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

Executives

Kerry Calaiaro - Senior Vice President, IR

Chris O'Kane - Chief Executive Officer

Julian Cusack - Chief Financial Officer

Analysts

Amit Kumar - Macquarie Capital

Mike Zirinsky - Credit Suisse

Vinay Misquith - Evercore

Dan Farrell - Sterne Agee

Brian Meredith - UBS

Josh Shanker - Deutsche Bank

Aspen Insurance Holdings Ltd. (AHL) Q3 2012 Results Earnings Call October 25, 2012 9:00 AM ET

Operator

Good morning. My name is Robin, and I will be your conference operator today. At this time, I would like to welcome everyone to the 3Q 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. Ms. Kerry Calaiaro, you may begin your conference.

Kerry Calaiaro

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

Last night we issued our press release announcing Aspen's financial results for the quarter ended September 30, 2012. This press release, as well as 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 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.

Chris O'Kane

Thank you, Kerry, and good morning, everyone. We are extremely pleased with our results in the third quarter. Our book value for the quarter was $41.53, an increase of 3.8% in June, which is an annualized operating ROE of 13.2% for the quarter.

There are number of features of the quarter which we find particularly encouraging, obviously we benefitted from the low level of catastrophe losses, but within reinsurance in casualty re, specialty re and in the other property reinsurance subsegment we also saw excellent returns.

Our insurance results were also profitable, real progress in the U.S. and some very good returns in our London market lines. As we’ve mentioned on the previous calls, we have a conservative and rigorous reserving approach, which has resulted in a pleasing level of reserve relief in the quarter, while maintaining overall reserving strength level at the 88 percentile at diversification which we regarded extremely strong.

I’m now going to turn the call over to Julian to review the financials and I will comment further on the business performance, as well as market environment later.

Julian Cusack

Thank you, Chris. This quarter, we reported total comprehensive income of $141.5 million, up over 100% from Q3 2011. The results include very strong profits from reinsurance underwriting with positive contribution from our insurance segments and from investment activity. I will address each of these in turn.

The reinsurance segment return the combined ratio of 73.8% with an accident year ex cats combined ratio of 81.4%. As we expect in the absence of any significant Q3 losses, the catastrophe excess of loss account which makes up only 22.3% of the segments net earned premium for the quarter, performed exceptionally well. But we also have good performance from the rest in our book.

Other property reinsurance lines, which include some cat expose risk excess in professional business also outperformed the corresponding quarter last year. Specialty lines which are also predominantly short tail but less cats exposed contributed 22.5% in net earned premiums and also performed well with a strong contribution from credit and surety.

We have been actively scaling back our casualty reinsurance book over a number of years and focusing on better risks. Since its peak in 2005, we have reduced the gross written premium off casualty reinsurance by an average of 6.4% per annum.

We regard the profitability of our remaining core accounts as acceptable, there are continuing signs of underlying rate increases especially in U.S. but not in our view compensates for declines in investment book yields across the industry.

Profitability was more mix in our insurance segment. There were strong performances in the quarter from energy, aviation and political risk underwriting, and our relatively new U.S. professional lines operation.

Property and casualty results though weaker with uptick in U.S. E&S property non-cat losses in the quarter, offsetting the absence of major cat losses.

For the quarter the accident year ex cat loss ratio was 61%, up from 56.6% a year ago. While this increase is predominantly driven by chances in the business mix specifically in the growth in our own programs business. We adjust for the business mix the accident year ex cat net loss ratio was basically flat.

Total operating expenses were $90.7 million in the second quarter, an increase of $18.7 million over Q3 last year of which $15 million is due to performance related compensation accruals.

Our investment team had another successful quarter. Total annualized investment return for the quarter was approximately 4.25%, including the effect of interest rate swaps. This includes unrealized gains shown in OCI of $32.2 million.

Our fixed income book yield in the quarter was 3%, down from 3.5% a year ago and down from 3.2% at the end of Q2, which is consistent with the quarter-on-quarter reduction in investment income that we have recorded. Our fixed income portfolio average duration is 2.8 years excluding the impact of interest rate swaps which reduce duration by approximately half a year.

