Aspen Insurance Holdings Ltd (AHL) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Pam, and I will be your conference operator today. At this time I would like to welcome everyone to the Aspen Insurance Holdings Limited fourth-quarter and year-end 2006 earnings conference call. (OPERATOR INSTRUCTIONS). Thank you. It is now my pleasure to turn the floor 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, Chief Executive Officer of Aspen Insurance Holdings, and Julian Cusack, Chief Financial Officer of Aspen Insurance Holdings.

Before we get underway, I would like to make the following remarks. Yesterday afternoon we issued our press release announcing Aspen's financial results for the quarter and year ended December 31, 2006. The press release, as well as corresponding supplementary financial information, can be found on our website at www.Aspen.bn.

I would also like to draw your attention to the fact that we have posted a short slide presentation on our website to accompany this call.

This presentation contains 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 reports on Form 10-K 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 and our earnings slide presentation posted on the Aspen website.

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

Good morning and thank you for joining us. During today's call, Julian and I will be covering four main topics. Firstly, our performance in the fourth quarter of 2006 and for full year. Secondly, current market conditions and outlook for the remainder of 2007. Thirdly, our perspective on the recent changes to Insurance legislation in Florida. And finally, updating our guidance for 2007. We will also provide our initial estimate of our losses from Windstorm Carol.

For the fourth quarter of 2006, we reported record net income of $119.5 million on GWP of $287 million. This equates to an annualized return on average equity for the quarter of 22.4%, and our combined ratio was 76.8%. Our net income was $378.1 million on GWP of $1.94 billion for the full year, equivalent to an ROAE of 18.5%. Our overall combined ratio for the year was 82.4%. Full details can be found on slides three and four.

We are particularly pleased with this result as we have achieved it in what was for us a year of considerable change driven by a systematic repositioning of our portfolio to reduce volatility and diversify our exposures.

Starting on January 1, 2006, we reduced our in force exposures to peak catastrophe risks by approximately [50%]. But because those exposures were still very significant at the beginning of the year, we bought a large amount of retrocessional cover at a cost of $171 million. It follows that our result is all the more impressive if we do it on a risk-adjusted basis, bearing in mind how much downside risk was eliminated. As Julian will show you later, all product groups in our diversified business model contributed to this result, and as we start 2007 with this repositioning successfully completed, I am confident that we will see our enhanced portfolio yield increased earnings power.

To illustrate this with some numbers, this year to date we have spent less than $5 million on retro cover, a figure which we do not expect to exceed $50 million for the full year. We have the option to do this because we -- our reduced catastrophe exposures allow us to stay within our risk tolerances without reliance on retro. You may ask what would cause us to change this approach, and the answer is that it would require a radical lowering in the pricing aspirations of retro sellers. It is our assessment that currently retro sellers are asking for too large a share of the original premium of a limited part of the risk that they will accept. We decided not to proceed with a potential sidecar at the end of last year for very similar reasons.

We said a year ago that our focus in 2006 was on improving absolute returns but doing so with reduced variability of outcomes. The signs are that our hard work in 2006 has positioned us to achieve that in 2007 and has created a stronger model for the longer-term. One of the first benefits to flow from this is that the overall economics, the book of business we wrote at 1/1/07, despite the pricing environment are superior to those of the equivalent book at 1/1/06.

Slides five and six address the outlook for market conditions in 2007. January is an important renewal month for our Reinsurance segment and for much of our specialty lines, representing a total of about 30% of our expected gross premium for the full year. Pricing at January 1 in US peak zone catastrophe Property Reinsurance remains extremely attractive and at near record highs with many accounts registering very significant price increases year-on-year, although not quite reaching the levels achieved in July 2006.

European renewals, however, were disappointing with rates flat or declining.

In Casualty Reinsurance we're seeing modest declines in rates on (indiscernible) business being reflected in Reinsurance pricing, particularly in programs with zero or minimal loss activity. In our international casualty count, we recorded an average rate decline of on a premium weighted basis of approximately 6%, and our US casualty count rates were trending down, and we experienced modest rate reductions on the bulk of the account with worker's compensation cap cover seeing the most pressure.

