Aeolus distributions drive cash flow increase at Allied World again

by Artemis on April 22, 2016

Once again insurance, reinsurance and financial services group Allied World Assurance Company (AWAC) has reported an increase in its operating cash flow for the first-quarter of 2016, thanks to distributions from its relationship with ILS manager Aeolus.

Reinsurance linked investment and insurance linked securities (ILS) asset manager Aeolus Capital Management Ltd. has been delivering strong and growing distributions of capital from prior underwriting years back to AWAC, resulting in significant increases in cash flow for the firm.

During AWAC’s first-quarter 2016 earnings call this week, CFO Tom Bradley explained that distributions from the relationship with Aeolus, due to collateralised reinsurance underwriting, had driven Q1 operating cash flow even higher.

“Operating cash flow was $347 million in the quarter compared to $318 million in the prior year quarter,” Bradley explained.

Comparing AWAC’s operating cash flow over recent years clearly shows the growing distributions back from Aeolus, which of course has been assisted by the more benign catastrophe loss environment.

For Q1 2014 AWAC reported record operating cash flow of just over $303m, citing its participation in collateralized property catastrophe reinsurance business with Aeolus Capital Management as the driving force behind this.

Again, for Q1 2015 AWAC reported another increase, with distributions from Aeolus’ property catastrophe reinsurance program again helping to drive the operating cash flow north to $318m.

Bradley explained that the growth in Q1 2016 is again down to the Aeolus relationship, saying; “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.”

As well as these distributions, AWAC will also have been benefiting from some form of share in profits and returns on its investments in Aelous’ collateralized reinsurance operations as well, we imagine.

Of course these distributions are likely to shrink in future, as AWAC reduced its participation in Aeolus’ collateralized reinsurance operations from $350m in 2015, down to $200m in 2016, a reflection of its position on the current market environment and as it seeks to manage its own PML’s.

However, interestingly AWAC reports that it entered into a new retrocessional reinsurance quota share for its property reinsurance business, increasing the amount of premiums ceded in Q1. It is possible that Aeolus could be the market behind this quota share as well, which if it would might suggest that the relationship hasn’t shrunk so much, rather changed as AWAC finds ways to leverage the efficiency of Aeolus’ ILS capital.

Of course, we cannot confirm that as it has not been reported, but it would perhaps make sense for both parties if Aeolus was behind this retro quota share for Allied World.

The reduced participation in the collateralized property catastrophe reinsurance program through Aeolus Re Ltd. has lowered AWAC’s gross property reinsurance premiums written. But given the current softened state of the market, it may be that AWAC can put the capital to work more effectively in writing other business, while Aeolus could assist in upping its efficiency as one of its retrocessionaires as well.

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

For AWAC, the stake in an established and successful ILS outfit has proven perhaps more effective than trying to start its own and also enabled the firm to hit the ground running, rather than having to create a track record. Aeolus, of course, benefits from the capital participation and the access to business, as well as underwriting synergies between the pair.

As other traditional insurance and reinsurance companies look to third-party capital management and ILS as vital pieces of their future business mix, they would do well to look at how relationships such as this have helped both sides profit, and consider teaming up as well as going it alone.

Also read:

Aeolus distributions to Allied World increase, but commitment to shrink.

Aeolus having an extremely good year: Allied World Assurance CEO.

Allied World Assurance “love the relationship” with Aeolus on ILS.

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