We believe that our office space is sufficient for us to conduct our operations for the foreseeable future in these locations.
Total cash and investments include cash, cash equivalents, fixed maturities, other investments, short-term investments, accrued interest and receivables for investments sold.
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 85,510,673, 81,506,503, 83,327,594, 70,508,013 and 70,655,698 at December 31, 2007, 2008, 2009, 2010 and 2011, respectively. In calculating the number of shares outstanding as at December 31, 2007 for this purpose, we have deducted shares delivered to us and canceled on January 22, 2008 pursuant to our accelerated share repurchase agreement.
A significant combination of catastrophe events and depressed investment returns made 2011 one of the tougher years the insurance industry has faced for some time, and one of the worst years of catastrophe-related losses in history. Countries around the globe faced a series of natural disasters, including an earthquake and tsunami in Japan, earthquakes in New Zealand, cyclone and flooding in Australia, a hurricane and a series of severe tornadoes in the United States, and devastating floods in Thailand. Industry-wide losses in 2011 totalled about $108 billion. This is more than double the figure of $48 billion in 2010, and second only to the record of $123 billion in 2005 when U.S. Hurricanes Katrina, Rita and Wilma alone cost the insurance industry over $100 billion. For 2011, we reported a net loss of $1.82 per share. Diluted book value was $38.43 per share, a decrease of 1.2% from year end 2010.
Insurance. The insurance segment had a successful year and achieved an underwriting profit of $33 million for 2011 and a combined ratio of 95.8%, compared with 103.1% for 2010. This reflected not only significant growth in certain niche areas, but also an improvement across a number of lines. We continued our build out of our U.S. insurance platform. We hired Mario Vitale in March of 2011 to lead our U.S. insurance operations. We hired a new surety underwriting team in May of 2011 and by December we had all the required regulatory consents in place and were fully operational. We continued our approval process for admitted licenses and we now have received admitted licenses in 48 U.S. states and the District of Columbia. We also expanded our programs book with a major new contract for a successful New York based MGA which was bound in September 2011 and which we expect to develop annual gross written premiums of around $100 million when fully seasoned over time. In environmental and primary casualty, we upgraded talent and strengthened our underwriting capabilities. We also continued to build out management expertise and infrastructure to support growth and development.
Reinsurance. Our casualty and specialty reinsurance lines of business had good performances, although the reinsurance segment was materially impacted by a high frequency and severity of natural catastrophes in 2011. The reinsurance segment had a combined ratio of 125.4% which included $520.1 million, or 47.5 percentage points, of pre-tax catastrophe losses, net of reinsurance and reinstatement premiums. The reinsurance segment’s underwriting loss was $282.5 million compared with an underwriting profit of $133.6 million in 2010.
Gross written premiums for 2010 in both our insurance and reinsurance segments were broadly in line with 2009. Within our reinsurance segment, our property catastrophe reinsurance line of business benefited from favorable market conditions and $12.0 million of reinstatement premiums from the Chilean earthquake while our other property reinsurance lines had a $45.1 million reduction in premium as a result of higher cedant retentions. The increase in our insurance segment’s gross written premiums was due to growth in property lines where we saw opportunities to write business that met our expected profitability requirements. Market conditions remained challenging in casualty insurance, resulting in a $47.9 million reduction in written premium in these lines.
Reinsurance. Total reinsurance ceded in 2011 increased by $93.0 million from 2010. The reinsurance segment has recognized the costs of catastrophe programs purchased to provide additional cover for the third quarter’s wind season after the first two quarters’ catastrophe events. 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.
Total reinsurance ceded in 2010 was $44.6 million lower than in 2009. The overall decrease was due mainly to the insurance segment following the cancellation of a reinsurance quota share for U.S. property insurance, and lower costs of quota share outwards reinsurance resulting from reduced gross written premium.
