In 2004, 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 an 8,000 square foot lease in Boston, Massachusetts for a five-year period. In August 2013, we entered into a seven-year lease for 5,000 square feet in Houston, Texas.
Including cash within consolidated variable interest entities of $176.7 million as at December 31, 2014 and $50.0 million as at December 31, 2013.
Of the total loan notes issued by our consolidated variable interest entities, at fair value, of $138.6 million as at December 31, 2014, $70.7 million were classified as long term liabilities and $67.9 million were classified as current liabilities due and payable in less than one year. For more information, refer to Note 7, “Variable Interest Entities” of our consolidated financial statements.
In 2014, the insurance industry, including Aspen, 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. Furthermore, we received an unsolicited approach for an inadequate offer by Endurance Specialty Holdings Limited (“Endurance”), which we defended with the support of our shareholders and customers at a cost of $28.5 million, and which consumed a significant amount of our resources and time. We are very pleased with our overall results for 2014 which delivered a strong return on equity of 11.1% for 2014 compared to 10.6% for 2013 and a 10.3% 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.
In our insurance segment, our U.S. insurance teams continued to gain scale, with premiums from the U.S. teams growing by more than 30% over the prior year. We established a hub in Miami to assist the expansion of our presence in Latin America. While the initial focus was on the onshore energy market, we intend to roll out additional products across Latin America. 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 segment increased by 14.4%.
Our combined ratio in insurance was 96.2% in 2014 compared to 103.9% in 2013.
In our reinsurance segment, 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. We 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.
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 2014, we grew 19% in our emerging markets which accounted for approximately 19% of our reinsurance segment. We also saw an opportunity to improve the solutions being offered to mid-western and smaller U.S. clients. 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.
The reinsurance segment’s combined ratio was 77.6% in 2014 compared to 76.4% in 2013.
Capital Management. We continue to focus on capital management and maintain our capital at an appropriate level. In 2014, we continued our strategy to return excess capital to shareholders with the repurchase of 4,289,857 ordinary shares for a total consideration of $180.9 million, with $43.3 million remaining under our share repurchase authorization. To that end, our Board authorized a new share repurchase program of $500 million on February 5, 2015 to replace the existing authority. In addition, in the second quarter of 2014, we increased our quarterly dividend on our ordinary shares from $0.18 to $0.20 per ordinary share.
Annualized net income return on average equity of 11.1% for 2014 compared with 10.6% in 2013 and 8.5% in 2012.
Gross written premiums of $2,902.7 million for 2014, an increase of 9.7% compared with 2013 and 12.4% compared to 2012.
Gross written premiums. The changes in our segments’ gross written premiums for the twelve months ended December 31, 2014, 2013 and 2012 are as follows:
Gross written premiums increased by 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 premium in the insurance segment was mainly attributable to our casualty, financial and professional lines and programs business in the U.S., with property and 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 reflected 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.
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, 2014, 2013 and 2012 were as follows:
The combined ratio for 2013 decreased by 1.7 percentage points compared to 2012 due to a reduction in pre-tax catastrophe losses, net of reinsurance and reinstatements of $101.9 million in 2013 compared to $137.4 million in 2012 partially offset by a $29.7 million reduction in prior year reserve releases and a $23.0 million increase in expenses.
In each of the years ended December 31, 2014, 2013 and 2012, we recorded a reduction in the level of reserves for prior years. In 2014, we reported net favorable development on prior year loss reserves of $104.1 million, or 4.3 combined ratio points, compared with $107.7 million, or 5.0 combined ratio points, for 2013, and $137.4 million, or 6.6 combined ratio points, for 2012.
Reserve releases decreased overall by $3.6 million in 2014 mainly due to a reduction in net reserve releases in our reinsurance segment from $122.6 million in 2013 to $99.0 million in 2014.
Reserve releases decreased by $29.7 million in 2013 due mainly to a net reserve release of $122.6 million for our reinsurance segment compared to net reserve release of $102.2 million for our reinsurance segment in 2012 and a net reserve strengthening in our insurance segment of $14.9 principally in the marine and energy liability account in the marine, aviation and energy line of business, compared to a $35.2 million reserve release in 2012.
