Aspen Insurance Holdings Ltd (AHL) 2010 Q1 法說會逐字稿

Good morning. My name is Shana and I'll be your conference operator today. At this time, I would like to welcome everyone to the Aspen Insurance Holdings First Quarter 2010 Conference Call.

(Operator Instructions.)

Mr. Noah 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-ended March 31st, 2010. 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 certainties 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 call -- I'll turn the call over to Chris O'Kane.

Thank you, Noah, and good morning. I'm very pleased to be reporting to you for the first time on the basis of our two separately branded insurance and reinsurance businesses. This new structure was announced at the start of the year and is designed to enhance the management of our business and better serve our global customer base. Our business is now grouped into eight broad subdivisions under the leadership of Rupert Villers and Bill Murray for insurance and Brian Boornazian and James Few for reinsurance.

Our first quarter net income of $18 million was down from $91 million in the comparative quarter last year and was significantly affected by a $100 post-tax loss from the earthquake in Chile. Diluted operating earnings per share amounted to $0.01 compared to $1.18 in the first quarter 2009, reflecting a reduction of $1.25 per share from the Chile loss. The vast majority of this loss has been born by our reinsurance business with combined ratios increased from 69.8% to 113.9% as a result, and Richard will shortly give you more detail on this and the overall financial performance of the group.

The first quarter of 2010 has witnessed an abnormally high incidence of cat losses for the industry with estimates of insured losses totaling some $16 billion. The earthquake in Chile accounts for the bulk of this with industry estimates in the range of 4 to $10 billion and an emerging consensus that this will be an $8 billion insured loss.

Other events included US winter storms, European winter storms (inaudible) and hail and winter storms in Australia. Aspen's exposure to these latter events has been de minimis and our Chile earthquake loss was well within our expectations for an amount of this size in the region.

The high incidence of industry cat losses in the first quarter has not changed our view of the market softening overall. The rapid recovery of balance sheets in 2009 has resulted in excess capacity, and so first quarter cat losses, while significant, can be regarded as an earnings rather than a balance sheet event, and as such, we do not believe will be a driver of industry pricing overall.

I would now like to comment on the current rating environment for our business and would draw your attention to slide 15, which provides a summary of our view. Starting with our reinsurance business, gross written premium for our property catastrophe and other property reinsurance funds increased by 7% to $220 million in the quarter, including $10 million of reinstatement premiums for the Chile earthquake.

As I mentioned during our last earnings call, the January 1 renewals for our property reinsurance lines proved competitive due to increased supply and high retentions. I commented at that time that we believe the market will be softened further in 2010, and as a result, we deployed more of our cat capacity than we had initially anticipated earlier in the year. Our predictions were correct and were reflected in the April 1st renewals. For the market as a whole, we estimate that rates have deteriorated by 5 to 10% since January 1st, although we now anticipate increases on Latin American business given the Chile earthquake.

Florida renewals in June and the significant July renewal season are now a talking point. Aspen is not a major player in the Florida domestic market, but we do pay close attention to developments due to the effect that any increase in private reinsurance demand will have on the cat market in general.

Predictions are difficult to make, given the $2 billion reduction in the optional temporary increased coverage limits tickle layer, the number -- failure of a number of reinsurers last year and subsequent shift of business to markets that may show more prudence in their reinsurance requirements. However, overall, we think that rates will continue to pull in this area of the market due to over-supply of capacity.

First quarter 2010 gross written premiums for our casualty reinsurance lines were marginally lower at $174 million. Pricing in this division remains flat to slightly down, depending on the line of business and the geographical location. Overall, the rating environment within the international treaty arena remains competitive with their rates broadly flat, although higher increases are seen on accounts with exposure to professional lines.

We recorded an average increase of 5% on our renewal book, but we non-renewed or reduced our lines on a number of (inaudible) which did not meet our hurdle rates. We continue to monitor terms and conditions very carefully, which are currently booked stable and acceptable. However, we're mindful of inflationary pressures and possible changes in the legal environment, which may result in an unacceptable risk profile.

Specialty reinsurance gross written premiums of $96 million in the first quarter 2010 increased by 34% against the 2009 comparative quarter, reflecting continued success of our relatively new trade credit and surety reinsurance team. Competition in this area has recently increased a little, reflecting perception of improved economic environment.

Turning now to Aspen Insurance, total gross written premiums increased by 16% to $213 million. Premium growth has been strongest in property lines, which reflect some new business in the UK where pricing has been marginally better than expected. US E&S property remains challenging with rate reductions of, on average, 2% on renewal business against the backdrop of a market environment where price declines of almost 10% are not uncommon.

