|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended
September 30, 2007
|
|
|
For the three months
ended
September 30, 2006
|
Reserve releases ($ in millions)
|
|
|
|
$
|
28.5
|
|
|
|
|
$
|
12.4
|
|
% of net premiums earned
|
|
|
6.8%
|
|
|
2.9%
|
The increase in reserve releases compared to the third quarter of 2006 is due to a combination of a reduction in the level of reserve strengthening for property reinsurance from $14.8 million in 2006 to $0.7 million in 2007, accompanied by an increase in reserve releases from $19.9 million in 2006 to $24.1 million in 2007 for international insurance. U.K. liability insurance contributed $15.4 million and aviation insurance provided $6.5 million of the international insurance releases for the current period.
Further information relating to the movement of prior year reserves can be found below under ‘‘Reserves for Loss and Loss Adjustment Expenses.’’
Expense ratio.
We monitor the ratio of expenses to net earned premium (the ‘‘expense ratio’’) as a measure of the cost effectiveness of our business acquisition, operating and administrative processes. The table below presents the contribution of the policy acquisition expenses and operating and administrative expenses to the expense ratio and the total expense ratios for each of the three months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
For the three months
ended
September 30, 2007
|
|
|
For the three months
ended
September 30, 2006
|
Policy acquisition expenses
|
|
|
18.1%
|
|
|
18.4%
|
Operating and administrative expenses
|
|
|
14.0%
|
|
|
8.6%
|
Expense ratio
|
|
|
32.1%
|
|
|
27.0%
|
The overall reduction in the policy acquisition ratio is driven by a reduced ratio for the property reinsurance segment more than compensating for commission increases in the casualty reinsurance and
30
Table of Contents
international insurance segments. The reduction in the acquisition ratio for property reinsurance is mainly due to a $22.7 million reduction in the earned reinsurance cost for the quarter compared to the same quarter in 2006. The movement was also impacted by changes in the mix of business from property reinsurance towards casualty reinsurance which attracts lower average commission rates.
Between the two periods we have experienced a $21.8 million increase in our operating and administrative expenses due to a $6.0 million rise in personnel costs resulting from increased bonus and long term incentive charges, $3.8 million of reorganization costs of our U.S. operations, $2.1 million increase in I.T. infrastructure costs associated with the upgrade of our underwriting systems, and $2.0 million increase in foreign exchange expense resulting from the weakening of the U.S. Dollar against the British Pound. The third quarter of 2006 also benefited from $2.4 million of accrual releases.
Investment income.
In the third quarter of 2007, we generated net investment income of $72.4 million (2006 — $47.3 million). The 53.1% increase in income was due to income from our investment in funds of hedge funds, increased book yields on our fixed interest portfolio and a $956.0 million increase in cash and invested assets between September 30, 2006 and September 30, 2007 as a result of positive operating cash flow.
Change in fair value of derivatives.
In the three months ended September 30, 2007 we recorded a reduction of $0.8 million (2006 — $7.0 million) in the estimated fair value of our catastrophe swap and a reduction of $1.9 million (2006 — $Nil) in the estimated fair value of our credit insurance contract. Further information on these contracts can be found in Note 7 to the financial statements.
Other revenues and expenses.
Other revenues and expenses in the three months ended September 30, 2007 included $9.2 million of foreign currency exchange gains (2006 — $2.5 million gain) and $1.9 million of realized investment losses (2006 — $1.0 million loss). The increase in foreign currency exchange gains in the period is primarily due to the increase in value of our Euro and Canadian Dollar denominated assets when converted into U.S. Dollars. The U.S. Dollar has weakened against both the Euro and Canadian Dollar in the period. The investment losses in 2007 are the result of transactions intended to re-position components of our fixed interest portfolio and to increase investment income in future periods. Interest payable was $4.2 million in the three months ended September 30, 2007 (2006 — $4.6 million).
Taxes.
We have estimated that the average effective rate of tax for the year ended December 31, 2007 is 15.0% (2006 — 20.0%). This is subject to revision in future periods if circumstances change and in particular, depending on the claims experience of those parts of business conducted in Bermuda where the rate of tax on corporate profits is zero.
Dividends.
Beginning in the first quarter of 2005, we increased our quarterly dividends from $0.03 to $0.15 per ordinary share, and we paid such dividends on our outstanding shares in each quarter of 2005, notwithstanding our losses from the 2005 hurricanes. This quarterly dividend was maintained at $0.15 per ordinary share throughout 2006 and the first three quarters of 2007.
Dividends paid on our preference shares in the three months ended September 30, 2007 were $6.9 million (2006 — $3.2 million). The increase between 2006 and 2007 was due to the issuance of 8,000,000 preference shares in December 2006 which pay a dividend of $3.7 million per quarter.
Shareholders’ equity and financial leverage.
Total shareholders’ equity increased by $142.2 million to $2,733.2 million for the three months ended September 30, 2007. The most significant movements were:
|
|
|
|
•
|
net income after tax for the period of $117.2 million;
|
|
|
|
|
•
|
dividend payments to ordinary and preference shareholders totaling $20.2 million;
|
|
|
|
|
•
|
increase in unrealized gains in foreign currency translation accounted for as Other Comprehensive Income of $29.7 million; and
|
|
|
|
|
•
|
reduction in unrealized losses on investments of $56.1 million.
|
As at September 30, 2007 total ordinary shareholders’ equity was $2,314.0 million compared to $1,970.1 million at December 31, 2006. The remainder of our total shareholders’ equity, as at
31
Table of Contents
September 30, 2007, was funded by two classes of preference shares with a total value as measured by their respective liquidation preferences of $419.2 million net of share issuance costs (December 31, 2006 — $419.2 million).
The amounts outstanding under our senior notes, less amortization of expenses, of $249.5 million were the only material debt that we had outstanding as of September 30, 2007 and December 31, 2006.
Management monitors the ratio of debt to total capital, with total capital being defined as shareholders’ equity plus outstanding debt. At September 30, 2007, this ratio was 8.4% (December 31, 2006 — 9.5%).
Our preference shares are classified in our balance sheet as equity but may receive a different treatment in some cases under the capital adequacy assessments made by certain rating agencies. Such securities are often referred to as ‘hybrids’ as they have certain attributes of both debt and equity. We also monitor the ratio of the total of debt and hybrids to total capital which was 22.4% as of September 30, 2007 (December 31, 2006 — 25.3%).
Capital Management.
On September 28, 2007 we entered into an accelerated share repurchase with Goldman Sachs to repurchase $50.0 million of our ordinary shares representing approximately 2% of the Company’s market capitalization. The share repurchase transaction brings the total cumulative repurchase amount to approximately $250 million, being part of the $300 million share repurchase program authorized by the Company’s Board of Directors as announced on November 8, 2006. The share repurchase of $50 million was funded from available cash on hand.
Liquidity.
Management monitors the liquidity of Aspen Holdings and of each of its Insurance Subsidiaries. With respect to Aspen Holdings, management monitors its ability to service debt, to finance dividend payments and to provide financial support to the Insurance Subsidiaries. As at September 30, 2007, Aspen Holdings held $62.5 million in cash and cash equivalents which, taken together with dividends declared or expected to be declared by subsidiary companies and our credit facilities, management considered sufficient to provide Aspen Holdings liquidity at such time.
At September 30, 2007, our subsidiaries held $504.7 million in cash and cash equivalents that are readily realizable securities. Management monitors the value, currency and duration of the cash and investments within its Insurance Subsidiaries to ensure that they are able to meet their insurance and other liabilities as they become due and was satisfied that there was a comfortable margin of liquidity as at September 30, 2007 and for the foreseeable future.
As of September 30, 2007, we had in issue $377.1 million and £46.2 million in letters of credit to cedants, for which $307.1 million and £48.6 million were held as collateral for the secured letters of credit. Our reinsurance receivables decreased by 32.6% from $468.3 million at December 31, 2006 to $315.8 million at September 30, 2007, mainly as a result of further amounts received from our reinsurers in respect of 2004 and 2005 hurricane claims.
Outlook and Trends
The following is a summary of our observations on current market rates, trends and conditions.
Overall.
In summary, overall rates are continuing to trend downwards but there are significant variations by line of business. Rating pressure in some of the lines we write, such as U.K. commercial property and U.K. employers’ and public liability is particularly acute. Therefore, we have written less new business and accepted reduced retention rates on renewals in order to preserve underwriting margins and return on capital.
Property Reinsurance.
In this segment, overall rates have remained flat on business we renewed this year, although rates have trended downwards from the record highs achieved in July 2006. In our catastrophe treaty book, rates increased marginally on average with respect to 2007 renewal business. However, the trend in property catastrophe pricing is downwards. Our pro rata treaty business has seen slight average rate declines in 2007. In our risk excess treaty business, renewal rates have also decreased, with some pressure on terms and conditions. Within property reinsurance as a whole, terms and conditions have remained stable to date. However, in the underlying primary policies we protect there has been some erosion in terms and conditions.
32
Table of Contents
Casualty Reinsurance.
Overall in this segment prices have decreased slightly. In our international casualty reinsurance account, rates have declined moderately reflecting lower pricing in the insurance markets and we anticipate further rating pressure in 2008. In U.S. casualty reinsurance, we recorded a similar reduction on our book. Overall, downward pressure on rates is increasing.
International Insurance.
In this segment, we have seen rates decrease marginally on average on renewal business, although this varies widely by line of business. In our energy physical damage account, average renewal pricing declined moderately year to date reflecting minimal loss activity. Marine liability insurance experienced a more significant increase in average rates due to a combination of market factors and past loss activity on some contracts, although we do anticipate some reductions in the coming months. We recorded a moderate increase on our marine hull account as a consequence of the increased frequency of losses in this line of business. Rates for aviation insurance have also decreased moderately. However, there are some encouraging signs in the aviation market. U.K. employers’ and public liability have seen the largest reduction in rates due to increased competition and we have written 25% less premium in these lines as a result. We have also seen moderate average rate declines this year on our U.K. commercial property account and our specialty reinsurance account.
U.S. Insurance.
In this segment, the market is seeing significant reductions in the excess and surplus lines property and casualty lines of business. Our renewal business however is faring much better. By leveraging our producer and client connections and by careful risk selection, rate reductions have been marginal in our property account and moderate in our casualty account.
Recent Developments
On October 10, 2007, we announced that we will enter the global excess casualty insurance market which will be written through a Dublin branch of Aspen Insurance UK Limited. A notification has been made to the U.K. Financial Services Authority to establish a branch in Dublin. We will focus on construction and global risk managed programs. The underwriting unit will be headed by Bob Patten who has more than 15 years of experience underwriting excess casualty.
