Aspen Insurance Holdings Ltd (AHL) 2006 Q1 法說會逐字稿

Good morning, my name is Jackie and I will be your conference facilitator today. At this time I would like to welcome everyone to the Aspen Insurance Holdings first quarter 2006 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. [OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to Noah Fields, Head of Investor Relations. Sir, you may begin your conference.

Thank you and good morning. The presenters on this morning’s call are Chris O’Kane, Chief Executive Officer of Aspen Insurance Holdings and Julian Cusack, Chief Financial Officer of Aspen. Before we get underway I’d like to make the following remarks.

Yesterday afternoon we issued our press release announcing Aspen’s financial results for the quarter ended March 31, 2006. This press release as well our corresponding supplementary financial information can be found on our website at www.aspen.bm.

This presentation may contain, and Aspen may make from time to time, written or oral forward-looking statements within the meaning under and pursuant to the Safe Harbor provisions of the U.S. Federal Securities Law. All forward-looking statements will have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For a more detailed description of these uncertainties and other factors please see the ‘Risk Factor’ section in Aspen’s Annual Report on Form 10-K for the year ended December 31, 2005 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’ll turn the call over to Chris O’Kane.

Chris O’Kane: Thank you Noah. Good morning. In the next few minutes or so our CFO, Julian Cusack, and myself will update you on our first quarter and give you reviews on markets in general and Aspen’s response to market developments.

We’re going to stay a bit longer than normal on this call this morning as we believe we’ve had an exceptionally complicated quarter and we want to make sure that you follow the events in detail.

Towards the end of last year we explained to you the confirmation of lessons learned from the 2004-2005 hurricanes and proved our understanding of potential for damage to Commercial risks and revised our understanding of demand surge that caused us to reduce the overall catastrophe exposure in our business model.

At the time we summarized it by saying that we have decided not to seek exceptionally high returns by assuming more risks, but rather to maintain our return aspirations, but coupled with a lower volatility.

Frankly, pricing available in the U.S. CAT market was disappointing at 1/1 and we took the opportunity to cancel a great deal of catastrophe-exposed business. Over the last few months we’ve been working hard to turning our plans into reality. Let me illustrate this for you.

Aspen’s gross loss from hurricane Katrina was approximately $1.1 billion. Based upon how we re-engineered our book, our gross loss from the exact reoccurrence of Katrina in the forthcoming wind season will amount to a loss of approximately $630 million, a reduction of over 40%.

However, the reunderwriting of CAT risks is not justified for the Gulf Coast. For example, in September 2005 we had exposed limits in our Property Reinsurance account of $1.726 billion. We have already reduced this to $850 million. Significant reductions have taken place in California, in Europe for European windstorm, and indeed elsewhere.

Similar risk management actions are taking place in our Offshore Energy accounts. In the Gulf of Mexico last year we had wind-exposed policy limits in force of just under $1.4 billion. As a consequence of imposing sub-limits for main windstorms and a more general re-underwriting of the book we currently envision having no more than $400 million of wind limit in force for the forthcoming season.

Further, we are viewing this as in the context of our model risk tolerance, which we have set at 17.5% of surplus post-tax, net of reinstatement premiums and reinsurance recoveries at the 1 in 100-year level.

Today we are well within our risk tolerances and based on rates prevailing in the early part of this quarter, we will be on track to reduce this to below 14%. But at more favorable pricing we would regard such a draconian reduction as under-trading.

Prices for U.S. CAT-exposed business have hardened very considerably in the last six weeks or so. If this hardening carries on, and we’re highly confident that it will, then we expect to take advantage of this by reassuming some of the exposures that we rejected as underpriced earlier in the year but at much more favorable prices.

Now, in the first quarter of 2006 we produced net earned premium of $402.6 million at a combined ratio of 90.4%. Our diluted earnings per share were $0.59.

Let me now take you through each of our underwriting segments in turn.

Our Specialty segment where we write Marine and Energy and Aviation insurance and reinsurance is showing good to excellent rate increases with terms and conditions stable or improving. The largest part of our Specialty account is, of course, Marine Liability insurance, a market that we entered at the end of 2004 and is now seeing its 5th successive year of increasing rates and tightening terms and conditions. These increases were caused by the need to restore profitability, but last year’s hurricanes and the more expensive reinsurance market have led to a further strengthening of pricing.

In the businesses in which we [inaudible] space we are seeing effective increases in reliability in the period up to March 31st on the order of 26%. This is split into about 14% more premium for unit of risk, and 12% for the value of deductible and condition changes.

Turning now to the Marine Hull account we would describe the conditions as hard and stable. Rate increases as a whole are running around mid-single digits with more substantial upwards movement for the loss effective business.

Finally, the Offshore Energy insurance physical damage component is showing the highest level of increase, in particular, for Gulf of Mexico exposures. Risks without 2005 hurricane losses in the Gulf are likely to see increases of about 150% while loss-effective risks are likely to be in the order of 200-400%. The second quarter is the major renewal period for Gulf risks and we see a continuation of this improving market, especially as capacity gets shorter in decline.

On top of these price movements coverage has been tightened for business interruption and contingent business interruption. Gulf of Mexico windstorms sub-limits are also being applied. Away from the Gulf of Mexico increases continue at the level of 20-25%.

