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Aspen Insurance Holdings (NYSE:AHL)

Q1 2014 Earnings Conference Call

April 24, 2014 8:30 a.m. ET

Executives

Kerry Calaiaro – SVP, IR

Chris O'Kane – Group CEO

John Worth – CFO

Analysts

Amit Kumar – Macquarie Capital, Inc.

Joshua Shanker – Deutsche Bank

Bryan Murtagh – UBS

Max Zormelo – Evercore Partners

Ronny Bobman – Capital Returns

Operator

Good morning. My name is Wanda and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2014 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. I would now like to turn the call over to Ms. Kerry Calaiaro. Please go ahead ma’am.

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 Limited. Last night, we issued our press release announcing Aspen’s financial results for the First Quarter of 2014. 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 with 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 a more detailed description 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 the Aspen website.

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

Chris O’Kane

Thank you, Kerry, and good morning everyone. Aspen reported diluted book value per share of $42.72 at March 31, 2014, an increase of 4.4% from December 31, 2013. We delivered an annualized operating return equity of 14.8%. We’re extremely pleased with the results of the quarter; pleased, but not surprised. Over a year ago, we announced a 10% ROE target for 2014. We are now one third of the way through 2014 and I can confidently say that our 10% target is well within sight.

We continue to make good progress amongst strategic objectives, our operating results and our profitability. And we’re confident that we’re laying the foundation for continuing improvements beyond 2014. We are executing on our three pillars to improve ROE that we implemented over a year ago, enhancing best in returns, managing capital and business portfolio optimization. John will provide more detail on first two pillars. I would like to spend a few minutes discussing portfolio optimization as it is the most significant lead for achieving the 10% ROE target in 2014 also continuing to increase operating return equity in 2015 and beyond.

Business portfolio optimization is what we do at Aspen every day. It is a process by which we utilize and sure we maximize returns generated on our capital. We are continuously analyzing the market dynamics and identify new opportunities for which Aspen is best positioned to capitalize. We then deploy capital to the most promising opportunities and draw capital from areas where returns are not adequate. Throughout the history of Aspen, we have investment areas where we believe we could generate superior returns and that to increase our return equity. That said, in the past five years, we are luckily up the amount of investment in both insurance and reinsurance. We have now reached an inflection points. We are beginning to see meaningful returns from these investments. As we look forward, we expect the returns we realized from these investments to accelerate with profitable premium growing at a much faster rate than our expense base.

Furthermore, because the growth is coming from less collegial lines we will only need a small amount of incremental capital to support premium growth. Thus, going forward, we expect increased premium leverage to write higher return equity or to put another way we will achieve significant increase at operating leverage. Its expected premium leverage as a result of capital strategic decisions we made in both insurance and reinsurance. As you know we’ve made an investments in our US Insurance platform, it’s not close to reaching premium level which result in a competitive G&A expense ratio.

The first quarter 2014 is the fifth top quarter in road for our US insurance teams. What we view is even more impressive, it is a very good loss ratios the US teams are achieving. For the first quarter, their net loss ratio was an impressive 57%. We have established successful growing US insurance franchise. The market is not familiar with our on driving capabilities and its bringing this opportunity which previously we would have to go seek. Over the last five years, we have been in the investment phase working to all those premium needed, to cover the investment we made in people, systems and infrastructure in order to build first class business. We have now turned to corner. In US insurance for the training four months, we had in excessive of $400 million in that own premium. We continually expected by the end of 2015 we would beat the level of $550 million net earned premium which will equate to normalize G&A rates of 16%, which we regarded competitive.

On the reinsurance side, we have invested in number of areas which are now paying dividends. A few years ago, we concluded the clients, wants to do business with people located nearby, people who understand their cultures and the environment in which they operate. We have now built out our regional reinsurance network, which includes officers service in constant to Europe, Asia-Pacific, and Latin American. The regional strategy allows us to be closer to our numinous funds to develop deeper client relations and to provide them with better and more tailored solutions.

We further strengthen client relationships by providing solution across many risks, not just property cat. This enables cross selling opportunities and helps us to grow our specialty reinsurance business. Specialty reinsurance has been the most profitable area of reinsurance and we expected to go meaningfully in the future. About a year ago, we saw an opportunity to improve the solutions being offered to mid westerns and smaller US clients. As a result we advanced our US regional reinsurance strategy. We strengthened our underwriting team and we dedicated additional resources and capital to the subsidiary. We are now able to provide better service to a wider range of clients across the US.

