We lease office space in Hamilton, Bermuda where we are headquartered. In addition, the Company and its subsidiaries lease office space in the United States, the United Kingdom, Australia, France, Germany, Ireland, Singapore, Switzerland and the United Arab Emirates. We renew and enter into leases in the ordinary course of business as required. We believe our current facilities and the leaseholds with respect thereto are sufficient for us to conduct our operations for the foreseeable future. For more information on our leasing arrangements, please refer to Note 19(b) of our consolidated financial statements, “Commitments and Contingent Liabilities - Operating leases.”
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, 2017, 2016, 2015, 2014 and 2013 and the balance sheet data as of December 31, 2017, 2016, 2015, 2014 and 2013 are derived from our audited consolidated financial statements. The consolidated financial statements as of December 31, 2017, and for each of the twelve months ended December 31, 2017, 2016 and 2015, and the report thereon of KPMG LLP, 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 65,546,976, 62,017,368, 60,918,373, 59,774,464 and 59,474,085 as at December 31, 2013, 2014, 2015, 2016 and 2017, respectively.
Business Portfolio Optimization. In 2017, we launched a comprehensive program to enhance operating effectiveness and efficiency across our organization and enhance our market position (the “Effectiveness and Efficiency Program”). The Effectiveness and Efficiency Program is intended to allow us to be a more nimble organization with faster decision-making ability and a more competitive expense ratio.
In our insurance segment, we experienced a significant underwriting loss due to a combination of catastrophe losses and an increased incidence of large losses and attritional losses. Gross written premium for the insurance segment was $1.81 billion in 2017, an increase of 4.5% from 2016. Our combined ratio in insurance was 117.9% in 2017 compared to 99.6% in 2016.
In our reinsurance segment, our results were dominated by the significant level of natural catastrophe losses primarily in the U.S. Gross written premium for the reinsurance segment for 2017 was $1.55 billion, an increase of 9.6% from 2016, with growth primarily in specialty lines. The combined ratio was 125.1% in 2017 compared to 90.0% in 2016.
On December 18, 2017, the Company acquired through its wholly-owned subsidiary, Aspen U.S. Holdings, a 23.2% share of Crop Re Services LLC (“Crop Re”), a newly formed U.S.-based subsidiary of CGB Diversified Services, Inc (“CGB DS”) in exchange for the sale of AG Logic Holdings, LLC and its affiliates (“AgriLogic”), the Company’s U.S. crop insurance business. For further information regarding this transaction, see Note 6 of our consolidated financial statements, “Investments.”
Total ceded written premiums in 2017 increased by $595.1 million compared to 2016. Ceded written premiums increased in both our insurance and reinsurance segments due to the purchase of a whole account quota share contract. Ceded reinsurance premiums increased for our insurance segment due to the restructure of our ceded reinsurance arrangements through the use of significant quota share reinsurance arrangements and the recognition of ceded premiums to reinstate cover following catastrophe and other large losses. Ceded premiums also increased in the reinsurance segment due to increased gross written premiums written in conjunction with increased retrocession to third parties, an increase in ceded reinsurance premiums following the sale of AgriLogic in December 2017 and due to the recognition of additional ceded premiums as a result of reinstating cover following catastrophe losses.
On January 3, 2017, we also elected to redeem all of the outstanding 7.401% Preference Shares. Each holder of a 7.401% Preference Share received $25 per 7.401% Preference Share, plus any declared and unpaid dividends. We likewise elected to redeem all of the outstanding 7.250% Preference Shares on July 3, 2017. Each holder of a 7.250% Preference Share received $25 per 7.250% Preference Share, plus any declared and unpaid dividends.
The following overview of our 2017, 2016 and 2015 operating results and financial condition is intended to identify important themes and should be read in conjunction with the more detailed discussion further below.
Net favorable development on prior year loss reserves of $105.4 million, or 4.6 combined ratio points, for 2017 compared with $129.3 million, or 4.9 combined ratio points, for 2016, and $156.5 million, or 6.3 combined ratio points, for 2015.
