Aspen Insurance Holdings Ltd (AHL) 2011 Q3 法說會逐字稿

Good morning. My name is Cassandra, and I will be your conference operator today. At this time I would like to welcome everyone to the Aspen Insurance Holdings third quarter 2011 earnings conference call. All lines have been put on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) And now, I would like to turn the call over to Kerry Calaiaro. You may begin.

Thank you and good morning. The presenters on today's call are Chris O'Kane, Chief Executive Officer, and Richard Houghton, Chief Financial Officer of Aspen Insurance Holdings. Before we get underway, I'd like to make the following remarks. Last night we issued our press release announcing Aspen's financial results for the quarter and 9 months ended September 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.co.

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 but are subject to a number of uncertainties and other factors. For more detailed descriptions of these uncertainties and other factors, please see the Risk Factor section in Aspen's annual report on Form 10-K filed with the SEC and on our website. This presentation will contain non-GAAP financial measures which we believe are meaningful in evaluating the Company's performance. For a detailed disclosure on non-GAAP financials, please refer to the supplementary financial data and our earnings slide presentation posted on the Aspen website. I'll now turn the call over to Chris O'Kane.

Thank you, Kerry, and good morning, everyone. I am pleased with our results this quarter which have been achieved against a back drop of continued soft market conditions in many lines, a high frequency of large loss cat activity, and turbulence in global financial markets. We reported an 8.4% annualized operating return in equity and the diluted book value per share role is over 2% in the quarter to $38.27. We achieved underwriting profits of $27 million with positive contributions from each of our 2 business segments. Included in these results, the net reserve of these is in both reinsurance and insurance.

As difficult as the current trading environment is, it is compounded by continuing macroeconomic uncertainty, and I think it is worth spending a few minutes on this topic before I address the results in more detail. The evidence from previous credit-driven economic crises suggest that recovery is likely to be slow and interrupted by periods of high volatility. That is certainly what we're witnessing now. This has implications for the level of investment return the industry can achieve and for lines of business such as trade credit insurance and financial institutions insurance that could respond to credit-related stress in capital markets and recessional risks in the real economy. 9 months ago our main concern was interest rates and inflationary risks. But at this time we believe the down-side risk in our investment portfolio over the next 4 months is most likely to rise from widening spreads on corporate bonds and weak equity markets. We have been adapting our investment appetite and stress tests accordingly.

I'd like to add more color on our Eurozone investment exposures. We have a very modest amount of risk, namely $291 million at book value of Eurozone investments, and provide some detail on the credit rating of these investments on page 19 of the slide pack. We are, of course, concerned by the potential contagion risks posed by the Eurozone crisis to bonds issued by financial institutions not just in Europe, but globally. And at quarter end our total worldwide holdings in financial institutions amounted to $824 million or 12% of our invested assets versus stable weighting of 15% in this category. This excludes government guaranteed holdings.

In particular, we have been reducing our exposure to the debt securities of Eurozone banks and this now stands, adjusted to 2% of invested assets, all of which is to banks in the stronger Eurozone nations. We have only $46 million of exposure to German, French and Finnish government bonds, and we do not hold the sovereign bonds of any other Eurozone country. The vast majority of our Eurozone exposures are in sovereign debt, government supported investments, and high quality corporates, with 96% having a rating of A or above. Our exposure to the corporate debt securities of Eurozone banks is $53 million, or just under 1% of invested assets, all of which is to banks in Germany, France, the Netherlands and other countries we consider to be stronger Eurozone nations.

Our equity portfolio was valued at $172 million or 2.2% of invested assets at quarter end. On [our equity] stress test results, we concluded that many losses from this -- I'm sorry, any losses from this small allocation should be manageable. Moreover, these investments comprise a high quality global equity income portfolio, a gross dividend yield of 4.6%. This portfolio is well diversified. At quarter end, about 40% of the equity portfolio was in North America with 22% in the UK, 20% in Europe, and 18% in the rest of the world including Asia and emerging markets. We are also sensitive to macroeconomic risks on the liability side of our [balance of] business. Should economic growth in Western Europe remain weak, we consider that our trade credit insurance precedents are well placed to protect profitability unless there is a very rapid dislocation in the economic environment, such as might arise, for example, from widespread sovereign defaults.

