Aspen Insurance Holdings Ltd (AHL) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Aspen Insurance third quarter earnings conference call.

(Operator Instructions)

Thank you. It is now my pleasure to turn the conference over to Kerry Calaiaro. Please go ahead.

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 third 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 laws. All forward-looking statements will have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For more detailed descriptions of these uncertainties and other factors, please see the risk factors section in Aspen's annual report on Form 10-K filed with the SEC, and on our website.

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

Thank you, Kerry. Good morning everyone. Aspen reported diluted book value per share of $44.60 at September 30, 2014, an increase of 9% through the first nine months of the year. We delivered an annualized operating return on equity of 10% in the quarter and 12.4% through the first nine months.

During the quarter, we continued to make progress on the strategy that we have been executing throughout 2014, to improve return on equity and increase shareholder value. We had solid performance in our insurance segment and another excellent result in reinsurance. We also continued our capital management program and repurchased $90 million or 2.1 million shares per quarter, and a further $53 million in the month of October.

Our gross written premiums for the quarter increased 12% from a year ago. This growth is a result of measured disciplined underwriting, as well as taking advantage of selective market opportunities. In the insurance segment, the US underwriting teams are now well-positioned in the market, have access to a diverse range of risks, and enjoy excellent relationships with favored producers.

Our strategy for the platform includes growth across the 10 lines of business. Previously, when we were building out the US, we had to seek out business that we wanted, and continuously communicate with the broker community about our underwriting aspirations. Now, the market is familiar with our expertise, offerings and risk aspirations. As a result, it is a much more efficient process.

While we continue to seek out attractive business, the type of business we want to write is increasingly being brought to us. We are successfully navigating a dynamic market, and positioning ourselves to obtain rates that, in many cases, are superior to the overall trends. As our teams are growing in areas where the market environment is favorable, and where we are able to differentiate ourselves and achieve pricing that we believe accurately reflects the risk.

In the US, through the first nine months of the year, we were able to achieve flat renewals on average. This average encompasses a range from as low as minus 5% in property, to as high as plus 9% in primary casualty. We do remain on track to achieve $550 million of net earned premium, and the corresponding 16% operating expense ratio by the end of 2015. The loss rates in the US have been at a very respectable level, averaging 59.4% through the first nine months of the year.

In international insurance, we continue to find niche opportunities to provide solutions to our clients, whether it be new products or identifying better ways of bringing products to market. For example, in the UK commercial markets, most of the our clients buy both property and casualty coverage. The more complex the risk, the more likely the broker is to place both pieces of business with one carrier.

Responding to this, we combined our UK property and casualty teams into one unit. This combination has allowed us to serve the market more effectively using leverage across classes, resulting in increased profile and enabling us to achieve greater alignment and relevance to our key broker partners. We're starting to see the results of this strategy with production running well over plan, with corresponding strong margins. This is just one example of how we are constantly adapting to the market and to our clients.

Across the entire insurance book, price adequacy has remained relatively stable. Yet there are some areas where rates are or have been under pressure such as energy property damage, where they have fallen 14% year-to-date, and aviation, which has fallen 7%. However, within the aviation market, where there has been recent loss activity, our overall rates have risen by 50% to 100%. We are generally pulling back from the areas where rates are suffering, and successfully allocating our capital to areas where pricing is holding steady or increasing slightly, such as certain parts of US casualty and also Marine energy liability, where we are achieving price increases of 9% year-to-date.

I will now move on to reinsurance. Our reinsurance business once again had a very strong quarter. We have an enviable, well-established brand, and our team is constantly evaluating market conditions to provide profitable opportunities even in the face of a very challenging rate environment.

For the third quarter, reinsurance had 17% growth in gross written premiums from a year ago, with which we were extremely pleased. This growth is primarily in the other property subsegment. We previously discussed other property and specifically how we recently capitalized on opportunities in pro rata.

In pro rata property, rates were more closely aligned with primary markets, and thus under less pressure than other areas of the reinsurance market. This quarter, not only did we continue to see rates in pro rata under less pressure, we also continued to see cedents cut down on the number of partners they trade with. In many cases, with a reduced number of reinsurers on the panel, the prevailing reinsurers can often get a larger land size.

