Aspen Insurance Holdings Ltd (AHL) 2013 Q4 法說會逐字稿

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

(Operator Instructions)

Thank you.

I would now like to turn the conference over to Kerry Calaiaro.

Thank you and good morning.

The presenters on today's call are Chris O'Kane, Chief Executive Officer; and John Worth, Chief Financial Officer of Aspen Insurance Holdings Ltd.

Last night, we issued our press release announcing Aspen's financial results for the fourth 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 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, please see our website.

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

Thank you, Kerry; and good morning, everyone.

Aspen reported diluted book value per share of $40.90 at December 31, 2013, and there was operating return on equity of 9.7% for the year. We continued to make good progress on our strategic objectives, our operating results, and our profitability.

A year ago, on our fourth quarter 2012 earnings call, we outlined three levers for driving ROE expansion. These three levers were: capital management, increasing the returns on investments, and business portfolio optimization. I'm happy to say that over the course of the year, we have made significant progress on all three.

We repurchased $310 million of ordinary shares during the year, including $15 million in the fourth quarter, exceeding our $300 million target for the year.

We rebalanced our investment portfolio. During the year, we increased our allocation to equities by $200 million, allocated $7 million to BB rated securities, and funded a $200 million BBB-rated emerging market debt portfolio. We announced 9.7% of the portfolio allocated to alternative investments.

These actions helped stabilize investment returns while keeping the portfolio within acceptable risk parameters.

Most importantly, we made strong progress on our business optimization initiatives.

First, as we previously discussed, we have been executing a significant controlled reduction of our E&S open market wind and earthquake-exposed US property insurance count. We continue to be on track to release approximately $140 million of capital by the end of this year.

Second, our US Insurance teams continued to gain scale, and this growth is driving meaningful operating leverage. Our US operations have been profitable every quarter of 2013, and achieved a loss ratio of 54% for the year.

We have both a profitable, valuable business, which is contributing to earnings. The future of our US Insurance business is now becoming increasingly clear as of one of greater profitability, lower expense ratios, and increased scale.

Finally, as I noted last quarter, we restructured both our ceded reinsurance and retrocessional arrangements. We estimate that this initiative alone will generate $25 million in incremental net income this year, with a further incremental benefit in 2015 of $20 million, equating to a total annual net income benefit of $45 million in 2015 onwards.

The overall pricing environment in which we operate continues to be varied and highly dynamic. For the US Primary Insurance market overall at the January renewals, rates increased yet at a more modest pace than a year ago. For the majority of International lines, the rates are holding firm.

There are a few lines which previously experienced loss activity and are now showing rate increases. Conversely, a few specialized areas, such as aviation and offshore energy property in the Gulf of Mexico, are experiencing downward pressure.

In the Reinsurance segment for the January renewals, the picture is similarly varied. In Specialty Reinsurance, Casualty Reinsurance and the less cat-exposed property lines, the picture is one of [fully]stable to slight reductions of 2% to 3%.

In Property Catastrophe, however, the influx of new capital is most pronounced. This resulted in the most intense competition during the January renewals, and rates are under significant pressure. At January 1, for the Property Catastrophe market as a whole, rates were down about 15%.

If you look at the individual regions, European Property cat saw rates down 10% to 15%, whereas the US Property cat was more pressurized, with rates down between 15% and 20%.

The good news is that within our property catastrophe book as a whole, we limited the overall rate reduction to 12% in the January renewals, so we were able to achieve better rates than the market. Another positive outcome is that in the case of retrocession, where we are a buyer and not a seller, we benefit from rates declining in the range of 25% to 35%.

Our strategy is enabling us to navigate the changing market; specifically, we are benefiting from our regional structure and new product offerings.

In late 2012, we introduced our regional structure within Reinsurance, which enables us to meet customers' increasing demands for local market solutions. We've also had successful introductions of new product offerings, such as those provided by Aspen Capital Markets -- which is, by the way, off to a great start.

As a result of our strategy, we're achieving technical pricing levels that we deem commensurate with the risks we write, while continuing to grow our business.

During the January 1 renewal season, we recorded access to the most sought-after risks and are extremely pleased with our achievements.

In Insurance, we expect the continued successful buildout of our intra-US business to drive increased profitability. Furthermore, International Insurance growth in targeted areas and investments, such as UK regional and in Global Casualty, are doing well and achieving their objectives.

