Aeolus distributions bulk up Allied World cash flow again

Allied World Assurance Company (AWAC) continues to report strong cash flow injections thanks to its ongoing relationship with reinsurance linked investment and insurance linked securities (ILS) manager Aeolus Capital Management Ltd.

For 2014 Allied World CFO Thomas Bradley reported operating cash flow of $417m, compared to $114m in 2013. One of the key reasons for that jump was the Aeolus relationship.

Bradley explained; “This increase was driven by the receipt of funds from prior underwriting years related to our participation in the Aeolus collateralized property catastrophe reinsurance program.”

In fact, the year 2014 began very positively for Allied World and its relationship with Aeolus as the firm reported booking $200m of distributions thanks to its participation in collateralized property catastrophe reinsurance business with Aeolus Capital Management.

Many collateralized reinsurance contracts are renewed in January, or collateral released, and once again this has resulted in the release of capital from Aeolus for prior underwriting years, once again resulting in a welcome cash flow boost at the start of this year for Allied World.

Bradley continued; “Already, during the first month of this quarter, we’ve received distributions from Aeolus of over $285 million from prior underwriting years, as we continue to benefit from their outstanding operating results.”

So the contribution has increased this year, which in the current reinsurance market environment of lower pricing and rates probably reflects more capital having been deployed through the relationship and into Aeolus’ collateralized underwriting.

With losses very low once again in 2014 and the kind of business written by ILS managers like Aeolus often attaching at high levels of loss, 2014 has been very good for the firms.

“2014 was a very good year for our property book across the board for our reinsurance and the Aeolus deals,” Bradley explained.

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

Allied World took a stake in Aeolus rather than establishing its own third-party reinsurance capital unit, as it felt the established Aeolus platform and experience could benefit it more from a partnership than by trying to recreate the wheel from scratch.

That decision continues to look like a good one, as Allied World continues to report the value it generates from the relationship it has built with Aeolus, both in terms of helping it to be more expansive and in real cash terms.

During the Allied World earnings call recently executives discussed that Allied World may write more business through its partnership within Aeolus in 2015. However they noted that this was unlikely to result in growth of its underwriting in property catastrophe risks, rather a change in mix as it uses more collateralized over rated balance-sheet underwriting due to the pricing environment.

Having a little more separation in this way, by allowing Aeolus to carry on doing what it is best at while Allied World can focus on the traditional business, seems to be reaping dividends for AWAC.

It’s a different strategy to that adopted by most re/insurers, who have tended to try to build ILS operations in-house, but in the future it may look a sensible one as the transparency and separation this results in could be something that third-party investors appreciate in years to come.