Aspen Insurance Holdings Ltd (AHL) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the Aspen Insurance Holdings Limited Second Quarter 2017 Earnings Conference Call. (Operator Instructions) And please do note, that today's event is being recorded. I would now like to turn the conference over to Mr. Mark Jones of Investor Relations. Please go ahead.

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 second quarter of 2017. 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 provision of U.S. 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 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 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 now turn the call over to Chris.

Thank you, Mark, good morning, everyone. We reported net income per diluted share of $1.07 for the second quarter of 2017, and annualized net income ROE of 9%. We ended the quarter with diluted book value per share of $48.64, an increase of 4.1% from the end of 2016.

Aspen sees further progress every quarter and I continue to be extremely excited about the future of this business. After Scott concludes his remarks, I will give an update on the progress of our efficiency initiative, folks who are ensuring that we have the right tools and systems in place to optimize our business processes and support our future business growth. In addition, we continue to make progress towards achieving our strategic goals in both insurance and reinsurance.

Looking at our segments. Aspen Re again performed well, delivering strong results in a market that continues to be characterized by overcapacity and rate pressure. Gross written premiums increased by 1% compared with the second quarter of 2016 with growth primarily coming from AgriLogic within our Specialty subsegment. Underwriting income in the quarter was healthy $26 million.

In Reinsurance, rates were down 3% overall in the quarter. This includes a 1% increase in Casualty, while at the other end of the scale, Property Cat was down 4%. We continue to see pressures in the property catastrophe market. Utilizing Aspen Capital Markets, which currently manages approximately $450 million of third-party capital, we are able to reduce our property cat exposures and carefully manage what we retain. This was reflected in a further reduction of our net PMLs across many perils.

We had a successful July renewal with overall rates down just 1%. Aspen Re was again able to capture select opportunities and achieve some modest overall growth. We remain disciplined and only buying business that meets our return hurdles.

Conditions remain competitive in many markets, particularly Europe. In this environment, we achieved an average growth rate of 16% in gross written premium across our Asia Pacific, Middle East and Africa and Latin America regional markets. The largest percentage of growth came from Middle East and Africa, although this is from a very small base.

Asia Pacific is seeing good traction with growth in all lines of business. As I've commented in the past, our established strategy and our global network of regional offices keeps us close to customers and allows us to identify opportunities quickly through the expertise of the team, strength of our client relationships and the insightful solutions we bring. Our reinsurance colleagues remain well positioned to continue to capitalize on opportunities as they arise.

Turning now to insurance. Our insurance team continues to expand the portfolio and remains very focused on building those areas that provide the best opportunities for long-term profitable growth. We returned to growth in insurance this quarter with the top line up 4%, compared to last year's second quarter. This is particularly significant as it follows the downsize of a business that we completed during 2016. Most of insurance expansion this quarter came from Financial and Professional Lines teams, which include several targeted business lines. Specifically, cyber and surety continue to increase nicely, reflecting steps we took previously to enhance our underwriting talent. Accident and Health also grew as we expanded our international distribution.

In lines such as professional, cyber, financial and D&O, we have recorded profitable growth in 18 of the last 20 quarters, a period in which the size of this portfolio has doubled. These lines are a core part of our Specialty Insurance operations. Under the leadership Bruce Eisler, we continue to see an excellent pipeline of opportunities that we believe will allows us to achieve future growth and maintain current margins.

Our Property and Casualty book was down overall, primarily due to the programs in primary casualty businesses that we've previously downsized. However, we grew in select areas including Excess Casualty where our team is seeing interesting opportunities in Dublin in areas such as construction, and in the U.S., across all industry classes in the upper middle market space.

We also saw good growth in our Environmental business. We are benefiting from previous investments in this line and have seen larger placements from U.S.- based multinationals.

We maintained a cautious approach to much of the Marine, Aviation & Energy market and our top line for this area was down modestly. The results of our disciplined approach to this business are reflected in improved profitability across a number of lines.

