In 2006, we moved offices in Boston and entered into a new lease for office space totalling approximately 28,715 square feet covering two floors of the Federal Reserve Bank Building in Boston, Massachusetts. The commencement date of the lease was September 1, 2006. The lease term is for ten years, with the annual rent for the first five years being approximately $1.0 million and for the remainder of the term being approximately $1.1 million.
In the second quarter of 2007, we terminated the lease on our Marlton, New Jersey office, relocating the business to our Rocky Hill, Connecticut office. In August 2007, we entered into a lease with Delaware Limited Partnership for our premises in Atlanta, Georgia. The term expires in August 2015 and the annual rent is $288,000 for the first year increasing to $375,000 in the last year.
In the fourth quarter of 2007, we also leased a small office in Pasadena, California. The term is for five years and the annual rent is $114,000 for the first year increasing to $136,000 in the last year. We also have some leased space in Manhattan Beach, California for which the annual rent is $14,000.
(1) The loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned.
Inflation may have a material effect on our consolidated results of operations by its effect on interest rates and on the cost of settling claims. The potential exists, after a catastrophe loss, for the development of inflationary pressures in a local economy as the demand for services such as construction typically surges. We believe this has had and will continue to have an impact on the cost of claims arising from the 2005 hurricanes and we have sought to take this into account when setting reserves for these events. Our calculation of reserves for losses and loss expenses in respect of casualty business includes assumptions about future payments for settlement of claims and claims-handling expenses, such as medical treatments and litigation costs. We write casualty business in the United States, the United Kingdom and Australia, where claims inflation has grown particularly strong in recent years. To the extent inflation causes these costs to increase above reserves established for these claims, we will be required to increase our loss reserves with a corresponding reduction in retained earnings. The actual effects of inflation on our results cannot be accurately known until claims are ultimately settled.
The following is a discussion and analysis of the results of our operations for the twelve months ended December 31, 2007, 2006 and 2005 and of our financial condition at December 31, 2007. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and accompanying Notes included in this report. This discussion contains forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and particularly under the headings ‘‘Risk Factors,’’ ‘‘Business’’ and ‘‘Forward-Looking Statements’’ contained in Item 1A, Item 1, and Part I of this report, respectively.
Our principal objective for 2007 was to reduce the volatility of our annual earnings while continuing to deliver superior returns to our shareholders. During 2007, we refined our business model in several areas pursuant to this objective.
Portfolio diversification. During the second quarter of 2007, we launched Aspen in Zurich, Switzerland, which is a branch of Aspen U.K. and acts as our hub for the Company’s European reinsurance operations. This move is strategically important for us as Europe is the second largest insurance market in the world after the United States. Furthermore, Zurich is one of the major financial centers in Europe and a key location for many insurance companies, making it increasingly important to have a physical presence close to where our clients do business. Aspen U.K.’s Zurich office incorporates property and casualty reinsurance under a single platform.
Investment management. We have further developed our asset allocation strategy during the year increasing our allocation of invested assets in funds of hedge funds from 3.0% in 2006 to 9.5% at December 31, 2007. The duration of our fixed income portfolio is approximately 3.4 years and our allocation to non-government securities, such as corporate bonds and high quality mortgage backed securities, has increased. As a result, we have increased the book yield of our fixed income portfolio from 4.52% at December 31, 2006 to 5.05% at December 31, 2007. At the end of 2007, we had negligible direct exposure to sub-prime investments wrapped by financial guarantors.
The following overview of our 2005, 2006 and 2007 operating results and financial condition is intended to identify important themes and should be read in conjunction with the more detailed discussion further below.
Loss ratio. We monitor the ratio of losses and loss adjustment expenses to net earned premium (the ‘‘loss ratio’’) as a measure of relative underwriting performance where a lower ratio represents a better result than a higher ratio. The loss ratios for our four business segments for the twelve months ended December 31, 2007, 2006 and 2005 were as follows:
Reserve releases. The loss ratios take into account any changes in our assessments of reserves for unpaid claims and loss adjustment expenses arising from earlier years. In each of the years ended December 31, 2007, 2006 and 2005, we recorded a reduction in the level of reserves for prior years. The amounts of these reductions and their effect on the loss ratio in each year are shown in the following table:
Expense ratio. We monitor the ratio of expenses to net earned premium (the ‘‘expense ratio’’) as a measure of the cost effectiveness of our business acquisition, operating and administrative processes. The table below presents the contribution of the policy acquisition expenses and operating and administrative expenses to the expense ratio and the total expense ratios for each of the years ended December 31, 2007, 2006 and 2005:
The allocation to funds of hedge funds rose from 3.0% of the portfolio to 9.5% at year-end. These alternative investments produced an 11.4% annualized return.
