We entered into a new 14,000 square foot lease in Bermuda on September 1, 2011. The term of the rental lease agreement is for ten years from September 1, 2011, with a break clause at five years and an additional five-year option commencing September 2021.
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, 2013, 2012, 2011, 2010 and 2009 and the balance sheet data as of December 31, 2013, 2012, 2011, 2010 and 2009 are derived from our audited consolidated financial statements. The consolidated financial statements as of December 31, 2013, and for each of the twelve months ended December 31, 2013, 2012 and 2011, and the report thereon of KPMG Audit Plc, an independent registered public accounting firm, 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.
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, 2009, 2010, 2011, 2012 and 2013, divided by the number of dilutive equivalent shares outstanding of 86,465,357, 74,172,657, 73,355,674, 73,312,340 and 67,089,572 at December 31, 2009, 2010, 2011, 2012 and 2013, respectively. At December 31, 2009, 2010, 2011, 2012 and 2013, there were 3,137,763, 3,664,644, 2,699,976, 2,558,617 and 1,542,596 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 $50.0 million as at December 31, 2013.
Our overall results for 2013 were strong delivering a return on equity of 10.6% for 2013 compared to 8.5% for 2012. Our reinsurance segment contributed $253.1 million to our results with lower catastrophe and attritional losses than in the prior year and favorable reserve developments in all lines of business. Our insurance segment had an overall loss of $43.9 million, driven by significant losses in the marine, aviation, energy and construction line of business, partially offset by the remaining four lines of business being profitable. The losses in the marine, aviation, energy and construction line of business were due to adverse loss development in the M.E.C. liability account which had an increased frequency of mid-sized energy and construction losses. Please refer to “Reserves for Losses and Loss Adjustment Expenses” below for further discussion.
Insurance. In 2013, we made significant progress in executing our strategic objectives to increase our insurance operations both geographically and in the level of premiums written. We continued to build our U.S. insurance operations with the establishment of a U.S. based property-focused onshore marine, energy and construction team, complementing our product offering across our marine, aviation, energy and construction line of business. Gross written premium for the segment increased by 11.6% reflecting significant growth in the U.S. combined with increases in several of our international accounts. Our combined ratio was 103.9% in 2013 compared to 99.3% in 2012.
Capital Management. In early 2013, we undertook a strategic review of the businesses we write that was exposed to catastrophe in the U.S. and we concluded that the earnings from our U.S. property insurance portfolio were excessively volatile as a result of inadequate original rates for catastrophe exposure that left insufficient margin for expenses and non-catastrophe attritional claims. Therefore, we implemented a controlled reduction of our U.S. wind and earthquake exposure within our U.S. property insurance account through purchasing additional reinsurance which resulted in a significant release of capital contributing to the surplus capital available for our share repurchases in 2013.
In 2013, we continued our strategy to return excess capital to shareholders with the repurchase of 8,461,174 shares for a total consideration of $309.6 million. We redeemed our $250 million 6.00% Senior Notes due August 14, 2014 following the issuance of $300 million of Senior Notes due November 15, 2023 (the “2023 Senior Notes”) at a favorable interest rate of 4.65%. We also opportunistically redeemed our 5.625% Perpetual PIERS ($230 million), which had an adverse impact on our dilutive shares with the proceeds from a new issuance of $275 million of 5.95% Perpetual Preference Shares. In the second quarter of 2013, we increased our quarterly dividend on our ordinary shares from $0.17 to $0.18 per ordinary share.
Annualized net income return on average equity of 10.6% for 2013 compared with 8.5% in 2012 and (4.8)% in 2011.
Combined ratio for 2013 of 92.6%, including $101.9 million, or 4.6 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements, compared with 94.3% for 2012, which included $205.0 million or 10.8 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements and 115.9% for 2011, which included 31.5 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements.
Net favorable development on prior year loss reserves of $107.7 million, or 5.0 combined ratio points, for 2013 compared with $137.4 million, or 6.6 combined ratio points, for 2012, or $92.3 million, or 4.9 combined ratio points, for 2011.
In each of the years ended December 31, 2013, 2012 and 2011, we recorded a reduction in the level of reserves for prior years. In 2013, we reported net favorable development on prior year loss reserves of $107.7 million, or 5.0 combined ratio points, compared with $137.4 million, or 6.6 combined ratio points, for 2012, and $92.3 million, or 4.9 combined ratio points, for 2011.
