Aspen Insurance Holdings Ltd (AHL) 2010 Q3 法說會逐字稿

Good morning. My name is Dorothy and I will be your conference operator today. At this time I would like to welcome everyone to the Aspen Insurance Holdings third quarter 2010 earnings conference call. All calls have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session.

(Operator instructions)

Thank you. Mr. Fields, you may being 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 September 30, 2010. This press release as well as corresponding supplementary financial information can be found on our Web site 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 that Aspen may make from time to time written or oral, forward-looking statements within the meaning under and pursuant to the Safe Harbor provisions of the US federal securities laws. All forward-looking statements will have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For more detailed descriptions of these uncertainties and other factors, please see the Risk Factors section in Aspen's annual report on Form 10-K filed with the SEC and on our website.

This presentation will contain non-GAAP financial measures which we believe are meaningful in evaluating the company's performance. For a detailed disclosure on non-GAAP financials, please refer to the supplementary financial data in 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 to everyone. Well, last night we reported net income for the quarter of $92.8 million which equates to an annualized return on equity on a net income basis of 13.2% and a combined ratio of 94.4%, book value per diluted share of $38.22, an increase of 15% when compared to September 30, 2009 and an increase of 12% for year-to-date, which reflects a positive contribution from both underwriting and investments.

Importantly, this is the eighth consecutive quarter that we've grown book value per share. For the nine months of 2010 net income annualized return on equity was 10.4% with a combined ratio of 97.2%. Our net income for the quarter was impacted by pre-tax losses of $20 million from the New Zealand earthquake and $40 million from two Enbridge oil spills and the PG&E gas pipeline loss in California.

We've also reported net reserve strengthening for the quarter of $6 million or $0.08 per share. This compares with the net release of $9 million for the year to date. Notwithstanding these claim events, year-to-date accident year loss ratios remain moderately profitable with insurance running at 98.1% and reinsurance running at 96.2%.

A summary of our results is set out in slide three and four of the accompanying presentation. As we look at the P and C industry, particularly casualty lines, prices continue to decrease, although arguable the pace of that change is starting to abate, reflecting the poor economics of much of the business.

Current and future trading additions are challenging and the assessment of the impact of events such as the financial crisis of 2008, the sub-prime crisis of Madoff and so on remains difficult to determine with absolute precision.

Thus far some initial judicial decisions have been in favor of insurers and in fact are reasons to be encouraged by the trends. Nevertheless, in the quarter we saw a few claims developments related to the financial crisis and to casualty lines more generally which we could have charged against existing reserves. However, we've taken a more conservative view and increased our GNR. Such actions are consistent with our historic preserving practices. We currently hold reserves totaling $153 million in respect of events relating to the financial crisis, with paid losses currently of $18 million.

In previous quarters I have commented on the need for companies to continually invest in their businesses. At Aspen we remain committed to investing in our infrastructure and capabilities so that we are well positioned to expand when the time is right. This is not about top-line in the short term, but we believe is key to longer term value creation for our shareholders.

We are building out our US insurance capability, a UK regional platform, and establishing a foothold in the Swiss insurance market, and this has impacted our expense ratio percentage point in the quarter, or $0.05 per share.

I'm particularly pleased at this time with the results from our reinsurance business where we reported a combined ratio in the third quarter of 80.1% with particularly strong performance in our property and specialty lines. Property reinsurance had an excellent quarter with the New Zealand earthquake that struck close to Christ Church at the end of September the only major loss.

There's been no movement in our reported loss of $100 million net of tax and reinstatement treatments for the Chile earthquake during the quarter. The results for specialty reinsurance were particularly strong with our credit insurers unit which we established two years ago, producing better than expected results and an excellent quarter on an accident year basis.

In our insurance segment, we reported a combined ratio of 107.3% for the quarter. These lines were impacted by the pipeline losses referenced above and net reserve strengthening of $9 million or 11 percentage points of combined ratio which primarily relates to our financial institutions and energy and construction liability accounts.

In finance institutions we reported a strengthening of $6 million substantially relating to developments in isolated Madoff and other circumstances. As I have mentioned on previous calls, this area of our business has been fundamentally re-engineered since 2009 under the guidance of Rupert Billers, the co-CEO of Aspen Insurance, who's a seasoned operator in this area. This has been reflected in the performance of this account for the 2009 and 2010 underwriting years.