The major renewal date for this business is January 1, and we will monitor carefully how our cedants managed their exposures as we approach that date, noting that they have many tools to limit risks, including rights of cancellation of limits on at-risk buyers. Trade credit insurers are reporting signs of stabilization in their market, and we continue to remain selective, having written less than $1 million of trade credit insurance and $25 million in trade credit reinsurance in the Eurozone through the 9 months of 2011. In our financial and professional lines, we have been seeking to minimize exposure to the Eurozone and have written less than $3 million of professional indemnity, prime, and D&O in the Eurozone through the 9 months of 2011.

Now, let's take a look at our underwriting performance. Starting with reinsurance, we reported underwriting profits for the third quarter of $13 million and the combined rates of 95.4%, including 18 points in catastrophe losses. Most written premiums were $276 million, 17% higher than a year ago, and our property lines premium increased by 12% quarter-on-quarter as we benefited from positive pricing on cat exposed property classes. In addition, some delayed earthquake renewals from Japan came through in the quarter. In specialty reinsurance, gross written premiums were $61 million, up 25% from a year ago. This reflected growth in our credit and surety [overall] pricing has generally been favorable and from our non US crop account which we established in 2010.

In our casualty lines, premiums were relatively flat in the quarter excluding premium adjustments, and they have declined 16% through the first 9 months of the year as we continue to manage our book downwards at this stage of the cycle. In the insurance segment, we reported underwriting profits for the third quarter of $14 million and the combined ratio of 93.2%. Gross written premiums rose 22% to $220 million from a year ago, with growth primarily in our financial and professional lines, which increased by $29 million to $68 million in the quarter. This was mainly due to our kidnap & ransom and US professional lines units.

As you may remember, we acquired a small business specializing in kidnap & ransom insurance in early 2010, which has enabled us to take advantage of attractive pricing in this market niche on the back of strong market demand. We've written $45 million of premium in this line through the 9 months. Our US professionalized unit was established in mid 2010. Since then we've made good progress in selectively building our book and have written just over $40 million of premium in this class year-to-date.

Casualty insurance had gross written premiums at $38 million, up $5 million from a year ago. The greatest component of this increase is a rise in global excess casualty, which has been a strong performing line for us and which is pitched to the level to avoid the attritional loss exposure of primary casualty. It is important to look at our casualty business in the UK and US separately. In the UK, employers' liability and public liability markets condition continue to be extremely challenging. Rates are down 5% this year and our book has been further eroded by competition. In the US, where we have been repositioning our primary casualty account, much of our old book was canceled and is now being rebuilt. We do expect some modest organic growth in this area.

Our marine, energy and transportation lines had gross written premiums of $71 million, relatively unchanged from a year ago, with most classes flat or down. However, our marine energy and construction liability accounts saw good premium growth and improved rating on the back of a series of industry losses over the past year, achieving average rate increases of 17% year-to-date.

At this point, I'd like to update you on the progress of our US insurance business. As you know, over the past 2 years, we have taken a number of steps to reposition this business as a highly focused head of specialty insurance lines, ranging from property and inland marine to professional and management liability with some general casualty and finally surety.

We have 9 underwriting teams working for us, backed up by some very strong claims management and operational support. I am very pleased with the much improved underwriting performance of this business. Our net loss ratio for US Insurance year-to-date is 67%, compared with 71% a year ago. We have a strong constriction that our underwriting is now on a very firm foundation. Clearly we have incurred some costs in building this platform and acquiring these team, which results in the relatively high expense ratio, and hence impacts the combined ratio of our US operation. We believe that this investment will reward us in the years to come, although if current market conditions persist, it will take some time to achieve scale and fully realize the benefits of the investments we have made.

