While the company has a very familiar sounding name, it’s headquarters in Bermuda are nowhere near a ski hill of any kind, especially its namesake, and that’s okay because people get hurt skiing and being in the insurance business, they frown upon avoidable risk.

Aspen (AHL) diversifies across four operating divisions including property reinsurance, casualty reinsurance, specialty lines, and general insurance. None of the four accounts for more than 31 percent of gross written premiums, protecting the business from a downturn in one or more of its units. Further, management focuses on building book value per share rather than top line growth, preferring to be more selective about the business it underwrites. In 2006, book value grew 16 percent to $22.44 per share from $19.30. If I were a shareholder, I’m not; this approach would give me greater peace of mind. Growth is only good if it is profitable.  

The company uses four methods for driving growth in book value. These include:

• Ensuring margins remain stable. They’ll avoid new business and margin expansion if it threatens their future stability. Management is interested in building a sustainable and profitable business model, not one that rises quickly and fades even quicker.

• Improving the return the company receives from its investment portfolio, valued at $4.7 billion as of December 31, 2006. They’ve moved away from a 100 percent fixed-income allocation to include other asset classes like hedge funds-of-funds, and other non-traditional investments. At the same time, they’ve increased the duration (bond repayment period) of their fixed-income securities from 1 to 3 years, increasing the effective yield. Investment income in 2006 increased 68 percent to $202 million from $121 million. Their capital management appears to be working.

• Reduce the average tax rate by moving income to different divisions when necessary to achieve greater tax efficiency. It’s projected to be between 16 and 19 percent in 2007.

• Staying on top of enterprise risk management - what exactly does this mean? Understanding all risks the company entertains and maintaining the highest underwriting guidelines to ensure there aren’t any liability surprises.

Aspen Insurance is a relatively new organization. It got its start in 2002 with equity injections from the Blackstone Group (they own 16 percent), Candover Investments (7 percent), and Credit Suisse First Boston (7 percent) and others. In a short period, the company has grown gross written premiums from $375 million in its first year (2002) to $1.94 billion in 2006. At the same time, net income has risen from $29 million in 2002 to $378 million last year. The most important number, book value per share, has moved from $15.44 to $22.44 in five years, an increase of almost eight percent annually. On a valuation basis, shares trade less than one times book value, better than most of their competitors. Lastly, they’ve bought back $200 million in company shares in the last year with $100 million to go. Share repurchases are always good news in my opinion.

With the exception of 2005, a year all insurers would like to forget, Aspen has been exceptionally profitable and I believe their slow but steady plan for growth makes sense given the risks the world faces moving forward.