Aspen Insurance Holdings Ltd (AHL) 2013 Q1 法說會逐字稿

Good morning. My name is Arnica, and I will be your conference operator today. At this time, I'd like to welcome everyone to the First-Quarter 2013 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.

Thank you, and good morning. Presenters on today's call are Chris O'Kane, Chief Executive Officer; and John Worth, Chief Financial Officer of Aspen Insurance Holdings.

Last night, we issued our press release announcing Aspen's financial results for the first quarter of 2013. 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'll now turn the call over to Chris O'Kane.

Thank you, Kerry. Good morning, everyone.

In the first quarter of 2013, Aspen delivered good operating results. We grew diluted book value per share 5% from a year ago to $40.68; or if you add back dividends, book value per share grew more than 7%. We delivered an annualized operating ROE of 10.8%.

As you know, on our call in February, we outlined three initiatives that will enable us to achieve 10% return on equity in 2014. The first initiative is business portfolio optimization. We are sharply focused on the profitability and risk profile of each of our major lines of business. Second is efficient capital management -- in other words, ensuring that the capital and equity we hold are appropriately sized given the risk of the business. And third is enhancing investment returns. We are focused on optimizing investment income by responding rapidly to the changing dynamics of the global markets.

We made progress on all three initiatives in the first quarter. Our efforts to optimize our business portfolio initially focused on reducing volatility in our insurance segment. We previously identified wind and earthquake-exposed property in our insurance platform as an area of our portfolio which was too volatile. Our view has not changed, and we are working towards reducing this exposure, which equals an approximate reduction of $140 million of capital within the next two years; and ultimately a reduction over $200 million.

The second lever to drive [improvement narrowly] is managing our capital in a most efficient way. We expect to generate substantial additional excess capital over the next several years given normal loss experience. Currently, we plan to distribute to shareholders through share repurchases most of the comprehensive earnings. This is after dividends and after what we need to cover organic growth. We were very active in 2013 so far, and have repurchased over [$250] million of our shares through April 23. We expect to complete $300 million of share repurchases by the end of this year.

The third lever to drive increased returns is our investment portfolio. As you've heard me say before, we are first and foremost an underwriting-led Company. That said, we have been evaluating various strategies to increase investment returns within acceptable risk parameters. This has resulted in an investment of an additional $200 million in equities and the acceleration of our program to investment in certain high-yielding securities. We will continue to evaluate other potential investment opportunities in line with our risk appetite.

In summary, utilizing these three levers will enable to us to improve shareholder returns by increasing both operating ROE and growing book value per share at a high rate.

I'm now going to turn the call over to John, and I'll close later with some market commentary.

Thank you, Chris.

Chris mentioned our three levers to help increase return on equity. I will take a few moments to update the progress on each of these three levers.

The first is business portfolio optimization. We are targeting a reduction in our wind PML by July 1 and our quake PML by October 1. To date, we have non-renewed approximately $40 million of aggregate limits for wind and quake exposure within our US insurance accounts. As regards to wind and quake exposure, the relationship between limit reduction and capital reduction for this exposure is approximately 1 to 1.

The second lever is insuring that the capital we hold is appropriately sized given the risks in our business. In the first quarter, we announced a $150 million accelerated share repurchase program, under which we initially delivered 3.3 million shares. We repurchased a further $58 million under our open market repurchase program during the first quarter, and an additional $10 million through April 23. Together, so far in 2013, we have repurchased almost 10% of our ordinary shares in the quarter, which is approximately 6.8 million shares at a total cost of $220 million. Assuming normal loss experience, we expect to repurchase at least $300 million of equity in 2013.

The third lever is enhancing the returns that we generate from our investment portfolio. We increased the total allocation of our investment portfolio to equities and BB-rated securities by $200 million each. We have added to our equities position, and that portfolio stood at $414 million, or 5% of our total portfolio, by the end of the quarter. Our additional investment in BB securities will be predominantly in bank loans. And to date we have $80 million in this portfolio and will continue to increase it. We continue to expect an ROE of 10% in 2014 given the current interest rates and pricing environment, assuming normal loss experience and including a pretax cap load of $190 million per annum. To be clear, this is an ROE calculated including other comprehensive income.

