We entered into a 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 in 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, 2014, 2013, 2012, 2011 and 2010 and the balance sheet data as of December 31, 2014, 2013, 2012, 2011 and 2010 are derived from our audited consolidated financial statements. The consolidated financial statements as of December 31, 2014, and for each of the twelve months ended December 31, 2014, 2013 and 2012, 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.
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 70,508,013, 70,655,698, 70,753,723, 65,546,976 and 62,017,368 at December 31, 2010, 2011, 2012, 2013 and 2014, 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, 2010, 2011, 2012, 2013 and 2014, divided by the number of dilutive equivalent shares outstanding of 74,172,657, 73,355,674, 73,312,340, 67,089,572 and 63,444,356 at December 31, 2010, 2011, 2012, 2013 and 2014, respectively. At December 31, 2010, 2011, 2012, 2013 and 2014, there were 3,664,644, 2,699,976, 2,558,617, 1,542,596 and 1,426,988 of dilutive equivalent shares, respectively. Potentially dilutive shares outstanding are calculated using the treasury method and all relate to employee, director and investor options.
The following is a discussion and analysis of our financial condition and results of operations for the twelve months ended December 31, 2014, 2013 and 2012. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and related Notes contained in this report. This discussion contains forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and particularly under the headings “Risk Factors,” “Business” and “Forward-Looking Statements” contained in Item 1A, Item 1, and Part I of this report, respectively.
Business Portfolio Optimization. We made strong progress on our business optimization initiatives in 2014. We restructured our ceded reinsurance and retrocessional arrangements in 2014 to further optimize our risk-return profile, which contributed in excess of $25.0 million to our net income.
The following overview of our 2014, 2013 and 2012 operating results and financial condition is intended to identify important themes and should be read in conjunction with the more detailed discussion further below.
Combined ratio of 91.7% for 2014 , including $65.5 million, or 2.7 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements, compared with 92.6% for 2013, which included $101.9 million or 4.7 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements and 94.3% for 2012, which included 10.8 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements. Excluding the impact of bid defense costs in 2014, the combined ratio is 90.5%.
Net favorable development on prior year loss reserves of $104.1 million, or 4.3 combined ratio points, for 2014 compared with $107.7 million, or 5.0 combined ratio points, for 2013, and $137.4 million, or 6.6 combined ratio points, for 2012.
Gross written premium increased 9.7% in 2014 compared to 2013 due largely to our insurance lines which grew across all major business lines with premium reductions limited to marine, aviation and energy lines written by our U.K.-based teams. Our U.S.-based operations continued to generate significant premium growth of $187.5 million compared to $138.8 million in 2013. In our reinsurance segment, the increase in gross written premiums was across all lines of business with the exception of casualty reinsurance. The increase in property catastrophe premiums is mainly attributable to the impact of our Aspen Capital Markets division which has enabled us to increase line sizes. The increase in other property reinsurance is predominately 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 premiums estimates and planned reductions in some casualty lines. Specialty reinsurance has maintained its level of written premium as growth in specialty marine has offset reductions in credit and surety.
The combined ratio for 2014 decreased by 0.9 percentage points compared to 2013, primarily due to growth a 10.8% growth in net premiums earned, a reduction in pre-tax catastrophe losses, net of reinsurance and reinstatements of $65.5 million in 2014 compared to $101.9 million in 2013, offset by a $77.6 million increase in expenses attributable to defending the unsolicited approach for an inadequate offer by Endurance at a cost of $28.5 million, increases in staff costs and performance-related accruals.
General, administrative and corporate expense increased in 2013 compared to 2012 due to an increase in staff costs, performance-related accruals and other costs associated with the continued build out of our U.S. insurance operations.
Net investment income. In 2014, we generated net investment income of $190.3 million, an increase of 2.1% on the prior year (2013 - $186.4 million; 2012 - $204.9 million). Notwithstanding the decline in reinvestment rates, our investment income increased slightly due to a higher investment balance compared to 2013. Lower reinvestment rates and declining book yields from fixed income securities were partially offset by $17.1 million of dividend income from our global equity securities portfolio in 2014 compared with $12.6 million in 2013. As mentioned above, we have invested in BBB Emerging Market Debt and BB Bank Loans and have increased further our investments in equities in 2014. Net investment income declined over the years from 2010 to 2013, due to the continuing decline in our reinvestment rate reflecting lower yields on investment grade fixed income securities.
