Aspen Insurance Holdings Ltd (AHL) 2009 Q4 法說會逐字稿

Good morning. My name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Insurance Holdings fourth quarter and year end 2009 earnings conference call. (Operator Instructions). Thank you.

I will now turn the conference 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 year and quarter ended December 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 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 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.

Thanks, Noah, and good morning. Last night, we announced our financial results for 2009, and I'm very pleased to be able to report to you this morning that we do have a combined ratio of 84.1% and an operating return on equity of 18% for the group against a challenging pricing environment and low interest rates. During the year, we also increased diluted book value per share from $28.10 to $34.04, an increase of 21%. The results for the fourth quarter were very pleasing, with a combined ratio of 84.7% and operating return equity of 18.8% and a 3% increase in diluted book value per share compared to the end of the third quarter in 2009. Both our underwriting and investments made strong contributions to our 2009 results. Richard will comment more fully on our investment performance, but I would like to share with you my perspective on our underwriting activities.

Taking our insurance business first, we achieved a combined ratio of 97.2%, with many of our insurance lines performing very well indeed, and some impacted by very tough market conditions. This equates to a contribution to operating income of $122 million, including an application of investment income. Our reinsurance business produced an outstanding result, achieving a combined ratio of 73.4% and a contribution to operating income of $415 million. All our reinsurance lines performed very well, although we achieved stronger pricing in property than in casualty. Our casualty performance in both our insurance and reinsurance business has benefited from reserve releases from prior years. It is worth noting that our selected loss reserves are set in excess of the mean actual reserve estimate. This has been our practice since the inception of the Company, and we will continue to reserve on this basis. We have maintained the rigor of our reserving standards in both property and casualty, independent of pricing environment.

One factor which influenced our results in a positive way in 2009 were the absence of major catastrophe losses. Our business plan expectation was for expected annual catastrophe losses of $170 million, whereas we only sustained cat losses of $12 million. Had we experienced our expected cat loss burden, our net income after tax would have amounted to $323 million, equivalent to a net income ROE of 12%. We believe that this "as if" reserve reflects the strength of our diversified business, as it shows that despite soft market conditions in most of our lines of business, our model generates a respectable return given average cat loss experienced, even at the bottom of the soft market. I would now like to tell you a little more about the performance of our individual business lines. Internally, we split our insurance and reinsurance business into 24 sub-groups for management purposes. In 2009, 19 of these lines produced an underwriting profit. Of the remaining five lines that made losses, four are relatively new lines and are still in what I would describe as the ramp up phase, i.e., relatively lower end premiums, I'll add with prudent reserving, and I am not concerned about the 2009 performance of these lines.

The fifth line in this category is our US E&S casualty account, where the performance is unacceptable -- and Richard will provide some comments on the specifics behind this and the remedial actions we are taking to address it. I'd like to emphasize, however, that building a profitable franchise in the US insurance market remains a core component of our strategy, and is going to be a key area of focus for us in 2010. As you may recall, we appointed a new leader, Bill Murray, for our US Insurance Operations in September last year. Bill has over 20 years of insurance experience, having joined Aspen from the W.R. Berkley organization, where he held a number of leadership positions with a particular focus on casualty underwriting. In addition to fixing our US E&S casualty account, Bill is selectively hiring new underwriters with demonstrable profitable track record. One significant hire we made in January of this year was Bruce Eisler. Bruce will be operating within the professional liability market, where he has a track record of high performance. I would like to emphasize, however, that Bruce, Bill and I are all deeply conscious of the challenging market conditions, and that we are not seeking to achieve rapid growth.

We expect neither large premium volume nor substantial profits in the short-term, but we are laying the foundations of a significant and profitable revenue stream in the US when market conditions change. I would like now to comment briefly on the January renewal season and market outlook. We have also included on page 17 of the slide packet an overview of business performance and market outlook by major lines within each segment. As a reminder, we measure rate relativity on a premium weighted average basis on business we renew. Starting with property reinsurance, given the benign cat season in 2009 and the industry balance sheet recovery, the first of January renewals proved competitive. Not only did supply increase, but retentions were also higher. We saw modest reductions of up to 5% for US peak zones, and this business still remains attractive. We believe that the market may well soften further in 2010, and as a result we deployed more of our cat capacity at January 1 than we had originally anticipated.