The Aviation part of our Specialty segment had a successful quarter, both in terms of business generation and benign loss experience. We also write some Specialty reinsurance and here conditions are very strongly in our favor.

Many clients with inception dates later in the year have been trying to move the programs forward in what we interpret as an attempt to avoid catastrophe shortages and rate increases that they expect to occur later in the year. The effect has been different and that the increases and catastrophe shortages are simply being experienced earlier. Most clients have reduced their budgets for catastrophe-exposed underwriting and are spending a significantly large portion of their premium to achieve perhaps one-third of the expiring amount of reinsurance capacity.

The picture in our Casualty reinsurance segment remained satisfactory but much more stable. Market conditions are good and on those rare occasions where we see a weakening of primary rates we were able to compensate for this in our reinsurance pricing. The U.S. Casualty reinsurance team has had an encouraging first quarter. Rate levels across the entire portfolio have seen modest nominal increases, but are probably flat after the effects of Casualty claim inflation have been added.

In general, primary rates on Medical Malpractice insurance have stabilized with just a few companies in certain states still obtaining rate increases.

Our Workers’ Compensation catastrophe accounts are also showing stable ratings, whereas on working covers we have been able to increase reinsurance terms for certain contracts, first are the effects of occasional primary rate reductions have been neutralized.

The situation is much more varied in our Insurance segment. Since the inception of our Company we have been highly successful in the UK primary insurance business, dominated by Employers’ Liability and Public Liability Insurance, supported by useful contribution from our mid-market Property operation.

We’ve good reason to believe that our Liability in Property underwriting has considerably outperformed the market as a whole, but nevertheless, the overall market has been good for several years now. These good years attracted more competition and it fueled downward pressure on pricing. I would now describe conditions in the UK Property Insurance market as soft.

And while the Liability market is a bit firmer, conditions are softening rapidly. To put some numbers around this we estimate that the Property market is routinely offering reductions of 20-30%, or more, on business that goes out to tender, while the Liability market is seeing reductions of about 20%.

Our response has been to write almost no new business and to offer much more modest reductions, typically up to 10% for good, continuing customers. This preserves the rate adequacy of our underwriting, but it has to be achieved at a price of greatly reduced top-line volume.

To give you a better idea of what this means, we’ve now reduced our gross written premium in UK Liability by over 40% since the peak in rates about three years ago.

The position on the other side of the Atlantic, in the United States, is much more encouraging. Our Surplus Lines Casualty operation continues to perform very well, and although there are signs of modest competition, rate levels continue to be acceptable. The Surplus Lines Property operation is benefiting from improved conditions after hurricanes of 2004 and ’05, as well as from catastrophe pricing model changes, altering the market’s perception of wind risk.

We’re taking advantage of these conditions to rebalance our accounts, seeking greater spread of risk from Texas to Maine while avoiding a spike in Florida, as well as targeting non-Coast exposures. The key terms for the Property operation is not finding good risks [inaudible] business, but dealing with a much tougher environment for the reinsurance we cede. We have to be careful that we do not pass too much of the advantage of improved rates and conditions onto our reinsurers.

Finally, with respect to our Property Reinsurance segments, the U.S. is still seeing better increases than the international account. But, of course, this can be explained by the much greater loss burden carried by the U.S. in the last couple of seasons. [Inaudible] were only modestly successful with price increases of about 5%, although these did come on top of increases of 10% last year.

On balance, we’re not excited about the reinsurance pricing achievable in Japan, but it is sufficient to cover more than the cost of expected claims. And since it’s [inaudible] to diversification, we’re content to provide 7% of our total Property Reinsurance premium [inaudible] from Japan.

Most of the rest of activity at April 1 related to U.S. renewals. Here we saw a much firmer April market than in January. Whereas, in January we saw very little was paid meaningfully more than the technical prices generated by our revised rating model. As the quarter progressed we’ve seen several major accounts that are paying well in excess of the technical price.

It is true to say that these extremely hard conditions apply principally to coastal-exposed business or to major nationwide accounts and we would like to see some of the less-heavily exposed contracts paying their fair share of the cost of living in more dangerous times.

However, we mustn’t complain about what is objectively a very good market in which to be selling Property reinsurance. On our last call we predicted that the market would harden further as the year advanced and it’s our decision to buying significantly less than we had planned at 1/1. Our strategy is working as this has proven to be the case. We think that we’ll continue to be true throughout 2006, and in fact, into next year 2007.

Even in the couple of short weeks since the April renewals we completed we have seen more evidence of this trend and much anticipated amendments or improvements to one of the leading proprietary rating [inaudible] model to significantly impact pricing in an upwards direction.

I’m now going to turn the call over to Julian for a review of the first-quarter results.

Thank you Chris. Yesterday we reported a profit for the first quarter of $61.8 million after tax. This compares to $70.1 million for the first quarter of 2005. Our overall combined ratio is 90.4%, up from 81.1%.

The most significant features of this quarter’s underwriting results are a reduction in gross written premiums, increased reinsurance costs, and a change in business mix.

Investment income has continued to grow strongly.