Reserve releases decreased by $29.7 million in 2013 due to a net reserve strengthening in our insurance segment of $14.9 million in 2013 principally in the marine, aviation, energy and construction line, compared to a $35.2 million reserve release in 2012. The reinsurance segment had a reserve release of $122.6 million compared to $102.2 million in 2012.
Reserve releases increased by $45.1 million in 2012 due mainly to a net reserve release of $102.2 million for our reinsurance segment compared to net reserve release of $72.3 million for our reinsurance segment in 2011. Reserve releases were lower in 2011 due to less favorable developments impacting our reinsurance segment, particularly property lines, while our insurance segment strengthened reserves in our financial and professional lines.
Amortization of deferred policy acquisition costs increased in 2013 compared to 2012, and in 2012 compared to 2011, in line with premium growth in our U.S. insurance operations and due mainly to adjustments in profit-related commission accruals. General, administrative and corporate expenses have increased to $368.1 million in 2013 from $345.1 million in 2012 and $284.5 million in 2011. The increase in 2013 is due to an increase in staff costs, performance-related accruals and other costs associated with the continued build out of our U.S. insurance. General, administrative and corporate expense increased in 2012 compared to 2011 due to increases in costs associated mainly with the continued build out of our U.S. insurance and U.K. regional platforms.
million increase in underwriting income resulting from higher earned premiums, and lower catastrophe losses combined with a $9.6 million increase in realized and unrealized investment gains and losses and a $29.7 million increase in fair value of derivatives compensating for an $18.5 million reduction in investment income. The increase in net income after tax in 2012 over 2011 was due primarily to the $417.7 million increase in underwriting income, principally due to a reduction in catastrophe losses of $298.7 million from 2011 to 2012.
Shareholders’ equity and financial leverage. Total shareholders’ equity reduced by $188.8 million from $3,488.4 million as at December 31, 2012 to $3,299.6 million at December 31, 2013. The most significant movements were:
the redemption of all of our 5.625% Perpetual PIERS with a liquidation preference of $50.00 for an aggregate amount of $230.0 million;
In addition to the senior debt issued by Aspen Holdings, we have also reported $50.0 million of debt issued by Silverton. For further information relating to Silverton, refer to Note 19(c) of our consolidated financial statements, “Commitments and Contingencies.”
Diluted book value per ordinary share at December 31, 2013 was $40.90, an increase of 0.6% compared to $40.65 at December 31, 2012.
In casualty reinsurance and the less catastrophe-exposed property lines, the January 1 renewal rates were broadly stable to slight reductions of approximately 2 to 3%. In property catastrophe however, the influx of new capital was most pronounced. This resulted in the most intense competition during the January renewals and rates are under significant pressure. At January 1, for the property catastrophe market as a whole, rates were down approximately 15%, with European property catastrophe experiencing rate decreases of approximately 10% to 15% whereas U.S. property catastrophe was more pressured with rate decreases between 15% and 20%. Within our property catastrophe account, we limited the overall rate reduction to approximately 12% for the January renewals. In the case of retrocession, where we are a buyer of reinsurance and not a seller, we benefited from rates declining in the range of 25 to 35%.
Property treaty pro rata made a significant contribution to our reinsurance segment where we wrote $155.8 million in gross written premium in 2013 (2012 - $171.3 million), or 13.7% of our reinsurance segment, of which $8.1 million was estimated (2012 - $52.5 million) and $147.7 million was reported by the cedants (2012 - $118.8 million). Excluding the impact of fixed costs such as reinsurance premiums and operating expenses, we estimate that the impact of a $1.0 million increase in our estimated gross premiums written in our property treaty pro rata business would increase net income before tax by $0.3 million for our property reinsurance segment for the year ended December 31, 2013 (2012 - $0.1 million increase).
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 $155.8 million (2012 - $171.3 million) in our property reinsurance treaty pro rata account as of December 31, 2013, a variation of 5% could increase or reduce net income before taxation by approximately $0.8 million (2012 - $0.9 million).
