Moody’s downgrades Aspen citing diminished earnings power
Moody’s has downgraded Aspen, citing concerns over the re/insurer’s diminished earnings power and difficulties rebuilding its balance sheet strength.
The rating agency downgraded the insurance financial strength ratings of Aspen Insurance UK and Aspen Bermuda to A3 from A2, while the outlook was changed to stable from negative.
Moody’s said Aspen’s earnings power and balance sheet were weaker than those of its peers, and underperformed its expectations, urging it to introduce more risk into the business over time.
Aspen's diminished earnings power is partly a result of its need to support regulatory capital levels through elevated cession of risk as balance sheet equity has fallen. The re/insurers is also set to incur meaningful claims related to COVID-19 in 2020, Moody’s predicted.
The rating agency acknowledged the steps Aspen has taken over the last two years to reduce its risk profile. These include 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.
Aspen has also exited some business lines, most recently with the sale of its profitable global surety business to the Amynta Group. This has 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.
The re/insurer has also implemented significant organisational changes and underwriting actions, resulting in an ongoing improvement in Aspen's underlying underwriting performance, Moody’s said - particularly in its primary insurance business. These actions saw Aspen's accident year ex-cat loss ratio improve to 64.3 percent in 2019, from 82 percent in 2017, though the group's combined ratio for 2019 remained elevated at 113.9 percent.
However, Moody’s said these efforts would not be sufficient to 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,” Moody’s 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.
