Aspen Insurance Holdings Ltd (AHL) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen. My name is Elsa and I will be your conference facilitator for today. At this time I would like to welcome everyone to the Aspen Insurance Holdings Limited third quarter 2005 Earnings Conference Call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the call over to your host, Mr. Noah Fields. Sir you may begin your conference.

Thank you and good morning. The presenters on this mornings call are Chris O’Kane, CEO of Aspen Insurance Holdings; and Julian Cusack, CFO of Aspen Insurance Holdings.

Before we get underway I would like to make the following remarks. Yesterday afternoon we issued our press release announcing Aspen’s financial results for the quarter ended September 30, 2005. This press release, as well as corresponding supplementary financial information, can be found on our web site at www.aspen.bm.

Now a word about forward-looking statements. This presentation may contain, and Aspen may make from time to time make, written or oral forward-looking statements pursuant on the Safe Harbor and the U.S. federal securities laws. Forward-looking statements include all statements that do not related solely to historical our current facts, and can be identified by words such as “expect”, “intend”, “will”, and similar expressions of a future or forward-looking nature. All forward-looking statements will have a number of the assumptions concerning future events that are subject to a number of uncertainties and other factors which could cause actual results to differ materially from such statements.

For a more detailed description of these uncertainties and other factors please see the risks factor section in Aspen's Annual Report on form 10K with year ended December 31, 2004. Filed with the SEC and on our website. Finally this presentation will contain non-GAAP financial measures, which we believe are meaningful in evaluating the company’s performance. For a detailed disclosure on non-GAAP financials please refer to the supplementary financial data posted on the Aspen website.

Now I will turn the call over to Chris O'Kane.

Chris O’Kane: Thanks Noah, good morning and welcome to Aspen’s third quarter earnings conference call. This year has been an exceptional year for natural catastrophes with an unprecedented level of gratuity in the North Atlantic falling on some four land-falling hurricanes [in corridor] last year. Currently Katrina, the New Orleans flood, Hurricanes Rita and Wilma present a number of fundamental challenges for our industry and the magnitude of these challenges is only gradually emerging.

In this morning call I intend to focus on the impact of Hurricanes’ Katrina and Rita on Aspens third quarter results and capital position. I will also discuss the loss estimates in this relation to hurricane Katrina and potential consequences of this year’s strong activity of the insurance and reinsurance industries in general. I will comment on the likely affects on pricing and market conditions for the remainder of the year and 2006 and the changes we will be making to Aspen’s property reinsurance business model in response to these events. Finally, I will comment briefly on the impact of Hurricane Wilma on our results for the year.

On October the 3rd we revised our estimate of the financial impact of Hurricane Katrina on Aspen after the affects of Inward and Outwards reinsurance and [added tax] from approximately $150 million to between $325 and $400 million. This equates to estimated gross losses to Aspen of between approximately $840 and $925 million. We also stated that our retained losses from Hurricane Rita, after recoveries from our Outwards reinsurance program and the impact of Outwards-Re, Inwards-Re and [Segments]-Re are likely between $50 and $60 million after tax. Our third quarter results reflect our revised estimate for hurricane Katrina having recognized a charge against net income in the quarter of $360 million, for the balance expected to affect the fourth quarter results.

On October the 11th we announced the completion of the sale of approximately 17.5 million shares which resulted in aggregate net proceeds to Aspen of about $400 million. We have since contributed $390 million in capital to Aspen Insurance Limited our Bermuda subsidiary, which will be used to support our Bermuda business platform. The performing net assets of Aspen Insurance Limited after this injection of capital are $790 million.

I would like to give you a little more detail on the breakdown of the revised Katrina loss and clarify the impact of these losses on our outwards reinsurance programs. Approximately 78% of our estimated Katrina losses resulted from our property reinsurance segments with energy physical damage, which we reported in our specialty line segment contributing 11% and our insurance segment through our property facultative and C&S accounts counting for the balance. We perceived a number of tentative, very tentative new indications from brokers suggesting that some major nation wide US [Stevens] losses may exceed their 1 in 100 or even 1 in 250 year return period loss calculations for US [indiscernible] losses.

Another way to think about this is that, whereas our original [indiscernible] of loss estimate was consistent with the market loss $40 billion, the new suggested trend would lead us to conclude that the market loss would be in the region of $55 billion.

Let me put this in perspective, our modeling suggests that the insured [wind] loss of this cost in the USA has a return period of just over 100 years. At this level of loss some elements of our reinsurance protections are exhausted as far as Hurricane Katrina is concerned, which means that it’s given this year’s ratio of gross loss will generate a much greater proportionate deterioration at the net level.

We do however, have approximately $40 million of specific cover remaining for our off shore energy insurance account and around $75 million in relation to our E&S Austin-based operation.

[Considering] our loss with Hurricane Rita deteriorated at a gross level, we have approximately $200 million of additional [retro-cession] cover available and a further $50 million of specific cover for energy physical damage insurance losses.

For any subsequent loss this year following Rita and assuming no deterioration in our current Rita reserves then we have approximately $500 million of reinsurance retro-cessional coverage remain.

In addition to our reinsurance program we entered into a risk transfer contract in 2004 which can provide further cover of up to $100 million under a fully collateralized risk transfer swap, placed with a non-insurance counter party. This would provide Aspen with recovery if the level of industry loss from Hurricane Katrina as determined by property claim services in the continental United States exceeds $39 billion for the maximum of $100 million recoverable on a linear basis as such industry losses reach $47 billion.

Our revised Katrina net cost estimates do not include any recoveries, under this cat-swap contract.

Turning now to market conditions and the impact of this year’s events on pricing of terms and conditions I shall address each our four business segments in turn.

Starting with our property reinsurance. Overall rates in 2005 held up much better than we initially expected. The remainder of 2005 will likely be an adjustment period as insurers and reinsurers begins to take stock and assess the broader implications for Katrina and the level of this year’s storm activity.

We therefore, do not expect that the full impact of the post-Katrina market will not be felt until the beginning of 2006 when we expect a meaningful reduction in capacity. Dramatic increases in rates and major changes to policy terms and conditions. We have already seen some evidence of reduced capacity with some carriers offering significantly smaller lines on non-renewing such contracts.

Turning back to market conditions we are expecting rate increases on US catastrophe exposed business, in particular loss effected lines to be very significant and certain cases we believe there will be increases in excess of 100%. Higher deductibles and the reduction in the availability in natural disaster cover are also likely to be a feature. We expect to see modest rate increases elsewhere with property reinsurers with higher increases in certain European business following the European storms during the summer.

In Mexico, we expect to see rate increases averaging 100% following the effects of Hurricane Wilma in the Yucatan. Also, elsewhere in Latin America, prices are expected to rise by 50% for the same reason.

In our specialty line segment, we expect the effect on rates in energy physical damage insurance to be equally far reaching.

With industry losses from Hurricane Katrina and Rita for this line estimated in the region of $3 to $5 billion each and following on Hurricane Ivan in 2004, we are expecting higher deductibles and very modest sub-limits for wind storm in the Gulf of Mexico exposed business. We expect rate increase in excess of 125% with certain loss-impacted insured’s.