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 two business segments for the twelve months ended December 31, 2011, 2010 and 2009 were as follows:
The loss ratio for 2011 was 82.4% compared to 65.8% in 2010. The increase in the loss ratio was attributable to a number of catastrophe losses in the period. Net losses before reinstatement premiums and taxes included: $22.3 million from the Australian floods, $73.3 million from the New Zealand earthquake and $254.9 million from the Japanese earthquake and tsunami, all of which occurred in the first quarter of 2011; $109.6 million from the U.S. storms in the second quarter; $10.0 million from Hurricane Irene; $65.8 million from the Thai floods in the fourth quarter; and $30.9 million from other natural catastrophes (U.S., Scandinavian and Asian weather-related events). The loss ratio in the reinsurance segment in 2011 was higher than in 2010 due to 2011 experiencing a higher frequency of catastrophe losses than 2010. Total catastrophe losses in 2011 added 48.4 percentage points to the loss ratio in the reinsurance segment while catastrophe losses in 2010 increased the loss ratio by 15.8 percentage points. The loss ratio in the insurance segment was lower in 2011 mainly due to $20.0 million of favorable reserve development on prior years compared to $44.2 million of reserve strengthening in 2010. The increase in the reinsurance loss ratio in 2010 was due mainly to $180.7 million of losses associated with the earthquakes in Chile and New Zealand. The loss ratio in the reinsurance segment for 2009 was lower due to the absence of major catastrophes when compared to 2010. The increase in the insurance loss ratio in 2010 was mainly due to additional prior year reserve strengthening of $44.2 million compared to $19.4 million of strengthening in 2009.
Prior year reserve movements. 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, 2011, 2010 and 2009, we recorded a reduction in the level of reserves for prior years. The amounts of these reductions and their effects on the loss ratio in each year are shown in the following table:
Reserve releases increased by $70.9 million in 2011 due to a net reserve release of $20.0 million for our insurance segment compared to a $44.2 million reserve strengthening in 2010. Reserve releases were $63.0 million lower in 2010 due to less favorable developments impacting our insurance segment, particularly our casualty insurance and financial and professional lines. In 2009, reserve releases from our property reinsurance and casualty reinsurance lines combined with releases from our non-U.S. insurance lines offset reserve strengthening in our U.S. reinsurance lines.
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, administrative and corporate expenses to the expense ratio and the total expense ratios for the twelve months ended December 31, 2011, 2010 and 2009:
Taxes. We recognized a tax credit in 2011 of $37.2 million (2010 - $27.6 million expense), equivalent to a consolidated rate on income before tax of 26.0% in 2011 compared to 8.1% in 2010 and 11.4% in 2009. The tax credit in 2011 is due to the geographic distribution of catastrophe losses, adjustments to prior years positions and changes in U.K. corporation tax rates.
an increase in net of tax unrealized gains on investments of $93.5 million, accounted for in other comprehensive income;
dividend payments to ordinary and preference shareholders totaling $65.3 million in 2011.
Diluted tangible book value per ordinary share at December 31, 2011 was $38.43, a decrease of 1.2% compared to $38.90 at December 31, 2010.
Balances as at December 31, 2011 and December 31, 2010 were:
As at December 31, 2011, Aspen Holdings held $125.3 million in cash and cash equivalents which, taken together with our credit facilities and expected levels of future inter-company dividends, we believe to be sufficient to provide us with an appropriate level of liquidity.
At December 31, 2011, the Operating Subsidiaries held $1,078.9 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 Operating Subsidiaries to ensure that, individually, they are able to meet their insurance and other liabilities as they become due and that a margin of liquidity was held as at December 31, 2011 and for the foreseeable future.
by natural hazards or by political or financial risk account for approximately 40% of the book of business that we expect to write in 2012. In other areas, we are achieving single-digit percentage rate increases or we are maintaining rates.
Reinsurance. U.S. property catastrophe rates rose 10% to 15% on January 1 renewals while rates for European property catastrophe covers renewed at flat rates to increases of up to 5%. Looking forward to the Japan April 1 renewals, we anticipate these rates should rise significantly following the Japanese earthquake and tsunami and Japanese cedant-related loss activity in Thailand in 2011. There is speculation in the scientific community concerning whether the risk of earthquake in the Tokyo bay area has increased following the Japanese earthquake. We are persuaded that the resulting uncertainty demands a higher price and we expect to be demanding rate increases of up to 100% for Japanese earthquake business. Casualty rates remain flat and premium rates in specialty reinsurance are stable although we have achieved price increases of at least 25% in the loss-affected marine and offshore energy market.
