Aspen Insurance Holdings Ltd (AHL) 2009 Q3 法說會逐字稿

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

Mr. Fields, you may begin your 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 and nine months ended September 30, 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. Our forward-looking guidance in relation to earnings is subject to normal loss experience.

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 our 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 am pleased to report record earnings for Aspen this quarter, with net income of $144.7 million. Annualized operating return on equity totaled 22%, and the combined ratio of the quarter was 80.3%.

For the nine months of 2009, net income increased more than 4 times compared to the first nine months of 2008. Our annualized operating return on equity for the year-to-date has advanced to 19.2%.

Book value rose 8.9% to $33.07 per diluted share versus $30.36 last quarter and is up 17.7% since the end of 2008. Further detail on our results is set out in slides 3 and 4 of the accompanying presentation.

Our results for the quarter reflects some very good performance from many of our underwriting lines, and all -- as all four segments making a positive contribution both in absolute terms and relative to last year, when Hurricane Ike in particular had a significant impact on third-quarter results. They also highlight the welcome improvement in investment markets.

I would now like to comment briefly on the rating experience of each of our four business segments. As a reminder, we measure rate relativity on a premium-weighted basis on business we renew.

Within property reinsurance, we commented last quarter on the highly satisfactory pricing environment for US cat -- pricing on average up 17% at the half-year stage. Our low combined ratio of 54.8% in the 2009 year-to-date is exceptionally gratifying, but should be kept in perspective given the volatility of this line.

It is also interesting to note that the loss ratio for the property reinsurance segment as a whole for the nine months was 23.6%; but in particular the loss ratio for the property catastrophe line was 6.9%, and the property cat combined ratio is 31.7%.

Our proportional treaty and risk excess books have also performed well, which is pleasing given challenging conditions. The facultative reinsurance book, which now represents nearly $50 million of non-property cat-exposed GWP, has again delivered an excellent result, recording a combined ratio for the quarter of 62.8% and 40.3% for the year-to-date.

The picture in casualty reinsurance continues to be mixed, with some rate increases in international business but the US closer to flat. Whereas a year ago rate decreases were common, they are now less frequent with most business renewing on an as-before basis.

International casualty, which represents 30% of this segment, is a more upbeat picture, and the positive trends witnessed at end-year continue. Specifically we are seeing more positive movement in professional lines and disciplined general liability underwriting.

We believe US casualty rates across the market as a whole are inadequate and that pricing improvement is needed.

For the international insurance division as a whole, average rate increases are still in double-digit territory; but we continue to see significant variation by class.

In energy and marine hull accounts there has been some moderation from the exceptionally high increases seen in previous quarters this year, but [parvious] average rates in these lines are still 10% and 9%, respectively, in the quarter. The financial institution account is buoyant and significant price increases are being achieved particularly on larger clients.

In aviation the important October renewal season is complete, and our current pricing confidence is well supported. For the quarter we experienced average increases of 19%, with increments of approximately 25% in the airline business on average.

Elsewhere in this division, UK property is broadly flat, within a range of plus to minus 5%. Employee liability and public liability renewals in the UK are also tending to renew at close to expiring prices.

In our UK professional liability, conditions are still challenging; but it is pleasing to see that the rating trend is upwards, and we have average rate increases in our book of 5% year-to-date.

In US insurance, the rating environment is unchanged from the second quarter. We continue to see some evidence of better pricing in cat-exposed property, but this is not the case in other property lines or in casualty lines. And with that, I will turn the call over to Richard.

Thank you, Chris, and good morning, everyone. As Chris has mentioned, our record third-quarter earnings have been driven by strong underwriting results and solid investment returns. This is in sharp contrast to the hurricane and investment related losses we suffered in the third quarter of 2008.

I will now highlight some of the key performance metrics for the quarter and nine months to the end of September. Book value per share on a diluted basis at the end of the quarter was $33.07, compared with $26.21 at September 30, 2008, and $30.36 at June 30, 2009. This represents a 26% increase over the third quarter of 2008 and a 9% increase from the previous quarter, with the latter driven by $127 million of retained income and $92 million of net investment gains after-tax.

Gross written premium for the quarter of $490 million is up 11% on the third quarter last year, with the increase attributable to our property and casualty reinsurance segments. For the nine months, gross written premium is up 6% to just under $1.7 billion when compared to 2008.