Insurance's performance was impacted by weather-related and other midsized losses. We've looked carefully at the causes of these losses and concluded that there is nothing systemic involved. These losses do not impact the future results we expect to see from our Insurance operations.

As a reminder, last year, we introduced a substantial use of quota share reinsurance in respect to our Insurance business. The benefits of this included an enhancement to capital efficiency, major risk transfer, beneficial impact on the acquisition rates here and some deep and enduring partnerships with key reinsurers who will support our future growth in what can be volatile lines. In short, these arrangements are working as anticipated and we are very pleased with the shift in this direction.

Now I'd like to turn it over to Scott for his comments and then I will make some further remarks. Scott?

Thank you, Chris, and good morning, everybody. In the second quarter of 2017, we recorded a combined ratio of 99.7% and an annualized operating ROE of 4%. And through the first six months of 2017, we achieved a combined ratio of 98.1% and an annualized operating ROE of 5.4%. Diluted book value per share at June 30 grew 4.1% from the end of 2016 to $48.64.

Gross written premiums for the group were $822 million, an increase of 3% compared to the second quarter of last year with growth coming mainly from Insurance particularly, in our Financial and Professional Lines.

Net written premiums decreased 20% from the second quarter of 2016 to $579 million due primarily to the quota share reinsurance placements we mentioned earlier.

As a result, the retention ratio for the group fell to 70% from 90% in the second quarter of 2016. We do continue to expect to see the retention ratio to be in the low 70s for the full year 2017. The loss ratio for the group improved 3 percentage points to 61.6% compared to the second quarter of 2016 with the improvement due to largely lower cat losses.

Net cat losses were $37 million or 7 percentage point in the second quarter of 2017, mainly driven by U.S. weather-related events. This compares to $65 million or 10 combined ratio points last year.

Prior year net reserve movements were $49 million or 9 percentage points in the second quarter of 2017. This quarter benefited from a $29 million reinsurance recovery from an offshore energy property loss that occurred in 2016. However, our prior year reserve releases on an underlying basis of $20 million for the quarter were largely in line with the second quarter of last year.

Our accident year ex cat loss ratio was 63.6% compared with 58% in the second quarter of 2016. We had around $37 million of midsized losses across both our segments in the second quarter of 2017, which largely accounts for the increase. And I will provide more color on this in a moment.

Turning to our total expense ratio, which has improved again from 38.3% for the full year 2016 to 38.1% this quarter. You will recall that we said previously that our acquisition ratio would improve, which it has done, coming down from 20.1% for the full year 2016 to 17.1% this quarter. We also said that the operating expense ratio would increase due to largely to the reduction in net earned premiums, which it has also done, with the ratio of 21% for the quarter compared with 18.2% for the full year 2016.

Although we don't provide guidance and obviously we don't control the weather, there are some positive contributions to earnings that should arise in the second half of 2017, specifically the earnings contribution of AgriLogic and the increased earn-through of commissions associated with the quota share reinsurance. The combination of these should result in a further decline in the total expense ratio by the end of the year.

Turning now to our segments, firstly Reinsurance. Gross written premiums were $336 million, an increase of 1% from the second quarter of last year. Growth came from Specialty and was largely due to AgriLogic while Property Cat was down as we continue to carefully manage this book.

Net earned premiums were down 9% compared with the second quarter last year, driven primarily by the increased sessions by Aspen Capital Markets.

Aspen Re delivered underwriting income of $26 million and a combined ratio of 90.5%. We had cat losses of $10 million or 4 percentage points on the loss ratio.

The accident year ex cat loss ratio was 64.2% compared with the very favorable 47.7% in the second quarter last year. The current quarter was negatively impacted by approximately $17 million or 6 percentage points of midsized losses, the largest of which was a fire at a chemical plant. A shift in business mix towards more Specialty and Casualty business also impacted the loss ratio by approximately 5 percentage points. Although the loss ratio is higher than the Property business, they do tend to have lower expense ratios.