Two of our measures, EPS and book value per share, have been subject to the dilution effect of our Perpetual Preferred Income Equity Securities, also known as PIERS. These securities amounted to $230 million and were issued in 2005 and 2006. During the first quarter, our share price increased by 20%, which increased the dilutive effects of the PIERS by 1.2 million shares from the year end. This morning, we notified the holders of our PIERS that we intended to mandatefully convert the PIERS into $230 million cash on a calculated number of shares. The final share price for this calculation is determined by our average share price over a 20 trading day settlement period.

This is the first practical opportunity to exercise this option. By exercising this option, we will eliminate the variability in the diluted share count from the PIERS. We launched a preferred share offering this morning, and we intend to use the proceeds to refinance the PIERS as well as for general corporate purposes.

I will now provide a overview of the results for the quarter. Gross written premiums decreased slightly from Q1 of 2012. This reflects growth in the insurance segment, offset by a reduction in the reinsurance segment, principally due to lower reinstatement premiums and the impact of commutations, which I'll expand upon in a moment. The group's combined ratio for the first quarter was 90.1% with no cats losses.

Reserve releases were $26 million, or 5.1 points, resulting in an accident year ex-cats combined ratio of 95.2% compared with 97.6% on the same basis a year ago. The loss ratio improved 4.7 points to 52.6% from 57.3% in Q1 2012, while the accident year ex-cats loss ratio was 57.7% compared with 61.1% a year ago. The first quarter of 2013 has several medium-sized non-cats losses, including a $7 million capitalized loss in reinsurance and several smaller ones in insurance; while the first quarter of 2012 had the Costa Concordia loss. These are not indicative of a trend of increased losses. These events, coupled with a lower net earned premium as a result of commutations, elevated the loss ratio.

Total group operating expenses were $191 million, or 37.5% of net earned premium. The group acquisition expense ratio rose 1 point from Q1 of 2012. This ratio reflects lower reinstatement premiums for the quarter, but is mainly the result a 2.4 percentage point increase in the acquisition expense ratio in our reinsurance segment as we commuted certain long-tail accounts which released us from the associated liabilities and locked in our profit, but also resulted in higher profit commission amounts and reduced the premium base.

The general administrative and corporate expense ratio for the quarter was in line with a year ago. We expect the total operating expense ratio to be slightly lower through the remainder of the year as our US insurance platform continues to gain scale. We also continue to look for opportunities to reduce costs and ensure that the size of our support operations is appropriate for the scale of our business.

Now, I will provide some more detail on the reinsurance and insurance segments for the first quarter. The reinsurance business produced an underwriting income of $55 million, which is stable compared with last year, with contributions from each sub-segment. We are pleased with this performance given the stage of the cycle. The combined ratio was 78.5%, with no cat losses in the first quarter of 2013. Prior-year reserve releases were $20 million or 7.8 combined ratio points.

The resulting accident year ex-cat combined ratio is 86.3% compared with 83.7% a year ago. This reflected increased policy acquisition costs, particularly in the casualty business, following higher provision, profit commissions, and commutation adjustments. The accident year ex-cat loss ratio at 52.3% is a 2 point improvement on the first quarter of 2012. This is a good result and reflects our continued focus on underwriting discipline.

Gross written premiums of $440 million declined 7% from Q1 2012. This mainly reflects lower reinstatement premiums this quarter compared to the same period last year, and the impacts of commutative policies. Underwriting income from the insurance business of $8 million compared with an underwriting loss of $10 million in Q1 2012. The combined ratio is 96.8% for the quarter against 104.2% last year, with a loss ratio of 60.7% compared with 66.1% a year ago. Prior-year reserve releases was $6 million or 2.4 percentage points. Gross written premiums increased 8% to $334 million, largely reflecting the continued growth in the US insurance business. Financial and professional lines had the highest growth, followed by our casualty business, reflecting an improvement in the rate environment. Our US-based insurance business continued to gain traction, with both the international and US businesses recording positive underwriting income for the quarter.

