Aspen Insurance Holdings Ltd (AHL) 2016 Q3 法說會逐字稿

Good day and welcome to the Aspen third quarter 2016 earnings conference call. All participants will be in a listen-only mode.

(Operator Instructions)

After today's presentation there will be an opportunity to ask questions.

(Operator Instructions)

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

Thank you and good morning. 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 2016. This press release as well as corresponding supplementary financial information and slide presentation can be found on our website at www.aspen.co.

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 Provision of US Federal Securities Laws. While forward-looking statements 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 factor section in Aspen's annual report on Form 10-K filed with the SEC and posted on our website.

Today's presentation also contains non-GAAP financial measures which we believe are meaningful in evaluating Aspen'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. With that I'll turn the call over to Chris O'Kane

Thank you, Mark. Good morning everyone. Aspen delivered very good results this quarter which are reflected in operating earnings per diluted share of $0.97 and operating ROE of 8%. We ended the quarter with a book value per share $50.49, an increase of 10% from the end of 2015. Our performance includes strong underwriting results from both our operating segments. The accident year ex-cat loss ratio for the group improved by 150 basis points from a year ago with reinsurance and insurance improving to 58.2% and 59.1% respectively.

Aspen Re had another impressive quarter with combined ratio of 88%. Gross written premiums increased by 16% due to the inclusion of AgriLogic. Excluding AgriLogic, Aspen Re premiums were down 17%. This reduction is not a reflection of the underlying business as on a year-to-date basis excluding AgriLogic, our top line is similar to a year ago.

Aspen Re continues to maintain and improve its market position due to its strong analytical skills and client relationships. Because our clients rely on us as helpful advisor, attractive opportunities continue to be brought to us despite the market environment.

The pace of rate reductions in reinsurance continues to slow. In fact there are even some areas where we are achieving rate increases, although so far these tend to be solely in response to loss activity. We have achieved these rate increases in the US following some small natural catastrophe losses. We have also achieve some good rate increases in the Middle East following a degree of market disruption.

Turning now to our insurance business we are very pleased with the direction in which this book is moving. Year-to-date top line is up approximately 2% while in the quarter it was down by similar amount as we continue to proactively manage our diversified insurance business lines and selectively reduce exposure in areas where rates are under pressure.

While our process is ongoing we continue to see attractive opportunities in areas that are aligned with our strategy where rates are less pressured and experience less volatile. This transformation is showing results with growth and improved profitability in targeted areas. Please note that our global accident health business continue to fall nicely along with surety and with cyber.

In marine aviation and energy we saw growth for the first time in many quarters. Over the last couple of years we've repositioned much of our marine and energy business and it is pleasing to see this area now delivering favorable results. However we remain cautious is a lot of marine energy business continues to experience pressurized rates.

In property and casualty our UK P&C business continued a strong track right of profitability and we generally good growth from our railroad business, one of our new global lines.

As you may recall David Cohen joined us last year as the Chief Underwriting Officer of Aspen insurance. David and his team have strengthened our offensive line and reviewed each portfolio. We suspect the benefits from this effort will improve the loss ratio and decrease volatility in the income statement in 2017 and more significantly in 2018 and beyond.

In the first nine months we have generated $416 million in new insurance business representing a 10% growth in this metric over 2015. However as the new teams review the existing books, we have chosen not to renew some business in favor of other opportunities with more attractive perspective margins.

Now I would like to turn it over to Scott Kirk and then I will make some further remarks.

Thank you, Chris, and good morning everybody. In the third quarter of 2016 we achieved an annualized operating return on equity of 8% and a combined ratio of 93.8%. Diluted book value per share grew by 10% from the year end 2015 to $50.49 due to strong underwriting and investment results. Gross written premiums for the group was $764 million, an increase of 6% compared with the third quarter last year primarily due to the inclusion of a AgriLogic.

Seeded written premiums increased 82% to $125 million this quarter. This increase is partially due to AgriLogic and the timing of some of our renewals, but is primarily driven by a greater use of quota share reinsurance. From our point of view this will optimize capital efficiency and reduce net retained volatility while our acquisition ratio benefits from seeding commissions as they run through.

