Aspen Insurance Holdings Ltd (AHL) 2011 Q1 法說會逐字稿

Good afternoon. My name is Felicia and I will be your conference operator today. At this time I would like to look everyone to the Aspen Insurance Holdings first quarter 2011 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. Ms. Calaiaro, you may begin your conference.

Thank you. A good afternoon. Joining us for this afternoon's call are Chris O'Kane, Chief Executive Officer, Richard Houghton, Chief Financial Officer, and James Few, President of Aspen Re.

Before we get underway, I would like to make the following remarks. This morning we issued our press release announcing Aspen's financial results for the quarter ended March 31, 2011. 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 10-K filed with the SEC and on our website.

This presentation will contain non-GAAP financial measures which we believe are meaningful in evaluating the Company's performance. For a detailed disclosure on non-GAAP financials please refer to the supplementary financial data and our earnings slide presentation posted on the Aspen website. Now, I will turn the call over to Chris O'Kane.

Thank you, Kerry and good afternoon everyone. It's been 10 quarters since we reported to you against the backdrop of potentially improved pricing and certain conditions. Today's sentiment is changing, and we're seeing a growing acceptance of the market not only needs to harden, but is in fact hardening. The industry has been struggling to achieve a pricing inflection point for some time, notwithstanding the many arguments in favor of this. These arguments are well rehearsed and include historically low interest rates, a depleted reservoir of potential prior year reserve releases, potential inflationary pressures and longer tail lines, and creeping expense burdens.

Last year was an expensive year for insurers with regard to natural catastrophes, but was well within their balance sheet means. The $17 billion returned to shareholders in 2010, the second time in a decade and the promise of more share returns in the 2011 pipeline was further testament to this. The natural catastrophe events occurring in the first quarter of 2011 were very significant and the likely cost the insurance industry could exceed $35 billion. That is close to the figure of $40 billion recorded for the whole of 2010. It is also worth remembering that the February New Zealand earthquake was the second earthquake occurring on a fault line which wasn't captured by the models (inaudible) and that the Tohoku quake in Japan, which was a magnitude 9, was an intensity not reflected in any of the models. This raises the question again as to whether models in general capture enough of the potential risks and underlines the fact that there could be just one element of the underwriting process.

Putting this question to one side, on the leading model vendors was released a new version of the US wind catastrophe model in March. This is another very important factor. This model is used by approximately 80% of primary property underwriting companies in the US. The main change in the new model is the impact on model probable maximum losses for US hurricane risks, in particular US Eastern and Southeastern wind exposures.

As we assess the relative impact of the model on our clients portfolios, we observed in a very few cases, model PML's actually reduce and also in a few cases they increased by several multiples. However, in the vast majority of client portfolios we've analyzed that are heavily US wind exposed, we see an increase in model probable maximum losses in the range of 50% to 100%. This is quite dramatic. If this new model is widely adopted, then this would likely result in a commensurate increase in the capital requirements of those primary writers affected by the change. The availability, pricing and affordability of reinsurance also needs to be added to the mix here. Some primary writers may look to buy more reinsurance, to offset the impact model changes on account position. We expect that many reinsurers pricing will in turn reflect the changes applied by the model. Should be remembered too that reinsurers will also have to assess their own capital positions.

This is causing many in our industry to reassess the need for price increases and we saw evidence to support this during the April renewals. We'd anticipate that average rate changes to a property reinsurance accounts on April 1, would be a reduction of price of 10%, whereas we achieved an average rate increase of 5%, with few contracts recording increases of as much as 15%. This understates the improvement as just under 40% for renewal income was posted or completed prior to the Tohoku earthquake. Furthermore, where were 17 programs which have been quoted pre the Tohoku earthquake and which had to be repriced to secure completion.

The infamous rate change is not surprisingly more pronounced in reinsurance and insurance with the improvements we've seen thus far concentrated in catastrophe peril exposed property lines. As a result, we believe that up to 35% of the business we intend to write in 2011 could be subject to meaningful, positive price change. The lines affected include our assessment surplus property insurance business, our energy, physical damage insurance business, our property reinsurance unit, and natural catastrophe exposed lines within our specialty reinsurance book.

Turning now to performance for the quarter, our results reflect the impact of the high incidence of catastrophes when we reported a combined ratio of 148.5% and a net loss of $2.40 per share. Our post tax estimated losses net rewritten premiums and applicable reinsurance for the 2011 Australian floods, and the earthquakes occurring in New Zealand and Japan in February and March, were just over $250 million. Which amounted to 63 percentage points on our combined ratio. Excluding those catastrophes, our combined ratio for the quarter was 85.1%. Our estimated losses for the 2011 Australian floods and the New Zealand earthquake in Christ Church were unchanged at $94 million post tax net of reinstatement.

