Aspen Insurance Holdings Ltd (AHL) 2010 Q4 法說會逐字稿

Good morning, my name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Insurance Holdings fourth 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. Mr. Fields, you may begin your conference.

Thank you, and good morning. The presenters on this morning's call are Chris O'Kane, Chief Executive Officer and Richard Houghton, Chief Financial Officer of Aspen insurance holdings. Before we get underway, I would like to make the following remarks. Yesterday afternoon, we issued our press release announcing Aspen's financial results for the year and quarter ended December 31, 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 factors section in Aspen's annual report on Form 10K 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 closed disclosure on non-GAAP financials, please refer to the supplementary financial data in our earnings slide presentation posted on the Aspen website. Now, I will turn the call over to Chris O'Kane.

Thank you, Noah, good morning. I'm pleased to announce a good set of results for 2010 with diluted operating earnings per share of $1.02 in the quarter and $3.03 for the full year, reflecting a positive contribution from both underwriting and investments and the benefits of our capital management activities during the year. We increased diluted book value per share by 14% to just under $39 from $39 -- I beg your pardon, $34 at the start of the year. We reported net operating income after tax of $266 million and an operating ROE of 9.4%. Net income after tax amounted to $313 million with a net income ROE of 11.2%. This was achieved against a backdrop of a difficult trading environment with continued downward pressure on prices and interest rates remaining at historically low levels.

The year was also characterized by a number of significant natural catastrophes, and our results demonstrate very clearly the benefit of our dual side approach as we absorbed $181 million of catastrophe losses from the Chile and New Zealand earthquakes. Our performance in the fourth quarter was particularly strong with an annualized operating ROE of 12%. We were also active in the capital markets during the final quarter of the year as we repurchased over 6 million shares for a combination of open market purchase and an accelerated share repurchase in addition to issuing $250 million of debt on the back of favorable debt market conditions. This means that we will return a total of $408 million to shareholders in 2010 and underlines our strong commitment to capital ventures. Market expectations of increasing interest rates impacted our investment portfolio in the fourth quarter, but this was more than offset by retained earnings and the impact of the share repurchase with an increase just under 2% and fully diluted book value per share.

Richard will discuss the results in more detail, but first I would like to highlight a number of points for each of our two business segments. Starting with Reinsurance, we reported underwriting profits for the full year of $134 million and a combined ratio of 88.2%. I'm particularly pleased with our results given the impact of natural catastrophes on the industry which reflects the investment we have made in building our Reinsurance offerings in both product and geographic terms. Each of our four Reinsurance lines business made a positive contribution to earnings. In our Property unit, we benefited from a particularly strong performance in our non-catastrophe lines, risk excess, (inaudible) and pro rata treaty. These generated profits of $67 million at a combined ratio of 73.6%. This is an excellent result and has been achieved notwithstanding very tough trading conditions.

We also had an outstanding result of the specialty reinsurance which reported annual underwriting profits of $55 million at a combined ratio of 79.3%. Here, the growth in both top line and profit underlines our ability to seek out opportunities independent of general market conditions. Two such examples are our credit insurance reinsurance and our agricultural products reinsurance. Credit insured has been profitable since inception 2009, and our non-US agricultural line, which we established last February, exceeded both our premium and profit expectations for its first year of operations. The results from our insurance segment were mixed, with many units performing very well and good progress being made in realizing a number of strategic objectives.

Our marine, energy and transportation insurance lines generated $44 million of underwriting profit at a combined ratio of 89.4%. Notwithstanding the volatility exhibited by the slide in the first quarter, it is good to note this very favorable results for full year. Property insurance lines also performed well, with a combined ratio across both our US and UK property accounts of 77.5%. Aviation's combined ratio for the year at 90.1% is again likely to be a top quartile performance in the whole industry, if not top decile. Industry reports on the aviation insurance market have been bleak, with airline losses last year at $2.15 billion, exceeding airline premium of $2 billion. We believe that the airline combined ratios for the industry as a whole are in excess of 120%, the fourth successive year of loss. I'm pleased to say that our approach, which is focused on a certain niches within this account such as deductible buyback while deemphasizing US airlines and products liability for critical components, has once again delivered profitable results.

In our casualty line of business, our UK employees liability account is another area I would like to single out where aggressive cycle management has delivered excellent results. Finally, I would like to highlight our financial and political risk book as an area where we have been able to leverage our knowledge and expertise very successfully. Our loss ratio for this class is 39.2%, which we believe puts us again in the top quartile for the industry and underlines the value in our approach.

Some areas of our insurance business are not achieving acceptable results. Our US casualty account is one such area where we have taken strong remedial action. As you know, John Cavoores joined our executive team in October last year as co-CEO of Insurance, having been a non-executive director of Aspen since 2006 and is overseeing our US insurance business. John hit the ground running and in three very busy months, has taken us out of several underperforming areas, notably contracted insurance. He also commissioned and completed a detailed ground up claims review with external input which has been used by our actuaries to put our reserves on a very strong foundation.

I would like to emphasize that building a profitable franchise in the US insurance market remains a core component of our strategy and will be a key area of focus for us again in 2011. We have been working through the process of reactivating all the licenses of the Admitted shell company we acquired last year, and we expect to be able to write Admitted business in 48 states at the end of the first half of this year. We have not only hired new underwriters with demonstrable profitable track records, but built a robust infrastructure with the addition of actuarial claims and legal expertise on the ground. I am deeply conscious of the challenging market conditions, but believe it is important to lay the foundation of a significant and profitable revenue stream in the US. It is all about being prepared and ready to act when market conditions permit.

