Aspen Insurance Holdings Limited — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited U.S. GAAP results; amounts in U.S. dollars unless stated otherwise. Aspen writes property and casualty insurance and reinsurance through its operating subsidiaries.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net earned premiums | $486.9m | $451.7m | $1,399.1m | $1,399.2m |
| Total revenues | $508.3m | $530.0m | $1,525.8m | $1,613.1m |
| Net income (loss) | $22.2m | $92.8m | $(119.3)m | $220.0m |
| Basic and diluted EPS | $0.23 | $1.14 basic; $1.08 diluted | $(1.93) | $2.63 basic; $2.51 diluted |
| Combined ratio | 96.7% | 94.4% | 116.1% | 97.2% |
| Net cash from operations | — | $278.4m | $502.1m |
- Q3 gross written premiums rose 19.2% to $495.6m, with growth in both insurance and reinsurance. Nine-month gross written premiums increased 5.1% to $1,749.1m.
- Q3 combined ratio was 85.6% excluding catastrophe losses, versus 89.8% a year earlier. The nine-month ratio reflected substantial catastrophe claims; management reported a 116.1% combined ratio.
- Q3 net investment income was $57.3m, down from $58.1m. Nine-month net investment income was $171.4m, versus $175.0m.
- Derivatives generated a $30.0m Q3 loss in the income statement and a $55.7m loss for nine months, primarily from interest-rate swaps as interest rates fell. These losses materially affected reported earnings.
Balance sheet, capital and liquidity
- At September 30, 2011, total assets were $9.42bn, total investments $6.48bn, cash and cash equivalents $1.04bn, and shareholders’ equity $3.15bn. Equity was down from $3.24bn at December 31, 2010.
- Gross loss and loss-adjustment reserves were $4.40bn, including $4.04bn net of $357.7m in reinsurance recoverables. Net reserves increased from $3.54bn at year-end 2010.
- Long-term debt was $498.9m. Debt to total capital was 13.7%, compared with 13.3% at year-end; debt plus preference shares to total capital was 23.4%, versus 22.8%.
- Operating subsidiaries held $918.6m in cash and readily realizable securities; Aspen Holdings held $80.6m in cash and cash equivalents. Management stated liquidity was sufficient, while noting that insurance claims can require substantial and unpredictable payments.
- Cash from operations fell to $278.4m from $502.1m in the prior-year period, which management attributed mainly to higher catastrophe-related loss payments and ceded reinsurance costs. Investing activities used $368.4m and financing activities used $56.5m; ending cash was $1.04bn.
Changes versus comparable periods
- Q3 net income declined to $22.2m from $92.8m. The decline reflected derivative losses, lower realized and unrealized investment gains, foreign-exchange losses and higher expenses, partly offset by underwriting income and reserve releases.
- For the first nine months, Aspen moved from $220.0m net income to a $119.3m net loss. Underwriting results were heavily affected by 2011 catastrophe losses; the reinsurance segment recorded a 125.9% combined ratio for the nine months, while insurance recorded 96.7%.
- Q3 loss ratio was 62.9%, slightly better than 63.3% a year earlier, despite higher catastrophe losses, due in part to $15.6m of prior-year reserve releases versus $6.2m of strengthening in Q3 2010. Nine-month prior-year reserve releases totaled $70.3m, compared with $8.8m.
- Expense ratios increased: Q3 net expense ratio was 33.8% versus 31.1%; nine-month net expense ratio was 33.1% versus 29.9%. Management cited business mix, reinsurance costs and investments in U.S., U.K. and Swiss operations.
- Available-for-sale equity securities were introduced in 2011, with a $163.8m fair value at quarter-end. Fixed-income portfolio average credit quality was AA, down from AA+ at year-end 2010; management attributed the change partly to the U.S. government downgrade.
Outlook, commentary and risks
- The filing gives no specific earnings or revenue guidance. Management described stronger pricing in selected catastrophe-exposed property, marine/energy and kidnap-and-ransom business, but challenging casualty and U.K. property/liability markets. It continued to manage down casualty reinsurance where pricing did not meet profitability requirements.
- Management identified potential investment downside from widening corporate-bond spreads and weak equity markets. Eurozone exposure was described as modest: $291m at book value, with Eurozone bank holdings below 1% of invested assets; the company also reported $46m exposure to German, French and Finnish government bonds.
- Key risks include catastrophe frequency and severity, reserve-estimation uncertainty, reinsurance counterparty credit and recoverability, market and interest-rate movements, foreign-exchange exposure, inflation in claims costs, competition, and regulatory or tax changes. The filing notes that actual catastrophe losses may differ materially from estimates.
- Subsequent event: significant flooding began in Bangkok on or after October 12, 2011. Aspen was assessing potential claims, but said available information was insufficient to estimate losses at filing.
- Other notable items: management announced Mario Vitale’s appointment as co-CEO of Aspen Insurance effective January 1, 2012. The board declared a $0.15 ordinary-share dividend payable November 25, 2011. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It reported no significant change in the company’s previously disclosed risk factors and no legal proceeding expected to materially harm the company as a whole.
Important facts for investors to verify
- How catastrophe loss estimates develop, particularly for 2011 events and the Thailand floods; the filing presents catastrophe-loss totals on differing stated bases.
- Whether reserve releases continue and whether adverse development in financial and professional lines offsets favorable development elsewhere; loss reserves rely on significant estimates.
- The duration and valuation sensitivity of the investment portfolio, derivative exposure and the effect of changing rates or credit spreads on earnings and equity.
- Reinsurance recoverable collectability and concentration: Lloyd’s and Munich Re represented 28.4% and 12.7% of recoverables, respectively.
- Liquidity available after collateral requirements: policyholder trusts and letters of credit totaled $3.12bn, or 41.5% of cash and invested assets, at quarter-end.
- The filing states a maximum potential $29.0m cumulative operating-expense increase from adoption of ASU 2010-26; verify the eventual accounting impact and timing.