Regarding our estimated losses from the February 2011 New Zealand earthquake, I would like to reiterate that while it is widely expected that the February event will be more costly than the first New Zealand earthquake, our estimated losses for the second New Zealand quake reflect the benefit of the $50 million excess retrocession protection which we did not have in place for the first New Zealand earthquake. Hence our estimated loss for the second New Zealand quake are not proportionate to the higher estimated market loss. It is worth mentioning that we took the decision to purchase this ex 50 retro cover as a consequence of concerns raised in relation to cap models by the Chile and first New Zealand earthquake. We are pleased with our decision and have purchased further back up cover after the region was impacted by the second New Zealand earthquake.

I'll now turn to the earthquake and subsequent tsunami which impacted Japan in March. We announced a loss estimate of approximately $160 million post tax and net return premiums on April 12, which we believe is consistent with the market loss of $30 billion. This equates to approximately 5% of our shareholders equity, as of December 31, 2010. Our published 1 in 100 year P&L for Japanese earthquake as of January 1, was 9.2% of shareholders equity and it derived using the more conservative of the two models which are typically deployed to evaluate Japanese earthquake risk. As a point of comparison, our 1 in 100 year impact to shareholder equity is about half of that, or below 5%, based on the less conservative model. As a further illustration, an industry insured loss of $30 billion arising from Japanese earthquake, could be expected to occur approximately once every 100 years using a less conservative model, and approximately once every 25 years using a more realistic model. This is illustrated graphically on slide five of the packet accompanying this call.

I'm now going to comment on the results of each of our business segments. Starting with the reinsurance, we reported an underwriting loss for the quarter of $212 million, which reflects the $285 million net of reinstatement premiums but before tax, arising from the natural catastrophes in the quarter. These were primarily in our property reinsurance and other property units. The remainder of our reinsurance segment performed well. I would like to highlight our casualty reinsurance and in particular where we reported 20% reduction in GWP year-on-year and a sub 100% combined ratio. This is a good result at this stage of the underwriting cycle and underlines our commitment to underwriting discipline.

Turning to our insurance segment, underwriting additions have remained challenging with some exceptions. As a result, most of our underwriting units reduced their top line and we've only increased our premium in those areas of our book where rating levels are maintained or increased. This includes our marine, energy and transportation insurance units, where we increased our premium by around 12%, reflecting positive pricing momentum, in line impacted by the Deepwater Horizon loss.

I'd also like to mention our kidnap and ransom business which is part of our financial and political risk unit. We've increased the amount of business we write in this class significantly, albeit from a low base, having acquired a small specialist company a year ago. We now expect to write around $30 million of premium this year, having written about one third of this so far. This business is highly profitable and illustrates our ability to leverage our expertise and capitalize on attractive issues in the marketplace.

In our US insurance operations, we are seeing some rate increases in our property account, especially for wind and quake perils. In our general casualty account, there are signs that rating pressure is abating and we have been able to achieve increases on some of the more difficult class. In professional lines, there's been modest firming of selected segments such as architects and engineers. Against this backdrop, we are continuing to adopt a disciplined stance. As I've said in previous calls, our investment in the US is all about being well positioned for when the time is right and we will continue to keep our party dry until the market turns.

We also strengthened our leadership in the US further during the quarter with the appointment of Mario Vitale as President of the US Insurance reporting to John Cavoores. Mario joins us from Zurich Insurance where he was most recently CEO of global, corporate insurance worldwide. Mario has an outstanding track record as business builder and I'm very confident that under Mario and John's leadership, we will be able to realize the full potential of the investment we are making in repositioning and building out our US insurance business.

Finally, we announced the creation of a surety unit under the leadership of Mike Toppi, a 23 year veteran of the US surety market with a demonstrable track record of very profitable underwriting. Mike joins us from Travelers where he was responsible for Travelers surety operations. We have completed our team through the hiring of an additional four professionals, and I'm very excited by the opportunity to build a first-class surety franchise for Aspen.

I would now like to comment on renewal activity during the quarter, which is summarized on page six of the slide pack. I'll start with the insurance lines. The first quarter is not a major renewal period, and the picture is little changed from one I described at year-end. Within our casualty lines, prices have continued to decline overall with some classes, such as global excess casualty, experiencing modest increases in the higher hazard classes or rates remained flat.

In aviation, pricing has remained broadly flat, with some pressure on our business, but renewal activity is very limited in the first quarter, and remains to be seen whether our expectation of some price improvements are realized later in the year. Competitive pressure, including risk insurance, remained strong. Pricing is generally satisfactory, particularly in credit, with some signs of the events in Libya and the Ivory Coast are beginning to have a positive impact.

Turning now to reinsurance, I've already commented on the changes we are seeing within property reinsurance and our casually lines in the rate environment remains challenging. We are able to achieve a 3% increase on international lines and the limited reduction on US accounts to 1%. This reflects benefits of our approach to managing our top line, as I described earlier, as these non-renewed exposures which did not meet our desired returns. Terms and conditions are remaining broadly stable.

