Diluted book value per share is calculated based on total shareholders’ equity excluding the aggregate value of the liquidation preferences of our preference shares, as at December 31, 2013, 2014, 2015, 2016 and 2017, divided by the number of dilutive equivalent shares outstanding of 67,089,572, 63,444,356, 62,240,466, 61,001,071 and 60,202,409 as at December 31, 2013, 2014, 2015, 2016 and 2017, respectively. As at December 31, 2013, 2014, 2015, 2016 and 2017, there were 1,542,596, 1,426,988, 1,322,093, 1,226,607 and 728,324 of dilutive equivalent shares, respectively. Potentially dilutive shares outstanding are calculated using the treasury method and all relate to employee, director and investor options.
Including cash within consolidated variable interest entities of $166.6 million as at December 31, 2017 and $291.3 million as at December 31, 2016.
The following is a discussion and analysis of our financial condition and results of operations for the twelve months ended December 31, 2017, 2016 and 2015. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and related Notes contained 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 “Cautionary Statement Regarding Forward-Looking Statements” contained in Item 1A, Item 1, and Part I of this report, respectively.
The insurance and reinsurance industry continued to be challenged in 2017 as a result of the impact of a series of costly catastrophe events and losses. In addition, although rates generally increased following the catastrophes in the third and fourth quarters of 2017, the industry has experienced years of rate reductions across many lines of business in both insurance and reinsurance.
We expect the Effectiveness and Efficiency Program to deliver cumulative total expense savings of approximately $160 million over the next three years. We expect to achieve approximately $30 million of the savings in 2018, $55 million in 2019 and $75 million in 2020, after which run-rate savings are expected to be approximately $80 million per year. We expect approximately 70% of the total expected savings to benefit our Insurance segment. We likewise expect to incur pre-tax charges of approximately $95 million to implement the Effectiveness and Efficiency Program and achieve the expected savings, the majority of which we expect will be incurred in 2018 and 2019. Approximately $50 million of this charge is for employee severance, benefits and related expenses, $30 million for business transformation and Effectiveness and Efficiency Program costs, and $15 million for outsourcing and premises. We also expect to spend a total of approximately $55 million in incremental capital expenditure, primarily information technology, in 2018 and 2019 that we expect to be amortized over a period of three to five years from the start of 2020. In 2017, we have recognized $15.2 million of expense associated with the Effectiveness and Efficiency Program.
Investment Management. We follow an investment strategy designed to emphasize the preservation of capital and provide sufficient liquidity for the prompt payment of claims. As of December 31, 2017, our investments consisted of a diversified portfolio of fixed income securities including U.S. Dollar BBB Emerging Market Debt, global equities and money market funds. Our overall portfolio strategy remains focused on high quality fixed income investments. In the third quarter of 2017, we took advantage of rising equity markets and sold $208.1 million of our equity portfolio. Proceeds from the sales were reinvested into a core fixed income strategy. As at December 31, 2017, we had a 5.8% (2016 -6.8%) position in equities, a 4% (2016 - 3.8%) position in U.S. Dollar BBB Emerging Market Debt and 0.2% (2016 -0.2%) in risk asset portfolio cash. As at December 31, 2017, approximately 10% of our total cash and investments, excluding catastrophe bonds and funds held by variable interest entities (the “Managed Portfolio”), was invested in equities and U.S. Dollar BBB Emerging Market Debt (2016 - 10.8%).
Gross written premiums of $3,360.9 million in 2017, an increase of 6.8% from 2016.
Combined ratio of 125.7% for 2017, including $561.9 million, or 24.6 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements, compared with 98.5% for 2016, which included $164.4 million or 6.3 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements, and 91.9% for 2015, which included $90.5 million or 3.7 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements.
Annualized net return on average equity of an 11.1% loss for 2017 compared with a 5.4% gain in 2016 and a 10.0% gain in 2015.
Ceded written premiums. Ceded written premiums in 2017 increased by 107.6% compared to 2016. The changes in our segments’ ceded written premiums for the twelve months ended December 31, 2017, 2016 and 2015 were as follows:
Ceded written premiums increased in both segments due to the combination of the purchase of a whole account quota share contract in the first quarter of 2017 in addition to increased use of quota share reinsurance, particularly in the insurance segment. Ceded written premiums increased in our insurance segment due to the restructuring of our ceded reinsurance arrangements and the recognition of reinstatement premiums associated with the increase in catastrophe and large losses. Ceded written premiums increased in our reinsurance segment due to new business opportunities written in conjunction with increased retrocession, additional ceded written premiums following the sale of AgriLogic in December 2017 and the recognition of reinstatement premiums associated with the increase in catastrophe losses.
