KaylaRe float grows, but fee income hit by performance for Enstar

The premium investment float generated by total return reinsurance vehicle KaylaRe Ltd. continued to grow in the first-quarter, promising an increasing return on the asset side of the reinsurer, but fee income delivered to parent Enstar declined due to lower performance from the ceded business in the period.

The reduction in fee income is likely due to the ongoing impact of the 2017 catastrophe events, as well perhaps as some impacts from 2018 severe weather events in the United States.

KaylaRe’s sponsoring parent, specialist insurance and reinsurance firm Enstar, reported a $2.7 million reduction in profit commission delivered by KaylaRe, due to worse performance of the business ceded to the vehicle.

Enstar said that the fees and commission income earned by its non-life run-off management companies fell to $4.9 million in Q1 2018, down from $8.7 million in Q1 2017, with the reduction in commission from KaylaRe the main driver. Enstar received $1.3 million of fee income for underwriting services provided in Q1, down from $1.6 million in the prior year.

KaylaRe was impacted by the 2017 loss events, with the vehicle acting as a third-party source of reinsurance for Enstar from which it can also earn fee and commission profit, making it an efficient reinsurance source for the company.

Enstar launched KaylaRe in late 2016 raising $620 million of equity capital, $300 million of which was contributed by Enstar itself, while another $270 million came from funds managed by Hillhouse Capital Management, Ltd. and $50 million from funds managed by Stone Point Capital LLC. The sponsor is set to acquire more of KaylaRe’s shares, having agreed to buy stakes from the other investors.

The $300 million value of Enstar’s initial investment in KaylaRe seems a shrewd one, with the carrying value of its initial stake now said to be $320.4 million, up from $309.8 million at the end of 2017.

Enstar also reported in its latest results that the firms reinsurance recoverable associated with KaylaRe has grown to $364.3 million, as the total-return reinsurer becomes an increasinly important part of its total $2.4 billion of reinsurance balances recoverable.

With KaylaRe likely the most efficient form of reinsurance Enstar has, given the nature of the vehicle and the fact it returns fees, commissions and also investment profit to the insurer, the growth of the recoverables reflects more risk ceded through to the total-return company.

Under the quota share reinsurance arrangement between KaylaRe and Enstar subsidiary StarStone (dubbed the KaylaRe-StarStone QS) StarStone ceded $52.7 million of premium earned, $31.5 million of net incurred losses and loss adjustment expenses, as well as $18.8 million of acquisition costs to KaylaRe Ltd. in the first-quarter of this year.

All of those figures were down slightly on the prior year, when they stood at $56 million, $33.7 million and $21.9 million, which is likely due to the non-renewal of reinsurance for StarStone’s U.S. entities at January 1st.

The continued and regular cessions of reinsurance premiums into KaylaRe from StarStone means that the total-return vehicle continues to grow its investment float, which Hillhouse can then put to work in its investment strategies.

KaylaRe had $480.4 million of investments in a fund managed by Hillhouse at the end of Q1 2018, up from $456.7 million at the end of last year.

This growing investment pot helps by adding greater efficiency to the underwriting capacity KaylaRe commands, compared to a traditional strategy that aims for a lower asset return.

The combination of this approach, with the earning of fees and commissions, makes the use of KaylaRe within its overall reinsurance program very attractive for Enstar and as a result we should expect to see the vehicle become an increasingly important part of the firms risk transfer arrangements over time.

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