Insurance. January 1 is not a major renewal date for insurance overall. In the insurance markets, international terms and conditions remain stable and the insurance market place is reluctant to provide multi-year policies at this point. We regard this as significant because this is the stage in the cycle where many buyers would like to have multi-year policies locked in at relatively weak rates. We are encouraged that the underwriting market is not agreeing to this. Looking forward to the mid-year U.S. property renewals, we estimate that we could see double digit price increases as adoption of RMS version 11 becomes increasingly incorporated into pricing models.
Earned premiums. Premiums are recognized as earned over the policy periods. The premium related to the unexpired portion of each policy at the end of the reporting period is included in the balance sheet as unearned premiums.
Reserving approach. We are required by U.S. GAAP to establish loss reserves for the estimated unpaid portion of the ultimate liability for losses and loss expenses (“ultimate losses”) under the terms of our policies and agreements with our insured and reinsured customers. Our loss reserves comprise the following components:
case reserves to cover the cost of claims that were reported to us but not yet paid;
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 the 2011 earthquake and tsunami in Japan, for example, 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.
Selection of reported gross reserves. Management, through its Reserve Committee, 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 are 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 Reserve Committee is a management committee consisting of the Head of Risk (Chair of the Reserve Committee), the Group Chief Actuary, the Group Chief Financial Officer and senior members of our underwriting and claims staff. In the fourth quarter of 2011, we established two separate Reserve Committees for our reinsurance and insurance segments. There is a core membership of both committees consisting of the Group Head of Risk, the Group Chief Actuary, the Group Chief Financial Officer and the underwriting heads of insurance and reinsurance. Senior members of the insurance and reinsurance segment underwriting and claims staff comprise the remaining members of each committee.
These factors are incorporated in the recommended reserve range from which management selects its best point estimate. As at December 31, 2011, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $115.7 million in loss reserves which would represent 80.9% of loss before income tax for the twelve months ended December 31, 2011. As at December 31, 2010, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $103.7 million in loss reserves which would represent 30.5% of income before income tax for the twelve months ended December 31, 2010.
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.
Investments. We currently classify all except $398.5 million of our fixed income maturity investments and short-term investments as “available for sale” and, accordingly, they are carried at estimated fair value. The Company uses quoted values and other data provided by internationally recognized independent pricing sources as inputs into its process for determining the fair value of its fixed income 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.
The fair value for mortgage-backed and other asset-backed debt securities, includes estimates regarding prepayment assumptions, which are based on current market conditions. Amortized cost in relation to these securities is calculated using a constant effective yield based on anticipated prepayments and estimated economic lives of the securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date. Changes in estimated yield are recorded on a retrospective basis, which result in future cash flows being used to determine current book value.
Other-than-temporary impairment is deemed to occur when there is no objective evidence to support recovery in value of a security and a) the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its adjusted amortized cost basis or b) it is deemed probable that the Company will be unable to collect all amounts due according to the contractual terms of the individual security. In the first case, the entire unrealized loss position is taken as an OTTI charge to realized losses in earnings. In the second case, the unrealized loss is separated into the amount related to credit loss and the amount related to all other factors. The OTTI charge related to credit loss is recognized in realized losses in earnings and the amount related to all other factors is recognized in other
Equity securities do not have a maturity date and therefore the Company’s review of these securities utilizes a higher degree of judgment. In its review, the Company considers its ability and intent to hold an impaired equity security for a reasonable period of time to allow for a full recovery. Where an equity security is considered to be other-than-temporarily impaired, the entire charge is recognized in realized losses in earnings. The cost basis of the investment is reduced accordingly and no adjustments to the cost basis are made for subsequent recoveries in value.