Combined ratio. We monitor the ratio of losses and expenses to net earned premium (the “combined ratio”) as a measure of relative performance where a lower ratio represents a better result than a higher ratio. The combined ratios for our two business segments for the twelve months ended December 31, 2017, 2016 and 2015 were as follows:
The combined ratio for 2017 increased by 27.2 percentage points compared to 2016 due mainly to the increase in the loss ratio. The increase in loss ratio was due primarily to a $409.6 million increase in catastrophe losses, a $59.7 million increase in large losses, a $23.9 million decrease in prior year reserve releases, an increase in attritional losses in our insurance segment and a $330.7 million decrease in net earned premiums. The expense ratio increased by 0.5 percentage point due to a reduction in net earned premiums and an increase in general, administrative and corporate expenses partially offset by a decrease in policy acquisition expenses due to over-rider commissions associated with the increase in ceded reinsurance.
The combined ratio for 2016 increased by 6.6 percentage points compared to 2015 due to a 4.6 percentage point increase in the loss ratio and a 2.0 percentage point increase in the expense ratio. The loss ratio increase was due primarily to a $75.9 million increase in catastrophe losses and a $27.2 million reduction in the level of prior year reserve releases. The increase in expense ratio was due to higher acquisition and general administrative and corporate expenses. The increase in the expense ratio was due to an increase in the acquisition ratio due to higher profit commission accruals and lower ceding commissions in the insurance segment and changes in business mix in the reinsurance segment. The increase in general, administrative and corporate expenses was due to costs associated with AgriLogic, growth in our insurance and reinsurance business and reorganization costs.
In each of the years ended December 31, 2017, 2016 and 2015, we recorded a reduction in the level of reserves for prior years. In 2017, we reported net favorable development on prior year loss reserves of $105.4 million, or 4.6 combined ratio points, compared with $129.3 million, or 4.9 combined ratio points, for 2016, and $156.5 million, or 6.3 combined ratio points, for 2015.
Amortization of deferred policy acquisition costs decreased in 2017 compared to 2016 due to an increase in over-rider commissions associated with the increase in ceded reinsurance. Amortization of deferred policy acquisition costs increased in 2016 compared to 2015 in line with premium growth and higher profit commission accruals and lower ceding commissions in the insurance segment offsetting the Federal Excise Tax (“FET”) refunds and changes in business mix in the reinsurance segment.
General, administrative and corporate expenses increased to $502.2 million in 2017 from $490.1 million in 2016 and $424.0 million in 2015. The increase in such expenses in 2017 compared to 2016 was largely due to $15.2 million of costs associated with the Effectiveness and Efficiency Program and increased costs associated with growth in our insurance business partially offset by lower provisions for performance-related remuneration. The increase in 2016 compared to 2015 was largely due to costs associated with AgriLogic which we acquired in January 2016 (and subsequently sold in December 2017), costs associated with growth in our insurance and reinsurance business and reorganization costs.
Net investment income. We generated net investment income of $189.0 million in 2017, an increase of 1.0% on the prior year (2016 - $187.1 million; 2015 - $185.5 million). The increase was primarily due to the increase in the book yield of the fixed income portfolio. The increase in investment income in 2016 compared to 2015 was primarily due to a higher investment balance and $20.4 million of dividend income from our global equity securities portfolio compared with $20.1 million in 2015.
signed on December 22, 2017. The impact of the U.S. federal income tax rate reduction from 34% to 21% has been reflected in measuring deferred taxes.
The effective tax rate for the year is subject to revision in future periods if circumstances change and depends on the relative profitability of the business underwritten in Bermuda (where the rate of tax on corporate profits is zero), the United Kingdom (where the corporation tax rate is 19% and will be reduced to 17% effective April 1, 2020) and the United States (where the federal income tax rate was previously 34% and has been reduced to 21% effective January 1, 2018). The tax in each of the years is representative of the geographic spread of our business between taxable and non-taxable jurisdictions in such years.
Net income. We reported a net loss after taxes of $266.4 million in 2017 compared to net income of $203.4 million in 2016 and net income of $323.1 million in 2015. The net loss in 2017 was primarily due to the $625.5 million decrease in underwriting income resulting mainly from a $409.6 million increase in catastrophe losses, a $330.7 million reduction in net earned premiums and a $23.9 million reduction in reserve releases, partially offset by a $116.3 million reduction in expenses. The decrease in income after tax in 2016 compared to 2015 was due primarily to a $137.7 million decrease in underwriting income resulting from higher catastrophe losses, lower reserve releases and increased expenses partially offset by growth in premiums earned.