I was delighted when John Cavoores took on a management position to assist us in strengthening our US insurance business in October last year, having joined our board as an independent director in 2006. The job I asked John to do is now largely complete. It has been done extremely well and in a manner that those who know John would expect, and he will relinquish his executive responsibility as co-CEO of our insurance business at the end of the year. US Insurance will now operate under the able leadership of Mario Vitale, who joined us in March this year from Zurich. At the end of this year, Mario will also assume responsibilities as co-CEO of our overall insurance operations working with his co-CEO, Rupert Villers. This is a very strong management team with a proven track record of navigating market cycles and building businesses. I enjoy working with both of them, and I expect that despite a challenging market, we will see them continue to produce the improving performance that we seek. We are also pleased that John will continue to contribute as a director on the Aspen board.

I'd now like to comment briefly on renewal activity during the quarter, which is summarized on page 6 of the slide pack. Starting with our reinsurance segment, I already mentioned rates in peak zone cat exposed property lines. In our casualty lines, the rate environment remains challenging, but we were able to achieve a small increase on our international line and limit the reduction on our US account to 1%. In our specialty reinsurance lines, the rating environment is stable with rates up 1%.

Turning now to our insurance segment. Property rates in the UK remain soft, and we renewed our book at rates down 1% [on average] this year. In the US we saw some wind rate increases through the hurricane season, however, pricing remains bad for all other cat and non-cat property business. Within financial and professional lines, market conditions are quite varied, and this area renewed at flat rates on average this year. We have seen some positive rate movement in the kidnap & ransom line caused by heightened concerns about piracy. Overall, terms and conditions are remaining broadly stable in both reinsurance and insurance. 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 third quarter was $22 million, compared with $93 million for 2010, and operating income was $57 million compared with $72 million for the same period last year. The quarter's results include $24 million of losses associated with third quarter catastrophe and headline weather events, $17 million associated with the second quarter US tornadoes and floods. In addition, there was a $50 million aggregate increase from first quarter events, primarily due to an increase in our loss from the Japan earthquake where we have responded to information received within the past week regarding 2 of our Japanese [seasons]. It's worth noting here that when we announce our Japanese earthquake loss estimates in March, we felt the market loss would be around $30 billion.

We now see the industry loss approaching $40 billion. We believe that this is the most serious deterioration of any catastrophe event in the history of the Japanese insurance market. Annualized operating ROE was 8.4% compared with 10% in 2010. Operating income was $0.70 per diluted share and excluding cat losses was $1.45 per share compared with $1.04 last year. Diluted book value per share rose 2.2% in the third quarter to $38.27.

Now, let me discuss some of our key financial metrics. Gross written premiums in the quarter of $496 million were up 19% on the same period last year with the increase coming from both our insurance and reinsurance segments. The combined ratio for the quarter was 96.7%, compared with 94.4% last year. The ex cat loss ratio improved to 51.7% from 58.7% last year, reflecting improved performance in our insurance segments in particular. Prior year reserve releases in the third quarter of 2011 were $16 million with $12 million from reinsurance and $4 million in insurance. Prior year reserves were strengthened by $6 million in the comparable 2010 quarter. Our expense ratio was 33.8%, compared with 31.1% last year. The major driver of the higher expense ratio was an increase in acquisition costs as our business mix has moved away from casualty insurance lines towards our successful kidnap & ransom business, which comes with a relatively higher acquisition expense ratio. Our policy acquisition cost ratio rose from a 16.7% to 19.2% in the third quarter, whereas our operating expense ratio was in line with the prior year at 14.6%.

I will now comment in further detail on our segmental results, starting with reinsurance. Reinsurance reported an underwriting profit of $13 million for the quarter, which included $5 million of losses for Hurricane Irene and $14 million for other natural catastrophe events which occurred in the third quarter of 2011, comprising US, Scandinavian and Asian weather-related events. In addition, we increased our estimates of losses arising from the severe US weather-related events which occurred in the second quarter by $17 million, which is consistent with an increase in estimated market losses from these events to $20 billion from $15 billion indicated at the end of the second quarter. A $15 million aggregate increase from first quarter events was also included in reinsurance results. Gross written premiums in the reinsurance segment were $276 million, up 17% compared with the third quarter a year ago. With growth across most lines and including $17 million of premium adjustments in our casualty reinsurance segments relating to prior periods, reflecting updated Cedants advice.

