Aspen’s increased cessions to retro & third-party capital continue in Q2

Bermudian insurance and reinsurance group Aspen Insurance Holdings Limited has continued to cede more of its underwritten premiums to third-party capital sources and retrocession, with quota shares playing an important role as the company expands its insurance book.

In the second-quarter of 2018, Aspen continued to take advantage of the improved rate environment in order to grow its book.

It’s a sign the company continues to focus on executing its strategy, despite the still ongoing sale process, while managing its exposure due to top-line growth with the help of both traditional and alternative sources of reinsurance and retrocession capital.

During the second-quarter, Aspen’s gross premiums underwritten increased by 4% across the business, but the Aspen Insurance unit drove this with gross premiums increasing by almost 9%, while the Aspen Re book actually shrank by 3%.

Chris O’Kane, Chief Executive Officer of Aspen, commented on the Q2 results, “Aspen’s second quarter results demonstrate ongoing execution of our plan to enhance performance. This included the continued successful repositioning of Aspen Insurance, which had its second consecutive record quarter in terms of gross written premium, another quarter of solid results and pricing discipline at Aspen Re and significant progress in the implementation of our Operational Effectiveness and Efficiency program.”

The growth in the insurance book continues to see Aspen utilising access to efficient capital through its quota share vehicles with traditional markets and third-party investors, with the Peregrine Re special purpose vehicle now providing the home for its fully-collateralized reinsurance quota-share business, as it sunsets the Silverton sidecar.

The Peregrine vehicle cedes large amounts of risk to ILS focused investors including Stone Ridge Asset Management, which had at least $260 million invested in Aspen quota shares as of the investors latest mutual ILS fund report.

Aspen continues to underwrite more business, but like so many others reinsurance capital is playing an increasingly important role, in helping the firm manage exposures, add efficiency to its own underwriting capital and moderate its PML’s.

Hence, the proportion of premiums underwritten that are ceded out continued to increase in Q2 2018, which is partly is due to a de-consolidation of the Aspen Capital Markets unit, as this is now be reported on as any other third-party source of reinsurance would be, but also the growing quota share business, we believe.

In the second-quarter of 2018 Aspen ceded out roughly 43% of its gross premiums, up significantly from the nearly 30% ceded in Q2 2017.

Interestingly the increase in the proportions ceded is very similar to those seen in the first-quarter, suggesting the mechanism for the increased cessions could be proportional quota shares through the Peregrine Re vehicle now being accounted for through the main cessions.

The higher amount ceded year-on-year reflects the significant use of retrocession and the ceding of risk through the Aspen Capital Markets unit vehicles (largely Peregrine Re we believe) in the quarter.

It’s a trend that is increasing across the market, particularly among the Bermudians that underwrite both insurance and reinsurance, as they look to take advantage of retrocessional capital, both from traditional reinsurance and ILS fund sources, as well as quota share capacity that can help them manage their PML’s and keep the combined ratios down on the insurance book of business as it grows.

Most importantly, Aspen, is utilising the capital markets and third-party reinsurance capital as a way to manage its own exposure, while putting its underwriting expertise to work in areas of the market where its own capital and balance-sheet is not always the most efficient home for the risk.

This enables the firm to grow into areas of risk with the help of efficient capital to manage top-line exposures, while also earning fees for its underwriting and management skills.

The trends of re/insurers underwriting more business when rates are attractive, but with more of the peak catastrophe and property exposures being passed onto third-party capital and sources of retrocession, is picking up pace and likely to become a core strategic lever for some companies.

Traditional reinsurers are going to be deploying even more third-party capital at renewals ahead, particularly if rates plateau again, as they look to increases stakes in key markets, while earning fee income but without becoming over-exposed to capital heavy lines of business.