While market conditions remain challenging for most business lines, we have found a number of opportunities, including our entry into credit and surety reinsurance in Zurich, which produced $43 million of premium so far this year, in addition to our geographic expansion into Singapore.

Our combined ratio for the quarter was 80.3%, compared with 123.3% for the same period in 2008. The third quarter last year was impacted heavily by Hurricanes Ike and Gustav, which increased the combined ratio by 43 percentage points in that quarter. For the nine months in 2009, our combined ratio was 84%, compared with 96.5% last year.

Net reserve releases were $44 million for the quarter and $71 million for the nine months, compared to $16 million and $96 million, respectively, in 2008.

Our expense ratio for the quarter was 30.4% compared with 28.1% for the third quarter of 2008, driven by an increase in the operating expense ratio to 13.5% from 11.9%. Operating expenses have increased in the quarter, driven predominantly by performance-related remuneration linked to the strong performance of the Group during the period. For the nine months our expense ratio of 30.5% was in line with the same period last year.

The financial highlights from our operating segments are as follows. Firstly, our reinsurance segments. As you would expect, in the absence of any significant cat events during the quarter, our property reinsurance segment has performed extremely well. The segment recorded a combined ratio of 58.1% for the quarter compared with 146% in 2008. Combined ratio for the nine months in 2009 was 54.8% compared with 93.4% in 2008.

Reserve releases in the quarter were $19 million compared with $3 million in 2008, with the increase driven by better than expected development on outstanding claims in our risk excess and property pro rata books. Reserve releases for the nine months were $47 million compared with $20 million in 2008.

Gross written premium increased by 12% to $171 million for the quarter, and increased by 13% to $572 million for the nine months when compared with 2008.

Our casualty reinsurance segment combined ratio for the quarter was 88.3% compared with 90.4% in 2008. The combined ratio for the nine months was 93.5% compared with 92.2% for 2008, with the variance driven largely by a reduction in reserve releases.

Reserve releases of $10 million for the quarter are consistent with those for the third quarter of 2008. And for the nine months, reserve releases were $19 million compared with $48 million in 2008.

The accident year combined ratio has improved to 99.2% for the current year from 103.2% in 2008.

Gross written premium in the quarter increased by 21% to $97 million due mainly to additional premiums for the 2006 and 2007 years in our US casualty reinsurance book. Gross written premium for the first nine months in 2009 was $342 million, up from $319 million in 2008. However, core growth remains muted.

Turning now to our insurance segment. The international insurance segment reported a combined ratio for the quarter of 89.8% compared with 119.4% in 2008. The improvement in the combined ratio is driven largely by the impact of Hurricane Ike on the 2008 result. Reserve releases were $16 million for the quarter and $13 million for the year, compared with $2 million and $20 million, respectively, in 2008.

The combined ratio for the nine months was 96.2% compared with 97.9% last year. Gross written premium of $184 million is up marginally on the third quarter of 2008. However, for the nine months, gross written premium of $617 million is down 4% compared with 2008.

As we have discussed previously, our international insurance segment covers a highly diverse range of products. In some lines rates were more favorable; in particular our energy liability book, where double-digit rate rises have increased gross written premium by 21% to $140 million without any significant increase in exposure. In other lines such as energy physical damage although rates have risen after Hurricane Ike, demand for Gulf of Mexico business has reduced significantly as cedents are choosing to retain more risk.

The combined ratio for our US insurance segment was 96.6% compared with 172.1% in the same quarter in 2008. The combined ratio for the nine months in 2009 was 117.1% compared with 123.1% in 2008, with hurricane losses included in both the quarter and nine months of last year.

The mix of business in this segment has changed from a 70/30 casualty-property split at the end of 2007 to one where property is now contributing over 50% of the premium in 2009. The growth in gross written premium and profitability in our property line since the reshaping of the book in 2008 has been encouraging, producing an 86% combined ratio for the first nine months in 2009.

Gross written premium increased to $39 million for the quarter compared with $28 million in 2008, resulting mainly from the reshaping of our property book. Gross written premiums for the nine months increased by 29% to $130 million when compared to 2008.

Now turning to our investment performance. Our net return on investments included in income for the quarter comprises $59 million of net investment income and $14 million of net realized and unrealized investment gains, compared with $19 million of net investment income and $58 million of net realized and unrealized investment losses in 2008.