Investment income was $48 million in the first quarter of 2013, down 8% from the equivalent quarter a year ago. Given the current interest rate environment and lower reinvestment rates, we expect a slightly lower level of investment income for the remainder of the year. Total investment return for the quarter was 0.5% compared with 0.6% for the first quarter 2012. Fixed income book yield for Q1 2013 was 2.8%, down from 3.31% in Q1 2012. These trends are consistent with our expectations, given lower reinvestment rates and declining book yields.

Our equity portfolio totaled $414 million at March 31, 2013, up from $188 million a year ago, reflecting our strategy of tactically diversifying our portfolio by investing in high-quality global equity income strategies. This portfolio generated a total return of 8.7% in the quarter.

The tax rate for the first quarter was approximately 6%, in line with the first quarter of 2012. Fully diluted book value was $40.68 at March 31, 2013, up 5% from a year ago, but up $0.03 from December 31, 2012 due to the diluted effect of the PIERS as the result of our share price increase in the quarter. Positive contributions from underwriting, investment returns, and as I've already mentioned, the buyback programs were substantially offset by the higher dilutive effects of our PIERS. In addition, the Board approved an increase of 6% in the ordinary dividend to a new rate of $0.18. This supports our commitment to return capital to shareholders and underscores our confidence in our outlook.

I'll now turn the call back to Chris.

Thank you, John.

As you know, the first quarter is dominated by the [one-run] renewals in the reinsurance market. That renewal appeared dominated by the US and the European markets. For the first quarter, we achieved an average rate increase of 6% on renewals across our entire book, with 1% in reinsurance and 15% in insurance. The rate increase in insurance was across a relatively small renewal book during the quarter and is been heavily influenced by several large accounts, particularly in our marine, energy, and transportation lines.

Excluding the outliers, we achieved a mid to high single-digit price increase across our insurance portfolio, which is closer to what we expect to see in the next few quarters. Overall, we are seeing rate improvements in areas which have meaningful (inaudible) loss experience into our specific lines and geographies, but not across a meaningful portion of our book.

As regards reinsurance, for the first quarter 2013 property catastrophe reinsurance business achieved a net rate increase of 2%. Prior to Sandy there were initial indications in the market that [one] renewals would be flat or down. The loss experience [transfer] reversed the trajectory. We achieved significant increases in loss effects accounts, but accounts with no loss experience were mostly flat. We are experiencing a similar trend across the rest of our property's [treaty] reinsurance book, and achieved average rate increases of 3% in the first quarter. As we noted previously, the US property factory insurance market responded to Sandy with significant increases in flood cover, but fire rates remain flat. This trend continued in the first quarter.

Following a largely benign year for losses outside the US rates, in international property reinsurance markets are generally flat, assuring a small decrease with strong capacity. April is a major renewal period for the Japanese market. As expected, the market continues to benefit from post-Tohoku pricing levels. You may recall, a year ago we managed our Japanese book such that we renewed about half of the earthquake risk but maintained our premium [volume]. This year, we maintained rating integrity, and renewed the majority of the book. Despite an increased level of capital in the market, most renewals were stable, although premiums in dollars are down due to yen exchange-rate movements.

For casualty reinsurance, we achieved a rate increase of 1% in the first quarter. The rate environment continues to vary based on line and geography. In parts of our casualty segment, we are seeing improving markets, especially in the US E&S general liability and non-medical professional lines. As discussed last quarter, our current portfolio continues to see stable loss cost trends.

For specialty reinsurance, rates across the portfolio were flat on average; however, they're quite different in their rates in various lines. Marine was dominated by the uncertainly of the Sandy and Costa Concordia losses. Business affected by these events experienced rate increases of up to 30%, with increased planned retention. Rates continue to [plan off] 7% on average in the first quarter. Competition in international credit and surety is high, with plenty of capacity supplemented by few new entrants in the market. As a result, rates declined 2% in the first quarter.

