At first glance Aspen is a perfect reinsurance case study. Nick Thorpe discovers its emphasis on risk management has given it a resilience that makes it stand out from the crowd.

2002 was notable for many reasons. The Euro was introduced to 12 countries; Brazil beat Germany 2-0 to win the FIFA World Cup; the International Criminal Court was established; and Turkmenistan renamed all months and most days of the week after president Saparmurat Niyazov.

In reinsurance terms, the year was characterised by two events - the floods that ravaged Central Europe and the establishment of Aspen Insurance Holdings in June in Bermuda with a capital base of £448m.

Aspen entered the industry in a remarkably quiet year in hurricane terms, although the post-9/11 capacity crunch was still being felt. It quickly established a UK subsidiary, Wellington Re, which was formerly part of Wellington Underwriting. At the time it was the largest independent reinsurance company based in the London market, focusing mainly on property and casualty reinsurance, a trend that has continued to this day.

"Our company was formed in 2002 to take advantage of a problem in the marketplace where there wasn't enough reinsurance capital to meet the demand of insurance companies, particularly for catastrophe risk," explained Aspen CEO Chris O'Kane in a recent interview with the New York Stock Exchange (NYSE). "By 2003, there was a shortage of capacity for casualty business as well, and we grew the company and grew into casualty and insurance lines."

2003 also saw Wellington Re change its name and start trading as Aspen Re. Having enjoyed a stable "A" rating from Standard & Poor's (S&P) since its inception, the company then raised an additional $244m through an initial public offering on the NYSE. Today the company has two main operating subsidiaries - Aspen Insurance UK and the Bermuda-based Aspen Insurance. In the US, Aspen Specialty Insurance, though, has "struggled to establish a profitable track record since it commenced trading in 2003," according to S&P.

Managing risk

Researching Aspen, you could be forgiven for thinking the company was a case study in a reinsurance exercise book. Not only has Aspen enjoyed a spate of strong performances and a preferable rating in its first five years of existence, the company has also weathered the turbulent hurricane seasons reasonably well.

It stood out from the crowd in 2004 when, despite an active hurricane season and compared to some competitor losses, it posted a net income of $195.1m. Losses of $177.8m in 2005 were more disappointing but when compared to wider industry results, the hit from Katrina, Rita and Wilma could have been far worse.

“Such was the investment made by Aspen into ERM that S&P revised its negative ratings out look to stable after just one year

O'Kane highlights diversification as the key to ensuring a repeat of the 2005 events will not occur again. "Our results for 2005 are clearly very disappointing and do not meet our expectations," he said at the time. "The insurance industry, including Aspen, has a great deal to learn from the hurricanes of 2004 and 2005... We have benefited in the past from our diversified underwriting strategy and 2006 will see greater diversification of our portfolio as we redeploy our capital in favour of the best underwriting opportunities."

One of the main outcomes of the 2005 hurricane season at Aspen was a substantial investment in enterprise risk management (ERM) resources and processes. S&P has said that Aspen "employs some of the most sophisticated processes to manage catastrophe risk within its peer group" and that it considers ERM to be strong within the company. Such was the investment made by Aspen into ERM that S&P revised its negative ratings outlook to stable after just one year, maintaining that it "reflects the successful transition of the group's underwriting risk profile to one designed to offer much reduced earnings volatility without any discernable negative impact on [its] competitive position."

O'Kane has responded by pointing out that given the nature of the reinsurance business and the constant pressure on prices, managing risk is paramount. "There are some risks that you just can't take. Those are the risks that you can't measure. So as long as we... have good data, good systems, good IT that helps us quantify that, then we're a very pro-risk company." The ratings agency has made no secret of the fact that it is now including ERM in its rating decisions. In fact, the Aspen upgrade was the first time ERM has so clearly affected a ratings decision.

Aspen has extended its risk management programme beyond ERM. In March 2007 the company won an award for "Best use of IT in insurance" for its "CATman" propriety catastrophe risk management tool which was designed to help manage catastrophe exposure. Continuing with the technology investing, in August this year it unveiled its bespoke "RiskClash" tool which models single site risk accumulation across combined insurance and reinsurance lines down to a city block.

