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Aspen Insurance Holdings Limited (NYSE:AHL)

Q3 2011 Earnings Conference Call

October 28, 2011 9:00 AM ET

Executives

Kerry Calaiaro – SVP, IR

Chris O’Kane – CEO

Richard Houghton – CFO

Analysts

Amit Kumar – Macquarie

Vinay Misquith – Evercore

Josh Shanker – Deutsche Bank

Operator

Good morning. My name is Cassandra, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Aspen Insurance Holding Third 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-answer-session. (Operator instructions)

Thank you. And now, I would like to turn the call over to Kerry Calaiaro. You may begin.

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 nine months ended September 30th, 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.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 US federal securities laws. All forward-looking statements will have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For more detailed descriptions of these uncertainties and other factors, please see the Risk Factors section in Aspen’s Annual Report on Form 10-K filed with the SEC and on our website.

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

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

Chris O’Kane

Thank you, Kerry, and good morning, everyone.

I’m pleased with our results this quarter, which have been achieved to gain some backdrop of continued soft market conditions and many lines, high frequency of lowered loss CAT activity and turbulence in global financial markets. We reported an 8.4% annualized operating return on equity and the diluted book value per share rose over 2% in the quarter to $38.27. We achieved underwriting profit of $27 million with positive contributions of each of our two business segments. Included in these results are the net reserve releases in both reinsurance and insurance.

As difficult as the current trading environment is, it is compounded by continuing macroeconomic uncertainty that I think it is worth spending a few minutes on this topic before I address the results in whole detail.

The evidence from previous credit-driven economic crises suggests that recovery is likely to be slow and interrupted by periods of high volatility, and that is certainly what we’re witnessing now. This is the implications for the level of investment return the industry can achieve and for lines of business such as trade credit insurance and financial institution insurance. The two respond to credit-related stress in troubled markets and recessional risks in the real economy.

Nine months ago our main concern was interest rates and inflation risks. But at this time, we believe down spending risk in our investment portfolio over the last 12 months is most likely to rise from widening spreads on corporate bonds and weak equity markets. We have been adapting our investment (inaudible) tighten stress test accordingly.

I would like to add more color on our eurozone investment exposures. We have a very modest amount of risk, namely $291 million at book value of eurozone investments and provide some detail on the credit rating of these investments on page 19 of the slide pack. We are concerned by the potential contagion risk posed by the eurozone crisis to bond issue backed financial institutions, not just in Europe, but globally.

And at quarter-end, our total worldwide holdings and financial institutions amounted to $824 million or 12% of our invested assets versus stable weighting [ph] of 15% in this category. This excludes government currencies holdings. In particular, we have been reducing our exposure to the debt securities of eurozone banks and this now stands at just to a 2% of invested assets, all of which is to banks in stronger eurozone nations.

We hold $46 million of exposures to German, French, and Finnish government bonds and we do not hold the sovereign bonds of any other eurozone country. The vast majority of our eurozone exposures are in sovereign debt, government supported investments and high quality profits with 96% having a ranking of A or above. Our exposure to corporate debt securities of eurozone banks is $53 million or just under 1% of invested assets, all of which is to banks in Germany, France, The Netherlands and other countries we considered to be stronger eurozone nations.

Our equity portfolio was valued at $172 million or 2.2% of invested assets at quarter end. At our equity stress test results we concluded that many losses from this – I’m sorry, any losses from the small allocation should be manageable. Moreover, these investments comprise high-quality global equity income portfolio gross dividend yield of 4.6%. This portfolio is world diversified.

At quarter end, about 40% of the equity portfolio was in North America, with 22% in the UK, 20% in Europe and 18% in the rest of the world including Asia and the emerging markets. We are also sensitive to macroeconomic risk on the liability side of our business. Should economic growth in Western Europe remain weak, we consider that our trade credit insurance (inaudible) are well-placed to protect profitability ability unless there is a very rapid diversification in the economic environment such as (inaudible) for example, from widespread sovereign reports.

The major renewal date for this business is close to January and we will monitor carefully how our teams manage their exposures as we approach that date. Those teams have many tools to limit risk including rights of cancellation limits from at-risk buyers. Trade presence shows our reporting side of the stabilization in their market and we continue to remain selective having written less than $1 million for trade credit insurance and $25 million in trade credit reinsurance in eurozone through the nine months in 2011.

