Insurance, reinsurance and financial services group Allied World Assurance Company (AWAC) has increased its capital contribution to reinsurance linked investment and insurance linked securities (ILS) manager Aeolus Capital Management Ltd. for 2015.
AWAC purchased a minority stake in Aeolus, the Bermuda-based of third-party capital manager that invests in property catastrophe reinsurance and retrocession on a fully collateralized basis, back in December 2012.
Since then the relationship has paid dividends to AWAC, in terms of capital contributions returned by Aeolus, which with low levels of global catastrophe losses and attractive returns made on the invested reinsurance assets have been growing over time.
In fact AWAC reported that distributions coming back from Aeolus had increased, with over $285 million being returned from prior underwriting years, which AWAC said allows the re/insurer to “continue to benefit from their [Aeolus’] outstanding operating results.”
Now it has become clear that this relationship is working well in both directions, as Allied World revealed that it has increased its capital contributions into Aeolus’ funds for the 2015 underwriting year.
With the partnership between AWAC and Aeolus now almost two and a half years old, AWAC has been steadily increasing the capital contribution that it makes into the Aeolus ILS and reinsurance funds. As Aeolus has demonstrated its ability to generate attractive returns and results, through its regular and growing distributions back to AWAC, the re/insurer has in turn upped its contribution.
Scott Carmilani, President and CEO of Allied World, explained; “In 2014 we supported Aeolus with $300 million of capital. In 2015 it’s $350 million, so up just slightly.”
Referring to the strong distributions that AWAC received back from Aeolus at the end of 2014, Carmilani continued; “Most of the ’14 capital has been returned. As of now, there is a little bit of lingering that will continue to come in, but most of that came back in the first-quarter.”
In terms of how the capital contribution for 2015 would translate into premiums written, Carmilani explained; “So a slight increase in our support [of Aeolus] for the 2015 underwriting year and that translates at, depending on the rate-on-line, on where they put that business in, at something in the 20% to 25% range to GWP for the reinsurance treaty operation.”
That’s a healthy addition to the Allied World GWP’s for 2015 and if Aeolus can maintain the recent performance, and large catastrophe losses remain low throughout the year, AWAC will expect to see another healthy distribution of capital and return in early 2016.
The relationship with Aeolus also helps AWAC to maintain a stake in the property catastrophe reinsurance market, where it has been pulling back based on rates becoming too low in some areas for its cost-of-equity.
Aeolus meanwhile, as an efficient underwriter leveraging third-party capital, can perhaps put some of AWAC’s contribution to work effectively in areas of the market where the re/insurer no longer has the appetite to play.
Allied World and Aeolus is a great example of the partnership approach, between a traditional insurance and reinsurance player and a reinsurance-linked investment or ILS fund manager. We expect to see more traditional players seeking out partnerships in years to come, as the additional separation between the two entities helps to overcome any questions about potential conflicts of interest.