Aspen Insurance Holdings Ltd (AHL) 2006 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Aspen Insurance Holdings Second Quarter 2006 Financial Results conference call. [OPERATOR INSTRUCTIONS]

Thank you; it is now my pleasure to turn this over to your host, Noah Fields. Sir, you may begin your conference.

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

Before we get under way, I would like to make the following remarks. Yesterday afternoon we issued our press release announcing Aspen’s financial results for the quarter ended June 30, 2006. This press release as well corresponding supplementary financial information can be found on our website at www.aspen.bm.

I would also like to draw your attention to the fact that we have posted a short slide presentation on our website to accompany the call which summarizes the key points we will address today and will be referenced during the conference call.

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 US Federal Securities Laws. 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 more detailed descriptions 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 will turn the call over to Chris O’Kane.

Chris O’Kane: Thanks Noah, and good morning. In this morning’s call, Julian Cusack and I will provide you with an update on the performance of our business in second quarter. I will comment briefly on how the business has performed overall. And will then provide a brief segment in overview of the current market conditions and renewal activity during the quarter. Julian will take you through our financials in some detail.

I will also comment the progress we are making in relation to our risk management initiatives and the indications of the new vendor model releases of catastrophe business. I would now like to ask you to turn to the first slide on page 3 of the accompanying slide presentation on our website.

For the second quarter of 2006 we reported net earned premium of $429 million, net income of $101.8 million, and fully diluted earnings per share of $1.01. Our combined ratio for the second quarter was 81.6% reflecting a low frequency of Catastrophe Losses. Our results for the quarter and for the year-to-date Recruitment Annualized Returns on Equity of 20.4% and 15.6% respectively.

Turning now to each of our segments, our specialty lines edition had written at the end of the first half approximately 60% of the premium we planned to write in this area for the year with significantly improved terms, conditions, and much better rates. As I mentioned in the previous calls, we measure rate movements on renewal business on a premium weighted average basis. In our Offshore Energy Property Account, we have achieved average rate increases of 143% on renewal business and have succeeded in achieving a meaningful reduction in our exposure to catastrophe risk and limiting the amount of coverage for business interruption. Price increases have been the most dramatic for Gulf of Mexico exposed risks where we have seen a number of renewals paying many multiples of risk selling price.

Away from the Gulf of Mexico, rate increases have remained in the region of 20 – 25%, although we have seen some evidence of price increases beginning to moderate in recent weeks. We are also benefiting from a strong pricing environment in Marine Liability, Marine Hull and certain of our specialty reinsurance lines. However, market conditions in our aviation account have been less favorable where we have witnessed a notable increase in competition for airline business. We expect this trend to continue and as a consequence we have repositioned our account by reducing the Airline Hull and liability content and putting more emphasis on areas where pricing is more favorable.

Moving on to our insurance segment, market conditions are very different in the UK versus the US. We are now experiencing certain soft market conditions in the UK commercial property and employers in public liability businesses. Our underwriters have adopted a defensive posture in response and we have been reducing our top line and declined a number of risks to maintain pricing integrity and the quality of our account. Our aim is to preserve underwriting margins and we are well on track to do that through lowering our written premiums. As you know, in the US we write excess and surplus lines property and casualty insurance. The casualty market as a whole saw relatively modest price reductions for the first half of the year and we have recorded average price decline of just 1% on renewal business for our account in the year-to-date. However, in recent weeks, we have seen signs of strengthening competition with rate reductions of 5-10% not uncommon.

In our Property Surplus Lines Account, conditions are very different. The market for hurricane exposed property is extremely hard and we have seen price increases of the order of three times expiring terms while California Quake is attracting increases of about 50%. Rate improvement on Fire only accounts have been relatively disappointing with average increases of about 10%. We have reduced our gross exposures to Florida hurricane risk for our excess and surplus lines Property Account by 84% and expect to replace some of its exposure with better priced business in Florida and elsewhere in the US as the year progresses.

On our retention, however, catastrophe risk for this account after reinsurance recoveries but before the effects of reinstating premium tax is unchanged at $10 million per event. However, the benefit of these strong rates is currently offset by high reinsurance spend which is based on 2005 as well as in current exposures.