Our credit insurance and reinsurance team had an excellent 2009, and 2010 started well for them as clients have rewarded us for offering valuable support when capacity was very scarce. In its first full year of operations, this credit insurance and reinsurance business generated gross earned premiums of just under $50 million and a combined ratio of 89.6%, with which we were particularly pleased. Pricing conditions within the casualty reinsurance market continue to be challenging, with mix depending on line and location of business. In the US, rates are mostly flat with some single digit declines. In our international casualty reinsurance, we saw rate increases in professional lines and continued strengthening of financial institutions' rates -- and elsewhere, rates tended to be flat.

Turning to insurance, the international insurance division covers a broad range of business by class, and January 1 is not a major renewal date. However, our marine liability and energy property rates increased by 10% on that part of the portfolio up for renewal at January 1, and it should be remembered that Gulf of Mexico business is not renewed at this time of year. Our energy and marine liability account also recorded rate increases of over 10%. Aviation renews principally at October 1, and I reported at the time of our third quarter results that loss events had been a major catalyst, producing increases of over 20% for the airline business. Our aviation book produced full year 2009 combined ratio of 92% and gross written premium of $113 million. This is a result which is likely to be in the top quarter, and with which we are also particularly pleased.

I'm also happy to report to you that our conservatively written financial and (inaudible) risk insurance portfolio, operating in the very challenging conditions of 2009, produced a combined ratio of 81.1% on gross written premium of $33 million. Now I'm going to turn the call over to Richard.

Thank you, Chris, and good morning, everybody. I'm pleased to report on another strong performance in the quarter for Aspen, which has produced income after tax of $126 million, up from only $22 million last year. The results include strong underwriting performance from most lines in our diversified portfolio, combined with solid investment return. The quarter's result have capped off a very good year for us, with income after tax of $474 million and an operating return on equity of 18%.

I will now highlight some of the key performance metrics for the quarter and the year. Book value per share on a diluted basis at the end of the quarter was $34.04 compared with $28.10 at December 31, 2008. This represents an increase of 21% over last year and an increase of 3% over the previous quarter. The increase in book value during the year reflects $400 million of retained income and $102 million of net investment gains after tax. Gross written premium for the quarter of $406 million is down 7% on the fourth quarter last year, with the decrease attributable to our casualty reinsurance segment. For the full year, gross written premium is up 3% to just under $2.1 billion when compared to 2008, with the increase largely a function of our entry into credit and surety reinsurance written in our Zurich office. Our combined ratio for the quarter was 84.7% compared with 93.4% for the same period in 2008.

For the full year in 2009, our combined ratio is 84.1% compared with 95.6% last year. Cat losses during the year of only $12 million related to two European wind storms, [Claus] and Wolfgang, and a hailstorm in Canada. This compares with $200 million in 2008, which of course included the impact of Hurricanes Ike and Gustav. Net reserve releases were $13 million for the quarter compared with $12 million of reserve strengthening for the same period in 2008. The majority of these reserve releases emanated from our reinsurance lines, due largely to better than expected developments on outstanding claims, particularly in our property pro rata book. For the year, net reserve releases of $84 million were broadly in line with last year, and represent 2.7% of opening gross reserves.

Our policy acquisition expense ratio for the quarter was 20% compared with 18.3% for the same period in 2008. The increase is attributable to profit related commissions, reflecting a strong underwriting result in our property reinsurance segment. For the year, the policy acquisition expensed ratio of 18.3% is up marginally from 17.6% in 2008. Our operating expense ratio for the quarter was 16.9% compared with 10.2% for the fourth quarter of 2008, mainly as a result of an increase in performance related remuneration attributable to the strong performance of the group during the year. For the year, the expense ratio has increased from 12.2% to 13.8%, with the variance attributable to performance related remuneration. Across the cycle, we would expect our run rate to operating expenses to be in the range of 11.5% to 12.5%, although the actual expense ratio will be influenced by net income, as we have seen in 2009.