The combined ratio for the reinsurance segment was 95.4%, including 18 percentage points of cat losses for the quarter. Excluding the impact of cat, the combined ratio of 77.6%, compared with 72.5% last year. You may recall the third quarter of 2010 included $20 million of losses from the first New Zealand earthquake. This quarter's results contain $12 million of reserve releases, principally from property lines. For the 9 months ended September 30, 2011, the combined ratio for the reinsurance segment was 125.9% with an ex cat combined ratio of 77.4% compared with 74.6% last year on the same basis. Gross written premiums are just over $1 billion, were broadly in line with last year, with increases in our specialty reinsurance lines offset by premium reductions in casualty reinsurance. The accident year ex cat combined ratio of 87.2% for the 9 months included 4 points of impact from an increase in retrocessional reinsurance purchased during the period. This compared with an accident year ex cat combined ratio of 80.2% for the same period in 2010.

Turning now to our insurance results. Our insurance segment generated an underwriting profit of $14 million for the quarter with a combined ratio of 93.2%, a significant improvement from an underwriting loss of $13 million and combined ratio of 107.3% last year. Catastrophe losses were modest at $5 million, primarily from Hurricane Irene, and reserve releases were $4 million principally from our property lines. The net loss ratio for the segment improved to 56.6% from 77.3% last year, with the improvement across several lines, including marine, energy and transportation, as well as within our financial and professional lines. The results include an 11 point reduction in our current accident year loss ratio to 61.1% from 72.1% and 7 points of reserve releases.

Our marine, energy and transportation lines have continued to perform very strongly with a 50% net loss ratio this quarter and 55% through the 9 months of 2011. Gross written premiums in our insurance segment were $220 million, compared with $180 million in the third quarter last year. The increase was attributable to the financial and professional lines where our successful kidnap & ransom unit and, recently established, US professional lines reside. Through the first 9 months, the combined ratio for the insurance segment was 96.7% compared with 101% last year. Gross written premiums are $748 million, rose 14% from last year, primarily in our financial and professional lines.

Now turning to our investment performance. You may wish to refer to pages 16 to 19 in the slide pack for additional information. Net investments income for the quarter was $57 million, broadly in line with last year, as dividend income from our recent $175 million investment in global, high-quality, low beta equities has provided an incremental contribution against the backdrop of persistent low interest rates. The book yield on our fixed income portfolio of 3.54% of September 30, 2011 was down 10 basis points from the end of the second quarter this year and 37 basis points from the end of the third quarter last year. The average duration of the fixed income portfolio, including the impact of our interest rates swap program, was 2.4 years, broadly in line with the second quarter of this year. The duration has been managed down from just over 3 years at the same point last year, primarily due to the impact of our $1 billion swap program. Average credit quality of the portfolio is AA after incorporating the impacts of the S&P downgrade of US government securities in August. We have no, other than temporary, impairment charges in the quarter.

Our $1 billion interest rates swap program has been put in place to manage interest rate volatility from our $6 billion fixed income investment portfolio. The current quarter included $36 million of mark to market losses on the swap portfolio included in net income, relative to an $82 million increase in unrealized gains in our fixed income investment portfolio. At the end of the quarter, there were $334 million of net unrealized gains pretax in the available for sale fixed income portfolio, compared with $252 million at the end of the second quarter this year and $240 million at the end of 2010. Net realized and unrealized investment losses included in the income statement were $33 million for the quarter, compared to a gain of $20 million last year.