Our equity portfolio returned 4.9% during the quarter and 9.35% year-to-date. In September, we began to build a new BB high yield portfolio focused on the U.S. corporate market. Recognizing that yields and spreads are close to record lows is our intention to tactically build this position over one to two-year period.

As part of our below investment grades strategy we will also begin investing in BB bank loans to complement our higher -- high yield portfolio. We have the appetite to invest up to 5% of our aggregate portfolio in BB securities.

We continue to actively manage our capital position and now assessing the excess capital again increase this quarter. In the third quarter, we conducted an open market repurchase program of $25 million at an average share price of $28.91.

As announced yesterday, we have increased our share buyback authorization to $400 million in anticipation of continuing open market program. Subject to market condition, we are likely to continue the program for the remainder of the year and into next year.

Buying back our shares remains one of the most attractive short-term value creating options and as we have previously stated, they will continue to seek to return the capital to shareholder if we are unable to find sufficiently effective opportunities within our business.

Following Q3 results, we have revised several elements like guidance for the full year 2012. The guidance for gross written premiums specifically is remains the same with gross written premiums currently forecasted at $2.4 billion plus or minus 5% and CD premiums at 10% to 12% of gross earned.

The range for the combined ratio is reduced to 89% to 93% from 93% to 98% reflecting the absence of significant Q3 cat losses. Tax rate guidance also reduces to 5% to 8% from 6% to 10%. The cat loss for the remainder of the year is $45 million, mainly relating to earthquake risk, the final phase of the (inaudible) risk and the first part of the European wind season.

I will now turn the call back to Chris.

Chris O'Kane

Thank you, Julian. Let me provide you with some commentary on the rate environment. For the first nine months of 2012 we achieved an average rate increase of 4% on the yields across the book with 5% in reinsurance and 3% in insurance.

Currently, the U.S. primary insurance market is achieving the most promising rate increases across most lines. In general these increases are flowing through to the U.S. reinsurance markets. The U.K. and international markets continue to have done with great pressure, particularly in those areas with sustained low loss activity.

Starting with reinsurance, in casualty re the market remains challenging but we have achieved to 2% rate increase year-to-date. In the U.S. we are seeing several indicators of potentially market changes, specifically the casualty E&S market shows positive momentum with underlying prices increases in the mid single digits. International casualty though environment continues to be challenging.

For specialty reinsurance, outside of loss affected markets and territories rates are generally flat. The established markets remained disciplined with relatively stable rates, while the more profitable niche lines such as credit and surety are attracting a bit more capacity which is causing some downward grade pressure.

Our crop business is written within our specialty reinsurance segment. Across Aspen re we wrote about $20 million of crop business to the nine months of the year, of which only around $300,000 related to the U.S. Currently within crop, we see growth opportunity in China and in Latin America, while we expect to maintain our exposure in Europe.

Several years ago we wrote a reasonable amount of U.S. crop reinsurance business but as rates decline we canceled almost all of it. Our underwriting do have the expertise to write U.S. crop if we decided to grow that book again.

As I mentioned in the last quarter’s call, we are actively monitoring market, see if rates rise to a level where we either attain underwriting U.S. crop as attractive. If that is the case, we may decide to build a crop position in future, but the scale of the U.S. opportunity if any will not be known before February.

Catastrophe reinsurance, although well-priced is not seeing the same upward pressure on price as we have for the last couple of years. In past we have seen upward price pressure as a result of model change in the U.S., while catastrophe losses on the international side, but now this upward pressure have subsided. The results of the new money in the market is focused chiefly on U.S. peak zone exposure and on retrocession products and is closing down with pressure in those specific markets.

It’s worth noting however that with regards to retrocession, Aspen tends to be a buyer rather than seller. So this could work to our advantage.