Elsewhere in insurance, we have continued to invest in our franchise and have been able to extend our distribution through the build out of a regional platform in the UK and the establishment of a selective offering for the Swiss insurance market, which leverages our expertise. By establishing close proximity with our customers, we can offer these spoke solutions that directly meet their needs.

I would now like to comment on the January renewals and market outlook. We've also included on page six of the slide pack a full review of business performance and market outlook by major line within each segment. Starting with Property Reinsurance. The first of January renewals proved competitive as ample capacity, exacerbated by the weak economy and higher seeded retention acted as a driving process. We see on average 7% decline in rates, although loss affected areas have seen some rises. Terms conditions are generally holding up, although we are increasingly seeing a press for widening of coverage from both the Reinsurance contracts and in the original business. Competitive pressure was particularly acute on European and Asian business. Conditions within the Casualty Reinsurance market remain challenging. We're continuing to see rate decreases on original business of around 2% to 5%, but this varies by line.

Terms conditions are generally remaining stable and acceptable, although we are seeing a request for increases in seeding commission, which the market is resisting overall. The 2011 January renewal season in Casualty Reinsurance has seen continued pressure and as a result, we will need to deploy capacity on business where adequate returns can be achieved. This action has resulted in a 25% reduction in premiums written. Within specialty read, for our London account, treaties with energy and energy liability exposures and losses from Deepwater Horizon have seen anything from 10% to 40% rate increases, averaging out at around 20%. The non-US insurance market remains highly competitive. We have reduced our exposure to terrorism business overall as rates have continued to reduce with broadening of terms and conditions away from short terrorism cover to include cover for strikes, riots and civil commotions, along with coup d'tat and civil insurrection.

January 1 is not a major renewal date for insurance, and the picture is little changed from the one that I described at the third quarter. Overall, both property and casualty lines continue to experience significant competitive pressures. Within marine, energy and transportation, losses in the energy market prompted rate firming. Uncertainty surrounding the ongoing regulation of the offshore drilling industry continues, and reinsurance capacity initiatives have to be added to the equation, which we expected this to have a positive impact on pricing overall. In aviation, we believe that there could be some removal of capacity in 2011 for airline business, but with no major accounts renewing until at least April, we will have to see. There have been a number of new entrants for the first of January within the financial improvement risk area. Pricing adequacy is generally more satisfactory, particularly in credit, and we continue to identify opportunities in this market.

I would now like to comment on the tragic and unprecedented events in Australia in the past six weeks or so. Although we know the Australian market very well and over the years have witnessed substantial Australian Casualty Reinsurance account, we have for many years felt that the prevailing property rates do not reflect the considerable natural hazards that the continent faces. Consequently, we have obtained only modest involvement as of property catastrophe reinsurer on domestic Australia placements. And in particular, we tend to avoid what we regard as under priced lower layers in aggregate covers. This means that we do not participate -- I'm sorry, we do not anticipate incurring substantial losses from the floods or cyclone damage, unless any one event produces losses large enough to trigger reinsurance placements for its national customers, which looks unlikely.

As the accompanying chart on slide 19 shows, we believe that four flood events, in addition to Cyclone Yasi, have taken place. The floods in central Queensland commencing on twenty-fourth of December are likely to result in a market loss in the range of $1 billion to $2 billion, and this should cost us less than $10 million, which we regard as being within the IBNR for the quarter. We expect no losses from the second flood in southeast Queensland, which commenced on fourth of January. The more significant south Queensland flooding, which commenced on the tenth of January, is likely to result in a market loss in the range of $2 million to $4 million, and we expect our losses to be less than 1% of the estimated market loss. In respect of the fourth flood event, which commenced in Victoria on the thirteenth of January, based on estimated market losses of between $500 million to $1 billion, we again expect our losses to be less than 1% of the estimated market loss.

Lastly, in respect to Cyclone Yasi which made landfall on the second of February, based on initial market loss estimate of $360 million to $1.5 billion, our losses are not expected to be material. We are providing these figures to you this morning because we want you to have as good an understanding of our exposure to these Australian events as we have. You should preset, however, that these are early estimates and that as time goes by, there is a potential for significant individual risk offers emerge which could ultimately require us to revise these estimates.

Finally, I will comment briefly on the likely impact on our political risk from the ongoing developments in Egypt. The political risk market's exposure to Egypt comes from three separate areas -- physical damage, government action or intervention, and credit payment or performance risk. Starting with physical damage, our exposure rises chiefly through coverage and worldwide programs as we tend to avoid Egypt-specific terrorism cover. We do have some exposure to government action or intervention and to credit payment or performance risk, but given the types of counter parties and the extent and types of security underlying the risk we have assumed, we do not anticipate any material losses at this stage within our political risk book. I would now turn the call over to Richard.

