Aspen Insurance Holdings Ltd (AHL) 2012 Q3 法說會逐字稿

Good morning, my name is Robin and I will be your conference operator today. At this time I would like to welcome everyone to the Q3 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a Q&A session.

(Operator Instructions)

Kerry Calaiaro, you may begin your conference.

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'd like to make the following remarks. Last night we issued our press release announcing Aspen's financial results for the quarter ended September 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 a more detailed description 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 the Aspen website.

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

Thank you Kerry. Good morning everyone. We are extremely pleased with our results in the third quarter. Our book value through quarter was $41.53, an increase of 3.8% from June. We achieved an annualized operating ROE of 13.2% for the quarter. There are a number of features of the quarter which we find particularly encouraging. Obviously we benefited from the low level of catastrophe losses, but within reinsurance -- in casualty re, specialty re, and in the other property reinsurance sub-segment -- we also saw excellent returns. Our insurance results are also profitable, with real progress in the US and some very good returns in our London market lines.

As we have mentioned on previous calls, we have a conservative and rigorous reserving approach which has resulted in a pleasing level of reserve release in the quarter whilst maintaining an overall reserving strength level at the 88% after diversification, which we regard as extremely strong. I am now going to turn the call over to Julian to review the financials and I will comment further on the business performance as well as market environment later.

Thank you, Chris. This quarter we reported total comprehensive income of $141.5 million, up over 100% from Q3 2011. The results include very strong profits from reinsurance underwriting, with positive contributions from our insurance segments and from investment activity. I'll address each of these in turn.

The reinsurance segment returned a combined ratio of 73.8% with an accident year ex-cat combined ratio of 81.4%. As would be expected in the absence of any significant Q3 losses, the catastrophe excess of loss account, which makes up fully 22.3% of the segments net earned premium for the quarter, performed exceptionally well. But we also had good performance from the rest of the our book. Other property reinsurance lines, which include some cat-exposed risk excess and proportional business, also outperformed the corresponding course of last year. Specialty lines, which are also predominately shorter [tale], but less cat-exposed, contributed 22.5% of net-earned premiums and also performed well with a strong contribution from credit and surety.

We have been actively scaling back our casualty reinsurance book over a number of years and focusing on better risks. Since its peak in 2005, we have reduced the gross written premium of casualty reinsurance by an average of 6.4% per annum. We regard the profitability of our remaining core account as acceptable. There are continuing signs of underlying rate increases, especially in the US, but not enough -- in our view -- to compensate for declines in investment book yields across the industry. Profitability was more mixed in our insurance segment. There were strong performances in the quarter from energy, aviation and political risk underwriting and our relatively new US professional lines operation. Property and casualty results, though, were weaker, with an uptick in US, E&S property non-cat losses in the quarter, offsetting the absence of major cat losses.

For the quarter, the accident year ex-cat loss ratio was 61%, up from 56.6% a year ago. But this increase is predominately driven by a change in business mix, specifically in the growth in our programs business. If you adjust for the business mix, the accident year ex-cat net loss ratio was basically flat. Total operating expenses were $90.7 million in the second quarter, an increase of $18.7 million over Q3 last year, of which $15 million is due to performance-related compensation accruals. Our investment team had another successful quarter. Total annualized investment return for the quarter was approximately 4.25%, including the effective interest rate swaps. This includes unrealized gains shown in OCI of $32.2 million. Our fixed income book yield in the quarter was 3%, down from 3.5% a year ago, and down from 3.2% at the end of Q2, which is consistent with the quarter-on-quarter reduction in investment income that we have recorded. Our fixed income portfolio average duration is 2.8 years, excluding the impact of interest rate swaps, which reduce the duration by approximately half a year.

