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Aspen Insurance Holdings Limited (NYSE:AHL)

Q2 2011 Earnings Call

July 28, 2011 9:00 AM ET

Executives

Kerry Calaiaro – SVP, IR

Christopher O’Kane – Group CEO

Richard Houghton – Group CFO

Analysts

Amit Kumar – Macquarie

Joshua Shanker – Deutsche Bank

Brian Meredith – UBS

Operator

Good morning. My name is Kimberley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Insurance Holdings’ Second Quarter 2011 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. Ms. Kerry Calaiaro, you may begin your conference.

Kerry Calaiaro

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

Before we get underway, I’d like to make the following remarks. Last night, we issued our press release announcing Aspen’s financial results for the quarter and six month’s ended June 30, 2011. This press release as well as corresponding supplementary financial information and a short slide presentation can be found on our website at www.Aspen.Bm.

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 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 financial data and our earnings slide presentation posted on Aspen website.

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

Christopher O’Kane

Thank you, Kerry and good morning, everyone. Our results today marked the midpoint of the year and it has been an event for six months of the industry with severe weather related events impacting the Southeast and Midwestern regions of the U.S. in April to May following all from active first quarter for the natural catastrophes.

During our first quarter earnings call, I commented that to the first time in over two years we are seeing market sentiment changing with the growing acceptance in our industry that the market not only needed to harden, but it wasn’t factoring itself. I’ve also stated that I expected to see the hardening take place in catastrophe exposed property lines in the first instance with the effect most apparent in reinsurance. This is what we have witnessed so far.

But the key June, July renewals not complete, it is clear that price momentum in catastrophe exposed property currently is continuing to build. As market focus shifts to 2012, I had with Monte Carlo Baden-Baden PCO meetings later this year. This will become more financed. Aspen that clearly identified those catalysts such as the major catastrophe event, it takes time to affect the market turn. As I mentioned, one of our first quarter call the preconditions for markets and are well known understood and it’s fair to say that many of these preconditions and support of the term have not been met.

However, the key to affecting the markets and it’s actually underwrite direction, some underwriters will respond faster than others changing circumstances and discernible change in the industry mindset is not taking place. The high incidence of natural catastrophes for the impact of the changes results and from the release of the RMS, U.S. wind catastrophe model in March up two key influences here.

The catastrophe events in the U.S. in the second quarter have added and estimated $18 billion to $48 billion of insured losses from natural catastrophe events in the first quarter. The half year total of $66 billion so far as far exceed the figure $400 billion for the whole of 2010 as you aware, AIR introduced the U. S. wind model version 12.5 last November and this was followed by RMS version 11 this past March. U. S. insurers and reinsurers who use these models to determine pricing and established buying limited in P&L’s are only pathway through the process of incorporating these new findings.

We completed, we’ve actually completed our assessments of RMS version 11. We did that by the end of May. We had already incorporated many of the changes in our previous assumptions. And we have now incorporated the reminder of the facts as we believe to be valid into our pricing and accumulation models.

In our CAT pricing, accumulation calculations, reinsurance retro buying and use of capital, fully reflect the most up-to-date for pricing models. This is reflected in the P&L’s reported to you on slide 19 of the company presentation and we will be taking no further action regarding this development.

At this stage, we do not believe that the border mark has reflected the full impact of these model changes. Some insurers buy reinsurance, as well as some reinsurers do not use RMS and as that we believe they will record little or no impact from the RMS changes. However, the majority of reinsurers and almost 80% of the U. S. primary companies use RMS as at least one of the CAT management models.

Currently, it appears to us that less than a quarter of these companies have reflected its impact and the way they have calculated P&L’s reinsurance purchasing needs and prices. As an illustration, the one in a hundred market loss for U. S. wind has increased from $120 billion in RMS version 10 and to $180 billion in RMS version 11. Notwithstanding this $60 billion increase in U. S. wind P&L across the industry.

We have only been able to identify an additional $2.5 billion of midyear additional CAT limit, which is actually been purchased. This suggests that the demand for U. S. wind capacity has the ability to increase a great deal as model acceptance and usage widens with upwards movement in price. We are aware of a number of clients who have scheduled their decisions and not respond to the model changes to take place in the last quarter of this year.