Thank you, Chris, and good morning everybody. I can report a solid set of results for the quarter with net income after tax of $93 million reflecting positive contributions from both underwriting and investments. Operating income for the quarter was slightly lower at $86 million. We were also very active in the capital markets this quarter, and I'll return to this later. For the full year, net income after tax was $313 million, and operating income after tax was $266 million, impacted by $150 million of net after-tax losses from the earthquakes in Chile and New Zealand. This compares to $474 million and $464 million respectively in 2009, a year with no material natural catastrophe losses in our book. The full year combined ratio of 96.7% compares with 84.1% last year and includes nine percentage points of earthquake losses. The accident year combined ratio, excluding earthquake losses of 89.9%, is in line with last year.

Our effective tax rate for the full year has reduced from 11.4% in 2009 to 8.1% in 2010 as a result of proactive fiscal and balance sheet management and distribution of underwriting results across our entity balance sheets. In the quarter, dilutable value per share has increased by just under 2%, reflecting $76 million of (inaudible) income, $40 million in shareholder value created as a result of stock repurchases, and net unrealized losses from the investment portfolio of $108 million, driven largely by increasing interest rates, particularly in November and December. For the full year, diluted book value per share has increased by just under 14%, with $243 million of retained income, $68 million from capital actions and $57 million of unrealized gains in the investment portfolio net of tax.

I would like to comment briefly on the strength of reserves in our book and put into context some of the reserve movement that I will refer to later. At the end of 2009, we disclosed our actuarial estimates with our total reserves of $3.3 billion was set of the 86 percentile of possible outcomes, giving a margin of $250 million over our mean best estimate. The total group number includes the benefit of our assessment of the impacts of diversification on our reserves. By the end of 2010, we have further strengthened our reserves so that held reserves of $3.8 billion are estimated to be at the 87.5 percentile of probable outcomes. And our margin over mean best estimates has grown to approximately $320 million. Within these numbers, our reserving strength of our Reinsurance business has increased marginally from the 73 to 74 percentile, and we have strengthened held reserves in insurance from the 69 percentile to the 72 percentile before allowance for diversification. As we mentioned before, we anticipate releasing our loss triangles in the first quarter of this year.

I will now comment in further detail on our segmental results, beginning with Reinsurance. Results for the quarter in our Reinsurance segment was strong, despite a revision in estimated losses from the New Zealand quake were, due to significant uncertainty, we have reserved at a total loss for Aspen share on all domestic placements. The revisions were estimates from the New Zealand earthquake of $33 million gross of tax, added 11 points to the combined ratio in the quarter. Our Reinsurance segment underwriting profits in the quarter was $54 million compared with $81 million last year and reflects positive underwriting results, particularly from our Property and Specialty Reinsurance lines. The combined ratio for the quarter was 81.9% compared with 71.9% last year. Gross written premium for the quarter of $153 million is down from $170 million last year, mainly in our Property and Casualty Reinsurance lines.

Our Property Facultative Reinsurance line has performed extremely well with a single digit loss ratio for the full year on net earned premium of just under $40 million. Our property risk excess line produced a loss ratio of sub 40% for the year with net earned premium of just under $86 million. Our specialty Reinsurance lines contributed to profitability across the board, in particular, our non-US agriculture business which produced a loss ratio of 65% in its first year of operation. Reserve releases for the quarter were $36 million compared with $23 million last year, and reserve releases for the full year were $66 million compared with $104 million in 2009. For the full year, underwriting profit for the Reinsurance segment was $134 million compared with $329 million in 2009. This reflects a combined ratio of 88.2% in 2010 compared with 70.4% last year. The accident year combined ratio, excluding Chile and New Zealand, while 79.1%, is in line with 2009 as the performance, while Property and Specialty Reinsurance lines have compensated for ever more challenging market conditions in casualty reinsurance. Gross written premiums for the full year of just under $1.2 billion are in line with last year, with limited increases in our property catastrophe book, balanced by reductions within other Reinsurance lines.

Turning now to our insurance results. Overall performance of our insurance segment for the quarter has been mixed with continued reserve strengthening in our US casualty business, where we have completed a comprehensive review of exposure to New York contractors business written in 2009 and prior. However, we have produced much stronger performances elsewhere in the portfolio. In particular our marine, energy and transport lines, which have achieved a loss ratio in the mid 60s for the year across the book on net earned premium of just under $410 million. Our property insurance lines in both the US and the UK has performed very well, with the loss ratio in the low 40s for the year against net earned premium of $120 million.

The fourth quarter underwriting loss for our insurance segment was $18 million compared with a profit of $12 million for the corresponding period in 2009. This reflects a combined ratio of 108.8% compared with 93.5% last year. Seven points of the movement is attributable to the change in prior year reserves. The current accident year combined ratio of 102.6% is up from 90.4% last year and reflects changing market conditions, particularly in casualty and professional lines. For the full year, the combined ratio for the insurance segment was 103.1% compared with 98.1% last year which primarily reflects increased reserve strengthening in 2010. The marginal increase in the accident year combined ratio to 99.2%, reflects actions taken in 2009 and early 2010, particularly in casualty insurance on our financial products lines which have adjusted our risk profile to enhance profitability.