Other revenues and expenses. Other revenues and expenses in 2007 included $20.6 million of foreign currency exchange gains (2006-$9.5 million gain) and $13.1 million of realized investment losses (2006-$8.0 million loss). In the twelve months ended December 31, 2007, we recorded a reduction of $2.4 million (2006-$13.1 million) in the estimated fair value of our catastrophe swap and a reduction of $9.0 million (2006-$Nil) for our credit insurance contract resulting from the change in the fair value and interest charges. Further information on these contracts can be found in Note 9 to the financial statements. Interest payable was $15.7 million in 2007 (2006-$16.9 million).
Taxes. We incurred a tax expense in 2007 of $85.0 million (2006-$92.3 million), equivalent to a consolidated rate on income before tax of 14.8% compared to 19.6% in 2006. In 2005, we reported a loss before taxation but also a tax charge of $17.4 million as Aspen U.K. was profitable in 2005 notwithstanding our hurricane losses.
Dividends. The quarterly dividend has been maintained at $0.15 per ordinary share throughout 2007.
Dividends paid on the preference shares in 2006 were $15.6 million and the full amount payable annually in 2007 and onwards (assuming no changes in the number or terms of shares outstanding) was $27.7 million.
• an increase in unrealized gains in foreign currency translation accounted for in other comprehensive income of $21.1 million;
• an increase in net unrealized gains on investments of $74.3 million, again in other comprehensive income;
• two accelerated share repurchases of $50.0 million each, in September and November 2007.
As at December 31, 2007, total ordinary shareholders’ equity was $2,398.4 million compared to $1,970.1 million at December 31, 2006.
As at December 31, 2007, the remainder of our total shareholders’ equity was funded by two classes of preference shares with a total value as measured by their respective liquidation preferences of $430 million (2006-$430 million) less issue costs of $10.8 million (2006-$10.8 million).
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 which was 21.8% as of December 31, 2007 (2006-25.3%; 2005-19.4%).
Diluted tangible book value per ordinary share at December 31, 2007 was $27.08, an increase of 24.0% compared to $21.83 at December 31, 2006 (1).
As at December 31, 2007, Aspen Holdings held $17.9 million in cash and cash equivalents which, taken together with our credit facilities, management considered sufficient to provide us liquidity at such time.
At December 31, 2007, the Insurance Subsidiaries held $633.5 million in cash and cash equivalents that are readily realizable securities. Management monitors the value, currency and duration of the cash and investments within its Insurance Subsidiaries to ensure that they are able to meet their insurance and other liabilities as they become due and was satisfied that there was a comfortable margin of liquidity as at December 31, 2007 and for the foreseeable future.
In summary, overall rates are continuing to soften, but there are significant variations by line of business. Rating pressure in some of the lines we write, such as U.K. commercial property and U.K. employers’ and public liability, is particularly acute. Therefore, we have written less new business and accepted reduced retention rates on renewals in order to preserve underwriting margins and return on capital.
Property Reinsurance. Our property reinsurance segment is experiencing rate softening in both the U.S. and international markets. Strong competition is leading to rate reductions although there are also offsetting modest increases in some lines. There are significant differences in rate movements in the U.S. catastrophe market. On average, U.S. coastal-exposed business saw rate declines of approximately 15%, while U.S. regional accounts rates fell by 20% or more. In U.S. property risk
excess, there are marked differences in rate movements between loss impacted programs, which registered up to 10% in increases while well-performing business recorded rate declines of 5% to 15%. Property facultative business has seen U.S. primary carriers reduce rates by 10% to 25% with a less pronounced decrease in Europe of around 10% to 15%. Reductions in our U.S. property facultative business were less pronounced but are softening.
