Aspen Insurance Holdings Limited

Transcription

1 Aspen Insurance Holdings Limited Investor Day Diversification for Performance The St. Regis Hotel, New York City May 15, 2008

2 Safe Harbor Disclosure This presentation is for information purposes only. It should be read in conjunction with our financial supplement posted on our website on the Investor Relations page and with other documents filed or to be filed shortly by Aspen Insurance Holdings Limited (the Company or Aspen ) with the U.S. Securities and Exchange Commission. Non-GAAP Financial Measures In presenting Aspen's results, management has included and discussed certain "non-gaap financial measures", as such term is defined in Regulation G. Management believes that these non-gaap measures, which may be defined differently by other companies, better explain Aspen's results of operations in a manner that allows for a more complete understanding of the underlying trends in Aspen's business. However, these measures should not be viewed as a substitute for those determined in accordance with GAAP. The reconciliation of such non-gaap financial measures to their respective most directly comparable GAAP financial measures in accordance with Regulation G is included herein or in the financial supplement, as applicable, which can be obtained from the Investor Relations section of Aspen's website at Note: Aspen defines ROE as Return on Average Equity. 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 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, guidance," and similar expressions of a future or forward-looking nature. In addition, any estimates relating to loss events involve the exercise of considerable judgment and reflect a combination of ground-up evaluations, information available to date from brokers and cedants, market intelligence, initial tentative loss reports and other sources. Due to the complexity of factors contributing to the losses and the preliminary nature of the information used to prepare these estimates, there can be no assurance that Aspen's ultimate losses will remain within the stated amount. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements. Aspen believes these factors include, but are not limited to: the impact of deteriorating credit environment created by the sub-prime crisis and the global credit crunch; a decline in the value of our investment portfolio or a rating downgrade of the securities in our portfolio; further diversification of our product portfolio and geographic scope will depend on rates, regulatory approvals and other factors at the time we pursue such new initiatives; the models on which we rely are dependent on various assumptions and in respect of assumptions on catastrophe exposures that necessarily use historical data which may not be predictive of all future events, perils and exposures; changes in the total industry losses resulting from Hurricanes Katrina, Rita and Wilma and any other events, and the actual number of Aspen's insureds incurring losses from these events; with respect to events such as Hurricanes Katrina, Rita and Wilma, Aspen s reliance on loss reports received from cedants and loss adjustors, Aspen's reliance on industry loss estimates and those generated by modeling techniques, the impact of these events on Aspen's reinsurers, any changes in Aspen's reinsurers' credit quality, the amount and timing of reinsurance recoverables and reimbursements actually received by Aspen from its reinsurers and the overall level of competition and the related demand and supply dynamics as contracts come up for renewal; the impact that our future operating results, capital position and rating agency and other considerations have on the execution of any capital management initiatives; the impact of any capital management activities on our financial condition; the impact of acts of terrorism and related legislation and acts of war; the possibility of greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events than our underwriting, reserving or investment practices have anticipated; evolving interpretive issues with respect to coverage as a result of Hurricanes Katrina, Rita and Wilma and any other events such as the UK floods; the level of inflation in repair costs due to limited availability of labor and materials after catastrophes; the effectiveness of Aspen's loss limitation methods; changes in the availability, cost or quality of reinsurance or retrocessional coverage, which may affect our decision to purchase such coverage; the reliability of, and changes in assumptions to, catastrophe pricing, accumulation and estimated loss models; loss of key personnel; a decline in our operating subsidiaries' ratings with Standard & Poor's, A.M. Best Company or Moody's Investors Service; changes in general economic conditions including inflation, foreign currency exchange rates, interest rates and other factors that could affect our investment portfolio; the number and type of insurance and reinsurance contracts that we wrote at the January 1st and other renewal periods in 2008 and the premium rates available at the time of such renewals within our targeted business lines; increased competition on the basis of pricing, capacity, coverage terms or other factors; decreased demand for Aspen s insurance or reinsurance products and cyclical downturn of the industry; changes in governmental regulations, interpretations or tax laws in jurisdictions where Aspen conducts business; proposed and future changes to insurance laws and regulations, including with respect to U.S. state- and other government-sponsored reinsurance funds and primary insurers; Aspen or its Bermudian subsidiary becoming subject to income taxes in the United States or the United Kingdom; the effect on insurance markets, business practices and relationships of ongoing litigation, investigations and regulatory activity by the New York State Attorney General's office and other authorities concerning contingent commission arrangements with brokers and bid solicitation activities. For a more detailed description of these uncertainties and other factors, please see the "Risk Factors" section in Aspen's Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission on February 29, Aspen undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made. 2

3 Probability Distributions of 2008 ROE and Return on Allocated Equity: Disclaimers This presentation includes slides relating to the probability distributions of the 2008 ROAE and Return on Allocated Equity based on model outputs only and are not, and should not be construed as guidance for The Company relies on the outputs of its Dynamic Financial Analysis ( DFA ) model in addition to other considerations in the establishment of its public guidance. No 2008 guidance is given in this presentation. No representation or warranty of any kind is or can be made with respect to the accuracy or completeness of, and no representation or warranty should be inferred from, the probability distributions of the 2008 ROAE and Return on Allocated Equity in these slides or the assumptions underlying them or their suitability. No representation or warranty is or can be made as to the future operations or the amount of any future income or loss. The figures shown are the result of numerous assumptions made within our DFA model, many of which are subject to uncertainty which could lead actual results to vary considerably from those indicated by the model, including our estimates of catastrophe and non-catastrophe losses, our estimates of reserve movements and our estimates of investment income. No explicit allowance has been made within the modelling for the possibility that the model could be wrong or assumptions within the model incorrect. This includes the possibility that catastrophe models are incorrect. Changes in market conditions and variations from expected underwriting and investment strategy may lead to results varying considerably from those indicated by the model. No reliance should be placed on the accuracy of our DFA probability distributions of the 2008 ROAE and Return on Allocated Equity as they are based on (i) assumptions and other factors made at the time of modeling which may be subject to uncertainty or which may change subsequently, (ii) currently available information derived from modeling techniques, which may be incorrect, and (iii) modeling assumptions that may be inaccurate or incorrect. Therefore, the results of the model are illustrative and not to be viewed as facts or forecasts, and should not be relied upon as a representation of the future value of an investment in Aspen shares. See Slide 2 Safe Harbor Disclosure for reference to important factors that could cause actual results to differ from the probability distribution of 2008 ROAE and Return on Allocated Equity provided in the following slides. Changes in market conditions and variations from expected underwriting and investment strategy may lead to results varying considerably from those indicated by the model. For a more detailed description of these uncertainties and other factors, please see the Risk Factors section in Aspen s Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission on February 29, Aspen undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they were made. 3

4 Investor Day Overview TIME ITEM PRESENTER am Introduction and Purpose Noah Fields, Head of Investor Relations am Business Overview and Strategy Chris O Kane, Chief Executive Officer am Mapping the Underwriting Process Kate Vacher, Director of Underwriting 09.30am Q&A Product Segment Overviews am Casualty Reinsurance Brian Boornazian, Head of Reinsurance am Property Reinsurance James Few, Head of Property Reinsurance am Q&A 10.30am Break am International Insurance Matt Yeldham, Head of International Insurance am US Insurance Nathan Warde, Head of US Insurance am Q&A am Risk Management Framework and Approach Oliver Peterken, Chief Risk Officer pm Quantative Techniques in ERM Julian Cusack, Chief Operating Officer pm Q&A pm Pulling the Financial Levers Richard Houghton, Chief Financial Officer pm Q&A 13.00pm Lunch and presentation by Dr. Timothy Hall: Hurricane Landfall and Climate Change 4

5 Purpose for the Day Introduce key members of senior management = strength and depth Overview of the Aspen underwriting process Detailed reviews of our 4 product segments Evolving our enterprise risk management framework Managing financial levers to enhance profitability Delivering Quality Returns for Shareholders with Lower Volatility 5

