Aspen Insurance Holdings Limited — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited U.S. GAAP financial statements. Aspen is a Bermuda-based global specialty insurer and reinsurer with Insurance and Reinsurance segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net earned premiums | $519.5 | $562.0 | $1,053.0 | $1,143.1 |
| Total revenue | $575.5 | $662.0 | $1,259.0 | $1,345.6 |
| Underwriting income | $38.1 | $13.2 | $75.4 | $46.7 |
| Pre-tax income/(loss) | $(16.2) | $77.0 | $18.2 | $176.3 |
| Net income/(loss) | $(14.7) | $75.8 | $16.1 | $172.3 |
| Diluted earnings/(loss) per ordinary share | $(0.38) | $1.07 | $0.01 | $2.43 |
| Combined ratio | 97.4% | 100.0% | 97.7% | 98.5% |
- Q2 gross written premiums increased 3.9% to $853.8; first-half premiums rose 8.3% to $1,970.6. Insurance growth more than offset lower Q2 Reinsurance premiums.
- Net investment income was $50.4 in Q2 and $97.7 for the half, versus $47.4 and $95.1, respectively. Net realized and unrealized investment losses were $20.7 in Q2 and $58.4 for the half, compared with gains of $42.0 and $88.2 in the prior-year periods.
- Operating cash flow was negative $195.4 for the first half, versus negative $104.5 a year earlier; investing activities provided $462.3 and financing activities used $243.0. Cash and equivalents ended at $1,070.7, up from $1,054.8 at year-end 2017.
- At June 30, total assets were $12,874.7, total liabilities $10,046.7 and shareholders’ equity $2,828.0. Net loss and LAE reserves were $4,876.4, with $1,656.4 of reinsurance recoverables.
- Long-term debt was $424.6, down from $549.5 at year-end after redeeming $125.0 of 6.00% senior notes. The redemption generated an $8.6 make-whole loss. The company reported no borrowings under its $200 million credit agreement.
- Total cash and investments were $8,055.0, down from $8,687.8 at year-end. The investment portfolio had average credit quality of AA- and duration of 3.88 years. Shareholders’ equity fell $100.5 from year-end; diluted book value per ordinary share was $38.21, down 4.7%.
Material changes versus comparable periods
- Q2 net loss contrasted with prior-year income, primarily reflecting weaker investment results, a $46.1 loss on non-hedge foreign-exchange contracts, and the $8.6 debt-redemption loss. Q2 2017 had a $49.0 investment gain and a $17.6 derivative gain.
- First-half net income fell to $16.1 from $172.3. Investment losses, derivative losses and the debt-redemption charge outweighed improved underwriting income and lower foreign-exchange losses.
- Combined ratio improved to 97.4% in Q2 from 100.0%; first-half ratio improved to 97.7% from 98.5%. Prior-year reserve releases were $42.5 in Q2 and $80.2 for the half, compared with $48.7 and $74.9, respectively.
- Net earned premiums fell 7.6% in Q2 and 7.9% for the half, largely because of higher ceded reinsurance. The retention ratio declined to 56.9% from 70.4% in Q2 2017 and 69.5% in first-half 2017.
- Available-for-sale fixed-income securities had a $99.0 after-tax unrealized loss recorded in other comprehensive income for the first half. The company sold its remaining equity portfolio during Q1 2018.
Outlook, management commentary and risks
- Management reported positive but narrowing reinsurance rates in the first half and flat average rates at July 1 renewals. Insurance rates increased an average 4.8% at July 1; renewed U.S. property business averaged a 12.1% rate increase.
- The company is reducing net catastrophe exposure through additional reinsurance and expects to retain more U.S. property business as the book improves. Management said it remained on track for $30.0 of 2018 savings from its operational and efficiency program; no earnings or revenue guidance was provided.
- After quarter-end, Aspen announced it would cease underwriting international professional indemnity, marine hull and aviation on the Lloyd’s platform. The company also declared a $0.24 quarterly ordinary dividend, payable September 4, 2018.
- Key exposures include catastrophe frequency and severity, reserve-estimation uncertainty and inflation, reinsurance counterparty credit and collection risk, interest-rate and foreign-exchange movements, investment valuation and liquidity, and regulatory or tax changes. Management identified the U.S. Base Erosion Anti-abuse Tax on certain ceded premiums as contributing to a higher 2018 effective tax rate.
- Restricted assets totaled $4,525.9, or 56.0% of investable assets. The company had $1,126.5 of uncollateralized reinsurance recoverables; management reported no provision for doubtful reinsurer debts. A $100.0 real-estate-fund commitment had $13.8 remaining to be called, and redemptions are subject to a two-year lock-up and fund liquidity.
- Management considered material adverse outcomes from pending litigation or arbitration remote. The filing describes ordinary-course coverage disputes and arbitration, including potential bad-faith exposure, but provides no material quantified contingency.
Important facts for investors to verify
- Whether reserve releases and favorable development persist, particularly given the $4,876.4 net reserve balance and the reliance on actuarial estimates.
- How the increased reinsurance ceded affects future net premiums, underwriting margins, protection from catastrophe losses and recoverable balances.
- Drivers of investment and foreign-exchange volatility, including the $58.4 first-half net investment loss and the Q2 derivative loss.
- Liquidity and capital availability after dividends, restricted-asset requirements, outstanding commitments and the $125.0 debt redemption; also verify compliance with credit-agreement covenants.
- Execution and financial effects of the $30.0 efficiency-savings target and the planned exit from three Lloyd’s lines.