Gross written premiums. The changes in our segments’ gross written premiums for the twelve months ended December 31, 2017, 2016 and 2015 were as follows:
Ceded written premiums increased by 57.6% in 2016 compared to 2015 as a result of new business opportunities written in conjunction with an increase in retrocession, and as a result of a restructure of our ceded reinsurance arrangements aimed at reducing earnings volatility and benefiting the expense ratio through an increase in over-rider commissions.
Overall reserve releases in 2017 decreased by $23.9 million compared to 2016 mainly due to an $18.7 million decrease in net reserve releases in our insurance segment from $42.3 million in 2016 to $23.6 million in 2017. Overall reserve releases in 2016 reduced by $27.2 million compared to 2015 due mainly to a $23.4 million decrease in net reserve releases in our insurance segment from $65.7 million in 2015 to $42.3 million in 2016. Reserve releases in our reinsurance segment in 2015 decreased from $90.8 million in 2015 to $87.0 million in 2016. Further information relating to the release of reserves can be found below under “- Reserves for Losses and Loss Adjustment Expenses - Prior Year Loss Reserves.”
Taxes. We recognized a tax credit in 2017 of $15.4 million (2016 - $6.1 million expense; 2015 - $14.4 million expense), equivalent to a consolidated rate on our loss before tax of 5.5% in 2017 compared to a consolidated rate on our profit before tax of 2.9% in 2016 and 4.3% in 2015. The income tax credit for 2017 takes into account a tax credit associated with the adoption of ASU 2016-09, “Compensation - Stock Compensation” and a tax credit regarding deductions available for certain research and development expenditure. The tax credit in 2017 has not been materially affected by the U.S. Tax Cuts and Jobs Act which was
Shareholders’ equity and financial leverage. Total shareholders’ equity decreased by $719.8 million from $3,648.3 million as at December 31, 2016 to $2,928.5 million as at December 31, 2017. The most significant movements were:
the repurchase of 648,941 ordinary shares for $30.0 million through open market and other repurchases.
As at December 31, 2017, our total shareholders’ equity included Preference Shares with a total value as measured by their respective liquidation preferences of $525.0 million (2016 - $818.2 million) less issue costs of $13.1 million (2016 - $21.1 million).
Management monitors the ratio of the total of debt and hybrids to total capital, with total capital being defined as shareholders’ equity plus outstanding debt and excluding loan notes issued by variable interest entities. As at December 31, 2017, the debt to capital ratio was 15.8% (2016 - 13.1%). The ratio increased due to the reduction in our retained earnings as a result of the increase in catastrophe losses impacting both our insurance and reinsurance segments, an increased frequency of large and attritional losses in our insurance segment and the redemption of the 7.401% Preference Shares and 7.250% Preference Shares in 2017. The 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 30.5% as at December 31, 2017 (2016 - 32.1%). The ratio reduced due to the redemption of the 7.401% Preference Shares and 7.250% Preference Shares in 2017.
Diluted book value per ordinary share as at December 31, 2017 was $40.10, a decrease of 14.2% compared to $46.72 as at December 31, 2016. Book value per ordinary share is based on total shareholders’ equity, less preference shares (liquidation preference less issue expenses) and non-controlling interests, divided by the number of ordinary shares in issue at the end of the period.
Overall, the rate environment has improved in both our reinsurance and insurance segments following one of the costliest years of catastrophe losses on record in 2017.
Following the large catastrophe losses in 2017, we continue to seek to balance our insurance portfolio and to target the best risk-adjusted returns. As a result, we expect to reduce our exposure to major property accounts that contain considerable catastrophe accumulations. As a result of the increased frequency of large and attritional losses in our insurance segment in 2017, we have likewise taken a more risk-averse view by retaining less risk and ceding more premiums with the aim to stabilize earnings. We have also significantly reduced our voluntary participation into our internal reinsurance vehicle. As a result of these actions, we expect our net written premium to gross written premium ratio to reduce to 60% in 2018.
We continue to expect that our Effectiveness and Efficiency Program will deliver savings of approximately $30 million in 2018, $55 million in 2019 and $75 million in 2020, after which run-rate savings are expected to be approximately $80 million per year. As a result of the Effectiveness and Efficiency Program, we expect our total expense ratio to continue to decline over the next three years.
