Aspen Insurance Holdings Ltd (AHL) 2018 Q1 法說會逐字稿

Good day, and welcome to the Aspen Insurance First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to 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 first quarter of 2018. This press release as well as corresponding supplementary financial information can be found at 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 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 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 our website. With that, I'll now turn the call over to Chris O'Kane.

Well, thank you, Mark, and good morning, everyone. Before we discuss the results, I want to comment briefly on recent speculative news with regards -- regarding Aspen. I'll reiterate what I said on our last call. Our board is very open-minded, we're considering all angles. And we rule nothing out in terms of preserving and creating shareholder value for the future. We won't comment further on these matters on this call.

So let's turn to our results. I'm pleased to say we had a very good start to the year with strong premium growth across both Aspen Re and Aspen Insurance, particularly in the lines we have targeted for growth. Reflecting ongoing support from our clients and distribution partners, in the first quarter of 2018, we achieved more than $1 billion of premium in a single quarter. Both segments generated underwriting profits. We improved our total expense ratio and we continue to implement our operational effectiveness and efficiency program. Digging deeper into these results, Aspen Re delivered good top line growth, and after the heavy cat impact last year a return to underwriting profits and good underwriting margin. At Aspen Insurance, where we have 2 regional businesses in the U.K. and the U.S., plus 12 global product lines, we achieved top line growth and underwriting profits in 13 out of these 14 lines.

All in all, while we still have work to do, this was a quarter of good progress. We operated -- we reported operating income of $0.91 per diluted share for the quarter, an annualized operating ROE of 9.2%. We ended the quarter with book value per diluted share of $38.70.

Looking at our segments. Aspen Re continued to build on a strong record of performance, achieving a combined ratio of 90.1%. We started the year with successful renewals in January. Our reinsurance colleagues remain very disciplined with pricing and cross-reinsurance overall. Rates were up 5.3% in the first quarter. Rates in property cat were up 8%, Other Property was up 6%, while Casualty and Specialty each increased by around 4%. The level of rate increase that we achieved on our portfolio was better than the overall market. We set ourselves a goal of eliminating the bottom 5% of our portfolio by concentrating on better-priced business and improving the average rate on the continuing book.

As a result, total gross written premiums at Aspen Re grew by 10% compared to the first quarter of 2017. Most of the premium growth in the quarter came from our Specialty Reinsurance business and related primarily to our Crop business. Transitional fronting arrangements following the sale of AgriLogic in the fourth quarter of 2017 accounted for much of this increase.

We also grew our property cat premiums in the quarter as we took advantage of improving pricing to write some additional property business in North America and Europe. While we grow gross lines, we continue to leverage third-party capital thrust in Capital Markets and we managed our net exposures carefully. Our reinsurance team has continued this disciplined approach at the April renewals. While rate increases have moderated and rate increases for Japanese renewals were flat, we still achieved a rate increase of just under 4%, excluding Japan. The Japanese renewals reflect the experience of those Japanese contracts.

We've already completed a reasonable sample of Florida, and other wind renewals set in June. For loss affected accounts, we're seeing rate increases up to 7.5% and accounts without loss are renewing in the range of flat to plus 5. The vast majority of renewals are still to come and we will report on them in our next earnings call.

Turning now to insurance. We talked last quarter about actions we were taking with the aim of reducing volatility and improving the profitability of our insurance business. These actions included increased use of quota share reinsurance, eliminating voluntary participation in our own reinsurances as well as reunderwriting and non-renewing parts of our U.S. property and downstream energy books.

Gross written premium increased by 14% in the first quarter. Most of this growth came from lines that we have specifically targeted for growth over the last couple of years. These lines include Accident and Health, Excess Casualty, Crisis Management as well as professional and some other related lines.

As I mentioned earlier, 13 out of our 14 lines achieved underwriting profits in the first quarter. Indeed, the growth lines that I referenced a moment ago grew by 24% this quarter and accounted for 46% of our total gross written premiums, producing an accident year ex cat loss ratio of 54% in the quarter.

In addition, I'd point out that the average accident year ex cat loss ratio for these lines over the last 5 years were under 54%. Business written at Lloyd's, which includes some parts of these lines, accounts for 30% of the premium written this quarter and achieved an accident year ex cat loss ratio of just over 60%.

So, as you can see, the vast part of our insurance business is performing very well. Aspen insurance achieved a combined ratio of 96% in the first quarter, a significant improvement from the fourth quarter 2017. We are not yet completely satisfied and certainly have more work to do, but we're making very good progress, and I remain optimistic. I will now turn the call over to Scott, who will take you through our financial performance in more detail.