Mr. Liaquat Ahamed was appointed to our Board of Directors on October 31, 2007. He is a member of our Board’s Investment Committee and Risk Committee. Mr. Ahamed has a background in investment management with leadership roles that include heading the World Bank’s investment division, and Chief Executive Officer of Fischer Francis Trees & Watts, Inc., a subsidiary of BNP Paribas specializing in institutional single and multi-currency fixed income investment portfolios. He is currently an adviser to the Rock Creek Group, an investment firm based in Washington D.C., a Board Member of the Rohatyn Group, and a member of the Board of Trustees at the Brookings Institution.
Application of Critical Accounting Policies
Our condensed consolidated financial statements are based on the selection of accounting policies and the application of significant accounting estimates, which require management to make significant estimates and assumptions. We believe that some of the more critical judgments in the areas of accounting estimates and assumptions that affect our financial condition and results of operations are related to reserves for property and liability losses, premiums receivable in respect of assumed reinsurance and the fair value of derivatives. For a detailed discussion of our critical accounting policies please refer to our 2006 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission. There were no material changes in the application of our critical accounting estimates subsequent to that report. We have discussed the application of these critical accounting estimates with our Board of Directors and Audit Committee.
Results of Operations for the Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006
The following is a discussion and analysis of our consolidated results of operations for the three months ended September 30, 2007 and 2006 starting with a discussion of segmental results and then summarizing our consolidated results under ‘‘Total Income Statement — Third quarter’’ below.
33
Table of Contents
Underwriting Results by Operating Segments
As a result of a shift in the Company’s operating structure and the implementation of a number of strategic initiatives in 2007, the Company changed the composition of its business segments to reflect the manner in which the business is managed. The Company is currently organized into four business segments: property reinsurance, casualty reinsurance, international insurance and U.S. insurance. These segments form the basis of how we monitor the performance of our operations.
The property and casualty insurance segment previously comprised U.S. property and casualty insurance business written on an excess and surplus lines basis, U.K. commercial property and liability insurance and international property facultative business. With the appointment of Nathan Warde, as head of U.S. insurance, and Matthew Yeldham, as head of international insurance, we have now redesignated U.S. property and casualty insurance business as a separate segment. The U.K. commercial property and liability insurance business now forms part of our international insurance segment which also consists of marine hull, energy and liability, aviation, professional liability insurance and non-marine transport lines of business as well as specialty reinsurance. We have also re-allocated our international property facultative business, previously part of our property and casualty insurance segment, to the property reinsurance segment.
Management measures segment results on the basis of the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and operating and administrative expenses by net premiums earned. Indirect operating and administrative expenses are allocated to segments based on each segment’s proportional share of gross earned premiums. As a relatively new company, our historical combined ratio may not be indicative of future underwriting performance. We do not manage our assets by segment; accordingly, investment income and total assets are not allocated to the individual segments.
Please refer to the tables in Note 4 in our unaudited financial statements of this report for a summary of gross and net written and earned premiums, underwriting results and combined ratios and reserves for each of our four business segments for the three months ended September 30, 2007 and 2006.
The contributions of each segment to gross written premiums in the three months ended September 30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
Business Segment
|
|
|
For the three months
ended
September 30, 2007
|
|
|
For the three months
ended
September 30, 2006
|
|
|
|
% of total gross written premiums
|
Property reinsurance
|
|
|
37.4%
|
|
|
44.1%
|
Casualty reinsurance
|
|
|
20.7%
|
|
|
21.1%
|
International insurance
|
|
|
34.5%
|
|
|
27.0%
|
U.S. insurance
|
|
|
7.4%
|
|
|
7.8%
|
Total
|
|
|
100.0%
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
Business Segment
|
|
|
For the three months
ended
September 30, 2007
|
|
|
For the three months
ended
September 30, 2006
|
|
|
|
($ in millions)
|
Property reinsurance
|
|
|
$139.5
|
|
|
$201.7
|
Casualty reinsurance
|
|
|
77.5
|
|
|
96.6
|
International insurance
|
|
|
129.0
|
|
|
123.5
|
U.S. insurance
|
|
|
27.5
|
|
|
35.7
|
Total
|
|
|
$373.5
|
|
|
$457.5
|
34
Table of Contents
Property Reinsurance
Our property reinsurance segment is mainly written on a treaty basis and includes catastrophe, risk excess and proportional treaty risks. We also have a small proportion of property facultative risks. We have written no significant retrocession business in this quarter. We also write some structured reinsurance contracts out of Aspen Bermuda. These contracts are tailored to the individual client circumstances and although written by a single team are accounted for within the business segment to which the contract most closely relates.
In the third quarter of 2006, we also opened a branch office of Aspen Re in Paris which writes property facultative business in continental Europe. We have recently established a branch of Aspen Re in Zurich which will focus on property and casualty reinsurance in Europe.
Gross written premiums.
Gross written premiums for our property reinsurance segment decreased by 30.8% compared to the three months ended September 30, 2006. This reduction reflects changes in the timing of the renewals this year versus last year, softening markets, increased competition, and the non-renewal of a number of accounts that no longer meet our internal profitability requirements.
The table below shows our gross written premiums for each line of business for the three months ended September 30, 2007 and 2006, and the percentage change in gross written premiums for each such line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
Lines of Business
|
|
|
For the three months
ended
September 30, 2007
|
|
|
For the three months
ended
September 30, 2006
|
|
|
|
($ in millions)
|
|
|
% increase/(decrease)
|
|
|
($ in millions)
|
Treaty catastrophe
|
|
|
|
$
|
60.1
|
|
|
|
|
|
(39.7
|
)%
|
|
|
|
$
|
99.7
|
|
Treaty risk excess
|
|
|
|
|
35.7
|
|
|
|
|
|
(36.0
|
)
|
|
|
|
|
55.8
|
|
Treaty pro rata
|
|
|
|
|
34.1
|
|
|
|
|
|
5.9
|
|
|
|
|
|
32.2
|
|
Property facultative
|
|
|
|
|
9.6
|
|
|
|
|
|
(31.4
|
)
|
|
|
|
|
14.0
|
|
Total
|
|
|
|
$
|
139.5
|
|
|
|
|
|
(30.8
|
)%
|
|
|
|
$
|
201.7
|
|
Losses and loss adjustment expenses.
The net loss ratio for the three months ended September 30, 2007 was 34.2% compared to 45.5% in 2006. Although the loss ratio in 2007 was impacted by $3.3 million for the July U.K. floods this has been more than offset by the lack of major catastrophic events during the quarter, in addition to lower charges in the quarter for ceded earned premiums. Ceded earned premiums have decreased from $47.6 million for the three months ended September 30, 2006 to $24.9 million for the three months ended September 30, 2007 which had a positive impact on net earned premiums. Excluding the impact of reinsurance ceded on earned premium, the gross loss ratio has decreased from 44.9% in 2006 to 26.4% in 2007 due primarily to a $14.1 million reduction in reserve strengthening between 2006 and 2007 and a reduction in loss ratios for pro rata business. The reduction has been partially offset by the impact of the U.K. floods.
Policy acquisition, operating and administrative expenses.
Total expenses were $43.7 million for the three months ended September 30, 2007 equivalent to 34.9% of net premiums earned (2006 — 32.3%). Policy acquisition expenses have decreased from $32.3 million in 2006 to $25.4 million for the third quarter in 2007, mainly as a result of the reduction in written premium for the period. The increase in the operating and administrative expenses to $18.3 million from $9.3 million for the comparative period in 2006 is attributable to increases in personnel costs associated with increased bonus accruals and long term incentive charges, costs associated with the establishment of our Zurich branch, increased I.T. infrastructure costs associated with enhancements to our underwriting system and the weakening of the U.S. Dollar against the British Pound.
35
Table of Contents
Casualty Reinsurance
Our casualty reinsurance segment is written mainly on a treaty basis with a small proportion of facultative risks. The casualty treaty reinsurance is primarily written on an excess of loss basis and includes coverage for claims arising from automobile accidents, employers’ liability, professional indemnity and other third party liabilities. It is written in respect of cedants located mainly in the United States, the United Kingdom, Europe and Australia. We also write some structured reinsurance contracts out of Aspen Bermuda.
Gross written premiums.
The 19.8% decrease in gross written premiums for the segment was due mainly to the timing of inceptions for our structured business, the impact of rate reductions and a strategic shift in our casualty facultative business which resulted in the closure of our Marlton, New Jersey office and relocation to our offices in Rocky Hill, Connecticut, impacting such business in the short-term. The table below shows our gross written premiums for each line of business for the three months ended September 30, 2007 and 2006, and the percentage change in gross written premiums for each such line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
Lines of Business
|
|
|
For the three months
ended
September 30, 2007
|
|
|
For the three months
ended
September 30, 2006
|
|
|
|
($ in millions)
|
|
|
%
increase/(decrease)
|
|
|
($ in millions)
|
U.S. treaty
|
|
|
|
$
|
53.5
|
|
|
|
|
|
(4.1
|
)%
|
|
|
|
$
|
55.8
|
|
Non-U.S. treaty
|
|
|
|
|
20.5
|
|
|
|
|
|
(31.4
|
)
|
|
|
|
|
29.9
|
|
Casualty facultative
|
|
|
|
|
3.5
|
|
|
|
|
|
(67.9
|
)
|
|
|
|
|
10.9
|
|
Total
|
|
|
|
$
|
77.5
|
|
|
|
|
|
(19.8
|
)%
|
|
|
|
$
|
96.6
|
|
Losses and loss adjustment expenses.
Losses and loss adjustment expenses increased by $10.2 million in the quarter compared to the equivalent period in 2006. The increase was primarily due to a smaller reserve release of $1.6 million in the quarter, whereas the comparative period benefited from a reserve release of $7.2 million and some unfavorable loss experience in the period. Prior year reserve releases are further discussed below under ‘‘Reserves for Losses and Loss Expenses.’’
Policy acquisition, operating and administrative expenses.
Total expenses were $33.6 million for the three months ended September 30, 2007 equivalent to 27.2% of net premiums earned (2006 — 21.5%). Policy acquisition expenses of $19.8 million have remained broadly consistent with those for the comparative period in 2006. Operating and administrative expenses have increased to $13.8 million from $8.1 million for the three months ended September 30, 2006. The increase in operating and administrative expenses is mainly due to the increase in personnel costs associated with increased bonus accruals and long term incentive charges, increased I.T. infrastructure costs associated with enhancements to our underwriting system and the weakening of the U.S. Dollar against the British Pound.
International Insurance
Our international insurance segment mainly comprises marine hull, liability, energy, non-marine transport, aviation, professional liability, U.K. commercial property and U.K. commercial liability insurance. The commercial liability line of business consists of U.K. employers’ and public liability insurance. Our specialty reinsurance lines of business include aviation, marine and other specialty reinsurance.
Gross written premiums.
Energy premiums have increased as a result of an underlying increase in insured values and the increased contribution from construction business. The increase in premium for the marine hull account has resulted from increased participation on a large contract that renewed during the quarter. Aviation has been better than expected due to an increase in the deductible and war accounts which offset other accounts facing rate pressures. The increase in premium for the specialty reinsurance business line is due to the timing of premium recognition for proportional treaty policies which are biased more towards the end of the year. Marine and specialty liability insurance premiums have decreased as a result of prior year premium adjustments. Similarly, increased competition and softening rates in U.K. commercial liability have resulted in premiums reductions and the loss of some contracts.
