Aspen Insurance Holdings Limited
Chris O’Kane, Chief Executive Officer
Chris O’Kane, Chief Executive Officer
Julian Cusack, Chief Financial Officer
Safe Harbor Disclosure
Application of the Safe Harbor of the Private Securities Litigation Reform Act of 1995:
Application of the Safe Harbor of the Private Securities Litigation Reform Act of 1995:
This presentation contains written or oral “forward-looking statements” within the meaning of the U.S. federal securities laws. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “seek,” “will,” “estimate,” “may,” “continue,” and similar expressions of a future or forward-looking nature.
Who We Are: Aspen at a Glance
Property Reinsurance
Property Reinsurance
Casualty Reinsurance
Casualty Reinsurance
Specialty<br/>18%
Insurance
Insurance
2005 Underwriting by Segment (GWP)
2005 Underwriting by Operating Entity (GWP)
* Shareholders’ equity (including preference shares, ex-AOCI) plus long-term debt
* Shareholders’ equity (including preference shares, ex-AOCI) plus long-term debt
UK
UK
Bermuda**
Bermuda**
US
US
$2.2bn market cap (July 26, 2006)
$2.2bn market cap (July 26, 2006)
$1.9bn common equity (ex-AOCI) and $2.4bn total capital* (June 30, 2006)
~408 employees in Bermuda, London and US (June 30, 2006)
Ratings of A (S&P), A2 (Moody’s) and A / A- (AM Best, for Aspen UK and Aspen Bermuda)
100% = $2.1bn
100% = $2.1bn
How We Manage Our Business
Finance & Treasury
Knowledge Management
IT
Ceded Reinsurance
Insurance
Specialty
Casualty Reinsurance
Property Reinsurance
Risk Management
Risk Management
Group Executive
HR
Legal
Claims
Product Segments
Product Segments
Support Services
Support Services
Risk Management
Risk Management
Group Executive
Group Executive
Function
Responsibility
?Implementing the rules’
?Implementing the rules’
Risk measurement
Risk monitoring
Control infra-structure
Business enablement
Production
Production
Sales & marketing
Customer relationship management
?Setting the rules’
?Setting the rules’
Strategy
Capital management
Organizational Structure Optimized Along Product Lines
Actuarial
Other
Underwriting Approach: Key Elements
Diversified approach
Diversified approach
Offer specialized insurance and reinsurance to clients where price is not the sole determinant
Niche based, bias towards more complex risks
Focus on lines where experience and judgment are critical success factors
Compete in ?commodity type’ products only if we have a competitive advantage, or if market conditions are attractive
Rigorous soft cycle and portfolio management
Maintain flexibility to expand opportunistically into new markets
Anticipate and respond quickly to events and new information
Successfully Diversifying Risks
By Segment
By Geography
* 2003 Specialty lines excludes QQS of Wellington Syndicate 2020
* 2003 Specialty lines excludes QQS of Wellington Syndicate 2020
100% = $1.3bn
Gross Written Premiums
*
100% = $2.1bn
100% = $1.3bn
100% = $2.1bn
2003
2005
2006E
2003
2005
US and Canada UK and Europe
US and Canada UK and Europe
Increasing Product Diversification
Profitable Growth
Progressive diversification of strategic footprint through incremental expansion into adjacent business lines*
Progressive diversification of strategic footprint through incremental expansion into adjacent business lines*
Key enablers:
Consistent with core competencies
Timing
* Businesses shown for first year of meaningful premium contribution
Selective Business Line Expansion
Increasing emphasis on Specialty Lines
Increasing emphasis on Specialty Lines
Evolving Our Strategy
Key Themes in 2006
Key Themes in 2006
Reduction in our risk tolerance
Managing volatility
Strengthening our risk management and execution framework
Reduced Risk Tolerance
Significant reduction in gross exposures consistent with reduced risk tolerances
$ in millions
$1,100
- -43%
- -56%
$1,400
- -71%
Projected
Projected
* Pre-tax and reinstatement premiums
- -51%
$1,726
- -1000bp
20.0%
17.5%
Projected
Projected
Projected
Projected
- -250bp
Property / Casualty / Marine
Property / Casualty / Marine
US Earthquake Cover $788** $655**
US Wind Cover 763** 573**
Retention 90 149
Property Only
US Earthquake Cover $698** 575**
US Wind Cover 673** 493**
Reduced Risk Tolerance
Per-event retentions higher in 2006 than 2005?
* Maximum recovery would require most favorable distribution of losses between our various lines of business and our various programs
* Maximum recovery would require most favorable distribution of losses between our various lines of business and our various programs
2005 2006
Potential Maximum Limits of Reinsurance Coverage*
$ in millions
?and relatively more exposure to a series of moderate (retained) losses in 2006 than 2005 due to absence of low level retrocessional protections
?and relatively more exposure to a series of moderate (retained) losses in 2006 than 2005 due to absence of low level retrocessional protections
Market Timing – Property Reinsurance
Decision to Hold Back Capacity at January 1
Decision to Hold Back Capacity at January 1
Rate index (US Catastrophe exposed contracts) vs. Renewal rate of whole account premium
Key Financial Objectives
Catastrophe exposure
Catastrophe exposure
Reserving risk
Asset and credit risk
Drivers
Operating leverage
Operating leverage
Financial leverage
Investment leverage
Investment yield
Value at risk
Value at risk
Growth in assets per share
Growth in assets per share
Improved Absolute Returns with Reduction in Earnings Volatility
Historical Performance
Satisfactory performance in first three years
Satisfactory performance in first three years
18% and 14% growth in 2003 and 2004
18% and 14% growth in 2003 and 2004
ROAE*
Fully Diluted Book Value Per Share
(annualized)
%
$
* ROAE – return on average common shareholders’ equity (see slide 25)
Historical Volatility
Q3 Storm Losses Main Cause of Historical Volatility
Annualized ROAE
%
* ROAE – return on average common shareholders’ equity (see slide 25)
Prospective Volatility
DFA modeling used to help understand and quantify prospective variability of losses and ROAE
DFA modeling used to help understand and quantify prospective variability of losses and ROAE
Absolute measurements subject to significant model error; therefore concentrate on directional changes in risk metrics
Example risk metrics:
Example risk metrics:
VAR 95 = 4%
This means that in 95 out of 100 simulations based on our current 2006 DFA model, the simulated net loss for the year is no greater than 4% of estimated average equity. This measure has not changed significantly over the last 6 months.
By comparison TVAR 99 has reduced from 48% to 35% consistent with our reduction in modeled cat exposures.
Q2 Financial Highlights
(US$ in millions)
(US$ in millions)
Gross Premiums Written $522.4 $549.4 -5%
Gross Premiums Written $522.4 $549.4 -5%
Net Premiums Written 500.1 486.6 3%
Net Premiums Earned 429.0 395.0 9%
Underwriting Profit 79.0 92.3 -14%
Net Investment Income 49.9 27.1 84%
Net Income after tax 101.8 83.8 21%
GAAP Ratios:
Loss Ratio 52.2% 49.6% 2.6 pts
Expense Ratio 29.4% 27.0% 2.4 pts
Combined Ratio 81.6% 76.6% 5.0 pts
2Q ROAE (annualized) 20.4% 21.2% -0.8 pts
Diluted Book Value
Diluted Book Value
Diluted 2Q Operating
Diluted 2Q Operating
Diluted 2Q Net Income
Diluted 2Q Net Income
* See slide 26 in appendix for reconciliation of diluted 2Q operating earnings per ordinary share (a non-GAAP measure) to diluted 2Q net income earned per ordinary share (a GAAP measure)
Continued extension of asset duration in line with growing liability duration
Continued extension of asset duration in line with growing liability duration
Fixed income portfolio* duration of 1.1 years in late 2003 to 3.14 years at June 30, 2006
Aggregate portfolio duration of 2.63 years and book yield of 4.29% as of June 30, 2006
Two-year plan to invest up to 15% of investment portfolio in non-fixed income securities
As of April 1, 2006, invested $150mm (3% of portfolio) in two low-volatility, diversified hedge fund-of-funds
Investment Performance
Fixed Income Portfolio* Yield
%
Fixed Income Portfolio* Duration
%
* Excluding short-term investments
Quarterly Production Pattern
Production pattern shifted from 44% in Q1 2003 to 33% in 2006
Reflects changing business mix as additional lines of business have been added
Held back reinsurance capacity at 1/1 which further accelerated this trend in 2006
GWP by Quarter (% of annual total)
Appendix
Ceded reinsurance premiums normally highest in Q1 reflecting 1/1 renewal of main retro program
Ceded reinsurance premiums normally highest in Q1 reflecting 1/1 renewal of main retro program
1H 2006 Results<br/>Ceded Reinsurance Premiums
1H 2006 Results<br/>Combined Ratio: Property Reinsurance
Prior year claims deterioration in 2006 mainly from KRW
Prior year claims deterioration in 2006 mainly from KRW
Increase in operating expenses from 5% to 8% of gross premiums earned reflects increased group expense allocation mainly due to additional investment in cat modeling, risk management and letter of credit charges
1
2
3
1
2
3
H1
H1
prior year
1H 2006 Results<br/>Combined Ratio : Casualty Reinsurance
Net earned premium reduced by $12m due to premium revisions relating to 2005 treaties, giving rise to $7m of corresponding reserve releases reflecting lower estimated exposures in 2005 accident year
Net earned premium reduced by $12m due to premium revisions relating to 2005 treaties, giving rise to $7m of corresponding reserve releases reflecting lower estimated exposures in 2005 accident year
Further $19m of reserve releases, due to improving industry trends and claims experience for US medical malpractice and workers’ compensation business
$21m of reserve releases on international casualty business due to favorable claims development
1
2
2
1
H1
H1
prior year
1H 2006 Results Combined Ratio : <br/>Specialty Reinsurance and Insurance
Change in business mix
Change in business mix
2
1
1
2
H1
H1
prior year
1H 2006 Results<br/>Combined Ratio : Insurance
Results impacted by large loss in Q1 in UK commercial property
Results impacted by large loss in Q1 in UK commercial property
Reserve releases on UK public liability given favorable claims development
2
1
1
2
H1
H1
prior year
2003 2004 2005 June 2006
Closing Shareholders’ Equity $1,298.7 $1,481.5 $2,039.8 $2,154.4
Closing Shareholders’ Equity $1,298.7 $1,481.5 $2,039.8 $2,154.4
Less: Preference Shares 0.0 0.0 193.8 222.9
Common Shareholders’ Equity 1,298.7 1,481.5 1,846.0 1,931.5
Less: Average Adjustment 343.0 87.0 339.6 10.3
Average Common
Shareholders’ Equity $955.7 $1,394.5 $1,506.4 $1,921.2
Reconciliation of Shareholders’ Equity to Average Common Equity*
* Average equity is a “non-GAAP financial measure,” as such term is defined in Regulation G, which management believes better explains the Company’s results in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. Average common shareholders’ equity is calculated as the arithmetic average of common equity on a monthly basis for the stated periods.
Quarter ended June 30, 2006 2005
Net income adjusted for preference share dividend $1.01 $1.16
Net income adjusted for preference share dividend $1.01 $1.16
Add (deduct) after tax income (loss)
Net exchange (gains) losses (0.06) 0.05
Net realized (gains) losses on investments 0.03 (0.01)
Reconciliation of Diluted Operating Income Per Share*
* Reconciliation between Net Income (a GAAP measure) and Operating Income (a non- GAAP measure)