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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 2004, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-31909
ASPEN INSURANCE HOLDINGS LIMITED
(Exact Name of Registrant as Specified in Its Charter)
BERMUDA NOT APPLICABLE
(State or Other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) No.)
VICTORIA HALL
11 VICTORIA STREET
HAMILTON, BERMUDA HM 11
(Address of Principal Executive (Zip Code)
Offices)
(441) 295-8201
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / X / No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
------------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 1, 2004, there were 69,309,624 ordinary shares, with a par value
of 0.15144558(cent) per ordinary share, outstanding.
INDEX
PAGE
-----
Part I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as at September 30, 2004 (Unaudited) and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations, for the Three and
Nine Months Ended September 30, 2004 and 2003 4
Unaudited Condensed Consolidated Statements of Changes in Shareholders'
Equity, for the Three and Nine Months Ended September 30, 2004 and 2003 5
Unaudited Condensed Consolidated Statements of Comprehensive Income, for the
Three and Nine Months Ended September 30, 2004 and 2003 6
Unaudited Condensed Consolidated Statements of Cash Flows, for the Three and
Nine Months Ended September 30, 2004 and 2003 7
Notes to the Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 36
CERTIFICATIONS 37
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASPEN INSURANCE HOLDINGS LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions, except per share amounts)
AS AT AS AT
SEPTEMBER DECEMBER
30, 2004 31, 2003
NOTES -------------- ------------
(Unaudited)
ASSETS
Investments
Fixed Maturities $1,994.4 $1,048.1
Short term investments 479.4 568.2
-------------- ------------
Total Investments 8 2,473.8 1,616.3
Cash and cash equivalents 277.5 230.8
Reinsurance Recoverables
Unpaid losses 2 163.6 43.6
Ceded unearned premiums 80.7 48.9
Receivables
Underwriting premiums 683.7 496.5
Other 30.2 40.8
Deferred policy acquisition costs 144.2 94.6
Derivatives at fair value 9 25.7 0.0
Office properties and equipment 1.1 0.4
Intangible assets 6.6 6.6
-------------- ------------
Total Assets $3,887.1 $2,578.5
============== ============
LIABILITIES
Insurance Reserves
Losses and loss adjustment expenses 2 $1,137.5 $525.8
Unearned premiums 853.7 572.4
-------------- ------------
Total insurance reserves 1,991.2 1,098.2
Payables
Reinsurance premiums 86.8 59.9
Accrued expenses and other payables 75.4 81.7
Liabilities under derivative contracts 9 26.7 0.0
Bank debt 40.0 40.0
-------------- ------------
Total Payables 228.9 181.6
Long term debt 249.3 0.0
-------------- ------------
Total liabilities $2,469.4 $1,279.8
SHAREHOLDERS' EQUITY
Ordinary Shares 69,174,303 ordinary shares of 0.15144558 cents each $1,094.0 $1,090.8
(2003 69,179,303)
Retained earnings 297.4 180.7
Accumulated other comprehensive income, net of taxes 26.3 27.2
-------------- ------------
Total shareholders' equity 1,417.7 1,298.7
-------------- ------------
Total Liabilities and Shareholders' Equity $3,887.1 $2,578.5
============== ============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
ASPEN INSURANCE HOLDINGS LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in millions, except shares and per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
NOTES SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2004 2003 2004 2003
------------ ----------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Net premiums earned 6 $ 293.4 $ 206.7 $ 926.2 $ 539.0
Net investment income 19.4 6.0 46.3 16.7
Realized investment gains / (losses) 1.9 (1.8) (2.4) (1.8)
Other 0.0 0.1 0.0 0.1
------------ ----------- ------------ ------------
Total Revenues 314.7 211.0 970.1 554.0
EXPENSES
Insurance losses and loss adjustment expenses (303.2) (110.5) (566.7) (276.4)
Policy acquisition expenses (40.0) (36.3) (164.2) (107.4)
Operating and administration expenses (26.5) (18.9) (70.7) (33.4)
Interest on long term debt (2.7) 0.0 (3.2) 0.0
Realized exchange gains 1.4 0.0 0.7 0.0
Other Expenses (2.1) 0.0 (2.1) 0.0
------------ ----------- ------------ ------------
Total expenses (373.1) (165.7) (806.2) (417.2)
Income / (loss) from operations before income tax (58.4) 45.3 163.9 136.8
Income tax (expense) / benefit 15.4 (12.8) (41.0) (39.2)
NET INCOME / (LOSS) $ (43.0) $ 32.5 $ 122.9 $ 97.6
============ =========== ============ ============
PER SHARE DATA
Weighted average number of ordinary share and share
equivalents
Basic 69,174,303 56,898,680 69,175,603 56,898,680
Diluted 69,174,303 57,257,360 71,751,883 57,257,360
Basic earnings / (loss) per ordinary share ($0.62) $ 0.57 $ 1.78 $ 1.72
Diluted earnings per ordinary share ($0.62) $ 0.57 $ 1.71 $ 1.70
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
($ in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------- ---------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
SHAREHOLDERS' EQUITY
Ordinary shares:
Beginning of period $1,092.7 $837.6 $1,090.8 $836.9
New share issue costs 0.0 0.1 0.0 0.8
Share-based compensation 1.3 6.5 3.2 6.5
------------- -------------- --------------- ----------------
End of period $1,094.0 $844.2 $1,094.0 $844.2
------------- -------------- --------------- ----------------
Retained earnings:
Beginning of period 342.4 93.7 180.7 28.6
Net income / (loss) for the period (43.0) 32.5 122.9 97.6
Dividends paid (2.0) 0.0 (6.2) 0.0
------------- -------------- --------------- ----------------
End of period $297.4 $126.2 $297.4 $126.2
------------- -------------- --------------- ----------------
Cumulative foreign currency translation adjustments:
Beginning of period 28.1 16.0 27.8 12.0
Change for the period 1.8 1.5 2.1 5.5
------------- -------------- --------------- ----------------
End of period $29.9 $17.5 $29.9 $17.5
------------- -------------- --------------- ----------------
Gain / (loss) on derivatives:
Beginning of period 0.0 0.0 0.0 0.0
Loss of derivatives (2.2) 0.0 (2.2) 0.0
Reclassification to interest payable 0.3 0.0 0.3 0.0
------------- -------------- --------------- ----------------
End of period $(1.9) $0.0 $(1.9) $0.0
------------- -------------- --------------- ----------------
Unrealized gains / (losses) on investments, net of taxes:
Beginning of period (9.7) 1.2 (0.6) 0.6
Change for the period 8.0 1.8 (1.1) 2.4
------------- -------------- --------------- ----------------
End of period $(1.7) $3.0 $(1.7) $3.0
------------- -------------- --------------- ----------------
Total accumulated other comprehensive income $26.3 $20.5 $26.3 $20.5
------------- -------------- --------------- ----------------
Total Shareholders' Equity $1,417.7 $990.9 $1,417.7 $990.9
------------- -------------- --------------- ----------------
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
($ in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net income / (loss) $(43.0) $32.5 $122.9 $97.6
Other comprehensive income, net of taxes
Change in unrealized gains / (losses) on 8.0 1.8 (1.1) 2.4
investments
Loss on derivatives (1.9) 0.0 (1.9) 0.0
Change in unrealized gains on foreign currency
translation 1.8 1.5 2.1 5.5
------------ ------------ ------------ -------------
Other comprehensive income 7.9 3.3 (0.9) 7.9
------------ ------------ ------------ -------------
Comprehensive income / (loss) $(35.1) $35.8 $122.0 $105.5
============ ============ ============ =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
2004 2003 2004 2003
----------- ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
OPERATING ACTIVITIES:
Net income / (loss) $(43.0) $32.5 $122.9 $97.6
ADJUSTMENTS:
Depreciation and amortization of premium or discount on investments 1.6 (1.0) 4.6 2.0
Share-based compensation expense 1.3 6.5 3.2 6.5
Changes in insurance reserves:
Losses and loss adjustment expenses 370.8 129.7 599.7 288.5
Unearned premiums (11.7) 115.7 276.8 512.6
Changes in reinsurance balances:
Reinsurance recoverables (98.2) (24.4) (115.4) (32.5)
Ceded unearned premiums 14.2 16.8 (34.1) (66.0)
Changes in accrued investment income and other receivables (7.8) (21.5) 11.5 (67.0)
Changes in deferred policy acquisition costs 2.2 (49.1) (49.6) (96.7)
Changes in reinsurance premiums payable (12.5) 28.5 26.9 77.8
Changes in premiums receivable 72.1 (33.5) (183.6) (420.4)
Changes in accrued expenses and other payable (69.7) (6.1) (6.3) 50.2
----------- ------------ ----------- ----------
Net Cash from operating activities 219.3 194.1 656.6 352.6
----------- ------------ ----------- ----------
INVESTING ACTIVITIES:
Purchases of fixed maturities (1,134.6) (388.7) (3,877.9) (1,048.4)
Proceeds from sales and maturities of fixed maturities 667.4 290.5 2,929.8 520.6
Net (purchases)/sales of short-term investments 56.1 (102.1) 88.8 263.9
Purchase of equipment 0.0 (6.6) (0.8) (6.6)
----------- ------------ ----------- ----------
Net cash used in investing activities (411.1) (206.9) (860.1) (270.5)
----------- ------------ ----------- ----------
FINANCING ACTIVITIES:
Proceeds from the issuance of ordinary shares, net of issuance costs 0.0 0.1 0.0 0.8
Dividends paid (4.1) 0.0 (6.2) 0.0
Loss on derivatives (2.2) 0.0 (2.2) 0.0
Proceeds from long term debt 249.3 0.0 249.3 0.0
----------- ------------ ----------- ----------
Net cash from financing activities 243.0 0.1 240.9 0.8
----------- ------------ ----------- ----------
Effect of exchange rate movements on cash and cash equivalents 8.6 0.2 9.3 0.3
----------- ------------ ----------- ----------
(Decrease) / increase in cash and cash equivalents 59.8 (12.5) 46.7 83.2
Cash and cash equivalents at beginning of period 217.7 105.3 230.8 9.6
----------- ------------ ----------- ----------
Cash and cash equivalents at end of period $277.5 $92.8 $277.5 $92.8
=========== ============ =========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $15.3 $11.3 $36.9 $11.3
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
($ in millions except share and per share amounts)
1. General
-------
Aspen Insurance Holdings Limited ("Aspen", "Aspen Holdings" or the
"Company"), is a Bermuda holding company. Aspen provides, through its
principal operating subsidiaries, property and liability reinsurance in
the global markets and property, liability, marine and aviation insurance
principally in the United Kingdom and United States. The principal
operating subsidiaries are Aspen Insurance UK Limited ("Aspen Re"),
located in London, Aspen Insurance Limited ("Aspen Bermuda") located in
Bermuda and Aspen Specialty Insurance Company Inc ("Aspen Specialty")
located in Boston.
