Aspen Insurance Holdings' CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.25.13 | About: Aspen Insurance (AHL)

Aspen Insurance Holdings Limited (NYSE:AHL)

Q1 2013 Earnings Call

April 25, 2013 9:00 AM ET

Executives

Kerry Calaiaro – SVP, IR

Chris O’Kane – CEO

John Worth – Group CFO

Analysts

Max Zormelo – Evercore

Amit Kumar – Macquarie Capital

Mike Zaremski – Credit Suisse

Josh Shanker – Deutsche Bank

Brian Meredith – UBS

Sarah DeWitt – Barclays

Scott Walls – Bank of America

Ron Bobman – Capital Returns

Operator

Good morning. My name is Anita and I will be a conference operator today. At this time, I would like to welcome everyone to the First Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the speakers’ remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn the call over to Kerry Calaiaro.

Kerry Calaiaro

Thank you and good morning. The presenters on today’s call are Chris O’Kane, Chief Executive Officer; and John Worth, Chief Financial Officer of Aspen Insurance Holdings.

Last night, we issued our press release announcing Aspen’s financial results for the first quarter of 2013. This press release, as well as corresponding supplementary financial information, can be found on our website at www.aspen.co. 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 U.S. 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 contains 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 financial data posted on Aspen’s website.

I’ll now turn the call over to Chris O’Kane.

Chris O’Kane

Thank you, Kerry. Good morning, everyone. In the first quarter 2012, Aspen delivered good operating results. We delivered book value per share 5% from a year ago to $40.68 or if you add dividends book value per share grew more than 7%. We delivered annualized operating ROE of 10.8%.

As you know on our call, we outlined three initiatives that will enable us to achieve 10% return on equity in 2014. First initiative is business portfolio optimization. We’re sharply focused on the profitability and risk profile of each of our major loans business. Second is efficient capital management. In other words, ensuring the capital equity we hold, are properly sized given the risk in our business. And third is enhancing investment returns. We’re focused on optimizing investment income by responding rapidly to the changing dynamics of the global markets. We made progress in all three initiatives in the first quarter.

Our efforts to optimize our business portfolio initially focused on reducing volatility in our insurance segment. We previously identified wind and earthquake exposed property in our insurance platform as area of our portfolio which was too volatile. Our views have not changed and we’re working towards reducing this exposure which equals an approximate reduction of $140 million of capital within the next two years and ultimately a reduction of over $200 million.

The second lever to drive improving ROE is managing our capital in a most efficient way. We expect to generate substantial additional excess capital over the next several years, given normal last experience.

Currently, we plan to distribute the shareholders through share repurposes most of comprehensive earnings. This is after dividends and after what we need to cover organic growth. We were very active in 2013 so far and repurchased over $230 million of shares through April 23rd. We expect to complete $300 million of share repurchases by the end of this year.

The third lever to drive increased returns is our investment portfolio, as you heard me say before we are first and foremost an underwriting led the company. That said, we have been evaluating various strategies to increase investment returns within acceptable risk parameters. This has resulted in an investment of an additional $200 million in equities and the acceleration of our programs investment in certain high-yielding securities. We will continue to evaluate other potential investment opportunities in line with our risk appetite.

In summary, utilizing these three levers will enable us to improve shareholder return by increasing both operating ROE and growing book value per share at a high rate.

I’m now going to turn the call over to John and I’ll close later with some market commentary.

John Worth

Thank you, Chris. Chris mentioned our three levers to help increase return on equity. I will take a few moments to update the progress on each of these three levers.

The first is business portfolio optimization. We are targeting a reduction in our wind PML by July 1 and our quake PML by October 1. To-date we have not renewed approximately $40 million of aggregates limits for wind and quake exposure within our U.S. insurance accounts. As regards to wind and quake exposure, the relationship between limit reduction and capital reduction for this exposure is approximately one to one.

The second lever is ensuring that the capital we hold is appropriately sized even the risks in our business. In the first quarter we announced $150 million accelerated share repurchase program. Under which we initially delivered 3.3 million shares. We repurchased the further $58 million under our open market repurchase program during the first quarter and an additional $10 million through April 23rd.

Together, so far in 2013, we have repurchased almost 10% of our ordinary shares in the quarter which is approximately 6.8 million shares at a total cost of $220 million. Assuming normal loss experience, we expect to repurchase at least $300 million of equity in 2013.