Other comprehensive income. Total other comprehensive income increased by $15.2 million (2013 - loss of $208.3 million), net of taxes, for the twelve months ended December 31, 2014. This is comprised of a $42.4 million gain in the net unrealized available for sale investment portfolio (2013 - $161.3 million unrealized loss) largely attributable to the impact of declining interest rates on our bond portfolios, $7.5 million reclassification of net realized gains to net income (2013 - $23.4 million reclassified realized gains), a $3.8 million unrealized loss (2013 - $Nil) on the hedged derivative contracts and an unrealized loss in foreign currency translation of $15.9 million (2013 - $24.1 million unrealized loss).
Shareholders’ equity and financial leverage. Total shareholders’ equity increased by $119.7 million from $3,299.6 million as at December 31, 2013 to $3,419.3 million at December 31, 2014. The most significant movements were:
As at December 31, 2014, our total shareholders’ equity included preference shares with a total value as measured by their respective liquidation preferences of $568.2 million (2013 - $568.2 million) less issue costs of $12.4 million (2013 - $12.4 million).
In addition to the senior debt issued by Aspen Holdings, we have also reported $150.0 million of debt issued by Silverton (2013 - $65.0 million) , of which $30.0 million is owned by Aspen Holdings (2013 - $15.0 million). For further information relating to Silverton, refer to Note 7, “Variable Interest Entities” of our consolidated financial statements.
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 30.8% as of December 31, 2014 (2013 - 29.6%).
Overall. Towards the end of 2014 and in early 2015, we saw a trend in consolidation among our peers with announced mergers. The consolidation wave may continue in the near future, which may lead to increased competitive pressure. Insurance now represents about 60% of our total book. In our international operations, we have had meaningful growth in our Lloyd’s operation, for the Lloyd’s balance sheet is big enough for any of our customers. We continue to grow our U.S. specialty operation which is at scale for our customers and lines of business. With regards to reinsurance, we preferred an opportunistic approach whereby we reduce or expand our activities depending on market opportunity. We ally this approach with a deep understanding of our clients and their needs and the products they require.
Reinsurance. During 2014 and the January 1 renewal season, which is a significant renewal date for the industry, the reinsurance market experienced rate reductions and contraction in demands, and the continued influx of alternative capital. As a result of the oversupply of capital outpacing demand following another year of relatively benign loss activity, downward pressure on reinsurance rates continued across nearly all lines and geographies. The downward rate pressure during the January 1 renewal season varied depending on the region and class. Rates decreased 6% on average, with the most intense rate pressure occurring in property catastrophe reinsurance where rates decreased by 9% in the U.S. and 11.5% in the rest of the world. In property catastrophe, we were able to leverage our third party capital relationships through Aspen Capital Markets to manage our net exposures. We expect to continue to use Aspen Capital Markets in 2015 to fund underwriting opportunities where we can better serve our clients.
During the life of a contract, notifications from cedants and brokers may affect the estimate of ultimate premium and result in either increases or reductions in reported revenue. Changes in estimated adjustable premiums do not generally have a significant impact on short-term liquidity as the payment of adjustment premiums generally occurs after the expiration of a contract.
The reported gross written premiums for treaty pro rata business include estimates of premiums due to us but not yet reported by the cedant because of time delays between contracts being written by our cedants and their submission of treaty statements to us. This additional premium is normally described as pipeline premium. Treaty statements disclose information
Property treaty pro rata made a significant contribution to our reinsurance segment where we wrote $197.4 million in gross written premium in 2014 (2013 - $155.8 million), or 16.8% of our reinsurance segment, of which $41.1 million was estimated (2013 - $8.1 million) and $156.3 million was reported by the cedants (2013 - $147.7 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 $0.1 million for our property reinsurance segment for the year ended December 31, 2014 (2013 - $0.3 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 $197.4 million (2013 - $155.8 million) in our property reinsurance treaty pro rata account as of December 31, 2014, a variation of 5% could increase or reduce net income before taxation by approximately $0.2 million (2013 - $0.8 million).