The accompanying unaudited condensed consolidated financial statements
have been prepared on the basis of generally accepted accounting
principles in the United States ("GAAP") for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Results
for the nine months ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the year ended December
31, 2004. The unaudited condensed consolidated financial statements
include the accounts of Aspen and its wholly-owned subsidiaries, which are
collectively referred to herein as the "Company". All intercompany
transactions and balances have been eliminated on consolidation.
Management is required to make estimates and assumptions that affect the
amounts reported in the unaudited condensed consolidated financial
statements and accompanying disclosures. Actual results could differ from
those estimates. Among other matters, significant estimates and
assumptions are used to record premiums and to record reserves for losses
and loss adjustment expenses. Estimates and assumptions are periodically
reviewed and the effects of revisions are recorded in the consolidated
financial statements in the period that they are determined to be
necessary.
The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by GAAP for complete financial
statements. These unaudited condensed consolidated financial statements
and notes thereto should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31,
2003 contained in Aspen's Annual Report filed on Form 10-K with the United
States Securities and Exchange Commission (File No. 001 - 31909).
8
2. Reserves for Losses and Adjustment Expenses
-------------------------------------------
The following table represents a reconciliation of beginning and ending
consolidated loss and loss adjustment expenses ("LAE") reserves:
AS AT AS AT
SEPTEMBER DECEMBER 31,
30, 2004 2003
------------- --------------
($ IN MILLIONS)
Provision for losses and loss LAE at period start January 1, 2004 and 2003
respectively
$525.8 $93.9
Less reinsurance recoverable (43.6) (12.5)
Net loss and LAE at period start January 1, 2004 and 2003
------------- --------------
$482.2 $81.4
Losses and LAE reserves of subsidiary at date of acquisition
- 22.4
Less reinsurance recoverable - (15.9)
------------- --------------
Net losses and reserves of subsidiary at date of acquisition $0.0 $6.5
Provision for losses and LAE for claims incurred
Current year 600.7 438.0
Prior year (34.0) (9.6)
------------- --------------
Total incurred $566.7 $428.4
------------- --------------
Losses and payments for claims incurred (82.4) (53.9)
------------- --------------
Foreign exchange losses 7.4 19.8
------------- --------------
Net loss and LAE reserves at period end 973.9 482.2
Plus reinsurance recoverables on unpaid loss at end of period 163.6 43.6
------------- --------------
Gross loss and LAE reserves at September 30, 2004 and December 31, 2003 $1,137.5 $525.8
============= ==============
For the nine months ended September 30, 2004, there was a reduction of our
estimate of the ultimate claims to be paid in respect of the 2002 accident year
of $14.1 million and $19.9 million in respect of the 2003 accident year. An
analysis of this reduction by line of business is given on page 26 of this Form
10-Q.
3. Debt and financing arrangements
-------------------------------
During 2003 the Company entered into a credit facility with a syndicate of
commercial banks under which it may, subject to the terms of the credit
agreements, borrow up to $150 million for periods of up to three years and
a further $50 million for periods of up to one year. Credit Suisse First
Boston, an affiliate of Credit Suisse First Boston Private Equity, which
is a shareholder of the Company, is a member of the syndicate on terms and
conditions similar to other syndicate members.
On October 15, 2003, the Company drew down $90 million on the facility at
an initial interest rate of three-month LIBOR plus 42.5 basis points. A
facility fee, currently calculated at a rate of 17.5 basis points on the
average daily amount of the commitment of each lender, is paid to each
lender quarterly in arrears. The interest rate at September 30, 2004 was
1.565%. On December 15, 2003, $50 million of the outstanding loan was
repaid following receipt of funds from the initial public offering. We
repaid the $40 million outstanding balance at the end of the October
interest period from the proceeds of our issuance on August 16, 2004 of
$250 million in aggregate principal amount of 6.00% Senior Notes due 2014
pursuant to Rule 144A and Regulation S of the Securities Act.
9
4. Earnings per ordinary share
---------------------------
Basic earnings per ordinary share are calculated by dividing net income
available to holders of Aspen's ordinary shares by the weighted average
number of ordinary shares outstanding. Diluted earnings per ordinary share
are based on the weighted average number of ordinary shares and dilutive
potential ordinary shares outstanding during the period of calculation
using the treasury stock method. In a loss making period the number of
dilutive potential ordinary shares is considered to be zero.
The following table sets forth the computation of basic and diluted earnings per
share for the three months and nine months ended September 30, 2004 and 2003
respectively:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
2004 2003 2004 2003
---------- -------- ------------ --------
Basic earnings / (loss) per share
Net income $(0.62) $0.57 $1.78 $1.72
Diluted earnings / (loss) per share
Net income $(0.62) $0.57 $1.71 $1.71
Weighted average ordinary shares outstanding 69,174,303 56,898,680 69,175,603 56,898,680
Weighted average ordinary shares outstanding and dilutive
potential ordinary shares 69,174,303 57,257,360 71,751,883 57,257,360
5. Stock-based compensation plans
------------------------------
The Company has issued options under three schemes: investor options,
employee options and restricted share units.
Investor options. The investor options were issued on June 21, 2002 in
consideration for the transfer of an underwriting team from Wellington
Underwriting plc ("Wellington"), the right to seek to renew certain
business written by Syndicate 2020, an agreement in which Wellington
agreed not to compete with Aspen Re through March 31, 2004, the use of the
Wellington name and logo and the provision of certain outsourced services
to the Company. The investor options confer the option to subscribe for up
to 6,787,880 ordinary shares of Aspen to Wellington and Appleby Trust
(Bermuda) Limited (formerly Harrington Trust Limited) (the "Names'
Trustee") on behalf of the members of Syndicate 2020 who are not corporate
members of Wellington. The subscription price payable under the options is
initially (pound)10 and increases by 5% per annum, less any dividends
paid. Option holders are not entitled to participate in any dividends
prior to exercise and would not rank as a creditor in the event of
liquidation. The options became exercisable on the initial public offering
of our ordinary shares. As a result of our initial public offering, the
options will expire on June 21, 2012.
In connection with our initial public offering, the Names' Trustee
exercised 440,144 investor options on both a cash and cashless basis,
pursuant to which 152,583 ordinary shares were issued. On October 15, 2004
the Names' Trustee exercised 856,218 options, 5,538 on a cash basis and
850,680 on a cashless basis, pursuant to which 135,321 ordinary shares
were issued. The Names' Trustee currently holds 1,710,398 options.
Employee options. On August 20, 2003 the Company granted 3,884,030
options to employees under the Aspen Insurance Holdings Limited 2003 Share
Incentive Plan. The initial grant options have a term of ten years and an
exercise price of $16.20 per share. Sixty-five percent of the initial
grant options are subject to time-based vesting with 20% vesting upon
grant and 20% vesting on each December 31 of the calendar years 2003,
2004, 2005 and 2006. The remaining 35% of the initial grant options are
subject to performance-based vesting. In addition to the initial grant of
3,884,030 options, 1,840,540 options are reserved for additional grants
following the completion of the Company's initial public offering.
The Company follows Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," which establishes a fair value-
based method of accounting for share-based compensation plans.
10
Compensation cost charged against income was $6.5 million for the nine
months ended December 31, 2003 and $3.0 million in the nine months ended
September 30, 2004. The per share weighted average fair value at grant
date of the share options granted under the 2003 Share Incentive Plan is
$5.31. This amount was estimated on the date of the grant using a modified
Black-Scholes option pricing model under the following assumptions:
risk-free interest rate of 4.70%; dividend yield of 0.6%; expected life of
7 years; share price volatility of zero (as the minimum value method was
utilized because the Company was unlisted on the date that the options
were issued); and foreign currency volatility of 9.40% (as the initial
exercise price was in British Pounds and the share price of the Company is
in U.S. Dollars).
Restricted share units. On March 12, 2004, the Board approved the grant
of 37,665 restricted share units under the 2003 Share Incentive Plan to
six employees of a subsidiary of the Company. Subject to the participants'
continued employment, the units will vest in tranches with one-third of
the units vesting on each of December 31, 2004, December 31, 2005 and
December 31, 2006. Vesting of a participant's units may be accelerated,
however, if the participant's employment with the Company and its
subsidiaries is terminated without cause (as defined in such participants'
award agreement), on account of the participant's death or disability (as
defined in such participants' award agreement), or, with respect to one of
the participants, by the participant with good reason (as defined in such
participants' award agreement). Compensation cost charged against income
was $0.2 million for the nine months ended September 30, 2004.
Participants generally will not be entitled to any rights of a holder of
ordinary shares, including the right to vote, unless and until their units
vest and ordinary shares are issued; provided, however, that participants
will be entitled to receive dividend equivalents with respect to their
units. Dividend equivalents will be denominated in cash and paid in cash
if and when the underlying units vest. Participants will be paid one
ordinary share for each unit that vests as soon as practicable following
the vesting date. Participants may, however, elect to defer the receipt of
any ordinary shares upon the vesting of units, in which case payment will
not be made until such time or times as the participant may elect. Payment
of deferred share units would be in ordinary shares with any cash dividend
equivalents credited with respect to such deferred share units paid in
cash.
6. Segment reporting
-----------------
The Company has two reportable segments, reinsurance operations and
insurance operations. The directors have determined these segments by
reference to the organization structure of the business and the different
services provided by the segments.