The third lever is enhancing the returns that we generate from our investment portfolio. We increased the total allocation of our investment portfolio to equities and BB rated securities by $200 million each. We have added to our equities position and that portfolio stood at $414 million or 5% of our total portfolio by the end of the quarter. Our additional investment in BB securities will be predominantly in bank loans and to date we have $80 million in the portfolio and will continue to increase it.

We continue to expect an ROE of 10% in 2014 given the current interest rates and pricing environment, assuming normal loss experience and including a pre-tax cap load of $190 million per annum. To be clear this is a ROE calculated including other comprehensive income.

Two of our measures, EPS and book value per share, have been subject for the dilution effects of our perpetual preferred income equity securities, also known as PIES. These securities amounted to $230 million and were issued in 2005 and 2006. During the first quarter, our share price increased by 20% which increased the diluted effect of the PIES by 1.2 million shares from the year-end.

This morning we notify the holders of our PIERS that we intended to mandatorily convert the PIERS into $230 million cash on calculated number of shares. The final share price for this calculation is determined by our average share price over a 20-trading day settlement period. This is the first practical opportunity to exercise this option. By exercising this option, we will eliminate the variability in the diluted share count from the PIERS.

We launched a preferred share offering this morning and we intend to use the proceeds to refinance the PIERS as well as the general corporate purposes.

I’d now provide an overview of the results for the quarter. Gross written premiums decreased slightly from Q1 of 2012. This reflects growth in the Insurance segment offset by reduction in the Reinsurance segment principally due to lower reinstatement premiums and the impact of commutations which I’ll spend upon in a moment.

The Group’s combined ratio for the first quarter was 90.1% with no cat losses. Reserve releases was $76 million or 5.1 resulting in an accident year ex-cat combine ratio of 95.2% compared with 97.6% on the same basis a year ago.

The loss ratio improved from 4.7 point to 52.6% from 57.3% in Q1 2012, while the accident year ex-cat loss ratio was 57.7% compared with 61.1% a year ago. The first quarter of 2013 have several medium size non-cat losses including a $7 million capitalize loss in reinsurance and several smaller one in insurance while the first quarter of 2012 had the cost of great loss.

These are not indicative of trend of increased losses. These events coupled with the lower net earned premium as a result of commutation elevated the loss ratio.

Total Group operating expenses were $191 million or 37.5% of net earned premium. The Group acquisition expense ratio rose one point from Q1 of 2012. This ratio reflects lower reinstatement premiums for the quarter, but is mainly the result of a 2.4 percentage point increase in the acquisition expense ratio in our Reinsurance segment as we commuted certain long term accounts which are listed from the associated liabilities and locks in our profit, but also resulted in higher profit commission amount and reduced the premium base.

The general administrative and corporate expense ratio for the quarter was in line with a year ago. We expect the total operating expense ratio to be slightly lower for the remainder of the year as our U.S. insurance platform continues to gain scale. We also continue to look for opportunities to reduce costs and ensure that the size of our support operations is appropriate for the scale of our business.

Now I will provide some more detail on the Reinsurance and Insurance segments for the first quarter. The Reinsurance business produce an underwriting income of $55 million which is stable compared with last year with contribution from each sub-segment. We’re pleased with this performance given the stage of the cycle. The combined ratio was 78.5% with no cat losses in the first quarter of 2013. Prior year reserve releases were $20 million or 7.8 combined ratio points.

The resulting accident year ex-cat combined ratio is 86.3% compared with 83.7% a year ago. This reflected increase policy acquisition cost particularly in the casualty business following higher provision profit commissions and commutation adjustments.

The accident year ex-cat loss ratio at 52.3% is a two-point improvement on the first quarter of 2012. This is a good result and reflects our continued focus on underwriting discipline.

Gross written premiums of $440 million declined 7% from Q1 2012. This mainly reflects lower reinstatement premiums this quarter compared to the same period last year and the impacts of commutative policies.

Underwriting income from the insurance business of $8 million compared with an underwriting loss of $10 million in Q1 2012. The combined ratio is 96.8% for the quarter against 104.2% last year with the loss ratio of 60.7% compared with 66.1% a year ago.

Prior year reserve releases were $6 million or 2.4 percentage points. Gross written premiums increased 8% to $334 million, largely reflecting the continued growth in the U.S. insurance business.

Financial and professional lines have the highest growth followed by our casualty business reflecting an improvement in the rate environment. Our U.S.-based insurance business continue to gain traction with both international and U.S. businesses recording positive underwriting income for the quarter.