Our equity portfolio returned 4.92% during the quarter and 9.35% year-to-date. In September, we began to build a new double B high yield portfolio focused on the US corporate market. Recognizing that yields and spreads are close to record lows, it is our intention to tactically build this position over a one- to two-year period. As part of our below investment-grade strategy, we will also begin investing in double B bank loans to complement our high-yield portfolio. We have the appetite to invest up to 5% of our anchor-group portfolio in double B securities. We continue to actively manage our capital position and our assessment of excess capital has again increased this quarter. In the third quarter we conducted an open-market repurchase program of $25 million at an average share price of $28.91. As announced yesterday, we have increased our share buyback authorization to $400 million in anticipation of a continuing open market program.

Subject to market conditions, we are likely to continue the program for the remainder of the year and into next year. Buying back our shares remains one of the most attractive short-term value creating options and, as we have previously stated, we will continue to seek to return to capital to shareholders if we are unable to find sufficiently attractive opportunities within our business. Following Q3 results, we have revised several elements of our guidance for the full year 2012. The guidance of gross written premiums and ceded premiums remains the same, with gross written premiums currently forecasted at $2.4 billion plus or minus 5%, and ceded premiums at 10% to 12% of gross earned. The range for the combined ratio is reduced to 89% to 93% from 93% to 98%, reflecting the absence of significant Q3 cat-losses. Tax rate guidance also reduces to 5% to 8% from 6% to 10%. The cat load for the remainder of the year is $45 million, mainly relating to earthquake risk, the final phase of the Atlantic hurricane risk, and the first part of the European wind season.

I will now turn the call back to Chris.

Thank you, Julian. Let me provide you with some commentary on the rate environment. For the first nine months of 2012, we achieved an average rate increase of 4% on renewals across the book, with 5% in reinsurance and 3% in insurance. Currently, the US primary insurance market is achieving the most promising rate increases across most lines. In general, these increases are flowing through to the US reinsurance markets. The UK and international markets continue to have downward [Re] pressure, particularly in those areas with sustained low loss activity.

Starting with reinsurance, in casualty Re the market remains challenging, but we have achieved a 2% rate increase year-to-date. In the US we are seeing several indicators of potentially positive market changes, specifically the casualty E&S market shows positive momentum with underlying price increases in the mid-single digits. For international casualty, though, the environment continues to be challenging. For specialty reinsurance, outside of loss-affected markets and [territories], rates are generally flat. The established markets remain disciplined with relatively stable rates, while the more profitable niche lines, such as credit and surety, are attracting a bit more capacity which is causing some downward-grade pressure.

Our crop business is written within our specialty reinsurance segment. Across Aspen Re, we have earned about $20 million of crop business through the nine months of the year, of which only around $300,000 relates to the US. Currently within crop we see growth opportunities in China and in Latin America, while we expect to maintain our exposure in Europe. Several years ago, we wrote a reasonable amount of US crop reinsurance business, but as rates declined we canceled almost all of it. Our underwriters do have the expertise to write US crop if we decide to grow that book again. As I mentioned on last quarter's call, we are actively monitoring the market to see if rates rise to a level where we view the return for underwriting US crop as attractive. If that is the case, we may decide to build our crop position in the future. But the scale of the US opportunity, if any, will not be known before February.

Catastrophe reinsurance, although well-priced, is not seeing the same upwards pressure on price as we have had for the last couple of years. In the past we have seen upwards price pressure as a result of model change in the US or catastrophe losses on the international side. But now this outwards pressure has subsided. There are signs that the new money in the market is focused chiefly on US peak-zone exposure and on Rec recessional products and is causing downwards pressure in those specific markets. It is worth noting, however, that as regards retrocession, Aspen tends to be a buyer rather than a seller. So this could work to our advantage.

Aspen Re is, of course, a broader book than just Cat. Our property catastrophe business represents only a little over 0.25 of our writings and while the results there have been very good, we are also encouraged by the rate environment in our other property segment and in the casualty business. Our clients in these areas are reporting mid-single digit increases and we are seeing these increases at the primary level flowing through to the reinsurance contracts. Looking towards the January 1 renewal seasons for reinsurance, we expect sale rates for the US with peak zone US and retro being two places most likely to experience rate pressure. The primary market in the US is likely to continue to achieve rate increases.