Turning now to Insurance. Gross written premiums were $487 million, an increase of 4% compared with the second quarter of 2016. This included growth in targeted areas such as Surety, Cyber and Excess Casualty in the U.S. We also continue to see the impact this quarter from the reinsurance changes that we've talked about previously.

Net written premiums were $293 million and decreased by 30% from $418 million in the second quarter of 2016. This resulted in a retention ratio of 60% in the quarter compared with 76% for the full year 2016.

The net loss ratio improved to 66.9% compared with 68.5% in the second quarter last year. The current quarter included $27 million or 9 percentage points of cat losses from U.S. weather-related events.

The accident year ex cat loss ratio improved to 63.1% from 66.1% in the second quarter of 2016. The current quarter included an $11 million surety loss and a $10 million fire loss. These impacted the accident year ex cat loss ratio by 7 percentage points.

I'll now move to investments where we continue to deliver strong investment performance. This quarter we recorded net investment income of $47 million together with realized and unrealized investment gains of $42 million. The total return on our aggregate investment portfolio is 1.2% in the quarter, reflecting net gains across our equity and fixed income portfolio. The fixed income book yield was 2.53%, up from 2.49% at the end of 2016. And the duration of the fixed income portfolio was 3.9 years at the end of the second quarter 2017.

Finally, I'll make some comments about our capital position. During the quarter, we repurchased $10 million of ordinary shares. In addition, on July 3, we redeemed our 7.25% Series B preference shares. As a result, year-to-date, we have reduced our total preference shares on issue by $43 million and we've repurchased $10 million of ordinary shares.

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

Thanks, Scott. Aspen Re continues to produce strong results in this tough trading environment. Our dedication to providing value-added service to clients through a complete regional network has differentiated our team and helped us deliver consistent results. At Aspen Insurance, we now have the strongest portfolio in Aspen's history.

Nonetheless, we continue to enhance that portfolio with actions such as the build-out of our Singapore platform. We recently added credit and political risk and also accident health products to our Singapore offering and we are seeing very good traction indeed in that market.

Now you'll remember at the end of our last earnings call, I mentioned that we have embarked upon an efficiency project. We've been very busy working on this over the last 3 months. We call this initiative Aspen 2.0 and we've engaged McKinsey to advise and support us. What we are seeking to do, is to turn a very good company into a great one.

At the simplest level, there are 2 areas of focus. The first of these could be thought of as modernization. Over the last 15 years, as we have grown organically, we have not always taken a coordinated approach to our operational strategy and structure. With Aspen 2.0, the time has come to have a more unified approach across segments and regions with the objective of improving operational efficiency and reducing costs. Some of this is very straightforward and involves pure process change. Some will entail better use of technology to enhance and simplify data capture. And the third category will involve the use of advanced analytics to sharpen our decisions around underwriting and claims.

The second area we're looking at is the use of facilities. It is clear that centers such as New York, London and Bermuda are critical to the specialty insurance and reinsurance business such as Aspen and our key trading platforms will continue to pivot around these 3 centers. However, as we currently do not have a low-cost location, we are moving to ensure that the right business activities are done in the right locations. Our organization is ready for this challenge. We are confident that by streamlining operations and using facilities more efficiently, we can deliver highly beneficial changes and make significant improvements to our financial performance. I look forward to sharing much more with you in October.

And with that, Scott and I are happy to take your questions.

(Operator Instructions) And our first questioner is going to be Josh Shanker with Deutsche Bank.

Chris, you just used the word “strongest” to describe the portfolio of risk you currently have at the company. Looking at the trailing 12 months ROE, I calculate a 4% ROE. It's very easy to argue that some of your competitors are not picking their losses at the same conservatism that you are, but that significantly lags peer results. Can you explain what you mean by strongest? It doesn't really jive with how the numbers are looking.