The loss ratio of 57.2% for the group was in line with Q3 last year. We recorded $25 million of net cat losses primarily from weather-related events in the US and a hailstorm in the Netherlands. This compares to total net cat losses of $19 million in Q3 last year.

Our accident year, ex-cat loss ratio, for the quarter improved by 150 basis points to 58.7% from a year ago and improved by almost 200 basis points for the nine months. Total reserve releases for the group were $35 million of which $20 million was in reinsurance and $15 million from insurance. For the nine months of the year we recorded $78 million of releases with $52 million from reinsurance and $26 from insurance.

Turning now to the results for our segments. Firstly, reinsurance. Gross written premiums for Aspen Re were $366 million, an increase of 16% from last year with AgriLogic contributing $103 million in the quarter. Excluding AgriLogic, gross written premiums went down in the quarter due largely to the timing of some cat related renewals we mentioned last quarter. However the underlying gross written premiums for the nine months were largely in line with the same period last year.

Aspen Re delivered underwriting income of $37 million on a combined ratio of 88.3% in the quarter compared with $15 million of underwriting income and a combined ratio of 94.7% in the prior year. The accident year ex-cat loss ratio improved to 58.2% from 59.5% a year ago. Drilling down a little further, excluding AgriLogic the accident year ex-cat loss ratio was 51%. Up marginally from 50% last year after adjusting for Tianjin. However for the nine months the ratio has improved from 48.7% to 48.3%.

Turning now to insurance, gross written premiums for insurance were down about 2% compared to the prior-year. However, we have shifted the mix towards financial and professional lines where we have seen some profitable opportunities to grow the business in addition to some areas of growth in marine, aviation and energy. Aspen Insurance reported underwriting income of $18 million and a combined ratio of 95% compared with $42 million of underwriting income and a combined ratio of 88.3% in the prior year. These increase in the combined ratio is primarily attributable to higher cat losses and some one-off adjustments impacting our acquisition ratio. The accident year ex-cat loss ratio improved to 59.1% compared with 60.8% in the year ago period due to fatal loss experience in our financial and professional lines and marine, aviation and energy sub segments.

Turning now to expenses for the group, the total expense ratio was 36.6% this quarter compared with 36.3% last year. Although the expense ratio is broadly flat, we have seen a shift between acquisition costs and G&A expenses. The acquisition ratio in the quarter reduced to 19.2% compared with 20.6% in the third quarter last year. The reduction is driven by a decline in Aspen Re's acquisition ratio due to the reinsurance we purchased for AgriLogic.

In insurance the acquisition ratio has increased to 21.4% from 18.9%. There are some one-off's in the quarter and as a result it is best to look at the year-to-date ratio which has increased from 18.9% to 19.9%. The increase is largely to the shift in business mix towards financial and professional lines where we have seen some attractive and profitable opportunities for growth however these lines do attract high levels of commission.

The G&A ratio for the group was 17.4% for the quarter compared with 15.7% last year. The higher ratio was due to the increase in seeded earned premiums in addition to the investment in our insurance segment.

Looking ahead to Q4 we still expect to see the full-year G&A ratio to be broadly in line with last year's ratio. However as always, the expense ratio will be affected by the general performance of the business and the impact that has on performance related compensation.

Going forward you'll begin to see the impact of the higher seeded reinsurance spend on our overall expense ratio. A greater pro rata reinsurance spend will reduce the acquisition ratio while increasing the operating expense ratio. However as seeding commissions earn through, we anticipate this will have a positive impact on our overall expense ratio.

I'll now move on to investments. Net investment income was $46 million in the third quarter up 3% from the prior-year. The increase is due to higher income from both our equity and fixed income investments. Total return on the aggregate investment portfolio was 50 basis points in the quarter and the total return was 4% for the nine months of the year. The fixed-income yield was unchanged from the end of 2015 2.5% and the duration of fixed income portfolio is largely unchanged from the year end 2015 at 3.6 years.

Lastly I'll make a couple of comments about capital. We repurchased approximately $7 million of ordinary shares in the quarter bringing our total buybacks to $50 million for the year-to-date. The window for share buybacks was limited by our preferenced share issuance. However our approach toward share repurchases has not changed and we will return excess capital to shareholders when that is financially more attractive than deploying it elsewhere.

