Aspen Insurance Holdings Ltd. Q3 2008 Earnings Conference Call Transcript

| About: Aspen Insurance (AHL)
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Aspen Insurance Holdings Ltd. (NYSE:AHL) Q3 FY08 Earnings Call October 30, 2008 8:00 AM ET


Noah Fields - Head of IR

Christopher O'Kane - CEO

Richard Houghton - CFO


Jay Gelb - Barclays Capital

Alain Karaoglan - Banc of America

Dean Evans - KBW


Good morning. My name is Lenin. I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Insurance Holdings Third 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].

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.

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 September 30, 2008. This press release as well as corresponding supplementary financial information can be found on our website at I would also like to draw your attention to the fact 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 factor 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 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

Thank you, Noah and good morning. In the third quarter, we've experienced considerable turmoil in global financial markets and two major hurricanes, which have impacted our results for the period.

For the quarter ended September 30th, 2008, Aspen recorded loss of $116.7 million after tax or an operating loss of $1.02 per share. The main driver of this were losses from Hurricane Ike, impairment charges of $44 million associated with our fixed income portfolio as well as losses from our... on the hedge fund investments of $42 million for the quarter.

Turning to the hurricanes, we reported net losses of $155 million for both storms with $141 million related to hurricane Ike. Our estimated losses are well within our expectations for storms of this nature. Regarding Hurricane Ike, approximately 69% of our estimated losses are derived from our property reinsurance operations. Our U.S. insurance book accounted for 4% of the losses, and 27% emanated from our international insurance segment, mainly in our offshore energy physical damage accounts.

Our overall estimated losses for the hurricanes have not changed since our pre-earning statements on October, the 10th. However, the analysis I've just given reflects our reporting segments. Specialty reinsurance is reported under international insurance, whereas we had grouped this into reinsurance in our pre-earnings statement.

Our loss estimates for this event assume a market loss of about $16 billion, which reflects our expectations that losses will be higher than some early loss estimates assumed, particularly higher than those from the cat modeling companies.

Our estimated market loss is split roughly $13 billion onshore and $3 billion offshore, with approximately 85% of the offshore losses arising in the State of Texas. On a gross basis, this equates to an estimated market share for us of just over 1.2% for the event. The equivalent figure for Hurricane Katrina was approximately 2.5% of the event, and this reflects the reduction in our risk appetite and repositioning of our catastrophe book in 2006 and 2007.

Our losses from these hurricanes were partly offset by strong performance in our non-catastrophe preferred lines, which underlines the robustness of our diversified underwriting model and reflects our success in expanding our insurance operations at our casualty lines in recent years.

Now, I'm going to turn the call over to Richard who will take you through our financial performance in more detail and provide an update to our 2008 guidance.

Richard Houghton - Chief Financial Officer

Thank you, Chris and good morning everybody. As Chris mentioned, our performance in the third quarter of 2008 was been impacted by losses from Hurricanes, Ike and Gustav on the global financial crisis, which has affected the performance of funds-of-hedge funds and our fixed income portfolio in the form of other than temporary impairments on unrealized looses.

Despite the impacts of the hurricanes and investments losses, Aspen's balance sheet, capital position and liquidity remain in an excellent condition to weather the storm and provide a solid platform for future performance.

Before I talk specifically about the impact of these events, let me first provide you with a summary of the key metrics we used to monitor the performance of our business. Operating losses per share for the quarter were $1.02 compared with $1.12 of operating income per share in the third quarter 2007. On a year-to-date basis, operating earrings per share were $1.28 compared with $3.52 for the same period in 2007.

Hurricanes, Ike and Gustav accounted to $1.91 of the losses per share for the quarter and $1.80 year-to-date. The fund of hedge funds performance accounted for $0.52 of the losses per share for the quarter and $0.56 year-to-date.

Book value per share on a diluted basis at the end of the quarter was $26.21 compared with $25.68 at September 30, 2007. This represents a 2% increase year-on-year. Although book value per share has decreased by $0.87 since December 31, 2007 and by $2.78 since the end of June, 2008 as a result of hurricane losses, impairment losses and the movement in unrealized losses in our investment portfolio.

