Aspen Insurance Holdings Ltd (AHL) 2015 Q3 法說會逐字稿

Good day, and welcome to the Aspen Insurance third-quarter 2015 earnings conference call.

(Operator Instructions)

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

Thank you, Emily, and good morning, everyone. On today's call, we have Chris O'Kane, Chief Executive Officer; and Scott Kirk, Chief Financial Officer.

Last night, we issued our press release announcing Aspen's financial results for the third quarter of 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 our 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 at 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 when evaluating the Company's performance. For 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, Mark, and good morning, everyone.

This was a good quarter for Aspen. We continue to execute on our diversified business strategy across both our Insurance and Reinsurance businesses. We've achieved an annualized operating ROE of 9.7% through the first nine months of 2015, and diluted book value per share of $45.28 as of September 30.

Our insurance business had a very strong quarter, with gross written premium growth a little over 2%, a combined ratio of 88.3%. And I am happy to say, the best quarterly underwriting income that our insurance business has ever produced. Importantly, both our US and international platforms contributed significantly to this underwriting performance.

We continue to operate in a rate environment that poses some challenges. US rates overall were down by 1% in the quarter, while in international they were down by 2%. However, there was significant variation by line and geography, with some areas under continued pressure, while others were steady.

For example, in US property insurance rates were down 6%, while other areas, such as programs, were up as much as 7%. In this environment, we remained selective to flowing capital to areas where returns are more attractive, and where we can differentiate our services to attract quality clients. This was demonstrated by the good growth from casualty, where our team operates a highly focused approach targeting to find [industry] groups.

We also continued to see solid growth from our professional liability team this quarter. We built this business by consistently demonstrating our underwriting skill on complex accounts for targeted professional services firms, including architects, accountants and civil engineers amongst other. We have an established role within the respective niche professional liability business.

It is with a similar focus that we have built our US platform over the last five years. Back in 2014, we estimated that the US platform would achieve $550 million of net earned premium during 2015. We raised that estimate to $600 million earlier this year, and I am delighted to say that we are delivering exactly what we said.

We will comfortably see the level of net earned premium of $600 million in 2015, and will do so with a highly competitive operating expense ratio of under 16%. We are well positioned in the market with our specialty focus, underwriting expertise, strong distribution relationships, have access to a diverse range of risks. We've a solid base build on as we turn to the next stage of growth for our US platform.

On our international insurance platform, the market environment continued to provide a number of challenges with rates more volatile than in new US. While international rates overall were down 2%, there was significant variance amongst lines. [Energy] physical damage rates decreased 16%, while technology and liability increased 1%, and renewal and energy liability increased 5%.

In this environment, our team has remain disciplined. We chose not to renew some businesses in areas where we believe rates did not reflect the underlying risk and focused on better rated opportunities, such as our UK property and casualty book which continues to deliver good growth. The international team has continued to focus on underwriting discipline was reflected in the improved underwriting profitability we achieved in the third quarter.

Turning now to Reinsurance, our business continues to do very well. While the reinsurance rate environment remains soft, with overall rates down by 6% on average, we see some encouraging signs that the pace of rate reductions is slowing and market discipline is building. We continue to target and find success in those areas under less pressure.

With our strong client relationships in market, we continue to pursue on opportunities and areas that are attractive to us and where we can be selective in our growth. As a result, in the quarter, we improved our shares with number of these select [accounts], capitalized on profitable new business opportunities, and benefit from the larger (inaudible) deal that was written earlier this year to drive growth across the other property, specialty and the casualty reinsurance sub segments. It is clear reinsurance that our business remains in good shape.

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

Thank you, Chris, and good morning, everybody.

In the third quarter of 2015, we achieved operating earnings per diluted share of $0.93, and an annualized operating return on equity of 8.4%. Through the first nine months, operating earnings per diluted share were $3.31 and annualized operating return on equity was 9.7%.

Diluted book value per share was $45.28 at September 30, up slightly from December 31, 2014. The movement reflects a positive impact from increased retained earnings, however, this was offset by market-to-market reductions in the equity portfolio. Since the end of the quarter we've seen equity markets rebound, and the majority of these unrealized reductions have since reversed.

Gross written premiums for the Group was $721 million, an increase of 10.4% compared with the third quarter last year. While underwriting income was $43 million, despite approximately $50 million of total losses related to Tianjin explosion and natural CATs in the quarter. The combined ratio was 93.4%, including $19 million or 3 percentage points of net CAT losses in the third quarter.

The accident year ex-CAT loss ratio was 60.2%, up from 58.7% a year ago due to the $30 million or 4.7 percentage points of losses related to Tianjin explosion. Excluding the impact of Tianjin, the accident year ex-CAT loss ratio was down 3.2 percentage points.

Total reserve releases across the Company were $39 million or 6.1 percentage points, compared with $33 million a year ago. In our reinsurance segment, gross written premiums increased 23% to $317 million.

On our last call, I commented that we expected the level of reinsurance gross written premium in the second half of 2015 to exceed meaningfully the level of GWP in the second half of 2014. We continue to believe this will be the case through the remainder of the year. This growth is a result of the success our teams have had in working with brokers and clients to improve our shares with selected clients and to win additional business, in addition to a couple of large pro rata deals signed earlier in the year.

Premiums associated with these pro rata deals appear in the GAAP financials as the underlying risks attach. These deals reflected in the results of specialty and other property sub segments, accounted for half of the total growth in GWP in the quarter. Whilst we also expect to see a similar contribution to GWP in the final quarter of the year, the impact on net earned premium is more gradual as these pro rata deals earn through over an extended period.

The Reinsurance segment recorded underwriting income of $15 million in the third quarter, and a combined ratio of 94.7%. There was $17 million or just under 6 percentage points of net CAT losses in the quarter, including the Washington state wildfires, the Chile earthquake and weather-related events in New Zealand and Australia. The ex-CAT accident year loss ratio of 59.5%, reflects 9.5 percentage points related to Tianjin, excluding the impact of Tianjin, the ex-CAT accident year loss ratio was 50%.

We had $16 million or 5.7 percentage points of favorable loss reserve development in Reinsurance in the quarter. Which releases predominantly in our short tail lines. This was down from $26 million in the third quarter last year, although the comparison is distorted by a one-off release related to short-tail credit [and surety] contracts last year.

In our Insurance segment, gross written premiums increased 2.1% to $404 million in the third quarter, with the US teams continuing to drive the majority of the growth. The property and casualty and financial professional line sub segments were up 4% and 3% respectively. Growth in these sub segments was offset by a decrease in the property elements of marine, aviation and energy, where pricing pressure and competition are most acute.

The Insurance segment reported an underwriting income of $42 million, and a very favorable combined ratio of 88.3%. This reflected $2 million or just under 1 percentage point of net CAT losses, primarily related to US weather events. The accident year ex-CAT loss ratio for the Insurance segment was an impressive 60.8%, down 2.9 percentage points from a year ago.

In Insurance, there was $23 million or just over 6 percentage points of prior-year favorable development in the third quarter, and this comes across all lines. This was up from $7 million or 2 percentage points in the year-ago quarter. Much of this movement related to a favorable development on a number of claims in our casualty book, and is consistent with the increasing maturity of our US casualty exposures.

Turning now to expenses. The operating expense ratio for the Group improved 15.7% in the quarter, compared with 16.3%, excluding those big defense costs in the year a quarter ago. For the nine months, we've also seen an improvement from 16.5% down to 16.2%. These changes reflect both ongoing efficiency gains, and the benefit of scale in our US platform.

We've said in the past that 16% is a competitive expense ratio for our US Insurance business. I am very pleased to report that the operating expense ratio to the US Insurance platform was 14.9% in the first nine months of 2015. And largely consistent with our overall Insurance segment expense ratio or operating expense ratio of 14.6%. We remain very focused on this number for the whole segment going forward.

