This Company Is Placing High Hopes on Share Buybacks

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Aspen Insurance Holdings (NYSE: AHL) is an insurance and reinsurance holding company operating out of Bermuda. Two developments make Aspen an interesting play. At present, Aspen's market cap is around $2.46 billion, which means that with a book value of $3.34 billion, it is trading at a 26% discount. Moreover, it seems that, as of December 2011, Aspen was over-reserved by $137 million.

Aspen reduced its reserves at the end of 2012 to $3,961 million from $4,098 million a year earlier. This overestimation of reserves implies a redundancy that results in an understated book value. Therefore, the discount to book value could be as much as 15.5%. The second development is the buy-back program that Aspen has been conducting since the beginning of the year.

Aspen Insurance Holdings is in the property and casualty (P&C) insurance business. Aspen‘s revenue is split evenly between insurance and reinsurance premiums, at least since 2010, but with a steady increase in that period for the insurance premiums part of the business as part of total revenue, which went from 44% in 2010 to 52% in 2012. This is in line with the move away from the reinsurance business, which is deemed too volatile and incapable of sustaining rising premiums as a result of overcapacity.

Within the insurance business, marine, energy, and transportation premiums represent 39% of the total, down from 47% in 2010. In 2011, this part of Aspen’s business grew 11% over 2010, and in 2012, it grew three times that rate, at 33%. Always on the insurance side, there is a 6% increase in premiums on renewals, mostly due to a 15% increase in insurance premiums. An analyst expects an 8% to 10% increase in earnings over the very long run.

Better than the competition?

Aspen’s share price has had a good run this year, going from $32 at the beginning of the year to over $38.33 at present. Its P/E ratio is 10.91. Among Aspen’s direct competitors in terms of size and line of business, Allied World Assurance Holdings (NYSE: AWH) and PartnerRe (NYSE: PRE) stand out.

Allied has a stronger earnings record than Aspen and has been upgraded by Zacks from a neutral rating to an outperform one. Its 2013 first-quarter revenue and earnings were nearly flat from a year ago, resulting in 4.2% growth in diluted book value per share. Zacks has a $96.70 target on the stock, as opposed to a current price of $91.65. Not all analysts are bullish on Allied World Assurance, with at least one analyst having a sell rating on the stock, but with a P/E rating of 7.13 Allied World Assurance appears to be a solid alternative to Aspen.

PartnerRe’s outlook has been revised upwards from negative to stable by A.M. Best. Mentioned among the factors for this upgrade are the good risk-adjusted capitalization and business profile, as well as the global reach of its reinsurance business, which has resulted in better than average 2012 operating performance, insuring PartnerRe’s capacity to compete successfully with the best of its peers. Its net income for the first quarter of 2013 was $210 million, which translated into $3.53 per share, underperforming first-quarter results for 2012. Its P/E ratio stands at 5.94.

Aspen's buyback program

The claim by Aspen to being a good investment with perhaps better prospects than either Allied World Assurance or PartnerRe as far as capitalization gains go rests largely on its buyback program. Since the start of the year, Aspen has dramatically increased its program, amounting to a buyback of 10% of the total, and plans to continue doing so for the rest of the year.

Conclusion: Prospects for capital gains

Fewer shares translates into higher earnings per share. This is in line with Aspen’s ROE targeting, which also means that it will continue with its buyback program. At current rates, it is buying shares at below book value, which, given present trends, should be a good investment.

An analyst also points out that Aspen is anticipating Warren Buffett’s investment strategy of buying big time into the type of insurance Aspen is into. Given Buffett’s reputation and track record, it is a very comforting reference to have for investors contemplating doing the same via Aspen.

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