During the quarter, we have benefited from a small tax credit of $200,000, which is a product of lowering our estimated effective rate of tax from 15% at the end of the third quarter to an actual rate of 11.4% at the end of the year. The reduction in the effective tax rate for the year from 26% in 2008 has resulted from the absence of any material cat events during the year and the distribution of investment returns within the group. The financial highlights from our operating segments are as follows. Firstly, our reinsurance segments. Combined ratio for the property reinsurance segment was 58% for the fourth quarter compared with 85.2% in the same period in 2008, and 55.6% for the full year compared with 91.1% in 2008. The improvement in the combined ratio for the quarter and the year reflects not only the absence of any material catastrophic events, but also strong results from our property risk excess and pro rata books. I'm particularly pleased with our property facultative book, which has produced a 5% loss ratio for the year on $53 million of gross written premium.

Gross written premium for the quarter was $77 million compared with $82 million for the same period in 2008. For the full year, gross written premium was $649 million compared with $589 million in 2008. Of this increase, $50 million is attributable to our grouping credit and surety reinsurance within our property reinsurance segment for reporting purposes in its first full year of operation. Our casualty reinsurance combined ratio for the full year was 96.1%, compared to 92% for 2008, and 103.9% for the fourth quarter, compared with 92% for the same period in 2008. Full year reserve releases in the segment were $28 million, down from $67 million in 2008. The accident year combined ratio for the 12 month period improved to 102.8% compared with 105.8% in 2008. Gross written premium for the quarter was $66 million, a decrease of 32.7% over the same period in 2008, with the prior year comparative driven by positive premium adjustments. Gross written premium in 2009 decreased marginally to $408 million, as the Company continued to shrink its book to align with challenging market rate.

Turning now to our insurance segments, the combined ratio for the international insurance segment was 78.9% for the fourth quarter of 2009 compared with 104.9% for the same period in 2008, and for the year was 91.5% compared with 99.8% in 2008. The improvement in the combined ratio across this diverse portfolio of insurance lines reflects active portfolio management. In addition, there was a modest contribution from favorable prior year reserve development. Gross written premium for the quarter of $230 million is broadly in line with the same period in 2008. Gross written premium for the full year was decreased by 2.3% to $848 million when compared to 2008. Retention levels in this segment for the full year are in line with 2008. However, the quarter on quarter comparison with 2008 is impacted by outwards reinstatements premiums associated with losses such as those from Hurricanes Ike and Gustav, included in ceded written premiums in 2008. In the US insurance segments, our combined ratio for the year was 137.9% and 200.4% for the quarter, with the latter reflecting reserve strengthening of $12 million in relation to our E&S casualty account.

This reserve strengthening increased the combined ratio by 49 percentage points in the quarter as a result of the relatively small earned premium in the segment. As you may recall, we strengthened our US E&S casualty reserves in the second quarter of this year by $7 million, relating to the years 2005 through 2007. This strengthening was then followed by a change in management, as Chris has mentioned, with Bill Murray joining us as President of US Insurance in September 2009 and Joe George appointed as our new Head of Casualty E&S Insurance in December. Following a detailed review of our E&S casualty book under Bill and Joe's leadership in the fourth quarter, we concluded that further reserve strengthening was required for our New York contractor's liability account, mostly in the years 2006 to 2009. In contrast to the casualty accounts, our E&S property book has performed well, producing 89.4% combined ratio for the full year compared with 118.9% in 2008. Gross written premium for the quarter increased by $5 million to $33 million, and by $34 million to $163 million for the full year, with most of the growth coming from US property insurance.

