Aspen to buy more reinsurance, uses Capital Markets to reduce PML’s

Insurance and reinsurance group Aspen is set to make greater use of reinsurance capacity as it sees the time as right to take advantage of pricing and appetite, in order to help it to reduce its probable maximum loss, something it has also been using its Aspen Capital Markets unit to do.

Aspen is the first of the larger re/insurance players to admit something we have suspected for the last few months, that after a period of consolidation, higher retentions and reduced reinsurance buying, we could be on the cusp of re/insurers strategically realising that the time is now to reduce their risk profile.

Aspen has already been actively managing its risk appetite, with the help of its alternative capital management and insurance-linked securities (ILS) unit, Aspen Capital Markets. The company shares risks, largely in property catastrophe risks, with third-party investors through the Capital Markets unit as a way to manage its exposures.

This is set to continue it seems, but Aspen is a company ready to leverage much more reinsurance and retrocession, as it feels the price gap between insurance and reinsurance is now such that it would be foolish not to.

CEO Chris O’Kane said during the firms recent earnings call that Aspen continues to leverage its Aspen Capital Markets unit “to manage our PML exposures downwards and also to provide our investors with the risks they seek.”

In fact, despite Aspen’s latest quarterly earnings showing top-line growth in property catastrophe risks, the firm has actually reduced its net written premiums, which CFO Scott Kirk explained was reflective of; “Management of our cat exposures through the use of the Aspen Capital Markets vehicle and the purchase of additional retrocessional reinsurance which has reduced our PMLs across most perils.”

And O’Kane explained that despite the falling pricing in reinsurance, particularly property catastrophe, and Aspen’s desire to hold onto less of this itself, the firm continues to look to third-party capital as a way to share this risk with investors.

“Many of our Aspen Capital Market partners actually can make a return out of prices that are available,” O’Kane explained, which suggests that, for some of these risks, a balance-sheet backed re/insurer like Aspen cannot make an adequate return anymore.

That raises questions about those companies which are not leveraging lower-cost capital from investors to enable them to stay in certain markets. If you’re not sharing the risk with someone who can make a return from it and not utilising reinsurance to offload it there must be some companies who are retaining risks that just are no longer profitable for them.

There could be more opportunities for the Aspen Capital Markets team to bring risks to their investors in the coming quarters as well, as Aspen as a company is set to reverse its policy of having retained more risks and will now look to cede more to the reinsurance and retrocession markets, according to O’Kane.

Aspen has been using what it terms its ‘internal reinsurance vehicle’ or IRV to retain portions of programs written in order to extract more profit margin. This was a strategy implemented only in the last few years, but the market has moved on so much that it makes more sense to buy more reinsurance or utilise more reinsurance capital again.

O’Kane explained; “We started doing that three or four years ago, because we thought there was a wide discrepancy between the price we could write business at and the price we could reinsure it. We thought by retaining more risk we would improve our net income and we did.

“That was a great course of action through 2013, 2014 and even in 2015 it made a lot of sense. In 2016 it makes a lot less sense and in 2017 it may make no sense whatsoever.”

O’Kane went on to explain that as a result of this some larger losses, such as those experienced in the second-quarter of 2016, may in future still exist on a gross basis but net they may be greatly reduced by the use of reinsurance capital.

“What we’re in the process of doing is buying a lot more quota share, some really quite chunky amounts of quota share across areas like marine and energy, but also our primary casualty, our excess casualty, our professional liability, our management liability and so on,” O’Kane continued.

“That is largely because we’re intending to cancel the additional retentions that we had on our reinsurances and actually cede those over to the outside world,” he explained.

That suggests the Aspen Capital Markets team and third-party investors in their vehicles, such as the Silverton Re collateralised reinsurance sidecar, could find themselves benefiting from greater cessions of risk from Aspen, providing the capital markets unit with an opportunity to also raise more capital from investors as well.

O’Kane said that this process of analysing the portfolio and identifying which to cede to reinsurance markets, above and beyond what has already been ceded, is already complete in some lines of business and work is ongoing in others.

It’s perhaps a sign that the rationalisation and centralisation of reinsurance buying is going to result in more risk being ceded as companies identify what risk fits better on its own balance-sheet, a third-party capitalised balance-sheet, or in the global reinsurance and capital markets.

There is also the recent catastrophe loss experience to consider, as companies are increasingly coming to terms with a more frequent cat loss load expectation, as weather volatility and frequency of events is anticipated to be on the increase, making reinsurance and risk transfer increasingly attractive.

The benefit for Aspen is “We will be retaining a lesser share of volatility, as this year goes on and certainly into next year and beyond, given the current differences in price between the insurance and the reinsurance products,” O’Kane commented.

This perhaps also suggest that Aspen might believe that at this point in the reinsurance cycle it would be prudent to de-risk, as much as is possible, before a really major loss occurs. In this way the company can hope to come out the other side of such an event looking far better than those competitors that choose to take on more of its risks.

Using more reinsurance capital, either from the traditional or alternative market, is one way to achieve this goal and Aspen has clearly decided that the market is positioned in such a way that now is the time to cede more risk.