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Aspen Insurance Holdings Limited (NYSE:AHL)

Q1 FY08 Earnings Call

May 1, 2008, 08:30 AM ET

Executives

Noah Fields - Head of IR

Christopher O'Kane - CEO

Richard Houghton - CFO

James Few - Head of Property Reinsurance and Group Underwriting Officer of Aspen Insurance

Analysts

Jay Gelb - Lehman Brothers

Alain Karaoglan - Banc of America

Dean Evans - KBW

Vinay Misquith - Credit Suisse

Dan Farrell - FPK

Operator

Good morning. My name is Cheryl, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Aspen Insurance Holdings First Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. Thank you. 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 Officer and Richard Houghton, Chief Financial Officer of Aspen Insurance Holdings. Also on the call today are Bryan Astwood [ph], Group Treasurer and James Few, Head of Property and Reinsurance.

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 ended March 31, 2008. 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 U.S. federal securities laws. All forward-looking statements will have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For more detailed descriptions of these uncertainties and other factors, please see the risk factors section in Aspen's annual report on Form 10-K filed with the SEC and on our website.

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

Finally, I'd like to remind you that Aspen will be holding an Investor Day on May 15th in New York City. If you have not already signed up to attend, please contact me.

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

Christopher O'Kane - Chief Executive Officer

Thanks Noah. During the first quarter of 2008, Aspen reported an annualized ROE of 12.8% on net income of $81.2 million or $0.85 earnings per share. Our book per share at the end of the quarter was $29.22, up almost 24% year-on-year and 4.5% for the first quarter in 2008. This reflects strong performance from underwriting, in particular in our Property Reinsurance segment, but investment income for the quarter was below our expectations.

A summary of financial highlights is available on slides 3 to 7. The shortfall in investment income was mainly due to the under performance of our fund... of hedge funds investments in March.

The quarter was characterized by relatively few cat losses, but there was an unusually high volume of large single risk losses. These have been substantial with insured losses estimated at over $4 billion. Of the 22 losses we have tracked in the quarter, Aspen only has exposure to 8 and we do not expect any impact to our portfolio from the rest. The 8 losses that we have recorded total $16 million in the quarter and the remainder are either not our reinsurers or are loses that are not expected to attach to Aspen's covered [ph].

On slide 8, we have set out our share of the risk excess losses in the quarter, which we estimate at less than 0.5%. We believe this is significantly below our market share. This also reflects in our loss ratio in the quarter of 52.9%, which is only marginally above the figure of 51.4% which we achieved in 2007. This demonstrates the benefit of our approach to risk selection and the increasingly selective pruning of our property risk excess [ph] writings and price grounds which we have carried out.

As I mentioned in the past, we take a measured underwriting approach to ensure that the business we write meets our risk compressing [ph] criteria. Giving the continuing declines in pricing, we normally use approximately 19% of our insurance and reinsurance renewal books. This was partly offset by approximately $24 million of premium which came from new lines that we established in 2007 in our International Insurance segment. The net reduction in GWP for the quarter therefore amounted to approximately 6% year-on-year, and this is shown in slide 9.

Now I am going to turn the call over to Richard who will take you through our financial performance in more detail.

Richard Houghton - Chief Financial Officer

Thank you, Chris, and good morning everybody. As Chris has already discussed, we reported net income for the quarter of $81.2 million, which is $40.7 million or 33.4% down on the first quarter of last year. Our net income result reflects a strong underwriting performance where our expectations have been met or improved upon across many of our lines, tempered by reduced investment income and in particular losses with our funds of hedge funds investments in the quarter.

Nevertheless, we have grown our book value per share by 23.7% since the first quarter of 2007 and by 4.5% since the start of the year.

Turning first to underwriting performance. Our gross written premium fell by just over 6% in the quarter as Chris discussed earlier. Our net earned premiums have fallen by 10.8% to $391.6 million in the quarter, reflecting disciplined underwriting.

