Aspen Insurance Not Operating At A Top-Notch Level

Aspen (NYSE:AHL) wasn't my favorite idea in P&C insurance back when I last wrote about the stock in early 2016 (I preferred Chubb (NYSE:CB)), as I thought the apparent undervaluation in the shares was overshadowed by some operational risks. While the shares have climbed about 10% since then, a lot of those operational risks have emerged as bigger issues, and Aspen has underperformed other insurance companies like Chubb and Travelers (NYSE:TRV), as well as the broader Dow Jones P&C Insurance Index (which is up about 25% since I last wrote about Aspen).

Aspen's "build it and they will come" strategy for insurance hasn't worked out yet, and the company has seen both higher adjusted loss ratios and higher expense ratios. The company's underwriting profitability has declined significantly and weak pricing is not going to help matters.

Aspen is shrinking its programs business and taking a harder look at expenses, but shrinking reserve releases and the prospect of claims inflation are worries. While I still believe that Aspen can get to low double-digit ROEs over the long term, and the shares are priced for high single-digit to low double-digit returns, there is still risk to those projections and it's hard for me to get excited about Aspen outside of potential M&A interest.

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Aspen Insurance Not Operating At A Top-Notch Level

Seeking Alpha: Aspen Insurance Trying To Defy Expectations And Tough Markets

This isn't an easy market for an insurance and reinsurance company that wants to grow, but Aspen Insurance (NYSE:AHL) continues to push a story that calls for above-average premium growth, driving above-average operating leverage. The Street still isn't buying it, as the shares are down a bit from my last article and not particularly well-loved in terms of "Buy" ratings.

It's always fair to question the compromises a company has to make to grow when its peers are struggling to do so, and that's a concern as Aspen looks to grow in a declining market. What's more, I'm a little disappointed in the company's progress with its underwriting profitability. This is still a story where growth could drive impressive performance, but I see more risk to that idea given what's going on in the sector as a whole. I've trimmed back my expectations, particularly for the next couple of years, but if the company can manage mid-single-digit cash earnings growth, a fair value in the high-$40s still makes sense.

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Aspen Insurance Trying To Defy Expectations And Tough Markets

Seeking Alpha: RenaissanceRe Changes With The Times

Insurance companies like ACE (NYSE:ACE), Arch Capital (NASDAQ:ACGL), and W.R. Berkley (NYSE:WRB) are successful in no small part because they are structured in a way that management can smoothly reallocate capital across business lines as rates and projected returns dictate. That wasn't historically as much of an option for RenaissanceRe (NYSE:RNR), though, as this very well-run property catastrophe reinsurer didn't have the same level of diversification across its operations.

Having closed the deal on Platinum Underwriters, it's a new era for RenRe. Management can, and is planning to, allocate significantly more capital toward casualty and specialty reinsurance, sidestepping some of the rate pressure in prop-cat. While this move should decrease the volatility of the business over the long term, it will likely also temper some of the advantages of what had been arguably the best prop-cat reinsurer out there. Long-term ROEs are likely to be lower with the new business mix, but RenRe looks like a stronger company for the deal. The one hitch is valuation - as I have complained on several occasions lately, there aren't that many bargains in the insurance space, and while RenRe does seem undervalued, it isn't a compelling bargain.

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RenaissanceRe Changes With The Times

Seeking Alpha: Arch Capital Keeps Going While The Going Gets Tougher

I like MetLife (NYSE:MET), ACE (NYSE:ACE), and W.R. Berkley (NYSE:WRB) quite a bit as insurance companies, but Arch Capital (NASDAQ:ACGL) has long been at the top of my list as a well-run insurance company with an uncanny knack for profitable allocating and reallocating of capital across multiple lines of business. That skill is increasingly valuable as P&C and reinsurance rates continue to fall and the industry looks to be heading into a tough multiyear stretch.

I don't believe that Arch Capital needs to join into the recent upswing in M&A activity, but the company does have the capital to get involved if the right opportunity should show up. Failing that, I expect the company to continue looking to mortgage insurance and selective alternative markets and excess and surplus lines as a source of growth and adequate returns.

Arch Capital has been something of a middle-of-the-road performer over the past year, but it's not yet particularly cheap even with long-range ROE estimates in the low teens. Buying into a part of the cycle where rates are falling, reserves are shrinking, and earnings are likely to come under pressure for many players is a risk on its own and given that backdrop I'd wait in the hopes of being able to buy Arch Capital's shares at a better price down the line.

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Arch Capital Keeps Going While The Going Gets Tougher

Seeking Alpha: Skepticism Can Still Benefit Aspen Insurance Shareholders

Aspen Insurance (NYSE:AHL) continues to look like an opportunity within the insurance sector for a management team to drive better-than-expected results and positive re-ratings on the shares. More than a few sell-side analysts remain convinced that Aspen is going to see slower-than-expected premium growth (due largely to price pressure), higher losses, and lower than expected investment income. For its part, Aspen management believes that it is approaching a point of significant operating leverage for the insurance business and that a focus on more specialized segments within reinsurance can preserve pricing.

These shares are up about 10% from my last update on the company, and I believe they can go higher from here. I'm still not quite as bullish as management on its long-term ROE potential, but I don't think a low-to-mid $50's fair value is unreasonable today and if management can outperform the ultimate value will be higher. I'd also note that while Aspen management has been consistent regarding its views of Aspen's ability to gain share in the market and generate stronger than expected ROEs, the current move toward more M&A in the insurance sector could have suitors approaching the company once again.

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Skepticism Can Still Benefit Aspen Insurance Shareholders

Seeking Alpha: Aspen Insurance Making Its Case To Stand Alone

If nothing else, Aspen Insurance (NYSE:AHL) doesn't lack for confidence. While Endurance Specialty Holdings (NYSE:ENH) has made an offer for the company that values it more highly than any of its peer group companies except Arch Capital and RenRe, management has remained steadfast in its rejection of Endurance's overtures. Likewise, management continues to project an ROE evolution that is meaningfully more bullish than the sell-side's projections.

While I'm still not willing to go 100% with Aspen's projections, the recent improvement in operating results is pushing me more in that direction. Although I do think management may be too bullish with its expectations for interest rates, cat losses, and reserve developments, the underwriting has been looking better and the company may be on the cusp of some significant margin leverage after years of investments to build out the insurance business. My new base-case of 11% ROE in 2018 suggests the shares should trade around $46, but even a half-point improvement offers some noteworthy upside.

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Aspen Insurance Making Its Case To Stand Alone

Seeking Alpha: Allied World Has A Good Story, But Less Value

As I've remarked more than once in recent months, the melt-up in the insurance sector has taken most of the value out of the sector. So it would seem to be with Allied World Assurance (AWH). I really like what this company has done with its transition towards small/mid-market specialty casualty underwriting, and I think the company's reserve quality and balance sheet are both high quality. I also like the company's plans and prospects for ongoing premium growth in a variety of specialty niches and segments. All of that said, even projecting double-digit earnings growth and ROE isn't enough to generate a truly compelling fair value today.

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Allied World Has A Good Story, But Less Value

Seeking Alpha: Aspen Insurance Building Tomorrow's Growth At The Cost Of Today's Margins

Few bargains remain in the insurance sector, what with these companies having recovered significantly from the post-credit crisis lows. Valuations have moved up in conjunction with higher pricing across multiple sectors, but it is now starting to look like pricing is topping out in many (if not most) markets. Couple that with a still-weak investment environment and growing loss severity and I'm not surprised that many sell-side analysts are pulling back a bit from their bullish calls on the sector.

Aspen Insurance (AHL) finds itself in an interesting position amidst these changes. The company has followed a clear and stepwise transition towards becoming more of a primary insurance underwriter (versus a balanced insurance/reinsurance company), and the management believes that the insurance platform has matured to a point where it can retain more risk. Margins and returns have taken a hit in the course of building out the primary insurance business, and the Street is quite skeptical about Aspen's near-term ROE prospects, but the shares do seem modestly undervalued and could offer growth-driven upside.

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Aspen Insurance Building Tomorrow's Growth At The Cost Of Today's Margins