Aspen Insurance Holdings Limited — Q3 2018 Form 10-Q
Business and period. Aspen is a Bermuda-based global specialty insurer and reinsurer. This unaudited filing covers the three and nine months ended September 30, 2018; comparisons are with the same 2017 periods unless noted. Amounts are in U.S. dollars.
Financial performance and position
- Third quarter: Total revenue was $674.4 million, down from $726.6 million. Net loss was $15.1 million versus $253.8 million; loss per ordinary share was $0.38 versus $4.48.
- First nine months: Revenue was $1.933 billion versus $2.072 billion. Net income was $1.0 million versus a net loss of $81.5 million; income attributable to ordinary shareholders was $0.8 million versus a loss of $82.3 million. Loss per ordinary share, after preference dividends, was $0.37 versus $1.99.
- Underwriting: Q3 underwriting loss improved to $2.3 million from $321.3 million, and the combined ratio improved to 111.1% from 152.2%. For nine months, underwriting income was $73.1 million versus a loss of $274.6 million; the combined ratio improved to 102.7% from 118.0%. Ratios above 100% indicate underwriting losses.
- Premiums: Q3 gross written premiums increased 2.4% to $873.2 million, as insurance growth offset lower reinsurance premiums. Nine-month gross written premiums rose 6.4% to $2.844 billion, while net earned premiums fell 6.6% to $1.676 billion, principally reflecting increased ceded reinsurance.
- Cash flow and liquidity: Operating cash flow was negative $222.8 million for nine months, versus positive $47.8 million. Cash and cash equivalents were $1.027 billion at quarter-end. Cash and investments totaled $7.940 billion, down from $8.688 billion at year-end 2017. Management reported $932.7 million of cash and short-term investments at operating subsidiaries and considered liquidity sufficient for the foreseeable future.
- Debt and capital: Long-term debt was $424.7 million, down from $549.5 million, after redemption of $125 million of senior notes; the redemption resulted in an $8.6 million loss. Shareholders’ equity was $2.776 billion versus $2.929 billion at year-end, including a $99.3 million nine-month other comprehensive loss, mainly from unrealized investment losses. Debt was 13.3% of total capital, compared with 15.8% at year-end.
- Investments and reserves: Net investment income increased to $145.7 million from $141.5 million for nine months, but realized and unrealized investment losses were $59.3 million, versus gains of $105.7 million. Net loss reserves were $4.959 billion; prior-year reserves developed favorably by $99.7 million in the first nine months.
Changes and management commentary
- Catastrophe losses were substantially lower than in 2017: Q3 net catastrophe losses were $56.4 million versus $360.3 million; nine-month losses were $103.6 million versus $436.8 million. The year-over-year improvement drove much of the better underwriting result.
- Reinsurance ceded increased, reducing the retention ratio to 59.8% for nine months from 70.1%. Management said this reflects a strategy to reduce volatility and catastrophe exposure.
- Q3 general, administrative and corporate expenses increased by $49.5 million to $160.4 million. The increase included $38.6 million of merger adviser fees and costs associated with the efficiency program. Nine-month non-operating expenses included $38.6 million of merger adviser fees and $31.5 million for the efficiency program.
- Management reported year-to-date rate increases of approximately 3% in reinsurance and 4% in insurance, varying by line and geography, and said it remained on track for $30 million of 2018 savings from its effectiveness and efficiency program. No formal earnings guidance was provided.
Merger, risks and contingencies
- On August 28, 2018, Aspen agreed to be acquired by an Apollo-affiliated entity for $42.75 cash per ordinary share. Preference shares remain outstanding. The transaction was expected to close in the first half of 2019, subject to shareholder and regulatory approvals, ratings conditions and other closing conditions. The agreement limits dividends and share repurchases.
- The buyer may terminate if aggregate losses from specified catastrophe events between July 1, 2018 and January 31, 2019 exceed $350 million. Failure to complete the merger could adversely affect the business; under certain circumstances Aspen could owe an $82.9 million termination fee.
- Hurricane Michael made landfall after quarter-end. Aspen’s preliminary estimate was that pre-tax losses would not exceed $40 million net of outwards reinsurance and reinstatement premiums, excluding potential crop reinsurance losses. The estimate was preliminary and could change materially.
- Investment values are exposed to interest-rate movements: management estimated a 100-basis-point parallel rate increase would reduce the market value of interest-sensitive invested assets by $272.8 million. Other key risks include catastrophe severity and reserve uncertainty, reinsurance recoverability, currency movements, inflation, and merger-related disruption. Management considered material litigation outcomes remote based on available information.
Important facts for investors to verify
- Merger approval status, closing conditions, ratings requirements, termination rights and any termination fee exposure.
- Ultimate Hurricane Michael losses, including crop reinsurance exposure, and the development of Q3 catastrophe claims.
- Reserve adequacy and reinsurance recoverables, including $1.767 billion of unpaid-loss recoverables, of which $1.238 billion was uncollateralized.
- Whether increased reinsurance cessions, premium growth and management’s stated rate trends support sustainable underwriting profitability.
- Investment portfolio valuation and interest-rate sensitivity, operating cash usage, restricted assets and continuing liquidity availability.