We entered into an agreement in July 2004 to lease three floors comprising a total of approximately 15,000 square feet in Hamilton, Bermuda for our holding company and Bermuda operations. The term of the rental lease agreement is for six years from September 1, 2005 to August 31, 2011, with an additional three-year option commencing September 1, 2011. We have agreed a three-year extension effective September 1, 2011.
The following table sets forth our selected historical financial information for the periods ended and as of the dates indicated. The summary income statement data for the twelve months ended December 31, 2010, 2009, 2008, 2007 and 2006 and the balance sheet data as of December 31, 2010, 2009, 2008, 2007 and 2006 are derived from our audited consolidated financial statements. The consolidated financial statements as of December 31, 2010, and for each of the twelve months ended December 31, 2010, 2009 and 2008, and the report thereon of KPMG Audit Plc, an independent registered public accounting firm, are included elsewhere in this report. These historical results, including the ratios presented below, are not necessarily indicative of results to be expected from any future period. You should read the following selected consolidated financial information along with the information contained in this report, including Item 8, “Financial Statements and Supplementary Data” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements, condensed consolidated financial statements and related notes included elsewhere in this report.
Diversification. During 2010, we received regulatory approval to write insurance business through our branch in Zurich, Switzerland. We have also established offices in Cologne, Germany to write property facultative reinsurance and Miami, Florida to access the Latin American markets.
The following overview of our 2008, 2009 and 2010 operating results and financial condition is intended to identify important themes and should be read in conjunction with the more detailed discussion further below.
Gross written premiums. Total gross written premiums increased by 0.5% in 2010 compared to 2009 and by 3.3% in 2009 compared to 2008. The changes in our segment gross written premiums for the twelve months ended December 31, 2010 and 2009 are as follows, with reductions shown as negative percentages.
Gross written premiums in both our insurance and reinsurance segments are broadly in line with 2009. Within our reinsurance segment, our property catastrophe reinsurance line of business has benefited from favorable market conditions and $12.0 million of reinstatement premiums from the Chilean earthquake while our other property reinsurance lines have seen a $45.1 million reduction in premium as a result of higher cedent retentions. The increase in our insurance segment’s gross written premiums was due to growth in property lines where we saw opportunities to write business that met our expected profitability requirements. Market conditions remain challenging in casualty insurance, resulting in a $47.9 million reduction in written premium in these lines.
The increase in gross written premiums in 2009 when compared to 2008 was due primarily to additional specialty reinsurance premiums, particularly premium written in our credit and surety reinsurance line which was established in 2009. Our U.S. property insurance business also experienced growth since 2008, where gross written premiums increased 55.1% to $82.5 million in 2009 due to new business growth and increased prices for catastrophe-exposed business.
Reinsurance. Total reinsurance ceded in the year ended December 31, 2010 of $185.7 million was $44.6 million lower than in 2009. The overall decrease was due mainly to the insurance segment following the cancellation of a reinsurance quota share for U.S. property insurance, and lower costs of quota share outwards reinsurance resulting from reduced gross written premium. In 2009, we ceded slightly more than in 2008 which was at an unusually low level as we took advantage of favorable pricing conditions in 2007 that enabled us to purchase a number of reinsurance contracts covering a period of greater than 12 months, effectively covering the 2008 windstorm season.
Prior year reserve movements. The loss ratios take into account any changes in our assessments of reserves for unpaid claims and loss adjustment expenses arising from earlier years. In each of the years ended December 31, 2010, 2009 and 2008, we recorded a reduction in the level of reserves for prior years. The amounts of these reductions and their effects on the loss ratio in each year are shown in the following table:
Reserve releases were $63.0 million lower in 2010 due to less favorable developments impacting our insurance segment, particularly our casualty insurance and financial and professional lines. Although total reserve releases for 2009 were in line with 2008, an increase in property reinsurance reserve releases offset smaller reserve releases from our casualty reinsurance lines.
The policy acquisition expenses ratio has reduced to 17.3% in 2010 mainly as a result of a reduction in profit related commissions in our reinsurance segment. In 2009, the policy acquisition expense ratio increased to 18.3% from 17.6% in 2008 due to the impact of profit-related commission. The 2008 ratio benefited from $15.3 million of reinstatement and profit-related premiums which incurred no additional acquisition costs in addition to lower profit commission accruals in a catastrophe-affected year.
