Aspen Insurance Holdings Ltd (AHL) 2010 Q2 法說會逐字稿

Good morning. My name is Dericka, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Insurance Holdings Second Quarter 2010 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. I would now like to turn the call over to Mr. Noel 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, and James Few, President of Aspen Re.

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 June 30, 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 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.

Thank you, Noah, and good morning. I'm very pleased to report a strong set of results for the second quarter. Our operating income for the quarter was $105 million, an increase of just over 1% on the same quarter last year. This equates to an annualized operating return on average equity for the quarter of 15.6%. Our combined ratio for the quarter was 86.9%.

For the six months of 2010, annualized return on average equity was 7.8% with a combined ratio of 98.4%. A summary of our results is set out on slides three and four of the accompanying presentation.

I'm going to begin with our losses from Chile and Deepwater Horizon. We stated on March 29th that we anticipated that our net loss from the Chilean earthquake would be in the range of $70 million to $110 million, and we recorded a net impact from this of $100 million in our first-quarter results. I'm pleased to report that this quarter we've seen no movement in our overall net Chilean earthquake loss estimate.

As a reminder, the vast majority of our exposure to this event derives from our property reinsurance account, and it's mainly from worldwide covers for international clients. As a point of further clarification, we do not write any uncapped quota shares in Chile and we do not have any exposure to these for this event.

The events surrounding Deepwater Horizon are also highly complex and ongoing, but I would like to comment briefly on our estimated loss from this event. Further detail is also included on slide six.

We have booked a net loss after tax and reinstatements of $18.6 million in our second-quarter results, which compares with our initial estimate where we stated our exposure was unlikely to exceed $25 million. This is split, $10 million in our Insurance segment and $9 million in our Reinsurance segment.

In determining our exposure to this event we evaluated a number of potential scenarios, and our estimate is based on our view of the most likely outcomes. Our exposure within our Insurance segment is to some elements of the various liability covers purchased by members of the operating group, not including BP, and to one of the drilling subcontractors.

We did not participate in the insurance of the property damage risk to the rig, which we declined on underwriting grounds. In our Reinsurance segment, we have some exposure to our ceding companies who may have provided either property or liability cover to some of the parties involved.

Turning now to forecasts for the current hurricane season, as you are aware, most are predicting a very active season indeed with the three main agencies suggesting a range of 12 to 23 named storms. It's extremely difficult to predict the likely level of storm activity with a high degree of accuracy, and this is illustrated on slide seven where you are shown predictions versus observed storms for each year since 2003. To put it mildly, the correlation is very low.

But what we do know however is that, unlike 2006 to 2009, when activity was dampened by the El Nino effect, this will not be the case this year and sea surface temperatures, which are the primary engine of hurricane activity, remain very high.

More importantly, what matters from a financial loss perspective is the number of hurricanes making landfall, the severity with which landfall is made and whether the track taken is over high-population density. All of these factors are impossible to predict.

But despite the imprecision in hurricane forecasting, we still feel that we should be prepared for a worse-than-average year. We remain committed to our stated objective of generating stable earnings over time with lower volatility and to continue to purchase retrocession or alternative (inaudible) covers where the pricing is acceptable as part of our approach to managing CAT risk.

We currently have approximately $429 million of limit available for our US wind first event, and $334 million for a second event loss across our entire book. Of the available limit I've just referenced, we have $195 million covering our catastrophe excessive loss account for a first event and $100 million for a second event.

These above limits include $25 million of aggregate second-event cover, which we opted to purchase in July, which also provides cover for US quake, European wind storm and flood as well as US wind. This additional limit did not form part of our initial planning assumptions.

But, irrespective of the difficulty of forecasting hurricane activity, we monitor our CAT exposures continuously to take into account changes in forecasted activity and other factors with a view to maintaining an acceptable level of activity. As you can see on slide eight, our exposure to US wind currently stands at 12.3% of surface for a one in 100-year event versus our stated tolerance of 17.5%.

I will now comment on renewal activity in our -- on our book in each of our two business segments. As a reminder, we measure rate relativities on a premium weighted average basis on the business to be renewed. Beginning with our Reinsurance segment, property reinsurance rates have continued to soften and we have seen clients retaining higher levels of risk than we had anticipated in both the accessory and risk excess market.

