Aspen Insurance Holdings Limited — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing. Aspen is a Bermuda-based global specialty insurer and reinsurer with Insurance and Reinsurance segments. Amounts are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Gross written premiums | $3,360.9 million | $3,147.0 million |
| Net premiums written | $2,212.5 million | $2,593.7 million |
| Net premiums earned | $2,306.6 million | $2,637.3 million |
| Total revenues | $2,653.4 million | $2,938.5 million |
| Net income (loss) | $(266.4) million | $203.4 million |
| Basic and diluted EPS | $(5.22) | $2.67 basic; $2.61 diluted |
| Combined ratio | 125.7% | 98.5% |
| Operating cash flow | $(111.5) million | $453.2 million |
| Cash and investments | $8,687.8 million | $9,174.1 million |
| Total shareholders’ equity | $2,928.5 million | $3,648.3 million |
| Long-term debt | $549.5 million | $549.3 million |
- The 2017 loss ratio was 86.5% and the expense ratio was 39.2%. Underwriting loss was $499.8 million, versus underwriting income of $125.7 million in 2016.
- Segment combined ratios were 125.1% for Reinsurance and 117.9% for Insurance, compared with 90.0% and 99.6%, respectively, in 2016.
- Net investment income was $189.0 million, up slightly from $187.1 million. Net realized and unrealized investment gains were $120.5 million.
- Net loss and loss adjustment expense reserves were $5,234.3 million, net of $1,515.2 million of reinsurance recoverables. Gross reserves were $6,749.5 million, including $3,720.8 million of IBNR.
- At year-end, readily realizable cash and short-term investments held by operating subsidiaries were $821.7 million, down from $1,409.3 million. Aspen Holdings separately held $111.4 million of cash, cash equivalents and investments.
- Debt-to-capital ratio, excluding Silverton loan notes, was 15.8%, versus 13.1%. Debt plus preference shares as a share of total capital was 30.5%, versus 32.1%. Remaining Silverton loan notes were $86.6 million; they are tied to the consolidated variable-interest entity.
Material changes versus 2016
- Gross written premiums grew 6.8%, but net premiums earned fell 12.5%, primarily because ceded earned premiums increased by $453.6 million. Ceded written premiums more than doubled to $1,148.4 million, reducing the retention ratio from 82.4% to 65.8%.
- Catastrophe losses rose sharply amid Hurricanes Harvey, Irma and Maria, California wildfires, Mexico earthquakes and other events. The filing’s overview cites $561.9 million of catastrophe losses, while detailed segment disclosures report $576.0 million; the amounts appear to reflect differing calculation scopes and should be reconciled.
- Prior-year reserve releases declined to $105.4 million from $129.3 million. Despite releases, higher current-year catastrophe, large and attritional losses drove the combined ratio above 100% and caused the annual net loss.
- Equity declined $719.8 million; diluted book value per ordinary share fell 14.2% to $40.10. Cash flow from operations turned negative, reflecting increased claims activity and ceded reinsurance costs.
- Aspen redeemed its 7.401% and 7.250% preference shares for $133.2 million and $160.0 million, respectively. It repurchased 648,941 ordinary shares for $30.0 million and increased its quarterly ordinary dividend to $0.24 per share.
- Aspen sold its AgriLogic crop insurance business in December for a 23.2% interest in Crop Re Services LLC and $5.9 million cash. AAIC’s primary crop insurance business is to run off; Aspen expects to provide quota-share reinsurance through the partnership.
Outlook, management commentary and risks
- Management expects its efficiency program to produce approximately $160 million in cumulative savings over three years: $30 million in 2018, $55 million in 2019 and $75 million in 2020, with approximately $80 million annual run-rate savings thereafter. Estimated implementation charges are $95 million, mostly in 2018–2019, plus approximately $55 million of incremental capital expenditure in 2018–2019. About 70% of expected savings are attributed to Insurance.
- For January 1, 2018 renewals, Aspen reported approximately 6% rate increases on renewed Reinsurance business, covering about 50% of its annual book. In Insurance, increases varied by line; the U.S. property book rose approximately 14% with improved terms. Management plans to reduce major-property catastrophe exposure, retain less risk and cede more premium; it expects the net-written-to-gross-written premium ratio to fall to 60% in 2018.
- Management estimated the U.S. Tax Cuts and Jobs Act could reduce 2018 net income by approximately $10 million or more, depending on where profits are generated.
- S&P and Moody’s affirmed operating-subsidiary ratings in early 2018 but changed their outlooks to negative. S&P cited the need to improve underwriting results and reduce leverage; Moody’s cited 2017 underwriting losses, weaker equity, rising leverage and declining profitability.
- Key risks include catastrophe severity and modeling uncertainty; reserve adequacy, especially for long-tail casualty claims; reinsurance counterparty and recovery risk; competitive pricing and alternative capital; investment, interest-rate and currency exposures; restricted assets and collateral needs; and uncertainty around Brexit, regulation and tax changes. A 5% change in gross IBNR would affect reserves by approximately $186 million, according to management’s sensitivity disclosure.
- Restricted assets totaled $4,638.8 million, or 53.4% of investable assets, primarily for regulatory trusts, deposits and letters of credit. The $200 million revolving credit facility had no borrowings at year-end. Management reported capital above applicable regulatory thresholds and stated liquidity was adequate, while noting the holding company depends on subsidiary distributions.
- Management said pending litigation and arbitration were not expected to have a material effect on the group. KPMG issued an unqualified opinion on the financial statements and internal controls; management also assessed internal control over financial reporting as effective.
Important facts for investors to verify
- Reconcile the filing’s $561.9 million and $576.0 million catastrophe-loss figures, and assess final claims development for 2017 events.
- Monitor reserve adequacy, particularly IBNR and long-tail casualty exposures, and whether favorable prior-year reserve development continues.
- Track the effect of substantially higher ceded reinsurance on earned premiums, underwriting volatility, recoveries and liquidity.
- Confirm progress on the efficiency program, including realized savings, implementation charges, capital spending and any disruption to underwriting or controls.
- Watch rating-agency outlooks, underwriting profitability, leverage and capital; verify that subsidiary distributions remain available to fund holding-company obligations and dividends.
- Assess Crop Re’s performance and the financial effect of the AgriLogic disposition, crop run-off and planned quota-share reinsurance.