Now turning to our investment performance. Our net investment income for the quarter was $58 million compared with $10 million in 2008. The fourth quarter of 2008 was impacted by losses from our fund of hedge fund investments, which we exited in 2009. Our net investment income for the full year in 2009 was $250 million compared with $139 million in 2008. Net realized and unrealized investment gains for the quarter and full year recorded in the income statements were $4 million and $11 million, respectively. Included in this result are our investment trading portfolios, which returned $16 million for the full year. These portfolios are managed on a total return basis, allowing us additional flexibility to take advantage of market opportunities as they arise and consist of single A average credit quality corporate bonds. At the end of December, there were $186 million of net unrealized gains in the available for sale fixed income portfolio, compared with $219 million at the end of the third quarter.

This fourth quarter reduction is due to rising interest rates affecting our treasuries and agency debt holdings. Net unrealized gains have increased by $118 million in the year. Total investment return, including realized and unrealized gains and losses and impairment charges, was $29 million or 1.8% annualized for the quarter, and $378 million or 6.1% for the full year. Book yield on our fixed income portfolio of 4.2% at December 31, 2009 is up marginally on the third quarter, and has decreased from 4.6% at the end of 2008. Average duration of the fixed income portfolio of 3.3 years is in line with September 2009. The average credit quality of the portfolio remains AA plus. We have taken charges in the quarter of just over $3 million pre-tax associated with investments we believe to be other than temporarily impaired. Total impairments for the full year were $23 million compared with $60 million in 2008, with last year's charge attributable primarily to the collapse of Lehman Brothers.

Turning briefly to our capsule position, total assets have increased by 13% to just under $8.3 billion when compared to 2008, and include $6.7 billion of cash and invested assets. Our total shareholder's equity has increased to just over $3.3 billion from $2.8 billion at the end of 2008. Our total debt and hybrids to total capital ratio, which includes $354 million of perpetual preference shares, is 17%, down from 22.1% at the end of 2008, with the decrease attributable to a combination of the preference share repurchase we completed early in 2009 and the increase in retained earnings during the year. On the back of our strong balance sheet and trading performance, I can also report AM Best has recently affirmed our rating of A Excellent for all of our trading subsidiary.

Turning now to guidance for 2010, which is set out on slide 16. At this early stage in the year and given the state of the market, we anticipate our gross written premium for the full year to be $2.2 billion, plus or minus 5%. We anticipate the growth in our book to come from our Lloyd's operation, which produced gross written premium of $230 million in 2009, and from opportunities we are seeing in Europe, particularly through our operation in Zurich. We expect to see between 18 -- sorry, I'll start it again. We expect to see between 8% and 12% of gross earned premium. We anticipate our combined ratio to be in the range of 88% to 94%, including a cat load of $170 million assuming normal loss experience in the year. Our aggregate investment portfolio is positioned well, both in terms of its embedded book yield and relatively short duration of around three years. We have taken advantage of opportunities to significantly increase our allocation to corporate paper during 2009, and with the sector rotation, we expect to maintain a book yield of around 4% on our fixed income portfolio during 2010.

Finally, we expect a tax rate in the range of 10% to 14%. That concludes my comments on our fourth quarter and guidance for 2010, and I would now like to hand the call back to Chris.

Thank you, Richard. Now notwithstanding a general climate of poor rate levels and soft market conditions, we do from time to time see pockets of opportunity, and it is core to our diversified strategy to take advantage of such opportunities if they arise. We are very pleased, for example, with the progress we have made in political risk insurance and in credit and surety reinsurance, both relatively new additions to our portfolio. My and Richard's comments on our US E&S casualty insurance unit show our determination to address areas which are not performing well, and our appetite to continue to refine and invest in our chosen business lines through the recruitment of top class underwriters. I'm frequently asked how Aspen plans to grow in the light of current challenging market conditions and what our appetite might be for acquisitions. Aspen's success, so far, has been [founded] on finding great underwriters and providing them with the capital and infrastructure to take advantages of opportunities in their specialized niches, consistent with market conditions.

