Aspen Insurance Holdings Ltd (AHL) 2015 Q2 法說會逐字稿

Good morning and welcome to the Aspen Insurance second-quarter 2015 conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Kathleen de Guzman, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Kate, and good morning. On today's call, we have Chris O'Kane, Chief Executive Officer; Scott Kirk, Chief Financial Officer; and Mario Vitale, CEO of our Insurance business.

Last night, we issued our press release announcing Aspen's financial results for the second quarter 2015. This press release, as well as corresponding supplementary financial information, can be found on our website at www.aspen.co. For the replay numbers for today's call, please check the press release on the website.

Today's 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.

Today's presentation also 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 will now turn the call over to Chris O'Kane.

Thank you, Kathleen. Good morning, everyone. Aspen reported diluted book value per share of $45.16 at June 30, 2015, and operating ROE of 10.6% through the first six months of 2015. Our reinsurance business had another very strong quarter with an accident year of ex-cat loss ratio of 51.4%. Continue to execute our plan of strategic growth by targeting work rate areas where rates are less pressured such as other property and specialty and utilizing our close client relationships in tailored solutions as well as our international office network to gain share in those areas.

In insurance this quarter, the rate environment in some areas was under intense pressure, but in other lines and geographies, rates held steady. In the US, the rates have held generally better than the international markets. Overall for the quarter, the US rates were down 1%. Our US insurance platform continues on its path of measured growth. We are deploying capital in areas where rates are less pressured and utilizing our differentiated services to attract quality clients. In international, the rate environment varies widely by line. Overall, international rates were down 2%. In energy, physical damage rates were down as much as 14% but in professional technology rates are flat, and UK regional rates were actually up slightly.

In the quarter, the Lloyd's energy markets experienced meaningfully increased competition. This coupled with recent historic low loss experienced led to intense downward rate pressure. We chose to allocate capital away from those markets, which resulted in a significant decrease in gross written premiums for the quarter. We're redeploying some of the capital to areas of insurance with less rate pressure. We believe we will grow in such areas in the second half of the year.

Now I would like to turn it over to Scott for some comments on the financial results, and then I will make some further remarks.

Thanks, Chris and good morning, everybody. Operating earnings per diluted share for the second quarter were $0.99, and annualized operating return on equity was 8.8%. For the first half of 2015, operating earnings per diluted share were $2.39, and annualized operating ROE was 10.6%. Diluted book value per share was $45.16 at June 30, 2015, up 7 basis points from December 31, 2014. The movement reflects a positive impact from increased retained earnings and a negative impact of $1.86 from other factors including a decrease in the mark-to-market gains in the fixed income portfolio and the negative impact of foreign currency movements that we experienced primarily in the first quarter.

Gross written premiums for the group was $723 million in the quarter, a decrease of 7.3% compared with the second quarter last year, while underwriting income was $39 million. Underwriting income was impacted by approximately $40 million of midsize losses in our insurance segment, with the majority of losses in energy and, to a lesser extent, property. The combined ratio was 93.6% with $12 million or 2 percentage points of net cat losses in a second quarter. Reserve releases were in line with a year ago at $31 million or just over 5 percentage points.

I will now provide some color on our segments. In the reinsurance segment, gross written premiums decreased 12.6% to $261 million. In property cat, where rates continue to be under the most pressure, we remain disciplined and choose to retain less exposure. It specialty and other property, it is a different story. In the course of year, we have been successful in working with our brokers and clients and have written several attractive new treaties. On an underwriting year basis, specialty gross written premium increased $78 million or 35%, and property other increased $89 million or 30% compared to a year ago. We wrote two large pro rata deals, one in specialty and one in property other, each circa $50 million of premium.

In our financial statements, however, we recognize these pro rata premiums as the underlying risks attach. Therefore, you will see these premiums appear in the GAAP financials over time. We currently expect that the level of reinsurance gross written premium in the second half of 2015 will meaningfully exceed the level of GWP in the second half of 2014. The reinsurance segment recorded underwriting income of $66 million in the second quarter and a combined ratio 75.3%. There were $2 million or just under a percentage point of net cat losses in the quarter related to US storms. We're $24 million on 9 percentage points of favorable loss reserve development in reinsurance in the quarter with releases in all sub segments. The ex-cat accident year loss ratio was an impressive 51.4%.

In our insurance segment, gross written premiums decreased 4% to $462 million in the second quarter. The decrease was largely driven by decline in the marine, aviation and energy sub segment. In the Lloyd's energy markets, a combination of intense competition and rate pressure resulted in rates offered that were not in our opinion reflective of the underlying risks. Offsetting this, the property and casualty sub segment was up 15%. The US teams continue to drive the majority of insurance growth as they gain further scale.

For the insurance segment, we expect the level of GWP in the second half of 2015 to slightly exceed the level of gross written premium in the second half of 2014. The combined ratio for the insurance segment in the second quarter was 103.6%, $10 million, or 3 percentage points of net cat losses related to US storms. As I mentioned earlier, the insurance segment recorded an above average $40 million in midsize losses in the quarter. Approximately $20 million of losses are in energy and the result of significantly higher loss frequency that we have seen for the last four to five years. In addition, there were $15 million of fire and weather-related losses and a $5 million [raw] loss. The accident year ex-cat loss ratio for the insurance segment was 70.9%. The exceptional level of midsize losses accounted for 12 points of the accident year ex-cat loss ratio. In insurance, there were $7 million or 2 percentage points of prior-year favorable development in the second quarter, largely from our short tail lines.

Turning now to expenses, the operating expense ratio for the group was 15.7% for the quarter compared with 16.8% a year ago. For the half-year, we have also seen a decline in the expense ratio from 16.6% to 16.4%. As we gain efficiencies and with the US platform continuing to gain scale, the G&A ratio should continue to decline. In the first half of the year, G&A dollars were $198 million. Given expected performance, we anticipate the G&A dollar spend in the second half of 2015 to be less than the spend was in the first half.

I will now move on to investments. Net investment income was $47 million in the second quarter broadly in line with the first quarter. Net investment income to the first half of the year is a reasonable run rate for the second half of the year. For the quarter, the total return on our aggregate investment portfolio was a negative 0.56%. This was mainly due to mark to market losses in the fixed income portfolio I mentioned earlier. The fixed income book yield in the second quarter was 2.57%, in line with the first quarter of 2015, while the duration of the fixed income portfolio was 3.38 years including swaps.

We continue to actively manage our excess capital. We repurchased $47 million of ordinary shares in the quarter and $84 million through the first half. We have $416 million remaining on our share repurchase authorization. We remain focused on managing our capital as efficiently as possible, and as you would expect, there are a number of different variables which are considered when deciding best how to allocate capital. These include business needs and opportunities, rating agency and regulatory capital requirements, interest rates and the market valuation of our shares. So based on the analysis of all of these variables, if there is excess capital available, we will look to opportunistically return capital to shareholders.

I also wanted to highlight that we've enhanced our P&L disclosures this quarter. If you look at our Investor presentation on the Investor Relations section of our website at www.aspen.co, you will see on pages 17 and 18 our new disclosure. In order to bring disclosure more in line with our peers, as well as provide more information on our underlying risks, we have split US All Wind into three regions: Texas and Gulf Wind, North East and Mid-Atlantic Wind and Florida and Southeast Wind. We've also provided the P&Ls as of April 1 on the same basis for easy comparison.

So in summary, our business is in good shape, and we look forward to maintaining a trajectory of profitable growth for the rest of 2015 and beyond. We continue to expect an 11% operating ROE for 2015. This of course assumes normal loss experience, our current yield interest rates and our prospective view of the insurance rate environment.

And with that, I will now turn the call back to Chris.

Thanks, Scott. In insurance, there are some areas where we are facing challenging market conditions and some areas where we see opportunities. In lines where competition is intense and rates under extreme pressure, we've taken action. We quickly moved to redeploy capital from these areas, and you will see this in the quarter results for our Marine, energy and aviation sub-segments. For example, in our energy physical damage lines, rates are down 14% -- rates are down even more for Gulf of Mexico. A few years ago, with pricing at its peak, we had over $300 million of exposure to Gulf of Mexico windstorm. With rates declining, we reduced that to $100 million at the beginning of this year, and as its competition further intensified, we withdrew capital, and now our exposure is only $18 million. We are moving our capital to other regions within this line of business such as the North Sea and such as Southeast Asia where we are seeing better prospects, rates are under less pressure and experience less volatile. Additionally, this relocation will result in a more diversified risk portfolio.

Our UK property and casualty operation is another bright spot. This is approximately a $200 million book of business with a five-year combined ratio just north of 80% and comprises property, liability and engineering offerings, typically for UK small and medium enterprises. In the past, we tended to sell property and liability separately, and we began cross-selling about a year ago, which has led to some useful growth as our clients have appreciated the [morruns] offering and ease of access to our underwriters and their products. Another differentiator in our approach in the UK is that rather than merely selling a simple commodotized insurance product, we bundled this with risk management services giving clients advice on health and safety and other issues. Taking this approach to small and medium clients, we self select more risk adverse clients who tend to have better loss ratios. So it is good to report that this area which we call ARML, our regional initiative in the UK, is going very nicely at a rate of 12% for the first six months of this year and has a loss ratio of 44%.

There is still plenty of competition in the UK of course, but as the UK economic recovery gathers pace, we should see this translate into growth. For example, employers liability, a very successful line for us in the UK, is priced on payroll. So as unemployment reduces and payroll increases, so do employers' liability premiums. We look to this area as one for future profitable growth. In the US, in our professional liability lines, there is a similar tailwind. As the US economy continues to recover and we see higher billings from professionals, we would expect to get higher premiums on US professional liability lines. That coupled with history of attractive performances encourage us about the future of this area.

Now let's move onto reinsurance. Our reinsurance business continues its record excellent performance with a loss ratio of 42.8% through the first six months. I'm extremely proud of what our reinsurance team is achieving. We are aggressively pursuing opportunities in areas where pricing is under less pressure and where our on-the-ground presence internationally affords us access to the most sought-after risks. We foster relationships with our clients and provide solutions to their risk requirements. Our brokers tell us that we are helpful, responsive and one of the best reinsurers to do business with. Therefore, we often get the allocations we ask for.

In many parts of our reinsurance business versus other property in the US and specialty throughout the world, we tend to trade with medium sized or smaller clients. Although large clients are an important component of our portfolio, we are not dependent upon them. The market for medium-sized clients is often not as competitive and prices are frequently under less pressure. We're able to provide services for medium-sized clients that large clients may already have in-house. I'm thinking of things such as risk management, product development advise, modeling expertise. These clients are also more likely to depend on reinsurance year after year whereas large clients can decide to retain much more risk depending on the state of their balance sheets. For all these reasons, we are able to forge very close relationships with such clients and gain insight into the risks that they write. Therefore we have been successful in continuing to grow the [opal]reinsurance business while pulling back capital from areas where the rate pressure is intense, such as a lot of property cat reinsurance.

In the current reinsurance market, growth is absolutely not across the board. As we have said in prior calls, we are targeting areas where rates are under less pressure like other property, which includes our pro rata properties treaty, our risk assess treaty and of course our [factheta] business. We are also targeting areas like specialty reinsurance. The continued success we having is a result of having the right people in the right places so that the good clients with the good deals want to do business with us. It is not about one special product offering; it's the result of an established brand that is respected by both clients and brokers. We have hired industry leaders over the years specifically in these two areas, and they are generating good results. We have the people in place and the relationships established that enable us to maneuver through some tough market conditions while continuing to achieve strong results in growing the overall book. In summary, while conditions are not even across all markets, both our reinsurance and insurance segments have performed well, and we remain on track to achieve an 11% operating return on equity for 2015.

That concludes our prepared remarks, but we are happy to take any of your questions.

(Operator Instructions)

Amit Kumar, Macquarie.

Thanks and good morning.

Good morning, Amit.

Just a few quick questions. First of all, can we talk about the volatility we are seeing in the non-cat losses? And I'm just curious if it is in the nature of the book or if something else is going on. And could you also share maybe what was the premium associated with these losses?

Let me take that off, and I will give you some market numbers and then I think Scott might give you a bit of insight into our own experience. So I think a lot of them were coming from two sources. One is the energy markets and the other is weather. We take energy first. We reckon in the first half of the year there are about 20 energy losses somewhere in the world, and the total cost of those looks to us to be in the region of about $1.8 billion. That's a lot of loss. Now, energy's always volatile -- nothing happens or a lot happens. And if you look over the last five years, you probably have below average loss frequency, but now you have a six-month period where I think you have above average los frequency. I don't think you can pin it on any one particular event. These events are all over the world, I think it is just the way it is.

For Aspen, we had involvement in 3 out of the 20 energy losses making up about $1.8 billion, and that gives us something around $15 million net loss from energy. So that's a little spike in our own experience. I think in general the loss experience is one thing, and the pricing is something else. So the loss experience I will put down to fortuity rather than to bad risk engineering or any systemic cause, but the pricing in some of the energy particularly the energy physical damage in the Gulf of Mexico is now extraordinarily cheap. We see probably the most competitive conditions anywhere in the world in the London market and Lloyd's business which is why we have withdrawn from so much of it. I think -- I cannot associate the premium with the loss because the losses are in different areas. It is onshore, it is offshore, it's liability, it is property, so it is not all premium that we have in the buckets that's affected. But certainly it's an ugly experience for energy. For -- I think you mentioned weather before I hand over to -- you have your own view, we all have a view how bad the weather in the last half-year half year in the Northeast of America is. That has led to all kinds of losses and not just freeze and flood. It is not something you would expect everyone as you know.

Yes, it is Scott, let me give you a little bit more color on that on the $40 million of losses that we said. And to Chris's point I completely agree, it is about $20 million of those headline energy related losses that Chris referred to. There is $15 million related to the weather events that Chris said, and we also picked up a rail loss for about $5 million, so that gives you the broad spectrum of the $40 million. There certainly is no trend in there, they are uncorrelated. You can see they're across a number of market segments and different loss types within that. So hopefully that helps answer the question.

That is helpful. Just Chris, going back to the comments that premiums are in different buckets. Could you put it in a range? Are we talking about maybe $5 million of premiums generating this level of losses, or how do we as analysts get comfort with this number?

Of the $1.8 billion worth of market loss, and there are 20 losses involved, we write 3. So to tell you the truth, I don't know how much premium goes to pay the rest of those 20 losses. I don't have a way to detect that. We are in this business, the energy-related business in at least three ways, maybe four ways. We have a book of energy-related liability. We didn't actually experience any fresh losses in that, but that is around about something over the $100 million range, $100 million, $120 million of premium for us. We have energy physical damage, that tends to be around the world but offshore. That is -- in the past it was over $100 million, these days a little less than $100 million -- $80 million, $90 million, something like that. And you also have energy onshore, that book is really developing in probably North and South America,. It is a smaller and younger book, probably more in the region of $40 million, $50 million, something like that.

Now having named our three sources of energy, sometimes you are selling on an excess basis which we would do more in the P&C area, but you might get some energy exposure on high excess basis in there. Global excess casualty for us is also a little bit under $100 million of premium. So you can see it is very hard to attribute the losses that occurred to a specific premium. If you want to -- I think it's meaningful to attribute the loss to the premium for the risk concerned. There is not telling anything about the sector to a particular loss. That's about as far as I can go, Amit, in trying to help clarity.

Maybe I will follow-up off-line. I don't think I still have my answer. The second question I have is what level of cat load -- we talked about the $185 million cat load or something like that. What level of cat load are you assuming for the second half for your guidance? That's the only question I have now. Thanks.

Hi, Amit, it is Scott here. Just to confirm that we actually haven't given any guidance on the level of cat load. It is a variable feature, and it is one of those things we decided not to give guidance on this time around.

I thought number was given some time back on the cat load?

That number is now out of date, Amit, but our cat exposures have been trending down. So I will give you a clue. I will say it is out of date by being on the high side.

Got it. I will stop here. Thank you for all the answers.

Thanks, Amit.

Josh Shanker, Deutsche Bank.

Good morning, everyone.

Good morning, Josh.

So in the press release, you mentioned 23.9% growth in the US insurance business. We do not have a P&L for US insurance, can we talk about growth rate in the non-US insurance part of the insurance segment? To my guess, it would be sharply declined and maybe want to go into -- talk about rate a little bit, but I want compare and contrast International versus US insurance.

We have Mario Vitale who runs insurance for us here on the call today, so I'm going to hand it over to Mario in a moment on this. But they say football is again of a game of two halves, and our international operation, the last quarter was certainly a game of two halves. If you look at insurance, you've got the teams we've talked to you about areas like professional liability and management liability, surety, environmental and general casualty, and very nice pulls from property. All doing really very well, and selling our product -- the products sell in some time, with more and more client and broker appreciation. A lot of our distributors want to do more business, so that's getting on. And by and large the rate environment in the US was what we expected. I think I said on the call a [minus 1%] in our average rate across the whole book, and the variance around that one wasn't that great. The best was a tiny increase and the worst was a very modest reduction. So basically US can move forward in terms of pricing and in terms of production goals pretty much as we expected.

