Item 1.
|
Unaudited Condensed Consolidated Financial Statements
|
ASPEN INSURANCE HOLDINGS LIMITED
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
As at September 30, 2012 and December 31, 2011
($ in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
As
at
September 30, 2012
|
|
|
As at
December 31, 2011
|
|
|
|
|
|
|
(As Adjusted)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
Fixed income maturities, available for sale at fair value
(amortized cost $5,180.8 and $5,099.7)
|
|
$
|
5,547.8
|
|
|
$
|
5,425.8
|
|
Fixed income maturities, trading at fair value
(amortized cost $408.4 and $380.4)
|
|
|
435.3
|
|
|
|
394.4
|
|
Equity securities, available for sale at fair value
(cost $171.4 and $169.8)
|
|
|
197.1
|
|
|
|
179.5
|
|
Other investments, equity method
|
|
|
34.8
|
|
|
|
33.1
|
|
Short-term investments, available for sale at fair value
(amortized cost $494.5 and $298.2)
|
|
|
494.7
|
|
|
|
298.2
|
|
Short-term investments, trading at fair value
(amortized cost $10.6 and $4.1)
|
|
|
10.6
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
6,720.3
|
|
|
|
6,335.1
|
|
Cash and cash equivalents
|
|
|
1,374.2
|
|
|
|
1,239.1
|
|
Reinsurance recoverables
|
|
|
|
|
|
|
|
|
Unpaid losses
|
|
|
461.6
|
|
|
|
426.6
|
|
Ceded unearned premiums
|
|
|
151.3
|
|
|
|
87.8
|
|
Receivables
|
|
|
|
|
|
|
|
|
Underwriting premiums
|
|
|
993.4
|
|
|
|
894.4
|
|
Other
|
|
|
76.4
|
|
|
|
69.7
|
|
Funds withheld
|
|
|
79.5
|
|
|
|
90.7
|
|
Deferred policy acquisition costs
(1)
|
|
|
232.0
|
|
|
|
184.5
|
|
Derivatives at fair value
|
|
|
5.8
|
|
|
|
1.3
|
|
Receivable for securities sold
|
|
|
14.6
|
|
|
|
1.1
|
|
Office properties and equipment
|
|
|
59.1
|
|
|
|
53.9
|
|
Tax recoverable
|
|
|
12.3
|
|
|
|
19.5
|
|
Other assets
|
|
|
38.1
|
|
|
|
36.8
|
|
Intangible assets
|
|
|
19.2
|
|
|
|
20.0
|
|
|
|
|
|
|
|
|
|
|
Total assets
(1)
|
|
$
|
10,237.8
|
|
|
$
|
9,460.5
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In 2012, 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
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As at September 30, 2012 and December 31, 2011
($ in millions,
except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
As
at
September 30, 2012
|
|
|
As at
December 31, 2011
|
|
|
|
|
|
|
(As Adjusted)
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Insurance reserves
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
$
|
4,639.6
|
|
|
$
|
4,525.2
|
|
Unearned premiums
|
|
|
1,184.0
|
|
|
|
916.1
|
|
|
|
|
|
|
|
|
|
|
Total insurance reserves
|
|
|
5,823.6
|
|
|
|
5,441.3
|
|
Payables
|
|
|
|
|
|
|
|
|
Reinsurance premiums
|
|
|
71.1
|
|
|
|
155.8
|
|
Deferred taxation
|
|
|
23.7
|
|
|
|
18.5
|
|
Accrued expenses and other payables
|
|
|
261.4
|
|
|
|
187.8
|
|
Liabilities under derivative contracts
|
|
|
4.7
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
Total payables
|
|
|
360.9
|
|
|
|
364.2
|
|
Long-term debt
|
|
|
499.1
|
|
|
|
499.0
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
6,683.6
|
|
|
$
|
6,304.5
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities (see Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Ordinary shares: 71,012,237 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)
|
|
|
|
|
|
|
|
|
6,400,000 7.250% shares of par value 0.15144558¢ each
(December 31, 2011 Nil)
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
(0.1
|
)
|
|
|
0.4
|
|
Additional paid-in capital
|
|
|
1,521.9
|
|
|
|
1,385.0
|
|
Retained earnings
(1)
|
|
|
1,562.6
|
|
|
|
1,341.6
|
|
Accumulated other comprehensive income, net of taxes
|
|
|
469.7
|
|
|
|
428.9
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
(1)
|
|
|
3,554.2
|
|
|
|
3,156.0
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
(1)
|
|
$
|
10,237.8
|
|
|
$
|
9,460.5
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In 2012, 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
AND COMPREHENSIVE INCOME
($ in millions, except share and per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(As Adjusted)
|
|
|
|
|
|
(As Adjusted)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
516.2
|
|
|
$
|
486.9
|
|
|
$
|
1,525.0
|
|
|
$
|
1,399.1
|
|
Net investment income
|
|
|
48.6
|
|
|
|
57.3
|
|
|
|
153.8
|
|
|
|
171.4
|
|
Net realized and unrealized investment gains
|
|
|
10.8
|
|
|
|
3.2
|
|
|
|
21.1
|
|
|
|
21.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
575.6
|
|
|
|
547.4
|
|
|
|
1,699.9
|
|
|
|
1,591.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
255.0
|
|
|
|
306.2
|
|
|
|
801.1
|
|
|
|
1,161.5
|
|
Policy acquisition expenses
|
|
|
103.1
|
|
|
|
93.4
|
|
|
|
301.2
|
|
|
|
261.5
|
|
General, administrative and corporate
expenses
(1)
|
|
|
90.7
|
|
|
|
72.0
|
|
|
|
259.0
|
|
|
|
205.2
|
|
Change in fair value of derivatives
|
|
|
4.9
|
|
|
|
30.0
|
|
|
|
24.0
|
|
|
|
55.7
|
|
Interest on long-term debt
|
|
|
7.8
|
|
|
|
7.7
|
|
|
|
23.2
|
|
|
|
23.1
|
|
Net realized and unrealized foreign exchange losses
|
|
|
(4.5
|
)
|
|
|
5.8
|
|
|
|
0.5
|
|
|
|
10.3
|
|
Other (income)/expenses
|
|
|
(4.5
|
)
|
|
|
9.1
|
|
|
|
(7.1
|
)
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
452.5
|
|
|
|
524.2
|
|
|
|
1,401.9
|
|
|
|
1,727.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations before income tax
|
|
|
123.1
|
|
|
|
23.2
|
|
|
|
298.0
|
|
|
|
(135.8
|
)
|
Income tax (expense)/credit
|
|
|
(8.0
|
)
|
|
|
(2.0
|
)
|
|
|
(19.6
|
)
|
|
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(Loss)
(1)
|
|
$
|
115.1
|
|
|
$
|
21.2
|
|
|
$
|
278.4
|
|
|
$
|
(122.5
|
)
|
|
|
|
|
|
Less: Net (Income)/Loss attributable to non-controlling interest
|
|
|
0.1
|
|
|
|
(0.2
|
)
|
|
|
0.3
|
|
|
|
0.2
|
|
Net Income/(Loss) attributable to Aspen Insurance Holdings Limiteds ordinary shareholders
|
|
$
|
115.2
|
|
|
|
21.0
|
|
|
$
|
278.7
|
|
|
|
(122.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(Loss)
(1)
|
|
$
|
115.1
|
|
|
$
|
21.2
|
|
|
$
|
278.4
|
|
|
$
|
(122.5
|
)
|
Available for sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for net realized losses/(gains) on investments included in net income
|
|
|
4.8
|
|
|
|
(5.2
|
)
|
|
|
5.1
|
|
|
|
(13.6
|
)
|
Change in net unrealized gains on available for sale securities held
|
|
|
26.3
|
|
|
|
69.0
|
|
|
|
51.2
|
|
|
|
96.5
|
|
Amortization of loss on derivative contract
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.2
|
|
Change in foreign currency translation adjustment
|
|
|
(4.9
|
)
|
|
|
(17.4
|
)
|
|
|
(15.8
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
26.4
|
|
|
|
46.5
|
|
|
|
40.8
|
|
|
|
83.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income/(Loss) attributable to Aspen Insurance Holdings Limiteds ordinary shareholders
(1)
|
|
$
|
141.5
|
|
|
|
67.7
|
|
|
$
|
319.2
|
|
|
|
(39.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares and share equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(2)
|
|
|
71,129,102
|
|
|
|
70,699,343
|
|
|
|
71,125,664
|
|
|
|
70,681,993
|
|
Diluted
(2)
|
|
|
73,397,796
|
|
|
|
73,299,874
|
|
|
|
73,703,038
|
|
|
|
70,681,993
|
|
Basic earnings/(loss) per ordinary share adjusted for preference share dividend
|
|
$
|
1.50
|
|
|
$
|
0.22
|
|
|
$
|
3.60
|
|
|
$
|
(1.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings/(loss) per ordinary share adjusted for preference share dividend
|
|
$
|
1.45
|
|
|
$
|
0.21
|
|
|
$
|
3.47
|
|
|
$
|
(1.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In 2012, 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 nine months ended September 30, 2011 in the tables 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)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September
30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(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
|
|
|
0.3
|
|
|
|
0.5
|
|
Net income/(loss) attributable to non-controlling interest
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
Dividends due to non-controlling interest
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
1,385.0
|
|
|
|
1,388.3
|
|
New ordinary shares issued
|
|
|
21.5
|
|
|
|
0.5
|
|
Ordinary shares repurchased and cancelled
|
|
|
(51.9
|
)
|
|
|
(8.1
|
)
|
Preference shares issued
|
|
|
154.5
|
|
|
|
|
|
Share-based compensation
|
|
|
12.8
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
1,521.9
|
|
|
|
1,381.8
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
Beginning of period
(1)
|
|
|
1,341.6
|
|
|
|
1,517.0
|
|
Net income/(loss) for the period
(1)
|
|
|
278.4
|
|
|
|
(122.5
|
)
|
Dividends on ordinary shares
|
|
|
(35.1
|
)
|
|
|
(31.8
|
)
|
Dividends on preference shares
|
|
|
(22.6
|
)
|
|
|
(17.1
|
)
|
Proportion due to non-controlling interest
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
End of period
(1)
|
|
|
1,562.6
|
|
|
|
1,345.8
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(15.8
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
108.4
|
|
|
|
113.7
|
|
|
|
|
|
|
|
|
|
|
Loss on derivatives, net of taxes:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
(0.7
|
)
|
|
|
(1.0
|
)
|
Reclassification to interest payable
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
(0.4
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation on investments, net of taxes:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
305.4
|
|
|
|
211.9
|
|
Change for the period, net of taxes
|
|
|
56.3
|
|
|
|
82.9
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
361.7
|
|
|
|
294.8
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income, net of taxes
|
|
|
469.7
|
|
|
|
407.7
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
(1)
|
|
$
|
3,554.2
|
|
|
$
|
3,135.6
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In 2012, 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)
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(As Adjusted)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income/(loss)
(1)
|
|
$
|
278.4
|
|
|
$
|
(122.5
|
)
|
Proportion due to non-controlling interest
|
|
|
0.3
|
|
|
|
0.2
|
|
Adjustments to reconcile net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
31.1
|
|
|
|
19.3
|
|
Share-based compensation
|
|
|
12.8
|
|
|
|
1.1
|
|
Net realized and unrealized investment and foreign exchange (gains)
|
|
|
(19.5
|
)
|
|
|
(21.5
|
)
|
Loss on derivative contracts
|
|
|
0.3
|
|
|
|
0.2
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Insurance reserves:
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
69.5
|
|
|
|
578.3
|
|
Unearned premiums
|
|
|
261.1
|
|
|
|
150.9
|
|
Reinsurance recoverables:
|
|
|
|
|
|
|
|
|
Unpaid losses
|
|
|
(32.8
|
)
|
|
|
(77.0
|
)
|
Ceded unearned premiums
|
|
|
(62.7
|
)
|
|
|
(67.4
|
)
|
Other receivables
|
|
|
(3.4
|
)
|
|
|
(1.4
|
)
|
Deferred policy acquisition costs
(1)
|
|
|
(46.7
|
)
|
|
|
(37.0
|
)
|
Reinsurance premiums payables
|
|
|
(85.1
|
)
|
|
|
21.0
|
|
Funds withheld
|
|
|
11.2
|
|
|
|
18.2
|
|
Premiums receivable
|
|
|
(105.2
|
)
|
|
|
(121.6
|
)
|
Deferred taxes
|
|
|
(2.9
|
)
|
|
|
(21.1
|
)
|
Income tax payable
|
|
|
14.5
|
|
|
|
(23.9
|
)
|
Accrued expenses and other payables
|
|
|
30.2
|
|
|
|
(2.6
|
)
|
Fair value of derivatives and settlement of liabilities under derivatives
|
|
|
(2.2
|
)
|
|
|
0.3
|
|
Long term debt
|
|
|
0.1
|
|
|
|
0.1
|
|
Other assets
|
|
|
(3.9
|
)
|
|
|
(15.2
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$
|
345.1
|
|
|
$
|
278.4
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In 2012, 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)
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(As Adjusted)
|
|
Cash flows (used in) investing activities:
|
|
|
|
|
|
|
|
|
(Purchases) of fixed income maturities Available for sale
|
|
$
|
(1,057.1
|
)
|
|
$
|
(1,544.6
|
)
|
(Purchases) of fixed income maturities Trading
|
|
|
(187.7
|
)
|
|
|
(335.2
|
)
|
(Purchases) of equity securities Available for sale
|
|
|
(41.5
|
)
|
|
|
(185.7
|
)
|
Proceeds from sales and maturities of fixed income maturities Available for sale
|
|
|
989.7
|
|
|
|
1,398.2
|
|
Proceeds from sales and maturities of fixed income maturities Trading
|
|
|
164.5
|
|
|
|
356.0
|
|
Proceeds from sales of equity securities Available for sale
|
|
|
35.9
|
|
|
|
12.6
|
|
Net (purchases)/sales of short-term investments
|
|
|
(190.4
|
)
|
|
|
(7.4
|
)
|
Net change in (payable) for securities (purchased)
|
|
|
19.3
|
|
|
|
(40.7
|
)
|
(Purchases) of equipment
|
|
|
(19.9
|
)
|
|
|
(21.6
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(287.2
|
)
|
|
|
(368.4
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from/(used in) financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of ordinary shares, net of issuance costs
|
|
|
21.5
|
|
|
|
0.5
|
|
Proceeds from the issuance of preference shares, net of issuance costs
|
|
|
154.5
|
|
|
|
|
|
Ordinary shares repurchased
|
|
|
(51.9
|
)
|
|
|
(8.1
|
)
|
Dividends paid on ordinary shares
|
|
|
(35.1
|
)
|
|
|
(31.8
|
)
|
Dividends paid on preference shares
|
|
|
(22.6
|
)
|
|
|
(17.1
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from/(used in) financing activities
|
|
|
66.4
|
|
|
|
(56.5
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate movements on cash and cash equivalents
|
|
|
10.8
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and cash equivalents
|
|
|
135.1
|
|
|
|
(140.3
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
1,239.1
|
|
|
|
1,179.1
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,374.2
|
|
|
$
|
1,038.8
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for income tax expense
|
|
$
|
6.4
|
|
|
$
|
4.8
|
|
Cash paid during the period for interest on long-term debt
|
|
$
|
22.5
|
|
|
$
|
22.7
|
|
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 Lloyds
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 and nine months ended September 30, 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 Companys 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 $3.2 million in the nine months ended September 30, 2012 and reduced closing retained earnings for the period ended September 30, 2012 by an aggregate of $19.2 million. The brought forward accumulated operating deferred
acquisition costs as at December 31, 2011 were reduced by $16.0 million due to a write down of previously deferred costs and resulted in a corresponding reduction in retained earnings brought forward.
9
The adoption of the standard has required the comparative data to be restated as follows:
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
|
|
As at December 31, 2011
|
|
|
|
As Reported
|
|
|
As Adjusted
|
|
|
|
($ in millions)
|
|
Assets
|
|
|
|
|
Deferred policy acquisition costs (reported and adjusted)
|
|
$
|
200.5
|
|
|
$
|
184.5
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Retained earnings (reported and adjusted)
|
|
$
|
1,357.6
|
|
|
$
|
1,341.6
|
|
|
|
Consolidated Statement of Shareholders Equity
|
|
Nine Months Ended
September 30, 2011
|
|
|
|
As Reported
|
|
|
As Adjusted
|
|
|
|
($ in millions)
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
Beginning of the period (reported and adjusted)
|
|
$
|
1,528.7
|
|
|
$
|
1,517.0
|
|
Net (loss) for the period (reported and adjusted)
|
|
|
(119.3
|
)
|
|
|
(122.5
|
)
|
Dividends on ordinary shares (reported and adjusted)
|
|
|
(31.8
|
)
|
|
|
(31.8
|
)
|
Dividends on preference shares (reported and adjusted)
|
|
|
(17.1
|
)
|
|
|
(17.1
|
)
|
Proportion due to non-controlling interest (reported and adjusted)
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
End of period (reported and adjusted)
|
|
$
|
1,360.6
|
|
|
$
|
1,345.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations
|
|
Three Months Ended
September 30, 2011
|
|
|
|
As Reported
|
|
|
As Adjusted
|
|
|
|
($ in millions)
|
|
Expenses
|
|
|
|
|
General, administrative and corporate expenses (reported and adjusted)
|
|
$
|
71.0
|
|
|
$
|
72.0
|
|
|
|
|
|
Nine Months Ended
September 30, 2011
|
|
|
|
As Reported
|
|
|
As Adjusted
|
|
|
|
($ in millions)
|
|
Expenses
|
|
|
|
|
General, administrative and corporate expenses (reported and adjusted)
|
|
$
|
202.0
|
|
|
$
|
205.2
|
|
|
|
Consolidated Statement of Cash Flows
|
|
Nine Months Ended
September 30, 2011
|
|
|
|
As Reported
|
|
|
As Adjusted
|
|
|
|
($ in millions)
|
|
Net (loss) (reported and adjusted)
|
|
$
|
(119.3
|
)
|
|
$
|
(122.5
|
)
|
Deferred policy acquisition costs (reported and adjusted)
|
|
|
(40.2
|
)
|
|
|
(37.0
|
)
|
10
Earnings per Ordinary Share
The above standard has also resulted in a change to the calculations of earnings per share as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2011
|
|
|
Nine Months Ended
September 30, 2011
|
|
|
|
($ in millions, except for per share amounts)
|
|
Net income/(loss) (reported)
|
|
$
|
22.2
|
|
|
$
|
(119.3
|
)
|
Preference dividends
|
|
|
(5.7
|
)
|
|
|
(17.1
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income/(loss) available to ordinary shareholders
|
|
|
16.5
|
|
|
|
(136.4
|
)
|
Additional deferred acquisition costs expensed
|
|
|
(1.0
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted basic and diluted net income/(loss) available to ordinary shareholders
|
|
$
|
15.5
|
|
|
$
|
(139.6
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average ordinary shares
|
|
|
70,699,343
|
|
|
|
70,681,993
|
|
Weighted average effect of diluted securities
|
|
|
2,600,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted weighted average ordinary shares
|
|
|
73,299,985
|
|
|
|
70,681,993
|
|
|
|
|
|
|
|
|
|
|
Reported basic income/(loss) per ordinary share
|
|
$
|
0.23
|
|
|
$
|
(1.93
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted basic income/(loss) per ordinary share
|
|
$
|
0.22
|
|
|
$
|
(1.98
|
)
|
|
|
|
|
|
|
|
|
|
Reported diluted income/(loss) per ordinary share
|
|
$
|
0.23
|
|
|
$
|
(1.93
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted diluted income/(loss) per ordinary share
|
|
$
|
0.21
|
|
|
$
|
(1.98
|
)
|
|
|
|
|
|
|
|
|
|
If the above standard had not been adopted, the basic and diluted earnings per ordinary share adjusted for
preference share dividends for the three and nine months ended September 30, 2012 would be as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2012
|
|
|
|
($ in millions, except for per share amounts)
|
|
Adjusted basic income per ordinary share
|
|
$
|
1.51
|
|
|
$
|
3.63
|
|
|
|
|
|
|
|
|
|
|
Adjusted diluted income per ordinary share
|
|
$
|
1.47
|
|
|
$
|
3.50
|
|
|
|
|
|
|
|
|
|
|
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 adopted this standard in the first quarter of 2012.
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 Companys valuation process. ASU 2011-04 was effective for annual reporting periods
beginning after December 15, 2011 with early adoption prohibited. The Company adopted this standard in the first quarter of 2012. This standard does not have a material impact on the Companys consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In 2011, the FASB issued ASU 2011-11,
Disclosures about Offsetting Assets and Liabilities.
The ASU 2011-11 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 IFRS
11
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 Companys consolidated financial statements.
In July 2012, the FASB issued ASU 2012-02,
Indefinite-Lived Intangible Assets Impairment Test
which permits an entity to make a qualitative assessment to determine whether it is more
likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. The ASU applies to both public and non-public entities and is effective for annual and interim impairment tests performed for fiscal years beginning after
September 15, 2012. The provisions of the new guidance are not expected to have a material impact on the Companys consolidated financial statements.
3. Acquisitions
There were no acquisition-related
transactions during the nine months ended September 30, 2012.
4. Earnings per Ordinary Share
Basic earnings per ordinary share are calculated by dividing net income available to holders of Aspen Holdings
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 and nine months ended September 30, 2012 and 2011, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(As Adjusted)
|
|
|
|
|
|
(As Adjusted)
|
|
|
|
($ in millions, except share and per share amounts)
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
(1)
|
|
$
|
115.1
|
|
|
$
|
21.2
|
|
|
$
|
278.4
|
|
|
$
|
(122.5
|
)
|
Preference share dividends
|
|
|
(8.6
|
)
|
|
|
(5.7
|
)
|
|
|
(22.6
|
)
|
|
|
(17.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income/(loss) available to ordinary shareholders
(1)
|
|
|
106.5
|
|
|
|
15.5
|
|
|
|
255.8
|
|
|
|
(139.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average ordinary shares
|
|
|
71,129,102
|
|
|
|
70,699,343
|
|
|
|
71,125,664
|
|
|
|
70,681,993
|
|
Weighted average effect of dilutive securities
(2)
|
|
|
2,268,694
|
|
|
|
2,600,531
|
|
|
|
2,577,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted weighted average ordinary shares
|
|
|
73,397,796
|
|
|
|
73,299,874
|
|
|
|
73,703,038
|
|
|
|
70,681,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per ordinary share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.50
|
|
|
$
|
0.22
|
|
|
$
|
3.60
|
|
|
$
|
(1.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.45
|
|
|
$
|
0.21
|
|
|
$
|
3.47
|
|
|
$
|
(1.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In 2012, 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 nine months ended September 30, 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 Companys long term incentive program and restricted stock units as described in
Note 12 in addition to Perpetual Preferred Income Equity Replacement Securities.
|
12
Dividends.
On October 24, 2012, the Companys Board
of Directors declared the following quarterly dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
|
|
|
Payable on:
|
|
|
Record Date:
|
|
Ordinary shares
|
|
$
|
0.17
|
|
|
|
November 26, 2012
|
|
|
|
November 8, 2012
|
|
5.625% preference shares
|
|
$
|
0.703125
|
|
|
|
January 1, 2013
|
|
|
|
December 15, 2012
|
|
7.401% preference shares
|
|
$
|
0.462563
|
|
|
|
January 1, 2013
|
|
|
|
December 15, 2012
|
|
7.250% preference shares
|
|
$
|
0.4531
|
|
|
|
January 1, 2013
|
|
|
|
December 15, 2012
|
|
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 Companys
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 segments 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 the
Companys 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 Companys 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 expenses, 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 Companys 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 Companys operating segments is measured by underwriting profit or loss.
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 September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012
|
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
Total
|
|
|
|
($ in millions)
|
|
Underwriting Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
|
$
|
259.5
|
|
|
$
|
298.9
|
|
|
$
|
558.4
|
|
Net written premiums
|
|
|
256.9
|
|
|
|
250.2
|
|
|
|
507.1
|
|
Gross earned premiums
|
|
|
299.8
|
|
|
|
302.0
|
|
|
|
601.8
|
|
Net earned premiums
|
|
|
279.6
|
|
|
|
236.6
|
|
|
|
516.2
|
|
Underwriting Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
117.1
|
|
|
|
137.9
|
|
|
|
255.0
|
|
Policy acquisition expenses
|
|
|
55.7
|
|
|
|
47.4
|
|
|
|
103.1
|
|
General and administrative expenses
|
|
|
33.6
|
|
|
|
42.8
|
|
|
|
76.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
|
73.2
|
|
|
|
8.5
|
|
|
|
81.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
(14.3
|
)
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
48.6
|
|
Net realized and unrealized investment gains
|
|
|
|
|
|
|
|
|
|
|
10.8
|
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
(4.9
|
)
|
Interest expense on long term debt
|
|
|
|
|
|
|
|
|
|
|
(7.8
|
)
|
Net realized and unrealized foreign exchange gains
|
|
|
|
|
|
|
|
|
|
|
4.5
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit before tax
|
|
|
|
|
|
|
|
|
|
$
|
123.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for loss and loss adjustment expenses
|
|
$
|
2,755.1
|
|
|
$
|
1,422.9
|
|
|
$
|
4,178.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
41.9
|
%
|
|
|
58.3
|
%
|
|
|
49.4
|
%
|
Policy acquisition expense ratio
|
|
|
19.9
|
|
|
|
20.0
|
|
|
|
20.0
|
|
General and administrative expense ratio
(1)
|
|
|
12.0
|
|
|
|
18.1
|
|
|
|
17.6
|
|
Expense ratio
|
|
|
31.9
|
|
|
|
38.1
|
|
|
|
37.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
73.8
|
%
|
|
|
96.4
|
%
|
|
|
87.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The total general and administrative expense ratio includes corporate expenses.
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2011
|
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
Total
|
|
|
|
(As Adjusted, $ in millions)
|
|
Underwriting Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
|
$
|
276.1
|
|
|
$
|
219.5
|
|
|
$
|
495.6
|
|
Net written premiums
|
|
|
270.5
|
|
|
|
192.1
|
|
|
|
462.6
|
|
Gross earned premiums
|
|
|
303.2
|
|
|
|
246.7
|
|
|
|
549.9
|
|
Net earned premiums
|
|
|
279.6
|
|
|
|
207.3
|
|
|
|
486.9
|
|
Underwriting Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
188.8
|
|
|
|
117.4
|
|
|
|
306.2
|
|
Policy acquisition expenses
|
|
|
51.8
|
|
|
|
41.6
|
|
|
|
93.4
|
|
General and administrative expenses
(1)
|
|
|
26.7
|
|
|
|
34.9
|
|
|
|
61.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
(1)
|
|
|
12.3
|
|
|
|
13.4
|
|
|
|
25.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
(10.4
|
)
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
57.3
|
|
Realized and unrealized investment gains
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
(30.0
|
)
|
Interest expense on long term debt
|
|
|
|
|
|
|
|
|
|
|
(7.7
|
)
|
Net realized and unrealized foreign exchange (losses)
|
|
|
|
|
|
|
|
|
|
|
(5.8
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
(9.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit before tax
(1)
|
|
|
|
|
|
|
|
|
|
$
|
23.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for loss and loss adjustment expenses
|
|
$
|
2,713.3
|
|
|
$
|
1,328.4
|
|
|
$
|
4,041.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
67.5
|
%
|
|
|
56.6
|
%
|
|
|
62.9
|
%
|
Policy acquisition expense ratio
|
|
|
18.5
|
|
|
|
20.1
|
|
|
|
19.2
|
|
General and administrative expense ratio
(1)(2)
|
|
|
9.5
|
|
|
|
16.8
|
|
|
|
14.8
|
|
Expense ratio
(1)
|
|
|
28.0
|
|
|
|
36.9
|
|
|
|
34.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
(1)
|
|
|
95.5
|
%
|
|
|
93.5
|
%
|
|
|
96.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The application of ASU 2010-26 has resulted in a net $1.0 million increase in the general, administrative and corporate expenses for the three months ended
September 30, 2011. For more information, refer to Note 2 of these financial statements.
|
(2)
|
The total general and administrative expense ratio includes corporate expenses.
|
15
The following tables provide a summary of gross and net written and earned premiums,
underwriting results, ratios and reserves for each of our business segments for the nine months ended September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2012
|
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
Total
|
|
|
|
($ in millions)
|
|
Underwriting Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
|
$
|
1,033.5
|
|
|
$
|
973.6
|
|
|
$
|
2,007.1
|
|
Net written premiums
|
|
|
963.2
|
|
|
|
759.3
|
|
|
|
1,722.5
|
|
Gross earned premiums
|
|
|
890.8
|
|
|
|
848.8
|
|
|
|
1,739.6
|
|
Net earned premiums
|
|
|
832.6
|
|
|
|
692.4
|
|
|
|
1,525.0
|
|
Underwriting Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
386.4
|
|
|
|
414.7
|
|
|
|
801.1
|
|
Policy acquisition expenses
|
|
|
166.8
|
|
|
|
134.4
|
|
|
|
301.2
|
|
General and administrative expenses
|
|
|
92.6
|
|
|
|
126.3
|
|
|
|
218.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
|
186.8
|
|
|
|
17.0
|
|
|
|
203.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
(40.1
|
)
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
153.8
|
|
Net realized and unrealized investment gains
|
|
|
|
|
|
|
|
|
|
|
21.1
|
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
(24.0
|
)
|
Interest expense on long term debt
|
|
|
|
|
|
|
|
|
|
|
(23.2
|
)
|
Net realized and unrealized foreign exchange (losses)
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit before tax
|
|
|
|
|
|
|
|
|
|
$
|
298.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for loss and loss adjustment expenses
|
|
$
|
2,755.1
|
|
|
$
|
1,422.9
|
|
|
$
|
4,178.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
46.4
|
%
|
|
|
59.9
|
%
|
|
|
52.5
|
%
|
Policy acquisition expense ratio
|
|
|
20.0
|
|
|
|
19.4
|
|
|
|
19.8
|
|
General and administrative expense ratio
(1)
|
|
|
11.1
|
|
|
|
18.2
|
|
|
|
17.0
|
|
Expense ratio
|
|
|
31.1
|
|
|
|
37.6
|
|
|
|
36.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
77.5
|
%
|
|
|
97.5
|
%
|
|
|
89.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The total general and administrative expense ratio includes corporate expenses.
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2011
|
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
Total
|
|
|
|
(As Adjusted, $ in millions)
|
|
Underwriting Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
|
$
|
1,001.2
|
|
|
$
|
747.9
|
|
|
$
|
1,749.1
|
|
Net written premiums
|
|
|
915.8
|
|
|
|
582.1
|
|
|
|
1,497.9
|
|
Gross earned premiums
|
|
|
878.7
|
|
|
|
704.8
|
|
|
|
1,583.5
|
|
Net earned premiums
|
|
|
819.6
|
|
|
|
579.5
|
|
|
|
1,399.1
|
|
Underwriting Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
805.2
|
|
|
|
356.3
|
|
|
|
1,161.5
|
|
Policy acquisition expenses
|
|
|
150.3
|
|
|
|
111.2
|
|
|
|
261.5
|
|
General and administrative expenses
(1)
|
|
|
78.6
|
|
|
|
94.5
|
|
|
|
173.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting (loss)/income
(1)
|
|
|
(214.5
|
)
|
|
|
17.5
|
|
|
|
(197.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
(32.1
|
)
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
171.4
|
|
Realized and unrealized investment gains
|
|
|
|
|
|
|
|
|
|
|
21.4
|
|
Change in fair value of derivatives
|
|
|
|
|
|
|
|
|
|
|
(55.7
|
)
|
Interest expense on long term debt
|
|
|
|
|
|
|
|
|
|
|
(23.1
|
)
|
Net realized and unrealized foreign exchange (losses)
|
|
|
|
|
|
|
|
|
|
|
(10.3
|
)
|
Other (expenses)
|
|
|
|
|
|
|
|
|
|
|
(10.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) before tax
(1)
|
|
|
|
|
|
|
|
|
|
$
|
(135.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for loss and loss adjustment expenses
|
|
$
|
2,713.3
|
|
|
$
|
1,328.4
|
|
|
$
|
4,041.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
98.2
|
%
|
|
|
61.5
|
%
|
|
|
83.0
|
%
|
Policy acquisition expense ratio
|
|
|
18.3
|
|
|
|
19.2
|
|
|
|
18.7
|
|
General and administrative expense ratio
(1)(2)
|
|
|
9.6
|
|
|
|
16.3
|
|
|
|
14.7
|
|
Expense ratio
(1)
|
|
|
27.9
|
|
|
|
35.5
|
|
|
|
33.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
(1)
|
|
|
126.1
|
%
|
|
|
97.0
|
%
|
|
|
116.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The application of ASU 2010-26 has resulted in a net $3.2 million increase in the general, administrative and corporate expenses for the nine months ended
September 30, 2011. For more information, refer to Note 2 of these financial statements.
|
(2)
|
The total general and administrative expense ratio includes corporate expenses.
|
17
6. Investments
Income Statement
Investment Income.
The
following table summarizes investment income for the three and nine months ended September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
|
Fixed income maturities Available for sale
|
|
$
|
43.7
|
|
|
$
|
51.0
|
|
|
$
|
136.9
|
|
|
$
|
154.0
|
|
Fixed income maturities Trading
|
|
|
4.0
|
|
|
|
4.2
|
|
|
|
12.2
|
|
|
|
12.8
|
|
Short-term investments Available for sale
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
1.8
|
|
|
|
0.8
|
|
Short-term investments Trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
Fixed term deposits (included in cash and cash equivalents)
|
|
|
1.4
|
|
|
|
2.0
|
|
|
|
4.7
|
|
|
|
4.4
|
|
Equity securities
|
|
|
1.9
|
|
|
|
1.7
|
|
|
|
5.1
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51.5
|
|
|
$
|
59.2
|
|
|
$
|
160.7
|
|
|
$
|
177.0
|
|
Investment expenses
|
|
|
(2.9
|
)
|
|
|
(1.9
|
)
|
|
|
(6.9
|
)
|
|
|
(5.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
48.6
|
|
|
$
|
57.3
|
|
|
$
|
153.8
|
|
|
$
|
171.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the net realized and unrealized investment gains and losses recorded in
the statement of operations and the change in unrealized gains and losses on investments recorded in comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
|
Available for sale short-term investments, fixed income maturities and equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
2.5
|
|
|
$
|
5.1
|
|
|
$
|
8.2
|
|
|
$
|
24.5
|
|
Gross realized (losses)
|
|
|
(0.2
|
)
|
|
|
(0.7
|
)
|
|
|
(4.9
|
)
|
|
|
(5.2
|
)
|
Trading portfolio short-term investments and fixed income maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
2.3
|
|
|
|
1.4
|
|
|
|
6.7
|
|
|
|
5.9
|
|
Gross realized (losses)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
(1.6
|
)
|
Net change in gross unrealized gains/(losses)
|
|
|
6.7
|
|
|
|
(4.8
|
)
|
|
|
12.7
|
|
|
|
(4.5
|
)
|
Impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
(3.0
|
)
|
|
|
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized and unrealized gains in Cartesian Iris Offshore Fund L.P.
|
|
|
1.7
|
|
|
|
2.3
|
|
|
|
1.7
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized and unrealized investment gains recorded in the statement of operations
|
|
$
|
10.8
|
|
|
$
|
3.2
|
|
|
$
|
21.1
|
|
|
$
|
21.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in available for sale unrealized gains/(losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income maturities
|
|
|
25.5
|
|
|
|
81.8
|
|
|
|
40.9
|
|
|
|
94.0
|
|
Short-term investments
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
|
|
Equity securities
|
|
|
6.5
|
|
|
|
(10.2
|
)
|
|
|
16.1
|
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in pre-tax available for sale unrealized gains
|
|
|
32.2
|
|
|
|
71.7
|
|
|
|
57.2
|
|
|
|
90.2
|
|
Change in taxes
|
|
|
(1.1
|
)
|
|
|
(7.9
|
)
|
|
|
(0.9
|
)
|
|
|
(7.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in unrealized gains, net of taxes recorded in other comprehensive income
|
|
$
|
31.1
|
|
|
$
|
63.8
|
|
|
$
|
56.3
|
|
|
$
|
82.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Other-than-temporary impairments.
A security is impaired when
its fair value is below its amortized cost. The Company reviews its available for sale fixed income and equity portfolios 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 Note 2 (c) of our Notes to the Audited Consolidated Financial Statements
in the Companys 2011 Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission. The total OTTI charge for the three and nine months ended September 30, 2012 was $2.1 million (2011 $Nil) and
$3.0 million (2011 $Nil), respectively.
Balance Sheet
Fixed Income Maturities, Short-Term Investments and Equities-Available For Sale.
The following tables
present the cost or amortized cost, gross unrealized gains and losses and estimated fair market value of available for sale investments in fixed maturities, short-term investments and equities as at September 30, 2012 and December 31,
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2012
|
|
|
|
Cost or
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Market
Value
|
|
|
|
($ in millions)
|
|
U.S. government
|
|
$
|
1,007.8
|
|
|
$
|
61.0
|
|
|
$
|
(0.2
|
)
|
|
$
|
1,068.6
|
|
U.S. agency
|
|
|
289.4
|
|
|
|
22.3
|
|
|
|
|
|
|
|
311.7
|
|
Municipal
|
|
|
37.2
|
|
|
|
2.7
|
|
|
|
|
|
|
|
39.9
|
|
Corporate
|
|
|
1,770.2
|
|
|
|
159.7
|
|
|
|
(0.2
|
)
|
|
|
1,929.7
|
|
FDIC guaranteed corporate
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
Non-U.S. government-backed corporate
|
|
|
135.4
|
|
|
|
3.7
|
|
|
|
|
|
|
|
139.1
|
|
Foreign government
|
|
|
600.1
|
|
|
|
28.5
|
|
|
|
(0.1
|
)
|
|
|
628.5
|
|
Asset-backed
|
|
|
58.8
|
|
|
|
5.0
|
|
|
|
|
|
|
|
63.8
|
|
Non-agency commercial mortgage-backed
|
|
|
65.7
|
|
|
|
9.9
|
|
|
|
|
|
|
|
75.6
|
|
Agency mortgage-backed
|
|
|
1,213.2
|
|
|
|
74.8
|
|
|
|
(0.1
|
)
|
|
|
1,287.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income maturities Available for sale
|
|
|
5,180.8
|
|
|
|
367.6
|
|
|
|
(0.6
|
)
|
|
|
5,547.8
|
|
Total short-term investments Available for sale
|
|
|
494.5
|
|
|
|
0.2
|
|
|
|
|
|
|
|
494.7
|
|
Total equity securities Available for sale
|
|
|
171.4
|
|
|
|
27.0
|
|
|
|
(1.3
|
)
|
|
|
197.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,846.7
|
|
|
$
|
394.8
|
|
|
$
|
(1.9
|
)
|
|
$
|
6,239.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Total 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Fixed Income Maturities and Short Term Investments Trading.
The
following tables present the cost or amortized cost, gross unrealized gains and losses, and estimated fair market value of trading investments in fixed maturities and short-term investments as at September 30, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2012
|
|
|
|
Cost or
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Market
Value
|
|
|
|
($ in millions)
|
|
U.S. government
|
|
$
|
38.1
|
|
|
$
|
0.8
|
|
|
$
|
(0.1
|
)
|
|
$
|
38.8
|
|
U.S. agency
|
|
|
1.6
|
|
|
|
0.4
|
|
|
|
|
|
|
|
2.0
|
|
Municipal
|
|
|
2.8
|
|
|
|
0.1
|
|
|
|
|
|
|
|
2.9
|
|
Corporate
|
|
|
344.5
|
|
|
|
24.0
|
|
|
|
(0.3
|
)
|
|
|
368.2
|
|
Foreign government
|
|
|
19.8
|
|
|
|
2.0
|
|
|
|
|
|
|
|
21.8
|
|
Asset-backed
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
Agency mortgage-backed
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income maturities Trading
|
|
|
408.4
|
|
|
|
27.3
|
|
|
|
(0.4
|
)
|
|
|
435.3
|
|
Total short-term investments Trading
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
419.0
|
|
|
$
|
27.3
|
|
|
$
|
(0.4
|
)
|
|
$
|
445.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Total short-term investments Trading
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
384.5
|
|
|
$
|
18.2
|
|
|
$
|
(4.2
|
)
|
|
$
|
398.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company classifies these financial instruments as held for trading as this most closely reflects the
facts and circumstances of the investments held.
In September 2012, Aspen funded a BB High Yield portfolio, an investment
portfolio investing in bonds rated BB by Standard & Poors Financial Services LLC (S&P) or Ba2 by Moodys Investors Services, Inc. (Moodys), with $60.0 million in cash. As of September 30, 2012,
the portfolio had invested $7.0 million in BB High Yield bonds.
Other Investments.
Other
investments represent the Companys 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 Companys 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.
20
In the three and nine months ended September 30, 2012, our share of gains and losses
increased the value of our investment by $1.7 million (2011 $2.3 million) and $1.7 million (2011 $2.3 million), respectively. The change in value has been recognized in realized and unrealized investment gains and losses in the
unaudited condensed consolidated statement of operations. For more information regarding our investment in Cartesian, refer to Notes to Audited Consolidated Financial Statements Investments in the Companys 2011 Annual Report
filed on Form 10-K filed with the United States Securities and Exchange Commission.
The table below shows our investment in
Cartesian for the nine months ended September 30, 2012 and twelve months ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening
Undistributed
Value of
Investment
|
|
|
Unrealized
Gain
|
|
|
Closing
Value
|
|
|
Funds
Distributed
|
|
|
Closing
Undistributed
Value of
Investment
|
|
|
|
($ in millions)
|
|
Cartesian Iris Offshore Fund L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2012
|
|
$
|
33.1
|
|
|
$
|
1.7
|
|
|
$
|
34.8
|
|
|
$
|
|
|
|
$
|
34.8
|
|
Twelve months ended December 31, 2011
|
|
$
|
30.0
|
|
|
$
|
3.1
|
|
|
$
|
33.1
|
|
|
$
|
|
|
|
$
|
33.1
|
|
Fixed Maturities.
The scheduled maturity distribution of available for sale
fixed income maturity securities as at September 30, 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 September 30, 2012
|
|
|
Amortized
Cost or Cost
|
|
|
Fair Market
Value
|
|
|
Average
Ratings by
Maturity
|
|
|
($ in millions)
|
Due one year or less
|
|
$
|
599.9
|
|
|
$
|
605.9
|
|
|
AA
|
Due after one year through five years
|
|
|
2,096.3
|
|
|
|
2,214.7
|
|
|
AA
|
Due after five years through ten years
|
|
|
1,057.2
|
|
|
|
1,190.2
|
|
|
AA
|
Due after ten years
|
|
|
89.7
|
|
|
|
109.7
|
|
|
AA
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,843.1
|
|
|
|
4,120.5
|
|
|
|
Non-agency commercial mortgage-backed
|
|
|
65.7
|
|
|
|
75.6
|
|
|
AA
|
Agency mortgage-backed
|
|
|
1,213.2
|
|
|
|
1,287.9
|
|
|
AA+
|
Other asset-backed
|
|
|
58.8
|
|
|
|
63.8
|
|
|
AAA
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income maturities Available for sale
|
|
$
|
5,180.8
|
|
|
$
|
5,547.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Gross Unrealized Loss.
The following tables summarize as at
September 30, 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 September 30, 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
|
|
$
|
49.5
|
|
|
$
|
(0.2
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
49.5
|
|
|
$
|
(0.2
|
)
|
|
|
7
|
|
Foreign government
|
|
|
19.5
|
|
|
|
|
|
|
|
7.4
|
|
|
|
(0.1
|
)
|
|
|
26.9
|
|
|
|
(0.1
|
)
|
|
|
10
|
|
Municipal
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
1
|
|
Corporate
|
|
|
43.4
|
|
|
|
(0.2
|
)
|
|
|
5.9
|
|
|
|
|
|
|
|
49.3
|
|
|
|
(0.2
|
)
|
|
|
29
|
|
Non-U.S. government-backed corporate
|
|
|
6.6
|
|
|
|
|
|
|
|
2.9
|
|
|
|
|
|
|
|
9.5
|
|
|
|
|
|
|
|
4
|
|
Agency mortgage-backed
|
|
|
9.3
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
9.3
|
|
|
|
(0.1
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income maturities Available for sale
|
|
|
129.8
|
|
|
|
(0.5
|
)
|
|
|
16.2
|
|
|
|
(0.1
|
)
|
|
|
146.0
|
|
|
|
(0.6
|
)
|
|
|
60
|
|
Total short-term investments Available for sale
|
|
|
14.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.5
|
|
|
|
|
|
|
|
8
|
|
Total equity securities Available for sale
|
|
|
29.9
|
|
|
|
(1.0
|
)
|
|
|
4.4
|
|
|
|
(0.3
|
)
|
|
|
34.3
|
|
|
|
(1.3
|
)
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
174.2
|
|
|
$
|
(1.5
|
)
|
|
$
|
20.6
|
|
|
$
|
(0.4
|
)
|
|
$
|
194.8
|
|
|
$
|
(1.9
|
)
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Investment Purchases and Sales.
The following table summarizes
investment purchases, sales and maturities for the three and nine months ended September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
|
Purchases of fixed income maturities Available for sale
|
|
$
|
351.8
|
|
|
$
|
323.7
|
|
|
$
|
1,057.1
|
|
|
$
|
1,544.6
|
|
Purchases of fixed income maturities Trading
|
|
|
73.0
|
|
|
|
57.5
|
|
|
|
187.7
|
|
|
|
335.2
|
|
Purchases of equity securities
|
|
|
12.0
|
|
|
|
10.7
|
|
|
|
41.5
|
|
|
|
185.7
|
|
(Proceeds) from sales of equity securities
|
|
|
(10.1
|
)
|
|
|
(7.0
|
)
|
|
|
(35.9
|
)
|
|
|
(12.6
|
)
|
(Proceeds) from sales and maturities of fixed income maturities Available for sale
|
|
|
(240.4
|
)
|
|
|
(348.6
|
)
|
|
|
(989.7
|
)
|
|
|
(1,398.2
|
)
|
(Proceeds) from sales and maturities of fixed income maturities Trading
|
|
|
(49.8
|
)
|
|
|
(52.2
|
)
|
|
|
(164.5
|
)
|
|
|
(356.0
|
)
|
Net change in payable/(receivable) for securities purchased /(sold)
|
|
|
22.8
|
|
|
|
(1.0
|
)
|
|
|
19.3
|
|
|
|
40.7
|
|
Net (sales)/purchases of short-term investments
|
|
|
(13.2
|
)
|
|
|
98.7
|
|
|
|
190.4
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (sales)/purchases for the period
|
|
$
|
146.1
|
|
|
$
|
81.8
|
|
|
$
|
305.9
|
|
|
$
|
346.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed Investments.
The following table presents the investments which
are guaranteed by mono-line insurers and excludes those with explicit government guarantees. The standalone rating (rating without guarantee) is determined as the senior unsecured debt rating of the issuer. Where the credit ratings were split
between the two main rating agencies, S&P and Moodys, the lowest rating was used.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30,
2012
|
|
|
As at December 31, 2011
|
|
Rating With
Guarantee
|
|
Rating without
Guarantee
|
|
Market
Value
|
|
|
Rating With
Guarantee
|
|
Rating without
Guarantee
|
|
Market
Value
|
|
($ in millions)
|
|
|
($ in millions)
|
|
BBB
|
|
BBB
|
|
$
|
0.1
|
|
|
BBB
|
|
BBB
|
|
$
|
0.5
|
|
BBB+
|
|
BBB+
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.6
|
|
|
|
|
|
|
$
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our exposure to mono-line insurers as at September 30, 2012 was limited to two municipal holdings
(2011 one municipal holding). Our exposure to other third-party guaranteed debt is primarily to investments backed by non-U.S. government guaranteed issuers.
7. 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.
The
Company considers prices for actively traded 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. As identified in the tables below, the majority of
securities are valued using prices supplied by index providers.
The Company considers prices for other securities that may
not be as actively traded which are priced via pricing services, index providers, vendors 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. As identified in the table below, these securities are also valued using prices supplied by index providers.
23
The Company considers 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.
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 September 30, 2012 and December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2012
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
|
|
($ in millions)
|
|
Available for sale financial assets, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
1,068.6
|
|
|
$
|
|
|
|
$
|
1,068.6
|
|
U.S. government agency
|
|
|
|
|
|
|
311.7
|
|
|
|
311.7
|
|
Municipal
|
|
|
|
|
|
|
39.9
|
|
|
|
39.9
|
|
Foreign government
|
|
|
466.3
|
|
|
|
162.2
|
|
|
|
628.5
|
|
Non-agency commercial mortgage-backed
|
|
|
|
|
|
|
75.6
|
|
|
|
75.6
|
|
Agency mortgage-backed
|
|
|
|
|
|
|
1,287.9
|
|
|
|
1,287.9
|
|
Asset-backed
|
|
|
|
|
|
|
63.8
|
|
|
|
63.8
|
|
Corporate
|
|
|
|
|
|
|
1,929.7
|
|
|
|
1,929.7
|
|
FDIC guaranteed corporate
|
|
|
|
|
|
|
3.0
|
|
|
|
3.0
|
|
Bonds backed by foreign government
|
|
|
|
|
|
|
139.1
|
|
|
|
139.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income maturities available for sale, at fair value
|
|
$
|
1,534.9
|
|
|
$
|
4,012.9
|
|
|
$
|
5,547.8
|
|
Short-term investments available for sale, at fair value
|
|
|
478.7
|
|
|
|
16.0
|
|
|
|
494.7
|
|
Equity investments available for sale, at fair value
|
|
|
197.1
|
|
|
|
|
|
|
|
197.1
|
|
Held for trading financial assets, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
38.8
|
|
|
$
|
|
|
|
$
|
38.8
|
|
U.S. government agency
|
|
|
|
|
|
|
2.0
|
|
|
|
2.0
|
|
Municipal
|
|
|
|
|
|
|
2.9
|
|
|
|
2.9
|
|
Foreign government
|
|
|
4.2
|
|
|
|
17.6
|
|
|
|
21.8
|
|
Agency mortgage-backed
|
|
|
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Asset-backed
|
|
|
|
|
|
|
1.3
|
|
|
|
1.3
|
|
Corporate
|
|
|
|
|
|
|
368.2
|
|
|
|
368.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income maturities trading, at fair value
|
|
$
|
43.0
|
|
|
$
|
392.3
|
|
|
$
|
435.3
|
|
Short-term investments trading, at fair value
|
|
|
10.2
|
|
|
|
0.4
|
|
|
|
10.6
|
|
Other financial assets and liabilities, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives at fair value
|
|
|
|
|
|
|
5.8
|
|
|
|
5.8
|
|
Liabilities under derivative contracts
|
|
|
|
|
|
|
(4.7
|
)
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,263.9
|
|
|
$
|
4,422.7
|
|
|
$
|
6,686.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between Level 1 and Level 2 during the nine months ended
September 30, 2012 and no assets or liabilities were classified as Level 3.
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 as at December 31, 2011.
The following
tables present a reconciliation of the beginning and ending balances for all assets measured at fair value on a recurring basis using Level 3 inputs for the nine months ended September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2011
|
|
|
|
Fixed Maturity
Investments
|
|
|
Derivatives at
Fair Value
|
|
|
Total
|
|
|
|
($ in millions)
|
|
Level 3 assets as of January 1, 2011
|
|
$
|
6.8
|
|
|
$
|
|
|
|
$
|
6.8
|
|
Total unrealized gains or (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in comprehensive income
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
(4.0
|
)
|
Included in earnings
|
|
|
4.8
|
|
|
|
|
|
|
|
4.8
|
|
Sales
|
|
|
(7.6
|
)
|
|
|
|
|
|
|
(7.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 assets as of September 30, 2011
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transactions for assets measured at fair value on a recurring basis using Level 3 inputs
during the three and nine months ended September 30, 2012 and during the three months ended September 30, 2011.
25
Fixed Maturities
. The Companys fixed income maturity
securities are classified as either available for sale or trading and carried at fair value. At September 30, 2012 and December 31, 2011, the Companys fixed income securities were valued by pricing services, index providers or
broker-dealers, using standard market conventions. The market conventions utilize market quotations, market transactions in comparable instruments and various relationships between instruments including, but not limited to, yield to maturity, dollar
prices and spread prices in determining value. The pricing sources are primarily internationally recognized independent pricing services and broker-dealers.
Independent Pricing Services and Index Providers.
The underlying methodology used to determine the fair value of securities in the Companys available for sale and
trading portfolios by the pricing services and index providers the Company uses is very similar. Pricing services will gather observable pricing inputs from multiple external sources, including buy and sell-side contacts and broker-dealers, in order
to develop their internal prices. Index providers are those firms which provide prices for a range of securities within one or more asset classes, typically using their own in-house market makers (traders) as the primary pricing source for the
indices, although ultimate valuations may also rely on other observable data inputs to derive a dollar price for all index-eligible securities. Index providers without in-house trading desks will function similarly to a pricing service in that they
will gather their observable pricing inputs from multiple external sources. All prices for the Companys securities attributed to index providers are for an individual security within the respective indices.
Pricing services and index providers, provide pricing for less complex, liquid securities based on market quotations in active markets.
Pricing services and index providers supply prices for a broad range of securities including those for actively traded securities, such as Treasury and other Government securities, in addition to those that trade less frequently or where valuation
includes reference to credit spreads, pay down and pre-pay features and other observable inputs. These securities include Government Agency, Municipals, Corporate and Asset-Backed Securities.
For securities that may trade less frequently or do not trade on a listed exchange, these pricing services and index providers may use
matrix pricing consisting of observable market inputs to estimate the fair value of a security. These observable market inputs include: reported trades, benchmark yields, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities,
bids, offers, reference data, and industry and economic factors. Additionally, pricing services and index providers may use a valuation model such as an option adjusted spread model commonly used for estimating fair values of mortgage-backed and
asset-backed securities. Neither the Company, nor its index providers, derives dollar prices using an index as a pricing input for any individual security.
Broker-Dealers.
We obtain quotes from broker-dealers who are active in the corresponding markets when prices are unavailable from independent pricing services or index
providers. Generally, broker-dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based on trade data, bids or offers, observed spreads and performance on
newly issued securities. They may also establish pricing through observing secondary trading of similar securities. Quotes from broker-dealers are non-binding.
The Company obtains prices for all of its fixed income investment securities via its third-party accounting service provider, in the majority of cases receiving a number of quotes so as to obtain the most
comprehensive information available to determine a securitys fair value. A single valuation is applied to each security based on the vendor hierarchy maintained by our third-party accounting service provider.
26
At September 30, 2012, we obtained an average of 2.8 quotes per fixed income
investment, compared to 2.6 quotes at December 31, 2011. Pricing sources used in pricing our fixed income investments at September 30, 2012 and December 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
As
at
September 30, 2012
|
|
|
As at
December 31, 2011
|
|
Index providers
|
|
|
89
|
%
|
|
|
83
|
%
|
Pricing services
|
|
|
8
|
|
|
|
15
|
|
Broker-dealers
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
A summary of securities priced using pricing information from index providers at September 30, 2012
and December 31, 2011 is provided below:
Fixed Income Maturities Available For Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Fair Market
Value Determined
using Prices from
Index Providers
|
|
|
% of Total
Fair Value by
Security Type
|
|
|
Fair Market
Value Determined
using Prices from
Index Providers
|
|
|
% of Total
Fair Value by
Security Type
|
|
|
|
($ in millions, except for percentages)
|
|
U.S. Government
|
|
$
|
1,062.7
|
|
|
|
99
|
%
|
|
$
|
932.4
|
|
|
|
100
|
%
|
U.S. Agency
|
|
|
270.1
|
|
|
|
87
|
|
|
|
238.1
|
|
|
|
81
|
|
Municipal
|
|
|
23.8
|
|
|
|
60
|
|
|
|
26.4
|
|
|
|
74
|
|
Corporate
|
|
|
1,840.6
|
|
|
|
95
|
|
|
|
1,635.0
|
|
|
|
89
|
|
FDIC Guaranteed Corporate
|
|
|
3.0
|
|
|
|
100
|
|
|
|
1.0
|
|
|
|
1
|
|
Non-U.S. Government-backed Corporate
|
|
|
88.0
|
|
|
|
63
|
|
|
|
111.3
|
|
|
|
66
|
|
Foreign Government
|
|
|
457.8
|
|
|
|
73
|
|
|
|
498.6
|
|
|
|
75
|
|
Asset-backed
|
|
|
52.7
|
|
|
|
83
|
|
|
|
37.4
|
|
|
|
61
|
|
Non-agency Commercial Mortgage-backed
|
|
|
69.1
|
|
|
|
91
|
|
|
|
2.9
|
|
|
|
3
|
|
Agency Mortgage-backed
|
|
|
1,050.1
|
|
|
|
82
|
|
|
|
1,011.6
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available for Sale
|
|
$
|
4,917.9
|
|
|
|
89
|
%
|
|
$
|
4,494.7
|
|
|
|
83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Maturities Trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Fair Market
Value Determined
using Prices from
Index Providers
|
|
|
% of Total
Fair Value by
Security Type
|
|
|
Fair Market
Value Determined
using Prices from
Index Providers
|
|
|
% of Total
Fair Value by
Security Type
|
|
|
|
($ in millions, except for percentages)
|
|
U.S. Government
|
|
$
|
38.8
|
|
|
|
100
|
%
|
|
$
|
32.3
|
|
|
|
100
|
%
|
U.S. Agency
|
|
|
2.0
|
|
|
|
100
|
|
|
|
1.8
|
|
|
|
100
|
|
Municipal
|
|
|
0.7
|
|
|
|
23
|
|
|
|
2.9
|
|
|
|
100
|
|
Corporate
|
|
|
348.5
|
|
|
|
95
|
|
|
|
322.1
|
|
|
|
92
|
|
Asset-backed
|
|
|
0.4
|
|
|
|
34
|
|
|
|
0.5
|
|
|
|
70
|
|
Agency mortgage-backed securities
|
|
|
0.3
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
Foreign Government
|
|
|
14.2
|
|
|
|
65
|
|
|
|
3.7
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Trading
|
|
$
|
404.9
|
|
|
|
93
|
%
|
|
$
|
363.3
|
|
|
|
92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company, in conjunction with its third-party accounting service provider, obtains an understanding of
the methods, models and inputs used by the third-party pricing service and index provider to assess the on-going
27
appropriateness of vendors prices. The Company and its third-party accounting service provider also have controls in place to validate that amounts provided represent fair values. Processes
to validate and review pricing include, but are not limited to:
|
|
|
quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified
and investigated);
|
|
|
|
comparison of market values obtained from pricing services, index providers and broker-dealers against alternative price sources where further
investigation is completed when significant differences exist for pricing of individual securities between pricing sources;
|
|
|
|
initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; and
|
|
|
|
comparison of the fair value estimates to our knowledge of the current market and on a sample basis against alternative internationally recognized
independent pricing sources.
|
Prices obtained from pricing services, index providers and broker-dealers are
not adjusted by us; however, prices provided by a pricing service, index provider or broker-dealer in certain instances may be challenged based on market or information available from internal sources, including those available to our third-party
investment accounting service provider. Subsequent to any challenge, revisions made by the pricing service, index provider or broker-dealer to the quotes are supplied to our investment accounting service provider.
