Despite the book of largely aggregate excess-of-loss catastrophe reinsurance business having faced its share of losses in recent years, Bermuda domiciled re/insurance, run-off and legacy specialist Enstar Group has made a gain on the commutation of the Enhanzed Reinsurance Ltd. (Enhanzed Re) cat book with joint-venture partner Allianz.
As we reported last August, legacy and run-off specialist Enstar was in the process of eliminating its exposure to catastrophe risks with a shuttering of its joint-venture reinsurer, Enhanzed Re.
Now that process is completed and while it’s not really clear how profitable the overall venture of Enhanzed Re has been for the parties involved, at least Enstar has managed to strike a positive commutation deal on the catastrophe risk that was sourced via Allianz.
Enhanzed Re has been launched in 2018 as a three-way joint-venture between Enstar Group, global insurer Allianz SE and investment manager Hillhouse Capital Management.
The idea was really a type of reinsurance efficiency play, benefiting its JV backers by creating a source of efficient reinsurance and complementary deal-making capacity, with an investment strategy that also aimed to outperform.
Enhanzed Re came with a twist on the total-return reinsurance business model, offering JV partners capital efficiency, a way to retain more of the risk premium from business they underwrote, with a higher-performing target for its investment strategy, and in future the potential to profit by taking Enhanzed Re public.
But, Enstar bought Hillhouse Capital management out of Enhanzed Re around the mid-point of 2021, with the price giving some insight into some of 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.
Enstar then revealed that Enhanzed Re would be wound-down, with the remaining JV partners set to extract what value is left from the structure and novate the reinsurance contracts underwritten by Enhanzed Re back to themselves.
Enstar explained that the move was designed to “eliminate Enstar’s direct exposure to catastrophe business,” as Enhanzed Re had assumed a book of property catastrophe aggregate excess-of-loss reinsurance from Allianz, that was seemingly European focused and was impacted by a range of losses, including windstorms, the European floods of 2021 and also Covid related losses.
As of the end of 2022, Enstar says the transactions to unwind Enhanzed Re were all completed, with the catastrophe reinsurance business commuted with Allianz and delivering Enstar a favorable commutation gain of $59 million, $26 million related to favourable loss development, the rest an accelerated ammortisation of liabilities.
Enstar also revealed it had received another $150 million dividend from Enhanzed Re last June, suggesting more profit was able to be extracted from the venture at that time.
Enstar has booked a consolidated net loss from Enhanzed Re of $235 million for 2022, driven by investment side impairments, however, it appears the vehicle has not been a loss-leader for the company given the distributions it had received, the positive development of the commutation, plus more revenue to come for Q1 2023 it seems.
At December 208th 2022, Enhanzed Re purchased back all of the 24.9% ownership interest Allianz held in the reinsurance vehicle for $174 million, putting it as a wholly-owned subsidiary of Enstar.
There is still some unwinding to go, before any visibility of the final value of Enhanzed Re is realised in Enstar’s results, in particular related to the novation of a reinsurance closed block of life annuity policies to Monument Re Limited in November 2022, that won’t be reported on until Q1 2023’s results.
However, Enstar did say it expects a boost to its first quarter 2023 net earnings of $197 million from the novation of this life business.
With that, Enhanzed Re is no more, but Enstar is holding onto the structure and has renamed it as the Assumed Life segment, saying that it could leverage this segment for any future potential assumed life business transactions, with a particular focus on reinsuring products that hold longevity and/or investment risk.
Enhanzed Re has been an interesting experiment for Enstar, but, as we speculated before, perhaps a bit of a distraction and drew the company further into the short-tailed world than it would have liked.
It does seem to have created value, although how significant is hard to understand. But the investment portfolio Enhanzed Re had assumed through float and operations will have significant value, given the premiums it had taken on, which alongside distributions and other recognition of value, could mean the overall venture was a profitable one for Enstar, experimental or not.
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