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#Good morning, and welcome to the Aspen Insurance Holdings Limited second-quarter 2016 in earnings conference call.
(Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to <UNK> <UNK>.
Mr.
<UNK>, please go ahead.
Thank you and good morning, everyone.
On today's call we have Chris O'Kane, Chief Executive Officer; and <UNK> <UNK>, Chief Financial Officer.
Last that we issued our press release announcing Aspen's financial results for the second quarter of 2016.
This press release, as well as corresponding supplementary financial information and the slide presentation, can be found on our website at www.Aspen.co. Today's 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 US federal securities laws. All forward-looking statements 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 posted on our website. Today's presentation also contains non-GAAP financial measures which we believe are meaningful in evaluating the Company's performance. For a detailed disclosure on non-GAAP financials, please refer to the supplementary financial data and our earnings release posted on the Aspen website. I will now turn the call over to Chris O'Kane.
Thank you, Chris, good morning, everybody.
In the second quarter of 2016 we achieved operating earnings per diluted share of $0.40 and an annualized operating return on equity of 3.2%.
Through the first six months of 2016 our operating earnings per diluted share were $1.68 and annualized operating return on ROE of 7%.
Diluted book value per share at June 30, 2016 was $49.53, up almost 8% from year-end 2015.
The movement reflects the positive impact from earnings and mark-to-market gains in both our fixed income and equity portfolios.
Gross written premiums for the group were $802 million, an increase of 11% compared with the second quarter of last year.
Adjusting for some changes in timing, some contract adjustments and the inclusion of AgriLogic, underlying gross written premiums were up 4% and I will give more color on this in a moment.
The loss ratio of 65% was impacted by $65 million or approximately 10 percentage points of net cat losses in the second quarter, of which $49 million was recorded in reinsurance and $16 million recorded in insurance.
This compares to net cat losses of just $12 million in Q2 last year.
The accident year, ex cat loss ratio was 58%, an improvement of more than 4 percentage points from a year ago despite a number of mid-sized non-cat losses.
Total reserve releases across the group were $21 million for the quarter, of which $14 million was from reinsurance and $7 million from insurance.
For the first six months of the year we recorded $43 million of releases with $32 million in reinsurance and $11 million in insurance.
Let's look at the reinsurance results first.
Reinsurance gross written premiums increased by 28% on a reported basis to $333 million in the second quarter, but the underlying growth was around 6% compared with the prior-year quarter.
There are a few items this quarter that elevated Aspen Re's reported growth rate, including AgriLogic, changes in the timing of a number of renewals and contract adjustments which impacted primarily property cat and specialty re.
The property cat top-line growth included one of the items that I just described.
Given these items, we believe that it's more helpful to look at the net written premiums for the first half of 2016.
On this basis, net written premiums actually decreased 5% compared with the first half of 2015.
This reflects continued management of our cat exposures through the use of Aspen Capital <UNK>ets vehicle and the purchase of additional retrocessional reinsurance which has reduced our PMLs across most perils.
Specialty reinsurance premiums were up $33 million compared to the second quarter last year.
Of this, $12 million was from the inclusion of AgriLogic while the remainder was largely due to favorable premium adjustments from prior years.
In the second quarter, Aspen Re delivered underwriting income of $29 million and a combined ratio of 91% compared with $66 million of underwriting income and a combined ratio of 75% in the prior-year quarter.
The difference can be largely explained by $49 million or just over 17 percentage points of net cat losses, primarily due to the Canadian wildfires, weather-related events in the US, and the Japan earthquake.
This compares to 1 percentage point of net cat losses in the prior year.
We had $14 million, or 5 percentage points, of primary loss reserved development in reinsurance in the quarter which releases predominantly in our short-tail lines.
This compares to reserve release of $24 million in the second quarter last year.
The accident year, ex cat loss, ratio was an impressive 47.7% compared to 51.4% in the year ago period, highlighting favorable underwriting results.
Turning now to our insurance segment, gross written premiums increased 2% in the quarter to $469 million.
Similar to recent quarters, growth is driven primarily by financial and professional line sub-segments, as we continue to see pockets of attractive opportunities in areas such as accident and health, credit and political risk, and US professional liability.
However, this is partially offset by continued decrease in our marine, aviation, and energy sub-segment.
The insurance results were broadly in line with those of Q2 2015 with an underwriting loss of $13 million and a combined ratio of 103%.
The current quarter reflects $17 million or 4 percentage points of net cat losses related to weather events in the US.
Our accident year, ex-cat loss, ratio improved by almost 5 percentage points from Q2 2015 to 66.1%.
During the quarter we recorded $26 million in energy-related mid-sized losses, primarily attributable to the damaged vessel in the Jubilee oil field and the Pemex petrochemical plant explosion.
We also recorded $12 million of fire-related losses and a $4 million aviation loss.
The insurance segment had $7 million or about 2 percentage points of prior-year favorable development in the second quarter, in line with a year ago.
Reserve releases in both quarters were mainly due to favorable development on our short-tail lines.
Turning now to expenses for the group, as we said previously, we expected the G&A expenses to be higher in the first half of the year.
The G&A ratio was 17.1% for the quarter, reflecting growth and investment in the business with 40 basis points of the increase attributable to the acquisition of AgriLogic and 90 basis points attributable to reorganization costs.
Excluding these two items, our G&A ratio would have been 15.8%, in line with the prior-year quarter.
We still expect the full-year G&A ratio to be broadly in line with last year's full-year ratio.
Lastly, the acquisition ratio was essentially unchanged from the second quarter last year I'll now move on to investments.
Net investment income was $48 million in the second quarter, up almost 3% from the prior-year quarter.
The increase is primarily due to hiring comp from our fixed income investments.
Total return on our aggregate investment portfolio was 1.44% in the quarter and the total return was 3.5% for the first half of the year.
The fixed income book yield was 2.5% while the duration of the fixed income portfolio was 3.6 years.
Lastly, I'll make a few comments about capital.
We repurchased $19 million of ordinary shares in the second quarter of 2016 and a further $6 million since the end of the quarter.
This takes our repurchases to $50 million through July and leaves approximately $366 million remaining on our current share repurchase authorization.
With that, I will turn the call back to Chris.
Thanks, <UNK>.
Since our last call we have appointed new leaders for our segments.
Steve Postlewhite moving from reinsurance become CEO of insurance, and Thomas Lillelund taking over as CEO of reinsurance.
Steve has left the reinsurance business in great shape and Thomas is ideally suited to build on this.
I am extremely proud of what the reinsurance team are achieving.
Our team continues to stay disciplined and walks away from business that does not clear our underwriting hurdles.
We are pursuing opportunities in areas where pricing is under less pressure.
We continue to add value to our [brogan] clients, which makes us an important business partner, and as a result, we often get the allocations we ask for.
One of the burgeoning benefits of the investments in our business that we have made in the last few years is the widespread regional network we've developed.
Our recent strategy provides us with another avenue for growth over the long term.
We continue to see select new business opportunities in Asia Pacific, Middle East, and Africa, and in Latin America.
Through our newly opened Dubai office, we continue to see good momentum in the Middle East and Africa region and we capitalize on some duplication on select new and renewed business.
We also continue to see momentum in further developing our Shanghai and Australian operations.
Steve now leads an insurance business that has achieved scale and is pursuing growth on a very targeted basis in his next phase of development as leading specialty insurance.
We have continued the roll-out of our global product line strategy with the recent appointment of heads for surety and credit and political risk.
We remain committed to developing our businesses in Asia through our Singapore operations.
While it is relatively early days, we have received a good showing of business and this is an important long-term strategic growth opportunity.
Over the first half of the year we also benefited from some disruption in the market selectively adding underwriting talent.
As learned earlier on this call and on even previous calls, we're very pleased by our success in adding to and upgrading our underwriting talent, broadening our underwriting capabilities and enhancing our product offerings.
These achievements bode well for the future and it is important to note that this process is now largely complete.
Hence, we do not expect any additional impact on our expense ratio from this initiative.
While we see more business, we're being very disciplined in our approach to growth.
As we have done for some time, in lines where competition is intense and rate remain unfresh, we've taken action.
We've continued to deploy capital away from marine, energy, and aviation sub-segments and into other more attractive lines such as accident health, UK regional P&C, global casualty, US professional liability lines and cyber, where we're seeing better prospects, rates are under less pressure and experience is less volatile.
Before we open the call up for questions, I would like to follow up on last quarter's commentary on Brexit, the British decision to leave the EU.
This is an unprecedented step and one that will take some time to work through.
I would reiterate, however, that we do not expect to see any material impact to our business, although premiums from the EU, ex UK, were less than 7% of our total 2015 gross written premiums.
We are working to establish the best routes to guarantee that all of our stakeholders continue to enjoy the benefits that flow from our small but highly regarded EU client base.
We remain fully committed to ensure the smooth transition to service our clients in the region.
Ahead of Brexit occurring, we expect to have effective distribution channels in place.
That concludes our prepared remarks and we are now happy to take your questions.
Good morning, <UNK>.
I think you are talking about the catastrophe exposures in major zones and minor zones.
Right, <UNK>.
Okay.
The general trend in pretty much all of those areas in terms of cat is downwards and has been so for some time.
The downward trend is a bit faster at net level than it is at a gross level because there are still some risks, which are okay risks.
We wouldn't want too much of them, but many of our Aspen Capital <UNK>et partners actually can make a return out of prices that are available.
So trending down, as I say, a little faster at a net level than a gross level.
I do talk, and you've heard me, just now, talk about Asia Pacific, about Middle East, North Africa, Latin America, et cetera.
Most of those growth initiatives are not targeting property cat business.
Property cat business is one of the most highly-commoditized business of all.
And while I think there is still some money to be made in it, it's really not one where we want to carry a lot of stakes.
So, generally speaking, it's try to open up the specialty casually end of things, looking at fire risk, maybe construction risk, not the sort of stuff that carries a significant cat load.
In terms of the difference between peak zones and minor zone, I don't think there's anything material to say.
I would say we would like a little less cat pretty much everywhere.
Sometimes post an event you might get a chance to write a bit more, so we will see what happens to Canadian rates post Fort McMurray.
Clearly as the prices go up by 50% or 100%, then we may have to take a different approach in terms of our risk appetite there.
But in general, this is not the time of the cycle for cat, peak zone or otherwise.
Questionable whether you find a different ROE.
What you find is different loss ratios or different expected, even combined ratios.
But capital is allocated based on the size of the exposure.
So if you are looking at really major exposures, I don't know, say Florida for example, yes, it might be that in one measure you've got a higher price, you've got a higher margin over the expected loss.
But you've got to allocate so much capital to a peak zone like Florida that it brings the ROE down and you might actually find that somewhere else some less-exposed part of the world where you write less business carries a lesser capital load and that the ROEs are actually broadly similar.
That is generally the way it is.
<UNK>, thank you very much, thanks for your questions.
I am looking at the CFO, <UNK>.
Thank you for your question.
(laughter)
Gee, thanks, <UNK>.
That is pretty helpful.
It is around about the $60 million mark, <UNK>.
An excellent question, <UNK>.
I think, first of all, this quarter we just had is exceptional in terms of both the frequency and the severity of these medium-sized losses.
I would say none of them are colossal and a lot of them come from energy-type situations.
And not just this quarter last year, but I would say over our lifetime as a public company, somewhere around every four to six quarters I have been saying it's been a bit lumpy in energy this quarter.
But don't expect energy to lose money for the year, it's just the nature of it.
You get these long periods of quiet with very nice returns and then you give a lot of that back in a bad quarter.
But overall it works out well.
I am not really aware of any kind of underlying cause that says there should be more loss activity connecting Ghana with Mexico, I don't know yet.
I don't think the price of oil, that's making the prices low, business is not that attractive.
But I don't think it actually in itself gives rise to more loss activity.
So at one level you would say this is one of those kind of random fluctuations you expect in a P&C business; it poses some volatility.
But there is another point I want to make and it is quite an important one.
It is not one I talked about in the prepared remarks.
You may recall, <UNK>, we talked a few years ago about the IRVV retaining its share of our reinsurances.
We started doing that three or four years ago because we thought there was a wide discrepancy between the price we could write business at and the price we could reinsure it.
We thought by retaining more risk we would improve our net income.
And we did.
That was a great course of action through 2013, 2014 and even in 2015 it made a lot of sense.
In 2016 it makes a lot less sense and in 2017 and make may make no sense whatsoever.
While most growth losses (inaudible) growth basis, what we're in the process of doing is buying a lot more quota share, some really quite chunky months of quota share across areas like marine and energy.
But also our primary casualty, our excess casualty, our professional liability, our management liability and so on.
[Lot quota] share and indeed on our excess basis, taking a smaller retention.
That is largely because we are intending to cancel the additional retentions that we had on reinsurances and actually cede those over to the outside world.
The effects of that is that basically our net retentions are trending down.
This process is actually complete now for the marine and energy programs which we combined.
We do have some very capable people working on the casualty, professional liability, et cetera and we expect that to be complete before the end of this year.
So I think the first part of my answer is give you my view on the gross loss exposure.
The second part is telling you that I think we will be retaining a lesser share of volatility as this year goes on and certainly into next year and beyond, given the current differences in price between the insurance and the reinsurance products.
I expect we will do, yes.
<UNK>, it is <UNK> here too.
Let me qualify what I talked to you about earlier in terms of the gross losses on the cats as well.
I gave you the actual reinsurance number, or the number in our reinsurance segment.
The actual gross numbers are about $75 million if you include the insurance side of the house as well.
(laughter) Well, the whole nature of this business has always been where there is fear, there is pricing power and there is opportunity.
So there is never been much of a market for, let's say, Swiss political risks, either.
So clearly it's always been the case that the more danger in the world ---+ over my career it's been Russia, it's been China, it's been Angola, it's of bits of South America.
So what are you doing in there.
You are looking at essentially the degree of risk, the level of hazard, and you're looking at the price you can debt and you're looking at the quota or the collateral.
So, our view for a lot of what we do is if there is a good client, with good money from sources we understand, prepared to offer a sensible amount of collateral to cover their exposures.
We believe our right to recovery, if there is a loss or actually very significant and that's where we can get into these more hazardous zones and activities.
Most of what we are doing is backing North American European, occasionally Japanese, exporters and project finance in areas of the world that do indeed carry a bit of political risk.
This is a business that has performed incredibly well for us since we have been in it.
The top line has been up and down and up and down.
I think it is always going to be like that.
It's a little dependent on deal flow and we just happen to have had a good couple of quarters.
And if people stop investing or something else happens then we may be telling you next year that we are not writing so much with that.
<UNK>, sure, thank you for your time.
Good morning, <UNK>.
<UNK>, it is <UNK> here.
You are absolutely right, you heard right.
There is 90 bps in the quarter from some reorganization costs.
It is a combination of some changes in senior management that we talked about in the prepared remarks.
In addition to there's still a little bit of tail-off from the insurance initiatives that we have been discussing through the first half of the year as well.
Certainly, the costs attached to the changes that we have made are it with regards to the individuals.
But beyond that, I think we are largely comfortable with our position.
I do not think so at this point.
I have tried to give some color on where we think the key levers are.
I have certainly gave some color on our expense ratios and where we expect those to be.
Acquisition ratios, as well to a certain extent.
So I think the losses are going to be the losses, but we are continuing to control the expense side with vigor.
(laughter) <UNK>, that's a great question and one that is pretty difficult to answer.
I think you've got to step back and you say on and ROE basis, what are the big challenges.
Clearly we've got continued low investment income environment and that has continued.
There is some pressure across the business in the pricing but there are pockets of opportunity as well.
So, I think we continue to work very hard and execute on what we do on a day-to-day basis and the ROE will come as a result of that.
Obviously we have got our levers, I was just going to say.
Clearly expense lever is an important one.
We have also got the capital management lever that we have pulled through the first half of the year; we bought back 50 million of shares.
We are always committed to giving that capital back if we can't find an opportunity to put it to work in the business.
<UNK>, neither <UNK> nor I would blame you for asking these questions, but as you know very well, and we've told you, we no longer provide these guidance or ROE guidance.
We can not be tempted to give you a number by one route or another route.
What I would say, which may be helpful ---+ but I still can't give you a, ROE number ---+ is in all of the bad news in terms of investment returns and underwriting pricing, there is a bit of good news is that the cost of money has come down.
So we in common with everyone in the industry, now have some of the lowest cost of capital that we have had in the history of our organization.
As you know, the capital market may come out with different numbers.
But I think that cost of capital probably could be less than 7% these days.
Now, if we were in any danger whatsoever of producing a return that was equal to or less than the cost of capital, <UNK> and I would say what are we doing, we make more money off our own investments if we didn't come to work every day.
So we would not want to be in that zone and we are not in that zone.
We feel that there is a good buffer over the cost of capital.
But the persistent low interest rate environment which is reducing the cost of capital is part of the reason why it's hard to get the ROE up.
I would say on a normalized basis ---+ I won't speak about Aspen ---+ I would say any company with an Aspen-type business mix, it is going to clear into double-digit ROEs in the next couple of years is doing exceptionally well.
That is a very, very, very tall order.
That said, <UNK> and I both feel that we are operating a business that is, on a normalized basis, well in excess of the cost of capital.
I think that is really about as far as I can go and I think my lawyer is probably kicking me under the table for going that far.
That as well, yes, it is terrible here.
(laughter)
I am not privy to all of the reasoning that is going on at EVEREST Re and I respect their decision.
I think there were different ways to be in the crop business.
In general, by the way, I agree with something you said, the days of excessive outsized returns for the crop insurers are probably behind us.
I think the way pricing, the way the schemes have evolved, means that those glory days are in the past.
But that's, in a way, not the comparison.
The comparison is probably to tough to capital and to what's available for your capital elsewhere.
Our view still is the crop business underwritten intelligently, which is something we think the folks at AgriLogic are very good at, can make a good return.
Why do we make a good return.
By having better data, better loss expectancy data, better views of how crops in which locations ---+ and I'm not even talking about in the states, but I'm talking about what part of the states [crops] are in.
AgriLogic have invested heavily in having that data which means they know which risks to take.
Even admitting they're charging the same price, I think their risk selection is superior.
And the same skillset, of course, goes into the way the reinsurance they buy is designed.
I think we have simply a lot of intellectual property there.
I am not suggesting that with regards over Heartland, don't do similar; I don't really know that organization.
But I think from our analysis, AgriLogic will make a return for us in ROE terms way, way above the average of the rest of the organization.
And for today, that is a nice little thing to have.
No problem.
Thanks for your questions.
I think the only closing comment is to thank all of the listeners this morning for having joined us and wish you a very pleasant summer's day.
Goodbye.