The following table provides a summary of the segment revenues and results for
the three months and nine months ended September 30, 2004 and, 2003 and the
reserves for losses and loss adjustment expenses as of September 30, 2004 and
September 30, 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------------
2004 2003 2004 2003
------------ ------------- ---------------- --------------
($ IN MILLIONS)
Revenues:
Underwriting
Total primary insurance operations $74.5 $54.8 $227.7 $135.3
Total reinsurance operations 218.9 151.9 698.5 403.7
------------ ------------- ---------------- --------------
Total underwriting 293.4 206.7 926.2 539.0
Investment operations
Net investment income 19.4 6.0 46.3 16.7
Realised investment gains/(losses) 1.9 (1.8) (2.4) (1.8)
------------ ------------- ---------------- --------------
Total investment operations 21.3 4.2 43.9 14.9
Other 0.0 0.1 0.0 0.1
------------ ------------- ---------------- --------------
Total Revenues $314.7 $211.0 $970.1 $554.0
============ ============= ================ ==============
11
Expenses:
Underwriting Claims and expenses
Total primary insurance operations $(64.2) $(41.3) $(186.7) $(103.8)
Total reinsurance operations (304.7) (124.4) (613.6) (313.4)
------------ ------------- ---------------- --------------
Total underwriting claims and expenses (368.9) (165.7) (800.3) (417.2)
Investment Operations
Investment and investment management expenses $(0.8) $0.0 $(1.3) $0.0
Realized foreign exchange gains / (losses) 1.4 0.0 0.7 0.0
Interest expense (2.7) 0.0 (3.2) 0.0
Other expense (2.1) 0.0 (2.1) 0.0
------------ ------------- ---------------- --------------
Total Expenses $(373.1) $(165.7) $(804.8) $(417.2)
============ ============= ================ ==============
INCOME / (LOSS) FROM OPERATIONS BEFORE INCOME TAXES:
Underwriting
Total primary insurance operations $10.4 $13.5 $41.0 $31.5
Total reinsurance operations (85.9) 27.5 84.9 90.3
------------ ------------- ---------------- --------------
Total underwriting (75.5) 41.0 125.9 121.8
Investment operations
Net investment income $19.4 $6.0 $46.3 $16.7
Realized investment gains/(losses) 1.9 (1.7) (2.4) (1.7)
Investment and investment management expenses (0.8) 0.0 (1.3) 0.0
------------ ------------- ---------------- --------------
Total investment operations 20.5 4.3 42.6 15.0
------------ ------------- ---------------- --------------
Interest expense (2.7) 0.0 (3.2) 0.0
Foreign exchange gains/(losses) and other (0.7) 0.0 (1.4) 0.0
------------ ------------- ---------------- --------------
Total income / (loss) before income taxes (58.4) 45.3 163.9 136.8
============ ============= ================ ==============
7. Commitments and contingencies
-----------------------------
In the normal course of business, letters of credit are issued as
collateral on behalf of the business, as required within our
reinsurance operations. As of September 30, 2004, letters of credit
with an aggregate amount of $55.5 million (December 31, 2003 - $24.6
million) and (pound)47.4 million (December 31, 2003 - (pound)47.4
million) were outstanding respectively. As of September 30, 2004 the
Company had funds on deposit of $60.7 million and (pound)51.5 million
(December 31, 2003 - $30 million - (pound)47.4 million) as collateral
for the letters of credit.
For its U.S. reinsurance activities, Aspen Re has established and must
retain a multi-beneficiary U.S. trust fund for the benefit of its U.S.
cedents so that they are able to take financial statement credit
without the need to post cedent-specific security. The minimum trust
fund amount is $20 million plus an amount equal to 100% of Aspen Re's
U.S. reinsurance liabilities. The balance of our total investments held
in trust was $358.1 million at September 30, 2004 (December 31, 2003 -
$25.6 million). Aspen Re has established a U.S. surplus lines trust
fund with a U.S. bank to secure U.S. surplus lines policies. The
initial minimum trust fund amount is $5.4 million. The balance held in
the trust at September 30, 2004 was $5.5 million. Aspen Re has
established a Canadian trust fund with a Canadian bank to secure a
Canadian insurance license. The initial minimum trust fund amount was
Can$25.0 million. The balance held in the trust at September 30, 2004
was Can$49.4 million. Aspen Specialty has a total of $7.4 million on
deposit with U.S. States in order to satisfy state regulations for
writing business there.
12
Amounts outstanding under operating leases as of September 30, 2004
were:
DUE IN
GREATER
LESS THAN THAN 5
1 YEAR 1-3 YEARS 3-4 YEARS 4-5 YEARS YEARS
----------- --------- --------- --------- -------
($ IN MILLIONS)
Operating Lease Obligations 2.5 1.6 0.6 0.6 3.0
8. Investments
-----------
The following presents the cost, gross unrealized gains and losses, and
estimated fair value of investments in fixed maturities and other investments:
AS AT SEPTEMBER 30, 2004
------------------------------------------------------------------
GROSS GROSS
COST OR UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES FAIR VALUE
----------------- -------------- ---------------- ---------------
($ IN MILLIONS)
Investments (excluding cash)
US government and agencies............. $873.6 $0.8 $(1.4) $873.0
Corporate securities................... 525.0 1.2 (1.5) 524.7
Foreign government..................... 212.8 0.7 (0.4) 213.1
Municipals............................. 1.1 0.0 0.0 1.1
Asset backed securities................ 225.7 0.1 (1.4) 224.4
Mortgage backed securities............. 159.5 0.5 (1.9) 158.1
--------- ------ ------ ---------
Total fixed maturities................. 1,997.7 3.3 (6.6) 1,994.4
Short - term investments............... 479.6 0.0 (0.2) 479.4
--------- ------ ------ ---------
Total............................. $2,477.3 $3.3 $(6.8) $2,473.8
========= ====== ====== =========
AS AT SEPTEMBER 30, 2004
------------------------------------------------------------------
GROSS GROSS
COST OR UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES FAIR VALUE
----------------- -------------- ---------------- ---------------
($ IN MILLIONS)
Investments (excluding cash)
US government and agencies............. $636.9 $1.1 $(0.1) $637.9
Corporate securities................... 71.2 0.2 (0.1) 71.3
Foreign government..................... 136.3 0.0 (2.0) 134.3
Municipals............................. 2.0 0.0 0.0 2.0
Asset backed securities................ 135.9 0.1 (0.6) 135.4
Mortgage backed securities............. 66.5 0.8 (0.1) 67.2
--------- ------ ------ ---------
Total fixed maturities................. 1,048.8 2.2 (2.9) 1,048.1
Short - term investments............... 568.1 0.1 - 568.2
--------- ------ ------ ---------
Total............................. $1,616.9 $2.3 $(2.9) $1,616.3
========= ====== ====== ==========
9. Derivative Contracts
--------------------
i) On August 17, 2004, Aspen Bermuda entered into a risk transfer swap
("cat swap") with a non-insurance counterparty. The cat swap is for a
3-year term during which Aspen Bermuda will pay quarterly "premiums" or
spread, applied to a notional amount ($100,000,000). In return Aspen
Bermuda will receive a portion or the entire notional amount only in
instances where industry losses on Florida hurricanes or California
earthquakes exceed pre-agreed amounts.
13
This cat swap falls under the requirement of SFAS 133 `Accounting for
Derivative Instruments and Hedging Activities', as amended ("SFAS 133")
and is therefore measured in the balance sheet at fair value with any
changes in the fair value shown on the consolidated statement of
operations.
As there is no quoted market value available for this derivative, the
fair value is determined by management using internal models taking
into account changes in the cat swap market. The amount recognized
could be materially different from the amount realized in an actual
sale.
ii) On July 7, 2004 the Company entered into a forward starting
interest rate swap ("swap"). The swap was designated as a cash flow
hedge of a forecast transaction as it was intended to hedge against the
variability of the Company's interest payments under the Company's then
proposed debt issuance which was completed in August 2004.
The swap falls under the requirements of SFAS 133 and was measured at
fair value with changes to fair value being included in other
comprehensive income as hedge accounting was appropriate and there was
no ineffective portion.
The swap was unwound as the Company issued the 10-year notes in August
2004. The realized loss of $2.2 million recorded in other comprehensive
income will be reclassified to earnings as interest income using the
level yield method over the term of the debt. In the three months ended
September 30, 2004 $0.3 million was reclassified to earnings and we
estimate that an additional $0.2 million of the realized loss will be
reclassified into earnings within the next twelve months.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition and
results of operations for the three and nine months ended September 30, 2004 and
2003. This discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and related notes
contained in this Form 10-Q and the audited consolidated financial statements
and related notes for the fiscal period ended December 31, 2003, as well as the
discussions of critical accounting policies and qualitative and quantitative
disclosure about market risk, contained in our Financial Statements in our 2003
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Some of the information contained in this discussion and analysis or set forth
elsewhere in this Form 10-Q, including information with respect to our plans and
strategy for our business, includes forward looking statements that involve risk
and uncertainties. Please see the section captioned "Cautionary Statement
Regarding Forward-Looking Statements" for more information on factors that could
cause actual results to differ materially from the results described in or
implied by any forward-looking statements contained in this discussion and
analysis.
OVERVIEW
Aspen is a Bermuda holding company. Aspen provides, through its operating
subsidiaries, property and liability reinsurance in the global markets and
property, liability, aviation and marine insurance principally in the United
Kingdom and the United States. The principal operating subsidiaries are Aspen
Re, located in London, Aspen Bermuda, located in Bermuda, and Aspen Specialty,
located in Boston.
The net result after tax for the third quarter of 2004 was a loss of $(43.0)
million, compared to a profit of $32.5 million for the third quarter of 2003.
Our third quarter operating performance has suffered from the hurricane losses
which affected the south eastern United States and typhoon losses in Japan. Our
pre-tax expense for these storms net of reinsurance, but including the cost of
reinstatement premiums, is $181 million which impacted earnings by $145 million
after tax. The storms affect 4 of our 6 reported classes of business but the
major impact was on property reinsurance which has loss provisions net of
reinsurance of $153 million. Specialty reinsurance accounted for storm loss
provisions of $12 million mainly related to marine losses from Hurricane Ivan
and property insurance accounted for $6 million. Casualty reinsurance incurred
an auto loss of $1 million from the impact of Hurricane Ivan on the Cayman
Islands.
In the third quarter we released $10.9 million of reserves which is equivalent
to a reduction of 3.7% in the combined ratio for the quarter. An explanation of
this release is given below under the heading "Reserves for losses and loss
expenses".
On August 16, 2004 we closed our offering of $250 million in aggregate principal
amount of 6.00% Senior Notes due 2014 under Rule 144A and Regulation S under the
Securities Act of 1933, which resulted in gross proceeds to us of approximately
$249.3 million. The proceeds from the offering were used to repay $40 million of
borrowings outstanding under our existing credit facilities with the balance
contributed to Aspen Bermuda.
