLC.

KaylaRe follows a total return, or investment oriented, reinsurance strategy, with Enstar acting as underwriting manager, while Hillhouse Capital Management looks after the investment of the float, seeking to produce a return on both assets and liabilities.

For Enstar the benefits are evident across its business, with the firm ceding risks into KaylaRe, which makes its own reinsurance costs lower and more efficient, while also benefitting from fees and commissions for the services it provides, as well as profits from a share in the return and performance of the total-return reinsurer.

In fact, as of the 31st March 2017 Enstar has already recognised an increase in value of its investment in KaylaRe, an additional benefit it has from the arrangement, with the investment carried at $300.6 million at the end of the quarter. Only a slight increase but on top of all the other areas of benefit and efficiency the fact this investment gains in value as well could be significant over time, especially should the backers ever elect to sell or float KaylaRe Ltd.

Immediately on launch Enstar ceded business to KaylaRe, with the total-return vehicle entering into a 35% reinsurance quota share agreement with StarStone, Enstar’s global insurance underwriting subsidiary (the KaylaRe-StarStone QS as it calls it).

Straight away StarStone ceded $117.6 million of premium earned, $75.7 million of net incurred losses and loss adjustment expenses (LAE) and $42.5 million of acquisition costs to KaylaRe for the year ended December 31st 2016.

In the first-quarter of 2017 the flow of risk through to KaylaRe continued, with StarStone ceding $56.0 million of premium earned, $33.7 million of net incurred losses and LAE and $21.9 million of acquisition costs to KaylaRe Ltd. under the KaylaRe-StarStone QS.

With just that amount ceded in the first-quarter it looks safe to assume there will be a relatively significant increases in business ceded to KaylaRe in 2017 over the first cessions between Enstar and the vehicle in 2016.

The premium float generated from business ceded to KaylaRe, from the quota-share as well as any other underwriting as the vehicle is expected to be market-facing as well in time, will be put to work by Hillhouse Capital Management in its investment strategies and any other investment managers appointed to manage the KaylaRe portfolio.

At the end of 2016 KaylaRe had $350 million of investments in a fund managed by Hillhouse, but by the end of the first-quarter of 2017 this had risen to $361.0 million. The scale of the investment side is key to the total-return strategy, as it increases the efficiency of KaylaRe’s capital and capacity, as well as enhancing the return for its backers.

Additionally Enstar can gain significant benefits from the cessions of risk to KaylaRe, as it gives the re/insurer an option for moving premiums and reserves around within its own group instead of ceding risk to the open market, a source of reinsurance backed by efficient third-party capital, it adds capital efficiency to the group’s activities and all with the benefit of fees and profits from the investment side as well.

By ceding risk into KaylaRe Enstar can extract a larger proportion of the profit from underwritten or legacy managed business than it would if it utilised the open reinsurance market, making it a very efficient addition to its overall business platform.

Enstar reports reinsurance recoverable of $264.0 million associated with KaylaRe at the end of Q1 2017, which puts the vehicle into its top-ten list of reinsurers and above some market stalwarts such as Lloyd’s syndicates. This figure has risen from $242.1 million at the end of 2016 and it remains more than 10% of Enstar’s total reinsurance recoverables.

Enstar said that its non-life and run-off management companies experienced a $2.1 million increase in fees and commission income in the first-quarter of 2017, compared to the prior year, with the increase “primarily related to services provided to KaylaRe.”

So Enstar is continuing to benefit from the still-recently launched KaylaRe, with the increasing premiums and reserves assumed from Enstar subsidiaries set to grow the investment float managed by Hillhouse et al, deliver increased fees, and as a result the contribution from KaylaRe back to Enstar’s results will increase at the same time.

Enstar can now face the market in the knowledge that it has KaylaRe as a form of retrocession and as a lever providing efficiency or capital support, while at the same time providing a companion underwriting balance-sheet for StarStone and other direct writing subsidiaries of the group.

Over time the benefits of efficiency should become more apparent, as Enstar begins to realise the two-fold efficiency benefits of its capital and capacity going further, while earning new revenues from its services delivered and ownership stake in KaylaRe.

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