Aspen Insurance Holdings Ltd (AHL) 2012 Q1 法說會逐字稿

Good morning. My name is Jody, and I will be your conference operator today. At this time, I would like to everyone to the Aspen Insurance Holdings first-quarter 2012 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) I would now like to introduce Ms. Kerry Calaiaro. Please go ahead ma'am.

Thank you, and good morning. The presenters on today's call are Chris O'Kane, Chief Executive Officer; and Julian Cusack, Chief Financial Officer of Aspen Insurance Holdings. Before we get underway, I would like to make the following remarks. Last night, we issued our press release announcing Aspen's financial results for the quarter ended March 31, 2012. This press release, as well as the corresponding supplementary financial information, 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 that are subject to a number of uncertainties and other factors. For more detailed descriptions of these uncertainties and other factors, please view the risk factors section and Aspen's annual report on Form 10-K filed with the SEC and on our website.

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

Thanks Kerry, and good morning, everyone. Like so many recent quarters, the first quarter of 2012 proved to be a very interesting one. This time though, the interest arises not from fresh catastrophe losses, but rather from the wide diversity of price changes and momentum in the underwriting cycle is affecting the industry throughout the world. If I tell you that the line of business with the greatest rate movements in the quarter for us was Japanese earthquake, with cumulative rates up 74%, and that's in contrast to a number of other lines, which renewed flat, you'll understand what I mean. Now, why is this coming about?

Well, in my view, there are three or four drivers. First, the industry has finally recognized that the reduction in investment income, resulting from the present yield environment, needs to be offset by improved underwriting income. This is at last being understood and acted upon. Second, the fact that the industry sustained catastrophe losses of $117 billion last year has given many management teams the confidence and the authority to demand more price from the customers. It's a slow burning fuse, but one that is certainly lit, and as a result, we are moving well in the right direction.

Importantly, it is not only customers with loss-making lines that are feeding this upward draft. We observe a number of our major reinsurance plans, particularly in Europe, successfully using the argument that losses that they have sustained in one part of the world need to be compensated for by improved prices around the globe.

In third place, we should look at the supply of capital. By that I mean, the degree of over- or under-capitalization of a given line, and this is not uniformly distributed. There is a mismatch between where the supply of capital is and where the demand for capital is. Therefore, we are seeing the same macro phenomena at a global level having differential impact in different regions and in different lines. By virtue of Aspen's extensive distribution network, onshore and offshore, and a diverse product mix, we are well placed to exploit these relatively under-capitalized pockets, which offer well above average pricing.

Fourth, US wind air version 12.5 and RMS version 11 releases last year, these are telling insurers and reinsurers alike, that there is more risk of the same amount of exposure. RMS version 11 in Europe delivers the same message, but in a more muted way to the European audience. In Japan, Coulomb Stress Transfer Theory and associated lessons of the Tohoku earthquake are telling Asian insurers and reinsurers that there is heightened risk of an earthquake in the Tokyo Bay area. This is not about charging more money for the same risk because of bad experience; this is about charging more money because the risk itself is greater. Later in the call, I will illustrate how these macro factors bring themselves very specifically into Aspen's lines of business in the regions in which we operate.

But before I move to discuss our performance of the quarter, I wanted to mention our recent capital raise. In April, as a result of the effective debt pricing environment, we opportunistically accessed the public markets and completed a $160 million preferred offering. This enhances our financial flexibility if raising momentum continues, and also supports our US lines, and gives us the opportunity for more share repurchases. Now let me review our performance.

For the first quarter, we reported an operating profit of $71 million, or $0.88 per share. Diluted value per share was $38.50, up 1% from the end of 2011, and up 6% from the first quarter of 2011. Our reinsurance segment had a strong quarter with an underwriting profit of $55 million reflecting good performance in all its lines. Our property and our financial insurance lines performed very well on the insurance side, but our marine business was impacted by the Costa Concordia event. Overall, this resulted in a modest underwriting loss of $10 million for the insurance segment.