The growth we saw in the January 1st renewals on our other property reinsurance business provide evidence with the strategy of succeeding. Our property self-statement had an outstanding season driven by the fact that we get more new business in our US regional initiative in the January period than we have plan to rate for whole of 2014.

The third area of major investment in the reinsurance business was Aspen capital markets. The industry has been changing and with the flow of capital into the reinsurance market, we modified a strategy to capitalize in new opportunities. Alternative capital is here to stake and we’re utilizing that capital to better serve our clients. At the January 1st renewals we were able to write larger lines using Silverton Re and transferring some of our [Indiscernible] to the third party capital enabling us to efficiently manage all these four part across the balance sheets. This combine with increased recession protection allows us to increase cause exposure by tier 1 parallels or keeping net exposure as a measure of return capital relatively flat.

We will continue to grow Aspen capital markets. In the first quarter we increased the capital under management by another 20 million to the total of $125 million. I would note that t Brian Tobeen, with his team, has just passed this one year mark at Aspen. It has been a really impressive first year. Somewhere I ask as the reinsurance market if it gets more competitive do you need to be figure. All reinsurance business is not only competing or winning. We are in the right places with the best people provide sought-after solutions throughout the world.

During the January renewals we wanted clear winners in the so called battle of the signings. We succeeded again at the April new season where once again the market continues to be competitive. To our strong fund relation and excellent service we gain access to the most sort after risk, we win that business. In addition, our offerings have been enhanced by the success of our growing Aspen capital market group which supports the ability to offer more substantial capacity to our clients in profitable business while maintaining our risk profile. We expect to continue to grow all of our sub-segments in re-insurance.

Finally, as I’ve disused with you previously, in 2013, we’ve reached with our succeed reinsurance and the sectional ranges. We estimate that this initiative alone will generate $25 million in incremental net income in 2014 with the third of incremental benefit in 2015 of $20, this equates to a total annual net income benefit of $ 45 million per annum from 2015 onwards. In the first quarter 2014, in seasonality, we saw only a few million up to 25 minute saving from though P&L.

The majority of the 25 million benefit for this share will be realized during the remainder of 2014. At Aspen we have spent the last few years with best in the business. We want to focus intensely and patiently and profitably growing our premium especially as we could leverage these investments. We are now very pleased to see those investments beginning to fail and drag meaning increased premium leverage. The 10% operating return on equity we expect to achieve in 2014 is only a near team marks on a longer trajectory of capital growth. We expect our rate to improve above 10% in 2015 and further again in 2016. You can see we are incredibly excited by the future of Aspen.

I’ll now turn the call over to John for some comments on the results of the quarter.

John Worth

Thank you, Chris. I’ll begin with an overview of the results for the quarter and then provide an update on our capital management and investment leaders. Operating earnings per diluted shares for the first quarter of 2014 were $1 55 and annualized operating return on equity was 14.8%. Rates return premiums for the group of $856 million increased 11% in the first quarter compared with year ago, with underwriting income of $88 million. The combined rate here was 88% with $11 million or 2% points of net catastrophe losses in the first quarter. For our reinsurance segment, growths return premium increased 7% to $472 million, due to strong growth in other property and specialty. The segments recorded underwriting income was $73 million in the first quarter. The resulting reinsurance combined ratio was very favorable at 73% with$6 million or 2 percentage points of net caps losses in the quarter, mainly related to Japanese base storms and US winter storms.

In the first quarter, we saw meaningful improvement in the accident year x cat loss ratios and property, specialty and casualty. In our insurance segment, gross written premiums increased 15% to $383 million. This is a result of our property and casualty business. The combined ratio for the insurance segment in the first quarter was 95% with $5 million or 2 percentage points of net caps loses in the quarter related to US with storms and UK flood. As Chris Mentioned, the US insurance teams continued to their profitable development and then achieved an impressive loss ratio of 56%.

As Chris also highlighted, we have worked on restructuring our reinsurance and retrocession arrangements and as a result we have retained 82% of gross written premiums compared to 77% in the first quarter of 2013. [Indiscernible] for the group were $28 million or five combined ratio points. This compared to $26 million in the first quarter of last year. In reinsurance, favorable reserve development towards $21 million or eight combined ratio points largely from short tail lines. In insurance there was favorable reserve development of $7 million with over half from the property lines and the remaining coming from individually small releases in all other segments. For the group, the overall operating expense ratio was 36.1% for the first quarter, a modest improvement from 37.5% year ago, with improvement in both the policy acquisition and the expense ratios. The general and administrative operating expense ratio improved from 17% to 16.3% reflecting the work that we have done on identifying and realizing expense saving as well as the continued growth in our U.S. business.

