Aspen Insurance Holdings Ltd (AHL) 2012 Q2 法說會逐字稿

Good morning. My name is Steve and I will be your conference operator today. At this time I would like to welcome everyone to the Aspen Insurance second 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).

Thank you. I would now like to turn the call over to Kerry Calaiaro, Senior Vice President of Investor Relations, Aspen Insurance. Please go ahead.

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 under way, I'd like to make the following remarks.

Last night we issued our press release announcing Aspen's financial results for the quarter ended June 30, 2012. This press release, as well as 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 see the Risk Factors section in 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 a detailed disclosure on non-GAAP financials, please refer to the supplementary financial data posted on Aspen's website.

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

Thank you, Kerry, and good morning, everyone. The second quarter was another strong quarter for Aspen with book value of $40, up 3.7% in the quarter, and an annualized operating ROE of 13.6%. Both Insurance and Reinsurance were profitable, had low loss activity and prior year reserve releases.

We recommenced our share buyback program during the second quarter and completed $25 million worth of repurchases. I'm also proud to say that in the year of our 10th anniversary as a company, we have surpassed the milestone of $10 billion of assets. I am now going to turn the call over to Julian to review the financials, and then I will later comment further on the business performance as well as the market environment. Julian?

Thank you, Chris. This quarter we reported total comprehensive income of $112.3 million, up 63% from Q2 2011. The results include strong contributions from Insurance and Reinsurance underwriting and from investment activity. I will address each in turn.

The major driver of improvement in our Insurance segment profits was a 25% increase in gross written premiums. The increase in premiums was distributed across most lines with 54% from property, mainly in the US.

In terms of underlying performance, we think a good metric to look at is accident year loss ratio ex cats. We calculate this by taking prior year premium developments and cat-related premium out of the net earned premiums, and cat losses and prior reserve changes out of the net losses.

On this basis, the accident year loss ratio for the Insurance segment has increased marginally from 59.5% to 63.1%, which is due to a higher loss ratio in financial and professional lines compared to a year ago, offset by improvements in most other classes. Prior year releases and positive premium adjustments in the quarter benefited the Insurance combined ratio by 8% versus 2.1% a year ago.

The Reinsurance segment has virtually no cat losses for the quarter and has a similar result to Q1. There is little overall change in gross written premiums year-on-year and underlying improvements in the accident year loss ration ex cats from 64.1% to 56.2%.

Casualty Reinsurance gross written premiums for the quarter did rise 49% year-on-year, principally due to premium adjustments on prior years and therefore not indicating any material increase in Casualty Reinsurance exposure.

Total operating expenses were $84 million in the second quarter, an increase of $13 million over Q2 last year, of which $10 million is due to performance-related compensation provisions. As Chris will discuss in more detail, our US Insurance business is gaining traction and has continued to grow into its expense base.

Our investment team had a successful quarter. Total annualized investment return for the quarter was approximately 4%, including the effect of interest rate swaps. This includes net investment income of $52.8 million, net realized and unrealized losses in the income statement of $10 million, and an increase in unrealized gains shown in OCI of $36.6 million.

Our fixed income book yield in the quarter was 3.19%, down from 3.64% a year ago, and down from 3.31% at the end of Q1. We continue to keep our fixed income portfolio average duration at around three years, excluding the impact of our interest rate swaps which reduced duration by approximately 0.6 for the year.

Our small equity portfolio total return was flat for the quarter, which was a good result considering its benchmark, the Morgan Stanley All Country World Index, was down 5.6%.

We continue to actively manage our capital position and our assessment of excess capital has increased this quarter. We took advantage of the favorable interest rate environment in April to issue preferred shares for net proceeds of $155 million which, combined with strong operating results and an increase in unrealized gains in our available for sale portfolio, has contributed to our strong capital position.

In the second quarter we conducted an open market repurchase program of $25 million at an average price per share of $28.05. We have $167 million remaining of our existing repurchase authorization. Subject to market conditions, we are likely to continue the open market program for the remainder of the year.

Buying back our shares remains one of the most attractive short-term value-creating options. After the US wind season we will review the magnitude and the duration of the program, again taking into account our assessment of capital needs for 2013 and beyond.

As we have stated previously, we will continue to seek to return capital to shareholders if we are unable to find sufficiently attractive opportunities within our business.

