We also have smaller serviced or leased office space in other U.K. or U.S. locations.
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, 2012, 2011, 2010, 2009 and 2008 and the balance sheet data as of December 31, 2012, 2011, 2010, 2009 and 2008 are derived from our audited consolidated financial statements. The consolidated financial statements as of December 31, 2012, and for each of the twelve months ended December 31, 2012, 2011 and 2010, 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.
(8) Diluted book value per share is calculated based on total shareholders’ equity excluding the aggregate value of the liquidation preferences of our preference shares, at December 31, 2008, 2009, 2010, 2011 and 2012, divided by the number of dilutive equivalent shares outstanding of 83,705,984, 86,465,357, 74,172,657, 73,355,674 and 73,312,340 at December 31, 2008, 2009, 2010, 2011 and 2012, respectively. At December 31, 2008, 2009, 2010, 2011 and 2012, there were 2,199,481, 3,137,763, 3,664,644, 2,699,976 and 2,558,617 of dilutive equivalent shares, respectively. Potentially dilutive shares outstanding are calculated using the treasury method and all relate to employee, director and investor options
The following is a discussion and analysis of the results of our operations for the twelve months ended December 31, 2012, 2011 and 2010 and of our financial condition as at December 31, 2012. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and accompanying Notes included in this report. This discussion contains forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and particularly under the headings “Risk Factors,” “Business” and “Forward-Looking Statements” contained in Item 1A, Item 1, and Part I of this report, respectively.
Reinsurance. Our reinsurance segment had a successful year notwithstanding pre-tax losses of $129.5 million, net of reinsurance and reinstatement premiums, from Superstorm Sandy. We had good performance in each of our principal lines of business - property, casualty and specialty reinsurance. We achieved an underwriting profit of $165.4 million for 2012 and a combined ratio of 85.4%, compared with an underwriting loss of $284.5 million and a combined ratio of 125.6% for 2011. Premium production was broadly consistent with the prior year as we maintained rates for casualty business and benefited from rate increases on catastrophe-exposed accounts. Catastrophe losses in 2012 were significantly lower than in 2011 with limited losses in the first nine months of 2012 and Superstorm Sandy in the fourth quarter.
Capital management. During 2012, we continued to execute our strategy to return excess capital to shareholders. In the second quarter, we increased our quarterly dividend from $0.15 to $0.17 per
Gross written premiums of $2,583.3 million in 2012, an increase of 17.0% compared to 2011 and 24.4% compared to 2010, principally in the insurance segment.
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, 2012, 2011 and 2010 were as follows:
In each of the years ended December 31, 2012, 2011 and 2010, we recorded a reduction in the level of reserves for prior years. In 2012, we reported net favorable development on prior year loss reserves of $137.4 million, or 6.6 combined ratio points, compared with $92.3 million, or 4.9 combined ratio points, for 2011 and $21.4 million, or 1.1 combined ratio points, for 2010.
Reserve releases increased by $45.1 million in 2012 due to a net reserve release in our reinsurance segment of $102.2 million compared to $72.3 million in 2011. The insurance segment had a $35.2 million reserve release in 2012 compared to a $20.0 million reserve release in 2011.
Reserve releases increased by $70.9 million in 2011 due mainly to a net reserve release of $20.0 million for our insurance segment compared to a $44.2 million reserve strengthening in 2010. Reserve releases were $64.2 million lower in 2010 due to less favorable developments impacting our insurance segment, particularly our casualty insurance and financial and professional lines.
increase in 2012 is due to an increase in performance-related accruals and the continued build out of our U.S. insurance and U.K. regional platforms. General, administrative and corporate expense increased in 2011 compared to 2010 due to increases in costs associated mainly with growth in our insurance business.
the issue of 6,400,000 7.25% perpetual non-cumulative preference shares for net proceeds of $154.5 million;
Diluted book value per ordinary share at December 31, 2012 was $40.65, an increase of 6.4% compared to $38.21 at December 31, 2011.
In our insurance segment, in early 2013 we are seeing favorable rating conditions in marine, energy and construction liability and global excess and U.S. primary casualty and a perceptibly hardening market in financial institutions both in the U.S. and internationally as well as increased deal flow in our credit, political and terrorism team.