Turning now to our capital position. Our balance sheet remains robust with $9.4 billion in total assets and $3.2 billion of total shareholders equity. We remain comfortably capitalized with expectations of being able to deploy our capital in hardening market conditions. In October, A.M. Best affirmed the ratings across our operating facilities at A, excellent. We have $4.4 billion of gross reserves on our balance sheet, an increase of just over $700 million since this time last year. This includes the march-in of approximately $360 million over our mean best estimate assessment of ultimate losses or approximating the 89th percentile in terms of the projected distribution of outcomes on a diversified basis. We have provided further information on our reserve strength on a Group basis and also splits between insurance and reinsurance on pages 22 and 23 of the slide pack. You will see that our reserving approach is consistent and, in our view, appropriately prudent.

Turning now to guidance for the remainder of 2011 as set out on page 24 of the slide pack. In the light of our year-to-date catastrophe losses and prevailing market conditions, we anticipate our full year combined ratio to be in the range of 108% to 114%, including a cat load of $40 million for the fourth quarter 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 remain between 11% and 14% of growth earned premium, reflecting the purchase of additional reinsurance ahead of the wind season earlier this year. We are leaving the effective tax rate unchanged in the range of 8% to 12%. However, this will of course vary depending on the actual distribution of losses within the Group.

That concludes my comments on our results for the quarter and 9 months and updated guidance for 2011. With that, I would like to hand the call back to Chris.

Thank you, Richard. 2 quarters ago I felt optimistic enough to say to you that we may be about to witness a general upturn in insurance and reinsurance pricing. Thus far, that confidence was only realized in catastrophe reinsurance and in cat driven property insurance in the US. However, following the most recent rounds of industry conferences, there appears to be growing acceptance of the need for a broader change. In US primary insurance markets, the dialog has focused on the need for improvements, particularly in workers' compensation and in general liability, in addition to catastrophe exposed property lines. We are also seeing accounts moving back from standard lines carriers to the surface lines market as the standards lines carriers are non-renewing these tougher risks.

This trend can have a much more profound impact than might be evident at first glance. Previous market turns have been characterized by standard carriers returning to their core strengths and rejecting non-standard risks. These risks are then offered to surface lines carriers who tend to push up prices and improve turns in the face of increased demands. As a result, both the admitted market and the excess in surface line carriers benefit from the process. We are also noticing that the excess casualty carriers are moving up attachment points, which is another precursor to a hardening market.

On the reinsurance side, there are signs that the market is now digesting the implications of the various model changes for US wind exposures and the $95 billion catastrophe loss burden seen so far this year. We expect to see further increases in cat exposed property in January and in the first 2 quarters of 2012, including regional US cat accounts as well as peak zone exposures. In casualty reinsurance, the signs are less pronounced. If the early momentum we see on the primary side continues to build, we would expect this to feed through to the casualty reinsurance market in time. As I said to you during our last earnings call, Aspen was an early adopter of the US wind model changes in terms of pricing, capital allocation and reinsurance purchasing. This leaves us very well placed to benefit from a better market that we expect to see as year end renewals approach.

Thank you for your attention. Richard and I are now ready to take any questions you may have.

(Operator Instructions) Amit Kumar.

Just going back to the discussion on Japan and New Zealand, did you -- was your development in Q3, is that based on a $40 billion number? And then what sort of range can that number sort of develop for you going forward?

Okay. I would say we tend to grow -- at this stage of the loss we pull more bottom up than top down. So what actually happened is a number of the smaller Japanese companies over recent months gave us reason to believe that we should hire reserves for their loss exposure and we did. There were a couple that were out of line, one in particular, who were quite adamant that they were on top of the reserving process and they saw no further need to be concerned about development. What happened was within the last week, in fact one case was just the beginning of this week, actually, they said, oops, we don't see it that way. We actually see the loss being a bit bigger.

That wasn't a complete shock to us. We took the opportunity to look at all of our Japanese loss exposures from that company and a bunch of other companies, pretty much everybody and do a thorough review. That thorough review caused us to increase our loss exposures, as Richard said during the call, and I would then -- then the process would be something like this - if that's the size of our loss from those companies, those companies must have how much loss on a gross basis and so what's the market loss and, yes, we now put the market loss at about $40 billion. We have about 0.5% of that, very, very roughly about 0.5% of the market loss, and I don't see that percentage changing very much.

