Aspen Insurance Holdings Ltd (AHL) 2013 Q3 法說會逐字稿

Good morning. My name is Cassandra, and I will be your conference operator. At this time, I would like to welcome everyone to the third-quarter 2013 earnings conference call.

(Operator Instructions)

At this time, I would like to turn the call over to Kerry Calaiaro. You may begin.

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 Limited.

Last night, we issued our press release announcing Aspen's financial results for the third 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 of 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. In the third-quarter 2013, Aspen grew diluted book value per share by 4%, to $40.43, and delivered an annualized operating return on equity of 10.8%. We continue to make good progress on our strategic objectives, our operating results, and our profitability.

Earlier this year, when we announced our target of a 10% operating return on equity in 2014, we described three levers for driving our expansion, namely, business portrait optimization, efficient capital management, and enhancing investment returns. Our last quarter earnings call, we noted some headwinds relative to this expectation, particularly with regard to the property cat line. Since then, we have made our own tailwinds. And in a few minutes, I will tell you what we mean by this.

Not only have we made progress on our own Aspen-specific initiatives to improve profitability further, but we are also continuing to achieve rate increases across the vast majority of our lines. The pace of rate increases is slowing in some areas, but we are pleased with the overall level of rate increase we have achieved. We have achieved 11% cumulative rate increases within the last two years, averaged across our entire portfolio.

As we look forward to 2014, we do not anticipate the rate environment significantly deteriorating. There are some areas that are challenging, but across the bulk of the markets in which we operate there are many attractive opportunities.

We are, therefore, reiterating our expectations of a 10% operating ROE for 2014, but with a greatly increased level of conviction. Today, I will provide some additional details about specific actions we're taking to drive ROE growth.

I will begin by providing an update on our business portfolio optimization. And later on, John will address capital management and enhancing investment returns. We expect business portfolio optimization to make a major contribution to ROE expansion next year. Broadly defined, this initiative covers improving risk adjuster returns and can encompass a number of activities.

First, as we mentioned last quarter, we have been taking a rigorous look at our ceded reinsurance needs and practices. While developing the US platform and building out our insurance business in London, we brought on new underwriters, who had strong reputations and excellent track records but had not yet built a track record at Aspen. Thus, we took a very conservative approach and bought a high level of reinsurance for those lines.

Now, many of those underwriters have been with us for a number of years. And we've seen the results here at Aspen, and they've been very good. We're at a point where we can look at our total ceded reinsurance program and evaluate how best to move forward with a view towards retaining a greater share of profitable risks.

We expect that this initiative alone will generate as much as $25 million in incremental net income in 2014. Most of the lines we are looking at are highly diversified and, therefore, not capital intensive. Consequently, we will only need to hold approximately $20 million of additional capital as a result of this increased risk retention.

Second, as we previously mentioned, we have been executing a significant controlled reduction of our US E&S open market wind-and-earthquake-exposed US property insurance account. We have released approximately [$80] million of capital thus far. We are committed to continue to reduce the volatility of this line, and we are on target to achieve our intended capital reduction by the end of 2014.

Third, our US insurance teams continue to gain scale, and this growth will drive meaningful operating leverage. For many years, we have reduced competitive loss ratios compared with elevated expense ratios. But now we have begun to grow into that expense base. Our US operations have had a combined ratio of less than 100% for three quarters in a row. We have built a profitable value business which is contributing to earnings.

If I sound more upbeat about the US, it's because I am. Currently, the US teams account for about 35% of our insurance and net earned premiums. We expect this percentage to increase over the next few years.

Previously, I've said that US operations would be at a scale to support their expense base competitively -- with about $550 million of net earned premium. At that point, we would expect a more normalized expense rate for US operations of around 16%. We're currently expecting to reach that level towards the end of 2015.

In summary, we're executing on the strategy we've previously set out. And we have a clear line of sight to how these levers will enable us to continue to improve our operating return on equity. I am now going to turn the call over to John. And later, I'll close with some thoughts on market and on our growth strategies.

Thank you, Chris. I'll begin with an overview of the results for the quarter and then provide an update on our capital management and investment levers.

Gross written premiums for the group rose 4% to $582 million in the third quarter, with underwriting income of $60 million. The combined ratio is 91.8%, with $14.2 million, or 2.6 points, of net catastrophe losses in the third quarter. Prior-year reserve releases were $33.6 million, or 6.2 combined ratio points. And we experienced net favorable development in both short-tail and long-tail lines.

For our Reinsurance segment, gross written premiums declined 15% to $220 million. This decline was due to a number of adjustments, including prior-year premium adjustments and higher commutations compared with last year. On an underwriting-year basis, excluding all the noise, our gross written premiums were about flat, with rate-driven decreases in property catastrophe offset by increases in other property.

