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Executives

Noah Fields - IR

Chris O'Kane - CEO

Richard Houghton - CFO

Analysts

Dan Farrell - Fox-Pitt Kelton

Brian Meredith - UBS

Vinay Misquith - Credit Suisse

Jay Gelb - Barclays Capital

Mark Seraphin - Citadel

Arthur Winston - Pilot

Aspen Insurance Holdings Limited (AHL) Q4 2008 Earnings Call February 5, 2009 8:30 AM ET

Operator

Good morning. My name is Tasha, and I will be your Conference operator today. At this time, I would like to welcome everyone to the Aspen Insurance Holdings Fourth Quarter and Year-End 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions). Thank you.

Mr. Fields, you may begin your Conference.

Noah Fields

Thank you, and good morning. The presenters on this morning's call are Chris O'Kane, Chief Executive Officer; and Richard Houghton, Chief Financial Officer of Aspen Insurance Holdings.

Before we get underway, I would like to make the following remarks. Yesterday afternoon, we issued our press release announcing Aspen's financial results for the year and quarter ended December 31, 2008.

This press release, as well as corresponding supplementary financial information, can be found on our website, at www.aspen.bm. I would also like to draw your attention to the fact we have posted a short slide presentation on our website to accompany in this call.

This 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 the US Federal Securities laws.

All forward-looking statements will have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For more detailed descriptions of these uncertainties and other factors, please see the Risk Factors section in Aspen's Annual Report on Form 10-K filed with the SEC and on our website.

This presentation will contain non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance. For a detailed disclosure on non-GAAP financials, please refer to the supplementary and financial data and our earnings slide presentation posted on the Aspen website.

Now, I will turn the call over to Chris O'Kane.

Chris O'Kane

Thank you, Noah, and good morning everybody. I am pleased to report that our book value per share increased by 3.8% to $28.10 for full-year. Our combined ratio for full-year was 95.6% and net income for the full-year 2008 was $103.8 million, which equates to an operating return on equity of 5.4%.

Our book value per share increased by 7.2% over the third quarter of 2008, and the combined ratio for the quarter was 93.4%. The reported net income of $21.8 million for the quarter, a decrease of 84% versus the same period last year.

While our absolute returns for the year are disappointing, I think there are some very positive aspects to our performance. 2008 was an incredibly challenging year, both for our industry and for financial markets more broadly and was dominated by Hurricane Ike and by unprecedented fall in the financial markets worldwide.

I will start my commentary on our underwriting performance over the year. Our reinsurance operations fared extremely well in the third most expensive catastrophe year on record. The combined ratio for reinsurance was 91.6%, with Hurricane Ike impacting the combined ratio for the property reinsurance by 23 percentage points.

Casualty reinsurance had an excellent result with a combined ratio of 92%, 6 percentage points better than we had expected. There is no doubt that market conditions in casualty have been and remain challenging, but our continued underwriting system and pricing integrity are guiding through this difficult stage and cycle with success.

Results in our insurance lines are more mixed. Our UK liability insurance unit continues to produce excellent results and our UK property insurance operation achieved combined ratio of 75% in extraordinarily challenging circumstances. These are superb results.

Elsewhere, for example, in offshore energy and physical damage insurance, our results were impacted by Hurricane Ike and our Marine & Energy liability account was affected by reserve strengthening on 2007 California wildfires losses.

Our US insurance account needs more careful interpretation. The loss ratio in property is 60% which we think is a good improvement and reflects the work we are doing to reposition our book.

Our casualty loss ratio is 66%, which is very respectable. However, the property combined ratio was 119%, and the casualty combined 102%, which reflects the expense load as we invest in the future of this business.

I will also comment on the impact of the ongoing financial crisis on the underwriting result for the year. While we have increased our net reserve position from $35 million to $85 million in total, this exposure rises from our casualty reinsurance and international insurance segments.

In casualty reinsurance, we have written a small number of reinsurance contracts to certain Lloyd's Syndicates who have underwritten financial institutions exposures including E&O and D&O as well as one casualty cash covenant.

