Aspen Insurance Holdings Limited — Q2 2016 Form 10-Q
Business context and reporting period. Aspen is a Bermuda-based insurer and reinsurer operating through Insurance and Reinsurance segments. This unaudited filing covers the three and six months ended June 30, 2016; comparisons are with the same 2015 periods unless stated otherwise. Dollar amounts are in millions except per-share data and ratios.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net earned premiums | $680.8 | $609.4 | $1,343.9 | $1,203.0 |
| Total revenues | $773.4 | $668.4 | $1,553.0 | $1,370.7 |
| Underwriting income | $15.6 | $54.2 | $88.4 | $134.7 |
| Income before tax | $66.2 | $51.2 | $183.1 | $184.3 |
| Net income | $64.9 | $49.0 | $179.3 | $177.0 |
| Diluted earnings per ordinary share | $0.89 | $0.62 | $2.57 | $2.50 |
| Combined ratio | 100.7% | 93.6% | 96.2% | 91.2% |
Q2 net income attributable to ordinary shareholders was $64.5 million, versus $48.5 million. Six-month net investment income was $97.5 million, up from $94.1 million. Reported realized and unrealized investment gains were $45.1 million in Q2 and $110.7 million for the first half, partly offset by investment losses of $8.3 million and $28.9 million, respectively. The six-month effective tax rate was 2.1%, compared with 4.0%.
Cash flow and financial position. Six-month operating cash flow was $242.2 million, compared with $204.4 million; investing cash flow was negative $118.5 million and financing cash flow was negative $175.7 million. Cash declined $60.7 million to $1,038.8 million. At June 30, total assets were $11,786.9 million, total liabilities $8,170.1 million, and shareholders’ equity $3,616.8 million. Investments totaled $7,903.5 million. Long-term debt was $549.3 million; Silverton variable-interest-entity loan-note liabilities were $104.1 million on the balance sheet. Total cash and investments were $8,942.3 million.
Management reported $820.1 million of cash and short-term investments at operating subsidiaries and $101.3 million of cash, cash equivalents and investments at the holding company. Restricted assets were $4,484.0 million, or 49.8% of investable assets. The $200 million credit facility had no borrowings outstanding. A letter-of-credit facility was amended to extend through June 2018, with a maximum aggregate amount of $550 million.
Material changes versus prior periods
- Gross written premiums increased 10.9% in Q2 to $801.7 million and 8.2% in the first half to $1,777.4 million. Reinsurance drove much of the growth: Q2 premiums rose 27.6%, including growth in property catastrophe and specialty lines. Insurance Q2 premiums increased 1.5%.
- Underwriting results weakened: Q2 underwriting income fell to $15.6 million from $54.2 million, and the combined ratio rose to 100.7% from 93.6%. For the first half, underwriting income declined to $88.4 million from $134.7 million and the combined ratio rose to 96.2% from 91.2%.
- Management attributed the Q2 combined-ratio deterioration principally to higher catastrophe losses, lower prior-year reserve releases and increased operating expenses. Q2 catastrophe losses net of reinsurance recoveries and reinstatement premiums were $65.1 million, versus $11.9 million a year earlier. Mid-sized energy, fire and aviation losses in Insurance were $41.7 million, versus $40.0 million.
- Favorable prior-year reserve development was $21.2 million in Q2, compared with $31.1 million, and $42.8 million for the first half, compared with $58.6 million. Six-month loss reserves increased to $5,181.5 million gross and $4,771.1 million net, from $4,938.2 million and $4,583.4 million at year-end.
- Investment results supported reported earnings: Q2 net investment gains, after investment losses, were $36.8 million versus a net loss of $15.3 million; first-half net gains were $81.8 million versus $27.6 million. Management cited mark-to-market gains in equity and fixed-income portfolios.
Outlook, management commentary and risks
No specific earnings or premium guidance was provided. Management described continued pricing pressure, particularly in international insurance markets and energy, and said it was redeploying capital from pressured Marine, Energy and Aviation lines toward selected areas including Accident & Health, U.K. regional property and casualty, global excess casualty, U.S. professional liability and cyber. Management reported successful mid-year reinsurance renewals, while emphasizing underwriting discipline and targeted insurance growth. It also continued to use third-party capital to manage property-catastrophe exposure.
- Claims and reserving: Catastrophe frequency and severity, reserve-estimation uncertainty, inflation in claims costs and the possibility of adverse development may affect results. Reserve releases contributed to earnings in both periods.
- Pricing and competition: Management cited excess capacity and weak crude-oil prices as pressures on energy pricing, alongside broader insurance and reinsurance competition.
- Brexit: The filing identifies uncertainty over U.K.–EU arrangements, market volatility, regulatory divergence and possible loss of access to the EU financial-services passport as potential risks to operations and investments.
- Markets and investments: The fixed-income portfolio had a 3.55-year duration; management notes that rising interest rates could reduce its market value. Equity holdings were $785.6 million. Foreign-exchange movements also affected results.
- Other items: Aspen acquired AgriLogic on January 19, 2016, for total consideration of $69.1 million, including contingent consideration; the acquisition added $22.1 million of goodwill. The company terminated its remaining interest-rate swaps in May. Management said pending litigation or arbitration was not expected to have a material effect, based on available information.
Important facts for investors to verify
- Whether subsequent catastrophe claims and reserve development confirm the estimates underlying the higher 2016 loss ratios.
- How much reported earnings depended on market-driven investment gains, and how investment values respond to rate, credit-spread and equity-market changes.
- Whether AgriLogic meets performance expectations and how contingent consideration affects acquisition costs.
- Available liquidity after considering restricted assets, regulatory capital requirements, subsidiary dividend constraints and claims-payment needs.
- The effect of Brexit negotiations on Aspen’s U.K. operations, regulatory permissions, investment portfolio and cross-border business.