Gross written premium for the quarter of $441 million is up 18% from $374 million in 2007, due mainly to the contribution from our new underwriting team. On the year-to-date basis, gross written premium have increased by 3.5% to $1.57 billion, again attributable to our new underwriting team.

Earned premium on the year-to-date basis of $1.22 billion, apologies, we'll start out again. Earned premium on a year-to-date basis of $1.22 billion has lagged behind that produced for the same period in 2007 with premium is yet to fully earn through from these newly established lines. Net earned premium for the quarter of $434 million is a small increase on the third quarter of 2007.

Reserve releases for the quarter was $16 million compared with $29 million in the third quarter of 2007. On a year-to-date basis, reserve releases were $96 million, up $23 million for the nine-month period last year, representing 3.4% of our net reserves at the end of September.

Our combined ratio for the quarter was 123.3% compared with 84.5% in 2007. Hurricanes, Ike and Gustav accounted or 41 percentage points of the increase in the combined ratio for the quarter. The net impact of cat events in 2008 including Ike and Gustav amounted to $199 million compared with $63 million in 2007, which as a reminder was a very light cat year.

On a year-to-date basis, our combined ratio was 96.5% compared with 84.1% in 2007. Our year-to-date combined ratio decreases to 81.8%, excluding the impacts of the hurricanes.

Our expense ratio for the quarter was 28.1%, down from 32.1% in the third quarter of 2007, due to a combination of increase in earned premiums for our new underwriting team and reduction in operating expenses.

Operating expenses have decreased from nearly $59 million in the third quarter to under $52 million in 2008, due mainly to the reduction in performance related incentives and lower exchange rates applying to our sterling denominated expenses.

I'd now like to discuss the major events that shaped the quarter at Aspen, starting with the more detailed discussion on the performance of our investment portfolio. Our net investment income for the quarter was $19 million compared to $72 million in the third quarter of 2007, due primarily to the performance of our funds of hedge funds.

The book yield on the fixed income portfolio was 4.87% for the quarter and 4.81% for the nine months September 30, 2008. As a result of the chaos in the financial markets over the quarter, we've taken impairment charges of $44 million pre-tax associated with investments we believe to be other and temporarily impaired. This represents just under 0.8% of our investment portfolio.

Net unrealized losses at the end of September 2008 were $82 million compared with unrealized gains of $42 million at the end of 2007. Out of the total impairment charge of $44 million pre-tax, $34 million relates to bond holdings in Lehman. We've written our subordinated debt Lehman down to zero and our senior debts down to a market value of less than $0.13 on the dollar, inline with current market pricing for such securities. Our ultimate recovery may exceed current market value.

To confirm our investment strategy, our portfolio does not complain any direct investment in real estate collateralized debt obligations of common equities. We continued to maintain a high quality, diversified portfolio with 46% invested in U.S. and foreign government backed securities, including treasury stock, agency debentures and agency CMBS. The portfolio has an average credit quality of AAA and the average duration of 3.5 years. Please refer the slide 14 of the earnings slide presentation for the breakdown of our portfolio by assets type.

Our investments in funds of hedge funds have also been materially impacted by the upheaval and de-leveraging in the financial markets and by extraneous factors such as restrictions on short selling.

Performance was down by 7% or $42 million in the quarter and 8% or $48 million for the nine months. By contrast, the S&P 500 was down nearly 9% for the quarter, and 21% for nine months. The fund of fund conservative index is down by over 7.5% for the quarter and down by just under 9% for the year-to-date.

We are actively evaluating our allocations to our funds of hedge funds holdings and are considering other opportunities available to us under the prevailing market conditions.

I'll now turn to the highlights from our operating segments. Our property reinsurance segment had a combined ratio of 146% for the quarter compared with 69.1% for the same period in 2007. Hurricanes, Ike and Gustav account for 89 percentage points of the combined ratio for the quarter. On a year-to-date basis, our combined ratio is 93.4% compared to 71.9% in 2007, with the hurricanes adding 30 percentage points to the combined ratio for the current year.

