Aspen Insurance Holdings Ltd (AHL) 2014 Q1 法說會逐字稿

Good morning. My name is Wanda, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2014 earnings conference call. All lines have been placed on mute to prevent any background noise. After speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn the call over to Ms. Kerry Calaiaro. Please go ahead, ma'am.

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 Limited. Last night, we issued our press release announcing Aspen's financial results for the first quarter of 2014. 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 Law. All forward-looking statements will have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For a more detailed description of these uncertainties and other factors, please view the Risk Factor section in Aspen's annual report on Form 10-K filed with the SEC and on our website.

This presentation contains non-GAAP financial measures which we believe are meaningful in evaluating the Company's performance. For a detailed disclosure on non-GAAP financials, please refer to the supplementary financial data posted on the Aspen website. I'd now like to turn the call over to Chris O'Kane.

Thank you, Kerry. Good morning, everyone. Aspen reported diluted book value per share of $42.72 at March 31, 2014, an increase of 4.4% from December 31, 2013. We delivered an annualized operating return on equity of 14.8%.

We are extremely pleased with the results of the quarter; pleased, but not surprised. Over a year ago, we announced a 10% ROE target for 2014. We are now one-third of the way through 2014, and I can confidently say that our 10% target is well within sight. We continue to make good progress on our strategic objectives, our operating results, and our profitability. We are confident that as we're -- that we are laying the foundation for continuing improvement beyond 2014.

We are executing on our three pillars to improve ROE that we implemented over a year ago: enhancing investment returns, managing capital, and business portfolio optimization. John will provide more detail on the first two pillars. I would like to spend a few minutes discussing the portfolio optimization as it is the most significant lever for achieving the 10% ROE target in 2014 and for continuing to increase operating return on equity in 2015 and beyond.

Business portfolio optimization is what we do at Aspen every day. It is the process by which we utilize and ensure we maximize the returns generated on our capital. We are continuously analyzing the market dynamics and identifying new opportunities for which Aspen is best positioned to capitalize. We then deploy capital to the most promising opportunities and withdraw capital from areas where the returns are not adequate.

Throughout the history of Aspen, we have invested in areas which where we believe we can generate superior terms and thus increase our operating return on equity. That said, in the past five years, we have [ratcheted] up the amount of investment in both Insurance and Reinsurance. We have now reached an inflection point. We are beginning to see meaningful returns from these investments. As we look forward, we expect the returns that we realize from these investments to accelerate, with profitable premiums growing at a much faster rate than our expense base.

Furthermore, because the growth is coming from less correlated lines, we will only need a small amount of incremental capital to support the premium growth. Thus going forward, we expect increased premium leverage to drive higher return on equity, or to put it another way, we will achieve significant increase in operating leverage. This expected premium leverage is a result of careful strategic decisions we made in both Insurance and Reinsurance.

As you know, we made an investment in our US Insurance platform. It's now close to reaching premium level which will result in a competitive G&A expense ratio. The first quarter of 2014 is the fifth profitable quarter in a row for our US Insurance teams. What we view as even more impressive is the very good loss ratios the US teams are achieving.

For the first quarter, their net loss ratio was an impressive 57%. We have established successful growing US Insurance franchise. The market is now familiar with our own driving capabilities, and it's bringing us opportunities which previously we would have to go seek.

Over the last five years, we have been in the investment phase, working to amass the premiums needed to cover investment we made in people, systems and infrastructure in order to build a first-class business. We have now turned the corner. In US Insurance, for the trailing 12 months, we had an excess of $400 million in net written premiums. We continue to expect that by the end of 2015, we will be at the level of $550 million net earned premium, which will equate to a normalized G&A rate of 16% which we regard as competitive.

On the Reinsurance side, we have invested in a number of areas which are now paying dividends. A few years ago, we concluded that clients want to do business with people located nearby, people that understand their cultures, and the environments in which they operate. We have now built out our Regional Reinsurance Network, which includes offices servicing Continental Europe, Asia Pacific and Latin America.

The regional strategy allows us to be closer to our non-US clients to develop deeper client relations and to provide them with better and more tailored solutions. We further strengthen our relationships by providing solutions across many risks, not just property cat. This enables cross-selling opportunities and helps us to grow our Specialty Reinsurance business. Specialty Reinsurance has [struck] to be the most profitable area of Reinsurance and we expect it to grow meaningfully in the future.

