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Aspen Insurance Holdings Limited (NYSE:AHL)

Q1 2012 Earnings Call

April 26, 2012 9:00 AM ET

Executives

Kerry Calaiaro – SVP, IR

Christopher O’Kane – CEO

Julian Cusack – Acting Group CFO

Analysts

Michael Zaremski – Credit Suisse

Amit Kumar – Macquarie

Dan Farrell – Sterne Agee

Vinay Misquith – Evercore Partners

Joshua Shanker – Deutsche Bank

Brian Meredith – UBS

Matthew Rohrmann – KBW

Wayne Archambo – Monarch Partners

Operator

Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to everyone to the Aspen Insurance Holdings First Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to introduce 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 Julian Cusack, Chief Financial Officer of Aspen Insurance Holdings. Before we get underway, I would like to make the following remark.

Last night we issued our press release announcing Aspens financial results for the quarter ended March 31, 2012. This press release as well as the corresponding supplementary financial information can be found on our website at www.aspen.co.

This presentation contains and Aspen may make from time to time written or oral forward-looking statements within the meaning under and pursuant to the Safe Harbor provisions of the U.S. Federal securities laws.

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

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

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

Christopher O’Kane

Thank Kerry. And good morning everyone. Like so many recent quarters, the first quarter 2012 prove to be very interesting one. This time though the interest arises not from past catastrophe losses, but rather from the wide diversity of price changes and momentum in the underwriting cycle is affecting the industry throughout the world.

If I tell you that the line of business with the greatest rate movements in the quarter for us was Japanese earthquake with cumulative rates up 74% and that’s in contrast with the number of other events, which renewed flat, you’ll understand what I mean. And why is this coming about?

Well, in my view there are three or four drivers. First, the industry has finally recognized that the reduction in investment income resulting from the present yield environment, need to be offset by improved underwriting income. This is at last being understood and acted upon.

Second, the fact that the industry sustained catastrophe losses of $117 billion last year has given many management teams the confidence and the authority to demand more price from the customers. Is a slow burning fuse, but one if it certainly looked at as a result we are moving well in the right direction.

Importantly, it’s not only customers with loss making lines they are speeding with upward draft. We observed a number of our major reinsurance clients, perhaps more particularly in Europe, successfully using the argument that losses they sustained in one part of the globe need to be compensated for by improved prices around the globe.

In third place, if you look at the supply capital. And that I mean is the degree of over or under capitalization to give line and this is not evenly distributed. There is a mismatch between where the supply of capital is and where the demand for capital is. Therefore, we are seeing the same macro phenomenon at a global level, having differential impact in different regions and in different lines.

By virtue of Aspens’ extensive distributions network onshore and offshore and in diverse product mix, we are well placed to exploit these relatively undercapitalized pockets, which offer well above average pricing.

And fourth, U.S. wind air version 12.5 and RMS version 11 releases, last year is telling insurers and reinsurers like that there is more risk from the same amount of exposure. RMS version of 11 delivers the same message, but in a more muted way to the Europeans.

In Japan, (inaudible) stress transferred theory and is associated a less than the Tokyo earthquake are telling Asian insurers and reinsurers that there is heightened risk of an earthquake in the Tokyo Bay area. This is not about charging more money for the same risk, because bad experience. This is about charging more money because the risk itself is greater.

Later in the call, I will illustrate how these macro factors bring themselves very specifically investment lines of business in the regions in which we operate.

But before I move to discuss our performance of the quarter, I want to mention our recent capital raise. In April, as a result of the attractive debt pricing environment, we opportunistically accessed the public markets and completed a $160 million preferred offering. This enhances our financial flexibility and rating momentum continues. And also support our U.S. lines and gives us the opportunity for more share repurchases.

Now let me review our performance. For the first quarter, we reported an operating profit of $71 million or $0.88 per share, diluted book value per share was $38.58, up 1% from the end of 2011 and up 6% from the first quarter of 2011.

Our reinsurance segment had a strong quarter with underwriting profit of $55 million, reflecting good performance in all of its lines. Our property and our finance insurance lines performed very well on the insurance side, but our marine business was impacted by the Costa Concordia event. Overall, this resulted in a modest underwriting loss of $10 million of insurance segment.

Now let’s take a look at our underwriting performance, and we’ll begin with reinsurance. In reinsurance we reported underwriting profits in this segment of $55 million for the first quarter with a combined ratio of 79.8% and the loss ratio of 50%. Prior year reserve release is 28 million in the quarter, mostly in our U.S. casualty and our London-based specialty reinsurance lines.