There will also be a lesser level of rate rises for non-Gulf of Mexico exposed Energy Physical Damage business. We anticipate a reduction in capacity and significant restrictions in coverage terms offered for business interruption and contingent business interruption insurance.

In the Marine Liability and Marine HOWL we are expecting price increases to be less significant but still up to 25% in certain areas.

In our aviation insurance business we expect modest declines in prices for the remainder of this year with rates leveling out at the beginning of 2006 and modest increases thereafter.

Moving on to our insurance segment, the outlook is more mixed. We expect rates in our UK commercial property account to stabilize and continued modest decline in the UK liability albeit a slow [intake].

Regarding the Boston based excess and surplus line operations, we expect rates in our casualty account to continue to supply for the remainder of 2005 and at a slower rate in 2006.

On the property side, Gulf exposed wind rates are beginning to move towards the level seen [logic] for this business prior to this years’ hurricanes. And we expect further upward movement as we move into 2006.

On our Florida book we have seen rates hardened in 2005 already and this trend is likely to continue in 2006. Finally, turning to casualty reinsurance with our US and international accounts are likely to be largely unaffected by the hurricane activity this year.

On the international side we expect rates to continue to decline slowly for the remainder of this year and into 2006. Our US book prices for workers compensation are likely to continue to fall slightly for the remainder of this year and into next. However, we are continuing to see rate increases in medical malpractice, which we expect to peak towards the end of 2006.

On that note, I am going to hand you over to Julian for a more detailed review of the second quarter financial results.

Thank you, Chris. The results of the third quarter of 2005 are dominated by the affects of Hurricanes Katrina and Rita.

Our combined ratio for the quarter was 207% and our combined ratio for the 9 months to September 30th was 121%. Valuated book value per share was $17.53 at September 30 compared to $22.17 at June 30, 2005, reflecting the severe loss in the quarter. And shareholders equity fell to $1.22 billion.

Subsequent to the quarter’s end the company raised approximately $400 million through a blocked trade. Our pro-forma shareholders that should be taken into account for new shares and increased to $1.62 billion and our pro-form valued book value per share to $18.59.

As of September 30, 2005 the total cost before tax or the two hurricanes effected the financial statements was some $454 million.

There will be a further charge primarily arising in the fourth quarter 2005 of some $46 million in relation to the reinstatement premiums that have to be recognized in accordance of their period of cover.

The total cost of the two hurricanes to the company is within the range set out in our press release of October 3rd, with the amount booked net of tax as of September 30, 2005 being $360 million for Katrina and $46 million for Rita.

Within our earnings release supplements we have shown for each segments the results for the quarter and the nine months to date, the impact of the hurricanes on the results for the quarter and the nine months. And by that we mean that impact of Hurricanes Katrina and Rita. And we have showed what the claims, expense, and combined ratios would have been excluding these two events.

We have also combined the analysis of the corresponding period in 2004, showing the impact of last year’s foreign losses and the claims expense and combined ratios excluding those events. This information is provided to assist in the understanding of the underlying results.

I will now give some background to the process we have adopted in establishing our losses in this for Hurricanes Katrina and Rita. The state of disaster following the hurricanes has been unprecedented for the people of the region. It has also meant exceptionally difficulty in assessing expected losses for Aspen’s clients and in producing an article loss assessment for the company.

By far the most difficult segment to assess has been the property reinsurance segment, in particular within this our catastrophe excessive loss account. In establishing an estimate for this account, we have made an assessment on a client by client basis of the expected losses for each layer of their reinsurance program that we participate on. In making these assessments, we have taken into account all available information including information from brokers and where possible, directly from clients.

The [application] investment catastrophe modeling systems market intelligence and initial tentative loss reports. However, much of this information can best be described as very preliminary, as to-date we have still seen relatively few formal loss advices. This area continues to pose the most uncertainty in our overall estimate.

I will now turn to our underwriting [indiscernible] segmental basis. The combined ratio for the property reinsurance segment in the quarter was 441% mainly driven by Katrina and Rita. Excluding these hurricanes, the combined ratio was a disappointing 91%. It is higher than in previous quarters for this segment, reflecting that the [happien] number [albeit] other will be at smaller events in the period [recognized] of losses.

These include losses in the quarter from hurricane Dennis of $8 million, European and Indian floods of $4 million, and a fire loss of a school in the U.S. of $4 million. Taken together these losses amount to some 13% on the property reinsurance combined ratio for the quarter.

In addition we have also observed an increase in attritional loss activity in our risk excess accounts and have taken the appropriate reserving action in the current quarter.

The casualty reinsurance segment has not been materially affected by the hurricanes in the quarter. There has been a small reduction in the loss ratio, which relates to continued favorable [indiscernible] on the business written in 2002 in our international casualty accounts. The losses in this account take a long time to be notified as developed, but we are now seeing favorable trends that have enabled us to make a small reduction in the held reserves for 2002.

Casualty reinsurance losses as of the end of the quarter have risen to over $600 million.

The specialty lines segments as a combined ratio for the quarter of 129%. This segment includes both a direct energy account and a Marine reinsurance account, which together have suffered net losses of $24 million from hurricanes Katrina and Rita.

Excluding the effects of these hurricanes, the loss ratio for the period is 65.9% compared to 29% in previous quarters. The primary drivers of this increase is the loss experience of our aviation insurance unit following a course of the high frequency of aviation losses. In the quarter we suffered losses on the [Helius] Airways and the West Caribbean airline crashes, and they came from Air India arising from the floods in that country. These amounted to $14 million in total.

The property and casualty insurance segment has a combined ratio of 114% in the quarter. Within this account are our worldwide property accounts and our U.S. excess and surplus lines accounts written out of our Boston office. These accounts have both suffered losses from hurricanes Katrina and Rita, contributing 43.8% combined ratio. Excluding the effects of two hurricanes, the segment would have produced a favorable combined ratio of 70.6%.

In net investment income in the quarter of $29.4 million was 51% higher than the third quarter 2004, due to both arising portfolio book deals and favorable movements in interest rates and positive cash flow.

Cash and invested assets increased by 41% compared to the corresponding period of last year. The invested portfolio yield to maturity at the end of the quarter was 4.34%, and during the quarter the invested portfolio book yield increased by 16 points from 3.86% to 3.84%. Maturation of our investment portfolio at September 30th, 2005 was 2.72 years versus 2.4 years as of June 30th, 2005.

As of September 30, 2005, followed by gross reserves for losses and loss adjustment expenses were approximately 2.75 billion, of which 75% represents estimates on losses incurred, but not reported. This is up from 58% at June 30th, 2005 mainly as a result of the third quarter hurricanes.

Reinsurance recoverables have increased significantly to around $893 million at September 30th, 2005 from $198 million at the end of last calendar year. This increase is driven by the reinsurance recoveries in relation to the hurricane events as we have presented analysis of this amount by both A.M. Best and Standard and Poor’s current ratings in our financial supplements.

In addition I can tell you that approximately 57% of the balance is due from 4 companies being GE, [Comptilia], [indiscernible] and Munich Re and further 10% of the balance is fully collateralized.

