For our U.K.-based reinsurance and insurance operations, Aspen U.K. signed an agreement on April 1, 2005 (following our entry in October 2004 into a heads of terms agreement) with B.L.C.T. (29038) Limited (the landlord), Tamagon Limited and Cleartest Limited in connection with leasing office space in London of approximately 49,500 square feet covering three floors. The term of the lease commenced in November 2004 and runs for 15 years. In 2007, the building was sold to Tishman International but the terms of the lease remain unchanged. The lease is subject to five-yearly upwards-only rent reviews. In 2009 we entered into a lease for approximately 10,000 square feet in London, which we terminated in December 2013 prior to its expiration. In 2011, we entered into another lease in London for approximately 7,000 square feet which expires in March 2016, subject to a negotiable extension provision. We also license office space within the Lloyd’s building on the basis of a renewable 24-month lease.
In 2009, we entered into a five-year lease on 6,500 square feet in Rocky Hill, Connecticut. Subsequent five-year lease renewals have increased the square footage to 34,000 square feet with a lease expiry of April 2018. In 2010, we entered into a five-year lease for office space in Manhattan, New York, covering 24,000 square feet. In 2011 we leased an additional floor of 24,000 square feet in the same building for a four year period. In 2011, we also leased a 5,000 square foot office space in Chicago, Illinois and a 6,300 square foot office space in San Francisco, California. On September 28, 2012, we entered into a 8,000 square foot lease in Boston for a five-year period. In August 2013, we entered into a seven-year lease for 5,000 square feet in Houston, Texas.
The expense ratio is calculated by dividing amortization of deferred policy acquisition costs and general, administrative and corporate expenses by net premiums earned.
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 83,327,594, 70,508,013, 70,655,698, 70,753,723 and 65,546,976 at December 31, 2009, 2010, 2011, 2012 and 2013, respectively.
Notes issued by our consolidated variable interest entity of $50.0 million as at December 31, 2013. For more information, refer to Note 19(c), “Commitments and Contingencies” of our consolidated financial statements.
The following is a discussion and analysis of our financial condition and results of operations for the twelve months ended December 31, 2013, 2012 and 2011. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and related Notes contained in this report. This discussion contains forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and particularly under the headings “Risk Factors,” “Business” and “Forward-Looking Statements” contained in Item 1A, Item 1, and Part I of this report, respectively.
Turning to our investments, in light of the continuing low interest rate environment, we took advantage of opportunities to further diversify our investment portfolio by investing in EMD, BB High Yield Bonds and BB Bank Loans as well as increasing our investments in equities. However, our net investment income for 2013 was $186.4 million, a decrease from $204.9 million in 2012.
Reinsurance. In reinsurance, notwithstanding challenging market conditions in certain lines of business, we continued to focus on growth in regional areas and we established Aspen Capital Markets in April 2013 to expand Aspen Re’s participation in the alternative reinsurance market. The focus of the team is to develop alternative reinsurance structures to leverage Aspen Re’s existing underwriting franchise, increase its operational flexibility in the capital markets and provide investors direct access to its underwriting expertise. 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. Gross written premium, in line with expectations and prevailing market conditions, reduced by 7.7%. The reinsurance segment’s combined ratio was 76.4% in 2013 compared to 85.4% in 2012.
Gross written premiums of $2,646.7 million for 2013, an increase of 2.5% compared with 2012 and 19.9% compared to 2011.
Gross written premiums. The changes in our segments’ gross written premiums for the twelve months ended December 31, 2013, 2012 and 2011 are as follows:
Gross written premium increased 2.5% in 2013 compared to 2012 due to increases from our insurance lines, mainly in the U.S. This has been partially offset by reductions across our reinsurance lines of business. The increase in gross written premiums in the insurance segment is mainly attributable to our casualty, financial and professional lines and programs business in the U.S., with casualty also benefiting from growth in our U.K.-based business. The decrease in gross written premiums in the reinsurance segment was across all lines and reflects challenging market conditions particularly in property catastrophe lines, higher commutations in casualty and specialty lines and adverse prior year premium adjustments in other property lines as well as rate pressures.
