We lease office space in Hamilton, Bermuda where we are headquartered. In addition, the Company and its subsidiaries lease office space in the United States, the United Kingdom, Australia, Ireland, Singapore, Switzerland and the United Arab Emirates. We renew and enter into leases in the ordinary course of business as required. We believe our current facilities and the leaseholds with respect thereto are sufficient for us to conduct our operations for the foreseeable future. For more information on our leasing arrangements, refer to Note 19(b) of our consolidated financial statements, “Commitments and Contingent Liabilities - Operating leases.”
Book value per ordinary share is based on total shareholders’ equity excluding the aggregate value of the liquidation preferences of our preference shares, divided by the number of shares outstanding of 62,017,368, 60,918,373, 59,774,464, 59,474,085 and 59,743,156 as at December 31, 2014, 2015, 2016, 2017 and 2018, respectively.
Including cash within consolidated variable interest entities of $26.9 million as at December 31, 2018 and $166.6 million as at December 31, 2017.
All of the loan notes issued by our consolidated variable interest entities, at fair value, of $4.6 million as at December 31, 2018, 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.
Business Combination. On August 27, 2018, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Highlands Holdings, Ltd., a Bermuda exempted company (“Highlands”), and Highlands Merger Sub, Ltd., a Bermuda exempted company and wholly owned subsidiary of Highlands (“Merger Sub”). Under the Merger Agreement, subject to the satisfaction or waiver of certain conditions set forth therein, and in the related statutory merger agreement, the Company will merge with and into Merger Sub in accordance with the Bermuda Companies Act (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Highlands. Highlands and Merger Sub are affiliates of certain investment funds managed by affiliates of Apollo Global Management, LLC, a leading global alternative investment manager. As previously announced, Christopher O’Kane will step down from his position as Group Chief Executive Officer and director of the Board on or shortly after the completion of the Merger and, subject to and contingent upon the Merger, will be replaced by Mark Cloutier.
All required regulatory approvals in connection with the Merger have been obtained and we anticipate that the Merger will be completed shortly. The Merger is subject to the satisfaction or waiver of a number of conditions, including, among others, the maintenance of certain financial strength ratings of the Operating Subsidiaries. The Merger Agreement also contains certain termination rights, including Highlands’ right to terminate if we suffered aggregate net losses exceeding $350 million resulting from certain catastrophic events occurring between July 1, 2018 and January 31, 2019. We do not believe that the net catastrophe losses arising from such catastrophic events during the specified period exceeded $350 million. For further details on the potential risks related to the Merger, refer to Part I, Item 1A, “Risk Factors - Risks Relating to the Merger.”
Gross written premiums of $3,446.9 million in 2018, an increase of 2.6% from 2017.
Annualized net return on average equity of a 7.7% loss for 2018 compared with an 11.1% loss in 2017 and a 5.4% gain in 2016.
Overall gross written premiums in 2018 increased by 2.6% compared to 2017. In 2018, gross written premiums in our reinsurance segment decreased by 3.4% compared to 2017 due primarily to reductions in mortgage business written within our specialty reinsurance business line. The 7.7% increase in gross written premiums in our insurance segment in 2018 was due to growth in property and casualty insurance, and financial and professional lines insurance, partially offset by reductions in marine, aviation and energy insurance where we exited certain lines of business as we continue to experience challenging market conditions. In 2017, gross written premiums increased by 6.8% compared to 2016 due primarily to growth in specialty reinsurance business lines and financial and professional insurance.
Ceded written premiums. Overall ceded written premiums in 2018 increased by 18.9% compared to 2017. Ceded written premiums increased in both business segments. The changes in our business segments’ ceded written premiums for the twelve months ended December 31, 2018, 2017 and 2016 were as follows:
Ceded reinsurance premiums in our insurance segment increased by $202.2 million in 2018 primarily due to an increase in the proportion of business ceded to our casualty, financial institutions and property quota per share programs. Ceded reinsurance costs in our reinsurance segment increased by $14.3 million in 2018 due to increased ceded reinsurance in property catastrophe reinsurance where business previously ceded to Silverton, a consolidated entity, is now ceded to Peregrine, a non-consolidated entity.
Ceded written premiums in our insurance segment increased by 107.6% in 2017 compared to 2016 due to the restructuring of our ceded reinsurance arrangements and the recognition of reinstatement premiums associated with increased catastrophes and large losses. Ceded written premiums in our reinsurance segment increased by 107.3% in 2017 compared to 2016 due to new business opportunities written in conjunction with increased retrocession, additional ceded written premiums following the sale of AgriLogic in December 2017 and the recognition of reinstatement premiums associated with increased catastrophe losses.
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, 2018, 2017 and 2016 were as follows:
The overall combined ratio for 2018 improved by 15.7 percentage points compared to 2017 due mainly to a decrease in the loss ratio. The improvement in loss ratio was due primarily to a $301.3 million decrease in catastrophe losses and a $38.7 million decrease in large losses, partially offset by a $91.9 million decrease in net earned premiums. The expense ratio decreased by 0.2 percentage points due to a reduction in general, administrative and corporate expenses and a decrease in policy acquisition expenses due to over-rider commissions associated with the increase in ceded reinsurance premiums partially offset by a reduction in net earned premiums.