We have made minor revisions to several elements of our guidance for the full-year 2012. We have raised premiums to $2.4 billion plus or minus 5% from $2.3 billion, and lowered the effective tax rate for the full-year to a range of 6% to 10%. The cat load for the remainder of the year is $135 million, which reflects a slight upward revision.

Over to you, Chris.

Thanks, Julian. I will first discuss the rate environment and then our underwriting results. We do continue to see a general upward trend in rates. However, the market is not embracing rate increases in a significant and meaningful way in all lines and geographies.

For the first six months of 2012 we achieved an average rate increase of 5% on renewals across both segments, with 4% in Insurance and 6% in Reinsurance. Most lines, though, show modest to encouraging rate improvements, but unfortunately a number have yet to move significantly upwards.

In Reinsurance, following the strong improvement at January 1 renewals, we were hoping to see that same magnitude of rate increase continue for the June and July US property renewal season. Indeed, there were rate increases at June and July for catastrophe-affected property lines, but they were more modest than we had hoped for.

Rate increases ranged from 0% to 20% with an average of about 5%. It is important to note, though, that the January 2012 rate increases followed lower levels of rate increases in 2011, whereas mid-year 2012 increases were on top of strong increases in mid-year 2011. Thus, over the two-year period, rate increases have followed a similar trajectory.

For the US non-cat property business, the Reinsurance segment is achieving rate increases of about 5%. The level of increase reflects improvements in primary rates.

On the US Casualty side, the general improving trends we saw earlier in the year are continuing. A number of our cedants in the US general liability E&S market are seeing increasing rate trends. We are also seeing some firming of underlying workers' compensation rates flowing through and cedants buying more workers' compensation catastrophe cover. The main challenges are the prolonged diminished level of investment return, the sluggish economy, and the availability of capacity.

On the international side, Casualty Reinsurance markets remain more challenging.

In specialty Reinsurance, rates are generally flat. We expect the full effect of the Costa Concordia event will be felt in January 2013 in terms of upward pressure on marine rates. Specialty Reinsurance aviation rates are holding steady, but space rates are challenging.

In our Insurance segment, there are strong rate increases in those loss-affected lines such as property, marine hull, marine energy and marine liability. Geographically, the US P&C markets are the most encouraging. In Europe, the more standard lines of business rate increases are muted, whereas in a number of our more specialized underwriting lines, we are getting good levels of rate improvement.

US cat-affected Property Insurance business is improving and we are achieving low double-digit increases on loss-affected accounts and peak zone wind accounts. For non-catastrophe property exposed business, we have obtained increases in the low single-digit range.

The E&S casualty market in the US is seeing encouraging early indications of firming, with improvement in rates as well as terms and conditions. We continue to see accounts moving back from standard lines carriers to the surplus lines markets as the standard lines carriers are non-renewing these tougher risks.

This trend can have a much more profound effect than might be evident at first glance. Previous market turns have been characterized by standard lines carriers returning to their core strengths and rejecting non-standard risks. These risks are then offered to the surplus lines carriers who tend to push up prices and improve terms and conditions in the face of increased demand.

As a result, both the admitted market and the excessive surplus lines carriers benefit from the process. We're also noticing that the excess casualty carriers are moving up attachment points, which is another precursor to a hardening market. By contrast, the UK liability insurance market remains very challenging.

Now, let's take a look at our underwriting performance, beginning with Insurance. Gross written premiums in the Insurance segment rose 25% from a year ago. This is primarily the result of the investment we made in our US Insurance operation where we made a significant effort to build and strengthen our producer relationships, resulting in increased showing of good quality business. In addition, this has been supported by good levels of price increase across a number of US property lines.

As a result, our US-based Insurance teams achieved gross written premiums of $134 million in the second quarter, with a number of our classes making strong contributions to underwriting profit in the quarter. In addition, this is the third consecutive quarter with year-on-year improvement in the loss ratios for our US Insurance teams. We are excited about our continued progress in the US as the investments we made over the last several years help support profitable growth.

For the second quarter 2012, the teams with our international Insurance lines had gross written premiums of $233 million, with a strong performance from our marine, energy, and transportation sub-segment in particular, where the rate environment is favorable.

We are continuing to grow our premium base in profitable lines where we are commensurate with the risk we are assuming. Let me just read that again. It didn't come across quite right.

What I'm saying is that within Insurance, for areas such as kidnap and ransom, we are getting profitably paid for the risk we're taking and we are happy with those.