And in our specialty reinsurance segment, pricing overall is favorable with an average 7% increase on our marine reinsurance account, while contracts impacted by the Deepwater Horizon loss registered increases in the region of 10% to 40%. And with that, I'm going to turn the call over to Richard.

Thank you, Chris, and good afternoon everybody. Our net loss after tax of $152 million have, of course, been dominated by the tragic events in the first quarter. Our losses from the Australian floods and cyclone Yasi and both the New Zealand and Japanese earthquakes, net of reinsurance reinstatement premiums and tax, totaled $256 million or 7.9% of our opening shareholders equity. Gross written premiums in the quarter of $671 million are down 4% on the same period last year with the decrease mainly coming from our reinsurance segment. Our ceded written premiums have increased by 32% to $162 million, as we purchased additional retrocessional reinsurance ahead of the US wind season.

The combined ratio for the quarter was 148.5%, compared with 110.3% last year. The ex cat loss ratio has decreased to 52.8%, from 56.1% last year. The combined ratio ex cat of 85.1% compares with 86.1% last year. Our expense ratio of 31.6% compares with 29.3% last year. The increase is attributable to foreign exchange and costs associated with the strengthening of our US leadership and underwriting capabilities.

Diluted operating loss was $2.40 per share and operating earnings per share ex cat losses were $1.23, compared with a $1.25 last year. Diluted book value per share was $36.65, increased by 6% from the first quarter last year, driven by our active capital management over the period. However, since the start of 2011, book value has decreased by 6%, due to the Q1 cat events and a small reduction in the value of our investment portfolio.

I will now comment in further detail on our segmental results and I will start with reinsurance. The quarters underwriting results on the reinsurance operations have of course been heavily impacted by cat events, particularly within our property cat reinsurance line. As a reminder, losses net of reinsurance, reinstatements and tax for our cat exposed reinsurance lines were as follows. $32 million from the Australian floods, $62 million from the second New Zealand earthquake and lastly, the Tohoku earthquake $162 million. Reserve estimates for all of these events, and in particular the Japanese earthquake, are preliminary and are derived from very limited data.

The combined ratio for the reinsurance segment of 178% includes 106 percentage points of cat losses. Excluding the impacts of cats, the combined ratio was 32.2% compared with 74.5% last year. Providing a little more detail on the underlying lines of business, our property reinsurance lines loss ratio for the quarter of 226.8%, includes 208 percentage points of cat losses. This compares with 117.5% last year, including the impacts of the Chilean earthquake. Gross written premium across our property reinsurance lines of $260 million are broadly in line with last year.

Our casualty reinsurance lines have performed solidly during the quarter, producing a loss ratio of 71.5%, an improvement from 77.3% last year. Gross written premium of $139 million is down over 20% from last year, as we have actively managed our casualty reinsurance portfolio in the current, tough market conditions.

Our specialty reinsurance lines have also continued to perform well, despite being impacted by the earthquake in Japan. The results include $20 million of loss reserves for the Tohoku earthquake within our marine reinsurance portfolio, which are contained within our overall loss estimate. The loss ratio of 54.5%, excluding 33 percentage points of cat losses, compares with 43 -- sorry 43.4% last year. Gross written premium of $83 million is down (audio difficulties) -- to build and invest an appropriate infrastructure to support our US insurance business.

Gross written premium in our insurance segment was $234 million, compared with $213 million in the first quarter of last year. The increase was attributable to our marine, energy and transportation lines and also our financial and professional lines, particularly in our financial and political risk class where we entered into kidnap and ransom business during 2010. Rates have hardened during the period in this class and business opportunities have arisen from heightened conflicts and piracy concern.

Our property insurance line in the US has continued to perform well with a loss ratio of just over 35%, on net earned premiums of just under $20 million. The net loss ratio in our casualty insurance lines have improved to 83.8% from 114% last year as we see incremental benefits from the reshaping of remedial action we took last year, particularly in our US casualty insurance book. Our marine, energy and transportation lines continued to produce robust profitability with a loss ratio of 61.2% in the quarter, or $90 million of earned premiums. Both our aviation and our energy physical damage classes returned loss ratios of approximately 47%. Results in our financial professional lines have been a little more mixed, but we have had encouraging signs from the improvement in financial lines.

Now, turning to our investment performance. Overall, net investment income for the quarter was $56 million, down from $59 million last year. Net investment gains included in the income statement were $8 million for the quarter, compared with $12 million last year. During the quarter, we made a small move into equity investments, deploying $170 million, or 3% of total investments, into high-quality, global equities via direct investments. Our overall portfolio at the time remains focused on high-quality, fixed-income investments, however market conditions and portfolio diversification prompted a limited move into equities. As a reminder, we have the flexibility to deploy up to 10% of the investment portfolio in non-fixed income investments.

