We terminated our existing Bermuda lease and entered into a new 14,000 square foot lease on September 1, 2011. The term of the rental lease agreement is for ten years from September 1, 2011, with a break clause at five years and an additional five-year option commencing September 2021.
Our international offices for our subsidiaries include locations with leased office space in Paris, Zurich, Geneva, Singapore, Cologne and Dublin.
(1) In 2012, the Company adopted the provision of ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful acquisition. For more information on the impact of ASU 2010-26 refer to Note 2(l) in our consolidated financial statements, “Basis of Preparation and Significant Accounting Policies - New Accounting Policies.”
(4) The combined ratio is the sum of the loss ratio and the expense ratio.
(5) Total cash and investments include cash, cash equivalents, fixed maturities, other investments, short-term investments, accrued interest and receivables for investments sold.
(7) Book value per ordinary share is based on total shareholders’ equity excluding the aggregate value of the liquidation preferences of our preference shares, divided by the number of shares outstanding of 81,506,503, 83,327,594, 70,508,013, 70,655,698 and 70,753,723 at December 31, 2008, 2009, 2010, 2011 and 2012, respectively.
In 2012, Aspen celebrated its 10-year anniversary. Our success over the last 10 years reflects the support of our clients, with whom we have built strong relationships, the hard work and skill of all our people, and the diversified Reinsurance and Insurance platforms that we have built together. We made strong progress in 2012 against our strategic objectives and continued to execute our strategy to increase the size and diversity of our insurance segment. This was the first full year of contributions from a number of our U.S.-based teams and was the most significant driver for our growth in gross written premiums. We experienced a significant reduction in catastrophe-related claims compared to 2011, with Superstorm Sandy being the only event to generate significant claims in 2012 as well as the sinking of the Costa Concordia cruise liner, which was a large loss. We continued to execute our strategy to grow our business, protect our balance sheet, preserve shareholder value and position our business for future growth. For 2012, we reported a net profit of $3.38 per diluted ordinary share and return on equity of 8.5% and increased our diluted book value per share by $2.44, an increase of 6.4% from year end 2011.
Insurance. In 2012, our insurance segment experienced losses from Superstorm Sandy and the sinking of the Costa Concordia cruise liner. Nevertheless, we achieved an underwriting profit of $6.3 million for 2012 and a combined ratio of 99.3%, compared with an underwriting profit of $30.2 million and a combined ratio of 96.1% for 2011. Gross written premiums for the segment increased by 32.8% reflecting significant growth in the U.S. but also an improvement across a number of international lines. The premium growth in the U.S. was achieved following the successful application and approval of admitted licenses in 50 U.S. states and the District of Columbia. We also continued to build out management expertise and infrastructure to support growth and development.
ordinary share and we returned additional funds to shareholders through the repurchase of ordinary shares. In total during 2012 we repurchased 2,168,080 ordinary shares, for a total consideration of $62.7 million. On October 24, 2012, our Board approved a new share repurchase authorization for up to $400.0 million of outstanding ordinary shares, which was recently increased to $500.0 million. See “Recent Developments,” below. The share repurchase authorization permits us to effect the repurchases from time to time through a combination of transactions, including open market repurchases, privately negotiated transactions and accelerated share repurchase transactions.
The following overview of our 2012, 2011 and 2010 operating results and financial condition is intended to identify important themes and should be read in conjunction with the more detailed discussion further below.
Annualized net income return on average equity of 8.5% for 2012 compared with (4.8)% in 2011 and 11.2% in 2010.
Combined ratio for 2012 of 94.3%, including $205.0 million, or 10.8 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements, compared with 115.9% for 2011, which included 31.5 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements and 96.7% for 2010, which included 9.0 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements.
Gross written premiums. The changes in our segments’ gross written premiums for the twelve months ended December 31, 2012, 2011 and 2010 are as follows:
Gross written premiums increased by 17.0% in 2012 compared to 2011 due predominantly to the continued development of our U.S. insurance platform. The increase in gross written premiums in the insurance segment was across all lines, but is mainly attributable to our property and programs business. Increases in gross written premiums in our marine, energy and transportation insurance lines were mainly due to increased premiums for marine, energy and liability business which achieved significant rate increases following a series of industry losses in the past year. The increase in gross
The combined ratio for 2012 decreased by 21.6 percentage points compared to 2011. The decrease was primarily due to a reduction in pre-tax catastrophe losses, net of reinsurance and reinstatements, of $329.3 million of net losses from major natural catastrophes from $534.3 million in 2011 to $205.0 million in 2012 but was partially offset by an increase in the expense ratio.