During the third quarter we took advantage of favorable rate environment and issued $250 million of preference shares with a dividend of 5.625%. We intend to use the proceeds of this issue to redeem our existing 7.401% and 7.25% preference shares in 2017. With that I'll now turn the call back to Chris.

Thanks, Scott. Once again we have been busy this quarter building our reinsurance platform. We continued to make progress on our global and regional product strategy building on products and geographies to further strengthen our portfolio businesses. For example we recently announced the renewal rights agreement in the UK regional P&C area for the business of another carrier. That book represents approximately $50 million premiums and our initial view is that we will retain at least 50%.

This business is highly complimentary to our own very profitable business and the agreement provides us with options to expand regionally. We continue to see good growth potential for our UK regional P&C business.

We also continue to build out our global [accident] and health operation, appointing a head for the business in the US where we see an opportunity to expand our [presence in accident] insurance offering. We also added head of US crisis [management], who is developing a new product contamination recall capability which will provide diversification to our existing lines. Lastly we expanded our US footprint opening an office in Dallas that will eventually focus on the excess cash casualty market although we expect to leverage our presence to offer other products over time.

In our reinsurance business we have successfully integrated AgriLogic and are delighted with this growth trajectory. The third quarter is typically the largest for AgriLogic top line and premiums are growing nicely. We expect healthy growth across all states where we already have an established strong presence and at this stage indications are that 2016 should be a good year in terms of the underwriting experience for the industry.

AgriLogic's intelligence and expertise is evidenced by the many clients who seek its consulting services. We believe it is this intelligence and expertise that allows the team to differentiate itself in the market.

Also in the quarter, following Thomas Lillelund's appointment to CEO of Aspen Re, we have promoted Phil Hough as Managing Director for the Asia-Pacific region. Phil is one of our most seasoned international executives and in his previous role has made significant contributions to the growth and profitability of our operations in continental Europe.

So in conclusion our reinsurance team has not faltered for the last 10 years and the same underwriting philosophy, analytical skills, customer relations combined with problem-solving ingenuity makes me feel very confident that Aspen Re has the ability to continue to outperform its peers.

However, the really exciting changes are taking place in our insurance operation. Our leadership and underwriting teams are the strongest we've ever had supported by broad and growing range of products, strong distribution networks and excellent client relationships Aspen Insurance is extraordinarily well-positioned to create exceptional shareholder value over the next few years. With that we are happy to take your questions.

(Operator Instructions)

Amit Kumar, Macquarie.

Thanks and good morning and congrats on the quarter.

Good morning, Amit.

Good morning. Just a few questions to start off. The first is I guess just talking about Hurricane Matthew. Do you have any early read on how you are thinking about Hurricane Matthew for Q4?

I can't give you a number this morning, it's just too early for that. But, first of all, there was impact in Haiti where we have pretty much no exposure. After that, Bahamas, where I would say we have minimal exposure. We're just not very fond of Caribbean wind exposures because they clash with US wind exposures. And then, fortunately for everybody, it kind of missed Florida and it went further north. We will pick up a few losses. At this stage it seems to be on the residential side, mainly on the Reinsurance side.

We haven't found any major risk losses. There is nothing -- none of the big industrial clients have reported anything there. So, putting it all together, I mean the best I could say is we really are not worried about it. It is well within our cat load for the quarter and it's not troubling us in any way.

And what's the cat load for the quarter usually?

I don't think we publish that these days. I think we stopped a couple of years ago on it.

Okay. (Laughter) Telepathically try to get a better answer from you. (Laughter) The second question I have is looking at, obviously, the business segmentation and the discussion on ROE and you have a strong ROE instead of all the noise. How should we think about that number going forward based on obviously the AgriLogic piece and the pullback in certain pieces in Insurance? How are you thinking about the trajectory from here on a normalized basis?