Regarding our Casualty Reinsurance segment, we would characterize conditions for both our US and International Accounts as continuing to be favorable. Along with ceded companies are experiencing some downward pricing pressure we have been able to compensate for this in our reinsurance pricing. Loss development trends on our account have remained favorable and Julian will discuss this further in his remarks.

Concluding with our property reinsurance segment, the market is not polarized between extremely strong pricing in the US especially in the hurricane risk and satisfactory but by no means excellent conditions elsewhere. South American business, of which we write very little, is at the bottom end of the range with price increases of 10% or less North of the Panama Canal, Mexican prices have increased by as much as a factor of 3, with capacity placements and 20 – 50% for smaller programs. We have taken the opportunity to write some business in Mexico as a result. In 2005, by contrast, we wrote no indigenous Mexican business at all.

We estimate that non-Coastal exposed US regional accounts have seen average increases of 15 – 25%, while in the Northeast, we’re seeing increases of 40% on average, that more than double the rate online for top liners.

Typical increases for California earthquake reinsurance are in the range of 30 – 40%. The most significant price increases, however, have been paid on wind-exposed East and Southeast accounts and especially Florida. These accounts are, in many instances, paying between two and three times more in 2006 than 2005.

I would like to draw your attention to the slide on page 4, which illustrates the average rate increase achieved on our account for the last four quarters and compare this with the amount of premium we actually renewed. As you can see, we achieved average rate increases on our Property/Catastrophe account in January of 18% and opted to fold back much of our capacity. As a result, renewal premium was only 55% of expiring premium.

By July, we have achieved average rate increases of 87%, increased our underwriting and wrote approximately 112% expiring premium. Thus, we were effectively able to re-seasonalize our account by writing much less business, lower rate increases and much more at higher prices. This decision did not result in us taking any more Florida exposure than we’ve intended to at the start of the year.

As you know, we’ve managed our overall zone exposure downwards with more pronounced reductions in certain key zones, such as Florida, since the beginning of the year, and I will return to this topic after we hear from Julian.

Thank you, Chris. We have announced the profits for the second quarter of 102 million after tax, which compares to 83.8 million after tax in the second quarter 2005. Our overall combined ratio was 81.6%. Gross written premium was 522.4 million in the quarter, 5% less than last year. The biggest reduction is the casualty insurance, which is down 65 million, effecting a 26 million lower contribution of Structure contracts and that’s down with revisions of 20 million with a seeded premium estimates and a number of US Casualty treaties based on our [baited] information from [inaudible].

Reduction of 37 million in the insurance segment gross written premiums, reflecting increasing competition within the segments, particular within the UK and Liability Commercial Property accounts. The quarter’s sought return to last year’s dollar level of property reinsurance premiums, although much stronger priority environments in to this comes with much less exposure.

Growth continued in our specialty segment as the account matures, driven by rate increases in Offshore Energy and new business in Aviation, Hull and Liability. This quarter we have released 29 million of prior year reserves, compared to releases of 12 million in the corresponding period of 2005. The 29 million release is net of deterioration on the 2005 hurricane reserves of 23 million. Within this, the increase in our Katrina loss reserves includes [13] million with respect to Offshore Energy. Taken together with other lines Specialty business, this means that we have now exhausted for this event, the specific reinsurance protection from Marine and Energy accounts.

The release includes 40 million from Casualty reinsurance reserves, including 14 million [inaudible] to lower assessments of seeded exposures related to the 20 million down with premium estimates before it took off.

Of the remaining 25 million, 15 million rates to non-US Business, 4 million to US Medical Malpractice and 6 million to Worker’s Compensation. Our own development experience is consistent with favorable trends in these sectors.

Our overall expense ratio has increased by 2.4% from 27 to 29.4. Firstly, the higher reinsurance spend drives down the denominator of the equation, which explains 1% to the increase.

Secondly, as we have grown in the business, investing further in our support functions including actuarial and Catastrophe modeling and expanded our Bermuda and US operating platforms, our operating expense ratio has increased by just over 1%.

I will now turn to our Underwriting results on a segmental basis. [Indiscernible] the segment has performed at profitable levels during the second quarter, with the exception of Specialty. Combined ratio for the Property reinsurance segment was 68%. This loss ratio reflects the absence of major losses in the period.