36
Table of Contents
The table below shows our gross written premiums for each line of business for the three months ended September 30, 2007 and 2006, and the percentage change in gross written premiums for each line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
Lines of Business
|
|
|
For the three months
ended
September 30, 2007
|
|
|
For the three months
ended
September 30, 2006
|
|
|
|
($ in millions)
|
|
|
% increase/(decrease)
|
|
|
($ in millions)
|
Marine and specialty liability insurance
|
|
|
|
$
|
13.8
|
|
|
|
|
|
(39.2
|
)%
|
|
|
|
$
|
22.7
|
|
Energy property insurance
|
|
|
|
|
21.3
|
|
|
|
|
|
22.4
|
|
|
|
|
|
17.4
|
|
Marine hull
|
|
|
|
|
11.2
|
|
|
|
|
|
47.4
|
|
|
|
|
|
7.6
|
|
Aviation insurance
|
|
|
|
|
23.7
|
|
|
|
|
|
11.3
|
|
|
|
|
|
21.3
|
|
Specialty reinsurance
|
|
|
|
|
16.1
|
|
|
|
|
|
85.1
|
|
|
|
|
|
8.7
|
|
U.K. commercial property
|
|
|
|
|
16.0
|
|
|
|
|
|
42.9
|
|
|
|
|
|
11.2
|
|
U.K. commercial liability
|
|
|
|
|
26.9
|
|
|
|
|
|
(22.3
|
)
|
|
|
|
|
34.6
|
|
Total
|
|
|
|
$
|
129.0
|
|
|
|
|
|
4.5
|
%
|
|
|
|
$
|
123.5
|
|
Losses and loss adjustment expenses.
Losses and loss adjustment expenses represented 51.3% of net premiums earned for the three months ended September 30, 2007 compared to 43.9% in 2006. The current period has been adversely affected by an aviation loss of $10.1 million, including reinstatement premiums, of which $6.6 million was attributable to aviation insurance and $3.5 million to specialty reinsurance as well as a provision of $4.0 million for the July U.K. flood losses, but has benefited from favorable prior period reserve releases of $24.1 million. The comparative period benefited from a reserve release of $19.9 million, $7.4 million of which was attributable to specialty reinsurance. Prior year reserve releases are further discussed under ‘‘Reserves for Losses and Loss Expenses.’’
Policy acquisition, operating and administrative expenses.
The acquisition expense ratio for this segment increased by 3.1 percentage points overall after additional profit commission accruals totaling $2.5 million were incurred during the quarter as a result of reduced loss ratios, particularly in the energy account. The increase in operating and administrative expenses to $17.2 million in the third quarter of 2007 from $14.4 million for the comparative period in 2006 is attributed to increases in personnel costs associated with increased bonus accruals and long term incentive charges and this segment’s greater share of expenses due to lower earned premiums in other segments.
U.S. Insurance
We write both U.S. property and casualty insurance on an excess and surplus lines basis.
Gross written premiums.
Gross written premiums decreased by 23.0% compared to 2006 due primarily to the repositioning of our U.S. commercial property account and the non-renewal of a number of poorly performing contracts. The U.S. casualty account is experiencing some rate pressure but we have been able to maintain premium levels while obtaining price adequacy.
The table below shows our gross written premiums for each line of business for the three months ended September 30, 2007 and 2006, and the percentage change in gross written premiums for each such line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
Lines of Business
|
|
|
For the three months
ended
September 30, 2007
|
|
|
For the three months
ended September 30,
2006
|
|
|
|
($ in millions)
|
|
|
% increase/(decrease)
|
|
|
($ in millions)
|
U.S. property
|
|
|
|
$
|
7.9
|
|
|
|
|
|
(55.6
|
)%
|
|
|
|
$
|
17.8
|
|
U.S. casualty
|
|
|
|
|
19.6
|
|
|
|
|
|
9.5
|
|
|
|
|
|
17.9
|
|
Total
|
|
|
|
$
|
27.5
|
|
|
|
|
|
(23.0
|
)%
|
|
|
|
$
|
35.7
|
|
Losses and loss adjustment expenses.
Losses for the period have decreased by $18.1 million when compared to the prior period primarily due to significantly better loss experience for the commercial
37
Table of Contents
property account which suffered a number of fire related losses in 2006, and a $3.4 million increase in the prior year reserve release in 2007 compared to 2006.
Policy acquisition, operating and administrative expenses.
Policy acquisition expenses have decreased to $4.5 million from $5.5 million for the equivalent period in 2006 due to a change in business mix. Operating and administrative expense have increased from $5.0 million in 2006 to $9.3 million in 2007 due primarily to $3.8 million of reorganization costs associated with our U.S. operations.
Total Income Statement — Third quarter
Our total income statement consolidates the underwriting results of our four segments and includes certain other revenue and expense items that are not allocated to the business segments.
Gross written premiums.
We wrote less business in the third quarter than in the corresponding period of 2006 as a result of a number of factors including the prevailing less favorable pricing environment in some lines of business, such as property catastrophe reinsurance, property treaty risk excess reinsurance and U.K. commercial liability insurance classes, as well as the re-positioning of our U.S. surplus lines property insurance business and our casualty reinsurance facultative account. This was partially offset by increases in premiums from the property pro rata reinsurance and energy insurance lines of business.
Reinsurance ceded.
Our reinsurance spend of $24.7 million is broadly consistent with the third quarter of 2006, although the underlying protections have changed as a result of opportunities taken during the period to purchase property covers at favorable prices for two wind seasons. In 2006 significantly more reinsurance was purchased, however, as a result of the timing of the purchase, a similar impact on earnings was produced in the third quarter of 2007.
Gross premiums earned.
Gross premiums earned reflect the portion of gross premiums written which are recorded as revenues over the policy periods of the risks we write. Therefore, the earned premium recorded in any year includes premium from policies incepting in prior years and excludes premium to be earned subsequent to the balance sheet date. Gross premiums earned in the third quarter of 2007 decreased by 7.9% compared to the third quarter of 2006 primarily as a result of the reduction in business written in the property and casualty reinsurance segments.
Net premiums earned.
Net premiums earned have decreased by 2.2% in 2007 compared to 2006. Although gross earned premiums have decreased by 7.9% for the same period, ceded earned premiums have decreased by 36.5% as a result of our reduced reliance on retrocession.
Losses and loss adjustment expenses.
In the third quarter of 2007 we suffered a $10.1 million aviation loss in Brazil ($6.6 million — aviation insurance; $3.5 million — specialty reinsurance). In comparison, in the third quarter of 2006, we suffered a U.K. commercial property account fire loss of $11.4 million, net of reinsurance, and a factory fire loss of $8.8 million on our property reinsurance account. Further information relating to movements in prior year reserves can be found below under ‘‘Reserves for Loss and Loss Adjustment Expenses.’’
Losses and loss adjustment expenses represented 52.4% of our net earned premiums for the three months ended September 30, 2007. The 1.6 percentage point reduction in the loss ratio over the comparative period in 2006 is due largely to a combination of limited catastrophic losses in the current period and an increase in prior year reserve releases from $12.4 million in the third quarter of 2006 to $28.5 million in the third quarter 2007. Further information relating to movements in prior year reserves can be found below under ‘‘Reserves for Loss and Loss Adjustment Expenses.’’
38
Table of Contents
The underlying changes in accident year loss ratios by segment are shown in the following table:
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2007
|
|
|
Total Loss
Ratio
|
|
|
Prior Year
Adjustment
|
|
|
Accident Year Loss
Ratio Excluding
Prior Year
Adjustments
|
Property reinsurance
|
|
|
34.2%
|
|
|
(0.5)%
|
|
|
33.7%
|
Casualty reinsurance
|
|
|
74.5%
|
|
|
1.3%
|
|
|
75.8%
|
International insurance
|
|
|
51.3%
|
|
|
16.4%
|
|
|
67.7%
|
U.S. insurance
|
|
|
39.6%
|
|
|
14.6%
|
|
|
54.2%
|
Total
|
|
|
52.4%
|
|
|
6.8%
|
|
|
59.2%
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2006
|
|
|
Total Loss
Ratio
|
|
|
Prior Year
Adjustment
|
|
|
Accident Year Loss
Ratio Excluding
Prior Year
Adjustments
|
Property reinsurance
|
|
|
45.5%
|
|
|
(11.5)%
|
|
|
34.0%
|
Casualty reinsurance
|
|
|
63.9%
|
|
|
5.6%
|
|
|
69.5%
|
International insurance
|
|
|
43.9%
|
|
|
13.7%
|
|
|
57.6%
|
U.S. insurance
|
|
|
101.8%
|
|
|
0.4%
|
|
|
102.2%
|
Total
|
|
|
54.0%
|
|
|
2.9%
|
|
|
56.9%
|
Expenses.
We monitor the ratio of expenses to gross earned premium (the ‘‘gross expense ratio’’) as a measure of the cost effectiveness of our business acquisition, operating and administrative processes. The table below presents the contribution of the policy acquisition expenses and operating and administrative expenses to the expense ratio and the total expense ratios for the three months ended September 30, 2007 and 2006. We also show the effect of reinsurance which impacts on the reported net expense ratio by expressing the expenses as a proportion of net earned premiums.
|
|
|
|
|
|
|
|
|
|
Expense Ratios
|
|
|
|
For the three months
ended
September 30, 2007
|
|
|
For the three months
ended
September 30, 2006
|
Policy acquisition expenses
|
|
|
16.1%
|
|
|
15.4%
|
Operating and administrative expenses
|
|
|
12.4%
|
|
|
7.1%
|
Gross expense ratio
|
|
|
28.5%
|
|
|
22.5%
|
Effect of reinsurance
|
|
|
3.6%
|
|
|
4.4%
|
Total net expense ratio
|
|
|
32.1%
|
|
|
26.9%
|
Changes in the acquisition and operating and administrative ratios to gross earned premiums and the impact of reinsurance on net earned premiums by segment for each of the three months ended September 30, 2007 and 2006 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2007
|
|
|
For the three months ended September 30, 2006
|
Ratios based on
Gross Earned Premium
|
|
|
Property
Reinsurance
|
|
|
Casualty
Reinsurance
|
|
|
International
Insurance
|
|
|
U.S.
Insurance
|
|
|
Total
|
|
|
Property
Reinsurance
|
|
|
Casualty
Reinsurance
|
|
|
International
Insurance
|
|
|
U.S.
