ASPEN INSURANCE HOLDINGS LTD quarterly report, Q3 FY2016

Business Context and Reporting Period

Aspen Insurance Holdings Limited is a Bermuda-based insurer and reinsurer operating principally in Bermuda, the United Kingdom and the United States. This unaudited Form 10-Q reports results for the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless noted. Figures are in U.S. dollars.

Financial Performance and Key Metrics

• Underwriting: Q3 underwriting income was $55.6 million versus $57.0 million. For nine months, it was $144.0 million versus $191.7 million. The nine-month combined ratio rose as the loss ratio increased to 58.7% from 56.0%; the expense ratio was 36.7% versus 36.0%.
• Investment results: Net investment income was $46.4 million in Q3 and $143.9 million year to date. Net realized and unrealized investment gains were $21.5 million for Q3, compared with a $41.2 million loss; for nine months, gains were $103.3 million versus a $13.6 million loss. Investment valuation changes materially supported reported earnings.
• Balance sheet and capital: At September 30, total assets were $12.15 billion, investments $8.13 billion, cash and cash equivalents $1.18 billion, and shareholders’ equity $3.90 billion. Net loss reserves were $4.83 billion; total insurance reserves, including unearned premiums, were $7.03 billion. Long-term debt was $549.3 million. The company reported no borrowings on its $200 million credit facility.
• Cash flow and liquidity: Nine-month cash from operations was $379.8 million; investing activities used $322.7 million and financing activities provided $36.1 million. Cash increased $83.8 million to $1.18 billion. Total cash and investments were $9.31 billion. Management said operating subsidiaries had a comfortable liquidity margin, while noting that $4.58 billion of assets were restricted or committed to regulatory trusts, deposits and letters of credit.

Material Changes Versus Prior Period

• Gross written premiums rose 6.0% in Q3 and 7.6% for the first nine months. Reinsurance growth reflected agriculture business following the AgriLogic acquisition; insurance premiums were down 1.6% in Q3 but up 1.9% year to date.
• Q3 net favorable prior-year reserve development was $35.4 million, versus $39.0 million a year earlier. Nine-month releases were $78.2 million, down from $97.6 million.
• Nine-month catastrophe losses increased, notably including Canadian wildfires and U.S. weather events in reinsurance. Total catastrophe losses were $77.2 million in reinsurance and $34.6 million in insurance for the period.
• General, administrative and corporate expenses increased by $63.1 million year over year for nine months, reflecting AgriLogic-related costs, business growth and reorganization costs.
• On September 20, the company issued $250 million liquidation preference of 5.625% perpetual non-cumulative preference shares, receiving $241.3 million net. Management intended to use proceeds toward redemption of outstanding 7.401% and 7.250% preference shares in 2017. Aspen repurchased $50.0 million of ordinary shares during the nine months.
• AgriLogic was acquired in January for total consideration of $69.1 million, including contingent consideration. A renewal-rights agreement was entered into in September, adding $1.9 million of intangible assets.

Outlook, Risks and Unusual Items

• Management gave no specific earnings or revenue guidance. It described continued rate pressure, with year-to-date rate reductions slowing to approximately 4% in reinsurance and 1% in insurance. It reported disciplined underwriting and selective reductions in less attractive business.
• Management expected AgriLogic to continue growing and said 2016 indications for agriculture underwriting were favorable. It expected insurance portfolio repositioning to improve the loss ratio and reduce volatility in 2017, with more significant benefits in 2018.
• Notable earnings factors included investment gains, favorable reserve development, catastrophe claims and foreign-exchange movements. Actual results remain sensitive to reserve estimates, catastrophe frequency and severity, investment-market movements, interest rates, currency changes, reinsurance recoverability and competitive pricing.
• The fixed-income portfolio had a 3.64-year duration and an average rating of AA-; management cautioned that rising rates could reduce investment values. The company had terminated its remaining interest-rate swaps in May 2016.
• Reinsurance recoverables carry counterparty risk; the largest reported concentrations were Munich Re (19.1%), Lloyd’s syndicates (18.1%) and Arch Re (7.8%). The company also disclosed ordinary-course insurance and reinsurance disputes, but management considered the likelihood of a material adverse effect remote.
• Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the period.

Important Facts for Investors to Verify

• Whether reserve releases and catastrophe-loss estimates remain supportable as claims develop, particularly given the nine-month deterioration in the combined ratio.
• How much reported earnings growth depended on investment gains, and how portfolio valuation changes could affect future earnings and equity.
• AgriLogic’s subsequent premium growth, underwriting performance and any contingent consideration payable under the acquisition terms.
• The planned 2017 preference-share redemptions, their completion and the resulting capital and dividend costs.
• Availability of liquidity after accounting for restricted assets, subsidiary dividend constraints, credit-facility terms and substantial claims obligations.
• Developments in reinsurance recoverables, market pricing and the company’s ability to maintain underwriting discipline amid competition and rate pressure.