In our international insurance segment, this comes from our financial institutions book, where we write E&O and some D&O basis. In my opinion, we have taken an extremely conservative, but appropriate reserving posture in respect of this exposure.

Turning back to Hurricane Ike, as set out on slide 3, we announced our initial loss estimates for this event of $141 million net of reinsurance, tax and reinstatement premiums on October 10th, which we believe was consistent with the market loss of approximately $16 billion. This consists of $99 million in property reinsurance and $42 million in international and US insurance segments.

We have increased our loss estimates for Hurricane Ike by 12% this quarter to $158 million, and we have increased our market loss assumption by 17% to $20 billion. The modest change in our loss increase reflects an approximate 8% increase in property reinsurance and 19% elsewhere, principally arising from deterioration in offshore energy and physical damage loss.

Regarding our property reinsurance segment, as stated in previous calls that we would typically expect our market share in property reinsurance for US catch up this time to be in a region 1% to 1.25%.

Based on our revised market loss estimates, our market share equates to approximately 0.6% within property reinsurance, which clearly demonstrates the benefits of the measures we put in place to reposition our property reinsurance book close to 2005 hurricanes.

Now let's look at our investment return that varies from our expectations. The bigger single variance is due to performance of our funded hedge fund investments. At the beginning of the year, we had $561 million invested with an expected return of 300 to 500 basis points in treasuries. The actual result is loss of 17% or $96 million.

This represents a reduction in post tax ROE of just under 4%. We gave Notice of Redemption in September last year in respect to the $177 million of our funds of hedge fund investments. And currently intent to redeem the balance in the next redemption day, which is June 30, 2009.

This will not be the end of our involvement in the funds of hedge fund. It is worth contrasting the performance of the funds of hedge fund with our fixed income and short-term investments, which returned 4% for the year. It was extremely pleasing given the turmoil in financial markets.

In aggregate, our investment portfolio had a positive total return of 2% in 2008.

And now I am going to turn the call over to Richard, who will take you through our financial performance in more detail.

Richard Houghton

Thank you, Chris, and good morning everyone. Despite strong conditions in 2008, our balance sheet has strengthened every year. Our capital position has strengthened during the quarter as a result of a significant increase in unrealized gains from our fixed term bond portfolio due to a general flight of quality and security where we believe we are very well positioned.

We continue to enjoy excellent liquidity generated by solid positive cash flows from operations amounting to $86 million in the quarter and $531 million for the year.

I will now highlight some of the key performance metrics for the quarter and the year. Book value per share on a diluted basis at the end of the quarter was $28.10, compared with $27.08 at December 31, 2007. This represents a 3.8% increase in year-on-year.

Since the third quarter, 2008 book value per share has increased by 7.2% due to unrealized gains in our investment portfolio and positive contribution from earnings. Operating income was $20.5 million for quarter and $151.5 million for the year. This includes losses from our funds of hedge funds of $49 million in the quarter and $97.3 million for the year.

Annualized operating return on equity for the quarter was 2.4% and 5.4% for the year. Annualized operating return on equity, excluding our funds of hedge funds performance was 10.6% for the quarter and 9.2% for the year.

Operating earnings per share for the quarter was $0.17, compared with $1.47 in the fourth quarter of 2007. On a year-to-date basis, operating earnings per share were $1.44, compared with $4.99 in 2007.

Losses from our hedge funds reduced operating income by $0.55 a share for the quarter and $1.01 for the year. Hurricane Ike and Gustav reduced our operating income per share by $2 in the year.

Gross written premium for the quarter of $435 million is up 43% from $305 million in 2007, due mainly to the contribution from our new underwriting teams. On a year-to-date basis, gross written premium has increased by 10% to just over $2 billion, again attributable to our new underwriting teams, which contributed $208 million.

Net earned premium for the quarter of $479 million, is an increase of 13% over the last quarter of 2007 as we see written premium from our new lines start to earn through to the income statement. Net earned premium on a year-to-date basis of $1.7 billion is broadly inline with 2007.

Our combined ratio for the quarter was 93.4%, compared with 79.4% in 2007. We experienced $12 million in net reserves strengthening for the quarter. We experienced some strengthening in respect to California wildfires with an international insurance offset by favorable experience across the number of our other lines of business.