Elsewhere within our insurance division, property, both in the UK and US, energy physical damage, and the financial and political risk count have all performed very well. I'm particularly pleased with the performance of our US property account, for the benefits of the restructuring we undertook in 2008 are becoming clearly apparent with increased gross written premium and with better underwriting results.

I'd also like to highlight our recent announcement of the appointment of John Cavoris as co-CEO of Aspen Insurance. In addition to overseeing certain insurance product lines on a global basis, he will take on executive oversight of our US insurance operations, working closely with Bill Murray, who leads our US insurance business.

John will share responsibility with Rupert Billers for insurance operations globally, with John particularly concentrating on global casualty, professional liability, management liability, and US property, while Rupert will manage marine, energy, and transportation risk, financial lines, and European property.

John, as you may know, has been a direct of Aspen Insurance Holdings since 2006 and will continue to serve on our [holdings] board, but has in addition taken the role of Chair of US insurance and has joined our group, executive, and underwriting committees.

John's oversight will be of great value as we continue to develop our US platform following the recent addition of admitted market capability, in particular as we seek to reposition our casualty account. Finally, I highlight in addition to the considerable management experience that John brings, he has held positions of chief underwriting operator of Chubb and CEO of One Beacon.

I'll now turn to my quarterly comment on market conditions. In soft markets such as we're now experiencing stringent risk assessment, selection, and patience are essential. Market conditions are undoubtedly tough with pricing integrity especially challenged and terms and conditions starting to come under pressure, but the most part remain broadly stable.

As a result we are scaling back the amount of business that we write in those areas where rates or terms have been most effected. Our diversified model allows us to concentrate on lines of business where rating pressure is less. As I've said before, too many people talk in black and white terms about soft and hard markets. It is simply not a case of feast or famine.

There are still opportunities, although I must admit a lot fewer than a year ago. Finding these opportunities is only half the story. How we execute is just as important. In 2010 we've had the advantage of market timing. For example, in property [cat] reinsurance, we chose to write business early in the year, giving us a better price book as we anticipated prices would be weakening in April and July.

Within our reinsurance segment, we saw price declines accelerating on property cat business as July renewals. This reflected both ample capacity and reduced demand (inaudible) through higher retentions and decreased exposures, although we continue to view this as adequately priced business.

We saw rate increases on Chile loss affected international accounts, however these were lower than we would have liked. We anticipate rate increases in marine energy reinsurance following Deepwater Horizon, where we are keeping a watching brief on new contract design.

Good results on credit and surety reinsurance are now attracting competition, but we are particularly pleased with the continued performance of this book. At nine months we've written premium of $57 million with combined ratio in the low 80s.

Likewise, our agricultural reinsurance account in Europe which we formed earlier this year has a good start and legislation -- legislative changes in Europe are likely to provide additional opportunities in 2011, albeit this comes on a small base.

Casualty reinsurance does remain challenging, with sustained rate pressure on original business, although some comfort can be drawn from the fact that the reinsurance markets generally continue to remain disciplined.

Our international casualty reinsurance account held up well in the third quarter where renewal activity is concentrating in Australia where rates are essentially flat. But in general terms we do not expect the environment to improve until there is a broader recognition of the challenges posed by lower interest rates and future claims.

Turning now to insurance, casualty lines continue to experience significant measure pressures and now represent less than 15% of our gross premiums for the quarter for this segment, down from just over 27% in the comparable period last year.

Property insurance is characterized by ample (inaudible) and aggressive competitor behavior. In addition -- I beg your pardon. In energy property insurance, Deepwater Horizon's loss had the effect of reversing the downward rating trends and the loss of the Aband Pearl drilling unit in Venezuela at a cost to the market $270 million shortly afterwards acted as a further brake.

There's also continued uncertainly surrounding the ongoing regulation of the offshore drilling industry. These three factors should result in a positive rating environment, but may be partly offset by surplus capacity in the market.