When assessing a new business line, our first consideration is the strategic fit, followed closely by its financial prospects, based on the confidence provided by a strong track record, and thirdly, how does it fit within our risk profile? We apply the same methodology in evaluating potential acquisition opportunities, i.e., any transaction must meet with our strategic and our financial criteria. We will not deploy our shareholders' capital to enter new business lines or expand our model for acquisition unless we are entirely satisfied that the opportunity is strategically and financially attractive and capable of being executed successfully. I would also like to reiterate our condition commitment to capital management. You should be aware our Board and management are deeply conscious of the value creating opportunity that lies in repurchasing our own shares at the current share price, in particular when compared to other potential opportunities.

As I reported to you earlier, the strength of our credit performance in 2009 created a capital surplus that we did not believe could be put fully to work in our business. As a consequence, we bought back $200 million of shares on January 5 this year. This buy back completed our outstanding share purchase authorization, but I'm pleased to tell you that yesterday, our Board authorized a new share repurchase program of up to $400 million over a two-year timeframe. It is, however, much too early to give you any indication of when our next share repurchase will occur. However, as we approach 2010, we will continue in the same vain as throughout the lifetime of the Company. When we see opportunities to put surplus earnings to work in a profitable way, we intend to do so. When we do not, then subject to rating agency and regulatory considerations, we will return that capital to our shareholders in order to maintain our capital efficiency. And with that, I would like to turn the call over to questions.

(Operator instructions). Your first question comes from the line of Josh Shanker with Deutsche Bank.

Good morning, everyone. I'm wondering --

Hi, Josh.

Hi there, hi there. I'm wondering if I could get a little more color on the professional liability? We are getting some mixed information from various competitors of yours. I'm wondering where you are playing in the markets and what size transactions and where you are in those towers and what not?

You are referring to US professional liability?

Sure.

The team joined us a couple of weeks ago and we have hardly written any business at all. So if your question is what are you doing? The answer is almost nothing. Our plans would be not to go -- we would be excess carriers, but not on the bigger risks -- for example, top four accountants would not at all be what we want to be. I think we are interested in professional services, people who have qualifications, people who work in a particular way, people who are licensed to do it and where we can actually check that they are operating in accordance with the dictates of the profession. With those guys, we think we can get close to them, help them anticipate and settle claims, satisfied so that the risk management is sound, and so it is truly professional, as opposed to, let's say, E&O for nonqualified or less qualified opportunity.

I'll give you an example. There is something in the world called [plane deicers] E&O. We would never write that. I hope that helps you. There isn't a lot of activity today to report on because it is too new.

And in terms of the broker response, I guess this is -- are they receptive? Are they beginning to show you submissions? Or how is that sort of trending in the market?

It's very, very encouraging. The guys who joined us are really well-known to the production force. They have very good relations with them, 15, 20 years professionally in the business, and I think that is looking very, very encouraging indeed. But I would say it's too early to give you any facts and figures. Maybe we'll return to that on next call and give you a little more specifics.

Okay. I appreciate it. Thank you.

Your next question comes from the line of Dean Evans with KBW.

Yes. Thanks for taking my question. I just had actually a couple of quick ones. First, could you sort of update us on where the current P&Ls stand as of the end of the year?

Yes, certainly, Dean. Actually, if you look in the slide packet which came out with the material, page 12 on that gives you an update at the 100 position, US (inaudible) to 12.9% of shareholders equity. We also break it down by the major categories that you would expect.

Okay. Do you have the 1 in 250 by any chance at all as well?

I don't have that in front of me. Sorry about that. When we come do our Non-Deal road show in a couple weeks' time, I'm sure we'll be publishing some material, and we'll include that within that material.

Okay. Appreciate it. I guess the other one, I guess, could you just clarify or sort of explain how the tax benefit came to light? Was that just sort of as a result of reestimating taxes? Or what exactly happened there?

Yeah, certainly. And what we have to do is -- as I'm sure you know -- is estimate our annual tax rate at every point during the quarter, during the year. So up to the end of Q3, we estimated our effective tax rate at 15% for the full year. But it is only really when you get to the end of Q3 and assess what has happened in the cat season, and also estimate or -- agree with certainty what your investment position is, where the investment return actually falls with our various legal entities what your effective tax rate will be for the year end. So it's difficult to estimate at any point during the year exactly what the tax rate is going to be. We make our best guess at the end of Q3, but it really gets defined in the final quarter, and that is what gave rise to that small credit to come back to our effective tax rate of 11.4% for the full year.

Okay. So I guess going forward, it is sort of fair to think that maybe the first three quarters will be somewhat more stable, and the fourth quarter could have some volatility?

I think -- yes, I think that is a reasonable thing to say. I would also point to the guidance where we are indicating between 10% and 14% as our best guess at the moment for 2010.

Okay. Great. Thank you.

Thank you.

Your next question comes from the line of Vinay Misquith with Credit Suisse.

Hi, good morning, everyone. This is actually --

Good morning.

This is actually Max [Zomello] on Vinay's line. Just had a couple of questions for you. First was just wondering if you could give us a sense of where you see terms and conditions at this point? Are they deteriorating? Where are they at this point, especially for the insurance line?

I think the good news there -- it continues to be and really actually has been throughout this sort of softening phase of the cycle -- that terms and conditions are generally holding up. Competition tends to be around price. We are not really hearing the deductible has been given away, which always is a very expensive mistake to make, but that's not coming under pressure. And equally, we're not seeing also widenings of coverage, and I think that is true actually on the insurance and on the reinsurance lines both.

Okay. My second question was, just curious. Given how the US insurance segment has performed, given the adverse reserve development on the accident year 2006 to 2009 years, just curious how that impacts your strategy for the US -- entering into the US (inaudible) market? Just wondering if that affects your time horizon? What you are thinking about it, at this point?

Yes, So that I think that is a very interesting and very good question, and it probably deserves probably more of a long detailed answer than I think I can give you on this call. I think what is going on there is a very specific issue. It is contractors' business, particularly in New York State -- or particularly in New York City -- it's five boroughs [builds risks]. And I regret to say that we took some risks in our book that I think we priced incorrectly, and we gave some coverage for what is known as action over, which is exposure to subcontractors, which we ceased doing. It was a very specific error, which we spotted I think in the second quarter, and which we took some reserve increases in the last quarter, when our new guys, Bill Murray and Joe George, took a look at that. So I wouldn't kind of generalize from that to a general statement about US insurance.

In terms of US insurance, we have in fact now acquired an admitted shell, when the contract is complete it will be subject to regulated approval. And then we're going to have to be doing the filing, so there's a degree of administration which will take place over the next three or four months. But I would expect us to be equipped with filings in place to sell the products we want to sell in the second half of this year. And then really, it's a question of strategic appetite. We have already talked a little bit about professional. We think about D&O, we think about management liability, we think about inland marine, we think about onshore energy -- that is not to say we are going to do any -- all of those or even any of those, but we think those are areas where there is some potential for profit if you do it right. Then the key thing is, can you find the right people, the right underwriters? And then timing of entry -- I think if there is a $20 million premium opportunity available that is profitable, that is what you want to take advantage of it.

You don't want to go out there and try and write 50. If you do that, you'll just depress rates and you'll win -- quote/unquote win -- by buying cheap business that is going to give you losses. So we are actually pretty experienced at managing these entry strategies over many years, now -- indeed, I've probably done it all of my career -- and it is going to have to be very, very slowly. Don't expect any dramatic premium news from us in the next couple of years in terms of US insurance. What I would expect instead is an investment in good teams, keeping a lot of powder dry, but absolutely building up the broker relationships and the brand recognition so that when there is an opportunity, when there is a turn in the market, we are not then going out and thinking, "What are we going to do next? We're going to hire a team." We're actually saying to people already in place, "Go, go for it, and expand very, very quickly." And I can't tell you when that moment comes because none of us know, but my sense is, it is probably a couple of years away.