In our insurance segment there continues to be rate increases in marine hull and in marine liability, reflecting both some loss [exhibitory] and in general disciplined competition. Geographically, the US primary insurance markets are the most encouraging while Continental Europe continues to lag behind and the UK remains very challenging. For our property insurance business we achieved an overall average rate increase of 5%, while the US property area achieved an average rate increase of 7%. We are continuing to obtain excellent results by maintaining our focus on underwriting discipline in our UK commercial property insurance underwriting. Despite these excellent results, however, this is not a growth area for us, as the UK market resolutely refuses to increase prices.

Our primary casualty lines in total achieved a modest rate increase of 2% the first nine months of the year. There were definitely signs of strength in the US where rates have increased 9% on average in the first nine months. Specifically, the US E&S casualty insurance market is seeing encouraging indications affirming, with improvement in rates as well as in terms and conditions. We continue to witness the phenomenon we spoke of in the last quarter where standard lines carriers are becoming more focused and releasing a number of risks to the E&S markets. We are pleased to see them there and we are well-placed to write them, but at better prices with higher deductibles and with lower limits. While it is by no means a hard market, it is showing steady and encouraging price increases.

Real estate, construction, hospitality, energy and certain difficult products are examples of classes that have seen an uptick in submission for back to the surface lines market. There's also pretty good news in our excess casualty book where composition has reduced, the market is firming, and we are retaining 5% price increases on average. The UK liability market is challenging. Yet there are some stress risks and risks with prior claims experience which are being re-rated by the current market and providing us with some encouraging opportunities. We have also been able to write some new business in the Irish market on the back of improving conditions, and this is the first time we have written business in that market for quite a few years.

We are well-positioned to capitalize on those areas of the market with good rate momentum. In addition we are making good progress in executing our diversification strategy. For example, consistent with our strategy within reinsurance, we continue to enhance our international presence to our offices in Zurich, Miami and Singapore, where we serve the European with a special focus on Eastern Europe markets; we serve Asia; we serve Latin America from Miami. Our [own grows] on the ground in those areas are accessing new clients as well as providing enhanced services to existing clients. Through the first nine months of 2012 these offices wrote about $200 million of gross written premium which represents approximately 20% of total reinsurance gross written premiums. We are making good progress in these geographies and quite optimistic about the future.

In insurance we continued to focus on profitable growth in the US and niche specialty insurance opportunities. In the US we have now built all the components of a successful underwriting operation and a number of our teams have achieved exciting forward momentum. We continue to have a conservative approach in our investment portfolio as we are most concerned with protecting our balance sheet and then looking for ways to generate higher investment returns in this ongoing low yield environment. We do not want to take on a lot more risk, but we are willing to take on a bit more risk for an appropriate increase in return. For example, as Julian mentioned, we do have an equities portfolio of just under $200 million, that generated close to 5% return in the quarter and we have begun to build a double B high yield portfolio focused on the US corporate market.

Active capital management is always foremost in our minds and a key focus for our board. We have said it to you before but let us stress that where we have rewarding opportunities we will dedicate our capital to them and where we do not we will seek ways to return it to shareholders. During the quarter we announced that we completed our search for a new CFO and we are pleased that John Worth is joining our team in November. I'd like to take a moment to thank Julian for seamlessly stepping back into the CFO role. With Julian at the helm, we were able to conduct a robust and thorough search for a new CFO. Julian has done a tremendous job for us in the course of 2012 and will now be returning to his role as Chief Risk Officer of the company.

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

(Operator Instructions)

Amit Kumar, Macquarie Research.

My first question relates to the discussion on capital management and the PMLs. When you look at the past buybacks and as I look forward, I am curious, would the pace of buybacks in Q4 be meaningfully higher than the $50 million which you have bought year-to-date?

That's a great question. I think what is clear is that after the good third-quarter results we have had is that the balance sheet has strengthened and that does give us scope to consider an increase in the share buyback program going forward.