6 Business Overview and Strategy Chris O Kane, Chief Executive Officer 6

7 Aspen: Where Are We 523 Professionals in 14 Locations 7

8 Recap: Insurance vs. Reinsurance Property vs. Casualty GWP by Core Platform Insurance Reinsurance Casualty Property US Bermuda 4 UK GWP $1.3bn Total Capital $1.3bn Common Equity $1.3bn Op ROE 16.0% BVPS $ employees 4 offices 3 countries GWP $1.8bn Total Capital $3.0bn Common Equity $2.3bn Op ROE 21.1% BVPS $ employees 14 offices 7 countries Improved Product and Geographical Diversification 8

9 Strategy: Key Elements Focus on specialty and more complex risks which fit with our skill-set 1. Doing What We re Good At Profitable expansion into new / adjacent lines and territories Better spread of risk and lower volatility Regarded as a Sector Expert by our clients Multi-platform approach 2. Running our Business Well Location of our people mirrors the production sources for the business we write Enterprise Risk Management as our core strategic enabler 3. Returns First, Growth Second Growth in book value per share primary metric by which we manage our business 9

10 1 Doing What We re Good At Focus on Specialty and More Complex Risks Products where... Because Meaning we tend to prefer This...not this Experience and judgement are critical to success Expertise can be rewarded We know how to manage these types of businesses We have developed deep knowledge & expertise over the years Space Specie Marine Property Fac Homeowners insurance Workers Comp Smaller markets where scale economies are less relevant Price is not sole determinant of purchasing decision We have a relative advantage versus competition We add value to clients & brokers Relatively low loss ratio Relatively low expense ratio Knowledge, relationships, service can be valued Focus on Products which Fit our Skill Set 10

11 1 Doing What We re Good At Profitable Expansion into New / Adjacent Lines and Territories Progressive diversification of strategic footprint through incremental expansion into adjacent business lines and selective establishment of new underwriting platforms / offices Key enablers: Consistent with core competencies Timing Availability of proven, successful underwriting teams Products Specialty Reinsurance Aviation Marine US Casualty Re US Excess & Surplus lines Aspen Re America Aviation Insurance Marine Insurance Energy Insurance International Property Facultative Professional Liability* Excess Casualty* Transportation related Liability Political Risk Financial Institutions Credit & Surety Reinsurance*** Platforms Bermuda London US Paris Zurich Dublin Lloyd s Singapore** Selective Business Line Expansion Resulting in Improved Diversification * Underwriting commenced post 09/07 ** Subject to final approval by Monetary Authority of Singapore *** Underwriting expected to commence Q

12 1 Doing What We re Good At Regarded as a Sector Expert by our Clients Business Lead (%) Catastrophe Risk Excess US Casualty US Int Casualty US Casualty UK Excess Casualty* Aviation Hull Specialty Re Marine Liability Political Risk* 0% 20% 40% 60% 80% 100% * Since January 2008 Recognised Leaders in Most of the Major Lines We Write 12

13 1 Doing What We re Good At Diversified Portfolio Improve spread of exposure/risk Selective Expansion into New Lines / Territories Reduce risk of unfavourable outcomes Lower volatility Diversification for Performance 13

14 1 Doing What We re Good At Benefits of Diversification Property Reinsurance Segment Only Property Reinsurance and Casualty Reinsurance 10.00% 9.00% 8.00% SD = 13.1% Sharpe SD = 13.1% Ratio = 0.69 Sharpe Ratio = % 9.00% 8.00% SD SD = = 10.7% 10.7% Sharpe Ratio = = % 7.00% Probabilities 6.00% 5.00% 4.00% Probabilities 6.00% 5.00% 4.00% 3.00% 3.00% 2.00% 2.00% 1.00% 1.00% 0.00% 0.00% <-31% -27% -23% -18% -14% -10% -6% -2% 2% 6% 10% 14% 18% 23% 27% 31% 35% 39% Return On Allocated Equity (ROAE for segment) Return On Allocated Capital for segment 43% 47% 51% 55% 59% <-31% -27% -23% -18% -14% -10% -6% -2% 2% 6% 10% 14% 18% 23% 27% 31% 35% 39% 43% Return On Allocated Equity (ROAE for segment) Return On Allocated Capital for segment 47% 51% 55% 59% Diversification Leads to a Reduction of the Risk of Unfavourable Outcomes Return on allocated capital less volatile (SD reduces to 10.7% from 13.1%, Sharpe Ratio increases from 0.69 to 0.90) Subject to the caveats on slides 2 and 3, this represents our estimates of modelled outcomes for

15 1 Doing What We re Good At Benefits of Diversification Distribution of Profit All Underwriting Product Segments 10.00% All Product Segments Property Reinsurance + Casualty Reinsurance Property Reinsurance Only All Underwriting Product Segments 9.00% 8.00% Strong Strong positive upside 7.00% 6.00% Reduced chance Reduced of chance of loss of loss SD = 9.4% Probabilities 5.00% 4.00% Sharpe Ratio = % Small Small increases in tail risk increases in in tail tail risk risk 2.00% 1.00% 0.00% <-29% -27% -25% -23% -21% -19% -18% -16% -14% -12% -10% -8% -6% -5% -3% -1% 1% 3% 5% 6% 8% 10% 12% 2008 ROE based on original plan 14% 16% 18% 19% 21% 23% 25% 27% 29% 30% 32% 34% 36% Diversification Results in 30% Reduction in Standard Deviation, 70% Improvement in Sharpe Ratio vs. Stand-alone Property Reinsurance The positive impact of diversification on Aspen s portfolio Diversification effect reduces volatility i.e. reduces significantly probability of unfavourable outcomes and in particular the chance of making a loss Subject to the caveats on slides 2 and 3, this represents our estimates of modelled outcomes for

16 2 Running our Business Well Enterprise Risk Management: Managing our Business Better Understanding linkage between assumed risk and capital at risk is key Risk management embedded within our culture and fundamental to everything we do Well defined risk appetite clearly articulated Leadership from the top Cascaded down throughout the organisation Actuarial Underwriting Risk Management Finance / Operations IT and processes designed to support underwriting and risk management objectives Claims Underwriting Legal Individual objectives and compensation structure aligned to company goals Aspen ERM rated strong by S&P; targeting excellent Risk Management and Infrastructure Aligned to Support our Goals via Underwriting Donuts 16

17 Running our Business Well Business Performance and Market Outlook Reinsurance Catastrophe Risk Excess Pro Rata Absolute Relative Price Terms and Volume Absolute Performance Outlook Pricing Movement Conditions change Scale Key 1, 2, 4 and 7 Excellent 3 and 5 Significantly up Facultative International Treaty US Casualty Treaty Casualty Facultative Insurance Specialty Reinsurance Aviation Energy PD Marine Hull MEC Liability UK Property UK Liability Professional Liability Excess Casualty Political Risk Financial Institutions US Property E&S US Casualty E&S 1, 2, 4 and 7 Good 3 and 5 Up 1, 2, 4 and 7 Satisfactory 3 and 5 Flat 1, 2, 4 and 7 Of concern 3 and 5 Down 1, 2, 4 and 7 Unsatisfactory 3 and 5 Significantly down Very significant Significant Medium Small Very small The table above comprises the blend of objective as well as subjective factors which combined represent our view of market conditions 1 - Rolling ROAE for the last four quarters from 2008 Q1 5 Comparison of 2007 actual premium to 2008 plan premium 2 - Ratio of Actual to Technical (or modelled) price Plan PAT figure (in $m) 3 - Relative Price Movement for all renewed contracts for YTD 30/04/ Terms and Conditions 7 - Outlook 17

18 Competitive Landscape Evolution of the Reinsurance Market Top 10: 35% market share Biggest had 10.5% share No Bermudan in top 10 Top 10: 38% market share Biggest had 9.3% share No Bermudan in top 10 Of the top 10 in 1991 three were sold, merged or exited market by year end Top 10: 58% market share Biggest had 14.9% share Three Bermudans in top 10 Of the top 10 in 1991 six were sold, merged or exited market by year end Number of Companies ,600 Start-up Capital by Wave Initial Capitalisation $m Class of 1993 Class of 2001 Class of , Rosemont ACE Ren Re IPC re Blue Ocean Mid Ocean (XL) Lasale XL Tempest (ACE) Platinum New Castle Hiscox DaVinci Arch Aspen Flagstone Montpelier Partner Re Validus Lancashire Class of 1993 Class of 2001 Class of 2005 Ariel Amlin Endurance Harbor Point AWAC Axis Increasing Scale Required to Compete 18

19 Competitive Landscape Capital Markets Competing (and Co-operating) with Traditional Reinsurers Capital markets increasingly competing in the traditional reinsurance domain Distinction between reinsurers and capital markets becoming less apparent but won t disappear altogether Reinsurers still provide services to the cedants not easily available from capital markets Capital requirement for new reinsurance start-ups now a significant barrier to entry Estimate future new entrants will require around $1bn of capital to compete effectively globally Ease and speed of sidecars will likely divert capital away from start-ups in the future 40 ILS and P&C Bonds 30 $bn * ILS O/S from previous years ILS new issues P&C Bonds O/S from prev. years P&C Bonds new issues Source: Swiss Re * To August 06 Demand for Cat Bonds and ILS Continuing to Grow with Side-Cars an Opportunistic Play 19

20 Competitive Landscape Continuing Evolution of Reinsurers Business Models Old Model Single risk capacity Multi-risk (Cat) capacity Surplus relief Reinsurer retained (up to) 100% of risk Old Environment Stable markets (usually profitable) Natural disasters Relationships strong (little commodity business) New Model Risk transfer as before but also: Co-reinsurance / capital market access Various capital structures (traditional common equity, hybrid equity, side-cars, ILS) Sophisticated capital allocation New Environment Volatile markets (often unprofitable) Climate change Economic convulsions Commodity price spikes Temporary capital structures Rating agency intervention Regulatory intervention Natural and man-made disasters Relationships weaker: commodity trading common Significant Increase in Complexity of Landscape in Which Reinsurers Compete 20

21 Competitive Landscape Continuing Evolution of Reinsurers Business Models Traditional model Insurer Risk Transfer Reinsurer Balance Sheet Traditional role of a reinsurer is to facilitate risk diversification and capital protection for insurers Current model Insurer Risk Transfer Reinsurer Capital Markets Reinsurers need to demonstrate a number of key attributes Risk selection expertise Provide risk solutions Work in partnership with capital markets Capital management/allocation Selection and management of partnership with insurers Use technology effectively Reinsurers Need to Adapt Their Models to Succeed Today 21

22 Aspen: Future Evolution Key Success Criteria Item Aspen Today Aspen: 5-10 Years Time Product Mix Geographical Mix Vision/Strategic thinking Expert Led Agility/Opportunism Claims Paying Ability Size Capital Efficiency Diversification Key Focus on Items Where Further Progress Required to Achieve Longer Term Objectives Unattractive Very attractive 22

23 How we Think about Opportunities Evaluation Framework Opportunities evaluated by reference to 2 sets of criteria Complementary exposure with overall book Products Adjacent New Low Execution risk High Underwriting Fit Material profitability and returns profile Availability of high quality individuals/teams Within management s experience and capabilities Risk profile Systems support infrastructure Marginal cost of doing business Existing Platforms New Operational Fit Remoteness Managerial stretch Culture and values Focus on Areas Where Execution Risk is Lower 23

24 How we Think about Opportunities 5 10 Years Time: Opportunities Map Products Adjacent New Financial Institutions London Political Risk London Professional Liability London Excess Casualty Dublin Accident & Health London Cargo & Specie London Credit & Surety Reinsurance Zurich Capital Markets Products Zurich Property Treaty Casualty Treaty CAR/EAR Reinsurance Zurich Extension of Asia platform Middle East Latin America New lines or platforms over last 18 months Evaluating opportunity Execution Risk UK Construction London NMT Liability Existing Property Facultative Singapore New Platforms Selective and Measured Approach to New Products and Platforms 24

25 2006 and Projected 2013 World P&C Market 2006 World P&C Market 2013 Projected World P&C Market Based on IMF projected 5yr average GDP growth Developed Markets ~80% W. Euro pe 33% Australasia 2% Middle East 1% CEE & CIS 3% Asia 12% Developed Markets ~76% W. Europe 30% Australasia 2% Middle East 1% CEE & CIS 4% Asia 14% N. America 45% India & A frica 1% Latin America 3% Emerging Markets ~20% N. America 44% India & Africa 2% Latin America 3% Emerging Markets ~24% GWP $1.5 trillion GWP $1.9 trillion 2.7% Annual Growth from Developed Economies and 5.9% from Emerging Markets But Developed Economies Still Constitute Largest Addressable Market 25

26 2008 and Beyond: 5 10 Years Time Key Elements Element Objective Retain specialty or niche focus Mix Geography Increase percentage of insurance vs. reinsurance business written Increase percentage of casualty vs. property business written Develop fee based income streams Take existing products to new platforms and increase penetration on existing platforms Focus more on under penetrated regions Insurance: increase percentage of US vs. non US Reinsurance: increase percentage of non US vs. US Continued Selective Expansion Consistent with our Skill Set and Subject to Market Conditions 26

27 2008 and Beyond: 5 10 Years Time Key Success Factors Right People Motivation Experience Appetite to succeed Alignment with shareholders (i.e., the right compensation structures) Right Tools Significant investment in ERM, actuarial and other quantitative techniques to enhance our business Right business model Niche focused Expert based Appropriately diversified (Insurance/Reinsurance, Property/Casualty, Geography) Right size Sufficient scale to withstand shock losses and compete effectively in changing (re)insurance landscape Aspen Well Positioned for Future Success 27

28 Mapping the Underwriting Process Kate Vacher : Director of Underwriting

29 What is Underwriting at Aspen? Do s Do Not s Right people Right Tools Right structure / controls One size fits all but tailored approach dependent on the complexity of the risks being written Underwriting Excellence = Maximising Return on Allocated Capital 29

30 How we Manage our Underwriting 30 Legal IT Claims Risk Management Property Reinsurance US Insurance Other Group Executive Casualty Reinsurance Risk Management HR International Insurance Actuarial Ceded Reinsurance Finance & Treasury Risk Management at the Core of our Business Quality Returns with Lower Volatility

31 Managing Underwriting Risk Defining underwriting strategy Actuarial Underwriting Finance / Operations Setting risk appetite Risk Management Monitoring underwriting risk Claims Underwriting Legal Underwriting Guidelines Appropriate underwriting authorities Underwriting Quality Review Underwriting Committee Focus on Ensuring Underwriting Decisions are the Right Ones 31

32 Underwriting Risk Management Example: Managing Casualty Risk & Concentrations Liability Risk Operational Risk Market Risk / Parameter Ris Risk Profile Presents Our Execution Market presents/imposes upon Class Product Exposure Automobile Liability Personal Automobile Commercial Automobbile Private Passenger Motorcycle RV's PP/LT/MT w/in 1st 10M Hvy/Xhvy w/in 1st 10M 15 passenger van w/in 1st 10M Taxi/Bus/Limo w/in 1st 10M Trucking w/in 1st 10M All auto xs 10M Knowledge: Access to / Availability of Quality Data Accumulation from any one event Latency Volatility Terrorism Correlation Pricing Reserving / Development Claim Management Judicial Reformation Polictical / Regulation / Legislation LOB/Segment Historic profitability General Liability BOP Mid-Size package National account (x Fortune 2000) Fortune 2000 Pharma Residential Construction w/in difficult jurisdictions Commercial Construction w/in difficult jurisdictions Physical or sexual abuse/misconduct NY Labor Law High excess Casualty Public Enitity Nursing Home Liquor Liability Umbrella Liability BOP/Light Auto Umbella Package/Mid Market Umbrella Mid Market Heavy Auto National Account/Large Account Environmental Heat Map Used to Identify Relative Degree of Exposure 32

33 Underwriting Risk Management Example: Managing Casualty Risk & Concentrations Liability Risk Risk Profile Presents Class Product Exposure Workers Compensation Pro Rata Excess W/in 1st M* Excess of 1st M Cat Statutory ** Knowledge: Access to / Availability of Quality Data Accumulation from any one event Latency Volatility Terrorism Heat Map Used to Identify Relative Degree of Exposure * W/in 1 st M = within the first $1 million **Excess of 1 st M = excess of the first $1 million 33

34 What Makes a Good Underwriter? Qualitative Quantitative Market Intelligence Client Selection Negotiating skills Ability to spot an opportunity Relationships Data/Information Analytical capabilities Capital allocation Constant recalibration Appropriate Blend of Qualitative and Quantitative Skills 34

35 Underwriting Risk Selection Our knowledge of client and business covered Quantitative Risk Assessment Ascertain loss expectancy and volatility Claims Actuarial Underwriting Legal Risk Management Finance / Operations Fit with underwriting guidelines and risk appetite Submission from approved broker Overall group relationship with client Review acquisition costs and commissions Target return on allocated capital Claims Underwriting Legal Legal Payment history of client Referral and peer review Qualitative Risk Assessment Appropriate decision documentation Client audits and visits Quality and completeness of data Review proposed contract wording and negotiate Portfolio Management Capacity/line size consideration Marginal impact on existing portfolio Competitive/market environment Legal and economic climate Practice Groups Risk Selection is Paramount = Right Underwriting Decision 35

36 Actuarial Pricing Individual account pricing Portfolio studies Development & maintenance of pricing tools Technical price governance Claims Actuarial Claims Underwriting Risk Management Underwriting Finance / Operations Legal Legal Reserving Reserving investigations Allocation Pricing Effective Rate Change Info Monitoring Effective Rate Change Capital Modelling, Reinsurance & Consulting Underwriting Risk Info Profitability Info Economic capital assessment Capital allocation Capital Reserving Evaluation of risk transfer options Portfolio optimization & efficient use of Reserving Risk Info capital Actuarial is Critical to Better Performance 36

37 Portfolio Study US Casualty Reinsurance January Renewals & New Business - Actual vs. Target Prices Written Premium by Actual / Target Band Per Programme 12,000,000 10,000,000 8,000,000 Premium $ 6,000,000 4,000,000 2,000, % - 80% 80% - 85% 85% - 90% Decreasing 90% - 95% 95% - 100% 100% - 105% Actual/Target 105% 110% Band % 115% 115% - 120% 120% - 125% 125% - 130% 130% - 135% 135% - 140% 140% - 145% Increasing 145% - 150% Actual / Target Band Focus is on Maximising Portfolio Return 37

38 Other: Claims / Legal / Finance / Operations Claims Client claims audits and visits Identification of trends and emerging risks Actuarial Underwriting Risk Management Finance / Operations Understanding potential volatility of claims reported Claims Underwriting Legal Assist in assessing impact of coverage changes Legal Individual contract review as appropriate Implications of significant reforms or judgments Contract wording guidance and specific clause training Finance/Operations Provision of timely and useful management information IT solutions to improve efficiency and effectiveness of underwriting Placement of reinsurance Better Management of Underwriting Process 38

39 Key Success Drivers Key metric to measure success is return on allocated capital Risk Management is at the core of the underwriting process Appropriate blend of qualitative and quantitative factors Performance Led Underwriting Approach 39

40 Underwriting Performance 120 Combined Ratio % Aspen Median Better Management for Better Performance Source: SNL Financial Peers include ACE, AWH, ACGL, AXS, ENH, RE, MXGL, ORH, PRE, PTP, TRH, XL 40

41 Casualty Reinsurance Brian Boornazian, Head of Reinsurance 41

42 Snapshot Casualty Reinsurance Cas Re 2007 GWP: By Line of Business $432m 31% 10% 8% 51% Business Products: Medical Malpractice, General/Umbrella Liability, Workers Comp, Professional Liability/Indemnity, Motor UK/Australia US Casualty (US Office) International Casualty US Casualty (London Office) Others Clients: Primarily Small to Medium Sized Carriers 2007 GWP: By Originating Platform Locations: US, UK, Europe, Canada & Australasia $432m 10% 7% 83% % Business lead: US Casualty (London Office) 60% US Casualty (US Office) 80% Int l Casualty 35% US UK Bermuda 42

43 Selective Expansion Selective expansion International Casualty Addition of US Casualty Addition of US Casualty Facultative Aspen Re America Cas Treaty Adding treaty capability to focus on Europe London based team London based team US based team US based team Zurich based team Premium Development GWP $m Year International Casualty US Casualty London US Casualty US Structured / Others Improved Portfolio Diversification Through Selective Addition of New Teams 43

44 Business Profile Casualty Reinsurance What we like to do What we don t like to do U.S. Casualty Mono-line/mono-state companies (Med Mal, Workers Compensation) with particular emphasis on practitioner clients E&S, regional, specialty selective approach to choosing clients International Casualty Excess of loss treaty; focus on General third party with some motor, Employers Liability, Workers Compensation and Professional Indemnity U.S. Casualty x Large nationwide companies (ex Workers Compensation Cat), Med Mal-occurrence based and D&O x Fortune 500, large trucking, FI, publicly traded D&O/E&O, lead large national account umbrella International Casualty x US domiciled cedants and unfamiliar jurisdictions Why Maintain good degree of diversity across both geography and business lines Smaller specialized companies tend to have a better loss history and proactive risk management which increases profitability Lack of extreme volatility/less extreme cyclicality Reinsurance and reinsurance relationships are a vital part of clients business need Quality and transparent data and pricing capabilities (allowing for actuarial pricing and minimisation of parameter) In-house underwriting experience Targeted Approach Focused on Areas Where We Have Expertise 44

45 Staff and Operational Structure Casualty Reinsurance Brian Boornazian Head of Reinsurance Rocky Hill, CT 25 years of experience Tony Spice International Casualty London 29 years experience 6 Mike Clifton US Casualty London 19 years experience Emil Issavi US Casualty ARA 4 Rocky Hill, CT 15 years experience 7 Average Underwriting Experience 12 years Average Underwriting Experience 14 years Average Underwriting Experience 20 years Staffing 41 employees Location of Employees 22% 55% 49% 29% 40% 5% Underwriting Claims Actuarial US London Other Right People : Highly Experienced Senior Underwriting Team with 16 Years Average Experience x # of underwriters 45

46 Distribution Approach Casualty Reinsurance Brian Boornazian US Casualty (UK) 6 underwriters International Casualty 4 underwriters US Casualty (US) 4 treaty underwriters 3 facultative underwriters Platforms London London Platforms Zurich Connecticut Product Product Focus Focus Med Mal, Workers Comp, Professional Liability, General Liability, Auto Liability, Fidelity & Surety Excess of loss treaty Motor UK, Employers Liability, Professional Indemnity, Motor Australia Treaty and Facultative E&S, regional, specialty Geographical Geographical focus focus United States Canada (Accountants and Med Mal) London market, Europe, Canada (Auto and General Liability), Australasia United States Structured to Efficiently and Effectively Access Business 46

47 Strategic Focus Casualty Reinsurance Focus on business where class and client-specific knowledge is imperative Includes mono-state/mono-line companies, regional, specialty and E&S Strong client relationships Deep knowledge of the market Frequent and robust audits Service culture Continuity and consistency of approach Multi-line responsiveness through ability to deliver combined property and casualty expertise Rapid response to referrals Lead quoting market Set terms and prices on majority of business Tailor products specific to client needs 47