Other comprehensive income. Total other comprehensive income decreased by $50.8 million (2016 - $64.7 million decrease), net of taxes, for the twelve months ended December 31, 2017. This consists of a net unrealized loss of $9.2 million in the available for sale investment portfolio (2016 - $28.8 million net unrealized loss) largely attributable to the impact of rising interest rates on our bond portfolios, a $3.6 million reclassification of net realized gains to net income (2016 - $8.9 million reclassified realized gains), a $2.6 million unrealized gain (2016 - $0.7 million unrealized gain) on the hedged derivative contracts and an unrealized loss in foreign currency translation of $40.6 million (2016 -$27.7 million unrealized loss) largely attributable to the impact from the continued strengthening of the U.S. dollar.
Dividends. In April 2017, the Board approved an increase in the quarterly dividend on our ordinary shares from $0.22 per ordinary share to $0.24 per ordinary share (2016 - $0.22 quarterly dividend; 2015 - $0.20 quarterly dividend). This resulted in total ordinary dividends for 2017 of $56.2 million (2016 - $52.7 million; 2015 - $50.9 million). Dividends paid on the outstanding Preference Shares in 2017 were $36.2 million (2016 - $41.8 million; 2015 - $37.8 million). The reduction in dividends in 2017 was due to the redemption of the 7.401% and 7.250% Preference Shares.
a decrease of $365.4 million in retained earnings due to the net loss of $266.4 million and the payment of $92.4 million in ordinary and preference share dividends;
Our senior notes were the only material debt issued by Aspen Holdings as at December 31, 2017 and 2016 totaling $549.5 million and $549.3 million, respectively. In addition to the senior notes, we also reported $86.6 million (2016 - $223.4 million) of debt issued by Silverton. For further information relating to Silverton, refer to Note 7 of our consolidated financial statements, “Variable Interest Entities.”
Balances as at December 31, 2017 and 2016 were as follows:
We achieved an overall rate increase of approximately 6% for our reinsurance business during the January 1, 2018 renewals where we renewed approximately 50% of our annual book of reinsurance business. In addition, our Aspen Capital Markets business continues to provide investors with direct access to our underwriting expertise, and to provide brokers and clients with additional capacity. It also gives us the flexibility to manage our exposures.
While the January 1, 2018 renewals are less important for our insurance business, we achieved double digit percentage rate increases in marine and energy liability, marine hull, U.S. ocean marine and U.S. property and we obtained approximately 5% to 10% rate increases in U.S. energy and U.S. environmental. We achieved a rate increase of approximately 14% for our U.S. property book in conjunction with improved terms and conditions. Other insurance lines of business achieved up to 4% rate increases during the January 1, 2018 renewals.
See “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” included in this report.
On January 26, 2018, S&P affirmed the ratings of our Operating Subsidiaries but changed their outlook to negative from stable. On February 6, 2018, Moody’s affirmed the ratings of our Operating Subsidiaries but changed their outlook to negative from stable. Both rating agencies stated certain factors which, if not achieved, could lead the relevant rating agency to downgrade the ratings of our Operating Subsidiaries. See “Risk Factors - Our Operating Subsidiaries are rated and our Lloyd’s business benefits from a rating by one or more of A.M. Best, S&P and Moody’s and a decline in any of these ratings could adversely affect our standing among brokers and customers and cause our premiums and earnings to decrease and limit our ability to pay dividends on our ordinary shares” for a discussion of some potential risks relating to our ratings.
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 premiums
The reported gross written premiums for treaty pro rata business include estimates of premiums due to us but not yet reported by the cedant because of time delays between contracts being written by our cedants and their submission of treaty statements to us. This additional premium is normally described as pipeline premium. Treaty statements disclose information on the underlying contracts of insurance written by our cedants and are generally submitted on a monthly or quarterly basis, from 30 to 90 days in arrears. In order to report all risks incepting prior to a period end, we estimate the premiums written between the last submitted treaty statement and the period end. Treaty pro rata premiums are written predominantly in our other property, specialty and casualty reinsurance line of business.
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 $242.5 million (2016 - $226.7 million) in our property reinsurance treaty pro rata account as at December 31, 2017, a variation of 5% could increase or reduce net income before tax by approximately $1.2 million (2016 - $0.5 million).
With respect to our reinsurance claims operations, claims handlers set case reserves for reported claims generally based on the claims reports received from our ceding companies and take into consideration our cedants’ own reserve recommendations and our prior loss experience with the cedant. Additional case reserves (“ACR”), in addition to the cedants’ own recommended reserves, may be established by us to reflect our estimated ultimate cost of a loss. ACRs are generally the result of either a claims handler’s own experience and knowledge of handling similar claims, general reserving practices or the result of reserve recommendations following an audit of cedants’ reserves.
