Aspen Insurance Holdings Limited — 2015 Form 10-K
Business context and reporting period. Bermudian insurance and reinsurance holding company reporting under U.S. GAAP for the year ended December 31, 2015, compared primarily with 2014. Aspen operates through two segments, Insurance and Reinsurance, and wrote business globally. Figures are in U.S. dollars unless noted.
Key financial results
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Gross written premiums | $2,997.3 million | $2,902.7 million | +3.3% |
| Net premiums earned | $2,473.3 million | $2,405.3 million | +2.8% |
| Net income | $323.1 million | $355.8 million | −9.2% |
| Diluted earnings per share | $4.54 | $4.82 | −5.8% |
| Net investment income | $185.5 million | $190.3 million | −2.5% |
| Combined ratio | 91.9% | 91.7% | +0.2 percentage points |
| Operating cash flow | $574.2 million | $607.4 million | −$33.2 million |
- Pre-tax income was $337.5 million versus $367.9 million. Underwriting income declined to $263.4 million from $294.7 million.
- The 2015 combined ratio included $90.5 million of net catastrophe losses, or 3.7 points, compared with $65.5 million, or 2.7 points, in 2014. Prior-year reserves were released by $156.5 million, compared with $104.1 million in 2014.
- Insurance premiums rose 1.1% to $1,748.4 million; its combined ratio was 96.1% versus 96.2%. Reinsurance premiums grew 6.5% to $1,248.9 million; its combined ratio increased to 80.4% from 77.6%.
- Total assets were $11.05 billion and shareholders’ equity $3.42 billion at year-end. Diluted book value per ordinary share rose 1.9% to $46.00.
- Cash and investments totaled $8.81 billion, including $1.10 billion in cash and cash equivalents. Fixed-income portfolio average credit quality was AA−; book yield was 2.59%, down from 2.65%.
- Long-term debt was $549.2 million; consolidated Silverton loan notes were $190.6 million. Debt to total capital was 17.8%, up from 17.0%. The $200 million revolving credit facility had no borrowings outstanding.
- Net loss reserves were $4.58 billion, up from $4.40 billion. Total restricted assets were $4.40 billion, or 49.6% of investable assets. Management said operating subsidiaries had a comfortable liquidity margin.
Material changes and management commentary
- Growth shifted toward other property and specialty reinsurance, including pro rata, credit and surety, and agriculture; property catastrophe reinsurance premiums were deliberately reduced 9.0%. Insurance growth in U.S. property and casualty and financial and professional lines was offset by a 17.7% decline in marine, aviation and energy premiums.
- Management reported a 10.0% return on equity, versus 11.1% in 2014, amid rate reductions across many lines and persistently low investment returns. It emphasized portfolio optimization, capital efficiency and improved investment returns.
- Net favorable prior-year reserve development increased to $156.5 million. Management noted uncertainty in reserves, including exposure to 2015 U.K. floods and the Tianjin port explosion, as well as long-tail casualty claims and inflation.
- Net income was affected by higher catastrophe and large losses, including $26.0 million attributed to Tianjin, $37.6 million of energy losses and $17.0 million associated with the Samarco dam event. The filing also reports segment-specific allocations of some event losses.
- Other comprehensive income fell by $174.7 million, principally reflecting investment fair-value declines and foreign-currency translation losses. The available-for-sale portfolio recorded a $68.5 million net unrealized loss, and currency translation was a $72.1 million loss.
- Aspen repurchased 1.79 million ordinary shares for $83.7 million and increased its quarterly ordinary dividend from $0.20 to $0.21. The 2015 repurchase program authorized up to $500 million, with $416.3 million remaining at year-end.
Outlook, risks and unusual items
- At January 1, 2016 renewals, reinsurance gross written premiums increased approximately 9% year over year; approximately 4 percentage points reflected the timing of a significant specialty contract. Property catastrophe business was reduced about 10%. Management reported average renewal rates down approximately 4%, with variation by line and geography. These are management disclosures, not full-year earnings guidance.
- Management described the market as soft and competitive, with alternative capital adding capacity and pressuring rates. It expected to retain more risk in certain lines in 2016, increasing potential results volatility.
- Key risks include catastrophe frequency and severity, climate and model uncertainty, reserve adequacy, long-tail claims inflation, reinsurance recoverability, investment-market and interest-rate risk, currency movements, broker concentration, and competition. Approximately 12.6% of the managed investment portfolio was in equities, BBB emerging-market debt and related risk-asset cash.
- Solvency II took effect in the U.K. and E.U. on January 1, 2016. The PRA approved Aspen U.K.’s internal model for capital calculations; Bermuda equivalence was expected to receive official confirmation in 2016. Regulatory changes, including the proposed U.K. E.U. referendum, could affect operations or capital requirements.
- After year-end, Aspen acquired AgriLogic on January 19, 2016, for an initial $53.0 million plus contingent consideration. The agency generated approximately $185 million of gross written premiums for its insurance carriers in 2015.
- The filing reports no material adverse effect expected from pending or threatened litigation, based on information available, and no material unresolved staff comments. The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of 2015 profitability depended on the $156.5 million reserve release, and whether reserve development remains favorable as claims mature.
- Underlying loss and expense trends excluding catastrophe losses and prior-year reserve development, particularly the increase in the insurance loss ratio and reinsurance acquisition costs.
- Exposure and ultimate loss estimates for Tianjin, U.K. floods, the Samarco dam event, and other 2015 catastrophe and large-loss events.
- Liquidity available to the holding company versus assets restricted in trusts or pledged against letters of credit; confirm the impact of regulatory capital and dividend restrictions.
- Investment sensitivity to rising rates, credit spreads and equity markets, and the effect of the $174.7 million decline in other comprehensive income.
- AgriLogic’s integration, contingent purchase consideration, renewal retention and crop-program exposure; also monitor the 2016 renewal growth for contract timing effects.