In addition, we expect the recently enacted U.S. Tax Cuts and Jobs Act of 2017 to have a modest impact on the amount of tax that we will pay. We expect that the U.S. tax bill will decrease net income by approximately $10 million or more in 2018 although the ultimate impact will depend on where our profits are generated.
On January 5, 2018, we notified the Prudential Regulation Authority of our intention to close Aspen U.K.’s branches in Paris, France and Cologne, Germany. We expect these branches to be closed during the first quarter of 2018.
During January 2018, we sold $206.9 million of equity securities from our investment portfolio and realized a net gain of $36.7 million.
receivable initially and update our premium estimates regularly throughout the contract term based on treaty statements received from the ceding company.
Property treaty pro rata made a significant contribution to our reinsurance segment where we wrote $242.5 million in gross written premium in 2017 (2016 - $226.7 million), or 15.7% of the gross written premium in our reinsurance segment, of which $76.6 million was estimated (2016 - $53.1 million) and $165.9 million was reported by the cedants (2016 - $173.6 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 / decrease in our estimated gross written premiums in our property treaty pro rata business would increase / decrease net income before tax by approximately $0.3 million for the year ended December 31, 2017 (2016 - $0.1 million increase /decrease).
We are required by U.S. GAAP to establish loss reserves for the estimated unpaid portion of the ultimate liability for losses and loss expenses (“ultimate losses”) under the terms of our policies and agreements with our insured and reinsured customers. Our loss reserves comprise the following components:
Prior to the selection of the reserves to be included in our financial statements, our actuarial team employs a number of techniques to establish a range of estimates from which they consider it reasonable for management to select a ‘best estimate’ (the “actuarial range”).
Sources of Information. Claims information received typically includes the loss date, details of the claim, the recommended reserve and reports from the loss adjusters dealing with the claim. In respect of pro rata treaties and any business written through managing general agents, we receive regular statements (bordereaux) which provide paid and outstanding claims information, often with large losses separately identified. Following widely reported loss events, such as catastrophes and airplane crashes, we adopt a proactive approach to establish our likely exposure to claims by reviewing policy listings and contacting brokers and policyholders as appropriate.
are not additive and should be considered separately. The following tables vary the assumptions employed therein independently. In addition, the tables below do not adjust any parameters other than the ones described above.
Net reserve for losses and loss expenses as at December 31, 2017 - Sensitivity to loss emergence patterns
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, 2017, 2016 and 2015.
Gross written premiums. The following table analyzes the overall change in gross written premiums for our two business segments in the twelve months ended December 31, 2017, 2016 and 2015:
Ceded written premiums. The following table analyzes the overall change in ceded written premiums for our two business segments in the twelve months ended December 31, 2017, 2016 and 2015:
Total ceded written premiums in 2017 increased by $595.1 million compared to 2016. Ceded written premiums increased in both segments in part due to the purchase of a whole account quota share contract. Ceded reinsurance premiums increased for our insurance segment due to the restructure of our ceded reinsurance arrangements though the use of significant quota share reinsurance arrangements and the recognition of ceded premiums to reinstate cover following catastrophe and other large losses. Ceded reinsurance premiums also increased for our reinsurance segment due to increased reinsurance for our property catastrophe and other property business lines due to new business opportunities which were written in conjunction with an increase in retrocession, an increase in ceded reinsurance premiums following the sale of AgriLogic in December 2017 and due to the recognition of additional ceded premiums as a result of reinstating cover following catastrophe losses. Due to these changes, the retention ratio, which is defined as net written premium as a percentage of gross written premium, decreased from 82.4% in 2016 to 65.8% in 2017.
Net premiums earned. The following table analyzes the overall change in net premiums earned for our two business segments in the twelve months ended December 31, 2017, 2016 and 2015:
The loss ratio for 2016 of 59.8% increased by 4.6 percentage points compared to 2015. Losses and loss adjustment expenses increased from $1,366.2 million in 2015 to $1,576.1 million in 2016 due to an increase in large and catastrophe losses, changes in business mix towards lines which have higher non-catastrophe loss ratios and a reduction in reserve releases. In 2016, net losses from major catastrophes increased by $75.9 million to $166.4 million compared with $90.5 million in 2015. Large losses in 2016 included $32.7 million of energy-related losses, $11.8 million of fire-related losses and a $4.2 million aviation loss.