Our property reinsurance produced a fine result with a loss ratio of 41.3%, gross written premiums were $231 million, an increase of 7% from the first quarter of 2011, primarily in our pro rata business. Casualty reinsurance was profitable, good result and it’s continuing in difficult markets. We achieved the loss rates of 62%. In the U.S. we’re seeing some small rate increases in certain classes. The international casualty market remains challenging especially comps at European business due to new entrance in recent years.

In specialty reinsurance, gross written premiums for the first quarter were $104 million, that’s up 26% from year ago with modest growth from most lines in this division. Specialty re delivered a loss ratio of 55.6%, strong performance in our specialty marine and credit and surety lines.

Moving on to insurance, gross written premiums rose 32% from last year, reflecting strong demand for that property and the marine lines. These areas have also seen favorable rate increases, especially in the loss affected areas and also peak zone U.S. property accounts. Our insurance segment reported an underwriting loss of $9.7 million in the quarter, a combined ratio of 104.2% that’s compared with 101% year ago.

However, excluding the Costa Concordia event, the combined ratio of the insurance segment was 92.6%. And it’s also interesting to look at our insurance business geographically. And I would like to make a few comments on the performance of international and U.S.-based teams.

For the first quarter of 2012, the teams within our international insurance lines delivered gross written premiums $214 million. We achieved a loss ratio of 67.4% in the quarter with strong performance in U.K. property, in aviation, in offshore energy, physical damage, as well as the kidnap and ransom, robbery.

Our U.S.-based teams achieved gross written premiums of $94 million in the first quarter, an increase of 122% from year ago as some of our newer U.S. teams have gained traction and also reflecting better pricing in some areas. The loss ratio for U.S. insurance improved in the quarter to 61.7% compared with 65% a year ago. Our property, excess casualty, and professional liability teams all made good contributions to our underwriting profit in the quarter. We are excited about the progress our U.S. teams are making. We certainly have the right people in the right places and all the licenses that they need to conduct business well.

Now, let me comment on market conditions in a little more detail. The best news is clearly in those loss affected lines such as property and marine, geographically the U.S. P&C markets are most encouraging. In Europe the story is more (inaudible) with some public restraint, yet other has continued to be quite competitive.

Last time we spoke I highlighted that there was 40% of our book of business that we want to write in 2012 was either already well rated or subject to significant upward rate pressure. These lines were predominantly affected by natural hazards or by political risk or financial risk. So during the first quarter we achieved an average increase of 8% from these lines compared with 4% on average across our entire book of business.

The really interesting thing to note about this 8% figure is that this is rate increased on top of what we believed to be well rate to start with, or maybe it’s even a second year. We feel particularly good about this attractive 40% profitable core of our business, especially that the balance of 6% of the book is also seeing positive rate.

Within the reinsurance account, April 1 is the key renewal date for the Japanese market. The successful completion of the new process has brought an end to the long and detailed negotiations with our customers as we thought not only to reflect the immediate losses stemming from the Tohoku quake, but also to acknowledge the increased probability of major earthquake striking Tokyo. Since the tragic Tokyo event, Aspen’s domestic Japanese earthquake portfolio has achieved a compound rate improvement of 74%. In addition to very material price increases, we’ve also made substantial structural changes recoveries sold to limit our exposure in the future loss.

In summary, the overall Japanese account has forecasted 2012 gross written premium that is 10% greater than at the time of the (inaudible) two years ago. And yet our exposed domestic policy limits have reduced by 50%. 10% more premium, half the exposure is a very good thing indeed.

Non-earthquake places in the Japanese market also achieved essential rate improvement, with Aspen’s typhoon exposed contracts recording annual price movements 16%. Pricing level of Japanese wind portfolio is now 24% greater than it was before the 2011 earthquake.

In our casualty reinsurance lines, the rate environment remains soft with ample capacity, but we were able to achieve a 2% increase in our international lines, while holding the U.S. casualty rate insurance account flat.

The first quarter is not a major renewal period for insurance. Overall, rates were up 3%. There was a wide range of rate movements across all lines. A significant rate improvements in the U.S. were property, up 9% overall while peak zone catastrophe winds exposed property risks are up over 10% and maybe as much as 20%. Non-catastrophe exposure risks or rate increases in the single digits.