Yet, our financial and professional lines, we have been seeking to minimize exposure to eurozone and have written less than $3 million of professional indemnity, prime and D&O in eurozone through the nine months of 2011.

Now, let’s take a look at our underwriting performance. Starting with reinsurance, we reported underwriting profits for the third quarter of $13 million and a combined rate of 95.4%, including 18 points from accessory losses. Gross written premiums were $276 million, 17% higher than year-ago. In our property lines, premium increased by 12% quarter-on-quarter as we benefited from positive price movement in certain CAT exposures public classes.

In addition, some delayed earthquake (inaudible) from Japan came through in the quarter. In specialty reinsurance, growth written premiums were $61 million, up 25% from a year ago. This reflects growth in our credit insurance (inaudible) pricing has generally been favorable and from our non-US (inaudible) where we established – which we established in 2010.

In our casualty lines, premiums were relatively flat in the quarter excluding premium adjustments and they have declined 16% through the first nine months of the year as we continue to manage our book down with this stage of the cycle. In the insurance segment, we reported underwriting profits for the third quarter of $14 million and a combined rate of 93.2%. Gross for the premium grew 22% to $220 million from a year ago, with growth primarily in our financial and professional lines which increased by $29 million to $68 million in the quarter. This was mainly due to our kidnap and ransom and US commercial lines units.

As you may remember we acquired a small business specializing in kidnap and ransom insurance in early 2010, which has enabled to take advantage of attractive pricing in this market niche on the back of strong market demand. We’ve written $45 million of premium in this line through the nine months.

Our US professional lines unit was established in mid-2010. Since then we have made good progress in selectively building our book and have written just over $40 million of premium in this class year-to-date.

Casualty insurance at gross written premium is $38 million, up from $5 million for a year ago. The greatest component of the increase is the rise in global ex-CAT casualty, which has been a strong following line for us and which has pitched at the level to the attritional loss exposure of primary casualty.

It is important to look at our casualty business in the UK and US separately. In the UK, employers liability and public liability markets conditions continue to be extremely challenging. Rates are down 5% this year and our book is in further erosion by competition. In the US we have been repositioning our primary casualty as we can. Much of our old book was cancelled and is now being rebuilt. We do expect some modest organic growth in this area.

Our marine energy and transportation lines had gross written premiums of $71 million relatively unchanged from a year ago, but most classes were down. However, our marine energy and construction liability accounts have good premium growth and improved rating on the back of a series of industry losses over the past year, achieving average rate increases of 17% year-to-date.

At this point, I’d like to update you on the progress of our US insurance business. As you know over the past two years, we have taken a number of steps to reposition this business at a highly-focused head of specialty insurance lines, ranging from property and (inaudible) to professional and management liability with some general casualty and, finally, surety. We have nine underwriting teams working for us, backed up by some very strong claims management and operational support.

I’m very pleased with a much improved underwriting performance of this business. Our net loss ratio for US insurance year-to-date is 67% compared with 71% a year ago and we have a strong conviction that our underwriting is now on a very firm foundation. Clearly, we have incurred some cost in building this platform and acquiring these teams, which resulted in the relatively high expense ratio and hence impacts the combined ratio of our US operation.

We believe that his investment will reward in the years to come. Although if current market conditions persist, it will take some time to achieve scale to fully realize the benefits of investments we have made.

I also like to (inaudible) John Cavoores who took on the management position to assist us in strengthening our US insurance business in October last year, having joined our board as an independent director in 2006. The job I asked John to do is now at last complete and have done extremely well in the manner that John would expect and he will relinquish his executive responsibility as co-CEO of our insurance business at the end of the year.

US insurance will now operate under the able leadership of Mario Vitale, who joined us in March this year from Zurich. At the end of this year, Mario will also assume responsibility as co-CEO of our overall insurance operations working with his co-CEO, Rupert Villers.

This is a very strong management team, with a proven track record of navigating market cycles and building businesses. I enjoy working with both of them and I expect that this fast challenging market we will see and continue to produce the improving performance that we seek. We’re also pleased that John will continue to contribute as a director on the Aspen board.