I would like to turn now to guidance for the remainder of 2005 in respect of investment income and combined ratio. We have previously projected investment income for the year in the range $110 million to $135 million. Based on our book yield of 3.84% and taking into account and taking the $10 million we raised earlier in the month I now expect the outcome for the year to be toward the upper end of that range. Our combined ration for the year-to-date excluding the charges for Katrina and Rita in the third quarter is 82%, which is in line with our earlier guidance that we would be in the lower end of our 80-90 range which excludes major losses.

In part, due to the expected the charges for additional charges for reinstatement premium in the fourth quarter also arising from the hurricanes, we would now expect a combined ratio for the year, excluding the third quarter hurricane charges to be toward the upper end of the range. That is, in the range 85-90%.

With that, I would like to turn the call back to Chris.

Chris O’Kane: Well thanks Julian and before I get underway again, I just remind you that Julian was of course talking about our third quarter rather than the second quarter, which I suggested he was going to do. As usual, the CFO has a perfect grasp of the figures. I won’t comment on the CEO in the circumstances.

What I would like to do now is to take the rather an unusual step of sharing with you some of our internal thinking about the challenges and opportunities facing as we survey the insurance and reinsurance markets in October 2005. Last weekend hurricane Wilma reminded us this continues to be an active hurricane season and seems to us that most of the underlying causes of hurricane information will continue to be with us for another 4-6 weeks. This represents a very late end to the traditional hurricane season.

It is too early to offer any reliable guidance on the market impact form the hurricane Wilma. But early indications are that on the US mainland Wilma will produce losses comparable to last year’s hurricane Charlie. But the really dramatic impact occurred in are area where Aspen has very little exposure indeed, mainly the Yucatan peninsula of Mexico. It appears to us that more or less all catastrophe programs in Mexico will sustain total losses as will all of these event limits on the Mexican proportion treaties. This represents up to $4 billion of insured loss in Mexico which is an extraordinarily large number if you think about the size of the Mexican economy. We also expect more than 90% of this $4 billion figure will be reinsured so this actually is a major loss for certain international reinsurer’s. The 2004 and 2005 hurricane seasons have caused full [thoughtful] observers of and participates in the reinsurance industry to question some of the fundamental assumptions concerning three issues.

First, the total amount of insurable value exposed to cat risk. This is a function essentially of more people and more buildings on the coast of America. This is growing much more rapidly than other aspects of the U.S. economy. Second, the frequency and severity of hurricane activity. And thirdly the reliability of catastrophe pricing and accumulation models currently in use. There a widespread view that the so called cat models are defective and need to be overhauled, replaced, or even abandoned altogether. In our view, some of these concerns are overstated. One of the biggest problems we see in the market place is unsophisticated use of [accessory] models. I have often remarked that if you want to participate in the cat business and you do not use a cat model, then you have a problem. On the other hand, if all you have is a model, than you have an even bigger problem. And in our view, there can sometimes be in the market and over reliance on black box techniques to solve complex issues, which the model designers have not yet addressed or offer only very imperfect solutions for. Within Aspen we constantly remind our underwriters to price the non-model perils such as winter weather for inadequately models such as brush fire or fire following the earthquake.

Another major problem in the use of models stems from inputting out-of-date or inaccurate exposure data. We are not going to next years’ exposure correctly if you just use last years’ data. Having said that, we too see significant defects in the approaches to disaster modeling used up until now. In early summer of this year we began commissioning research to help us gain a better understanding of the apparent upturn in hurricane frequency and severity in the recent past. We believe we have now succeeded in recalibrating our model to reflect this change, while the standard models continue to base annual loss expectancy assumptions on the long term average. We have also addressed a surprisingly complex phenomenon know as demand surge and we believe we have established a better correlation between the degree of demand serge and a size of the loss.

I am not going to bore you with an exhaustive list, but another key issue revisited has been the different and more dangerous damage characteristics of commercial structures versus residential. We believe that these insights and initiatives will give Aspen significant competitive advantage in the months and years ahead. Put simply, we expect to be able to achieve significantly better price adequacy, superior risk selection and a lesser downside risk. In short a more profitable portfolio with reduced volatility. And this volatility question is one of increasing importance as rating agencies appear inclined to require increased capital to cover these risks. One of the primary drivers of the capital requirements is volatility and by reducing our risk tolerances which we are doing, and continuing to develop along correlated risks in the context of our diversified underwriting model, we believe that we offer both clients and investors an increasingly attractive vehicle.

I would also like to share my thoughts with you on the off shore energy physical damage line of business. Aspen has a highly respected team of underwriter in this line. We are experiencing increased demand for our products and the willingness to pay increased prices sometimes greater than double and very significant reduction in exposure to natural hazards. In this context, I believe Aspen can approach the coming hurricane season with well placed confidence.

Now, in the market place, there is considerable speculation that the current upturn in property rates resulting from recent hurricanes will be short lived, perhaps only one or two years. While this may be right, but I have to tell you that if this is true, then the industry will be ignoring some important fundamentals. If our analysis is correct then we’re facing a long term if not permanent change in catastrophe loss expectancies and this will require a permanent solution. Putting it bluntly, prices will go up and they will need to stay up for a very long time.

An with that thought, I’m going to pause and invite your questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from Charles Gates with CSFB.

What is the appropriate tax rate that we should apply against the losses resulting from the two large storms?

Yes. Charles that would be about 10% on a [marginal] tax basis.

And that would be true for both of them.

Yes.

Okay.

The figures I quoted in the text were net of tax when I gave them for the individual hurricanes.

My second question --I realize Chris spoke to this to some extent but with regard to this change in regime in the part of A.M. Best with regard to the rating of company seemingly in your industry. If you were to go back to say 1/1/05, what would that imply as far as additional capital that might be required.

I don’t think that we can quantify that at the moment. I mean the thoughts of the rating agencies and A.M. Best in particular on the indications of capital loss through merging and I still think we don’t know enough about it yet to be able to put a number on that.

Chris O’Kane: Charlie, I’d add to that, that obviously we have been having some conversations and will in the next couple of weeks have more detailed conversations with the rating agencies. Our approach is going to put prices up for these property cat exposeries, but also in an absolute sense to reduce our exposure. And I think one of the things that concerns reg agencies is this volatility, we’re going to be saying there is less volatility. I think the new regime, as you called it, holds perhaps unequally, I could be wrong here, but my expectation is implications are greater from mono lying versus diversified plans. And as you know very well, Aspen has always endeavored to write a diversified account. I expect that that diversification trend away from property exposures will continue next year.

What is the status of the ILW?

I think, Charlie, you’re referring to our cat swapping stuff and that is the current PTOA estimated loss is less then the trigger point on the contracts and therefore we are not taking any credit for it.

Well if it reaches $39 billion, I guess it’s now $34.6, then at that point you can take in a portion of that?

Chris O’Kane: That is correct. Even when that happens, then we will be able to begin recognized – would be required to recognize that as a fair value of the contract.

I’ll let others ask a question. Thank you guys.

Thank you. Our next question is coming from Dan Johnson with Citadel Investment Group. Please go ahead.