About a year ago, we saw an opportunity to improve the solutions being offered to Midwestern and smaller US clients. As a result, we advanced our US regional Reinsurance strategy. We strengthened our underwriting team and we dedicated additional resources in casualty [to sub acuity].

We are now able to provide better service to a wider range of clients across the US. The growth we saw at the January 1 renewals in our other Property Reinsurance business provides evidence that this strategy is succeeding. Our other property sub-segment had an outstanding [RE] season, driven by the fact that we wrote more new business in our US regional initiative in the January renewal period than we've planned to write for all of 2014.

The third area of major investment in the Reinsurance business was Aspen Capital Markets. The industry has been changing, and with the flow of return to capital into the Reinsurance market, we modified our strategy to capitalize on the opportunities. Return on capital is here to stay and we're utilizing that capital to better serve our clients.

At the January 1 renewals, we were able to write larger lines using Silverton Re and transferring some of our [rate accessories] to third-party capital, enabling us to efficiently manage our risk profiles across the [following achievements]. This, combined with increased [retrocession] protection, allows us to increase growth exposure for our Tier 1 perils while keeping net exposure as a measure of return to capital relatively flat.

We will continue to grow Aspen Capital Markets. In the first quarter, we increased the capital under management by another $20 million to a total of $125 million. I would note that Brian Tobeen, who leads this team, has just passed his one-year mark at Aspen. It has been a really impressive first year. Some may ask in Reinsurance market if it gets more competitive, do you need to be bigger? Our Reinsurance business is not only competing. We're winning. We're in the right places with the best people, providing sought-after solutions throughout the world.

During the January renewals, we were one of the clear winners in the so-called battle of the signings. We succeeded again with the [new] season where, once again, the market continued to be competitive. Through our strong client relations and excellent service, we gained access to the most sought-after risks to win that business.

In addition, our offerings have been enhanced by the success of our growing Aspen Capital Markets Group which affords the ability to offer more substantial capacity to our clients and profitable business while maintaining our risk profile. We expect to continue to grow all of our sub-segments in the Reinsurance.

Finally, as I have discussed with you previously in 2013, we restructured both our ceded Reinsurance and our retrocessional arrangements. We estimate that this initiative alone will generate $25 million in incremental net income in 2014, with a third of incremental benefit in 2015 of $20 million. This equates to a total annual net income benefit of $45 million per annum in 2015 onwards. In the first quarter of 2014, due to seasonality, we saw only a few million of the $25 million of savings come through P&L. The majority of the $25 million benefit for this year will be realized during the remainder of 2014.

At Aspen, we have spent the last few years investing in the business. We are focusing intensely, and patiently, and profitably growing our premiums, such that we could start leveraging these investments. We are now very pleased to see those investments beginning to pay off and drive meaningful increased premium leverage. The 10% operating return on equity we expect to achieve in 2014 is only a near-term milestone on the long-growth trajectory of profitable growth. We expect ROE to improve above 10% in 2015 and further again in 2016. You can see we are incredibly excited about the future of Aspen.

I would like to turn the call over to John for some commentary on results for the quarter.

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

Operating earnings per diluted share for the first quarter of 2014 were $1.55, and annualized operating return on equity was 14.8%. Gross written premiums for the Group of $856 million increased 11% in the first quarter compared with a year ago, with underwriting income of $88 million. The combined ratio was 88%, with $11 million or 2 percentage points, of net catastrophe losses in the first quarter.

For our Reinsurance segment, gross written premiums increased 7% to $472 million due to strong growth in other Property and Specialty. The segments recorded underwriting income of $73 million in the first quarter. The resulting Reinsurance combined ratio was very favorable at 73%, with $6 million, or 2 percentage point of net cat losses in the quarter, mainly related to Japanese snowstorms and US winter storms. In the first quarter, we saw meaningful improvement in the accident year ex-cat loss ratios in Property, Specialty, and Casualty.

In our Insurance segment, gross written premiums increased 15% to $383 million. This is the result of our Property and Casualty business. The combined ratio for the Insurance segment in the first quarter was 95% with $5 million, or 2 percentage point of net cat losses in the quarter related to US winter storms and UK floods. As Chris mentioned, the US insurance teams continued with their profitable development and achieved an impressive loss ratio of 56%.