In the reinsurance segment, the loss ratio for 2017 was 92.6% compared to 55.7% in 2016 largely due to a $352.5 million increase in catastrophe losses, a $25.3 million increase in large losses and a $5.2 million decrease in reserve releases. In 2017, we experienced $467.3 million of catastrophe losses, net of reinsurance recoveries, associated with Hurricanes Harvey, Irma and Maria, wildfires in California, earthquakes in Mexico and other weather-related events in the U.S. and Australia. In the comparable period in 2016, we experienced $114.8 million of natural catastrophe losses, net of reinsurance recoveries, associated with wildfires in Canada, earthquakes in Japan and Taiwan, Hurricane Matthew and other weather-related events in the U.S. and Europe.
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 2017 catastrophe losses as losses associated with Hurricanes Harvey, Irma and Maria, the earthquakes in Mexico, a tornado in Mississippi, Cyclone Debbie in Australia, wildfires in California and other U.S. weather-related events. We have defined major 2016 catastrophe losses as losses associated with wildfires in North America, Hurricane Matthew and other weather-related events in the U.S., several earthquakes and a hailstorm in the Netherlands. We have defined major 2015 catastrophe losses as losses associated with winter storms in Europe, Australia and New Zealand, storms in the U.S., U.S. wildfires, the Chilean earthquake, U.K. floods and weather-related events in the Philippines.
The decrease in the policy acquisition expense ratio, gross of the effect of reinsurance, to 18.6% in 2017 from 18.9% in 2016 is due to a reduction in profit commission accruals in the insurance segment partially offset by an increase in the acquisition ratio in the reinsurance segment due to an increase in profit commission accruals and the prior year benefiting from FET refunds.
General, administrative and corporate expenses increased by $12.1 million from $490.1 million in 2016 to $502.2 million in 2017 due to $15.2 million of costs associated with the Effectiveness and Efficiency Program, and increased costs associated with growth in our insurance business, partially offset by lower provisions for performance-related remuneration. General, administrative and corporate expenses increased by $66.1 million from $424.0 million in 2015 to $490.1 million in 2016 due to costs associated with AgriLogic which we acquired in January 2016 and subsequently sold in December 2017, costs associated with growth in our insurance and reinsurance business and reorganization costs.
Investment gains. Total net realized and unrealized investment gains for the twelve months ended December 31, 2017 were $120.5 million (2016 - losses of $45.2 million; 2015 - losses of $17.0 million).
Net investment income. In 2017, we generated net investment income of $189.0 million, an increase of 1.0% on the prior year (2016 - $187.1 million, 2015 - $185.5 million). The increase was primarily due to the increase in the book yield of the fixed income portfolio despite a reduction in dividend income following the sale of a portion of our equity portfolio in the third quarter of 2017. The increase in investment income in 2016 compared with 2015 was primarily due to an increase in invested assets.
The increase in corporate and non-operating expenses in 2017 compared to 2016 was due to $15.2 million of costs associated with implementing the Effectiveness and Efficiency Program and higher salary costs due to increased headcount as a result of growth in our insurance and reinsurance business, partially offset by reductions in performance-related remuneration provisions. The increase in corporate and non-operating expenses in 2016 compared to 2015 was due to higher salary costs due to increased headcount as result of growth in our insurance and reinsurance business and reorganization costs.
We are organized into two business segments: reinsurance and insurance. The Company has determined its reportable segments, Aspen Insurance and Aspen Re, by taking into account the manner in which management makes operating decisions and assesses
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 predominantly based on each segment’s proportional share of gross earned premiums.
Non-underwriting disclosures. We provide additional disclosures for corporate and other (non-underwriting) income and expenses. Corporate and other income and expenses include net investment income, net realized and unrealized investment gains or losses, expenses associated with managing the Group, certain strategic and non-recurring costs, changes in fair value of derivatives and changes in fair value of loan notes issued by variable interest entities, interest expense, net realized and unrealized foreign exchange gains or losses and income taxes, which are not allocated to the business segments. Corporate expenses are not allocated to our business segments as they typically do not fluctuate with the levels of premiums written and are not directly related to our segment operations.