Thank you very much. I have a few questions please. You said you’ve made some changes to your – the way your utilizing your cat model, can you go into a little more specifics in terms of sort of what variables and factors you’ve changed? And then can you talk a little more about the reinstatement premiums to be recorded in the fourth quarter? Seems that most everyone else has booked both inward and outward in the third quarter and just wondering what the difference for you might be? Thanks.

Chris O’Kane: Okay Dan. Well if we -- this is Chris, and I’ll deal with the first question. I’ll handle over to Julian for the second one. Think about the model in terms of the addressing hazard as the number of hurricanes, how big the hurricanes are, whether the hurricanes go to different places, maybe more northerly latitudes where the building standards are weaker, and that’s where they’re going to cause more destruction, and whether there’s a cluster theory of hurricanes. It used to be assumed that hurricanes were independent. I think increasingly there is a body of scientific thought that says, once you get one, there’s an underlying cause, which is warm weather, so might have more. So on this hazard signs, we have made some assumptions about increased severity. And our working assumptions and we’re working with some external scientific consultants here, but at the moment, with the Gulf of Mexico we’re suggesting to expect 20% more frequency, of Florida 25% more frequency and for the East Coast 43% more frequency.

Now you need to think about severity. Not just more often, but that they can be bigger. Now I think there’s less concern of that then of the frequency. And our current working assumption, also capable of being reviewed before we start pricing next year’s business, is for on average 7.5% more severity.

Now I’m going to turn to the next thing. Not the hazard, but the vulnerability side. That’s giving a hurricane, how much damage will it do? There are a couple of things that are going on there, this phenomenon called the demand surge, has the increased prices of the cost of goods and services that occurs after the hurricane. And when the models were built demand surge was calibrated around North Ridge and around Hurricane Andrew, that’s ’92 and 1994, so it’s out of date data. Now we always assume that, let’s take economy like New Zealand, which is a long way from anywhere. We’ve always assumed that it was [indiscernible] affecting New Zealand because everything needs to be shipped in from abroad and very little can be produced internally that the demand surge can be absolutely huge. But there’s been a tendency given the size of the U.S. economy, to assume that for normal cat losses, that increase cost of business services will be relatively modest. I would say relatively modest might be up to 20%. What we’re actually seeing, we’ve began to very clearly with the four hurricanes in Florida last year, which is about $30 billion, but that most insurance prices are much bigger. And what I think we have the chance to do following really 2005 and 2004 experience is to start looking at correlation between the size of the loss and the demand for it. A cat one hurricane may be costing $2 or $3 billion and they have almost no demand surge implications at all. While in an event like Katrina, which is probably $50 to $60 billion in insured loss. Here the demand surge could be 30%, 40%, even more. We also, we’re getting increasing amounts of good empirical data to help us recalibrate that.

Those I think are the two key things to think about. No I think there’s one more to say, which is on the commercial risk side, as opposed to the residential risk side. The model is weaker and we’re making some corrections. That’s it. So in most of your headings of hazard and vulnerability we make a series of corrections, which implies more loss, potential and we price accordingly.

And with that, I’m going to hand you over to Julian, for the other part of your question.

Okay. The treatments reinstatement premiums is quite a complex subject. But the hazards heard some is that what we do on the charge arising on our outwards program is to earn the or charge the reinstatement premium from the date of loss to the date of expiry of the original contract on the basis that the excellent purpose of the reinstatement is to secure the limits available on a second subsequent lot and the so is the contract. And we’ve got a similar approach on inventory statements so we get our own from the date of loss to the expirary of the relevant in this contract. This does mean that although it’s a substantial amount of the charge for additional reinstate premiums and including the acceleration of the first loss premium to date of loss occurring in that quarter and will be sum will still earnings through the fourth quarter those to expire by the end of the year.

Pretty soon you’ll have both additional inward and outward in the forecast.

We’ll figure I quoted was to net of ’02.

Ah, great. Now the last question is, in terms of your own reinsurance or requisition purchase, do you have a thought on how you will respond to the market environment in changing the structure, size, limits, etc.? In general.

Chris O’Kane: As you can imagine we’ve had a lot of conversations with our existing reinsurers and requisitionaires and with our reinsurance programs in the last month or two. A lot of our cover is concentrating with four players, who I think are very, very strong players, some of the strongest in the world, and preliminary conversations with them suggest that they want to go forward on a more or less unchanged basis. I think they want to attach a bit higher and they probably want some more money from us to recognize more hazard and maybe some kind of the depth of the position of the contracts, but they’re there. Our working assumption is that there will be less retro available and it will cost a bit more. And our job then is to really judge the cost of retrocession, which is effectively a form of contingent capital against the cost of other capital. And to buy less or more depending on price of retro versus the price of the incoming reinsurance. I think that’s the core expertise for this company and I feel fairly confident that we will be going forward next year with a broadly similar approach to those issues.

Thank you. [OPERATOR’S INSTRUCTIONS] Our next question is coming from Alain Karaoglan from Deutsche Bank. Please go ahead.

Morning Chris and Julian. Julian, could you repeat the after tax numbers from Katrina and Rita? I didn’t catch them when you first mentioned them.

Yes. Certainly I will. $360 million for Katrina and they figure for Rita is $46 million.

Okay. And the other question that I have relates to the significant growth in property reinsurance premium in the third quarter of this year. Could you speak to that and what does it mean for you going forward and what does it mean for your exposure to Wilma, even though Wilma may be as big as Charlie relatively speaking, should you have more losses from it because you wrote more property reinsurance.

Okay. Well $74 million of additional GWP in the property reinsurance segment in the quarter is directly related to the Katrina and Rita claims in the industry instatement premiums or other, prime adjustments related to the losses. The underlying increase is not as large as it appears.

But am I correct that at the beginning of the third quarter you had thought that the property business was becoming more attractive and were willing to write more?

What we thought and still do think is that the right environment even before the third quarter storm as far as property reinsurance was more attractive then we had thought prior to our conditional business planning. Rates were falling in much more modesty then we had thought and therefore we have seen options as to the new business or in retained higher shares then we might otherwise had thunk in circumstances. Chris also learned something from it.

Chris O’Kane: Yes Alain, I think learned what works and I do need to add it’s just too early to be quoting offsets that we felt from Wilma. But one of the things that happened in Florida this year was that the Florida Hurricane Catastrophe Fund is providing a bit of limited of cover and is attaching it in place. Most of our exposure is excessive as some of you compare this year with last year in Florida, I would anticipate more of loss falling to the primary retentions and to the FHCF as opposed to the reinsurance market in general. I think that’s one important phenomenon and I’m not going to put on it this morning. I think the other thing is, this will now be the third cat of this year. And the way our reinsurance programs work is that according to the number of losses that there are in a year they can attach rather lower down. We buy lower for subsequent losses then we do for first loss. I would also expect the gross to net to shift, meaning that even if Wilma on a gross basis were comparable to Charlie, which is not a statement I can make, I’d expect the net to be much less then was the case with Charlie. Because Charlie was the first loss last year.

Chris, could you speak to the results of the new teams that you’ve hired and how they performed and how the hazard business performed relative to your expectations?

Chris O’Kane: I think your talking if that’s about aviation and Marine themes?

Marine and energy, yes.