This net strengthening compares to $35 million of reserve releases in the fourth quarter of 2007. In 2008, our combined ratio was 95.6%, compared with 83% for 2007. Hurricane Ike and Gustav accounted for 11 percentage points of the increase in combined ratio for the year.

Reserve releases were $84 million down $23 million on last year. The net impact of CAT events in 2008 including Ike and Gustav have amounted to $203 million, compared with $77 million in 2007.

Our expense ratio for the quarter was 28.5%, down from 31.8% in the fourth quarter of 2007 due to the increase in earned premiums and reduction in operating expenses. Operating expenses have decreased from $57 million in the fourth quarter of 2007 to under $49 million in 2008 due to a reduction in performance related incentives and lower exchange rates applying to our Sterling denominated expenses.

Our tax rate increased in the fourth quarter to get an annual effective rate of 26%, this is being driven by the distribution of underwriting and investment losses within the group between our Bermuda and UK operating companies in particular in the fourth quarter.

I will now turn to the highlights from our operating segments. Chris has already commented on the performance of our property reinsurance segments including our Hurricanes Ike numbers.

Our casualty reinsurance segment combined ratio improved to 92% for the quarter from 96.1% in the fourth quarter of 2007. The improvement is due largely to favorable developments from prior accident years, particularly in our US casualty book.

In the full-year 2008, the combined ratio has improved to 92% from 94.6% in 2007. Our accident year loss ratio for the year was a 105.8%, which includes $35 million of reserve charges related to the financial crisis as Chris referenced earlier.

Our fourth quarter gross written premium increase of $46.4 million includes the impact of a number of prior year premium adjustments as we receive updated information from our [cedents].

For the twelve-month period gross written premiums decreased by 4% to $416 million when compared to 2007. The international insurance segment reported a combined ratio for fourth quarter of 104.9% versus 70.5% in 2007.

The fourth quarter 2008 has been impacted by $24 million in net prior year reserve strengthening. We have adverse prior year deterioration in respect to California wildfires and also from ship owners' liability, both within our Marine & Energy liability accounts offset by a favorable development in our UK commercial and property lines. I will not draw any negative trend conclusions from the specific elements of adverse developments within this quarter.

For 2008, the combined ratio for the segment was increased to 99.8%, compared to 80.7% from the same period in 2007. With Hurricanes Ike and Gustav contributing 7 percentage points to the increase.

Gross written premium in the quarter increased by 53% to $229 million. For the 12-month period gross written premiums have increased to $868 million from $663 million in 2007.

The combined ratio for the US Insurance segment have improved significantly to 59%, compared with 77% in the fourth quarter 2007, due mainly to favorable loss experienced in the current quarter.

The combined ratio for the 12 months was 105.8% with Hurricanes Gustav and Ike accounting for 15 percentage points of the increase in the combined ratio for the year. This compares with a combined ratio of 98.3% for 2007. Gross written premium increased by 13% when compared to the fourth quarter of 2007 and 5% for the year.

Turning now to our investment performance, our net investment income for the quarter was $10 million, compared with $80 million in the fourth quarter of 2007 due primarily to adverse performance of our funds of hedge funds.

Our fixed income portfolio performed strongly with unrealized gains of $138 million in the fourth quarter. At the end of the year the fixed income portfolio of $67 million of net unrealized gains, compared with $42 million of gains at the end of 2007.

The average credit quality of the portfolio remains AAA. Please refer to slide 4 of the earnings slide presentation for a breakdown of our portfolio by asset type. Total investment return including unrealized gains and losses for the quarter was $157 million, up from a $145 million in the fourth quarter of 2007.

On a year-to-date basis, total investment return of $117 million is down 69% from 2007, due mainly to the performance of our fund of hedge fund investments, taking together with the impairment charges and the smaller net change in unrealized investment gains.

The book yield on fixed-income portfolio was 4.64% at December 31, 2008 compared with 5.05% at the end of 2007. Average duration decreased to 3.1 years from 3.4 years as we have responded to the changing interest rate environment.