Book yield on our fixed income portfolio of 3.65% at March 31, 2011, was down 5 basis points from the end of 2010, as pressure on the reinvestment rates continues. This compares with a book yield of 4.23% of the end of the first quarter in 2010. We continue to see that one of the major risks of the market value of our fixed income portfolio is a sustained drive in interest rates. To manage this, we entered into an additional $500 million of interest rate swaps in the quarter, bringing our total notional value of interest rate swaps to $1 billion. These instruments have reduced average duration of the fixed-income portfolio to 2.5 years at the quarter end, compared with 2.9 years at the end of 2010. Average credit quality of the portfolio remains AA plus, and we have no other than temporary impairment charges in the quarter. At the end of the quarter, there were $204 million of net unrealized gains, pre tax in the available for sale fixed income portfolio, compared with $240 million at the end of 2010, and $211 million at the end of the first quarter last year.

Turning now to our capital position. The accelerated stock repurchase, which we entered into in the fourth quarter of 2010, was completed in March 2011. Resulting in repurchase and cancellation of an additional 543,000 shares, bringing the total number of shares repurchased under the transaction to just under 6.3 million. We had just under 71 million shares outstanding at the end of the quarter, a 15% reduction from the beginning of 2010. Although we have authority to repurchase a further 192 million shares under our existing share repurchase program, due to the recent cat events and the prospect of hardening rates, we have no immediate plans to repurchase shares.

Our balance sheet continues to remain robust, resilient and flexible with $9.3 billion in total assets, and $3.1 billion of shareholders equity. Our capital needs are driven by the requirements of our own internal capital model, which we then cross check against rating agency and regulatory requirements. We continue to more than satisfy our needs in respect to all of these tests.

We have $4.2 billion of gross reserves on our balance sheet, an increase of just under -- sorry, I'll start again, we have $4.2 billion of gross reserves on our balance sheets, an increase of just under $800 million since Q1 last year. This includes a margin in excess of $400 million over our mean, best estimate assessment of ultimate losses, or approximating the 90th percentile on the diversified basis, in terms of the distribution of projected outcomes. The margin over mean best estimate of ultimate losses is up from just over $300 million at the end of 2010, and from the 88th percentile in terms of the distribution. We've also released our 2010 reserve triangle for the first time this year as we aim to provide our investor base with greater insight into the strength of our balance sheet.

Turning now to guidance for 2011, as set out on slide 18 in the pack. In light of our catastrophe losses in the first quarter and prevailing market conditions, we anticipate our full year combined ratio to be in the range of 105% to 110%, including a cat load of $140 million for the remainder of the year, assuming normal loss experience. We anticipate our gross written premium for the full year to be unchanged on previous guidance, at $2.1 billion plus or minus 5%, and we expect our ceded premium to increase to between 10% and 14% of gross earned premium as we have purchased additional reinsurance ahead of wind season.

We continue to see our fixed income book yield in the range of 3.50% to 3.75%. We are leaving the effective tax rate estimate unchanged in the range of 8% to 12%. However, this will of course vary, depending on the actual distribution of cat losses within the group. That concludes my comments on our results for the quarter, and updated guidance for 2011. And with that, I would like to hand the call back over to Chris.

Thanks, Richard. What I hope you will have taken away from Richard's and my earlier comments, is that we are both feeling significantly more optimistic about our business at this juncture than we have done for many quarters. We have spoken about model change, the impact of cat losses, low rates of investment return and so on. This has already resulted in a degree of firming in cat property exposed lines and we expect to see this accelerate in the coming months.

We do not want to exaggerate the degree of impact this is likely to have. To be very clear, we're not predicting a hard market in all classes of business and throughout the world. We do, however, anticipate better returns from our catastrophe exposed property lines, both from the insurance and reinsurance side. But more particularly, on the reinsurance side.

Aspen currently enjoys a level of capitalization above what our internal model would indicate we need. Our catastrophe risk exposures are currently running at about two-thirds of our self-imposed tolerances, leaving us plenty of headroom, both in terms of risk capital and in terms of the risk appetite, to take advantage of an improved market. Our branding and catastrophe lines is very strong and is much in demand from our clients. On that upbeat note, I'd like to turn the call over to Q&A.

(Operator Instructions) Your first question comes from the line of Amit Kumar with Macquarie.

Thanks, and good afternoon. Just going back to your opening comments on PML, and in fact, I thought the color was quite helpful. Your 1 in 100 is 17.5% based on RMS 10. How would that number change if you applied RMS 11 across your entire portfolio?

Okay, Amit, let me see how to answer that question in the most helpful way. There are different models in the world, RMS version 10, version 11, AIR, EQ, et cetera, but what we tend to use is our own internal model, which is informed by all of those various models, okay? So, I wouldn't say -- I think RMS is one, maybe has a lot of influence on us, but I couldn't say we are a prisoner of any single model. We have our own thoughts. That's one thought.

