Aspen adds another Peregrine quota share, likely with Stone Ridge

Bermudian insurance and reinsurance group Aspen Insurance Holdings Limited has continued to expand its use of collateralized reinsurance and ceding risks to third-party capital investors through its Aspen Capital Markets division.

Aspen has been making increasing use of retrocessional sources of reinsurance capital alongside the appetite of third-party ILS investors to manage its probable maximum losses (PML’s) in recent quarters.

In 2018 the company expanded its use of the Peregrine Re special purpose vehicle, which serves as the home for Aspen’s fully-collateralized reinsurance quota-share business, following the sun setting of its Silverton Re sidecar.

Aspen reported that, “As at December 31, 2018, Peregrine had formed four segregated accounts which were funded by a third party investor.”

So, Aspen ended 2018 with four segregated account transactions within the Peregrine Re vehicle, which each house some kind of fully-collateralized quota share reinsurance arrangement between the re/insurer and presumably mutual fund manager Stone Ridge Asset Management.

One of these transactions must have been completed in the final weeks of 2018, as Stone Ridge had already reported three segregated account investments in the Peregrine Re vehicle as of the end of October.

Hence it’s safe to assume a fresh private quota share transaction was entered into by Aspen and Stone Ridge between that date and the end of the year, likely aligned with the reinsurance renewal.

The earlier three segregated account transactions were valued at roughly $265 million as at the end of October, so with another deal added it’s likely that Stone Ridge has over $300 million invested in private ILS transactions that access risks originated and underwritten by Aspen.

Third-party capital has been helping Aspen to broaden its underwriting, expand its book and lower the volatility in its own results as well.

The re/insurer established its Aspen Capital Markets unit looks to leverage the expertise and underwriting ability within Aspen Re, the firm’s reinsurance unit, in developing alternative reinsurance structures and private ILS deals that provide investors with a way to directly access its underwriting returns, while at the same time providing a way to leverage third-party capital as a form of retrocession for the portfolio.

The unit earns management and performance fees for arranging, structuring and matching Aspen’s risks with the third-party investors capital.

Aspen has been ceding an increasing proportion of its reinsurance premiums written to third-party investors through these arrangements, which also benefits the firm as investors share in its losses as well.

The company said on 2018 that, “We have also increased our capacity through other collateralized reinsurance arrangements via Aspen Capital Markets.”

Aspen also notes that should any of its major third-party investor relationships come to an end it could be detrimental to its financial condition and results, suggesting that these meaningful arrangements are becoming an increasingly important piece of its operational structure.

Aspen also has an SEC registered investment advisory unit, Aspen Capital Advisors Inc., which manages an ILS fund focused on weather and catastrophe risks for certain third-party investors. At the end of December 2018 Aspen reports that this unit had $86.3 million of assets under its management, down slightly from $91.9 million at the end of 2017.

Aspen reported an elevated level of catastrophe losses for the fourth-quarter of 2018, as reported by our sister publication, which suggests it likely passed on an elevated level of losses to third-party investors through its various collateralized reinsurance strategies and ILS investment strategies.

But that’s no surprise, given the elevated level of catastrophes that the market suffered and for Aspen, the third-party capital partners it works with will have helped it to moderate its loss experience slightly, to the benefit of its results.

For 2018 as a whole, Aspen ceded around $220 million more in premiums than the prior year, part of which will have reflected the cessions to its third-party capital investors through vehicles such as Peregrine Re.

Of course this is a trend that we see market-wide, particularly among the mid-sized re/insurers that underwrite both insurance and reinsurance business, as they look to take advantage of retrocession and reinsurance, from traditional, ILS fund and direct investor sources.

The quota share capacity that re/insurers such as Aspen get directly from investors and ILS funds helps them to manage their PML’s and keep their combined ratios down on their books of business as they expand, all the while earning important income from fees and profit shares as well.

With Aspen expanding the amount of third-party capital support it receives using this latest Peregrine private ILS quota share, the company is ensuring its protection is robust while also earning income for its underwriting expertise.