We also have smaller serviced or leased office space in other U.K. and U.S. locations. In addition, our international offices for our subsidiaries include locations with leased office space in Paris, Zurich, Geneva, Singapore, Dubai, Cologne and Dublin. We believe that our office space is sufficient for us to conduct our operations for the foreseeable future in these locations. For more information on our leasing arrangements, please refer to Note 20(b) of our consolidated financial statements, “Commitments and Contingent Liabilities - Operating leases.”
Including cash within consolidated variable interest entities of $243.3 million as at December 31, 2015 and $176.7 million as at December 31, 2014.
In 2015, the insurance industry, including us, continued to be challenged as a result of the impact of rate reductions across many lines of business in both insurance and reinsurance and the continuing low investment returns. We are pleased with our overall results for 2015 which delivered a strong return on equity of 10.0% for 2015 compared to 11.1% for 2014 and a 1.9% growth in diluted book value per share. We achieved this through our continued focus on our three strategic levers - business portfolio optimization, capital efficiency and enhancing investment returns.
Business Portfolio Optimization. We made continued strong progress on our business optimization initiatives in 2015. We further diversified our business, both by product and geography, expanding our reinsurance and insurance operations, respectively, into markets including Australia and Singapore.
In our insurance segment, our U.S. insurance teams continued to gain scale, with premiums from our U.S. teams growing by more than 14% over the prior year. We expanded into Singapore, grew our property operations in Bermuda and Chicago, and launched Aspen Starr Property, a joint underwriting initiative with Starr Companies that began writing European property business in the second half of the year. We launched our broadened railroad offering and further developed our environmental and excess casualty businesses. Late in the year, we started the rollout of our global insurance product lines with the launch of our global accident and health business.
Elsewhere, we also continue to target select markets where we have the expertise and creativity to help provide our clients with solutions to complex risks. There are areas where rates are under pressure but there are other areas where the rating environment is not as stressed that we have targeted such as data protection liability, credit and political risks and warranty and indemnity. As a result, gross written premium for the insurance segment increased by 1.1%, with growth in property and casualty and financial and professional lines and primarily driven by the U.S. teams. Our combined ratio in insurance was 96.1% in 2015 compared to 96.2% in 2014.
In our reinsurance segment, we have also diversified by product line, significantly increasing our specialty and other property lines while reducing our exposure to property catastrophe, particularly through our Aspen Capital Markets business. Our premium increased over the prior year, having demonstrated our strong relationships in the market and relevance as we are continually shown specific larger attractive opportunities and have had success with our renewal levels and an increase in submission flow.
Notwithstanding the influx of third party capital into the reinsurance market and rate pressures, in particular in property catastrophe, we were able to benefit both through Aspen Capital Markets and our clients who buy meaningful amounts of reinsurance and chose to concentrate their purchases with fewer, larger reinsurers, including us. Our Aspen Capital Markets team effectively leveraged Aspen Re’s underwriting expertise to continue to provide investors with access to diversified natural catastrophe risk backed by Aspen Re’s existing underwriting franchise, thereby growing our use of third party capital and alternative reinsurance structures. Silverton, our sidecar, was established in 2013 to provide quota share support to Aspen Re’s global property catastrophe excess of loss reinsurance business in light of these objectives. Silverton raised $65.0 million (of which $50.0 million was raised from third parties) in 2013 and this increased to $85.0 million (of which $70.0 million was raised from third parties) in 2014. In 2015, Silverton further increased this to $125.0 million (of which $100.0 million was raised by third parties).
We also continued to focus on growth in regional areas. In particular, we targeted growth in international markets such as Asia Pacific, Middle East and Africa and Latin America. These markets have a number of opportunities which we were able to capitalize on using our regional offices. In 2015, we grew 4% in our emerging markets which accounted for approximately 19% of our reinsurance segment. We saw an opportunity to improve the solutions being offered to mid-western and smaller U.S. clients and as a result, we advanced our U.S. regional reinsurance strategy by strengthening our underwriting team and dedicating additional resources and capital to this opportunity. We also wrote a limited number of specific large contracts in areas that are attractive to us.
The reinsurance segment’s gross written premium in 2015 was $1.25 billion, an increase of over 6% from 2014, with growth primarily in specialty and other property. The combined ratio was 80.4% in 2015 compared to 77.6% in 2014, driven primarily by higher acquisition costs associated with pro rata business.