In aviation we believe there could be some removal of capacity in 2011 for our line business, but currently rates remain unpressured. WE continue to underwrite very selectively in aviation and have focused on areas of the market such as deductible buy-back insurance.

We have seen new entrants in the financial and physical risk area and we expect price increases to be more muted as a result. However, we have benefit from increased (inaudible) lending and trade flow. Nevertheless, pricing, particularly on the credit side remains attractive and demand reflects banks' growing appetite to lend. I'll now turn the call over to Richard.

Thank you, Chris, and good morning, everybody. The third quarter has produced net income after taxes of $93 million and operating income after taxes, $70 million. The result reflects a positive contribution from both underwriting and investments despite the quarter's featuring several headline losses, including the New Zealand earthquake and the oil and gas pipeline losses in the US which Chris has mentioned.

Our reinsurance segment had a relatively stronger result than insurance. Net income for the quarter is down from the third quarter of last year, which was of course cap free and also featured very strong reserve releases relative to this year. For the nine month to September net income after tax was $220 million and operating income after tax was $181 million. This compares to $348 million and $335 million, respectively, in 2009.

Diluted book value per share continues to accrete strongly, increasing by 15% to $38.22 when compared to September 30, 2009 and 12% since the start of this year. In the quarter diluted book value per share has increased by just over 3%, reflecting $76 million retained income and $62 million of unrealized investment gains net of tax.

I will now highlight some of the key performance metrics for the quarter. Gross written premium for the quarter of $416 million is down on the third quarter of last year, with a decrease coming mainly in our reinsurance segment. Our combined ratio for the quarter was 94.4% compared with 80.3% last year with the movement attributable to the New Zealand earthquake, US oil and gas pipeline losses, and the change in the movement in prior year reserves.

Our combined ratio for the nine month to September was 97.2% compared with 84% last year. The current year has been impacted by 10 percentage points of net losses from cap events in both Chile and New Zealand, in addition to the reduction in prior year reserve releases.

Net reserve strengthening in the quarter of $6 million arises in our financial and professional insurance lines, offset by small releases in other lines. This compares with reserve releases of $44 million in the third quarter last year. For the nine months, reserve releases were $9 million compared with $71 million last year.

Our expense ratio of 31.1% for the quarter, comprising both our acquisition and operating expenses, was up slightly from 304% last year as we have invested in the infrastructure and capabilities to support our growing US, UK, and European businesses. For the nine months, our expense ratio was 29.9%, down from 30.5% last year.

Operating cash flow for the quarter, up $256 million, was particularly strong, up 37% on last year due to the payment of Hurricane Ike related claims in 2009. For the nine months, operating cash flow was $504 million, an increase of 3% over the same period last year.

The financial highlights from our underwriting segments are as follows. I'll start with insurance. The underwriting loss for our insurance segment was $13 million, compared with a profit of $21 million last year. This reflects a combined ratio of 107.3% compared with 88.6% last year, with 11 points attributable to reserve strengthening.

The combined ratio for the nine months in the insurance segments was 101% compared with 99.7% last year, with the movement largely due to the increased reserve strengthening this year. However, the year to date accident year combined ratio of 98.1% have improved from 100.6% last year, led mainly by our property lines in both the UK and the US

Gross written premium for the third quarter was $180 million, down from $194 million last year, with growth in our property lines being more than outweighed by reductions in several casualty classes as we reshape portfolios to optimize profitability.

For the nine months, gross premium -- gross written premium of $655 million is in line with last year. We've growth in our property lines and premiums from our newly established lines in the US balanced by managed reductions in our casualty and marine energy and transportation lines.

Turning now to our reinsurance results, our reinsurance segment underwriting profit for the quarter was $53 million compared with $86 million last year and reflects positive underwriting results across our property and specialty reinsurance lines, coupled with very challenging market conditions in casualty reinsurance. The combined ratio for the quarter was 80.1% compared with 70.1% for the third quarter last year.

As I mentioned earlier, losses from the New Zealand earthquake of $20 million pre-tax added 8 points to the combined ratio in the quarter, with no equivalent cat activity last year. Our reduction in reserve releases from $33 million last year to $3 million this accounts for 11 points of the change.

