Aspen Insurance Holdings Limited — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited U.S. GAAP results; the company writes insurance and reinsurance through operations in Bermuda, the U.K. and the U.S.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net earned premiums | $516.2m | $486.9m | $1,525.0m | $1,399.1m |
| Total revenues | $575.6m | $547.4m | $1,699.9m | $1,591.9m |
| Income/(loss) before tax | $123.1m | $23.2m | $298.0m | $(135.8)m |
| Net income/(loss) | $115.1m | $21.2m | $278.4m | $(122.5)m |
| Diluted EPS, adjusted for preference dividends | $1.45 | $0.21 | $3.47 | $(1.98) |
| Combined ratio | 87.0% | 96.9% | 89.3% | 116.4% |
| Operating cash flow | — | $345.1m | $278.4m |
- Gross written premiums rose 12.7% in Q3 to $558.4m and 14.8% for the nine months to $2,007.1m. Insurance drove growth: its gross written premiums increased 36.2% in Q3 and 30.2% year to date; reinsurance premiums declined 6.0% in Q3 and increased 3.2% year to date.
- Q3 underwriting improvement reflected lower catastrophe losses, particularly in reinsurance, and $29.8m of favorable prior-year reserve development. The nine-month comparison also benefited from catastrophe losses falling to $30.5m from $429.1m in the prior-year period, alongside $95.4m of favorable reserve development.
- Net investment income declined 15.2% in Q3 to $48.6m and 10.3% year to date to $153.8m, as lower yields reduced reinvestment income. Derivative fair-value charges were $4.9m in Q3 and $24.0m year to date, smaller than the respective prior-year charges of $30.0m and $55.7m.
- At September 30, total assets were $10.24bn, shareholders’ equity $3.55bn, cash and cash equivalents $1.37bn, and investments $6.72bn. Total cash and investments, including accrued interest and securities settlement balances, were $8.13bn. Net loss reserves were $4.18bn; gross insurance reserves were $5.82bn, including $1.18bn of unearned premiums.
- Long-term debt was $499.1m. Debt to total capital was 12.3%; debt plus preference shares to total capital was 24.8%. The company reported $3.45bn of restricted assets, equal to 42.6% of cash and invested assets.
- Operating cash flow was $345.1m for the nine months; investing activities used $287.2m and financing activities provided $66.4m. No borrowings were outstanding under the $280m revolving credit facility at quarter-end.
- Diluted book value per share was $41.53, up 9.1% year over year and 3.8% from Q2 2012. Total shareholders’ equity increased $119.1m during Q3.
Material changes and notable items
- The company adopted ASU 2010-26 retrospectively in 2012. It increased general, administrative and corporate expense by $3.2m for the first nine months of 2012 and reduced retained earnings at September 30 by an aggregate $19.2m. Prior-period figures shown are adjusted.
- In April, Aspen issued 6.4m 7.250% preference shares, generating $154.5m net proceeds. It repurchased $50.0m of ordinary shares during the first nine months. The ordinary quarterly dividend had increased from $0.15 to $0.17 per share.
- Other-than-temporary investment impairment charges were $2.1m for Q3 and $3.0m for the nine months, versus none in the comparable 2011 periods. In September, Aspen funded a new BB high-yield portfolio with $60m; $7m had been invested by quarter-end.
- Post-quarter, the board authorized a new share repurchase program of up to $400m. The board also declared a $0.17 ordinary-share dividend. John Worth became CFO effective November 1, 2012.
Outlook, commentary and risks
- Management reported average renewal rate increases of 4.0% for the first nine months—5.0% in reinsurance and 3.0% in insurance. It expected broadly stable U.S. reinsurance rates for the January 2013 renewals, with U.S. peak-zone and retrocession business more exposed to pricing pressure. U.K. and international markets remained challenging in certain lines. This is commentary, not earnings guidance.
- Management cited lower investment yields, increased compensation and operating costs, and competition and rate pressure as relevant trends. It said rising inflation, interest rates and bond yields could increase claims costs and reduce fixed-income market values.
- Hurricane Sandy made landfall in the U.S. Northeast on October 29, 2012. Aspen was assessing potential claims, but information available at filing did not support a reliable loss estimate.
- Key exposures include catastrophe frequency and severity, reserve-estimate uncertainty, reinsurer collectability, investment and counterparty risk, foreign exchange and interest rates, market competition, and regulatory or tax changes. Management reported no significant changes to the risk factors in its 2011 Form 10-K. Ordinary-course litigation and arbitration were not expected by management to have a material adverse effect on the business as a whole.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much Q3 and year-to-date underwriting profitability depended on catastrophe experience and favorable prior-year reserve releases, and whether those releases are repeatable.
- Ultimate insured losses and reinsurance recoveries associated with Hurricane Sandy, once estimates become available.
- Whether premium growth—especially in U.S. insurance—can be sustained at adequate rates while acquisition and administrative expenses rise.
- Investment income trends, portfolio credit quality and duration, and the risk-return and liquidity implications of the planned BB high-yield allocation.
- Capital deployment, including the new $400m repurchase authorization, preference-share dividends, and liquidity available after restricted assets and subsidiary capital requirements.