So if the question is, could the market loss of $40 billion get worse, I'm not actually expecting it, but I definitely wouldn't rule it out. And if it does, then maybe we would have about 0.5% of that duration above $40 billion. So I don't think it's too much to worry about there. A little bit of a down side, but I'd actually say our losses are pretty conservative as we are this morning.

That's helpful. And I guess just staying on the topic of Asian exposure, this relates to Q4. There have been these reports about this flooding in industrial states surrounding Bangkok and a lot of the Japanese car manufacturers are out there and Japanese insurance companies write that. Would you have any exposure to that or do you have any initial views on that?

It's very, very early to give you any facts. Our impression is that these losses are going to be relatively serious. The flooding is quite severe in Bangkok and you're right, there is both Thai commercial exposure and foreign manufacturer exposure. The talk in the local market, and I stress it is only talk which I am repeating, puts the market loss at a low of $4 billion and a high of $10 billion. As far as Thailand is concerned, it's not an area of huge exposure for Aspen, but we do have some worldwide writing clients who would have exposure there, but I'm afraid it's much too early for me to sort of hint at a number for us.

Okay.

We haven't seen a single loss report yet.

Got it. Last question and I'll re-queue. Your growth in financial and professional lines, there have been some companies who had exposure to club deals and they've had to adjust the results upwards. Do you have any exposure to club deals in your book in US?

No, we do not. None whatsoever

Okay.

And just to stress -- sort of a confusion of categorization, a lot of that growth is coming from piracy-related coverage that we just happen to classify under professional. The biggest growth area is kidnap and ransom business. It's not what people generally think of when they think professional lines.

Got it.

Your next question comes from the line of Vinay Misquith.

Hi, good morning. First just an overall question on pricing. Chris, you mentioned that you're seeing signs of formal pricing and you mentioned workers' compensation and property. Are you seeing signs of pricing increases in other areas as well?

It's been funny, Vinay. We're officially reporting on a quarter that ended on September 30 and. To be honest, there wasn't very much sign that we saw of price improvement in that quarter other than in the marine and liability area, where we're up 17% and pretty happy about that, other than kidnap and ransom where the world is very concerned about piracy, and then on the property cat area, which is mainly about model change driving price. So that's the news for the quarter.

But then this last month has been very interesting. It's just at any point in the last 12 months people have said, hey, where is my investment income going? Hey, all that capital we gave back as an industry last year is gone and we need it to run risk. There was no reaction just until about the last 4 weeks, and now you're seeing it pretty much all over the place everywhere, much more encouraging. So I take workers' comp, that's the line we don't write on a primary basis, we have no exposure to workers' comp insurance at all. What we do, do or we have done in the past is, we reinsured some of the guys who were in that area and we reinsured them on pretty good terms and conditions. We had to cancel a lot of that in the last couple of years as the conditions went south.

Now some of the carriers are talking to us again, saying we're in a little trouble, we're in a little balance sheet stress, is there any chance of helping us out. I can't really put numbers on this yet, but I think it's something that's going to crystallize over the next couple of months running up to 1/1 to what extent Aspen will benefit from that but it's a much better picture there. Property we've touched on. Generally, more widely, there is more of a sense, I would say, that companies that used to talk about a mid-teens ROE, faced with an ROE that maybe isn't even double digits are beginning to say that's not good enough, go out and push price. One very interesting statistic, one of my colleagues reported from the conference talking to the wholesale brokers is the wholesale brokers told them that their showing of business is up 15% in recent weeks. Now that's very interesting. Because what they're basically saying is the admitted markets that took our business for the last few years are finding, guess what, standard lines mentality isn't very good when it comes to nonstandard risk. They're losing money, they're chucking that out, going back to the wholesale side. And that's coming to us as a growth opportunity at better prices. So I'm fairly upbeat, but it's really just about the last 4 weeks that I've been seeing that.