Gross written premiums in 2010 were broadly in line with 2009, with reductions in our reinsurance segment balanced by increases in our insurance segment. Gross written premiums in the reinsurance segment for 2010 contained an additional $45.5 million from new teams that commenced underwriting in 2009 (credit and surety and agriculture) and $39.0 million of additional catastrophe premium which includes $12.0 million of reinstatement premiums from the Chilean earthquake. These increases were offset by reductions in other property reinsurance, casualty reinsurance and other specialty lines of business. Gross written premiums in the insurance segment of $914.6 million for 2010 include additional
contributions of $32.5 million from property insurance where we saw opportunities to write business that met our profitability requirements compensating for reductions in casualty and energy physical damage.
Net premiums written. In 2011, gross written premiums increased by 6.3% while net premiums written increased by 2.0%. The lower level of growth in net premiums written was due to the $93.0 million increase in reinsurance expenditure in the year due predominantly to the reinsurance segment recognizing the costs of catastrophe retrocession programs purchased to provide additional cover for the third quarter’s wind season after the first two quarters’ catastrophe events.
In 2010, while gross written premiums increased by only 0.5%, net premiums written increased by 3.0% compared to 2009 due to a reduction of $44.6 million in ceded written premiums. The overall decrease in the insurance segment reflected the cancellation of a reinsurance quota share for U.S. property insurance and lower costs of quota share reinsurance resulting from reduced gross written premium. In 2009, although total gross written premiums increased by 3.3%, net premiums written increased by only 0.1% compared to 2008 as a result of the $64.1 million increase in ceded written premiums.
Net premiums earned. Net premiums earned have decreased by $10.4 million, or 0.5%, in 2011 compared to 2010 due to the recognition of earned premiums associated with the additional reinsurance purchased to protect the second half of 2011 following the large losses in the first half of the year. Net premiums earned increased by $75.9 million, or 4.2%, in 2010 compared to 2009 which is consistent with the increase in gross earned premiums and the reduction in the cost of our reinsurance purchased in that period. The changes in net premiums earned for each of our segments were as follows:
Losses and loss adjustment expenses. Losses and loss adjustment expenses have increased from $1,248.7 million in 2010 to $1,556.0 million in 2011 primarily due to $534.3 million of net losses from natural disasters that occurred in 2011 (principally the Japanese earthquake and tsunami, U.S. tornadoes, Thai floods, Australian floods and New Zealand earthquakes). In 2010, we suffered $127.9 million of net losses from the Chilean earthquake and $52.8 million from the New Zealand earthquake. In 2009, we had no significant catastrophe loss events, with the only notable loss events being the recognition of $13.4 million of European and Canadian storm losses and $11.4 million of net losses from the Air France disaster. Further information relating to movements in prior year reserves can be found below under “Reserves for Loss and Loss Adjustment Expenses.”
$72.3 million in 2011 following favorable development in property reinsurance and specialty reinsurance lines. The insurance segment had a $20.0 million reserve release in 2011 from the property, casualty and marine, energy and transportation insurance lines compared to a $44.2 million reserve strengthening in 2010 mainly in casualty insurance.
We have presented loss ratios both including and excluding the impact from prior year reserve adjustments and catastrophe losses to aid in the analysis of the underlying performance of our segments. We have defined 2011 catastrophic losses as: losses associated with the New Zealand earthquakes, the Australian floods, the Japanese earthquake and tsunami, the Thai flood and $39.1 million of other weather-related events. Our estimate of loss for the 2011 events, including reinstatement premium adjustments but before taxes, is $534.3 million.
Our 2010 catastrophe losses were associated with the Chilean earthquake in the first quarter of 2010 and the New Zealand earthquake in the third quarter of 2010. Our estimate of loss for these 2010 events is $127.9 million for the Chilean earthquake and $52.8 million for the New Zealand earthquake. The underlying changes in accident year loss ratios by segment are shown in the table below. The prior year claims adjustment in the table below reflects claims development and excludes premium adjustments.
Expenses. We monitor the ratio of expenses to gross earned premium (the “gross expense ratio”) as a measure of the cost effectiveness of our policy acquisition, general, administrative and corporate processes. The table below presents the contribution of the policy acquisition expenses and general, administrative and corporate expenses to the gross expense ratios and the total net expense ratios for the twelve months ended December 31, 2011, 2010 and 2009. 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.