Thank you, Chris, and good morning, everybody. We started 2018 with a good first quarter. Top line growth, positive underwriting income in both segments, and success in reducing our expense ratios resulted in a return to operating profitability. We produced after-tax operating income of $63 million, a combined ratio of 95.5% and diluted book value per share of $38.70. Gross written premiums for the group were $1.1 million, and an increase of 12% compared with the first quarter of 2017, with growth coming from both segments. Seeded written premiums increased to $481 million due primarily to the increased quota share reinsurance we previously discussed and now includes a 60% quota share on our U.S. property book. As a result, the retention ratio for the group is 57%, down from 69% in the first quarter of 2017. The loss ratio for the group was 58.1% compared with 56.5% in the first quarter of 2017. We recorded net cat losses of $24 million or 5 loss ratio points, principally from winter weather-related events. Total prior year net reserve releases for the group were $38 million or 7 percentage points. Aspen Insurance accounted for $30 million of the net favorable loss reserve development in the quarter. These releases were primarily from short-tail lines, including favorable loss experience from the 2017 cat events. Aspen Re accounted for the remaining $8 million of net favorable reserve development in the quarter with the reduction in releases reflecting the conservative view we have taken of the 2017 crop year runoff.

Our accident year ex cat loss ratio was 60.7% compared with 56% in the first quarter of 2017. The current quarter was impacted by a small number of midsized losses in insurance and reinsurance. Consistent with what we've done in the past, we tend to take a more conservative view of the midsized losses in the first quarter of the year as we build our large loss loads across the remainder of the year.

Turning now to our expense ratios. I'm very pleased to say that the total expense ratio declined 270 basis points to 37.4% compared to the first quarter of 2017. The decrease was primarily as a result of the reduction in the acquisition ratio. Importantly, however, the G&A ratio was also lower than the first quarter of 2017, and we are on track to achieve our targeted savings of $30 million this year from our operational effectiveness and efficiency program.

I'll now turn to our segments and firstly reinsurance. Gross written premiums were $624 million, an increase of 10% compared with the first quarter of 2017. The specialty subsegment recorded the largest increase and the crop business was the primary driver, contributing $115 million of premium in the first quarter. It's worth noting that this included close to $40 million of premiums related to a transitional fronting arrangement we have with CGB as part of the sale of AgriLogic in the fourth quarter of 2017. Noncrop premiums of approximately $510 million were up slightly from the prior year as we benefited from rate improvement, writing more property cat.

I want to make a few comments about our Aspen Capital Markets business. Historically, we've consolidated the cat business that we retroceeded via ACM. However, going forward, these premiums will be disclosed in the same way as any other third-party reinsurance. And this is the main driver of the increase in seeded written premiums within our reinsurance segment this quarter. Our reinsurance business recorded underwriting income of $28 million and a combined ratio of 90.1% in the first quarter. We recorded net cat losses of $15 million or 5 percentage points on the loss ratio, principally from winter weather-related events.

The accident year ex cat loss ratio was 56.6% compared with a very low 50.3% in the first quarter last year. The first quarter included approximately 3 percentage points from a fire-related loss in Australia. And the shipment business mix resulting from the growth in our crop premium also added about 3 points to that ratio.

I'll turn now to insurance, which produced an underwriting income of $9 million and a combined ratio of 96.3% in the quarter, both of which are significant improvements from the fourth quarter of 2017. Gross written premiums were $493 million, an increase of 14% compared with the first quarter of 2017. Growth came primarily from our Financial and Professional lines, and to a lesser extent from our Property and cat -- Casualty subsegment. We continue to see further impact on our insurance book this quarter from the reinsurance changes that we implemented in 2017. The net written premiums were $211 million, a decrease of 12% from $238 million in the first quarter of 2017. This resulted in a net to gross written premium ratio of 43% in the quarter compared with 55% in the first quarter of 2017. The flip side of the decrease in net owned premium from these reinsurance changes is the seeding commissions we received and the resulting improvement in the acquisition ratio to 13.9% this quarter compared with 17.9% in the first quarter of 2017. The net loss ratio in the insurance segment was 57.1% compared with 61% in the first quarter last year. We had approximately $9 million or 4 percentage points of net cat losses from weather-related events in the U.S. and the U.K.

The accident year ex cat loss ratio for the first quarter was 65.4% and is a significant improvement from both the third and fourth quarters of 2017. The current quarter included a credit loss in the U.K. and a fire-related loss in the U.S.

I'll now move on to investments, where we generated net investment income of $47 million, in line with the first quarter of 2017. We took advantage of strength in the equity markets and liquidated our equity portfolio during the first quarter. The total return on our aggregate investment portfolio was a negative 90 basis points in the quarter and reflects mark-to-market changes in the fixed-income portfolio, driven by rising interest rates.

The fixed income book yield was 2.63%, up from 2.56% at the end of 2017. The duration of the fixed income portfolio was just under 4 years at the end of the first quarter 2018.

