Aspen Insurance Holdings Limited CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: Aspen Insurance (AHL)
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Aspen Insurance Holdings Limited (NYSE:AHL) Q22012 Earnings Call July 26, 2012 9:00 AM ET


Kerry Calaiaro - Senior Vice President of Investor Relations

Chris O'Kane - Chief Executive Officer

Julian Cusack - Chief Financial Officer


Mike Zirinsky - Credit Suisse

Sarah DeWitt - Barclays Capital

Amit Kumar - Macquarie

Max Zormelo - Evercore Partners

Dan Farrell - Sterne Agee

Joshua Shanker - Deutsche Bank

Brian Meredith – UBS


Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aspen Insurance second quarter 2012 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 session. [Operator Instructions]

Thank you. I would now like to turn the call over to Kerry Calaiaro, Senior Vice President of Investor Relations, Aspen Insurance. Please go ahead.

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 June 30, 2012. This press release as well as corresponding supplementary financial information can be found on our website at

This presentation contains, and Aspen may make, from time-to-time written or oral forward-looking statements within the meaning under and pursuant to the Safe Harbor provisions of the U.S. federal securities laws. All forward-looking statements will have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For more detailed descriptions of these uncertainties and other factors, please see the Risk Factors section in Aspen's Annual Report on Form 10-K filed with the SEC and on our website.

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

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

Chris O'Kane

Thank you, Kerry and good morning, everyone.

The second quarter was another strong quarter of Aspen with book value of $40, up 3.7% in the quarter and an annualized operating ROE of 13.6%. Both insurance and reinsurance were profitable at low loss activity than prior year releases. We recommenced our share buyback program during the second quarter and completed $25 million worth of repurchases.

I am also proud to say that in the year of our tenth of the anniversary of the company, we have surpassed the milestone of $10 billion of assets. I am now going to turn the call over to Julian to review the financials and then I will later comment further on the business performance as well as the market economy. Julian.

Julian Cusack

Thank you, Chris. This quarter, we reported total comprehensive income of $112.3 million, up 63% from Q2 2011. Results include strong contributions from insurance and reinsurance underwriting and from investment activity. I will address each in turn.

The major driver of improvement in our insurance segment profits was 25% increase in gross within premiums. The increase in premiums was distributed across most lines with 54% from property mainly in the U.S. In terms of underlying performance, we think a good metric to look at is accident year loss ratio, ex cats.

We calculate this by taking prior premium developments and calculated premium and also the net on premiums and cat losses on prior reserve changes and also the net losses. On this basis, the accident year loss ratio for the insurance segment has increased marginally from 59.5% to 63.1%, which is due to a higher loss ratio in financial and professional lines compared to a year ago offset by improvements in most other classes.

Prior year releases and positive premium adjustments in the quarter benefits the insurance combined ratio by 8% versus 2.1% a year ago.

The reinsurance segment has virtually no cat losses for the quarter as a similar result to Q1. There was little overall change in gross written premiums year-on-year and underlying improvements in the accident year loss ratio ex cats from 64.1% to 56.2%.

Casualty reinsurance gross written premiums for the quarter did rise 49% year-on-year, principally due to premium adjustments on prior years and therefore are not indicating any material increase in casualty reinsurance exposure.

Total operating expenses were $84 million in the second quarter, an increase of $13 million over Q2 of last year of which $10 million is due to performance related compensation provisions. As Chris will discuss in more detail, our U.S. insurance business has gained traction and has continued to grow in to its expense base.

Our investment team had a successful quarter. Total annualized investment return for the quarter was approximately 4% including the effect of interest rate swaps. This includes net investment income of $52.8 million, net realized and unrealized losses in the income statement of $10 million and an increase in unrealized gains shown in OCI of $36.6 million.

Our fixed income book yield in the quarter was 3.19% down from 3.64% a year ago and down from 3.31% at the end of Q1. We continued to keep our fixed income portfolio average duration at around three years excluding the impact of our interest rate swaps which reduce duration by approximately 0.6 for the year.