Chris O’Kane: Yes. Okay. Well, let me take aviation first. A tremendous amount of that business renews in October. So they’re really only getting going now. The amount of the premium written is quite small. The amount of earned premium is even smaller, so I’m not sure what we have is really indicative of the future performance. There have, as you know, been a tremendous number of minor aviation losses in recent months, I mean, in places like Indonesia and some. We’ve had some small losses on those. I think the combined ratio looking at aviation and premium to date; as result of those losses is over 100%. But not, I think sort of, worrying me and concerning over that, I think we just need to wait for the end premium to build and we’ll get a better read on that. Essentially I think they’re doing the job they came to do and I’m pretty happy with the aviation team’s performance.

On the Marine side, who’s to make a distinction as being the Marine HOWL and the Marine liability versus the Marine energy? And Marine energy has obviously been affected by Rita and by Katrina and we came into the business, if you remember, after Ivan last year in the face those increasing rates. Rate increases may be in the order 20%, 25%, 30%. And there was a paramount of natural hazards cover our vests, so the performance there is not good as the consequences to hurricanes. We do buy reinsurance. It keeps our net loss per then to about $10 million and our gross losses in both of those storms on the [indiscernible] calendar of the order of $40 to $50 million currently reserved. The net is perhaps the more important numbers to work. What I think about that business is that we still are in the right place at the right time. We expect rates to double in the Gulf of Mexico. And we expect the amount of natural hazard cover, which as been driving the losses to a reduced typically $100 million per rig, maybe $50 million per rig. And I do not mean that is what Aspen’s providing, I mean that is what the whole market is provides per rig. And then Aspen might take a 5%, 10%, 15% share of it. So I think that the thing that has been causing the problem is largely going to be sublimated or excluded, but price is going to go up along with it. Pretty bullish as you can tell on the Marine energy. In fact I would probably say I am more bullish about that line than any other line business in the C&C world today.

Finally Marine HOWL is holding very well indeed, exactly according to plan. Marine liability is performing fairly well. We did have a loss area in [Kinser] Morgan, which on that same phenomena when you have a loss, is very modest [indiscernible]and it can kind of distort the true picture. I think that if we look at that year in total we look forward I do not give any cause for concern then.

And then the last question relates to the shelf that you just filed. Can you tell us if you filed this with any expectations or just to replenish and have a shelf ready?

I would describe the filing the shelf as a house keeping measure. We had thrown on the original shelf acquisition [indiscernible] we did wanted to make sure that should it become appropriate at sometime in the future in raising additional capital that we would be held up from a process point of view.

Thank you and our next question is coming from Charles Gates of CSFB.

My first question, I thought Chris, in your prepared remarks, you made reference to a $500 million outwork reinsurance program in the fourth quarter. What was that? Could you elaborate on it?

Chris O’Kane: If you, our reinsurance program is mostly purchased on the 1st of January and it is for 12 months and we buy with most of the covers of what we want with reinstatement’s and then we also buy some covers that only come in for the second loss of the year or maybe the second or third loss of the year, and then some covers that might require two previous losses. Now if we look at the cover we have used, which was essentially Katrina and Rita there is quite a lot of cover left. So that number of $500 million represents what our reinsurance recovery could be if there were another big cat this year. To put it very simply we have a lot of un-inferred reinsurance covers continuing to protect our balance sheet against any further big event that could happen in the next few months.

So all other things being equal is that protection in effect specific to Wilma?

Chris O’Kane: Yes, I guess it is. I mean, I do not think that Wilma is going to need that sort of size of limit, I would be very surprised if it did. In theory, yes it is there for Wilma.

The only other question I have, some companies, I am looking at the page in the IPC Re 10K that basically shows their breakdown of business, number of contracts in percentage of sales by geographic zone. Is the closest thing that you can always provide page number 8 on 10K that basically shows the breakdown of sales by country, Australia, Asia, Caribbean, whatever?

Chris O’Kane: Yes, that is the geographical exposure that we make in our 10K.

But you have not elected to go the same route with regard to zonal exposures?

Chris O’Kane: No we have not shown, in our computations to date shown [indiscernible] exposure. Charlie I would just say that we are not sort of holding anything back there. I think if you find it useful we will take a look for future quarters in making that type of disclosure. In general I would say that we have tended to focus our underwriting on the areas that offer the best prices relative to what the risk exposure is. And in our case we tend to believe that, that is California earthquake, US hurricanes, [coming up] European storms, and Japanese wind and quakes, so our exposure, sales in those areas as you put it tend to be relatively large. And in some of those smaller territories like Southeast Asia, Africa, South America our view of pricing as it as being rather inadequate. We tend to write very little business there. One of the reasons I mentioned the impact of Wilma in Mexico is that I think that is about to change. I think that every chance that Latin American business in 2006 is going to be a write-able proposition for us and so you will see potentially a change in the pattern there.

Thank you our next question is coming from Kevin Shield with Adelphia Financials. Please go ahead.

Good morning. Could you quickly characterize what percent of Katrina property reinsurance losses are subject to potential revision upwards and what percent is capped out or maxed out at this time? And in Katrina energy losses, maybe give us a sense of what percent is physical damage as opposed to business interruption.

I think that on the property reinsurance side, on the catastrophe excesses loss program, I can’t give you percentages, but there are a number of programs where we have always reserved the maximum there are others where, we have not done so do because we’ve taken the view that that might be exposed in the [way up]. On the energy accounts the optional energy insurance account our net loss is effectively contained with specific headroom within our specific Marine outward reinsurance program.

Chris O’Kane: Just to amplify, Kevin if this helps, a lot of our, we do not write very many local companies. I do not think that we have a single Louisiana company for example as a reinsurance client. If we did have those local Louisiana companies I think that you could assume the whole program is gone. But most of our exposure is off the nation wide writers. Therefore, we need to look at their market share by zone. If we got a company, and we do as many as, for example the California biased and maybe one or two policies in the Gulf, or Northeast biased or some of these companies of the Gulf, it does not make sense to presume all of our limits are going to be subject to this, but will not be. So I am often asked that question I do not think that it is most, I can understand why it is the thing to know. But I think the answer tells you a lot less than you really want to know. You really need to relate it to exposures in the relative zone. In which case most of the limits are indeed reserved now.

That is helpful. Could you also restate the Aspen’s exposure to the Yucatan loss situation?

Chris O’Kane: Because we have regarded prices in Latin America as being really quite inadequate, we wrote very, very few specific contracts in Mexico itself. That has just not been our game. However, there are a couple of worldwide or worldwide ex-USA contracts of multi-national writers that could pick up shares in some of those US-owned hotel chains. Early impressions are this is not a big deal for us. That the losses will not be big enough for us to get into the worldwide programs in general. But that would be our area of vulnerability if there are one. To be frank, I think that I am talking about Mexico because I think it is a huge loss for small economy and I use it as an opportunity going forward. I am not talking about it because I think I have got a big loss there and I really do not think that is true.

Thank you, that is helpful.

Thank you, our next question is coming from Bob Zales with LMK Capital Management. Please go ahead sir.

Hi, a couple questions. The -- could you just quantify one more time the net reinstatement charge for Q4?