Our decision to employ -- deploy more CAT capacity on January 1 was justified as July renewal rates where expiring premium fell 15% to 20% versus 12 months earlier and were down approximately 10% versus 1/1.

Following the earthquake in Chile, we have seen rates on Catastrophe Reinsurance business in Chile rise between 40% and 70%. As a result, we have written 23 new contracts for 14 new clients. We registered a 4% price decline on our risk excess book, reflecting strong competition in Europe and in the US. On the facultative side, we've also experienced reductions in demand and rate exacerbated by new market entrants who increase supply.

I think it is worth commenting briefly on the Florida domestic market, which tends to dominate renewal activity in June in property CAT. We continue to view this segment of the market with caution as we believe there are a number of underlying problems, which render this business insufficiently attractive. We have remained purposely underweight in standalone Florida business and continue to accept most of our exposures in Florida from nationwide writers.

Within our specialty reinsurance area, our Zurich-based credit and surety reinsurance teams sell business -- let me read that again, sorry. Within our specialty reinsurance area, our Zurich-based credit and surety reinsurance business rates were up on average 4% but less market for -- than the initial expected, given the increased competition.

Elsewhere, we're experiencing single-digit declines with average rate reductions of around 2% on the Space business and 6% in aviation reinsurance. The casualty reinsurance bond remains challenging with continued rate pressure on original business. We expect this trend to be maintained for the remainder of 2010.

In the second quarter, US casualty reinsurance rates were flat overall with the greatest pressure in the E&S, primary and umbrella markets. Activity within our international casualty reinsurance segment is dominated by the Australian reorder at this time of year where pricing was broadly stable. Elsewhere, prices have remained flat or with single-digit reductions.

We recorded a modest increase of 2% on our Casualty Facultative book, although the market remains competitive. Within casualty reinsurance overall, terms and conditions are beginning to come under pressure but are often still acceptable.

Turning now to our Insurance segment, marketing conditions are challenging in most lines of business in both the US and UK markets. However, in the second quarter, we recorded an average increase of 1% on our renewal book.

Marine hulls are rate increases of 6% on average, with pricing remaining flat on profitable business. Within our Marine, Energy and Construction liability account, we experienced average rate increases of 3% with the impact of the Deepwater Horizon loss yet to be felt. Strong competition in the US and Bermuda have pushed renewal rates down an average 2% in our excess casualty account.

We saw modest increases of 2% on our Aviation book and in our UK Commercial property account. Within UK, employees' liability rates fell by on average 3% with marketing conditions expected to remain testing in the foreseeable future.

Within our Financial and Professional Lines conditions in financial and full-risk insurance have remained relatively attractive, and we have experienced a meaningful pick-up in demand as some competitors have scaled back their activities in this area. Rate increases on our Financial Institutions book were lower than we had anticipated at around a 1% increase, reflecting increased competition and the continued, perceived economic recovery.

Within our US Insurance business, E&S Property experienced a 3% rate decrease with terms and conditions under pressure. In E&S Casualty, we saw expiring premium renewed with an average rate increase of 1% in a very competitive market.

I'm now going to hand over to Richard Houghton for a review of our second-quarter financial results.

Thank you, Chris. Good morning, everybody. I'm pleased to report a successful quarter for Aspen with operating income after tax of $105 million, reflecting positive contributions from both underwriting and investment. As Chris has said, our net reserves for Chile remain unchanged from the last quarter, and reserves booked in respect of Deepwater Horizon are $18.6 million net of tax and reinstatement premiums.

Results for the quarter are broadly in line with last year, although the half-year profits of course reflect $100 million of losses net of tax and reinstatement premiums from Chile.

I will now highlight some of the other key performance metrics for the quarter. Diluted book value per share increased by 21.3% to $36.93 when compared to June 30, 2009, and has increased by 8% since the start of this year. For the quarter, diluted book value per share increased by just under 7%, reflecting $92 million of retained income and $78 million of unrealized investment gains net of tax.

Gross written premium for the quarter of $545 million is up marginally on the second quarter of last year, with increases in our Reinsurance segment offsetting decreases in our Insurance segment. I'll return to this later in the call.

