Hurricane Bargain? Aspen Insurance Holdings

Recent operations did not bring any attractiveness despite high discount to book value
Stock: Aspen Insurance Holdings (ticker: AHL)

Reinsurers are recently hit brought by their exposure to such calamities that have occurred in Florida.

A Bermuda-based $2.3 billion insurance company with 51% of its gross written premiums based in the United States, Aspen Insurance is worth a look.
The company’s shares dropped 6.3% in the days that Hurricane Irma’s landfall in Florida while having jumped a whopping 9.44% after lost estimates were reduced.

Meanwhile, the insurer’s cheap 0.6 times PB ratio accompanied by a decent 2.4% trailing dividend yield with 36% payout ratio could trigger an easy decision that it is a great value and a worthy buy even today even without waiting for the accumulative after effects of Hurricane Irma and Harvey in the coming quarters.

Aspen, nonetheless, exhibited an already weak 13% decline in revenue and 4% drop in profits as per its recent six months operations compared to its year ago period.
This decline in profits was observed despite that Aspen was able to reduce its total expenses by 14%. Net earned premiums (85% of revenue) declined by 14.9%.

Further, Aspen management brought up that Aspen was operating in a challenging environment during the press release.

Returns
The company has provided 22.82% total losses to its shareholders so far this year compared to the S&P500’s 11.51% total gains.

Aspen
Aspen Insurance Holdings Limited (“Aspen Holdings”) was incorporated on May 23, 2002, as a holding company headquartered in Bermuda.

Aspen underwrites specialty insurance and reinsurance on a global basis through its Operating Subsidiaries based in Bermuda, the United States, and the United Kingdom: Aspen U.K. and AUL, corporate member of Syndicate 4711 at Lloyd’s of London and managed by AMAL (United Kingdom), Aspen Bermuda (Bermuda) and Aspen Specialty and AAIC (United States). The company also has branches in Australia, Canada, France, Germany, Ireland, Singapore, Switzerland and the United Arab Emirates.

Aspen has two distinct business segments, Aspen Insurance and Aspen Reinsurance (“Aspen Re”).

Aspen Insurance
Aspen Insurance consists of (i) property and casualty insurance, (ii) marine, aviation and energy insurance, (iii) and financial and professional lines insurance.

Gross written premium for the insurance business grew 6% in the first half to $900.9 million (49% of written premiums) and an underwriting income margin of 6.3% compared to 8.3% a year earlier.

Aspen Re

Aspen Re consists of (i) property catastrophe reinsurance (including the business written through Aspen Capital Markets), (ii) other property reinsurance, (iii) casualty reinsurance, and (iv) specialty insurance and reinsurance.

Aspen Re gross written premiums decreased by 0.9% year over year to $919.2 (51% of total written premiums) and underwriting losses of $10.3 million vs. profits of $17.6 million a year earlier.

Sales and profits
In the past three years, Aspen registered revenue growth average of 6.6%, profit decline average of 14.9%, and profit margin average 9.75% (Morningstar).

Cash, debt and book value
As of June, Aspen had $1.23 billion in cash and cash equivalents and $7 million in long-term debt with debt-equity ratio 0.18 times–at par in the same period last year. Equity rose by $4 million to $3.62 billion from a year earlier period.

Cash flow
Aspen’s had $104 million in cash outflow from operations brought by lower payables and other assets in its first half of operations. The company also had a free cash outflow of $122 million compared to $223 million a year earlier. Aspen also allocated $114 million in long-term debt repayments and spent $133 million in preferred stock redemptions.

The cash flow summary
In the past three years, Aspen allocated $64 million in capital expenditures, raised $118 million in debt net repayments and $12 million in share issuances, generated $1.57 billion in free cash flow, and provided $611 million in dividends and repurchases at an average free cash flow payout ratio of 39%.

Conclusion
Aspen’s recent sharp rise in share price brought some relief from several hurricane episodes should be taken as a caution. This is because the company has performed weakly in its recent months of operations absent such recent events. Further, both metrics ROE and ROA has fallen in recent years too.

Aspen’s reinsurance business, in particular, has experienced weak premium growth accompanied even by losses in the recent first half period.

Nonetheless, the company has a strong balance sheet accompanied by a healthy free cash flow generation and prudent payout ratios.

Analysts have an average hold recommendation on Aspen with a target price of $51 a share vs. $41.75 at the time of writing. Asking a 25% discount from Aspen’s book value would still indicate an 8.6% upside from today’s share price to $45.36.

In summary, Aspen is a pass.

Quotes
Chris O’Kane, Chief Executive Officer

“We continue to make progress in both Reinsurance and Insurance to enhance further our competitive position and profitability.
“With a strong regional network and deep local relationships, the Aspen Re team has been able to capture new opportunities and again deliver strong results in an operating environment that remains challenging. The Aspen Insurance team remains focused on lines that provide the best opportunities for long-term profitable growth such as Professional Liability, with its excellent track record of growth and strong underwriting performance.
“While our second quarter underwriting results reflected elevated loss levels in certain areas of the business, our investment performance contributed positively to diluted book value per share growth.”

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