Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Aspen Insurance Holdings Limited (NYSE:AHL)

Q4 FY07 Earnings Call

February 07, 2008, 09.30 AM ET

Executives

Noah Fields - Head of IR

Christopher O'Kane - CEO

Richard Houghton - CFO

Analysts

Vinay Misquith - Credit Suisse

Alain Karaoglan - Banc of America Securities

Scott Thomas - Morgan Stanley

Operator

Good morning. My name is Rich and I will be your conference operator today. At this time I would like to welcome everyone to the Aspen Insurance Holdings' fourth quarter and year-end 2007 results 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 period. [Operator Instructions]

It is now my pleasure to turn the floor over to your host Noah Fields. Sir, you may begin your conference.

Noah Fields - Head of Investor Relations

Thank you and good morning. The presenters on this morning's call are Chris O'Kane, Chief Executive Office of Aspen Insurance Holdings and Richard Houghton, Chief Financial Officer of Aspen Insurance Holdings. Before we get underway I'd like to make the following remarks.

Yesterday afternoon we issued our press release announcing Aspen's financial results for the quarter and year ended December 31, 2007. This press release as well as corresponding supplementary financial information can be found on our website at www.aspen.bm. I would also like to draw your attention to the fact that we have posted a short slide presentation on our website to accompany this call. 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 detail description of these uncertainties and other factors please see the risk factor section in Aspen's Annual Report on Form 10-K filed with the SEC and on our website.

Finally, 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.

Now, I'll turn the call over to Chris O'Kane.

Christopher O'Kane - Chief Executive Officer

Thanks Noah. I am pleased to report a strong finished 2007 and a record year for net income and return on equity. For the quarter we reported net income of $135 million, an increase of 13% versus the same period last year. This equates an annualized return on average equity for the quarter of 23.2%. Our combined ratio for the quarter was 79.4%. For the full-year 2007, net income was $489 million, the return on average equity was 21.1% for the combined ratio of 83% and our book value per share increased by 25% to $27.95.

I'm now going to turn the call to Richard to discuss our 2007 financial performance in more detail and later I'll comment on current market condition.

Richard Houghton - Chief Financial Officer

Thank you Chris, and good morning everybody. As Chris has just told you, I'm very pleased to report on a strong fourth quarter for Aspen completing an outstanding year for the group. Our record results for 2007 combines strong underwriting performance and excellent investment return and active capital management to produce net income of $489 million, up 29% on last year with book value per share of $27.95, 25% up year-on-year. We've enjoyed a 20% compound annual growth rate in book value per share over the last two years. Our return on equity for the year was 21.1%, slightly above the top end of our guidance reflecting our prudent management of underwriting opportunities and strong investment performance. In particular, we have proactively managed our investment portfolio and avoided any significant impact from the credit crisis of 2007. Slides 3 through 9 provide you with a summary of recent results.

Our combined ratio for the year was 83%, compared with 82.4% last year. You will recall that 2006 had virtually no cat events, whereas in 2007 we've absorbed several natural events, including European Windstorm Kyrill in January, U.K. floods in June and July, and California wildfires in October at an aggregate cost of $77 million. Our combined ratio for the year ex-cat losses was 78.6%. We have benefited from reserve releases this year, which I will discuss in more detail later, but we believe that our combined ratio represents strong results from our diversified model in the face of softening rates across a number of our product line.

Our combined ratio for the quarter was 79.4%, compared to 76.8% last year with California wildfires costing us approximately $18 million and additional reserves in respect to reinsurance exposures to sub-prime and the ensuing credit crisis of further $12.5 million, a subject I'll return to later.

I'd like to start my detailed review with our investment performance, which we're particularly to have successfully navigated through a difficult year in the markets, materially improving on our performance from last year. Net investment income for the year was $299 million, up 46% on last year. We have achieved this result by improving our fixed income portfolio book yield to 5.05% from 4.52% through strategic sector rotation into high-quality, mortgage-backed securities and corporate bonds. Assets under management grew from $5.2 billion at the start of the year to $5.9 billion at year-end, helped by $774 million of positive cash flows from operations.