Against the backdrop of these developments, we have reduced our total limit exposed to U. S. wind by over $100 million since the beginning of the year and have remained within our self-imposed tolerance of 17.5% of shareholder equity for a one in a hundred event, with our current U. S. wind peak exposures standing at 16.3%.

As such we remain well-positioned to increase our book and that will benefit from continued pricing momentum through the January 1 renewals, our catastrophe reinsurance business has renewed its improving rates since the Japanese earthquake struck in March.

There were two major years accounts which renewed positive and positive introduction of RMS version 11. Excluding these two accounts, we achieved 16% improvement across (inaudible). Including these two accounts we still achieved 13% increase. Start further, we achieved average increased results 89% in Australia and New Zealand, 49% in Japan including temporary exemptions there and 18% in Asia, it’s Japan. In the U. S. we achieved 12% improvement in price excluding the two major U. S. accounts and an 8% increase if there included. Elsewhere in excess to what we renewed business and then will price changes.

We achieve these price movements in past because we did not renewed approximately $100 million of aggregate U. S. wind limit and further $80 million of non-U. S. wind limit, while we did not believe price and offer reflected our current view risk. Nonetheless, we anticipate that we will have the opportunity of two exposures in 2012 and beyond and better prices.

Turning now to our performance for the quarter we reported an operating profit of $32 million and net operating income was $0.36 per diluted share. These results reflect catastrophe losses from the U. S. storm in the second quarter which mainly impacted our reinsurance segment.

Our reinsurance segment reported a modest loss of $14 million in the quarter as this segment absorb the majority of the second quarter catastrophe loses. Market conditions and casualty reinsurance although challenging or stabilizing and we continue to manage our top line accordingly for the reduction in gross written premium of 13% from the last year’s second quarter. This reflects our continued selective approach and focus on delivering expect risk adjusted returns at this stage in the cycle.

Within our specialty reinsurance business we’ve continued to see opportunities for profitable growth particularly in credit and surety at in our non-U.S. topline. Gross written premiums increased by 28% for these (inaudible). Our insurance segment have been modest but encouraging results this quarter. We reported an underwriting profit of $5 million or 12% premium growth and positive signed in number of areas.

We generated six percentage points movement in the net cost ratio in the quarter to 62.6 from 69.1% last year. The majority of our premium growth was drive from a marine, energy and transportation and from our financial and professional lines businesses. The premium growth in marine, energy and transportation as a reason from our energy liability account on the back with certain market losses. The premium in financial and professional lines is growing, as we have written more kidnap and ransom business.

We’ve made good progress to this quarter in U. S. insurance operations under leadership and positive momentum is building there. We were strong team now, underwriters in place would be experienced and take collection fees to navigate the cycles on our markets. And we continue to strengthen the supporting infrastructure to the development of our systems and processors. We further enhanced our U. S. team during the quarter to key us, we’ve appointed Ken Cornell is the new leader for our environmental liability insurance business. Ken is a highly regarded and successful underwriter in this field.

Robert Rheel, a seasoned industry veteran joined us in a new position has headed U. S. Sales, Marketing and Distribution, our strategic marketing role will allow us to enhance the distribution efforts collectively with brokers and agents in key market segments where we expect to see growing premium production and profitable results.

With that I’m going to turn the call over to Richard to review the results of the quarter in more detail.

Richard Houghton

Thank you Chris, and good morning everybody. Net income after tax for the second quarter was $10 million compared with the $109 million for 2010, and operating income was $32 million compared with $105 million for the same period last year.

The quarter’s results include $65 million of losses after-tax and net of reinstatement premiums and reinsurance associated with the U. S. tornadoes and floods. Annualized operating ROE was 4.4% compared to 15.6% in 2010, with the impact of catalog is representing a 11 point on this year’s operating ROE.

Operating income was $0.36 per diluted share, our next uncatalogued it was $1.24 per share compared with $1.23 last year.

Diluted book value per share was $37.43, an increase of 2% over the first quarter 2011 and 1% over the second quarter of 2010. The increase during the quarter was primarily attributable for the increase in unrealized gains in our investment portfolio.