The operating, administrative and corporate expenses ratio of 13.6% for 2010 is broadly in line with 2009 with the increased expenditure associated with our expansion into the U.S. admitted market and U.K. regional distribution network balanced by reductions in profit related compensation in 2010. The 2009 increase over 2008 was due to higher performance-related costs in a year which did not experience significant catastrophic activity.
dividend payments to ordinary and preference shareholders totaling $69.3 million in 2010.
Book value per ordinary share is based on total shareholders’ equity, less preference shares (liquidation preference less issue expenses), divided by the number of ordinary shares in issue at the end of the period. Balances as at December 31, 2010 and December 31, 2009 were:
Liquidity. Management monitors the liquidity of Aspen Holdings and of each of its Insurance Subsidiaries. With respect to Aspen Holdings, management monitors its ability to service debt, to finance dividend payments and to provide financial support to the Insurance Subsidiaries. During the year ended December 31, 2010, Aspen Holdings received a $36.5 million payment of inter-company interest in respect of an inter-company loan from Aspen U.K. Holdings. In addition, Aspen Holdings received dividends of $203.0 million (2009 - $401.0 million) from Aspen U.K. Holdings and $120.0 million (2009 - $Nil) from Aspen Bermuda.
In summary, there is a general climate of poor rate levels and soft market conditions and we believe this trend will continue in 2011.
Conditions within the casualty reinsurance market remain challenging. We are continuing to see rate decreases on original business of around 2% to 5% but this varies by line. Terms and conditions are generally remaining stable and acceptable although we are seeing requests for increases in ceding commissions which the market is resisting overall. The January 2011 renewal season in casualty reinsurance has seen continued pressure and as a result, we have only deployed capacity on business where adequate returns could be achieved. This action has resulted in a 25% reduction in premiums written.
Insurance. January 1 is not a major renewal date for insurance and market conditions have not significantly changed from last quarter. Overall, both property and casualty lines continue to experience significant competitive pressures. Within marine, energy and transportation, losses in the energy market have prompted rate firming. Uncertainty surrounding the ongoing regulation of the offshore drilling industry continues and re/insurance capacity initiatives have to be added to the equation but we expect this to have a positive impact on pricing overall. In aviation, we believe that there could be some removal of capacity in 2011 for airline business but with no major accounts renewing until at least April we are uncertain on the impact on pricing at this time. We also note that there have been a number of new entrants at the January 1 renewals within the financial and political risk area. Pricing adequacy is generally more satisfactory particularly in credit and we continue to identify opportunities in this market.
Interest Rate Swaps. Since the end of 2010, we entered into an additional $450.0 million of interest rate swaps bringing the total to $950.0 million. The purchase of additional interest rate swaps will partially mitigate the negative impact of rises in interest rates on the market value of our fixed income portfolio.
Australian Floods. Although we believe we know the Australian market well and over the years have written a substantial Australian casualty reinsurance account, we have for many years believed that the prevailing property rates do not reflect the considerable natural hazards that the continent faces. Consequently, we have maintained only modest involvement as a property catastrophe reinsurer on domestic Australian placements and, in particular, we have tended to avoid what we regard as underpriced lower layers and aggregate covers. As a result of this strategy, we do not anticipate incurring substantial losses from the floods or cyclone damage unless any one event produces losses large enough to trigger reinsurance placements for international customers, which at this time looks unlikely. We believe that four flood events in addition to Cyclone Yasi have taken place. The floods in central Queensland commencing on December 24, 2010, are likely to result in a market loss in the range of $1-2 billion and we believe this should cost us less than $10 million, which we regard as being within our IBNR for the fourth quarter of 2010. We expect no losses from the second flood in South East Queensland which commenced on January 4, 2011. The more significant south Queensland flooding which commenced on January 10, 2011, is likely to result in a market loss in the range of $2-4 billion and we expect our losses to be less
Egypt. The political risk market’s exposure to Egypt comes from three separate areas: physical damage, government action/intervention and payment or performance risk. In respect of physical damage, our exposure arises chiefly through coverage on worldwide programs as we tend to avoid Egypt-specific terrorism cover. We do have some exposure to government action/intervention and payment or performance risk but given the types of counterparties and the extent and types of security underlying the risks we have assumed, we do not anticipate any material losses at this stage within our political risk book. As the situation in Egypt develops, we may need to revisit our analysis of our exposures.