Gross written premiums increased by 17.0% in 2012 compared to 2011 due predominantly to the continued development of our U.S. insurance platform. The increase in gross written premiums in the insurance segment was across all lines, but was mainly attributable to our property and programs business. Increases in gross written premiums in our marine, aviation, energy and construction insurance lines were mainly due to increased premiums for marine, energy and liability business which achieved significant rate increases following a series of industry losses in recent years. The increase in gross written premiums in the reinsurance segment arose from other property and casualty reinsurance business. The increase in other property was due to strong production from our proportional treaty and facultative business as we benefited from positive pricing momentum in catastrophe-exposed accounts while casualty benefited from favorable prior year premium adjustments. In 2013, we recognized $6.8 million of reinstatements premiums associated with German hailstorms and Central European and Canadian floods, while in 2012, we recognized a total of $23.3 million of reinstatement premiums associated with catastrophe events, $22.1 million of which were associated with Superstorm Sandy.
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, 2013, 2012 and 2011 were as follows:
The combined ratio for 2013 decreased by 1.7 percentage points compared to 2012, primarily due to a reduction in pre-tax catastrophe losses, net of reinsurance and reinstatements of $205.0 million in 2012 to $101.9 million in 2013, partially offset by reduction of $29.7 million in prior year reserve releases and a $23.0 million increase in expenses.
The combined ratio for 2012 decreased by 21.6 percentage points compared to 2011. The decrease was primarily due to a $329.3 million reduction in pre-tax catastrophe losses, net of reinsurance and reinstatements from major natural catastrophes from $534.3 million in 2011 to $205.0 million in 2012 but was partially offset by an increase in the expense ratio.
Net investment income. In 2013, we generated net investment income of $186.4 million, a decrease of 9.0% on the prior year (2012 - $204.9 million; 2011 - $225.6 million). Net investment income has steadily declined over the years from 2011 to 2013, due to the continuing decline in our reinvestment rate reflecting lower yields on investment grade fixed income securities. Lower reinvestment rates and declining book yields from fixed income securities were partially offset by $12.6 million of dividend income from our global equity securities portfolio in 2013 compared with $6.2 million in 2012 and $6.1 million in 2011. As mentioned above, we have invested in EMD, BB Bank Loans and BB High Yield Bonds and have increased our investments in equities.
Taxes. We recognized a tax expense in 2013 of $13.4 million (2012 - $15.0 million expense; 2011 - $37.2 million credit), equivalent to a consolidated rate on income before tax of 3.9% in 2013 compared to 5.1% in 2012 and 25.3% tax credit in 2011. The effective tax rate has reduced in 2013 due to the reduction in U.K. corporate tax rate from 24% to 23%. 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. The tax credit in 2011 was due to a greater proportion of losses having been incurred by Operating Subsidiaries in tax paying jurisdictions, adjustments to prior years’ tax provisions as well as reductions in the U.K. corporation tax rates.
Other comprehensive income. Total other comprehensive income decreased by $206.8 million (2012 - loss of $106.1 million), net of taxes, for the twelve months ended December 31, 2013. This is comprised of a $161.3 million loss in the net unrealized available for sale investment portfolio (2012 - $7.8 million unrealized gain) largely attributable to the impact of rising interest rates on our bond portfolios, $23.4 million reclassification of net realized losses to net income (2012 - $2.0 million reclassified realized losses) and an unrealized loss in foreign currency translation of $24.1 million (2012 - $11.5 million unrealized loss).
Dividends. In April 2013, the Board approved an increase in the quarterly dividend on our ordinary shares from $0.17 per ordinary share to $0.18 per ordinary share (2012 - $0.17 quarterly dividend; 2011 - $0.15 quarterly dividend). Dividends paid on the preference shares in 2013 were $35.5 million (2012 - $31.1 million; 2011 - $22.8 million). The increase from 2011 was due to the issuance in April 2012 of an additional series of $160.0 million of preference shares. The increase in the dividends paid in 2013 was due to the additional issuance of a series of preference shares on May 2, 2013 for $275.0 million and issue expenses of $4.4 million, offset by the redemption of the 5.625% Perpetual PIERS on May 30, 2013 for which dividends are no longer paid.
the net proceeds of $270.6 million from the issuance of the 5.95% Perpetual Preference Shares;
the repurchase of 4,407,898 ordinary shares for $159.6 million through open market and other repurchases; and
the repurchase of 4,053,276 ordinary shares for $150.0 million through an accelerated share repurchase.