Further information relating to the release of reserves can be found below under “- Reserves for Losses and Loss Adjustment Expenses - Prior Year Loss Reserves.”
Net income. For 2014, we reported income after taxes of $355.8 million, compared to income after taxes of $329.3 million in 2013, and income after taxes of $280.4 million in 2012. The increase in net income in 2014 over 2013 was primarily due 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 for an inadequate offer by Endurance. The increase in net income after tax in 2013 over 2012 was due primarily to the $39.3 million increase in underwriting income resulting from higher earned premiums, lower catastrophe losses combined with a $9.6 million increase in realized and unrealized investment gains and losses and a $29.7 million increase in fair value of derivatives compensating an $18.5 million reduction in investment income.
a $266.8 million increase in retained earnings for the period; and
the repurchase of 4,289,857 ordinary shares for $180.9 million through open market and other repurchases.
On May 2, 2013, we issued 11.0 million shares of 5.95% Perpetual Preference Shares. The 5.95% Perpetual Preference Shares have a liquidation preference of $25.00 per share and net proceeds were $270.6 million (comprising $275.0 million of total liquidation preference less $4.4 million of issue expenses). On May 30, 2013, we redeemed all of our 5.625% Perpetual PIERS with a liquidation preference of $50.00 for an aggregate amount of $230.0 million. We also issued a total of 1,835,860 ordinary shares in connection with the redemption of the 5.625% Perpetual PIERS.
Diluted book value per ordinary share at December 31, 2014 was $45.13, an increase of 10.3% compared to $40.90 at December 31, 2013.
Market Conditions, Rate Trends and Developments in 2014 and Early 2015
Insurance. We saw material diversity in rate movements across our various insurance lines of business in 2014, with casualty rates tending to perform more positively than those for shorter-tail classes. Overall, we would characterize the rating environment for the year as flat both for U.S. and international operations. January 1st is not a dominant renewal date for the insurance market and, in addition, the rate dynamics differ from those in reinsurance. Sentiment continues to differ according to individual classes of business but overall it is a little less positive than at this time last year. We will continue to monitor technical pricing levels closely and redeploy capital to classes which are better rated.
Investments. As a global (re)insurance company, we are affected by the monetary policy of central banks around the world. Financial markets have also been affected by concerns over the direction of U.S. monetary policy. The Federal Reserve Board has taken a number of policy actions in recent years to spur economic activity, by keeping official interest rates at record lows and through its asset purchase programs. The Federal Reserve Board may reverse this policy and begin raising rates sometime over the next two years, at a pace which may have an impact on fixed income and equity markets. The European Central Bank (“ECB”) has also recently adopted an array of accommodative monetary policies and stimulus measures, which are intended to lessen the risk of a prolonged period of deflation and support economic recovery in the Eurozone. However, we cannot predict with certainty the effect of these programs and policies on interest rates or the impact on fixed income and equity markets.
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.
On February 5, 2015, the Company and its Board agreed a new share repurchase authorization program of $500.0 million. The total share repurchase authorization, which was effective immediately through February 6, 2017, permits the Company to
effect the repurchases from time to time through a combination of transactions, including open market repurchases, privately negotiated transactions and accelerated share repurchase transactions.
Written premiums are comprised of 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.
on the underlying contracts of insurance written by our cedants and are generally submitted on a monthly or quarterly basis, from 30 to 90 days in arrears. In order to report all risks incepting prior to a period end, we estimate the premiums written between the last submitted treaty statement and the period end.
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. See Part 1, Item 1, “Business - Reserves” for additional information on our reserving approach for case reserves.
Sources of information. Claims information received typically includes the loss date, details of the claim, the recommended reserve and reports from the loss adjusters dealing with the claim. In respect of pro rata treaties and any business written through managing general agents, we receive regular statements (bordereaux) which provide paid and outstanding claims information, often with large losses separately identified. Following widely reported loss events such as natural catastrophes and airplane crashes we adopt a proactive approach to establish our likely exposure to claims by reviewing policy listings and contacting brokers and policyholders as appropriate.
