Fountaingrove after October 2017 California wildfires
Fountaingrove after October 2017 California wildfires by Frank Schulenburg

Climate Change is dramatically transforming the insurance industry. The troubled Aspen Insurance Holdings reportedly agreed to sell itself to private-equity giant Apollo Global Management LLC for $42.75 a share.

California wildfires, widely blamed on global warming, caused a $135 million (£100 million) underwriting loss at Aspen in 4th Quarter 2017, Artemis reported. Aspen is probably facing even greater losses from this summer’s California wildfires, which were apparently more destructive.

Fires and other climate-related catastrophes devastated Aspen’s reinsurance business last year. Observers blamed climate related disasters for 55% of the company’s losses in 3rd Quarter 2017, and 75% of the 4th Quarter 2017 losses.

Wildfires are not the only climate catastrophe affecting insurers. According to Insurance Business Magazine, Aspen took heavy losses from hurricanes Maria, Irma, and Harvey in 2017. The Magazine estimated Aspen’s pre-tax losses for the first three quarters of 2017 at $310 million. News reports did not specify hurricane loss amounts.

Aspen CEO Stephen Postlewhite resigned on 26 January 2018; a day after the company revealed the underwriting losses, Business Insurance reported. Disturbingly, Aspen admitted actual 2017 losses could be greater.

Private Equity profiting from Climate Change

Aspen’s problems were Apollo Global’s opportunity. The private equity fund will pay $2.6 billion for Apollo’s $12.9 billion in assets.

Apollo is one of several private funds shopping for insurance assets. Bain Capital Private Equity paid £1.2 billion ($1.5 billion) for Esure Group LLC in August. Cinven Ltd is reportedly in talks to acquire one of AXA SA’s retirement products units, Bloomberg claimed.

Private equity funds are buying insurers to gain the float generated by insurance premiums. Float is a stream of revenue that an investor can tap to make acquisitions or pay debt.

The strategy of using float to finance equity investments is a speciality of American investment legend Warren Buffett. Buffett used float from the auto insurer GEICO, and reinsurance operations, to build his Berkshire Hathaway empire.

Equity operators like Apollo Global’s Leon Black are trying to emulate Buffett by buying up troubled insurers. By purchasing Aspen, Apollo gains access to premiums from annuity provider Athene Holding Ltd and reinsurer Catalina Holdings Bermuda Ltd.

Aspen Insurance will go private in 2019

Insiders expect the Aspen-Apollo deal to close during the first half of 2019, Reuters reported. After the deal, Apollo will become a privately held portfolio company owned by Apollo Funds. Aspen’s board still needs to approve the acquisition.

Aspen Insurance Holdings has operations in the United States, the United Kingdom, Canada, the United Arab Emirates, Singapore, Ireland, and Australia. Its current headquarters location is in Hamilton, Bermuda.

Aspen Insurance Holdings trades on the New York Stock Exchange under the ticker symbol AHL. Aspen Holdings had a market capitalization of $2.455 billion and a share price of $41.12 on 31 August 2018.

Aspen reported a $14.8 million loss at the end of 2nd Quarter 2018. Stockrow data shows Aspen’s revenues declined by 13.07% during 2nd Quarter 2018.

Insurers facing tough times ahead

Scientists believe shifting weather patterns created by Climate Change caused by greenhouse gases caused California’s wildfires. Climate Change leads to high temperatures which makes the fire season worse.

“The weather patterns are just stuck,” Jennifer Francis a Professor at Rutgers University said. “They’re trapped.” Francis is an expert in atmospheric circulation.

Fires have taken a terrible toll on California this summer. The Chronicle estimated that wildfires destroyed over 1,000 homes and killed eight people by 3 August 2018.

The peak fire season in the Western United States is now nine days longer than it was in 2000, a study by Columbia University and the University of Idaho found. Insurers can expect increased fire risk around the world, Francis predicted.

“We’re seeing this mix of conditions across North America and Europe, but they’re all connected,” Francis said. Under those conditions, high underwriting losses might be the new normal for many insurers.

Interestingly, publicly held insurance companies might be one of Climate Change’s first casualties. Other publicly traded insurers are likely to follow Aspen’s lead and sell out to privately equity firms to cover underwriting losses.

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