When we first offered 2014 ROE guidance a year ago, we told you that we expected to achieve a 10% ROE, subject to both the insurance pricing environment and also the interest rate environment continuing unchanged.

As I mentioned, reinsurance pricing is pressured in some lines of business, notably property catastrophe reinsurance, as are some specialty insurance lines, such as aviation and offshore energy property.

Nevertheless, in the face of this more difficult pricing environment, we have taken some actions to maintain our profitability; specifically, reallocating capital within our underwriting portfolio to the best business lines, retaining more of the best business rather than ceding it out as reinsurance, and we've also striven to maintain and increase our investment return.

Therefore, we can tell you that we continue to expect to achieve an ROE of 10% in 2014, assuming a pretax cat load of $185 million, normal loss experience, and given the current interest rate and insurance rate environment.

I'll provide additional thoughts on the market and on our growth strategy in a moment, but first I will turn the call over to John to provide some detail on our results.

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 leaders.

Operating earnings per diluted share for the fourth quarter of 2013 was $1.13. The annualized operating return on equity was 11.2% in the fourth quarter of 2013.

Gross written premiums for the group of $604 million increased 5% in the fourth quarter compared with a year ago, with underwriting income of $47 million. The combined ratio was 91.9%, with $34.7 million, or 6.1 points of net catastrophe losses in the fourth quarter.

For our Reinsurance segment, gross written premiums declined 9% to $176 million, partially due to a decline in the reinstatement premiums primarily related to Superstorm Sandy in the fourth quarter 2012. The segment recorded underwriting income of $118 million in the fourth quarter.

The resulting Reinsurance combined ratio was a very favorable at 58.6%, with $29.4 million, or 10.4 points of net cat losses in the quarter, mainly related to European windstorms. In the fourth quarter, all four subsegments in Reinsurance improved their accident year ex-cat loss ratios.

In our Insurance segment, gross written premiums increased 12% to $428 million. This is a result of growth in our casualty and our programs business, and financial and professional lines.

The combined ratio for the Insurance segment in the fourth quarter was 121.6%. This was largely a reflection of a higher frequency of mid-sized losses in the marine and casualty subsegments of approximately $45 million, which accounted for 16 points on the loss ratio. Prior-year reserve releases for the group were $20.5 million, or 3.6 combined ratio points.

In Reinsurance, favorable reserve development was $46.1 million, or 16.2 combined ratio points, split evenly between short-term and long-term lines. The long-term releases were predominantly from 2009 and prior accident years.

In the Insurance segment, there was $25.6 million, or 8.9 combined ratio points of reserve development.

During 2013, we observed an increase in the frequency of mid-sized energy and construction losses in recent accident years, which prompted further analysis. The analysis was completed in the fourth quarter, which resulted in an increase in our estimated loss (inaudible).

The associated reserve review caused us to increase reserves in the quarter for prior accident years by $60 million in the marine, energy, and transportation subsegment. This reserve increase was partially offset by releases in our casualty and professional and financial lines.

For the Aspen Group as a whole, based on our capital model, we aim to hold reverse at a diversified level such that there is a mid- to high-80%s chance that they will turn out to be adequate or redundant. This is a level of reserves which is very strong.

At the end of the fourth quarter of 2013, we were at the 86% level, which is consistent with our reserving philosophy.

For the Group, the expense ratio was 34% for the fourth quarter, an increase from 29.7% a year ago. The fourth quarter of 2012 had a number of nonrecurring items which reduced the expenses. Therefore, it's more reflective in the expense space to look at the full-year comparison.

For the full year 2013, the expense ratio was 36.3%, compared with 34.9% the year ago. Policy acquisition costs increased from 18.3% to 19.4%. This reflects both a change in business mix, with our growing US programs business having a higher acquisition cost, as well as a reduction in the provision for profit commission in the fourth quarter of 2012.

The operating expense ratio, on the other hand, remained relatively flat. As you know, we've been focused on finding operational efficiencies throughout the group; and our general and administrative expense ratio for the year came in slightly lower than targeted. We will continue to look for operational efficiencies going forward and expect the G&A ratio to decrease as the US Insurance team continues to achieve scale.

I'll now move on to investments.

Investment income was $47.2 million in the fourth quarter of 2013, down 8% from the equivalent quarter a year ago.