Case reserves. For reported claims, reserves are established on a case-by-case basis within the parameters of coverage provided in the insurance policy or reinsurance agreement. In estimating the cost of these claims, we consider circumstances related to the claims as reported, any information available from cedants, lawyers and loss adjustors and information on the cost of settling claims with similar characteristics in previous periods. See Part 1, Item 1, “Business - Reserves” for additional information on our reserving approach.
In general terms, the IELR method is most appropriate for lines of business and/or accident years where the actual paid or reported loss experience is not yet mature enough to modify our initial expectations of the ultimate loss ratios. Typical examples would be recent accident years for lines of business in the casualty reinsurance segment. The BF method is generally appropriate where there are few reported claims and a relatively less stable pattern of reported losses. Typical examples would be our treaty risk excess line of business in our reinsurance segment and marine hull line of business in our insurance segment. The Chain Ladder method is appropriate when there are relatively stable patterns of loss emergence and a relatively large number of reported claims. Typical examples are the U.K. commercial property and U.K. commercial liability lines of business in our international insurance segment.
There are two Reserve Committees, one for each of the insurance and reinsurance segments. Common membership to both committees includes the Group Chief Risk Officer (the Chair), the Group Head of Risk and Group Chief Actuary, the Group Chief Financial Officer, the U.S. Insurance Chief Actuary, the Chairman of Aspen Insurance and the Chief Underwriting Officer of Aspen Re. Senior members of the insurance and reinsurance segment underwriting and claims staff comprise the remaining members of each committee.
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, for all lines of business, we review the emergence of actual losses relative to expectations every fiscal quarter. If warranted from this analysis, we may accelerate the timing of our detailed actuarial reviews.
Allowance is made, however, for changes or uncertainties which may create distortions in the underlying statistics or which might cause the cost of unsettled claims to increase or reduce when compared with the cost of previously settled claims, including:
There are specific areas of our selected reserves which have additional uncertainty associated with them. In property reinsurance, recent catastrophe events such as European floods and storms and the fact that Superstorm Sandy remains a relatively recent event and therefore the ultimate cost is uncertain. In casualty reinsurance, there are additional uncertainties associated with claims emanating from the global financial crisis. There is also a potential for new areas of claims to emerge as underlying this segment are many long-tail lines of business. In the insurance segment, we wrote a book of financial institutions risks which have a number of notifications relating to the financial crisis in 2008 and 2009. In each case, management believes that they have selected an appropriate best estimate based on current information and current analyses.
future liabilities, the Company considers both the results of actuarial point estimates of loss reserves as well as the potential variability of these estimates as captured by a reasonable range of actuarial reserve estimates. In determining the appropriate best estimate, the Company reviews (i) the position of overall reserves within the actuarial reserve range, (ii) the result of bottom up analysis by accident year reflecting the impact of parameter uncertainty in actuarial calculations, and (iii) specific qualitative information on events that may have an effect on future claims but which may not have been adequately reflected in actuarial best estimates, such as the potential for outstanding litigation or claims practices of cedants to have an adverse impact.
In order to show the potential variability in the Company’s estimate of loss reserves, we use stochastic modeling techniques around the mean estimate. We believe that stochastic modeling provides a distribution against which selected reserves can be assessed for which we show the probability of various outcomes relative to the actuarial mean estimate. Stochastic modeling provides a range of potential outcomes as reserve movements will be caused by any number of factors, and as such it is unlikely that only one factor will change in a given period; stochastic modeling techniques will reflect the impact from many factors. The output from the stochastic modeling is more meaningful at a segmental level and is therefore not provided at a line of business level.
Actuarial range of gross reserves. The following tables show the 10th percentile, 25th percentile, actuarial mean estimate, 75th percentile and 90th percentile together with the actual percentile that the selected loss reserves represent. The following table sets out the actuarial range of gross reserves for each of our segments and compares it to management’s selected best estimate as at December 31, 2013. Management’s selected reserves include unallocated claims handling expenses which remain unchanged across all reserve distributions.
We currently classify $5,878.9 million of our $6,959.8 million investment portfolio as “available for sale” and, accordingly, they are carried at estimated fair value. We use quoted values and other data provided by internationally recognized independent pricing sources as inputs into our process for determining the fair value of our investments. Where multiple quotes or prices are obtained, a price source hierarchy is maintained in order to determine which price source provides the fair value (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers.