As Chris also highlighted, we have worked from restructuring our Reinsurance and retrocessional arrangements and as a result, we have retained 82% of gross written premiums compared to 77% in the first quarter of 2013. Prior year reserve releases for the Group were $28 million, or 5 combined ratio points. This compares to $26 million in the first quarter of last year. In Reinsurance, favorable reserve development was $21 million, or 8 combined ratio points, largely from short tail lines.

In Insurance, there was favorable reserve development of $7 million, with over half from the property line, and the remaining coming from individually small releases in all other segments. For the Group, the overall operating expense ratio was 36.1% for the first quarter, a marked improvement from 37.5% a year ago, with improvements in both the policy acquisitions and expense ratios. The general and administrative operating expense ratio improved from 17% to 16.3%, reflecting the work that we have done on identifying and realizing expense savings as well as the continued growth in our US business.

I'll now move on to investments. Net investment income was $49.5 million in the first quarter of 2014 compared to $48.3 million a year ago. The increase in income reflects a larger global equity portfolio as well as a larger active base of $8.4 billion for the first quarter of 2014 compared with $8 billion a year ago. We expect investment income to approach $45 million a quarter, on average, for the remainder of the year.

We recorded a positive mark-to-market in the investment portfolio of $30 million during Q1, reflecting a $2 million gain in our equity portfolio, a loss of $2 million on our interest rate swaps, and a $30 million gain in the fixed income portfolio due to tighter credit spreads and lower yields in the intermediate to longer end of the curve.

For the quarter, our aggregate investment portfolio had a total return of just over 1% compared with a total return of 0.5% in the fourth quarter of 2013. The fixed income book yields for the first quarter of 2014 was 2.68%, down 6 basis points from the fourth quarter of 2013, while the duration of fixed income portfolio is 3.2 years including swaps compared with 3.17 years in the first quarter. Excluding the effects of our interest rates swaps, the duration was 3.5 years, in line with the fourth quarter.

Our alternative asset portfolio in equities, bank loans and emerging market debt now comprises $810 million, or 9.8% of total investments, the majority of which were invested in global equities. At March 31, 2014, we held $508 million in equities, up from $414 million a year ago, reflecting an increase in market value and an additional $40 million investments in a new minimum volatility equity portfolio in early March, 2014. We will continue to diversify tactically our investment portfolio during 2014 by investing in high-quality global equity income strategies.

We repurchased $31 million of ordinary shares during the first quarter. We have repurchased a total of $341 million of shares since the start of 2013. We continue to allocate capital to drive shareholder value, whether it be investing in new business opportunities, seeking higher risk adjusted returns in our investment portfolio, or returning capital to shareholders. I will now turn the call back to Chris.

Thanks, John. Now, I can't imagine anyone listening this morning who hasn't heard about Endurance's unsolicited approach. Our Board takes very seriously its fiduciary obligations to pursue all credible offers that have the potential to create superior value, and we have very carefully and thoroughly evaluated Endurance's proposal. There are a number of documents in the public record that clearly articulate our response. These releases and matters are all available on our website if you would like to read them.

Endurance represents a remarkable post-strategic fit for Aspen. The $47.50 per share proposal is a gross under evaluation of our stock. The [proposal] comes with significant execution risks, and material unanswered questions about financing. And this is a call to discuss our operating performance, and we are very excited about the results thus far and our prospects of future growth. We would like to focus on the quarter-to-quarter results and our strategic plans.

As I said at the outset, we are delighted with our results in the first quarter, with diluted book value of 4.4% at $42.72, annualized operating return on equity of 14.8%, a loss rate of 51%, and the combined ratio of 87%. I am delighted because our first quarter results, but I am even more than so, as I believe this is just a step in the direction that Aspen is going to continue to move going forward. We continue to expect to achieve an operating return on equity of 10% in 2014, assuming a pre-tax catastrophe load of $185 million, normal loss experience, the current interest rate curve, and insurance pricing environment.

Over the past five years, we have invested over $150 million in our insurance platform to build our underwriting claims, actuarial capabilities, technological and other infrastructure capabilities. While the ROE we generated during the investment phase was suppressed by these investments, we knew that those investments would help generate superior returns. Now we are starting to see the meaningful benefits that come from those investments. The 10% ROE we expect to achieve in 2014 is a stepping stone to greater operating ROE in 2015 and again in 2016.

