Sarah Goddard looks at quasi-post-9/11 re/insurer Aspen as it approaches its second anniversary

Aspen : n : any of several trees of the genus Populus having leaves on flattened stalks so that they flutter in the lightest wind.

It is the tree that Aspen Insurance Holdings is named after, rather than the upmarket Colorado ski resort. But its family tree is rather more complicated than that of many of its post-9/11 classmates. Although it is essentially a 2002 start-up, Aspen emerged from Lloyd's agency Wellington and was originally branded Wellington Re. Aspen CEO Chris O'Kane explained that at the end of 2001/beginning of 2002, Lloyd's was having difficulties attracting new capital, despite the fact that business conditions had changed dramatically and Wellington had a strong brand. So the decision was taken to attract capital from outside Lloyd's.

On 29 May, 2002, Wellington's board announced it had raised £448m to fund Wellington Re, provided by a group of investors including The Blackstone Group, Candover plc, CSFB Private Equity, 3i, Phoenix Equity Partners, Olympus Partners and Lexicon. In addition, post-9/11 classmate Montpelier Re invested in the quasi-start-up, as did Wellington Re's management.

"Everybody liked the idea of a sponsor and a trade investor," commented Mr O'Kane. "They were attracted because of the underwriting track record of the group in Wellington," he added.

Three weeks later, on 21 June, Wellington Re announced that the third party capital providers to Wellington syndicate 2020 had given their consent to the formation of Wellington Re. In addition, the new company was licensed by the UK regulator, the Financial Services Authority (FSA), and the necessary regulatory approvals had been granted by Lloyd's.

The first staff into Wellington Re were carved out from the Wellington syndicate. Property/casualty reinsurance and UK insurance business was transferred from the syndicate to the new re/insurer, with the caveat that the Lloyd's operation could not write reinsurance business for 15 months from the beginning of 2003, a proviso that has now expired. "It also happened that these were lines of business which had a good record," said Mr O'Kane. The syndicate remained writing marine, energy, accident and health, aviation and non-UK insurance business.

Although several new re/insurers had been set up in Bermuda, Wellington Re was the first to establish in the UK. The London market received the news "terrifically well," said Mr O'Kane. "According to brokers, it was terrifically good news." By early December, Wellington Underwriting (the Lloyd's operation) had put an additional £123m into Wellington Re, and it had been decided to set up a Bermuda operating company to provide Wellington Re with a 20% quota share facility, initially capitalised at $200m. At the same time, the new branding of Aspen was unveiled.

"We changed the name to avoid confusion," explained Mr O'Kane. "Wellington Re was the right name at the time (it was set up), but looking forward, we knew the Wellington syndicate would be writing reinsurance again, and Wellington Re would be writing insurance, so a change of name was needed." Aspen fitted the bill of being clean, pure and fresh.

Exceeding projections

Within the first six months of operation, the new business had exceeded its premium projections, and the spread to Bermuda was part of a plan to be in several marketplaces. "The UK has been terrifically good business for us," said Mr O'Kane, and almost every client of the Lloyd's syndicate transferred its business to the new reinsurer. But the tax and distribution opportunities of Bermuda were not to be sniffed at. "The kind of business which goes to Bermuda is business which is free to travel," he said. By mid-December 2002, rating agencies Standard & Poor's and AM Best & Co had assigned ratings to the Bermudian operation, Aspen Insurance Ltd.

S&P assigned an 'A' (strong) rating, while AM Best assigned an 'A-' (excellent) rating.

It was pretty obvious that the next step would be to set up in the US, so the decision was taken to account in dollars, using US GAAP. "We knew we were going to list on a US stock exchange, so we made sure we looked like a US company." In the following September, Aspen bought Dakota Specialty Insurance Co from The Insurance Corp of New York, renaming it Aspen Specialty Insurance Co, and entered the US excess and surplus lines business. The business was set up in Boston, partly because President and CEO Peter Coghlan was based there. "Peter is one of the best guys in the surplus lines business," said Mr O'Kane. "At Wellington, we had reinsured him for 15 years." Chris Maciejewski joined from First State Management, along with Mr Coghlan, taking the post of Chief Casualty Underwriting Officer.

Those last three months of 2003 saw a small amount of business flowing into Aspen from the Aspen Specialty operations, but Mr O'Kane is confident it will constitute about 10% of the 2004 business. "Surplus lines is a business I've been in or around all my career," he said. "It can be very rewarding. It is a bit more volatile, but that volatility is rewarded by better returns."

Aspen's business has blossomed over the past two years, but despite a $1.3bn surplus it is not aiming to take over the world. "Our market share is very small, so there's plenty of business," explained Mr O'Kane. "We are more effective selling to sophisticated buyers who have 'unusual needs'." As a group, Aspen is particularly focused in the North American, western European (particularly the UK) and Japanese markets.

From the initial 39 people who left Wellington to join Wellington Re, the business has now expanded into about 180 people spread over five offices in Bermuda, London, Boston, Rocky Hill, Connecticut and New Jersey. The New Jersey office is headed by former AXA Re underwriter Alice Cathrall and writes casualty fac reinsurance, while ex-XL Re'er Brian Boornazian leads the US property reinsurance operation in Connecticut, under the Aspen Re America brand. Other hires have included Nick Bonnar on the marine and aviation reinsurance side, who joined from XL's Lloyd's operations, Mike Clifton to head up US casualty reinsurance in London, previously a Faraday (Berkshire Hathaway) man. Former Liberty Syndicates underwriter Tom Milligan is heading up the retrocession team based in Bermuda. "Most of the people who've been hired here I've known personally for a long time," said Mr O'Kane.

November 2003 saw the announcement of the inevitable IPO, to take place on the New York Stock Exchange. New York was chosen because it had a much larger equity pool, and potential investors could compare Aspen with similar organisations. In early December, the offering was priced at $22.50 per share, but the success of the offering led to the underwriters exercising in full their over-allotment option to purchase an additional 1,578,600 shares. In total, 12,102,600 shares were sold, raising net proceeds of about $245.5m.

Mr O'Kane admitted that along with the funds from the IPO came the responsibilities of being a listed company. "As a private company, life had been very simple.

We went from several thousand names (in the Lloyd's operation) to a handful of investors. We are now a public company with 300 plus investors, so we can't have the same degree of intimacy." But he is dealing with "financially intelligent individuals."

This year's growth is set to come from the lines of business Aspen's already playing in. "US casualty rates this year to date are up 22%," said Mr O'Kane, "and we're writing more of it as well." The surplus lines operation is still relatively new, "so every dollar they write is growth. It will continue to grow this year and into next," he said confidently.

Currently, the insurance side of the business is growing faster than the reinsurance side, and casualty is growing faster than property. "It is strategic, reflecting where the rates are growing," he explained. "The optimal balance is 50/50," between insurance and reinsurance. "Currently, it is at 30/70." Despite speculation that the time is ripening for a round of M&A activity, Mr O'Kane doesn't see this as part of Aspen's strategy.

"We think about it very little - it's not high on the agenda," he said, "though we are very keen to acquire teams of underwriters." In particular, "anything of a specialty insurance nature is something that we could do." But he is adamant that underwriting discipline is a fundamental pillar of the business. "When claims add up to less than premiums, the result is happiness," he said, "though I'm not saying it's not a difficult discipline to maintain."

With its strong growth and keen market eye, it is less a case of Aspen's leaves fluttering than branches spreading.