The total group general and administrative expense ratio includes corporate expenses.
Net investment income. In 2011, net investment income was $225.6 million (2010 - $232.0 million). which decreased due to lower reinvestment rates and declining book yields from fixed income securities partially offset by $6.2 million of dividend income from global equity securities (2010 - $ Nil). In 2010, the lower interest rate environment and hence lower reinvestment rates resulted in a lower net investment income for the year. Investment income in 2009 benefited from a $19.8 million contribution from our investments in funds of hedge funds which we exited on June 30, 2009.
Change in fair value of derivatives. In 2011, we recorded a reduction in the fair value of derivatives of $59.9 million (2010 - $0.2 million; 2009 - $8.0 million). This includes a loss of $64.4 million in the value of our interest rates swaps which we entered into during 2010 and 2011. In 2010, we recorded a reduction of $7.0 million (2009 - $8.0 million) in the estimated fair value of our credit insurance contract. On October 26, 2010, we gave notice of our intention to cancel our credit insurance contract with effect from November 28, 2010. The notice of cancellation triggered a final payment of $1.9 million to the contract counter-parties.
At December 31, 2011, we held eight foreign currency derivative contracts to purchase $192.4 million of U.S. and foreign currencies. The foreign currency contracts are recorded as derivatives at fair value with changes recorded as changes in fair value of derivatives in our statement of operations. At December 31, 2010 and December 31, 2009, there were no outstanding foreign currency contracts. For the twelve months ended December 31, 2011, the impact of foreign currency contracts on net income was $4.5 million (2010 - $Nil)
$232.0 million in net investment income and $50.6 million of realized investment gains. Our decrease in underwriting income in 2011 when compared to 2010 was mainly due to the $505.2 million of losses net of reinsurance and reinstatement premiums associated with the Japanese earthquake and tsunami, U.S. storms and Hurricane Irene, Thai floods, Australian floods and New Zealand earthquakes. In 2009, income before tax was $534.7 million and comprised mainly $288.4 million of underwriting profit and $248.5 million in net investment income. The decrease in income in 2010 when compared to 2009 was due principally to natural catastrophe losses from the earthquakes in Chile and New Zealand. There was an absence of catastrophes combined with improved investment performance in 2009.
Net income/loss. In 2011, we had a net loss of $105.8 million, equivalent to a basic and diluted loss per ordinary share of $1.82 based on the weighted average number of shares in issue during the period. In 2010, we had net income of $312.7 million, equivalent to diluted earnings per ordinary share of $3.62 based on the weighted average number of shares in issue during the period. In 2009, we had net income of $473.9 million, equivalent to diluted earnings per ordinary share of $5.64 based on the weighted average number of shares in issue during the period. Preference share dividends are deducted from net income for the purpose of calculating earnings per ordinary share.
Management measures segment results on the basis of the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and operating and administrative expenses by net premiums earned. Other than corporate expenses, indirect operating and administrative expenses are allocated to segments based on each segment’s proportional share of gross earned premiums. As a relatively new company, our historical combined ratio may not be indicative of future underwriting performance.
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 expense, interest expense, 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 our operating segments as they typically do not fluctuate with the levels of premium written and are related to our operations. They include group executive costs, group finance, legal and actuarial costs, non-underwriting share-based compensation and certain strategic costs, including new teams which have not commenced underwriting.
Gross written premiums. The table below shows our gross written premiums for each line of business for the twelve months ended December 31, 2011, 2010 and 2009, and the percentage change in gross written premiums for each line:
Policy acquisition, general and administrative expenses. Policy acquisition expenses were $197.7 million for 2011, equivalent to 17.8% of net premiums earned (2010 - $202.4 million or 17.7% of net premiums earned). The increase in the ratio is due to our purchase of additional reinsurance reducing our net earned premium. General and administrative expenses were $109.8 million for 2011, a $2.5 million reduction from 2010, attributable mainly to lower performance-related accruals following the high loss activity of 2011.
