Business context and reporting period
Aspen Insurance Holdings Limited is a Bermuda-based insurance and reinsurance group. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015; comparisons are to the corresponding 2014 periods unless noted. Amounts are in U.S. dollars.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net earned premiums | $609.4m | $616.2m | $1,203.0m | $1,182.7m |
| Income before tax | $51.2m | $137.0m | $184.3m | $261.2m |
| Net income | $49.0m | $130.8m | $177.0m | $251.2m |
| Diluted EPS, adjusted for preference dividends | $0.62 | $1.82 | $2.50 | $3.48 |
| Combined ratio | 93.6% | 90.1% | 91.2% | 88.9% |
| Net cash from operations | Not separately presented | $204.4m | $307.9m |
Q2 underwriting income was $54.2m, down from $83.3m. Reinsurance underwriting income was $66.2m, while Insurance recorded a $12.0m underwriting loss. For the first half, underwriting income was $134.7m versus $171.0m. Net investment income was $46.7m in Q2 and $94.1m for the half year.
At June 30, 2015, total assets were $10.95bn, shareholders’ equity $3.36bn, cash and cash equivalents $1.15bn, and total cash and investments $8.51bn. Senior long-term debt was $549.2m; Silverton variable-interest-entity loan notes were $77.8m. The company reported no borrowings under its $200m credit facility. Operating subsidiaries held $986.8m in cash and short-term investments considered readily realizable; $3.87bn of assets were restricted for regulatory, trust, or letter-of-credit purposes.
Material changes versus prior comparable periods
- Q2 gross written premiums fell 7.3% to $722.8m: Reinsurance declined 12.6% and Insurance 3.9%. First-half gross written premiums edged up 0.4% to $1.64bn, with Insurance growth offsetting lower Reinsurance premiums.
- Q2 net income fell to $49.0m, principally reflecting lower underwriting income, $15.3m of net realized and unrealized investment losses versus $31.3m of gains a year earlier, and $11.6m of foreign-exchange losses versus $10.7m of gains. First-half net income declined to $177.0m; foreign-exchange losses were $18.0m versus $10.8m of gains in 2014.
- The Q2 combined ratio worsened 3.5 points. Management cited increased large losses, including $40.0m of mid-sized property and energy physical-damage losses; catastrophe losses net of reinsurance were $11.9m, compared with $22.1m in Q2 2014. First-half combined ratio deterioration reflected Insurance losses and higher expense ratios.
- Prior-year reserve releases were $31.1m in Q2 and $58.6m for the half year, compared with $31.8m and $60.0m, respectively, in 2014. Net loss reserves were $4.48bn at June 30, up from $4.40bn at year-end.
- Operating cash flow fell $103.5m year over year in the first half, which management attributed mainly to higher claims settlements and performance-related payments. Cash and cash equivalents declined $30.1m from year-end.
- Other comprehensive loss was $84.5m in Q2 and $115.8m for the half year, mainly reflecting lower unrealized gains on available-for-sale investments and foreign-currency translation losses. Total shareholders’ equity was $3.36bn versus $3.42bn at year-end.
Outlook, management commentary, risks and unusual items
Management said insurance and reinsurance markets remained under rate pressure. It described a strategy of reducing property-catastrophe exposure where pricing was challenging and targeting less-pressured reinsurance areas, including other property and specialty. U.S. insurance rates declined about 1% in Q2 and international insurance rates about 2%; energy physical-damage rates fell as much as 14%. Management gave no specific earnings or premium guidance.
For the first half, the fixed-income portfolio averaged AA- quality, with 89.4% rated A or higher. Management noted that rising interest rates could reduce investment values; a parallel 100-basis-point increase was estimated to reduce the modeled value of interest-rate-sensitive assets by $239.5m. Investment and reserve estimates are judgmental, and actual claims and recoverables may differ materially. Other stated risks include catastrophe severity and modeling uncertainty, competition and alternative capital, claims inflation, foreign exchange and interest-rate movements, reinsurer or counterparty credit, and constraints on subsidiary dividends or liquidity.
The company repurchased 1.79m ordinary shares for $83.7m in the first half under a new $500m authorization, leaving $416.4m available at June 30. The quarterly ordinary dividend was raised to $0.21 per share; the board declared that dividend again in July. Management considered liquidity adequate but noted that claims payments can be substantial and unpredictable, and that restricted assets and regulatory capital requirements limit funds available for general use. Management assessed pending litigation or arbitration as unlikely to have a material effect; the filing reports no significant change in risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether underwriting performance, especially Insurance results and the combined ratio, improves as large-loss experience and market pricing evolve.
- Whether reserve releases continue and whether ultimate loss-reserve estimates prove adequate, particularly in long-tail lines.
- How the investment portfolio responds to interest-rate, equity-market, credit-spread, and currency changes, including the impact on earnings and other comprehensive income.
- Whether operating cash generation and readily available subsidiary liquidity remain sufficient given claims, restricted assets, and regulatory capital needs.
- Progress and remaining capacity under the share-repurchase program, and the sustainability of dividends amid capital-management and subsidiary-distribution constraints.