We took advantage of the wider credit spread environment by increasing exposure to high-quality corporates by approximately 11% of the portfolio or $700 million in the first half of 2009. The average credit quality of these corporate bonds is single-A. We expect this major sector rotation to assist us with maintaining a fixed income book yield above 4% into next year.

At the end of September, there were $220 million of net unrealized gains in the available-for-sale fixed income portfolio, compared with $112 million at the end of the second quarter. The increase in unrealized gains has continued to be driven by improvements in market valuation of corporate credit.

Total investment return, including realized and unrealized gains and losses and impairment charges, was $180 million or 11.4% annualized for the quarter, and $349 million or 7.6% annualized for the nine months.

Book yield on our fixed income portfolio of 4.4% at September 30, 2009, is in line with the second quarter of this year, decreasing from 4.9% at the end of the third quarter in 2008. Average duration of the fixed income portfolio has increased marginally to 3.3 years from 3.2 years at June 2009. The average credit quality of the portfolio remains double-A+.

We have taken charges in the quarter of just under $2 million pretax associated with investments we believe to be other-then-temporarily-impaired. Total impairments for the nine months of this year were $20 million compared with $56 million in 2008, with last year's charge being driven by the collapse of Lehman Brothers.

Turning briefly to our capital position, we continue to manage a strong balance sheet with just over $6.6 billion of cash and invested assets. Our total shareholders equity has increased to just over $3.2 billion from $2.6 billion at the end of the third quarter in 2008. Our total debt and hybrids to total capital ratio, which includes $354 million of perpetual preference shares, is 17.4%, down from 22.1% at the end of 2008.

Turning now to guidance for 2009, which is set out on slide 16. Our expectations at the top line remain broadly unchanged from our last earnings call, with an improvement in our combined ratio and full-year cat-loads, based on our experience in the third quarter and assuming normal loss experience for the remainder of the year.

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 ratio to be in the range of 84% to 88%, including a cat-load of $40 million, assuming normal loss experience in the last quarter of the year. Finally, we expect a tax rate in the range of 13% to 16%.

That concludes my comments on our third quarter and guidance for the full year, and I would now like to hand the call back to Chris.

Thanks, Richard. Being well positioned for the market turn is a key aspect to success in a highly cyclical business. A core component of our investment strategy is the selective diversification of our business through non-correlating product lines and an expanding geographic footprint when conditions are right.

We continue to build our capabilities. The recent appointment of Bill Murray as President of our US Insurance underlines our commitment to the US market, and Bill will play a pivotal role in Aspen's planned entrance into the US admitted insurance market. On the reinsurance side we have hired Peter Emblin as Head of Latin American Reinsurance and International Casualty Reinsurance.

I'm pleased to report continuing progress from our Continental European and Asian house. Both our Zurich and Singapore offices are seeing good submission flow.

Zurich has been in operation now for about two years and offers a full range of property and casualty as well as credit and surety reinsurance products. We've been warmly received by clients in Continental Europe, and progress to date is highly encouraging. So far this year we've written just over $100 million in our Zurich operations, and this could reach $150 million in 2010.

Our Singapore office has just completed its first year and has made a very good start, generating about $10 million of premium so far.

Last quarter, I updated you on our current cat exposures. We have provided an outline of our worldwide natural catastrophe exposures on slide 13. You may recall that we maintain a self-imposed cat tolerance for a 1-in-100-year event at 17.5% of shareholders equity, and for a 1-in-250-year event the tolerance is 25%.

Overall, our gross exposure to US hurricanes has increased year-on-year. However, in January of this year, we decided to purchase retrocession due to the continued uncertainty in the overall economic environment and in capital markets in particular. This reduced our net exposure to US hurricanes from 16% in January for a 1-in-100-year event down to around 13% of shareholders equity or $368 million thereafter.

Our next largest exposures are Californian earthquake and European windstorm, both at 11% of shareholders equity. We will continue to evaluate competitively priced retro and capital markets opportunities should they arise for the 2010 wind season.

In the meantime, it is pleasing to note that record returns of the quarter, which are predicated on a diversified business model and our focus on managing our business with consideration of both risk and reward in equal measure.

Looking ahead now, we continue to search for opportunities where our capital can be deployed at attractive rates of return. We are mindful that such opportunities do not always present themselves, and that return of capital to shareholders can present an attractive alternative and is indeed a route we have taken before.