Given everything that went on in the quarter, I think we're, broadly speaking, pretty happy with what happened in the quarter. But I think our business in a steady-state ought to be able to do a bit better than that, quite a bit better than that. So as I indicated on the call, we have made, the last 12 months or so, some new investments, especially in the US in the Insurance platform. Some of those investments are actually around the world in places like Dublin, London, Singapore as well. And the first thing that happens when you do those things is you spend the money, the expense line is hit. Those guys are looking at the books of business and are responsible for. They are making some small changes here and there. I wouldn't say anything is terribly radical.

Maybe the US primary casualty area is the area we are stepping back from most, and that we have been doing anyway because it's one of the most competitive areas in terms of pricing. But they are also putting new business on the books and that is going to start some earning and feeding through in the course of 2017. I think by 2018 the expenditure is done. Clearly, paying people's salaries, we'll carry on doing that but the cost of new offices and acquiring people, et cetera, is over.

So I would look for expenses to stabilize and top line to begin to grow again. This year, the top line is up a little. It is up very little, maybe 2%, but we are going to do better than that I think in 2017 and 2018, and that should lead to little better ROE.

Do you get the sense that you could cross the double-digit hurdle?

That's hard to say. Any given quarter depends on loss experience and I think as we talked on the call last time about what represented reasonable return. We have a strong view of our cost to capital and I think the hurdle that I am interested in is beating the cost to capital, which we're certainly doing at present and we'll increase the margin over the cost of capital next year and the year after.

Just one question and then I will stop. How should we think about buybacks going forward for Q4 as well as 2017?

Thanks, Amit. Scott here. With regards to buybacks, we pulled back about $50 million year to date. In regard to our approach, there is no change in our approach. If -- we are going to return that capital to shareholders if we can't deploy it in the business. I can't really give you any sort of guidance on that buyback position but we're certainly not changing our overall approach.

Got it. That's all I have for now. Thanks for the answers and good luck for the future.

Thank you very much, Amit.

Brian Meredith, UBS. Mr. Meredith is your line muted?

Josh Shanker, Deutsche Bank.

Thank you. So I just have a question about -- I think we have talked about it a little in the past but it is sort of like the Goldilocks question. To the extent that there is some would say that reinsurance has become a game of scale and a company like Aspen would be too small. There are other companies who would say that, if you have a few unique relationships with some regional players you can build a small niche reinsurance business to be very successful and would argue that Aspen is too big to fall into that class. What is the right size? And is there any truth in this sort of scaling idea?

Josh, good morning. Thanks for your question. We have indeed talked about it before and I will concede that scale matters. But I will not concede because I don't believe that scale in and of itself is the driver of great performance. I think it would be invidious to name competitors, but you look at some of the biggest players in the world and you don't look at some of the best players in the world. You look at some of the smaller companies and you find them some of the best-rated companies of all.

So what is going on here? Underwriting expertise. Knowing how to price complex risks, knowing how to design solutions, work through the brokers. The brokers are doing a lot of the heavy lifting. The reinsurers are saying: Have you thought about this, have you tried this? Having the reputation for helping the brokers solve their clients' problems is the key to success.

The way you do it matters. Some reinsurers give service with a smile. They say: There's no limit to the number of quotes that we can give you; if you need it tonight we're going to try to get it tonight if not tomorrow morning. Others take the view that you'll wait in line and when everything else is processed we will attend to you. They don't get back to you. So that kind of service orientation matters. Your attitude to claims. Fundamentally, do you pay them? Or do you start asking unnecessary questions and delaying them?

We monitor our position in speed to paying claims and, for reinsurance, the two primary areas for us would be Bermuda and the London market, but also in the US domestic market, also in New York and Singapore. And to the extent we get specifics from our brokers or from market, we are always in the top handful of people to speed the settlement. When a client, especially a small client, is out of pocket, they really do appreciate being made whole as quickly as possible. I think these are the things that matter. Yes, you need a balance sheet of a certain size and I think people probably look at the claims-paying ability. You've got to be at least A-, and A is better than A-. They look at that more than the actual size. So, I think that's what matters.