Sure. Thanks for the question. I would divide that between the Reinsurance side of operations and the Insurance side of operations. Reinsurance, as we look at it and we compare it to standalone reinsurers, has been an outperformer or a worst inline performer pretty much every quarter for about the last five years. Great people, great client relationships, great performance. And frankly, in some quarters I would use the word strong about reinsurance, other quarters I would use more superlative words than strong. In Insurance, on the other hand, as you know very well, is a different story. For some years now, we've been growing and refocusing changing that book. And each step along that way, we improve it and sometimes we make missteps. In the first call of this year, I mentioned that last year we nonrenewed about $150 million. Some of the continued runoff of that business associated with reinsurance charges we decided to lose the risk or adjusted our performance is negative. It's a headwind on our performance, and quite rightly you calculate, I can't check your math, by the way, the last four quarters. But that would be something that is not in our book going forward, which is in our book in the last 12 months, that would make us look poor relative to peers. I'm not using the word strong to describe that aspect of our book. There are other aspects of book, much of it we're doing in the London market, in Dublin, in Bermuda, and a great deal of what we're doing in the U.S. that I would describe as a strong. If I look at our five biggest and most rapidly growing areas of business in the U.S., I think we achieved this year 54% growth right now year-on-year in those areas. These are the future of the business. They have a long track record of good performance. They have a decent growth rates. They have good margins. They're cautiously reserved. They are becoming the bedrock of Aspen Insurance. So what you're going to see, and this certainly does justify the word strong but maybe it's more future than past oriented, what you're going to see is the performance associated with that go-forward book become the performance of Aspen Insurance overall and therefore I think will earn a word like strong. I hope that caters to your question adequately.

Yes. So if we take the Insurance segment, you talk about like a business that's not going to be there going forward. Can we talk about how much premium we're talking about over the past year has been associated with this, I guess, business gone into runoff per se, what the combined ratio on that business was? And how much of it will be in earned premium going forward?

So the figure that we use about, I think, on the first quarter this year was $150 million and some of that is still in force. A substantial part of that, however, we transferred to another party and is run off at their expense, although we did take a reinsurance charge, a substantial one, associated with that. So that was a hit to Q4 last year, we talked about it last February. There isn't really very much left of that sort. The turnaround of this book began when David Cohen joined us in September 2015. The job was pretty much done by the end of 2016. You phrased it as the last 12 months, so in that time period you're capturing some of those negative effects. Looking forward, we don't see that reoccurring. What we did have in this quarter, by the way, and we mentioned this in the call, was more fire loss than we’d normally expect and actually there was some fire losses on the Reinsurance side as well. We had a titanium dioxide plant in Finland deteriorate that was quite chunky. That comes in the Reinsurance from a client who, I think, has excellent underwriters and with whom we have a very long-term and successful profitable relationship, just even the good guys sometimes give you a loss. And on the Insurance side and Property in the U.S., we had some weather-related losses, we had 1 or 2 fire losses, none although worth by themselves, they're probably less than $5 million each. But the accumulation of those did this quarter impact the insurance results quite negatively. What I said in the call is something like when something like that happens, I'm asking myself, do we have a problem here? Is this something systemic? Is this something -- is it telling us something about not just property, but the whole insurance operation. In fact, it's isolated to a very small part of the book and we do not expect that to be a recurring problem.

(Operator Instructions) And our next question today is going to come from Ian Gutterman with Balyasny .

So Chris, I guess, I want to follow up on -- a little bit of what Josh was asking. I guess specifically on the large losses, can you talk a little bit about it because you're not the only one, but you're among a number of companies that this has been sort of a recurring issue for and I just want to understand better sort of how you define it. When you say, for example, on the Reinsurance that you know was 6 points on the combined ratio, does that mean there were 6 points of large losses and without that it would have been 0? Or 6 points above your budget? What exactly does that refer to in the same one, Insurance?