Fixed-income book yield for the fourth quarter 2013 was 2.74%, down 8 basis points from the third quarter, while the duration of the fixed-income portfolio was 3.5 years. Including the effects of our interest rate swaps, the duration was 3.2 years.

Our alternative investments now comprise 9.7% of total investments. At December 31, 2013, we held $460.4 million in equities, up from $200.1 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 total return of 21% for the full year 2013, including a gain of 4.9% in the quarter.

In 2013, we've repurchased $310 million of common equity; and to date in 2014, we've repurchased a further $22 million. We continue to allocate capital in the most efficient way, whether it be investing in new business opportunities, allocating a higher proportion of our investment portfolio to alternative assets, or returning capital to shareholders. We review this very actively and expect to continue to repurchase our shares opportunistically throughout 2014.

In the fourth quarter, we were able to the take advantage of the very attractive interest rate environment and issued $300 million of 10-year 4.65% senior notes. We used the proceeds from the issuance to redeem $250 million of our 6% 2014 Senior Notes and for general corporate purposes.

I'll now turn the call back to Chris.

Thanks, John.

I'd now like to provide a few additional comments on the operating environment in general, as well as Aspen's specific achievements and performance within that environment.

Currently in the reinsurance market, the rate dynamics are evolving rapidly. The January 1 renewal season again saw an influx of new capital. We view this increased amount of capital in the reinsurance market less as a developing story and more as the new norm.

This renewal season saw a further increase in the supply in the market, which was happening at the same time as a reduction in demand from clients for the reinsurance product. Companies reassessed their reinsurance needs to take advantage both of high-level of capital on their balance sheets and the declining rate environment.

As a result of these market dynamics, the trend that has been developing steadily accelerated during the January renewals. Specifically, companies that buy meaningful amounts of reinsurance are choosing to concentrate their purchases with a fewer number of large reinsurance.

Their [role] was, if you like, a battle of the signings, which resulted in a bifurcated market. On one side were those companies that had the clout to remain relevant to customers, and on the other side those companies that do not. Well, Aspen landed solidly on the winning side in January.

We formed Aspen Capital Markets early in 2013 to help capitalize on opportunities in the changing market. Through Silverton Re and other initiatives, we now have $100 million in third-party capital vehicles. This additional capacity, combined with the strength of our planned relationships, the range of product offerings, and local distribution, resulted in a very successful January 1 renewal season for Aspen Re.

We were able to grow our premiums while maintaining the same (inaudible) net exposure by utilizing our relationships with third-party capital, as well as taking advantage of less expensive retrocession. While I'm not surprised by the success of our team in January, I am pleased to say that Aspen Re is a key player in this changing market.

I would not want the attention that one always receives, though, or the success of our 1/1 renewal season to overshadow the performance of Aspen Re in 2013. They simply had an excellent result for the year.

Many of the initiatives we discussed on previous earning calls are now established and growing. Our local office distribution across the globe, our US regional strategy, and our close relationships with clients throughout the business enables us to gain access to the most sought-after risks.

As I look forward into 2014, we expect to see the benefits of these investments that we made, both in platform and in people, to come to fruition. Within our Reinsurance segment, during 1/1 renewals, our Re US regional strategy was very successful and surpassed its new business goal for the entire year.

Roughly, our facultative reinsurance initiative in the broker market, our US surety reinsurance initiative, which started in the latter part of 2013, are both being well received by the market.

Agriculture signings are in February, so it's too early to discuss our results there. But I can say that Michael Dicker, our new Global Head of Agriculture, is up and running and has been well-received by brokers and clients. We look forward to discussing his success over the coming quarters.

As you can tell, we're very proud of the performance of our Reinsurance business in 2013 and excited to keep driving the business forward in 2014.

I'll now discuss our Insurance business. The majority of International teams had a very successful 2013, with very strong performance in US programs, in management professional liability, as well as admirable growth across our casualty lines. I'm proud to say that our US teams have yet another quarter of impressive underwriting performance.

I cannot say emphatically enough how excited I am about our achievements in the US. We've built a solid, successful, profitable business. We continue to expect the US teams to add scale to support their expense base by the end of 2015, with about $550 million of net earned premiums. At that point, we would expect the G&A expense ratio to be about 16%.

As you know, we made some strategic hires in Insurance business in the past 12 months, including Tony Carroll.

