Bermuda-Based Aspen Insurance Downgraded To 'A-'; Outlook Stable

  • Aspen has taken corrective actions over the past two years to re-underwrite its portfolio and reduce its expenses. It has also strengthened its balance sheet by protecting its prior year reserves and maintaining a higher level of capital in excess of the 'AAA' level.
  • Despite these improvements, Aspen's 2019 results continue to highlight the pricing challenges that it faces.
  • We think it will take longer than we previously expected for Aspen to show improved underwriting results consistently at a level in line with 'A' rated peers.
  • We are downgrading Aspen's core subsidiaries, Aspen Bermuda Ltd. and Aspen Insurance U.K. Ltd., to 'A-' from 'A'. We are also downgrading its nonoperating holding company, Aspen Insurance Holdings Ltd., to 'BBB' from 'BBB+'.
  • The stable outlook reflects our expectations that Aspen will defend its competitive position, its performance will gradually improve, and the group will remain highly capitalized.
LONDON (S&P Global Ratings) March 26, 2020--S&P Global Ratings today lowered its insurer financial strength and issuer credit ratings on the group's core subsidiaries, Aspen Bermuda Ltd. and Aspen Insurance U.K. Ltd., to 'A-' from 'A'.
At the same time, we lowered our long-term issuer credit rating on Aspen Insurance Holdings Ltd. to 'BBB' from 'BBB+'.
The outlooks on all long-term ratings are stable.
We also lowered our issue ratings on the preference shares to 'BB+' from 'BBB-' and the senior unsecured debt to 'BBB' from 'BBB+'.
The stable outlook reflects our expectations that the group will continue to benefit from its competitive position within the global specialty and reinsurance market. It also reflects our view that, as a result, the underwriting performance will gradually improve back to better than break-even in the next two years. We also expect Aspen to maintain capitalization at least at the 'AA' level, as per our capital model, during this period.
We currently view an upgrade as unlikely over the next 12-24 months. However, we could raise the rating over the next 24 months if:
  • We consider Aspen is likely to improve its underwriting profitability materially and consistently, matching the performance of its 'A' rated peer group, through successful re-underwriting and declining operating expenses; and
  • The group maintains at least a 'AA' level of capital adequacy, maintains an adequate level of liquidity, and does not materially increase its financial leverage position.
We currently view a downgrade as unlikely over the next two years because we think actions taken by Aspen's management would support the group's competitive position and at least very strong capital adequacy, which support the current ratings. However, we would consider lowering the ratings if:
  • Aspen's underwriting performance does not show further signs of improvement, signalling greater competitive pressure than we currently anticipate;
  • Aspen's capital adequacy position consistently declines below the 'AA' level. This could stem from excessive investment risk-taking or a change in capital management;
  • Aspen weakens its financial strength by increasing its financial leverage or materially reducing its liquidity level; or
  • There is unexpected turnover in senior management that weakens current levels of expertise, or if we observe an unexpected change in involvement from its new owner, Apollo, which could weaken our view of governance.
The downgrade of Aspen reflects our view that its insurance and reinsurance businesses will continue to face negative pressure as the group repositions under its new management team. This means Aspen's underwriting performance is likely to continue lagging behind some of its 'A' rated peers.
Corrective underwriting actions have been ongoing at Aspen since late 2017. During this period, the group has exited more than $700 million of underperforming business. At the same time, Aspen has also lowered its exposure to catastrophic risks and reduced line sizes. In addition, Aspen has significantly lowered its operating expenses, and we expect these efforts to continue through 2020 and 2021. As a result of these actions, we expect Aspen's underwriting performance to revert to better than break-even in 2020-2022 with a combined ratio of 98%-100%. Nevertheless, we think there is uncertainty regarding the extent and the timing of the recovery. This is because despite some positive price uptick in both the specialty and reinsurance space, we think the environment remains challenging. Furthermore, we think it will take some time before Aspen starts to benefit from these material changes to the group's portfolio and structure.
For year-end 2019, Aspen posted a combined ratio--claims plus expenses relative to premium--of 108.5% and an accident year loss ratio of 64.3%, excluding reserve strengthening of 2.6 percentage points and catastrophe losses of 6.3 percentage points. This compares to a combined ratio of 106.5% and an accident year loss ratio of 63.9% in 2018. Adjusted for the legacy lines that Aspen is exiting, the 2019 results would be better, but still below our expectations. We think the pace of improvement during this period highlights that the group's underwriting actions might take time to fully come to fruition.
Strengthening in Aspen's reserves, particularly for its U.S. casualty primary and reinsurance classes, weakened the group's 2019 performance. There was also underperformance in marine, energy, and liability business and in credit and surety reinsurance business, both of which Aspen is exiting.
In March 2020, Aspen announced that it had entered into an adverse development cover reinsurance agreement with a wholly owned subsidiary of Enstar Group Limited. We expect the agreement to significantly reduce potential earnings volatility from 2019 and prior loss reserves. The decision also demonstrates Aspen's clear commitment to maintaining the strength of its balance sheet.
Despite the $241.7 million post-tax loss that Aspen recorded in 2019, we expect the group to maintain its capital strength at least at the 'AA' level, as per our risk-based capital model, for the next two years. Aspen's capital adequacy position has improved in recent years, reflecting management's actions and commitment to maintaining the company's high capitalization. We expect Aspen to maintain the existing level of prudence in its reserves after taking actions in 2019 to strengthen certain classes. Aspen is in the process of converting some of its assets into private assets using Apollo's asset management expertise. The shift will increase Aspen's exposure to credit risk and reduce liquidity, but it is unlikely to materially harm our view of Aspen's current capital strength and liquidity level.
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