Now let's take a look at our underwriting performance, and we'll begin with reinsurance. In reinsurance, we reported an underwriting profit in this segment of $55 million for the first quarter, with a combined ratio of 79.8% and a loss ratio of 50%. Prior-year reserve releases $28 million in the quarter, mostly in our US casualty and our London-based specialty reinsurance lines. Our property reinsurance produced a fine result with a loss ratio of 41.3%. Gross written premiums were $231 million, an increase of 7% from the first quarter of 2011, primarily in our pro rata business.

Casualty reinsurance was profitable, a good result in its continuing difficult market. We achieved loss ratio of 62%. In the US, we are seeing some small rate increases in certain classes. The international casualty market, however, remains challenging especially continental European business due to new entrants in recent years. In specialty reinsurance, gross written premiums for the first quarter were $104 million. That's up 26% from year ago, with modest growth for most lines in this division. Specialty Re delivered a loss ratio of 55.6%, strong performance in our specialty marine and credit insurity lines.

Moving on to insurance, gross written premiums rose 32% from last year, reflecting strong demand for the property and the marine lines. These areas have also seen favorable rate increases, especially in the loss-affected areas and also peak-zone US property accounts. Our insurance segment reported an underwriting loss of $9.7 million in the quarter, a combined ratio of 104.2%. That's compared with 100.1% a year ago. However, excluding the Costa Concordia events, the combined ratio of the insurance segment was 92.6%.

Now, it is also interesting to look at our insurance business geographically. I would like to make a few comments on the performance of our international and US-based teams. For the first quarter of 2012, the teams with international insurance lines delivered gross written premiums of $214 million. They achieved a loss ratio of 67.4% in the quarter, with strong performance in UK property, in aviation, in offshore energy physical damage, as well as the kidnap and ransom offering.

Our US-based teams achieved gross written premiums of $94 million in the first quarter, and increase of 122% from a year ago, as some of our newer US teams have gained traction, and also affecting better pricing in some areas. The loss ratio for US insurance improved in the quarter to 61.7% compared with 65% a year ago. Our property, excess casualty, and professional liability teams all make good contributions for underwriting profit in the quarter. We are excited about the progress our US teams are making. We certainly have the right people in the right places and all the licenses that they need to conduct business well.

Now let me comment on market conditions in a little more detail. The best news is clearly in those loss-affected lines, such as property and marine. Geographically, the US P&C markets are most encouraging. In Europe, the story is more muted with some public restraint, yet other areas continue to be quite competitive. Last time we spoke, I highlighted that there was about 40% of our book of business that we want to write in 2012 that was either well-rated or subject to significant upward rate pressure. These lines were predominantly affected by natural hazards or by political risk or financial risk.

During the first quarter, we achieved an average increase of 8% for these lines, compared with 4% on average across our entire book of business. The really interesting thing to note about this 8% figure is that this is rate increase on top of what we believe to be well rated to start with, or maybe it is even a second year of increase. We feel particularly good about this attractive 40% profitable core of our business, especially at the balance of 6% of a book is also seeing positive rate movement.

Within the reinsurance account, April 1 is a key renewal date for the Japanese market. The successful completion of the renewal process has brought an end to the long and detailed negotiations with our customers, as we've sought not only to reflect the immediate losses stemming from the Tohoku quake, but also to acknowledge the increased probability of a major earthquake striking Tokyo. Since the tragic Tohoku event, Aspen's domestic Japanese earthquake portfolio has achieved a compound rate improvement of 74%. In addition to very material price increases, we have also made substantial structural changes to recoveries sold, to limit our exposure in the future loss.

In summary, the overall Japanese account has a forecasted 2012 gross written premium that is 10% greater than at the time of Tohoku two years ago, and yet our exposed domestic earthquake policy limits have reduced by 50%. 10% more premium for half the exposure is a very good thing indeed. Non-earthquake places in the Japanese market also achieved substantial rate improvements with Aspen's typhoon exposed contracts recording an annual price movement of 16%. Pricing level over Japanese wind portfolio is now 24% greater than it was before the 2011 earthquake.

