UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

Commission file number 001-31909

 

 

 

 

ASPEN INSURANCE HOLDINGS LIMITED

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(441) 295-8201

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

 

Securities registered pursuant to Section 12(g) of the Exchange Act:  None.

 

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 o     No þ

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

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

 

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.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

 

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

 

The aggregate market value of the ordinary shares held by non-affiliates of the registrant, as of June 30, 2008, was approximately $1.9 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, 2008.

 

As of February 1, 2009, 81,530,686 ordinary shares were outstanding.

 

 

ASPEN INSURANCE HOLDINGS LIMITED
INDEX TO FORM 10-K

TABLE OF CONTENTS

 

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 wholly-owned subsidiaries Aspen Insurance UK Limited (“Aspen U.K.”), Aspen (UK) Holdings Limited (“Aspen U.K. Holdings”), Aspen Insurance UK Services Limited (“Aspen UK Services”), AIUK Trustees Limited (“AIUK Trustees”), Aspen Insurance Limited (“Aspen Bermuda”), Aspen Underwriting Limited (“AUL”, corporate member of Lloyd’s Syndicate 4711, “Syndicate 4711”), Aspen Managing Agency Limited (“AMAL”), 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 California, LLC (“ARA — CA”), Aspen Specialty Insurance Solutions LLC (“ASIS”), Aspen Re America Risk Solutions LLC (“Aspen Solutions”) and any other direct or indirect subsidiary collectively, as the context requires. Aspen U.K., Aspen Bermuda, Aspen Specialty and AUL, as corporate member of Syndicate 4711, are each referred to herein as an “Insurance Subsidiary,” and collectively referred to as the “Insurance 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” 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 contains, and the Company may from time to time make other verbal or written, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that involve risks and uncertainties, including statements regarding our capital needs, business strategy, expectations and intentions. Statements that use the terms “believe,” “do not believe,” “anticipate,” “expect,” “plan,” “estimate,” “project,” “seek,” “will,” “may,” “aim,” “continue,” “intend,” “guidance” and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and because our business is subject to numerous risks, uncertainties and other factors, our actual results could differ materially from those anticipated in the forward-looking statements, 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 and the differences could be significant. 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:

 

 

 

In addition, any estimates relating to loss events involve the exercise of considerable judgment and reflect a combination of ground-up evaluations, information available to date from brokers and cedants, market intelligence, initial tentative loss reports and other sources. Due to the complexity of factors contributing to losses and the preliminary nature of the information used to prepare estimates, there can be no assurance that our ultimate losses will remain within stated amounts.

 

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise or disclose any difference between our actual results and those reflected in such statements.

 

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements you read in this report reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by the points made above. You should specifically consider the factors identified in this report which could cause actual results to differ before making an investment decision.

 

PART I

 

 

General

 

We are a Bermuda holding company, incorporated on May 23, 2002, and now conduct insurance and reinsurance business through our wholly-owned subsidiaries in three major jurisdictions: Aspen U.K. and AUL, corporate member of Syndicate 4711 at Lloyd’s of London (United Kingdom), Aspen Bermuda (Bermuda) and Aspen Specialty (United States). Aspen U.K. also has branches in Paris, France, Zurich, Switzerland, Dublin, Ireland, Singapore, Australia and Canada. We operate in the global markets for property and casualty insurance and reinsurance.

 

For the year ended December 31, 2008, we wrote $2,001.7 million in gross premiums and at December 31, 2008 we had total capital employed, including long-term debt, of $3,028.6 million.

 

Our corporate structure as at February 13, 2009 was as follows:

 

We manage our business in four segments: property reinsurance, casualty reinsurance, international insurance and U.S. insurance.

 

Property reinsurance business is assumed by Aspen Bermuda and Aspen U.K. and written by teams located in Bermuda, London, Paris, Singapore, the U.S. and Zurich. The business written in the U.S is written exclusively by Aspen Re America and ARA-CA as reinsurance intermediaries with offices in Connecticut, Illinois, New York, Georgia and California. Aspen U.K. started writing credit and surety reinsurance out of our Zurich branch, for business incepting on or after January 1, 2009.

 

Casualty reinsurance is mainly assumed by Aspen U.K. and written by teams located in London, Zurich 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 in its Connecticut office.

 

Our international insurance business is written primarily in the London Market through Aspen U.K. and AUL which is the sole corporate member of Syndicate 4711 at Lloyd’s of London (“Lloyd’s”), managed by AMAL. Excess casualty insurance is written by the Dublin branch of Aspen U.K. Beginning in 2009, we will also commence writing excess casualty insurance business out of Aspen Bermuda.

 

In the U.S., we write property and casualty insurance, predominantly through the U.S. wholesale surplus lines broker network. In 2008, substantially all the excess and surplus lines business previously written by Aspen Specialty was written by Aspen U.K. through Aspen Management and ASIS, our U.S. brokerage companies.

 

Aspen Management is an insurance producer and management company with offices in Boston, Massachusetts, Atlanta, Georgia and Scottsdale, Arizona, which provides underwriting, claims and management services predominantly on behalf of Aspen Specialty and Aspen U.K. ASIS is a California broker placing surplus lines property and casualty business predominantly on behalf of Aspen Specialty and Aspen U.K.

 

Our Business Strategy

 

Our financial objective is to deliver superior financial returns to our ordinary shareholders while at the same time achieving a comparatively lower earnings volatility relative to similar companies. Over the past three years, we have endeavored to reduce this volatility by further diversifying into new business lines and reducing exposure to catastrophic events. Our objective of reducing volatility implies a reduction in our exposure to natural catastrophe losses which in turn implies that in years such as 2006 and 2007 when there is limited insured natural catastrophe loss we may not report returns as high as some of our competitors whose business is more exposed to natural catastrophe risks. For 2008, our estimated losses from Hurricanes Ike and Gustav were within our expectations for storms of this size.

