Aspen cedes U.S. insurance to investors, hits $185m third-party AuM

Global insurance and reinsurance firm Aspen ceded a portion of its U.S. insurance business to third-party investors in its Aspen Capital Markets unit for the first time recently, while growing its third-party capital assets under management to $185m by the end of 2014.

Aspen has been slowly developing its insurance-linked securities (ILS) and third-party capital unit Aspen Capital Markets in recent years, having launched it in 2013. The re/insurer has been steadily growing its Silverton Re collateralized reinsurance sidecar (now $85m) and other alternative capital strategies and has now reached $185m of third-party funds under management.

However the firm has noted recently that alternative capital is a key part of its strategy, when CEO of Reinsurance Stephen Postlewhite said that the firm would look at “expanding our Aspen Capital Markets offerings and leveraging our access to third party capital,” as one of its areas of growth for 2015.

Aspen uses third-party capital both as a way to reduce its cost-of-capital for underwriting, to generate fee income and profit shares as well as to manage its net exposures by ceding certain business to its third-party investors.

CEO of Aspen Chris O’Kane explained; “We continue to build on the success of Aspen Capital Markets (ACM). In property cat we’re able to leverage our third-party capital relationships through ACM to manage our net exposures down.”

As alternative capital and ILS investors become more sophisticated they are seeking more than access to pure catastrophe reinsurance risks, with other lines of business and areas of diversification becoming ever more prevalent in the ILS and third-party capital arena. Aspen is using its breadth of underwriting to facilitate access to new risks.

“We’re also able to offer our ACM investors access to a different type of risk, which is what they’re seeking,” O’Kane explained. “Previously our ACM vehicle solely offered property cat exposures, this year we passed a part of our US insurance risk to ACM investors for the first time.”

So Aspen has now gone down a route that some other ILS managers and reinsurers have followed, in providing third-party investors with a way to access the returns of primary insurance business as well as reinsurance and with a broader diversification than pure property cat.

At the same time the firm has increased its third-party assets under management at Aspen Capital Markets, from $130m of investor funds at the 30th September 2014 to $185m of third-party capital at the end of 2014.

O’Kane continued; “We now have $185 million of third-party capital and in 2014 ACM contributed in excess of $13 million to the group results.”

That contribution will be welcome in the currently challenging reinsurance market. As long as third-party capital is being leveraged as a way to access new business, or to grow line sizes or to be expansive, rather than simply sharing profits from existing business, it is a viable growth strategy offering incremental income to reinsurers.

“In 2015 we expect to continue to use ACM to fund underwriting opportunities where we can better serve our clients,” O’Kane said.

The slow and steady approach to building out Aspen Capital Markets looks set to continue as the firm targets building a three-year track record to attract investors. The firm does have ambitions to grow it but O’Kane explained that it would not be rushed.

“You’ve got ACM which we’ve now been doing for two years. The growth rate there is rapid. We do want more scale in ACM, but we’re building a track record. To us, three years of trading, a formal track record, gets us to that inflection point where we could expand it a lot more. We’ve got some very good people working on that. So I look at that and say, you know, it seems to be working very well,” he commented.

It’s worth returning to the fact that re/insurers like Aspen are using third-party capital as an exposure management tool, which may or may not always be fully appreciated by investors. O’Kane gave an example of how Aspen has used ACM to help it manage European windstorm exposures.

O’Kane said that European wind was an area where rates were the most under pressure at the January renewals, but Aspen managed this by sharing the risk with third-party capital which allowed it to reduce its PML’s considerably.

“We also continued to utilize Aspen Capital Markets to manage our net exposures downwards. For example, in European wind where rates were most under pressure, our 1-100 PML fell by 1% on a gross basis, but was down six points on a net basis, after the effects of ACM and the effects of retrocession,” O’Kane explained.

So Aspen is using its third-party capital facilities as a way to access reinsurance or retrocessional capacity, while sharing risks with investors and continuing to take a profit share. This allows Aspen to benefit the most from the lower-cost of ILS capital, we would imagine, while still maintaining market shares in areas of the market where it feels the most-pressured.

As Aspen and other reinsurers continue to grow their use of third-party capital it will be interesting to see how these dynamics play out, of utilising investor capital as a form of retrocession while also sharing profits from it.

It’s a little different to a dedicated ILS investment manager, where the third-party capital is managed as the only underwriting capacity available, meaning any exposure management is in the portfolio diversification, while investors and manager are perhaps more aligned, some might say.

However re/insurers like Aspen typically have their own capital in their ILS and third-party capital vehicles as well, which is a different type of alignment to the majority of ILS managers.

Also read:

– Aspen feels competition, to expand use of third-party capital.

– Aspen renews Silverton Re reinsurance sidecar with $85m for 2015.

– Aspen Capital Markets to grow ILS assets, product range in 2015: O’Kane.