With the hurricane season almost at an end and preparations for one [mun] renewals under way, and our business planning process nearing completion, we are continuing to assess the opportunities and capital requirements of our business in 2010. We would point out here that we do not intend to trade on an over-capitalized basis.

I believe that between the strong position of our underwriting business, anticipated investment performance, and capital management opportunities, a 2010 ROE that reaches into the teens is attainable.

That concludes my comments, and with that I would like to hand the call over to Q&A.

(Operator Instructions) Dean Evans, KBW.

Yes, thanks, guys. I just had a couple quick questions. First, could you give the amount of the casualty reinsurance premium adjustments, so we could really calculate growth ex that movement?

Sure, Dean. It's $13 million in the quarter.

Okay, great. Another quick numbers question. What was the slight reserve addition within the US insurance line related to?

Just -- it was a tiny uptick in the casualty portion; but it was just within our normal sort of reserving process. So I wouldn't like to draw any particular attention to it, Dean.

Okay. I guess one last one. Do you see any movement or losses on the political risk or trade credit side at all in the quarter?

I think I can say that we have not been advised of any political risk losses at all. We are aware of a couple of situations that might give rise to an advise, although they haven't done so yet. But frankly, they are within expected bounds of loss and they are not giving us any cause for concern.

Our trade credit book is largely -- it was written really post the crisis. Proportional treaty with risk attaching from on or after 1/1 this year, and so far it appears to be performing in accordance with plan.

I think if we had been in that business a year earlier I would be giving you a very different position, but I think we've come in since after the problem.

Okay, great. That's all I had; thank you.

Vinay Misquith, Credit Suisse.

Hello. Good morning. This is actually [Max Zumal] on Vinay's line. Had a couple of questions.

First one was about the top-line growth. I was just wondering if you could give us some sense of where you are finding the attractive opportunities in the market at this time, and what the growth came from.

Yes, the question was about where we are seeing attractive growth in the markets and where opportunities might come from in the future.

Well, maybe there's two parts of that question. I will give you the bigger picture.

If I look across our business, typically we think about it in 21 lines. Some are getting worse; many are the same; and a few are a better. The ones that are better would be, for example energy liability and marine liability. We do a lot of shipowners liability and liability for oil and gas companies.

There were losses in the past, and so we saw good rate increases this year. And we've grown the book a little bit as a consequence of those rate increases. That is one. That is on the liability side.

Number two, aviation. As you're aware again kind of loss generated. There have been a lot of losses in the aviation market over the last couple of years. Our figures have been small profit for the last few years. And then you had Air France. Following Air France, rates really started to move, about 20%. I think I said on the call 19%, 20% across the whole of aviation, but actually about 25% for the airline business. With that kind of rate increase there, we're cautiously growing a little bit in that one.

Energy, on the physical damage side, energy in the Gulf of Mexico, we saw a huge rate increase there. Probably effective rate increases maybe 3 or 4 times, but the clients stopped buying the cover. So we sold them less; we sold it at higher prices; and we sold it with much higher deductibles.

So we didn't actually get much more premium there. It's kind of a disguised growth. It's a growth in rate but not necessarily a growth in top line. But the exposure behind it is reduced.

And then another one to mention would be the financial institutions area. Really pretty obviously after the crisis, those banks who are still trading and still buying are buying cover and they are paying more for cover. That is particularly true on the D&O side, which is an area of less interest to us. But we are seeing more for the E&O part and we're seeing even a little bit more for the crime part of that, too.

And I think that probably -- property cat, I should mention. Earlier in the year we did take up our property cat exposures a bit, basically peak zone Florida-type exposures. We are pricing much, much better and we took the opportunity to expand.

I think Richard may have a few numbers to back those general comments up.

Yes, just to give you a flavor. I think Chris has given you an idea of what the sort of future opportunities might be. Just to go a little bit back into history as to what has been happening this year, growth areas that we would look to specifically would be credit and surety reinsurance operations coming out of Zurich, which we have mentioned, which has given us $44 million of gross written premiums.

Energy liability, which I talked about earlier, has been a good area of growth for us, as has been US property insurance. So those are the things I would highlight in the sort of nine-month position.

Okay. Thank you. My second question is if pricing doesn't meet your expectations going forward, any chance that you guys might buy back your stock?