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, 2014.
Reserving procedures and process. Our actuaries calculate the IELR, BF and Chain Ladder and, if appropriate, other methods for each class of business and each accident year. They then provide a range of ultimates within which management’s best estimate is most likely to fall. This range will usually reflect a blend of the various methodologies. These methodologies involve significant subjective judgments reflecting many factors, including but not limited to, changes in legislative conditions, changes in judicial interpretation of legal liability policy coverages and inflation. Our actuaries collaborate with our underwriting, claims, legal and finance teams in identifying factors which are incorporated in their range of ultimates in which management’s best estimate is most likely to fall. The actuarial ranges are not intended to include the minimum or maximum amount at which the claims may ultimately settle, but are designed to provide management with ranges from which it is reasonable to select a single best estimate for inclusion in our financial statements.
Each class 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 classes 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.
Net reserve for losses and loss expenses at December 31, 2014 - Sensitivity to expected loss ratios
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. The total OTTI charge for the twelve months ended December 31, 2014 was $2.4 million (2013 -$Nil). 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.”
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 U.S. financial and professional lines. Increases in insurance premiums were also due to marine and energy liability business which achieved significant rate increases following a series of industry losses. Gross written premiums in our reinsurance segment decreased in 2013 due to higher commutations in casualty and specialty lines combined with lower reinstatements in catastrophe and increasing rate pressure.
In 2013, total ceded written premiums increased by $10.6 million compared to 2012. Ceded written premiums decreased for the reinsurance segment in line with reduced gross written premiums from our catastrophe lines and changes to our reinsurance program. Ceded written premiums increased for the insurance segment as we used reinsurance as an effective risk mitigation tool for our growing insurance lines, particularly in the U.S.
Losses and loss adjustment expenses. The loss ratio for 2014 of 54.4% decreased by 1.9 percentage points compared to 2013. The reduction in loss ratio is due predominantly to fewer catastrophe losses. Losses and loss adjustment expenses have 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 $108.9 million in 2013.
Losses and loss adjustment expenses have reduced from $1,238.5 million in 2012 to $1,223.7 million in 2013 primarily due to the reduced level of catastrophe losses in 2013 compared to 2012 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 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. 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 $3.6 million from $107.7 million in 2013 to $104.1 million in 2014. Reserve releases for the reinsurance segment have reduced by $23.6 million due to lower releases from casualty and catastrophe lines. The insurance segment had reserve releases of $5.1 million compared to $14.9 million of strengthening in 2013.
Prior year reserve releases in our reinsurance segment increased by $20.4 million in 2013 due to better than expected development from casualty and specialty lines in addition to small releases from property lines. The insurance segment had a $14.9 million reserve strengthening in 2013 after significant deterioration in our marine, aviation and energy line of business, mainly in our marine and energy liability account partially off-set by releases across other lines, compared to $35.2 million reserve release in 2012 from most lines, but especially from property, casualty and financial and professional lines. Further information relating to movements in prior year reserves can be found below under “Reserves for Losses and Loss Adjustment Expenses.”
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, 2014, 2013 and 2012. 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.
Policy acquisition expenses have increased by $29.2 million in 2014 due primarily to growth in written premiums. The growth in commissions payable did not result in an increase in the policy acquisition expense ratio, gross of the effect of reinsurance, which has fallen to 16.5% in 2014 from 16.9% in 2013 due to lower profit commission accruals in 2014. The total policy acquisition expense ratio, gross of the effect of reinsurance, 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.
As at December 31, 2014, the Company held foreign exchange contracts that were not designated as hedging under ASC 815 with an aggregate nominal value of $403.4 million (2013- $281.9 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, 2014, the impact of foreign exchange contracts on net income was a charge of $8.0 million (December 31, 2013 - charge of $1.3 million).
As at December 31, 2014, the Company held foreign exchange contracts that were designated as hedging under ASC 815 with an aggregate value of $135.8 million (2013- $Nil). The foreign exchange contracts are recorded as derivatives at fair
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 being 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.
