Aspen Insurance Holdings Limited ( AHL)

Q3 2011 Earnings Conference Call

October 28, 2011 9:00 AM ET


Kerry Calaiaro – SVP, IR

Chris O’Kane – CEO

Richard Houghton – CFO


Amit Kumar – Macquarie

Vinay Misquith – Evercore

Josh Shanker – Deutsche Bank



Good morning. My name is Cassandra, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Aspen Insurance Holding Third Quarter 2011 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-answer-session. (Operator instructions)

Thank you. And now, I would like to turn the call over to Kerry Calaiaro. You may begin.

Kerry Calaiaro

Thank you, and good morning. The presenters on today’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. Last night, we issued our press release announcing Aspen’s financial results for the quarter and nine months ended September 30th, 2011. This press release as well as corresponding supplementary financial information and a short slide presentation 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 US federal securities laws. All forward-looking statements will have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For more detailed descriptions of these uncertainties and other factors, please see the Risk Factors section in Aspen’s Annual Report on Form 10-K filed with the SEC and on our website.

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

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

Chris O Kane

Thank you, Kerry, and good morning, everyone.

I’m pleased with our results this quarter, which have been achieved to gain some backdrop of continued soft market conditions and many lines, high frequency of lowered loss CAT activity and turbulence in global financial markets. We reported an 8.4% annualized operating return on equity and the diluted book value per share rose over 2% in the quarter to $38.27. We achieved underwriting profit of $27 million with positive contributions of each of our two business segments. Included in these results are the net reserve releases in both reinsurance and insurance.

As difficult as the current trading environment is, it is compounded by continuing macroeconomic uncertainty that I think it is worth spending a few minutes on this topic before I address the results in whole detail.

The evidence from previous credit-driven economic crises suggests that recovery is likely to be slow and interrupted by periods of high volatility, and that is certainly what we’re witnessing now. This is the implications for the level of investment return the industry can achieve and for lines of business such as trade credit insurance and financial institution insurance. The two respond to credit-related stress in troubled markets and recessional risks in the real economy.

Nine months ago our main concern was interest rates and inflation risks. But at this time, we believe down spending risk in our investment portfolio over the last 12 months is most likely to rise from widening spreads on corporate bonds and weak equity markets. We have been adapting our investment (inaudible) tighten stress test accordingly.

I would like to add more color on our eurozone investment exposures. We have a very modest amount of risk, namely $291 million at book value of eurozone investments and provide some detail on the credit rating of these investments on page 19 of the slide pack. We are concerned by the potential contagion risk posed by the eurozone crisis to bond issue backed financial institutions, not just in Europe, but globally.

And at quarter-end, our total worldwide holdings and financial institutions amounted to $824 million or 12% of our invested assets versus stable weighting [ph] of 15% in this category. This excludes government currencies holdings. In particular, we have been reducing our exposure to the debt securities of eurozone banks and this now stands at just to a 2% of invested assets, all of which is to banks in stronger eurozone nations.

We hold $46 million of exposures to German, French, and Finnish government bonds and we do not hold the sovereign bonds of any other eurozone country. The vast majority of our eurozone exposures are in sovereign debt, government supported investments and high quality profits with 96% having a ranking of A or above. Our exposure to corporate debt securities of eurozone banks is $53 million or just under 1% of invested assets, all of which is to banks in Germany, France, The Netherlands and other countries we considered to be stronger eurozone nations.

Our equity portfolio was valued at $172 million or 2.2% of invested assets at quarter end. At our equity stress test results we concluded that many losses from this – I’m sorry, any losses from the small allocation should be manageable. Moreover, these investments comprise high-quality global equity income portfolio gross dividend yield of 4.6%. This portfolio is world diversified.

At quarter end, about 40% of the equity portfolio was in North America, with 22% in the UK, 20% in Europe and 18% in the rest of the world including Asia and the emerging markets. We are also sensitive to macroeconomic risk on the liability side of our business. Should economic growth in Western Europe remain weak, we consider that our trade credit insurance (inaudible) are well-placed to protect profitability ability unless there is a very rapid diversification in the economic environment such as (inaudible) for example, from widespread sovereign reports.

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