Aspen Insurance Holdings Limited — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited and prepared under U.S. GAAP. Aspen writes insurance and reinsurance worldwide through subsidiaries in Bermuda, the U.K. and the U.S. Results for the quarter are not necessarily indicative of full-year results. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Total revenues | $576.6 | $559.2 |
| Net earned premiums | $510.9 | $495.4 |
| Net investment income | $48.3 | $52.4 |
| Income before tax | $97.7 | $84.1 |
| Net income | $91.8 | $78.7 |
| Diluted EPS, adjusted for preference dividends | $1.15 | $0.99 |
| Operating cash flow | $103.5 | $99.4 |
| Cash and cash equivalents at period end | $1,212.7 | $1,463.6 at Dec. 31, 2012 |
| Total assets | $10,336.3 | $10,310.6 at Dec. 31, 2012 |
| Total shareholders’ equity | $3,339.6 | $3,488.4 at Dec. 31, 2012 |
| Long-term debt | $499.2 | $499.1 at Dec. 31, 2012 |
- Combined ratio improved to 90.1% from 93.8%; underwriting income was $63.0 million before $12.0 million of corporate expenses.
- By segment, reinsurance underwriting income was $54.9 million, with a 78.5% combined ratio; insurance underwriting income was $8.1 million, with a 96.8% combined ratio.
- Net favorable prior-year reserve development was $26.2 million, versus $37.0 million. The total loss ratio was 52.6%, versus 57.3%.
- Gross written premiums declined 1.1% to $773.4 million: reinsurance fell 7.3% to $439.6 million, while insurance rose 8.4% to $333.8 million.
- Cash decreased $250.9 million during the quarter, principally reflecting $210.2 million of ordinary-share repurchases and $20.5 million of dividends paid. Net investing cash use was $128.5 million.
- Debt was the only material debt outstanding. Debt to total capital was 13.0%, up from 12.5%; debt plus preference shares to total capital was 26.2%, versus 25.3%.
- Total cash and investments, including accrued interest, were $8.0 billion, down from $8.2 billion at year-end. The fixed-income portfolio had an average AA rating and 3.2-year duration; 91.8% was rated A or higher.
Material changes, outlook and risks
- Profit growth reflected improved underwriting results and higher investment gains, partly offset by lower net investment income. Net investment income fell 7.8%, principally due to lower reinvestment yields.
- The comparative quarter included catastrophe losses and $31.1 million of Costa Concordia losses; Q1 2013 had no major catastrophe losses. Prior-year reserve releases were lower year over year. In insurance, releases were partly offset by $27.4 million of strengthening in marine, energy and construction liability after an adverse judgment and unfavorable claims development.
- Management reported average renewal rate increases of approximately 6% across both segments: about 1% in reinsurance and 15% in insurance. Conditions varied by line and geography; international credit and surety rates were declining, while some marine, casualty and property areas were improving. This is market commentary, not earnings guidance.
- Management announced new U.S. specialty marine, energy and construction operations and a new Aspen Capital Markets division. On April 24, the board declared a $0.18 ordinary-share dividend, up from $0.17.
- On April 25, after quarter-end, the company announced mandatory conversion of its 5.625% PIERS, with settlement expected May 30, 2013, and an offering of $275 million of 5.95% fixed-to-floating perpetual preference shares. Proceeds were intended partly to fund the cash portion of the PIERS settlement. These events are subsequent to the reporting date.
- Liquidity considerations include $3.77 billion of restricted assets, equal to 47.2% of cash and invested assets. The $200 million revolving credit facility had no borrowings at quarter-end and was due to expire July 30, 2013. Management stated subsidiary liquidity had a comfortable margin; holding-company liquidity depends partly on subsidiary distributions, subject to regulatory and capital constraints.
- Key risks include catastrophe and other claims severity, reserve-estimation uncertainty (especially for longer-tail lines), reinsurance recoverability and counterparty credit, competition and rate changes, inflation and rising interest rates, currency and investment-market movements, and regulatory or tax changes. A 100-basis-point parallel rate increase was estimated to reduce the modeled value of interest-sensitive investments by $175 million. Litigation and arbitration arise in the ordinary course; management did not expect current proceedings to materially adversely affect the business as a whole. No significant risk-factor changes from the 2012 Form 10-K were reported.
Important facts for investors to verify
- Reserve development and the adverse marine, energy and construction liability claims: confirm later estimates, paid losses and any further strengthening.
- Whether reported premium-rate improvement translates into adequate risk-adjusted pricing, premium growth and sustained segment underwriting profitability.
- Cash and holding-company liquidity after the PIERS conversion, preference-share offering, share repurchases and dividends; also confirm the status and replacement of the revolving credit facility due July 2013.
- Investment income, portfolio valuation and sensitivity to interest rates, credit spreads, equity markets and foreign exchange; review the $205.0 million trading-equity position added in Q1.
- Final share count, dilution and capital impact from settlement of the PIERS and completion of the accelerated share repurchase agreement.