During 2007 we increased our allocation to funds of hedge funds from 3% of the portfolio to just over 9% at the year-end. These alternative investments produce an 11.4% return over the year. The broad and diversified nature of the underlying investments produced an excellent absolute and relative return for us through the toughest part of a turbulent year for the market. I've stated before, that we have negligible direct exposures to the credit crisis and can further confirm that we currently have less than $51,000 of our fixed income investments wrapped by financial guarantors.

Details of our portfolio are given on slides 10 and 11, which highlight that our average portfolio rating remains AA-plus with 89% rated A or better. We have not suffered any investment losses requiring an impairment charge at the year-end, and indeed the movements in the markets have produced unrealized gains of $74 million over the year, reflected in other comprehensive income and contributing to the growth in book value per share.

Gross written premium for the year of $1.8 billion was down 6.5% as we chose to pull back from certain product lines where we felt rates were too low to generate adequate returns. Net written premiums were only down 4% however, reflecting our reduced reliance on outward insurance relative to 2006. Our spend on reinsurance protection in the fourth quarter rose to $26 million compared with $9 million for the same period in 2006 as we purchased specific covers to protect our new business lines such as professional liability. Gross written premiums in Q4 rose by 6%, reflecting in part the contribution of these new lines. Net written premium for the year rose by 3% to $1.7 billion mainly as a result of the reduction in reinsurance spend in 2007.

Turning now to claims and reserve releases, the fourth quarter saw a continuation of conservative releases from prior years, producing favorable development of $35 million in the quarter, and $107 million for the year, compared with a strengthening of $7 million in Q4 2006 and overall releases of $51 million. Releases in 2007 came primarily from our U.K. liability insurance and U.S. Casualty Reinsurance books. Total favorable developments in the year represents 4.6% of opening net reserves compared to 2.8% in 2006. Our equivalent number for 2006 excluding strengthening for hurricane losses was 6.3%. Our loss estimates with Kyrill and the U.K. floods have continued to reduce slightly in Q4 from original estimates supporting our initial assessments. Our reserving methodologies and philosophy remain unchanged.

Turning to the specific issue of U.S. sub-prime and the global credit crunch. As you would expect we have conducted a thorough review of all our potential exposures. Our exposure is very small and is limited to two areas. A small number of reinsurance contracts of certain Lloyd's Syndicate both underwritten and worldwide financial institutions exposures including U.S. D&O and E&O cover within our International Casualty Reinsurance book and one Casualty class contracts written by our U.S. Casualty Reinsurance unit. We have no losses on any of our insurance lines. Our total exposure amounted to $35 million in reserves at the year-end, comprising $20 million of additional reserves above our expected losses of $15 million for this segment.

You’ll see from the data in our earnings supplement and our supporting slides that our expense ratio for the year was marginally up of 29.9% versus 29.3% with a Q4 ratio of 31.8% versus 28.2%. The adverse variance in Q4 is attributable to strong underwriting performance driving higher profit sharing with our product distributors. In addition as I reported in Q3, our operating and administrative expenses have been affected this year by investment in new lines and teams, increases in profit-related compensation, and adverse exchange rates hitting our sterling cost base.

I will now pick up headlines within each of our operating segments. You will recall that we redefined new segments to reflect our structure in Q3. Our earnings supplement contains details of our performance using both our new and previous segmental split. Starting with Property Reinsurance, we finished the year with a strong fourth quarter recording a combined ratio of 74.8% compared with 80.1% last year, with the only substantial loss of approximately $18 million attributable to California wildfires.

Our full-year combined ratio was 72.6% is particularly pleasing compared with last year's 79.2% of 2006 had virtually no cat events, whereas 2007 has produced a series of modest cat losses, Windstorm Kyrill, U.K. floods and California fires. While not insignificant, our losses from these events were comfortably within our initial catastrophe loss guidance of $135 million for 2007. The loss ratio for the year was 39.7% versus 43.2% last year and gross written premium only fell by 3.5% to $602 million despite pressure on prices.