Ian, it's Scott here. Maybe I can just help flesh out a couple of those losses for starters and then talk about the impact on the ratios. So in Reinsurance, Chris talked about the titanium dioxide plant. There was one other fact loss that we picked up. That 6 points is, in fact, relative to where we were last year. Now last year, Q2 was an exceptional quarter at a 47.7% ex cat accident year loss ratio with very little loss activity. So we saw a bit of that this quarter. I might just add to that, though, there is a shift in business mix underlying here, too, where we're seeing less cat and you'd expect by default that the next cat accident year loss ratio in your cat book should be pretty much 0. And we've seen a move towards some specialty and casualty business, which is going to pick up some higher loss ratios, at least at your initial pick and I think that there's about a 5-point difference in there. And maybe that's more of a reasonable view of the future to think about where we were this time last year at high 40s with perhaps another 5 points added in there for mix shift on a go-forward basis. So hopefully, that helps in that regard.

Got that. That's kind of where I was looking. And just to be clear, that was a Reinsurance comment, those 5 points, correct?

That was very much a Reinsurance comment.

Okay. Just wanted to make sure.

Sure. On the Insurance side, there has been obviously a bit of an increase in activity, sort of a frequency of some storm-related losses. And you know that, historically, in our U.S. insurance book that we've not been exposed to the edges, but more middle America and that's actually been one of the things that's cropped up this quarter, but I think that's sort of being consistent with some of the notes that you've seen from some of the other sort of large primary players. The other area we'd picked up a loss, which we haven't seen really for a while is in Surety. And as unfortunate as that is, that part of the business has performed extremely well for the last 5 years and it's just unfortunate. So there's no trend in that regard in terms of the frequency losses and I hope we put that behind us, that I think it's just a function of where we've been in the quarter.

Got it, got it. And then just to follow up on the expense ratio commentary from earlier. How much of improvement as a year goes by is dependent on a certain level of premium growth versus what's, I guess, controllable and even if premium continues -- ends up being down a little bit more than expected, you can still get to where you're hoping to.

Yes, Ian. I guess, let me just reflect on that for a second. The OpEx ratio at 38.1% sort of continued to trend downwards and that's the third quarter in a row and the components have behaved as we expected it to be, largely speaking. That's some -- the seeding commissions that are coming through on the business that we've written are helping push that down. We've also got AgriLogic again, which, as you remember last year, had pretty much a heavy skew of earning towards the second half of the year. So that again I expect to help. I think it would have to be a fairly significant change in the levels of premiums for the OpEx -- for the expense ratio to creep up on that basis. So I feel okay where we are. But as you know, the expense ratios are always going to move around a little bit depending on the results of the company that are linked to variable comp side. But overall, I think the key message is a combination of those should see the overall expense ratio to continue to trend downward through the rest of the year.

Maybe, Ian, we are not assuming massive premium growth on either the Insurance side or the Reinsurance side. So that sort of gentle downward guidance you're getting from Scott is not dependent upon rapid growth is basically, I'd say, steady as she goes. We might be a point or 2 up, we might be a point or 2 down. I think Reinsurance is actually down year-on-year if you strip out AgriLogic and that's probably the way that reinsurance market is going to go. On the insurance side, there are some bits of growth in some lines, others, like energy, are tough. But essentially, that's the kind of sort of close to steady expectation, which we're reasonably confident is going to be correct.

Got it, got it. And then just my last one, Chris, is you mentioned, you went a little fast for me, just drug on a little bit here this morning. You mentioned towards the end of your commentary about getting into facilities. Can you just repeat that again, are you talking about brokerage like Aon Marsh facilities? Or would you do something different?

No, no, no.

That's a -- I heard there word facilities and I had a visceral reaction...

Yes, you would. Premises is another word for facilities (inaudible)

Okay. Just want to make sure.