Our loss ratio for the quarter was slightly higher than the first quarter of 2007 at 52.9% versus 51.4%. This reflects a strong performance by our underwriting units, particularly given the unusually high number of single risk losses which impacted the industry in the quarter. Our claims experience included a satellite loss and several manufacturing losses for fire, explosion and flood. Our one cat loss relates to Windstorm Emma, which we have reserved of $4.5 million. Net prior year releases of $39 million came from across the book and included releases of $6 million against 2007 UK floods, continued favorable development in the UK liability book and reserve releases from commuted contracts in our casualty reinsurance book. There has been no material change in our 2005 hurricane losses. And we also let our reserves in respect of U.S. subprime and the global credit crunch unchanged from the year end, up $35 million in total.

Our expense ratio has risen to 32.5% in the quarter from 28% in the first quarter last year. Within this, our policy acquisition ratio has increased to 19.5%, mainly driven by increases in profit commissions this quarter in casualty reinsurance, international insurance and U.S. insurance. Our general and administrative expense ratio has increased from 10.3% to 13% or by $5.5 million to $50.8 million. Approximately 6% of this absolute increase arises from investment in new teams in International Insurance with the balance attributable to annual pay awards and strengthening our support functions such as risk management. The expense ratio suffers from the lag between the investment in new teams and the anticipated generation of earned premium. We have a number of actions underway to enhance our operating efficiency and cost management within the group, continue to believe that our investment in both new teams and our current underwriting and support teams is essential as we take Aspen through and beyond the soft phase of the cycle.

Our overall combined ratio was 85.6% compared with 79.4% last year.

Turning to our individual segments, Property Reinsurance enjoyed a good quarter with a combined ratio of 63.4% despite the industry being impacted heavily by risk losses. Our result has also been driven by benign cat experience and favorable development from the 2007 UK floods.

As regards Casualty Reinsurance, gross written premium was 18.5% lower than last year. On our previous call, we discussed that the January renewals for this account are being characterized by some large rate reductions in particular in workers' comp. As a result, we chose to non-renew a lot of this type of business. The combined ratio was 94.9% compared to 84.6% in Q1 2007, driven by the loss ratio of 64.9% compared to 57.2% in the first quarter of 2007. Q1 2007 benefited from prior period releases of $22 million compared to $14 million this year.

Our International Insurance segment reported a combined ratio of 95.6% compared with 82.7% last year. Gross written premium was up by 7.6% at $199 million, reflecting the contribution of new teams as we continue to build out our diversified portfolio. Removing the contribution of the new underwriting teams, GWP within this segment has decreased by 5% year-on-year. The loss ratio increased from 55.4% to 65%, impacted by the satellite loss I mentioned earlier and from lower reserve releases than in the corresponding period last year.

Our U.S. Insurance operation reported a combined ratio of 103.7% compared to 96% in 2007. The segment continues to go through a rebuild and restructuring phase in the challenging pricing environment. Both of theses factors have reduced written and earned premium. The decline in the latter has the effect of increasing our expense ratio, which is the main driver for the increase in combined ratio.

Turning now to investments. Our net investment income shows a decline from $67.5 million in Q1 2007 to $39.4 million in 2008 with a principal reason being the recording of our share of revenues and expenses from our investments in funds of hedge funds. Excluding the impact of the fund of hedge funds, investments income for the quarter is $56 million compared with $57.6 million for Q1 2007. Net investment income for the quarter also included a one-off negative accounting adjustment of $7.8 million relating to 2007.

Our fund of hedge fund investments, which account for around 9% of our portfolio of $6 billion adopt diversified strategies to manage volatility, and we believe that they are an effective way to generate superior risk adjusted returns over the long term and that they complement our fixed income strategy. However, as we are all well aware, the ex-in [ph] capital markets have suffered considerable declines in the first quarter with the Standard & Poor's 500 Index down by 9.9%.

By contrast, our hedge funds suffered a reduction in value of a little less than 3% with the heaviest declines in March where market conditions placed significant strain on liquidity and leverage. This is illustrated on slide 10 in your pack.