We do not allocate our assets by segment as we evaluate underwriting results of each segment separately from the results of our investment portfolio. Segment profit or loss for each of our operating segments is measured by underwriting profit or loss. See Note 5 of our consolidated financial statements, “Segment Reporting” for information on gross and net premiums written and earned, underwriting results, and combined ratios and reserves for each of our business segments.
Our reinsurance segment consists of property catastrophe, other property reinsurance, casualty and specialty reinsurance. For a more detailed description of this segment, see Part I, Item 1, “Business - Business Segments - Reinsurance” and Note 5 of our consolidated financial statements, “Segment Reporting.”
The increase in property catastrophe reinsurance gross written premiums was primarily due to $22.2 million of reinstatement premiums associated with catastrophe losses recognized in 2017 partially offset by premium reductions due to challenging market conditions and downward revisions on premium estimates. The increase in other property reinsurance gross written premiums was largely due to reductions in premium estimates for proportional contracts in the comparative period. Gross written premiums in casualty reinsurance decreased slightly due to reductions in U.S. casualty treaty business lines. The increase in gross written premiums in specialty reinsurance was predominantly due to growth in agriculture insurance business, as well as growth in engineering and cyber business lines.
Ceded written premiums. Total ceded written premiums in 2017 was $298.5 million, an increase of $154.5 million compared to 2016. Ceded written premiums increased across all lines of business due to the purchase of a whole account quota share contract in the first quarter of 2017. The increase in ceded written premiums in property catastrophe and other property reinsurance was due to new business opportunities which were written in conjunction with an increase in retrocession. Ceded written premiums also increased in property catastrophe and other property reinsurance due to the recognition of ceded costs to reinstate cover following catastrophe losses. The increase in ceded written premiums in specialty reinsurance was due to an increase in retrocession costs following the sale of our agriculture business in December 2017. Total ceded written premiums in 2016 was $144.0 million, an increase of $48.6 million compared to $95.4 million in 2015. The largest increase in ceded written premiums in 2016 was in specialty reinsurance as a result of increased retrocession costs following the acquisition of AgriLogic in January 2016 and in property catastrophe reinsurance due to new business opportunities which were written in conjunction with an increase in retrocession costs.
Net premiums earned. Net premiums earned increased by $24.2 million, or 2.0%, in 2017 compared to 2016 largely due to increased business written in specialty reinsurance and inwards reinstatement premiums associated with catastrophe losses, partially offset by increased ceded costs. Net premiums earned increased by $109.3 million, or 10.2%, in 2016 compared to 2015 largely due to increased business written in specialty reinsurance and casualty reinsurance, partially offset by increased ceded costs in specialty reinsurance and property catastrophe reinsurance lines.
The loss ratio in 2016 of 55.7% increased compared to 45.8% in 2015 mainly due to an increase in catastrophe losses of $65.2 million, changes in business mix towards lines which have higher non-catastrophe ratios and a $3.8 million decrease in prior year reserve releases. In 2016, our reinsurance segment experienced $114.8 million of catastrophe losses, including $35.4 million from the wildfires in Canada, $10.5 million from an earthquake in New Zealand, $9.3 million from Hurricane Matthew, $8.5 million from an earthquake in Japan, $9.2 million from U.S wildfires, $5.0 million from a hailstorm in the Netherlands, $2.3 million from an earthquake in Taiwan and $31.2 million from U.S. weather-related events.
Policy acquisition, general and administrative expenses. Amortization of deferred policy acquisition costs were $235.5 million for the twelve months ended December 31, 2017, equivalent to 19.5% of net premiums earned (2016 - $226.4 million or 19.2% of net premiums earned; 2015 - $224.7 million or 20.9% of net premiums earned). The increase in the acquisition ratio is due to an increase in profit commission accruals and the prior period benefiting from FET refunds. The decrease in policy acquisition expense ratio in 2016 compared with 2015 was due to FET refunds and changes in business mix towards agriculture and specialty marine business lines, which have lower average commission rates, and away from other property, casualty and specialty business written on a pro rata basis which have higher average commission rates.
