Scott Carmilani, the CEO of insurance, reinsurance and financial services group Allied World Assurance Company (AWAC) said recently that the ILS and third-party capital manager Aeolus, that AWAC bought a stake in last December is having an extremely good year in 2013.
Allied World Assurance bought a minority stake in Aeolus Capital Management Ltd., the Bermuda-based asset manager that manages third-party capital to invest in insurance-linked securities (ILS), property catastrophe reinsurance and retrocession on a collateralized basis, in December 2012. The stake gives AWAC a share of fee income and also allows it to work alongside Aeolus on some catastrophe reinsurance contracts.
Earlier this year, Carmilani said that AWAC loved the relationship it had built with Aeolus Capital Management and attributed some of the firms growth in the reinsurance space to its partnership with the reinsurance-linked investment manager.
During AWAC’s third-quarter earnings conference call last week Carmilani explained that Aeolus is doing very well in 2013 thanks to a lack of major catastrophe loss events. He explained that the catastrophe space has had a relatively quiet year and that with the U.S. hurricane season approaching its close the chance of a major loss event looks ever more remote. Carmilani said; “So far, through nine months, Aeolus is having, as you would expect, an extremely good year.”
AWAC is confident that Aeolus will raise a good amount of third-party capital again for 2014 and that the asset manager is already actively fund-raising for 2014.
John Gauthier, CIO at Allied World Assurance, commented; “They’re (Aeolus) starting the fund-raising for next year, and we’re optimistic that people who have participated, the institutions that have participated profitably in 2013 will participate again next year. As a partial owner, we’ll be a recipient of those fees.
Carmilani explained on the call that AWAC’s own investment in Aeolus is fixed and that the commitment of funds it put into the reinsurance-linked asset manager would likely go up slightly, but not materially. Here he was perhaps referring to the value of its investment in Aeolus rather than injecting more capital.
Showing the size of growing relationship between AWAC and Aeolus in property catastrophe reinsurance, Carmilani explained that the catastrophe portfolio that AWAC writes in participation with Aeolus is approximately 30% to 40% of what the firm writes in total in catastrophe reinsurance on a global basis today.
The relationship between Allied World Assurance and Aeolus certainly seems to be working out for AWAC, judging by their comments. It has helped AWAC expand its catastrophe reinsurance business while also bringing in useful fee income. The partnership has also allowed AWAC to continue to focus on what it does best rather than being distracted into asset management itself.
For Aeolus, the partnership likely helps it to expand its business as well by enabling it to team up on underwriting alongside AWAC, thus giving it access to a rated balance sheet as well which will no doubt appeal to some underwriting clients.
The Allied World Assurance and Aeolus partnership shows that it is not necessarily essential for large insurance and reinsurance groups to establish their own third-party capital or ILS management units if they can set up a good working relationship with an established asset manager in the space.
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