Moving on to the insurance markets. As I said earlier, our insurance book for the first quarter achieved a blended rate increase of 15%, with several insurance lines with significant loss effects regionally in the marine, aviation, and financial institutions areas. If we look at the rest of the book, I would say those rates rose about 7% or 8% on average in the quarter. For our property insurance book across the US and the UK, we achieved a average rate increase of 2%, and the US property team achieved a increase of 3% on the book of primary non-cat affected business.

In our programs business, we also achieved rate increases of 3% for the quarter as the market has responded to Sandy losses. In our UK property business, the market remains crowded, but the rating environment appears to be stabilized, and we continue to focus on strict underwriting discipline which has produced excellent results for us.

We continue to see positive momentum in the US primary casualty market. We achieved average rate increases of 9% in the first quarter, and the outlook continues to be favorable. The global casualty market is showing some signs of momentum with slight rate improvements. In our marine, energy, and transportation business, we achieved an overall rate increase of 26% for the quarter, led by marine, energy, and construction liability. These were accounts where the market continues to harden following significant loss activity.

The aviation market continues to be challenging. The rating environment in financial and professional lines is mixed, achieving a 2% increase in average. Rate increases were led by the financial institutions accounts, which, as I mentioned earlier, were skewed by a loss-affected account on relatively small renewal premium. Professional liability rates in the US rose 2% on average in the quarter. This is very encouraging, as it is the first positive rate movement in many years. UK professional liability as well as management liability rates stay continuing to be under pressure.

In summary, within our insurance segment we see favorable rating additions and marine, energy, construction liability, global excess, and US primary casualty and a perceptibly hardening market in financial institutions.

In our reinsurance segment, we're seeing improving market in parts of casualty business, especially US E&S general liability and in non-medical professional lines. Our investment into our regional network is allowing us the insight to take advantage of adequately [racious] opportunities that we wouldn't otherwise have access to. Heading into the June and July property catastrophe renewals, we are seeing some pressure in the rating environment. We anticipated that property cat rates would weaken as the year progressed, and therefore, we allocated more of our aggregate capacity to the January renewals. Thus, if it's necessary we can non-renew some of our accounts in midyear if we do not believe there is an adequate pricing level, and we will still be able to achieve our plan for the year.

Previously, we explained that we would allocate the capital that has been freed up from a planned reduction of wind and quake exposure in US property insurance, to either share buybacks or to other business opportunities, if we felt they had the capacity to meet appropriate return targets. This quarter, it's pleasing to be able to report that we made two such strategic hires into areas where we will redeploy some of that capital. We're very excited about these new hires, Brian Tobben and Anthony Carroll.

Brian is now a member of our reinsurance organization. He joins us with extensive and profitable expertise managing ILS funds, and he's going to help lead our efforts in leveraging our internal underwriting expertise and increasing our management of third-party capital.

We continue to enhance our insurance business globally. Anthony Carroll is one of the leading players in the energy market worldwide. He has joined our US insurance Team and will help build upon our existing global expertise in marine, energy, and transportation markets to help us better serve our energy clients.

Our diversified platform means we're well place to take advantage of those areas where rates are improving and leverage our proven underwriting expertise. This, coupled with the measures we have outlined to enhance our profitability, will enable us to continue to improve ROE and rapidly build shareholder value. We have a very exciting plan, and we're very energized about executing it.

Thanks for listening to us. John and I would now be pleased to take any questions you may have.

(Operator Instructions)

Your first question comes from Max Zormelo with Evercore.

Hi, good morning. My first question is about the monetary conversion of the perpetual PIERS. I was wondering, I know historically, you've got 50% equity credit treatment and 50% debt. First, is that correct? And secondly, wanted to know how the monetary conversion affects your excess capital position. I believe you told us last quarter you had $250 million of excess capital. How does this monetary conversion affect your excess capital position?

Thank you, Max. This is John Worth here. You are right in terms of the credit that we get. And the PIERS doesn't affect our excess capital position.

Okay. So the second question I had was about the insurance margins. The margins deteriorated quite a bit. I think you mentioned that part of it was because of some medium-sized losses. Wanted to know what are the impact of the medium-sized loss, and the other was eager to take those out. What is the call margin change from the prior quarter for the insurance segment, please?