The building blocks of the expected acceleration of ROE are growth in our US Insurance business, portfolio optimization initiatives, rising interest rates, and capital management. As we have previously mentioned, we expect to achieve premium scales in our US Insurance business in 2015, and we expect our business to be a strong contributor to overall results as we gain great premium leverage over time.

Our US Insurance business, net earned premiums grew 25% in the first quarter, compared with a year ago, and we are experiencing continued growth momentum with attractive loss ratios. Further, we expect our portfolio optimization initiatives, including the restructuring by reinsurance and retrocessional arrangements, combined with a rising interest rate environment to be a positive contributor to operating income.

In the aggregate, assuming precursory -- pre-tax catastrophe load of $200 million, normal loss experience, our expectations for rising interest rates and a less favorable insurance pricing environment, we would expect operating return on equity in 2015 to increase over 2014 in the order of 100 basis points. Beyond 2014, we expect to obtain additional continued benefits to our ROE from increasing operating leverage.

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

Thank you.

(Operator Instructions)

We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Amit Kumar with Macquarie.

Good morning. Two quick questions.

First of all, just going back to the discussion of the expansion in your ROE. Can you also address what you're thinking about in terms of [AYLR] in terms of reserve releases? And separately, if interest rates stay flat, how does that impact your goal? And does this guidance also include capital management actions?

Amit, I'm very happy to address those questions. The expansion in ROE doesn't concentrate any change in our reserve posture. We've talked about that in the past. We believe in more of a conservative reserving. We sit this quarter as we did last quarter around about the 86th percentile in terms of range of outcomes post-diversification credit.

That is kind of the zone in which we have operated for many years and which I expect to continue operating. So I would say we will not be relying on increased reserve releases to achieve what we talk about, nor do we expect the level of reserve releases in the future to deviate meaningfully from what we have seen in the last few years.

The expansion ROE is essentially the product of a five-year investment in the future of the business, $150 million I talked about just now paying returns. So in very simple terms, we see greater premium -- premiums largely coming from less correlated or non-correlated lines of business that are not requiring more capital; investments largely already made, therefore not requiring significant incremental expense, therefore better operating leverage.

You also asked about interest rates. Of course, I don't know or I don't think anyone does know the [future there] in the industry, so we take an assumption based on various interest rate curves provided by the banks which we think is in the middle of the road. Because we do that, we have a negative impact on AOCI every time this [risk up] happens. It has an effect on capital, but also has an effect on investment income.

Without interest rate assumptions, I think we would likely find ourselves to be overcapitalized and we'd have to address capital management in a more radical way than just contemplating the plan. The plan contemplates a degree of capital return to shareholders. If your flex interest range change, the degree of return of capital to shareholders would also have to flex accordingly. It actually doesn't have a very significant impact on ROE. I would think our forecast that I gave this morning, about 100 basis points improvement for next year over this year, stands for a good range of scenarios.

Okay. The other question I have is, going back to your concluding remarks, when you talked about the Endurance bid. I think you talked about how it undervalues your franchise.

I guess two questions coming out of that. First of all, what do you think is a fair value for your franchise? And second of all, hypothetically, if we were to flip this, can you outline what would you look for in a potential partner? Thanks.

In terms of what we look for in a potential partner, it would be a partner that has seen the road that we want to go down and has gone down it already to an extent that we have not done. So, for example, we have a very strong presence in Lloyd's; improving our presence in Lloyd's would be good. To be a bigger player in that market would be highly beneficial.

We have the presence in the UK insurance market, the regional market. UK economy has turned the corner. We have some very good people offering risk-managed products in the UK, and anything that, that opportunity would be beneficial.

In the US, we're growing our specialty insurance franchise; some areas grow faster than others. And any company that was doing things similar to what we're doing, and in a way it is culturally at one with the way we do it, such as there would be meaningful synergies -- that is of interest.

On the reinsurance side, we have a very strong franchise in the US, but we are wary of increasing our cat exposures, and the way we see US casualty reinsurance normally is a quite challenged business; normally I want to expand. So US -- outside of those areas, US in the specialty zones, US in the regional zones.

And then the rest of the world: Latin America, Asia Pacific, from a reinsurance point of view are very attractive to us -- high growth; [huge] margins. Some greater [in those] who are underwriting those regions, I admit, than others; but generally speaking, we think we get paid for the risk that we take. So reinsurance opportunity that accelerated us further down as fast as we want to take there. That's a very different picture in terms of what makes sense for Aspen for its shareholders than the company that you mentioned.

In terms of what we'd be looking to do otherwise, we have a great standalone plan. What we're really focused on is delivering. I think the results of first quarter show that we're delivering and we intend to carry on doing that throughout this year and the next several years. And we'll see a Company with better earnings, better ROE, and I believer a much greater recognition in the market of the value of the franchise.

And what -- I guess, what is a fair value? How would you characterize what a fair value would be for Aspen?

I understand why you ask the question, and I think you'll understand why I'm not going to respond to it with a number.

Okay. Fair enough. Thanks for all the answers.

Thank you.

Your next question comes from the line of Sarah DeWitt with Barclays.

Good morning.

Looking at the factors that you outline to expand ROE -- 100 bps in 2015. Can you just elaborate on those? And could you quantify the impact of each of those factors?

Sarah, thank you.

In terms of the expansion for 2015, it's really coming through the additional leverage we're going to get through premium growth. That comes in turn from the investments we've made, in particular in the US platform.

So what we're anticipating is, we see that, that premium growth come through at a greater rate than we're seeing the expense growth come through. In fact, we're already experiencing some of that additional leverage during 2014. So that's part of it, certainly.

Another part is anticipating an increase in interest rates and that will come through on our investment income. I would say those are probably two -- maybe the two main things, but the most significant is the leverage on the business.

Okay. So where do you see operating leverage being in 2015? And how much higher could net investment income be?

Well, I'd add one other fact that -- I mentioned in the script, is what we call the RRV. I'll just remind you, and maybe I'll list what that is. We used to buy -- in fact, we continue to buy quite an extensive reinsurance program, but we used to buy, really, a lot of reinsurance. We were ceding way over 20% of our business.

And when our teams were new, even though we recruit teams with great care and we onboard them with great precision, you don't know for a few years whether they're going to work out as you hope they will. So we took the view of reinsuring a lot of the business.

Now most of our teams have been with us for a minimum of three years. And they're performing; they're doing exactly what we want them to do so we are more confident about retaining more risks.

Using our capital model last year, we did a great deal of work to think how would we optimize this retention, how we optimize the business ceded. That's going to reduce the amount of ceded reinsurance over time. Take about a year and a half to achieve that by a couple of hundred million dollars.

The profit that we would have ceded away on that, this year is [quoting to] about $25 million; and next year, 2015, is about quoting $45 million. $45 million anticipated, expected, additional net income each year in perpetuity. It's a very big contributor to ROE expansion. I just didn't -- I want to make sure you didn't miss that one.

Right. That's helpful.

Sarah, in terms of the operating leverage, I mean, all I would say is we expect it to rise over the next few years in accordance with the rise in our topline growth. We're focusing on less capital-intensive lines, and what we're anticipating is that the growth in risk-adjusted capital supports the overall growth in those -- in premium income.

Is there a target premium to equity that we can look at?

No, we're not giving guidance around that. For the purposes of guidance, we're clear of our operating ROE.

Okay, all right, thanks.

And then, it was helpful that you outlined what factors that you look for in a strategic partner. Is there anyone out there that fits that criteria and would be willing and able to pay a financially attractive price? And have you gotten any other offers?

All I know is that there's loads of such people out there. However, what we're doing is running a successful independent business. We really have a stock that has trailed the value of the Company. We've been slow in coming forward to talk about the investments we made. Now is a good time to do it when they're beginning to pay off.

And what we're showing the market is, you haven't seen anything yet. You're going to see a vastly more profitable and successful asking business, which we think the market will recognize. So that's what we believe is the best way and the surest, safest way to create value for our shareholders. That's what we are focused on, Sarah.

Okay, great, thank you.

Your next question comes from the line of Josh Shanker with Deutsche Bank.

Good morning, everyone.

Chris, if I were to say that I'm fairly confident with these results that you could have had as good a result like this without the investments you've made over the two years, do you think that's a mistake in statement?

Yes, Josh, I think it is, up to a point, because -- what if I tell you about the investments a few years [in 2000] UK regional is now a good contributor. It's still relatively small. That's the business; we don't do in a lot of market. We do it in provincial cities in the UK. It's a risk-managed property casualty product. It's nice little contributor now.

It wasn't -- we built in the last years. And US Insurance is not profitable, although I think there's an awful lot more rewards to come out of that.

And some of the really [in sync things] on the reinsurance side where we're seeing margins include the Latin American operation, the Asia Pacific operation, the specialty initiative areas like agriculture, where we're growing. So, no, we would still be able to get good results, but we've got a better one because of what we've been investing in.

And what do you think the investments you made over the last few years have contributed to the 1Q 2014 ROE?

Josh, I'm not in a position to quantify that with precision.

Okay, okay. That was my question. Appreciate it. Thank you.

Okay, Josh.

Your next question comes from the line of Brian Meredith with UBS.

Yes, thanks. Good morning. A couple of questions here.

First, when I look at the topline growth in the quarter, Chris, is there anything that we should consider one-time transactions? Or is this pretty much a good growth rate that we should be looking for? Gross written premium --

No, I don't think there is anything anomalous in that rate, Brian. This is really a business that's firing on all cylinders. It's good on the insurance side; it's good on the reinsurance side. Reinsurance, probably cat, especially, presents some challenges; but with Aspen Capital Markets, we have a way of addressing those challenges. So I think what you're seeing this quarter is something that we're going to maintain for the next year or two.

Was any of the gross written premium from Aspen Capital Markets, or how much was?

And well, remember, the premium figure is $30 million-odd, but we're really taking a fee and a commission on that, so you need to interpret that differently between the gross level and net level.

Right. Okay.

And then I would say, Chris, if I'm looking at the quarterly results, and your return on equity that you generated in the quarter -- obviously, [light] quarter for cat losses, although there was some non-cat weather in the quarter. How would you view these underlying return on equity right now at a normalized? Are you already at that 10%-plus level or above?

I think we're very comfortable saying, we told you February last year, we'd do 10%; and I think that's where I would stick. It's encouraging that we've had a good quarter. It's stripped by the cats. It looks a little better than 10%, but we do write some volatile businesses and you've got to make some allowances for seeing that even the best run operations can go wrong, as [quarter in the smooth sails]. So let's stick with 10%, but feel there's a reasonable chance for an upside.

Great. And then I guess the last question I've got to ask here is, your thoughts on what your renewals are going to look like for the property cat reinsurance market?

Well, yes, that's got to be the one area this quarter in which I'm not for really upbeat. The downward pricing pressure continues on those. 10% in Florida doesn't seem unrealistic. It could be more. It could be worse than that.

The good news is that we've got less Florida business than many of our competitors. We've never really considered Florida specifics to be the best place to play. We like to have clients with [naturally] super-regional exposures and that's how we get our Florida business. And it's a bit better price if you go at it that way.

We also have Aspen Capital Markets, where there are people where cost of capital that maybe make some [a little] better there that we can represent. And so we can [underwrite for them]. And, as I said on the [pool], our reinsurance guys really are some of the best-connected, best-regarded people in the business.

So the clients that we want to do business with will sometimes, quite often actually, do deals with us and then a little bit better than the rest of the market. So while the market can be down and I think we could be cutting back on exposures, too, I think Aspen RE will be insulated of the downward trends to a certain extent.

Great. Thank you.

Your next question comes from the line of Max Zormelo with Evercore.

Good morning.

I want to talk about margins. The margins, core margins, improved quite meaningfully in both segments this quarter. And I was wondering what drove the improvement in the accident year loss for your ex-cats? And then related to that, should we expect the level of margin improvement to continue the rest of the year over into next year?

Yes, we did see a -- we have seen a marked improvement in margins. Remembering the first quarter of 2013, Max, we had a number of lumpy losses which affected the accident year ex-cat loss ratios. And that's one of the reasons that we are seeing an improvement in both reinsurance and insurance in the accident year ex-cat loss ratios quarter on quarter.

The other is, of course, there's a -- the denominator is bigger, so we've got improved net earned premiums quarter on quarter. Elsewhere, expenses have come down, and the expense ratio, the general and operating expense ratio, as I said earlier, has come down to 16.3% compared to 17%. We've been highly focused on costs over the last year, and we're building into our US cost base.