Our general and administrative expenses decreased by $20.9 million from $178.2 million in 2016 to $157.3 million in 2017. Our general and administrative expense ratio was 13.0% in 2017 compared to 15.1% in 2016 due to a lower provision for performance-related remuneration. Our general and administrative expense ratio of 15.1% in 2016 increased from 13.7% in 2015 due predominantly to costs associated with AgriLogic.
The decrease in gross written premiums in 2016 compared to 2015 in property and casualty insurance was largely attributable to reductions in our global casualty, U.S. casualty and U.S. environmental business lines, partially offset by growth in our U.S. excess casualty and railroad insurance business lines. The decrease in gross written premiums in marine, aviation and energy insurance was largely due to challenging market conditions in our marine and energy liability, U.S. inland marine, offshore energy, and energy and construction insurance business lines, partially offset by growth in our ocean cargo and aviation insurance business lines. The increase in gross written premiums in financial and professional lines insurance was largely attributable to growth in our accident and health, credit and political risks, management liability and financial institutions business lines.
Ceded reinsurance for 2016 was $409.3 million, an increase of $153.6 million from 2015. Ceded reinsurance increased across all our business lines because we restructured our ceded reinsurance arrangements to seek to reduce volatility and benefit the expense ratio. In addition, we purchased an adverse development cover in the fourth quarter of 2016 for certain casualty business which we ceased to underwrite.
In 2016, the insurance segment experienced $51.6 million of catastrophe losses, consisting of $39.9 million associated with U.S. weather-related events and $11.7 million from Hurricane Matthew. Large losses experienced during 2016 included $32.7 million of energy-related losses, $11.8 million of fire-related losses and a $4.2 million aviation loss.
In 2015, the insurance segment experienced $40.9 million of catastrophe losses, consisting of $25.7 million associated with U.K. floods and $15.2 million associated with U.S. storms. Large losses included $37.6 million of energy losses, $10.0 million associated with a dam collapse in Brazil and $3.0 million associated with the port explosion in Tianjin, China.
In 2017, there were reserve releases of $23.6 million compared to $42.3 million of reserve releases in 2016. The reserve releases were principally from our marine, aviation and energy business lines which included an additional $15.4 million reinsurance recovery in respect of an offshore energy-related loss that occurred in Africa which offset adverse development in property and casualty insurance and financial and professional lines insurance. The reserve releases in 2016 were predominantly from marine, energy and aviation insurance and financial and professional lines insurance offsetting adverse development in our property and casualty insurance. Prior year reserve releases are further discussed under “Reserves for Losses and Loss Adjustment Expenses.”
Our general and administrative expenses increased by $25.5 million to $253.9 million in 2017 from $228.4 million in 2016. Our general and administrative expense ratio was 23.1% in 2017 compared to 15.7% in 2016 due predominantly to costs associated with growth in the business. General and administrative expenses of $228.4 million in 2016 increased from $213.6 million in 2015 largely due to costs associated with growth in the business.
As at December 31, 2017, we had investments in four entities classified as other investments, equity method: a micro-insurance incubator (“MVI”), Bene Assicurazioni (“Bene”), Digital Risk Resources, LLC (“Digital Re”) and Crop Re Services LLC (“Crop Re”). For further information regarding these investments, see Note 6 of our consolidated financial statements, “Investments.”
The composition of our cash and investments as at December 31, 2017 and 2016 is summarized below:
Sub-prime securities. We define sub-prime related investments as those supported by, or containing, sub-prime collateral based on creditworthiness. We do not invest directly in sub-prime related securities.
Valuation of Other Investments, Equity Method. The value of our investments in MVI, Chaspark, Bene, Digital Re and Crop Re are based on our share of the capital position of the entities which includes income and expenses reported in quarterly management accounts. Each of MVI, Chaspark, Bene, Digital Re and Crop Re is subject to annual audit evaluating the financial statements of the entities. We periodically review the management accounts of MVI, Chaspark, Bene, Digital Re and Crop Re and evaluate the reasonableness of the valuation of our investment.