Insurance
|
|
|
Total
|
Policy acquisition expense ratio
|
|
|
|
|
16.9
|
|
|
|
|
|
15.8
|
|
|
|
|
|
16.1
|
|
|
|
|
|
13.6
|
|
|
|
|
|
16.1
|
|
|
|
|
|
18.3
|
|
|
|
|
|
14.8
|
|
|
|
|
|
13.0
|
|
|
|
|
|
13.9
|
|
|
|
|
|
15.4
|
|
Operating and administrative
expense ratio
|
|
|
|
|
12.2
|
|
|
|
|
|
11.0
|
|
|
|
|
|
10.5
|
|
|
|
|
|
28.0
|
|
|
|
|
|
12.4
|
|
|
|
|
|
5.3
|
|
|
|
|
|
6.1
|
|
|
|
|
|
8.7
|
|
|
|
|
|
12.6
|
|
|
|
|
|
7.2
|
|
Gross expense ratio
|
|
|
|
|
29.1
|
|
|
|
|
|
26.8
|
|
|
|
|
|
26.6
|
|
|
|
|
|
41.6
|
|
|
|
|
|
28.5
|
|
|
|
|
|
23.6
|
|
|
|
|
|
20.9
|
|
|
|
|
|
21.7
|
|
|
|
|
|
26.5
|
|
|
|
|
|
22.6
|
|
Effect of reinsurance
|
|
|
|
|
5.8
|
|
|
|
|
|
0.4
|
|
|
|
|
|
3.1
|
|
|
|
|
|
16.1
|
|
|
|
|
|
3.6
|
|
|
|
|
|
8.7
|
|
|
|
|
|
0.6
|
|
|
|
|
|
3.1
|
|
|
|
|
|
12.3
|
|
|
|
|
|
4.4
|
|
Total net expense ratio
|
|
|
|
|
34.9
|
|
|
|
|
|
27.2
|
|
|
|
|
|
29.7
|
|
|
|
|
|
57.7
|
|
|
|
|
|
32.1
|
|
|
|
|
|
32.3
|
|
|
|
|
|
21.5
|
|
|
|
|
|
24.8
|
|
|
|
|
|
38.8
|
|
|
|
|
|
27.0
|
|
The policy acquisition ratio, gross of the effect of reinsurance, has increased to 16.1% for the three months ended September 30, 2007 from 15.4% for the comparative period in 2006. The increase is driven mainly by the increase in profit commissions for the casualty reinsurance and international insurance
39
Table of Contents
segments. The reduction in the acquisition ratio for property reinsurance is mainly due to a $22.7 million reduction in the earned reinsurance cost for the quarter compared to the same quarter in 2006. The movement was also impacted by changes in the mix of business from property reinsurance towards international insurance which attracts lower average commission rates.
Between the two periods we have experienced a $21.8 million increase in our operating and administrative expenses due to a $6.0 million rise in personnel costs resulting from increased bonus and long term incentive charges, $3.8 million of reorganization costs in relation to our U.S. operations, $2.1 million increase in I.T. infrastructure costs associated with the upgrade of our underwriting systems, and $2.0 million increase in foreign exchange expense resulting from the weakening of the U.S. Dollar against the British Pound. The third quarter of 2006 also benefited from a $2.4 million of accrual releases.
Net investment income.
Net investment income consists primarily of interest on fixed income securities and is stated after deduction of expenses relating to the management of our investments. In the third quarter of 2007, we generated net investment income of $72.4 million (2006 — $47.3 million). The $25.1 million increase in investment income was due to gains from our investment in funds of hedge funds of $7.9 million, higher book yields on our fixed income portfolio and a $956.0 million increase in cash and invested assets between September 30, 2006 and September 30, 2007 as a result of positive operating cash flow. During the quarter the book yield on our fixed income portfolio increased 14 basis points from 4.94% to 5.08% and the portfolio duration decreased marginally from 3.59 years to 3.46 years.
Change in fair value of derivatives.
In the three months ended September 30, 2007, we recorded an increase of $0.8 million (2006 — $7.0 million) in the estimated fair value of our catastrophe swap and a reduction of $1.9 million (2006 — $Nil) in the estimated fair value of our credit insurance contract. Further information on these contracts can be found in Note 7 to the financial statements.
Income before tax.
In the third quarter of 2007, income before tax was $137.9 million and is comprised of $65.1 million of underwriting profit, $72.4 million in net investment income, $7.3 million of net exchange and investment gains/(losses), $4.2 million of interest payable and $2.7 million of other expenses. In the third quarter of 2006, income before tax was $118.7million and comprised $81.6 million of underwriting profit, $47.3 million in net investment income, $1.5 million of net exchange and investment gains/(losses), $4.6 million of interest payable and $7.1 million of other expenses. Our lower underwriting profit in the quarter compared to the prior period was mainly due to lower gross written premium in the quarter partially offset by lower losses. As discussed above, the significant increase in investment income was the biggest contribution to our net income for the quarter.
Income tax expense.
Income tax expense for the three months ended September 30, 2007 was $20.7 million. Our consolidated tax rate for the three months ended September 30, 2007 was 15.0% (2006 — 20.0%). As required by FAS 109 and APB 28, the charge represents an estimate of the tax rate which will apply to our pre-tax income for 2007. As discussed in the ‘‘Overview’’ above, the effective tax rate may be subject to revision.
Net income after tax.
Net income after tax for the three months ended September 30, 2007 was $117.2 million, equivalent to $1.24 earnings per basic ordinary share adjusted for the $6.9 million preference share dividends and $1.21 fully diluted earnings per ordinary share adjusted for the preference share dividends on the basis of the weighted average number of ordinary shares in issue during the three months ended September 30, 2007. The net income for the three months ended September 30, 2006 was $95.0 million equivalent to earnings per ordinary share of $0.96 and fully diluted earnings per share of $0.94.
Results of Operations for the Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006
The following is a discussion and analysis of our consolidated results of operations for the nine months ended September 30, 2007 and 2006 starting with a discussion of segmental results and then summarizing our consolidated results for such period under ‘‘Total Income Statement — Nine Months Ended September 30, 2007’’ below.
40
Table of Contents
Underwriting Results by Operating Segments
Please refer to the tables in Note 4 in our unaudited financial statements of this report for a summary of gross and net written and earned premiums, underwriting results and combined ratios and reserves for each of our four business segments for the nine months ended September 30, 2007 and 2006.
The contributions of each segment to gross written premiums in the nine months ended September 30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
Business Segment
|
|
|
For the nine months
ended
September 30, 2007
|
|
|
For the nine months
ended
September 30, 2006
|
|
|
|
(% of total gross written premiums)
|
Property reinsurance
|
|
|
34.5%
|
|
|
34.1%
|
Casualty reinsurance
|
|
|
25.1%
|
|
|
26.3%
|
International insurance
|
|
|
33.9%
|
|
|
32.4%
|
U.S. insurance
|
|
|
6.5%
|
|
|
7.2%
|
Total
|
|
|
100.0%
|
|
|
100.0%
|
|
|
|
($ in millions)
|
Property reinsurance
|
|
|
$521.9
|
|
|
$565.1
|
Casualty reinsurance
|
|
|
380.2
|
|
|
435.8
|
International insurance
|
|
|
513.2
|
|
|
538.6
|
U.S. insurance
|
|
|
98.2
|
|
|
119.1
|
Total
|
|
|
$1,513.5
|
|
|
$1,658.6
|
Property Reinsurance
Our property reinsurance segment is mainly written on a treaty basis and includes catastrophe, risk excess and proportional treaty risks. We also write international property facultative risks and in the third quarter of 2006, we opened a branch office of Aspen Re in Paris which writes property facultative business in continental Europe. We have recently established a branch of Aspen Re in Zurich which will focus on property and casualty reinsurance in Europe. We also write some structured reinsurance contracts out of Aspen Bermuda.
Gross written premiums.
Gross written premiums for our property reinsurance segment decreased by 7.6% compared to the nine months ended September 30, 2006. This decrease was principally due to softening rates in particular in our risk excess line of business, and unfavorable pricing and market conditions and the non-renewal of several large contracts which did not meet our pricing conditions.
The tables below show our gross written premiums for each line of business for the nine months ended September 30, 2007 and 2006, and the percentage change in gross written premiums for each such line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
Lines of Business
|
|
|
For the nine months
ended
September 30, 2007
|
|
|
For the nine
months ended
September 30,
2006
|
|
|
|
($ in millions)
|
|
|
% increase/(decrease)
|
|
|
($ in millions)
|
Treaty catastrophe
|
|
|
|
$
|
263.9
|
|
|
|
|
|
(9.4
|
)%
|
|
|
|
$
|
291.4
|
|
Treaty risk excess
|
|
|
|
|
125.3
|
|
|
|
|
|
(20.0
|
)
|
|
|
|
|
156.6
|
|
Treaty pro rata
|
|
|
|
|
105.2
|
|
|
|
|
|
13.0
|
|
|
|
|
|
93.1
|
|
Property facultative
|
|
|
|
|
27.5
|
|
|
|
|
|
14.6
|
|
|
|
|
|
24.0
|
|
Total
|
|
|
|
$
|
521.9
|
|
|
|
|
|
(7.6
|
)%
|
|
|
|
$
|
565.1
|
|
41
Table of Contents
Losses and loss adjustment expenses.
The net loss ratio for the nine months ended September 30, 2007 was 40.4% compared to 41.6% in 2006. The net loss ratio in 2007 benefited from significantly lower charges in the period for ceded reinsurance premiums earned which decreased by 70.7% over the comparative period. Excluding the impact of reinsurance, the gross loss ratio has increased from 30.7% in 2006 to 36.9% in 2007. The increase in 2007 was primarily due to the impact from $23.8 million of losses associated with winter storm Kyrill and $17.0 million of losses from the June U.K. floods compared to no large losses in 2006. Prior period reserves were strengthened by $9.6 million in 2007 compared to $33.5 million of reserve strengthening in 2006. The reserve strengthening in 2006 was attributable to adverse development of the 2005 Hurricanes.
Policy acquisition, operating and administrative expenses.
Total expenses were $133.5 million for the nine months ended September 30, 2007 equivalent to 31.5% of net premiums earned (2006 — 37.4%). The decrease in the expense ratio is attributable to the reduction in earned reinsurance premiums referred to above which increases net earned premium, the denominator of the expense ratio calculation. The decrease of $20.4 million in policy acquisition expenses over the comparative period reflects the reduction in gross earned premium and generally lower commission rates for risk and pro rata business.
Casualty Reinsurance
Our casualty reinsurance segment is written mainly on a treaty basis with a small proportion of facultative risks. The casualty treaty reinsurance is primarily written on an excess of loss basis and includes coverage for claims arising from automobile accidents, employers’ liability, professional indemnity and other third party liabilities. It is written in respect of cedants located mainly in the United States, the United Kingdom, Europe and Australia. We also write some structured reinsurance contracts out of Aspen Bermuda.
Gross written premiums.