Investment Management. We follow an investment strategy designed to emphasize the preservation of capital and provide sufficient liquidity for the prompt payment of claims. As of December 31, 2015, our investments consisted of a diversified portfolio of fixed income securities, global equities and money market funds. Our overall portfolio strategy remains focused on high quality fixed income investments. In keeping with our strategy of improving long term investment returns and in light of the ongoing low interest rate environment, in 2013 we invested in a $200.0 million BBB Emerging Market Debt portfolio, which is reported in corporate and foreign government securities and in 2014 we adjusted our asset allocation by increasing our equity exposures by $240.0 million, of which $80.0 million was invested in our global equity strategy and $160.0 million was invested in a minimum volatility equity portfolio. In 2014, we maintained an 8.5% position in equities, a 1.0% position in BB Bank Loans and a 2.5% position in BBB Emerging Market Debt. In November 2015, we liquidated the majority of our BB Bank Loan portfolio and received net proceeds of $82.5 million. Proceeds from the sales were reinvested into the BBB Emerging Market Debt portfolio. As at December 31, 2015, we had an 8.7% position in equities, a 3.5% position in BBB Emerging Market Debt and a 0.4% in risk asset portfolio cash. As a result, our investments in equities, BBB Emerging Market Debt and risk portfolio cash consisted of approximately 12.6% of our Managed Portfolio (2014 - 12.5%).
Gross written premiums of $2,997.3 million in 2015, an increase of 3.3% compared with 2014 and 13.2% compared to 2013.
Combined ratio of 91.9% for 2015, including $90.5 million, or 3.7 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements, compared with 91.7% for 2014, which included $65.5 million or 2.7 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements and 92.6% for 2013, which included 4.7 percentage points of pre-tax catastrophe losses, net of reinsurance and reinstatements. Excluding the charge in 2014 attributable to defending the unsolicited approach and an inadequate offer by Endurance Specialty Holdings Limited (“Endurance”), the combined ratio was 90.5%.
Gross written premiums. The changes in our segments’ gross written premiums for the twelve months ended December 31, 2015, 2014 and 2013 are as follows:
Gross written premiums increased by 3.3% in 2015 when compared to 2014 predominantly due to our reinsurance lines, with growth from our other property and specialty reinsurance business lines offsetting planned reductions in property catastrophe lines. Premiums from our insurance segment increased due to growth principally in our U.S. and U.K. property
In 2015, premiums from our reinsurance segment increased by 6.5% when compared to 2014 across all business lines with the exception of property catastrophe reinsurance. The increase is mainly attributable to increased business written in our other property reinsurance, in particular our pro rata business, and specialty reinsurance business lines, specifically our credit and surety and agriculture lines. Gross written premiums in casualty reinsurance have remained broadly stable.
Combined ratio. We monitor the ratio of losses and expenses to net earned premium (the “combined ratio”) as a measure of relative performance where a lower ratio represents a better result than a higher ratio. The combined ratios for our two business segments for the twelve months ended December 31, 2015, 2014 and 2013 were as follows:
The combined ratio for 2014 decreased by 0.9 percentage points compared to 2013, primarily due to a 1.1 percentage point reduction in the loss ratio offset by a 1.0 percentage point increase in the expense ratio. The loss ratio reduction was due predominantly to lower pre-tax catastrophe losses, net of reinsurance and reinstatements reducing to $65.5 million in 2014 from $101.9 million in 2013. The increase in expense ratio in 2014 was due to a $49.1 million increase in operating expenses attributable to defending the unsolicited approach and an inadequate offer by Endurance at a cost of $28.5 million, increases in staff costs and performance-related accruals.
Reserve releases increased overall by $52.4 million in 2015 mainly due to a $60.6 million increase in net reserve releases in our insurance segment from $5.1 million in 2014 to $65.7 million in 2015. Reserve releases decreased by $3.6 million in 2014
due mainly to a reduction in the net reserve release for our reinsurance segment from $122.6 million in 2013 to $99.0 million in 2014. In 2014, reserve releases in our insurance segment increased by $20.0 million to $5.1 million as in 2013, we had net reserve strengthening in our insurance segment of $14.9 million principally in the marine and energy liability account in the marine, aviation and energy line of business. Further information relating to the release of reserves can be found below under “- Reserves for Losses and Loss Adjustment Expenses - Prior Year Loss Reserves.”
General, administrative and corporate expenses have decreased to $424.0 million in 2015 from $445.7 million in 2014 and increased from $368.1 million in 2013. The decrease in 2015 compared to 2014 is largely due to expenses attributable to defending the unsolicited approach and an inadequate offer by Endurance at a cost of $28.5 million in 2014. This was also largely the reason for the increased expenses in 2014 compared to 2013 combined with an increase in staff costs, performance-related accruals and costs associated with the continued build out of our U.S. insurance operations.
Taxes. We recognized a tax expense in 2015 of $14.4 million (2014 - $12.1 million expense; 2013 - $13.4 million expense), equivalent to a consolidated rate on income before tax of 4.3% in 2015 compared to 3.3% in 2014 and 3.9% in 2013. The effective tax rate in 2015 was impacted by a greater proportion of group profits being generated by U.K.-based operations offset in part by the reduction in the U.K. corporate tax rate from 21% to 20% in 2015. The decrease in the effective tax rate in 2014 compared to 2013 was largely associated with the reduction in the U.K. corporate tax rate from 23% to 21%. The tax in each of the years is representative of the geographic spread of our business between taxable and non-taxable jurisdictions in such years.