The Reinsurance combined ratio is 80.5%, with $11.3 million, or 4.5 points, of net cat losses in the quarter. Catastrophe losses included $14.9 million from German hailstorms. The results -- excuse me, the resulting accident year ex-cat combined ratio is 88.7% combined with 81.4% a year ago.

The increase is primarily due to $17 million, or 6.7 combined ratio points, of attritional losses in the Reinsurance segment in the third quarter, related to a container ship loss and a chemical plant fire. These losses occurred in our specialty and other property subsegments.

In our Insurance segment, gross written premiums increased 21% to $362 million. This reflects rate- and market-driven increases in our primary casualty; NEC and financial institutions; and our US marine business.

Underwriting income for the segment was $10 million. And, once again, both our international and US insurance teams recorded positive underwriting income for the quarter. The combined ratio of the Insurance segment in the third quarter was 96.7%, with $3 million, or 1 point, of net catastrophe losses. Prior-year reserve releases were $1 million. For the group, the expense ratio was 38.5% for the third quarter, an increase from 37.6% a year ago.

In Reinsurance, the expense ratio increased to 32.7% from 31.9% a year ago, mainly reflecting lower net earned premiums, as the absolute dollar amount of expenses was relatively flat. In Insurance, the expense ratio increased slightly to 38.5% from 38.1% a year ago. The acquisition expense ratio increased due to one-off factors -- which we do not expect to repeat -- whilst the expense ratio elements reduced to 17.2% from 18.1%. This decrease is particularly pleasing, and reflects strong [crossed] controls and the build-out of our US business.

I will now move on to investments. Investment income was $45 million in the third quarter of 2013, down 7% from the equivalent quarter a year ago. Fixed-income book yields for the third-quarter 2013 was 2.82%, up 11 basis points from the second quarter, while the duration of the fixed-income portfolio was 3.5 years. Including the effect of our interest rate swaps, the duration was 3.1 years.

Our risk-asset portfolio now comprises 9% of [table] investments. At September 30, 2013, we held $442 million in equities, up from $197 million a year ago, reflecting our strategy of tactically diversifying our investment portfolio by investing in high-quality global equity income strategies. The equity portfolio generated a gain of 15.3% year to date, including a gain of 6.5% in the quarter.

Chris gave an update on the first of three levers for our 10% ROE target for 2014. I would now like to give you an update on the other two levers -- enhancing investment returns and efficient capital management.

On enhancing investment returns, we have found -- and continue to find -- opportunities to increase investment returns within acceptable risk parameters. You will remember that, in the first quarter, we increased our allocation to equities by $200 million. And, following asset appreciation, equities now account for 5.5% of the investment portfolio.

Then, in the second quarter, we allocated $75 million to BB-rated bank loans, bringing our total investment in BB securities to $105 million. In August, we funded a $200-million, BBB-rated, emerging-market debt portfolio. These actions, plus the rise in yields we have seen since May, have served to stabilize our book years.

We've continued to focus on capital management initiatives, repurchasing just under $55 million of ordinary shares in the open market during Q3. And this brings our year-to-date total share repurchases to $296 million, essentially meaning that we have already met our share repurchase promise for the year. Assuming current valuations and similar opportunities in the market to deploy risk capital, we expect to continue to opportunistically repurchase shares in the near term.

Taken together, the results of these two levers will make a meaningful contribution to our return on equity in 2014. I'll now turn the call back to Chris.

Thank you, John. I must take the opportunity to talk about the current rate environment as well as specific growth initiatives which we are going to drive Aspen's business in the coming quarters and years. In some instances, the initiatives will have the benefit of rate momentum at their back. And in other areas, this strategy will insure that our team succeeds, even in the face of rates that are under pressure.

We are not venturing into brand-new territories, but rather building up our talent in markets where we already have a presence, or targeting specific niche areas of markets where we see specialty opportunities. In terms of the rate environment, for the first nine months of 2013, we achieved an average rate increase of 3% in renewals across our book. Reinsurance is flat overall, and Insurance achieving a 5% increase.

First, let me discuss our Reinsurance business. As I previously mentioned, we achieved flat renewals for the first nine months of the year on our total Reinsurance book. Specifically in property cat reinsurance, despite the industry-wide pressures, we experienced a rate decline of only 1% through the nine months of 2013. This is a result of our diversified property catastrophe book, both in geography and peril; our global office network; and our close ties with our clients.