Gross written premium for the quarter was $260 million, up from $236 million last year, with the increase attributable to our marine, energy and transportation lines and also financial and professional lines. For the full year, gross written premium of $950 million is up marginally from $891 million in 2009, with growth coming in our property and financial products classes. However, within our US casualty insurance line, written premiums in our New York construction business decreased from $20 million in 2009 to just over $2 million in 2010 as we reshaped the portfolio. Now, turning to our investment performance. Net investment income for the quarter is $57 million, broadly in line with last year. Net investment gains included in the income statement were $11 million for the quarter, compared with the $8 million last year. For the full year, net investment income was $232 million compared with $249 million last year. Net investment gains for the full year were $51 million compared with $11 million in 2009, driven by the same investment to fund capital repurchases.

Book yield on our fixed income portfolio of 3.7% at December 31, 2010, was down 21 basis points on the third quarter of 2010 as pressure on investment rates continues. This compares with a book yield of 4.22% at the end of 2009. We perceived one of the major risks to the market value of our fixed income portfolio to be a sustained rise in interest rates. To manage this, we entered into $500 million of interest rate swaps, which have reduced average duration of the fixed income portfolio to 2.9 years at the end of 2010 compared with 3.3 years at the end of 2009. We have entered into a further $200 million swaps since the end of the year. Average credit quality of the portfolio remains AA plus, and we have no other than temporary impairment charges in the current quarter with less than $0.5 million for the full year compared with $23 million last year. For the full year, total investment return was $336 million, or 4.8%, compared with $378 million, or 6.1% in 2009. At the end of the year, there were $240 million of net unrealized gains pre-tax in the available for sale fixed income portfolio, compared with $362 million at the end of the third quarter and $186 million at the start of 2010, with the movement in the fourth quarter driven by increasing interest rates.

Turning now to our capital position, in the fourth quarter, we repurchased just under 6.3 million shares through a combination of an accelerated share repurchase and open market share repurchase activity. Over the full year, we repurchased 13.8 million shares, or just under 17% of our opening issued shares for $408 million. We also issued $250 million of ten year senior notes and a 6% coupon, taking advantage of favorable market conditions. This takes our total capital, including long-term debt, to over $3.7 billion. Our total debt to equity ratio, which includes our preference shares, is 22.8%, subsequent to the debt issuance.

Turning now to guidance for 2011, which is set out on slide 21. We anticipate market conditions to remain challenging in 2011, and in the absence of a significant market event, expect down pricing pressure to continue in the majority of our business lines. To that end, our full year combined ratio is forecast to be in the range of 93% to 98%, including account load of $170 million, or nine percentage points of combined ratio. Our gross written premium for the full year is expected to be $2.1 billion, plus or minus 5%, with seeded premium between 8% and 12% of gross earned premium. Although we anticipate some inflationary pressure in the second half of 2011, we are forecasting our fixed-income book yield to be in the range of 3.25% to 3.75%. Finally, our effective tax rate range is expected to be 8% to 12%, depending on the distribution of losses and the occurrence of catastrophic events during the year. That concludes my comments on our fourth quarter and full year results and guidance for 2011, and I would now like to hand the call back to Chris.

Thanks, Richard. While there is no doubt that property and casualty insurance is today facing some of the toughest challenges for many years, challenges which include record low interest rates, compounded by poor insurance and reinsurance pricing, the liability overhang of the financial crisis and increasingly strident questions about whether the pattern of reserve releases can continue. At Aspen, we are well aware of these challenges, and we are coping with every one of them. Through careful selection of risk, active management of our underwriting portfolio, retiring capital where no profitable use can be found for it and prudent investment management, we remain confident that we will continue to offer acceptable returns through the down phase of the cycle. But we should also look beyond this phase. It is indubitably true that over time, both low investment returns and the inadequate pricing of insurance risk will reverse. When that happens, Aspen is extraordinarily well-positioned to benefit.

In the last three years, we have invested some $50 million in the acquisition of new underwriting teams and platforms and the further diversification of our portfolio. We have spent $25 million in the last 12 months alone. Some of these things joined us at a time when fairly rapid expansion was appropriate. Our trade credit insurance reinsurance operation in Zurich is a good example of one of those. Others are operating in much less propitious market conditions and are merely biding their time and waiting for market turn. By this I mean they are establishing broker and client contacts, building brand awareness, filing rates in forms where appropriate, and laying down a solid risk management infrastructure. They are also accepting some underwriting risk, but only in a very modest way in the current soft market. As a result of this -- of these investments, when the time comes, Aspen has the potential to offer a very impressive rate of profitable growth. I am keen to emphasize this as one of our intrinsic strengths. That really concludes the prepared remarks for our call, and now Richard and myself are very keen to take your questions.

Thank you. (Operator Instructions) We will pause for just a moment to compile the Q&A roster. Your first question is from Amit Kumar of Macquarie.

Thanks, and good morning. Just going back to that first development in the contractors book in 2006 through 2009. Now, I recall Bill and Joe had done a similar review back in Q4 '09. Can you just talk about what new factors emerged since that time which led to the adjustment this quarter?

Sure. I will be happy to do that.

We wondered whether we were fully aware of all the playing potential, and so we commissioned, with some outside help, a review of every single situation. And we did it with a much more conservative approach, much more, if you like, (pessimistic) approach, that we had taken before. So, situations that we might previously regarded as less likely to result in a claim, we deemed as more likely. In situations of really likely to produce a claim, we considered that they might produce a bigger claim.

