Aspen Insurance Holdings Ltd (AHL) 2016 Q4 法說會逐字稿

Good morning and welcome to the Aspen Insurance Holdings Limited fourth-quarter 2016 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Mark Jones, Investor Relations. Please go ahead.

Thank you 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 fourth-quarter and full-year 2016. This press release, as well as corresponding supplementary financial information, 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 Provisions of US Federal Securities Laws. All forward-looking statements have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For a 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 financially data and our earnings release posted on the Aspen website.

With that I'll now turn the call over to Chris O'Kane.

Thank you, Mark. Good morning, everyone, from the New York blizzard. We are happy to be here this morning to explain what was going on in Aspen in the last quarter and what will be going on in the next year or two.

As you would expect following our preliminary results published on January 30, our fourth-quarter results reflected an operating loss per diluted share of $0.34 and an operating ROE of minus 2.8%. We ended the quarter with diluted book value per share of $46.72, an increase of 2% from the end of 2015.

During the quarter, we completed a comprehensive review of our insurance operations. The goal of this review was the optimization of the portfolio, and we expect that the actions taken following this review will result in expanded margins and an attractive of rate of profitable growth in 2017. We first started talking about this review in late 2015 after the appointment of David Cohen as President and CUO of Insurance.

When Steve Postlewhite took over as CEO of Insurance in May 2016, Steve and David continued to build upon a substantial body of work that already had been done. They were looking to identify the best opportunities for long-term profitable growth in the insurance business. Their review found that most of insurance lines were meeting or exceeding requirements.

These lines, which include UK, Property and Casualty, professional lines, credit and political risk, surety, crisis management, and many others, performed very well both in the quarter and in the full-year 2016. They grew profitably during 2016 and are expected to accelerate these growth rates in 2017.

We also identified some elements of business, which we decided not to continue to rewrite. There were many different reasons for deciding to reduce our appetite for these lines. Chief amongst these was that the future expected returns did not meet our current requirements. Hence, we concluded it was best to put our capital to work in areas of potentially higher returns. Consequently, we have ceased underwriting a great deal of primary casualty business, whether required through programs or assessed on a risk-by-risk basis. In all, approximately $150 million of insurance business or just under 5% of our total underwriting portfolio, fell outside of the refocused underwriting guidelines and was not renewed.

As part of the decision to exit certain accounts, we purchased additional reinsurance to protect ourselves from the runoff of some of the discontinues business. The reinsurance provides for up to approximately 40% duration in expected losses for this book. We believe this will substantially mitigate any potential residual risk. We also placed considerably more per asset reinsurance, reducing end volatility going into 2017. The expense of these two purchases negatively impacted the quarter, as did the decrease in loss activity and some of the repositioned lines. We were able to place the runoff cover and the additional seat of reinsurance ahead of schedule in the fourth quarter, having originally anticipated these being completed in the first quarter of 2017.

Turning now to Reinsurance. For many years our Reinsurance business has achieved satisfactory and has continued to perform well in 2016. Reinsurance experience net cat losses of [$113] million, which led to a 90% combined ratio. But taking into account the market headwinds and the cat experience, we believe we have done well.

In our Casualty reinsurance business, the difficult market conditions are well-known. However, less well understood is how our casualty reinsurance colleagues prepared for these conditions. With a smaller portfolio of carefully chosen plans, rigorous adherence to strict pricing requirements, and careful responses to tough term conditions, this business has achieved very satisfactory underwriting margins. At 1/1, we managed to achieve a small rate increase, the first in many renewals, and we won a few new business opportunities with the existing select plans.

Within our Property reinsurance portfolios, we have seen the deepest rate reductions over the last few years, and we have responded by carefully managing our net exposures toward better priced business. Despite the difficult rate environment, the Property teams have performed well. Especially, we recorded very good results across many of our specialty lines, including Contingency and Marine.

The other piece of our Specialty business is AgriLogic, and I'm delighted with the success of this business in its first year as part of Aspen. The AgriLogic team has exceptional insights into crop risks and has some very innovative technology to help price those risks.

These assets, coupled with an entrepreneurial and energetic spirit, enable AgriLogic to deliver a gross underlying loss rate of 62% for the quarter and 75% for the year. Our investment in the business has allowed them to improve their systems and align with Aspen's processes as they become further integrated.

