General

We are a Bermudian holding company, incorporated on May 23, 2002, and conduct insurance and reinsurance business through our principal Operating Subsidiaries: Aspen U.K. and AUL, corporate member of Syndicate 4711 at Lloyd’s of London (United Kingdom), Aspen Bermuda (Bermuda) and Aspen Specialty and AAIC (United States). Aspen U.K. also has branches in Cologne (Germany), Dublin (Ireland), Paris (France), Zurich (Switzerland), Singapore, Australia and Canada. Reinsurance business is also written through Aspen Capital Markets via Silverton and Peregrine. We operate in the global markets for property and casualty insurance and reinsurance.

For the year ended December 31, 2014 , we wrote $2,902.7 million in gross premiums and at December 31, 2014 we had total capital employed, including long-term debt, of $3,968.4 million .

Our corporate structure as at February 15, 2015 was as follows:

We manage our insurance and reinsurance businesses as two distinct underwriting segments, Aspen Insurance and Aspen Reinsurance (“Aspen Re”), to enhance and better serve our global customer base.

Our insurance segment is comprised of: property and casualty insurance; marine, aviation and energy insurance; and financial and professional lines insurance. The insurance segment is led by Mario Vitale, Chief Executive Officer of Aspen Insurance and President of U.S. Insurance, Rupert Villers, Chairman of Aspen Insurance and President of International Insurance, and Ann Haugh, Chief Operating Officer and Chief Underwriting Officer of Aspen Insurance.

Our reinsurance segment is comprised of: property catastrophe reinsurance (including the business written through Aspen Capital Markets); other property reinsurance; casualty reinsurance; and specialty reinsurance. The reinsurance segment is led by Stephen Postlewhite, Chief Executive Officer of Aspen Re, Brian Boornazian, Chairman of Aspen Re and Emil Issavi, President and Chief Underwriting Officer of Aspen Re.

 

In 2014, Aspen Re continued to expand its participation in the alternative reinsurance market through Aspen Capital Markets. The focus of Aspen Capital Markets is to develop alternative reinsurance structures to leverage Aspen Re’s existing underwriting franchise, increase its operational flexibility in the capital markets, and provide investors direct access to its underwriting expertise.

In our insurance segment, property and casualty business is written primarily in the London Market by Aspen U.K. and in the U.S. by AAIC and Aspen Specialty (both on an admitted and excess and surplus lines basis). Our marine, aviation and energy insurance and financial and professional lines insurance are written mainly by Aspen U.K. and AUL, (which is the sole corporate member of Syndicate 4711 at Lloyd’s of London (“Lloyd’s”), managed by AMAL) with most of the same lines also written in the U.S. by ASIC and AAIC. We also write a small amount of casualty and financial and professional lines business through Aspen Bermuda.

In reinsurance, property reinsurance business is assumed by Aspen Bermuda and Aspen U.K. and written by teams located in Bermuda, London, Paris, Singapore, Cologne, the U.S. and Zurich. The property reinsurance business written in the U.S. is written exclusively by Aspen Re America and ARA - CA as reinsurance intermediaries with offices in Connecticut, Illinois, Florida, New York, Georgia and California.

Casualty reinsurance is mainly assumed by Aspen U.K. and written by teams located in London, Zurich, Singapore and the U.S. A small number of casualty reinsurance contracts are written by Aspen Bermuda. The business written in the U.S. is produced by Aspen Re America.

Specialty reinsurance is assumed by Aspen Bermuda and Aspen U.K. and written by teams located in London, Zurich, the U.S., Dublin and Singapore. A small number of specialty reinsurance contracts are written by Aspen Bermuda. The business written in the U.S. is produced by Aspen Re America.

Our Business Strategy

We are a diversified, well-capitalized, and strongly rated company providing carefully tailored underwriting solutions in select markets. We aim to identify and respond swiftly to emerging opportunities and to operate across a wide range of geographies and specialist business lines. This approach, underpinned by effective risk management, has enabled us to broaden our earnings stream and reduce exposure to any particular risk or event.  We are both an insurer and reinsurer of specialty and similar lines and trade under two distinct brands — Aspen Re and Aspen Insurance.

In 2014, we continued progress against our objectives through our focus on three strategic levers - business portfolio optimization, capital efficiency and enhancing investment returns.

Business Portfolio Optimization.   We made strong progress on our business optimization initiatives in 2014.  Our U.S. insurance teams continued to gain scale, with premiums from the U.S. teams growing by more than 30% over the prior year. Our Aspen Capital Markets team effectively leveraged Aspen Re’s underwriting expertise to grow our use of third party capital structures. In 2014, we restructured our ceded reinsurance and retrocessional arrangements to further optimize our risk-return profile, which we plan to continue to do in 2015.

Capital Management.   We continue to focus on capital management, and maintain our capital at an appropriate level as determined by our internal risk appetite and the financial strength required by our customers, regulators and rating agencies. We monitor and review our group and operating entities’ capital and liquidity positions on an ongoing basis, and allocate our capital in the most efficient way which may include investing in new business opportunities, rebalancing our investment portfolio within acceptable risk parameters and returning capital to shareholders, subject to market conditions.  In 2014, we repurchased $180.9 million of our ordinary shares. On February 5, 2015, we announced a new share repurchase program of $500 million.

Investment Management.   Our investment strategy is focused on delivering stable investment income and total return through all market cycles while maintaining appropriate portfolio liquidity and credit quality to meet the requirements of our customers, rating agencies and regulators. This includes thoughtfully and tactically adjusting the portfolio duration and asset allocation based on our views of interest rates, credit spreads and markets for different assets as well as taking appropriate decisions to enhance investment returns where possible. During 2014, we increased our investment in equities by a total of $240.0 million . In May 2014, we sold our U.S. Dollar BB High Yield bonds (“BB High Yield Bonds”) portfolio for net proceeds of $25.1 million . As at December 31, 2014, approximately 12.5% of our total cash and investments, excluding catastrophe bonds, other investments and funds held by variable interest entities (the “Managed Portfolio”) was invested in equities, U.S. Dollar BBB Emerging Market Debt (“BBB Emerging Market Debt”) and U.S. Dollar BB Bank Loans (“BB Bank Loans”).

Our main aim is to give our shareholders a strong return on their investment while ensuring that we have sufficient capital and liquidity to meet our obligations. Where we see profitable opportunities to deploy our underwriting and other capabilities, we expect to grow our business to realize them. Growth may be organic within existing lines, by recruitment of underwriters with complementary skills and experience, or by acquisition. Our key evaluation criteria for any acquisition proposal will include strategic fit, financial attractiveness, manageable execution risks and consistency with our risk appetite.

Key strategies for Aspen Insurance.   Aspen Insurance is a significant global market for marine, aviation and energy, financial and professional and property and casualty lines of insurance, served for the large part from London. This requires specialized expertise, innovative underwriting and the financial strength to offer meaningful capacity in these lines.

A core part of Aspen Insurance’s strategy is to further build and enhance our profitable specialty insurer in the U.S. domestic market headquartered in New York. Our approach is highly focused and in the past four years we have hired teams with specialized focus on underwriting opportunities in specialty lines including onshore energy, inland marine and ocean risks, programs, management liability, certain financial and professional lines, and surety. These are underwritten in addition to our established lines of property, general casualty and environmental liability. We have also invested significantly in terms of IT, actuarial resource, claims staff, legal, human resource and other functions in order to provide the appropriate infrastructure on which to build our U.S. operations.

In addition to our U.S. and London-market insurance operations, we offer focused capacity from our Bermuda and Dublin operations for certain global casualty and management liability risks and from our Zurich branch we offer certain specialized risks within the Swiss market.

Key strategies for Aspen Re.   We offer reinsurance for property, casualty and specialty risks as further described below. From time to time, the underwriting cycle allows us to deploy additional capacity on a more opportunistic basis and a key part of our strategy is to maintain the ability to identify special situations and take advantage of them when they arise. As result of our Aspen Capital Markets division, we are also able to develop alternative reinsurance structures to leverage our existing underwriting franchise, increase our operational flexibility in the capital markets and provide investors with direct access to our underwriting expertise.

Following the successful launch of Silverton, our first sidecar, in 2013, Aspen Re renewed Silverton in December 2014 to continue to provide additional collateralized capacity to support Aspen Re’s global reinsurance business. As a result of our partnership with the capital markets, Silverton, a Bermuda domiciled special purpose insurer, is able to provide investors with access to diversified natural catastrophe risk backed by the distribution, underwriting, analysis and research expertise of Aspen Re. Through Aspen Capital Markets, we have also increased our capacity through other collateralized reinsurance arrangements. 

Aspen Re’s largest market is the United States where we are well established and have solid market penetration. The markets in Latin America, Middle East and Africa, and Asia-Pacific have historically been less significant for Aspen Re, but we believe they offer significant growth potential, especially in the medium and longer-term, albeit from a smaller base. In 2014, the premiums from these emerging markets in reinsurance increased by 19% .

We aim to maintain sufficient capital strength and access to capital markets to ensure that major losses can be absorbed and to meet additional demand from existing or new clients.

Risk Management.  We have a comprehensive risk management framework that defines the corporate risk appetite, risk strategy and the policies required to monitor, manage and mitigate the risk inherent in our business.  In so doing, we aim to comply with emerging regulations, corporate governance and industry best practice and monitor and take remedial action against six main risk objectives: (1) extreme losses falling within planned limits; (2) volatility of results falling within planned limits; (3) compliance with regulatory requirements; (4) preserving rating agency credit ratings; (5) maintaining solvency and liquidity; and (6) avoiding reputational risk.

Business Segments

We are organized into two business segments: reinsurance and insurance. In addition to the way we manage our business, we have considered similarities in economic characteristics, products, customers, distribution, the regulatory environment of our operating segments and quantitative thresholds in determining our reportable segments.

We provided additional disclosures for corporate and other (non-underwriting) income and expenses. Corporate and other income and expenses include net investment income, net realized and unrealized investment gains or losses, expenses associated with managing the Group, certain strategic and non-recurring costs, changes in fair value of derivatives and changes in fair value of loan notes issued by variable interest entities, interest expense, net realized and unrealized foreign exchange gains or losses and income taxes, which are not allocated to the underwriting segments. Corporate expenses are not allocated to

our operating segments as they typically do not fluctuate with the levels of premiums written and are not directly related to our segment operations. We do not allocate our assets by segments as we evaluate underwriting results of each segment separately from the results of our investment portfolio.

The gross written premiums are set forth below by business segment for the twelve months ended December 31, 2014 , 2013 and 2012 :

 

For a review of our results by segment, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5 of our consolidated financial statements, “Segment Reporting.”

Reinsurance

Aspen Re consists of property catastrophe reinsurance, other property reinsurance (risk excess, pro rata and facultative), casualty reinsurance (U.S. treaty, international treaty and global facultative) and specialty reinsurance (credit and surety, agriculture, marine, aviation and other specialty lines). During 2013, we established our Aspen Capital Markets division to expand our access to alternative capital and leverage Aspen Re’s existing underwriting franchise, increase its operational flexibility in the capital markets and provide investors with direct access to our underwriting expertise. Since its inception, Aspen Capital Markets has added collateralized capacity to Aspen Re’s property catastrophe line of business by focusing on property catastrophe business through the use of alternative capital.

The reinsurance business we write can be analyzed by geographic region, reflecting the location of the reinsured risks, as follows for the twelve months ended December 31, 2014 , 2013 and 2012 :

 

Our gross written premiums by our principal lines of business within our reinsurance segment for the twelve months ended December 31, 2014 , 2013 and 2012 are as follows:

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Property Catastrophe Reinsurance:   Property catastrophe reinsurance is generally written on a treaty excess of loss basis where we provide protection to an insurer for an agreed portion of the total losses from a single event in excess of a specified loss amount. In the event of a loss, most contracts provide for coverage of a second occurrence following the payment of a premium to reinstate the coverage under the contract, which is referred to as a reinstatement premium. The coverage provided under excess of loss reinsurance contracts may be on a worldwide basis or limited in scope to selected regions or geographical areas.

We launched Silverton our first sidecar in 2013. Silverton was renewed in December 2014, raising $85.0 million (of which $70.0 million was provided by third parties). Silverton will continue to provide quota share support for Aspen Re’s global property catastrophe excess of loss reinsurance business. For the twelve months ended December 31, 2014 , Silverton’s gross written premium was $40.0 million, all of which is classified within property catastrophe reinsurance. Through Aspen Capital Markets we have also increased our capacity through other collateralized reinsurance arrangements.

Other Property Reinsurance:   Other property reinsurance includes property, engineering and construction risks written on excess of loss and proportional treaties, facultative or single risk reinsurance. Risk excess of loss reinsurance provides coverage to a reinsured where it experiences a loss in excess of its retention level on a single “risk” basis. A “risk” in this context might mean the insurance coverage on one building or a group of buildings for fire or explosion or the insurance coverage under a single policy which the reinsured treats as a single risk. This line of business is generally less exposed to accumulations of exposures and losses but can still be impacted by natural catastrophes, such as earthquakes and hurricanes.

Proportional treaty reinsurance provides proportional coverage to the reinsured, meaning that, subject to event limits where applicable and ceding commissions, we pay the same share of the covered original losses as we receive in premiums charged for the covered risks. Proportional contracts typically involve close client relationships which often include regular audits of the cedants’ data.

As previously announced, in addition to writing property facultative on a direct basis, we established Rock Re, a dedicated brokered property facultative unit which focuses on the North American brokered property facultative marketplace. As a result of such initiatives and a greater focus on regional U.S. business, increases in premium in other property contributed meaningfully to the reinsurance segment.

Casualty Reinsurance:   Casualty reinsurance is written on an excess of loss, proportional and facultative basis and consists of U.S. treaty, international treaty and casualty facultative reinsurance. Our U.S. treaty business comprises exposures to workers’ compensation (including catastrophe), medical malpractice, general liability, auto liability, professional liability and excess liability including umbrella liability. Our international treaty business reinsures exposures mainly with respect to general liability, auto liability, professional liability, workers’ compensation and excess liability.

Specialty Reinsurance:   Specialty reinsurance is written on an excess of loss and proportional basis and consists of credit and surety reinsurance, agriculture reinsurance and other specialty lines. Our credit and surety reinsurance business consists of trade credit, surety (mainly European, Japanese and Latin American risks) and political risks. Our agricultural reinsurance business is primarily written on a treaty basis covering crop and multi-peril business. Other specialty lines include reinsurance treaties and some insurance policies covering policyholders’ interests in marine, energy, aviation liability, space, contingency, terrorism, nuclear and personal accident.

A high percentage of the property catastrophe reinsurance contracts we write exclude or limit coverage for losses arising from the peril of terrorism. Within the U.S., our other property reinsurance contracts generally include limited coverage for acts that are certified as “acts of terrorism” by the U.S. Treasury Department under the Terrorism Risk Insurance Act (“TRIA”), the

Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”), the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”), which expired on December 31, 2014, and now the Terrorism Risk Insurance Program Reauthorization Act of 2015 (the “2015 TRIA Reauthorization”). We have written a limited number of property reinsurance contracts, both on a pro rata and risk excess basis, specifically covering the peril of terrorism. These contracts typically exclude coverage protecting against nuclear, biological or chemical attack, though we have written a small number of contracts that do not exclude nuclear, biological or chemical attacks, the coverage of which may be applicable to non-terrorism events.

Insurance

Our insurance segment consists of property and casualty insurance, marine, aviation and energy insurance and financial and professional lines insurance. Effective January 1, 2014, our property insurance and casualty insurance lines of business became integrated into a combined property and casualty line and our programs business, which we previously reported separately, is included in our property and casualty insurance line.

The insurance business we write can be analyzed by geographic region, reflecting the location of the insured risk, as follows for the twelve months ended December 31, 2014 , 2013 and 2012 :

 

 

Our gross written premiums by our principal lines of business within our insurance segment for the twelve months ended December 31, 2014 , 2013 and 2012 are as follows:

  Property and Casualty Insurance:  Our property and casualty insurance line comprises U.S. and U.K. commercial property and construction business, commercial liability, U.S. specialty casualty, global excess casualty, environmental liability and programs business, written on a primary, excess, quota share, program and facultative basis.

U.S. and U.K. Commercial Property and Construction:  Property insurance provides physical damage and business interruption coverage for losses arising from weather, fire, theft and other causes. The U.S. commercial property and construction team covers mercantile, manufacturing, municipal and commercial real estate business. The U.K. commercial and construction team’s client base is predominantly U.K. institutional property owners, small and middle market corporates and public sector clients.

Commercial Liability:  Commercial liability is primarily written in the U.K. and provides employers’ liability coverage and public liability coverage for insureds domiciled in the U.K. and Ireland.

U.S. Specialty Casualty:  The U.S. specialty casualty account consists primarily of lines written within the primary, excess and umbrella liability insurance sectors. Coverage on our general liability line is offered on those risks primarily in the real estate, hospitality, contractors, products liability and other general liability business in the upper middle market and commercial account market.

Global Excess Casualty:  The global excess casualty line comprises large, sophisticated and risk-managed insureds worldwide and covers broad-based risks at high attachment points, including general liability, commercial and residential construction liability, life science, railroads, trucking, product and public liability and associated types of cover found in general liability policies in the global insurance market. It also includes a portfolio of U.K. and other non-U.S. employers’ liability and public liability coverage written through a managing general agent.

Environmental Liability:  The U.S. environmental account primarily provides contractors’ pollution liability and pollution legal liability across industry segments that have environmental regulatory drivers and contractual requirements for coverage including: real estate and public entities, contractors and engineers, energy contractors and environmental contractors and consultants. The business is written in both the primary and excess insurance markets.

Programs:  Our programs business, previously reported separately, writes property and casualty insurance risks for a select group of U.S.-based program managers. These programs are managed as a distinct and separate unit. We work closely with our program managers to establish appropriate underwriting and processing guidelines and have established performance monitoring mechanisms.

On a significant portion of our property and casualty insurance contracts we are obligated to offer terrorism under TRIPRA, and now the 2015 TRIA Reauthorization, and there is a notable take-up rate by insureds. Wherever possible, we exclude coverage protection against nuclear, biological, chemical or radiological attacks. However, certain U.S. states (notably New York and Florida) prohibit admitted market companies from fully excluding such perils, resulting in exposures to chemical and biological events as well as fire following nuclear or radioactive events. In addition, we would expect to benefit from the protection of TRIPRA and the over-arching $100 billion industry loss cap (subject to the relevant deductible and co-retention).

Marine, Aviation and Energy Insurance:  Our marine, aviation and energy insurance line comprises marine and energy liability, onshore energy physical damage, offshore energy physical damage, marine hull, specie, inland marine and ocean risks and aviation, written on a primary, excess, quota share, program and facultative basis.

Marine and Energy Liability:  The marine and energy liability business based in the U.K. includes marine liability cover mainly related to the liabilities of ship-owners and port operators, including reinsurance of Protection and Indemnity Clubs (“P&I Clubs”). It also provides liability cover globally (including the U.S.) for companies in the oil

and gas sector, both onshore and offshore and in the power generation sector. Our liability for U.S. commercial construction is now being written under our global excess casualty line and we are no longer writing new construction liability in this class.

Onshore Energy Physical Damage: Our marine, energy and construction property unit based in the U.S. underwrites a variety of worldwide onshore energy and construction sector classes of business with a focus on property covers.

Offshore Energy Physical Damage:  Offshore energy physical damage provides insurance cover against physical damage losses in addition to operators’ extra expenses for companies operating in the oil and gas exploration and production sector.

Marine Hull:  The marine hull team insures physical damage for ships (including war and associated perils) and related marine assets.

Specie:  The specie business line focuses on the insurance of high value property items on an all risks basis, including fine art, general and bank related specie, jewelers’ block and armored car.

Inland Marine and Ocean Risks:  The inland marine and ocean cargo team writes business principally covering builders’ construction risk, contractors’ equipment, transportation and ocean cargo risks in addition to exhibition, fine arts and museums insurance.

Aviation:  The aviation team writes physical damage insurance on hulls and spares (including war and associated perils) and comprehensive legal liability for airlines, smaller operators of airline equipment, airports and associated business and non-critical component part manufacturers. We also provide aviation hull deductible cover.

Financial and Professional Lines Insurance:  Our financial and professional lines comprise financial and corporate risks, professional liability, management liability, credit and political risks, accident and specialty risks and surety risks, written on a primary, excess, quota share, program and facultative basis.

Financial and Corporate Risks:  Our financial institutions business is written on both a primary and excess of loss basis and consists of professional liability, crime insurance and directors’ and officers’ (“D&O”) cover, with the largest exposure comprising risks headquartered in the U.K., followed by Australia, the U.S. and Canada. We cover financial institutions including commercial and investment banks, asset managers, insurance companies, stockbrokers and insureds with hybrid business models. This account also includes a book of D&O insurance for commercial insureds located outside of the U.S. and a worldwide book of representations and warranties and tax indemnity business.

Professional Liability:  Our professional liability business is written out of the U.S. (including Errors and Omissions (“E&O”)), the U.K., Switzerland and Bermuda and is written on both a primary and excess of loss basis. The U.K. team focuses on risks in the U.K. with some Australian and Canadian business while the U.S. team focuses on the U.S. We insure a wide range of professions including lawyers, accountants, architects and engineers. This account also includes a portfolio of technology liability and data protection insurance. The data protection insurance covers firms for first party costs and third party liabilities associated with their breach of contractual or statutory data protection obligations.

Management Liability: Our management liability business is written out of the U.S. and Bermuda. We insure a diverse group of commercial and financial institutions predominately on an excess basis. Our products include D&O liability, fiduciary liability, employment practices liability, fidelity insurance and blended liability programs including E&O liability. The focus of the account is predominantly on risks headquartered in the U.S. or risks with a material U.S. exposure.

Credit and Political Risks:  The credit and political risks team writes business covering the credit and contract frustration risks on a variety of trade and non-trade related transactions, as well as political risks (including multi-year war on land cover). We provide credit and political risks cover worldwide but with concentrations in a number of countries, such as China, Brazil, Russia (where we significantly reduced our exposures from 2014), the Netherlands and the U.S.

Accident and Specialty Risks:  The accident and specialty risks team writes insurance designed to protect individuals and corporations operating in high-risk areas around the world, including covering the shipping industry’s exposure to acts of piracy. It also writes terrorism insurance and personal accident business.

Surety Risks:  Our surety team writes commercial surety risks, admiralty bonds and similar maritime undertakings including, but not limited to, federal and public official bonds, license and permits and fiduciary and miscellaneous bonds, focused on Fortune 1000 companies and large, privately owned companies in the U.S.

Underwriting and Reinsurance Purchasing

Our objective is to create a diversified portfolio of insurance and reinsurance risks, diversified across lines of business, products, geographic areas of coverage, cedants and sources. The acceptance of appropriately priced risk is the core of our business. Underwriting requires judgment, based on important assumptions about matters that are inherently unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. We view underwriting quality and risk management as critical to our success.

Underwriting.   In 2014 , our underwriting activities were managed in two product areas: reinsurance and insurance. Under our organizational structure, our insurance segment is led by Mario Vitale, Chief Executive Officer of Aspen Insurance, Rupert Villers, Chairman of Aspen Insurance and Ann Haugh, Chief Underwriting Officer and Chief Operating Officer of Aspen Insurance. Our reinsurance segment is led by Stephen Postlewhite, Chief Executive Officer of Aspen Re, Brian Boornazian, Chairman of Aspen Re and Emil Issavi, President of Aspen Re.

Our Group Chief Executive Officer is supported by our Director of Underwriting, Kate Vacher. Our Director of Underwriting assists in the management of the underwriting process by developing our underwriting strategy, monitoring our underwriting principles and acting as an independent reviewer of underwriting activity across our businesses.

  We underwrite according to the following principles:

Reinsurance Purchasing.   We purchase reinsurance and retrocession to mitigate and diversify our risk exposure to a level consistent with our risk appetite and to increase our insurance and reinsurance underwriting capacity. These agreements provide for recovery of a portion of our losses and loss adjustment expenses from our reinsurers. The amount and type of reinsurance that we purchase varies from year to year and is dependent on a variety of factors, including, but not limited to, the cost of a particular reinsurance contract and the nature of our gross exposures assumed, with the aim of securing cost-effective protection.

We have reinsurance covers in place for the majority of our insurance lines of business, most of which are on an excess-of-loss basis. These covers provide protection in various layers and excess of varying attachment points according to the scope of cover provided. We also have a limited number of proportional treaty arrangements on specific lines of business and we anticipate continuing with these in most instances.

In respect of our non-catastrophe reinsurance book, in 2015 we will be retaining shares in most of our excess of loss and proportional reinsurance treaties in the form of co-insurance.  In the event of a large loss or a series of losses, it is likely that we will retain a higher proportion of such loss(es) than would have occurred had we purchased cover for the full value of the contracts.  We believe this is a more efficient way of managing our exposures, although it could lead to greater volatility of results. 

With respect to natural perils coverage, we buy protections that cover both our insurance and reinsurance lines of business through a variety of products, including, but not limited to, excess of loss reinsurance, facultative reinsurance,

aggregate covers, whole account covers and collaterized products which can be on either an indemnity or an index linked basis. For example, we may purchase industry loss warranty reinsurance which provides retrocessional coverage when insurance industry losses for a defined event exceed a certain level. We expect the type and level of coverage that we purchase will vary over time, reflecting our view of the changing dynamics of the underlying exposure and the reinsurance markets.  We manage our risk by seeking to limit the amount of exposure assumed from any one reinsured and the amount of the aggregate exposure to catastrophe losses from a single event in any one geographical zone. Additionally, Aspen Re has quota share protection for worldwide catastrophe losses through its sidecar, Silverton , and through other collateralized reinsurance arrangements.

We have a centralized ceded reinsurance department which coordinates the placement of all of our treaty reinsurance placements. We maintain a list of authorized reinsurers graded for short, medium and long tail business which is regularly reviewed and updated by the Reinsurance Credit Committee.

Although reinsurance agreements contractually obligate our reinsurers to reimburse us for an agreed-upon portion of our gross paid losses, we remain liable to our insureds to the extent that our reinsurers do not meet their obligations under these agreements. As a result, and in line with our risk management objectives, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk on an on-going basis. In general, we seek to place our reinsurance with highly rated companies with which we have a strong trading relationship. For additional information, please refer to Note 9, “Reinsurance” of our consolidated financial statements.

Risk Management

In this section, we provide a summary of our risk governance arrangements and our current risk management strategy. We also provide more detail on the management of core underwriting and market risks and on our internal model. The internal model is an economic capital model which has been developed internally for use in certain business decision-making processes, the assessment of risk-based capital requirements and for various regulatory purposes.

Risk Governance

Board of Directors.   The Board of Directors of the Company (the “Board”) considers effective identification, measurement, monitoring, management and reporting of the risks facing our business to be key elements of its responsibilities and those of the Group Chief Executive Officer and management. Matters relating to risk management reserved to the Board include approval of the internal controls and risk management framework and any changes to the Group’s risk appetite statement. The Board also receives reports at each scheduled meeting from the Group Chief Risk Officer and the Chairman of the Risk Committee and training in risk management processes including the design, operation, use and limitations of the internal model. As a result of these arrangements and processes, the Board, assisted by management and the Board Committees, is able to exercise effective oversight of the operation of the risk management strategy described in “Risk Management Strategy” below.

Board Committees.   The Board delegates oversight of the management of certain key risks to its Risk, Audit and Investment Committees. Each of the committees is chaired by an independent director of the Company who also reports to the Board on the committees’ discussions and matters arising.

Risk Committee:   The purpose of this committee is to assist the Board in its oversight duties in respect of the management of risk, including:

Audit Committee:   This committee is primarily responsible for assisting the Board in its oversight of the integrity of the financial statements. It is also responsible for reviewing the adequacy and effectiveness of the Company’s internal controls and receives regular reports from both internal and external audit in this regard.

Investment Committee:   This committee is responsible for, among other things, setting and monitoring the Group’s investment risk and asset allocation policies and ensuring that the Chairman of the Risk Committee is kept informed of such matters.

Management Committees.   The Group also has a number of executive management committees which have oversight of certain risk management processes including the following:

Group Executive Committee:   This is the main executive committee responsible for advising the Group Chief Executive Officer on matters relating to the strategy and conduct of the business of the Group.

Capital and Risk Principles Committee:   The primary purpose of the Capital and Risk Principles Committee is to assist the Group Chief Executive Officer and the Group Chief Risk Officer in their oversight duties in respect of the design and operation of the risk management systems of the Group. In particular, it has specific responsibilities in relation to the Internal Model and for the establishment of risk limits for accumulating underwriting exposures and monitoring solvency and liquidity requirements.

Reserve Committee:   This committee is responsible for managing reserving risk and making recommendations to the Group Chief Executive Officer and the Group Chief Financial Officer relating to the appropriate level of reserves to include in the Group’s financial statements.

Underwriting Committee:   The purpose of this committee is to assist the Group Chief Executive Officer in his oversight duties in respect of the management and control of underwriting risk, including oversight of the independent review of the quality of each team’s underwriting.

Reinsurance Credit Committee:   The purpose of this committee is to seek to minimize credit risks arising from insurance and reinsurance counterparties by the assessment and monitoring of collateralized reinsurance arrangements, direct cedants, intermediaries and reinsurers.

Group Chief Risk Officer.   Our Group Chief Risk Officer, Richard Thornton, is a member of the Group Executive Committee. His role includes providing the Board and the Risk Committee with reports and advice on risk management issues.

 

Risk Management Strategy

We operate an integrated enterprise-wide risk management strategy designed to deliver shareholder value in a sustainable and efficient manner while providing a high level of policyholder protection. The execution of our integrated risk management strategy is based on:

Risk Appetite Statement.   The Risk Appetite Statement is a central component of the Group’s overall risk management framework and is approved by the Board. It sets out, at a high level, how we think about risk in the context of our business model, Group objectives and strategy. It sets out boundary conditions for the level of risk we assume, together with a statement of the reward we aim to receive for this level of risk.

Our Risk Appetite Statement comprises the following components:

Risk Components.   The main types of risks that we face are summarized as follows:

Insurance risk:   The risk that underwriting results vary from their expected amounts, including the risk that reserves established in respect of prior periods are understated.

Market risk:   The risk of variation in the income generated by, and the fair value of, our investment portfolio, cash and cash equivalents and derivative contracts including the effect of changes in foreign currency exchange rates.

Credit risk:   The risk of diminution in the value of insurance receivables as a result of counter-party default. This principally comprises default and concentration risks relating to amounts receivable from intermediaries, policyholders and reinsurers. We include credit risks related to our investment portfolio under market risk. We include credit risks related to insurance contracts (e.g. credit and political risk policies) under insurance risk.

Liquidity risk:   The risks of failing to maintain sufficient liquid financial resources to meet liabilities as they fall due or to provide collateral as required for commercial or regulatory purposes.

Operational risk:   The risk of loss resulting from inadequate or failed internal processes, personnel or systems, or from external events.

Strategic risk :  The risk of adverse impact on shareholder value or income and capital of adverse business decisions, poor execution or failure to respond to market changes.

Emerging risk :  The risk that events or issues not previously identified or fully understood impact the operations or financial results of the Group.

We classify insurance risk and market risk in pursuance of our underwriting and investment strategies as core risks, meaning that they are risks we intend to take with a view to making a return for shareholders as a consequence. Other risks are designated as ‘non-core’ risks and our strategy is to seek to avoid or minimize exposures to such risks to the extent it is practicable and economic to do so.

Key Risk Limits.   We use the term risk limit to mean the upper limit of our tolerance for exposure to a given risk. Key risk limits are a sub-set of risk limits and are subject to annual approval by the Board on the advice of the Risk Committee as part of the annual business planning process. If a risk exceeds key risk limits, the Chief Risk Officer is required to report the excess and management’s plans for dealing with it to the Risk Committee.

Business Distribution

Our business is produced principally through brokers and reinsurance intermediaries. The brokerage distribution channel provides us with access to an efficient, variable cost and global distribution system without the significant time and expense which would be incurred in creating wholly-owned distribution networks. The brokers and reinsurance intermediaries typically act in the interest of ceding clients or insurers; however, they are instrumental to our continued relationship with our clients.

The following tables show our gross written premiums by broker for each of our segments for the twelve months ended December 31, 2014 , 2013 and 2012 :

 

Claims Management

We have a staff of experienced claims professionals organized into insurance and reinsurance teams which are managed separately. We have developed processes and internal business controls for identifying, tracking and settling claims, and authority levels have been established for all individuals involved in the reserving and settlement of claims.

The key responsibilities of our claims management departments are to:

On those accounts where it is applicable, a team of in-house claims professionals oversees and regularly audits claims handled under outsourcing agreements and manages those large claims and coverage issues on referral as required under the terms of those agreements.

Senior management receives a regular report on the status of our reserves and settlement of claims. We recognize that fair interpretation of our reinsurance agreements and insurance policies with our customers, and timely payment of valid claims, are a valuable service to our clients and enhance our reputation.

Reserves

Loss & Loss Expense Reserves.   Under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), we are required to establish loss reserves for the estimated unpaid portion of the ultimate liability for losses and loss expenses under the terms of our policies and agreements with our insured and reinsured customers. These loss reserves consist of the following:

Case Reserves.   For reported claims, reserves are established on a case-by-case basis within the parameters of coverage provided in the insurance policy or reinsurance agreement. The method of establishing case reserves for reported claims differs among our operations. With respect to our insurance operations, we are advised of potential insured losses and our claims handlers record reserves for the estimated amount of the expected indemnity settlement, loss adjustment expenses and cost of defense where appropriate. The reserve estimate reflects the judgment of the claims personnel and is based on claim information obtained to date, general reserving practices, the experience and knowledge of the claims personnel regarding the nature of the specific claim and where appropriate and available, advice from legal counsel, loss adjusters and other claims experts.

With respect to our reinsurance claims operations, claims handlers set case reserves for reported claims generally based on the claims reports received from our ceding companies and take into consideration our cedants’ own reserve recommendations and our prior loss experience with the cedant. Additional case reserves (“ACR”), in addition to the cedants’ own recommended reserves, may be established by us to reflect our estimated ultimate cost of a loss. ACRs are generally the result of either a claims handler’s own experience and knowledge of handling similar claims, general reserving practices or the result of reserve recommendations following an audit of cedants’ reserves.

Case reserves are based on a subjective judgment of facts and circumstances and are established for the purposes of internal reserving only. Accordingly, they do not represent a commitment to any course of conduct or admission of liability on our behalf in relation to any specific claim.

IBNR Reserves.   The need for IBNR reserves arises from time lags between when a loss occurs and when it is actually reported and settled. By definition on most occasions, we will not have specific information on IBNR claims; they need to be estimated by actuarial methodologies. IBNR reserves are therefore generally calculated at an aggregate level and cannot generally be identified as reserves for a particular loss or contract. We calculate IBNR reserves by class of business. IBNR reserves are calculated by projecting our ultimate losses on each class of business and subtracting paid losses and case reserves.  

The main projection methodologies that are used by our actuaries are:

In addition to these methodologies, our actuaries may use other approaches depending upon the characteristics of the class of business and available data.

In general terms, the IELR method is most appropriate for classes of business and/or accident years where the actual paid or reported loss experience is not yet mature enough to override our initial expectations of the ultimate loss ratios. Typical examples would be recent accident years for certain long tail classes of business such as casualty reinsurance. The BF method is generally appropriate where there are few reported claims and a relatively less stable pattern of reported losses. Typical examples would be our property treaty risk excess class of business in our reinsurance segment and marine hull in our insurance segment. The Chain Ladder method is appropriate when there is a relatively stable pattern of loss emergence and a relatively large number of reported claims. Typical examples are U.K. commercial property and U.K. commercial liability in the insurance segment. There are no differences between our year end and our quarterly reserving procedures in the sense that our actuaries perform the basic projections and analyses described above for each class of business.

While our actuaries calculate the IELR, BF and Chain Ladder methods for each class of business, they provide a range of ultimate losses (“ultimates”) within which management’s best estimate is most likely to fall. This range will usually reflect a blend of the various methodologies. These methodologies involve significant subjective judgments reflecting many factors such as, but not limited to, changes in legislative conditions and changes in judicial interpretation of legal liability policy coverages and inflation. Our actuaries collaborate with underwriting, claims, legal and finance in identifying factors which are incorporated in their range of ultimates in which management’s best estimate is most likely to fall. The actuarial ranges are not intended to include the minimum or maximum amount that the claims may ultimately settle at, but are designed to provide management with ranges from which it is reasonable to select a single best estimate for inclusion in our financial statements.

 

Management through its Reserve Committees then reviews the range of actuarial estimates and any other evidence before selecting its best estimate of reserves for each class of business. Management may select outside the range provided by the actuaries but to date gross reserves are within the range of actuarial estimates. This provides the basis for the recommendation made by management to the Audit Committee and the Board regarding the reserve amount to be recorded in the Company’s financial statements.

There are three Reserve Committees, one for each of the insurance and reinsurance segments and a “core” committee that makes final reserving recommendations. The “core” Reserving Committee currently consists of the Chief Executive Officer of Aspen Re, the Group Chief Risk Officer, the Group Head of Risk and the Group Chief Actuary, the Group Chief Financial Officer, the U.S. Insurance Chief Actuary, the Chairman of Aspen Insurance and the Chief Underwriting Officer of Aspen Re. Senior members of the insurance and reinsurance segment underwriting and claims staff comprise the remaining members of each committee.

Each class of business within each line of business is reviewed in detail by management, through its Reserve Committee, at least once a year; the timing of such reviews varies throughout the year. Additionally, for all classes of business, we review the emergence of actual losses relative to expectations every fiscal quarter. If warranted from this analysis, we may accelerate the timing of our detailed actuarial reviews.

We take all reasonable steps to ensure that we utilize all appropriate information and actuarial techniques in establishing our IBNR reserves. However, given the uncertainty in establishing claims liabilities, it is likely that the final outcome will prove to be different from the original provision established at the balance sheet date. Changes to our previous estimates of prior period loss reserves impact the reported calendar year underwriting results by worsening our reported results if the prior year reserves prove to be deficient or improving our reported results if the prior year reserves prove to be redundant. A 5% change in our net loss reserves equates to $220.0 million and represents 6.4% of shareholders’ equity at December 31, 2014 .

Reinsurance recoveries.   In determining net reserves, we estimate recoveries due under our proportional and excess of loss reinsurance programs. For proportional reinsurance we apply the appropriate cession percentages to estimate how much of the gross reserves will be collectable. For excess of loss recoveries, individual large losses are modeled through our reinsurance program. An assessment is also made of the collectability of reinsurance recoveries taking into account market data on the financial strength of each of the reinsurance companies.

 

The following tables show an analysis of consolidated loss and loss expense reserve development net and gross of reinsurance recoverables as at December 31, 2014 , 2013 , 2012 , 2011 , 2010 , 2008, 2007, 2006, 2005 and 2004.

Analysis of Consolidated Loss and Loss Expense Reserve Development Net of Reinsurance Recoverables