Net investment income. In 2012, we generated net investment income of $204.9 million, a decrease of 9.2% on the prior year (2011 - $225.6 million; 2010 - $232.0 million). Net investment income has steadily declined over the years from 2010 to 2012, due to the continuing decline in our reinvestment rate reflecting lower yields on investment grade fixed income securities. Relative to 2010, in 2011, lower reinvestment rates and declining book yields from fixed income securities were partially offset by $6.1 million of dividend income from global equity securities.
Net income. For 2012, we reported income after taxes of $280.4 million, compared to a loss after taxes of $110.1 million in 2011, and income after taxes of $312.7 million in 2010. The increase in net income in 2012 over 2011 was due to primarily to the $417.7 million increase in underwriting income including corporate expenses which more than offset the $20.7 million reduction in investment income. The significant decrease in net income from 2011 compared to 2010 was due to total net losses after tax of $485.4 million from natural disasters in 2011 which included $223.7 million from the Japanese earthquake and tsunami, $93.8 million from the U.S. storms, $53.5 million from the Thai floods, $60.1 million from the 2011 New Zealand earthquake, $18.1 million from the Australian floods and $36.2 million from other natural catastrophes.
Dividends. In April 2012, the Board approved an increase in the quarterly dividend on our ordinary shares from $0.15 per ordinary share to $0.17 per ordinary share (2011 - $0.15 quarterly dividend; 2010 - $0.15 quarterly dividend). Dividends paid on the preference shares in 2012 were $31.1 million (2011 - $22.8 million; 2010 - $22.8 million). The increase was due to issuance in April 2012 of additional $160.0 million of preference shares.
Shareholders’ equity and financial leverage. Total shareholders’ equity increased from $3,156.0 million as at December 31, 2011 to $3,488.4 million as at December 31, 2012. The most significant movements were:
As at December 31, 2012, our total shareholders’ equity included preference shares with a total value as measured by their respective liquidation preferences of $523.2 million (2011 - $363.2 million) less issue costs of $15.1 million (2011 - $9.6 million).
Our Senior Notes were the only material debt that we had issued as of December 31, 2012 and 2011 of $499.1 million and $499.0 million, respectively. Management monitors the ratio of debt to total capital, with total capital being defined as shareholders’ equity plus outstanding debt. At December 31, 2012, this ratio was 12.5% (2011 - 13.7%).
Our preference shares are classified in our balance sheet as equity but may receive a different treatment in some cases under the capital adequacy assessments made by certain rating agencies. We also monitor the ratio of the total of debt and the liquidation preference of our preference shares to total capital which was 25.3% as of December 31, 2012 (2011 - 23.3%).
Overall. For 2012 as a whole, we achieved an approximate average rate increase of 4% on renewals across our business with approximately 5% in reinsurance and approximately 3% in insurance. Currently, the U.S. primary insurance market is achieving the most promising rate increases across the greatest number of lines. These increases are now beginning to flow through to the reinsurance market.
a rate increase of approximately 11%. Prior to Superstorm Sandy, there were initial indications in the market that January 1 renewal rates would be flat or declining. The loss experience from Superstorm Sandy reversed that trajectory. We achieved significant rate increases in loss affected accounts, but accounts with no loss experience were mostly flat. We are experiencing a similar trend across most of our property treaty book. For specific lines and geographies where there has been meaningful loss activity we are seeing significant rate increases. The U.S. property facultative market has responded to Superstorm Sandy with significant increases for flood cover but fire rates remain flat. The tendency for cedants to retain more risk continued during the January renewal period.
We also expect terms and conditions for windstorm and flood to tighten in the Northeast. In our programs business, we achieved rate increases of approximately 3% for 2012 and anticipate rates increasing further in response to Superstorm Sandy losses. In our U.K. property business, the market remains very competitive but the rating environment appears to have stabilized and we continue to focus on our strict underwriting discipline.
In casualty insurance, we continue to see positive momentum in the U.S. primary casualty market. We achieved average rate increases of approximately 8% for 2012 and the outlook continues to be favorable. The global casualty market achieved an approximate average rate increase of 4% in 2012.