We have taken charges in the quarter of just under $4 million pre-tax associated with investments we believe to be other than temporarily impaired. For the 12-month period, our impairment charges were $60 million. Total impairment charges are just over 1% of the portfolio as at the year-end.

I will now talk about our liquidity and capital structure.

We continue to enjoy a strong balance sheet with just under $6 billion of cash and invested assets. Our debt-to-capital ratio at the end of December is 8.2% reflecting our limited reliance on borrowings. This ratio is broadly in line with December 2007, despite the impact of the 2008 hurricanes.

Our total debts from hybrids to total capital ratio is 22%, which includes 419 million of perpetual preference shares.

Turning now to guidance for 2009, set out on slide 5. Due to economic uncertainty surrounding investment returns in particular, we have limited our guidance metrics to the following data points. Our gross written premium guidance is $2 billion, plus or minus 5%. We expect to see between 10% and 12% of gross earned premium.

We anticipate our combined ratio to be in the range of 90% to 96% including a CAT load of $170 million assuming normal loss experience. We expect a tax rate of 13% to 16%.

That concludes my comments on 2008 performance and guidance for 2009, and I would now like to turn the call back to Chris.

Chris O'Kane

Thank you, Richard. I am now going to comment on January renewals and our view of the market outlook. As a reminder, we measure rate growth activity on the premium weighted basis on the business we renew.

Starting with the property reinsurance segment, we saw significant hardening of US peak zone and CAT contracts with the rates rising by 20% or more and we expect this upward strength to continue throughout 2009. Rate increases on regional and US business, however, had been more muted.

Accounts from the European wind exposure experienced rate increases of 5% on average but rates elsewhere in Europe were flat. In general, our US Casualty Reinsurance business, we saw early signs of market hardening in the January first renewals, general and umbrella liability lines were worst than mid-2008 double-digit declines to a smaller single-digit decrease or even a flat renewal.

We are still seeing some pockets of heavy competition on certain more attractive and loss rate counts. Term and conditions, however, are holding up. In international casualty reinsurance, generally we saw rate increases in the high single-digit range depending on the transfer business and the loss experiences.

Terms and conditions were broadly steady with small improvements. Overall, we recorded an average rate increase of 3% on the renewal business across the international casualty reinsurance book.

Turning now to our international insurance segment, which is an average rate increase of 50% renewal business reflecting an improving rate environment in a number of our lines of business, in particular Marine Hull and Marine & Energy liability, for which month of January is an important renewal period.

In Marine Hull, the rate environment is improving in part due to reduced market capacity. And we achieved average effective rate increases of 27% of the book. We achieved significant increases on Marine, Energy and Construction liability book of an average 44% versus our planning assumption of 10%.

In US, property insurance rates continue to vary between 10% above and 10% below expiring premium, but there are many outliners. For larger property accounts we are trying in a number of marketplaces, we are generally able to find business with the rate increases between 5% and 10%. Property rates remain heavily bifurcated between CAT and non-CAT, but CAT being much more likely to see increases.

In US Casualty Insurance, we maintained a disciplined underwriting approach. In low book we typically saw reduction of 10%, we were in fact able to secure renewals orders at rates equivalent to those achieved at the end of 2007.

In conclusion, there is no doubt that the P&C Insurance industry is still experiencing very difficult conditions. Since we reported to you last quarter three month LIBOR declined by 2.63% and the US treasury primary yield declined by 1.3%. This will ultimately lead to reduced investment income.

There is still no return to stability in equity markets and we have yet to experience the impact the recession we will have on claims frequency and severity. On the other hand, many lines of business are experiencing good level of rate increase. And we believe this trend will continue as 2009 progresses.

I have already reported to you on the level of increase versus planned from many of our lines of business. Our task now in managing our underwriting is to increase exposure to those lines that are enjoying the biggest increases or moderating our exposure to those which we are yet to reprise. This is something we will be working on assiduously throughout 2009.

And with that I am happy to turn the call over to Q&A

Question-and-Answer Session

Noah Fields

Operator, can you start questions please.

Operator

(Operator Instructions). And your question comes from the line of Dan Farrell.

Dan Farrell - Fox-Pitt Kelton

Good morning.