Slide 11 shows that the funds of hedge funds have contributed in excess of a 15% cumulative return since we first invested in these products in April 2006 and indeed produced a return of 11.4% in 2007. This compares to our long-term return target for this asset class of 300 to 500 basis points over cash. They continue to offer the key advantages of active risk return management and diversification over traditional equity or other alternative asset classes. We believe there is a prudent and valuable role for alternatives of this nature alongside our fixed income investments. And we are content to present [ph] for the proportion of our portfolio in alternatives to remain below 10%, which is well below our self-imposed maximum limit of 15% for alternatives.

It should be noted that our fixed income portfolio and short-term funds, which account for over 90% of our investments, contributed a yield of 4.7% versus 4.6% last year. The overall total return including investment income yield and unrealized movements on both our fixed income portfolio and funds of hedge funds investments for the quarter was $84.5 million versus $76.3 million for last year. We carry no impairments in our investment portfolio and continue to be satisfied with our credit quality with 89% being graded A or higher. This can be seen in slides 12 and 13.

Going now to guidance for the year. We have included an updated guidance slide on page 14. We are making the following changes to our original guidance. We are reducing anticipated investment income from a range of $290 million to $320 million to $250 million to $285 million to reflect the performance of our funds of hedge funds investments in the first quarter and also lower U.S. interest rates.

For clarity, within this guidance, I expect net return on fixed income and short-term investments to be in the range of $240 million to $255 million and return on funds of hedge funds to be in the range of $10 million to $30 million for the full year. As result of lower investment income, we have reduced our full year 2008 return on equity range from 14% to 17% to 13% to 16%.

I now hand the call back to Chris.

Christopher O'Kane - Chief Executive Officer

Okay. I am now going to discuss market conditions in each of our business segments as shown in slides 15 and 16. As a reminder, we measures rates, relativity on premium weighted average basis on business we renew.

Starting with our International Insurance segment, we saw rates come up [ph] by 3% on average versus last year. The largest rate decreases were in energy physical damage insurance and UK liability insurance where rates were down 15% and 11% on average. This was worse than we had expected. We wrote less business in these lines as a result.

We recorded modest increases of around 2% in both marine hull and marine liability. We expect that marine hull rates will remain relatively firm for the reminder of the year given loss activities in 2007 with continuing downward pricing pressure in marine liability. There is limited renewal activity in aviation at this time of year, but prices have remained weak. However, there were three recent large aviation hull losses, and we do expect to see some signs of pressure abating as a result. Aspen did not have any involvement in any of these losses. Financial institutions and political risks are seeing stable to modestly upward rate trends, but excess casualty and professional lines are experiencing continued downward pressure.

Moving on to our Property Reinsurance segment, the rates for this book of business are down on average 7% with the risk excess down 11% and cat and pro rata lines down approximately 5%. In risk excess, we are seeing terms and conditions weakening more quickly than other areas of our book, making risk selection even more crucial.

Prices for the larger industrial type risks are often inadequate, particularly given weak original terms and conditions, and we are avoiding much of this business. Despite the large number of single risk losses in the quarter, there are no signs that they are leading to any improvement in terms and conditions. U.S. cap pricing continues to fall, but remains attractive, particularly in coastal regions. Non-peak zone regions are attracting significant capacity and prices are low. Pricing on Japanese excess loss renewals was down 5 to 10% while we achieved some modest improvement on loss effected pro rata treaties in Japan during the April 1st renewal period.

Turning now to Casualty Reinsurance, overall rates were down approximately 2% on renewal business in this segment. As I referenced previously, we are seeing much higher reduction in certain segments of this market and so we have opted to non renew business where this is the case.

International treaty business held up well and recorded a modest increase of 1% on the book we renewed [ph]. Loss impacted programs are attracting rate increases for competition remaining disciplined despite new entrants diluting signings with some established players. Our U.S. casualty reinsurance book experienced an average rate reduction of about 5% in the quarter.

