Soft market opportunities: Aspen Insurance Holdings celebrates a milestone by continuing to innovate growth.

Aspen Insurance Holdings, which just celebrated its fifth anniversary, plans to continue to grow in the soft market by being creative, its chief executive said.

"One of the tricks of insurance and reinsurance underwriting is not just to make money when rates are good, but to avoid losing money when rates are bad," Chief Executive Officer Chris O'Kane said. "That's the first order of business. The second order of business is even in a softening market, if you are inventive, if you are patient, if you are creative, you can always find ways to grow your business."

On the property side, midyear reinsurance rates are coming in lower than 12 months ago, but there's still room to turn a profit, O'Kane said.

"The all-time high-water mark for wind-exposed property cat in the U.S. was reached in June of last year. There's capital in everyone's balance sheet after a good year; some sidecars arrived; there's some new companies that are a year old and getting better distribution. Demand is flat, even down a bit, which is going to lead to lower pricing.

"But we feel pretty good about the price levels we are achieving. It's a few points off the all-time high, but it's still very attractive pricing," O'Kane said.

Asked if he expected the traditional cycles of hard and soft markets to continue, O'Kane said he tends to side with the skeptics. "The economic forces that drive insurance cycles are as real, powerful and enduring as ever, and consequently, the potential for cycles to be characterized by strong ups and very weak downs is still there. I don't think in any sense the cycle has been abolished or even tamed."

Aspen has a record of being innovative. Earlier this year, the company announced a deal with Deutsche Bank to secure as much as $420 million of coverage for Aspen's reinsurance recoverables. The Bermuda-based property/casualty company described the policy as having "characteristics similar to a credit derivative" to protect its portfolio of reinsurance contracts against risk of default due to a reinsurer's inability to pay. The policy effectively wraps Deutsche Bank's highly rated paper around Aspen's receivables.

"We are now in the happy position where if one of our reinsurance counterparties were to become insolvent or suffer a downgrade from one of the rating agencies, this facility steps in to make payments," O'Kane said.

While the transaction may be the first of its kind, O'Kane said he expects similar transactions to follow.

Also, Aspen Insurance recently announced two collateralized reinsurance contracts--a catastrophe bond and an industry loss warranty--designed to protect its balance sheet against severe California earthquake and United States wind events.

"We wanted to obtain some protection not so much for the losses happening, but against the models being wrong," O'Kane said.

Aspen said it has entered into a multiyear property catastrophe reinsurance agreement with Ajax Re, a Cayman Islands-domiciled reinsurer, to provide up to $100 million of reinsurance coverage for Aspen's insurance subsidiaries in the event of one or more California earthquakes.

The agreement is fully collateralized by proceeds received by Ajax Re from the issuance of catastrophe bonds, with a reinsurance limit proportionally available based on industry insured losses of between $23.1 billion and $25.9 billion in the covered area, as reported by ISO's Property Claim Services. The full $100 million available is exhausted when the industry insured losses reported by PCS reach $25.9 billion.

Aspen said this transaction coincides with the expiration of an existing catastrophe swap agreement and provides it with coverage effective Aug. 18, 2007, through May 1, 2009.

In a separate transaction, Aspen will enter into a $100 million industry loss warranty reinsurance contract to provide protection against U.S catastrophic wind events. The H.W is structured in three layers, with trigger points ranging from $30 billion to $50 billion in industry losses as reported by PCS.

In addition to encouraging innovation on the financial side, Aspen encourages its underwriters to be inspired, O'Kane said. For instance, the company has provided cyber risk and mold coverage to answer clients' needs.

"You start by hiring good people, and when you've got good people, they naturally are creative and think a lot about what they want to do," O'Kane said.

About Aspen

Aspen Insurance Holdings

Established: In 2002 in Bermuda

Employees: 430

Offices (9): Arizona, Bermuda, Connecticut, Georgia, Illinois, London, Massachusetts, New Jersey, Paris

Structure: Stock company

Ticker symbol: NYSE: AHL 

Net Premiums Written 2006: $1.66 billion

Net Income 2006: $378.1 million

Combined Ratio 2006: 82.4

Learn More

Aspen Insurance Ltd. (The Bermuda-based operating company of Aspen Insurance Holdings)

A.M. Best Company # 83210

Distribution: Brokers and direct

For ratings and other financial strength information about this company, visit www.ambest.com.

Increased Diversification

Aspen Insurance Holdings has improved its spread of risk from 2003
to 2006.

Gross Written Premiums

2003

Property Reinsurance   43%
Casualty Reinsurance   22%
Specialty Lines        12% *
Insurance              23%

100% = $1.3 billion

2004

Property Reinsurance   41%
Casualty Reinsurance   28%
Specialty Lines         8%
Insurance              23%

100% = $1.6 billion

2005

Property Reinsurance   39%
Casualty Reinsurance   25%
Specialty Lines        18%
Insurance              18%

100% = $2.1 billion

2006

Property Reinsurance   31%
Casualty Reinsurance   25%
Specialty Lines        26%
Insurance              18%

100% = $1.9 billion

* 2003 Specialty lines excludes QQS of Wellington Syndicate 2020

Source: Aspen Insurance Holdings

Note: Table made from bar graph.