Chris O'Kane

Hello Dan.

Dan Farrell - Fox-Pitt Kelton

Hi. Couple of question, firstly I apologize if you touched on this in your comments but can you just go through again, some of the details on the movements in the reserve addition in the quarter. And in particular did any of the reserve movement relate to some of the premium adjustments that were taking place in the quarter.

Chris O'Kane

Yes certainly. The answer to your second question is no. And just to go to a bit more detail on what happened, in the major movements that we had in our international insurance segments, as I am sure you can see from the financial supplements, where we have $24 million strengthening in the quarter. From that by far the biggest proportion of that in respect of a California wildfire claim, where the issue is between utility owner and various property owners and it’s a question of liability under that position. So that is by far the largest element of that reserve strengthening.

The second element I will pick up is on ship owner's liability, where we have had some strengthening in relation to 2007 and before. And a particular one item I will pick up is the wreckage of the SS Napoli which happened in 2007. We ended up with part (inaudible) After the more expensive cleanup than have been anticipated.

So that’s what has been happening on the negative side in international insurance. Though, on a positive side, we actually had some releases from prior years in a limited way. From the property line, and very early years of UK liability where we continue to see very good loss experience.

Dan Farrell - Fox-Pitt Kelton

That’s helpful. Thank you. And then just on the combined ratio of guidance for next year, does that include any prior year reserve movement assumptions? And then, also on the CAT assumption over $170 million, can you refresh us on what that compares to assumptions for a year ago when you were forecasting caps?

Chris O'Kane

Yes. Sure. We do not include any assumption in respect of prior year development in our anticipated number, in the 90 to 96 we quoted for you. Our CAT number for last year was 135. And so we have a small of our largest drivers not materially increasing CAT load.

Dan Farrell - Fox-Pitt Kelton

Okay. Great. Thank you. That was helpful.

Chris O'Kane

Okay.

Operator

Your next question comes from the line of Brian Meredith with UBS.

Brian Meredith - UBS

Hi everybody. A couple of questions here. First one, Chris, I wonder if you could walk through on any significant changes in your re-insurance program, ongoing reinsurance program, significant changes in retentions or additional coverages that were brought during the one month renewal?

Chris O'Kane

I would say that in general, there are no very significant changes. But that’s very short answer to a good question. If I look, most of what we are buying is client specific protections against specific lines of business. And in a few instances, we had losses and reinsurance that sort of pushing us to retain a little bit more risk. For example, in the marine and energy line where there were Ike losses, which actually comes for renewal at the end of this month. We are thinking maybe we are going to retain a little bit more there but it’s not decided yet, we have a $20 million retention loan maybe that could be 20%, 30% higher or something like that. And then some of the other specifics, maybe they want to keep this, not to give an extra million or a couple million dollars in each and every loss.

I would say in general that the pattern is the same, there is no change in our risk retention strategy. Over on the retro side, as you may recall, we bought much, much less retro for the last couple of years and that pattern began to carry on. We are actually out in the market at the moment we are buying cover, there is a kind of spot market for that stuff, prices fluctuate. We buy more retro it's available to price and make sense, but there is enough available price that makes sense, which has moderated our growth exposures accordingly. So, again I would say it’s much pretty steady as she goes.

Brian Meredith - UBS

Excellent and then Chris your comments about your exposure to the financial credit crisis out there right now. Maybe if you would give a little bit more color around the numbers you provided. And do you have kind of loss pick in your DINO, NINO which you are booking at it now for 2007 and 2008 year?

Chris O'Kane

In the general sense, I would say obviously it's very hard to reserve this, but clearly the financial crisis is going to cost the insurance industry some money market loss estimates are pretty made off and I think that’s so around about $9 million to $10 million, and people are estimating anywhere from $1 billion to $4 billion extra on top of that for Madoff.

There are issues like we what are the circumstances being in buying do they really lead to real claims or they just notifications. Which year of account will the claims go to. What are the nature of the defenses. So I think it's actually hard to put a good number on it. And what I think a lot of people would be faced with that, I said let's not, we don’t really know enough to reserve adequately so why don’t we wait until we know more and then we will revert.