In our casualty reinsurance lines, the rate environment remains soft with ample capacity, but we were able to achieve a 2% increase in our international lines, while holding the US casualty reinsurance account flat. The first quarter is not a major renewal period for insurance. Overall, rates were up 3%, but there was a wide range of rate movements across all lines. The significant rate improvements in the US were property, up 9% overall, while peak zone catastrophe wind expose property risks are up over 10% and maybe as much as 20%. Non-catastrophe exposure risks saw rate increases in the a single-digits.

The Costa Concordia then has tightened the marine market a little, with marine and energy liability achieving a 6% rate increase and hull achieving 3%. However, it is really much too early to predict the ultimate market impact of this major market loss. We'll have to wait and see. Other lines, such as UK property and UK liability continue to battle against very tough trading conditions. Our global excess casualty account achieved a price increase of 8% year-to-date. With that summary, I'm going to call -- turn the call over to Julian who will review the results for the quarter.

Thank you, Chris. I will start with a brief review of the results of our two segments, and then move on to discuss expenses, investment performance, and capital management. Starting with reinsurance, I am pleased to report that we had the best quarter since the fourth quarter of 2009, with a combined ratio of 79.8% for the quarter.

The only losses of significance in the quarter were from the US storms in February and March, for which we have losses of $17.6 million net of reinstatement premiums and potential reinsurance claims resulting from the Costa Concordia event of $5 million. The effects on the combined ratio of the reinsurance segment of these two events was 8.5%. Prior-year releases in the quarter were $28 million, including $18.6 million from casualty reinsurance. Of these casualty reinsurance releases, $7 million resulted from commutation activity. There was no net overall movement on reserves of 2010 and 2011 catastrophe events.

Our insurance business had a tougher quarter with a combined ratio of 104.2%. This includes losses of $26.5 million net of reinsurance recoveries and reinstatement premiums, but before tax, arising from the sinking of the Costa Concordia. Our loss in the insurance segment from this event includes a small participation in the hull insurances, which are soon to be a total loss of approximately $500 million, of which our share is $7 million gross. The balance of the loss relates to the ship owners' liabilities for removal of wreck and compensation to passengers and crew, for which our gross reserve is $28 million. Our combined hull and liability net reserve is $24.1 million, plus a $2.4 million provision for reinstatement premiums payable. Any increase in reserve will be covered by reinsurance.

The insurance segment also had US property losses of $5.4 million from severe US storms in February and March, which taken together with the net $26.5 million of Costa Concordia losses, account to 14 points on the combined ratio of the insurance segment. Prior-year releases in the insurance segment were $9 million or 4 points of combined ratio. Overall, we continue to see good underlying profitability in our London market-based insurance operations. Our US-based insurance teams continue to make steady progress, despite a continuing drag from higher operating costs, which under current market conditions, will take some time yet to be fully absorbed in top-line growth.

Total operating expenses rose this quarter. The $22 million increase since the first quarter of 2011 includes $14 million due to the increases in performance-rated compensation provisions relative to the loss-making quarter of Q1 last year. A further $4 million increase relates to direct expenses of our newer insurance lines, not yet matched to new business growth. The remainder relates to non-recurrent items included in corporate expenses.

Our investment team had another successful quarter. Total annualized return for the quarter was 2.4%, including the effective interest rate swaps. This includes net investment income and gains in the income statement of $53 million and $5.5 million, respectively; and a reduction in unrealized gains shown in OCI of $12 million. Our book yield in the quarter was 3.31%, down from 3.65% a year ago. We intend to keep our fixed income portfolio at around three year's average duration. Given recent gains in the high-yield market, we are no longer considering entering that sector, but will keep that option under review.

Our equity portfolio performed well in the quarter, with a total return of 4.2%. We continue to actively manage our capital base, and the good news is that our Q1 earnings, together with net proceeds of $155 million from our recent issue of 7.25% preference shares, have significantly increased our capital flexibility. As a result, we are well-positioned to allocate capital to profitable underwriting as the markets firm, continue to support our growing US business, and to repurchase shares opportunistically.