As at December 31, 2013, our total shareholders’ equity included preference shares with a total value as measured by their respective liquidation preferences of $568.2 million (2012 - $523.2 million) less issue costs of $12.4 million (2012 - $15.1 million).
Our senior notes were the only material debt issued by Aspen Holdings as of December 31, 2013 and 2012 of $549.0 million and $499.1 million, respectively. Management monitors the ratio of debt to total capital, with total capital being defined as shareholders’ equity plus outstanding debt. As at December 31, 2013, this ratio was 15.4% (2012 - 12.5%).
Our preference shares are classified in our balance sheet as equity but may receive a different treatment in some cases under the capital adequacy assessments made by certain rating agencies. We also monitor the ratio of the total debt and the liquidation preference of our preference shares to total capital which was 29.6% as of December 31, 2013 (2012 - 25.3%).
Market Conditions, Rate Trends and Developments in 2013 and Early 2014
Reinsurance. Currently in the reinsurance market the rate dynamics are evolving rapidly. The January 1 renewal season, which is a significant renewal date in the reinsurance market, again saw an influx of new capital. We view the increased amount of capital in the reinsurance market less as a developing story and more as the new norm. This renewal season saw a further increase in the level of supply in the market which was coupled with a decrease in demand. Companies reassessed their reinsurance needs to take advantage of both higher levels of capital on their balance sheets and the declining rate environment. Nevertheless, we were able to grow our premiums while maintaining the same amount of net exposure by utilizing our relationships with third party capital as well as taking advantage of less expensive retrocession.
Insurance. January 1 is not a major renewal date for insurance overall. For the U.S. primary insurance market overall at the January renewals, rates increased yet at a more modest pace than a year ago. For the majority of international lines, the rates are holding firm. There are a few lines which previously experienced loss activity and are now showing rate increases. Conversely, a few specialized areas such as aviation and offshore energy property in the Gulf of Mexico are experiencing downward pressure.
From January 1, 2014 to February 14, 2014, we repurchased 715,505 ordinary shares at an average price of $40.16 per share for a total cost of $28.7 million.
We refer to premiums receivable which are not fixed at the inception of the contract as adjustment premiums. The proportion of adjustment premiums included in the premium estimates varies between business lines with the largest adjustment premiums associated with property and casualty reinsurance business and the smallest with property and liability insurance lines.
changes in the renewal rate or rate of new business acceptances by the cedant insurance companies leading to lower or greater volumes of ceded premiums than our estimate, which could result from changes in the relevant primary market that could affect more than one of our cedants or could be a consequence of changes in marketing strategy or risk appetite by a particular cedant;
In addition to these methodologies, our actuaries may use other approaches depending upon the characteristics of the line of business and available data.
Reserving procedures and process. Our actuaries calculate the IELR, BF and Chain Ladder and, if appropriate, other methods for each line of business and each accident year. They then provide a range of ultimates within which management’s best estimate is most likely to fall. This range will usually reflect a blend of the various methodologies. These methodologies involve significant subjective judgments reflecting many factors, including but not limited to, changes in legislative conditions, changes in judicial interpretation of legal liability policy coverages and inflation. Our actuaries collaborate with our underwriting, claims, legal and finance teams in identifying factors which are incorporated in their range of ultimates in which management’s best estimate is most likely to fall. The actuarial ranges are not intended to include the minimum or maximum amount at which the claims may ultimately settle, but are designed to provide management with ranges from which it is reasonable to select a single best estimate for inclusion in our financial statements.