Ceded written premium has reduced to $7 million from $50 million in the second quarter of 2009 with the decrease attributable to our Insurance segment. For the half year, ceded premiums are down from $180 million to $129 million as we have purchased less reinsurance for our Marine, Energy and Transportation business and also our US Property Insurance book. In addition, we have benefited from reduced reinsurance costs for our Financial and Professional Lines.

Our combined ratio for the quarter of 86.9% was down from 87.7% in 2009 with the improvements led largely by our Insurance segment. The combined ratio for the half year was 98.4% compared with 86% in 2009, with the current year impacted by 12 percentage points of net losses from Chile.

There's been a small net reserve release from prior years in the quarter of $2 million, compared with $17 million for the same period last year. For the half year, reserve releases were up $15 million compared with $27 million last year.

Our expense ratio of 29.2% for the quarter, comprising both our acquisition and operating expenses, was down from 32.9% last year, mainly as a result of a reduction in profit-related commissions in our Reinsurance segment. Our operating expense ratio for the quarter was also down from 14% last year to 13% this year. Coincidentally, the half-year expense ratio was also 29.2% compared with 30.6% last year.

The financial highlights from our underwriting segments are as follows. I'll start with Insurance. Underwriting profit for our Insurance segment was $6 million, compared with a loss of $15 million in the second quarter of 2009. This reflects a combined ratio of 96.9% compared to 108.7% last year. I'm particularly pleased with our property insurance lines including our UK Commercial business which has produced a loss ratio of only 30% in the quarter.

The half-year combined ratio for the insurance segment was 97.8% compared with 105.5% last year with the improvement also led largely by our property insurance lines.

Ceded written premium has decreased from $48 million in the second quarter of 2009 to $2 million in the current quarter. The decrease is attributable to timing where we purchased reinsurance for our financial professional lines earlier in 2010 than last year, and the downward ceded premium adjustment for our Marine, Energy and Transportation business.

In the current quarter our net losses in the segments included $9 million in connection with the Libyan airline crash in addition to $11 million of pretax losses from Deepwater Horizon. There was reserve strengthening of $9 million in the quarter, arising mainly within our UK professional accounts relating to the financial crisis. This compares with reserve strengthening of $15 million in 2009.

Gross written premium for the second quarter was $262.1 million, down from $276.9 million last year. For the half-year, gross written premium of $475 million is up marginally when compared to last year with growth in our property lines balanced by managed reductions in Marine, Energy and Transportation.

Turning now to our reinsurance results. Our reinsurance segment underwriting profit for the quarter was $67 million compared with $78 million last year, and reflects positive underwriting results across both our property and specialty reinsurance lines and increasingly tough conditions within casualty reinsurance.

The combined ratio for the quarter was 76.8% compared with 69.5% for the second quarter last year, with the movements due largely to reduction in reserve releases from $32 million last year to $11 million in the current quarter.

Gross written premium for the quarter of $283 million is up from $257 million last year due to both our Property Catastrophe business and our developing specialty reinsurance lines, including Credit Surety and our International Agriculture business both written from our Zurich office.

For the half year, underwriting profit for the reinsurance segment was $27 million, compared with $161 million in 2009. This reflects a combined ratio of $95.4% for the current period, compared with 69.6% last year. The half-year results have of course been dominated by the earthquake in Chile, where our pretax loss estimates were $112 million, net of reinstatement premiums, which we reported in the first quarter, have remained unchanged.

The accident year combined ratio, excluding the impact of Chile, was 82.5% compared with 78.3% last year, reflecting softening market conditions particularly in Casualty reinsurance.

Gross written premiums of $773 million for the half year, are up 9% in the last year with an increase from both property catastrophe, where we chose to write more business in the beginning of the year ahead of expectations of further declining rates as Chris has discussed and new business written in our Specialty reinsurance lines.

Now turning to our investment performance; net investment income for the quarter was $58 million compared with $72 million in 2009. The comparative period included $16 million of income from funds of hedge funds in which we are no longer invested.