We believe that the following critical accounting policies affect the more significant estimates used in the preparation of our consolidated financial statements. A statement of all the significant accounting policies we use to prepare our financial statements is included in the Notes to the financial statements. If factors such as those described in Item 1A, “Risk Factors” cause actual events to differ from the assumptions used in applying the accounting policy and calculating financial results, there could be a material adverse effect on our results of operations, financial condition and liquidity.
minimum and deposit premium, as defined in the contract, is generally considered to be the best estimate of the contract’s written premium at inception. Accordingly, this is the amount we generally record as written premium in the period the underlying risks incept. During the life of a contract, notifications from cedants and brokers may affect the estimate of ultimate premium and result in either increases or reductions in reported revenue. Changes in estimated adjustable premiums do not generally have a significant impact on short-term liquidity as the payment of adjustment premiums generally occurs after the expiration of a contract.
Premiums receivable. Premiums receivable are recorded as amounts due less any required provision for doubtful accounts. A significant portion of amounts included as premiums receivable, which represent estimated premiums written, net of commissions, is not currently due based on the terms of the underlying contracts. In determining whether or not any bad debt provision is necessary, we consider the financial security of the policyholder, past payment history and any collateral held. We have not made a provision for doubtful accounts in relation to assumed premium estimates. In addition, based on the above process, management believes that the premium estimates included in premiums receivable will be collectable and, therefore, we have not maintained a bad debt provision for doubtful accounts on the premiums at December 31, 2010.
Credit insurance contract. On November 28, 2006, the Company entered into a credit insurance contract which, subject to its terms, insures us against losses due to the inability of one or more of our reinsurance counterparties to meet their financial obligations to us. We consider that this contract is a financial guarantee insurance contract that does not qualify for exemption from treatment for accounting purposes as a derivative. This is because it provides for the final settlement, expected to take place two years after expiry of cover, to include an amount attributable to outstanding and IBNR claims which may not at that point of time be due and payable to us.
reserves for IBNR claims to cover the anticipated cost of claims incurred but not reported; and
a reserve for the LAE associated with settling claims, including legal and other fees and the general expenses of administering the claims adjustment process.
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. In estimating the cost of these claims, we consider circumstances related to the claims as reported, any information available
In general terms, the IELR method is most appropriate for lines of business and/or accident years where the actual paid or reported loss experience is not yet mature enough to modify our initial expectations of the ultimate loss ratios. Typical examples would be recent accident years for lines of business in the casualty reinsurance segment. The BF method is generally appropriate where there are
Reserving procedures and process. Our actuaries calculate the IELR, BF and Chain Ladder 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 do involve significant subjective judgments reflecting many factors such as changes in legislative conditions, changes in judicial interpretation of legal liability policy coverages and inflation. Our actuaries collaborate with underwriting, claims, legal and finance 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 that the claims may ultimately settle at, 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.
There are no differences between our year-end and our quarterly internal reserving procedures and processes in the sense that our actuaries perform the basic projections and analyses described above for each line of business.
Selection of reported gross reserves. Management, through its Reserve Committee, 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 and accident year. Management can select its best estimate outside the range provided by the actuaries, but to date gross reserves are within the range of actuarial estimates. This provides the basis for the recommendation made by management to the Audit Committee and Board of Directors regarding the reserve amounts to be recorded in the Company’s financial statements. The Reserve Committee is a management committee consisting of the Group Chief Risk Officer, the Group Chief Actuary, the Group Chief Financial Officer and senior members of our Underwriting and Claims staff.
Loss Reserving Sensitivity Analysis: The most significant key assumptions identified in the reserving process are that (1) the historic loss development and trend experience is assumed to be indicative of future loss development and trends, (2) the information developed from internal and independent external sources can be used to develop meaningful estimates of the initial expected ultimate loss ratios, and (3) no significant losses or types of losses will emerge that are not represented in either the initial expected loss ratios or the historical development patterns.
heavily on projections of prior year trends into the future. In selecting its best estimate of future liabilities, the Company considers 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, the Company reviews (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 mid-point estimates, such as the potential for outstanding litigation or claims practices of cedants to have an adverse impact.
Changes in loss reserve estimates would not have an immediate effect on our liquidity as settlement of insurance liabilities typically can take a number of years. However, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity” for a discussion of liquidity risks.