I’d now like to comment briefly on the renewal activity during the quarter, which is summarized on page six of the slide pack. Starting with our reinsurance segments, I already mentioned rates in peak (inaudible) CAT exposed property lines. In our casualty lines, the rating environment remains challenging, but we were able to achieve a small increase on international lines and limit the reduction on our US account to 1%. In our specialty reinsurance lines, the rating environment is stable, with rates up 1%.

Turning now to our insurance segment, property rates in the UK remain soft and we renewed our books at rates down 1% (inaudible) this year. In the US we saw some wind rate increases through the hurricane season. However, pricing remains but for all other CAT and non-CAT property business. Within financial and professional lines, market conditions are quite varied, and this area we renewed flat rates on our rates this year.

We have seen some positive rate movement in the kidnap and ransom line caused by heightened concerns about piracy. Overall, terms and conditions are remaining broadly stable in both reinsurance and insurance.

With that, I’m going to turn the floor 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 third quarter was $22 million compared with $93 million for 2010 and operating income was $57 million compared with $72 million for the same period last year. The quarter’s results include $24 million of losses associated with the third quarter catastrophe and headline weather events, $17 million associated with the second quarter US tornados and flood. In addition, there was a $50 million aggregate increase from first quarter events primarily due to an increase in our loss from the Japan earthquake where we have responded to information received with the past week regarding two of our Japanese seasons.

It’s worth noting here that when we announced our Japanese earthquake loss estimate in March, we felt the market loss will be around $30 billion. We now see the industry loss approaching $40 billion. We believe that this is the most serious deterioration of any catastrophe events in the history of the Japanese insurance markets.

Annualized operating ROE was 8.4% compared with 10% in 2010. Operating income was $0.70 per diluted share and excluding CAT losses was $1.45 per share compared with $1.04 last year. Diluted book value per share rose 2.2% in the third quarter to $38.27.

Now, let me discuss some of our key financial metrics. Gross written premiums in the quarter of $496 million were up 19% on the same period last year where the increase is coming from both our insurance and reinsurance segments. The combined ratio for the quarter was 96.7% compared with 94.4% last year. The ex-CAT loss ratio improved to 51.7% from 58.7% last year, reflecting improved performance in our insurance segments in particular.

Prior year reserve releases in the third quarter of 2011 was $16 million with $12 million from reinsurance and $4 million in insurance. Prior year reserve was strengthened by $6 million in the comparable 2010 quarter. Our expense ratio was 33.8% compared with 31.1% last year. The major driver of the higher expense ratio was an increase in acquisition costs as our business mix have moved away from casualty insurance lines towards our successful kidnap and ransom business, which comes with a relatively higher acquisition expense ratio. Our policy acquisition cost ratio rose from 16.7% to 19.2% in the third quarter, whereas our operating expense ratio was in line with the prior year of 14.6%.

On our comment and further detail on our segmental results starting with reinsurance. Reinsurance reported an underwriting profit of $30 million for the quarter, which included $5 million of losses for Hurricane Irene and $14 million for other natural catastrophe events which occurred in the third quarter of 2011, comprising US, Scandinavian, and Asian weather-related events.

In addition, we increased our estimate of losses arising from the severe US weather-related event which occurred in the second quarter by $17 million, which is consistent with an increase in estimated market losses from these events to $20 billion, from $15 billion indicated at the end of the second quarter.

A $15 million aggregate increase from first quarter events were also included in reinsurance results. Gross written premiums in reinsurance segments were $276 million, up 17% compared with the third quarter a year ago with growth across most lines and including $17 million of premium adjustments in our casualty reinsurance segments relating to prior period reflecting updated seasons advice. The combined ratio for the reinsurance segment was 95.4% including 18 percentage points of CAT losses for the quarter.

Excluding the impact of CAT, the combined ratio of 77.6% compared to its 72.5% last year. You may recall the first quarter of 2010 included $20 million of losses from the first New Zealand earthquake. This quarter’s result contains $12 million of reserve releases principally from property lines.