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 for an inadequate offer by Endurance, increases in staff costs and performance-related accruals.
Net income after tax. In 2014, we had net income of $355.8 million, equivalent to $4.92 basic earnings per ordinary share and fully diluted earnings per ordinary share of $4.82 based on the weighted average number of shares in issue during the period. 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 fully diluted earnings per ordinary share of $3.39, based on the weighted average number of shares in issue during the period.
Management measures segment results on the basis of the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, amortization of deferred policy acquisition costs and operating and administrative expenses by net premiums earned. Other than corporate expenses, indirect operating and administrative expenses are allocated to segments based on each segment’s proportional share of gross earned premiums.
The general and administrative expense ratio in the total column includes corporate expenses.
Gross written premiums. The table below shows our gross written premiums for each line of business for the twelve months ended December 31, 2014, 2013 and 2012, and the percentage change in gross written premiums for each line:
The increase in gross written premiums for the twelve months ended December 31, 2014 compared to the equivalent period in 2013 was across all lines of business with the exception of casualty reinsurance. The increase in property catastrophe premiums is mainly attributable to the impact of our Aspen Capital Markets division which has enabled us to leverage our existing franchise and underwriting expertise to increase line sizes. 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 in line with the challenging market conditions. Specialty reinsurance has maintained its level of written premium as growth in specialty marine has offset reductions in credit & surety.
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. There were $6.8 million of reinstatement premiums in 2013 associated with the German hailstorms, Central European and Canadian floods while in 2012, we recognized $22.5 million of reinstatement premiums associated with the U.S. storms.
Net premiums earned. Net premiums earned have increased 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. Net premiums earned decreased by $59.4 million, or 5.2%, in 2013 compared to 2012.
Losses and loss adjustment expenses. The loss ratio in 2014 of 45.7% increased marginally compared to 44.9% in 2013. The increase in the loss ratio is mainly due to higher attritional losses combined with a $23.6 million reduction in prior year reserve releases partially offset by a $50.6 million reduction in catastrophe losses. 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. 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.
Policy acquisition, general and administrative expenses. Amortization of deferred policy acquisition costs were $200.0 million for the twelve months ended December 31, 2014 equivalent to 18.4% of net premiums earned (2013 - $207.2 million or 19.3% of net premiums earned; 2012 - $207.8 million or 18.4% of net premiums earned). The policy acquisition expense ratio in 2013 was higher 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 13.5% in 2014 increased from 12.2% in 2013 due predominantly to an increase in performance-related accruals. Our general and administrative expense ratio was 12.2% in 2013 an increase from 10.9% in 2012 due to a $59.4 million reduction in net earned premium and a $7.1 million increase in overall expenses associated with increased staff costs.
Gross written premiums. The table below shows our gross written premiums for each line of business for the twelve months ended December 31, 2014, 2013 and 2012 and the percentage change in gross written premiums for each line:
The increase in gross written premium is mainly due to continued higher contribution from all our U.S. teams, our international property and casualty team and our international financial and professional lines. Marine, aviation and energy lines have reduced premium written due to the repositioning of certain accounts and difficult market conditions in certain accounts.
Ceded reinsurance. Total ceded reinsurance for 2014 was $338.7 million, an increase of $43.6 million from 2013 and in line with increases in gross written premiums in 2014 compared to 2013. We have taken steps to retain more risk within the Group but we 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 2013 was $295.1 million, an increase of $29.7 million from 2012 which is in line with increases in gross written premiums in 2013 compared to 2012.
Net premiums earned. Net earned premiums have increased by $218.3 million, or 19.9%, in 2014 compared to 2013 due to the written premium growth in prior years earning in 2014. Net premiums earned increased by $147.7 million, or 15.5%, in 2013 compared to 2012 which is consistent with the increase in gross earned premiums and the increase in the cost of our reinsurance purchased in 2013.
Our general and administrative expenses increased by $19.6 million to $205.5 million in 2014 from $185.9 million in 2013 due to growth in our U.S. business, increased U.S. dollar to Sterling exchange rates and higher performance-related accruals. The expense ratio decreased in the period as the increase in expenses was less significant than the increase in net earned premiums. General and administrative expenses of $185.9 million in 2013 increased from $168.2 million in 2012 mainly associated with increases in premises costs related to the expansion of our U.S. and U.K. insurance operations.