48 Managing the Soft Cycle Risk selection Data quality Casualty Reinsurance Pricing Trend Customer knowledge/track record Lead quoting market 500 Actuarial experience 400 Audit capability Transparent pricing 100 Service Capacity/line size Efficient Underwriting Structure GWP Aspen's Aspen s Casualty RI reinsurance Rate Index Rate Index Track Record of Managing the Soft Cycle 48

49 Focus 2008 and Beyond US Casualty (London Office) Expand Canadian business (currently 5%) Reduce income estimates as rates soften and cover expands International Casualty Develop European business from Zurich Expand writings in the UK market based upon opportunity Maintain Australian and Canadian portfolio US Casualty (US Office) Expand product offering to proven, cycle managed companies Well balanced and diversified portfolio of regional and specialty (inc. E&S) Position away from volatile jurisdictions & very large national account business Continue to build actuarial and underwriting platform equal to growth and service expectations Centralised underwriting with broker distribution allows expense control See slide 2: Safe Harbor Disclosure for reference to important factors that could cause actual results to differ from strategic growth plans 49

50 Underwriting Case Studies Casualty Reinsurance Client: US insurer with niche geographical focus Client: US Insurer entering new product segment Issue New management team needed underwriting support and impartial advice Issue Client wants Aspen excess pricing and underwriting expertise prior to finalizing business plan Aspen s response We invested in clients through in-depth visits and underwriting reviews Made a number of recommendations which were taken up immediately Aspen s response On very short notice met at client s location to discuss business plan Offered actuarial services and recommended excess pricing Worked with client to establish underwriting guidelines Outcome for client Translated to immediate increase in premiums and decline in loss ratio Outcome for client Client is able to enter market quickly with appropriate controls and pricing Client feels Aspen s input and support will insure placement of reinsurance program Outcome for Aspen Acquired favoured reinsurer status for quotations and signing Aspen now writes 25% on a very popular and profitable treaty Outcome for Aspen Aspen awarded lead reinsurer status and viewed as main consultant by client in underwriting and pricing decisions Expertise and Service Valued by Client Resulting in Better Returns for Aspen 50

51 Property Reinsurance James Few, Head of Property Reinsurance 51

52 Snapshot Property Reinsurance 2007 GWP: Lines of Business Prop Re $602m 9% 7% 19% 21% 44% Business Products: Catastrophe Excess of loss, Risk Excess of loss, Pro Rata treaty, Facultative, Structured Risk Catastrophe Risk Excess Pro Rata Facultative Structured Property 2007 GWP: By Originating Platform Clients: Focus on personal lines and small to medium commercial risk insurance carriers 62% 22% 1% 15% Locations: US, UK, Europe, Bermuda, Singapore % Business lead: 70% US UK Bermuda Other 52

53 Business Profile Property Reinsurance What we like to do Focus on Must Have reinsurance Understand customer s motivation Treaty & facultative co-ordinated approach Think global, act local Provide added value services Develop long-term partnerships via mutual u understanding Why Products sold in most appropriate locations Quality, diversifying risks do not travel far Close proximity to the customer leads to greater understanding of risk and stronger relationships What we don t like to do x Risks where data doesn t meet our standards x Risks where we do not know the client Facultative underwriting provides the wider property team with detailed and current market intelligence Significant presence in all major market hubs x Model dependent reinsurance Auditing adds value for Aspen and the customer Targeted Approach Focused on Areas Where We Have Expertise 53

54 Strategic Focus Property Reinsurance Target clients for whom reinsurance is an essential part of their business plan = a must have not a nice to have Bias towards personal lines and small/medium commercial risks Balanced portfolio constructed around long-term trusted customers Operate a service culture offering lead terms Develop strong understanding of clients business Enhanced underwriting in terms of risk selection, terms & conditions and pricing Relationship management remains important In depth auditing and data mining significantly improves analysis Leverage our reinsurance knowledge and leadership positions to offer added value Underwriting new risks (e.g. mould, terrorism) Management of large claims Cat peril research and development Advice on strengths and weaknesses in state of the art modeling Experienced Team with Long Term Client Relationships 54

55 Staff and Operational Structure Property Reinsurance James Few Head of Property Re Bermuda 15 years of experience Mike Sowa Senior Vice President & Head of ARA Property Re Rocky Hill, CT 21 years experience Jacopo D Antonio President & Chief Underwriting Officer Europe 17 years experience Staffing 66 employees Location of Employees 15% 11% 2% 72% 9% 11% 21% 29% 30% Underwriting Claims Actuarial Other Bermuda US London Zurich Other x # of underwriters Right People : Team of 66 Underwriters with 18 Years Average Experience 55

56 Distribution Approach Property Reinsurance Property Re James Few London 9 underwriters US 11 underwriters Bermuda 8 underwriters Switzerland 4 underwriters Paris 4 underwriters Singapore 1 underwriter Rationale Rationale London Market specialist underwriting Working layer and proportional fire driven contracts supported by frequent auditing Cat driven business Aspen Re Europe brand to improve access to attractive European risks Facultative hub to access attractive European risks Facultative hub to access attractive Asian risks Product Product focus focus Cat, risk, pro rata treaty Facultative Risk, pro rata treaty Facultative Cat, risk, pro rata treaty Structured Risk Cat, risk, pro rata treaty Facultative Facultative Geographical Geographical focus focus Canada Latin America RoW ex USA USA USA Japan UK Europe Europe Asia Structured to Efficiently and Effectively Access Business 56

57 Underwriting Case Studies Excellent Service Client: Major US insurer Issue Complex claims adjustment needs after WTC Aspen s response Led the London market to an acceptable settlement for both the client and reinsurers Outcome for client Complex claim settled in a mutually acceptable manner and in a reasonable timeframe Sector Expert Client: Major specialist US insurer Issue Clients need to understand how reinsurers develop their grid rates Aspen s response Only market to respond in detail to client s request Prepared reports, briefing notes and devoted 12 hours with the client to take them through our methodology Outcome for client Better understanding and acceptance of our pricing rationale Relationship with Aspen built on trust and co-operation Outcome for Aspen Further cemented our position as a trusted and favoured reinsurer for quotations and signing Signing protected when reinsurance capacity returned to the market in the past 2 years Outcome for Aspen Client accepted Aspen s more restrictive terms Named as Market Leader before we committed a line Service and Expertise Valued by our Clients = Better Returns 57

58 Progress Since 2006 Continued geographical diversification Aspen Re Europe Aspen Singapore* & Paris facultative offices Further footprint expansion likely over time Improved portfolio balance Changes of 06/07 maintained Portfolio management tools enhanced Delivered on our 2006 Objectives * Subject to final approval by Monetary Authority of Singapore 58

59 Improved Balance in Exposure Profile % reduction in Cat US Wind but only 5% reduction in Cat premium $m Dec-05 Dec-07 Projected '08 Cat Premium Cat US Wind 1% OEP Risk Premium Risk US Wind 1% OEP Pro Rata Premium Pro Rata US Wind 1% OEP Improved Balance of Peak Exposure *OEP: Occurrence Exceedance Probability Excludes business written by Aspen Re America 59

60 Improved Risk Excess of Loss Balance No. of Programmes # Lines Average Line $m m 3-5m 5-10m 10-15m 15m+ Line size Line Sizes Reduced: Risk Selection Key, Evidenced in our Share of Recent Risk Losses 60

61 Estimated Share Of 2007 & 2008 Large Losses Event Market Loss ($) Aspen loss ($) Aspen share (%) Windstorm Kyrill $6.1bn $22m 0.3% UK Flood (June 07) $2.5bn $10.5m 0.4% UK Flood (July 07) $2.0bn $2m 0.1% CA Wildfire $2.4bn $21m 0.9% Windstorm Emma $1.5bn $4.5m 0.3% US Tornados (Cat 27) $850m $3m 0.4% 1Q 08 Risk Losses $4.3bn $16m 0.4% Aspen Share Below Estimated Market Share 61

62 Claim Payment Response Time As Reported by Aon Limited Aspen Reinsurance America rated best payment settlement time in our category as compared to the top 10 domestic US Reinsurers Aspen Insurance Limited rated in top tier of Bermuda Reinsurers for payment settlement time Aspen Insurance Limited UK rated best payment settlement time for London Reinsurers Aspen treats all major brokers equally and therefore we would expect similar results elsewhere Prompt Payment of Valid Claims 62

63 Understanding Exposure - Beyond Loss Modeling Audit Reporting Optimization Portfolio Analytics Exposure Data Cat Model Results CATman Pricing Accumulation Probabilistic Loss Modelling Claims Non-Cat Report Risk Clash More Than Just Running a Model 63

64 Key Priorities Continue to prudently manage large lines & risk clash potential Continue broadening the Aspen footprint to take advantage of diversifying opportunities Risk book focus shifted away from large complex original risks Improve data quality Partner with vendor models to produce improved products (Data Mining & Risk Clash) Audits are essential Sophisticated portfolio optimisation technology Enhancing Portfolio Balance 64

65 Vision 2008 and Beyond Current footprint likely to grow into new regions, as opportunities arise Current focus on R&D will continue Product range will develop as the market develops Cycle management will be key to success In-depth customer knowledge is crucial in toughening markets Service and relationships remain important Global Diversification; Local Operations 65

66 International Insurance Matthew Yeldham, Head of International Insurance 66

67 Snapshot International Insurance Int. Ins 2007 GWP: By Line of Business $663m Business Products: Marine, Energy & 22% Liability (including non-marine 46% 1% transportation), UK Property, UK Employers Liability / Public Liability, Professional Liability, 31% Excess Casualty, Professional & Financial Institutions, Political Risk Aviation & Specialty RI and Specialty Reinsurance Marine, Energy & Liability Professional & Financial Lines UK Insurance 2007 GWP: By Originating Platform Clients: Insurance companies, Fortune 1000 corporations, and various other commercial and industrial companies 8% Locations: Worldwide (inc: US, UK & Europe) % Business lead: 46% UK Bermuda 67

68 Evolution International Insurance Products Specialty Reinsurance (Aviation & Marine ) Aviation Insurance Transportation related Liability Professional Lines Excess Casualty Political Risk Financial Institutions Marine, Energy & Liability Insurance UK Property & Liability Platforms London Dublin Lloyd s Premium Development GWP $m * 2003* UK Insurance Marine, Energy & Liability Other Aviation & Specialty RI Professional & Financial Lines Progressive Development of Insurance Footprint Through Selective Team Hires 68

69 Business Profile International Insurance What we like to do What we don t like to do Marine, Energy & Liability: Construction, vessels, onshore and offshore energy, long-tail liability insurance Aviation & Specialty Re Aviation hull, liability and war insurance; marine, aviation, crop, space and terrorism reinsurance Professional & Financial Lines Professional and financial liability for Fortune 1000 and equivalent companies UK Property & Liability Insurance Employers and Public liability insurance, commercial property and property owners liability insurance x Personal lines x Casino vessels, pleasure yachts or US brown water hull x US or Japanese airlines or critical component manufacturers x Downstreaming energy physical damage business x Direct & Facultative Property (except UK Commercial) Why Requires a specialist approach Focus on complex risks which leverage experience base and relationships Diversification (by customer and product) to improve portfolio balance Reduced reliance on limited number of classes and improved spread of risk Expert Based, Niche Focused and Limited Correlation within Segment 69

70 New Classes Financial and Professional Lines Focus Professional Indemnity GWP Split by Line* Description 15% Professional Indemnity and E&O cover for most professional activities 34% 51% Mix Others 10% Financial advisors 15% Accountants 20% Architects/Surveryors 15% Professional Liability Insurance Financial Institutions Insurance Political Risks Insurance Maximum Line Size Financial Institutions: $20m Political Risks: $60m** Professional Liability: $10m Do Don t Solicitors 15% Support services 10% Engineers 15% Write Professional Indemnity and associated exposures Target well managed businesses across all sectors Focus on medium to large risks paying excess of 75k premium Provide risk and claims management support to insureds Write >20% in any one sector Write risks with >30% of turnover in US * Estimated 2008 ** Except Political Violence 70

71 New Classes Financial and Professional Lines Financial Institutions Political Risk Description Financial Crimes ( Bankers Blanket Bonds ), Professional Indemnity and Directors & Officers cover for Financial Institutions Mix Description Political Risk loss of investments from host government actions Political Violence war or violence on land Contract Frustration failure of a contract as a result of government actions Credit buyers insolvency or protracted default Mix Do Don t US Brokers / Dealers Do Focus on projects / investments that have a clear economic benefit to the host country Top Canadian banks Source business from specialist brokers Regional / super regional banks in the US Underwrite the client as well as the risk Crime international SME business (BB/PI/D&O) Good risks in difficult countries BBB 45% D&O 10% PI 45% BBB Bankers Blanket Bonds Stand alone entity D&O business for large investment banks Don t Hedge funds in the US Follow market wordings Primary French / Italian/Greek Banks Surety bonding PR 79% CF & Credit 19% PV 2% PR Political Risk PV Political Violence CF Contract Frustration Write financial risks where the client wants to lay off risk rather than risk share 71

72 Staff and Operational Structure International Insurance Matt Yeldham Head of International Insurance 16 yrs experience John Henderson David Whiter Russell Griffiths Paul Rudden Nick Evans Bernard de Haldevang Bob Patten Head of Marine, Energy Head of Aviation & UK Property UK Liability Professional Liability Political Risks Excess Casualty & Liability Specialty Re London London London London Dublin Insurance, London London 33 yrs experience 32 yrs experience 22 yrs experience 25 yrs experience 26 yrs experience 33 yrs experience 30 yrs experience Staffing 79 employees* Location of Employees* 22% 6% 8% 72% 92% Underwriting Claims Actuarial London Other * Excluding IT x # of underwriters Right People : Senior Team with 27 Years Average Experience and Proven Track-Record 72

73 Distribution Approach International Insurance International Insurance Matt Yeldham London (Company) London (Lloyd s) Dublin 4 Underwriters 46 Underwriters Rationale Rationale Worldwide hub for wholesale specialty business Location of expertise for these lines of business Leading market for Marine, Energy and Aviation risks Access to worldwide distribution capability Partnership with a strong worldwide brand Significant location for writing of excess casualty business outside Bermuda Available talent with relevant expertise Product Product focus focus Marine, Energy and Liability Insurance Aviation and Specialty reinsurance Financial and Professional lines UK Property and Liability Insurance Energy PD Marine Hull Specialty Liability Space Aviation war and deductibles Excess Casualty Geographical Geographical focus focus Europe US Worldwide Europe US Worldwide US Right Places : Structure Mirrors Key Production Centres for Targeted Business 73

74 Underwriting Case Studies International Insurance Client: Chartered Surveyor Example 1: Professional Lines Example 2: Non-marine Transportation Liability Client: Publicly-traded truckload carrier in US Issue Significant overvaluation of claims policy years New managing director (ex bank operations manager) appointed 2003 Changes in training and business controls introduced in 2004 Benefits apparent by mid 2007 but unrecognised by insurers By 2007 renewal, insured feeling misunderstood and unfairly treated Aspen s response Aspen proposition offered bespoke risk management review to understand specific risks to enable long term stability and mutual benefits ` Issue Open claims under reserved Reactionary claims process in place Empathetic claims model not employed Aspen s response Aspen commissioned review by outside Counsel and stipulated issues outlined above be addressed as a condition of cover Outcome for client Greater claims and insurance cost stability Improved risk management systems Outcome for client Meaningful cost savings since the changes were made Reduction in open claims from 900 plus days to a year Outcome for Aspen Pre-quote investigations enabled Aspen to quote more appropriate structure; price quoted higher than expiring insurer Insured needed no price incentive to change to Aspen at renewal Outcome for Aspen Aspen established key insurer status Contract commuted by insured each year Superior Service and Intelligent Approach to Underwriting 74

75 Strategic Focus International Insurance Diversification Create a diverse and balanced portfolio of insurance lines, (which are all at different stages within their own market underwriting cycle) in order to produce consistent and acceptable returns Cycle Management Focus on managing the bottom line result during the soft cycle including the maintenance of underwriting discipline which entails reducing top line where necessary Grow the top line opportunistically during the hard cycle to maximize returns for shareholders Selective Expansion Expand footprint to take advantage of underwriting opportunities which fit with our skillset Focus on adding non-correlating lines Vision: To Be One of the Pre-eminent Insurers of Choice for Complex Commercial and Industrial Risks 75

76 US Insurance Nathan Warde, Head of U.S. Insurance 76

77 Snapshot US Insurance US Ins 2007 GWP: Lines of Business $123m 67% 33% Business Products: Excess and Surplus Lines, Specialty property and casualty commercial coverages Property Casualty 2007 GWP: By Originating Platform 100% Clients: Select wholesale producers Locations: Atlanta, GA; Boston, MA; Pasadena, CA; Scottsdale, AZ US 77

78 Business Profile US Insurance What we like to do What we don t like to do Property Inland Marine Casualty General Liability Professional Liability E&O* Umbrella Focus on strong performing wholesale producers/programs Balance between primary and excess exposures (approx 50/50) Strong geographical spread x Risks requiring significant preunderwriting review x Occupancies requiring substantial pre-engineering x Classes with high claims frequency x Classes with above average litigation/class actions exposure x US D&O** Why Classes and products fit very well with Aspen s specialty focus Focus on sectors that Have strong fit with our in-house underwriting expertise Can be assessed and underwritten quickly Products and regional diversification reduces volatility and extremes of market cycle Access business without need for large networks or support infrastructure Provides flexibility to select and target profitable segments and where necessary withdraw capacity * E&O = Errors & Omissions ** D&O = Directors & Officers Targeted Approach to Leverage Underwriting Skills / Expertise 78

79 Staff and Operational Structure US Insurance Nathan Warde President US Insurance 23 yrs experience Grant Bentley EVP Property Atlanta 30 yrs experience 11 David Lewis EVP Casualty Boston 18 yrs experience 16 Staffing 101 employees Location of Employees 24% 11% 13% 52% 4% 8% 23% 65% Underwriting Claims/IT Finance/Actuarial Administrative Atlanta Boston Pasadena Scottsdale x # of underwriters Right People : Senior Team has Average 24 Years of Underwriting Experience 79

80 Evolution US Insurance Selective expansion into new lines and geography Established Aspen Specialty Insurance Co. to focus on E&S (Property & Casualty) Nathan Warde appointed in April Property portfolio re-engineered Casualty risk appetite broadened Portfolio repositioning - Professional Liability, Umbrella Premium Development $250 $200 $150 Performed consistently well $100 $50 $ e Performance unsatisfactory and account being repositioned US Property US Casualty Focus on Repositioning of Property and Enhancing Casualty in 2007/

81 Repositioning Property and Enhancing Casualty Property Strengthening underwriting staff through selective hires Repositioning portfolio to achieve better balance - More diverse occupancies - Better split between primary and excess of loss Focus on trading relationships Casualty Broadening our risk appetite in specialist sectors with in house expertise Leverage our market knowledge and experience to extend risk appetite to develop existing lines and enter new lines - Umbrella - Professional Liability Meaningful Progress in Evolving US Insurance Footprint 81

82 US Insurance Repositioning Distribution Through Select Wholesalers Active Producer Management Reciprocated by our Service Led Approach Balanced by our Underwriting Expertise and Market Knowledge Solidified by Mutual Success Focus on select wholesalers Expand our reach into all areas and beyond our physical office locations Filter business submitted to us based on their knowledge of what we write New products and developing opportunities Don t want to be all things to all people Favour producers who: Know and understand our approach Add value to the transaction Enhance the placement by aiding in the risk discovery and underwriting process Key producers in their regions, and Strive to protect their relationships with their markets Focus on Active Producer Management and Investment in Developing Long-term Relationships 82

83 Repositioning Property Account Profile Occupancy Profile Perils Profile Temporary Lodging 2% General Manufacturing 3% Government & Education 2% Mining 2% Real Estate 1% Distribution & Wholesale 1% Other 2% Retail 4% All Risk Exclude FL & EQ 69% Personal & Repair Services 6% Apartment Buildings 66% 06 / 07 Year All Risk Include FL & EQ 31% Office Buildings 11% Personal & Repair Services 8% Distribution & Wholesale 4% Mining 5% Government & Education 7% FL = Flood EQ = Earthquake DIC = Difference in Conditions Real Estate 10% General Manufacturing 3% Other 5% Retail 10% Apartment Buildings 24% Temporary Lodging 11% Office Buildings 13% 07 / 08 Year All Other 1% All Risk Include FL All Risk Exclude FL & EQ 30% & EQ 47% All Risk Include FL & Exclude EQ 1% Greater Diversification of Occupancy and Perils Profiles DIC 17% Windstorm & Hail Only 2% All Risk Exclude FL & Include EQ 2% 83

84 'Apr '08 Impact of Property Repositioning US Property Insurance Gross Claims Incurred By Calendar Month: excludes KRW $m 'Mar '08 'Jan 06 'Feb 06 'Mar 06 'Apr 06 'May 06 'Jun 06 'Jul 06 'Aug 06 'Sep 06 'Oct 06 'Nov 06 'Dec 06 'Jan 07 'Feb 07 Mar '07 'Apr 07 'May 07 'June 07 'July '07 'Aug '07 'Sep '07 'Oct '07 'Nov '07 'Dec '07 'Jan '08 'Feb '08 All claims by Month All claims 3-Mth Avg Claims excl. 7 Non Renew ed Accounts 3-Mths Avg Property Repositioning Reflected in Lower Gross Loss Ratio

85 Managing the Cycle Cycle management is both a soft market and hard market necessity Apply robust analytics and market intelligence Key tools Chart rate movements based on all of our bound business GWP $m RRV Capture extensive data on all quote and bound accounts Property Property RRV 100 Continually analyze data for meaningful information to spot developing trends Monitor portfolio development: 90 - Limit and attachment profiles - Occupancy/peril and class profiles GWP $m RRV - Rate movements and benchmark rate variances Production and business profile by producers and underwriters Casualty Casualty RRV Approach Structured to Detect Quickly and Respond Decisively to Cycle Changes 85

86 Strategic Focus 2008 and Beyond Target Accounts Company underwriting expertise required and recognized price not sole determinant of placing business Focus on areas within our expertise Underwriting for Profit Leverage expertise / underwriting experience Write to technical price for all lines Apply Intelligent and Creative Underwriting Approach Take a contrarian approach where necessary Do not aim to be market followers Responsiveness and flexibility to meet clients needs Portfolio Management for Diversification Aim for 50/50 balance between primary and excess layers Improve geographical spread targeting areas with minimal CAT accumulations Upper Atlantic Pacific Northwest Midwest Utilize Wholesalers to Expand our Reach Business written with select wholesalers Appointments managed within geographic regions Reach extends throughout the US See slide 2: Safe Harbor Disclosure for reference to important factors that could cause actual results to differ from strategic growth plans 86

