Aspen Insurance Holdings Limited — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited U.S. GAAP results; amounts are in U.S. dollars unless noted. Aspen writes insurance and reinsurance worldwide through subsidiaries, with Insurance and Reinsurance as its reporting segments.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net earned premiums | $544.0 million | $513.4 million | $1,054.9 million | $1,008.8 million |
| Net income | $40.1 million | $84.6 million | $131.9 million | $163.3 million |
| Diluted EPS, adjusted for preference dividends and PIERS redemption | $0.36 | $1.03 | $1.52 | $2.02 |
| Combined ratio | 97.1% | 87.3% | 93.7% | 90.4% |
| Net investment income | $45.9 million | $52.8 million | $94.2 million | $105.2 million |
- Q2 income before tax was $41.1 million, versus $90.8 million; first-half income before tax was $138.8 million, versus $174.9 million. Lower earnings reflected catastrophe losses, weaker investment income and lower underwriting income.
- Q2 net favorable prior-year reserve development was $27.4 million; first-half development was $53.6 million. Q2 net catastrophe losses were $58.7 million; first-half major catastrophe losses were $64.0 million.
- Q2 total comprehensive income attributable to ordinary shareholders was a loss of $106.2 million, versus income of $112.5 million. First-half comprehensive loss was $36.0 million, versus income of $178.0 million, largely reflecting investment valuation losses in other comprehensive income.
- Six-month operating cash flow was $248.2 million, compared with $159.6 million. Investing cash flow was negative $284.2 million and financing cash flow negative $227.3 million. Cash and cash equivalents declined to $1,188.9 million from $1,463.6 million at year-end 2012.
Financial position and capital
- At June 30, total assets were $10,354.3 million, total liabilities $7,119.4 million and shareholders’ equity $3,234.9 million. Equity was $3,488.4 million at December 31, 2012.
- Total investments were $6,746.7 million. Total cash and investments, including accrued interest, were $7,985.1 million, down from $8,203.9 million at year-end.
- Long-term debt was $499.2 million, substantially unchanged from year-end. Debt was 13.4% of total capital, compared with 12.5%; debt plus preference shares was 28.2%, compared with 25.3%.
- Aspen issued $275 million liquidation preference of 5.950% preference shares in May, generating net proceeds of $270.4 million, and redeemed $230 million of PIERS. It repurchased ordinary shares for $240.1 million in the first half. The quarterly ordinary dividend was raised from $0.17 to $0.18 per share.
- The company reported $137.3 million of holding-company cash and $1,103.8 million of cash and short-term investments at operating subsidiaries. A $200 million revolving credit facility was undrawn at June 30. Restricted assets totaled $3,684.1 million, or 46.4% of cash and invested assets.
Material changes and management commentary
- Q2 gross written premiums rose 3.1% year over year to $687.3 million: Insurance grew 6.0%, while Reinsurance was down 0.4%. First-half gross written premiums increased 0.8% to $1,460.7 million, with Insurance up 7.1% and Reinsurance down 4.6%.
- The Q2 combined ratio increased to 97.1% from 87.3%, mainly because 2013 included catastrophe losses while the comparable quarter had none. First-half loss ratio increased to 57.1% from 54.1%, and the combined ratio rose to 93.7% from 90.4%.
- Management attributed lower investment income to declining reinvestment yields. Rising interest rates also drove substantial unrealized losses on available-for-sale bonds: first-half other comprehensive income included a $131.7 million after-tax investment loss, and accumulated other comprehensive income fell to $259.5 million from $427.4 million at year-end.
- Management reported average renewal rate increases of 4% across both segments in the first half—flat in Reinsurance and 7% in Insurance. It noted pricing pressure in some reinsurance markets, particularly U.S. peak-zone catastrophe, and improving pricing in several insurance lines. Aspen Capital Markets, a new division intended to expand participation in alternative reinsurance markets, was being established.
- No specific full-year earnings or financial forecast is provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- Key exposures include catastrophe frequency and severity, reserve-estimation uncertainty, interest-rate and investment-market movements, foreign exchange, competition and pricing, reinsurance recoverability and counterparty credit. Management noted that rising rates may reduce fixed-income values; a parallel 100-basis-point increase was estimated to reduce the relevant investment portfolio value by $222 million.
- Net loss and LAE reserves were $4,262.6 million after reinsurance recoverables. Management reported no significant change in reserving assumptions, but emphasized limited company-specific experience, particularly for longer-tail claims. Prior-year reserve releases supported current-period underwriting results.
- Reinsurance recoverables were concentrated: Lloyd’s syndicates represented 26.8% and Munich Re 11.2% at June 30. The company remains liable if reinsurers fail to meet obligations.
- Derivatives produced a $2.9 million net expense in Q2 and $7.1 million net expense in the first half. Foreign-exchange contracts generated losses, partly offset by gains on interest-rate swaps; the derivatives were not designated for hedge accounting.
- The filing reports ordinary-course insurance and reinsurance disputes, but management did not believe any then-pending matter would materially adversely affect the business as a whole. It reported no significant change in risk factors from the 2012 Form 10-K.
Important facts for investors to verify
- Whether catastrophe claims estimates and the related reinsurance recoveries develop as reported, and whether reserve releases remain sustainable.
- How continued interest-rate movements affect bond valuations, book value, investment income and swap results.
- The availability of operating-subsidiary capital and liquidity, considering restricted assets, regulatory requirements and holding-company cash needs.
- The final share count and settlement economics of the accelerated repurchase agreement, alongside the effects of share repurchases, preference dividends and the PIERS redemption on ordinary shareholders.
- Whether renewal pricing and premium trends in Insurance and Reinsurance translate into durable underwriting profitability.