The Casualty segments, Casualty Reinsurance segments, which is combined ratio of 64%, compared to 97% in 2005. The significant reduction in the loss ratio relates to favorable developments in the business written in our International [penalty] and US penalty accounts as discussed earlier. This has given rise to releases in relation to prior periods of $40 million in this quarter.

Casualty Reinsurance loss reserves at the end of the quarter had risen to nearly $806 million. After a strong first quarter, the Specialty line segment has a combined ratio for the quarter of 111.4%, reflecting the strengthening of the Energy 2005 hurricane reserves in the quarter of just over $10 million and an Aviation loss of 7.4 million in the quarter.

This segment includes our Offshore Energy insurance business around 51 million of GWP in quarter two, which is expected to make a stronger contribution later in the year as extremely well-rated premium moves into the earned premium line.

The Property and Casualty insurance segment has a combined ratio of 93.1% in the quarter, compared to 85.5% in 2005. This account benefits from favorable developments by UK Liability Commercial Property accounts, which have resulted in releases from prior years of nearly $10 million in the period.

We have provided some additional explanation of segmental movements and combined ratios between the first half of 2005 and 2006. And these are set out on slides 8 to 11 on our website.

Net investment income in the quarter, $49.9 million is 84% higher than the second quarter of 2005. A fixed income portfolio book yield at the end of the quarter was 4.4% and then market yield 5.34%. The duration of our fixed income portfolio at 30 June, 2006 was 3.14 years versus 2.90 years at December 31, 2005. The aggregate portfolio book yield at the end of the quarter was 4.29%, with market yield of 5.06% and duration 2.63 years.

At the beginning of the quarter, we invested approximately 3% of the company’s assets into two diversified global [indiscernible] funds.

The performance of these funds has been modest during the quarter with positive returns of 0.26% of 1.13% respectively compared to the S & P 500 which had a negative return of 1.44%.

At June 30, 2006, our gross reserves, the losses, and lost adjustment expenses were approximately $2.96 billion of which 45% represent estimates of losses incurred but not reported. This is marginally down from the 52% December 31, 2005 and a larger portion of hurricane losses [indiscernible] December 31, have now been notified.

I would now like to update you on some of the factors that are likely to influence our results in the second half of 2006. GWP the first half of the year is down 11% from 2005. For the second half we expect premiums to be a little higher than last year, but this will depend on a number of factors including a very unpredictable deal flow in our Bermuda structured risk group and by continuing competitive pressures in the UK commercial markets. Overall for the year, we expect a single digit percentage reduction versus 2005.

The underlying changes to out premium production patent are shown on page 12 of the slide presentation. In property reinsurance, we have written approximately $130 million of premium in July and this is line with the middle of our previous guidance of 550 to 600 a year as a whole. Excluding prior alert reserve leases our combined ratio for the first half of 2006, was around the mid point of our guidance range of 85 to 95 and we are not offering that guidance in relation to the second half of the year. We do include within this a cap load of 7% of second half net earned premiums. Previous guidance for investment income was 180 to 200, of which 94 million accrued in the first half. Revised guidance is 190 to200 for the year. I will now turn the call back over to Chris.

Chris O'Kane,: Thank you Julian. In May this year, Standard and Poors announced the result of their first enterprise risk management audit of many of their client companies. Aspen was awarded a rating of strong, the second highest of four categories. Probably only 25% of companies will be rated in the upper two categories. We 're very pleased with this rating and risk management remained a core area of focus for us.

Since joining us about a year ago, our Chief Risk Officer, Oliver Peterken has made tremendous strides in increasing risk awareness and improving our risk management culture. Our basic objective is to marry the rigors and disciplines of modern risk management with the need to preserve an entrepreneurial underwriting culture to maximize returns in a controlled manner. As we mentioned at our recent Investor Day, we have established a risk committee of the board under the chair of Heidi Hutter in order to ensure that this topic is given prominence and focus at the highest level in our company.

Although we wrote a higher proportion that usual of our total catastrophe premium in the second quarter, we did so whilest maintaining a strict focus on our risk tolerances. To remind you of 2 our key tolerances, a catastrophe loss with a modeled frequency of 1 in 100 should not impact this with a loss greater than 17.5% surface]after reinsurance recoveries, reinstated premiums, and taxes. The equivalent figure for 1in 250 is 25% of surface. To help clarify what we mean by this, if the 1 in 100 year loss were to occur in a year where we were expecting and ROE of 17.5% than our expected result would be a 0% ROE.

We are continuing to operate within the risk tolerances I have just described, the slide on page 5 illustrates how we have reduced our gross exposures in achieving this. For example, limits in property catastrophe loss account exposed in Florida are down from $1.726 billion in September 2005 to $753 million in July 2006. Energy limits exposed to hurricane risks in the Golf of Mexico are down from $1.4 billion in 2005 to a figure of no more than $400 million during the wind season.

I would like to draw your attention again to one very important factor, which is direct on the slide on page 6. Although the reduction in our gross catastrophe exposures in critical [indiscernible] is very significant, we have chosen to retain more risk on a per-event basis, due to different conditions in the retro markets. In 2005, the amount of loss we had to retain in the first event before the effects of reinstatement premiums and tax is $90 million whereas in 2006 the equivalent number is $149 million. Furthermore, in 2005 we have a number of protections designed to protect us against of frequency of moderate events, and this type of cover is no longer available in the market at an affordable price.

In summary, our catastrophe risk management initiatives, combined with the changing retro market mean that in 2006 we can expect much less in the way of catastrophe losses. At a gross level, compared to 2005, but we will retain in larger share of each one. As a result, we are potentially at risk from the statistically remote possibility of series of say three or four, or even more, moderate losses, losses costing the market for example, $10 to $20 billion dollars each in the US.

In concluding my remark, I would like to touch briefly on the new the new RMS model which was released in late May. Having had an opportunity since our last earnings call to analyze the impact with the changes in more detail, for extreme events, the variation in RMS’s projection of loss cost versus our own was less than 10% albeit smaller event and discrepancies can be greater. In other words the model that we began using in November 2005 substantially anticipated that the changes that RMS was going to introduce and the consequence on risk assessment in the marketplace. I think it was getting ahead of the curve in this way allowed us to time this movement in catastrophe pricing accurately enabling us to deploy our capital for the best price at the best time. With that I am just turn the call over to questions.

[OPERATOR INSTRUCTIONS] We have a question from Jay Gelb of Lehman Brothers.

Good morning, I wanted to just run through the one timers on the premium side in the second quarter, I didn't catch all those, I just want to make sure I got that all clear.

Okay Jay, this is Julian, I was talking about premium reductions in the casualty reinsurance segments. Did you catch that? Let me repeat it anyway. We talked about a reduction of some 20 million related to reestimates of certain US causality treaty in GP, RI [indiscernible] estimates and a reduction in the productional structures casualty contracts in the quarter relative to the previous year. And then in the UK insurance sector, we reported on reductions in commercial property and UK liability premiums are a result of current competition softening in the market in those areas.

Okay, thank you. And then on the guidance, for the single digit reduction for the full year, what type of market environment does that take into account and does that already include your production for July?

Yes, it takes into account the business that we’ve written as of July 1 and subsequently in the month and reestimates having called all our underwriting teams of what they now expect to achieve for the rest of the year. As I mentioned, there are one or two volatile elements in there. I particularly mentioned the reduction of structured risks gross written premium in our structured risk units where we write a relatively small number of contracts and they can have individually significant premiums attached to them, and it’s quite unpredictable as to when or even indeed they will be legally bound at all. And Chris laid out some of the market backgrounds that are in casualty and in the UK primary insurance business where the risk environment is certainly not anywhere near as strong as it is in selected areas of property insurance and property reinsurance. So it’s a mixed picture really.

Jay, the background here is say a couple of years ago, pretty much every line of business we were in just got terrific rates, terms, conditions. Everything was good stuff. It’s a much more difficult market today, much more varied market, much more mixed market. There are areas that are very, very good indeed, better than 2 or 3 years ago, and there are areas that are significantly worse, and there are areas about the same. This makes it much more difficult to pick our way through the market. Our view basically business that meets our terms, meets our hurdle rates, we want to keep. Business that doesn’t, we don’t give it a backward glance. We dump it. That’s the way to maintain profitability, which is we’re all about, but it does make predicting the top line that little bit more difficult.

I see, okay. And then on the offshore energy, my understanding is that rates have just gone through the roof. But it will be interesting to know what your maximum aggregate limits are for the year if there is another round of storms in the Gulf?

Well, as I said, last year we had limits exposed to hurricane in the Gulf of 1.4 billion, and our current number is 350 million, and our risk tolerance number for that is $400 million. So let met just repeat, the $400 million is the sum of limits in the Gulf altogether, we obviously wouldn’t expect them to be exposed, all of them, to a single event unless it’s a quite extraordinary track.

I see. So the limits have been cut by more than 2/3. And what’s happened to the related premiums?

They’ve gone up by a bit less than a factor of 3.

Wow, okay.

So you can see its an exposure of taking onboard at very, very much increased prices. That’s for the Gulf. The rest of the world as I said, average price increase of more like 20-25%.

Right okay. And then the combined—

We’ve seen some risks in the Gulf of paying 6 times what we’ve paid last year. It really is pretty extraordinary down there.

Is the market still clearing though? Is there enough capacity for the demand that’s out there for our --?

I think there was in the earlier part of the year. The impression we’re getting now is that some people have topped out in the Gulf, which sore of suits us because we do have some power drive for some more of that business to get to there at the right price.

Right okay. And then separately on the combined ratio guidance, the first half result was 86 and your keeping your guidance unchanged of 85-95. And am I remembering correctly that you’re assuming about 10 points of CAT and now it’s down to 7?

Yes, at the beginning of the year, we guided on a CAT load to the year of 10% of the annual premium, having reduced our second half exposures against reduced risk tolerances and so forth. We’ve now reestimated our seasonalized CAT loads, taking into account the fact that the third and fourth quarter are likely more active than the first half of the year, and we’ve estimated that the average annual expected CAT exposures net of reinsurance to be 7% in the second half of net earned premiums.

I’m sorry, 7 points of the second half, not the full year?

Correct.

Okay. So then to me the command ratio guidance is pretty conservative based on that and also that you’re reviewing reserves every quarter, there’s been continued releases? Would you agree?

Well, I would simply comment that if you adjusts the second quarter or the first half year results for reserve releases in the first half, then [indiscernible] will be just over 90%, which is a sensitive guidance range.

Right, okay. That addresses all of my questions. Thank you very much. Great quarter.

The next question comes from Adam [Gillespie] of Goldman Sachs.

Actually Goldman Sachs Asset Management International, for your information. And I apologize if you answered this before. I had to step off the call briefly. But I’m wondering if you can provide just a bit more color on the weakness that you’re seeing in the UK commercial market? Do you believe that that weakness is arising from increased capital flowing into that particular line of business, in other words new competitors, or is it simply that people have lax underwriting standards? Or any more color that you can provide on that would be helpful. Thanks.

Sure I’d be happy to do that. First of all, I’ll tell you what’s going on in the market with the rates. I think 3 or 4 years ago, both on the liability and property side, rates were very, very favorable. Competition was low. Some of the bigger players in the UK domestic market had some very, very bad underwriting experience, became rather risk adverse, became, if you like, gun shy, had very strict underwriting standards and limits on the premium. And then the UK market had several really very, very good years. Some of the finest years that market had seen in a very long time and prices began to suffer accordingly. On the property side, a rate reduction of 20% is not uncommon or even 30 or 35% if the risk goes out to tender. Now, we just don’t do that sort of thing. There may be a little extra margin in some risk some of the time, but there’s never 35% excess margin.

On the liability side, the downward pressure is a little bit less, but something up to 20% reduction on renewal risk if it goes out to tender is, again, not uncommon. We tend to draw the bar more closer to 10 of what we think we could give up. And it’s not really driven by new entrants. I think it’s the companies who were losing a lot of money 3 or 4 years ago and they tend to be companies with let’s say 30 dominant market shares. Having had several good years, I believe relaxing standards, returning to the old competitive way of looking at business, trying to build and maintain market share, and our view is we’ve got to sit that one out and just keep withdrawing. One of the advantages we try and look for with diversified portfolio is we’re not dependent on any one line of business. It’s something of that we can afford to draw back from and put the emphasis on somewhere where the prices are better. Does that help?

It does. And could you please do me the favor of clarifying, do you write both primary and reinsurance in the UK commercial market?

All of these comments have relation to the primary market. None of them are related to reinsurance market. Although in fact we do write some reinsurance, in fact quite a lot of reinsurance, of the UK market. The point here is you’ve got two ways of pricing business. In reinsurance, you’ve got he original rates on the primary end and then you’ve got the reinsurance rate itself. So generally what we’re able to do in the reinsurance market is increase the reinsurance rates to compensate for any short fall in the original rates. So we’re not actually too worried about our reinsurance pricing at the moment.

Okay very good. And one final clarification on that UK commercial market, are both prices coming down and terms and conditions worsening or from what you’ve seen, is it more a price effect versus an underwriting effect?

It’s largely price. You will get some erosion in terms of condition as well, maybe extending limits for business interruption or something like that. But most of the competition is simply about money.

Very good. Thank you very much.

Our next question comes from Mark [Steraphin] of Morgan Stanley.

Chris, could you give your sense or your expectation for January first property catastrophe renewal pricing? Is it your sense that there’s going to be another leg up here at that point or is it too early to tell?

I really can’t see anything the stops prices in the property CAT line certainly in the US going up again in January 2007. And the reason that I say that is the big discrepancy we see in pricing today and pricing earlier in the year. There are at least three distinct markets this year. There’s the 1/1; there’s the April market; there’s the July market, if I bracket that business we did in May, June, and July. The July stuff is much better priced than April, which was much better priced than January. So for the business that you can write at any time in the year, why on earth would anybody want to write it in January when they know that they can wait until later in the year to get the better price? I would say, certainly seeing it from our point of view, if we have a renewal in January, we’re going to concur to our midyear pricing level then we’re going to move it up in line. If we can get it in line, we’ll write it. If we can’t, we’ll cancel it and write more in the midyear again. I think that the drivers of price, nervousness about CATs, the impact of RMS version 6, the new rating industry models are still working themselves through the marketplace. So, I would say even without loss, without any major loses this summer, we should see another up tick of the US. The rest of the world, unfortunately, is a different position, different dynamic, and I’m not sure how connected those things are.

Right. Is there anything from your prospective that causes this momentum to spread to other lines? It’s obviously moving into Cal Quake which is a pretty strong correlation, but what about the rest of the world or other areas?

I think if you look at the US CAT market and who the dominant players are and how that market is made up and the buying of the clients, you see one set of players and one dynamics. I think if you look elsewhere in the world, let’s say Australia or Japan or Western Europe, the experience is fairly different from the US. You don’t have the dominance of hurricane risk; the leading market shares are different. And I think it’s actually a rather sort of detached. I’d love to tell you that I think the rest of the world is going to catch up, but unfortunately I don’t believe it. I think it will require other independent developments in the rest of the world to have that ripple effect going out around in Europe and Asia.

You made mention of exposures to frequency based on your changes in reinsurance coverage and series of $10-20 billion events, but what about the layer below that, say the $5-10 billion events? Have you moved largely out of that area or is that statement true for the smaller type events?

I think it’s a lot less true. It’s not so much that we’ve moved out of that area. The first thing is a lot of the big companies just aren’t buying at 5-10 billion. The bigger companies are probably buying now 10 billion, 12 billion market loss. So even if we want to sell it, we can’t. But also in terms of pricing with the frequency of the last couple of years, it doesn’t seem to us to be a very attractive place to be. Now, there’s some small companies maybe away from Florida, that sort of thing, who could be affected by a much smaller loss and we might have some shares of those. But there, I think, our shares again would be pretty small. I really don’t think it should trouble us.

And then anything affecting the seasonality of earned premium in the quarter?

I’ll give that one to Julian. That one of seasonality of earned premium in the quarter.

It jumped up a little bit more than I would have otherwise thought with the premium numbers. I know that there’s different rates for different lines of business.

I think the reinsurance charge in the second quarter is less against the gross earned premiums current. And we’re still earning through business from Britain 2005. I think the net earned premium in the second half of the year, I would expect it to be marginally down on the first half.

Okay. And then just last question is about the way you see the second half playing out. A, do you have more capacity that can utilize in some of the different hotter lines of business, and then are you seeing companies come back into the market now that weren’t necessarily able to place the limits that they wanted to in the past?

