For our U.K.-based reinsurance and insurance operations, Aspen U.K. signed an agreement on April 1, 2005 (following our entry in October 2004 into a heads of terms agreement) with B.L.C.T. (29038) Limited (the landlord), Tamagon Limited and Cleartest Limited in connection with leasing office space in London of approximately 49,500 square feet covering three floors. The term of the lease commenced in November 2004 and runs for 15 years. The building was sold to Tishman International in 2007 and to One Plantation Place Trust in 2012 but the terms of the lease remained unchanged. The lease is subject to five-yearly upwards-only rent reviews. In September 2014, we entered into an additional lease with One Plantation Place Trust for a further 14,000 square feet in the same building. The lease will run for a 14-year term. In 2011, we entered into another lease in London for approximately 7,000 square feet which expires in March 2016. In October 2014, we sub-leased this property until expiry in March 2016. We also license office space within the Lloyd’s building in London on the basis of a renewable 24-month lease.
In 2004, we entered into a five-year lease on 6,500 square feet in Rocky Hill, Connecticut. Subsequent five-year lease renewals have increased the square footage to 34,000 square feet with a lease expiry of April 2018. In 2010, we entered into a five-year lease for office space in Manhattan, New York, covering 24,000 square feet. In 2011, we leased an additional floor of 24,000 square feet in the same building for a four-year period. In March 2015, we renewed the lease on both floors in Manhattan, New York and entered into a new lease for an additional floor of 24,300 square feet in the same building, taking the total square footage in Manhattan, New York to 72,300 square feet. The new lease commences in March 2016 and will run for a 15 year term with a break clause at 10 years. In 2011, we also leased a 5,000 square foot office space in Chicago, Illinois and a 6,300 square foot office space in San Francisco, California. On September 28, 2012, we entered into an 8,000 square foot lease in Boston, Massachusetts for a five-year period. A portion of the Boston lease has been subleased. In August 2013, we entered into a seven-year lease for 5,000 square feet in Houston, Texas.
The following table sets forth our selected historical financial information for the periods ended and as of the dates indicated. The summary income statement data for the twelve months ended December 31, 2015, 2014, 2013, 2012 and 2011 and the balance sheet data as of December 31, 2015, 2014, 2013, 2012 and 2011 are derived from our audited consolidated financial statements. The consolidated financial statements as of December 31, 2015, and for each of the twelve months ended December 31, 2015, 2014 and 2013, and the reports thereon of KPMG LLP (in respect of 2015) and KPMG Audit Plc (in respect of 2014 and 2013), both independent registered public accounting firms, are included elsewhere in this report. These historical results, including the ratios presented below, are not necessarily indicative of results to be expected from any future period. You should read the following selected consolidated financial information along with the information contained in this report, including Item 8, “Financial Statements and Supplementary Data” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and related notes included elsewhere in this report.
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 70,655,698, 70,753,723, 65,546,976, 62,017,368 and 60,918,373 at December 31, 2011, 2012, 2013, 2014 and 2015, respectively.
Diluted book value per share is calculated based on total shareholders’ equity excluding the aggregate value of the liquidation preferences of our preference shares, at December 31, 2011, 2012, 2013, 2014 and 2015, divided by the number of dilutive equivalent shares outstanding of 73,355,674, 73,312,340, 67,089,572, 63,444,356 and 62,240,466 at December 31, 2011, 2012, 2013, 2014 and 2015, respectively. At December 31, 2011, 2012, 2013, 2014 and 2015, there were 2,699,976, 2,558,617, 1,542,596, 1,426,988 and 1,322,093 of dilutive equivalent shares, respectively. Potentially dilutive shares outstanding are calculated using the treasury method and all relate to employee, director and investor options.
Of the total loan notes issued by our consolidated variable interest entities, at fair value, of $190.6 million as at December 31, 2015, $103.0 million were classified as long term liabilities and $87.6 million were classified as current liabilities due and payable in less than one year. For more information, refer to Note 7, “Variable Interest Entities” of our consolidated financial statements.
Annualized net income return on average equity of 10.0% for 2015 compared with 11.1% in 2014 and 10.6% in 2013.
and casualty insurance lines and financial and professional lines offset by reductions in our marine, aviation and energy insurance.
The increase in gross written premiums in 2015 from our insurance segment is modest at 1.1% driven by growth in property and casualty insurance both in our U.S. and our international teams which has been offset by reductions in marine, aviation and energy. The decrease in gross written premium in marine, aviation and energy insurance lines is largely due to the repositioning of certain accounts and difficult market conditions, including increased competition in particular in energy. The prior year also benefited from favorable prior-year premium adjustments . The increase in gross written premiums in financial and professional insurance is largely attributable to growth in our U.S. lines with increases in some classes in international.