Tony is leading our US energy business. His Team of underwriters, engineers, and claims professionals in the US surpassed our initial expectations in 2013 and are very active in the market.

Another area we had a good result in in 2013 and look forward to continuing our progress in in 2014 is our UK-based Global Casualty business. This team, under the strong leadership of Bob Patten, had a very strong performance in 2013. And we have high expectations of this team for the year to come.

Individuals like Tony and like Bob are contributing meaningfully to the business and are helping to keep a high level of excitement throughout Aspen as we strive to continue to develop a world-class insurance operation.

In closing, we've had a strong 2013; and we're well-positioned for the year and beyond. We're operating in a challenging, rapidly-evolving marketplace; but we remain confident that the initiatives we are undertaking and our ongoing strategic focus will enable us to continue to deliver for our shareholders.

Thanks for listening to us. With that, John and I will be very pleased to take any questions you may have.

(Operator Instructions)

Your first question comes from Mike Zaremski.

Hello. Good morning, everybody. First question, can you guys hear me?

Yes, Mike, we can hear you loud and clear.

Okay. Great. First question, sitting from my seat, I have a hard time getting to a -- seeing the 10% ROE for 2014. The CATs this year were well under base plan of 2014 of 185. You guys threw off a good amount of reserve redundancies this year. Of the three levers, what would you say is the main lever to get to the 10%, versus this year, you did 9.7%. Is it the business portfolio optimization? Maybe you can help us think through that. Thank you.

Okay. Mike, let me kick that off, and John might want to come in on this question, as well. I'd say the big thing that's different between 2014 and 2013 is our increased Reinsurance retentions, which I talked about a bit on the last call. So really, what we're doing there, what we're saying is, Teams that used to be new Teams that we didn't know and understand so well are now established, profitable Teams. Could be less.

We see less need for (inaudible) Reinsurance. We're happy. We understand the risk. We're happy we retained a little bit more of it. And it's pre diversified risk. We're choosing bigger shares to retain of lots of different programs around this place.

That, and a slightly distant approach to buying retro contributed $25 million of net income to the bottom line. That was not there at all in 2013. We had none of that effect in 2013. So that's probably the biggest single chunk of the difference, and that may be all that you're looking for.

If you look elsewhere, while we would continue to evolve the business mix, that in combined ratio terms, US improved this year -- 2013 I mean over 2012, 2012 over 2011, and so on, and I think that's just going to continue. Mainly what we're going to see there is not better loss ratios. We're happy with the loss ratios there. We're going to see a bigger book with a lower expense ratio, and consequently, better combined.

We mentioned, of course, some adverse experience in the Marine energy area. That looks like a few bumps from certain -- a few big losses. They don't look like they're going to be recurring, but in any case, we're going to be de-emphasizing that part of our book.

So I would expect the underwriting performance out of the attachment business results to be better. Those would, I'd say, would be some of the main differences in the concept of a bridge from 2013 to 2014. John may like to add to that.

Mike, this time last year, we outlined three levers that we were pulling on to get to 10% ROE for 2014. And I think in order of contribution, probably business optimization initiatives first, and then followed by the share buybacks that we've been doing and the contribution that they've given us, and then investment in alternative assets. All three are doing what we expected of them, and it's in 2014 that we'll really start to see that contribution come through.

Okay. That's helpful. And John, regarding the reserve true-ups in the Insurance segment, can you gives us some more color on what -- is that recent action in your business? And also, I believe you said the reserves are being held at an 86% confidence percentile, I don't know, maybe, you correct me if I'm wrong. What percentile had Aspen been picking beforehand?

As I said earlier, we aim to reserve between the 85th and 90th percentile. We've remained pretty stable between those percentiles, and last year, it was the 87th percentile. So we're broadly at the same level of reserving.

Okay. And I might have missed it on the prepared remarks. In regards to what happened there exactly, was that all recent accident year reserve true-ups?

Mike, what we had was a few significant losses in the marine and energy construction liability portfolio. They made it -- we weren't too happy with that. We took a close look, and we went back and looked at the previous years. We increased reserves for prior periods by about $60 million in the fourth quarter.

And we did it really looking at how that book was running. We didn't like it as much as we thought we did. So $60 million of the reserve strengthened because of that, but also less of that type of business going forward. It's underperforming. Does that help you?

Yes. Thank you.

Sure.

Your next question comes from Amit Kumar.

