Introduction
Last winter I covered the Aspen Insurance Pfd C (NYSE:AHL.PR.C) as its owners, the Apollo Management Group (APO) was contemplating doing an IPO for their subsidiary (article link). Apollo filed the papers needed for the IPO last December but then decided not to proceed in late April, apparently due to poor reception expectations. I found no articles with any real details other than that. I thought the IPO strengthen the case for owning the preferreds backing Aspen. With that on hold at least until next year, this article reviews Aspen’s three preferreds, with updated ratings on each of those:
- Aspen Insurance Holdings Limited PFD SHS 5.95 (AHL.PR.C)
- Aspen Insurance Holdings Limited PFD SHS (NYSE:AHL.PR.D)
- Aspen Insurance Holdings Limited DP SH 1/1000 PFD (AHL.PR.E)
Aspen Insurance Holdings Limited review
Even though Aspen is owned by Apollo, they do file their own financials which can be used to help determine the default risk of the preferred stocks as they have multiple institutional holders.
Seeking Alpha describes this Apollo Global Management subsidiary as:
Aspen Insurance Holdings Limited, together with its subsidiaries, engages in insurance and reinsurance businesses in Australia/Asia, the Caribbean, Canada, the United States, the United Kingdom, Europe, and internationally. Its insurance products include U.S. primary casualty, excess casualty, environmental, international, and railroad liability; cyber, management, and professional indemnity and lines liability; inland and ocean marine; U.S property; and credit and political risks, crisis management, energy and construction, UK property and construction, and specie insurances. The company’s reinsurance products include agriculture, engineering and technical lines, marine, energy and terrorism, mortgage, special risks, property, and casualty insurances.
Source: seekingalpha.com AHL.PR.C
The recently released quarterly report shows some deterioration in both the expense and loss ratios.
While premiums written increased over last year, Aspen saw a drop in Net and Operating income. On the plus side, income available to pay the preferred stock dividends was about 8X what is needed.
Looking at the Balance sheet, we see that Total Shareholders’ Equity was about 3X, low but up from last year. A favorable IPO should improve that. I like to see ratios over 5X to get a Buy rating from a safety viewpoint.
Preferred stock review
The information at the top says this preferred stock will stay at first floating rate of 9.59343% until the LIBOR rate comes back, which is very unlikely. This makes this issue much more costly to Aspen than the others, which were fixed from the start.
Factor | AHL C | AHL D | AHL E |
Issue size | 11m | 9m | 10m |
Issue date | 4/29/13 | 9/13/16 | 8/6/19 |
Coupon | 9.59343% | 5.625% | 5.625% |
Call date | 7/1/23 | 1/1/27 | 10/1/24 |
Price | $25.91 | $20.66 | $20.07 |
Yield | 9.26% | 6.81% | 7.01% |
YTC | NA | 13.8% | 85.3% |
All three are non-cumulative, eligible for the lower tax rate and are currently rate Ba1/BB+.
Analysis
- AHL-C, by far offers the best yield but currently comes with a capital loss if Called, which it can be. I suspect it would have been if the IPO was executed. Since its cost to Aspen jumped over 360bps since last October, investors should take the Call risk into their calculations.
- AHL-D or AHL-E, when the pass their Call date, will not until the AHL-C issued is Called.
- Investors expecting rates to fall would chose AHL-D over AHL-E for the time difference between the two Call dates.
- Based on its current price, the market is not expecting Aspen to Call AHL-E in a few months, thus its 85% YTC value is highly unlikely.
- If an investor does not believe or wishes to bet on neither AHL-D or AHL-E being Called, then AHL-E is the better choice as it provides investors with 20bps more in yield.
Conclusion: Personally, I would avoid AHL-C out of fear that it will be Called. At a fixed 5.625% cost to Aspen. If I was willing to give a Buy rating, it would be to AHL-E for the better yield between the other two preferred stocks despite the pending Call date this fall as I (and the market) do not see that happening.
I would expect Apollo to execute the Aspen IPO as soon as they believe the market will be respective, which in my view will be when interest rate cuts start with a clearer glide path down.
Rating downgrade on AHL-C:
This was my outlook back in January for AHL-C:
If the Issuer executes the IPO, I believe that will strengthen this preferred. The risk is the new fixed rate of 9.5+% coupon makes being Called very high. With that understanding, I give it a Buy rating.
My downgrade is based on the IPO being pulled and the over Par amount having doubled. I believed the IPO would lower the default risk, though before/after it seems minimal, and while I believe the IPO would have funded the calling of this issue, thus I see that as less but not unlikely, the higher capital loss if Called warranted a drop to a Hold rating.
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