Investment income was $48 million in the first quarter of 2013, down 8% from the equivalent quarter a year ago. Given the current interest rates environment and lower reinvestment rates, we expect a slightly lower level of investment income for the remainder of the year.

Total investment returns for the quarter was 0.5% compared with 0.6% for the first quarter 2012. Fixed income book yield for Q1 2013 was 2.8%, down from 3.31% in Q1 2012. These trends are consistent with our expectations given lower reinvestment rates and declining book yields.

Our equity portfolio totaled $414 million at March 31, 2013, up from $188 million a year ago, reflecting our strategy of tactically diversifying our portfolio by investment in high-quality global equity income strategies.

Fiscal earlier generated a total return of 8.7% in the quarter. The tax rate for the first quarter was approximately 6% in line with the first quarter of 2012. Fully diluted book value was $40.68 at March 31, 2013, up 5% from a year ago, but up $0.03 from December 31, 2012 due to the dilutive effect of the PIERs at the result of our share price increase in the quarter.

Positive contributions from underwriting, investment returns, and as I’ve already mentioned the buyback programs, was substantially offset by the higher dilutive effect of our PIERs. In addition, Board approved an increase of 6% in the ordinary dividend to a new rate of $0.18. This supports our commitment to return capital to shareholders and underscores our confidence in our outlook.

I will now turn the call back to Chris.

Chris O’Kane

Thank you, John. As you know the first quarter is dominated by the renewals in the reinsurance market. That renewal period is dominated by the U.S. and the European markets.

For the first quarter we achieved an average rate increase of 6% on renewals across our entire book with 1% in reinsurance and 15% in insurance. The rate increase in insurance was across a relatively small renewal book during the quarter and has been heavily influenced by several large accounts, particularly in our marine, energy and transportation lines. Excluding the outlines, we achieved a mid-to high single-digit price increase across our insurance portfolio which is closer to what we expect to see in the next few quarters.

Overall, we are seeing rate improvement in areas which are meaningful due to loss experienced and some other specific lines and geographies, but not across the meaningful portion of our book.

As regards reinsurance, for the first quarter 2013, property catastrophe reinsurance business achieved a net rate increase of 2%. Prior to Sandy, the initial indications in market that 1/1 renewals would be flat or down, the loss experienced from Sandy reversed that trajectory.

We achieved significant increases in loss affected accounts, but accounts with no loss experience were mostly flat. We are experiencing a similar trend across most of our property treaty reinsurance book and achieved average rate increases of 3% in the first quarter.

As we noted previously, the U.S. property facultative insurance market responded to Sandy with significant increases in flood – for flood cover, but the fire rates remain flat. This trend continued in the second quarter – in the first quarter, beg your pardon.

Following a largely benign year for losses outside the U.S. rates in international property reinsurance markets are generally flat are showing a small decrease with strong capacity. April is a major renewal period for Japanese market. As expected the market continues to benefit from post – pricing levels. You may recall a year ago we managed our Japanese book such that we renewed about half of the earthquake risk, but maintained our premium volume. This year we maintained rate integrity and renewed the majority of the book. Despite an increased level of capital in the market, most renewals were stable, although premiums in dollars are down due to Yen exchange rate movements.

For casualty reinsurance, we achieved a rate increase of 1% in the first quarter. The rate environment continues to vary based on line and geography. In parts of our casualty segment, we are seeing improving market, especially in U.S. E&S general liability and non-medical professional lines.

As discussed last quarter, our current portfolio continues to see stable loss cost trends. Especially reinsurance rates across portfolio were flat on average, however quite different dynamics in various lines. Marine was dominated by the uncertainly of the Sandy and Costa Concordia losses. Business affected by the events, expense of rate increases of up to 30% with increase planned retention.

Rates continue to increase 7% on average in the first quarter. Competition in international credit and surety is high with plenty of capacity supplemented by a few new entrants in the market as a result rates declined 2% in the first quarter.

Moving onto the insurance markets. As I said earlier, our insurance book for the first quarter achieved a blended rate increase of 15%. With several insurance lines with significant loss affects in the Marine aviation and financial institutions areas. If we look at the rest of the book, I would say those rates rose about 7% or 8% on average in the quarter.

Our property insurance book across the U.S. and the U.K. we achieved an average rate increase of 2% and the U.S. property team achieved a increase of 3% on the book of primary non-cat affective business.