Net realized and unrealized investment gains included in the income statements of $6 million for the quarter were broadly in line with last year, and for the half year, net investment income was $117 million compared with $131 million last year. Net realized and unrealized gains included in the income statement for the half year were $18 million, compared with net realized and unrealized losses of $7 million in 2009.

We have no other-than-temporary impairment charges in the current quarter with $3 million in equivalent period last year. For the half year, other-than-temporary impairment charges were only $300,000 compared with $18 million last year.

By the end of the second quarter, there were $293 million of net unrealized gains pretax in the available for sale fixed income portfolio, compared with $211 million at the end of the first quarter and $186 million at the start of 2010, with the growth attributable mainly to (inaudible) credit spreads and reducing interest rates.

Total investment return was $146 million or 8.7% annualized for the quarter, compared with $119 million or 7.9% annualized in 2009. For the half year total investment return was $242 million or 7.1% annualized compared with $169 million or 5.7% in 2009. Book yield on our fixed income portfolio of 4.05% at June 30, 2010 was down 18 points on the first quarter of this year as pressure on reinvestment rates persists. This compares with the book yield of 4.4% at the end of the second quarter last year.

Average duration of the fixed-income portfolio of three years is down from 3.3 years at the end of the first quarter, as we've taken a more defensive duration stance in the current low-yield environment. Average credit quality of the portfolio remains AA plus.

Turning now to our capital position. Total assets have increased during the quarter by 2% to just under $8.6 billion. Our total shareholder's equity is $3.3 billion, up from $3.1 billion at the end of the first quarter as result of the contributions from retained earnings and unrealized gains in the investment portfolio, which I have discussed.

Our $200 million accelerated share repurchase was completed during the quarter, resulting in a repurchase and cancellation total of 7.2 million shares this year, with just over 750,000 shares cancelled in the second quarter.

As a reminder, in February this year our Board authorized a new share repurchase program allowing us to repurchase up to $400 million of our ordinary shares over the next two years. This authorization is in addition to the completed share repurchase.

Turning now to the guidance of 2010, which is set out in slide 23. Taking into consideration our catastrophe losses in the first 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 $110 million for the remainder of the year, assuming normal loss experience.

In light of the market outlook with continued pricing pressure, we've reduced our full year gross written premium guidance to approximately $2.1 billion from approximately $2.2 billion, and we're also refining the range of ceded premium to between 8% and 10% of gross earned premium from a range of 8% to 12% given previously.

With the continuing low interest rate environment, we expect to record a book yield of between 3.75% and 4% on our fixed income portfolio for 2010. Finally, our effective tax rates range is unchanged at 9% to 13%.

That concludes my comments on our second quarter half-year results and updated guidance of 2010. I would now like to hand the call back over to Chris.

Thanks, Richard. As I referenced earlier, as far as the market outlook is concerned, the overall picture remains one of continued rate declines and pricing pressure. There are still pockets of opportunity, but the number of these is reducing and so we remain focused on maintaining underwriting discipline and staying vigilant with regards to terms and conditions. This includes reducing top-line where appropriate, changing business mix, reducing line size and changing attachment points and deductible levels.

As Richard mentioned, we have revised our top-line guidance down for the full year. As you know, we group our business into eight broad categories which comprise 25 individual classes of business. For the full year 2010, we expect to write less premium in 11 of these classes of business with some reductions in the 35% to 45% range. This reflects our view of market conditions, and our strategy of disengaging from risk we're required to ensure our return requirements are met.

This anticipated reduction is likely to be partially offset, to a small extent by growth in some new and recently added lines of business. One area where we had anticipated potentially writing more business was energy physical damage and liability insurance following the Deepwater Horizon loss.

Prior to this incident, most buyers have been seeking a rate reduction, whereas post Deepwater they were asked to pay more. The full impact of this has been less felt so far in 2010 than the industry expected as discussions for the May renewals were already underway when the disaster occurred.

We have seen, however, significant improvement in rates during June and July in response to the BP situation at Deepwater which was further reinforced by another rig loss, Aban Pearl off the coast of Venezuela on May 13th.

Given the short window of opportunity before the end of the energy renewal season, we have not increased our exposure significantly; although we have seen requests from buyers for increased control of well and seepage and pollution liability limits. The current deepwater drilling moratorium in the Gulf of Mexico has also deferred inquiries for increased levels of cover.