87 Vision 2008 and Beyond Enhance the Aspen Brand Establish Aspen as a premier specialty underwriter Recognition from producers as a go to market Recognition amongst peers as a smart competitor Look to obtain admitted capability, as appropriate Currently operating solely on a non-admitted basis Admitted capability allows broader product mix Building our capabilities and scale Avoid commodity business Selectively add new products and lines of business when market conditions are right Currently looking to broaden existing lines, adding attractive subsegments Retain focus on the specialty arena Retain flexibility to respond to market opportunities See slide 2: Safe Harbor Disclosure for reference to important factors that could cause actual results to differ from strategic growth plans 87

88 Risk Management Framework and Approach Oliver Peterken, Chief Risk Officer

89 Overview Levels of Risk Management Strategic Risk Management Superior asset-liability allocation Risk implications of strategy Asset liability management Quantitative, dynamic ERM Enterprise Risk Management S&P ERM strong rating Risk-based capital Advanced risk modelling Extreme event risk management Operational Risk Management No surprises Operational risk and process control Regulatory control Underwriting control and emerging risks 89

90 Enterprise Risk Management Recognised as an Aspen strength by S&P in 2006 and reaffirmed in 2007 S&P: ERM ratings for Global Insurers and Reinsurers 3% 5% 11% 81% Weak Adequate Strong Excellent Source: S&P 90

91 Risk Governance Board Ultimate ownership of all risks Risk Committee Internal Governs the risk management framework Audit 3 Third line of defence Executive Management Risk ownership and accountability Risk Risk Management Management Design, Design, maintenance maintenance and and operation operation of of framework framework 2 Second line of defence Aspen Licenses Control Framework Product / underwriting areas Risk ownership / local control Support functions Risk ownership / local control Legal Entities Risk ownership / control 1 First line of defence Three Lines of Defence 91

92 Aspen s Risk Management Principles Principles Outcomes Openness Discipline Anticipation Accountability Oversight Appropriate risk taking behaviour Compliance with Aspen standards Constant evaluation of risk assumptions Effective risk culture 92

93 Key Global Risks Very Large Multiple extreme nat cat events Ratings downgrade Reputational damage SEVERITY Pandemic Asset meltdown Regulatory intervention Major reserve strengthening Financial markets disruption Modelling error Group risk Commodities hyper-inflation 100 year cat event Terrorism Credit loss Securities class action Major OP risk loss Liquidity crisis Major risk clash Bermuda tax status Underwriting errors Infrastructure disruption Very minor Operational errors Highly Probable Highly Improbable LIKELIHOOD 93

94 Core and Non-Core Risks Core risks Non-Core Risks Optimise subject to risk appetite and risk capital Minimise subject to cost benefit Risk capital Return Cost Risk appetite Underwriting Market Operational Credit Strategic Group Regulatory Reputational Expected Risks 94

95 Risk Budget Dynamic Risk Capital Allocation at TVAR 99% Operational Other Investment Reserving Underwriting Annual Risk Budget Sets the Asset-liability Risk Parameters for the Year Ahead 95

96 Operational Risk Management Process Risk Analysis Risk Evaluation Risk Capital Attribution Action Programme INPUT Workshops Risk objectives Business risks Case studies Business environment Peer review Frequency scores Severity scores Risk Modelling process Mean loss Tail risk Stress test scenarios Priority top 5 risks per business unit Agreed recommendations/ mitigation actions OUTPUT Identification of key risks and controls Risks quantities defined Loss distribution quantified Risk reduction Operational Risk Minimisation Program 96

97 Operational Risk Case Study Risk Profile Matrix Example Business Unit Illustrative Inherent Risk Profile Residual Risk Profile Probability Probability 0 Less than $5m $5m - $25m $25m - $100m $100m - $250m Greater than $250m 0 Less than $5m $5m - $25m $25m - $100m $100m - $250m Greater than $250m Greater than 50% (1 in 2yrs) Greater than 50% (1 in 2yrs) % - 50% (1 in 20yrs - 1 in 2yrs) % - 50% (1 in 20yrs - 1 in 2yrs) % - 5% (1 in 100yrs - 1 in 20yrs) % - 5% (1 in 100yrs - 1 in 20yrs) % - 1% (1 in 250yrs - 1 in 100yrs) % - 1% (1 in 250yrs - 1 in 100yrs) Less than 0.4% (1 in 250yrs) Less than 0.4% (1 in 250yrs) Severity Severity Low Medium High Very High Risk Profile Shows Impacts of Controls and Facilitates Targeting of Undesirable Risk Hot Spots 97

98 Catastrophe Risk Management Limits Hierarchy Group Aggregate Cat Risk Appetite ( GACRA ) Tail risk TVAR 99% = cat risk budget Single event risk tolerance Any zone or peril 17.5% of capital * at 1 in 100 yr return period US wind Cal quake US eastern quake US NW quake Europe wind Japan 25% of capital * at 1 in 250 yr return period Zonal risk tolerances * Risk tolerances expressed as a percentage of total shareholders equity, i.e. potential impact on ROE increases with increased leverage 98

99 Catastrophe Risk Management Risk Type Indicator Group aggregate cat risk ( GACRA ) TVAR 99 $851m $860m $689m Limit: Group - single event 0.01% 0.1% 0.4% 1% 10% 34% 27% 75% 45% 34% 27% 10% 75% 45% 34% 27% 10% Limit: Group - zonal Single peril 1% OEP* 17.5% 17.5% 17.5% Single peril 0.4% OEP* 25% 25% 25% Capital defined as total shareholders equity * OEP = Occurrence Exceedence Probability 99

100 Capital Exposed to Aggregate Tail Risk % Capital * 35.6% % -31% Cat risk budget (GACRA) % % ** * Capital defined as total shareholders equity ** 2008 capital as at December 31,

101 Aspen s Worldwide Natural Catastrophe Exposures Major peril zones, 100 year return period as a percentage of total shareholders equity 0% 17.5% US Eastern Earthquake US Pacific NW 5% 10% 15% Californian earthquake Japanese earthquake & typhoon European Wind US hurricane Group Risk Tolerance Japanese Earthquake & Typhoon US Hurricane European Wind Californian Earthquake US Pacific NW Earthquake US Eastern Earthquake Source: Aspen analysis using RMS v7.0 occurrence exceedance probablility at 1 April

102 Aspen s Reserving Risk Exposures Project segments, 100 year reserving risk as a percentage of total shareholders equity 0% 10% US Insurance Property R/I Other 5% International Insurance Casualty R/I 2008 opening reserves Other Property R/I International Insurance Casualty R/I US Insurance Source: Aspen analysis and 2007 annual report 102

103 Aspen s Non-Catastrophe Event Exposures Realistic disaster scenarios as a percentage of total shareholders equity 0% 10% North sea oil complex 5% Aviation collision over NYC Marine collision 100 year non-cat losses Property R/I International Insurance Casualty R/I US Insurance Source: Aspen analysis using selected Lloyds realistic disaster scenarios and Aspen modelling 103

104 Overview Levels of Risk Management Strategic Risk Management Enterprise Risk Management Operational Risk Management 104

105 Quantitative Techniques in ERM Julian Cusack, Chief Operating Officer

106 Agenda 1. Risk tolerances 2. Value models 3. Optimizing capital management 4. Optimizing catastrophe exposure ERM Shareholder value 106

107 Risk Tolerances Risk tolerances are boundaries we set for ourselves Examples 1 in in year year cat cat loss loss < 17.5% 17.5% of of SHE* SHE* Financial Financial leverage leverage < 30% 30% Single Single city city terrorism terrorism PML PML <$200m <$200m Investment Investment VAR VAR < 5% 5% * Total shareholders equity including preference shares 107

108 Traditional Approach to Setting Risk Tolerances Analyze risk/reward trade-offs Assess rating agency, customer and shareholder perspectives Make the call 108

109 Setting Risk Tolerances Improving the Traditional Approach Objective is to move from: Multiple choice presented as risk/reward trade-offs or an efficient frontier To: Single best value that optimizes sustainable shareholder value 109