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, 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):

 

(Do not check if a 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 o     No þ

 

The aggregate market value of the ordinary shares held by non-affiliates of the registrant, as of June 30, 2009, was approximately $1.8 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, 2009.

 

As of February 1, 2010, 78,503,333 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”), Acorn Limited (“Acorn”) 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.

 

 

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, 2009, we wrote $2,067.1 million in gross premiums and at December 31, 2009 we had total capital employed, including long-term debt, of $3,555.0 million.

 

Our corporate structure as at February 15, 2010 was as follows:

 

We historically have managed our business in four segments: property reinsurance, casualty reinsurance, international insurance and U.S. insurance. On January 14, 2010, we announced a new organizational structure where we intend to manage our insurance and reinsurance businesses as two underwriting segments, Aspen Insurance and Aspen Reinsurance, to enhance and better serve our global customer base. Under the new organizational structure, our insurance segment will comprise primarily of the existing international insurance and U.S. insurance segments, with Rupert Villers, acting as CEO of Aspen Insurance. William Murray will continue to lead our U.S. Insurance business forming part of our newly established insurance segment. Our reinsurance segment will comprise three divisions, property reinsurance, casualty reinsurance and specialty reinsurance (the latter previously part of international insurance). Brian Boornazian has been appointed CEO of Aspen Reinsurance and James Few has been appointed as President of Aspen Reinsurance.

 

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 Re America is in the process of establishing an office in Florida to access Latin American reinsurance business. 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 is 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. Global excess casualty insurance is written by the Dublin branch of Aspen U.K. In 2009, we also commenced 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 2009, we resumed writing this business through Aspen Specialty. In 2008 this business was mainly written by Aspen U.K. We are also seeking regulatory approval to write U.S. insurance business on an admitted basis which will complement our existing U.S. insurance business written on an excess and surplus lines basis.

 

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 primarily 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 shareholders while at the same time achieving a comparatively lower earnings volatility relative to similar companies in our peer group. 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, relative to our business balance in earlier years, which in turn implies that in years such as 2007 and 2009 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 (“ROE”) and the percentage change in book value per share, adjusted for dividends to shareholders. We calculate ROE 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 ROE which we target for any one year will depend on our assessment of the state

of the insurance market, anticipated losses and the investment environment to which we expect to be exposed. Book value per share (“BVPS”) is calculated by dividing total shareholders’ equity adjusted for intangible assets and preference shares by the number of 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 and by the selective addition of new lines. We intend to accomplish this diversification by building on our established underwriting expertise and analytical skills. 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 global excess casualty insurance business and an office in Singapore to write property reinsurance and received authorization to establish a branch in Australia, through which a number of lines of business are written.

 

In 2007, we established new underwriting units in professional liability and global excess casualty insurance. In 2008, we established new underwriting units to write financial institutions insurance, financial and political risk insurance and management and technology liability insurance, as well as credit and surety reinsurance.

 

Integrated 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 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 Economic Capital 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 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 our Economic Capital model to determine the risk-adjusted capital amounts that we notionally allocate to each of our lines of business and to set target 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, to maximize its contribution to ROE 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 February 2009, we gave notice to redeem all our remaining hedge fund investments. By December 31, 2009, we had fully redeemed our position in funds of hedge funds subject to the receipt of final payment after year-end audit is completed by one of the funds of hedge funds.

 

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 these objectives while managing costs by investing in information technology and by continuous process improvements

 

Business Segments

 

We were organized into four business segments: property reinsurance, casualty reinsurance, international insurance, and U.S. insurance. We have considered similarities in economic characteristics, products, customers, distribution, and the regulatory environment of our Company’s operating segments and quantitative thresholds to determine our reportable segments. As discussed above, as a result of our organizational changes, in 2010 we intend to manage our underwriting business in two operating segments: Insurance and Reinsurance.