Second thought, that view of 17.5% as a maximum, we are currently more like 10% or 11% in reality, it is something we thought was a sensible amount of a balance sheet to put a risk from a single event, about 6 years ago, we had to change, and no model change is going to change that. We will just stay with that, and if something happened, because risk goes up, we would have to readjust them down to stay within that [tranche], so we don't change that.

So, then the next question is, if you looked at our exposures in version 10, and looked again in version 11, what happens? Well, the increase varies on insurance, where it's a little more dramatic than it is on reinsurance, but we're not absolutely sure that that's what we are going to do in our portfolio. And the reason I say it is we currently are not using version 10 of RMS. Academically, and assume you know what it is, but it wasn't the version of reality we believe was true. But we haven't yet decided that version 11 is going to be the version of value we think is true. There are things about that, that we were aware of from doing additional pricing, additional hazard for inland exposures. There's also some stuff about hurricane frequency which the jury is out on, whether we're going to adopt it at all or some of it.

So, the fact is without giving you anything more quantitative, I think we have the capital and we have the risk appetite to write more business, which we would want to do if prices take a turn for the better. And if they don't, we'll keep our powder dry for when that time comes. I hope that's helpful.

Yes, that's actually quite helpful. Maybe just related to that, based on the discussions with brokers and ratings agencies, what is your view? Do you think there is a greater than 50% chance that RMS 11 will be adopted? Or do you get the sense, as you are saying, that eventually the entire group sort of trends towards the mix of models, and hence, the overall impact of RMS 11 is more muted than what initially thought?

I think that the answer to that question is going to vary from company to company, and it's going to vary from insurance to reinsurance. Aspen, as you know, writes insurance, writes reinsurance, we do quite a bit of catastrophe special team, we have our own seismologist, climatologist, and so on, on staff. So, we are kind of in a position that we can make some of our own judgment calls on these issues. I wouldn't say we will put blind faith in any model.

But a lot of our clients, some of our clients are quite small, they are primarily writers that are writing homeowners on the East Coast somewhere, that's their business, it's not really about being in the cat business, so they want something that is simple and readily digestible. And they are more likely, I think, to just take a model and use it. They would typically be informed by their reinsurance brokers. To some extent they will talk to their reinsurer as well, sometimes we will have those conversations, but I think it is the reinsurance brokers who inform those decisions.

And I have -- my crystal ball is a little foggy, or I'm not seeing very clearly, but RMS has 75%, 80% market share. I would be surprised to see it dipping very much, to be honest. That's on the primary side.

On the reinsured side, AIR -- I don't know the market share, but it is much more influential, so those companies that were AIR shops before will probably continue to be AIR shops, and in their own underwriting, they're not going to be changing what they do. On the other hand, if their clients are using RMS, their clients are probably going to say -- you know what, I need more cover, how can you help? Which is the thing I am excited about because I think that increased demand is the thing that improves the price of the products, and gives us some opportunity to grow this year.

Okay. And then just one very quick unrelated question. Does your number include contingent BI? And what is your view of that issue developing going forward?

Is this with respect to the Japanese earthquake loss?

Yes, the Japanese earthquake.

Let me ask James Few to take that question.

Sure, hi, Amit. The short answer is, yes, but of course, this early on in a complicated loss such as this Japanese earthquake, it's very difficult to arrive at a firm number. What we've done is we've listened to our customers, we've analyzed our book thinking about which of our clients writes the exposures which could be linked by CBI extensions to the Japanese earthquake, and we've come up with a sensible reserve based on that analysis. And it is not yet based on detailed advice because it's too early, unfortunately. But yes, we have included CBI in our deliberations.

Okay. Thanks so much for the answers.

Your next question comes from the line of Sarah DeWitt with Barclays Capital.

Given your more positive outlook for pricing this year, why aren't you raising your forecast for flat gross written premiums for 2011?

We have time to do that if we see this happening. I think our position is cat-exposed property in the US on the insurance side and the reinsurance side. International property, around the world, particularly in Asia Pacific, but right around the world is going up, but there are some other things that we are not happy about and will continue to [lose] business. I pointed out that we canceled about 20% of our international casualty book year on year, just because we weren't getting the pricing.

So, there are current upswings and round about pluses or minuses. I think the conservative view is maybe not to revisit that top line premium view at this stage. But the next 6 weeks is very important because that's when a lot is going to be done, and if we get the momentum we think we are going to get, we are going to have to come back and revisit premiums again, if it's justified.

Okay, thank you. And then, the loss reserve development in insurance turned favorable this quarter after being slightly adverse in the last few quarters, could you elaborate on what you're seeing in this line, and particularly in the lines of business where I think you added to reserves before, like contractors and professional liability?