That's interesting. Then if I could just circle back to your business. I think you mentioned US professional lines, just mostly kidnap and ransom. Are you also doing some D&O business in the US. Some competitors have said that that's been pretty soft even now. If you could help us understand your growth in that line.

Sure. Well, in what we call financial professional lines, we have a number of things. And the most rapid growth area is what I said, kidnap and ransom. The second biggest growth area is US professional, not management liability D&O, just professional, and that comes from a team that we've got a great track record. They've been with us a couple of years and they're making good steady process. No concerns there.

When it comes to the D&O, I agree with you, there are more than 60 carriers today offering the D&O product in the US, and while we have a team, actually a very, very good team, they're just keeping their powder dry. Our premium year to date in D&O is below $10 million. Maybe half of that, a little over half of that actually we do down in Bermuda, which is an excess D&O play, and I think the excess D&O is somewhat more attractive than the stuff on the primary side. On the primary side, our guys, as I say, are -- they're patient, they've got the skills, they've got the contacts, they've got the market brand, but they don't want to and I don't want them to be writing too much premium. So we're really -- D&O is an area to stay cautious. I think it will turn in due course like everything does, but it looks like it's been one of the later ones to see an improvement.

And the growth in the casualty, I believe you mentioned was in the UK, was it? Or was it in the US, too?

In the segment that we call general casualty, the biggest build out of growth -- it was actually $5 million in total is global excess casualty, so that's stuff that we're selling to major corporations around the world, fairly high attachment point stuff, very good track record for us and somewhat different loss characteristic than the primary side.

Okay. Great. And in terms of the margins on the reinsurance and the primary insurance, let's follow the primary insurance. You've had significantly improving margins over the last 2 quarters. Do you expect that to continue next year and also on the reinsurance lines in light of higher pricing on prop cat business, do you expect improving margins or do you expect flattish margins because of the negative pricing on the other lines?

Let's take the insurance side first. As you know very well, we've done an awful lot to our US Insurance. We've canceled a lot of business, we've got out of construction largely, we have a little bit left, there's very little listing on liability left, and we have basically 9 teams doing things we didn't -- we weren't doing before. Some of those were with us a couple of years and are beginning to build a track record. Others like D&O are just keeping their powder dry.

This is a different kind of operation, it's better managed, it's got better backup and I think the trend that you're seeing is largely a reflection of new underwriting and new underwriting approach. And now the phenomenon that is going on there is, about a year ago we took a couple of long, hard looks at our reserving position in US Insurance. We did that. I'm not anticipating that we're going to have to do it again. So one of the contributors should be removed. So I would say to you in general, yes, you're going to see a better performance out of US, particularly the US, but even in London there were some areas like marine hull, for example, which we really had to reposition that. And I think we've got that right and that's running comfortably the right side of (100 combined) now having had a couple of quarters on the wrong side. Insurance is looking better, notwithstanding where we are on the market, even without the rising side of better rates, our insurance, I think, could throw a better performance, add in a better market and you could begin to get quite excited about that.

The reinsurance side, property cat we're going to see more pricing. Partly, it's $95 billion of loss this year and that doesn't include something from Bangkok, so the market always responds to loss, then you've got model change, you've got model change in the US, you've got model change in Europe, so we're still optimistic about property and specialty will be pretty good as well. So casualty really is lagging a little bit. To some extent an improvement there is going to depend on an improvement at the primary level. One thing is going to feed through the other, but it could be a couple of quarters later. But net, net, I feel our reinsurance probably won't show as big a level of improvement as our insurance, and that's largely because our reinsurance was already not too bad, so there wasn't the improvement there, but a margin improvement is possible in the insurance, too.

Fair enough. And do you expect to buy less retrocessional reinsurance next year versus this year?

Got to wait and see what the market offers on that stuff. We bought some more this year because of the model change. We increased buying mid-year because when we ran the new model implications in our system, it basically was more capital hungry, so we bought some retro. If we have some decent quarters, that capital rebuilds and we don't need necessarily to buy retro. I'll leave it there. Maybe we'll update you on that in a quarter's time. The only thing about buying retro, it always pays. If it's available at a good price, we tend to like to buy it, and if it's not available at all, we tend to do without it.