Overall, gross written premiums increased by 9.7% in 2014 compared to 2013 due primarily to increases from our insurance lines, mainly in the U.S. In 2014, premiums from our reinsurance segment increased by 3.4% reflecting growth in catastrophe and other property lines offset by planned reductions in casualty lines. The increase in property catastrophe premiums in 2014 is mainly attributable to the impact of Aspen Capital Markets enabled us to leverage our existing franchise and underwriting expertise to increase line sizes and cede risk to third party investors. The increase in other property reinsurance is predominantly due to growth in our pro rata business across most regions. Gross written premiums in casualty reinsurance decreased primarily due to reductions in prior-year premium estimates and planned reductions in some casualty lines. Specialty reinsurance maintained its levels of written premium as growth in specialty marine offset reductions in credit and surety. Our insurance segment’s premiums increased by 14.4% principally due to growth across all major business lines with premium reductions limited to marine, aviation and energy lines written by our U.K.-based teams due to repositioning of certain accounts and difficult market conditions.
The combined ratio for 2015 increased by 0.2 percentage points compared to 2014, primarily due to a 0.8 percentage point increase in the loss ratio offset by a 0.6 percentage point reduction in the expense ratio. The loss ratio increase was due to the insurance segment which experienced an increased frequency of mid-sized losses and higher catastrophe losses. The reduction in the expense ratio is due to a lower operating expense ratio in the insurance segment as we reach scale in our U.S. operations partially offset by higher acquisition costs in the reinsurance segment due to a change in business mix towards pro rata business which attracts higher commission rates. The operating expense ratio was adversely impacted in 2014 by $28.5 million due to the costs of defending the unsolicited approach and an inadequate offer by Endurance.
In each of the years ended December 31, 2015, 2014 and 2013, we recorded a reduction in the level of reserves for prior years. In 2015, we reported net favorable development on prior year loss reserves of $156.5 million, or 6.3 combined ratio points, compared with $104.1 million, or 4.3 combined ratio points, for 2014, and $107.7 million, or 5.0 combined ratio points, for 2013.
Amortization of deferred policy acquisition costs increased in 2015 compared to 2014, and in 2014 compared to 2013, in line with premium growth in our U.S. insurance operations and due to changes in business mix towards more pro rata business which attracts higher average commission rates. In 2014, the deferred acquisition costs were also impacted by adjustments in profit-related commission accruals.
Dividends. In April 2015, the Board approved an increase in the quarterly dividend on our ordinary shares from $0.20 per ordinary share to $0.21 per ordinary share (2014 - $0.20 quarterly dividend; 2013 - $0.18 quarterly dividend). This resulted in a total ordinary dividends for 2015 of $50.9 million (2014 - $50.3 million; 2013 - $47.8 million). Dividends paid on the preference shares in 2015 were $37.8 million (2014 - $37.8 million; 2013 - $35.5 million).
an increase of $233.5 million in retained earnings for the period;
the repurchase of 1,790,333 ordinary shares for $83.7 million through open market and other repurchases.
Our senior notes were the only material debt issued by Aspen Holdings as of December 31, 2015 and 2014 of $549.2 million and $549.1 million, respectively. In addition to the senior notes issued by Aspen Holdings, we have also reported $190.6 million of debt issued by Silverton. For further information relating to Silverton, refer to Note 7 of our consolidated financial statements, “Variable Interest Entities.”
Management monitors the ratio of debt to total capital, with total capital being defined as shareholders’ equity plus outstanding debt. As at December 31, 2015, this ratio was 17.8% (2014 - 17.0%).
Our preference shares are classified in our balance sheet as equity but may receive a different treatment in some cases under the capital adequacy assessments made by certain rating agencies. We also monitor the ratio of the total debt and the liquidation preference of our preference shares to total capital which was 31.1% as of December 31, 2015 (2014 - 30.8%).
Diluted book value per ordinary share at December 31, 2015 was $46.00, an increase of 1.9% compared to $45.13 at December 31, 2014.
Book value per ordinary share is based on total shareholders’ equity, less preference shares (liquidation preference less issue expenses) and non-controlling interests, divided by the number of ordinary shares in issue at the end of the period.
Market Conditions, Rate Trends and Developments in 2015 and Early 2016
On January 19, 2016, Aspen U.S. Holdings acquired 100% of the equity and voting interest of AG Logic Holdings, LLC(“AgriLogic”), a specialist U.S. crop managing general agency business with an integrated agricultural consultancy, for an initial purchase price of $53.0 million and additional contingent consideration subject to the future performance of the business. A significant proportion of the acquired business will be represented by intangible assets and goodwill with all other assets being immaterial. The acquisition further diversifies our portfolio of specialty insurance business and complements our strategy of building businesses which are founded on deep technical expertise. During 2015, AgriLogic as a managing general agent generated approximately $185.0 million in gross written premium for its insurance carriers. AgriLogic provides us with renewal rights on its existing book of business which we would initially access through a reinsurance arrangement, and will be written in subsequent periods on a direct basis.