The contribution to our results from investment income continues to increase as
a result of positive cash flow from operations and through the proceeds from the
issuance of our Senior Notes. Cash flow from operations was $219.3 million for
the third quarter of 2004, $228.7 million for the second quarter of 2004 and
$208.6 million for the first quarter of 2004. During the third quarter of 2004,
we continued to take a cautious view on interest rates and our portfolio of
fixed income securities was positioned to seek to protect capital from the
negative impact of rising rates with an average duration of 1.6 years, and 1.9
years excluding money market funds.
15
OUTLOOK AND TRENDS
In respect of the current market conditions, we believe that the significant
losses experienced by the industry in the third quarter of 2004 will lead to
increases in price and improvements in terms and conditions for wind exposed
property business in the United States.
Our casualty reinsurance lines continue to enjoy favourable conditions with
overall rate increases of approximately 8% on average for the year-to-date. Our
overall outlook for the casualty reinsurance book is positive to stable.
In respect of the insurance segment, property rates are declining. We believe
that this is due to overcapacity in the market. Although we are not immune from
this trend, within our U.K. commercial property book we are somewhat insulated
where we have in place various long-term undertakings.
Rates are also declining somewhat in the U.K. commercial liability business with
competition coming in the form of "risk bundling" with property exposures.
The development of the business of Aspen Specialty has been slower than we had
expected but we have succeeded in attracting a very strong, experienced
underwriting team and we are now seeing an increasing amount of business and are
receiving very positive support from brokers. In order to further enhance Aspen
Specialty's reach, we have opened offices in Scottsdale, Arizona and Atlanta,
Georgia.
RECENT DEVELOPMENTS
On October 19, 2004 Aspen Re entered into an agreement for 15-year leases of
office space in London of approximately 49,500 square feet. See "Liquidity and
Capital Resources."
On October 15, 2004, a registration statement for sale of Aspen ordinary shares
in a non-underwritten offering of up to 212,743 of our ordinary shares by one of
our existing shareholders, Appleby Trust (Bermuda) Limited, formerly known as
Harrington Trust Limited (the "Names' Trustee") was declared effective. In
connection with this non-underwritten offering, the Names' Trustee exercised
856,218 investor options on a cash and cashless basis on October 15, 2004,
pursuant to which 135,321 ordinary shares were issued and Aspen received
approximately $110,000. The Names' Trustee currently holds 1,710,398 options.
On September 30, 2004, we announced that, in accordance with our strategy to
build on our presence in the U.S., London and Bermuda, we will expand our
Bermuda property reinsurance underwriting activities, primarily to service our
existing client base in the U.S. and Japan. To support this expansion, we have
allocated an additional $200 million of capital to Aspen Bermuda and several of
our underwriters will move to Bermuda. We also intend to diversify our
operations in London, including in the marine and aviation lines.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
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 the recognition of premiums written and ceded and
reserves for losses and loss adjustment expenses. For a detailed discussion of
our critical accounting estimates please refer to our 2003 Annual Report on Form
10-K filed with the 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.
16
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2003
The following is a discussion and analysis of the Company's consolidated results
of operations for the three months ended September 30, 2004 and 2003.
Gross Premiums Written. For the three months ended September 30, 2004,
gross premiums written were $349.4 million, a 5.3% increase over the $331.8
million written for the three months ended September 30, 2003. The main
contributions to the increase were the new operations established in 2004 by
Aspen Specialty and Aspen Re America and the new business line of marine and
aviation based in the United Kingdom.
Reinsurance ceded. Reinsurance premiums ceded for the three months ended
September 30, 2004 were $53.5 million compared to premiums ceded of $36.7
million for the three months ended September 30, 2003. The significant increase
in reinsurance premiums ceded is mainly due to the recognition of reinstatement
premiums due in order to reinstate covers after the windstorms.
Net premiums written. Net premiums written for the three months ended
September 30, 2004 were $295.9 million compared to $295.1 million in the
comparative period. The lack of any significant change over the prior year is
due to the additional gross written premiums written in 2004 being offset by the
increase in reinsurance premiums required after the windstorms.
Net premiums earned. Net premiums earned for the three months ended
September 30, 2004 were $293.4 million representing an increase of 41.9% over
the comparable period in 2003. The increase was due to premiums written in the
second half of 2003 earning through in 2004 being more material than premiums
written in 2002 earning through in 2003. The impact of 2002 business is less
material as we only commenced operating half way through 2002 and written
premiums were therefore significantly lower than in subsequent years.
Insurance losses and loss adjustment expenses. Insurance losses and loss
adjustment expenses for the three months ended September 30, 2004 were $303.2
million, an overall increase of $192.7 million compared to the three months
ended September 30, 2003. Given the increase in earned premium an increase in
recognised losses is expected but the size of the increase in this quarter is
due to the recognition of windstorm losses.
Policy acquisition expenses. Policy acquisition expenses for the three
months ended September 30, 2004 were $40.0 million, representing 13.7% of net
premiums earned, compared to $36.3 million for the three months ended September
30, 2003 which represented 17.9 % of net premiums earned for that period. The
reduction in the ratio of acquisition expenses to net premiums earned is mainly
driven by reductions in profit commission due on property reinsurance policies
following the windstorms.
Operating and administrative expenses. Operating and administrative
expenses for the three months ended September 30, 2004 were $26.5 million, which
was an increase of $7.6 million compared to the three months ended September 30,
2003. The increase over 2003 was due to a number of factors the most significant
of which was the growth in the infrastructure of the group reflecting the
overall expansion both in terms of premium volumes and operating locations
resulting in increased staff costs, increased accommodation and IT costs.
Net investment income. Net investment income of $19.4 million for the three
months ended September 30, 2004 represented an increase of 223.3% over the net
investment income of $6.0 million for the three months ended September 30, 2003.
The increase was due to favourable movements in interest rates but more
significantly due to a 114% increase in the value of cash and investments as at
September 30, 2004 compared to September 30, 2003.
Income/(loss) before tax. Loss before tax for the three months ended
September 30, 2004 was $(58.4) million, compared to $45.3 million for the three
months ended September 30, 2003. The loss for the three months ended September
30, 2004 was the direct result of losses associated with windstorms.
17
Income tax expense. A credit for income tax has been recognised in the
three months ended September 30, 2004 due to the reported losses in the period.
The annual expected tax rate was reduced to 25% from the 28.3% tax rate in the
comparative period as a greater proportion of the Company's profit emanates from
our Bermudian operations which are not subject to tax.
Net income/(loss). The result for the three months ended September 30, 2004
was a loss of $(43.0) million, equivalent to $(0.62) loss earnings per basic
share and $(0.62) fully diluted loss earnings per share on the basis of the
weighted average number of shares in issue during the three months ended
September 30, 2004. Net income for the three months ended September 30, 2003 was
$32.5 million, equivalent to $0.57 earnings per basic share and $0.57 fully
diluted earnings per share.
UNDERWRITING RESULTS BY OPERATING SEGMENTS
Our business segments are based on how we monitor the performance of our
underwriting operations. Management measures segment results on the basis of the
combined ratio, which is obtained by dividing the sum of the losses and loss
expenses, acquisition expenses and general and administrative expenses by net
premiums earned. As a newly formed company, our historical combined ratio may
not be indicative of future underwriting performance. We do not manage our
assets by segment, accordingly, investment income and total assets are not
allocated to the individual segments. General and administrative expenses are
allocated to segments based on each segment's proportional share of gross
premiums written.
The following table summarizes gross and net written premium, underwriting
results, and combined ratios and reserves for each of our two business segments
for the three months ended September 30, 2004 and September 30, 2003:
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
---------------------------------- ----------------------------------
REINSURANCE INSURANCE TOTAL REINSURANCE INSURANCE TOTAL
------------ --------- --------- ----------- ---------- ---------
($ IN MILLIONS)
Gross premiums written $231.2 $118.2 $349.4 $212.6 $119.2 $331.8
Net premiums written 189.1 106.8 295.9 183.9 111.2 295.1
Gross premiums earned 273.7 87.4 361.1 200.7 59.8 260.5
Net premiums earned 218.9 74.5 293.4 151.9 54.8 206.7
Expenses:
Losses and loss expenses (254.4) (48.8) (303.2) (76.7) (33.8) (110.5)
Policy acquisition, operating and
administrative expenses (50.4) (16.1) (66.5) (47.7) (7.5) (55.2)
------------ --------- --------- ----------- ---------- ---------
Underwriting profit / (loss) before investment (85.9) 9.6 (76.3) 27.5 13.5 41.0
income ============ ========= ========= =========== ========== =========
Investment income 19.4 6.0
Other net income and interest expense (4.8) 0.1
Net realized gains / losses 3.3 (1.8)
--------- ---------
Income from operations before income tax (58.4) 45.3
========= =========
Net reserves for loss and loss adjustment
expenses $698.6 $275.3 $973.9 $240.4 $96.4 $336.8
RATIOS
Loss ratio 116% 65% 103% 51% 62% 53%
Expense ratio 23% 22% 23% 31% 13% 27%
------------ --------- --------- ----------- ---------- ---------
Combined ratio 139% 87% 126% 82% 75% 80%
============ ========= ========= =========== ========== =========
The loss ratio is calculated by dividing losses and loss expenses by net
premiums earned. The expense ratio is calculated by dividing policy acquisition,
operating and administrative expenses by net premiums earned. The combined ratio
is the sum of the loss ratio and expense ratio.
18
REINSURANCE
We write reinsurance for both property and casualty risks. In 2004 our
property reinsurance line of business is all written on a treaty basis and
includes catastrophe, risk excess and pro rata, including retrocession. In 2003
we also wrote a limited amount of property facultative reinsurance.
In 2004 our casualty reinsurance line of business is written mainly on a
treaty basis with a small proportion of facultative risks. The casualty treaty
reinsurance is primarily 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 cedents
located mainly in the United States, the United Kingdom, Europe and Australia.
The casualty facultative business covers United States umbrella, workers
compensation and general liability business.
Our specialty reinsurance line of business includes aviation and marine
reinsurance. In 2003 we also included under this heading our quota share
reinsurances of Syndicates 2020 and 3030 in respect of the lines of business
that we do not write under our own name, including marine, energy, accident and
health and aviation risks. Our quota share reinsurance of Syndicate 2020 did not
continue into 2004 and the quota share of Syndicate 3030 was discontinued after
2002.
