ASPEN INSURANCE HOLDINGS LIMITED — FY 2011 Form 10-K
Business context and reporting period. Bermuda-based global property and casualty insurer and reinsurer, operating through insurance and reinsurance segments. This annual report covers the year ended December 31, 2011; figures are in U.S. dollars unless stated otherwise. 2011 gross written premiums were $2.208 billion.
Key financial metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Gross written premiums | $2,207.8 million | $2,076.8 million |
| Net premiums earned | $1,888.5 million | $1,898.9 million |
| Total revenues | $2,077.7 million | $2,190.4 million |
| Net income (loss) | $(105.8) million | $312.7 million |
| Diluted earnings (loss) per share | $(1.82) | $3.62 |
| Loss / expense / combined ratio | 82.4% / 33.2% / 115.6% | 65.8% / 30.9% / 96.7% |
| Operating cash flow | $343.5 million | $624.3 million |
| Cash and cash equivalents | $1,239.1 million | $1,179.1 million |
| Total cash and investments | $7,625.1 million | $7,320.0 million |
| Total assets / shareholders’ equity | $9,476.5 million / $3,172.0 million | $8,832.1 million / $3,241.9 million |
| Long-term debt | $499.0 million carrying value; $500 million face value | $498.8 million carrying value |
Net investment income was $225.6 million, down from $232.0 million. Fixed-income and cash portfolio total return was 4.7%, versus 4.8% in 2010. Debt was 13.6% of total capital; debt plus preference-share hybrids was 23.2%. The quarterly ordinary dividend remained $0.15 per share, or $0.60 for the year.
Material changes versus the prior comparable period
- Catastrophe losses drove a sharp reversal from 2010 profit to a 2011 net loss. The company reported $534.3 million of net 2011 catastrophe losses before tax, including events in Japan, New Zealand, the United States, Thailand and Australia; after-tax natural-disaster losses were reported at $485.4 million.
- Reinsurance underwriting recorded a $282.5 million loss and a 125.4% combined ratio, versus $133.6 million underwriting profit and an 88.2% ratio in 2010. Catastrophe losses contributed 47.5 percentage points to the 2011 reinsurance combined ratio.
- Insurance underwriting remained profitable: $32.5 million profit and a 95.8% combined ratio, improving from a $23.6 million loss and 103.1% ratio in 2010.
- Gross written premiums rose 6.3%, led by 11.6% growth in insurance; net premiums earned edged down 0.5% as the company bought additional reinsurance protection. Total loss reserves rose to $4.525 billion gross and $4.099 billion net from $3.821 billion and $3.541 billion, respectively.
- Shareholders’ equity declined $69.9 million. The net loss and $65.3 million of dividends were partly offset by $93.5 million of after-tax unrealized investment gains. Operating cash flow fell to $343.5 million from $624.3 million, while net claims paid increased to $982.2 million from $666.8 million.
- Gross written premiums in financial and professional lines insurance rose 44.4%, while casualty insurance premiums fell 7.4%. The company continued building its U.S. insurance platform.
Outlook, management commentary, risks and unusual items
- Management said January 2012 renewal rates rose about 4% overall, but it could not conclude that a broad hard market had arrived. U.S. property catastrophe renewal rates increased 10%–15%; management anticipated substantial increases for Japanese earthquake business at April renewals and double-digit increases at mid-year U.S. property renewals. These are expectations, not formal earnings guidance.
- Management described 2011 as an exceptionally difficult catastrophe year and cited soft market conditions, low investment yields and the need to preserve capital. Growth opportunities were described as limited in some markets; management said it would avoid business that did not meet profitability targets.
- Reserve estimates remain a major uncertainty: 51.1% of gross loss reserves were IBNR. Management estimated a 5% change in net loss reserves would equal $205.1 million, or 6.5% of year-end shareholders’ equity. Long-tail casualty claims, catastrophe development, inflation, coverage disputes and reliance on catastrophe models may affect ultimate losses.
- Market and liquidity risks include interest-rate and credit-spread movements, foreign exchange, the Eurozone debt crisis, investment liquidity, and reinsurer, broker and financial-counterparty credit risk. About $3.363 billion of assets were held in trusts or pledged for secured letters of credit, equal to 44.4% of cash and invested assets.
- A Kentucky court granted partial summary judgment of $42 million against Aspen U.K. and Aspen Specialty in the Muriel Don Coal coverage dispute, plus 12% interest from March 25, 2010. Additional bad-faith and punitive-damages claims remained for trial; the company said it intended to appeal.
- For the January 2012 Costa Concordia incident, management estimated retained insurance losses below $30 million before reinstatement premiums and reinsurance-segment exposure below 1% of market loss; the estimate was preliminary.
- Other notable items: interest-rate swaps generated a $64.4 million loss in 2011; the company expanded the swap notional amount to $1.0 billion. CFO Richard Houghton was scheduled to leave effective February 29, 2012, with the company’s Chief Risk Officer to act as CFO pending a successor.
Most important facts for investors to verify
- Track development and collectability of the 2011 catastrophe losses and reinsurance recoverables, especially the $426.6 million recoverable balance and Thailand/Japan-related claims.
- Assess reserve adequacy, including IBNR assumptions, prior-year releases of $92.3 million, and exposures to long-tail casualty and financial-crisis-related claims.
- Review the Muriel Don appeal, accrued amounts, potential interest and unresolved bad-faith and punitive-damages claims.
- Confirm actual 2012 renewal pricing, retention, premium growth and whether expected rate increases translate into underwriting profitability.
- Monitor liquidity and collateral constraints, debt covenants, subsidiary dividend capacity and changes in ratings or regulatory capital requirements.
- Check investment performance, swap valuation and collateral, and the sensitivity of book value and earnings to interest rates, credit spreads and foreign exchange.