IBNR reserves. The need for IBNR reserves arises from time lags between when a loss occurs and when it is actually reported and settled. By definition, we do not have specific information on IBNR claims so they need to be estimated by actuarial methodologies. IBNR reserves are therefore generally calculated at an aggregate level and cannot generally be identified as reserves for a particular loss or contract. We calculate IBNR reserves by class of business within each line of business. Where appropriate, analyses may be conducted on sub-sets of a class of business. IBNR reserves are calculated by projecting our ultimate losses on each class of business and subtracting paid losses and case reserves. IBNR reserves also cover any potential development of reported claims. Over recent years, we have begun to place greater reliance on our actual actuarial experience for our long-tail lines of business that we have written since our inception in 2002. We believe that our earliest accident years are now capable of providing us with meaningful actuarial indications. Estimates and judgments for new insurance and reinsurance lines of business are more difficult to make than those made for more mature lines of business because we have more limited historical information through December 31, 2015.
Initial expected loss ratio (“IELR”) method: This method calculates an estimate of ultimate losses by applying an estimated loss ratio to an estimate of ultimate earned premium for each accident year. The estimated loss ratio may be based on pricing information and/or industry data and/or historical claims experience revalued to the year under review.
In addition to these methodologies, our actuaries may use other approaches depending upon the characteristics of the class of business and available data.
Selection of reported gross reserves. Management, through its Reserve Committees, reviews the actuarial stochastic distribution and any other evidence before selecting its best estimate of reserves for each line of business. Management selects the “management best estimate” by considering all the information provided to them and by considering the risks and uncertainties within the actuarial mean best estimate. Management has to date selected its best estimate above that of the actuarial mean best estimate and within the range of the actuarial stochastic distribution. This provides the basis for the recommendation to the Audit Committee and the Board made by management regarding the reserve amounts and related disclosures to be recorded in our financial statements.
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 Chief Executive Officer of Aspen Re, the Group Head of Risk and the Group Chief Actuary, the Group Chief Financial Officer, the Group Head of Capital Management, the U.S. Insurance Chief Actuary, the President and Chief Underwriting Officer of Aspen Re, and the Chief Operating Officer of Aspen Insurance and President of Aspen International Insurance. 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.
Because many of the coverages underwritten involve claims that may not be ultimately settled for many years after they are incurred, subjective judgments as to the ultimate exposure to losses are an integral and necessary component of the loss reserving process. We review our reserves regularly, using a variety of statistical and actuarial techniques to analyze current claims costs, frequency and severity data, and prevailing economic, social and legal factors. Reserves established in prior periods are adjusted as claims experience develops and new information becomes available.
Loss Reserving Sensitivity Analysis: The most significant key assumptions identified in the reserving process are that (i) the historic loss development and trend experience is assumed to be indicative of future loss development and trends, (ii) the information developed from internal and independent external sources can be used to develop meaningful estimates of the initial expected ultimate loss ratios, and (iii) no significant losses or types of losses will emerge that are not represented in either the initial expected loss ratios or the historical development patterns.
Management’s best estimate of the net reserve for losses and loss expenses at December 31, 2015 is $4,583.4 million. The following tables show the effect on estimated net reserves for losses and loss expenses as of December 31, 2015 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 a reasonably likely scenario is represented by such a standard, as used by some professional actuaries as part of their review of an insurer’s or reinsurer’s reserves. Utilizing this standard as a guide, management has selected these variances to determine reasonably likely scenarios of variability in the loss emergence and loss ratio assumptions. Loss reserves may vary beyond these scenarios in periods of heightened or reduced claim activity. The reserves resulting from the changes in the assumptions are not additive and should be considered separately. The following tables vary the assumptions employed therein independently. In addition, the tables below do not adjust any parameters other than the ones described above. Specifically, reinsurance collectability was not explicitly stressed as part of the calculations below.
Net reserve for losses and loss expenses at December 31, 2015 - Sensitivity to expected loss ratios
The most significant variance in the above scenarios, a 10% deterioration in expected loss ratio, would have the effect of increasing losses and loss expenses by $311.7 million.
Other-than-temporary Impairment of Investments. A security is impaired when its fair value is below its cost or amortized cost. We review our available for sale investment portfolio on an individual security basis for potential other-than-temporary impairment (“OTTI”) each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions. There were no OTTI charges for the twelve months ended December 31, 2015 (2014 -$2.4 million). For further discussion see Note 2(c) of our consolidated financial statements, “Basis of Preparation and Significant Accounting Policies - Accounting for Investments, Cash and Cash Equivalents.”