Moving to our specialty lines segment, prices decreased by around 1% on average for renewal business on January 1. This figure excludes aviation Insurance, which does not have significant renewal activity in January. In marine haul Insurance, rates have remained firm, and we achieved an average rate increase of 11% on renewal business.

For energy physical damage, Insurance rates are flat to slightly down, and on our marine liability Insurance account, we were able to achieve modest rate increases on an average of 1%. Within our specialty Reinsurance account, we experienced a better-than-expected rate reduction of roughly 4%.

Concluding with our Insurance segment, January 1 is not a major renewal period for these lines.

As I mentioned on recent calls, pricing in both our UK commercial property and UK liability accounts remains challenging and expect this trend to continue in 2007. We will continue to maintain that underwriting discipline here and have cut our gross premium to maintain underwriting margins in these lines.

Now one very important recent development is the new Insurance legislation in Florida. As we think about this, we should remind ourselves what purpose property catastrophe Reinsurance actually is namely to allow our clients primary insurers to deliver their Insurance products to their customers on a more stable basis. The intervention in this process by the Florida legislators provides a significant additional supply of capital to the part of the worldwide property cat business where buying demand most greatly exceeded [cattle] supply, and this we expect will reduce prices.

In short, this is a big win for Florida homeowners. I think the real question, however, is to ask how sustainable this victory is, and at what potential price it has been achieved? Of course, the risk of Florida being struck by a serious hurricane is unaffected by these initiatives, so in Aspen's longer-term planning, we are asking ourselves what increased demand will there be for our capital from Caribbean buyers after the next serious hurricane loss. We anticipate that the spike in pricing at that stage may be even greater than that which was experienced in the aftermath of the 2004 and 2005 storms.

Nevertheless, the overall impact of these changes on Aspen is very minor indeed. To illustrate this, I would draw your attention to slide seven where we have analyzed the impact on Aspen into direct and indirect components. The direct impact on Aspen is remarkably small as we had only budgeted to write approximately $3 million of Reinsurance premium for Florida domicile Insurance companies in 2007.

Another impact is around changes in the pricing of companies based outside Florida, but which have some element of Florida exposure. To be more precise, we expect that those clients will ask for a price reduction because the benefit of the increased Florida cat fund will be greater. This is more difficult to quantify, but our current working assumption is that the negative impact on Aspen's premium be less than $10 billion.

The changing landscape in Florida raises the more complex question of how much lower Property Reinsurance rates around the world will be because capital which entered the industry to take advantage of the seemed attractive rates in Florida may target other exposures, At Aspen I'm pleased to be able to tell you that our business model is sufficiently well diversified both geographically within Property Reinsurance and within our other lines of business, and we expect the impact on our premium production in 2007 to be negligible.

With that, I will hand you over to Julian.

Thank you, Chris, and good morning. Our underwriting results for the year demonstrate the success of our diversification strategy with strong contributions from all business segments and an overall combined ratio of 82.4%. Gross written premium in the course has increased by 17% from $245 million to $287 million with the majority of the increase arising in specialty lines. The best performing lines for the year were property catastrophe treaty, Casualty Reinsurance, most of our specialty lines and Casualty Insurance in the UK and the US. Performance of our property Insurance line continues to be adversely impacted by poor results from US property service lines.

In the quarter there has been a small net deterioration of prior year reserves of $6.8 million. This includes some late developing Katrina claims arising from our national accounts Insurance property accounts, which we discontinued at the end of 2005.

A second factor impacting the quarter is that the commutation of a liability quota share contract at a discounted reserve evaluation resulted in a deterioration on net prior year reserves of 6.3 million. This does not result in an economic loss to the company because we expected to be covered by increased investment spend on the cash received.

Net prior year reserve leases for the year were 51.3 million equivalent to 3 percentage points benefit to the combined ratio. For the full year, our expense ratio was 29.3% compare to 27.1% in 2005. While policy acquisition costs increased marginally from 18.8% to 19.3%, operating expense ratio increased by under 70 basis points, including 113 basis points of higher performance-related remuneration cost as a result of the improved results in 2006 compared to 2005.

On gross earned premium, our full-year expense ratio is 24.6%, well within our target maximum of 26%.