Aspen Re has crossed a broader book in just cat. Our public catastrophe business represents only a little over one quarter of writing and while results that have been very good, we’re also encouraged by the rate environment in our other property segment and in the casualty business. Our clients in these areas are reporting mid single digit increases and we’re seeing these increases at a primary level slowing through to the reinsurance contracts.

Looking towards the January 1 renewal season for reinsurance, we expect stable rates for U.S. with the peak zone U.S. and retro being two places mostly likely to experience rate pressure. The primary market in U.S. is likely to continue to achieve rate increases.

In our insurance segment, there continues to be rate increases in marine hull and in marine liability reflecting both some loss activity and in general discipline competition.

Geographically, the U.S. prime insurance markets are the most encouraging while continental Europe continues to lag behind and the U.K. remains very challenging.

For our property insurance business, we achieved overall average rate increase of 5% while the U.S. property area achieved an average rate increase of 7%. We’re continuing to obtain excellent results by maintaining our focus of underwriting discipline in our U.K. commercial property insurance underwriting. Despite these excellent results, this is not growth area for us as the U.K. market resolutely refuses to increase prices.

Our primary casualty lines in total achieved modest rate increase of 2% first nine months of the year. They were definitely size of strength in the U.S. with rates of increase 9% on average in the first nine months. Specifically, the U.S., as casualty insurance market is seeing encouraging indications of firming with an improvement in rates as well as in terms of conditions.

We’re continuing to witness the phenomenon we spoke of in the last quarter where standard life carriers are becoming more focused and releasing a number of risks to the E&S markets. We’re pleased to see them there and we’re well placed to write them but at better prices with high deductibles and with lower limits.

While it is by no means a hard market, it’s showing steady and encouraging price increases. Real estate, construction, hospitality, energy and certain difficult products are examples of classes that has seen an uptick into mission for back of surface lines market. It is also pretty good news in our excess casualty book where competition has reduced. The market is firming and we’re obtaining 5% price increases on average.

The U.K. liability market is challenging. There are some stress risks and risks that co-claimant has experienced which are being re-rated by the current market and providing us with some encouraging opportunities.

We’ve also been able to write some new business in the Irish market on the bag of improving conditions. This is the first time we were in the business in that market for quite a few years. We’re well positioned to capitalize on those areas of the markets with good rates momentum.

In addition, we’re making good progress in executing our diversification strategy. For example, consistent with our strategy with reinsurance, we continue to enhance our international presence to our offices in Zurich, Miami, and Singapore while we serve the European with the special focus on Eastern Europe markets, South Asia, we serve Latin America from Miami.

Our underwriting grant in those areas are accessing new clients as well as providing it on services to existing clients. Through the first nine months of 2012, these offices wrote about $200 million of gross written premium, which represents approximately 20% of total reinsurance gross written premiums. We’re making good progress in this geographies and quite optimistic about the future. In insurance, we continue to focus on profitable growth in the U.S. and special niche, specialty insurance opportunities.

In the U.S. we’ve not built all the components of a successful underwriting operations and a number of our teams that shows exciting forward momentum. We continue to have a conservative approach in our investment portfolio as we’re most concerned with protecting our balance sheet and mainly looking for ways to generate higher investment returns in this ongoing low-yield environment.

We do not want to take on a lot more risk but we’re willing to take on a bit more risk for an appropriate increase in return. For example, Julian mentioned we do have an equity’s portfolio of just under $200 million that generated close to 5% return in the quarter and we begun to built a double-D high-yield portfolio focused on U.S. corporate market.

Active capital management is always foremost in our minds and a key focus for our Board. We said it to you before but let us stress that while we have rewarding opportunities, we will dedicate our capital to them and where we do not, we will seek ways to return it to shareholders.

During the quarter, we announced that we completed our search for new CFO and we’re pleased that John Worth is joining our team in November. I’d like to take a moment to thank Julian for seamlessly setting back into CFO role. With Julian at the helm, we were able to conduct a robust and a thorough search for new CFO.