IBNR Reserves. The need for IBNR reserves arises from time lags between when a loss occurs and when it is actually reported and settled. By definition, we do not have specific information on IBNR claims so they need to be estimated by actuarial methodologies. IBNR reserves are therefore generally calculated at an aggregate level and cannot generally be identified as reserves for a particular loss or contract. We calculate IBNR reserves by class of business within each line of business. Where appropriate, analyses may be conducted on sub-sets of a class of business. IBNR reserves are calculated by projecting our ultimate losses on each class of business and subtracting paid losses and case reserves. IBNR reserves also cover the anticipated cost of claims incurred but not reported, within this we also include any potential development of reported claims. Over recent years, we have begun to place greater reliance on our actual actuarial experience for our long-tail lines of business that we have written since our inception in 2002. We believe that our earliest accident years are now capable of providing us with meaningful actuarial indications. Estimates and judgments for new insurance and reinsurance lines of business are more difficult to make than those made for more mature lines of business because we have more limited historical information through December 31, 2017.
There are three Reserve Committees, one for each of the insurance and reinsurance segments and a “core” committee that makes final reserving recommendations. The “core” Reserve Committee currently consists of the Group Chief Risk Officer (the chair), the Group Head of Capital Management, the Group Head of Risk, the Group Chief Financial Officer, the Insurance Chief Financial Officer and the President and Chief Underwriting Officer of Aspen Re. Senior members of the insurance and reinsurance segment underwriting and claims staff comprise the remaining members of each of the insurance and reinsurance reserve committees, respectively.
Each class of business within each line of business is reviewed in detail by management through its Reserve Committee at least once a year. The timing of such reviews varies throughout the year. Additionally, we review the emergence of actual losses relative to expectations every fiscal quarter for all classes of business. If warranted from this analysis, we may accelerate the timing of our detailed actuarial reviews.
These factors are incorporated in the recommended reserve range from which management selects its best point estimate. We take all reasonable steps to ensure that we utilize all appropriate information and actuarial techniques in establishing our IBNR reserves. However, given the uncertainty in establishing claims liabilities, it is likely that the final outcome will prove to be different from the original provision established at the balance sheet date. Changes to our previous estimates of prior period loss reserves impact the reported calendar year underwriting results by worsening our reported results if the prior year reserves prove to be deficient or improving our reported results if the prior year reserves prove to be redundant. As at December 31, 2017, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $186.0 million in loss reserves which would represent 66.0% of loss before income tax for the twelve months ended December 31, 2017. As at December 31, 2016, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $152.2 million in loss reserves which would represent 72.6% of income before income tax for the twelve months ended December 31, 2016. A 5% change in our net loss reserves equates to $261.7 million and represents 5.0% of shareholders’ equity as at December 31, 2017.
There are specific areas of our selected reserves which have additional uncertainty associated with them. See Part I, Item 1A, “Risk Factors -Insurance Risks - Our financial condition and operating results may be adversely affected if actual claims exceed our loss reserves” for a discussion of the specific areas of our selected reserves which have additional uncertainty. In each case, management believes they have selected an appropriate best estimate based on current information and current analyses.
Management’s best estimate of the net reserve for losses and loss expenses as at December 31, 2017 was $5,234.3 million. The following tables show the effect on estimated net reserves for losses and loss expenses as at December 31, 2017 of a change in two of the most critical assumptions in establishing reserves: (i) loss emergence patterns, accelerated or decelerated by three and six months; and (ii) expected loss ratios varied by plus or minus five and ten percent. Management believes that these scenarios present a reasonable range of variability around the booked reserves using standard actuarial techniques. Loss reserves may vary beyond these scenarios in periods of heightened or reduced claim activity. The reserves resulting from the changes in the assumptions
Net reserve for losses and loss expenses as at December 31, 2017 - Sensitivity to expected loss ratios
The most significant variance in the above scenarios (i.e., a 10% deterioration in expected loss ratio) would have the effect of increasing losses and loss expenses by $343.0 million.
Overall gross written premiums increased by 6.8% in 2017 compared to 2016. Gross written premiums in our reinsurance segment increased by 9.6% in 2017 compared to 2016 due to growth in agriculture insurance business written within specialty reinsurance and due to $32.3 million of reinstatement premiums associated with catastrophe losses. Gross written premiums from our insurance segment increased by 4.5% due to growth in financial and professional lines insurance partially offset by reductions in marine, aviation and energy insurance where we continue to experience challenging market conditions and in property and casualty insurance as a result of a change in our appetite for this type of business.