This quarter, we benefited from a client doing just that, with a treaty that we have long experience of, and which has historically performed extremely well. The increased allocation to Aspen led to the growth we saw in other property in the quarter. This is a reflection of our team's excellent customer relationships and customer service. Historically, specialty re has been the most profitable subsegment in reinsurance, and it continues to be very profitable. In specialty re, there are some areas where rate is under pressure, but in other areas such as developing markets such as Latin America, we are finding many opportunities. Both property catastrophe, and casualty reinsurance markets remain under pressure, and we continue to take a very disciplined approach to writing that business.

In summary, we had yet another quarter of impressive results from our reinsurance business, which further demonstrates what a strong franchise and what a great team we have. Now, I would like to turn it over to John.

Thank you, Chris. We have reported good results for the third quarter, and through the first nine months of 2014. Operating earnings by diluted share for the third quarter of 2014 were $1.08. Book value grew 9% from December 31, 2013, or 10.1% excluding bid defense costs.

Annualized operating return on equity was 10% in the quarter and 12.4% through the nine months. Gross written premiums for the group of $653 million increased 12% in the third quarter, compared with a year ago across both segments, with underwriting income of $68 million. The combined ratio was 94.6%, or 91.3%, excluding bid defense costs with $17 million or 3 percentage points of net catastrophe losses in the third quarter, and $33 million or 5 percentage points of favorable prior year reserve development.

For our reinsurance segment, gross written premiums rose 17% to $257 million. As Chris explained, this is largely due to our being able to capitalize on opportunities in other property. The segment's recorded underwriting income of $57 million in the third quarter.

The resulting reinsurance combined ratio was very favorable at 79.5%, with all four subsegments of reinsurance performing well. There were $11 million, or 4 percentage points of net capital losses in the quarter, mainly related to European and North American storms. We had $26 million, or 9 percentage points of favorable loss reserve development, mainly from short tail accounts within property and specialty lines. For the first nine months of the year, reinsurance had a combined ratio of 76%, compared with 82.8% for the same period in 2013, whilst the accident year ex-cats loss ratio improved by 110 basis points to 50.3%, compared with 51.4% for the same period a year ago.

In our insurance segments, gross written premiums increased 9% to $396 million in the quarter. The US teams accounted for the majority of the growth, as they continue to build on the excellent progress that they have made thus far. The combined ratio for the insurance segment in the third quarter was 96.7%, with $7 million or 2 percentage points of pre-tax catastrophe losses related to US storms, and $7 million or 2 percentage points of favorable loss reserve development. In addition, there was a higher frequency of mid-sized losses in the insurance segment at $14 million, with over half of these from aviation losses. These losses came from diverse sources, are unrelated, and are not indicative of a trend.

For the first nine months of the year, insurance had a combined ratio of 95.7%, compared with 97.7%, for the same period in 2013, whilst the accident year ex-cats loss ratio of 61.5%, was broadly in line with the same period a year ago. The retention ratio, defined as net written premium as a percentage of gross written premium, decreased from 89% in the third quarter of 2013 to 83% this quarter. This is a result of timing of reinsurance purchases in our marine, aviation and energy subsegment, in addition to ceded written premium attaching to our US property book.

Despite this, we expect the retention ratio to increase over the short term, as we benefit from our internal reinsurance vehicle. Although it is early to point to firm conclusions, we can tell you that year to date, our vehicle has contributed an annualized 70 basis points to ROE. For the group, the overall operating expense ratio, excluding the defense costs was 35.2% for the quarter, a meaningful improvement from 38.5% in the same period a year ago, as we continue to gain scale in our US operations, and realize efficiencies in our cost base. For the first nine months, the expense ratio excluding the defense costs improved to 35.3%, from 37.3% for the same period a year ago.

I will now move on to investments. Net investment income was $48 million in the third quarter of 2014, up 7% from a year ago, with a higher contribution from our equity portfolio. We expect investment income to be slightly less in the fourth quarter, reflecting seasonally lower dividend income, as well as modest assumptions for principal pay downs within the fixed income portfolio.

Realized and unrealized investment gains and losses in the income statement in the quarter were nil, compared with $13.4 million gain a year ago. We also saw a $30.9 million net of tax reduction in the investment of AOCI in the quarter, compared to a $3.8 million reduction a year ago. For the quarter, the total return on our aggregate investment portfolio was relatively flat, compared to a total return of 0.8% in the third quarter of 2013. The fixed income book yields for the third quarter of 2014 was 2.65%, up 4 basis points from the second quarter of 2014, while the duration of the fixed income portfolio was 3.26 years, including swaps in line with the second quarter.