Gross written premium is $678.7 million in the quarter, compared to $804.1 million, a reduction of 15.6%. This has entirely due to the Property reinsurance costs where we have written $163 million, or 47% this business and in the corresponding quarter in 2005. This is a direct consequence of our planned reduction in exposures, as explained earlier by Chris.

Our other segments are overall in line with the volumes written in 2005, with an overall increase across these three remaining segments of $16.7 million, or 3.3%.

Our overall loss ratio in the period was 57.7%, compared to 54.8% in 2005. Both periods benefited from the low level of catastrophe risks. The only major losses in the quarter for Aspen was a fire at a cat food manufacturer, costing us an estimated $13 million net of reinsurance, and a loss to our Marine accounts of $5 million in relation to a ferry in Canada.

In this quarter we have released $17.5 million of prior-year reserves, compared to releases of $12.5 million in the corresponding period of 2005. The $17.5 million release this quarter includes $7.5 million in Casualty reinsurance, $8.7 million for Specialty lines, and $9.7 million from insurance, offset by increase in prior-period Property reinsurance reserves of $8.5 million.

Our overall expense ratio in the quarter has increased 6.4 points, from 26.3% to 32.7%, driven by a number of factors. However, we do not think this is indicative of the expected annual ratio, which we anticipate will be around 30% given our current business mix.

Firstly, the high reinsurance charge in the period drives down [inaudible] equation, which explains nearly half of the increase.

Secondly, as we have run the business, investing further in our support functions, our operating expenses have increased by just over 1%.

Finally, there have been some adjustments to commissions on policies written in 2004 and 2005, which together, with the changes in business mix, with a reduction in Property reinsurance business was generating at a lower overall commission rate, have given rise to approximately 2% increase in commission [inaudible] of the ratio.

I will now give an update on the hurricane reserves and movements in the quarter.

There has been a small deterioration of our losses from hurricanes Katrina, Rita and Wilma in the quarter of $16.5 million before tax, of which $13.9 million [inaudible phrase] net claims developments, and $2.6 million to net additional [inaudible] reinstatement premiums.

Net of tax the deterioration is $11.8 million. Of the $13.9 million net claims deterioration, $8.9 is in relation to Katrina, $0.8 million Rita, and $4.2 million Wilma.

I’d now like to comment on the disappointing results in our Insurance segment where the combined ratio is just under 100%. This is where we report the results of our UK Commercial and the U.S. Surplus lines Insurance businesses. This account benefited from the favorable reserve [inaudible] in UK Liability and worldwide Property, which resulted in the releases from prior years of nearly $10 million in the period.

However, the second [inaudible] of our largest loss in the quarter, which was a fire at a cat food manufacturer in our UK Commercial account as I mentioned earlier. The result was also significantly adversely affected by increased U.S. reinsurance costs, as Chris referred to earlier.

By contrast, the Specialty lines segment has had a good quarter and is benefiting from relatively low losses and a prior-period release of just over $8 million.

Net investment income in the quarter of $44.5 million was 75% higher than in the first quarter of 2005 due to both rising portfolio book yields from favorable movements in interest rates and our [inaudible] incrementally expanding portfolio duration as yields rose through 2005.

Cash and invested assets increased by 41% compared to the corresponding period last year. The book yield at the end of the quarter was 4.18% and the market yield was 4.99%. The duration of our invested portfolio at March 31, 2006 was 2.9 years, not significantly changed from December 31st. Reinvestment rates are still running at around 5%.

[Inaudible] March 2006 Aspen had maintained a 100% fixed income portfolio. In recognizing the long-term benefits of asset portfolio diversification, on April 1st we invested $150 million, or approximately 3% of our assets into two low volatility diversified hedgefund accounts.

At December 31, 2005 our gross reserves for losses and loss adjustment expenses were approximately $3.05 billion, of which 48% were expensed estimates for losses incurred but not recorded. This percentage is marginally down from 52% at December 31st, as a larger proportion of the hurricane losses were in IBNR at December 31st have now been notified.

I’d now like to update you on some of the factors that are likely to influence our results for the remainder of 2006. When providing guidance at the yearend we highlighted that the hardest segments to predict would be the Property Reinsurance segments. This has proved to be the case and with that segment reacting slower in the first quarter to premium rate increases than we had hoped.

The Property Reinsurance team has written approximately a further $85 million of GWP in April, and depending on market conditions, we currently expect a total of between $550 and $600 million for the year, from [inaudible] $740 million, exclusive of reinstatement premiums in 2005.

The resulting business mix for the year would be approximately 27% Property Reinsurance, 28% Casualty Reinsurance, 26% Specialty lines, and 19% Insurance. This emphasizes the significant change in business mix that is underway in the business.

We are revising our premium growth guidance for 2006 to an increase of 0% to 5% compared to the estimate of 5% to 10% previously given.

Overall, however, we maintain our previously issued guidance that our combined ratio will be in the range of 85% to 95%. We said that this included approximately 10 points of annual average CAT load, though I made these calculations to suggest that this may now be overstated as a consequence of the downward trend in our exposures.

Investment income is expected to between $180 and $200 million before tax. An interest table based on our current capital structure, including dividends on our preferred shares, will increase from $16.2 million in 2005 to around $29 million in 2006.