In the financial and professional lines insurance area, we are seeing submission flow to our political risk account almost double as bank lending has resumed and global trade and industrial reduction has strengthened. We're still seeing rate increases in financial institutions business, although this is slowing down given the general perception of economic recovery. Our UK professional liability team has obtained average rate increases of 9% on business renewed.

Within marine, energy and transportation, pricing has improved overall. In marine energy and construction liability, we've seen average increases in the range of 0 to 5%. Although relatively little airline business renews at this time of year, we have achieved rate increases of 5% overall and are anticipating price increases in our aviation book for the remainder of this year.

In offshore energy physical damage insurance, the losses associated with the explosion and sinking of the deepwater Horizon drilling rig are difficult to quantify at this stage. However, the loss will be a material one for the energy market to bear, and the timing just before the key May and June renewal dates for Gulf of Mexico exposed business is significant.

Elsewhere within our casualty insurance lines, we are continuing to reposition our US E&S casualty book and conditions are still testing in the UK liability account. We expect pricing in both the US and the UK casualty insurance lines to remain soft to flat overall with some pockets of business expected to show improving price trends such as residential construction business in the US.

I'll now hand the call over to Richard Houghton for a review of the first quarter financial results.

Thank you, Chris, and good morning, everybody. Before I discuss our results for the quarter, let me first talk about our revised reporting formats, which you'll find in our earnings supplement. As Chris has mentioned, we announced the reorganization of the group earlier this year into two underwriting segments, insurance and reinsurance, and we have changed our disclosure to reflect this. We've also provided disclosure for our non-underwriting revenues and expenses that we do not allocate across our underwriting businesses. To help with the transition, we've provided financial analysis based on our historical four segments in the appendix to the earnings supplement, and we will continue to do this throughout 2010.

Turning now to our results for the first quarter, operating income after tax was $6 million compared with $106 million in the first quarter of 2009. The dominant feature of this quarter's results was, of course, $100 million of losses after tax net of reinstatement premiums from the earthquake in Chile. You'll find an analysis of our Chilean earthquake losses on slide nine of the presentation accompanying this call.

I will now highlight some of the key performance metrics for the quarter. Diluted book value per share increased by just over 1% from the end of 2009 to $34.62, reflecting $22 million of net after tax unrealized investment gains and $10 million of foreign exchange translation gains.

Gross written premium for the quarter of just over $700 million is up 10% on the first quarter of last year with increases coming from both of our underwriting segments. I'll return to this later in the call.

Ceded written premium has reduced to $123 million from $130 million at the end of the first quarter in 2009 with the decrease attributable mainly to our property catastrophe line. Our combined ratio for the quarter was 110.3% compared with 84.5% in 2009, and losses from the earthquake have increased the combined ratio by 24 points during the quarter.

In addition to events in Chile, we have $2 million of losses attributable to Windstorm Xynthia. This compares with $3 million of cat losses from Windstorm Klaus in the first quarter of 2009. Net reserve releases were $13 million for the quarter of 2.8 points on the combined ratio compared with $10 million for the same period last year.

Our expense ratio for the quarter was 29.3% compared with 28.4% for the same period in 2009 following our group reorganization and as we have continued to invest in the development of our business. The financial highlights from our underwriting segment are as follows. First of all, insurance - underwriting profit for our insurance segment was $2 million compared with an underwriting loss of $4 million in the first quarter last year. This result reflects the combined ratio of 98.9% compared with 102.4% in 2009. The improvement in the combined ratio has been led by our marine, energy and transport lines. There's a small reserve strengthening of $2 million in the quarter compared with $6 million last year.

On an accident year basis, the combined ratio was 99.9%, down from 102.9% in the first quarter of 2009 with change attributable to the ongoing recovery in results from our financial institution line. We are also pleased that our insurance lines have not been significantly impacted by the cat events in Q1 2010.

Gross written premium in our insurance segment was $230 million compared with $184 million in the first quarter of 2009. The increase is attributable to both our property insurance and our marine, energy and transport lines where we have seen opportunities to write new business that meets our profitability requirements in the first case and benefited from better rates achievable in the second.

Turning now to our reinsurance results, our reinsurance segment underwriting loss for the quarter was $40 million compared with an underwriting profit of $83 million last year. The result reflects a combined ratio of 113.9% compared with 69.8% for the first quarter of last year. Losses of $112 million net of reinstatement premiums from the Chilean earthquake have increased the combined ratio in the segment by 39 points during the quarter. Net favorable reserve development was $15 million or five points within the combined ratio compared with $16 million or six points in last -- in the equivalent period in 2009.