That's where we're increasing our exposure. We're also scaling back in areas where we do not believe the risk/reward tradeoff is acceptable. For example, in areas such as the financial and professional lines book, especially if it is exposed to the Euro zone.

Moving on to our Reinsurance segment. Reinsurance had an excellent quarter with a combined ratio of 79% compared with 105.3% in the catastrophe-affected second quarter of 2011, with premiums in line with the same period last year. Property Reinsurance performed strongly in the quarter with good contributions from both our cat and non-cat lines.

Our Casualty Reinsurance book was also profitable, a good result given continued challenging market conditions, although there are some signs of improvement. As a result, there was minimal growth in the quarter excluding prior year adjustments and we are continuing to actively manage the cycle.

Finally in Specialty Reinsurance, our London-based teams had another strong quarter with good results in both marine and in aviation.

As I mentioned at the beginning of the call, our book value per share has now hit the $40 mark and total assets have passed $10 billion. You may not know that our Company turned 10 years old last month, and in that time we have built a brand in both the Specialty Insurance and Reinsurance marketplaces that is highly attractive to our clients and our brokers.

Today we have approximately 900 employees in eight countries. Our diversified approach allows us to have a great showing of business and obtain critically important market intelligence about what is going on in all the lines of business in which we want to participate.

I have said to you before that I think the central task of underwriting management is to allocate capital to those areas of the business where pricing is the most attractive, and seek to reduce or withdraw that capital as the opportunity recedes. Today we have the brand, the distribution, and the capitalization to benefit from any improvements in large sections of commercial P&C markets throughout the world.

We are certainly not enjoying a hard market as yet, but we are taking advantage of those lines where price has improved and we expect to be able to expand selectively on a number of our underwriting positions in the next 12 months or so.

There has inevitably been a great deal of discussion in the marketplace in the past few months about property catastrophe pricing, especially in Florida, and this is certainly an attractive business for us. However, property catastrophe excess of loss represents only about 12% of our expected premium writings for this year, and there are many exciting opportunities in the 88% of our premium which is not property catastrophe excess of loss.

As we have said on many previous calls, to the extent we are able to put our capital to work effectively to take advantage of this, we will do so. Otherwise we will continue to return capital to shareholders.

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

(Operator Instructions). Your first question comes from the line of Mike Zaremski from Credit Suisse. Your line is now open.

Thanks. Good morning.

Good morning, Mike.

Chris, last quarter I recall you saying that 40% of the business was well-rated and had received rate increases I believe in the 8% range. Would you be able to update us on that metric for this quarter?

And I would also be curious in regards to the new business growth. What percentage of that do you think is quote-unquote well-rated?

Okay. I'm not updating that particular 40% metric, but I will tell you what we are excited about and where we think there is opportunity. Starting in Reinsurance, as you know, sadly the Casualty Reinsurance area is not an area to expand, it is pretty tough. We have done -- we have written much better-priced business in the property Reinsurance area, particularly in the loss-affected areas of the world, you know, Asia.

Sometimes we have wanted to see even more rate so we have increased the prices but we have cut back the exposure because we thought that was the best way to maximize returns, but in general that is looking better and I think that is a slow-burning fuse.

I think what is happening in Asia in particular is new catastrophe models are being worked on and developed. They are going to hit the market later this year and next year. And the kind of prices it seems you are going to have to pay will be higher. Through our Singapore operation, we will be taking advantage of that.

Also, pretty excited about some of our guys in specialty re. That is where we write things such as marine and aviation, also crop.

You know, we are not in the crop business this year and we are pretty happy about not being in the crop business, but next year is a whole other story. Usually there is a reaction to what has gone on. There is payback; there's opportunities for growth.

I'm not saying we are going to do it. We are certainly going to be looking at that. So I feel kind of upbeat there for next season, by the way.

Just so you know, these crop problems are not just in the United States. You have seen them in Latin America, too. It is not limited to just one country. That is probably good for Reinsurance.

On the Insurance side, I have talked a little bit already about the US operation. We have teams who, when they joined us two or three years ago, they worked in places and they handled books of business of $200 million, $300 million, $400 million. We said we don't want you to be handling $200 million, $300 million, $400 million. You handle the amount that is going to be profitable at the pace that it can come on board.

And now some of these guys are doing $20 million, $40 million, $60 million, $70 million books with growth. They have relationships with producers. They have established an Aspen brand and they are not cutting corners, not cutting rates.

