ASPEN INSURANCE HOLDINGS LTD annual report, FY2012

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Aspen Insurance Holdings Limited — FY 2012 Form 10-K

Business context and reporting period. Bermuda-domiciled insurance and reinsurance holding company with global property and casualty operations. This is the annual report for the fiscal year ended December 31, 2012, compared principally with FY 2011. Figures are U.S. dollars unless noted.

Financial performance and position

  • Premiums and revenue: Gross written premiums rose 17.0% to $2.583 billion; net premiums written were $2.247 billion and net premiums earned were $2.084 billion, up 10.3%. Total revenue was $2.329 billion.
  • Profit: Net income was $280.4 million, versus a $110.1 million loss in 2011; diluted EPS was $3.38 versus a $1.88 loss. Income before tax was $295.4 million and tax expense was $15.0 million. Reported return on equity was 8.5%.
  • Underwriting and margins: Combined ratio improved to 94.3% from 115.9% (below 100% indicates underwriting profit). Loss and expense ratios were 59.4% and 34.9%. Reinsurance earned $165.4 million with an 85.4% combined ratio; insurance earned $6.3 million with a 99.3% combined ratio. Segment underwriting profit totaled $171.7 million before $53.0 million of corporate expenses.
  • Claims and reserves: Catastrophe losses, net of reinsurance and reinstatements, were $205.0 million, down from $534.3 million in 2011. Favorable prior-year reserve development was $137.4 million. Year-end net loss and loss expense reserves were $4.281 billion, including $2.579 billion of gross IBNR reserves.
  • Cash flow and liquidity: Audited cash flow from operations was $496.4 million. Cash and cash equivalents were $1.464 billion; total cash and investments were $8.204 billion, including $431.5 million in short-term available-for-sale investments. Operating subsidiaries held about $1.638 billion in cash and short-term investments. Restricted assets totaled $3.722 billion, or 45.6% of cash and invested assets.
  • Debt and capital: Long-term debt was $499.1 million, consisting principally of Senior Notes; debt was 12.5% of total capital. Debt plus preference-share liquidation value was 25.3% of total capital. Shareholders’ equity was $3.488 billion, and diluted book value per ordinary share was $40.65, up 6.4%.
  • Investments: Net investment income declined 9.2% to $204.9 million amid low reinvestment yields. Fixed-income portfolio average credit quality was AA; book yield was 2.9%. The company held $1.0 billion notional of interest-rate swaps.

Material changes versus FY 2011

  • Insurance drove premium growth: insurance gross written premiums increased 32.8% to $1.355 billion, while reinsurance premiums increased 3.4% to $1.228 billion. U.S. insurance expansion and programs business were major contributors.
  • Lower catastrophe losses drove the return to profitability and the combined-ratio improvement. Superstorm Sandy and the Costa Concordia sinking were significant 2012 losses; the 2011 comparison included multiple major international catastrophes.
  • General, administrative and corporate expenses rose 21.3% to $345.1 million, reflecting U.S. and U.K. platform expansion and higher performance-related accruals. Net investment income continued to decline.
  • Shareholders’ equity increased from $3.156 billion. The company issued $160 million of 7.250% perpetual preference shares, repurchased 2.168 million ordinary shares for $62.7 million, and raised the quarterly ordinary dividend from $0.15 to $0.17.
  • The company adopted ASU 2010-26 retrospectively, requiring some acquisition-related costs to be expensed rather than deferred. The filing reports a $4.3 million increase in FY 2012 expenses and a $20.3 million reduction in year-end 2012 retained earnings relative to the prior accounting treatment.

Outlook, commentary, risks and unusual items

  • Management reported average 2012 renewal-rate increases of about 5% in reinsurance and 3% in insurance, and described early-2013 conditions as favorable in selected lines. It did not provide quantified earnings guidance.
  • Management announced a controlled reduction in U.S. property wind and earthquake exposure, citing inadequate catastrophe pricing and costly reinsurance; released capital was expected to support repurchases unless other opportunities emerged. In February 2013, the buyback authorization was increased to $500 million through February 2015.
  • For 2013, management planned to increase allocations to equities and BB-rated securities by $200 million each; the additional equity investment was completed February 1, 2013, while the BB allocation was expected to be deployed over time.
  • Key risks include catastrophe frequency and severity, model and reserve uncertainty, long-tail casualty claims, coverage disputes, reinsurer and broker credit, investment and interest-rate volatility, foreign exchange, competition and ratings downgrades. Management noted that a 5% change in net loss reserves equaled $214 million, or 6.1% of year-end shareholders’ equity.
  • Regulatory capital and dividend restrictions apply across jurisdictions. The holding company relies on subsidiary distributions, and about 45.6% of cash and investments were restricted or supporting collateral and trust arrangements. The revolving credit facility had no borrowings at year-end; its stated maturity was July 2013. The company also had substantial outstanding letters of credit.
  • Unusual items include a $200.6 million net loss from Superstorm Sandy, a $38.2 million Costa Concordia loss, $137.4 million favorable reserve development, and $3.0 million of other-than-temporary investment impairments. The fourth quarter recorded $2.0 million net income, while diluted quarterly EPS was a loss of $0.09 after preference dividends.
  • The filing says no pending legal proceeding was expected to have a material adverse effect on the company as a whole. The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.

Important facts for investors to verify

  • Reconcile operating cash flow: MD&A states $502.9 million for FY 2012, while the audited cash flow statement reports $496.4 million.
  • Assess whether favorable reserve releases and the reduction in catastrophe losses are sustainable, including the adequacy of Sandy and long-tail casualty reserves.
  • Review profitability and capital consequences of the planned U.S. property wind and earthquake retrenchment, including effects on premium growth and reinsurance costs.
  • Confirm the availability and terms of credit and letter-of-credit facilities after their disclosed 2013 maturities and amendments, and the practical liquidity of restricted assets.
  • Evaluate the effect of the ASU 2010-26 accounting change on reported expense, earnings and comparisons with prior periods.