In 2016, total ceded written premiums increased by $202.2 million compared to 2015. Ceded reinsurance costs increased for our reinsurance segment due to increased ceded reinsurance for our property catastrophe business line for new business opportunities written in conjunction with an increase in retrocession costs and due to our agriculture business reported in our specialty reinsurance business line. Ceded reinsurance costs increased for our insurance segment because we restructured our ceded reinsurance arrangements to reduce earnings volatility and benefit the expense ratio. In addition, we purchased an adverse development cover in the fourth quarter of 2016 for certain casualty business which we have ceased to underwrite. These changes led the retention ratio to decrease from 88.3% in 2015 to 82.4% in 2016.
(1) Includes net earned premium of $198.8 million (2016 - $114.5 million, 2015 -$Nil) related to AgriLogic.
Net premiums earned decreased by $330.7 million, or 12.5%, in 2017 compared to 2016 due to a $453.6 million increase in ceded earned premiums partially offset by a $122.9 million increase in gross earned premiums. Net premiums earned increased by $164.0 million, or 6.6%, in 2016 compared to 2015 due to growth in gross earned premium and the impact from and the increases in ceded written premiums in 2016 not substantially flowing into earnings until 2017.
In the insurance segment, the loss ratio for 2017 was 79.8% compared to 63.1% in 2016. The increase in the loss ratio was largely due to a $57.1 million increase in catastrophe losses, a $34.4 million increase in large losses, an increase in attritional losses, an $18.7 million decrease in reserve releases and a decrease in net earned premiums. In 2017, there were $108.7 million of catastrophe losses associated with Hurricanes Harvey, Irma and Maria, wildfires in California and U.S. weather-related events. The loss ratio for 2016 was 63.1% compared to 62.4% for 2015. The increase in the loss ratio in 2016 was mainly due to a decrease of $23.4 million in prior year reserve releases and a $10.7 million increase in catastrophe losses. In 2016, our insurance segment experienced $51.6 million of catastrophe losses associated with U.S. weather-related events and Hurricane Matthew.
Overall, prior year reserve releases decreased by $23.9 million from $129.3 million in 2016 to $105.4 million in 2017. The reinsurance segment had reserve releases of $81.8 million compared to $87.0 million in 2016. The reserve releases from the reinsurance segment were across all reinsurance business lines. The insurance segment had reserve releases of $23.6 million compared to $42.3 million in 2016. The reserve releases from the insurance segment were principally from marine, energy and aviation insurance.
Overall, prior year reserve releases reduced by $27.2 million from $156.5 million in 2015 to $129.3 million in 2016. The reserve releases from reinsurance were across all business lines, totaling $87.0 million. The insurance segment had reserve releases of $42.3 million compared to $65.7 million in 2015. The reserve releases from insurance were from marine, energy and aviation insurance and financial and professional lines insurance.
The underlying changes in loss ratios by segment for the twelve months ended December 31, 2017, 2016 and 2015 are shown in the tables below. The total loss ratio represents the calendar year U.S. GAAP loss ratio. The current year adjustments represent catastrophe loss events incurred in those years which reflect net claims and reinstatement premium adjustments.
Policy acquisition expenses decreased by $128.4 million in 2017 compared to 2016 as although gross policy acquisition expenses increased this was more than offset by an increase in over-rider commissions associated with the increase in ceded reinsurance. Policy acquisition expenses increased by $45.3 million in 2016 compared to 2015 due to growth in written premiums and higher profit commission accruals.
As at December 31, 2017, we held foreign exchange contracts that were not designated as hedging under ASC 815 - "Derivatives and Hedging" with a notional amount of $751.6 million (2016 - $665.6 million). The foreign exchange contracts are recorded as derivatives at fair value in the balance sheet with changes recorded as a change in fair value of derivatives in the statement of operations. For the twelve months ended December 31, 2017, the impact of foreign exchange contracts on net income was a gain of $27.7 million (December 31, 2016 - loss of $21.5 million).
Income before tax. In the twelve months ended December 31, 2017, loss before tax was $281.8 million (2016 - income of$209.5 million; 2015 - income of $337.5 million), consisting of the amounts set out in the table below:
The decrease in underwriting income in 2017 compared to 2016 was due to higher catastrophe losses, lower reserve releases, an increase in large losses, an increase in attritional losses in the insurance segment and a reduction in premiums earned offset by a reduction in expenses. The decrease in underwriting income in 2016 compared to 2015 was due to higher catastrophe losses, lower reserve releases and an increase in expenses, partially offset by growth in premiums earned.