The Costa Concordia event has tightened the marine market a little with Marine energy liability achieving a 6% rate increase and hull achieving 3%. However, it is really much too early to predict the ultimate market impact of this major market loss. We’ll have to wait and see.

Other lines such as UK property and UK liability continue to battle against very tough trading conditions. Our global excess casualty count achieved a price increase of 8% year-to-date.

And with that summary I’m going to call – turn call over to Julian, who will review the results for the quarter.

Julian Cusack

Thank you, Chris. I will start with a brief review of the results of our two segments and then move on to discuss expenses, investment performance, and capital management.

Starting with reinsurance, I’m pleased to report that we have the best quarter since the fourth quarter 2009 with a combined ratio of 79.8% for the quarter. The only losses of significance in the quarter were from the U.S. storms in February and March for which we have losses of 17.6 million net of reinstated premiums and potential reinsurance claims resulting from the Costa Concordia event of 5 million. The effect on the combined ratio of the reinsurance segment of these events was 8.5%.

Prior year of leases in the quarter were 28 million, including 18.6 million from casualty reinsurance. Of these casualty reinsurance releases 7 million resulted from commutation activity. There was no net overall movement on reserves of 2010 and 2011 catastrophe events.

Our insurance business had a tougher quarter with the combined ratio of 104.2%. This includes losses of 26.5 million net of reinsurance recoveries and reinstatement premiums before tax, arising from the sinking of the Costa Concordia.

Our loss in the insurance segment from this event includes a small participation in the hull insurances, which are seemed to be a total loss of approximately 500 million of which our share is $7 million gross. The balance of the loss relates to the ship owners liabilities for removal of rack at compensation to passengers and crew. For which our gross reserve is 28 million.

Our combined hull and liability net reserve is 24.1 million, plus a 2.4 million provision for reinstatement premiums payable. Any increase in reserve will be covered by reinsurance.

The insurance segment also had U.S. property losses of 5.4 million from severe U.S. storms in February and March which taken together with the net 26.5 million of Costa Concordia losses account to 14 points on the combined ratio of the insurance segment. Prior year releases in insurance segment were 9 million or four points of combined ratio.

Overall we continue to see good underlying profitability in our London market based insurance operations. Our U.S. based insurance teams continues to make steady progress despite a continuing drag from higher operating costs, which under current market conditions will take some time yet to be fully absorbed in top-line growth.

Total operating expenses rose this quarter. The 22 million increase since the first quarter of 2011 includes 14 million due to the increases in performance rated compensation provisions relative to the loss making quarter of Q1 last year. A further 4 million increase relates to direct expenses of our newer insurance lines, not yet matched the new business growth. The remainder relates to non-recurrent items included in corporate expenses.

Our investment team had another successful quarter. Total annualized return of quarter was 2.4% including the effective interest rate swaps. This includes net investment income and gain in the income statement of 53 million and 5.5 million respectively and a reduction in unrealized gains shown in OCI of 12 million.

Book yield in the quarter was 3.31% down from 3.65% a year ago. We intend to keep our fixed income portfolio at around three year’s average duration. Given recent gains in the high-yield market we are no longer considering entering the sector, but we will keep that option under review. Our equity portfolio performed well in the quarter, with a total reserve of 4.2%.

We continue to actively manage our capital base and the good news is that our Q1 earnings together with net proceeds of 105 million from our recent issue of 7.25% of shares has significantly increased our capital flexibility. As a result, we are well-positioned to allocate capital to profitable underwriting as the markets firm continues to support our growing U.S. business, and to repurchase shares opportunistically.

Finally, we announced yesterday that we were increasing our normal quarterly dividend by 13% to €0.17 per quarter. Guidance for the full-year 2012 remained unchanged except for the cat load. In our Q4 earnings commentary we gave this as a 190 million for the year.

Based on our accumulations allowing for some growth, we now estimate the cat load for the year at around 180 million of which approximately 30 million can attributed to Q1 leaving a 150 million for the rest of the year. Our cat load only covers losses from natural catastrophes and so for example includes events such as the Q1 tornadoes but excludes man-made disasters such as the sinking of the Costa Concordia.

The number represents the average over 50,000 simulations of the aggregate catastrophe events in any one year as modeled by our suites of catastrophe models. It also includes estimated allowances for un-modeled losses and it’s stated before credit for reinsurance and before tax.