There’s a little bit of that going on. The impression that I have is that some of the very, very big programs in July just didn’t get done in a regular market. So they’ve gone to maybe looking at capital market solutions or maybe looking at solutions from a larger reinsurer who is not part of the regular market.

The smaller programs they probably mostly got done, I think what we’re going to see in the next few months some people they’re be reanalyzing their underwriting. There’re going to be some people who find that as they model it out, they’ve got more risk than they thought they had, more risk than they wanted. And I think they’re going to come into the market in the next few months as distressed buyers. For many years we’ve made a living continuing with those folks and we have kept some powder dry, such that if there is good business out there at very, very attractive prices, we could still write some of it. I don’t think it’s hugely material. You really relying on people finding out things they don’t like as they model their exposures. And they’re won’t be too many of those and we don’t need too much capacity for it, but they’re be a little activity and we’re not closed for business on the property reinsurance or on the energy side at all. In both cases, we’ve got a way to go.

Your next question comes from Robert Rowell of RiverSource Investment.

A few questions, please. First, I was hoping, Chris, maybe you can remind us what an industry loss might look like for the 1 in 100 or 1 in 250 event as you model it. In terms of damage, industry damage

We would say now expect a 100 year loss to cost about 95-100 billion.

Okay.

I haven’t actually got in my head the figure for 250. It’s usually about 50-60% more than the 1 in 100 though. Last year most of the old models would have told you 1 in 100 was 50 or 55 billion. Now we’d be saying they’re 95 or 100, and that just reflects that increased exceptional risk I’ve talked a lot about in the last 6-12 months.

And then, I think Julian mentioned some adverse development you had on marine or energy business and that the reinsurance cover applicable to that business was exhausted. I was wondering if you could tell us what the limit in excess of your reinsurance cover is remaining?

Well, the programming questioning, Rob, is [90 million] excess 10 and more proportional protection of our marine and specialty lines insurance business. That limit for the Katrina event has now been exhausted, but there is still headroom within the limit on the Rita events later in last year.

I guess what I’m trying to get at, if you’re capped out on Katrina with respect to marine and specialty lines, what kind of potential is there for adverse development? Because I would assume that everything is net now for you with respect to the business you’ve written there. I just want to know what that exposure is.

Well what happened on the marine energy account is that after several months of absolutely flat reported estimated losses, there was one particular insured where there was an increase in the reserve that was 5 million up to us. As a result, we responded opposite to that, but we also added an additional IB&R of $3 million dollars to the gross position. Now we can’t be sure that that deals with it, but having re-polled all the loss adjusters dealing with our other unpaid losses on Katrina, they all reaffirm that they believe that the estimates that they’ve given us and that we have on the books are good solid estimates. Now I have to say there is relatively small amounts of Katrina offshore energy loss that is being paid to date. So it does have some way to go.

I might add to that, Rob, is here we’re talking about a relatively small number of pretty big risks. There are oil rigs offshore in the Gulf of Mexico and you have the [GLIP] reporting higher because of something that happened that hadn’t been advised. Well, given the size of these risks and their visibility, I think if one were missing we would know about it by now. So, the late reporting anything is very, very, I think extraordinarily unlikely. The next thing would be adverse development in one that’s already reported. The one case that Julian referred to where the 100% loss for the market went from 20 to 100 million was handled by a firm of adjustors who is outside the main set of adjustors with a lot of expertise. And it looks to us like a pretty much a one-off, an anomaly. It was kind of one firm of adjustors moving into line with the others. We’re not the lead insurer on it, but we watch it very, very closely. And I simply think that we’ve got our arms around the rest. This is very different from the way, let’s say, our insuring personal lines with flat issues or something like that. You’ve got a lot of [imponderables] to try to anticipate. Here it’s fairly transparent and so it’s not going to be the issue that worries us the most.

Okay, so is wasn’t a wait reporting, it was adverse development on --?

Exactly.

Why you feel entirely comfortable with the current position and that this might not happen again, what is the risk – I just want to know what the potential exposure would be. Can you say how much of the limit you have?

No, it’s very hard for us to quantify that. We had 1.4 billion of limit out last year. That’s over a large number of [indiscernible] rigs. The gross loss is a little over 100 million. So you could argue there’s 1.3 billion of limit unaffected, but that’s a very misleading number. The reason most of it is unaffected is some of it is at the Mexican border and the storms weren’t over at the Mexican border and some was closer to Florida. That sort of thing. I think it’s probably better to think about the probably of deterioration rather than try to quantify the amount, which would be very misleading.