The reserve releases in the current quarter reflect favorable claims developments in both our property and specialty reinsurance lines. The increase in the accident year combined ratio from 81.1% in the first quarter of 2009 to 119.1% in the current quarter is due overwhelmingly to cat losses from the Chilean earthquake.

Gross written premiums for our reinsurance segment were $490 million compared with $453 million last year. In total, property catastrophe premium has increased by $30 million to $146 million over last year with $20 million attributable mainly to timing as we have deployed more of our cat capacity earlier in the year on the basis that we expect cat prices to decrease during 2010, and we also have $10 million of reinstatement premiums associated with the earthquake. Our specialty reinsurance lines increased premium by $24 million, driven largely by favorable market conditions in aviation reinsurance and our credit and surety class.

Turning now to our investment performance, net investment income for the quarter of $59 million is in line with last year. Net realized and unrealized investment gains in the income statement were $12 million compared with losses of $12 million in the first quarter of 2009 with a prior year loss attributable mainly to $15 million of other than temporary impairment charges. In contrast, we have incurred a relatively small charge in the current quarter of less than $500,000 for OTTI.

At the end of March, there were $211 million of net unrealized gains in the available for sale fixed income portfolio compared with $186 million at the end of 2009. Total investment return, including realized and unrealized gains and losses and impairment charges, was $97 million or 5.8% annualized for the quarter compared with $50 million or 3.4% annualized in 2009.

Book yield on our fixed income portfolio of 4.2% at March the 31st, 2010 is in line with the start of the year and down from 4.4% at the end of the first quarter last year. Average duration of the fixed income portfolio at 3.3 years is inline with December 2009. The average current credit quality of the portfolio remains AA plus.

Turning briefly to our capital position, total assets have increased by 2% to just over $8.4 billion when compared to the end of 2009. Our total shareholder equity is $3.1 billion, down from $3.3 billion at the end of 2009 as a result of our share repurchase. As a reminder, we entered into a $200 million accelerated share repurchase in early January this year where we have repurchased and cancelled 6.5 million shares in the first quarter. Our total debt and hybrids to total capital ratio, which includes our preference shares, is 18%, up from 17% at the end of last year with the increase attributable to the share repurchase.

Turning now to guidance for 2010, which is set out on slide 14, in the light of our catastrophe losses in the first quarter and prevailing market conditions, we anticipate our full year combined ratio to be in the range of 92 to 98%, including a cat load of $140 million for the remainder of the year, assuming normal loss experience. We anticipate our gross written premium for the full year to be changed of $2.2 billion plus or minus 5%. And we expect to cede between 8 and 12% of gross earned premium.

Despite the continuing low interest rate environment, we expect to maintain a book yield of around 4% on our fixed income portfolio for 2010. Finally, we expect a tax rate in the range of 9 to 13%.

That concludes my comments on our first quarter and updated guidance for 2010, and I would now like to hand the call back to Chris.

Thanks, Richard. I now want to return to the current market environment we're trading in and our strategy for managing this late phase in the soft market. Throughout the cycle, the key task in running an insurance business is capital allocation. By this, I mean how much capital we want to deploy in underwriting at any given time and in which lines and what proportions.

It's absolutely vital to avoid being overexposed to underwriting risk at the wrong time in the cycle, but it's equally important to be highly granular in the way this is approached. Around the world, many lines of business behave differently, and it is critical to reduce exposure in those lines where the proper potential has eroded, and equally critical to seize on those rare opportunities where good or improving margins exist. This capital allocation and reallocation process is imperative throughout the cycle and even more essential in the current predominately soft market conditions.

So, what does this mean for our business in practical terms? Within reinsurance, our low property catastrophe pricing has eroded a little from the highs achieved in the spring of 2009, we believe that margins continue to be acceptable, and we will not be reducing exposure.

We commenced underwriting trade credit reinsurance on the first of January 2009 and increased our exposures as pricing improved in January this year. We have recently enhanced our capabilities to underwrite European agricultural reinsurance business and we're making good progress in this regard. The prices there are acceptable and we see potential for modest growth.

Our office in Singapore, which we opened 18 months ago to write property treaty business, continues to make excellent progress. It is in a region of the world which are low competitive, was relatively untouched by the financial crisis and is showing both growth and acceptable underwriting margins.

This week also sees the opening of a new office in Miami targeting reinsurance business in the Latin America region. Although we do not believe that the price -- that the earthquake in Chile will have a significant impact on worldwide pricing, we do expect some impact within the region and we have already observed increases in prices in Chile of up to 70%. Our new office will position us well to benefit from this localized market improvement.

