Enstar confirms total return reinsurer KaylaRe helps on hurricane loss

Insurance and reinsurance specialist Enstar Group has confirmed that its total return reinsurance vehicle KaylaRe Ltd. softened the blow from third-quarter hurricane catastrophe losses, as the firm said that its quota share agreement with KaylaRe reduced the impact by $22.7 million.

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.

With the hurricanes having caused significant and major industry-wide losses, it’s no surprise that Enstar and StarStone took their share and as a result KaylaRe has supported the firm’s ability to pay their losses, as we suggested it would a month ago.

Enstar said that its 35% whole account quota share reinsurance agreement with KaylaRe helped to offset the impacts of hurricanes Harvey, Irma and Maria, reducing the impact to its net incurred losses and loss adjustment expenses by $22.7 million during the third-quarter.

KaylaRe offers Enstar a way to self-reinsure (likely at lower costs) into a vehicle partly backed by third-party capital, while Enstar benefits from fees and commissions related to the underwriting business it cedes to KaylaRe and also earns a higher return off the assets due to its total-return investment focus, which is managed by joint-venture partner Hillhouse Capital Management, Ltd.

As KaylaRe grows in size, thanks to the regular quarterly quota share cessions from StarStone, Enstar benefits increasingly as the fees it receives in return increase, the size of the investment float increases and the amount of reinsurance the total-return reinsurer provides grows as well.

As of September 30th 2017 Enstar reports that the reinsurance recoverable associated with KaylaRe has risen to a meaningful $331 million, up from $288.2 million at the mid-year point. As a percentage of Enstar’s total reinsurance provisions, KaylaRe is growing in importance to the company.

The amount of risk Enstar cedes into KaylaRe continues to rise as well, with the firm reporting that during the third-quarter and first nine months of 2017 Enstar’s StarStone ceded $57.3 million and $170.6 million of premium earned, $53.7 million and $113.7 million of net incurred losses and loss adjustment expenses, and $33.6 million and $78.9 million of acquisition costs to KaylaRe Ltd. through the quota share arrangement (dubbed the KaylaRe-StarStone QS).

Importantly, the continued and regular cessions of premiums into KaylaRe means that the vehicle sees ongoing growth of its investment float, which Hillhouse can then put to work.

KaylaRe had $350 million of investments in a fund managed by Hillhouse at the end of 2016, which reached $397.3 million at the end of June 2017. But now the investment float has grown once again, reaching $416.3 million by the end of September 2017.

We don’t get any visibility of the investment returns earned by Hillhouse Capital Management in its work under the KaylaRe joint-venture, but the growth of this pool of investable assets is key to the strategy, with the returns helping to increase the returns for the backers of KaylaRe and increase the efficiency of the reinsurance it provides to Enstar as well.

The income KaylaRe delivers is also key, of course.

During the recent quarter, Enstar reported that it saw $12.9 million of income growth in its run-off segment, which the firm said is “primarily due to increased other income and increased fee and commission income, primarily attributable to our investment in KaylaRe.”

Additionally, Enstar earned fees and commission income of $10.8 million for the third-quarter, and $30.3 million for the nine months of 2017 primarily related to services it provided to KaylaRe.

However, the losses paid by KaylaRe show in an expense of $4 million for the quarter, compared to income of $1.7 million a year earlier, as a $5.7 million hit was recorded from Enstar’s equity investment in KaylaRe due to the hurricanes impact.

But even though Enstar faces a small loss on its equity investment in KaylaRe, following losses, the benefits that flow through from the reinsurance the total-return vehicle provides as well as the fee income outweigh this and the overall efficiency it adds to Enstar’s business is likely becoming increasingly significant.

KaylaRe helps Enstar make its capital and capacity go further, through the added efficiency of having KaylaRe within its overall platform, the lowering of reinsurance costs, while earning new revenues from fees, commissions and ownership stake in KaylaRe.

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