Yes, Sarah, I'd characterize it as a very quiet quarter actually. There was a $1 million overall favorable reserve development, as you've identified, the usual ups and downs within the insurance segment, but there are also single-digit ups and downs. So, it really was very quiet. You'll remember, the sort of things we're talking about in Q4, we have had no repeats on that sort of activity, and we have seen some encouraging signs in some of the lines where we have to take remedial action back in early 2010, et cetera. But overall, a very quiet quarter in respect to reserve development in insurance.

Okay, great. Thanks for the answers.

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

Good afternoon, everyone. You made the comment, Chris, about the preliminary nature of the Japanese reserve position, given the limited amount of information. To what extent is your methodology you think unique in estimating that, and to what extent do you think there would be the risk of convergence of the whole industry is over-reserved, or the whole industry is under-reserved as information emerges?

Josh, that is one tough question. Probably the best way to start this is to describe our process, which has a top-down estimate and a bottom-up estimate. I'd start with how big do we think this economic loss is. I think it's $300-plus billion, by the way, based on what the Japanese government is saying. And also what RMS is saying. I think you then need to read about insurance penetration in Japan to figure the earthquake, and it's low, much lower than elsewhere in the world. So, that huge economic loss doesn't necessarily translate into a very big insured loss.

We also look at what the modeling agencies were saying, but to be honest, I don't think they know very much to help us there. But that gave us kind of a top-down sense of reasonably what kind of market loss, and we concluded $30 billion of insured loss was probably a little on the conservative end.

You then need to do the bottom up view. We have very good relationships and very strong connections in Japan, both in the insurance companies that we traded with for the lifetime of this Company, and I have, in fact, personally traded with for most of my career. Also the brokers based in Japan and elsewhere, we talk to them, we took the hard information, soft information, the Japanese non-life association website has some good data there as well, which I took a look at.

Basically, we kind of listen to what the clients were saying, and the clients are being -- they don't know for sure either, so we kind of listen to what they said and made some very substantial increases to their preliminary views to form our view of what it might cost us on a per client basis. We've added that up, and the idea would be the bottom-up and the top-down would look the same, and they weren't too far apart. And that was kind of a process.

I don't think that we are suffering from group think, because all of those conversations were unique, one-on-one conversations between Aspen personnel and varying clients and brokers. Other companies will have done their own thing, maybe talked to similar people, but they may not have asked the same questions. So, I feel it's about as robust as can be.

The preliminary nature is basically we haven't got more than three or four actual loss advices from the Japanese book, and that's not very much. Ideally you wouldn't want to be selling a number of these things for a few more months, but the reality is we have to pick a number, and so we picked a number that we thought as pretty robust, and had a good dollop of conservativism in there. So, I hope that helps.

It does. A long time ago, you and I had a talk about Northridge and about the impact that had and the delayed response. This is really the first earthquake that the industry is dealing with almost since 1992 in many ways, or 1994 in many ways. Kobe being a small reinsured event. Is there any risk of prolonged and lagging reporting here? Or do you think that the lessons learned 20 years ago will prevent that from recurring?

The statistic that I gave you then was 1 year after Northridge was Kobe, and the deterioration in one major insurance company, US, lost from Northridge was the same in that quarter, the quarter of Kobe, the deterioration was the same as the whole of the Japanese industry loss had been. An extraordinary statistic, which I will never forget.

But why did California turn with the US legal system, it's got to do with California in particular. It had to do with, not so much indemnifying insureds for the loss they had, but improving the quality of buildings. It was kind of it making them wheelchair friendly, getting them up to current codes. It was kind of what the old-fashioned insurance word investment, that was what was going on in Northridge.

I'd like to remember the statistic, I think it's something like 1 in 400 Americans is a lawyer. I think in Japan, it's like one in 6,000 or 7,000 Japanese is a lawyer. You don't have the same readiness to have recourse to law in Japan. You don't have such a consumer-friendly legal system. So, I don't want to rule out deterioration in Japan, it could happen, but I think the reasons why we saw Northridge are rather unique to that time and that place, and I don't think they really necessarily would reproduce themselves in Japan.

Okay, very thorough answer. Thank you very much.

Your next question comes from the line of Dan Farrell with Sterne Agee.

Hi, thank you, and good morning. Or good afternoon, actually. I was wondering if you could talk a little bit more about your expectations, specifically on the June/July renewals for cat, and maybe how you think the negotiations play out? Underwriters clearly seem to want to get some higher rate increase in the double digits, but brokers certainly have been more muted in their viewpoint. And I'm also wondering, as we move through the year, how do you think about the trade-off between writing more business versus maybe doing some additional capital management, and what kind of rate increase do you think is attractive enough that it wouldn't be worth doing repurchase?

Okay, Dan. There are two questions there, and the first one I will ask James to take, and then Richard or I will come back on the capital question. Let's let James go ahead.