The general and administrative expense ratio of 9.9% in 2011 increased from 9.8% in 2010 due to an increase in general expenses as we continued to invest in the development of the business and growth of existing offices. The general and administrative expense ratio of 9.8% in 2010 increased from 8.8% in 2009 due to our continued investment in the development of the business and establishment of new offices.
At December 31, 2011 and December 31, 2010, total cash and investments, including accrued interest receivable, were $7.6 billion and $7.3 billion, respectively. The composition of our investment portfolio is summarized below:
Mortgage-Backed Securities. The following tables summarize the fair value of our Mortgage-Backed Securities (“MBS”) by rating and class at December 31, 2011:
In addition to returns on our investment, we provide services on risk selection, pricing and portfolio design in return for a percentage of profits from Iris Re. In the twelve months ended December 31, 2011, fees of $0.7 million (2010 - $0.3 million) were payable to us.
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. The framework prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels, which are described in more detail below.
Independent Pricing Services and Index Providers. The underlying methodology used to determine the fair value of securities in the Company’s available for sale and trading portfolios by the pricing services and index providers the Company uses is very similar. Pricing services will gather observable pricing inputs from multiple external sources, including buy and sell-side contacts and broker-dealers, in order to develop their internal prices. Index providers are those firms which provide prices for a range of securities within one or more asset classes, typically using their own in-house market makers (traders) as the primary pricing source for the indices, although ultimate valuations may also rely on other observable data inputs to derive a dollar price for all index-eligible securities. Index providers without in-house trading desks will function similarly to a pricing service in that they will gather their observable pricing inputs from multiple external sources. All prices for the Company’s securities attributed to index providers are for an individual security within the respective indices.
Pricing services and index providers, provide pricing for less complex, liquid securities based on market quotations in active markets. Pricing services and index providers supply prices for a broad range of securities including those for actively traded securities, such as Treasury and other Government securities, in addition to those that trade less frequently or where valuation includes reference to credit spreads, pay down and pre-pay features and other observable inputs. These securities include Government Agency, Municipals, Corporate and Asset-Backed Securities.
At December 31, 2011, we obtained an average of 4.8 quotes per equity investment. We had no equity investments as at December 31, 2010. Pricing sources used in pricing our equities at December 31, 2011 were as follows:
quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated);
comparison of market values obtained from pricing services, index providers and broker-dealers against fund manager pricing where further investigation is completed when significant differences exist for pricing of individual securities between pricing sources;
comparison of the fair value estimates to our knowledge of the current market and on a sample basis against alternative internationally recognized independent pricing sources.
Prices obtained from pricing services, index providers and broker-dealers are not adjusted by us; however, prices provided by a pricing service, index provider or broker-dealer in certain instances may be challenged based on market or information available from internal sources, including those available to our third-party investment accounting service provider. Subsequent to any challenge, revisions made by the pricing service, index provider or broker-dealer to the quotes are supplied to our investment accounting service provider.
Management reviews the vendor hierarchy maintained by our third-party accounting service provider in order to determine which price source provides the most appropriate 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 level assigned to each security in the Company’s available for sale and trading portfolios is based upon its assessment of the transparency and reliability of the inputs used in the valuation as of the measurement date. The hierarchy of index providers and pricing services is determined using various qualitative and quantitative points arising from reviews of the vendors conducted by the Company’s third-party accounting service provider. Vendor reviews include annual onsite due diligence meetings with index providers and pricing services vendors covering valuation methodology, operational walkthroughs and legal and compliance updates. Index providers are assigned the highest priority in the pricing hierarchy due primarily to availability and reliability of pricing information.
The Company considers prices for actively traded securities to be derived based on quoted prices in an active market for identical assets, which are Level 1 inputs in the fair value hierarchy. As the fair values of our U.S. Treasury securities are based on unadjusted market prices in active markets, they are classified within Level 1. As identified in the tables above, the majority of securities are valued using prices supplied by index providers.
The Company considers securities, other financial instruments and derivative insurance contracts subject to fair value measurement whose valuation is derived by internal valuation models to be based largely on unobservable inputs, which are Level 3 inputs in the fair value hierarchy.