In our program business, we also achieved rate increase of 3% for the quarter as the market has responded to Sandy losses. In our U.K. property business, the market remains crowded but the rating environment appears to be stabilize and we continue to focus on strict underwriting discipline which has produced excellent results for us.

We continue to see positive momentum in the U.S. primary casualty markets, we achieved average rate increases of 9% in the first quarter and the outlook continues to be favorable. The global casualty market is showing some signs of events in with slight rate improvements.

In our Marine energy and transportation business, we achieved overall rate increase of 26% for the quarter lead by Marine energy and construction liability. These were accounts where the market continues to harden following significant loss activity.

Aviation market continues to be challenging. The rating environments in financial and professional lines is mixed, achieving 2% increase in average. Rate increases were led by the financial institutions account, which as I mentioned earlier were executed by loss-affected accounts on relatively small renewal premium.

Professional liability rates in the U.S. rose 2% on average in the quarter. This is very encouraging as this is the first positive rate movement in many years. U.K. professional liability as well as management liability rates stay continuing to be under pressure.

In summary, within our insurance segment we see favorable rating additions in Marine, energy, construction liability, global access and U.S. primary casualty and is – hardening market in financial institutions.

In our reinsurance segment we’re seeing improvement market in parts of casualty business especially U.S. ENS general liability and in non-medical professional lines.

Our investment into our regional network is allowing us the insight to take advantage of adequately raised opportunity that we wouldn’t otherwise have access to. Heading into the June and July property catastrophe renewals, we are seeing some pressure in the rate environment. We anticipate the property cat rates would weaken as the year progressed and therefore we allocated more of our aggregate capacity to the January renewals.

That if necessary we cannot renew some of our accounts in midyear if we do not believe there are adequate pricing level and we will still be able to achieve our plan for the year. Previously, we explained that we would allocate the capital is being freed up for our planned reduction of wind and quake exposure in U.S. property insurance to either share buybacks or too other business opportunities, if we felt they had the capacity to meet appropriate return targets.

This quarter as we seem to be able to report that we’ve made two such strategic – into areas where we will redeploy some of the capital.

We’re very excited about these new hires Brian Tobben and Anthony Carroll. Brian is now a member of our reinsurance organization. He joined us with extensive and proper expertise managing eyeless funds and going to help with our efforts and leveraging our internal underwriting expertise and increasing our management of the third-party capital.

We continue to enhance our insurance business globally. Anthony Carroll is one of the leading players in the energy market worldwide. He has joined our US insurance teams and will help build upon our existing global expertise in marine energy and transportation markets to help us better serve our energy clients.

Our diversified platform means we’re well-placed to take advantage of those areas where rates are improving and leverage improving underwriting expertise. This coupled with the measures we’ve outlined to enhance our profitability will enable us to continue to improve ROE and rapidly build shareholder value. We have a very exciting plan and we’re very energized about executing it.

Thanks for listening to us. John and I will now be pleased to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Max Zormelo with Evercore.

Max Zormelo – Evercore

Hi, good morning. My first question is about the mandatory conversion of the professional PIERS. I was wondering and historically you have 50% equity credit down 50% debt. First, is that correct? Secondly want to know how the mandatory conversion as such your excess capital position I believe you told us last quarter you had $250 million of excess capital. How does this mandatory conversion affect your excess capital position?

John Worth

Thank you, Max. This is John Worth. You are right in terms of the credit that we get and the PIERS does not affect the excess capital position.

Max Zormelo – Evercore

Okay. So the second question I had was about the insurance margins. The margins deteriorated a bit, I think you mentioned that part of it was because some medium-sized losses. I want to know what are the impact of medium-sized loss either you to limit – take those out what is the core margin change from the prior quarter? For the Insurance segment, please.

John Worth

Yes, you are right. There are a couple of smaller losses. If you take those out, I believe the – if we take those out those losses together contributed approximately $12 million.

Max Zormelo – Evercore

Can you repeat that please?

John Worth

Yeah, if we take those losses out, they contributed approximately $12 million.

Max Zormelo – Evercore

Okay. So $12 million was the impact of those losses in total? Okay.

John Worth

Yeah.

Max Zormelo – Evercore

That’s helpful. And also looking at the insurance segment, did you change your repurchase – your purchase of reinsurance this quarter? I noticed the net to gross ratio changed quite a bit. I was wondering if you changed amount of reinsurance you have for the segment?

John Worth

No there was no material change in the purchase of reinsurance.