Before I discuss some key financial metrics, I wanted to highlight a change we’ve made the definition of operating income in the quarter. Historically, operating income included movements in derivative contracts, which consisted of interest rates swaps, foreign exchange contracts and credit protection influence.

The income statement impacted these instruments being reclassified from other income or expense into realized and unrealized investment gains and losses. We view this activated is primarily protecting book value and lot of the call component of call underwriting operations, hence the reclassification.

Now let me discuss some of our key financial metrics. Gross written premiums in the quarter of $582 million were up 7% from the same period last year with the increase coming primarily from our insurance segments. Reinsurance gross from premiums rose 2% from a year ago. Our ceded written premiums increased by $50 to $57 million of we have selectively lowed our retention levels through purchasing additional retrocession and adjusting exposure particularly in architecture exposed property reinsurance lines ahead of the U. S. wind seasons and to proactively manage the pricing cycle.

The combined ratio for the quarter was 105% compared with 86.9% last year. The ex-cat loss ratio has improved to 54.7% from 57.4% last year. The access of the ex-cat combined ratio for the quarter was 96.2% compared with 89.1% last year with five point of a movement due to the purchase of additional reinsurance and retrocession. We made these decisions to strengthen the balance sheet ahead of our predicted active U. S. hurricane season.

The underlying (inaudible) loss ratio have increased less than two points compared to last year. Prior year reserve releases in the second quarter of 2011 was $32.8 million with $25.3 million from reinsurance and $7.5 million from insurance. Prior year reserve releases with $2.1 million in the comparable 2010 quarter. Our expense ratio of 34% compared with 29.2% last year with just under two points of the increase attributable to our reduced retention and consequence reduction in net earns premium.

The remainder of the increase is split between acquisition cost and general and administrative expenses. Higher acquisition costs were attributable to a slight change in our business mix including a shift from casualty insurance lines towards our successful kidnap and ransom business, which comes with the relatively higher acquisition expense ratio. The increase in our G&A expense ratio is associated with continued build out of our U. S. operations.

I will now comment in further detail on our segmented results and our solid reinsurance. Reinsurance reported an underlying loss of $14 million for the quarter, included in our reinsurance results for the quarter were $63 million of losses as a result of the April and May U. S. tornadoes and floods, net of reinsurance and reinstatements. We had a small improvement on the Q1 2011 CAT events and a level of uncertainties surrounding our results for these events have significantly diminished as our seasons have reported an updated initial loss estimates.

The combined ratio for the reinsurance segments of 105.2% including 24 percentage points of CAT losses. Excluding the impact of CAT, the combined ratio of 81% compared to 76.6% last year. You may recall the Q2 2010, did not have material natural catastrophe losses. For the half-year, the combined ratio for the reinsurance segment was 141.7% with an ex-cat combined ratio of 77.3% compared with 75.6% last year.

Gross return premiums of $725 million decline 6% year-on-year, primarily due to reduced exposure in casualty reinsurance lines. The accident year ex-cat combined ratio of 86.2% for the half-year, includes three points of impacts from an increase in retrocession reinsurance purchased during the period. On the equivalent basis, this is in line with 82.5% for the six months period in 2010.

Turning now to our insurance results. Our insurance segment generated an underwriting profit of $5 million for the quarter with a combined ratio of 97.4% throughout the in line with last year. The net loss ratio for the segments improved to 62.6% from 69.1% with an improvement across our marine, energy and transportation lines, as well as in our casualty and financial and professional lines.

Gross return premium in our insurance segment was $294 million compared with $262 million in the second quarter last year. The increase is primarily attributable to a kidnap and ransom business that we have seen rates rising our new business opportunities generated by height and secured concern. For the half-year, the combined ratio for the insurance segment was 98.6% with an ex-cat combined ratio of 96.2% compared with 97.8% last year.

Gross return premiums of $528 billion drove the 11% primarily in our marine, aviation and transportation lines and also our financial and professional lines. The accident year ex-cat combined ratio of 98% for the half-year, includes three points of impacts from the increasing reinsurance purchase this year. This compared with 95.4% for the six month period in 2010.