Reserves by segment. As at December 31, 2017, we had total net loss and loss adjustment expense reserves of $5,234.3 million (December 31, 2016 - $4,759.2 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 $6,749.5 million at the balance sheet date of December 31, 2017, a total of $3,720.8 million, or 55.1%, represented IBNR claims (December 31, 2016 - $3,044.9 million and 57.2%, respectively). The following tables analyze gross and net loss and loss adjustment expense reserves by business segment as at December 31, 2017 and 2016, respectively:
Prior year loss reserves. For the twelve months ended December 31, 2017, there was an overall reduction in our estimate of ultimate net claims to be paid in respect of prior accident years. An analysis of this reduction by business segment is as follows for each of the twelve months ended December 31, 2017, 2016 and 2015:
For the twelve months ended December 31, 2017. The analysis of the development by each segment is as follows:
Reinsurance. Net reserve releases of $87.0 million in 2016 were attributable to all lines of business. The largest releases in the period were $39.7 million from other property reinsurance lines, $18.9 million from specialty reinsurance lines and $14.9 million from casualty reinsurance lines due to better than expected claims development.
We do not consider the Loan Notes issued by Silverton to be part of our permanent capital as the noteholders have no recourse to the other assets of the Company.
As at December 31, 2017, total shareholders’ equity was $2,928.5 million compared to $3,648.3 million as at December 31, 2016. Our total shareholders’ equity as at December 31, 2017 includes two classes of preference shares with a total value as measured by their respective liquidation preferences of $511.9 million net of share issuance costs (December 31, 2016 - $797.1 million, four classes of preference shares).
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. Such securities are often referred to as “hybrids” as they have certain attributes of both debt and equity. We also monitor the ratio of the total of debt and hybrids to total capital which was 30.5% as of December 31, 2017 (December 31, 2016 - 32.1%).
Our senior notes were the only material debt issued by Aspen Holdings as at December 31, 2017 and 2016 of $549.5 million and $549.3 million, respectively.
On April 26, 2017, we announced a 9% increase in our quarterly dividend to our ordinary shareholders from $0.22 per ordinary share to $0.24 per ordinary share.
For the twelve months ended December 31, 2017, we repurchased 648,941 ordinary shares in open market repurchases for a total consideration of $30.0 million at an average price of $46.23 per ordinary share. As at December 31, 2017, we had $220.0 million remaining under our $250.0 million share repurchase authorization program.
On April 21, 2016, we announced a 5.0% increase in our quarterly dividend to our ordinary shareholders from $0.21 per ordinary share to $0.22 per ordinary share.
On September 20, 2016, we issued the 5.625% Preference Shares for total net proceeds of $241.3 million, consisting of $250.0 million of total liquidation preference less $8.7 million of issue expenses. The 5.625% Preference Shares have no stated maturity but are callable at our option on or after the 10 year anniversary of the date of issuance.
For the twelve months ended December 31, 2016, we acquired and canceled a total of 1,595,076 ordinary shares in open market repurchases. We paid a total consideration of $75.0 million and an average price of $47.02 per ordinary share for the twelve months ended December 31, 2016. As at December 31, 2016, we had $341.3 million remaining under our then existing $500.0 million share repurchase authorization program.
Access to capital. Our business operations are in part dependent on our financial strength, the opinions of the independent rating agencies thereof as discussed elsewhere in this report and the market’s perception thereof, as measured by total shareholders’ equity, which was $2,928.5 million as at December 31, 2017 (December 31, 2016 - $3,648.3 million). We believe our financial strength provides us with the flexibility and capacity to obtain funds through debt or equity financing. Our continuing ability to access the capital markets is dependent on, among other things, our operating results, market conditions and our perceived financial strength. See “Risk Factors - We may repurchase additional capital in the future, which may not be available of may only be available on unfavourable terms.” We regularly monitor our capital and financial position, as well as investment and securities market conditions, both in general and with respect to Aspen Holdings’ securities. Our ordinary shares and all our preference shares are listed on the NYSE.