There are three Reserve Committees, one for each of the insurance and reinsurance segments and a “core” committee that makes final reserving recommendations. The “core” Reserving Committee currently consists of the Chief Executive Officer of Aspen Re, the Group Chief Risk Officer, the Group Head of Risk and the Group Chief Actuary, the Group Chief Financial Officer, the U.S. Insurance Chief Actuary, the Chairman of Aspen Insurance and the Chief Underwriting Officer of Aspen Re.
Senior members of the insurance and reinsurance segment underwriting and claims staff comprise the remaining members of each committee.
These factors are incorporated in the recommended reserve range from which management selects its best point estimate. As at December 31, 2014, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $135.7 million in loss reserves which would represent 36.9% of income before income tax for the twelve months ended December 31, 2014. 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.
There are specific areas of our selected reserves which have additional uncertainty associated with them. In property reinsurance, large catastrophe events such as the New Zealand earthquakes and the fact that Superstorm Sandy remains a relatively recent event and therefore the ultimate cost is uncertain. In casualty reinsurance, there are additional uncertainties associated with claims emanating from the global financial crisis. Casualty reinsurance has the longest expected claims development in our business, which naturally provides the greatest area of uncertainty. There is also a potential for new areas of
claims to emerge as underlying this line of business are many long-tail lines of business. In the insurance segment, we wrote a book of financial institutions risks which have a number of notifications relating to the financial crisis in 2008 and 2009. In each case, management believes that they have selected an appropriate best estimate based on current information and current analyses.
The selected best estimate of reserves is typically in excess of the mean of the actuarial reserve estimates. 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 as well as the potential variability of these estimates as captured by a reasonable range of actuarial reserve estimates. In determining the appropriate best estimate, we review (i) the position of overall reserves within the actuarial reserve range, (ii) the result of bottom up analysis by accident year reflecting the impact of parameter uncertainty in actuarial calculations, and (iii) specific qualitative information on events that may have an effect on future claims but which may not have been adequately reflected in actuarial best estimates, such as the potential for outstanding litigation or claims practices of cedants to have an adverse impact.
Management’s best estimate of the net reserve for losses and loss expenses at December 31, 2014 is $4,400.8 million. The following tables show the effect on estimated net reserves for losses and loss expenses as of December 31, 2014 of a change in two of the most critical assumptions in establishing reserves: (1) loss emergence patterns, accelerated or decelerated by three and six months; and (2) expected loss ratios varied by plus or minus five and ten percent. Management believes that a reasonably likely scenario is represented by such a standard, as used by some professional actuaries as part of their review of an insurer’s or reinsurer’s reserves. Utilizing this standard as a guide, management has selected these variances to determine reasonably likely scenarios of variability in the loss emergence and loss ratio assumptions. These scenarios consider normal levels of catastrophe events. Loss reserves may vary beyond these scenarios in periods of heightened or reduced claim activity. The reserves resulting from the changes in the assumptions are not additive and should be considered separately. The following tables vary the assumptions employed therein independently. In addition, the tables below do not adjust any parameters other than the ones described above. Specifically, reinsurance collectability was not explicitly stressed as part of the calculations below.
Net reserve for losses and loss expenses at December 31, 2014 - Sensitivity to loss emergence patterns
The most significant variance in the above scenarios, 10% deterioration in expected loss ratio, would have the effect of increasing losses and loss expenses by $282.3 million.
We currently classify $5,998.2 million of our total cash and investments of $8,607.4 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.
In 2014, premiums from our reinsurance segment increased by 3.4% reflecting growth in catastrophe and other property lines offset by planned reductions in casualty lines and challenging market conditions in some specialty lines. The increase in property catastrophe premiums in 2014 is mainly attributable to the impact of Aspen Capital Markets which has enabled us to leverage our existing franchise and underwriting expertise to increase line sizes and cede risk to third party investors. Our insurance segment’s premiums increased by 14.4% principally due to growth in all our U.S. teams, our international property and casualty business lines and from international financial and professional lines. Marine, aviation and energy lines have reduced premium written due to repositioning of certain accounts and difficult market conditions.