Gross written premiums. The following table analyzes the overall change in gross written premiums in the twelve months ended December 31, 2015, 2014 and 2013.
Overall, gross written premiums increased by 9.7% in 2014 compared to 2013 due primarily to increases from our insurance lines, mainly in the U.S. In 2014, gross written premiums in our reinsurance segment increased by 3.4% reflecting growth in catastrophe and other property lines offset by planned reductions in casualty lines and challenging market conditions in some specialty lines. The increase in property catastrophe premiums in 2014 is mainly attributable to the impact of Aspen Capital Markets which has enabled us to leverage our existing franchise and underwriting expertise to increase line sizes and cede risk to third party investors. Our insurance segment’s premiums increased by 14.4% principally due to growth in all our U.S. teams, our international property and casualty business lines and from international financial and professional lines. Marine, aviation and energy lines have reduced premium written due to repositioning of certain accounts and difficult market conditions.
Ceded written premiums. Total ceded written premiums in 2015 decreased by $36.4 million compared to 2014. The retention ratio, defined as net written premium as a percentage of gross written premium, increased from 86.7% in 2014 to 88.3% in 2015 mainly as a result of our strategy to retain more risk which has reduced the ceded reinsurance costs for our insurance segment. The impact from this strategy has been partially offset through the growth of Aspen Capital Markets which has allowed us to increase our gross catastrophe reinsurance line sizes and cede more risk to third-party investors.
Losses and loss adjustment expenses. The loss ratio for 2015 of 55.2% increased by 0.8 percentage points compared to 2014. Losses and loss adjustment expenses increased from $1,307.5 million in 2014 to $1,366.2 million in 2015 due to increases in large and catastrophe losses being more significant than the increase in reserve releases. In 2015, net losses from major natural catastrophes increased by $25.0 million to $90.5 million compared with $65.5 million in 2014. Large losses in 2015 included $26.0 million due to the port explosion in Tianjin, China, $37.6 million of energy losses, and $17.0 million associated with the Samarco dam in Brazil. In 2014 the severity and frequency of large losses was significantly lower than than in 2015. Reserve releases increased from $104.1 million in 2014 to $156.5 million in 2015.
The loss ratio for 2014 of 54.4% decreased by 1.9 percentage points compared to 2013. The reduction in loss ratio was due predominantly to fewer catastrophe losses. Losses and loss adjustment expenses increased from $1,223.7 million in 2013 to $1,307.5 million in 2014 primarily due to increases in business written partially offset by the reduction in catastrophe losses. In 2014, net losses from major natural catastrophes were $65.5 million compared to $101.9 million of net losses from major natural catastrophes in 2013.
In the reinsurance segment, the loss ratio in 2015 of 45.8% increased marginally compared to 45.7% in 2014. The increase in the loss ratio is mainly due to an increase in catastrophe losses of $6.7 million, an $8.2 million decrease in prior year reserve releases, offset partially by lower attritional losses. In 2015, our reinsurance segment experienced $49.6 million of natural catastrophe losses largely comprising of $7.0 million associated with U.K. floods, $7.0 million from the Washington wildfires, and $35.6 million of other losses associated with the Chilean earthquake and weather-related events in Europe, the U.S. and Australasia In addition, we experienced a loss in the amount of $23.0 million due to a port explosion in Tianjin, China and $7.0 million associated with a dam collapse in Brazil. In 2014, our reinsurance segment experienced $42.9 million of catastrophe losses associated with North American weather-related events and Australian, European and Asian storms.
Prior year reserve releases have reduced by $3.6 million from $107.7 million in 2013 to $104.1 million in 2014. Prior year reserve releases in our reinsurance segment decreased by $23.6 million in 2014 compared to 2013 due to lower releases from casualty and catastrophe lines. The insurance segment had a $5.1 million reserve release in 2014 compared to a $14.9 million reserve strengthening in 2013. Further information relating to movements in prior year reserves can be found below under “Reserves for Losses and Loss Adjustment Expenses.”
The underlying changes in loss ratios by segment are shown in the table below. The total loss ratio represents the calendar year U.S. GAAP loss ratio. The current year adjustments represent catastrophe loss events which reflect net claims and reinstatement 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 amortization of deferred policy acquisition costs, general, administrative and corporate expenses. The table below presents the contribution of the amortization of deferred policy acquisition costs and general, administrative and corporate expenses to the gross expense ratios and the total net expense ratios for the twelve months ended December 31, 2015, 2014 and 2013. 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 increase in the policy acquisition expense ratio, gross of the effect of reinsurance, to 16.9% in 2015 from 16.5% in 2014 is mainly driven by changes in the mix of business written in our reinsurance segment towards a greater proportion of other property and specialty reinsurance, written on a pro rata basis which incur higher acquisition costs, and commutation adjustments in our specialty lines which reduced net earned premiums without any equivalent reduction in commissions. The total policy acquisition expense ratio, gross of the effect of reinsurance, decreased to 16.5% in 2014 from 16.9% in 2013 due to lower profit commission accruals. The growth in commissions payable did not result in an increase in the policy acquisition expense ratio.