Net income. For 2015, we reported income after taxes of $323.1 million, compared to income after taxes of $355.8 million in 2014, and income after taxes of $329.3 million in 2013. The decrease in net income in 2015 over 2014 was primarily due to the $31.3 million decrease in underwriting income resulting from higher catastrophe losses offset by growth in premiums earned. The increase in net income after tax in 2014 over 2013 was due primarily to the $42.9 million increase in underwriting income resulting from higher earned premiums and lower catastrophe losses which were partially offset by increased expenses that included a $28.5 million charge attributable to defending the unsolicited approach and an inadequate offer by Endurance.
Other comprehensive income. Total other comprehensive income decreased by $174.7 million (2014 - $15.2 million increase), net of taxes, for the twelve months ended December 31, 2015. This comprises a net unrealized loss of $68.5 million in the available for sale investment portfolio (2014 - $42.4 million unrealized gain) largely attributable to the impact of rising interest rates on our bond portfolios, a $36.7 million reclassification of net realized gains to net income (2014 - $7.5 million reclassified realized gains), a $2.6 million unrealized gain (2014 - $3.8 million unrealized loss) on the hedged derivative contracts and an unrealized loss in foreign currency translation of $72.1 million (2014 -$15.9 million unrealized loss) largely attributable to the impact from the strengthening of the U.S. dollar.
Shareholders’ equity and financial leverage. Total shareholders’ equity increased slightly by $0.6 million from $3,419.3 million as at December 31, 2014 to $3,419.9 million at December 31, 2015. The most significant movements were:
As at December 31, 2015, our total shareholders’ equity included preference shares with a total value as measured by their respective liquidation preferences of $568.2 million (2014 - $568.2 million) less issue costs of $12.4 million (2014 - $12.4 million).
Reinsurance. Aspen Re continues to be shown opportunities in areas that we find attractive and where we can be selective in our growth. While the reinsurance rate environment remained soft in 2015, with overall rates down by 6% on average, we continued to target and find success in specialty reinsurance.
The reinsurance market continued to face pricing challenges during the January 1, 2016 renewals, with rates down on average by 4% although the impact varied by line and geography. In general, relative pricing for most lines held better in the United States compared to elsewhere and there were positive movements in some loss affected portfolios. As a result, we maintained flexibility in deploying capital regionally, growing faster in North America where rates are higher and pulling back in Europe. Terms and conditions remained reasonably stable while clients continued to consolidate panels, choosing reinsurers capable of delivering a broad range of products with local distribution reach. Our gross written premiums during the January 1, 2016 renewals increased by approximately 9% compared to our 2015 renewal season, although approximately 4% is due to timing on a significant contract in specialty reinsurance. The remaining growth in our reinsurance renewals was primarily as a result of increased shares on long-established relationships and new lines from existing clients. Our growth was primarily in our targeted specialty reinsurance and other property reinsurance classes of business. In property catastrophe reinsurance, where we continued to manage our exposure, we reduced our business by approximately 10%. We further reduced our property catastrophe exposure by continuing to leverage third-party capital through Aspen Capital Markets. Rates in other property and property catastrophe in the United States decreased approximately 4% whereas elsewhere property catastrophe rates decreased by approximately 7%. Casualty reinsurance rates remained relatively flat during the renewal season.
Insurance. We remain selective, deploying capital to areas where returns are more attractive and where we can differentiate our services to attract quality clients. We continued to find opportunities in our property and casualty insurance line and our financial and professional lines. We decided to pull back in some areas, especially in our marine, aviation and energy insurance line, where we believe rates do not reflect the underlying risk. Part of our energy business, particularly energy physical damage, were among the softest, as was aviation for which the fourth quarter is the largest for renewals.
Investments. We are exposed to interest rate risk with respect to our fixed income investments. Changes in market interest rates will impact the net unrealized gain or loss position of our fixed income investment portfolio and the yield we receive on both new cash invested and reinvestment of existing funds. In a low interest rate environment, we may be forced to reinvest proceeds from coupons and investments that have been sold, matured or paid down at lower yields, which will reduce our investment income.
Written premiums comprise the estimated premiums on contracts of insurance and reinsurance entered into in the reporting period, except in the case of proportional reinsurance contracts, where written premium relates only to our estimated proportional share of premiums due on contracts entered into by the ceding company prior to the end of the reporting period.
Adjustment premiums are most significant in relation to reinsurance contracts. Different considerations apply to non-proportional and proportional treaties as follows:
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.