In our reinsurance segment, in early 2013 we are seeing good rating momentum in marine and U.S. property reinsurance with an improving market in parts of our casualty business. We are also benefiting from our regional network, where we are achieving favorable rate increases for many international accounts notwithstanding a tough trading environment in those geographic markets.
In a largely benign year for losses outside the U.S., rates in international property markets are generally flat or showing a small decrease. It is encouraging that the markets are responding to the Asian catastrophe events of 2011 with event limits becoming the norm rather than the exception and markets willing to reduce limits for business interruption and Japanese interest abroad exposures.
Casualty reinsurance achieved a rate increase of approximately 1% for 2012. The rate environment continues to vary based on line and geography. The most meaningful rate increases were within our U.S. general and professional excess and surplus lines where we have seen increases of up to approximately 5%. This trend continued in our January renewals. Overall, we remain cautious about our growth opportunities in casualty reinsurance given the prolonged low interest rate environment. It is however important to note that we do not see any significant changes in loss cost trends for this line and the rates achieved in our current account are keeping in front of any inflationary indications.
In specialty reinsurance, rates declined approximately 2% on average in 2012, with the softest rates in credit and surety reinsurance following another profitable year. The rates for the January 1 renewals were mixed. Marine was dominated by the uncertainty over the Superstorm Sandy and Costa Concordia losses. Business affected by these events experienced rate increases of up to approximately 30% with increased client risk retention. Competition in credit and surety was high with plenty of capacity supplemented by a few new entrants to the market but both primary and reinsurance contract terms and conditions remain disciplined.
Insurance. January 1 is not a major renewal date for insurance overall. For our property insurance lines across the U.S. and the U.K. we achieved an approximate average rate increase of 5% and the U.S. property team achieved an approximate increase of 6% in 2012. We saw no major changes in the U.S. property insurance terms and conditions during the most recent quarter although we are anticipating approximate price increases at mid-year 2013 renewals in the 5% - 25% range in the loss-affected Northeast and 5% - 10% overall as the market responds to Superstorm Sandy losses.
in this account and we achieved an increase of approximately 9% for 2012. The aviation market remains challenging with rate decreases of approximately 8% for 2012.
Investments. We recognize that the low interest rate environment is likely to remain for at least the immediate future. We have evaluated investment opportunities that will help us generate increased returns, while remaining within our risk tolerances. As a result, we are increasing the total allocation of our investment portfolio to equities and BB rated securities by $200.0 million in each sector. We completed our additional investment in equities on February 1, 2013. Our additional investment in BB securities will be predominantly in bank loans and we expect to complete this in the medium term.
On February 7, 2013, we announced that our Board has replaced the existing share repurchase authorization of $400.0 million with a new authorization of $500.0 million. The total share repurchase authorization, which is effective immediately through February 7, 2015, permits us to effect the repurchases from time to time through a combination of transactions, including open market repurchases, privately negotiated transactions and accelerated share repurchase transactions.
Our consolidated financial statements contain certain amounts that are inherently subjective in nature and require management to make assumptions and best estimates to determine the reported
All premium estimates are reviewed regularly, comparing actual reported premiums to expected ultimate premiums along with a review of the collectability of premiums receivable. Based on management’s review, the appropriateness of the premium estimates is evaluated, and any adjustments to these estimates are recorded in the periods in which they become known. Adjustments to original premium estimates could be material and these adjustments may directly and significantly impact earnings in the period they are determined because the subject premium may be fully or substantially earned.
Non-proportional treaties. A large number of the reinsurance contracts we write are written on a non-proportional or excess of loss treaty basis. As the ultimate level of business written by each cedant can only be estimated at the time the reinsurance is placed, the reinsurance contracts generally stipulate a minimum and deposit premium payable under the contract with an adjustable premium determined by variables such as the number of contracts covered by the reinsurance, the total premium received by the cedant and the nature of the exposures assumed. Minimum and deposit premiums generally cover the majority of premiums due under such treaty reinsurance contracts and the adjustable portion of the premium is usually a small portion of the total premium receivable. For excess of loss contracts, the 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.