Selection of reported gross reserves. Management, through its Reserve Committees, then reviews the range of actuarial estimates, which to date it has not adjusted, and any other evidence before selecting its best estimate of reserves for each line of business. Management can select its best estimate outside the range provided by the actuaries, but to date gross reserves have been within the range of actuarial estimates. This provides the basis for the recommendation made by management to the Audit Committee and the Board regarding the reserve amounts to be recorded in the Company’s financial statements.
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. Lines 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.
These factors are incorporated in the recommended reserve range from which management selects its best point estimate. As at December 31, 2013, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $129.3 million in loss reserves which would represent 37.7% of income before income tax for the twelve months ended December 31, 2013. As at December 31, 2012, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $128.9 million in loss reserves which would represent 43.6% of income before income tax for the twelve months ended December 31, 2012.
The selected best estimate of reserves is typically in excess of the mean of the actuarial reserve estimates. The Company believes 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 its best estimate of
The 10th percentile represents a 1 in 10 chance that, for example, reinsurance reserves will be at or lower than $2,128.1 million. The 90th percentile represents a 1 in 10 chance that reserves will be at or greater than $2,926.6 million. Diversification reflects the fact that not all the segments are perfectly correlated; that is, we would not expect all lines of business to run off better than or worse than the mean at the same time.
If the ultimate liabilities equate to the mean actuarial estimate, then the impact from the change in loss reserves would be to increase net income before tax by $359.5 million (being the difference between the selected loss reserves of $4,678.9 million
Conversely, if the ultimate liabilities equate to the estimated 90th percentile, then the impact from the change in loss reserves would be to reduce net income before tax by $81.0 million (being the difference between the selected loss reserves of $4,678.9 million and the 90th percentile value of $4,759.9 million), although the impact of such a change is unlikely to be recognized in one calendar year.
Other-than-temporary Impairment of Investments. A security is impaired when its fair value is below its cost or amortized cost. We review our available for sale investment portfolio on an individual security basis for potential other-than-temporary impairment (“OTTI”) each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions. For further discussion, see Note 2(c) of our consolidated financial statements, “Basis of Preparation and Significant Accounting Policies - Accounting for Investments, Cash and Cash Equivalents.”
Total gross written premiums increased by 2.5% in 2013 when compared to 2012 predominantly due to increases from our insurance lines, mainly in the U.S. This has been partially offset by reductions across all our reinsurance lines of business. Gross written premiums also included reinstatement premiums and other premiums receivable directly related to losses arising from all catastrophic events of $7.0 million (2012 - $23.3 million; 2011 - $32.5 million).
The increase in gross written premiums in the insurance segment is mainly attributable to our casualty, financial and professional lines and programs business in the U.S., with casualty also benefiting from growth in our U.K.-based business. The decrease in gross written premiums in the reinsurance segment was across all lines and reflects higher commutations in
casualty and specialty lines and lower reinstatement premiums in catastrophe as well as increasing rate pressures on certain lines within reinsurance.
Ceded written premiums. Total ceded written premiums in 2013 increased by $10.6 million compared to 2012. Ceded written premiums have decreased for the reinsurance segment in line with reduced gross written premiums from our catastrophe lines and changes to our reinsurance program. Ceded written premiums have increased for the insurance segment as we seek to use reinsurance as an effective risk mitigation tool for our growing insurance lines, particularly in the U.S.
Net premiums earned. Net premiums earned increased by $88.3 million, or 4.2%, in 2013 compared to 2012, consistent with the increase in gross earned premiums. Net premiums earned increased by $195.0 million, or 10.3%, in 2012 compared to 2011, consistent with the increase in gross earned premiums. The changes in net premiums earned for each of our segments were as follows:
General, administrative and corporate expenses increased by 21.3% from $284.5 million in 2011 to $345.1 million in 2012, with the increased expenditure associated with our expansion into the U.S. admitted market and U.K. regional distribution network and increases in accruals for profit-related compensation.
The increase in underwriting income in 2013 compared to 2012 is due to premium growth and improved loss experience. Our increase in underwriting income in 2012 compared to the comparative period in 2011 was due to a profitable underwriting year notwithstanding the impact of the losses from Superstorm Sandy and the Costa Concordia loss event.