I will now discuss the performance of our four business segments. Property Reinsurance produced an underwriting profit in the quarter of $21.6 million and $105.4 million for the year. The turnaround in results compared to 2005 obviously reflects 2006 suffered from far fewer catastrophe losses than 2005. The overall combined ratio in 2006 was 78.5% and would have been even better if not for the effect of adverse prior year developments of $41 million. There was a Reinsurance charge for the year of $171 million, which adds 20 points to the combined ratio. This expense was necessary in 2006 as we started the year with higher than desired gross catastrophe exposures running off from business in 2005, but will be very much lower in 2007 as Chris has already explained.

Casualty Reinsurance has produced an underwriting profit of $18.2 million in the quarter and an excellent $81.3 million in the year including prior year releases of $60.3 million due to the continuing favorable development on both our international and US casualty treaty lines. The Casualty segment's overall combined ratio is 83.4% compared to 93.7% in 2005. This is an excellent result for casualty costs which also generates substantial investment income from the near $1 billion of reserves writing for this segment.

Our Specialty lines have also performed extremely well, producing a profit of $43.6 million in the quarter and $89.1 million for the year. This compares to $17.2 million and $23.8 million respectively in the hurricane impact of 2005. There was a particularly strong contribution for specialty liability, which after a year of three major losses in 2005 has had a very favorable claims experience in 2006.

The Energy and Specialty Reinsurance books have also had a profitable 2006, and the segment benefited from a release of $9.4 million on prior periods. Overall the segment produced a combined ratio of 78.2%.

The Property and Casualty Insurance segment produced an underwriting profit of $12.9 million in the quarter and $19.8 million in the year compared to $34.3 million and $45.7 million respectively in 2005. This result is disappointing largely due to the poor performance of our US surplus lines property Insurance account, which has generated underwriting losses of $26 million. We have been taking action to rectify this situation and expect to see an improvement in these results in 2007.

Premium volumes in the Insurance segment overall declined 11.5% as a result of strong competition, particularly in the UK. We continue to have the philosophy of underwriting for profit and not for topline growth, and this is reflected in the results of the UK Insurance lines, which have performed extremely strongly in 2006 despite the drop in premiums. Net investment income for the year came in at $204 million, which is above the top end of our guidance range of 180 to 200 and an increase of 68.5% over 2005.

In April 2006 we invested $150 million into two funds of hedge funds. These have made a return of 4.6% in nine months, equivalent to an annualized return of 6.1. In our fixed-income portfolio, we have continued to favor the short end of the curve and to keep away from significant allocations to corporate credits where we continue to find spreads unattractive.

On slide eight you can see that we have modestly increased our waiting to better yielding AAA mortgage-backed securities. During 2006 we increased our fixed-income portfolio book yield from 4.08% to 4.52% as can be seen on slide nine. This resulted from incremental portfolio sector restructuring and maintaining a short duration position, hence giving us the ability to capture high-yield at the front end of the curve.

As of December 31, the duration of our fixed-income portfolio was three years. We made a further $150 million investment into hedge funds on February 1st of this year.

At December 31, 2006, our gross reserves on losses and loss adjustment expenses were approximately $2.8 billion, of which 48.7% represents estimates for losses incurred but not reported. This is down from the 51.8% at December 31, 2005 as a larger portion of the hurricane losses within IBNR at December 31 have now been notified. Excluding hurricane reserves, the IBNR percentage is 61%. The remaining IBNR for Katrina, Rita and Wilma is $118 million, part of total gross KRW unpaid reserves of $721 million. We also have $75 million of limit remaining uncredited on our cat swap, which responds to any further increases in the Katrina PCS market loss estimate.

Reinsurance recoverables were reduced significantly from $1.19 billion at the end of 2005 to $468 million, reflecting the collection of Reinsurance claims as we paid hurricane losses. The gross balance sheet figure respects our net credit position with reinsurers, which is reduced by collateral held and by reinstatement premiums payable. The net credit position is $407 million compared to $615 million at September 30. The balance was further reduced by a total of $96 million in our commutation agreement with [PX3] and the commutation of our quota share ranges at Montpelier.

