Aspen Insurance Holdings Limited — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited results; amounts below are in U.S. dollars, millions except per-share data and ratios. Aspen writes insurance and reinsurance through subsidiaries in Bermuda, the U.K. and the U.S.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $567.5 | $528.2 | $1,124.3 | $1,044.5 |
| Net earned premiums | $513.4 | $459.8 | $1,008.8 | $912.2 |
| Income/(loss) before tax | $90.8 | $10.3 | $174.9 | $(159.0) |
| Net income/(loss) | $84.6 | $9.1 | $163.3 | $(143.7) |
| Diluted earnings/(loss) per ordinary share, adjusted for preference dividends | $1.03 | $0.05 | $2.02 | $(2.19) |
| Combined ratio | 87.3% | 105.3% | 90.4% | 126.8% |
| Operating cash flow | — | — | $159.6 | $194.0 |
Q2 gross written premiums rose 14.5% to $666.6, driven mainly by 24.7% growth in Insurance; Reinsurance grew 4.1%. First-half gross written premiums increased 15.6% to $1,448.7. The Q2 net loss ratio was 51.1%, versus 71.0%; the first-half ratio was 54.1%, versus 93.8%.
At June 30, total assets were $10,079.3, total shareholders’ equity $3,435.1, and net assets attributable to ordinary shareholders $2,927.0. Cash and cash equivalents were $1,309.0 and total cash and investments, including accrued interest and net securities receivables, were $7,877.7. Long-term debt was $499.0; debt to total capital was 12.7%, versus 13.7% at year-end. The company also had $508.1 of preference shares, net of issue costs, included in equity.
Changes and notable items
- Profit improved substantially against Q2 2011 and the first-half 2011 loss. The filing attributes much of the year-on-year underwriting improvement to lower catastrophe losses: first-half 2012 catastrophe losses were $20.2, compared with $373.3 in the first half of 2011. Q2 2012 had no material catastrophe losses; Q2 2011 included $79.0.
- Net prior-year reserve releases were $28.6 in Q2 and $65.5 for the first half, compared with $32.8 and $54.7 in the respective 2011 periods. These releases contributed to reported underwriting results.
- Net investment income declined 9.9% in Q2 to $52.8 and 7.8% for the first half to $105.2, reflecting lower reinvestment yields. Derivative fair-value losses were $11.6 in Q2 and $19.1 for the first half.
- General, administrative and corporate expenses rose $12.8 in Q2 and $35.1 in the first half. Management cited performance-related compensation, expansion of U.S. and U.K. operations and, in Q2, a $2.5 IT asset impairment charge. First-half acquisition expense ratios also increased, partly because of business mix and profit commissions.
- Adoption of ASU 2010-26 was applied retrospectively. It increased first-half 2012 expenses by $2.2 and reduced retained earnings at adoption by $16.0, with a cumulative $18.2 reduction to June 30 retained earnings versus the former accounting treatment. Comparatives were adjusted.
- The company issued $160.0 of 7.250% perpetual non-cumulative preference shares in April, receiving $154.5 net proceeds, and repurchased 891,335 ordinary shares for $25.0 under its open-market program. It declared a quarterly ordinary dividend of $0.17 per share, up from $0.15.
Liquidity, outlook and risks
First-half operating cash flow was $159.6, down from $194.0, primarily due to higher loss payments following 2011 catastrophe events and ceded reinsurance costs. The parent held $209.1 in cash and equivalents; operating subsidiaries held $1,030.3 in cash and short-term investments. Management said subsidiary liquidity had a comfortable margin, while noting that collateral and trust arrangements restricted assets: $2,591.4 was held in trusts or supported secured letters of credit at June 30.
No formal earnings guidance is provided. Management reported average renewal rate increases of 5% for the first half (4% Insurance; 6% Reinsurance), with uneven improvement by line and geography. It described stronger pricing in loss-affected property and marine lines, but more modest U.S. property reinsurance increases than hoped; investment yields remained pressured. Management noted a challenging U.K. liability market, sluggish economic conditions and available capacity as headwinds.
Key risks include catastrophe severity and model uncertainty, reserving estimates and claims inflation, reinsurer and other counterparty credit risk, market and interest-rate movements, foreign exchange exposure, investment liquidity, competition, regulatory and tax changes, and the ability to maintain financial strength ratings. The filing states that legal disputes arise in the ordinary course and management did not expect the outcome of current proceedings to materially adversely affect the business as a whole. After quarter-end, Aspen Bermuda replaced a $1.05 billion letter-of-credit facility with a facility capped at $950 million, expiring in tranches in 2013 and 2014.
Important facts for investors to verify
- How much of the earnings and combined-ratio improvement reflects lower catastrophe losses and reserve releases, and how much reflects underlying underwriting performance.
- Whether reserve estimates and reinsurance recoverables remain adequate, given limited company-specific loss experience in some longer-tail lines and reinsurer concentration.
- How lower investment yields, interest-rate sensitivity and derivative valuation changes may affect future investment income and equity.
- The effect of higher operating and acquisition expenses as the U.S. and U.K. insurance platforms expand.
- Availability of unrestricted liquidity after pledged collateral, trust requirements, letters of credit, dividends and share repurchases.
- Comparability of reported results following the retrospective ASU 2010-26 adjustment; the filing notes that 2012 results are not necessarily indicative of full-year results.