These impairments will be included within realized losses and the cost basis of the investment reduced accordingly.
We review all of our fixed maturities on an individual security basis for potential impairment each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions.
Deferred tax assets. We provide for income taxes for our subsidiaries operating in income tax- paying jurisdictions. Our deferred tax assets and liabilities primarily result from the net tax effect of temporary differences between the amounts recorded in our audited consolidated financial statements and the tax basis of our assets and liabilities. We determine deferred tax assets and liabilities separately for each tax-paying component in each tax jurisdiction.
Gross written premiums in 2010 of $2,076.8 million are broadly in line with 2009, with reductions in our reinsurance segment balanced by increases in our insurance segment. Gross written premiums in the reinsurance segment of $1,162.2 million for 2010 contain an additional $45.5 million from new teams that commenced underwriting in 2009 (credit and surety and agriculture) and $39.0 additional catastrophe premium which includes $12.0 million of reinstatement premiums from the Chilean earthquake. These increases are offset by reductions in other property reinsurance, casualty reinsurance and other specialty lines of business. Gross written premiums in the insurance segment of $914.6 million for 2010 include additional contributions of $32.5 million from property insurance where we saw opportunities to write business that met our profitability requirements compensating for reductions in casualty and energy physical damage.
Gross written premiums in 2009 increased by 3.3% to $2,067.1 million when compared to the twelve months ended December 31, 2008 due mainly to a $48.9 million contribution from the full year impact of the underwriting teams established in 2008 which included financial and political risk, financial institutions, professional indemnity and excess casualty in the insurance segment in addition to premium written in our credit and surety reinsurance line which was established in 2009.
The increase in reinsurance net premiums earned in 2009 were mainly from property lines due to favorable market conditions following the hurricanes in 2008 and also the earnings generated by the newly established credit and surety reinsurance business included in our reinsurance segment. An increase of $70.0 million in net earned premiums in our insurance segment was predominantly due to the contribution from new underwriting teams.
Our 2010 catastrophic losses were associated with the Chilean earthquake in the first quarter of 2010 and the New Zealand earthquake in the third quarter of 2010. Our current estimate of loss for these 2010 events is $127.9 million for the Chilean earthquake and $52.8 million for the New Zealand earthquake. The underlying changes in accident year loss ratios by segment are shown in the table below. The prior year claims adjustment in the table below reflects claims development and excludes premium adjustments.
Changes in the acquisition and operating expense ratios to gross earned premiums, and the impact of reinsurance on net earned premiums by segment for each of the twelve months ended December 31, 2010, 2009 and 2008 are shown in the following tables:
Net investment income. In the twelve months ended December 31, 2010, net investment income was $232.0 million (2009 - $248.5 million). Investment income in 2009 benefited from a $19.8 million contribution from our investments in funds of hedge funds which we exited on June 30, 2009. In 2010, the lower interest rate environment combined with our exit from the funds of hedge funds resulted in a lower net investment income for the year. In 2008, we suffered a loss of $97.3 million from our investments in funds of hedge funds.
Change in fair value of derivatives. In the twelve months ended December 31, 2010, we recorded a reduction in the fair value of derivatives of $0.2 million (2009 - $8.0 million). This includes a gain of $6.8 million in the value of our interest rates swaps which we entered into during 2010 and a reduction of $7.0 million (2009 - $8.0 million) in the estimated fair value of our credit insurance contract. At December 31, 2010 and December 31, 2009, there were no outstanding foreign currency contracts. At December 31, 2008, we held foreign currency derivative contracts to purchase $18.8 million of U.S. and foreign currencies. The foreign currency contracts are recorded as derivatives at fair value with changes recorded as a realized foreign exchange gain or loss in our statement of operations. For the twelve months ended December 31, 2010, the impact of foreign currency contracts on net income was $Nil (2009 - $1.8 million). Further information on these contracts can be found in Note 9 to the financial statements.
Net income. In 2010, we had net income of $312.7 million, equivalent to diluted earnings per ordinary share of $3.62 based on the weighted average number of shares in issue during the period. In 2009, we had net income of $473.9 million, equivalent to diluted earnings per ordinary share of $5.64 based on the weighted average number of shares in issue during the period. In 2008, we had net income of $103.8 million, equivalent to diluted earnings per ordinary share of $0.89 based on the weighted average number of shares in issue during the period. Preference share dividends are deducted from net income for the purpose of calculating earnings per ordinary share.