The following table summarizes gross and net written premiums and
underwriting results for each of the lines of business within our reinsurance
segment for the three months ended September 30, 2004 and 2003:
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
--------------------------------------------- ----------------------------------------------
PROPERTY CASUALTY SPECIALTY TOTAL PROPERTY CASUALTY SPECIALTY TOTAL
--------- ---------- --------- -------- ----------- --------- ---------- ---------
($ IN MILLIONS)
Gross premiums written $139.5 $83.4 $8.3 $231.2 $167.3 $53.5 $(8.2) $212.6
Net premiums written 100.6 82.5 6.0 189.1 134.6 55.3 (6.0) 183.9
Gross premiums earned 155.2 91.9 26.6 273.7 111.8 42.8 46.1 200.7
Net premiums earned 105.9 88.1 24.9 218.9 70.8 41.6 39.5 151.9
Losses and loss expenses (172.6) (63.9) (17.9) (254.4) (23.2) (31.0) (22.5) (76.7)
Policy acquisition, operating
and administration expenses (30.1) (15.5) (4.8) (50.4) (33.5) (9.1) (5.1) (47.7)
--------- ---------- --------- -------- ----------- --------- ---------- ---------
Underwriting profit / (loss) $(96.8) $8.7 $2.2 $(85.9) $14.1 $1.5 $11.9 $27.5
========= ========== ========= ======== =========== ========= ========== =========
before investment income
Ratios
Loss ratio 163% 72% 72% 116% 33% 74% 57% 51%
Expense ratio 28% 18% 19% 23% 47% 22% 13% 31%
--------- ---------- --------- -------- ----------- --------- ---------- ---------
Combined ratio 191% 90% 91% 139% 80% 96% 70% 82%
========= ========== ========= ======== =========== ========= ========== =========
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
Gross Written Premiums. Gross premiums written for the three months ended
September 30, 2004 were $231.2 million, an increase of 8.7% over the equivalent
period in 2003. This increase in gross premiums written was driven by a $46.4
million increase in casualty and specialty reinsurance premiums offset by a
$27.8 million reduction in property reinsurance. The increase in the casualty
business was due to our expansion of our U.S. casualty business and timing
differences due to some clients bringing forward their renewal dates compared to
2003. The movement in the specialty business is due to downward adjustment in
premium estimates having been recognised in 2003 and not in 2004. Property
reinsurance has suffered a reduction in premiums due to a decision not
19
to renew the Wellington Underwriting Inc. binding authority and a number of
large contracts initially written in the third quarter of 2003 renewing in the
second quarter of 2004.
Losses and loss adjustment expenses. Losses and loss adjustment expenses
were $254.4 million for the three months ended September 30, 2004, representing
116.2% of net earned premiums for the three months ended September 30, 2004. The
increase in the loss ratio by 65% from the three months ended September 30, 2003
has been due to the $165.7 million of net losses incurred following the
windstorms during the third quarter of 2004.
Policy acquisition, operating and administration expenses. Total expenses
were $50.4 million for the three months ended September 30, 2004, an increase of
5.7% compared to the three months ended September 30, 2003. This is broadly in
line with the increase in gross written premiums but also takes into account
lower levels of profit commission payable in the quarter due to the windstorm
losses.
INSURANCE
We write commercial property, commercial liability and marine and aviation
insurance. Our commercial property line of business is primarily composed of
U.K. commercial property insurance. Commercial property also includes our U.S.
excess and surplus lines property business written through Aspen Specialty and
the worldwide property account written by Aspen Re.
The commercial liability line of business consists of U.K. employers' and
public liability insurance. Commercial liability also includes our U.S. excess
and casualty business written through Aspen Specialty. During the quarter we
also established a new marine insurance team writing both hull and energy
business. The results from the new marine and aviation classes are reported as a
separate line of business within our insurance segment.
The following table summarizes gross and net written premiums and
underwriting results for each of the lines of business within our insurance
segment for the three months ended September 30, 2004 and 2003:
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------------------------------------- ------------------------------------------------
COMMERCIAL COMMERCIAL MARINE & COMMERCIAL COMMERCIAL MARINE &
PROPERTY LIABILITY AVIATION TOTAL PROPERTY LIABILITY AVIATION TOTAL
---------- ---------- -------- -------- ---------- ---------- ---------- -------
($ IN MILLIONS)
Gross premiums written $37.1 $69.5 $11.6 $118.2 $22.4 $96.8 $0.0 $119.2
Net premiums written 33.2 62.5 11.1 106.8 21.9 89.3 0.0 111.2
Gross premiums earned 26.7 58.2 2.5 87.4 13.3 46.5 0.0 59.8
Net premiums earned 21.3 50.9 2.3 74.5 11.9 42.9 0.0 54.8
Losses and loss expenses (9.9) (36.8) (2.1) (48.8) (7.1) (26.7) 0.0 (33.8)
Policy acquisition,
operating and
administration expenses (6.4) (9.1) (0.6) (16.1) (2.8) (4.7) 0.0 (7.5)
Underwriting profit /
(loss) before investment ---------- ---------- -------- -------- ---------- ---------- ---------- -------
income $5.0 $5.0 $(0.4) $9.6 $2.0 $11.5 $0.0 $13.5
========== ========== ======== ======== ========== ========== ========== =======
RATIOS
Loss ratio 47% 72% 91% 65% 60% 62% 0% 62%
Expense ratio 30% 18% 26% 22% 23% 11% 0% 13%
---------- ---------- -------- -------- ---------- ---------- ---------- -------
Combined ratio 77% 90% 117% 87% 83% 73% 0% 75%
========== ========== ======== ======== ========== ========== ========== =======
20
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
Gross Premiums Written. Gross premiums written for the three months ended
September 30, 2004 were $118.2 million, a 0.8% decrease from the three months
ended September 30, 2003. The growth in the property segment reflected the
contribution from our worldwide property insurance team which commenced
underwriting at the end of 2003 as well as a contribution from Aspen Specialty.
The remaining $11.6 million increase in premiums is due to the new marine
insurance team. The reduction in commercial liability insurance is due to a
number of policies not renewing in 2004 and the impact of policies written in
2003 which have yet to renew as they have duration of greater than one year.
Losses and loss adjustment expenses. Total loss and loss adjustment
expenses were $48.8 million and are predominately incurred but not reported
("IBNR") provisions. The reduction in the commercial property loss ratio was due
to a $2.0 million favourable development on prior year reserves.
Policy acquisition, operating and administration expenses. Total expenses
were $16.1 million for the three months ended September 30, 2004. The increase
over the comparative period was due to the change in business mix associated
with the establishment of our U.S. insurance operations, Aspen Specialty, our
worldwide property team and our marine team.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2003
The following is a discussion and analysis of the Company's consolidated results
of operations for the nine months ended September 30, 2004 and 2003.
Gross Premiums Written. For the nine months ended September 30, 2004, gross
premiums written were $1,370.0 million, a 17.9% increase over the $1,161.8
million written for the nine months ended September 30, 2003. The increase was
due to our decision to expand our casualty reinsurance book, which has expanded
by 51% from $260.3 million for the nine months ended September 30, 2003 to
$393.0 million for the nine months ended September 30, 2004, and the development
of our U.K. insurance division which has increased by 29% over the corresponding
period in 2003.
Reinsurance ceded. Reinsurance premiums ceded for the nine months ended
September 30, 2004 were $201.1 million compared to $200.7 million for the nine
months ended September 30, 2003. Although in aggregate the total reinsurance
premiums are consistent with the comparative period, as a percentage of gross
written premiums the reinsurance ceded has decreased from 17.3% to 14.7%. The
reduced percentage reflects the decision to increase our retentions in 2004 and
the impact of our decision not to renew certain quota share agreements.
Offsetting these reductions is our requirement to reinstate reinsurance
contracts following the windstorms and new reinsurance purchased to protect new
classes of business.
Net premiums written. Net premiums written for the nine months ended
September 30, 2004 were $1,168.9 million. This represents a 21.6% increase over
the equivalent period in 2003 and is a consequence of the growth in casualty
reinsurance and U.K. insurance, together with the increase in net retentions.
Net premiums earned. Net premiums earned for the nine months ended
September 30, 2004 were $926.2 million, an increase of 71.8% over the
comparative period. The increase is due to the earn-out of 2003 premiums in 2004
whereas in 2003 the level of premiums earned from 2002 policies was
significantly lower because the Company wrote a lower amount of business in
2002.
Insurance losses and loss adjustment expenses. Insurance losses and loss
adjustment expenses for the nine months ended September 30, 2004 were $566.7
million, which was an increase of $290.3 million compared to the nine months
ended September 30, 2003. This increase was due to the requirement to reserve
for the increase in business but more significantly as a result of the losses
incurred from the windstorms which occurred during the third quarter of 2004.
The total reported losses for the first nine months of 2004 have been reduced by
a $34.0 million release from prior year reserves.
21
Policy acquisition, operating and administrative expenses. Policy
acquisition expenses for the nine months ended September 30, 2004 were $164.2
million representing 17.7% of net premiums earned. This represented a slight
reduction from acquisition expenses for the nine months ended September 30, 2003
which were $107.4 million, representing 19.9% of net premiums earned. The
reduction was due to the increase in casualty reinsurance business written in
2004 compared to 2003 which attracted a lower commission rate than our property
reinsurance business. Operating and administrative expenses have increased from
6.2% for the nine months ended September 30, 2003 to 7.6% for the nine months
ended September 30, 2004. The increase was due to the additional costs incurred
in expanding our business and establishing new underwriting teams.
Net investment income. Net investment income of $46.3 million for the nine
months ended September 30, 2004 represents an increase of 277% over the $16.7
million earned in the nine months ended September 30, 2003. The increase was due
to favourable movements in interest rates, but more significantly due to a 207%
increase in the value of cash and investments held by the group.
Income before tax. Income before tax for the nine months ended September
30, 2004 was $163.9 million, compared to $136.8 million for the nine months to
September 30, 2003. The $27.1 million increase is consistent with the increase
in business earned in the period after the impact of windstorms.
Income tax expense. Income tax expense for the nine months ended September
30, 2004 was $41.0 million. Our consolidated tax rate for the nine months ended
September 30, 2004 was 25%, compared to the tax rate of 28.7% for the nine
months ended September 30, 2003. The higher rate for the comparative period
reflects the fact that the Bermudian operations, which are not subject to tax,
were in their set up phase and were not making a significant contribution at
that time. We consider that the tax rate reported for the nine months ended
September 30, 2004 to be more representative of future performance.
