Business Portfolio Optimization. We made continued progress on our business optimization initiatives in 2016 and further diversified our business by product and geography.
Gross written premiums of $3,147 million in 2016, an increase of 5.0% from 2015.
Combined ratio. We monitor the ratio of losses and expenses to net earned premium (the “combined ratio”) as a measure of relative performance where a lower ratio represents a better result than a higher ratio. The combined ratios for our two business segments for the twelve months ended December 31, 2016, 2015 and 2014 were as follows:
The combined ratio for 2015 increased by 0.2% percentage points compared to 2014 due to a 0.8 percentage point increase in the loss ratio, partially offset by a 0.6 percentage point reduction in the expense ratio. The loss ratio increase was due to the insurance segment which experienced an increased frequency of mid-sized losses and higher catastrophe losses. The reduction in the expense ratio was due primarily to a lower operating expense ratio in the insurance segment as we reach scale in our U.S. operations partially offset by higher acquisition costs in the reinsurance segment due to a change in business mix towards pro rata business which attracts higher commission rates.
Taxes. We recognized a tax expense in 2016 of $6.1 million (2015 - $14.4 million expense; 2014 - $12.1 million expense), equivalent to a consolidated rate on income before tax of 2.9% in 2016 compared to 4.3% in 2015 and 3.3% in 2014. The decrease in the effective tax rate in 2016 was due to a smaller proportion of group profits being generated by U.K.-based operations and the reduction in the U.K. corporate tax rate from 21% to 20% in April 2015. The increase in the effective tax rate in 2015 compared to 2014 was largely associated with a greater proportion of group profits being generated in the U.K. The tax in each of the years is representative of the geographic spread of our business between taxable and non-taxable jurisdictions in such years.
the expenses associated with settling claims, including legal and other fees and the general expenses of administering the claims adjustment process, known as the loss adjustment expenses (“LAE”).
IBNR Reserves. The need for IBNR reserves arises from time lags between when a loss occurs and when it is actually reported and settled. By definition, we do not have specific information on IBNR claims so they need to be estimated by actuarial methodologies. IBNR reserves are therefore generally calculated at an aggregate level and cannot generally be identified as reserves for a particular loss or contract. We calculate IBNR reserves by class of business within each line of business. Where appropriate, analyses may be conducted on sub-sets of a class of business. IBNR reserves are calculated by projecting our ultimate losses on each class of business and subtracting paid losses and case reserves. IBNR reserves also cover any potential development of reported claims. Over recent years, we have begun to place greater reliance on our actual actuarial experience for our long-tail lines of business that we have written since our inception in 2002. We believe that our earliest accident years are now capable of providing us with meaningful actuarial indications. Estimates and judgments for new insurance and reinsurance lines of business are more difficult to make than those made for more mature lines of business because we have more limited historical information through December 31, 2016.
of coverage with long duration reporting patterns and changes in claims handling practices, as well as the other factors described above.
We currently classify $5,809.9 million of our total cash and investments of $9,174.1 million as “available for sale” and $2,078.3 million as “trading,” both of which are carried at estimated fair value. We use quoted values and other data provided by internationally recognized independent pricing sources as inputs into our process for determining the fair value of our investments. Where multiple quotes or prices are obtained, a price source hierarchy is maintained in order to determine which price source provides the fair value (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers.
Gross written premiums. The following table analyzes the overall change in gross written premiums for our two business segments in the twelve months ended December 31, 2016, 2015 and 2014:
In 2015, total ceded written premiums decreased by $36.4 million compared to 2014. The retention ratio increase from 86.7% in 2014 to 88.3% in 2015 mainly as a result of our strategy at the time to retain more risk which reduced the ceded reinsurance costs for our insurance segment. The impact from this strategy was partially offset through the growth of Aspen Capital Markets which has allowed us to increase our gross catastrophe reinsurance line sizes and cede more risk to third-party investors.
Expenses. We monitor the ratio of expenses to gross earned premium (the “gross expense ratio”) as a measure of the cost effectiveness of our amortization of deferred policy acquisition costs, general, administrative and corporate expenses. The tables below present the contribution of the amortization of deferred policy acquisition costs and general, administrative and corporate expenses to the gross expense ratios and the total net expense ratios for the twelve months ended December 31, 2016, 2015 and 2014. We also show the effect of reinsurance purchased which impacts the reported net expense ratio by expressing the expenses as a proportion of net earned premiums.
months ended December 31, 2016, the amount recognized within general, administration and corporate expenses for settled foreign exchange contracts was a realized loss of $8.7 million (December 31, 2015 - loss of $4.9 million recognized within general, administration and corporate expenses).
Interest rate swaps. We have used interest rate swaps in the ordinary course of our investment activities to partially mitigate the negative impact of rises in interest rates on the market value of our fixed income portfolio. In 2014, we decided to let our interest rate swap program roll off and not renew maturing positions. We took this decision after an extensive reassessment of the costs of maintaining an interest rate swap program in a steep yield curve environment. In addition, the continued uncertainty in the global economy and low inflation make it difficult to gauge the timing and speed of interest rate rises by the Federal Reserve. On May 9, 2016, we terminated all remaining outstanding interest rate swaps (notional value of $256.3 million) under our International Swap Dealers Association agreement.
Gross realized and unrealized gains in other investments. These represent the share of earnings from our investments in Bene Assicurazioni (“Bene”), a Micro-insurance incubator (“MVI”) and Chaspark Maritime Holdings Limited (“Chaspark”).
Other income/(expenses). These are primarily due to the inclusion of the amortization of Agrilogic intangibles, acquired in January 2016.
We do not allocate our assets by segment as we evaluate underwriting results of each segment separately from the results of our investment portfolio. Segment profit or loss for each of our operating segments is measured by underwriting profit or loss. The following tables summarize gross and net premiums written and earned, underwriting results, and combined ratios and reserves for each of our business segments for the twelve months ended December 31, 2016, 2015 and 2014.
Ceded written premiums. Total ceded written premiums in 2016 was $144.0 million, an increase of $48.6 million compared to 2015. The largest increases in reinsurance ceded in 2016 are in our specialty reinsurance business line which had an increase in retrocession costs for our new agriculture business and in our property catastrophe business line due to new business opportunities which were written in conjunction with an increase in retrocession costs. Total reinsurance ceded in 2015 was $95.4 million, an increase of $46.6 million compared to $48.8 million in 2014. The largest increase in reinsurance ceded in 2015 was in our property catastrophe reinsurance business line primarily from the growth of our Aspen Capital Markets division which enabled us to cede more risk to third-party investors.
Policy acquisition, general and administrative expenses. Amortization of deferred policy acquisition costs were $226.4 million for the twelve months ended December 31, 2016 equivalent to 19.2% of net premiums earned (2015 - $224.7 million or 20.9% of net premiums earned; 2014 - $200.0 million or 18.4% of net premiums earned). The decrease in the acquisition ratio is due to the receipt of FET refunds and changes in business mix toward agriculture and specialty marine business lines, which have lower average commission rates, and away from other property, casualty and specialty business written on a pro rata basis which have higher average commission rates. The decrease in policy acquisition expense ratio in 2015 compared with 2014 was due to lower profit commission accruals and increased ceding commissions.
Unrealized gains in the available for sale investment portfolio, net of taxes, including equity securities, at December 31, 2016 were $22.5 million, a decrease of $37.7 million from December 31, 2015.
As at December 31, 2016, we had investments in three entities classified as other investments: Bene, MVI and Chaspark. For further information regarding these investments, see Note 6 of our consolidated financial statements, “Investments.”
See Note 19(a), “Commitments and Contingencies - Restricted Assets” of our consolidated financial statements for further detail on our trust fund balances which we are required to maintain in accordance with contractual obligations to policyholders and in compliance with regulatory requirements.
Consolidated cash flows for the twelve months ended December 31, 2015. Total net cash flow from operations for the twelve months ended December 31, 2015 was $574.2 million, a decrease of $33.2 million from the equivalent period in 2014. For the twelve months ended December 31, 2015, our cash flows from operations provided us with sufficient liquidity to meet our operating requirements. We paid net claims of $1,108.5 million in 2015, and used $501.9 million in investing and net purchases and sales of equipment during the period. We paid ordinary and preference share dividends of $88.7 million, and $83.7 million was used to repurchase ordinary shares. At December 31, 2015, we had a balance of cash and cash equivalents of $1,099.5 million.
On June 30, 2016, Aspen Bermuda and Citibank Europe plc (“Citi Europe”) amended the committed letter of credit facility, dated June 30, 2012, as amended on June 30, 2014 (the “LOC Facility”). The amendment to the LOC facility extended the term of the LOC Facility to June 30, 2018 and provides a maximum aggregate amount of up to $550.0 million. Under the LOC Facility, Aspen Bermuda will pay to Citi Europe (a) a letter of credit fee based on the available amounts of each letter of credit and (b) a commitment fee, which varies based upon usage, on the unutilized portion of the LOC Facility. Aspen Bermuda will also pay interest on the amount drawn by any beneficiary under a credit provided under the LOC Facility at a rate per annum of LIBOR plus 1% (plus reserve asset costs, if any) from the date of drawing until the date of reimbursement by Aspen Bermuda. In addition, Aspen Bermuda and Citi Europe entered into an uncommitted letter of credit facility whereby Aspen Bermuda has the ability to request letters of credit under this facility subject to the prior approval of Citi Europe. The fee associated with the uncommitted facility is a letter of credit fee based on the available amounts of each letter of credit issued under the uncommitted facility. Both the LOC Facility and the uncommitted facility are used to secure obligations of Aspen Bermuda to its policyholders. In addition to these facilities, we also use regulatory trusts to secure our obligations to policyholders.
Adjusted diluted book value per ordinary share, a non-U.S. GAAP measure, is calculated by deducting from total shareholders equity the total of: accumulated other comprehensive income; the value of preference shares less issue expenses; the share of equity due to non-controlling interests; and adding back ordinary dividends. The resulting balance is then divided by the diluted number of ordinary shares as at the year end. We believe that adding back ordinary dividends provides a more consistent and useful measurement of total shareholder value, which supplements U.S. GAAP information.