It isn’t an easy time to be at the top, but James Few, CEO of Aspen Re, talked in confident tones about the potential of the industry and Aspen’s growing strength as a specialist global reinsurer.
Reinsurers are facing something of a perfect storm at present— with meagre investment returns and uninspiring rates. How is Aspen looking to increase its ROE in the current climate?
One could add that there are a number of other elements in this storm including a fragile economic backdrop and increasingly onerous regulation. As a specialty reinsurer we still see scope to improve our ROE and believe that we have flexibility to meet these challenges. It is not only about spotting opportunities in terms of both product and geography but also about focusing on aspects of the business such as expenses which are often regarded as less exciting. We are always looking for smarter ways to drive the business which does not necessarily mean driving faster. We also think we have a good track record when it comes to spotting opportunities.
Our Zurich office for example, which opened in 2007, now offers a broad suite of products and generates annual gross written premium of more than $200 million. We are not afraid to invest in the business and are prepared to commit to profitable niches. We also began underwriting trade credit reinsurance on the back of the 2008 crisis and subsequently enjoyed a hard market for several years.
The challenge is obviously not just about revenue but it is essential to maintain high underwriting standards and a rigid focus on risk management and balance sheet management. At Aspen group level, we continually assess the amount of capital we need and seek to return capital to shareholders if we are unable to identify sufficiently attractive ways to deploy it in our business.
Is profitable growth possible in this climate, or is Aspen instead ‘sticking to the knitting’?
In soft underwriting cycles growth is often seen as a dirty word. Weak economic conditions typically reduce demand for our products, despite their proven value. That suggests a difficult trading environment, but even as governments are grappling with austerity programmes, thereis scope for growth in the industry. At a very fundamental level, the business of insurance and reinsurance—ie, risk transfer—is essential to economic activity.
"We are able to drive growth in keeping with market conditions as we leverage our regional knowledge and local input to make underwriting decisions and market strategies more robust."
There are at least signs that the primary market is responding to the economic realities of life and that makes for a better trading environment. We ‘stick to our knitting’ in the sense that we value intelligent underwriting and our group targets are couched in terms of ROE—not top line, but we feel there is room for innovation to grow insurance markets. For example, can we profitably bring more of the economic loss suffered in cat events under the scope of our policies? In 2011 disasters, only 31 percent of economic damages were insured, according to Sigma. What new insurance opportunities are created by advances in technology? It is possible to achieve profitable growth but it requires innovative thinking, a research and development budget and detailed local understanding of risk. It is possible to achieve profitable growth but it requires a disciplined approach and an acute understanding of risk.
Where do you see the major opportunities for Aspen and the wider industry? How are you looking to pursue these opportunities?
As a specialist reinsurer, Aspen Re offers detailed technical knowledge and meaningful capacity to local insurance clients. We have established a network to meet the demands of clients wherever they may be via trading hubs servicing North America, Latin America, Europe, Asia and the Middle East and North Africa. We also provide a dedicated service for customers who buy on a global basis.
The opportunity lies in providing value-added services better, not just in capacity. For example, our proprietary EZ FAC product offers the client a tailored solution yet has streamlined placement and has web-based functionality. EZ FAC provides the client with real-time detailed market intelligence on the facultative portfolio at the desktop, including easily generated reports. We are committed to excellence in research and development and prepared to share our insights with our customer, which we do through regular dialogue and the publication of short pieces through Aspen Opinion on our website. Recent topics include the likelihood of more earthquakes in the Tokyo area due to Coulomb stress transfer and the relevance of hurricane forecasts to risk managers and underwriters.In the cat space we have developed bespoke cat management tools. Apex, our latest software, has received an industry special commendation for the Use of Technology in Business Transformation. It delivers industry-leading capability and competitive advantage in aggregation management including multimodel simulation and forward-looking ‘what if’ capabilities.
We have also announced an organisational change at Aspen Re that will strengthen the operating autonomy of our regions, bringing local leadership, decision-making and resources closer to our clients. We are a genuinely global business that can support profitable growth in regional offices without compromising our underwriting integrity. Our regional knowledge and local input is an important part of our commitment to clients and it is through superior service that new opportunities will emerge. We opened our Asian hub in Singapore, for example, in 2008 and the team provides important local perspective on the events of 2011 and business opportunities in exciting emerging markets.
What are your strategic ambitions for the coming five years and how do you expect your product and geographical mix to develop?
We are looking to achieve steady and measured growth at Aspen. Our ambitions are centred on our customers. Customer service is paramount and we believe we can offer tailored regional solutions that harness skills from all parts of the group.
Our recent reorganisation underlines the importance of this strategic thinking with the creation of five regional managing directors. We are able to drive growth in keeping with market conditions as we leverage our regional knowledge and local input to make underwriting decisions and market strategies more robust. Emil Issavi’s (chief underwriting officer at Aspen Re) overarching role is to ensure underwriting discipline and lead the development and refinement of models and data within Aspen Re.