Net income. Net income for the nine months ended September 30, 2004 was
$122.9 million, equivalent to $1.78 earnings per basic share and $1.71 fully
diluted earnings per share on the basis of the weighted average number of shares
in issue during the nine months ended September 30, 2004 compared to $1.72
earnings per basic share and $1.70 fully diluted earnings per share for the nine
months ended September 30, 2003.
UNDERWRITING RESULTS BY OPERATING SEGMENTS
The following table summarizes gross and net written premium, underwriting
results, and combined ratios and reserves for each of our two business segments
for the nine months to September 30, 2004 and September 30, 2003:
22
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
---------------------------------- ----------------------------------
REINSURANCE INSURANCE TOTAL REINSURANCE INSURANCE TOTAL
----------- --------- ------- ----------- --------- --------
($ IN MILLIONS)
Gross premiums written $1,082.6 $287.4 $1,370.0 $939.6 $222.2 $1,161.8
Net premiums written 925.8 243.1 1,168.9 760.0 201.1 961.1
Gross premiums earned 827.8 265.4 1,093.2 521.0 145.9 666.9
Net premiums earned 698.5 227.7 926.2 403.7 135.3 539.0
Expenses:
Losses and loss expenses (433.4) (133.3) (566.7) (193.3) (83.1) (276.4)
Policy acquisition, operating and (180.5) (54.4) (234.9) (120.1) (20.7) (140.8)
administrative expenses
Underwriting profit before investment
income 84.6 40.0 124.6 90.3 31.5 121.8
=========== ========= ======= =========== ========= ========
Investment income 46.3 16.7
Other net income and interest expense (5.3) 0.1
Net realized gains / (losses) (1.7) (1.8)
------- --------
Income from operations before income tax 163.9 136.8
======= ========
Net reserves for loss and loss adjustment
expenses $698.6 $275.3 $973.9 $240.4 $96.4 $336.8
RATIOS
Loss ratio 62% 58% 61% 48% 62% 51%
Expense ratio 26% 24% 26% 30% 15% 26%
----------- --------- ------- ----------- --------- --------
Combined ratio 88% 82% 87% 78% 77% 77%
=========== ========= ======= =========== ========= ========
REINSURANCE
The following table summarizes gross and net written premiums and
underwriting results for each of the lines of business within our reinsurance
segment for the nine months ended September 30, 2004:
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2004
------------------------------------------ ------------------------------------------
PROPERTY CASUALTY SPECIALTY TOTAL PROPERTY CASUALTY SPECIALTY TOTAL
-------- -------- --------- ------- -------- -------- --------- ------
($ IN MILLIONS)
Gross premiums written $618.8 $393.0 $70.8 $1,082.6 $555.4 $260.3 $123.9 $939.6
Net premiums written 474.5 383.8 67.5 925.8 398.5 251.5 110.0 760.0
Gross premiums earned 479.6 255.2 93.0 827.8 295.0 106.6 119.4 521.0
Net premiums earned 361.2 248.5 88.8 698.5 197.4 100.8 105.5 403.7
Losses and loss expenses (215.9) (173.6) (43.9) (433.4) (60.0) (72.0) (61.3) (193.3)
Policy acquisition,
operating and
administration expenses (113.0) (50.6) (16.9) (180.5) (76.8) (22.0) (21.3) (120.1)
-------- -------- --------- ------- -------- -------- --------- ------
Underwriting profit before
investment income $32.3 $24.3 $28.0 $84.6 $60.6 $6.8 $22.9 $90.3
======== ======== ========= ======= ======== ======== ========= ======
RATIOS
Loss ratio 60% 70% 49% 62% 30% 71% 58% 48%
Expense ratio 31% 20% 19% 26% 39% 22% 20% 30%
-------- -------- --------- ------- -------- -------- --------- ------
Combined ratio 91% 90% 68% 88% 69% 93% 78% 78%
======== ======== ========= ======= ======== ======== ========= ======
23
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Gross Written Premiums. Gross premiums written for the nine months ended
September 30, 2004 were $1,082.6 million, an increase of 15.2% over the
equivalent period in 2003. In accordance with our strategy, gross premiums
written for our casualty reinsurance line of business increased by 51.0%
compared to the nine months ended September 30, 2003. The decrease in premiums
from the specialty class is due to the non renewal of the 2003 quota share
agreement with Syndicate 2020.
Losses and loss adjustment expenses. Losses and loss adjustment expenses
were $433.4 million for the nine months ended September 30, 2004, representing
62.0% of net earned premiums. The 14% increase in loss ratio from the 48.0% loss
ratio for the nine months ended September 30, 2003 is a result of the
recognition of windstorm claims offset by a $23.5 million release from prior
year reinsurance reserves.
Policy acquisition, operating and administration expenses. Total expenses
were $180.5 million for the nine months ended September 30, 2004, equivalent to
25.8% of net earned premiums. The increase from $120.1 million for the nine
months ended September 30, 2003 was due to the additional operational resources
required by the Company to service the growth in premiums.
INSURANCE
The following table summarizes gross and net written premiums and
underwriting results for each of the lines of business within our insurance
segment for the nine months ended September 30, 2004:
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
-------------------------------------------- --------------------------------------------
COMMERCIAL COMMERCIAL MARINE & COMMERCIAL COMMERCIAL MARINE &
PROPERTY LIABILITY AVIATION TOTAL PROPERTY LIABILITY AVIATION TOTAL
----------- ------------ ---------- -------- ---------- ----------- --------- ------
(IN US$ MILLIONS)
Gross premiums written $92.8 $183.0 $11.6 $287.4 $59.1 $163.1 $0.0 $222.2
Net premiums written 70.2 161.8 11.1 243.1 56.6 144.5 0.0 201.1
Gross premiums earned 72.3 190.6 2.5 265.4 30.8 115.1 0.0 145.9
Net premiums earned 56.2 169.2 2.3 227.7 28.0 107.3 0.0 135.3
Losses and loss expenses (27.3) (103.9) (2.1) (133.3) (15.9) (67.2) 0.0 (83.1)
Policy acquisition, operating (16.7) (37.1) (0.6) (54.4) (6.4) (14.3) 0.0 (20.7)
and administration expenses
----------- ------------ ---------- -------- ---------- ----------- --------- ------
Underwriting profit before
investment income $12.2 $28.2 $(0.4) $40.0 $5.7 $25.8 $0.0 $31.5
=========== ============ ========== ======== ========== =========== ========= ======
RATIOS
Loss ratio 48% 61% 91% 58% 57% 63% 0% 61%
Expense ratio 30% 22% 26% 24% 23% 13% 0% 15%
----------- ------------ ---------- -------- ---------- ----------- --------- ------
Combined ratio 78% 83% 117% 82% 80% 76% 0% 76%
=========== ============ ========== ======== ========== =========== ========= ======
24
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Gross Premiums Written. Gross premiums written for the nine months ended
September 30, 2004 were $287.4 million, a 29.3% increase from the nine months
ended September 30, 2003. This increase was due to the commencement of
underwriting by Aspen Specialty, our worldwide property account and our new
marine insurance class.
Losses and loss adjustment expenses. Total loss and loss adjustment
expenses were $133.3 million and are predominately IBNR provisions. The
reduction in earned loss ratios for business written in 2004 was due to the
relatively low level of claims experienced in 2004 and the release of $10.5
million of prior year reserves.
Policy acquisition, operating and administration expenses. Total expenses
were $54.4 million for the nine months ended September 30, 2004, equivalent to
23.9% of net earned premiums. This increase from $20.7 million for the nine
months ended September 30 2003 was due to the set up costs associated with the
establishment of our U.S. insurance operations, Aspen Specialty, our worldwide
property team and the marine team, the costs of which are first reflected in
2004.
RESERVES FOR LOSSES AND LOSS EXPENSES
As of September 30, 2004, the Company had gross accrued losses and loss
adjustment expense reserves of $1,137.5 million. This amount represented the
Company's best estimate of the ultimate liability for payment of losses and loss
adjustment expenses. Of the total gross reserves for unpaid losses of $1,137.5
million at the balance sheet date of September 30, 2004 a total of $804.8
million or 70.8% represented IBNR claims.
AS AT SEPTEMBER 30, 2004
-----------------------------------------
REINSURANCE
GROSS RECOVERABLE NET
---------- ------------- ---------
($ IN MILLIONS)
Property Reinsurance $372.7 $(99.2) $273.5
Casualty Reinsurance 306.8 (6.3) 300.5
Specialty Reinsurance 142.9 (18.3) 124.6
---------- ------------- ---------
Total Reinsurance $822.4 $(123.8) $698.6
Commercial Property 61.4 (11.1) 50.4
Commercial Liability 246.4 (27.4) 219.0
Marine & Aviation 7.3 (1.4) 5.9
---------- ------------- ---------
Total Insurance $315.1 $(39.8) $275.3
Total Losses and loss expense reserves $1,137.5 $(163.6) $973.9
---------- ------------- ---------
25
For the three months ended September 30, 2004, there was a reduction of our
estimate of the ultimate net claims to be paid in respect of the 2002 accident
year of $5.1 million and $5.8 million in respect of the 2003 accident year. An
analysis of this reduction by line of business is as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2004
------------- --------------
($ IN MILLIONS)
Property Reinsurance $2.1 $10.9
Casualty Reinsurance 0.3 0.1
Specialty Reinsurance 6.5 12.5
------------- --------------
Total Reinsurance 8.9 23.5
Commercial Property 2.0 4.6
Commercial Liability 0.0 5.9
Marine and Aviation 0.0 0.0
------------- --------------
Total Insurance 2.0 10.5
------------- --------------
Total reduction in prior year net loss reserves $10.9 $34.0
============= ==============
The key elements which gave rise to the favourable development during the
three months ended September 30, 2004 were as follows:
Property Reinsurance: The release in the quarter was mainly due to further
specific reductions in reserves for losses associated with the Californian brush
fires.
Specialty Reinsurance: Favourable incurred claims development, particularly
based on information received from the cedent on our 2002 year of account quota
share with Wellington Syndicates 2020 and 3030, has resulted in reserve
adjustments in this line of business.