In the final quarter 2006, the Company entered into an Insurance contract to provide cover against the (indiscernible) of reinsurers to settle current or future receivables. This innovative contract provides an increased level of security to the company and should be seen as part of our overall approach to risk management with 60 million lives are exposed to noncore risks such as receivables credit risk. Although not our primary motivation, we also expect some mitigation of rating agency capital charges. The contract will be accounted for as a derivative.

In 2006 the board authorized a collective share buyback program of up $300 million. The first phase of that program involving the buyback of 200 million common shares funded through the issuance of 200 million or 7.4% preference shares was completed in Q4. We would hope to undertake the second stage involving a further repurchase of 100 million of common equity during the course of 2007, but this will be dependent on the performance of the Company during the year and on our level of confidence that our remaining capital levels will continue to support our financial strength rating objectives.

As shown on slide 10, on a pro forma basis assuming our 2006 capital management transactions have taken place on January 1, 2006, our operating return on average equity would have been 19.5%. Other things being equal, we should be able to capture this uplift in total for 2007.

On slide 11 you can see an annual comparison of the components of ROE which shows a growing contribution from investment income.

In November we gave our initial guidance for 2007. Since then we have a lot more information, including January production numbers, more solid costings on our Reinsurance programs and updated views on market terms and conditions. After reviewing all this information, we have concluded that no changes in guidance are appropriate at this time.

Therefore, as can be seen on slide 12, we confirm our previous indications of GWP of $1.9 billion plus or minus 5%, ceded ratio of between 6 and 8%, combined ratio in the range of 83% to 88% absent major losses. Our guidance for investment income remains at $230 million to $250 million and tax rate guidance of 16 to 19%. Depending on the timing of any future capital management matters, our ROE guidance remains at 16 to 20%.

In addition, we are able to offer some initial guidance on our cat budget for 2007. This is based on modeling in RMS versus six of the distribution of worldwide annual aggregate cat losses based on our anticipated exposures. On this basis we estimate that in the mythical average year, which has experienced approximately 135 million of cat losses, although there is, of course, a very wide range of possible outcomes in any one year. Speaking of cat losses, we have made our first assessment of the limited loss information now available of our potential exposure to Windstorm Carol, and our initial estimate is the impact before tax on Aspen will be in the range of $20 million to $35 million.

With that, I will turn the call back over to Chris.

Thanks, Julian. Before we open the lines for Q&A, I would like to spend a few minutes on our longer-term prospects. It is my belief that the very hard market which began in the fall of 2001 and reached a peak in late 2003 or early 2004 is now over. There are many lines of business still enjoying rate levels consistent with good underwriting returns, but the trend is downwards in almost every major primary Insurance and Reinsurance line.

In these market conditions, success depends not just on price but on very careful risk selection, robust risk management, thoughtful buying of Reinsurance protection and on giving the right way to the nonunderwriting drivers of return. You will remember that we commenced our capital management program in November 2006, and we expect to be able to continue with that program this year.

For risk management reasons, we are also now balancing our exposures more equally between our UK and Bermuda underwriting platforms, which will also have the effect of reducing our tax rate. As our company matures, our Insurance reserves have grown, and this in conjunction with our targeted approach to improving investment returns will result in a significantly greater contribution to our overall returns from investments. These factors allow Aspen to look forward to the more challenging underwriting conditions ahead with a high degree of confidence.

At this point we would welcome your questions.

(OPERATOR INSTRUCTIONS). Alain Karaoglan.

I have a few questions. First, on the Property Reinsurance business, it seemed that in the fourth quarter on an accident year basis, the combined ratio was around 75%, which seems high in a quarter where we have not seen much in cat. Can you comment on that?

The second question relates to the Casualty Reinsurance business. The accident year loss ratio there seems to have dropped to around 65% in the fourth quarter. Are you using different loss pick or taking some trends into account, and should we expect that going forward?

And the third question relates to Carol. How does that loss compare to what we should think of from a quarterly basis? Is it still within the cat? I briefly calculated it at around 8 points, but if you could confirm that, that would be great.

Okay. Thanks for those questions. On Property Reinsurance, you were right. These are somewhat disappointing results in the fourth quarter given the absence of cat losses. The negative impact comes partly from a little bit of KRW strain, but also there is an impact from prior quarters where we had to increase a little on our risk excess and pro rata reserves in the light of higher-than-expected development. We do expect that the rather poor results we have had from the risk assessment pro rata business in 2006 has now worked its way out, and we should be seeing better results from those two lines in 2007.