Change in fair value of derivatives. The change in fair value of derivatives in 2017 was attributable to foreign exchange contracts that had a gain of $27.7 million compared to a loss of $21.5 million in 2016 and a gain of $11.6 million in 2015. Interest rate swaps
had a realized loss of $3.1 million and $4.8 million in 2016 and 2015, respectively. There was no gain or loss in 2017 because we terminated our interest rate swaps on May 6, 2016.
The $21.2 million change in fair value of loan notes issued by variable interest entities represents the proportion of profit or loss generated by Silverton attributable to third-party investors. The reduction in the value of the loan notes in 2017 is due to catastrophe losses assumed by Silverton. The increase in the value in 2016 and 2015 is due to premiums received by Silverton being greater than the losses assumed.
Income tax expense. There was an income tax credit for the twelve months ended December 31, 2017 of $15.4 million compared to an expense of $6.1 million and $14.4 million in 2016 and 2015, respectively. The effective tax rate for the twelve months ended December 31, 2017 on our loss before tax was 5.5% (2016 - 2.9%; 2015 - 4.3%) and is representative of the geographic spread of our business between taxable and non-taxable jurisdictions.
Net income after tax. In 2017, we had net loss after tax of $266.4 million, equivalent to $5.22 basic loss per ordinary share adjusted for the $36.2 million preference share dividends, $8.0 million of preference share redemption costs and $1.3 million non-controlling interest. Fully diluted loss per ordinary share was $5.22 for 2017. In 2016, we had net income after tax of $203.4 million, equivalent to $2.67 basic earnings per ordinary share adjusted for the $41.8 million preference share dividends and $0.1 million non-controlling interest. Fully diluted earnings per ordinary share were $2.61 in 2016. In 2015, we had net income after tax of $323.1 million, equivalent to fully diluted earnings per ordinary share of $4.54. For a more detailed description of basic and diluted earnings per ordinary share, see Note 4 of our consolidated financial statements, “Earnings per Ordinary Share.”
Gross written premiums. The table below shows our gross written premiums for each line of business for the twelve months ended December 31, 2017, 2016 and 2015 and the percentage change in gross written premiums for each line of business:
The 13.2% increase in gross written premiums for the twelve months ended December 31, 2016 compared to the equivalent period in 2015 was attributable to increased business written in our specialty reinsurance and casualty reinsurance business lines. The increase in our specialty reinsurance gross written premiums was mainly due to growth in agriculture business written following our acquisition of AgriLogic in January 2016. The increase in our casualty reinsurance gross written premiums was largely due to growth in our U.S. casualty treaty and international casualty business lines. The slight decrease in property catastrophe reinsurance gross written premiums was largely due to reductions in business written due to challenging market conditions, partially offset by new business opportunities which were written in conjunction with an increase in retrocession costs. The decrease in other property reinsurance gross written premiums was largely due to challenging market conditions and adjustments in prior year premium estimates on proportional contracts.
Losses and loss adjustment expenses. The loss ratio in 2017 of 92.6% increased by 36.9 percentage points compared to 55.7% in 2016. The increase in the loss ratio was mainly due to a $352.5 million increase in catastrophe losses. The increase in the loss ratio was compounded by a $5.2 million decrease in prior year reserve releases compared to 2016 and $25.3 million of large fire related losses, the largest of which was a fire in a chemical plant, compared with no large losses in 2016. In 2017, our reinsurance segment experienced $467.3 million of catastrophe losses, net of reinsurance recoveries, including $72.1 million from Hurricane Harvey, $119.6 million from Hurricane Irma, $57.1 million from Hurricane Maria, $16.6 million from the earthquakes in Mexico, $7.2 million from a tornado in Mississippi, $5.7 million from Cyclone Debbie in Australia, $125.8 million from the wildfires in California and $32.9 million from U.S. weather-related events.
The $5.2 million reduction in prior year reserve releases from $87.0 million in the twelve months ended December 31, 2016 to $81.8 million in the current period included a $13.1 million reinsurance recovery in respect of an offshore energy-related loss that occurred in Africa and adverse development of $12.8 million in casualty reinsurance due to the U.K. Ministry of Justice decision to increase the discount rate used to calculate lump sum awards in U.K. bodily injury cases, known as the Ogden rate. The $3.8 million decrease in prior year reserve releases from $90.8 million in the twelve months ended December 31, 2015 compared to $87.0 million in 2016 was due predominantly to a decrease in reserve releases from casualty lines. Prior year reserve releases are further discussed below under “Reserves for Losses and Loss Adjustment Expenses.”