I would also would mention briefly in this context the extraordinary difficulty of regaining control of well in deepwater drilling when difficulties occur which the Deepwater Horizon event should serve to reinforce. In the case of Deepwater Horizon, the impact on the insurance industry while significant, has been less marked on what otherwise might have been the case because BP self-insures most exposures.

However, there are a number of oil companies who operate in even deeper waters who do buy insurance. We will continue to be cautious of our exposures to deepwater drilling while these risks are reevaluated.

As referenced above, top-line is only one aspect of how we manage our business in a challenging rate environment. In property reinsurance for example, brokers are seeking to expand the scope of coverage. Requests are being received (inaudible) extensions more frequently, and we'll continue to resist these requests. Another example on a recent renewal submission was the deletion of a cyber-risk exclusion clause where we declined the risk as a consequence.

In casualty reinsurance, we are cautious concerning start-up operations and are actively avoiding specific segments of the market, for example, large US trucking risks. We're also acutely aware of the shift in exposure profiles, fire hazard business for our E&S customers which has been occurring over the last two years as the lower hazard E&S business has flowed back to standard markets.

There are a number of examples, similar examples in our insurance segment. Within our US E&S casualty account, we are retaining greater retentions to meet insured demands of lower premiums and offering brokers [priority] service in exchange for first and last look.

Within our UK employers' liability and public liability account, we're looking to tie in the better quality clients by waving premium adjustments and subject to renewal offering risk management at our expense. In financial institutions our emphasis is on finding the best performing layers in multi-layer programs.

We've also changed our business mix in many classes. One good example of this is within property reinsurance where we have shifted support from pro rata to risk excess. This helps us to avoid attritional loss, which is of particular concern when rates and terms of conditions are coming under pressure.

We've talked before about the shift away from general aviation business to hull, war and deductible buyback within the aviation insurance portfolio, and already mentioned the reduction in the Gulf of Mexico business within our energy account.

Last quarter I talked about a strategy for managing this phase of the sell cycle, and today I've tried to give you a little more cover on the tactics we're employing and actions we're taking in our day-to-day underwriting. We cannot predict exactly when the pricing cycle will turn, but I would like to remind you again of the premise in which Aspen is based. We are a diversified business with a specialty approach and that gives us scope to manage the cycle, reduce volatility for our shareholders.

With that I'd like to turn the call over for Q&A.

Thank you.

(Operator Instructions)

Your first question comes from Josh Shanker with Deutsche Bank.

Good morning. My question regards a little bit more description on the development. Although you had barely any, you had some in reinsurance and you had some adverse in the primary line. I'm interested in discussing where that primary line adverse is coming from.

Yes, sure. I'll take that. It's from two areas. Limited adverse developments in US insurance on our casualty accounts which has come from two specific areas; one is nursing homes, and the other is California construction. Small numbers but adverse so I -- put in front of you in that context.

The other element would be some development in our professional lines accounts written in the UK, which I would broadly describe as being connected with the financial crisis. Two elements of that -- first, are property related in relation to exposures that we wrote back in the UK and a little bit in Australia, and also some exposure to independent financial advisors in the UK.

The professional lines strengthening will be around about $10 million in this quarter.

One of your competitors also point to London market financial crisis reserve strengthening and primary lines. Do you think there's an industry trend that's brewing here, or do you think it's just a one-time housekeeping item for a few insurers who are out there?

Well, I think it's a set of circumstances which actually covers quite a number of lines. I think we've been pretty prudent and proactive in the reserving stance that we've taken. It's relative to our financial institutions lines and our professional lines as well, as well as the fact [of] our reinsurance lines. Extremely hard to reserve because these things have to develop into litigation and it will take a number of years to get to the ultimate conclusion.

But Josh, it's Chris. I think you are onto something. What we're looking here is at economic downturn as we all know, and part of that is collapse in property prices. So anyone who had a valuation from a surveyor on the value of his property is now going to say that valuation was bogus, was flawed or at least make that allegation. That gives rise to potential to claims.