Casualty Reinsurance finished the year with a combined ratio of 94.6% compared with 83.4% reflecting increased loss experience and lower rate levels. Note that 2006 enjoyed favorable reserve developments of $60 million compared with $32 million in 2007 and an accident year comparison, which show 101.1% for 2007 and 96.1% for 2006. The $20 million increase in sub-prime reserves I mentioned earlier added 4.2 points to the current accident year combined ratio.

Our International Insurance book covers a wide range of classes of business and the overall combined ratio for the year of 80.7% compares to 79.1% last year. This includes some moderate size losses in the marine and aviation books this year, and within our U.K. commercial Property account from the U.K. floods. These were offset by strong prior year releases within our U.K. liability account from 2006 and before.

Towards the end of 2007 our new lines including Excess Casualty and Professional Liability started to contribute to the topline, and we look forward to the contributions that all of our new teams will make in 2008. Our US insurance operation has been strategically repositioned in 2007 against the backdrop of challenging market conditions in both Casualty and Property lines. And we look forward to continued progress in 2008. The Property book in particular was reshaped lowering gross written premium by 20% to $123 million.

Our full year combined ratio of 98.3% compared favorably to 111.4% last year and the segment moved from an underwriting loss of $12 million last year to an underwriting profit of $2 million in 2007. Having covered our trading and investment performance for the year I would like to make some brief comments on capital management undertaken in 2007 and proposed actions for 2008 and beyond.

In the second half of 2007 we completed two tranches of share buybacks totaling $100 million through accelerated share repurchases completing a $300 million buyback program authorized by our Board in November 2006. Our balance sheet continues to benefit from strong trading performance and a favorable risk profile, which is the product of prudent and diversified underwriting.

This strength was reflected in November when A.M. Best announced an upgrade of our Bermuda operating company and removal of the negative outlook on our U.K. company so that both companies are now rated AA stable. Given prevailing market conditions and our anticipated trading performance the Board yesterday authorized a new buyback program for up to $300 million of ordinary equity. The authorization covers the next two years and I look forward to give you more details of the timing of these buybacks as the year progresses.

Turning now to guidance, in 2007, we exceeded our ROE guidance due to strong underwriting performance and excellent investment return and active capital management. On slide 12, we provide guidance for 2008. Our 2008 ROE guidance of 14 to 17% given normal loss experience reflects our anticipation of challenging pricing conditions. Our topline guidance is relatively flat on 2007 at $1.8 billion plus or minus 5% reflecting the contribution from new lines and slight declines in other lines due to market conditions.

Our percentage of earned premiums remains in the range of 8% to 10% of gross earned premium as the multi-year deal signed in 2007 work through the income statements. Our combined ratio guidance at 88% to 93% has declined on 2007 due to margin pressure and the assumption of a normal cat load of $135 million, relative to our 2007 experience of $77 million. Investment income is forecast to be in the range of $290 million to $320 million and our tax rate between 13% and 16%.

To conclude on 2007, we're very pleased with the quality of our financial performance for the year and robust strength of our balance sheet, our investment portfolio, and our diversified trading platform, which gives every expectation and continued success in 2008.

At this point I'd like to hand over to Chris.

Christopher O'Kane - Chief Executive Officer

Thanks, Richard. Well, I am now going to discuss each of our business segments as shown in slides 13 and 14. As a reminder we measure rate relativity on premium weighted basis on business we renew. Starting with International Insurance segment, we achieved single-digit declines on average on our book, which was better than we had expected over significant variation by line of business.