On Casualty Reinsurance, the result in Q4 does reflect a little bit of commutation activity within US casualty treaty, but also a good experience generally in the international business. There is no particularly radical change in approach going on in the quarter.

And as far as the seasonalization of the cat budget goes, it is very difficult to be precise about that. I mean normally you would expect the highest risk of highest numbers being in Q3 and Q4, but that sort of level loss from a European windstorm is in line with our expectations.

And regarding reserve releases, Julian, was there any reserve releases from the prior three quarters that affected the fourth quarter?

In a sense, yes, that we looked at the performance through the year of lines such as specialty and liability, our UK liability Insurance lines, and took a view that the development in the year and in the quarter supported further takedowns on the accident year loss ratios. So I think what you're saying is a fair comment.

Okay. And, Chris, in terms of the environment, are you seeing any competitors being too aggressive, or is it just that the environment is quite profitable for everybody so prices are declining? Are you seeing any bad behavior out there?

I think the general mood is one of a reasonable amount of discipline throughout the market worldwide. On the order count and in the odd territory, you will notice one or two competitors seemingly consistently cheapen the market but not meaningfully so usually. There was I think a mention in a previous call of one rather large European account, which we used to write and which changed hands for a 30% rate reduction. I think that is shocking, and that is soft market behavior. But I mentioned it because it is so much the exception to the general rule of rather disciplined approach. I don't think we could point the finger at any competitor or any line of business as being consistently wayward.

Kevin O'Donahue, Banc of America Securities.

Thank you for the additional detail on the supplement this quarter as well. Just a few questions. First of all, I'm wondering if you could give us the number for the hedge fund gains in the investment portfolio in the quarter, or if there is anything else unusual there what that might be?

And then secondly, I was just wondering if you can talk a little bit more about what gives you confidence that the loss of the Florida premium to the world catastrophe Insurance market is not going to result in more competitive behavior than you seem to think it will?

Chris, can you take the second question first?

Sure. Let me talk a little bit about Florida then. Just to be absolutely clear, I think this is good news for policyholders. I think it is probably bad news for reinsurers. But I wanted to draw a big distinction between reinsurers in general who have tended to take bigger position in Florida than Aspen and Aspen in particular. So there is a substantial amount of premium coming out of the world Reinsurance pool. It is probably between 15 and 20% of world cat premium and may have been removed by this process.

Two things can happen. One is that capital can also withdraw maintaining the supply/demand equilibrium. That is the optimistic or benign view, and I don't really think that is going to happen.

The other is that some of the capital reverted to Florida is now going to find some other areas of exposure. It could be in Europe. It could be elsewhere in the U.S., and it is going to target those, and it is going to drive prices down a little bit. I think that is going to happen. In one of our slides, we suggested something like about a 2.5% reduction over the whole world in terms of property Reinsurance premium. Like I say, that is our current working assumption about 2.5% rate reduction right through the worldwide Reinsurance system.

But I want to say it is a very early estimate. We have not seen a lot of competitive behavior yet, and frankly where rates are, it is not by any means the end of the world. Now we contrast that with Aspen, we only had $3 million in our budget for Florida for Florida-based clients. So you don't miss what you have not got. We won't have that $3 million, but frankly it is pretty de minimus in terms of our potential result not being above the year. I hope that helps on that part of your question. I'm going to hand over to Julian on the hedge fund point now.

Kevin, the contribution to investment income in the fourth quarter from hedge funds is around $4.5 million.

[Adam Gillesky], Goldman Sachs.

I'm actually from the Asset Management side of the business, and I wanted to ask, first of all, on aviation I respect the fact that you don't have a lot of business renewing on January 1 for aviation. But would you care to make some comments on your observations of the market generally based on what you have heard and what you might have seen in the few accounts that did renew?

Sure. On the call I pointed to a UK commercial property and liabilities to softer areas where we are maintaining margins. We are fighting hard to do so. Aviation is the other area tracking with them. I think since the 2002 peak rates have fallen tremendously. So I think it is a tough and challenging environment.