That data then went to actuarial, and actuarial had to say, well we now believe you like our session current larger, then our IBNR should correspondingly be larger, and that is what we did. So, it may well be that we could be criticized for being ultraconservative, not for over reacting. I don't know if that's true or fair, but it is certainly true that I think that is one of the most carefully researched and strongly reserved areas of the entire operation.

So, if I understand this correctly, you are saying it's more so a change in the assumptions then actual claim experience?

I think that what you say is part of what I'm saying too, but when a claim situation comes to light, you take a look, you may decide it is without merit, you may say it is going to be a total loss, you may say it is somewhere in between. The key thing that went on was the reevaluation, the injection of more pessimism into what the likely outcome was, if you like, a bias to conservatism.

I mean, you know what I'm trying to ask? I'm sorry, go ahead.

Could you repeat that?

What I am trying to ask is that, obviously, this has developed adversely for quite some time, and I'm just trying to figure out, do you think, and I asked the same question last quarter too, do you think that this might be the last of it?

I certainly hope so. There are no guarantees of this sort of thing, as you know very well. But, I think what we have done has been extraordinarily comprehensive and profoundly conservative. So, I hope that we've got this right and nailed it and we won't be talking about this in future calls. But as I said, that is the likely outcome now, but there are no guarantees.

I hope so too. Just one more question on the guidance, and I apologize if I missed this. You said you're activating licenses in all 48 states by the first half of 2011. Can you just remind us, first of all what is the return expectations on that business at this time ? And secondly, what is the premium contributions from this?

I'm not sure I'm going to be able to answer the question exactly in the terms that you say, but we took the decision to start selling admitted market [for insurance purposes] about a year or more ago. We bought a shell company and the reference in the call was to completing the licensing for that, which should be done by the end of this year. I think we've got about 20 licenses so far.

There are lines of business like management liability that will benefit a lot from this. Some professional liability will also benefit and some inland marine and ocean cargo. Those are all things that are slated to be sold this year. In the future, we may also sell some property on an admitted market basis.

You then asked me about the return characteristics of those, and you need to look in both the long-term and short-term way in answering that. In the short-term, the expenditure is quite considerable, because there's both getting this Company, licensing it, employing the actuaries to the filing , et cetera, et cetera. So, the expense load and advance is quite considerable.

If you take the expense out, you think about it in loss ratio terms, then I think these guys are capable of making modest underwriting profits in the short-term. Their premium budgets, I suppose range from about $20 million in the case of managed liability, to as much as $40 million or so for marine and ocean cargo. That is the first year, but we are looking at this in a longer-term basis.

It does -- I think it's fair to give you a kind of an ROE or return on [equity] capital figure. Given that expense load, I think we need to normalize that. But if we were fully ramped up in this market, it is merely something -- it is a sub 10 ROE business, it's probably somewhere like 8% or 9%. It is a business, though, that has considerable potential of done well to produce ROEs way into double digits, in the sort of mid teens area, in a more favorable

Got it. That's helpful. Thanks.

Pleasure.

Your next question is from Josh Shanker of Deutsche Bank.

I hate to dwell on the reserves, but just a quick point. I was just curious, were there some attritional reserve releases in the insurance segment that were overshadowed and reversed by the unfavorable development?

Yes, there were indeed, Josh. Our UK liability accounts, we did release some of our disease load from way back in 2003, 2004. So yes, the worst of releases, as usual, with our portfolio, we have some ups and downs. But on balance, it was a strengthening of about $23 million, I think.

Is there any way to put some contact around -- I think attritional tends to be a pretty vague word, but to understand the full extent of the reserve strengthening we would need to understand the offsets against it.

Well, I think the important thing to focus on is what Chris was talking about in US casualty.The US casualty strengthening was around about $21 million net, so the other ups and downs we had just about washed each other out.

Okay. And in the prepared comments, you made some comments about second half of the year inflation. I'm wondering if you can elaborate on that?

It's merely to indicate that we are trying to take a pick on what is going to happen to the interest rate. I wasn't talking about claims inflation our pricing inflation, Josh, I was just talk about what might happen to the reinvestment rate.

And just out of curiosity, in terms of forecasting that, why not forecast at the beginning of 2Q or whatever? Is there something that you're looking at macroeconomically to think about a second half of the year pick up?

We think on balance that it's more likely to see an increase in the second half than it is in the first half.

Okay. Thank you.

Thanks, Josh.

You next question is from Dan Farrell of Sterne Agee.

Hi, good morning. Just a question on the US insurance segment.

Within the current accident year results, it still seems like the accident year loss ratio is trending somewhat higher than I would have thought, given that you are reworking the business mix. It's far more property, and you've definitely tried to pull back on some of the areas that have caused problems.But it does seem like that loss ratio is still trending on a higher end. I was wondering if you could comment on what we are seeing in those current accident year results?

Yes, certainly. I will kick off on that. What you're seeing is still, if you will, the old casualty portfolio being worked through. So, the exercise will be taking around about reserve strengthening hit 2009 and prior, but that also informed our loss pick in 2010. A much smaller book to deal with in 2010, but it still impacted on the accident year loss ratio.

The other point I will make is that we have been investing in new teams, and some of that does feed through to a higher than anticipated run rate expense ratio. So, what you're really seeing is a book in transition. Chris has talked about the exciting times in the future, I think we've been clear that we've been taking a very proactive start to deal with the casualty issues in particular in 2010. So, we're really looking to move forward into 2011.