Yes, hi, Dan. There certainly is no -- it's not very -- there's no simple answer to what is happening at June and July. The market hasn't yet settled down for me to give you a short and easy answer on what we're saying. But I can tell you that there are -- there is a growing feeling that what's been occurring in the world, not just cat losses, not just model changes which may influence capital requirements, but also the relative stated rates and the historically low investment returns, perhaps reserve releases not being as much as they used to be. A combination of factors in the market place where we're past the market is ready for a turn to offer investors a more reasonable return relative to the risk that they take. And I think there is a feeling that that momentum is starting to build, but there isn't yet a consistent message to give you.

From our point of view, we underwrite each customer individually, and if you're looking at the midyear in yours now, there's the June market which is heavily influenced by the Florida renewals. Florida is, of course, the peak US wind zone. US wind is the peak peril, and what we are seeing at the moment is some significant perception of risk changes for US wind. And it is the key consumer of capital for many insurers and reinsurers. So, you would expect to see June pricing change upwards, and I think that's what we are seeing. In fact, we are seeing that right now.

I expect that trend to continue and to gather pace as messages get through, as all these pennies drop in the industry. We don't tend to be an industry that reacts rapidly unless there is a major catalyst, and in this instance, I think we're at the early stages of a hardening environment. And I expect to see that continue.

Okay, on the second part of the question, around capital and what our options are, and of course our overwhelming preference right now is to deploy capital profitably, and in order to assess whether we can do that, the next few weeks are extremely important. And we very much hope and believe that we should be able to achieve pricing increases to give us an appropriate return on capital.

But having said that, we have a strong track record of giving capital back if we can't put it to use profitably, but what we have not done historically is made a substantial buybacks or any other return on capital during wind season. So, really, it's a 2-part approach to what's going to happen in respect to capital, and the next few weeks coming up will give us an idea of how much we can deploy. After that we're into wind season, so we really need to look towards the end of the year, and updates on these sort of calls as the quarters unfold throughout this year.

Okay, thank you very much.

Your next question comes from the line of Beth Malone with Wunderlich.

Thank you. Good afternoon. I have a couple of questions. One is on, when you talk about the top line being flat, I just want to make sure I understand that in the next 3 quarters, in order to get to your $2.1 billion goal, you would have to see an increase, modest, but an increase over a year ago's next 3 quarters. So, does that indicate -- is that modest growth, is that expected to come from rate? Or is it from market share?

If I could start up, it's coming from several different places. As we've already discussed, we do have an aspiration to grow on the property cat side and those lines which are exposed to property cat. We also do have some lines which continue to grow. We referred, for example, to our kidnap and ransom line where we are experiencing some really nice market conditions, and we have enjoyed that very much in this quarter. That's not a business that we were in, in any material way this time last year. So, we do have some contributions, new lines coming through, we have some good potential round about lines which are exposed to property cat. And we have some reductions as well in those lines which are not doing as well as we would like them to. So, it's a real mixture.

Okay. And then on the US insurance operations, in the past you've already broken that division out, but with this most recent quarter, you're incorporating all of insurance together without a geographical breakdown. But could you give us kind of a status report as to where that business is after the first quarter and with new management being brought in?

Well, perhaps I could give you an explanation as to why we have the disclosure we have, and then Chris might make some comments on how we are feeling about US insurance. We determined at the beginning of 2010 that we would reorganize and manage our business in terms of insurance and reinsurance, and that is how we report our business. For 2010, we did continue, for the obvious accounting reasons to disclose on the old basis, we no longer do that, but that's not the way we actually seek to manage the business. So, that's why the US insurance element has fallen away, but perhaps Chris has some comments on how we're feeling about US insurance?

Sure. It's been a repositioning, it's been a rebuild in the US, and I think just reminding you of some things that in the last 15 months or so, there's a new team handling professional liability; they're doing a great job. I think they've written about $25 million of premium so far; it's not a big number, but it's a good number given a tough market, and I think it's high quality business and making good progress, very happy with what they're doing.

On the D&A side, we've also got a very nice team. They need the admitted paper, which we won't have fully for another month or two, but their progress is a little slower than on the professional side, but the progress is good. We have an inland, marine, and ocean cargo team that are doing just great things, not big premium numbers, again, but very high quality. We like what they're doing.

We had to make some changes in the general casualty, a new team replaced old management there a couple of months ago. They cut the book we had, which I guess at one stage was $66-odd million, they took it down below $10 million, and they are beginning to rebuild that now, and they may do $20 million, $25 million this year using connections that they have and connections that our new leader in the US, Mario Vitale, has. Their job is not just building, it's kind of fix what they inherit and build.

Also, I mentioned on the call, Mike Toppi, and Mike is a terrific, energetic guy. He is a surety specialist, probably the best underwriting loss ratio of any underwriter I have ever met in my life. So, we like what he's doing, but he's early stages.

