Aeolus distributions to Allied World increase, but commitment to shrink

Distributions from its relationship with reinsurance linked investment and insurance linked securities (ILS) manager Aeolus Capital Management Ltd. have again bulked up Allied World’s operating cash flow, but the re/insurer is set to reduce its commitment to the partnership in 2016.

Insurance, reinsurance and financial services group Allied World Assurance Company (AWAC) had been steadily increasing its commitment to the relationship with ILS and reinsurance asset manager Aeolus, but now as it finds it needs to manage it’s probable maximum losses the commitment is being reduced.

This is a reflection of the market environment, which AWAC has found challenging at times and the reduction in its own reinsurance business. AWAC no longer needs as much of the quota share support it had been receiving from Aeolus, so the capital commitment is being reduced in 2016.

However the benefits of that capital commitment have been significant, with Aeolus returning growing amounts of cash distributions to AWAC each year.

AWAC reported receiving almost $300m from the 2015 underwriting year from Aeolus, up from the $285m received a year earlier.

CFO of AWAC Tom Bradley explained during the firms recent earnings call that once again the distributions back from Aeolus helped to boost operating cash flow at the re/insurer.

“Operating cash flow was $513 million for 2015, compared to $417 million in 2014. 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,” Bradley said.

And confirming that the distributions received were significant, Bradley continued; “In the first month of this quarter, we received distributions from Aeolus of about $300 million from the 2015 underwriting year.”

But the commitment that AWAC has been making in terms of capital and its quota share reinsurance arrangement with Aeolus Re, the ILS managers underwriting vehicle, which seems a reflection of its changed book and focus over the last few years as it has navigated the challenging market environment.

AWAC is continuing the commitment but at a reduced level, as the re/insurer manages its exposures for its current book.

Bradley explained; “As many of you know, our contracted quota share with Aeolus Re expired as of the end of 2015. We have renewed our commitment for the 2016 year, but are reducing our capital participation from the $350 million in 2015 to $200 million for the 2016 underwriting year. This is done consistent with our desire to reduce volatility from cat PML.”

Of course, 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, back in December 2012.

AWAC took the stake in Aeolus as it felt the established Aeolus platform and experience could benefit it more from a partnership than if it tried to recreate the wheel from scratch and set up its own ILS management unit.

This choice has proven very effective for AWAC, delivering the increasing amounts of operating cash flow, while the quota share has also provided reinsurance and retro as well.

By working in partnership with Aeolus in this way AWAC has been able to better optimise its own exposures, manage its PML’s, while also effectively making its own capital contribution work harder for it and tapping efficient ILS capital techniques.

With the commitment down in 2016 the capital distribution AWAC receives in return will likely reduce as well. However the relationship remains intact and Aeolus remains a key partner for AWAC.

Also read:

– Allied World increases capital contribution to Aeolus for 2015.

– Aeolus distributions bulk up Allied World cash flow again.

– AWAC adds $200m to cash flow in Q1 thanks to Aeolus relationship.

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

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