Yes, you are right. There are a couple of smaller losses. If we take those out, I believe the -- Yes, if we take those out, those losses together contributed approximately $12 million. (technical difficulty)

Go on.

Could you repeat that please?

Yes. If we take the losses out, they contributed approximately $12 million.

Okay, so $12 million was the impact of those losses in total. Okay, that's helpful. And also looking at the insurance segment, did you change your repurchase -- your purchase of insurance -- reinsurance this quarter? I notice the net-to-gross ratio changed quite a bit. I was wondering if you changed the amount of reinsurance you had for the segment?

No, there was no material change in the purchase of reinsurance.

Okay. Last one, if I may. So you're saying the perpetual PIERS, I just want to go back to my first question. The perpetual PIERS, the conversion doesn't affect your excess capital position. What is excess capital position now versus what it was last quarter?

The excess capital is about $200 million.

Okay. All right. That's all that I have for now. Thank you.

Your next question come from Amit Kumar with Macquarie Capital

Thanks, and good morning. Maybe I will go in reverse order in terms of the questions. Going back to the comments on the upcoming renewals, again, we were seeing a clear divergent commentary coming out of reinsurers. You talked about you expect some pressure. Maybe expand on that comment. Talk about the impact of third-party capital. What would be helpful is if you could put a range around how much rates would be down at the renewals. That would be very helpful.

That is a big and complicated question. I sense you know it is a big question. This is a market where every segment is behaving, you could say it was independently of every other. So you've got a pattern in insurance; you've got a pattern in reinsurance. Well, the one in insurance itself, you've got different things going on. So if I look at the European theater, if I look at the UK, it's pretty impressive. Not a lot of good stuff to report. The best you can say maybe is rates aren't going down much anymore. You look into Europe where we write some of the trade credit, surety business, you actually see rate reductions there. Then we go to -- those are interesting. They're not actually a big part of what we do, and frankly, we see rates going down. We'll just do less of it.

If I look at the US market on the primary side, you have areas of pretty good news, encouraging. Professional liability improving, general liability improving quite a lot, management liability proving a bit. Property especially, with cat exposed property improving meaningfully. If it's not cat exposed property, it's flat generally maybe. I think we averaged up three in that book in the quarter for us. It is very diverse. And you'll see the odd rate reduction here and there. Areas we're not in as an organization, for example, workers comp, we don't do any of that. It's all on a primary basis. But I think the news there is actually quite encouraging. So it's a very diverse area.

And then if you look over to reinsurance, stay with casualty example, some of our portfolio is reinsuring ENS writers and casualty business, and those guys are pretty excited about what we're seeing there. They're having their primary customers getting rate improvement, strengthening [fold], and we're getting rate increases on the deals generally. That didn't show through, actually, much this quarter, but I think that was just an anomaly of a small book in the quarter. I think generally, that's quite encouraging, especially re-area marine, energy, where you have losses, you're seeing really thumping increases, 30%, 40% if you want to renew a marine program in the London market these days. But in other bits of specialty away from the losses, it is flattish. Does that help? It's really case where I give you two numbers, one for -- (multiple speakers). You don't see what is going on.

I was asking more about the fixed one, prop cat renewals, and in fact --

I am sorry. Well, maybe that was not a complete waste of words. But on that, what you have is Sandy wasn't a big enough loss to dramatically affect the market. You have a lot of third-party capital. Depending on which expert you listen to, maybe 14%, maybe more of major property cat programs now are down in (inaudible) capital. We're all familiar with the story, and that story is that the risk is viewed by certain elements of the capital markets, both pension funds and endowments, as being diversifying, and therefore, merits a lower return than traditionally reinsurers have aspired to. They find that kind of return attractive. They find the diversification involved from their portfolio is attraction, and so they are coming in at some pace. That is having downward effect on prices.

Our strategy to cope with that is twofold. Number one, we did more business area in the year because we could see the prices were pretty firm there, which means we may want -- we maybe able to sacrifice business later and still be on plan. And then secondly, it's a very important part of the market, so we've hired Brian Tobben who's a really, very expert guy in this area, and he will move us into the position of managing third-party capital so we can play in that part of the market. I couldn't, and I don't want to give a figure saying rates are going to change by this much in negative direction in that area, but I will admit that there is more capital -- more capacity and pressure is downward not upward.