Our small equity portfolio total return was flat for the quarter which was as a good result during its benchmark by the Morgan Stanley All Country World Index was down 5.6%.

We continue to actively manage our capital position and our assessments of excess capital has increased this quarter. We took advantage of the favorable interest rates in advance in April to issue preferred shares and from that proceeds were 155 million, which combined with strong operating results and an increase in unrealized gains on our available for sale portfolio also contributed to our strong capital position.

In the second quarter, we conducted open market repurchase program for $25 million at an average price per share of $28.05. We have $167 million remaining of our existing repurchase authorization. Subject to market condition, we are likely to continue the open market program for the remainder of the year. Buying back our shares from remains one of the most attractive short term value creating options and after the U.S. wind season we will review the magnitude and the duration of the program, again taking into account our assessment for capital needs for 2013 and beyond.

As we have stated previously, we will continue seek to return capital to shareholders if we are unable to find sufficiently attractive opportunities within our business.

We have made minor revisions to several of our guidance for the fully year 2012. We have raised premiums to $2.4 billion plus or minus 5% from $2.3 billion and lowered the effective tax rate for the full year to the range of 6% to 10%. The cat load for the remainder of the year is $135 million which reflects a slight upper revision.

Over to you, Chris.

Chris O'Kane

Thanks, Julian. I will first discuss the rate environment and then our underwriting results. We do continue to see a general upward trend in rates. However, the market is not embracing rate increases in a significant and meaningful way in all lines and geographies.

For the first six months of 2012, we achieved an average rate increase of 5% on our yields across both segments with 4% in insurance and 6% in reinsurance. Most lines show modest to encouraging rate improvements but unfortunately the number have yet to move significantly upwards.

In reinsurance, following the strong improvement at January 1, renewals we were hoping to see at same magnitude of rate increase continue for the June and July property renewal season. Indeed there were rate increases in June and July for (inaudible) property lines but they were more modest than we had hoped for. Rate increases ranged from 0% to 30% with an average of about 5%.

It is important to note though that the January 2012 rate increases, followed lower levels of rate increases in 2011, whereas the mid-year 2012 increases were in top of strong increases in mid-year 2011. Thus over the two year period, the rate increase have followed a similar trajectory. For the U.S. non-cat property business, the reinsurance segment is achieving rate increase of about 5%, a level of increase reflects improvements in primary rates.

On the U.S. casualty side, the general improving trends we saw earlier in the year are continuing. A number of our (inaudible) in the U.S. general liability E&S market are seeing increasing rate trends. We are also seeing some firming of underlying worker compensation rates flowing through and (inaudible) by more workers compensation catastrophe cover. The main challenges of the prolonged diminished level of investment return, the sluggish economy and the availability of capacity. On the international side, casualty reinsurance markets remained more challenging.

In specialty reinsurance, rates were generally flat. We expect a full effect of catastrophe control event will be felt in January 2013 in terms of upward pressure on marine rates. Specialty reinsurance aviation rates are holding steady but space rates are challenging.

In our insurance segment, there are strong rate increases in those loss affected lines such as property, marine home, marine energy and marine liability. Geographically, the U.S. P&C markets are the most encouraging and Europe on standard lines of business rate increases have muted both in the number of our most specialized underwriting lines, we are getting good levels of rate improvement.

U.S. cat affected property insurance business is improving and we are achieving low double digit increases on loss effects accounts and peak zone win accounts. The non catastrophe property exposed, we have obtained increases in the low single digit range.

The E&S casualty market in U.S. is seeing encouraging early indications of firming with improvement in rates as well as (inaudible) additions. We continue to see accounts are moving back from standard lines carriers to the service lines markets as the standard lines carriers are non renewing these tougher risks.

These trends can’t have a much more profound than might be evident at first glance. Previous market trends have been characterized by standard lines carriers returning to their core strengths and rejecting non standard risks. These risks are then offered to the surplus lines carriers who tend to push up prices and improve terms and conditions in the face of increased demands. As a result, both the admitted market and the excess & surplus line carriers benefit from the process.

We are also noticing that the excess casualty carriers are moving up attachment points, which is another precursor to hardening market. By contrast, the U.K liability insurance market remains very challenging.

Now, let’s take a look at our underwriting performance beginning with insurance. Gross written premiums in the insurance segment rose 25% from year ago. This is primarily the result of the investment we made in our U.S. insurance operation where we made a significant effort to build and strengthen our producer relationships resulting in increased showing of good quality business. In addition, this is being supported by good levels of price increases across the number of U.S. property lines.

As a result, our U.S. based insurance teams achieved gross written premiums of $134 million in the second quarter with a number of our classes making strong contributions of underwriting profit in the quarter. In addition, this is the third consecutive quarter with year-on-year improvement in the loss ratios for our U.S. insurance teams. We are excited about our continued progress in U.S. as the investments we made over the last several years helps support a profitable growth.

For the second quarter 2012, the teams with the their international insurance lines with the gross written premiums of $233 million with a strong performance from our marine, energy and transportation sub-segment in particular where the rate environment is favorable.

We are continuing to grow our premium base in profitable lines where we are commensurate with the risk we are assuming. Let me just read that again. That didn’t come across quite right.

What I am saying is that within insurance, for areas such as kidnap and ransom, we are getting profitably paid for the risk we are taking. We are happy with those. That’s what where we are increasing our exposure.

We are also scaling back in areas where we do not believe the risk that were traded and acceptable. For example, in areas such as the financial and professional lines book especially as it’s exposed to the Eurozone.

Moving on to our insurance segment, I am sorry, our reinsurance segment. Reinsurance had an excellent quarter with a combined ratio of 79% compared with 105.3% in the catastrophe affected second quarter 2011 with premiums in line with the same period last year.

Property reinsurance performed strongly in the quarter with good contributions from both our cat and non cat lines.

Our casualty reinsurance book was also profitable, a good result given continued challenging market conditions, although there are some signs of improvement. As a result, there was minimal growth in the quarter excluding the prior year adjustments and we are continuing to actively manage the cycle.

Finally in specialty reinsurance, our London based teams had another strong quarter with good results in both marine and in aviation.

As I mentioned at the beginning of the call, our book value per share has now hit the $40 mark and total assets have passed $10 billion. You may not know that our company turned 10 year old, as of last month and then at the time we have built a brand and booked a specialty insurance and reinsurance marketplaces, it is highly attractive to our clients and our brokers.

Today, we have approximately 900 employees in eight countries. Our diversified approach allows us to have great showing of business and obtain critically important market intelligence about what is going on in all the lines of business in which we want to participate.

I have said to you before that I think the central task of underwriting management is to allocate capital to those areas of the business where pricing is the most attractive and seek to reduce or withdraw that capital as the opportunity proceeds.

Today, we have the brand, the distribution and the capitalization to benefit from any improvements in large sections of commercial P&C markets throughout the world.

We are certainly not enjoying a hard market as yet but we are taking advantage of those lines where prices improve and we expect to be able to expand selectively on a number of our underwriting positions in the next 12 months or so.

There has inevitably been a great deal of discussion in the marketplace in the past few months about property catastrophe pricing, especially in Florida and this is certainly an attractive business for us. However, property catastrophe excessive loss represents only about 12% of our expected premium writings for this year and there are many exciting opportunities in the 88% of our premium which is not property catastrophe excessive loss.

As we have said on many previous calls, to the extent we are able to put our capital to effectively to take advantage of this smoothly otherwise we will continue to return capital to shareholders.

Thank you for attention. Julian and I are ready to take any question you may have.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Mike Zirinsky from Credit Suisse. Your line is now open.

Mike Zirinsky - Credit Suisse

Thanks, good morning.

Julian Cusack

Good morning, Mike.

Mike Zirinsky - Credit Suisse

Chris, last quarter, I recall you saying that 40% of the business was well rated and had received rate increases, I believe, in the 8% range. Would you be able to update us on that metric for this quarter?

Then also, curious in regards to the new business growth, what percentage of that due you think is “well rated”?

Julian Cusack

Okay, I am not updating that particular 40% metric but I will tell you what we are excited about and where we think there is opportunity. Starting in reinsurance, as you know sadly, the casualty reinsurance area is not an ordinary expanding but it is pretty tough. We have written much better price business in the property reinsurance area particularly in the loss affected world in Asia.

Sometimes, we want to see even more rates so we increased the prices but we can’t back the exposure because we thought that was the best way to maximize returns but in general that’s looking better. I think that’s a slow burning fuel. I think what’s happening in Asia in particular is new catastrophe models are being worked on and developed they are going to hit the market later this year and next year and the kind of prices that seems to be, will be higher through our Singapore operation we will be taking advantage of that.

Also, pretty excited about some of our guidance for specialty. That’s where we write things such as marine and aviation, also crop. We are not in the crop business this year and we are pretty happy about being in the crop business but next year is a whole other story.

Usually there is a reaction to what’s going on. There is payback, there are opportunities for growth, and well, I am not saying we are going to do it but certainly are going to be looking at that. So I feel upbeat for that for next season, by the way.

Just so you know, these crop problems are not just the United States. You see them in Latin America too. It is not limited to just one country.

That’s probably good for reinsurance. On the insurance side, I have talked a little bit already about the U.S. operation. We seem to, when the job is (inaudible) and the working places they handle books of business of $200 million, $300 million or $400 million. We said we don’t want to be handling $200 million, $300 million or $400 million. You handle the amount that (inaudible) at the pace that can come onboard and now some of these guys are doing $20 million, $40 million, $60 million, $70 million books with growth.

They have relationships with producers. They have established an Aspen brand and they are not cutting corners, not cutting rates. I like what they are doing. Their numbers are good. Some of it is longer term lines so we have to watch and see. We are not going to see reserve of leases after some time but we like what our U.S. guys are doing.

In international side, as I said on the call, marine looks good, marine liability looks good, little bit better, not god enough yet in hull. I think those are the main areas that I feel are improving. The credit risk and political risk, there is opportunity and there is danger in that. It depends on what day it is. I think there are people occasionally who will be buy deals that look very well priced but there is a lot of fear particularly and in connected to Eurozone and we are running away from that. To be honest, it’s too hard to tell. So we would rather have no exposure. So I hope that helps.

Second part of your question. I don’t believe we are putting any business on our books anywhere that doesn’t make sense. It’s all sensible business.

Mike Zirinsky - Credit Suisse

Okay, that’s helpful. Lastly, regarding the investment portfolio allocations. Is the strategy to continue staying highly rated in regards to rating agency ratings?

Julian Cusack

Broadly speaking, yes. We continue to explore the options as presented by high yield and it’s quite possible that we will take a position in high yield sometime in the not too distant future and that would marginally reduce the average credit cost of our portfolio but that’s really what’s majorly not the consideration at the moment.

Mike Zirinsky - Credit Suisse

Okay, and sorry just a quick follow up to Chris’s comments. So if you went again into crop insurance next year would you need to hire a new team or is that something you guys could underwrite using your existing underwriters?

Chris O'Kane

Well, I was thinking more of our reinsurance when I made this remark. So I don’t really just want to get into crop insurance business. Generally speaking, in the U.S. crop reinsurance is not a great business to be in. Every so often there is a blip in the market and you get an opportunity few years ago and we don’t know how this one is going to pan out. Yes, but if it carries on the way it is looking, I think there is going to shortage of capacity for reinsurers and we have the expertise already to do it.

Just to be clear, by the way, we do have some crop exposure elsewhere. It is not big but Latin America has some events this year too and there is some central growth there next year. Again, we are fully resourced to do that.

Mike Zirinsky - Credit Suisse

Thank you for the color.


Your next question comes from the line of Sarah DeWitt with Barclays. Your line is now open.

Sarah DeWitt - Barclays Capital

Hi, good morning. In the insurance business, I was wondering if you could just talk about broadly how you are achieving such strong growth for the past two quarters, given what’s still probably a pretty competitive market.

Julian Cusack

I am happy to do that although for some of you, I maybe repeating what I said to the last question. Most of this growth is coming in the U.S. and as you know very well, as you will recall, two to three years ago, now we invested very significantly in getting admitted market capability and getting better claims, people better IT systems, generally establishing the brand.

We also had 38 new underwriting teams that joined along the existing property team. We have nine teams in all. We said, guys, you know, there is no rush here. You handle very big and very successful books at your previous places of employ. We don’t need you to do that. We don’t need you to try and take business from your previous employers.

What we need you to do is set forth a value proposition to your brokers, your agents, your clients based on service, consistency of underwriting, based on claims handling knowledge and ability and just generally be true to the people that you are. Sensible underwriting acting consistently in the market.

Now, that’s a slow way to this and we have been doing it for two, three years. What we are seeing this year, is it is finally beginning to pay off. We are finding that accounts these guys may have written in the past have encountered some kind of an obstacle with the existing carrier.

Often it’s about service, more than price and they will come to them and say that didn’t happen like that when you were handling it. Will you like to take a look at it? Now we do take a look. We are not competing on price particularly. We are just kind of there saying we offer a fair price and we offer good service.

That’s the offering, if you want to take it. We are finding professional lines, it is working, in the assurity area, we only got license. We got a team listing in December last year. So we had that team onboard doing all the marketing for about a year before. This year they got some momentum. In marine, we have got some absolute first class guys in that area and that’s a very interesting line of business and again, this year, they got the momentum.

So I think what you are really seeing is not, it looks like explosive growth suddenly. It is actually the Q2 2012 stage of the process that began about three years ago and I hope that makes sense to you.

Sarah DeWitt - Barclays Capital

Okay, and how are just the U.S. insurance business now and how large you expect it to become overtime?

Julian Cusack

This year, we could do around $400 million of premium. That’s sort of the figure. Over time, it depends on how the market helps us. Leasing this operation can be breakeven profitable in the $500 million to $550 million area. Maybe we can achieve that next year and maybe it will be the year after.

The thing here is not to push it too fast. We want to stay disciplined and as the opportunity there will expand, and if the opportunity is not there we will stay at the 2012 size for as long as it takes to find the opportunity.

Chris O'Kane

Just like to add one observation of your former question about the growth in the insurance segment premium year-on-year. One of the major contributors to that is actually from a program that we acquired in the close of last year that was zero premium contribution in the contribution in the corresponding quarter last year.

Now program business is now contributing about $30 million in this quarter. So that’s approximately half of the growth in the quarter as coming from that one source.

Julian Cusack

Right, and that is the U.S. program, by the way.

Sarah DeWitt - Barclays Capital

Great. Thanks for the answers.

Chris O'Kane

Thank you, Sarah.


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

Amit Kumar - Macquarie

Thanks and good morning. Two questions.

Firs of all, just on capital management. Just listening to you talk this quarter and comparing your commentary to the past quarter, I do detect an additional shift. I am wondering did you plan to use that outstanding buyback for 2012? Does it get completely exhausted this year? Did I infer that correctly? Or did I miss something?

Julian Cusack

I think the I would characterize it is, and this is, you are right that there a change here, but actually I did in the last quarter rather than this quarter and changes but from time to time that’s on an opportunistic basis we are going buy back shares but last year, the lot of cat losses, the capital was a little depleted. We were in the buffer zone.

We have had a few strong quarters and the capital position is very strong. We don’t, as we said too many times, like doing big buybacks in the wind season but if we have the kind of performance over the next couple of quarters that we have had over the last couple of quarters, then we are going to have a really lot of capital.

That not a sustainable position. I would love to put it to work in the underwriting business and if we can profitably do, we will. I think it is far more likely that there will be a position of our capitalization that needs to be rectified. I cannot give you a date nor a quantity nor any of the details, you know very well, on that, but you have got the sentiment, I hope.

Amit Kumar - Macquarie

Got it, I know that’s helpful. The other question I had was, I think in the opening remarks, you mentioned about why the underlying loss ratio had ticked up because of financial and professional lines. Maybe just expand on that. Are there some specific factors you are noticing today or did something change in that?

Julian Cusack

First of all, there is nothing we are concerned about there. I characterize it as a quarterly fluctuation. It is related to a slight up tick in the claims experience zone on credit and political risk accounts, rather than more general and if fact, if you look at the half year, as opposed to quarter results and adjust for the fact that we had the cost of the Concordia loss in the first quarter and the underlying accident year ratio excluding cats and excluding cost of Concordia, then actually there is a margin improvement in the first half year.

So it is certainly nothing to be concerned about and we regard it more of a fluctuation than any thing that’s systemic.

Amit Kumar - Macquarie

Okay, that’s helpful. That’s all I have for now. Thanks.

Julian Cusack

Amit, thank you.


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

Max Zormelo - Evercore Partners

Hi, good morning, this is actually Max Zormelo on Vinay’s line. Congratulations on a good quarter. A couple of questions.

My first question is on the PMLs. I was looking at the EPMS for this quarter versus last quarter and I noticed that if come down quite a bit and wanted to get some color on that. It looks like virtually for all parallels except for U.S. wind for the one in 250 year, your PMLs have come down quite a bit, I am just wondering why that is?

Julian Cusack

Max, I think there is a couple of things going on here. I am going to start with Japan where the story basically is that in the two year we have probably halved our PML and we have increased our premium and I think that was the right thing to do. Now we could have increased the PML, increased the premiums still further. To do that we would have written pretty okay business but not the very best. So we took the bid.

It isn’t about driving the car at 100 miles an hour because you can get it up to 100 on the dial. It’s about driving the car at the right sort of speed at the condition. Japan, just on a sort of maximizing return on risk adjusted capital, downsizing PML and upsizing premium was the right way to go.

In terms of U.S. wind which maybe another you are thinking about, we did sink a few months ago, that the June, July renewals could yield 10%, maybe 15% more rate. In fact they were on 5%. So we were a little more cautious there.

This is not that it is bad business. It is good business but we didn’t think it was supercharged really good business. Elsewhere some of these areas, New Zealand, maybe Australia, to some sense Thailand, and places like they are probably not registering on the PMLs but our view is the day will come, the models need to be recalibrated.

We worry about New Zealand’s South Island just from a habit point of view and so we cut our exposure there but we are very in the market. We are aware of what’s going and if new models come up and they are accepted by clients and the brokers have the way to thrive the business, then we will back this model, we will increase it again.

It is not as simple as prices go up, right, more prices come down, right, less. It’s about just choosing your positions to get the best risk adjusted returns.

So I guess that helps.

Max Zormelo - Evercore Partners

Okay, that’s helpful. I have a couple of numbers questions.

First one is on the effective tax rate. I was wondering what the run rate maybe for 2013? Is it going to be on the 6% to 10% for 2012?

Then secondly, about the expense ratio ticking up this quarter. I wanted to know, looks like for the reinsurance segment, you have got the policy acquisition expense ratio running higher versus last year for the insurance segment for the upper term and admin expense ratio is running high. Just wanted to know, are these the new run rates going forward?

Thanks very much.

Julian Cusack

Okay, well let’s take the question on tax first. I think it is too early for us to give guidance for the 2013 tax rate but I think I could say that I don’t think it is likely to go any lower from the range that we are closing for 2012 at the moment.

On the acquisition cost in the reinsurance segment. There is, as you say, an up tick in the quarter. That is attributable to accrued profit commission on various reinsurance deals. So actually an indication of profitability in terms of those deals.

I now expect the acquisition ratio, as in the past, to continue to fluctuate a little quarter-to-quarter, mainly for those kinds of reasons.

In the insurance segment and in the Eurozone reinsurance, fair pricing expense are also up. Your question was, can we take Q2 as indication of run rate for the rest of the year. I think that’s broadly a fair thing to do. I think in terms of total pricing expenses, I think it is around $18 million this quarter and I think that’s a pretty good number to see in the number term future on a quarterly basis.

Max Zormelo - Evercore Partners

Okay, thank you.


Your next question comes from the line of Dan Farrell from Sterne Agee. Your line is now open.

Dan Farrell - Sterne Agee

Hi, good morning. Just a question on the cat loss for cats for the remainder of the year and Julian, I think, correct me if I am wrong, you said you had raised it moderately from where it was previously. I was wondering if you can talk about what drove that particularly given that your cat PMLs are coming down a little bit in most areas. Is there a change in your seasonality assumption or shall we think about your full year assumptions going forward, maybe being a bit higher?

Julian Cusack

It is the last really. I look back at what we said the cat load was for the three or remaining quarters in the year at last call. That was $150 million. Our revision, including a revision of the position in Q2 for that same period. So on a like-to-like basis, it is more like $160 million. So for the year, as a whole, it is an increase in $10 million.

Yes, I mean we have adjusted the seasonalization profile on wind losses to a certain extent. This is a combined all parallels estimate. So it includes contributions from around the world and it will talk to parallels and to be honest, a fluctuation of plus or minus $10 million this number is probably a noise as much as anything else.

Dan Farrell - Sterne Agee

Thanks, and then, just give more color on your reserve. I noticed another solid result in both segment. Can you talk a little bit about what lines are driving that and what active years?

Julian Cusack

Yes, sure. If you look at the insurance segment first, you have got a total release of $14.4 million and I would say that majority of that $9.4 million is from shorter tail lines, only a small contribution coming from longer tail lines. The shorter tail lines involved include credit, risk and terror property insurance and energy PV.

On reinsurance, the majority of the $14.1 million release is coming from non cat related other property lines. So again, short tail.

Dan Farrell - Sterne Agee

Okay, just one other question. On the accident year loss ratio that’s, I think, a reason for (inaudible) insurance segment, can you give a little more detail on some of the mix changes that are driving that in some of the lines that you might be growing that might have a higher loss ratio.

Then I am also trying to think, if there are lines that you are building in those early years, do you try and take a conservative stand for the initial loss tick and the outcomes of the lines you have developed?

Julian Cusack

Well, we do what you just described but that isn’t really accounting for the small uptick in the accident year loss ratio quarter-on-quarter. What we do is, we look at the performance on a sub segment level and we look at property, we look at casualty, we look at marine, aviation, we look at financial and professional lines and the first three of those, property, casualty and marine, are on that (inaudible) on the next year ex cats loss ratio,

They will have improvements quarter-on-quarter. The one that (inaudible) and is slightly is on the financial and professional lines and that’s just dues to a slight up tick in the loss ratio for credit and physical risk this quarter rather than anything systemic or related to new lines.

Dan Farrell - Sterne Agee

Okay, thank you very much.


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

Joshua Shanker - Deutsche Bank

Hi there. Congratulations on the quarter. I wanted to follow up a little bit deeper on Max’s question on expenses. Last quarter, there was about $20 million of compensation expense due to a much better performance in Q1 ’12 versus Q1 ’11. Can you break that out a little bit and talk about when the U.S. business will get to the size where it’s not a drag on expenses anymore, proportionately?

Julian Cusack

The expenses at cat that’s in Q1 and Q2 is now from $22 million last quarter to $12 million this quarter. In those last quarter and this quarter, majority of that was made of performance related compensation issues but in addition, in the first quarter there was another one off issues to do with payroll taxes, severance payments and other issues.

So I think the indication is that the position for the second quarter probably more represents to where of that $12 million that we are seeing possibly $3 million is underlying expense increase and the rest is performance related pay provisions.

Joshua Shanker - Deutsche Bank

So, excluding a typical compensation arrangement, it is actually 2Q expenses were higher than Q1 expenses? It is $50 million versus $60 million.

Julian Cusack

I think there is an increase in expense this quarter-on-quarter.

Joshua Shanker - Deutsche Bank

Okay, just trying to model out for the future. The other question, I really don’t know as much as I should about kidnap and ransom. I am just wondering the incoming carriers that you managed to out compete, are they responding? Is it a growing market that there is room for everybody? What is the key to add some success in that area?

Julian Cusack

Josh, I don’t think I see that’s the way it worked but with this about two years ago to the explosion in piracy off the coast of Somalia. We were the first people to spot the opportunity. The key, and this is my opinion, is in three parts.

One is the corporate clients. The people organization who send their employees to dangerous parts of the world.

The second part is what we tend to call family business. Principally in Latin America, wealthy families protecting themselves or children against kidnapping.

This third element which is actually where we have excelled was the marine piracy and that was not a marketplace a few years ago. It emerged. We spotted. We took advantage of it. It was and is terrific. There is however some of the more traditional carriers and what the juniors kind of tend of find their way into that zone of eh market.

Now a little bit of downward pressure on rates. That’s the bad news. The good news is that the owners are probably on the standing of the risk of it better. So risk management has improved and currently we feel the price is a little lower but the risk is a bit better so we are happy to hang in there.

Like I said, in different context in the call, this is one of those areas where you just have to be ruthlessly opportunistic. Opportunities are there, you take it. Opportunity goes away, you drop it. There is no continuity or loyalty in a line like this. It is just if it is commercially feasible, you want to be in it. Otherwise you are out again.

For now, I think we have pretty good business for the next year or so.

Joshua Shanker - Deutsche Bank

Well, thank you for the education and congratulations on your tenth year.

Julian Cusack

Thank you, Josh. Thank you very much.


[Operator Instructions] Your next question comes from the line of Brian Meredith from UBS. Your line is now open.

Brian Meredith – UBS

Thanks, and good morning, everybody. Chris, just a couple of quick questions here.

First one is just a numbers question. As I look at the insurance segment, it looks like fees reinsurance was up pretty significantly year-over-year. Is that mix timing? Is anything going on there?

Chris O'Kane

That’s purely timing difference in the placements of our marine and energy protection.

Brian Meredith – UBS

Yes, that’s what it looked like, great. Then the second question, I am just curious, with the 1.4% treasury yields right now, when you are writing a new piece of casualty business, what kind of ROE do you think you are getting on that business and just as a follow on to that, do you think the price increases that we are seeing right now are enough to compensate for that continued decline in investment yields for casualty business?

Chris O'Kane

Those are good questions, Brian. That was a good question. In general, I think the longer tail lines are very challenged given not just the current investment yield but the perspective investment yield and as far as our casualty reinsurance area is concerned, I think the guys are very conservative. They have cut our position in the casualty every year for about four years now and I am pretty sure that they are going to cut it again next year.

I don’t think that the increases that we are seeing, and they are there, but they are modest, are compensating, really for the lack of investment return. This has turned a business that historically, for us, has been terrific. Things like casualty, like the 16%, 17% ROE over the last 10 years on average. It has turned it into sub 10 or single digit ROE business.

In reinsurance, I just talked a moment ago about K&R and I said, you need to be ruthlessly opportunistic. I casualty reinsurance, you need to be a bit more hopeful. There are clients who are doing a good job. They have sometimes a hole in the books of business that are a little special that have different return characteristics and you can’t do an (inaudible) correction. You can’t say, Mr. Excellent Client, who operates in 12 countries or a single state, we don’t want to reinsure you anymore because the investment used on you. Got to think on a more long term basis.

So we would take temporary low returns on some of that stuff. Others, you just have to let it go. There is no margin in that.

On the insurance side, a little bit different, because you can choose you risk. You can take your positions a lot more subtly. So I would take something like energy related liability which again, I would call that GL for energy clients. It’s a casualty line but there are some big pops in that world in the last year and I think you are getting underwriting prices that are pretty attractive.

Yes, we would like it more if we could make more return on money we hold but it still pretty good stuff. Other areas, other aspects of GL is just a lot more difficult. So it’s a little bit more subtle tailored made approach to each individual insurance line.

Generally speaking, though, I would say, there is more opportunity for growth in the financial lines and in the property lines and in the casualty lines if you look across the whole P&C universe.

Brian Meredith – UBS

Got it, great, thank you.

Chris O'Kane

Thank you, Brian.


And at this time, I am showing there are no further questions in the queue.

Chris O'Kane

Okay, well, thanks everyone for the time and attention. We enjoyed your questions. Have a good day.


Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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