I think with respect to that point of view but it's not the one we would say, because what we try to do is try and work out what we think is our best pick of what ultimately it's going to cost us and that cost is over the 2007 and 2008 years to increase the total reserves as I said on the call by about a $50 million to about $85 million.

I think there’s much more I can tell you because other than I would say is informed by a general spurt of prudence. That’s what we've done, and I think we'll walk ahead.

Brian Meredith - UBS

Excellent. And then last question, can you talk more about, what you perceive your capital position is right now and your ability to grow here in 2009 and take on more exposure in the market. I mean it's hard to hear there is much of a constraint right now.

Chris O'Kane

I have to separate property CAT from everything else. And in property CAT certainly in the peak zones which would essentially be US wins. I would say we were close to full, I think really we are in a position where the amount of headroom is very-very small and what we are looking at doing is – ther are better deals and worst deals and maybe if you see a good deal you want to get on that one and that means you need to cancel one that isn't so good. As I said earlier, we are also looking at buying more property retro and to the extent that is available and we can arbitrage effectively, with that we may be able to increase a little more on growth space, but not a lot of space.

I would say pretty much every other line of business and every other peril, we're comfortably capitalized to do that. The only pinch point would be peak zone cash. So, elsewhere and I think a lot of it -- (inaudible) in Marine Hull, marine liability elsewhere some D&O price institutions will continue to reprice will certainly go clearly to capital to do that.

Brian Meredith - UBS

And what about energy in the Gulf?

Chris O'Kane

Well obviously energy in the Gulf is effectively a cap line and the way we budgeted that is, we probably are assuming CAT in three ways; in the property reinsurance area, in the E&S property insurance on-shore and then off in the Gulf. And we made an allocation based on what we think the markets likely could be.

The interesting thing about energy physical damages, I think we need to see on that business something like about a 75% maybe even 100% increase, and it will be effective price of the risk clearly and it's been under-pricing that risk sometime.

And if we get that kind on pricing, we certainly have the capital available. We are not yet to take advantage of that. If that kind of pricing doesn’t come through. Now I don’t see much point in writing that business. And that would actually free our cap capacity to use elsewhere, for example, in property account reinsurance. But I don’t want to do that yet because I am very hopeful that the trend of reprising needed for the offshore energy is actually going to flow through. We won't know it for a couple of months yet because the renewals really get going bazillion in March from that, that’s going to tell us where the market for this summer is in that line.

Brian Meredith - UBS

Thanks for your answer.

Chris O'Kane

Okay.

Operator

Your next question comes from the line of Vinay Misquith with Credit Suisse.

Vinay Misquith - Credit Suisse

Good morning. On the D&O loss increase, if you could help us understand your preserving in the sense that what is the industry loss estimate that you have reserved? Would that be the $10 billion limit and how should we look at as to whether your losses might increase? What are the factors that we should look out for that might lead to an increase in loss reserves in the future?

Chris O'Kane

I don’t really think that we can, it's a bottom off approach rather than top down approach, best way to put it. What we have done, we had insurance and reinsurance exposures, but in both cases, we have looked at every situation, every finance institution that one of reinsurance clients touched or in our primary underwriting. We look at each one. And we look at whether there is any notification coming through. We then look at quality of that notification, because some of them clearly will not amount ultimately to pay claims. And others I think very likely to do. So, there is some exercise of judgment.

What I was saying earlier is, I mean that's been informed by a good degree of prudence and conservatism. Coming up with that ground up approach, you can look at our share of those contracts and get a view of what 100% loss would be on those, but we are not involved, we are not big enough in this business to actually have a big enough sample to grow sub to a degree of the market loss. So that’s why I personally use the advise and figure from late last year for the market loss which was just shying to $10 billion. But certainly we made off, it's going to add meaningfully to that.

The other part of the question, what would cause a deterioration. I guess, if defenses that we think should be affective, don’t work or for some reason coverages might get attached to a different year of account than the year of account we think they would be belonging to. I don’t think that’s going to happen. Obviously, if we did, we do reserve differently, but it can't be ruled out.

My general sense is we are at the more conservative and at the more proactive end of this particular exposure rather than sort of waiting to see what’s going to get paid-in putting up a reserve on it back.