U.S. Insurance. In this segment, the market is seeing significant reductions in the excess and surplus lines property and casualty lines of business. Our renewal business however is faring much better. By leveraging our producer and client relationships and by careful risk selection, rate reductions have been marginal in our property account and moderate in our casualty account.
Reinsurance Ceded. In 2008, we will continue to purchase reinsurance protection for our insurance lines of business broadly in line with previous years. However, we will continue to reduce our reliance on property retrocessional cover compared to previous years. This follows the repositioning of our portfolio which has resulted in a reduction in volatility and an increase in diversification of our exposures.
Our overall risk management strategy of reducing reliance on property retrocessional reinsurance is evidenced by the reduction in the ceded premium amounts for the twelve months ended December 31, 2007. We were able to take advantage of opportunities to purchase property cover for two wind seasons at favorable prices which has resulted in the increase in cost in the second half of 2007 over the comparative period.
On February 6, 2008 the Company’s Board authorized a new repurchase program for up to $300 million of ordinary equity. The authorization covers the period to March 1, 2010.
Proportional treaties (‘‘treaty pro rata’’). Estimates of premiums assumed under treaty pro rata reinsurance contracts are recorded in the period in which the underlying risks are expected to incept and are based on information provided by brokers and ceding companies and estimates of the underlying economic conditions at the time the risk is underwritten. We estimate premium receivable initially and update our estimates regularly throughout the contract term based on treaty statements received from the ceding company.
The segment for which treaty pro rata is most relevant is our property reinsurance segment in which we wrote $145.2 million in gross written premium in 2007 (2006-$119.1 million) or 24.1% of our property reinsurance segment, of which $31.0 million was estimated (2006-$28.9 million) and $114.2 million was reported by the cedants (2006-$84.2 million). We estimate that the impact of a $1 million change in our estimated gross premiums written in our property treaty pro rata business would have an impact of $0.2 million on our net income before tax for our property reinsurance segment at December 31, 2007 (2006-$20,000), excluding the impact of fixed costs such as reinsurance premiums and operating expenses.
We anticipate that ultimate premiums might reasonably be expected to vary by up to 5% as a result of variations in one or more of the assumptions described above, although larger variations are possible. Based on gross written premiums of $145.2 million in our property reinsurance treaty pro rata account as of December 31, 2007, a variation of 5% could increase or reduce net income before taxation by approximately $1.2 million.
Premiums receivable. Premiums receivable are recorded as amounts due less any required provision for doubtful accounts. A significant portion of amounts included as premiums receivable, which represent estimated premiums written, net of commissions, is not currently due based on the terms of the underlying contracts. In determining whether or not any bad debt provision is necessary, we consider the financial security of the policyholder, past payment history and any collateral held. We have not made a provision for doubtful accounts in relation to assumed premium estimates as adjustable premiums are considered to be inseparable from minimum and deposit premiums. In addition, based on the above process, management believes that the premium estimates included in premiums receivable will be collectable and, therefore, we have not maintained a bad debt provision for doubtful accounts on the premiums at December 31, 2007.
arising from Hurricane Katrina published by PCS on June 8, 2007 was $41.1 billion, which entitled the Company to a recovery of approximately $26.3 million which has been paid to us. The Company decided not to extend the development period under the cat swap and will not be making any further recoveries under the cat swap.
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. We establish reserves for IBNR claims using established actuarial methods which generally rely to a greater or lesser extent on historical information but also consider such variables as changes in policy terms and coverage, changes in legislative conditions and judicial interpretation of insurance policies and inflation. We take into account the quality of the historical information available and where appropriate historical trends are used to validate information received from cedants.
A higher degree of uncertainty is associated with setting reserves for reinsurance business owing to the longer reporting pattern and time to final settlement. Where IBNR is based on an analysis of past loss experience, then the principal assumption is that past patterns of development are a reasonable proxy for current business after allowance for any changes in underlying mix of business. The process of extrapolation is by necessity one involving subjective judgment because the actuary has to take into account the impact of the changing business mix as well as changes in legislative conditions, changes in judicial interpretation of legal liability policy coverages and inflation. These factors are incorporated in the recommended reserve range from which management selects its best point estimate.