We are very conscious of the need to optimize our capital structure and proceed to our ROE objectives on which management is [inaudible], and as a result we are continuing to explore further ways in which to optimize our capital structure over the coming months and years.

We expect to continue a tax rate in the low 20s from underwriting results and a range of 18% to 20% for investment returns.

With that I’d like to turn the call back to Chris.

Chris O’Kane: Thanks Julian. A further point I’d like to update you on before turning the call over to q&a concerns our outwards reinsurance arrangements.

The market for retrocession capacity, in particular, have hardened immensely since our last call. Fortunately, most of our program [inaudible] January 1st, and that part was largely completed on time.

Our Marine Reinsurance program, which renews in late February, proved to be a more expensive purchase than planned, but is nonetheless a satisfactory program.

A simple summation of these observations is that we now have up to $655 [million] of cover available for a single U.S. quake event, which covers Property, Casualty and Marine losses, or $573 million for a U.S. wind event, which touches Florida, calculated on a similar basis affecting all three lines.

For a Property-only loss, we have a maximum potential recovery of $575 million for U.S. quake, or $493 million for U.S. wind if it affects [inaudible].

The amount of loss we would have to retain before recovering is greater than the 2005, amounting to $149 million for a combined loss, but $139 million for a Property-only loss. These retentions are stated prior to the effects of [inaudible] reinsurance [inaudible] premiums and prior to taxation.

Our diversification by peril, by class of business and by geography, has always been a core element of our strategy. We hope that you’ve been able to deduce from our remarks this morning that we’re taking every sensible opportunity the market currently offers to enhance the benefits of diversification of a better-balanced book portfolio.

The risk management actions we have described allows to reduce our vulnerability to a large event loss while simultaneously maintaining a comparable level of gross premium and an acceptable return on equity. The same level of reward by taking less risks seems to us to be very sound business logic.

At this point, Julian and I are ready for your questions.

Thank you. [OPERATOR INSTRUCTIONS]

Tom Cholnoky with Goldman Sachs.

Two questions, if I can. I guess, number one, Chris, on the various buckets that you identified for your risk appetite where are right now in terms of filling those buckets, because you cut back exposures that much and you want to limit your ultimate exposures, it seems you may not have that much room in your buckets to really grow the Property CAT business? So, I’m just trying to get a sense of where you are with the various buckets.

Chris O’Kane: Well, there are different ways to measure that Tom. One of the things that I gave you was net of reinsurance recoveries after tax. We wouldn’t want more than 17.5% of our surplus exposed to a single event. And currently we’re running between 13 and 14%, so that says we can take a really meaningfully more amount of risk net and that’s about 25% more risk.

The question is, is the market going to be there at the right price to enable us to do it. We think it is. It’s a calculated risk but it looks to us like we got it absolutely right. We cancelled more than we needed to at one line in the first couple of months. We thought the market needed to firm more than it has done. It’s firming day by day. The last few weeks have been tremendous. I think that’s going to carry on right through June, so I think you could see us taking it back up again, staying within our [inaudible]. We’re not going to breach those, but taking it back up quite meaningfully.

Julian, secondly, and I hate to do this on a conference call, but I think it’s important. Just really walk through the mechanics of why your expense ratio -- I think I understand a little bit more why it’s up so much in Property, but I think it’s important that you walk through the mechanics of what exactly went on.

But secondly, your explanation for what drove that doesn’t seem to foot with what also happened, your expense ratio and Casualty reinsurance and also Special Insurance because both of those jumped pretty dramatically year over year, and so I’m at a loss as to how to explain what happened with those ratios.

The explanation I gave was directed at the whole account level and there are three components to the explanation. One is the increase in the reinsurance costs charged in the quarter, so the difference between the gross and net earned this quarter compared to the corresponding quarter. Just [inaudible] amount of that difference accounts for 3% off the increase in the overall expense ratio, and that’s just due to the costs of Property Reinsurance, Specialty Reinsurance, and indeed the Insurance lines. They’re all impacted by that [inaudible] degree.

The other thing that’s going on in the Property Reinsurance segment, I alluded to some non-recurrent runoff commission charges on certain treaties and that we don’t expect to occur on a regular basis. That was on profit commission on treaties where the profit commission is adjusted on the basis of the [inaudible] results.

So, in other words, those treaties did better than you expected.

Yes. And then in the Casualty Reinsurance segments you brought your attention to, again, there was a commission charge, non-recurrent commission charge there of about $3 million. But also, [inaudible] in Casualty is that the acquisition costs on our U.S. book are significantly higher than they are on our international book and that’s a point that we’ve made several times. And there is more U.S. treaty business earning in this period than in the corresponding period in 2005. So that increases the commission rate and that’s why the expense ratio on that account.

So, Casualty Reinsurance should be higher year over year for the remainder of the year then.

Yes, that’s right. There’s a runoff spike of around $3 million in the quarter, but apart from that I would expect it to be higher, yes.

And what was the profit commission in Property Reinsurance? What was that -- what does that contribute in dollars? How much higher was that?

Yes, that was about $8 million.

$8 million. Okay. And that’s kind of a one-time yearend event?