Yes, thanks, and good morning. Two quick follow-ups to the previous question. First of all, maybe I missed this in the opening remarks, what exactly is that $25 million benefit? Is that the retro impact to some higher loss ratio lines? Maybe can you just expand on that?

Amit, hello, good morning. What I think you're asking me is how do you get at $25 million proven to net income by changing your ceded Reinsurance practices? I think that's the question.

If that is the question, the answer is that we buy a lot of Reinsurance, some excessive loss, some proportional across a wide range of our Insurance lines, and these have been performing extremely well. And most of them have seen rate increases in the last year or two, so we think they're going to perform much better in the future.

So if we made replacing 100% Reinsurance with external parties, we're going to cut back the ceded share. Maybe we'll cut it back in some cases to 75, 60, 35, 40, just depends what it is. We'll basically keep and eat more of our own cooking rather than giving it to other people.

We still do want some external risk transfer, so we're not actually dropping programs. We're just carefully varying the percentage ceded to optimize our own retained portfolio. Our capital model, which is a very, very useful or effective tool, we use it all the time in our own business, guides us in what the right retention is.

Since we would expect our reinsurers to make a profit from reinsuring us, when we decide to retain more of our business, we retain more of our profit. The sum total of all those shares and individual treaties, mainly in Reinsurance, but a few on the retro side as well, the sum total of all of those in 2014 is expected to be $25 million.

And then in 2015, as I said in the call, it gets bigger. It goes up to about $45 million because this is the first year, but this year also has some Reinsurance placed during 2013 that is still valid, still alive in 2014, so we're not going to get the full bang of benefit all in this year.

Got it.

Does that help you?

Yes, And what was the biggest piece in that $25 million? Which subsegment would be the biggest piece?

It is actually pretty well diversified. It actually -- it would be a mistake to retain too much of one, but that's giving you a spike of exposure. So we're really -- it's pretty even around the place in terms of the different categories of risk. I couldn't really point the to one and say one is bigger.

I would say, the retro is the smallest, because that is a key part of what we do, and that drives our capital needs. So the change in retro is a comparably small bit, and I don't think it will evolve that much. I could actually see us buying a little more retro as time goes by because that's a very competitive market to buy in.

Got it. That's actually quite helpful. The other question, going back to Mike's question on the reserve adjustment, did you mention you had some specific claims? Maybe I misheard. Was there an adjustment to the level of IBNR, or was it all case? And what was the ultimate loss ratio it was running at, and what is the developed loss ratio? Could you expand on those points, please?

I'm going to kick off, and John is going to come in on the specific claims. What I would say happened in Q4 is that we had three or four chunky, not huge, but quite big, all coming from the same area of the book in this MEC liability, and in a moment, John will tell you what those claims were and what the cost was.

That made us take a look at the prior period, the previous three quarters, and indeed, the previous years, and we said, this because it was running this bad this quarter, maybe we should carry a bit more reserve for past quarters. So in the quarter, we increased reserves for prior periods by $60 million. And I think you were asking what those claims were, which I think John has.

Yes, I mentioned earlier, Amit, that we had approximately $45 million, which related to higher frequency of mid-sized losses in the marine and casualty subsegments. There were actually three. They were unrelated, although they were all personal injury losses in marine liability.

There was also, as a contribution to that $45 million, a pharmaceutical product defect claim in the global casualty area. Those are the main items that relate to the $45 million.

Got it. And what's the readjusted loss ratio now? At least that book is -- or what year is running at?

After taking account of these one-off losses?

Yes.

I'd say broadly, they would contribute, at $45 million, about 16 points on the loss ratio.

Okay. Maybe I'll follow up offline. I'll stop here. Thanks for the answers.

Okay, Amit, thanks for your questions.

Your next question comes from Josh Shanker.

Good morning, everyone. You guys get the award for most long-term planning on your guidance, of course. And I think that when you --

We're very happy to accept that award from you, Josh.

I'm not sure when you guys first talked about it. I think it was probably six quarters ago. Maybe I'm mistaken, but that seems about right.

Obviously, property CAT pricing is weaker now than when you set that guidance, and probably weaker than you thought it would be. Maybe you're telling me that's not the case at all.

Do you have less wiggle room on the long-term planning goal? Were you saying 10, you really thought 12 back a year and a half, and now you're closer to 11? Or there are really -- do your change the property CAT pricing have a negligible effect overall on that guidance?

