Enstar eliminating catastrophe exposure with shuttering of Enhanzed Re JV

Bermuda domiciled re/insurance, run-off and legacy specialist Enstar Group is eliminating its exposure to catastrophe risks with a shuttering of its joint-venture reinsurer, Enhanzed Reinsurance Ltd. (Enhanzed Re).

Enhanzed Re was launched as a three-way joint-venture between Enstar Group, global insurer Allianz SE and investment manager Hillhouse Capital Management.

The joint-venture was an efficiency play, benefiting its launch investors by creating a source of efficient reinsurance and complementary deal capacity, with an investment strategy that aimed to outperform.

Enhanzed Re was a twist on the total-return reinsurance venture model, offering its sponsors capital efficiency, a way to effectively retain more of the risk premium from business they underwrote, with a higher-performing target investment strategy and the potential to profit in future through the taking Enhanzed Re public, had they chosen to.

Enstar bought Hillhouse Capital management out of Enhanzed Re just over a year ago, with the price giving some insight into the value the joint-venture reinsurance vehicle had created for its owners.

After that, Enstar held a 75.1% equity stake in Enhanzed Re, with Allianz owning the remainder.

In an SEC filing yesterday, Enstar revealed that Enhanzed Re seems to be getting wound-down, with the remaining JV partners set to extract what value is left from the structure and novate reinsurance contracts underwritten by Enhanzed Re back to themselves.

Cavello Bay Reinsurance Limited, one of the main underwriting structures Enstar operates with, and Allianz have agreed to commute or novate all of the reinsurance contracts written by Enhanzed Re, repay Enhanzed Re’s debt, and distribute Enhanzed Re’s excess capital to Cavello Bay and Allianz, based on their percentages of ownership.

Insurance and reinsurance liabilities ceded to Enhanzed Re by Enstar will be returned to Cavello Bay Reinsurance, and those ceded to the JV by Allianz will go back to that company or be novated to Cavello Bay Re, except an annuity portfolio written by an affiliate of Allianz.

Cavello Bay and Allianz are aiming to novate the Annuities Portfolio to a third-party on commercially reasonable terms, the firm said.

These actions are set to “eliminate Enstar’s direct exposure to catastrophe business” the company explained.

Enhanzed Re had taken on some property catastrophe exposure through transactions it had entered into and we understand some losses had been suffered.

Enstar is very much a business focused on specialty reinsurance at the longer-tailed end of the market and has always avoided catastrophe exposure in its legacy and run-off business.

The shuttering of Enhanzed Re is expected to drive a $62 million increase in Enstar’s book value, which represents an increase of approximately $3.57 in book value per share.

It’s not 100% clear what the motives are for shuttering Enhanzed Re, especially given the value generated by that business up until a year ago.

But with catastrophe exposure Enstar hadn’t wanted, as well perhaps as some investment losses in the last six months or so (Enstar itself revealed total recognized and unrecognized investment losses of $1.3 billion at the half-year point, but how the financial downturn impacted Enhanzed isn’t yet clear.

More broadly, perhaps Enhanzed Re was a bit of a distraction and it became felt that the value generated sat better within Enstar, to the benefits of its shareholders.

It’s another interesting business model that seemingly hasn’t delivered what was hoped for, else why the shuttering.