The international side had a much more turbulent time. I think I said on the call and mentioned damage where the average rate was down 14%, I think in the Gulf of Mexico might've been down 20%. I think in an area like aviation, I think the airline business was down by about 20% in a lot of cases. It was also good news on the international side. I think I mentioned UK property liability packages where we are selling more, UK employers liability and public liability we're seeing a little rate increase and we're seeing a little growth. But in those areas, it was mainly the energy-related stuff. We really seriously didn't like the business that was available, somehow that was true. We stopped writing it.

International, not US.

That book we put -- I know it sounds funny because it is off the coast of the US, but yes, we write it from London from Lloyd's, and we do it in the International book because it is written globally including the Gulf. But now we are as I said on the call virtually out of the Gulf with $18 million exposure. That's not P&L by the way, that is actually $18 million in total at risk, it is a negligible amount and it just --from watching what the markets is going to do.

So do you have at your fingertips a premium decline number for international insurance and can you parse how much of that is rate and how much of that is exposure?

I do not have that number at my fingertips. I would tell you though that the business we turned way that we expect to write, that was very big and we turned it away on grounds of rate. On the business we renewed on the international side, the average is still only minus [2%], which we do not feel too bad about. But if you go into the line of business, if something is 20% less than last year, we almost certainly non-renewed it, but if it is only minus [3%] we probably have renewed it. I'm conscious I'm not quite getting to the core of your question, Josh --

I just wondered -- you had fantastic growth in the US part of the business, it had to be offset by real shrinkage internationally. I'm just trying to put all the pieces together because sometimes we get qualitative information and other times we have a P&L. So I'm trying to fill out my hypothetical --

I get you. I think really it was our underwriters doing what we want them to do and reacting to what they saw in the market. The toughest without a doubt was in the Lloyd's energy market both on the liability side where there was renewed competition, one particular source, and on the energy side where the competition was more widespread. So we did what I think only rational underwriters can do, just turn away the risk that wasn't paying the right price.

Okay. Then switching over to the same discussion but I will tell you where I'm going on the profitability side of US insurance versus International insurance on attritional basis. And where I'm going is I want to find out how profitable US insurance is going and to what extent you are making use of your DTA?

Josh, it is Scott here. Let me take that question. Obviously we have invested heavily in US. You know the story, it has certainly been a very good one for us over the last few years. Admittedly, we are in the game of insurance, and this quarter we mentioned some weather-related losses and the US did pick those up. That certainly impacted the level of profitability this quarter that again, that's not a systemic issue. It was a pretty severe winter. I think we are not the only people who have certainly picked that up, so there's no real change in us in terms of the prospects, the US insurance, we are working hard. We are fast approaching the $600 million of net premium we talked about, and we are looking for a competitive expense ratio to result from that, so 16[%] or sub 16[%]. Let me just hand over to Mario for perhaps a little more color on that.

Hi, Josh, it's Mario Vitale here. I'm just echoing what Chris and Scott just told you, overall insurance is down on the top line by 4% as you indicated. And the US portion being a positive movement gaining scale as you just heard and the International -- especially in the areas of marine and aviation have the greatest amount of pressure. The second part of your question in terms of how bullish we are on the US market, I will say that generally from a rate environment and generally from terms and conditions and the positioning of our underwriters and where they are in the specialty classes of business particularly [thinpro] and particularly in many areas of the Property Casualty segment. They're positioned very well. We still see measured growth, we are still optimistic about where we see them performing in the rest of year, not just on the expense side but also as we gain scale but also on the profitability side.

As we said, the second quarter did have an aberration in there. It was generally midsize losses, weather-related, very concentrated in Northeast. As you probably know, the prospect for weather-related claims in the Northeast is generally good in the third and fourth quarter. Again, we don't know what cats may come along, but from an attritional loss ratio, we are quite optimistic. In the thinpro area, which is of course one of the seven nines of the nine lines of business that is doing well and making money in the US, we are particularly optimistic. We have a very laser focused professional liability area that is focused on very niche businesses in the architects area, lawyers, professional, surety in many other areas where the prospects are good both for profitable growth and we think great results in the next couple of quarters. So we are quite optimistic about it.

Thank you for all the answers and good luck.

Thank you, Josh.

(Operator Instructions)

There are no additional questions at this time. This concludes our question and answer session. I'd like to turn the conference back over to Chris O'Kane for any closing remarks.

Thanks to all for joining us this morning, and wish you a very good day. Goodbye

Goodbye, thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.