Interesting question, Josh. First of all, we offered the guidance on this call last year, on the February call, so it's actually 12 months ago.

Okay.

And no, I think the property CAT impact is actually quite significant. We had expected prices to fall because as you know, the property CAT margin is never, ever stable. It's always going up or going down. But it's been going down quite a bit. What we've done is worked hard elsewhere to find other sources of revenue or retained profits to offset the reduced profit expectations from the property CAT.

And I think it was Amit earlier that I was explaining about the increased Reinsurance retention, but we hadn't got that actually worked out this time last year. So that's something that was very beneficial, and it does take away a lot of the downward impacts of the property CAT stuff.

We've also -- ACM is relevant here because that's Aspen Capital Markets, which is Aspen Re managing CAT capacity, CAT capital for third parties. And we have in some of the peak zones, which is probably still the area we are [pricing in times], we've been able to underwrite for third parties, and that has actually helped our bottom line a little bit.

And then I also mentioned earlier that the retro market is the softest part of the property CAT market. So we're actually -- we've restructured our retro. We're buying a bit more retro as a consequence of that. All these things help.

It's probably not a single thing you could point to, but overall, we managed to basically make up lost ground. I would say we're pretty much equal level of confidence today with where we were a year ago in terms of expecting to hit the 10 ROE this year.

It helps, of course, we're closer to it now. We know more than we did a year ago, so (inaudible) maybe in some ways, we're more familiar and maybe slightly more confident.

And so if I'm going to paraphrase that you had to work harder than you thought you would, would find some incremental earnings power, but overall, given the fact that you have more clarity now, you're about the same place you thought you were a year ago for 2014.

Yes, that's fair. Same place, maybe slightly better place because we're closer to this year. We know it better than we did a year ago.

And in terms of the rating agency thoughts on CAT versus the rating agency thoughts on your overall business, to what extent do you think the greatest bounds or constraints are on your capital management? Is it the overall Aspen business, or is it your PMLs that are guiding right now how much you can buy back?

It's probably the overall business. I will just tell you that if you -- and this is today. In three month's time with another renewal season might change. If you look at our peak zone net retained CAT, I don't mean the gross level, I mean the net retained, we're actually $50 million lower in terms of our net retained peak-zone wind CAT exposure than we were a year ago, so we actually, perhaps, got more head room on the CAT side.

If we see some deals we like, we could use that again. I'm not saying that is money to buy back shares. It's money, it's capital, it's not working as hard as it might right now, but it could be put to work. Or it might buy back shares. We'll have to see.

And this isn't the marketplace where you would want to maximize your PMLs, I assume?

That's exactly why it has trended down year on year in terms of peak zones.

Josh, if I may, in terms of our ability to continue buybacks and the factors that affect our decision, (inaudible) as part of our guidance, we've said that we would -- we've assumed $185 million of CAT losses, and clearly, that's a consideration.

Others are the amount of unrealized gains and losses, particularly as they affect OCI expanding their anticipation of increased interest rates and how much we choose to invest in alternate assets. So this is a very real and live decision-making process that we go through all the time in terms of balancing the decision to buy back capital with where we think we might earn that capital in the business or get enhanced returns from alternative assets.

That makes perfect sense. Well, good luck in 2014. I hope you deliver.

Thank you very much.

Thank you, Josh, appreciate that.

Your next question comes from Dan Farrell.

Hello, good morning. Just on the increased retention in Insurance for next year, any particular quarters where it will hit more? I think you obviously see it a lot more in the first quarter. Should we see a larger proportion there? Will all quarters to some extent be seeing increases?

And then thinking about the ratios, obviously, earned premium will have a benefit on both. Are there any other of moving parts of ratios to think about with the changes to the Reinsurance programs? Thanks.

In terms of you how that's going to spread across the year, it's going to be pretty even. A lot of our Reinsurance outlook is 1/1, so that would just be earned quarterly through the year. We do have a few programs, not too many, that are in the spring, or even there's a couple in July. So that -- those are going to be a little bit loaded to the back of the year. I wouldn't say it's 25% each quarter, but it's probably not too far off. Second part of your question, Dan, would you mind -- I couldn't quite capture what you were asking me.

I'm sorry, just the expense ratios, acquisition ratio, G&A ratio. Obviously, the earned premium benefits, I'm trying to think if there's any other component changes we should be thinking about with the meaningful change in the Reinsurance structure.