Okay, all right. Thanks very much for answering my questions.

Thank you.

Your next question comes from the line of Richard [Schvaznik] with [Hobb] Capital.

Good morning, thanks for taking the call. I just had a question in terms of the guidance on the cat load. It seems very high relative to what you have actually experienced over the past couple of years in terms of catastrophe losses. And I'm just wondering if there is some conservatism built in there, or if it has to do with just kind of product mix changes or something along those lines?

I don't actually think there is any conservatism, and the trouble with this one is that number is a long run average. It is calculated, if you like, over several hundred years of potential experience, calculated in a (inaudible) way. So at $170 million, we have been stable for a few years. Our exposures this year are probably going to be not very different than what they have been in past years, and consequently the cat load would be the same. In terms of how it is calculated, we have a model for assessing this risk. In fact, we have a number of models for assessing this risk. We would simply look at the expected annual loss feature in those models, and that is what we report.

Okay. And also just lastly on the contractor's book, I'm wondering, is there any additional metrics that you can provide that give us some sense that you are kind of done reserving in that line?

Well, when it comes to reserves there is always an element of unknown. So I can't guarantee there would be no increase. But let's say we took a look at this in the second quarter, based on reported claims. We took another look at the fourth quarter. The fourth quarter was really not about fresh claims, it was, I think, more a question of looking at the same data and looking at it in a more pessimistic way. I'm hopeful that we are pretty much done with that, but there is no cast iron guarantee there, I'm afraid. But although -- I'm going to just draw your attention to one fact here -- the ratios here are truly horrible. The amount of money concerned -- and this is a pretty small business -- so the amount of actual dollars is not that severe. I'm hopeful we're towards the end of the road.

Sure. And I guess is your fourth quarter reserve number, is that an audited number on that book?

Yes, it is.

Great, thanks.

Your next question comes from the line of Marie Lunackova with UBS.

Good morning, everybody. I had a couple of questions. First one was, if I could get your thoughts on the political risk market what you are seeing there right now, and do you think the industry is going to see an increase in loss activity?

I think there are really a number of quite big loss situations -- or potential loss situations affecting that market. I don't think it's a huge number, but the cases that I'm aware of are actually pretty costly. And I think that is -- the nature of these risks and these losses is they are complicated. There are situations that could give rise to a loss. They tend to be reserved in a conservative way. Very often, there is then a process of negotiation and there's some collateral left at the end of that negotiations. Often the loss is a lot less severe than it gets initially reserved for, but that process can take a couple of years -- maybe even more than a couple of years -- to negotiate the way through.

So I would expect some big and ugly headlines across the marketplace, followed maybe by better news as negotiations reach the conclusion. Those remarks -- I'm sorry, just to finish, I want to stress one thing. Those are remarks, responding to your question about the political risk insurance market in general, specific for Aspen, we have not been involved or very little involved in any of these significant loss experiences. So I don't know about the specifics of them, because luckily or by good judgment, our team actually declined the risks that [reduced] the losses.

And it is coming from this some specific areas, territories? If you could give us a little more detail?

There are some situations in Kazakhstan, there's some in Russia, there's one or two in the Middle East, one in [Oman] in particular, that are hitting the headlines.

Okay. And then the second question was on the buyback program. The first was for the accelerated one -- the $200 million. Should we look at it as if it is complete, and the impact on the share count would be for the full quarter? So I can look at it as a January 5th event? Is that the correct way to look at it?

Well, Marie, it started in January. The whole program will take nine to ten months. So we expect between 7 and 8 million shares to be retired, but we can't give the full details as to what the price of that will be until we reach the end of the program. But if you think about those parameters, that will give you a rough idea.

Okay, and then the new program -- the $400 million -- any color on how you think about it, what the format would be? Would it be another, maybe accelerated program? And then the timing. How do you look at the timing? How do you think about the timing of the (inaudible) purchases?