Yes, we expect that to be around $46 million.

A char…, an expense?

As an expense, yes.

And what was the inward and outward gross figures, if you do not mind?

I can ask my colleague in [indiscernible] that question.

Yes, while you are looking that up, let me just…

Chris O’Kane: We have that, reinstatement premiums are at approximately $120 million and our inward reinstatement premiums in total are about $60 million.

Okay. In -- what was the -- last year you quantified Charley, Francis, Ivan, and Jeanne of a $135 million. What specifically, how much was Charley last year? Do you have that?

I do not think, I am sorry, we do not have that figure with us, but we can get it to you after the call.

What are we, by what you offered so far, if Rita was the same loss amount as Charley, given your higher attachment points, are you suggesting that your loss for, excuse me, I mean Wilma, loss for Wilma would then likely turn out to be less than your loss for Charley?

Chris O’Kane: Yes, I think that is right. Essentially what we are saying is that this stage in the year, after this loss frequency, we have reinsurance actually lower than before, so I would say that the net loss in Wilma is likely to be less than that loss in Charley. But I do not want to go too far on this Bob, because nobody knows exactly what the Wilma loss is. But, certainly there is an awfully lot more reinsurance available in Aspen’s programs and you’ve got the Florida hurricane catastrophe fund reducing the loss to the private enterprise insurance market in any case in the US.

And can you just help us understand because there have been some other calls where it has not been clear to the company exactly how the Florida fund, when it kicks in, and the impact under individual exposure. Can you explain how that will impact your exposure in Florida with Wilma?

Chris O’Kane: Yes. Last year, the Hurricanes Fund in Florida, provided $4 billion of limited, I am sorry; it provided $15 billion excess of $4 billion last year. [inaudible] Last year seemed to provide 90% of $15 billion, excess of $4 billion. That is before and after it. The scheme this year is actually down at $4 billion, so therefore there is ½ a billion of reinsurance availability that were covered by the FACF instead of in the private market.

Was Charley the biggest hit last year of the four hurricanes, Charley, Frances, Ivan, and Jeanne? From, I am just trying to get a comp here, and I am not trying to pencil this in too precisely but I, you know where I am going in terms of understanding what the Charley loss was.

Chris O’Kane: I think the biggest event last year was actually Ivan, but I think a lot of the Ivan losses were off shore. For us, I think Charley was the biggest hit. But for the market, I think it was Ivan.

Oh no, I meant for you.

Chris O’Kane: Yes, Charley was the biggest.

Yes. And then…

Chris O’Kane: That was partly a function of the size of the gross Charley lost and it was partly because it was the first loss of the year and so those reinsurance’s that attach for, second or third losses of the year obviously did not operate, so it is complicated.

When I look at your estimate for Rita, $50 to $60 million, and I think about that in terms of before hurricanes that came ashore last year, and I realize, and where Rita came ashore, help me to understand why your losses on Rita at $50 to $60 million appear at first glance to me to be higher than what you would have realized with the individual hurricanes that hit in ‘04.

Chris O’Kane: Well, I think the difference between this year and last year is last year we had not started writing off shore energy. So although there was a big off shore energy loss, we had a very tiny part of it. Then we started writing up business earlier this year and so a lot of our loss in Rita this year comes from the off shore energy. So, if you were just thinking about property reinsurance, I think you would get a different picture and I think you get the picture that you would sort of expect i.e. Wilma, why we say Wilma is similar to these things. Rita is quite a small on-shore loss, and so the on-shore bit of Rita is going to be less than the on-shore bit of Charley last year.

Yes. Help us with your capital structure. What, I know I have it in front of me, but I will just, I will use your figure for now, what was the debt to capital ratio at the end of Q3?

Chris O’Kane: Well, on a personal basis including the new capital that we [wrote]?

Yes.

Chris O’Kane: It will be 13.3%.

13%. So, we are looking probably at a loss in Q4. Although, albeit perhaps with the reinstatements and in Wilma, not being nothing the magnitude of Q3. I guess the question is where – when you think about your debt CAP ratio, and I know this is a fluid figure given the changes in the rating agencies, what do you look at as kind of a ceiling in terms of where you maintain the debt to CAP ratio in order to keep the ratings that you required to do business?

Well, I think you are right to say that that may be a fluid situation. I think that general guidance is been that a debt to capital ratio of up to 20% is generally regarded as an okay situation by most of the rating agencies and if you use high [predicative] instruments with sufficient equity credits you can go higher than that. We have yet to have [indiscernible] rating agencies just to see whether that use prevails in the account environment.

When you did your fundraising earlier in October. I am curious in what your thoughts were. You went with straight equity and I have seen some other fundraising efforts that have used some preferred equity in lieu of common with the obvious effort to, say whether dilution to the common shareholders. Can you help us think through what your fundraising strategy, it might have been just you needed it when you needed it, right, but help us think through what your fundraising strategy was at that point and what your – whether or not it has changed in terms of different levers you might use going forward.

I would say to that, our thinking about our target capital structure over time has not changed. We have been researching, since at least the beginning of this calendar year, the availability of companies like Aspen to various structures. I would still thing that in the formative time we will develop capital structure, which has a greater complexity and hopefully a lower cost of capital than the current capital structure. In the circumstances that we were in this month, the equity market seems to us to be the right place to be going at that time, it was something of it we could execute quite quickly, and that is what we concentrated on.

Do you have more flexibility if indeed you decide to have the need to raise money in Q4? With the shelf registration that was filed? I have not glanced at it closely.

The shelf registration has not gone effective yet, but even without it we would still have, I think, perhaps a $200 million of available headroom within the existing shelf. I am not talking the issues around excess to the debt capital markets will be around pricing and execution risk.

Got you. Okay, thank you very much.

Chris O’Kane: I would also like to add to that whether or not we need to do that in terms of use of proceeds.

Thank you. Our next question is coming from Stephen Hughes with [indiscernible] Bank.

I have two questions really. The first is some – if you could refresh my – refresh what my memory at what you said at the beginning of the call to the effect that you had made certain industry loss assumptions I think about Katrina, and could you using these figures for the third quarter? Did I understand that right to the extent that there was a higher overall industry loss than you assumed you may actually have to put more towards it by Katrina? Is that right?

Chris O’Kane: No. I think we just need to distinguish cause and effect here. Essentially our approach to setting reserves is, was, always has been to start contract by contract client by client and try to make an assessment of what the loss of that portfolio is based on our understanding of the exposures in it. But behind that, we had to review how serious the event was, you know, a given contract might have no loss in a $5 billion event or a $15 or 20 or $30 billion event would have been a lot more. So contract by contract, by talking to clients or their brokers or benchmarking what one portfolio might have against facts we have on a different one, we have reached a grand [up view] and we added all that up, and when we add it all up, we said in our first press release, it looks like it is consistent with a $40 billion market loss. We did not think it was based on, it didn’t [indiscernible]. It looked like that implied the originally our $40 billion. Then what happened rather later was a couple of – I think I used the word for that intimation, they were not loss advices, but there were a couple of sort of views from brokers that some of their clients were very shaken because in terms of those clients only internal views, we were getting loss amounts they equated to perhaps 100-250 or even more than 250 years market loss. That caused us to say that 250 year market loss is not $40 billion. It is much more. These companies where I think pretty sane to the sensible companies. So what they are saying is, we went back immediately when we heard that and revisited all our reserving, and if you like, we now said, “hey this could be worse. Let’s put is through a more pessimistic prism” and we did the whole [grand-up] thing again. This time when we completed it, it looked to be consistent with something more like about a $55, $56, 57 billion market loss rather than the previous $40 billion loss –

And that is what is in your numbers that you quote – what you put in your third quarter numbers?