Our response to that, well, first of all, our book was built on the basis that we don't write critical components products liability in aviation, which is a very competitive area, and we're not doing US airlines, and indeed, we're not doing Japanese airlines, which is also I would say the US airlines in particular is the most competitive zone of all. So our response is essentially avoid the worst of it, and then we have increased the emphasis on a couple of areas in our book, in particular deductible buyback. That is the process whereby some buyers are required by their insurers to run pretty big deductibles, and there are a few very specialist players who will look at those deductibles and selectively reduce them for a pretty good premium. That is an area where I don't get too much competition, and we have terrific results.

So it is an odd one. It is a tough sector. I watch it very, very carefully and worry about it a lot, but I am satisfied that our almost unique approach in that is consistent with making some decent returns.

When does that book actually -- when does the bulk of that book renew, your aviation book that is?

October is the most important renewal date.

Okay. And then secondly, on a separate matter, can you describe your appetite for risk or for an exposure to, let's say, a single event or class of events in terms of a percent of capital that you're willing to lose if you like for a one and 100 year event? Some of your competitors have mentioned their appetite for risk in that way, and it is helpful for -- (multiple speakers)

Sure, we can do that. Yes, we have mentioned this on many previous occasions, but just to reiterate, the numbers are for a one in 100 single event 17.5% of shareholders equity, and at the one in 250 year return level 25% of shareholders equity.

Josh Smith, TIAA-CREF.

Just a little more detail on the KRW development. Does that have anything to do with the ILW recovery you had?

No, the development in the reserves is on the, if you like, on the liability side of the balance sheet and relates to two main things. The first is that we had after many months of completely flat development three increases on large property claims written in our London direct facultative book in 2005. That was part of it, and that has affected the Insurance segment.

There was another part in our property Reinsurance account where we reacted with some additional reserving related to one of the more recent legal coverage decisions. And the impact on cat swap could be that if some of these increases eventually flow through into a revised PCS estimate that we would then be able to take more credit from the cat swap. But currently we have taken 25 million of credit from the cat swap risk, $75 million of limit remaining. So that does give us some comfort that we are cautious because of the basis risk between what we might be seeing in our book and what will ultimately be reflected in PCS estimates.

And then Carol, where did losses break out? Was it more from Germany's side, or did you have any exposure to that ship that ran aground in the UK?

We had exposure to both of those aspects -- property damage in Germany and to the cargo ship. Chris, I don't know whether you want to add anything to that.

We are still waiting on some really good data, and this loss (inaudible) we're saying 20 to 35 is a big range. We have something in the region of $4 million on the Napoli, the ship that went aground, and we have some European transfer use, as you rightly point predominately Germany in our property cat writings where we expect some losses, not that many necessarily advised to us yet. And then there's some small bits on our UK commercial fire account, and I think that is about it really.

Just one last one on the flood exposure, the Florida ruling, the $10 million from business. What is the total premium base that you had there that you're estimating $10 million might decrease?

Well, we think our property cat book worldwide is about $290 million.

And only $10 million you think is exposed -- has had any kind of exposure to Florida that would --?

No, let's be very clear there. When you have a company outside of Florida buying program maybe for two zones, that is heading back for the Northeast and for Florida. They are still going to buy that program. They need it for the Northeast. We think they are going to come to us and say that we now how have a cover from the Florida hurricane cat bond, which you, the reinsurer, will benefit from. So we want you to reduce our price to reflect that you have some benefit of FHCF.

So the Florida premium is not going to disappear altogether. We're not going to stop charging, but we're going to charge less because we have got less exposure, which I think is perfectly sound. So the $10 million does not represent a disappearance of Florida exposure. It represents just a reduction in Florida exposure.

I guess I'm just curious because, not just you, but a lot of people are saying that they don't think it is going to be a significant impact when Florida is, I don't know, 30, 40% of the US cat market. And if that is really being stocked up by the government of Florida or the cat fund, I would think that the overall exposure would fall down more than we're seeing people estimate the impact.

You know, we (indiscernible) to say again, our book of business has never really been based on the Florida domicile companies. Some of our competitors, there is a very big writing in the Florida homeowners accounts. That is just not something that we have favored. So the impact on Aspen is going to be a lot less than I think of the industry in general.

