Aspen Insurance Holdings Limited — 2014 Form 10-K
Business context and reporting period. Bermuda-domiciled global property and casualty insurer and reinsurer. This filing reports the fiscal year ended December 31, 2014, with comparisons to 2013 and 2012; it is an annual report, not a standalone fourth-quarter filing. Aspen operates through two segments, Insurance and Reinsurance.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Gross written premiums | $2,902.7 million | $2,646.7 million |
| Net premiums earned | $2,405.3 million | $2,171.8 million |
| Total revenue | $2,646.4 million | $2,423.3 million |
| Net income | $355.8 million | $329.3 million |
| Diluted earnings per ordinary share | $4.82 | $4.14 |
| Combined ratio | 91.7% | 92.6% |
| Net cash from operating activities | $607.4 million | $566.4 million |
| Cash and cash equivalents at year-end | $1,178.5 million | $1,293.6 million |
| Total cash and investments | $8,607.4 million | $8,253.4 million |
| Shareholders’ equity | $3,419.3 million | $3,299.6 million |
| Long-term debt | $549.1 million | $549.0 million |
Gross written premiums increased 9.7%, led by Insurance, up 14.4%; Reinsurance grew 3.4%. Net premiums earned rose 10.8%. Net income attributable to ordinary shareholders was $355.0 million. Return on average equity was 11.1%, versus 10.6%; diluted book value per share increased 10.3% to $45.13.
The consolidated loss ratio improved to 54.4% from 56.3%, while the expense ratio increased to 37.3% from 36.3%. The resulting combined ratio improved to 91.7% from 92.6%. Insurance’s combined ratio improved to 96.2% from 103.9%; Reinsurance’s rose to 77.6% from 76.4%.
Net investment income was $190.3 million, compared with $186.4 million. Total investment return, including cash and cash equivalents, was 3.1%, versus 0.5%. The fixed-income portfolio’s book yield declined to 2.65% from 2.74%; its average credit rating remained AA-.
Financial position, liquidity and capital
Operating cash flow was $607.4 million. Investing activities used $515.0 million and financing activities used $196.4 million. Aspen paid $1,107.7 million in net claims, $88.1 million in ordinary and preference dividends, and repurchased $180.9 million of ordinary shares during 2014.
Debt to total capital was 17.0%, up from 15.4%; debt plus preference-share liquidation value to total capital was 30.8%, versus 29.6%. Aspen also consolidated Silverton, its collateralized reinsurance sidecar; its loan notes had a year-end fair value of $138.6 million. The filing describes these obligations as linked to Silverton’s assets and with no recourse to Aspen’s general credit.
Operating subsidiaries held $1,296.2 million in cash and short-term investments. The $200 million revolving credit facility had no borrowings outstanding at year-end. Restricted assets, including regulatory trusts and collateral for letters of credit, totaled $4,049.0 million, or 47.0% of cash and invested assets. Aspen reported statutory capital and surplus above requirements for its principal U.S., Bermuda and U.K. operating subsidiaries.
Changes versus prior year and unusual items
- Net favorable prior-year reserve development was $104.1 million, compared with $107.7 million in 2013. Reinsurance released $99.0 million; Insurance released $5.1 million overall, despite $38.0 million of strengthening in marine, aviation and energy, particularly construction liability.
- Net catastrophe losses were $65.5 million, compared with $101.9 million in 2013. The 2014 combined ratio included 2.7 percentage points of catastrophe losses and 4.3 points of favorable prior-year reserve development.
- General, administrative and corporate expenses increased to $445.7 million from $368.1 million. This included $28.5 million of non-recurring costs defending an unsolicited Endurance approach that management characterized as inadequate. Excluding those costs, the company reported a 90.5% combined ratio.
- Shareholders’ equity rose $119.7 million, with earnings partly offset by share repurchases. Aspen repurchased 4.29 million shares for $180.9 million and increased its quarterly ordinary dividend from $0.18 to $0.20.
Outlook, management commentary and risks
Management described continued rate pressure and soft conditions across much of the insurance and reinsurance market. January 1 reinsurance renewal rates fell about 6% on average, including 9% for U.S. property catastrophe and 11.5% elsewhere. Insurance pricing varied by line and was characterized overall as flat for 2014. Management said it would monitor technical pricing and redeploy capital toward better-rated classes; no specific earnings or revenue guidance is provided.
For 2015, Aspen said it expected to retain a greater share of some non-catastrophe reinsurance risks following changes to its outward reinsurance program, which could increase result volatility. The company planned to continue using Aspen Capital Markets and third-party collateralized capacity. Silverton was renewed with $85 million of notes, including $70 million funded by third parties.
Key risks include catastrophe frequency and severity; uncertainty in catastrophe models and loss reserves; adverse development in long-tail casualty and marine/construction claims; competition and alternative capital pressuring pricing; lower investment yields and market volatility; foreign exchange and counterparty risk; and regulatory or capital constraints. Management highlighted Solvency II implementation, then expected January 1, 2016, as a regulatory undertaking. It also cautioned that subsidiary dividend capacity is subject to regulatory requirements and that 47% of cash and invested assets were restricted or pledged.
On February 5, 2015, the Board authorized a new $500 million share repurchase program through February 6, 2017. Management stated that existing cash, expected subsidiary distributions and credit facilities were sufficient for holding-company liquidity needs, subject to regulatory and contractual limits. The auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether favorable reserve releases continue and whether the marine, energy and construction liability strengthening signals further adverse development. A 10% adverse change in expected loss ratios would increase estimated net reserves by $282.3 million, according to the filing’s sensitivity analysis.
- Whether premium growth—particularly in U.S. Insurance—can be maintained without weakening pricing or underwriting profitability amid soft markets and competition.
- The quality, timing and availability of reinsurance recoveries and collateral, including the concentration of recoverables and the effects of retaining more risk in 2015.
- Investment portfolio exposure and liquidity following increased equity allocations; verify sensitivity to interest rates, credit spreads and equity markets.
- Capacity to fund the new repurchase authorization and dividends while maintaining regulated subsidiary capital, liquidity and rating strength; assess the significance of restricted assets and the holding-company’s dependence on subsidiary distributions.