Aspen Insurance Holdings Limited — 2016 Form 10-K
Business context and reporting period. Aspen is a Bermuda-based global specialty insurer and reinsurer, operating through two segments: Aspen Insurance and Aspen Reinsurance. This annual report covers the fiscal year ended December 31, 2016; it also reports fourth-quarter results and compares the year with 2015 and 2014. Amounts are in U.S. dollars unless otherwise noted.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Gross written premiums | $3,147.0 million | $2,997.3 million |
| Net written premiums | $2,593.7 million | $2,646.2 million |
| Net premiums earned | $2,637.3 million | $2,473.3 million |
| Total revenues | $2,938.5 million | $2,753.4 million |
| Net income | $203.4 million | $323.1 million |
| Diluted earnings per ordinary share | $2.61 | $4.54 |
| Combined ratio | 98.5% | 91.9% |
| Net cash from operating activities | $453.2 million | $574.2 million |
- Underwriting and margins: Underwriting income fell to $125.7 million from $263.4 million. The loss ratio rose to 59.8% from 55.2%; the expense ratio rose to 38.7% from 36.7%. Reinsurance’s combined ratio was 90.0% (80.4% in 2015); Insurance’s was 99.6% (96.1%).
- Losses and reserves: Catastrophe losses, net of reinsurance and reinstatements, were $164.4 million, or 6.3 combined-ratio points, versus $90.5 million, or 3.7 points. Favorable prior-year reserve development was $129.3 million, down from $156.5 million. Net loss and loss expense reserves were $4,759.2 million at year-end; gross IBNR reserves were $3,044.9 million.
- Investment results: Net investment income was $187.1 million versus $185.5 million. Net realized and unrealized investment gains recorded in operations were $45.2 million versus $17.0 million. Fixed-income portfolio book yield declined to 2.49% from 2.59%; total investment return was 2.2% versus 1.1%.
- Liquidity and cash flow: Total cash and investments were $9,174.1 million, up from $8,811.7 million; cash and cash equivalents were $1,273.8 million. Operating cash flow decreased by $121.0 million to $453.2 million. Operating subsidiaries held $1,409.3 million in cash and short-term investments. Restricted assets totaled $4,535.7 million, 49.3% of investable assets.
- Debt and capital: Aspen Holdings’ long-term debt was $549.3 million; consolidated Silverton loan notes were $223.4 million. Debt to total capital was 17.5%, while debt plus preference-share liquidation value to total capital was 35.5%. Shareholders’ equity was $3,648.3 million, and diluted book value per ordinary share was $46.72, up 1.6%.
- Fourth quarter: Aspen reported a net loss of $71.5 million, compared with net income of $117.9 million in Q4 2015. Q4 2016 included a $29.0 million net realized and unrealized investment loss and $17.6 million expense from changes in derivative fair value.
Material changes versus prior periods
- Gross written premiums grew 5.0%, led by 13.2% growth in reinsurance; Insurance premiums declined 0.8%. Specialty reinsurance grew 50.4%, including the contribution from AgriLogic, acquired in January 2016. AgriLogic contributed $178.9 million of gross written premiums.
- Ceded written premiums increased 57.6% to $553.3 million, and the retention ratio fell to 82.4% from 88.3%, reflecting expanded reinsurance purchases and an adverse development cover for certain discontinued casualty business.
- General, administrative and corporate expenses increased to $490.1 million from $424.0 million, in part due to AgriLogic, business growth and reorganization costs. AgriLogic acquisition consideration was $69.1 million; Blue Waters, acquired in October, cost $8.0 million.
- Shareholders’ equity increased $228.4 million, including $241.3 million net proceeds from issuing 5.625% preference shares, partly offset by $75.0 million of ordinary-share repurchases and lower accumulated other comprehensive income.
Outlook, commentary, risks and unusual items
- Management described insurance and reinsurance markets as competitive and rate-pressured. At January 1, 2017 renewals, average reinsurance rates declined about 2%; U.S. property catastrophe rates declined about 3% and rates elsewhere about 5%. Casualty reinsurance achieved modest rate increases. No formal quantitative earnings guidance is provided in the filing.
- After reviewing its Insurance portfolio, Aspen elected not to renew approximately $150 million of business, about 5% of its portfolio, including a large portion of primary casualty. Management expects the portfolio actions and increased ceded reinsurance to reduce volatility and improve future performance, but outcomes are uncertain.
- Key risks include catastrophe frequency and severity, reserve-estimation uncertainty and long-tail claims inflation, soft-market pricing, reinsurance counterparty risk, investment-market and interest-rate movements, currency exposure, broker concentration, cyber and operational risks, and regulatory or tax changes.
- Brexit creates uncertainty for U.K. operations, including potential loss of EEA passporting rights, regulatory divergence, market volatility and currency effects. Management noted that the long-term consequences remained uncertain.
- Reserve sensitivity is significant: management estimated that a 10% unfavorable change in expected loss ratios would increase net reserves by $308.2 million. A 5% change in net loss reserves equated to $238.0 million. These are sensitivities, not forecasts.
- Capital actions included $75.0 million of 2016 share repurchases and a quarterly ordinary dividend increase to $0.22 per share. A new $250 million repurchase authorization was approved in February 2017. The 7.401% preference shares were redeemed in January 2017; the company said it intended to redeem the 7.250% preference shares in July 2017.
- The company reported effective disclosure controls and internal control over financial reporting. The internal-control assessment excluded AgriLogic, a recently acquired business.
Important facts for investors to verify
- Whether the higher 2016 catastrophe burden, lower reserve releases and worsening combined ratio persist, and how much future earnings depend on favorable prior-year reserve development.
- Whether the $4.76 billion net reserve estimate remains adequate, particularly for casualty and other long-tail exposures, and how reserve sensitivities compare with subsequent claims development.
- Whether increased ceded reinsurance reduces volatility as intended, including the cost, limits and collectability of coverage and the resulting effect on net premiums and expense ratios.
- How AgriLogic and the portfolio exits perform, and whether management achieves profitable growth in targeted lines amid continuing rate pressure.
- Available parent-company liquidity and subsidiary dividend capacity, given regulatory restrictions, $4.54 billion of restricted assets, and the $200 million credit facility’s June 2017 expiry.
- Developments in Brexit and U.S.–EU reinsurance collateral arrangements, and any resulting changes to operating access, capital requirements or liquidity.