With the current softened state of reinsurance rates and competitive pressures from well-capitalised reinsurers and growing insurance-linked securities players, the property catastrophe reinsurance market is “not as much fun as it was,” according to Aspen CEO Chris O’Kane.
The property catastrophe reinsurance space has become the peak zone of competition and pressure for global insurance and reinsurance companies, such as Aspen. In many cases this has led to a continued pull-back on the amount of capacity being allocated to property cat, Aspen has been among those redeploying capital in a search for better priced business to underwrite.
“We are redeploying capital within it,” O’Kane explained during the Aspen Q1 2015 earnings call when asked about the firm’s strategy within the reinsurance market.
Aspen has had a historical record of achieving high returns on equity in its reinsurance underwriting unit, but the pressure in property catastrophe reinsurance has got too much for the firm’s risk appetite.
O’Kane explained; “Our reinsurance segment has a history of outstanding results and this quarter continued that track record in really quite a difficult environment. At a time when the property catastrophe market is faced with continued pressure we are able to leverage our long-established expertise in other segments.”
“I think some of that commoditised property cat is not as much fun as it was,” O’Kane later explained, referring to the area of the market where Aspen’s reallocation of reinsurance capacity has been most apparent.
However, unlike many of the firm’s competitors, Aspen has been able to achieve ongoing growth in its reinsurance unit, and there are a number of brighter spots where the firm has been focusing its attention.
One of these is the Aspen Capital Markets unit, which manages third-party investors capital in insurance-linked securities (ILS) and alternative reinsurance structures, such as the firm’s Silverton Re fully-collateralized reinsurance sidecar.
O’Kane commented that “Aspen Capital Markets provides growth,” while other bright spots are international markets such as Asia Pacific, Africa, Middle East and North Africa.
The CEO said that he expects Aspen’s growth in its reinsurance book will continue over the next few years, as cedents are not all looking positively on consolidation within the market.
“We are going to increase our market share at the expense of some bigger consolidating companies. So naturally we feel pretty good about reinsurance,” O’Kane explained.
O’Kane explained that at Q1 renewals Aspen saw a decline in pricing of around 11% across its property catastrophe underwriting. However the firm uses its third-party capital vehicle to help it to move some of this capacity onto a more efficient balance-sheet.
“We have managed our exposures down by moving capital away and by utilising Aspen Capital markets,” O’Kane said. “We are then redeploying that capital where rates are less pressured and we are getting paid for our thoughtful nimble approach to underwriting.”
Aspen has also been restructuring its ceded reinsurance and retrocessional programmes, in order to centralise, rationalise and ensure best use of capital and capacity. Aspen Capital Markets no doubt also plays a role in influencing how the re/insurer thinks about the reinsurance and retro capital it requires.
As Aspen adapts its underwriting and ceded reinsurance programmes, in order to better navigate the challenging market environment, the Aspen Capital Markets unit will play a key role. The re/insurer aims to grow this unit over time and expand its remit, which should enable it to maintain a strong foothold in the property catastrophe reinsurance market, despite reduced pricing that does not suit its equity balance-sheet.
Third-party capital vehicles continue to play a key role as the reinsurance market adjusts to the new reality of softer rates, higher retentions, centralised buying and in some cases lower cessions.
Over time re/insurers like Aspen could end up placing a significant portion of its more commoditised reinsurance business into its third-party capital unit. So despite property catastrophe reinsurance not being as much “fun”, third-party capital still enables reinsurers to play.