I think I dealt with that in the call, and I think all I can say is yes, there is such a chance. What I said on the call I'd repeat, is we don't intend to trade on an over-capitalized basis.

So it's a question of now looking at opportunities in 2010. There are some. Not as many as we would like to see.

And balancing opportunities for growth with opportunities for capital management, working out which is -- more serves our shareholders' interests, and then acting the right way. I can't give you anything more specific in terms of quantum or time, however.

Thank you very much. That's all I had.

Dan Farrell, FPK.

Good morning. Can you just maybe expand a little bit more on your strategy for the US business? You have had a lot of hires there.

And then also just in particular how the expansion into admitted markets will unfold and just what you think that business is going to look like in the next couple of years.

Be very happy to do that. Up until now, in the US, for US risk written in the US, all we have offered is some E&S property, some E&S casualty. Property with a sort of a cat flavor to it. You know, wind or earthquake. And casualty a bit more mixed, but a bias to general liability. I think we've been generalists rather than specialists.

And what we have found in the last couple years is we have lost business to the admitted guys. Sometimes the price is the same, the conditions are the same, but a carrier who offers admitted paper will take our business from us because we don't do admitted paper.

So it becomes strategically very, very important to be able to offer admitted. That's something that I expect us to be able to do in the course of the next few months.

Now, what are we going to do with that admitted paper is the obvious question. And one of the first things we want to do is target some MGAs which are very close to some people that we've had in the last year or so. We have good relations with those organizations and we understand their business. We like to trade with them, and I think they like to trade with us. And I would expect this to grow.

This would be in the property and crop area in the smaller commercial. So not the big-ticket cat-exposed property but rather small to midmarket business. So that is one I would mention on the property side.

Others will be on the casualty side. What I want to do there is really build a more focused book of business. I want us to look at professional. I want us to look at D&O, and I want us to look at inland marine. I want us to look again at marine liability, which we do a lot of in London, but we don't have the smaller liability risks. You know, stevedores liability, port-owners liability that tends to stay in the US market. These are areas that in London we have a lot of expertise, and I want to draw on that expertise and hire people in the US to be able to leverage our capabilities in the US.

I can't give you and it would be inappropriate to give you any premium growth targets or even timing on this. Because you know as well as I do it's a tough market. It's a developing capability. Maybe people are going to have to start very small, but I want to it structured and focused to be able to benefit when the US market turns.

If that's a year or two or three away it doesn't really matter. We want to be able to expand quickly at the right time. You don't want to be trying to hire people halt after the market turn has occurred. You want to be positioned to exploit it. And I think that really summarizes where we are going in the US.

That's very helpful. Thank you.

(Operator Instructions) [Marie Lunakova], UBS.

Good morning, I just have two quick number questions. One of them is on reserve releases, if you could tell us where they came from, [usual] lines of business in each of the segments?

Yes, certainly. We've got a total of 44 in the quarter, and I'm just looking up exactly which segments they've come from. I actually went through them in my prepared remarks, so I'll just refer back to those.

In the quarter, -- I'm sorry; the nine-months' number. Okay, in the quarter property reinsurance reserve releases of $19.1 million. Casualty reinsurance $9.5 million. International insurance $16.4 million. US insurance an immaterial strengthening, $0.8 million. The details are in our financial supplement.

Do they show the years, maybe which years those were from? Or any events on the property reinsurance side, any specific events that development was on?

No, there is nothing particular I'd sort of draw your attention to. The property stuff tends to be from more recent years because those are shorter-tailed lines.

Okay, and then the last is a very quick one. The credit and surety, that premium jump in third-quarter '09, this quarter, was it the new teams and the new business? And should we expect a similar run rate going forward? Or was it part of a some kind of one deal?

There was one deal that accounted for quite a bit of that. Clearly this is the first year of that operation, so the premium change can be quite dramatic in the early days. It will not be as dramatic in the future.

But I think there is -- these guys are in Zurich, where one of the major players in that market has withdrawn from the market. So there is a lot more business to go around, and there is certainly some potential for growth there.

And also I would say growth that is fairly attractive in terms of conditions and prices.

Okay. Thank you. That was all for me.

At this time there are no further questions. Are there any closing remarks?

No, there are no further remarks. Thank you all for your attention. Goodbye.

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