Thanks, that's helpful. Just one more question. I don't want to take too much time. Going back to the discussion on the conversion and the impact. Let me be very clear on this, so the buyback pace does not change in spite of all other things that you've done, right? The $314 million is what you will complete, and you will continue buying back. Is that -- did I understand that correctly?

Yes, that's correct. We're continuing our share buyback program, and that is because with the retirements of the PIERS, we're issuing, as I say, a new security which was announced this morning.

And will the pace change as we approach the hurricane season? Or no matter what, that's what you said is that you will get through this and no matter what, you'll get through this.

Amit, I would never say no matter what. It's a huge loss in the world, a $75-billion event.

Right.

We're going to always progress and say what do we do next. But given normal loss experience, we do not to intend to vary the pace because of the wind season. We're just going to carry on with the plan that we laid out in February.

Got it. Thanks for all the answers.

Your next question comes from Mike Zaremski with Credit Suisse.

Hi, thanks. Reinsurance segment expense ratio elevated 4 points from 1Q. John, and I believe cited commutation costs. Are those one-time, and if so, can you quantify them so I can get a sense of the run rate? And if you did provided the details in the prepared marks and I missed it, we can move on to my next question.

It is not unexpected at this time of year. In terms of the impact, relatively modest in the first quarter, something like about $6 million on premium I would estimate.

Okay. So the expense ratio was up 4 points. If I do the math, I think that's more than $6 million. So how should we be thinking about the expense ratio in the reinsurance segment?

As you say, part of it is due to the increase in the acquisition of cost expenses, and part of it is due to profit commission accruals also.

Okay. So the only unusual was the commutation?

Yes, that was the only unusual thing for this quarter.

Okay. How about details on the reserve releases this quarter. I'd be curious, specifically, is anything from Sandy?

No reserve releases specific to Sandy.

And any context around the reserve releases in the segments?

Reserve releases in the segment at $26 million in total. That's split reinsurance $20 million and insurance $6 million.

Yes. I'm just curious if you provide any details on what type of events or vintages caused the $26 million?

Nothing specific across that. I wouldn't say there's anything particular to bring out.

Okay. And lastly, if I look at the investment income from dividends from the equity portfolio, $3.3 million doubled quarter over quarter, so is that the run rate. I think that -- calculate about a 3% common dividend yield from the portfolio?

Yes, that would be about right.

Okay. And actually, maybe I'll slip one more in. So I believe -- we saw the release on Aspen Capital Markets. Any thoughts on how that will impact revenues in the coming year? I don't know if you could -- probably wouldn't be up by midyear renewals, but I could be wrong. And I also believe that you also already might have a controlling interest in a third-party platform named Cartesian. I'd be curious if that's commingled with Aspen Capital Markets? Thanks.

Mike, as regards the co-venture with Cartesian -- and we'd be wrong so say we have a controlling interest. We do have a significant economic interest, however. That's a stand-alone venture. It's small. The ambitions have been fairly modest, but the returns are very good. What we are talking about here is bringing it -- not bring it out, but rather creating capacity in-house just for Aspen and Aspen as management for third-party capital. We'd expect to do a few deals in June. It's not going to move the dial in premium exposure very much, but certainly, there's a lot going on, and we think there's some interesting stuff that can be done. And frankly, the way market is, there's opportunities to both buy and sell in there. But as you rightly suggest, the real impact on that is going to be felt in 2014, and I would rather talk about in a bit more detail when the plans are more concrete later in the year.

Thank you.

Your next question comes from Josh Shanker with Deutsche Bank.

Well, Mike hit upon my question with that last question. I was wondering what capacity you are hoping to achieve with the Aspen Capital Markets in total and what the fee structure will look like?

Josh, we are not going to publish a figure for funds we expect to have under management at this stage. We are talking to a lot of people. And with regard to fee structure, I would say it's likely to be in line with what others are achieving, but individual deals are to be negotiated still. That's something that will emerge over the coming months. I can't really help you anymore at this stage.