The 12.8% reduction in gross written premiums for the segment was due to a general reduction in premium rates, the reorganization of our casualty facultative business and downward revisions on estimated premiums on prior year premium estimates for a number of U.S. and international casualty treaties based on updated information received from cedants. The closure of our Marlton, New Jersey office and relocation to our Rocky Hill, Connecticut office has impacted our casualty facultative premiums in the short-term. The table below shows our gross written premiums for each line of business for the nine months ended September 30, 2007 and 2006, and the percentage change in gross written premiums for each such line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
Lines of Business
|
|
|
For the nine months
ended September 30, 2007
|
|
|
For the nine
months ended
September 30,
2006
|
|
|
|
($ in millions)
|
|
|
% increase/(decrease)
|
|
|
($ in millions)
|
U.S. treaty
|
|
|
|
$
|
220.8
|
|
|
|
|
|
(12.9
|
)%
|
|
|
|
$
|
253.4
|
|
Non-U.S. treaty
|
|
|
|
|
154.0
|
|
|
|
|
|
(2.0
|
)
|
|
|
|
|
157.2
|
|
Casualty facultative
|
|
|
|
|
5.4
|
|
|
|
|
|
(78.6
|
)
|
|
|
|
|
25.2
|
|
Total
|
|
|
|
$
|
380.2
|
|
|
|
|
|
(12.8
|
)%
|
|
|
|
$
|
435.8
|
|
Losses and loss adjustment expenses.
Losses and loss adjustment expenses increased by $34.3 million compared to the equivalent period in 2006. The increase is primarily due to a reserve release in the period of $19.0 million compared to a reserve release of $54.2 million for the comparative period. Prior year reserve movements are further discussed below under ‘‘Reserves for Losses and Loss Expenses.’’
Policy acquisition, operating and administrative expenses.
Total expenses were $90.2 million for the nine months ended September 30, 2007 equivalent to 25.3% of net premiums earned (2006 — 25.0%). Policy acquisition expenses have reduced mainly as a result of the change in business mix. The increase in operating and administrative expenses is attributed mainly to the increase in personnel costs associated with increased bonus accruals and long term incentive charges, increased I.T. infrastructure costs associated with enhancements to our underwriting system, costs associated with the closure of our Marlton, New Jersey office and the weakening of the U.S. Dollar against the British Pound.
42
Table of Contents
International insurance
Our international insurance segment mainly comprises marine hull, liability and energy, non-marine transport, aviation, professional liability, U.K. commercial property, U.K. commercial liability insurance and specialty reinsurance. The commercial liability line of business consists of U.K. employers’ and public liability insurance. Our specialty reinsurance lines of business include aviation, marine and other specialty reinsurance.
Gross written premiums.
The increase in energy property insurance written premium in the period is mainly due to contracts renewing earlier in 2007 than in 2006, insured value increasing and increased contribution from construction business initially written in 2006. In addition property valuations have increased for energy risks and this has increased premiums. Specialty reinsurance renewals were better than the prior year with rates and lines holding up well. In the aviation line, there were differences in the timing of premium recognition between 2007 and 2006 as well as an underlying downward trend in rates. U.K. commercial liability has suffered from rate reductions which resulted in the non-renewal of several larger contracts.
The table below shows our gross written premiums for each line of business for the nine months ended September 30, 2007 and 2006, and the percentage change in gross written premiums for each line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
Lines of Business
|
|
|
For the nine months
ended September 30, 2007
|
|
|
For the nine
months ended
September 30,
2006
|
|
|
|
($ in millions)
|
|
|
% increase/(decrease)
|
|
|
($ in millions)
|
Marine and specialty liability insurance
|
|
|
|
$
|
108.5
|
|
|
|
|
|
1.7
|
%
|
|
|
|
$
|
106.6
|
|
Energy property insurance
|
|
|
|
|
94.5
|
|
|
|
|
|
13.8
|
|
|
|
|
|
83.0
|
|
Marine hull
|
|
|
|
|
45.9
|
|
|
|
|
|
0.2
|
|
|
|
|
|
45.8
|
|
Aviation insurance
|
|
|
|
|
61.2
|
|
|
|
|
|
(24.2
|
)
|
|
|
|
|
80.7
|
|
Specialty reinsurance
|
|
|
|
|
87.4
|
|
|
|
|
|
4.3
|
|
|
|
|
|
83.8
|
|
U.K. commercial property
|
|
|
|
|
42.3
|
|
|
|
|
|
(1.4
|
)
|
|
|
|
|
42.9
|
|
U.K. commercial liability
|
|
|
|
|
73.4
|
|
|
|
|
|
(23.4
|
)
|
|
|
|
|
95.8
|
|
Total
|
|
|
|
$
|
513.2
|
|
|
|
|
|
(4.7
|
)%
|
|
|
|
|
538.6
|
|
Losses and loss adjustment expenses.
Losses and loss adjustment expenses represented 56.1% of net premiums earned for the nine months ended September 30, 2007. The 2.7 percentage point decrease in the loss ratio over the comparative period in 2006 was due largely to $60.0 million of prior period reserve releases compared to $36.1 million of releases for the same period in 2006. In 2007, the most significant losses included a $14.0 million loss following a shipping collision, and a $10.1 million loss, net of reinsurance and including reinstatement premiums, from an air crash in Brazil. The most significant loss in 2006 was $11.7 million factory fire.
Policy acquisition, operating and administrative expenses.
The acquisition expense ratio for this segment increased by 1.0 percentage point compared to the prior period due largely to the mix of business and profit commission accruals related to the lower loss ratios, particularly in the energy class of business.
U.S. Insurance
We write both U.S. property and casualty insurance on an excess and surplus lines basis.
Gross written premiums.
Gross written premiums decreased by 17.5% compared to 2006 due to the non-renewal of a number of poorly performing property contracts, the repositioning of our property book and the impact of downward rating pressures.
43
Table of Contents
The table below shows our gross written premiums for each line of business for the nine months ended September 30, 2007 and 2006, and the percentage change in gross written premiums for each such line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
Lines of Business
|
|
|
For the nine months
ended September 30, 2007
|
|
|
For the nine
months ended
September 30,
2006
|
|
|
|
($ in millions)
|
|
|
% increase/(decrease)
|
|
|
($ in millions)
|
U.S. property
|
|
|
|
|
34.3
|
|
|
|
|
|
(38.6
|
)%
|
|
|
|
|
55.9
|
|
U.S. casualty
|
|
|
|
|
63.9
|
|
|
|
|
|
1.1
|
|
|
|
|
|
63.2
|
|
Total
|
|
|
|
$
|
98.2
|
|
|
|
|
|
(17.5
|
)%
|
|
|
|
$
|
119.1
|
|
Losses and loss adjustment expenses.
Losses for the period decreased by 19.1% when compared to the comparative period. The reduction was primarily due to the 2006 period suffering from a significant number of fire related losses compared to more favorable experience in 2007. Prior year reserve releases have also increased from $1.3 million in 2006 to $3.5 million in 2007, which improved the loss ratio in this segment.
Policy acquisition, operating and administrative expenses.
Acquisition costs have remained consistent with those for the same period in 2006. Operating and administrative expenses have however increased by $7.2 million over the same period in 2006 due to the additional costs associated with the reorganization of the business.
Total Income Statement — Nine Months Ended September 30, 2007
Our total income statement consolidates the underwriting results of our four segments and includes certain other revenue and expense items that are not allocated to the business segments.
Gross written premiums.
The overall change in gross written premiums between the nine months ended September 30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
Business Segment
|
|
|
For the nine months
ended September 30, 2007
|
|
|
For the nine
months ended
September 30,
2006
|
|
|
|
($ in millions)
|
|
|
% increase/(decrease)
|
|
|
($ in millions)
|
Property reinsurance
|
|
|
|
$
|
521.9
|
|
|
|
|
|
(7.6
|
)%
|
|
|
|
$
|
565.1
|
|
Casualty reinsurance
|
|
|
|
|
380.2
|
|
|
|
|
|
(12.8
|
)
|
|
|
|
|
435.8
|
|
International insurance
|
|
|
|
|
513.2
|
|
|
|
|
|
(4.8
|
)
|
|
|
|
|
538.6
|
|
U.S. insurance
|
|
|
|
|
98.2
|
|
|
|
|
|
(17.5
|
)
|
|
|
|
|
119.1
|
|
Total
|
|
|
|
$
|
1,513.5
|
|
|
|
|
|
(8.7
|
)%
|
|
|
|
$
|
1,658.6
|
|
We wrote less business in the period than in the corresponding period of 2006 as a result of a number of factors including the prevailing less favorable pricing environment in some lines of business, such as property catastrophe reinsurance, property treaty risk excess reinsurance, aviation and U.K. commercial liability insurance classes, and the re-positioning of our U.S. casualty facultative and U.S. surplus lines property insurance business. This was partially offset by increases in premiums from the property pro rata reinsurance and energy insurance lines of business.
Reinsurance ceded.
Reinsurance spend decreased by 30.0% in 2007 principally as a result of our strategy of reducing reliance on property retrocessional reinsurance in favor of managing our catastrophe risk tolerances by cutting gross exposures instead of exporting risk to reinsurers. This reduced reinsurance spend across the segments from $273.1 million in 2006 to $191.1 million in 2007.
Gross premiums earned.
Gross premiums earned for the nine months ended September 30, 2007 decreased by 5.7% compared to the same period in 2006 due to a reduction in the contribution to earnings
44
Table of Contents
from the prior underwriting year and the reduction in business written in property and casualty reinsurance and U.S. insurance segments mainly due to rate pressures.
Net premiums earned.
Net premiums earned increased by 3.9% in 2007 compared to 2006 due to the reduction in reinsurance ceded in the period being more significant than the gross earned premium reduction.
Insurance losses and loss adjustment expenses.
In the nine months of 2007 we suffered a $27.1 million loss from Winter storm Kyrill, a $22.6 million loss associated with the June U.K. floods, a $14.0 million marine loss resulting from a shipping collision, and a $10.1 million Brazilian aviation loss, net of reinsurance and including reinstatement premiums ($6.6 million — aviation insurance; $3.5 million — specialty reinsurance). In comparison, in the nine months ended September 30, 2006 we suffered a U.K. commercial property account fire loss of $11.4 million, net of reinsurance and a property reinsurance factory fire loss of $8.8 million. Further information relating to movements in prior year reserves can be found below under ‘‘Reserves for Loss and Loss Adjustment Expenses.’’
Losses and loss adjustment expenses represented 54.8% of our net earned premiums for the nine months ended September 30, 2007 compared to 54.6% for the same period in 2006. Although we suffered larger losses in 2007, the 2007 loss ratio has benefited from reserve releases of $72.9 million compared to $58.1 million in the nine months ended September 30, 2006. Prior year reserve movements are further discussed below under ‘‘Reserves for Losses and Loss Expenses.’’