For the nine months ended September 30th, 2011, the combined ratio for the reinsurance segments was 125.9% with an ex-CAT combined ratio of 77.4% compared to a 74.6% last year on the same basis. Gross written premiums are just over $1 billion or broadly in line with last year, with increases in our specialty reinsurance lines offset by premium reductions in casualty reinsurance. The excess in the year ex-CAT combined ratio of 87.2% over the nine months included four points of impact from an increase in retrocessional reinsurance purchased during the period. This compares within an accident year ex-CAT combined ratio of 80.2% for the same period in 2010.

Turning now to our insurance results. Our insurance segment generated an underwriting profit of $14 million in the quarter, with a combined ratio of 93.2%, a significant improvement from an underwriting loss of $13 million and combined ratio of a 107.3% last year. Catastrophe losses were modest, of $5 million, primarily from Hurricane Irene and reserve releases were $4 million principally from our property lines.

The net loss ratio for the segment improves to 56.6% from 77.3% last year with the improvement across several lines including marine, energy and transportation as well as within our financial and professional lines. The results include an 11-point reduction in our current accident year loss ratio to 61.1% from 72.1% and seven points of reserve releases.

Our marine, energy and transportation lines have continued to perform very strongly, with a 50% net loss ratio this quarter and 55% through the nine months of 2011. Gross writing premiums in our insurance segment with $220 million compared with $180 million in the third quarter last year. The increase was attributable to the financial and professional lines where our successful kidnap and ransom units and recently established US professional lines reside.

Through the first nine months, the combined ratio for the insurance segments was 96.7% compared with the 101% last year. Gross written premiums are $748 million rose 14% from last year primarily in our financial and professional lines.

Now, turning to our investment performance. You may wish to revert to page 16 to 19 in the slide pack for additional information.

Net investment income for the quarter was $57 million broadly in line with last year. Our dividend income from our recent $175 million investment in global, high-quality, low beta equities, has provided an incremental contribution against the backdrop of the fifth low interest rates. The book yield on our fixed income portfolio of 3.54% of September 30th, 2011 was found 10 basis points from the end of the second quarter this year and 37 basis points from the end of the third quarter last year. The arbitration of the fixed income portfolio including the impact of our interest rates swap program was 2.4 year broadly in line the second quarter of this year.

The duration has been managed down from just over three years at the same point last year primarily due to the impact of our $1 billion swap program. Average credit quality of the portfolio is AA, also incorporating the impacts of the S&P downgrade of the US government securities in August. We have no other than temporary impairment charges in the quarter.

Our $1 billion interest rate swap program has been put in place to manage interest rate volatility from our $6 billion fixed income investment portfolio. The current quarter including $36 million of mark-to-market losses on the swap portfolio included in net income relative to an $82 million increase in unrealized gains in our fixed income investment portfolio.

At the end of the quarter, there were $334 million of net unrealized gains pre-tax in the available for sale fixed income portfolio compared with $252 million at the end of the second quarter this year, and $240 million at the end of 2010. Net realized and unrealized investment losses included in the income statements were $33 million of the quarter compared to a gain of $20 million last year.

Turning now to our capital position. Our balance sheet remains robust with $9.4 billion in total assets and $3.2 billion of total shareholders’ equity. We remain comfortably capitalized with expectations of being able to deploy our capsule in hardening market conditions.

In October, A.M. Best affirmed the ratings across our operating subsidiaries at A-excellent. We have $4.4 billion of gross reserves on our balance sheet, an increase of just over $700 million since this time last year. This includes the margin of approximately $360 million over our mean best estimate assessments of ultimate losses or approximating the 89 percentile in terms of the projected distribution of outcomes on a diversified basis. We have provided further information on our reserved strength on a group basis and also split between insurance and reinsurance on pages 22 and 23 of the slide pack.

You will see that our reserving approach is consistence and, in our view, appropriately prudent. Turning now to guidance for the remainder of 2011 as set out on page 24 of the slide pack. In the light of our years (inaudible) catastrophe losses on prevailing market conditions, we anticipate our full-year combined ratio to be in the range of 108% to 114% including our CAT load of $40 million for the fourth quarter assuming normal loss experience.