In our marine, energy and transportation business we achieved an overall rate increase of approximately 2% for 2012. This increase was led by our marine, energy and construction liability accounts where the market continues to harden following significant loss activity. Terms remain strong
The rating environment in financial and professional lines is mixed, achieving an approximate average rate increase of 1%. Rate increases were led by the financial institutions account which increased by approximately 7% and U.S. management liability which increased by approximately 5% while rates in the U.K. remain pressured in areas such as U.K. management liability and professional indemnity accounts.
On February 1, 2013, we announced that Aspen U.K. and Aspen Bermuda entered into an amendment to the secured letter of credit facility agreement with Barclays Bank PLC dated as of October 6, 2009 and amended as of February 28, 2011. The amendment extends the maturity date of the credit facility to January 31, 2015.
On February 7, 2013, we announced the appointment of Mr. Gordon Ireland to our Board as a Class III director. In addition, Mr. Julian Cusack will resign as a director of the Company at the next Annual General Meeting scheduled for April 24, 2013. Mr. Cusack has stepped down from his role as Aspen’s Chief Risk Officer with effect on February 7, 2013, but will remain with us in a strategic role and as Chairman of Aspen Bermuda. Further, Mr. Ian Cormack will not stand for re-election as a director of the Company at the next Annual General Meeting scheduled for April 24, 2013.
On February 7, 2013, we announced that we would commence a significant and controlled reduction of our wind and earthquake exposure within our U.S. property insurance account. The decision to reduce our exposures was taken following a review of all business lines, after which we concluded that the earnings from our U.S. property insurance portfolio were excessively volatile as a result of inadequate original rates for catastrophe exposure and expensive reinsurance costs. We expect the reduction in wind and earthquake exposure to result in a release of capital over the next two years which we will utilize to repurchase shares unless other compelling opportunities emerge.
values. We believe that the following critical accounting policies affect the more significant estimates used in the preparation of our consolidated financial statements. A statement of all the significant accounting policies we use to prepare our financial statements is included in the Notes to the consolidated financial statements. If factors such as those described in Item 1A, “Risk Factors” cause actual events to differ from the assumptions used in applying the accounting policy and calculating financial results, there could be a material adverse effect on our operating results, financial condition and liquidity.
Adjustment premiums are most significant in relation to reinsurance contracts. Differing considerations apply to non-proportional and proportional treaties as follows:
the premiums charged for the restoration of the reinsurance limit of an excess of loss contract to its full amount after payment by the reinsurer of losses as a result of an occurrence. These premiums relate to the future coverage obtained during the remainder of the initial policy term and are included in revenue in the same period as the corresponding losses.
Property treaty pro rata made a significant contribution to our reinsurance segment where we wrote $171.3 million in gross written premium in 2012 (2011 - $136.0 million), or 14.0% of our reinsurance segment, of which $52.5 million was estimated (2011 - $46.7 million) and $118.8 million was reported by the cedants (2011 - $89.3 million). Excluding the impact of fixed costs such as reinsurance premiums and operating expenses, we estimate that the impact of a $1.0 million increase in our estimated gross premiums written in our property treaty pro rata business would increase net income before tax by $0.1 million for our property reinsurance segment for the year to December 31, 2012. Conversely in the year to December 31, 2011, property treaty pro rata posted a loss and as a result a $1.0 million increase in our estimated gross premiums written would decrease our net income before tax by $0.8 million for our property reinsurance segment.
the cost of claims that have not yet been reported to use known as IBNR claims; and
Case reserves. For reported claims, reserves are established on a case-by-case basis within the parameters of coverage provided in the insurance policy or reinsurance agreement. In estimating the cost of these claims, we consider circumstances related to the claims as reported, any information available from cedants, lawyers and loss adjustors and information on the cost of settling claims with similar characteristics in previous periods. In addition, for significant events such as Superstorm Sandy which made landfall in late October 2012 in the Northeast of the U.S., the detailed analysis of our potential exposures includes information obtained directly from cedants which has yet to be processed through market systems enabling us to reduce the time lag between a significant event occurring and establishing case reserves. This additional information is also incorporated into the analysis used to determine the actuarial IBNR. Reinsurance intermediaries are used to assist in obtaining and validating information from cedants but we establish all reserves. In addition, we may engage loss adjusters and perform on site cedant audits to validate the information provided. Disputes do occur with cedants, but the number and frequency are generally low. In the event of a dispute, intermediaries are used to try to resolve the dispute. If a resolution cannot be reached, then the contracts typically provide for binding arbitration.
IBNR claims. 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 line of business and by accident year within that line. Where appropriate, analyses may be conducted on sub-sets of a line of business. IBNR reserves are calculated by projecting our ultimate losses on each line of business and subtracting paid losses and case reserves.