In each of the years ended December 31, 2018, 2017 and 2016, we recorded a reduction in the level of reserves for prior years. In 2018, we reported net favorable development on prior year loss reserves of $111.1 million, or 5.0 combined ratio points, compared with $105.4 million, or 4.6 combined ratio points, for 2017, and $129.3 million, or 4.9 combined ratio points, for 2016.
General, administrative and corporate expenses decreased to $491.7 million in 2018 from $502.2 million in 2017 and were broadly in line with $490.1 million in 2016. The decrease in expenses in 2018 compared to 2017 was largely due to reductions in administration costs in the reinsurance segment following the sale of AgriLogic, and a reduction in operating expenses in the insurance segment. These reductions were offset by a $44.5 million increase in non-operating expenses, which included $39.0 million of advisor fees related to the Merger and a $22.3 million increase in costs associated with the Effectiveness and Efficiency Program, offset by a reduction in other non-operating expenses primarily due to the write back of a $14.1 million buyout provision. The increase in 2017 compared to 2016 was largely due to $15.2 million of costs associated with the Effectiveness and Efficiency Program and increased costs associated with growth in our insurance business, partially offset by lower provisions for performance-related remuneration.
The increase in the tax rate, (defined as the tax charge or credit, divided by the profit or loss before tax) for 2018 was due to the successful conclusion of a U.K. tax inquiry which enabled the release of a $12.8 million provision we were holding against the potential disallowance of a prior period adjustment. The tax benefit was partially offset by the introduction of U.S. BEAT on premium ceded from U.S. subsidiaries to non-U.S. related parties. In addition, the tax rate for 2017 benefited from a tax credit associated with the adoption of ASU 2016-09, “Compensation - Stock Compensation” and a tax credit regarding deductions available for certain research and development expenditure. The tax benefit in 2017 was not materially affected by the U.S. Tax Cuts and Jobs Act which was signed on December 22, 2017. The impact of the U.S. federal income tax rate reduction from 34% in 2017 to 21% in 2018 has been reflected in measuring deferred taxes.
Net income. We reported a net loss after taxes of $145.8 million in 2018 compared to a net loss of $266.4 million in 2017 and net income of $203.4 million in 2016. The decrease in net loss in 2018 was primarily due to the $412.2 million increase in underwriting income as a result of the $301.3 million decrease in catastrophe losses and a $39.4 million reduction in expenses, partially offset by a $91.9 million reduction in net earned premiums. The net loss in 2017 was due primarily to a $625.5 million decrease in underwriting income mainly from a $409.6 million increase in catastrophe losses, a $330.7 million reduction in net earned premiums and a $23.9 million reduction in reserve releases, partially offset by a $116.3 million reduction in expenses.
Shareholders’ equity and financial leverage. Total shareholders’ equity decreased by $272.5 million from $2,928.5 million as at December 31, 2017 to $2,656.0 million as at December 31, 2018, the most significant movements of which were as follows:
a decrease of $220.3 million in retained earnings due to a net loss of $145.8 million and the payment of $73.4 million in dividends on our outstanding ordinary shares and Preference Shares; and
Management monitors the ratio of the total of debt and hybrids to total capital, with total capital defined as shareholders’ equity plus outstanding debt excluding loan notes issued by variable interest entities. As at December 31, 2018, the debt to capital ratio decreased to13.8% (2017 - 15.8%) primarily due to the partial redemption of the 2020 Senior Notes in June 2018, partially offset by a decrease in capital due to catastrophe losses and unrealized losses in our investment portfolio. We also monitor the ratio of
Diluted book value per ordinary share as at December 31, 2018 was $35.48, a decrease of 11.5% compared to $40.10 as at December 31, 2017. Book value per ordinary share is based on total shareholders’ equity, less preference shares (liquidation preference less issue expenses) and non-controlling interests, divided by the number of ordinary shares in issue at the end of the period. Balances as at December 31, 2018 and 2017 were as follows:
We achieved an overall rate increase of approximately 3% for our reinsurance business during the January 1, 2019 renewals where we renewed approximately 40% of our annual book of reinsurance business excluding our strategic partnership with CGB DS. Our Aspen Capital Markets business continues to provide investors with direct access to our underwriting expertise and to provide brokers and clients with additional capacity. The January 1 renewals are less important for our insurance segment. During 2018, we achieved price increases of approximately 4% in property and casualty insurance and approximately 8% in marine, aviation and energy insurance, whereas prices across our financial and professional lines insurance remained broadly flat.
With regard to our Effectiveness and Efficiency Program, we exceeded our target to achieve run rate savings of $30 million in 2018 and continue to expect to achieve approximately $55 million of run rate savings in 2019.
Many non-proportional treaties also include a provision for the payment to us by the cedant of reinstatement premiums based on loss experience under such contracts. Reinstatement premiums are the premiums charged for the restoration of the reinsurance limit of an excess of loss contract to its full amount after payment by the reinsurer of losses as a result of an occurrence. These premiums relate to the future coverage obtained during the remainder of the initial policy term and are included in revenue in the same period as the corresponding losses.
