Aspen Insurance Holdings Limited — 2013 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2013, not a standalone fourth-quarter filing. Aspen is a Bermuda-based property and casualty insurer and reinsurer operating through insurance and reinsurance segments across the U.S., U.K., Bermuda and other markets. Figures are in U.S. dollars unless noted.
Key financial results
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Gross written premiums | $2,646.7 million | $2,583.3 million | Up 2.5%; insurance growth more than offset lower reinsurance premiums. |
| Net premiums earned | $2,171.8 million | $2,083.5 million | Up 4.2%. |
| Total revenues | $2,423.3 million | $2,329.4 million | Up 4.0%. |
| Net income | $329.3 million | $280.4 million | Up 17.4%; diluted EPS was $4.14 versus $3.39. |
| Return on equity | 10.6% | 8.5% | Management-reported annualized net income return. |
| Combined ratio | 92.6% | 94.3% | Improved 1.7 percentage points; below 100% indicates underwriting profit. |
| Net investment income | $186.4 million | $204.9 million | Down 9.0%, reflecting low reinvestment yields. |
| Net operating cash flow | $566.4 million | $496.4 million | Cash from operations increased $70.0 million. |
| Shareholders’ equity | $3,299.6 million | $3,488.4 million | Down $188.8 million, primarily reflecting lower accumulated OCI and share repurchases. |
Underwriting and segment performance
- Reinsurance: Gross premiums fell 7.7% to $1,133.9 million; underwriting income was $253.1 million and the combined ratio improved to 76.4% from 85.4%. Results benefited from lower catastrophe losses and $122.6 million of favorable prior-year reserve development.
- Insurance: Gross premiums rose 11.6% to $1,512.8 million; underwriting loss was $43.9 million and the combined ratio deteriorated to 103.9% from 99.3%. Adverse development in marine, aviation, energy and construction liability was the principal drag.
- Consolidated catastrophe losses, net of reinsurance and reinstatements, were $101.9 million, compared with $205.0 million in 2012. Net favorable prior-year reserve development was $107.7 million, down from $137.4 million.
Balance sheet, investments and liquidity
- Total cash and investments were approximately $8.3 billion at year-end, including $1,293.6 million of cash and cash equivalents. Total assets were $10,230.5 million.
- Long-term debt was $549.0 million at Aspen Holdings; consolidated debt also included $50.0 million of Silverton notes. Debt to total capital was 15.4%, compared with 12.5% in 2012. Debt plus preference-share liquidation value to total capital was 29.6%.
- Net loss and loss-adjustment reserves were $4,346.2 million; gross reserves were $4,678.9 million, of which $2,585.6 million, or 55.3%, was IBNR. Management estimated that a 5% change in net loss reserves would equal $217.3 million, or 6.6% of year-end shareholders’ equity.
- Operating subsidiaries held $1,150.2 million in cash and short-term investments. Restricted assets totaled $3,752.6 million, equal to 45.5% of cash and invested assets, principally due to regulatory trusts, deposits and letters of credit.
- The $200 million revolving credit facility had no borrowings outstanding at year-end. It expires in 2017. The filing states management considered liquidity adequate, while noting that the holding company depends on subsidiary distributions and that the U.K. regulator requested a non-objection before future Aspen U.K. dividends.
Material changes and notable items
- Insurance premiums increased, led by U.S. casualty, financial and professional lines, and programs. Reinsurance premiums declined across all major lines amid commutations, rate pressure and lower catastrophe-related premiums.
- Investment portfolio total return was 0.5%, versus 2.9% in 2012. Net unrealized available-for-sale investment losses contributed to a $208.3 million decline in other comprehensive income, net of tax. The fixed-income portfolio’s average credit rating was AA-; 88.3% was rated A or higher, compared with 92.0% in 2012.
- Aspen repurchased $309.6 million of ordinary shares during 2013 and raised the quarterly ordinary dividend from $0.17 to $0.18. It issued $275.0 million of 5.95% preference shares and redeemed $230.0 million of 5.625% PIERS, issuing 1,835,860 ordinary shares in the conversion.
- Aspen issued $300 million of 4.65% senior notes due 2023 and redeemed $250 million of 6.00% notes due 2014; the redemption resulted in a $9.3 million make-whole loss.
- Silverton, a collateralized reinsurance sidecar, raised $65 million of notes, including $50 million from third parties. It began operations on January 1, 2014; no premiums were written by Silverton in 2013.
- Fourth-quarter 2013 net income was $90.0 million and diluted EPS was $1.21. For comparison, fourth-quarter 2012 net income was $2.0 million and diluted loss per share was $0.09.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management described continued competitive pressure, particularly in property catastrophe reinsurance. At January 2014 renewals, market rates for property catastrophe were down about 15% overall; Aspen reported limiting its own decrease to approximately 12%. Retrocession rates, by contrast, declined about 25%–35%.
- For 2014, Aspen expected to retain larger shares of selected non-catastrophe reinsurance treaties. Management estimated this could reduce ceded premiums by about $100 million, but would leave Aspen retaining a greater share of losses in a large-loss year. The company also reported expanded 2014 catastrophe protection.
- Key risks include catastrophe frequency and severity, climate and catastrophe-model uncertainty, reserve estimation and long-tail claims inflation, reinsurance recoverability, competition and alternative capital, investment and interest-rate risk, foreign exchange, broker concentration, regulatory capital and dividend restrictions, and the availability of reinsurance.
- Specific reserve uncertainties include Superstorm Sandy and other catastrophe claims, financial-crisis-related casualty claims, and increased frequency of medium-sized energy and construction losses in the M.E.C. liability account. Management reported routine litigation and arbitration; it did not expect pending or threatened matters to have a material effect on financial condition, results or liquidity.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2013. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether favorable reserve development continues and whether M.E.C. liability and other long-tail claims require further strengthening.
- How the planned 2014 retention of more non-catastrophe risk affects underwriting margins and loss volatility, and whether the expected ceded-premium savings are realized.
- Whether the investment portfolio’s greater exposure to equities, BB-rated securities, bank loans and emerging-market debt improves returns without materially weakening liquidity or credit quality.
- How much subsidiary capital is practically available to the holding company after regulatory requirements, restricted assets and the U.K. regulator’s dividend non-objection process.
- The terms, collateralization and risk allocation of Silverton’s 2014 operations, and the remaining share-repurchase authorization and capital needs.