And my point is New York, vital U.S. insurance center; London, insurance and reinsurance; Bermuda, great reinsurance center and pretty important insurance center, too. But Central Manhattan and London EC3 are some of the most expensive places in the world to do business. We have too many people in those places. So we're going to be looking at where -- what needs to be done there. And the answer is an awful lot does need to be done there. There's no getting away from that, if you want to be a leading London market or Bermuda player, you're going to be in London EC3 or go to Hamilton. But nonessential activities could be thought through and that's going to produce some more savings. That's what I was referring into.

Got it. Okay, perfect, just wanted to make sure. And do you still plan to give us a more detailed update on the strategic review in Q3 call?

Absolutely, yes.

And our next question is going to be Brian Meredith with UBS .

I got 2 questions here for you. First one, I'm just curious, on some of these large losses involved totally we've been seeing, does the reinsurance that you guys have bought mitigate any of that? And should it mitigate it going forward? And did it mitigate any of it in the quarter?

Brian, it's Scott here. The reinsurance placements that we have in place, or at least the larger quota shares, really cover our longer-tail lines in insurance, particularly, financial and professional and casualty. We also have some protection on the energy -- or the marine, aviation and energy areas. The losses we picked up in the quarter were a little more focused in the property area this time around and that's just the way it happens. So there was some mitigation overall, but perhaps not as much given the level of activity.

Brian, I'll just add to that because I think it's a very good point. On the reinsurance side, it's harder to buy that kind of protection, for risk losses and we do have some, but it tends to be for more extreme events. On the insurance side, most of what we're buying is excessive loss. We have quota share across marine, aviation, energy. We have quota share across casualty, financial lines, professional lines. Huge (inaudible) of our business are quota share. But the U.S. property is protected by excessive loss and what we had there was a small number of modest losses, like I said, I don't think it was many more than $5 million. So excessive losses are kicking in and the quota share wasn't there to support. So I think we want to review whether that reinsurance structure is right and that's something we're going to be doing over the next few months and then we may make some changes there. If we do, we will alert you.

Great. And then next question, Chris. Just curious, one or two companies this quarter kind of talked a little bit about loss trend increasing. There’s some cautionary notes to that. Have you seen any?

We have not seen that in our book. I've heard those comments, I think some of the people making those comments have somewhat different sets of exposures than we do and maybe more towards workers comp where we have none on the insurance side at all and very little by way of reinsurance. So I think it's kind of it's out there. I don't doubt it's real, but I don't think it's affecting the Aspen portfolio.

(Operator Instructions) And our next questioner is going to be Andy Kurita with Kettle Hill.

I was just wondering if you could comment if there's anything you're doing structurally regarding the cost structure of the company and how you're evaluating that, what the benefits could be going forward.

Andy, thanks for the question. I did deal with this to some extent in the prepared remarks. We are making a very radical review of this. We retained McKinsey to advise us. We're looking at simple processes, many of which, I think, are manual or use technology in a very rudimentary way. There's room to streamline those processes. There's room to deploy technology to be more efficient on data capture all over the organization. Data capture tends to be done on a variety of tools in different vintages. We believe there could be a single tool that would kind of unify and harmonize that. We also believe that as we look at our underwriting going forward, there are some analytic techniques available today that work. I'm not talking about what might be invented, but start with what's available today and used by just a few of our peers that we could deploy to sharpen the underwriting decisions. And there's Ian Gutterman asked me about premise of facilities there, that's another aspect of this efficiency initiative. Not in the position to give any more detail on that today, but it's something that's absolutely top of the agenda for both the board and management of the company, and we're hoping to give you further and better particulars in October.

(Operator Instructions) It looks we have no further questions , so this will conclude the question-and-answer session. I would like to turn the conference back over to Chris O'Kane for his closing remarks.

Well, thank you very much for your time and attention. Have a good day. Goodbye.

Ladies and gentlemen, the conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines.