Aspen Insurance Holdings Limited — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited U.S. GAAP results. Aspen writes specialty insurance and reinsurance globally through its Insurance and Reinsurance segments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net earned premiums | $652.5 million | $681.0 million | $1,795.6 million | $2,024.9 million |
| Total revenues | $726.6 million | $755.6 million | $2,072.2 million | $2,308.6 million |
| Net income (loss) | $(253.8) million | $95.6 million | $(81.5) million | $274.9 million |
| Net income (loss) attributable to ordinary shareholders | $(254.4) million | $95.8 million | $(82.3) million | $274.9 million |
| Diluted earnings (loss) per ordinary share | $(4.48) | $1.40 | $(1.99) | $3.97 |
| Combined ratio | 152.2% | 94.8% | 118.0% | 95.7% |
| Net investment income | $46.4 million | $46.4 million | $141.5 million | $143.9 million |
The combined ratio exceeded 100% in Q3 and for the nine-month period, indicating underwriting losses. Q3 catastrophe losses were a major driver of the deterioration. Nine-month underwriting loss was $274.6 million, versus underwriting income of $144.0 million a year earlier. Net investment income was broadly stable; nine-month net realized and unrealized investment gains were $105.7 million.
Cash flow, balance sheet and capital
- Operating cash flow for the first nine months was $47.8 million, down from $379.8 million in 2016; management attributed the decrease mainly to increased ceded reinsurance activity and paid claims. Cash and cash equivalents ended at $1,209.3 million, versus $1,273.8 million at year-end 2016.
- Total investments were $7,658.0 million; cash and investments together were $8,867.3 million, down from $9,174.1 million at December 31, 2016.
- Total assets were $13,051.6 million and total liabilities $9,888.7 million. Shareholders’ equity was $3,162.9 million, down from $3,648.3 million at year-end 2016. Diluted book value per ordinary share fell to $44.00 from $47.89.
- Gross loss and loss-adjustment reserves were $6,490.6 million, with $1,369.5 million of reinsurance recoverables and net reserves of $5,121.1 million. Net prior-year reserve releases were $92.8 million for the nine-month period.
- Long-term debt was $549.4 million. Aspen also reported $103.9 million of Silverton loan notes, which the company excludes from permanent capital. The debt-to-total-capital ratio was 14.8%; debt and preference shares together were 28.6% of total capital.
- A $200 million revolving credit facility was undrawn at quarter-end. Outstanding collateralized letters of credit under a separate facility were $444.2 million. Restricted assets totaled $4,537.6 million.
- The company paid $42.0 million in ordinary dividends and $28.7 million in preference dividends during the nine months, and repurchased $30.0 million of ordinary shares. The board declared a quarterly ordinary dividend of $0.24 per share after quarter-end.
Material changes and drivers
- Q3 gross written premiums rose 11.7% to $852.5 million, while nine-month gross written premiums rose 5.2% to $2,672.6 million. Growth reflected reinsurance and specialty lines, including agriculture, and financial and professional insurance.
- Despite gross premium growth, nine-month net earned premiums declined 11.3%. Ceded reinsurance costs increased by $422.3 million year over year for the nine months, as Aspen restructured its programs to reduce earnings volatility and expand retrocession. The retention ratio fell to 70.1% from 85.1%.
- Q3 pre-tax catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $360.3 million, compared with $24.9 million in Q3 2016. Events included Hurricanes Harvey, Irma and Maria, Mexico earthquakes and other weather events. Management’s event estimates remained subject to considerable uncertainty.
- Nine-month net catastrophe losses included $329.8 million in Reinsurance and $107.0 million in Insurance. The total loss ratio rose to 80.8% from 58.7% year over year; excluding the stated current-year catastrophe adjustments, the nine-month loss ratio was 56.9%, versus 53.3%.
- Equity declined during the period, reflecting net losses, dividends, share repurchases and the redemption of higher-coupon preference shares. Aspen redeemed its 7.401% and 7.250% preference shares during 2017, while retaining 5.95% and 5.625% preference shares.
Outlook, risks and unusual items
- Management expected insurance and reinsurance markets to reprice, particularly short-tail lines, with rate increases anticipated across most property and casualty lines. Aspen said it would reallocate capital toward areas with stronger expected returns. The filing provides no specific full-year earnings or premium guidance.
- A company-wide efficiency program is expected to deliver approximately $160 million of cumulative savings over three years: $30 million in 2018, $55 million in 2019 and $75 million in 2020, followed by about $80 million of annual run-rate savings. Aspen expects approximately $95 million of pre-tax implementation charges, mainly in 2018 and 2019, and about $55 million of incremental capital expenditure in 2018–2019. Execution, timing and savings are uncertain.
- Key risks include the ultimate cost and coverage allocation of 2017 catastrophe claims; the timing and collectability of reinsurance recoveries; reserve estimation and casualty-claim inflation; competition and pricing; market, foreign-exchange and credit risks; and operational, cyber-security and regulatory risks. Management said pending litigation and arbitration were not expected to have a material effect, based on information available.
- The company ceded $125.7 million of reserves under an adverse development cover purchased in Q3. Reserve estimates also reflect favorable development, while the filing notes adverse development in certain casualty and financial and professional lines, including effects associated with the U.K. Ogden rate change.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- How catastrophe loss estimates, reinstatement premiums and reinsurance recoverables develop as claims mature, particularly for the three hurricanes and Mexico earthquakes.
- Whether ceded reinsurance and retrocession arrangements reduce volatility as intended, and how they affect net premium growth, retention and expense ratios.
- Whether prior-year reserve releases continue to be supported by experience, and whether adverse development emerges in casualty, property or financial and professional lines.
- Progress, costs and realized savings from the efficiency program, including its effect on staffing, underwriting capacity and service levels.
- Capital and liquidity after catastrophe claims, dividends, share repurchases and preference-share redemptions; also assess the availability of restricted assets and subsidiary distributions.
- Investment portfolio performance and sensitivity to interest-rate, equity-market, foreign-exchange and credit movements.