Ceded written premiums. Total ceded written premiums in 2014 increased by $40.5 million compared to 2013. The ceded reinsurance premiums increased slightly as a percentage of gross written premiums from 13.1% in 2013 to 13.3% in 2014. The retention ratio, defined as net written premium as a percentage of gross written premium, was basically flat from a year ago despite our growth in gross written premiums. We had expected this ratio to trend upwards throughout the year, 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 $233.5 million, or 10.8%, in 2014 compared to 2013, consistent with the increase in gross earned premiums. Net premiums earned increased by $88.3 million, or 4.2%, in 2013 compared to 2012, consistent with the increase in gross earned premiums. The changes in net premiums earned for each of our segments were as follows:
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 2014 catastrophe losses as losses associated with winter storms in the U.S., snowstorms in Japan and flooding in the U.K. which occurred in the first and second quarter 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 major 2013 catastrophe losses as losses associated with floods in Central Europe, Canada and India, as well as tornadoes and hailstorms in the U.S. in the second quarter of 2013, hailstorms in Germany and floods in Canada and Mexico in the third quarter of 2013, and storms and associated flooding in Europe, India and the Philippines in the fourth quarter of 2013. We have defined 2012 catastrophe losses as losses associated with the severe weather conditions in the U.S. in February and March 2012, Hurricane Isaac in August 2012 and Superstorm Sandy in October 2012.
General, administrative and corporate expenses increased by $77.6 million in 2014 compared to 2013 due to $28.5 million in non-recurring corporate expenses associated with the cost of defending the unsolicited approach for an inadequate offer by Endurance, increases in headcount associated with growth in our business and higher performance-related accruals. General, administrative and corporate expenses increased by $23.0 million from $345.1 million in 2012 to $368.1 million in 2013 which is attributable to increases in staff, premises and other costs associated mainly with growth in our insurance business.
Investment gains. Realized and unrealized investment gains for the twelve months ended December 31, 2014 were $31.6 million (2013 - $36.4 million; 2012 - $26.8 million) comprising the amounts set out in the table below:
Net investment income. In 2014, we generated net investment income of $190.3 million, an increase of 2.1% on the prior year (2013 - $186.4 million, 2012 - $204.9 million). This included $17.1 million in dividends from our equity investments (2013 - $12.6 million; 2012 - $6.2 million). The increase was due to a higher investment balance compared to 2013. The decrease in investment income in 2013 was due to the continuing decline in the reinvestment rate over the twelve-month period from 2012, which reflected lower yields on investment grade fixed income securities.
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. For the twelve months ended December 31, 2014, the movement in other comprehensive income representing the effective portion was a net unrealized loss of $3.8 million (December 31, 2013 - $Nil) and the impact of foreign exchange contracts on net income representing the expired contracts was a charge of $3.8 million (December 31, 2013 - charge of $Nil).
During 2014, $48.7 million in notional amount of our interest rate swaps terminated and were not renewed. In 2013, $38.9 million in notional amount of our interest rate swaps terminated, and as a result of which we entered into $38.9 million notional 5-year interest rate swaps with termination dates in 2018. As at December 31, 2014, cash collateral with a fair value of $22.3 million was transferred to our counterparties to support the current valuation of the interest rate swaps (December 31, 2013 - $34.3 million). As at December 31, 2014, no non-cash collateral was transferred to us by our counterparties (December 31, 2013 - $Nil). In accordance with FASB ASC 860 Topic Transfers and Servicing, transfers of cash collateral are recorded on the balance sheet within derivatives at fair value, while transfers in respect of non-cash collateral are disclosed but not recorded. No amount was recorded in our balance sheet as at December 31, 2014 (2013 - $Nil) for the pledged assets. Changes in the estimated fair value of derivatives are included in the statement of operations.
Gross realized and unrealized gains in other investments. These represent the share of earnings from our investments in Cartesian Iris Offshore Fund L.P. (“Cartesian”) and Chaspark Maritime Holdings Limited (“Chaspark”).