Development of our business depends on the particular demands of our clients. For example, Solvency II and regulatory change is likely to increase the capital needs and reinsurance demands of the primary market. Movement towards robust risk capital regimes is a positive. We have targeted China and India as an area of focus over the next five years. Agriculture, for example, is a product we are focusing on not only in the developing world but also in Europe.
We aim to build up the business over time by investing in research and development to help profitably grow our range of specialty products. As we open up our portfolio of specialty products our growth in different countries will play to those strengths. In one region it could be agriculture, in another it could be more appropriate to emphasise trade credit products.
How can the industry look to increase book value and what is the industry doing wrong when it comes to inspiring greater investor confidence?
Sadly there is no silver bullet that can raise investor confidence in the industry. In my opinion, insurance and reinsurance has proved to be of enormous value in recent turbulent economic times, meeting obligations efficiently and helping to rebuild economies stricken by natural disasters. However, inherent volatility in earnings combined with an uncertain economic outlook is not an appealing proposition to many investors. In addition, there is a concern that reserve releases that have supported recent results may be coming to an end. Such concerns are plain to see in the current valuations where share prices trade at a significant discount to book value.
However, I believe that this investor pessimism is overdone. The industry has learnt lessons from the past, but there seems to be little recognition that the industry has remained resilient through the financial crisis. Our public relations has sometimes been found wanting as we have been tarnished with the same brush as banks. Importantly however, we are now proving to be a destination of choice for alternative capital attracted both by asset class diversification and by the yields offered by property cat underwriting in particular. Another, often overlooked, point is that I believe we are attracting significant talent to our business on a level I have not seen before. This is having an impact today and will be important in shaping our future.
How significant are alternative forms, such as ILS and sidecars, becoming to the industry? What kind of response do you expect to ‘just-in-time’ capital over the long term?
When thinking about the role of alternative forms of capital in the reinsurance industry, and more particularly catastrophe reinsurance, there are two different forces to be considered. First, there is a greater awareness, among a more diverse investor universe, of the benefits of insurance-linked securities (ILS) as an investment portfolio constituent. Cat bonds, for example, since their inception have been promoted as an uncorrelated risk class, but it was only as performance through 2008/2009 proved this point that investors really stood up and took notice.
The relatively high yields of ILS have been an additional pull factor in the low interest rate environment. These attractions have drawn more investors into the sector and they have been prepared to conduct the necessary due diligence required to make an investment in this specialist area. I believe that this commitment is unlikely to be transitory as the attractions of uncorrelated risk will not diminish even if the relative yield attractions fade. The number of new investors suggests that a healthy level of investor support for the ILS market is here to stay.
Second, there has been a structural shift in the way traditional investors (such as private equity) invest in reinsurance. There isgeneral consensus that the days of equity investments in start-ups and recapitalisation after a big event will be less prevalent when compared to the amount of capital that will enter via sidecar type vehicles. These ‘just-in-time’ vehicles are simply a more efficient mechanism for the investors to enter and exit the market.
Aspen Re has recognised these trends and, alongside its strategic private equity partner, Cartesian Capital Group, launched a dedicated cat asset manager in 2009. We continue to explore additional alternative mechanisms to leverage our cat capability in this way.
What further innovations does the industry need to consider in order to avoid a further slowing in re/insurance take-up globally?
I think that the future for the industry lies both in innovation and in doing what we do already better. At our core it is all about the ability to understand risk and this is dependent on data. The quality and volume of data have increased and the industry needs to make sure that it has the right tools available for interpretation.
At Aspen Re we have a significant research and development budget to do this. Events of 2011, among other things, provided the industry with a learning opportunity. The Thai floods, for example, highlighted the underlying risks of economic interconnectivity and the need to understand supply chain risk as well as the risk of cat perils in new areas of manufacturing. The industry needs to make sure it is positioned to reflect the changing global economic landscape and to recognise the growth in underlying exposures from increases in concentrated populations.
"We must remain flexible to all changes in our environment whether that is economic, legal or regulatory. We also need to innovate."
If one takes GDP as a proxy for property value at risk, it suggests potential for increased penetration. This depends not only on effective marketing but also on appropriate products to meet the needs for developing economies. We must remain flexible to all changes in our environment whether that is economic, legal or regulatory. We also need to innovate; advancing technology requires new products and so does, for example, new energy provision. Finally, we have to find a way for the industry to reduce the level of economic risk currently assumed by governments. The natural catastrophe events of 2011 and the implementation of austerity programmes both underline this point. Risk should be underwritten and satisfied in the private market to benefit consumers over time. All this suggests there is huge potential for our industry; we just need to realise it.
Aspen Re, CEO, Few, reinsurance, Bermuda