Aspen Insurance Holdings Limited — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited U.S. GAAP interim results. Aspen writes specialty insurance and reinsurance globally through operations principally in Bermuda, the U.K. and the U.S.
Financial performance
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Gross written premiums | $998.0 million | $975.7 million; up 2.3% |
| Net earned premiums | $581.1 million | $663.1 million; down 12.4% |
| Total revenues | $683.6 million | $779.6 million |
| Income before tax | $99.3 million | $116.9 million |
| Net income | $96.5 million | $114.4 million |
| Net income attributable to ordinary shareholders | $96.4 million | $114.6 million |
| Diluted EPS | $1.36 | $1.68 |
| Net investment income | $47.7 million | $49.5 million |
| Operating cash flow | $(84.3) million | $67.2 million |
| Combined ratio | 97.0% | 91.6% |
Underwriting income fell to $33.5 million from $72.8 million. The combined ratio worsened mainly from higher catastrophe and large losses and lower net earned premiums; prior-year reserve releases partly offset those effects. Reinsurance reported a 88.8% combined ratio and $31.0 million underwriting income; Insurance reported a 99.3% ratio and $2.5 million underwriting income.
Balance sheet, debt and liquidity
- Total assets were $12.25 billion and shareholders’ equity was $3.59 billion at March 31, 2017. Total liabilities were $8.65 billion.
- Cash and cash equivalents were $873.1 million, down from $1.27 billion at year-end 2016. Total cash and investments were $8.87 billion, down from $9.17 billion.
- Long-term debt was $549.4 million. The company also reported $115.1 million of Silverton variable-interest-entity loan notes; these are collateralized and noteholders have no recourse to Aspen’s other assets.
- Operating cash outflow was attributed mainly to increased ceded reinsurance costs and paid claims. Financing cash outflow included the $133.2 million redemption of preference shares and $111.2 million repayment of Silverton notes.
- A new $200 million revolving credit facility, expiring March 2022, had no borrowings outstanding. A separate letter-of-credit facility had $444.7 million of outstanding collateralized letters of credit against a maximum of $550 million.
- Restricted assets totaled $4.41 billion, or 49.6% of investable assets. Management reported subsidiary liquidity sufficient for foreseeable needs, while noting that operating-company distributions are subject to regulatory and capital constraints.
Material changes and unusual items
- Gross written premiums grew in Reinsurance by 9.2%, while Insurance premiums declined 5.5% amid portfolio repositioning and challenging marine, aviation and energy conditions. Increased ceded reinsurance reduced the retention ratio to 68.8% from 82.0% and contributed to lower net earned premiums.
- Net catastrophe losses were $29.1 million, versus $18.7 million in Q1 2016. Reported events included a Mississippi tornado, Cyclone Debbie and other weather events, as well as a refinery explosion and fires.
- Prior-year reserves had $26.2 million of net favorable development, compared with $21.6 million favorable in Q1 2016. Favorable development included $30.5 million of adverse casualty development associated with the U.K. Ogden rate change.
- Realized and unrealized investment gains were $46.2 million, compared with $45.0 million; net foreign-exchange losses improved to $8.9 million from $15.7 million. Other comprehensive income was a $9.6 million loss, principally reflecting currency translation.
- Aspen redeemed all 5.3275 million outstanding 7.401% preference shares for $133.2 million in January. It authorized a new $250 million ordinary-share repurchase program through February 2019; no shares were repurchased during Q1. The board declared a $0.24 quarterly ordinary dividend after quarter-end, up from $0.22.
Outlook, commentary and risks
Management said pricing remained pressured: reinsurance rates decreased approximately 2% in Q1 (about 4% for property catastrophe), while insurance rates declined approximately 1%. April renewals were described as in line with expectations. The company is reviewing its operating strategy and structure; it provided no specific earnings or premium guidance.
Key risks include catastrophe frequency and severity, reserve uncertainty and casualty claims inflation, pricing and competition from alternative capital, reinsurer credit and recoverability, interest-rate and investment-market movements, foreign exchange, and the uncertain effects of Brexit on U.K. operations, market access and regulation. Management considered material adverse outcomes from pending litigation or arbitration remote. The filing also notes that actual reserve payments and timing may differ materially from estimates.
Important facts for investors to verify
- Whether reserve estimates remain adequate, particularly for U.K. casualty claims affected by the Ogden rate and broader claims inflation.
- How the expanded use of ceded reinsurance affects net premium growth, underwriting profitability, counterparty exposure and recoverables.
- Whether catastrophe and large-loss experience develops as expected and how it affects the combined ratio.
- Investment portfolio sensitivity to rising rates, equity-market declines and currency movements, alongside the level of restricted assets and available liquidity.
- Potential Brexit effects on Aspen’s U.K. and Lloyd’s operations, regulatory permissions, capital requirements and access to E.U. markets.