Property treaty pro rata made a significant contribution to our reinsurance segment where we wrote $240.0 million in gross written premium in 2015 (2014 - $197.4 million), or 19.2% of our reinsurance segment, of which $15.1 million was estimated (2014 - $41.1 million) and $224.9 million was reported by the cedants (2014 - $156.3 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 the year ended December 31, 2015 (2014 - $0.1 million increase).
We anticipate that ultimate premiums might reasonably be expected to vary by up to 5% as a result of variations in one or more of the assumptions described above, although larger variations are possible. Based on gross written premiums of $240.0 million (2014 - $197.4 million) in our property reinsurance treaty pro rata account as of December 31, 2015, a variation of 5% could increase or reduce net income before taxation by approximately $0.2 million (2014 - $0.2 million).
the cost of claims reported to us but not yet paid known as case reserves (“case reserves”);
Case reserves. For reported claims, reserves are established on a case-by-case basis within the parameters of coverage provided in the insurance policy or reinsurance agreement. The method of establishing case reserves for reported claims differs among our operations. With respect to our insurance operations, we are advised of potential insured losses and our claims handlers record reserves for the estimated amount of the expected indemnity settlement, loss adjustment expenses and cost of defense where appropriate. The reserve estimate reflects the judgment of the claims personnel and is based on claim information obtained to date, general reserving practices, the experience and knowledge of the claims personnel regarding the nature of the specific claim and where appropriate and available, advice from legal counsel, loss adjusters and other claims experts.
In general terms, the IELR method is most appropriate for classes of business and/or accident years where the actual paid or reported loss experience is not yet mature enough to modify our initial expectations of the ultimate loss ratios. Typical examples would be recent accident years for classes of business in casualty reinsurance. The BF method is generally appropriate where there are few reported claims and a relatively less stable pattern of reported losses. Typical examples would be our treaty risk excess class of business in our reinsurance segment and marine hull class of business in our insurance segment. The Chain Ladder method is appropriate when there are relatively stable patterns of loss emergence and a relatively large number of reported claims. Typical examples are the U.K. commercial property and U.K. commercial liability classes of business in our international insurance business.
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 calculate a single point actuarial mean best estimate(“ultimate”) for each class of business and provide a stochastic distribution around the mean for each line of business. The actuarial 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 stochastic distribution is designed to provide management with a range from which it is reasonable to select a single best estimate for inclusion in our financial statements.
There are no differences between our year-end and our quarterly internal reserving procedures and processes because our actuaries perform the basic projections and analyses described above for each class of business.
Uncertainties. While the management selected reserves make a reasonable provision for unpaid loss and loss adjustment expense obligations, we note that the process of estimating required reserves, by its very nature, involves uncertainty and therefore the ultimate claims may fall outside the actuarial range. The level of uncertainty can be influenced by such factors as the existence of coverage with long duration reporting patterns and changes in claims handling practices, as well as the other factors described above.
Estimates of IBNR are generally subject to a greater degree of uncertainty than estimates of the cost of settling claims already notified to us, where more information about the claim event is generally available. IBNR claims often may not be apparent to the insured until many years after the event giving rise to the claims has happened. Classes of business where the IBNR proportion of the total reserve is high, such as casualty insurance, will typically display greater variations between initial estimates and final outcomes because of the greater degree of difficulty of estimating these reserves.
Classes of business where claims are typically reported relatively quickly after the claim event tend to display lower levels of volatility between initial estimates and final outcomes. Reinsurance claims are subject to a longer time lag both in their reporting and in their time to final settlement. The time lag is a factor which is included in the projections to ultimate claims within the actuarial analyses and helps to explain why in general a higher proportion of the initial reinsurance reserves are represented by IBNR than for insurance reserves for business in the same class. Delays in receiving information from cedants are an expected part of normal business operations and are included within the statistical estimate of IBNR to the extent that current levels of backlog are consistent with historical data. Currently, there are no processing backlogs which would materially affect our financial statements.
There are specific areas of our selected reserves which have additional uncertainty associated with them. See Part I, Item 1A, Risk Factors, “Insurance Risks - Our financial condition and operating results may be adversely affected if actual claims exceed our loss reserves” for a discussion of the specific areas of our selected reserves which have additional uncertainty. In each case, management believes they have selected an appropriate best estimate based on current information and current analyses.
We believe that there is potentially significant risk in estimating loss reserves for long-tail lines of business and for immature accident years that may not be adequately captured through traditional actuarial projection methodologies. As discussed above, these methodologies usually rely heavily on projections of prior year trends into the future. In selecting our best estimate of future liabilities, we consider both the results of actuarial point estimates of loss reserves in addition to the stochastic distribution of reserves. In determining the appropriate best estimate, we review (i) the position of overall reserves within the actuarial distribution, (ii) the result of bottom up analysis by accident year reflecting the impact of parameter uncertainty in
actuarial calculations, and (iii) specific qualitative information on events that may have an effect on future claims but which may not have been adequately reflected in actuarial best estimates, such as the potential for outstanding litigation or claims practices of cedants to have an adverse impact.