For lines of business where early claims experience may not provide a sound statistical basis to estimate the loss reserves, our approach is to establish an initial expected loss and loss expense ratio. This is based on one or more of (a) an analysis of our own claims experience to date, (b) market benchmark data, and (c) a contract by contract analysis, and (d) an analysis of a portfolio of similar business written by Syndicate 2020, as available, adjusted by an index reflecting how insurance rates, term and conditions have changed. This initial expected loss and loss expense ratio is then modified in light of the actual experience to date measured against the expected experience. Loss reserves for known catastrophic events are based upon a detailed analysis of our reported losses and potential exposures conducted in conjunction with our underwriters.
The actuarial ranges are not intended to include the minimum or maximum amount that the claims may ultimately settle at, but are designed to provide management with ranges from which it is reasonable to select a single best estimate for inclusion in our financial statements.
The net actuarial range for reserves for losses and loss expenses assuming that net reserves move in proportion to gross would be between $2,281.7 million and $2,750.7 million. The actual net reserves established as at December 31, 2007 were $2,641.3 million.
Because many of the coverages underwritten involve claims that may not be ultimately settled for many years after they are incurred, subjective judgments as to the ultimate exposure to losses are an integral and necessary component of the loss reserving process. We review regularly our reserves, using a variety of statistical and actuarial techniques to analyze current claims costs, frequency and severity data, and prevailing economic, social and legal factors. Reserves established in prior periods are adjusted as claims experience develops and new information becomes available.
approximately $68.7 million in loss reserves which would represent 14.6% of net income before income tax for the twelve months ended December 31, 2006.
Our 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, 2007, 2006 and 2005.
The reduction in gross written premiums in the property reinsurance segment in 2006 was mainly due to the change in our approach to catastrophe risk management which resulted in the planned non-renewal of, or reduced participation in, certain catastrophe exposed contracts, particularly in the risk excess and proportional lines of business. There was also a reduction in loss related reinstatement premiums between 2005 and 2006 of $59.6 million.
Net premiums earned. Net premiums earned in 2007 increased by 3.4% compared to 2006 mainly as a result of the reduction in ceded earned premium in 2007. Net premiums earned increased by 11.1% in 2006 compared to 2005. The increases for each of our segments were as follows:
Net premiums earned increased by 11.1% in 2006 compared to 2005. The largest percentage increase in 2006 related to our marine and aviation insurance business written in our international insurance segment and was driven primarily by increases in written premium in our energy and aviation accounts.
Expenses. We monitor the ratio of expenses to gross earned premium (the ‘‘gross expense ratio’’) as a measure of the cost effectiveness of our business acquisition, operating and administrative processes. The table below presents the contribution of the policy acquisition expenses and operating and administrative expenses to the gross expense ratios and the total net expense ratios for the twelve months ended December 31, 2007, 2006 and 2005. We also show the effect of reinsurance which impacts the reported net expense ratio by expressing the expenses as a proportion of net earned premiums.
The gross expense ratio has increased by 2.8 percentage points when compared to 2006 mainly as a result of the increase in operating and administrative expenses. This increase is attributable to a $14.6 million rise in personnel costs resulting from increased bonus and long-term incentive charges, a $9.9 million increase due to foreign exchange expense principally related to the weakening of the U.S. Dollar against the British Pound, and $7.9 million related to our investment in new business lines including global excess casualty, professional liability, non-marine and transportation liability insurance and political risk insurance.
Net investment income. Net investment income consists primarily of interest on fixed income securities and the change in the value of funds of hedge funds investments, and is stated after deduction of expenses relating to the management of our investments. The allocation to funds of hedge funds rose from 3.0% of the portfolio to 9.5% at year end. These alternative investments produced an 11.4% annualized return.
During 2007, our fixed income portfolio book yield increased from 4.52% as of December 31, 2006 to 5.05% as at December 31, 2007. In 2007, we continued to review our fixed income portfolio duration as interest rates rose. Our fixed income portfolio duration increased marginally from three years to 3.4 years during 2007.
first time in the fourth quarter of 2005 when a gain of $19.4 million was recorded in the income statement at December 31, 2005. Further information on these contracts can be found in Note 9 to the financial statements.