Finally, we announced yesterday that we were increasing our normal quarterly dividend by 13% to $0.17 per quarter. Guidance for the full-year 2012 remained unchanged, except for the cat load. In our Q4 earnings commentary, we gave this as a $190 million for the year. Based on our January accumulations allowing for some growth, we now estimate the cat load for the year at around $180 million, of which approximately $30 million can be attributed to Q1 leaving $150 million for the rest of the year.

Our cat load only covers losses from natural catastrophes, and so for example, includes events such as the Q1 tornadoes, but excludes man-made disasters such as the sinking of the Costa Concordia. The number represents the average over 50,000 simulations of the aggregate catastrophe events in any one year, as modeled by our suite of catastrophe models. It also includes estimated allowances for un-modeled losses, and it is stated before credit for reinsurance and before tax. With that, I would like to hand the call back to Chris.

Thanks, Julian. Now our balance sheet continues to be strong, and as Julian said, we are well-positioned to take advantage of the market turn or any market turn at any point. The way we see it, our job is to manage capital. We evaluate the underwriting opportunities where we can achieve the most profitable underwriting, and we deploy capital to those areas. Simultaneously, we may withdraw capital from lines that are beginning to look as if their best days are behind them. Of course, finally, we return capital to shareholders by repurchasing shares at attractive levels and by paying dividends. Taken together, those three activities constitute what we call capital management.

Just now, we do see an opportunity to deploy more capital, likely in the property, catastrophe exposed area. Our current 1 in 100 PMO for US wind is 15.3%, compared to our stated tolerance of 17.5% of total shareholder equity at March 31. With US property rates increasing 10% to 20% as we head towards the June and July renewals, we may well consider increasing that exposure and writing more property business.

It is now time for the dynamics of the market to accelerate from short-term reaction responses to loss to a more sustainable improvement. There are specific areas where rates increased in line with increased risks. But we're assuming we are not seeing enough rate increases broadly and across all lines. We do feel that the momentum for a broader turn in the market is building. Again, finally I would remind you that we are well-placed to take advantage of that turn. Thanks you for your attention. Julian and I are now ready to take any questions you may have.

(Operator Instructions) Your first question comes from Mike Zaremski with Credit Suisse.

Chris, you gave a lot of good detailed pricing commentary. What I'm hoping you can help us discern is, your expectations for new business ROEs versus the existing book, and whether you think pricing is strong enough to actually offset the low interest-rate pressures that you cited in the prepared remarks?

Let me take that part of the question, the latter part first. Unfortunately, the answer is no. If you think our investment leverage is a bit more than 2 to 1, and you think, as Julian says, we are achieving 2.4%, something like that in return.

Well, there was a time when that figure was nearly 5%, and that is a big hit to earnings. As you know very well, that's true for Aspen, that's true for P&C everywhere. So the underwriting movements, in general, are not enough. They're offsetting it, but they are not replacing it, I'm sorry. That is just hopeful, pie-in-the-sky thinking to think that it would.

But one of the offers I want to turn toward is I don't really think I have seen a market where there was a broader range of potential underwriting outcomes looking different prices. The stuff in the market looks to us definitely loss-making; we try and avoid that. There is also stuff that looks not just double-digit ROEs, but some of it is actually 20% ROE and more. So, I think if your question was on the property side, where we do think we're going to take on a little more risk, if the opportunity presents itself, as it will, that stuff is priced well in the double digits, 14%, 16%, 18%. Once in a while it might even be 20% ROE.

Now, that's not every deal, and on average, it is, maybe, more like a 15% or 16%. That is the stuff that gets -- There is also some other pockets on the insurance side with a more specialty or niche field that we think are priced double-digit ROE or better. Let me just give one other thought here. You may be thinking, well why don't you guys do much more of that? Why isn't the whole book like that? The problem is there is just not enough this available. What we are trying to do is ease back on the stuff that is in the high single-digit ROE area currently, but may be better tomorrow. Do less of that if we can, fill the coffers as much as possible with this attractive stuff, but there isn't enough to fill the whole Company with. Does that help you?

Yes, that is helpful. One other question, why wasn't stock repurchased in 1Q? And how should we think about the growth versus buyback decision in the coming quarters? And I will say, it's because I noticed the premiums guidance didn't change, and you did raise capital recently, as well.