Book yield as at December 31, 2014 on the fixed income portfolio was 2.65%, a decrease of 9 basis points from 2.74% as at December 31, 2013, 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, 2014, (2013 - 3.50 years) excluding the impact of interest rate swaps, or 3.29 years (2013 - 3.17 years) including the impact of interest rate swaps. 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. As at December 31, 2013, the average credit quality of our fixed income portfolio was “AA-,” with 88.5% 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.
In 2012, we did not make any material changes to our fixed income sector positions, however, 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 Emerging Market Debt portfolio which is reported below in corporate and foreign government securities. In 2014, we sold our BB High Yield Bonds portfolio for net proceeds of $25.1 million and increased our investments in equities by $240.0 million. As of December 31, 2014, we had invested $85.1 million in a BB Bank Loans trading portfolio.
Our mortgage-backed portfolio is supported by loans diversified across a number of geographic and economic sectors. The following table summarizes the fair value of our mortgage-backed securities by rating and class at December 31, 2014:
Equity securities. Equity securities are comprised of U.S. and foreign equity securities and are classified as available for sale or trading. In March 2011, we initiated an investment into a high quality global equity income strategy. In January 2013, we increased the investment in our equity trading portfolio by an additional $200.0 million. 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. Our overall portfolio strategy remains focused on high quality fixed income investments. The total investment return from the available for sale and trading equity portfolios are as follows:
We manage our European fixed income exposures by proactively adapting our investment guidelines to our views on the European debt crisis. In August 2010, we amended our investment guidelines to prohibit purchases of sovereign or guaranteed debt of Greece, Ireland, Italy, Portugal or Spain (“GIIPS”). We also prohibited purchases of peripheral European bank issuers. In November 2010, we amended our investment guidelines to prohibit purchases of corporate bonds issued by companies domiciled in any of the GIIPS countries. In May 2011, we amended our investment guidelines to prohibit purchases of European and U.K. corporate financial issuers including covered bonds. We also added Belgium to our list of prohibited sovereign investments. In May 2014, we amended our restrictions on purchases of bonds issued by U.K. and non-peripheral European corporate financial issuers to allow the purchase of those issued by select issuers. We do not actively hedge any of our European exposures.
government guaranteed bonds, covered bonds, corporate bonds and equities. We have no exposure to the sovereign debt of GIIPS, and de minimis holdings of Spanish corporate bonds.
The tables below summarize our European holdings by country (Eurozone and non-Eurozone), rating and sector as at December 31, 2014. 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.
Valuation of Other Investments. The value of our investments in Chaspark and Silverton are based on our share of the capital position of the partnership which includes income and expenses reported by the limited partnership as provided in its quarterly management accounts. Each of Chaspark and Silverton is subject to annual audit evaluating the financial statements of the partnership. We periodically review the management accounts of Chaspark and Silverton and evaluate the reasonableness of the valuation of our investment.
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. The total OTTI charge for the twelve months ended December 31, 2014 was $2.4 million (2013 -$Nil).
Provision is made at the end of each year for the estimated ultimate cost of claims incurred but not settled at the balance sheet date, including the cost of IBNR claims and development of existing reported claims. The estimated cost of claims includes expenses to be incurred in settling claims and a deduction for the expected value of salvage and other recoveries. Estimated amounts recoverable from reinsurers on unpaid losses and loss adjustment expenses are calculated to arrive at a net claims reserve. As required under U.S. GAAP, no provision is made for our exposure to natural or man-made catastrophes other than for events occurring before the balance sheet date.