I like what they are doing. Their numbers are good. Some of it is longer-tailed lines so we have to watch and see. We are not going to see reserve releases from that for some time but we like what our US guys are doing.

On the international side, as I said on the call, marine looks good. Marine liability looks good. A little bit better, not good enough yet in hull. I think those are the main areas that I feel that are improving.

The credit risk and political risk, there is opportunity in there and there is danger in there, it depends on what day it is. I think there are people occasionally who will buy deals that look very well priced, but there is a lot of fear, particularly connected to Euro zone, and we are running away from that, to be honest.

It is just too hard to call, so we'd rather have no exposure. I hope that helps.

The second part of your question, I don't believe we are putting any business on our books anywhere that doesn't make sense. It is all sensible business.

Okay. That's helpful. Lastly, regarding the investment portfolio allocations, is the strategy to continue staying highly rated in regards to rating agency ratings?

Broadly speaking, yes. We continue to explore the options presented by high yield, and I think it is quite possible that we will take a position in high yield sometime in the not too distant future. And that would marginally reduce the average credit quality of our portfolio, but that is really what is majorly under consideration at the moment.

Sorry, just a quick follow-up to Chris' comments. If you wanted to get into crop insurance next year, would you need to hire a new team or is that a something you guys could underwrite using your existing underwriters?

Well, I was thinking more about Reinsurance when I made those remarks. I don't really want to see us get into crop insurance business.

Generally speaking, in the US, crop reinsurance is not a great business to be in. Every so often there is a blip in the market and you get an opportunity [for year-ago.] We don't know how this one is going to pan out yet, but if it carries on the way it is looking, I think there will be a shortage of capacity for reinsurers and we have the expertise already to do it.

Just to be clear, by the way, we do have some crop exposure elsewhere. It is not big, but Latin America has some events this year, too, and there is some potential for growth there next year. Again, we are fully resourced to do that.

Thank you for the color.

Sure.

The next question from the line of Sarah DeWitt with Barclays. Your line is now open.

Good morning. In the Insurance business, I was wondering if you could just talk about broadly how you are achieving such strong growth for the past two quarters, given what is still probably a pretty competitive market?

Yes. I'm happy to do that although to some extent I may be repeating what I said to the last questioner. Most of this growth is coming in the US, and as you know very well, as you will recall two or three years ago now we invested very significantly in getting admitted market capability and getting better claims people, better IT systems, generally establishing the brand.

We also had essentially eight new underwriting teams that joined a long existing property team. We have nine teams in all.

We said, guys, there is no rush here. You handled very big and a very successful books at your previous places of employ. We don't need you to do that and we don't need you to try and take business from your previous employers.

What we need you to do is set forth a value proposition to your brokers, your agents, your clients, based on service, consistency of underwriting, based on claims handling knowledge and ability, and just generally be true to the people that you are. Sensible underwriters acting consistently in the market. That is a slow way to do it and we have been doing it for two, three years.

What we are seeing this year is it is finally beginning to pay off. We are finding that accounts these guys may have written in the past have encountered some kind of an obstacle with the existing carrier. Often it is about service rather than price, and they'll come to us and say it didn't happen like that when you were handling it. Would you like to take a look at it now?

We do take a look. We are not competing on price particularly. We are just there saying we offer a fair price and we offer a good service. That's the offering if you want to take it.

And we are finding professional lines it is working. In the surety area we only got licensed -- we got our two listing in December last year. So we had the team onboard doing all the marketing for about a year before. This year they have got some momentum.

Inland marine, we have got some absolutely first-class guys in that area and that is a very interesting line of business, and again this year they have got the momentum.

So I think what you are really seeing is not -- it looks like explosive growth suddenly. It's actually the Q2 2012 stage of a process that began about three years ago and I hope that makes sense to you.

Okay. And how large is the US Insurance business now and how large do you expect it to become over time?

This year we could do around $400 million of premium, that sort of figure. Over time it depends on how the market helps us. We think this operation can be break-even profitable in the sort of $500 million, $550 million area and maybe we can achieve that next year and maybe the year after.

The thing here it not to push it too fast. We want to stay disciplined and if the opportunity is there we will expand. And if the opportunity is not there we will stay at this sort of 2012 size for as long as it takes to find the opportunity.

