Aspen Insurance Holdings Ltd (AHL) 2009 Q1 法說會逐字稿

Good morning. My name is Stacy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Insurance Holdings first quarter 2009 earnings conference call.

(Operator instructions)

Mr. Noah Fields, you may begin the conference.

Thank you, and good morning. The presenters on this morning's call are Chris O'Kane, Chief Executive Officer, and Richard Houghton, Chief Financial Officer of Aspen Insurance Holdings.

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, 2009. This press release, as well as 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 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 Factors section in Aspen's Annual Report on Form 10-K filed with the SEC and on our website.

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'll turn the call over to Chris O'Kane.

Thank you, Noah, and good morning.

I'm pleased to report an excellent start to 2009, with first quarter annualized operating ROE of 17.6%, or operating earnings per share of $1.18. On a net income basis, earnings per share increased to $1.39, as this includes the impact of the preference share buyback. Richard will explain the impact of this transaction later in the call.

Our book value per share at the end of the quarter was $29.12, up almost 2.2% year on year and 3.6% for the first quarter of 2009. This reflects a positive contribution from each of our four business segments and a good result from our investments against a backdrop of continued economic turbulence. A summary of our financial highlights for the quarter is set out on Slide 3.

I will now comment on the current rate environment and would draw your attention to Slide 11, where we have provided a detailed overview of business performance and outlook.

While the overall trends have been positive, as we mentioned on our last two calls, the global financial and economic crisis has not resulted in an industry-wide hardening of rates. Our general sense is that the lines we expected to see improve, such as US peak zone property cat reinsurance, marine and energy liability and aviation insurance, have all experienced good rate increases. For lines such as energy physical damage insurance in the Gulf of Mexico and some of our Florida-exposed business in property reinsurance, it is still too early to determine the ultimate level of rate increases.

Our Gulf of Mexico energy book renews in the next few months, and there are encouraging signs regarding the level of rate increases. In Florida, the key driver is what happens to the Florida Hurricane Catastrophe Fund, and this is still in a state of flux. For other lines such as US casualty, where many had anticipated that rating pressure would abate and we would see some improvement this year, it is disappointing to note that so far there is little evidence that this is taking place. Pro pricing by some competitors continues to be disguised and subsidized by prior year releases.

US casualty business on both the insurance and reinsurance side is generally underpriced, and a correction is overdue. We will continue to monitor the situation closely. It remains possible that an uptick will occur later this year or early in 2010, and we intend to be well positioned to take advantage of this when it comes. In the meantime, we will continue to maintain a defensive posture.

I will now comment on each of our segments in turn.

Starting with property reinsurance, this segment had an excellent first quarter. Both premium production and bottom line contribution have been better than our expectations. Our losses from Windstorm Klaus and the tragic Italian earthquake are de minimis, and our risk business continues to perform well. Rates for peak zone exposures continued the hardening trend experienced in the January renewals, driven upward by strong demand to protect capital. As a result, catastrophe business is very effectively priced.

April renewals include the Japanese portfolio, where margins are much tighter. A combination of capital preservation goals and exchange rate movement weakening the yen led to a rare supply/demand squeeze, and therefore single-digit rate increases ensued.

Within property reinsurance, the risk excess market is finally showing signs of improvement after a difficult 18 months or so, but it remains much more inconsistent than the cat market. We are therefore underwriting particularly selectively. Our US property facultative reinsurance team is benefiting from some market hardening, but unfortunately international property fac reinsurance remains highly competitive.

Attention now turns to the Florida renewals in June and the significant July renewal season. Aspen is not a major player in the Florida domestic market, but we pay close attention to developments due to the effect that any increase in private reinsurance demand will have on the cat market in general. You will have seen many press articles covering the funding problems of the Florida Hurricane Catastrophe Fund, the Florida state-backed reinsurer that dominates the reinsurance market and provides cover at prices well below the cost of the risk. There are various legislative processes underway to address this. However, even if these are implemented, there is still likely to be a funding shortfall.