The most likely drivers of change in our premium estimates in decreasing order of magnitude are:
We anticipate that ultimate premiums might reasonably be expected to vary by up to 5% as a result of variations in one or more of the assumptions described above, although larger variations are possible. Based on gross written premiums of $182.0 million (2017 - $242.5 million) in our property reinsurance treaty pro rata account as at December 31, 2018, a variation of 5% could increase or reduce net income before tax by approximately $0.7 million (2017 - $1.2 million).
Case Reserves. For reported claims, reserves are established on a case-by-case basis within the parameters of coverage provided in the insurance policy or reinsurance agreement. The method of establishing case reserves for reported claims differs among our operations. With respect to our insurance operations, we are advised of potential insured losses and our claims handlers record reserves for the estimated amount of the expected indemnity settlement, loss adjustment expenses and cost of defense where appropriate. The reserve estimate reflects the judgment of the claims personnel and is based on claim information obtained to date, general reserving practices, the experience and knowledge of the claims personnel regarding the nature of the specific claim and where appropriate and available, advice from legal counsel, loss adjusters and other claims experts.
IBNR Reserves. The need for IBNR reserves arises from time lags between when a loss occurs and when it is actually reported and settled. By definition, we do not have specific information on IBNR claims so they need to be estimated by actuarial methodologies. IBNR reserves are therefore generally calculated at an aggregate level and cannot generally be identified as reserves for a particular loss or contract. We calculate IBNR reserves by class of business within each line of business. Where appropriate, analyses may be conducted on sub-sets of a class of business. IBNR reserves are calculated by projecting our ultimate losses on each class of business and subtracting paid losses and case reserves. IBNR reserves also cover the anticipated cost of claims incurred but not reported, within this we also include any potential development of reported claims. Over recent years, we have begun to place greater reliance on our actual actuarial experience for our long-tail lines of business that we have written since our
inception in 2002. We believe that our earliest accident years are now capable of providing us with meaningful actuarial indications. Estimates and judgments for new insurance and reinsurance lines of business are more difficult to make than those made for more mature lines of business because we have more limited historical information through December 31, 2018.
Reserving Procedures and Process. Our actuaries calculate the IELR, BF and Chain Ladder and, if appropriate, other methods for each class of business and each accident year. They then calculate a single point actuarial mean best estimate (“ultimate”) for each class of business and provide a stochastic distribution around the mean for each line of business. The actuarial methodologies involve significant subjective judgments reflecting many factors, including but not limited to, changes in legislative conditions, changes in judicial interpretation of legal liability policy coverages and inflation. Our actuaries collaborate with our underwriting, claims, legal and finance teams in identifying factors which are incorporated in their range of ultimates in which management’s best estimate is most likely to fall. The actuarial stochastic distribution is designed to provide management with a range from which it is reasonable to select a single management best estimate for inclusion in our financial statements.
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” Reserve Committee currently consists of the Group Chief Risk Officer (the chair), the Group Chief Financial Officer, the Group Head of Capital Management, the Group Chief Accounting Officer, the President and Chief Underwriting Officer of Aspen Re, the President and Chief Underwriting Officer of Aspen Insurance and the Executive Vice President of Global Business Performance and Strategy of Aspen Insurance. Senior members of the insurance and reinsurance segment underwriting and claims staff comprise the remaining members of each of the insurance and reinsurance reserve committees, respectively.
Each class of business is reviewed in detail by management through its Reserve Committee at least once a year. The timing of such reviews varies throughout the year. Additionally, we review the emergence of actual losses relative to expectations every fiscal quarter for all classes of business. If warranted from this analysis, we may accelerate the timing of our detailed actuarial reviews.
These factors are incorporated in the recommended reserve range from which management selects its best point estimate. We take all reasonable steps to ensure that we utilize all appropriate information and actuarial techniques in establishing our IBNR reserves. However, given the uncertainty in establishing claims liabilities, it is likely that the final outcome will prove to be different from the original provision established at the balance sheet date. Changes to our previous estimates of prior period loss reserves impact the reported calendar year underwriting results by worsening our reported results if the prior year reserves prove to be deficient or improving our reported results if the prior year reserves prove to be redundant. As at December 31, 2018, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $198.5 million in loss reserves which would
represent 126.2% of loss before income tax for the twelve months ended December 31, 2018. As at December 31, 2017, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $186.0 million in loss reserves which would represent 66.0% of income before income tax for the twelve months ended December 31, 2017. A 5% change in our net loss reserves equates to $249.8 million and represents 5.0% of shareholders’ equity as at December 31, 2018.
There are specific areas of our selected reserves which have additional uncertainty associated with them. Refer to Part I, Item 1A, “Risk Factors -Insurance Risks - Our financial condition and operating results may be adversely affected if actual claims exceed our loss reserves” for a discussion of the specific areas of our selected reserves which have additional uncertainty. In each case, management believes they have selected an appropriate best estimate based on current information and current analyses.
Loss Reserving Sensitivity Analysis. The most significant key assumptions identified in the reserving process are that (i) the historic loss development and trend experience is assumed to be indicative of future loss development and trends, (ii) the information developed from internal and independent external sources can be used to develop meaningful estimates of the initial expected ultimate loss ratios, and (iii) 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.