Foreign exchange contracts. We use foreign exchange contracts to manage foreign currency risk. A foreign exchange contract involves an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Foreign exchange contracts will not eliminate fluctuations in the value of our assets and liabilities denominated in foreign currencies, but rather allow us to establish a rate of exchange for a future point in time.
As at December 31, 2015, we held foreign exchange contracts that were not designated as hedging under ASC 815 with an aggregate nominal value of $379.9 million (2014 - $403.4 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, 2015, the impact of foreign exchange contracts on net income was a gain of $11.6 million (December 31, 2014 - charge of $7.7 million).
As the foreign exchange contracts settle, the realized gain or loss is reclassified from other comprehensive income into general, administration and corporate expenses of the statement of operations and other comprehensive income. For the twelve months ended December 31, 2015, the amount recognized within general, administration and corporate expenses for settled foreign exchange contracts was a realized loss of $4.9 million (December 31, 2014 - loss of $0.3 million recognized within change in fair value of derivatives).
During 2015, $195.0 million in notional amount of our interest rate swaps terminated and were not renewed. In 2014, $48.7 million in notional amount of our interest rate swaps terminated and were not renewed. In 2013, $38.9 million in notional amount of our interest rate swaps terminated, and as a result of which we entered into $38.9 million notional 5-year interest rate swaps with termination dates in 2018. As at December 31, 2015, cash collateral with a fair value of $10.1 million was transferred to our counterparties to support the current valuation of the interest rate swaps (December 31, 2014 - $22.3 million). As at December 31, 2015, no non-cash collateral was transferred to us by our counterparties (December 31, 2014 - $Nil). In accordance with FASB ASC 860 Topic Transfers and Servicing, transfers of cash collateral are recorded on the balance sheet within derivatives at fair value, while transfers in respect of non-cash collateral are disclosed but not recorded. No amount was recorded in our balance sheet as at December 31, 2015 (2014 - $Nil) for the pledged assets. Changes in the estimated fair value of derivatives are included in the statement of operations.
Gross realized and unrealized gains in other investments. These represent the share of earnings from our investments in a Micro-insurance incubator (“MVI”) and Chaspark Maritime Holdings Limited (“Chaspark”).
Interest on long-term debt. Interest on long-term debt is the interest due on our senior notes, with the increase in the twelve months ended December 31, 2013 due to our issuance of the 2023 Senior Notes in November 2013 after redeeming our $250.0 million 6.00% Senior Notes, which were due to expire in 2014.
Income before tax. In the twelve months ended December 31, 2015, income before tax was $337.5 million (2014 - $367.9 million; 2013 - $342.7 million), comprising the amounts set out in the table below:
The decrease in underwriting income in 2015 compared to 2014 was due to higher loss experience offset by premium growth. The increase in 2014 compared to 2013 was due to premium growth and improved loss experience.
The increase in corporate expenses in 2015 is due to reorganization and integration costs and higher salary costs due to increased headcount. The increase in corporate expenses in 2014 is mostly due to $28.5 million in non-recurring corporate expenses associated with the cost of defending the unsolicited approach and an inadequate offer by Endurance, increases in staff costs and performance-related accruals.
2014 and a loss of $1.3 million in 2013. Interest rate swaps had a realized loss of $4.8 million in 2015 compared to a realized loss of $7.2 million in 2014 and a realized gain of $2.6 million in 2013.
The increase in gross written premiums for the twelve months ended December 31, 2015 compared to the equivalent period in 2014 is mainly attributable to increased business written in our other property reinsurance, in particular pro rata, and specialty reinsurance business lines, specifically our credit and surety and agriculture business lines offsetting planned reductions in our property catastrophe business lines. Increases in gross written premiums in casualty reinsurance were less significant due to reductions in prior year estimates and commutations.
Reinsurance ceded. Total reinsurance ceded in 2015 was $95.4 million, an increase of $46.6 million from 2014. The largest increase is in the property catastrophe reinsurance business line primarily from the growth of our Aspen Capital Markets division which has enabled us to cede more risk to third-party investors. Total reinsurance ceded in 2014 was $48.8 million, a reduction of $3.1 million from 2013. The reduction is due to favorable rates in our retrocession purchasing.
Net premiums earned. Net premiums earned decreased by $15.6 million, or 1.4%, in 2015 compared to 2014 largely due to changes in the business mix and increased ceded costs. Net premiums earned decreased by $15.2 million, or 1.4%, in 2014 compared to 2013 due to the growth in gross written premiums and the reduction in ceded costs.