Income/(loss) before tax. In 2007, income before tax was $574.0 million and comprised $295.1 million of underwriting profit, $299.0 million in net investment income, $20.6 million of net exchange gains, $15.7 million of interest payable and $25.0 million of other expenses. In 2006, income before tax was $470.4 million and comprised $295.6 million of underwriting profit, $204.4 million in net investment income, $9.5 million of net exchange gains, $16.9 million of interest payable and $22.2 million of other expenses. In 2005 we incurred losses before tax of $160.4 million. The principal source of the loss in 2005 was underwriting losses of $358.2 million in our property reinsurance segment resulting from the 2005 hurricanes. Our underwriting losses were offset by $121.3 million in respect of net investment income and a $19.4 million net unrealized gain on derivatives. We also incurred losses of $18.2 million from the revaluation or sale of non-functional foreign currencies and $4.4 million from the sale of investments.
As a result of a shift in our operating structure and the implementation of a number of strategic initiatives in 2007, we changed the composition of our business segments to reflect the manner in which the business is managed. We are currently organized into four business segments: property reinsurance, casualty reinsurance, international insurance and U.S. insurance. These segments form the basis of how we monitor the performance of our operations.
The property and casualty insurance segment previously included U.S. property and casualty insurance business written on an excess and surplus lines basis, U.K. commercial property and liability insurance and international property facultative business. With the appointment of Nathan Warde as Head of U.S. Insurance, and Matthew Yeldham as Head of International Insurance, we have now redesignated U.S. property and casualty insurance business as a separate segment, now called U.S. insurance. The U.K. commercial property and liability insurance business now forms part of our International Insurance segment which also consists of marine hull, energy, liability and aviation insurance, professional liability insurance, non-marine transport lines of business, global excess casualty insurance, political risk insurance, financial institutions insurance as well as specialty reinsurance. We have also re-allocated our international property facultative business to the property reinsurance segment, which was previously part of the property and casualty insurance segment
Losses and loss adjustment expenses. The loss ratio has decreased to 39.7% at December 31, 2007 from 43.2% at the end of 2006. In 2007, the property reinsurance segment was impacted by a series of modest catastrophe losses from windstorm Kyrill of $25.5 million, June and July U.K. floods of $28.7 million and the California wildfires of $18.1 million. Prior year reserve movements increased the 2007 loss ratio by 2.2 percentage points from 37.5% which is broadly in line with the loss ratio at the end of 2006.
Our casualty reinsurance segment is written mainly on a treaty basis with a small proportion of facultative risks. The casualty treaty reinsurance is primarily written on an excess of loss basis and includes coverage for claims arising from automobile accidents, employers’ liability, professional indemnity and other third party liabilities. It is written in respect of cedants located mainly in the United States, the United Kingdom, Europe and Australia. We also write some structured reinsurance contracts out of Aspen Bermuda. For a more detailed description of this segment, see Part I, Item 1, ‘‘Business-Business Segments-Casualty Reinsurance.’’
Gross written premiums decreased by 11.1% in 2007 compared to 2006. The reduction in gross written premium for the segment in 2007 was due to a general reduction in premium rates, the reorganization of our casualty facultative business and downward revisions on estimated premiums on prior year premium estimates for a number of U.S. and international casualty treaties based on updated information received from cedants. The closure of our Marlton, New Jersey office and
Losses and loss adjustment expenses decreased by $42.7 million between 2006 and 2005 principally due to the recognition of $60.3 million of prior year reserve releases, an increase of $46.4 million over the $13.9 million released in 2005.
Our international insurance segment mainly comprises marine hull, marine and specialty liability, energy, non-marine and transportation liability, aviation, professional liability, U.K. commercial property and U.K. commercial liability insurance. The commercial liability line of business consists of U.K. employers’ and public liability insurance. Our specialty reinsurance lines of business include aviation, marine and other specialty reinsurance. For a more detailed description of this segment, see Part I, Item 1, ‘‘Business-Business Segments-International Insurance.’’