Our international offices in Zurich, Singapore, and [Miami for North America] continue to grow profitably. These offices are well established, and the Aspen representatives are influential, leading players in their respective markets. This enables us to be closer to our clients and have a better understanding of their risk profiles.

There are other areas of our Reinsurance book where we are achieving rate increases. In our [PEROSA] line, within other property reinsurance, we achieved a rate increase of 5% through the nine months, reflecting the increases in primary markets.

As I mentioned, we are targeting areas of the specialty and niche markets where we see opportunities. Last week, we announced the formation Rock Re, a new dedicated brokered property facultative unit within our other property reinsurance subsegment. Rock Re builds upon our existing highly profitable direct property facultative offering in the US, and will focus on the North American brokered property fac marketplace.

Historically, we have mainly written property fac business on a direct basis. And while this will continue to be a key focus for us, we're establishing Rock Re with a dedicated team to better serve the needs of the broker marketplace.

Also, in our US Reinsurance business, we hired Tom Luning as head of US regional business development in June this year. Regional carriers often have different buying strategies than larger insurers and place a lot of value on their relationships with the traditional reinsurers. Tom will ensure that our regional clients have access to the full suite of products that Aspen Re can offer.

In our specialty reinsurance subsegment, we achieved flat renewal rates overall through the nine months, but rates do vary by line. We achieved a 5% increase through the nine months on our marine line, where we continue to see rate increases following a challenging year of industry losses. On our agriculture line, we achieved an increase of 2% through the first nine months.

In our third key initiative, we recently hired Michael Dicker as global head of agriculture to serve this growing marketplace. He will work closely with our underwriters in Miami, London, Singapore, and Zurich, as well as throughout North America, and provide strategic project direction for this line.

Casualty reinsurance was at 1%, and the rate environment continues to vary based on line and geography. We had positive rates in US casualty of 2%, while international casualty reinsurance remains under pressure. In total, our current portfolio continues to achieve good results with stable loss cost trends.

In our Insurance line, the rate dynamics are markedly different. As I said earlier, our Insurance book achieved a blended rate increase of 5%. There are many pockets of positive rate movement on the [primary] side. Through the first nine months, we achieved positive rates across all five of our Insurance subsegments.

In April of this year, we announced the hire of Tony Carroll in the US in our energy business -- which is part of our marine, energy, and transportation subsegment. Tony complements our established global energy team.

He has hired a team in the US, including underwriters, engineers, and claims professionals. They are focused on a variety of onshore energy and construction classes. The team is growing the business with sound, fundamental underwriting, as well as the momentum of the rate environment.

The marine, energy, and transportation subsegment achieved an overall rate increase of 9% for the first nine months of the year. And we foresee that the rate environment will continue to be positive.

In our financial and professional lines subsegment, we achieved a rate increase of 2% through the nine months. Again, rates varied by line, but notable rate improvements in financial institutions and in US professional indemnity.

Turning now to casualty insurance, both global and US combined achieved 5% renewal rate through the nine months. Recently, there has been a changing market dynamic in the US, following a number of agency downgrades of competitors. These downgrades have created some opportunities in primary markets and will continue to create further opportunities for those companies that are strongly rated and conservatively reserved. We are well positioned to take advantage of additional opportunities that arise.

The most notable areas where we're seeing increased opportunities from downgrades are within property and casualty, both primary and excess. Specifically in casualty -- in the areas of hospitality and real estate -- we are seeing pricing up anywhere from 30% to 200%, with higher attachments and tighter terms and conditions.

Accounts we previously quoted -- and did not win -- are back in the market. And our brokers are positioning Aspen as being a stable alternative with an ability to develop creative and flexible solutions. We expect the combined effect of these growth initiatives to contribute $180 million to gross written premium by 2015, with $100 million of that in reinsurance, and the balance of $80 million in insurance.

As you can see, we have a number of initiatives that we're very excited about. We are driving toward the 10% operating ROE in 2014 through continued execution of our three levers, combined with the progress we're making in the underlying business. We're focused on this goal throughout the organization, and the compensation of the senior management team is significantly tied to this 10% ROE target.

I look forward to continuing to update you on our progress on future earnings calls. That concludes the Halloween edition of earnings call, and we hope you'll agree that there have been lots of treats and no tricks at all.

Thanks for listening. John and I are ready to take your questions.

(Operator Instructions)

Your first question comes from the line of Max Zormelo.

Hi, good morning. My first question -- Chris, I wanted to follow-up on the -- your comments about, [again this yield] -- the US insurance business. I think you mentioned -- it's 35% of insurance net earned premiums now. You think it's going to go up -- increase in the next couple of years. I wanted to get a sense for what it will grow to next year -- for the total business -- maybe within 2015. I also wanted to get some more color on the 16% expense ratio by the end of 2015. Is that for this insurance business, or is it for the whole book -- you're talking about?