Effect if Actual Results Differ From Assumptions: Given the risks and uncertainties associated with the process for estimating reserves for losses and loss expenses, management has performed an evaluation of the potential variability in loss reserves and the impact this variability may have on reported results, financial condition and liquidity. Because of the inherent uncertainties discussed above, we have developed a reserving philosophy which attempts to incorporate prudent assumptions and estimates, and we have generally experienced favorable net development on prior year reserves in the last several years. However, there is no assurance that this will occur in future periods.
Net reserve for losses and loss expenses at December 31, 2015 - Sensitivity to loss emergence patterns
We currently classify $6,114.0 million of our total cash and investments of $8,811.7 million as “available for sale” and, accordingly, they are carried at estimated fair value. We use quoted values and other data provided by internationally recognized independent pricing sources as inputs into our process for determining the fair value of our investments. Where multiple quotes or prices are obtained, a price source hierarchy is maintained in order to determine which price source provides the fair value (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers.
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The discussions that follow include tables and discussions relating to our consolidated income statement and our segmental operating results for the twelve months ended December 31, 2015, December 31, 2014 and December 31, 2013.
Total gross written premiums increased by 3.3% in 2015 when compared to 2014 predominantly due to our reinsurance lines, with growth from our other property and specialty reinsurance business lines offsetting planned reductions in property catastrophe lines. Premiums from our insurance segment increased due to growth principally in our property and casualty insurance lines and financial and professional lines offset by reductions in our marine, aviation and energy insurance.
In 2015, gross premiums written in our reinsurance segment increased by 6.5% compared to 2014 across all business lines with the exception of property catastrophe reinsurance. The increase is mainly attributable to increased business written in our other property reinsurance, in particular our pro rata business, and specialty reinsurance business lines, specifically our credit and surety and agriculture lines. Gross written premiums in casualty reinsurance remained stable although we made planned reductions in some casualty lines in line with market conditions.
The increase in gross written premiums in 2015 from our insurance segment is modest at 1.1% as growth in property and casualty insurance as well as financial and professional lines was offset by reductions in marine, aviation and energy. The decrease in gross written premium in marine, aviation and energy insurance lines is largely due to the repositioning of certain accounts and difficult market conditions, including increased competition combined with favorable prior-year premium adjustments in the comparative period. The increase in gross written premiums in financial and professional insurance was largely attributable to growth in our U.S. lines with increases in some classes in international.
In 2014, total ceded written premiums increased by $40.5 million compared to 2013. The retention ratio reduced slightly from 86.9% in 2013 to 86.7% in 2014. The retention ratio was basically flat compared to 2013 despite our growth in gross written premiums. We had expected this ratio to trend upwards throughout 2014, but we retained less than we had planned due to a combination of taking advantage of lower retrocession pricing, as well as the timing on some of our contracts.
Net premiums earned. Net premiums earned increased by $68.0 million, or 2.8%, in 2015 compared to 2014, the rate of growth being lower than the 4.4% growth in gross earned premium. While our ceded written premium has decreased in 2015 following our strategy to selectively retain more risk, the impact on net premiums earned is less significant as earnings are recognized over multiple years. Net premiums earned increased by $233.5 million, or 10.8%, in 2014 compared to 2013, consistent with the increase in gross earned premiums. The changes in net premiums earned for each of our segments were as follows:
In the insurance segment, the loss ratio for 2015 was 62.4% compared to 61.5% in 2014. The increase in the loss ratio in 2015 is due to an $18.3 million increase in catastrophe losses and a greater frequency of large losses offset by a $60.6 million increase in prior year reserve releases. In 2015, the insurance segment experienced $40.9 million of catastrophe losses comprising $25.7 million associated with the U.K. floods and $15.2 million associated with the U.S. storms while in 2014, we recognized $22.6 million of catastrophe losses associated with U.S. and U.K storms. Large losses experienced during the period 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.
Prior year reserve releases have increased by $52.4 million from $104.1 million in 2014 to $156.5 million in 2015. The reserve releases from reinsurance were from across all business lines, totaling $90.8 million. The insurance segment had reserve releases of $65.7 million compared to $5.1 million of reserve releases in 2014. In 2015, we did not have the need to strengthen reserves in the marine, aviation and energy business lines.