Just like to add one observation on your former question about the growth in the Insurance segment premium year-on-year. One of the major contributors to that is actually from a program that we acquired in the course of last year that was zero premium contribution in the corresponding quarter last year. Our program business is now contributing about $30 million in this quarter, so that is approximately half of the growth in the quarter is coming from that one source.

Right. And that is a US program by the way.

Great. Thanks for the answers.

Thank you, Sarah.

Your next question comes from the line of Amit Kumar from Macquarie. Your line is now open.

Thanks and good morning. Two questions, first of all just on capital management. Just listening to you talk this quarter and sort of comparing your commentary to the past quarter, I do detect an additional shift. I'm wondering do you plan to use that outstanding buyback for 2012? Does it get completely exhausted this year? Did I infer that correctly or did I miss something?

I think the way I'd characterize it is, and this is -- you're right that there is a change here, but I think actually I did it the last quarter rather than this quarter and the change is that from time to time, let's say on a more opportunistic basis, we are going to buy back shares.

But last year there were a lot of cat losses. The capital was a little depleted. We were in the buffer zone. We have had a few strong quarters when the cat position was very strong. We don't, as we've said to you many times, like doing big buybacks in the wind season, but if we have the kind of performance over the next couple of quarters that we have had over the last couple of quarters then we are going to have really a lot of capital. That is not a sustainable position.

I would love to put it to work in the underwriting business and if we can profitably do it, we will. I think it is far more likely there will be a position of overcapitalization that needs to be rectified. I cannot give you a date nor a quantity nor any other detail, as you know very well, on that. But you have got the sentiment, I hope.

Got it. That is helpful. The other question I had was I think in the opening remarks you mentioned about why the underlying loss ratio had ticked up because of financial and professional lines. Maybe just expand on that. Is that -- are there some specific factors you are noticing today or did something change in that?

First of all, there is nothing we are concerned about there. I characterize it as a quarterly fluctuation. It is related to a slight uptick in the claims experience on our credit and political risk accounts rather than more general.

And in fact, if you look at the half year as opposed to the quarter results, adjusted for the fact that we had the Costa Concordia loss in the first quarter, and look at the underlying accident year ratio excluding cats and excluding Costa Concordia, then actually there is a margin improvement in the first half year.

So it is certainly not something to be concerned about. I regard it as more of a fluctuation than anything that's systemic.

Okay. Okay. That's helpful. That's all I have for now. Thanks.

Amit, thank you.

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

Good morning. This is actually Max Zormelo on Vinay's line. Congratulations on a good quarter. A couple of questions.

My first question is on the PMLs. I was looking at the PMLs for this quarter versus last quarter and I noticed it did come down quite a bit, and wanted to get some color on that. Looks like virtually for all perils, except for US wind for the one-in-250 year, your PMLs have come down quite a bit and I was wondering why that is.

I think there is a couple of things going on here. I'm going to start with Japan where the story basically is that in a two-year period we have probably halved our PML and we have increased our premium. And I think that that was the right thing to do.

Now, we could have increased the PML and increased the premium still further. To do that, we would have written some pretty okay business but not the very best. So we took the view it isn't about driving the car at 100 miles an hour because you can get it up to 100 on the dial. It is about driving the car at the right sort of speed for the conditions.

Japan suggests to us from a sort of maximizing return on risk adjusted capital that a downsizing in PML and an upsizing in premium was the right way to go.

In terms of US wind, which may be another area you are thinking about, we did think a few months ago that the June/July renewals could yield 10%, maybe 15% more rate. In fact, they were around 5%. So we were a little more cautious there.

This is not that it it's bad business. It is good business, but we didn't think it was sort of super-chargedly good business.

Elsewhere some of these areas, New Zealand, maybe Australia, to some extent Thailand, places like that, they are probably not registering in our PMLs, but our view is their day will come. The models need to be recalibrated. We worry about New Zealand's South Island just from a hazard point of view and so we cut our exposure there.

But we are very in the market. We're aware of what's going on and if new models come up and they are accepted by clients and their brokers as the way to price the business and we back those models, we'll increase it again.

It is not as simple as prices go up, write more. Prices come down, write less. It is about just choosing your positions to get the best risk adjusted returns. I hope that helps.

Okay. That's helpful. I have a couple of numbers questions. First one is on the effective tax rate. I was wondering what the run rate might be for 2013. Is it going to be around the 6% to 10% for 2012?