We anticipate our gross written premium for the full year to be unchanged on previous guidance at $2.1 million plus or minus 5% and we expect our CD premiums to remain between 11% and 14% of gross written premium reflecting the purchase of addition reinsurance ahead of the wind season earlier this year. We are leaving the effective tax rate estimate unchanged in the range of 8% to 12%, however, this will, of course, know depending on the actual distribution of losses within the group.

That concludes my comment on our results of the quarter and nine months and updated guidance for 2011. And with that, I would like to hand the call back to Chris.

Chris O’Kane

Thank you, Richard. Two quarters ago, I felt optimistic enough to say to you that we may be allowed to witness a general upturn in insurance and reinsurance pricing. Thus far that confidence was only realized in catastrophe reinsurance and it captured in property insurance in the US. However, following the most recent grounds of industry conferences, there appears to be growing acceptance of the need for broader change.

In US primary insurance markets, the dialog is focused on the need for improvements particularly in worker’s compensation and in general liability, in addition to catastrophe exposed property lines. We’re also seeing accounts moving back from standard lines carries to the surface lines markets as the standards lines carries are non-renewing these tougher risks.

This trend can have a much more profound impact than might be evident at first glance. Previous market turns have been characterized by standard carriers returning to their core strengths and rejecting non-standard risks. These risks are then offered to services lines which tend to push up prices and improve terms in the face of increased demand. As a result, both the admitted market and the (inaudible) service lines carriers benefit from the process.

We also noted saying that the excess casualty carriers are moving up attachment points, which is another precursor to a hardening market. On the reinsurance side, there are signs that the market is now digesting the implication of the various model changes for US wind exposures and $95 billion catastrophe loss doesn’t seem so far this year.

We expect to see further increases in CAT exposure property in January and in the first two quarters of 2012 including regional US CAT account as well as peak zone exposures. In casualty reinsurance, the signs are less pronounced. The early momentum that we see on the primary side continues to build. We would expect that to feed through to casualty reinsurance market in time.

As I said to you during our last earning’s call, Aspen was an early adopter of the US wind model changes in terms of pricing, capital allocation and reinsurance purchasing. And this leaves us very well placed to benefit from a better market that we expect to see as the year-end renewals approach.

Thank you for your attention. Richard and I are now ready to take any questions you may have.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Amit Kmuar.

Amit Kumar – Macquarie

Thanks, and good morning. Just going back to the discussion on Japan and New Zealand, was your development in Q3, is that based on a 40 billion number? And then what sort of range can that number sort of develop for you going forward?

Chris O’Kane

Okay, Amit, I would say we tend to grow – at this stage of a loss, we are pooled more bottom up than top down. So what actually happened is a number of the smaller Japanese companies over recent months gave us reason to believe that we should hire reserves for their loss exposure, and we did.

There were a couple that were out of line – one in particular – who were quite adamant that they were on top of the reserving process initials, so no further need to be concerned about development. What happened was, within the last week – in fact, (inaudible) just a beginning of this week, actually – they said, “Oops, we don’t see it that way. We actually see the loss being a bit bigger.”

That wasn’t a complete shock to us, so we took the opportunity to look at all of our Japanese loss exposures from that company and a bunch of other companies, pretty much everybody, and do a thorough review. That thorough review caused us to increase our loss exposure, as Richard said during the call. And I would then think – then the process of (inaudible), if that’s the sort of a loss from those companies, those companies must have how loss on a gross basis. And so, what’s the market loss? And yes, we’d now close the market loss at about $40 billion.

We have about 0.5% of that – really, very, very roughly about 0.5% of the market loss. And I don’t see that percentage changing very much. So, if the question is could the market loss of $40 billion get worse, I’m not actually expecting it, but I definitely wouldn’t rule it out. And if it does, then maybe we would have about 0.5% of that duration above $40 billion.

So, I don’t think it’s too much to worry about there. A little bit of a downside also, but I’d actually say our loss makes it pretty conservative as we are this morning.

Amit Kumar – Macquarie

That’s helpful then. And I guess, just staying on the topic of Asian exposure. This relates to Q4 – they’re having these reports about this flooding in the industrial estates surrounding Bangkok and a lot of the Japanese car manufacturers are out there and Japanese insurance companies write that. Would you have any exposure to that or do you have any initial views on that?