The reduction in the change in fair value of derivatives in 2013 compared to the equivalent periods in 2012 and 2011 is largely attributable to the interest rate swaps which had a realized gain of $2.6 million in 2013 compared to realized losses of $23.0 million and $64.4 million in 2012 and 2011, respectively.
Income tax expense/credit. There was an income tax expense for the twelve months ended December 31, 2013 of $13.4 million compared to $15.0 million in the equivalent period of 2012 and an income tax credit of $37.2 million in the comparative period of 2011. The effective tax rate for the twelve months ended December 31, 2013 was 3.9% (2012 - 5.1%; 2011 - 25.3% ) and is representative of the geographic spread of our business between taxable and non-taxable jurisdictions. The tax credit for the twelve months ended December 31, 2011 was due to a greater proportion of losses having been incurred by Operating Subsidiaries in tax paying jurisdictions, adjustments to prior years’ tax provisions as well as reductions in the U.K. corporation tax rates.
We are organized into two business segments: Reinsurance and Insurance. The reinsurance segment consists of property catastrophe reinsurance, other property reinsurance, casualty reinsurance and specialty reinsurance. The insurance segment consists of property insurance, casualty insurance, marine, aviation, energy and construction insurance, financial and professional lines insurance and programs business.
Non-underwriting disclosures. We have provided additional disclosures for corporate and other (non-underwriting) income and expenses. Corporate and other includes net investment income, net realized and unrealized investment gains or losses, corporate expenses, interest expenses, net realized and unrealized foreign exchange gains or losses and income taxes, which are not allocated to the underwriting segments. Corporate expenses are not allocated to the Company’s operating segments as they typically do not fluctuate with the levels of premiums written and are not directly related to our segment operations. They include group executive costs, group finance costs, legal and actuarial costs, non-underwriting share-based compensation and certain strategic costs including new teams before they commence underwriting.
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 the Company’s operating segments is measured by underwriting profit or loss.
The following tables summarize gross and net premiums written and earned, underwriting results, and combined ratios and reserves for each of our business segments for the twelve months ended December 31, 2013, 2012 and 2011.
The increase in gross written premiums for the twelve months ended December 31, 2012 compared to the equivalent period in 2011 arose from other property and casualty reinsurance business. The increase in other property was due to strong production from our proportional treaty and facultative business as we benefited from positive pricing momentum in catastrophe-exposed accounts while casualty benefited from favorable prior year premium adjustments.
Reinsurance ceded. Total reinsurance ceded in 2013 was $51.9 million, a reduction of $19.1 million from 2012 and in line with decreases in gross written premiums in 2013 compared to 2012. Total reinsurance ceded of $71.0 million in 2012 reduced by $18.4 million from 2011 and was due to us having purchased a greater amount of reinsurance in 2011 as a result of the unusually high frequency and severity of catastrophes in 2011.
Policy acquisition, general and administrative expenses. Amortization of deferred policy acquisition costs were $207.2 million for the twelve months ended December 31, 2013 equivalent to 19.3% of net premiums earned (2012 - $207.8 million or 18.4% of net premiums earned; 2011 - $197.7 million or 17.8% of net premiums earned). The increase in the policy acquisition expense ratio in 2013 is due to increases in profit commission accruals and a change in the business mix towards property proportional treaty business lines, which have higher average commission rates. Our general and administrative expense ratio of 12.2% in 2013 increased from 10.9% in 2012 due to the reduction in net earned premium by $59.4 million in the period and a $7.1 million increase in the overall expenses associated with increased staff costs. General and administrative expenses were $123.9 million for 2012, a $12.1 million increase from 2011, attributable mainly to higher performance-related compensation accruals following the lower loss activity of 2012.
Net premiums earned. Net earned premiums have increased by $147.7 million, or 15.5%, in 2013 compared to 2012 due to growth in our U.S. operations. Net premiums earned have increased by $170.9 million, or 21.9%, in 2012 compared to 2011 which is consistent with the increase in gross earned premiums and the increase in the cost of our reinsurance purchased in 2012.
Policy acquisition, general and administrative expenses. Amortization of deferred policy acquisition costs were $214.8 million in 2013, equivalent to 19.5% of net premiums earned (2012 - $173.4 million or 18.2% of net premiums earned; 2011 - $149.3 million or 19.1% of net earned premium). The increase was due to an increase in profit commission accruals and
In 2012, the increase in costs were mainly due to a reduction in profit-related commission accruals as well as to a change in the mix of business written where we have written a higher proportion of casualty business which has lower average commission rates. Another factor was the increase in loss related premiums in property and marine liability that do not incur additional acquisition costs. General and administrative expenses of $168.2 million in 2012 increased from $128.0 million in 2011 mainly due to our continued build out of our U.S. operations.
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, 2013:
Equity securities. In March 2011, we initiated an investment into a high quality global equity income strategy. In January 2013, we increased the investment in our equity trading portfolio by an additional $200.0 million. Equity securities are comprised of U.S. and foreign equity securities and are classified as available for sale or trading. The portfolio targets high quality global equity securities with attractive dividend yields. Our overall portfolio strategy remains focused on high quality fixed income investments. The total investment return from the available for sale and trading equity portfolios are as follows:
We manage our European fixed income exposures by proactively adapting our investment guidelines to our views on the European debt crisis. In August 2010, we amended our investment guidelines to prohibit purchases of sovereign or guaranteed debt of Greece, Ireland, Italy, Portugal or Spain (“GIIPS”). We also prohibited purchases of peripheral European bank issuers. In November 2010, we amended our investment guidelines to prohibit purchases of corporate bonds issued by companies domiciled in any of the GIIPS countries. In May 2011, we amended our investment guidelines to prohibit purchases of European and U.K. corporate financial issuers including covered bonds. We also added Belgium to our list of prohibited sovereign investments. We do not actively hedge any of our European exposures.
As at December 31, 2013, we had $1,071.2 million, or 12.9% of our aggregate investment portfolio, invested in European issuers, including the U.K. (2012 - $968.8 million, or 11.8%). Our European exposures consisted of sovereigns, agencies, government guaranteed bonds, covered bonds, corporate bonds and equities. We have no exposure to the sovereign debt of GIIPS, and de minimis holdings of Spanish and Italian corporate bonds and equities.
Valuation of Other Investments. The value of our investments in Cartesian and Chaspark 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 Cartesian and Chaspark is subject to annual audit evaluating the financial statements of the partnership. We periodically review the management accounts of Cartesian and Chaspark and evaluate the reasonableness of the valuation of our investment.
Prior year loss reserves. For the twelve months ended December 31, 2013, 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, 2013, 2012 and 2011:
Insurance. Net reserve strengthening of $14.9 million in 2013 derived primarily from incurred development in our marine, aviation, energy and construction line of business partially offset by releases of $56.8 million from our casualty line due to better than expected development across all years. There were also reserve releases of $11.9 million from our financial and professional line due to favorable development on the 2010 and prior accident years and $10.6 million from our property line mainly due to better than expected claims development for the 2012 and 2011 accident years. The $92.8 million of net reserve strengthening in the marine, aviation, energy and construction line of business was due to M.E.C. liability business which experienced an increase in the frequency of mid-sized energy and construction losses in recent accident years.
For the twelve months ended December 31, 2012. The analysis of the development by each segment is as follows:
Reinsurance. Net reserve releases for the year ended December 31, 2012 in the reinsurance segment were $102.2 million. Property reinsurance had releases of $56.9 million, primarily on the pro rata treaty, risk excess and facultative accounts due to
For the twelve months ended December 31, 2011. The analysis of the development by each segment is as follows:
Insurance. Net reserve releases for the year ended December 31, 2011 in the insurance segment were $20.0 million. Better than expected experience in the marine and transportation, property and casualty business lines led to reserve releases of $23.7 million, $20.6 million and $5.5 million, respectively. This was partially offset with a strengthening in reserves in financial and professional lines of $29.8 million, primarily in U.K. professional lines which experienced more than expected claims development affected by the financial crises in prior years.