I think we said in our fourth quarter earnings call that we had spent some 2011 -- latter part in 2011 rebuilding our capital buffer to meet our risk appetite levels. Q1 confirmed that we are now well through that rebuilding phase, and we wanted to wait to have a good quarter report behind us before planning to start share buybacks. But now there is nothing standing in the way of that.

So, would you say that we should expect buybacks for the rest of the year, given where the stock is trading versus new business expectations?

There is a very slight philosophical shift here. What we have done historically is a significant ASRs, but pretty infrequently. What we are saying to you this morning is that we may still do this in the future. I don't rule them out. But whereas in the past, we might have said before the wind season, we're not going to be buying shares, now we're saying, if we see weakness in daily trading, we might be out there buying some shares back shares at any given time.

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

I guess just following up on the last question regarding the guidance, clearly the bias is on the top end of the range. I'm just wondering maybe just touch upon your expectation for 61 renewals.

In what sense, Amit? Are you talking about pricing level or premium developments?

Pricing as well as maybe also touch upon the delta between industry supply versus demand.

Sounds like a very broad open-ended question, so I will try and be brief. There are areas where there is fear, and there is areas where there is loss, and there is areas where the perception of risk has changed because the model changed. I could be talking to you about trade, credit, insurance, reinsurance. I could be talking about political risk, talking about political violence, kidnap and ransom. We could be talking about marine energy. We could be talking about property CAT in Asia.

These are all areas where the fear factor is comparatively high, and in some of these areas, the supply of capital is comparatively low. So, we are either seeing pretty good prices, or we are seeing prices that are getting better. Or in some cases, we are seeing the clients actually managing risk better and reducing risk for us so we can charge them the same money but actually have a better product because the risk has become better.

Now, that is the stuff that we like, and I said on the call, that is probably around about 40% of our book of business is subject to that. If you're ask me about June, I think it's going to carry on. I think there is still plans of our reinsurance Company, competitors or insurance business in the United States that haven't fully reflected the implications of RMS version 11, and they are working to do that. We are seeing people come to the market and buy more cover. If you buy more cover in a tight market, you drive prices up a bit. So that is encouraging.

The rest of the stuff, let's say, that's a lot of -- I would even maybe then say, let's divide the United States from the rest of the world, and think particularly on the insurance side. In the US, there is definitely some forward momentum, even away from the CAT-exposed stuff. One of my colleagues was down at Rims in Philadelphia the other day, and he came back saying, look expect 10% increase on this bigger risk managed business, because everybody understands times are tougher. And the risk managers talked to their CFOs, and the CFOs are prepared to write the checks for a 10% increase and buy about the same amount of cover.

And that is the new norm. You are seeing other companies reporting 6%, 8%, maybe 10% increases in some of their (inaudible) so that's pretty good. In Europe, it is behind. It is maybe a couple of percent up on average. So, a long answer to an open-ended question, but I hope I have addressed what you wanted me to.

Yes, that was very helpful. One other question. This relates to the recent news surrounding of Repsol and the YPF. It seems that the market probably dodged this loss. Maybe just remind us what your exposure is in Argentina, and maybe also refresh us on how much of your political risk book comes out of the Latin American countries. Thanks.

You got me, because I haven't actually got our exposure figures for (inaudible) for across the world in front of me. I'm going to have to give a more general answer, which is the guys we have doing it, they're pretty savvy and they're pretty risk-averse. And they have certainly have not regarded most of Latin America as a place where they want to be.

Where you see political change, like a populist in power like a Chavez in Venezuela or Argentina, or possibly even Brazil, they tend to start running for the hills. So I'm afraid I cannot give you a figure. I've not been advised of any loss exposure, by the way, which doesn't mean we haven't got it. But I think if it was significant, someone would've told me. I'm just not up to speed on that. It's not one that's keeping me awake at night.

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

Just the first question, I want to clarify the combined ratio guidance, the 93% to 90%. I just want to confirm again, does that -- you obviously have a CAT-load assumption for the rest of the year. Does that guidance assumes no reserve development for the remaining three quarters of the year?