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The discussions that follow include tables and discussions relating to our consolidated income statement and our segmental operating results for the twelve months ended December 31, 2013, 2012 and 2011.
Gross written premiums. The following table analyzes the overall change in gross written premiums in the twelve months ended December 31, 2013, 2012 and 2011.
In 2013, premium growth was due predominantly to the continued development of our U.S. insurance platform, primarily from the new programs business and U.S. property, both of which benefited from rate increases in the year, and from our financial and professional lines. Increases in insurance premiums were also due to M.E.C. liability business which achieved significant rate increases following a series of industry losses. Gross written premiums in our reinsurance segment increased in 2012 due to growth in our property catastrophe and casualty business lines, which recognized loss-related additional premiums, offset by decreased property risk excess and international casualty reinsurance premiums.
Total ceded written premiums in 2012 increased by $57.7 million compared to 2011. Ceded written premiums for the insurance segment increased in line with increased gross written premiums while ceded written premiums for the reinsurance segment reduced in 2012. In 2011, additional cover was purchased following significant catastrophe losses early in that year.
Losses and loss adjustment expenses. The loss ratio for 2013 of 56.3% decreased by 3.1% compared to 2012. Losses and loss adjustment expenses have reduced from $1,238.5 million in 2012 to $1,223.7 million in 2013 primarily due to a reduction in catastrophe losses off-setting increases in business written. In 2013, net losses from major natural catastrophes were $108.9 million compared to $217.7 million of net losses from natural catastrophes associated with the U.S. weather events in 2012.
Losses and loss adjustment expenses have reduced from $1,556.0 million in 2011 to $1,238.5 million in 2012 primarily due to the reduced level of catastrophe losses in 2012 compared to 2011. Losses in 2012 included $200.6 million of net losses from Superstorm Sandy in October 2012, $17.1 million from losses associated with the severe weather in the U.S. in February and March 2012 and Hurricane Isaac in August 2012 as well as $38.2 million of losses in respect of claims arising from the sinking of the Costa Concordia cruise liner in January 2012. In 2011, we experienced $534.3 million of net losses from natural disasters (principally the Japanese earthquake and tsunami, U.S. tornadoes, Thai floods, Australian floods, New Zealand earthquakes and Hurricane Irene). Further information relating to movements in prior year reserves can be found below under “Reserves for Losses and Loss Adjustment Expenses.”
Prior year reserve releases have reduced by $29.7 million from $137.4 million in 2012 to $107.7 million in 2013. The releases for the reinsurance segment have increased by $20.4 million due to better than expected development from casualty and specialty lines as well as smaller releases from property lines. The insurance segment had a reserve strengthening of $14.9 million after significant deterioration in our marine, aviation, energy and construction line of business, mainly in our M.E.C. liability account, partially offset by releases across other insurance lines. Prior year reserve releases in our reinsurance segment increased from $72.3 million in 2011 to $102.2 million in 2012 following favorable development in our U.S. casualty treaty
account, specialty reinsurance and other property business lines. The insurance segment had a $35.2 million release in 2012 from most lines, but especially from property, casualty and financial and professional lines compared to $20.0 million reserve release in 2011 from the property, casualty and marine, aviation, energy and construction insurance lines. Further information relating to movements in prior year reserves can be found below under “Reserves for Losses and Loss Adjustment Expenses.”
We have presented loss ratios both including and excluding the impact from catastrophe losses to aid in the analysis of the underlying performance of our segments. We have defined major 2013 catastrophe losses as losses associated with floods in Central Europe, Canada and India, as well as tornadoes and hailstorms in the U.S. in the second quarter of 2013, hailstorms in Germany and floods in Canada and Mexico in the third quarter of 2013, and storms and associated flooding in Europe, India and the Philippines in the fourth quarter of 2013. We have defined major 2012 catastrophe losses as losses associated with the severe weather conditions in the U.S. in February and March 2012, Hurricane Isaac in August 2012 and Superstorm Sandy in October 2012. We have defined major catastrophe losses in 2011 as losses associated with the U.S. storms (specifically related to Hurricane Irene which occurred in the third quarter of 2011, and the tornadoes in the second quarter of 2011) in addition to losses associated with the Australian floods and the New Zealand and Japanese earthquakes which occurred in the first quarter of 2011, the Thai floods and movements in losses associated with the 2010 catastrophe events (Chilean and New Zealand earthquakes) which were recognized in 2011.