Other than the matters described above, we did not make any significant changes in assumptions used in our reserving process. However, 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.
Share capital, additional paid-in capital, retained income and accumulated other comprehensive income attributable to ordinary shareholders
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 29.6% as of December 31, 2013 (December 31, 2012 - 25.3%).
In addition to the senior notes issued by Aspen Holdings, we have also reported $50.0 million of debt issued by Silverton. For further information relating to Silverton, refer to Note 19(c) of our consolidated financial statements, “Commitments and Contingencies.”
On March 9, 2012, an agreement was signed to repurchase 42,578 ordinary shares from the Names’ Trustee for a total consideration of $1.1 million and on March 23, 2012, an agreement was signed to repurchase 26,708 ordinary shares from the Names’ Trustee for a total consideration of $0.7 million. The shares under both transactions were repurchased on May 8, 2012 and subsequently cancelled.
On August 10, 2012, an agreement was signed to repurchase 34,151 ordinary shares from the Names’ Trustee. The shares were repurchased for a total consideration of $1.0 million and subsequently cancelled.
On February 26, 2013, the Company entered into an accelerated share repurchase agreement (“ASR”) with Goldman Sachs & Co. (“Goldman”) to repurchase an aggregate of $150.0 million of our ordinary shares. Under this arrangement, we initially acquired and cancelled 3,348,214 ordinary shares for the three months ended March 31, 2013. The ASR commenced on February 27, 2013, and was terminated on August 29, 2013. Settlement was made entirely in the Company’s ordinary shares and was accounted for as an equity transaction under the guidelines specified under ASC 815 Derivatives and Hedging. On August 29, 2013, Goldman delivered to the Company an additional 705,062 ordinary shares. The total amount repurchased under the ASR was 4,053,276 ordinary shares at an average price of $37.01.
Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations. Management monitors the liquidity of Aspen Holdings and of each of its Operating Subsidiaries and arranges credit facilities to enhance short-term liquidity resources on a stand-by basis. As a holding company, Aspen Holdings relies on dividends and other distributions from its Operating Subsidiaries to provide cash flow to meet ongoing cash requirements, including any future debt service payments and other expenses, and to pay dividends, if any, to our preference and ordinary shareholders. During the year ended December 31, 2013, Aspen Holdings received a $45.4 million (2012 - $56.5 million) payment of intercompany interest in respect of an intercompany loan from Aspen U.K. Holdings. In addition, Aspen Holdings received dividends of $286.3 million (2012 - $100.0 million) from Aspen Bermuda and $15.5 million (2012 - $Nil) from AMAL.
As at December 31, 2013, Aspen Holdings held $94.2 million (December 31, 2012 - $192.3 million) of cash and cash equivalents with the significant reduction due to a total of $309.6 million of ordinary share repurchases in the twelve months ended December 31, 2013. Management considers the current cash and cash equivalents, together with dividends declared or expected to be declared by subsidiary companies and our credit facilities, sufficient to appropriately satisfy the liquidity requirements of Aspen Holdings. Aspen Holdings’ liquidity depends on dividends, capital distributions and interest payments from our Operating Subsidiaries. Aspen Holdings has recourse to the credit facility described below.
Cash is used primarily to pay reinsurance premiums, losses and loss adjustment expenses, brokerage commissions, general and administrative expenses, taxes, interest and dividends and to purchase new investments.
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, 2013 and December 31, 2012:
Consolidated cash flows for the twelve months ended December 31, 2013. Total net cash flow from operations was $566.4 million, an increase of $70 million from 2012. For the twelve months ended December 31, 2013, our cash flows from operations provided us with sufficient liquidity to meet our operating requirements. We paid net claims of $1,085.1 million in 2013, and used $497.9 million in investing and net purchases and sales of equipment during the period. We paid ordinary and preference share dividends of $83.3 million, and $309.6 million was used to repurchase ordinary shares. At December 31, 2013, we had a balance of cash and cash equivalents of $1,293.6 million.