Julian has done a tremendous job for us in the quarter 2012 and now -- will now be returning to his role of Chief Risk Officer of the company.

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

Question-and-Answer Session

Operator

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

Amit Kumar - Macquarie Capital

Thanks. My first question relates to the discussion on capital management and the PMLs. When you look at, sort of, the past buybacks and as I look forward, I’m curious what the pace of buybacks in Q4 be meaningfully higher than the $50 million, which you have bought year-to-date?

Julian Cusack

Well, that’s a great question. I think, what is clear is that after the good third quarter results that we’ve had, the balance sheet has strengthened and that does gives us scope to consider an increase in the share buyback program going forward.

Chris O’Kane

Amit, we won’t further comment here. I think we’ve said in the past that we tend to buyback little during the winter season but if post winter season, we find ourselves in a comfortable capital position, we could potentially do more. I don’t think we take that one any further and I’m sure you understand why.

Amit Kumar - Macquarie Capital

Okay. But all this mean you equal in a non-cat quarter dividends plus buyback what you call net income or something like that?

Chris O’Kane

We’re really relating the pace which we manage capital to balance sheet considerations rather than total income.

Amit Kumar - Macquarie Capital

Okay. The second question I had is when you talk about 2013, and you talked about pricing increases and talking about some more opportunities, if you see sort of step back and look at your overall book. Do you get the sense that once you sort of parse with ups and downs for 2013, I guess, the premiums would look a lot similar to what they look for 2012 or would they be modestly up?

Chris O’Kane

You know, Amit, I think we’d be disappointed if we can’t get them up modestly as you say. I do think there could be quite a lot of change though as I said in the call, peak zone in U.S. cat business is pretty well rated business but is more capital seeking it. So maybe we maintain, maybe we need to reduce that but if we look else well reinsurance on the international, sort of, Latin America and Asia side.

On the back of those losses last year, in the back of just a lot more marketing to this year, we really becoming a brand name in those markets and I think we could -- we’ll see some growth there. It’s quite interesting what’s going on. And now let’s see in property cap but in a diverse line range of specialty lines. That’s pretty good. As you know very well, we’ve got nine underwriting teams working in the U.S. now. No team has been worked more than three years. I think one of the team is being with us just over a year.

They are pretty much established. They know the market, they’ve got the licenses, they’ve got capital. They’ve all got forward momentum, some very, very encouraging. And I see some growth there.

Looking at the casualty market, there is every reason in the world why we should see casualty prices going up. Mainly, it had to do with the absence of investment return to compliment the casualty underwriting side plus why I’m pretty comfortable about Aspen’s reserving level. I don’t think everybody has been precipitous in the same way. So to some extent, you’ll see a slowing down of reserve release elsewhere.

And that kind of going to help the casualty market, whether we’re going to see that in 2013, I couldn’t say. But on balances, we look at it, there is sort of little more upward pressure than it is downward. So in summary, a bit more premium next year.

Amit Kumar - Macquarie Capital

Got it. And then just a final question on, you talked about crop. Can you just expand on what kind of product are you looking at in terms of what sort of product are you contemplate in offering?

Chris O’Kane

Around -- the main markets that we’re in currently are Europe, particularly, Italy actually. We do some in China. It’s all going to be caught multi parallel or copal.

We’re talking about reinsurance of course, most of that in Europe would be written on a stop loss basis. In China, they use a quite share as well and then I also made reference to the U.S. but I don’t want to stress that our current exposure to that area is really quite minimal. It’s more wait and see. We’d like to believe we could be even in a position to do some more next year and if we do that would be likely stop loss reinsurance. But I don’t yet know whether that opportunity is real or imaginary.

Amit Kumar - Macquarie Capital

Got it. Thanks. Thanks for the answers and congrats on the quarter.

Chris O’Kane

Thank you, Amit.

Operator

Your next question comes from the line of Mike Zirinsky with Credit Suisse.

Mike Zirinsky - Credit Suisse

Can you comment on the expense ratio outlook? I noticed profits are similar to 2Q levels, while the expense base was $4 million higher.