I'll now move on to investments. Net investment income was $49.5 million in the first quarter of 2014 compared to $48.3 million a year ago. The increase in income reflects a larger global equity portfolio as well as a larger asset based of $8.4 billion for the first quarter of 2014 compared to its $8 billion a year ago. We are expecting invest income to approach $45 million quarter on average for the reminder of the year. We’ve recorded a positive mark-to-market in the investment portfolio of $30 million during Q1 reflecting a $2 million gain in our equity portfolio a loss of $2 million on our interest rate swaps and a $30 million gain in the fixed income portfolio due to tighter credit spread and lower yield and the intermediate to longer end of the curve.

For the quarter our aggregate investment portfolio had a total return of just over 1% compared with the total return of 5% in the fourth quarter of 2013. The fixed income book yields for first quarter of 2014 was 2.68% down six basis points from the fourth quarter of 2013. While the duration of fixed income portfolio is 3.2 years including swaps compared with 3.17 years in the fourth quarter. Excluding the effects of our interest rates swaps the duration was 3.5 years in line with the fourth quarter. Our alternative asset portfolio and equities, bank loans and emerging markets that now comprises $810 million or 9.8% of total investment. The majority of which were invested in global equities. At March 31st 2014 we held $508 million in equities up from $414 million a year ago reflecting an increase in market value and an additional $14 million investment in a new minimum volatility equity portfolio in early March 2014.

We will continue to diversify tactically our investment portfolio during 2014 by investing in high quality global equity income strategies. We repurchased $31 million of ordinary shares during the first quarter. We have repurchased a total of $341 million of shares since the start of 2013. We continue to allocate capital to drive shareholder value whether it being investing in new business opportunities, seeking higher risk adjustable returns in our investment portfolio or returning capital to shareholders. I will now turn the call back to Chris.

Gary Gregg.

Thanks, John. Now I can't imagine anyone listing this morning who hasn’t heard about Glyn Jones unsolicited approach. About to take very seriously its producer obligations to pursue all credible offers that has the potential to create superior value. And we have very carefully and thoroughly elevated insurance’s proposal. There are number documents in the public record that clearly articulate our response. These releases and matters are available on our website if you like to read them. Insurance represents remarkably for a strategic investment. $ 47.50 per share proposal is a gross undervaluation of our stock. The proposal comes with significant execution risk and material unanswered questions about financing. As this is thought to discuss our operating performance and we are very excited about the results this far and the prospects of future growth we would like to focus upon our quarter results and our strategic plans.

As I said at the outsets, we are delighted with our results in the first quarter which deluded the value of 4.4% of $44.72 cents. Annualized operating return on equity of 14.8% a loss rates of 51% and a combined ratio of 87%. I'm delighted because of our first quarter results, but even more than so as I believe this is just a step in the direction that Aspen is going to continue to move going forward. We continue to expect to achieve an operating return equity of 10% in 2014 and assuming a pre-tax catastrophe load of $185 million, normal loss experience and the current interest rate curve and insurance pricing environment.

Over the past five years, we have invested over $150 million in our insurance platform to build our underwriting claims, actuarial capabilities, technological and other infrastructural capabilities. While the ROE we generated during the investment phase was suppressed by the investments, we knew that those investments would help to generate superior returns. Now we're starting to see the meaningful benefits that come from those investments. The 10% ROE we expect to achieve in 2014 is a stepping stone to a greater operating ROE in 2015 and again in 2016. The building blocks for expected acceleration of ROE are gross in our insurance business, portfolio optimization initiatives, rising interest rates and capital management.

As we’ve previously mentioned we expected achieve premium scale in our U.S insurance business in 2015 and we expect the business to be a strong contributor to overall results as we gain greater premium leverage overtime. Our U.S Insurance business net and premium through 25% in first quarter compared with a year ago. And we’ve experienced continued growth momentum with attractive loss ratios. Further, we expect our portfolio optimization initiatives, including the restructuring of our reinsurance and retrocession engines combined with a rising interest rate environment, we have positive contributor to operating income.