For example, in Energy Physical Damage insurance following huge rate increases in 2005 and 2006, the line loss environment has resulted in increased competition. Rate reductions here are averaging approximately 16% and we have non-renewed a number of accounts as a result. In reinsurance [ph] rates were generally flat to marginally down, but we were able to secure an average rate increases about 2% in our book. On our Marine Liability account, the experience was similar. In the Marine Liability market the whole rates were down and in spite of this we achieved an average increase of 5% on our book reflecting loss experience on certain accounts and some exceptionally strong client relationships

In our new Excess Casualty insurance unit, we're seeing rate declines of about 5% especially reinsurance division experienced reductions of approximately 3% in average was bigger declines in certain clusters and we normally renewed a number of programs that no longer met our hurdle rates.

Moving on to the Property Reinsurance segment, we are experiencing rate softening in both the U.S. and international markets. There are significant differences in rate movements in the U.S. cap market. On average, U.S. coastal exposed business saw rate declines of around 15%, which still allows for acceptable margins for us.

On U.S. regional cat accounts, the rates fell by 20% or more rendering many programs uneconomic. Our non-U.S. business we benefited from increased submission flow following the establishment of branch office in Zurich in August last year. Strong competition led to rate reductions or modest increases however. For example, while we were successful in achieving rate increases and programs impacted by Windstorm Kyrill, they were only modest.

In the U.S. Property Risk Excess, there are marked differences in rate movements between loss impacted programs, which registered flat to 10% increases. Our well performing business recorded rate declines 5% to 15%. On our Facultative Reinsurance book, we've seen U.S. primary carriers reduced rates by 10% to 25% with a less pronounced decrease in Europe over 10% to 15%.

Turning now to Casualty Reinsurance. In our International Casualty Reinsurance business, we saw rate reductions of just between 2.5% and 10% depending on the type of business and the loss experienced. Prices have reduced but still meet our hurdle return rates. Terms and Conditions remain reasonably firm.

In U.S. Casualty Reinsurance, rate reductions of between 10% and 15% are not in prominent marketplace. However, we were able to achieve an average reduction of only 4.5%, reflecting our focus on risk selection. We are seeing increasing competition in our U.S. Casualty Treaty business overall with particularly aggressive pricing and workers' comp clash covers or a number of contracts in the market were being renewed by some of our competitors with the rate reductions around 40%.

In addition, there was a significant broadening of coverage with nuclear, biological, chemical, and radiological exposures increasingly being included for little or no additional premium. I believe this is the worst kind of soft market underwriting. I had asked them to cancel virtually all our contracts with NBCR on the workers' comp cat side.

I'd now like to highlight a number of our achievements in 2007. In 2007, we delivered fully against our stated objectives. Our underwriting performance was consistently strong in 2007 with a combined ratio of 83% before reserve releases. We recorded only modest losses from both Windstorm Kyrill and the U.K. floods in June and July, reflecting the measures we've put in place in 2006 to reduce our natural catastrophe exposures.

We also improved our fixed income portfolio book yield 5.05% from 4.5%, against a backdrop of extremely volatile market in the second half of 2007. And we lowered our tax rates from approximately 26% in 2004 to 14.8% in 2007. Additionally in 2007 in November, we completed our share repurchase program of $300 million. We will continue to focus on ways to optimize our financial leverage and our tax rates in 2008 and beyond.

Our delivery against our taxes was recognized by A.M. Best in December when our Bermuda company was upgraded to the same level as our U.K. company. Both companies are now rated A stable. Finally, we have been selectively building out our International Insurance segment with the establishment of a number of new underwriting units, namely Professional Alliance Insurance, Excess Casualty Insurance, and Political Risk Insurance. I am also pleased to announce today that we have entered into the financial institution insurance market and have hired a highly respected underwriter to lead our efforts.

We anticipate that we will write around $60 million to $70 million of GWP in this line by the third year. The emphasize will be on smaller and medium-sized financial institutions with limited exposure to major investment banks. We also tend to avoid the global 100 players. We think we've got the timing right on this one given the current market.