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
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 $171.3 million (2011 - $136.0 million) in our property reinsurance treaty pro rata account as of December 31, 2012, a variation of 5% could increase or reduce net income before taxation by approximately $0.9 million (2011 - $5.2 million).
the associated expenses with settling claims, including legal and other fees and the general expenses of administering the claims adjustment process, known as the loss adjustment expenses (“LAE”).
of pro rata treaties we receive regular statements (bordereaux) which provide paid and outstanding claims information, often with large losses separately identified. Following widely reported loss events such as natural catastrophes and airplane crashes we adopt a proactive approach to establish our likely exposure to claims by reviewing policy listings and contacting brokers and policyholders as appropriate.
Loss development (“Chain Ladder”) method: This method uses actual loss data and the historical development profiles on older accident years to project more recent, less developed years to their ultimate position.
Reserving procedures and process. Our actuaries calculate the IELR, BF and Chain Ladder and, if appropriate, other methods for each line of business and each accident year. They then provide a range of ultimates within which management’s best estimate is most likely to fall. This range will usually reflect a blend of the various methodologies. These methodologies involve significant subjective judgments reflecting many factors, including but not limited to, changes in legislative conditions, changes in judicial interpretation of legal liability policy coverages and inflation. Our actuaries
There are no differences between our year-end and our quarterly internal reserving procedures and processes because our actuaries perform the basic projections and analyses described above for each line of business.
There are two Reserve Committees, one for each of the insurance and reinsurance segments. Common membership to both committees includes the Group Head of Risk (the acting Chair), the Group Chief Actuary, the Group Chief Financial Officer, the Chairman of Aspen Insurance and the Chief Underwriting Officer of Aspen Re. Senior members of the insurance and reinsurance segment underwriting and claims staff comprise the remaining members of each committee.
Each line 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, for all lines of business, we review the emergence of actual losses relative to expectations every fiscal quarter. If warranted from these loss emergence tests, we may accelerate the timing of our detailed actuarial reviews.
Uncertainties. While the management selected reserves make a reasonable provision for unpaid loss and loss adjustment expense obligations, we note that the process of estimating required reserves does, by its very nature, involve uncertainty and therefore the ultimate claims may fall outside the actuarial range. The level of uncertainty can be influenced by such factors as the existence of coverage with long duration reporting patterns and changes in claims handling practices, as well as the other factors described above.
These factors are incorporated in the recommended reserve range from which management selects its best point estimate. As at December 31, 2012, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $128.9 million in loss reserves which would represent 43.6% of income before income tax for the twelve months ended December 31, 2012. As at December 31, 2011, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $124.9 million in loss reserves which would represent 84.8% of loss before income tax for the twelve months ended December 31, 2011.
There are specific areas of our selected reserves which have additional uncertainty associated with them. In property reinsurance, there is still the potential for adverse development from litigation associated with Hurricane Katrina. With Superstorm Sandy being the most recent catastrophe event, there remains uncertainty and potential for adverse development. In casualty reinsurance, there are additional uncertainties associated with claims emanating from the global financial crisis. There is also a potential for new areas of claims to emerge as underlying this segment are many long-tail lines of business. In the insurance segment, we wrote a book of financial institutions risks which have a number of notifications relating to the financial crisis in 2008 and 2009. In each case, management believes that they have selected an appropriate best estimate based on current information and current analyses.
Actuarial range of gross reserves. The following tables show the 10th percentile, 25th percentile, actuarial mean estimate, 75th percentile and 90th percentile together with the actual percentile that the selected loss reserves represent. The following table sets out the actuarial range of gross reserves for each of our segments and compares it to management’s selected best estimate as at December 31, 2012. Management’s selected reserves include unallocated claims handling expenses which remain unchanged across all reserve distributions.
Conversely, if the ultimate liabilities equate to the estimated 90th percentile, then the impact from the change in loss reserves would be to reduce net income before tax by $65.3 million (being the difference between the selected loss reserves of $4,779.7 million and the 90th percentile value of $4,845.0 million), although the impact of such a change is unlikely to be recognized in one calendar year.
We currently classify all except $458.5 million of our fixed income maturity investments and short-term investments as “available for sale” and, accordingly, they are carried at estimated fair value. The Company uses quoted values and other data provided by internationally recognized independent pricing sources as inputs into its process for determining the fair value of its fixed income investments. Where multiple quotes or prices are obtained, a price source hierarchy is maintained in order to determine which price source provides the fair value (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers.