Other income/(expenses). These are primarily due to movements in the value of deposit accounted and funds withheld contracts.
The increase in underwriting income in 2014 compared to 2013 and the increase in 2013 compared to 2012 was due to premium growth and improved loss experience.
The increase in the change in fair value of derivatives in 2014 compared to the equivalent periods in 2013 and 2012 is largely attributable to the interest rate swaps which had a realized loss of $7.2 million in 2014 compared to a realized gain of $2.6 million in 2013 and a realized loss of $23.0 million in 2012.
The change in fair value of loan notes issued by variable interest entities represents the proportion of profit or loss generated by Silverton attributable to third party investors.
Income tax expense. There was an income tax expense for the twelve months ended December 31, 2014 of $12.1 million compared to $13.4 million in the equivalent period of 2013 and an income tax expense of $15.0 million in the comparative period of 2012. The effective tax rate for the twelve months ended December 31, 2014 was 3.3% (2013 - 3.9%; 2012 - 5.1%) and is representative of the geographic spread of our business between taxable and non-taxable jurisdictions.
Non-underwriting disclosures. We provided additional disclosures for corporate and other (non-underwriting) income and expenses. Corporate and other income and expenses include net investment income, net realized and unrealized investment gains or losses, expenses associated with managing the Group, certain strategic and non-recurring costs, changes in fair value of derivatives and changes in fair value of loan notes issued by variable interest entities, interest expense, net realized and unrealized foreign exchange gains or losses and income taxes, which are not allocated to the underwriting segments. Corporate expenses are not allocated to our operating segments as they typically do not fluctuate with the levels of premiums written and are not directly related to our segment operations.
We do not allocate our assets by segment as we evaluate underwriting results of each segment separately from the results of our investment portfolio. Segment profit or loss for each of 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, 2014, 2013 and 2012.
Reinsurance ceded. Total reinsurance ceded in 2014 was $48.8 million, a reduction of $3.1 million from 2013. The reduction is due to favorable rates in our retrocession purchasing. 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.
The $23.6 million decrease in prior year reserve releases from $122.6 million in the twelve months ended December 31, 2013 to $99.0 million in the current period was predominantly due to a reduction in reserve releases from catastrophe and casualty lines. Prior year reserve releases are further discussed below under “Reserves for Losses and Loss Adjustment Expenses.”
The loss ratio in 2013 was 44.9% compared to 56.1% in 2012. The decrease in the loss ratio was primarily attributable to the reduced level of catastrophe losses from $166.5 million in 2012 to $93.5 million in 2013. Catastrophe losses in 2012 were from severe weather conditions in the U.S. in February and March 2012, Hurricane Isaac in August 2012 and Superstorm Sandy in October 2012. There was also a $20.4 million increase in prior year reserve releases from $102.2 million in the twelve months ended December 31, 2012 compared to $122.6 million in 2013.
Our insurance segment consists of property and casualty insurance, marine, aviation and energy insurance, and financial and professional lines insurance. For a more detailed description of this segment, see Part I, Item 1, “Business - Business Segments - Insurance” and Note 5 of our consolidated financial statements, “Segment Reporting.”
Overall, premiums increased by 14.4% or $217.1 million in 2014 compared to 2013 and 11.6% in 2013 compared to 2012. The increase in gross written premium was across all business lines with premium reductions limited to aviation and marine and energy liability lines written by our U.K.-based teams. Our U.S.-based operations continued to generate significant premium growth of $187.5 million compared to $138.8 million 2013. The reduction in premiums from our marine, aviation and energy lines is due to the repositioning of the marine and energy liability business and conditions in the aviation market. Gross written premiums from our financial and professional lines have increased due to growth in business written by our U.S.- based surety management and professional liability teams.