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 processes. 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, 2013, 2012 and 2011. We also show the effect of reinsurance purchased which impacts the reported net expense ratio by expressing the expenses as a proportion of net earned premiums.
The total policy acquisition expense ratio, gross of the effect of reinsurance, has increased to 16.9% in 2013 from 16.0% in 2012 due to increased profit commission accruals and changes in the mix of business written across both segments where we have written a greater proportion of business with higher average commission rates. The total policy acquisition expense ratio, gross of the effect of reinsurance, decreased marginally to 16.0% in 2012 from 16.2% in 2011 due to a reduction in accruals for profit-related commissions and due to changes in the mix of business written. General, administrative and corporate expenses increased by $23.0 million in 2013 compared to 2012 which is attributable to increases in staff, premises and other costs associated mainly with growth in our insurance business.
Total net realized and unrealized investment gains recorded in the statement of operations
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. The foreign exchange contracts are recorded as derivatives at fair value with changes recorded as a change in fair value of derivatives in the Company’s statement of operations. At December 31, 2013, we held foreign currency derivative contracts to purchase $281.9 million of U.S. and foreign currency (2012 - $424.0 million). For the twelve months ended December 31, 2013, these contracts incurred a loss of $1.3 million (2012 - $5.4 million loss; 2011 - $4.5 million gain).
During 2013, $38.9 million in notional amount of our interest rate swaps terminated, 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, 2013, cash collateral with a fair value of $34.3 million was transferred to our counterparties to support the current valuation of the interest rate swaps (December 31, 2012 - $52.0 million). As at December 31, 2013, no non-cash collateral was transferred to us by our counterparties (December 31, 2012 - $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, 2013 (2012 - $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 on other investments. These represent the share of earnings from our investment in Cartesian Iris Offshore Fund L.P. (“Cartesian”) and Chaspark Maritime Holdings Limited (“Chaspark”).
Income/(loss) before tax. In the twelve months ended December 31, 2013, income/(loss) before tax was $342.7 million (2012 - $295.4 million; 2011 - loss of $147.3 million), comprising the amounts set out in the table below:
Net income/(loss) after tax. In 2013, we had net income of $329.3 million, equivalent to $4.29 basic earnings per ordinary share adjusted for the $35.5 million preference share dividends and the $7.1 million difference between the capital raised upon issuance of the 5.625% Perpetual PIERS and the final redemption of the 5.625% Perpetual PIERS. Fully diluted earnings per ordinary share were $4.14 for the twelve months ended December 31, 2013. In 2012, we had net income of $280.4 million, equivalent to diluted earnings per ordinary share of $3.39 based on the weighted average number of shares in issue during the period. Preference share dividends are deducted from net income for the purpose of calculating earnings per ordinary share. In 2011, we had a net loss of $110.1 million, equivalent to a basic and diluted loss per ordinary share of $1.88 based on the weighted average number of ordinary shares in issue during the period due to the significant level of catastrophe events experienced in the year.
Gross written premiums. The table below shows our gross written premiums for each line of business for the twelve months ended December 31, 2013, 2012 and 2011, and the percentage change in gross written premiums for each line:
The decrease in gross written premiums for the twelve months ended December 31, 2013 compared to the equivalent period in 2012 affected all lines and arose from higher commutations in casualty and specialty lines, adverse prior year premium adjustments in other property lines as well as rate pressure on catastrophe-exposed accounts and adverse exchange rate movements. The current period benefited from $6.8 million of reinstatement premiums associated with the German hailstorms, Central European and Canadian floods while in the comparative period, we recognized $22.5 million of reinstatement premiums associated with the U.S. storms.
Net premiums earned. Net premiums earned have decreased by $59.4 million, or 5.2%, in 2013 compared to 2012. Net premiums earned have increased by $24.1 million, or 2.2%, in 2012 compared to 2011, consistent with the increase in gross earned premiums and the reduction in the cost of our reinsurance purchased in the period.
