Aspen Insurance Holdings Ltd (AHL) 2011 Q2 法說會逐字稿

Good morning my name is Kimberly and I will be your conference operator today. At this point I would like to welcome everyone to Aspen Insurance Holdings second 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 miss Kerry Calaiaro, you may begin your conference.

Thank you and good morning. The presenters are today's call is Chris O'Kane, Chief Executive Officer and Richard Houghton Chief Financial Officer of Aspen Insurance Holdings.

Before we get underway I'd like to make the following remarks.

Last night we issued our press release announcing Aspen's financial results for the quarter and 6 months ended June 30, 2011. This press release as well as corresponding supplementary financial information and a short slide presentation can be found on our website at www.aspen.bm.

The presentations 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 a more detailed description of these uncertainties and other factors, please see the risk factor section in Aspen's annual report on Form 10-K filed with the SEC and on our website.

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

I'd now like to turn the call over to Chris O'Kane.

Thank you, Kerry and good morning, everyone. Our results today mark the midpoint of the year and it has been an eventful 6 months for the industry with severe weather related events impacting the southeast and Midwestern regions of the US in April and May following on from an extremely active first quarter for natural catastrophes.

During our first quarter earnings call I commented that for the first time in over 2 years we were seeing market sentiment changing with the growing acceptance in our industry that the market not only needed to harden but was in fact doing so. I also said that I expected to see the hardening take place in catastrophe exposed property lines in the first instance with the effect most apparent in reinsurance.

This is what we have witnessed so far. With the key June and July renewals not complete, it is clear that pricing momentum in catastrophe exposed property count is continuing to build as market focus shifts to 2012 ahead of the Monte Carlo Baden-Baden PCI meetings later this year. This will become more pronounced.

Absent the clearly identifiable catalyst such as a major catastrophe event it takes time to effect a market turn. As I mentioned on our first quarter call, the preconditions for a market turn are well known and understood and let's first say that many of these preconditions in support of a turn have now been met.

However, the key to affecting a market turn is actually underwriter action. Some underwriters will respond faster than others to changing circumstances and an internal change in the industry mind-set is now taking place.

The high incidence of natural catastrophes and the impact of the changes resulting from the release of the RMS US wind catastrophe model in March are two key influences here.

The catastrophe events in the US in the second quarter have added an estimated $18 billion to the $48 billion of insured losses from natural catastrophe events in the first quarter. The half year total of $66 billion so far it far exceeds the figure $40 billion for whole 2010.

As you are aware, AIR introduced their US wind model version 12.5 last November and this was followed by RMS version 11 this past March. US insurers and reinsures who use these models to determine pricing and establish buying limits and PMLs are only part way through the process of incorporating these new findings.

We completed, we have actually completed our assessment of RMS version 11 and we did that by the end of May. We had already incorporated many of the changes in our previous assumptions and we have now incorporated the remainder of the practice we believe to be valid into our pricing and accumulation models.

Hence our cap pricing, accumulation calculations, reinsurance retro buying and use of capital fully reflect the most up-to-date proprietary models. This is reflected in the PMLs reported to you on slide 19 of the accompanying presentation and we will be taking no further action regarding this development.

At this stage we do not believe that the broader market has reflected the full impact of these model changes. Bear in mind that some insurers who buy reinsurance as well as some reinsurers do not use RMS and as such we believe they will record little or no impact from the RMS changes.

However, the majority of reinsurers and almost 80% of US primary companies use RMS as at least one of the cat management models. Currently it appears to us that less than a quarter of these companies have reflected its impact in the way they have calculated PML's reinsurance purchasing needs and prices.

As an illustration, the 1 in a 100 market loss of US wind has increased from $120 billion in RMS version 10 to $180 billion in RMS version 11. Notwithstanding the $60 billion increase in US win PML across the industry we have only been able to identify an additional $2.5 billion of mid-year additional cat limit which has actually been purchased.

This suggests that the amount for US wind capacity has the ability to increase a great deal as model acceptance and usage widens with upwards movement in price. We are aware of a number of clients who have scheduled their decisions on how to respond to the model changes to take place in the last quarter of this year.