Net reserve for losses and loss expenses as at December 31, 2018 - Sensitivity to loss emergence patterns
Net reserve for losses and loss expenses as at December 31, 2018 - Sensitivity to expected loss ratios
The most significant variance in the above scenarios (i.e., a six month deceleration of loss emergence patterns) would have the effect of increasing losses and loss expenses by $296.1 million.
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The discussions that follow include tables and discussions relating to our consolidated income statement and our segmental operating results for the twelve months ended December 31, 2018, 2017 and 2016.
Gross written premiums. The following table analyzes the overall change in gross written premiums for our two business segments in the twelve months ended December 31, 2018, 2017 and 2016:
Overall gross written premiums increased by 2.6% in 2018 compared to 2017. Gross written premiums in our reinsurance segment decreased by 3.4% in 2018 compared to 2017 due to reductions in premiums written in property catastrophe reinsurance, other property reinsurance and specialty reinsurance, partially offset by a modest increase in premiums written in casualty reinsurance. Gross written premiums in our insurance segment increased by 7.7% due to growth in property and casualty insurance, and financial and professional lines insurance, partially offset by reductions in marine, aviation and energy insurance where we have exited certain lines of business and continue to experience challenging market conditions.
Overall gross written premiums in 2017 increased by 6.8% compared to 2016. Gross written premiums in our reinsurance segment increased by 9.6% in 2017 compared to 2016 due to growth in agriculture insurance business written within specialty reinsurance and $32.3 million of reinstatement premiums associated with catastrophe losses. Gross written premiums in our insurance segment increased by 4.5% in 2017 compared to 2016 due to growth in financial and professional lines insurance partially offset by reductions in marine, aviation and energy insurance and property and casualty insurance.
Ceded written premiums. The following table analyzes the overall change in ceded written premiums for our two business segments in the twelve months ended December 31, 2018, 2017 and 2016:
Total ceded written premiums in 2017 increased by $595.1 million compared to 2016, resulting in a decrease in our retention ratio from 82.4% in 2016 to 65.8% in 2017. Ceded written premiums increased in both business segments in part due to the purchase of a whole account quota share contract. Ceded reinsurance premiums increased for our insurance segment due to the restructure of our ceded reinsurance arrangements though the use of significant quota share reinsurance arrangements and the recognition of ceded premiums to reinstate cover following catastrophe and other large losses. Ceded reinsurance premiums increased for our reinsurance segment due to increased reinsurance for our property catastrophe and other property business lines due to new business opportunities which were written in conjunction with an increase in retrocession, an increase in ceded reinsurance premiums as a result of the transitional arrangements following the sale of AgriLogic in December 2017 and the recognition of additional ceded premiums as a result of reinstating cover following catastrophe losses.
Includes net earned premium of $243.6 million related to CGB DS and $2.8 million related to AgriLogic (2017 - $198.8 million, 2016 -$114.5 million related to AgriLogic).
We have presented loss ratios both including and excluding the impact from catastrophe losses to aid in the analysis of the underlying performance of the business segments. We have defined major 2018 catastrophe losses as losses associated with Hurricanes Florence and Michael, Typhoon Jebi in Japan, Winter Storm Friederike in Europe, wildfires in California, U.K. winter storms and other U.S. and Asian weather-related events. We have defined major 2017 catastrophe losses as losses associated with Hurricanes Harvey, Irma and Maria, the earthquakes in Mexico, a tornado in Mississippi, Cyclone Debbie in Australia, wildfires in California and other U.S. weather-related events. We have defined major 2016 catastrophe losses as losses associated with wildfires in North America, Hurricane Matthew and other weather-related events in the U.S., several earthquakes and a hailstorm in the Netherlands.
The underlying changes in loss ratios by business segment for the twelve months ended December 31, 2018, 2017 and 2016 are shown in the tables below. The total loss ratio represents the calendar year U.S. GAAP loss ratio. The current year adjustments represent catastrophe loss events incurred in those years which reflect net claims and reinstatement premium adjustments.
Expenses. We monitor the ratio of expenses to gross earned premium (the “gross expense ratio”) as a measure of the cost effectiveness of our amortization of deferred policy acquisition costs, general, administrative and corporate expenses. The tables below present the contribution of the amortization of deferred policy acquisition costs and general, administrative and corporate expenses to the gross expense ratios and the total net expense ratios for the twelve months ended December 31, 2018, 2017 and 2016. We also present the effect of reinsurance purchased which impacts the reported net expense ratio by expressing the expenses as a proportion of net earned premiums.
(1) The total group general and administrative expense ratio includes corporate and non-operating expenses. Comparative ratios have been re-presented to include corporate and non-operating expenses.
Net policy acquisition expenses decreased by $28.9 million in 2018 compared to 2017 primarily due to an increase in over-rider commissions associated with the increase in ceded reinsurance. Policy acquisition expenses decreased by $128.4 million in 2017 compared to 2016 despite the increase in gross policy acquisition expenses as it was offset by an increase in over-rider commissions associated with the increase in ceded reinsurance.
The increase in the gross policy acquisition expense ratio from 18.6% in 2017 to 19.1% in 2018 was due to a change in the mix of business written in the insurance segment and an increase of commission expense for crop business in the reinsurance segment following the sale of AgriLogic.