Then for the financial advisors who arrange the loan, someone's going to say that they didn't do their jobs properly, that they should have pointed out risk, hazards associated, which they didn't. There are defenses against this and it's by no means the case that everybody's who is a bit unhappy because his property's worth less is going to make a successful play. But I think anyone in writing professional lines, who has exposure, either to the property market in any way, is -- would be wise to reevaluate reserves.

We have seen a few people doing it and others may be doing it, and they haven't talked about it, but I think it's a broader issue than one or two companies. I think it's fundamentally a result of the economic downturn and the collapse of property prices.

I hope that helps.

Yes, it does. Thank you. Then the other question relates to share repurchasing. I assume that likely share repurchasing will slow down as you out -- with the outcomes of the North Atlantic hurricane season. But I want to talk about the pace of repurchases in tandem with the accelerated repurchase. What will be your appetite and to the extent that you would be repurchasing more shares going forward? What will be your target at the end of the year, in your mind?

We don't actually have a target for the end of the year as yet because it depends very much what happens over the next couple of months, which is very much top of our minds as to the value available to us, in repurchasing our shares. So that should be absolutely clear to everybody on this call.

I think it would be premature to announce a target right now. What we said and what we said at our investor day is that we continue to evaluate the opportunities that are available in the market and we're doing that right now. We're very conscious of what is going to happen in the next couple of months, in the wind season.

So we take those two factors together and we see where we get to at the end of that. But I'll repeat, we are extremely conscious of the value available in share repurchases relative to deploying capital organically at present.

Just a couple of other thoughts on that question. Oh, sorry, Josh, keep going.

No, I was going to say, if you get to the end of the hurricane season and it's a modest hurricane season, what would be your preferred avenue? To be purchasing them in the open market, or to be arranging a -- some sort of accelerate system?

Well, I think both have got attractions. I think I might favor the former, but I'd really quite like to get there and see what state of the market is before making that evaluation. But I certainly wouldn't be signing up, absolutely, for the sort of mechanisms that we've used in the past. I would consider where we get to in two or three-months' time.

I was just going to add, Josh, just the thought process, really. We don't think our exposures are likely to grow in the foreseeable future, given the market, as it is. As we write casualty lines, we add to our reserves and so there's some more reserves and there's a capital charge that we'll have of holding those reserves. So, we need more capital for that.

But apart from that, I guess you could say, I'm being very simplistic here, our earnings, minus what the increased capital lead reserves is, are surplus earnings. So that's the kind of fund from which reserve buy-backs is going to come.

Just to reiterate what Richard said, we're trading at something just a little north of 0.7 book. We think we've got a well-run business with a decent earning potential. There aren't many better buys in the world than that, so that's what we'd like to be buying.

I can't give you a figure and I can't give you a date. You'll understand why. But hopefully that gives you a fair idea of where our, Richard, my and the Board's, orientation is.

Very much so. Well, thank you and congratulations on the quarter.

Thank you.

Thanks, Josh.

Your next question comes from Dean Evans with KBW.

Thanks, guys. Congratulations on a strong result. First, I was wondering if you could sort of touch on the Insurance segment. It looks like the retention there, year-over-year at least, is pretty substantially up. What's sort of underlying that move?

Yes. Good morning, Dean. A couple of things going on there. The first thing, I would say, is I think it's more useful to point to the half-year comparison rather than the quarterly comparison. I say that because we've got some timing differences, which have kind of confused the quarter.

The quarter itself looks very, very low, I know. One of the reasons is we bought our cover for our financial professional lines in the second quarter last year and the first quarter this year. So for those reasons, it's difficult to compare quarter-to-quarter.

But if you look at half-year versus half-year, you're absolutely right. We have got higher retentions, particularly on the sort of Gulf of Mexico business and other elements I'll point to is actually reduced costs of reinsurance for protecting our financial and professional lines. So I think we've got two major components, which is pushing that comparison down somewhat on a half-year basis.

Okay. So even though really on a relative basis, the PML sort of came down, you do have higher Gulf retentions?

Correct. On slightly lower lines.

Okay.

Just -- don't want to -- get you on track here, I think what we're saying here is that our exposure to wind in the Gulf of Mexico, or the offshore, is the same as it was before. So we've got a higher retention, we buy less reinsurance, but we've written less business. So we haven't actually increased our exposure on a net basis.