Okay. And should we think about the expense drag in that US segment for the foreseeable future? I realize you're trying to rework the book of business, but it would seem like a difficult environment to add any meaningful premium growth, so it would seem tough to address any sort of expense leverage in the near term, is that fair to say?

I think it has been extreme, Dan, in the last (half) or so because really, there was no revenue to speak of from the new teams in the year 2010. Some of them arrived without licenses, and so they are working , they are getting ready to operate.

So, it is very, very exaggerated in 2010. But through 2011 and '12, I'm inclined to agree with you. I don't think -- we are not hiring these guys to put in combined ratios way over 100%, but nor are we expecting to come in significantly under 100%. And I agree with you, the balance between even a good loss ratios are likely to be offset by significant expense loads.

But I'm not thinking about it as being loss making, if you like, measure by combined ratio in two years

Okay.

Of course, the challenge is that if we are saw writing on the admitted paper in the first half of 2011, it will take to the second half and into the first half of 2012 before we start seeing that come through its earned premium.

Fair enough. And then just one last question on the reserves that you currently have for the 2009 and prior casualty book. Can you give us a sense for where that loss ratio for those prior accident years is now booked at, either on a total casualty basis or if you could tell us specifically on the contractor's book where your loss ratio is for some of those problem accident years?

If I can, I think the best way to answer that is to say that we will be publishing our loss triangles in the very near future, and that is going to be able to give us the rights to the detail. I could attempt to answer the question you pose, but I don't think I can give you a level of detail which would give you the appropriate amount of comfort. So, if I could suggest that we could wait until we publish or loss triangles, which will be in this quarter, then I will be delighted to come back to that question.

Okay. Fair enough. Thank you.

Your next question is from Brian Meredith of UBS.

Yes. A couple of questions here for you. The first one, when we, looking out of 2011 with respect to capital management, what should we look at as far as metrics, the debt to cap limitations, maybe equity limitations or anything with respect to your ability or your willingness to actually continue to aggressively repurchase stock?

I think I'm going to say what I say every quarter actually, Brian, which is our capital management strategy is very, very straightforward. When we generate capital, we look very carefully and very quickly as to whether we could put it to use, and if we can't, it comes back in an as efficient way as we possibly can do, which is been the story of 2010. So really, I think you're going to have to look to underwriting performance for 2011, given the way we are forecasting a relatively flat top line.

So, therefore --

Brian, look, we do have some metrics, we don't publish them, also, it's not very helpful. But we have our own economic capital model, we'd also looking at best (inaudible), we'd also look at our S&P, and we look at regulated capital models. The capital we need is the greatest one, represented by only those models and currently that is our own economic capital model.

In addition to that, we like to have a buffer. We've talked about that before why we'd be safe to have a buffer (or what the model says). So really, I guess that's what we think we need to have.

Will an earnings take us significantly over that? As Richard said, unless we can put that to work profitably in the underwriting business, we are going to give it back to shareholders.

Now, we did a lot last quarter. So, we're clearly not thinking about acting this quarter. But my guess is if this year goes to plan, and as each quarter goes on, we are going to move back to that over capitalization position, we will be taking some actions which we will obviously brief you on at that time.

Got you. So, it sounds like it's all dependant upon how strong your earnings are.And if you've got good strong earnings and the growth is not there, you could basically give back earnings to shareholders.

I think that's a good way to put it.

Great. And then I guess the second question, you kind of touched on this, the financial institutions business. You had some growth there, although results, as you -- on your kind of key map showed it hadn't been so good, and things are deteriorating there. What are you seeing in that marketplace right now, and can we expect there to continue to be growth there?

Okay, well, there is two things. There's what that marketplace is doing and then there's what we are doing. So really, two or three years ago, we did not do a great entry into that business. We had some losses, and then we had a very, very high reinsurance charge as a result, because we gave our insurance a lot of losses. So, that really meant that on a gross basis, like our first year, which was in '08, was a disaster. But on a net of reinsurance basis, there was a lot of trouble in 2009 as well.

2010, beginning a little bit better, actually I think a 97% combined ratio for FI in the fourth quarter of 2010 begins to show you the shape of things to come there. Basically, the pain was felt, but things just kind of pushed through the system. The reinsurance costs has now normalized again and so, I think we are in a position to do probably a bit better than most of the market, having done a bit worse two years ago.

Got you.

Look at the market generally though, I don't think it repriced as much as it needed to for the effect of the financial crisis. And today, I would say pricing is flat, in some case it's going down. Our book is very, it's emphasized away from US financial institutions, it is away from D&O. It's, if you like, it's a safer, more geographically diverse book, and it is a book I would say with little downside in it as a consequence.

It's not seen much growth, but I am seeing some profit there. It would be very welcome if that 97 combined in Q4 becomes something more like the early 90s and sticks like that for the next year or two. That's about as much as we can hope for at current pricing levels.

Great, and then last question. Australia, obviously , you talked about it, and thanks for the information on it. Do you anticipate some potential opportunities down there given the loss activity, particularly since we've got a lot of 4-1 and 7-1 renewals down there? And would you be willing to move -- do you have the position to move into the

We certainly could. I mean, we have the brand, we have the capital, we have the strength to do it. You've got to remember these losses, they are terrible, the human cost is just appalling and the economic cost considerable.