Now turning to our investment performance. And you may 16 to 18 in the earnings pack for additional information. Overall, net investment income for the quarter was $59 million of marginally from last year of dividend income from our recent investment in high-quality global equity was provided incremental income against the backdrop of the system low interest-rates. Equity securities represents about 2% of total cash and investment through the end of June.

Book yield on our fixed income portfolio is 3.64% on June 30, 2011, is in line with the end of the first quarter this year or less down from 4.05% at the end of the second quarter last year. The average duration to fixed income portfolio including the impacts of interest rates swaps of 2.5 years is in line with the third quarter of this year. The duration has been managed down from three years at the same point last year. Average credit quality of the portfolio remains AA+ and we have known other than temporary impairment charges in this quarter.

As a reminder, we have $1 billion swap against our $6 billion fixed income investment portfolio to protect our balance sheet from anticipated rising rates. The current quarter included $25 million of charge in realized and unrealized losses on our interest rates swap portfolio. Net realized and unrealized losses, investments losses included in the income statements were $16 million for the quarter compared to a gain of $6 million last year.

I also wanted to provide a brief update on our investment exposures in Europe, as we watch the situation in Greece and elsewhere unfold. Although we have no direct exposure in the investment portfolio to Greece and indeed in material direct exposure to Portugal or into the Spain, we do have just over $300 million of fixed income investments in U. S. owned financial. These investments of which approximately one third have direct government guarantees or with major corporate lenders predominantly in Germany, the Nordic countries, the Netherlands and Switzerland.

We do not have any credit concerns of any of these holdings at this time. At the end of the quarter there were $252 million of net unrealized gains pre-tax in the available-for-sales fixed income portfolio compared with $204 million at the end of the first quarter this year and $240 million at the end of 2010.

Turning now to our capital position. Our balance sheet remains robust with $9.5 million in total assets and $3.1 billion at total shareholders’ equity. We have increased our percentage of cash and cash equivalents to 14% of total investments in cash to enhance our investing and capital flexibility in the current economic climates. Consequently we remain comfortably capitalized and in respect to not only the assessment of rating agencies but also our own internal view.

We have $4.4 billion of grocery growth from our balance sheet an increase of just over $900 million, since this time last year. This includes the margin of $400 million over our mean best estimates assessment to ultimate losses are approximately 87% in terms of the projected distributional organizational outcomes.

Turning now to guidance of 2011, as set out on slide 20 of the pack. In light of our catastrophe losses in the first half of the year and prevailing market conditions, we anticipate our full-year combined ratio to be in the range of 109% to 114% including a cap load of $110 million for the remainder of the year assuming normal loss experience.

We anticipate our gross written premium for the full-year to be unchanged on previous guidance at $2.1 billion plus or minus 5% and we expect our ceded premiums to increase to between 11% and 14% of gross written premium as we have purchased additional reinsurance and retrocession ahead of winter season.

We continue to see our fixed income book yield in the range of 3.50% to 3.75%. We are leaving the effective tax rate estimate unchanged in the range of 8% to 12%. However, this will of course very depending on the actual geography distribution of losses within the group.

That concludes my comments on our results for the quarter and half year and updated guidance for 2011. And with that I’d like to hand the call back over to Chris.

Christopher O’Kane

That’s Richard. I’m now going to comment briefly on renewal activity during the quarter, which is summarized on page 6 of this slide pack. Starting with our insurance lines, I’ve already talked about strength, rates and property reinsurance. Market conditions in casualty reinsurance remain challenging. Although rates have begun stabilized.

Our U. S. Casualty reinsurance are very little movements in the rates, international casualty reinsurance achieved some rate increases mainly driven by the Australian account. In our specialty reinsurance lines, we’ve seen modest improvements in the areas of the account impacted by the natural catastrophes in the first quarter with non-US and single digit reproductions in credit insurance.

Turning now to our insurance segment, our marine, energy and construction liability account was (inaudible) in part due to the impact of Deepwater Horizon last year, and we were able to take the advantage of increased price from much resulting and achievement of an average rate increase of 22% in our book yield year-to-date.

In aviation, pricing remain broadly flat, but with some pressure on world classes. The energy marker that has been impacted by a significant market loans with the sinking of the but we have not yet seen as reflected in improved process.

Our strategy is predicated in achieving qualities, stable learnings over the time and managing earnings over the time and protecting our capitalization of key elements of this. Effective use of – could be possibly insurance demand in catalysts and also providing some additional balance sheet flexibility given high incentives in natural catastrophes year-to-date, with several months of U. S. hurricane season still to go. We have taken the opportunity to purchase additional in this wind and quake in the U. S. and Europe, as well as additional cover for non-peak quake perils.

Compared with this period last year, we now have $167 million of additional investment for U. S. wind. $123 million of additional event for U. S. quake and $65 million of additional events for non-US events. With this additional reinsurance in place, and having fully implemented the changes from the latest model developments. We are now looking forward with some optimism that have to – has been as we anticipate prices with CAT exposed property who raise to meet increased demand.

So with that, we’re going to turn the call up to questions and we’ll be happy to deal with any.

Question-and-Answer Session

Operator

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

Amit Kumar – Macquarie

Thanks and good morning and congrats on the quarter. Just going back to your opening comments and in terms of your expectations for ‘11, I was wondering how much additional business could you write if the rate momentum continues at 11?

Christopher O’Kane

Okay, Amit, I mean, the questions are like a simple one. It’s more complicated than that because as you know very well we wish to have price starting at 0.7 something in book. So one attractive things to do with capital is to buy back shares. But we have to do, we’d say, is that more attractive than writing more business. And if it is, we will buy back shares and if it is we will write more business.

And where we see the opportunity and moments for writing is really is in CAT exposed property. And as – think I said to you on the call, we are at about 16.3% currently with 17.5% at one in a hundred year number. So that is about 1.2% of total shareholders’ equity which is about $40 million very approximately of additional P&L limit we could take on. Depending how we spread that P&L around the world, my guess is 100, 120 million additional limit that sort of figure. So it’s a little bit of headroom not a vast on this headroom.

Amit Kumar – Macquarie

Got it. That’s actually helpful. And I’m just wondering is the pricing momentum contingent on a moderately active hurricane season and if that does not happen, do you still expect the pricing to go up in spite of the commensurate build up in capacity because even other companies are mentioning what you’re talking about in terms of keeping the powder dried, I’m just wondering – how do you view a lack of act of can impacting your top process?

Christopher O’Kane

Okay. Well, I actually think the main driver is changed in the perception of risk and I think what I try to say in the call a very good illustration is, believe is in RMS the $60 billion more or 50% more exposure at the 100 level in the U. S. wind, $60 billion more is a very big number. I wouldn’t expect all of that to be reinsured, but so far we’ve only seen people by about $2.5 million of additional limit. I’d expect a lot more than $2.5 billion of additional limits.

Some people going to retain risk, some will reduce exposures, some will say, I don’t believe in RMS, I believe in AIR, I believe my own modeling, not going to be affected, but I still think this probably 20 billion of additional demand that sort of figure for more insurance and the reinsurance market is incapable providing that amount of demand. So capital markets to be get drowned in, but frankly the $20 billion is a big deal for capital markets over that’s small subsection that actually is interested in insurance line securities.

And I think that is what we’ll drive our price, essentially it’s always about but in this case, we have a change perception risk leading to increased demand forcing up prices. Technically if you want to look at it that way our new models would suggest that set an path with East Coast wind, probably need to pay 30% more than I did for but that’s highly variable in some areas where I should suggest maybe a little less money as hurricanes in some few cases then the inland accounts that were flatted by the overall in this model may need multiples. But you’re probably looking at 20% to 30% more money is being – was required and that’s what I think we have to had some to make the industry able to reinsurance and able to meet the needs.

That I see it’s happenings in our regardless of loss activity to be – we have no losses, that’s the scenario, if we have losses that just complicates the (inaudible) some people will be damaged by those losses and will be less stable respond and that will bit more. So I’d promise cautiously optimistic and this one as we look forward to ‘11.

Operator

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

Joshua Shanker – Deutsche Bank

Okay. Yes, thank you. I just want to walk through a little bit of the growth this quarter and understand where is rate isn’t where premium is coming, let’s start with ease one, on the kidnap and ransom giving the $30 million more in premium, have you opened up that market and found business how they grown so quickly.

Christopher O’Kane

We bought a small company just over a year ago, that company operated as an agency for variety of insurance carriers, principally low it’s indicates and because it operated as an agency it wasn’t very, it wasn’t as popular with the brokers with the classes that might have been.

When it came into Aspen, it got an entirely different reception and I said, we always like to underwriting our expertise, we like to probably get sold, we just didn’t like the securities chain, now with the Aspens – we like it so suddenly there is demands and that was the first change and we – so we only from delivery, yet. You then have that situation in Somalia and there is simply more concern about Paris seeing that, that something in the world’s before.

So that is causing a big amount of demand and then in general, I would say the world is a little more turtle and that it used to be and this is an area of increased demand generally. So, it’s hardly the market is growing that’s partly our ability to access the market has improved and a big junk of this is also rate, we are – all about this generally speaking it’s a good thing to be selling when there is a lot of fear around. And in this area there is a lot of fear around and that had frankly helps our pricing.

Joshua Shanker – Deutsche Bank

Okay and then on property cash reverse of the property, premium gross it was flat in the property cat area, but down a little bit because you bought the cover. Is that’s and we make correctly on all the property cat business?

Christopher O’Kane

Yeah, there is something beyond that we both, as I said we work credit a bit of additional reinsurance work flow limit and that’s affecting the net premium. At a gross level it’s affected by counseling limit because our viewed risk has moved on.

So our renewal with thing that same money for the same exposure we paying and that’s not what we’re looking for, so we counsel living all that, so we lose some premium we do that. And what I actually feel the rest about because as I said in answer to I mean few more moment ago, we see the demands of the cat probably increasing as this year it is ordering into next year and having some project right take advantage of that better thing to do then to write at rates now.

Joshua Shanker – Deutsche Bank

And so you look at your own footprint of the test just right now and take up slightly smaller than it was one year ago?

Christopher O’Kane

In terms of the limit out there that is the correct statement because of you a PML has grown more conservative and the PML is actually, slightly high we are at 16.3% today for U. S. wind 100 and I think from – then we – a year ago that figure was around about 14%.

Joshua Shanker – Deutsche Bank

Okay. And then finally – Yeah. Yeah, it’s very good and finally the other property line which is down on the gross basis about 15% on a little bit more on net basis?

Richard Houghton

(Inaudible) particular magic in there, there is still some sort of CAT exposed component two other property even though it outsource the property CATs of specific designation. So it actually poses on for more Chris was talking about earlier about bringing down those limits where we haven’t been able to get the price increases that we thought were appropriate.

Christopher O’Kane

The other item, I can’t quantify this on (inaudible) just put the other we just exposed which would come in other property is in Japan past earthquake where we reduced exposures. Since – while we done that having clearly prices in Japan are going up. But there is a view that we are investigating that the – of Tokyo is acting more active we’re previously a major erupt to might have been expanded in the next 40, 50 years. There is a view we’ve been saying expected in 10 to 20 years between now our next April, we want send that will love better, but meanwhile we’re being so little bit acquired by risk and that would have a negative impact on at least return premium in the quarter for in the other property area.

Operator

Your next question comes from the line of (inaudible).

Unidentified Analyst

Hi, good morning. I believe Richard has already answered this but I just sort of wanted some clarification. The accident year loss ratio or ex-cat in the reinsurance segment picked up quite significantly this quarter was it because of the retro purchased and would that flow into good earnings for the remaining quarters or is it a just a one quarter deal?

Richard Houghton

The sure answer is yes, that is the case. That’s the main variants that’s occurred in the accident year ratio and that will continue to flow through the rest of this year. Of course what that mean is, because the extra purchasing of retro, we are in a great position to take advantage of the potential hardening rise but Chris mentioned. So that’s the trade of, on the other elements I would bring up is our reinsurance metro purchasing against Chris stated before fully includes our appreciation of RMS 11 and this built up into our thinking purchasing decision. So we think we made the purchases we require to retain our limits and exposures as we like to.

Unidentified Analyst

Okay. So far – so from a margin perspective which would assumed that the margin stay flat for this quarter for the rest of the year, but because of the high (inaudible) okay. The second question whereas on the decision to buy a vector or just curious whether that was more protecting the balance sheet in case of a large cat or was it because you felt that you wanted to keep your powder dry for one, one?

Christopher O’Kane

As there is a number of elements have going to any decision of that sort about, let me think about last September, October we were looking at increased cat activity on the International places like Australia, places like Chile, places like New Zealand and we took a decision to buy some vector that really, I would call that more earnings and I’d call that balance sheet protection and it turned out to be a very good decision and so we’ve actually renewed some of that been inspect with subsequent you need a lot that think we even fix it again. So, I would say that was kind of a news driven.

Then there was another element, which was related to model change and clearly what we’re saying the low that allowed in the new more releases we were well often as incorporated where some things we hadn’t that’s required more capital for unit to risk in the cat work and one of the ways we doubled that was protect the balance sheet by buying aligning us to maintain our goods exposures over nearly maintain those exposures. And then the other thing is some of this is U. S. wind and I’m not a great believer that you can look at these forecasters and decide what’s going to happen the coalition is low, but I think the balance was sensible taking this to expect this season to be a bit more active been average, so having a little more color than previous seem to us to be just a prudent thing to do.

Operator

(Operator Instructions) Your next question comes from the line of Brian Meredith with UBS.

Brian Meredith – UBS

Hey, good morning. Couple of questions here for you Chris. The first one, I’m wondering, if you give us a sense of what the impact of our March ‘11 was on you gross PML and I can see that U. S. when PMLs were up call roughly 17% sequentially, but you brought the right term this curious going to what the impact on a gross basis what is that?

Christopher O’Kane

It’s like, if we haven’t done anything what would have been the case?

Brian Meredith – UBS

Yeah, exactly.

Christopher O’Kane

But, of course that’s not how you run a business, you always doing things. If we hit just taking off both the business and renewed it then on the reinsurance side we do had something by the 35% to 40% increase in PML.

And on the insurance side, which is – it is a much smaller part of it, but the increase was bigger more like 80% well, that’s if you just take a book close to new year, what you actually have to do that and say we look at what’s consuming the capital here, what’s the stop that you still you want to that you may not wanted to do again and you really not wanted to do again, you believe there is a split in the model or do you – some intelligent and then you start reacting and so our reactions were changing our pricing, changing the distribution of risk, changing the amount of reinsurance or retros that we bought, canceling some limits, repositioning the books, all the things we’re talking about on this call.

So in the end the answer is not been like as big of that’s just if you had, if you just stood in the phase of the headlights and fros, but I think that’s what you’re asking me.

Brian Meredith – UBS

Yeah, that’s exactly. And then the next one on the wind model or the hurricane model. What are the model had the most impact on that increase in PMLs was it’s – was it the medium-term rates, was a strong surge, what are the most impact on you?

Christopher O’Kane

I think the inland, the increasing exposure on the inland up with the significant component and storm search accounted for a significant in terms of work.

Brian Meredith – UBS

Okay. So the medium term rate increase in hurricane frequency didn’t have as much of an impact, because that’s actually when you look at the PMLs from RMS, that’s the area that had the biggest hits to industry wide PMLs?

Christopher O’Kane

That’s also a significant prophet, I have the say, I don’t think we completely believe everything is coming out of RMS.

Brian Meredith – UBS

Right.

Christopher O’Kane

So in all these things RMS is an important determinant but it’s by no means like they say that we do it. So to be honest I think on that they are a little unduly pessimistic.

Brian Meredith – UBS

Okay. And then last question. Can you give us kind of your initial read on the impact of the European wind model?

Christopher O’Kane

Well, let me – I just don’t know, we’ve had it for a few days, we are looking at it cautiously, my impression is the impact in Europe is nothing like as dramatic as the impact in U. S. wind was with version 11, but it really is a little bit early to be to talk about that, sorry.

Brian Meredith – UBS

Okay. Thanks.

Christopher O’Kane

Thank you Brian.

Operator

And there are no further questions at this time.

Christopher O’Kane

Okay. We thank you all for your time and attention this morning and wish you a pleasant day. Bye, bye.

Operator

Thank you. That does concludes today’s Aspen Insurance Holdings second quarter 2011 earnings conference call. You may now disconnect.

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