Reserves by segment. As of December 31, 2014, we had total net loss and loss adjustment expense reserves of $4,400.8 million (December 31, 2013 - $4,346.2 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 $4,750.8 million at the balance sheet date of December 31, 2014, a total of $2,714.1 million, or 57.1%, represented IBNR claims (December 31, 2013 - 2,585.6 million and 55.3%, respectively). The following tables analyze gross and net loss and loss adjustment expense reserves by segment as at December 31, 2014 and December 31, 2013, respectively:
The gross reserves may be further analyzed between outstanding claims and IBNR as at December 31, 2014 and 2013, are as follows:
Reinsurance. Net reserve releases of $99.0 million in the period were attributable to all lines of business. The most significant releases were $48.6 million from our specialty lines due to a combination of a reduction in credit and surety estimates, a reduction in 2011 prior claim estimates, mainly from short-tail lines, and the final settlement of a large contract; $18.9 million from other property lines, $17.5 million from casualty lines due to better than expected development; and $14.4 million from catastrophe lines due primarily to a reduction in reserving margins held against 2012 and prior catastrophe events and better than planned experience.
As at December 31, 2014, total shareholders’ equity was $3,419.3 million compared to $3,299.8 million at December 31, 2013. Our total shareholders’ equity as at December 31, 2014 includes three classes of preference shares with a total value as
Our senior notes were the only material debt issued by Aspen Holdings as of December 31, 2014 and 2013 of $549.1 million and $549.0 million, respectively. Management monitors the ratio of debt to total capital, with total capital being defined as shareholders’ equity plus outstanding debt. As at December 31, 2014, this ratio was 17.0% (2013 - 15.4%).
On February 7, 2013, our Board 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.
Under the open market repurchases, the Company acquired and cancelled 8,461,174 ordinary shares for the twelve months ended December 31, 2013. The total consideration paid was $309.6 million and the average price paid was $36.59. As at December 31, 2013, we had $224.2 million remaining under our current share repurchase authorization.
On April 24, 2013, we announced a 6% increase in our normal quarterly dividend to our ordinary shareholders from $0.17 per share to $0.18 per share.
On April 23, 2014, we announced an 11.1% increase in our normal quarterly dividend to our ordinary shareholders from $0.18 per share to $0.20 per share.
As at December 31, 2014, Aspen Holdings held $86.8 million (December 31, 2013 - $94.2 million) of cash and cash equivalents with the significant reduction due to a total of $180.9 million of ordinary share repurchases in the twelve months ended December 31, 2014. 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.
The ability of our Operating Subsidiaries to pay us dividends or other distributions is subject to the laws and regulations applicable to each jurisdiction, as well as the Operating Subsidiaries’ need to maintain capital requirements adequate to maintain their insurance and reinsurance operations and their financial strength ratings issued by independent rating agencies. On October 21, 2013, and in line with common market practice for regulated institutions, the PRA, the regulatory agency which oversees the prudential regulation of insurance companies in the U.K. such as Aspen U.K., requested that it be afforded the opportunity to provide a “non-objection” prior to all future dividend payments made by Aspen U.K. We do not expect to suffer tax on foreign earnings since our significant source of earnings outside of Bermuda is the U.K. and no taxes are imposed on profits repatriated from the U.K. to Bermuda. For a further discussion of the various restrictions on our ability and our Operating Subsidiaries’ ability to pay dividends, see Part I, Item 1 “Business - Regulatory Matters.” For a discussion of the volatility and liquidity of our other investments, see Part I, Item 1A, “Risk Factors - Market and Liquidity Risks,” and for a discussion of the impact of insurance losses on our liquidity, see Part I, Item 1A, “Risk Factors - Insurance Risks” and Note 15 of our consolidated financial statements, “Statutory Requirements and Dividend Restrictions.”
For all material currencies in which our underwriting activities are written we ensure that sufficient cash and short-term investments are held in such currencies to enable us to meet potential claims without liquidating long-term investments and
Consolidated cash flows for the twelve months ended December 31, 2014. Total net cash flow from operations was $607.4 million, an increase of $41.0 million from 2013. For the twelve months ended December 31, 2014, our cash flows from operations provided us with sufficient liquidity to meet our operating requirements. We paid net claims of $1,107.7 million in 2014, and used $515.0 million in investing and net purchases and sales of equipment during the period. We paid ordinary and preference share dividends of $88.1 million, and $180.9 million was used to repurchase ordinary shares. At December 31, 2014, we had a balance of cash and cash equivalents of $1,178.5 million.