We continue to actively manage our excess capital, repurchasing $90 million of shares in the third quarter, and a further $53 million during October. As you know, we have a strong commitment towards running a capital-efficient organization and a track record of returning capital to shareholders if it cannot be put to work profitably in executing our business strategy.

In summary, our business is performing well. We continue to execute our plans with another good quarter's results. We will 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.

Thank you, John. We are now a month into the final quarter of 2014, and I can say with even more confidence, that we believe we will comfortably exceed our 10% ROE target for the year. We look forward to a strong finish in 2014.

Over the last few years, we have put in place the building blocks for our long-term strategy. We will continue to execute on that strategy in 2015 and beyond. As we continue to execute our strategic initiatives and allocate our capital in a nimble, decisive, and opportunistic manner, as stated in our press release, we believe we will achieve an ROE for 2015 of 11% and a ROE for 2016 between 11% and 12%.

As you know we established Aspen Capital Markets last year. Brian Tobben and his team have done an excellent job. We currently have $130 million of third-party capital, and the team has continued to build a strong track record for future products. ACM's total contribution to the group's earnings for all products is now in excess of $10 million.

In 2015, we continue to expand the ACM platform, with both an increased level of third-party capital, as well as adding new products that investors are looking to having access to. ACM enables us to meet the needs of our underwriting clients and our investors. Utilizing the capital in ACM, combined with other outwards reinsurance options, we are able to offer bigger line sizes so we can increase our gross exposures, while keeping our net exposures relatively flat.

With those larger line sizes, we are positioned to access the best risks, and provide them with the optionality they seek. In the property catastrophe market, where rates have been under increasing amounts of pressure, the introduction of capital to the lower return hurdle has allowed us to increase our offerings to our underwriting clients, benefiting them, benefiting ACM's investors, and also Aspen. As we continue to expand our offerings to third-party investors, we expect to generate an increased level of fee income, which is less volatile in nature, and an important facet of our diverse strategy.

There are other areas of reinsurance where rates are not as challenged. We're targeting growth in international markets such as Asia-Pacific and Latin America. These markets have a number of opportunities where we can capitalize on using our office in Singapore, and our Miami office, which serves Latin America. Many products that we have provided to clients in more mature markets like North America are not widely available in other geographic regions. Whether it is demand for products we know, and the rates are in-line with our view of the risk, we will be in position to win that business.

Through the first nine months of this year, we have grown approximately 20% in our emerging markets, which now account for approximately 20% of our total reinsurance business. We expect our emerging markets to be an area of continued growth for us in the future. In our insurance business, our US teams continue to focus on growing the platform. We are reaping the benefits of the investments we previously made, as evidenced by premium growth. This is steady calculated growth in lines and geographies where attractive opportunities are available.

In 2015, we will continue to build out the platform and specifically see growth opportunities in US energy and also in professional lines. In international insurance, we continue to target select markets where we have the expertise and creativity to help provide our clients with solutions to complex risks. There are areas where rates are under pressure, but there are other areas where the rating environment is not as stressed that we're targeting, such as data protection liability, credit (inaudible) insurance, and warranty and indemnity.

We are constantly evaluating new market opportunities, whether it is a need that has not yet been met by the existing market participants. We will quickly move to redirect capital to promising opportunities for profitable growth. As we look forward to 2015, we are building plans that will ensure that we successfully maneuver through an ever-changing marketplace. This is a dynamic group in our industry, and it is imperative to assess thoughtfully and then adapt quickly to the changing market.

It is not a time for rapid high double-digit percentage growth across the board. But nor is it necessary to hold back in growth, or to shrink across the board. We are highly confident that the nimble and carefully vetted approach we're taking towards selective growth, will provide an excellent path towards superior value creation.

Thanks for listening to us. John and I will now be pleased to take your questions.

(Operator Instructions)

Max Zormelo, Evercore Partners.

My first question is on -- Chris, I believe you mentioned 20% of growth in emerging markets, which now makes up 20% of the reinsurance business. I was wondering if you could delve a little bit into that, tell us what lines of business you are growing in? And how do returns on the emerging markets business compare to the rest of your reinsurance business?

Across emerging markets, it is quite diverse. First of all, let me clarify -- we are talking about the reinsurance side of the house, and we're talking about Middle East, North Africa. Not much in sub-Saharan Africa but obviously the Asia-Pacific region and Latin America. We are, I suppose, less keen on property in those areas.

We do write property in Latin America, of course we write some and property in Asia Pacific too. But areas such as construction, which we do on a facultative and sometimes a treaty basis, crop, agriculture, some of the specialty casualty areas, are growth areas. Small markets but capable of growth. Credit, sureties, these sorts of things, it is deliberately meant to be a diverse and well-balanced book of business.

