Business context and reporting period
Aspen Insurance Holdings Limited is a Bermuda-based global specialty insurer and reinsurer. This unaudited Form 10-Q reports the three months ended March 31, 2018, compared with the three months ended March 31, 2017; balance-sheet figures are compared with December 31, 2017. Management cautions that quarterly results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Gross written premiums | $1,116.8 million | $998.0 million |
| Net earned premiums | $533.5 million | $581.1 million |
| Total revenues | $683.5 million | $683.6 million |
| Income before tax | $34.4 million | $99.3 million |
| Net income | $30.8 million | $96.5 million |
| Basic / diluted earnings per ordinary share | $0.39 / $0.38 | $1.39 / $1.36 |
| Net cash used in operating activities | $122.8 million | $84.3 million |
| Cash and cash equivalents at period-end | $1,246.9 million | $873.1 million |
Q1 2018 underwriting income was $37.3 million versus $33.5 million. The total combined ratio was 97.8%, compared with 97.0%; a ratio below 100% indicates underwriting profit. The total loss ratio rose to 58.1% from 56.5%. Net favorable prior-year reserve development was $37.7 million, benefiting the combined ratio by 7.1 percentage points, versus $26.2 million and 4.5 points in Q1 2017. Net catastrophe losses were $24.2 million, versus $29.1 million.
Net investment income was $47.3 million, nearly unchanged from $47.7 million. Net realized and unrealized investment results were a $37.7 million loss, versus a $46.2 million gain. A $23.5 million gain on foreign-exchange contracts not designated as hedges partly offset other results. Other comprehensive loss, net of tax, was $83.2 million, principally reflecting unrealized losses on available-for-sale investments and currency translation.
Financial position, liquidity and capital
At March 31, 2018, total assets were $13.208 billion, total liabilities $10.349 billion and shareholders’ equity $2.859 billion. Equity declined $69.5 million from year-end, mainly due to the $83.2 million reduction in accumulated other comprehensive income, partly offset by retained earnings. Diluted book value per ordinary share was $38.70, down 3.5% from December 31, 2017.
Total cash and investments were $8.479 billion, down from $8.688 billion at year-end. Cash rose during the quarter as investment cash flows and equity-portfolio sales more than offset operating and financing cash use. Operating cash flow was negative $122.8 million, $38.5 million more cash used than in the comparable quarter, which management attributed mainly to increased ceded reinsurance activity and paid claims. Management reported $1.060 billion of cash and short-term investments at operating subsidiaries and considered liquidity adequate for the foreseeable future; it noted that claims can require substantial, unpredictable payments.
Long-term debt was $549.5 million, unchanged; quarterly interest expense was $7.4 million. Debt was 16.1% of total capital, and debt plus preference shares was 31.1% of total capital. No borrowings were outstanding under the $200 million credit agreement. Silverton loan notes were $39.8 million at fair value and are not treated by management as permanent capital. Restricted assets totaled $4.575 billion, or 55.6% of investable assets.
Material changes versus the prior comparable period
- Gross written premiums increased 11.9%, with reinsurance up 10.3% and insurance up 14.0%; growth included specialty reinsurance, property catastrophe, financial and professional lines, and property and casualty insurance.
- Net earned premiums fell 8.2%, mainly because ceded earned reinsurance premiums increased $138.9 million, partly offset by $91.3 million higher gross earned premiums. The retention ratio fell to 56.9% from 68.8%.
- Net income and diluted EPS declined substantially. In addition to lower net earned premiums and a higher total combined ratio, investment results shifted from a gain to a loss, and the fair-value mark on trading fixed-income portfolios was a significant factor.
- Available-for-sale fixed-income unrealized losses increased: gross unrealized losses were $86.9 million at March 31, versus $33.9 million at year-end. The company sold its trading equity portfolio during Q1.
- Reinsurance-segment underwriting income was $28.1 million versus $31.0 million; insurance-segment underwriting income improved to $9.2 million from $2.5 million.
Outlook, management commentary and risks
Management reported approximately 5% overall rate increases in Q1, including approximately 8% in property catastrophe, 6% in property reinsurance and 4% in casualty and specialty reinsurance. April 1 renewal rates increased approximately 4%, excluding flat Japanese renewals. The company intends to pursue selected growth opportunities, increase quota-share reinsurance and reposition parts of its U.S. property and downstream energy portfolios to improve insurance profitability.
Aspen said it remained on track to achieve $30 million of savings in 2018 through its operating effectiveness and efficiency program. It entered into a five-year outsourcing agreement with Genpact, effective April 1, 2018, with a phased transition expected to take 12–15 months.
Key risks include catastrophe-loss estimation and coverage disputes, reserve uncertainty and claims inflation, reinsurance-counterparty collectability, investment-market and interest-rate movements, currency exposure, competition and execution of efficiency and portfolio initiatives. Uncollateralized reinsurance recoverables were $1.120 billion; management had made no provision for doubtful reinsurance debts. Ordinary-course litigation and arbitration were disclosed; management considered a material adverse outcome remote. A $100 million real-estate fund commitment had an $86.2 million initial capital call due May 10, 2018. A new $225 million catastrophe-risk note issuance by Kendall Re after quarter-end provides collateralized retrocessional protection and is not consolidated by Aspen.
Important facts for investors to verify
- Confirm the drivers and sustainability of premium growth alongside the sharp decline in net earned premiums and retention following increased ceded reinsurance.
- Review reserve assumptions and the sources of the $37.7 million favorable prior-year development; assess the effect on reported underwriting results if reserve releases do not recur.
- Examine investment performance, interest-rate sensitivity and the impact of trading and available-for-sale valuation changes on earnings, OCI and book value.
- Assess liquidity and collateral constraints, including restricted assets, the real-estate fund capital call, and the timing and collectability of reinsurance recoverables.
- Track delivery of the targeted $30 million savings, the Genpact transition, and the stated underwriting and portfolio repositioning plans.
- The filing’s MD&A contains an inconsistent statement of Q1 2018 diluted EPS ($0.39); the financial statements and EPS note report $0.38, which is used above.