The underlying changes in accident year loss ratios by segment are shown in the following table:
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2007
|
|
|
Total Loss
Ratio
|
|
|
Prior Year
Adjustment
|
|
|
Accident Year Loss
Ratio Excluding
Prior Year
Adjustments
|
Property reinsurance
|
|
|
40.4%
|
|
|
(2.3)%
|
|
|
38.1%
|
Casualty reinsurance
|
|
|
68.7%
|
|
|
5.3%
|
|
|
74.1%
|
International insurance
|
|
|
56.1%
|
|
|
13.3%
|
|
|
69.4%
|
U.S. insurance
|
|
|
61.9%
|
|
|
4.2%
|
|
|
66.1%
|
Total
|
|
|
54.8%
|
|
|
5.6%
|
|
|
60.4%
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2006
|
|
|
Total Loss
Ratio
|
|
|
Prior Year
Adjustment
|
|
|
Accident Year Loss
Ratio Excluding
Prior Year
Adjustments
|
Property reinsurance
|
|
|
41.6%
|
|
|
(8.9)%
|
|
|
32.7%
|
Casualty reinsurance
|
|
|
57.6%
|
|
|
14.9%
|
|
|
72.5%
|
International insurance
|
|
|
58.8%
|
|
|
8.2%
|
|
|
67.0%
|
U.S. insurance
|
|
|
79.6%
|
|
|
1.7%
|
|
|
81.3%
|
Total
|
|
|
54.6%
|
|
|
4.6%
|
|
|
59.2%
|
Expenses.
We use the gross expense ratio to measure the cost effectiveness of our business acquisition, operating and administrative processes. The table below presents the contribution of the policy acquisition expenses and operating and administrative expenses to the expense ratio and the total expense ratios for the nine months ended September 30, 2007 and 2006. We also show the effect of reinsurance which impacts on the reported net expense ratio by expressing the expenses as a proportion of net earned premiums.
45
Table of Contents
|
|
|
|
|
|
|
Expense Ratios
|
|
|
For the nine months
ended
September 30, 2007
|
|
|
For the nine months
ended
September 30, 2006
|
Policy acquisition expenses
|
|
|
16.5%
|
|
|
16.9%
|
Operating and administrative expenses
|
|
|
10.4%
|
|
|
7.8%
|
Gross expense ratio
|
|
|
26.9%
|
|
|
24.7%
|
Effect of reinsurance
|
|
|
2.4%
|
|
|
5.0%
|
Total net expense ratio
|
|
|
29.3%
|
|
|
29.7%
|
Changes in the acquisition and operating and administrative ratios to gross earned premiums and the impact of reinsurance on net earned premiums by segment for each of the nine months ended September 30, 2007 and 2006 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2007
|
|
|
For the nine months ended September 30, 2006
|
Ratios based on
Gross Earned Premium
|
|
|
Property
Reinsurance
|
|
|
Casualty
Reinsurance
|
|
|
International
Insurance
|
|
|
U.S.
Insurance
|
|
|
Total
|
|
|
Property
Reinsurance
|
|
|
Casualty
Reinsurance
|
|
|
International
Insurance
|
|
|
U.S.
Insurance
|
|
|
Total
|
Policy acquisition expense ratio
|
|
|
|
|
18.1
|
|
|
|
|
|
15.5
|
|
|
|
|
|
16.1
|
|
|
|
|
|
14.4
|
|
|
|
|
|
16.5
|
|
|
|
|
|
20.3
|
|
|
|
|
|
16.7
|
|
|
|
|
|
14.4
|
|
|
|
|
|
12.8
|
|
|
|
|
|
16.9
|
|
Operating and administrative
expense ratio
|
|
|
|
|
10.7
|
|
|
|
|
|
9.3
|
|
|
|
|
|
9.1
|
|
|
|
|
|
18.6
|
|
|
|
|
|
10.4
|
|
|
|
|
|
7.2
|
|
|
|
|
|
7.6
|
|
|
|
|
|
7.9
|
|
|
|
|
|
10.8
|
|
|
|
|
|
7.8
|
|
Gross expense ratio
|
|
|
|
|
28.8
|
|
|
|
|
|
24.8
|
|
|
|
|
|
25.2
|
|
|
|
|
|
33.0
|
|
|
|
|
|
26.9
|
|
|
|
|
|
27.5
|
|
|
|
|
|
24.3
|
|
|
|
|
|
22.3
|
|
|
|
|
|
23.6
|
|
|
|
|
|
24.7
|
|
Effect of reinsurance
|
|
|
|
|
2.7
|
|
|
|
|
|
0.5
|
|
|
|
|
|
2.7
|
|
|
|
|
|
9.7
|
|
|
|
|
|
2..4
|
|
|
|
|
|
9.9
|
|
|
|
|
|
0.7
|
|
|
|
|
|
3.6
|
|
|
|
|
|
10.9
|
|
|
|
|
|
5.0
|
|
Total net expense ratio
|
|
|
|
|
31.5
|
|
|
|
|
|
25.3
|
|
|
|
|
|
27.9
|
|
|
|
|
|
42.7
|
|
|
|
|
|
29.3
|
|
|
|
|
|
37.4
|
|
|
|
|
|
25.0
|
|
|
|
|
|
25.9
|
|
|
|
|
|
34.5
|
|
|
|
|
|
29.7
|
|
The small reduction in acquisition expense ratios between periods is due to changes in the mix of business from property reinsurance towards international insurance which attracts lower average commission rates. The increase in the operating expense ratio is attributable to increases in personnel costs resulting from our performance during the period, increased operating expenses following the reorganization of our U.S. operations, increased IT spend and the weakening of the U.S. Dollar against the British Pound. The most significant impact on our decrease in expense ratio compared to the prior period was the significant reduction in reinsurance purchase.
Net investment income.
Net investment income consists primarily of interest on fixed income securities and is stated after deduction of expenses relating to the management of our investments. Total net investment income increased by 54.3% in the nine months ended September 30, 2007 compared to the equivalent period in 2006. The increases have been driven by rising interest rates, changes in our fixed income sector allocation and gains from investment in funds of hedge funds which have translated into higher book yields, in addition to increases in our total cash and investment balances. The total investment income for the period included $32.6 million gains from funds of hedge funds. We made our first investment in funds of hedge funds of $150 million on April 1, 2006, another $150 million on February 1, 2007 and a further $150 million on June 1, 2007. Our total allocation to alternative investments is currently 8.5% of our total portfolio. During the period December 31, 2006 to September 30, 2007 the book yield on our fixed income portfolio increased 56 basis points from 4.52% to 5.08% and the portfolio duration increased from 3.00 years to 3.46 years.
Change in fair value of derivatives.
In the nine months ended September 30, 2007, we recorded a reduction of $2.4 million (2006 — $8.6 million) in the estimated fair value of our catastrophe swap and a reduction of $5.7 million (2006 — $Nil) in the estimated fair value of our credit insurance contract. Further information on these contracts can be found in Note 7 to the financial statements.
Income before tax.
In the nine months ended September 30, 2007, income before tax was $416.2 million and comprised $208.0 million of underwriting profit, $218.7 million in net investment income, $10.4 million of net exchange and investment gains/(losses), $12.8 million of interest payable and $8.1 million of other expenses. Both underwriting profit and investment income are contributing meaningfully to our results. In the equivalent period of 2006, income before tax was $323.2 million and
46
Table of Contents
comprised $199.3 million of underwriting profit, $141.7 million in net investment income, $4.3 million of net exchange and investment gains/(losses), $12.5 million of interest payable and $9.6 million of other expenses.
Income tax expense.
Income tax expense for the nine months ended September 30, 2007 was $62.4 million. Our consolidated tax rate for the nine months ended September 30, 2007 was 15.0% (2006 — 20.0%). As required by FAS 109 and APB 28, this is an estimate of the tax rate which will apply to our pre-tax income for 2007 and anticipates that a greater proportion of our profits for the year will accrue from our Bermudian operations. This estimate could change materially in the event of major losses reducing the income of our Bermudian operations.
Net income after tax.
Net income after tax for the nine months ended September 30, 2007 was $353.8 million, which after deducting the $20.8 million preference share dividend, is equivalent to $3.77 earnings per basic ordinary share and $3.67 fully diluted earnings per ordinary share. Earnings per share calculations use the weighted average number of ordinary shares in issue during the period. The net income for the nine months ended September 30, 2006 was $258.6 million equivalent to earnings per ordinary share of $2.61 and diluted earnings per share of $2.55.
Reserves for Losses and Loss Expenses
As of September 30, 2007, we had total net loss and loss adjustment expense reserves of $2,647.2 million (December 31, 2006 — $2,351.7 million). This amount represented our best estimate of the ultimate liability for payment of losses and loss adjustment expenses. Of the total gross reserves for unpaid losses of $2,963.0 million at the balance sheet date of September 30, 2007, a total of $1,622.7 million or 54.8% represented IBNR claims (December 31, 2006 — $2,820.0 million and 48.7%, respectively). The following tables analyze gross and net loss and loss adjustment expense reserves by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2007
|
Business Segment
|
|
|
Gross
|
|
|
Reinsurance
Recoverable
|
|
|
Net
|
|
|
|
($ in millions)
|
Property reinsurance
|
|
|
|
$
|
569.7
|
|
|
|
|
$
|
(89.7
|
)
|
|
|
|
$
|
480.0
|
|
Casualty reinsurance
|
|
|
|
|
1,215.9
|
|
|
|
|
|
(14.0
|
)
|
|
|
|
|
1,201.9
|
|
International insurance
|
|
|
|
|
1,046.0
|
|
|
|
|
|
(136.3
|
)
|
|
|
|
|
909.7
|
|
U.S. insurance
|
|
|
|
|
131.4
|
|
|
|
|
|
(75.8
|
)
|
|
|
|
|
55.6
|
|
Total losses and loss expense reserves
|
|
|
|
$
|
2,963.0
|
|
|
|
|
$
|
(315.8
|
)
|
|
|
|
$
|
2,647.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2006
|
|
|
|
|
|
|
Business Segment
|
|
|
Gross
|
|
|
Reinsurance
Recoverable
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
Property reinsurance
|
|
|
|
$
|
713.2
|
|
|
|
|
$
|
(159.7
|
)
|
|
|
|
$
|
553.5
|
|
|
|
|
|
|
|
Casualty reinsurance
|
|
|
|
|
970.9
|
|
|
|
|
|
(9.1
|
)
|
|
|
|
|
961.8
|
|
|
|
|
|
|
|
International insurance
|
|
|
|
|
1,006.7
|
|
|
|
|
|
(215.6
|
)
|
|
|
|
|
791.1
|
|
|
|
|
|
|
|
U.S. insurance
|
|
|
|
|
129.2
|
|
|
|
|
|
(83.9
|
)
|
|
|
|
|
45.3
|
|
|
|
|
|
|
|
Total losses and loss expense reserves
|
|
|
|
$
|
2,820.0
|
|
|
|
|
$
|
(468.3
|
)
|
|
|
|
$
|
2,351.7
|
|
|
|
|
|
|
|
The reduction in reinsurance recoverable is due to the continuing settlement of losses associated with Hurricanes Katrina, Rita and Wilma.