So what does all this mean for private reinsurance? It is likely that some reinsurers will choose private market reinsurance over the FHCF due to concerns over funding and speed of payment, particularly for the optional layer known as TICL, temporary increased coverage limits, which is above the mandatory layer. This increase in demand in the peak zone of Florida is likely to further increase reinsurance rates and tighten the US cat market for all midyear buyers. Aspen is well positioned to benefit, not just in Florida, but across the US cat market.

In our casualty reinsurance segment we are continuing to see greater than expected submission flow, in part due to the challenges faced by two major competitors. Competition within our international casualty division is generally rational, but rating pressure remains acute in US casualty. In international casualty there are indications that the insurance and reinsurance market is starting to improve and rate increases are apparent on primary business. We're continuing to experience rate pressure in our casualty facultative lines. In general, terms and conditions remain stable across the entire casualty reinsurance market.

In our international insurance book we're seeing strong rate increases in a number of our lines of business. Starting with aviation, the first quarter is not a busy renewal time, but the early signs are encouraging, with single-digit rate increases from the few airline accounts renewing at this time, as the market continues to firm following significant overall loss activity.

As I referenced earlier, the renewal season for Gulf of Mexico energy physical damage insurance is still in its preliminary stages, with some of our competitors indicating that they will not write any Gulf of Mexico exposure this year.

Our approach is somewhat different. Over the period 2004 to 2008, this class has seen a substantial increase in both the frequency and severity of losses resulting from hurricanes compared to previous historical experience. We've revised our pricing model for this class so it assumes the loss history we have experienced for the last five years is typical, rather than adopting a longer time horizon. This will result in us charging much higher prices whilst reducing coverage and seeking higher deductibles. We will have a better sense of how this is likely to unfold in the coming weeks as buyers focus on how much cover they wish to buy. The early signs, however, are encouraging, but to repeat what I said before, we will not write the business if prices don't meet our hurdle rates.

In our marine and energy liability business, the rating environment remains positive, and we recorded average increases of 20% to 30% on our book, which is in line with our expectations.

In UK commercial property, excluding the property owners' business, we are continuing to see signs of modest rate hardening and expect this to gain momentum as the year progresses. In our excess casualty line, rates were basically flat. We've not seen the broader market upturn which we'd anticipated at the end of last year, as one large competitor is offering rate decreases of as much as 15%. This is in contrast to the broader market, where most of our competitors are seeking to achieve rate increases.

In our US insurance business, we're seeing rate improvements of up to 15% on cat exposed lines. The E&S casualty insurance market continues, however, to be rather competitive, accepting rate declines in the range of minus 5% to minus 10%.

I would now like to hand over to Richard Houghton for a review of the first quarter financial results.

Thank you, Chris, and good morning, everybody.

I'm very happy to report on an excellent first quarter performance for Aspen. Our financial performance has been driven by strong underwriting results across most of our business lines and satisfactory investment returns. Our active approach to capital management also provided us with an opportunity to repurchase some of our preference shares during the quarter.

I will now highlight some of the key performance metrics for the quarter.

Book value per share on a diluted basis at the end of the quarter was $29.12, compared with $28.48 at March 31, 2008 and $28.10 at December 31, 2008. This represents a 3.6% increase from the end of 2008 due to the $72.2 million contributed -- contribution from retained income and $31.5 million of accounting gains on the repurchase of a block of our preference shares.

Operating income after tax was $105.7 million for the quarter, compared with $76 million for the first quarter of 2008. Annualized operating return on equity for the quarter was 17.6%, up from 12% for the same period in 2008. Diluted operating earnings per share for the quarter were $1.18, compared with $0.79 in the same period in 2008.

Gross written premium for the quarter was $637 million, up 7% from $596 million in 2008, due mainly to improving market conditions in most of our business lines within property reinsurance and insurance, in addition to some favorable prior period premium development. Ceded written premium of $130 million is an increase of $54 million, or 70%, on the first quarter 2008. First quarter 2008 ceded written premium was unusually low, as a number of multiyear industry loss warranties were purchased in 2007 covering the 2008 wind season. The ceded written premium was recognized in 2007 and earned through to Q3 and Q4 2008, when these covers expired.