Commercial Property: Better than expected settlement patterns have caused
us to adjust our estimate of ultimate claims in this line.
Other than the matters described above, the Company 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 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 - Reserves for Losses and Loss Expenses," included
in our 2003 Annual Report on Form 10-K for the year ended December 31, 2003
filed with the Securities and Exchange Commission.
26
LIQUIDITY AND CAPITAL RESOURCES
Aspen is a holding company that does not have any significant operations or
assets other than its ownership of the shares of its direct and indirect
subsidiaries, including Aspen Re, Aspen Bermuda and Aspen Specialty. Aspen
relies primarily on dividends and other permitted distributions from these
insurance subsidiaries to pay its operating expenses, interest on debt finance
and dividends, if any, on its ordinary shares. There are restrictions on the
payment of dividends by Aspen Re, Aspen Bermuda and Aspen Specialty to Aspen,
which are described in more detail in the Regulatory Matters section of the 2003
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The ability of Aspen Bermuda to pay dividends is dependent on its ability to
meet the requirements of applicable Bermuda law and regulations. Under Bermuda
law, Aspen Bermuda may not declare or pay a dividend if there are reasonable
grounds for believing that Aspen Bermuda is, or would after the payment be,
unable to pay its liabilities as they become due, or the realizable value of
Aspen Bermuda's assets would thereby be less than the aggregate of its
liabilities and its issued share capital and share premium accounts. Further,
Aspen Bermuda, as a regulated insurance company in Bermuda, is subject to
additional regulatory restrictions on the payment of dividends or distributions.
As of September 30, 2004, Aspen Bermuda could pay a dividend or return
additional paid-in capital totalling approximately $50 million without prior
regulatory approval based upon the Bermuda Insurance Act and the Bermuda
Companies Act regulations.
Aspen Re and Aspen Specialty are also subject to regulatory restrictions
limiting their ability to pay dividends. As of September 30, 2004, Aspen Re
could pay dividends totalling approximately $36 million per annum without prior
regulatory approval based upon the Financial Services Authority ("FSA") and the
Companies Act regulations. For the nine months ended September 30, 2004
dividends totalling $15 million have been paid. Aspen Specialty could pay a
dividend without regulatory approval of approximately $10 million.
Our aggregate invested assets as of September 30, 2004 totalled $2.47 billion
compared to aggregate invested assets of $1.62 billion as of December 31, 2003.
The increase in invested assets since December 31, 2003 resulted from
collections of premiums on insurance policies and reinsurance contracts and
investment income, offset by policy acquisition expenses paid, reinsurance
premiums paid, operating and administrative expenses paid. Total net cash flow
from operations from December 31, 2003 through September 30, 2004 was $656.6
million.
As of September 30, 2004 we had $40 million outstanding under our three-year
credit facility. The interest rate is three-month LIBOR plus 42.5 basis points.
A facility fee, currently calculated at a rate of 17.5 basis points on the
average daily amount of the commitment of each lender, is paid to each lender
quarterly in arrears. We repaid the $40 million outstanding balance on October
12, 2004 from the proceeds of our issuance on August 16, 2004 of $250 million in
aggregate principal amount of 6.00% Senior Notes due 2014.
On August 16, 2004, we closed our offering of $250 million in aggregate
principal amount of 6.00% Senior Notes due 2014 (the "Senior Notes") under Rule
144A and Regulation S under the Securities Act of 1933. We also have granted and
agreed certain customary exchange and shelf registration rights (the "Notes
Registration Rights Agreement") to noteholders under the terms of the Senior
Notes. The gross proceeds from the Senior Notes offering were $249.3 million. A
portion of the proceeds of the offering was used to repay $40 million in
principal amount of outstanding borrowings under our existing credit facilities.
The remainder of the net proceeds have been contributed to Aspen Bermuda in
order to increase its capital and surplus, and consequently, their respective
underwriting capacity.
Subject to certain exceptions, so long as any of the Senior Notes remain
outstanding, we have agreed that neither we nor any of our subsidiaries will (i)
create a lien on any shares of capital stock of any designated subsidiary
(currently
27
Aspen Re and Aspen Bermuda, as defined in the Indenture), or (ii) issue, sell,
assign, transfer or otherwise dispose of any shares of capital stock of any
designated subsidiary. Certain events will constitute an event of default under
the Indenture, including default in payment at maturity of any of our other
indebtedness in excess of $50 million.
Under the Notes Registration Rights Agreement, we agreed to file a registration
statement for the Senior Notes within 150 days after the issue date of the
Senior Notes, use reasonable best efforts to cause the registration statement to
become effective within 210 days after the issue date of the Senior Notes, and
consummate the exchange offer within 45 days after the date the registration
statement becomes effective. In addition, we will agree to file, in certain
circumstances, a shelf registration statement that would allow some or all of
the notes to be offered to the public. If we fail to meet the targets listed
above (a "registration default"), the annual interest rate on the notes will
temporarily increase by 0.25% during the first 90-day period during which the
registration default continues, and will increase to a maximum per annum rate
increase of 0.50% thereafter for any remaining period in which a registration
default continues.
The following table summarizes our contractual obligations, other than our
obligations to our employees, under operating leases and long term debts as of
September 30, 2004 and recognises the repayment of the $40 million syndicated
loan discussed above.
DUE IN
------
LESS THAN GREATER
1 YEAR 1-3 YEARS 3-4 YEARS 4-5 YEARS THAN 5 YEARS
--------- --------- ----------- ---------- ------------
($ IN MILLIONS)
Operating lease obligations 2.5 1.6 0.6 0.6 3.0
Long term debt obligation 0.0 0.0 0.0 0.0 250.0
Bank Debt 40.0 0.0 0.0 0.0 0.0
The long term debt obligation disclosed above does not include the $15 million
annual interest payable on the Senior Notes.
On October 19, 2004, Aspen Re entered into a new lease for office space in
London of approximately 49,500 square feet covering three floors. The term of
the lease is 15 years and commences soon after the date of practical completion
of the landlord's preliminary fitting-out works. Service charges and insurance
of approximately (pound)0.5 million per annum will be payable from this date,
and are subject to increase. It is expected that we will begin to pay the yearly
basic rent of approximately (pound)2.7 million per annum 36 months after the
relevant date of practical completion of the landlord's works. The basic annual
rent for each of the leases will each be subject to 5-year upwards-only rent
reviews. There are no contractual provisions in any of the leases allowing us to
terminate any of the leases prior to expiration of the 15-year contractual
terms.
Cash flow from operations was $219.2 million for the third quarter of 2004,
$228.7 million for the second quarter of 2004 and $208.6 million for the first
quarter of 2004. During the third quarter of 2004, we continued to take a
cautious view on interest rates and our portfolio of fixed income securities was
positioned to seek to protect capital from the negative impact of rising rates
with an average duration of 1.6 years, and 1.9 years excluding money market
funds.
For a discussion of derivative instruments we have entered into, please see note
9 to our financial statements for the nine months ended September 30, 2004.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2003 the FASB issued EITF 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" which requires certain
disclosures regarding the fair values and associated unrealized losses on
available-for-sale debt and equity securities accounted for under FASB Statement
No. 115, "Accounting for Certain Investments In Debt and Equity Securities," as
well as providing guidance for determining whether an impairment is
other-than-temporary resulting in the recognition of a loss on the investment.
The disclosure provisions of EITF 03-1 have been delayed until further guidance
on the application of recognition and measurement requirements of EITF 03-1 has
been issued. The delay of the recognition and measurement provisions
28
is expected to be superseded concurrently with the issuance of an FSP which will
provide additional implementation guidance. We will assess whether this guidance
will have a material impact on our financial position or results of operations
once the new guidance is released.
CURRENCY
The functional currencies of the Company's operations are U.S. Dollars and
British Pounds. Other foreign currency amounts are remeasured to the appropriate
functional currency and the resulting foreign exchange gains or losses are
recorded in the statement of operations. Functional currency amounts of assets
and liabilities are then translated into U.S. Dollars. The unrealized gain or
loss from this translation, net of tax, is recorded as part of shareholders'
equity. The change in unrealized foreign currency translation gain or loss
during the period, net of tax, is a component of comprehensive income. Both the
remeasurement and translation are calculated using current exchange rates for
the balance sheets and average exchange rates for the statement of operations.
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 expenses includes assumptions about future payments for settlement of
claims and claims-handling expenses, such as medical treatments and litigation
costs. We write liability business in the United States, the United Kingdom and
Australia, where claims inflation has grown strongly 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 retained earnings.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
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 (the "Exchange Act") 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," "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, including those set forth below under Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this report and the differences could be
substantial. The risks, uncertainties and other factors set forth in the
Company's 2003 Annual Report on Form 10-K filed with the Securities and Exchange
Commission and other cautionary statements made in this report should be read
and understood as being applicable to all related forward-looking statements
wherever they appear in this report.
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, those
set forth under Item 1, "Business-Risk Factors" of the Company's 2003 Annual
Report on Form 10-K filed with the Securities and Exchange Commission, and the
following:
o our short operating history;
o the impact of acts of terrorism and acts of war;
o greater frequency or severity of claims and loss activity, including
as a result of natural or man-made catastrophic events, than our
underwriting, reserving or investment practices have anticipated;
o the effectiveness of our loss limitation methods;
o changes in the availability, cost or quality of reinsurance or
retrocessional coverage;
29
o loss of key personnel;
o the inability to maintain financial strength or claims-paying ratings
by one or more of our subsidiaries;
o changes in general economic conditions, including inflation, foreign
currency exchange rates, interest rates and other factors that could
affect our investment portfolio;
o increased competition on the basis of pricing, capacity, coverage
terms or other factors;
o the effects of terrorist-related insurance legislation and laws;
o decreased demand for our insurance or reinsurance products and
cyclical downturn of the industry;
o changes in regulations or tax laws applicable to us, our subsidiaries,
brokers or customers;
o Aspen Holdings or Aspen Bermuda becomes subject to income taxes in the
United States or the United Kingdom; and
o the effect on the insurance markets, business practices and
relationships of current 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.