 

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 generally allocated to segments based on each segment’s proportional share of net 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, 2009, 2008 and 2007:

 

 

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). We also include within this segment credit and surety reinsurance contracts written by the Zurich branch of Aspen U.K. This portfolio is written primarily on a treaty basis. Treaty reinsurance contracts provide for automatic coverage of a type or category of risk underwritten by our ceding clients. 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. We also write some structured risks on a treaty basis out of Aspen Bermuda. Our property reinsurance segment 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 reinsured risks, as follows for the twelve months ended December 31, 2009, 2008 and 2007:

 

 

 

 

Our gross written premiums by our principal lines of business within our property reinsurance segment for the twelve months ended December 31, 2009, 2008 and 2007 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 although this may be subject to event limits which restrict the amount we are required to pay if the loss events affect more than one reinsured policy. 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. This line 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.

 

Credit and Surety Reinsurance.  We entered the credit and surety reinsurance market for business incepting on and after January 1, 2009 with a new team hired to work in our Zurich office. The line of business consists of trade credit reinsurance, international surety reinsurance (mainly European, Japanese and Latin American risks and excluding the U.S.) and a political risks reinsurance portfolio.

 

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 2009, these contracts were accounted for partly in this segment and partly in casualty reinsurance and international insurance. Within the property reinsurance segment, these contracts generated gross written premiums in 2009 of $33.1 million which were reported in the treaty catastrophe, risk excess and pro rata business lines.

 

A very high percentage of the property reinsurance contracts that we write exclude coverage for losses arising from the peril of terrorism. 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”) (currently set to expire on December 31, 2014). 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 in this segment, both on a pro rata and risk excess basis, specifically covering the peril of terrorism. These contracts typically exclude coverage protecting against nuclear, biological or chemical attack.

 

In our property reinsurance segment, Factory Mutual and its affiliates accounted for approximately 11.9%, and Liberty and its affiliates accounted for approximately 6.3% of gross written premiums in this segment for the twelve months ended December 31, 2009. 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 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 casualty facultative reinsurance, both U.S. and international. 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 reinsured risks, as follows for the twelve months ended December 31, 2009, 2008 and 2007:

 

 

 

 

Our gross written premiums by our principal lines of business within our casualty reinsurance segment for the twelve months ended December 31, 2009, 2008 and 2007 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 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 primarily protect U.S. cedants 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, general liability and professional liability for lawyers, accountants, architects and engineers. Our U.S. team reinsures exposures mainly with respect to general liability, automobile liability, non-medical professional liability, workers’ compensation and excess liability including umbrella.

 

International Treaty.  This line of business comprises long-tail treaty contracts for non-U.S. domiciled cedants, some of which may have incidental U.S. exposure, including exposure to U.S. financial institutions. The majority 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 line 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.

 

Casualty Facultative.  Our U.S. casualty facultative reinsurance line of business consists of umbrella, automobile liability, general liability and workers’ compensation reinsurance, written on an excess of loss basis out of our Rocky Hill, Connecticut office. In 2009, we started writing international casualty facultative business which consists of professional liability medical malpractice and ancillary covers, as well as umbrella, automobile liability, general liability and employers’ liability. This business is written predominantly in support of European-based cedants, from our London 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 2009 of $56.2 million. The two largest of these contracts in 2009 were both workers’ compensation quota share contract with estimated gross written premiums of $36.1 million (which accounted for 8.8% of gross written premiums in 2009 for the casualty reinsurance segment).

 

In our casualty reinsurance segment, ACE Group and its affiliates accounted for approximately 5.5% of gross written premiums in this segment for the twelve months ended December 31, 2009. No other customer accounted for more than 5% of gross written premiums in this segment for the year ended December 31, 2009.

 

International Insurance

 

Our international insurance segment comprises marine, hull, marine, energy and construction liability, energy property, specie, aviation, global excess casualty (including non-marine and transportation liability), 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. 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 can be analyzed by geographic region, reflecting the location of the insured risk, as follows for the twelve months ended December 31, 2009, 2008 and 2007:

 

 

 

 

Our gross written premiums by our principal lines of business within our international insurance segment for the twelve months ended December 31, 2009, 2008 and 2007 are as follows:

 

 

Marine Hull.  The marine hull team writes insurance covering the risks of physical damage for ships (including war and associated perils) and related marine assets.

 

Energy.  In this line of business, we provide insurance cover against physical damage losses and Operators Extra Expenses (“OEE”) for companies operating in the oil and gas exploration and production sector. OEE cover provides for expenses incurred as a result of a blow-out or other well control incident.