Total gross written premiums increased by 17.0% in 2012 compared to 2011 due predominantly to the continued development of our U.S. insurance platform. Gross written premiums in our insurance segment increased by 32.8% from 2011, primarily from the new programs business and U.S. property, which benefited from rate increases in the year and our financial and professional lines. Increases in our marine, energy and transportation insurance were mainly due to increased premiums for marine, energy and construction liability business which achieved significant rate increases following a series of industry losses in the past year. Gross written premiums in our reinsurance segment have increased due to growth in our property catastrophe and casualty business lines, which recognized loss-related additional premiums, offset by decreased premiums written in property risk excess and international casualty reinsurance within our other property reinsurance and casualty reinsurance lines, respectively. In 2011, the principal growth in premiums was in our insurance segment, mainly from our U.S. insurance lines as we started benefiting from our investment in 2010 in the U.S.
in 2011 compared to 2010 due to the recognition of earned premiums associated with the additional reinsurance purchased to protect the second half of 2011 following the large losses in the first half of the year. The changes in net premiums earned for each of our segments were as follows:
Losses and loss adjustment expenses. Losses and loss adjustment expenses have reduced from $1,556.0 million in 2011 to $1,238.5 million in 2012 primarily due to the reduced level of catastrophe losses in 2012 compared to 2011. Losses in 2012 included $200.6 million of net losses from Superstorm Sandy, $17.1 million from losses associated with the severe weather in the U.S. in February and March 2012 and Hurricane Isaac in August 2012 as well as $38.2 million of losses in respect of claims arising from the sinking of the Costa Concordia cruise liner in January 2012. In 2011, we experienced $534.3 million of net losses from natural disasters (principally the Japanese earthquake and tsunami, U.S. tornadoes, Thai floods, Australian floods and New Zealand earthquakes). In 2010, we suffered $127.9 million of net losses from the Chilean earthquake and $52.8 million from the New Zealand earthquake. Further information relating to movements in prior year reserves can be found below under “Reserves for Loss and Loss Adjustment Expenses.”
The loss ratio for 2012 of 59.4% decreased by 23.0 percentage points compared to 2011 due to the relatively benign year for catastrophes in 2012. Prior year reserve releases in our reinsurance segment increased from $72.3 million in 2011 to $102.2 million in 2012 following favorable development in U.S. casualty treaty, specialty reinsurance and other property business lines. The insurance segment had a $35.2 million reserve release in 2012 from almost all lines, but especially from property, casualty and financial and professional lines compared to $20.0 million reserve release in 2011 from the property, casualty and marine, energy and transportation insurance lines.
Expenses. We monitor the ratio of expenses to gross earned premium (the “gross expense ratio”) as a measure of the cost effectiveness of our policy acquisition, general, administrative and corporate processes. The table below presents the contribution of the policy acquisition expenses and general, administrative and corporate expenses to the gross expense ratios and the total net expense ratios for the twelve months ended December 31, 2012, 2011 and 2010. We also show the effect of reinsurance purchased which impacts the reported net expense ratio by expressing the expenses as a proportion of net earned premiums.
The policy acquisition expense ratio, gross of the effect of reinsurance, has decreased to 16.0% in 2012 from 16.2% in 2011 due to a reduction in accruals for profit-related commissions and due to changes in the mix of business written. The policy acquisition expense ratio, gross of the effect of reinsurance, increased to 16.2% in 2011 from 15.7% for 2010 mainly as a result of increased commission in our insurance segment due to changes in the mix of business written. General, administrative and corporate expenses increased by 21.3% from $284.5 million in 2011 to $345.1 million in 2012, with the increased expenditure associated with our expansion into the U.S. admitted market and U.K. regional distribution network and increases in accruals for profit-related compensation.
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, 2012, 2011 and 2010 are shown in the following tables:
(1) The total group general and administrative expense ratio includes corporate expenses.
derivatives at fair value with changes recorded as a change in fair value of derivatives in the statement of operations. At December 31, 2010, there were no outstanding foreign currency contracts.