Chris O’Kane: What I am quoting is the process that led to the establishment of our accounts in the third quarter, absolutely.

The 2nd question I had was, I realize what sort of liabilities you have – you want to put on your books is a function of price, but is there something in your thinking that you really do not want a single loss event, say more than 10% of your equity capital, or whatever it is that you want to put a specific limit down to a single event loss.

Chris O’Kane: That is absolutely right. I think your question is spot on. What we are saying is, we are going to charge an awful lot of more money for this, and I seen the demand for catastrophe risk on the insurance and reinsurance. It is going to be absolutely huge for many kinds of reason. There are many, many more buyers, many more [indiscernible] to sell, and I think we’ll have better technical models, we’ll have learned the lessons of this year, and we will give [indiscernible] and the prices will be much, much better.

In spite of that, we are going to say there are more unknowns in this business than we thought there were, and it seems to us appropriate to reduce a proportion of our overall enterprises contingent on it. So even though I think it is much more attractive, we are still going to do a bit less of it and our measure, in fact, is not 10% as you said, I think you used that just as an illustration. But whatever that measure is in 2005 going forward, we are going to be moving it down to reduce the volatility of potential outcomes for our company.

Our next question is coming from Charles Gates with CSFB. Please go ahead.

How big is the excess in surplus lines business? I am in the statistical supplement – I am having trouble finding this. I guess that is comment number one. Then comment number two, you say that pricing there was under some pressure in the liability area. Could you just expand on that?

Chris O’Kane: You are asking – what you are asking is how much surplus lines does Aspen write, is that right?

Yes, sir, and I was in your statistical supplement and I was just having trouble figuring out where that business was here.

Chris O’Kane: Well, why don’t I deal with the second question first, and the final question to get the exact answer to your questions. If not, I will give you an approximate number, which I have.

The point of the liability, I think we were talking about employees’ liability and public liability in the UK. That is basically the British version of Worker’s Comp and GL. We have had a great run at that business, very attractive rates and very, very good performance for us. We have that partly because some of the bigger players, the bigger companies in the UK and Europe, got badly burnt in the last ’90’s and kind of exited it. What we have really found the last 12 months or so, is that they have been gradually coming back in. What it means is that if a contract goes out to tender, some of those guys are cheaper than us, so we lose it. If it doesn’t go out to tender, the price tends to be stable and we can keep it. So, is not the sort of disaster area, but it is an area where I think rate adequacy is edging downwards. What I am really saying is because it is edging downwards, we are going to write a bit less of it. There are still good opportunities in there, a bit more challenging, but good opportunities in there, but a bit more challenging.

Thank you.

Chris O’Kane: Now on the surplus lines, how much is that totally gross premium question?

From the year to dates, from the nine month period, the earned gross premium and full up business is just under $17 million Charlie.

Is that the business – or some of that business is written in Boston isn’t it?

That figure I just quoted is in its entirety United Kingdom written in our Boston office.

I think you have done a real good job on your conference call. I have no more questions.

Thank you. Our next question is coming from Ron Bobman with Capital Returns.

Good morning, I apologize I got on the call late so I may have missed this topic, but as you put in your Katrina and Rita loss press release, you have, I guess it is an ILW or some sort of retro cover, I think it was $100 million. Could you, if you have not covered it yet, could you go over this just as far as what the current PCS number is, which I think is a trigger, and where the cover trigger is at, and I know PCS came out with their number. Has there been any info that you have gleaned from market – company losses since the PCS that gives you more confidence, less confidence that industry losses will get to the point where this thing might get triggered and hopefully we collect some more money. Thanks a lot.

Chris O’Kane: Okay. Well I will give you the facts first, then I might indulge in a tiny bit of tribulation. If PCS declare a market loss of $39 billion, than that contract starts paying. The limit is $100 million, and if the market loss gets to $47 billion, the $100 million is exhausted. That’s just how it is. It is on a linear basis. Those are the facts. Because of that, and the currency number is $34.4 billion, so it does not attach and therefore, we are not presuming any recoveries at all.

The more speculative side is what PCS is saying is what they are including to-date versus what they do not include. What they are including is, in their view, losses that are paid within a strict interpretation of policy limits. That would presume that in general flood is excluded. Certainly on ordinary residential business and in simple commercial risks. There are some big commercial where flood is covered and automobile flood is covered. So, making that presumption, this is one of the big debates in this question what extent will there be what some people are calling term political risk. So, I would say that is the big swing factor in this. I am not going to try to put you a number on it because I can’t – there is no basis to do that, but if you think that the industry will pay losses that are not within strict policy terms and conditions, than you will be adding a [indiscernible] number.

Then there are other things, things in there like inadequate recognition of demand search. The companies have not done that. There is a tendency for some of these losses to creep anyway. So, I think the PCS view is, I think ;m right in saying 60 days or so after the first release, based on what [indiscernible] told them. They will produce a second release; most people probably expect to move upward. I think they will carry on producing numbers until such a time that they are satisfied that they are within a few percentage points of the right number. So, I think as prudent people we should not take any credit for that today, but we should monitor the situation with the PCS view and market loss. Of course that is what we are going to do.

I think you are right. They are at 34.4 today and our payout is linear from a 39 to a 47?

Chris O’Kane: Yes.

Okay. Okay. And obviously they excluded certain things like offshore losses, you know offshore losses and what have you, but your – our coverage is tied to whatever they define as paid market losses?

Chris O’Kane: Yes. Thanks right.

Thank you. Our next question is coming from David Pickering with [Noonday] Asset Management. Please go ahead.

A couple of questions. One is the pricing expectation that you mentioned early on in the call. Are those based on sort of preliminary discussions or more detailed discussions at [Bard and Barton] in Chicago?

Chris O’Kane: They are the most up-to-date views that we have so they go right back to Monte Carlo. They are based on conversations with a lot clients we have seen in our offices in the last month or two, and we do the representatives at both Bard and Barton and in Chicago. I guess that’s our up to the minute view, yes.

Okay. Some of your competitors have pointed to unexpected correlations in damages from Katrina, I wonder if you had experienced any similar views or had any opinion on that?

Chris O’Kane: Unexpected correlations, what exactly do you mean by that?

For example, one of your peers have pointed to concentrations of exposure and economic effect that have been unmodeled and unexpected.

