Aspen Insurance Holdings Limited — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019; this is an annual report, not a standalone fourth-quarter filing. Figures are in U.S. dollars unless indicated. Aspen reports under U.S. GAAP. The audited financial statements received an unqualified opinion from KPMG.
Business context and significant corporate change
Aspen underwrites specialty insurance and reinsurance globally through its Insurance and Reinsurance segments. On February 15, 2019, the company was acquired by an Apollo-affiliated parent; public ordinary shares were canceled for $42.75 per share and Aspen became wholly owned. Its preference shares and depositary shares remain NYSE-listed. Parent owned 100% of ordinary shares at year-end.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Gross written premiums | $3,442.4 million | $3,446.9 million |
| Net written premiums | $2,427.9 million | $2,082.0 million |
| Net premiums earned | $2,293.3 million | $2,214.7 million |
| Total revenue | $2,592.6 million | $2,531.9 million |
| Net investment income | $197.3 million | $198.2 million |
| Net loss | $241.7 million | $145.8 million |
| Combined ratio | 113.9% | 110.0% |
| Operating cash flow | $(337.8) million | $(304.5) million |
| Cash and investments at year-end | $7,801.9 million | $7,823.1 million |
| Total shareholders’ equity | $2,725.5 million | $2,640.4 million |
| Long-term debt | $299.8 million | $424.7 million |
The 113.9% combined ratio indicates an underwriting loss. The loss ratio was 73.2% and the expense ratio 40.7%. Segment combined ratios were 103.1% for Reinsurance and 109.7% for Insurance. Net loss reserves were $4,632.0 million, including $3,682.8 million of gross IBNR reserves. Prior-year reserves were strengthened by $59.5 million, versus releases of $111.1 million in 2018.
Net cash used in operations increased by $33.3 million, chiefly reflecting increased claims payments. Aspen paid $2,122.6 million of net claims. Investing activities provided $218.3 million of cash and financing activities provided $65.2 million. Operating subsidiaries held $1,062.7 million in cash and short-term investments; Aspen Holdings separately held $117.6 million in cash, cash equivalents and investments. Restricted assets totaled $4,268.3 million, or 54.4% of investable assets.
At year-end, Aspen’s material holding-company debt was $300 million of 4.65% senior notes due 2023; the remaining $125 million of 6.00% notes due 2020 was redeemed in September 2019, with a $5.5 million make-whole loss. The debt-to-total-capital ratio was 9.8%. Aspen issued $250 million in liquidation preference of 5.625% preference shares through depositary shares, receiving net proceeds of $241.6 million. Preference-share dividends paid were $35.9 million.
Material changes versus 2018
- Gross written premiums were nearly flat, down 0.1%; net written premiums rose 16.6%, mainly as ceded premiums declined 25.7% and the retention ratio rose from 60.4% to 70.5%.
- Net premiums earned increased 3.5%, but underwriting results weakened: the combined ratio rose 3.9 percentage points and net loss widened by $95.9 million.
- Catastrophe losses, net of reinsurance, fell to $143.2 million from $262.9 million. However, prior-year reserve development swung from a $111.1 million release to $59.5 million of strengthening, and large losses increased by $24.6 million.
- Net realized and unrealized investment gains were $86.2 million, compared with losses of $64.7 million in 2018. The company also recorded a $130.2 million loss on newly entered interest-rate swaps.
- Shareholders’ equity increased $85.1 million, supported partly by the preference-share issuance and $151.3 million of net unrealized gains on available-for-sale investments; the net loss and preference dividends reduced retained earnings.
- Strategic reviews led to runoff or exits in several lines, including U.K. regional agency business and credit and surety reinsurance. Marine and energy liability and global accident and health were designated for runoff in early 2020. Aspen also reduced catastrophe exposure and streamlined offices and staffing.
Outlook, risks and unusual items
- Management said market rates were strengthening and expected that trend to continue in 2020, while noting continued abundant industry capital and competition. It described efforts to improve underwriting discipline, streamline operations and deploy capital for risk-adjusted returns; no quantified earnings or premium guidance was provided.
- In March 2020, Aspen announced an adverse development cover agreement with an Enstar subsidiary for pre-2020 losses: $770 million of cover excess of a $3.805 billion retention, plus $250 million excess of $4.815 billion. The agreement was subject to approvals and other closing conditions and was expected to close in the first half of 2020.
- COVID-19 exposure was uncertain at the report date. Potential claims included contingency and event cancellation, credit and surety, and business interruption; investment exposures included corporate bonds and middle-market and mortgage loans. The filing said it could not estimate the potential impact.
- After year-end, S&P downgraded Aspen Bermuda and Aspen U.K. to A- and Aspen Holdings to BBB; A.M. Best affirmed A ratings for operating subsidiaries but changed their outlook to negative. Management said the effect remained under assessment.
- Management identified a material weakness in internal controls over recording adjustment premiums on certain ceded excess-of-loss reinsurance contracts. The delay did not cause a material adjustment to current or prior-period results, but disclosure controls and internal controls over financial reporting were deemed ineffective at year-end. Remediation and testing were planned for 2020.
- The filing also reports an immaterial correction for historical ceded-premium adjustments, recorded as a $15.6 million cumulative adjustment to opening retained earnings and reinsurance premium payables in 2017; prior filings were not amended.
- Other notable items include $103.4 million of merger, severance, retention and related expenses; $22.2 million for the operational-effectiveness program, including $12.3 million of lease-asset impairment; and a $42.6 million deferred-tax valuation allowance charge contributing to 2019 tax expense.
- Loss-reserve estimates are a major uncertainty: a 5% change in gross IBNR would alter reserves by about $184.1 million, while a 5% change in net reserves equates to $231.6 million. Risks also include catastrophe severity, climate change, inflation, reinsurer recoverability, investment-market volatility, liquidity constraints, Brexit and regulatory changes.
- Apollo-related arrangements merit attention: Aspen recognized $4.4 million of management consulting fees and $3.5 million of investment-management fees in 2019. The consulting agreement specifies an annual fee equal to the greater of 1% of consolidated net income or $5 million.
Most important facts for investors to verify
- Whether the Enstar adverse development cover closed, its final economics and recoverability, and how it changes reserve and capital volatility.
- Subsequent development of 2019 prior-year reserve strengthening, especially U.S. primary casualty and international marine and energy liability, and the adequacy of IBNR estimates.
- Actual COVID-19 claims, coverage disputes and investment effects, which the filing could not quantify.
- Progress and independent testing of controls remediation, particularly ceded-premium recording; the filing identifies a material weakness despite no material financial-statement adjustment.
- Effects of rating downgrades and negative outlooks on renewals, broker access, collateral requirements, capital costs and subsidiary dividend capacity.
- Liquidity available after accounting for restricted assets, claims payments and regulatory capital needs; also verify the timing and availability of subsidiary distributions to the holding company.
- Performance and valuation of the new privately held loan investments, their concentration and liquidity, and the terms and costs of Apollo-affiliated management arrangements.