 

Marine, Energy and Construction Liability.  This line of business 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 cover for the liabilities of companies in the oil and gas sector, both onshore and offshore and in the power generation sector. Construction liability insurance offered by this team covers U.S. homebuilders’ risks and single projects. Construction liability policies may have contract periods longer than one year.

 

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

 

Professional Liability.  Aspen U.K.’s professional liability line of business was established in September 2007. The team writes an international portfolio of professional liability risks. We target predominantly non-U.S. domiciled risks, although some risks 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. with some Australian and 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.  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. We cover broad-based risks including general liability, commercial and residential construction liability, providing 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. This line now includes the non-marine and transportation liability team which joined Aspen U.K. in the second half of 2007 and which focuses on industry groups such as life science, railroads and trucking and includes some coverage offered on an excess of loss basis.

 

Financial Institutions.  We started writing this business in January 2008 and repositioned the account in 2009 following the financial crisis in 2008. From the second quarter of 2009, we operated under the guidelines of a new business plan. Segmenting the book by product line, slightly over half of 2009’s business was professional liability, the greater part of the balance was crime insurance and the remainder directors’ and officers’ cover. From a geographical perspective, the largest sector of the account comprised risks headquartered in the U.K., the next largest contributors were from Australia and the U.S. and, of the remainder, the largest amounts of business were from institutions in Canada, Western Europe and Scandinavia. We wrote both primary and excess of loss coverage for all types of financial institutions including commercial and investment banks, asset managers, insurance companies, stockbrokers and insureds with hybrid business models.

 

Management and Technology Liability.  We commenced writing this line of business in September 2008. It comprises directors’ and officers’ insurance, technology-related policies in the areas of network privacy, misuse of data and cyber liability and warranty and indemnity insurance in connection with, or to facilitate, corporate transactions. Coverage is written on both a primary and excess basis. The directors’ and officers’ account is focused on companies domiciled outside the U.S. but includes companies with stock exchange listings in the U.S. The technology business largely comprises U.S. companies; and the warranty and indemnity account is written on a worldwide basis.

 

Financial and Political Risks.  The financial and political risks team writes business covering the credit/default risk on a variety of project and trade transactions, as well as political risks, terrorism (including multi-year war on land cover) and kidnap and ransom (“K&R”). Credit insurance focuses on secured and trade-related credit covering a proportion of lenders’ or corporates’ exposure but also includes unsecured credit risk. 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 or facultative reinsurance and can be primary layers, excess of loss or proportional reinsurance. 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 financial and political risks worldwide but with concentrations in a number of key countries, such as China, Egypt, Kazakhstan, Russia, South Korea, Switzerland, U.K. and Turkey.

 

U.K. Commercial Property.  The U.K. commercial property insurance team 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. institutional 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 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.

 

Specie.  This business line focuses on the insurance of high value property items on an all risks basis. The team commenced underwriting in March 2009. Its portfolio embraces fine art, general and bank related specie, jewelers’ block and armored car. The business is accessed through the London market and is written on a direct basis and through binding authorities. Sometimes it is written as reinsurance.

 

Specialty Reinsurance.  Our specialty reinsurance line of business is composed principally of reinsurance treaties 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.

 

For the twelve months ended December 31, 2009, our mix of specialty reinsurance business as measured by gross written premiums was approximately 61.4% aviation and marine reinsurance (2008 — 52.2%; 2007 — 63.9%) and 38.6% (2008 — 47.8%; 2007 — 36.1%) 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 $3.0 million of gross premiums in 2009 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. We also write property insurance that underwrites risk to a select group of U.S. program managers. We refer to this as our risk solutions business. The U.S. 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, 2009, 2008 and 2007:

 

 

 

 

Our gross written premiums by our principal lines of business within our U.S. insurance segment for the twelve months ended December 31, 2009, 2008 and 2007 are as follows:

 

 

Our property account, following repositioning of the portfolio in 2008, saw substantial growth and profitability in 2009. The property account consists mainly of mercantile, manufacturing, municipal and commercial real estate business. The casualty account primarily consists of lines written within the general liability, umbrella liability and certain Errors and Omissions (“E&O”) insurance segments. Coverage on our general liability line is offered on those risks that are primarily contractors (general contractors and artisans) and other general liability business. Results on our contractor business for 2009 saw significant adverse development from prior accident years. Consequently, we are changing our underwriting approach to our contractor account, especially New York contractors. At year end 2009, we hired a new head for our U.S. casualty insurance operations. In 2010, we will commence writing professional lines business covering mainly lawyers, accountants, architects and engineers, through our hire of a professional lines underwriter who will lead a U.S.-based professional lines team.