Max Zormelo – Evercore

Okay. Last one if I may, so you’re saying the perpetual PIERs, I just want to go back to my first question. Perpetual PIERs, the conversion doesn’t affect your excess capital position. What is that capital position now versus what it was last quarter?

John Worth

The excess capital is about $200 million.

Max Zormelo – Evercore

Okay. All right. That’s – I think that’s all that I have for now. Thank you.

Operator

Your next question comes from Amit Kumar with Macquarie Capital.

Amit Kumar – Macquarie Capital

Thanks and good morning. Maybe I will go in reverse order in terms of the question. Just going back to your comments on the upcoming renewals, again we were seeing clear divergent commentary coming out of reinsurers. You talked about you expect some pressure. Maybe just expand on the comment, talk about the impact of third-party capital. And what would be helpful if you could sort of put a range around how much rates would be down at the renewals? That would be very helpful.

Chris O’Kane

I mean, that’s a big and complicated question. Since you know it is a big question. This is the markets where every segment is behaving you could say independent of every other. So you’ve got a pattern in insurance, you’ve got a pattern in reinsurance. But within insurance itself you’ve got different things going on. So if I look at the European data, and look at UK it is pretty impressive. Not a lot of good stuff to report. The best you can say maybe is rates not going down much anymore.

You look into Europe were we’ve write some of the trade credits, surety business, you actually see rate reductions there. But then we go to – then actually a big part of what we do think and frankly with the rates going down, we will just do less of it.

If I look at the U.S. market on the primary side, you have areas a pretty good news, encouraging professional liability improving, general liability improving quite a lot, management liability proving a bit. Property, especially if its cat exposed property improving meaningfully, if it’s not cat exposed property its flat generally, maybe I think we averaged up three on that book – in the quarter for us. So it’s very, very, very diverse.

And you will still see the odd rate reduction here and there. Areas we are not in normalization, for example, workers comp, we don’t do any of that at all on primary basis. But I think the news there is actually quite encouraging. So it is a very, very diverse theory.

And then if you look over to reinsurance, say with casualty, for example some of our portfolio is reinsuring E&S line casualty business, and those guys are pretty excited about what we’re seeing there. They are having their primary customers getting rate improvement, strengthening fold and we’re getting rate increases on the deals generally.

That didn’t show through actually much this quarter, but I think that was just a anomaly of a small book in the quarter and generally that’s quite encouraging. The Specialty Re-area marine, energy, were you have losses, you’re seeing really pumping increases 30%, 40%, if you want to renew a marine program in the market these days, but in other business especially kind of the way from the losses, it’s flattish. Does that help? It is really a case where...

Amit Kumar – Macquarie Capital

It was…

Chris O’Kane

You do not see what is going on.

Amit Kumar – Macquarie Capital

I was asking more about the sixth one prop cat renewals, and the fact about the capital.

Chris O’Kane

I’m sorry. Maybe it is not complete waste of words. But on that what you have is, Sandy wasn’t a big enough loss to dramatically affect the markets. We have a lot of third party capital depending which – expect you listened to maybe 14% maybe more of major property cat programs now are down in several capital, we are all familiar with the story.

And that story is that the risk is viewed by certain elements of capital markets, by pension funds and endowments as being diversifying and therefore merits a lower return, and traditionally we ensure that it’s aspire to find that kind of return is attractive, they find the diversification from their portfolio is attractive and so they are coming in some business that is having downward effect on prices.

Our strategy to go with that is twofold. Number one, we did more business area in the year, because we could see the prices were pretty firm there, which means, that we may want – we may be able to sacrifice business later and still be on plan. And then secondly, it’s a very important part of the market so we’ve had Bryant – a really very, very expert guy in this area and he will move us into the position of managing third party capital so we can play in that part of the markets.

I couldn’t and I don’t want to give a figure saying rates are going to change by this much the negative direction in that area, but I will admit that there is more capitals, more capacity and pressure is downward, not upward.

Amit Kumar – Macquarie Capital

Thanks, that’s helpful. Just one more question, I don’t want to take too much time. Going back to the discussion on the conversion and the impact, let me be very clear on this, the buyback pace does not change in spite of all of things that you’ve done right? The 314 million is what you will complete and you will continue buying back. Is that – did I understand that correctly?

Chris O’Kane

Yes, that is correct. We’re continuing our share buyback program. And that’s because with the retirements of the peers we’re issuing as I say a new security which was announced this morning.

