Aspen continues to cede higher premiums to retro & third-party capital

Bermudian insurance and reinsurance group Aspen Insurance Holdings Limited has continued to cede an increasing amount of its gross premiums written, with retrocessional and third-party capital providers the likely beneficiaries.

Aspen, which is now going through a sale process to private equity investment giant Apollo, has been making increasing use of both retrocessional sources of reinsurance capital and the appetite of third-party ILS investors to manage its probable maximum losses (PML’s) in recent quarters.

At the same time the firm has been consistently growing its book, likely taking advantage of the slightly improved rates available, while at the same time leveraging the retro and third-party capital as a way to add capital efficiency.

This strategy, of managing overall exposure created by top-line growth using both traditional and alternative sources of reinsurance and retrocession capital, is becoming a key lever in the re/insurer toolkit as they seek to add efficiency to their business models.

Aspen continued to grow its insurance book in the third-quarter of the year, growing gross premiums written by more than 143% year-on-year to $476.8 million, with the growth largely from its Financial and Professional Lines and Property and Casualty sub-segments, while there were slight declines across Marine, Aviation and Energy.

At the same time the firms reinsurance book continued to shrink, as gross premiums fell 8% to $396.4 million, largely due to cutting back in property catastrophe reinsurance business.

However, the firms net written insurance premiums decreased by almost 5%, which Aspen said was largely due to the impact of increased quota share reinsurance attaching during 2018, resulting in a lower amount of premiums retained.

Aspen took $56.4 million of catastrophe losses in the quarter, primarily due to Typhoon Jebi in Japan, Hurricane Florence in the U.S. and various other weather-related events in the U.S. and Asia. But the firms reinsurance and third-party capital arrangements have assisted here.

This is a sign that Aspen’s increased use of third-party capital through its Aspen Capital Markets unit, which often involves private collateralized quota share reinsurance arrangements with investors, mutual fund managers and other ILS interested parties, is working, helping the firm to better manage its exposures.

Aspen’s growing insurance book has been supported by the firms access to efficient capital through quota share vehicles with traditional markets and third-party investors.

This business has fallen to the Peregrine Re special purpose vehicle, which now provides the home for Aspen’s fully-collateralized reinsurance quota-share business, as it sunsets its Silverton Re sidecar.

The Peregrine vehicle cedes significant amounts of risk to ILS focused investors including Stone Ridge Asset Management, which had at least $260 million invested in Aspen quota shares and catastrophe bonds as of the firms latest mutual ILS fund report.

The proportion of premiums underwritten that are being ceded out At Aspen grew again in Q3 2018, which will be partly due to the attaching quota shares, some of which could be third-party capital backed, but also the overall growth in its quota share business, we believe.

In the third-quarter of 2018 Aspen ceded out roughly 34% of its gross premiums, up from the nearly 29% ceded in Q3 2017.

This is a lower rate of cessions than was seen in the second quarter, but it’s still evident that Aspen continues to make increased use of all forms of reinsurance and retrocessional capital as it manages its book and losses.

In the insurance business at Aspen in particular, it does look like the quota shares that attached have helped the firm hand off more of its Q3 catastrophe losses to reinsurance capital providers, than it has retained during the quarter.

This trend is being seen market-wide, particularly among the Bermudians re/insurers that underwrite both insurance and reinsurance business, as they look to take advantage of retrocessional capital, both from traditional reinsurance and ILS fund sources, as well as quota share capacity direct from investors and funds, that can help them manage their PML’s and keep their combined ratios down on the insurance book of business as it grows.

As the end of year reinsurance renewals approach it will be interesting to see how traditional re/insurers like Aspen and as we wrote earlier AXIS, use and deploy third-party capital to increases stakes in key markets, while earning fee income but without becoming over-exposed to capital heavy lines of business.