During 2012, $80.8 million in notional amount of our interest rate swaps terminated, as a result of which we entered into $80.8 million notional 5-year interest rate swaps with termination dates in 2017. As at December 31, 2012, cash collateral with a fair value of $52.0 million was transferred to the Company’s counterparties to support the current valuation of the interest rate swaps (December 31, 2011 - $43.7 million). As at December 31, 2012, no non-cash collateral was transferred to the Company by its counterparties (December 31, 2011 - $Nil). In accordance with FASB ASC 860 Topic Transfers and Servicing, transfers of cash collateral are recorded on the balance sheet within Derivatives at Fair Value, while transfers in respect of non-cash collateral are disclosed but not recorded. No amount was recorded in our balance sheet as at December 31, 2012 (2011 - $Nil) for the pledged assets. Changes in the estimated fair value of derivatives are included in the statement of operations.
The reduction in investment income year on year is due to the continuing decline in our reinvestment rate over the last twelve months which reflected lower yields on investment grade fixed income securities. Other expenses are primarily corporate expenses, interest on long term debt, changes in the fair value of derivatives and investment and foreign exchange gains and losses.
The reduction in other expenses in 2012 compared to 2011 is due primarily to a $31.5 million reduction in losses from derivative contracts. The increase in 2011 compared to 2010 is due to a $59.7 million increase in losses from derivative contracts, a $20.3 million reduction in net realized and unrealized investment gains and a $14.3 million increase in interest expenses on long term debt.
Income tax expense/credit. There was an income tax expense of $15.0 million in 2012 compared to an income tax credit of $37.2 million in 2011 and a $27.6 million tax expense in 2010. The effective tax rate in 2012 was 5.1% compared to 25.3% in 2011 and 8.1% in 2010. The tax charge in 2012 is representative of the geographic spread of our business between taxable and non-taxable jurisdictions. The tax credit in 2011 was due to a greater proportion of losses having been incurred by Operating Subsidiaries in tax paying jurisdictions, adjustments to prior years’ tax provisions as well as reductions in the U.K. corporation tax rates.
Net income/loss. In 2012, we had net income of $280.4 million, equivalent to diluted earnings per ordinary share of $3.38 based on the weighted average number of shares in issue during the period. In 2011, we had a net loss of $110.1 million, equivalent to a basic and diluted loss per ordinary share of $1.88 based on the weighted average number of shares in issue during the period due to the significant level of catastrophe events experienced in the year. 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. Preference share dividends are deducted from net income for the purpose of calculating earnings per ordinary share.
Management measures segment results on the basis of the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and operating and administrative expenses by net premiums earned. Other than corporate expenses, indirect operating and administrative expenses are allocated to segments based on each segment’s proportional share of gross earned premiums.
(1) The application of ASU 2010-26 has resulted in a net $4.3 million increase in the general, administrative and corporate expenses for the twelve months ended December 31, 2011. For more information, see Note 2(l) in our consolidated financial statements, “Basis of Preparation and Significant Accounting Policies - New Accounting Policies.”
(2) The total group general and administrative expense ratio includes the impact from corporate expenses.
(1) The application of ASU 2010-26 has had no impact on the general, administrative and corporate expenses for the twelve months ended December 31, 2010. For more information, refer to Note 2(l) of our consolidated financial statements.
In 2011, gross written premium increased from 2010 in specialty reinsurance due to growth in credit and surety and the recognition of loss-related additional premiums. We wrote more property catastrophe premium due to the impact of reinstatement premiums and some favorable pricing following the natural catastrophes in 2011. The increases were offset by reductions in casualty reinsurance where we continued to experience challenging market conditions and prices that did not meet our profitability requirements.
Reinsurance ceded. Total reinsurance ceded of $71.0 million reduced by $18.4 million from 2011. The reduction in ceded reinsurance in 2012 was due to us having purchased a greater amount of reinsurance in 2011 as a result of the unusually high frequency and severity of catastrophes in 2011. Total 2011 reinsurance ceded of $89.4 million increased by $45.7 million from 2010. In 2011, the reinsurance costs increased significantly compared to 2010 due to the high level of catastrophes in early 2011 resulting in our decision to purchase additional cover for the third quarter’s wind season.
Net premiums earned. Net premiums earned have increased by $24.1 million, or 2.2%, in 2012 compared to 2011, consistent with the increase in gross earned premiums and the reduction in the cost of our reinsurance purchased in the period. Net premiums earned decreased by $33.5 million, or 2.9%, in 2011 compared to 2010 due to the recognition of earned premiums associated with the additional reinsurance purchased to protect the second half of 2011 following the large losses in the first half of the year.
in 2012 which experienced losses of $164.9 million from Superstorm Sandy and U.S. tornadoes while 2011 experienced losses of $552.6 million from the Australian floods, the New Zealand and Japanese earthquakes, the U.S. storms (including Hurricane Irene) and other natural catastrophes (U.S., Scandinavian and Asian weather-related events). There was also a $29.9 million increase in prior year reserve releases from $72.3 million in the twelve months ended December 31, 2011 compared to $102.2 million in 2012.
General and administrative expenses were $123.9 million for 2012, a $12.1 million increase from 2011, attributable mainly to higher performance-related compensation accruals following the lower loss activity of 2012. The general and administrative expenses ratio of 10.1% in 2011 increased from 9.8% in 2010 due to an increase in general expenses as we continued to invest in the development of the business and growth of existing offices. The general and administrative expense ratio for the twelve months ended December 31, 2012 was 10.9% (2011-10.1%; 2010 - 9.8%).
Premiums increased by 11.6% in 2011 compared to 2010. The increase in gross written premium was mainly attributable to the financial and professional lines where we experienced additional demand, in particular for our kidnap and ransom products, and to the continued development of our U.S. professional lines business. Increases in gross written premium in property were due to U.S. property which benefited from rate increases in the year. Gross written premiums in our casualty insurance lines reduced compared to 2010 where we declined business that did not meet our profitability requirements coupled with higher client retention in some classes. We also expanded our programs account with a major new contract for a successful New York based managing general agent which was bound in September.
In 2011, there was a $20.0 million prior year reserve release compared to a $44.2 million reserve strengthening in 2010. We experienced limited catastrophe losses in this segment of $14.2 million in 2011, while 2010 was impacted by $35.3 million of net losses from two oil pipeline spills and a gas explosion in California in addition to $10.7 million of losses from the Deepwater Horizon oil spill. Prior year reserve releases are further discussed under “Reserves for Losses and Loss Expenses.”
Policy acquisition, general and administrative expenses. Policy acquisition expenses of $173.4 million for 2012 were equivalent to 18.2% of net premiums earned (2011 - $149.3 million or 19.1% of net earned premium; 2010 - $126.1 million or 16.7% of net earned premium). This was mainly due to a reduction in profit-related commission accruals as well as to a change in the mix of business written where we have written a higher proportion of casualty business which has lower average commission rates. Another factor was the increase in loss related premiums in property and marine liability that do not incur additional acquisition costs. General and administrative expenses of $168.2 million in 2012 have increased from $128.0 million in 2011 mainly due to our continued build out of our U.S. operations.
As of December 31, 2012 and December 31, 2011, the average credit rating of our fixed income portfolio was AA. We did not make any material changes to our fixed income sector positions and in September 2012 we began to build a new BB High Yield portfolio focused on the U.S. corporate market. As at December 31, 2012, we had invested $24.6 million in BB High Yield Bonds. We continued to maintain our fixed to floating interest rate swap positions with a total notional amount of $1.0 billion as at December 31, 2012 (2011 - $1.0 billion). For further discussion on interest rate swaps, see Note 9 in our consolidated financial statements, “Derivative Financial Instruments.”
Book yield at December 31, 2012 on the fixed income portfolio was 2.88%, a decrease of 49 basis points from 3.37% at December 2011, as a result of the continuing low interest rate environment. The average duration of the fixed income portfolio was 3.0 years at December 31, 2012, excluding the impact of interest rate swaps, or 2.5 years including the impact of interest rate swaps.
Unrealized gains in the available for sale investment portfolio, including equity securities, at the end of December 31, 2012 were $354.9 million, an increase of $19.1 million from 2011, and an increase of $115.4 million from 2010. Unrealized gains have increased over time as a result of the increase in market value of our fixed income and equity securities.
Fixed maturities. At December 31, 2012, the average credit quality of our fixed income book was “AA,” with 92% of the portfolio being graded “A” or higher. At December 31, 2011, the average credit quality of our fixed income book was “AA,” with 94% of the portfolio being graded “A” or higher.
Other investments. As at December 31, 2012, we had investments in two entities classified as other investments: Cartesian and Chaspark Maritime Holdings Ltd. (“Chaspark”). For further information regarding these investments, see Note 6 in our consolidated financial statements, “Investments.”
European Fixed Income & Equity Exposures. As at December 31, 2012, we had $968.8 million, or 11.8% of our investment portfolio, invested in European issuers (December 31, 2011 - $900.0 million or 11.8%). European exposures consisted of sovereigns, agencies, government guaranteed bonds, covered bonds, corporate bonds and equities. Aspen has no exposure to the sovereign debt of Greece, Ireland, Italy, Portugal or Spain, and de minimis holdings of Spanish and Italian corporate bonds and equities.
Valuation of Other Investments. The value of our investment Cartesian and Chaspark is based on our shares of the capital position of the partnership which includes income and expenses reported by the limited partnership as provided in its quarterly management accounts. Each of Cartesian and Chaspark is subject to annual audit evaluating the financial statements of the partnership. We periodically review the management accounts of Cartesian and Chaspark and evaluate the reasonableness of the valuation of our investment.
The increase in reinsurance recoverables in 2012 was due predominantly to the recognition of recoveries associated with Superstorm Sandy and the sinking of the Costa Concordia cruise liner.
The gross reserves may be further analyzed between outstanding claims and IBNR as at December 31, 2012 and 2011, as follows:
Prior year loss reserves. In the twelve months ended December 31, 2012, 2011 and 2010, there was an overall reduction of our estimate of the ultimate claims to be paid. An analysis of this reduction by segment is as follows:
Management monitors the ratio of debt to total capital, with total capital being defined as shareholders’ equity plus outstanding debt. At December 31, 2012, this ratio was 12.5% (2011 - 13.6 %).
On June 29, 2011, an agreement was signed to repurchase 254,107 shares from the Names’ Trustee for a total consideration of $6.4 million. The transaction was completed on August 10, 2011 and the shares were subsequently cancelled.
On March 9, 2012, an agreement was signed to repurchase 42,578 shares from the Names’ Trustee for a total consideration of $1.1 million and on March 23, 2012, an agreement was signed to repurchase 26,708 shares from the Names’ Trustee for a total consideration of $0.7 million. The shares under both transactions were repurchased on May 8, 2012 and subsequently cancelled.
On August 10, 2012, an agreement was signed to repurchase 34,151 shares from the Names’ Trustee. The shares were repurchased for a total consideration of $1.0 million and subsequently cancelled.
On October 24, 2012, our Board approved a new share repurchase authorization for up to $400.0 million of outstanding ordinary shares. The share repurchase authorization replaced the previous authorization and permits us to effect the repurchases from time to time through a combination of transactions, including open market repurchases, privately negotiated transactions and accelerated share repurchase transactions.
Access to capital. Our business operations are in part dependent on our financial strength and the market’s perception thereof, as measured by shareholders’ equity, which was $3,488.4 million at December 31, 2012 (2011 - $3,156.0 million). We believe our financial strength provides us with the flexibility and capacity to obtain funds through debt or equity financing. However, our continuing ability to access the capital markets is dependent on, among other things, market conditions, our operating results and our perceived financial strength. We regularly monitor our capital and financial position, as well as investment and security 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.
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.”
As of December 31, 2012, our Operating Subsidiaries held approximately $1,638.0 million (2011 - $1,377.1 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 Operating Subsidiaries to ensure that they are able to meet their insurance and other liabilities as they become due and are satisfied that there was a comfortable margin of liquidity as at December 31, 2012. For all material currencies in which our underwriting activities are written we ensure that sufficient cash and short-term investments are held in such currencies to enable us to meet potential claims without liquidating long-term investments and adversely affecting our investment return. This follows the matching principle which matches our assets and liabilities in currency to mitigate foreign currency risk whenever possible.
liquidity to meet our operating requirements. We paid net claims of $1,080.0 million in 2012, and used $317.2 million in investing and net purchases and sales of equipment during the period. The increase in paid claims over 2011 was largely due to the continued settlement of catastrophe losses that occurred in 2011. We paid ordinary and preference share dividends of $78.1 million, and $62.7 million was used to repurchase ordinary shares. At December 31, 2012, we had a balance of cash and cash equivalents of $1,463.6 million.
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 facility”) by and among the Company, certain of our direct and indirect subsidiaries, including the Operating Subsidiaries (collectively, the “Borrowers”), the lenders party thereto, Barclays Bank PLC, as administrative agent, Citibank, NA, as syndication agent, Crédit Agricole Corporate and Investment Bank (“Crédit Agricole CIB”), Deutsche Bank Securities Inc., U.S. Bank N.A, Lloyd’s Bank and HSBC and The Bank of New York Mellon, as co-documentation agent and as collateral agent.
The credit facility can be used by any of the Borrowers to provide funding for our Operating Subsidiaries, to finance the working capital needs of the Company and our subsidiaries and for general corporate purposes of the Company and our subsidiaries. The revolving credit facility further provides for the issuance of collateralized and uncollateralized letters of credit. Initial availability under the credit facility is $280.0 million and the Company has the option (subject to obtaining commitments from acceptable lenders) to increase the credit facility by up to $75.0 million. In February 2013, we intend to give notice under our credit facility to reduce the lenders’ commitments to $200.0 million. The credit facility will expire on July 30, 2013. As of December 31, 2012, no borrowings were outstanding under the credit facility. The fees and interest rates on the loans and the fees on the letters of credit payable by the Borrowers increased based on the consolidated leverage ratio of the Company.
Under the credit facility, 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 facility contains other customary affirmative and negative covenants as well as certain customary events of default, including with respect to a change in control. The various affirmative and negative covenants, include, among others, covenants that, subject to various exceptions, restrict the ability of the Company and its subsidiaries to; 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 facility also includes covenants that restrict the ability of our subsidiaries to incur indebtedness and guarantee obligations.
On February 28, 2011, Aspen U.K. and Aspen Bermuda entered into an amendment to the $200.0 million secured letter of credit facility agreement with Barclays Bank PLC dated as of October 6, 2009. The amendment extends the maturity date of the credit facility to December 31, 2013. 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. As at December 31, 2012, we had $37.5 million of outstanding collateralized letters of credit under this facility. On February 1, 2013, Aspen U.K. and Aspen Bermuda entered into a further amendment to the secured letter of credit facility to extend the maturity date of the credit facility to January 31, 2015.
(2) In estimating the time intervals into which payments of our reserves for losses and loss adjustment expenses fall, as set out above, we have utilized actuarially assessed payment patterns. By the nature of the insurance and reinsurance contracts under which these liabilities are assumed, there can be no certainty that actual payments will fall in the periods shown and there could be a material acceleration or deceleration of claims payments depending on factors outside our control. This uncertainty is heightened by the relatively short time in which we have operated, thereby providing limited Company-specific claims loss payment patterns. The total amount of payments in respect of our reserves, as well as the timing of such payments, may differ materially from our current estimates for the reasons set out above under “- Critical Accounting Policies - Reserves for Losses and Loss Expenses.”
Operating income, a non-U.S. GAAP financial measure, is an internal performance measure used by us in the management of our operations and represents after-tax operational results excluding, as applicable, after-tax net realized and unrealized capital gains or losses, after-tax net foreign exchange gains or losses and changes in the fair value of derivatives. We exclude after-tax net realized and unrealized capital gains or losses, after-tax net foreign exchange gains or losses and changes in the fair value of derivatives from our calculation of operating income because the amount of these gains or losses is heavily influenced by, and fluctuates in part, according to the availability of market opportunities. We believe these amounts are largely independent of our business and underwriting process and including them distorts the analysis of trends in its operations. In addition to presenting net income determined in accordance with U.S. GAAP, we believe that showing operating income enables investors, analysts, rating agencies and other users of our financial information to more easily analyze our results of operations in a manner similar to how management analyzes our underlying business performance. Operating income should not be viewed as a substitute for U.S. GAAP net income.