Total return reinsurer KaylaRe to lessen impact of cat losses for Enstar

Total return reinsurance vehicle KaylaRe Ltd. is set to lessen the impact of recent hurricanes for its sponsor, insurance and reinsurance specialist Enstar Group, shouldering a portion of the group’s losses through its quota-share with StarStone.

Enstar Group said today that it expects to suffer a combined catastrophe loss for Q3 2017 from hurricanes Harvey, Irma and Maria, after reinsurance recoveries and allocations to non-controlling interests of $39 million.

The $39 million loss to Enstar Group is due to its ownership interests in StarStone Insurance Bermuda Limited and Atrium Underwriting Group Limited, the firm said.

As we’ve highlighted before, KaylaRe offers Enstar a particularly efficient source of reinsurance capacity, taking a share of business underwritten through a 35% reinsurance quota share agreement with StarStone, Enstar’s global insurance underwriting unit, every quarter.

As a result, KaylaRe is expected to shoulder some of the losses from hurricanes Harvey, Irma and Maria, which Enstar confirmed.

“Enstar’s underwriting loss estimate is net of reinsurance to KaylaRe Ltd.,” the company said in its SEC filing on the quarters losses.

Enstar owns a 48.4% stake in KaylaRe, but the benefits to the group include that by ceding business into the total-return reinsurance vehicle, Enstar effectively lowers the cost of this reinsurance because it earns underwriting fees from KaylaRe and a share of investment returns made by joint-venture partner Hillhouse Capital Management, Ltd.

KaylaRe, being more than 50% owned by other parties, is also a source of third-party reinsurance capital for Enstar which will help it to reduce volatility in its results when major loss events, like the recent ones, occur.

With KaylaRe following an investment-oriented or total-return strategy, there is even the chance that investment performance can offset these losses that it shares from StarStone, helping to deliver a smaller loss ultimately back to the parent Enstar.

Strategies that can reduce the volatility of major loss events, through leveraging third-party capital, investment oriented techniques and by offsetting them with fee income earned, as well as reduced brokerage fees for placing the reinsurance, can benefit greatly in quarters such as the one just experienced.