Losses and loss adjustment expenses. The loss ratio 2013 of 44.9% decreased by 11.2 percentage points compared to 56.1% in the equivalent period in 2012. In 2013, our reinsurance segment experienced $93.5 million of losses associated with floods in Central Europe, Canada and India, as well as tornadoes and hailstorms in the U.S. in the second quarter of 2013, hailstorms in Germany and floods in Canada and Mexico in the third quarter of 2013, and storms and associated flooding in Europe, India and the Philippines in the fourth quarter of 2013. The comparable period in 2012 experienced losses of $166.5 million due to severe weather conditions in the U.S. in February and March 2012, Hurricane Isaac in August 2012 and Superstorm Sandy in October 2012. There was a $20.4 million increase in prior year reserve releases from $102.2 million in the twelve months ended December 31, 2012 to $122.6 million in the current period predominantly due to an increase in reserve releases from our casualty and specialty reinsurance lines. Prior year reserve releases are further discussed below under “Reserves for Losses and Loss Adjustment Expenses.”
The loss ratio in 2012 was 56.1% compared to 97.7% in 2011. The decrease in the loss ratio is primarily attributable to the reduced level of catastrophe losses from $552.6 million in 2011 to $166.5 million in 2012. Catastrophe losses in 2011 were from the Australian floods, the New Zealand and Japanese earthquakes, the U.S. storms (including Hurricane Irene) and other natural catastrophes (Thai floods and Scandinavian weather-related events). There was also a $29.9 million increase in prior year reserve releases from $72.3 million in the twelve months ended December 31, 2011 compared to $102.2 million in 2012.
Our insurance segment consists of property insurance, casualty insurance, marine, aviation, energy and construction insurance, financial and professional lines insurance and programs business. For a more detailed description of this segment, see Part I, Item 1, “Business - Business Segments - Insurance” and Note 5 of our consolidated financial statements, “Segment Reporting.”
Gross written premiums. The table below shows our gross written premiums and the percentage change for each line of business for the twelve months ended December 31, 2012, 2011 and 2010:
The increase in gross written premium in 2013 is mainly attributable to our casualty, financial and professional lines and programs business as we continue to grow our U.S. operations. Casualty also benefited from growth in our U.K.-based business.
Overall, premiums increased by 11.6% or $157.4 million in 2013 compared to 2012 and 32.8% in 2012 compared to 2011. The increase in gross written premium was across all business lines with $138.8 million of the total increase from our U.S.- based teams following our recent expansion particularly in the programs business. Increases in our marine, aviation, energy and construction line were mainly due to increased premiums for M.E.C. liability business which achieved significant rate increases following a series of industry losses in recent years. Gross written premiums from our financial and professional lines have increased due to growth in business written by our U.S.- based surety management and professional liability teams.
Ceded reinsurance. Total ceded reinsurance for 2013 was $295.1 million, an increase of $29.7 million from 2012 and in line with increases in gross written premiums in 2013 compared to 2012 as we seek to use reinsurance as an effective risk mitigation tool for our growing insurance lines, particularly in the U.S. Ceded reinsurance for 2012 was $265.4 million, an increase of $76.1 million from 2011 which is in line with increases in gross written premiums in 2012 compared to 2011.
Losses and loss adjustment expenses. The loss ratio for 2013 was 67.5% compared to 63.4% in 2012. The increase in the loss ratio in 2013 is mainly due to a $14.9 million prior year reserve strengthening primarily in our marine, aviation, energy and construction line of business compared to a $35.2 million reserve release in 2012. Losses in 2013 also include $15.4 million of catastrophe losses related to the tornadoes and hailstorms in the U.S. in addition to a higher frequency of medium-sized losses of $40.0 million principally in our M.E.C. liability account and our casualty line of business. In 2012, we recognized $24.8 million of losses in respect of claims arising from the sinking of the Costa Concordia in January 2012 and $51.2 million of losses from Superstorm Sandy and U.S. tornadoes.
changes in business mix where we have written a greater proportion with higher average commission rates. The increase of $17.7 million in our general and administrative expenses in 2013 is mainly associated with increases in premises costs related to the expansion of our U.S. and U.K. insurance operations.
At December 31, 2013 and December 31, 2012, total cash and investments, including accrued interest receivable, were $8.3 billion and $8.2 billion, respectively.
Book yield as at December 31, 2013 on the fixed income portfolio was 2.74%, a decrease of 14 basis points from 2.88% as at December 31, 2012, as a result of the continuing low interest rate environment. The average duration of the fixed income portfolio was 3.50 years as at December 31, 2013, (2012 - 3.00 years) excluding the impact of interest rate swaps, or 3.17 years (2012 - 2.47 years) including the impact of interest rate swaps. As at December 31, 2013, the average credit quality of our fixed income portfolio was “AA-,” with 88.3% of the portfolio being rated “A” or higher. As at December 31, 2012, the average credit quality of our fixed income portfolio was “AA,” with 92.0% 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.
We did not make any material changes to our fixed income sector positions and in October 2012 we amended the portfolio guidelines to allow investment in U.S. Dollar BB Bank Loans of the BB High Yield portfolio. During 2013, we increased our allocation to equities by $200.0 million, allocated up to $200.0 million to BB-rated securities and funded a $200.0 million BBB-rated, EMD portfolio. As of December 31, 2013, we had invested $26.5 million in BB High Yield Bonds (2012 - $24.6 million) and $69.1 million (2012 - $Nil) in our U.S. Dollar BB Bank Loans trading portfolio. In August 2013, the Company invested in a $200.0 million BBB rated EMD portfolio, which is reported below in corporate and foreign government securities.
We continued to maintain our fixed to floating interest rate swap positions with a total notional amount of $1.0 billion as at December 31, 2013 (2012 - $1.0 billion). For further discussion on interest rate swaps, see Note 9 of our consolidated financial statements, “Derivative Contracts.”
Unrealized gains in the available for sale investment portfolio, including equity securities, at December 31, 2013 were $156.5 million, a decrease of $198.4 million from December 31, 2012, and a decrease of $179.3 million from December 31, 2011. Unrealized gains have decreased due to the continued lower interest-rate environment.
As at December 31, 2013, we had investments in two entities classified as other investments: Cartesian and Chaspark. For further information regarding these investments, see Note 6 of our consolidated financial statements, “Investments.”
We continue to evaluate investment opportunities that will help us generate increased returns, while remaining within our risk tolerances. As at December 31, 2013, 9.7% of the portfolio was allocated to alternative investments.
The tables below summarize our European holdings by country (Eurozone and non-Eurozone), rating and sector as at December 31, 2013. 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.
Fair Value Measurements. Our estimates of fair value for financial assets and liabilities are based on the framework established in the fair value accounting guidance included in ASC Topic 820, Fair Value Measurements and Disclosures. For a description of the framework, see Note 7 of our consolidated financial statements, “Fair Value Measurements.”
Reserves by segment. As of December 31, 2013, we had total net loss and loss adjustment expense reserves of $4,346.2 million (December 31, 2012 - $4,280.7 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 $4,678.9 million at the balance sheet date of December 31, 2013, a total of $2,585.6 million, or 55.3%, represented IBNR claims (December 31, 2012 - $2,578.7 million and 54.0%, respectively). The following tables analyze gross and net loss and loss adjustment expense reserves by segment as at December 31, 2013 and December 31, 2012, respectively:
The gross reserves may be further analyzed between outstanding claims and IBNR as at December 31, 2013 and 2012, are as follows:
$16.1 million reduction in reserves for 2011 and 2010 catastrophe losses and to better than expected claims development. Specialty reinsurance had releases of $19.0 million, primarily in the aviation account as a result of a reduction in the reserve for a specific claim and favorable development in the marine account. This was partly offset by some increases in reserves, most notably in our structured risks business following adverse development and additional review.
Insurance. Net reserve releases for the year ended December 31, 2012 in the insurance segment were $35.2 million. Property, casualty and financial and professional business lines led to reserve releases of $16.3 million, $18.0 million and $8.2 million, respectively. Property lines in both the U.S. and U.K. experienced better than expected development while the excess casualty account had an absence of advised claims. The release for financial and professional lines was due predominantly to the credit and political risk account which experienced a reduction in specific claim reserves. This was partially offset with a strengthening in reserves in marine and transportation of $7.2 million, primarily in marine liability which experienced more than expected claims development in prior years.