And you think the probably is very low?

I think it’s very low.

Speaking of probabilities, what probability – Chris, I think you mentioned that you thought some players in the market were full up on Gulf risk for the year. What probability, based on what you’re seeing in the market right now, what probability would you ascribe to you actually doing more of that business in this second half or even as we approach the fourth quarter? And how much capacity would you allocate?

Well, our limits exposed now are 350 million. We set ourselves at a tolerance of 400 million. So, I guess it would be very easy for us to move from 350 to 400. That would be completely within our plans for the year. And frankly, if we see the business at the sort of terms and conditions we’ve been seeing in the prices, we will move from 350 to 400. The other factors of what would cause us to revise 400 take on more risk and that would have to be a further transformation in pricing and that would cause us to have to get back to the board and look at the whole risk tolerance question.

Chris O’Kane: I think that is unlikely to occur because I think the prices are very attractive as they are and our risk tolerance was set in anticipation of those. So high probability of moving from 350 to 400; low probability of going beyond 400.

Okay. And just in total in aggregate across your entire book and the spectrum of business that you look at on a day-to-day basis, what probability would you ascribe to, what is the upside probability or downside probability you would ascribe to being up on a gross and net basis on the premium lines in the second half? In other words, is there a greater probability that there is upside or is it more likely that it is as you suggested and just up modestly from last year’s levels or is there risk because of the UK liability market that there is downside? I am just trying to get a gauge as to what, how you would handicap it.

Chris O’Kane: Okay, Robert. In saying that we anticipated that there would be a reduction in the full year DWP in single digits meaning clearly not to 9%, I would really not want to bias that guidance to any particular point in that range. If it was down months after the full year that would have been slight; little to no growth in the second half. Presently it knocks up to the lower end of that range. There would have to be some growth in the second half to make up for the fact that the first half is down minus 11, but we are not really top line underwriters. We are picking our risks and balancing our portfolio in the interest of margin and also line results. The top line, although we need to have a reasonable idea of where it is going, is something that will be very much determined by what is happening in the markets and individual transaction decisions by underwriting teams.

I realize that. I appreciate that. It was just a different way of asking what your feeling on the market was. Thanks very much.

Your next question comes from Lee Markowitz of Pilot Advisors.

Hi. Just following up on that, now that you are also pulling back from the UK given the pricing there, can you allocate additional capital than you would otherwise to the other property and insurance businesses with the pricing the way they are?

Chris O’Kane: I don’t think that would follow the driver of how much property ratios we are going to do comes from the exposures and the critical exposure is East Coastal especially Florida wind. So the fact that we are doing less in the UK doesn’t really affect the exposure we would have in the US wind side. I think they are really independent.

You forgot capital that you had been applying to the other businesses.

The marginal amount of capital relief by reducing a little on the UK Primary liability is really quite small. Whatever you allocate that to CAT it doesn’t go a long way.

Chris O’Kane: I would add that within our self-imposed risk tolerance rules we are saying that our peak mode exposures from wind and claim consulting should not exceed at 100 level 17.5% of our total group surplus. It is really that constraint that is setting a limit on the acceptance of property reinsurance premium rather than the allocation of capital towards attritional risk.

Your next question comes from Victoria Patrick of Perry Capital

Actually Jay Yang with Perry. Good morning, just a quick question clarifying Julian’s response to Jay Gelb’s question earlier. Is your combined ratio guidance an accident year combined ratio guidance or is it a reported combined ratio rate?

Chris O’Kane: It is essentially an accident year guidance because we do not project or anticipate prior year reserve changes when thinking about the planning of our next quarter’s income.

So it would exclude the prior period development already reported in the first half, positively?

What I was essentially doing was saying 85-95 should be regarded as the guidance for the second half combined ratio exclusive of any reserve changes.

(OPERATOR INSTRUCTIONS] There seems to be no further questions at this time. I turn the phone over to your hosts.

Chris O’Kane: I would just like to thank you all for attending our call this morning and wish you a good day. Good-bye.

This concludes today’s Aspen Insurance Holdings Conference Call. You may now disconnect.