I think we have said in the past that we tend to buy back little during the wind season but if post-wind season we find ourselves in a comparable capital position where we could potentially do more. I don't think we can take that one any further and I'm sure you understand why.

Okay, but all's being equal in a non-cat quarter, dividends plus buyback would equal net income or something like that?

We are really relating the pace at which we manage capital to balance sheet considerations rather than quarterly income.

Okay. The second question I had is when you talk about 2013 and you talked about pricing increases and talking about some more opportunities, if you step back and look at your overall book, do you get the sense that once you parse through the ups and downs for 2013 the premiums would look a lot similar to what they look for 2012 or would they be modestly up?

I think we would be disappointed if we can't get them up modestly as you say. I think there could be quite a lot of change, though. As I said on the call, peak zone US cat business is pretty well-rated business, but there is more capital seeking it so maybe we maintain, maybe we need to reduce there. If we look elsewhere in reinsurance on the international and Latin America and Asia side, on the back of those losses last year and on the back of a lot more marketing activity, we really are becoming a brand name in those markets and I think we will see some growth there and it is quite interesting what is going on. Not necessarily in property cat, but in a diverse line range of specialty lines, that is pretty good.

As you know very well we have got nine underwriting teams working in the US now. No team has been with us more than three years. I think one of the teams has been with us just over a year. They are pretty much established and known in the market, they've got the licenses, they've got the capital. They have all got full momentum, some very, very encouraging and I'd see some growth there.

Looking at the casualty market, there is every reason in the world why we should see casualty prices going up. Mainly it has to do with the absence of investment return to complement the casualty underwriting side. Plus, while I'm pretty comfortable about Aspen's reserving level, I don't think everybody has been fastidious in the same way. So to some extent you will see a slowing down of reserve releases elsewhere and that is going to help the casualty market. Whether we are going to see that in 2013 I couldn't say. But on balance as we look at there's sort of a little more upward pressure than it is downwards so in summary, a bit more premium next year.

A final question -- you talked about crop, can you just expand on what kind of product are you looking at in terms of what sort of product are you contemplating offering?

The main markets that we are in currently are Europe, particularly Italy. We do some in China. It's only going to be crop multi-peril or crop hail, and we are talking about reinsurance of course. Most of that in Europe would be written on a stop-loss basis. In China they use the quota share as well. And I also made reference to the US, but I want to stress that our current exposure to that area is really quite minimal -- it is more wait and see. We would like to believe we could be even in the position to do some more next year and if we do that would be likely stop-loss reinsurance. But I don't yet know whether that opportunity is real or imaginary.

Thanks for the answers and congratulations on the quarter.

Mike Zaremski, Credit Suisse.

Can you comment on the expense ratio outlook? I noticed profits are similar to Q2 levels while the expense base was $4 million higher.

Yes, the expenses here are sort of quarter-on-quarter comparing Q3 to Q2 have increased mainly as a result of an increase in the level of accrual for performance-rated compensation which is about $7.3 million increase on that number in the quarter. In Q4, I think the underlying rates will be consistent with Q3. But the total will depend on what the performance is for the remainder of the year.

Okay. Given your answer to the previous question about the growth outlook for 2013, should we potentially expect the expense ratio to start falling or it just depends on what actually happens with rates next year and opportunities?

I am expecting there to be a trend to stabilize and reduce our operating expense ratio through 2013.

Okay. Could you comment on what you would expect the new money yields to be in the coming quarter under the slightly changed allocation strategy?

The book yield -- sorry, the market yield of our fixed income portfolios has fallen again in the quarter. And so realistically including our pretty slow investments in the double B strategy, I'm looking at 1% to 1.25% reinvestment rate in Q4.

Okay. If I can slip one more in, I noticed the PMLs were up a little bit. Any color there?

Yes, that is absolutely correct. There are up on a number of perils including the Californian quake and US wind. Some of that is driven by the growth in our program business in our US operations. That certainly accounts for most of the change in the US perils. In Europe, in European wind, there is a slight uptick due to a change in our reinsurance structures there.