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 2015 catastrophe losses as losses associated with winter storms in Europe and Australia which occurred in the first quarter of 2015, storms in the U.S. which occurred in the first and second quarter of 2015, U.S. wildfires, the Chilean earthquake and weather-related events in the U.S., New Zealand and Australia which occurred in the third quarter of 2015, and the U.K. floods and weather-related events in the U.S. and Philippines which occurred in the fourth quarter of 2015. We have defined major 2014 catastrophe losses as losses associated with winter storms in the U.S. and Japan and flooding in the U.K. which occurred in the first and second quarters of 2014, North American and European storms in the third quarter of 2014 and North American, Asian and Australian storms in the fourth quarter of 2014. We have defined 2013 catastrophe losses as losses associated with floods in Central Europe, Canada and India, as well as tornadoes and hailstorms in the U.S. in the second quarter of 2013, hailstorms in Germany and floods in Canada and Mexico in the third quarter of 2013, and storms and associated flooding in Europe, India and the Philippines in the fourth quarter of 2013.
Policy acquisition expenses increased by $32.4 million in 2015 compared to 2014 due to growth in written premiums and changes in business mix. Policy acquisition expenses increased by $29.2 million in 2014 compared to 2013 due primarily to growth in written premiums.
General, administrative and corporate expenses decreased by $21.7 million in 2015 compared to 2014. In 2014, we incurred $28.5 million in non-recurring corporate expenses associated with the cost of defending the unsolicited approach and an inadequate offer by Endurance. In 2015, growth in our U.S. business, reorganization and integration costs and higher salary costs due to increased headcount impacted our operating expenses.
General, administrative and corporate expenses increased by $77.6 million from $368.1 million in 2013 to $445.7 million in 2014 due to $28.5 million in non-recurring corporate expenses associated with the cost of defending the unsolicited approach and an inadequate offer by Endurance, increases in headcount associated with growth in our business and higher performance-related accruals. The increase in expenses, excluding the costs of successfully defending the unsolicited approach and an inadequate offer by Endurance, is due to fair value adjustment on equity compensation as well as expenses related to the recruitment of senior underwriters in our insurance segment.
Net investment income. In 2015, we generated net investment income of $185.5 million, a decrease of 2.5% on the prior year (2014 - $190.3 million, 2013 - $186.4 million). The decrease was primarily due to lower reinvestment rates and declining book yields from fixed income securities partially offset by $20.1 million of dividend income from our global equity securities portfolio in 2015 compared with $17.1 million in 2014 and $12.6 million in 2013. The increase in investment income in 2014 compared to 2013 was due primarily to a higher investment balance compared to 2013.
As at December 31, 2015, we held foreign exchange contracts that were designated as hedging under ASC 815 with an aggregate value of $113.6 million (2014 - $135.8 million). The foreign exchange contracts are recorded as derivatives at fair value in the balance sheet with the effective portion recorded in other comprehensive income and the ineffective portion recorded as a change in fair value of derivatives in the statement of operations. The contracts are considered to be effective and therefore, for the twelve months ended December 31, 2015, the movement in other comprehensive income representing the effective portion was an increase of $2.6 million (December 31, 2014 - reduction of $3.8 million).
Interest rate swaps. As at December 31, 2015, we held a number of standard fixed for floating interest rate swaps with a total notional amount of $756.3 million (2014 - $951.3 million) due to mature between January 20, 2016 and November 9, 2020. The interest rate swaps are used in the ordinary course of our investment activities to partially mitigate the negative impact of rises in interest rates on the market value of our fixed income portfolio. In 2014, we decided to let our interest rate swap program roll off and not renew maturing positions. We took this decision after an extensive reassessment of the costs of maintaining an interest rate swap program in a steep yield curve environment. As at December 31, 2015, there was a loss in respect of the interest rate swaps of $4.8 million (2014 - $7.2 million loss; 2013 - $2.6 million gain).
The increase in the change in fair value of derivatives in 2015 compared to the equivalent periods in 2014 and 2013 is largely attributable to foreign exchange contracts that had a gain of $11.6 million in 2015 compared to a loss of $7.7 million in
Income tax expense. There was an income tax expense for the twelve months ended December 31, 2015 of $14.4 million compared to $12.1 million in the equivalent period of 2014 and an income tax expense of $13.4 million in the comparative period of 2013. The effective tax rate for the twelve months ended December 31, 2015 was 4.3% (2014 - 3.3%; 2013 - 3.9%) and is representative of the geographic spread of our business between taxable and non-taxable jurisdictions.
Net income after tax. In 2015, we had net income after tax of $323.1 million, equivalent to $4.64 basic earnings per ordinary share and fully diluted earnings per ordinary share of $4.54 based on the weighted average number of ordinary shares in issue during the period. In 2014, we had net income of $355.8 million, equivalent to $4.92 basic earnings per ordinary share. Fully diluted earnings per ordinary share were $4.82 for the twelve months ended December 31, 2014. In 2013, we had net income of $329.3 million, equivalent to fully diluted earnings per ordinary share of $4.14 based on the weighted average number of ordinary shares in issue during the period. For a more detailed description of basic and diluted earnings per ordinary share, see Note 4 of our consolidated financial statements, “Earnings per Ordinary Share.”