Finally, in our U.S. Insurance segment, rates have declined by between 10 and 20% with bigger declines on property, reflecting two Atlantic win seasons without a U.S. land falling hurricane. Despite recent price softening, the margins for property remained mostly attractive. However, the trend is downward and any further deterioration will have a negative impact on profitability. Competition remains acute with incumbent carriers willing to retreat both on rate and coverage terms. E&S cash repricing also continues to be impacted by increased competition and new entrants. We recorded an average decline of 13% on our book.

In conclusion, I would like to comment briefly on our newly established underwriting vehicle of Lloyd's. Our diversified strategy is based partly on multi platforms, and Lloyd's represents a major enhancement to our capability in this respect. We have always focused on writing business where it makes more sense to do so. For example, our property catastrophe reinsurance underwriting is concentrated in Bermuda and we established an office in Zurich last year to develop continental European reinsurance business. We believe that Lloyd's is the preeminent marketplace for a number of lines we currently write within our International Insurance segment. And we will write more business in Lloyd's in the future as we continue to develop our insurance business. However, we will only do this when market conditions are right. In addition, Lloyd's provides significant licensing and distribution advantages which will give us the flexibility to expand rapidly, again, when the time is right.

With that, I would like to open the call up for questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. Your first question is coming from Jay Gelb of Lehman Brothers.

Jay Gelb - Lehman Brothers

Thanks and good morning. The first thing I wanted to touch base on is the U.S. Insurance segment. I believe in the press release, it referenced some restructuring activity. Could you give us a bit more insight on that?

Christopher O'Kane - Chief Executive Officer

I don't think I would very much add to what I have said on previous calls, Jay.

Richard Houghton - Chief Financial Officer

Jay, it's Richard here. I would like to talk to you. It's actually a continuation of what we're talking about throughout most of last year with Nathan Warde coming in and having a good look at our property segment as well as continuing the good work on the casualty side. So we're not seeing any new restructuring; it's just a continuation of the way we are reshaping that portfolio.

Jay Gelb - Lehman Brothers

Okay. And then separately, on the hedge fund outlook, if my math is right, if you're looking for $10 million to $30 million of contributions from the hedge fund of funds for the full year, it works out that the quarterly contribution for the second quarter to the fourth quarter would be between $9 million and $15 million per quarter, which is sort of in line with what you have generated historically. Have you seen any type of evidence that that... that those types of returns are achievable for the back half of the year?

Christopher O'Kane - Chief Executive Officer

Yes, I'd say two things on that, Jay. I mean I'll translate this with $10 million to $30 million in a slightly different way which might help other listeners. 10% would reflect... sorry, $10 million would reflect just under 2% annual return for the full year, whereas 30 will be just around 5% for the full year. So that's how the sums work out in a slightly different way.

Two things give us comfort around about expecting a recovery in the funds of hedge funds. One is that we have had an excellent series of meetings with both our leading fund managers, Blackstone and Ivy where we have been through the underlying strategies that we have in the portfolios. We understand exactly how they are approaching the challenges from March and the opportunities that exist in the rest of the year. So that gave us great comfort.

I would also say that initial results for April suggest that we have already recovered 60 basis points or in excess of 60 basis points and we are still at a very early reporting period for April. So we've got some signs of improvement and we've got some comfort around about strategy from our leading fund managers.

Jay Gelb - Lehman Brothers

Okay. And then separately, the Florida mid year renewals, do you see an opportunity there with restructuring and the Florida Hurricane Cat Fund --

Christopher O'Kane - Chief Executive Officer

Jay, we have James Few who, as you know, runs Property Reinsurance for us here and I am going to ask James to comment on that one.

James Few - Head of Property Reinsurance and Group Underwriting Officer of Aspen Insurance

Hi Jack. Yes, I think the Florida renewal has always represented an opportunity. And the extent to which we will move into that sector will depend on a numbers of factors. At the moment, we are looking at some legislative change which may see a smaller role played by the FHCF. I believe the effect of that will not be significant, but will help in some degree in retuning some business to the private market.

In terms of original buying demand, I think there will be some increase in buying demand as values in Florida increase and some take out companies come out... this is an insurance [ph] company. But I don't think that's going to be too dramatic either. But I think there will be some opportunity yet. The extent to which we wish to differ [ph] more Florida business into our portfolio is a key driving factor to me running the book. And that's something that we'll look as the pricing comes through to us. And so I think definitely, it's something we have our eye on, but I don't think the current suggested changes in the FHCF, which have been much talked about, are likely to cause a dramatic change in pricing.

Jay Gelb - Lehman Brothers

That's helpful. Thanks. And my last question is was there any benefit on the reported gross and written premium result from foreign exchange?

Christopher O'Kane - Chief Executive Officer

I don't believe so. No, I am confident [ph] that that is coming through anywhere in the financial supplement, Jay.

Jay Gelb - Lehman Brothers

So no impact from foreign exchange, positive or negative?

Christopher O'Kane - Chief Executive Officer

Well, no, I would have to look at the whole of the income statement to recall that, and the FX movement is recorded on the face of the income statement overall.

Jay Gelb - Lehman Brothers

Okay. Well maybe we can follow up with that offline. Thanks again.

Christopher O'Kane - Chief Executive Officer

Yes, sure.

Operator

Thank you. Your next question is coming from Alain Karaoglan of Banc of America.

Alain Karaoglan - Banc of America

Good morning. Several question. You mentioned you had $16 million in gross losses on large risks. What was the net amount?

Richard Houghton - Chief Financial Officer

It's the same figure [indiscernible].

Alain Karaoglan - Banc of America

Okay. So gross and net were the same. Okay. In terms of catastrophes, did you have any catastrophe losses in the first quarter? Your cat load for the year is still $135 million. So what were the catastrophes in the first quarter and how did that run versus your expectations?

Christopher O'Kane - Chief Executive Officer

Well the only one of note was this winter storm here in Europe called Emma.

Alain Karaoglan - Banc of America

Yes.

Christopher O'Kane - Chief Executive Officer

And opinions vary in what the market loss is there from kind of 7, €800 million up to maybe just over €1 billion, depending who you listen to. Our involvement is about $5 million, which we think is pretty modest. And that was about it in terms of cat losses in the first quarter.

Richard Houghton - Chief Financial Officer

And just to carry on on the cat load guidance, Alain, we left that alone because since we put our initial guidance out, we continue to receive the forecast and things are firming up and we are seeing no huge improvement in the forecasting. So at this stage in the year, we felt it was appropriate to leave the guidance of $135 million.

Alain Karaoglan - Banc of America

Okay. So essentially, we are assuming $127 million for the next three quarters if you add the $8 million in the first quarter of cat losses?

Richard Houghton - Chief Financial Officer

You could do it like that, yes.

Alain Karaoglan - Banc of America

Okay. And in terms of ceded reinsurance, was there anything unusual in the first quarter, or is that in line with your expectations or should it be... will the ceded premium be lower in the next three quarters?

Richard Houghton - Chief Financial Officer

No, it's entirely in line with expectations and you will see there is a little bit more gone out on the International Insurance segment to accommodate some of our new teams in accordance with our business plans as we took those teams on.

Christopher O'Kane - Chief Executive Officer

I think just to [indiscernible] slightly, Alain, what we used to spend a lot of money on was protecting property reinsurance. And over the last couple of years, we have reduced that dramatically and there is a further reduction in that this year. So that was the old pattern. There is an emerging new pattern, which as we hired some guys in excess casualty, we placed a 50% quota share of that. Professional liability, we operate with a £5 million line. We bought 4 million, excess of 1 million. And so on each of these new teams, we are protecting, especially in the early days, against kind of early volatility and experience. So that's going to change the pattern of reinsurance sessions for the next year or two.

Alain Karaoglan - Banc of America

Chris, with the environment becoming more competitive and you are hiring new teams that you expect d to generate a certain level of premium volume, is that going to be more challenging for them to generate that premium volume and does that mean you have to focus more intently on the expense ratio to make sure that it doesn't get out of hand?