Vinay Misquith - Credit Suisse

Okay, that’s great. On the casualty US CD business, your gross premiums went up quite significantly, I believe some of that was because of premium adjustments, but what was mentioned in the press release is you had higher contribution from your US and Bermuda teams. Could you help us understand the growth in that line? We have heard that pricing really hasn’t improved significantly. So I am just curious on your perspective?

Chris O'Kane

I am going to ask Richard to give you the detail on that, but my general observation would be there are a few funny things in the quarter but across the year actually casualty rate insurance is down, and that’s probably a fairer way to look at it than to quarter in particular, can you get into the detail Richard?

Richard Houghton

I do Chris. I think that is the main point. The 4% decline year-on-year, having said that we have got a US team which is performing very strongly, I think very roughly in the fourth quarter they are up from about $5 million in 2007 to round about $15 million in this quarter. So there are some increases in that, but in the quarter itself the adjustments do make it rather difficult to see what the trend is. So I would pull you towards the year-on-year number rather than number in the quarter.

Chris O'Kane

Just to be very clear, Richard it was frankly, in million rather than in billions.

Vinay Misquith - Credit Suisse

Yes.

Chris O'Kane

I don't think anybody would buy this.

Vinay Misquith - Credit Suisse

One final question on the investment side, you guys did very well this quarter with your book value growing 7% you had mostly a very conservative investment portfolio. Are you looking to maybe increase that a little bit, maybe in the second half of 2009, as there are opportunities?

Richard Houghton

The short answer to that is yes. They are very much in line with what we have been doing at the backend of 2008. We are very pleased with what come through in terms of the quality of what we produced in Q4, we did go more into agency and [BS] in particular, I think it's on and that worked out very well for us. I think there is actually some decent opportunities back in corporate bond markets and so A+ will back up as the market proves attractive, as the yields drop off on the treasury side.

So that’s going to be the focus of our attention for all incremental money as it comes up. But the main sort of our investment portfolio will be consistency with regards to 2008 in the fixed income portfolio, quality will be kept high, liquidity will be kept very high and hope it will be producing the consistent returns from the fixed income portfolio we have achieved in 2008.

Vinay Misquith - Credit Suisse

That’s great. Thank you.

Chris O'Kane

Thank you.

Operator

The next question comes from the line of Jay Gelb with Barclays Capital.

Jay Gelb - Barclays Capital

With regards to investment income, I don’t know if you can give us your view there on the outlook for 2009.

Richard Houghton

Well it’s certainly not part of our guidance Jay, for reasons that I talked about in the call. I think it’s extremely hard to call investments income particularly in respect with funds of hedge funds. And that being our experience in 2008. We are currently looking for reinvestment rates of something like 4% and that seems to be a good working assumption for us right now, but you will appreciate as well as I do, how typical it is to project that going forward?

Jay Gelb - Barclays Capital

I think you mentioned with LIBOR being down, does that could have a drag on investment income. Would you anticipate the investment income excluding the alternatives, that would be down for the full-year 2009 versus 2008?

Richard Houghton

Well I have said the reinvestment rate will be about 4% that’s how we see it right now. If you think about a portfolio as a whole round about a billion in fixed income portfolio round about 4 billion will come to maturity this year. So, I think from those data points you will be able to draw your own conclusions.

Jay Gelb - Barclays Capital

Okay and then on the alternatives, I know you have significantly reduced the exposures to the hedge fund to funds. What was the performance in January?

Richard Houghton

Actually it was up as of the back end of last Friday by about 1% from a blended rates. So some recovery from Q4.

Jay Gelb - Barclays Capital

So up 1% year-to-date or for January?

Richard Houghton

To the end of last Friday which is the most recent numbers that I have.

Jay Gelb - Barclays Capital

Okay, great.

Richard Houghton

So January, lets call it January.

Jay Gelb - Barclays Capital

Okay. And the other point on the guidance was the CDs premiums. If I was to try and convert that to the dollar amount of CD premiums for the year. You are essentially saying that will be up versus the $166 million in 2008 for the full-year, am I thinking about that correctly?