For the three months ended September 30, 2007, there was a reduction of our estimate of the ultimate net claims to be paid in respect of prior accident years of $28.5 million. An analysis of this reduction by line of business is as follows for each of the three and nine months ended September 30, 2007 and 2006:
47
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
For the nine months ended
|
Business Segment
|
|
|
September 30,
2007
|
|
|
September 30,
2006
|
|
|
September 30,
2007
|
|
|
September 30,
2006
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
Property reinsurance
|
|
|
|
$
|
(0.7
|
)
|
|
|
|
$
|
(14.8
|
)
|
|
|
|
$
|
(9.6
|
)
|
|
|
|
$
|
(33.5
|
)
|
Casualty reinsurance
|
|
|
|
|
1.6
|
|
|
|
|
|
7.2
|
|
|
|
|
|
19.0
|
|
|
|
|
|
54.2
|
|
International insurance
|
|
|
|
|
24.1
|
|
|
|
|
|
19.9
|
|
|
|
|
|
60.0
|
|
|
|
|
|
36.1
|
|
U.S. insurance
|
|
|
|
|
3.5
|
|
|
|
|
|
0.1
|
|
|
|
|
|
3.5
|
|
|
|
|
|
1.3
|
|
Total Losses and loss expense reserves reductions
|
|
|
|
$
|
28.5
|
|
|
|
|
$
|
12.4
|
|
|
|
|
$
|
72.9
|
|
|
|
|
$
|
58.1
|
|
The key elements which gave rise to the net favorable development during the three months and nine months ended September 30, 2007 were as follows:
Property Reinsurance:
The $0.7 million reserve strengthening in this segment was a combination of a small strengthening on the catastrophe and pro rata books partially offset by releases in risk excess and other lines. The reserves for the 2004 and 2005 major hurricanes are unchanged in the quarter.
Casualty Reinsurance.
The $1.6 million reserve release in our casualty reinsurance segment is mainly attributable to reserve releases on our structured casualty business. No material releases were made this quarter from U.S. casualty and international casualty reinsurance. The total releases for the nine months ended September 30, 2007 were $19.0 million compared to $54.2 million in the equivalent period in 2006.
International Insurance.
The $24.1 million reduction in the net reserves in this segment was due to an improvement over several lines of business. The largest movement occurred in our U.K. liability insurance account of $15.4 million and results from favorable loss experience. Our aviation insurance account also had a significant release due to favorable claims settlement, amounting to $6.5 million.
U.S. Insurance.
Owing to better than expected experience on prior years, we had a release of $3.5 million mainly from our U.S. casualty line of business.
Our quarterly reserving process currently includes an independent review of a number of selected classes each quarter by a firm of consulting actuaries. Having factored in the uncertainties impacting the reserves for our book of business, our consulting actuaries concluded that our reserves as at September 30, 2007 lie within a range of reasonable best estimates.
We did not make any significant changes in assumptions used in our reserving process. However, because the period of time we have been in operation is relatively short, our loss experience is limited and reliable evidence of changes in trends of numbers of claims incurred, average settlement amounts, numbers of claims outstanding and average losses per claim will necessarily take years to develop.
For a more detailed description see ‘‘Management’s Discussion and Analysis — Critical Accounting Policies’’ and ‘‘Management’s Discussion and Analysis — Reserves for Losses and Loss Adjustment Expenses,’’ included in our 2006 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission.
Capital Management
In relation to capital management, we have $50 million remaining under our share repurchase plan approved by our Board of Directors as announced in November 2006. We expect to complete repurchase plan by the end of the year.
48
Table of Contents
The following table shows our capital structure at September 30, 2007 compared to December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at
September 30,
2007
|
|
|
As at
December 31,
2006
|
|
|
|
($ in millions)
|
Share capital, additional paid in capital and retained income and accumulated other comprehensive income attributable to ordinary shareholders
|
|
|
|
$
|
2,314.0
|
|
|
|
|
$
|
1,970.1
|
|
Preference shares (liquidation preference less issue expenses)
|
|
|
|
|
419.2
|
|
|
|
|
|
419.2
|
|
Long-term debt
|
|
|
|
|
249.5
|
|
|
|
|
|
249.4
|
|
Total capital
|
|
|
|
$
|
2,982.7
|
|
|
|
|
$
|
2,638.7
|
|
Management monitors the ratio of debt to total capital, with total capital being defined as shareholders’ equity plus outstanding debt. At September 30, 2007, this ratio was 8.4% (December 31, 2006 — 9.5%).
Our preference shares are classified in our balance sheet as equity but may receive a different treatment in some cases under the capital adequacy assessments made by certain rating agencies. Such securities are often referred to as ‘hybrids’ as they have certain attributes of both debt and equity. We also monitor the ratio of the total of debt and hybrids to total capital which was 22.4% as of September 30, 2007 (December 31, 2006 — 25.3%).
Accelerated Share Repurchase.
On September 28, 2007, we entered into a contract with Goldman Sachs for the purchase of ordinary shares to the fixed value of $50 million. Under this arrangement we acquired and cancelled the minimum number of shares of 1,644,415 shares on October 25, 2007. When the contract expires, we may receive and subsequently cancel additional shares, with the actual number being determined by the volume weighted average price of our shares over the period from October 22, 2007 (the end of the hedge period) and the date of termination. Apart from our payment of $50 million on September 28, 2007, the Company will make no further payments or transfer shares under this contract, except under certain circumstances in a friendly acquisition context. Refer to Exhibit 10.1 to this report for further details.
The share repurchase transaction brings the total cumulative repurchase amount to approximately $250 million, being part of the $300 million share repurchase program authorized by our Board of Directors as announced on November 8, 2006. The $50 million share repurchase was funded from cash on hand.
Access to capital.
Our business operations are in part dependent on our financial strength and the market’s perception thereof, as measured by shareholders’ equity, which was $2,733.2 million at September 30, 2007 (December 31, 2006 — $2,389.3 million). We believe our financial strength provides us with the flexibility and capacity to obtain funds through debt or equity financing. Our continuing ability to access the capital markets is dependent on, among other things, our operating results, market conditions and our perceived financial strength. We continuously monitor our capital and financial position, as well as investment and security market conditions, both in general and with respect to Aspen Holdings’ securities. Our ordinary shares and all our preference shares are listed on the New York Stock Exchange.
Liquidity
Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations. Management monitors the liquidity of Aspen Holdings and of each of its Insurance Subsidiaries and arranges credit facilities to enhance short-term liquidity resources on a stand-by basis.
Holding company.
We monitor the ability of Aspen Holdings to service debt, to finance dividend payments to ordinary and preference shareholders and to provide financial support to the Insurance Subsidiaries.
49
Table of Contents
As at September 30, 2007, Aspen Holdings held $62.5 million (December 31, 2006 — $46.0 million) in cash and cash equivalents which management considers sufficient to provide Aspen Holdings liquidity at such time. Holding company liquidity depends on dividends, capital distributions and interest payments from our Insurance Subsidiaries.
In the nine months ended September 30, 2007, Aspen Holdings received a $75 million dividend payment from Aspen Bermuda and a $19.5 million payment of inter-company interest from Aspen U.K. Holdings in respect of an inter-company loan. In 2006, Aspen U.K. Holdings paid Aspen Holdings a dividend of $35 million. We also received interest of $26 million from Aspen U.K. Holdings in respect of an inter-company loan.
The ability of our Insurance Subsidiaries to pay us dividends or other distributions is subject to the laws and regulations applicable to each jurisdiction, as well as the Insurance Subsidiaries’ need to maintain capital requirements adequate to maintain their insurance and reinsurance operations and their financial strength ratings issued by independent rating agencies. For a discussion of the various restrictions on our ability and our Insurance Subsidiaries’ ability to pay dividends, see ‘‘Business-Regulatory Matters’’ in Part I, Item 1 in our 2006 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission.
In addition to its dividend capacity as at September 30, 2007, Aspen Bermuda could also make capital repayments to Aspen Holdings of approximately $140 million without prior approval from the Bermuda Monetary Authority. Aspen Re has $150 million available for capital repayments to Aspen U.K. Holdings which could in turn be used to fund repayments of loans made by Aspen Holdings to Aspen U.K. Holdings.
Insurance subsidiaries.
As of September 30, 2007, the Insurance Subsidiaries held approximately $1,058.0 million (December 31, 2006 — $1,144.5 million) in cash and short-term investments that are readily realizable securities. Management monitors the value, currency and duration of cash and investments held by its Insurance Subsidiaries to ensure that they are able to meet their insurance and other liabilities as they become due and was satisfied that there was a comfortable margin of liquidity as at September 30, 2007 and for the foreseeable future.
On an ongoing basis, our Insurance Subsidiaries’ sources of funds primarily consist of premiums written, investment income and proceeds from sales and redemptions of investments.
Cash is used primarily to pay reinsurance premiums, losses and loss adjustment expenses, brokerage commissions, general and administrative expenses, taxes, interest and dividends and to purchase new investments.
The potential for individual large claims and for accumulations of claims from single events means that substantial and unpredictable payments may need to be made within relatively short periods of time.
We manage these risks by making regular forecasts of the timing and amount of expected cash outflows and ensuring that we maintain sufficient balances in cash and short-term investments to meet these estimates. Notwithstanding this policy, if our cash flow forecast is incorrect, we could be forced to liquidate investments prior to maturity, potentially at a significant loss.
50
Table of Contents
The liquidity of our Insurance Subsidiaries is also affected by the terms of our contractual obligations to policyholders and by undertakings to certain regulatory authorities to facilitate the issue of letters of credit or maintain certain balances in trust funds for the benefit of policyholders. The following table shows the forms of collateral or other security provided to policyholders as at September 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at
September 30,
2007
|
|
|
As at
December 31,
2006
|
|
|
|
($ in millions)
|
Assets held in multi-beneficiary trusts
|
|
|
|
$
|
1,470.0
|
|
|
|
|
$
|
1,280.1
|
|
Assets held in single beneficiary trusts
|
|
|
|
|
52.6
|
|
|
|
|
|
51.4
|
|
Letters of credit issued under our revolving credit facilities (1)
|
|
|
|
|
132.6
|
|
|
|
|
|
231.7
|
|
Secured letters of credit (2)
|
|
|
|
|
339.1
|
|
|
|
|
|
233.6
|
|
Total
|
|
|
|
$
|
1,994.3
|
|
|
|
|
$
|
1,796.8
|
|
Total as % of cash and invested assets
|
|
|
|
|
34.5
|
%
|
|
|
|
|
34.7
|
%
|
(1)
|
These letters of credit are not secured by cash or securities, though they are secured by a pledge of the shares of certain of the Company’s subsidiaries under a pledge agreement.
|
(2)
|
As of September 30, 2007, the Company had funds on deposit of $307.1 million and £48.6 million (December 31, 2006 — $171.2 million and £50.2 million) as collateral for the secured letters of credit.
|
Further information on these arrangements can be found in our 2006 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission.