Consolidated cash flows for the twelve months ended December 31, 2011. Total net cash flow from operations in 2011 was $343.5 million, a decrease of $280.8 million from 2010. For the twelve months ended December 31, 2011, our cash flows from operations provided us with sufficient liquidity to meet our operating requirements. We paid net claims of $982.2 million in 2011, and used $210.5 million in investing and net purchases and sales of equipment during the period. The increase in paid claims over 2010 was largely due to the catastrophes that occurred in 2011. We paid ordinary and preference share dividends of
Under the credit facility, we must not permit (a) consolidated tangible net worth to be less than approximately $2,428.6 million plus 50% of consolidated net income and 50% of aggregate net cash proceeds from the issuance by the Company of its capital stock, in each case after January 1, 2013, (b) the ratio of our total consolidated debt to the sum of such debt plus our consolidated tangible net worth to exceed 35% or (c) any material insurance subsidiary to have a financial strength rating of less than “B++” from A.M. Best. In addition, the credit facility contains other customary affirmative and negative covenants as well as certain customary events of default, including with respect to a change in control. The various affirmative and negative covenants, include, among others, covenants that, subject to various exceptions, restrict the ability of the Company and its subsidiaries to: incur indebtedness; create or permit liens on assets; engage in mergers or consolidations; dispose of assets; pay dividends or other distributions; purchase or redeem the Company’s equity securities or those of its subsidiaries and make other restricted payments; make certain investments; agree with others to limit the ability of the Company’s subsidiaries to pay dividends or other restricted payments or to make loans or transfer assets to the Company or another of its subsidiaries. In addition, the credit facility has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, bankruptcy or insolvency proceedings, change of control and cross-default to other debt agreements.
Other Credit Facilities. On February 28, 2011, Aspen U.K. and Aspen Bermuda entered into an amendment to the $200.0 million secured letter of credit facility agreement with Barclays Bank PLC dated as of October 6, 2009. The amendment extends the maturity date of the credit facility to December 31, 2013. On February 1, 2013, Aspen U.K. and Aspen Bermuda entered into a further amendment to the secured letter of credit facility to extend the maturity date of the credit facility to January 31, 2015. On August 21, 2013, the commitments were reduced to $100.0 million. All letters of credit issued under the facility are used to support reinsurance obligations of the parties to the agreement and their respective subsidiaries. As at December 31, 2013, we had $18.9 million of outstanding collateralized letters of credit under this facility (December 31, 2012 - $37.5 million).
December 31, 2013, we had $516.8 million of outstanding collateralized letters of credit under this facility compared to $839.1 million at December 31, 2012.
The following table summarizes our contractual obligations (other than our obligations to employees and our Perpetual Preference Shares) under long-term debt, operating leases (net of subleases) and reserves relating to insurance and reinsurance contracts as of December 31, 2013:
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 $50.0 million which mature in September 2016.
In estimating the time intervals into which payments of our reserves for losses and loss adjustment expenses fall, as set out above, we have utilized actuarially assessed payment patterns. By the nature of the insurance and reinsurance contracts under which these liabilities are assumed, there can be no certainty that actual payments will fall in the periods shown and there could be a material acceleration or deceleration of claims payments depending on factors outside our control. This uncertainty is heightened by the relatively short time in which we have operated (relevant in particular to longer-tail lines), thereby providing limited Company-specific claims loss payment patterns. The total amount of payments in respect of our reserves, as well as the timing of such payments, may differ materially from our current estimates for the reasons set out above under “ - Critical Accounting Policies - Reserves for Losses and Loss Expenses.”
For a detailed description of our operating lease obligations, see Part I, Item 2, “Properties.”
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.
We also seek to take into account the projected impact of inflation on the likely actions of central banks in the setting of short-term interest rates and consequent effects on the yields and prices of fixed interest securities. As of February 2014, we consider that although inflation is currently low, 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.
Average equity, a non-U.S. GAAP financial measure, is calculated by the arithmetic average on a monthly basis for the stated periods excluding (i) preference shares, (ii) after-tax unrealized appreciation or depreciation on investments and (iii) the average after-tax unrealized foreign exchange gains and losses. 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 British Pound. 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.