Turning now to the 1/1 Reinsurance renewals, approximately 50% of Aspen reinsurance renewals, excluding AgriLogic, take place on 1/1. We had very strong renewal season. We grew the book by approximately $10 million on an underwriting yield basis, while experiencing a negative rate change of just under 2%. This is a result of the close relationships we've built with our clients and the expertise and solutions we are able to provide for them. January renewals are slowing the rate declines compared to those of last year.

Although there was broad pressure on those lines with variations depending on geographical location and line of business, there was little lift occurred outside of the markets expectations. Terms and conditions, along with overall commissions paid in [per hour yield], did not change significantly.

In Property cat, we managed to renew with rates down 3% in the US and 5% for the rest of the world. As mentioned earlier, we had a good renewal in Casualty reinsurance while achieving a small rate increase.

We are very pleased about achieving good outcomes with existing Reinsurance clients and achieving favorable pricing. We have been able to achieve this because of the breadth of products we offer and the geographic spread of distribution. One example is our US regional clients initiative. We have doubled our client base and grown gross premiums written from $20 million to $50 million since the team began this initiative three years ago.

This was an important quarter for Aspen and with the actions we have taken, we are positioned well for the future.

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

Thank you, Chris, and good morning, everybody. For the year, we produced operating ROE of 4.8%, underwriting income of $126 million, and grew diluted book value per share by 2% to $46.72. However, for the quarter, we recorded and underwriting loss of $18 million; which was heavily affected by the repositioning of the lines in the insurance portfolio, which cost approximately $60 million.

This $60 million is comprised of three separate elements. The first is $30 million of increased loss activity in the quarter. The second is approximately $20 million of additional acquisition expenses. The third is $10 million of costs related to the runoff reinsurance we purchased in the quarter. On a positive note, we generated a $30 million of incremental underwriting income from the remaining lines in insurance. It is these lines that we look forward to growing profitably in 2017.

Turning now to Reinsurance, we produced an underwriting income of $11 million, compared to $70 million in fourth quarter of 2015. The reduction in underwriting profit was due to $25 million increase in property and energy related losses, $15 million of higher cat losses and $10 million of one-off commission related adjustments. It is worth noting that the fourth quarter of 2015 was a benign loss quarter in Reinsurance.

Turning now to the underlying performance in our operations. Gross written premiums for the group was $606 million, a decrease of 5% compared to the fourth quarter last year. The change is largely a result lower premiums in insurance reflecting the repositioning that we discussed. Further, and in line with our strategy of reducing earnings volatility, in mid-November we placed a 50% quota share covering our Casualty, Financial, and Professional insurance business. This followed the placement of additional quota share on various marine and energy classes effective July 1, 2016.

These placements had a substantial impact on ceded written premium, which increased to $177 million in the quarter from $40 million in the fourth quarter of 2015. Whilst the impact on ceded earned premium was modest, at approximately $19 million in the fourth quarter, we expect the retention ratios to fall to between 70% to 75% in 2017. As a result, we also anticipate lower earnings volatility, a lower expense ratio, and greater flexibility in deciding where to deploy our capital.

The loss ratio for the group was 63.2%, an increase from 53% in the fourth quarter of 2015. We recorded net cat losses of $55 million, or 9 percentage points, primarily from Hurricane Matthew, the New Zealand quake, and the Tennessee wildfires. This compares the total net cat losses of $46 million, or 7 percentage points, in the fourth quarter of 2015.

Total reserve releases for the group were $51 million in the quarter, of which $35 million was from reinsurance and $16 million from insurance. For the full year, we recorded $129 million of releases with $87 million in reinsurance and $42 million from insurance.

Our accident year ex-cat loss ratio was 62.6% compared with 55.1% in the fourth quarter of 2015. The increase in the accident year ex-cat loss ratio is attributable mainly to the additional losses we incurred in those insurance lines that we repositioned. We also experienced an increase in property and energy related losses in our Reinsurance segment, although this impact needs to be balanced with the fact that the fourth quarter of 2015 benefited from benign loss activity.

Turning now to our segments and firstly insurance. Insurance reported an underwriting loss of $30 million for the quarter, or a 109.1% combined ratio. For the year, we produced underwriting income of $6 million or a 99.6% combined ratio.