Net earned premium for the quarter of $447 million is an increase of 14% over the first quarter of 2008, reflecting the earning of business written by teams new to Aspen in 2008 as well as some improved pricing conditions towards the end of 2008 and into the beginning of this year. Our combined ratio for the quarter was 84.5%, compared with 85.4% for the same period in 2008. We experienced $10 million in net reserve releases for the quarter, compared to $40 million of reserve releases in the first quarter of 2008. Cat experience for the quarter was relatively benign, with losses of less than $3 million attributable to Windstorm Klaus.

Our expense ratio for the quarter was 28.4%, down from 32.5% in the first quarter of 2008, due to an increase in earned premiums and a reduction in operating expenses. The operating expense ratio has decreased to 11% in Q1 2009, from 13% in Q1 2008, due to tight expense management, higher earned premium and lower exchange rates applying to our sterling denominated expenses.

I will now turn to the financial highlights from our operating segments.

Our property reinsurance segment recorded a combined ratio of 57.6% for the quarter, compared with 63.4% for the same period in 2008. The main driver for the improvement in the combined ratio is the increase in gross earned premiums attributable to improved market conditions and favorable prior year premium development, as both quarters enjoyed benign cat experience. Gross written premium increased from $184 million in the first quarter of 2008 to $221 million in 2009, due mainly to favorable market conditions.

Our casualty reinsurance segment combined ratio improved to 94.1% for the quarter, from 94.9% in the first quarter of 2008. While this is broadly unchanged, the first quarter of 2008 benefited from prior year releases of $14 million, whereas the current year has benefited more from favorable exchange movements in the international casualty segment, coupled with smaller releases of $3 million. The corresponding current and prior year pure accident year combined ratios are 103.5% and 105.6%, respectively. Our first quarter gross written premium of $187 million is up slightly on $182 million in Q1 2008.

The international insurance segment reported a combined ratio for the first quarter of 99.2% versus 95.5% in 2008. This segment had mixed loss experience for both prior year claims and current year losses in the quarter. We had limited adverse prior year deterioration in respect of our lines exposed to the global financial crisis, and we continue to monitor this very closely. Gross written premiums in the quarter of $195 million are down slightly from $199 million in the first quarter of 2008.

The combined ratio for the US insurance segment was 88.7%, compared with 103.6% in the first quarter of 2008, with the improvement due to improved loss experience and a reduction in the expense ratio. The loss ratio for the quarter of 48.1% is better than expectations and has resulted from the continued reshaping of the proxy book, in addition to some small reserve releases. The improvement in the expense ratio was driven by the increase in net earned premium. Gross written premium increased by $4 million, to $35 million for the first quarter of 2009.

Turning now to our investment performance, our net investment income for the quarter was $59 million, up from $39 million in the first quarter of 2008. The increase is due primarily to the $4 million contribution from our funds of hedge funds investments during 2009, compared to $17 million of losses from these investments in the first quarter of 2008.

At the end of March, the fixed income portfolio had $71 million of net unrealized gains, compared with $67 million of gains at the end of 2008. The average credit quality of the portfolio is AA+, and please refer to Slide 9 of the earnings slide presentation for a breakdown of our portfolio by asset type. Total investment return, including unrealized gains and losses and impairment charges for the quarter, was $50 million, or 3.4% annualized.

The book yield on the fixed income portfolio was 4.42% at March 31, 2009, compared with 4.64% at the end of 2008. Average duration has decreased to 2.9 years from 3.1 years as we have responded to the current investment climate.

We have taken charges in the quarter of just over $15 million pretax, associated with investments we believe to be other than temporarily impaired, mainly from our exposure to non-agency RMBS. Our non-agency RMBS holdings at the end of the first quarter are small, with a market value of $51 million after impairments.

I will now talk briefly about our liquidity and capital structure. We continue to enjoy excellent liquidity, generated by solid positive cash flows from operations, amounting to $203 million in the quarter, compared with $164 million for the same period in 2008.

At the end of the quarter we took advantage of favorable market pricing and repurchased a block of our perpetual preference shares. We purchased $60 million of preference shares at 50% of book value, using a mixture of common equity and cash to meet the replacement capital covenant requirements for these preference shares. Total cost of the repurchase of $34.1 million includes all transaction costs. The repurchase unlocks just over $31 million of value for our common shareholders.

We continue to manage a strong balance sheet, with just under $6.1 billion of cash and invested assets. Our debt to capital ratio at the end of March is 8.1%, reflecting our limited reliance on borrowings. Our total debt and hybrid total capital ratio, which includes the remaining $354 million of perpetual preference shares, is 19.6%, down from 22.1% at the end of 2008.

Turning now to guidance for 2009, as set out on Slide 10 of our presentation, due to the level of economic uncertainty surrounding investment returns and the early stage in the financial year, we have chosen to limit our guidance metrics to the following data points.

Our gross written premium guidance remains at $2 billion plus or minus 5%. We are seeing opportunities in a number of our lines where rates have increased significantly over the first quarter, and we expect these conditions to persist. However, rates in some lines have been slow to correct, and we are actively repositioning our capital to take advantage of these shifts in market conditions.

We expect to cede between 10% to 12% of gross earned premium. We anticipate our combined ratio to be in the range of 88% to 94%, including a cat load of $140 million for the full year, assuming normal loss experience, reflecting our underwriting experience in the first quarter. We expect a tax rate in the range of 13% to 16%.

That concludes my comments on our performance for the first quarter and guidance of full-year results for 2009, and with that I would like to turn the call over to Q&A.

(Operator instructions)

There are no verbal questions.

Sorry, your first question comes from the line of Brian Meredith, with UBS.

Good morning. This is actually Marie Lunackova on behalf of Brian. I had a question on the international lines reserve increase, if you could give us a little bit more color, maybe what lines it came from and how much it was, the absolute increase, and then on the size of the reserves. And you mentioned it's -- I'm assuming it's -- the current loss [figs] were increased, too, for this year, so maybe by how much, if you could share that with us.

Yes, Leona (sic). As I said, in the international insurance segment we do have quite a few ups and downs. I suppose the reserve strengthening that took place which had the most significant impacts on the quarter would be within our financial institutions book, where we increased our reserves by around about $10 million in respects of last year and just up over $10 million for this quarter, as well, above our normal anticipated loss pick. So that would be the main sort of adverse movement for us within international insurance. And then we have some positive developments in some of our other business lines.

Okay. And then maybe on the property reinsurance side, do you -- how much of capacity do you have to grow there? I mean, you had a great growth in the first quarter, and there was a lot of reinsurance repurchasing, significant, so how do you see it for the rest of the year? Was that the move to kind of keep the capacity because you expect better pricing throughout the year?

There's two way to answer that. First of all, I think we have some capacity, some spare capital available, to take on more risk, which we will do if the prices are right. Having said that, it's not a great deal more. As you probably know, we like to maintain our 1 in 100 level catastrophe exposures at about 17%, not more than 17.5% of total capital, and we are, generally speaking, operating in the sort of 16% to 17% area, so a little bit of headroom there.

If you want to think about it in premium you get a slightly different answer, because in April I suppose we are seeing rate increases somewhere in the 10%, 15%, even as much as 20% area. I think there's a further tightening of demand, especially in Florida. That's going to have a ripple effect elsewhere in the US.

So I don't think it's unrealistic to hope for maybe increases up of 20% and more. Maybe we'll see 25%, possibly even 30%, though that's probably optimistic. So you get that sort of double whammy where you sell more policies, but you sell them at higher prices. I can't give you a sensible figure for that at this stage. Obviously in the next call we'll know, and we can tell you then.

Okay. Thank you.

Okay.

(Operator instructions)

At this time there are no further questions.

Okay, well, if there are no further questions, we will thank you for your attention this morning and wish you a good day. Goodbye.

Thank you for joining today's conference. You may now disconnect.