This investment in technological solutions is in line with the general London market push towards an electronic business environment and stands the company in good stead for the future. "The amount of data that we are required to produce these days, particularly in modelling property risk, requires great IT," says O'Kane. "We need to know how much is at risk at any given day at any given moment from any given peril. Staying on top of that is a key to success, and IT helps us do that."

Striving ahead

With a market capitalisation nearing $2.3bn in 2007, Aspen continued a successful year with a strong performance at the half year. Net income was up 45% compared to 2006, from $163.6m to $236.6m. Net earned premium had a marginally less successful result but still increased 5% from $429m to $451.2m. The only oddity in the first half results was the combined ratio for the second quarter, which increased to 88.4% from 81.6% for the same quarter in 2006.

"We reported a 21% increase year-on-year in book value per share and an annualised return on average equity of 20.4% for the quarter, which reflects strong performance across our underwriting segments and an increasing contribution from investment income," said Chris O'Kane. "Our results this quarter and year-to-date clearly show the impact of the changes to our business in 2006 and the benefits of our targeted approach to managing our key performance levers."

“With the US accounting for almost 75% of Aspen's premiums and the company's exposure to catastrophes, it is inevitable that the hurricane season will be closely monitored

During an analyst conference call, O'Kane described how terms and conditions are holding firm across all lines, with only a few lines - such as marine hull and marine liability - seeing rate increases. This appears to go against the overall direction of pricing in the marine market as witnessed at the mid-year renewals. According to O'Kane, US cat pricing remains very strong. "But we witnessed rate decreases of 15%-20% from last year's record highs," he added. "Overall we are writing a smaller portfolio in 2007 reflecting the softening market." Most of Aspen's casualty book saw a marginal decrease in rates, especially in Australia, although this was offset by "better-than-expected pricing" on the US accounts.

Catastrophes past and present

A turbulent 2007 has proved a nail-biting precursor to what many are predicting will be an active hurricane season. Unseasonable floods in the UK have been juxtaposed by unusual heatwaves throughout Central Europe. According to Aspen chief financial officer Richard Houghton, the UK floods have represented the biggest loss of the year so far, with the company reserving flood losses at $23.5m. This is in addition to a marine loss of $14m and a tornado loss at $7m.

"When added to Kyrill, it brings our gross cat losses for the year so far to $48m - $10m higher than expected for the year to date - compared to very minor losses in 2006," said Houghton. Due to the timing of the July floods, however, the loss estimate could rise dramatically and O'Kane noted they could still impact the final year results. At the time of going to press, any exposure to Hurricane Dean had not yet been revealed.

With the US accounting for almost 75% of Aspen's premiums and the company's exposure to catastrophes, it is inevitable that the hurricane season will be closely monitored. O'Kane continues to emphasise the company's diversification strategy, which he says has extended to its catastrophe book as well. As well as Florida wind, Aspen has also written some California earthquake risk and East Coast wind. "We are also looking at political risk and marine liabilities, as well as developing our catastrophe books in Europe and the Far East, and doing less hurricane risk as a consequence of 2005," O'Kane adds.

While this diversification strategy is endemic of the industry as a whole and is contributing to rate softening across the board, even O'Kane can't deny that reinsurers are currently riding the good times. "I'd like to say we could continue the growth of the second quarter but I have to say I think it is very unlikely," he says. "Can we maintain our earnings performance in general? I think we can. We have taken a number of steps to ensure we keep going forward and as I keep saying to our investor base - 'You ain't seen nothing yet'."

Nick Thorpe is associate editor of Global Reinsurance.

Aspen | Chris O'Kane, CEO

Chris O'Kane has been chief executive officer and a director of Aspen since June 2002. Prior to the creation of Aspen, from November 2000 until June 2002, O'Kane served as a director of Wellington Underwriting and chief underwriting officer of Lloyd's Syndicate 2020. O'Kane has over 25 years of experience in the insurance industry, beginning his career as a Lloyd's broker.