Before I finish, I wanted to provide an update on our PMLs. You will notice that our PMLs reduced significantly, reflecting lower exposure to our key perils. In combination with the additional quota share reinsurance that we purchased, we recently placed a $225 million cat bond to provide fully collateralized cover for losses from a broad range of perils worldwide, including wind, earthquake and wildfire. This 3-year deal was competitively priced and oversubscribed.

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

Thanks, Scott. So 2018 is off to a good start with targeted growth and solid underwriting contributions from both Aspen Re and Aspen Insurance. These results reflect actions that we've taken and continue to take to build on the strength of the Aspen franchise and position the company well for the future. One of those actions is the Operational Effectiveness and Efficiency Program we launched in 2017. This transformational program is meaningful for Aspen, and we expect it to create a more dynamic and scalable platform to execute on opportunities and enhance long-term shareholder value. Much of the work over the first few months has been getting the framework of the program up and running. At the same time, we've been looking closely at the ways we work, the technology we use, and how we spend our money. We have taken actions to reduce our expenses, instigating a first wave of streamlining in December, and closed down some peripheral offices in New York during the quarter. An important element of the program that we've been working through is the selection of an outsourcing partner. Following a tendering process, we recently selected Genpact as our outsourcing partner, and we have now entered into a phase of due diligence with them to assess the feasibility of outsourcing much of our middle and back-office support processes across the business.

As Scott mentioned, the program is already starting to produce the anticipated savings. While it is still early days, we're making good progress on implementation, and look forward to updating you further about these efforts in due course. The Board, the leadership team and employees across the company remain fully committed to delivering strong results and building shareholder value. Thank you for participating on the call this morning. With that, we are happy to take your questions.

(Operator Instructions) And our first question will come from Amit Kumar of Buckingham Research Group.

A few questions to begin with. First of all, I had a broader question for Chris. Chris, we've seen a lot of consolidation in the industry recently. And broadly, I would be curious to hear your thoughts on the trends we have seen and is this a new normal since the pricing actions which we used to see previously following large catastrophes are not possible now based on the level of capital in the industry.

And that's a very interesting and a philosophical question to start an early morning call with. We could talk for the next hour about it, and I don't think anybody wants to listen -- to do that, and you probably don't either. I think there are a couple of things going on. I think that the 2 deals this year represented excellent -- absolutely excellent value for the shareholders of the 2 companies that wrote insurance and reinsurance that were bought. I think almost any board at any time in the history faced with an opportunity to get that much value for their shareholders would take it. Question is, is whether that is the new normal, and I'm not sure that it is. I think there might have been special circumstances, special relationship following those things. That said, I think there will be more M&A, there will be more consolidation. And that is absolutely the way of the world, but maybe the beginning of this year saw more than the normal allocation and maybe prices were a bit more generous than you might expect to see over time.

To your point about capital, I think that's particularly true in the cat business. There's no question that the best pricing in property cat was at 1/1 and it's fallen a little bit in April, and it looks like it's falling a little bit more in May, June. This is because, while I think that the established reinsurers, writing on their own common equity basis, operate with the same standards and the same philosophy. You have no loss, the price can erode a little. You have a loss, the price goes up to reflect the experience. That's becoming sort of a minority taste and you have people who are essentially commission earners -- they still call themselves underwriters, but the fundamental business model is earn commission for capital that is more naïve and therefore seeking a lower return and isn't using these kind of price-related techniques. So you're absolutely right, in property cat that's the case. I don't think the ripple effect of that outside of property cat is all that great. Yes, to some extent in some property -- probably in areas like Marine, in Energy, in the Casualty lines it really isn't a significant factor. What it says to me, if you're building a hybrid business that does insurance and reinsurance, the thing -- the place that may be historically you've made lot of your money, like property cat, is not going to be your place where you make most of your money in the future. I don't rule out the possibility of attractive moments of little inflection points post losses. Some of those may be more local, it may not be the whole property cat, while it may just be somewhere in the southern hemisphere or somewhere in Asia where it might be. But some of the fund has gone, business model has changed. Our reaction to that is to have a broad base of insurance and reinsurance. In fact, we look at our own performance. We've probably done as well, maybe a bit better in our Casualty Re and our Specialty Re in particular, than we have in our property cat Re. Although property cat Re has done very well, it's not actually for us over the last 10 years has been the best place. There are different factors driving the consolidation. I think it's mainly investor led, some of it is cost led. The guys, who I think, matter a lot are the buyers. And what we find with the buyers is post some of these transactions is they're coming to smaller reinsurers and say, we want to have choice, we need diversification of our counter-parties. We really like the guys in such and such a place, we're not so sure we're going to deal with them in the same way on the same scale now that they are part of this other place. So I wouldn't overlook the role of clients which is -- after all, it's their money is getting spent and their wishes that we are all trying to meet. So Amit, I'm sorry, it's a bit long, but I think it was a great question, I hope I did justice.