Losses and loss adjustment expenses. The loss ratio for 2014 was 61.5% compared to 67.5% in 2013. The decrease in the loss ratio in 2014 is due to lower current year losses in addition to a $5.1 million prior year reserve release compared to a $14.9 million reserve strengthening in 2013. In 2014, we recognized $22.6 million of catastrophe losses associated with U.S. and U.K storms while in 2013, we recognized $15.4 million of catastrophe losses related to the tornadoes and hailstorms in the U.S. in addition to a higher frequency of medium-sized losses of $40.0 million principally in our marine and energy liability account and our casualty line of business. The reserve releases in 2014 were mainly from our property and casualty lines of business.
The loss ratio for 2013 was 67.5% compared to 63.4% for 2012. In 2012, we recognized $24.8 million of losses in respect of claims arising from the sinking of the Costa Concordia in January 2012 and $51.2 million of losses from Superstorm Sandy and U.S. tornadoes. The deterioration in the loss ratio included a $14.9 million reserve strengthening in 2013 compared to a $35.2 million reserve release in 2012. Prior year reserve releases are further discussed under “Reserves for Losses and Loss Adjustment Expenses.”
Policy acquisition, general and administrative expenses. Amortization of deferred policy acquisition costs were $251.2 million in 2014, equivalent to 19.1% of net premiums earned (2013 - $214.8 million or 19.5% of net premiums earned; 2012 - $173.4 million or 18.2% of net earned premium). The decrease in the acquisition expense ratio is due to changes in business mix and increased commissions on ceded reinsurance cessions. The increase in 2013 compared with 2012 was due to an increase in profit commission accruals and changes in business mix where we have written a greater proportion with higher average commission rates.
We decided to let our interest rate swap program roll-off and not renew maturing positions. This decision was made after an extensive reassessment of the costs of maintaining an interest rate swap program in a steep yield curve environment. In addition, the continued uncertainty in the global economy, weak oil prices and low inflation make it difficult to gauge the timing and speed of interest rate rises by the Federal Reserve. As at December 31, 2014, our interest rate swaps program was a notional $951.3 million (2013 - $1.0 billion) and during 2014, a notional amount of $48.7 million rolled off. 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, 2014 were $165.4 million, an increase of $34.9 million from December 31, 2013.
As at December 31, 2014, we had investments in two entities classified as other investments: Chaspark and Silverton. For further information regarding these investments, see Note 6 of our consolidated financial statements, “Investments.”
As at December 31, 2014, we had $1,144.1 million, or 13.3% of our aggregate investment portfolio, invested in European issuers, including the U.K. (2013 - $1,071.2 million, or 12.9%). Our European exposures consisted of sovereigns, agencies,
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.”
Prior year loss reserves. For the twelve months ended December 31, 2014, 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, 2014, 2013 and 2012:
Reinsurance. Net reserve releases of $122.6 million in the period were attributable to all lines of business. The most significant releases were $53.8 million from our casualty line predominantly from the 2009 and prior accident years due to better than expected claims development and $28.6 million from our specialty line of business due to favorable updated information from our cedants. Releases from property catastrophe and other property lines were $40.3 million, due primarily to better than expected claims development for the 2011 catastrophe losses.
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 $16.1 million reduction in reserves for 2011 and 2010 catastrophe losses and to better than expected claims development. Specialty reinsurance had releases of $19.0 million, primarily in the aviation account as a result of a reduction in the reserve for a specific claim and favorable development in the marine account. This was partly offset by some increases in reserves, most notably in our structured risks business following adverse development and additional review.
The following table shows our capital structure at December 31, 2014 compared to December 31, 2013:
Our preference shares are classified in our balance sheet as equity but may receive a different treatment in some cases under the capital adequacy assessments made by certain rating agencies. Such securities are often referred to as “hybrids” as they have certain attributes of both debt and equity. We also monitor the ratio of the total of debt and hybrids to total capital which was 30.8% as of December 31, 2014 (December 31, 2013 - 29.6%).
measured by their respective liquidation preferences of $555.8 million net of share issuance costs (December 31, 2013 - $555.8 million).
In addition to the senior notes issued by Aspen Holdings, we have also reported $138.6 million of debt issued by Silverton. For further information relating to Silverton, refer to Note 7 of our consolidated financial statements, “Variable Interest Entities.”
