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Rating Action:

Moody's affirms Aspen's IFS rating at A2; outlook changed to negative

06 Feb 2018

London, 06 February 2018 -- Moody's Investors Service, ("Moody's") has today affirmed the A2 insurance financial strength (IFS) ratings of Aspen Insurance UK Limited and Aspen Bermuda Limited, and the Baa2 senior unsecured debt rating and Ba1(hyb) preferred stock ratings issued by Aspen Insurance Holdings Limited ("Aspen"). The outlook has been changed to negative from stable.

A complete list of ratings affected by this rating action is available at the end of this press release.

RATINGS RATIONALE

CHANGE OF OUTLOOK TO NEGATIVE

The change in outlook to negative reflects deterioration in Aspen's financial strength, including a sharp decline in shareholder's equity as a result of underwriting losses in the second half of 2017, pressure on financial flexibility as evidenced by rising financial leverage and weakening earnings coverage, and declining profitability driven by margin erosion and challenges with underwriting. In addition, Aspen's capital base is now meaningfully smaller than the majority of its mid-tier reinsurance peers, a factor that could place pressure on its franchise and increase its reliance on retrocession to maintain underwriting capacity and economic capital levels within its target range. Ongoing underperformance of Aspen's primary insurance business creates uncertainty about the group's ability to significantly improve underwriting profitability of that business in the near term, and alleviate some of the pressure on Aspen's financial profile, including its capital position.

Aspen had suffered heavy losses from natural catastrophes during the third quarter of 2017, with pre-tax catastrophe losses of $360 million primarily due to hurricanes Harvey, Irma and Maria and the Mexican earthquakes. As a result, Aspen reported an underwriting loss of $335 million for the third quarter. In addition, Aspen has stated that it expects to record an underwriting loss of approximately $245 million in the fourth quarter of 2017, reflecting approximately $135 million in pre-tax loss related to the wildfires in California, and the remainder due to increased frequency of mid-sized and attritional losses primarily in Aspen's primary insurance segment. These include property and fire-related losses in the U.K. and U.S. and, to a lesser extent, cyber losses.

As a result of these losses in the second half of last year, Moody's expects the group's shareholder's equity at year-end 2017 to decline sharply relative to the previous year, resulting in higher operating leverage, particularly on a gross basis. More specifically, Moody's expects Aspen's gross underwriting leverage to deteriorate to a level meaningfully above the level of 2.7x reported in prior years. The group's adjusted shareholders' equity as a percentage of net written premiums, which has already declined over the past five years given the group's share buy-back and progressive dividend policy, will decline further at year-end 2017.

Following the losses in second half of last year, Moody's does not expect Aspen's economic solvency position to have deteriorated significantly due to risk mitigating actions recently implemented by management to reduce the group's solvency capital requirement. However we believe the group has limited remaining capital flexibility at its current capital level, for example in meaningfully reducing its solvency requirement if another stress situation would occur.

While Moody's expects Aspen to benefit from stronger pricing for (re)insurance during 2018, particularly in loss-affected regions, including Florida, the Caribbean and California, the presence of alternative reinsurance capital could cause price rises to be more muted than was the case after previous large loss events. Equally the US tax reform and the Base Erosion Anti-Abuse (BEAT) tax, in particular, may place pressure on Aspen's profitability over time. In fact Aspen transfers a significant portion of its US business to Bermuda through quota-share reinsurance, which will be subject to the BEAT tax if Aspen leaves the quota share in place, or be taxed in the US if Aspen reduces the amount of business transferred to Bermuda.

Moody's expects the group's adjusted financial leverage, which at YE2016 was relatively high at 24.7% (excluding external debt issued by Silverton Re, the group's sidecar), to increase above 25% at YE2017 as a result of erosion of shareholders' equity. Earnings coverage remains a weakness for Aspen, relative to peers, with 2017 being the third consecutive year of declining earnings coverage. Aspen's earnings coverage for the five-years from 2016-2012 averaged 4.9x and we expect the average to decrease to below 4x as of YE2017, as a result of underwriting losses during the year.

More positively, while Aspen is facing significant headwinds related to its underwriting performance and difficult market conditions, Moody's believes that Aspen's expertise, deep relationships with chosen clients, and continued focus on innovation, including capabilities to leverage third party capital, positions the group to defend its market position. In addition, Aspen has well-recognised underwriting expertise in a number of specialty insurance lines, and has been viewed as a valuable reinsurance partner by ceding companies.

WHAT COULD CHANCE THE RATINGS UP/DOWN

Given the negative outlook, there is limited upward pressure on Aspen's rating at present, however Moody's stated that the following factors would lead it to stabilise the outlook for Aspen: (i) increased capitalisation, or a clear path to increasing equity capital such that gross underwriting leverage returns to the historic range of 2.5x to 2.7x, and gross natural catastrophe exposure relative to equity returns to a more moderate level; (ii) improved performance of Aspen's primary insurance book relative to peers and historical expectations (sub-100 combined ratio).

Conversely, the following factors could lead to a downgrade: (i) further erosion of shareholders' equity due to underwriting losses or return of capital to shareholders; (ii) underperformance of the primary insurance book as demonstrated by a combined ratio above 100% through the first-half of 2018 and going forward; (iii) indications of weakening in market position at key renewal periods during 2018 including weaker renewal pricing than peers or significantly diminished volumes; (iv) financial leverage remaining above 25% (excluding Silverton Re debt) and earnings coverage below 4x on a four-year average basis; and (v) indications of the group favouring shareholders over policyholders and creditors, including a lack of commitment to rebuilding the capital base.

While rating outlooks are typically resolved within 12-18 months, Moody's noted that the risks for Aspen are weighted towards the downside, and that any indication of further downward pressure through the first-half of 2018 would likely result in negative action sooner than 12 months. Conversely, a longer time period will be applied to any stabilisation of the rating, to allow more time to assess the sustainability of improvements to Aspen's operating performance or financial profile.

LIST OF RATING ACTIONS

Affirmations:

Issuer: Aspen Insurance Holdings Limited

....Senior Unsecured (Foreign), Affirmed Baa2

....Pref. Stock Non-cumulative (Foreign), Affirmed Ba1 (hyb)

....Preference Stock (Foreign), Affirmed Ba1 (hyb)

Issuer: Aspen Insurance UK Limited

....Insurance Financial Strength, Affirmed A2

Issuer: Aspen Bermuda Limited

....Insurance Financial Strength, Affirmed A2

Outlook Actions:

.Outlooks changed to negative from stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Reinsurers published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Brandan Holmes
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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