Practically for us in the quarter, again, won't mention client names. There was one big deal that went down, Aspen Re was in there helping shape the terms and conditions, helping set the price and had one of the larger shares. It was a deal with about six players in it and not as big as some of those we had a couple years ago. But again this says to me when the world is rich in reinsurance to choose from, they keep coming to Aspen Re for the biggest and most interesting deals.

Okay. And then, on the Insurance side, one of your competitors last night made the claim that we are in a soft market and the ultimate soft-market strategy is to cut expenses. When you look at Aspen, is there room to follow this soft-market strategy? And to the extent -- is that the correct thinking about the world today?

I think expense control is absolutely a part of solution. I think if expense control comes, that the price is sacrificing the future and I think it is a false economy. We are not running this business to produce a nice result in the next quarter. We run this business to produce significant shareholder value over a period of time. Think about that period of time as being, let's say, three years or something like that, actually we would think even longer term in some ways.

So, I think you want to look at your T&E. You want to look at your procurement. You want to look at efficiency of staff. You want to look at your office rent, absolutely. But when there is an opportunity to launch a new product, to hire good people, to build your expertise -- for example, in the cyber area, we've hired probably 10 underwriters in cyber in the last year. That is a cost, but I think that is the -- (inaudible) is the most rapid growing area of P&C. It may be the only growing area of P&C. I think we need to understand and we need to get it right and we are going to make a lot in value, so there I would say cost-cutting not hiring people would be a false economy. Does that help Josh?

All the detail helps. I appreciate it and good luck and we will see where we go.

Thanks.

Mike [Zaremski], BAM Fund.

Hey, good morning, gentlemen.

Good morning, Mike.

Just one question on AgriLogic. Can you tell us what you booked that at this quarter and just the seasonality, how should we expect profits to be booked? Is that usually a 3Q, 4Q, or 1Q event?

Hey, Mike, it's Scott here. I guess I'll take that in reverse order perhaps. The profits are definitely skewed towards the second half of the year. It's Q3, Q4. So that's the way you should think about that. In terms of what we book it at, it is a crop business, we tend to book broadly in line with where you would expect us to be and where the peer group is. It certainly attracts a higher loss ratio than other areas within our Reinsurance segment.

I think we are seeing some decent news coming out of the crop business this year. Yields look to be in pretty decent shape and the commodity prices, too, seem to be holding up. I don't think we would be willing to release too much out of that at this point and will wait to see where we end up at the end of the year.

Got it. So is a normal year for crop in the low 90s, high 90s just ball park figure?

How do you mean? Are you talking about a combined ratio or are you talking about a loss ratio?

On a combined-ratio basis.

Yes. On a combined ratio basis, sure. I think that's where we're ultimately going to be targeting but given this is our first year, there is a bit of investment drag in there from our perspective. But we expect AgriLogic to be a solid contributor next year in 2017 and then incrementally in good shape in 2018 go forward.

Okay, best of luck. That's all I have. Thank you.

Thanks, Mike.

(Operator Instructions)

Brian Meredith, UBS.

Great, can you hear me now?

Brian, we can hear you. Good morning. (Laughter)

Perfect. Perfect.

A little bit too quiet for us earlier.

(Laughter) Most have been answered but one question, Scott, I think you mentioned that there were some unusuals in the quarter with respect to G&A. What were those and where were they, so we can think about what the year of your G&A growth should look like?

Yes. Hey, Brian. It was actually more in the acquisition line. There was a one-off sitting in the Insurance numbers. It's a ceding commission adjustment that was at its one-off and that's what caused the bump up to 21 this quarter.

Okay. And then, back on Mike's question, just as we think you're going forward, the impact in the loss ratio according to the reinsurance from AgriLogic, should we expect that to happen going forward in 2017 and 2018 where you are going to have your loss ratios in the Reinsurance side a little bit more elevated just because of the earnings that are coming through on AgriLogic in the third and the fourth quarter?

Yes. That is spot on, Brian. Actually, the way the mix works because it does attract a higher loss ratio, it will skew that so you will see a little bit of elevation there.

Excellent. All right, that's all I had. Thanks guys.

Thank you, Brian.

Thanks, Brian.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Chris O'Kane for any closing remarks.

So I'm going to say thanks to everyone for listening this morning and wish you having -- have a good day.

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