And -- well, that's going to do it for me. I have all my questions answered. Thank you.

Your next question comes from Brian Meredith with UBS.

Good morning. Couple questions here for you Chris. The first one, just curious, given the rate activity that you experience and marine and energy area in the primary, why didn't we see any growth in the area? Why was it down?

One of the factors going on there, Brian, is the retentions are increasing on part of the [feeding] company. If that is a reinsurance question --

On the insurance side. It was minus 8% gross written down.

What is happening is, a few deals have lost money, and they're being renewed at much higher premiums, but there aren't more deals available in markets to do.

Brian, just to add to that, there is some business that we anticipated being written in the first quarter that has slipped into the second quarter

Okay, so there's a timing issue.

Yes, there's a bit of a timing issue there.

Okay, great. And then also on the property insurance line, I thought, given what's going on in the US in the reduction to cat-expose property area, you would have start to see a decline there? Is that also just a timing issue? Should we start to see that the decline in the gross basis, or are you doing it through reinsurance? How is that going to work through?

Yes, it is a timing issue. And as I said earlier, we are taking off exposure for wind and quake exposure.

Got you. So like you said in the PMLs will be down, what, July 1, I think, from a wind perspective. That's when we should see most of the reduction from a premium perspective?

That's correct.

We are seeing it, obviously, at original level already, and it's going to take a little while to feed through to the end.

Okay. Terrific. Great. And then Chris, I'm wondering if you can comment on and give us your thoughts on the Aon agreement with Berkshire Hathaway that was -- with respect to Lloyd's business and what you think the potential impact that has on the market?

It's very interesting question. Very interesting question, indeed, Brian. Winners in this, I would probably say Aon, though I don't know the particular precise terms of the deal, but to have a market of that caliber willing to take their business without it being individual risk underwritten is a great advantage for a broker. Another winner is Berkshire. It's a very efficient machine with a low cost of capital and a very attractive return on assets on the investment side. So it has a competitive advantage, which perhaps was always there but was not put to use in this way previously as a opportunity. Losers, I would say, would be small players who are not leaders. Somebody has to make space for Berkshire. So that seems to me two of the most likely source for the revenue to be taken from. Much less likely at a lead capacity in the Lloyd's environment is actually needed for his expertise and structuring the deals, that they would suffer. That said, very little is public, so I'm giving you the benefit of having thought about it and some speculative insights. It's perfectly possible everything I've said to you turns out to be wrong. That is the way that I see it.

Okay. Thanks, Chris. I appreciate it.

Sure.

Your next question comes form Sarah DeWitt with Barclays.

Hi. Good morning. I wanted to follow up on capital management. How are you arriving at the $300 million of buybacks this year? Because if I think about it, you have $200 million of excess capital, and then you've got $140 million of relief from reducing your property insurance exposure, and then you'll probably generate over $100 million of retained earnings for the rest of the year, so it seems a little conservative.

Yes, in very broad terms, think about it in terms of a $300-million surplus at the beginning of the year, $100 million, give or take, profit during the quarter. And then, of course, we have the buybacks, so just in excess of $200 million.

Okay. And then just separately, on the preferred, how much are you issuing in preferred to fund the PIERS?

We are conserving that, as you will appreciate, during the day.

Okay. Makes sense, thanks very much.

That is fine.

Your next question comes from Scott Frost with Bank of America.

Thanks for taking my call. In your investment movements there, with adding BBs and equities, how does that move the risk metric of your portfolio in your view?

It moved it relatively marginally, I would say. The move that we've entered into the equities, as you'll have seen so far this year, I think it's been another 2.5% of the total portfolio, and we have authorization for another 5%. So sure, there is a increase in capital allocation. But in terms of the overall risk metrics, it is not that significant.

Okay. Another question. It touches on the third-party capital, and I appreciate the comments so far. I think it expands on Brian's question a little bit as well. But S&P has a report out talking about third-party capital changing the property catastrophe market. Says that cat writers the serve merely as capacity providers are at the highest risk of being marginalized. No surprise. But generally speaking, what metrics would you use, or how would you otherwise determine which reinsurers are, quote, merely capacity providers?