And the programs business, which is new and I think impacted the loss ratio, we should expect that to continue, correct? That wasn't one time.

That business is still continuing to come onto our books so we would expect continuing growth in the PMLs on US wind and quake as a consequence.

Thank you for the color.

Vinay Misquith, Evercore.

The first question is about the US insurance business. I was wondering if you could give us some color on when you expect growth in that segment to begin to slow -- specifically maybe look out in 2013 -- do you expect the rate of growth there to be at the same level we have seen this year?

When you put it as rate of growth, a percentage increase over the previous year, then I would say the rate of growth in 2013 over 2012 will be less than 2012 or 2011 -- this is just a percentage change. However, the quantum of premium may be similar.

I don't want to get into a detailed forecast and a part of our operations this morning but as I mentioned in response to another question, there are nine teams, so I take a team like surety --surety insurance, they got fully t-listed only last December so they have been marketing this year with a product to sell. We are increasing the line size they'll operate with next year. In proportionate terms, those guys could double or even more than double what they are doing in 2013, but that is with a small premium base, kind of high single-digit millions of dollars.

The more mature lines with ample property, I don't see a lot of growth there. The market is somewhat encouraging but we have about as much as we want, maybe a little more. Programs continues to offer potential as does, I think, professional liability. Management liability could do more. I can't give you any detailed guidance -- I hope that helps.

That's helpful. Just to follow up on that, when should we expect to see the expense leverage start to benefit your numbers? In other words, when do you expect the operating and admin expense to start to flatten out based on -- driven by the growth you have seen from the insurance segment?

Is this a question specifically in the US or across the whole --?

I'm thinking more about the insurance segment as the whole. Obviously, given the growth in the US segment, I'm just wondering when we start to see the expense ratio to start to flatten out given the end premiums coming through in the next few quarters?

I think the best answer I can give you is that we are working very hard with our US team to try and ensure that the pricing expense ratio for our US insurance operations is normalized by the end of 2013 and well into 2014. Obviously, that then averages out with the international insurance business that already has a satisfactory expense ratio. So we should be seeing some stabilization improvement in 2013 and 2014 at the latest I think.

One more if I may, the reserve development. I'm wondering if you could give some color on that. What accident years did it come from and if you could help us with the lines of business too?

Certainly, yes. We are looking at some reserve releases for the quarter of $29.7 million overall. And a significant part of that comes from short detail lines and some of that comes out of the 2011 account. But otherwise it is distributed fairly evenly over the years back through 2009, 2008 and earlier.

Thank you very much.

Dan Farrell, Sterne, Agee, & Leach, Inc.

Just back on the growth in the US segment, I was wondering if you could put it into buckets as we think about this. How much would you say is driven by these newer lines or businesses that have small scale that are building out the platform and how much is being driven by you taking advantage in areas that are seeing rate? And maybe there is overlap there, but maybe just talk a little bit more about it. I think you gave some indication of that with the surety, which was a good example, that might be driving next year. But maybe go in a little more color on this year's growth there?

Let me try, but as I said to respond to remarks earlier, I don't want to give you detailed premium forecast at this stage for the US. But let's say the most immature line is surety, therefore the growth rate is huge while the quantum premium is quite small. Inland marine, we have got a great team. What I think they have lacked to date has been distribution. They have been working hard to build distribution, build brand. The signs are that they are getting there. They have done some interesting deals just in the last couple of months which we feel pretty good about.

There's a sense that two years ago no one would have brought their inland marine to Aspen, that we weren't there, and now I think for a lot of the smaller agents up and down the country wanted a decent deal, one of the people you want to think about is us. So growth flat rates in inland marine could be reasonably encouraging.

Management liability, we were basically an excess player and I guess we didn't have a full suite of licenses until 18 months ago, something like that. I did say the first year we have been active so you have similar to inland marine surety but a little more muted you have the opportunity to see a flow of business and write some. I think the guys doing it aren't necessarily delighted with the prices they are seeing in D&O though. It's perhaps one of the last casualty areas to show some upward price. I'm not actually earmarking that for very significantly.