With that, I would like to hand the call back to Chris.

Christopher O’Kane

Thanks Julian. Now our balance sheet continues to be strong and as Julian said, we are well-positioned to take advantage as the market turn or any market turn at any point. The way we see it our job is to manage capital. We evaluate the underwriting opportunities where we can achieve with most profitable underwriting, and we deploy capital to those areas.

Simultaneously we may withdraw capital from lines that are beginning to look as if their best days are behind them. And of course finally we’ll return capital to shareholders by repurchasing shares at attractive levels and by paying dividends.

Taken together, those three activities constitute what we call capital management. Just know, we do see an opportunity to deploy more capital likely in the property catastrophe exposed area. Our current 110 PM of the U.S. wind is 15.3% compared to our stated tolerance of 17.5% total shareholders’ equity at March 31. With US property rates increasing 10 to 20% as we head towards the June and July renewals, we may well consider increasing the exposure and writing more property business.

It is now time for the dynamics of the market to accelerate from short-term reaction expenses to loss to a more sustainable improvement. There are specific areas where rates increased in line with increased risks. If you’re assuming we are not seeing enough rate increases broadly and across all lines. We do feel that the momentum for broader term in the market is building. And again finally I would remind you that we are well-placed to take advantage of that term.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Zaremski with Credit Suisse.

Michael Zaremski – Credit Suisse

Hi, good morning.

Christopher O’Kane

Good morning, Mike.

Michael Zaremski – Credit Suisse

Chris, he gave a lot of good detailed pricing commentary. And I’m hoping you can help us discern, is your expectations for new business ROEs versus the existing book, and whether you think pricing is strong enough to actually offset the low interest-rate pressures that you cited in the prepared remarks.

Christopher O’Kane

Let me take that part of the question, the latter part first I mean unfortunately the answer is no. If you think our investment leverage is a bit more than two to one and you think as Julian says, we are achieving 2.4%, something like that in return, well, there was a time when that figure was nearly 5% and that’s a big hit to earnings. As you know very well it’s true for us, when it’s true for P&C everywhere.

So the underwriting movements in general are not enough. They’re offsetting it, but they are not replacing it, I’m sorry. That is just hopeful thinking to think that it would. But one of the things, I want to mention is that I don’t really think, I have seen a market where there was a broader range of potential underwriting outcomes looking different prices. The stuff in the market looks to us definitely loss making, we try to avoid that.

There is also stuff that looks not just double-digit ROEs, but some of it is actually 20% ROE and more. So I think if your question was on the property side, where we do think we’re going to take on a little more risk, if the opportunity presents itself – and that’s stuff is priced well in the double-digits, 14, 16, 18. Once in a while, it maybe 20% ROE. Now, that’s not at on every deal and on average, it is maybe more like 15 or 16. That’s the stuff that gets interest

There is also some other pockets on the insurance side with a more specialty or niche field, but we think price double-digit ROE or better, just – let me just give one other thought. You may be thinking, why don’t guys do much more, why isn’t the whole book like that? The problem is there is just not enough this available. What we are really trying to do is ease back on the stuff that’s in the high single-digit ROE area currently, but maybe better tomorrow. Do less of that and if we can, so that comp as much as possible this attractive stuff. There isn’t enough to pull the whole company. Does that help you?

Michael Zaremski – Credit Suisse

Yeah, that’s helpful. One other question, why wasn’t stock repurchase in 1Q and how should we think about the growth versus buyback position in the coming quarters? And I will say it’s because I noticed the premiums guidance did change and you did raise capital recently as well.

Christopher O’Kane

I think we said in our fourth quarter earnings call that we had spent some 2011 last part – we’ve been rebuilding our capital buffer to meet our risk appetite levels. Q1 confirmed that we are now well through that rebuilding phase and we wanted to wait to have a good quarter report behind this before planning to start some share buybacks. But now there is nothing standing in the way of that.

Michael Zaremski – Credit Suisse

Okay. So would you say that we should expect buybacks for the rest of the year given where the stock is trading versus new business expectations?

Christopher O’Kane

Yeah, there is a very slight philosophical shift here, okay. So what we have done historically is a significant ASRs pretty and frequently. What we are saying this morning is, we may still do this in the future, I don’t rule them out. But whereas in the past, we might have said the full wind season, we’re not going to buying back shares. Now we’re saying, if we weakness in daily trading we might pay out – banking shares back at any given time.