Sources of information. Claims information received typically includes the loss date, details of the claim, the recommended reserve and reports from the loss adjusters dealing with the claim. In respect
Actuarial Methodologies. The main projection methodologies that are used by our actuaries are:
Selection of reported gross reserves. Management, through its Reserve Committees, then reviews the range of actuarial estimates, which to date it has not adjusted, and any other evidence before selecting its best estimate of reserves for each line of business and accident year. Management can select its best estimate outside the range provided by the actuaries, but to date gross reserves have been within the range of actuarial estimates. This provides the basis for the recommendation made by management to the Audit Committee and the Board regarding the reserve amounts to be recorded in the Company’s financial statements.
The selected best estimate of reserves is typically in excess of the mean of the actuarial reserve estimates. The Company believes that there is potentially significant risk in estimating loss reserves for long-tail lines of business and for immature accident years that may not be adequately captured through traditional actuarial projection methodologies. As discussed above, these methodologies usually rely heavily on projections of prior year trends into the future. In selecting its best estimate of future liabilities, the Company considers both the results of actuarial point estimates of loss reserves as well as the potential variability of these estimates as captured by a reasonable range of actuarial reserve estimates. In determining the appropriate best estimate, the Company reviews (i) the position of overall reserves within the actuarial reserve range, (ii) the result of bottom up analysis by accident year reflecting the impact of parameter uncertainty in actuarial calculations, and (iii) specific qualitative information on events that may have an effect on future claims but which may not have been adequately reflected in actuarial mid-point estimates, such as the potential for outstanding litigation or claims practices of cedants to have an adverse impact.
If the ultimate liabilities equate to the mean actuarial estimate, then the impact from the change in loss reserves would be to increase net income before tax by $418.3 million (being the difference between the selected loss reserves of $4,779.7 million and the mean value of $4,361.4 million), although the impact of such a change is unlikely to be recognized in one calendar year due to the unwinding of experience against expectations taking many years.
Actuarial range of net reserves. In determining the range of net reserves, we estimate recoveries due under our proportional and excess of loss reinsurance programs. For proportional reinsurance we apply the appropriate cession percentages to estimate how much of the gross reserves will be collectable. For excess of loss recoveries, individual large losses are modeled through our reinsurance program. An assessment is also made of the collectability of reinsurance recoveries taking into account market data on the financial strength of each of the reinsurance companies. The net actuarial range for reserves for losses and loss expenses assuming that net reserves move in proportion to gross would be between $3,908.7 million at the 10th percentile and $4,845.0 million at the 90th percentile. The actual net reserves established as at December 31, 2012 were $4,280.7 million (2011 - $4,098.6 million).
Other-than-temporary Impairment of Investments. A security is impaired when its fair value is below its amortized cost. The Company reviews its available for sale fixed income investment portfolio on an individual security basis for potential other-than-temporary impairment (“OTTI”) each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions. For further discussion, see Note 2(c) in our consolidated financial statements, “Basis of Preparation and Significant Accounting Policies - Accounting for Investments, Cash and Cash Equivalents.”
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The discussions that follow include tables and discussions relating to our consolidated income statement and our segmental operating results for the twelve months ended December 31, 2012, 2011 and 2010.
(1) In 2012, the Company adopted the provision of ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful business acquisition. For more information on the impact of ASU 2010-26, see Note 2(l) in our consolidated financial statements, “Basis of Preparation and Significant Accounting Policies - New Accounting Policies.”
Gross written premiums. The following table analyzes the overall change in gross written premiums in the twelve months ended December 31, 2012, 2011 and 2010.
Gross written premiums included reinstatement premiums and other premiums receivable directly related to losses arising from all catastrophic events of $11.1 million (2011 - $32.5 million; 2010 - $12.0 million).
Ceded reinsurance. Total reinsurance ceded in 2012 increased by $57.7 million compared to 2011. Ceded reinsurance premiums have increased for the insurance segment in line with increases in gross written premiums. Ceded reinsurance premiums reduced for the reinsurance segment as 2011 included additional cover purchased following significant catastrophe losses early in that year.
The reinsurance costs in the reinsurance segment increased significantly compared to 2010 due to the high level of catastrophes in early 2011 resulting in our decision to purchase additional cover for the third quarter’s wind season. Reinsurance costs also increased for the insurance segment in 2011 as we purchased advanced protection for our new U.S. professional lines business as well as an increase in the U.S. property program.