After that, you're talking about somewhat more established lines like professional liability, the program area, and property. Property, I think, is largely about rate increase now. We could take a little more cat risk. You've seen the figures. We have a little headroom there and we would like to keep a little headroom for opportunities but certainly we could allocate that somewhat to our US property insurance if we see continuing rate increases. If not, we probably would say that is a steady-state sort of account.

Professional lines have done a very good job to date and they are certainly capable of doing a bit more and they are a little more encouraged about the pattern of rate increases than let's say the management liability team. The environmental team has been with us maybe 18 months, although we have been in that line for 5 or 6 years. We made some changes to the book and there is some growth there. Price-wise, it a tough end of general casualty, mid-single digits, high-single digits would be the sort of price increase you are seeing. So some exposure coming, some more rate coming there.

That is helpful detail, thank you. Just one other question. What do you view as within your cash investments as your optimal allocation to cash? It seems rather high and I suspect some of that cash will be drawn down to go into some of these other investment strategies that you were talking about.

You are absolutely right. The current allocations to cash and short-term investments is higher than our target rates and that is for a number of short-term issues including cash allocated to some foreign currencies supporting our liabilities for unpaid claims arising from the 2011 cats and also money being held for cap and management purposes.

Rough ballpark on how much of the cash is being held to pay claims?

We are just getting that figure. It is reasonably significant. I think it is probably of the order of $50 million to $100 million.

Thank you very much.

(Operator Instructions)

Brian Meredith, UBS.

Just quickly on the fixed income book yield in the quarter -- the investment yield -- I just want some clarification. It came down fairly dramatically sequentially. Was there anything unusual in the number happening this quarter?

Not really. The third quarter, as it happened, was a fairly active quarter for us in terms of maturities and coupon payments. And so there was a higher level of reinvestments in lower-yielding securities that in the previous quarters and that accelerated the reduction in book yield in Q3 compared to the first two quarters of the year, but nothing really other than that sort of seasonalization issue.

For Chris, could you talk a little bit about what you are seeing as far as casualty loss trend in the US and what your expectations are for loss trend?

Brian, I think you asked me that question about a year ago and I think the answer is a bit the same. (laughter) Loss trend is peculiarly muted. I sort of struggle for an adequate explanation but really there isn't a lot going on and I think that is true in our book. I also think it is true in the marketplace overall.

I don't know if you want to relate it to the state of the economy, if you want to relate it to the slight change in legal stance from the Bush era. But certainly there is plenty of activity, there is plenty of exposure but there just are not a lot of claims. It is encouraging, it is helpful, it helps everybody's numbers including ours but I would not want to bet on that carrying on forever. I think there has to be a reversion to the historical mean sooner or later.

I guess price, though, is in excess of loss trend at this point?

As I said, we've got across all casualty about 2% more rate year-to-date. I think that's actually a bit more in the US and it's a little less internationally. We don't do a lot of quota share casualty reinsurance but where we do -- and even on the excess of loss where we have an adjustable future on the E&S portfolios, our clients in the reinsurance side are probably getting 5%, 7%, 8%, something like that and some of that is flowing as well through to us. I think rate increase is certainly ahead of loss trend as we have historically seen, and probably based on inflation for the next couple of years, ahead of anticipated loss trend as long as something untoward doesn't occur.

Given some of the makeshift we're seeing in your book of business and what is going on with investment yields here, I am curious what do you think a good, appropriate target of return on equity for Aspen should be at this point?

We haven't been given specific guidance on target rates of ROE. In the early years of the Company we used to about a mid-teens target over cycle, but that we don't regard as now realistic given the current state of investment yields. We are pleased with the ROE we have reported this year. But clearly that's on the back of a third quarter without any major cat losses. I don't really think I can offer much more color than that.

When you're pricing business are you pricing to a return on equity?

That, I think I can answer. For practical, pragmatic reasons, we have retained our technical pricing benchmark at 15% of risk-adjusted capital. Our target pricing is setting our business planning process rather than, by reference, that 15% benchmark on a permanent basis.