Gross written premiums. The table below shows our gross written premiums for each line of business for the twelve months ended December 31, 2017, 2016 and 2015 and the percentage change in gross written premiums for each line:
The decrease in gross written premiums in property and casualty insurance was largely attributable to reductions in primary global casualty and program business as a result of a change in our appetite for this type of business, partially offset by growth in our U.K. regional and excess casualty business lines. The decrease in gross written premiums in marine, aviation and energy insurance was largely attributable to continued challenging market conditions in marine and energy liability and aviation business lines. The increase in gross written premiums in financial and professional lines insurance was largely attributable to growth in our management liability, surety, cyber and accident and health business lines.
Ceded written premiums. Total ceded written premiums for 2017 was $849.9 million, an increase of $440.6 million from 2016. Ceded written premiums increased as a result of the impact from restructuring our ceded reinsurance arrangements in the second half of 2016 and in particular through the use of significant quota share reinsurance arrangement which aim to reduce earnings volatility and benefit the expense ratio through an increase in over-rider commissions. Ceded written premiums also increased across all lines of business due to the purchase of a whole account quota share contract and due to the recognition of ceded costs to reinstate cover following catastrophe losses.
In 2017, the insurance segment experienced $108.7 million of catastrophe losses, consisting of $22.4 million from Hurricane Harvey, $20.6 million from Hurricane Irma, $13.2 million from Hurricane Maria, $10.2 million from wildfires in California, and $42.3 million from U.S. weather-related events. Large losses experienced during 2017 included $38.7 million of fire-related losses, a $12.6 million surety loss, an $11.1 million loss related to cyber and terrorism and a $4.8 million refinery explosion.
Policy acquisition, general and administrative expenses. Amortization of deferred policy acquisition costs were $165.0 million in 2017, equivalent to 15.0% of net premiums earned (2016 - $302.5 million or 20.8% of net premiums earned; 2015 - $258.9 million or 18.5% of net earned premium). The decrease in the acquisition expense ratio in 2017 compared with 2016 was due to lower profit commission accruals and an increase in over-rider commissions. The increase in the acquisition expense ratio in 2016 compared with 2015 was due to higher profit commission accruals and lower ceding commissions.
As at December 31, 2017 and December 31, 2016, total cash and investments, including accrued interest receivable, were $8.7 billion and $9.2 billion, respectively. Total cash and investments decreased mainly as a result of increased payments associated with the increase in ceded written premiums and due to increased claims payments during 2017. Our investment strategy is focused on delivering stable investment income and total return through all market cycles while maintaining appropriate portfolio liquidity and credit quality to meet the requirements of our customers, rating agencies and regulators.
Book yield for the year ended December 31, 2017 on the fixed income portfolio was 2.56%, an increase of 7.0 basis points from 2.49% at December 31, 2016, as a result of rising interest rates. Our fixed income portfolio duration as at December 31, 2017 was 3.90 years compared to 3.89 as at December 31, 2016. As at December 31, 2017, the average credit quality of our fixed income portfolio was “AA-,” with 88.9% of the portfolio being rated “A” or higher. As at December 31, 2016, the average credit quality of our fixed income portfolio was “AA-,” with 89.3% of the portfolio being rated “A” or higher. Where the credit ratings were split between the two main rating agencies, S&P and Moody’s, the lowest rating was used.
Unrealized gains in the available for sale investment portfolio, net of taxes and including equity securities, were $9.7 million as at December 31, 2017, a decrease of $12.8 million from December 31, 2016.
Our mortgage-backed portfolio is supported by loans diversified across a number of geographic and economic sectors. The following table summarizes the fair value of our mortgage-backed securities by rating and class as at December 31, 2017:
Equity securities. Equity securities are comprised of U.S. and foreign equity securities and are classified as available for sale or trading. In 2015 as a result of rebalancing equity investments across subsidiary company balance sheets, equities were sold that were classified as available for sale, with a commensurate purchase of equities designated as trading securities. As at December 31, 2015, all equity securities were classified as trading. In the fourth quarter of 2016 and third quarter of 2017, we took advantage of rising equity markets and sold $200.0 million and $208.1 million respectively, of our equity portfolio. The total investment return from the available for sale and trading equity portfolios for the twelve months ended December 31, 2017, 2016 and 2015 were as follows:
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
The increase in reinsurance recoverables in 2017 was due predominantly to additional reinsurance purchased to reduce earnings volatility in addition to the impact from a loss portfolio transfer described in Note 12 of our consolidated financial statements, “Reserves for Losses and Loss Adjustment Expenses.” The recoveries in the reinsurance segment are generally associated with catastrophes and levels of recoveries fluctuate based on the type of catastrophe.