Gross written premiums. The table below shows our gross written premiums for each line of business for the twelve months ended December 31, 2015, 2014 and 2013, 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 maintained its level of written premium as growth in specialty marine has offset reductions in credit and surety.
The loss ratio in 2014 of 45.7% increased marginally compared to 44.9% in 2013. The increase in the loss ratio was 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. Catastrophe losses in 2013 were from floods in Central Europe, Canada and India, as well 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.
There was also a $23.6 million decrease in prior year reserve releases from $122.6 million in the twelve months ended December 31, 2013 compared to $99.0 million in 2014.
Losses and loss adjustment expenses. The loss ratio for 2015 was 62.4% compared to 61.5% in 2014. The increase in the loss ratio in 2015 is due to an $18.3 million increase in catastrophe losses and a greater frequency of large losses offset by a $60.6 million increase in prior year reserve releases. In 2015, the insurance segment experienced $40.9 million of catastrophe
losses, comprising $25.7 million associated with the U.K. floods and $15.2 million associated with the U.S. storms, while in 2014 we recognized $22.6 million of catastrophe losses associated with U.S. and U.K storms. Large losses experienced during the period 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 2015, there were reserve releases of $65.7 million compared to $5.1 million of reserve releases in 2014. The reserve releases in 2014 and 2015 were predominantly from our property and casualty line of business.
Our general and administrative expenses increased by $8.1 million to $213.6 million in 2015 from $205.5 million in 2014 largely due to growth in our U.S. business and reorganization and integration costs. General and administrative expenses of $205.5 million in 2014 increased from $185.9 million in 2013 largely due to growth in our U.S. business, increased U.S. dollar to Sterling exchange rates and higher performance-related accruals.
At December 31, 2015 and December 31, 2014, total cash and investments, including accrued interest receivable, were $8.8 billion and $8.6 billion, respectively. Our investment strategy is focused on delivering stable investment income and total return through all market cycles while maintaining appropriate portfolio liquidity and credit quality to meet the requirements of our customers, rating agencies and regulators.
As of December 31, 2015, our investments consisted of a diversified portfolio of fixed income securities, global equities and money market funds. Our overall portfolio strategy remains focused on high quality fixed income investments. However, in keeping with our strategy of improving long term investment returns and in light of the ongoing low interest rate environment, in 2013, we invested in a $200.0 million BBB Emerging Market Debt portfolio, which is reported in corporate and foreign government securities and in 2014 we adjusted our asset allocation by increasing our equity exposures by $240.0 million, of which $80.0 million was invested in our global equity strategy and $160.0 million was invested in a minimum volatility equity portfolio, from 5.6% to 8.5% of the portfolio. In 2014 we also maintained a 1.0% position in BB Bank Loans and a 2.5% position in BBB Emerging Market Debt. In November 2015, we liquidated the majority of our BB Bank Loan portfolio and received net proceeds of $82.5 million. Proceeds from the sales were reinvested into the BBB Emerging Market Debt portfolio. As at December 31, 2015, we had an 8.7% position in equities, a 3.5% position in BBB Emerging Market Debt and a 0.4% in risk asset portfolio cash. As a result, our investments in equities, BBB Emerging Market Debt and risk portfolio cash consisted of approximately 12.6% of our Managed Portfolio (2014 - 12.5%).
We continue to evaluate investment opportunities that will help us generate increased returns, while remaining within our risk tolerances.
timing and speed of interest rate rises by the Federal Reserve. As at December 31, 2015, our interest rate swaps program was a notional $756.3 million (2014 - $951.3 million). During 2015, a notional amount of $195.0 million matured and we have a further $500.0 million of interest rate swaps rolling off in the first quarter of 2016. For further discussion on interest rate swaps, see Note 10 of our consolidated financial statements, “Derivative Contracts.”
Unrealized gains in the available for sale investment portfolio, net of taxes, including equity securities, at December 31, 2015 were $60.2 million, a decrease of $105.2 million from December 31, 2014.
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, 2015:
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 debt issued by peripheral European banks domiciled in any of the GIIPS countries. 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 debt issued by European and U.K. corporate financial institutions 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 institutions to allow the purchase of those issued by select issuers. We do not actively hedge any of our European exposures.
Valuation of Other Investments. The value of our investments in Chaspark and MVI 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 MVI is subject to annual audit evaluating the financial statements of the entities. We periodically review the management accounts of Chaspark and MVI and evaluate the reasonableness of the valuation of our investment.
The increase in reinsurance recoverables in 2015 is due to a higher frequency of losses which trigger reinsurance recoveries in our insurance lines. The recoveries in the reinsurance segment are generally associated with natural catastrophes and due to the low level of this type of event in 2015, 2014 and 2013 the reported balance is reducing as recoveries are collected for 2012 and prior catastrophes.