Gross written premium for the quarter of $236 million is down from $296 million last year as we have -- as we have reduced our production in specialty reinsurance to maintain profitability in the book. For the nine months, underwriting profit for the reinsurance segment was $80 million compared with $247 million in 2009. This reflects a combined ratio of 90.6% for the current period, compared with 69.8% last year.

This year's results have of course been dominated by the earthquake losses in Chile where our pre-tax loss estimate remains unchanged at $112 million net of reinstatement premiums. Net cat losses this year have amounted to $133 million compared with only $2 million last year. The accident year combined ratio excluding the impact of Chile and New Zealand was 80.2% compared with 78.9% last year, reflecting softening market conditions, particularly in casualty reinsurance. Gross written premiums were just over $1 billion for the nine months are line with last year with limited increase in our property catastrophe book, balanced by reductions within other reinsurance lines.

Now turning to investments, net investment income for the quarter is $58 million, broadly flat versus last year. Net realized and unrealized investment gains included in the income statements were $22 million for the quarter compared with $15 million last year. For the nine months, net investment income was $175 million compared with $190 million last year. Net realized and unrealized gains included in the income statement for the nine months were $40 million compared with $7 million in 2009.

Book yield on our fixed income portfolio of 3.91% as of September 30 this year was down 14 basis points on the second quarter of this year as pressure on reinvestment rates continues. This compares with a book yield of 4.13% at the end of the third quarter last year. Average duration of the fixed income portfolio is marginally up at 3.1 years from 3 years at the end of the second quarter, but is down from 3.3 years at the end of the third quarter last year as we have taken action to position the portfolio in the current low yield environment.

Average credit quality of the portfolio remains AA plus. We have no other contemporary impairment charges in the current quarter and less than $0.5 million in the year to date. Total investment return was $148 million or 8.5% annualized for the quarter compared with $180 million or 11.4% annualized in 2009. For the nine months, total investment return was $391 million or 7.5% annualized compared with $349 million or 7.5% annualized in 2009.

At the end of the third quarter, there were $362 million of net unrealized gains pre-tax in the available for sale fixed income portfolio compared with $293 million at the end of the second quarter and $186 million at the start of the year, with the growth attributable to tightening credit spreads and reducing interest rates.

Turning now to our capital position, total assets have increased during the quarter by 3%, just over $8.8 billion. Our total shareholders equity is $3.4 billion, up from $3.3 billion at the end of the second quarter as a result of increases in returning -- in retained earnings and unrealized gains in the investment portfolio. We continue to assess our capital position in light of our growing balance sheet strength and also challenging trading conditions in many of our lines as we look towards 2011.

In the third quarter we initiated an open market share buy-back program as the cat season evolved, purchasing just under $8 million of shares at an average of just over 78% of the opening diluted book value. In the fourth quarter we will continue to look for opportunities to actively manage our capital base for the benefit of shareholders.

Turning now to guidance for 2010, which is set out on slide 20, taking into consideration our catastrophe losses in the year and pervading market conditions, we anticipate our full year combined ratio to be in the range of 94% to 99%, including a cat load of $40 million for the fourth quarter, assuming normal loss experience. Our full year gross written premium guidance is reduced to $2 billion plus or minus 5% as softening prices, particularly in casualty lines in both insurance and reinsurance caused less business to meet our hurdle rates.

Ceded premium guidance of between 8% and 10% of gross earned premium remains unchanged from my last update. Finally, our effective tax rate range is 9% to 11%, depending on the distribution of losses and the occurrence of catastrophic events during the last quarter. That concludes my comments our third quarter, our capital position, and updated guidance for 2010, and I would now like to turn the call over to Q and A.

Dorothy?

I wonder if I could have the first question, please?

Dorothy, are you with us?

(Operator instructions)

Your first question comes from Beth Malone with Wunderlich Securities.

When you incur those kinds of catastrophes, what decision making do you use to determine whether you're going to preannounce, because when you had the Chile loss you preannounced it and it was actually smaller? I'm sorry, it wasn't smaller, but you didn't preannounce it.

So that's my first question. The second question on the pipeline loss is, has this incident had any impact on the pricing in that market or how you're underwriting those risks or the opportunities for writing that type of risk?