The loss reserves and other estimates regarding the recent windstorms affecting
the southeastern United States and Japan could be affected by the following:
o the total industry losses resulting from these storms;
o the actual number of the Company's insureds incurring losses from
these storms;
o the limited actual loss reports received from the Company's insureds
to date;
o the Company's reliance on industry loss estimates and those generated
by modelling techniques;
o the amount and timing of losses actually incurred and reported by
insureds to the Company;
o the preliminary nature of the range of loss estimates to date from the
insurance industry;
o the limited ability of claims personnel of insureds to make
inspections and assess claims of losses to date;
o the inherent uncertainties of establishing estimates and reserves for
losses and loss adjustment expenses;
o the impact of these storms on the Company's reinsurers;
o the amount and timing of reinsurance recoverables and reimbursements
actually received by the Company from its reinsurers; and
o the overall level of competition, and the related demand and supply
dynamics, in the wind exposed property reinsurance lines as contracts
come up for renewal.
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
30
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information provided
in our 2003 Annual Report on Form 10-K. However, on August 17, 2004 we entered
into a cat swap which exposed the Company to additional risks related to the
impact of market factors and outside events on its fair value. As quoted market
prices are not widely available for this derivative, the fair value is
determined by management using internal models taking into account changes in
the cat swap market. Fair values are subject to change in the near-term and
reflect management's best estimate based on various factors including but not
limited to, changes in the prices implied by the reinsurance and cat bond
markets for the transfer of the risks associated with hurricanes making landfall
in the Florida or earthquakes occurring in California and whether or not any
such events have occurred during the period covered by the contract. The amount
recognized could therefore be materially different from the amount realized in
an actual sale. The worst case financial impact on the consolidated accounts
from changes in the assumptions used for the cat swap would be $28 million in
the event that the Company ceased to have any exposures to Californian
earthquakes and Florida hurricanes at the level covered by the contract and was
unable to transfer the benefit to a third party for valuable consideration. The
maximum potential benefit which could accrue under the contract is $100 million,
however it is unlikely that this benefit would accrue unless the Company
suffered significant underwriting losses. Please see note 9 to our financial
statements for the nine months ended September 30, 2004, for a discussion of
derivative instruments. For further information, please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Quantitative and Qualitative Information about Market Risk" included in our 2003
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the design and operation of the Company's disclosure
controls and procedures as of the end of the period of this report. Our
management does not expect that our disclosure controls or our internal controls
will prevent all errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. As a result
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons or by collusion of
two or more people. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. As a result of the inherent limitations in a
cost-effective control system, misstatement due to error or fraud may occur and
not be detected. Accordingly, our disclosure controls and procedures are
designed to provide reasonable, not absolute, assurance that the disclosure
controls and procedures are met. Based on the evaluation of the disclosure
controls and procedures, the Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures were
effective in ensuring that information required to be disclosed by the Company
in this report is recorded, processed, summarized and reported in a timely
fashion.
31
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Similar to the rest of the insurance and reinsurance industry, we are
subject to litigation and arbitration in the ordinary course of business. We are
not currently involved in any material pending litigation or arbitration
proceedings.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASE OF EQUITY
SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders
during the third quarter of 2004.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following sets forth those exhibits filed pursuant to Item 601 of
Regulation S-K:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation and Memorandum of
Association (1)
3.2 Amended and Restated Bye-laws (1)
4.1 Specimen Ordinary Share Certificate (1)
4.2 Amended and Restated Instrument Constituting
Options to Subscribe for Shares in Aspen Insurance
Holdings Limited (1)
4.3 Indenture between Aspen Insurance Holdings Limited
and Deutsche Bank Trust Company Americas, as
trustee dated as of August 16, 2004 (incorporated
herein by reference to Exhibit 4.3 to the Company's
2004 Registration Statement on Form F-1
(Registration No. 333-119314))
4.4 First Supplemental Indenture by and between Aspen
Insurance Holdings Limited, as issuer and Deutsche
Bank Trust Company Americas, as trustee dated as of
August 16, 2004 (incorporated herein by reference
to Exhibit 4.4 to the Company's 2004 Registration
Statement on Form F-1 (Registration No.
333-119314))
4.5 Exchange and Registration Rights Agreement among
the Company, Deutsche Bank Securities Inc. and
Goldman Sachs & Co. as representatives of the
purchasers named in Schedule I thereto, dated
August 16, 2004 (incorporated herein by reference
to Exhibit 4.5 to the Company's 2004 Registration
Statement on Form F-1 (Registration No.
333-119314))
32
10.1 Amended and Restated Shareholders' Agreement, dated
as of September 30, 2003 among the Company and each
of the persons listed on Schedule A thereto (1)
10.2 Third Amended and Restated Registration Rights
Agreement dated as of November 14, 2003 among the
Company and each of the persons listed on Schedule
1 thereto (1)
10.3 Service Agreement dated September 24, 2004 among
Christopher O'Kane, Aspen Insurance U.K. Services
Limited and the Company (2)
10.4 Service Agreement dated September 24, 2004 between
Julian Cusack and the Company (2)
10.5 Service Agreement dated September 24, 2004 among
Sarah Davies, Aspen Insurance U.K. Services Limited
and the Company (2)
10.6 Service Agreement dated June 21, 2002 between David
May and Aspen Insurance UK Services Limited (1)
10.7 Aspen Insurance Holdings Limited 2003 Share
Incentive Plan (1)
10.8 Three-Year Credit Agreement dated as of August 26,
2003 among the Company, Barclays Bank plc and the
Lenders named therein (incorporated herein by
reference to Exhibit 10.8 to the Company's 2003
Registration Statement on Form F-1 (Registration
No. 333-110435)), as amended by the First Amendment
dated January 22, 2004, the Second Amendment dated
May 17, 2004, the Third Amendment dated August 2,
2004 (incorporated herein by reference to Exhibits
10.8a, 10.8b and 10.8c to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
2004) and the Fourth Amendment dated August 9, 2004
(incorporated herein by reference to Exhibit 10.8
to the Company's 2004 Registration Statement on
Form F-1 (Registration No. 333-119314))
10.9 364-Day Credit Agreement dated as of August 26,
2003 among the Company, Barclays Bank plc and the
Lenders named therein (incorporated herein by
reference to Exhibit 10.9 to the Company's 2003
Registration Statement on Form F-1 (Registration
No. 333-110435)), as amended by First Amendment
dated January 22, 2004, the Second Amendment dated
May 17, 2004, the Third Amendment dated August 2,
2004 (incorporated herein by reference to Exhibits
10.9a, 10.9b and 10.9c to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
2004), the Fourth Amendment dated August 9, 2004
and the Fifth Amendment dated August 25, 2004
(incorporated herein by reference to Exhibits 10.9A
and 10.9B to the Company's 2004 Registration
Statement on Form F-1 (Registration No.
333-119314)).
10.10 Quota Share Agreement between Syndicate 3030 and
Aspen Insurance UK Limited, dated October 21, 2003
reflecting the slip agreement entered into on June
12, 2002 therein (1)
10.11 Slip agreement for quota share entered into June 6,
2002 between National Indemnity Company and Aspen
Insurance UK Limited (1)
10.12 Qualifying Quota Share Agreement between Wellington
Underwriting, Syndicate 2020 and Aspen Insurance UK
Limited dated April 15, 2003 (1)
33
10.13 Slip Agreement for Property Risk Excess of Loss
Reinsurance Quota Share Treaty between Aspen
Insurance UK Limited and Montpelier Reinsurance
Ltd., dated June 20, 2002 (1)
10.14 Slip Agreement for Quota Share Treaty of Wellington
Underwriting Inc. Property Business between Aspen
Insurance UK Limited and Montpelier Reinsurance
Ltd., dated June 20, 2002 (1)
10.15 Slip Agreement for Quota Share Treaty of Wellington
Underwriting Inc. Auto Liability Business between
Aspen Insurance UK Limited and Montpelier
Reinsurance Ltd., dated June 20, 2002 (1)
10.16 Employment Agreement dated June 21, 2003 between
Peter Coghlan and Aspen Insurance U.S. Services
Inc. (incorporated herein by reference to Exhibit
10.16 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003)
10.17 Supplemental Executive Retirement Plan prepared for
Aspen Insurance U.S. Services, Inc., dated August
25, 2004 (incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on August 31, 2004)
31.1 Officer Certification of Christopher O'Kane, Chief
Executive Officer of Aspen Insurance Holdings
Limited, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed with this report.
31.2 Officer Certification of Julian Cusack, Chief
Financial Officer of Aspen Insurance Holdings
Limited, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed with this report.
32.1 Officer Certification of Christopher O'Kane, Chief
Executive Officer of Aspen Insurance Holdings
Limited, and Julian Cusack, Chief Financial Officer
of Aspen Insurance Holdings Limited, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, submitted
with this report.
(1) Incorporated herein by reference to similarly numbered exhibit
to the Company's 2003 Registration Statement on Form F-1
(Registration No. 333-110435).
(2) Incorporated herein by reference to Exhibits 10.1, 10.2 and
10.3 to the Company's Current Report on Form 8-K filed on
September 24, 2004.
(b) Reports on Form 8-K
(1) Current Report on Form 8-K filed on August 5, 2004, under
Items 7, 9 and 12 thereof, announcing the Company's results
for the second quarter ended March 31, 2004.
(2) Current Report on Form 8-K filed on August 11, 2004 under
Item 9 furnishing the Company's press release relating to
its offering of $250 million 6% Senior Notes due 2014 under
Rule 144A and Regulation S of the Securities Act of 1933.
(3) Current Report on Form 8-K filed on August 16, 2004 under
Items 7 and 9 furnishing the Company's press release in
connection with the impact of Hurricane Charley.
34
(4) Current Report on Form 8-K filed on August 24, 2004 under
Items 7.01 and 9.01 furnishing the Company's press release
in connection with its estimated exposure as a result of
Hurricane Charley.
(5) Current Report on Form 8-K filed on August 31, 2004 under
Items 1.01 and 9.01 in connection with the Supplemental
Executive Retirement Plan for the benefit of Peter Coghlan,
President and Chief Executive Officer of Aspen Specialty
Insurance Company and one of the Company's named executive
officers.
(6) Current Report on Form 8-K filed on September 24, 2004 under
Items 1.01 and 9.01 in connection with the new service
agreements with Messrs. Christopher O'Kane, our chief
executive officer, and Julian Cusack, our chief financial
officer and Ms. Sarah Davies, our chief operating officer.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: November 12, 2004 By: /s/ Chrisopher O'Kane
---------------------------
Christopher O'Kane
Chief Executive Officer
Date: November 12, 2004 By: /s/ Julian Cusack
---------------------------
Julian Cusack
Chief Financial Officer
36