Global re/insurance firm Aspen felt the competition in reinsurance during 2014, forcing it to remain disciplined and non-renew some business at 1/1, but it expects to expand on its Aspen Capital Markets offerings and leverage its access to third-party capital in 2015.
There’s a bit of a trend emerging through the results season, of re/insurers either pulling-back, non-renewing or at the least citing the competitive and challenging reinsurance market environment, while at the same time declaring a desire to manage more third-party capital from investors.
Aspen had a mixed year in 2014, over the full-year the firm grew its reinsurance gross written premiums by 3.4%, but in the fourth-quarter pulled-back significantly, underwriting $145.3m of GWP, down 17.5% from $176.2m in 2013.
At the same time in Q4 Aspen announced a renewal and upsizing of its Silverton Re collateralized reinsurance sidecar for 2015, with $85m of capital, as it showed that even if it was pulling back on reinsurance there were opportunities that could be secured to meet capital market investors return hurdles.
Once again the cost-of-capital is paramount to reinsurers and the ability to leverage third-party capital alongside their own increasingly key. Of course the question will remain as to whether underwriting for fee income and profit share, compared to on their own balance-sheet, can be a sustainable source of income that allows large reinsurers to maintain profitability. On that issue, only time will tell.
Where Aspen suffered in Q4 2014 was in terms of revenue, with net income after tax for Q4 reported as $67.2m, down from $90m in Q4 2013. For the full-year net income was up, at $355.8m from $329.3m, reflecting the firms diversity and the strong contribution its insurance business made over the year.
CEO Chris O’Kane, said that the firm needed to remain vigilant to navigate the challenging environment; “In 2014 Aspen achieved Book Value per Share growth of 10.3% and a strong Operating Return on Equity of 11.5%. Our performance – achieved despite a dynamic and competitive reinsurance market that has required constant strategic vigilance – reflects our deep client relationships and access to more attractively priced business in reinsurance, as well as the continued successful build out of our U.S. Insurance teams and the innovative insurance solutions we offer our clients around the world.”
At the January reinsurance renewals Aspen set itself up well for 2015, underwriting 2.1% more gross premiums at $531.3m. However the firm reflects the markets difficulties once again, writing 12% less property catastrophe business and slightly less casualty business too, perhaps showing that the pressures on pricing in casualty are reaching a point where a pull-back may begin from some players. The growth Aspen saw all came from specialty business, of which it underwrote 15% more than the prior year.
Stephen Postlewhite, CEO of Reinsurance, commented on the renewals; “At the important January 1, 2015 renewal season we continued our trajectory of modest growth while maintaining our underwriting discipline. As a result of our client relationships and access to risk, we were able to withdraw capital from areas where rates and terms and conditions did not meet our requirements and deploy it in areas where the business was better rated.”
There was a price decline across Aspen’s renewal book, but overall this seems in-line with other firms experience.
Postlewhite explained; “While there was continued rate pressure in Property Cat we were able to renew the rest of our book, which accounts for approximately 70% of the total renewal, with rates down only 3%. Our strategic positioning, focused on product and regional diversification has resulted in an ability to access and select the better priced risks to retain. We were also able to write a meaningful amount of new, well rated business.”
O’Kane also said on the renewals; “We maintained our disciplined underwriting approach during the January Reinsurance renewal season as we reduced our book where rates and terms did not meet our return requirements while achieving meaningful growth in areas where overall return remain attractive.”
So where are the bright spots looking forwards in reinsurance for Aspen? Postlewhite said that Aspen anticipates capitalising on its regional businesses in Asia and Latin America, as it seeks to navigate the marketplace.
The other area, of course, is in leveraging alternative capital within its underwriting business, which should help Aspen to maintain shares in areas of the business where returns perhaps no longer meet its balance-sheet hurdles. Postlewhite said the firm would look at “expanding our Aspen Capital Markets offerings and leveraging our access to third party capital,” as one of its areas of growth for 2015.
Expanding the firms use of third-party capital and placing an emphasis on the Aspen Capital Markets division will help Aspen to continue to navigate the challenging environment. As of 31st October 2014 the Aspen Capital Markets unit was managing around $130m of investors money, with $70m of third-party capital in the Silverton Re sidecar and the rest in other structures.
Aspen had been using its third-party capital in order to underwrite larger lines in property catastrophe risks throughout 2014, but its not clear yet whether the firm increased its third-party capital managed for the January renewals this year.
It’s worth noting that through much of 2014 Aspen had been taking larger gross positions in reinsurance and using third-party capital at Aspen Capital Markets to redistribute some of that risk. At the same time the firm had increased its use of retrocession as well, so channeling some of that additional risk to third-party capital or to retro capacity, which meant that the net position was remaining stable.
As reinsurance firms increasingly adopt these strategies, of sharing more risk with investors and utilising third-party capital increasingly alongside their balance-sheets, the question remains of whether the profits from managing external capital can match those achieved on the balance-sheet.
Some have called the strategy a race to the bottom, by which it is meant that the more you leverage third-party capital the harder it might be in future to go back to underwriting that business against the balance-sheet.
With cost-of-capital higher across the traditional reinsurance company than at the ILS manager or dedicated third-party capital specialist, could reinsurers end up exacerbating the potential for a perma-soft reinsurance market, in effect undermining their traditional side?
O’Kane said that Aspen would continue to use “repurchases and dividends as appropriate to return to shareholders excess capital that cannot be deployed in the business at our required rates of return.”
With that in mind, Aspen could write less on its balance-sheet, returning that capital to investors, while using more third-party capital for which it will generate a lower-return.
Is there a slippery slope here, not necessarily for Aspen but for the re/insurer that gets stuck in a loop of taking on business it cannot justify underwriting using its own capital, but that it can with third-party investors?
If the market doesn’t change, in terms of price and levels of competition, could we see a day when some companies wholesale pull-out of certain areas of the market with their own balance-sheets?
Will they continue in these areas using third-party capital though, and will that generate enough profit to maintain their returns?
Or could this strategy in fact exacerbate and perpetuate the very issues that they are seeking to avoid and should they instead just relinquish that type of business to the more efficient ILS market?
More questions than answers, but certainly something to ponder and that we’ll write more on in due course.