Aspen Insurance Holdings Limited — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited U.S. GAAP consolidated results. Aspen writes insurance and reinsurance internationally through subsidiaries, with Insurance and Reinsurance reporting segments.
Financial results
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Gross written premiums | $975.7 million | $919.2 million; up 6.1% |
| Net earned premiums | $663.1 million | $593.6 million; up 11.7% |
| Total revenues | $779.6 million | $702.3 million |
| Net investment income | $49.5 million | $47.4 million |
| Net realized and unrealized investment gains | $45.0 million | $42.9 million |
| Income before tax | $116.9 million | $133.1 million |
| Net income | $114.4 million | $128.0 million |
| Diluted earnings per ordinary share | $1.68 | $1.87 |
| Combined ratio | 91.6% | 88.9% |
| Operating cash flow | $60.5 million | $72.0 million |
The combined ratio rose 2.7 percentage points. The total loss ratio increased to 53.9% from 51.6%; the expense ratio was 37.7% versus 37.3%. Underwriting income was $72.8 million, down from $80.5 million. Annualized net income return on average equity was 14.4%, compared with 16.4%.
At March 31, total assets were $11.5 billion, total shareholders’ equity $3.56 billion, and cash and cash equivalents $903.1 million. Total investments were $7.92 billion; cash and investments together were $8.82 billion. Long-term debt was $549.3 million, and Silverton variable-interest-entity loan notes were carried at $107.6 million. The company reported no borrowings under its $200 million credit facility.
Cash declined $196.4 million during the quarter, to $903.1 million, versus a $47.4 million increase in Q1 2015. Operating cash flow was positive; investing activities used $119.4 million and financing activities used $133.2 million. Management said operating cash flow met operating requirements and considered liquidity adequate, while noting that subsidiary liquidity is affected by claims payments and assets held as collateral.
Changes and drivers versus the prior period
- Premium growth came from both segments: Reinsurance gross written premiums rose 6.8%, including $45.2 million of agriculture business associated with the AgriLogic acquisition; Insurance premiums rose 5.5%.
- Reinsurance underwriting income declined to $42.3 million from $58.1 million; its combined ratio worsened to 84.9% from 76.7%. Insurance underwriting income increased to $30.5 million from $22.4 million, while its combined ratio improved to 92.0% from 93.5%.
- Catastrophe losses, net of reinsurance, were $18.7 million, or 2.8 combined-ratio points, versus $13.5 million, or 2.3 points. Favorable prior-year reserve development was $21.6 million, versus $27.5 million, reducing the favorable combined-ratio effect to 3.3 points from 4.6.
- General, administrative and corporate expenses increased to $119.8 million from $102.2 million, reflecting business expansion, AgriLogic-related costs and higher corporate costs. Reinsurance segment general and administrative expenses included $7.0 million of AgriLogic acquisition costs.
- Foreign-exchange losses increased to $15.7 million from $6.4 million, predominantly reflecting continued U.S. dollar strengthening. Net investment gains rose to $45.0 million from $42.9 million.
- AgriLogic was acquired on January 19 for total consideration of $69.1 million, including contingent consideration. The acquisition added $22.1 million of goodwill and $56.8 million of intangible assets and software additions reported in the quarter.
- Shareholders’ equity increased to $3.56 billion from $3.42 billion, with net income and favorable investment-related other comprehensive income partly offset by share repurchases and dividends. The company repurchased 568,239 shares for $25.0 million.
Outlook, risks and other items
- Management reported continuing rate pressure: approximately 4% overall rate decreases in Reinsurance and 1% in Insurance. Property catastrophe reinsurance rates declined approximately 6%; specialty reinsurance rates declined approximately 4%. Management said it was selectively pursuing business and managing down property catastrophe exposure while using third-party capital.
- No quantified full-year earnings or premium guidance is provided in the supplied filing text. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- The Board declared a quarterly ordinary dividend of $0.22 per share on April 21, 2016, up from $0.21; preference-share dividends were also declared.
- Key exposures include catastrophe frequency and severity, uncertainty in loss reserves and inflation of claims costs, competitive and declining insurance/reinsurance rates, investment-market and interest-rate movements, currency risk, reinsurance counterparty recoverability, and regulatory or agricultural-program changes. Management noted that rising rates could reduce fixed-income investment values.
- Restricted assets totaled $4.38 billion, or 49.5% of investable assets, including regulatory trusts, deposits and letters of credit. Funds at Lloyd’s of $447.2 million were not available for dividends. Subsidiary distributions are subject to regulatory and capital constraints.
- Management considered the probability of pending or threatened litigation or arbitration materially affecting financial condition, results or liquidity to be remote. The filing reports no significant change in risk factors and says disclosure controls were effective.
Important facts for investors to verify
- Whether reserve releases, catastrophe losses and loss trends develop as assumed, particularly given the lower favorable reserve development and higher combined ratio.
- AgriLogic’s performance, contingent consideration (up to $22.8 million), integration costs and contribution to premium growth and underwriting results.
- Cash-flow and liquidity trends, including restricted assets, collateral needs, claim-payment timing and regulated-subsidiary dividend capacity.
- Investment portfolio valuation and sensitivity to interest rates, equity prices and foreign-exchange movements; the filing estimates a 100-basis-point parallel rate increase would reduce the market value of interest-sensitive invested assets by $262.8 million.
- Reinsurance recoverables and counterparty concentration, as well as catastrophe and reserve assumptions underlying underwriting results.
- Debt and capital actions, including the $549.3 million senior debt balance, Silverton notes, dividends and remaining $391.3 million share-repurchase authorization.