Consolidated cash flows for the nine months ended September 30, 2007.
Total net cash flow from operations from December 31, 2006 through September 30, 2007 was $626.1 million, an increase of $245.7 million over the comparative period. The increase was a result of a significant reduction in net claims settlements and a lower reinsurance spend. For the nine months ended September 30, 2007, our cash flow from operations provided us with sufficient liquidity to meet our operating requirements. On March 3, 2007, May 25, 2007, and August 17, 2007, we paid a dividend of $0.15 per ordinary share to shareholders of record on February 21, 2007, May 15, 2007, and August 7, 2007, respectively. On March 31, 2007, June 30, 2007, and September 30, 2007, dividends totaling $3.2 million on our Perpetual Preferred Income Equity Replacement Securities (‘‘Perpetual PIERS’’) were paid to our dividend disbursing agent, for payment to our Perpetual PIERS holders on April 1, 2007, July 1, 2007, and October 1, 2007, respectively. On March 31, 2007, June 30, 2007, and September 30, 2007, dividends totaling $3.7 million on our Perpetual Non-Cumulative Preference Shares (‘‘Perpetual Preference Shares’’) were paid to our dividend disbursing agent, for payment to our Perpetual Preference Share holders on April 1, 2007, July 1, 2007, and October 1, 2007, respectively.
Credit Facility.
On August 2, 2005, we entered into a five-year $400 million revolving credit facility pursuant to a credit agreement dated as of August 2, 2005 (the ‘‘credit facilities’’) by and among the Company, certain of our direct and indirect subsidiaries (collectively, the ‘‘Borrowers’’) the lenders party thereto, Barclays Bank plc, as administrative agent and letter of credit issuer, Bank of America, N.A. and Calyon, New York Branch, as co-syndication agents, Credit Suisse, Cayman Islands Branch and Deutsche Bank AG, New York Branch, as co-documentation agents and The Bank of New York, as collateral agent. On September 1, 2006 the aggregate limit available under the credit facility was increased to $450 million.
The facility can be used by any of the Borrowers to provide funding for the Insurance Subsidiaries of the Company, to finance the working capital needs of the Company and our subsidiaries and for general corporate purposes of the Company and our subsidiaries. The revolving credit facility provides for a $250 million subfacility for collateralized letters of credit. The facility will expire on August 2, 2010. As of September 30, 2007, no borrowings were outstanding under the credit facilities, although we had $180.5 million and $132.6 million of outstanding collateralized and uncollateralized letters of credit, respectively. The fees and interest rates on the loans and the fees on the letters of credit payable by the Borrowers increase based on the consolidated leverage ratio of the Company.
51
Table of Contents
Under the credit facilities, we must maintain at all times a consolidated tangible net worth of not less than approximately $1.1 billion plus 50% of consolidated net income and 50% of aggregate net cash proceeds from the issuance by the Company of its capital stock, each as accrued from January 1, 2005. On June 28, 2007, we amended the credit agreement to permit dividend payments on existing and future hybrid capital notwithstanding a default or event of default under the credit agreement. On April 13, 2006, the agreement was amended to remove any downward adjustment on maintaining the Company’s consolidated tangible net worth in the event of a net loss. We must also not permit our consolidated leverage ratio of total consolidated debt to consolidated tangible net worth to exceed 35%. In addition, the credit facilities contain other customary affirmative and negative covenants as well as certain customary events of default, including with respect to a change in control. The various affirmative and negative covenants, include, among others, covenants that, subject to important exceptions, restrict the ability of the Company and its subsidiaries to: create or permit liens on assets; engage in mergers or consolidations; dispose of assets; pay dividends or other distributions, purchase or redeem the Company’s equity securities or those of its subsidiaries and make other restricted payments; permit the rating of any insurance subsidiary to fall below A.M. Best Company (‘‘A.M. Best’’) financial strength rating of B++ or S&P financial strength rating of A−; make certain investments; agree with others to limit the ability of the Company’s subsidiaries to pay dividends or other restricted payments or to make loans or transfer assets to the Company or another of its subsidiaries. The credit facilities also include covenants that restrict the ability of our subsidiaries to incur indebtedness and guarantee obligations.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations (other than our obligations to employees, our Perpetual PIERS and our Perpetual Preference Shares) under long-term debt, operating leases and reserves relating to insurance and reinsurance contracts as of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Later
Years
|
|
|
Total
|
|
|
|
($ in millions)
|
Operating Lease Obligations
|
|
|
|
$
|
2.1
|
|
|
|
|
|
8.2
|
|
|
|
|
|
8.0
|
|
|
|
|
|
7.9
|
|
|
|
|
|
7.6
|
|
|
|
|
|
46.3
|
|
|
|
|
$
|
80.1
|
|
Long-Term Debt Obligations (1)
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
250.0
|
|
|
|
|
$
|
250.0
|
|
Reserves for Losses and loss adjustment expenses (2)
|
|
|
|
$
|
400.8
|
|
|
|
|
|
1,032.8
|
|
|
|
|
|
518.6
|
|
|
|
|
|
322.9
|
|
|
|
|
|
151.3
|
|
|
|
|
|
536.6
|
|
|
|
|
$
|
2,963.0
|
|
(1)
|
The long-term debt obligations disclosed above do not include the $15 million annual interest payments on our outstanding senior notes.
|
(2)
|
In estimating the time intervals into which payments of our reserves for losses and loss adjustment expenses fall, as set out above, we have utilized actuarially assessed payment patterns. By the nature of the insurance and reinsurance contracts under which these liabilities are assumed, there can be no certainty that actual payments will fall in the periods shown and there could be a material acceleration or deceleration of claims payments depending on factors outside our control. This uncertainty is heightened by the short time in which we have operated, thereby providing limited Company-specific claims loss payment patterns. The total amount of payments in respect of our reserves, as well as the timing of such payments, may differ materially from our current estimates for the reasons set out above under ‘‘ — Critical Accounting Policies-Reserves for Losses and Loss Expenses.’’
|
Further information on operating leases is given in our 2006 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission.
For a discussion of derivative instruments we have entered into, please see Note 7 to our unaudited financial statements for the nine months ended September 30, 2007 included elsewhere in this report.
Off-Balance Sheet Arrangements
We are not party to any transaction, agreement or other contractual arrangement to which an affiliated entity unconsolidated with us is a party that management believes is reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
52
Table of Contents
Effects of Inflation
The effects of inflation could cause the severity of claims from catastrophes or other events to rise in the future. Our calculation of reserves for losses and loss adjustment expenses includes assumptions about future payments for settlement of claims and claims-handling expenses, such as medical treatments and litigation costs. We write casualty/liability business in the United States, the United Kingdom and Australia, where claims inflation has grown particularly strong in recent years. To the extent inflation causes these costs to increase above reserves established for these claims, we will be required to increase our loss reserves with a corresponding reduction in current period earnings.
Cautionary Statement Regarding Forward-Looking Statements
This Form 10-Q contains, and the Company may from time to time make other verbal or written, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the ‘‘Securities Act’’), and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, including statements regarding our capital needs, business strategy, expectations and intentions. Statements that use the terms ‘‘believe’’, ‘‘do not believe’’, ‘‘anticipate’’, ‘‘expect’’, ‘‘plan’’, ‘‘estimate’’, ‘‘project’’, ‘‘seek’’, ‘‘will’’, ‘‘may’’, ‘‘continue’’, ‘‘intend’’ and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and because our business is subject to numerous risks, uncertainties and other factors, our actual results could differ materially from those anticipated in the forward-looking statements. The risks, uncertainties and other factors set forth in the Company’s 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission and other cautionary statements made in this report, as well as the following factors, should be read and understood as being applicable to all related forward-looking statements wherever they appear in this report.
In addition, any estimates relating to loss events involve the exercise of considerable judgment and reflect a combination of ground-up evaluations, information available to date from brokers and cedants, market intelligence, initial tentative loss reports and other sources. Due to the complexity of factors contributing to the losses and the preliminary nature of the information used to prepare estimates, there can be no assurance that our ultimate losses will remain within the stated amounts.
All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:
|
|
|
|
•
|
changes in the total industry losses resulting from Hurricanes Katrina, Rita and Wilma and any other events, and the actual number of our insureds incurring losses from these storms;
|
|
|
|
|
•
|
with respect to events such as Hurricanes Katrina, Rita and Wilma, the Company’s reliance on loss reports received from cedants and loss adjustors, our reliance on industry loss estimates and those generated by modeling techniques, the impact of these storms on our reinsurers, changes in assumptions on flood damage exclusions as a result of prevailing lawsuits and case law, any changes in our reinsurers’ credit quality, and the amount and timing of reinsurance recoverables and reimbursements actually received by us from our reinsurers and the overall level of competition;
|
|
|
|
|
•
|
the impact that our future operating results, capital position and rating agency and other considerations have on the execution of any capital management initiatives;
|
|
|
|
|
•
|
the impact of any capital management initiatives on our financial condition;
|
|
|
|
|
•
|
the impact of acts of terrorism and related legislation and acts of war;
|
|
|
|
|
•
|
the possibility of greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving, reinsurance purchasing or investment practices have anticipated;
|
|
|
|
|
•
|
evolving interpretive issues with respect to coverage as a result of Hurricanes Katrina, Rita and Wilma and any other events;
|
53
Table of Contents
|
|
|
|
•
|
the level of inflation in repair costs due to limited availability of labor and materials after catastrophes;
|
|
|
|
|
•
|
the effectiveness of our loss limitation methods;
|
|
|
|
|
•
|
changes in the availability, cost or quality of reinsurance or retrocessional coverage;
|
|
|
|
|
•
|
the reliability of, and changes in assumptions to, catastrophe pricing, accumulation and estimated loss models;
|
|
|
|
|
•
|
a decline in our operating subsidiaries’ ratings with Standard & Poor’s, A.M. Best or Moody’s Investors Service;
|
|
|
|
|
•
|
changes in general economic conditions, including inflation, foreign currency exchange rates, interest rates and other factors that could affect our investment portfolio;
|
|
|
|
|
•
|
increased competition on the basis of pricing, capacity, coverage terms or other factors and the related demand and supply dynamics as contracts come up for renewal;
|
|
|
|
|
•
|
decreased demand for our insurance or reinsurance products and cyclical downturn of the industry;
|
|
|
|
|
•
|
changes in governmental regulations or tax laws in jurisdictions where we conduct business;
|
|
|
|
|
•
|
Aspen Holdings or Aspen Bermuda becoming subject to income taxes in the United States or the United Kingdom; and
|
|
|
|
|
•
|
the effect on insurance markets, business practices and relationships of ongoing litigation, investigations and regulatory activity by the New York State Attorney General’s office and other authorities concerning contingent commission arrangements with brokers and bid solicitation activities.
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The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise or disclose any difference between our actual results and those reflected in such statements.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements you read in this report reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by the points made above. You should specifically consider the factors identified in this report which could cause actual results to differ before making an investment decision.