Christopher O'Kane - Chief Executive Officer

I think that the answer to both parts of that question are yes. In terms of the first part, clearly, when you enter a line of business just or indeed, any continuing line of business, you are trying to anticipate conditions over the next 12, 18 months and plan accordingly. Most of the time I think our planning is pretty good, i.e. we anticipate correctly how the market is going to move. But once in a while, something breaks out of bounds and so on. So what would happen if rates fall further than we planned they would fall, then we would simply write less premiums. You can't get the stuff for the margin you need, so you don't write anyway, you write less. So consequently, that offers the chance, the possibility that expense burden becomes disproportionate. Overall, I think our income is sort of flattish this year over last year. As I said on the call, there is some small emerging contribution from new lines and a lot of shrinkage in the existing lines was kind of what we expected. I don't think we're in an expense squeeze. But I think if you want to look forward to 2009 and 2010 and you assume a falling market, that expense management becomes absolutely critical for everyone in the insurance industry.

Alain Karaoglan - Banc of America

Great, thank you very much.

Christopher O'Kane - Chief Executive Officer

Okay.

Richard Houghton - Chief Financial Officer

Thanks Alain.

Operator

Thank you. Your next question is coming from Dean Evans of KBW.

Dean Evans - KBW

Hi guys. I just had two quick questions, I guess. The first would be on the $7.8 million accounting adjustment for 2007. I guess can you give some more details on what that was for?

Richard Houghton - Chief Financial Officer

Yes, sure. It was just... it was an error which we booked in 2007 into investment income. So I've chosen Q1 2008 to correct that error. It's nothing to do with investment income in itself. It was just an accounting misposting, which I caught up [ph] in my year-end processes. So nothing untowards in it; just unfortunate that I got the timing of the adjustment slightly incorrect.

Dean Evans - KBW

Okay. And then I guess my other question is on repurchases. I guess one, what were they in the quarter? How many shares did you buy back? And second, with shares down at around 90% of book value right now, what is your thinking about that as far as ahead of storm season or going out through the rest of the year?

Richard Houghton - Chief Financial Officer

Okay. We didn't make any repurchases or immaterial repurchases in Q1 at all. What I will say going forward is that we clearly have a very strong balance sheet. We have also got plenty of cash. And consideration of capital management is... remains a priority for the management team and the Board.

Dean Evans - KBW

Thank you.

Operator

Thank you. Your next question is coming from Morris Williams [ph] of Williams & Company.

Unidentified Analyst

Yes, thank you. Two questions. One, it would seem that you are endorsing a range of expected earnings for this year of 365 to 465. And second, could you talk about the dividend policy? I was surprised that you did not raise the dividend, and why aren't you paying out, let's just say, 20, 25% of the earnings?

Richard Houghton - Chief Financial Officer

Okay. Well, we don't actually give guidance in respect of earnings. We give a number of metrics and we give an implied ROE as a result of some of those metrics. So that's how we address that. In terms of dividend policy, what we have favored over the last few quarters, those have been share repurchase and keeping a consistent dividend. I know opinions vary amongst our shareholders. And we have recently been asking our shareholders what their views are. And the sort of conclusion of all of that is that there are many, many opinions, but after consideration... actually, at the Board yesterday, we decided it was appropriate to retain our current dividend policy at this time.

Unidentified Analyst

Well I hope you will reconsider it, but thank you for your response.

Richard Houghton - Chief Financial Officer

And thank you for your input.

Operator

Thank you. Your next question is coming from Vinay Misquith of Credit Suisse.

Vinay Misquith - Credit Suisse

Good morning.

Richard Houghton - Chief Financial Officer

Good morning, Vinay.

Vinay Misquith - Credit Suisse

On your cat losses, well, you had $4.5 million for Windstorm Emma and $16 million of large individual risks. Now does that also include the satellite loss? If you could just give me the numbers by segment, that would be helpful please.

Richard Houghton - Chief Financial Officer

It doesn't include the satellite loss, Vinay. That's about $6 million on top of those.

Vinay Misquith - Credit Suisse

We have 16 plus 6 versus our 4.5, correct?

