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

In its recent second-quarter earnings call the CEO of insurance, reinsurance and financial services group Allied World Assurance Company Holdings, AG, Scott Carmilani, said that the firm “love the relationship” it has built with reinsurance-linked asset manager Aeolus Capital Management Ltd.

Allied World Assurance acquired a minority stake in Aeolus Capital Management Ltd., a Bermuda-based asset manager who manage investors third-party capital to invest in property catastrophe reinsurance and retrocession on a collateralized basis, in December 2012. It chose this route rather than seeking to establish its own third-party capital management division, the route preferred by many re/insurers in recent months.

Allied World Assurance is serious about asset and capital management. In the last year it has also formed a strategic partnership with MatlinPatterson to expand its asset management business and opportunities as well as acquiring a minority stake in asset manager Crescent Capital Group LP which saw Crescent manage $500m of Allied World’s investment portfolio.

It certainly seems that Allied World Assurance would rather let experts manage the assets while it concentrates on its core business of underwriting risk on an insurance and reinsurance basis. CEO Carmilani said that part of the growth within the firms reinsurance segment could be attributed to its partnership with Aeolus Capital Management and that it continues to see property catastrophe premium growth in that part of its business.

Carmilani said that Allied World Assurance chose to go into business with Aeolus, over establishing its own ILS focused division, as it appreciated the firms track-record and size. He said that Aeolus has a competitive advantage and size advantage in the ILS space and in Allied World’s mind that translates into higher returns and better fee income. Allied World wanted this scale when entering the ILS space, rather than beginning with its own small structure such as a sidecar, as it makes the venture more worthwhile for it.

Commenting on the ILS and third-party reinsurance capital management business, Carmilani said; “I think it’s a market that’s here to stay for the foreseeable future. I think it’s a healthy one. It’s a strongly modeled portfolio. And they get a different type of business, and arrangement for the businesses, for the accounts they do.”

Carmilani then discussed Aeolus specifically and the partnership that the two firms have built. He commented; “We like it. In fact, I’d say we love it. We love the relationship. We love the people we’re involved with. I think they do a great job and that they’re performing as we would expect them to perform. I think they’ve got not only a competitive edge but a leadership position.”

Carmilani continued by saying that he looks at the fact that everyone else is emulating this in trying to establish third-party and ILS capital management divisions as flattery. He said that most traditional reinsurers now realise that at least some portion of the catastrophe reinsurance market is now going to vehicles like this.

Clearly AWAC has seen the growing trend for third-party capital in reinsurance and been watching it closely over the last few years as it evaluated the best way to enter the space.

Carmilani said; “It’s been headed that way for a year or so now. And I think some folks tried to stem it, some folks embraced it, and everyone’s going to be affected by it. So our position is we’re out in front of it.”

Carmilani also commented that Allied World Assurance has actively been doing deals alongside Aeolus Capital in the second quarter of the year. From his comments it seems that these deals have been done both using the Aeolus collateralized reinsurance vehicle as well as on AWAC’s own rated paper. That gives AWAC, and also Aeolus Capital Management, a great deal of flexibility in how they can structure contracts and it also gives their clients flexibility in terms of using rated paper, or otherwise. Carmilani said that this ability to use the collateralized reinsurer or their own structure was one of the advantages the firm had over some others in this market.

Using this model is certainly an advantage to Aeolus as it can offer its investment clients risk selection from a large insurance and reinsurance group and its underwriting clients the option to use AWAC’s rated paper. So the partnership works both ways and gives both parties, Aeolus Capital Management and Allied World Assurance, the flexibility to ensure they can offer a broad range of investment and underwriting services between them.

Also read: Our article from last week on Alleghany Corporation, the insurance and reinsurance holding company with property and casualty subsidiaries including reinsurer Transatlantic Re, which purchased a stake in alternative investments asset manager Ares Management LLC, a partnership which positions them to serve the converging reinsurance and capital markets.