Allied World restructures reinsurance with help of ILW’s

Insurance, reinsurance and financial services group Allied World Assurance Company (AWAC) restructured its ceded global property catastrophe reinsurance program at recent renewals, reducing its probable maximum loss and using ILW’s for the first time.

According to the firms second quarter results the restructuring of its catastrophe reinsurance reduced the probable maximum loss (PML) for the perils to which AWAC is most exposed “as a percentage of total capital by over 130 basis points for a 1-in-250 year event .”

Allied World put in place the new program at the beginning of May, the company elected to move away from the more traditional renewal season of June/July. That may help the company to secure better terms and pricing as AWAC will have got to the main property catastrophe protection providers in advance of the busy renewal season.

AWAC purchased an increased amount of protection for both its North American and world-wide exposures and for the first time utilised industry loss warranties (ILW’s), which will have come at an attractive price in May, prior to the more recently seen hardening of ILW prices.

With ILW’s AWAC will have been able to effectively shave off the tops of peak exposures at a reasonable cost, while also taking advantage of cheaper traditional reinsurance capacity and likely some collateralized cover as well, although the firm didn’t confirm that.

As a result of the restructuring AWAC’s ceded premiums rose by almost $16m, which the firm explained was “due to higher ceded premiums on our property catastrophe reinsurance coverage for the three months ended June 30, 2015 compared to the three months ended June 30, 2014.”

The cost of improving its protection saw its reinsurance spend increase. The company explained; “The cost of our current property catastrophe reinsurance coverage, which was effective May 1, 2015, was higher than the prior coverage as we purchased additional coverage, for both world-wide and North American perils, and also purchased industry loss warranties, which we did not purchase in the prior year.”

However improved terms also offset some of the cost, AWAC continued; “The increase in ceded premiums was partially offset by one of our reinsurance treaties in the North American Insurance segment that renewed in the current quarter that did not have a minimum ceded premium provision, whereas that same reinsurance treaty last year had a minimum ceded premium provision.”

Allied World, while taking advantage of attractive reinsurance and ILW market conditions, underwrote less reinsurance itself, as it continued to shift capacity into its primary insurance business.

Citing poor terms and conditions AWAC non-renewed a number of reinsurance contracts with cedents, saw some cedents retaining more business and also saw lower premiums coming in on some contracts that were renewed.

AWC explained; “Gross premiums written decreased by $41.0 million, or 19.1%. The decrease was primarily due to lower premiums written in our general casualty reinsurance and property reinsurance lines of business.”

The company also experienced some losses from the New South Wales storms earlier this year in its reinsurance division.

So Allied World provides a solid example of a company taking advantage of attractive reinsurance market buying conditions, while at the same time pulling back as an underwriter of these risks.

Having better peak peril protection will allow AWAC to expand its insurance businesses more readily, so it is set up for expansion throughout the rest of the year, safe in the knowledge that its peak catastrophe exposures are now lower, thanks to cheaper reinsurance and ILW’s.