Yes, you did. And I appreciate you going back, and in the opening, you mentioned about, I guess, addressing what you had said in the last call. It's May 3rd and I'm curious, is there, I guess some level of urgency into any process that may or may not be happening? I'm just curious, we are getting to the hurricane season here, and I wanted to understand about any potential time lines where you probably want to achieve some sort of resolution?

Yes. I'm certainly sympathetic to the idea that you'd want your deliberations to be clear before you enter the roulette wheel phase of the underwriting season. I think we certainly have the time to do that. There's no sense of urgency. You could ask Scott, whether he has been working hard these last few months, and I think he will confirm that. Scott and the finance team, the legal team, the underwriting teams all very hard at work. We had a 3-day board meeting ending yesterday. So noses have indeed been to the grindstone, we work very hard. But there's a lot to do. There are many, many different possibilities and players that we have to evaluate, and it's a big job. You would want us to do it absolutely right, which is what we're trying to do.

Got it. And just, I guess, on the broader discussion on consolidation, and you've seen some of the multiples for Validus and Excel, and I don't know if you got any opinion on that. Do you think that there is generally a hurdle in the industry in terms of, I guess, the price-to-book multiples, and if you go back and remember in the past -- I mean, we can go back all the way to Flagstone, IPCR, PXT, and then you come back -- come to AWH, and Altera, et cetera. I mean, do you think that there is, I guess, any difference in the buyers' and sellers' mind what the multiple should be? And can some franchises accept a lower multiple to achieve quicker resolution? Or do you think that generally based on the market conditions, franchises should be waiting for things to improve down the road?

It's hard to answer that question with a yes or no. I think that the multiple is going to be a function of a couple of things. One is the company is being brought, its performance and its prospective performance. And we all know, when you look at the prospective performance, the reality could sometimes deviate from that. But then you've got to look at the combination. What are the synergies? Are they big or are they small? And if a company is bringing another company something that it really hadn't got in underwriting terms, but isn't bringing a need to preserve a big operational infrastructural system, then you tend to get some of the better multiples that way. Also the absolute level of multiple of both players. Companies trading at a certain level seldom buy companies trading at much higher level. So too complicated to say yes or no. A lot of factors having a part to play would be my view.

Just one more question and I will requeue. I do have other questions too. Are you seeing any impact on the business you're negotiating with clients based on the uncertainty and in terms of the future of the company? Is there a wait-and-see attitude for some of the counterparts? Or what are the interactions like, where they might be asking about, should I enter into this deal with them or not? Because I don't know what things might look like 6 months down the road. Are you witnessing that? Or how are you navigating what I would assume is a fairly common question?

Yes. So a couple of things. First of all, this is hardly an issue at all on the insurance side of the house. It's much more a reinsurance issue. But if we step back a moment and look at our premium, what I said to you on the call was in both insurance and reinsurance we had year-on-year growth, quite considerable growth in top line in insurance, and the company passed $1 billion of written in the -- for the first time in history, about $1.1 billion, which is the best we've ever had. So, like the real proof is the numbers, and the numbers are okay. But to achieve that, what we're drawing on is what I said to you over the years: We have exceptionally able reinsurance underwriters, with exceptionally good relations with our clients and brokers. At a time like this, they have to reach out to those clients and say, here's what's going on with Aspen, here's how we fit with what you expect from us in the past, and what you can expect from us in the future. And I can honestly say to you, we have not lost a single client through this process. We have had some detailed conversations though, where we had to say this is what we're doing, and our potential futures involve these sorts of things, and any of those futures actually is a way that works for you, we continue to be a good counter-party. And people accept that to greater or lesser extents. But we trade with everyone we've traded with before. Some of the places where we are putting our participations are a little different. Situation gets complicated as well, as I mentioned in the call, in reinsurance. I don't know if you know that expression, bouquet underwriting, people used to use in the London market -- you take some good stuff, some middling stuff, and some bad stuff, and you hope that the good and the middling more than compensate for the bad. But our reinsurance guys at 1/1 decided the bad was too bad and the good wasn't actually compensating. So we pulled the rug on some of the less performing stuff. Some of the clients have said, okay, if you're not going to help us on the stuff that nobody wants, we're going to have to retain some of the stuff that you like. So our premium volume came down as a consequence of that. I think that was the right thing to do by the way, because we looked at the numbers, and we wanted to basically just slightly improve the quality of our reinsurance accounts.

Ladies and gentlemen, having no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Chris O'Kane for any closing remarks.

Well, I'd simply say thank you very much for joining us on what I know is an extremely busy reporting morning. The team, myself, Scott, Mark are always available if there are any questions or clarification you need to follow up on. Thank you, and have a good day.

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