Net premiums earned. Net premiums earned have increased by $195.0 million, or 10.3%, in 2012 compared to 2011, consistent with the increase in gross earned premiums and the cost of our reinsurance purchased in the period. Net premiums earned have decreased by $10.4 million, or 0.5%,
We have presented loss ratios both including and excluding the impact from catastrophe losses to aid in the analysis of the underlying performance of our segments. We have defined major 2012 catastrophe losses as losses associated with the severe weather conditions in the U.S. in February and March 2012, Hurricane Isaac in August 2012 and Superstorm Sandy in October 2012. We have defined major catastrophe losses in 2011 as losses associated with the U.S. storms (specifically related to Hurricane Irene which occurred in the third quarter of 2011, and related to the tornadoes in the second quarter of 2011) in addition to losses associated with the Australian floods and the New Zealand and Japanese earthquakes which occurred in the first quarter of 2011, and movements in losses associated with the 2010 catastrophe events (Chilean and New Zealand earthquakes) which were recognized in 2011. We have defined major 2010 catastrophe losses as losses associated with the Chilean earthquake in the first quarter of 2010 and the New Zealand earthquake in the third quarter of 2010.
Net investment income. In 2012, we generated net investment income of $204.9 million, a decrease of 9.2% on the prior year (2011 - $225.6 million, 2010 - $232.0 million). In 2012, the continuing decline in our reinvestment rate over the last twelve months reflected lower yields on investment grade fixed income securities. Relative to 2010, in 2011 lower reinvestment rates and declining book yields from fixed income securities were partially offset by $6.1 million of dividend income from global equity securities.
Foreign exchange contracts. We use forward exchange contracts to manage foreign currency risk. A forward foreign currency exchange contract involves an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Foreign currency exchange contracts will not eliminate fluctuations in the value of our assets and liabilities denominated in foreign currencies, but rather allow us to establish a rate of exchange for a future point in time. The foreign currency contracts are recorded as derivatives at fair value with changes recorded as a change in fair value of derivative in the Company’s statement of operations.
At December 31, 2012, we held foreign currency derivative contracts to purchase $424.0 million of U.S. and foreign currency. For the twelve months ended December 31, 2012, these contracts incurred a loss of $5.4 million (2011 - $4.5 million gain). The foreign currency contracts are recorded as
Other revenues and expenses. Other revenues and expenses in 2012 include the following:
Gross realized and unrealized gains on other investments. These represent the share of earnings from our investment in Cartesian Iris Offshore Fund L.P. (“Cartesian”). Other income / (expense) is primarily due to movements in the value of deposit accounted and funds withheld contracts. Interest payable is the interest due on our Senior Notes, with the increase in 2011 being due to our issuance of an additional $250.0 million of 6.0% Senior Notes in December 2010.
Non-underwriting disclosures: We have provided additional disclosures for corporate and other (non-underwriting) income and expenses. Corporate and other includes net investment income, net realized and unrealized investment gains or losses, corporate expenses, interest expenses, net realized and unrealized foreign exchange gains or losses and income taxes, which are not allocated to the underwriting segments. Corporate expenses are not allocated to the Company’s operating segments as they typically do not fluctuate with the levels of premiums written and are not directly related to our segment operations. They include group executive costs, group finance costs, legal and actuarial costs, non-underwriting share-based compensation and certain strategic costs including new teams before they commence underwriting.
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, 2012, 2011 and 2010.
(1) The total group general and administrative expense ratio includes the impact from corporate expenses.
Gross written premiums. The table below shows our gross written premiums for each line of business for the twelve months ended December 31, 2012, 2011 and 2010, and the percentage change in gross written premiums for each line:
Gross written premiums in this segment were broadly in line with those in 2011 and 2010. The increase in gross written premiums arose from other property and casualty reinsurance business. The increase in other property is due to strong production from our proportional treaty and facultative business as we benefited from positive pricing momentum in catastrophe-exposed accounts while casualty benefited from favorable prior year premium adjustments.
The loss ratio in 2011 was 97.7% compared to 60.7% in 2010. The increase in the loss ratio is attributable to a high frequency of catastrophe losses in 2011 with $253.7 million from the Japanese earthquake and tsunami, $109.2 million from U.S. storms (including Hurricane Irene), $73.3 million from the New Zealand earthquake, $65.7 million from the Thai floods, $22.3 million from the Australian floods and $28.3 million from other natural catastrophes (U.S., Scandinavian and Asian weather-related events). All losses are net of reinsurance recoveries but before reinstatement premiums and tax. The increase in losses has been partly mitigated by a $6.7 million increase in prior year reserve releases compared to 2010.
