Aspen Insurance Holdings Limited — Q3 2010 Form 10-Q
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2010, compared with the same periods in 2009. Aspen writes property and casualty insurance and reinsurance worldwide and reports two underwriting segments: Insurance and Reinsurance. Amounts are U.S. dollars unless noted.
Key financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $528.2 million | $542.4 million | $1,606.5 million | $1,538.4 million |
| Net earned premiums | $451.7 million | $470.9 million | $1,399.2 million | $1,346.8 million |
| Net investment income | $58.1 million | $58.9 million | $175.0 million | $190.3 million |
| Income before tax | $103.1 million | $171.1 million | $244.4 million | $408.6 million |
| Net income | $92.8 million | $145.8 million | $220.0 million | $347.6 million |
| Diluted EPS, adjusted for preference dividends | $1.08 | $1.63 | $2.51 | $4.25 |
| Operating cash flow | — | $502.3 million | $489.1 million |
Q3 net income fell about 36% year over year; nine-month net income fell about 37%. Revenue rose about 4% for the nine-month period, but higher claims costs and lower reserve releases more than offset the increase. Nine-month operating cash flow increased about 3%.
- Underwriting: Q3 combined ratio was 94.4%, versus 80.3% a year earlier; nine-month combined ratio was 97.2%, versus 84.0%. Q3 underwriting profit was $39.6 million before $14.3 million of corporate expenses; nine-month underwriting profit was $74.6 million before $34.7 million of corporate expenses.
- Balance sheet at September 30: Total assets were $8.82 billion, total liabilities $5.38 billion, and shareholders’ equity $3.44 billion. Cash and cash equivalents were $914.3 million; total investments were $6.29 billion.
- Debt and capital: Long-term debt was $249.7 million, essentially unchanged from year-end 2009. Debt to total capital was 6.8%; debt plus preference shares to total capital was 16.3%. No borrowings were outstanding under the new revolving credit facility.
- Liquidity and collateral: The parent held $54.5 million in cash; subsidiaries held $848.8 million in cash and readily realizable securities. Assets held in trusts and secured letters of credit totaled $2.32 billion, or 32.1% of cash and invested assets.
- Investment portfolio: Available-for-sale fixed maturities had fair value of $5.55 billion, including $362.0 million of gross unrealized gains and $0.4 million of gross unrealized losses. Nine-month after-tax unrealized investment gains increased equity by $161.4 million.
Material changes and unusual items
- Gross written premiums declined 15.2% in Q3 to $415.8 million, mainly from lower reinsurance premiums; nine-month gross written premiums were broadly flat at $1.66 billion. Management cited selective underwriting amid competitive pricing and reduced casualty exposure.
- Q3 loss ratio rose to 63.3% from 49.9%. The quarter included $6.2 million of prior-year reserve strengthening, compared with $44.2 million of releases in Q3 2009. For the first nine months, prior-year reserves released by $8.8 million, versus $71.0 million in 2009.
- Management estimated pre-tax losses of $125.3 million from the Chile earthquake and $20.4 million from the New Zealand earthquake. Nine-month insurance losses also included $10.7 million for Deepwater Horizon and $35.9 million net for two pipeline spills and a California gas explosion.
- Net loss and loss adjustment expense reserves were $3.41 billion, up from $3.01 billion at year-end 2009. Gross reserves were $3.67 billion; 61.7% represented incurred-but-not-reported claims. Reserve estimates depend on significant assumptions and may differ from ultimate claims.
- The company repurchased $200 million of ordinary shares through an accelerated program, cancelling 7.23 million shares in the first half. A separate authorization allows up to $400 million of repurchases through March 2012; $7.7 million was spent under that program through September 30.
- Aspen America Insurance Company was acquired in August for $10 million plus closing surplus. A new $280 million, three-year revolving credit facility replaced the prior $450 million facility in July.
Outlook, commentary, and risks
Management described market conditions as difficult, with pressured terms and pricing generally stable. It said it would reduce business in areas where rates or terms had weakened and focus on adequately priced lines. Property catastrophe reinsurance pricing was declining at July renewals; casualty markets remained challenging. Management cited opportunities in financial and political risks, and anticipated possible rate improvement in marine and energy reinsurance following major losses. No numerical earnings or revenue guidance is provided.
Key risks include catastrophe frequency and severity, uncertainty in loss estimates and reserving, claims inflation, competitive pricing and capacity, investment and interest-rate exposure, foreign exchange movements, reinsurer credit quality and the availability of reinsurance. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It reported no material pending litigation or arbitration proceedings.
Important facts for investors to verify
- How the Chile and New Zealand earthquake loss estimates, pipeline claims, and other catastrophe exposures develop.
- Whether reserve adequacy and future prior-year development support current estimates, particularly in long-tail financial, professional, and casualty lines.
- Whether investment income remains under pressure from low yields, and how interest-rate or credit-market changes affect portfolio values and liquidity.
- Whether premium reductions and selective underwriting improve pricing and combined ratios, especially in casualty and reinsurance lines.
- The amount and pace of share repurchases, collateral requirements, subsidiary dividend capacity, and compliance with credit-facility covenants.