That is correct, yes.

And then I was wondering if you could talk a little bit more about the expense ratio, and I think in the prepared remarks you mentioned some unusual stuff in there. I forget if you detailed it, but maybe you could give a little more color on that? And then there is obviously other expense pressures from all of the platform investments and other things you're making. Maybe just talk a little bit about where you think expense ratio needs to get over time, and how we might see that trend through the year.

Sure, to recap, compared to the first quarter of last year, it does look like a significant $22 million increase in overall G&A expenses. Much of that is related to performance-related compensation. The underlying piece of it, that I think is more important here is about $4 million increase over that 12-month period in relation to the costs of our new insurance teams, mainly in the US, but also a new team in the UK. As regards of where it might settle down, we just concentrate on the total G&A expenses. I think the ratio in the first quarter is looking like 17%. I think that is a little higher than what I would hope the run rate would be, because of some one-off issues in the first quarter.

And in broad terms, if you look at the average of the last three quarters, including Q1 2012, I get something like a run rate of around 16% on $500 million of net earned premium, the quarter on average. That is a little higher that we would like it to be, but that is largely related to the fact that we have invested ahead of the hardening of the market, or hope for hardening of the market in our US Insurance business. We hope to grow into that expense base over the next couple of years.

Your next question comes from the line of Vinay Misquith from Evercore Partners.

I wanted to clarify on the expenses once again, so the numbers we are seeing within the reinsurance segment for the operating expenses, that is roughly around $29 million, and for the primary insurance, that is about $40 million. That would reasonably be expected to be the run rate for the next few quarters, correct?

Yes, that is broadly correct, yes.

Okay, great. The second question was on the stock repurchase and the preferred stock issuance. I'm curious on whether that will be used for growth, or is that going to be used to repurchase stock?

I think the answer is likely somewhat of both. We did say in connection with our marketing of the preference shares, that we expect to use some of the proceeds to support the capital of our US Insurance business, and that is certainly likely to be the case. But that will not be all of it, and as Chris has indicated, we are probably going to keep away from the large-scale ASRs at least for now. But we do see opportunity, and when we do see opportunity, we'll expect to be in the market.

Okay. And the final question is on the opportunities you're seeing in the US. For primary insurance, if you could, add some color about the pace of growth. I know these are new operations, but who are you getting this business from? And what price increases do you think you're getting on these businesses?

Vinay, I think you know the lines we are in. Let's start with a surety and the surety markets. It is a very big marketplace, we're a very small player. I would say we're making slow and steady progress rather than dramatic progress there. And I don't think there is any particular single carrier we're taking business from. Business is profitable.

As you probably know, we don't do contract to surety, it is just commercial surety there as a contributor. Let's look at professional liability. The team we hired a couple years ago took a while to get their feet under the table. They have historically liked to deal just with one or two really quality agents per state, and they have established relationships in those two years.

And sometimes it is those agents saying, here's a deal you always wrote what used to work, would you take another look at it? Other times, it is those agents saying, we are having a problem with a carrier. Service is poor. We like the way you help us with claims. We like the way you manage the risk with us. Whatever bring it to us. There is no single source of business.

Your question about what is the price gain when we do it? I though there was technically difficult part of that, which is sometimes you don't know the expiring price, but mostly in the US, it's single-digit increases. Exceptions to that would probably be the CAT-driven property area, where as I said on the call, it's probably more in the range probably of 10% to 20% currently. And you'll see the odd risk.

The average in casualty is probably 5%, but you will see the odd one in market that is a little bit -- typically it is something that is maybe being on the omitted said before, when it shouldn't be. And it is returning over to DNS side, and as a result of that, it might be paying 20% more. Those are outliers by the way. The average is 5%, but that is the flavor of what is going on.

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

Looking at your initial comments about -- you said there's two things that are driving rate. One is the recognition of inadequacy of investment income, and the latter was being able to charge geographically for losses in one area to another. I just wanted to dig in a little bit. It seems like most for your business, you are seeing much better response in the property lines that tend not use investment income aggressively. What is your confidence or the primary motivator is a lack of investment income that is driving pricing changes?