The principal capital management transactions during 2014 and 2013 were as follows:
On May 2, 2013, we issued 11.0 million shares of our 5.950% Perpetual Preference Shares. See Part II, Item 5, “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Description of our 5.95% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares.” On May 30, 2013, we redeemed all of our 5.625% Perpetual PIERS with a liquidation preference of $50.00 for an aggregate amount of $230.0 million. We also issued a total of 1,835,860 ordinary shares in connection with the redemption of the 5.625% Perpetual PIERS.
On November 13, 2013, we closed our offering on the 2023 Senior Notes. The net proceeds from the 2023 Senior Notes offering, before offering expenses, were $299.7 million and a portion of the proceeds was used to redeem the outstanding 6.00% $250.0 million Senior Notes due August 15, 2014. The redemption resulted in a realized loss, or make-whole payment, of $9.3 million which is reflected in net realized and unrealized investment gains and losses of the statement of operations and other comprehensive income. Subject to applicable law, the 2023 Senior Notes will be the senior unsecured obligations of Aspen Holdings and will rank equally in right of payment with all of our other senior unsecured indebtedness from time to time outstanding.
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, the Company had $43.3 million remaining under its current share repurchase authorization of $500.0 million granted on February 7, 2013.
On February 5, 2015, our Board replaced the existing share repurchase authorization program with a new share repurchase authorization program of $500.0 million. The total share repurchase authorization, which was effective immediately through February 6, 2017, permits us to effect the repurchases of our shares from time to time through a combination of transactions, including open market purchases, privately negotiated transactions and accelerated share repurchase transactions.
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 $3,419.3 million at December 31, 2014 (December 31, 2013 - $3,299.8 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.
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, 2014, Aspen Holdings received a $30.5 million (2013 - $45.4 million) payment of intercompany interest in respect of an intercompany loan from Aspen U.K. Holdings. In addition, Aspen Holdings received dividends of $258.5 million (2013 - $286.3 million) from Aspen Bermuda and $Nil (2013 - $15.5) from AMAL.
On an ongoing basis, our Operating Subsidiaries’ sources of funds primarily consist of premiums written, investment income and proceeds from sales and redemptions of investments. 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 potential for individual large claims and for accumulations of claims from single events means that substantial and unpredictable payments may need to be made within relatively short periods of time.
adversely affecting our investment return. This follows the matching principle which matches our assets and liabilities in currency to mitigate foreign currency risk whenever possible.
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, 2014 and December 31, 2013:
Consolidated cash flows for the twelve months ended December 31, 2012. Total net cash flow from operations in 2012 was $496.4 million, an increase of $152.9 million from 2011. For the twelve months ended December 31, 2012, our cash flows from operations provided us with sufficient liquidity to meet our operating requirements. We paid net claims of $1,080.0 million in 2012, and used $317.2 million in investing and net purchases and sales of equipment during the period. The increase in paid claims over 2011 was largely due to the continued settlement of catastrophe losses that occurred in 2011. We paid ordinary and preference share dividends of $78.1 million, and $62.7 million was used to repurchase ordinary shares. At December 31, 2012, we had a balance of cash and cash equivalents of $1,463.6 million.
On June 30, 2014, Aspen Bermuda and Citi Europe replaced the LOC Facility with a new letter of credit facility in a maximum aggregate amount of up to $575.0 million (the “New LOC Facility”). Under the New LOC Facility, which will expire on June 30, 2016, Aspen Bermuda will pay to Citibank Europe plc (a) a letter of credit fee based on the available amounts of each letter of credit and (b) a commitment fee, which varies based upon usage, on the unutilized portion of the New LOC Facility. Aspen Bermuda will also pay interest on the amount drawn by any beneficiary under a credit provided under the New LOC Facility at a rate per annum of LIBOR plus 1% (plus reserve asset costs, if any) from the date of drawing until the 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 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 $138.6 million.
As at December 31, 2014, 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 the Company 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.
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 2015, although inflation is currently low, we consider that in the medium-term there is a risk that inflation, interest rates and bond yields may rise, resulting in a decrease in the market value of certain of our fixed interest investments.