Aspen Insurance's CEO discusses the strategy at work in its U.S. operation, including the recent decision to reduce its earthquake and wind exposure in the U.S. Property market.
Aspen Insurance Holdings is reducing its earthquake and wind exposure in the U.S. Property insurance market due to the volatility of catastrophe risks. Was there a tipping point for you, at which you took a hard look at these risks and finally determined they were no longer a good fit for Aspen?
The continuing difficult pricing environment in many lines, together with low investment returns and a weak global economy, led us to re-challenge the acceptability of returns, risk and volatility for each of our major product lines. The fact that the vast majority of our lines have a satisfactory expected return, risk and volatility trade-off was re-validated by this process.
We concluded, however, that the earnings from the cat-exposed segment of our U.S. Property insurance portfolio are excessively volatile as a result of still inadequate rates for cat exposure and expensive reinsurance costs that leave insufficient margin. Therefore, we decided to reduce our earthquake and wind exposure in the U.S. Property insurance market over the next two years. We remain committed to the U.S. Property insurance and will continue to write non-CAT E&S business and incidental CAT.
It is important to emphasize that this decision does not impact our Marine and Programs units within our U.S. Insurance operation, nor our Property Reinsurance business at Aspen Re.
How does your U.S. Insurance operation fit into your overall enterprise strategy?
It has always been our intention to build a diversified platform with an insurance business and a reinsurance business, and these are now approximately equal in terms of premium generation. We remain committed to our U.S. Insurance business and its success. This past year, we have really started to see the benefit of that investment.
The United States is the largest commercial insurance marketplace with the largest specialty products opportunity. We recognize that to be a market leader, a strong insurance operation in addition to our already strong reinsurance business is a very compelling proposition.
It's been reported that Aspen plans to improve its investment portfolio with high-yield investment securities. How do you see this strategy playing out in the long-run, and with investment yields currently still so low, what's your measure for “success” in a business where we'll likely never see the days of 15 percent return on equity ever again?
Like many others, we recognize that the current low interest rate environment is here to stay for some time to come.This has led us to re-evaluate investment opportunities that will help us to generate increased returns while remaining well inside our overall risk appetite. We are going to add about $200 million in BB [rated] bonds over time, and have already doubled the size of our equities portfolio from $200 million at year-end to around $400 million today. A 15% return on equity is simply not a realistic target for insurance companies given current low interest rates. It would be reasonable to assume that investment income would contribute roughly half of a company's total return in a more “normalized” interest rate environment. That same element of return from investment income is not achievable given continued low interest rates, and I think a double-digit return is a reasonable measure of success given the current market climate.
How would you define your key differentiators for the U.S. operation?
We are a specialty insurer with nine lines of business in the U.S. Insurance group, which provides our clients and brokers with a very strong variety of coverage solutions. We have a strong emphasis on complex risks. In terms of talent, we hire recognized experts in our selected segments—professionals with proven industry track records. Another advantage is our claims-underwriting model. We integrate claims and underwriting into teams by line of business, which is not common in the industry. But we think it provides a stronger, more effective platform from which to provide solutions and be responsive. I believe that our distribution model is also an advantage for us since we work with a limited number of brokers who value and sell our expertise.
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Shawn Moynihan
Shawn Moynihan is Editor-in-Chief of National Underwriter Property & Casualty. A St. John’s University alum, Moynihan has earned 11 Jesse H. Neal Awards, the Pulitzers of the business press; seven Azbee Awards, from the American Society of Business Press Editors; two Folio Awards; and a SABEW award, from the Society of American Business Editors & Writers. Prior to joining ALM, he served as Managing Editor/Online Editor of journalism institution Editor & Publisher, the trade bible of the newspaper industry. Moynihan also has held editorial positions with AOL, Metro New York, and Newhouse Newspapers. He can be reached at [email protected].