That's good.

(Operator Instructions) Josh Shanker.

Good morning, everyone.

Good morning, Josh.

My question regards the kidnap and ransom a little bit. It's a line that I don't know so much about, and the extent to which the growth coming there is because a major competitor is abducted, is it pure rate and, just to put the nail in the coffin, that's where the growth is coming from in financial institutions as a whole?

Sorry to hear you mention you hear coffins here on the subject of kidnap and ransom insurance, Josh. That's a bad idea.

We hope not, we hope not.

Okay. Well, let me tell you what it is. There was a little company, basically, an MGA who wrote for a bunch of Lloyd's syndicates, and we bought them a couple years ago and connected them. They're not fully part of our spin. So suddenly they had -- they were part of an established (a-rated paper), and their brand appeal increased hugely. And their book of business was largely family type K&R in Latin America. This is just basically wealthy or not-so-wealthy people, their kids worrying about getting hijacked in the street. And that book of business has performed very well for a very long time and we've had that. We bought it, it runs well, it's expanded a little, we're happy with it.

What is different in the world is the Somalian piracy situation and here it really is -- there's over a thousand miles of water and ships going through that are desperately concerned about Somalian piracy. It's run as almost an industry there. This is not like Jack Sparrow in Pirates of the Caribbean. This is businessmen sending kids out to try and pull ships in, and that ship needs help, and we're providing that help. This is a new area of business launched. I'm not saying there was none of it before, but the demand has just skyrocketed the last 12 or 18 months. We had a good team, we brought in a good team, they had a good reputation, and I don't believe we're taking market share from anybody, I think we just happen to have caught an updraft in demand for this sort of thing.

You asked me, I think, about pricing as well. We started off with a certain pricing level and to be frank with you, demand has driven that pricing level higher still. We like the risk. We don't like the nature of the risk, clearly it's a very odious risk indeed, but we do think part of the social function of insurance is to provide a degree of comfort for property owners, in this case particularly ship owners who have got that concern. And the cover is basically on risk for about 6 days. That's about how long the piece of voyage lasts over those waters, so on a risk adjusted basis, we very much like the kind of returns we're seeing.

And on the sort of financial institutions D&O, E&O type stuff, there's no movement in your book on that?

As I said to someone on the call, the D&O piece is very small. US D&O below $10 million. There's another very small amount of international D&O. The professional is a little bit bigger. Bruce Eisler and his team joined us a couple of years ago. He is a very assiduous underwriter with very good broker connections. And what we're seeing there is, connections that Bruce has known for long time are basically coming to us and saying the product you sold us, we like the way you sold it, we like the service you give, we like the rapport of working with your people and we want to work with you. So what Bruce is able to do basically is grow in a modest way, but he's not growing by pricing himself, he's not taking market share by being cheap. He's improving his position by representing the same values that people have come to associate Bruce and his team with and that -- I would say in that area, that's the only real areas of change is US professional is coming along nicely. And the K&R piece quite separately, which we do out of London, is making good progress. Everything else fairly much unchanged.

Very good. And changing gears entirely, coming up on 1/1, looking at the changes sort of in rating, agency modelling, agency views, your capital position right now, how is your appetite right now compared to where it was a year ago given where pricing is?

You might remember we cut back a little bit in the mid-year because we felt that the models implied much more demand for cat reinsurance. We also felt that with that extra demand should come extra price, and while there was a bit of extra price, there wasn't enough, so we cut back to leave ourself with capacity at sort of January, April and so on. Consequently -- we also, as I said earlier on the call, we also bought a bit more retro, which is still enforced. These 2 things give us a little head room to grow in what we think is going to be a more attractive cat market in the first 6 months of next year.

Well, I appreciate all your answers.

Pleasure, Josh.

There are no further questions at this time.

Okay. In which case, thank you all for your time and attention and have a good day. Good-bye.

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