XFRA:BXP Aspen Insurance Holdings Ltd Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

  þ  

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

  
    For the Quarterly Period Ended March 31, 2012   
    Or   
  ¨  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

  

Commission file number 001-31909

 

 

ASPEN INSURANCE HOLDINGS LIMITED

(Exact name of registrant as specified in its charter)

 

Bermuda

(State or other jurisdiction of

incorporation or organization)

 

Not Applicable

(I.R.S. Employer

Identification No.)

141 Front Street

Hamilton, Bermuda

(Address of principal executive offices)

 

HM 19

(Zip Code)

Registrant’s telephone number, including area code

(441) 295-8201

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   þ   Accelerated filer   ¨   Non-accelerated filer  ¨     Smaller reporting company   ¨
        (Do not check if a smaller reporting company)      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of April 30, 2012, there were 71,517,845 outstanding ordinary shares, with a par value of 0.15144558¢ per ordinary share, outstanding.

 

 

 


INDEX

 

         Page  

PART I. FINANCIAL INFORMATION

  

Item 1.

  Unaudited Condensed Consolidated Financial Statements      3   
  Condensed Consolidated Balance Sheets as at March 31, 2012 (Unaudited) and December 31, 2011      3   
  Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income, for the Three Months Ended March 31, 2012 and 2011      5   
  Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity, for the Three Months Ended March 31, 2012 and 2011      6   
  Unaudited Condensed Consolidated Statements of Cash Flows, for the Three Months Ended March 31, 2012 and 2011      7   
  Notes to the Unaudited Condensed Consolidated Financial Statements      9   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      55   

Item 4.

  Controls and Procedures      56   

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      58   

Item 1A.

  Risk Factors      58   

Item 2.

  Unregistered Sale of Equity Securities and Use of Proceeds      58   

Item 3.

  Defaults Upon Senior Securities      59   

Item 4.

  Mine Safety Disclosures      59   

Item 5.

  Other Information      59   

Item 6.

  Exhibits      59   

SIGNATURES

     60   

CERTIFICATIONS

  

 

2


PART I

FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Consolidated Financial Statements

ASPEN INSURANCE HOLDINGS LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

As at March 31, 2012 (Unaudited) and December 31, 2011

($ in millions, except share and per share amounts)

 

     As at
March 31,  2012
     As at
December 31,  2011
 
     (Unaudited)      (As Adjusted)  

ASSETS

     

Investments

     

Fixed income maturities, available for sale at fair value
(amortized cost — $5,133.8 and $5,099.7)

   $   5,444.6       $   5,425.8   

Fixed income maturities, trading at fair value
(amortized cost — $379.0 and $380.4)

     397.5         394.4   

Equity securities, available for sale at fair value
(cost — $174.8 and $169.8)

     188.1         179.5   

Other investments, equity method

     33.1         33.1   

Short-term investments, available for sale at fair value
(amortized cost — $423.5 and $298.2)

     423.5         298.2   

Short-term investments, trading at fair value
(amortized cost — $10.3 and $4.1)

     10.3         4.1   
  

 

 

    

 

 

 

Total investments

     6,497.1         6,335.1   

Cash and cash equivalents

     1,173.3         1,239.1   

Reinsurance recoverables

     

Unpaid losses

     455.4         426.6   

Ceded unearned premiums

     175.3         87.8   

Receivables

     

Underwriting premiums

     1,061.2         894.4   

Other

     70.2         69.7   

Funds withheld

     86.9         90.7   

Deferred policy acquisition costs(1)

     215.3         184.5   

Derivatives at fair value

     0.9         1.3   

Receivable for securities sold

     2.0         1.1   

Office properties and equipment

     58.5         53.9   

Tax recoverable

     20.3         19.5   

Other assets

     31.1         36.8   

Intangible assets

     19.7         20.0   
  

 

 

    

 

 

 

Total assets(1)

   $ 9,867.2       $ 9,460.5   
  

 

 

    

 

 

 

 

 

(1) In the current quarter, the Company adopted the provision of ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful business acquisition. For more information on the impact of ASU 2010-26, please refer to Note 2 of these financial statements.

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


ASPEN INSURANCE HOLDINGS LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

As at March 31, 2012 (Unaudited) and December 31, 2011

($ in millions, except share and per share amounts)

     As at
March 31, 2012
     As at
December 31, 2011
 
     (Unaudited)      (As Adjusted)  

LIABILITIES

     

Insurance reserves

     

Losses and loss adjustment expenses

   $   4,585.7       $   4,525.2   

Unearned premiums

     1,146.3         916.1   
  

 

 

    

 

 

 

Total insurance reserves

     5,732.0         5,441.3   

Payables

     

Reinsurance premiums

     192.2         155.8   

Deferred taxation

     22.9         18.5   

Accrued expenses and other payables

     208.9         187.8   

Liabilities under derivative contracts

     1.3         2.1   
  

 

 

    

 

 

 

Total payables

     425.3         364.2   

Long-term debt

     499.0         499.0   
  

 

 

    

 

 

 

Total liabilities

   $ 6,656.3       $ 6,304.5   
  

 

 

    

 

 

 

Commitments and contingent liabilities (see Note 14)

               
  

 

 

    

 

 

 

SHAREHOLDERS’ EQUITY

     

Ordinary shares: 71,495,852 shares of par value 0.15144558¢ each (December 31, 2011 — 70,655,698)

   $ 0.1         0.1   

Preference shares:

     

4,600,000 5.625% shares of par value 0.15144558¢ each
(December 31, 2011 — 4,600,000)

               

5,327,500 7.401% shares of par value 0.15144558¢ each
(December 31, 2011 — 5,327,500)

               

Non-controlling interest

     0.3         0.4   

Additional paid-in capital

     1,390.8         1,385.0   

Retained earnings(1)

     1,404.1         1,341.6   

Accumulated other comprehensive income, net of taxes

     415.6         428.9   
  

 

 

    

 

 

 

Total shareholders’ equity(1)

     3,210.9         3,156.0   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity(1)

   $ 9,867.2       $ 9,460.5   
  

 

 

    

 

 

 

 

 

(1) In the current quarter, the Company adopted the provision of ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful business acquisition. For more information on the impact of ASU 2010-26, please refer to Note 2 of these financial statements.

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


ASPEN INSURANCE HOLDINGS LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($ in millions, except share and per share amounts)

 

     Three Months Ended March 31,  
     2012     2011  
     (Unaudited)     (As Adjusted)  

Revenues

    

Net earned premium

   $ 495.4      $ 452.4   

Net investment income

     52.4        55.5   

Net realized and unrealized investment gains

     9.0        8.4   

Net realized and unrealized foreign exchange gains

     7.7        6.4   
  

 

 

   

 

 

 

Total Revenues

     564.5        522.7   
  

 

 

   

 

 

 

Expenses

    

Losses and loss adjustment expenses

     284.0        528.9   

Policy acquisition expenses

     96.1        81.4   

General, administrative and corporate expenses(1)

     84.8        62.5   

Change in fair value of derivatives

     7.5        3.4   

Interest on long-term debt

     7.7        7.7   

Other expenses

     0.3        8.1   
  

 

 

   

 

 

 

Total Expenses

     480.4        692.0   
  

 

 

   

 

 

 

Income/(loss) from operations before income tax

     84.1        (169.3

Income tax (expense)/credit

     (5.4     16.5   
  

 

 

   

 

 

 

Net Income/(Loss)(1)

   $ 78.7      $ (152.8
  

 

 

   

 

 

 

Other Comprehensive Income, net of taxes:

    

Available for sale investments:

    

Reclassification adjustment for net realized (gains) on investments included in net income

     (0.9     (7.0

Change in net unrealized gains on available for sale securities held

     (10.9     (21.5

Amortization of loss on derivative contract

            0.1   

Change in foreign currency translation adjustment

     (1.5     5.6   
  

 

 

   

 

 

 

Other comprehensive (loss)

     (13.3     (22.8
  

 

 

   

 

 

 

Comprehensive Income/(Loss)(1)

   $ 65.4      $ (175.6
  

 

 

   

 

 

 

Per share data

    

Weighted average number of ordinary shares & share equivalents(2)

    

Basic

     70,943,997        70,551,859   

Diluted

     73,832,734        70,551,859   

Basic earnings/(loss) per ordinary share adjusted for preference share dividends

   $ 1.03      $ (2.25
  

 

 

   

 

 

 

Diluted earnings/(loss) per ordinary share adjusted for preference share dividends

   $ 0.99      $ (2.25
  

 

 

   

 

 

 

 

 

(1) In the current quarter, the Company adopted the provision of ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful business acquisition. For more information on the impact of ASU 2010-26, please refer to Note 2 of these financial statements.

 

(2) The basic and diluted number of ordinary shares for the three months ended March 31, 2011 in the table above is the same, as the inclusion of dilutive securities in a loss making period would be anti-dilutive.

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


ASPEN INSURANCE HOLDINGS LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

($ in millions)

 

     Three Months Ended March 31,  
     2012     2011  
     (Unaudited)     (As Adjusted)  

Ordinary shares

    

Beginning and end of period

   $ 0.1      $ 0.1   
  

 

 

   

 

 

 

Preference shares

    

Beginning and end of period

              
  

 

 

   

 

 

 

Non-controlling interest

    

Beginning of period

     0.4        0.5   

Change for the period

     (0.1     (0.2
  

 

 

   

 

 

 

End of period

     0.3        0.3   
  

 

 

   

 

 

 

Additional paid-in capital

    

Beginning of period

     1,385.0        1,388.3   

New ordinary shares issued

     1.3        0.5   

Ordinary shares repurchased and cancelled

            (1.7

Share-based compensation

     4.5        1.1   
  

 

 

   

 

 

 

End of period

     1,390.8        1,388.2   
  

 

 

   

 

 

 

Retained earnings

    

Beginning of period(1)

     1,341.6        1,517.0   

Net (loss)/income for the period(1)

     78.7        (152.8

Dividends on ordinary shares

     (10.6     (10.6

Dividends on preference shares

     (5.7     (5.7

Proportion due to non-controlling interest

     0.1        0.2   
  

 

 

   

 

 

 

End of period(1)

     1,404.1        1,348.1   
  

 

 

   

 

 

 

Accumulated other comprehensive income:

    

Cumulative foreign currency translation adjustments, net of taxes:

    

Beginning of period

     124.2        113.4   

Change for the period, net of income tax

     (1.5     5.6   
  

 

 

   

 

 

 

End of period

     122.7        119.0   
  

 

 

   

 

 

 

Loss on derivatives, net of taxes:

    

Beginning of period

     (0.7     (1.0

Reclassification to interest payable

            0.1   
  

 

 

   

 

 

 

End of period

     (0.7     (0.9
  

 

 

   

 

 

 

Unrealized appreciation on investments, net of taxes:

    

Beginning of period

     305.4        211.9   

Change for the period, net of taxes

     (11.8     (28.5
  

 

 

   

 

 

 

End of period

     293.6        183.4   
  

 

 

   

 

 

 

Total accumulated other comprehensive income, net of taxes

     415.6        301.5   
  

 

 

   

 

 

 

Total shareholders’ equity(1)

   $   3,210.9      $   3,038.2   
  

 

 

   

 

 

 

 

 

(1) In the current quarter, the Company adopted the provision of ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful business acquisition. For more information on the impact of ASU 2010-26, please refer to Note 2 of these financial statements.

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


ASPEN INSURANCE HOLDINGS LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

 

     Three Months Ended March 31,  
     2012     2011  
     (Unaudited)     (As Adjusted)  

Cash flows from operating activities:

    

Net income/(loss)(1)

   $ 78.7        $  (152.8

Income/(loss) due to non-controlling interest

     0.1        (0.2

Adjustments to reconcile net income to net cash flows from operating activities:

    

Depreciation and amortization

     8.0        7.1   

Share-based compensation

     4.5        1.1   

Net realized and unrealized investment and foreign exchange (gains)

     (8.1     (8.4

Loss on derivative contracts

            0.1   

Changes in:

    

Insurance reserves:

    

Losses and loss adjustment expenses

     40.7        357.8   

Unearned premiums

     226.0        138.9   

Reinsurance recoverables:

    

Unpaid losses

     (27.8     (51.7

Ceded unearned premiums

     (87.1     (83.5

Other receivables

     (0.5       

Deferred policy acquisition costs(1)

     (30.2     (21.5

Reinsurance premiums payable

     35.4        112.7   

Funds withheld

     3.8        (3.0

Premiums receivable

     (164.2     (110.5

Deferred taxes

     (4.4     0.4   

Income tax payable

     8.1        (18.7

Accrued expenses and other payable

     10.7        (13.3

Fair value of derivatives and settlement of liabilities under derivatives

     (0.5     2.4   

Intangible assets

     0.3          

Other assets

     5.9        (2.2
  

 

 

   

 

 

 

Net cash from operating activities

   $ 99.4      $ 154.7   
  

 

 

   

 

 

 

 

 

(1) In the current quarter, the Company adopted the provision of ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful business acquisition. For more information on the impact of ASU 2010-26, please refer to Note 2 of these financial statements.

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7


ASPEN INSURANCE HOLDINGS LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

     Three Months Ended March 31,  
     2012     2011  
     (Unaudited)     (As Adjusted)  

Cash flows (used in) investing activities:

    

(Purchases) of fixed income maturities — Available for sale

   $ (421.0   $ (643.6

(Purchases) of fixed income maturities — Trading

     (58.6     (230.9

Purchases of equity securities

     (18.5     (171.1

Sales of equity securities

     16.3          

Proceeds from sales and maturities of fixed income maturities — Available for sale

     394.3        487.1   

Proceeds from sales and maturities of fixed income maturities — Trading

     66.1        264.4   

Net (purchases)/sales of short-term investments

     (128.6     106.5   

Net change in (payable)/receivable for securities (purchased)/sold

     1.4        (22.2

Purchase of equipment

     (7.7     (5.0
  

 

 

   

 

 

 

Net cash (used in) investing activities

     (156.3     (214.8
  

 

 

   

 

 

 

Cash flows (used in) financing activities:

    

Proceeds from the issuance of ordinary shares, net of issuance costs

     1.3        0.5   

Ordinary shares repurchased

            (1.7

Dividends paid on ordinary shares

     (10.6     (10.6

Dividends paid on preference shares

     (5.7     (5.7
  

 

 

   

 

 

 

Net cash (used in) financing activities

     (15.0     (17.5
  

 

 

   

 

 

 

Effect of exchange rate movements on cash and cash equivalents

     6.1        15.4   
  

 

 

   

 

 

 

(Decrease) in cash and cash equivalents

     (65.8     (62.2

Cash and cash equivalents at beginning of period

     1,239.1        1,179.1   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,173.3      $ 1,116.9   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash (received)/paid during the period for income tax (credit)/expense

   $ (0.1   $ 0.4   

Cash paid during the period for interest on long-term debt

   $ 7.5      $ 7.5   

See accompanying notes to unaudited condensed consolidated financial statements.

 

8


ASPEN INSURANCE HOLDINGS LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    History and Organization

Aspen Insurance Holdings Limited (“Aspen Holdings”) was incorporated on May 23, 2002 and holds subsidiaries that provide insurance and reinsurance on a worldwide basis. Its principal operating subsidiaries are Aspen Insurance UK Limited (“Aspen U.K.”), Aspen Bermuda Limited (“Aspen Bermuda”), Aspen Specialty Insurance Company (“Aspen Specialty”), Aspen American Insurance Company (“AAIC”) and Aspen Underwriting Limited (corporate member of Lloyd’s Syndicate 4711, “AUL”), (collectively, the “Operating Subsidiaries”). References to the “Company”, “we”, “us” or “our” refer to Aspen Holdings or Aspen Holdings and its wholly-owned subsidiaries.

2.    Basis of Preparation

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. The unaudited condensed consolidated financial statements include the accounts of Aspen Holdings and its subsidiaries, which are collectively referred to herein as the “Company.” All intercompany transactions and balances have been eliminated on consolidation.

The balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date adjusted for the adoption of ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts,” but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011 contained in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (File No. 001-31909).

Assumptions and estimates made by management have a significant effect on the amounts reported within the consolidated financial statements. The most significant of these relate to losses and loss adjustment expenses, the value of investments, reinsurance recoverables and the fair value of derivatives. All material assumptions and estimates are regularly reviewed and adjustments made as necessary, but actual results could be significantly different from those expected when the assumptions or estimates were made.

New Accounting Policies Adopted in 2012

In 2010, the Financial Accounting Standard Board (“FASB”) issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, which requires costs incrementally or directly related to the successful acquisition of new or renewal insurance contracts to be capitalized as deferred acquisition costs, effective for the 2012 interim and annual reporting period. This decision requires us to expense the proportion of our general and administrative deferred acquisition costs which relate to quoted business which does not successfully convert into a policy. We adopted this standard for the first time on January 1, 2012 and followed the full retrospective method permitted by the FASB which requires prior periods to be represented.

The provisions of the standard have increased general, administrative and corporate expenses by $1.1 million in the three months ended March 31, 2012 and reduced closing retained earnings for the period ended March 31, 2012 by an aggregate $17.1 million. The brought forward accumulated operating deferred acquisition costs as at December 31, 2011 were reduced by $16.0 million due to a write down of previously deferred costs and resulted in a corresponding reduction in retained earnings brought forward.

 

9


The adoption of the standard has required the comparative data to be restated as follows:

 

 

Consolidated Balance Sheet

   As at December 31, 2011  
     As Published     As Adjusted  
     ($ in millions)  

Assets

  

Deferred policy acquisition costs (disclosed and adjusted)

   $ 200.5      $ 184.5   

Shareholders’ equity

    

Retained earnings (disclosed and adjusted)

   $     1,357.6      $     1,341.6   

Consolidated Statement of Shareholders’ Equity

   Three Months Ended
March  31, 2011
 
     As Published     As Adjusted  
     ($ in millions)  

Retained earnings

    

Beginning of the period (disclosed and adjusted)

   $     1,528.7      $     1,517.0   

Net (loss) for the period (disclosed and adjusted)

     (151.7     (152.8

Dividends on ordinary shares (disclosed and adjusted)

     (10.6     (10.6

Dividends on preference shares (disclosed and adjusted)

     (5.7     (5.7

Proportion due to non-controlling interest (disclosed and adjusted)

     0.2        0.2   
  

 

 

   

 

 

 

End of period (disclosed and adjusted)

   $ 1,360.9      $ 1,348.1   
  

 

 

   

 

 

 

Consolidated Statement of Operations

   Three Months Ended
March  31, 2011
 
     As Published     As Adjusted  
     ($ in millions)  

Expenses

  

General, administrative and corporate expenses (disclosed and adjusted)

   $     61.4      $     62.5   

Consolidated Statement of Cash Flows

   Three Months Ended
March  31, 2011
 
     As Published     As Adjusted  
     ($ in millions)  

Net (loss) (disclosed and adjusted)

   $ (151.7   $ (152.8

Deferred policy acquisition costs (disclosed and adjusted)

     (22.6     (21.5

 

10


Earnings Per Share

The above standard has also resulted in a change to the calculations of earnings per share as follows:

 

 

     Three Months Ended
March 31, 2011
 
     ($ in millions except for per
share amounts)
 

Net (loss) as reported

   $ (151.7

Preference dividends

     (5.7
  

 

 

 

Basic and diluted net (loss) available to ordinary shareholders

     (157.4

Additional deferred acquisition costs expensed

     (1.1
  

 

 

 

Adjusted basic and diluted net loss available to ordinary shareholders

   $ (158.5
  

 

 

 

Basic weighted average ordinary shares

     70,551,859   

Weighted average effect of diluted securities

       
  

 

 

 

Total diluted weighted average ordinary shares

     70,551,859   
  

 

 

 

Reported basic loss per ordinary share

   $ (2.23
  

 

 

 

Reported diluted loss per ordinary share

   $ (2.23
  

 

 

 

Adjusted basic loss per ordinary share

   $ (2.25
  

 

 

 

Adjusted diluted loss per ordinary share

   $ (2.25
  

 

 

 

If the above standard had not been adopted, the basic earnings per ordinary share adjusted for preference share dividends for the three months ended March 31, 2012 would be $1.04 (March 31, 2011 — loss of $2.23) and the diluted earnings per ordinary share adjusted for preference share dividends would be $1.00 (March 31, 2011 — loss of $2.23).

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which eliminates the option to report other comprehensive income and its components in the statement of changes in shareholders’ equity. The standard requires comprehensive income to be reported in either a single statement, which the Company has implemented, or in two consecutive statements including the components of net income, the components of other comprehensive income and total comprehensive income. The Company has adopted this standard for the current reporting quarter.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which emphasizes using the same meaning and disclosures of fair value within the financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). This decision requires the Company to disclose additional information about transfers between Level 1 and Level 2 of the fair value hierarchy, additional disclosures for Level 3 fair value measurement, including quantitative and qualitative information about significant unobservable inputs and discussions about the sensitivity of these unobservable inputs and a description of the Company’s valuation process. ASU 2011-04 is effective for annual reporting periods beginning after December 15, 2011 with early adoption prohibited. This does not have a material impact on the Company’s consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” The ASU retains the existing offsetting model under U.S. GAAP but requires disclosures to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under International Financial Reporting Standards by aligning these requirements. ASU 2011-11 is effective for annual reporting periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The provisions of the new guidance are not expected to have a material impact on the Company’s consolidated financial statements.

 

11


3.    Acquisitions

There were no acquisition-related transactions during the three months ended March 31, 2012.

4.    Earnings Per Ordinary Share

Basic earnings per ordinary share are calculated by dividing net income available to holders of Aspen’s ordinary shares by the weighted average number of ordinary shares outstanding. Diluted earnings per ordinary share are based on the weighted average number of ordinary shares and dilutive potential ordinary shares outstanding during the period of calculation using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2012 and 2011, respectively:

 

     Three Months Ended March 31,  
     2012     2011  
     (Unaudited)     (As Adjusted)  
    

($ in millions, except share

and per share amounts)

 

Earnings

    

Basic

    

Net income/(loss) as reported(1)

   $ 78.7      $ (152.8

Preference dividends

     (5.7     (5.7
  

 

 

   

 

 

 

Basic and diluted net income/(loss) available to ordinary shareholders(1)

   $ 73.0      $ (158.5
  

 

 

   

 

 

 

Ordinary shares

    

Basic weighted average ordinary shares

     70,943,997        70,551,859   

Weighted average effect of dilutive securities(2)

     2,888,737          
  

 

 

   

 

 

 

Total diluted weighted average ordinary shares

     73,832,734        70,551,859   
  

 

 

   

 

 

 

Earnings/(loss) per ordinary share

    

Basic

   $ 1.03      $ (2.25
  

 

 

   

 

 

 

Diluted

   $ 0.99      $ (2.25
  

 

 

   

 

 

 

 

 

(1) In the current quarter, the Company adopted the provision of ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful business acquisition. For more information on the impact of ASU 2010-26, please refer to Note 2 of these financial statements.

 

(2) The basic and diluted number of ordinary shares for the three months ended March 31, 2011 in the table above is the same, as the inclusion of dilutive securities in a loss making period would be anti-dilutive.

Dilutive securities comprise: investor options, employee options, performance shares associated with the Company’s long term incentive program and restricted stock units as described in Note 12.

Dividends.    On April 25, 2012, the Company’s Board of Directors declared the following quarterly dividends:

 

     Dividend      Payable on:      Record Date:  

Ordinary shares

   $ 0.17                 May 25, 2012         May 10, 2012   

5.625% preference shares

   $ 0.703125         July 1, 2012         June 15, 2012   

7.401% preference shares

   $ 0.462563         July 1, 2012         June 15, 2012   

7.250% preference shares

   $ 0.4028             July 1, 2012         June 15, 2012   

 

12


5.    Segment Reporting

The Company has two reporting business segments: Insurance and Reinsurance. In arriving at these reporting segments, we have considered similarities in economic characteristics, products, customers, distribution, the regulatory environment of our operating segments and quantitative thresholds to determine our reportable segments. Segment profit or loss for each of the Company’s operating segments is measured by underwriting profit or loss. Underwriting profit is the excess of net earned premiums over the sum of losses and loss expenses, policy acquisition expenses and general and administrative expenses. Underwriting profit or loss provides a basis for management to evaluate the segment’s underwriting performance.

Reinsurance Segment.    Our reinsurance segment consists of property catastrophe reinsurance, other property reinsurance (risk excess, pro rata and facultative), casualty reinsurance (U.S. treaty, international treaty and global facultative) and specialty reinsurance (credit and surety, structured, agriculture and specialty). For a more detailed description of this segment, see Part I, Item 1, “Business — Business Segment — Reinsurance” in in the Company’s 2011 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission.

Insurance Segment.    Our insurance segment consists of property insurance, casualty insurance, marine, energy and transportation insurance and financial and professional lines insurance. For a more detailed description of this segment, see Part I, Item 1 “Business — Business Segment — Insurance” in the Company’s 2011 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission.

Non-underwriting Disclosures.    We have provided additional disclosures for corporate and other (non-underwriting) income and expenses. Corporate and other includes net investment income, net realized and unrealized investment gains or losses, corporate expense, interest expenses, net realized and unrealized foreign exchange gains or losses and income taxes, which are not allocated to the underwriting segments. Corporate expenses are not allocated to the Company’s operating segments as they typically do not fluctuate with the levels of premiums written and are not directly related to our segment operations. They include group executive costs, group finance costs, legal and actuarial costs, non-underwriting share-based compensation and certain strategic costs including new teams before they commence underwriting.

We do not allocate our assets by segment as we evaluate underwriting results of each segment separately from the results of our investment portfolio. Segment profit or loss for each of the Company’s operating segments is measured by underwriting profit or loss. Underwriting profit or loss provides a basis for management to evaluate the segment’s underwriting performance.

 

13


The following tables provide a summary of gross and net written and earned premiums, underwriting results, ratios and reserves for each of our business segments for the three months ended March 31, 2012 and 2011:

 

     Three Months Ended March 31, 2012  
     Reinsurance     Insurance     Total  
     ($ in millions)  

Underwriting Revenues

      

Gross written premiums

   $ 474.2      $ 307.9      $ 782.1   

Net written premiums

     429.5        204.0        633.5   

Gross earned premiums

     290.2        266.9        557.1   

Net earned premiums

     271.0        224.4        495.4   

Underwriting Expenses

      

Losses and loss adjustment expenses

     135.6        148.4        284.0   

Policy acquisition expenses

     51.8        44.3        96.1   

General and administrative expenses

     29.0        41.4        70.4   
  

 

 

   

 

 

   

 

 

 

Underwriting income/(loss)

     54.6        (9.7     44.9   
  

 

 

   

 

 

   

Corporate expenses

         (14.4

Net investment income

         52.4   

Net realized and unrealized investment gains

         9.0   

Change in fair value of derivatives

         (7.5

Interest expense on long term debt

         (7.7

Net realized and unrealized foreign exchange gains

         7.7   

Other (expense)

         (0.3
      

 

 

 

Net profit before tax

       $ 84.1   
      

 

 

 

Net reserves for loss and loss adjustment expenses

   $ 2,743.0      $ 1,387.3      $ 4,130.3   
  

 

 

   

 

 

   

 

 

 

Ratios

      

Loss ratio

     50.0     66.1     57.3

Policy acquisition expense ratio

     19.1        19.7        19.4   

General and administrative expense ratio(1)

     10.7        18.4        17.1   

Expense ratio

     29.8        38.1        36.5   
  

 

 

   

 

 

   

 

 

 

Combined ratio

     79.8     104.2     93.8
  

 

 

   

 

 

   

 

 

 

 

 

(1) The total general and administrative expense ratio includes the impact from corporate expenses.

 

14


     Three Months Ended March 31, 2011  
     Reinsurance     Insurance     Total  
     (As Adjusted, $ in millions)  

Underwriting Revenues

      

Gross written premiums

   $ 437.1      $ 234.2      $ 671.3   

Net written premiums

     388.4        121.2        509.6   

Gross earned premiums

     284.8        224.0        508.8   

Net earned premiums

     272.0        180.4        452.4   

Underwriting Expenses

      

Losses and loss adjustment expenses

     410.1        118.8        528.9   

Policy acquisition expenses

     49.4        32.0        81.4   

General and administrative expenses(1)

     25.0        29.8        54.8   
  

 

 

   

 

 

   

 

 

 

Underwriting (loss)(1)

     (212.5     (0.2     (212.7
  

 

 

   

 

 

   

Corporate expenses

         (7.7

Net investment income

         55.5   

Realized and unrealized investment gains

         8.4   

Change in fair value of derivatives

         (3.4

Interest expense on long term debt

         (7.7

Net realized and unrealized foreign exchange gains

         6.4   

Other (expense)

         (8.1
      

 

 

 

Net (loss) before tax(1)

       $ (169.3
      

 

 

 

Net reserves for loss and loss adjustment expenses

   $ 2,594.3      $ 1,301.0      $ 3,895.3   
  

 

 

   

 

 

   

 

 

 

Ratios

      

Loss ratio

     150.8     65.9     116.9

Policy acquisition expense ratio

     18.2        17.7        18.0   

General and administrative expense ratio(1)(2)

     9.2        16.5        13.8   

Expense ratio(1)

     27.4        34.2        31.8   
  

 

 

   

 

 

   

 

 

 

Combined ratio(1)

     178.2     100.1     148.7
  

 

 

   

 

 

   

 

 

 

 

 

(1) The application of ASU 2010-26 has resulted in a net $1.1 million increase in the general, administrative and corporate expenses for the three months ended March 31, 2011. For more information, refer to Note 2 of these financial statements.

 

(2) The total general and administrative expense ratio includes the impact from corporate expenses.

 

15


6.    Investments

Fixed Income Maturities, Short-Term Investments and Equities-Available For Sale.    The following presents the cost or amortized cost, gross unrealized gains and losses and estimated fair value of available for sale investments in fixed maturities, short-term investments and equities as at March 31, 2012 and December 31, 2011:

 

     As at March 31, 2012  
     Cost or
Amortized  Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Market
Value
 
     ($ in millions)  

U.S. Government

   $ 852.6       $ 45.8       $ (0.6   $ 897.8   

U.S. Agency

     309.2         22.1                331.3   

Municipal

     36.6         2.1                38.7   

Corporate

     1,757.8         132.4         (1.1     1,889.1   

FDIC Guaranteed Corporate

     63.5         0.1                63.6   

Non-U.S. Government-backed Corporate

     154.7         3.8                158.5   

Foreign Government

     594.2         25.4         (0.1     619.5   

Asset-backed

     58.9         4.5                63.4   

Non-agency Commercial Mortgage-backed

     75.4         9.2                84.6   

Agency Mortgage-backed

     1,230.9         67.5         (0.3     1,298.1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Fixed Income Maturities — Available for Sale

     5,133.8         312.9         (2.1     5,444.6   

Total Short-term Investments — Available for Sale

     423.5                        423.5   

Total Equity Securities — Available for Sale

     174.8         18.4         (5.1     188.1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 5,732.1       $ 331.3       $ (7.2   $ 6,056.2   
  

 

 

    

 

 

    

 

 

   

 

 

 
     As at December 31, 2011  
     Cost or
Amortized  Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Market
Value
 
     ($ in millions)  

U.S. Government

   $ 873.9       $ 58.5       $      $ 932.4   

U.S. Agency

     271.7         23.8                295.5   

Municipal

     33.6         2.0                35.6   

Corporate

     1,722.6         127.7         (3.8     1,846.5   

FDIC Guaranteed Corporate

     72.5         0.4                72.9   

Non-U.S. Government-backed Corporate

     163.9         3.9                167.8   

Foreign Government

     632.1         28.4         (0.1     660.4   

Asset-backed

     56.4         4.6                61.0   

Non-agency Commercial Mortgage-backed

     77.1         8.3                85.4   

Agency Mortgage-backed

     1,195.9         72.5         (0.1     1,268.3   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Fixed Income Maturities — Available for Sale

     5,099.7         330.1         (4.0     5,425.8   

Short-Term Investments — Available for Sale

     298.2                        298.2   

Total Equity Securities — Available for Sale

     169.8         15.1         (5.4     179.5   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 5,567.7       $ 345.2       $ (9.4   $ 5,903.5   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

16


The scheduled maturity distribution of available for sale fixed income maturity securities as at March 31, 2012 and December 31, 2011 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     As at March 31, 2012
     Amortized
Cost or  Cost
     Fair Market
Value
     Average
Ratings by
Maturity
     ($ in millions)

Due one year or less

   $ 693.9       $ 702.8       AA

Due after one year through five years

     1,939.0         2,042.3       AA

Due after five years through ten years

     1,047.1         1,152.9       AA–

Due after ten years

     88.6         100.5       AA–
  

 

 

    

 

 

    

Subtotal

     3,768.6         3,998.5      

Non-agency Commercial Mortgage-backed

     75.4         84.6       AA+

Agency Mortgage-backed

     1,230.9         1,298.1       AA+

Other Asset-backed

     58.9         63.4       AAA
  

 

 

    

 

 

    

Total Fixed Income Maturities — Available for Sale

   $ 5,133.8       $ 5,444.6      
  

 

 

    

 

 

    
     As at December 31, 2011
     Amortized
Cost or  Cost
     Fair Market
Value
     Average
Ratings by
Maturity
     ($ in millions)

Due one year or less

   $ 726.0       $ 732.9       AA+

Due after one year through five years

     1,955.0         2,057.9       AA

Due after five years through ten years

     997.9         1,112.3       AA–

Due after ten years

     91.4         108.0       AA–
  

 

 

    

 

 

    

Subtotal

     3,770.3         4,011.1      

Non-agency Commercial Mortgage-backed

     77.1         85.4       AA+

Agency Mortgage-backed

     1,195.9         1,268.3       AA+

Other Asset-backed

     56.4         61.0       AAA
  

 

 

    

 

 

    

Total Fixed Income Maturities — Available for Sale

   $ 5,099.7       $ 5,425.8      
  

 

 

    

 

 

    

Fixed Income Maturities — Trading.    The following tables present the cost or amortized cost, gross unrealized gains and losses, and estimated fair value of trading investments in fixed maturities as at March 31, 2012 and December 31, 2011:

 

     As at March 31, 2012  
     Cost or
Amortized Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Market
Value
 
     ($ in millions)  

U.S. Government

   $ 37.5       $ 0.2       $ (0.3   $ 37.4   

U.S. Agency

     1.6         0.2                1.8   

Municipal

     2.8         0.1                2.9   

Corporate

     324.5         18.3         (0.9     341.9   

Foreign Government

     12.0         0.9                12.9   

Asset Backed

     0.6                        0.6   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Fixed Income Maturities — Trading

   $ 379.0       $ 19.7       $ (1.2   $ 397.5   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

17


     As at December 31, 2011  
     Cost or
Amortized Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Market
Value
 
     ($ in millions)  

U.S. Government

   $ 30.3       $ 2.0       $      $ 32.3   

U.S. Agency

     1.6         0.2                1.8   

Municipal

     2.8         0.1                2.9   

Corporate

     337.9         15.6         (4.2     349.3   

Foreign Government

     7.1         0.3                7.4   

Asset Backed

     0.7                        0.7   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Fixed Income Maturities — Trading

   $ 380.4       $ 18.2       $ (4.2   $ 394.4   
  

 

 

    

 

 

    

 

 

   

 

 

 

The Company classifies these financial instruments as held for trading as this most closely reflects the facts and circumstances of the investments held.

Gross Unrealized Loss.    The following tables summarize as at March 31, 2012 and December 31, 2011, by type of security, the aggregate fair value and gross unrealized loss by length of time the security has been in an unrealized loss position for our available for sale portfolio:

 

    As at March 31, 2012  
    0-12 months     Over 12 months     Total  
    Fair
Market
Value
    Gross
Unrealized
Loss
    Fair
Market
Value
    Gross
Unrealized
Loss
    Fair
Market
Value
    Gross
Unrealized
Loss
    Number  of
Securities
 
    ($ in millions)  

U.S. Government

  $ 103.3      $ (0.6   $      $      $ 103.3      $ (0.6     27   

U.S. Agency

    8.4                             8.4               6   

Foreign Government

    41.8        (0.1     2.0               43.8        (0.1     20   

Municipal

    3.0                             3.0               2   

Corporate

    105.7        (1.0     5.8        (0.1     111.5        (1.1     77   

Non-U.S. Government-backed Corporate

    18.1               0.9               19.0               15   

Asset-backed

    2.1                             2.1               7   

Non-agency Commercial Mortgage-backed

                  0.4               0.4               1   

FDIC Guaranteed Corporate

    2.0                             2.0               1   

Agency Mortgage-backed

    111.9        (0.3     0.1               112.0        (0.3     32   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Fixed Income Maturities — Available for Sale

    396.3        (2.0     9.2        (0.1     405.5        (2.1     188   

Total Short-term Investments — Available for Sale

    21.3                             21.3               8   

Total Equity Securities — Available for Sale

    36.0        (4.4     7.8        (0.7     43.8        (5.1     59   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 453.6      $ (6.4   $ 17.0      $ (0.8   $ 470.6      $ (7.2     255   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


    As at December 31, 2011  
    0-12 months     Over 12 months     Total  
    Fair
Market
Value
    Gross
Unrealized
Loss
    Fair
Market
Value
    Gross
Unrealized
Loss
    Fair
Market
Value
    Gross
Unrealized
Loss
    Number  of
Securities
 
    ($ in millions)  

U.S. Government

  $ 6.3      $      $      $      $ 6.3      $        2   

U.S. Agency

    2.7                             2.7               1   

Municipal

    2.4                             2.4               1   

Foreign Government

    14.6        (0.1                   14.6        (0.1     7   

Corporate

    133.7        (3.4     11.1        (0.4     144.8        (3.8     96   

Non-U.S. Government-backed Corporate

    17.4               3.4               20.8               14   

Asset-backed

    8.2                             8.2               20   

Agency Mortgage-backed

    24.4        (0.1     0.1               24.5        (0.1     11   

FDIC Guaranteed Corporate

    2.0                             2.0               1   

Non-agency Commercial Mortgage-backed

    0.4               0.7               1.1               2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Fixed Income Maturities — Available for Sale

    212.1        (3.6     15.3        (0.4     227.4        (4.0     155   

Total Short-term Investments — Available for Sale

    18.1                             18.1               9   

Total Equity Securities — Available for Sale

    37.5        (5.4                   37.5        (5.4     15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 267.7      $ (9.0   $ 15.3      $ (0.4   $ 283.0      $ (9.4     179   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other-than-temporary impairments (“OTTI”).    A security is impaired when its fair value is below its amortized cost. The Company reviews its available for sale fixed income investment portfolio on an individual security basis for potential other-than-temporary impairment (“OTTI”) each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions.

Other-than-temporary impairment is deemed to occur when there is no objective evidence to support recovery in value of a security and (a) the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its adjusted amortized cost basis or (b) it is deemed probable that the Company will be unable to collect all amounts due according to the contractual terms of the individual security. In the first case, the entire unrealized loss position is taken as an OTTI charge to realized losses in earnings. In the second case, the unrealized loss is separated into the amount related to credit loss and the amount related to all other factors. The OTTI charge related to credit loss is recognized in realized losses in earnings and the amount related to all other factors is recognized in other comprehensive income. The cost basis of the investment is reduced accordingly and no adjustments to the cost basis are made for subsequent recoveries in value.

Equity securities do not have a maturity date and therefore our review of these securities utilizes a higher degree of judgment. In our review we consider our ability and intent to hold an impaired equity security for a reasonable period of time to allow for a full recovery. Where a security is considered to be other-than-temporarily impaired, the entire charge is recognized in realized losses in earnings. Again, the cost basis of the investment is reduced accordingly and no adjustments to the cost basis are made for subsequent recoveries in value.

Although we review each security on a case by case basis, we have also established parameters to help identify securities in an unrealized loss position which are other-than-temporarily impaired. These parameters focus on the extent and duration of the impairment and for both fixed maturities and equities we consider declines in value of greater than 20% for 12 consecutive months to indicate that the security may be other-than-temporarily impaired.

 

19


We review all of our fixed maturities on an individual security basis for potential impairment each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions. The total other-than-temporary impairment charge for the three months ended March 31, 2012 was $Nil (2011 — $Nil).

U.S. Government and Agency Securities.    U.S. government and agency securities consist primarily of bonds issued by the U.S. Treasury and corporate debt issued by agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Federal Home Loan Bank.

Corporate Securities.    Corporate securities are composed of short-term, medium-term and long-term debt issued by corporations and supra-national securities.

Foreign Government.    Foreign government securities are composed of bonds issued and guaranteed by foreign governments such as the U.K., Australia, Canada, Germany and France.

Municipals.    Municipal securities are composed of bonds issued by U.S. municipalities.

Asset-Backed Securities.    Asset-backed securities are securities backed by notes or receivables against assets other than real estate.

Mortgage-Backed Securities.    Mortgage-backed securities are securities that represent ownership in a pool of mortgages. Both principal and income are backed by the group of mortgages in the pool. They include bonds issued by government-sponsored enterprises such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and the Government National Mortgage Association.

Short-Term Investments.    Short-term investments comprise highly liquid debt securities with a maturity greater than three months but less than one year from the date of purchase and are held as part of the investment portfolio of the Company. Short-term investments are classified as either trading or available for sale according to the facts and circumstances of the investment held, and carried at estimated fair value.

Equity Securities.    Equity securities are comprised of U.S. and foreign equity securities and are classified as available for sale. The portfolio invests in high quality global equity securities with attractive dividend yields.

Other Investments.    Other investments represent the Company’s investment in Cartesian Iris Offshore Fund L.P (“Cartesian”), which provides capital to Iris Re, a Class 3 Bermudian reinsurer. The Company has accounted for its investment in Cartesian in accordance with the equity method of accounting. The Company is not committed to making further investments in Cartesian; accordingly, the carrying value of the investment represents the Company’s maximum exposure to a loss as a result of its involvement with the partnership at each balance sheet date. In addition to returns on its investment, the Company provides services on risk selection, pricing and portfolio design in return for a percentage of profits from Iris Re. Adjustments to the carrying value of this investment are made based on our share of capital including our share of income and expenses, which is provided in the quarterly management accounts of the partnership. The adjusted carrying value approximates fair value.

In the three months ended March 31, 2012, our share of gains and losses increased the value of our investment by $Nil (2011 — $0.1 million). The change in value has been recognized in realized and unrealized investment gains and losses in the unaudited condensed consolidated statement of operations. For more information regarding our investment in Cartesian, refer to “Notes to Audited Consolidated Financial Statements — Investments” in the Company’s 2011 Annual Report filed on Form 10-K filed with the United States Securities and Exchange Commission.

 

20


The tables below show our other investments for the three months ended March 31, 2012 and twelve months ended December 31, 2011:

 

     Three Months Ended March 31, 2012  
     Opening
Undistributed
Fair Value of
Investment
     Unrealized
Gain
     Carrying
Value
     Funds
Distributed
     Closing
Undistributed
Fair Value of
Investment
 
     ($ in millions)  

Cartesian Iris Offshore Fund L.P.

   $ 33.1       $       $ 33.1       $   —       $ 33.1   
     Twelve Months Ended December 31, 2011  
     Opening
Undistributed
Fair Value of
Investment
     Unrealized
Gain
     Carrying
Value
     Funds
Distributed
     Closing
Undistributed
Fair Value of
Investment
 
     ($ in millions)  

Cartesian Iris Offshore Fund L.P.

   $ 30.0       $ 3.1       $ 33.1       $   —       $ 33.1   

Investment Purchases and Sales.    The following table summarizes investment purchases, sales and maturities for the three months ended March 31, 2012 and 2011:

 

     Three Months Ended
March  31, 2012
    Three Months Ended
March  31, 2011
 
     ($ in millions)  

Purchases of fixed income maturities — Available for sale

   $ 421.0      $ 643.6   

Purchases of fixed income maturities — Trading portfolio

     58.6        230.9   

Net purchases of equity securities

     2.2        171.1   

(Proceeds) from sales and maturities of fixed income maturities — Available for sale

     (394.3     (487.1

(Proceeds) from sales and maturities of fixed income maturities — Trading portfolio

     (66.1     (264.4

Net change in payable/(receivable) for securities purchased/(sold)

     (1.4     22.2   

Net (sales)/purchases of short-term investments

     128.6        (106.5
  

 

 

   

 

 

 

Net purchases for the period

   $ 148.6      $ 209.8   
  

 

 

   

 

 

 

Investment Income.    The following table summarizes investment income for the three months ended March 31, 2012 and 2011:

 

     Three Months Ended
March  31, 2012
    Three Months Ended
March  31, 2011
 
     ($ in millions)  

Fixed income maturities — Available for sale

   $ 46.8      $ 51.2   

Fixed income maturities — Trading portfolio

     4.2        4.4   

Short-term investments — Available for sale

     1.7        0.3   

Fixed term deposits (included in cash and cash equivalents)

     0.4        1.1   

Equity securities

     1.4        0.2   
  

 

 

   

 

 

 

Total

   $ 54.5      $ 57.2   

Investments expenses

     (2.1     (1.7
  

 

 

   

 

 

 

Net investment income

   $ 52.4      $ 55.5   
  

 

 

   

 

 

 

 

21


The following table summarizes the net realized and unrealized investment gains and losses, and the change in unrealized gains and losses on investments recorded in shareholders’ equity and in comprehensive income:

 

     Three Months Ended
March  31, 2012
    Three Months Ended
March  31, 2011
 
     ($ in millions)  

Available for sale short-term investments, fixed income maturities and equity securities:

    

Gross realized gains

   $ 3.7      $ 11.8   

Gross realized (losses)

     (1.5     (3.5

Trading portfolio short-term investments and fixed income maturities:

    

Gross realized gains

     2.5        3.3   

Gross realized (losses)

     (0.2     (1.4

Net change in gross unrealized gains/(losses)

     4.5        (1.9

Other investments:

    

Gross realized and unrealized gains in Cartesian Iris Offshore Fund

            0.1   
  

 

 

   

 

 

 

Net realized and unrealized investment gains

   $ 9.0      $ 8.4   
  

 

 

   

 

 

 

Change in available for sale unrealized gains/(losses):

    

Fixed income maturities

     (15.2     (35.6

Equity securities

     3.6        2.2   
  

 

 

   

 

 

 

Total change in pre-tax available for sale unrealized gains/(losses)

   $ (11.6   $ (33.4
  

 

 

   

 

 

 

Change in taxes

     (0.2     4.9   
  

 

 

   

 

 

 

Total change in unrealized gains/(losses), net of taxes

   $ (11.8   $ (28.5
  

 

 

   

 

 

 

7.    Fair Value Measurements

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. The framework prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels, which are described in more detail below.

 

   

Level 1 — Valuations based on unadjusted quoted prices in active markets, to which the Company has access, for identical assets or liabilities.

 

   

Level 2 — Valuations based on observable inputs other than unadjusted quoted prices in active markets for identical assets or liabilities. Inputs include quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in inactive markets, and inputs other than quoted prices which are directly or indirectly observable for the asset or liability (for example interest rates, yield curves, prepayment speeds, default rates, loss severities).

 

   

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s own views about the assumptions that market participants would use in pricing the asset or liability.

We consider prices for actively traded Treasury securities to be derived based on quoted prices in an active market for identical assets, which are Level 1 inputs in the fair value hierarchy. We consider prices for other securities priced via vendors, indices and broker-dealers, or with reference to interest rates and yield curves, to be derived based on inputs that are observable for the asset, either directly or indirectly, which are Level 2 inputs in the fair value hierarchy. We consider securities, other financial instruments and derivative insurance contracts subject to fair value measurement whose valuation is derived by internal valuation models to be based largely on unobservable inputs, which are Level 3 inputs in the fair value hierarchy.

Where inputs to the valuation of an asset or liability fall into more than one level of the fair value hierarchy, the classification of the asset or liability will be within the lowest level identified as significant to the valuation.

 

22


Our fixed income securities are traded on the over-the-counter market, based on prices provided by one or more market makers in each security. Securities such as U.S. Government, U.S. Agency, Foreign Government and investment grade corporate bonds have multiple market makers in addition to readily observable market value indicators such as expected credit spread, except for U.S. Treasury securities, over the yield curve. We use a variety of pricing sources to value our fixed income securities including those securities that have pay down/prepay features such as mortgage-backed securities and asset-backed securities in order to ensure fair and accurate pricing. The fair value estimates for the investment grade securities in our portfolio do not use significant unobservable inputs or modeling techniques. Please refer to Note 6 of these financial statements for additional information on our fixed income investment portfolio.

Equity securities include U.S. and foreign equity securities which are classified as available for sale and carried at fair value. These securities are classified within Level 1 as their fair values are based on quoted market prices in active markets from independent pricing sources.

The following tables present the level within the fair value hierarchy at which our financial assets and liabilities are measured on a recurring basis at March 31, 2012 and December 31, 2011.

 

     As at March 31, 2012  
     Level 1      Level 2     Total  
     ($ in millions)  

Available for sale financial assets, at fair value

       

U.S. Government

   $ 897.8       $      $ 897.8   

U.S. Government Agency

             331.3        331.3   

Municipal

             38.7        38.7   

Foreign Government

     473.0         146.5        619.5   

Non-agency Commercial Mortgage-backed

             84.6        84.6   

Agency Mortgage-backed

             1,298.1        1,298.1   

Asset-backed

             63.4        63.4   

Corporate

             1,889.1        1,889.1   

FDIC Guaranteed Corporate

             63.6        63.6   

Bonds backed by Foreign Government

             158.5        158.5   
  

 

 

    

 

 

   

 

 

 

Total fixed income maturities available for sale, at fair value

   $ 1,370.8       $ 4,073.8      $ 5,444.6   

Short-term investments available for sale, at fair value

     391.3         32.2        423.5   

Equity investments available for sale, at fair value

     188.1                188.1   

Held for trading financial assets, at fair value

       

U.S. Government

   $ 37.4       $      $ 37.4   

U.S. Government Agency

             1.8        1.8   

Municipal

             2.9        2.9   

Foreign Government

     4.2         8.7        12.9   

Asset-backed

             0.6        0.6   

Corporate

             341.9        341.9   
  

 

 

    

 

 

   

 

 

 

Total fixed income maturities trading, at fair value

   $ 41.6       $ 355.9      $ 397.5   

Short-term investments trading, at fair value

     9.6         0.7        10.3   

Other financial assets and liabilities, at fair value

       

Derivatives at Fair Value

             0.9        0.9   

Liabilities under Derivative Contracts

             (1.3     (1.3
  

 

 

    

 

 

   

 

 

 

Total

   $ 2,001.4       $ 4,462.2      $ 6,463.6   
  

 

 

    

 

 

   

 

 

 

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2012 and no assets or liabilities were classified as Level 3.

 

23


 

     As at December 31, 2011  
     Level 1      Level 2     Total  
     ($ in millions)  

Available for sale financial assets, at fair value

       

U.S. Government

   $ 932.4       $      $ 932.4   

U.S. Government Agency

             295.5        295.5   

Municipal

             35.6        35.6   

Foreign Government

     548.8         111.6        660.4   

Non-agency Commercial Mortgage-backed

             85.4        85.4   

Agency Mortgage-backed

             1,268.3        1,268.3   

Asset-backed

             61.0        61.0   

Corporate

             1,846.5        1,846.5   

FDIC Guaranteed Corporate

             72.9        72.9   

Bonds backed by Foreign Government

             167.8        167.8   
  

 

 

    

 

 

   

 

 

 

Total fixed income maturities available for sale, at fair value

   $ 1,481.2       $ 3,944.6      $ 5,425.8   

Short-term investments available for sale, at fair value

     270.6         27.6        298.2   

Equity investments available for sale, at fair value

     179.5                179.5   

Held for trading financial assets, at fair value

       

U.S. Government

   $ 32.3       $      $ 32.3   

U.S. Government Agency

             1.8        1.8   

Municipal

             2.9        2.9   

Foreign Government

     4.1         3.3        7.4   

Asset-backed

             0.7        0.7   

Corporate

             349.3        349.3   
  

 

 

    

 

 

   

 

 

 

Total fixed income maturities trading, at fair value

   $ 36.4       $ 358.0      $ 394.4   

Short-term investments trading, at fair value

     3.4         0.7        4.1   

Other financial assets and liabilities, at fair value

       

Derivatives at Fair Value

             1.3        1.3   

Liabilities under Derivative Contracts

             (2.1     (2.1
  

 

 

    

 

 

   

 

 

 

Total

   $ 1,971.1       $ 4,330.1      $ 6,301.2   
  

 

 

    

 

 

   

 

 

 

There were no transfers between Level 1 and Level 2 during the twelve months ended December 31, 2011 and no assets or liabilities were classified as Level 3.

 

24


8.    Reinsurance

We purchase retrocession and reinsurance to limit and diversify the Company’s risk exposure and to increase its own insurance underwriting capacity. These agreements provide for recovery of a portion of losses and loss adjustment expenses from reinsurers. As is the case with most reinsurance treaties, the Company remains liable to the extent that reinsurers do not meet their obligations under these agreements, and therefore, in line with its risk management objectives, the Company evaluates the financial condition of its reinsurers and monitor concentrations of credit risk.

Balances pertaining to reinsurance transactions are reported “gross” on the consolidated balance sheet, meaning that reinsurance recoverables on unpaid losses and ceded unearned premiums are not deducted from insurance reserves but are recorded as assets.

The largest concentrations of reinsurance recoverables as at March 31, 2012, were with Lloyd’s syndicates and with Aeolus Re which is not currently rated, but the recoverable amount is fully collateralized. Balances with Lloyd’s and Aeolus Re represented 25.7% and 15.6%, respectively, of reinsurance recoverables (December 31, 2011 — 26.9% and 15.8%).

9.    Derivative Contracts

The following table summarizes information on the location and amounts of derivative fair values on the consolidated balance sheet as at March 31, 2012 and December 31, 2011:

 

          As at March 31, 2012     As at December 31, 2011  

Derivatives Not Designated as

Hedging Instruments

Under ASC 815

  

Balance Sheet Location

   Notional
Amount
     Fair
Value
    Notional
Amount
     Fair Value  
          ($ in millions)     ($ in millions)  

Interest Rate Swaps

   Derivatives at Fair Value    $ 1,000.0       $ 0.9 (1)    $       $   

Interest Rate Swaps

   Liabilities under Derivative Contracts    $       $      $ 1,000.0       $ (2.1 )(1) 

Forward Exchange Contracts

   Liabilities under Derivative Contracts    $ 260.3       $ (1.3 )(2)    $       $   

Forward Exchange Contracts

   Derivatives at Fair Value    $       $      $ 192.4       $ 1.3 (2) 

 

 

(1) Net of $44.6 million of cash collateral provided to counterparties as security for our net liability position (December 31, 2011 — $43.7 million).
(2) At March 31, 2011, forward exchange contracts with a positive fair value totaled $2.7 million (December 31, 2011 — $1.4 million). Forward exchange contracts with a negative fair value totaled $4.0 million (December 31, 2011 — $0.1 million).

The following table provides the unrealized and realized gains/(losses) recorded in earnings for the three months ended March 31, 2012 and 2011:

 

Derivatives Not Designated as Hedging
Instruments Under ASC 815

  

Location of Gain/(Loss) Recognized in Income

   Amount of Gain/(Loss)
Recognized in Income

Three Months Ended
 
          March 31, 2012     March 31, 2011  
          ($ in millions)  

Forward Exchange Contracts

   Change in Fair Value of Derivatives    $ (4.0   $ (3.5

Interest Rate Swaps

   Change in Fair Value of Derivatives    $ (3.5   $ 0.1   

Foreign Exchange Contracts.    The Company uses forward exchange contracts to manage foreign currency risk. A forward foreign currency exchange contract involves an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Foreign currency exchange contracts will not eliminate fluctuations in the value of the Company’s assets and liabilities denominated in foreign currencies but rather allow it to establish a rate of exchange for a future point in time.

 

25


As at March 31, 2012, we held thirteen foreign currency derivative contracts to purchase $260.3 million of foreign currencies. The foreign currency contracts are recorded as derivatives at fair value with changes recorded as a change in fair value of derivatives in the statement of operations. For the three months ended March 31, 2012, the impact of foreign currency contracts on net income was a charge of $4.0 million (March 31, 2011 — three forward contracts resulting in a charge of $3.5 million).

Interest Rate Swaps.    As at March 31, 2012, the Company held fixed for floating interest rate swaps with a total notional amount of $1.0 billion (December 31, 2011 — $1.0 billion) that are due to mature between August 2, 2012 and November 9, 2020. The swaps are used in the ordinary course of the Company’s investment activities to partially mitigate the negative impact of rises in interest rates on the market value of the Company’s fixed income portfolio. For the three months ended March 31, 2012, there was a charge in respect of the interest rate swaps of $3.5 million (March 31, 2011 — credit of $0.1 million).

As at March 31, 2012, cash collateral with a fair value of $44.6 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 March 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. In the three months ended March 31, 2012, no amount was recorded in our balance sheet for the pledged assets.

As a result of the application of derivative accounting guidance, none of the derivatives mentioned above meet the requirements for hedge accounting. Changes in the estimated fair value are therefore included in the consolidated statement of operations.

10.    Reserves for Losses and Adjustment Expenses

The following table represents a reconciliation of beginning and ending consolidated loss and loss adjustment expenses (“LAE”) reserves for the three months ended March 31, 2012 and twelve months ended December 31, 2011:

 

     Three Months Ended
March  31, 2012
    Twelve Months  Ended
December 31, 2011
 
     ($ in millions)  

Provision for losses and LAE at the start of the year

   $ 4,525.2      $ 3,820.5   

Less reinsurance recoverable

     (426.6     (279.9
  

 

 

   

 

 

 

Net loss and LAE at the start of the year

     4,098.6        3,540.6   
  

 

 

   

 

 

 

Net loss and LAE expenses (disposed)

     (8.8     (20.6
  

 

 

   

 

 

 

Provision for losses and LAE for claims incurred:

    

Current year

     321.0        1,648.3   

Prior years

     (37.0     (92.3
  

 

 

   

 

 

 

Total incurred

     284.0        1,556.0   
  

 

 

   

 

 

 

Losses and LAE payments for claims incurred:

    

Current year

     (33.0     (269.3

Prior years

     (227.8     (712.9
  

 

 

   

 

 

 

Total paid

     (260.8     (982.2
  

 

 

   

 

 

 

Foreign exchange losses

     17.3        4.8   
  

 

 

   

 

 

 

Net losses and LAE reserves at period end

     4,130.3        4,098.6   

Plus reinsurance recoverable on unpaid losses at period end

     455.4        426.6   
  

 

 

   

 

 

 

Provision for losses and LAE at March 31, 2012 and December 31, 2011

   $ 4,585.7      $ 4,525.2   
  

 

 

   

 

 

 

 

 

26


For the three months ended March 31, 2012, there were reserve releases of $37.0 million compared to $21.9 million for the three months ended March 31, 2011 in our estimate of the ultimate claims to be paid in respect of prior accident years. For additional information on our reserve releases, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” — “Reserves for Losses and Loss Adjustment Expenses” below. The $8.8 million net loss and LAE expenses disposed in the three months ended March 31, 2012 (twelve months ended December 31, 2011 — $20.6 million) relates to commuted contracts.

11.    Capital Structure

The following table provides a summary of the Company’s authorized and issued share capital at March 31, 2012 and December 31, 2011:

 

     As at March 31, 2012      As at December 31, 2011  
     Number      $ in
Thousands
     Number      $ in
Thousands
 

Authorized Share Capital:

           

Ordinary Shares 0.15144558¢ per share

     969,629,030         1,469         969,629,030         1,469   

Non-Voting Shares 0.15144558¢ per share

     6,787,880         10         6,787,880         10   

Preference Shares 0.15144558¢ per share

     100,000,000         152         100,000,000         152   

Issued Share Capital:

           

Issued ordinary shares of 0.15144558¢ per share

     71,495,852         108         70,655,698         107   

Issued preference shares of 0.15144558¢ each with a liquidation preference of $50 per share

     4,600,000         7         4,600,000         7   

Issued preference shares of 0.15144558¢ each with a liquidation preference of $25 per share

     5,327,500         8         5,327,500         8   
     

 

 

       

 

 

 

Total issued share capital

        123            122   
     

 

 

       

 

 

 

Additional paid-in capital includes the aggregate liquidation preferences of our preference shares of $363.2 million (2011 — $363.2 million) less issue costs of $9.6 million (2011 — $9.6 million).

 

     As at March 31, 2012      As at December 31, 2011  
     ($ in millions)      ($ in millions)  

Additional paid-in capital

   $ 1,390.8       $ 1,385.0   
  

 

 

    

 

 

 

Ordinary Shares.    The following table summarizes transactions in the Company’s ordinary shares during the three-month period ended March 31, 2012:

 

     Number of
Shares
 

Shares in issue at December 31, 2011

     70,655,698   

Share transactions in the three months ended March 31, 2012:

  

Shares issued to the Names’ Trustee upon exercise of investor options (refer to Note 12)

     43,602   

Shares issued to employees under the share incentive plan

     755,331   

Shares issued to non-employee directors

     41,221   
  

 

 

 

Shares in issue at March 31, 2012

     71,495,852   
  

 

 

 

12.    Share Based Payments

The Company has issued options and other equity incentives under three arrangements: investor options, the employee incentive plan and the non-employee director plan. When options are exercised or other equity awards have vested, new shares are issued as the Company does not currently hold treasury shares.

Investor Options.    The investor options were issued on June 21, 2002 in connection with the transfer to us of part of the operations of Wellington Underwriting plc (“Wellington”), our predecessor company. The

 

27


Company conferred the option to subscribe for up to 6,787,880 ordinary shares of Aspen Holdings to Wellington and members of Syndicate 2020 who were not corporate members of the Lloyd’s syndicate managed by Wellington (“the Wellington Names”).

All of the options issued to Wellington were exercised on March 28, 2007 resulting in the issuance of 426,083 ordinary shares by the Company.

The options issued to the Wellington Names are held for their benefit by Appleby Services (Bermuda) Ltd. (the “Names’ Trustee”). The subscription price payable under the options is initially £10 and increases by 5% per annum, less any dividends paid. Option holders are not entitled to participate in any dividends prior to exercise and would not rank as a creditor in the event of liquidation. If not exercised, the options will expire after a period of ten years. During the three months ended March 31, 2012, the Names’ Trustee exercised 142,025 options on a cash and cashless basis (2011 — 539,823 options).

Employee and Non-Executive Director Awards.    Employee options and other awards are granted under the Aspen 2003 Share Incentive Plan and non-executive director awards are granted under the 2006 Stock Option Plan for Non-Employee Directors.

Stock options are granted with an exercise price equivalent to the fair value of the share on the grant date. The weighted average value at grant date is determined using the Black-Scholes option pricing model. Stock options typically vest over a three-year period with a ten-year contract period (except for options granted in 2007 which have a seven-year exercise period) with vesting dependent on time and performance conditions established at the time of grant. No options were granted during the period (2011 — Nil) and 9,914 options were exercised in the three months ended March 31, 2012 (2011 — 9,208). No charges against income were made in respect of employee options for the three months ended March 31, 2012 (2011 — $Nil).

Restricted share units (“RSU’s”) granted to employees vest equally over a two or three-year period, based on continued service. Some of the grants vest at year-end, while some other grants vest on the anniversary of the date of grant or when the Compensation Committee of the Board agrees to deliver them. The fair value of the restricted share units is based on the closing price on the date of the grant. The fair value is expensed through the income statement evenly over the vesting period. During the three months ended March 31, 2012, the Company granted to employees 345,852 restricted share units (2011 — 105,234), with 6,373 RSU’s subsequently forfeited. In the case of non-employee directors, one-twelfth of the RSU’s vest on each one month anniversary of the date of grant, with 100% of the RSU’s becoming vested on the first anniversary of the date of grant. On February 2, 2012 (with a grant date of February 8, 2012), the Board of Directors approved a total of 29,071 RSU’s for the non-employee directors (February 9, 2011 — 23,408) and 17,705 RSU’s to the Chairman (February 9, 2011 — 16,722). Compensation costs charged against income in respect of restricted share units for the three months ended March 31, 2012 were $1.7 million (2011 — $2.5 million).

2012 Performance Shares.    On February 2, 2012, the Compensation Committee approved the grant of 334,125 performance shares with a grant date of February 8, 2012 with 18,597 subsequently forfeited (February 9, 2011 — 853,223; March 21, 2011 — 31,669 ). The performance shares will be subject to a three-year vesting period with a separate annual diluted book value per share (“BVPS”) growth test for each year. One-third of the grant will be eligible for vesting each year based on a formula, and will only be issuable at the end of the three-year period. If the diluted BVPS growth achieved in 2012 is less than 5%, then the portion of the performance shares subject to the vesting conditions in such year will be forfeited (i.e. 33.33% of the initial grant). If the diluted BVPS growth achieved in 2012 is between 5% and 10%, then the percentage of the performance shares eligible for vesting will be between 10% and 100% on a straight-line basis. If the diluted BVPS growth achieved in 2012 is between 10% and 20%, then the percentage of the performance shares eligible for vesting will be between 100% and 200% on a straight-line basis. The Compensation Committee will determine the vesting conditions for the 2013 and 2014 portions of the grant in such years taking into consideration the market conditions and the Company’s business plans at the commencement of the years concerned. Notwithstanding the vesting criteria for each given year, if in any given year, the shares eligible for vesting are greater than 100% for the portion of such year’s grant and the average diluted BVPS growth over such year and the preceding year is less than the average of the minimum vesting thresholds for such year and the preceding year (or in the case of the 2012 portion of the grant and the average BVPS of less than 5%), then only 100% (and no more) of the shares

 

28


that are eligible for vesting in such year shall vest. Notwithstanding the foregoing, if in the judgment of the Compensation Committee, the main reason for the BVPS metric in the earlier year falling below the minimum threshold (or below 5% in the case of 2012) is the impact of rising interest rates and bond yields, then the Compensation Committee may, in its discretion, disapply this limitation on 100% vesting.

The fair value of performance share awards is based on the value of the average of the high and low of the share price on the date of the grant less a deduction for expected dividends which would not accrue during the vesting period. Compensation costs charged against income in the three months ended March 31, 2012 in respect of performance shares were $3.3 million (2011 — credit of $0.1 million).

2012 Phantom Shares.    On February 2, 2012, the Compensation Committee approved the grant of 278,143 phantom shares with a grant date of February 8, 2012. The phantom shares will be subject to a three-year vesting period with a separate annual diluted BVPS growth test for each year, in accordance with the test described above for the 2012 performance shares, with the difference being that any vested amount would be paid in cash in lieu of shares. As shares are not issued, these instruments have no dilutive effect.

The fair value of the phantom shares is based on the average of the high and low share price on the date of the grant, less estimated dividends payable over the vesting period. The fair value is expensed through the income statement evenly over the vesting period, but as the payment to beneficiaries will ultimately be in cash rather than shares, an adjustment is required each quarter to revalue the accumulated liability to the balance sheet date fair value. Compensation costs charged against income in the three months ended March 31, 2012 in respect of phantom shares were $0.6 million, with a fair value adjustment in the period of $Nil.

Employee Share Purchase Plans.    On April 30, 2008, the shareholders of the Company approved the Employee Share Purchase Plan (the “ESPP”), the 2008 Sharesave Scheme and the International Employee Share Purchase Plan, which are implemented by a series of consecutive offering periods as determined by the Board. In respect of the ESPP, employees can save up to $500 per month over a two-year period, at the end of which they will be eligible to purchase Company shares at a discounted price. In respect of the 2008 Sharesave Scheme, employees can save up to £250 per month over a three-year period, at the end of which they will be eligible to purchase Company shares at a discounted price. The purchase price will be eighty-five percent (85%) of the fair market value of a share on the offering date which may be adjusted upon changes in capitalization of the Company. Under the plan, 51,638 shares were issued during the three ended March 31, 2012 (2011 — 21,479 shares). Compensation costs charged against income in the three months ended March 31, 2012 in respect of the ESPP were $Nil (2011 — $0.2 million).

13.    Intangible Assets

 

     Three Months Ended March 31, 2012     Three Months Ended March 31, 2011  
     Trade
Mark
     Insurance
Licenses
     Other     Total     Trade
Mark
     Insurance
Licenses
     Other     Total  
            ($ in millions)                  ($ in millions)        

Intangible Assets

                    

Beginning of the period

   $ 1.6       $ 16.6       $ 1.8      $ 20.0      $ 1.6       $ 16.6       $ 2.8      $ 21.0   

Amortization

                     (0.3     (0.3                     (0.3     (0.3
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

End of the period

   $ 1.6       $ 16.6       $ 1.5      $ 19.7      $ 1.6       $ 16.6       $ 2.5      $ 20.7   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

License to use the “Aspen” Trademark.    On April 5, 2005, the Company entered into an agreement with Aspen (Actuaries and Pension Consultants) Plc to acquire the right to use the Aspen trademark in the United Kingdom. The consideration paid was approximately $1.6 million. As at March 31, 2012, the value of the license to use the Aspen trademark was $1.6 million (December 31, 2011 — $1.6 million).

Insurance Licenses.    The total value of the licenses as at March 31, 2012 was $16.6 million (December 31, 2011 — $16.6 million). This includes $10.0 million of acquired licenses held by AAIC, $4.5 million of acquired licenses held by Aspen Specialty and $2.1 million of acquired licenses held by Aspen U.K. The insurance licenses are considered to have an indefinite life and are not being amortized. The licenses are tested for impairment annually or when events or changes in circumstances indicate that the asset might be impaired.

 

 

29


Other.    In 2010, the Company purchased APJ Continuation Limited and its subsidiaries (“APJ”) for an aggregate consideration of $4.8 million. The directors of Aspen Holdings assessed the fair value of the net tangible and financial assets acquired at $1.2 million. The $3.6 million intangible asset represented our assessment of the value of renewal rights and distribution channels ($2.2 million) and the lock-in period for employees associated with the business ($1.4 million). The asset is being amortized over a five-year period and the value as at March 31, 2012 was $1.5 million (December 31, 2011 — $1.8 million).

14.    Commitments and Contingencies

 

  (a) Restricted assets

The Company is obliged by the terms of its contractual obligations to U.S. policyholders and by undertakings to certain regulatory authorities to facilitate the issue of letters of credit or maintain certain balances in trust funds for the benefit of policyholders.

The following table shows the forms of collateral or other security provided to policyholders as at March 31, 2012 and December 31, 2011:

 

     As at March 31, 2012     As at December 31, 2011  
     ($ in millions, except percentages)  

Assets held in multi-beneficiary trusts

   $ 1,310.3      $ 1,343.7   

Assets held in single-beneficiary trusts

     777.9        811.5   

Secured letters of credit(1)

     1,176.0        1,208.0   
  

 

 

   

 

 

 

Total

   $ 3,264.2      $ 3,363.2   
  

 

 

   

 

 

 

Total as percent of cash and invested assets

     42.6     44.4
  

 

 

   

 

 

 

 

 

(1) As of March 31, 2012, the Company had securities and cash of $1,344.8 million and £19.4 million (December 31, 2011 — $1,344.1 million and £19.3 million) as collateral for the secured letters of credit.

Aspen Bermuda has a letter of credit facility with Citibank Europe with a maximum aggregate amount of up to $1,050.0 million. The Company had $862.8 million of outstanding collateralized letters of credit under this facility at March 31, 2012. Included in outstanding collateralized letters of credit is a letter of credit for $245.5 million provided to AUL as Funds at Lloyd’s and described below.

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 (“Barclays”) 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 are used to support reinsurance obligations of the parties to the agreement and their respective subsidiaries. The Company had $62.9 million of outstanding collateralized letters of credit under this facility at March 31, 2012.

On July 31, 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.

Funds at Lloyd’s.    AUL operates in Lloyd’s as the corporate member for Syndicate 4711. Lloyd’s determines Syndicate 4711’s required regulatory capital principally based on the syndicate’s annual business plan. Such capital, called Funds at Lloyd’s, comprises: cash, investments and a fully collateralized letter of credit. The amounts of cash, investments and letter of credit at March 31, 2012 amounted to $272.2 million (December 31, 2011 — $272.2 million).

The amounts provided as Funds at Lloyd’s will be drawn upon and become a liability of the Company in the event of the syndicate declaring a loss at a level that cannot be funded from other resources, or if the syndicate requires funds to cover a short term liquidity gap. The amount which the Company provides as Funds at Lloyd’s is not available for distribution to the Company for the payment of dividends. Aspen Managing Agency Limited is also required by Lloyd’s to maintain a minimum level of capital which as at March 31, 2012, the minimum amount was $0.3 million (December 31, 2011 — $0.6 million). This is not available for distribution by the Company for the payment of dividends.

 

30


Interest rate swaps.    As at March 31, 2012, cash collateral with a fair value of $44.6 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 March 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. In the three months ended March 31, 2012, no amount was recorded in our balance sheet for the pledged assets.

 

  (b) Operating leases

Amounts outstanding under operating leases net of subleases as of March 31, 2012 were:

 

     2012      2013      2014      2015      2016      Later
Years
     Total  
     ($ in millions)  

Operating Lease Obligations

   $ 10.0       $ 11.7       $ 11.3       $ 10.7       $ 7.2       $ 13.9       $ 64.8   

 

  (c) Variable interest entities

The Company has no investments in variable interest entities other than Cartesian Iris Offshore Fund L.P. as disclosed in Note 6 of these financial statements.

15.    Subsequent Events

On April 11, 2012, the Company issued 6,400,000 shares of 7.250% of Perpetual Non-Cumulative Preference Shares (the “Preference Shares”). The Preference Shares have a liquidation preference of $25 per share (or $160,000,000 in aggregate liquidation preference for net proceeds of $155.0 million).

The Company intends to use the net proceeds from the offering for general corporate purposes, including supporting its insurance and reinsurance activities through its operating subsidiaries as well as repurchasing its outstanding ordinary shares as determined from time to time.

The Preference Shares rank equally with preference shares previously issued by the Company and have no fixed maturity date. The Company may redeem all or a portion of the shares at a redemption price of $25 per share on or after July 1, 2017. Aspen has listed the Preference Shares on the New York Stock Exchange under the symbol “AHLPRB”.

 

31


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2012 and 2011. This discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes contained in this Form 10-Q and the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2011, as well as the discussions of critical accounting policies, contained in our Financial Statements in our 2011 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans and strategy for our business and in “Outlook and Trends” below, includes forward-looking statements that involve risk and uncertainties. Please see the section captioned “Cautionary Statement Regarding Forward-Looking Statements” in this report and the “Risk Factors” in Item 1A of our 2011 Annual Report on Form 10-K for more information on factors that could cause actual results to differ materially from the results described in, or implied by, any forward-looking statements contained in this discussion and analysis.

On February 14, 2012, we announced that Mr. Richard Houghton would be stepping down from his role as Group Chief Financial Officer and director with effect from February 29, 2012. Mr. Julian Cusack has assumed the role of interim Chief Financial Officer pending the appointment of a successor to Mr. Houghton. Prior to assuming his current role, Mr. Cusack was the Chief Financial Officer of the Company from its inception until April 2007.

Overview

We are a Bermuda holding company and write insurance and reinsurance business through our wholly-owned subsidiaries in Bermuda, the U.K. and the U.S.

Highlights of our results for the three months ended March 31, 2012 were:

 

   

Diluted book value per share(1) of $38.58, increased by 5.8% over the end of the first quarter of 2011(2) and by 1.0% from the end of the fourth quarter of 2011(2);

 

   

Combined ratio of 93.8% compared with a combined ratio of 148.7% for the first quarter of 2011;

 

   

Net income per diluted share of $0.99 for the quarter ended March 31, 2012 compared with a net loss of $2.25 in the same quarter last year(2);

 

   

Gross written premium of $782.1 million for the first quarter of 2012, an increase of 16.5% from the first quarter of 2011, principally due to growth in our insurance segment;

 

   

Prior year net reserve releases of $37.0 million for the quarter compared with $21.9 million of net reserve releases in the first quarter of 2011; and

 

   

Losses of $27.0 million resulting from the sinking of the cruise ship Costa Concordia on January 13, 2012. These losses were net of reinsurance recoveries, reinstatement premiums and taxes.

Shareholders’ equity and financial leverage.    Total shareholders’ equity increased by $54.9(1) million to $3,210.9 million for the three months ended March 31, 2012. The most significant movements were:

 

   

a $62.5 million increase in retained earnings for the period; and

 

   

an increase in unrealized losses on investments, net of taxes, of $11.8 million.

 

(1) Diluted book value per ordinary share is based on total shareholders’ equity less preference shares (liquidation preference less issue expenses), divided by the number of diluted ordinary shares at the end of the period.

 

(2)

In the current quarter, the Company adopted the provision of ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful business acquisition. For more information on the impact of ASU 2010-26, please refer to Note 2 of these financial statements.

 

32


Shareholders’ equity and ordinary shares in issue as at March 31, 2012 and December 31, 2011 were:

 

     As at
March 31, 2012
    As at
December 31, 2011
 
     ($ in millions, except for share amounts)  

Total shareholders’ equity(1)

   $ 3,210.9      $ 3,156.0   

Preference shares less issue expenses

     (353.6     (353.6
  

 

 

   

 

 

 

Net assets attributable to ordinary shareholders(1)

   $ 2,857.3      $ 2,802.4   
  

 

 

   

 

 

 

Ordinary shares

     71,495,852        70,655,698   

Diluted ordinary shares

     74,064,546        73,355,674   

 

 

(1) In the current quarter, the Company adopted the provision of ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful business acquisition. For more information on the impact of ASU 2010-26, please refer to Note 2 of our unaudited financial statements.

Recent Developments

On April 11, 2012, the Company issued 6,400,000 shares of 7.250% of Perpetual Non-Cumulative Preference Shares (the “Preference Shares”). The Preference Shares have a liquidation preference of $25 per share (or $160,000,000 in aggregate liquidation preference for net proceeds of $155.0 million).

 

The Company intends to use the net proceeds from the offering for general corporate purposes, including supporting its insurance and reinsurance activities through its operating subsidiaries as well as repurchasing its outstanding ordinary shares as may be determined from time to time.

On April 25, 2012, we announced a 13% increase in our normal quarterly dividend to our ordinary shareholders from $0.15 per share to $0.17 per share.

Outlook and Trends

Overall.    In respect of renewals, there was a great variety in rate changes across our business lines with the greatest rate improvement being Japanese earthquake in property catastrophe reinsurance in contrast to a number of other lines which renewed flat. Overall, during the first quarter, the premium rates on the contracts we renewed increased by 4% on average across all our lines of business. This overall increase may show an overall positive trend but is not an indication that all lines of business we write are showing rate improvement.

Reinsurance.    Within the reinsurance segment, April 1 is the key renewal date for the Japanese market. Since the 2011 Tohoku earthquake and tsunami, the Company’s domestic Japanese earthquake portfolio achieved a compound rate improvement of 74%. In addition to material price increases, we have also made substantial structural changes to the coverage sold to limit the Company’s exposure. In summary, the overall Japanese account has a forecast 2012 gross written premium that is approximately 10% greater than at the time of the Tohoku earthquake and yet exposed domestic earthquake policy limits have reduced by approximately 50%.

Non-earthquake placements in the Japanese market also achieved substantial rate improvements, with the Company’s typhoon exposed contracts recording an annual price improvement of 16%. The pricing level of our Japanese wind portfolio increased by approximately 24% as compared to before the 2011 earthquake.

In our casualty reinsurance lines, the rate environment remains soft with ample capacity; but, we were able to achieve a small 2% increase on our international lines and held rates flat on our U.S. accounts.

Insurance.    The first quarter is not a major renewal period for insurance. Overall rates increased by approximately 3% in lines we Renewed but there was a wide range of rate movements across lines. The significant rate improvement was in the U.S. with property catastrophe rates increasing by approximately 9% overall with peak zones catastrophe wind exposed risk increasing by approximately 10% and up to 20%. Non-exposed risks also saw rate increases in the single digits. The Costa Concordia event has tightened the

 

33


marine market with marine, energy and construction liability achieving approximately a 6% rate increase and hull achieving approximately a 3% increase. However, it is much too early to predict the ultimate market impact of this major market loss. Other lines such as U.K. property and liability continue to experience difficult market conditions. Our global excess casualty account had rate increases of 8% year to date.

See “Cautionary Statement Regarding Forward-Looking Statements” included in this report.

Application of Critical Accounting Policies

Our condensed consolidated financial statements are based on the selection of accounting policies and the application of significant accounting estimates, which require management to make significant estimates and assumptions. We believe that some of the more critical judgments in the areas of accounting estimates and assumptions that affect our financial condition and results of operations are related to reserves for property and liability losses, premiums receivable in respect of assumed reinsurance, the fair value of derivatives and the value of investments, including the extent of any other-than-temporary impairment. For a detailed discussion of our critical accounting policies please refer to our 2011 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission and the notes to the financial statements contained in this report.

We have discussed the application of these critical accounting estimates with our Board of Directors and Audit Committee.

Results of Operations for the Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

The following is a discussion and analysis of our consolidated results of operations for the three months ended March 31, 2012 and 2011, starting with a summary of our consolidated results and continuing with a segmental analysis intending to identify important trends.

Total Income Statement

Our statements of operations consolidate the underwriting results of our two segments and include certain other revenue and expense items that are not allocated to the business segments.

Gross written premiums.    Total gross written premiums increased by 16.5% in the first quarter of 2012 when compared to 2011 due predominantly to growth in our insurance segment. The $73.7 million increase in written premiums in the insurance segment when compared to the first quarter of 2011 was due to the continued development of our U.S. platform, particularly in our property lines of business, which includes our programs business. In the reinsurance segment, gross written premiums have increased by $37.1 million when compared to the first quarter of 2011, due to modest increases in our property lines reflecting a more positive environment and continued growth in some of our specialty lines. The table below shows our gross written premiums for each segment for the three months ended March 31, 2012 and 2011, and the percentage change in gross written premiums for each segment:

 

Business Segment

   Three Months Ended
March  31, 2012
     Three Months Ended
March  31, 2011
     % increase  
     ($ in millions)      ($ in millions)         

Reinsurance

   $ 474.2       $ 437.1         8.5

Insurance

     307.9         234.2         31.5   
  

 

 

    

 

 

    

 

 

 

Total

   $ 782.1       $ 671.3         16.5
  

 

 

    

 

 

    

 

 

 

Reinsurance ceded.    Total reinsurance ceded for the quarter of $148.6 million has decreased by $13.1 million from the first quarter of 2011. The reinsurance segment was in line with the comparable quarter of 2011 while ceded reinsurance premiums have reduced for the insurance segment due to differences in the timing of cover purchased.

Gross premiums earned.    Gross premiums earned in the first quarter of 2012 increased by 9.5% from the first quarter of 2011, due principally to the significant increase in premiums in the insurance segment. Gross premiums earned in the first quarter of 2012 in the insurance segment were 19.2% higher than the first quarter of 2011 due to the increase in premiums from program business as well as marine, energy and transportation

 

34


business. The reinsurance segment’s increase of 1.9% is due to writing more specialty business in the first three months of 2012, in particular credit and surety and non-U.S. crop as well as some favorable prior year premiums adjustments in casualty.

Net premiums earned.    Net premiums earned have increased by $43.0 million or 9.5% in the first quarter of 2012 compared to the first quarter of 2011 which is consistent with the increase in gross premiums earned in the first quarter of 2012.

Losses and loss adjustment expenses.    The loss ratio for the quarter of 57.3% has decreased by 59.6 percentage points compared to the first quarter of 2011. The decrease is primarily due to only $20.2 million of net losses from natural catastrophes in the current period compared to $295.5 million of catastrophe losses in the comparative period, primarily from the Australian floods and the New Zealand and Japanese earthquakes.

We monitor the ratio of losses and loss adjustment expenses to net earned premium (the “loss ratio”) as a measure of relative underwriting performance where a lower ratio represents a better result than a higher ratio. The loss ratios for our two business segments for the three months ended March 31, 2012 and 2011 were as follows:

 

Business Segment

   Three Months Ended
March  31, 2012
    Three Months Ended
March  31, 2011
 

Reinsurance

     50.0     150.8

Insurance

     66.1        65.9   
  

 

 

   

 

 

 

Total Loss Ratio

     57.3     116.9
  

 

 

   

 

 

 

We have also presented accident year loss ratios excluding the impact from prior year reserve adjustments and catastrophe losses to assist in the analysis of the underlying performance of our segments. We have defined 2012 catastrophe losses as losses associated with the severe weather in the U.S. in February and March 2012. We have defined catastrophe losses in the comparative period as losses associated with the Australian floods and the New Zealand and Japanese earthquakes which occurred in the first quarter of 2011, and movements in losses associated with the 2010 catastrophe events (Chilean and New Zealand earthquakes) which were recognized in the first quarter of 2011.

Reserve releases in our reinsurance segment increased from $20.8 million in the first quarter of 2011 to $28.1 million in the current period following favorable development in casualty and specialty reinsurance lines. The insurance segment had an $8.9 million reserve release this quarter compared to a $1.1 million reserve release in the first quarter of 2011. The reserve releases were mainly attributable to the U.S. and U.K. property lines.

The underlying changes in accident year loss ratios by segment are shown in the table below. The total loss ratio represents the calendar year U.S. GAAP loss ratio. The prior year adjustment in the table below reflects prior-year reserve movement and premium adjustments. The current year adjustments represent catastrophe loss events which reflect net claims and reinstatement premium adjustments.

 

For the Three Months Ended March 31, 2012

   Total Loss
Ratio
    Prior Year
Adjustments
    Total
Accident Year
Loss Ratio
    Current Year
Adjustments
    Accident
Year Loss
Ratio Excluding
Prior and
Current Year
Adjustments
 

Reinsurance

     50.0     10.8     60.8     (6.8 )%      54.0

Insurance

     66.1        6.4        72.5        (0.5     72.0   

Total

     57.3     8.7     66.0     (3.9 )%      62.1

For the Three Months Ended March 31, 2011

   Total Loss
Ratio
    Prior Year
Adjustments
    Total
Accident Year
Loss Ratio
    Current  Year
Adjustments
    Accident
Year Loss
Ratio Excluding
Prior and
Current Year
Adjustments
 

Reinsurance

     150.8     8.3     159.1     (106.9 )%      52.2

Insurance

     65.9        1.4        67.3               67.3   

Total

     116.9     5.8     122.7     (64.1 )%      58.6

 

35


Expense ratio.    We monitor the ratio of expenses to net earned premium (the “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 expense ratio and the total expense ratios for each of the three months ended March 31, 2012 and 2011:

 

     Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 

Ratios Based on Gross Earned Premium

   Reinsurance     Insurance     Total     Reinsurance     Insurance     Total  

Policy acquisition expense ratio

     17.8     16.6     17.3     17.3     14.3     16.0

General and administrative expense ratio(1)(2)

     10.0        15.5        15.2        8.8        13.3        12.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross expense ratio

     27.8        32.1        32.5        26.1        27.6        28.3   

Effect of reinsurance

     2.0        6.0        4.0        1.3        6.6        3.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net expense ratio

     29.8     38.1     36.5     27.4     34.2     31.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) The total group general and administrative expense ratio includes the impact from corporate expenses.

 

(2) In the current quarter, the Company adopted the provision of ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful business acquisition. For more information on the impact of ASU 2010-26, please refer to Note 2 of our unaudited financial statements.

General, administrative and corporate expenses have increased by $22.3 million for the quarter. The increase in the general, administrative and corporate expense ratio is due to increases in performance-related costs, increases in the operating expenses of our newer insurance lines and certain other non-recurring costs.

The policy acquisition expense ratio, gross of the effect of reinsurance, has increased to 17.3% for the quarter from 16.0% in the first quarter of 2011. The increase is due to a change in the mix of business written across both segments where we have written a greater proportion of business with higher average commission rates, such as credit and surety, property proportional treaty, non-U.S. crop and kidnap and ransom.

Net investment income.    Net investment income for the quarter of $52.4 million has reduced by 5.6% compared to the $55.5 million in the first quarter of 2011 due to lower interest rates.

Change in fair value of derivatives.    In the three months ended March 31, 2012, we recorded a loss of $3.5 million (2011 — credit of $0.1 million) in respect of interest rate swaps due to falling interest rates and a loss of $4.0 million (2011 — $3.5 million loss) in respect of forward currency contracts.

Other-than-temporary impairments.    A security is impaired when its fair value is below its amortized cost. The Company reviews its aggregate investment portfolio on an individual security basis for potential other-than-temporary impairment (“OTTI”) each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions. For a more detailed description of OTTI, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2011 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission. The total other-than-temporary impairment charge for the three months ended March 31, 2012 was $Nil (2011 — $Nil).

Income before tax.    In the first quarter of 2012, profit before tax was $84.1 million, comprised of $30.5 million of underwriting income, $52.4 million in net investment income, $7.5 million of losses from a change in fair value of derivatives, $16.7 million of net realized and unrealized investment and foreign exchange gains, $7.7 million of interest expense and $0.3 million of other expenses. In the first quarter of 2011, losses before tax were $169.3 million, comprised of $220.4 million of underwriting losses, $55.5 million in net investment income, $3.4 million of losses from a change in fair value of derivatives, $14.8 million of net realized and unrealized investment and foreign exchange gains, $7.7 million of interest expense and $8.1 million of other expenses.

 

36


Taxes.    Income tax charge for the three months ended March 31, 2012 was $5.4 million. The estimated effective rate of tax for the quarter is a 6.4% charge (2011 — a 9.7% benefit). The charge represents an estimate of the tax rate which will apply to our pre-tax income for 2012 including adjustments to prior year estimates. The effective tax rate for the year is subject to revision in future periods if circumstances change and depends on the relative claims experience of those parts of business underwritten in Bermuda (where the rate of tax on corporate profits is zero), the U.K. (where corporate tax rate was reduced from 26% to 25% effective April 1, 2012) and the U.S. (where the corporate tax rate is 35%).

Net income after tax.    Net income after tax for the three months ended March 31, 2012 was $78.7 million, equivalent to a $1.03 basic earnings per ordinary share adjusted for the $5.7 million preference share dividends and fully diluted earnings per ordinary share of $0.99 during the three months ended March 31, 2012. Net loss after tax for the three months ended March 31, 2011 was $152.8 million, equivalent to a $2.25 basic and diluted loss per ordinary share adjusted for the $5.7 million preference share dividends.

Reserve releases.    The loss ratios take into account changes in our assessments of reserves for unpaid claims and loss adjustment expenses arising from earlier years. In the three months ended March 31, 2012 and 2011, we recorded a reduction in the level of reserves for prior years. The amounts of these reductions and their effect on the loss ratio in each period are shown in the following table:

 

     Three Months Ended
March  31, 2012
    Three Months Ended
March  31, 2011
 
     ($ in millions)  

Reserve releases

   $ 37.0      $ 21.9   

Decrease in the loss ratio (as percentage of net premiums earned)

     7.5     4.8

Investment gains.    Realized and unrealized gains included $1.7 million (2011 — $8.3 million) of net realized gains from the fixed income maturities available for sale portfolio, $2.3 million (2011 — $1.9 million) of net realized gains from our fixed income maturities trading portfolio, $4.5 million net unrealized losses (2011 — $1.9 million loss) from our fixed income maturities trading portfolio and $0.5 million of net realized losses from our equity investments (2011 — $Nil).

Other revenues and expenses.    Other revenues and expenses in the three months ended March 31, 2012 included $7.7 million of foreign currency exchange gains (2011 — $6.4 million).

Dividends.    The dividend on our ordinary shares has been maintained at $0.15 per ordinary share for the quarter. Dividends paid on our preference shares in the three months ended March 31, 2012 were $5.7 million (2011 — $5.7 million).

Underwriting Results by Operating Segments

We are organized into two business segments: Reinsurance and Insurance. We have considered similarities in economic characteristics, products, customers, distribution, the regulatory environment of our operating segments and quantitative thresholds to determine our reportable segments. The reinsurance segment consists of property catastrophe reinsurance, other property reinsurance, casualty reinsurance and specialty reinsurance. The insurance segment consists of property insurance, casualty insurance, marine, energy and transportation insurance and financial and professional lines insurance.

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 general and administrative expenses by net premiums earned. Other than corporate expenses, indirect general and administrative expenses are allocated to segments based on each segment’s proportional share of gross earned premiums.

We have provided additional disclosures for corporate and other (non-underwriting) income and expenses in Note 5 of our unaudited financial statements. Corporate and other income includes net investment income, net realized and unrealized investment gains or losses, corporate expense, interest expense, net realized and unrealized foreign exchange gains or losses and income taxes, which are not allocated to the underwriting segments.

 

37


Please refer to the tables in Note 5 in our unaudited financial statements of this report for a summary of gross and net written and earned premiums, underwriting results and combined ratios and reserves for our two business segments for the three months ended March 31, 2012 and 2011. The contributions of each segment to gross written premiums in the three months ended March 31, 2012 and 2011 were as follows:

 

     Gross Written Premiums  

Business Segment

   Three Months Ended
March  31, 2012
    Three Months Ended
March  31, 2011
 
     (% of total gross written premiums)  

Reinsurance

     60.6     65.1

Insurance

     39.4        34.9
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

     Gross Written Premiums  

Business Segment

   Three Months Ended
March  31, 2012
     Three Months Ended
March  31, 2011
 
     ($ in millions)  

Reinsurance

   $ 474.2       $ 437.1   

Insurance

     307.9         234.2   
  

 

 

    

 

 

 

Total

   $ 782.1       $ 671.3   
  

 

 

    

 

 

 

Reinsurance

Our reinsurance segment consists of property catastrophe reinsurance, other property reinsurance (risk excess, pro rata and facultative), casualty reinsurance (U.S. treaty, international treaty and global facultative) and specialty reinsurance (credit and surety, structured, agriculture and specialty). Please see Note 5 of our unaudited financial statements for further descriptions of the lines of business within this segment.

Gross written premiums.    Gross written premiums in our reinsurance segment have increased by 8.5% compared to the three months ended March 31, 2011. The increase in gross written premiums has arisen mainly from specialty reinsurance business, where we recognized loss-related additional premiums and growth in our non-U.S. crop and credit and surety business lines. The increase in other property is due to a large proportional treaty renewing at higher rates than in the prior period as we benefited from positive pricing momentum in catastrophe-exposed accounts while casualty benefited from favorable prior year premium adjustments of $8.7 million. In the comparative quarter, we recognized $10.7 million of reinstatement premiums associated with the New Zealand earthquakes and the Australian floods.

The table below shows our gross written premiums for each line of business for the three months ended March 31, 2012 and 2011, and the percentage change in gross written premiums for each such line:

 

     Gross Written Premiums  

Lines of Business

   Three Months Ended
March 31, 2012
     Three Months Ended
March  31, 2011
     % increase  
     ($ in millions)      ($ in millions)         

Property catastrophe reinsurance

   $ 152.9       $ 151.0         1.3

Other property reinsurance

     78.5         64.8         21.1   

Casualty reinsurance

     138.9         138.6         0.2   

Specialty reinsurance

     103.9         82.7         25.6   
  

 

 

    

 

 

    

 

 

 

Total

   $ 474.2       $ 437.1         8.5
  

 

 

    

 

 

    

 

 

 

Losses and loss adjustment expenses.    The loss ratio for the three months ended March 31, 2012 was 50.0% compared to 150.8% in the equivalent period in 2011. The decrease in the loss ratio is primarily attributable to the reduced level of catastrophe losses in the current quarter while the comparable quarter of 2011 experienced losses of $295.5 million from the Australian floods and the New Zealand and Japanese earthquakes. There was a $7.3 million increase in prior year reserve releases from $20.8 million in the first quarter of 2011 to $28.1 million in the current period following favorable development in the casualty and specialty reinsurance lines. The loss

 

38


ratio in the period was also impacted by 1.2 percentage points reflecting the $6.4 million increase in ceded earned premiums as we purchased additional reinsurance in the quarter compared to the first quarter of 2011.

Further information relating to the movement of prior year reserves is found below under “Reserves for Losses and Loss Adjustment Expenses.”

Policy acquisition, general and administrative expenses.    Policy acquisition expenses were $51.8 million for the three months ended March 31, 2012 equivalent to 19.1% of net premiums earned (2011 — $49.4 million or 18.2% of net premiums earned). The increase in the acquisition expense ratio is due to the purchase of additional reinsurance ahead of the hurricane season reducing our net earned premium, as well as a change in the mix of business written where we have written more credit and surety, property proportional treaty and non-U.S. crop, which have higher average commission rates. General and administrative expenses increased by $4.0 million as compared to the first quarter of 2011 and this mainly attributable to performance related pay accruals.

In the current quarter, the Company adopted the provision of ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful business acquisition. For more information on the impact of ASU 2010-26, please refer to Note 2 of our unaudited financial statements.

Insurance

Our insurance segment consists of property insurance, casualty insurance, marine, energy and transportation insurance and financial and professional lines insurance. See Note 5 of our unaudited financial statements for descriptions of the lines of business within this segment.

Gross written premiums.    Overall premiums have increased by 31.5% to $307.9 million for the quarter from $234.2 million in the equivalent period in 2011. The increase in gross written premium is mainly attributable to our property and program business and to the continued development of our U.S. professional lines business. Increases in our marine, energy and transportation insurance were mainly due to increased premiums in our marine, energy and construction liability account which achieved significant rate increases following a series of industry losses in the past year. The increase in our casualty lines were in our global excess casualty account.

The table below shows our gross written premiums for each line of business for the three months ended March 31, 2012 and 2011, and the percentage change in gross written premiums for each line:

 

     Gross Written Premiums  

Lines of Business

   Three Months  Ended
March 31, 2012
     Three Months  Ended
March 31, 2011
     % increase/(decrease)  
     ($ in millions)      ($ in millions)         

Property insurance

   $ 73.6       $ 38.6         90.7

Casualty insurance

     35.0         19.6         78.6   

Marine, energy and transportation insurance

     149.6         123.8         20.8   

Financial and professional lines insurance

     49.7         52.2         (4.8
  

 

 

    

 

 

    

 

 

 

Total

   $ 307.9       $ 234.2         31.5
  

 

 

    

 

 

    

 

 

 

Losses and loss adjustment expenses.    The loss ratio for the quarter was 66.1% compared to 65.9% for the three months ended March 31, 2011. The increase in the loss ratio for the quarter is mainly due to the $24.2 million loss associated with the Costa Concordia incident. The increase was partially mitigated by an $8.9 million prior year reserve release in the current quarter compared to a $1.1 million reserve release in the first quarter of 2011.

The release in the current quarter was due primarily to our property lines following favorable loss development as well as a small release from our casualty line.

 

39


Policy acquisition, general and administrative expenses.    Policy acquisition expenses of $44.3 million for the three months ended March 31, 2012 equivalent to 19.7% of net premiums earned (2011 — $32.0 million or 17.7% of net earned premium) were $12.3 million higher than those in the first quarter of 2011. This was partly due to the increase in premiums earned but also attributable to a change in our business mix towards our successful kidnap and ransom and property program businesses, which have higher acquisition expense ratios. The increase of $11.6 million in our general and administrative expenses is mainly associated with $5.4 million performance related pay accruals and $4.7 million for continued build out of our U.S. and U.K. operations.

In the current quarter, the Company adopted the provision of ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” Under the standard, the Company is required to expense the proportion of its general and administrative deferred acquisition costs not directly related to successful business acquisition. For more information on the impact of ASU 2010-26, please refer to Note 2 of our unaudited financial statements.

Balance Sheet

Total cash and investments

At March 31, 2012 and December 31, 2011, total cash and investments, including accrued interest receivable, were $7.7 billion and $7.6 billion, respectively. The composition of our investment portfolio is summarized below:

 

     As at March 31, 2012     As at December 31, 2011  
     Estimated
Fair  Value
    Percentage of
Total Cash  and
Investments
    Estimated
Fair  Value
     Percentage of
Total Cash  and
Investments
 
     ($ in millions except for percentages)  

Fixed Income Securities — Available for Sale

         

U.S. Government

   $ 897.8        11.6   $ 932.4         12.2

U.S. Government Agency

     331.3        4.3        295.5         3.9   

Municipal

     38.7        0.5        35.6         0.5   

Corporate

     1,889.1        24.5        1,846.5         24.2   

FDIC Guaranteed Corporate

     63.6        0.8        72.9         0.9   

Non-U.S. Government-backed Corporate

     158.5        2.1        167.8         2.2   

Foreign Government

     619.5        8.0        660.4         8.7   

Asset-backed

     63.4        0.8        61.0         0.8   

Mortgage-backed

     1,382.7        18.0        1,353.7         17.8   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total Fixed Income — Available for Sale

   $ 5,444.6        70.6   $ 5,425.8         71.2

Fixed Income Securities — Trading

         

U.S. Government

   $ 37.4        0.5   $ 32.3         0.4

U.S. Government Agency

     1.8               1.8           

Municipal

     2.9               2.9           

Corporate

     341.9        4.5        349.3         4.6   

Foreign Government

     12.9        0.2        7.4         0.1   

Asset-backed

     0.6               0.7           
  

 

 

   

 

 

   

 

 

    

 

 

 

Total Fixed Income — Trading

   $ 397.5        5.2   $ 394.4         5.1

Total Other Investments

     33.1        0.4        33.1         0.4   

Total Equity Securities

     188.1        2.4        179.5         2.4   

Total Short-term Investments — Available for Sale

     423.5        5.5        298.2         3.9   

Total Short-term Investments — Trading

     10.3        0.1        4.1         0.1   

Total Cash and Cash Equivalents

     1,173.3        15.2        1,239.1         16.3   

Total Net Receivable/(Payable) for Securities Sold/(Purchased)

     (0.3            1.1           

Total Accrued Interest Receivable

     48.7        0.6        49.6         0.6   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total Cash and Investments

   $ 7,718.8        100.0   $ 7,624.9         100.0
  

 

 

   

 

 

   

 

 

    

 

 

 

 

40