Policy acquisition, general and administrative expenses. Policy acquisition expenses were $207.8 million for 2012, equivalent to 18.4% of net premiums earned (2011 - $197.7 million or 17.8% of net premiums earned; 2010 - $202.4 million or 17.7% of net premiums earned). The increase in the acquisition expense ratio is due to increases in profit commission accruals and a change in the business mix towards property proportional treaty business lines, which have higher average commission rates and away from structured risks business lines, which have lower average commission rates. The policy acquisition expense ratio of 17.8% of net premiums earned for 2011 was 0.1 percentage point higher than in 2010 due to our purchase of additional reinsurance in 2011 reducing our net earned premium.
Our insurance segment consists of property insurance, casualty insurance, marine, energy and transportation insurance, financial and professional lines insurance and programs business. For a more detailed description of this segment, see Part I, Item 1, “Business - Business Segments - Insurance” and Note 5 of our consolidated financial statements, “Segment Reporting.”
Overall, premiums have increased by 32.8% in 2012 compared to 2011. The increase in gross written premium is across all business lines with $207.6 million of the total increase from our U.S. based teams following our recent expansion particularly in the programs business. Increases in our marine, energy and transportation insurance were mainly due to increased premiums for marine, energy and construction liability business which achieved significant rate increases following a series of industry losses in the past year. Gross written premiums from our financial and professional lines have increased due to growth in business written by our U.S. based surety management and professional liability teams.
Reinsurance ceded. Reinsurance ceded for 2012 was $265.4 million, an increase of $76.1 million from 2011. Ceded reinsurance premiums have increased for the insurance segment in line with increases in gross written premiums. Reinsurance ceded in 2011 increased by $47.3 million from 2010 as we purchased advanced protection for our new U.S. professional lines business as well as an increase in the U.S. property program.
Net premiums earned. Net premiums earned have increased by $170.9 million, or 21.9%, in 2012 compared to 2011 which is consistent with the increase in gross earned premiums and the increase in the cost of our reinsurance purchased in the period. Net premiums earned increased by $23.1 million, or 3.1%, in 2011 compared to 2010, consistent with the increase in gross written and gross earned premiums.
Losses and loss adjustment expenses. The loss ratio for 2012 was 63.4% compared to 60.6% for 2011 (2010 - 73.3%). The deterioration in the loss ratio is the result of losses in 2012 including
$24.8 million of losses in respect of claims arising from the sinking of the Costa Concordia cruise liner in January 2012 and $49.8 million of losses from claims arising from Superstorm Sandy in the fourth quarter of 2012. The increase in losses was partly offset by a $15.2 million increase in prior year reserve releases to $35.2 million compared to a $20.0 million reserve release in 2011.
Policy acquisition expenses for 2011 increased by $23.2 million from 2010 with the cost increase reflecting the increase in gross written premiums. General and administrative expenses of $128.0 million in 2011 increased by $28.6 million from 2010 mainly due to our continued build out of our U.S. operations. We had increased expenditure in 2010 associated with our expansion into the U.S. admitted market and U.K. regional distribution network offset by reductions in performance-related compensation in 2010.
At December 31, 2012 and December 31, 2011, total cash and investments, including accrued interest receivable, were $8.2 billion and $7.6 billion, respectively.
We continue to evaluate investment opportunities that will help us generate increased returns, while remaining within our risk tolerances. As a result, for 2013 we are increasing the total allocation of our investment portfolio to equities and BB rated securities by $200.0 million in each asset class. We have already completed our additional investment in equities on February 1, 2013. Our additional investment in BB securities will be predominantly in bank loans and we expect to complete this in the medium term.
Our fixed income portfolio duration as at December 31, 2012 was 2.5 years which increased from 2.2 years at the end of 2011 including the impact of the interest rate swaps.
Mortgage-Backed Securities. The following tables summarize the fair value of our Mortgage-Backed Securities (“MBS”) by rating and class at December 31, 2012:
We manage our European fixed income exposures by proactively adapting our investment guidelines to our views on the European debt crisis. In August 2010, we amended our investment guidelines to prohibit purchases of Greece, Ireland, Italy, Portugal and Spain (“GIIPS”) sovereign or guaranteed debt. We also prohibited purchases of peripheral European Bank issuers. In November 2010, we amended our investment guidelines to prohibit purchases of corporate bonds issued by companies domiciled in any of the GIIPS countries. In May 2011, we amended our investment guidelines to prohibit purchases of European and U.K. corporate financial issuers including covered bonds. We also added Belgium to our list of prohibited sovereign investments. We do not actively hedge any of our European exposures.
