Aspen Insurance Holdings Limited — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Amounts are in U.S. dollars unless stated otherwise. Aspen is a Bermuda-based global insurer and reinsurer, reporting Insurance and Reinsurance segments.
Financial results and key metrics
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Total revenue | $504.8 million | $538.4 million, down 6.2% |
| Net earned premiums | $452.4 million | $467.6 million, down 3.3% |
| Net loss | $151.7 million | Net income of $18.3 million |
| Loss per ordinary share | $2.23 | Earnings per share of $0.16 |
| Combined ratio | 148.5%; 85.1% excluding catastrophe losses | 110.3%; 86.1% excluding catastrophe losses |
| Net investment income | $55.5 million | $59.4 million |
| Operating cash flow | $154.9 million | $102.8 million |
- Catastrophe losses from the Australian floods, New Zealand earthquake, and Japan earthquake and tsunami were reported at $255.9 million net of reinsurance recoveries, reinstatement premiums, and taxes. Management also reported $295.5 million of losses for the events before those offsets; individual event estimates were subject to uncertainty.
- Reinsurance underwriting loss was $212.0 million, with a 178.0% combined ratio. Insurance underwriting income was $0.4 million, with a 99.8% combined ratio.
- Gross written premiums fell 4.5% to $671.3 million: Reinsurance declined 10.8% to $437.1 million, while Insurance rose 10.1% to $234.2 million.
Balance sheet, liquidity, and capital
- At March 31, total assets were $9.30 billion, total liabilities $6.25 billion, and shareholders’ equity $3.05 billion. Equity declined $190.9 million from year-end, principally reflecting the quarterly loss and a $28.5 million after-tax reduction in unrealized investment appreciation.
- Cash and cash equivalents were $1.12 billion; total cash and investments, including accrued interest, were $7.47 billion. Net cash from operations was positive, while investing activities used $214.8 million; cash declined $62.2 million during the quarter.
- Long-term debt was $498.8 million, unchanged from year-end. Debt to total capital was 14.1%, versus 13.3% at December 31; debt plus preference-share hybrids to total capital was 24.0%, versus 22.8%.
- The $280 million revolving credit facility had no borrowings outstanding and expires in July 2013. Subsidiary cash and readily realizable securities were $917.6 million; holding-company cash was $102.9 million. Management stated liquidity was sufficient, while noting holding-company liquidity depends partly on subsidiary distributions.
- Assets held in trusts or supporting secured letters of credit totaled $2.55 billion, or 34.5% of cash and invested assets. The company reported $624.5 million of secured letters of credit outstanding.
- Diluted book value per share was $36.65, down 5.8% from year-end and up 6.4% from March 2010.
Material changes and management commentary
- Catastrophe losses drove the swing from prior-year profit to a substantial quarterly loss and lifted the total loss ratio to 116.9% from 81.0%. Excluding catastrophe and prior-year reserve effects, the reported accident-year loss ratio was 56.4%, compared with 57.6% in Q1 2010.
- Prior-year reserves were released by $21.9 million, versus $12.9 million in Q1 2010. Reinsurance releases included a favorable satellite-loss development; Insurance had a $1.1 million release, partly offset by strengthening in financial and professional lines.
- Operating and administrative expenses rose to $61.4 million from $52.5 million, reflecting investment in infrastructure and expansion. Net investment income fell as portfolio yields declined. A $3.5 million loss on foreign-exchange forward contracts and $8.1 million of other expense also affected results.
- The investment portfolio remained predominantly fixed income; average credit quality was AA+, with 95% rated A or higher. The company added $171.3 million of equities, 2.3% of cash and investments at quarter-end, and reported fixed-income duration of 2.5 years including swaps.
Outlook, risks, and unusual items
- Management reported stronger pricing at April 1 property reinsurance renewals than previously expected: an average 5% increase versus an anticipated 5%–10% decrease. It said up to 35% of planned 2011 business could see meaningful positive price changes, concentrated in catastrophe-exposed property and specialty reinsurance. Casualty reinsurance pricing remained challenging.
- For Insurance, management described generally declining casualty prices, but expected meaningful positive price changes in excess-and-surplus property and energy physical damage following recent catastrophe events. These comments are expectations, not formal earnings guidance.
- On April 28, two major Japanese clients announced loss estimates; management said the information strengthened its confidence in reserve adequacy. The ultimate cost of catastrophe claims remains uncertain and depends on further reporting, modeling, and coverage interpretation.
- Key risks include catastrophe frequency and severity, reserve-estimation uncertainty, reinsurer collectability, market competition, interest-rate and investment valuation changes, inflation in claim costs, foreign-exchange movements, and regulatory or tax changes. Management noted its relatively short operating history limits company-specific claims experience, particularly for long-tail business.
- The filing disclosed no material pending litigation or significant change in stated risk factors. Disclosure controls were assessed as effective; management reported no material change in internal control over financial reporting during the quarter.
- A not-yet-adopted accounting standard for insurance acquisition costs could increase cumulative operating expenses by up to $21.6 million, with the impact spread across current and prior periods; the company did not plan early adoption.
Important facts for investors to verify
- How catastrophe loss estimates and recoveries develop, particularly for Japan, New Zealand, and Australia, and whether the reported reserve confidence is borne out.
- Underlying underwriting performance: catastrophe-excluded combined ratio, segment trends, and the sustainability of prior-year reserve releases.
- Reinsurance pricing and renewal volumes, including whether the anticipated rate improvements translate into profitable earned premiums.
- Liquidity available at the holding company after collateral requirements, dividends, and subsidiary regulatory capital needs; also monitor credit-facility covenants.
- Investment portfolio valuation and interest-rate sensitivity, alongside the effect of added equity exposure and foreign-currency hedging.
- The eventual financial effect and transition treatment of the acquisition-cost accounting standard.