And then secondly about the expense ratio ticking up this quarter. I wanted to know, looks like for the Reinsurance segment you have got a policy acquisition expense ratio running higher versus last year. For the Insurance segment the operating and admin expense ratio is running high. I just wanted to know, are these the new run rates going forward? Thanks very much.

Okay. Let's take the question on tax first. I think it is too early for us to give guidance for the 2013 tax rate, but I think I could say that I don't think it is likely to go any lower from the range that we are quoting for 2012 at the moment.

On the acquisition costs in the Reinsurance segment. There is, as you say, an uptick in the quarter and that is attributable to accrued profit commission on various Reinsurance deals. So it was actually an indication of a profitability, in fact, of those deals. I now expect the acquisition ratio, as it has in the past, to continue to fluctuate a little from quarter to quarter, mainly for those kind of reasons.

In the Insurance segment and in the -- also in Reinsurance, the operating expenses are also up. Your question was can we take Q2 as indication of run rate for the rest of the year? And I think that is broadly a fair thing to do.

I think in terms of total operating expenses, I think it is around $80 million this quarter and I think that is a pretty good number to assume for the near-term future on a quarterly basis.

Thank you.

Your next question comes from the line of Dan Farrell from Sterne Agee. Your line is now open.

Hi, good morning. Just a question on the cat loss forecast for the remainder of the year. And Julian, correct me if I'm wrong. I think you said that you had raised it moderately from where it was previously.

I was wondering if you can talk about what drove that, particularly given than your cat PMLs are coming down a little bit in most areas. Is there a change in seasonality assumption or should we think about your full-year assumptions going forward maybe being a bit higher?

It is the latter really. I look back at what we said the cat load was for the three remaining quarters in the year at the last call. That was $150 million. Our revision including a revision of the position in Q2 for that same period, so like-to-like basis, it is more like $160 million. So for the year as a whole there's an increase in $10 million.

Yes, we have adjusted the seasonalization profile on wind losses to a certain extent. This is a combined all perils estimate, so it includes contributions from all around the world and all types of perils. To be honest, a fluctuation of plus or minus $10 million in this number is probably noise as much as anything else.

Thanks. Then a bit more color on your reserve release. Another solid result in both segments. Can you talk to us about what lines are driving that and what accident years?

Yeah, sure. If we look at the Insurance segment first, you have got a total release of $14.4 million and I would say that the majority of that, $9.4 million is from shorter tailed lines. Only a small contribution coming from longer tail lines. The shorter tailed lines involved include credit, political, and terror, property insurance and energy PD.

On Reinsurance, the majority of the $14.1 million release is coming from our non cat related other property lines. Again, short tail.

Okay. Just one other question. On the accident year loss ratio that's increasing a little bit in the Insurance segment, can you give a little more detail on some of the mix changes that are driving that and some of the lines that you might be growing that might have a higher loss ratio?

Then I am also trying to think, if there are new lines that you are building, in those early years, do you try and take a conservative stance on the initial loss pick and see how some of those newer lines develop?

Well, we do do what you just described but that isn't really accounting for the small uptick in the accident year loss ratio quarter-on-quarter. What we do is, we look at the performance on a sub-segment level and we look at Property, we look at Casualty, we look at marine, aviation. We look at financial and professional lines.

The first three of those, Property, Casualty and marine, on that test, on the accident year ex cats loss ratio, they all got improvements quarter-on-quarter. I said the one that is serrated slightly is on financial and professional lines, and that's just due to a slight uptick in the loss ratio for credit and political risks this quarter rather than anything systemic or related to new lines.

Okay. Thank you very much.

Thank you.

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

Hi there, everyone. Congratulations on the quarter. I wanted to follow up a little bit deeper on Max's questions on expenses. Last quarter there was about $20 million higher of compensation expenses due to a much better performance in Q1 2012 versus Q1 2011. Can you sort of break that out a little bit and then talk about when the US business will get to the size where it is not a drag on expenses anymore, proportionally?

Yes, the expenses gap, if you like, between Q1 and Q2, has narrowed from $22 million last quarter to the $12 million this quarter. In both cases, last quarter and this quarter, the majority of that was made up of performance-related compensation issues. But in addition in the first quarter there were some other one-off issues to do with payroll taxes, severance payments and other issues.

So I think the indication that -- the position for the second quarter is probably more representative, where of that $12 million I think we are saying approximately $3 million is underlying expense increase and the rest is profit performance-related pay provisions.

