NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
History and Organization
|
Aspen Insurance Holdings Limited (“Aspen Holdings”) was incorporated on May 23, 2002 as a holding company headquartered in Bermuda. We underwrite specialty insurance and reinsurance on a global basis through our Operating Subsidiaries (as defined below) based in Bermuda, the United States and the United Kingdom: Aspen Insurance UK Limited (“Aspen U.K.”) and Aspen Underwriting Limited (corporate member of Lloyd’s Syndicate 4711, “AUL” and managed by Aspen Managing Agency Limited (“AMAL”)) (United Kingdom), Aspen Bermuda Limited (“Aspen Bermuda”) (Bermuda), Aspen Specialty Insurance Company (“Aspen Specialty”) and Aspen American Insurance Company (“AAIC”) (United States) (collectively, the “Operating Subsidiaries”). We also have branches in Australia, Canada, France, Germany, Ireland, Singapore, Switzerland and the United Arab Emirates. We established Aspen Capital Management, Ltd and other related entities (collectively, “ACM”) to leverage our existing underwriting franchise, increase our operational flexibility in the capital markets and provide investors direct access to our underwriting expertise. References to the “Company,” the “Group,” “we,” “us” or “our” refer to Aspen Holdings or Aspen Holdings and its subsidiaries.
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 considered necessary for a fair presentation have been included. Results for the
three and six
months ended
June 30, 2017
are not necessarily indicative of the results that may be expected for the year ended
December 31, 2017
. The unaudited condensed consolidated financial statements include the accounts of Aspen Holdings and its subsidiaries. All intercompany transactions and balances have been eliminated on consolidation.
The balance sheet as at
December 31, 2016
has been derived from the audited consolidated financial statements at that date, 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, 2016
contained in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (the “SEC”) on
February 22, 2017
(File No. 001-31909). Except for the changes associated with ASU 2016-09, “
Compensation — Stock Compensation
” listed below, there have been no changes to significant accounting policies from those disclosed in the Company’s 2016 Annual Report on Form 10-K.
Assumptions and estimates made by management have a significant effect on the amounts reported within the unaudited condensed consolidated financial statements. The most significant of these assumptions and estimates relate to losses and loss adjustment expenses, reinsurance recoverables, gross written premiums and commissions which have not been reported to the Company such as those relating to proportional treaty reinsurance contracts, unrecognized tax benefits, the fair value of derivatives and the fair value of other investments. All material assumptions and estimates are regularly reviewed and adjustments made as necessary, but actual results could turn out significantly different from those expected when the assumptions or estimates were made.
Accounting Pronouncements Adopted in 2017
On March 30, 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, “
Compensation — Stock Compensation
” which provides guidance on several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016 and interim periods beginning after December 15, 2016. Following the adoption of this ASU, all excess tax benefits or expense related to stock-based compensation transactions are recognized prospectively as income tax benefits or expense in the Consolidated Income Statement and the excess tax benefits or expense from stock-based compensation transactions previously included in “Financing activities” on the Consolidated Statements of Cash Flows are prospectively included on that statement as “Operating activities.” The cash paid to the tax authority for tax withholding purposes has also been reclassified from operating to financing activity in the Consolidated Statement of Cash Flows and the comparative period has been restated. This ASU also allows share withholding up to the maximum statutory withholding requirement while still avoiding liability accounting. As a result, the Company has applied the equity accounting method for its restricted share units retrospectively and has recorded a cumulative effect adjustment of
$2.8 million
through opening retained earnings and
$7.9 million
through additional paid-in capital.
Accounting Pronouncements Not Yet Adopted
On March 10, 2017, FASB issued ASU 2017-7, “
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost
” which changes how employers report defined benefit pension and/or other post-retirement benefit costs in their financial statements. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods beginning after December 15, 2017. As the Company does not operate a defined benefit pension scheme, the impact from the adoption of the ASU is unlikely to have a material impact on future financial statements and disclosures.
Other accounting pronouncements were issued during the three months ended
June 30, 2017
which were either not relevant to the Company or did not impact the Company’s consolidated financial statements.
|
|
3.
|
Reclassifications from Accumulated Other Comprehensive Income
|
The following tables set out the components of the Company’s accumulated other comprehensive income (“AOCI”) that are reclassified into the unaudited condensed consolidated statement of operations for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from AOCI
|
|
|
Details about the AOCI Components
|
|
Three Months Ended June 30, 2017
|
|
Three Months Ended June 30, 2016
|
|
Affected Line Item in the Unaudited
Condensed Consolidated Statement
of Operations
|
|
|
($ in millions)
|
|
|
Available for sale securities:
|
|
|
|
|
Realized gains on sale of securities
|
|
$
|
3.3
|
|
|
$
|
2.4
|
|
|
Realized and unrealized investment gains
|
Realized (losses) on sale of securities
|
|
(2.5
|
)
|
|
(1.3
|
)
|
|
Realized and unrealized investment losses
|
|
|
0.8
|
|
|
1.1
|
|
|
Income from operations before income tax
|
Tax on net realized gains of securities
|
|
—
|
|
|
(0.1
|
)
|
|
Income tax expense
|
|
|
$
|
0.8
|
|
|
$
|
1.0
|
|
|
Net income
|
Realized derivatives:
|
|
|
|
|
|
|
Net realized (losses) on settled derivatives
|
|
$
|
0.9
|
|
|
$
|
(1.4
|
)
|
|
General, administrative and corporate expenses
|
Tax on settled derivatives
|
|
(0.2
|
)
|
|
0.5
|
|
|
Income tax expense
|
|
|
$
|
0.7
|
|
|
$
|
(0.9
|
)
|
|
Net income
|
|
|
|
|
|
|
|
Total reclassifications from AOCI to the statement of operations, net of income tax
|
|
$
|
1.5
|
|
|
$
|
0.1
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from AOCI
|
|
|
Details about the AOCI Components
|
|
Six Months Ended June 30, 2017
|
|
Six Months Ended June 30, 2016
|
|
Affected Line Item in the Unaudited
Condensed Consolidated Statement
of Operations
|
|
|
($ in millions)
|
|
|
Available for sale securities:
|
|
|
|
|
Realized gains on sale of securities
|
|
$
|
5.6
|
|
|
$
|
9.5
|
|
|
Realized and unrealized investment gains
|
Realized (losses) on sale of securities
|
|
(3.8
|
)
|
|
(4.2
|
)
|
|
Realized and unrealized investment losses
|
|
|
1.8
|
|
|
5.3
|
|
|
Income from operations before income tax
|
Tax on net realized gains of securities
|
|
(0.2
|
)
|
|
(0.6
|
)
|
|
Income tax expense
|
|
|
$
|
1.6
|
|
|
$
|
4.7
|
|
|
Net income
|
Realized derivatives:
|
|
|
|
|
|
|
Net realized (losses) on settled derivatives
|
|
$
|
1.2
|
|
|
$
|
(2.5
|
)
|
|
General, administrative and corporate expenses
|
Tax on settled derivatives
|
|
(0.2
|
)
|
|
0.5
|
|
|
Income tax expense
|
|
|
$
|
1.0
|
|
|
$
|
(2.0
|
)
|
|
Net income
|
|
|
|
|
|
|
|
Total reclassifications from AOCI to the statement of operations, net of income tax
|
|
$
|
2.6
|
|
|
$
|
2.7
|
|
|
Net income
|
|
|
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. Net income available to ordinary shareholders is calculated by deducting preference share dividends and net income/(loss) attributable to non-controlling interest from net income/ (loss) after tax for the period. 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 ordinary share for the
three and six
months ended
June 30, 2017
and
2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
($ in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
Net income
|
$
|
75.8
|
|
|
$
|
64.9
|
|
|
$
|
172.3
|
|
|
$
|
179.3
|
|
Preference share dividends
|
(10.5
|
)
|
|
(9.4
|
)
|
|
(21.0
|
)
|
|
(18.9
|
)
|
Change in redemption value
(1)
|
—
|
|
|
—
|
|
|
(2.4
|
)
|
|
—
|
|
Net amount attributable to non-controlling interest
|
(0.1
|
)
|
|
(0.4
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
Basic and diluted net income available to ordinary shareholders
|
$
|
65.2
|
|
|
$
|
55.1
|
|
|
$
|
148.7
|
|
|
$
|
160.2
|
|
Ordinary shares:
|
|
|
|
|
|
|
|
Basic weighted average ordinary shares
|
59,966,358
|
|
|
60,705,028
|
|
|
59,914,797
|
|
|
60,771,601
|
|
Weighted average effect of dilutive securities
(2)
|
1,056,623
|
|
|
1,487,114
|
|
|
1,181,020
|
|
|
1,491,608
|
|
Total diluted weighted average ordinary shares
|
61,022,981
|
|
|
62,192,142
|
|
|
61,095,817
|
|
|
62,263,209
|
|
Earnings per ordinary share:
|
|
|
|
|
|
|
|
Basic
|
$
|
1.09
|
|
|
$
|
0.91
|
|
|
$
|
2.48
|
|
|
$
|
2.64
|
|
Diluted
|
$
|
1.07
|
|
|
$
|
0.89
|
|
|
$
|
2.43
|
|
|
$
|
2.57
|
|
|
|
(1)
|
The
$2.4 million
deduction from net income in 2017 is attributable to the reclassification from additional paid-in capital to retained earnings representing the difference between the capital raised upon issuance of the
7.401%
Perpetual Non-Cumulative Preference Shares, net of issuance costs, and the final redemption costs of
$133.2 million
.
|
|
|
(2)
|
Dilutive securities consist of employee restricted share units and performance shares associated with the Company’s long-term incentive plan, employee share purchase plans and director restricted share units as described in Note 14.
|
Dividends.
On July 26, 2017, the Company’s Board of Directors (the “Board of Directors”) declared the following quarterly dividends:
|
|
|
|
|
|
|
|
|
|
Dividend
|
|
Payable on:
|
|
Record Date:
|
Ordinary shares
|
$
|
0.24
|
|
|
August 29, 2017
|
|
August 14, 2017
|
5.95% preference shares
|
$
|
0.3719
|
|
|
October 1, 2017
|
|
September 15, 2017
|
5.625% preference shares
|
$
|
0.3516
|
|
|
October 1, 2017
|
|
September 15, 2017
|
The Company has
two
reporting business segments: Insurance and Reinsurance. In addition to the way the Company manages its business, the Company has considered similarities in economic characteristics, products, customers, distribution, the regulatory environment of the Company’s business segments and quantitative thresholds to determine the Company’s reportable segments. Segment profit or loss for each of the Company’s business 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, amortization of deferred policy acquisition costs and general and administrative expenses. Underwriting profit or loss provides a basis for management to evaluate the business segment’s underwriting performance.
Reinsurance Segment.
The 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 insurance and reinsurance (credit and surety, mortgage reinsurance and insurance, agriculture insurance and reinsurance, marine, aviation, terrorism, engineering, cyber and other specialty lines). ACM forms part of our property catastrophe reinsurance line of business as it focuses primarily on property catastrophe business through the use of alternative capital. For a more detailed
description of this business segment, see Part I, Item 1, “Business — Business Segments — Reinsurance” in the Company’s
2016
Annual Report on Form 10-K filed with the SEC.
Insurance Segment.
The insurance segment consists of property and casualty insurance, marine, aviation and energy insurance and financial and professional lines insurance. For a more detailed description of this business segment, see Part I, Item 1 “Business — Business Segments — Insurance” in the Company’s
2016
Annual Report on Form 10-K filed with the SEC.
Non-underwriting Disclosures.
The Company has provided additional disclosures for corporate and other (non-operating) income and expenses. Corporate and other income and expenses include net investment income, net realized and unrealized investment gains or losses, expenses associated with managing the Group, certain strategic and non-recurring costs, changes in fair value of derivatives and changes in fair value of the loan notes issued by variable interest entities, interest expenses, net realized and unrealized foreign exchange gains or losses, and income taxes, none of which are allocated to the business segments. Corporate expenses are not allocated to the Company’s business segments as they typically do not fluctuate with the levels of premiums written and are not directly related to the Company’s business segment operations. The Company does not allocate its assets by business segment as it evaluates underwriting results of each business segment separately from the results of the Company’s investment portfolio.
The following tables provide a summary of gross and net written and earned premiums, underwriting results, ratios and reserves for each of the Company’s business segments for the three months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
Reinsurance
|
|
Insurance
|
|
Total
|
|
|
($ in millions)
|
|
Underwriting Revenues
|
|
|
|
|
|
|
Gross written premiums
|
$
|
335.6
|
|
|
$
|
486.5
|
|
|
$
|
822.1
|
|
|
Net written premiums
|
285.5
|
|
|
293.2
|
|
|
578.7
|
|
|
Gross earned premiums
|
320.6
|
|
|
429.1
|
|
|
749.7
|
|
|
Net earned premiums
|
272.7
|
|
|
289.3
|
|
|
562.0
|
|
|
Underwriting Expenses
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
152.6
|
|
|
193.5
|
|
|
346.1
|
|
|
Amortization of deferred policy acquisition costs
|
53.4
|
|
|
42.9
|
|
|
96.3
|
|
|
General and administrative expenses
|
40.7
|
|
|
65.7
|
|
|
106.4
|
|
|
Underwriting income
|
$
|
26.0
|
|
|
$
|
(12.8
|
)
|
|
13.2
|
|
|
Corporate expenses
|
|
|
|
|
(11.4
|
)
|
|
Non-operating expenses
|
|
|
|
|
(2.1
|
)
|
|
Net investment income
|
|
|
|
|
47.4
|
|
|
Realized and unrealized investment gains
|
|
|
|
|
49.0
|
|
|
Realized and unrealized investment losses
|
|
|
|
|
(7.0
|
)
|
|
Change in fair value of loan notes issued by variable interest entities
|
|
|
|
|
(3.3
|
)
|
|
Change in fair value of derivatives
|
|
|
|
|
17.6
|
|
|
Interest expense on long term debt
|
|
|
|
|
(7.4
|
)
|
|
Net realized and unrealized foreign exchange losses
|
|
|
|
|
(20.6
|
)
|
|
Other income
|
|
|
|
|
3.6
|
|
|
Other expenses
|
|
|
|
|
(2.0
|
)
|
|
Income before tax
|
|
|
|
|
$
|
77.0
|
|
|
|
|
|
|
|
|
|
Net reserves for loss and loss adjustment expenses
|
$
|
2,445.0
|
|
|
$
|
2,347.0
|
|
|
$
|
4,792.0
|
|
|
Ratios
|
|
|
|
|
|
|
Loss ratio
|
56.0
|
%
|
|
66.9
|
%
|
|
61.6
|
%
|
|
Policy acquisition expense ratio
|
19.6
|
|
|
14.8
|
|
|
17.1
|
|
|
General and administrative expense ratio
|
14.9
|
|
|
22.7
|
|
|
21.3
|
|
(1)
|
Expense ratio
|
34.5
|
|
|
37.5
|
|
|
38.4
|
|
|
Combined ratio
|
90.5
|
%
|
|
104.4
|
%
|
|
100.0
|
%
|
|
|
|
(1)
|
The general and administrative expense ratio in the total column includes corporate and non-operating expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
Reinsurance
|
|
Insurance
|
|
Total
|
|
|
( $ in millions)
|
|
Underwriting Revenues
|
|
|
|
|
|
|
Gross written premiums
|
$
|
332.6
|
|
|
$
|
469.1
|
|
|
$
|
801.7
|
|
|
Net written premiums
|
306.8
|
|
|
418.0
|
|
|
724.8
|
|
|
Gross earned premiums
|
329.8
|
|
|
454.7
|
|
|
784.5
|
|
|
Net earned premiums
|
299.4
|
|
|
381.4
|
|
|
680.8
|
|
|
Underwriting Expenses
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
181.1
|
|
|
261.1
|
|
|
442.2
|
|
|
Amortization of deferred policy acquisition costs
|
50.7
|
|
|
76.0
|
|
|
126.7
|
|
|
General and administrative expenses
|
39.1
|
|
|
57.2
|
|
|
96.3
|
|
|
Underwriting income/(loss)
|
$
|
28.5
|
|
|
$
|
(12.9
|
)
|
|
15.6
|
|
|
Corporate expenses
|
|
|
|
|
(20.1
|
)
|
|
Net investment income
|
|
|
|
|
48.0
|
|
|
Realized and unrealized investment gains
|
|
|
|
|
45.1
|
|
|
Realized and unrealized investment losses
|
|
|
|
|
(8.3
|
)
|
|
Change in fair value of loan notes issued by variable interest entities
|
|
|
|
|
0.5
|
|
|
Change in fair value of derivatives
|
|
|
|
|
(0.4
|
)
|
|
Interest expense on long term debt
|
|
|
|
|
(7.4
|
)
|
|
Net realized and unrealized foreign exchange losses
|
|
|
|
|
(5.3
|
)
|
|
Other income
|
|
|
|
|
(0.5
|
)
|
|
Other expenses
|
|
|
|
|
(1.0
|
)
|
|
Income before tax
|
|
|
|
|
$
|
66.2
|
|
|
|
|
|
|
|
|
|
Net reserves for loss and loss adjustment expenses
|
$
|
2,474.6
|
|
|
$
|
2,296.5
|
|
|
$
|
4,771.1
|
|
|
Ratios
|
|
|
|
|
|
|
Loss ratio
|
60.5
|
%
|
|
68.5
|
%
|
|
65.0
|
%
|
|
Policy acquisition expense ratio
|
16.9
|
|
|
19.9
|
|
|
18.6
|
|
|
General and administrative expense ratio
|
13.1
|
|
|
15.0
|
|
|
17.1
|
|
(1)
|
Expense ratio
|
30.0
|
|
|
34.9
|
|
|
35.7
|
|
|
Combined ratio
|
90.5
|
%
|
|
103.4
|
%
|
|
100.7
|
%
|
|
|
|
(1)
|
The general and administrative expense ratio in the total column includes corporate expenses.
|
The following tables provide a summary of gross and net written and earned premiums, underwriting results, ratios and reserves for each of the Company’s business segments for the
six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
Reinsurance
|
|
Insurance
|
|
Total
|
|
|
($ in millions)
|
|
Underwriting Revenues
|
|
|
|
|
|
|
Gross written premiums
|
$
|
900.9
|
|
|
$
|
919.2
|
|
|
$
|
1,820.1
|
|
|
Net written premiums
|
733.7
|
|
|
531.2
|
|
|
1,264.9
|
|
|
Gross earned premiums
|
648.2
|
|
|
852.8
|
|
|
1,501.0
|
|
|
Net earned premiums
|
550.2
|
|
|
592.9
|
|
|
1,143.1
|
|
|
Underwriting Expenses
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
295.7
|
|
|
378.6
|
|
|
674.3
|
|
|
Amortization of deferred policy acquisition costs
|
112.9
|
|
|
97.1
|
|
|
210.0
|
|
|
General and administrative expenses
|
84.6
|
|
|
127.5
|
|
|
212.1
|
|
|
Underwriting income
|
$
|
57.0
|
|
|
$
|
(10.3
|
)
|
|
46.7
|
|
|
Corporate expenses
|
|
|
|
|
(24.8
|
)
|
|
Non-operating expenses
|
|
|
|
|
(4.3
|
)
|
|
Net investment income
|
|
|
|
|
95.1
|
|
|
Realized and unrealized investment gains
|
|
|
|
|
100.2
|
|
|
Realized and unrealized investment losses
|
|
|
|
|
(12.0
|
)
|
|
Change in fair value of loan notes issued by variable interest entities
|
|
|
|
|
(6.2
|
)
|
|
Change in fair value of derivatives
|
|
|
|
|
20.7
|
|
|
Interest expense on long term debt
|
|
|
|
|
(14.8
|
)
|
|
Net realized and unrealized foreign exchange losses
|
|
|
|
|
(29.5
|
)
|
|
Other income
|
|
|
|
|
7.2
|
|
|
Other expense
|
|
|
|
|
(2.0
|
)
|
|
Income before tax
|
|
|
|
|
$
|
176.3
|
|
|
|
|
|
|
|
|
|
Net reserves for loss and loss adjustment expenses
|
$
|
2,445.0
|
|
|
$
|
2,347.0
|
|
|
$
|
4,792.0
|
|
|
Ratios
|
|
|
|
|
|
|
Loss ratio
|
53.7
|
%
|
|
63.9
|
%
|
|
59.0
|
%
|
|
Policy acquisition expense ratio
|
20.5
|
|
|
16.4
|
|
|
18.4
|
|
|
General and administrative expense ratio
|
15.4
|
|
|
21.5
|
|
|
21.1
|
|
(1)
|
Expense ratio
|
35.9
|
|
|
37.9
|
|
|
39.5
|
|
|
Combined ratio
|
89.6
|
%
|
|
101.8
|
%
|
|
98.5
|
%
|
|
|
|
(1)
|
The general and administrative expense ratio in the total column includes corporate and non-operating expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
Reinsurance
|
|
Insurance
|
|
Total
|
|
|
( $ in millions)
|
|
Underwriting Revenues
|
|
|
|
|
|
|
Gross written premiums
|
$
|
850.2
|
|
|
$
|
927.2
|
|
|
$
|
1,777.4
|
|
|
Net written premiums
|
756.3
|
|
|
768.2
|
|
|
1,524.5
|
|
|
Gross earned premiums
|
636.6
|
|
|
900.3
|
|
|
1,536.9
|
|
|
Net earned premiums
|
579.7
|
|
|
764.2
|
|
|
1,343.9
|
|
|
Underwriting Expenses
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
315.6
|
|
|
484.0
|
|
|
799.6
|
|
|
Amortization of deferred policy acquisition costs
|
110.1
|
|
|
146.8
|
|
|
256.9
|
|
|
General and administrative expenses
|
83.2
|
|
|
115.8
|
|
|
199.0
|
|
|
Underwriting income
|
$
|
70.8
|
|
|
$
|
17.6
|
|
|
88.4
|
|
|
Corporate expenses
|
|
|
|
|
(37.2
|
)
|
|
Net investment income
|
|
|
|
|
97.5
|
|
|
Realized and unrealized investment gains
|
|
|
|
|
110.7
|
|
|
Realized and unrealized investment losses
|
|
|
|
|
(28.9
|
)
|
|
Change in fair value of loan notes issued by variable interest entities
|
|
|
|
|
(3.9
|
)
|
|
Change in fair value of derivatives
|
|
|
|
|
(7.6
|
)
|
|
Interest expense on long term debt
|
|
|
|
|
(14.8
|
)
|
|
Net realized and unrealized foreign exchange losses
|
|
|
|
|
(21.0
|
)
|
|
Other income
|
|
|
|
|
0.9
|
|
|
Other expenses
|
|
|
|
|
(1.0
|
)
|
|
Income before tax
|
|
|
|
|
$
|
183.1
|
|
|
|
|
|
|
|
|
|
Net reserves for loss and loss adjustment expenses
|
$
|
2,474.6
|
|
|
$
|
2,296.5
|
|
|
$
|
4,771.1
|
|
|
Ratios
|
|
|
|
|
|
|
Loss ratio
|
54.4
|
%
|
|
63.3
|
%
|
|
59.5
|
%
|
|
Policy acquisition expense ratio
|
19.0
|
|
|
19.2
|
|
|
19.1
|
|
|
General and administrative expense ratio
|
14.4
|
|
|
15.2
|
|
|
17.6
|
|
(1)
|
Expense ratio
|
33.4
|
|
|
34.4
|
|
|
36.7
|
|
|
Combined ratio
|
87.8
|
%
|
|
97.7
|
%
|
|
96.2
|
%
|
|
|
|
(1)
|
The general and administrative expense ratio in the total column includes corporate expenses.
|
The Company uses underwriting ratios as measures of performance. The loss ratio is the ratio of losses and loss adjustment expenses to net earned premiums. The policy acquisition expense ratio is the ratio of amortization of deferred policy acquisition costs to net earned premiums. The general and administrative expense ratio is the ratio of general, administrative and corporate expenses to net earned premiums. The combined ratio is the sum of the loss ratio, the policy acquisition expense ratio and the general and administrative expense ratio.
6. Investments
Income Statement
Investment Income.
The following table summarizes investment income for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
|
($ in millions)
|
|
($ in millions)
|
Fixed income securities — Available for sale
|
$
|
33.9
|
|
|
$
|
36.5
|
|
|
$
|
67.8
|
|
|
$
|
73.1
|
|
Fixed income securities — Trading
|
10.4
|
|
|
7.9
|
|
|
20.5
|
|
|
15.3
|
|
Short-term investments — Available for sale
|
0.2
|
|
|
0.2
|
|
|
0.3
|
|
|
0.3
|
|
Short-term investments — Trading
|
0.3
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
Cash and cash equivalents
|
1.3
|
|
|
0.9
|
|
|
2.0
|
|
|
1.4
|
|
Equity securities — Trading
|
3.7
|
|
|
5.5
|
|
|
8.9
|
|
|
12.4
|
|
Catastrophe bonds — Trading
|
0.4
|
|
|
0.5
|
|
|
0.8
|
|
|
1.1
|
|
Total
|
$
|
50.2
|
|
|
$
|
51.5
|
|
|
$
|
100.8
|
|
|
$
|
103.6
|
|
Investment expenses
|
(2.8
|
)
|
|
(3.5
|
)
|
|
(5.7
|
)
|
|
(6.1
|
)
|
Net investment income
|
$
|
47.4
|
|
|
$
|
48.0
|
|
|
$
|
95.1
|
|
|
$
|
97.5
|
|
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 other comprehensive income for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
|
($ in millions)
|
|
($ in millions)
|
Available for sale:
|
|
|
|
|
|
|
|
Fixed income securities — gross realized gains
|
$
|
3.3
|
|
|
$
|
2.1
|
|
|
$
|
5.5
|
|
|
$
|
9.2
|
|
Fixed income securities — gross realized (losses)
|
(2.4
|
)
|
|
(1.3
|
)
|
|
(3.7
|
)
|
|
(3.7
|
)
|
Short-term investments — gross realized gains
|
—
|
|
|
0.2
|
|
|
0.1
|
|
|
0.2
|
|
Short-term investments — gross realized (losses)
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
Cash and cash equivalents — gross realized gains
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Cash and cash equivalents — gross realized (losses)
|
(0.1
|
)
|
|
0.2
|
|
|
(0.1
|
)
|
|
(0.5
|
)
|
Other-than-temporary impairments
|
(0.1
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
Trading:
|
|
|
|
|
|
|
|
Fixed income securities — gross realized gains
|
3.5
|
|
|
4.0
|
|
|
5.3
|
|
|
5.2
|
|
Fixed income securities — gross realized (losses)
|
(0.4
|
)
|
|
(0.6
|
)
|
|
(2.4
|
)
|
|
(6.4
|
)
|
Short-term investments — gross realized gains
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
Equity securities — gross realized gains
|
4.4
|
|
|
9.3
|
|
|
8.9
|
|
|
15.2
|
|
Equity securities — gross realized (losses)
|
(3.6
|
)
|
|
(6.5
|
)
|
|
(5.0
|
)
|
|
(18.0
|
)
|
Catastrophe bonds
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
(0.2
|
)
|
Net change in gross unrealized gains
|
38.5
|
|
|
29.4
|
|
|
79.4
|
|
|
80.8
|
|
Other investments:
|
|
|
|
|
|
|
|
Gross realized and unrealized (loss) in MVI
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
Gross realized (loss)/gain in Chaspark
|
(0.8
|
)
|
|
—
|
|
|
0.9
|
|
|
—
|
|
Gross realized and unrealized (loss) in Bene
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
Total net realized and unrealized investment gains recorded in the statement of operations
|
$
|
42.0
|
|
|
$
|
36.8
|
|
|
$
|
88.2
|
|
|
$
|
81.8
|
|
|
|
|
|
|
|
|
|
Change in available for sale net unrealized gains:
|
|
|
|
|
|
|
|
Fixed income securities
|
12.9
|
|
|
42.2
|
|
|
14.9
|
|
|
127.2
|
|
Total change in pre-tax available for sale unrealized gains
|
12.9
|
|
|
42.2
|
|
|
14.9
|
|
|
127.2
|
|
Change in taxes
|
(1.1
|
)
|
|
(5.0
|
)
|
|
(1.0
|
)
|
|
(13.1
|
)
|
Total change in net unrealized gains, net of taxes, recorded in other comprehensive income
|
$
|
11.8
|
|
|
$
|
37.2
|
|
|
$
|
13.9
|
|
|
$
|
114.1
|
|
Other-Than-Temporary Impairments.
A security is potentially impaired when its fair value is below its amortized cost. The Company reviews its available for sale fixed income 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. The total OTTI charge for the
three and six
months ended
June 30, 2017
was
$0.1 million
and
$0.4 million
, respectively (
2016
— $
Nil
and $
Nil
). For a more detailed description of accounting policies for OTTI, please refer to Note 2(c) of the “Notes to the Audited Consolidated Financial Statements” in the Company’s
2016
Annual Report on Form 10-K filed with the SEC.
Balance Sheet
Fixed Income Securities and Short-Term Investments
—
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 income securities and short-term investments as at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2017
|
|
Cost or
Amortized Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Market
Value
|
|
($ in millions)
|
U.S. government
|
$
|
1,218.3
|
|
|
$
|
9.2
|
|
|
$
|
(6.7
|
)
|
|
$
|
1,220.8
|
|
U.S. agency
|
74.4
|
|
|
1.1
|
|
|
—
|
|
|
75.5
|
|
Municipal
|
30.8
|
|
|
2.0
|
|
|
—
|
|
|
32.8
|
|
Corporate
|
2,469.3
|
|
|
44.7
|
|
|
(10.6
|
)
|
|
2,503.4
|
|
Non-U.S. government-backed corporate
|
92.3
|
|
|
0.5
|
|
|
(0.2
|
)
|
|
92.6
|
|
Non-U.S. government
|
516.9
|
|
|
9.7
|
|
|
(0.7
|
)
|
|
525.9
|
|
Asset-backed
|
48.7
|
|
|
0.2
|
|
|
—
|
|
|
48.9
|
|
Non-agency commercial mortgage-backed
|
4.3
|
|
|
—
|
|
|
—
|
|
|
4.3
|
|
Agency mortgage-backed
|
982.9
|
|
|
17.4
|
|
|
(7.2
|
)
|
|
993.1
|
|
Total fixed income securities — Available for sale
|
5,437.9
|
|
|
84.8
|
|
|
(25.4
|
)
|
|
5,497.3
|
|
Total short-term investments — Available for sale
|
41.9
|
|
|
—
|
|
|
—
|
|
|
41.9
|
|
Total
|
$
|
5,479.8
|
|
|
$
|
84.8
|
|
|
$
|
(25.4
|
)
|
|
$
|
5,539.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2016
|
|
Cost or
Amortized Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Market
Value
|
|
($ in millions)
|
U.S. government
|
$
|
1,207.9
|
|
|
$
|
9.4
|
|
|
$
|
(11.2
|
)
|
|
$
|
1,206.1
|
|
U.S. agency
|
117.7
|
|
|
1.9
|
|
|
—
|
|
|
119.6
|
|
Municipal
|
23.2
|
|
|
1.6
|
|
|
(0.4
|
)
|
|
24.4
|
|
Corporate
|
2,566.9
|
|
|
39.6
|
|
|
(20.0
|
)
|
|
2,586.5
|
|
Non-U.S. government-backed corporate
|
89.2
|
|
|
0.7
|
|
|
(0.1
|
)
|
|
89.8
|
|
Non-U.S. government
|
477.7
|
|
|
11.8
|
|
|
(0.8
|
)
|
|
488.7
|
|
Asset-backed
|
62.6
|
|
|
0.4
|
|
|
—
|
|
|
63.0
|
|
Non-agency commercial mortgage-backed
|
12.3
|
|
|
0.3
|
|
|
—
|
|
|
12.6
|
|
Agency mortgage-backed
|
1,062.6
|
|
|
19.6
|
|
|
(8.3
|
)
|
|
1,073.9
|
|
Total fixed income securities — Available for sale
|
5,620.1
|
|
|
85.3
|
|
|
(40.8
|
)
|
|
5,664.6
|
|
Total short-term investments — Available for sale
|
145.3
|
|
|
—
|
|
|
—
|
|
|
145.3
|
|
Total
|
$
|
5,765.4
|
|
|
$
|
85.3
|
|
|
$
|
(40.8
|
)
|
|
$
|
5,809.9
|
|
Fixed Income Securities, Short-Term Investments, Equities and Catastrophe Bonds — 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 income securities, short-term investments, equity securities and catastrophe bonds as at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2017
|
|
Cost or
Amortized Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Market
Value
|
|
($ in millions)
|
U.S. government
|
$
|
112.4
|
|
|
$
|
0.7
|
|
|
$
|
(0.3
|
)
|
|
$
|
112.8
|
|
Municipal
|
5.7
|
|
|
—
|
|
|
—
|
|
|
5.7
|
|
Corporate
|
882.5
|
|
|
16.1
|
|
|
(2.7
|
)
|
|
895.9
|
|
Bonds backed by Non-U.S government
|
2.0
|
|
|
—
|
|
|
—
|
|
|
2.0
|
|
Non-U.S. government
|
180.8
|
|
|
6.3
|
|
|
(0.6
|
)
|
|
186.5
|
|
Asset-backed
|
12.2
|
|
|
—
|
|
|
—
|
|
|
12.2
|
|
Agency mortgage-backed
|
142.7
|
|
|
0.4
|
|
|
(0.7
|
)
|
|
142.4
|
|
Total fixed income securities — Trading
|
1,338.3
|
|
|
23.5
|
|
|
(4.3
|
)
|
|
1,357.5
|
|
Total short-term investments — Trading
|
73.7
|
|
|
—
|
|
|
—
|
|
|
73.7
|
|
Total equity securities — Trading
|
569.5
|
|
|
99.4
|
|
|
(10.2
|
)
|
|
658.7
|
|
Total catastrophe bonds — Trading
|
28.3
|
|
|
—
|
|
|
—
|
|
|
28.3
|
|
Total
|
$
|
2,009.8
|
|
|
$
|
122.9
|
|
|
$
|
(14.5
|
)
|
|
$
|
2,118.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2016
|
|
Cost or
Amortized Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Market
Value
|
|
($ in millions)
|
U.S. government
|
$
|
82.8
|
|
|
$
|
0.4
|
|
|
$
|
(0.8
|
)
|
|
$
|
82.4
|
|
Municipal
|
15.7
|
|
|
—
|
|
|
(0.2
|
)
|
|
15.5
|
|
Corporate
|
817.8
|
|
|
9.9
|
|
|
(7.1
|
)
|
|
820.6
|
|
Non-U.S. government
|
203.4
|
|
|
3.5
|
|
|
(4.1
|
)
|
|
202.8
|
|
Asset-backed
|
14.5
|
|
|
—
|
|
|
—
|
|
|
14.5
|
|
Agency mortgage-backed
|
130.6
|
|
|
0.2
|
|
|
(0.9
|
)
|
|
129.9
|
|
Total fixed income securities — Trading
|
1,264.8
|
|
|
14.0
|
|
|
(13.1
|
)
|
|
1,265.7
|
|
Total short-term investments — Trading
|
185.4
|
|
|
—
|
|
|
—
|
|
|
185.4
|
|
Total equity securities — Trading
|
554.3
|
|
|
55.4
|
|
|
(25.0
|
)
|
|
584.7
|
|
Total catastrophe bonds — Trading
|
42.5
|
|
|
—
|
|
|
—
|
|
|
42.5
|
|
Total
|
$
|
2,047.0
|
|
|
$
|
69.4
|
|
|
$
|
(38.1
|
)
|
|
$
|
2,078.3
|
|
The Company classifies the financial instruments presented in the tables above as held for trading as this most closely reflects the facts and circumstances of the investments held.
Catastrophe Bonds.
The Company has invested in catastrophe bonds with a total value of
$28.3 million
as at
June 30, 2017
. The bonds receive quarterly interest payments based on variable interest rates with scheduled maturities ranging from 2017 to 2021. The redemption value of the bonds will adjust based on the occurrence of a covered event, such as windstorms and earthquakes in the United States, Canada, the North Atlantic, Japan or Australia.
Other Investments.
In January 2015, the Company established, along with seven other insurance companies, a micro-insurance venture consortium and micro-insurance incubator (“MVI”) domiciled in Bermuda. The MVI is a social impact organization that provides micro-insurance products to assist global emerging consumers. The Company’s initial investment in the MVI was
$0.8 million
.
On October 2, 2012, the Company established a subsidiary, Aspen Recoveries Limited, to take ownership of a
58.5%
shareholding in Chaspark Maritime Holdings Ltd., a Singaporean registered company (“Chaspark”), with the remaining shareholding owned by other insurers. The shareholding in Chaspark was received as a settlement for subrogation rights associated with a contract frustration claim settlement. In the
three and six
months ended
June 30, 2017
, the change in the value of the Company’s investment in Chaspark was a realized loss of
$0.8 million
and a realized gain of
$0.9 million
, respectively (
June 30, 2016
— $
Nil
and $
Nil
). On March 10, 2017, Aspen Recoveries Limited received cash of
$9.3 million
as settlement of its share of subrogation assets held by Chaspark.
On July 26, 2016, the Company purchased through its wholly-owned subsidiary, Acorn Limited, a
20%
share of Bene Assicurazioni (“Bene”), an Italian-based motor insurer for a total consideration of
$3.3 million
. The investment is accounted for under the equity method and adjustments to the carrying value of this investment are made based on the Company’s share of capital, including share of income and expenses.
On January 1, 2017, the Company purchased through its wholly-owned subsidiary, Aspen U.S. Holdings, Inc. (“Aspen U.S. Holdings”), a
49%
share of Digital Risk Resources, LLC (“Digital Re”), a U.S.-based enterprise engaged in the business of developing, marketing and servicing turnkey information security and privacy liability insurance products for a total consideration of
$2.3 million
. The investment is accounted for under the equity method and adjustments to the carrying value of this investment are made based on the Company’s share of capital, including share of income and expenses.
The tables below show the Company’s investments in the MVI, Chaspark, Bene and Digital Re for the
three and six
months ended
June 30, 2017
and
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2017
|
|
MVI
|
|
Chaspark
|
|
Bene
|
|
Digital Re
|
|
Total
|
|
($ in millions)
|
Opening undistributed value of investment
|
$
|
0.5
|
|
|
$
|
0.8
|
|
|
$
|
3.2
|
|
|
$
|
0.5
|
|
|
$
|
5.0
|
|
Realized/unrealized losses for the three months to June 30, 2017
|
(0.1
|
)
|
|
(0.8
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
(1.1
|
)
|
Closing undistributed value of investment
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
0.5
|
|
|
$
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2016
|
|
MVI
|
|
Chaspark
|
|
Total
|
|
($ in millions)
|
Opening undistributed value of investment
|
$
|
0.8
|
|
|
$
|
8.1
|
|
|
$
|
8.9
|
|
Realized loss for the three months to June 30, 2016
|
(0.2
|
)
|
|
—
|
|
|
$
|
(0.2
|
)
|
Closing value of investment
|
$
|
0.6
|
|
|
$
|
8.1
|
|
|
$
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2017
|
|
MVI
|
|
Chaspark
|
|
Bene
|
|
Digital Re
|
|
Total
|
|
($ in millions)
|
Opening undistributed value of investment
|
$
|
0.5
|
|
|
$
|
8.4
|
|
|
$
|
3.2
|
|
|
$
|
—
|
|
|
$
|
12.1
|
|
Initial investment
|
—
|
|
|
—
|
|
|
—
|
|
|
2.3
|
|
|
2.3
|
|
Goodwill
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.8
|
)
|
|
(1.8
|
)
|
Distribution received
|
—
|
|
|
(9.3
|
)
|
|
—
|
|
|
—
|
|
|
(9.3
|
)
|
Realized/unrealized gain/(losses) for the six months to June 30, 2017
|
(0.1
|
)
|
|
0.9
|
|
|
(0.2
|
)
|
|
—
|
|
|
0.6
|
|
Closing undistributed value of investment
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
0.5
|
|
|
$
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2016
|
|
MVI
|
|
Chaspark
|
|
Total
|
|
($ in millions)
|
Opening undistributed value of investment
|
$
|
0.8
|
|
|
$
|
8.1
|
|
|
$
|
8.9
|
|
Realized loss for the six months to June 30, 2016
|
(0.2
|
)
|
|
—
|
|
|
$
|
(0.2
|
)
|
Closing value of investment
|
$
|
0.6
|
|
|
$
|
8.1
|
|
|
$
|
8.7
|
|
Fixed Income Securities.
The scheduled maturity distribution of available for sale fixed income securities as at
June 30, 2017
and
December 31, 2016
is set forth in the tables 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 June 30, 2017
|
|
Amortized
Cost or Cost
|
|
Fair Market
Value
|
|
Average
S&P Ratings by
Maturity
|
|
($ in millions)
|
Due one year or less
|
$
|
612.6
|
|
|
$
|
615.0
|
|
|
AA
|
Due after one year through five years
|
2,599.3
|
|
|
2,627.0
|
|
|
AA-
|
Due after five years through ten years
|
1,096.7
|
|
|
1,105.6
|
|
|
A+
|
Due after ten years
|
93.4
|
|
|
103.4
|
|
|
A+
|
Subtotal
|
4,402.0
|
|
|
4,451.0
|
|
|
|
Non-agency commercial mortgage-backed
|
4.3
|
|
|
4.3
|
|
|
AAA
|
Agency mortgage-backed
|
982.9
|
|
|
993.1
|
|
|
AA+
|
Asset-backed
|
48.7
|
|
|
48.9
|
|
|
AAA
|
Total fixed income securities — Available for sale
|
$
|
5,437.9
|
|
|
$
|
5,497.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2016
|
|
Amortized
Cost or Cost
|
|
Fair Market
Value
|
|
Average
S&P Ratings by
Maturity
|
|
($ in millions)
|
Due one year or less
|
$
|
567.2
|
|
|
$
|
570.0
|
|
|
AA
|
Due after one year through five years
|
2,643.7
|
|
|
2,671.9
|
|
|
AA-
|
Due after five years through ten years
|
1,172.3
|
|
|
1,168.1
|
|
|
A+
|
Due after ten years
|
99.4
|
|
|
105.1
|
|
|
A+
|
Subtotal
|
4,482.6
|
|
|
4,515.1
|
|
|
|
Non-agency commercial mortgage-backed
|
12.3
|
|
|
12.6
|
|
|
AAA
|
Agency mortgage-backed
|
1,062.6
|
|
|
1,073.9
|
|
|
AA+
|
Asset-backed
|
62.6
|
|
|
63.0
|
|
|
AAA
|
Total fixed income securities — Available for sale
|
$
|
5,620.1
|
|
|
$
|
5,664.6
|
|
|
|
Guaranteed Investments.
As at
June 30, 2017
, the Company held
no
investments which are guaranteed by mono-line insurers, excluding those with explicit government guarantees. The Company has
one
municipal security with fair value less than
$0.1 million
rated D or higher (
December 31, 2016
—
one
municipal security rated CC or higher). The standalone rating (rating without guarantee) is determined as the senior unsecured debt rating of the issuer. Where the credit ratings were split between the two main rating agencies, Standard & Poor’s Financial Services LLC (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”), the lowest rating was used. The Company’s exposure to other third-party guaranteed debt is primarily to investments backed by non-U.S. government guaranteed issuers.
Gross Unrealized Loss.
The following tables summarize, by type of security, the aggregate fair value and gross unrealized loss by length of time the security has been in an unrealized loss position in the Company’s available for sale portfolio as at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2017
|
|
0-12 months
|
|
Over 12 months
|
|
Total
|
|
Fair
Market
Value
|
|
Gross
Unrealized
Loss
|
|
Fair
Market
Value
|
|
Gross
Unrealized
Loss
|
|
Fair
Market
Value
|
|
Gross
Unrealized
Loss
|
|
Number of
Securities
|
|
($ in millions)
|
U.S. government
|
$
|
663.7
|
|
|
$
|
(6.7
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
663.7
|
|
|
$
|
(6.7
|
)
|
|
76
|
|
U.S. agency
|
17.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17.8
|
|
|
—
|
|
|
6
|
|
Municipal
|
10.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.9
|
|
|
—
|
|
|
4
|
|
Corporate
|
693.8
|
|
|
(10.5
|
)
|
|
3.4
|
|
|
(0.1
|
)
|
|
697.2
|
|
|
(10.6
|
)
|
|
274
|
|
Non-U.S. government-backed corporate
|
54.0
|
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
|
54.0
|
|
|
(0.2
|
)
|
|
14
|
|
Non-U.S. government
|
150.7
|
|
|
(0.7
|
)
|
|
21.0
|
|
|
—
|
|
|
171.7
|
|
|
(0.7
|
)
|
|
30
|
|
Asset-backed
|
13.4
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
13.6
|
|
|
—
|
|
|
11
|
|
Agency mortgage-backed
|
488.2
|
|
|
(6.5
|
)
|
|
24.4
|
|
|
(0.7
|
)
|
|
512.6
|
|
|
(7.2
|
)
|
|
139
|
|
Total fixed income securities — Available for sale
|
2,092.5
|
|
|
(24.6
|
)
|
|
49.0
|
|
|
(0.8
|
)
|
|
2,141.5
|
|
|
(25.4
|
)
|
|
554
|
|
Total short-term investments — Available for sale
|
25.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25.4
|
|
|
—
|
|
|
9
|
|
Total
|
$
|
2,117.9
|
|
|
$
|
(24.6
|
)
|
|
$
|
49.0
|
|
|
$
|
(0.8
|
)
|
|
$
|
2,166.9
|
|
|
$
|
(25.4
|
)
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2016
|
|
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
|
$
|
724.4
|
|
|
$
|
(11.2
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
724.4
|
|
|
$
|
(11.2
|
)
|
|
78
|
U.S. agency
|
14.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14.1
|
|
|
—
|
|
|
4
|
Municipal
|
7.7
|
|
|
(0.2
|
)
|
|
0.8
|
|
|
(0.2
|
)
|
|
8.5
|
|
|
(0.4
|
)
|
|
6
|
Corporate
|
1,044.4
|
|
|
(19.4
|
)
|
|
6.6
|
|
|
(0.6
|
)
|
|
1,051.0
|
|
|
(20.0
|
)
|
|
386
|
Non-U.S. government-backed corporate
|
29.6
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
29.6
|
|
|
(0.1
|
)
|
|
11
|
Non-U.S. government
|
143.5
|
|
|
(0.8
|
)
|
|
1.0
|
|
|
—
|
|
|
144.5
|
|
|
(0.8
|
)
|
|
29
|
Asset-backed
|
25.8
|
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
27.2
|
|
|
—
|
|
|
15
|
Agency mortgage-backed
|
527.6
|
|
|
(7.6
|
)
|
|
27.2
|
|
|
(0.7
|
)
|
|
554.8
|
|
|
(8.3
|
)
|
|
148
|
Total fixed income securities — Available for sale
|
2,517.1
|
|
|
(39.3
|
)
|
|
37.0
|
|
|
(1.5
|
)
|
|
2,554.1
|
|
|
(40.8
|
)
|
|
677
|
Total short-term investments — Available for sale
|
1.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.1
|
|
|
—
|
|
|
2
|
Total
|
$
|
2,518.2
|
|
|
$
|
(39.3
|
)
|
|
$
|
37.0
|
|
|
$
|
(1.5
|
)
|
|
$
|
2,555.2
|
|
|
$
|
(40.8
|
)
|
|
679
|
|
|
7.
|
Variable Interest Entities
|
As at
June 30, 2017
, the Company had investments in
three
variable interest entities (“VIE”): Chaspark, Peregrine Reinsurance Ltd (“Peregrine”) and Silverton Re Ltd (“Silverton”).
Chaspark.
The Company has determined that Chaspark has the characteristics of a VIE as addressed by the guidance in ASC 810,
Consolidation
. As discussed in Note 6 of these unaudited condensed consolidated financial statements, the investment in Chaspark is accounted for under the equity method. In the
three and six
months ended
June 30, 2017
, the change in the value
of the Company’s investment in Chaspark was a realized loss of
$0.8 million
and a realized gain of
$0.9 million
, respectively (
June 30, 2016
— $
Nil
and $
Nil
). The adjusted carrying value approximates fair value. For more information on Chaspark, refer to Note 6 of these unaudited condensed consolidated financial statements.
Peregrine.
In November 2016, Peregrine, a subsidiary of the Company, was registered as a segregated accounts company under the Segregated Accounts Companies Act 2000, as amended. As at
June 30, 2017
, Peregrine had three segregated accounts which were funded by a third party investor. The segregated accounts have not been consolidated as part of the Company’s consolidated financial statements. The Company has, however, determined that Peregrine has the characteristics of a VIE as addressed by the guidance in ASC 810,
Consolidation
. The Company concluded that it is not the primary beneficiary of the three segregated accounts of Peregrine but is the primary beneficiary of the Peregrine general fund and, similar to prior reporting periods, the Company has included the results of the Peregrine general fund in its consolidated financial statements. The Company’s exposure to Peregrine’s general fund is not material.
Silverton.
On September 10, 2013, the Company established Silverton, a Bermuda domiciled special purpose insurer
formed to provide additional collateralized capacity to support Aspen Re’s business through retrocession agreements which are collateralized and funded by Silverton through the issuance of one or more series of participating loan notes (collectively, the “Loan Notes”). Silverton is a non-rated insurer and the risks are fully collateralized by way of funds held in trust for the benefit of Aspen Bermuda and Aspen U.K., the ceding reinsurers.
All proceeds from the issuance of the Loan Notes were deposited into separate collateral accounts for each series of Loan Notes to fund Silverton’s obligations under a retrocession property quota share agreement entered into with Aspen Bermuda or Aspen Bermuda and Aspen U.K, as the case may be. The holders of the Loan Notes participate in any profit or loss generated by Silverton attributable to the operations of the respective Silverton segregated account. Any existing value of the Loan Notes will be returned to the noteholders in installments after the expiration of the risk period of the retrocession agreement issued by Silverton for the related series of Loan Notes with the final payment being contractually due on the respective maturity dates.
The following tables show the total liability balance of the Loan Notes for the
six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2017
|
|
|
Third Party
|
|
Aspen Holdings
|
|
Total
|
|
|
($ in millions)
|
Opening balance
|
|
$
|
223.4
|
|
|
$
|
54.5
|
|
|
$
|
277.9
|
|
Total change in fair value for the period
|
|
6.2
|
|
|
1.6
|
|
|
7.8
|
|
Total distributed in the period
|
|
(114.1
|
)
|
|
(28.6
|
)
|
|
(142.7
|
)
|
Closing balance as at June 30, 2017
|
|
$
|
115.5
|
|
|
$
|
27.5
|
|
|
$
|
143.0
|
|
|
|
|
|
|
|
|
Liability
|
|
|
|
|
|
|
Loan notes (long-term liabilities)
|
|
$
|
110.8
|
|
|
$
|
26.4
|
|
|
$
|
137.2
|
|
Accrued expenses (current liabilities)
|
|
4.7
|
|
|
1.1
|
|
|
5.8
|
|
Total aggregate unpaid balance as at June 30, 2017
|
|
$
|
115.5
|
|
|
$
|
27.5
|
|
|
$
|
143.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2016
|
|
|
Third Party
|
|
Aspen Holdings
|
|
Total
|
|
|
($ in millions)
|
Opening balance
|
|
$
|
190.6
|
|
|
$
|
44.4
|
|
|
$
|
235.0
|
|
Total change in fair value for the period
|
|
3.9
|
|
|
1.0
|
|
|
4.9
|
|
Total distributed in the period
|
|
(89.0
|
)
|
|
(19.4
|
)
|
|
(108.4
|
)
|
Closing balance as at June 30, 2016
|
|
$
|
105.5
|
|
|
$
|
26.0
|
|
|
$
|
131.5
|
|
|
|
|
|
|
|
|
Liability
|
|
|
|
|
|
|
Loan notes (long-term liabilities)
|
|
$
|
104.1
|
|
|
$
|
25.7
|
|
|
$
|
129.8
|
|
Accrued expenses (current liabilities)
|
|
1.4
|
|
|
0.3
|
|
|
1.7
|
|
Total aggregate unpaid balance as at June 30, 2016
|
|
$
|
105.5
|
|
|
$
|
26.0
|
|
|
$
|
131.5
|
|
The Company has determined that Silverton has the characteristics of a VIE that are addressed by the guidance in ASC 810,
Consolidation
. The Company concluded that it is the primary beneficiary of Silverton as it owns all of Silverton’s voting shares and issued share capital, and has a significant financial interest and the power to control Silverton. As a result, the Company consolidated Silverton upon its formation. The Company has no other obligation to provide financial support to Silverton and neither the creditors nor beneficial interest holders of Silverton have recourse to the Company’s general credit.
In the event of an extreme catastrophic property reinsurance event or severe credit-related event, there is a risk that Aspen Bermuda and Aspen U.K. would be unable to recover losses from Silverton. These two risks are mitigated as follows:
|
|
i.
|
Silverton has collateralized the aggregate limit provided to Aspen Bermuda and Aspen U.K. by way of a trust in favor of Aspen Bermuda and Aspen U.K. as beneficiaries;
|
|
|
ii.
|
the trustee is a large, well-established regulated entity; and
|
|
|
iii.
|
all funds within the trust account are bound by investment guidelines restricting investments to one of the institutional class money market funds run by large international investment managers.
|
For further information regarding the Loan Notes attributable to the third-party investments in Silverton, refer to Note 8 of these unaudited condensed consolidated financial statements.
|
|
8.
|
Fair Value Measurements
|
The Company’s estimates of fair value for financial assets and liabilities are based on the framework established in the fair value accounting guidance included in ASC 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. The majority of these 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. The majority of these securities are also valued using prices supplied by index providers.
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 the Company’s financial assets and liabilities are measured on a recurring basis as at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
($ in millions)
|
Available for sale financial assets, at fair value
|
|
|
|
|
|
|
|
U.S. government
|
$
|
1,220.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,220.8
|
|
U.S. agency
|
—
|
|
|
75.5
|
|
|
—
|
|
|
75.5
|
|
Municipal
|
—
|
|
|
32.8
|
|
|
—
|
|
|
32.8
|
|
Corporate
|
—
|
|
|
2,503.4
|
|
|
—
|
|
|
2,503.4
|
|
Non-U.S. government-backed corporate
|
—
|
|
|
92.6
|
|
|
—
|
|
|
92.6
|
|
Non-U.S. government
|
373.5
|
|
|
152.4
|
|
|
—
|
|
|
525.9
|
|
Asset-backed
|
—
|
|
|
48.9
|
|
|
—
|
|
|
48.9
|
|
Non-agency commercial mortgage-backed
|
—
|
|
|
4.3
|
|
|
—
|
|
|
4.3
|
|
Agency mortgage-backed
|
—
|
|
|
993.1
|
|
|
—
|
|
|
993.1
|
|
Total fixed income securities available for sale, at fair value
|
1,594.3
|
|
|
3,903.0
|
|
|
—
|
|
|
5,497.3
|
|
Short-term investments available for sale, at fair value
|
38.1
|
|
|
3.8
|
|
|
—
|
|
|
41.9
|
|
Held for trading financial assets, at fair value
|
|
|
|
|
|
|
|
U.S. government
|
112.8
|
|
|
—
|
|
|
—
|
|
|
112.8
|
|
U.S. agency
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Municipal
|
—
|
|
|
5.7
|
|
|
—
|
|
|
5.7
|
|
Corporate
|
—
|
|
|
895.9
|
|
|
—
|
|
|
895.9
|
|
Non-U.S. government-backed corporate
|
—
|
|
|
2.0
|
|
|
—
|
|
|
2.0
|
|
Non-U.S. government
|
1.7
|
|
|
184.8
|
|
|
—
|
|
|
186.5
|
|
Asset-backed
|
—
|
|
|
12.2
|
|
|
—
|
|
|
12.2
|
|
Agency mortgage-backed
|
—
|
|
|
142.4
|
|
|
—
|
|
|
142.4
|
|
Total fixed income securities trading, at fair value
|
114.5
|
|
|
1,243.0
|
|
|
—
|
|
|
1,357.5
|
|
Short-term investments trading, at fair value
|
73.5
|
|
|
0.2
|
|
|
—
|
|
|
73.7
|
|
Equity investments trading, at fair value
|
658.7
|
|
|
—
|
|
|
—
|
|
|
658.7
|
|
Catastrophe bonds trading, at fair value
|
—
|
|
|
28.3
|
|
|
—
|
|
|
28.3
|
|
|
|
|
|
|
|
|
|
Other financial assets and liabilities, at fair value
|
|
|
|
|
|
|
|
Derivatives at fair value — foreign exchange contracts
|
—
|
|
|
22.1
|
|
|
—
|
|
|
22.1
|
|
Liabilities under derivative contracts — foreign exchange contracts
|
—
|
|
|
(8.6
|
)
|
|
—
|
|
|
(8.6
|
)
|
Loan notes issued by variable interest entities, at fair value
|
—
|
|
|
—
|
|
|
(110.8
|
)
|
|
(110.8
|
)
|
Loan notes issued by variable interest entities, at fair value (included within accrued expenses and other payables)
|
—
|
|
|
—
|
|
|
(4.7
|
)
|
|
(4.7
|
)
|
Total
|
$
|
2,479.1
|
|
|
$
|
5,191.8
|
|
|
$
|
(115.5
|
)
|
|
$
|
7,555.4
|
|
There were no transfers between Level 1, Level 2 and Level 3 during the
three and six
months ended
June 30, 2017
. The Company settled
$2.9 million
and
$114.1 million
of Level 3 liabilities in respect of the Loan Notes issued by Silverton for the
three and six
months ended
June 30, 2017
, respectively. As at
June 30, 2017
, there were no assets classified as Level 3 and the Company’s Level 3 liabilities consisted solely of the Loan Notes issued by Silverton.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
($ in millions)
|
Available for sale financial assets, at fair value
|
|
|
|
|
|
|
|
U.S. government
|
$
|
1,206.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,206.1
|
|
U.S. agency
|
—
|
|
|
119.6
|
|
|
—
|
|
|
119.6
|
|
Municipal
|
—
|
|
|
24.4
|
|
|
—
|
|
|
24.4
|
|
Corporate
|
—
|
|
|
2,586.5
|
|
|
—
|
|
|
2,586.5
|
|
Non-U.S. government-backed corporate
|
—
|
|
|
89.8
|
|
|
—
|
|
|
89.8
|
|
Non-U.S. government
|
343.7
|
|
|
145.0
|
|
|
—
|
|
|
488.7
|
|
Asset-backed
|
—
|
|
|
63.0
|
|
|
—
|
|
|
63.0
|
|
Non-agency commercial mortgage-backed
|
—
|
|
|
12.6
|
|
|
—
|
|
|
12.6
|
|
Agency mortgage-backed
|
—
|
|
|
1,073.9
|
|
|
—
|
|
|
1,073.9
|
|
Total fixed income securities available for sale, at fair value
|
1,549.8
|
|
|
4,114.8
|
|
|
—
|
|
|
5,664.6
|
|
Short-term investments available for sale, at fair value
|
118.6
|
|
|
26.7
|
|
|
—
|
|
|
145.3
|
|
Held for trading financial assets, at fair value
|
|
|
|
|
|
|
|
U.S. government
|
82.4
|
|
|
—
|
|
|
—
|
|
|
82.4
|
|
Municipal
|
—
|
|
|
15.5
|
|
|
—
|
|
|
15.5
|
|
Corporate
|
—
|
|
|
820.6
|
|
|
—
|
|
|
820.6
|
|
Non-U.S. government
|
—
|
|
|
202.8
|
|
|
—
|
|
|
202.8
|
|
Asset-backed
|
—
|
|
|
14.5
|
|
|
—
|
|
|
14.5
|
|
Agency mortgage-backed
|
—
|
|
|
129.9
|
|
|
—
|
|
|
129.9
|
|
Total fixed income securities trading, at fair value
|
82.4
|
|
|
1,183.3
|
|
|
—
|
|
|
1,265.7
|
|
Short-term investments trading, at fair value
|
76.1
|
|
|
109.3
|
|
|
—
|
|
|
185.4
|
|
Equity investments trading, at fair value
|
584.7
|
|
|
—
|
|
|
—
|
|
|
584.7
|
|
Catastrophe bonds trading, at fair value
|
—
|
|
|
42.5
|
|
|
—
|
|
|
42.5
|
|
|
|
|
|
|
|
|
|
Other financial assets and liabilities, at fair value
|
|
|
|
|
|
|
|
Derivatives at fair value – foreign exchange contracts
|
—
|
|
|
7.2
|
|
|
—
|
|
|
7.2
|
|
Liabilities under derivative contracts – foreign exchange contracts
|
—
|
|
|
(18.4
|
)
|
|
—
|
|
|
(18.4
|
)
|
Loan notes issued by variable interest entities, at fair value
|
—
|
|
|
—
|
|
|
(115.0
|
)
|
|
(115.0
|
)
|
Loan notes issued by variable interest entities, at fair value (included within accrued expenses and other payables)
|
—
|
|
|
—
|
|
|
(108.4
|
)
|
|
(108.4
|
)
|
Total
|
$
|
2,411.6
|
|
|
$
|
5,465.4
|
|
|
$
|
(223.4
|
)
|
|
$
|
7,653.6
|
|
Transfers of assets into or out of a particular level are recorded at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. During the twelve months ended
December 31, 2016
, the Company transferred
$83.9 million
of non-U.S. government securities from Level 1 to Level 2.
The Company settled
$89.3 million
Level 3 liabilities in respect of the Loan Notes issued by Silverton for the twelve months ended
December 31, 2016
. As at
December 31, 2016
, there were no assets classified as Level 3 and the Company’s Level 3 liabilities consisted of the Loan Notes issued by Silverton.
The following table presents a reconciliation of the beginning and ending balances for all assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Liabilities Using Level 3 Inputs
|
|
|
Three Months Ended June 30, 2017
|
|
Three Months Ended June 30, 2016
|
|
|
|
($ in millions)
|
Balance at the beginning of the period
|
|
|
$
|
115.1
|
|
|
$
|
107.6
|
|
Distributed to third party
|
|
|
(2.9
|
)
|
|
(1.6
|
)
|
Total change in fair value included in the statement of operations
|
|
3.3
|
|
|
(0.5
|
)
|
Balance at the end of the period
(1)
|
|
|
$
|
115.5
|
|
|
$
|
105.5
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Liabilities Using Level 3 Inputs
|
|
|
Six Months Ended June 30, 2017
|
|
Six Months Ended June 30, 2016
|
|
|
|
($ in millions)
|
Balance at the beginning of the period
|
|
|
223.4
|
|
|
190.6
|
|
Distributed to third party
|
|
|
(114.1
|
)
|
|
(89.0
|
)
|
Total change in fair value included in the statement of operations
|
|
6.2
|
|
|
3.9
|
|
Balance at the end of the period
(1)
|
|
|
115.5
|
|
|
105.5
|
|
(1)
The amount classified within accrued expenses and other payables was
$4.7 million
and
$1.4 million
as at
June 30, 2017
and
June 30, 2016
, respectively.
Valuation of Fixed Income Securities
. The Company’s fixed income securities are classified as either available for sale or trading and carried at fair value. As at
June 30, 2017
and
December 31, 2016
, the Company’s 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.
Independent Pricing Services and Index Providers.
The underlying methodology used to determine the fair value of securities in the Company’s 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 Company’s 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.
The Company obtains 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 of newly issued securities. They may also establish pricing through observing secondary trading of similar securities.
The Company obtains prices for all of its fixed income investment securities via its third-party accounting service provider, and in the majority of cases receiving a number of quotes so as to obtain the most comprehensive information available to determine a security’s fair value. A single valuation is applied to each security based on the vendor hierarchy maintained by the Company’s third-party accounting service provider.
As at
June 30, 2017
, the Company obtained an average of
2.2
quotes per fixed income investment, compared to
2.1
quotes as at
December 31, 2016
. Pricing sources used in pricing fixed income investments as at
June 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
As at June 30, 2017
|
|
As at December 31, 2016
|
Index providers
|
85
|
%
|
|
87
|
%
|
Pricing services
|
9
|
|
|
7
|
|
Broker-dealers
|
6
|
|
|
6
|
|
Total
|
100
|
%
|
|
100
|
%
|
Summary Pricing Information Table.
A summary of securities priced using pricing information from index providers as at
June 30, 2017
and
December 31, 2016
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2017
|
|
As at December 31, 2016
|
|
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
|
$
|
1,333.6
|
|
|
100
|
%
|
|
$
|
1,288.2
|
|
|
100
|
%
|
U.S. agency
|
61.5
|
|
|
81
|
%
|
|
110.2
|
|
|
92
|
%
|
Municipal
|
19.5
|
|
|
51
|
%
|
|
28.8
|
|
|
72
|
%
|
Corporate
|
3,221.8
|
|
|
95
|
%
|
|
3,275.3
|
|
|
96
|
%
|
Non-U.S. government-backed corporate
|
44.7
|
|
|
47
|
%
|
|
44.8
|
|
|
50
|
%
|
Non-U.S. government
|
425.4
|
|
|
63
|
%
|
|
455.6
|
|
|
72
|
%
|
Asset-backed
|
26.4
|
|
|
43
|
%
|
|
32.1
|
|
|
41
|
%
|
Non-agency commercial mortgage-backed
|
4.3
|
|
|
100
|
%
|
|
12.5
|
|
|
98
|
%
|
Agency mortgage-backed
|
637.5
|
|
|
56
|
%
|
|
691.9
|
|
|
58
|
%
|
Total fixed income securities
|
$
|
5,774.7
|
|
|
85
|
%
|
|
$
|
5,939.4
|
|
|
87
|
%
|
Equities
|
657.0
|
|
|
100
|
%
|
|
584.7
|
|
|
100
|
%
|
Total fixed income securities and equity investments
|
$
|
6,431.7
|
|
|
86
|
%
|
|
$
|
6,524.1
|
|
|
88
|
%
|
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 providers to assess the ongoing 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 for each security 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 the Company’s knowledge of the current market.
|
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 information available from market or internal sources, including those available to the Company’s 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 the Company’s investment accounting service provider.
Management reviews the vendor hierarchy maintained by the Company’s 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 Company’s 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 Company’s 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.
Fixed Income Securities
. The Company’s fixed income securities are traded on the over-the-counter (“OTC”) market based on prices provided by one or more market makers in each security. Securities such as U.S. Government, U.S. Agency, Non-U.S. 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 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 Company’s 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 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.
Municipals.
The Company’s 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.
Foreign Government.
The issuers for securities in this category are non-U.S. governments and their agencies. The fair values of certain 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 remaining non-U.S government bonds are classified within Level 2 as they are not actively traded. 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. In addition, foreign government securities include a portion of the Emerging Market Debt (“EMD”) portfolio which is also 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 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. In addition, corporate securities include a portion of the EMD portfolio. The Company classifies all of these securities within Level 2.
Mortgage-backed Securities.
The Company’s 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 Company’s 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. Short-term investments are valued in a manner similar to the Company’s 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 trading 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. As at
June 30, 2017
, the Company obtained an average of
3.9
quotes per equity investment, compared
to
3.9
quotes as at
December 31, 2016
. Pricing sources used in pricing equities as at
June 30, 2017
and
December 31, 2016
were substantially all provided by index providers.
Catastrophe Bonds.
Catastrophe bonds held by the Company are variable rate fixed income instruments with redemption values adjusted based on the occurrence of a covered event, usually windstorms and earthquakes. These bonds have been classified as trading and carried at fair value. Bonds are priced using an average of multiple broker-dealer quotes and, as such, are classified as Level 2.
Foreign Exchange Contracts.
The foreign exchange contracts which the Company uses to mitigate currency risk are characterized as OTC due to their customized nature and the fact that they do not trade on a major exchange. These instruments trade in a deep liquid market, providing substantial price transparency and accordingly are classified as Level 2.
Loan Notes Issued by Silverton
. Silverton, a licensed special purpose insurer, is consolidated into the Company’s accounts as a VIE. In the fourth quarter of 2014, Silverton issued an additional
$85.0 million
(
$70.0 million
third-party funded) of Loan Notes with a maturity date of September 18, 2017. In the fourth quarter of 2015, Silverton issued an additional
$125.0 million
(
$100.0 million
third-party funded) of Loan Notes with a maturity date of September 17, 2018. In the fourth quarter of 2016, Silverton issued an additional
$130.0 million
(
$105.0 million
third-party funded) of Loan Notes with a maturity date of September 16, 2019. The Company elected to account for the Loan Notes at fair value using the guidance as prescribed under ASC 825,
Financial Instruments
as the Company believes it represents the most meaningful measurement basis for these liabilities. The Loan Notes are recorded at fair value at each reporting period and, as they are not quoted on an active market and contain significant unobservable inputs, they have been classified as a Level 3 instrument in the Company’s fair value hierarchy. The Loan Notes are unique because they are linked to the specific risks of the Company’s property catastrophe book.
To determine the fair value of the Loan Notes the Company runs an internal model which considers the seasonality of the risk assumed under the retrocessional agreement between Aspen Bermuda or a combination of Aspen Bermuda and Aspen U.K., as ceding reinsurers, and Silverton. The seasonality used in the model is initially determined by applying the percentage of property catastrophe losses planned by the Company’s actuaries to the estimated written premium to determine earned premium for each quarter. The inputs to the internal model are based on Company specific data due to the lack of observable market inputs. Reserves for losses are the most significant unobservable input. An increase in reserves for losses would normally result in a decrease in the fair value of the Loan Notes while a decrease in reserves would normally result in an increase in the fair value of the Loan Notes. The observable and unobservable inputs used to determine the fair value of the Loan Notes as at
June 30, 2017
and
December 31, 2016
are presented in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2017
|
|
Fair Value
Level 3
|
|
Valuation Method
|
|
Observable (O) and
Unobservable (U) inputs
|
|
Low
|
|
High
|
|
($ in millions)
|
|
|
|
|
($ in millions)
|
Loan Notes
|
|
$
|
115.5
|
|
(1)
|
Internal Valuation Model
|
|
Gross premiums written (O)
|
|
$
|
42.9
|
|
|
$
|
50.0
|
|
|
|
|
|
|
|
Reserve for losses (U)
|
|
$
|
1.2
|
|
|
$
|
7.4
|
|
|
|
|
|
|
|
Contract period (O)
|
|
N/A
|
|
|
365 days
|
|
|
|
|
|
|
|
Initial value of issuance (O)
|
|
$
|
325.0
|
|
|
$
|
325.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2016
|
|
Fair Value
Level 3
|
|
Valuation Method
|
|
Observable (O) and
Unobservable (U) inputs
|
|
Low
|
|
High
|
|
($ in millions)
|
|
|
|
|
($ in millions)
|
Loan Notes
|
|
$
|
223.4
|
|
(1)
|
Internal Valuation Model
|
|
Gross premiums written (O)
|
|
$
|
38.9
|
|
|
$
|
43.4
|
|
|
|
|
|
|
|
Reserve for losses (U)
|
|
$
|
2.7
|
|
|
$
|
11.8
|
|
|
|
|
|
|
|
Contract period (O)
|
|
N/A
|
|
|
365 days
|
|
|
|
|
|
|
|
Initial value of issuance (O)
|
|
$
|
220.0
|
|
|
$
|
220.0
|
|
(1)
The amount classified within accrued expenses and other payables was
$4.7 million
and
$108.4 million
as at
June 30, 2017
and December 31, 2016, respectively.
The observable and unobservable inputs represent the potential variation around the inputs used in the internal model. The contract period is defined in the respective Loan Notes agreements and the initial value represents the funds received from third parties. For further information regarding Silverton, refer to Note 7 of these unaudited condensed consolidated financial statements.
The Company purchases retrocession and reinsurance to limit and diversify the Company’s risk exposure and increase its own insurance and reinsurance underwriting capacity. These agreements provide for recovery of a portion of losses and loss
adjustment expenses from reinsurers. As is the case with most reinsurance contracts, the Company remains liable to the extent that reinsurers do not meet their obligations under these agreements and therefore, in line with its risk management objectives, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. The largest concentrations of un-collateralized reinsurance recoverables for unpaid losses as at
June 30, 2017
were
13.4%
(
December 31, 2016
—
16.8%
) with
Munich Re
which is rated AA- by S&P,
6.9%
(
December 31, 2016
—
12.8%
) with
Lloyd's Syndicates
which are rated A+ by S&P and
4.4%
(
December 31, 2016
—
4.6%
) with
Axis
which is rated A+ by S&P.
The following tables summarize information on the location and amounts of derivative fair values on the consolidated balance sheet as at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2017
|
|
As at December 31, 2016
|
|
Derivatives Not Designated as Hedging Instruments
Under ASC 815
|
|
Balance Sheet Location
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
|
|
|
|
|
($ in millions)
|
|
($ in millions)
|
|
Foreign Exchange Contracts
|
|
Derivatives at Fair Value
|
|
$
|
547.3
|
|
|
$
|
19.5
|
|
|
$
|
240.2
|
|
|
$
|
5.0
|
|
|
Foreign Exchange Contracts
|
|
Liabilities under Derivative Contracts
|
|
$
|
267.3
|
|
|
$
|
(8.6
|
)
|
|
$
|
425.4
|
|
|
$
|
(17.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2017
|
|
As at December 31, 2016
|
|
Derivatives Designated as Hedging Instruments Under ASC 815
|
|
Balance Sheet Location
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
|
|
|
|
|
($ in millions)
|
|
($ in millions)
|
|
Foreign Exchange Contracts
|
|
Derivatives at Fair Value
|
|
$
|
54.6
|
|
|
$
|
2.6
|
|
(1)
|
$
|
—
|
|
|
$
|
2.2
|
|
|
Foreign Exchange Contracts
|
|
Liabilities under Derivative Contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
108.6
|
|
|
$
|
(0.7
|
)
|
|
|
|
(1)
|
Net of $
Nil
cash collateral (
December 31, 2016
—
$2.2 million
).
|
The following table provides the unrealized and realized gains/(losses) recorded in the statements of operations and other comprehensive income for derivatives that are not designated or designated as hedging instruments under ASC 815 - "
Derivatives and Hedging"
for the
three and six
months ended
June 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) Recognized on Derivatives
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
Location of Gain/(Loss)
Recognized on Derivatives
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
Derivatives not designated as hedges
|
|
|
|
|
($ in millions)
|
|
($in millions)
|
Foreign Exchange Contracts
|
|
Change in Fair Value of Derivatives
|
|
17.6
|
|
|
0.2
|
|
|
20.7
|
|
|
(4.2
|
)
|
Interest Rate Swaps
|
|
Change in Fair Value of Derivatives
|
|
—
|
|
|
(0.6
|
)
|
|
—
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
General, administrative and corporate expenses
|
|
0.9
|
|
|
(1.4
|
)
|
|
1.2
|
|
|
(2.5
|
)
|
Foreign Exchange Contracts
|
|
Net change from current period hedged transactions
|
|
2.4
|
|
|
(2.9
|
)
|
|
3.7
|
|
|
(5.0
|
)
|
Foreign Exchange Contracts.
The Company uses foreign exchange contracts to manage foreign currency risk. A foreign 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 exchange contracts will not eliminate fluctuations in the value of the Company’s assets and liabilities denominated in foreign currencies but rather allow it to establish a rate of exchange for a future point in time.
As at
June 30, 2017
, the Company held foreign exchange contracts that were not designated as hedging under ASC 815 with an aggregate notional value of
$814.6 million
(
December 31, 2016
—
$665.6 million
). The foreign exchange 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 six
months ended
June 30, 2017
, the impact of foreign exchange contracts on net income was a
gain
of
$17.6 million
(
June 30, 2016
—
gain
of
$0.2 million
) and a
gain
of
$20.7 million
(
June 30, 2016
—
loss
of
$4.2 million
), respectively.
As at
June 30, 2017
, the Company held foreign exchange contracts that were designated as hedging under ASC 815 with an aggregate nominal amount of
$54.6 million
(
December 31, 2016
—
$108.6 million
). The foreign exchange contracts are recorded as derivatives at fair value in the balance sheet with the effective portion recorded in other comprehensive income and the ineffective portion recorded as a change in fair value of derivatives in the statement of operations. The contracts are considered to be effective and therefore the movement in other comprehensive income representing the effective portion for the
three and six
months ended
June 30, 2017
was a net unrealized
gain
of
$2.4 million
(
June 30, 2016
—
loss
of
$2.9 million
) and a net unrealized
gain
of
$3.7 million
(
June 30, 2016
—
loss
of
$5.0 million
), respectively.
As the foreign exchange contracts settle, the realized gain or loss is reclassified from other comprehensive income into general, administration and corporate expenses of the statement of operations and other comprehensive income. For the
three and six
months ended
June 30, 2017
, the amount recognized within general, administrative and corporate expenses for settled foreign exchange contracts was a realized
gain
of
$0.9 million
(
June 30, 2016
—
loss
of
$1.4 million
) and a net realized
gain
of
$1.2 million
(
June 30, 2016
—
loss
of
$2.5 million
), respectively.
Interest Rate Swaps.
In 2014, the Company decided to let its interest rate program roll-off and not renew maturing positions. This decision was made after an extensive reassessment of the costs of maintaining an interest rate swap program in a steep yield curve environment. In addition, the continued uncertainty in the global economy and low inflation make it difficult to gauge the timing and speed of interest rate rises by the Federal Reserve. On May 9, 2016, the Company terminated all remaining outstanding interest rate swaps (notional value of
$256.3 million
) under its International Swap Dealers Association agreement.
As at
June 30, 2017
and
December 31, 2016
, the Company no longer had outstanding interest rate swaps. There was
no
charge in respect of the interest rate swaps for the
three and six
months ended
June 30, 2017
(
June 30, 2016
—
loss
of
$0.6 million
and
loss
of
$3.4 million
), respectively.
11. Deferred Policy Acquisition Costs
The following table represents a reconciliation of beginning and ending deferred policy acquisition costs for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
($ in millions)
|
|
($ in millions)
|
Balance at the beginning of the period
|
$
|
367.5
|
|
|
$
|
407.7
|
|
|
$
|
358.4
|
|
|
$
|
361.1
|
|
|
Acquisition costs deferred
|
93.4
|
|
|
128.1
|
|
|
216.2
|
|
|
304.9
|
|
|
Amortization of deferred policy acquisition costs
|
(96.3
|
)
|
|
(126.7
|
)
|
|
(210.0
|
)
|
|
(256.9
|
)
|
Balance at the end of the period
|
$
|
364.6
|
|
|
$
|
409.1
|
|
|
$
|
364.6
|
|
|
$
|
409.1
|
|
|
|
12.
|
Reserves for Losses and Loss Adjustment Expenses
|
The following table represents a reconciliation of beginning and ending consolidated loss and loss adjustment expenses (“LAE”) reserves for
the six months
ended
June 30, 2017
and
2016
and the twelve months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
Six Months Ended June 30, 2016
|
|
Twelve Months Ended December 31, 2016
|
|
($ in millions)
|
Provision for losses and LAE at the start of the year
|
$
|
5,319.9
|
|
|
$
|
4,938.2
|
|
|
$
|
4,938.2
|
|
Less reinsurance recoverable
|
(560.7
|
)
|
|
(354.8
|
)
|
|
(354.8
|
)
|
Net loss and LAE at the start of the year
|
4,759.2
|
|
|
4,583.4
|
|
|
4,583.4
|
|
|
|
|
|
|
|
Net loss and LAE expenses assumed
|
—
|
|
|
5.7
|
|
|
(80.1
|
)
|
|
|
|
|
|
|
Provision for losses and LAE for claims incurred:
|
|
|
|
|
|
Current year
|
749.2
|
|
|
842.4
|
|
|
1,705.4
|
|
Prior years
|
(74.9
|
)
|
|
(42.8
|
)
|
|
(129.3
|
)
|
Total incurred
|
674.3
|
|
|
799.6
|
|
|
1,576.1
|
|
Losses and LAE payments for claims incurred:
|
|
|
|
|
|
Current year
|
(54.4
|
)
|
|
(21.0
|
)
|
|
(241.0
|
)
|
Prior years
|
(686.7
|
)
|
|
(555.2
|
)
|
|
(981.8
|
)
|
Total paid
|
(741.1
|
)
|
|
(576.2
|
)
|
|
(1,222.8
|
)
|
|
|
|
|
|
|
Foreign exchange losses/(gains)
|
99.6
|
|
|
(41.4
|
)
|
|
(97.4
|
)
|
|
|
|
|
|
|
Net losses and LAE reserves at period end
|
4,792.0
|
|
|
4,771.1
|
|
|
4,759.2
|
|
Plus reinsurance recoverable on unpaid losses at period end
|
779.4
|
|
|
410.4
|
|
|
560.7
|
|
Provision for losses and LAE at the end of the relevant period
|
$
|
5,571.4
|
|
|
$
|
5,181.5
|
|
|
$
|
5,319.9
|
|
For the
six
months ended
June 30, 2017
, there was a reduction of
$74.9 million
in the Company’s estimate of the ultimate claims to be paid in respect of prior accident years compared to a reduction of
$42.8 million
for
the six months
ended
June 30, 2016
. In
the six months
ended
June 30, 2016
, the Company assumed
$5.7 million
of additional loss reserves as a result of its acquisition of AG Logic Holdings LLC and its subsidiaries (“AgriLogic”), a wholly owned specialist U.S. admitted crop intermediary with an integrated agricultural consultancy. The Company ceded
$85.8 million
of reserves as part of an adverse development cover purchased during the twelve months ended December 31, 2016. For additional information on the reserve releases, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Reserves for Losses and Loss Adjustment Expenses” below.
The following tables show an analysis of incurred claims and allocated loss adjustment expenses, net of reinsurance and cumulative paid claims and allocated claim adjustment expenses, net of reinsurance as at
June 30, 2017
, December 31, 2016, 2015, 2014, 2013 and 2012. The loss development triangles are derived from all business written by the Company. Although a limited number of contracts are written which have durations of greater than one year, the contracts do not meet the definition of a long duration contract.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
|
Incurred Claims, IBNR and Loss Adjustment Expenses, Net of Reinsurance
|
|
As at June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of IBNR Plus Expected Development on Reported Claims
|
|
Cumulative Number of Reported Claims
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
Unaudited Prior Years
|
|
|
|
|
|
|
Accident
Year
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
Q2 2017
|
|
|
|
|
$ (in millions)
|
|
|
|
|
2012
|
|
603.4
|
|
|
625.3
|
|
|
654.4
|
|
|
668.4
|
|
|
653.2
|
|
|
641.2
|
|
|
53.8
|
|
|
15,541
|
|
2013
|
|
|
|
688.0
|
|
|
666.3
|
|
|
677.5
|
|
|
658.8
|
|
|
674.0
|
|
|
72.2
|
|
|
14,461
|
|
2014
|
|
|
|
|
|
753.0
|
|
|
727.8
|
|
|
700.0
|
|
|
717.2
|
|
|
152.2
|
|
|
18,577
|
|
2015
|
|
|
|
|
|
|
|
911.5
|
|
|
901.3
|
|
|
889.9
|
|
|
245.7
|
|
|
20,566
|
|
2016
|
|
|
|
|
|
|
|
|
|
905.2
|
|
|
889.3
|
|
|
351.4
|
|
|
19,623
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
405.7
|
|
|
305.1
|
|
|
5,979
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
4,217.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
Cumulative Paid Claims and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Accident Year
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
Q2 2017
|
|
|
($ in millions)
|
|
|
2012
|
|
116.8
|
|
|
307.5
|
|
|
378.7
|
|
|
453.2
|
|
|
502.8
|
|
|
519.3
|
|
2013
|
|
|
|
90.4
|
|
|
253.8
|
|
|
364.0
|
|
|
455.2
|
|
|
473.4
|
|
2014
|
|
|
|
|
|
99.4
|
|
|
247.0
|
|
|
389.6
|
|
|
423.6
|
|
2015
|
|
|
|
|
|
|
|
118.8
|
|
|
325.6
|
|
|
427.5
|
|
2016
|
|
|
|
|
|
|
|
|
|
116.9
|
|
|
265.4
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
20.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
2,129.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All outstanding liabilities for 2012 and subsequent years, net of reinsurance
|
|
|
$
|
2,087.7
|
|
|
|
|
|
All outstanding liabilities before 2012, net of reinsurance
|
|
|
232.0
|
|
|
|
|
|
Liabilities for claims and claim adjustment expenses, net of reinsurance
|
|
|
$
|
2,319.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
|
|
|
|
Incurred Claims, IBNR and Loss Adjustment Expenses, Net of Reinsurance
|
|
As at June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of IBNR Plus Expected Development on Reported Claims
|
|
Cumulative Number of Reported Claims
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
Unaudited Prior Years
|
|
|
|
|
|
|
Accident
Year
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
Q2 2017
|
|
|
|
|
$ (in millions)
|
|
|
|
|
2012
|
|
691.5
|
|
|
736.0
|
|
|
719.6
|
|
|
690.1
|
|
|
688.8
|
|
|
683.6
|
|
|
101.2
|
|
|
3,620
|
|
2013
|
|
|
|
577.5
|
|
|
570.0
|
|
|
548.8
|
|
|
522.9
|
|
|
514.9
|
|
|
100.5
|
|
|
3,457
|
|
2014
|
|
|
|
|
|
549.1
|
|
|
528.8
|
|
|
513.1
|
|
|
496.0
|
|
|
127.7
|
|
|
3,316
|
|
2015
|
|
|
|
|
|
|
|
579.7
|
|
|
563.2
|
|
|
553.5
|
|
|
185.3
|
|
|
3,299
|
|
2016
|
|
|
|
|
|
|
|
|
|
749.5
|
|
|
754.7
|
|
|
325.9
|
|
|
2,764
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
366.6
|
|
|
258.3
|
|
|
1,242
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
3,369.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
Cumulative Paid Claims and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Accident Year
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
Q2 2017
|
|
|
($ in millions)
|
|
|
2012
|
|
63.2
|
|
|
247.6
|
|
|
360.3
|
|
|
414.1
|
|
|
458.0
|
|
|
483.4
|
|
2013
|
|
|
|
63.0
|
|
|
185.7
|
|
|
277.2
|
|
|
318.8
|
|
|
342.4
|
|
2014
|
|
|
|
|
|
56.8
|
|
|
172.0
|
|
|
247.6
|
|
|
271.9
|
|
2015
|
|
|
|
|
|
|
|
57.3
|
|
|
171.1
|
|
|
236.5
|
|
2016
|
|
|
|
|
|
|
|
|
|
125.9
|
|
|
249.4
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
1,617.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All outstanding liabilities for 2012 and subsequent years, net of reinsurance
|
|
|
1,751.7
|
|
|
|
|
|
All outstanding liabilities before 2012, net of reinsurance
|
|
|
677.6
|
|
|
|
|
|
Liabilities for claims and claim adjustment expenses, net of reinsurance
|
|
|
$
|
2,429.3
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
($ in millions)
|
Net outstanding liabilities:
|
|
Insurance lines
|
$
|
2,319.7
|
|
Reinsurance lines
|
2,429.3
|
|
Net loss and LAE
|
4,749.0
|
|
|
|
Reinsurance recoverable on unpaid losses:
|
|
Insurance lines
|
653.3
|
|
Reinsurance lines
|
126.1
|
|
Total reinsurance recoverable on unpaid losses
|
779.4
|
|
|
|
Insurance lines other than short-duration
|
—
|
|
Unallocated claims incurred
|
41.6
|
|
Other
|
1.4
|
|
|
$
|
43.0
|
|
|
|
Provision for losses and LAE at the end of the period
|
$
|
5,571.4
|
|
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
|
|
1
|
|
2
|
|
3
|
|
4
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
14.4
|
%
|
|
24.5
|
%
|
|
16.0
|
%
|
|
12.6
|
%
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
11.9
|
%
|
|
23.2
|
%
|
|
16.2
|
%
|
|
7.9
|
%
|
|
6.4
|
%
|
The following table provides a summary of the Company’s authorized and issued share capital as at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2017
|
|
As at December 31, 2016
|
|
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
|
|
Total authorized share capital
|
|
|
1,631
|
|
|
|
|
1,631
|
|
Issued share capital:
|
|
|
|
|
|
|
|
Issued ordinary shares of 0.15144558¢ per share
|
59,844,075
|
|
|
91
|
|
|
59,774,464
|
|
|
91
|
|
Issued 7.401% preference shares of 0.15144558¢ each with a liquidation preference of $25 per share
|
—
|
|
|
—
|
|
|
5,327,500
|
|
|
8
|
|
Issued 7.250% preference shares of 0.15144558¢ each with a liquidation preference of $25 per share
|
6,400,000
|
|
|
10
|
|
|
6,400,000
|
|
|
10
|
|
Issued 5.95% preference shares of 0.15144558¢ each with a liquidation preference of $25 per share
|
11,000,000
|
|
|
17
|
|
|
11,000,000
|
|
|
17
|
|
Issued 5.625% preference shares of 0.15144558¢ each with a liquidation preference of $25 per share
|
10,000,000
|
|
|
15
|
|
|
10,000,000
|
|
|
15
|
|
Total issued share capital
|
|
|
133
|
|
|
|
|
140
|
|
Additional paid-in capital as at
June 30, 2017
was
$1,125.2 million
(
December 31, 2016
—
$1,259.6 million
). Additional paid-in capital includes the aggregate liquidation preferences of the Company’s preference shares of
$685.0 million
(
December 31, 2016
—
$818.2 million
) less issue costs of
$18.7 million
(
December 31, 2016
—
$21.1 million
).
Ordinary Shares.
The following table summarizes transactions in the Company’s ordinary shares during the
six
months ended
June 30, 2017
:
|
|
|
|
|
Number of Ordinary Shares
|
Ordinary shares in issue as at December 31, 2016
|
59,774,464
|
|
Ordinary share transactions in the six months ended June 30, 2017
|
|
Ordinary shares issued to employees under the 2013 share incentive plan and/or
2008 share purchase plan
|
258,150
|
|
Ordinary shares issued to non-employee directors
|
9,134
|
|
Ordinary shares repurchased
|
(197,673
|
)
|
Ordinary shares in issue as at June 30, 2017
|
59,844,075
|
|
Share Repurchase Authorization Program
. On February 8, 2017, the Company’s Board of Directors approved a new share repurchase authorization program of
$250.0 million
. The new share repurchase authorization program, which was effective immediately and expires on February 8, 2019, permits the Company to effect the repurchases of its ordinary shares from time to time through a combination of transactions, including open market purchases, privately negotiated transactions and accelerated share repurchase transactions.
The Company acquired and canceled
197,673
ordinary shares for the
three and six
months ended
June 30, 2017
. The total consideration paid for the
three and six
months ended
June 30, 2017
was
$10.0 million
. The Company acquired and canceled
409,800
and
978,039
ordinary shares for the
three and six
months ended
June 30, 2016
, respectively. The total consideration paid for the
three and six
months ended
June 30, 2016
was
$18.5 million
and
$43.5 million
, respectively, and the average price per ordinary share for the
three and six
months ended
June 30, 2016
was
$45.10
and
$44.46
, respectively.
Preference Share Issuance and Redemption.
On September 20, 2016, the Company issued
10,000,000
shares of
5.625%
Perpetual Non-Cumulative Preference Shares (the “
5.625%
Preference Shares”). The
5.625%
Preference Shares have a liquidation preference of
$25
per share. Net proceeds were
$241.3 million
, comprising
$250.0 million
of total liquidation preference less
$8.7 million
of issuance expenses. The Company used a portion of the net proceeds from the offering to redeem the Company’s outstanding
7.401%
Perpetual Non-Cumulative Preference Shares on January 3, 2017 and used a portion of the net proceeds from
the offering to redeem the
7.250%
Perpetual Non-Cumulative Preference Shares on July 1, 2017. The
5.625%
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
5.625%
Preference Shares at a redemption price of
$25
per share on or after January 1, 2027. The
5.625%
Preference Shares are listed on the NYSE under the symbol “AHLPRD”. For further information regarding the
7.250%
Perpetual Non-Cumulative Preference Shares, refer to Note 17 of these unaudited condensed consolidated financial statements.
The Company has issued options and other equity incentives under
three
arrangements: employee incentive plans, a non-employee director plan and employee share purchase plans. When options are exercised or other equity awards vest, new ordinary shares are issued because the Company does not currently hold treasury shares.
Employee and Non-Employee Director Awards.
Employee options and other stock awards were granted under the Aspen 2003 Share Incentive Plan, as amended (the “2003 Share Incentive Plan”), prior to April 24, 2013 and thereafter under the 2013 Share Incentive Plan, as amended (the “2013 Share Incentive Plan”). The total number of ordinary shares that may be issued under the 2013 Share Incentive Plan is
2,845,683
ordinary shares, which includes
595,683
ordinary shares available to grant under the 2003 Share Incentive Plan as of February 25, 2013. The number of ordinary shares that may be issued under the 2013 Share Incentive Plan is adjusted per the number of awards that may be forfeited under the 2003 Share Incentive Plan. The non-employee director awards were granted under the 2006 Stock Option Plan for Non-Employee Directors prior to April 21, 2016 and thereafter under the 2016 Stock Option Plan for Non-Employee Directors, as amended (the “2016 Non-Employee Director Plan”). The total number of ordinary shares that may be issued under the 2016 Non-Employee Director Plan is
263,695
.
Employee stock options are granted with an exercise price equivalent to the fair value of the ordinary 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 exercise period with vesting dependent on time and performance conditions established at the time of grant.
No
stock options were granted or exercised during the
six
months ended
June 30, 2017
(
2016
—
Nil
) and
no
ordinary shares were issued in the
six
months ended
June 30, 2017
(
2016
—
29,222
ordinary shares).
No
charges against income were made in respect of stock options for the
six
months ended
June 30, 2017
(
2016
— $
Nil
).
Restricted share units (“RSUs”) granted to employees typically vest over a two or
three
-year period subject to the employee's continued service. Some of the RSUs vest at year-end, while others vest on the anniversary of the date of grant or when the Compensation Committee of the Board of Directors agrees to deliver the RSUs. The fair value of the RSUs is based on the closing price on the date of the grant less a deduction for illiquidity, and is expensed through the income statement evenly over the vesting period. In the
six
months ended
June 30, 2017
, the Company granted
174,489
RSUs (
2016
—
292,699
) to its employees. Compensation costs charged against income in respect of RSUs granted to employees for the
six
months ended
June 30, 2017
were
$5.0 million
(
2016
—
$4.6 million
).
In the case of non-employee directors, generally
one-twelfth
of the RSUs vest on each one month anniversary of the date of grant, with
100%
of the RSUs vesting on the first anniversary of the date of grant, or on the date of departure of a director (for the amount vested through such date). On February 8, 2017 (with a grant date of February 10, 2017), the Board of Directors approved a total of
22,230
RSUs for non-employee directors (February 8,
2016
—
24,456
RSUs) and
8,892
RSUs for the Chairman of the Board of Directors (February 8,
2016
—
10,962
RSUs). Compensation costs charged against income in respect of RSUs granted to non-employee directors for the
six
months ended
June 30, 2017
were
$0.7 million
(
2016
—
$0.8 million
).
The total fair value adjustment for all RSUs for the
six
months ended
June 30, 2017
was $
Nil
(
2016
—
$0.3 million
). The total tax credit recognized by the Company in relation to RSUs in the
six
months ended
June 30, 2017
was
$1.2 million
(
2016
—
$1.1 million
).
Performance Shares.
During the
six
months ended
June 30, 2017
, the Company granted
206,076
performance shares to its employees (
2016
—
278,477
). The performance shares are 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. One-third of the grant is eligible for vesting each year based on a formula and the performance shares are only issuable at the end of the three-year period.
If the diluted BVPS growth achieved in
2017
is:
|
|
•
|
less than
5.00%
, then the portion of the performance shares subject to the vesting conditions in such year will be forfeited (i.e., one-third of the initial grant);
|
|
|
•
|
between
5.00%
and
10.00%
, then the percentage of the performance shares eligible for vesting in such year will be between
10%
and
100%
on a straight-line basis; or
|
|
|
•
|
between
10.00%
and
20.00%
, then the percentage of the performance shares eligible for vesting in such year will be between
100%
and
200%
on a straight-line basis.
|
In calculating BVPS for
2017
, the entire movement in AOCI will be excluded. Interest rate movements and credit spread movements in AOCI can be fairly significant and impact growth in BVPS which management does not have any control over. The Compensation Committee will review the impact of any capital management actions undertaken during
2017
, including share repurchases and special dividends, and consider whether any further adjustments to growth in BVPS should be made in the context of such actions. The calculation of BVPS for
2017
will likewise exclude all transactional expenses incurred in connection with any transaction which, if consummated, would result in a change in control, including without limitation the cost of defending against any such transaction and any third-party legal and advisory costs. The calculation of BVPS for
2017
will likewise exclude the impact of amortization of goodwill/intangibles resulting from any corporate acquisitions. The Compensation Committee believes that it would not be appropriate for employees’ performance-related compensation to be impacted by these costs.
The Compensation Committee will determine the vesting conditions for the
2018
and
2019
portions of the grant in such years taking into consideration the market conditions and the Company’s business plans at the commencement of the years concerned. Notwithstanding the vesting criteria for each given year, if the shares eligible for vesting in
2018
and
2019
are greater than
100%
for the portion of such year’s grant and the average diluted BVPS growth over such year and the preceding year is less than the average of the minimum vesting thresholds for such year and the preceding year, then only
100%
(and no more) of the ordinary 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 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 closing ordinary share price on the date of the grant less a deduction for illiquidity and expected dividends which would not accrue during the vesting period. Compensation costs charged against income in the
six
months ended
June 30, 2017
in respect of performance shares were
$1.2 million
(
2016
—
$2.8 million
). The total tax recognized by the Company in relation to performance shares in the
six
months ended
June 30, 2017
was a tax credit of
$0.3 million
(
2016
—
$0.6 million
).
Phantom Shares.
During the
six
months ended
June 30, 2017
, the Compensation Committee approved the grant of
173,619
phantom shares to its employees (
2016
—
146,357
). The phantom shares are 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
2017
performance shares, with the difference being that any vested amount is paid in cash in lieu of ordinary shares. As ordinary shares are not issued, the phantom shares have no dilutive effect.
The fair value of the phantom shares is based on the closing ordinary share price on the date of the grant less a deduction for illiquidity. The fair value is expensed through the consolidated income statement evenly over the vesting period, but as the payment to beneficiaries will ultimately be in cash rather than ordinary 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
six
months ended
June 30, 2017
in respect of phantom shares were
$2.1 million
(
2016
—
$1.0 million
) with a fair value adjustment for the
six
months ended
June 30, 2017
of
$2.1 million
(
2016
—
$1.3 million
). The total tax credit recognized by the Company in relation to phantom shares in the
six
months ended
June 30, 2017
was
$0.1 million
(
2016
—
$0.3 million
).
Employee Share Purchase Plans.
On April 30, 2008, the shareholders of the Company approved the Employee Share Purchase Plan, the 2008 Sharesave Scheme and the International Employee Share Purchase Plan (collectively, the “ESPP”), which are implemented by a series of consecutive offering periods as determined by the Board of Directors. In respect of the Employee Share Purchase Plan and the International Employee Share Purchase Plan, employees can save up to
$500
per month over a
two
-year period, at the end of which they are eligible to purchase the Company’s ordinary shares at a discounted price. In respect of the 2008 Sharesave Scheme, employees can save up to
£500
per month over a
three
-year period, at the end of which they are eligible to purchase the Company’s ordinary shares at a discounted price. Employees can purchase the Company’s ordinary shares at a discounted price equivalent to eighty-five percent (
85%
) of the fair market value of the ordinary shares on the offering date which may be adjusted upon changes in capitalization of the Company. Under the ESPP,
9,979
ordinary shares were exercised and issued during the
six
months ended
June 30, 2017
(
2016
—
13,153
). Compensation costs charged against income in the
six
months ended
June 30, 2017
in respect of the ESPP were
$0.2 million
(
2016
—
$0.2 million
).
|
|
15.
|
Intangible Assets and Goodwill
|
The following table provides a summary of the Company’s intangible assets for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
Three Months Ended June 30, 2016
|
|
Beginning of the Period
|
|
Additions
|
|
Amortization
|
|
End of the Period
|
|
Beginning of the Period
|
|
Additions
|
|
Amortization
|
|
End of the Period
|
|
($ in millions)
|
|
($ in millions)
|
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Mark
|
$
|
6.4
|
|
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
6.3
|
|
|
$
|
5.5
|
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
5.4
|
|
Insurance Licenses
|
16.7
|
|
|
—
|
|
|
—
|
|
|
16.7
|
|
|
16.6
|
|
|
—
|
|
|
—
|
|
|
16.6
|
|
Agency Relationships
|
25.8
|
|
|
—
|
|
|
(0.7
|
)
|
|
25.1
|
|
|
24.6
|
|
|
—
|
|
|
(0.4
|
)
|
|
24.2
|
|
Non-compete Agreements
|
3.1
|
|
|
—
|
|
|
(0.1
|
)
|
|
3.0
|
|
|
2.8
|
|
|
—
|
|
|
(0.2
|
)
|
|
2.6
|
|
Value of Business Acquired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
(1.6
|
)
|
|
0.2
|
|
Consulting Relationships
|
0.9
|
|
|
—
|
|
|
(0.1
|
)
|
|
0.8
|
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
Goodwill
|
26.0
|
|
|
—
|
|
|
—
|
|
|
26.0
|
|
|
22.1
|
|
|
—
|
|
|
—
|
|
|
22.1
|
|
Renewal Rights
|
1.6
|
|
|
—
|
|
|
(0.1
|
)
|
|
1.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
80.5
|
|
|
$
|
—
|
|
|
$
|
(1.1
|
)
|
|
$
|
79.4
|
|
|
$
|
74.3
|
|
|
$
|
—
|
|
|
$
|
(2.3
|
)
|
|
$
|
72.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
Six Months Ended June 30, 2016
|
|
Beginning of the Period
|
|
Additions
|
|
Amortization
|
|
End of the Period
|
|
Beginning of the Period
|
|
Additions
|
|
Amortization
|
|
End of the Period
|
|
($ in millions)
|
|
($ in millions)
|
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Mark
|
$
|
6.6
|
|
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
6.3
|
|
|
$
|
1.6
|
|
|
$
|
4.0
|
|
|
$
|
(0.2
|
)
|
|
$
|
5.4
|
|
Insurance Licenses
|
16.7
|
|
|
—
|
|
|
—
|
|
|
16.7
|
|
|
16.6
|
|
|
—
|
|
|
—
|
|
|
16.6
|
|
Agency Relationships
|
26.2
|
|
|
—
|
|
|
(1.1
|
)
|
|
25.1
|
|
|
—
|
|
|
25.0
|
|
|
(0.8
|
)
|
|
24.2
|
|
Non-compete Agreements
|
3.3
|
|
|
—
|
|
|
(0.3
|
)
|
|
3.0
|
|
|
—
|
|
|
2.9
|
|
|
(0.3
|
)
|
|
2.6
|
|
Value of Business Acquired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
|
(1.6
|
)
|
|
0.2
|
|
Consulting Relationships
|
0.9
|
|
|
—
|
|
|
(0.1
|
)
|
|
0.8
|
|
|
—
|
|
|
1.0
|
|
|
(0.1
|
)
|
|
0.9
|
|
Goodwill
|
24.2
|
|
|
1.8
|
|
|
—
|
|
|
26.0
|
|
|
—
|
|
|
22.1
|
|
|
—
|
|
|
22.1
|
|
Renewal Rights
|
1.7
|
|
|
—
|
|
|
(0.2
|
)
|
|
1.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
79.6
|
|
|
$
|
1.8
|
|
|
$
|
(2.0
|
)
|
|
$
|
79.4
|
|
|
$
|
18.2
|
|
|
$
|
56.8
|
|
|
$
|
(3.0
|
)
|
|
$
|
72.0
|
|
AgriLogic
On January 19, 2016, Aspen U.S. Holdings acquired
100%
of the equity voting interest of AgriLogic, a specialist U.S. crop managing general agency business with an integrated agricultural consultancy, for an initial purchase price of
$53.0 million
. In addition, the Company recognized
$14.1 million
of contingent consideration, with a total maximum payable of
$22.8 million
, subject to the future performance of the business and
$2.0 million
of ceding commission. The total consideration for the acquisition was
$69.1 million
.
A significant proportion of the acquired business was represented by intangible assets, specifically
$25.0 million
for agency relationships,
$4.0 million
for the right to use the AgriLogic trademark,
$2.9 million
for non-compete agreements,
$1.8 million
for the value of business acquired and
$1.0 million
for consultancy relationships. In addition,
$12.0 million
of software was acquired and is recognized in the balance sheet under office properties and equipment along with
$0.3 million
of residual net assets. The total net assets acquired of
$47.0 million
resulted in the Company recognizing a total of
$22.1 million
in goodwill for the acquisition of AgriLogic,
$34.0 million
of intangible assets and
$21.0 million
of goodwill are eligible for tax deduction over the next
15
years.
License to use the “AgriLogic” Trademark.
The Company acquired the right to use the AgriLogic trademark in the United States. The Company valued the trademark at
$4.0 million
with an estimated economic useful life of
10
years. The Company will amortize the estimated value of the trademark over its estimated useful life.
Agency Relationships.
The Company valued the agency relationships at
$25.0 million
with an estimated economic useful life of
15
years. The Company will amortize the estimated value of the agency relationships over their estimated useful life.
Non-compete Agreements.
The Company valued the non-compete agreements at
$2.9 million
with an estimated economic useful life of
5
years. The Company will amortize the estimated value of the non-compete agreements over their estimated useful life.
Value of Business Acquired.
The Company recognized a
$1.8 million
asset for value of business acquired (“VOBA”) consisting of the inforce unearned premium reserve and claims reserves at fair value. The Company will amortize the VOBA in line with the unwinding of the acquired unearned premium balances and loss reserves. Given the short tail nature of AgriLogic’s business, the VOBA was fully amortized in 2016.
Consulting Relationships.
The Company valued the consulting relationships at
$1.0 million
with an estimated economic useful life of
10
years. The Company will amortize the estimated value of the consulting relationships over their estimated useful life.
Goodwill.
The Company valued the goodwill at
$22.1 million
. The goodwill is deemed to have an indefinite useful life and will be assessed for impairment annually.
Blue Waters
On October 31, 2016, Acorn acquired
100%
of the equity voting interest of Blue Waters, a specialist marine insurance agency. The total consideration for the acquisition was
$8.0 million
.
A significant proportion of the acquired business was represented by intangible assets, specifically
$3.1 million
for agency relationships,
$1.5 million
for the right to use the Blue Waters trademark,
$1.0 million
for non-compete agreements and
$0.05 million
for the value of trading licenses. In addition,
$0.3 million
of residual net assets were acquired. The total net assets acquired of
$5.75 million
resulted in the Company recognizing a total of
$2.1 million
in goodwill for the acquisition of Blue Waters.
Agency Relationships
. The Company valued the agency relationships at
$3.1 million
with an estimated economic useful life of
5
years. The Company will amortize the estimated value of the agency relationships over their estimated useful life.
License to use the “Blue Waters” Trademark
. The Company acquired the right to use the Blue Waters trademark in the United States. The Company valued the trademark at
$1.5 million
with an estimated economic useful life of
5
years. The Company will amortize the estimated value of the trademark over its estimated useful life.
Non-compete Agreements
. The Company valued the non-compete agreements at
$1.0 million
with an estimated economic useful life of
5
years. The Company will amortize the estimated value of the non-compete agreements over their estimated useful life.
Insurance Licenses
. The Company valued the insurance licenses at
$0.05 million
. The insurance licenses are considered to have an indefinite useful life and are not amortized. The licenses are tested annually for impairment.
Goodwill
. The Company valued the goodwill at
$2.1 million
. The goodwill is deemed to have an indefinite useful life and will be assessed for impairment annually.
Other Intangible Assets
Renewal Rights.
On September 22, 2016, the Company entered into a renewal rights agreement with Liberty Specialty Markets Limited (“LSML”). The Company valued the renewal rights at
$1.9 million
with an estimated economic useful life of
5 years
. The Company will amortize the estimated value of the renewal rights over the estimated useful life.
In addition to the intangible assets and goodwill associated with the AgriLogic acquisition and the renewal rights agreement with LSML, the Company has the following intangible assets from prior transactions:
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
June 30, 2017
, the value of the license to use the Aspen trademark was
$1.6 million
(
December 31, 2016
—
$1.6 million
). The trademark has an indefinite useful life and is tested for impairment annually or when events or changes in circumstances indicate that the asset might be impaired.
Insurance Licenses.
The total value of the Company’s licenses as at
June 30, 2017
was
$16.6 million
(
December 31, 2016
—
$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 amortized. The licenses are tested for impairment annually or when events or changes in circumstances indicate that the asset might be impaired.
Goodwill.
On January 1, 2017, the Company purchased through its wholly-owned subsidiary, Aspen U.S. Holdings, a
49%
share of Digital Re. The Company valued the goodwill at
$1.8 million
. The goodwill is deemed to have an indefinite useful life and will be assessed for impairment annually under the provisions of ASC 323-10-35.
|
|
16.
|
Commitments and Contingent Liabilities
|
The Company is obliged by the terms of its contractual obligations to specific policyholders and by obligations to certain regulatory authorities to facilitate issue of letters of credit or maintain certain balances in deposits and trust funds for the benefit of policyholders. The following table details the forms and value of the Company’s restricted assets as at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
As at June 30, 2017
|
|
As at December 31, 2016
|
|
($ in millions, except percentages)
|
Regulatory trusts and deposits:
|
|
|
|
Affiliated transactions
|
$
|
1,311.1
|
|
|
$
|
1,482.8
|
|
Third party
|
2,343.6
|
|
|
2,380.8
|
|
Letters of credit / guarantees
|
689.9
|
|
|
672.1
|
|
Total restricted assets
|
$
|
4,344.6
|
|
|
$
|
4,535.7
|
|
Total as percent of investable assets
(1)
|
48.9
|
%
|
|
49.3
|
%
|
|
|
(1)
|
Investable assets comprise total investments, cash and cash equivalents, accrued interest, receivables for securities sold and payables for securities purchased.
|
Funds at Lloyd’s.
AUL operates at Lloyd’s as the corporate member for Syndicate 4711. Lloyd’s determines Syndicate 4711’s required regulatory capital principally through the syndicate’s annual business plan. Such capital, called Funds at Lloyd’s, consists of investable assets as at
June 30, 2017
in the amount of
$454.8 million
(
December 31, 2016
—
$447.3 million
).
The amounts provided as Funds at Lloyd’s are drawn upon and become a liability of the Company in the event Syndicate 4711 declares a loss at a level that cannot be funded from other resources, or if Syndicate 4711 requires funds to cover a short term liquidity gap. The amount which the Company provides as Funds at Lloyd’s is not available for distribution to the Company for the payment of dividends. Aspen Managing Agency Limited, the managing agent to Syndicate 4711, is also required by Lloyd’s to maintain a minimum level of capital which as at
June 30, 2017
was
£0.4 million
(
December 31, 2016
—
£0.4 million
). This is not available for distribution by the Company for the payment of dividends.
Credit Facility.
On March 27, 2017, Aspen Holdings and certain of its direct or indirect subsidiaries (collectively, the “Borrowers”) entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with various lenders and Barclays Bank plc, as administrative agent, which amends and restates the Amended and Restated Credit Agreement, dated as of June 12, 2013, among the Company, certain subsidiaries thereof, various lenders and Barclays Bank plc, as administrative agent. The credit facility will be used by the Borrowers to finance the working capital needs of the Company and its subsidiaries, for letters of credit in connection with the insurance and reinsurance businesses of the Company and its subsidiaries and for other general corporate purposes. Initial availability under the credit facility is
$200,000,000
and the Company has the option (subject to obtaining commitments from acceptable lenders) to increase the credit facility by up to
$100,000,000
. The credit facility will expire on March 27, 2022.
As at
June 30, 2017
,
no
borrowings were outstanding under the Credit Agreement. The fees and interest rates on the loans and the fees on the letters of credit payable by the Borrowers under the Credit Agreement are based upon the credit ratings for the Company’s long-term unsecured senior debt by S&P and Moody’s. In addition, the fees for a letter of credit vary based upon whether the applicable Borrower has provided collateral (in the form of cash or qualifying debt securities) to secure its reimbursement obligations with respect to such letter of credit.
Under the Credit Agreement, the Company must not permit (a) consolidated tangible net worth to be less than approximately
$2,323,100,000
plus
25%
of consolidated net income plus
25%
of aggregate net cash proceeds from the issuance by the Company of its capital stock, in each case after January 1, 2017, (b) the ratio of its total consolidated debt to the sum of such debt plus its consolidated tangible net worth to exceed
35%
or (c) any material insurance subsidiary to have a financial strength rating of less than B++ from A.M. Best. The Credit Agreement contains other customary affirmative and negative covenants, including (subject to various exceptions) restrictions on the ability of the Company and its subsidiaries to incur indebtedness, create or permit liens on their assets, engage in mergers or consolidations, dispose of assets, pay dividends or other distributions, purchase or redeem
the Company’s equity securities, make investments and enter into transactions with affiliates. In addition, the Credit Agreement has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, bankruptcy or insolvency proceedings, change of control and cross-default to other debt agreements.
Other Credit Facilities.
On June 30, 2016, Aspen Bermuda and Citibank Europe plc (“Citi Europe”) amended the committed letter of credit facility, dated June 30, 2012, as amended on June 30, 2014 (the “LOC Facility”). The amendment to the LOC facility extends the term of the LOC Facility to June 30, 2018 and provides a maximum aggregate amount of up to
$550.0 million
. Under the LOC Facility, Aspen Bermuda will pay to Citi Europe (a) a letter of credit fee based on the available amounts of each letter of credit and (b) a commitment fee, which varies based upon usage, on the unutilized portion of the LOC Facility. Aspen Bermuda will also pay interest on the amount drawn by any beneficiary under the LOC Facility at a rate per annum of LIBOR plus
1%
(plus reserve asset costs, if any) from the date of drawing until the date of reimbursement by Aspen Bermuda. In addition, Aspen Bermuda and Citi Europe entered into an uncommitted letter of credit facility whereby Aspen Bermuda has the ability to request letters of credit under this facility subject to the prior approval of Citi Europe. The fee associated with the uncommitted facility is a letter of credit fee based on the available amounts of each letter of credit issued under the uncommitted facility. Both the LOC Facility and the uncommitted facility are used to secure obligations of Aspen Bermuda to its policyholders. In addition to these facilities, we also use regulatory trusts to secure our obligations to policyholders.
The terms of a pledge agreement between Aspen Bermuda and Citi Europe (pursuant to an assignment agreement dated October 11, 2006) dated January 17, 2006, as amended, were also amended on June 30, 2014 to change the types of securities or other assets that are acceptable as collateral under the New LOC Facility. All other agreements relating to Aspen Bermuda’s LOC Facility, which now apply to the New LOC Facility with Citi Europe, as previously filed with the United States Securities and Exchange Commission, remain in full force and effect. As at
June 30, 2017
, we had
$444.2 million
of outstanding collateralized letters of credit under the New LOC Facility (
December 31, 2016
—
$449.4 million
under the LOC Facility).
Interest Rate Swaps.
As at
June 30, 2017
,
no
cash collateral was held by the Company’s counterparties to support the current valuation of the interest rate swaps (
December 31, 2016
— $
Nil
). For further information on the Company’s terminated interest rate swaps, refer to Note 10 of these unaudited condensed consolidated financial statements.
Amounts outstanding under operating leases net of subleases as at
June 30, 2017
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Later
Years
|
|
Total
|
|
($ in millions)
|
Operating Lease Obligations
|
$
|
9.9
|
|
|
$
|
15.7
|
|
|
$
|
14.6
|
|
|
$
|
13.8
|
|
|
$
|
9.4
|
|
|
$
|
80.8
|
|
|
$
|
144.2
|
|
|
|
(c)
|
Contingent liabilities
|
In common with the rest of the insurance and reinsurance industry, the Company is subject to litigation and arbitration in the ordinary course of business. The Company’s Operating Subsidiaries are regularly engaged in the investigation, conduct and defense of disputes, or potential disputes, resulting from questions of insurance or reinsurance coverage or claims activities. Pursuant to insurance and reinsurance arrangements, many of these disputes are resolved by arbitration or other forms of alternative dispute resolution. Such legal proceedings are considered in connection with estimating the Company’s Insurance Reserves — Loss and Loss Adjustment Expenses, as provided on the Company’s consolidated balance sheet.
In some jurisdictions, noticeably the U.S., a failure to deal with such disputes or potential disputes in an appropriate manner could result in an award of “bad faith” punitive damages against the Company’s Operating Subsidiaries. In accordance with ASC 450-20-50-4b, for (a) reasonably possible losses for which no accrual is made because any of the conditions for accrual in ASC 450-20-25-2 are not met and (b) reasonably possible losses in excess of the amounts accrued pursuant to ASC 450-20-30-1, the Company will provide an estimate of the possible loss or range of possible loss or state that such an estimate cannot be made.
As at
June 30, 2017
and
December 31, 2016
, based on available information, it was the opinion of the Company’s management that the probability of the ultimate resolution of pending or threatened litigation or arbitrations having a material effect on the Company’s financial condition, results of operations or liquidity would be remote.
17. Subsequent Events
On July 3, 2017, the Company elected to mandatorily redeem all of the outstanding
7.250%
Perpetual Non-Cumulative Preference Shares (the “
7.250%
Preference Shares”) for
$160.0 million
. Each holder of a
7.250%
Preference Share received
$25
per
7.250%
Preference Share, plus any declared and unpaid dividends.