 

Our principal measures of financial return are Return On Average Equity (“ROAE”) and change in book value per share, adjusted for dividends to shareholders. We calculate ROAE as income after tax and preference share dividends as a percentage of average monthly shareholders’ equity excluding accumulated comprehensive income and the aggregate of the liquidation preferences of our preference shares. The ROAE which we target for any one year will depend on our assessment of the state of the insurance and interest rate cycles to which we expect to be exposed. Book value per share is the ratio of total shareholders’ equity adjusted for intangible assets, preference shares and dividends to shareholders, to ordinary shares outstanding.

 

We aim to deliver our financial objective by pursuing the following key aspects of business strategy:

 

Diversification.  We plan to continue to diversify our insurance and reinsurance operations by offering new products within our existing lines of business or the selective addition of new lines, and we may selectively increase our exposure in parts of the world or in lines of business where we are currently under-represented. In this regard, we opened a branch office in Zurich, Switzerland in 2007 to develop our continental European reinsurance business. In 2008, we established a Dublin branch to write excess casualty insurance business and an office in Singapore to write property reinsurance. We intend to accomplish this diversification by building on our established underwriting expertise and analytical skills.

We anticipate continuing to develop and selectively build out our reinsurance operations with emphasis on non-U.S. peak zone catastrophe exposures and emphasize our evolving franchise in our international and U.S. insurance segments. In 2007, we established new underwriting units in professional liability and excess casualty insurance. In 2008, we established new underwriting units to write financial institutions insurance, financial and political risk insurance, management and technology liability insurance, as well as credit and surety reinsurance.

 

Enterprise Risk Management.  We aim to achieve our objective of reduced volatility by a holistic approach to risk management which emphasizes not only the improved management of known risks but also seeks to identify and mitigate new and emerging risks. We have invested and will continue to invest both in skills and technology in support of this objective and aim to establish superior risk management practices across our entire operation.

 

As part of our risk management approach we manage our net exposure to large individual risk losses in our insurance business lines by selectively purchasing reinsurance. Our reliance on outwards reinsurance has diminished since 2006 as we have reshaped our risk profile and strengthened our balance sheet.

 

Capital Management.  We strive to maintain an optimal level of capital relative to our business plan. To do this, we employ Dynamic Financial Analysis (“DFA”) statistical modeling techniques to assess the risk of loss to our capital base based upon the portfolio of risks we underwrite and on our asset and operational risk profiles. We use this together with rating agency models and marketing considerations to make an informed judgment as to the minimum amount of capital that we need to hold.

 

We also set targets for financial leverage which we believe provide an appropriate balance between improving returns to our ordinary shareholders while maintaining the levels of financial strength expected by our customers and by the rating agencies. For this purpose we define financial leverage as the ratio of long-term debt and ‘hybrid’ capital to total capital. The term ‘hybrid’ refers to securities, such as our preference shares, which have characteristics of both debt and equity.

 

We strive to maintain access to the capital markets by seeking to ensure that all our issued securities are fairly priced at issuance and by targeting a variety of different investor markets.

 

Performance Management.  We also use DFA to determine the risk-adjusted capital amounts that we notionally allocate to each of our lines of business and to set maximum combined ratios. Combined ratio is the ratio of losses and expenses to net earned premium and therefore returns are higher for lower values of combined ratio and vice versa.

 

Cycle Management.  By anticipating changing market conditions, we seek as far as possible to access different lines of business with complementary risk/return characteristics and to deploy capital appropriately. We monitor relative and absolute rate adequacy and movements and we adjust the composition of our risk portfolio based on market conditions and underwriting opportunities. We are prepared to adjust our underwriting and capital management objectives in order to respond in a timely manner to the changing market environment for all or some of our lines of business. This includes reducing our gross written premiums for a business line, or for our overall writings, should conditions warrant.

 

Investment Management.  We manage our investment portfolio, subject to defined risk parameters, with a view to maximizing its contribution to ROAE in the form of net investment income while also targeting superior total returns. We employ an active fixed income investment strategy that focuses on the outlook for interest rates, yield curves 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 and our assessment of the interest rate cycle. In 2008, we reviewed our strategy of diversifying our investment portfolio away from 100% fixed income securities and reduced our allocation to funds of hedge funds from 9.5% at the start of the year to 5.0% of our aggregate portfolio as at December 31, 2008. In February 2009, we gave notice to redeem all our remaining hedge fund investments.

Effective operational management and cost control.  We believe that we will not succeed in meeting our financial objectives without highly effective information systems and other technical support services to our underwriting teams. We strive to meet this objective while managing costs by investing in information technology and by continuous process improvements.

 

Business Segments

 

We are organized into four business segments: Property Reinsurance, Casualty Reinsurance, International Insurance, and U.S. Insurance. These segments form the basis of how we monitor the performance of our operations.

 

Management measures segment results on the basis of the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and operating and administrative expenses by net premiums earned. Indirect operating and administrative expenses are allocated to segments based on each segment’s proportional share of gross earned premiums. As a relatively new company, our historical combined ratio may not be indicative of future underwriting performance. We do not manage our assets by segment; accordingly, investment income and total assets are not allocated to the individual segments.

 

The gross written premiums are set forth below by business segment for the twelve months ended December 31, 2008, 2007 and 2006:

 

 

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 financial statements.

 

Property Reinsurance

 

Our property reinsurance segment is written on both a treaty and facultative basis and consists of the following principal lines of business: treaty catastrophe, treaty risk excess, treaty pro rata and property facultative (U.S. and international). Treaty reinsurance contracts provide for automatic coverage of a type or category of risk underwritten by our ceding clients. Our property reinsurance business is written out of Bermuda, London, the U.S., Paris, Zurich and Singapore. The property reinsurance business we write can

be analyzed by geographic region, reflecting the location of the insured, as follows for the twelve months ended December 31, 2008, 2007 and 2006:

 

 

 

 

Our gross written premiums by our principal lines of business within our property reinsurance segment for the twelve months ended December 31, 2008, 2007 and 2006 are as follows:

 

 

Treaty Catastrophe.  Treaty catastrophe reinsurance contracts are typically “all risk” in nature, providing protection against losses from earthquakes and hurricanes, as well as other natural and man-made catastrophes such as floods, tornadoes, fires and storms. Exposures are covered for property damage and business interruption losses resulting from a catastrophe event caused by an insured peril. Coverage can also be limited to only specified perils such as windstorm.