Losses and loss adjustment expenses. The loss ratio for the international insurance segment has reduced from 53.3% in 2006 to 51.7% in 2007. Although the current period has been adversely affected by a $14.0 million loss from a shipping collision and a $10.1 million loss from an air crash in Brazil, it has benefited from favorable prior period reserve releases of $80.8 million. The comparative period in 2006 benefited from a reserve release of $32.7 million, $7.4 million of which was attributable to specialty reinsurance. Prior year reserve releases are further discussed under ‘‘Reserves for Losses and Loss Expenses.’’
Policy acquisition, operating and administrative expenses. Increases in the acquisition costs for the international insurance segment are attributable to increases in profit commissions resulting from improved profitability, particularly in the energy portfolio.
The operating and administrative expense ratio increased in 2007 by 2.0 percentage points due to the investment in new teams, increases in personnel costs connected with increased bonuses and long-term incentive charges and the weakening of the U.S. Dollar against the British Pound.
We write both U.S. property and casualty insurance on an excess and surplus lines basis. For a more detailed description of this segment, see Part I, Item 1, ‘‘Business-Business Segments-U.S. Insurance.’’
Gross written premiums. Gross written premiums decreased by 20.2% compared to 2006 due primarily to the repositioning of our U.S. commercial property account and the non-renewal of a number of poorly performing contracts. The U.S. casualty account is experiencing some rate pressure but we have been able to maintain premium levels while obtaining price adequacy.
The table below shows our gross written premiums for each line of business for each of 2007, 2006 and 2005, and the percentage change in gross written premiums for each line:
The loss ratio for U.S. insurance increased from 68.0% in 2005 to 75.0% in 2006. This was attributable mainly to our U.S. property business which suffered from an unexpected frequency of large fire losses which resulted in $19.6 million of losses, representing 23.7% of net earned premiums.
The increase in expense ratio from 2005 to 2006 of 1.1 percentage points was due to the premium growth in the U.S. property business which attracted a higher operating and administrative charge to the segment.
Gross IBNR for the property reinsurance segment has increased in 2007 reflecting changes in the business mix from treaty catastrophe and risk excess business to a higher proportion of pro rata business which has higher attritional loss ratios. Gross reserves for the casualty reinsurance segment have continued to increase reflecting the build up of long-tail reserves. International insurance reserves have reduced slightly due to the settlement of the 2005 hurricane losses. The reserves for U.S. insurance have increased reflecting the higher proportion of longer-tail casualty business.
U.S. Insurance. This segment shows a $6.3 million release driven largely by the casualty account. This is due to the recognition of some of the good experience to date on the account.
International Insurance. As at December 31, 2004 the international insurance segment held net claims reserves of $473.7 million, partly derived through the Wellington quota share arrangements which have developed better than anticipated resulting in a release of $7.2 million. The specialty reinsurance business line experienced better than expected development from the 2004 windstorms and significantly lower than anticipated development of IBNR claims, leading to a favorable development of $19.2 million.
Better than expected development from the U.K. commercial property and liability classes has resulted in a net reserve release of $25.0 million. The other insurance lines also contributed a further $1.0 million release.
Management monitors the ratio of debt to total capital, with total capital being defined as shareholders’ equity plus outstanding debt. At December 31, 2007, this ratio was 8.1%, (2006-9.4%, 2005-10.9%).
On February 6, 2008 the Company’s Board authorized a new share repurchase program for up to $300 million of ordinary equity. The authorization covers the period through March 1, 2010.
As at December 31, 2007 and 2006, Aspen Holdings held $17.9 million and $46.0 million, respectively, in cash and cash equivalents which management considers sufficient to provide us liquidity at such time.
In 2007, Aspen Bermuda and Aspen U.K. Holdings paid Aspen Holdings a dividend of $125 million and $17.0 million, respectively. In 2006, Aspen U.K. paid a dividend to Aspen Holdings
There were no significant restrictions on the ability of Aspen U.K. and Aspen Bermuda to pay Aspen Holdings dividends funded from their respective accumulated balances of retained income as at December 31, 2007.
The potential for individual large claims and for accumulations of claims from single events means that substantial and unpredictable payments may need to be made within relatively short periods of time.