There are also elements of positive news from our reinsurance -- from the insurance operations. For example, deal flow in financial improvement was almost double compared to this time last year as project landing recovers in response to an improved economic outlook post the credit crisis and prospective pricing appears to be satisfactory.

Within the UK, we're seeing modest to good increases in professional liability business, and although we would like to see stronger increases, what we have achieved so far is a good step in the right direction. We are continuing to see an improving pricing environment of financial institutions business of a level of rate increases is less than last year.

Turning to very recent events, last week witnessed the biggest individual rig loss for some time. As yet, there are many unknowns, but it does appear that this even could amount to a loss of $1 billion or more when physical damage, cost of cleanup and other liabilities are taken into account. We believe that this represents a loss of about 40% of the world offshore energy premium and that this will lead to a hardening of rates in the sector. We're well placed to benefit from this as we have the capital distribution brand to offer continued or enhanced support to our energy clients at prices commensurate with the risk involved.

At this early stage, we are unable to quantify our own loss, but we can say that we declined the property risk on a primary insurance basis when we saw it, and any exposure that we do have will be by joint venture partners or by reinsurance and are likely to be modest.

There are other parts of our diversified portfolio, however, where we cannot report signs of improvement and where, consequently, we are withdrawing capital and reducing exposure. The most significant of these are in our casualty lines, especially US casualty, and we expect to write significantly less casualty insurance and reinsurance. The only area of our property business where we're expecting a significant reduction is in property treaty risk excess.

You will recall that we carried out an accelerated share repurchase of $200 million at the beginning of this year. Our preference remains to deploy our capital profitability, but if opportunities to do so are not available, we will revisit the issue of returning capital to our shareholders within the next nine months.

That concludes our prepared remarks, but before handing the call over to Q&A, I'd like to take the opportunity to remind you that we will be holding our investor day in New York City on the 10th of June this year. We do hope to see you there.

Operator, you can open the line to questions, please.

(Operator Instructions.)

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

Hi. This is actually Max Zormelo on Vinay's line. Good morning, everyone.

Morning, Max.

Morning.

Morning. My first question is about the planned expansion in the European agriculture insurance line. Just wondering if you could give us some more color on that, where exactly you're planning to grow the business and give us a sense of the magnitude of it.

Yes, I'm happy to do that. It's a modest development. It's not a huge one. We, as I think you probably know, opened an office doing reinsurance business in Zurich about two, two and a half years ago, and we've been bolting on teams there. Recently, we established this capability, so it's written out of Zurich. The target of this business is European. It's not US. We will not be writing any US agriculture business or crop business from Europe at all.

And so far, we've really -- most of what we've done is Italian, Italian crop business. That tends to be done on an excessive loss basis, stop loss reinsurance, some quote of share and hail is probably the major peril. This year, I'd expect to be writing maybe 12 to $15 million. And I think there's some modest potential for growth, maybe in the 20 to $30 million area when it's mature. So, it's a useful and diversifying adjunct to what we're doing. It's not kind of game changing in itself. But, it's a very typical to our approach. Where we see good underwriters and a potential for profit, we'd like to take it.

Okay, thank you. My second question was about the adverse development in insurance segment. I was wondering if that's related to the contra lab -- I think it was the contractors liability contract in New York that you had adverse development on last quarter. I was just wondering if this is related to that.

We have -- a very small element is related to US insurance, and into that specific issue that we talked about at some length in the last quarter. It's round about $2 million of strengthening within a total strengthening of $2 million in the insurance segment.

Okay. And -- thank you for that. And last question - do you have any -- through your political risk insurance segment, just wondering if you have any exposure to Spain, Portugal or Greece?

I guess we have exposure to Spain, Portugal and Greece in two ways. One is the investment side, which I'll ask Richard to deal with in a moment, and it's modest. For our financial political risk book, it's very, very slight. The focus of that book does not tend to be within the EU. It tends to be Russia, China, Central Asia, South America, other parts of Asia. So, we're not unduly concerned within financial political risk underwriting about Greece, which frankly, I think that's an area our underwriters will have seen as a problem looming for quite a long time.

And on the investment side, Max, just to wrap up on that, in respect to the fixed income portfolio, no exposure to Greece, none to Portugal, around $14 million of government debt from Greece that we have in the portfolio now -- sorry, I'll correct that -- $14 million in Spain, apologies. Greece is zero, Portugal zero, Spain 14.

Okay, okay, all right. That's all I had. Thank you very much.

Thank you very much.

At this time, presenters, there are no more questions.

In that case, I think we'll draw the call to a conclusion. Thank you all for your attention. Have a good day.

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