 

Property catastrophe reinsurance is generally written on an excess of loss basis. Excess of loss reinsurance provides coverage to primary insurance companies when aggregate claims and claim expenses from a single occurrence from a covered peril exceed a certain amount specified in a particular contract. Under these contracts, we provide protection to an insurer for a portion of the total losses in excess of a specified loss amount, up to a maximum amount per loss specified in the contract. 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. A loss from a single occurrence is limited to the initial policy limit and would not usually include the policy limit available following the payment of 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.

 

Treaty Risk Excess.  We also write risk excess of loss property treaty reinsurance. This type of reinsurance provides coverage to a reinsured where it experiences a loss in excess of its retention level on a single “risk” basis, rather than to two or more risks in an insured event, as provided by catastrophe reinsurance. A “risk” in this context might mean the insurance coverage on one building or a group of buildings due to 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.

 

Treaty Pro Rata.  Our treaty pro rata reinsurance product provides proportional coverage to the reinsured rather than excess of loss. We share original losses in the same proportion as our share of premium and policy amounts. Pro rata contracts typically involve close client relationships and frequent auditing.

 

Property Facultative.  The business is written on an excess of loss basis for primary insurers in the U.S. as well as worldwide. The account has dual distribution with business written both directly and through brokers. The U.S. property facultative account is mostly written on a direct basis, whereas the international account is written both on a direct basis and through brokers. This line of business is not typically driven by natural perils.

 

In facultative reinsurance, the reinsurer assumes all or part of a risk written by the insurer in a single insurance contract. Facultative reinsurance is negotiated separately for each contract. Facultative reinsurance is normally purchased by insurers where individual risks are not covered by their reinsurance treaties, for amounts in excess of the dollar limits of their reinsurance treaties or for unusual risks. We also underwrite “facultative automatics” where all original risks that meet certain contractual criteria are covered under the same reinsurance contract. There is typically a different type of underwriting expertise required in facultative underwriting as compared to treaty underwriting.

 

Structured Reinsurance.  We write a small number of structured property reinsurance contracts out of Aspen Bermuda. These contracts are tailored to individual client circumstances and although written by a single team are accounted for within the business segment to which the contract most closely relates. In 2008, these contracts were accounted for in this segment, casualty reinsurance and international insurance. Within the property reinsurance segment, these contracts generated gross written premiums in 2008 of $46.7 million.

 

A very high percentage of the property reinsurance contracts that we write excludes coverage for losses arising from the peril of terrorism involving nuclear, biological or chemical attack outside the U.S. Within the U.S., our reinsurance contracts generally exclude or limit our liability to 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”) and now the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”). With respect to personal lines risks, losses arising from the peril of terrorism that do not involve nuclear, biological or chemical attack are usually covered by our reinsurance contracts. Such losses relating to commercial lines risks are generally covered on a limited basis; for example, where the covered risks fall below a stated insured value or into classes or categories we deem less likely to be targets of terrorism than others. We have written a limited number of reinsurance contracts, both on a pro rata and risk excess basis, covering the peril of terrorism. We have done so only in instances where we believe we are able to obtain pricing that is commensurate with our exposure. These contracts typically exclude coverage protecting against nuclear, biological or chemical attack.

In our property reinsurance segment, Factory Mutual and its affiliates accounted for approximately 11% of gross written premiums in this segment for the twelve months ended December 31, 2008. No other customer accounted for more than 5% of gross written premiums within this segment.

 

Casualty Reinsurance

 

Our casualty reinsurance segment is written on both a treaty and a facultative basis and consists of the following principal lines of business: U.S. treaty, international treaty, and casualty facultative. The casualty treaty reinsurance business we write includes excess of loss and pro rata reinsurance which are applied to portfolios of primary insurance policies. We also write U.S. casualty facultative reinsurance. Our excess of loss positions come most commonly from layered reinsurance structures with underlying ceding company retentions.

 

Casualty reinsurance is written by Aspen U.K. and our reinsurance intermediary in the U.S., Aspen Re America, on behalf of Aspen U.K. We also write some structured casualty reinsurance contracts out of Aspen Bermuda.

 

The casualty reinsurance business we write can be analyzed by geographic region, reflecting the location of the insured, as follows for the twelve months ended December 31, 2008, 2007 and 2006:

 

 

 

 

Our gross written premiums by our principal lines of business within our casualty reinsurance segment for the twelve months ended December 31, 2008, 2007 and 2006 are as follows:

 

 

U.S. Treaty.  Our U.S. casualty reinsurance business is comprised of long-tail treaty contracts protecting U.S. cedants. In July 2006, Aspen Re America appointed a U.S.-based team of casualty treaty underwriters, based in Connecticut, who write U.S. casualty treaty exclusively on behalf of Aspen U.K. The U.S.-based team complements our existing London-based team which writes this business mostly on an excess of loss basis. With respect to business written by our U.S. team, the contracts protect U.S. cedants primarily within the regional, specialty and excess and surplus lines segments written both on an excess of loss and pro rata basis. Our London team reinsures exposures mainly with respect to workers’ compensation (including catastrophe), medical malpractice, and professional liability for regional lawyers, accountants, architects and engineers. Our U.S. team reinsures exposures mainly with respect to general liability, automobile liability, non-medical professional, workers’ compensation and excess liability including umbrella.

 

International Treaty.  Our international casualty reinsurance business is composed of long-tail treaty contracts. The majority of our international casualty reinsurance business is written on an excess of loss basis with a small proportion written on a pro rata basis. The exposures that we cover in the international casualty business include automobile liability, workers’ compensation, employers’ liability, public and product liability, fidelity business, professional indemnity and various coverages for financial institutions including bankers blanket bonds, directors and officers (“D&O”) liability and professional indemnity. This line of business is comprised of non-U.S. domiciled cedants, some of which may have incidental U.S. exposure, including exposure to U.S. financial institutions.