Well, what we said a few minutes ago was that we couldn't actually make a guess as to when that was going to happen. In regards to exactly how we do it, it will be the most efficient mechanism when we actually decide to do that share buyback. Our accelerated share repurchase has worked very well for us to date. We'll have to see how that mechanism changes or pertains going forward in the next two years.

And Marie, I think I'd just add to that. Frankly, we haven't decided what the answer to your question is yet. It is something that when we get around to it the Board will take a look and look at the facts and we'll do what we think is the best thing to do when we have those facts. But really too early to give you an answer.

Okay. Thank you.

Thank you.

Your next question comes from the line of Josh Shanker with Deutsche Bank.

Yes, sorry, a quick follow-up. I know it is not a big business for you, but I'm interested in the pricing of it. On 1/1 do you guys write IOWs?

I don't believe we wrote any fresh ones at 1/1. I'm not absolutely categorically sure of that, because we have only a few of those in our portfolio. We did most of them, I think, in the sort of April, May time of 2009. Some of those would still be in force. But I'm not aware we added any to that. My expectation on the pricing there is it would be moving kind of in line with property reinsurance -- property cat reinsurance generally, which is gently -- only very gently downwards, and probably pricing in an absolute sense, I think, is pretty good there still. Not as good maybe as 12 months ago, but it is better than a lot of what else could be seen in the marketplace in other lines.

And along those lines, do you have any philosophical thoughts on competing with the cat bond market this year?

I think that's going to emerge over the next few months. That market tends to get really heated up in the run up to the hurricane season. So maybe the end of March, April will be a better time to give you some color on that question. My general impression is a little bit more interest from alternative providers of capital -- probably a little bit more supply available in the cat [bond] market compared to late last year and certainly 12 months ago. 12 months ago, as I think you know, that market was really almost dormant for a period of about six months.

Well, great. I'll hit you up again on that. I appreciate your answers.

Thanks, Josh.

(Operator Instructions) You do have a question from the line of Ron Bobman with Capital Returns.

Hi, good morning and congratulations.

Thank you.

I had an accounting question -- and I know it doesn't sound like it is really sort of relevant to your results. But since you are in the line, I would be curious to get some insight. Richard, for writers of political risk insurance, how much latitude do they have to reserve for losses sort of net of recoveries -- obviously net of expected recoveries -- given the -- as Chris mentioned, sort of the multi-year period of time over which they may benefit from recoveries?

Okay. First of all, you could answer this question in different ways. I would say the underwriters have no latitude at all, because our reserving process is -- it is deliberately designed to be done independently of any one interest group. It is chaired by Julian Cusack, who I think you met when he was here, and carries on as Chief Risk Officer. So Julian is in there. On that committee, Richard sits on it. I don't, as a matter of fact. And then you have people from underwriting, you have people from claims; and in particular, you have actuaries, and the actuaries try and operate independently of any interest group. They are really there to give a dispassionate view.

And then the committee can considers it; the committee can accept or actually recommend or reject it. After that, there is a proposal that comes out of that committee, comes to Richard and me and through us to our audit committee, and our auditors and our external actuaries take a look as well. So there is a lot of checks and balances there. So I think if it is just kind of a governance side of the question, I think it is a pretty good answer. In terms of recoveries, every situation is different. Sometimes they are collateralized, sometimes they are not collateralized. You really have to look at the particular circumstances and make an assessment. Matt is an expert in professional (inaudible), about which I don't think you could generalize. We don't actually have reported claims situations to deal with in this way. We are fortunate in that. But I have been involved with this account elsewhere in my career for many years, and it is very, very intricate. You can't generalize -- (inaudible).

In accounting terms, just to answer that specific question, you certainly would look at the possibility of recoveries [in] collateralization when you are thinking about what the ultimate loss position might be. So in general terms, yes, you most certainly do look at the propensity to recover when you are forming a reserve position.

Okay. Thanks. I think that helped. Best of luck. Okay.

Thank you.

At this time, there are no questions in queue.

Well, thank you very much indeed for your time and attention this morning, and thank you for your questions. Goodbye.

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