Well, let's take the expense ratio first. What I've been saying for sometime is -- we've got a great underwriting business. We've got an expense base that's appropriate to a bigger size of business, so the business has to grow into expense base. We've taken our time to do that because we wanted to move at a pace that the underwriting opportunities allowed. Recently, of course, rate increases have helped us. There's been a bit of a tailwind from rate increases. So what we are saying to you is -- around that 16%, 17% area. US insurance has a competitive expense ratio, and it's going to get to that before the end of 2015. I think that's the tail end of your question.

Growth rate for US -- I mean, I don't think we've actually published anything. And I don't think I want to divulge that now. But historically, it's been going along the last couple years at sort of 20% plus, annually. And there's plenty of momentum there. The market is generally favorable. So, that's probably a reasonable assumption, but it's not a careful prediction. So as we said, 35% of insurance, currently with good loss ratio in the US -- with a less than competitive expense rate -- are moving into line within the next two years -- changes the way we think US insurance has been. It's has been profitable this year-to-date. Interestingly, it's profitable even if you strip out the effects of cat. It's on plan when you do that.

2014 -- we're expecting a decent return from the US. 2015 -- we're expecting as good a return from the US as the average of the rest of our business. So I would say, in the US -- congratulations to all the guys who work there because it's a job very well done. Does that help you, Max?

Yes. That's helpful. Thank you. Next question I had was on capital management. The share repurchase was the strongest quarter. Just wondering -- looking out into Q4, is it fair to assume that you could have the share repurchases slowing down a little bit versus Q3?

Max, thank you. Yes. I mean, we've committed to $300 million for the year. We've achieved that. In terms of going forward, we are committed to continuing to buy back shares. We'll do it on an opportunistic basis. And, of course, take into consideration business opportunities, capital requirements for those business opportunities, market conditions, and any opportunities we see for investing in the investment portfolio.

Okay. And then just a couple of quick numbers ones, if I may, please. First one is on the tax rate. You said it was low this quarter. What should we expect for the rest of the year? And then the second one was --

Yes --

Okay. Go ahead, please.

Sorry. I mean, I think on that one, the tax rate -- it is tracking down. And I think you should expect to see that going forward, really as a function of the tax rate in the UK -- which is decreasing.

Okay. So can we expect this quarter's rate to be -- this next quarter's rate to be similar to this quarter's?

I'm not sure we're giving any guidance on the tax rate for the next quarter. But as I say, as a general comment -- you can see it trending down over time in line with corporate tax rates in the main jurisdiction in which we pay tax -- being the UK.

Alright. That's fair. And then -- last one, please. The fixed income portfolio yield has [gone on, but the duration] has, obviously, gone up. I guess, part of it also because of the -- I guess, part of it's due to the investment in the bank loans. Just wondering -- looking out, what should we expect for the yield? I mean, I was surprised it actually picked up last quarter. I just -- what should we expect [through the] quarters? Thank you.

Yes. You're right. The duration has increased slightly. And during August, we invested $200 million in emerging-market debt, which is the main reason for the increase. Sorry, the second part of your question is in terms of yield going forward?

Yes.

Yes. I think overall yields going forward -- we can expect to stay at the same sort of rate. And of course, if we saw an increase in interest rates, then we could see a yield pickup in 2014. But of course, we're not anticipating anything significant at the moment.

Thanks for the answers.

Thank you, Max. Thanks for your questions.

Your next question comes from the line of Amit Kumar from Macquarie Capital.

Thanks, and good morning. Just one quick question, I guess, starting off with the sidecars. Did you talk about the discussion in the press regarding your new sidecar? I think it's called Silverton Re. Can you just expand on that?

We didn't talk about that, and we really can't talk about rumors in the press. I'm sorry.

Okay, because I thought the $65 million capital thing was going to go online very shortly. The other question -- and I apologize; I was on another call. Did you talk about the commutations were they, sort of, one-off? Or should we anticipate more of that going forward in your reinsurance segment?

We did talk about the commutations and some prior year adjustment in the reinsurance segment. They are one-off. And if I look forward to GWP over the medium-term, if anything, I'd expect it to track upwards. So these are really just one-off occurrences for this quarter.

Got it. And the growth in insurance -- I presume that's from the usual teams, et cetera, right? In the US and UK? Or was there any other factor on the growth?