So excluding atypical compensation arrangements, actually 2Q expenses were higher than Q1 expenses? The $50 million versus, I guess, $60 million.

Yes. I think there's an increase in expenses quarter-on-quarter, that's correct.

Okay, okay. Just trying to model out for future. The other question, I really don't know as much as I should about kidnap and ransom and I'm just wondering, the incumbent carriers who you have managed to outcompete, are they responding? Is it a growing market that there is room for everybody? What is the key to Aspen's success in that area?

Josh, I don't think actually that is the way it worked. But with this, about two years ago now, sort of explosion in piracy off of the coast of Somalia, we were the first people, I think, to spot the opportunity.

The K&R, and this is my opinion, is in three parts. One is for corporate clients, people, organizations who send their employees to dangerous part of the world. The second part is what we tend to call family business, principally in Latin America, wealthy families protecting themselves or children against kidnap and being held hostage.

And this third element which is actually where we have, I think, excelled was marine piracy, and that was not a marketplace a few years ago. It emerged, we spotted it, we took advantage of it. It was and is terrific.

There is, however, some of the more traditional carriers and one or two in the US [currently] trying to find their way into that. So in the market now, a little bit of downward pressure on rates. That's the bad news.

The good news is that the owners are probably understanding the risk a bit better, so risk management has improved. And currently we feel the price is a little lower, but the risk is a bit better, so we are kind of happy to hang in there.

Like I said, in a different context in the call, this is one of those areas where you just have to be able ruthlessly opportunistic. Opportunity is there, you take it. Opportunity goes away, you drop it.

There is no continuity or loyalty in a line like this. If is just, if it is commercially feasible you want to be in it, and otherwise you are out again. For now I think we have a pretty decent business for the next year or so.

Thank you for the education and congratulations on your tenth year.

Thank you, Josh. Thanks very much.

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

Thanks and good morning, everybody. Chris, just a couple quick questions here. First one is the numbers question. If I look at the Insurance segment it looks like ceded reinsurance was up pretty significantly year-over-year. Is that mix, timing, anything going on there?

That is purely a timing difference in the placements of our marine and energy protection.

Yes, that is what it looked like. Great.

And then the second question, I'm just curious, with the 1.4% treasury yield right now, when you are writing a new piece of casualty business, what kind of ROE do you think you are getting on that business?

And just as a follow-on to that, do you think the price increases that we are seeing right now are enough to compensate for that continued decline in investment yields for casualty business?

Those are good questions, Brian. Those are good questions. In general, I think the longer tailed lines are very challenged, given not just the current investment yield but the prospective investment yield. And as far as our Casualty Reinsurance area is concerned, I think the guys are very conservative. They've cut our position in Casualty Re I think every year for about four years now and I'm pretty sure that they are going to cut it again next year.

I don't think that the increases that we are seeing -- and they are there, but they are modest -- are compensating really for the lack of investment return.

This has turned a business that historically for Aspen has been terrific. I think Casualty Re is like a 16%, 17% ROE over the last ten years on average. It's turned it into a sub-10%, a single-digit ROE business.

In Reinsurance, I just talked a moment ago about K&R and I said you need to be ruthlessly opportunistic. In Casualty Reinsurance you need to be a bit more thoughtful. There are clients who are doing a good job. They have sometimes a hold on books of business that are a little special that have different return characteristics. And you can't do a knee-jerk reaction. You can't say, Mr. Excellent Client who operates in 12 counties of a single state, we don't want to reinsure you anymore because of the investment yield [on you].

You have got to think in a more long-term basis. So we would take temporarily low returns on some of that stuff. Others you just have to let it go. There's no margin in that.

On the Insurance side, a little bit different because you can choose your risks. You can pick your positions a lot more subtly. So if I take something like energy-related liability, which I would call that a GL for energy clients. It's a casualty line. But there have been some big pops in that world in the last few years and I think you are getting underwriting prices that are pretty attractive.

Yes, we would like it more if we could make more return on the money we hold, but it is still pretty good stuff. Other areas, other aspects of GL is just a lot more difficult, so it is a little bit more a subtle tailor-made approach to each individual insurance line. Generally speaking, though, I would say there is more opportunity for growth in the financial lines and in the property lines and in the casualty lines if you look across the whole P&C universe.

Okay. Great. Thank you.

Thank you.

At this time I am showing there are no further questions in queue.

Okay. Well, thanks, everyone, for the time and attention. We enjoyed your questions. Have a good day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.