KaylaRe boosts Enstar income, as investment float increases

Total return reinsurance vehicle KaylaRe Ltd. has driven higher fee income again for its sponsor, insurance and reinsurance specialist Enstar, as the strategy begins to acquire scale, as cessions made to KaylaRe build up and the investment float continues to accumulate.

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.

KaylaRe follows a total-return, or investment oriented, reinsurance strategy, with Enstar acting as the vehicles underwriting manager and Hillhouse Capital Management investing the float, with the aim being to produce a return on both assets and liabilities.

In the second-quarter of 2017 KaylaRe’s contribution to Enstar’s results began to pick up steam, with Enstar reporting an increase in fees and commission income earned by its non-life run-off management companies of almost $10 million over the prior year, with this jump “primarily related to services provided to KaylaRe.”

In Q2 2017 Enstar earned $10.8 million of fees and commission income, compared to just $0.9 million in Q2 2016, before KaylaRe existed.

For the first-half of 2017 the fee and commission income came in at $19.5 million, compared to $7.4 million in H1 2016, which shows that the income earned from KaylaRe in the second-quarter was significantly higher than the first, a sign that the strategy is beginning to pay off for Enstar and perhaps providing a glimpse of the ongoing income benefit.

Of course fee and commission income is just part of the KaylaRe benefits that Enstar is beginning to enjoy, as the firms investment in the total-return reinsurance vehicle has also increased in value again.

What was initially a $300 million investment in late 2016, was then carried at $294.6 million at the end of last year, $300.6 million at the end of Q1 2017, but is now valued at $312.9 million as of the end of the second-quarter. Not a bad appreciation in just over six months.

Another benefit is the fact that Enstar can use KaylaRe as a source of efficient reinsurance capacity, ceding a share of business underwritten through a 35% reinsurance quota share agreement with StarStone, Enstar’s global insurance underwriting unit, to the vehicle each quarter.

During the second-quarter and first-half of 2017 Enstar’s StarStone ceded $56 million and $113.3 million of premium earned, $33.7 million and $60.0 million of net incurred losses and loss adjustment expenses, and $21.9 million and $45.3 million of acquisition costs to KaylaRe Ltd. through the quota share arrangement (dubbed the KaylaRe-StarStone QS.)

As a result of the continued cessions of business through to KaylaRe, the vehicle remains one of Enstar’s top ten reinsurers.

Enstar reports that its reinsurance recoverable associated with KaylaRe has risen to $288.2 million, up from $242.1 million at the end of 2016. This means KaylaRe now accounts for around 14% of Enstar’s total reinsurance coverage.

That 14% is far more efficiently placed with KaylaRe, than if Enstar placed it with normal third-party reinsurers. Not to mention the fact that the company earns fee income from that business and a share of profits from the investment side.

On the investment float side, KaylaRe had $350 million of investments in a fund managed by Hillhouse at the end of 2016, which grew to $361.0 million by the end of Q1 2017.

The investment float has grown again, thanks to the continued StarStone cessions, reaching $397.3 million at the end of June 2017.

The scale of the investment side of any total-return or investment oriented reinsurance business is key to the strategy, as the investment return increases the efficiency of KaylaRe’s capital and capacity, as well as enhancing the profits for its backers.

Finally, Enstar reports $10.8 million of other income for the quarter, up from $2 million in the prior year, with the increase primarily due to “earnings from the equity method investment in KaylaRe.” For the six months that other income figure was $22.7 million, up $18.9 million on the prior year.

As ever it’s difficult to really judge the impact of KaylaRe on Enstar’s earnings, as the investment returns are not disclosed and neither are the combined ratio of the reinsurance portfolio.

However, the fees, commissions, other income, and increase in value of the investment reported by Enstar, alongside the increasing cessions and resulting growth in the investment float at KaylaRe, all suggest that the contribution is becoming more meaningful.

As we’ve written before, the KaylaRe strategy can effectively help Enstar to make its capital and capacity go further, through the added efficiency having KaylaRe within its overall platform offers, while earning new revenues from fees, commissions and ownership stake in KaylaRe.

For now, KaylaRe remains focused on sourcing its reinsurance business from Enstar, but in the future it intends to opportunitistically underwrite in the open market as well. Which will provide Enstar a chance to earn income from business it would not have underwritten itself, as well as extracting more profit out of business that it does.

In the challenging reinsurance market environment these strategies make a lot of sense and they can also provide a platform for efficient growth over the longer-term as well.