Richard Houghton - Chief Financial Officer

Yes, I know those are... yes, all right [ph], that's a reasonable list of our large losses in the quarter.

Vinay Misquith - Credit Suisse

Sure. And do you have a sense for which segments it came from?

Richard Houghton - Chief Financial Officer

Yes, the 16 will be applied to our Property Reinsurance segment. The satellite loss will be appearing in International Insurance, and I would also expect the cat losses to be in our Property Reinsurance segment.

Vinay Misquith - Credit Suisse

Okay. So Property Reinsurance 16 and 4.5. All right. And if you could... with respect to the guidance, or the combined ratio, I presume this includes the first quarter's results. But does that include any favorable development for the rest of the year?

Richard Houghton - Chief Financial Officer

No. Going forward, we don't include any expectation of favorable development explicitly within the combined ratio.

Vinay Misquith - Credit Suisse

All right, fair enough. And on your U.S. Insurance book, the accident year loss ratio was a little high, 74.6. Could you shed some light on that as to why it's so high and what you are doing to write better business? And is Nathan sort of going to ramp up the book of business towards the end of the year so that the expense ratio is sort of more in line with the segment, while at the same time ensuring that you are not writing any bad business?

Richard Houghton - Chief Financial Officer

Yes, well, I will start off with the expense question if I can, Vinay, because you have picked up the main driver there, which is a shortfall in own premium as Nathan gets on and restructures that book. The actual cost base is not that different from what it was last year. But Nathan is trying to grow the book and grow the volumes against some pretty challenging pricing conditions. So we are hoping and expecting that that will be coming through in the later part of this year. Chris?

Christopher O'Kane - Chief Executive Officer

Vinay, on the underwriting side of it, we are dividing that in two parts. One is the casualty, which, as said on previous calls, has historically performed very well, it's continuing to performance very well. I would say if there is a threat there, what we tend to write... it's all E&S. Remember, we tend to take the risks that are closer to standard or close to the middle market that's sort of safe from all the other [ph] risks. And there is some pressure on the mid carriers to sup those back over to the middle side, in which case we lose them. But I think the book we have got is a book I have always and continue to feel pretty good about.

The other issue is on the property side where, as you may recall, over the last couple of year, we have talked about losses in this area, both cat looses and indeed risk losses. And when Nathan, the whole conversation was about why was that happening and what were we going to do about it. So we have repositioned the book. That is going to take about 18 months in total to complete and we are around about 12 months into it at this stage. In other words, the readjustment ought to be finished by the end of this year.

What kinds of things are we doing here? We operated previously with a maximum... typical maximum line of $5 million. We are now operating with occasionally up to 25. So are writing some risks that are a bit bigger. We have reduced the amount of real estate business in the book, which was very high, which Nathan has shown me, I think very convincingly, that very tough area to make a margin in over time. So we are deemphasizing that.

We have also addressed producer management. We are doing a lot of producers, and what Nathan has done is cancelled a lot, I mean maybe more than half of the total number of producers with a view to becoming very relevant [ph]; let's say a top two, top three market for those producers we do deal with. And the feedback from those producers is very positive. I think they understand our risk appetite, they understand their underwriting... there are quite a lot of new property underwriters on board... and it's going very well. And I think the real point of [ph] encouragement there is not so much look at the expense ratio, which I think is transitory, but looking at the loss ratio, which for quite a few quarters now has been very encouraging. So I don't think it's going to sort of surprise us with huge returns this year. But I think we've got the foundations for a really nice operation in the future.

Vinay Misquith - Credit Suisse

So this quarter's numbers were... the accident year loss ratio was a little high, 75% on [ph] the loss ratio. Was there some one-time items, do you recall, for this quarter?

Richard Houghton - Chief Financial Officer

I don't think, Vinay... it does look a little heavier than normal, Vinay. I don't think there is anything exceptional I would like to sort of draw your attention to. It is very small numbers we are talking about.

Vinay Misquith - Credit Suisse

Yes, sure. Sure.

