Swiss Re Insurance-Linked Fund Management

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Aeolus distributions to Allied World up again in 2016


Allied World Assurance Company’s (AWAC) relationship with Aeolus Capital Management Ltd. helped the firm offset a decline in operational cash flows in 2016; with distributions from Aeolus increasing to $406 million while the re/insurer’s commitment to the partnership remained relatively flat.

Distributions from AWAC’s relationship with reinsurance linked investment and insurance-linked securities (ILS) manager Aeolus have been increasing steadily year-on-year, with the re/insurer reporting that it received approximately $406 million in cash from Aeolus in 2016.

This represents growth of roughly 35% from the $300 million AWAC received from the 2015 underwriting year, and 42% higher than the $285 million reported in 2014, as covered by Artemis.

While the distributions to AWAC have been increasing year-on-year the insurer and reinsurer had been reducing its commitment to the partnership in recent times, with market forces the main reason, although for the 2017 underwriting year its commitment is actually up very slightly, at $204 million.

This is compared with a commitment of $200 million for the 2016 underwriting year, and $385 million for the 2015 underwriting year.

Cash flows from operations across its business declined by $113.5 million for AWAC in 2016, largely driven by increased net paid losses and a decline in net premiums written.

However, the insurer and reinsurer explained that higher net cash receipts from its collateralised quota share reinsurance agreement with Aeolus partially offset the decline in cash flows from operations.

So despite the commitment declining in 2016 the capital distribution continues to increase for AWAC, so it’s clear that the relationship remains beneficial to the re/insurer, enabling the firm to optimise its own exposures and manage its PMLs, via the utilisation of efficient ILS market features and capital.

Around this time last year AWAC’s Chief Financial Officer (CFO), Tom Bradley, explained during the company’s earnings call that the reduction of the capital participation to Aeolus was consistent with its desire to reduce volatility from cat PML, and it appears the re/insurer has sought to reduce volatility further.

For the year ending December 31st 2016 the re/insurer also saw its assumed premiums from its collateralised property catastrophe quota share reinsurance arrangement with Aeolus decline further. Declining to $38.2 million in 2016, compared with $76.3 million in the previous year, and $87.3 million in 2014.

The continued and increasing distributions AWAC receives from its relationship with Aeolus highlights how beneficial a partnership between a traditional re/insurer and a reinsurance-linked investment of ILS fund manager can be.

As the partnership between the pair continues into 2017, it will be interesting to see if AWAC’s distributions from Aeolus grow further.

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