In addition we have expanded our distribution consistent with our multi-platform approach with a branch office in Zurich to develop our Continental Reinsurance business and a branch in Dublin, which is where Excess Casualty Insurance is being written. We have a proven track record in adding profitable new teams and will continue to seek opportunities to do so in a controlled and measured way. Our underwriters are measured in profit not volume, established new teams by having the right people in place so that we are well positioned to take advantage of a change in marketing conditions when the time is right. Our measured approach to expanding and diversifying our business coupled with a rigorous focus on managing the underlying drivers of ROE this is well positioned in the soft phase of the cycle to deliver consistent quality returns to our shareholders.

And with that, I'm going to open the call up to Q&A.

Question and Answer

Operator

[Operator Instruction] Your first question comes from Vinay Misquith of Credit Suisse.

Vinay Misquith - Credit Suisse

Hi, good morning.

Christopher O'Kane - Chief Executive Officer

Good morning Vinay.

Vinay Misquith - Credit Suisse

Could you provide some more detail around exposure to sub-prime and the charge you took this quarter. Was it a current quarter charge, was it prior quarter charge, and what was the exact amount, was it $20 million and if you could give us some sense for limits you provide and why you believe that it's now behind you?

Christopher O'Kane - Chief Executive Officer

Okay, Vinay, I think it was a multi-faceted questions so this is Chris, and I will start and then I will hand it over to Richard for more of the detail. I don't think this is a big issue for us because basically it is not a line of business that we will begin. We see the main exposures coming from, on a primary basis from the right of the D&O. We also think there will be some E&O exposures and we think there may be some crime… financial crime involved ultimately as well. Those are all lines of business that historically we have not been writing. So we miss the issue altogether.

Then we have to look at the reinsurance side of our operations. Do we reinsure the big ride as a D&O? And the answer to that is, no, we don't. That's just not part of what we do. But we do provide cover to few Lloyd's Syndicate, who writes some worldwide financial institutions. The premium we received from that is just $23 million, we have been through that very carefully. And what I mean by very carefully is we've looked through the reinsurance contract to see which institutions they are protecting and we reached a view on which institutions are likely to producing losses. This is reserving, so these are not reported losses, it’s highly perspective. The coverage is that claims made, so the numbers we’re quote you relate to our books as close on the 31st of December. We had some reserves already in Q3 and we chose to increase these at Q4.

My view, we've taken a pretty conservative approach here. So I would be surprised to see any adverse development. Last thing before handing over to Rich, I'd say that it is claims made cover and this problem isn't over yet. Every few weeks we find another interesting headline. So there may well be more claims in the future. I don't think Aspen is particularly exposed to those as to say, simply not the business we are in, but as a word of warning, the problem hasn't ended for the industry as yet. Richard, would you like to fill in the numbers?

Richard Houghton - Chief Financial Officer

Sure. Morning Vinay. The numbers are as follows. Total exposure $35 million, as of the year end and that includes $20 million of what we are describing as additional reserves in respect to this sector in addition to $15 million which you would anticipate as the normal loss ratio. That's $15 million plus $20 million equals $35 million and within that $20 million, we have $7.5 million, which we booked in Q3 and $12.5 million, which we booked in Q4.

Vinay Misquith - Credit Suisse

Okay. $12.5 million Q4, that's great. And how… within the Lloyd’s Syndicate is it mostly exposure to European clients or is it U.S. clients?

Christopher O'Kane - Chief Executive Officer

It's a mixture of both. I think the focus of buyers would be towards U.S.

Vinay Misquith - Credit Suisse

Okay. So you do have some exposure from that side but you say that you have already taken care of it. Have you received any claims on those exposures?

Richard Houghton - Chief Financial Officer

We haven’t any specific claims Vinay; we are talking to those syndicates.

Vinay Misquith - Credit Suisse

Sure.

Christopher O'Kane - Chief Executive Officer

As I said Vinay we've looked at the institutions and we have reached our own view as to whether they might likely make claims, but there is nothing actually reported as yet.