I think, Josh, when investment returns began to plummet, intellectually everybody got it. It is not hard to run the model and see what it is going to do earnings. Nevertheless, I think the industry looked on this with a sense of disbelief or powerlessness. It's sort of sad, what can we do about it? Then another year happens, another year happens and it gets worse. It took quite a few years for people to say that is enough, no further. We really have got to do something to replenish earnings.

So in the realm of rhetoric as insurance companies and reinsurance companies are talking to the clients, they're saying, you've got to realize where our earnings have gone to. You've got to realize where our cost of capital is. We have got to do something. So that general level, it is an argument. It is giving a bit of power, a bit of authority, a bit of oomph to the negotiations. I couldn't help you trace that mechanically through any single renewal negotiation. I don't think that is what's going on.

In terms of where we are seeing the more opportunity, yes, CAT-driven property partly because of model change in some parts of the world, partly because of loss in other parts of the world is one. And as I said already, I think the marine energy area, partly it's recognition exposure, partly it's loss there as well, looks more attractive. And then I think anything with a political risk dimension or financial risk dimension is also, it stands to reason, viewed as risky. We are getting significantly more price there. Does that help?

I am still not seeing enough in casualty, I guess, to feel really comfortable with the investment income-driven market thesis,I suppose. But I appreciate the comments. Then on PML, I'm looking at your book. Are you getting -- increasing your PML in insurance, while decreasing it in reinsurance in some sense? Is there a change in the weighting where the risks of the Company at, and can you go through the PML by major risk region?

There is no such general trend, actually. What we would seek to do is put the money where the best opportunity is. I think the reinsurance side reacted earlier and faster to the model change, although, you also have got to remember that said, we have more risk than we though, just as I said to everybody else. So we did have to normalize that. We have done that this time last year, actually. Today I think there is no significant change in the blend. I think the primary insurance property in the US is beginning to catch up with the reinsurance changes.

And when I look at the waiting in terms of the big growth in your numbers, it seems like -- how much is program growth on the insurance side, and how much is non-CAT property? If we can dig in maybe a little bit there?

The program growth year-on-year is $21 million, so it is quite a significant part of the overall growth in our Property Insurance subsegment. The balance of that is coming in our US Insurance line from the open market E&S business, which is probably rate driven on CAT-exposed lines.

Okay, and then finally going back, CAT exposure in California, CAT exposure in the US, Southeast, CAT exposure in, I guess, Japan compared to where you were a year ago. I guess I don't need numbers, but how are you feeling about your exposure compared to a year ago, I guess?

The major most dramatic change in exposure is the reduction in our Japanese quake accumulations that Chris mentioned earlier in the call. In the US, as far as US wind is concerned, the Program business that we just mentioned is bringing with it an increase in our Northeast US wind exposure. But apart from that change, certainly in our probably reinsurance book in the US, there is no major changes in the distribution of accumulations within the US (inaudible) zones

(Operator Instructions) Your next question comes from the line of Brian Meredith from UBS.

A couple of questions here for you. First, Chris, just curious on Japan. You talk about pretty substantial price increases, yet you reduced your exposure by 50%, so is pricing still not adequate there for earthquake? And why did you reduce your exposure as much as you did if pricing is pretty good?

Brian, that's an excellent question. What we are saying is that the risk has gotten worse. So, because you have Tohoku at one end of the fault line, you actually have an increased probability of that. I think it's called [Chigami] trench off Tokyo at the other end of the fault line. The risk is not the same; the risk is more. So although we got a lot more money, the risk is higher, we believe, as a consequence of Tohoku.

So on a risk-adjusted basis, the book is a bit better than it was before, and we are happy about that. But the scientific literature, not all of it, but a significant amount, is saying expect something major in Tokyo fairly soon. And our reaction is to say, okay, we expect it, we will take a bit less risk. So, the story is a nice one. We got 10% more money for Japanese earthquake, and we got about half the exposure we did to Japanese earthquake two years ago. The implication is, correctly, that there are some clients where we were not satisfied with the price they had to pay, and we cut their proposal altogether or reduced it substantially.