Losses and loss adjustment expenses. The loss ratio in 2015 of 45.8% increased marginally compared to 45.7% in 2014. The increase in the loss ratio is mainly due to an increase in catastrophe losses of $6.7 million, an $8.2 million decrease in prior year reserve releases, partially offset by lower attritional losses. In 2015, our reinsurance segment experienced $49.6 million of natural catastrophe losses largely comprising of $7.0 million associated with U.K. floods, $7.0 million from the Washington wildfires, and $35.6 million of losses associated with the Chilean earthquake and weather-related events in Europe, the U.S. and Australasia In addition, we experienced a loss in the amount of $23.0 million due to a port explosion in Tianjin, China and $7.0 million associated with a dam collapse in Brazil. In 2014, our reinsurance segment experienced $42.9 million of catastrophe losses associated with North American weather-related events and Australian, European and Asian storms.
The $8.2 million decrease in prior year reserve releases from $99.0 million in the twelve months ended December 31, 2014 to $90.8 million in the current period was predominantly due to a reduction in reserve releases from specialty, casualty and other property lines. Prior year reserve releases are further discussed below under “Reserves for Losses and Loss Adjustment Expenses.”
Policy acquisition, general and administrative expenses. Amortization of deferred policy acquisition costs were $224.7 million for the twelve months ended December 31, 2015 equivalent to 20.9% of net premiums earned (2014 - $200.0 million or 18.4% of net premiums earned; 2013 - $207.2 million or 19.3% of net premiums earned). The increase in the policy acquisition ratio is due to a change in the business mix towards pro rata lines, which have higher average commission rates. The policy acquisition expense ratio in 2013 was higher than in 2014 due to increases in profit commission accruals and a change in the business mix towards property pro rata lines, which have higher average commission rates. Our general and administrative expense ratio of 13.7% in 2015 increased from 13.5% in 2014 due to the impact from lower premium retention rates on net premiums earned. Our general and administrative expense ratio was 13.5% in 2014, an increase from 12.2% in 2013 due to a $15.2 million reduction in net earned premium and a $15.4 million increase in overall expenses due predominantly to an increase in performance-related accruals.
Gross written premiums. The table below shows our gross written premiums for each line of business for the twelve months ended December 31, 2015, 2014 and 2013 and the percentage change in gross written premiums for each line:
Overall, premiums increased by 1.1% or $18.5 million in 2015 compared to 2014 and 14.4% or $217.1 million in 2014 compared to 2013. The increase in gross written premium in 2015 in property and casualty insurance is due to continued higher contribution from all our teams in this line of business. The decrease in gross written premium in marine, aviation and energy insurance lines is largely due to lower production in our marine, energy and construction liability and energy property damage accounts due to the repositioning of certain accounts and difficult market conditions, including increased competition combined with favorable prior-year premium adjustments in the comparative period. The increase in gross written premiums in financial and professional insurance is largely attributable to growth in our U.S. lines with increases in some classes in international.
The increase in gross written premium in 2014 was across all business lines with premium reductions limited to aviation and marine and energy liability lines written by our U.K.-based teams. Our U.S.-based operations generated significant premium growth of $187.5 million in 2014 compared to $138.8 million in 2013. The reduction in premiums from our marine, aviation and energy lines is due to the repositioning of the marine and energy liability business and conditions in the aviation market. Gross written premiums from our financial and professional lines increased due to growth in business written by our U.S.- based surety management and professional liability teams.
Ceded reinsurance. Total ceded reinsurance for 2015 was $255.7 million, a decrease of $83.0 million from 2014 as we have taken steps to retain more risk within the Group but continue to seek to use reinsurance as an effective risk mitigation tool for our growing insurance lines, particularly in the U.S. Ceded reinsurance for 2014 was $338.7 million, an increase of $43.6 million from 2013 which is in line with increases in gross written premiums in 2014 compared to 2013.
Net premiums earned. Net earned premiums increased by $83.6 million, or 6.3%, in 2015 compared to 2014 due to the written premium growth in prior years earning in 2015. Net premiums earned increased by $218.3 million, or 19.9%, in 2014 compared to 2013 which is consistent with the increase in gross earned premiums and the increase in the cost of our reinsurance purchased in 2014.
The loss ratio for 2014 was 61.5% compared to 67.5% for 2013. The decrease in the loss ratio in 2014 is due to lower current year losses in addition to a $5.1 million prior year reserve release compared to a $14.9 million reserve strengthening in 2013. In 2013, we recognized $15.4 million of catastrophe losses related to tornadoes and hailstorms in the U.S. in addition to a higher frequency of medium-sized losses of $40.0 million principally in our marine and energy liability account and our casualty line of business. Prior year reserve releases are further discussed under “Reserves for Losses and Loss Adjustment Expenses.”