Yes. Thanks, Chris.

Okay. That makes sense. Second, I was just wondering, you kind of mentioned that pricing was down -- or that you were planning to reduce 11 out of the 25 lines. Can you sort of give us an idea as to some of the things that you do like here? Maybe even how some of the newer lines that you've added and the newer teams have been progressing? Has it been in line with expectations or has it been a little weaker, given the environment?

Sure. If I talk about sort of some of the new stuff, none of these are very big, but for the first time this year, we've started writing some reinsurance business of crop agriculture, principally crop, in Europe. We might do $20 million of premium in that area. We think it's pretty well priced.

It's definitely a diversifying risk. We don't have anything else like added in the books, so that's nice. The credit and surety reinsurance area numbers have held up reasonably well. We saw some price increases there. Not the level we're seeing a year ago. But broadly, we're happy with that.

On the insurance side, political risk, financial risk, last year you had banks not lending. You had a very reduced demand for that product. As you see a little bit more economic activity starting, there's a bit more demand there and one or two people writing less. So we're doing a little bit more in that area. The pricing reflects the demand level. Not too bad.

None of the pricing, I would say, is scintillatingly good. I don't want to give you the wrong impression. But certainly adequate ROEs or a bit better than adequate ROEs. It's always worth mentioning property CAT. We talk about it a lot. Pricing is down, but the way we measure exposure and the rate we need, it's still, on an absolute basis, pretty well priced.

So we're not actually writing less property CAT. We're getting less premium. But still an adequate price point. So that's what -- that would be the more positive areas. Some of the more positive areas.

On the negative side, I thought financial institutions business really ought to pay more this year. It repriced a bit during the crisis, and that kind of repricing just hasn't continued. Maybe people think an economic recovery is coming, so we're out of the woods and we don't need more price, but the rate increase is there. We thought we might see 15% this year. It's like 2%, I think, so I think fairly anemic.

Kind of broad casualty, particularly on the reinsurance side, well we're looking at large portfolio of risk. Pricing is not very good at all, and you have terms and conditions under pressure. So I'd say in US casualty reinsurance, we're doing less. International casualty reinsurance in some ways a little bit stronger than in US? But actually we're doing less there as well.

Does that give you a reasonable flavor?

Yes. Yes. Very helpful color. I appreciate it.

Thanks, Dean.

Your next question comes from Amit Kumar with Macquarie.

Congrats on a strong quarter. Just going back to the discussion on professional lines in the UK and the 10 million adverse development, can we just expand on that a bit more? What timeframe did this come from? What was the size of the book at that time? Just so that we can get some comfort that this would not turn out to be a bigger issue going forward?

Okay. Certainly. Yes. It's related to losses that we did suffer in 2009, in our expectation. As I say, it's split between Australia and the UK. We've done the same sort of job that we did on the financial institutions book, when we looked at the impact. So it's going through subclass by subclass to see what essential impacts might be. We will -- we've taken our usual sort of reserving decisions, based on that analysis.

It's difficult to add a great deal more than that, to be quite honest. We think we've done a fair analysis, given the level of information that we have available to us, right now.

So it was mainly chaining loss picks? It wasn't some specific decisions, which resulted in this?

It's a combination of some small growth incurred on our vices, which has changed our loss picks. So a combination of the two, as you normally expect, at this stage of early development for that accident year.

What was the size of the book at that time?

The size of the book, PI for 2009 will be round about $40 million.

So $10 million and $40 million book. Okay. That's helpful. Just quickly, going back to the discussion on the guidance, you said that it -- the biggest change might be your view on the energy physical damage market. Can you sort of quantify that? Is -- what proportion of the $100 million change is that lowered expectation?

Well, the amount related to energy is a reduction of around about $20 million, if that's helpful, out of that approximate 100 reduction.

Okay. That's all for now. Thanks so much.

A pleasure.

(Operator Instructions)

Your next question comes from Vinay Misquith with Credit Suisse.

Hey, good morning. Could you provide some color on the growth in the financial and professional lines that comes from the new teams? Also, on property insurance, within the (inaudible) primary insurance business?