Yes.

I may come back in but let me let other people on.

Alain Karaoglan of Deutsche Bank.

I have several questions. First, I want to thank you both for the very thorough presentation that you gave, but I do still have many questions.

Just conceptionally, Chris, could you have written $200 million of Property Reinsurance business if you wanted to in the first quarter? You may not have liked the rate, but could you have?

Chris O’Kane: Absolutely, we could have.

Okay. The second question is, I was surprised on the loss ratio on the Property Reinsurance business of 44.5% versus 41.8%. Given two things -- the low capacity quarter and the fact that the pricing of the business that you wrote, you increased it and you decreased your exposure. Could you -- what is happening that? Are you just putting some IBNR, or what is happening in that segment?

The [$8.5 million] of prior-year reserve strengthening, which is equivalent to around 8% on that ratio. And then there is the impact of the front-loaded reinsurance costs on the net premiums earned, which is the [inaudible] ratio.

Okay. Then on the expense side, you alluded to higher commission. You mentioned higher commission on Property Reinsurance. When I look at the Property Reinsurance policy acquisition Operating and Admin expenses they were $49 million. If I take out that $8 million it still is $41 million compared to $47 million last year on a premium volume that is 50% lower. Is there anything else happening on the expense side beyond the commissions?

Yes, the General and Admin expenses in this quarter had had a heavier weighting within the total towards Property Reinsurance [inaudible] from some of the other segments as a result of more refined allocation of expenses. Overall, the General and Admin expenses are up around 3%, but that has [inaudible] more on Property Reinsurance and less on some of the other segments.

Okay.

And [inaudible] about that. We felt that the Property Reinsurance segment needed to just carry a higher charge. Therefore our actuarial and risk management expenditures than they had done previously and we think that’s appropriate.

Now, on the Specialty segment, the premium was flat on a gross basis relative to last year. That was a little surprising given two things -- the price movements that you described in the Energy market that they’re quite significant, and the fact that a lot of the decrease in the CAT exposure in the Energy market is through terms and conditions as opposed to reduction in premiums. Could you comment on that? Is it just a function that most of the business renews in the second quarter versus the first?

Chris O’Kane: Essentially that’s right. The stuff where the market is moving faster [inaudible] are Energy. There was very little in the first quarter. It’s really not the second quarter and that’s the big story and what’s happening there is really we expect to write about three times more premium. As I said in the call we’re cutting our exposure from $1.4 billion to about $400 million, so three times the premium for an awful lot less risk.

Okay. Could you discuss -- and I’m sorry I have many questions -- but the catastrophe payments that you’ve made so far on the hurricanes and what is -- that that is [inaudible] insurance recoverables and how much you’ve recovered from the paid point of view?

Chris O’Kane: Since December we have received $43 million in reinsurance receipts for losses that have been paid and now collectible. We have very little, if any, that is outstanding in terms of collecting those that have been issued and not collected. We expect to see a significant acceleration in the rate in which we collect reinsurance recoveries through the remainder of this year as we get into the writers of reinsurance that are applicable.

The overall balance sheet total has hardly changed as you may have observed. That’s because there has been an addition to reinsurance recoveries from the events in the quarter and the further strengthening of the hurricane reserves at the gross level, a sum of $51 million.

And the last question is, overall, Chris, how do you feel about the return on equity prospects for -- or Julian -- for the Company in 2006? Given the outlook that you’ve described, it seems to be including and given what the results in the first quarter have been.

Chris O’Kane: I think Julian, at least indirectly, covered that and you know we don’t provide an ROE guidance, but we’re not changing our view of the combined ratio. We’re saying our gross income ought to be up a little bit, somewhere between 0 and 5% from last year. A lot of the CAT business that we might have been writing in the past at 1/1 is, if you like, been back-loaded and it’s going to be coming in the second and third quarters.

The reinsurance costs, which is something we buy to protect last year’s underwriting as well as the underwriting we’re going to do in last year, has already been spent. That’s $300 million and [inaudible] 1/1. So, you’ve got, I think, a unique squeeze in the first quarter where the outwards reinsurance cost is big, but the inward premiums that pay for it isn’t coming in, but it’s not actually changing our view overall for the year.

I would [inaudible] anything we’ve said in the past in terms of our [inaudible] and we said somewhere in the sort of middle teens is where we expect to be over the cycle. That is still valid for this year and beyond.

Clearly, we are disappointed with the results in this one quarter. This is a business, which is in transition, sort of a changed business, [inaudible] business model, and we will be endeavoring by [inaudible] optimization by managing our investment portfolio well, as well as by the changes in the underwriting to attempt to get a better result than we have in this quarter as the year progresses.

Jay Gelb with Lehman Brothers.

I want to clarify on the last point you made about the outwards reinsurance. There was a sharp decline in the retention ratio and that’s probably explained by the higher reinsurance costs that are front-loaded for the first quarter. Can you give us a sense of what the retention ratios will look like for the remainder of 2006 versus 2005?

Yes. This is Julian. The first thing that I’d like to say that in the first quarter there are some runoff hopefully charges for reinsurance in the figures related first of all to the UK fire loss that we mentioned and that is about $4 million. And also to the impact of [inaudible] written premiums from the hurricane strengthening, which is another $4 million or so. So it’s roughly $8 million of event-driven charge in the first quarter.

