Moody’s downgrades Aspen over ‘weaker’ diminished earnings power

Aspen has been downgraded by Moody’s, which has cited concerns over the re/insurer’s diminished earnings power and difficulty in rebuilding balance sheet strength, both of which remain weaker than that of its peers and Moody's expectations.

The rating agency has downgraded the insurance financial strength ratings of Aspen Insurance UK and Aspen Bermuda to A3 from A2. The outlook for the ratings has been changed to stable from negative.

It said that Aspen's diminished earnings power, which is in part a result of its need to support regulatory capital levels through elevated cession of risk as balance sheet equity has fallen, allows it limited earnings flexibility to absorb unexpected events within current year earnings.

Moody’s also said that, similar to peers, Moody's expects Aspen will incur meaningful claims related to the coronavirus in 2020.

It acknowledged that, over the past two years Aspen has taken a number of steps to reduce its risk profile, including reducing certain property-catastrophe reinsurance exposures, concluding a large adverse development cover reinsurance agreement on its existing reserves and selling the majority of equity exposures in its investment portfolio.

The group has also exited some business lines, most recently with the sale of its profitable global surety business to the Amynta Group, which have diminished the breadth and size of its premium base. “While these actions have supported its regulatory capital ratio and reduced the potential for volatility in profits, the group's earning power and ability to rebuild capital organically is diminished,” Moody’s said.

Moody's noted that the group has implemented significant organizational changes and underwriting actions which have resulted in an ongoing improvement in Aspen's underlying underwriting performance, particularly in its primary insurance business. As a result of these actions, Aspen's accident year ex-cat loss ratio improved to 64.3 percent in 2019 from 82 percent in 2017, albeit that the group's combined ratio for 2019 remained elevated at 113.9 percent.

However, despite the progress made in shifting the trajectory of the group's profitability, Moody's does not believe that the impact of these positive changes on Aspen's balance sheet strength and absolute profit levels over the next 12 to 18 months, will be sufficient to fully offset the impact of any unexpected events, including development of losses related to coronavirus, or to restore its financial and business profile to a level consistent with A2 peers.

“The rapid spread of the coronavirus outbreak and deteriorating global economic outlook are creating a severe and extensive credit shock, with the re/insurance sectors being affected given the exposure to rising claims on property and casualty insurance coverages, and rising financial markets risk. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety,” it said.

It stressed that the A3 financial strength rating is supported by Aspen's good franchise and position in its chosen markets, which includes its growing alternative reinsurance capital management platform, and diversified reinsurance and primary specialty insurance platforms. The group's credit profile is further supported by good regulatory and economic capital, with a Bermuda regulatory solvency capital coverage of 203 percent at year-end 2019 and moderate asset risk due to its currently conservative investment portfolio.

But it added: “These strengths are offset by the group's historically weak profitability and diminished level of balance sheet capital, along with reduced flexibility to respond to unexpected events, and in Moody's opinion, the need to introduce more risk into the business over time, as it seeks to strengthen earnings and take advantage of the hardening reinsurance price environment.”