Richard Houghton

Not quite, it's just 10% to 12% of earned is what we put it out. I haven’t actually given earnings guidance. We are just trying to give you a trend or an indication of how it's been since 2008. So, as Chris said in his response to the earlier question, at the moment it looks likely up a pretty steady policy related to what we have achieved in 2008 in terms of written.

Jay Gelb - Barclays Capital

Okay. Thank you. And then my last question is on exposure to [Cluv]. I don’t know if you've any view there?

Chris O'Kane

It seems to be a pretty small event, it's probably $2 billion or less. Probably Spain is worse affected than France, and Spain is the [consortial] national. And so the exposure doesn’t come to the private reinsurance market generally. And then in France, it was down in the southwest, it's going to be as agricultural rises, which is not a part of the book that we specialize in. So for Aspen, it's unlikely to be one where we will be troubled. I don’t think we will make announcement about [Cluv] I think it's going to be just too small.

Jay Gelb - Barclays Capital

Okay. That’s helpful. Thank you.

Chris O'Kane

Thanks Jay.

Operator

Next question comes from Mark Seraphin with Citadel.

Mark Seraphin - Citadel

The premium explanations on the casualty reinsurance growth were helpful. And maybe you could help me understand a little bit better any implications that those adjustments might have had on the accident year loss ratio pick, or is the increase in that sequentially or year-over-year more related to or solely related to the increasing credit crisis provisioning that you talked about backing some of the Lloyd's Syndicate treaties?

Chris O'Kane

Okay. The main impacts in accident year loss ratio will be from the extra reserving in respect to the financial position, rather than those adjustments. I would suggest you look at full-year accident ratio rather than the quarter.

Mark Seraphin - Citadel

Okay. And then maybe you have mentioned this in your prepared remarks and I missed it. Could you walk me through the currency translation impact that would have changed shareholders equity in the quarter?

Chris O'Kane

Yeah sure, I will give you some numbers for the year, if I might on the quarter. The most significant and impulsive impact was actually our expense base, the exchange rate movement has improved our expense line by around about $10 million for the full-year and around about $5 million for the quarter. So that is quite significant movement for us not being appreciated. On the rest of the accounts on the balance sheet we are pretty evenly matched between assets and liability, so there isn’t actually a significant movement on a net basis.

Mark Seraphin - Citadel

Thank you.

Chris O'Kane

Okay

Operator

Your next question comes from Arthur Winston with Pilot.

Arthur Winston - Pilot

Good morning. It seems that with very uncertain investment opportunities or low return investment opportunities there are higher dividends and it would be in order that you would tell the Board before we lost any more money on these investments. So the idea is that you think, the management thinks that going forward with all of your new teams in the direction that the overall insurance market is headed to, suggest a better opportunity for growth of mix two or three years than we have seen recently. Is that what you are thinking, the premium growth the life insurance?

Chris O'Kane

I believe that some of the lines of the business; property, reinsurance especially on the property CAT side, some of the marine, maybe the offshore energy where I talked to you at and maybe the rates can double from that. The Marine Hull, some of the energy related liability lines and that sort of things. I think they have the potential to reprice very dramatically and I think it makes a lot of sense to keep capital low and take advantage of that, which is what we are doing.

I think there is a chance some people might say -- an outside chance that you are going to see a broader re-pricing of business as the year goes on. There is a view common amongst the brokers that the first and second quarter this year we will see property re-pricing and the third and fourth quarter will see casualty re-pricing, if that happens we want to be in a position with the capital to take advantage of this. So, I think that probably will be the main thing to kind of informing our view of how much capital is on the hold is the opportunity. It is either already here or is going to be here in quarter and then it might be some more in couple of quarters. So I hope that helps the answer.

Arthur Winston - Pilot

Yes, it does thank you.

Chris O'Kane

My pleasure.

Operator

(Operator Instructions). At this time there are no further questions.

Chris O'Kane

Well in that case, thank you all for your attention and wish you a good day. Goodbye.

Operator

That concludes today's conference call. You may now disconnect.

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Source: Aspen Insurance Holdings Limited, Q4 2008 Earnings Call Transcript
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