Aspen Insurance Holdings Limited — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Aspen underwrites specialty insurance and reinsurance globally. On February 15, 2019, it became a wholly owned subsidiary of Highlands Holdings, an Apollo-affiliated entity. Ordinary shareholders received $42.75 per share in cash and the ordinary shares delisted; preference shares remain outstanding and NYSE-listed. EPS was omitted because the merger made it not meaningful.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $605.8 million | $683.5 million |
| Net earned premiums | $510.6 million | $533.5 million |
| Net investment income | $51.5 million | $47.3 million |
| Net income | $10.6 million | $30.8 million |
| Income before tax | $6.2 million | $34.4 million |
| Operating income, non-GAAP | $59.5 million | $62.8 million |
| Net cash used in operating activities | $179.5 million | $122.8 million used |
| Cash and cash equivalents, March 31 | $975.9 million | $1,083.7 million at December 31, 2018 |
| Total assets / shareholders’ equity | $12,978.1 million / $2,717.2 million | $12,532.9 million / $2,656.0 million at December 31, 2018 |
| Long-term debt | $424.7 million | Unchanged from December 31, 2018 |
Gross written premiums declined 9.2% to $1,013.8 million: reinsurance fell 13.6% and insurance 3.6%. The combined ratio was 105.3%, versus 97.8%; this total includes corporate and non-operating costs. Segment combined ratios were 92.3% for reinsurance and 98.7% for insurance. Net income was pressured by a $50.2 million interest-rate-swap loss, $29.8 million of merger-related fees, and weaker underwriting results, partly offset by investment gains and a $4.4 million tax benefit. Reported investment gains were $35.8 million net, compared with net losses of $37.7 million in Q1 2018. Other comprehensive income was $59.8 million, largely reflecting a $70.4 million after-tax unrealized investment gain.
Net loss and loss adjustment expense reserves were $4,877.4 million, down from $4,996.6 million at year-end. The quarter included $7.6 million of unfavorable prior-year reserve development, compared with $37.7 million favorable development in Q1 2018. Catastrophe losses, net, were $12.5 million, versus $24.2 million.
Material changes and liquidity
- Management entered into $3.318 billion of fixed-for-floating interest-rate swaps during the quarter to reduce portfolio duration and partially mitigate interest-rate exposure. Their fair-value loss was $50.2 million; $109.1 million of margin was posted.
- Operating cash outflow increased by $56.7 million year over year; the company said investment-portfolio funds were needed to support operating liquidity. Investing activities provided $79.9 million, and financing activities used $9.8 million.
- Cash and investments totaled $7.76 billion. Operating subsidiaries held $917.3 million in cash and short-term investments; Aspen Holdings itself held $90.6 million in cash, cash equivalents and investments. Management reported a comfortable liquidity margin, while noting subsidiary distributions are subject to regulatory and capital constraints.
- Debt-to-total-capital was 13.5%; debt plus preference shares as a proportion of total capital was 29.8%. No borrowings were outstanding under the $200 million credit agreement. Restricted assets totaled $4.56 billion, or 58.5% of investable assets.
- Adoption of the lease standard added $91.4 million of right-of-use assets and $93.9 million of lease liabilities at March 31; it reduced opening retained earnings by $2.4 million.
Outlook, commentary and risks
The filing provides no numerical earnings or premium guidance. Management expected a similar proportion of premiums to be written in currencies other than U.S. dollars and British pounds for the rest of 2019, and stated it believed the business would be largely unaffected by Brexit, subject to UK-EU Solvency II equivalence developments. Aspen withdrew its application to establish an Irish insurance subsidiary and planned to serve EEA customers through Lloyd’s Brussels and other arrangements.
Key stated risks include reserve uncertainty and claims inflation; catastrophe frequency, severity and loss-model limitations; reinsurance recoverability and counterparty risk; market, interest-rate, foreign-exchange and investment-liquidity risk; and the execution and costs of post-merger integration and operational-efficiency initiatives. Parent owns all ordinary shares and controls company affairs. A post-merger Apollo consulting agreement carries an annual fee equal to the greater of 1% of consolidated net income or $5 million, for an initial eight-year term. Apollo-affiliated investment managers were also engaged after quarter-end under cost-plus arrangements, subject to stated fee caps and additional sub-adviser fees.
Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. Management considered the likelihood of pending or threatened litigation having a material effect on financial condition, results or liquidity remote; no specific material contingency amount was reported.
Investor facts to verify
- Assess underwriting trends excluding merger costs and other non-operating items, and reconcile the 105.3% total combined ratio with segment ratios.
- Review the assumptions and future development of loss reserves, especially marine, energy and construction liability strengthening and catastrophe-related reserves.
- Evaluate interest-rate swap exposure, collateral/margin requirements and the effect of market movements on both earnings and investment values.
- Check the collectability and concentration of reinsurance recoverables: $2.12 billion was recoverable, including $1.64 billion uncollateralized.
- Review post-merger related-party consulting and investment-management fees, governance implications of sole ordinary-shareholder control, and preference-share dividend terms.