Vinay Misquith - Credit Suisse

Okay, that's great. And on the financial institutions on this new segment that you're starting, is that focused on worldwide or is it U.S.? Is it small to medium-size financial institutions, correct?

Christopher O'Kane - Chief Executive Officer

Yes, it could write worldwide. We don't want to say we will never write U.S. underwriting circumstances but some… we actually think you get a better rates or better risk-adjusted return by avoiding some of the global 100 players in some of the bigger U.S. institutions. So I would say the bias of the book will be away from the U.S. but we’ve got to wait and see. I think this is an interesting area, given what's been going on I think rates are going to go up quite meaningfully and we have got to wait and see in the U.S. to what extent we want to be tempted in by improved rates and better trading conditions.

Vinay Misquith - Credit Suisse

So right now, it's focused worldwide but you might think of going into the U.S. if the conditions are effective, would that be fair?

Christopher O'Kane - Chief Executive Officer

I think that's fair. Yes.

Vinay Misquith - Credit Suisse

Okay, that's great. And one last numbers question for Richard. What was the income from hedge funds, I have an estimate here but I just wanted to get the real number?

Richard Houghton - Chief Financial Officer

It seems $44 million out of total of $299 million.

Vinay Misquith - Credit Suisse

Sure, but this quarter… do you have a number for this quarter specifically?

Richard Houghton - Chief Financial Officer

I'm afraid, I don't have it for the quarter, I think that's an easy one, I can follow up on.

Vinay Misquith - Credit Suisse

No problem, so you said it's a $44 million for the whole year, right? Okay, that's great. All right. Thank you.

Richard Houghton - Chief Financial Officer

Okay.

Operator

Thank you. And the next question comes from Alain Karaoglan of Banc of America.

Alain Karaoglan - Banc of America Securities

Good morning. Just following up on the sub-prime, you mentioned $35 million of exposure and then you went to… there are really reserve losses right, the reserves IBNR that you put up of $35 million, but the exposure could be higher than that in terms of the limits or have we reached the limits?

Christopher O'Kane - Chief Executive Officer

Alain, you're right. I think we did say $35 million exposure, we should more accurately have said $35 million in reserves. So I will give you two points in that, that $35 million is in respect of $23 million of excessive loss reinsurance premium and not all that premium relates to FI, it’s everything that they do and the… we have not assumed that every limit that we've written are in Excess whole spaces is going to be totaled and that the reinstatement is going to be totaled as well. I haven't got a hand the total limits, but I think that I know that $35 million represents an extremely conservative interpretation of the total theoretical exposure in the book.

Alain Karaoglan - Banc of America Securities

Okay. The other question regarding the guidance that you provided, does that incorporate any expectation of reserve releases?

Richard Houghton - Chief Financial Officer

No, we don't Alain.

Alain Karaoglan - Banc of America Securities

Okay. And the high… the top end of the combined ratio at 93% seems… what would need to happen for that to occur ex-cat, I mean, you have the $235 million cat-load, that's 3.5 points or so how you have done in 2007, but what would you see happening in… could happen in 2008 to get the high end of the range ex-catastrophes?

Christopher O'Kane - Chief Executive Officer

This is so easy Alain, as you know very well very difficult thing to do is to predict the future.

Alain Karaoglan - Banc of America Securities

Yes.

Christopher O'Kane - Chief Executive Officer

But, we looked at this 1-1 and unlike the more recent renewal seasons, I find more variability around the mean. The average in our U.S. Casualty Reinsurance book, the average in the business renewed was $0.045 reduction, but we lost business to people who are giving 40% reductions. And I find it mind-boggling that that's happening, but it happened so we canceled the business. So the question is could that [inaudible] spread as we go through the year, are we going to see increasing levels of rate reduction and if we do, for the part of the premium that was going to earn in '08, I got to expect higher attritional loss of result. I mean, what I mean by that is the same losses will represent the higher rates on the premium. So 93$ represents, if the market is a bit worse than our current read of the market being as it is today.

