Aspen Insurance Holdings Limited — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited U.S. GAAP results; amounts in U.S. dollars unless stated otherwise. Aspen writes insurance and reinsurance through subsidiaries in Bermuda, the U.K. and the U.S.
Financial results and position
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $564.5 million | $522.7 million |
| Net earned premiums | $495.4 million | $452.4 million |
| Net income (loss) | $78.7 million | $(152.8) million |
| Diluted EPS, after preference dividends | $0.99 | $(2.25) |
| Operating cash flow | $99.4 million | $154.7 million |
| Combined ratio | 93.8% | 148.7% |
- Gross written premiums rose 16.5% to $782.1 million: Insurance increased 31.5% to $307.9 million; Reinsurance increased 8.5% to $474.2 million.
- Underwriting income was $44.9 million, versus an underwriting loss of $212.7 million. Reinsurance earned $54.6 million; Insurance recorded a $9.7 million underwriting loss. Segment combined ratios were 79.8% and 104.2%, respectively.
- Current-quarter net catastrophe losses were $20.2 million, compared with $295.5 million in Q1 2011, primarily from Australian floods and the New Zealand and Japanese earthquakes. Q1 2012 included Costa Concordia losses; management cited $27.0 million net in its highlights and $24.2 million in the Insurance segment discussion.
- Prior-year reserve releases were $37.0 million, compared with $21.9 million in Q1 2011, reducing the current-quarter loss ratio by 7.5 percentage points. The current-quarter reported loss ratio was 57.3%; excluding prior-year adjustments and catastrophe effects, the accident-year loss ratio was 62.1%.
- Net investment income declined 5.6% to $52.4 million, attributed primarily to lower interest rates. Derivative fair-value expense was $7.5 million; realized and unrealized investment gains were $9.0 million, and foreign-exchange gains were $7.7 million.
- At March 31, total assets were $9.87 billion, shareholders’ equity $3.21 billion, cash and cash equivalents $1.17 billion, and total investments $6.50 billion. Total cash and investments, including accrued interest, were $7.72 billion.
- Long-term debt was $499.0 million, unchanged from year-end; debt to total capital was 13.5%. No borrowings were outstanding under the $280 million revolving credit facility. Operating subsidiaries held $1.04 billion in cash and short-term investments; substantial assets were pledged or held in trust for policyholders.
- Gross loss and LAE reserves were $4.59 billion, including $2.38 billion, or 52%, for incurred-but-not-reported claims. Net reserves were $4.13 billion. Total shareholders’ equity increased $54.9 million from year-end; diluted book value per share was $38.58, up 1.0% from Q4 2011.
Changes, accounting, outlook and risks
- The earnings rebound chiefly reflects the much lower catastrophe burden than in Q1 2011; it also includes $37.0 million of prior-year reserve releases. Insurance growth was led by U.S. property and program business. General, administrative and corporate expenses rose $22.3 million, including performance-related costs, expansion of newer operations and other non-recurring costs.
- Aspen retrospectively adopted ASU 2010-26 on insurance acquisition costs. It reduced December 31, 2011 deferred acquisition costs and retained earnings by $16.0 million and increased Q1 2012 general and administrative expenses by $1.1 million. The 2011 comparative figures were restated.
- Management reported average renewal rate increases of 4% across lines in Q1, with wide variation by business. Japanese domestic earthquake reinsurance had a 74% compound rate improvement since the 2011 earthquake; management also reported lower exposed limits. Casualty reinsurance remained soft. These rate observations are management estimates, not earnings guidance; no quantified full-year earnings guidance is provided.
- After quarter-end, Aspen issued 6.4 million 7.25% perpetual non-cumulative preference shares, raising $155 million net, for general corporate purposes, including possible ordinary-share repurchases. The board also raised the ordinary quarterly dividend from $0.15 to $0.17 per share. The CFO left effective February 29; Julian Cusack became interim CFO.
- Key exposures include catastrophe frequency and severity, reserve-estimation uncertainty and claims inflation, reinsurer collectability, investment credit and interest-rate risk, currency movements, market competition, and liquidity constraints from policyholder collateral requirements. Fixed-income portfolio duration was 2.4 years including swaps; management estimated a 100-basis-point parallel rate rise would reduce the modeled portfolio value by about $190 million. European investments totaled $937.2 million; management reported no sovereign debt exposure to Greece, Ireland, Italy, Portugal or Spain.
- The filing reports ordinary-course insurance and reinsurance disputes and says it did not expect current proceedings to materially adversely affect the business as a whole. A Kentucky coverage judgment of $42 million plus interest, with further bad-faith and punitive claims pending, was settled through an agreement reached in arbitration on March 5, 2012; the settlement amount is not stated in the provided filing text.
Important facts for investors to verify
- How much of underwriting profitability and the improved combined ratio is repeatable after excluding reserve releases and catastrophe variability.
- Whether reserve estimates, particularly long-tail and IBNR claims, develop consistently with assumptions; validate the $37.0 million release and subsequent claims experience.
- The Costa Concordia loss estimate and its net exposure after reinsurance, reinstatement premiums and taxes; the filing gives differing headline and segment amounts.
- The impact of ASU 2010-26 on reported expense trends and comparability, and the costs associated with business growth.
- Availability of liquidity after accounting for policyholder trusts, letters of credit, regulatory capital restrictions and the new preference-share obligations.
- Terms and financial effect of the Kentucky settlement, plus the use of proceeds from the post-quarter preference-share offering and any ordinary-share repurchases.