Chris O’Kane: I’m not sure that I fully understand the question. I think – I suppose the way I think about this loss, which I think is probably a $55 billion loss when all is said and done, is you’d expect a loss, a wind loss in America costs that much to happen maybe once every hundred years. But you wouldn’t expect it to happen in New Orleans, Louisiana, Mississippi. In fact, in our model, given a loss of that size is actually only about a 3% or 4% chance of a loss of that cost would happen over there. And why is that? Because the big values are perhaps in Houston, Galveston and more particularly in Miami and Palm Beach. So think the unusual thing is not the wind speed – not of the hurricane of the wind speed striking the American coast somewhere, that’s probably every 40 or 50 years or something like that, but that it costs so much loss. And why is it costing so much? And that has to do, I think, with the floodwater damage issues being mixed up with wind issues. And maybe that’s what their saying. I know that that’s what we call an unexpected correlation, but I guess, everybody knew that New Orleans could flood but did they expect the flooding to represent such a big part of the total. Yes, I think there’s really not a great deal of light on that issue yet. And I think there won’t be until more policies claims are notified and more get settled and so on so forth.

The only other essay, but it wasn’t an unexpected correlation, a very much expected one is, you’ve got some big – the biggest area of off shore rigs in the world in the Gulf of Mexico and clearly there’s going to be a potential clash between the off shore energy staff and the on shore staff. But that we knew about and always modeled for.

Right. And just to come back to a prior comment of just two questions ago, there was a question about single event limits and your comment about there not being more unknowns, therefore, if I heard you right, in terms of reducing exposures. I don’t know if that’s what you said. But I had a question in general on your approach to aggregate limits, concentrations and so on, whether it’s by line or by geography and so on, maybe to just revisit that, has your approach on aggregate limits changed as a result of these events?

Chris O’Kane: Yes. I think that the most important method, is the probable statistic based method that given a hurricane – that’s just limiting of a basic hurricane and other effect. Given a hurricane that can follow a track that can give Florida, North Carolina, Florida Northeast or Florida then Texas, whatever, what would you lose in that? And it’s the stimulation based on characters of the storm of the losses to the exposures that we have assumed. That, I think, has been our primary method of assessing it and, I think, the challenge there is to improve it, not to abandon it, not to say it’s faulty and throw it away but to make it do a better job.

Now if I side with that, I think that all the things you can do and essentially what you can do is divide the United States into zones, look at all the limits that are exposed and that with those zones, add them up and you can’t loss – well it’s very difficult to loss more then the limit that you’ve issued. Actually not – probably not – it’s not impossible but it’s pretty hard. So, what you have there is not so much a probabilistic base tool, you’ve just done a review of what you could lose if some useful pieces of information and you’re supposed to do something with it, you need to know, you know, is that a one in a million year chance or is it a one in a 20 year chance, cause you’re going to act very differently. And that’s the weakness of just using the aggregate exposure approach. And the wise answer and the answer that we’re using here is to do both. One acts as a sense check on the other.

Thank you. [OPERATOR’S INSTRUCTIONS] Our next question is coming from Bob Zales with LMK Capital Management.

Yes. I just wanted to extend that last question. Observationally I think that when you look at where your damage was in 78% property, which was the bulk of the losses you’ve had and you had in Katrina, it appears. It just strikes – you know, given that the flood damage is still by in large, at least from a residential standpoint, by in large not a significant part of the total insured cost – insured loss, I’m just trying to understand how – given -- if you look at the losses you incurred, and I think it’s hard to disagree that somewhere along the lines your models – what you would limit your losses – the model kind of broke down. Cause I would expect a cat 5 through Miami to wipe out 20-25% of your equity. But something up through Mississippi kind of touching on Louisiana, I’m get – what I’m getting at, is I’m trying to understand where you think the internal models and thinking broke down with respect to the losses you incurred on this type of hurricane and how you might compare it that – what your expect of losses would be if you had a cat 5 or cat 4 go through Miami or if Rita was a cat four or cat five through Houston?

Chris O’Kane: Let me try and address that. I think it comes back to the view as taking a probabilistic view and, as I said earlier, if you look at smaller storms that might land anywhere, but if you look at the big ones, the storms that might cost the industry $50 or $60 or $70 billion, increasingly they are Miami storms. They’re quite a lot of potential storms that could happen. And $55 billion is round about 1 in 100 years, and if you – for wind in the U.S. So what you have said and it tells me it couldn’t happen in Florida, I’m sorry in the Gulf States but I think I mentioned only about a 3% chance, and if there is a storm of that size that it’s going to cause most relative damage in the Gulf States. In other words, what might be a 100 and – a 1 and 100 possibility anywhere in the U.S. becomes a 1 and several thousand possibility, specifically in Louisiana and Mississippi. Now that’s if you’re talking about U.S. wind. But – and remember the models basically a wind models. It recognizes the company being done for, rain damage coming with the hurricane and, I think less perfectly, they recognizes element of storm surge. But as far as I know there is no only flood model in the U.S. And I think one of the reasons why our loss estimates were what they are, we were trying to estimate, not what’s being advised to date, which is really quite small, but what the ultimate cost is going to be. And when thinking about the ultimate cost of what it’s going to be, what affect most as reinsurance, what do we think our seedents are going to have to pay and we’re having to set reserves on not what we know today but what we think it’s ultimately going to amount to and it’s going to amount to that great number of $55 billion of which I can’t give you a split between the water damage element and the wind damage element but I think that implies a lot of water damage. And so if it’s failing model it would merely be a failure to recognize the political risk and the consequences of political risk is more cover of water damage then a correct and strict interpretation of the conditions would suggest.

Are you suggesting then that if the State of Mississippi fails in their efforts to win flood coverage with the implication that wind, power and storm surge and therefore you paid, that your reserves could in fact be overstated or -- as opposed to if they’re successful that they could up. I’m just trying to understand which side of the fence do you come down on with the fulcrum point being that particular lawsuit.

Chris O’Kane: Tremendous number of our unknowns in this, Bob. I would say we have tried to be realistic rather than legalistic in establishing our reserves so it could swing either way. But, you know, I can’t tell how much. It’s just – I’m not a lawyer, there are too many unknowns. I mean it could be even worse then we thought that more and more policies get drawn in when they shouldn’t or it could be less. Something that I could say even further would be –

I’m just suggesting with the argument that there’s a confliction in your argument is that there will be $55 billion worth of coverage implies that there will be coverage of surge and flood damage.

Chris O’Kane: Well, I don’t think I’ve got anything more to add. I think I’ve told you what I know, what I’ve told you what I think and beyond that is just not useful. We’re just going to have wait and see.

Really, I’m just trying to understand your thinking as you’ve thought through this, I’m trying to get you to reflect a little bit on it, that’s all.

Chris O’Kane: Sure. That’s fine.

Our next question is coming from Ron Bobman with Capital Return.

I just have one follow up. The reserves you set last year for the four storms, has there been any increase in the reserves that you had to incur for that. Thanks a lot.

Chris O’Kane: In the third quarter of this year there was a small increase in the reserves, many around Hurricane Charlie of some $3 million.

Okay. Thanks a lot.

There are no further questions at this time. I’ll turn the floor back over to you for any further closing remarks.

Christ O’Kane: Okay. Well just to thank you very much indeed for your attention for listening to our call this morning. We hope we’ve provided some useful color and explanation of what’s going on in the last quarter and to review what’s to come. Thank you all very much indeed. Good-bye.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this and have a wonderful day.