But in insurance terms, they're probably falling more on the insurance balance sheets than they are on the reinsurance balance sheets. And that means when the renewals come up, the buyers are quite likely to say, we have the problem, not you, so why do we need to pay you more? So, there's going to be some tough negotiation there. I think companies -- we've done -- and again, we're looking at if this has happened, what is the worst that can happen? And maybe we actually need to buy more cover, and that is an opportunity.

I think there is going to be some payback type component to the pricing going forward, the stuff that might have been a two online is going to be a six or eight online, reflecting the experiences had. And then I expect there to be a reevaluation of the risk.

Although, everybody always knew this could happen. Somehow, it wasn't really in the pricing, but everybody knew it was there. Now, I think it's going to be known to be there, and it's going to be priced in.

So, cautiously, I would say from a reinsurance selling point of view, prices are going to go up and the chances are, we would want to and we will sell a bit more. But it still, globally, property cat is overcapitalized. It's not -- it's tough to see the dial really moving dramatically.

Great. Thank you.

Sure, Brian, bye.

(Operator Instructions) The next question is from Beth Malone of Wunderlich Securities.

Thank you. Good morning, and congratulations on the quarter. I have a couple of questions. On the political risk exposure that you seem pretty comfortable about in Egypt right now, does that indicate that there is an opportunity in that market? Do you think pricing is going to be more attractive having seen these events occur?

How can I put this, Beth. You wouldn't ensure a building when it was actually on fire. This is a situation that is very complex ,and it is ongoing, and we don't know where it is going to end. So, I expect that pricing could be higher, I suspect there will be more demand for cover.

But on the other hand, it is very, very hard to evaluate this risk correctly. So, we would be, as we see it currently, very unlikely to want to expand. And not only in Egypt, but in the region, frankly, because it is the possibility for this to be exported to some other countries as well. I think we'd better stay cautious, even though I do you think pricing and demand is going to move up.

Okay. And next question, on the $170 million estimated catastrophic loss for 2011, does that already include the Australia losses?

Yes, Beth, that's our initial count load, so the answer is yes.

Okay. Thank you.

And then on the US insurance operations, you commented that you've added some underwriting and continue to believe that the US insurance market is an attractive one. Are you at a point now where you've kind of built out your platform for the US? Or should we anticipate that there is going to be a continued acquisition of underwriters? And can you be a little more specific as to which markets you think will be attractive in the US going forward?

Okay. I think we have done a lot of the work, most of the work in terms of getting the paper, investing in IT, hiring the right back office, hiring the right risk management, actuarial, et cetera, et cetera. We could do with some more actuaries, but the staffing level is kind of more or less where it needs to be. We have teams now focused on property, on management liability, environmental liability, professional liability, inland marine, ocean cargo. I hope I'm not forgetting anybody, but those are the main ones.

So, I think that's a fairly full product mix, and I don't expect to add a lot more to that. Now, there are some other situations where we talk to people, we think they are in interesting little niches of the market, and we might very well want to go in there. But I don't see an awful lot of those. Maybe another one this year. Two would be a surprise, but you have to see what the market offers.

Question about how attractive is it, I would say it's the most important insurance market in the world, it's a market where the price of failure is quite severe. The bottom quartile guys do, do very badly, but the top quartile players in the US can do consistently well. We want to be a top quartile player throughout the market and do quite well throughout the market. I'm very conscious we haven't done that yet. But it would be wrong to say that we think US insurance is presently very attractive across the board. It's actually very tough and challenging.

So, I think within those lines I mentioned, the professional liability, the management liability, the inland marine, it's a question of getting really good underwriters. We know we want to do and keeping the risk appetite quite small. Moving very slowly through the next year or two, however long it takes.

But building up the brand awareness and building the contacts and being ready to expand really incredibly rapidly when the time comes. So, this is not going to be kind of steady, linear growth over the next three or four years. It's going to be very flat and then it is going to move up very rapidly when the time is right. So, I hope that gives you a better flavor.

Yes, that's helpful. Also, is acquisition in the US an option for your expansion strategy going forward?

We always think about acquisitions. We think about it in three ways. Strategically, yes, we'd love to make a US acquisition especially insurer. Financially, it doesn't make financial sense, we are not going to do it. And Aspen, in common with a lot of Bermuda companies, trade at valuations that tend to be adverse to the US companies, so it's very hard to make the arithmetic add up in our shareholders' interest.

So, I think strategically, we'd love to, financially we are debarred from, and then the third thing would be culturally. We would only do it if we find people who care about underwriting the way we do, and that would mean a company small enough to absorb by us. There's nothing presently on the horizon there, but I wouldn't rule it out forever. It would require a change in our valuation though, I think it's fair to say.

Okay. Alright, thank you very much.

Pleasure.

Our next question is from Vinay Misquith of Credit Suisse.

Hi, good morning. This is Max Zormelo. A couple of questions.

First one is on the 2011 guidance. Looking at a combined ratio, it seems to indicate, it seems to imply that 2011 combined ratio on an accident year basis would improve from the 2010 level. I'm just wondering what would drive that improvement, it's a business mix shift or what. And then secondly, I wanted to find out from you if any of the growth this quarter in insurance segment came from any of the new underwriting teams?

