Aspen Insurance Holdings Limited — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly data is included. Aspen is a Bermuda-based global specialty insurance and reinsurance group, reported in U.S. GAAP, with Aspen Insurance and Aspen Reinsurance segments.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Gross written premiums | $3,446.9 million | $3,360.9 million |
| Net premiums written | $2,082.0 million | $2,212.5 million |
| Net premiums earned | $2,214.7 million | $2,306.6 million |
| Net investment income | $198.2 million | $189.0 million |
| Net loss | $(145.8) million | $(266.4) million |
| Loss ratio / expense ratio / combined ratio | 71.0% / 39.0% / 110.0% | 86.5% / 39.2% / 125.7% |
| Cash and investments | $7,823.1 million | $8,687.8 million |
| Shareholders’ equity | $2,656.0 million | $2,928.5 million |
| Long-term debt | $424.7 million | $549.5 million |
| Operating cash flow | $(304.5) million | $(111.5) million |
Gross premiums grew 2.6%, as insurance-segment growth of 7.7% more than offset a 3.4% decline in reinsurance. Net premiums earned fell 4.0%, reflecting substantially higher ceded premiums; the net-to-gross written premium retention ratio declined to 60.4% from 65.8%. The combined ratio remained above 100%, indicating an underwriting loss, but improved by 15.7 percentage points from 2017. Net catastrophe losses fell to $274.7 million from $576.0 million; favorable prior-year reserve development was $111.1 million, or 5.0 combined-ratio points.
Net investment income rose 4.9%, while net realized and unrealized investment results were a $64.7 million loss. Net unrealized losses on available-for-sale investments, net of tax, were $66.8 million at year-end, versus a $9.7 million gain in 2017, largely reflecting rising interest rates. Diluted book value per ordinary share fell 11.5% to $35.48. Cash and investments decreased by $864.7 million; operating cash use increased as ceded reinsurance costs, claims payments, and accrued-expense payments rose. Year-end cash and cash equivalents were $1,083.7 million.
Material changes and unusual items
- Insurance premiums increased, particularly in financial and professional lines; reinsurance premiums declined, largely due to lower mortgage and other specialty business. Aspen exited Lloyd’s international professional liability and marine hull and stopped underwriting aviation during 2018.
- Ceded written premiums increased 18.9% to $1,364.9 million, as Aspen bought more reinsurance to reduce volatility and catastrophe exposure. Management expected less proportional and more excess-of-loss protection in 2019.
- Aspen redeemed $125.0 million of its 6.00% notes due 2020, paying an $8.6 million make-whole charge. Debt to capital declined to 13.8% from 15.8%.
- Investment portfolio changes included selling the remaining equity portfolio and investing $100.0 million in a real estate fund. Fixed-income portfolio duration was 3.54 years; average credit quality was AA-, with 88.3% rated A or higher.
- Non-operating costs included $39.0 million of merger adviser fees, $37.5 million of efficiency-program costs and $11.3 million of retention costs, partly offset by a $14.1 million write-back of a buyout provision. A U.K. tax inquiry concluded favorably, allowing release of a $12.8 million provision; the company also incurred U.S. BEAT-related tax costs.
Merger, outlook, and risks
Aspen agreed to be acquired by affiliates of Apollo-managed investment funds for $42.75 in cash per ordinary share; the preference shares remain outstanding. The company said required regulatory approvals had been obtained and expected completion shortly, subject to remaining conditions, including maintenance of certain operating-subsidiary financial-strength ratings. The agreement restricts ordinary-share dividends and share repurchases; ordinary dividends previously declared and announced may be paid, and preference dividends may continue under their terms. Highlands could terminate under specified conditions, including certain catastrophe losses exceeding $350 million during the contractual measurement period; management said it did not believe the threshold had been exceeded.
Management reported approximately 3% overall rate increases at the January 1, 2019 reinsurance renewals, covering about 40% of the annual book excluding the CGB DS partnership. During 2018, rates increased approximately 4% in property and casualty insurance and 8% in marine, aviation and energy; financial and professional lines were broadly flat. Management expected 2019 run-rate savings of approximately $55 million from its efficiency program, following achievement of its $30 million 2018 target, and projected the net-to-gross written premium ratio to rise to approximately 75% as reinsurance purchasing changed. These are management expectations, not guarantees.
Key risks include catastrophe frequency and severity, uncertain loss-reserve estimates and inflation, reinsurance recoverability and counterparty concentration, market and interest-rate losses, competition and rate pressure, and the execution and disruption risks of the efficiency program and outsourcing. The company also identified Brexit-related uncertainty over EEA access and operations. Ratings were under negative outlook at S&P and Moody’s; A.M. Best had placed applicable ratings under review with developing implications following the announced ownership change. Management reported capital above applicable Bermuda group and Aspen Bermuda target levels and operating subsidiaries meeting or exceeding regulatory solvency requirements.
Important facts for investors to verify
- Whether the merger closed, whether all remaining conditions were met, and the final treatment of ordinary shares, preference shares, and equity awards.
- Whether underwriting performance improved beyond the 2018 combined ratio of 110.0%, particularly after catastrophe losses and reserve releases.
- Whether the $111.1 million prior-year reserve release proves sustainable; gross IBNR reserves were $3,969.8 million, and management disclosed material sensitivity to reserve assumptions.
- Whether the expected $55 million in 2019 run-rate savings and approximately 75% net-to-gross premium ratio were achieved, and how the changed reinsurance mix affected earnings and volatility.
- How the negative or developing rating outlooks, $1,497.8 million of uncollateralized reinsurance recoverables, and restricted assets of $4,419.2 million affect flexibility and liquidity.
- Whether the investment portfolio recovered from 2018 unrealized losses and whether the real estate fund’s lock-up and redemption terms constrain access to invested capital.