So I'd say this: it comes back to the question that Sarah asked earlier in terms of the additional leverage that we're going to get into 2015, in getting towards -- and the target that we have of the 11% ROE and the expansion of the margins that we see through the further build-out of the businesses. Premiums increase at a faster rates -- well, faster rates than the operating cost base.

Max, let me just add a word or two to that. I agree with what John said, but Aspen is an underwriting company founded by a underwriter. And you compare loss ratios with our peers over any period of time, you'll find that they're -- if they're not the best, they're very close to being the best. That's something we've always had, we've always seen.

To do that, we hire some very good underwriters and we give them a lot of authority. We also surround them with some very good actuaries, very powerful risk management. This is a carefully well-managed business.

We don't aspire to have the lowest expense ratio out there. You can't do that if you want to run the safest business. Our aspiration is to have a very safe business, very good loss ratio; slightly higher than average expense ratios. But a combined, it isn't just attractive, it's also attractive and safe and stable, avoiding the volatility that other approaches might in both.

All right, thank you.

Second question -- I think, Chris, I think I may have heard you mention you were expecting $200 million in reinsurance savings. Is that correct?

That's approximately correct, yes.

Okay. And in terms of the topline growth from the US insurance teams, I think you mentioned you're close to $400 million now. You're expecting to reach $550 million in 2015. That $550 million number I don't think is new, but just wondering, are you expecting some other growth besides that in the insurance segment?

Yes, we showed that number, Max, because that's the point at which the expense ratio hit 16%. We looked at our peers -- and most peers with similar strategies to us, and where there's a meaningful expense level is. And with 16%, we're in line. We're as good as everybody else, but we're not the best. So $550 million, which we achieve next year, aligns with 16%.

Of course, the US business is going to grow beyond that, and as it grows, that G&A expense ratio is going to fall still further, at which point we don't just become in line and reasonably competitive. We actually begin to develop an advantage in the US insurance business.

I just want to go back to the RRV question. What I expect from the RRV is, over time -- this will take about two years to work through -- is that we will spend a couple of hundred million dollars less annually on ceded reinsurance than we were doing for the last couple of years. So of course, that earns through -- takes a couple of years to earn through -- so the number this year, 2014, is smaller than the optimal number is going to be. I hope that's clear.

All right. Thank you.

Thank you, Max.

Your next question comes from the line of Ronnie Bobman with Capital Returns.

Good morning.

Ron, good morning to you.

Hello; thanks. I've got three questions, all sort of spread on topic, in no particular order.

I had a question on Aspen Capital Markets, and its disclosures to its investors -- the third-party investors. I was curious -- does Aspen Capital Markets provide those third parties monthly valuation updates on the valuation of their stake in whatever vehicle they've invested in? Or is it less frequent than that? If you could (multiple speakers) --

It's actually quarterly, Ron.

Okay. So quarterly valuations on their stakes and whatever entity they're an investor in, I guess.

Exactly.

Okay, thanks.

Okay, my next question was US insurance. I was wondering if you could provide some more detail on the classes of business that you're writing there, and particularly ones -- in particular the ones that are growing or the larger elements of that US insurance business.

If you could provide some insight -- I assume you've got a greater than average weighting towards new business as opposed to renewal, given its growth mode. If you could provide some figures on the mix of new versus renewal? And then also how the Company chooses to pick its loss picks for each of those lines, given that factor that being a younger and newer growing book.

Thanks a lot. That's it for me.

Well, Ron, I think those are excellent questions and I'll try and give you an excellent answer. I think the last question is one of the -- last part of your question is one of the most important parts of all. But let's just start about the business. As you've seen, it's deliberately quite well diversified.

There is no dominant player, but we've been in property for a long time. We've actually been in property since about 2004; and property, I guess, is the biggest thing [for components]. We do that out of Atlanta. It comes with some catastrophe risk, and we decided that the cat-exposed property on the insurance side wasn't the best place to be.

That was something we announced February last year, so we've been de-emphasizing the cat-driven part of that, using quota sharing, excess of loss reinsurance to lose and to pass down and funnel it; and also finally just making a smaller portion book. So we see that as a big investment property, but a lot less cat-driven than it used to be. So we're pretty happy and pretty comfortable with it. And it's E&S, so the renewal portion is going to be typical of E&S, but it's still reasonably high. It's not a new book.

