10-K 1 ahl10-k2015doc.htm 10-K 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 ____________________________________________________________

Form 10-K
 ____________________________________________________________
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2015
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-31909
 ____________________________________________________________
ASPEN INSURANCE HOLDINGS LIMITED
(Exact name of registrant as specified in its charter) 
Bermuda
 
Not Applicable
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
141 Front Street
Hamilton, Bermuda
 
HM 19
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code
(441) 295-8201
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Ordinary Shares, 0.15144558¢ par value
 
New York Stock Exchange, Inc.
7.401% Perpetual Non-Cumulative Preference Shares
New York Stock Exchange, Inc.
7.250% Perpetual Non-Cumulative Preference Shares
New York Stock Exchange, Inc.
5.95% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares
 
New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ý   No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ¨   No ý  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
 
Accelerated filer
¨
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨   No  ý
The aggregate market value of the ordinary shares held by non-affiliates of the registrant, as of June 30, 2015, was approximately $2.9 billion based on the closing price of the ordinary shares on the New York Stock Exchange on that date, assuming solely for the purpose of this calculation that all directors and employees of the registrant were “affiliates.” The determination of affiliate status is not necessarily a conclusive determination for other purposes and such status may have changed since June 30, 2015.
As of February 12, 2016, there were 60,983,997 outstanding ordinary shares, with a par value of 0.15144558¢ per ordinary share, outstanding.




ASPEN INSURANCE HOLDINGS LIMITED
INDEX TO FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
Aspen Holdings and Subsidiaries
Forward-Looking Statements
PART I
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
 
 
 
PART IV
 
Item 15.
Exhibits, Financial Statement Schedules
Index to Consolidated Financial Statements and Reports
 
 
 


1


Aspen Holdings and Subsidiaries
Unless the context otherwise requires, references in this Annual Report to the “Company,” “we,” “us” or “our” refer to Aspen Insurance Holdings Limited (“Aspen Holdings”) or Aspen Holdings and its subsidiaries, Aspen Insurance UK Limited (“Aspen U.K.”), Aspen (UK) Holdings Limited (“Aspen U.K. Holdings”), Aspen (US) Holdings Limited (“Aspen U.S. Holdings Ltd.”), Aspen Insurance UK Services Limited (“Aspen U.K. Services”), AIUK Trustees Limited (“AIUK Trustees”), Aspen Bermuda Limited (“Aspen Bermuda”, formerly Aspen Insurance Limited), Aspen Underwriting Limited (“AUL”, corporate member of Lloyd’s Syndicate 4711, “Syndicate 4711”), Aspen European Holdings Limited (“Aspen European”), Aspen Managing Agency Limited (“AMAL”), Aspen Singapore Pte. Ltd. (“ASPL”), (Aspen U.S. Holdings, Inc. (“Aspen U.S. Holdings”), Aspen Specialty Insurance Company (“Aspen Specialty”), Aspen Specialty Insurance Management, Inc. (“Aspen Management”), Aspen Re America, Inc. (“Aspen Re America”), Aspen Insurance U.S. Services Inc. (“Aspen U.S. Services”), Aspen Re America CA LLC (“ARA - CA”), Aspen Specialty Insurance Solutions LLC (“ASIS”), Aspen Re America Risk Solutions LLC (“Aspen Solutions”), Acorn Limited (“Acorn”), APJ Continuation Limited (“APJ”), APJ Asset Protection Jersey Limited (“APJ Jersey”), Aspen UK Syndicate Services Limited (“AUSSL”, formerly APJ Services Limited), Aspen Risk Management Limited (“ARML”), Aspen American Insurance Company (“AAIC”), Aspen Recoveries Limited (“Aspen Recoveries”), Aspen Capital Management, Ltd (“ACM”), Silverton Re Ltd. (“Silverton”), Aspen Capital Advisors Inc. (“ACA”), Peregrine Reinsurance Ltd (“Peregrine”), Aspen Cat Fund Limited (“ACF”) and any other direct or indirect subsidiary collectively, as the context requires. Aspen U.K., Aspen Bermuda, Aspen Specialty, AAIC and AUL, as corporate member of Syndicate 4711, are our principal operating subsidiaries and each referred to herein as an “Operating Subsidiary” and collectively referred to as the “Operating Subsidiaries.” References in this report to “U.S. Dollars,” “dollars,” “$” or “¢” are to the lawful currency of the United States of America, references to “British Pounds,” “pounds,” “GBP” or “£” are to the lawful currency of the United Kingdom and references to “euros” or “€” are to the lawful currency adopted by certain member states of the European Union (the “E.U.”), unless the context otherwise requires.
Forward-Looking Statements
This Form 10-K (this “report”) contains, and the Company may from time to time make other verbal or written, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, including statements regarding our capital needs, business strategy, expectations and intentions. Statements that use the terms “believe,” “do not believe,” “anticipate,” “expect,” “assume,” “objective,” “target,” “plan,” “estimate,” “project,” “seek,” “will,” “may,” “aim,” “likely,” “continue,” “intend,” “guidance,” “outlook,” “trends,” “future,” “could,” “would,” “should,” “on track” and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and because our business is subject to numerous risks, uncertainties and other factors, our actual results could differ materially from those anticipated in the forward-looking statements, including those set forth below under Item 1, “Business,” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. The risks, uncertainties and other factors set forth below and under Item 1A, “Risk Factors” and other cautionary statements made in this report should be read and understood as being applicable to all related forward-looking statements wherever they appear in this report.
 
All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, those set forth under “Risk Factors” in Item 1A, and the following:
our ability to successfully implement steps to further optimize the business portfolio, ensure capital efficiency and enhance investment returns;
the possibility of greater frequency or severity of claims and loss activity, including as a result of natural or man-made (including economic and political risks) catastrophic or material loss events, than our underwriting, reserving, reinsurance purchasing or investment practices have anticipated;
the assumptions and uncertainties underlying reserve levels that may be impacted by future payments for settlements of claims and expenses or by other factors causing adverse or favorable development, including our assumptions on inflation costs associated with long-tail casualty business which could differ materially from actual experience;
the reliability of, and changes in assumptions to, natural and man-made catastrophe pricing, accumulation and estimated loss models;
decreased demand for our (re)insurance products and cyclical changes in the (re)insurance industry;



2


the models we use to assess our exposure to losses from future natural catastrophes contain inherent uncertainties and our actual losses may differ significantly from expectations;
our capital models may provide materially different indications than actual results;
increased competition from existing (re)insurers and from alternative capital providers and insurance-linked funds and collateralized special purpose insurers on the basis of pricing, capacity, coverage terms, new capital, binding authorities to brokers or other factors and the related demand and supply dynamics as contracts come up for renewal;
our ability to execute our business plan to enter new markets, introduce new products and teams and develop new distribution channels, including their integration into our existing operations;
our acquisition strategy;
the recent consolidation in the (re)insurance industry;
loss of one or more of our senior underwriters or key personnel;
changes in our ability to exercise capital management initiatives (including our share repurchase program) or to arrange banking facilities as a result of prevailing market conditions or changes in our financial results;
changes in general economic conditions, including inflation, deflation, foreign currency exchange rates, interest rates and other factors that could affect our financial results;
the risk of a material decline in the value or liquidity of all or parts of our investment portfolio;
the risks associated with the management of capital on behalf of investors;
evolving issues with respect to interpretation of coverage after major loss events;
our ability to adequately model and price the effects of climate cycles and climate change;
any intervening legislative or governmental action and changing judicial interpretation and judgments on insurers’ liability to various risks;
the risks related to litigation;
the effectiveness of our risk management loss limitation methods, including our reinsurance purchasing;
changes in the total industry losses, or our share of total industry losses, resulting from past events such as floods in the U.K., the port explosion in Tianjin, China and a dam collapse in Brazil in 2015, the winter storms in the U.S., snowstorms in Japan, flooding in Asia and the U.K., North American and European storms and hailstorms in Australia in 2014, the German hailstorms, floods and other catastrophes in 2013, Superstorm Sandy in 2012, the Costa Concordia incident in early 2012, the floods in Thailand, various losses from the U.S. storms and the earthquake and ensuing tsunami in Japan in 2011, the floods in Australia in late 2010 and early 2011, the Deepwater Horizon incident in the Gulf of Mexico in 2010, the Chilean and the New Zealand earthquakes in 2010 and 2011 and, with respect to such events, our reliance on loss reports received from cedants and loss adjustors, our reliance on industry loss estimates and those generated by modeling techniques, changes in rulings on flood damage or other exclusions as a result of prevailing lawsuits and case law;
the impact of one or more large losses from events other than natural catastrophes or by an unexpected accumulation of attritional losses and deterioration in loss estimates;
the impact of acts of terrorism, acts of war and related legislation;
any changes in our reinsurers’ credit quality and the amount and timing of reinsurance recoverables;
changes in the availability, cost or quality of reinsurance or retrocessional coverage;
the continuing and uncertain impact of the current depressed lower growth economic environment in many of the countries in which we operate;
our reliance on information and technology and third-party service providers for our operations and systems;
the level of inflation in repair costs due to limited availability of labor and materials after catastrophes;
a decline in our Operating Subsidiaries’ ratings with Standard & Poor’s Ratings Services (“S&P”), A.M. Best Company Inc. (“A.M. Best”) or Moody’s Investors Service Inc. (“Moody’s”);


3


the failure of our reinsurers, policyholders, brokers or other intermediaries to honor their payment obligations;
our reliance on the assessment and pricing of individual risks by third parties;
our dependence on a few brokers for a large portion of our revenues;
the persistence of heightened financial risks, including excess sovereign debt, the banking system and the Eurozone crisis;
changes in government regulations or tax laws in jurisdictions where we conduct business;
changes in accounting principles or policies or in the application of such accounting principles or policies;
increased counterparty risk due to the credit impairment of financial institutions; and
Aspen Holdings or Aspen Bermuda becoming subject to income taxes in the United States or the United Kingdom.
In addition, any estimates relating to loss events involve the exercise of considerable judgment in the setting of reserves and reflect a combination of ground-up evaluations, information available to date from brokers and cedants, market intelligence, initial tentative loss reports and other sources. The actuarial range of reserves provided, if any, is based on our then current state of knowledge and explicit and implicit assumptions relating to the incurred pattern of claims, the expected ultimate settlement amount, inflation and dependencies between lines of business. Due to the complexity of factors contributing to losses and the preliminary nature of the information used to prepare estimates, there can be no assurance that our ultimate losses will remain within stated amounts.
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, or to disclose any difference between our actual results and those reflected in such statements.
If one or more of these or other risks or uncertainties materialize or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements you read in this report reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by the points made above. You should specifically consider the factors identified in this report which could cause actual results to differ before making an investment decision.


4


PART I
Item 1.
Business
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), Dubai (United Arab Emirates), 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, 2015, we wrote $2,997.3 million in gross premiums and at December 31, 2015 we had total capital employed, including long-term debt, of $3,969.1 million.
Our corporate structure as at December 31, 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, David Cohen, President and Chief Underwriting Officer of Aspen Insurance (from November 2015), Ann Haugh, Chief Operating Officer of Aspen Insurance and President of Aspen International Insurance (from August 2015), and Robert Rheel, President of Aspen U.S. Insurance (from August 2015). Rupert Villers served as President of International Insurance until July 2015 and as Chairman of Aspen Insurance until he stepped down in October 2015.


5


Aspen Re is comprised of: property catastrophe reinsurance (including the business written through Aspen Capital Markets); other property reinsurance; casualty reinsurance; and specialty reinsurance. Aspen Re 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 2015, Aspen Re continued its participation in the alternative reinsurance market through Aspen Capital Markets. Aspen Capital Markets continues its focus on developing 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 Aspen Re, 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.
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.

We continued progress against our objectives in 2015 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 2015.  Our U.S. insurance teams continued to gain scale, with premiums from the U.S. teams growing by more than 14% 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. We continued to further optimize our risk return profile in 2015 following the restructure of our ceded reinsurance and retrocessional arrangements in 2014.
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 2015, we repurchased $83.7 million of our ordinary shares. On February 5, 2015, we announced a new share repurchase program of $500 million.


6


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.
As at December 31, 2015, approximately 12.6% of our total cash and investments, excluding catastrophe bonds and funds held by variable interest entities (the “Managed Portfolio”), was invested in equities and U.S. Dollar BBB Emerging Market Debt (“BBB Emerging Market Debt”). During 2015, we increased our investment in BBB Emerging Market Debt and liquidated the majority of our investment in BB Bank loans.
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 originally in 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 such 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 both December 2014 and 2015 to continue to provide additional collateralized capacity to support Aspen Re’s global reinsurance business. 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 been historically 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 2015, the premiums from these emerging markets in reinsurance increased by 4%.
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.


7


Business Segments
We are organized into two business segments: reinsurance and insurance. In addition to the way we manage our business, we considered similarities in economic characteristics, products, customers, distribution, the regulatory environment of our operating segments and quantitative thresholds to determine our reportable segments. Segment profit or loss for each of the Company’s operating segments is measured by underwriting profit or loss. Underwriting profit is the excess of net earned premiums over the sum of losses and loss expenses, amortization of deferred policy acquisition costs and general and administrative expenses. Underwriting profit or loss provides a basis for management to evaluate the segment’s underwriting performance.
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, 2015, 2014 and 2013:
 
 
 
Twelve Months Ended December 31, 2015
 
Twelve Months Ended December 31, 2014
 
Twelve Months Ended December 31, 2013
Business Segment
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
 
 
($ in millions, except for percentages)
Reinsurance
 
$
1,248.9

 
41.7
%
 
$
1,172.8

 
40.4
%
 
$
1,133.9

 
42.8
%
Insurance
 
1,748.4

 
58.3

 
1,729.9

 
59.6

 
1,512.8

 
57.2

Total
 
$
2,997.3

 
100.0
%
 
$
2,902.7

 
100.0
%
 
$
2,646.7

 
100.0
%
 

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, terrorism, engineering and other specialty lines). We established our Aspen Capital Markets division in 2013 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 the property catastrophe business through the use of alternative capital.


8


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, 2015, 2014 and 2013:
 
 
 
 
Twelve Months Ended December 31, 2015
 
Twelve Months Ended December 31, 2014
 
Twelve Months Ended December 31, 2013
Reinsurance
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written
Premiums 
 
% of Total 
 
 
 
($ in millions, except for percentages)
Australia/Asia
 
$
122.8

 
9.8
%
 
$
114.4

 
9.8
%
 
$
100.2

 
8.8
%
Caribbean
 
13.5

 
1.1

 
11.0

 
0.9

 
9.7

 
0.9

Europe (excluding U.K.)
 
100.9

 
8.1

 
101.3

 
8.6

 
101.8

 
9.0

United Kingdom
 
15.3

 
1.2

 
15.5

 
1.3

 
15.6

 
1.4

United States & Canada (1)
 
530.1

 
42.5

 
453.6

 
38.7

 
466.2

 
41.1

Worldwide excluding United States (2)
 
40.3

 
3.2

 
50.6

 
4.3

 
53.0

 
4.7

Worldwide including United States (3)
 
345.9

 
27.7

 
363.8

 
31.0

 
331.7

 
29.3

Others
 
80.1

 
6.4

 
62.6

 
5.4

 
55.7

 
4.8

Total
 
$
1,248.9

 
100.0
%
 
$
1,172.8

 
100.0
%
 
$
1,133.9

 
100.0
%
_______________
(1)
“United States and Canada” comprises individual policies that insure risks specifically in the United States and/or Canada, but not elsewhere.
(2)
“Worldwide excluding the United States” comprises individual policies that insure risks wherever they may be across the world but specifically excludes the United States.
(3)
“Worldwide including the United States” comprises individual policies that insure risks wherever they may be across the world but specifically includes the United States.
Our gross written premiums by our principal lines of business within our reinsurance segment for the twelve months ended December 31, 2015, 2014 and 2013 are as follows:
 
 
 
Twelve Months Ended December 31, 2015
 
Twelve Months Ended December 31, 2014
 
Twelve Months Ended December 31, 2013
Reinsurance
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written
Premiums 
 
% of Total 
 
 
 
($ in millions, except for percentages)
Property catastrophe reinsurance
 
$
274.3

 
22.0
%
 
$
301.5

 
25.7
%
 
$
273.3

 
24.1
%
Other property reinsurance
 
360.3

 
28.8

 
343.0

 
29.3

 
302.8

 
26.7

Casualty reinsurance
 
287.5

 
23.0

 
281.9

 
24.0

 
312.3

 
27.5

Specialty reinsurance
 
326.8

 
26.2

 
246.4

 
21.0

 
245.5

 
21.7

Total
 
$
1,248.9

 
100.0
%
 
$
1,172.8

 
100.0
%
 
$
1,133.9

 
100.0
%
 `1
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) and was further renewed in December 2015 raising $125.0 million (of which $100.0 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, 2015, Silverton’s gross written premium was $38.5 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 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


9


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. In 2015, we capitalized on new business opportunities where rates were under less pressure and wrote more pro rata business.
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 and facultative 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, engineering, 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, chemical or radiological attack, though we have written a small number of contracts that do not exclude such attacks, the coverage of which may be applicable to non-terrorism events.
Insurance
Our insurance segment consists of specialty property and casualty insurance, marine, aviation and energy insurance and financial and professional lines insurance.
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, 2015, 2014 and 2013:
 
 
 
Twelve Months Ended December 31, 2015
 
Twelve Months Ended December 31, 2014
 
Twelve Months Ended December 31, 2013
Insurance
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written
Premiums 
 
% of Total 
 
 
 
($ in millions, except for percentages)
Australia/Asia
 
$
17.2

 
1.0
%
 
$
15.7

 
0.9
%
 
$
8.2

 
0.5
%
Caribbean
 
6.8

 
0.4

 
8.7

 
0.5

 
4.7

 
0.3

Europe (excluding U.K.)
 
12.7

 
0.7

 
12.6

 
0.7

 
10.4

 
0.7

United Kingdom
 
208.2

 
11.9

 
193.8

 
11.2

 
150.8

 
10.0

United States & Canada (1)
 
949.4

 
54.3

 
903.7

 
52.3

 
713.4

 
47.2

Worldwide excluding United States (2)
 
66.9

 
3.8

 
65.6

 
3.8

 
92.7

 
6.1

Worldwide including United States (3)
 
447.7

 
25.6

 
488.0

 
28.2

 
495.7

 
32.8

Others
 
39.5

 
2.3

 
41.8

 
2.4

 
36.9

 
2.4

Total
 
$
1,748.4

 
100.0
%
 
$
1,729.9

 
100.0
%
 
$
1,512.8

 
100.0
%
_______________ 
 


10


(1)
“United States and Canada” comprises individual policies that insure risks specifically in the United States and/or Canada, but not elsewhere.
(2)
“Worldwide excluding the United States” comprises individual policies that insure risks wherever they may be across the world but specifically excludes the United States.
(3)
“Worldwide including the United States” comprises individual policies that insure risks wherever they may be across the world but specifically includes the United States.
 
Our gross written premiums by our principal lines of business within our insurance segment for the twelve months ended December 31, 2015, 2014 and 2013 are as follows:
 
 
 
Twelve Months Ended December 31, 2015
 
Twelve Months Ended December 31, 2014
 
Twelve Months Ended December 31, 2013
Insurance
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written
Premiums 
 
% of Total 
 
 
 
($ in millions, except for percentages)
Property and casualty insurance
 
$
890.6

 
51.0
%
 
$
801.0

 
46.3
%
 
$
654.1

 
43.2
%
Marine, aviation and energy insurance
 
427.3

 
24.0

 
519.3

 
30.0

 
523.4

 
34.6

Financial and professional lines insurance
 
430.5

 
25.0

 
409.6

 
23.7

 
335.3

 
22.2

Total
 
$
1,748.4

 
100.0
%
 
$
1,729.9

 
100.0
%
 
$
1,512.8

 
100.0
%
 Property and Casualty Insurance: The 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, products and public liability coverage for insureds domiciled in the U.K. and Ireland. The U.K. regional team also covers directors’ and officers’ (“D&O”) and professional indemnity, predominantly to small and medium corporates.
U.S. Specialty Casualty: The U.S. specialty casualty account consists primarily of lines written within the primary and excess liability insurance sectors. We are focused on delivering expertise to brokers and customers in Hospitality, Real Estate, Construction, Excess Transportation, Products Liability and Lead/High Excess.
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. Wherever possible, we exclude coverage protection against nuclear, biological, chemical or radiological (“NBCR”) attacks. However, certain U.S. states (notably New York and Florida) prohibit admitted market companies, such as AAIC, from fully excluding such perils, resulting in some level of exposures to NBCR as well as fire following such events. In addition, we would expect to benefit from the protection of 2015 TRIA Reauthorization and the over-arching $100 billion industry loss cap (subject to the relevant deductible and co-retention).


11


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 to 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), aviation hull deductible cover and comprehensive legal liability for airlines, smaller operators of airline equipment, airports and associated business and non-critical component part manufacturers.
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 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, engineers, doctors and medical technicians. 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 predominantly 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 (“Aspen Crisis Management”): The Aspen Crisis Management 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 and political violence insurance, providing coverage for damage to


12


property (largely fixed assets such as buildings) resulting from acts of terrorism, strikes, riots, civil commotion or political violence. This book is written on a global basis, although capacity is selectively deployed.
Accident and Health: The global accident and health team focuses on insurance and reinsurance products which help protect individuals, groups and companies from the consequences of accidental death or disability whether resulting from accident or sickness. This may include single or multi-person losses as well as major catastrophic events such as air crashes, earthquakes or terrorist attacks. Coverage written includes whole account treaty and facultative reinsurance protection for insurance companies.
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 2015, our underwriting activities were managed in two product areas: reinsurance and insurance. For a discussion of our business and business segments, see above “Business — General” and “Business — Business Segments.”
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 control framework and acting as an independent reviewer of underwriting activity across our businesses.
 We underwrite according to the following principles:
operate within agreed boundaries as defined by the Aspen Underwriting Principles for the relevant class of business;
operate within prescribed maximum underwriting authority limits, which we delegate in accordance with an understanding of each individual’s capabilities, tailored to the classes of business written by the particular underwriter;
evaluate the underlying data provided by clients and adjust such data where we believe it does not adequately reflect the underlying exposure;
price each submission based on our experience in the class of business, and where appropriate, by deploying one or more actuarial models either developed internally or licensed from third-party providers;
maintain a peer review process to sustain high standards of underwriting discipline and consistency; other than for simpler insurance risks, risks underwritten are subject to peer review, by at least one qualified peer reviewer (for reinsurance risks, peer review occurs mostly prior to risk acceptance; for complex insurance risks, peer review may occur before or after risk acceptance and for simpler insurance risks, peer review is performed using a sampling methodology);
more complex risks may involve peer review by several underwriters and input from catastrophe risk management specialists, our team of actuaries and senior management; and
risks outside of agreed underwriting authority limits are referred to the Group Chief Executive Officer as exceptions for approval before we accept the risks.
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 classes 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 classes of business and we anticipate continuing with these in most instances.


13



In respect of our purchased non-catastrophe specific reinsurance contracts, in 2016 (similar to our approach in 2015) we intend to retain 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 or have fully collateralized arrangements in place. 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 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 that are reserved to the Board include approval of the internal controls and risk management framework and any changes to the Group’s risk appetite statement and key risk limits. The Board also receives reports at each scheduled meeting from the Group Chief Risk Officer and the Chairman of the Risk Committee as well as 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:
making recommendations to the Board regarding management’s proposals for the risk management framework, risk appetite, key risk limits and the use of our internal model;
monitoring compliance with the agreed Group risk appetite and key risk limits; and
oversight of the process of stress and scenario testing established by management.


14


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 primarily responsible for 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 Group’s business.
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 Group’s risk management systems. 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:
the establishment and maintenance of a risk management and internal control system based on a three lines of defense approach to the allocation of responsibilities between risk accepting units (first line), risk management activity and oversight from other central control functions (second line) and independent assurance (third line);
identifying material risks to the achievement of the Group’s objectives including emerging risks;
the articulation at Group level of our risk appetite and a consistent set of key risk limits for each material component of risk;
the cascading of key risk limits for material risks to each operating subsidiary and, where appropriate, risk accepting business units;
measuring, monitoring, managing and reporting risk positions and trends;
the use, subject to an understanding of its limitations, of the internal model to test strategic and tactical business decisions and to assess compliance with the risk appetite statement; and
stress and scenario testing, including reverse stress testing, designed to help us better understand and develop contingency plans for the likely effects of extreme events or combinations of events on capital adequacy and liquidity.
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 and limits for the level of risk we assume, together with a statement of the reward we aim to receive for this level of risk.


15


Our risk appetite statement comprises the following components:
Risk preferences:  a high level description of the types of risks we prefer to assume and those we prefer to minimize or avoid;
Return objective:  the levels of return on capital we seek to achieve, subject to our risk constraints;
Volatility constraint:  a target limit on earnings volatility; and
Capital constraint:  a minimum level of risk adjusted capital.
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 divide risks into “core” and “non-core” risks. Core risks comprise those risks which are inherent in the operation of our business, including insurance risks in respect of our underwriting operations and market and liquidity risks in respect of our investment activity. We intentionally expose the Company to core risks with a view to generating shareholder value but seek to manage the resulting volatility in our earnings and financial condition within the limits defined by our risk appetite. However, these core risks are intrinsically difficult to measure and manage and we may not, therefore, be successful in this respect. All other risks, including regulatory and operational risks, are classified as non-core. We seek, to the extent we regard as reasonably practicable and economically viable, to avoid or minimize our exposure to non-core risks.
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 Group Chief Risk Officer is required to report the excess and management’s plans for dealing with it to the Risk Committee.


16


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 and 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, 2015, 2014 and 2013:
 
 
 
Twelve Months Ended December 31, 2015
 
Twelve Months Ended December 31, 2014
 
Twelve Months Ended December 31, 2013
Reinsurance
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written
Premiums 
 
% of Total 
 
 
 
($ in millions, except for percentages)
Aon Corporation
 
$
367.2

 
29.4
%
 
$
321.3

 
27.4
%
 
$
298.2

 
26.3
%
Marsh & McLennan Companies, Inc.
 
307.2

 
24.6

 
287.3

 
24.5

 
267.6

 
23.6

Willis Group Holdings, Ltd.
 
291.0

 
23.3

 
287.3

 
24.5

 
274.4

 
24.2

Others
 
283.5

 
22.7

 
276.9

 
23.6

 
293.7

 
25.9

Total
 
$
1,248.9

 
100.0
%
 
$
1,172.8

 
100.0
%
 
$
1,133.9

 
100.0
%

 
 
 
 
Twelve Months Ended December 31, 2015
 
Twelve Months Ended December 31, 2014
 
Twelve Months Ended December 31, 2013
Insurance
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written
Premiums 
 
% of Total 
 
 
 
($ in millions, except for percentages)
Aon Corporation
 
$
192.5

 
11.0
%
 
$
196.0

 
11.3
%
 
$
146.7

 
9.7
%
Marsh & McLennan Companies, Inc.
 
155.1

 
8.9

 
151.9

 
8.8

 
130.4

 
8.6

Willis Group Holdings, Ltd.
 
142.7

 
8.2

 
110.8

 
6.4

 
107.1

 
7.1

Ryan Specialty
 
106.7

 
6.1

 
99.7

 
5.8

 
50.6

 
3.3

Brownstone Agency
 
92.7

 
5.3

 
95.8

 
5.5

 
94.7

 
6.2

Amwins
 
76.2

 
4.4

 
60.4

 
3.5

 
58.9

 
3.9

Miller Insurance Services, Ltd.
 
50.4

 
2.9

 
65.6

 
3.8

 
65.0

 
4.3

Jardine Lloyd Thompson Ltd.
 
49.4

 
2.8

 
54.6

 
3.2

 
51.1

 
3.4

CRC
 
42.7

 
2.4

 
33.2

 
1.9

 
31.1

 
2.1

Others
 
840.0

 
48.0

 
861.9

 
49.8

 
777.2

 
51.4

Total
 
$
1,748.4

 
100.0
%
 
$
1,729.9

 
100.0
%
 
$
1,512.8

 
100.0
%
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:
process, manage and resolve reported insurance or reinsurance claims efficiently and accurately to ensure the proper application of intended coverage, reserving in a timely fashion for the probable ultimate cost of both indemnity and expense and make timely payments in the appropriate amount on those claims for which we are legally obligated to pay;
select appropriate counsel and experts for claims, manage claims-related litigation and regulatory compliance;


17


contribute to the underwriting process by collaborating with both underwriting teams and senior management in terms of the evolution of policy language and endorsements and providing claim-specific feedback and education regarding legal activity;
contribute to the analysis and reporting of financial data and forecasts by collaborating with the finance and actuarial functions relating to the drivers of actual claim reserve developments and potential for financial exposures on known claims; and
support our marketing efforts through the quality of our claims service.
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
Under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and applicable insurance laws and regulations in the countries in which we operate, 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. The process of estimating these reserves involves a considerable degree of judgment and, as of any given date, is inherently uncertain. For a full discussion regarding our loss and loss expenses reserving process, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Reserving Approach” and Item 1A, “Risk Factors — Our financial condition and operating results may be adversely affected if actual claims exceed our loss reserves.”
  The following tables show an analysis of consolidated loss and loss expense reserve development, net and gross of reinsurance recoverables, as at December 31, 2015, 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007, 2006 and 2005. 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 tables below do not present accident or policy year development data. Each table begins by showing the original year-end reserves recorded at the balance sheet date for each of the years presented. The re-estimated liabilities reflect additional information regarding claims incurred prior to the end of the preceding financial year. The cumulative redundancy or deficiencies represent cumulative differences between the original reserves and the currently re-estimated liabilities over all prior years. Annual changes in the estimates are reflected in the consolidated statement of operations and comprehensive income for each year. The lower sections of the tables show the portions of the original reserves that were paid (i.e., claims paid) as of the end of each subsequent year. This section of each table provides an indication of the portion of the re-estimated liability that is settled and is unlikely to develop in the future.
To facilitate an understanding of the information provided in the tables below, the following is an example using net loss reserves established as at December 31, 2008. It can be seen from the top section of the table that as at December 31, 2008 our estimate of loss reserves, net of reinsurance recoverables, was $2,787.0 million. The next section of the table shows that our current estimate of net unpaid loss reserves for events occurring on or before December 31, 2008 is $2,455.7 million. The cumulative favorable development from our initial estimate of $331.3 million was recognized over the course of the following seven calendar years 2009 - 2015. As at December 31, 2015, we paid $1,874.2 million towards settlement of $2,787.0 million of net loss reserves established as at December 31, 2008 and now believe we will ultimately pay $2,455.7 million for full settlement.


18





Analysis of Consolidated Loss and Loss Expense Reserve Development Net of Reinsurance Recoverables
 
 
 
As at December 31, 
 
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
 
 
($ in millions)
Estimated liability for unpaid losses and loss expenses, net of reinsurance recoverables
 
1,848.9

 
2,351.7

 
2,641.3

 
2,787.0

 
3,009.6

 
3,540.6

 
4,098.6

 
4,280.7

 
4,346.2

 
4,400.8

 
4,583.4

Liability re-estimate as of:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
One year later
 
1,797.6

 
2,244.3

 
2,557.8

 
2,702.6

 
2,988.2

 
3,448.3

 
3,961.2

 
4,173.0

 
4,242.1

 
4,244.3

 
 
Two years later
 
1,778.8

 
2,153.1

 
2,536.0

 
2,662.5

 
2,937.6

 
3,363.5

 
3,799.3

 
4,102.6

 
4,119.6

 
 

 
 
Three years later
 
1,726.4

 
2,114.8

 
2,480.0

 
2,621.4

 
2,858.2

 
3,275.3

 
3,716.7

 
3,990.3

 
 

 
 

 
 
Four years later
 
1,687.2

 
2,066.4

 
2,405.3

 
2,546.9

 
2,771.6

 
3,217.6

 
3,617.7

 
 

 
 

 
 

 
 
Five years later
 
1,641.2

 
2,008.1

 
2,342.7

 
2,489.9

 
2,736.1

 
3,151.5

 
 

 
 

 
 

 
 

 
 
Six years later
 
1,608.2

 
1,964.2

 
2,291.7

 
2,486.0

 
2,694.7

 
 

 
 

 
 

 
 

 
 

 
 
Seven years later
 
1,575.9

 
1,951.2

 
2,287.4

 
2,455.7

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Eight years later
 
1,578.2

 
1,943.4

 
2,274.1

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Nine years later
 
1,570.5

 
1,925.7

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Ten years later
 
1,553.5

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative redundancy
 
295.4

 
426.0

 
367.2

 
331.3

 
314.9

 
389.1

 
480.9

 
290.4

 
226.6

 
156.5

 
 
Cumulative paid losses, net of reinsurance recoveries, as of:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
One year later
 
332.4

 
585.1

 
534.2

 
677.0

 
550.3

 
712.9

 
835.7

 
912.3

 
995.6

 
966.6

 
 
Two years later
 
766.9

 
914.8

 
990.9

 
1,080.0

 
1,076.4

 
1,103.3

 
1,314.0

 
1,608.7

 
1,629.1

 
 

 
 
Three years later
 
1,014.6

 
1,208.3

 
1,215.8

 
1,453.9

 
1,342.5

 
1,403.6

 
1,775.0

 
1,970.3

 
 

 
 

 
 
Four years later
 
1,225.5

 
1,347.7

 
1,497.3

 
1,599.7

 
1,557.6

 
1,694.9

 
1,975.1

 
 

 
 

 
 

 
 
Five years later
 
1,313.4

 
1,547.2

 
1,600.0

 
1,722.7

 
1,750.4

 
1,833.5

 
 

 
 

 
 

 
 

 
 
Six years later
 
1,434.9

 
1,605.0

 
1,658.2

 
1,843.9

 
1,823.6

 
 

 
 

 
 

 
 

 
 

 
 
Seven years later
 
1,483.5

 
1,629.1

 
1,701.2

 
1,874.2

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Eight years later
 
1,490.8

 
1,655.0

 
1,719.9

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Nine years later
 
1,510.9

 
1,663.8

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Ten years later
 
1,516.4

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 










The cumulative paid losses table, net of reinsurance recoveries, has been represented to reallocate reinsurance recoveries across years.


19


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

 
 
As at December 31, 
 
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
 
 
($ in millions)
Estimated liability for unpaid losses and loss expenses
 
3,041.6

 
2,820.0

 
2,946.0

 
3,070.3

 
3,331.1

 
3,820.5

 
4,525.2

 
4,779.7

 
4,678.9

 
4,750.8

 
4,938.2

Liability re-estimate as of:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
One year later
 
3,048.3

 
2,739.9

 
2,883.3

 
3,041.9

 
3,338.3

 
3,773.6

 
4,396.4

 
4,636.8

 
4,576.0

 
4,586.2

 
 
Two years later
 
3,027.6

 
2,634.6

 
2,896.1

 
3,011.3

 
3,330.4

 
3,689.5

 
4,187.6

 
4,568.7

 
4,438.7

 
 

 
 
Three years later
 
2,957.4

 
2,625.9

 
2,853.5

 
2,994.3

 
3,260.4

 
3,589.0

 
4,108.7

 
4,447.5

 
 

 
 

 
 
Four years later
 
2,943.6

 
2,589.0

 
2,792.3

 
2,938.2

 
3,164.5

 
3,540.2

 
4,006.5

 
 

 
 

 
 

 
 
Five years later
 
2,909.5

 
2,541.3

 
2,733.1

 
2,874.8

 
3,140.6

 
3,474.4

 
 

 
 

 
 

 
 

 
 
Six years later
 
2,886.0

 
2,497.3

 
2,679.2

 
2,873.1

 
3,096.8

 
 

 
 

 
 

 
 

 
 

 
 
Seven years later
 
2,854.8

 
2,481.5

 
2,677.0

 
2,844.4

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Eight years later
 
2,854.9

 
2,474.1

 
2,665.9

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Nine years later
 
2,847.6

 
2,458.1

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Ten years later
 
2,832.1

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative redundancy
 
209.5

 
361.9

 
280.1

 
225.9

 
234.3

 
346.1

 
518.7

 
332.2

 
240.2

 
164.6

 
 
 For additional information concerning our reserves, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8, “Financial Statements and Supplementary Data.”
Investments
The Investment Committee of the Board establishes investment guidelines and supervises our investment activity. The Investment Committee regularly monitors our overall investment results and our performance against our investment objectives and guidelines. These guidelines specify minimum criteria on the overall credit quality and liquidity characteristics of the portfolio. They include limitations on the size of certain holdings as well as restrictions on purchasing certain types of securities. Management and the Investment Committee review our investment performance and assess credit and market risk concentrations and exposures to issuers.
We follow an investment strategy designed to emphasize the preservation of capital and provide sufficient liquidity for the prompt payment of claims. As of December 31, 2015, our investments consisted of a diversified portfolio of fixed income securities, global equities and money market funds. In keeping with our strategy of improving long term investment returns and in light of the ongoing low interest rate environment, in 2013 we invested in a $200.0 million BBB Emerging Market Debt portfolio, which is reported in corporate and foreign government securities and in 2014 we adjusted our asset allocation by increasing our equity exposures by $240.0 million, of which $80.0 million was invested in our global equity strategy and $160.0 million was invested in a minimum volatility equity portfolio.  In 2014, we maintained an 8.5% position in equities, a 1.0% position in BB Bank Loans, a 2.5% position in BBB Emerging Market Debt and 0.5% in risk asset portfolio cash.
In November 2015, we liquidated the majority of our BB Bank Loan portfolio and received net proceeds of $82.5 million.  Proceeds from the sales were reinvested into the BBB Emerging Market Debt portfolio. As at December 31, 2015, we had an 8.7% position in equities, a 3.5% position in BBB Emerging Market Debt and 0.4% in risk asset portfolio cash. As a result, our investments in equities, BBB Emerging Market Debt and risk portfolio cash consisted of approximately 12.6% of our Managed Portfolio (2014 — 12.5%).
For 2015, we engaged BlackRock Financial Management Inc., Alliance Capital Management L.P., Deutsche Investment Management Americas Inc., Pacific Investment Management Company LLC, Goldman Sachs Asset Management L.P. and Conning Asset Management Limited to provide investment advisory and management services for our portfolio of fixed income and equity investments. We have agreed to pay investment management fees based on the average market values of total assets held under management at the end of each calendar quarter. These agreements may be terminated generally by either party on short notice without penalty.
The total return of our investable assets, defined as the total of total investments, cash and cash equivalents, accrued interest, receivables for securities sold and payables for securities purchased, for the twelve months ended December 31, 2015 was 1.1% (2014 — 3.1%). Total return is calculated based on total net investment return, including interest on cash equivalents and any


20


change in unrealized gains/losses on our investments, divided by the average market value of our investable assets during the twelve months ended December 31, 2015.
Fixed Income Portfolio.  We employ an active investment strategy that focuses on the outlook for interest rates, the yield curve and credit spreads. In addition, we manage the duration of our fixed income portfolio having regard to the average liability duration of our reinsurance and insurance risks.
As at December 31, 2015, we had $756.3 million remaining in our interest rate swaps program to mitigate the negative impact of rises in interest rates on the market value of our fixed income portfolio. In 2015, $195.0 million of interest rate swaps matured. We decided to let our interest rate swap program roll-off and not renew maturing positions. This decision was made in 2014 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, weak oil prices and low inflation make it difficult to gauge the timing and speed of further interest rate rises by the Federal Reserve. We have a further $500.0 million of interest rate swaps rolling off in the first quarter of 2016. The interest rate swaps reduce the fixed income portfolio duration by 0.08 years. As at December 31, 2015, the fixed income portfolio duration was 3.57 years including the impact of the interest rate swaps and 3.65 years excluding the impact of the interest rate swaps. As at December 31, 2014, the fixed income portfolio duration was 3.50 years excluding the impact of the interest rate swaps and 3.29 years including the impact of the interest rate swaps. As of December 31, 2015, the fixed income portfolio book yield was 2.59% compared to 2.65% as of December 31, 2014.
We employ several third-party investment managers to manage our fixed income assets. We agree separate investment guidelines with each investment manager. These investment guidelines cover, among other things, counterparty limits, credit quality, and limits on investments in any one sector. We expect our investment managers to adhere to strict overall portfolio credit and duration limits to ensure that a minimum “AA-” credit rating for the aggregate fixed income portfolio is maintained.
BB Securities.  In September 2012, we established a bespoke portfolio to invest in BB High Yield Bonds and in October 2012 amended the portfolio guidelines to allow investment in BB Bank Loans. In May 2014, we sold our BB High Yield Bonds portfolio for net proceeds of $25.1 million. In the fourth quarter of 2015, we liquidated the majority of our BB Bank Loans portfolio and received net proceeds of $82.5 million. Proceeds from the sales were reinvested into the BBB Emerging Market Debt portfolio. 
Emerging Market Debt Portfolio. In August 2013, we invested in a $200.0 million BBB Emerging Market Debt portfolio, which is reported below in corporate and foreign government securities.  In 2015 the proceeds from the sale of our BB Bank Loans were reinvested into the BBB Emerging Market Debt portfolio. 
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, short-term investments and equity securities as at December 31, 2015 and 2014:
 
As at December 31, 2015
 
Cost or
Amortized Cost 
 
Gross
Unrealized
Gains 
 
Gross
Unrealized
Losses 
 
Fair Market
Value 
 
($ in millions)
U.S. Government
$
1,113.9

 
$
13.0

 
$
(3.8
)
 
$
1,123.1

U.S. Agency
154.5

 
4.3

 
(0.1
)
 
158.7

Municipal
25.0

 
1.6

 

 
26.6

Corporate
2,626.2

 
49.5

 
(15.1
)
 
2,660.6

Non-U.S. Government-backed Corporate
81.6

 
0.6

 
(0.1
)
 
82.1

Foreign Government
634.6

 
10.5

 
(0.9
)
 
644.2

Asset-backed
75.4

 
0.9

 
(0.3
)
 
76.0

Non-agency Commercial Mortgage-backed
25.5

 
1.2

 

 
26.7

Agency Mortgage-backed
1,130.8

 
27.6

 
(5.3
)
 
1,153.1

Total Fixed Income Securities — Available for Sale
5,867.5

 
109.2

 
(25.6
)
 
5,951.1

Total Short-term Investments — Available for Sale
162.9

 

 

 
162.9

Total
$
6,030.4

 
$
109.2

 
$
(25.6
)
 
$
6,114.0

 


21


 
 
As at December 31, 2014
 
Cost or
Amortized Cost 
 
Gross
Unrealized
Gains 
 
Gross
Unrealized
Losses 
 
Fair Market
Value 
 
($ in millions)
U.S. Government
$
1,074.2

 
$
21.5

 
$
(1.3
)
 
$
1,094.4

U.S. Agency
190.0

 
7.5

 
(0.1
)
 
197.4

Municipal
29.1

 
2.4

 

 
31.5

Corporate
2,244.7

 
79.9

 
(5.2
)
 
2,319.4

Non-U.S. Government-backed Corporate
76.8

 
1.2

 

 
78.0

Foreign Government
648.6

 
17.3

 
(0.2
)
 
665.7

Asset-backed
141.3

 
2.4

 
(0.2
)
 
143.5

Non-agency Commercial Mortgage-backed
41.5

 
3.3

 

 
44.8

Agency Mortgage-backed
1,016.7

 
40.8

 
(2.2
)
 
1,055.3

Total Fixed Income Securities — Available for Sale
5,462.9

 
176.3

 
(9.2
)
 
5,630.0

Total Short-term Investments — Available for Sale
258.2

 
0.1

 

 
258.3

Total Equity Securities — Available for Sale
82.6

 
27.3

 

 
109.9

Total
$
5,803.7

 
$
203.7

 
$
(9.2
)
 
$
5,998.2

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 and equity securities as at December 31, 2015 and 2014:
 
As at December 31, 2015
 
Cost or
Amortized Cost 
 
Gross
Unrealized
Gains 
 
Gross
Unrealized
Losses 
 
Fair Market
Value 
 
($ in millions)
U.S. Government
$
27.4

 
$

 
$
(0.1
)
 
$
27.3

Municipal
0.5

 

 

 
0.5

Corporate
561.9

 
5.9

 
(9.6
)
 
558.2

Foreign Government
181.5

 
1.7

 
(3.7
)
 
179.5

Asset-backed
20.7

 

 
(0.2
)
 
20.5

Bank Loans
2.2

 

 
(0.2
)
 
2.0

Total Fixed Income Securities — Trading
794.2

 
7.6

 
(13.8
)
 
788.0

Total Short-term Investments — Trading
9.5

 

 

 
9.5

Total Equity Securities — Trading
722.5

 
57.3

 
(43.4
)
 
736.4

Total Catastrophe Bonds — Trading
55.2

 
0.3

 
(0.1
)
 
55.4

Total
$
1,581.4

 
$
65.2

 
$
(57.3
)
 
$
1,589.3



22



 
As at December 31, 2014
 
Cost or
Amortized Cost 
 
Gross
Unrealized
Gains 
 
Gross
Unrealized
Losses 
 
Fair Market
Value 
 
($ in millions)
U.S. Agency
$
0.2

 
$

 
$

 
$
0.2

Municipal
1.1

 

 

 
1.1

Corporate
520.9

 
11.7

 
(2.8
)
 
529.8

Foreign Government
137.3

 
4.3

 
(1.5
)
 
140.1

Asset-backed
14.6

 
0.1

 

 
14.7

Bank Loans
86.8

 

 
(1.7
)
 
85.1

Total Fixed Income Securities — Trading
760.9

 
16.1

 
(6.0
)
 
771.0

Total Short-term Investments — Trading
0.2

 

 

 
0.2

Total Equity Securities — Trading
585.2

 
55.5

 
(24.7
)
 
616.0

Catastrophe Bonds — Trading
34.4

 
0.4

 

 
34.8

Total
$
1,380.7

 
$
72.0

 
$
(30.7
)
 
$
1,422.0


Gross Unrealized Losses. As at December 31, 2015, we held 793 available for sale fixed income securities (December 31, 2014 — 428 fixed income securities) in an unrealized loss position with a fair value of $2,562.1 million (2014 — $1,213.3 million) and gross unrealized losses of $25.6 million (2014 — $9.2 million). We believe that the gross unrealized losses are attributable mainly to a combination of widening credit spreads and interest rate movements. We have assessed these securities which are in an unrealized loss position and believe the decline in value to be temporary.
U.S. Government and Agency Securities.  U.S. government and agency securities are composed of bonds issued by the U.S. Treasury and corporate debt issued by agencies such as Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal Home Loan Bank.
Corporate Securities.  Corporate securities are composed of short-term, medium-term and long-term debt issued by corporations and supra-national entities.
Foreign Government Securities.  Foreign government securities are composed of bonds issued and guaranteed by foreign governments including, but not limited to, the U.K., Australia, Canada, France and Germany.
Municipal Securities.  Municipal securities are composed of bonds issued by U.S. municipalities.
Asset-Backed Securities.  Asset-backed securities are securities backed by notes or receivables against assets other than real estate.
Mortgage-Backed Securities.  Mortgage-backed securities are securities that represent ownership in a pool of mortgages. Both principal and income are backed by the group of mortgages in the pool. They include bonds issued by government-sponsored enterprises such as FNMA, FHLMC and GNMA.
Short-Term Investments.  Short-term investments comprise highly liquid debt securities with a maturity greater than three months but less than one year from the date of purchase and are held as part of our investment portfolio. Short-term investments are classified as either trading or available for sale according to the facts and circumstances of the investment held, and carried at estimated fair value.
Equity Securities.  Equity securities are comprised of U.S. and foreign equity securities and are classified as trading. The portfolio invests in global equity securities. As at December 31, 2015, we held $736.4 million of equities in our trading portfolio.
Catastrophe Bonds. Catastrophe bonds are variable rate fixed income investments with redemption values adjusted based on the occurrence of a covered event usually windstorms and earthquakes.
Interest Rate Swaps.  As at December 31, 2015, we held fixed for floating interest rate swaps with a total notional amount of $756.3 million (2014 — $951.3 million) that are due to mature between January 20, 2016 and November 9, 2020. The interest


23


rate swaps are used in the ordinary course of our investment activities to partially mitigate the negative impact of rises in interest rates on the market value of our fixed income portfolio.
For additional information concerning our investments, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Note 6 of our consolidated financial statements, “Investments,” and Note 8 of our consolidated financial statements, “Fair Value Measurements.”
For additional information concerning Other-Than-Temporary Impairment of Investments, see Note 2(c) of our consolidated financial statements, “Basis of Preparation and Significant Accounting Policies — Accounting for Investments, Cash and Cash Equivalents.”
Competition
The insurance and reinsurance industries are highly competitive. We compete with major U.S., U.K., European and Bermudian insurers and reinsurers and underwriting syndicates from Lloyd’s, some of which have greater financial, marketing and management resources than us. We compete with insurers that provide property and casualty-based lines of insurance and reinsurance, some of which may be more specific to a particular product or geographical area. Given the influx of third-party capital into the reinsurance market, we also compete with capital market participants that create alternative products that are intended to compete with traditional reinsurance products, including funds such as Nephila and Aeolus.
In our reinsurance segment, we compete principally with Arch Capital Group Ltd., Axis Capital Holdings Limited, Endurance Specialty Holdings Ltd., Everest Re Group Limited, Lancashire Holdings Limited, PartnerRe Ltd., Renaissance Re Holdings Ltd., Validus Holdings Ltd., XL Group plc and various Lloyd’s syndicates.
In our insurance segment competition varies significantly on the basis of product and geography.
Competition in the types of business that we underwrite is based on many factors, including, but not limited to, the following:
the experience of management in the line of insurance or reinsurance to be written;
financial ratings assigned by independent rating agencies and actual and perceived financial strength;
responsiveness to clients, including speed of claims payment;
services provided, products offered and scope of business (both by size and geographic location);
underwriting capacity of the (re)insurance company;
coverage terms and conditions (including premiums charged and wordings);
relationships with brokers; and
reputation.
 
Increased competition could result in fewer submissions for our products and services, lower rates charged, slower premium growth and less favorable policy terms and conditions, any of which could adversely impact our growth and profitability.


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Ratings
Ratings by independent agencies are an important factor in establishing the competitive position of (re)insurance companies and are important to our ability to market and sell our products and services. Rating organizations continually review the financial positions of insurers, including us. As of February 15, 2015 and February 15, 2016, our Operating Subsidiaries were rated as follows:
Aspen U.K.:
 
 
A.M. Best
 
A (Excellent) (third highest of fifteen levels)
S&P
 
A (Stable) (seventh highest of twenty-three levels)
Moody’s
 
A2 (sixth highest of twenty-one levels)
Aspen Bermuda:
 
 
A.M. Best
 
A (Excellent) (third highest of fifteen levels)
S&P
 
A (Stable) (seventh highest of twenty-three levels)
Moody’s
 
A2 (sixth highest of twenty-one levels)
Aspen Specialty:
 
 
A.M. Best
 
A (Excellent) (third highest of fifteen levels)
AAIC:
 
 
A.M. Best
 
A (Excellent) (third highest of fifteen levels)
These ratings reflect A.M. Best’s, S&P’s and Moody’s respective opinions of the ability of Aspen U.K., Aspen Bermuda, Aspen Specialty and AAIC to pay claims and are not evaluations directed to investors in our ordinary shares and other securities and are not recommendations to buy, sell or hold our ordinary shares and other securities. A.M. Best maintains a letter scale rating system ranging from “A++” (Superior) to “F” (in liquidation). S&P maintains a letter scale rating system ranging from “AAA” (Extremely Strong) to “D” (Default). Moody’s maintains a letter scale rating system ranging from “Aaa” (Exceptional) to “C” (Lowest). Aspen Specialty’s and AAIC’s ratings reflect the Aspen group rating issued by A.M. Best.
These ratings are subject to periodic review by, and may be revised downward or revoked at the sole discretion of, A.M. Best, S&P and Moody’s, respectively.
Employees
As of December 31, 2015, we employed 1,121 persons through the Company and our subsidiaries, Aspen Bermuda, Aspen U.K. Services and Aspen U.S. Services, none of whom was represented by a labor union.
As at December 31, 2015 and 2014, our employees were located in the following countries:  
Country
 
 
As at December 31, 2015
 
As at December 31, 2014
United Kingdom
 
579

 
527

United States
 
412

 
353

Bermuda
 
52

 
48

Switzerland
 
37

 
36

Singapore
 
19

 
15

Ireland
 
12

 
11

France
 
5

 
5

Germany
 
3

 
3

Australia
 
2

 
0

Total
 
1,121

 
998




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Regulatory Matters
General
The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another.
The discussion below summarizes the material laws and regulations applicable to our Operating Subsidiaries, as well as where relevant Peregrine and Silverton. Our Operating Subsidiaries have met or exceeded the solvency margins and ratios applicable to them.
Bermuda Regulation
The Insurance Act 1978 (the “Insurance Act”) regulates insurance companies in Bermuda, and it provides that no person may carry on any insurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (the “BMA”) under the Insurance Act. The Insurance Act applies to both insurance and reinsurance business. We have one Bermuda-based Operating Subsidiary, Aspen Bermuda, a Class 4 insurer under the Insurance Act. We also have entities licensed as Special Purpose Insurers (“SPI”) under the Insurance Act, Peregrine and Silverton. We also have a Bermuda-based insurance management subsidiary, ACM, which is registered under the Insurance Act as an insurance manager and as an insurance agent.
Group Supervision.  The BMA has implemented a framework for group supervision. Pursuant to the Insurance Act, the BMA acts as the group supervisor of the Aspen group of companies and has designated Aspen Bermuda as the designated insurer. Key elements of the framework for group supervision are the Insurance (Group Supervision) Rules 2011, as amended and the Insurance (Prudential Standards) (Insurance Group Solvency Requirement) Rules 2011, as amended (collectively the “Group Rules”). The role of the designated insurer is to facilitate and maintain compliance by the group with the Group Rules.
The Group Rules set out the rules in respect of the assessment of the financial situation and solvency of an insurance group, the system of governance and risk management of the insurance group and supervisory reporting and disclosures of the insurance group. Significant requirements of the Group Rules are set out below.
Group Financial Statements and Returns. The duties and obligations related to the financial condition of the insurance group requires that every insurance group prepare (a) annual consolidated financial statements of the parent company of the group, (b) annual statutory financial statements of the parent company of the group, (c) annual statutory financial return and (d) a group capital and solvency return, all of which must be submitted to the BMA by the designated insurer within five months after its financial year ends (unless specifically extended). For financial years after January 1, 2016, the Group Rules also include the requirement to submit an Economic Balance Sheet, and for insurance groups to prepare and publish a Financial Condition Report (“FCR”). Among other things, the FCR must provide details of measures governing business operations, the corporate governance framework, solvency and the financial performance of an insurance group. The FCR is to be publicly disclosed and is intended to provide additional information to the public in relation to the group’s business model.
The group statutory financial return must include, among other things, a report of the approved group auditor, an opinion of an approved group actuary, an insurance group business solvency certificate, particulars of ceded reinsurance comprising the top ten unaffiliated reinsurers for which the group has the highest recoverable balances and any reinsurer with recoverable balances exceeding 15% of the insurance group’s statutory capital and surplus, particulars of qualifying members, a list of non-insurance financial regulated entities owned by the group and details of all adjustments applied to the group financial statements to produce the statutory financial statements in the form of a reconciliation of amounts reported as total assets, total liabilities, net income and total statutory capital and surplus.
The group capital and solvency return includes the Group Bermuda Solvency Capital Requirement (“BSCR”), a risk-based capital adequacy model, and associated schedules, including a Group Solvency Self-Assessment (“GSSA”), each of which is to be prepared in accordance with the Group Rules. The Group Rules require that the insurance group perform the GSSA, which provides a determination of both the quality and quantity of the capital required to adequately cover material risks, at least annually. The group capital and solvency return must include a declaration signed by two directors of the parent company, one of which may be the chief executive, and either the chief risk officer or the chief financial officer of the parent company.
In addition to the annual filings, every insurance group is required to submit quarterly consolidated financial statements of the parent company of the group, comprising unaudited consolidated group financial statements and a schedule of intra-group transactions and risk concentrations.


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Group Solvency Margin and Group Enhanced Capital Requirements. Aspen Holdings must ensure that the group’s assets exceed the amount of its liabilities by the aggregate minimum margin of solvency of each qualifying member.
For the financial year ending December 31, 2015, Aspen Holdings was required to maintain available group capital and surplus at a level equal to or exceeding 70% of the Group Enhanced Capital Requirement (“ECR”) and this requirement will increase by increments of 10% in each of the following years until 100% ECR is required for the 2018 financial year. An insurance group’s ECR is to be calculated at the end of its relevant year by reference to either the BSCR Model or a BMA approved group internal capital model. For the financial year ending December 31, 2015, Aspen Holdings has relied on the BSCR model.
Group Eligible Capital. The Group Rules also outline the eligible capital regime for insurance groups. The tiered capital system classifies all capital instruments into one of three tiers based on their “loss absorbency” characteristics with the highest quality capital classified as Tier 1 Capital and lesser quality capital classified as either Tier 2 Capital or Tier 3 Capital.
Local Entity Supervision.  Aspen Bermuda, as an insurer carrying on general insurance business under the Insurance Act, is registered as a Class 4 insurer. In addition, the Insurance Act outlines provisions for SPIs, such as Peregrine and Silverton.
The Insurance Act requires every insurer, such as Aspen Bermuda, to appoint and maintain a principal representative resident in Bermuda and to maintain a principal office in Bermuda. The principal representative must be knowledgeable in insurance and is responsible for arranging the maintenance and custody of the statutory accounting records and for ensuring that the annual Statutory Financial Return and Capital and Solvency Return for the insurer are filed. The principal representative is also responsible for notifying the BMA where the principal representative believes there is a likelihood of Aspen Bermuda becoming insolvent or that a reportable “event” under the Insurance Act has, to the principal representative’s knowledge, occurred or is believed to have occurred.
Approved Independent Auditor. Aspen Bermuda, as a Class 4 insurer, must appoint an independent auditor who will annually audit and report on the statutory financial statements and the statutory financial return of the insurer, all of which are required to be filed annually with the BMA. The independent auditor must be approved by the BMA.
Loss Reserve Specialist. Class 4 insurers are required to submit an opinion of their BMA approved loss reserve specialist with their statutory financial return in respect of their loss and loss expense provisions.
Supervision, Investigation and Intervention.  The BMA may appoint an inspector with extensive powers to investigate the affairs of an insurer, such as Aspen Bermuda, if it believes that such an investigation is in the best interests of its policyholders or persons who may become policyholders. In order to verify or supplement information otherwise provided to the BMA, the BMA may direct an insurer to produce documents or information relating to matters connected with its business. If it appears to the BMA that there is a risk of an insurer becoming insolvent, or being in breach of the Insurance Act, or any conditions imposed upon its registration under the Insurance Act, the BMA may, among other things, direct the insurer: (i) not to take on any new insurance business; (ii) not to vary any insurance contract if the effect would be to increase its liabilities; (iii) not to make certain investments; (iv) to realize certain investments; (v) to maintain in or transfer to the custody of a specified bank certain assets; (vi) not to declare or pay any dividends or other distributions, or to restrict the making of such payments; (vii) to limit its premium income; (viii) to remove a controller or officer; and/or (ix) to file a petition for the winding up of the insurer.
Restrictions on Dividends, Distributions and Reduction of Capital.  Aspen Bermuda, Peregrine, Silverton and Aspen Holdings must comply with the provisions of the Bermuda Companies Act 1981, as amended (the “Companies Act”), regulating the payment of dividends and distributions. A Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than its liabilities. Further, an insurer may not declare or pay any dividends during any financial year if it would cause the insurer to fail to meet its relevant margins, and an insurer which fails to meet its relevant margins on the last day of any financial year may not, without the approval of the BMA, declare or pay any dividends during the next financial year. In addition, as a Class 4 insurer, Aspen Bermuda may not in any financial year pay dividends which would exceed 25% of its total statutory capital and surplus, as shown on its statutory balance sheet in relation to the previous financial year, unless it files with the BMA a solvency affidavit at least seven days in advance. Further, Aspen Bermuda must obtain the prior approval of the BMA before reducing by 15% or more its total statutory capital as set out in its previous year’s financial statements.
Annual Financial Statements, Annual Statutory Financial Return and Annual Capital and Solvency Return. As prescribed by the Insurance Act, Aspen Bermuda, a Class 4 insurer, must prepare and file with the BMA a statutory financial return which includes, among other items, a report of the approved independent auditor on the statutory financial statements, a general business solvency certificate, the statutory financial statements, the opinion of the loss reserve specialist, a schedule of reinsurance ceded and a statutory declaration of compliance. Class 4 insurers are also required to file audited U.S. GAAP annual financial statements, which are made available to the public. For financial years after January 1, 2016, commercial


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insurers will also be required to submit an Economic Balance Sheet and need to prepare an FCR providing details of, among other things, measures governing the business operations, corporate governance framework, solvency and financial performance of the insurer. Where the commercial insurer is part of an insurance group, as Group Supervisor, the BMA may waive the submission of the legal entity FCR and may require the submission of the group FCR which must clearly include information specific to the insurer. Aspen Bermuda has requested a waiver for the submission of the legal entity FCR for the financial year ending December 31, 2015.
In addition, Class 4 insurers are required to file a capital and solvency return in respect of their general business which shall include the regulatory risk based capital model and associated schedules. It also includes the requirement to perform an assessment of the insurer’s own risk and solvency requirements, referred to as a Commercial Insurer’s Solvency Self Assessment (“CISSA”), at least annually. The CISSA allows the BMA to obtain an insurer’s view of the capital resources required to achieve its business objectives and to assess the company’s governance, risk management and controls surrounding this process. Class 4 insurers must also file with the BMA a Catastrophe Risk Return which assesses an insurer’s reliance on vendor models in assessing catastrophe exposure.
Enhanced Capital Requirements and Minimum Solvency Margin. The BMA has introduced a risk-based capital adequacy model called the BSCR for Class 4 insurers like Aspen Bermuda to assist the BMA both in measuring risk and in determining appropriate levels of capitalization. The BSCR employs a standard mathematical model that correlates the risk underwritten by Bermuda insurers to the capital that is dedicated to their business. The BSCR applies a standard measurement format to the risk associated with an insurer’s assets, liabilities and premiums, including a formula to take account of the catastrophe risk exposure. Aspen Bermuda must maintain available capital and surplus in an amount equal to or exceeding its ECR calculated using the BSCR model.
In order to minimize the risk of a shortfall in capital arising from an unexpected adverse deviation, the BMA expects that insurers operate at or above a threshold captive level (termed the target capital level (“TCL”)), which exceeds an insurer’s ECR. The TCL for a Class 4 insurer is set at 120% of ECR. Aspen Bermuda holds capital in excess of its TCL.
As a Class 4 Insurer, Aspen Bermuda is also required to meet a minimum margin of solvency, which is the minimum amount by which the value of the general business assets of the insurer must exceed its general business liabilities, being equal to the greater of:
(a) $100,000,000; or
(b) 50% of net premiums written (being gross premiums written less any premiums ceded by the insurer, but the insurer may not deduct more than 25% of gross premiums when computing net premiums written) in its current financial year; or
(c) 15% of net losses and loss expense reserves; or
(d) 25% of the ECR.
Eligible Capital. The BMA has also introduced a three tiered capital system for Class 4 insurers designed to assess the quality of capital resources that an insurer has available to meet its capital requirements as outlined in the Insurance (Eligible Capital) Rules 2012. The tiered capital system classifies all capital instruments into one of three tiers based on their “loss absorbency” characteristics with the highest quality capital classified as Tier 1 Capital and lesser quality capital classified as either Tier 2 Capital or Tier 3 Capital. Only capital or percentages of capital in certain Tiers may be used to support an insurer’s minimum solvency margin, ECR or TCL.
Minimum Liquidity Ratio.  The Insurance Act provides a minimum liquidity ratio for general business insurers, like Aspen Bermuda. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include, but are not limited to, cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable and funds held by ceding reinsurers. There are certain categories of assets which, unless specifically permitted by the BMA, do not automatically qualify as relevant assets, such as unquoted equity securities, investments in and advances to affiliates and real estate and collateral loans. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax, sundry liabilities (by interpretation, those not specifically defined), and letters of credit and guarantees.
The BMA completed a prudential review of Aspen Bermuda in late November 2015. No material issues were identified.
Special Purpose Insurer. Peregrine and Silverton are registered as SPIs licensed to carry on special purpose business under the Insurance Act. Special purpose business is defined under the Insurance Act as insurance business under which an insurer fully funds its liabilities to the persons insured through (a) the proceeds of any one or more of (i) a debt issuance where the repayment rights of the providers of such debt are subordinated to the rights of the person insured, or (ii) some other financing


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mechanism approved by the BMA; (b) cash; and (c) time deposits. An SPI may only enter into contracts, or otherwise assume obligations, that are solely necessary for it to give effect to the special purpose for which it has been established.
Unlike other (re)insurers, SPIs are fully funded to meet their (re)insurance obligations and are deemed “bankruptcy remote”. As a result, the application and supervision processes are streamlined to facilitate the transparent structure. As SPIs, Peregrine and Silverton need to maintain a minimum solvency margin by which the value of the special purpose business assets must exceed its special purpose business liabilities by at least $1.00. Further, SPIs are currently not required to file annual loss reserve specialist opinions and the BMA has the discretion to modify such insurer’s accounting requirements under the Insurance Act. Like other (re)insurers, the principal representative of an SPI has a duty to inform the BMA in relation to solvency matters, where applicable.
Change of Controller and Officer Notifications.  Under the Insurance Act, each shareholder or prospective shareholder will be responsible for notifying the BMA in writing of his becoming or ceasing to be a shareholder controller, directly or indirectly, of 10%, 20%, 33% or 50% of Aspen Holdings and ultimately Aspen Bermuda, Peregrine and Silverton within 45 days of such a change. The BMA may serve a notice of objection on any shareholder controller of Aspen Bermuda, Peregrine and Silverton if it appears to the BMA that the person is no longer fit and proper to be such a controller. Aspen Bermuda is required to notify the BMA in writing in the event of any person becoming or ceasing to be a controller, a controller being a managing director, chief executive or other person in accordance with whose directions or instructions the directors of Aspen Bermuda are accustomed to act, including any person who holds, or is entitled to exercise, 10% or more of the voting shares or voting power or is able to exercise a significant influence over the management of Aspen Bermuda. Peregrine and Silverton are required to file with the annual statutory financial statements a list of every person who has become or ceased to be a shareholder controller or director during the financial year.
Each of Aspen Holdings and Aspen Bermuda are required to notify the BMA in writing in the event any person has become or ceased to be an officer of it, an officer being a director, chief executive or senior executive performing duties of underwriting, actuarial, risk management, compliance, internal audit, finance or investment matters.

Notification of Material Changes. All registered insurers are required to give the BMA 14 days’ notice of certain matters that are likely to be of material significance to the BMA in carrying out its supervisory function under the Insurance Act.
The Bermuda Insurance Code of Conduct. All Bermuda insurers are required to comply with the BMA’s Insurance Code of Conduct (the “Bermuda Insurance Code”) effective July 1, 2010, as amended in July 2015.
The Bermuda Insurance Code is divided into six categories, including:
(1) Proportionality Principle;
(2) Corporate Governance;
(3) Risk Management;
(4) Governance Mechanism;
(5) Outsourcing; and
(6) Market Discipline and Disclosure.
    
These categories contain the duties, requirements and compliance standards to be adhered to by all insurers under the Insurance Act. Failure to comply with these requirements will be a factor taken into account by the BMA in determining whether an insurer is conducting its business in a sound and prudent manner under the Insurance Act.
U.K. and E.U. Regulation
General. U.K. insurance companies are regulated by the Prudential Regulatory Authority (the “PRA”) and the Financial Conduct Authority (the “FCA”). The PRA is responsible for prudential regulation of banks, building societies, credit unions, insurers and major investment firms and the FCA is responsible, among other things, for the regulation of the conduct of business of financial services firms.
Aspen U.K. is authorized by the PRA to effect and carry out contracts of insurance (which includes reinsurance) in the U.K. in all classes of general (non-life) business and is regulated by both the PRA and the FCA for prudential and conduct of business matters respectively.
An insurance company with authorization to write insurance business in the U.K. may provide cross-border services in other member states of the European Economic Area (“EEA”) subject to having notified the appropriate EEA host state regulator via


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the PRA prior to commencement of the provision of services and the appropriate EEA host state regulator not having good reason to refuse consent. As an alternative, such an insurance company may establish a branch office within another member state, subject to it also notifying the appropriate EEA host state regulatory via the PRA. Aspen U.K. notified the Financial Services Authority (the “FSA”) (the PRA’s predecessor) of its intention to write insurance and reinsurance business in other EEA member states. As a result, Aspen U.K. is licensed to write insurance business under the “freedom of services” and under the “freedom of establishment” rights contained in the European Council’s Insurance Directives within EEA member states and as a general insurer is able to carry out reinsurance business on a cross-border services basis across the EEA. The PRA is responsible for prudential regulation of Aspen U.K.’s European branches and the FCA and the appropriate EEA host state regulators are responsible for the conduct of business regulation of those branches.
The PRA and the FCA have extensive powers to intervene in the affairs of an authorized person, culminating in the ultimate sanction of the removal of authorization to carry on a regulated activity. The PRA and the FCA have power, among other things, to enforce and take disciplinary measures in respect of breaches of their rules by authorized firms and approved persons.
Supervision.  The PRA’s most recent review of Aspen U.K. was in December 2014 when they undertook their Periodic Summary Meeting. The FCA conducted a review of Aspen U.K. in February 2015. No material issues were raised as a result of these reviews and for the small number of areas where additional work was requested this has subsequently been completed.
Restrictions on Dividend Payments.  The company law of England and Wales prohibits Aspen U.K., AMAL or AUL from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits and other distributable reserves less its accumulated realized losses. While the U.K. insurance regulatory rules impose no statutory restrictions on a general insurer’s ability to declare a dividend, the PRA’s rules require each emerging insurance company within its jurisdiction to maintain its solvency margin at all times. On October 21, 2013, and in line with common market practice for regulated institutions, the PRA requested that it be afforded with the opportunity to provide a “non-objection” prior to all future dividend payments made by Aspen U.K.
Solvency Requirements. Under the Solvency I regime, which was in effect until December 31, 2015, Aspen U.K. was required to maintain a margin of solvency at all times, the calculation of which depended on the type and amount of insurance business written. The method of calculation of the solvency margin (or “capital resources requirement”) was set out in the PRA’s Prudential Sourcebook for Insurers, and for these purposes, all assets and liabilities were subject to specific valuation rules.
In addition to its required minimum solvency margin, each insurance company was required to calculate an ECR, which is a measure of the capital resources a firm may need to hold, based on risk-sensitive calculations applied to a company’s business profile which includes capital charges based on assets, claims and premiums. An insurer was also required to maintain financial resources which were adequate, both as to amount and quality, to ensure that there was no significant risk that its liabilities cannot be met as they fall due. This process is called the Individual Capital Assessment (“ICA”). As part of the ICA, the insurer was required to take comprehensive risk factors into account, including market, credit, operational, liquidity and group risks, and to carry out stress and scenario tests to identify an appropriate range of realistic adverse scenarios in which the risk crystallizes and to estimate the financial resources needed in each of the circumstances and events identified. The PRA could give individual capital guidance to (re)insurers following receipt of ICAs. If the PRA considered that there were insufficient capital resources, it could give guidance advising the insurer of the amount and quality of capital resources it considered necessary for that insurer.
Under the Solvency I regime, an insurer that was part of a group was also required to perform and submit to the PRA a solvency margin calculation return in respect of its ultimate parent undertaking in accordance with the PRA’s rules. This return was not part of an insurer’s own solvency return and was not publicly available. Although there was no requirement for the parent undertaking solvency calculation to show a positive result where the ultimate parent undertaking was outside the EEA, the PRA could take action where it considered that the solvency of the U.K. insurance company was or could be jeopardized due to the group solvency position. Further, an insurer was required to report in its annual returns to the PRA all material related party transactions (e.g., intra-group reinsurance whose value was more than 5% of the insurer’s general insurance business amount).
An E.U. directive covering the capital adequacy, risk management and regulatory reporting for insurers, known as Solvency II (the “Solvency II Directive”), was adopted by the European Parliament in April 2009 and implemented on January 1, 2016. Under the new Solvency II regime, an insurer has the option of seeking the approval of a full or partial internal model from its regulator or to use a standard formula to calculate its capital requirements. On December 5, 2015, Aspen U.K. received confirmation that its application to use its Internal Model to calculate its Solvency Capital Requirement (“SCR”) for Aspen U.K. and Aspen European was approved by the PRA and that, effective January 1, 2016, the Internal Model must be used to calculate the SCR. Aspen U.K. is required to ensure that the Internal Model operates properly on a continuous basis and that it


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continues to comply with the Solvency Capital Requirements - Internal Models as set out in the PRA rulebook and Solvency II Delegated Acts. If Aspen U.K. fails to comply with these requirements, the PRA may revoke Aspen U.K.’s approval to use the Internal Model. Aspen U.K. must maintain the ability to calculate its SCR using the Standard Formula as prescribed by EIOPA in the Solvency II Directive. Aspen U.K. is required to maintain a minimum margin of solvency equivalent to its SCR at all times, the calculation of which depends on the type and amount of insurance business written. The financial resources maintained in support of the SCR must be adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due. If the PRA considers that there are insufficient capital resources, it can give guidance advising the insurer of the amount and quality of capital resources it considers necessary for that insurer.
Under the Solvency II regime, solvency requirements will apply to both Aspen U.K. and Aspen European. In addition, until legal equivalence has been confirmed for Bermuda, additional disclosures in relation to the risk and solvency of the ultimate holding company must be provided to the PRA. This is expected to be an interim arrangement given that the European Commission published delegated acts granting Bermuda full equivalence under the Solvency II regime in November 2015. For more information regarding the risks associated with Solvency II, please refer to Item 1A, “Risk Factors.”
Under both the Solvency I and Solvency II regimes, Aspen U.K. is also required to meet local capital requirements for its branches in Canada, Singapore, Australia and its insurance branch in Switzerland. Aspen U.K. holds capital in excess of all of its regulatory capital requirements.
European Sub-Group U.K. and Branch Financial Statements and Returns. Under the Solvency I regime, AIUK was required to submit an annual PRA return which is subject to review by its auditors. As a consequence of the EU Insurance Groups Directive (“IGD”) a group capital adequacy calculation was also performed at the ultimate EEA parent undertaking level, Aspen European, and the ultimate insurance parent undertaking, AIHL. As noted above, every three years AIUK was also required to submit to the PRA an assessment of its own capital needs through an Individual Capital Adequacy assessment (“ICA”). The Solvency I regime applied until January 1, 2016 when it was replaced by Solvency II.
In order to prepare for Solvency II, the PRA required some Solvency II information from insurers, including AIUK, during 2015. This included a sub-set of the Quantitative Reporting Templates (“QRTs”) that are required under the full Solvency II regime and some narrative information concerning system of governance, capital management and valuation of assets and liabilities.
Under the full Solvency II regime, effective January 1, 2016, AIUK and the ultimate EEA parent undertaking, Aspen European, will be required to disclose to the PRA quarterly and annual QRTs and, at least every three years, a narrative Regular Supervisory Report (“RSR”). Both of these are submitted directly to the regulator. The QRTs report on a mixture of quantitative information on a Solvency II and local GAAP basis, which includes among others, the Balance Sheet and own funds, Solvency II capital position, invested assets, premiums, claims and technical provisions, reinsurance and group specific information. The RSR includes both qualitative and quantitative information and is more forward looking. In addition AIUK will complete a set of annual National Specific Templates (“NSTs”) required by the PRA which are applicable to solo firms only. An annual Solvency and Financial Condition report (“SFCR”), which is a public document, will be completed for AIUK and Aspen European in a single combined report and will include a mixture of narrative information and a sub-set of the QRTs. Similarly an annual Own Risk and  Solvency Assessment  (“ORSA”) will be completed for AIUK and Aspen European in a single combined report.  The ORSA process for AIUK covers the Solvency of the European sub-group since Aspen European does not have any material risks (beyond those faced by AIUK). The combined report approach for the SFCR and ORSA has been granted via a dispensation from the PRA. The PRA is currently consulting on which aspects of the SFCR will be subject to review by auditors.
There are additional returns required by local regulators for Aspen U.K.’s branches in Australia, Canada and Singapore and its insurance Branch in Zurich.
Change of Control.  The PRA and the FCA regulate the acquisition of “control” of any U.K. insurance company and Lloyd’s managing agent which are authorized under the Financial Services and Markets Act 2000 (“FSMA”). Any company or individual that (together with any person with whom it or he is “acting in concert”) directly or indirectly acquires 10% or more of the shares in a U.K. authorized insurance company or Lloyd’s managing agent, or their parent company, or is entitled to exercise or control the exercise of 10% or more of the voting power in such authorized insurance company or Lloyd’s managing agent or their parent company, would be considered to have acquired “control” for the purposes of the relevant legislation, as would a person who had significant influence over the management of such authorized insurance company or their parent company by virtue of his shareholding or voting power in either. A purchaser of 10% or more of the ordinary shares of the Company would therefore be considered to have acquired “control” of Aspen U.K. or AMAL. Under FSMA, any person proposing to acquire “control” over a U.K. authorized insurance company must give prior notification to the PRA and the FCA of his intention to do so. The PRA and the FCA would then have upwards of sixty working days to consider that person’s application to acquire “control.” Failure to make the relevant prior application could result in action being taken against Aspen


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U.K. or AMAL (as relevant) by the PRA and the FCA. Failure to make the relevant prior application would constitute criminal offense. A person who is already deemed to have “control” will require prior approval of the PRA and the FCA if such person increases their level of “control” beyond certain percentages. These percentages are 20%, 30% and 50%.
Aspen U.K. is in the process of finalizing its preparation for Solvency II compliance and applied for Internal Model approval in 2015. As a result of Solvency II E.U. Subgroup supervision requirements, we restructured our European Subgroup and created a new U.K. intermediate holding company, Aspen European Holdings Limited. We obtained PRA permission to transfer Aspen U.K., previously a subsidiary of Aspen U.K. Holdings, as the sole subsidiary of Aspen European Holdings Limited, and completed the transfer in February 2015. The other subsidiaries of Aspen U.K. Holdings were not transferred as part of this change, and therefore are not subject to Solvency II E.U. Subgroup supervision rules. The Solvency II E.U. Subgroup supervision requirements will only apply to Aspen European Holdings Limited and its sole subsidiary, Aspen U.K.
PRA, FCA and Bank of England Powers Over Unregulated Parent Companies. A feature of regulation of U.K. insurance companies was introduced in April 2013 when the Financial Services Act 2012 came into effect. This created additional powers for the FCA, PRA and the Bank of England to impose requirements on U.K. parent companies, such as Aspen European, of certain regulated firms. The powers allow the regulators to: (i) direct qualifying parent undertakings to comply with specific requirements; (ii) take enforcement action against qualifying parent undertakings if those directions are breached; and (iii) gather information from qualifying parent undertakings. For example, if an authorized firm is in crisis, the new powers may allow a regulator to direct a parent company to provide that firm with capital or liquidity necessary to improve the position of the firm. The definition of “qualifying parent undertakings” could allow the regulators to exercise these powers against an intermediate U.K. parent company of an insurer that is not at the head of the ownership chain. How the FCA, PRA and Bank of England will exercise these powers over unregulated holding companies remains uncertain but the FCA, PRA and Bank of England have indicated that they will be used rarely and only where the other regulatory tools available are ineffective.
Senior Insurance Managers Regime. As part of the implementing measures of Solvency II, Aspen U.K. and AMAL responded to the requirements of the Senior Insurance Managers Regime, the key requirements of which were to have governance maps in place by December 31, 2015 detailing the positions of senior personnel and key functions. The governance maps will be used by the PRA and FCA in its supervision of Aspen U.K. and AMAL.
Branch Regulations
Switzerland
General.  Aspen U.K. established a branch in Zurich, Switzerland to write property and casualty reinsurance. The Federal Office of Private Insurance, a predecessor to the Financial Markets Supervisory Authority (“FINMA”) confirmed that the Swiss branch of Aspen U.K. for its reinsurance operations is not subject to its supervision under the Insurance Supervision Act (Switzerland), so long as the Swiss branch only writes reinsurance. If Swiss legislation is amended, the Swiss reinsurance branch may be subject to supervision by FINMA in the future.
On October 29, 2010, Aspen U.K. received approval from FINMA to establish another branch in Zurich, Switzerland to write insurance products. The activities of the Switzerland insurance branch are regulated by FINMA pursuant to the Insurance Supervision Act (Switzerland).
Supervision.  Currently, the PRA assumes regulatory authority for prudential regulation of the Swiss reinsurance branch, while FINMA assumes regulatory authority over the insurance branch. FINMA conducted a review of the Swiss insurance branch of Aspen U.K. in January 2015. No material issues were identified.
Singapore
General.  On June 23, 2008, Aspen U.K. received approval from the Monetary Authority of Singapore (“MAS”) to establish a reinsurance branch in Singapore. The activities of the Singapore branch are regulated by the MAS pursuant to The Insurance Act of Singapore. Aspen U.K. is also registered by the Accounting and Corporate Regulatory Authority (“ACRA”) as a foreign company in Singapore and in that capacity is separately regulated by ACRA pursuant to The Companies Act of Singapore. AMAL set up a subsidiary company, Aspen Singapore Pte. Ltd. (“ASPL”), to access insurance business in Singapore and regulatory approval for ASPL to act as an intermediary was received from the MAS on December 21, 2015. ASPL was incorporated by ACRA on December 22, 2015 as a local company regulated by the Companies Act of Singapore.
Supervision.  The MAS conducted a review in December 2014 of the Singapore branch of Aspen U.K. No material issues were identified.


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Canada
General.  Aspen U.K. has a Canadian branch whose activities are regulated by the Office of the Superintendent of Financial Institutions (“OSFI”). OSFI is the federal regulatory authority that supervises federal Canadian and non-Canadian insurance companies operating in Canada pursuant to the Insurance Companies Act (Canada). In addition, the branch is subject to the laws and regulations of each of the provinces and territories in which it is licensed.
Supervision.  OSFI carried out an inspection visit to the Canadian branch of Aspen U.K. in September 2014. No material issues were identified.
Australia
General.  On November 27, 2008, Aspen U.K. received authorization from the Australian Prudential Regulation Authority (“APRA”) to establish a branch in Australia. The activities of the Australian branch are regulated by APRA pursuant to the Insurance Act of Australia 1973. Aspen U.K. is also registered by the Australian Securities and Investments Commission as a foreign company in Australia under the Corporations Act of Australia 2001.
Supervision.  APRA undertook a review of Aspen U.K.’s Australian branch in September 2015. No material issues were identified.
For additional information on our branches, refer to Note 20(a) of our consolidated financial statements, “Commitments and Contingent Liabilities — Restricted Assets.”
Other Regulated Firms

General. AUSSL (previously APJ Services Limited) and ARML are authorized and regulated by the FCA. Both companies are subject to a separate prudential regime and other requirements for insurance intermediaries under the FCA Handbook.

Dubai

General. AUSSL has established a branch in Dubai through which it intends to place reinsurance business into Aspen U.K. The Dubai Financial Services Authority confirmed its approval of the branch on November 15, 2015.
Lloyd’s Regulation
General.  We participate in the Lloyd’s market through our ownership of AMAL and AUL. AMAL is the managing agent for Syndicate 4711. AUL provides underwriting capacity to Syndicate 4711 and is a Lloyd’s corporate member. Our Lloyd’s operations are authorized by the PRA and regulated by the FCA and the PRA. AMAL received FSA (predecessor to the PRA and FCA) authorization on March 28, 2008. Our Lloyd’s operations are also subject to supervision by the Council of Lloyd’s. AMAL received authorization from Lloyd’s for Syndicate 4711 on April 4, 2008. The PRA and the FCA have been granted broad authorization and intervention powers as they relate to the operations of all insurers, including Lloyd’s syndicates, operating in the U.K. Lloyd’s market is authorized by the PRA and regulated by both the PRA and the FCA and is required to implement certain rules prescribed by the PRA and the FCA, which it does by the powers it has under the Lloyd’s Act 1982 relating to the operation of the Lloyd’s market. Lloyd’s prescribes, in respect of its managing agents and corporate members, certain minimum standards relating to their management and control, solvency and various other requirements. The PRA and the FCA directly monitors Lloyd’s managing agents’ compliance with their own regulatory requirements. If it appears to the PRA or the FCA that either Lloyd’s is not fulfilling its regulatory responsibilities or that managing agents are not complying with the applicable regulatory rules and guidance, they may intervene in accordance with their powers under the FSMA. By entering into a membership agreement with Lloyd’s, AUL undertakes to comply with all Lloyd’s bye-laws and regulations as well as the provisions of the Lloyd’s Acts and FSMA that are applicable to it. The operation of Syndicate 4711, as well as AMAL and their respective directors, are subject to the Lloyd’s supervisory regime.
Supervision.  AMAL was in scope for the PRA Periodic Summary Meeting performed in December 2014 and the FCA visit in February 2015. No material issues were raised as a result of these reviews and for the small number of areas where additional work was requested this has subsequently been completed.
Solvency Requirements.  Underwriting capacity of a member of Lloyd’s must be supported by providing a deposit (referred to as “Funds at Lloyd’s”) in the form of cash, securities or letters of credit in an amount determined under the ICA regime of the PRA. The amount of such deposit is calculated for each member through the completion of an annual capital adequacy exercise. Under these requirements, Lloyd’s must demonstrate that each member has sufficient assets to meet its underwriting


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liabilities plus a required solvency margin. This margin can have the effect of reducing the amount of funds available to distribute as profits to the member or increasing the amount required to be funded by the member to cover its solvency margin.
Restrictions.   A Reinsurance to Close (“RITC”) is a reinsurance contract to transfer the responsibility for discharging all the liabilities that attach to one year of account of a syndicate into a later year of account of the same or different syndicate in return for a premium. A RITC is usually put in place after the third year of operations of a syndicate year of account. If the managing agency concludes that an appropriate RITC for a syndicate that it manages cannot be determined equitably or negotiated on commercially acceptable terms in respect of a particular underwriting year, the underwriting year must remain open and be placed into run-off. During this period there cannot be a release of the Funds at Lloyd’s of a corporate member that is a member of that syndicate without the consent of Lloyd’s and such consent will only be considered where the member has surplus Funds at Lloyd’s.
Intervention Powers.  The Council of Lloyd’s has wide discretionary powers to regulate members’ underwriting at Lloyd’s. It may, for instance, change the basis on which syndicate expenses are allocated or vary the Funds at Lloyd’s or the investment criteria applicable to the provision of Funds at Lloyd’s. Exercising any of these powers might affect the return on an investment of the corporate member in a given underwriting year. Further, the annual business plans of a syndicate are subject to the review and approval of the Lloyd’s Franchise Board. The Franchise Board is responsible for setting risk management and profitability targets for the Lloyd’s market and operates a business planning and monitoring process for all syndicates.
If a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund, which in many respects acts as an equivalent to a state guaranty fund in the United States. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members. The Council of Lloyd’s has discretion to call or assess up to 3% of a member’s underwriting capacity in any one year as a Central Fund contribution. Our syndicate capacity for the 2016 underwriting year is $745.8 million (2015 underwriting year — $701.1 million). Above this level, it requires consent of members voting at a general meeting.
States of Jersey Regulation
General.  On March 22, 2010, we purchased APJ Jersey, a Jersey registered insurance company, which is subject to the jurisdiction of the Jersey Financial Services Commission (“JFSC”). The JFSC sets the solvency regime for those insurance companies under its jurisdiction. APJ Jersey holds funds in excess of the minimum requirement.
Supervision.  JFSC undertook a review of APJ Jersey in March 2013. No material matters were identified.
U.S. Regulation
General. AAIC is a Texas-domiciled insurance company and is licensed to write insurance on an admitted basis in 50 U.S. states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.   
We also write surplus lines policies on an approved, non-admitted basis through Aspen Specialty and Aspen U.K. Aspen Specialty is an insurance company domiciled and licensed in North Dakota and is therefore subject to North Dakota laws and regulations applicable to domestic insurers. Aspen Specialty is not licensed in any other state, however it is eligible to write surplus lines policies on a non-admitted basis in all 50 U.S. states and the District of Columbia. Aspen Specialty accepts business only through surplus lines brokers and does not market directly to the public.
Aspen U.K. is not licensed in any state in the U.S., however it is an alien insurer eligible to write surplus lines business in all 50 U.S. States and the District of Columbia based on its listing in the Quarterly Listing of the International Insurers Department (“IID”) of the National Association of Insurance Commissioners (“NAIC”). Pursuant to IID requirements, Aspen U.K. has established a U.S. surplus lines trust fund with a U.S. bank to secure U.S. surplus lines policies. As noted above, we participate in the Lloyd’s market through our ownership of AMAL and AUL; AMAL is the managing agent for Syndicate 4711, and AUL provides underwriting capacity to Syndicate 4711 and is therefore a Lloyd’s corporate member. Syndicate 4711 also appears on the IID. As of December 31, 2015, Aspen U.K.’s and Syndicate 4711’s surplus lines trust funds were $188.5 million.
Following the enactment of the Non-Admitted and Reinsurance Reform Act (the “NRRA”), which took effect on July 22, 2011 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), no U.S. state can prohibit a surplus lines broker from placing business with a non-admitted insurer domiciled outside the U.S., such as Aspen U.K., that appears on the IID. IID filing and eligibility requirements were amended in February 2012 and, among other changes, beginning January 1, 2013, IID listed insurers are required to report and continually maintain a capital and/or surplus amount of $45 million. As a matter of U.S. federal law, this means that Aspen U.K. should be surplus lines eligible in every U.S. state, even in states where Aspen U.K. had not previously been an eligible surplus lines insurer. Some states have developed eligibility standards and filing requirements separate from the IID listing, and our satisfaction of this additional listing or filing requirement is necessary to maintain our eligibility and acceptance by surplus lines brokers in those states.


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Aspen Specialty and Aspen U.K. are subject to limited state insurance regulations in states where they are surplus lines eligible. Specifically, rate and form regulations otherwise applicable to authorized insurers generally do not apply to Aspen Specialty and Aspen U.K.’s surplus lines transactions. In addition, because Aspen U.K. is not licensed under the laws of any U.S. state, U.S. solvency regulation tools, including risk-based capital standards, investment limitations, credit for reinsurance and holding company filing requirements, otherwise applicable to authorized insurers do not generally apply to alien surplus lines insurers such as Aspen U.K. However, Aspen U.K. may be subject to federal and state incidental regulations in areas such as those pertaining to federal reporting related to terrorism coverage and post-disaster emergency orders, such as the post-Sandy moratorium on non-renewals and cancellations and mandatory mediation requirements in New York and New Jersey. We monitor federal and state regulations and directives and comply as necessary for all affected subsidiaries.
Aspen Management is a Massachusetts corporation licensed as a surplus line broker in Massachusetts, Connecticut, New York and Texas. ASIS is a California limited liability company licensed as a surplus line broker in California. Aspen Solutions is a Connecticut limited liability company licensed as a surplus line broker in Connecticut. Aspen Management, ASIS and Aspen Solutions serve as surplus line brokers only for companies within the Aspen Group, and do not act on behalf of non-Aspen third parties or market directly to the public.
Aspen Re America is a Delaware corporation and functions as a reinsurance intermediary with offices in Connecticut, Florida, Georgia, Illinois and New York. ARA - CA is a California limited liability company and is licensed as a California reinsurance intermediary. Aspen Re America and ARA - CA both act as intermediaries for Aspen U.K. and do not currently serve as intermediaries for non-Aspen third parties or market directly to the public. Additionally, Aspen Re America has been approved by Lloyd’s as a service company for the purpose of accessing certain Latin American reinsurance business for AMAL only.
Aspen U.S. Services is a Delaware corporation that provides administrative and technical services to our U.S. entities, primarily from our Rocky Hill, Connecticut office. It is authorized to do business in the various states where we have physical offices. No filings are required with state insurance departments.
U.S. Insurance Holding Company Regulation.  Aspen U.S. Holdings is a Delaware corporation and is the direct holding company parent of all of the above U.S. entities. Aspen Specialty and its affiliates are subject to the insurance holding company laws of North Dakota and AAIC and its affiliates are subject to the insurance holding company laws of Texas. The holding company laws require that each insurance company within the holding company system furnish annual information about certain transactions with affiliated companies. Generally, all material transactions among companies in the holding company system affecting Aspen Special