The tables below summarize our European holdings by country (Eurozone and non-Eurozone), by rating and by sector as at December 31, 2012. Equity investments included in the table below are not rated (“NR”).
Fair Value Measurements. Our estimates of fair value for financial assets and liabilities are based on the framework established in the fair value accounting guidance included in ASC Topic 820, Fair Value Measurements and Disclosures. For a description of the framework, see Note 7 in our consolidated financial statements, “Fair Value Measurements.”
Other-than-temporary Impairment of Investments. We review all our available for sale fixed income and equity investments on an individual security basis for potential OTTI each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions. For further discussion, see Note 2(c) in our consolidated financial statements, “Basis of Preparation and Significant Accounting Policies - Accounting for Investments, Cash and Cash Equivalents.”
Reserves by segment. For the twelve months ended December 31, 2012, we had total net loss and loss adjustment expense reserves of $4,280.7 million (December 31, 2011 - $4,098.6 million). This amount represented our best estimate of the ultimate liability for payment of losses and loss adjustment expenses. Of the total gross reserves for unpaid losses of $4,779.7 million at the balance sheet date of December 31, 2012, a total of $2,578.7 million, or 54.0%, represented IBNR claims (December 31, 2011 - $2,497.2 million and 55.2%, respectively). The following tables analyze gross and net loss and loss adjustment expense reserves by segment as at December 31, 2012 and 2011:
The two tables above are not directly comparable as the year end 2012 position reflects an additional year’s business. The increase in reserves in 2012 over 2011 therefore reflects the reserves associated with the 2012 accident year less changes in reserve estimates and payments made on earlier accident years.
releases of $16.3 million, $18.0 million and $8.2 million, respectively. Property lines in both the U.S. and U.K. experienced better than expected development while the excess casualty account had an absence of advised claims. The release for financial and professional lines was due predominantly to the credit and political risk account which experienced a reduction in specific claim reserves. This was partially offset with a strengthening in reserves in marine and transportation of $7.2 million, primarily in marine liability which experienced more than expected claims development in prior years.
The following table shows our capital structure at December 31, 2012 compared to December 31, 2011.
Our preference shares are classified in our balance sheet as equity but may receive a different treatment in some cases under the capital adequacy assessments made by certain rating agencies. Such securities are often referred to as ‘hybrids’ as they have certain attributes of both debt and equity. We also monitor the ratio of the total of debt and hybrids to total capital and this stands at 25.3% as of December 31, 2012 (2011 - 23.3%).
The principal capital management transactions during 2012 and 2011 were as follows:
On February 2, 2012, our Board extended the authorization for the remaining amount of the $400.0 million ordinary share repurchase program originally authorized on February 9, 2010. In 2012, we initiated an open market share repurchase and acquired a total of 2,064,643 ordinary shares for a total amount of $59.9 million.
rate of 7.250%. The Perpetual Preference Shares have no stated maturity but are callable at our option on or after the 10th anniversary of the date of issuance. We raised net proceeds of approximately $154.5 million from this issuance.
On February 7, 2013, we announced that our Board has replaced the existing share repurchase authorization of $400.0 million with a new authorization of $500.0 million. The total share repurchase authorization, which was effective immediately through February 7, 2015, permits us to effect the repurchases from time to time through a combination of transactions, including open market repurchases, privately negotiated transactions and accelerated share repurchase transactions.
Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations. Management monitors the liquidity of Aspen Holdings and of each of its Operating Subsidiaries and arranges credit facilities to enhance short-term liquidity resources on a stand-by basis. As a holding company, Aspen Holdings relies on dividends and other distributions from its Operating Subsidiaries to provide cash flow to meet ongoing cash requirements, including any future debt service payments and other expenses, and to pay dividends, if any, to our preference and ordinary shareholders. During the year ended December 31, 2012, Aspen Holdings received a $56.5 million payment of intercompany interest in respect of an intercompany loan from Aspen U.K. Holdings. In addition, Aspen Holdings received dividends of $100.0 million (2011 - $100.0 million) from Aspen Bermuda.
As at December 31, 2012 and 2011, Aspen Holdings held $192.3 million and $125.3 million, respectively, in cash and cash equivalents which, taken together with dividends declared or expected to be declared by subsidiary companies and our credit facilities, management considered sufficient to provide Aspen Holdings liquidity at such time. As at December 31, 2012, we also held $431.5 million of short-term investments that are available for sale to meet any future liquidity needs. For a discussion
For a more detailed discussion of our Operating Subsidiaries’ ability to pay dividends, see Note 14 of our consolidated financial statements, “Statutory Requirements and Dividend Restrictions.”
Operating Subsidiaries. Our Operating Subsidiaries’ sources of funds primarily consist of premiums written, investment income and proceeds from sales and redemptions of investments. Cash is used primarily to pay reinsurance premiums, losses and loss adjustment expenses, brokerage commissions, general and administrative expenses, taxes, interest, dividends and to purchase new investments.
Where we incur losses in currencies which are not normally held we will convert funds into the appropriate currencies to mitigate our currency risk and also make funds available to settle claims in local currencies as and when they become due. Recent examples of this have been where we have converted funds to Thai Bhatt and New Zealand Dollars to cover flood and earthquake losses in these countries. For local regulatory reasons we hold assets in trust which does limit our liquidity to some degree, however, the process of matching assets with liabilities in currency means that at any one time we will hold cash and short-term assets in all major currencies which are available to settle claims.
The liquidity of the Operating Subsidiaries is also affected by the terms of contractual obligations to policyholders and by undertakings to certain regulatory authorities to facilitate the issue of letters of credit or maintain certain balances in trust funds for the benefit of policyholders. See Note 18, “Commitment 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, 2012. Total net cash flow from operating activities in 2012 was $502.9 million, an increase of $159.4 million from 2011. For the twelve months ended December 31, 2012, our cash flows from operations provided us with sufficient
Consolidated cash flows for the twelve months ended December 31, 2011. Total net cash flow from operating activities in 2011 was $343.5 million, a decrease of $280.8 million from 2010. For the twelve months ended December 31, 2011, our cash flows from operations provided us with sufficient liquidity to meet our operating requirements. We paid net claims of $982.2 million in 2011, and used $210.5 million in investing and net purchases and sales of equipment during the period. The increase in paid claims over 2010 was largely due to the catastrophes that occurred in 2011. We paid ordinary and preference share dividends of $65.3 million, and $8.1 million was used to repurchase ordinary shares. At December 31, 2011, we had a balance of cash and cash equivalents of $1,239.1 million.
Consolidated cash flows for the twelve months ended December 31, 2010. Total net cash flow from operating activities in 2010 was $624.6 million, a decrease of $20.0 million from 2009. For the twelve months ended December 31, 2010, our cash flows from operations provided us with sufficient liquidity to meet our operating requirements. We paid net claims of $666.8 million in 2010 and received $18.4 million from market securities and net purchases and sales of equipment during the period. We paid ordinary and preference share dividends of $69.3 million, and $407.8 million was used to repurchase ordinary shares. At December 31, 2010, we had a balance of cash and cash equivalents of $1,179.1 million. The balance of cash and cash equivalents increased from the issuance of $250.0 million of additional Senior Notes in December 2010.
Letters of Credit Facility. On July 30, 2012, Aspen Bermuda and Citibank Europe PLC replaced an existing letter of credit facility dated August 12, 2011 in a maximum aggregate amount of up to $1,050.0 million with a new letter of credit facility in a maximum aggregate amount of up to $950.0 million. The new facility will expire in two separate tranches; Tranche II, which consists of $300.0 million, will expire on June 30, 2013, and Tranche I, which consists of the remaining maximum aggregate amount of $650.0 million, expires on June 30, 2014. As at December 31, 2012, we had $839.1 million of outstanding collateralized letters of credit under this facility compared to $837.8 million at December 31, 2011.
The following table summarizes our contractual obligations (other than our obligations to employees, our Perpetual PIERS and our Perpetual Preference Shares) under long-term debt, operating leases and reserves relating to insurance and reinsurance contracts as of December 31, 2012:
We also seek to take into account the projected impact of inflation on the likely actions of central banks in the setting of short-term interest rates and consequent effects on the yields and prices of fixed interest securities. As of February 2013, we consider that although inflation is currently low, in the medium-term there is a risk that inflation, interest rates and bond yields may rise, resulting in a decrease in the market value of certain of our fixed interest investments.