Aspen Insurance Holdings Limited — 2010 Form 10-K
Business context and reporting period. Bermuda-based global property and casualty insurer and reinsurer. This annual filing covers the fiscal year ended December 31, 2010, with comparisons to 2009 and 2008; it is not a standalone fourth-quarter report. Aspen reported two underwriting segments: Insurance and Reinsurance.
Financial performance and position
- Premiums and revenue: Gross written premiums were $2.077 billion, up 0.5% from 2009; net premiums written were $1.891 billion, up 3.0%. Net premiums earned rose 4.2% to $1.899 billion. Total revenue was $2.190 billion, up from $2.083 billion.
- Profit: Net income was $312.7 million, down 34.0% from $473.9 million; diluted EPS was $3.62 versus $5.64. Pretax income was $340.3 million. Net investment income was $232.0 million, down from $248.5 million, while realized and unrealized investment gains were $50.6 million.
- Underwriting and margins: The consolidated loss ratio increased to 65.8% from 52.0%; the expense ratio improved to 30.9% from 32.1%. The combined ratio rose to 96.7% from 84.1%. Reinsurance generated $133.6 million of underwriting income (combined ratio 88.2%); Insurance recorded a $23.6 million underwriting loss (combined ratio 103.1%).
- Cash flow and liquidity: Operating cash flow was $624.6 million, versus $646.6 million. Cash and cash equivalents ended at $1.179 billion, and cash and investments totaled approximately $7.3 billion. Operating subsidiaries held $818.4 million in cash and readily realizable securities. The $280 million revolving credit facility had no borrowings outstanding at year-end.
- Debt and capital: Long-term debt was $498.8 million on the balance sheet; the company issued $250 million of 6% Senior Notes due 2020 in December. Debt was 13.3% of total capital, up from 7.0%; debt plus preference-share hybrids was 22.8%, versus 17.0%. Shareholders’ equity was $3.242 billion, down from $3.305 billion.
- Reserves: Gross loss and loss adjustment expense reserves were $3.821 billion, including $2.075 billion of IBNR; net reserves were $3.541 billion. Reinsurance recoverables on unpaid losses were $279.9 million.
Material changes versus 2009
- Net income declined mainly because of $180.7 million of pretax catastrophe losses from the Chile and New Zealand earthquakes and $63.0 million less in prior-year reserve releases. Net reserve releases were $21.4 million, versus $84.4 million in 2009.
- Insurance-segment premiums increased 2.6%, including growth in property and financial/professional lines; casualty insurance premiums fell 24.4%. Reinsurance premiums declined 1.2%, with catastrophe-property growth offset by lower other-property and casualty premiums.
- Aspen repurchased $407.8 million of ordinary shares. It also acquired APJ, a specialist Kidnap and Ransom business, and AAIC, a U.S. admitted-market insurer; these acquisitions supported expansion into new platforms and markets.
- Investment impairment charges fell to $0.3 million from $23.2 million. Fixed-maturity portfolio total return was 4.8%, compared with 6.1% in 2009.
Outlook, commentary and risks
- Management described 2010 markets as soft and expected overall conditions to remain similar in 2011. January 2011 property reinsurance renewals saw average rate declines of about 7%; casualty reinsurance rates remained under pressure, and capacity deployed selectively resulted in a 25% premium reduction at those renewals. Energy-related specialty reinsurance rates firmed after losses.
- Management reported estimated losses from Australian floods and Cyclone Yasi were not expected to be material, but emphasized estimates were preliminary and could change. It did not provide a clear numerical full-year earnings or revenue forecast.
- Key exposures include catastrophe frequency and severity, model and reserve uncertainty, long-tail casualty claims and claims inflation, competition and pricing, investment and interest-rate volatility, reinsurer and broker credit risk, foreign exchange, and regulatory change. A 5% change in net loss reserves was estimated to equal $177 million.
- Substantial assets were committed to collateral and trusts: $2.488 billion of assets supported policyholder obligations, equivalent to 34.2% of cash and invested assets. The holding company depends on regulated subsidiaries for dividends and debt-service funding.
- The company reported effective internal control over financial reporting; its auditor issued an unqualified opinion. Aspen stated that pending litigation and arbitration were not expected to have a material adverse effect on the business as a whole.
Important facts for investors to verify
- How the 2010 earthquake and subsequent catastrophe estimates develop, including early-2011 Australian event losses.
- Reserve adequacy, especially casualty and financial/professional lines, New York contractor business, and prior-event litigation.
- Whether soft-market pricing and reduced renewal capacity affect premium volume and underwriting profitability in 2011.
- The sustainability of investment income and the impact of interest-rate movements on portfolio values and earnings.
- Debt covenants, subsidiary dividend capacity, collateral requirements, and the effect of share repurchases on capital flexibility.