Thank you.

I will add one or two remarks here. Our earnings, our return equity in the last couple of years, has been impacted by the significant investment we have made in developing our insurance operations particularly in the US. And there are still things to invest in the US for sure, but much of that investment has been made. And as I talked to other people there on the call, we are good guys writing profitable business today.

So I think we are going to see the expense ratio come in line with the best of the peers somewhere in the next 12 to 24 months and that drive was at least one percentage point and maybe at certain stages more than one percentage point of ROE.

We are not going to give you forecast numbers, but you would expect our ROE to be in line with or a little better than mixed diversified competitors of our size and scale because we've got some very profitable things in our London market insurance -- more so than others -- and we've got some very profitable lines in our reinsurance. Think about it as being a higher-than-average rather than in-line or lower-than-average ROE performer in about 18 months time.

Great, that's real helpful, thanks.

Josh Shanker, Deutsche Bank.

I wanted to talk a little bit about building capability versus the rate turn in the US markets. If we went back in time a year ago and -- we can put it two ways -- and you had the capability, would you have seen the premium growth that you saw this year? Or, put another way, if we hadn't seen the rate improvement this year, would we have seen the growth when you reported Q3 2012?

I think that part of the growth that we are reporting in our US operations in Q3 is property- and property programs-related and I think that would have been more muted if it hadn't been for the improving rate environment.

Okay. In terms of putting your programs up there, do you think that there was plenty of capacity out there for -- or there was a limited amount of capacity and that the new programs were needed, or did you acquire these programs, they were already existing?

The program business that we have acquired was already existing programs which we won from incumbent carriers.

We hired a program team three or four years ago. We were actually filing up their insurance programs. We actually had them in our reinsurance segment for a while, then our insurance, more properly, more sensibly. And they said that there were half a dozen programs that historically they were closely associated with and they would work with and they think that their career loyalty and service would ultimately mean that those program managers would want to bring those programs across to us. And not all, maybe about two-thirds of them have come across. And then we say to them, well what else is out there and if they can add about one program a year, two at the most, that would be very nice. I don't think it is more than that.

The other factor was, as you know, we had Mario Vitale about 18 months, 21 months ago, and Mario was associated with a very successful program who had some issues with their carrier at the time. That's our biggest program and that switched over to us largely because Mario joined, so you say that a little bit of luck in there. I don't think Mario would say it was just luck, I think he would say he is a professional guy and there are other people who would like to do business with him as well. So it isn't that we are going to write a lot of programs but it isn't that there is no growth potential. I think part of your question at the beginning, Josh, was how much of this is rate and how much is --

How much of your initiative is rate? In the end, you can't measure rate off business you didn't have a year ago. But, to what extent rates improved and you said it's go time?

What happens is we assess the program, we think about the return we will get. If rates are flat that return is going to be lower than if rates are helping us. Generally this upward pressure in rate we are seeing on a pretty widespread basis across the US, is helping us execute our strategy. But I wouldn't say we would have done nothing were it not for rate. But when you look at any given program you're more likely to want to write if you believe the rates are going to be up by 5% or 10% than you would have been. The rate is a little bit of wind at our back but we are moving in that direction anyway.

And can we talk a little about the casualty insurance growth?

Sure. What specifically?

The program-based opportunities that you see in the market, what is the mix generally?

Most of our casualty insurance income is coming from open market business rather than programs. There is some casualty element in some of the predominantly property programs, but most of that growth -- and it has been much slower in primary E&F casualty and excess casualty -- is open market business, single-risk business.

But still it is somewhat strong growth though, in Q3 2012 compared to what peers might be reporting?

Yes, that is right. Some of that is environmental business quoted as casualty. I think it is coming from a very low base. I think that is really the main point to make.

That's good. Thank you very much for all the color, I appreciate it.

(Operator Instructions)

And at this time, there are no audio questions.

In which case, thanks everyone for your time, attention and some very good questions this morning. Goodbye -- have a good day.

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