Amit Kumar – Macquarie Capital

And will the pace change as we approach the hurricane season? Or no matter what, that’s what you said is that you will get through this and no matter what you will get through this.

Chris O’Kane

I would never say no matter what. It is a huge loss in the world at 75 billion. We will always progress and say what are we doing? But giving normal loss experience we do not intend to vary the pace because of the – we’re just going to carry on with the plan that we laid out in February.

Amit Kumar – Macquarie Capital

Got it. Thank you for all of the answers.

Operator

The next question comes from Mike Zaremski with Credit Suisse.

Mike Zaremski – Credit Suisse

Hi, thanks. Reinsurance segment expense ratio elevated four points from 1Q, John I believe you citied commutation costs, are those one time and if so can you quantify them? So you can get a better sense of the run rate. And if you did provide the details in the prepared remarks and I missed it, you know we can move onto my next question.

John Worth

It’s not an expected at this times of year in terms of the impact relatively modest in the first quarter something like about it $6 million on the premium. I would estimate.

Mike Zaremski – Credit Suisse

Okay. So the expense ratio was up four points – if I do the math I think it is more than 6 million. So how should we be thinking about the expense ratio in the reinsurance segment?

John Worth

As you see part of it is due to the increase in the acquisition of cost expenses and part of it is due to profit commission approval.

Mike Zaremski – Credit Suisse

Okay. Okay. So the only unusual was the commutation?

John Worth

Yes that is the only unusual thing for this quarter.

Mike Zaremski – Credit Suisse

Okay. How about details on the reserve releases this quarter, specifically anything from Sandy?

John Worth

No reserve releases specific to Sandy.

Mike Zaremski – Credit Suisse

And any context around the reserve releases in the segments?

John Worth

Reserve releases in the segment $26 million in total. That is reinsurance $20 million and insurance $6 million.

Mike Zaremski – Credit Suisse

Yes. I am just curious if you provide any details on what type of events or vintages caused the 26 million?

John Worth

Nothing specific across that. I wouldn’t say there’s anything particular to bring in.

Mike Zaremski – Credit Suisse

Okay. And I guess lastly, if I look at the investment income from dividends from the equity portfolio. 3.3 million doubled quarter-over-quarter, so is that the run rate I think that calculated about a 3% common dividend yield from the portfolio?

John Worth

Yes that would be about right.

Mike Zaremski – Credit Suisse

Okay. And actually maybe I will slip one more in.

John Worth

Yes.

Mike Zaremski – Credit Suisse

So I believe we saw the release on Aspen capital markets, any thoughts on how that will impact revenues on the coming year? I don’t know if you could probably wouldn’t be up by mid-year renewals I could be wrong. And I also believe that you also already might have a controlling interest in a third-party platform named Cartesian. Curious if that’s commingled with Aspen capital markets? Thanks.

Chris O’Kane

Mike as regard the covenants with Cartesian, we also we have a controlling interest we do have a significant economic interest however that’s a standalone venture. It is small. The ambitions have been fairly modest but the returns are very good.

What we are talking about here is bringing – is not bringing that but rather creating capacity in-house just for Aspen and Aspen management third-party capital. We’d expect to do a few deals in June. It’s not going to move the premium exposure very much, but certainly there is a lot going on and we think there is some interesting stuff that could be done. And frankly, the way the marketing opportunities to buy and so in there. But as you rightly suggest, the real impact on that is going to be spoke in 2014. And I’d rather talk about in a bit more detail when the plans are more concrete later in the year.

Mike Zaremski – Credit Suisse

Thank you.

Operator

Your next question comes from Josh Shanker with Deutsche Bank.

Josh Shanker – Deutsche Bank

Well, Mike hit upon my question what that last question. I was just wondering what capacity you’re hoping to achieve with the Aspen capital markets in total? And what the fee structure will look like?

Chris O’Kane

Josh, we’re not going to publish a figure for funds we expect to have on the management decision. We’re talking to a lot of people and with regard to the fee structure, I would say it’s likely to be in line with what others are achieving. But individual deals are still be negotiated so, that was something that will emerge over the coming months. Can’t really help you anymore at this stage.

Josh Shanker – Deutsche Bank

And so that’s going to do it for me. I’ve all my questions answered. Thank you.

Chris O’Kane

Sure.

Operator

Your next question comes from the Brian Meredith with UBS.