Management reviews the vendor hierarchy maintained by our third-party accounting service provider in order to determine which price source
provides the most appropriate fair value (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy level assigned to each security in the Companys
available for sale and trading portfolios is based upon its assessment of the transparency and reliability of the inputs used in the valuation as of the measurement date. The hierarchy of index providers and pricing services is determined using
various qualitative and quantitative points arising from reviews of the vendors conducted by the Companys third-party accounting service provider. Vendor reviews include annual onsite due diligence meetings with index providers and pricing
services vendors covering valuation methodology, operational walkthroughs and legal and compliance updates. Index providers are assigned the highest priority in the pricing hierarchy due primarily to availability and reliability of pricing
information.
The Companys fixed income securities are traded on the over-the-counter market based on prices provided by
one or more market makers in each security. Securities such as U.S. Government, U.S. Agency, Foreign Government and investment grade corporate bonds have multiple market makers in addition to readily observable market value indicators such
as expected credit spread, except for Treasury securities, over the yield curve. The Company uses 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 the Companys portfolio do not use significant unobservable inputs or modeling techniques.
U.S. Government and Agency.
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 (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Bank. As the
fair values of our U.S. Treasury securities are based on unadjusted market prices in active markets, they are classified within Level 1. The fair values of U.S. government agency securities are priced using the spread above the
risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.
Foreign government.
The issuers for securities in this category are non-U.S. governments and their
agencies. The fair values of non-U.S. government bonds, primarily sourced from international indices, are based on unadjusted market prices in active markets and are therefore classified within Level 1. The fair values of the
non-U.S. agency securities, again primarily sourced from international indices, are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market
inputs, the fair values of non-U.S. agency securities are classified within Level 2.
28
Municipals.
Our municipal portfolio comprises bonds issued by
U.S. domiciled state and municipality entities. The fair value of these securities is determined using spreads obtained from broker-dealers, trade prices and the new issue market which are Level 2 inputs in the fair value hierarchy.
Consequently, these securities are classified within Level 2.
Corporate.
Corporate
securities consist primarily of U.S. and foreign corporations covering a variety of industries and are for the most part priced by index providers and pricing vendors. Some issuers may participate in the Federal Deposit Insurance Corporation
(FDIC) program or other similar non-U.S. government programs which guarantee timely payment of principal and interest in the event of a default. The fair values of these securities are generally determined using the spread above the
risk-free yield curve. Inputs used in the evaluation of these securities include credit data, interest rate data, market observations and sector news, broker-dealer quotes and trade volumes. The Company classifies these securities within
Level 2.
Mortgage-backed securities.
Our residential and commercial mortgage-backed
securities consist of bonds issued by the Government National Mortgage Association, the FNMA and the FHLMC as well as private non-agency issuers. The fair values of these securities are determined through the use of a pricing model (including Option
Adjusted Spread) which uses prepayment speeds and spreads to determine the appropriate average life of the mortgage-backed security. These spreads are generally obtained from broker-dealers, trade prices and the new issue market. As the significant
inputs used to price mortgage-backed securities are observable market inputs, these securities are classified within Level 2.
Asset-backed securities.
The underlying collateral for the Companys asset-backed securities consists mainly of student loans, automobile loans and credit card
receivables. These securities are primarily priced by index providers and pricing vendors. Inputs to the valuation process include broker-dealer quotes and other available trade information, prepayment speeds, interest rate data and credit spreads.
The Company classifies these securities within Level 2.
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 classified as either trading or available for sale and carried at estimated fair value. Short-term
investments are valued in a manner similar to the Companys fixed maturity investments and are classified within Levels 1 and 2.
Equity securities.
Equity securities include U.S. and foreign common stocks and 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.
At September 30, 2012, we obtained an average of 4.7 quotes per equity investment, compared to 4.8 quotes as at December 31, 2011. Pricing sources used in pricing our equities at
September 30, 2012 and December 31, 2011, were as follows:
|
|
|
|
|
|
|
|
|
|
|
As
at
September 30, 2012
|
|
|
As at
December 31, 2011
|
|
Index providers
|
|
|
100
|
%
|
|
|
95
|
%
|
Pricing services
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts.
The foreign currency forward contracts
which we use to mitigate currency risk are characterized as over-the-counter (OTC) due to their customized nature and the fact that they do not trade on a major exchange. These instruments trade in a very deep liquid market, providing
substantial price transparency and accordingly are classified as Level 2.
Interest rate
swaps.
The interest rate swaps which we use to mitigate interest rate risk are also characterized as OTC and are valued by the counterparty using quantitative models with multiple market inputs. The market inputs, such as
interest rates and yield curves, are observable and the valuation can be compared for reasonableness with third party pricing services. Consequently, these instruments are classified as Level 2.
29
8. Reinsurance
We purchase retrocession and reinsurance to limit and diversify the Companys 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 contracts, 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 monitors concentrations of credit risk.
The largest concentrations of reinsurance recoverables as at September 30, 2012 were with Lloyds syndicates and with Aeolus Re.
Balances with Lloyds and Aeolus Re represented 21.4% and 10.8%, respectively, of reinsurance recoverables (December 31, 2011 Lloyds 26.9% and Aeolus Re 15.8%).
9. Derivative Contracts
The following tables
summarize information on the location and amounts of derivative fair values on the consolidated balance sheet as at September 30, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 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
|
|
Liabilities under Derivative Contracts
|
|
$
|
1,000.0
|
|
|
$
|
(1.6
|
)
(1)
|
|
$
|
1,000.0
|
|
|
$
|
(2.1
|
)
(1)
|
Forward Exchange Contracts
|
|
Liabilities under Derivative Contracts
|
|
$
|
117.2
|
|
|
$
|
(3.1
|
)
|
|
$
|
|
|
|
$
|
|
|
Forward Exchange Contracts
|
|
Derivatives at Fair Value
|
|
$
|
198.6
|
|
|
$
|
5.8
|
|
|
$
|
192.4
|
|
|
$
|
1.3
|
|
(1)
|
Net of $53.8 million of cash collateral provided to counterparties as security for our net liability position (December 31, 2011 $43.7 million).
|
The following tables provide the unrealized and realized gains/(losses) recorded in earnings for the three and
nine months ended September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging
Instruments Under ASC 815
|
|
Location of Income/(Loss) Recognized in
the
Statement of Operations
|
|
Amount of Income/(Loss)
Recognized in the Statement of
Operations
|
|
|
|
Three Months Ended
|
|
|
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
|
|
|
($ in millions)
|
|
Forward Exchange Contracts
|
|
Change in Fair Value of Derivatives
|
|
$
|
3.2
|
|
|
$
|
6.1
|
|
Interest Rate Swaps
|
|
Change in Fair Value of Derivatives
|
|
$
|
(8.1
|
)
|
|
$
|
(36.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging
Instruments Under ASC 815
|
|
Location of Income/(Loss) Recognized in the
Statement of Operations
|
|
Amount of Income/(Loss)
Recognized in the Statement
of
Operations
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
|
|
|
($ in millions)
|
|
Forward Exchange Contracts
|
|
Change in Fair Value of Derivatives
|
|
$
|
(1.1
|
)
|
|
$
|
5.8
|
|
Interest Rate Swaps
|
|
Change in Fair Value of Derivatives
|
|
$
|
(22.9
|
)
|
|
$
|
(61.5
|
)
|
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 Companys assets and liabilities denominated in foreign currencies but rather allow it to establish a rate of exchange for a future point in time.
30
As at September 30, 2012, we held foreign currency derivative contracts with an
aggregate value of $315.8 million. 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 and nine months ended
September 30, 2012, the impact of foreign currency contracts on net income was a gain of $3.2 million (September 30, 2011 a gain of $6.1 million) and a charge of $1.1 million (September 30, 2011 a gain of $5.8 million),
respectively.
Interest Rate Swaps.
As at September 30, 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 October 8, 2012 and November 9, 2020. The swaps are used in the ordinary course of the
Companys investment activities to partially mitigate the negative impact of rises in interest rates on the market value of the Companys fixed income portfolio. On August 2, 2012, $27.9 million in notional amount of our interest rate
swaps terminated, as a result of which we entered into a $27.9 million notional 5-year interest rate swap with a termination date of August 2, 2017.
For the three and nine months ended September 30, 2012, there was a charge in respect of the interest rate swaps of $8.1 million (September 30, 2011 charge of $36.1 million) and a
charge of $22.9 million (September 30, 2011 charge of $61.5 million), respectively.
As at September 30, 2012,
cash collateral with a fair value of $53.8 million was transferred to the Companys counterparties to support the current valuation of the interest rate swaps (December 31, 2011 $43.7 million). As at September 30, 2012, no
non-cash collateral was transferred to the Company by its counterparties (December 31, 2011 $Nil). Transfers of cash collateral are recorded on the balance sheet within Derivatives at Fair Value, while transfers in respect of non-cash
collateral are disclosed but not recorded. As at September 30, 2012, no amount was recorded in our balance sheet for the pledged assets.
As a result of the application of derivative accounting guidance, none of the derivatives mentioned above meet the requirements for hedge accounting. Changes in the estimated fair value are therefore
included in the consolidated statement of operations.
10. Reserves for Losses and Adjustment Expenses
The following table represents a reconciliation of beginning and ending consolidated loss and loss adjustment expenses
(LAE) reserves for the nine months ended September 30, 2012 and twelve months ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2012
|
|
|
Twelve Months Ended
December 31, 2011
|
|
|
|
($ 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
|
|
|
896.5
|
|
|
|
1,648.3
|
|
Prior years
|
|
|
(95.4
|
)
|
|
|
(92.3
|
)
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
801.1
|
|
|
|
1,556.0
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE payments for claims incurred:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(186.8
|
)
|
|
|
(269.3
|
)
|
Prior years
|
|
|
(570.1
|
)
|
|
|
(712.9
|
)
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
(756.9
|
)
|
|
|
(982.2
|
)
|
|
|
|
|
|
|
|
|
|
Foreign exchange losses
|
|
|
44.0
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE reserves at period end
|
|
|
4,178.0
|
|
|
|
4,098.6
|
|
Plus reinsurance recoverable on unpaid losses at period end
|
|
|
461.6
|
|
|
|
426.6
|
|
|
|
|
|
|
|
|
|
|
Provision for losses and LAE at September 30, 2012 and December 31, 2011
|
|
$
|
4,639.6
|
|
|
$
|
4,525.2
|
|
|
|
|
|
|
|
|
|
|
31
For the nine months ended September 30, 2012, there were reductions of
$95.4 million (twelve months ended December 31, 2011 $92.3 million) 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
Managements 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 nine months ended
September 30, 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 Companys authorized and issued share capital at September 30, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 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
|
|
|
71,012,237
|
|
|
|
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
|
|
Issued preference shares of 0.15144558¢ each with a liquidation preference of $25 per share
|
|
|
6,400,000
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total issued share capital
|
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital includes the aggregate liquidation preferences of our preference shares of
$523.2 million (2011 $363.2 million) less issue costs of $15.1 million (2011 $9.6 million). The following table provides the additional paid-in capital as at September 30, 2012 and December
31, 2011:
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2012
|
|
|
As at December 31, 2011
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
|
Additional paid-in capital
|
|
$
|
1,521.9
|
|
|
$
|
1,385.0
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares.
The following table summarizes transactions in the
Companys ordinary shares during the nine-month period ended September 30, 2012:
|
|
|
|
|
|
|
Number of
Ordinary
Shares
|
|
Shares in issue at December 31, 2011
|
|
|
70,655,698
|
|
Share transactions in the nine months ended September 30, 2012:
|
|
|
|
|
Issued to the Names Trustee upon exercise of investor options (refer to Note 12)
|
|
|
116,510
|
|
Issued to employees under the 2003 share incentive plan and/or 2008 share purchase plan
|
|
|
2,021,250
|
|
Issued to non-employee directors
|
|
|
44,034
|
|
Repurchased from ordinary shareholders
|
|
|
(1,825,255
|
)
|
|
|
|
|
|
Shares in issue at September 30, 2012
|
|
|
71,012,237
|
|
|
|
|
|
|
32
Ordinary Share Repurchases
. On May 8, 2012, the Company
repurchased 69,286 ordinary shares from the Names Trust at an average price of $27.13 per ordinary share for a total amount of $1.9 million, including the costs incurred to effect the repurchases.
On May 14, 2012, the Company initiated a share repurchase program to repurchase ordinary shares on the open market. Under this
arrangement, the Company acquired and cancelled 864,634 and 1,755,969 ordinary shares for the three and nine months ended September 30, 2012, respectively. The total consideration paid was $25.0 million and $50.0 million and the average
price was $28.91 and $28.47 for the three and nine months ended September 30, 2012, respectively.
Preference Share
Issuance.
On April 11, 2012, the Company issued 6,400,000 shares of 7.250% Perpetual Non-Cumulative Preference Shares (the Preference Shares). The Preference Shares have a liquidation preference of $25 per
share. Net proceeds were $154.5 million, comprising $160.0 million of total liquidation preference less $5.5 million of issue expenses.
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 Preference 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.
12. Share Based Payments
The Company 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 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 Lloyds 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 were held for their benefit by Appleby Services (Bermuda)
Ltd. (the Names Trustee). The subscription price payable under the options was initially £10 and increased by 5.0% per annum, less any dividends paid. Option holders were not entitled to participate in any dividends
prior to exercise and would not rank as a creditor in the event of liquidation. All options were exercised prior to the expiry date of June 21, 2012.
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 three and nine months ended
September 30, 2012 (2011 Nil and Nil) and 1,165,201 and 1,221,152 options, respectively, were exercised and issued in the three
33
months and nine months ended September 30, 2012 (2011 Nil and 9,208). No charges against income were made in respect of employee options for the three and nine months ended
September 30, 2012 (2011 $Nil and $Nil).
Restricted share units (RSUs) 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 of Directors agrees to
deliver them. The fair value of the RSUs 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 and nine months ended September 30, 2012,
the Company granted to employees Nil and 345,852 RSUs, respectively (2011 36,695 and 166,445). In the case of non-employee directors, one-twelfth of the RSUs vest on each one month anniversary of the date of grant, with 100% of the RSUs
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 RSUs for the non-employee directors (February 9,
2011 23,408) and 17,705 RSUs to the Chairman (February 9, 2011 16,722). Compensation costs charged against income in respect of RSUs for the three and nine months ended September 30, 2012 were $1.8 million and
$5.8 million, respectively (2011 $0.7 million and $4.0 million) with a fair value adjustment in the three and nine months ended September 30, 2012 of $0.2 million and $0.2 million, respectively (2011 $Nil and $Nil).
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 (February 9, 2011 853,223; March 21, 2011 31,669; May 2, 2011 5,902). 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, adjusted to add back ordinary dividends to shareholders equity at the end of the relevant 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 Companys 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 years 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 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 due to 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 and nine months ended September 30, 2012 in respect of performance shares were $3.3 million and $9.9 million, respectively (2011 $Nil and $Nil).
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.
34
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 and nine months ended September 30, 2012 in respect of phantom
shares were $0.5 million and $1.6 million (2011 $Nil and $Nil), respectively, with a fair value adjustment in the three and nine months ended September 30, 2012 of $0.2 million and $0.2 million (2011 $Nil and $Nil),
respectively.
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
of Directors. 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, subject to a further one year holding period. 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, 200 and 59,184 ordinary shares were issued during the three and nine
months ended September 30, 2012, respectively (2011 1,174 shares and 42,538 shares). Compensation costs charged against income in the three and nine months ended September 30, 2012 in respect of the ESPP were $Nil and
$Nil, respectively (2011 $0.1 million and $0.4 million).
13. Intangible Assets
The following table provides a summary of the Companys intangible assets for the three months and nine months
ended September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012
|
|
|
Three Months Ended September 30, 2011
|
|
|
|
Trade
Mark
|
|
|
Insurance
Licenses
|
|
|
Other
|
|
|
Total
|
|
|
Trade
Mark
|
|
|
Insurance
Licenses
|
|
|
Other
|
|
|
Total
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
|
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of the period
|
|
$
|
1.6
|
|
|
$
|
16.6
|
|
|
$
|
1.3
|
|
|
$
|
19.5
|
|
|
$
|
1.5
|
|
|
$
|
16.6
|
|
|
$
|
2.4
|
|
|
$
|
20.5
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of the period
|
|
$
|
1.6
|
|
|
$
|
16.6
|
|
|
$
|
1.0
|
|
|
$
|
19.2
|
|
|
$
|
1.5
|
|
|
$
|
16.6
|
|
|
$
|
2.2
|
|
|
$
|
20.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2012
|
|
|
Nine Months Ended September 30, 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
|
|
|
$
|
1.5
|
|
|
$
|
16.6
|
|
|
$
|
2.9
|
|
|
$
|
21.0
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of the period
|
|
$
|
1.6
|
|
|
$
|
16.6
|
|
|
$
|
1.0
|
|
|
$
|
19.2
|
|
|
$
|
1.5
|
|
|
$
|
16.6
|
|
|
$
|
2.2
|
|
|
$
|
20.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 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 September 30, 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.
35
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 September 30, 2012 was $1.0 million (December 31, 2011 $1.8 million).
14. Commitments and Contingencies
The
Company is obliged by the terms of its contractual obligations to U.S. policyholders and by obligations to certain regulatory authorities, to facilitate issue of letters of credit or maintain certain balances in trust funds for the benefit of
policyholders.
The following table details the forms and value of Companys restricted assets as at September 30,
2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
As at
September 30,
2012
|
|
|
As at
December 31,
2011
|
|
|
|
($ in millions, except percentages)
|
|
Regulatory trusts and deposits:
|
|
|
|
|
|
|
|
|
Affiliated transactions
|
|
$
|
466.4
|
|
|
$
|
447.4
|
|
Third party
|
|
|
1,789.4
|
|
|
|
1,682.3
|
|
Letters of credit / guarantees
|
|
|
1,193.6
|
|
|
|
1,374.1
|
|
|
|
|
|
|
|
|
|
|
Total restricted assets
|
|
$
|
3,449.4
|
|
|
$
|
3,503.8
|
|
|
|
|
|
|
|
|
|
|
Total as percent of cash and invested assets
|
|
|
42.6
|
%
|
|
|
46.3
|
%
|
|
|
|
|
|
|
|
|
|
Funds at Lloyds.
AUL operates at Lloyds as the corporate member
for Syndicate 4711. Lloyds determines Syndicate 4711s required regulatory capital principally through the syndicates annual business plan. Such capital, called Funds at Lloyds, comprises: cash, investments and a fully
collateralized letter of credit. The fully collateralized letter of credit has been provided by AUL and is disclosed in the above table as affiliated balance.
The amounts provided as Funds at Lloyds 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 Lloyds is not available for distribution to the Company for the payment of dividends. Aspen Managing Agency Limited is
also required by Lloyds to maintain a minimum level of capital which as at September 30, 2012 was £0.4 million (December 31, 2011 £0.6 million). This is not available for distribution by the Company
for the payment of dividends.
Interest rate swaps.
As at September 30, 2012, cash
collateral with a fair value of $53.8 million was transferred to the Companys counterparties to support the current valuation of the interest rate swaps (December 31, 2011 $43.7 million). For more information, please refer to
Note 9 of these financial statements.
Amounts
outstanding under operating leases net of subleases as of September 30, 2012 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Later
Years
|
|
|
Total
|
|
|
|
($ in millions)
|
|
Operating Lease Obligations
|
|
$
|
4.0
|
|
|
$
|
10.2
|
|
|
$
|
9.9
|
|
|
$
|
9.8
|
|
|
$
|
7.0
|
|
|
$
|
14.4
|
|
|
$
|
55.3
|
|
|
(c)
|
Variable interest entities
|
As at September 30, 2012, the Company had one investment in a variable interest entity, Cartesian Iris Offshore Fund L.P., as
disclosed in Note 6 of these financial statements.
36
15. Subsequent events
On September 11, 2012, the Company announced the conditional appointment of Mr. John Worth as Chief Financial
Officer of the Company, subject to certain regulatory approvals. Such regulatory approvals were subsequently obtained and Mr. Worth was appointed as Chief Financial Officer of the Company effective November 1, 2012. As of such date,
Mr. Julian Cusack stepped down as the Interim Chief Financial Officer of the Company and resumed his role as Chief Risk Officer. For more information, please refer to the Companys Current Report on Form 8-K filed with the United States
Securities and Exchange Commission on September 11, 2012.
As at September 30, 2012, the Company had $142.4 million
remaining under its current share repurchase authorization. On October 24, 2012, the Companys Board of Directors approved a new share repurchase authorization for up to $400.0 million of outstanding ordinary shares. The share repurchase
authorization replaces the previous authorization and permits the Company to effect the repurchases from time to time through a combination of transactions, including open market repurchases, privately negotiated transactions and accelerated share
repurchase transactions.
On October 8, 2012, $26.5 million in notional amount of our interest rate swaps terminated, as a
result of which we entered into a $26.5 million notional 5-year interest rate swap with a termination date of October 8, 2017.
On October 29, 2012, a large storm system (Hurricane Sandy) made landfall in the Northeast of the U.S. and caused substantial wind and flood damage over a wide area. The Company is assessing its
potential claims relating to these events; the information available was not sufficient to support a reliable loss estimate at the date of filing.
37
|
|
|
|
|
|
|
|
|
|
|
As at
September 30, 2012
|
|
|
As at
December 31, 2011
|
|
|
|
($ in millions, except for share amounts)
|
|
Total shareholders equity
(1)
|
|
$
|
3,554.2
|
|
|
$
|
3,156.0
|
|
Preference shares less issue expenses
|
|
|
(508.1
|
)
|
|
|
(353.6
|
)
|
|
|
|
|
|
|
|
|
|
Net assets attributable to ordinary shareholders
(1)
|
|
$
|
3,046.1
|
|
|
$
|
2,802.4
|
|
|
|
|
|
|
|
|
|
|
Issued ordinary shares
|
|
|
71,012,237
|
|
|
|
70,655,698
|
|
Issued and potentially dilutive ordinary shares
|
|
|
73,341,200
|
|
|
|
73,355,674
|
|
(1)
|
In 2012, 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 September 11, 2012, we announced the conditional appointment of Mr. John Worth as Chief Financial Officer of the Company,
subject to certain regulatory approvals. Such regulatory approvals were subsequently obtained and Mr. Worth was appointed as Chief Financial Officer effective November 1, 2012. As of such date, Mr. Julian Cusack stepped down as the
Interim Chief Financial Officer of the Company and resumed his role as Chief Risk Officer. For more information, please refer to the Companys Current Report on Form 8-K filed with the United States Securities and Exchange Commission on
September 11, 2012.
As at September 30, 2012, we had $142.4 million remaining under our current share repurchase
authorization. On October 24, 2012, our Board of Directors approved a new share repurchase authorization for up to $400.0 million of outstanding ordinary shares. The share repurchase authorization replaces the previous authorization and permits
us to effect the repurchases from time to time through a combination of transactions, including open market repurchases, privately negotiated transactions and accelerated share repurchase transactions.
On October 8, 2012, $26.5 million in notional amount of our interest rate swaps terminated, as a result of which we entered into a
$26.5 million notional 5-year interest rate swap with a termination date of October 8, 2017.
On October 29, 2012, a
large storm system (Hurricane Sandy) made landfall in the Northeast of the U.S. and caused substantial wind and flood damage over a wide area. We are assessing our potential claims relating to these events; the information available was not
sufficient to support a reliable loss estimate at the date of filing.
Outlook and Trends
Overall
. For the first nine months of 2012, we achieved an average rate increase of 4.0% on renewals, with
5.0% in reinsurance and 3.0% in insurance. Currently, the U.S. primary insurance market is achieving the most promising rate increases across most lines. In general, these increases are flowing through to the U.S. reinsurance markets. The U.K. and
international markets continue to have downward rate pressure particularly in those areas with sustained low loss activity.
Reinsurance.
In casualty reinsurance, the market remains challenging but we have achieved a 2.0% rate
increase year to date. In the U.S., we are seeing several indicators of potentially positive market changes. Specifically, the casualty excess and surplus lines market continues to show positive momentum with underlying price increases in the
mid-single digits. For international casualty, however, the rate environment continues to be challenging.
39
For specialty reinsurance, outside of loss affected markets and territories, rates are
generally flat. The established markets remain disciplined with relatively stable rates while the more profitable niche lines such as credit and surety are attracting more capacity which is causing downward rate pressure. Our crop reinsurance
business is written within specialty reinsurance, where most of our exposures are outside of the U.S. We are actively monitoring the market to see if rates rise to a level where we view the return for underwriting U.S. crop as attractive. If that is
the case we may decide to build our U.S. crop position in the future.
Catastrophe reinsurance, although well priced, is not
experiencing the same upwards pressure on price as we have seen in the last two years. In the past, we have seen upwards price pressure as a result of changes to modelled insurance exposures in the U.S. and to non-U.S. catastrophe losses but this
upwards pressure has now subsided. There are signs that new capacity in the market is focused on U.S. peak zone exposure and particularly retrocession products causing downwards price pressure in those specific markets. Looking toward the
January 1, 2013 renewal season, for reinsurance we expect stable rates for the U.S., with U.S. peak zone and retrocession being the two products most likely to experience rate pressure.
Insurance.
In our insurance segment, there continue to be rate increases in marine hull and marine
liability reflecting both some loss activity and in general disciplined competition. Geographically, the U.S. primary insurance markets are the most encouraging while Continental Europe continues to lag behind and the U.K. remains very challenging.
For our property insurance business, we achieved an overall average rate increase of 5.0% with U.S. property achieving
average rate increases of 7.0%.
Our casualty lines in total achieved a modest rate increase of 2.0% for the first nine months
of 2012. There are definitely signs of strength in the U.S. where rates have increased 9.0% on average in the first nine months. Specifically, the U.S. excess and surplus lines casualty insurance market is seeing encouraging indications of firming,
with improvement in rates as well as terms and conditions. Standard lines carriers are becoming more focused and releasing a number of risks to the excess and surplus lines markets, with which we are pleased as we are well placed to write such risks
but at better prices, with higher deductibles and lower limits. While it is not a hard market, it is showing steady and encouraging price increases.
Real estate, construction, hospitality, energy and certain difficult products are examples of classes that have seen an increase in submission flow back to the surplus lines market. In our excess
casualty account, where competition has reduced and the market is firming, we are attaining 5.0% price increases on average. The U.K. liability insurance market remains challenging in general. Yet, there are some distressed risks and risks with poor
claims experiences which are being re-rated by the current market and providing us with some encouraging opportunities. We have also been able to write some new business in the Irish liability market as a result of improving conditions.
Investments.
In September, we began to build a new BB High Yield portfolio focused on the U.S. corporate
market. Recognizing that yields and spreads are close to record lows it is our intention to tactically build the position over a one to two-year period. These assets are expected to provide higher returns in return for greater risk of default and
lower liquidity. Our investment guidelines permit us to invest up to 5.0% of our aggregate portfolio in BB-rated securities.
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 require management to make significant estimates and assumptions. 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 insurance reserves, 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
40
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 policies with our Board of Directors
and Audit Committee.
Results of Operations for the Three Months Ended September 30, 2012 Compared to the Three Months Ended
September 30, 2011
The following is a discussion and analysis of our consolidated results of operations for the three
months ended September 30, 2012 and 2011, starting with a summary of our consolidated results and followed by a segmental analysis.
Total Income Statement
Our statements of operations consolidate the underwriting results of our two business segments and include certain other revenue and
expense items that are not allocated to segments.
Gross written premiums.
Total gross written
premiums increased by $62.8 million, or 12.7%, in the third quarter of 2012 compared to the third quarter of 2011 due predominantly to growth in our insurance segment which was mainly attributable to continued development of our U.S. based
insurance operations. The table below shows our gross written premiums for each segment for the three months ended September 30, 2012 and 2011, and the percentage change in gross written premiums for each segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segment
|
|
Three Months Ended
September 30, 2012
|
|
|
Three Months Ended
September 30, 2011
|
|
|
% increase/
(decrease)
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
|
|
|
|
Reinsurance
|
|
$
|
259.5
|
|
|
$
|
276.1
|
|
|
|
(6.0
|
)%
|
Insurance
|
|
|
298.9
|
|
|
|
219.5
|
|
|
|
36.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
558.4
|
|
|
$
|
495.6
|
|
|
|
12.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance ceded.
Total reinsurance ceded for the quarter of
$51.3 million increased by $18.3 million from the third quarter of 2011 mainly due to differences in the timing of cover purchased in our insurance segment and additional reinsurance costs associated with the growth in our U.S. insurance
operations.
Gross premiums earned.
Gross premiums earned in the third quarter of 2012 increased
by 9.4% from the third quarter of 2011 lagging behind the increase in gross written premiums due to the timing of new business being written.
Losses and loss adjustment expenses.
The loss ratio for the quarter of 49.4% decreased by 13.5 percentage points compared to the third quarter of 2011. The decrease is
primarily due to the absence of major catastrophe losses in the current period compared to the comparative period.
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 September 30, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
Business Segment
|
|
Three Months Ended
September 30, 2012
|
|
|
Three Months Ended
September 30, 2011
|
|
Reinsurance
|
|
|
41.9
|
%
|
|
|
67.5
|
%
|
Insurance
|
|
|
58.3
|
|
|
|
56.6
|
|
Total Loss Ratio
|
|
|
49.4
|
%
|
|
|
62.9
|
%
|
41
We also present, in the table below, loss ratios excluding the impact from major catastrophe
losses to assist in the analysis of the underlying performance of our segments. For this purpose, we have defined major 2012 catastrophe losses as losses associated with the severe weather in the U.S. in February and March 2012 and Hurricane Isaac
in August 2012 and movements in losses associated with the 2011 catastrophe events. We have defined major catastrophe losses in the comparative period as losses associated with Hurricane Irene in the third quarter of 2011, the U.S. storms in the
second quarter of 2011, the Australian floods and the New Zealand and Japanese earthquakes in the first quarter of 2011, and movements in losses associated with the 2010 catastrophe events (the Chilean and New Zealand earthquakes) which were
recognized in the third quarter of 2011.
The underlying changes in loss ratios by segment are shown in the table below. The
total loss ratio represents the calendar year U.S. GAAP loss ratio. The current year adjustments represent catastrophe loss events which reflect net claims and related reinstatement premium adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2012
|
|
Total Loss
Ratio
|
|
|
Current Year
Adjustments
|
|
|
Loss
Ratio Excluding
Current Year
Adjustments
|
|
Reinsurance
|
|
|
41.9
|
%
|
|
|
(0.3
|
)%
|
|
|
41.6
|
%
|
Insurance
|
|
|
58.3
|
|
|
|
(0.6
|
)
|
|
|
57.7
|
|
Total
|
|
|
49.4
|
%
|
|
|
(0.4
|
)%
|
|
|
49.0
|
%
|
|
|
|
|
For the Three Months Ended September 30, 2011
|
|
Total Loss
Ratio
|
|
|
Current Year
Adjustments
|
|
|
Loss
Ratio Excluding
Current Year
Adjustments
|
|
Reinsurance
|
|
|
67.5
|
%
|
|
|
(17.8
|
)%
|
|
|
49.7
|
%
|
Insurance
|
|
|
56.6
|
|
|
|
(1.8
|
)
|
|
|
54.8
|
|
Total
|
|
|
62.9
|
%
|
|
|
(11.1
|
)%
|
|
|
51.8
|
%
|
Reserve releases in our reinsurance segment increased from $11.7 million in the third quarter of 2011 to
$22.0 million in the current period. Favorable development in other property and specialty reinsurance lines was the main contributor to the release. The insurance segment had a $7.8 million reserve release this quarter, mainly from the
shorter-tail lines, compared to a $3.9 million reserve release in the third quarter of 2011.
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 September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2012
|
|
|
Three Months Ended
September 30, 2011
(2)
|
|
Ratios Based on Gross Earned Premium
|
|
Reinsurance
|
|
|
Insurance
|
|
|
Total
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
Total
|
|
Policy acquisition expense ratio
|
|
|
18.6
|
%
|
|
|
15.7
|
%
|
|
|
17.1
|
%
|
|
|
17.1
|
%
|
|
|
16.9
|
%
|
|
|
17.0
|
%
|
General and administrative expense ratio
(1)(2)
|
|
|
11.2
|
|
|
|
14.2
|
|
|
|
15.1
|
|
|
|
8.8
|
|
|
|
14.1
|
|
|
|
13.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expense ratio
|
|
|
29.8
|
|
|
|
29.9
|
|
|
|
32.2
|
|
|
|
25.9
|
|
|
|
31.0
|
|
|
|
30.1
|
|
Effect of reinsurance
|
|
|
2.1
|
|
|
|
8.2
|
|
|
|
5.4
|
|
|
|
2.1
|
|
|
|
5.9
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net expense ratio
|
|
|
31.9
|
%
|
|
|
38.1
|
%
|
|
|
37.6
|
%
|
|
|
28.0
|
%
|
|
|
36.9
|
%
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The total group general and administrative expense ratio includes corporate expenses.
|
(2)
|
In 2012, 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.
|
42
General, administrative and corporate expenses increased by $18.7 million for the
quarter compared to the third quarter of 2011 due principally to increases in accruals for performance-related compensation.
Net investment income.
Net investment income for the quarter of $48.6 million decreased by 15.2% compared
to $57.3 million in the third quarter of 2011 due to the continuing decline in our reinvestment rate over the last twelve months which reflects lower yields on investment grade fixed income securities.
Change in fair value of derivatives.
In the three months ended September 30, 2012, we recorded a loss
of $8.1 million (2011 loss of $36.1 million) in respect of interest rate swaps due to falling interest rates and a gain of $3.2 million (2011 $6.1 million gain) in respect of forward currency contracts.
Other-than-temporary impairments.
A security is impaired when its fair value is below its cost or amortized
cost. The Company reviews its investment portfolio on an individual security basis for potential OTTI each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions. The total
OTTI charge for the three months ended September 30, 2012 was $2.1 million and related entirely to our equity portfolio (2011 $Nil). For a more detailed description of OTTI, please refer to Part II, Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations in the Companys 2011 Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission.
Income before tax.
In the third quarter of 2012, income before tax was $123.1 million (2011
$23.2 million) comprising the amounts set out in the table below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2012
|
|
|
Three Months Ended
September 30, 2011
|
|
Underwriting income
|
|
$
|
67.4
|
|
|
$
|
15.3
|
|
Other income/(expenses)
|
|
|
4.5
|
|
|
|
(9.1
|
)
|
Net investment income
|
|
|
48.6
|
|
|
|
57.3
|
|
Change in fair value of derivatives
|
|
|
(4.9
|
)
|
|
|
(30.0
|
)
|
Investment and foreign exchange gains/(losses)
|
|
|
15.3
|
|
|
|
(2.6
|
)
|
Interest expense
|
|
|
(7.8
|
)
|
|
|
(7.7
|
)
|
|
|
|
|
|
|
|
|
|
Income before tax
|
|
$
|
123.1
|
|
|
$
|
23.2
|
|
|
|
|
|
|
|
|
|
|
Taxes.
Income tax expense for the three months ended September 30,
2012 was $8.0 million (2011 $2.0 million). The estimated effective rate of tax for the quarter was 6.5% (2011 8.6%). The effective rate represents an estimate of the tax rate which will apply to our pre-tax income
for 2012 including adjustments to prior period 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 the corporate tax rate was reduced from 26% to 24% 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 September 30, 2012 was
$115.1 million, equivalent to a $1.50 basic earnings per ordinary share adjusted for the $8.6 million preference share dividends and fully diluted earnings per ordinary share of $1.45. Net income after tax for the three months ended
September 30, 2011 was $21.2 million, equivalent to basic earnings per ordinary share of $0.22 adjusted for the $5.7 million preference share dividend and fully diluted earnings per ordinary share of $0.21.
Investment gains
. Realized and unrealized gains included $1.4 million (2011
$5.9 million) of net realized gains from the fixed income available for sale portfolio, $2.2 million (2011 $1.3 million) of net realized gains from our fixed income trading portfolio, $6.7 million net unrealized gains
(2011 $4.8 million unrealized loss) from our fixed income trading portfolio, $0.9 million (2011 $1.5 million loss) of net realized losses from our equity investments and $1.7 million (2011 $2.3 million)
realized gains from our investment in Cartesian.
43
Other comprehensive income includes an increase of $32.2 million (2011 $69.0
million), net of taxes, in the unrealized gains from the available for sale portfolio which is largely attributable to lower yields during the quarter.
Dividends.
As announced in April 2012, the Board of Directors approved an increase in the dividend on our ordinary shares from $0.15 per ordinary share to $0.17 per ordinary
share for the quarter. Dividends paid on our preference shares in the three months ended September 30, 2012 were $8.6 million (2011 $5.7 million).
Underwriting Results by Operating Segments Third Quarter
We are
organized into two business segments: Reinsurance and Insurance. The reinsurance segment consists of property catastrophe reinsurance, other property reinsurance, casualty reinsurance and specialty reinsurance. The insurance segment consists of
property insurance, casualty insurance, marine, energy and transportation insurance and financial and professional lines insurance.
We have provided additional disclosures for corporate and other (non-underwriting) income and expenses in Note 5 of our unaudited financial statements. Corporate and other income includes net
investment income, net realized and unrealized investment gains or losses, corporate expenses, interest expense, net realized and unrealized foreign exchange gains or losses and income taxes, none of which are allocated to the business segments.
Please refer to the tables in Note 5 in our unaudited financial statements of this report for a summary of gross and net
written and earned premiums, underwriting results and combined ratios and reserves for our two business segments for the three months ended September 30, 2012 and 2011.
The contributions of each segment to gross written premiums in the three months ended September 30, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
Business Segment
|
|
Three Months Ended
September 30, 2012
|
|
|
Three Months Ended
September 30, 2011
|
|
|
|
(% of total gross written premiums)
|
|
Reinsurance
|
|
|
46.5
|
%
|
|
|
55.7
|
%
|
Insurance
|
|
|
53.5
|
|
|
|
44.3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
Business Segment
|
|
Three Months Ended
September 30, 2012
|
|
|
Three Months Ended
September 30, 2011
|
|
|
|
($ in millions)
|
|
Reinsurance
|
|
$
|
259.5
|
|
|
$
|
276.1
|
|
Insurance
|
|
|
298.9
|
|
|
|
219.5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
558.4
|
|
|
$
|
495.6
|
|
|
|
|
|
|
|
|
|
|
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 other specialty). For a more detailed description of this segment, see Part I, Item 1, Business Business Segment Reinsurance
in the Companys 2011 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission.
44
Gross written premiums.
Gross written premiums in our
reinsurance segment decreased by 6.0% compared to the three months ended September 30, 2011.
The table below shows our
gross written premiums for each line of business for the three months ended September 30, 2012 and 2011, and the percentage change in gross written premiums for each such line:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of Business
|
|
Three Months Ended
September 30, 2012
|
|
|
Three Months Ended
September 30, 2011
|
|
|
% increase/
(decrease)
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
|
|
|
|
Property catastrophe reinsurance
|
|
$
|
42.7
|
|
|
$
|
53.5
|
|
|
|
(20.2
|
)%
|
Other property reinsurance
|
|
|
92.6
|
|
|
|
78.6
|
|
|
|
17.8
|
|
Casualty reinsurance
|
|
|
76.3
|
|
|
|
83.4
|
|
|
|
(8.5
|
)
|
Specialty reinsurance
|
|
|
47.9
|
|
|
|
60.6
|
|
|
|
(21.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
259.5
|
|
|
$
|
276.1
|
|
|
|
(6.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in gross written premiums has arisen mainly from the casualty reinsurance and property
catastrophe business lines.
The reduction in property catastrophe reinsurance in the third quarter of 2012 relates to
reduction in exposures where the pricing did not meet our profitability requirements. Casualty reinsurance gross written premiums for the quarter decreased by 8.5% year on year, due principally to the inclusion in the third quarter of 2011 of
significant premium adjustments in respect of prior years and policy commutations.
The increase in other property is due to
increased pro rata business and positive pricing momentum in catastrophe-exposed accounts and the reduction in premiums from specialty reinsurance is due to planned reductions in our structured risks business.
Losses and loss adjustment expenses.
The loss ratio for the three months ended September 30, 2012 was
41.9% compared to 67.5% in the equivalent period in 2011. The decrease in the loss ratio is primarily attributable to the lack of catastrophe losses in the current quarter while the comparable quarter of 2011 experienced losses of $51.8 million due
to deterioration in loss estimates for the Japanese earthquake and tsunami and deterioration in the U.S. storm loss estimates. There was a $10.3 million increase in prior year reserve releases from $11.7 million in the third quarter of 2011 to
$22.0 million in the current period. Reserve releases for the quarter were mainly as a result of favorable development in the other property and specialty lines.
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
$55.7 million for the three months ended September 30, 2012 equivalent to 19.9% of net premiums earned (2011 $51.8 million or 18.5% of net premiums earned). The increase in the acquisition expense ratio is due to increased
profit commission accruals in our specialty and casualty lines. The increase in general and administrative expenses of $6.9 million compared to the third quarter of 2011 is mainly attributable to higher accrued performance-related compensation.
Insurance
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 Companys 2011 Annual Report on Form 10-K filed with the United
States Securities and Exchange Commission.
Gross written premiums.
Overall premiums increased
by 36.2% to $298.9 million for the quarter from $219.5 million in the equivalent period in 2011.
45
The table below shows our gross written premiums for each line of business for the three
months ended September 30, 2012 and 2011, and the percentage change in gross written premiums for each line:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of Business
|
|
Three Months Ended
September 30, 2012
|
|
|
Three Months Ended
September 30, 2011
|
|
|
% increase/
(decrease)
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
|
|
|
|
Property insurance
|
|
$
|
76.5
|
|
|
$
|
42.5
|
|
|
|
80.0
|
%
|
Casualty insurance
|
|
|
56.4
|
|
|
|
38.1
|
|
|
|
48.0
|
|
Marine, energy and transportation insurance
|
|
|
102.2
|
|
|
|
70.5
|
|
|
|
45.0
|
|
Financial and professional lines insurance
|
|
|
63.8
|
|
|
|
68.4
|
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
298.9
|
|
|
$
|
219.5
|
|
|
|
36.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in gross written premium is mainly attributable to our U.S. property and program business
and to the continued development of our U.S. casualty lines, in particular our U.S. professional and management liability accounts. The program business is mainly included in the property and casualty sub-totals. The growth in marine, energy
and transportation premium includes some positive prior year and loss related premiums adjustments and increased aviation insurance premiums due to difference in year on year seasonalization.
Losses and loss adjustment expenses.
The loss ratio for the quarter was 58.3% compared to 56.6% for the
three months ended September 30, 2011. The increase in the loss ratio for the quarter is mainly due to a number of fire losses in our U.S. property account offset by a $7.8 million prior year reserve release in the current quarter compared
to a $3.9 million reserve release in the third quarter of 2011 and to a change in our business mix.
The release in the
current quarter was due primarily to favorable development in shorter-tail lines including property, energy physical damage and aviation, but partially offset by some strengthening in marine, energy and construction liability. The comparative
quarter in 2011 had a smaller release due to offsetting reserve strengthening in our financial and professional lines.
Policy acquisition, general and administrative expenses.
Policy acquisition expenses for the three months
ended September 30, 2012 were 20.0% of net premiums earned and did not materially change compared to 20.1% in the third quarter of 2011. The increase of $7.9 million in our general and administrative expenses is mainly associated with
higher performance-related compensation accruals and the continued build out of our U.S. and U.K. operations.
Results of Operations
for the Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011
The following
is a discussion and analysis of our consolidated results of operations for the nine months ended September 30, 2012 and 2011, starting with a summary of our consolidated results and followed by a segmental analysis.
Total Income Statement
Our statements of operations consolidate the underwriting results of our two segments and include certain other revenue and expense items
that are not allocated to the business segments.
Gross written premiums.
Total gross written
premiums increased by 14.8% in the first nine months of 2012 when compared to 2011 due predominantly to the continued development of our U.S. insurance platform. The table below shows our gross written premiums for each segment for the nine
months ended September 30, 2012 and 2011, and the percentage change in gross written premiums for each segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segment
|
|
Nine Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2011
|
|
|
% increase
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
|
|
|
|
Reinsurance
|
|
$
|
1,033.5
|
|
|
$
|
1,001.2
|
|
|
|
3.2
|
%
|
Insurance
|
|
|
973.6
|
|
|
|
747.9
|
|
|
|
30.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,007.1
|
|
|
$
|
1,749.1
|
|
|
|
14.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Reinsurance ceded.
Total reinsurance ceded for the nine months
of 2012 was $284.6 million, an increase of $33.4 million from the first nine months of 2011. Ceded reinsurance premiums have increased for the insurance segment in line with increases in gross written premiums.
Gross premiums earned.
Gross premiums earned in the nine months of 2012 increased by 9.9% from the first
nine months of 2011, lagging behind the increase in gross written premiums as a consequence of increases in unearned premiums.
Losses and loss adjustment expenses.
The loss ratio for the nine months of 2012 of 52.5% decreased by 30.5
percentage points compared to the first nine months year of 2011. The decrease is primarily due to a reduction in net losses from major natural catastrophes from $429.1 million in 2011 to $30.5 million in 2012.
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 nine months ended September 30, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
Business Section
|
|
Nine Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2011
|
|
Reinsurance
|
|
|
46.4
|
%
|
|
|
98.2
|
%
|
Insurance
|
|
|
59.9
|
|
|
|
61.5
|
|
Total Loss Ratio
|
|
|
52.5
|
%
|
|
|
83.0
|
%
|
We also present, in the table below, loss ratios excluding the impact from major catastrophe losses to
assist in the analysis of the underlying performance of our segments. For this purpose, we have defined major 2012 catastrophe losses as losses associated with the severe weather in the U.S. in February and March 2012 and Hurricane Isaac in August
2012 and movements in losses associated with the 2011 catastrophe events. We have defined major catastrophe losses in the comparative period as losses associated with the U.S. storms (specifically related to Hurricane Irene which occurred in the
third quarter of 2011, and related to the tornadoes in the second quarter of 2011) in addition to losses associated with the Australian floods and New Zealand and Japanese earthquakes which occurred in the first quarter of 2011, and movements in
losses associated with the 2010 catastrophe events (the Chilean and New Zealand earthquakes) which were recognized in the first nine months of 2011.
The underlying changes in loss ratios by segment are shown in the table below. The total loss ratio represents the calendar year U.S. GAAP loss ratio. The current year adjustments represent catastrophe
loss events which reflect net claims and reinstatement premium adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2012
|
|
Total Loss
Ratio
|
|
|
Current Year
Adjustments
|
|
|
Loss
Ratio Excluding
Current Year
Adjustments
|
|
Reinsurance
|
|
|
46.4
|
%
|
|
|
(2.6
|
)%
|
|
|
43.8
|
%
|
Insurance
|
|
|
59.9
|
|
|
|
(1.4
|
)
|
|
|
58.5
|
|
Total
|
|
|
52.5
|
%
|
|
|
(2.1
|
)%
|
|
|
50.4
|
%
|
|
|
|
|
For the Nine Months Ended September 30, 2011
|
|
Total Loss
Ratio
|
|
|
Current Year
Adjustments
|
|
|
Loss
Ratio Excluding
Current Year
Adjustments
|
|
Reinsurance
|
|
|
98.2
|
%
|
|
|
(48.5
|
)%
|
|
|
49.7
|
%
|
Insurance
|
|
|
61.5
|
|
|
|
(2.2
|
)
|
|
|
59.3
|
|
Total
|
|
|
83.0
|
%
|
|
|
(29.3
|
)%
|
|
|
53.7
|
%
|
Reserve releases in our reinsurance segment increased from $57.8 million in the first nine months of 2011
to $64.2 million in the current period. The insurance segment had a $31.2 million reserve release in the first nine
47
months of 2012 compared to a $12.5 million reserve release in the first nine months of 2011. Refer to Reserves for Losses and Loss Adjustment Expenses below for a description of
the key elements giving rise to the reserve releases.
Expense ratio.
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 nine months ended September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2011
(2)
|
|
Ratios Based on Gross Earned Premium
|
|
Reinsurance
|
|
|
Insurance
|
|
|
Total
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
Total
|
|
Policy acquisition expense ratio
|
|
|
18.7
|
%
|
|
|
15.8
|
%
|
|
|
17.3
|
%
|
|
|
17.1
|
%
|
|
|
15.8
|
%
|
|
|
16.5
|
%
|
General and administrative expense ratio
(1)(2)
|
|
|
10.4
|
|
|
|
14.9
|
|
|
|
14.9
|
|
|
|
8.9
|
|
|
|
13.4
|
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expense ratio
|
|
|
29.1
|
|
|
|
30.7
|
|
|
|
32.2
|
|
|
|
26.0
|
|
|
|
29.2
|
|
|
|
29.5
|
|
Effect of reinsurance
|
|
|
2.0
|
|
|
|
6.9
|
|
|
|
4.6
|
|
|
|
1.9
|
|
|
|
6.3
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net expense ratio
|
|
|
31.1
|
%
|
|
|
37.6
|
%
|
|
|
36.8
|
%
|
|
|
27.9
|
%
|
|
|
35.5
|
%
|
|
|
33.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The total group general and administrative expense ratio includes corporate expenses.
|
(2)
|
In 2012, 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 increased by
$53.8 million for the nine months ended September 30, 2012 compared to the equivalent period in 2011 of which $35.8 million relates to higher performance-related compensation accruals with the balance attributable to increases in staff,
premises and other costs associated mainly with growth in our insurance business.
The policy acquisition expense ratio, gross
of the effect of reinsurance, has increased to 17.3% for the first nine months of 2012 from 16.5% in the first nine months of 2011. The increase is due to increases in profit commission accruals and changes in the mix of business written across both
segments where we have written a greater proportion of business with higher average commission rates.
Net investment
income.
Net investment income for the first nine months of 2012 was $153.8 million, a decrease of 10.3% compared to the $171.4 million in the first nine months of 2011 due to the continuing decline in our reinvestment
rate over the last twelve months which reflects lower yields on investment grade fixed income securities.
Change in fair
value of derivatives.
In the nine months ended September 30, 2012, we recorded a loss of $22.9 million (2011 loss of $61.5 million) in respect of interest rate swaps due to falling interest rates and
a loss of $1.1 million (2011 $5.8 million gain) in respect of forward currency contracts.
Investment
gains
. Total realized and unrealized gains of $21.1 million (2011 $21.4 million) included $4.9 million (2011 $20.7 million) of net realized gains from the fixed income available for sale
portfolio, $6.4 million (2011 $4.3 million) of net realized gains from our fixed income trading portfolio, $12.7 million net unrealized gains (2011 $4.5 million loss) from our fixed income trading
portfolio, $1.6 million of net realized losses from our equity investments (2011 $1.4 million loss), $3.0 million OTTI charges (2011 $Nil) and $1.7 million (2011 $2.3 million) realized gains from our investment in
Cartesian.
Other-than-temporary impairments.
A security is impaired when its fair value is
below its amortized cost. The Company reviews its aggregate investment portfolio, including equities, on an individual security basis for
48
potential OTTI each quarter based on criteria including issuer-specific circumstances, credit ratings actions and general macro-economic conditions. The total OTTI charge for the nine months
ended September 30, 2012 was $3.0 million (2011 $Nil). For a more detailed description of OTTI, please refer to Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations in the Companys 2011 Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission.
Income before tax.
In the first nine months of 2012, income before tax was $298.0 million (2011 loss of $135.8 million), comprising the amounts set out in the
table below.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2011
|
|
Underwriting income/(losses)
|
|
$
|
163.7
|
|
|
$
|
(229.1
|
)
|
Other income/(expenses)
|
|
|
7.1
|
|
|
|
(10.4
|
)
|
Net investment income
|
|
|
153.8
|
|
|
|
171.4
|
|
Change in fair value of derivatives
|
|
|
(24.0
|
)
|
|
|
(55.7
|
)
|
Investment and foreign exchange gains
|
|
|
20.6
|
|
|
|
11.1
|
|
Interest expense
|
|
|
(23.2
|
)
|
|
|
(23.1
|
)
|
|
|
|
|
|
|
|
|
|
Income before tax
|
|
$
|
298.0
|
|
|
$
|
(135.8
|
)
|
|
|
|
|
|
|
|
|
|
Taxes.
Income tax expense for the nine months ended September 30, 2012
was $19.6 million. Our effective consolidated tax rate for the nine months ended September 30, 2012 was 6.6%. The effective rate represents an estimate of the tax rate which will apply to our pre-tax income for 2012. As discussed above,
the effective tax rate for the year is subject to revision. In the nine months ended September 30, 2011, there was a $13.3 million tax credit resulting from pre-tax losses in that period.
Net income after tax.
Net income after tax for the nine months ended September 30, 2012 was
$278.4 million, equivalent to a $3.60 basic earnings per ordinary share adjusted for the $22.6 million preference share dividends and fully diluted earnings per ordinary share of $3.47 for the nine months ended September 30, 2012. Net
loss after tax for the nine months ended September 30, 2011 was $122.5 million, equivalent to a $1.98 adjusted basic and diluted loss per ordinary share adjusted for the $17.1 million preference share dividends and ASU 2010-26,
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.
Underwriting Results by Operating
Segments Nine Months Ended September 30, 2012
Please refer to the tables in Note 5 in our unaudited financial
statements of this report for a summary of gross and net written and earned premiums, underwriting results and combined ratios and reserves for our two business segments for the nine months ended September 30, 2012 and 2011.
The contributions of each segment to gross written premiums in the nine months ended September 30, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
Business Segment
|
|
Nine Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2011
|
|
|
|
(% of total gross written premiums)
|
|
Reinsurance
|
|
|
51.5
|
%
|
|
|
57.2
|
%
|
Insurance
|
|
|
48.5
|
|
|
|
42.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
Business Segment
|
|
Nine Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2011
|
|
|
|
($ in millions)
|
|
Reinsurance
|
|
$
|
1,033.5
|
|
|
$
|
1,001.2
|
|
Insurance
|
|
|
973.6
|
|
|
|
747.9
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,007.1
|
|
|
$
|
1,749.1
|
|
|
|
|
|
|
|
|
|
|
49
Reinsurance
Gross written premiums.
Gross written premiums in our reinsurance segment increased by 3.2% compared to the nine months ended September 30, 2011.
The table below shows our gross written premiums for each line of business for the nine months ended September 30, 2012 and 2011,
and the percentage change in gross written premiums for each such line:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of Business
|
|
Nine Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2011
|
|
|
% increase/
(decrease)
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
|
|
|
|
Property catastrophe reinsurance
|
|
$
|
287.5
|
|
|
$
|
297.5
|
|
|
|
(3.4
|
)%
|
Other property reinsurance
|
|
|
252.1
|
|
|
|
214.3
|
|
|
|
17.6
|
|
Casualty reinsurance
|
|
|
281.8
|
|
|
|
266.6
|
|
|
|
5.7
|
|
Specialty reinsurance
|
|
|
212.1
|
|
|
|
222.8
|
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,033.5
|
|
|
$
|
1,001.2
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in gross written premiums arose from other property and casualty reinsurance business. The
increase in other property is due to strong production from our proportional treaty and facultative business as we benefited from positive pricing momentum in catastrophe-exposed accounts while casualty benefited from favorable prior year premium
adjustments. In the comparative period, we recognized $22.7 million of reinstatement premiums associated with the New Zealand earthquakes, the Australian floods and the U.S. storms and mainly included in property catastrophe.
Losses and loss adjustment expenses.
The loss ratio for the nine months ended September 30, 2012 was
46.4% compared to 98.2% 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 period while the comparable period of 2011 experienced losses of
$416.1 million from the Australian floods, the New Zealand and Japanese earthquakes, the U.S. storms (including Hurricane Irene) and other natural catastrophes (U.S., Scandinavian and Asian weather-related events). There was also a $6.4 million
increase in prior year reserve releases from $57.8 million in the nine months ended September 30, 2011 compared to $64.2 million in the current period.
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
$166.8 million for the nine months ended September 30, 2012 equivalent to 20.0% of net premiums earned (2011 $150.3 million or 18.3% of net premiums earned). The increase in the acquisition expense ratio is due to
increases in profit commission accruals and a change in the business mix towards credit and surety and property proportional treaty business lines, which have higher average commission rates. An increase in general and administrative expenses by
$14.0 million as compared to the nine months ended September 30, 2011 is mainly attributable to increased accruals for performance-related compensation.
Insurance
Gross written premiums.
Gross
written premiums in our insurance segment have increased by 30.2% to $973.6 million for the nine months ended September 30, 2012 from $747.9 million in the equivalent period in 2011.
50
The table below shows our gross written premiums for each line of business for the nine
months ended September 30, 2012 and 2011, and the percentage change in gross written premiums for each line:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of Business
|
|
Nine Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2011
|
|
|
% increase/
(decrease)
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
|
|
|
|
Property insurance
|
|
$
|
263.1
|
|
|
$
|
154.7
|
|
|
|
70.1
|
%
|
Casualty insurance
|
|
|
143.2
|
|
|
|
90.6
|
|
|
|
58.1
|
|
Marine, energy and transportation insurance
|
|
|
385.5
|
|
|
|
324.6
|
|
|
|
18.8
|
|
Financial and professional lines insurance
|
|
|
181.8
|
|
|
|
178.0
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
973.6
|
|
|
$
|
747.9
|
|
|
|
30.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in gross written premium is mainly attributable to our property and program business, with
the program business contributing to both property and casualty. Increases in our marine, energy and transportation insurance were mainly due to increased premiums for marine, energy and liability business which achieved significant rate increases
following a series of industry losses in the past year.
Losses and loss adjustment
expenses.
The loss ratio for the nine months ended September 30, 2012 was 59.9% compared to 61.5% for the nine months ended September 30, 2011. The decrease in the loss ratio is mainly due to a $31.2 million
prior year reserve release in the current period compared to a $12.5 million reserve release in the nine months ended September 30, 2011. Losses for the nine months ended September 30, 2012 also include $24.8 million of losses in respect
of claims arising from the sinking of the Costa Concordia cruise liner in January 2012 while in the nine months ended September 30, 2011, we recognized $12.9 million of losses related to claims associated with the Japanese earthquake and
tsunami and U.S. weather-related events.
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 of $134.4 million for the first nine months ended September 30, 2012 increased to 19.4% of net premiums earned from 19.2% in the first nine months of 2011. This was
attributable to an increase in ceded earned premiums and to a change in our business mix towards financial and professional lines and program businesses, which have higher acquisition expense ratios. The increase of $31.8 million in our general
and administrative expenses is mainly associated with increases in accruals for performance-related compensation and staff and premises costs related to the expansion of our U.S. and U.K. insurance operations.
51
Cash and investments
At September 30, 2012 and December 31, 2011, total cash and investments, including accrued interest receivable, were $8.1 billion and $7.6 billion, respectively. The composition of our
investment portfolio is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2012
|
|
|
As at December 31, 2011
|
|
|
|
Estimated
Fair Value
|
|
|
Percentage of
Total Cash and
Investments
|
|
|
Estimated
Fair Value
|
|
|
Percentage of
Total Cash and
Investments
|
|
|
|
($ in millions except for percentages)
|
|
Fixed income securities Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
1,068.6
|
|
|
|
13.1
|
%
|
|
$
|
932.4
|
|
|
|
12.2
|
%
|
U.S. government agency
|
|
|
311.7
|
|
|
|
3.8
|
|
|
|
295.5
|
|
|
|
3.9
|
|
Municipal
|
|
|
39.9
|
|
|
|
0.5
|
|
|
|
35.6
|
|
|
|
0.5
|
|
Corporate
|
|
|
1,929.7
|
|
|
|
23.8
|
|
|
|
1,846.5
|
|
|
|
24.2
|
|
FDIC guaranteed corporate
|
|
|
3.0
|
|
|
|
|
|
|
|
72.9
|
|
|
|
0.9
|
|
Non-U.S. government-backed corporate
|
|
|
139.1
|
|
|
|
1.7
|
|
|
|
167.8
|
|
|
|
2.2
|
|
Foreign government
|
|
|
628.5
|
|
|
|
7.7
|
|
|
|
660.4
|
|
|
|
8.7
|
|
Asset-backed
|
|
|
63.8
|
|
|
|
0.9
|
|
|
|
61.0
|
|
|
|
0.8
|
|
Mortgage-backed
|
|
|
1,363.5
|
|
|
|
16.8
|
|
|
|
1,353.7
|
|
|
|
17.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income Available for sale
|
|
$
|
5,547.8
|
|
|
|
68.3
|
%
|
|
$
|
5,425.8
|
|
|
|
71.2
|
%
|
Total short-term investments Available for sale
|
|
|
494.7
|
|
|
|
6.1
|
|
|
|
298.2
|
|
|
|
3.9
|
|
Total equity securities
|
|
|
197.1
|
|
|
|
2.4
|
|
|
|
179.5
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
6,239.6
|
|
|
|
76.8
|
%
|
|
$
|
5,903.5
|
|
|
|
77.5
|
%
|
Fixed income securities Trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
|
38.8
|
|
|
|
0.5
|
|
|
|
32.3
|
|
|
|
0.4
|
|
U.S. government agency
|
|
|
2.0
|
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
Municipal
|
|
|
2.9
|
|
|
|
|
|
|
|
2.9
|
|
|
|
|
|
Corporate
|
|
|
368.2
|
|
|
|
4.5
|
|
|
|
349.3
|
|
|
|
4.6
|
|
Foreign government
|
|
|
21.8
|
|
|
|
0.4
|
|
|
|
7.4
|
|
|
|
0.1
|
|
Mortgage-backed
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
1.3
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income Trading
|
|
$
|
435.3
|
|
|
|
5.4
|
%
|
|
$
|
394.4
|
|
|
|
5.1
|
%
|
Total short-term investments Trading
|
|
|
10.6
|
|
|
|
0.1
|
|
|
|
4.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
$
|
445.9
|
|
|
|
5.5
|
%
|
|
$
|
398.5
|
|
|
|
5.2
|
%
|
Total other investments
|
|
|
34.8
|
|
|
|
0.4
|
|
|
|
33.1
|
|
|
|
0.4
|
|
Total cash and cash equivalents
|
|
|
1,374.2
|
|
|
|
16.9
|
|
|
|
1,239.1
|
|
|
|
16.3
|
|
Total net receivable/(payable) for securities sold/(purchased)
|
|
|
(17.9
|
)
|
|
|
(0.2
|
)
|
|
|
1.1
|
|
|
|
|
|
Total accrued interest receivable
|
|
|
49.7
|
|
|
|
0.6
|
|
|
|
49.6
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and investments
|
|
$
|
8,126.3
|
|
|
|
100.0
|
%
|
|
$
|
7,624.9
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income maturities.
At September 30, 2012, the average credit
quality of our fixed income portfolio was AA, with 92.0% of the portfolio being rated A or higher. At December 31, 2011, the average credit quality of our fixed income portfolio was AA, with 94.0% of the
portfolio being rated A or higher. Our fixed income portfolio duration as at September 30, 2012 was 2.8 years compared to 2.9 years as at December 31, 2011 excluding the impact of the interest rate swaps.
In September 2012, we funded a BB High Yield portfolio with $60.0 million in cash. As of September 30, 2012, the portfolio had
invested $7.0 million in BB High Yield bonds with further investments planned for subsequent quarters.
52
Mortgage-Backed Securities.
The following table summarizes the
fair value of our mortgage-backed securities by rating and class at September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
AA and Below
|
|
|
Total
|
|
|
|
($ in millions)
|
|
Agency
|
|
$
|
57.7
|
|
|
$
|
1,230.5
|
|
|
$
|
1,288.2
|
|
Non-agency commercial
|
|
|
46.3
|
|
|
|
29.3
|
|
|
|
75.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities
|
|
$
|
104.0
|
|
|
$
|
1,259.8
|
|
|
$
|
1,363.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our mortgage-backed portfolio is supported by loans diversified across a number of geographic and
economic sectors.
Equity securities.
In March 2011, we invested $175.0 million into a high
quality global equity income strategy via direct investment. Equity securities are comprised of U.S. and foreign equity securities and are classified as available for sale. The portfolio targets high quality global equity securities with
attractive dividend yields. Our overall portfolio strategy remains focused on high quality fixed income investments; however, market conditions and portfolio diversification prompted this limited move into equities. Our group investment guidelines
allow us to deploy up to 10% of the investment portfolio in alternative investments. We recognized dividend income of $5.1 million (2011 $4.9 million), $16.1 million net unrealized gain (2011 $3.8 million loss),
$1.6 million net realized loss (2011 $1.4 million loss) and an OTTI charge of $3.0 million (2011 $Nil) from the equity portfolio for the nine months ended September 30, 2012.
European Fixed Income & Equity Exposures.
As at September 30, 2012, we had
$925.1 million, or 13.8% of our aggregate investment portfolio (excluding cash and cash equivalents) invested in European issuers, including the U.K. Our European exposures consisted of sovereigns, agencies, government guaranteed bonds, covered
bonds, corporate bonds and equities. We have no exposure to the sovereign debt of Greece, Ireland, Italy, Portugal or Spain (GIIPS), and
de minimis
holdings of Spanish and Italian corporate bonds and equities.
We manage our European fixed income exposures by proactively adapting our investment guidelines to our views on the European debt crisis.
In August 2010, we amended our investment guidelines to prohibit purchases of GIIPS sovereign or guaranteed debt. We also prohibited purchases of peripheral European bank issuers. In November 2010, we amended our investment guidelines to prohibit
purchases of corporate bonds issued by companies domiciled in any of the GIIPS countries. In May 2011, we amended our investment guidelines to prohibit purchases of European and U.K. corporate financial issuers including covered bonds. We also added
Belgium to our list of prohibited sovereign investments. We do not actively hedge any of our European exposures.
53
The tables below summarize our European holdings by country (Eurozone and non-Eurozone),
rating and sector as at September 30, 2012. Equity investments included in the table below are not rated (NR).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2012 by Ratings
|
|
Country
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
NR
|
|
|
Market
Value
|
|
|
Market
Value
%
|
|
|
|
($ in millions except percentages)
|
|
Austria
|
|
$
|
|
|
|
$
|
20.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20.2
|
|
|
|
2%
|
|
Belgium
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
3.5
|
|
|
|
6.5
|
|
|
|
1
|
|
Denmark
|
|
|
19.8
|
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
20.2
|
|
|
|
2
|
|
Finland
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
13.2
|
|
|
|
1
|
|
France
|
|
|
4.5
|
|
|
|
68.8
|
|
|
|
17.7
|
|
|
|
1.6
|
|
|
|
15.5
|
|
|
|
108.1
|
|
|
|
12
|
|
Germany
|
|
|
56.7
|
|
|
|
6.1
|
|
|
|
15.9
|
|
|
|
2.8
|
|
|
|
2.0
|
|
|
|
83.5
|
|
|
|
9
|
|
Italy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
2.0
|
|
|
|
2.7
|
|
|
|
0.5
|
|
Netherlands
|
|
|
24.4
|
|
|
|
22.5
|
|
|
|
15.6
|
|
|
|
|
|
|
|
4.5
|
|
|
|
67.0
|
|
|
|
7
|
|
Norway
|
|
|
14.0
|
|
|
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.6
|
|
|
|
3
|
|
Spain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.4
|
|
|
|
|
|
|
|
3.4
|
|
|
|
0.5
|
|
Sweden
|
|
|
|
|
|
|
17.8
|
|
|
|
|
|
|
|
1.0
|
|
|
|
8.0
|
|
|
|
26.8
|
|
|
|
3
|
|
Switzerland
|
|
|
6.0
|
|
|
|
25.2
|
|
|
|
72.8
|
|
|
|
1.1
|
|
|
|
14.0
|
|
|
|
119.1
|
|
|
|
13
|
|
United Kingdom
|
|
|
275.5
|
|
|
|
10.7
|
|
|
|
80.0
|
|
|
|
14.0
|
|
|
|
43.6
|
|
|
|
423.8
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total European Exposures
|
|
$
|
412.1
|
|
|
$
|
187.9
|
|
|
$
|
205.0
|
|
|
$
|
25.0
|
|
|
$
|
95.1
|
|
|
$
|
925.1
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2012 by Sectors
|
|
Country
|
|
Sovereign
|
|
|
ABS
|
|
|
Government
Guaranteed
Bonds
|
|
|
Agency
|
|
|
Local
Government
|
|
|
Corporate
Financial
Issuers
|
|
|
Corporate
Non-
Financial
Issuers
|
|
|
Covered
Bonds
|
|
|
Equity
|
|
|
Market
Value
|
|
|
Market
Value
%
|
|
|
Unrealized
Pre-tax
Gain/
(Loss)
|
|
|
|
($ in millions except percentages)
|
|
Austria
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20.2
|
|
|
|
2%
|
|
|
$
|
0.1
|
|
Belgium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
3.5
|
|
|
|
6.5
|
|
|
|
1
|
|
|
|
1.5
|
|
Denmark
|
|
|
|
|
|
|
|
|
|
|
19.8
|
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.2
|
|
|
|
2
|
|
|
|
|
|
Finland
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
13.2
|
|
|
|
1
|
|
|
|
0.7
|
|
France
|
|
|
20.3
|
|
|
|
|
|
|
|
7.3
|
|
|
|
36.0
|
|
|
|
|
|
|
|
2.0
|
|
|
|
22.5
|
|
|
|
4.5
|
|
|
|
15.5
|
|
|
|
108.1
|
|
|
|
12
|
|
|
|
5.3
|
|
Germany
|
|
|
17.8
|
|
|
|
|
|
|
|
41.4
|
|
|
|
|
|
|
|
3.6
|
|
|
|
|
|
|
|
20.7
|
|
|
|
|
|
|
|
|
|
|
|
83.5
|
|
|
|
9
|
|
|
|
4.1
|
|
Italy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
2.0
|
|
|
|
2.7
|
|
|
|
0.5
|
|
|
|
|
|
Netherlands
|
|
|
4.5
|
|
|
|
|
|
|
|
5.1
|
|
|
|
19.2
|
|
|
|
|
|
|
|
11.6
|
|
|
|
26.6
|
|
|
|
|
|
|
|
|
|
|
|
67.0
|
|
|
|
7
|
|
|
|
3.2
|
|
Norway
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.6
|
|
|
|
3
|
|
|
|
1.8
|
|
Spain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
3.4
|
|
|
|
0.5
|
|
|
|
|
|
Sweden
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.0
|
|
|
|
|
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
8.1
|
|
|
|
26.8
|
|
|
|
3
|
|
|
|
1.9
|
|
Switzerland
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45.2
|
|
|
|
53.9
|
|
|
|
3.9
|
|
|
|
14.0
|
|
|
|
119.1
|
|
|
|
13
|
|
|
|
10.4
|
|
United Kingdom
|
|
|
236.1
|
|
|
|
0.3
|
|
|
|
17.7
|
|
|
|
2.3
|
|
|
|
|
|
|
|
26.2
|
|
|
|
78.4
|
|
|
|
19.1
|
|
|
|
43.7
|
|
|
|
423.8
|
|
|
|
46
|
|
|
|
22.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total European Exposures
|
|
$
|
287.7
|
|
|
$
|
0.3
|
|
|
$
|
111.5
|
|
|
$
|
97.4
|
|
|
$
|
3.6
|
|
|
$
|
99.1
|
|
|
$
|
209.2
|
|
|
$
|
27.5
|
|
|
$
|
88.8
|
|
|
$
|
925.1
|
|
|
|
100%
|
|
|
$
|
51.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
Reserves for Losses and Loss Adjustment Expenses
As of September 30, 2012, we had total net loss and loss adjustment expense reserves of $4,178.0 million (December 31,
2011 $4,098.6 million). This amount represented our best estimate of the ultimate liability for payment of losses and loss adjustment expenses. The following tables analyze gross and net loss and loss adjustment expense reserves by
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2012
|
|
Business Segment
|
|
Gross
|
|
|
Reinsurance
Recoverable
|
|
|
Net
|
|
|
|
($ in millions)
|
|
Reinsurance
|
|
$
|
2,946.2
|
|
|
$
|
(191.1
|
)
|
|
$
|
2,755.1
|
|
Insurance
|
|
|
1,693.4
|
|
|
|
(270.5
|
)
|
|
|
1,422.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss expense reserves
|
|
$
|
4,639.6
|
|
|
$
|
(461.6
|
)
|
|
$
|
4,178.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2011
|
|
Business Segment
|
|
Gross
|
|
|
Reinsurance
Recoverable
|
|
|
Net
|
|
|
|
($ in millions)
|
|
Reinsurance
|
|
$
|
2,953.5
|
|
|
$
|
(183.5
|
)
|
|
$
|
2,770.0
|
|
Insurance
|
|
|
1,571.7
|
|
|
|
(243.1
|
)
|
|
|
1,328.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss expense reserves
|
|
$
|
4,525.2
|
|
|
$
|
(426.6
|
)
|
|
$
|
4,098.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2012, there was a reduction of our estimate of the ultimate
net claims to be paid in respect of prior accident years of $95.4 million. An analysis of this reduction by business segment is as follows for each of the three and nine months ended September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
Business Segment
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
|
($ in millions)
|
|
|
($ in millions)
|
|
Reinsurance
|
|
$
|
22.0
|
|
|
$
|
11.7
|
|
|
$
|
64.2
|
|
|
$
|
57.8
|
|
Insurance
|
|
|
7.8
|
|
|
|
3.9
|
|
|
|
31.2
|
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss expense reserves reductions
|
|
$
|
29.8
|
|
|
$
|
15.6
|
|
|
$
|
95.4
|
|
|
$
|
70.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The key elements which gave rise to the net positive development during the three months ended
September 30, 2012 were as follows:
Reinsurance.
Net reserve releases of
$22.0 million in the current quarter came from property and specialty reinsurance business lines. The largest releases in the quarter was $8.0 million from other property lines and $9.5 million from credit and surety due primarily to
better than expected claims development.
Insurance.
Net reserve releases of $7.8 million
in the quarter came primarily from shorter-tail lines including property, energy physical damage and aviation but offset by a strengthening of $9.0 million in marine, energy and construction liability. The most significant release was $3.6 million
from our property lines due to favorable development.
The key elements which gave rise to the net positive development during
the nine months ended September 30, 2012 were as follows:
Reinsurance.
Net reserve
releases of $64.2 million came from U.S. casualty treaty, specialty reinsurance and other property business lines. The largest releases were $32.1 million from U.S. casualty treaty and $11.0 million from credit and surety reinsurance while
our property risk excess business line generated a net release of $9.5 million.
55
Insurance.
The net reserve releases of $31.2 million came
largely from our shorter-tail lines, including $13.7 million from credit, political risk and terrorism business lines, $10.9 million from property lines and $21.6 million from marine and aviation lines. This was offset by a strengthening of $20.9
million in marine, energy and construction liability.
We did not make any significant changes in assumptions used in our
reserving process. However, for certain longer-tail lines, our loss experience is relatively limited and reliable evidence of changes in trends of numbers of claims incurred, average settlement amounts, numbers of claims outstanding and average
losses per claim will necessarily take years to develop.
For a more detailed description see Managements
Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Managements Discussion and Analysis of Financial Condition and Results of Operations Reserves for
Losses and Loss Adjustment Expenses, included in our 2011 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission.
Capital Management
The following table shows our capital structure as at
September 30, 2012 compared to December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
As at
September 30, 2012
|
|
|
As at
December 31, 2011
|
|
|
|
($ in millions)
|
|
Share capital, additional paid-in capital, retained income and accumulated other comprehensive income attributable to ordinary
shareholders
|
|
$
|
3,046.1
|
|
|
$
|
2,802.4
|
|
Preference shares (liquidation preferences less issue expenses), net of issue costs
|
|
|
508.1
|
|
|
|
353.6
|
|
Long-term debt
|
|
|
499.1
|
|
|
|
499.0
|
|
|
|
|
|
|
|
|
|
|
Total capital
|
|
$
|
4,053.3
|
|
|
$
|
3,655.0
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2012, total ordinary shareholders equity was $3,554.2 million
compared to $3,156.0 million at December 31, 2011. The remainder of our total shareholders equity as at September 30, 2012 was funded by three classes of preference shares with a total value as measured by their respective
liquidation preferences of $508.1 million net of share issuance costs (December 31, 2011 $353.6 million).
On April 11, 2012, the Company issued 6,400,000 Preference Shares with a liquidation preference of $25 for an aggregate amount of
$160.0 million. Each Preference Share will receive dividends on a non-cumulative basis only when declared by our Board of Directors initially at an annual rate of 7.250%. The Preference Shares have no stated maturity but are callable at the
option of the Company on or after the 10th anniversary of the date of issuance. We raised net proceeds of approximately $154.5 million from this issuance.
On April 25, 2012, our Board of Directors approved and we announced a 13.0% increase in our normal quarterly dividend to our ordinary shareholders from $0.15 per share to $0.17 per share.
On February 9, 2010, our Board of Directors authorized a repurchase program for up to $400.0 million of ordinary shares of
which $192.4 million remained available as at December 31, 2011. The authorization for the remaining amount of the repurchase program was extended by the Board of Directors at its meeting on February 2, 2012.
In the second quarter, we initiated an open market share repurchase and acquired a total of 891,335 ordinary shares for $25.0 million at
an average price of $28.05 per ordinary share. In the third quarter, we repurchased a total of 864,634 ordinary shares in the open market for a further $25.0 million at an average price of $28.91 per ordinary share for a total amount of $50.0
million during the nine months ended September 30, 2012. As at
56
September 30, 2012, we had $142.4 million remaining under our current share repurchase authorization. On October 24, 2012, our Board of Directors approved a new share repurchase
authorization for up to $400.0 million of outstanding ordinary shares. The share repurchase authorization replaces the previous authorization and permits us to effect the repurchases from time to time through a combination of transactions, including
open market repurchases, privately negotiated transactions and accelerated share repurchase transactions.
The amount
outstanding under our senior notes, less amortization of expenses, of $499.1 million (December 31, 2011 $499.0 million) was the only material debt that we had outstanding as of September 30, 2012 and December 31,
2011.
Management monitors the ratio of debt to total capital, with total capital being defined as shareholders equity
plus outstanding debt. At September 30, 2012, this ratio was 12.3% (December 31, 2011 13.7%).
Our
preference shares are classified in our balance sheet as equity but may receive a different treatment in some cases under the capital adequacy assessments made by certain rating agencies. Such securities are often referred to as hybrids
as they have certain attributes of both debt and equity. We also monitor the ratio of the total of debt and hybrids to total capital which was 24.8% as of September 30, 2012 (December 31, 2011 23.3%).
Access to capital.
Our business operations are in part dependent on our financial strength and the
markets perception thereof, as measured by total shareholders equity, which was $3,554.2 million at September 30, 2012 (December 31, 2011 $3,156.0 million). We believe our financial strength provides us
with the flexibility and capacity to obtain funds through debt or equity financing. Our continuing ability to access the capital markets is dependent on, among other things, our operating results, market conditions and our perceived financial
strength. We regularly monitor our capital and financial position, as well as investment and securities market conditions, both in general and with respect to Aspen Holdings securities. Our ordinary shares and all our preference shares are
listed on the New York Stock Exchange.
Liquidity
Liquidity is a measure of a companys ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations. Management monitors the liquidity of
Aspen Holdings and of each of its Operating Subsidiaries and arranges credit facilities to enhance short-term liquidity resources on a stand-by basis.
Holding Company.
We monitor the ability of Aspen Holdings to service debt, to finance dividend payments to ordinary and preference shareholders and to provide financial
support to the Operating Subsidiaries.
As at September 30, 2012, Aspen Holdings held $154.2 million
(December 31, 2011 $125.3 million) in cash and cash equivalents which management considers sufficient to provide Aspen Holdings with appropriate liquidity at such time, taken together with dividends declared or expected to be
declared by subsidiary companies and our credit facilities. Aspen Holdings liquidity depends on dividends, capital distributions and interest payments from our Operating Subsidiaries. Aspen Holdings has recourse to the credit facility
described below.
The ability of our Operating Subsidiaries to pay us dividends or other distributions is subject to the laws
and regulations applicable to each jurisdiction, as well as the Operating Subsidiaries need to maintain capital requirements adequate to maintain their insurance and reinsurance operations and their financial strength ratings issued by
independent rating agencies. For a discussion of the various restrictions on our ability and our Operating Subsidiaries ability to pay dividends, see Part I, Item 1 Business Regulatory Matters in our 2011
Annual Report on Form 10-K filed with the United States Securities and Exchange Commission. For a more detailed discussion of our Operating Subsidiaries ability to pay dividends, see Note 14 of our annual financial statements in our
2011 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission.
57
Operating Subsidiaries.
As of September 30, 2012, the
Operating Subsidiaries held $1,202.6 million (December 31, 2011 $1,377.1 million) in cash and short-term investments that are readily realizable securities. Management monitors the value, currency and duration of cash and
investments held by its Operating Subsidiaries to ensure that they are able to meet their insurance and other liabilities as they become due and was satisfied that there was a comfortable margin of liquidity as at September 30, 2012 and for the
foreseeable future.
On an ongoing basis, our Operating Subsidiaries sources of funds primarily consist of premiums
written, investment income and proceeds from sales and redemptions of investments.
Cash is used primarily to pay reinsurance
premiums, losses and loss adjustment expenses, brokerage commissions, general and administrative expenses, taxes, interest and dividends and to purchase new investments.
The potential for individual large claims and for accumulations of claims from single events means that substantial and unpredictable payments may need to be made within relatively short periods of time.
We manage these risks by making regular forecasts of the timing and amount of expected cash outflows and ensuring that we
maintain sufficient balances in cash and short-term investments to meet these estimates. Notwithstanding this policy, if our cash flow forecast is incorrect, we could be forced to liquidate investments prior to maturity, potentially at a significant
loss.
The liquidity of our Operating Subsidiaries is also affected by the terms of our contractual obligations to
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 in respect of these obligations and undertakings as at September 30, 2012 and December 31, 2011:
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|
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As at
September 30,
2012
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As at
December 31,
2011
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|
($ in millions, except percentages)
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Regulatory trusts and deposits:
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|
|
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|
|
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Affiliated transactions
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$
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466.4
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|
|
$
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447.4
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|
Third party
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|
|
1,789.4
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|
|
|
1,682.3
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|
Letters of credit/guarantees
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|
|
1,193.6
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|
|
|
1,374.1
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|
|
|
|
|
|
|
|
|
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Total restricted assets
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$
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3,449.4
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|
|
$
|
3,503.8
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|
|
|
|
|
|
|
|
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Total as percent of cash and invested assets
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|
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42.6
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%
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|
|
46.3
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%
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|
|
|
|
|
|
|
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For more information on these arrangements, see our 2011 Annual Report on Form 10-K filed with the
United States Securities and Exchange Commission.
Consolidated Cash Flows for the Nine Months Ended September 30,
2012.
Total net cash flow from operations was $345.1 million, an increase of $66.7 million from the comparative period last year. The cash flow in the comparative quarter was impacted by higher loss payments
following the exceptional level of catastrophe losses in 2011 and ceded reinsurance costs. For the nine months ended September 30, 2012, our cash flow from operations provided us with sufficient liquidity to meet our operating requirements.
Credit Facility.
On July 30, 2010, we entered into a three-year $280.0 million
revolving credit facility pursuant to a credit agreement (the credit facilities) by and among the Company, certain of our direct and indirect subsidiaries, including the Operating Subsidiaries (collectively, the Borrowers),
the lenders party thereto, Barclays, as administrative agent, Citibank, NA, as syndication agent, Crédit Agricole Corporate and Investment Bank (Crédit Agricole CIB), Deutsche Bank Securities Inc., U.S. Bank N.A,
Lloyds Bank and HSBC and The Bank of New York Mellon, as co-documentation agent and as collateral agent.
58
The credit facilities can be used by any of the Borrowers to provide funding for our
Operating Subsidiaries, to finance the working capital needs of the Company and our subsidiaries and for general corporate purposes of the Company and our subsidiaries. The credit facilities further provide for the issuance of collateralized and
uncollateralized letters of credit. Initial availability under the credit facilities is $280.0 million, and the Company has the option (subject to obtaining commitments from acceptable lenders) to increase the facility by up to
$75.0 million. The credit facilities will expire on July 30, 2013. As of September 30, 2012, no borrowings were outstanding under the credit facilities. The fees and interest rates on the loans and the fees on the letters of credit
payable by the Borrowers increase based on the consolidated leverage ratio of the Company.
Under the credit facilities, we
must maintain at all times a consolidated tangible net worth of not less than approximately $2.3 billion plus 50.0% of consolidated net income and 50.0% of aggregate net cash proceeds from the issuance by the Company of its capital stock, each
as accrued from January 1, 2010. The Company must also not permit its consolidated leverage ratio of total consolidated debt to consolidated debt plus consolidated tangible net worth to exceed 35.0%. In addition, the credit facilities contain
other customary affirmative and negative covenants as well as certain customary events of default, including with respect to a change in control. The various affirmative and negative covenants, include, among others, covenants that, subject to
various exceptions, restrict the ability of the Company and its subsidiaries to: create or permit liens on assets; engage in mergers or consolidations; dispose of assets; pay dividends or other distributions; purchase or redeem the Companys
equity securities or those of its subsidiaries and make other restricted payments; permit the rating of any insurance subsidiary to fall below A.M. Best financial strength rating of B++; make certain investments; agree with others to limit the
ability of the Companys subsidiaries to pay dividends or other restricted payments or to make loans or transfer assets to the Company or another of its subsidiaries. The credit facilities also include covenants that restrict the ability of our
subsidiaries to incur indebtedness and guarantee obligations.
On July 30, 2012, Aspen Bermuda and Citibank Europe plc
replaced an existing letter of credit facility dated August 12, 2011 in a maximum aggregate amount of up to $1,050.0 million with a new letter of credit facility in a maximum aggregate amount of up to $950.0 million. The new facility will
expire in two separate tranches; Tranche II, which consists of $300.0 million, will expire on June 30, 2013, and Tranche I, which consists of the remaining maximum aggregate amount of $650.0 million, expires on June 30, 2014. As at
September 30, 2012, we had $856.9 million of outstanding collateralized letters of credit under this facility compared to $837.8 million at the end of 2011.
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 dated as of October 6, 2009. The
Amendment extends the maturity date of the credit facility to December 31, 2013. As at September 30, 2012, we had $62.5 million of outstanding collateralized letters of credit under this facility compared to $49.8 million at the
end of 2011.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations under long-term debt, operating leases (net of subleases) and reserves relating to insurance and reinsurance contracts as of September 30,
2012:
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|
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|
|
|
|
|
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2012
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2013
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2014
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2015
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|
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2016
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Later
Years
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Total
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($ in millions)
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Operating Lease Obligations
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|
$
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4.0
|
|
|
|
10.2
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|
|
|
9.9
|
|
|
|
9.8
|
|
|
|
7.0
|
|
|
|
14.4
|
|
|
$
|
55.3
|
|
Long-Term Debt Obligations
(1)
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|
$
|
|
|
|
|
|
|
|
|
250.0
|
|
|
|
|
|
|
|
|
|
|
|
250.0
|
|
|
$
|
500.0
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|
Reserves for Losses and loss adjustment expenses
(2)
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|
$
|
616.1
|
|
|
|
1,241.9
|
|
|
|
739.1
|
|
|
|
475.7
|
|
|
|
330.1
|
|
|
|
1,236.7
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|
|
$
|
4,639.6
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(1)
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The long-term debt obligations disclosed above do not include the $30.0 million annual interest payments on our outstanding senior notes or dividends payable to
holders of our preference shares.
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(2)
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In estimating the time intervals into which payments of our reserves for losses and loss adjustment expenses fall, as set out above, we have utilized
actuarially assessed payment patterns. By the nature of the insurance
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59
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and reinsurance contracts under which these liabilities are assumed, there can be no certainty that actual payments will fall in the periods shown and there could be a material acceleration or
deceleration of claims payments depending on factors outside our control. This uncertainty is heightened by the short time in which we have operated, thereby providing limited Company-specific claims loss payment patterns. The total amount of
payments in respect of our reserves, as well as the timing of such payments, may differ materially from our current estimates for the reasons set out in our 2011 Annual Report on Form 10-K under Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Reserves for Losses and Loss Expenses.
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Further information on operating leases is given in our 2011 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission.
For a discussion of derivative instruments we have entered into, please see Note 9 to our unaudited financial statements for the
three and nine months ended September 30, 2012 included elsewhere in this report.
Effects of Inflation
Inflation may have a material effect on our consolidated results of operations by its effect on interest rates and on the cost of settling
claims. The potential exists, after a catastrophe or other large property loss, for the development of inflationary pressures in a local economy as the demand for services such as construction typically surges. The cost of settling claims may also
be increased by global commodity price inflation. We seek to take both these factors into account when setting reserves for any events where we think they may be material.
Our calculation of reserves for losses and loss expenses in respect of casualty business includes assumptions about future payments for settlement of claims and claims-handling expenses, such as medical
treatments and litigation costs. We write casualty business in the United States, the United Kingdom and Australia and certain other territories, where claims inflation has in many years run at higher rates than general inflation. To the extent
inflation causes these costs to increase above reserves established for these claims, we will be required to increase our loss reserves with a corresponding reduction in earnings. The actual effects of inflation on our results cannot be accurately
known until claims are ultimately settled.
In addition to general price inflation we are exposed to a persisting long-term
upwards trend in the cost of judicial awards for damages. We seek to take this into account in our pricing and reserving of casualty business.
We also seek to take into account the projected impact of inflation on the likely actions of central banks in the setting of short-term interest rates and consequent effects on the yields and prices of
fixed income securities. As of September 30, 2012, we consider that although inflation is currently low, in the medium-term there is a risk that inflation, interest rates and bond yields may rise, resulting in a decrease in the market value of
certain of our fixed interest investments.
Cautionary Statement Regarding Forward-Looking Statements
This Form 10-Q contains, and the Company may from time to time make other verbal or written, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), that involve risks and uncertainties,
including statements regarding our capital needs, business strategy, expectations and intentions. Statements that use the terms believe, do not believe, anticipate, expect, plan,
estimate, project, outlook, trends, seek, will, may, aim, continue, intend, guidance and similar expressions are
intended to identify forward-looking statements. These statements reflect our current views with respect to future events and because our business is subject to numerous risks, uncertainties and other factors, our actual results could differ
materially from those anticipated in the forward-looking statements. The risks, uncertainties and other factors set forth in the Companys 2011 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission and
other cautionary statements made in this report, as well as the factors set forth below, should be read and understood as being applicable to all related forward-looking statements wherever they appear in this report.
60
All forward-looking statements address matters that involve risks and uncertainties.
Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:
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the possibility of greater frequency or severity of claims and loss activity, including as a result of natural or man-made (including economic and
political risks) catastrophic or material loss events, than our underwriting, reserving, reinsurance purchasing or investment practices have anticipated;
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the reliability of, and changes in assumptions to, natural and man-made catastrophe pricing, accumulation and estimated loss models;
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evolving issues with respect to interpretation of coverage after major loss events, any intervening legislative or governmental action and changing
judicial interpretation and judgments on insurers liability to various risks;
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the effectiveness of our loss limitation methods;
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changes in the total industry losses, or our share of total industry losses, such as the various losses from the Costa Concordia event, the
U.S. storms in 2011 and 2012, the earthquake and ensuing tsunami in Japan in 2011, floods in Australia in late 2010 and early 2011, the Deepwater Horizon incident in the Gulf of Mexico in 2010, the Chilean and the New Zealand earthquakes in
2010, Hurricanes Ike and Gustav in 2008 and, with respect to such events, our reliance on loss reports received from cedants and loss adjustors, our reliance on industry loss estimates and those generated by modeling techniques, changes in rulings
on flood damage or other exclusions as a result of prevailing lawsuits and case law;
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the impact of acts of terrorism, acts of war and related legislation;
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decreased demand for our insurance or reinsurance products and cyclical changes in the insurance and reinsurance sectors;
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any changes in our reinsurers credit quality and the amount and timing of reinsurance recoverables;
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changes in the availability, cost or quality of reinsurance or retrocessional coverage;
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the continuing and uncertain impact of the current depressed lower growth environment in many of the countries in which we operate;
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the persistence of the global financial crisis and the Eurozone debt crisis;
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the level of inflation in repair costs due to limited availability of labor and materials after catastrophes;
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changes in insurance and reinsurance market conditions;
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increased competition on the basis of pricing, capacity, coverage terms or other factors and the related demand and supply dynamics as contracts come
up for renewal;
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a decline in our Operating Subsidiaries ratings with S&P, A.M. Best or Moodys;
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our ability to execute our business plan to enter new markets, introduce new products and develop new distribution channels, including their
integration into our existing operations;
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changes in general economic conditions, including inflation, foreign currency exchange rates, interest rates and other factors that could affect our
investment portfolio or our derivative contracts;
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the risk of a material decline in the value or liquidity of all or parts of our investment portfolio;
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changes in our ability to exercise capital management initiatives or to arrange banking facilities as a result of prevailing market changes or changes
in our financial position;
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changes in government regulations or tax laws in jurisdictions where we conduct business;
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Aspen Holdings or Aspen Bermuda becoming subject to income taxes in the United States or the United Kingdom;
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loss of key personnel; and
|
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|
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increased counterparty risk due to the credit impairment of financial institutions.
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61
In addition, any estimates relating to loss events involve the exercise of considerable
judgment and reflect a combination of ground-up evaluations, information available to date from brokers and cedants, market intelligence, initial tentative loss reports and other sources. Due to the complexity of factors contributing to losses and
the preliminary nature of the information used to prepare estimates, there can be no assurance that our ultimate losses will remain within stated amounts.
The rate changes described in Managements Discussion and Analysis Outlook and Trends reflect managements assessment of changes in exposure-adjusted rates on renewals only.
This does not include contracts with fundamental changes to terms and conditions. The calculation involves a degree of judgment in relation to comparability of contracts in the different business lines. Due to changes in assumptions underlying the
pricing of contracts, the trends in premium rates reflected in our outlook and trends may not be comparable over time. The future profitability of each business line is dependent upon many factors besides the trends in premium rates.
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other
cautionary statements that are included in this report. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise or disclose any difference
between our actual results and those reflected in such statements.
If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements you read in this report reflect our current views with respect to future events and are
subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on
our behalf are expressly qualified in their entirety by the points made above. You should specifically consider the factors identified in this report which could cause actual results to differ before making an investment decision.