Consolidated cash flows for the twelve months ended December 31, 2013. Total net cash flow from operations was $566.4 million, an increase of $70.0 million from 2012. For the twelve months ended December 31, 2013, our cash flows from operations provided us with sufficient liquidity to meet our operating requirements. We paid net claims of $1,085.1 million in 2013, and used $497.9 million in investing and net purchases and sales of equipment during the period. We paid ordinary and preference share dividends of $83.3 million, and $309.6 million was used to repurchase ordinary shares. At December 31, 2013, we had a balance of cash and cash equivalents of $1,293.6 million.
On June 12, 2013, Aspen Holdings and several of its wholly-owned subsidiaries (collectively, the “Borrowers”) entered into an amended and restated credit agreement (the “Credit Agreement”) with various lenders and Barclays Bank PLC (“Barclays”), as administrative agent, which amends and restates the credit agreement, dated as of July 30, 2010, among Aspen
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.
Under the credit facility, we must not permit (a) consolidated tangible net worth to be less than approximately $2,428.6 million plus 50% of consolidated net income and 50% of aggregate net cash proceeds from the issuance by the Company of its capital stock, in each case after January 1, 2013, (b) the ratio of our total consolidated debt to the sum of such debt plus our consolidated tangible net worth to exceed 35% or (c) any material insurance subsidiary to have a financial strength rating of less than “B++” from A.M. Best. In addition, the credit facility contains other customary affirmative and negative covenants as well as certain customary events of default, including with respect to a change in control. The various affirmative and negative covenants, include, among others, covenants that, subject to various exceptions, restrict the ability of the Company and its subsidiaries to: incur indebtedness; create or permit liens on assets; engage in mergers or consolidations; dispose of assets; pay dividends or other distributions; purchase or redeem the Company’s equity securities or those of its subsidiaries and make other restricted payments; make certain investments; agree with others to limit the ability of the Company’s subsidiaries to pay dividends or other restricted payments or to make loans or transfer assets to the Company or another of its subsidiaries. In addition, the credit facility has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, bankruptcy or insolvency proceedings, change of control and cross-default to other debt agreements. Our credit facility also contains customary provisions in respect of successor companies resulting from mergers and acquisitions assuming obligations thereunder.
The terms of a pledge agreement between Aspen Bermuda and Citi Europe (pursuant to an assignment agreement dated October 11, 2006) dated January 17, 2006, as amended, were also amended on June 30, 2014 to change the types of securities or other assets that are acceptable as collateral under the New LOC Facility. All other agreements relating to Aspen Bermuda’s LOC Facility, which now apply to the New LOC Facility with Citi Europe, as previously filed with the United States Securities and Exchange Commission, remain in full force and effect. As at December 31, 2014, we had $463.6 million of outstanding collateralized letters of credit under the New LOC Facility (December 31, 2013 - $516.8 million under the LOC Facility).
On December 18, 2014, Aspen Bermuda and Citi Europe entered into an amended and restated pledge agreement (“pledge agreement”) to, among other things, (i) change the types of securities or other assets that qualify as collateral pledged under the pledge agreement, (ii) provide Aspen Bermuda the right to give certain directions or entitlement orders to The Bank of New
York Mellon (“BNY Mellon”), as securities intermediary, relating to the collateral without the consent of Citi Europe provided certain conditions are satisfied, (iii) provide Citi Europe, subject to the provisions set forth in the amended and restated account control agreement, dated December 18, 2014 (the “control agreement”), among Aspen Bermuda, Citi Europe and BNY Mellon, with the right and power to exercise exclusive control over the accounts set forth in the control agreement and (iv) provide a schedule of currency margins such that if the collateral is denominated in a currency other than the credit currency the collateral shall be reduced by a specified percentage.
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 extends 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, 2014, we had $5.0 million of outstanding collateralized letters of credit under this facility (December 31, 2013 - $18.9 million). We did not extend the maturity date of the Barclays Bank PLC 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, 2014:
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 2014, non-recurring items included costs associated with defending the unsolicited approach from Endurance in the amount of $28.5 million for the twelve months ended December 31, 2014. 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 which matured 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.