During the year ended December 31, 2017, Aspen Holdings received dividends of $360.0 million (2016 - $234.5 million) from Aspen Bermuda and $13.6 million (2016 - $63.4 million) from Aspen European. In addition, Aspen Holdings received $18.7 million in respect of an intercompany loan from Aspen European (2016 - $21.6 million).
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. In line with common market practice for regulated institutions, the PRA previously requested that it be afforded with the opportunity to provide a “non-objection” prior to all future dividend payments made by Aspen U.K. In 2017, the PRA stated that they no longer routinely require Aspen U.K. to apply for a non-objection to dividends provided that such dividend payment and Aspen U.K.’s subsequent capital position are within Aspen U.K.’s board-approved solvency capital risk appetite. 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.”
Operating Subsidiaries. As at December 31, 2017, the Operating Subsidiaries held $821.7 million (December 31, 2016 - $1,409.3 million) in cash and short-term investments that are readily realizable securities. The reduction is largely due to the costs associated with the increase in ceded reinsurance and the significant level of claims activity in 2017. Management monitors the value, currency and duration of cash and investments held by its Operating Subsidiaries to ensure they are able to meet their insurance and other liabilities as they become due and, despite the year-on-year decrease, was satisfied that there was a comfortable margin of liquidity as at December 31, 2017 and for the foreseeable future.
The liquidity of our Operating Subsidiaries is also affected by the terms of our contractual obligations to policyholders and by undertakings to certain regulatory authorities to facilitate the issue of letters of credit or maintain certain balances in trust funds for the benefit of policyholders. The following table shows the forms of collateral or other security provided in respect of these obligations and undertakings as at December 31, 2017 and December 31, 2016:
Consolidated cash flows for the twelve months ended December 31, 2015. Total net cash flow from operations for the twelve months ended December 31, 2015 was $574.2 million, a decrease of $33.2 million from the equivalent period in 2014. For the
The following table summarizes our contractual obligations (other than our obligations to employees and our Preference Shares) under long-term debt, operating leases (net of subleases) and reserves relating to insurance and reinsurance contracts as at December 31, 2017:
As at December 31, 2017, we were not party to any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K, to which an entity unconsolidated with us is a party that management believes is reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that we believe is material to investors.
Inflation may have a material effect on our consolidated results of operations by its effect on interest rates and on the cost of settling claims. The potential exists after a catastrophe or other large property loss, such as the hurricanes in 2017, for the development of inflationary pressures in a local economy as the demand for services, such as construction, typically surges. The cost of settling claims may also be increased by global commodity price inflation. We seek to take both these factors into account when setting reserves for any events where we think they may be material.
We also seek to take into account the projected impact of inflation on the likely actions of central banks in the setting of short-term interest rates and consequent effects on the yields and prices of fixed interest securities. As at February 2018, although inflation is currently low, we consider that in the medium-term there is a risk that inflation, interest rates and bond yields may rise, resulting in a decrease in the market value of certain of our fixed interest investments. See “Risk Factors - Our results of operations and investment portfolio may be materially affected by conditions impacting the level of interest rates in the global capital markets and major economies, such as central bank policies in interest rates and the rate of inflation.”
Adjusted diluted book value per ordinary share, a non-U.S. GAAP measure, is calculated by deducting from total shareholders’ equity the total of: accumulated other comprehensive income; the value of preference shares less issue expenses; the share of equity due to non-controlling interests; and adding back ordinary dividends. The resulting balance is then divided by the diluted number of ordinary shares as at the year end. We believe that adding back ordinary dividends provides a more consistent and useful measurement of total shareholder value, which supplements U.S. GAAP information. We have excluded accumulated other comprehensive income, net of taxes, as unrealized appreciation (depreciation) on investments is primarily the result of interest rate movements and the resultant impact on fixed income securities, and unrealized appreciation (depreciation) on foreign exchange is the result of exchange rate movements between the U.S. Dollar and the functional currencies of our Operating Subsidiaries. Therefore, we believe that excluding these unrealized appreciations (depreciations) provides a more consistent and useful measurement of operating performance, which supplements U.S. GAAP information.