Amit, I mean, you're right to take it in looking at the US and the UK in turn. Slightly different reasons. In the US, we're seeing deals flow and price increases -- as much as anything, due to some consolidation in the market and rating actions which have impacted some of our competitors. We're also seeing growth in the US energy book which, of course, we invested in earlier this year. And the growth in the US is very much in line with the plans that we have.

In international -- a slightly different story. More mixed on pricing, but we are seeing price improvements in some of the lines -- so, marine energy and construction liability, financial institutions, and global casualty. And we're taking advantage of those price increases in improved margins in those lines. And for example, in NEC, some of the increases that we are seeing are as much is 20%.

Got it. And then, I just -- finally on the buyback. I see that you bought back, you know, some stock in Q4 to-date. Can you sort of talk about the pace from here, going into 2014? Thanks.

Yes. The buyback pace that we've had has been very significant. I mean, it has averaged $100 million a quarter so far this year. I wouldn't anticipate that it is going to be at that sort of rate going forward, so I just want to manage your expectations in that respect. But nevertheless, we are committed to a share buyback program -- as I said earlier.

And how should we then think about it going forward? Are you thinking of some ranges in terms of on return on capital -- going forward?

No. We're not giving ranges. I don't think that would be fair, but only to say that we're pursuing it all on an opportunistic basis. You know, that takes into consideration a number of factors. But it won't be at the same rate as you've seen earlier this year.

Got it. Okay. I'll stop here. Thanks for all the answers.

Thank you.

Your next question comes from the line of Samir Khare from Capital Returns Management.

Good morning. I'm just curious about any exposure that Aspen might have to the recent Supreme Court rulings in the Spanish surety market.

We don't believe that we have any exposure to those. There's a couple reasons for that. Two insurance companies are involved, and we are not one of those. Second, we don't reinsure those companies. Third, they are related to a time period before we wrote the credit and surety class. We've been in there for about four years, these relate back seven or eight years. And finally, we have actually looked at what was being sold there. And we would describe it as very ambiguous policy language.

Ambiguous policy language in an environment where the courts -- which they would in Spain -- favor the consumer quite heavily, are going to land you problems. So I think if we had, had the chance to write that stuff, we wouldn't have done it anyway. But the good news is -- we have zero exposure for a variety of reasons.

Very good. Thank you. Sure.

(Operator Instructions)

Your next question comes from the line of [Josh Schwartz] from CJE Investments.

Hi, and congratulations on the excellent quarter.

Thank you, Josh.

No problem. On your last conference call, Mr. Worth said the expense ratio would benefit as the US operations grew. This year, total premiums earned have been up 5%. But the combined expense ratio of insurance and reinsurance is higher in Q3 than throughout the rest of 2013 and is higher compared to 2012. From 2003 to 2012, Aspen averaged 29.7% combined expense ratio. Aspen's currently significantly above competitors. So, does the company have a few future expense ratio target and a timeline to achieve it?

In terms of the target, the guidance we've have given, as you know, is just around ROE. But to comment specifically on expenses -- and you referred specifically to the US insurance area there. In the US, we're actually very pleased with the operating expense ratio improvement, which is 1 percentage point across the insurance. And there's too reason for that, really. One is the build-out of the US. And the other is tight cost control in the US. But overall, we have seen an increase, and that's due to a modest increase in the reinsurance segment. In absolute terms, it's only $1 million quarter-on-quarter. For the increase in terms of the ratio -- it's due to the denominator. And the fact that we have seen the GEP come down this quarter for a number of one-off reasons, as we talked about earlier.

Okay. Is the target much lower? Or, I guess, that's an internal target?

Well, it is an internal target, but it comes back to -- as you pointed out -- some of the comments we've made previously that we'd expect to see, in particular, the expense ratio for the insurance segment come down over time -- as we build out in the US. And actually, with respect to that component, we're already starting to see some of that.

Okay. But just the last thing on that -- reinsurance was also a little higher than the average, too. So would that expense ratio expect to drop, too?

Yes. I would expect that to come back down, and that's in line with our expectations on gross certain premium, and the fact that it's down this quarter, as I say, for one-off reasons.

Okay, perfect. And one more question. As the reinsurance sales declined 15.4% this year, is it expected to stabilize next quarter? And in 2014?

Yes. As I referred to earlier, there are commutations. There are one-off prior-year adjustments that have come through on the GWP line for reinsurance this quarter. So going forward, if anything, I would expect to see an increase in GWP for the rest of this year and going into 2014 and beyond.

Okay. Perfect. Thank you for your answers.

You're welcome. Thank you.

(Operator Instructions)

There are no further questions at this time.

Okay. Cassandra, thanks for helping us this morning. And thanks, everyone, for listening. Have a good day. Goodbye.

This concludes today's conference call. You may now disconnect.