Allianz Re, the reinsurance unit of global insurance firm Allianz, has taken a big step towards its goal of establishing its own run-off operations by entering into a $1.1 billion legacy reinsurance deal with specialist Enstar.
The transaction sees Enstar subsidiaries reinsuring portfolios of Allianz Re’s U.S. run-off business, with the subject business including around $2.2 billion of reserves from portfolios of workers’ compensation, construction defect and asbestos, pollution and toxic tort insurance business originally held by Fireman’s Fund Insurance Company.
It’s particularly interesting to see the large transaction and ongoing partnership between Allianz and Enstar, as it could signal how Enstar will source some of the risk for its Aligned Re investment-oriented or total return reinsurer, which it is launching in partnership with UBS O’Connor LLC.
The transaction sees Enstar’s subsidiary assuming net reinsurance reserves of approximately $1.1 billion, by entering in a quota-share and reinsuring 50% of the subject portfolios from San Francisco Reinsurance Company (ARM US), part of Allianz Resolution Management (ARM).
Allianz Re will retain 50% of the profit, or loss, of the subject business, ensuring alignment with Enstar and its subsidiaries and continuing to benefit from run-off revenues associated with it.
Enstar will provide consulting services for the whole $2.2 billion portfolio, including across Allianz Re’s retained 50% share, as it assists Allianz as it continues to build a group run-off function.
For Allianz this transaction enables it to secure the past, at least associated with this block of portfolios, while also developing its future with the assistance of Enstar as it develops the run-off group.
For Enstar there is the immediate profit from the deal, but perhaps more importantly the large amount of reserves and the ongoing relationship with Allianz, which position it well to assist Allianz in future run-off deals.
With Enstar’s total return reinsurer Aligned Re set to launch in the near future, which will see it adopt an investment-oriented approach with the help of UBS O’Connor, sourcing quality run-off will be vital and the long-tailed reserves will provide the investable float.
Enstar is making a commitment to this deal and relationship, transferring approximately $110 million into a reinsurance collateral trust and also offering a limited parental guarantee as part of this arrangement. In total, the combined monetary support offered by Enstar will be capped initially at $270 million.
“We are pleased with the implementation of this transaction with Enstar, a leading player in the run-off business. The co-operation with ARM US will combine our own strong claims management capabilities with Enstar’s experience and proven track record. The reinsurance agreement ensures that both parties will benefit from the combined team’s efficient claims handling. This enables us to actively manage the business and support our strategic goal of building a Group run-off operation,” explains Axel Theis, Allianz SE board member responsible for Allianz Re.
Effective run-off management is an important contribution to the Group’s strategic initiative “Technical Excellence”, one of five components of the Allianz Renewal Agenda launched in November 2015. For this, Allianz Re is building the platform and capabilities to effectively manage the legacy and run-off portfolios across the Group.
As part of the agreement, a team of Enstar experts will support the operational management of the reinsured liabilities on an ongoing basis.
“Enstar’s combined role as reinsurer and co-manager provides several benefits”, comments Dieter Wemmer, CFO Allianz Group. “We reduce our risk and release capital through the reinsurance contract. Further, the premium for the reinsurance agreement is in line with the carried reserves at year-end 2015. We see significant value potential for both parties thanks to the combined strengths and economies of scale going forward.”
Dominic Silvester, Enstar’s Chief Executive Officer, commented; “Implementing a reinsurance transaction of this complexity and magnitude for Allianz, a global industry leader, demonstrates clearly the scope and scale of the solutions that Enstar can provide.
We welcome the opportunity to continue to work with Allianz, and we appreciate the trust and confidence Allianz has placed in Enstar to structure, manage and advise on this sizeable transaction.”
Finally, these large run-off deals are attractive to third-party capital and ILS investors as well, Enstar’s backers are evidence of that as are deals done by Credit Suisse and other asset managers. With the Aligned Re total return reinsurer being partly capitalised by external investors it shows another way that they can access the returns of legacy business, while also benefiting from the active investment approach.
There is an expectation that third-party and ILS capital will increasingly be brought into run-off and legacy reinsurance deals, providing a further opportunity for capital to be deployed as long as the structures allow investors an element of liquidity, or at least feature a fixed-term investment.