Gross written premiums. Gross written premiums in this segment are broadly in line with those in 2009 with a more significant increase in 2009 when compared with 2008.
Gross written premiums of $1,162.2 million in our reinsurance segment are $13.8 million less than in 2009 despite a $38.6 million increase in premiums in property catastrophe reinsurance which includes $12.0 million of reinstatement premiums associated with the Chilean earthquake. The increase is in contrast to reductions across our other reinsurance lines. Written premium in other property has reduced as a result of higher cedent retentions, while challenging market conditions continue in casualty reinsurance. Specialty reinsurance premiums have increased marginally with reductions in our structured risk portfolio being offset by premiums written in our new credit and surety and non-U.S. agriculture accounts.
The increase in gross written premium of $61.7 million in 2009 compared to 2008 was due to a $48.8 million contribution from our new credit and surety reinsurance team and favorable market conditions in the U.S. property reinsurance market following the 2008 hurricanes.
We purchased $59.3 million of reinsurance contracts during 2009 which was a 112% increase over 2008 with the increase attributable to a combination of specific reinsurance purchased to cover our newly established lines of business and some higher renewal rates on existing reinsurance. The 2008 year benefited from the purchase in 2007 of a number of reinsurance contracts covering us for a period of greater than 12 months, effectively covering the 2008 windstorm season.
The net loss ratio for 2009 was 42.2% compared to 60.9% in 2008 which was impacted by losses of $140.5 million (gross and net of recoveries) from Hurricanes Ike and Gustav and had an impact of 14.2 and 13.8 percentage points on the loss ratio and combined ratio, respectively.
Policy acquisition, operating and administrative expenses. The policy acquisition expense ratio of 17.7% of net premiums earned for 2010 was 1.1 percentage points below the same period in 2009 due largely to the mix of business with more property catastrophe which attracts lower average commission rates. This line of business has lower brokerage costs and provides a greater contribution to the total amount of business written.
The increase of the policy acquisition expense ratio in 2009 to 19.4% from 17.4% in 2008 was due largely to 2008 including reinstatement premiums which have no acquisition costs.
The operating and administrative expense ratio of 9.8% has increased from 8.8% in 2009 due to an increase in general expenses as we continue to invest in the development of the business and establish new offices. The 2009 increase over 2008 was due to higher performance-related compensation costs following a catastrophe free year and investment in new teams.
Total expenses were $189.9 million in 2009, which was equivalent to 33.9% of net premiums earned (2008 - 32.0%). The policy acquisition expense ratio was broadly in line with 2008, while the operating and administrative expense ratio increased from 12.3% to 13.9%. The increase in the operating and administrative expenses to $111.8 million from $105.0 million for the comparative period in 2008 was mainly attributable to an increase in bonus-related accruals and long term incentive charges linked to our improved performance during the year.
Gross written premiums. The table below shows our gross written premiums for each line of business for the twelve months ended December 31, 2010, 2009 and 2008, and the percentage change in gross written premiums for each line:
management and technology business lines and additional premiums from our marine, energy and construction liability account.
Policy acquisition, operating and administrative expenses. Policy acquisition expenses were $126.1 million for 2010 equivalent to 16.7% of net premiums earned (2009 - $119.5 million or 16.7% of net earned premium), with the cost increase reflecting the increase in gross premiums. The 2009 acquisition expense ratio improved from 17.9% in 2008 due to changes in the mix of business written and the addition of new business lines.
Operating and administrative expenses of $99.4 million for the twelve months ended December 31, 2010 are $1.3 million less than 2009 due to the prior year including higher performance-related compensation costs following a catastrophe free year. Nevertheless, we had increased expenditure in 2010 associated with our expansion into the U.S. admitted market and U.K. regional distribution network balanced by reductions in profit-related compensation in 2010. The 2008 operating and administrative expense of $73.1 million was much lower than in 2009 which included investment in new teams. Performance-related compensation costs in 2008 were lower than in 2009 following losses associated with Hurricanes Ike and Gustav.
At December 31, 2010 and December 31, 2009, total cash and investments, including accrued interest receivable, were $7.3 billion and $6.8 billion, respectively. The composition of our investment portfolio is summarized below:
Fixed maturities. At December 31, 2010, the average credit quality of our fixed income book was “AA+,” with 96% of the portfolio being graded “A” or higher. At December 31, 2009, the average credit quality of our fixed income book was “AA+,” with 96% of the portfolio being graded “A” or higher.