The following table shows our capital structure at December 31, 2013 compared to December 31, 2012:
Management monitors the ratio of debt to total capital, with total capital being defined as shareholders’ equity plus outstanding debt. At December 31, 2013, this ratio was 15.4% (December 31, 2012 - 12.5%).
As at December 31, 2013, total shareholders’ equity was $3,299.6 million compared to $3,488.4 million at December 31, 2012. Our total shareholders’ equity as at December 31, 2013 includes three classes of preference shares with a total value as measured by their respective liquidation preferences of $555.8 million net of share issuance costs (December 31, 2012 - $508.1 million).
The principal capital management transactions during 2013 and 2012 were as follows:
On April 25, 2012, our Board approved and we announced a 13.3% increase in our normal quarterly dividend to our ordinary shareholders from $0.15 per share to $0.17 per share.
On February 7, 2013, the Company’s Board of Directors replaced the existing share repurchase authorization of $400.0 million with a new authorization of $500.0 million. The total share repurchase authorization, which was effective immediately through February 7, 2015, permits the Company to effect the repurchases from time to time through a combination of transactions, including open market repurchases, privately negotiated transactions and accelerated share repurchase transactions.
On March 4, 2013, an agreement was signed to repurchase 54,437 ordinary shares from the Names’ Trustee. The shares were repurchased on March 21, 2013 for a total purchase price of $2.0 million and subsequently cancelled.
Operating Subsidiaries. On an ongoing basis, our Operating Subsidiaries’ sources of funds primarily consist of premiums written, investment income and proceeds from sales and redemptions of investments.
As of December 31, 2013, the Operating Subsidiaries held $1,150.2 million (December 31, 2012 - $1,606.7 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 that they are able to meet their insurance and other liabilities as they become due and was satisfied that there was a comfortable margin of liquidity as at December 31, 2013 and for the foreseeable future.
See Note 19(a), “Commitments and Contingencies - Restricted Assets,” of our consolidated financial statements for further detail on our trust fund balances which we are required to maintain in accordance with contractual obligations to policyholders and in compliance with regulatory requirements.
$65.3 million, and $8.1 million was used to repurchase ordinary shares. At December 31, 2011, we had a balance of cash and cash equivalents of $1,239.1 million.
The fees and interest rates on the loans and the fees on the letters of credit payable by the Borrowers under the credit agreement are based upon the credit ratings for the Company’s long-term unsecured senior debt by S&P and Moody’s. In addition, the fees for a letter of credit vary based upon whether the applicable Borrower has provided collateral (in the form of cash or qualifying debt securities) to secure its reimbursement obligations with respect to such letter of credit.
On April 29, 2009, Aspen Bermuda replaced its existing letter of credit facility with Citibank Europe plc dated October 29, 2008 in a maximum aggregate amount of up to $450.0 million with a new letter of credit facility in a maximum aggregate amount of up to $550.0 million. On August 12, 2011, the maximum aggregate amount was increased to $1,050.0 million. On July 30, 2012, Aspen Bermuda and Citibank Europe plc replaced the existing letter of credit facility dated August 12, 2011 in a maximum aggregate amount of up to $1,050.0 million with a new letter of credit facility in a maximum aggregate amount of up to $950.0 million. The new facility was structured in two separate tranches; Tranche I, for $650.0 million, only applies in respect of credits issued on or prior to June 30, 2014. Tranche II, for $300.0 million, only applies in respect of credits issued on or prior to December 31, 2013. Each tranche of the facility shall expire on the earlier of (1) the date that is one year from the end of the relevant Tranche Facility Period (as defined in the agreement); or (2) the stated expiry date on the last remaining credit issued within the relevant Tranche Facility Period. Tranche II of this facility was cancelled effective July 31, 2013. As at
Our calculation of reserves for losses and loss expenses in respect of casualty business includes assumptions about future payments for settlement of claims and claims-handling expenses, such as medical treatments and litigation costs. We write casualty business in the United States, the United Kingdom and Australia 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 capital 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 on foreign exchange contracts, changes in the fair value of derivatives and certain non-recurring items. In 2013, these non-recurring items included issue costs associated with the redemption of the Preferred Income Equity Redemption Securities and a make-whole payment associated with the
redemption of the $250.0 million 6.0% coupon Senior Notes due to mature in 2014. 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.