Enstar buys back Hillhouse’s stake in itself and in Enhanzed Re

Bermuda domiciled re/insurance, run-off and legacy specialist Enstar Group has bought back its shares and a stake in its joint-venture reinsurer, Enhanzed Reinsurance Ltd. (Enhanzed Re), that were held by investment manager Hillhouse Capital Management.

Enstar said it has agreed with Hillhouse to repurchase 3,749,400 ordinary shares of Enstar for $234.52 per share, totaling $879.3 million in aggregate, which the legacy specialist says is a discount to book value.

This is the entire equity interest that funds managed by Hillhouse held in Enstar, representing a significant 16.9% of total ordinary shares and 9.4% of voting ordinary shares.

As a result, Enstar is deploying its own capital into increasing its ownership of itself, at a below book-value price, which can only be good for its business and other shareholders.

At the same time, a subsidiary of Enstar has agreed to purchase a Hillhouse affiliate’s 27.7% interest in Enhanzed Re for an estimated purchase price of $228.7 million.

Hillhouse partnered with Enstar on the launch of Enhanzed Re back in 2018, when it took that 27.7% stake and signed up to act as the primary investment manager for Enhanzed Re as well.

Enhanzed Re was following a kind of total-return reinsurance strategy, focused on supporting Enstar’s legacy focused business, which also meant it was acting as a kind of capacity sidecar, sitting alongside the main company, as well.

Interestingly, the Enhanzed Re stake seems to have also been bought back for below book-value, as Enstar said the purchase price is based on 90% of Enhanzed Re’s estimated total shareholders’ equity as of June 30, 2021.

Which is interesting to note, as at its launch three joint-venture partners made equity investments amounting to $470 million into Enhanzed Re, resulting in Enstar owning the majority of the reinsurer at 47.4%, global insurer Allianz owning 24.9%, and an affiliate of Hillhouse with the 27.7%.

So the 27.7% is now worth $228.7 million, at a 90% valuation, which suggests the total shareholders equity value of Enhanzed Re is somewhere around $910 million, while Enhanzed Re has roughly $4 billion of assets.

A 27.7% stake at launch of Enhanzed Re cost around $130 million, it would seem, so not only has Enstar bought it back at below book-value, its own stake will have appreciated in-line with that and so it now holds a 75.1% equity stake in Enhanzed Re, with Allianz owning the remainder still.

Enstar said it would fund these purchases with cash on hand and liquidity available under its revolving credit facility.

Dominic Silvester, Enstar’s Chief Executive Officer, commented on the news, “We view these transactions as a compelling opportunity for Enstar to deploy capital strategically to repurchase shares at a discount to book value and to acquire control of the Enhanzed Re platform on terms expected to be accretive to Enstar.

“Following completion of the share repurchase and the acquisition of Enhanzed Re, Enstar will maintain a strong capital and liquidity position, allowing us to continue to pursue future run-off transactions. In 2021 we have already completed a record amount of transactions in terms of size, and we continue to see a healthy legacy pipeline.”

These certainly seem accretive transactions, as Enstar once again takes greater control of its own capital base and a key source of complementary reinsurance capital that helps to fund the major run-off and legacy deals it enters into, while also providing a source of diversifying returns as Enhanzed Re also writes some other classes of business and reinsures certain business ceded by Allianz to it as well.

It’s also worth noting that Hillhouse had been an asset manager to Enhanzed Re, managing some of its portfolio alongside an Allianz investment unit as well.

It’s not clear from today’s announcement on the sale of its stake back to Enstar whether Hillhouse retains this asset management role for Enhanzed Re, or not.