The operating margins in Latin America tend to be quite good. The rates obviously are lower than in Western Europe and North America. We would generally say the rates are lower because on a risk-adjusted basis they are okay.

In other words, the objective risk that we're facing is lower as well. It tends to be somewhat less capital intensive business. And so if you look at it on a return on allocated capital basis, it looks extremely attractive.

Okay. That is helpful. My second question, you bought back about over 3% of shares outstanding this quarter, more in the fourth quarter to date, I suspect part of that is because you were out of the market in second quarter, and obviously it's been a benign storm quarter. I was just wondering, as we think about the capital management going forward -- one if you can update us on your excess capital position.

And secondly, how should we think of capital return for the rest of the year. Could you return more than 100% of earnings? Thanks.

Thank you, Max. It's John here. In terms of excess capital, we wouldn't give specifics around excess capital, only to say that we will continue to manage our capital effectively and look for opportunities to buy back capital, depending on retained earnings and the prices in the market. Going forward, for the rest of this year, if we see opportunities, then we will continue to buy back capital. And clearly we will balance that against opportunities in our risk assets in our investment portfolio. And of course opportunities in the business.

And Max, maybe I will just add to that. If you look at the history of the share price over the last six months or so, really starting in August and September there was a lot of volatility. We have a view about the company going forward, which is very, very positive. We have a view about our potential ROE as positive, and obviously the share price we expect to follow that.

So when we saw that volatility happening, particularly perhaps earlier in the quarter, we saw it as a splendid buying opportunity. If what we think is going to unfold -- which is a stronger share price does come to happen, the relative factions of buying back shares versus investing in the business are going to change, we have to evaluate that pretty much on a weekly basis as we go forward through the next six months.

Thank you. One last one if I may. Just a numbers question. The $7.8 million other expense this quarter, I'm wondering what exactly that is, and how much of it is occurring.

That represents -- Max, the proportion of income that is due to the third parties in ACM. And ACM had a good quarter. The other side of that -- you will see, within underwriting income.

In terms of whether we would expect it to repeat in future quarters, really, it comes back to the profitability of ACM, and the amount that we owe to third parties.

Okay. Got it. Thanks for the answers.

Josh Shanker, Deutsche Bank.

Thank you, everyone. Good morning. Could you walk me through the other items on the corporate P&L? Both the corporate expense, other, and the other income?

Yes. Josh, corporate expense, relates to the proportion of income that we give to the third-party investors in ACM. And that will change in each quarter, depending upon the profitability of ACM.

It was just a fantastically profitable quarter -- is that what is going on here?

Yes. That is right. It has been a very good quarter. As Chris said, we are very pleased with the success of ACM and the job that the team is doing.

Is there any way that I can model that more effectively going forward?

I think the thing to think about is on the net basis, in terms of what is due to third-party investors. You will see it come in the underwriting line and the equivalent number come out of the operating -- of the other expense line.

Okay. And the other income line?

That is the other income.

No -- I'm talking about comparing the -- let me find it -- if I look on the P&L, we have two items. There is the $20 million -- one second here.

Are you thinking about the non-operating expenses, Josh? The defense costs? That we put in $20 million --

It is a delay. I thought we would have seen most of that by the 2Q 2014 call.

All right. So what we did is we accrued for last -- we went through the -- bid defense. Clearly with the approach going away, we have taken all the remaining costs during the third quarter. That is the one-off cost you won't see any of -- [multiple speakers].

Okay. The distribution among the three quarters of 2014 surprised me a bit, I supposed.

All I would say as we have taken all of those costs. And of course -- they fall below operating ROE as non-operating costs.

Okay. Thank you. Everything else makes sense. Good luck in the remainder of the year.

(Operator Instructions)

[Maria Ukonova], UBS.

I have a number of questions. The first one is on reinsurance sessions in the insurance segment. Especially it was for the marine and the [nurturon] and the different programs. Why this session went up year over year?

I think you're looking three months to three months.

Yes.

What we experienced this year was a delay and the sessions on the marine and energy account. Really it is a timing thing, as much as anything, between Q2 and Q3. They were a few months later then they were last year. Really that is the main reason.

So is the expectation for the Marine line, for the full year -- of the premiums section would be actually larger then it was in 2013?

Not significantly so, no. But I wouldn't take anything from the trend that you are seeing from Q2 to Q3.