Chris O’Kane

Yeah. The expenses are -- yeah, sorry, quarter-on-quarter, comparing Q3 to Q2 have increased mainly as a result of an increase in the level of accrual for performance raising compensation which is about $7.3 million increase on that number in the quarter. In Q4, I think the underlying rates will be consistent with Q3, where the total will depend on what performance is for remainder of the year.

Mike Zirinsky - Credit Suisse

Okay. So, I mean given your answer to the previous question about the growth outlook for 2013, should we potentially expect the expense ratio to start falling or just depends on what actually happens with rates next year and opportunities?

Chris O’Kane

Yeah. I mean, I’m expecting that to be a trend to stabilize and reduce our operating expense ratio through 2013.

Mike Zirinsky - Credit Suisse

Okay. And lastly, could you comment on what you would expect in new money yields to be in the coming quarter under the slightly changed allocation strategy?

Chris O’Kane

Yeah. Well, the book yield -- sorry, the market yield of our fixed income portfolio has formed again in the quarter, so realistically including our pretty slow investments in the BB strategy, I’m looking at 1:1 on a quarter percent reinvestment rate in Q4.

Mike Zirinsky - Credit Suisse

Okay. Okay. And then if I can slip one more and I noticed that PMLs were up a little bit, any color there?

Chris O’Kane

Yeah. That’s absolutely correct. They offer a number of parallels including Californian quake and U.S. Wind. Some of that is driven by the growth in our program business in our U.S. operations that certainly accounts for most of the change in the U.S. parallels. In European Wind, there is a slight uptick due to a change in our reinsurance structures there.

Mike Zirinsky - Credit Suisse

Okay. In the programs’ business, which is new and I think impacted the loss ratio, we should expect that to continue, correct, that wasn’t one time?

Chris O’Kane

Yeah. That business still continues to come on to our books. So we would expect continuing growth in the PMLs on U.S. Wind than quake as a consequence.

Mike Zirinsky - Credit Suisse

Thank you for the color.

Operator

The next question comes from the line of Vinay Misquith with Evercore.

Vinay Misquith - Evercore

First question is about the U.S. insurance business, so I was wondering if you could give us some color on when you expect growth in the segment to begin to slow. Specifically, maybe as we look out in 2013, you would expect the rate of growth there to be at a same level we are seeing this year?

Chris O’Kane

When you put it as rate of growth, i.e. percentage increase of the previous year that I would say the rate of growth in 2013 over 2012 would be less than 2012 or 2011. This is just the percentage change, however, the quantum of premium maybe similar.

And I don’t want to get into kind of a detailed forecast on part of operations this morning, but as I’ve mentioned in response to earlier question. There were nine teams, so I would take a team like a surety. Surety insurance, they got fully T-listed only last December.

So they’ve been marketing this year with a product to sell, we are increasing the line size to operate with next year. And proportionate terms, I mean the guys could double or even move double what they are doing in 2013, but that’s a small premium base kind of high single digit, millions of dollars.

The more material lines, for example, property, I don’t see a lot of growth there. I mean, the market is somewhat encouraging but we have about as much as we want, maybe a little more. Program continues to offer potential as I think professional liability, management liability to consumer. I can’t give you any detailed guidance, so I’d hope that helps.

Vinay Misquith - Evercore

That’s helpful. And so, it is just a follow-up on that. When should we expect to see the expense leverage to start to benefit your numbers? In other words, when do you expect the operating and admin expense to start to flatten out, based on driven by the growth you are seeing from the insurance sector?

Chris O’Kane

Is the question, specifically in the U.S. or across the whole?

Vinay Misquith - Evercore

More about the insurance segment as a whole. Obviously given the growth in the U.S. segment, I’m just wondering when we start to see the expense ratio to start to flatten out based on your given unpremiums coming through in the next few quarters.

Chris O’Kane

I think the best answer I can give you is that we are working very hard with our U.S. team to try and ensure that the operating expense ratio for our U.S. insurance operations is normalized by the end of 2013, more into 2014.