Turning to the sub-segments within insurance, within our property and casualty sub-segment. Our UK property and casualty business has continues to perform extremely well in 2016, with 10% growth in premium and a combined ratio of 67%. While premiums in our Financial and Professional lines were up just over 11%, and we achieved good targeted growth in areas such as surety and accident and health, we produced an excellent combined ratio of 87% across our Fin-Pro insurance business.

The marine, aviation, and energy market has faced a tough year, both in terms of price and loss activity. As a result, we have been very selective in the business we have written. For the year, while we reduced our exposures and had lower premiums, we saw improved profitability compared to 2015, with the loss ratio improving by 11 percentage points.

The substantial increase in ceded premiums across the insurance segment resulted in a retention ratio of 57% in the quarter, compared to 91% a year ago. The largest contributor to this increase is our Casualty, Financial, and Professional lines cover. As I mentioned earlier, the Reinsurance program has a modest impact on ceded earned premiums at this stage; however, we expect to see these benefits build through 2017.

We have $17 million, or 5 percentage points of cat losses, compared with the $23 million, or 7 percentage points, in the fourth quarter of 2015. The accident year ex-cat loss ratio was 68.3%, compared with 64.6% in the fourth quarter of 2015.

Importantly, if we adjust for the business that fell outside of the refocused underwriting guidelines, the ex-cat accident year loss ratio for the go-forward business was 58.9% for the quarter, and 57.4% for the full year.

The acquisition ratio for insurance in the fourth quarter was 23.8%, compared with 17.3% in 2015. This is due to $12 million of one-off commission adjustments related to lines we've repositioned. Whilst the fourth quarter of 2015 benefited from $8 million of favorable profit commission adjustments.

Looking ahead to 2017, the higher pro rata reinsurance spend will reduce the acquisition ratio. While the operating expense ratio will increase as a result of lower earned premiums. However, as the ceding commissions earned through in 2017, we anticipate this will have a positive impact on the overall expense ratio.

Turning to Reinsurance, Aspen RE delivered underwriting income of $11 million and a combined ratio of 95.9% in the fourth quarter. For the full year, Aspen RE generated $119 million of underwriting income at a combined ratio of 90%. We had cat losses of $38 million or 13 percentage points in the fourth quarter, about $15 million higher than the fourth quarter of 2015. The accident year ex-cat loss ratio was 56.2% compared with 42.4% a year ago.

There are a few items that impacted this comparison. Firstly, the fourth quarter of 2015 benefited from very benign loss activity. Second, the impact of AgriLogic, which added 2 percentage points in the current year. Finally, we did see an increase in energy and property related losses.

Turning now to expenses for reinsurance, the acquisition ratio was 22.1% compared with 20.8% in the prior year. The increase reflects $10 million of one-off commission related adjustments in the quarter. On a full-year basis, however, the ratio improved to 19.2% with a benefit from the inclusion of AgriLogic, which attracts a very low acquisition cost.

Before turning to investments, I just wanted to reflect on the results for the full year. We saw a significant increase in cat activity in 2016, with net total cat losses of $164 million, primarily due to US weather-related storms, Canadian wildfires, and Hurricane Matthew. This compares with just $90 million in 2015. Reserve releases continue to be strong at $129 million. The ex-cat accident year loss ratio for the group was 58.4% and broadly in line with 2015. And we produced $186 million of operating income at a combined ratio of 98.1%.

Our Reinsurance segment had another very good year despite the increased loss activity, and the insurance segment was again profitable for the year despite the impact of a fourth quarter of the correctives action resulting from the underwriting review.

I will now move on to investments. During the fourth quarter, we took advantage of raising equity markets and sold $200 million of our equity portfolio. This reduced equities to 6.8% of our total portfolio. Net investment income was down 7% to $43 million in the fourth quarter, as a result of lower dividend income, due to the reduction in the equity portfolio I just mentioned, and the movement of sterling and other currencies against US dollar. For the full year, net investment income was $187 million up 1% from the prior year.