Michael Zaremski – Credit Suisse

Okay. Thank you.

Christopher O’Kane

Sure.

Operator

Your next question comes from the line of Amit Kumar from Macquarie.

Amit Kumar – Macquarie

I guess just following up on the last question regarding the guidance, I mean clearly the bias is on the top end of the range. I’m just wondering maybe just touch upon your expectation for 6 1 renewals.

Christopher O’Kane

In what sense? I mean are you talking about pricing level or at...

Amit Kumar – Macquarie

Yeah, pricing as well as maybe also touch upon the Delta between industry supply versus demand.

Christopher O’Kane

Sounds like a very broad open-ended question. So I will try and be brief. There are areas where there is fear, and there is areas where there is loss, and areas where the perception of risk has changed because the model changed. I could be talking to you about trade, credit, insurance, reinsurance, I could be talking about political risk, and about violence, political violence, kidnap and ransom, we could be talking about marine energy, we could be talking about property cat in Asia.

I mean these are all areas where the fear factor is comparatively high and in some of these areas the supply of capital is comparatively low. So we are either seeing pretty good prices or we are seeing prices that are getting better or in some cases we are seeing the clients managing risk better and reducing the risk for us so we can charge them the same money but actually have a better product because the risk has become better. And that’s the stuff we like and I said on the call, that’s probably around 40% of our book of business is subject to that.

If you’re asking me about June, I think it’s going to carry on. I think there is still – there are still plans of our reinsurance company competitors or insurance business in the United States that haven’t fully reflected the implications of our RMS Version 11, and they are working to do that. We are seeing people come to market and buy more cover. If you buy more cover in the tight market you drive prices up a bit. So that’s encouraging.

Now the other – the rest of the stuff, let’s say, there is a lot of – I would even maybe then say let’s divide the United States from the rest of the world and I think particularly in the insurance side. In the U.S., there is definitely some poor momentum, even away from the cat exposed stuff.

One of my colleagues was down at Rims in Philadelphia the other day and he came back saying, look expect a 10% increase on the bigger risk management business because everybody understands it was under priced – everybody understands times are tougher and the risk managers talked to their CFOs and the CFOs are prepared to write the checks (inaudible) then increase and buy about the same amount in cover, and that is the new norm. And you’ve seen other companies reporting 6%, 8%, maybe 10% increases in some of their reports. So that’s pretty good. In Europe, it’s behind. It’s maybe a couple of percent up in average. So long answer to an open-ended question but I hope I have addressed what he wanted me to.

Amit Kumar – Macquarie

Yeah, that was very helpful. One other question; this relates to the recent news surrounding of Repsol and YPF. It seems that the market probably dodged this loss. Maybe just remind us what your exposure is in Argentina and maybe also refresh us on how much of your political risk book comes out of the Latin American countries. Thanks.

Unidentified Company Representative

You kind of got me because I haven’t actually got exposure figures first of all in front of me. I’m going to give more general answer which is the guys that are doing – they are pretty savvy and they’re pretty risk-averse and have certainly not regarded most of Latin America as a place where they want to be. Where you see political change like a populist and power like (inaudible) in Venezuela or Argentina or even Brazil, they can start running for the hill, so, I’m afraid I cannot give you a figure. I have not been of any loss exposure by the way which does not mean we haven’t got it. But I think it was significant some of them told us I am just not – but it is not one that is – that keeps me awake at night. Okay?

Amit Kumar – Macquarie

Okay. That’s helpful, thanks so much.

Unidentified Company Representative

Thank you.

Operator

Your next question comes from the line of Dan Farrell from Sterne, Agee.

Dan Farrell – Sterne Agee

Thank you and good morning. Just the first question, I just want to clarify the combined ratio guidance, the 93 to 90 – I just want to confirm again does that you obviously have a couple of assumption for the rest of the year. Does that guidance assume no reserve development for the remaining three quarters of the year?

Unidentified Company Representative

That is correct.

Dan Farrell – Sterne Agee

Okay. And then I was wondering if you could talk a little bit more about the expense ratio and I think in the prepared remarks you mentioned some unusual stuff in there. I forget if you detail the but maybe a little more color on that and then there is obviously other expense pressures from all of the platform investments in other things that you’re making, maybe just talk a little bit about where you think the expense ratio need to get over time and how we might see that trend through the year?

Unidentified Company Representative

Sure. Just to recap, compared to the first quarter of last year, it does look like a significant 22 million increase in overall G&A expenses. Much of that is related to performance related compensation. The underlying piece of that, but I think more important here are, is that 4 million increase over that 12 month period in relation to the costs of our new insurance teams made in the U.S. but also seen in the U.K. As regards of where it might settle down, we just concentrate on the total G&A expenses. I think the ratio in the first quarter is looking like 17%.

I think that’s a little higher than but I would hope the run rate would be because of some one-off issues in the first quarter. And in broad terms if we look at the average of the last three quarters including Q1, 2012, I get something like a run rate of around 16% on 500 million of net earned premium quarter on average. That’s a little high than we would like it to be, because that is largely related to the fact that we have invested ahead of the hardening of the market or hoped for hardening of the market in our U.S. insurance business. And we hope to grow into that expense base over the next couple of years.

Dan Farrell – Sterne Agee

Okay. Thank you very much.

Operator

Your next question comes from the line of Vinay Misquith from Evercore Partners.

Vinay Misquith – Evercore Partners

Hi, good morning. So, I just wanted to clarify on the expenses once again. So the numbers we are seeing within the reinsurance segment for the operating expenses, that is somewhere around 29 million and for the primary insurance, that is about $40 million. That would reasonably be expected to be the run rate for the next few quarters, correct?

Unidentified Company Representative

Yes. That’s probably correct. Yes.

Vinay Misquith – Evercore Partners

Okay, great. The second question was on the stock repurchase and the preferred stock issuance. I’m curious on whether that will be used for growth or is that going to be used to repurchase stock?

Unidentified Company Representative

Okay. I think the answer is likely some of both. We did say in connection with our marketing and preference shares that we expected to use some of the proceeds to support the capital value as insurance business and that is certainly likely to be the case. But that will not be all of it and as Chris has indicated, we are probably going to keep away from the large-scale ASR’s at least for now. But we do see opportunity and when we do see opportunity, we’d expect to be in the market.

Vinay Misquith – Evercore Partners

Okay. And the final question is on the opportunities you’re seeing in the U.S. For primary insurance is it good – add some color about the pace of growth I know these are new operations, but who you getting this business from and what price increases do you think you’re getting on these businesses?

Unidentified Company Representative

I think you know the lines we are in. Let’s start with a surety and the maturity markets. Yeah. It is a very big marketplace for a very small player. I would say we’re making slow and steady progress overall and dramatic progress there. And I don’t think there is any particular single carrier we taking to disrupt.

This business is profitable and as you probably know we don’t do contract a surety or just commercial surety there is a contributor. Let’s look at professional liability, the team we hired a couple years ago, took a while to get their feet under the table. And they have historically like to deal just with one or two really quality agents through stay, and they have established relationships in those two years.

And sometimes it’s those agents saying here’s a deal that we used to work, would you take and have a look at it? Of the time those agents saying we are having a problem with carrier services, we like the way you help us with claims, we like the way you manage the risk for this or whatever they bring to us.

There is no single source of business. Your question about what is the price again when we do it? The technically difficult part of that which is sometimes you don’t know the expiring price, but mostly in the U.S., it single digit increases. Exceptions to that would probably be the catering and property area were they said on the call is probably more in the range of 10 to 20 currently.

And you’ll see the odd cash risk that is – in the average cash is probably five, but you will see the odd one in market that is a little bit stuck – typically it is something that is maybe being on the admitted side before. Where it shouldn’t have been, and it is returning over to the E&S side and as a result of that it might be paying 20% more. Those are lies by the way, the average is five, but that’s the sort of flavor what is going on.

Vinay Misquith – Evercore Partners

Okay. That’s great, thank you.

Operator

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

Joshua Shanker – Deutsche Bank

– very much. Looking at your – and there’s some comments about you said there is two things that are driver, one is the recognition of inadequacy of investment income and latter was being able to charge geographically for losses in one area to another. I just wanted to dig in a little bit, it seems like most for your business, you are seeing much better response in the property lines that do not use investment income aggressively, what’s your confidence for the primary motivators or lack of investment income that’s driving pricing changes?

Unidentified Company Representative

I think Josh when investment returns began to plummet, intellectually everybody got. It is, it’s not hard to run the model and see what it is going to do earnings. Nevertheless, I think the industry looked on this with a kind of sense of disbelief – so it’s sort of sad what can you do about it, and then another year happens another year happens when it gets worse. It took quite a few years to people so to say that’s enough, no further. We really got to do something to replenish earnings.

So I think in the realm of rhetoric as insurance companies and reinsurance companies are talking to the clients and saying, you’ve got to realize where our earnings have gone to, you got to realize what our cost of capital is. We got to do something. So at general level it is an argument, it is giving a bit of power a bit of authority but it – to the negotiations. I couldn’t help you trace that mechanically through any single in your negotiations. I don’t think that is what’s going on.

In terms of where we are seeing the more opportunity, yes captive and property because mold change in some parts of the world, because of loss and flexibility is one, and as I said already I think the Marine energy area, part lease recognition exposure, partly loss there as well, looks more attractive and then I think anything with a political risk, financial dimension, is also and I think you understand reasons viewed as risky and we are getting significantly more price there. Does that help?

Joshua Shanker – Deutsche Bank

Yes – I am still I am still not seeing enough in casualty I get to feel really comfortable with the investment income driven market pieces. I suppose. But I appreciate the comments. Then on PML, and I’m looking at your book, are you getting, increasing your P&L in insurance while decreasing in reinsurance to some sense? Is there a change to the waiting where are the risks of the company I think, can you kind of go through little P&L by major risk region?

Unidentified Company Representative

There is no such general trend actually. What we would seek to do is put the money where the best opportunity is. I think the reinsurance side reacted earlier and faster to the model change although you also got to remember that model said, we have more risk than we thought just as everybody else. So we did have to normalize that. We’ve done that this time last year, actually. Today I think there is no significant change in the blend. I think the primary insurance property in the U.S. is beginning to catch up with the reinsurance changes.

Joshua Shanker – Deutsche Bank

And when I look at the waiting in terms of the big growth in your numbers, it seems like how much is program growth on the insurance side and how much is non-cap property if we can dig in maybe a little bit there?

Unidentified Company Representative

The program growth year-on-year is $21 million so it is significant part of the growth in our property insurance sub segment. And the balance of that is coming in our U.S. insurance line from the open market in this business which is probably rate driven on with those expose lines.

Joshua Shanker – Deutsche Bank

Okay and then finally going back, cat exposure in California, cat exposure in the U.S. Southeast, cat exposure in I guess Japan compared to where you were a year ago, I guess I don’t need numbers, but how are you feeling about your exposure compared to one year ago, I guess?

Unidentified Company Representative

The major most dramatic change in exposure is a reduction in Japanese quake accumulation’s that Chris mentioned earlier in the call. In the U.S. as far as U.S. wind is concerned, the program business that we just mentioned is bringing with it an increase in our Northeast U.S. wind exposure. But apart from that change, probably reinsurance book in the U.S., there are no major changes in the distribution of accumulations within the U.S. components.

Joshua Shanker – Deutsche Bank

Okay, that’s very good. I appreciate it. Thank you.

Unidentified Company Representative

Thank you.

Operator

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

Brian Meredith – UBS

Couple of questions here for you. First, Chris, just curious on Japan, so you talk a pretty substantial price increases, yet you reduced your exposure by 50%, so is pricing still not adequate there for earthquake and why did you reduce your exposure as much as you did in pricing is pretty good?

Unidentified Company Representative

Well Brian, I think an excellent question. What we are saying is that the risk has gotten worse. So because you have – at one end of the fault line, you actually have an increased probability of a visit coming trends. The risk is not the same, the risk is more, so although we got a lot more money, the risk is higher we believe as the consequence of dashes on a risk adjusted basis, the book is a bit better than it was before and we are happy about that, but the scientific literature, not all that does – it does expect something major and so I gives fairly soon and our reaction to that is say, okay, we expect that we will take a bit less risk.

So I mean sure it is a nice one, we got 10% more money for Japanese earthquake and we’ve got about half the exposure we did for the Japanese earthquake two years ago. And nothing – implication is, correctly that there are some clients where we weren’t satisfied with the price they have to pay and we cut their exposure together or reduced it substantially.

Brian Meredith – UBS

Got you. Okay, good. Next question, just quickly, your thoughts on the impact that sidecar capacity and collateralize market, I think will have on the reinsurance window and also if we look at fix one and seven one and just your thoughts on that market and potentially Aspen in doing something there?

Unidentified Company Representative

Incredibly high to quantify this in advance, but the demand for the product is there, exposures grow every year and then model change says that the recognition even grows more. Some of that increased demand is certainly going to be met by sidecars and other types of vehicles. We don’t think all is going to be met from that source. We don’t necessarily think it’s going to be met by that source cheaply.

We don’t see anybody cutting prices to buy their way in, but let’s say it’s the normal equation because you have a little more supply of capital, you would expect prices to go up less than they otherwise would. We’re still feeling pretty good that there’s some price increase to come. It’s double-digit. It’s better than 10. It might not be as good as 20, it’s probably in the U.S. wind area in the next couple of months, going to be in that range.

Brian Meredith – UBS

Okay. Great. And then last question, just taking a look at the U.S. platform, are you guys where you want to be as far as investment in that platform now, or is there more investment that needs to be done to get it to where you’re comfortable that you’ve got the right platform to take advantage of opportunities?

Unidentified Company Representative

At the risk of oversimplifying I think we’ve made the investments. I think we have some great people doing great work, but what we want to see now is return on the investment. And clearly, there are some things that are recovering, the cost of staff, the cost of offices, the cost of IT, so I’m not saying that we don’t have any more to spend, but we are not looking to increase our investment in infrastructure in the U.S. Now, I’d issue which is the capitalization of the U.S. entities and we may be putting more capital rather than using internal shares, so that I would say is not truly an increased investment, it’s more like a restructuring how we capitalize it.

Brian Meredith – UBS

Great. Thank you.

Unidentified Company Representative

Thank you, Brian.

Operator

(Operator Instructions) Your next question comes from the line of Matt Rohrmann from KBW.

Matthew Rohrmann – KBW

Gentlemen, good morning. Just want one quick follow-up on obviously the tough investment income environment. I want to get your thoughts, I know would touch on (inaudible) are there any – are there sort of outside the box investment ideas or maybe more fee-driven strategies that you are looking at to help offset some of the pressure on investment side?

Unidentified Company Representative

I think in a word the answer to that is No. We would expect to stick with our investment grade fixed income strategy. We have a small allocation to equities. As I said on earlier, we have been considering an allocation to go which to go with small to high yields, but now the pricing environment doesn’t look right for that. So I don’t think we’re really looking to anything other than – we do have a small, hopefully growing in-house investment in (inaudible) and that’s going very well always so far. And that is something that we may expand at some point in the future.

Unidentified Company Representative

Yeah. I think that is right. Good returns, good growth, but at the very, very small base there. It’s not going to change a way of life, but it’s doing nicely.

Matthew Rohrmann – KBW

Great. Thank you, gentlemen.

Operator

Your next question comes from the line of Wayne Archambo from Monarch Partners.

Wayne Archambo – Monarch Partners

Yes. I was looking at your start this morning. It’s been flat for five years. Your book value has grown so there has been a reduction in the price to book ratio. Can you just elaborate on what more you can do for shareholders, either a special dividend or a significant buyback? It seems like the stock is in a state of going nowhere for five years.

Unidentified Company Representative

Well, we’ve noticed where share price is and as you can imagine, we don’t feel very good about it either. And look – we have a business where some parts of that business that are excellent in some parts that are good, they need capital and we need to think about the risk in the business. The way we look at it is, what’s the capital that it takes to run that business safely, keep regulators happy, keep the rating agency happy, keep the policyholders protected. And are we getting a return on that?

We think we are. We think that the share price doesn’t actually necessarily – represent the return on capital – a business. From time to time that capital builds up and we would go to what I call excess capital. We can’t – we’d love to put it to work in the business, but the fact is, you make more money by buying back your own shares than you do by putting full capital.

Historically, at that point we’ve done some pretty big buybacks and we tend to do them sort of fourth quarter or first quarter, not before the wind season. The only other thing I could say to you is – two things, we talked about this one, is a small increase in dividend, we announced that the other day. And the other is we will be in the markets potentially buying back shares from time to time from now on. I don’t necessarily think it’s going to big and dramatic because there is a wind season coming, but we regard that as a sensible capital management measure and I can’t give you any more detail.

Wayne Archambo – Monarch Partners

Thank you.

Unidentified Company Representative

Thank you. And thanks for your question.

Operator

At this time there are no further questions. Presenters, I will turn it back to you for any closing remarks.

Christopher O’Kane

Nothing more to add, I think, other than thanks everyone for their time and attention and for some very good questions. Goodbye.

Operator

Thank you. That does conclude today’s conference call. You may now disconnect.

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