I think the next biggest area would be professional lines. Bruce Eisler and his team, they've been with us now probably rising four years. So they're not so new either. They've just done a terrific job over the years. The whole point, when we decided on this expansion was, you don't want to rush. The last thing you need to do is turn out on the street saying, I'm the newest guy; I'm the cheapest guy; and you're going to get a lot of business that way that you're going to regret.

We said, you do not compete on price. You have a lot of connections through the industry -- producers, agents that you work with successfully; they're good experience. They are going to -- when they have a bad experience with another carrier, they're going to come to you. You're going to remind them of the good experience they had with you and your team. You're going to turn them into Aspen customers.

And that really is what Bruce and his guys have been doing. Bruce happens to be an exceptionally conservative underwriter. I like him a lot for that. So through his career, he probably produced loss ratios, close to 50%. But we said to Bruce, look -- you probably will do that one day. We certainly hope you do, but we think something more like the mid-60%s, just to be prudent, makes a lot more sense.

So for the first few years, we keep it sitting at 65%, and over time, if nothing bad happens, we'll see some reserve takedowns. We're probably just getting to that phase. I would think in the next year or two, in US Insurance where we're going to see some reserve releases. That's not been an area in the [growth] phase of reserve releases. But we have in other areas, like our D&O team.

D&O can be a much better business. D&O can run in loss ratios in the 30%s. The team we used to have, who is no longer with us, I'm pleased to say, they thought they were going to produce loss rates in the 30%s, and we said to them, no, no, no; we're going to go mid-60%s for you as well. And they would say, it's going to be better than that.

And we said, well, sure, we don't discourage that. That's why we hired you. But the way we operate here is to have very conservative initial loss base, and then over time, with a lack of experience, when we're confident, the book gets mature, you'll see the releases. It may take five or six years, but with that particular team which didn't work out for us, we applied our principles and I guess they got uncomfortable with them. They wanted a quick box, they wanted recognition of profit before it's prudent to do so.

So that deals with professional management liability, which is a smaller within professional. We're also in environmental liability, doing very nicely there. We've been in that area for a number of years in a smaller way. So again, that practice is a very conservative loss pick, much greater than the team of the individual we hired as (inaudible) in his career. But we expect the number to move into line in due course.

What else do we do? We've got a small but very valuable surety operation. Really, in surety, it isn't the losses. It's the adjusting expense, if you like, that is the issue there. But performance there is very encouraging.

We do some ocean and marine. We more recently got into energy, but energy is an area we know very well. Throughout my career, I've been involved closely with the energy business. I simply know how it tracks, how it runs, but Tony Carroll runs that. He's another very experienced guy. So he was one; his view and loss pick, my view and loss pick, and the organization's view and loss pick all are closely aligned. What Tony's built, we're going to see some reserve releases over time in that. But he's been with us about a year, so we're going to wait for that.

I hope that deals with the different strategies of your question, Ron.

Yes, thanks.

Actually I forgot; I have a third question and it touches on all of the M&A rigamarole. As it relates to employment agreements, HR -- and I am sorry if you disclosed this in an 8-K or some other filing, but -- I'm getting already worn down by all the back and forth on the letters. Should we expect any supplemental set of employment agreements, retention agreements --

Ron? Sorry. You just cut out there. I --

Sorry. I'm just wondering if we should expect -- or if you've already done it and I just missed it. Should we expect some additional employment agreements or some form of that (multiple speakers) --

I've got your question now. I have the confidence to say about our people -- all Aspen people, I would say, really enjoy working at Aspen. And while we have a legal agreement to protect them and protect the employer, they fundamentally want to work here, and they don't want to work somewhere else.

They like the Company. They like the respect that they're given. They like that it's not a command control type organization. They like being professional people who have the autonomy and are trusted to do their jobs well. So I think flight risk is actually very low for us.

That said, if things come up and the current circumstances can be -- could be destabilizing, for a Company with less well-aligned employees, it would be very scary. But we'll take a look on a case-by-case basis. We haven't had to do anything at all of that nature so far.

Thank you.

Thank you, Ron.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Management for any closing remarks.

Well, thanks, everyone, for listening to our call this morning. Have a good day. Good-bye.

Thank you. This does conclude the conference call for today. We thank you for your participation, and we ask that you please disconnect your lines.