Chris O’Kane

It’s very, very early to give you any facts. Our impression is that these losses are going to be relatively serious. The flooding is quite severe in Bangkok. And you’re right. There is both Thai commercial exposure and auto manufacturing exposure.

The talk in the local market – and I just read it is only talk, which I’m repeating – puts the market loss at a low of $4 billion and a high of $10 billion. As far as Thailand is concerned, it’s not an area of huge exposure for Aspen. But we do have some worldwide writing clients who would have exposure there. But I’m afraid it’s much too early for me to sort of hint any number for us. We haven’t seen a single loss report yet.

Amit Kumar – Macquarie

Got it. And the last question and I’ll re-queue. Your growth in the financial and professional lines, there have been some companies who had exposure to club deals and they’ve had to adjust the risk of those upwards, do you have any exposure to club deals in your bulk in US?

Chris O’Kane

No, we do not.

Amit Kumar – Macquarie

Okay. Thanks.

Chris O’Kane

And just to describe sort of a confusion of categorization. A lot of that growth is coming from piracy-related coverage that we just happen to classify on the professional. The biggest growth area is kidnap and ransom business, because it’s what people generally think of when they think professional lines.

Amit Kumar – Macquarie

Got it. Thanks.

Chris O’Kane

Okay.

Operator

Your next question comes from the line of Vinay Misquith.

Vinay Misquith – Evercore

Hi, good morning. First, just an overall question on pricing. Chris, you mentioned that you’re seeing signs of formal pricing and you mentioned worker’s compensation and property. Are you seeing signs of pricing increasing in other areas as well?

Chris O’Kane

It’s been funny. We’re officially reporting on a quarter that ended on September the 30th. And to be honest, there wasn’t very much sign that we saw a price improvement in that quarter other than in the marine, energy liability area, where we’re up 17%. I’m pretty happy about that. Other than kidnap and ransom, where the world is very concerned about piracy, and then on the property CAT area, which is mainly about model change driving price. So that’s like the news for the quarter.

But then this past month has been very interesting. At any point in the last 12 months people have said, “Hey, where’s my investment income going?” All that capital we gave back in the industry last year is gone and we needed to run risk results. There was no reaction just until about the last four weeks. And now you’re seeing it pretty much all over the place everywhere. Much more encouraging.

So, let’s take worker’s comp, I mean, that’s the line we don’t write on a primary basis. We have no exposure to worker’s comp insurance at all. What we do do and we have done in the process is, we reinsured some of the guys who are in that area and we reinsured them a pretty good in certain condition. We had to cancel that in the last of couple of years as the conditions went south. Now, some of those carriers are sort of talking to us again, saying, “We’re in a little trouble, we were a little balance sheet stressed. Is there any chance of helping us out?”

And I can’t really put numbers on this yet, but I think that some of this is going to crystallize over the next couple of months running up to 01/01, to what extent Aspen had, but a much better picture there. Property we’ve touched on. Generally, more widely, there is more of a sense, I would say, that companies that used to talk about a mid-teens ROE, faced with an ROE that maybe isn’t even double digits, I’ll begin to say that’s not good enough, to go out and push price.

One very interesting static – one of my college reporter from the conference talking to the wholesale brokers is, the wholesale brokers told them that their showing a business that’s up 15% in recent weeks. And that’s very interesting because what they’re basically saying is, the admitted markets that took our business for the last few years are finding, guess what, in a standard line of mentality isn’t very good when it comes to non-standard risk. We’re losing money. They’re checking that out, going back to the wholesale side and that’s coming to us as a growth opportunity at better prices. So, I’m fairly upbeat, but it’s really just about the last four weeks that I’ve been seeing that.

Amit Kumar – Macquarie

Okay, that’s interesting. And then if I could just circle back to your own business. I think you mentioned US professional line, which is mostly kidnap and ransom, are you also doing some D&O business in the US? And some competitors have said that that’s being pretty soft even now. So, it’s good to help us understand your growth in that line.

Chris O’Kane

Sure. Well, in what we call financial professional lines, we have a number of things, okay? And the most rapid growth area is what I said, kidnap and ransom. The second biggest growth area is US professional, not management liability, just professional. And that comes from a team that has a good a very track record. They’ve been with us a couple of years. They’re making good steady progress, no consent there.