Our exposure to mono-line insurers was limited to one municipal holding (2010 - 1 holding) as at December 31, 2011 with a market value of $0.1 million (2010 - $0.1 million). Our exposure to other third-party guaranteed debt is primarily to investments backed by the Federal Depository Insurance Corporation (FDIC) and non-U.S. government guaranteed issuers.
Reserves by segment. For the twelve months ended December 31, 2011, we had total net loss and loss adjustment expense reserves of $4,098.6 million (December 31, 2010 - $3,540.6 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 $4,525.2 million at the balance sheet date of December 31, 2011, a total of $2,314.4 million, or 51.1%, represented IBNR claims (December 31, 2010 - $2,074.8 million and
The increase in reinsurance recoverables in 2011 is due predominately to the recognition of recoveries associated with the New Zealand earthquake and the Thai floods.
The gross reserves may be further analyzed between outstanding claims and IBNR as at December 31, 2011 and 2010, as follows:
The two tables above are not directly comparable as the year end 2011 position reflects an additional year’s business. The increase in reserves in 2011 over 2010 therefore reflects the reserves associated with the 2011 accident year less changes in reserve estimates and payments made on earlier accident years 2010 and prior. For the reinsurance segment, the main events which impacted the reserves in 2011 were the earthquakes in Japan and New Zealand, the Australian and Thai floods and the U.S. storms while we have seen overall favorable experience from prior years. The insurance segment did not have material exposure to the catastrophe events of 2011. The level of reserves in insurance also reflects prior year releases.
Prior year loss reserves. In the twelve months ended December 31, 2011, 2010 and 2009, there was an overall reduction of our estimate of the ultimate claims to be paid. An analysis of this reduction by segment is as follows:
Reinsurance. Net reserve releases of $65.6 million in the year were attributed to all of our reinsurance lines. The largest release was seen in other property reinsurance where we released $43.7 million due largely to better than expected loss experience. Casualty reinsurance experienced a lower level of releases than in previous years with some areas with exposure to the global financial crisis being strengthened. We released $17.5 million from specialty reinsurance spread across several accounts and several years where the experience was better than expected.
Insurance. The net reserve strengthening in the insurance segment of $44.2 million in 2010 was mainly due to both our casualty business and our financial and professional lines. Following a full and detailed review of U.S. casualty insurance, we strengthened reserves by $31.8 million of which $22.5 million was in the fourth quarter, reflecting mainly adverse loss experience largely in construction accounts. Other areas of strengthening were in excess casualty and professional lines insurance which were adversely impacted by recession-related claims. This strengthening was partly compensated for by various releases including U.K. liability where experience was better than expected.
Reinsurance. The reserve releases in 2009 were as a result of better than expected incurred development on nearly all lines in the segment spread across several accident years and including settlement of Hurricane Ike and Gustav claims. Because of ongoing litigation, there remains significant uncertainty as to our ultimate costs of Hurricane Katrina. Just over half of the $103.8 million reserve releases came from property with an even split of casualty and specialty releases for the remainder. Most of the casualty favorable development was in our U.S. casualty treaty reinsurance business line where the experience to year end compared with starting loss ratios and expected patterns was generally better than expected at the aggregate level.
relatively short, our loss experience is limited and reliable evidence of changes in trends of numbers of claims incurred, average settlement amounts, numbers of claims outstanding and average losses per claim will necessarily take years to develop.
The following table shows our capital structure at December 31, 2011 compared to December 31, 2010.
On November 10, 2010, we entered into an accelerated share repurchase program with Barclays Capital to repurchase $184 million of our ordinary shares. As of December 31, 2010, a total of 5,737,449 ordinary shares were received and cancelled. Upon the termination of the contract on March 14, 2011, an additional 542,736 ordinary shares were received and cancelled. A total of 6,280,185 ordinary shares were cancelled under this contract.
On February 16, 2011, an agreement was signed to repurchase 58,310 shares from the Names’ Trustee. The shares were repurchased on March 10, 2011 for a total consideration of $1.7 million and subsequently cancelled.
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.
Holding company. We monitor the ability of Aspen Holdings to service debt, to finance dividend payments to ordinary and preference shareholders and to provide financial support to the Operating Subsidiaries.
During the period ended December 31, 2011, Aspen U.K. Holdings paid Aspen Holdings dividends of $85.0 million and Aspen Bermuda paid Aspen Holdings dividends of $100.0 million. During the period ended December 31, 2010, Aspen U.K. Holdings paid Aspen Holdings dividends of $203.0 million and Aspen Bermuda paid Aspen Holdings dividends of $120.0 million. Aspen Holdings also received interest of $52.6 million (2010 - $36.5 million) from Aspen U.K. Holdings in respect of an inter-company loan.
For a more detailed discussion of our Operating Subsidiaries’ ability to pay dividends, see Note 14 of our consolidated financial statements.
On an ongoing basis, our Operating Subsidiaries’ sources of funds primarily consist of premiums written, investment income and proceeds from sales and redemptions of investments.
As of December 31, 2011, the Company had pledged assets under these arrangements of $1,344.1 million and £19.3 million (December 31, 2010 - $699.9 million and £30.0 million) as collateral for the secured letters of credit.
See Note 18, “Commitment and Contingencies - Restricted Assets”, to the 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, 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 received $210.5 million from market securities and net purchases and sales of equipment during the period. The increase in paid claims over 2010 is 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.
Credit Facility. On July 30, 2010, Aspen Holdings and its various subsidiaries replaced its then existing $450.0 million revolving credit facility with a three-year $280.0 million revolving credit facility pursuant to a credit agreement (the “credit facility”) by and among the Company, certain of our direct and indirect subsidiaries, including the Operating Subsidiaries (collectively, the “Borrowers”), the lenders party thereto, Barclays Bank plc, as administrative agent, Citibank, NA, as syndication agent, Crédit Agricole CIB, Deutsche Bank Securities Inc. and The Bank of New York Mellon, as co-documentation agents and The Bank of New York, as collateral agent, U.S. Bank N.A, Lloyd’s Bank and HSBC.
Letters of Credit Facility. On August 12, 2011, Aspen Bermuda replaced its existing letter of credit facility with Citibank Europe dated April 29, 2009 in a maximum aggregate amount of up to $550.0 million with a new letter of credit facility in a maximum aggregate amount of up to $1,050.0 million. As at December 31, 2011, we had $837.8 million of outstanding collateralized letters of credit under this facility.
The long term debt obligations disclosed above do not include the $30.0 million annual interest payable on our outstanding Senior Notes.
Average equity, a non-GAAP financial measure, is calculated by the arithmetic average on a monthly basis for the stated periods excluding (i) preference shares, (ii) after-tax unrealized appreciation or depreciation on investments and (iii) the average after-tax unrealized foreign exchange gains and losses. Unrealized appreciation (depreciation) on investments is primarily the result of interest rate movements and the resultant impact on fixed income securities, and unrealized appreciation (depreciation) on foreign exchange is the result of exchange rate movements between the U.S. dollar and the British pound. Therefore, we believe that excluding these unrealized appreciations (depreciations) provides a more consistent and useful measurement of operating performance, which supplements GAAP information.
Operating income, a non-GAAP financial measure, is an internal performance measure used by us in the management of our operations and represents after-tax operational results excluding, as applicable, after-tax net realized and unrealized capital gains or losses, after-tax net foreign exchange gains or losses and changes in the fair value of derivatives. We exclude after-tax net realized and unrealized capital gains or losses, after-tax net foreign exchange gains or losses and changes in the fair value of derivatives from our calculation of operating income because the amount of these gains or losses is heavily influenced by, and fluctuates in part, according to the availability of market opportunities. We believe these amounts are largely independent of our business and underwriting process and including them
distorts the analysis of trends in its operations. In addition to presenting net income determined in accordance with GAAP, we believe that showing operating income enables investors, analysts, rating agencies and other users of our financial information to more easily analyze our results of operations in a manner similar to how management analyzes our underlying business performance. Operating income should not be viewed as a substitute for GAAP net income.