 

Casualty Facultative.  Our casualty facultative reinsurance line of business consists of umbrella, automobile liability, general liability and workers’ compensation reinsurance. Approximately all exposures reinsured in this line of business are located in the United States, written on an excess of loss basis out of our Rocky Hill, Connecticut office. During 2003 and for part of 2004, this business was written for us by Wellington Underwriting, Inc. (“WU Inc.”). The binding authority for general liability, umbrella and workers’ compensation along with the team that wrote this business at WU Inc., was transferred to Aspen Re America on February 1, 2004. Following the closure of our Marlton, New Jersey office in 2007, our casualty facultative business is conducted out of our Rocky Hill, Connecticut office.

 

Structured Reinsurance.  We have written a small number of structured casualty reinsurance contracts through our specialist team in Bermuda. Within the casualty reinsurance segment, these contracts generated gross written premiums in 2008 of $57.8 million. The two largest of these contracts in 2008 were a workers’ compensation quota share contract with estimated gross written premiums of $25.7 million (which accounted for 6.1% of gross written premiums in 2008 for the casualty reinsurance segment) and an automobile liability and physical damage quota share contract with estimated gross written premiums of $28.3 million (6.8% of total gross written premiums in 2008).

 

No other customer accounted for more than 4% of gross written premiums in this segment for the year ended December 31, 2008.

International Insurance

 

Our international insurance segment comprises marine hull, marine and specialty liability, energy property, non-marine transportation liability, aviation, excess casualty, professional liability, U.K. commercial property (including construction), U.K. commercial liability, financial and political risk, financial institutions, management and technology liability and specialty reinsurance. The commercial liability line of business consists of U.K. employers’ and public liability insurance. In 2008, we began writing financial and political risk, financial institutions and management and technology liability insurance. Our specialty reinsurance line of business includes aviation, marine and other specialty reinsurance. Our insurance business is written on a primary, quota share and facultative basis and our reinsurance business is mainly written on a treaty pro rata and excess of loss basis with some on a facultative basis.

 

The international insurance business we write (including the quota share business) can be analyzed by geographic region, reflecting the location of the insured, as follows for the twelve months ended December 31, 2008, 2007 and 2006:

 

 

 

 

Our gross written premiums by our principal lines of business within our international insurance segment for the twelve months ended December 31, 2008, 2007 and 2006 are as follows:

 

 

Marine, Energy and Liability Insurance.  The marine, energy and liability team commenced underwriting in the third quarter of 2004 and writes marine hull, energy physical damage and marine and specialty liability classes. The vast majority of business is written on a direct facultative basis with underwriters setting the terms and conditions of the risk. Coverage underwritten includes onshore and offshore natural perils, fire, explosion, well blow-out, liability risks associated with the aforementioned, and onshore liability construction (which may have longer contract periods than one year).

 

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

 

We target a global aviation client base (other than the United States), taking advantage of London’s position as a leading center for aviation insurance business distribution.

 

Non-Marine and Transportation Liability.  The non-marine transportation liability team joined Aspen U.K. in the second half of 2007. The team focuses on industry groups such as life science, railroads and trucking. Insureds are predominantly North American-domiciled with coverage offered on both a primary and excess of loss basis. This line of business is primarily written on a direct facultative basis.

 

Professional Liability.  In September 2007, Aspen U.K.’s professional liability line of business was established. The team writes an international portfolio of professional liability risks, via its London Market broker partners. We target predominantly non-U.S. domiciled risks, although some risks may have an element of U.S. exposure through subsidiary offices and other related minority activities. The majority of our business emanates from the U.K. and Australasia, with some European business. We

insure a wide range of professions including lawyers, surveyors, accountants, engineers, contractors and financial advisors. Risks are written on both a primary and excess of loss basis.

 

Global Excess Casualty (Dublin).  The global excess casualty line of business was established at Aspen U.K. in October 2007. Beginning in January 2008, the team started writing this business out of our Dublin office and is dedicated to the writing of large, sophisticated and risk-managed insureds worldwide. The account is a broad-based book of business including general liability, commercial and residential construction liability. It provides for product and public liability and associated types of cover found in general liability policies in the global insurance market. The team writes excess layers only, with the intention of writing 100% of layers or quota share as applicable, with a portion of the contracts being multi-year policies.

 

Financial Institutions.  In January 2008, we started underwriting this business. Our principal focus is on super-regional and regional financial institutions, smaller investment banks and specialized financial institution service companies. Additionally, we also provide Fortune 500 commercial entity commercial crime insurance. Products include financial institutions blanket bonds, electronic and computer crime insurance (comprehensive crime), professional indemnity/errors and omissions (“E&O”) and D&O liability. Insureds are predominantly in North America, U.K., Australia, Northern and Central Europe with coverage offered mainly on a primary basis. This line of business is written on a direct and facultative basis.

 

Management and Technology Liability Insurance.  In September 2008, we started writing a balanced and diversified portfolio of Management and Technology Liability insurance (“M&TL”), consisting of international commercial D&O insurance, network security, technology liability and warranty and indemnity insurance. The M&TL book constitutes risks for non-U.S. domiciled companies written on both a primary and excess basis. Core territories include the U.K., Europe, Asia Pacific and Canada and we provide coverage for directors and officers of both publicly listed and private companies. The technology liability portfolio encompasses liability for the design and manufacture of technology-related hardware and software as well as the broader provision of technology-related services. We write technology liability business primarily on an excess basis. Network security liability, which we write mostly on a primary basis, provides cover for internet-related exposures such as privacy, identity theft and internet media liability and attendant loss or misuse of data. Warranties and indemnities (“W&I”) insurance provides cover for losses arising from specific (but not all) representations and warranties provided or obtained in connection with a corporate transaction, particularly in a merger or acquisition. Derivative exposures can arise from tax or other issues that are contingent to or otherwise impede the successful sale or purchase of a company. Although some specific types of contingent risks are considered on a primary basis, most W&I business is written on an excess basis.