Total return on aggregate investment portfolio was negative 1.8% in the quarter, reflecting the impact of the approximate 60 basis point rise in bond yields. For the full year, total return on the aggregate portfolio was 2.2%. The fixed income book yield was 2.5%, broadly in-line with 2015. And the duration of the fixed income portfolio ended 2016 at 3.9 years.

Finally, I'll make a couple of comments about capital. We repurchased $25 million of ordinary shares in the quarter, bringing total buybacks to $75 million for the year. Also the Board approved a new $250 million share repurchase program, taking us through to the start of 2019.

Our approach towards share repurchases has not changed, and we will return excess capital to shareholders when it is financially more attractive than deploying it elsewhere. Naturally, the extent to which the program is utilized will depend on a number of factors, including underwriting performance, our expectation of changes in interest rates, and the prevailing share price. Lastly, following the issuance of our $250 million of preference shares in the third quarter of 2016, we used some of these funds to redeem our 7.401% preference shares at the beginning of 2017.

With that I will now to call back to Chris.

Thanks, Scott.

What I would like to do with these last comments on today's call is to give you some flavor of why both the Management and the Board of Aspen feel emboldened and invigorated about the future of our underwriting operations. What it comes down to is the energy, the talent, the expertise, and the problem-solving capabilities of our lead underwriters and the teams that support them. Both our underwriting segments are well positioned to operate successfully in a competitive environment while remaining agile in order to continue to provide valuable service to our clients and capturing new opportunities.

In insurance, we have a great blend of tried and trusted experience, combined with new talent with excellent track records who joined us more recently. For example, in the UK our P&C operations are led by Clive Edwards, who has been a colleague of mine for over 16 years. In his time at Aspen, Clive has never produced a combined ratio over 100% and, in fact, has only twice exceeded 90%. What is particular exciting about Clive's operation is it combines great technical underwriting ability, very good profits, and impressive top-line growth.

In addition, about six years ago, we launched the combined property and liability policy in the UK, targeting clients who favor the risk management approach. Since this launch, this effort has gained considerable traction and UK P&C is expected to grow by 15% in 2017.

Another initiative we began five years ago and which is bearing a lot of ripe and tasty fruit today is our professional lines and management liability operation led by Bruce Eisler. From a standing start, Bruce has created a business with almost $300 million of premiums and impeccable underwriting performance. The interesting thing about Bruce and his team, is that the more business they do successfully, the more clients and more brokers want to do business with them. For this year and beyond, we expect a significant expansion of our franchise in these lines, especially in the United States.

Another star worth mentioning, is Mike Toppi, our global head of surety. Mike has produced extraordinary returns for us in the last five years and in 2016 realized selective and strategic opportunities from the energy and mining sectors. We've taken some steps to grow our underwriting team and regional distribution capabilities, and we expect, based on Mike's track record that we will continue to deliver superb results.

Other talented members of our teams are working in new initiatives in crisis management, in accident/ health, in [railwood] business, and in excess casualty amongst other areas. Our investment in talent and new product areas with insurance during 2016 has led to a very healthy pipeline of new opportunities. Coupled with the actions we have taken on the portfolio, we believe we are in a very strong position to achieve growth in both top line a bottom line going forward. The future for Aspen Insurance is very bright.

For Aspen RE, the recent January renewals we gained demonstrated then strength of our relations with clients and our ability to find opportunities even in a difficult environment. The challenge for our reinsurance colleagues going forward is slightly different. They already have some of the best performers in the industry, so the question is how to maintain that position.

One of the ways they will continue to build on their success is by a rigorous, carefully thought through approach to customer management. Bear in mind, it's a broker market and we have two customers; the broker who brings us the business and the clients who ultimately pay the premiums. My Reinsurance colleagues understand both types of customer and give them the responsive, intelligent, and joined up solution to all of their needs.

Original regional strategy for Aspen RE has driven top-line growth and consistent profitability despite challenging market conditions. This strategy has enabled us to achieve organic growth through the expansion of our presence in the Middle East and Africa by the creation of a hub in Dubai, further penetration in Asia-Pacific with our business in Sydney, Australia and in Shanghai through Lloyds. We expect our original strategy to continue to drive profitable growth in the future.

Market conditions obviously are not easy. With the attributes and strategy I have discussed here, as well as other initiatives, such the insurance portfolio repositioning behind us, we believe both our insurance and reinsurance operations are now very well placed to succeed.

