ASPEN INSURANCE HOLDINGS LIMITED — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; financial statements are unaudited. Aspen is a Bermuda-based insurer and reinsurer, reporting Insurance and Reinsurance segments. Amounts below are U.S. dollars unless noted.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Gross written premiums | $720.5m | $652.5m | $2,362.5m | $2,287.3m |
| Net earned premiums | $640.6m | $610.4m | $1,843.6m | $1,793.1m |
| Net investment income | $45.0m | $48.0m | $139.1m | $143.6m |
| Income before tax | $30.0m | $38.7m | $214.3m | $299.9m |
| Net income attributable to ordinary shareholders | $27.9m | $37.5m | $204.4m | $288.6m |
| Diluted earnings per share | $0.30 | $0.42 | $2.80 | $3.91 |
| Combined ratio | 93.4% | 94.6% | 92.0% | 90.9% |
| Operating cash flow | — | $363.7m | $480.1m |
- Q3 underwriting income was $57.0m, down from $68.2m. The Q3 loss ratio was 57.1% versus 56.1%; the expense ratio was 36.3% versus 38.5%.
- For the first nine months, underwriting income was $191.7m versus $239.2m. The loss ratio increased to 56.0% from 54.0%, while the expense ratio improved to 36.0% from 36.9%.
- At September 30, total assets were $11.00bn, shareholders’ equity $3.37bn, cash and investments $8.62bn, and long-term debt $549.2m. Net loss reserves were $4.57bn, up from $4.40bn at year-end 2014.
- Cash and cash equivalents were $1.20bn. The company reported $1.03bn of operating-subsidiary cash and short-term investments and $80.2m of holding-company cash. Restricted assets totaled $4.20bn, or 48.7% of cash and invested assets.
- Ordinary share repurchases totaled $83.7m in the first nine months; none occurred in Q3. The company had $416.3m remaining under its $500m authorization. Total shareholders’ equity was $48.0m lower than at December 31, 2014, including a $120.7m nine-month other comprehensive loss.
Material changes versus comparable periods
- Premium growth was strongest in Q3: gross written premiums rose 10.4%, including 23.2% growth in Reinsurance and 2.1% in Insurance. Nine-month gross written premiums increased 3.3%.
- Q3 ordinary-shareholder income and diluted EPS declined year over year; nine-month net income fell to $205.2m from $288.6m. Investment results and underwriting performance weighed on the comparisons.
- Q3 realized and unrealized investment losses were $41.2m, versus $0.2m in the prior-year quarter, primarily reflecting equity-market mark-to-market losses. Nine-month net investment losses were $13.6m, compared with $44.7m of net gains in 2014.
- Prior-year reserve releases were $39.0m in Q3 and $97.6m year to date, versus $32.6m and $92.6m, respectively. Nine-month releases were lower in Reinsurance ($53.4m versus $75.6m) but higher in Insurance ($44.2m versus $17.0m).
- Operating cash flow decreased $116.4m year over year, which management attributed mainly to higher claims settlements and performance-related payments.
Outlook, commentary, risks and unusual items
- Management described market pricing as soft: average reinsurance rates declined approximately 6%, with reductions appearing to slow; U.S. and international insurance rates fell approximately 1% and 2%, respectively. Aspen said it remained selective, targeting areas with more attractive returns. No specific earnings or premium guidance was provided.
- Q3 included $30.0m of pre-tax net losses associated with the Tianjin port explosion and $11.2m of mid-sized losses. Separate net catastrophe losses were $19.1m. Prior-year reserve releases benefited the Q3 combined ratio by 6.1 percentage points.
- Q3 investment losses reflected volatility in global equity markets and fixed-income trading portfolios. For the nine-month period, foreign-exchange losses were $26.4m; the company also reported a $70.2m net-of-tax foreign-currency translation loss in other comprehensive income.
- Management cited competition from alternative capital, catastrophe frequency and severity, reserve-estimation uncertainty, inflation in claims costs, investment-market and interest-rate risk, foreign-exchange exposure, and counterparty/reinsurance credit risk. Higher interest rates could reduce fixed-income portfolio values; the filing estimates a 100-basis-point parallel rate increase would reduce the modeled value of interest-sensitive invested assets by $240m.
- Pending litigation and arbitrations arise in the ordinary course; management considered the probability of a material adverse effect on financial condition, results or liquidity remote. The filing reports no significant change in risk factors from the 2014 Form 10-K.
Most important facts for investors to verify
- Whether underwriting results and reserve development remain adequate, particularly given the $97.6m of nine-month prior-year releases and the higher year-to-date combined ratio.
- The ultimate insured losses from the Tianjin event and other catastrophe and large-loss claims, and whether estimates or reinsurance recoveries change.
- Investment portfolio performance and sensitivities, including trading-equity exposure, interest-rate risk, and the reported investment and foreign-exchange losses.
- Liquidity available after accounting for restricted assets, collateral requirements, subsidiary dividend restrictions, and potential claims-payment timing.
- How soft pricing, competition, and management’s selective underwriting approach affect premium growth and returns in coming periods.