In the aggregate, assuming pre-tax catastrophe load of $200 million, normal loss experience, our expectations for rising interest rates and a less favorable insurance pricing environment, we would expect operating return on equity in 2015 to increase over 2014 in the order of 100 basis points. Beyond 2015 we expect to obtain additional continued benefits to our ROE from increasing operating leverage. Thank you for listening to us. John I would now be pleased to take any questions you may have.

Question-and-Answer session

Operator

Thank you. (Operator Instructions) Your first question comes from line of Amit Kumar with Macquarie.

Amit Kumar – Macquarie Capital, Inc

Good morning. Two quick questions; first of all, just going back to the discussion of the expansion in your ROE, can you also address what you are thinking about in terms of AYLR [ph] in terms of reserve releases and separately if interest rate is stay flat how does that impact your goal and does this guidance also include capital management actions?

Chris O’Kane

Amit, very happy to address those questions. The expansion in ROE doesn’t concentrate any change in our observed posture, we’ve talked about that in the past, we believe in rather conservative preserving we fit this quarter as we did last quarter round about the 86 percentile in terms of range of outcomes, that is the kind of zone in which we’ve operated for many years and in which I expected to continue operating. So I would say we will not be relying on increased reserve releases to achieve what we talk about nor do we expect some level of reserve releases in future to deviate meaningful from what we’ve seen in the last few years.

The expansion ROEs essentially the products of five year investment in the future of the business, the $150 million I talked about is now paying returns. So in very simple terms we see greater premium, premium largely coming from less correlated or non-correlated on business that are requiring more capital. Investments largely already made that’s not requiring significant incremental expenses therefore better operating leverage.

You also asked about interest rates, well of course I don’t know I don’t think anyone does know about future financial interest rates. So we take an assumption based on these various interest curves provided by the banks which we think is sort of in the middle road, because we do that we have a negative impact on ALCI every time insurance cut, that’s what happens. It has an effect on capital but also has an effect on investment income. Without interest rate assumptions, I think we would likely find ourselves to be over capitalized and we’d have to address capital management in a more radical way than it’s contemplated in plan. The plan contemplates a degree of capital returns to shareholders. If we flex interest rate change the degree of return of capital share would also have to flex accordingly. It actually doesn’t have a very significant impact on ROE. I think our forecast that I gave this morning about a 100 basis points improvements the next year over this year stands for a good range of scenarios.

Amit Kumar – Macquarie Capital, Inc

Okay. The other question I have is going back to your concluding remarks when you talked about vendor and that I think you talked about how it undervalues your franchise. I guess two questions coming out of that, first of all what do you think is a fair value for your franchise and second of all hypothetically if we were to flip this, can you outline what would you look for in a potential partner. Thanks.

Chris O’Kane

In terms of what we look for in a potential partner, it would be a partner that has seemed growth that we want to be around and it’s gone down already to an extent that we have not done. So for example, we have a very strong presence on those, improving our presence on those will be good to be our biggest player in that market would be highly beneficial. We have the presence in the UK insurance market, the regional market, UK economist has turned to corner with very good people offering risk managed products in the UK and anything that got with that obviously would be beneficial.

In U.S., we’re growing specialty insurance franchise, some areas [Indiscernible] Any company that was doing things similar to what we are doing, are in a way that is culturally at one with the way you do it such that there wouldn’t be meaningful synergies facts and interest. And in the reinsurance side, we’re very strong franchise in the U.S, but we are vary of increasing vary of increase our cat exposures and the way we see U.S. cat reinsurance movement is quite challenging business normally everyone would find, so U.S. outside zone, U.S. in the specialty zone, U.S. in the regional zones and then the rest of the world, Latin America, Asia-Pacific, on reinsurance point of view reflect to this, high growth, huge volumes, some greatest as it was underwriting those regions I admit than others, but generally speaking, we think we get paid for the risk of the sake. So in reinsurance obviously needed an accelerated further down optimum to take that, that’s a very different picture in terms of what makes sense for Aspen for which shareholders and the company that you mentioned.

In terms of, what we’ve been doing otherwise, we have a great standalone time, what we really focused is delivering and I think the results of the first quarter showed the delivery and we intend to carry on doing that throughout this year and the next several years. And you will see a company with better earnings better ROEs and I believe with much greater recognition in the markets that values the franchise.

Amit Kumar – Macquarie Capital, Inc

And I guess what is the fair value. How would you characterize what a fair value would be for Aspen?

Chris O’Kane

I mean, I understand why you asked the question and I think you understand why I’m not going to respond to it with a number.

Amit Kumar – Macquarie Capital, Inc

Okay. Fair enough. Thanks for all answers.

Chris O’Kane

Thank you.

Operator

Your next question comes from the line of Sierra [indiscernible] with Barclays.

Unidentified Analyst

Hi, good morning. Looking at the factors that you outlined to expand ROE 100 bps in 2015, could you just elaborate on those and could you quantify the impact of each of those factors?

John Worth

Hi, Sierra, thank you. In terms of the expansion for 2015, it’s really coming through the additional leverage we’re going to get through premium growth. That comes in turn from the investments we’ve made in particular in the U.S. platform. So what we’re anticipating is, we see that, that premium group comes through at a greater rate than we’re seeing with the expense growth comes through. And in fact we’ve already experiencing some of that additional leverage during 2014. So that’s part of it certainly. Another part is anticipating an increase in interest rates and that will come through on our investment in turn. I would say those are probably the two – those are the two main things, but the most significant is the leverage on the business.

Unidentified Analyst

Okay. So where do you see operating leverage being in 2015 and so much higher could net investment income base?

Chris O'Kane

With that I’ll add one other factor that I mentioned the script is what we call the IRV, I’ll just remind maybe a little bit on what that is. We used buy – we continue by quite an extensive reinsurance program, but we used to buy really a lots of reinsurance. We are receiving way over 20% of our business and we’re not with teams who are new, even though we recruit teams with great care and we’re on boarding with great decision, you don’t know for few years whether it’s going to work out as you hope they will. So we took the reinsuring a lot – now most of our teams have been with us for a minimum of three years and they are performing and they are doing exactly what we want them to do so.

We are more confident about with taking more risks. So using our capital model last year we did a great deal of work to think how it would we optimize this retention, how would we optimize business seeded, that’s kind of reduced the amount of seeded reinsurance overtime taking about a year and a half to achieve that by couple of hundred million dollars. And the process that we would have seeded away on that this year it’s going to be about $25 million and next year 2015 is to invest $45 million. $45 million anticipated, expected additional net income each year in maturity, it is very big contributors to all the expansion and just didn’t – well I want to make sure you didn’t miss that one.

Unidentified Analyst

Right. That’s helpful.

John Worth

Well, Sierra. In terms of the operating leverage, I mean, all I would say is we expected to like favor in next few years in accordance with the rising our topline growth. You know, we’re focusing on less capital intensive lines and what we are anticipating is that the growth in which adjusted capitals supports the overall growth in those in premium income.

Unidentified Analyst

Okay. Is there a target premium to equity that we can look at?

John Worth

No, we’re not giving guidance around that. But, for the purposes of guidance we’re clear about operating ROE.

Unidentified Analyst

Okay. All right, thanks. And then, it was helpful that you outlined what factors to that you would look for in a strategic partner? Is there anyone one out there that fits those, fits that criteria and willing and able to pay a financially attractive price and have you gotten any other offers?

Chris O'Kane

Well, I know there are lots of such people out there. However, what we’re doing is running successful independent business. We really have a staff that has trailed the value of the company. We’ve been slow in coming forward to talk about the investments we’ve made. Now it’s good time to do it, when they are beginning to day off than what we’re showing the market is, you haven’t seen anything yet, you’re going to see a vastly more popular and successful Aspen business, which we think the market will recognized, so that’s what we believe is the best way and sure it’s safest way to create value for our shareholders, that’s what we’re focused on.

Unidentified Analyst

Okay. Great, thank you.

Operator

Your next comes from the line of Joshua Shanker with Deutsche Bank.

Joshua Shanker – Deutsche Bank

Yeah. Good morning, everyone. Chris is something there to say that fairly and comfortable looking these results that you could have had a good result like this without the investments you’ve made over the last few years. Do you think that’s a mistake in statement?

Chris O'Kane

Yeah, Josh, I think it is up to a point, because whatever if I tell you about the investments few years and for example UK regional is now a good contributor, it’s a relatively flow, that’s the business we don’t do on the market, we do it in the provincial cities in the UKs, it’s risk managed [indiscernible] product. It’s nice little contributor now, it wasn’t – we’ve built in the last few years. U.S. insurance is not profitable although I think there is woeful lot more awards come out of that. And some of the really interesting gains in the reinsurance side where we’re seeing margins include the Latin American operation, the Asia-Pacific operation, the specialty initiative areas like agriculture where we’re going. So no, we would still have a good results, but we’ve got a better one because of what we’ve been investing in.

