ASPEN INSURANCE HOLDINGS LTD quarterly report, Q2 FY2011

Aspen Insurance Holdings Limited — Q2 2011 Form 10-Q

Business context and reporting period. Bermuda-based global property and casualty insurer and reinsurer, reporting unaudited results for the three and six months ended June 30, 2011, compared with the same 2010 periods. Its two reporting segments are Reinsurance and Insurance. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.

Key financial results

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Gross written premiums	$582.2	$545.4	$1,253.5	$1,248.2
Net earned premiums	$459.8	$479.9	$912.2	$947.5
Total revenues	$512.7	$544.7	$1,017.5	$1,083.1
Pre-tax income/(loss)	$11.4	$121.0	$(156.8)	$141.3
Net income/(loss)	$10.2	$108.9	$(141.5)	$127.2
Diluted earnings/(loss) per ordinary share	$0.06	$1.28	$(2.16)	$1.43
Combined ratio	105.0%	86.9%	126.6%	98.4%

Q2 underwriting loss was $8.9 million; the combined ratio was 89.2% excluding catastrophe losses, according to management.
First-half cash provided by operations was $194.0 million, versus $247.9 million in 2010. Investing activities used $279.8 million and financing activities used $33.8 million. Cash and cash equivalents ended the period at $1,074.1 million, down from $1,179.1 million at year-end 2010.
At June 30, total assets were $9,516.9 million, total liabilities $6,412.3 million, and shareholders’ equity $3,104.6 million. Long-term debt was $498.9 million. Debt to total capital was 13.8%; debt plus preference shares to total capital was 23.7%.
Cash and investments, including accrued interest receivable, totaled $7,533.2 million, compared with $7,279.4 million at year-end. Fixed-income portfolio average credit quality was AA+; 98% was rated A or higher.
Net loss reserves were $4,032.4 million, up from $3,540.6 million at year-end; gross reserves were $4,391.7 million and reinsurance recoverables on unpaid losses were $359.3 million.

Material changes versus prior periods

First-half net income swung to a $141.5 million loss from $127.2 million profit, primarily reflecting $352.6 million of catastrophe losses net of reinsurance and reinstatement premiums, as described in MD&A. The filing separately reports $373.3 million of catastrophe losses net of reinsurance recoveries but before reinstatement premiums and tax.
Catastrophe events included Australian floods, the New Zealand and Japanese earthquakes and tsunami, and U.S. storms. Management cited $65.0 million of Q2 losses net of recoveries, reinstatement premiums and taxes in its highlights; it also estimated U.S. storm losses at $71.8 million net of reinstatement premiums before tax. These measures have different bases.
First-half combined ratio rose to 126.6% from 98.4%, with the reinsurance segment at 141.7% and insurance at 98.6%. The first-half total loss ratio increased to 93.8% from 69.2%.
Q2 gross written premiums rose 6.7%, led by 12.2% growth in Insurance; first-half premiums were broadly flat as Insurance growth offset lower Reinsurance premiums. Net earned premiums declined in both periods, in part because of increased ceded reinsurance.
Prior-year reserve releases were $32.8 million in Q2 and $54.7 million for the half, compared with $2.1 million and $15.0 million, respectively, in 2010. Favorable development included property and specialty reinsurance; insurance releases were partly offset by deterioration in financial and professional lines.
Q2 investment income increased slightly to $58.6 million from $57.5 million; first-half investment income declined to $114.1 million from $116.9 million. Q2 derivative fair-value loss was $22.3 million, primarily reflecting a $25.5 million interest-rate-swap loss, versus a $2.1 million derivative loss in Q2 2010.
First-half general, administrative and corporate expenses rose to $131.0 million from $115.1 million, reflecting investment in U.S. capacity, a U.K. regional platform and Swiss operations. The first-half net expense ratio increased to 32.8% from 29.2%.

Outlook, risks and unusual items

Outlook: No numerical earnings or full-year guidance is provided. Management reported improved catastrophe reinsurance renewal pricing after the Japan earthquake: average catastrophe excess-of-loss rate increases were 13% overall, or 16% excluding two major U.S. accounts. It declined certain wind limits it considered inadequately priced and said it anticipates opportunities to increase exposures in 2012 and beyond at better prices. Casualty reinsurance conditions remained challenging; marine, energy and construction liability rates increased, while aviation pricing was broadly flat.
Management purchased additional wind and earthquake protection for the U.S. and Europe and additional cover for non-peak catastrophe perils after substantial catastrophe activity, while the Atlantic hurricane season remained ahead.
Risks highlighted include catastrophe frequency and severity, uncertainty in catastrophe models and loss estimates, reserve adequacy and claims inflation, reinsurance availability and counterparty credit, interest-rate and investment-market movements, foreign exchange, competition, regulation, and the ability to maintain subsidiary financial-strength ratings.
Liquidity: Aspen Holdings held $97.5 million in cash and equivalents; operating subsidiaries held $955.2 million in cash and readily realizable securities. The company reported a comfortable liquidity margin, but noted that subsidiary distributions are subject to regulatory and capital constraints. No borrowings were outstanding under the $280 million revolving facility.
Policyholder collateral and restricted assets totaled $2,668.3 million, or 35.8% of cash and invested assets. Secured letters of credit outstanding were $656.6 million, supported by collateral; such commitments constrain asset availability.
Potential accounting change: ASU 2010-26, not yet adopted, could require expensing deferred acquisition costs associated with unsuccessful quoted business. The company estimated a maximum cumulative operating-expense increase of $31.3 million, with the charge spread across current and prior years.
The filing states there were no significant changes in risk factors from the 2010 Form 10-K and no material adverse effect expected from current legal proceedings. Disclosure controls were assessed as effective, and no material internal-control change was reported.

Important facts for investors to verify

How catastrophe loss estimates develop, including the distinct disclosed measures for first-half events and Q2 U.S. storms, and the remaining exposure to the 2011 hurricane season.
Whether prior-year reserve releases persist, particularly in light of reserve growth, the 55.3% IBNR share of gross reserves, and adverse development in financial and professional lines.
The sustainability of underwriting performance excluding catastrophe losses, including reinsurance pricing, ceded-reinsurance costs, and rising acquisition and operating expense ratios.
The effects of interest-rate movements and derivative valuation volatility on reported earnings and investment values; the $25.4 million first-half interest-rate-swap charge is not the same as the net derivative line in the income statement.
Liquidity available after policyholder collateral requirements, subsidiary distribution restrictions, dividends and debt service; also monitor compliance with credit-facility covenants.
The outcome and timing of adoption of ASU 2010-26 and the potential acquisition-cost accounting impact.