Aspen Insurance Holdings Limited — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The unaudited U.S. GAAP statements cover Aspen’s global insurance and reinsurance operations. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $660.5 | $614.5 | $1,995.1 | $1,796.3 |
| Net earned premiums | $610.4 | $544.3 | $1,793.1 | $1,599.2 |
| Income before tax | $38.7 | $110.3 | $299.9 | $249.1 |
| Net income | $37.4 | $107.4 | $288.6 | $239.3 |
| Diluted EPS | $0.42 | $1.43 | $3.91 | $2.95 |
| Combined ratio | 94.6% | 91.8% | 90.9% | 93.1% |
- Premium growth: Q3 gross written premiums rose 12.2% to $652.5; nine-month premiums rose 12.0% to $2,287.3. Nine-month growth was stronger in Insurance (+16.2%) than Reinsurance (+7.3%).
- Underwriting: Q3 underwriting income increased to $68.2 from $59.5, but the combined ratio worsened as the loss ratio rose to 56.1% from 53.3%. For nine months, underwriting income rose to $239.2 from $153.4, and the combined ratio improved to 90.9% from 93.1%.
- Investment and other results: Net investment income was $48.0 in Q3 and $143.6 for nine months. Q3 realized and unrealized investment results were a $0.2 loss, versus a $17.7 gain a year earlier; nine-month gains were $44.7 versus $26.3. Foreign-exchange losses were $21.2 in Q3 and $10.4 for nine months.
- Cash flow: Operating cash flow was $476.3 for nine months, compared with $433.0 in 2013. Investing used $301.8 and financing used $185.3. Cash and cash equivalents ended at $1,289.1, down $4.5 from year-end 2013.
- Balance sheet and liquidity: Total assets were $10,829.6, total shareholders’ equity $3,444.5, and total liabilities $7,385.1. Cash and investments, including accrued interest, were $8.6 billion. Aspen reported $1,262.1 of cash and short-term investments at operating subsidiaries and described liquidity as comfortable; however, $3,663.9 of assets were restricted for regulatory trusts, deposits, letters of credit or guarantees.
- Debt and capital: Long-term debt was $549.1; Silverton variable-interest-entity loan-note liabilities were $64.5. Management reported a debt-to-total-capital ratio of 15.1% and a debt-and-preference-shares-to-total-capital ratio of 28.8%. No borrowings were outstanding under the $200 million credit facility.
- Capital returns: Aspen repurchased 2.9 million ordinary shares for $120.9 during the first nine months; $103.2 remained under the authorization at September 30. The board declared a $0.20 quarterly ordinary dividend after quarter-end. Diluted book value per share was $44.60, up 9.0% from December 31, 2013.
Material changes versus comparable periods
- Q3 net income fell to $37.4 from $107.4, chiefly reflecting weaker investment results, $21.2 of foreign-exchange losses, a $5.1 derivative fair-value expense, an $8.5 Silverton loan-note fair-value expense, and higher expenses. The prior-year quarter included larger investment gains and favorable derivative and foreign-exchange results.
- Q3 catastrophe losses net of reinsurance were $17.1, compared with $14.2 in Q3 2013. Prior-year reserve releases were $32.6 in Q3 2014 versus $33.6 in Q3 2013. Nine-month reserve releases increased to $92.6 from $87.2.
- Nine-month net income rose despite $28.5 of non-recurring corporate costs associated with defending Endurance Specialty Holdings’ unsolicited approach, which was withdrawn on July 30, 2014. Q3 included $20.2 of these costs.
- Shareholders’ equity increased to $3,444.5 from $3,299.6 at year-end 2013, with earnings and accumulated other comprehensive income contributing, partly offset by dividends and share repurchases.
Outlook, commentary and risks
- Management provided no specific earnings or premium guidance. It expects continued pressure on insurance and reinsurance pricing overall, while pursuing growth in selected pro rata, specialty and emerging markets, including Latin America and Asia Pacific. Aspen reported approximately 20% growth in emerging-market reinsurance premiums through nine months.
- Management described relatively stable overall insurance price adequacy but cited pressure in energy physical damage and aviation. It reported year-to-date rate increases in certain U.S. casualty and marine/energy liability lines, while U.S. renewals averaged flat.
- Risks highlighted include catastrophe frequency and severity, reserve estimation and development, competitive and alternative capital pressures, reinsurance recoverability and counterparty credit, investment-market and interest-rate movements, foreign-exchange exposure, claims inflation, and regulatory or rating changes. Management cautioned that actual claims and reserve outcomes may differ materially from estimates.
- The fixed-income portfolio had an average AA- rating and 3.51-year duration before interest-rate swaps (3.26 years after swaps). Management noted that rising rates could reduce investment values. Litigation and arbitration arise in the ordinary course; management assessed the likelihood of a material effect from pending or threatened matters as remote.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the period. The filing reported no significant change in the risk factors from the 2013 Form 10-K.
Important facts for investors to verify
- Whether underwriting margins hold up as pricing pressure continues, particularly in catastrophe, energy and aviation lines.
- The sustainability and composition of reserve releases, including the assumptions behind the $92.6 million nine-month prior-year release and the adequacy of long-tail reserves.
- How much of the Q3 earnings decline reflects recurring operating trends versus market-driven investment, currency and derivative movements, and the non-recurring Endurance-related costs.
- The effect of restricted assets, collateral requirements and reinsurance recoverables on usable liquidity; also monitor the replacement $575 million letter-of-credit facility and its utilization.
- Investment portfolio sensitivity to interest rates, equity-market movements, foreign exchange and credit deterioration, as well as the valuation of Silverton’s Level 3 loan notes.
- Progress on premium growth and capital returns, including remaining share-repurchase authorization, dividend capacity and subsidiary dividend restrictions.