The gross reserves may be further analyzed between outstanding claims and IBNR as at December 31, 2015 and 2014, are as follows:
Prior year loss reserves. For the twelve months ended December 31, 2015, there was an overall reduction of our estimate of the 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, 2015, 2014 and 2013:
For the twelve months ended December 31, 2015. The analysis of the development by each segment is as follows:
For the twelve months ended December 31, 2014. The analysis of the development by each segment is 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 property catastrophe lines due primarily to a reduction in reserving margins held against 2012 and prior catastrophe events and better than planned experience.
liability account within marine and energy liability, although this strengthening has been partially mitigated by the receipt of additional adjustment premiums.
Other than the matters described under “- Critical Accounting Policies - Reserving Approach,” we did not make any significant changes in methodologies used in our reserving process. Nevertheless, because the period of time we have been in operation is relatively short, for longer tail lines in particular, our loss experience is limited and reliable evidence of changes in trends of numbers of claims incurred, average settlement amounts, numbers of claims outstanding and average losses per claim will necessarily take years to develop.
The following table shows our capital structure at December 31, 2015 compared to December 31, 2014:
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 31.1% as of December 31, 2015 (December 31, 2014 - 30.8%).
Our senior notes were the only material debt issued by Aspen Holdings as of December 31, 2015 and 2014 of $549.2 million and $549.1 million, respectively.
The principal capital management transactions during 2014 and 2015 were as follows:
For the twelve months ended December 31, 2014, we acquired and cancelled a total of 4,289,857 ordinary shares in open market repurchases. The total consideration paid for the twelve months ended December 31, 2014 was $180.9 million with the average price for the twelve months ended December 31, 2014 being $42.16. As at December 31, 2014, we had $43.3 million remaining under our current share repurchase authorization of $500.0 million granted on February 7, 2013.
Access to capital. Our business operations are in part dependent on our financial strength and the market’s perception thereof, as measured by total shareholders’ equity, which was $3,419.9 million at December 31, 2015 (December 31, 2014 - $3,419.3 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. 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.
We manage these risks by making regular forecasts of the timing and amount of expected cash outflows and ensuring that we maintain sufficient balances in cash and short-term investments to meet these estimates. Notwithstanding this policy, if these cash flow forecasts are incorrect, we could be forced to liquidate investments prior to maturity, potentially at a significant loss. Historically, we have not had to liquidate investments at a significant loss to maintain sufficient levels of liquidity.
(1) The comparative balances have been re-presented to reflect total restricted investable assets as a percent of investable assets. Investable assets comprise total investments, cash and cash equivalents, accrued interest, receivables for securities sold and payables for securities purchased.
See Note 20(a), “Commitments and Contingencies - Restricted Assets,” of our consolidated financial statements for further detail on our trust fund balances which we are required to maintain in accordance with contractual obligations to policyholders and in compliance with regulatory requirements.
Consolidated cash flows for the twelve months ended December 31, 2015. Total net cash flow from operations was $574.2 million, a decrease of $33.2 million from 2014. For the twelve months ended December 31, 2015, our cash flows from operations provided us with sufficient liquidity to meet our operating requirements. We paid net claims of $1,108.5 million in 2015, and used $501.9 million in investing and net purchases and sales of equipment during the period. We paid ordinary and preference share dividends of $88.7 million, and $83.7 million was used to repurchase ordinary shares. At December 31, 2015, we had a balance of cash and cash equivalents of $1,099.5 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 Holdings, the Borrowers, various lenders and Barclays. The credit facility is used to finance our working capital needs and those of our subsidiaries for letters of credit in connection with our insurance and reinsurance businesses and for other general corporate purposes. Initial availability under the credit facility is $200.0 million and we have the option (subject to obtaining commitments from acceptable lenders) to increase the facility by up to $100.0 million. The facility will expire on June 12, 2017. As of December 31, 2015, no borrowings were outstanding under the credit facility.
date of reimbursement by Aspen Bermuda. The New LOC Facility is used to secure obligations of Aspen Bermuda to its policyholders. In addition to the New LOC Facility, we also use regulatory trusts to secure our obligations to policyholders.
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, 2015, we had $463.6 million of outstanding collateralized letters of credit under the New LOC Facility (December 31, 2014 - $463.6 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.
The long-term debt obligations disclosed above do not include the $29.0 million annual interest payments on our outstanding senior notes or dividends payable to holders of our preference shares or the loan notes issued by Silverton in the amount of $190.6 million.
As at December 31, 2015, 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, for the development of inflationary pressures in a local economy as the demand for services, such as construction, typically surges. We believe this had an impact on the cost of claims arising from the 2005 hurricanes. 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.
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, the amount attributable to non-controlling interest and certain non-recurring items. In 2014, non-recurring items included costs associated with defending the unsolicited approach and an inadequate offer by Endurance in the amount of $28.5 million for the twelve months ended December 31, 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.