The acquisition ratio for the Group increased to 20.6% from 18.9% a year ago. For the nine-month period, we also saw the ratio increase to 19.8% from 18.8%. This increase is largely driven by increasing acquisition costs in our Reinsurance business, attributable to market conditions and a change in business mix in the quarter. With an increase in property pro rata and specialty business that have higher acquisition costs. And while the mix will move around from quarter to quarter, the year-to-date numbers for both Reinsurance and the Group are probably a better indication of the run rate for acquisition expenses.

Lastly on expenses, I wanted to comment on the $11 million in the other expense line. $8 million of the total other expenses reflects the proportion of income due to third-party investors in our sidecar Silverton rate. This amount reflects a relatively benign CAT experience for Silverton rate this quarter.

I'll now move on to investments. Net investment income was $45 million in the third quarter of 2015. For the quarter, the total return on our aggregate investment portfolio was 21 basis points, reflecting mark-to-market losses in the equity portfolio. The fixed income book yield for the third quarter was 2.5%, in line with the first two quarters of 2015, while the duration of the fixed income portfolio was 3.33 years including the swaps.

As we continue to actively manage our excess capital as efficiently as possible, and as you would expect, there are a number of different variables which are considered when deciding our best to allocate capital. These include business needs and opportunities, rating agency and regulatory capital requirements, interest rates and the market valuation of our shares. Based on the analysis of all these variables, if there is excess capital available, we will look to return capital to shareholders.

In this quarter, we found opportunities to deploy capital at attractive rates of return. As you can see from the growth we've achieved in our Insurance and Reinsurance businesses. As a result, we chose not to repurchase shares during the third quarter. However, we have repurchased $84 million of ordinary shares for the first nine months, and have $416 million remaining on our share repurchase authorization.

So in summary, our business is in great shape. And assuming normal loss experience in the fourth quarter, our current view of interest rates and our view of the insurance rate environment, we continue to expect an 11% operating ROE for 2015.

But what gives us this confidence? We have significant momentum in our Insurance business. And as you can see from the $42 million of underwriting income this quarter, why we're excited about the future of this business.

While Reinsurance underwriting income of $15 million in the quarter was impacted by $27 million Tianjin losses, our belief in the underlying earnings ability of the business, given normal loss experience, remains unchanged. Combined with our continued focus on expense management, we look forward to maintaining a trajectory of profitable growth through the remainder of 2015 and beyond.

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

Thanks, Scott. So, it was a very good quarter for our business. I'm sure that you, like us, are more interested in the future for Aspen. We're very excited about that future. Since our founding, we have successfully built a diversified insurance and reinsurance company that is an underwriting driven culture at its core. Many talented experienced underwriters from across the industry are drawn to that culture and have joined our businesses over that period.

We announced earlier this year that one of those underwriting leaders, Rupert Villers, would be stepping down as Chairman as of Aspen Insurance and President of international insurance. Rupert left Aspen last week, and he goes with our sincere gratitude for all that he has done for the Company over the last seven years. Since we made that earlier announcement, Anne Hawk has taken over Rupert's former role as President of International Insurance and has been doing an excellent job.

We've also actually been seeking someone to step into Rupert's underwriting role. And I'm delighted to announce today, the appointment of David Cohen as President and Chief Underwriting Officer of Aspen Insurance. David is an exceptional underwriter in the specialty insurance marketplace and a charismatic business leader. He has a demonstrated track record in building businesses and delivering consistent cross cycle returns, clearly aligned with what we aim for, for Aspen Insurance.

We see this as an excellent opportunity to bring on board an acknowledged leader the market, and significantly add to our specialty underwriting leadership. Working together with Mario Vitale and Bob Real, David will further develop and implement the Aspen Insurance strategy as we accelerate the successful growth of the business.