So obviously, an average is now with the international insurance business that already has a satisfactory expensed ratio. So we should be seeing some stabilization improvement in 2013, 2014 at the latest I think.

Vinay Misquith - Evercore

One more if I may? The reserve development, I’m wondering if you could give us some color on that. What action did you guys, did it come from and if you could help us with the Atlanta business view?

Chris O’Kane

Certainly, yeah. We are looking at some reserve releases for the quarter of $29.7 million overall and a significant part of that comes from shorts curtailed lines and some of that comes out of the 2011 accounts. But otherwise it’s distributed fairly evenly over years back through to 2009, 2008 and earlier.

Vinay Misquith - Evercore

Thank you very much.

Operator

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

Dan Farrell - Sterne Agee

Just back on the growth in the U.S. segment, I was wondering if you could sort of put it into buckets as we think about this. How much would you say is driven by these newer lines or businesses that have small scale, better building of the platform and how much has been driven by you taking advantage in areas that are seeing rate and maybe there is overlap there?

But maybe just talk a little bit more about it. And I think you gave some indication that our surety, which was a good example that that might be driving next year, but maybe giving a little more color on this year’s growth there?

Chris O’Kane

Let me try. As I said, I was talking to Max earlier I don’t want to give you a detailed premium forecast at this stage for the U.S. But let’s say the most immature line is surety, therefore the growth rate is huge but the quantum premium is quite small.

Remembering, we’ve got a great team but I think they have lacked to date has been distribution. They’ve been working hard to build distribution, build brand. The signs are that they are kind of trying getting there. They’ve some interesting views just in the last couple of months, which we feel pretty good about in the sense that two years ago, no one would have build their inland marine.

So I asked them, we went there and now I think for a lot of the smaller agents up and down the country wanted the decent deal, one of the people they want to think about is us. So growth led rates in inland marine could be reasonably encouraging.

Management liability, we are basically an excess player and I guess we didn’t have a full suite of licensees and so -- 18 months ago. As I said, this is the first year we’ve been active. So you have similar to inland marine surety, but a little more usage you have the opportunity to see a flow business and right some.

I think the guys doing it, aren’t necessarily delighted with the prices they are seeing and even though it’s perhaps one last casualty areas to show some of price are not actually earmarking that for a very significant growth.

Apart from that, you are talking about more, somewhat more established clients like professional liability. The program area and property and property, I think is largely about rate increase. We could take a little more cat risk. You’ve seen that because we – we have a little headroom there. We like to keep a little headroom of opportunities, but certainly we could allocate that somewhat to our U.S. property insurance if we see continuing rate increases, if not we probably would say that’s steady state sort of accounts.

Professional wise, we’ve done a very good job to date and they are certainly capable of doing it bit more and they are a little more encouraged about the pattern and the rate increases than I’d say the management liability teams. So we all feel like…

Environmental, the environmental team has been with us, maybe 18 months, although we’ve been in that line for five or six years. We made some changes to the book and there is some growth there. Price wise, it’s a top end of general casualty. It kind of serve mid single digits, high single digits because of sort of price increase you are seeing, so some expose coming, some more rate coming there.

Dan Farrell - Sterne Agee

That’s helpful detail. Thank you. And then just one other question, what do you view as within your cash investments as your sort of optimal allocation to cash? It seems rather high and I suspect some of that cash would be drawn down, is going to some of this other investments strategies that you were talking about.

Chris O’Kane

Yeah. You are absolutely right. The current allocations of cash and short-term investments is higher than our target rate and that is for a number of short-term issues, including cash allocated to some foreign currencies supporting our lines, which is for unpaid claims arising from the 2011 cats and also money being held for capital management purposes.

Dan Farrell - Sterne Agee

Rough ballpark of how much of the cash is being held to take one?

Chris O’Kane

We are just getting that figure. It’s reasonably significant. I think it’s probably of the order, $50 million to $100 million.