 

In our U.S. insurance segment, no single customer accounted for more than 1% of gross written premiums within this segment.

 

Underwriting 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.

 

Underwriting.  In 2009, our underwriting activities were managed in four product areas: property reinsurance, casualty reinsurance, international insurance and U.S. insurance. The reinsurance product areas reported into Brian Boornazian, CEO of Aspen Reinsurance, who has a strategic and operational responsibility for the underwriting of these lines of business. The property reinsurance lines reported into James Few, President of Aspen Reinsurance and the casualty reinsurance lines reported into our Head of Casualty Reinsurance, and Executive Vice President of Aspen Reinsurance, Emil Issavi. The international insurance lines reported into our then Head of International Insurance and Rupert Villers (then Head of Financial and Professional Lines Insurance, currently CEO of Aspen Insurance), and the U.S. insurance lines reported into William Murray, our President of U.S. Insurance. Our Chief Executive Officer is supported by our Director of Underwriting, Kate Vacher. Our Director of Underwriting assists in the management of the underwriting process by developing our underwriting strategy, monitoring our underwriting principles and acting as an independent reviewer of underwriting activity across our businesses. As mentioned elsewhere in this report, starting in 2010, we intend to manage our business along two underwriting segments: Aspen Insurance and Aspen Reinsurance.

We underwrite according to the following principles:

 

 

Following our announcement of organizational changes in January 2010, where we intend to manage our business as two underwriting segments, insurance and reinsurance, we also intend to have two separate underwriting committees, one focusing on insurance and the other on reinsurance, while maintaining the group underwriting committee mentioned above.

 

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.

 

In respect of our insurance lines of business, we have reinsurance covers in place for many of our lines of business, the majority of which are on an excess of loss basis. In 2010, we anticipate renewing much of the reinsurance protecting our insurance business that we bought in 2009 which is comprised of specific excess of loss reinsurance on portfolios of property insurance, casualty insurance, financial and professional insurance, aviation insurance and marine, energy and liability insurance. These covers provide protection in various layers and excess of varying attachment points according to the scope of cover provided. We have elected to take co-reinsurance participations within some of these programs. We also have a limited number of proportional treaty arrangements on specific lines of business and we anticipate continuing with these in most instances. Natural perils catastrophe coverage was included within excess of loss programs purchased for two portfolios. For our onshore U.S. business, in 2009, we bought protection for $85 million excess of $25 million with an additional layer for earthquake losses only of $30 million excess of $110 million. For 2010, we bought $65 million excess of $35 million for all natural perils in respect of our onshore U.S. business. For our offshore exposures in 2009, predominantly for Gulf of Mexico hurricane losses, we bought catastrophe cover of $80 million excess of $20 million. We are currently evaluating whether to continue this cover for 2010.

 

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. However, in 2009, we did elect to purchase more cover than 2008 to provide additional protection given prevailing economic

instability. This is unlikely to continue in 2010. We entered into various retrocession agreements to protect our property reinsurance segment through 2009. Of the cover purchased on an indemnity basis, the vast majority ($100 million) provided protection against frequency and severity of natural perils events in the U.S. and Europe for wind and earthquake, with flood coverage provided in addition for European exposures. Also included within these purchases was $60 million on an index trigger rather than indemnity basis with the majority providing coverage against frequency of U.S. wind events and $40 million covering both wind and earthquake. In addition, with effect from April 2009, we entered into 12-month reciprocal arrangements with two major reinsurers accepting Japanese earthquake exposure and ceding our exposures to windstorms in parts of the U.S. The aggregate event limits of these agreements are in excess of $100 million with both reinsurances responding on an index trigger basis.

 

In 2009, losses triggering our reinsurance protections were negligible. We had total recoverables across all years of $101.1 million.

 

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, 100% 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 2009, $149 million of reinsurance capacity was secured from reinsurance markets unrated by A.M. Best, of which $125 million was fully collateralized with cash and securities. Of the remaining $24 million, 57% was provided by reinsurers rated A or better by S&P.

 

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 2009, our retention was £690,000 per event with an annual aggregate of £1,380,000. For 2010, our retention is £920,000 per event with an annual aggregate of £1,840,000.

 

Risk Management

 

Risk Governance.  The Board of Directors considers effective identification, assessment, monitoring and mitigation of the risks facing our business to be a key element of its responsibilities and those of the CEO and management. The Board’s responsibility for oversight of the group’s risk management framework is enabled by management reporting processes that are designed to provide visibility to the Board and its Committees about key risks. Senior management regularly attend the Board meetings and are available to address any questions or concerns raised by the Board on risk management matters. The Board and its Committees also receive presentations from senior management on risk management efforts. In summary, the Board through its Committees oversees key risks to the business through a well established and comprehensive approach, which is described in greater detail below.

 

Board Committees.  The Board manages the key risks to the organization primarily through its Risk, Audit and Investment Committees. Each of the Committees is chaired by a director of the Company who also reports to the Board on the committees’ discussions and matters arising. Every director also receives all of the papers for each of the Committees.

 

The membership of the Board Committees is set out under Item 10 “Directors, Executive Officers of the Registrant and Corporate Governance.”

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

 

 

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

 

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

 

Management Committees.  The group also has a number of executive management committees which have oversight of risk and control effectiveness.

 

Group Executive Committee:  This is the main executive committee responsible for making proposals to the Board relating to the strategy and conduct of the business of the group. To assist in these duties, it receives regular reports from the Group Chief Risk Officer on whether the group is operating within agreed risk limits.

 

Capital Allocation Group:  This committee is primarily responsible for determining and allocating capital for the different lines of business. It also considers appropriate levels of risk limits for underwriting and other exposures for recommendation to the Risk Committee.

 

Reserve Committee:  This committee is responsible for managing reserving risk and recommending to the Board the appropriate level of reserves to include in the group’s financial statements.

 

Underwriting Committee:  The purpose of the Underwriting Committee is to assist the Group Chief Executive Officer in his oversight duties in respect of underwriting risk and to advise insurance subsidiaries as to whether proposed risks comply with group policies.

 

Reinsurance Credit Committee:  This committee sets credit limits, reviews our credit analysts’ evaluation of insurance and reinsurance counterparties and approves acceptable financial strength ratings of our counterparties. Our risk management function monitors individual exposures in addition to credit and market risk accumulations compared to set tolerances.

 

Group Chief Risk Officer.  In addition to the above, following our announcement in January 2010 of our organizational changes, which included the appointment of Julian Cusack as Group Chief Risk Officer, we took the decision to appoint local chief risk officers for our operating platforms in the U.K., the U.S. and Bermuda. Our Group Chief Risk Officer is a member of the Board and a member of the Risk Committee. His role includes providing the Board and the Risk Committee with input directly on all risk matters.

 

Risk Strategy.  We operate an integrated risk management strategy designed to deliver shareholder value in a sustainable manner while providing a high level of policyholder protection. The use of the word ‘integrated’ emphasizes that risk management is not simply a support function but is a way of thinking about and managing the business which is central to the formulation of strategy and annual business planning. The execution of our integrated risk management strategy is based on:

 

 

 

In 2009, S&P reaffirmed our Enterprise Risk Management rating as “Strong” for the third year in succession. We believe that this rating is an attestation of the strength of our risk management processes.

 

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

 

Insurance risk:  The risk that claims occurring or reported in a period exceed the expected amounts (“underwriting risk”) or that reserves established in respect of prior periods are understated (“reserving risk”).

 

Credit risk:  The risk that a firm is exposed to if another party fails to perform its obligations. This principally comprises credit risks relating to premiums receivable and outward reinsurance. We include credit risks related to our investment portfolio under market risk.

 

Market risk:  The risk that arises from changes in the value of our investment portfolio from fluctuations in interest rates, bond yields, credit spreads and foreign currency exchange rates. This includes the risk of issuer default or ratings downgrades.

 

Operational risk:  The risk of loss resulting from inadequate or failed internal processes including the failure to comply with procedures and regulations.

 

Liquidity risk:  The risk that a firm fails to maintain sufficient liquid financial resources to meet its liabilities as they fall due, or can only secure them at excessive costs resulting in realized losses.

 

Key Risk Limits.  The Risk Committee of our Board of Directors reviews and approves the risk limits proposed by management. Only the relevant governing committees can make decisions to accept risks above agreed levels. Any risks accepted above agreed levels are reported to the Risk Committee.

 

We set out below our approach to establishing and monitoring risk limits for underwriting risk and market risk. Reserving risk is discussed elsewhere within “Management’s Discussion and Analysis — Critical Accounting Policies — Reserving Approach”.

 

Underwriting risk.  In addition to our risk limits for natural catastrophes described below, we also establish limits for our exposures to the risks of terrorism and to events other than natural catastrophes where claims may rise from multiple policies of insurance and reinsurance.

 

 

 

 

Natural catastrophe risk metrics are estimated using exposure based models driven by key assumptions relating, inter alia, to windstorm and earthquake frequencies and severities and the damageability of buildings in events of varying severity. These models are subject to unknown levels of model error and so our assurance that catastrophe events will be consistent with our risk limits cannot be absolute.

 

We seek to manage our exposure to the risk that premium levels are insufficient to meet expected loss costs by requiring all our pricing models to comply with our Group Pricing Standard which includes requirements as to data standards, technical pricing methods and independent quality control by our pricing actuaries. In recognizing that pricing is a core part of our underwriting approach, we manage pricing risk by continuously developing and enforcing our Group Pricing Standards within our Group Underwriting Control framework required for each portfolio. Our Group Pricing Standard sets out the minimum underwriting information and requires that all pricing decisions are made with the knowledge of a technical price benchmark which includes appropriate allowances for expected claims, internal expenses and external costs. We seek to monitor how the actual prices achieved compare to our technical price benchmarks over time for each portfolio and for segments therein. Finally we seek to improve the quality of our pricing decisions by complimenting our underwriting skills and expertise with robust actuarial analyses both pre- and post- underwriting and also by developing high quality pricing models and deploying them in an appropriately controlled environment.

 

Market risk.  We manage risk in our investment portfolio in a number of ways including concentration limits and single issuer limits, minimum average rating standards and stress tests.

 

In addition, we monitor Value-at-Risk (“VaR”) at the 95% confidence level against a limit of 7% using a model which estimates the sensitivity of a portfolio to a broad set of market risk factors model and is calibrated from historical market observations. In other words, 95% of the time, should the portfolio perform in accordance with the VaR model, the portfolio’s loss in any one-year period is expected to be less than or equal to the calculated VaR, stated as a percentage of the measured portfolio’s initial value.

 

We measure VaR for our portfolio on two different bases that place lower (short VaR) or higher (long VaR) weights on older price observations. As at December 31, 2009 our short VaR was 4.1% and our long VaR was 5.1%.

 

Like all such models, the VaR model we use suffers from limitations particularly in relation to extreme tail risk and in periods of extreme market volatility. Therefore, our policy for the management of investment risk does not provide for automatic action if VaR on either measure exceeds our risk limit and other considerations are taken into account when determining our asset allocation policy. However, if VaR does move above the risk limits management provides a report accordingly to the Risk and Investment Committees where any appropriate action will be determined.

 

Economic Capital Model.  Since inception, we have continually expanded our internal capabilities in terms of supporting and developing our ECM and the model now plays a central part in our risk management strategy.

 

The model has many and varied uses including helping us to:

 

 

The ECM aims to capture all material and quantifiable risk types faced within the business plan. We have identified the most material types of risks at various points within the risk distribution as:

 

 

 

The model has been constructed based around a number of key underlying principles. The model aligns directly to the business plan and planning assumptions for the current underwriting year are assumed as ‘best estimate’ for the model.

 

For the purpose of determining economic capital requirements, we measure risk capital using Tail Value at Risk (“TVAR”) at the 99th percentile. TVAR is the average of all losses in excess of the selected percentile of the frequency distribution of simulated profits and losses generated by the ECM.

 

Our estimate of economic capital as of January 2010, including estimates of unrealized investment gains and losses, was $1,482 million. Our actual shareholders’ equity at December 31, 2009 was $3,305.4 million. Therefore, based on our ECM and actual shareholders’ equity, we can imply a capital adequacy of 223% as of December 31, 2009. Subsequent to the year end, we entered into an accelerated share repurchase agreement that has reduced our shareholders’ equity by $200 million. After taking into account this transaction, our capital adequacy reduces to 210%. We maintain capital levels well above the level of our economic capital in order to maintain our financial strength ratings (which require higher levels of capital) and to allow for model error.

 

Limitations.  Although the ECM is used widely in the business to help evaluate the risk return trade offs of various actions, we are aware of the limitations from the use of this and other models. Therefore other considerations, including, where appropriate, stress and scenarios testing, are invariably taken into account when making business decisions.

 

In general we recognize that sound risk management systems reduce, but cannot eliminate, the possibility of human error, subjective judgment in decision-making, the deliberate overriding of controls or the occurrence of unforeseeable circumstances. As a result, our risk management strategy including our risk capital modelling can only provide a reasonable level of assurance rather than an absolute level. An investor must therefore carefully consider all the risks. These include the risk factors described elsewhere in this report under “Item 1A, Risk Factors”, and which could cause our actual results to differ materially from those in the forward-looking and other statements contained in this report and other documents that we file with the U.S. Securities and Exchange Commission (“SEC”).

 

Business Distribution

 

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, 2009, 2008 and 2007:

 

 

 

 

 

 

 

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. commercial property and liability 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 are 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.

 

As part of our organizational changes announced in January 2010, we have decided to appoint a separate head of claims for each of insurance and reinsurance.

 

Reserves

 

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

 

 

 

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

 

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

 

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

 

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

 

 

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

While our actuaries calculate the IELR, BF and Chain Ladder methods for each line of business and each accident year, they provide a range of ultimates within which management’s best estimate is most likely to fall. This range will usually reflect a blend of the various methodologies. In general terms, the IELR method is most appropriate for lines of business and/or accident years where the actual paid or reported loss experience is not yet mature enough to override our initial expectations of the ultimate loss ratios. Typical examples would be recent accident years for lines of business in the casualty reinsurance segment. The BF method is generally appropriate where there are few reported claims and a relatively less stable pattern of reported losses. Typical examples would be our treaty risk excess line of business in our property reinsurance segment and marine hull line of business in our international insurance segment. The Chain Ladder method is appropriate when there is a relatively stable pattern of loss emergence and a relatively large number of reported claims. Typical examples are the U.K. commercial property and U.K. commercial liability lines of business in the international insurance segment. There are no differences between our year end and our quarterly reserving procedures in the sense that our actuaries perform the basic projections and analyses described above for each line of business.

 

Actuarial projection methodologies involve significant subjective judgments reflecting many factors such as changes in legislative conditions, changes in judicial interpretation of legal liability policy coverages and inflation. Our actuaries collaborate with underwriting, claims, legal and finance in identifying factors which are incorporated in their range of ultimates in which management’s best estimate is most likely to fall. Management through its Reserve Committee then reviews the range of actuarial estimates, which to date it has not adjusted, as well as any other evidence before selecting its best estimate of reserves for each line of business and accident year. This provides the basis for the recommendation made by management to the Audit Committee and Board of Directors regarding the reserve amount to be recorded in the Company’s financial statements. The Reserve Committee is a management committee consisting of the Chief Risk Officer (Chair of the Reserve Committee), the Group Chief Actuary, the Chief Financial Officer and senior members of our underwriting and claims staff.

 

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

 

We take all reasonable steps to ensure that we utilize all appropriate information and actuarial techniques in establishing our IBNR reserves. However, given the uncertainty in establishing claims liabilities, it is likely that the final outcome will prove to be different from the original provision established at the balance sheet date. Changes to our previous estimates of prior period loss reserves impact the reported calendar year underwriting results by worsening our reported results if the prior year reserves prove to be deficient or improving our reported results if the prior year reserves prove to be redundant. A five percent change in our net loss reserves equates to $150.5 million and represents 4.6% of shareholders’ equity at December 31, 2009.

 

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

The following tables show an analysis of consolidated loss and loss expense reserve development net and gross of reinsurance recoverables as at December 31, 2009, 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