Yes. Certainly. The growth for the financial and professional lines came from a financial and fiscal risk, as Chris discussed earlier, we've seen a bit better deal flow in that market. So that's -- that particular line is going very well for us this year.

In terms of property, we're seeing decent growth in the UK and also in the US. It's mainly in the UK, but it's related to a couple of specific contracts that we've written rather than a trend, which I think you should extrapolate for the rest of the year. So --.

Just to a certain degree, in the UK, it's municipality business. A couple of deals, some quite big ones, where we took over some business from a competitor at a very significant rate increase. They've been losing money, frankly, because they did no risk management and they've charged the wrong price. We will take that over.

It's an area we know quite well and we do quite well in. But if you're thinking, is this a trend? No, unfortunately it was a couple of specific opportunities that we availed ourselves and we don't see it repeating in the next quarter, unless we're very lucky.

Okay. The financial and professional lines, is that deal flow was up, was that from the new teams?

Well, that team was a team that's been writing for us for, I think, three years now? So it's that one specific team that we did discuss at some length on the investor day, if you remember.

But that's not that new team, it's your old teams that --?

I think the growth is coming from financial and political risk insurance, not from professional lines. I think you're referring to the new US-based team.

Yes.

They have done very, very little premium so far. I mean, it's certainly less than $10 million -- really not statistically significant at all. So the growth is really the established financial risk team. It may be confusing, and I apologize for that, we've bracketed the two things together and it may be, in future commentary, it will be clearer about what's driving the change in premium level.

No, that's great. I was just wondering why you're seeing higher deal flow and how you're managing to gain the business because the market still appears to be soft.

Well, it is. But the banks are starting to lend money again. It really is that straightforward. We have good relationships with the banks that do business in the sort of areas that were discussed in financial and political risk. So we are -- as the volume of trade builds up and as more projects start to be launched, we see more opportunities. It really is that simple.

But then I'd sort of (inaudible) slightly here. We're talking about financial and political risk. We're talking about the insurance of project finance. Your view is it's soft. I don't know how widely shared that view is, but we actually think the pricing power in that area is pretty good at the moment.

Okay. Because you're referring to the political risk piece. I think I was referring to the normal financial institutions' piece. Right. Okay. Fine. So I got that. That's a -- that's helpful.

That's the confusion. Yes. On financial institutions or professional liability attaching to that, yes, I -- we are disappointed by the pricing level. We're not actually -- we're doing, I think, less premium this year than last, as a consequence.

Okay. Fair enough. Then on capital -- yes, sorry. On CAT losses this year, did you have any CAT losses? I'm sorry, I think I might have missed that. This quarter.

Hi, Vinay. It's James Few here. In the first quarter, we, of course, had the Chile quake loss.

Yes.

Where our reserve is unchanged in Q2 from Q1. There was also wind storm Xynthia in Europe, but our loss there was immaterial.

Right. So in the second quarter, there was nothing?

The second quarter, there was nothing except for IBNR.

Okay. What's your normal CAT load that you would say for the second quarter?

It was $110 million to the remainder of the year.

Yes. Okay. Because -- yes. I mean, what I'm trying to get at is how much of the bid was because of lower CAT versus strong underlying fundamentals?

I don't have 100-and -- I don't have the second quarter CAT load in front of me.

Okay. Okay. Fair enough. Then on the acquisition expenses, I believe within the Reinsurance segment, it was mentioned that it was because of lower ceding commissions. Just wondering whether that's one time or whether we should extrapolate that into the future?

Well, one of the things we've been doing in the soft market is reducing our position on some pro rata business, which tends to carry high ceding commissions and as we reduce that, the overall total of expenses reduces.

Okay. Fair enough. Then one last question on the primary insurance side. I found that the accident year loss ratio, ex-CAT, improved this quarter versus last quarter. Now was that because of better property risk business? Is that what I heard on the call?

Yes. Property business is -- has gone particularly well for us in Q2, Vinay. That was the main driver.

Okay. All right. Thank you.

There are no further questions at this time. I would now like to turn the call back to management for any closing remarks.

Well, thank you all for listening. I hope you have a good day. Goodbye.

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