Brian Meredith – UBS

Yeah, good morning. Couple of questions here for you, Chris. The first one just curious given the rate activity that you experience in marine and energy area in the primary. What didn’t we see any growth in the area? Why was it down?

Chris O’Kane

One of the factors going on there Brian is the retentions are increasing is that retentions are increasing in the product fee, a company that, is that the reinsurance question?

Brian Meredith – UBS

On the insurance side. It was minus 8% gross written down.

Chris O’Kane

What’s happening is a few deals have lost money and being renewed at much higher premiums. But there aren’t more deals in any one market to do.

John Worth

Hey, Brian, just to do that there is some business that we anticipated being written in the first quarter that is slipped into the second quarter.

Brian Meredith – UBS

Okay. So there is a timing issue.

Chris O’Kane

Yeah, its bit of a timing issue there.

Brian Meredith – UBS

Okay. Great. And then also on the property insurance line I thought given what’s going on in the U.S., in reduction to cat exposed property area. You would start to see a decline there? Is that also just a timing issue? Should we see that the decline in the gross basis, or are you doing it reinsurance. How is that going to work through?

Chris O’Kane

Yeah, I know it is a timing issue. And as I said earlier, we are taking off exposure for wind and quake exposure.

Brian Meredith – UBS

Got you. So like you said the PMLs will be down July 1st, I think from a wind perspective that’s when we should see most of the reduction from a premium perspective?

Chris O’Kane

That’s correct.

John Worth

We’re seeing it obviously at a written level already, and it’s going to take a little while to feed through to the end.

Brian Meredith – UBS

Okay. Terrific. Great. And then Chris I’m wondering if you could comment on and give us your thoughts on the Aon agreement with Berkshire Hathaway that was – with respect to Lloyd’s business. And what do you think the potential impact that has on the market?

Chris O’Kane

Very interesting question. Very interesting question indeed, Brian. In this I would probably say, Aon, I do not know the particular precise terms of the deal, but to have a market of that caliber, willing to take their business without it being individual risk underwritten.

It’s a great advantage for Broker, another winner is Berkshire it’s a very efficient machine with a low cost of capital and very attractive return on assets in the investment side. So it has a competitive it advantage, which perhaps was always there, but was not put to use in this way.

Previously as opportunity loses I would say we’ll be small players, we’re not leaders. Something – somebody has to make space for BARC Share. So I guess that seems to lead to the most likely source for the revenue to be taken from. Much less likely at lead capacity in the Lloyd’s environment is actually needed for his expertise and structuring the deals that they would suffer.

That said, a very little is public, so I’m giving you the benefit of having thought about it and some speculative insight as perfectly possible everything I said to you turns out to be wrong. That’s the way that I see it.

Brian Meredith – UBS

Thanks, Chris I appreciate it.

Chris O’Kane

Sure.

Operator

Your next question comes from Sarah DeWitt with Barclays.

Sarah DeWitt – Barclays

Hi, good morning. I want to follow up on the capital management, how are you arriving at that 300 million of buybacks this year? I think you have 200 million of excess capital and you got a 140 million of relief from reducing your property insurance exposure and you probably generated over 100 million of retained earnings for the rest of the year. So it seems a little conservative?

John Worth

Yes, I mean, I think in very broad terms to think about, in terms of a $300 million surplus at the beginning of the year, $100 million give or take profit during the quarter. And then we’ve of course had the buybacks just in excess of $200 million.

Sarah DeWitt – Barclays

Okay. And then just separately on the preferred, how much are you issuing in preferred to fund the PIERS?

John Worth

We are conserving that as you’ll appreciate during the day.

Sarah DeWitt – Barclays

Okay. Makes sense, thank you very much.

John Worth

That’s fine.

Operator

Your next question comes from Scott Walls with Bank of America.

Scott Walls – Bank of America

Hi. Thanks for taking my call. In your investment movements there with adding BBs and equities, how did that move the risk mentioned of the portfolio in your view?

Chris O’Kane

It moved relatively marginally I would say. I mean, the move that we have into equities as you have seen so far this year, I think it’s been another 2.5% of the total portfolio. We have authorization for another 5%. So sure there is an increase in capital allocation. But in terms of the overall risk metrics it’s not that significant.

Scott Walls – Bank of America

Okay. Another question. It touches on a third party capital and I appreciate the comments so far and I think it extends on Brian’s question a little bit as well. S&P has a report our talking about third party capital change in the property catastrophe market. It says that, we had serve merely as capacity providers are the highest risk being marginalized. No surprise. But generally speaking what metrics would you use or how would you otherwise determine which reinsurers are really capacity providers?

Chris O’Kane

In the old days Scott people took that lead capacity, but probably everybody is a lead these days. But to the extent you can isolate who is the leading market and who is not that’s important. What I will use internally to kind of assess the health of our operation is when a major broker has a major program either renewal or restructuring program or new business. Who do they go to the? Who are the half-dozen or eight people that they use they absolutely seek out?

And most of those are on the island of Bermuda, couple are in Europe, maybe there is one or two these days in Lloyd’s of London, couple on Continental Europe. It is a club of probably 10 to 12 players and that not all 10 or 12 are going to be in there. So what I’d say to our guys are we – do our markets or do our plans to the producing brokers need to know what we think and the good news is in the case of Aspen Re they do want to know what we think and that constitutes to me that we’re part of the leading group rather than the so-called following capacity. But I think...

Scott Walls – Bank of America

Channel.

Chris O’Kane

Did you say broker generated.

Scott Walls – Bank of America

No, sorry. I just want to make sure I understand it’s sort of checking like a broker channel to see if who are the leads on particular programs? That’s one way you will do it?

Chris O’Kane

Yes. I mean, the brokers wouldn’t reveal who the leads were on the programs you are writing. You cannot easily get that. But if you are writing the program, they will tell you who is the lead. So the question is when the point of closing, structuring, how to solve a problem a client has. Who are the markets that the broker turns to, who does the client want to know what are those guys think about that?

So we would have – stay away from cat for a moment, but in other property reinsurance one of the biggest industrial writers in the world takes about three people as we need to know what they think, Aspen RE is one of those three. That to me is subjective, two it’s not a metric. But it’s absently says that the guys are in the – they are in the forefront of leading thought about how to structure solutions for property writing clients.

And therefore, I think our view is as long as there a significant traditional market, we will play very effectively in that. The issue is if you not also offering this alternative type capacity you will lose out on the emerging market aspect of this, about positioning yourselves to be effective in the alternative side as we have been over the years in the traditional side.

Scott Walls – Bank of America

Okay. Thank you.

Chris O’Kane

Sure.

Operator

(Operator Instructions). Your next question comes from Ron Bobman with Capital Returns.

Ron Bobman – Capital Returns

Hi. Good morning. Thanks for taking my question. It is a – surely non-operating question, but I think it’s relative nonetheless. I am interested in 10b5-1 plan, management plans to sell it sound like future point in time. I am wondering what the company’s policy is with respect to the 10b5-1 plan? And specifically how much of a lag you permit after the filing of a plan for trades to potentially commence? And do you have any sort of limitation as far as that timing? And secondarily do you have a further limitation as to the volume of a manager’s holdings that can be sold at any one point as part of the plan? Thanks. That’s all I have.

Chris O’Kane

Okay Ron. Interesting. Out of the blue question.

Ron Bobman – Capital Returns

Yeah, for sure.

Chris O’Kane

That’s okay. Look we like to encourage our people to hold stock in the company rather than sell stock in the company. So, if they want to sell, it’s theirs they can do it after a certain time vesting criteria is met.

They need to achieve two things. They need – it’s only for the senior-level, they need to come to me and explain why they are doing it, and I need to be satisfied that after doing it they still have enough skin in the game. And I have said no to people and I’ve also said well may be some time, but no to people.

They also have to act in – outside of closed period of the legal checking balance. If we agreed they want to go ahead, we would kind of recommend that they use a 10b5-1 plan because; finally it’s for their protection. They may know something or may be deemed to have known something which would leave them exposed to risk. So, we strongly encourage, but we don’t mandate it. If they want to go without the 10b5-1, they can.

And then I do not think in terms of those waiting periods, we do anything different than what the bankers would advise us to go. I don’t actually the call what the figures are. Certainly the waiting period and there’s an execution period negotiated between the individual and the banker. But pretty much going along what the broker would advise. Does that help?

Ron Bobman – Capital Returns

A little bit.

Chris O’Kane

Sorry, it wasn’t a bit more. That’s about all I know on the subject.

Ron Bobman – Capital Returns

I can still get back in the future. Thank you a lot.

Chris O’Kane

Okay, Ron.

Operator

At this time there are no for the question. I will turn it back over to the presenters for their closing remarks.

Chris O’Kane

We do not have any further remarks to make other than thank you for joining us today. Bye-bye.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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