But I think you need to look at each individual carrier and look at their relative exposure to Florida. We have our Florida exposure mainly by nationwide or multiregional accounts. And there, as I have just said, the exposure in Florida is going to be a bit less, but it is not going to disappear altogether.

Another factor, which I really have not seen commented on very much but I think is very interesting, is the increased benefit of FHCF is about $21 billion. It has got a buying -- I'm sorry -- a coverage, increased coverage capacity of $21 billion. If you look at the difference between RMS Version 5 and Version 6, there is a total at the 100-year level for windstorm -- there's an increased buying requirement for $28 billion to about 17 for commercial and about 12 for personal lines. So if you think about it, the buying -- assuming everybody wants to buy up to that 100 year number -- that has gone up by more than the FHCF benefit offsets. To some extent as an -- that is I would say a mitigating factor, and maybe that is what some people have in mind when they say to you that they don't think it's such a big deal.

Great. Nice job.

Vinay Misquith, Credit Suisse.

Good quarter, guys. Your guidance for '07, if you exclude the cat seems to be a reduction in the accident loss ratio of about 3 or 4 points. Is that because you are buying less retrocessional Reinsurance so despite the fact that pricing is coming down you will have better profitability in '07 versus '06?

That is exactly right. That is the major impact there. We're also assuming that we don't suffer the impacts of poor results that we had in 2006 on our property accounts in the US.

Okay. And how do you propose to manage your exposures given the fact that they are buying less Reinsurance? Wouldn't your cat losses increase in '07 versus '06 on a pro forma basis, and I think you have provided the number $135 million for the cat load in '07. What would that have been for '06?

Okay. The straight answer to your first question is that we are managing our exposures at the gross level. That is what we did throughout 2006 when they reduced the statutory over 2005. There will be a further reduction in our gross peak zone exposures on a planned basis in 2007 to ensure that we can continue and will continue to remain within our risk tolerances without needing to depend on retrocessional assets. That is our strategy there. And the second question?

The cat load in '07 versus '06, I think it was $135 million in '07. What would have been pro forma in '06?

Well, when we originally estimated our cat load for the beginning of 2006 we were estimating it at around 10% of net earned premium. Taking into account the exposures that we actually had on the books by that midyear, we then reduced that to 6 to 7% of net earned premium, which is actually pretty similar to the level that we're now saying for 2007.

So you are saying that despite the fact that you are buying less retro in '07 versus '06, you level of cat losses you are assuming are on an average basis should (multiple speakers)

Because the cat load estimate for 2006 was a net of Reinsurance number, so what we're now doing is achieving the same level of exposure based on our lower gross exposures not being reinsured.

Just at the risk of belaboring a point here, a couple of years ago looking at buying retro versus not buying retro, our judgment was it was better to write more exposure by way of Insurance and Reinsurance than buying more retro.

Since 2005 the rules of the game have changed. I believe it is now wiser to write less exposure on an Insurance/Reinsurance basis and buy a lot less retro. And that just has something to do with the relative change in retro pricing being greater than the relative change in Reinsurance pricing. So we're always sort of managing to net exposure, and we have been doing that consistently for some time. But we get there by a very different route. Therefore, we don't feel that we are a riskier enterprise. In actual fact I think we are a less risky enterprise now as we face the beginning of 2007 than we have been at anytime in our history.

Sure, okay. (multiple speakers). The main difference between the two was I guess because of the arbitrage between retro and primary, and you are saying that primary pricing is significantly better than retro pricing. So you will just do more primary and less on the retro side?

Okay. That makes sense. The last question was on the hiring of senior executives. Have you made progress in replacing the three people who left the firm?

Yes, we have made a lot of progress, and I wish I could actually give you some announcement this morning. All I can say is actually we are very close, but we are not able to reveal any names today.

All right. Thank you very much, and I think you guys have done a great job with the capital management. I think that is good for the firm, and the lower tax rate is also very good for the firm. So thank you.

(OPERATOR INSTRUCTIONS). Ron Bobman, Capital Returns.

I agree with Vinay. Nice comments a moment ago. Congratulations on a real fine quarter.

Well, thank you.

I had I think three questions. One is, I think it was mentioned earlier in the call about some losses in your US VNS book if I heard it correctly, $20 some-odd million and some actions that you're undertaking there to remedy that. Could you expand on what that book of business is and the nature of the loss development and the change that you are undertaking?

Yes, I would be happy to. We're talking about the Property business, and it is written in our E&S Company in Boston. It is not a huge book of business. It is roughly about a $70 million book of business. And in the middle of last year, kind of probably July, August, September, we had a space of sort of four losses in a sort of $2 million to $6 million range. We had a good look at whether there was an underlying cause of that, and we found a lot of them had to do with managed property. In other words, the real estate business where the owner is buying the Insurance for the tenants and so on.

It's hard to understand quite why we had that space. Some people thought it was going to coincidental. In any case we took the decision to eliminate that from our books as a potential for the loss going forward.

We also took a pretty thorough look at minimum deductible levels. We also took a look at how much we were putting out in a primary position and decided to reduce that, and we strengthened some of the REIT's federal criteria from that operation to head office. Since then, and since then in this case probably means last October, the account has been performing very well, but it would be premature to say the problem is solved. I would want to wait a bit longer to just categorically say it is solved. But to the extent that the causes have been identified, diagnosed, they have been treated, and I hope they have been treated successfully.

Okay, thanks. The other question I had was there was a mention of the hedge fund performance I think for the nine months, and there is an annualized number with like 4% annualized to something in the 6's. If I heard you right and you are in two hedge fund to fund, those don't sound like all that -- obviously not all that impressive returns. I'm not sure if you think differently. But if you agree, are you just sort of sitting and watching those current allocations, or are you contemplating making any change, or is it too early to do anything?

The annualized return was 6.1%, and the reason for that being certainly lower than our expectations, and certainly what we had expected was due to one of the funds having had a (indiscernible), which we reported as a loss impact in the third quarter. We have taken a very good look at that fund, and the due diligence process is -- and we're continuing with them. But that was also very disappointing to us in our first-year investment in hedge funds.

And how did it do in the fourth quarter? There was a $4.5 million contribution you replied to somebody else. What sort of percentage number is that on a quarterly return basis?

The return on the fourth quarter we thought was very good. I can't recall the exact percentage, but I think it was around 8% annualized.

Okay. So like 2% for the quarter. Okay. And I had one last question. You mentioned the $25 million realized on the ILW with 75 of limits still remaining, and obviously it's linked to sort of PCS changes. Could you refresh my memory as far as where the PCS number is, and what sort of movement in PCS was needed to take place at its next update for you to realize some more benefit?

I think the last PCS estimate, which came out in December, was around $41 billion, and each $1 billion of improvement in the increase I should say in the PCS number is equivalent to $12 million additional potential recovery on our cat swap. To be absolutely precise, we have received or are about to receive $21 million in cash. We received about $19 (inaudible) million due to us any day now, and then there's another $4 million which we have taken credit for in anticipation that there may be a further increase in the PCS number, making a total of 25.

Okay. So there is sort of $4 million that you are realizing as a benefit without the PCS number yet --?

That is right. That is included in our fair value of the derivative on the balance sheet.

Okay. I remember that. I did not know it was a couple of quarters ago. And so if we were to see the PCS number go up $1 billion -- we now have the $12 million. So you would quickly outstrip the $4 million of credit you have taken? Okay.

Absolutely right. That is absolutely right, yes.

Okay. But by the way, the 41 when they went to 41 in December, what was the preceding estimate that PCS had before that? Was that an increase or was that a flat?

It was an increase, a relatively small increase.

Okay. Thanks a lot and continued good look and success.

Josh Smith, TIAA-CREF.

This will be a real easy one. Just the total preferred that you are backing out to get to the common equity number? You gave the average, but I did not see the total preferred amount.

Yes, it is $423 million.

And what is the average rate on that, or what did the rate to the pieces on that?

$200 million at 7.401% and $223 million at 5.675%.

And that should come through on the preferred dividend line?

That is correct, yes.

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Mr. Chris O'Kane for closing comments.

Thanks very much, indeed, for coming to our call this morning. Good-bye. Have a good day.

Thank you and this concludes today's Aspen Insurance Holdings Limited fourth-quarter and year-end 2006 earnings conference call. You may now disconnect, and have a pleasant day.