Aspen Insurance Holdings Limited — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited U.S. GAAP results. Aspen is a Bermuda-based insurer and reinsurer operating through Insurance and Reinsurance segments. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net earned premiums | $544.3 | $516.2 | $1,599.2 | $1,525.0 |
| Total revenues | $614.5 | $582.8 | $1,796.3 | $1,717.1 |
| Income before tax | $110.3 | $123.1 | $249.1 | $298.0 |
| Net income | $107.4 | $115.1 | $239.3 | $278.4 |
| Diluted EPS, adjusted for preference dividends | $1.43 | $1.45 | $2.95 | $3.47 |
| Combined ratio | 91.8% | 87.0% | 93.1% | 89.3% |
- Quarterly gross written premiums rose 4.2% to $581.6, as Insurance grew 21.1% to $362.1 and Reinsurance fell 15.4% to $219.5. For nine months, premiums rose 1.8% to $2,042.3, with Insurance up 11.4% and Reinsurance down 7.3%.
- Underwriting income was $59.5 in Q3 versus $81.7 in the prior-year quarter; for nine months it was $153.4 versus $203.8. Q3 total loss ratio increased to 53.3% from 49.4%; nine-month ratio rose to 55.8% from 52.5%.
- Net investment income declined to $45.0 in Q3 from $48.6 and to $139.2 for nine months from $153.8, reflecting lower reinvestment yields. Investment gains were $17.7 for Q3 and $26.3 for nine months.
- Operating cash flow was $433.0 for nine months, compared with $345.1 in 2012. Investing activities used $393.2 and financing activities used $299.9; cash and cash equivalents ended at $1,198.3 versus $1,463.6 at year-end 2012.
- At September 30, total assets were $10,301.7, total shareholders’ equity $3,271.1 (down from $3,488.4 at year-end), and long-term debt $499.2. Debt to total capital was 13.2%; including preference shares as hybrids, debt and hybrids to total capital was 28.0%.
- Total cash and investments, including accrued interest, were $8,141.1. Restricted assets were $3,721.4, or 46.0% of cash and invested assets. Operating subsidiaries held $1,127.2 in cash and short-term investments; the $200.0 million revolving credit facility had no borrowings outstanding.
Material changes and notable items
- Profitability weakened year over year: net income fell 6.7% in Q3 and 14.0% for the first nine months; diluted EPS fell to $1.43 and $2.95, respectively. Higher catastrophe losses and underwriting expenses contributed to higher combined ratios.
- Q3 catastrophe losses were $14.2 net of reinsurance and reinstatement premiums, including German hailstorms and floods in Toronto and Mexico, partly offset by lower estimates for earlier 2013 catastrophe events. Nine-month net losses from major natural catastrophes were $79.5 versus $30.5 in 2012.
- Prior-year reserve development remained favorable: reserve releases were $33.6 in Q3 and $87.2 for nine months. The company reported net loss reserves of $4,273.4; releases included commutations. Management reported no significant changes in reserving assumptions and cautioned that longer-tail loss experience remains limited.
- Other comprehensive income was a loss of $168.3 for nine months, primarily reflecting a $127.3 after-tax loss on unrealized available-for-sale investments and $21.0 of foreign-currency translation losses. Shareholders’ equity also reflects capital returns and preference-share issuance.
- Aspen repurchased ordinary shares for $294.9 in the first nine months and had $238.8 remaining under its $500.0 million authorization. It issued $270.4 net from 5.950% preference shares and redeemed $230.0 of PIERS, issuing 1,835,860 ordinary shares in connection with the redemption. The ordinary quarterly dividend increased from $0.17 to $0.18 per share.
Outlook, risks and contingencies
- Management said average renewal rates increased 3% in the first nine months of 2013: flat in Reinsurance and up 5% in Insurance. Rate increases were slowing in some areas, but management did not expect a significant deterioration in the overall rate environment in 2014. No earnings or EPS guidance was provided.
- Management cited growth opportunities in U.S. Insurance and selected specialty markets, while noting pressure in some reinsurance lines and variable market conditions. It continued developing Aspen Capital Management and announced Rock Re, a brokered property facultative unit.
- Key risks include catastrophe severity and frequency, reserve estimation uncertainty, competition and alternative capital, investment-market and interest-rate exposure, inflation in claim costs, foreign-exchange movements, reinsurer and counterparty credit risk, and possible liquidity pressure if claims payments accelerate. A 100-basis-point parallel increase in rates was estimated to reduce the market value of interest-sensitive invested assets by $230.4.
- Ordinary-course insurance and reinsurance litigation and arbitration are ongoing. Management considered a material adverse effect from pending or threatened proceedings remote; no specific loss estimate was provided. Restricted collateral and regulatory capital requirements limit the availability of some assets. The U.K. regulator requested an opportunity to provide prior non-objection to future Aspen U.K. dividend payments.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether catastrophe claims and future reserve development alter the reported favorable prior-year releases, particularly in longer-tail lines.
- Whether underwriting results and combined ratios stabilize as catastrophe losses rise and reinsurance premium volumes contract.
- How lower investment yields, interest-rate movements, and the larger trading equity and emerging-market debt exposures affect investment income, OCI, and capital.
- Liquidity available after accounting for restricted assets, claims-payment timing, and regulatory limits on subsidiary distributions.
- Capital allocation and dilution effects of share repurchases, preference dividends, and the PIERS redemption, including the sustainability of the ordinary dividend.