Alain Karaoglan - Banc of America Securities

Okay. And in terms of your sort of thinking about an ROE on average, you wanted it to be x. How low would you tolerate it to go in a soft market from a budgeting point of view with expectation of average cats and of course catastrophes can take you to territory that as negative, but so we're around, the low end of the range is 14%, how low would you plan it to be or would you be comfortable going on a budgeted basis for any year going forward?

Christopher O'Kane - Chief Executive Officer

Yes. I think the answer is that we wouldn't want to be lower than 14% by very much at all, I mean, that's getting quite close to what seems to us to be a return for being in the business.

Alain Karaoglan - Banc of America Securities

Okay.

Christopher O'Kane - Chief Executive Officer

We’re seeing the number is not the lower, it is the lower end of the range it's not the expected.

Alain Karaoglan - Banc of America Securities

Yes, I understand. Great thank you very much and congratulations on a great quarter and are very strong year.

Christopher O'Kane - Chief Executive Officer

Thank you, Alain

Richard Houghton - Chief Financial Officer

Thank you, Alain.

Operator

Thank you. Your next question comes from Scott Thomas from Morgan Stanley.

Scott Thomas - Morgan Stanley

Hi, I know you've touched on this a bit already but I was hoping you could provide some extra details on a few the numbers on your segments, the first was in Property Reinsurance. You could just add some details as to what drove the higher written premiums for the quarter?

Richard Houghton - Chief Financial Officer

For the quarter simply the amount of business that we are able to put on the book. I don't see there’s anything specific to draw attention to.

Scott Thomas - Morgan Stanley

Okay.

Christopher O'Kane - Chief Executive Officer

One of the phenomenon that has been affecting us this year is that in comparisons to previous year, we had a very low retro costs. I mean that's affecting the entire year and the fourth quarter is quite a small amount of written premium.

Scott Thomas - Morgan Stanley

Okay.

Christopher O'Kane - Chief Executive Officer

So the year-on-year comparison is slightly… I mean it's accurate, but it could be misleading when you realized that we spent about $100 million plus less on the retrocession.

Scott Thomas - Morgan Stanley

Okay, that helps. And then the second was in Casualty Reinsurance. Maybe you could just explain a bit more as to the higher combined ratio?

Richard Houghton - Chief Financial Officer

Yes, the high combined ratio is well chiefly due to a couple of things actually, 2006 had stronger reserve development relative to 2007, had $60 million of development relative to $32 million in 2007 plus about $20 million increase I was talking about in sub-prime and so that hit that sector and that's where it is popped up.

Scott Thomas - Morgan Stanley

Okay, that makes sense. And then the last one was in Property and Casualty Insurance. Just may be some extra details behind the lower combined ratio for the quarter?

Richard Houghton - Chief Financial Officer

Sure, and there’s two parts to this story. In 2007, is an improving year with the sort of reshaping the book that we are undertaking and we're hoping that is going to get better in 2008 against tough market conditions. But 2006 also included some fire losses, about $20 million of fire losses, which hit the book pretty hard last year.

Scott Thomas - Morgan Stanley

Okay, that makes sense. All right that's all the questions I had. Thanks a lot.

Richard Houghton - Chief Financial Officer

Thank you.

Operator

[Operator Instruction] Your next question comes from Chris Nespor [ph] of Goldman Sachs.

Unidentified Analyst

Hi, good morning. I just had a question about the ROE guidance and how that relates to the buyback in terms of the timing. Is it safe to assume kind of a half this year, half next year or basically how should we be thinking about that?

Christopher O'Kane - Chief Executive Officer

I’m not actually giving specific guidance as to the timing of the buy back for 2008 and actually I got an idea in the… in my plan for the year which is what is produced that ROE, but it does depend on market conditions and where we can put the capital to work. So at the moment I don’t really want to go any further than we already have to say that we have a new authorization program in place covering two years.

Unidentified Analyst

Okay, understood. But if you could just go back to the increase in reinsurance premiums during the quarter I know you said there wasn’t anything specific you want to highlight there but may be can help as to understand and we should think about the fact that you guys are able to grow that book and how you… I think you mentioned that you are able to get some rate increases when… if you look across the rest of the companies that have reported, there’s been some significant declines in reinsurance volumes, so I'm just… I’m just trying to reconcile that in my head as to how we should be comfortable with the business incrementally that you are putting on your book, everyone else is saying that they are non-renewals thank you?

Christopher O'Kane - Chief Executive Officer

I am not sure if I got much more details out and I think we’re very comfortable with the business we are putting on the book, we’ve got several segments within Property Reinsurance and they are all moving on pretty well. I don't think I can add any more than that.

Richard Houghton - Chief Financial Officer

I mean I’d put it in a little bit of context for you. We have let's say the lines of business that we started 2007 with and many of them, the majority of them are subjected to rate increases… rate decreases, some modest, some significant. I think I have said quite often we regard the U.K. primary market as the toughest market that we're in and we [inaudible] Asian market is pretty tough as well. Obviously, there’s a little bit we are favorable. So that part of business is basically shrinking but some of it affected by loss… is maybe break-even in a few cases… if get an account that has a big loss you can usually charge more money and by the time you relate that amount of money to just one quarter it can distort in a segment of quarters, you can get a rate increase.

We had that in reliability. We had a couple of accounts that had losses and we have good relations with clients and we said to them we need this kind of money to carry on and they paid us a price which is different than the price they are paying the rest of the market. And that’s got to do with good client relationship, claims paying good service, good lead quality. That’s what Aspen really tries to do so there are cases where quite simply same dealers in the market and Aspen gets more money for writing it to other people. I don’t think that’s a huge volume of money but break it down to a segment in related to quarter and it can give an average increase in spite of the market falling.

The other side in the course of the year, we added some new teams. And these teams several of now joined us and they have client relationships and within those client relationships there’s some very good ones and there’s some average ones. If you focus just on the very good ones, you can add some business well rates and that’s largely where the premium growth is coming from. I called it premium growth, what was really happening is the shrinkage in the renewal book is been offset by some growth coming from some well targeted well chosen new accounts and that’s kind of keeping our topline steadish. It’s actually down a bit on the year but steadish let’s say as opposed to shrinking faster. So I hope that helps you.

Unidentified Analyst

Yes, it does. Thank you very much.

Operator

Thank you we have a follow-up question from Alain Karaoglan of Banc Of America.

Alain Karaoglan - Banc of America Securities

Yes. Thanks for taking the question; I just want to follow-up on the capital management and share buyback Richard. I understand there is the $300 billion authorization over two years but there is nothing magical about that. I assume you are going to look at opportunities and to the extent that the opportunities to deployed capital don't materialize. There is nothing magical about not willing to buyback more accelerated or changing that plan. Because the way I look at it you are going to have around 4… $350 million to $400 million in earnings on flat premiums in ’08 and probably somewhere around there in '09. That suggests a lot of additional capital if we're still in a softening environment where you are not going to grow the business?

Richard Houghton - Chief Financial Officer

Alain, I quite agree with you. There's nothing magical about the figure at all. It depends entirely on market conditions and what opportunities are available to us. If it feels right to give more back than I'm sure we will have that discussed with the Board and the rating agencies. If we can deploy successfully through new lines or doing something else with it, I'm sure we will do that. So, it is a very tricky one to try and predict. All I can say is that I will keep you very much engaged as we go through the year as to… indeed the strength of the balance sheet and how we feel about that authorization.

Alain Karaoglan - Banc of America Securities

Great. Thank you very much.

Operator

Thank you. There are no more further questions. I will turn it back to management for any closing remarks.

Christopher O'Kane - Chief Executive Officer

Thank you for joining us this morning. Have a good day.

Operator

This concludes today's Aspen Insurance Holdings fourth quarter and year-end 2007 results conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Aspen Insurance Holdings Ltd. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts