Aspen Insurance Holdings Limited — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The filing is unaudited. Aspen is a Bermuda-based global insurer and reinsurer with Insurance and Reinsurance reporting segments.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Gross written premiums | $919.2 million | $855.5 million | +7.4% |
| Net earned premiums | $593.6 million | $566.5 million | +4.8% |
| Total revenues | $702.3 million | $634.5 million | +10.7% |
| Net investment income | $47.4 million | $49.5 million | −4.2% |
| Net realized and unrealized investment gains | $42.9 million | $13.6 million | Higher |
| Income before tax | $133.1 million | $124.2 million | +7.2% |
| Net income | $128.0 million | $120.4 million | +6.3% |
| Diluted EPS | $1.87 | $1.66 | Higher |
| Operating cash flow | $72.0 million | $211.9 million | −$139.9 million |
Q1 2015 combined ratio was 88.9%, versus 87.6% a year earlier; below 100% indicates underwriting profit. Underwriting income declined to $80.5 million from $87.7 million. The total loss ratio rose to 51.6% from 50.9%, while the net expense ratio increased to 37.3% from 36.7%. Annualized net income return on average equity was 16.4%, compared with 16.0%.
- Segment results: Reinsurance gross written premiums rose 2.7% to $484.8 million; underwriting income fell to $58.1 million from $73.1 million, and combined ratio increased to 76.7% from 72.6%. Insurance premiums grew 13.3% to $434.4 million; underwriting income rose to $22.4 million from $14.6 million, with combined ratio improving to 93.5% from 95.1%.
- Balance sheet at March 31: Total assets were $10.98 billion, investments $7.28 billion, cash and cash equivalents $1.23 billion, and shareholders’ equity $3.47 billion. Net loss and loss adjustment expense reserves were $4.34 billion.
- Debt and liquidity: Long-term debt was $549.1 million; Silverton variable-interest-entity loan notes were carried at $76.7 million. The reported debt-to-total-capital ratio was 11.5%, versus 17.0% at year-end 2014. Operating subsidiaries held $1.06 billion in cash and short-term investments. No borrowings were outstanding under the $200 million corporate credit facility; $463.5 million of collateralized letters of credit were outstanding under the $575 million facility.
- Capital returns: Aspen repurchased 787,138 ordinary shares for $36.5 million at an average $46.32 per share, under a new $500 million authorization; $463.5 million remained. The board declared a quarterly ordinary dividend of $0.21 per share, up from $0.20.
Material changes and unusual items
- Investment gains benefited from a $28.9 million realized gain related to selling available-for-sale equities while purchasing trading equities as part of a portfolio rebalance. Total reported investment gains were $42.9 million; net investment income declined.
- Prior-year reserve development was favorable by $27.5 million, compared with $28.2 million in Q1 2014, contributing 4.6 combined-ratio points. Releases were $13.2 million in Reinsurance and $14.3 million in Insurance. Reserve estimates remain sensitive to assumptions and actual claims experience.
- Net catastrophe losses were $13.5 million, or 2.3 combined-ratio points, compared with $10.6 million, or 1.9 points. The quarter also included losses associated with an airline crash and a floating gas production and storage facility.
- Foreign-exchange losses were $6.4 million, compared with a $0.1 million gain, largely reflecting U.S. dollar strength. Other comprehensive income was a $31.3 million loss, including $26.1 million of after-tax currency-translation losses.
- Operating cash flow declined to $72.0 million, which management attributed mainly to higher claim payments for 2014 losses than the comparable-period payments for 2013 losses. Cash increased by $47.4 million after investing, financing, and currency effects.
Outlook, commentary, and risks
Management reported continued pricing pressure: first-quarter reinsurance rates declined about 5% overall, including approximately 11% in property catastrophe; insurance rates declined about 1%. Aspen said it was shifting capital toward less-pressured lines and using its capital-markets platform. It cited 21% growth in specialty reinsurance premiums, 7% growth in other property reinsurance, and 25% premium growth in Asia Pacific, Latin America, and Middle East and North Africa. Management expected regional growth to continue and anticipated attractive returns from its Lloyd’s business in 2015. The filing provides no numerical earnings or full-year financial guidance.
Key risks include pricing and competition, catastrophe frequency and severity, reserve uncertainty and claims inflation, investment-market and interest-rate exposure, foreign exchange, and counterparty or reinsurer credit risk. Management noted that higher interest rates could reduce fixed-income portfolio values; a parallel 100-basis-point increase was estimated to reduce the modeled market value of interest-rate-sensitive invested assets by $234.3 million. About 45% of cash and invested assets were restricted at quarter-end. Management considered material adverse outcomes from pending or threatened litigation remote; it reported no significant changes to the risk factors in the 2014 Form 10-K. Disclosure controls were considered effective, and management reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the higher earnings are sustainable without the portfolio-rebalancing gain, and how investment returns and investment income evolve.
- Reserve adequacy and the composition and persistence of favorable prior-year development, especially given the quarter’s loss events.
- Pricing, retention, and underwriting margins by segment as market rates remain under pressure; monitor combined and expense ratios.
- Liquidity available after accounting for restricted assets, claims-payment variability, collateral requirements, and subsidiary dividend restrictions.
- Clarify the ordinary-share count: the balance sheet reports 61,772,502 shares at March 31, while the capital-structure note reports 61,722,502; the filing reports 61,618,257 outstanding at April 24.