I think, Beth, Rich will take the first part of that and then I'll talk about the pipeline losses afterwards.

Yes. Thanks, Beth. In terms of the Chile loss, we did actually preannounce. When we think about the overall materiality of the loss quite clearly, how important it is to our quarterly results, so Chile, obviously a far bigger incident for us than the New Zealand earthquake. So that was our sort of decision making process, would be roundabout overall materiality to our quarterly results and that really is how we go about thinking as to whether we should prerelease or not.

Okay, and then on the pipeline losses, Beth, I'd put a few things together, because this is the same book of business that has seen Deepwater Horizon, which is obviously the biggest and ugliest thing any of us has ever witnessed. And I would say the whole area of energy, offshore energy property, energy liability is an area where prices are set to firm. They are not -- they are firming a little bit at the moment and the market is mostly thinking about how to respond to liabilities for offshore drilling and that's going to require probably some legislative change with Congress needing to say what cover is needed and then an insurance response.

I would say those things and some other things mean that the business looks like it's going to be better priced today and a bit better again than that tomorrow, going on. The other thing to say, though, is actually we think this is going to be a profitable book for the year. We're expecting to bring this one in -- nothing surprising happens the last quarter, somewhere in the early '90s combined ration, which is not a bad result, given these type of pipeline losses and Deepwater Horizon and so on.

The thing about it, though, it's volatile stuff. We did a quarter like this a couple of years ago where you can have nothing for quarter after quarter and then bang, bang, bang, you get three, four losses in two quarters. And we just had one of those quarters, so it's a bit surprising. It's volatile, but it doesn't actually make it necessarily an unprofitable book of business. Doesn't do much for the quarter, I admit, but the book of business itself I think is probably okay.

Okay, and then another question on the reserve development, financial reserve development. Has that -- have you made changes to your -- how you're looking at that business or the underwriting of that business as a consequence of this reserve development, or was this kind of development already developed on that? Have you changed how you're looking at this going forward?

Which business? Do you mean again the energy related or --

No, no. I'm talking about the reserve development that you experienced on the financial?

Okay, changes to the underwriting of financial institutions is where the business took place a couple of years ago and we're continuing to sort of execute on that plan. And if we look at our underwriting year figures in this book they're quite encouraging actually. The development that you saw in the quarter actually relates to, I think, to policy written in 2008, so it's quite an old one.

And here, I mean what I'm really saying, we gave you the figures on the call in terms of paid losses of 18, total reserves about 153 million. There are uncertainties about this. I mean no one knows exactly how it's going to pan out and it's to finally judge things whether when you see something new you say it's part of the IVNR we already set up or we're going to increase IVNR. So far, as we said on the call, core decisions are encouraging.

It looks like the insurance industry is basically in the right here and there aren't so many insurance plans, but I think there's enough uncertainly that we felt a bit of conservatism now, which hopefully will be rewarded in the future with some reserve releases, that's a more prudent course of action to take than sort of hope for the best now and strengthen later.

But to recap, that's quite a long answer to a good question, I think the underwriting changes took place two years ago and what you're seeing today is a reasonably conservative, reasonably prudent approach to reserving from events that are actually a couple of years old now.

And does that same business, does that encompass the risk that we're seeing with the foreclosure, mortgage foreclosure debacle that the marketplace is going through right now? Do you see that you have exposure on those types of risks as well?

I'm not aware that we have ongoing exposure to that. I mean these are very complicated situations and one has to look at the original cause of loss, but the proportion of our book that's US related and US bank related is very, very small indeed today.

Okay, thank you.

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

Yes, thank you. A few quick questions and one is, the pipeline loss that you had, were these losses part of a syndicate or do you take the whole loss?

We don't take the whole loss. There were three different incidents that we're talking about Josh.

Yes.

A couple of them were the couple of Enbridge spills that you probably see in the news. One was the Kalamazoo River loss. The other one was just outside of Chicago and the final one was the gas pipeline explosion, PG&E.

So in terms of comparison the scale of those losses compared to your liability, where do you stand in the syndicate that took these things generally? Are you -- what percentage of that?

Well, it's sort of different circumstances for each layer. It's one of these ones where I can't give you a very, very straightforward answer, I'm afraid. And that's one of the reasons we've actually aggregated the total loss to $40 million from the [three]. I'm sure you'll understand.

Okay.

For the usual commercial reasons, we don't want to get into the individual claims.

But Josh, I mean I -- the reason we're not answering the question is we actually haven't got that data in front of us, but it's a coinsurance market. It would be unusual for us to have more than 20% share. It would be unusual for us to have less than 10% or 15%. Specifically on these three I can't tell you because I haven't got it in front of me, but they are substantially coinsured around the place.

I didn't get the sense of the previous question actually. We do see this volatility in this book of business. For some time it's been a bad quarter. We've had bad quarters before. We actually think the odd turn for the year is going to be okay and I'm not saying that we've got a problem with the underwriting of this or a problem with the reserving of it. We've just got this kind of bumpy ride that you sometimes see writing energy liability business.

Understood. And the second question relates to if we disaggregate the financial professional lines reserve strengthening from the insurance book, how big of a reserve strengthening is that portion and what does the rest of the reserve (inaudible) look like for your business in the quarter?

Total insurance reserve strengthening was just under $10 million, of which round about $8 million was associated with our financial and professional lines.

So in aggregate it wasn't that just this one book here. There were no -- it wasn't a larger amount of reserve strengthening for these lines offset by reserve releases elsewhere in the insurance book?

Correct.

Okay. That answers my question. Thank you.

Thanks, Josh.

Thanks, Josh.

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

Yes, thanks for taking my questions. I was first wondering if you could touch a bit on capital management. Obviously you did start the open market repurchases in the quarter, but the quarter did seem maybe a bit light. I guess is that due to wind season and how are you thinking about fourth quarter and sort of what level we could see there?

Well, Dean, you're absolutely right about the timing of when we started the program, but my words I used were chosen very carefully, which is we've initiated open market share buy-back program. I'll repeat what I say every quarter. We determine, with hopefully as much speed as we can manage, how much capital we can efficiently deploy in the business and when we recognize what the available number is we give it back to shareholders as quickly and as efficiently as possible.

The change which you've seen in the quarter is us starting to use open market as well as thinking about larger capital actions. Those are the things that we're thinking about as we move into this quarter on a basis of the strength of the balance sheet, which hopefully you can see in the numbers. So hopefully that's as much of a guide as will be appropriate for this point.

Do you have, by any chance, a number you'd be willing to share with us as to what you're view on the potential access capital position is?

I'm sorry. I don't think it would be appropriate to give out that sort of indication.

Okay. Moving on to look at, I guess, the expense side, it was maybe a bit higher there, and I know you pointed to a few issues that drove that. Are those type of costs and the sort of infrastructure buildout, is that something that's going to go away or should we expect that to stay in the expense ratio for a while?

You should expect that it will be staying. It's one of the features of the soft market, in a way. The Aspen approach to this is to make sure that we're in the best possible position for the rates to recover, which tells me we are making some investments which we think are in the long term interest of the shareholders. So yes, it will persist and in some circumstances it will take a matter of time before we can generate really profitable material premium from those investments. We think that's the appropriate thing to do to manage the cycle.

Okay, thank you.

Okay, thank you.

Your next question comes from the line of Amit Kumar from Macquarie.

Thanks. I guess just a quick follow-up on the last question. In terms of capital management, how do you view and accelerated share buy-back or a special dividend?

I would prefer the concept of the accelerated share repurchase. It's a mechanism that we've used before. I think it's a great way, particularly when the shares are trading below book, to create some value for shareholders in an efficient way. So I think that's pretty straight forward in terms of sort of basic financial engineering.

Okay, that's helpful. And just going back to the discussion on Enbridge, if I understand this correctly, Enbridge has said that they expect roughly 300 -- in fact the number is $295 million to $400 million from insurance recoveries. Now, you said it would be unusual for you to have more than 20% proportion. If I do the math that seems to be a higher number than what you have reported. Can you just give some more color on this?

Sure, and the number we've reported, we've reported a number around about $40 million, but that's connected with three different incidents. It's connected with two separate Enbridge incidents and the oil --

PG&E.

-- pipeline explosion in California. (inaudible - multiple speakers).

Can you break that out?

No, I'm sorry. I don't think it would be appropriate to break them out for the usual commercial reasons associated with reserving specific claims.

And are you reserved to the full limit?

I really wouldn't want to get into that on particular claims.

Okay. Just quickly moving on, in terms of the adverse development, if I understand this correctly, this was $6 billion from one policy related to a Madoff loss. Previously you've had adverse development from financial advisors in Australia and UK Can you just update us on how that has developed this quarter?

Yes. I mean that happened to have been a large feature of -- you're referring particular to the financial advisors issue?

Yes.

That hasn't been a major feature within Q3. It's part of the usual reserving process every quarter to look at these lines which have had activity in particular. That hasn't been a major feature of our reserving exercise or particularly strengthening this time. And the reasons why we talk about that Madoff incident are that that was the major driver for the numbers we've quoted in reserve to insurance.

Elsewhere I think it's sort of steady as she goes, largely using the reserve I've quoted a couple of times on the call. $153 million covers the sub-prime crisis in the US, the Madoff affair in the US, and other risks associated with the crisis. For example, Irish banks, Anglo Irish Bank in particular, three banks in Iceland -- these are things we talked about a couple of years. And -- every situation is different.

Every jurisdiction has its own legal system. In places like Iceland and Ireland I don't think it's even been decided that there's going to be any prosecutions or actions against the boards of those companies, which obviously would remove the need for us to be holding reserves for DNO policies. But we are holding such reserves. So mostly what we're saying, we monitor court proceedings in the US and around the world, and while there's nothing final and conclusive and definitive, so far, so good. I think the industry, and Aspen is part of it, is generally seeing a succession of green lights.

But I think we just took the view, with uncertainly still to go, more stage in this process, that reducing reserves was wrong. We thought with Madoff, which is a slightly new situation, we add a little bit rather than sort of take it out of the IVNR that had been established for previously known situations.

Got it. And just -- I guess just going back to my previous question. You can't talk about if it's fully reserved or not, but just based on your comments, you do feel that this line will be profitable for 2010, is that correct?

Well, obviously I don't know what's going to happen tomorrow, but let's say if the last quarter runs on an expected basis, then I think we make something close to 10% underwriting margin on premium for the year for this book. It's a book with -- you know, long tail book, so early '90s is a pretty nice result actually.

If I could just add, the reason why we've drawn attention to these particular losses this quarter is just because of the unusual concentration within one quarter. The sort of losses we've experienced are exactly what we should be experiencing in this line, but the losses we've had to date actually match pretty well with our expectations of this type of loss for the year to date. It's just that they've happened in one particular quarter, which we thought would be helpful to explain the financial performance that we've just recorded.

So just related to that, Enbridge had three different covers. One is probably in business interruption. Other was general liability and third was pollution liability. What bucket did you loss fall under?

I think our general exposure is in respective liability and pollution clear-up.

Okay. Okay, thanks. Thanks for answers.

Okay, Amit, thank you.

Your next question comes from the line of Jay Gelb from Barclays Capital.

Thanks and good morning. I think one of the issues people will be interested in exploring is since the pace of loss reserve releases peaked in the third quarter of 2009 there's been sort of a steady decline in terms of that overall pace and then Aspen turned to unfavorable development in the most recent quarter. So I guess what the question is, to what extent should we anticipate that there won't be further adverse development going forward?

Very good question. Couple of things I would say. 2009, particularly Q3 2009 was an unusually strong reserve relief. It's one of the challenges we've had when looking at these numbers, the swing between the two quarters being round about $50 million. So that, I think, speaks to an unusually heavy reserve release in 2009, more than the impact that we've had in Q3 this year.

You're right. The release problem has slowed down somewhat in 2010, but what I would say is there reserving philosophy remains absolutely unchanged and the quarterly process has just taken into account development on particular circumstances that we think are reasonable to reflect in the results. So I think the important thing to recognize is the reserving philosophy and the prudence that we apply has remained unchanged. It's just that this year quarterly variations have come through in the sort of figures that you've seen relative to last year.

But is it fair to say that Aspen will have little if any lift going forward from reserve releases?

No, I don't think it's fair to make that statement, but clearly we cannot predict the future. Jay, I think what Richard is saying to you is we believe our reserving approach has been conservative from the beginning of the company. I think we've been conservative in the way we've put reserves away and we've been conservative in the way that we release reserves. I would like to be continuing to be conservative in the way we release reserves. If we feel really comfortable, we'll do it.

And however long this soft market lasts, I want to have the potential to seek claims settling for less money than we put away for them. And that's how you really want to see the reserve releases coming. What you don't want to see is an attitude of mind in the quarter that calls for release from reserves and is less justified.

I think the mood -- I think of the mood in the industry today and within the Company. It's appropriately gloomy. Prices are low. There are some things related to the financial crisis that we just don't know how they're going to pan out. Casualty terms are weakening. Generally, holding on to reserves rather than releasing them seems to me a wise way to go, but that's not the same as saying the level of reserving looks thin.

I think we're something like on a diversified basis, we're reserved at the 86 percentile in terms of where we think (inaudible). You know what I mean, 50 percentile meaning as likely to be too high as too low. Well, we're 86, which I think is a pretty comfortable reserving position and one any given quarter, anything might happen based on what we see in the quarter. If your question is over time, over the next few years through the timeline of this sort of market have we give up hope of seeing reserve releases? Absolutely not. I would be astonished if that was the case.

But any given quarter like the one we've just had, you've got to react to what you see and what you feel about it and caution, prudence, conservatism, is going to be the watchwords. So I don't want us to have massive reserve releases in a quarter. I don't -- I don't like running the business in a way that says our accident year numbers are bit thick, but, hey, don't worry. Reserve releases will make it all right in the bottom line. That's not and never has been our philosophy.

I see. Thank you.

Pleasure.

Thanks, Jay.

(Operator Instructions)

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

Hi, good morning. On the adverse reserve development on Madoff, could you help us understand what changed this quarter that made you put up a reserve versus the past?

I think it was notification on one specific incident, Vinay. So there's nothing sort of systemic in there. It's just new information has come to light in the usual reserving process.

So essentially, Vinay, we had a choice. We could -- that was anticipated in a general IVNR or we could increase the total reserves. And in some ways the easy decision would have been to say let's take it out of the general IVNR. That's what it's there for. And the more conservative decision, which we sound a bit technical is the one we actually took, which was to increase total provisions. But it was, as Richard said, one particular new notification.

Thanks. What risk do we have that if you receive some more notifications that you may have to take the reserves up?

You know, this is business that's done on a sort of claims made or losses reported basis. So it's not long-tail in the sense that [casualty's] long-tail. Mostly we ought to know what was happening and we -- it ought to be reported by now, so I think the risk is not zero, but I think the risk is limited.

But please, if we find another one this time next year or something, the don't tell -- don't tell me that I've denied the possibility. But I think it's relatively unlikely that we'll see that. I think what we have to worry about, in fact, is not new notifications. I think what we have to worry about is particular claim settlement patterns and court actions. As I said a few times already, initial decisions tend to be positive, encouraging, but that could reverse at any time, which would cause you, perhaps, to re-evaluate the potential for already known situations.

Okay, fair enough. The second question is on the reinsurance accident year loss ratio (inaudible). They seem to have improved about 8 points year over year. Could you help me understand what's driving that?

Just checking that number, actually, Vinay. I think it's actually worsened by a couple of points, I believe from 78% to around about 80%.

I'm talking about accident [ex cap].

Yes.

Okay.

That's how I calculated it. I think I referred to that in my remarks.

Okay, that's on the reinsurance side.

Yes.

Okay, so maybe I'm missing something here. And then finally on share repurchases, you mentioned something about starting an accelerated share repurchase program. I'm not sure if I heard that correctly. Could you just add color on that, please?

No, I said we'd initiated a share buy-back program, but that's just open market. I didn't say we'd initiated and accelerated share repurchase. I said that both mechanisms are and could be an effective way to give capital back to our shareholders and that's what we're thinking about in Q4.

And that was started in the third quarter, correct?

Correct.

Okay, thank you.

Thanks, Vinay.

There are no further questions at this time.

Thank you for joining us. Goodbye.

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