In the old days, Scott, people talked about lead capacity, but probably everybody is a lead these days. But to the extent you can isolate who's a leading market and who's not, that's important. What I will use internally to assess the health of our operation is, when a major broker has a major program, either a renewal, a restructuring program, some new business, who do they go to? Who are the six or eight people whose views they absolutely seek out? Most of those are on the island of Bermuda. A couple are in Europe. Maybe one or two these days in Lloyd's of London, a couple on the continent of Europe. It is a club of probably 10 to 12 players, and not all 10 or 12 are going to be in there. So what I would say to our guys is, are we in? Do our markets, do our clients, do our producing brokers need to know what we think? And the good news is, in the case of Aspen Re, they do want to know what we think, and that constitutes, to me, that we are part of that leading group rather than the so-called following capacity. But I think -- (multiple speakers)

So it's fair to say broker channel?

Did you say broker generated?

No, sorry. I just want to make sure I understand, it's checking, like, a broker channel to see if -- who are the leads on particular programs? That's one way that you would do it?

Yes. The brokers wouldn't necessarily reveal who their leads were on programs that you're not writing. You couldn't easily get that data. But if you're writing the program, they will tell you who is the lead. So the question reads, when they are at the point of quoting, structuring, thinking about how to solve a problem a client has, who are the markets that the broker turns to? Who does the client want to know, what do those guys think about that? So we would have -- stay away from cats for a moment, but in other property reinsurance, one of the biggest industrial writers in the world, takes about three people as we need to know what they think. Aspen Re is one of those three. That, to me, it's a subjective view. It's not a metric. But it absolutely says that the guys are in the forefront of leading thought about how to structure solutions for property writing clients. And therefore, I think our view is, as long as there a significant traditional market, we'll play very effectively in that. The issue is, if you're not also offering this alternative-type capacity, you will lose out on the emerging market aspect of this. So hiring Brian Tobben and the efforts we're making is about positioning is supposed to be as effective in the alternative side as we have been over the years in the traditional site

Okay, thank you.

Sure.

(Operator Instructions)

Your next question comes from Ron Bobman Capital Return.

Hi. Good morning. Thanks for taking my question. It is a non-operating question but I think it's relevant nonetheless. I'm interested in 10b5-1 plans, management plans to sell at some future point in time. I am wondering with the Company's policy is with respect to the 10b5-1 plans? And specifically, how much of a lag you permit after the filing of a plan for trades to potentially commence? And do you have any limitation as far as that timing? And then secondarily, do you have any limitation as to the volume of a manager's holdings that can be sold at any one point as part of the plan? Thanks, and that's all that I have.

Okay, Ron. Interesting. Out-of-the-blue question.

Yes, for sure.

That's okay. Look, we like to encourage our people to hold stock in the Company rather than sell stock in the Company. So if they want to sell, it's theirs, they can do it after a certain time vesting criteria met. They need to achieve two things. They need to -- certainly through senior level, they need to come to me and explain why they are doing it, and I need to be satisfied that after doing it, they still have enough skin in the game. And I have no to people, and I've also said, well, maybe sometime but not now to people. They also have to act outside of closed periods, so there's a legal check and balance there, too.

If we agreed they want to go ahead, we would recommend that they use a 10b5-1 plan because, finally, it's for protection. They may know something or may be deemed to know something which would leave them exposed to risk. So we strongly encourage, but we don't mandate it. If they want to go without the 10b5-1, they can. And then I don't think in terms of those waiting periods, we do anything different than what the bankers would advise us to do. I don't actually recall what the figures are, but there certainly is a waiting period, and there's an execution period negotiated between the individual and the banker, but pretty much going along with what the broker would advise. Does that help?

A little bit.

Well, sorry it was not a bit more. (laughter) That's about all I know on the subject.

I can check you back in the future. Thanks a lot.

Okay, Ron. On with it.

At this time, there are no further questions. I will now turn it back over to the presenters for their closing remarks.

We do not have any further remarks to make other to thank you for joining us on our call today. Bye-bye.

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