If your question is one about the overall expense ratio and the way it's moving compared with last year --

Sure, sure, you can take it from that approach. That's fine.

Does that work?

Sure.

If it's on the G&A ratio in particular, which as I said earlier, that's increased slightly with -- partly due to -- in the Reinsurance segment, I think it's fair to say, given the standout year that Reinsurance has had, there are higher performance-related accruals compared with last year.

And in Insurance, if anything, which is what we'd expect, the G&A ratio is trending down, and actually it's been improved by about 1 percentage point compared with 2012 as we've grown into our cost base, in particular, in the US. Does that help, Dan?

Yes, that's good. Thank you. And then just on the reserve review in marine, transportation and energy, you said you did a detailed analysis off of seeing some increased frequency. Are there any other lines that you also did detailed reserve reviews on and came out fine? Was there an overall reserve review? I'm just trying to just think if that was the only piece that was drilled into to that level.

Our reserve process is very thorough, very meticulous. We look at every line in some detail every quarter. Then we select other lines about once a year on a rolling basis that we take a look at more deeply.

We have our external actuaries take an overall look at everything every quarter, and any issues that come up, we take a deep dive, and they will take a deep dive as well, and then we compare notes and so on. So pretty much everything gets its tires kicked pretty thoroughly.

What the marine, energy, liability did was it came up and said, you need to kick me a bit harder. Nothing else did that in the year, so nothing else required extra additional attention. But let me reassure, everything gets a pretty thorough examination at least annually in Aspen. Okay. All right. Well, thank you very much. Sure, Dan.

Your next question comes from Max Zormelo.

Hi, good morning.

Wanted to talk about margins for a second. Thinking about 2014 versus 2013, given all the different moving pieces, the business portfolio optimization going on, how should we think about margins this year versus last year? How do you -- should we expect margins to deteriorate?

Let me start off, if I may. In some parts of the business, you certainly won't see a deterioration in margins, and in particular, in the US business, which, you'll be aware, we've invested in over the last few years.

And we're expecting to see the fruits of that investment further come through in 2014 as we have done in 2013. And to come back to a previous question, that's one of the components of the improvement in ROE and the 10% ROE guidance that we're giving for this year.

Okay. And in terms of -- just related to that, Chris, I think last quarter you gave the rate increase through the first nine months as about 3% across entire book vertically. Could you give us an update on that? What is it now? What is the loss trend across your book?

In terms of -- not really very much happened in the fourth quarter. It's our smallest quarter by some margin in the Reinsurance side, and it's actually not much in the Insurance at all.

But overall, if you're looking just at that last quarter, Insurance was still up by about 3%, so it's still moving in the right direction, maybe not as fast as it was a couple quarters ago, but still moving nicely. Reinsurance, if you're thinking about 1/1 renewals, overall blended basis was about flat.

Okay. And the loss cost trend?

Nothing really significant to report there. Our book is a spiky book with a lot of different areas of exposure, so in most of our lines, it is very hard to say quarter to quarter there's a meaningful trend.

Some areas, UK, employer's liability, public liability, it's actually quite favorable. US shows an absence of major losses reported. A lot of what we're really doing there is holding IBNR. Nothing, I would say, to worry about in terms of loss trend.

Okay. And then the second question is the -- if you could, update us on the excess capital position and how you're thinking about share repurchases this year. You still looking at dividends and buybacks about equal to operating earnings?

The excess capital position remains at about $200 million, which is, I think, a number I've given on previous earning calls. We've certainly -- during the fourth quarter, we had earnings of about $90 million. That's was offset by OCI reductions and dividends and some buybacks.

In terms of going forward, we are very much committed to a share buyback program. We've executed -- continue to execute against that program so far during the first quarter with $22 million of buybacks. Going forward, we'll pursue on an opportunistic basis, and as I said earlier, taking into consideration capital requirements for investing in the business and new business opportunities, market conditions, as well as the prevailing share price.

Okay. Last one, if I may. Any adverse development on the New Zealand quakes?

On New Zealand, a small amount of deterioration, so a couple of million dollars maybe in the fourth quarter where we got an updated advance. But overall, for 2013, we've seen a net favorable development on our reserve estimates for 2012 and prior CATs.

Thank you.

(Operator Instructions) Your next question comes from Brian Meredith.

Good morning. Chris, a couple of questions here.

The first one, I'm just curious, your PMLs have come down some, but if I look at your 1/1 renewal information you gave us, about a 13% increase in property CAT business and a fairly sizable increase in other property business. I'm just wondering what types of business was that that it didn't increase your PMLs?

Well, let me just repeat very carefully, Brian -- and good morning to you -- what I just said. I said on net retained peak zone, wind PML is down, down by $50 million. Actually, at a gross level, it's up by $100 million. That's one thing to bear in mind.

So the difference between the gross and the net in CAT Reinsurance is actually getting bigger. Now also, there are other places in the world we write CAT. It isn't all about the Florida wind, and we, as you know, we've got a very successful operation out of Zurich, doing business in Europe, particularly focused Eastern Europe. We also have the operation down in Singapore, the Asia-Pacific region, also Latin America out of Miami. All these guys are growing very nicely.

So if you like the non-peak zone, people would call the tier-2 CAT exposures, those are growing. They wouldn't show up in that peak-zone measure. But if I point you to a different metric, which we mentioned, called the CAT load, for the last year that was 190, this year it's 185.

So you can see overall, CAT is down a little bit, but it's a more diverse set of CAT exposures. It's a bit less peak and a bit more reliance on third-party capital interventions where we're underwriting for other people or increased use of retro.

And then the final little bit -- so it's a long answer, Brian. But the final thing you mustn't lose sight of is in the US, the E&S property is reducing. We said a year ago we're doing that. We also have on the [itinerary] calendar energy operation. There is some CAT risk that comes with those big oil, gas, energy-related risks as well. So that will be one of the plus factors actually increasing it again.

Okay.

Does that solve it for you?

Yes, that's good. The other property, what was the big increase at 1/1? I'm just curious. You give us the four metrics. One is property CAT, and then other property was up fairly substantially.

Need to check into that. What that could be is we hired a couple of guys in our Rocky Hill operation to put a bit more emphasis on US regional business.

We've always been a big writer of CAT. We've always been pretty much a large company writer, and I think we've been missing out on some good business, the smaller accounts, the mutuals, the regional companies, et cetera. Those guys had worked very hard and were extremely successful 1/1. And I think that probably is the difference that you're seeing there would be the US regional.

So more quota share risk programs.

Exactly. And maybe some risk (inaudible), too, but not the CAT written as such.

And then my second question, I'm sorry to beat on the whole ceded Reinsurance, but it's an important part of the whole guidance here. What is the premium associated with a $25 million of savings, number one? And then number two, I'm just curious, if you had taken the changes you're making to the program for 2014 and overlaid it on 2013, what would the savings look like?

I don't know the answer to your second question, actually. I suspect broadly similar.

Okay.

Maybe, as we're a slightly growing business, it may be even a little smaller in 2013 than it will be in 2014, but not order of magnitude difference. Difference in spend.

How can I put it? 2013, on the Insurance side, the ceded ratio was region of 20%, and this year, it's going to be region of 15%. And that 15% is actually going to be again next year because some of what's going out this year is coming out from business that was placed -- Reinsurance contracts were placed last year.

Great. That's helpful. Thank you.

Your next question comes from Josh Shanker.

Yes, just some back up. Following up on Brian's question about increasing in non-peak zones, I had a conversation with James a couple of years ago following the Japanese quake, and I think you guys reduced your exposure in Japan at the next renewal. Are you still concerned about quake pricing? Or have you taken it back to where it was before?

No, actually, with Japanese quake, Josh, you really get one chance a year to write it, and that's in April, so that hasn't come around yet. But our view in Japan is pretty much the same as before, which is this Coulomb stress transfer thing, we are scared by it.

We think that that last earthquake increases the probability, or may increase the probability of a loss in (inaudible), so we took our exposures down, and that's not one that is earmarked to grow again. It's more what we just talked a moment ago about, the US regional.

That would be non-peak zone. But it's going to be mainly the Aspen Re Zurich, Singapore, and Miami operations that are contributing to it, but not necessarily the Asian peak zone of Japan. Not at all.

That's exactly perfect answer. Thank you.

Glad to hear it, Josh.

At this time there are no further questions. I will now turn the call back over to the speakers for closing remarks.

Well, thanks, everyone for listening to us this morning. Thanks for joining us on the call. Let us wish you a very pleasant day. Good-bye.

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