Okay. And on the programs?

Yes. On the programs, this really relates to the initiative that we talked about at the beginning of last year, where we were taking down the risk on our US property book. And as a result of that, the sessions that we introduced, we're seeing the effects of during this quarter. Again, there is nothing unusual with respect to that.

Okay. So if I look into the fourth quarter, should I see a similar trend?

Broadly, yes.

Okay. And then on the underlying loss ratio, I think in the prepared remarks you mentioned -- the non significant losses really should be taken out of the numbers, if we want to look at the trend. And I know this year, it was the energy, versus last year, there were a few -- if I look at the first nine months of the last year, there were some as well.

Is then the right number to look at exclude all of these significant losses? Or should we assume, even if it's lumpy, on the annual basis, there will be some points for those kind of losses?

Maria, I think you are referring to the insurance segment.

It is mainly an insurance. I think there were some in reinsurance as well last year, but we can focus on insurance.

That is right. I think on the insurance segment, if you were to look on a ex-cat accident year basis, you would see that the ex-cat accident year loss ratio -- the first nine months of 2013 compared with 2014 are broadly the same at 61.5%.

Maria, I would just add that you get -- ours is a specialty book. We write some significant line sizes. When we adopted the increased retention vehicle, we said, there might be a little bit more lumpiness in the quarters because retention are greater. I think you just have seen a quarter without it happening.

I think if you went to smooth that out and get a truer picture, look at the year to date. You could compare year to date this year with the year to date in 2013. You will see it largely unchanged. For us, that is the true story. And looking at a quarter is just going to produce maybe one or two little distortions.

So that 61.5%, that would be somewhat of a run rate that you would see that is the underlying trend for the portfolio?

The other thing I would say on this is the overall combined ratio for insurance is coming down. And again, that is what we anticipated, and it's a function of the expense ratio in insurance improving over time, as we build out the US business. We have seen that nine months this year -- compared with last year. Sorry.

On that, I actually note, the acquisition ratio is down as well in the nine-month basis. Is that the mix of business?

Partially, yes. It is due also to some restructuring and our ceded reinsurance purchasing in some of our lines of business, which provide an override of commission back from the reinsurer.

Okay. And the last question which was on the reinsurance -- with the change in the leadership -- and on the business performed very well, should we expect any shift in your expectation for business strategy or will this be a business steady as it goes?

I think if you look forward -- and I wouldn't expect this to show up in the next quarter or two. I think the leadership is going to be more dynamic. It is going to be more volatile. It is going to be more strategically ambitious.

And I look forward to talking about that. But I think we're will be doing that probably -- first or second call of next year. And I think we will have some exciting things to talk about there.

Right now, I would regard it as steady as she goes. Longer term, it's going to be a stronger business.

Thank you very much. That is all from me.

(Operator Instructions)

Amit Kumar, Macquarie.

This is actually Chris Martin this morning. Just a quick question -- following up -- we see in the emerging markets business, you're less keen on property. Can you explain in a year-over-year growth -- and the reinsurance item your other property reinsurance, and what is included in that?

Yes. Let me just say less keen on property is fair. That doesn't say we don't like any property in emerging markets.

I think it is just a mistake to let you -- for example, your Latin American can't be totally dominated by earthquake in Latin America. That would not be our doing, but some of that business is priced right.

The other property, actually, the growth is actually entirely attributable to a single deal. We have been on that deal for pretty much as long as I can remember. It has performed very well for as long as I can remember.

We were very pleased this year when the client was consolidating the cat a little bit and allocated us a bigger share. So it is the perfect kind of growth, because you are growing into a deal you already have. You don't have any incremental expense in doing it.

You don't need any more underwriting in doing it. You just take more of the stuff that is good that you already know. It is just absolutely the virtuous perfect way to grow a business.

Great thanks. Can you give a little more color on what that larger deal is then?

I'm not going to name clients --.

No, of course. What type of property?

It is property -- commercial investment property. And it is substantially North American, but it is global in nature, with a very strong track record.

Got it. Thanks. That is really helpful. That is all I had for today.

Okay, Chris, thank you.

Ladies and gentlemen, this concludes the Q&A session. I will now turn the call over to Chris O'Kane for any closing remarks.

Thanks everyone for your time and attention this morning. I know it is a busy day for us all. We appreciate your questions. Goodbye.

Thank you, ladies and gentlemen, for joining the Aspen Insurance third quarter earnings conference call. You may now disconnect.