Dan Farrell - Sterne Agee

Okay. Okay. Thank you very much.

Chris O’Kane

Thanks, Dan.

Operator

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

Brian Meredith - UBS

Julian, just quickly on the fixed income booked yield to the quarter, investment yields just going to some clarification it came down fairly dramatically sequentially, was there anything unusual in the number happening this quarter?

Julian Cusack

Not really, I mean the third quarter as happened was a fairly active quarter for us in terms of maturities and coupon payments and so there was a high level reinvestments in low yielding securities than in the previous quarters, not accelerated the reduction in book yield in Q3 compared to the first two quarters of the year. But nothing really out of them that seasonalization issue.

Brian Meredith - UBS

Okay. Great. And then for Chris, could you talked a little bit about kind of what you are seeing as far as casualty loss trend in the U.S. and kind of what your expectations are for loss trend?

Chris O'Kane

Brian, I think you ask for that question about a year ago, the answer is basically same. Loss trends peculiarly muted, I mean really I so struggled for that explanation, but really there isn’t a lot going on. And I think that’s truly in our book, I also think its true in the marketplace overall.

I don’t know if you want to relate it to stay to the economy. I don’t want to -- if you want to relate it to kind of the slight change in legal stands from the Bush-era, but certainly its this plenty of activities for exposure, but there are just aren’t lot of claims. So, it’s encouraging, it’s helpful and hopes everybody number including ours, but I wouldn’t want that on that carrying on forever. I think there has to be a reversion to historical mean sooner or later.

Brian Meredith - UBS

Right. So, but I guess price though is an excess of loss trend at this point.

Chris O'Kane

As I’ve said we’ve got across all cash to be about 2% more rate year-to-date. It’s going to actually a bit more in the U.S. and it’s a little less internationally. And then we don’t do a lot of quarter shake, casualty reinsurance but why we do and even on the excess of loss where we have in adjustable future on the E&S portfolio. So our clients in the reinsurance side are probably getting 5%, 7%, 8% something of that, some of that flowing as well through to us.

So, I think kind of rate increase is certainly ahead of loss trend as we’re historically seeing and probably based on inflation for the next couple of years ahead of anticipated loss trend as long as something on toward it doesn’t appear.

Brian Meredith - UBS

Right. And then last question for you. Given kind of some of the mix shift we are seeing in your book of business and what’s going on with investment yield here. I am curious what do you think a good kind of appropriate target return equity for Aspen should be at this point.

Chris O'Kane

Well, we haven’t been given specific guidance on target rate of ROE, in the areas that the company we talk about some mid-teens, talk about recyclable, but we don’t regard as now realistic given the current state of investment yields. We’re pleased with the ROE we reported this year, but clearly that some on the back of third quarter without any major cap losses. Are there anything I can offer lots more commitments there.

Brian Meredith - UBS

So, when your pricing business what do -- are you pricing it to return on equity?

Chris O'Kane

Well, not I think our canals in the -- for practical prognostic reasons we retained technical crossing benchmark at 50% of risk adjusted capital. But so now our target pricing is setting our business funding process rather than by reference to that 50% benchmark on a parallel basis.

Brian Meredith - UBS

Great. Thank you.

Julian Cusack

Well, I will add just one or two remarks here. Our earnings, our return on equity in the last couple of years has been impacted by the significant investment we’ve made in developing our insurance operations particularly in the U.S. And there are still things invest in U.S. for sure, but most of that investment has been made and if I talk to other people here in the call, would good guys riding profitable business today.

So, I think we are going to see the expense ratio kind of come inline with the best of peers somewhere in the next 12 to 24 months. And that drive was at least one percentage point and may be in certain stages more than one percentage point of ROE. So, we are not going to give you forecast numbers, but you would expect our ROE to be inline with or a little bit better than mix diversified competitors of our source, size and scale.

Because we’ve got some very profitable things in our London market insurance most of than others. We’ve got some very profitable lines in our reinsurance. So, I think about this is being higher than average, lower than inline or lower than average ROE performed in about 18 months time.