Well, starting off with the guidance, Max, it is what it is. I think it's a pretty natural progression from 2010. So, I don't think there is any particular magic in respect to accident year loss ratios. We don't plan, as you know, any specific prior year reserve movement within our guidance. So, that's an area that we will see where that comes out.

Your second question was about contribution from new teams (multiple speakers) 2011 or 2010?

This is the -- for the fourth quarter of 2010. The growth in the insurance segment, just wondering if any of that came from the new underwriting teams?

Actually, it didn't. The growth that we did have was in our marine liability account, and it came about because we have some premiums adjusted following better advice from customers. Within the insurance result, we had some ups and some downs. Generally, our casualty lines were reducing in size of some of our other lines were increasing year on year.

Thanks. And a couple of members questions. The first one is what drove the expense ratio improvement this quarter? And also, some other income item seems to increase quite a bit this quarter, I think it is about $10 million. Just wondering what is in there as far as gains, what else is in there.

The expense ratio one is in respect to bonus and the long-term incentive payment costs relative to last year. You will recall, when we had the return equity around 18%, we had very, very strong variable remuneration in that, less so this year. So, that is the reason why the expense ratio is lower, quarter on quarter.

The second question was about other income, got a couple of things going on in there. We have one or two reinsurance accounts which we deposit account for, so that does go into the other income line. Also, you might have heard on the call that I did refer to a hedging program that we've undertaken in respect to part of our fixed income portfolio. Now, the income statements' impact of that comes through in other income.

Okay. The hedging program -- interest rate swaps for the duration of the portfolio, is that what you're referring to?

Yes. It's interest rate swaps, exactly. We have 500 on at the end of year, we've done another 200 since year end.

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

Pleasure.

Your next question is from Ron Bobman of Capital Returns.

Hi, good morning, and thanks a lot. Chris, I was -- I had a question about reinsurance and I was -- I forgot whose -- I think it was Brian's question you were answer about the line share or meaningful amount of the Australia related losses, whether they were New Zealand losses picked up on Australian programs or the more recent Australia losses, that you felt that it was sort of primarily an insurance loss. I thought it was sort of much more weighted to the reinsurers, given how big those programs were, as well as the purchase of aggregate covers. Did I understand your point right?

Okay, well, you've got a fair question. What I think is going on here is we have five events, and we don't know what they are going to cost yet. But our slide, and I mentioned on call what our expense was. A couple of those I think are likely to be below the reinsurance retention.

I think even cyclone Yasi, at the lower end of those estimates, it's going to be a retained loss, it's not going to penetrate to the reinsurance. So, then you really have the bigger floods in Queensland as being the one that is most likely to get exported to the reinsurance side. And yes, there are (audio difficulties), and some people did buy our [group]coverage, it's true, that toast. That's true.

But overall, if you take all of those five events, I think you're going to find that the balance is going to stay with the primary guys rather that the reinsurance guys. And only in one of those events is it going to actually go sort of disproportionately the other way towards reinsurance.

Okay.

Go on. Sorry.

No, no, you go ahead, I'm sorry.

I haven't actually done the precise sums to say what the numbers are one side or the other, and I feel suitably chastened, I'm not going to do that. But I'm pretty certain that order of magnitude wise, one (inaudible) to is correct.

Okay, so I guess -- so you would be of the view that there really isn't a need for a restructuring of these programs, more risk sharing, so to speak. That in large part, if there's any necessary corrective action, it will be evident in rate at the next -- largely evident in rate at the next renewal date, not some sort of structural change that permits primary companies cost sharing, et cetera. Is that fair?

This is colossal and disastrous in human terms and very significant in economic terms. But in terms of insured loss, is not so big and in terms reinsurance, loss is lesser still. So, what do I think what is going to happen? I think some Australian companies buy excessive loss programs with a very low retention, and I think those low retentions are going to be under some pressure.

Probably for two reasons. One is the price of buying it will be prohibitively high, and the companies themselves will want to save some money by retaining more. And also the reinsurers, and that is not us, by the way, who like to play at that low level, may decide it's just too dangerous to play there. So, I think increased retention is certainly going to be there.

As a summary, I think the frequency of loss -- and by the way, the season is not over yet, it is still late summer there. It's not over yet, so I think the thing's I was going to say to people, this is a bit worse than we thought it was. I'm not sure that's warranted.

I think anybody who knows a bit about Australian history and understands the exposures would probably say this is not truly unexpected. But I think there's going to be kind of a bit of wake-up call. So, everybody is going to be pricing risk a little bit higher.

And then, I think it always makes sense to think the worst thing that could happen is likely to be a lot worse than the worst thing that has already happened. (inaudible) is a way of saying that the cat modeling agencies are going to reevaluate their PMLs, and they're probably all going to go in one direction. That made end core companies to want to buy more cover.

If they want to project, let's say to a hundred year event, they are going to need to buy more dollars of cover. So, I don't think I would call that destructive change, but probably more risk aware, higher retention, bigger program paying a bit more, flexing more risk. That would be my early prediction for it.

Thanks a lot, and best of luck.

Sure, Ron. Thank you.

At this time, there are no further questions. I would now like to turn the call back over to management for any closing remarks.

Well, thank you very much for your time, attention and some very good questions which we enjoyed responding to. Have a good day. Goodbye.

Thank you. This concludes today's Aspen Insurance Holdings fourth quarter 2010 earnings conference call. You may now disconnect.