Alternative-A securities. We define Alternative-A (“alt-A”) mortgages as those considered less risky than sub-prime mortgages, but with lower credit quality than prime mortgages. At December 31, 2010, we had $Nil invested in alt-A securities (December 31, 2009 - $9.3 million).
In addition to returns on our investment, we provide services on risk selection, pricing and portfolio design in return for a percentage of profits from Iris Re. In the twelve months ended December 30, 2010, fees of $0.3 million (2009 - $0.1 million), were payable to us.
The tables below show our other investments for the twelve months ended December 31, 2010 and 2009:
We consider prices for actively traded Treasury securities to be derived based on quoted prices in an active market for identical assets, which are Level 1 inputs in the fair value hierarchy. We consider prices for other securities priced via vendors, indices and broker-dealers, or with reference to interest rates and yield curves, to be derived based on inputs that are observable for the asset, either directly or indirectly, which are Level 2 inputs in the fair value hierarchy. We consider securities, other financial instruments and derivative insurance contracts subject to fair value measurement whose valuation is derived by internal valuation models to be based largely on unobservable inputs, which are Level 3 inputs in the fair value hierarchy.
Our fixed income securities are traded on the over-the-counter market, based on prices provided by one or more market makers in each security. Securities such as U.S. Government, U.S. Agency, Foreign Government and investment grade corporate bonds have multiple market makers in addition to readily observable market value indicators such as expected credit spread, except for Treasury securities, over the yield curve. We use a variety of pricing sources to value our fixed income securities including those securities that have pay down/prepay features such as mortgage-backed securities and asset-backed securities in order to ensure fair and accurate pricing. The fair value estimates for the investment grade securities in our portfolio do not use significant unobservable inputs or modelling techniques.
Broker-Dealers. For the most part, we obtain quotes directly from broker-dealers who are active in the corresponding markets when prices are unavailable from independent pricing services or index providers. Generally, broker-dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based on trade data, bids or offers, observed spreads and performance on newly issued securities. They may also establish pricing through observing secondary trading of similar securities. Quotes from broker-dealers are non-binding.
To validate the techniques or models used by third-party pricing sources, we review the process, in conjunction with the processes completed by the third-party accounting service provider, which include, but are not limited to:
initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; and;
Other-than-temporary Impairment of Investments. The difference between the cost and the estimated fair market value of available for sale investments is monitored to determine whether any investment has experienced a decline in value that is believed to be other-than-temporary. Impairment occurs when there is no objective evidence to support recovery in value before disposal and we intend to sell the security or more likely than not will be required to sell the security before recovery of its adjusted amortized cost basis or it is deemed probable that we will be unable to collect all amounts due according to the contractual terms of the individual security.
We review all of our fixed maturities on an individual security basis for potential impairment each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions. The total other-than-temporary impairment for the twelve months ended December 31, 2010, was $0.3 million (2009 - $23.2 million).
For a discussion of our valuation techniques within the fair value hierarchy, please see Note 6 of the consolidated financial statements for the twelve months ended December 31, 2010 included elsewhere in this report.
The decrease in reinsurance recoverables in 2010 is due to the continued settlement of losses associated with the 2005 hurricanes (Katrina, Rita, and Wilma) and settlement of claims from Hurricane Ike and the Air France disaster.
The gross reserves may be further analyzed between outstanding or reported claims and IBNR as at December 31, 2010 and 2009, as follows:
Insurance. The net reserve strengthening in the insurance segment of $44.2 million in the year was mainly due to both our casualty business and our financial and professional lines. Following a full and detailed review of U.S. casualty insurance, we strengthened reserves by $31.8 million of which $22.5 million was in the fourth quarter, reflecting mainly adverse loss experience largely in construction accounts. Other areas of strengthening were in excess casualty and professional lines insurance which were adversely impacted by recession-related claims. This strengthening has been partly compensated for by various releases including U.K. liability where experience was better than expected.
Reinsurance: The $96.9 million reserve release in this segment was predominantly from casualty business which saw favorable development in our U.S. casualty treaty and international casualty treaty reinsurance business which contributed $33.2 million and $31.0 million, respectively. For both U.S. and international casualty, where claims may take several years to emerge, the experience to date compared with starting loss ratios and expected patterns was generally better than expected at the aggregate level. Additional releases occurred from commutations of certain contracts. Property business lines showed an $11.1 million release due mainly to favorable development on the catastrophe class. The most significant elements related to reductions in loss estimates for the 2007 U.K. floods and estimated recoveries from enforcing subrogation rights in respect of California wildfires. A lack of incurred development resulted in a release in specialty business of $21.0 million.
The following table shows our capital structure at December 31, 2010 compared to December 31, 2009.
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 and this stands at 22.8% as of December 31, 2010 (2009 - 17.0%).
On January 5, 2010, we entered into an accelerated share repurchase program with Goldman, Sachs & Co. to repurchase $200.0 million of our ordinary shares. This transaction was completed on May 26, 2010 resulting in the repurchase and cancellation of 7,226,084 ordinary shares in the first half of 2010. The repurchase completed the share repurchase program authorized by the
On November 10, 2010, we entered into an accelerated share repurchase program with Barclays Capital to buy back $184 million of Aspen’s ordinary shares. To date, the program has resulted in 5,737,449 ordinary shares being received and cancelled.
On December 15, 2010, we filed an unlimited shelf registration statement for the issuance and sale of securities from time to time.
As at December 31, 2010 and 2009, Aspen Holdings held $354.0 million and $33.5 million, respectively, in cash and cash equivalents which, taken together with dividends declared or expected to be declared by subsidiary companies and our credit facilities, management considered sufficient to provide Aspen Holdings liquidity at such time. As at December 31, 2010, we also held $286.0 million of short-term investments, that are available for sale to meet any future liquidity needs. For a discussion of the volatility and liquidity of our other investments, see Part I, Item 1A, “Risk Factors - Market and Liquidity Risks,” and for a discussion of the impact of insurance losses on our liquidity, see Part I, Item 1A, “Risk Factors - Insurance Risks.”
Insurance subsidiaries. As of December 31, 2010, the Insurance Subsidiaries held approximately $818.4 million (2009 - $701.5 million) in cash and short-term investments that are readily realizable securities. Management monitors the value, currency and duration of cash and investments held by its Insurance Subsidiaries to ensure that they are able to meet their insurance and other liabilities as they become due and was satisfied that there was a comfortable margin of liquidity as at December 31, 2010 and for the foreseeable future.
resources, or if the syndicate requires funds to cover a short term liquidity gap. The amount which the Company provides as Funds at Lloyd’s is not available for distribution to the Company for the payment of dividends. AMAL is also required by Lloyd’s to maintain a minimum level of capital. As at December 31, 2010, the minimum amount was $0.6 million (December 31, 2008 - $0.6 million). This is not available for distribution by the Company for the payment of dividends.
U.S. regulatory deposits. As at December 31, 2010, Aspen Specialty had a total of $7.1 million (2009 - $6.6 million) on deposit with U.S. states in order to satisfy state regulations for writing business in those states.
Canadian trust fund. Aspen U.K. has established a Canadian trust fund with a Canadian bank to secure a Canadian insurance license. As at December 31, 2010, the balance held in trust was CAD$329.4 million (2009 - CAD$276.5 million).
Australian trust fund. Aspen U.K. has established an Australian trust fund with an Australian bank to secure an Australian insurance license. As at December 31, 2010, the balance held in trust was AUD$122.0 million (2009 - AUD$41.5 million).
Singapore trust fund. Aspen U.K. has established a Singapore trust fund with a Singapore bank to secure a Singapore insurance license. As at December 31, 2010, the balance held in trust was SGD$68.4 million (2009 - SGD$10.4 million).
Consolidated cash flows for the twelve months ended December 31, 2010. Total net cash flow from operating activities in 2010 was $624.6 million, a decrease of $20.0 million from 2009. For the twelve months ended December 31, 2010, our cash flows from operations provided us with sufficient liquidity to meet our operating requirements. We paid net claims of $666.8 million in 2010 and received $17.6 million from market securities and net purchases and sales of equipment during the period. We paid ordinary and preference share dividends of $69.3 million, and $407.8 million was used to repurchase ordinary shares. At December 31, 2010, we had a balance of cash and cash equivalents of $1,179.1 million. The balance of cash and cash equivalents has increased from the issuance of $250.0 million of additional Senior Notes in December 2010.
Consolidated cash flows for the twelve months ended December 31, 2009. Total net cash flow from operating activities in 2009 was $646.6 million, an increase of $116.1 million from 2008. For the twelve months ended December 31, 2009, our cash flows from operations provided us with sufficient liquidity to meet our operating requirements. We paid net claims of $808.6 million in 2009 and made net investments in the amount of $682.4 million in market securities and equipment during the period. We paid ordinary and preference share dividends of $73.6 million, and $100.3 million was used to repurchase ordinary shares. At December 31, 2009, we had a balance of cash and cash equivalents of $748.4 million. The balance of cash and cash equivalents decreased during the year as opportunities arose to increase our holdings of high quality corporate bonds.
Credit Facility. On July 30, 2010, Aspen Holdings and its various subsidiaries replaced its then existing $450.0 million revolving credit facility with a three-year $280.0 million revolving credit facility pursuant to a credit agreement (the “credit facilities”) by and among the Company, certain of our direct and indirect subsidiaries, including the Insurance Subsidiaries (collectively, the “Borrowers”), the lenders party thereto, Barclays Bank plc, as administrative agent, Citibank, NA, as syndication agent, Credit Agricole CIB, Deutsche Bank Securities Inc. and The Bank of New York Mellon, as co-documentation agents and The Bank of New York, as collateral agent, U.S. Bank N.A, Lloyd’s Bank and HSBC.
Under the credit facilities, we must maintain at all times a consolidated tangible net worth of not less than approximately $2.3 billion plus 50% of consolidated net income and 50% of aggregate net cash proceeds from the issuance by the Company of its capital stock, each as accrued from January 1, 2010. The Company must also not permit its consolidated leverage ratio of total consolidated debt to consolidated debt plus consolidated tangible net worth to exceed 35%. In addition, the credit facilities contain 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; 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; permit the rating of any insurance subsidiary to fall below A.M. Best financial strength rating of B++; 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. The credit facilities also include covenants that restrict the ability of our subsidiaries to incur indebtedness and guarantee obligations.
Letters of Credit Facility. On April 29, 2009, Aspen Bermuda replaced its existing letter of credit facility with Citibank Europe dated October 29, 2008 in a maximum aggregate amount of up to $450.0 million with a new letter of credit facility in a maximum aggregate amount of up to $550.0 million. As at December 31, 2010, we had $372.0 million of outstanding collateralized letters of credit under this facility.
On October 6, 2009, Aspen U.K. and Aspen Bermuda entered into a $200.0 million secured letter of credit facility with Barclays Bank plc. All letters of credit issued under the facility will be used to support reinsurance obligations of the parties to the agreement and their respective subsidiaries. We had $42.4 million of outstanding collateralized letters of credit under this facility as at December 31, 2010.
The long term debt obligations disclosed above does not include the $30.0 million annual interest payable on our outstanding Senior Notes.
We entered into an agreement in July 2004 to lease three floors comprising a total of approximately 15,000 square feet in Hamilton, Bermuda for our holding company and Bermuda operations. The term of the rental agreement is for six years from September 1, 2005 to August 31, 2011, with an additional three-year option commencing September 1, 2011. We have agreed a three-year extension effective September 1, 2011.
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 2011, we consider that although inflation is currently low, in the medium-term there is a risk that inflation, interest rates and bond yields will rise with the result that the market value of certain of our fixed interest investments may fall.
Operating income, a non-GAAP financial measure, is an internal performance measure used by us in the management of our operations and represents after-tax operational results excluding, as applicable, after-tax net realized capital gains or losses, after-tax net foreign exchange gains or losses and after-tax gains or losses from our investments in funds of hedge funds. We exclude after-tax net realized capital gains or losses and after-tax net foreign exchange gains or losses and after-tax gains from our calculation of operating income because the amount of these gains or losses is heavily influenced by, and fluctuates in part, according to the availability of market opportunities. We believe these amounts are largely independent of its business and underwriting process and including them distorts the analysis of trends in its operations. In addition to presenting net income determined in accordance with GAAP, we believe that showing operating income enables investors, analysts, rating agencies and other users of our financial information to more easily analyze our results of operations in a manner similar to how management analyzes our underlying business performance. Operating income should not be viewed as a substitute for GAAP net income.