 

Financial and Political Risks.  The financial and political risks team writes business covering project and trade risk, political risks, terrorism and kidnap and ransom (“K&R”). Credit insurance, mostly focusing on secured and trade-related credit, is written largely on a direct basis as a percentage of the lenders’ exposure. Political risks, which include confiscation, expropriation, nationalization and deprivation (“CEND”) cover, currency inconvertibility/non- transfer (“CI”) cover and political violence, are written as direct insurance and facultative reinsurance and can be primary layers, excess of loss or quota share reinsurance (non-treaty). K&R insurance policies typically cover kidnap, hijack and resultant bodily injury, threats to kill, injure or abduct or to damage property or products, extortion, and malicious and illegal detention. K&R insurance is written as direct insurance. We write the financial and political risks worldwide but with concentrations in a number of key countries, such as Russia and China.

 

U.K. Commercial Property.  The U.K. commercial property insurance focuses on providing physical damage and business interruption coverage as a result of weather, fire, theft and other causes. Our client base is predominantly U.K. property owners, middle market corporate and public sector clients. In 2008, we commenced writing construction risks coverage.

U.K. Commercial Liability.  The U.K. commercial liability line of business focuses on providing employers’ liability coverage and public liability coverage for insureds domiciled in both the United Kingdom and Ireland.

 

In the United Kingdom, all employers must maintain employers’ liability insurance. This insurance covers employers’ liability for bodily injury or disease sustained by employees, and arising out of and in the course of employment. In the United Kingdom, employees are required to show breach of statute or tort prior to being entitled to any compensation. As opposed to the United States, there is no set scale of compensation in the United Kingdom, as claims are settled in accordance with legal precedent and official damages guidelines. Most claims are settled out of court; however, most employees engage legal representation that increases claims costs, though in a predictable way. Insurance cover is written on an “occurrence” basis; that is, the monetary limits of the insurance apply to all claims relating to any one occurrence, with the minimum legal requirement being £5 million for any one occurrence. However, the usual limit for employers’ coverage is £10 million for any one occurrence.

 

We also offer public liability cover. Public liability insurance covers businesses for claims made against them by members of the public or other businesses, but not for claims by employees or shareholders of such businesses. Public liability insurance is generally not required by regulation.

 

Specialty Reinsurance.  Our specialty reinsurance line of business is composed of reinsurance covering interests similar to those underwritten in marine, energy, liability and aviation insurance above, as well as contingency, terrorism, nuclear, personal accident and crop reinsurance. We also write satellite insurance and reinsurance. Our specialty reinsurance business is generally written on a treaty basis, though some risks are written on a facultative basis.

 

For the twelve months ended December 31, 2008, our mix of specialty reinsurance business as measured by gross written premiums was approximately 52.2% aviation and marine reinsurance (2007 — 63.9%; 2006 — 50.4%) and 47.8% (2007 — 36.1%; 2006 — 49.6%) other specialty reinsurance risks such as terrorism, nuclear, personal accident, crop and satellite.

 

In our international segment, no single customer accounted for more than 3% of gross written premiums within this segment.

 

Structured Reinsurance.  Our structured reinsurance team in Bermuda wrote $1.9 million of gross premiums in 2008 that fall within the international insurance segment.

 

U.S. Insurance

 

Our U.S. insurance segment consists of U.S. property and casualty insurance written on an excess and surplus lines basis. In 2007, after the appointment of Nathan Warde as Head of U.S. Insurance, there was a substantial reorganization of our property account. In 2008, substantially all of this business was written by Aspen U.K. through Aspen Management and ASIS. The U.S. insurance business we write can be analyzed by geographic region, reflecting the location of the insured, as follows for the twelve months ended December 31, 2008, 2007 and 2006:

 

 

 

 

Our gross written premiums by our principal lines of business within our U.S. insurance segment for the twelve months ended December 31, 2008, 2007 and 2006 are as follows:

 

 

The property account consists predominantly of mercantile, manufacturing, municipal and commercial real estate business. The casualty account primarily consists of general liability, umbrella liability and certain E&O insurance. Coverage on our casualty line is offered on those risks that are primarily premises-driven, focusing on low to moderately hazardous exposures.

 

Underwriting, Risk Management and Reinsurance

 

Our objective is to create a 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.

 

Enterprise Risk Management.  Risk management focuses on the threat to the achievement of our business objectives. Enterprise Risk Management (“ERM”) identifies the sources of such risks and oversees the setting of limits on risks, as well as risk mitigation and risk transfer. Underpinning this approach is a two-dimensional risk management process that forms the basis of business decision making:

 

 

ERM is well integrated in our business practices through a “Three-Lines-of-Defense” structure:

 

 

Our risk management process produces tailored views on our specific profile with respect to underwriting, credit, market and operational risks and sets and monitors risk tolerances for significant identified risks. We also use risk modeling techniques to assist us in the assessment of total capital requirements, to allocate capital to classes of insurance risk and to test the effectiveness of various risk mitigation strategies including reinsurance and retrocession. However, our use of quantitative techniques

is moderated by a consciousness of the likelihood of model error, unmodeled risks and the need to make common-sense business judgments.

 

In 2008, S&P reaffirmed our ERM rating as strong. We believe that this rating is an attestation of the strength of our risk management processes. The following sections describe in more detail our risk management processes in underwriting, credit, market and operational risk areas.

 

Underwriting.  Our underwriting activities are managed in four product areas: property reinsurance, casualty reinsurance, international insurance and U.S. insurance. The reinsurance product areas report into Brian Boornazian, President, Aspen Re, who has a strategic and operational responsibility for the underwriting of these lines of business. The property reinsurance lines report into James Few, Managing Director, Aspen Re and the casualty reinsurance lines report into our Head of Casualty Reinsurance, Emil Issavi. The international insurance lines report into our Head of International Insurance, Matthew Yeldham and the U.S. insurance lines report into Nathan Warde, our Head of U.S. Insurance. The Head of Reinsurance (President, Aspen Re), Head of International Insurance and Head of U.S. Insurance all report directly into our Chief Executive Officer, who is supported by our Director of Underwriting, Kate Vacher. Our Director of Underwriting assists in the management of the underwriting process by developing our underwriting strategy, monitoring our underwriting control framework and acting as an independent reviewer of underwriting activity across our businesses.

 

We underwrite according to specific disciplines, with the aim of maintaining the following principles:

 

 

Natural Catastrophe Risk Management.  The Risk Committee continues to provide oversight of risk management. The Risk Committee reviews the risk appetites and risk tolerances proposed by management which are then approved by our Board of Directors.

 

Our Catastrophe Risk Management (“CRM”) team, which reports to our Chief Risk Officer, Oliver Peterken, has responsibility for identifying, quantifying, and qualifying catastrophe risk information for use within and across business units. CRM’s primary activity is the collation, analysis and distribution of portfolio statistics and reporting the group’s exposure information on a monthly basis.

The principal objectives of the CRM team are to:

 

 

We use a variety of catastrophe modeling techniques but also employ a number of other underwriting methods to “sense check” modeled outputs, where appropriate. We use leading vendor models as part of the underwriting process but may adjust results to reflect frequency and severity rates as we believe appropriate. Hurricane frequency assumptions may be adjusted in consultation with hurricane forecasters such as Accurate Environmental Forecasting (“AEF”) and severity loads may also be adjusted to reflect our underwriting experience.

 

In respect of our property reinsurance segment, we have also implemented the Submission Management System (“SMS”). The SMS, together with our accumulation control system, enables us to simulate the effect on our portfolio’s Probable Maximum Loss (“PML”) of different participations on each treaty ahead of each renewal period. This enables us to manage our aggregate exposures efficiently, control our probabilistic exposures and ensure that our capacity is deployed appropriately.

 

Portfolio-specific and group-wide exceedance probability data (both occurrence and aggregate) is reviewed monthly, and modeled results are compared with aggregate limits-exposed data as a secondary check. Modeling includes some secondary perils (fire following earthquake, storm surge and post-event loss amplification) where applicable. Results are reported both on a “Combined All Risks” basis and by the key regions of U.S. windstorm, earthquake, New Madrid earthquake, European windstorm and Japan all risks.

 

Many of the reinsurance contracts which we underwrite and which we purchase include terms under which additional payments, known as reinstatement premiums, are payable if claims are made. We take these into account when assessing our overall costs arising from catastrophic events, together with exposures arising from parts of our business, such as the marine reinsurance business that we write, but which are excluded from our reinsurance cover.

 

Catastrophe accumulation reporting is subject to rigorous quality control, under our expanded risk management program. Aggregates and modeled results are reviewed over several stages each month, and signed-off by our Chief Risk Officer before being circulated to senior management and all underwriting teams. Any significant changes or deviations from the plan are highlighted, and relevant actions prescribed.

 

Operational Risk.  Our approach to operational risk management aims to minimize exposures. This approach is predicated on methodical identification and measurement of inherent operational risks, a thorough assessment of the adequacy of the controls in place and an analysis of the residual risks compared to preset tolerances. The focus areas of our operational risks cover financial reporting, business continuity, financial crime, system security, regulatory, strategic and other areas. Because of the complex nature of operational risks, we have implemented a process that reinforces clear responsibility and accountability for managing these exposures. Periodically, our risk and compliance functions work with relevant business units to identify, measure and assess different aspects of operational risks. Additionally, business units conduct their own self-assessments and attest to the soundness of the controls operating in their units. Where improvements are identified, follow-up actions are implemented until the expected remediation is achieved. Finally, as an independent third party, our internal audit team undertakes a risk-based approach to test the operation of controls across all business units. Internal Audit reports directly to our Board of Directors’ Audit Committee.

Credit and Market Risk.  Our Investment Committee and the Reinsurance Credit Committee (a management committee) define credit and market risk tolerances in line with the risk appetite set by our Board of Directors. Our Investment Committee reviews the group’s investment performance and assesses credit and market risk concentrations and exposures to issuers. Our credit analysts evaluate reinsurance and insurance counterparties and propose acceptable financial strength ratings and credit limits. Our Reinsurance Credit Committee reviews these recommendations and sets credit limits. Our risk management function monitors individual exposures in addition to credit and market risk accumulations compared to tolerances. Any exceptions are reported to senior management and our Risk Committee. In 2006, we transferred some of our counterparty credit risk through the purchase of an innovative policy that will protect the Company against losses due to the inability of one or more of our reinsurance counterparties to meet their financial obligations to us. The contract is for a maximum of five years and provides 90% cover for a named panel of reinsurers up to individual defined sub-limits. The contract does allow, subject to certain conditions, for substitution and replacement of panel members if the Company’s panel of reinsurers changes. Payments are made on a quarterly basis throughout the period of the contract based on the aggregate limit, which was set initially at $477 million but is subject to adjustment.

 

During 2008, we began to insure certain types of credit risk through our financial and political risk underwriting unit and in 2009, we have started to reinsure certain providers of trade credit insurance, surety bonds and political risks.

 

Reinsurance.  We purchase reinsurance and retrocession to limit and diversify our own risk exposure and to increase our own insurance and reinsurance underwriting capacity. These agreements provide for recovery of a portion of losses and loss expenses from reinsurers. For our reinsurance business, we expect to continue the philosophy first implemented in 2006 of limited and strategic retrocession purchasing in conjunction with risk tolerances.

 

In respect of our insurance lines of business, we have different reinsurance covers in place for many of our lines of business. In 2009, we anticipate renewing much of the reinsurance protecting our insurance business that we bought in 2008. In addition, we will be looking to purchase reinsurance programs in 2009 for some of our new insurance lines, including management and technology liability. In 2008, we entered into various proportional treaty arrangements on specific lines of business. This will continue into 2009 with the lines benefiting from proportional treaty coverage likely to include financial and political risk, U.K. construction and excess casualty.

 

The multi-year property catastrophe reinsurance agreement with Ajax Re Limited (“Ajax Re”), a Cayman Islands domiciled reinsurer, was intended to provide up to $100 million of reinsurance coverage for our operating subsidiaries in the event of one or more California earthquakes. The coverage, which is in place until May 1, 2009, provides for recovery on a pro rata basis to an industry loss of between $23.1 billion and $25.9 billion as recorded by Property Claims Services (“PCS”).

 

In order to ensure that Ajax Re had sufficient funding to service the LIBOR portion of interest due on the bonds issued by Ajax Re, Ajax Re entered into a total return swap with Lehman Brothers Special Financing, Inc. (“Lehman Financing”), whereby Lehman Financing directed Ajax Re to invest the proceeds from the bonds into permitted investments. Lehman Brothers Holdings Inc. (“Lehman Brothers”) also provided a guarantee of Lehman Financing’s obligations under the swap.

 

On September 15, 2008, Lehman Brothers filed for bankruptcy, which is a termination event under the swap. Ajax Re terminated the swap on September 16, 2008. As a result, without the benefit of the total return swap, the extent of the actual reinsurance cover in the event of a California earthquake provided by Ajax Re will be limited to the market value of the collateral held by Ajax Re. In light of current financial market conditions, we expect that the market value of this collateral is substantially less than the $100 million of original reinsurance cover. Nevertheless, we remain within our risk tolerances without the benefit of this reinsurance cover.

We also entered into various retrocessional agreements to protect our property reinsurance segment against a frequency of natural perils events in the U.S., particularly U.S. catastrophic wind events. Included within these purchases was $80 million of cover which expired on December 31, 2008, mostly on an index trigger rather than indemnity basis. In July 2008, we entered into additional retrocessional agreements totaling $25 million expiring in July 2009. In addition, with effect from July 2008, we entered into a 12-month reciprocal arrangement with a major reinsurer accepting Japanese earthquake exposure and ceding our exposures to windstorms in the Northeastern States of the U.S. The limit of this cover which expires in June 2009 is $62.5 million for each occurrence but only responds to an original market loss of $27.5 billion.

 

During the last quarter of 2008, we purchased $35 million of frequency cover protection and $28 million of severity cover protection against natural peril events in the U.S. for 2009.

 

In 2008, various losses occurred throughout the year which triggered our reinsurance program. In the third quarter of 2008, Hurricanes Gustav and Ike triggered recoverables of $61.3 million from our retrocessional agreements with the majority of $58.0 million recovered from our marine and energy program. In 2008, we had total recoverables of $86.5 million in the year.

 

As is the case with most reinsurance treaties, we remain liable to the extent that reinsurers do not meet their obligations under these agreements, and therefore, in line with our risk management objectives, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. Of our reinsurers who have been rated by A.M. Best, 98% of our uncollateralized reinsurance is provided by those who have been assigned a rating of “A−” (Excellent) (the fourth highest of fifteen rating levels) or better. In 2008, $122 million of reinsurance capacity was secured from a reinsurance market unrated by A.M. Best, of which $105 million was fully collateralized with cash and securities. Of the remaining $17 million, 75% is provided by reinsurers rated AA− by S&P or better.

 

We are also a member of Pool Reinsurance Company Limited, commonly known as Pool Re, which is authorized to write reinsurance relating to terrorist risks on commercial property insurance and consequential losses in England, Scotland or Wales. Pool Re has a retrocession agreement with HM Treasury, the U.K. Government economics and finance ministry, to which it pays a reinsurance premium and from which it will recover any claims that exceed its resources. Pool Re provides an indemnity in respect of Aspen U.K.’s ultimate net loss, in excess of our retention, relating to damage to commercial property and consequential losses in England, Scotland or Wales caused by an act of terrorism. Our retention is calculated by reference to our market share of this type of coverage and for 2008, our retention was £690,000 per event with an annual aggregate of £1,380,000. For 2009, our retention remains unchanged.

 

Business Distribution

 

With respect to our segments and lines of business, our business is produced principally through brokers and reinsurance intermediaries. Our commercial lines of business are mostly produced through the U.K. regional and London broker network. Our U.S. property and casualty insurance products are marketed through a select number of appointed wholesale brokers with the appropriate surplus lines licenses. The brokerage distribution channel provides us with access to an efficient, variable cost and global distribution system without the significant time and expense which would be incurred in creating wholly-owned distribution networks. The brokers and reinsurance intermediaries typically act in the interest of ceding clients or insurers; however, they are instrumental to our continued relationship with our clients.

The following tables show our gross written premiums by broker for each of our segments for the twelve months ended December 31, 2008, 2007 and 2006:

 

 

 

 

 

 

 

Claims Management

 

The key responsibilities of our claims management department are to:

 

 

We have a staff of experienced claims professionals who are assigned to specific product lines, and will expand, as needed, to service our clients and to properly adjust reported claims. 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. Our underwriters do not make the final decisions regarding the ultimate determination of reserves and settlement of claims; rather, this is a function separately determined by our claims team, except for ex gratia payments which are subject to approval by the relevant underwriter or members of senior management (depending on amount).

 

We utilize the services of third-party service providers for our U.K. insurance operations. These providers have authority to handle claims up to a specific monetary threshold. Claims above these thresholds must be referred to our internal claims adjusters for all decisions. A team of in-house claims professionals oversees those outsourcing agreements. We manage, review and audit those claims handled under our outsourcing agreements.

 

Our U.S. property and casualty claims, on policies written by Aspen Specialty or Aspen U.K., are managed by a staff of experienced claims professionals. We expect to be involved in every stage of the claims process, including the selection of counsel, the approval of budgets and staffing, review of motion

papers and discovery, and the decision on whether to settle or try a case. We also utilize the services of third-party service providers, similar to our U.K. insurance operations, with similar controls.

 

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

 

We take all reasonable steps to ensure that we have appropriate information regarding our claims exposures. However, given the uncertainty in establishing claims liabilities, it is likely that the final outcome will prove to be different from the original provision established. Prior to the selection by management of the reserve estimates to be included in our financial statements, our internal actuarial team employs a number of techniques to establish a range of estimates (the “actuarial range”).

 

Sources of information.  Claims information received typically includes the loss date, details of the claim, the recommended reserve and reports from the loss adjusters dealing with the claim. In respect of pro rata treaties we receive regular statements (bordereaux) which provide paid and outstanding claims information, often with large losses separately identified. Following widely reported loss events such as natural catastrophes and airplane crashes, we adopt a proactive approach to establish our likely exposure to claims by reviewing policy listings and contacting brokers and policyholders as appropriate.

 

Reported claims.  For reported claims, reserves are established on a case-by-case basis within the parameters of coverage provided in the insurance policy or reinsurance agreement. In estimating the cost of these claims, we consider circumstances related to the claims as reported, any information available from cedants and loss adjustors and information on the cost of settling claims with similar characteristics in previous periods. In addition, for significant events such as hurricanes, for example, the detailed analysis of our potential exposures includes information obtained directly from cedants which has yet to be processed through market systems, enabling us to reduce the time lag between a significant event occurring and establishing case reserves. Reinsurance intermediaries are used to assist in obtaining and validating information from cedants; however, we establish all reserves. In addition, we may engage loss adjusters and perform on-site cedant audits to validate the information provided. Disputes do occur with cedants, but the number and frequency are generally low. In the event of a dispute, intermediaries are used to try to resolve the dispute. If a resolution cannot be reached, then the contracts typically provide for binding arbitration.

 

IBNR claims.  We establish reserves for incurred but not reported (“IBNR”) claims using established actuarial methods which generally rely to a greater or lesser extent on historical information but also consider such variables as changes in policy terms and coverage, changes in legislative conditions and judicial interpretation of insurance policies and inflation. We take into account the quality of the historical information available and where appropriate historical trends are used to validate information received from cedants.

 

A higher degree of uncertainty is associated with setting reserves for reinsurance business owing to the longer reporting pattern and time to final settlement. Where IBNR is based on an analysis of past loss experience, then the principal assumption is that past patterns of development are a reasonable proxy for current business after allowance for any changes in underlying mix of business. The process of extrapolation is by necessity one involving subjective judgment because the actuary has to take into account the impact of the changing business mix as well as changes in legislative conditions, changes in judicial interpretation of legal liability policy coverages and inflation. These factors are incorporated in the recommended reserve range from which management selects its best point estimate.

 

For lines of business where early claims experience may not provide a sound statistical basis to estimate the loss reserves, our approach is to establish an initial expected loss and loss expense ratio. This is based on one or more of (a) an analysis of our own claims experience to date, (b) market

benchmark data, (c) a contract-by-contract analysis and (d) for international casualty reinsurance, an analysis of a portfolio of similar business written by Syndicate 2020, adjusted by an index reflecting how rates, terms and conditions have changed. This initial expected loss and loss expense ratio is then modified in light of the actual experience to date measured against the expected experience. Loss reserves for known catastrophic events are based upon a detailed analysis of our reported losses and potential exposures conducted in conjunction with our underwriters.

 

Selection of reported gross reserves.  In arriving at our selected reserves for each line of business, we take into account all of the factors set out above, and in particular the quality of the historical information we have on which to establish our reserves.

 

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

 

The following tables show an analysis of consolidated loss and loss expense reserve development net and gross of reinsurance recoverables as at December 31, 2008, 2007, 2006, 2005, 2004, 2003 and 2002. No adjustment has been made for foreign exchange movements.

 

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

 

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

 

 

All our reserves relate to reinsurance or insurance policies incepting on or after January 1, 2002, except for the following amounts assumed as a result of acquisitions:

 

 

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 our Board of Directors establishes investment guidelines and supervises our investment activity. The Investment Committee regularly monitors our overall investment results and reviews compliance with 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 invested assets and provide sufficient liquidity for the prompt payment of claims. Our investments consist of a diversified portfolio of highly-rated, liquid, fixed income securities and funds of hedge funds. As at December 31, 2008, our allocation to funds of hedge funds was 5.0% of our portfolio.

 

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. In 2008,

we did not make a strategic change in the fixed income portfolio duration which was 3.1 years as of December 31, 2008. Despite record low Treasury yields, investing premium and interest income at wider spreads in high quality fixed income securities enabled us to maintain a relatively steady book yield in 2008. As of December 31, 2008, the fixed income portfolio book yield was 4.6% compared to 5.1% as of December 31, 2007. We continuously monitor interest rate market developments with a view to managing portfolio duration accordingly.

 

Alternative Investments.  As of December 31, 2008, our exposure to alternative investments was 5.0% of our aggregate portfolio and consisted entirely of our investment in funds of hedge funds.

 

In 2008, we kept under review our allocation within the investment portfolio to alternative asset classes, under a constraint of a maximum appetite of 15% of the total portfolio. As a result, we concluded that we should reduce our exposure to funds of hedge funds from 9.5% to 5.0% of our aggregate portfolio. In the third quarter of 2008, we issued a redemption notice effective December 31, 2008 for approximately 40% of our investments in funds of hedge funds. As a result, as at year-end, we redeemed $177.2 million of our investments in funds of hedge funds, reducing our total exposure to these investments to 5.0% of our aggregate investment portfolio. In February 2009, we gave notice to redeem all of our remaining hedge fund investments.

 

We utilize 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 and a minimum “AA−” portfolio credit rating for the portion of the assets they manage.

 

The following presents the cost, gross unrealized gains and losses, and estimated fair value of investments in fixed maturities and other investments as at December 31, 2008 and 2007: