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, France, Germany, Ireland, Singapore, Switzerland and the United Arab Emirates. We renew and enter into leases in the ordinary course of business as required. While we believe our current facilities and the leaseholds with respect thereto are sufficient for us to conduct our operations for the foreseeable future, we may need to expand into additional facilities to accommodate future growth. For more information on our leasing arrangements, please refer to Note 19(b) of our consolidated financial statements, “Commitments and Contingent Liabilities - Operating leases.”
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, 2016, 2015, 2014, 2013 and 2012 and the balance sheet data as of December 31, 2016, 2015, 2014, 2013 and 2012 are derived from our audited consolidated financial statements. The consolidated financial statements as of December 31, 2016, and for each of the twelve months ended December 31, 2016, 2015 and 2014, and the reports thereon of KPMG LLP (in respect of 2016 and 2015) and KPMG Audit Plc (in respect of 2014), both independent registered public accounting firms, 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 and related notes included elsewhere in this report.
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 70,753,723, 65,546,976, 62,017,368, 60,918,373 and 59,774,464 as at December 31, 2012, 2013, 2014, 2015 and 2016, respectively.
Diluted book value per share is calculated based on total shareholders’ equity excluding the aggregate value of the liquidation preferences of our preference shares, as at December 31, 2012, 2013, 2014, 2015 and 2016, divided by the number of dilutive equivalent shares outstanding of 73,312,340, 67,089,572, 63,444,356, 62,240,466 and 61,001,071 as at December 31, 2012, 2013, 2014, 2015 and 2016, respectively. As at December 31, 2012, 2013, 2014, 2015 and 2016, there were 2,558,617, 1,542,596, 1,426,988, 1,322,093 and 1,226,607 of dilutive equivalent shares, respectively. Potentially dilutive shares outstanding are calculated using the treasury method and all relate to employee, director and investor options.
Including cash within consolidated variable interest entities of $291.3 million as at December 31, 2016 and $243.3 million as at December 31, 2015.
Of the total loan notes issued by our consolidated variable interest entities, at fair value, of $223.4 million as at December 31, 2016, $115.0 million were classified as long term liabilities and $108.4 million were classified as current liabilities due and payable in less than one year. For more information, refer to Note 7, “Variable Interest Entities” of our consolidated financial statements.
The following is a discussion and analysis of our financial condition and results of operations for the twelve months ended December 31, 2016, 2015 and 2014. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and related Notes contained in this report. This discussion contains forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and particularly under the headings “Risk Factors,” “Business” and “Forward-Looking Statements” contained in Item 1A, Item 1, and Part I of this report, respectively.
Capital Management. We continue to focus on capital management and maintain our capital at an appropriate level. In 2016, we continued our strategy to return excess capital to shareholders with the repurchase of 1,595,076 ordinary shares for a total consideration of $75.0 million. In addition, in the second quarter of 2016, we increased our quarterly dividend on our ordinary shares from $0.21 to $0.22 per ordinary share. On February 8, 2017, our Board of Directors also authorized a new share repurchase program 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.
Annualized net income return on average equity of 5.4% for 2016 compared with 10.0% in 2015 and 11.1% in 2014.
Net favorable development on prior year loss reserves of $129.3 million, or 4.9 combined ratio points, for 2016 compared with $156.5 million, or 6.3 combined ratio points, for 2015, and $104.1 million, or 4.3 combined ratio points, for 2014.
In 2016, gross written premiums written in our reinsurance segment increased by 13.2% compared to 2015 due to growth in specialty reinsurance and casualty reinsurance business lines. The increase in our specialty reinsurance business is largely due to growth in agriculture business written following our acquisition of AgriLogic in January 2016 and growth in specialty marine business. The increase in our casualty reinsurance lines of business is largely due to growth in our U.S. casualty treaty and international casualty business lines.
The 0.8% reduction in gross written premiums in 2016 in our insurance segment was due to reductions in our property and casualty insurance lines, and marine, aviation and energy insurance lines being offset by a growth in our financial and professional lines. The increase in gross written premiums in financial and professional lines was largely attributable to growth in our accident and health, credit and political risks, management liability and financial institutions business lines. The decrease in gross written premiums in property and casualty insurance was largely attributable to reductions in our global casualty, U.S. casualty and U.S. environmental business lines offset by growth in our U.S. excess casualty and railroad insurance business lines. The decrease in gross written premiums in marine, aviation and energy insurance was largely due to challenging market conditions in our marine and energy liability, U.S. inland marine, offshore energy, and energy and construction insurance business lines offset by growth in our ocean cargo and aviation insurance business lines.
Overall gross written premiums in 2015 increased by 3.3% in compared to 2014 due primarily to our reinsurance lines, with growth from our other property and specialty reinsurance business lines offsetting planned reductions in property catastrophe lines. Premiums from our insurance segment in 2015 increased due to growth principally in our property and casualty business lines and financial and professional lines offset by reductions in our marine, aviation and energy lines.
Overall reserve releases in 2016 reduced by $27.2 million compared to 2015 mainly due to a $23.4 million decrease in net reserve releases in our insurance segment from $65.7 million in 2015 to $42.3 million in 2016. Overall reserve releases in 2015 increased by $52.4 million compared to 2014 due mainly to a $60.6 million increase in net reserve releases in our insurance segment from $5.1 million in 2014 to $65.7 million in 2015. Reserve releases in our reinsurance segment in 2015 decreased from $99.0 million in 2014 to $90.8 million in 2015. Further information relating to the release of reserves can be found below under “- Reserves for Losses and Loss Adjustment Expenses - Prior Year Loss Reserves.”
Amortization of deferred policy acquisition costs increased in 2016 compared to 2015, and in 2015 compared to 2014, in line with premium growth and higher profit commission accruals and lower ceding commissions in the insurance segment offsetting the receipt of FET refunds and changes in business mix in the reinsurance segment. In 2014, the deferred policy acquisition costs were also impacted by adjustments in profit-related commission accruals.
General, administrative and corporate expenses increased to $490.1 million in 2016 from $424.0 million in 2015 and $445.7 million in 2014. The increase in 2016 compared to 2015 is largely due to costs associated with AgriLogic which we acquired in January 2016, costs associated with growth in our insurance and reinsurance business and reorganization costs. The reduction in 2015 compared to 2014 is largely due to expenses attributable to defending the unsolicited approach and an inadequate offer by Endurance at a cost of $28.5 million in 2014.
Net investment income. We generated net investment income of $187.1 million in 2016, an increase of 0.9% on the prior year (2015 - $185.5 million; 2014 - $190.3 million). The increase was primarily due to a higher investment balance, $20.4 million of dividend income from our global equity securities portfolio in 2016 compared with $20.1 million in 2015 and $17.1 million in 2014. The decrease in investment income in 2015 compared to 2014 was due primarily to lower reinvestment rates and declining book yields from fixed income securities.
Shareholders’ equity and financial leverage. Total shareholders’ equity increased by $228.4 million from $3,419.9 million as at December 31, 2015 to $3,648.3 million as at December 31, 2016. The most significant movements were:
an increase of $108.7 million in retained earnings for the period;
As at December 31, 2016, our total shareholders’ equity included preference shares with a total value as measured by their respective liquidation preferences of $818.2 million (2015 - $568.2 million) less issue costs of $21.1 million (2015 - $12.4 million).
Management monitors the ratio of debt to total capital, with total capital being defined as shareholders’ equity plus outstanding debt. As at December 31, 2016, this ratio was 17.5% (2015 - 17.8%). Our preference shares are classified in our balance sheet as equity but may receive a different treatment in some cases under the capital adequacy assessments made by certain rating agencies. We also monitor the ratio of the total debt and the liquidation preference of our preference shares to total capital which was 35.5% as at December 31, 2016 (2015 - 31.1%).
Balances as at December 31, 2016 and 2015 were as follows:
The reinsurance market continued to face pricing challenges during the January 1, 2017 renewals, with an average rate decrease of 2%. Although there was pricing pressure on most reinsurance lines, with variations depending on geographical location and line of business, the January renewals were in line with our expectations. Terms and conditions, along with overall commissions paid on pro-rata deals, did not change significantly. We achieved a modest rate increase in casualty reinsurance where we also obtained new business opportunities with select clients. Rates in property catastrophe decreased by approximately 3% in the United States whereas elsewhere property catastrophe rates decreased by approximately 5%. As a result, we continued to manage our net exposures and continued to leverage third party capital through Aspen Capital Markets. We increased gross written premiums during the January 1, 2017 renewals compared to our 2016 renewal season and we expect our regional strategy to continue to enable us to achieve profitable growth through the expansion of our presence in the Middle East and Africa through the opening of a hub in Dubai, and further penetration in Asia-Pacific with our office in Australia and in China through Lloyd’s.
We completed a comprehensive review of our insurance business in the fourth quarter of 2016 to identify the best opportunities for long-term profitable growth. As a result of this review, we decided to cease underwriting a large portion of primary casualty business whether acquired through programs or assessed on an individual risk basis. In total, we chose to not renew approximately $150.0 million of insurance business, or approximately 5% of our total portfolio, during 2016. We believe the actions taken as a result of this review will ultimately improve the results of our insurance business.
We likewise purchased significantly more ceded reinsurance during 2016 covering our Casualty and Financial and Professional lines business, and our Marine, Energy and Aviation lines. We believe this will ultimately lead to lower earnings volatility, a lower expense ratio and greater flexibility in deciding where to deploy our capital.
Proportional treaties (“treaty pro rata”). Estimates of premiums assumed under treaty pro rata reinsurance contracts are recorded in the period in which the underlying risks are expected to incept and are based on information provided by brokers and ceding companies and estimates of the underlying economic conditions at the time the risk is underwritten. We estimate premiums receivable initially and update our premium estimates regularly throughout the contract term based on treaty statements received from the ceding company.
Property treaty pro rata made a significant contribution to our reinsurance segment where we wrote $226.7 million in gross written premium in 2016 (2015 - $240.0 million), or 16.0% of the gross written premium in our reinsurance segment, of which $53.1 million was estimated (2015 - $15.1 million) and $173.6 million was reported by the cedants (2015 - $224.9 million). Excluding the impact of fixed costs, such as reinsurance premiums and operating expenses, we estimate that the impact of a $1.0 million increase / decrease in our estimated gross written premiums in our property treaty pro rata business would increase / decrease net income before tax by less than $0.1 million for the year ended December 31, 2016 (2015 - $0.1 million increase /decrease).
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 Operations Officer and Head of Strategy (the chair), the Chief Executive Officer of Aspen Insurance, the Group Head of Risk and the Group Chief Actuary, the Group Chief Financial Officer, the Group Head of Capital Management, the Insurance Chief Financial Officer and the President and Chief Underwriting Officer of Aspen Re. 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.
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, by its very nature, involves 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
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, 2016, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $152.2 million in loss reserves which would represent 72.6% of income before income tax for the twelve months ended December 31, 2016. As at December 31, 2015, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $142.1 million in loss reserves which would represent 42.1% of income before income tax for the twelve months ended December 31, 2015. A 5% change in our net loss reserves equates to $238.0 million and represents 6.4% of shareholders’ equity at December 31, 2016.
We believe that there is potentially significant risk in estimating loss reserves for long-tail lines of business and for immature accident years that may not be adequately captured through traditional actuarial projection methodologies. As discussed above, these methodologies usually rely heavily on projections of prior year trends into the future. In selecting our best estimate of future liabilities, we consider both the results of actuarial point estimates of loss reserves in addition to the stochastic distribution of reserves. In determining the appropriate best estimate, we review (i) the position of overall reserves within the actuarial distribution, (ii) the result of bottom up analysis by accident year reflecting the impact of parameter uncertainty in actuarial calculations, and (iii) specific qualitative information on events that may have an effect on future claims but which may not have been adequately reflected in actuarial best estimates, such as the potential for outstanding litigation or claims practices of cedants to have an adverse impact.
Effect if Actual Results Differ From Assumptions. Given the risks and uncertainties associated with the process for estimating reserves for losses and loss expenses, management has performed an evaluation of the potential variability in loss reserves and the impact this variability may have on reported results, financial condition and liquidity. Because of the inherent uncertainties discussed above, we have developed a reserving philosophy which attempts to incorporate prudent assumptions and estimates, and we have generally experienced favorable net development on prior year reserves in the last several years. However, there is no assurance that this will occur in future periods.
Management’s best estimate of the net reserve for losses and loss expenses as at December 31, 2016 was $4,759.2 million. The following tables show the effect on estimated net reserves for losses and loss expenses as at December 31, 2016 of a change in two of the most critical assumptions in establishing reserves: (i) loss emergence patterns, accelerated or decelerated by three and six months; and (ii) expected loss ratios varied by plus or minus five and ten percent. Management believes that these scenarios present a reasonable range of variability around the booked reserves using standard actuarial techniques. Loss reserves may vary beyond these scenarios in periods of heightened or reduced claim activity. The reserves resulting from the changes in the assumptions are not additive and should be considered separately. The following tables vary the assumptions employed therein independently. In addition, the tables below do not adjust any parameters other than the ones described above. Specifically, reinsurance collectability was not explicitly stressed as part of the calculations below.
The most significant variance in the above scenarios (i.e., a 10% deterioration in expected loss ratio) would have the effect of increasing losses and loss expenses by $308.2 million.
The slight reduction in gross written premiums in 2016 in our insurance segment was due to reductions in our property and casualty insurance and marine, aviation and energy insurance lines offset by a growth in our financial and professional lines. The increase in gross written premiums in financial and professional lines was largely attributable to growth in our accident and health, credit and political risks, management liability and financial institutions business lines. The decrease in gross written premiums in property and casualty insurance was largely attributable to reductions in our global casualty, U.S. casualty and U.S. environmental business lines offset by growth in our U.S. excess casualty and railroad insurance business lines. The decrease in gross written premiums in marine, aviation and energy insurance was largely due to challenging market conditions in our marine and energy liability, U.S. inland marine, offshore energy, and energy and construction insurance business lines offset by growth in our ocean cargo and aviation insurance business lines.
Includes gross written premium of $178.9 million related to the acquisition of AgriLogic in January 2016.
Net premiums earned increased by $164.0 million, or 6.6%, in 2016 compared to 2015, due to growth in gross earned premium and the impact from the increases in ceded written premiums in 2016 not substantially flowing into earnings until 2017. Net premiums earned increased by $68.0 million, or 2.8%, in 2015 compared to 2014. The rate of growth in net earned premium was lower than the 4.4% growth in gross earned premium as ceded written premium decreased in 2015 following our strategy at the time to selectively retain more risk.
Losses and loss adjustment expenses. The loss ratio for 2016 of 59.8% increased by 4.6 percentage points compared to 2015. Losses and loss adjustment expenses increased from $1,366.2 million in 2015 to $1,576.1 million in 2016 due to an increase in large and catastrophe losses, changes in business mix towards lines which have higher non-catastrophe loss ratios and a reduction in reserve releases. In 2016, net losses from major catastrophes increased by $75.9 million to $166.4 million compared with $90.5 million in 2015. Large losses in 2016 included $32.7 million of energy-related losses, $11.7 million of fire-related losses and a $4.2 million aviation loss. Reserve releases reduced from $156.5 million in 2015 to $129.3 million in 2016.
Overall, prior year reserve releases in 2015 increased by $52.4 million from $104.1 million in 2014 to $156.5 million. The reserve releases from reinsurance were from across all business lines, totaling $90.8 million. The insurance segment had reserve releases of $65.7 million in 2015 compared to $5.1 million in 2014. In 2014, we strengthened reserves in the marine, aviation and energy business lines. Further information relating to movements in prior year reserves can be found below under “Reserves for Losses and Loss Adjustment Expenses.”
We have presented loss ratios both including and excluding the impact from catastrophe losses to aid in the analysis of the underlying performance of our segments. We have defined major 2016 catastrophe losses as losses associated predominantly with wildfires in North America, Hurricane Matthew and other weather-related events in the U.S., several earthquakes, and a hailstorm in the Netherlands. We have defined major 2015 catastrophe losses as losses associated with winter storms in Europe, Australia and New Zealand, storms in the U.S., U.S. wildfires, the Chilean earthquake, U.K. floods and weather-related events in the Philippines. We have defined major 2014 catastrophe losses as losses associated with winter storms in the U.S. and Japan, flooding in the U.K., European, Asian and Australian storms.
The increase in the policy acquisition expense ratio, gross of the effect of reinsurance, to 17.1% in 2016 from 16.9% in 2015 is due to higher profit commission accruals and lower ceding commissions in the insurance segment partially offset by the receipt of FET refunds and changes in business mix toward agriculture and specialty marine business lines, which have lower average commission rates, in the reinsurance segment.
The increase in the policy acquisition expense ratio, gross of the effect of reinsurance, to 16.9% in 2015 from 16.5% in 2014 was mainly driven by changes in the mix of business written in our reinsurance segment towards a greater proportion of other property and specialty reinsurance, written on a pro rata basis which incur higher acquisition costs, and commutation adjustments in our specialty lines which reduced gross earned premiums without any equivalent reduction in commissions.
General, administrative and corporate expenses increased by $56.4 million from $424.0 million in 2015 to $490.1 million in 2016 due to costs associated with AgriLogic which we acquired in January 2016, costs associated with growth in our insurance and reinsurance business and reorganization costs. General, administrative and corporate expenses decreased by $21.7 million from $445.7 million in 2014 to $424.0 million in 2015. In 2014, we incurred $28.5 million in non-recurring corporate expenses associated with the cost of defending the unsolicited approach and an inadequate offer by Endurance. In 2015, our operating expenses were impacted by growth in our U.S. business, reorganization and integration costs and higher salary costs due to increased headcount.
Investment gains. Total net realized and unrealized investment gains for the twelve months ended December 31, 2016 were $45.2 million (2015 - gains of $17.0 million; 2014 - gains of $31.6 million) comprising the amounts set out in the table below:
Net investment income. In 2016, we generated net investment income of $187.1 million, an increase of 0.9% on the prior year (2015 - $185.5 million, 2014 - $190.3 million). The increase was primarily due to a higher investment balance in addition to a small increase in dividend income from our global equity securities portfolio from $20.1 million in 2015 to $20.4 million in 2016. The decrease in investment income in 2015 compared with 2014 was primarily due to lower reinvestment rates and declining book yields from fixed income securities partially offset by $20.1 million of dividend income from our global equity securities portfolio compared with $17.1 million in 2014.
As at December 31, 2016, we held foreign exchange contracts that were designated as hedging under ASC 815 with a notional amount of $108.6 million (2015 - $113.6 million). The foreign exchange contracts are recorded as derivatives at fair value in the balance sheet with the effective portion recorded in other comprehensive income and the ineffective portion recorded as a change in fair value of derivatives in the statement of operations. The contracts are considered to be effective and therefore, for the twelve months ended December 31, 2016, the movement in other comprehensive income representing the effective portion was a decrease of $0.7 million (December 31, 2015 - increase of $2.6 million).
Income before tax. In the twelve months ended December 31, 2016, income before tax was $209.5 million (2015 - $337.5 million; 2014 - $367.9 million), consisting of the amounts set out in the table below:
The decrease in underwriting income in 2016 compared to 2015 was due to higher catastrophe losses, lower reserve releases and increased expenses offset by growth in premiums earned. The increase in 2015 compared to 2014 was due to premium growth and improved loss experience.
The change in fair value of derivatives in 2016 of $24.6 million loss, compared to the equivalent periods in 2015 and 2014, is largely attributable to foreign exchange contracts that had a loss of $21.5 million in 2016 compared to a gain of $11.6 million in 2015 and a loss of $7.7 million in 2014. Interest rate swaps had a realized loss of $3.1 million in 2016 compared to a realized loss of $4.8 million in 2015 and a realized loss of $7.2 million in 2014.
Non-underwriting disclosures. We provided additional disclosures for corporate and other (non-underwriting) income and expenses. Corporate and other income and expenses include net investment income, net realized and unrealized investment gains or losses, expenses associated with managing the Group, certain strategic and non-recurring costs, changes in fair value of derivatives and changes in fair value of loan notes issued by variable interest entities, interest expense, net realized and unrealized foreign exchange gains or losses and income taxes, which are not allocated to the business segments. Corporate expenses are not allocated to our business segments as they typically do not fluctuate with the levels of premiums written and are not directly related to our segment operations.
Gross written premiums. The table below shows our gross written premiums for each line of business for the twelve months ended December 31, 2016, 2015 and 2014, and the percentage change in gross written premiums for each line:
The 6.5% increase in gross written premiums for the twelve months ended December 31, 2015 compared to the equivalent period in 2014 was mainly attributable to increased business written in our other property reinsurance, in particular pro rata, and specialty reinsurance business lines, specifically our credit and surety and agriculture business lines offsetting planned reductions in our property catastrophe business lines. The increase in gross written premiums in casualty reinsurance was less significant due to reductions in prior year estimates and commutations.
Net premiums earned. Net premiums earned increased by $109.3 million, or 10.2%, in 2016 compared to 2015 largely due to increased business written in our specialty reinsurance and casualty reinsurance business lines partially offset by increased ceded costs in our specialty reinsurance and catastrophe business lines. Net premiums earned decreased by $15.6 million, or 1.4%, in 2015 compared to 2014 largely due to changes in the business mix and increased ceded costs.
The $3.8 million decrease in prior year reserve releases from $90.8 million in the twelve months ended December 31, 2015 to $87.0 million in the current period was due to a decrease in reserve releases from property lines. The $8.2 million decrease in prior year reserve releases from $99.0 million in the twelve months ended December 31, 2014 compared to $90.8 million in 2015 was due predominantly to a reduction in reserve releases from specialty, casualty and other property lines. Prior year reserve releases are further discussed below under “Reserves for Losses and Loss Adjustment Expenses.”
Ceded reinsurance for 2015 was $255.7 million, a decrease of $83.0 million from 2014, as we undertook steps to retain more risk within the Group at the time but continued to seek to use reinsurance as an effective risk mitigation tool for our growing insurance lines, particularly in the U.S.
Net premiums earned. Net earned premiums increased by $54.7 million, or 3.9%, in 2016 compared to 2015 due to the written premium growth in 2016 and the impact from the increases in ceded written premiums in 2016 not flowing into earnings until 2017. Net premiums earned increased by $83.6 million, or 6.3%, in 2015 compared to 2014 which is consistent with the written premium growth in prior years earning in 2015.
Losses and loss adjustment expenses. The loss ratio in 2016 was 63.1% compared to 62.4% in 2015. The increase in the loss ratio in 2016 was primarily due to a $23.4 million reduction in prior year reserve releases offset by a $10.7 million reduction in catastrophe losses. The loss ratio in 2015 increased from 61.5% in 2014 due to an $18.3 million increase in catastrophe losses and a greater frequency of large losses partially offset by a $60.6 million increase in prior year reserve releases.
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 experienced during 2016 included $32.7 million of energy-related losses, $11.8 million of fire-related losses and a $4.2 million aviation loss.
In 2015, the insurance segment experienced $40.9 million of catastrophe losses, consisting of $25.7 million associated with U.K. floods and $15.2 million associated with the U.S. storms. Large losses experienced during 2015 included $37.6 million of energy losses, $10.0 million associated with a dam collapse in Brazil and $3.0 million associated with the port explosion in Tianjin, China.
In 2014, the insurance segment experienced $22.6 million of catastrophe losses associated with U.S. and U.K. storms.
In 2016, there were reserve releases of $42.3 million compared to $65.7 million of reserve releases in 2015. The reserve releases in 2016 were predominantly from our marine, energy and aviation line of business while the reserve releases in 2015 were predominantly from our property and casualty line of business. Prior year reserve releases are further discussed under “Reserves for Losses and Loss Adjustment Expenses.”
Policy acquisition, general and administrative expenses. Amortization of deferred policy acquisition costs were $302.5 million in 2016, equivalent to 20.8% of net premiums earned (2015 - $258.9 million or 18.5% of net premiums earned; 2014 - $251.2 million or 19.1% of net earned premium). The increase in the acquisition expense ratio in 2016 compared with 2015 was due to higher profit commission accruals and lower ceding commissions. The decrease in the acquisition expense ratio in 2015 compared with 2014 was due to lower profit commission accruals and increased ceding commissions.
As at December 31, 2016 and December 31, 2015, total cash and investments, including accrued interest receivable, were $9.2 billion and $8.8 billion, respectively. 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.
As of December 31, 2016, our investments consisted of a diversified portfolio of fixed income securities including U.S. Dollar BBB Emerging Market Debt, global equities and money market funds. Our overall portfolio strategy remains focused on high quality fixed income investments. As at December 31, 2016, our investments in equities, U.S. Dollar BBB Emerging Market Debt and risk portfolio cash consisted of approximately 10.8% of our Managed Portfolio (2015 - 12.6%). In November 2016 we reduced our holdings in our global equity strategy and received net proceeds of $200.0 million. Proceeds from the sales were reinvested into a core fixed income strategy. As at December 31, 2016, we had a 6.8% (2015 - 8.7%) position in equities, a 3.8% (2015 - 3.5%) position in U.S. Dollar BBB Emerging Market Debt and 0.2% (2015 - 0.4%) in risk asset portfolio cash.
Book yield as at December 31, 2016 on the fixed income portfolio was 2.49%, a decrease of 10 basis points from 2.59% as at December 31, 2015, as a result of the continuing low interest rate environment. Our fixed income portfolio duration as at December 31, 2016 was 3.89 years compared to 3.65 as at December 31, 2015 (December 31, 2015 - 3.57 including the impact of the interest rate swaps). As at December 31, 2016, the average credit quality of our fixed income portfolio was “AA-,” with 89.3% of the portfolio being rated “A” or higher. As at December 31, 2015, the average credit quality of our fixed income portfolio
We have used interest rate swaps in the ordinary course of our investment activities to partially mitigate the negative impact of rises in interest rates on the market value of our fixed income portfolio. In 2014, we decided to let our interest rate swap program roll off and not renew maturing positions. We took this decision after an extensive reassessment of the costs of maintaining an interest rate swap program in a steep yield curve environment. In addition, the continued uncertainty in the global economy and low inflation make it difficult to gauge the timing and speed of interest rate rises by the Federal Reserve. On May 9, 2016, we terminated all remaining outstanding interest rate swaps (notional value of $256.3 million) under our International Swap Dealers Association agreement. As at December 31, 2016, we no longer had outstanding interest rate swaps. As at December 31, 2015, we had a total notional of interest rate swaps of $756.3 million. For further discussion on interest rate swaps, see Note 10 of our consolidated financial statements, “Derivative Contracts.”
The composition of our cash and investments as at December 31, 2016 and 2015 is summarized below:
Our mortgage-backed portfolio is supported by loans diversified across a number of geographic and economic sectors. The following table summarizes the fair value of our mortgage-backed securities by rating and class as at December 31, 2016:
Equity securities. Equity securities are comprised of U.S. and foreign equity securities and are classified as available for sale or trading. We initiated an investment into a high quality global equity income strategy in March 2011 and increased the investment in 2013 and 2014. In 2014, we increased our investment in equities by a total of $240.0 million of which $80.0 million was in our global equity strategy and $160.0 million was in a minimum volatility equity portfolio. In 2015 as a result of rebalancing equity investments across subsidiary company balance sheets, equities were sold that were classified as available for sale, with a commensurate purchase of equities designated as trading securities. As at December 31, 2015, all equity securities were classified as trading. In the fourth quarter of 2016 we took advantage of rising equity markets and sold $200.0 million of our equity portfolio. The total investment return from the available for sale and trading equity portfolios for the twelve months ended December 31, 2016, 2015 and 2014 were as follows:
As at December 31, 2016, we had $869.6 million, or 9.5% of our aggregate investment portfolio, invested in European issuers, including the U.K. (2015 - $1,004.0 million, or 11.4%). Our European exposures consisted of sovereigns, agencies, government guaranteed bonds, covered bonds, corporate bonds and equities. As at December 31, 2016, we had no exposure to the sovereign debt of GIIPS and had de minimis holdings of Irish equities.
Fair Value Measurements. Our estimates of fair value for financial assets and liabilities are based on the framework established in the fair value accounting guidance included in ASC Topic 820, Fair Value Measurements and Disclosures. For a description of the framework, see Note 8 of our consolidated financial statements, “Fair Value Measurements.”
Valuation of Other Investments. The value of our investments in Chaspark and MVI are based on our share of the capital position of the entities which includes income and expenses reported in quarterly management accounts. Each of Chaspark and MVI is subject to annual audit evaluating the financial statements of the entities. We periodically review the management accounts of Chaspark and MVI and evaluate the reasonableness of the valuation of our investment.
Other-than-temporary Impairment of Investments. We review all our available for sale fixed income and equity investments on an individual security basis for potential OTTI each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions. There was no OTTI charge for the twelve months ended December 31, 2016 (2015 -$Nil).
Reserves by segment. As at December 31, 2016, we had total net loss and loss adjustment expense reserves of $4,759.2 million (December 31, 2015 - $4,583.4 million). This amount represented our best estimate of the ultimate liability for payment of losses and loss adjustment expenses. Of the total gross reserves for unpaid losses of $5,319.9 million at the balance sheet date of
December 31, 2016, a total of $3,044.9 million, or 57.2%, represented IBNR claims (December 31, 2015 - $2,841.6 million and 57.5%, respectively). The following tables analyze gross and net loss and loss adjustment expense reserves by business segment as at December 31, 2016 and 2015, respectively:
Prior year loss reserves. For the twelve months ended December 31, 2016, there was an overall reduction in our estimate of ultimate net claims to be paid in respect of prior accident years. An analysis of this reduction by business segment is as follows for each of the twelve months ended December 31, 2016, 2015 and 2014:
Insurance. Net reserve releases of $42.3 million in 2016 were attributable to net reserve releases of $38.9 million from marine, aviation and energy lines and $15.3 million from financial and professional lines due to better than expected development partially offset by an $11.9 million net reserve strengthening in property and casualty lines.
Insurance. Net reserve releases of $5.1 million in 2014 were mainly attributable to our property and casualty lines but were partially offset by a $38.0 million net strengthening in the marine, aviation and energy lines, in particular in our construction liability account within marine and energy liability, although this strengthening has been partially mitigated by the receipt of additional adjustment premiums.
Other than the matters described under “- Critical Accounting Policies - Reserving Approach,” we did not make any significant changes in methodologies used in our reserving process. Nevertheless, because the period of time we have been in operation is still relatively short, for longer tail lines in particular, our loss experience is limited and reliable evidence of changes in trends of numbers of claims incurred, average settlement amounts, numbers of claims outstanding and average losses per claim will necessarily take years to develop.
As at December 31, 2016, total shareholders’ equity was $3,648.3 million compared to $3,419.9 million as at December 31, 2015. Our total shareholders’ equity as at December 31, 2016 includes four classes of preference shares with a total value as measured by their respective liquidation preferences of $797.1 million net of share issuance costs (December 31, 2015 - $555.8 million).
In addition to the senior notes issued by Aspen Holdings, we have also reported $223.4 million of debt issued by Silverton. For further information relating to Silverton, refer to Note 7 of our consolidated financial statements, “Variable Interest Entities.”
On April 22, 2015, we announced a 5.0% increase in our quarterly dividend to our ordinary shareholders from $0.20 per ordinary share to $0.21 per ordinary share.
For the twelve months ended December 31, 2015, we acquired and canceled a total of 1,790,333 ordinary shares in open market repurchases. We paid a total consideration of $83.7 million and an average price of $46.74 per ordinary share for the twelve months ended December 31, 2015. As at December 31, 2015, we had $416.3 million remaining under our then existing share repurchase authorization of $500.0 million which was approved on February 5, 2015 and expired on February 6, 2017.
Access to capital. Our business operations are in part dependent on our financial strength and the market’s perception thereof, as measured by total shareholders’ equity, which was $3,648.3 million as at December 31, 2016 (December 31, 2015 - $3,419.9 million). We believe our financial strength provides us with the flexibility and capacity to obtain funds through debt or equity financing. Our continuing ability to access the capital markets is dependent on, among other things, our operating results, market conditions and our perceived financial strength. We regularly monitor our capital and financial position, as well as investment and securities market conditions, both in general and with respect to Aspen Holdings’ securities. Our ordinary shares and all our preference shares are listed on the NYSE.
During the year ended December 31, 2016, Aspen Holdings received dividends of $234.5 million (2015 - $223.0 million) from Aspen Bermuda, $63.4 million (2015 - $61.4 million) from Aspen European, $33.4 million (2015 - $Nil) from Aspen UK Holdings, $15.0 million (2015 - $Nil) from ACM and $Nil (2015 - $2.9 million) from AMAL. In addition, Aspen Holdings received $21.6 million in respect of an intercompany loan from Aspen European (2015 - $17.5 million). During 2015, Aspen Holdings received a $4.7 million payment of intercompany interest in respect of an intercompany loan from Aspen U.K Holdings.
As at December 31, 2016, Aspen Holdings held $327.1 million (December 31, 2015 - $135.5 million) of cash, cash equivalents and investments with the increase largely due to the issuance of the 5.625% Perpetual Shares, comprising $250.0 million of total liquidation preference less $8.7 million of issuance expenses. This was offset by the $61.0 million net payments for the acquisitions of AgriLogic and BlueWaters and the $75.0 million cost for the repurchase of ordinary shares in 2016. Management considers the current cash and cash equivalents, together with dividends declared or expected to be declared by subsidiary companies and our credit facilities, sufficient to appropriately satisfy the liquidity requirements of Aspen Holdings. Aspen Holdings’ liquidity depends on dividends, capital distributions and interest payments from our Operating Subsidiaries. Aspen Holdings has recourse to the credit facility described below.
Where we incur losses in currencies which are not normally held we will convert funds into the appropriate currencies to mitigate our currency risk and also make funds available to settle claims in local currencies as and when they become due. Recent examples of this have been where we have converted funds to Thai Bhat, New Zealand Dollars and Brazilian Reals to cover flood, earthquake and other losses in these countries. For local regulatory reasons, we hold assets in trusts which limits our liquidity to some degree, however, the process of matching assets with liabilities in currency means that at any one time we will hold cash and short-term assets in all major currencies which are available to settle claims.
Under the credit facility, we must not permit (a) consolidated tangible net worth to be less than approximately $2,428.6 million plus 50% of consolidated net income and 50% of aggregate net cash proceeds from the issuance by Aspen Holdings of its capital stock, in each case after January 1, 2013, (b) the ratio of our total consolidated debt to the sum of such debt plus our consolidated tangible net worth to exceed 35% or (c) any material insurance subsidiary to have a financial strength rating of less than “B++” from A.M. Best. In addition, the credit facility contains other customary affirmative and negative covenants as well as certain customary events of default, including with respect to a change in control. The various affirmative and negative covenants, include, among others, covenants that, subject to various exceptions, restrict the ability of Aspen Holdings and its subsidiaries to: incur indebtedness; create or permit liens on assets; engage in mergers or consolidations; dispose of assets; pay dividends or other distributions; purchase or redeem Aspen Holdings’ equity securities or those of its subsidiaries and make other restricted payments; make certain investments; agree with others to limit the ability of Aspen Holdings’ subsidiaries to pay dividends or other restricted payments or to make loans or transfer assets to Aspen Holdings or another of its subsidiaries. In addition, the credit facility has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, bankruptcy or insolvency proceedings, change of control and cross-default to other debt agreements. Our credit facility also contains customary provisions in respect of successor companies resulting from mergers and acquisitions assuming obligations thereunder.
On December 12, 2014, Aspen Holdings and the Borrowers entered into a first amendment to the Credit Agreement with various lenders and Barclays, which amends the Credit Agreement. Aspen Holdings has recently established, and may establish additional, special purpose entities that have issued or will issue insurance-linked securities to third-party investors (each, an “ILS Entity” and collectively, the “ILS Entities”). Accordingly, the Credit Agreement was amended, among other things, to (i) exclude ILS Entities from the definition of “Subsidiary”, (ii) permit the Borrowers to invest in ILS Entities and (iii) permit the Borrowers to engage in transactions with an ILS Entity.
The following table summarizes our contractual obligations (other than our obligations to employees and our Preference Shares) under long-term debt, operating leases (net of subleases) and reserves relating to insurance and reinsurance contracts as at December 31, 2016:
The long-term debt obligations disclosed above do not include the $29.0 million annual interest payments on our outstanding senior notes or dividends payable to holders of our preference shares or the loan notes issued by Silverton in the amount of $223.4 million.
In estimating the time intervals into which payments of our reserves for losses and loss adjustment expenses fall, as set out above, we have utilized actuarially assessed payment patterns. By the nature of the insurance and reinsurance contracts under which these liabilities are assumed, there can be no certainty that actual payments will fall in the periods shown and there could be a material acceleration or deceleration of claims payments depending on factors outside our control. This uncertainty is heightened by the relatively short time in which we have operated (relevant in particular to longer-tail lines), thereby providing limited Company-specific claims loss payment patterns. The total amount of payments in respect of our reserves, as well as the timing of such payments, may differ materially from our current estimates for the reasons set out under “ - Critical Accounting Policies - Reserves for Losses and Loss Expenses” above.
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 2017, 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.
Average equity, a non-U.S. GAAP financial measure, is used in calculating ordinary shareholders return on average equity. It is calculated by taking the arithmetic average of total shareholders equity on a monthly basis for the stated periods excluding (i) the average share of equity due to non-controlling interests and (ii) the average value of preference shares less issue expenses. Unrealized appreciation (depreciation) on investments is primarily the result of interest rate movements and the resultant impact on fixed income securities, and unrealized appreciation (depreciation) on foreign exchange is the result of exchange rate movements between the U.S. Dollar and the functional currencies of our Operating Subsidiaries. Therefore, we believe that excluding these unrealized appreciations (depreciations) provides a more consistent and useful measurement of operating performance, which supplements U.S. GAAP information.