In addition, there are a number of reinsurances, which are running off [inaudible] dates from last year, which may or may not be renewed later in the year. I think that some of them won’t be and therefore that should see further savings against our [inaudible] internal budget on reinsurance ceded.

The bottom line is that I think the ratio of ceded to gross written premium for the year as a whole, and this is [inaudible] written premiums would be of the order of 15%, maybe 15 to 16%. That’s the order of magnitude.

And is that for the full year or for the remainder of the year.

Yes, written ceded versus [inaudible] premium.

Okay, so retained will be about 80 -- 84 to 85%?

Yes.

For the full year?

Yes.

That’ll mean a sharp increase through the rest of the year if the first quarter was around 67%.

Yes. If you look at the ratio between the written reinsurance premiums in the first quarter and the announced expense through the earned line, it’s growing well above 25%. In a normalized situation where the only thing that’s happening was the earning of losses occurring during policies renewed the 1st of January you’d expect a 25% relationship between those two numbers. It’s much higher than that, partly because of these runoff expenses and it’s partly because of the running off of reinsurances from the prior year. The thing will normalize to a certain extent through the rest of the year.

Next question is on the combined ratio guidance. You printed a 90% combined ratio in the first quarter, but there was a lot of noise there. It would be very helpful, I think, for all of us if you could talk about what it would lead you potentially to be at the low end of your guidance as opposed to the high end but for catastrophes.

Excluding the impact of catastrophes, the major risks around the results for the year would be first of all fluctuations in [inaudible] attritional risks. I mean, this [inaudible] we’ve seen a significant [inaudible] from the UK. It’s not unexpected, [inaudible phrase], but if you had a frequency at that level of significant risk loss, then that could push it towards the upper end of the combined ratio even without a catastrophe event driving it.

The second risk is reserving, and you know we’ve had reserves from our Casualty reserves for most of the last, I think, four or five quarters. We are very confident in this level of strength in our cash reserves. We’re also very cautious and having been around the business for many, many years, we’re aware of what can happen with [inaudible] forces, not as unhealthy business. We’re not expecting that. And for that something we [inaudible] [infecting] our range.

The other thing is simply a change in business mix, in which it would be driven by market opportunities and can change the ratio between Casualty and Property business. [Inaudible] the combined ratio around in that range.

And so if we’re not going to assume reserve problems and a normal level of Personal losses, it may make sense to say that the high end of your combined ratio range could be conservative.

You might like to say that, yes.

And then finally and then I’ll circle back. On the reinsurance recoverables, on the PXT outstanding and the IOW, can you just update us there?

Well, our exposure to PXT, net of collateralized amounts received and [inaudible] premiums is $42 million and that’s pretty much unchanged from the yearend. We continue to monitor that situation very closely. You have probably seen the most recent rating actions by the management of the company through the ratings, but the last [inaudible] releases from Standard & Poor’s, it was their opinion that the Company has sufficient capital to meet its current liabilities. We take some comfort in that, but obviously monitoring the situation very closely. As has been previously reported, we cancelled most of their involvements in our ongoing 2006 program.

And the IOW?

The IOW, we’ve left the Katrina part of that evaluation unchanged despite the unchanged PCS announcement because we still think about [inaudible] that the final number will be higher. If that turns out not to be the case then we will have to reduce that [inaudible] to the fair valuation in due course. The amount then after tax being carried is $18 million.

Dan Farrell with Fox-Pitt Kelton.

Just a couple of questions and some of mine were answered. But, on the expense side in the G&A and some of the upward movement you’re having there, are you seeing any pressures on retention of [inaudible] and higher costs of retaining people?

Chris O’Kane: Yes, we are. In Bermuda there has been further upward movement in compensation packages. That’s been a fairly prevalent feature of the Bermuda operating scene since 2001, but it’s been further kicked upwards by the new staff [inaudible] that happened last year. And we have responded to that in our compensation packages for our Bermuda people and so far we are happy with the level of retention that we’ve been able to achieve.

Can you quantify how much of an impact that had on the expense ratio?

Chris O’Kane: That will mainly kick in from the 1st of April, which is pay review dates and will be of people with $750,000 to $1 million in the year. And the London operation is not immune from cost pressures as well. The market that made the kind of underwriters that we employ, it’s an international market and we’ve also been experiencing upward pressure on compensation arrangements in our London office, but [inaudible].

And then, secondly, on the reserve releases that you took, ex the [inaudible] addition, it was about $29 million of releases, can you just comment what accident years those were coming from?

Most of that is from 2004 accident year, some from 2003, very minor change in ’05 accident year.

Cliff Gallant with KBW.

I just wanted to double-check some of the guidance that you gave in regard to premium lines, Julian. For Property Reinsurance you’re saying $550 to $600 million gross. And then you gave a group of percentages. You said 27% would be Property Reinsurance. That was also on a gross basis for the year I assume.

Gross written premium, yes, exactly.

So, backing in that, using the other percentages, we can see that [inaudible] 26% in Specialty. That [inaudible] ends up being about $530 million or so of premium, depending on what your total number will be. Is that right? That seems like you’re expecting some pretty strong growth in that line, is that correct?

Yes it is, yes.

In this past quarter the Specialty growth was much more subdued, relatively flat. And I’m thinking if you get to $530 million for the year, that seems like you’re assuming something closer to 20% growth for the remainder of the year in the Specialty lines, is that right?

It depends on [inaudible] the overall guidance we’re taking here that’s offline. I mean, Specialty income is projected to be over $500 for the year. And one of the things that’s happening in the first quarter is that there has been some business that’s been renewed on short periods and therefore, it’s in that sense, artificially depressing gross written premium, but we expect to see [inaudible] for the full period.

Chris O’Kane: And that, I think, [inaudible] to that point we made earlier about the Offshore Energy, most of which actually renews in the second quarter, maybe third quarter, and that’s where the real kicker for growth is coming, so we can’t recognize it until it happens and it will be happening in the next few months.

Robert [Rowell] of Riversource Investments.

Just a few questions. Back to the combined ratio. Julian, I think you said 10 points was the kind of the normalized CAT number you had in the previous guidance and such that might be a conservative and given exposure reduction, and so I guess my question is, why isn’t the combined ratio -- I mean, I know that the combined ratio was up [inaudible] the loss ratio and the combined ratio for that matter were up in the first quarter, but why you then said that guidance going down, given the dramatic reduction in exposure relative to the price increases?

Well, the -- a rough estimate of the CAT load [inaudible] now [inaudible] 10 points. It might be somewhere between 6 and 8 points, so that will be something [inaudible], yes, you would expect that that [inaudible] combined ratio guidance.

As I said on the expense ratio, as a consequence of things we talked about there and the change of business mix, we’re expecting that to be a little higher, so overall, I felt it’s prudent to keep the total combined ratio guidance as it was.

Okay.

But also remember this is guidance for the full year, so the fact that we’ve got a larger percent number in the first quarter is there in the facts, and as the year goes on it’s hopeful the variation changes.

The other question is on capital adequacy relative to the new outlook for gross premium and net premium. It seems like your leverage is going to come down. Your premium leverage is going to come down, but your exposure is going to come down more because prices are upgrading, your exposure is down dramatically. I guess the question is are you planning to return capital at some point, or how do you feel about your leverage right now?

Chris O’Kane: You’re right our operating leverage has come down as a consequence of the [inaudible] in the fourth quarter of last year and the changes in the business model. One thing I would like to say is that it is essential to the continuing success of our [inaudible] operations in [inaudible] that we have a strong balance sheet, [inaudible] for the risk of rating actions or credit watches than we experienced in the last quarter and [inaudible]. That was very uncomfortable for us.

And so we were determined to have a stronger balance sheet as we thought was appropriate. As I said in my prepared remarks, we are looking at [inaudible] optimizing our capital structure with the interest of common shareholders in mind and I think I should leave that comment as it is because we haven’t developed a more specific plan that we [inaudible] just yet.

Could you run through again with me quickly the dollar amounts on the adverse and favorable development again? I didn’t catch it all earlier.

Yes, certainly, I can. The total is $17.5 million and the positives are $7.5 million from Casualty, $8.7 million from Specialty, $9.7 million from Insurance, and the negative is $8.5 million on Property Reinsurance.

Earlier I think it was Chris said that the Offshore Energy or the Energy book would be possibly written 3x some base level and I was just curious what that base level would be.

Chris O’Kane: Last year we wrote just over $30 million.

And it was just Offshore Energy?

Chris O’Kane: Yes, that’s just the Offshore Energy [inaudible].

And you would expect then in the second quarter you’d write 3x that number? Or would that be the second and third quarter combined?

Chris O’Kane: That’s actually for the rest of the year, but in point of fact it’s heavily weighted towards the second quarter. There’s a bit in the first quarter but there’s not much in the fourth quarter.

And I guess my last question for now is just on the Insurance business in the UK, I guess I was just -- I understand there was a large fire loss, but it’s a massive loss ratio and I’m just curious as to -- I guess I would expect to see that kind of loss ratio in a CAT line of business, not a primary insurance business. So, could you just review with me again what type of risks you’re writing there and how it’s priced and what kind of reinsurance is on that line specifically?

Chris O’Kane: [Inaudible] by the relatively small part of our business. It’s a $50 to $60 million book of business and I described it as mid-market or upper mid-market Property in the UK. We really only write UK situated risk. We don’t write multinationals in the UK. We’ve been very successful at this through the history of the Company. The average combined is on the order of 70-something %. I think in the [inaudible] of the Company on this line of business, so it’s pretty good.

You’re right to make some reference to [inaudible] because we operate with gross line of, I think, ?40 million of Standard line and a bit more for the Property owners portfolio. It’s the real estate business. So, there is the possibility for [inaudible] loss. But they seek reinsurance retention [inaudible phrase] is ?5 million on a per-risk basis and it’s a bit more for CAT. What you had here was a risk loss. And I’ll ask Julian just to refresh your memory on what the cost of that [inaudible] was and obviously just remind you that relating it to one quarter [inaudible] a little different than relating it to the overall year’s income at the risk without stating the obvious.