Policy acquisition, general and administrative expenses. Amortization of deferred policy acquisition costs were $258.9 million in 2015, equivalent to 18.5% of net premiums earned (2014 - $251.2 million or 19.1% of net premiums earned; 2013 - $214.8 million or 19.5% of net earned premium). The decrease in the acquisition expense ratio in 2015 compared with 2014 is due to lower profit commission accruals and increased ceding commissions. The decrease in 2014 compared with 2013 was due to a reduction in profit commission accruals.
Book yield as at December 31, 2015 on the fixed income portfolio was 2.59%, a decrease of 6 basis points from 2.65% as at December 31, 2014, as a result of the continuing low interest rate environment. The average duration of the fixed income portfolio was 3.65 years as at December 31, 2015 (2014 - 3.50 years), excluding the impact of interest rate swaps, or 3.57 years (2014 - 3.29 years) including the impact of interest rate swaps. As at December 31, 2015, the average credit quality of our fixed income portfolio was “AA-,” with 88.8% of the portfolio being rated “A” or higher. As at December 31, 2014, the average credit quality of our fixed income portfolio was “AA-,” with 88.3% 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.
As at December 31, 2015, we had investments in two entities classified as other investments: MVI and Chaspark. For further information regarding these investments, see Note 6 of our consolidated financial statements, “Investments.”
Equity securities. Equity securities are comprised of U.S. and foreign equity securities and are classified as available for sale or trading. We initiated an investment into a high quality global equity income strategy in March 2011 and increased the investment in 2013 and 2014. In 2014, we increased our investment in equities by a total of $240.0 million of which $80.0 million was in our global equity strategy and $160.0 million was in a minimum volatility equity portfolio. As a result of rebalancing equity investments across subsidiary company balance sheets, a portion of equities were sold that were classified as available for sale, with a commensurate purchase of equities designated as trading securities. As a result, there was a realized investment gain of $28.9 million on this sale. The total investment return from the available for sale and trading equity portfolios are as follows:
As at December 31, 2015, we had $1,004.0 million, or 11.4% of our aggregate investment portfolio, invested in European issuers, including the U.K. (2014 - $1,144.1 million, or 13.3%). Our European exposures consisted of sovereigns, agencies,
government guaranteed bonds, covered bonds, corporate bonds and equities. We have no exposure to the sovereign debt of GIIPS, and de minimis holdings of Irish equities.
The tables below summarize our European holdings by country (Eurozone and non-Eurozone), rating and sector as at December 31, 2015. Equity investments included in the table below are not rated (“NR”). Where the credit ratings were split between the two main rating agencies, S&P and Moody’s, the lowest rating was used.
Other-than-temporary Impairment of Investments. We review all our available for sale fixed income and equity investments on an individual security basis for potential OTTI each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions. There was no OTTI charge for the twelve months ended December 31, 2015 (2014 -$2.4 million).
Reserves by segment. As of December 31, 2015, we had total net loss and loss adjustment expense reserves of $4,583.4 million (December 31, 2014 - $4,400.8 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 $4,938.2 million at the balance sheet date of December 31, 2015, a total of $2,841.6 million, or 57.5%, represented IBNR claims (December 31, 2014 - $2,714.1 million and 57.1%, respectively). The following tables analyze gross and net loss and loss adjustment expense reserves by segment as at December 31, 2015 and December 31, 2014, respectively:
Reinsurance. Net reserve releases of $90.8 million in the period 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, $25.5 million from casualty reinsurance due to favorable development and $24.8 million from other property reinsurance lines due to favorable development.
For the twelve months ended December 31, 2013. The analysis of the development by each segment is as follows:
Insurance. Net reserve strengthening of $14.9 million in 2013 derived primarily from incurred development in our marine, aviation and energy line of business partially offset by releases of $56.8 million from our casualty line due to better than expected development across all years. There were also reserve releases of $11.9 million from our financial and professional line due to favorable development on the 2010 and prior accident years and $10.6 million from our property line mainly due to better than expected claims development for the 2012 and 2011 accident years. The $92.8 million of net reserve strengthening in the marine, aviation and energy line of business was due to marine and energy liability business which experienced an increase in the frequency of mid-sized energy and construction losses in recent accident years.
In addition to the senior notes issued by Aspen Holdings, we have also reported $190.6 million of debt issued by Silverton. For further information relating to Silverton, refer to Note 7 of our consolidated financial statements, “Variable Interest Entities.”
Management monitors the ratio of debt to total capital, with total capital being defined as shareholders’ equity plus outstanding debt and as at December 31, 2015, this ratio was 17.8% (2014 - 17.0%).
Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations. Management monitors the liquidity of Aspen Holdings and of each of its Operating Subsidiaries and arranges credit facilities to enhance short-term liquidity resources on a stand-by basis. As a holding company, Aspen Holdings relies on dividends and other distributions from its Operating Subsidiaries to provide cash flow to meet ongoing cash requirements, including any future debt service payments and other expenses, and to pay dividends, if any, to our preference and ordinary shareholders. During the year ended December 31, 2015, Aspen Holdings received a $4.7 million (2014 -$30.5 million) payment of intercompany interest in respect of an intercompany loan from Aspen U.K. Holdings and $17.5 million in respect of an intercompany loan from Aspen European. In addition, Aspen Holdings received dividends of $223.0 million (2014 - $258.5 million) from Aspen Bermuda, $61.4 million from Aspen European and $2.9 million (2014 - $Nil) from AMAL.
As at December 31, 2015, Aspen Holdings held $110.5 million (December 31, 2014 - $86.8 million) of cash and cash equivalents. 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.
Operating Subsidiaries. As of December 31, 2015, the Operating Subsidiaries held $1,136.4 million (December 31, 2014 - $1,296.2 million) in cash and short-term investments that are readily realizable securities. Management monitors the value, currency and duration of cash and investments held by its Operating Subsidiaries to ensure they are able to meet their insurance and other liabilities as they become due and was satisfied that there was a comfortable margin of liquidity as at December 31, 2015 and for the foreseeable future.
Where we incur losses in currencies which are not normally held we will convert funds into the appropriate currencies to mitigate our currency risk and also make funds available to settle claims in local currencies as and when they become due. Recent examples of this have been where we have converted funds to Thai Bhat, New Zealand Dollars and Brazilian Reals to cover flood, earthquake and other losses in these countries. For local regulatory reasons we hold assets in trust which does limit our liquidity to some degree, however, the process of matching assets with liabilities in currency means that at any one time we will hold cash and short-term assets in all major currencies which are available to settle claims.
The liquidity of our Operating Subsidiaries is also affected by the terms of our contractual obligations to policyholders and by undertakings to certain regulatory authorities to facilitate the issue of letters of credit or maintain certain balances in trust funds for the benefit of policyholders. The following table shows the forms of collateral or other security provided in respect of these obligations and undertakings as at December 31, 2015 and December 31, 2014:
On June 30, 2014, Aspen Bermuda and Citi Europe replaced the LOC Facility with a new letter of credit facility in a maximum aggregate amount of up to $575.0 million (the “New LOC Facility”). Under the New LOC Facility, which will expire on June 30, 2016, Aspen Bermuda will pay to Citibank Europe plc (a) a letter of credit fee based on the available amounts of each letter of credit and (b) a commitment fee, which varies based upon usage, on the unutilized portion of the New LOC Facility. Aspen Bermuda will also pay interest on the amount drawn by any beneficiary under a credit provided under the New LOC Facility at a rate per annum of LIBOR plus 1% (plus reserve asset costs, if any) from the date of drawing until the
In addition, on February 28, 2011, Aspen U.K. and Aspen Bermuda entered into an amendment to the $200.0 million secured letter of credit facility agreement with Barclays Bank PLC dated as of October 6, 2009. The amendment extended the maturity date of the credit facility to December 31, 2014. On February 1, 2013, Aspen U.K. and Aspen Bermuda entered into a further amendment to the secured letter of credit facility to extend the maturity date of the credit facility to January 31, 2015. On August 21, 2013, the commitments were reduced to $100.0 million. All letters of credit issued under the facility are used to support reinsurance obligations of the parties to the agreement and their respective subsidiaries. As at December 31, 2015, we had $5.0 million of outstanding collateralized letters of credit under this facility (December 31, 2014 - $5.0 million). We did not extend the maturity date of this secured letter of credit facility and, as a result, it expired on January 31, 2015. As a result, no new letters of credit can be issued under this facility.
The following table summarizes our contractual obligations (other than our obligations to employees and our perpetual preference shares) under long-term debt, operating leases (net of subleases) and reserves relating to insurance and reinsurance contracts as of December 31, 2015:
We also seek to take into account the projected impact of inflation on the likely actions of central banks in the setting of short-term interest rates and consequent effects on the yields and prices of fixed interest securities. As of February 2016, although inflation is currently low, we consider that in the medium-term there is a risk that inflation, interest rates and bond yields may rise, resulting in a decrease in the market value of certain of our fixed interest investments.
Adjusted diluted book value per ordinary share, a non-U.S. GAAP measure, is calculated by adding back ordinary dividends to shareholders’ equity at the end of the year. We believe that adding back ordinary dividends provides a more consistent and useful measurement of total shareholder value, which supplements U.S. GAAP information.
currencies of our Operating Subsidiaries. Therefore, we believe that excluding these unrealized appreciations (depreciations) provides a more consistent and useful measurement of operating performance, which supplements U.S. GAAP information.