Reinsurance. Net reserve releases of $81.8 million in 2017 were mainly as a result of favorable development across our property catastrophe and other property reinsurance lines. The specialty reinsurance business lines reported favorable development and the recognition of additional prior year ceded recoveries in respect of an offshore energy-related loss that occurred in Africa. The casualty reinsurance business line reported a net reserve release due to favorable development despite our exposure to the Ogden rate change from reinsurance of U.K. employer’s liability and U.K. public liability business and, to a lesser degree, U.K. motor liability reinsurance.
Insurance. Net reserve releases of $23.6 million in 2017 were mainly as a result of favorable development and the recognition of additional prior year ceded recoveries in our marine, aviation and energy business line in respect of an offshore energy-related loss that occurred in Africa. Net reserves were strengthened in property and casualty lines due to adverse development in our casualty lines following the change in the Ogden rate which impacted our U.K. employer’s liability and U.K. public liability business and increases in loss reserves associated with the purchase of an adverse development cover. Financial and professional lines reported an increase in prior year reserves due to adverse development in the management liability account.
For the twelve months ended December 31, 2016. The analysis of the development by each segment is as follows:
Insurance. Net reserve releases of $42.3 million in 2017 were attributable to net reserve releases of $38.9 million from marine, aviation and energy lines and $15.3 million from financial and professional lines due to better than expected development partially offset by an $11.9 million net reserve strengthening in property and casualty lines.
Reinsurance. Net reserve releases of $90.8 million in 2015 were attributable to all lines of business. The largest releases in the period were $32.6 million from specialty reinsurance lines due primarily to benign incurred experience and $25.5 million from casualty reinsurance and $24.8 million from other property reinsurance lines due to favorable development.
Other than the matters described under “- Critical Accounting Policies - Reserving Approach,” we did not make any significant changes in methodologies used in our reserving process.
The following table shows our capital structures as at December 31, 2017 compared to December 31, 2016:
We monitor the ratio of the total of debt and hybrids to total capital, with total capital being defined as shareholders’ equity plus outstanding debt and excluding loan notes issued by variable interest entities, which was 15.8% as at December 31, 2017 (December 31, 2016 - 13.1%).
On February 8, 2017, we replaced our existing share repurchase authorization with a new authorization of $250.0 million. The share repurchase authorization, which is effective through February 8, 2019, permits us to effect repurchases from time to time through a combination of transactions, including open market repurchases, privately negotiated transactions and accelerated share repurchase transactions.
As at December 31, 2017, Aspen Holdings held $111.4 million (December 31, 2016 - $327.1 million) of cash, cash equivalents and investments with the reduction largely due to the costs associated with the redemption of the 7.401% Preference Shares on January 3, 2017 and the redemption of the 7.250% Preference Shares on July 3, 2017. Management considers the current cash and cash equivalents, together with dividends declared or expected to be declared by subsidiary companies and our credit facilities, sufficient to appropriately satisfy the liquidity requirements of Aspen Holdings. Aspen Holdings’ liquidity depends on dividends, capital distributions and interest payments from our Operating Subsidiaries. Aspen Holdings has recourse to the credit facility described below.
Consolidated cash flows for the twelve months ended December 31, 2017. Total net cash flow from operations for the twelve months ended December 31, 2017 was $(111.5) million, a decrease of $564.7 million from the equivalent period in 2016. The negative cash flows from operations for the twelve months ended December 31, 2017 were due to the significant increase in ceded reinsurance costs and claims activity in 2017. We paid net claims of $1,555.1 million in 2017 and generated cash inflows of $419.0 million from investing and net purchases and sales of equipment during the period. We paid ordinary share and preference share dividends of $92.4 million, and $30.0 million was used to repurchase ordinary shares. At December 31, 2017, we had a balance of cash and cash equivalents of $1,054.8 million.
The long-term debt obligations disclosed above do not include the $29.0 million annual interest payments on our outstanding senior notes or dividends payable to holders of our preference shares or the loan notes issued by Silverton in the amount of $86.6 million.
In November 2016, Peregrine, a subsidiary of the Company, was registered as a segregated accounts company under the Bermuda Segregated Accounts Companies Act 2000, as amended. As at December 31, 2017, Peregrine had formed four segregated accounts which were funded by a third party investor. The segregated accounts have not been consolidated as part of the Company's consolidated financial statements.
business in the United States, the United Kingdom and Australia and certain other territories, where claims inflation has in many years run at higher rates than general inflation. 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 earnings. The actual effects of inflation on our results cannot be accurately known until claims are ultimately settled.
Operating income, a non-U.S. 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 gains or losses, including net realized and unrealized gains and losses on interest rate swaps, after-tax net foreign exchange gains or losses, including net realized and unrealized gains and losses from foreign exchange contracts, net realized gains or losses on investments, amortization of intangible assets and certain non-recurring income or expenses. 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 U.S. 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 U.S. GAAP net income.