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Rating Action:

Moody’s downgrades Aspen’s insurance financial strength rating to A3; outlook stable

27 July 2020


London , July 27, 2020 – Moody's Investors Service, ("Moody's") has today downgraded the insurance financial strength ratings (IFSR) of Aspen Insurance UK Limited and Aspen Bermuda Limited (collectively, Aspen) to A3 from A2. Concurrently, the senior unsecured debt rating of Aspen Insurance Holdings Limited has been downgraded to Baa2 from Baa1 and the preferred stock ratings downgraded to Ba1(hyb) from Baa3(hyb). The outlook for the ratings has been changed to stable from negative.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The downgrade of Aspen's IFSR to A3 from A2 reflects its diminished earnings power and difficulty in rebuilding balance sheet strength, both of which remain weaker than that of its peers and Moody's expectations. Aspen's diminished earnings power, 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. Similar to peers, Moody's expects Aspen will incur meaningful claims related to the coronavirus in 2020.

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 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% in 2019 from 82% in 2017, albeit that the group's combined ratio for 2019 remained elevated at 113.9%.

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.

The A3 IFSR 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% at year-end 2019 and moderate asset risk due to its currently conservative investment portfolio. 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.

OUTLOOK RATIONALE

The stable outlook reflects Moody's view that the steps Aspen has taken to improve its underwriting performance and operating efficiency, along with hardening prices for reinsurance, will lead to improving profitability for the business and a return to positive capital generation. The outlook also anticipates that Aspen will maintain its moderate underwriting and investment risk stance and good levels of economic and regulatory capital.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's stated that the following factors could lead to an upgrade of Aspen's ratings: (i) increased capitalisation such that gross underwriting leverage (GUL) improves to a level consistently below 3.0x with regulatory capital remaining above a 200% coverage ratio; (ii) return on capital consistently above 6% with a combined ratio in the mid-90's range; (iii) financial leverage consistently below 25% and earnings coverage above 5x; and/or (iv) the group maintaining a moderate investment risk profile.

In contrast, the following factors could lead to a downgrade of Aspen's ratings: (i) a material loss of business or market position in the group's core lines; (ii) gross underwriting leverage (GUL) remaining above 4.5x and/or a regulatory capital coverage ratio consistently less than 150%; (iii) a material increase in natural catastrophe exposure or investment risk relative to capital; (iv) adjusted financial leverage above 30% with earnings coverage of interest below 3x in consecutive years; and/or (v) more than a 10% decline in shareholders' equity over a rolling twelve month period.

LIST OF RATING ACTIONS

Issuer: Aspen Insurance Holdings Limited

....Preference Stock, Downgraded to Ba1(hyb) from Baa3(hyb)

....Preferred Stock Non-cumulative, Downgraded to Ba1(hyb) from Baa3(hyb)

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

..Outlook Action:

....Outlook, Changed to Stable from Negative

Issuer: Aspen Insurance UK Limited

....Insurance Financial Strength Rating, Downgraded to A3 from A2

..Outlook Action:

....Outlook, Changed to Stable from Negative

Issuer: Aspen Bermuda Limited

....Insurance Financial Strength Rating, Downgraded to A3 from A2

..Outlook Action:

....Outlook, changed to Stable from Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Reinsurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187551 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Simon James Robin Ainsworth
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

© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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