Sure. The negative results on the Property Reinsurance is just over -- it’s just under $12 million for the quarter. And that includes results from our UK and our U.S. operation. [Inaudible] help you just to break that down a bit.

The loss is almost entirely in our UK operation. It’s $12 million of loss, but the U.S. operation has broken even in the quarter and that’s on the Property side. On the Property side it’s broken even. And that is because of the high reinsurance costs, partly attributable to duration of the gross [inaudible] in hurricane Wilma, but also because of the very significant and increased costs paid on the catastrophe reinsurance renewal for Aspen Specialty, which has affected the costs quite badly.

So, what you’ve got is, on earned premium in the U.S. operation of $9.6 million, you’ve got a breakeven result, and then on the UK business you’ve got this impact of this [inaudible] loss, which is $13 million. So, that’s -- perhaps that will explain what’s going on. There’s not just a -- [inaudible phrase].

I guess my final question on that point is, what would you ascribe the probability was of that kind of loss in that book? Is it a very low catastrophe-like probability, or is that -- does that happen more often than that?

Chris O’Kane: There are occasional losses of that order of magnitude and have been since we’ve been writing that book. So, I don’t [inaudible] on it. It’s a low frequency event that just happens from time to time.

You’re going to get something like that once every year or two. I don’t think we can give you a specific [inaudible] basis for that, but it’s not something, for example, that we would say means [inaudible] is going to make a loss for the year. You’d expect one of these things from time to time.

Lee [Markowitz] of Pilot Advisors.

I’m sorry, we don’t have a question. We’d like to withdraw.

Bill Wilt with Morgan Stanley.

Just a very brief one. You gave the revised losses under a repeat of hurricane Katrina post the reunderwriting. Can you give us some more analysis on the 2004 storm season?

Chris O’Kane: I’m sorry, let me interrupt. The line here went dead briefly, so we’re not sure who is asking the question and we only heard the last few words. Could you start from the beginning, please?

Sure, pleasure. Bill Wilt from Morgan Stanley. You gave your revised losses under a repeat of hurricane Katrina post the reunderwriting. I’m wondering if you have a similar analysis for the -- were there to be a repeat of the 2004 storm season.

Chris O’Kane: We do have such analysis and I’m going to tell you, but I want to sort of sound a big note of caution around this because the one thing you know for sure is the next loss is never exactly the same than the previous loss, so there is kind of [inaudible] around this, so all we can do is we can take the risks that were affected by the loss in the past, assess will we still write them, look at our line size, look at that sort of thing and give a simulation.

But to give you some sort of a clue, the biggest loss was hurricane Charlie. That was $116 million gross at the time and on a rerun we think it’s about $41 million. Another way of looking at it, the four, actually five if I include [Sunga], the Japanese one, total on a gross basis $355 million. On a rerun of all five we come up with about $198 million. So, meaningful reductions there too.

But, this is meant to be helpful as a guide to what we’re doing with the exposures. It’s not the finest moment of actuarial science in terms of accuracy of projection.

Bill Wilt with Morgan Stanley.

No response.

We’ll move on. Tom [Cure] with Goldman Sachs.

I’ve just got a quick question. I think you previously said that your annual ratio for your annual acquisition and general administrative ratio was running about 30% for the year. Is that right?

That’s I said on this call, yes.

Okay. Now, I just want to know what’s behind that, other than the non-recurring charges of the first quarter because it just runs in the past at around a 25% ratio and then it’s upticked to like 27.1 because of some of the storms. So, I was just wondering what’s driving the higher loss ratio on an annual basis, not what happened in the quarter, but on an annual basis.

Part of it higher reinsurance costs. Part of it, and a significant part, I think most of it, is the change of business mix [inaudible]. If we write Property Catastrophe treaty business in Bermuda the acquisition cost is 11% of gross written premiums for U.S. business. If we’re writing U.S. Casualty treaty business in London our acquisition cost is nearer 18-19% in total, and therefore a change in business mix can be very significant in terms of the commission rate.

And obviously, we take into account [inaudible] charge in our pricing models and try and cover it, but it’s also taking into account [inaudible] fee estimates. So, it does result in increasing the acquisition costs.

On the G&A side there is also an increase. Where we have invested and are continuing to invest quite significantly in NIT, we had a quite heavy cap expenditure last year on both [inaudible] and underwriting systems and we’ve got a major investment project running this year on risk management’s A.M. Best improving the speed and delivery of our cap modeling and accumulation of control data. We think that’s an essential investment. That is part certainly of what’s driving the increased costs in our G&A line.

I’m understanding the G&A piece and the business mix you’re essentially write more Casualty reinsurance [inaudible]?

Yes, and the Insurance business as well it tends to [inaudible] our acquisition costs. The positions for the [inaudible] acquisition costs is the U.S. CAT treaty business written in Bermuda and that is [inaudible] projected [inaudible] going to be a lower component to the overall business mix than there has been.

There are no further questions. I would like to hand the floor back to the speaker for any closing comments.

Chris O’Kane: Thank you all for your time this morning and I hope you found the call helpful. Good-bye and have a good day!

Thank you. This does conclude today’s teleconference. You may now disconnect your line and have a wonderful day.