General, administrative and corporate expenses decreased by $10.5 million from $502.2 million in 2017 to $491.7 million in 2018. The net general, administrative and corporate expense ratio in 2018 decreased by 1.7 percentage points compared to the prior period due to reductions in administration costs in the reinsurance segment following the sale of AgriLogic and a reduction in operating expenses in the insurance segment offset by a $44.5 million increase in other non-operating costs. Non-operating costs in 2018 include the recognition of $39.0 million of advisor fees related to the Merger, $37.5 million of costs associated with the Effectiveness and Efficiency Program and $11.3 million of retention costs, partially offset by the write back of a $14.1 million buy out provision which was no longer exercisable.
As the foreign exchange contracts settle, the realized gain or loss is reclassified from other comprehensive income into general, administration and corporate expenses of the statement of operations and other comprehensive income. For the twelve months ended December 31, 2018, the amount recognized within general, administration and corporate expenses for settled foreign exchange contracts was a realized loss of $1.2 million (December 31, 2017 - gain of $4.4 million recognized within general, administration and corporate expenses).
Interest on long-term debt. Interest on long-term debt of $25.9 million is the interest due on the 2020 Senior Notes and 2023 Senior Notes. The reduction in the interest charge in the twelve months ended December 31, 2018 was due to the redemption, on June 18, 2018, of $125.0 million of our 6.00% Senior Notes due 2020.
The increase in corporate and non-operating expenses in 2018 compared to 2017 was due to a $72.4 million increase in other non-operating costs which includes the recognition of $39.0 million of advisor fees related to the Merger, $37.5 million of costs associated with implementing the Effectiveness and Efficiency Program and $11.3 million of retention costs, partially offset by the write back of a $14.1 million buy out provision. The increase in corporate and non-operating expenses in 2017 compared to 2016 was due to $15.2 million of costs associated with implementing the Effectiveness and Efficiency Program and higher salary costs due to increased headcount, partially offset by reductions in performance-related remuneration provisions.
Change in fair value of derivatives. The change in fair value of derivatives in 2018 was attributable to foreign exchange contracts that had a loss of $31.8 million compared to a gain of $27.7 million in 2017 and a loss of $21.5 million in 2016. Interest rate swaps had a realized loss of $3.1 million in 2016. There was no gain or loss from interest rate swaps in 2018 or 2017 because we terminated the swaps on May 6, 2016. Refer to Note 23 of our consolidated financial statements, “Subsequent Events” for information on the interest rate swap we executed in January 2019.
The $4.4 million change in fair value of loan notes issued by variable interest entities represents the proportion of profit generated by Silverton attributable to third-party investors. The $21.2 million reduction in the value of the loan notes in 2017 is due to catastrophe losses assumed by Silverton. The increase in the value in 2016 is due to premiums received by Silverton being greater than the losses assumed.
Income tax expense. There was an income tax benefit for the twelve months ended December 31, 2018 of $10.2 million compared to an income tax benefit of $15.4 million in 2017 and an income tax expense of $6.1 million in 2016. The effective tax rate (defined as the tax charge or credit, divided by the profit or loss before tax), for the twelve months ended December 31, 2018 on our loss before tax was 6.5% (2017 - 5.5%; 2016 - 2.9%) and is representative of the geographic spread of our business between taxable and non-taxable jurisdictions.
The tax benefit for 2018 included the release of a $12.8 million provision we had been holding against the potential disallowance of a prior period adjustment following the successful conclusion of a U.K. tax inquiry. The tax benefit was partially offset by the introduction of U.S. BEAT on premium ceded from U.S. subsidiaries to non-U.S. related parties and withholding tax charges on premium ceded from our Australian branch to related parties. In addition, the tax rate for 2017 benefited from a tax benefit associated with the adoption of ASU 2016-09, “Compensation - Stock Compensation” and a tax benefit regarding deductions available for certain research and development expenditure.
The effective tax rate for the year is subject to revision in future periods if circumstances change and depends on the relative profitability of those parts of business underwritten in Bermuda (where the rate of tax on corporate profits is zero), the United Kingdom (where the corporation tax rate is 19% and will be reduced to 17% effective April 1, 2020) and the United States (where the federal income tax rate is 21% effective January 1, 2018).
Our reinsurance segment consists of property catastrophe reinsurance, other property reinsurance, casualty reinsurance and specialty reinsurance. For a more detailed description of this segment, refer to Part I, Item 1, “Business - Business Segments - Reinsurance” and Note 5 of our consolidated financial statements, “Segment Reporting.”
Gross written premiums. The table below shows our gross written premiums for each line of business in our reinsurance segment for the twelve months ended December 31, 2018, 2017 and 2016 and the percentage change in gross written premiums for each line of business:
The decrease in gross written premiums in property catastrophe reinsurance was primarily due to the recognition of $22.2 million of reinstatement premiums associated with the catastrophe events which occurred in 2017 compared with $12.6 million of reinstatement premiums associated with the catastrophe losses that occurred in 2018. The decrease in gross written premiums in other property reinsurance was due to a reduction in risk excess and pro rata premiums. The increase in gross written premiums in casualty reinsurance was due to favorable adjustments to prior year premium estimates. The decrease in gross written premiums in specialty reinsurance was largely due to reductions in engineering and mortgage business which offset growth in agriculture reinsurance business.
The 9.6% increase in gross written premiums for the twelve months ended December 31, 2017 compared to the equivalent period in 2016 was primarily due to $22.2 million of reinstatement premiums associated with catastrophe losses recognized in 2017 partially offset by premium reductions due to challenging market conditions and downward revisions on premium estimates. The increase in gross written premiums in other property reinsurance was largely due to reductions in premium estimates for proportional contracts in the comparative period. Gross written premiums in casualty reinsurance decreased slightly due to reductions in U.S. casualty treaty business lines. The increase in gross written premiums in specialty reinsurance was predominantly due to growth in agriculture insurance business, as well as growth in engineering and cyber business lines.
Ceded written premiums. Total ceded written premiums in 2018 were $312.8 million, an increase of $14.3 million compared to 2017. The increase in ceded written premiums in property catastrophe reinsurance was due to ceding business to Peregrine, a
Total ceded written premiums in 2017 were $298.5 million, an increase of $154.5 million compared to $144.0 million in 2016. Ceded written premiums increased across all lines of business due to the purchase of a whole account quota share contract in the first quarter of 2017. Ceded written premiums increased in property catastrophe reinsurance and other property reinsurance due to new business opportunities which were written in conjunction with an increase in retrocession. Ceded written premiums also increased in property catastrophe reinsurance and other property reinsurance due to the recognition of ceded costs to reinstate cover following catastrophe losses. The increase in ceded written premiums in specialty reinsurance was due to an increase in retrocession costs in connection with a fronting arrangement written as part of the transitional arrangements following the sale of our agriculture business in December 2017.
Losses and loss adjustment expenses. The loss ratio was 73.8% in 2018, a decrease of 18.8 percentage points compared to 92.6% in 2017. The decrease in the loss ratio was mainly due to a $245.1 million decrease in catastrophe losses which offset a $24.3 million increase in large losses and a $13.4 million decrease in reserve releases. In 2018, our reinsurance segment experienced $222.2 million of catastrophe losses, net of reinsurance recoveries, including $49.3 million from Typhoon Jebi, $15.3 million from Hurricane Florence, $2.9 million from Winter Storm Friederike, $28.7 million from Hurricane Michael, $70.5 million from the wildfires in California, $6.4 million from Typhoon Trami and $49.1 million from other U.S. and Asian weather-related events. Large losses experienced during 2018 included $13.0 million of credit and surety losses, $26.7 million of fire-related losses, and $9.9 million in relation to the construction of a dam, compared with $25.3 million of fire-related losses in 2017.
The loss ratio in 2017 increased to 92.6% compared to 55.7% in 2016 mainly due to an increase in catastrophe losses of $352.5 million and a $5.2 million decrease in prior year reserve releases compared to 2016 and $25.3 million of large fire related losses, the largest of which was a fire in a chemical plant, compared with no large losses in 2016. In 2017, our reinsurance segment experienced $467.3 million of catastrophe losses, net of reinsurance recoveries, including $72.1 million from Hurricane Harvey, $119.6 million from Hurricane Irma, $57.1 million from Hurricane Maria, $16.6 million from the earthquakes in Mexico, $7.2 million from a tornado in Mississippi, $5.7 million from Cyclone Debbie in Australia, $125.8 million from the wildfires in California and $32.9 million from U.S. weather-related events.
The $13.4 million reduction in prior year reserve releases from $81.8 million in the twelve months ended December 31, 2017 to $68.4 million in the current period was primarily due to a reduction in reserve releases in our casualty reinsurance and specialty reinsurance business lines. The reserve releases in 2017 included a $13.1 million reinsurance recovery in respect of an offshore energy-related loss that occurred in Africa and adverse development of $12.8 million in casualty reinsurance due to the U.K. Ministry of Justice decision to increase the discount rate used to calculate lump sum awards in U.K. bodily injury cases, known as the Ogden rate. The $5.2 million decrease in prior year reserve releases from $87.0 million in the twelve months ended December 31, 2016 compared to $81.8 million in 2017 was due predominantly to a decrease in reserve releases from casualty lines. Prior year reserve releases are further discussed below under “Reserves for Losses and Loss Adjustment Expenses.”
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, refer to Part I, Item 1, “Business - Business Segments - Insurance” and Note 5 of our consolidated financial statements, “Segment Reporting.”
Gross written premiums. The table below shows our gross written premiums for each line of business for the twelve months ended December 31, 2018, 2017 and 2016 and the percentage change in gross written premiums for each line:
The increase in gross written premiums in property and casualty insurance was largely attributable to growth in our U.K. regional and U.S excess casualty business lines. The decrease in gross written premiums in marine, aviation and energy insurance was largely attributable to reductions in aviation and Lloyd’s marine hull following the decision to exit these lines in the third quarter of 2018. These reductions were partially offset by growth in U.S. inland marine, marine and energy liability and U.S. ocean marine business lines. The increase in gross written premiums in financial and professional lines insurance was largely attributable to growth in U.S. professional lines, management liability, accident and health, and credit and political risk business lines.
Net premiums earned. Net premiums earned decreased by $142.2 million, or 12.9%, in 2018 compared to 2017 due to the impact from the increase in the proportion of business ceded to our quota share treaties. Net premiums earned decreased by $354.9 million, or 24.4%, in 2017 compared to 2016 due to the impact from the decreases in ceded written premiums in 2017.
Losses and loss adjustment expenses. The loss ratio in 2018 was 67.4% compared to 79.8% in 2017. The improvement in the loss ratio in 2018 was primarily due a $56.2 million decrease in catastrophe losses, a $47.6 million decrease in large losses and a $19.1 million increase in prior year reserve releases which offset the impact from a decrease in net earned premiums. The loss ratio in 2017 of 79.8% increased from 63.1% in 2016 due primarily to an $18.7 million reduction in prior year reserve releases and a $57.1 million increase in catastrophe losses.
In 2018, the insurance segment experienced $52.5 million of catastrophe losses, net of reinsurance recoverables, due to $4.7 million from U.K. winter storms, $5.8 million from Hurricane Florence, $14.5 million from wildfires in California, $9.6 million from Hurricane Michael, $1.3 million from an Alaskan Earthquake and $16.6 million from other U.S. and Asian weather-related events. Large losses experienced during 2018 included a $6.6 million trade credit loss and $13.0 million of fire-related losses.
$42.3 million associated with U.S. weather-related events. Large losses experienced during 2016 included $38.7 million of fire-related losses, a $12.6 million surety loss, an $11.1 million loss related to cyber and terrorism and a $4.8 million refinery explosion.
In 2016, the insurance segment experienced $51.6 million of catastrophe losses, consisting of $39.9 million associated with U.S. weather-related events and $11.7 million associated with Hurricane Matthew. Large losses included $32.7 million of energy-related losses, $11.8 million of fire-related losses and a $4.2 million aviation loss.
In 2018, there were reserve releases of $42.7 million compared to $23.6 million of reserve releases in 2017. The reserve releases were primarily from property and casualty and marine, aviation and energy lines. The reserve releases in 2017 were principally from our marine, aviation and energy business lines which included an additional $15.4 million reinsurance recovery in respect of an offshore energy-related loss that occurred in Africa which offset adverse development in property and casualty insurance and financial and professional lines insurance. The reserve releases in 2016 were predominantly from marine, energy and aviation insurance and financial and professional lines insurance offsetting adverse development in our property and casualty insurance. Prior year reserve releases are further discussed under “Reserves for Losses and Loss Adjustment Expenses” below.
As at December 31, 2018 and December 31, 2017, total cash and investments, including accrued interest receivable, were $7.8 billion and $8.7 billion, respectively. Total cash and investments decreased mainly as a result of increased payments associated with the increase in ceded written premiums and due to increased claims payments during 2018 associated with catastrophe losses in 2017. Our investment strategy is focused on delivering stable investment income and total return through all market cycles while maintaining appropriate portfolio liquidity and credit quality to meet the requirements of our customers, rating agencies and regulators.
Total other investments represents our investment in a real estate fund. For further information refer to Note 6 our consolidated financial statements, “Investments.”
Equity securities. Equity securities consisted of U.S. and foreign equity securities and after rebalancing equity investments across subsidiary company balance sheets in 2015 were all classified as trading. In the fourth quarter of 2016 and the third quarter of 2017, we took advantage of rising equity markets and sold $200.0 million and $208.1 million respectively, of our equity portfolio. Similarly, in the first quarter of 2018, we sold the remainder of our equity portfolio. The total investment return from trading equity portfolios for the twelve months ended December 31, 2018, 2017 and 2016 were as follows:
For the twelve months ended December 31, 2018. The analysis of the development by each segment is as follows:
Reinsurance. Net reserve releases of $68.4 million in 2018 were mainly as a result of favorable development in property catastrophe reinsurance, other property reinsurance and specialty reinsurance lines. The property catastrophe and other property reinsurance business lines reported favorable development due to reductions in estimated losses from 2017 catastrophes. The specialty reinsurance business lines reported net reserve releases due primarily to favorable development on marine reinsurance lines.
Insurance. Net reserve releases of $42.7 million in 2018 were mainly as a result of favorable development in property and casualty and marine, aviation and energy lines with only modest reserves releases for financial and professional lines. The property and casualty business lines reported favorable development due to reductions in estimated losses from 2017 catastrophes. The marine, aviation and energy business lines reported net reserve releases due primarily to favorable development on U.S energy lines.
We did not make any significant changes in methodologies used in our reserving process.
We maintain our capital at an appropriate level as determined by our internal risk appetite and the financial strength required by our customers, regulators and rating agencies. We monitor and review our group and operating entities’ capital and liquidity positions on an ongoing basis. The following table shows our capital structures as at December 31, 2018 compared to December 31, 2017:
As at December 31, 2018, total shareholders’ equity was $2,656.0 million compared to $2,928.5 million as at December 31, 2017. Our total shareholders’ equity as at December 31, 2018 includes two classes of preference shares with a total value as measured by their respective liquidation preferences of $511.9 million net of share issuance costs (December 31, 2017 - $511.9 million, two classes of preference shares).
Our senior notes are the only material debt issued by Aspen Holdings currently outstanding. As at December 31, 2018 and 2017, the value of debt less amortization expenses was $424.7 million and $549.5 million, respectively. In addition to the senior notes issued by Aspen Holdings, we have also reported $4.6 million of debt issued by Silverton. For further information relating to Silverton, refer to Note 7 of our consolidated financial statements, “Variable Interest Entities.”
Under the terms of the Merger Agreement we are restricted from declaring or paying any dividends on our ordinary shares other than the quarterly dividends on our ordinary shares that were previously declared and publicly announced prior to the date of the Merger Agreement.
On January 3, 2017, we elected to redeem all of the outstanding 7.401% Preference Shares. Each holder of a 7.401% Preference Share received $25 per 7.401% Preference Share, plus any declared and unpaid dividends.
On February 8, 2017, we replaced our existing share repurchase authorization with a new authorization of $250.0 million. The share repurchase authorization, which is effective through February 8, 2019, permits us to effect repurchases from time to time through a combination of transactions, including open market repurchases, privately negotiated transactions and accelerated share repurchase transactions. Under the Merger Agreement, we agreed not to redeem, purchase or otherwise acquire any outstanding ordinary shares unless Highlands consents in writing, except as otherwise set forth in the Merger Agreement.
On July 3, 2017, we elected to redeem all of the outstanding 7.250% Preference Shares. Each holder of a 7.250% Preference Share received $25 per 7.250% Preference Share, plus any declared and unpaid dividends.
Access to capital. Our business operations are in part dependent on our financial strength, the opinions of the independent rating agencies thereof as discussed elsewhere in this report and the market’s perception thereof, as measured by total shareholders’ equity, which was $2,656.0 million as at December 31, 2018 (December 31, 2017 - $2,928.5 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. Refer to Part I, Item 1A, “Risk Factors - We may repurchase additional capital in the future, which may not be available or may only be available on unfavorable terms.” We regularly monitor our capital and financial position, as well as investment and securities market conditions, both in general and with respect to Aspen Holdings’ securities. Our ordinary shares and all our preference shares are listed on the NYSE.
Consolidated cash flows for the twelve months ended December 31, 2018. Total net cash flow used in operations for the twelve months ended December 31, 2018 was $304.5 million, a $193.0 million increase in cash used from the equivalent period in 2017. The increase in cash used in operations for the twelve months ended December 31, 2018 is mainly attributable to ceded reinsurance costs, an increase in paid claims and payments of accrued expenses. For the twelve months ended December 31, 2018, the cash flow used in operations required funds to be realized from the investment portfolio. We paid net claims of $1,726.7 million in 2018 and generated cash inflows of $657.3 million from investing and net purchases and sales of equipment during the period.
We paid ordinary share and preference share dividends of $73.4 million and $125.0 million was used to redeem a portion of our 6.00% Senior Notes due 2020. At December 31, 2018, we had a balance of cash and cash equivalents of $1,083.7 million.
Consolidated cash flows for the twelve months ended December 31, 2017. Total net cash flow used in operations for the twelve months ended December 31, 2017 was $111.5 million, a decrease of $564.7 million from the equivalent period in 2016. The negative cash flows for the twelve months ended December 31, 2017, were due to the significant increase in ceded reinsurance costs and claims activity in 2017. We paid net claims of $1,555.1 million in 2017, and generated cash inflows of $419.0 million from investing and net purchases and sales of equipment during the period. We paid ordinary and preference share dividends of $92.4 million, and $30.0 million was used to repurchase ordinary shares. At December 31, 2017, we had a balance of cash and cash equivalents of $1,054.8 million.
Letter of Credit Facilities. See Note 22, “Credit Facility and Long-term Debt” of our consolidated financial statements for discussion of our credit agreements and letter of credit facilities.
In estimating the time intervals into which payments of our reserves for losses and loss adjustment expenses fall, as set out above, we have utilized actuarially assessed payment patterns. By the nature of the insurance and reinsurance contracts under which these liabilities are assumed, there can be no certainty that actual payments will fall in the periods shown and there could be a material acceleration or deceleration of claims payments depending on factors outside our control. The total amount of payments in respect of our reserves, as well as the timing of such payments, may differ materially from our current estimates for the reasons set out under “ - Critical Accounting Policies - Reserves for Losses and Loss Expenses” above.
For a detailed description of our operating lease obligations, refer to Part I, Item 2, “Properties.”
In November 2016, Peregrine, a subsidiary of the Company, was registered as a segregated accounts company under the Bermuda Segregated Accounts Companies Act 2000, as amended. As at December 31, 2018, Peregrine had formed four segregated
In addition to general price inflation, we are exposed to a persisting long-term upwards trend in the cost of judicial awards for damages. We seek to take this into account in our pricing and reserving of casualty business.
We also seek to take into account the projected impact of inflation on the likely actions of central banks in the setting of short-term interest rates and consequent effects on the yields and prices of fixed interest securities. As at February 2019, 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. Refer to Part I, Item 1A, “Risk Factors - Market and Liquidity Risks - Our results of operations and investment portfolio may be materially affected by conditions impacting the level of interest rates in the global capital markets and major economies, such as central bank policies in interest rates and the rate of inflation.”