Got you, okay, good. Next question, just quickly, thoughts on the impact that sidecar capacity and collaterized market you think will have on the reinsurance renewals as we look at 61 and 71, and just your thoughts on that market and potentially Aspen doing something there.

Incredibly high to quantify this in advance, but the demand for the product is there. Exposures grow every year, and then model change says the recognition even grows more. Some of that increased demand is certainly going to be met by sidecars and other types of vehicles. We don't think all of it is going to be met from that source, and we don't necessarily think it is going to be met by that source cheaply.

We don't see anybody cutting prices to buy their way in. But let's say -- it is a normal equation, because you have a little more supply of capital, you would expect prices to go up less than they otherwise would. We're still feeling pretty good that there's some price increase to come. It's double digit. It's better than 10. It might not be as good as 20. It's probably in the US wind area in the next couple of months, going to be in that range.

Okay great. And then last question, taking a look at the US platform, are you where you want to be as far as investment in that platform now? Or is there more investment that needs to be done to get it to where you're comfortable that you have got the right platform to take advantage of opportunities?

At the risk of oversimplifying, I think we have made the investment. I think we have some great people doing great work. But what we want to see now is return on investment. Clearly, there are some things that are recurring, the cost of staff, the cost of offices, the cost of IT. So, I am not saying that we spend and we don't have anymore to spend, but we are not looking to increase our investment in infrastructure in the US. There is now at issue, which is about the capitalization of the US entities, and we may be putting more capital there, rather than using internal, quote, shares. But that I would say, is not truly an increased investment, it is more a slightly restructuring how we capitalize it.

(Operator Instructions) Your next question comes from the line of Matt Rohrmann from KBW.

One quick follow-up on, obviously, the tough investment income environment. I want to get your thoughts I know we touched on sidecars, but are there any other outside-the-box investment ideas, or maybe more fee-driven strategies that you are looking at to help offset some of the pressure on the investment side?

In a word, the answer is no. We would expect to stick with our predominantly investment grade fixed income strategy. We have a small allocation to equities, as I said on earlier, we have been considering an allocation, which again, would have been small to high yields. But now, the pricing environment doesn't look right for that. So, I don't think that we're looking to anything other than we do have a small, hopefully growing in-house investment I&S fund called IRIS. And that has done very well for us in a small way, so far. And that is something that we may expand it at some point in the future.

I think Julian is right, good returns, good growth, but with very, very small base there. It is not going to change a way of life, but it is doing nicely.

Your next question comes from the line of Wayne Archambo from Monarch Partners.

Looking at your stock this morning. It has been flat for five years. Your book value has grown, so there has been a reduction in the price-to-book ratio. Can you just elaborate on what more you can do for shareholders, either a special dividend or a significant buyback? It seems like the stock is in a state of going nowhere for five years.

Well, Wayne, we have noticed where our share price is, and as you can imagine, we don't feel very good about it either. We have a business, there's some parts of that business that are excellent, some parts that are good. They need capital, and we need to think about the risk in the Business. The way we look at is, what is the capital it takes to run the Business safely, keep the regulators happy, keep the rating agency happy, keep the policy-holders protected, and are we getting a return on that? We think we are. We think that the share price doesn't actually necessarily represent the return on the Capital Deployment business.

From time to time that capital builds up, and we would go to what I'd call exit capital. We'd love to put it to work in the business, but the fact is, you make more money by buying back your own shares than you do by (inaudible). Historically at that point, we have done some pretty big buybacks. We tend to them fourth quarter or first quarter, not before the wind season. The only other thing I could say to you is, two things we've talked about on this call. One is a small increase in dividend. We announced that the other day. And the other is, we will be in the markets potentially buying back shares from time to time from now on. I don't necessarily think it was big and dramatic, because there is a wind season coming, but we regard that as a sensible capital management measure, and I can't give you any more detail.

At this time, there are no further questions. Presenters, I will turn it back to you for any closing remarks.

Nothing more to add, I think, other than thank everyone for the time and attention and for some very good questions, goodbye.

Thank you. That does conclude today's conference call. You may now disconnect.