(1) These letters of credit are not secured by cash or securities, though they are secured by a pledge of the shares of certain of the Company’s subsidiaries under a pledge agreement.
(2) As of December 31, 2007, the Company had funds on deposit of $367.2 million and £49.3 million (December 31, 2006-$171.2 million and £50.2 million) as collateral for the secured letters of credit.
U.S. reinsurance trust fund. For its U.S. reinsurance activities, Aspen U.K. has established and must retain a multi-beneficiary U.S. trust fund for the benefit of its U.S. cedants so that they are able to take financial statement credit without the need to post cedant-specific security. The minimum trust fund amount is $20 million plus a minimum amount equal to 100% of Aspen U.K.’s U.S. reinsurance liabilities, which were $810.2 million at December 31, 2007 and $811.3 million at December 31, 2006. At December 31, 2007 the total value of assets held in the trust was $1,180.2 million (2006-$1,101.7 million).
U.S. surplus lines trust fund. Aspen U.K. has also established a U.S. surplus lines trust fund with a U.S. bank to secure liabilities under U.S. surplus lines policies. The balance held in the trust at December 31, 2007 was $75.5 million (2006-$70.6 million).
U.S. regulatory deposits. As at December 31, 2007, Aspen Specialty had a total of $6.9 million (2006-$6.8 million) on deposit with U.S. states in order to satisfy state regulations for writing business in those states.
Canadian trust fund. Aspen U.K. has established a Canadian trust fund with a Canadian bank to secure a Canadian insurance license. As at December 31, 2007, the balance held in trust was Can$159.9 million (2006-Can$117.7 million).
Consolidated cash flows for the twelve months ended December 31, 2005. Total net cash flow from operating activities in 2005 was $789.1 million. Dividends paid on ordinary shares totaled $45.5 million with approximately $790 million after expenses raised from the issuance of 25,884,891 ordinary shares and 4,000,000 Perpetual PIERS. As at December 31, 2005, we had a consolidated cash balance of $748.3 million.
Under the credit facilities, the Company must maintain at all times a consolidated tangible net worth of not less than approximately $1.1 billion plus 50% of consolidated net income and 50% of aggregate net cash proceeds from the issuance by the Company of its capital stock, each as accrued from January 1, 2005. On June 28, 2007, we amended the credit agreement to permit dividend payments on existing and future hybrid capital notwithstanding a default or an event of default under the credit agreement. On April 13, 2006, the agreement was amended to remove any downward adjustment on maintaining the Company’s consolidated tangible net worth in the event of a net loss. The Company must also not permit its consolidated leverage ratio of total consolidated debt to consolidated tangible net worth to exceed 35%. In addition, the credit facilities contain other customary affirmative and negative covenants as well as certain customary events of default, including with respect to a change in control. The various affirmative and negative covenants, include, among others, covenants that, subject to important exceptions, restrict the ability of the Company and its subsidiaries to: create or permit liens on assets; engage in mergers or consolidations; dispose of assets; pay dividends or other distributions, purchase or redeem the Company’s equity securities or those of its subsidiaries and make other restricted payments; permit the rating of any insurance subsidiary to fall below A.M. Best financial strength rating of B++ or S&P financial strength rating of A−; make certain investments; agree with others to limit the ability of the Company’s subsidiaries to pay dividends or other restricted payments or to make loans or transfer assets to the Company or another of its subsidiaries. The credit facilities also include covenants that restrict the ability of our subsidiaries to incur indebtedness and guarantee obligations.
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, 2007:
On April 1, 2005, Aspen U.K. signed an agreement for under-leases for office space in London of approximately a total of 49,500 square feet covering three floors. The term of each lease for each floor commenced in November 2004 and runs for 15 years. Service charges of approximately £0.5 million per annum are payable from this date, and are subject to increase. The Company began paying the yearly basic rent of approximately £2.7 million per annum in November 2007. The basic annual rent for each of the leases is each subject to 5-yearly upwards-only rent reviews. There are no contractual provisions in any of the leases allowing the Company to terminate any of the leases prior to expiration of the 15-year contractual terms.
For a discussion of derivative instruments entered into by the Company, please see Note 9 to the audited financial statements for the twelve months ended December 31, 2007 included elsewhere in this report.