Gross written premium of $153 million for the quarter and $508 million for the nine months is inline with the comparable periods in 2007, if you exclude $12 million of reinstatement premiums in respect to Hurricane Ike.

Turning now to our Casualty Reinsurance segment, the combined ratio for the quarter improved to 90.4% from 101.7%. Improvement in the combined ratio is due largely to favorable developments from prior years and prior period premium adjustments, particularly in our U.S. casualty line. On a year-to-date basis, the combined ratio has improved to 92.2% from 94% in 2007.

Gross written premium have increased marginally in the third quarter. However, in the nine months gross written premium decreased by 16% over the same period in 2007, reflecting our response to the prevailing market conditions.

Our International Insurance segment reported a combined ratio for the quarter of 119.4% compared with 81% for the same period in 2007. Losses associated with hurricanes of $46 million, net of reinsurance recovered on reinstatement premiums accounted for 29% of the combined ratio for the quarter. The remaining increase in the combined ratio is attributable mainly to a $22 million reduction in reserve releases compared to the third quarter of 2007.

On a year-to-date basis, our combined ratio was 97.9% compared to 84% in the same period in 2007. Gross written premium was up by 40% to $181 million for the quarter, reflecting the incremental contributions from business lines such as financial institutions, professional indemnity and excess casualty insurance which have been developing over the past year.

Our U.S. Insurance segment reported a combined ratio for the quarter of 172.1% compared with 97.3% for the same period in 2007. Hurricane losses of $15 million accounted for 63 percentage points of the increase in the combined ratio.

The current period has also seen reduction in reserve releases from $3.5 million in the third quarter of 2007 to less than $1 million this quarter. For the nine months, excluding the impact of the hurricanes, the combined ratio has improved to 101.4% compared to 104.6% for the same period in 2007.

Gross written premium on a year-to-date basis was increased 3% when compared to the same period last year, as the book continues to be reshaped.

I'll now talk briefly about our liquidity and capital structure. We continued our strong positive cash flow from operations of over $442 million for the nine months. In addition to $5.9 billion of cash in invested assets, which are predominantly liquid within our fund of hedge fund investments, which are subject to some limited redemption restrictions. We maintained high levels of liquidity with modest levels of long-term leverage in our balance sheet and we are not dependant on external sources of short term funding.

Our debt to capital ratio at the end of September is 8.6%, reflecting our limited reliance on borrowings. This ratio is up slightly from December 2007 as a result of the impacts of the hurricanes and unrealized losses from our investment portfolio.

As a reminder, our debt is in the form of $250 million of senior loan notes expiring in 2014. Our total debt to total capital ratio is 22%, which would include $419 million of perpetual preference shares.

Lastly, I would like to update our guidance for 2008 based on our experience year-to-date and expectations for the fourth quarter. You'll see an updated certain metrics on page 15 of the slide presentation. We anticipate the total gross written premium will remain within original guidance of $1.8 billion, plus or minus 5%.

Our combined ratio is being revised to a range of 92%... 96% as a result of the hurricane driven loss activity in the third quarter. Volatility in the financial markets is expected to continue throughout remainder of the year. And as a result, guidance for investment income has been revised to a range of $160 million to $205 million, with fixed income and short-term investments expected to contribute $230 million to $245 million. And funds of hedge funds expected to contribute losses of between $40 million and $70 million. This latter range is very difficult to predict, given the high market volatility.

Our tax rate is being revised to a range of 14% to 17% as a result of the distribution of the hurricane losses within the Group. The assumed cat load has also been revised $235 million for the year, including $35 million for the fourth quarter, reflecting our hurricane losses.

Operating return on equity is in the range of 8% to 11% for 2008, assuming no more loss experience for the remainder of the year.

In conclusion, our underwriting business in the round has performed satisfactorily. The quarter's results are reflective of recent events. However, I'm confident in the long-term performance of our diversified business models and the strength of our balance sheets. Coupled with the high levels of liquidity, I believe we are placed in a strong position to benefit from opportunities which are likely to present themselves over coming quarters.

And with that, I would like to turn the call back over to Chris.

Christopher O'Kane - Chief Executive Officer

Thanks, Richard. I'd now like to comment on current underwriting conditions and the implications of the ongoing financial prices on our business. Further detail is set out in slide 16.

What sets this earning's call apart from every other one we presented since our first call as a public company in February 2004, is that I believe it is possible from the first time to be hopeful about general upturn in market fortunes.

To be hopeful is not the same as to be completely persuaded that a general market correction has arrived. And I think it is worth spending few moments considering the reasons to be cautious versus the reasons to be optimistic.

In almost 30 years in this industry, I've witnessed five soft markets and four market corrections. All the corrections have certain features in common. First, there had been a period of several years of low premium rates and high attritional losses. Second, some company failures occurred, however it was with the withdrawal of capital.

Third, a cataclysmic event or events such as asbestos and pollution in the 1980s, hurricane Andrew 1992 or World Trade Center in 2001.

Fourth and finally, a widespread willingness by insurance industry management to put up prices even with results in the loss of business. I would now argue that only one or two of these preconditions thus far have been even partly met. Of course, we should be aware of expecting future to be invariably a repeat of the past. There are some additional features this time, which may allow a correction to occur for different reasons.

For example, the typical P&C insurance, return on equity will see about a 50% contribution derived from investments. This is what allows combined ratios in the 90s to produce satisfactory returns.

Today, the investment side is not contributing at these levels and the immediate prognosis for investments is uncertain at best. This puts increased pressure on the underwriting side to contribute more and I feel there is an increasingly widespread recognition of the need to move back to higher premium rates throughout the industry. The next few months will show us whether this will indeed be the case.

My personal opinion is that this will happen in some lines of business, most likely dominated by property reinsurance and insurance of first then ultimately expanding into causality lines.

There is also this time a second set of considerations around hurricane losses. By the way, it is convenient to classify hurricanes on the 1 to 5 Saffir-Simpson scale, it's important to note that wind speed is one piece of the puzzle when analyzing the loss potential from a storm.

By definition, a category two storm has sustained wind speeds of between 96 miles and 110 miles per hour. While it's true that Ike was a category two storm under this definition, Ike carried storm-surge characteristics of the casualty four storm.

According to NOAA, Ike's storm-surge rate is five on a scale of 0 to 6 just before landfall. This was about the same destructive potential as Katrina had at its landfall. In addition, Ike was significantly larger than Katrina.

Ike's tropical-force winds extended 274 miles, which was 30% larger than Katrina and its hurricane-force winds extended 115 miles, which was 10% larger than Katrina. As a result of its shear size, Ike's destructive force penetrated much deeper inland than what would typically be expected from a category 2 storm. As a result, even clients in non-coastal states were impacted by Ike.

Significant and broad loss activity for hurricane Ike has reminded the market that U.S. cat exposed property is once again been written at prices which are at unacceptable lows. I expect that the pattern of rate reductions that we've seen since 2006 has ended. I expect rates to be flat going into the year end, and to increase by 10 to 20% by the middle of 2009.

Thirdly, we're witnessing the discomfiture today of two major competitors who previously enjoyed excellent reputations and very good financial strength ratings. Many of our clients are telling us that they not feel we made a fundamental risk management error in allowing so much of their business to replace with one carrier in particular, despite that carrier's impressive ratings and balance sheet.

They are saying that the risk of excessive concentration in a single counterparty was not justified by the quality of that counterparty's balance sheet. We sense that there is a return to the subscription market, particularly evidenced in financial and professional lines, in construction liability and general liability, in aviation and even in major account property lines.

Commitments of $100 million to $500 million previously with one carrier are now being offered to three or four or even as many as 10 carriers. This process, which constitutes sound risk management, will ultimately lead to significant price increases. We should bear in mind that at this stage, we're paradoxically in reverse, with significant rate reductions being offered by our distressed competitor to counter the threat of lost business.

So, what is all this means for Aspen? There is a broad and narrow way to answer that question. In the broader sense, our 2009 business plan expected and continued decline in rates. Following the events of September and October, we have revised this up, something closer to flat rates overall with some lines expected to deliver sizable increases.

As you know, we've always believed in capital management, which means allocating capital quickly to emerging attractive opportunities and withdrawing it as quickly as necessary when the returns begins to deteriorate.

Currently, we see significant opportunities in certain financial and professional lines, in financial and political risk, excess casualty, offshore energy property, and to some extent in property reinsurance and aviation insurance.

More narrowly, the ongoing financial crisis and the deepening recession have caused us to look again and in a penetrating way at our financial and professional lines exposures. As you'll recall, we only began writing these lines within the last year or 18 months, and therefore we've very little exposure to the problems.

Our entry into most of the lines, who played after the crisis have become apparent and so we have moved cautiously and with the benefit of very significant rate increases already. Although, we have moved cautiously thus far, we now expect to enjoy very attractive underwriting conditions in near future and see considerable scope for expansion in these lines.

Another consequence of the prices I believe is a real likelihood of increased regulator oversight of our industry. And those common companies which have placed a premium on enterprise risk management and transparency as Aspen has done, will be well positioned to respond to the challenge.

We are not blind to the challenges that are looming. On the last call, I talked about the inflationary threat which has certainly receded at least for the present. Today, we're at the onset of a recession which many competitors anticipate will be significant and long drawn out. This will produce increased claims in causes such as fraud and arson. In addition, these businesses will have further pressure exerted on them as the margins resulting in a rethink of interims needs.

Aspen's underwriting teams have successfully faced these challenges before, and we will be vigilant in protecting our shareholders from these recessionary threats.

In conclusion, at Aspen, we found ourselves in a fortunate position of enjoying excellent relationships with our clients, rich on balance sheet and a diversified business model which makes us really exceptionally well placed to take advantage of opportunities as they emerge in 2009.

And with that, I will turn the call over to Q&A.

Question And Answer


Thank you. [Operator Instructions]. Our first question is coming from Jay Gelb of Barclays Capital.

Jay Gelb - Barclays Capital

Thanks very much and good morning. Chris that was a great review in terms of what it may take to change the cycle here. I believe one of the things you mentioned was low rate and high attritional losses. It seems it was maybe different about the cycle is that the underwriting results are still overall pretty solid, including what most of would argue is still some excess loss reserve positions for the industry. Do we need to see loss reserves start to become more deficient for the industry with higher calendar year underwriting losses before we can call it a turn?

Christopher O'Kane - Chief Executive Officer

Jay, I mean... I think it's incredibly difficult one to call. And I agree with you, that's why I was really trying to say there are reasons to be cautious and there are reasons to be optimistic. And if you want to put it prudently, things happened in that bad so far for most people, notwithstanding the depletion of returns on the investment side. There probably is maybe another year worth of over reserving within the industry as a whole, maybe 18 months. I think the first factor is you're going to see that trying to being leached out, maybe that's easier to do than push for rate increases, which would say may be we see the beginnings of the turn this year-end and may be it begins to develop and strengthen over the next 18 months or so with may be a hard market coming more in let's say 2010 rather than 2009.

I think it's very, very tough to call. The other side is how long is the crisis investments markets going to carry on. I mean if that recovers, it eases pressure on underwriting. If that intensifies, it increases pressure on underwriting. So, I feel I don't want to sit on fence here but I feel things are definitely looking up compared to what they were, but it might be a little bit early to sound the trumpet and say the hard market is with us.

Jay Gelb - Barclays Capital

Okay. That makes a lot of sense. And then secondly, can you talk about the exposure to the hurricanes, you saw it on the property reinsurance, the property insurance, the international to the offshore? When you look back in terms of the risk management process, is Aspen comfortable that it wasn't accepting too much exposure in too many different parts of the franchise?

Christopher O'Kane - Chief Executive Officer

Yes. I am totally comfortable about that. I mean clearly, we operated insurance and reinsurance and different lines within, but management is holistic. We have... I think something over 20 people in capacity risk management and their job is to collect bad debt, they get it into one place and make sure give us ability to look whatever we've done.

I felt that something in the region of 1% of the hurricane loss of significant size from the property reinsurance account what... above what expected. I mean it's what we capitalized to take. And I think probably we got a bit less than that. So I think that's a good news event.

And then on the insurance side, $7.5 million on Gustav and Ike from E&S property, I think that's very respectable, considerably more respectable than what I was reporting three years ago in Katrina or in Wilma. You then got the marine entity stuff. That's reinsured excess of $20 million, up to $100 million and this is quite a big loss for that industry and that's the one. I'm not saying we've too much of it, but it's the one where I think we all need to take a close look at these offshore rigs and how much money you need to insure against wind. I was still taking that look, I mean I would say I'm cautiously optimistic there that we're going to see rate increases of 50%, maybe 60% as they come up for renewals in the last 12 months or so.

And I think there are, one of our competitors who probably have been shocked, our gross loss from that stuff is around by $50 millionish, 20 odd out to reinsurance and I think we've got some competitors, we've got 3-4 times of that amount of gross loss who maybe overacting. But, we watch that carefully and if we're convince that the price is right, we're going to expand that. Just a few doubts as to whether price is absolutely right, is yes.

Jay Gelb - Barclays Capital

Okay. Thanks for that insight. And then secondly for Richard, can you give us a bit more insight maybe on what if... I don't know if you have for the hedge fund to funds what the performance is so far in October or if not maybe with the index did and then it sounded like you are reviewing the allocation to that asset class when will that review be complete?

Richard Houghton - Chief Financial Officer

Okay, Jay, good morning. I'll start off with October performance; we are not at the end of October of course, up to the end of last week it looked like we were down something like 200 points. But I will say the market have some recovery for this week. So as has been the story for most of Q3 and before, really rather difficult to predict where we will end up. But that's the performance in October, where we are down, but the market is going back up again. So, we should see, we should track it very carefully.

As regard what we're doing in the asset class and what we're doing in alternatives generally, we have pulled a redemption notice into our fund managers in respect of 40% of our funds of hedge funds holdings. So that could be about $200 million. And we've done that actually in September and expect the cash to come through from that at the beginning of January.

And we're thinking about our policy in relation to the remainder of our holdings. The position we'd very much like to be in is to be flexible to respond to the opportunities that are appearing in the markets. I think some of the investing models and opportunities are changing on the way to take best advantages and this is to stay very close to our advisors and the markets and response of all these [ph] studies, clearly a major feature what's going on at the moment. And I think the opportunities are available to us. We'll change over next two or three months. We're watching very carefully. And I think it will be some very interesting places to put our money as we move into 2009.

Jay Gelb - Barclays Capital

Okay. And that performance number you gave so far in October is that for Aspen's performance or the index?

Richard Houghton - Chief Financial Officer

That's Aspen. I think the index is tend to be monthly.

Jay Gelb - Barclays Capital

Okay, all right. Thanks very much.

Richard Houghton - Chief Financial Officer



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

Alain Karaoglan - Banc of America

Good morning. I have a couple of questions. The first one on the casualty reinsurance business and the U.S. insurance business, your adjusted accident year combined ratio for the casualty reinsurance business is 105.7 in this quarter and on the U.S. insurance business also the same. Why is it so high and what had happened in the quarter?

And the second question relates to... is in terms of your outlook, you don't see the outlook on the excess and surplus improving going forward and given that one of that competitor... large companies in difficulty is a big player in that. And I was wondering what's your thoughts on that way? And on the professional liability business on that sheet, it doesn't seem to be a very attractive environment, yet you are growing it meaningfully and I realize you've hired a new team.

Richard Houghton - Chief Financial Officer

Okay. Well, I'll kick-off Alain and then I'm sure Chris will join in as well. On the casualty reinsurance, the combined ratio for the quarter, you are right, is not looking enough strong for the accident year. We've had a little bit of reserve strengthening. We recognized what's been going on in respect to the credit crunch and we look our reserves in that respect, I think I would point you towards the longer term loss ratios rather than any one particular quarter for casualty reinsurance in particular.

But, I think the ratio we are recording does reflect the strength reflected in that particular segment, and one would hope that the race would start to push up as Chris has described. So, not a great result for the quarter. It does reflect some very limited strengthening in respect of the credit crunch and losses that might arise from that and where we should see how that progresses over a multi-quarter view.

Alain Karaoglan - Banc of America

And once the dollar amount of the reserve strengthening, Richard in that plan?

Richard Houghton - Chief Financial Officer

$10 million.

Alain Karaoglan - Banc of America


Richard Houghton - Chief Financial Officer

And 20 U.S. insurance, I think you'll still think a transition in U.S. insurance. Combined ratio for the quarter is starting to improve year-on-year, but what we're short of at the moment is earned premiums. And our team that's looking out of U.S. insurance is starting to produce the GWP and you can see that increasing on a year-to-year basis. But they have an expense base to sustain and I'm expecting that to improve the GWP stock coming through from that reshaping.

Christopher O'Kane - Chief Executive Officer

Okay. Alain, I think the other part of your question... yes, I will take and that was first of all E&S property and probably I had both in the U.S. and then professional lines. Taking the E&S first, I am I would say hopeful for the medium term future, reporting on what I'm seeing about today I'm not so happy. I think a lot of the pre-conditions for a correction there, but actually what's happening is there is more competition as there is an effort to hold on to business by companies that might otherwise lose it.

So, actually rates are lower in many cases today than there were three months ago. And that's a paradox. It makes no sense. And I think, it's transient and I think it's going to stop quite soon. So actually rates are down.

If you look forward to year end, when does that process end, when do some sort of sense of pricing correctly return, maybe at year end, maybe in the course of next year. If you want to look out to the middle of next year, I would say the E&S arena ought to be seeing these rate increases too. It's just too soon to sound the bell on those.

I think the final part of your question... and correct me if I got it wrong here, I think it was about professional lines. That's something that we started doing about last summer. It's almost entirely UK business, little bit of it is Australian, almost nothing outside of the UK and Australia.

We had team because they had an unusual approach to this, the risk management business. And most guys doing this kind of... we provide couple of a smaller firms, maybe actuaries, maybe architects, maybe small firms of accountants. It's not the big stuff, the household names. And they really get close to the clients and they say who's interested in risk management, who is willing to change their business model, change the business practice, just try and run the business a bit more cleverly? Now oddly in the UK, that's just not something that's common.

And these guys have a certain network of clients that has been with them and like the treatment they get for quite a couple of years, more than a couple, quite a few years, over probably two different previous employers. And we know the performance of that book and that it outperforms general market. So, what we've really done is we got a team that's connected itself with it's own group of clients, risk managed business which outperforms the market and are completely comfortable with we've done the right thing there.

Beyond that, the general sort of commoditized professional lines in the UK remains competitive. I would say thought that the UK in general is further into the downturn and possibly closer to coming out of the other side than the U.S. market; prices went down that faster earlier. So, we may be beginning to see a turn there in 2009 as well, but without that turn, I'm not predicting significant growth in our UK professional lines.

Alain Karaoglan - Banc of America

Thank you very much.

Christopher O'Kane - Chief Executive Officer



Thank you. [Operator Instructions]. Our next question is coming from Dean Evans of KBW.

Dean Evans - KBW

Yes, I may have missed it. But could you give the impact of what reinstatement premiums were in the quarter on the top line?

Richard Houghton - Chief Financial Officer

Sure Dean. It's $14 million.

Dean Evans - KBW

Okay. And which segments... how do that breakdown by segments?

Richard Houghton - Chief Financial Officer

It's predominantly in property reinsurance; I think it's about $12 million in property reinsurance.

Dean Evans - KBW

Okay, great. Great, that was all I had. Thank you.

Richard Houghton - Chief Financial Officer

Thanks, Dean.

Christopher O'Kane - Chief Executive Officer

Thank you, Dean.


Thank you. At this time, there appear to be no further questions.

Christopher O'Kane - Chief Executive Officer

In that case, I think we can bring the quarter close. Thank you very much indeed for listening. Good bye.


Thank you. This does conclude today's conference call. You may now disconnect your lines. And have a wonderful day. .

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