AWAC adds $200m to cash flow in Q1 thanks to Aeolus relationship

Allied World Assurance Company (AWAC) reports significant value from its close relationship with reinsurance linked investments and insurance linked securities (ILS) manager Aeolus Capital Management Ltd., booking $200m of distributions from Aeolus in Q1.

Allied World Assurance purchased a minority stake in Aeolus Capital Management Ltd., the Bermuda-based asset manager of third-party capital which it invests in property catastrophe reinsurance and retrocession on a collateralized basis, in December 2012.

Allied World elected to take a stake in Aeolus, rather than establishing its own third-party reinsurance capital unit, feeling that it could benefit from the established Aeolus platform and perhaps benefit more from a partnership than by trying to go it alone and start-up an ILS manager from scratch.

That decision is beginning to look very smart, as Allied World has reported that it s beginning to gain significant value from the relationship it has built with Aeolus.

During the Allied World first-quarter 2014 earnings call, which took place yesterday, the re/insurer reported a 10% growth in its reinsurance gross written premiums with approximately one-third of that growth in reinsurance attributable to its Aeolus relationship, according to the firms CIO John Gauthier.

CEO Scott Carmilani also highlighted the contribution that the relationship with Aeolus is making to AWAC, saying; “The increase (in reinsurance premiums) was driven in part by our participation in the Aeolus quota share business and a large growth in our crop book.”

So that is pretty impressive, that a stake in an ILS and third-party reinsurance capital manager is beginning to contribute so meaningfully to Allied World’s growth in the reinsurance business. As the relationship develops we could see Aeolus’ contribution to AWAC’s reinsurance premium growth increasing even more.

However, while that is impressive another fact revealed during the earnings call really shows where Aeolus is bringing significant value to Allied World. The firm reported record operating cash flow of just over $303m for the first-quarter of 2014, up from just under $14m a year earlier.

The main reason for this huge increase in operating cash flow? Allied World’s participation in collateralized property catastrophe reinsurance business with Aeolus Capital Management.

AWAC CFO Tom Bradley explained; “This increase largely relates to our participation in a collateralized property catastrophe program with Aeolus Re. During the first quarter we received contributions of over $200 million from Aeolus for prior underwriting years, we received distributions of over $200 million.”

This is something that Allied World will hope to continue to enjoy, as prior year distributions of profits from the Aeolus relationship increasingly boost its cash flow. Other reinsurers with third-party capital units will begin to enjoy similar cash flow increases, but Allied World is ahead of the game having partnered with an established, large player in the ILS and third-party reinsurance capital space.