Brian Meredith - UBS

Great. That’s very helpful. Thanks.

Julian Cusack

Okay.

Operator

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

Josh Shanker - Deutsche Bank

I wanted to talk a little bit about building capability versus the rate turn in the U.S. markets. If we wouldn’t back in time a year ago and put two ways and you have the capability would you have seen the premium growth that you saw this year or put another way, if we haven’t seen can’t see the rate improvement this year, what we have seen the growth when you reported 3Q, '12?

Chris O'Kane

I think the part of the growth that we are reporting in our U.S. operations in Q3 is again launch by is property and property programs related. And I think that would have been more muted so they hadn’t been for the improving rate environment.

Josh Shanker - Deutsche Bank

Okay. And so in terms of putting your pull ramps up there, do you think that there was plenty of capacity out there for -- and they just or there is a limit amount of cap seen with the new programs were needed or where you do to acquire this programs they were already existing?

Chris O'Kane

Yeah. The program business that we have acquired was already existing program, which we won from incumbent carriers. A little color here, we hired a program team three, four years ago. We actually funded up the insurance programs. We actually have driven our reinsurance segment for while that our insurance more powerfully, more sensibly.

And they said they were sort of have dozen programs that is historically they were close associated with and they would work with and they think that their courier loyalty in service would ultimately mean that those program manages, one bring those programs across to us and not all maybe about two thirds of them have come across.

And then we say more royal to out there and they have taken at about one program a year, two of the most that would be very nice. I don’t think it’s more than that. The other factor was we hired Mario Vitale about 18 months -- 21 months ago and Mario was, let’s say, with very successful program, who had some issues with their career designer. That’s our biggest program and that switched over to us largely, because Mario joins say, you can say that a little bit of luck in there. But I don’t think Mario would say it was just luck, I think he’d say, he is a professional guys in there, other people who would like to do businesses as well.

So again, it isn’t that we are going to write a lot of programs. But isn’t there is no growth potential. I think part of your question that we getting Josh was -- how much of this is rate and how much of this kind of…

Josh Shanker - Deutsche Bank

How much of your initiative is rate. I mean you can’t measure write-off business you don’t have year ago, but it wasn’t it rate improving, you said its go time?

Chris O'Kane

What obvious is -- we assess the program. We think about the return we’ll get. If rates are flat that return is going to be lower than if rates are helping us. So, generally this output pressure in rate we are seeing pretty are based across the U.S. is hoping us execute our strategy.

But I wouldn’t say we are done nothing why not for rate, but when you look at any given program you are more likely to want to arrive if we believe the rates are going to be up by 5% to 10% and it would have been. So, the rate is little bit of win then all back, so we are moving in that direction anyway.

Josh Shanker - Deutsche Bank

And can we talk little bit about the casualty insurance growth?

Chris O'Kane

Sure. What…

Josh Shanker - Deutsche Bank

So, the program based opportunities that you see in the market, what’s the mix generally?

Chris O'Kane

Josh, most of our casualty insurance income is coming from other market business from in program, so there is some program -- so there is some casualty element in some of the property programs. But most of that growth and it’s been much slower in primary E&S casualty and excess casualty is our market business, singulars business.

Josh Shanker - Deutsche Bank

So, still some of strong growth so 3Q, '12 compared to what peers might be reporting?

Chris O'Kane

Yeah. That’s right. So, those environmental business cause of those casualty and I think that is coming from very low base, I think that’s really the main point to make it.

Josh Shanker - Deutsche Bank

Now, that’s good. Well, thank you very much for all the color. Appreciate it.

Chris O'Kane

Thank you.

Julian Cusack

Thank you, Josh. Bye.

Operator

(Operator Instructions) And at this time, there are no audio questions.

Chris O'Kane

In which case, thanks everyone for your time, attention and some very good questions this morning. Good bye. Have a good day.

Operator

Thank you for your participation. That does conclude today’s 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's CEO Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts