Aspen Insurance Holdings Ltd (AHL) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Aspen Insurance Holdings second quarter 2009 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to Mr. Noah Fields. Please go ahead, sir.

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 and six months ended June 30th, 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 delighted to report another good quarter with strong performances from both our underwriting operation and investment portfolio.

We recorded a net income for the quarter of $110.4 million or $1.14 per share, compared to $106.9 million or $1.44 per share in 2008.

Annualized operating return on equity was 16.4% for the quarter and 17% for the half year, compared with 31.2 and 16.6 respectively in 2008.

We also increased book value per share by 4% during the quarter, and 8% for the first half of the year.

Late last year, it was widely assumed in our industry that following Hurricanes Gustav and Ike and widespread investment losses, we would see a very hard market in cat-exposed property lines, with modest hardening in other property business in the first quarter of 2009 followed by firming in the casualty markets in the third quarter.

Our view at the time was less optimistic than many of our peers and regrettably, has proven to be more accurate. There has been no across-the-board hardening, although we have seen good increases in certain [specific] lines usually following market loss activity in those lines.

During our last earnings call at the end of April, I noted that lines such as catastrophe-[proof] property, especially in the US, and particularly on the reinsurance side, and other specialty lines, such as NG-related liability, marine, health, and to a lesser extent, aviation, had seen some good price improvements.

That trend had continued into the second quarter with renewal rates in those lines generally outpacing other areas. We're seeing few rate increases in casualty lines, however, although some risks are now being (inaudible) at the same -- at the (inaudible) price and the majority are showing much smaller rate reductions than in the recent past.

Turning now to each of our core business segments, as a reminder, we measure rate relativity on a premium-weighted basis on business we renewed. You will find an overview of business performance and our market outlook on Page 16 of the slide pack.

Our property reinsurance renewals written in the second quarter are dominated by US, rather than non-US business, the split being 87% US and 13% international. Nevertheless, I can report encouraging progress in our relatively new platforms in Zurich and Singapore, which are producing well ahead of plan in both premium and loss rates [with them] at this admittedly very early stage.

Pricing on the international side of our business is satisfactory, but relatively stable and showing few signs of meaningful price increases. US renewals at this time of year are dominated by hurricane risk and more particularly, by Florida.

We view the pricing achieved for hurricane risk in the quarter as being highly satisfactory, with pricing on average up by 17% for US cat. In fact, there was some moderation of the level of price increase in the month of June, following the decision not to purchase the private market reinsurance by the Texas Windstorm Insurance Association, which removed about $1.5 billion of demand from the market this year.

During the quarter, we also launched a co-venture named Iris Re which is a fund management business specializing in natural catastrophe risk. Initial funding for this fund is $100 million of which we have invested 25 million. This is a very small beginning, but we are hopeful that over a period of many years, this will grow to become a useful fee-based contributor to our earnings.

Moving onto our international insurance segment, I'm pleased to say that we experienced an average rate increase of 14% across the segment, which was better than our expectations. This was driven mainly by strong increases in energy physical damage and our Marine and Energy liability lines, with an improving rate environment in aviation and in financial lines.

Pricing and (inaudible) levels in the energy insurance market for hurricane cover in the Gulf of Mexico moved dramatically in our favor. We believe that the effective rate and exposure in our portfolio for this risk is more than double last year. However, many clients faced with increased pricing chose to buy less cover or even to retain the risk altogether. We also declined the number of risks that does not meet our underwriting criteria.

This has meant that we now have just 60 accounts on an insurance basis exposed to Gulf of Mexico hurricanes, a considerable reduction from 116 risks in 2008. Our total exposure to hurricanes in the Gulf of Mexico in respect of our offshore energy insurance account has reduced from $299 million to 144 million. The premium we received for this risk is more or less the same. Thus, it can be seen the rate of exposure has improved by just over 100%.

Hard data as to what has happened in the overall marketplace for Gulf of Mexico hurricanes is extremely difficult to come by. The best evidence we are able to find suggests that about a quarter of the clients have stopped buying Gulf of Mexico cover altogether and the total limits purchased have reduced by about half.

In our aviation insurance book, we achieved average increases of 9% on renewal business, with rates hardening following the Air France tragedy and a number of other airline crashes in the first half of the year. We expect rates -- I beg your pardon, I just couldn't find the next page for a second there. We expect rates to continue to firm for the remainder of the year in this line.

In marine, energy and construction liability, we've seen increases in the region of 32% on monitored risks. In our financial improvement risk units, we've seen modest rate increases of 2%, but have written less business than we had anticipated due to low levels of bank lending in the first half of the year and economic weakness in a number of key markets.

We are seeing continued improvement in pricing for our financial lines business and are positioning ourselves to take advantage of what we expect to be more [market] rate improvements at the turn of the year.

Turning now to casualty reinsurance, we see few rate improvements, although pricing in general is still under pressure, with industry price reductions currently around 5%. Previously, these had in the range of 10 to 15%.

At our international casualty reinsurance business, we recorded an average rate increase of 5% with significant variation by line. We saw strong pricing on financial institutions and on Canadian business, up 30% in some cases, and improved rates in professional lines and Australian business, up 5 to 10%. And US casualty reinsurance competition remains strong, with rates in our portfolio down 2% on average. We had average rate increases of 4% in Worker's Comp, with modest increases on auto liability, general liability and in [further] products.

Finally, in our US insurance business, we're seeing rate improvements of 6% on cat-exposed property lines only. The E&S casualty insurance market continues to decrease with rates down 5% on average. However, there's some evidence that rates are firming somewhat in the umbrella and excess markets, but are continuing to fall in the primary lines.

Before handing it over to Richard, I have one more piece of information that would be helpful to report on after the recent catastrophe renewals. As you know, we operate with a self-imposed cat tolerance of 17.5% of total shareholders equity for a one-in-100 event and 25% for a one-in-250 event. Our actual in force numbers as of today's date are $370 million or 13.2% of total shareholders equity for a one-in-100 event and $480 million or 17.2% for the one-in-250.

And now, I'll turn the call over to Richard for a review of our financial results.

Thank you, Chris, and good morning, everyone. I'm pleased to report on another strong quarter's performance for Aspen. Our financial performance has been driven by strong underwriting results and (inaudible) investment returns. Our capital position has also strengthened during the quarter, with a significant increase in unrealized gains from our fixed-term bond portfolio.

I'll now highlight some of the key performance metrics of the quarter and six months period, June. Please note we have provided a summary of the results in the accompanying slides.

[Book] value per share on the diluted basis at the end of the quarter was $30.36 compared to $28.99 at June the 30th, 2008, and $28.10 at December 31st, 2008. This represents a 5% increase over the second quarter of 2008 and an 8% increase from the start of this year. An increase in the quarter of 4% had been driven by retained income of $92 million and $42 million of investment gains.

Gross written premium for the quarter of $534 million was broadly in line with the second quarter of 2008, with increases in property reinsurance being offset by reductions in our international insurance book. For the six months, gross earned premium is up 4%, just under $1.2 billion when compared to 2008, driven by favorable market conditions, particularly in our property reinsurance lines.

Net earned premium for the quarter of $429 million is an 8% increase over the second quarter of 2008. For the six-month period in 2009, net earned premium was up 11% to 876 million, reflecting the increased premium production in the second half of 2008.

Our combined ratio for the quarter was 87.7% compared with 78.2% for the same period last year, with the increase attributable to aviation losses and the reduction in reserve releases. For the six months in 2009, our combined ratio was 86% compared with 81.7% last year, with the change driven largely by a reduction in reserve releases.

On an accident-year basis, our combined ratio in the quarter was 88.2% and 90.1% for the half year compared to 87.7% and 91.3% for the equivalent period last year. Net reserve releases were $17 million for the quarter and 27 million for the half year compared with 40 million and 80 million respectively in 2008.

Our expense ratio for the quarter was 32.9% compared with 30.8% in the second quarter of 2008, driven by an increase in acquisition expenses. For the half year, our expense ratio was 30.6%, down from 31.6% in 2008 due to an increase in earned premium and a reduction in reported operating expenses.

The operating expense ratio at 12.4% over six months in 2009 has decreased from [14].7% in the equivalent period to the higher earned premium and lower exchange rate applying to our [sterling] nominated expenses.

The financial highlights from our operating segment are as follows.

Our property reinsurance segment recorded a combined ratio of 48.1% for the quarter compared with 65% in the same period in 2008. Both quarters have been (inaudible) the experience, with the main driver for the improvement in the combined ratio being an $18 million increase in reserve releases when compared to the second quarter of 2008. The increase in reserve releases in the current quarter is attributable to a reduction in loss expectations for Hurricane Ike.

Gross written premium for the quarter of $180 million is up marginally when compared to the second quarter in 2008. For the half year, gross written premium has increased by 13% to $400 million due to favorable market conditions.

Our casualty reinsurance segment combined ratio for the quarter was 99% compared with 91.5% in 2008. Higher earned premium resulting from expansion of our US reinsurance platform in 2008 was offset by an $18 million reduction in reserve releases from $24 million in 2008 to 6 million in the current quarter.

For the first six months of 2009, the combined ratio was 96.4% compared with 93.4% for 2008. The variance is driven largely by a reduction in reserve releases.

The accident year combined ratio for the half year improved marginally to 100.2% from 100.6% in 2008.

Gross written premium for the quarter and the half year are both in line with last year.

The international insurance segment reported a combined ratio for the quarter of 99.9% compared with 79.2% for 2008. The increase is driven by a combination of the Air France disaster, while our total reserve net loss is $12 million in addition to a small reserve strengthening. The combined ratio or the half year was 99.5% compared with 87.1% in 2008. The increase was driven by the aviation loss that I just mentioned and the net $4 million of reserve strengthening.

Gross written premium was 239 million for the quarter and 433 million for the half year is down 8% and 5% respectively when compared to 2008, as we have adjusted our underwriting asset type in certain lines in response to market conditions.

In US insurance, our smallest segment, reserves in the quarter were strengthened by $6.9 million in our US casualty lines, which increased the combined ratio by 27.4 percentage points in the quarter as a result of a relatively small earned premium in the segment.

As a result, the combined ratio for the quarter was 165.9% compared with 91% in the same period in 2008. The combined ratio for the six months in 2009 was 128.4% compared with 96.6% in 2008. However, the accident year loss ratio for the six months of 2009 was 68.5% compared to 66% in the same period in 2008.

Gross written premium increased by 32.9% to $56.6 million when compared to the second quarter of 2008, driven by favorable market conditions in the property book. Gross written premiums for the six-month period increased by 24.9% to 91.4 million when compared to 2008.

Turning now to our investment performance, our net investment income for the quarter of $72 million was broadly in line with last year, with our funds of hedge fund investment contributing $16 million of income during the quarter compared to 11 million in 2008. As I mentioned in our last call in April, we redeemed our remaining fund of hedge fund investments at June 30th, 2009.

At the end of June, there were 112 million of net unrealized gains in the fixed-income portfolio compared with $70 million at the end of the first quarter. The increase in unrealized gains has been driven by improvements in market valuation of corporate credit, with credit spreads heightened during the quarter.

Total investment return, including unrealized gains and losses and the impairment charges, was $119 million or 7.9% annualized for the quarter and 169 million or 5.7% annualized for the half year. Book yields on our fixed-income portfolio of 4.4% at June the 30th is in line with the first quarter of this year, decreasing from 4.8% at the end of the second quarter in 2008.

Average duration of the fixed-income portfolio has increased marginally to 3.2 years from 2.9 years at March 2009, as we have used the rising bond yields to invest a portion of our cash holdings at attractive rates of return.

The average credit quality of the portfolio remains AA-plus. Please refer to Slide 14 of the presentation for a breakdown of our portfolio by asset type.

We have taken charges in the quarter of just under $3 million pretax associated with investments we believe to be other than temporarily impaired, mainly from our exposure to non-agency RMBS securities. Our non-agency RMBS holdings are a very small component of our total cash and investments of $6.3 billion and have a market value of $53 million after impairments. Total impairments for the first six months of this year were $18 million and we took no impairment charges in the first half of 2008.

I will now talk briefly about our liquidity and capital structure. We continue to improve our liquidity position through solid positive cash flow from operations, amounting to $99 million in the quarter and $302 million for the half year. This compared with 156 million and 320 million for the second quarter and half year respectively in 2008. The reduction quarter-on-quarter is attributable to increased claim payments related to Hurricane Ike.

We continue to manage a strong balance sheet with just under $6.3 billion of cash and invested assets. Our debt to capital ratio at the end of June decreased to 7.7% from 8.2% at the end of 2008.

Our total debt and [hybrid] to total capital ratio, which includes the remaining $354 million of perpetual preference shares, is 18.7%, down from 22.1% at the beginning of 2009. As a reminder, we purchased 67 -- I'll say this again. As a reminder, we repurchased $67 million of preference shares during the first quarter of this year.

Turning now to guidance for 2009, which is set out on Slide 15, our expectations remain broadly unchanged from our last earnings call, other than for a slight reduction in cat load.

Our gross written premium guidance remains at $2 billion, plus or minus 5%. We expect to see between 10 and 12% of gross earned premium. We anticipate our combined ratios to be in the range of 88 to 94%, including a cat load of $105 million assuming normal loss experience in the second half of the year.

We expect a tax rate in the range of 13 to 16%.

That concludes my comments on our performance in the second quarter and guidance for full year results for 2009. And I would now like to turn the call over to Q&A.

Thank you. (Operator Instructions). Your first question comes from Vinay Misquith with Credit Suisse.

First question for Chris. Curious why you chosen not to take your PMLs up to your maximum limit when pricing is so high in property catastrophe reinsurance.

Okay, Vinay. I think that's like having a car that can do 125 miles an hour and then complaining when someone's only driving it at 100, you know? I think it's just not an essential place to go. To get us there, I mean, we have a cat price [comparison] we currently have today. Our guys tell me they're probably about 1.3 times technical on the reinsurance. It's probably cat returns written in the quarter and that's pretty good, but I've seen it better than that in the past.

The other thing I need to think about is how well is the rest of the business doing? You know how we like to be diversified? I don't want the cat business to grow on (inaudible). So we got rates up on some of the insurance lines and the casualty lines, it would make me a little better (sic) about taking the cat up at the same time in order to preserve some of that balance (inaudible). So you're right to highlight it, but I think it's consistent with a kind of a well risk-managed, cautious, conservative and diversified strategy.

Okay. The second question was on the adverses of development. I was curious if you could give us more color on both the segments and why there was some adverse development.

Yes, Vinay, it's Richard here. There was a little adverse development in the US insurance segments on the casualty side and that's just our reflection of the way the book is moving, particularly in 2006 and 2007. Given the size of the book, it is unfortunate that the absolute level of a reserve strengthening has had a significant impact on the combined ratio in the quarter. So these small absolute numbers can give a significant impact to the combined ratio in the quarter. So it would be very disappointing if we were to see a recurrence of the sort of casualty strengthening that we had within Q2.

And what about the international insurance -- it's a small amount. Was it on financial lines?

Yes, it's actually insurance, a little in financial lines, around about $5 million there and a little bit on our liability account as well.

Okay. And Chris mentioned that you were seeing some attractive opportunities in financial lines. Would that be US or would that be non-US financial?

I'm not sure I did mention opportunities, but I mean, I think there are some, probably not quite today. I would say in financial lines, [we've been] increasing, as I'm sure you know, the crime business. The rates there are flat, sometimes up maybe 5% -- not a great deal of difference, I would say, between US and non-US there.

On the errors, omissions and then the D&O, it's a different picture where you're seeing bigger increases, maybe up to 30% improvement, for example, on US FI D&O, but our view nevertheless would be that the worst of the crisis may have passed in the real economy, but it hasn't yet hit the insurance industry. In other words, there's a lot more reserving to be done by some of our competitors for the cost of it.

As that happens, we feel that there's going to be much, much more movement on FI pricing around the world, both internationally and in the US. And that could start early next year in May. It may be later next year, but certainly, in a sort of 12-month time horizon, you're going to see that. So we have a play in that business today which is going to stay about the same size, but I'm anticipating 12 or 18 months telling you some good news, which is we're expanding rapidly on the back of a significant market hardening.

That's great. One last question, if I may. This is just a numbers question. Just curious as to why the expense ratio picked up so much this quarter versus last quarter.

Yes, sure, Vinay. Part of that is an exchange rate movement which didn't help at this time, but it wouldn't surprise you for me to say that we have a limited number of one-offs in there. So it was a little bit higher than ARPU and run rate this quarter, and we feel we can achieve next quarter. So your two elements there, the foreign exchange moves against this relative to the first quarter and a number of small one-offs, which overall, added up to a small uptick in the expense ratio.

Do you have a number for what the one-offs were and what do you expect the expenses -- the dollar value of expense to be in the future?

Number of one-offs in this quarter, I'll put around 2 to 3 million, which shouldn't be recurring.

Okay.

And I haven't published a specific piece of guidance around our expenses going forward.

Sure. All right. Thank you.

Thanks very much, Vinay.

(Operator Instructions). There are no further questions at this time.

Okay. In that case, I'll thank you all for your attention and wish you a good day. Good-bye.

This concludes today's conference call. You may now disconnect.