Joshua Shanker – Deutsche Bank

And what do you think the investments you’ve made over the last few years had contributed to the 1Q ‘14 ROE?

Chris O'Kane

Josh, I’m not in a position to quantify that with position.

Joshua Shanker – Deutsche Bank

Okay. That’s my question. I appreciate it thank you.

John Worth

Okay. Josh.

Operator

Your next question comes from the line of Bryan Murtagh with UBS.

Bryan Murtagh – UBS

Yeah. Thanks, good morning. Couple of questions here. First, when I look at the topline growth of the quarter, Chris is there anything that we should kind of consider kind of one time transaction or is this pretty much a good growth rate that we should be looking for?

Chris O'Kane

No. I don’t think there is anything anomalistic in that way. Bryan this is really a big a business that’s firing in all cylinders. It’s good on the insurance side. It’s good on the reinsurance side. Reinsurance probably cat especially present some challenges, but with Aspen capital markets, we are really dressing this terms with those. I think what you are seeing in this quarter was something we’re going to maintain for the next year or two.

Bryan Murtagh – UBS

Was any of the gross rate premium from Aspen take couple of markets, how much it was?

Chris O'Kane

The premium figure is $30 odd million, but we are really taking a fee and a commission on that, so you to insert with that different between gross level and the net level.

Bryan Murtagh – UBS

Great. Okay. And then, I would say, Chris, if I’m looking at the quarterly results, the return on equity that you generated in the quarter, obviously, late quarter for cat loses, although there were some non-Cat weather in the quarter, how would you kind of view it, kind of underline return on equity, right now kind of an normalized or your quality asset 10 plus percent level or above?

Chris O’Kane

I think we’re very comfortable saying we told you February last year, we do 10 and I think that’s where I would stick it’s encouraging that we had a good quarter. But strip out the cat it looks a little better than 10, but we do like some volatile businesses and you got to make some alliances for things even in the best run operations can go wrong with quarters and two so let’s stick with 10, but feel there was a reasonable chance on upside.

Bryan Murtagh – UBS

Great. And then I guess the last question I got ask here is kind of your thoughts on what made your renewals are going to look like for the property cat reinsurance market?

Chris O’Kane

Yeah. Well, that might be the one area of the column which are not thoroughly updated downward pricing pressure continues in those, 10% in Florida doesn’t seem on realistic and it could be more, it could be worse than that. The good news is that we have – we got less Florida business than many of our competitors. We’ve never really considered Florida specifics to be best place to play, we like to have clients with national or at least with the regional exposures and that’s how we got our Florida business since been better price we go at that way.

We also have Aspen Capital Markets where there are people who lost the capital it may be we makes them in to more competitive there that we can represent so we can underwrite for them. And as I said on call our reinsurance guys really are some of the best connected, best regarded people in business. So the clients that we want to do business with will sometimes quite often actually do deals with us little bitter than the rest of the market. So while the market would down and I think we could be cutting back exposures too. I think Aspen Re will be insulated on the downward trend to certain extents.

Bryan Murtagh – UBS

Great, thank you.

Operator

Your next question comes from the line Max Zormelo with Evercore Partners.

Max Zormelo – Evercore Partners

Hi, good morning. I’m wanted to talk margins, be the margins – co margins improved quite meaningfully in both segments this quarter. And I’m just wondering what drove the improvement in the Aspen your loss for share cats and then related to that, should we expect the level of margin improvement to continue the rest of the year, maybe in to next year.

John Worth

Yeah, we did see – we have seen a marked improvement in margins. I mean remember in the first quarter of 2013 Max we had a number of lumpy losses which affected the accident year Ex-cat loss ratios. That’s one of the reasons that we are feeling an improvement like reinsurance than the insurance in the Ex and year Ex-Cat loss ratios quarter-on-quarter. The other is of course there is – the denominator is biggest, so we’ve got improved less than premiums quarter-on-quarter. Elsewhere, expenses have come down and the expense ratio – the gentleman operating expense ratio as I said earlier has come down to 16.3% compared with 17%. We’ve been highly focused on costs over the last year, and we’re building into our US cost base. So I would see this, comes back to the question that Sierra asked earlier in terms of the additional leverage that we’re going to get in to 2015, and getting towards on the target that we have of 11% ROE and expansion of the margin as we see through the further build out of the businesses those premiums increased at a faster rates, faster rates than the operating cost base.

Chris O’Kane

Max, let me just add a word or two to that I agree with what John said, but Aspen is an underwriting company founded by an underwriter and you compare a lot ranges with our peers over any period of time like you find that if they are not the best, they are very close to being the best. And that’s something that we’ve always had we always think. And to do that, we hire some very good underwriters and we give them a lot of proceeds. We also surrounding with some very good actuaries, very powerful risk management. This is a carefully well managed business. We don’t despite to have the lowest expense ratio out there, you can’t do that if you want to run safest business. Our aspiration is to have very safe business, very good loss ratios slightly higher than average expense ratios, but a combined that isn’t just attractive, it’s also attractive and safe and stable avoiding the volatility that I would approach this might involve.

Max Zormelo – Evercore Partners

All right, thank you. Second question, I think Chris – Chris, I think, I may have heard you mentioned you’re expecting $200 million in reinsurance savings is that correct?

Chris O’Kane

That’s approximately correct, yeah.

Max Zormelo – Evercore Partners

Okay. And in terms of the top line growth from the US insurance teams, I think you mentioned close to $400 million now, you expect them to reach $550 million in 2015. And that $50 million number I don’t think is new, I’m just wondering are you expecting some other growth besides that in the insurance segment?

Chris O’Kane

Yeah, we choose that number Max, because that’s the point at which the expense ratio hit 16. And we look at our peers and we still – those peers with similar strategies to us and we all sort of meeting expense of losing a 16 we’re inline as good as everybody else but we’re not that so 550 and which we achieve next year allow to 16. Of course few our business going to grow beyond that and as we grows that G&A expense ratio is going to fall still further at which point we don’t just become inline recently competitive. We actually begin to lose advantage in the US insurance business.

And just want to go back to ROE question, what I expect from the ROE is overtime, this will take about two years to improve, so that we will a couple of hundred million dollars less annually on state of reinsurance then we’re doing for the last couple of years, but of course that earns through we’d take couple of years to run through. So the number this year 2014 is smaller than what the number is going to be. I hope that’s clear.

Max Zormelo – Evercore Partners

All right, thank you.

Chris O’Kane

Thank you, Max.

Operator

Your next question comes from the line of Ronny Bobman with Capital Returns.

Ronny Bobman – Capital Returns

Good morning

Chris O’Kane

Ron, good morning to you.

Ronny Bobman – Capital Returns

Hi, thanks. I got three questions all sort of spread on top of, and particular, I have question on Aspen Capital Markets and its disclosures towards investors – the third party investors. I was curious, does Aspen Capital Markets provide those third parties monthly evaluation updates on the evaluation of their state and whatever vehicle they’ve invested in or is it less frequent than that, if you could –

Chris O’Kane

It’s actually quarterly, Ron.

Ronny Bobman – Capital Returns

Okay, so quarterly evaluations on their stakes and whatever entity there an investor and I guess.

Chris O’Kane

Exactly.

Ronny Bobman – Capital Returns

Okay, thanks. Okay, my next question was US insurance. I was wondering if you can provide some more detail on the classes of business that your writing there and particularly the once that are growing or the larger elements of US insurance business and if you could have thought some insight, I assume you’ve got a greater than average waiting towards new business as oppose to renewal given its growth mode. Could you provide some figures on the mix of new versus renewal, and then also how you – how the company chooses to sort of pick its loss picks for each of those lines, given that factor of being a younger and new growing books. Thanks a lot, that’s it from me.

Chris O’Kane

Ron, I think those are excellent questions, and I’ll try and give you an excellent answer. I think the last question is one of the – the last part of the your question one of those important parts of all. But I’d just start about the business, it’s deliberately quite well diversified. There is no dominant player. We’ve been prophecy for long time. We actually been prophecy since about 2004, and prophecy I guess is the biggest thing as opponent as we do that out as a lancer, it comes with some catastrophe risk and we decided that cat exposed property and insurance side just wasn’t the best place to be, that was something we announced February last year.

So we’ve been deemphasizing the cat driven part of that using [indiscernible] loss reinsurance to lose to pass on some of it and also starting to just make smaller portion books. So we see that big investment property, but a lot less cat driven then it used to be. So we’re pretty happy and pretty comfortable with. And it’s VNS so the renewal portion is going to typical of VNS but it still, it’s reasonably high, but it’s not a new book. I think the next biggest area will be professional lines. Glyn Jones and his team being with us now probably raising four years so that they’re not new either. I think Jones did terrify job over the years, I mean, the whole point when we decided this expansion was you don’t want to rush.

The last thing you need to do is turn out on the street saying, I’m the newest guy, I’m the cheapest guy and you got to get a lot of business on way that you are going to request. We said you know, you do not compete in price. You have a lot of connections where the industry produces agents that you work successfully with good experience. They are going to you know, one day have a bad experience with one of the career, they are going to come to you, you are going to remind them of the duties that they had with you and your team, and you are going tell them as Aspen customers and that really is going to boost this guys what they have been doing. Jones happens to be an exceptionally conservative underwriter, you know I like him a lot, so you know through his carrier, he probably produce lost ratios and close to 50%, but we spent [indiscernible] you probably will do that one day, we certainly hope you do, but we think something more like in the mid 60s just to be prudent, it makes a lot more sense. So for the first two years you know, we keep this setting as [indiscernible] and overtime if nothing bad happens we’ll see if we are going to take them and we probably just getting to that space, you know I would think in the next year or two in US insurance where it benefits some reserve releases, that’s not been an area in the growth face of reserve releases.

So, we go to other areas you know like our D&O team, where D&O can’t be a much better, because D&O can run in last [indiscernible] in the 30s and you know, the team we use to have, are no longer with us, I’m pleased to say. Very prudently we are going to produce loss rates [indiscernible] and we said to them. It’s we are going to go to mid-60s as well and they would say it’s going to be not better than, and we would say, well sure we don’t do that, while we had you. The way we operate here is to have a very conservative loss pick and then you know overtime with a lack of experience and we’re confident about this material, you’ll see the releases.

It may take five to six years, but with that particular team which didn’t work out first we have planned our principles and I guess they get uncomfortable with them, because they wanted quick box, they wanted recognition of profit before it’s prudent to do so.

So that deals with professional management liability which is a smaller with some special world, so in environment liability doing very nicely there, we’ve been in that area for a number of years in a smaller way. So again, you know that practices are very conservative loss pick, much greater than the team or the individual we had dude to his career but we expect them to move into line of your course. What else do we do. We’ve got a small but very valuable surety operation. I really you know ensured you that it isn’t the lawsuit, it’s the adjusting expansion if you like life that is the issue and that performs there is very, very encouraging. We do some Ocean Marine, which more recently got into Energy, but Energy is an area we know very well. Throughout my carrier I've been involved closely with the energy business and we simply know how attracts, how it runs and Tony Carroll is a very experienced guy, but he was one with his view on loss pick, my view on loss pick and the organizations view on those pick, all the close to your line. And certainly both, we are going to see some reserve releases over time in that, but this is about a year so we are going to wait for that. I hope that kind of deals with different strands of your question.

Ronny Bobman – Capital Returns

Yes, also I had forget, I had one – I had a third question. And it sort of touches on all of the M&A rigmarole, as it relates to some of the employment agreement, HR and I'm sorry if you just close us in an 8-k or some other fine, but the – I'm getting already one down, but back and forth on the letters. Should we expect any sort of supplemental set of employment agreement, retention agreements?

Chris O’Kane

Sorry, you just cut out there.

Ronny Bobman – Capital Returns

I’m just wondering if you should expect or if you’ve already done it and I just missed it, should we expect some additional employment agreements or some form of?

Chris O’Kane

Well, there is [indiscernible] say our people, all Aspen people I could say really enjoy working at Aspen. And while we have legal agreement to take them, to take the employer they fundamentally want to work here and they don’t want to work some of their life, they like the respect that they have given, they like that it’s not a command control and organization. They like being professional people who have the autonomy and are trusted to do the jobs well. So I think flat risk is actually very low, as that said, things come up and the current circumstances can – can or could be destabilizing for a company that left well aligned employees, it would be very stabilized, but we will take a look on a case-by-case basis. We haven’t had to do anything at all of that nature so far.

Ronny Bobman – Capital Returns

Thank you

Chris O’Kane

Thank you, Ron.

Operator

Thank you, there are no further questions at this time. I would now like to turn the call back over to management for any closing remarks.

Chris O’Kane

Well, thanks everyone for listening to our call this morning. Have a good day. Good luck.

Operator

Thank you. This does concluded the conference call for today. We thank you for your participation. And we ask that you please disconnect your lines.

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