Aeolus in early stages of developing balance sheet plans

Bermudian ILS platform Aeolus is in the early stages of planning to set up a rated balance sheet, sources said, as the firm considers ways of broadening its offering.

The move to develop an in-house rated balance sheet follows similar steps from Credit Suisse ILS and LGT ILS Partners, as well as smaller player ILS Capital more recently.

It also comes after the firm's hire of ex-RenRe Ventures head Aditya Dutt, who presided over various rated third-party vehicles, including DaVinci Re and Vermeer Re, before he stepped down in June.

Dutt will not be free to join Aeolus until the middle of next year, but his hire and the more recent signing of a reinsurance catastrophe underwriter, Nick Jagoda, from Elementum were widely seen as indications that the firm had significant plans to develop and extend its offering in some way.

However it is understood the project is still in the early planning stages, with no fixed launch in mind, and that the manager's collateralised strategies would still remain core to its offering.

The move follows stress in the high-risk retro niche where Aeolus is a leading player, as a result of high catastrophe activity and trapped capital.

The Aeolus product base largely focuses on aggregate retro and reinsurance, as well as Florida business, and its flagship funds steer to the high-risk return side of the ILS market, although it also offers a lower risk Spire fund.

The high-risk aggregate retro niche has borne the brunt of disaster losses experienced by the ILS market in recent years, given two years that featured multiple medium sized losses. Although 2019 was a cleaner year for the segment, some capital trapping persisted, while Covid has also led to mid-year locking of capital this year as well.

Trapped capital is undoubtedly a major factor in the shift towards greater use of rated balance sheets within the ILS market, as it causes disruption both for cedant and investor relationships. 

But the outcome for Aeolus is likely to be more nuanced than simply a shift from writing business one way to another model.

Along with some other retro managers, Aeolus raises a fresh closed-end fund to deploy ahead of each January and June renewal, which mitigates some of the pressure to negotiate collateral roll-over at each renewal.

A rated balance sheet could provide some operational efficiencies for the firm and enable it to add a degree of leverage to its existing portfolios, but high-rate aggregate products are generally still seen as a better fit for collateralised covers from a seller's perspective, given the heavy capital charges they accrue on rated balance sheets.

So one possibility is that it would use the rated balance sheet to steer into new products.

Meanwhile, the return proposition for a rated balance sheet will be very different from that offered by its ILS funds. Existing in-house ILS rated vehicles have largely been sponsored by a different major investor – for example, an Abu Dhabi investment fund backed the launch of Kelvin Re, while LGT's parent controls Lumen Re.

More recently, ILS Capital's rated proposition for Prospero Re laid a new template for engaging with investors to co-participate in both a rated fund and underlying strategy.

This vehicle gained a rating from Kroll Bond Rating Agency.

However, majority owner Elliott may be an obvious target for capital if Aeolus looks to find institutional backers for a rated platform.

Following the 2017 buy-in which saw the hedge fund take a controlling stake in the asset manager, Elliott has since bought out all equity held by former chairman Peter Appel and previous co-owner Allied World.

Management retains an unspecified stake in the firm.

Aeolus declined to comment.

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