Against the backdrop of these developments, we have reduced our total limits exposed to US wind by over $100 million since the beginning of the year and have remained within our self-imposed tolerance of 17.5% of shareholders equity or a 1 in a 100 event, with our current US wind peak exposure standing at 16.3%.

As such we remain well positioned to increase our book and therefore benefit from continued pricing momentum through the January 1 renewals.

Our catastrophe reinsurance business has renewed at improving rates since the Japanese earthquake struck in March.

There were 2 major US accounts which renewed prior to Tohoku, and prior to the introduction of our version 11. Excluding these 2 accounts, we achieved a 16% improvement across our entire cat excess loss book, including these 2 accounts we still achieved a 13% increase.

Breaking this down further, we achieved average increases of 89% in Australia and New Zealand, 49% in Japan including temporary extensions there and 18% in Asia ex Japan.

In the US we achieved a 12% improvement in price excluding the 2 major US accounts and an 8% increase if they are included. Elsewhere in our catastrophe book we renewed business with minimal price changes. We achieved these price movements in part because we did not renew approximately $100 million of aggregate US wind limit and a further $80 million of non-US wind limit, where we did not believe price and offer reflected our current view of risk.

Nevertheless we anticipate that we will have the opportunity for risk exposures in 2012 and beyond at better prices.

Turning now to our performance for the quarter, we reported an operating profit of $32 million and net operating income of $0.36 per diluted share.

These results reflect the catastrophe losses from the US storms in the second quarter which mainly impacted our reinsurance segment. Our reinsurance segment reported a modest loss of $14 million in the quarter as this segment absorbed the majority of the second quarter catastrophe losses.

Market conditions in casualty reinsurance although challenging are stabilizing and we continue to manage our top line accordingly with the reduction in gross written premium of 13% from last year's second quarter. This reflects our continued selectable approach and focus on delivering acceptable risk adjusted returns at this stage in the cycle. Within our specialty reinsurance business, we have continued to see opportunities for profitable growth particularly in credit and surety and in our non-US crop lines.

Gross written premium increased by 28% for these lines year on year.

Our insurance segment had a modest but encouraging result this quarter. We reported an underwriting profit of $5 million with 12% premium growth and positive signs in a number of areas. We generated a 6 percentage point movement in the net loss ratio in the quarter to 62.6% from 69.1% last year.

The majority of our premium growth was derived from our marine, energy and transportation and from our financial and professional lines businesses.

The premium growth in marine, energy and transportation has arisen from our energy liability accounts on the back of certain market losses. The premium in financial and professional lines has grown as we have written more kidnap and ransom business. We have made good progress in this quarter in US insurance operations under Mario Vitale leadership and positive momentum is building there.

We have a strong team now of underwriters in place with the experience and technical expertise to navigate the cycles of our markets and we continue to strengthen the supporting infrastructure through the development of our systems and processes.

We further enhanced our US team during the quarter with 2 key hires. We appointed Ken Cornell as the new leader for our environmental liability insurance business. Ken is a highly regarded and successful underwriter in this field.

Robert Rheel, a seasoned industry veteran joined us in a new position of head of US sales, marketing and distribution, a strategic marketing role that will allow us to enhance our distribution efforts collectively with brokers and agents in key market segments where we expect to see growing premium production and profitable results. With that, I'm going to turn the call over to Richard to review the results of the quarter in more detail.

Thank you, Chris and good morning, everybody. Net income after tax for the second quarter was $10 million compared with $109 million for 2010 and operating income was $32 million compared with $105 million for the same period last year.

The quarter's results include $65 million of losses after tax and net of reinstatement premiums and reinsurance associated with the US tornados and floods.

Annualized operating ROE was 4.4% compared with 15.6% in 2010 with the impact of cat losses representing 11 points on this year's operating ROE.

Operating income was $0.36 per diluted share and ex-cat losses was $1.24 per share compared with $1.23 last year. Diluted book value per share was $37.43 an increase of 2% over the first quarter 2011 and 1% over the second quarter of 2010.

The increase during the quarter was primarily attributable to the increase in unrealized gains in our investment portfolio. Before I discuss some key financial metrics I wanted to highlight a change we have made to the definition of operating income in the quarter.

Historically, operating income included movements in derivative contracts which consisted of interest rate swaps, foreign exchange contracts and credit protection instruments. The income statement impact of these instruments has been reclassified from other income or expense into realized and unrealized investment gains and losses.

We view these activities as primarily protecting book value and not as a core component of core underwriting operations, hence the reclassification.

Now let me discuss some of our key financial metrics.

Gross written premiums in the quarter of $582 million were up 7% on the same period last year with the increase coming primarily from our insurance segment. Reinsurance gross written premiums rose 2% from a year ago.

Our seeded written premiums increased by $50 million to $57 million as we have selectively lowered our retention levels through purchasing additional retro session and adjusting exposures particularly in our catastrophe exposed property reinsurance lines ahead of the US wind season and to proactively manage the pricing cycle.

The combined ratio for the quarter was 105% compared with 86.9% last year. The ex-cat loss ratio has improved to 54.7% from 57.4% last year.

The accident year ex-cat combined ratio for the quarter was 96.2% compared with 89.1% last year with 5 points of the movement due to the purchase of additional reinsurance and retrocession.

We made these decisions to strengthen the balance sheet ahead of a predicted active US hurricane season. The underlying accident year loss ratio have increased less than 2 points compared to last year.

Prior year reserve releases in the second quarter of 2011 were $32.8 million with $25.3 million from reinsurance and $7.5 million from insurance.

Prior year reserve releases were $2.1 million in the comparable 2010 quarter.

Our expense ratio of 34% compares with 29.2% last year with just under 2 points of the increase attributable to our reduced retention and consequent reduction in net earned premium. The remainder of the increase is split between acquisition costs and general and administrative expenses.

Higher acquisition costs were attributable to a slight change in our business mix including a shift from casualty insurance lines towards our successful kidnap and ransom business which comes with a relatively higher acquisition expense ratio.

The increase in our G&A expense ratio is associated with continued build-out of our US operations.

I will now comment in further detail on our segmental result. I will start with reinsurance.

Reinsurance reported an underwriting loss of $14 million for the quarter. Included in our reinsurance results for the quarter was $63 million of losses as a result of the April and May US tornados and floods, net of reinsurance and reinstatements. We had a small improvement on the Q1 2011 cat events and our level of uncertainty surrounding our reserves for these events have significantly diminished as our seasons have reported and updated initial loss estimates.

The combined ratio for the reinsurance segment of 105.2% included 24 percentage points of cat losses. Excluding the impact of cats, the combined ratio of 81% compared with 76.6% last year. You may recall that Q2 2010 did not have material natural catastrophe losses.

For the half year, the combined ratio for the reinsurance segment was 141.7% with an ex cat combined ratio of 77.3% compared with 75.6% last year.

Gross written premiums of $725 million declined 6% year-on-year primarily due to reduced exposure in casualty reinsurance lines.

The accident year ex-cat combined ratio of 86.2% for the half year includes 3 points of impacts from an increase in retrocessional reinsurance purchased during the period. On the equivalent basis this is in line with 82.5% for the 6-month period in 2010.

Turning now to our insurance results.

Our insurance segment generated an underwriting profit of $5 million for the quarter with a combined ratio of 97.4%, broadly in line with last year.

The net loss ratio for the segment has improved to 62.6% from 69.1% with the improvement across our marine, energy and transportation lines as well as in our casualty and financial and professional lines.

Gross written premium in our insurance segment was $294 million compared with 262 million in the second quarter last year. The increase is primarily attributable to the kidnap and ransom business where we have seen rates rising and new business opportunities generated by heightened security concerns. For the half year the combined ratio for the insurance segment was 98.6% with an ex-cat combined ratio of 96.2% compared with 97.8% last year.

Gross written premiums of $528 million rose 11% primarily in our marine, aviation and transportation lines and also our financial and professional lines.

The accident year ex-cat combined ratio of 98% for the half year includes 3 points of impact from the increase in reinsurance purchased this year. This compares with 95.4% for the 6-month period in 2010.

Now turning to our investment performance.

And you may wish to refer to slide 16 to 18 in the earnings pack for additional information.

Overall, net investments income for the quarter was $59 million, up marginally from last year, as dividend income from our recent investment in high quality global equities has provided incremental income against a backdrop of persistent low interest rates.

Equity securities represent about 2% of total cash and investment for the end of June.

Book yield on our fixed income portfolio of 3.64% on June 30, 2011, is in line with the end of the first quarter this year, although down from 4.05% at the end of the second quarter last year.

The average duration of the fixed income portfolio including the impacts of interest rate swaps of 2.5 years is in line with the first quarter of this year. The duration has been managed down from 3 years at the same point last year.

Average credit quality of the portfolio remains AA plus and we have no other than temporary impairment charges this quarter.

As a reminder, we have a $1 billion swap against our $6 billion fixed income investment portfolio to protect our balance sheet from anticipated rising rates.

The current quarter included $25 million of charge in realized and unrealized losses on our interest rate swap portfolio.

Net realized and unrealized losses, investment losses included in the income statement were $16 million in the quarter compared to a gain of $6 million last year.

I also wanted to provide a brief update on our investment exposures in Europe as we watch the situation in Greece and elsewhere unfold.

Although we have no direct exposure in the investment portfolio to Greece and indeed imperial direct exposure to Portugal Island in Spain, we do have just over $300 million of fixed income investments in Euro zone financials.

These investments, of which approximately 1/3 have direct government guarantees, are with major corporate lenders predominantly in Germany, the Nordic countries, the Netherlands and Switzerland. We do not have any credit concerns over any of these holdings at this time.

At the end of the quarter there $252 million of net unrealized gains pre-tax in the available for sale fixed income portfolio compared with $204 million at the end of the first quarter this year and $240 million at the end of 2010.

Turning now to our capital position.

Our balance sheet remains robust with $9.5 billion in total assets and $3.1 billion in total shareholders equity.

We have increased our percentage of cash and cash equivalents to 14% of total investments in cash to enhance our investing in capital flexibility in the current economic climate.

Consequently, we remain comfortably capitalized in respect to not only the assessments of rating agencies but also our own internal view.

We have $4.4 billion of gross reserve on our balance sheet an increase of just over $900 million since this time last year. This includes a margin of $400 million over our mean best estimate assessment ultimate losses or approximating the 87 percentile in terms of the projected distribution of outcomes.

Turning now to guidance for 2011 as set out on slide 20 of the pack.

In the light of our catastrophe losses in the first half of the year and prevailing market conditions we anticipate our full-year combined ratio to be in the range of 109% to 114% including a cat load of $110 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 seeded premium to increase to between 11% and 14% of gross earned premium as we have purchased additional reinsurance and retrocession 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 geographic distribution of losses within the group.

That concludes my comments on our results for the quarter and half year and updated guidance for 2011.

And with that, I would like to hand the call back over to Chris.

Thanks, Richard.

I am now going to comment briefly on renewal activity during quarter which is summarized on page 6 of the slide pack.

Starting with our reinsurance lines I've already talked about strength in rates and property reinsurance.

Market conditions in casualty reinsurance remain challenging although rates have begun to stabilize.

Our US casualty reinsurance saw very little movement in range, international casualty reinsurance achieved some rate increases mainly driven by the Australian account. In our specialty reinsurance lines we have seen modest improvements in areas of account impacted by the natural catastrophes in the first quarter with non-US caught broadly flat and single digit rate reductions in credit and surety.

Turning now to our insurance segment. Our marine, energy and construction liability account was a virtual dry spot in part due to the impact of Deepwater Horizon last year and we were able to take advantage of increased price momentum resulting in the achievement of an average rate increase of 22% in our book year to date.

Aviation pricing remained broadly flat but with some pressure on more classes. The energy/physical damage market has been impacted by significant market loss with the sinking of the Griffin below ship in the North Sea in February, but we are not yet seeing this reflected in improved pricing.

Our strategy is predicated on the achievement of quality stable earnings over time and managing earnings volatility, and protecting our capital position are key elements of this. Effective use of appropriately priced reinsurance is an integral part of approach to managing cat risk and also provides us with some additional balance sheet flexibility.

Given the high incidence of natural catastrophes year to date with several months of US hurricane season still to go, we have taken the opportunity to purchase additional limit wind and quake in the US and Europe as well as additional cover for non-peak cap perils.

Compared with this period last year we now have $167 million of additional limit for US wind, $123 million of additional limit for US quake and $65 million of additional limit for non-US events.

With this additional reinsurance in place and having fully implemented the changes from the latest model developments, we are now looking forward with some optimism at Aspen as we anticipate prices for cat exposed property will rise to meet the increased demand and with that, we are going to turn the call over to questions and we'd be happy to deal with any you may have.

(Operator instructions).

We will pause for just a moment to compound the Q&A roster. Your first question comes from the line of Amit Kumar with Macquarie.

Thanks and good morning and congrats on the quarter. Just going back to your opening comments and in terms of your expectations for 1-1. I was wondering how much additional business could you write if the rate momentum continues at 1-1?

Amit, the question sounds like a simple one. It's more complicated than that because as you know very well we have share price trading at 0.7 something a book so one attractive things to do with capital is to buy back shares.

What we have to do is say --Is that more attractive than writing more business?-- And if it is, we will buy back shares and if it isn't, we will write more business.

And where we see the opportunity a moment for writing business really is in the cat exposed property and I think I said to you in the call we are at about 16.3% currently versus 17.5% at a 1 to 100 year number so that is about 1.2% of our total shareholder's equity which is about $40 million very approximately of additional PML limit we could take on.

Depending how we spread that PML around the world my guess is $100 million to $120 million of additional limit that sort of figure. So its a little bit of headroom, not a vast amount of headroom.

Got it. That's actually helpful.

And I'm just wondering is the pricing momentum contingent on a moderately active hurricane season? And if that does not happen, do you still expect pricing to go up in spite of the commensurate buildup in capacity? Because even other companies are mentioning, you know, what you're talking about in terms of keeping the powder dry 1-1. I'm just wondering how do you view a lack of active hurricane impacting your top process?

Okay. Well, I actually think the main driver is change in the perception of risk and I think what I try to say in the call. A very good illustration is for believers in RMS, $60 billion more or 50% more exposure at the 100 level in the US wind, $60 billion more is a very big number.

I wouldn't expect all of that to be reinsured but so far we have only seen people by about $2.5 billion of additional limit and expect a lot more than $2.5 billion of additional limit.

Some people are going to retain risk, some will reduce exposures, some will say I don't believe in RMS, I believe in AIR, I believe my own model not going to be affected. But I still think there is probably $20 billion of additional demand, that sort of figure for more reinsurance, and the reinsurance market isn't capable providing that amount of demand.

So capital markets are going to get drawn in but frankly $20 billion is a big deal for capital markets or that small subsection that is actually interested in insurance linked securities, and I think that is what will drive up price essentially. It's always about supply and demand and in this case we have a change perception of risk leading to increased demand forcing up prices.

Technically if you want to look at it that way, the new models would suggest that sort of set in parts of East Coast wind probably need to pay 30% more than they did before, but that's highly variable. There are some areas where actually it suggests maybe a little less money is okay and some few cases certainly inland accounts that were flattered by the old RMS model may need multiples.

But you're probably looking at 20% to 30% more money as being, what's required and that's what I think would have to happen to make the industry able to meet the primary writers needs. That I see as happening kind of regardless of loss activity.

If we have no losses, if that's the scenario-- if we have losses that just complicates things because some people will be damaged by those losses and will be less able to respond and that will force prices up a bit more. So I put myself down as cautiously optimistic on this one as we look forward to one month.

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

Yes, thank you. I just wanted to walk through a little bit of the growth this quarter and understand, you know, where rate is and where premium is coming? Let's start with the easy one.

On the kidnap and ransom getting the $30 million more in premium, have you opened up that market and found business? How has that grown so quickly?

We bought a small company just over a year ago. That company operated as an agency for a variety of insurance carriers, principally Lloyd syndicates and because it operated as an agency it wasn't very -- it wasn't as popular with the brokers with the clients as it might have been.

When it came into Aspen, it got an entirely different reception. We always liked your underwriting expertise, we liked the product you sold, we just didn't like the security chain not with the Aspen paper. We like it. So suddenly there is demand.

So that was the first change and so we have only been in K&R in a serious way for a little over a year.

You then have the situation in Somalia and, you know, there is simply more concern about piracy and that sort of thing than there was before so that is causing a big amount of demand. And then, you know, the generally I would say the world is a little more turbulent than it used to be and this is an area of increased demand generally. So it's partly the market is growing but it's partly our ability to access the market has improved.

And a big chunk of this is also rate. We are, you know, how do I put this? Generally speaking it's a good thing to be selling when there's a lot of fear around and in this area there is a lot of fear around and that probably helps our pricing.

Okay. Excellent. And then on property catastrophe versus other property, premium gross was flat in the property cat area but down a little bit because you bought the cover. That's -- I'm reading that correctly on the property cat business?

Yes, there's a couple of things you'll know We bought -- as I said, we bought quite a bit of additional reinsurance or retro limit and that's affecting the net premium.

At a gross level, it's affected by cancelling limits. And we cancelled limits because our view of risk has moved on. So, a renewal with paying the same money for the same exposure, that's not what we are looking for, so we cancel limit and obviously we lose premium when we do that. And we are actually feeling pretty relaxed about that and as I said in answer to Amit a moment ago we see the demand for the cat property increasing as this year goes on into next year and having taking some drive of that I think the better thing to do than to write at less attractive rates now.

So you look at your own footprint of cat risk right now and think it is slightly smaller than it was one year ago?

In terms of the limits out there, that is a correct statement. Because of you PML calculation has grown more conservative than the PML is slightly higher, we are at 16.3% today for US wind 100. I think from memory a year ago that figure was around about 14%.

Okay. And then finally--

Was that good Josh?

Yes, yes, very good. And finally the other property line which is down on a gross basis about 15% on a little bit more on a net basis.

I don't think there's any particular magic in there.

There is still some sort of cat exposed component to other property even though it's outside of the property cats, specific designation. So it actually follows on from what Chris was talking about earlier about, you know, bring down those limits where we haven't been able to get the price increases that we thought were appropriate.

The other action, I can't quantify this, unfortunately Josh, but the other reduced exposure which would come in other property is in Japan post the quake where we reduced exposures. Essentially why we have done that clearly prices in Japan are going up, but there is a view that we are investigating that the Sagami Trough off Tokyo is actually more active, where previously might have been -- in the next 40, 50 years with the view to saying expected in 10 to 20 years.

Between now and next April we will understand that a lot better but meanwhile we are being a little bit coy about risk and that would have a negative impact on at least written premium in the quarter in the other property area.

Your next question comes from the line of Vinay Misquith with Ever Court Partners.

Good morning. I believe Richard has already answered this but I just sort of wanted some clarification.

The accident year loss ratio ex-cat and the reinsurance segment picked up quite significantly this quarter. Was it because of the retro purchased and would that flow into earnings for the remaining quarters or is it just a one quarter deal?

The short answer is, yes, that is the case, that's the main variance that's occurred in the accident year ratio and that will continue to flow through the rest of this year. And of course all that means is because extra purchasing of retro, we are in a great position to take advantage of the potential hardening that Chris mentioned so that's the trade-off.

The other element I will bring up is our reinsurance and retro purchasing, again as Chris has stated before, fully includes our appreciation of RMS 11 and there's buildup into our thinking purchasing decisions. So we think we have made the purchases we require to retain our limits and exposures as we would like to.

Okay. So from a margin perspective we should assume that the margins stay flat for this quarter -- for the rest of the year because of the higher retro purchases. Okay.

The second question was on the decision to buy retro, just curious whether that was more predicting the balance sheet in case of a large cat or was it because you felt that you wanted to keep your powder drive for 1-1?

The number of elements Vinay that go into any decision of that sort. About -- let me think-- about last September, October we were looking at increased cat activity on the international side places like Australia, places like Chile, places like New Zealand affected us and we took a decision to buy some retro there. Really I would call it more earnings than I would call it balance sheet protection. And it turned out to be a very good decision and so we have actually renewed some of that and in fact with subsequent loss I think we even hit it again. So I would say that was kind of news driven.

And then there was another element which was related to model change and clearly what we are seeing a lot of any model releases we were aware of and it incorporated, there were some things that we hadn't. That required more capital per unit of risk in the cat book and one of the ways we dealt with that was protect the balance sheet by buying reinsurance or retro allowing us to maintain our growth exposures or nearly maintain our growth exposures.

And, then the other thing of this is US wind and I'm not a great believer that you can look at these forecasts and decide what's going to happen, the correlation is low. But I think, you know, the balance of sensible opinion is to expect this season to be a bit more active than average so having a little more cover than previous seemed to us to be a prudent thing to do.

(Operator Instructions)

As a reminder, if you would like to ask an audio question, please press star then the number 1 on your telephone keypad. Your next question comes from the line of Brian Meredith with UBS.

Yes, good morning. A couple questions here for you, Chris.

The first one I'm wondering if you give us a sense of what the impact of RMS 11 was on your gross PML and I can see that your US, you know, wind PMLs were up roughly 17% sequentially but you bought the retro. I'm curious what the impact on the gross basis would have been.

Okay.

That's obviously a little bit more.

If we hadn't done anything, what would have been the case?

Yes, exactly.

But of course that's not how you run a business, you're always doing things. If we had just taken our book of business and renewed it, then on the reinsurance side we would have had something like a 35% to 40% increase in PML.

Wow.

And on the insurance side, which is actually a much smaller part of it but the increase was bigger, more like 80%.

Wow.

That's if you just take a book -- what you actually have to do then is say well, okay, what's consuming the capital here? What's the stuff that you thought you wanted to do -- that you may not want to do again and do you really not want to do it again. Do you believe there's a rip in the model or do you believe the model is intelligent? And then you start reacting.

And so our reactions were changing our pricing, changing the distribution of risk, changing the amount of reinsurance or retro that we bought, cancelling some limits, repositioning the book, all the things we have been talking about on this call. So in the end, the answer is nothing like as big as that. That's just if you had -- if you just stood in the face of the headlights and froze.

But I think that's what you're asking me.

Yes, that's exactly it. And then next one on the wind model or the hurricane model. What area of the model had the most impact on that increase in PMLs? Was it the medium term rates? Was it storm surge?

What had the most impact on you?

I think the inland -- the increase exposure on the inland stuff was a significant component and storm surge accounted for a significant chunk as well.

So the medium term rates the increase in hurricane frequency didn't have as much of an impact? That's actually when you look at the PMLs from RMS that's the area that had the biggest hits to industry wide PMLs.

That also is a significant part but I have to say I don't think we completely believe everything that's coming out of RMS.

Right.

So you know, we -- you know, in all these things RMS is an important determinant but it's by no means like they say it so we do it. So to be honest I think on that they are a little bit unduly pessimistic.

Okay. And then last question, can you give us kind of your initial read on the impact of the European wind model?

I just don't know. We've had it for a few days. We are looking at it cautiously.

My impression is the impact in Europe is nothing like as dramatic as the impact in US wind was with version 11 but really a little bit early to be talking about that. Sorry.

Okay. Thanks.

Thank you Brian.

Thank you, Brian.

And there are no further questions at this time.

Okay. Well, thank you all for your time and attention this morning and wish you a pleasant day. Bye-bye.

Thank you. That does conclude today's Aspen Insurance Holdings Second Quarter 2011 earnings conference call. You may now disconnect.