Richard Houghton - Chief Financial Officer

So as Chris has said, this is a multi-quarter story that we have to tell.

Vinay Misquith - Credit Suisse

Sure, fair enough. Thank you.

Richard Houghton - Chief Financial Officer

Thank you.

Operator

Thank you. [Operator Instructions]. Your next question is coming from Dan Farrell of FPK.

Dan Farrell - FPK

Hey, good morning.

Richard Houghton - Chief Financial Officer

Hey Dan.

Dan Farrell - FPK

Can you talk a little bit about the new lines of business that you are in, the excess casualty, the political risk [ph] and financial institutions? And what's your expectation for quarterly run rate for those businesses? Are we at that now or are we still in a sort of ramp up phase give that they have just started up? And then, secondly, you may have covered it in your prepared remarks, but can you just talk about the expenses associated with those new segments initiatives?

Christopher O'Kane - Chief Executive Officer

Well, let... this is Chris, Dan. Let me deal with the business lines and then I'll hand it over to Richard to talk about the expenses which are kind of front loaded. All of these things are in their infancy. Excess casualty, of the ones you mentioned, is the oldest. I think we started writing... our first risk was probably in November. We weren't particularly active at the one 1/1 season, and February is a quiet month. So this is a slow build. I think my expectation is the book of business will grow roughly to the size that we said when we announced it. It's a $50 million premium opportunity quite easily and maybe a bit more in a better market. But it's going to take a full year for that to ramp up.

The other two, political risk, we started I think in January. The premium written to date is very, very modest, no losses. And financial institutions is hardly even fully under way yet. Some of the team doesn't actually come on board for about another week. So we have got a handful of risk there, but not so much I can give you any commentary on.

In terms of... someone asked a question earlier, what you do when the market changes? Well, actually on those three, excess casualty is probably a little bit worse than we anticipated. Political risk is a little better and financial institutions is probably meaningfully better. And I think it's going to become really quite a lot better still. And that will ultimately I think cause us to rethink how much premium we're going to do in the financial institution line. But I am not in a position to give you a view on that this morning. We are sort of still analyzing and thinking about that. On the expense associated with... with this I'll hand you over to Richard

Richard Houghton - Chief Financial Officer

Sure. Thanks Chris. Additional expenditure over and above last year in respect of new teams is $3 million to $3.5 million. And that includes staff costs and things like IT fit out as well.

Dan Farrell - FPK

Okay. That's helpful guys. Thanks.

Richard Houghton - Chief Financial Officer

Okay.

Operator

Thank you. You have a follow-up question coming from Alain Karaoglan of Banc of America.

Alain Karaoglan - Banc of America

Hi. Richard, just one comment on the share repurchases going forward. I couldn't hear what you said with respect to the Board and your appetite for share repurchases going forward.

Richard Houghton - Chief Financial Officer

All I said, Alain, was that it was a matter of priority for us as it usually is.

Alain Karaoglan - Banc of America

And priorities meaning?

Richard Houghton - Chief Financial Officer

Meaning we are focusing very hard upon it.

Alain Karaoglan - Banc of America

Okay. Okay. So you have a $300 million authorization that you are expected to do by the... by a certain date?

Richard Houghton - Chief Financial Officer

We have authorization for 300. That covers two years from last February. So we have plenty of capacity to do what we think is appropriate.

Alain Karaoglan - Banc of America

And I assume you think the stock is attractive?

Richard Houghton - Chief Financial Officer

It would be very hard to say no to that.

Alain Karaoglan - Banc of America

Okay. Thank you.

Richard Houghton - Chief Financial Officer

Thanks Alain.

Operator

Thank you. There appear to be no more questions at this time. I will turn the floor over back to Chris O'Kane for any closing remarks.

Christopher O'Kane - Chief Executive Officer

Well thank you for joining us this morning and we look forward to seeing you in New York in a couple of weeks or talking to you in three months time on the next call. Good bye.

Operator

Thank you. This concludes today's Aspen Insurance Holdings first quarter 2008 earnings conference call. You may now disconnect.

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