When it comes to the D&O, I agree with you. There are more than 60 carriers today offering the D&O product in the US. And while we have a team – actually, a very, very good team, they’re just keeping their powder dry. Our premium year-to-date in D&O is below $10 million. Maybe half of that – a little over half of that, actually, we do down in Bermuda which is an excess D&O play. And I think the excess D&O is somewhat more attractive than the stuff in the primary side.

On the primary side, our guys, say, they’re patient. They’ve got the skills. They’ve got the contact. They got the market brand. But they don’t want to and I don’t want them to be writing so much premiums. So, really D&O is an area to stay cautious. I think it will turn in due course like everything does.

Vinay Misquith – Evercore

And the growth in the casualty, I believe you mentioned was in the UK was it, or was it in the US too?

Chris O’Kane

In the segment that we see on casualty, the biggest for that growth – it was actually only 5% in total – is global access casualty. So that stuff that we’re starting to major corporations around the world, fairly high attachment on stuff, very good retroactive for us and somewhat distant loss characteristic than the primary side.

Vinay Misquith – Evercore

Great. In terms of the margins and the reinsurance of the primary insurance plus some of the primary insurance to a significantly improving margin over the last two quarters, do you expect that to continue next year? And also on the reinsurance lens in light of higher pricing and property CAT business, do you expect them to improve in margins or do you expect cloddish margins because of negative pricing on the other lines?

Chris O’Kane

Let’s take the insurance side first. As you know very well we've done an awful lot to our US insurance. We’ve cancelled a lot of business. We’ve got out of construction largely. We have a little bit left. There’s very little left (inaudible) of liability left and we basically have nine things doing things we weren’t doing before. Some of them we’re doing a couple of years and beginning to build those track records. Others, like D&O they’re just keeping their powder dry.

This is a different kind of operation. It’s better managed, it got better backup. And I think the trend that you’re seeing is largely a reflection of new underwriting and new underwriting approach. Another phenomenon that’s going on there is about a year ago, we took couple of long hard looks at our reserving position in US Insurance. We did that. I’m not anticipating that we’re going to have to do it again. So, one of the contributors should be removed.

So I would say to you in general, yes, you’re going to see a better performance out of US, particularly the US, but even in London. The (inaudible) like marine health, for example, which we really had to reposition that. And I think we got that right and that’s running comfortably with the right size of 100 combined now having had a number of orders the wrong side. So, yes, the insurance is looking better. Notwithstanding where we are in the market, even without the rising side and better rates, our insurance I think controlled better performance and in a better market. And you could begin to be quite excited about that.

The reinsurance side, property CAT, we’re going to see more pricing. I mean partly it’s $95 billion of loss this year. And that does include, you know, something from (inaudible). So the market would response a lot. Then you go model changes, one change in the US, you’ve got one change in Europe. So we feel optimistic about property and especially pretty good as well. So casualty is lagging a little bit. To some extent in improvement, they’re going to depend on improvement primary level. That’s one thing is going to feed through the other. But it could be a couple of four days later.

But net-net, I feel our reinsurance probably won’t show a big a level o f improvement as our insurance. And that’s largely because our reinsurance was already not too bad. So there wasn’t a room for improvement there, but a margin improvement is possible in the insurance too.

Vinay Misquith – Evercore

Fair enough. And do you expect to buy less retrocessional reinsurance next year versus this year?

Chris O’Kane

We got to wait and see what the market offers and that we bought some more this year because of month change. We increased buying midyear because when we ran a new model, implication about this would basically set it – basically it will be capital-hungry. And so we bought some retro. Now if we have a couple of decent quarters, that capital rebuilds and we don’t therefore need necessarily to buy retro. So I leave at that. Maybe we’ll update you on that in a quarter’s time.

We’re only buying retros. It’s always paid. If it’s available at a good price, we tend to like to buy it. And if it’s not available at all we tend to do without.

Vinay Misquith – Evercore

That’s good. Thank you very much.

Operator

(Operator instruction) The next question comes from the line of Josh Shanker.

Josh Shanker – Deutsche Bank

Good morning, everyone.

Chris O’Kane

Good morning, Josh.

Josh Shanker – Deutsche Bank

Good morning. My question regards the kidnap and ransom a little bit. It’s a line that I don’t know so much about. And to make sense which, the growth coming there is because our major competitors advocated, is it your rate? And just the nail in the coffin, that’s where the growth is coming from in financial institution as a whole?

Richard Houghton

Yeah. I hear you mentioned coffins here in the subject of kidnap and ransom insurance, Josh. That’s a bad idea.

Josh Shanker – Deutsche Bank

You’re right. We hope not. We hope not.

Richard Houghton

Okay. Well, let me tell you what is that. There was a little company basically an MGA who wrote for a bunch of Lloyd’s syndicates and we bought the company years ago and connected them. They’re not fully part of Aspen’s.

So suddenly they were part of an established (inaudible) and their brand appeal increased hugely. And their book of business was largely family type K&R in Latin America. This is just basically wealthy or not-so-wealthy people, their kids worrying about getting hijacked in the street. And that book of business has performed very well for a very long time and we’ve had that. We bought it, it runs well, it’s expanded a little, we’re happy with it.

What is different in the world is the Somalian piracy situation. And here it really is – there’s over a thousand miles of water and ships going through there are desperately concerned about Somalian piracy. It’s run as almost an industry there. This is not like Jack Sparrow in Pirates of the Caribbean. This is businessmen sending kids out to try and pull ships in and that shipping needs help and we’re providing that help.

This is a new area of business at large. I’m not saying there was none of this before. But the demand has just skyrocketed the last full 18 months. We had a good team, we brought in a good team, they had a good reputation, and I don’t believe we’re taking market share for anybody. I think we just happened to have caused an up drought in demand of this sort of thing.

Yes, I think about pricing as well. We started off for the setting of pricing level and to be frank with you, demand is driving that pricing level high. So we like the risk. I mean we don’t like the nature of the risk clearly. This is a very obvious type of risk indeed. But we do think part of the social function insurance is to provide a degree of comfort for property owners, in this case particularly ship owners who got concern. And the cover is basically on risk for about six days. That’s how long the peace and voice [ph] lasts through those waters. So on the risk-adjustment basis, we very much likely kind of return we’re seeing.

Josh Shanker – Deutsche Bank

And on the sort of financial institutions, D&O, E&O type of stuff, there’s no movement in your book on that?

Chris O’Kane

As I said to somebody on the call the D&O piece is, for US, D&O below $10 million. That is another very small amount of international D&O. The professional is a little bit bigger. Bruce Eisler and his team joined us a couple of years ago. He have a very assiduous underwrite with very good broker-produced connections.

And what we’re seeing there is connection that Bruce has known a long time are basically coming to us and say, “The product you sold us, we like the way you sold it. We like the service you give. We like the rapport with working with new people. And we want to work with you.” So what Bruce was able to do basically is grow, in a modest way, but he’s not growing by pricing himself. He’s not taking much by being cheap. He’s improving his position by representing the same values. His people have come to associate Bruce in the same way.

And that, I would say in that area, it’s the only real area of the change as US professional is coming along nicely. And the K&R piece, quite separately, which we do out of London is making very good progress. Everything else, fairly much haven’t changed.

Josh Shanker - Deutsche Bank

Very good. And changing gears entirely, coming up on one-on-one, looking at the changes sort of in-rating, it is the modeling agency views, your capital position right now, how is your appetite right now compared to where it was a year ago given where pricing is?

Chris O’Kane

You might have a weak cutback a little bit in the midyear because we felt that the models implied much more demand for CAT reinsurance. We also felt that with that extra demand should come extra price. And while there was bit of extra price, there wasn’t enough. So, we cut back back to leave ourselves with capacity as sort of January, April and so on. And we also, as I said earlier, we also bought a bit more retro, which is still important. These two things give us a little headroom to grow and what we think is going to be a more attractive CAT market in the first six months of next year.

Josh Shanker - Deutsche Bank

Well, I appreciate all your answers and thank you very much.

Chris O’Kane

Pleasure, Josh. Thank you.

Operator

There are no further questions at this time.

Chris O’Kane

Okay, in which case, thank you all for your time and attention. And have a good day. Goodbye.

Operator

Thank you for joining today’s conference call. You may now disconnect.

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