That concludes our prepared remarks, and we're happy to take your questions.

(Operator Instructions)

Vinay Misquith, Sterne Agee.

Good morning. In the US Insurance business, did I hear correctly that the growth in P&C was more on the casualty side not on the property side?

Hello, Vinay, it is Scott here. Actually in the US business, really there's two of the three sub segments that we have where the growth has been. It has been across our property and casualty sub segment, as well as a little bit in our financial and professional lines. So not in any particular area, but just across those broader two sub segments.

Sure. And to your comments and also the industry comments, is that pricing in property seems to be a little bit weak. Also pricing in out financial lines, especially D&R, seems a little vague. So curious as to where you're finding these opportunities in the US Insurance?

Sure, your general comments about the serving market I think I would agree with, and you've got to be very targeted. Most of the profit that we do is E&S property on an open market basis. That is a very, very well performing area for us, but is not a high growth area. The growth area is quite modest.

We have been doing about four or five programs over the last few years. I would say four the five are very successful, one has given us some challenges on the property side in fact, but there has been a little bit of growth in the program area.

Most of the growth would come from what I would call the specialty casualty area. And management liability is an area that we've tended to avoid. We've a small book of that, mostly done on an excess basis.

Professional liability, on the other hand, is one of the jewels in the crown. Bruce Lizer runs that for us in the US, and Ed Beckwith does it in the UK. Both outstanding underwriters with a pattern of great performance and growth.

We are very, very sensitive to the kind of client we are doing business with and what they need. And we are very good at figuring out solutions that require a little bit more effort, a bit more thought, that other people with cookie-cutter approach cannot actually deliver. And that I think is what is setting us apart in delivering growth.

Apart from that, we've got a great team in environmental. Is not a big area for us, but it's been an area of steady growth, and I think the returns there are okay. We've seeing some opportunity and excess auto in the last year or so, where the market leader there slightly lost their way in terms of pricing. Stepped back from the market, and we've able to put prices up.

Having not really played in that market before this year, we see some interesting opportunities there. Not huge, but there's lots of little bits adding into the overall growth pot. I think those are probably the main areas.

And maybe I will mention surety as well. And there we've been in for 4 to 5 years now, and we add a little bit to our surety business every year. Is sort of slow going, but slow steady growth was very, very good performance indeed on under Mike Topic. Does that help you, Vinay?

Yes. And on the Reinsurance side, is the growth mostly from smaller clients or is it from larger clients?

There's two growth engines there. I think since we've regionalized that business, it's been the guys servicing Latin America, Asia-Pacific, and to some extent Europe that have been delivering the growth. And in general, they are looking out to smaller clients rather than the mega clients.

In the US, we also have some interesting initiatives. I think previously, we probably neglected some of the smaller companies in the US. Our book was a little bit Northeastern, and a little bit focused on the big national writers.

So we've really been trying to strengthen our offering to those guys that want to buy combined property liability, reinsurance programs, Midwesterners, mutual smaller more regional companies. Rapid growth there, but of a small base, so it's not a big contributor.

And then, that I would say, those remarks are like a journal of strategic direction. Then there's an opportunistic overlay of that this year, where we saw one opportunity with a quota share for high net worth homeowners. And the other was a portfolio of mortgage insurance business, where we took some pretty significant positions on a pro rata basis and that's accelerated growth this year.

We don't necessarily think those things are enduring. I think they are not strategic statements, they are opportunistic responses to some very well priced opportunities in a lot of places this year.

That's helpful. And just a question on the Insurance side on the expenses. I see the operating expenses went up this quarter year over year. Is a $51 million base, is that the level for the future?

Hey, Vinay, it's Scott here. Let me take that one. You know what, there is a way it's going to be a little bit annoyed from quarter to quarter.

There's nothing too much going on there. I would say that it's probably better to focus on the nine months. Actually, that's a bit more level there.

We've got -- and in fact, actually a slight decrease if anything over the nine months. Obviously, come back to those statements we made about the US. And we feel quite comfortable about the fact that we are now in excess of that $600 million net earned premium lever, and are continuing to focus and find efficiencies in that expense ratio.

Okay, that's helpful. Thank you.

Thank you, Vinay.

Thanks, Vinay.

Mike Zaremski, BAM Funds.

Hello, gentlemen. A follow-up clarification for Scott on the other expense result of $10.6 million this quarter.

So I guess, was the roughly $8 million that was called out in relation to Silverton Re, was that simply a mark-to-market change due to buy market conditions? Or was it a low loss ratio causing earnings to flow to the investors? And if it was the latter, was there offsetting income flowing through in the other segments like the Reinsurance segment? Thanks.

Hey, Mark. It is Scott here, and thanks for the question.

You're right, of the $10 million, $11 million, $8 million is related to the sidecar Silverton. And it isn't the mark to markets, it's more of the earnings flowing through to the investors in -- all the third-party investors in that vehicle. So yes, there has been corresponding offsetting profits flowing through the other lines.

Is there a way to think about how the -- in next quarter, or would next quarter be a benign quarter for our writings in Silverton due to the 4Q being light on CATs? Or how do we think about seasonality or timing of this line?

Yes, Mike, you are bang on there actually. The way the earnings flows through is they are seasonally adjusted. So you do see a bit more of an uptick in the third quarter.

But if there is a benign CAT quarter, and I would say benign CAT in terms of our Silverton sidecar, then you would expect to see some profitability flow through there. If anything, as a general guide, I think we had $4 million to $5 million move through in Q4 of last year. So hopefully, there's been a little bit of growth in Silverton over this year, but maybe that's just a helpful hint on how to think about that.

Okay, got it. And lastly, in the primary insurance segment, there was a good amount of reserve releases. Any color on where those came from, either [action] in your lines of business et cetera?

Mike, those things are always going to bounce around a little bit. The distribution can always be a little bit different. But as you know, we've been building out our insurance segment. And in particular, in the US. And it has been maturing. So I think as over time, you'd expect to see that normalized a little bit more.

So we had one particular area this quarter where we took a couple of casualty numbers down. Nothing much going on in there, other than just what you generally expect to see as that portfolio matures.

Got it. Thank you for the insights.

(Operator Instructions)

Brian Meredith, UBS.

This is actually Jason on for Brian, morning. Just looking at your results and the 11% ROE target, can you just help me understand how we get there? Looks like you need, just mathematically a pretty big quarter to reach that number.

Yes, Jason, it's Scott here. Let me take that. What gives us confidence in that $0.11, I think there's two things I wanted to pull out.

What do you see in the numbers so far, and then really if you step back from that, maybe what's changed? If you look at the numbers, and particularly in this quarter, we've got a lot of momentum in there in earnings. And that's particularly from in Reinsurance, as well as in the Insurance side. Both in net earned and net written. So we feel pretty good about the profitability of that business flowing through.

Expenses. We've been focused on expenses. We've seen the overall operating expense ratio come down from 16.5% to 16.2%. So it's trending quite nicely. I think you couple that with the $45 million to $46 million of investment income, and you see some really strong contributions coming through from both of the segments there.

I think if you step back a little bit and you look what's changed, I think the biggest driver is US Insurance. I think in the prepared remarks and also in the press release, we talked about one of the key levers being reaching $600 million of net earned premium. And therefore, our ability to produce a competitive 16% expense ratio, operating expense ratio.

And we achieved both of those this quarter, and are very comfortable and very happy to see the way that it's trending. So if you take all of those bits and pieces together, it certainly gives us confidence in our ability to hit the 11%.

Perfect. That's really helpful. Thanks.

(Operator Instructions)

Well it sounds like we don't do any further questions. So thank you all for your time and attention this morning. Have a good day.

Thank you. Bye.

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