With that, we'll pause and get ready for any questions you may have.

(Operator Instructions)

Amit Kumar, Macquarie Capital. Thanks for taking questions. A few questions. The first question I want to start with is I'll have numbers for given -- when you talked about the runoff cover I think you mentioned a $10 million payment for that and there's a 40% deterioration in loss ratio, could you talk about what size of book it covers? And that 40% deterioration is from what number to what number?

Scott here and thanks for the question. Just to confirm, yes, you're right. I did mention the fact that it was $10 million for the runoff cover. The size of the book, is, it's one of the programs and it's one of the more significant programs that we had. We purchased about $160 million worth of cover and that includes the original run off premium. It is the difference there between roughly the $100 million of premium of $115 million of premium $160 worth of cover that we purchased. It certainly gives us a decent amount of flexibility and headroom if any of that moves against us.

Got it. That is helpful. The second question I have, I think you were mentioning the underlying loss ratio numbers and I think you alluded to maybe a 57%, 58% number; 57.4% if I got that right. So next what you are saying to us as after these actions, the insurance book would be running at a lower rate than that, or how should we think about that?

Scott here again. Just to confirm you're absolutely right. The existing lines and the going forward lines in the insurance book did produce an accident year ex-cat loss ratio 2016 of 57.4% so you are bang on.

You've heard correctly. It was just an opportunity for us to tell you how successful those lines have been. You can never predict with absolute certainty what the future will hold. But certainly that future looks bright in insurance if we are able to keep that up.

The next question I have is for Chris and I will requeue after this. Chris I wanted to go back to the discussion we had on the last call, October 27. I had asked you about if you can cross a double-digit hurdle and if you look at the REs for this quarter they are at 4.8%.

At that time, you had said that your answer was that you are exceeding the cost of capital and this margin will increase going forward. Now that was October 27, so clearly something changed in the last two months.

And this brings us back to the questions we have always asked you over different quarters. Do think that perhaps the time has come to look at alternatives for this franchise based on it's size, including a potential sale of the Company? Thanks.

Good morning Amit and thanks for your question. I think you take us back to a conversation we had three months ago quite rightly. There were some things I didn't know three months ago. I didn't know there were going to be some losses in the quarter beyond -- quarter of the year before, beyond plan B, our normal expectations which knocked it sideways in the quarter, just for that quarter.

I did know that we are planning on buying some runoff cover and also restructuring our reinsurance arrangements. I didn't know the cost of that and I didn't know when the work would be completed. We actually thought we could be done this year. We got the main pro rata deal away on November 16 and I think we did the runoff cover much, much later, almost in the last few days of the year.

It made sense to spend the money on getting those pieces of protection in place sooner. So there was a charge to the quarter that I didn't anticipate and those two things were not on my mind when I made my comment about exceeding the cost of capital. We clearly didn't do that last quarter.

I think with this medicine having been taken, we have a pretty strong franchise and reinsurance already and we have an improving franchise and insurance. I think the $150 million in business was non-renewed was not likely to create a lot of value for our share holders here going forward. It's been eliminated and we are working hard to replace it with business that we believe makes a lot more sense.

We hired something like 80 people last year. We moved on about 30 people last year from insurance operations. The talent has been upgraded.

All these things make me, the Company, very, very confident indeed of REs future. I would be back to saying to we were looking to do ROEs that exceed our cost of capital. I'm not going to, as you know we don't give guidance. I am not going to be more specific there. So that seems to me a successful operation -- absolute terms and a successful operation relative to the peers and that is one that I think we want to carry on running.

Just one quick follow-up if I may and I will stop. Let's just get it out there when you talk about exceeding the cost of capital, what do you think is the cost of capital, and how many basis points? Just a range that you would be able to exceed?

I do admire your (inaudible) and the way you just persist but the basic answer is, we don't give you ROE guidance and we are also not going to give you the number to which we can add a number which equals ROE guidance. I am sorry but I think you understand how it is.

I will stop here. Thanks for the answers.

(Operator Instructions)

This concludes our question-and-answer session. I would like to turn the conference of back over to Chris O'Kane, CEO for any closing remarks.

Thank you all for joining us on this snowy morning. We appreciate your questions. Goodbye.

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