So, we feel pretty good about it. But I'll characterize like this, we had a loss ratio problem that showed up in the last quarter and 2 quarters before that in terms of reserve strengthening. I think we've done that reserve strength. I think the loss ratio problem has been cured, but now temporarily we have an expense ratio issue because these are good people and good people aren't cheap people, and we don't try to pay them cheaply. So, until such time as the end premium builds, and you get that expense ratio kind of normalizing, I think what you're going to see in the US is favorable loss ratios and unattractive expense ratios, and combines that are just about the right size of acceptable.

As I also said on the call, it is about positioning. If you believe the US is never going to turn, then we've got this wrong, but I don't hold that view. I think there will be a better market. I can't tell you exactly when, but when that comes we have the potential for quite explosive and very profitable growth in the US. So, I hope that gives you a little flavor.

Yes, I appreciate that. Thank you for the color. One last question on -- coming into the second quarter, already we're seeing unusually high incidences of tornadoes and other catastrophes in the US market. And I'm just curious, do you see that as something that may be a factor affecting Aspen?

Those events are more or less going on as we speak, so all I can give you is some general color. On our insurance side, we're not big in the Midwest and in those southern states that have been effected so far, so I'd be very surprised to find we had any real exposure there.

Although tornadoes make a lot of destruction, they're actually a very small footprint. So, typically they don't add up to very, very big insured losses. They would typically be below the retentions of most of our reinsurance clients. There's always the chance we have some small clients as well, some small mutuals, we might pick up one of those, I don't know that we have one, but it is conceivable. But I'm not anticipating that it would be anything that upsets the results of the quarter in a serious way. If the point of your question really is, do we think we're financially impacted by the tornadoes? My guess at this early stage is no, we're not.

Okay, well, thank you very much.

Okay.

(Operator Instructions)

We have another question.

Your next question is a follow-up from the line of Amit Kumar with Macquarie.

Thanks. I'll make this quick. Can you revisit the New Zealand and Australian markets? From what I've heard that some of the primaries out there are having difficulty purchasing reinsurance based on the rates. Maybe you can refresh us what the rates are? What rates are being offered right now? And where do you see yourself in those markets?

Hi, Amit, this is James Few. So, let's take Australia first. In cat-affected areas in Australia, the primary players in that market are able to challenge and are successively challenging increased rates to reflect the losses from catastrophes. And there have actually been a trend of loss activity frequency of smaller losses in Australia for some time, and we were hoping that that rate increase wouldn't just be on cat-exposed business, but actually would extend more broadly across their portfolios. To some extent that has happened, but so far not to the level that we were hoping.

That to our mind would probably leave us in a similar position as we've been in before in Australia where our role there tends to be quite high up, and we don't tend to find the pricing lower down attractive. So, from Aspen Re's point of view, our position in Australia probably isn't going to change based on the recent rate increases that we have seen.

In New Zealand, a bigger event for the New Zealand public to deal with down in Christ Church, a tragic event, the complexity of it is still being dealt with. The government scheme that provides earthquake coverage to homeowners in New Zealand will indeed be charging more money going forward. The political will to do that is there, and that's likely to happen. In the meantime, the government scheme will be looking to buy reinsurance again. As you know, we have provided reinsurance to the government scheme for many, many years. We haven't yet concluded any negotiations with that customer. But the thinking would be across the board, if you have had such activity, such earthquake activity in New Zealand, then rates will respond accordingly. If they don't, then our appetite for the risk will change.

Okay.

Did that get to your question?

Yes, very helpful. And just one final question to end this, can you talk about the Florida markets, and there have been a lot of comments and discussions, and in fact there has been some movement today itself. Do you -- what sort of role do you anticipate to play as we go forward with citizens, perhaps reducing its market share and maybe the take-out companies and other companies expanding the primary market share?

In Florida I think there's a lot of changes going on at the moment, and I think the net effect of that is likely to be increased demand for reinsurance from companies such as Aspen. Aspen, as Chris alluded to earlier, we are trading well below our tolerance, we're taking on board some lessons learned at the moment from cat losses, and we are reviewing the views of a major cat model, but we have capacity. I think we have a view on what we think pricing should do, and that's a view that isn't yet universally shared, but we think is gathering some momentum. If prices go to areas where we think they need to go, then Aspen has capacity to write reinsurance. And I think, though, that if the prices don't go to where we need them to go, we are unlikely to certainly become a much bigger player in the Florida market despite the increased demand.

Okay. Thanks for your answers.

And there are no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

Okay, if there are no further questions, I will just thank everybody for their attention on our first-ever PM call. I think next time we will return to our morning convention. I wish you a very pleasant rest of your day. Goodbye.

Thank you. This concludes today's Aspen Insurance Holdings first-quarter 2011 earnings conference call. You may now disconnect.