Aspen Insurance Holdings Limited — Q2 2017 Form 10-Q
Business context and reporting period. Aspen is a Bermuda-based global specialty insurer and reinsurer, reporting Insurance and Reinsurance segments. This unaudited filing covers the three and six months ended June 30, 2017; balance-sheet comparisons are with December 31, 2016. Amounts are in U.S. dollars unless stated otherwise.
Financial performance and position
- Q2 revenue and earnings: Total revenue was $662.0 million, down 14.4% year over year, principally reflecting net earned premiums falling 17.5% to $562.0 million. Net income was $75.8 million versus $64.9 million; diluted EPS was $1.07 versus $0.89. Pretax income increased to $77.0 million from $66.2 million.
- First-half performance: Total revenue was $1,345.6 million versus $1,553.0 million; net income was $172.3 million versus $179.3 million. Diluted EPS was $2.43 versus $2.57. Pretax income was $176.3 million versus $183.1 million.
- Premiums and underwriting: Q2 gross written premiums rose 2.5% to $822.1 million, while net earned premiums fell to $562.0 million. Q2 underwriting income was $13.2 million: Reinsurance earned $26.0 million and Insurance recorded a $12.8 million loss. The combined ratio was 100.0% versus 100.7%. For the first half, gross written premiums increased 2.4% to $1,820.1 million, underwriting income declined to $46.7 million from $88.4 million, and the combined ratio worsened to 98.5% from 96.2%.
- Investment results and margins: Q2 net investment income was $47.4 million versus $48.0 million; reported realized and unrealized investment gains were $49.0 million. The MD&A separately reports net realized and unrealized investment gains of $42.0 million, reflecting its presentation of gains and losses. First-half net investment income was $95.1 million versus $97.5 million; MD&A-reported investment gains were $88.2 million. Investment and foreign-exchange marks materially affected reported earnings.
- Cash flow: Operating cash flow was a $104.5 million outflow in the first half, compared with a $242.2 million inflow in 2016. Management attributed the deterioration mainly to increased ceded reinsurance costs and paid claims. Investing activities provided $365.6 million; financing activities used $314.6 million. Cash and cash equivalents ended at $1,228.4 million, down from $1,273.8 million at year-end.
- Assets, reserves and liquidity: Total assets were $12,516.5 million and shareholders’ equity $3,620.9 million. Total cash and investments were $8,889.7 million, down from $9,174.1 million. Gross loss and LAE reserves were $5,571.4 million, with $779.4 million of reinsurance recoverables and $4,792.0 million net reserves. Aspen reported $1,133.5 million of cash and short-term investments at operating subsidiaries and described liquidity as sufficient for the foreseeable future.
- Debt and capital: Long-term debt was $549.4 million. The company had no borrowings under its $200 million revolving credit facility. The debt-to-total-capital ratio was 15.5%, down from 17.5%; debt and preference shares together were 31.0% of total capital, down from 35.5%. Silverton variable-interest-entity loan notes were $115.5 million at fair value and are not treated by the company as permanent capital.
- Equity and shareholder returns: Diluted book value per ordinary share was $48.64, up 4.1% from year-end. The company repurchased 197,673 ordinary shares for $10.0 million during the first half. It redeemed $133.2 million of 7.401% preference shares in January; after quarter-end, it redeemed all 7.250% preference shares for $160.0 million. The board declared a $0.24 quarterly ordinary dividend in July.
Material changes versus prior comparable periods
- Q2 net earned premiums declined as ceded earned premiums rose; the retention ratio fell to 70.4% from 90.4%. For the first half, it fell to 57.8% from 82.9%. Management said the expanded ceded reinsurance program was intended to reduce earnings volatility and improve the expense ratio through overriding commissions.
- Prior-year reserve releases were $48.7 million in Q2 and $74.9 million in the first half, versus $21.2 million and $42.8 million, respectively, in 2016. Releases included additional recoveries on an offshore energy loss in Africa. For the first half, favorable development was partly offset by adverse casualty development associated with the U.K. Ogden discount-rate change.
- Q2 catastrophe losses, net of reinsurance, were $37.4 million, compared with $65.1 million in 2016. Mid-sized fire-related losses in Reinsurance and surety/U.S. fire losses in Insurance were $16.5 million and $20.5 million, respectively.
- Foreign-exchange losses increased to $20.6 million in Q2 from $5.3 million, mainly due to U.S. dollar movements against the euro and pound. First-half foreign-exchange losses were $29.5 million versus $21.0 million.
- Other comprehensive income was negative $17.1 million for the first half, versus positive $97.5 million in 2016, principally reflecting foreign-currency translation losses that offset investment gains.
Outlook, commentary and risks
- Outlook: No specific earnings or premium guidance was provided. Management described reinsurance as an overcapacity, rate-pressured market: rates fell about 3% in Q2, including approximately 4% for property catastrophe; July renewal rates declined about 1%. Insurance rates were broadly flat. Aspen highlighted growth priorities including cyber, surety, accident and health, and expansion of its Singapore platform.
- Efficiency initiative: Aspen 2.0 is intended to improve processes through technology and better placement of activities. The filing identifies execution risk, possible operational disruption, and the possibility that anticipated benefits will not be realized.
- Key exposures: Risks include catastrophe frequency and severity, reserve-estimation uncertainty and claims inflation, competitive pricing and alternative capital, reinsurance counterparty and availability risk, investment-market and interest-rate changes, foreign exchange, and Brexit-related uncertainty. A 100-basis-point parallel rise in rates was estimated to reduce the market value of interest-rate-sensitive invested assets by $279.9 million (3.9%).
- Other matters: Management said material adverse outcomes from pending litigation or arbitration were considered remote. Restricted assets totaled $4,344.6 million, or 48.9% of investable assets. The filing reports no material change in internal control over financial reporting and says disclosure controls were effective.
Investor verification priorities
- Assess whether the increased use of ceded reinsurance can stabilize results without unduly constraining net premium growth or worsening expense ratios.
- Review reserve adequacy and the sustainability of prior-year releases, especially offshore energy recoveries and casualty exposure to the Ogden rate change.
- Separate recurring underwriting performance from investment marks, foreign-exchange movements, derivative gains, and other fair-value effects when evaluating earnings.
- Monitor cash generation, claims payments, collateral and restricted-asset needs, and the availability of holding-company liquidity and subsidiary dividends.
- Track execution and costs of Aspen 2.0, competitive rate conditions, catastrophe losses, Brexit developments, and the capital effects of preference-share redemptions and shareholder distributions.