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Section 1: 10-K (10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________________

Form 10-K
 ____________________________________________________________
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 001-31909
396734268_gemimagea04.jpg
ASPEN INSURANCE HOLDINGS LIMITED
(Exact name of registrant as specified in its charter) 
Bermuda
 
Not Applicable
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
141 Front Street
Hamilton, Bermuda
 
HM 19
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code
(441) 295-8201
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Ordinary Shares, 0.15144558¢ par value
 
New York Stock Exchange, Inc.
5.95% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares
 
New York Stock Exchange, Inc.
5.625% Perpetual Non-Cumulative Preference Shares
New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ý   No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ¨   No ý  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
ý
 
Accelerated filer
¨
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨   No  ý
The aggregate market value of the ordinary shares held by non-affiliates of the registrant, as of June 30, 2018, was approximately $2.4 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, 2018.
As of February 11, 2019, there were 59,862,693 outstanding ordinary shares, with a par value of 0.15144558¢ per ordinary share.



ASPEN INSURANCE HOLDINGS LIMITED
FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
Aspen Holdings and Subsidiaries
Cautionary Statement Regarding Forward-Looking Statements
PART I
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
 
 
 
PART IV
 
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
Index to Consolidated Financial Statements and Reports
 
 
 


1


Aspen Holdings and Subsidiaries
Unless the context otherwise requires, references in this Annual Report on Form 10-K (this “report”) to the “Company,” the “Aspen Group,” “we,” “us” or “our” refer to Aspen Insurance Holdings Limited (“Aspen Holdings”) or Aspen Holdings and its subsidiaries, which consist of: Aspen Insurance UK Limited (“Aspen U.K.”), Aspen (UK) Holdings Limited (“Aspen U.K. Holdings”), Aspen (US) Holdings Limited (“Aspen U.S. Holdings”), Aspen Insurance UK Services Limited (“Aspen U.K. Services”), AIUK Trustees Limited (“AIUK Trustees”), Aspen Bermuda Limited (“Aspen Bermuda”), Aspen Underwriting Limited (“AUL”, corporate member of Lloyd’s Syndicate 4711, “Syndicate 4711”), Aspen European Holdings Limited (“Aspen European”), Aspen Managing Agency Limited (“AMAL”), Aspen Singapore Pte. Ltd. (“Aspen Singapore”), 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 Specialty Insurance Solutions LLC (“ASIS”), Acorn Limited (“Acorn”), Blue Waters Insurers, Corp. (“Blue Waters”), APJ Continuation Limited (“APJ”), APJ Asset Protection Jersey Limited (“APJ Jersey”), Aspen UK Syndicate Services Limited (“AUKSSL”, formerly APJ Services Limited), Aspen Risk Management Limited (“ARML”), Aspen American Insurance Company (“AAIC”), Aspen Recoveries Limited (“Aspen Recoveries”), Aspen Capital Management, Ltd (“ACM”), Silverton Re Ltd. (“Silverton”), Aspen Capital Advisors Inc. (“Aspen Advisors”), Peregrine Reinsurance Ltd (“Peregrine”) and Aspen Cat Fund Limited (“ACF”), Aspen Insurance Ireland Holdings Limited (“Aspen Ireland Holdings”), Aspen Insurance Ireland Designated Activity Company (“Aspen Ireland DAC”) and any other direct or indirect subsidiary collectively, as the context requires. Aspen U.K., Aspen Bermuda, Aspen Specialty, AAIC and AUL (as corporate member of Syndicate 4711 which is managed by AMAL) are our principal operating subsidiaries and each referred to herein as an “Operating Subsidiary” and collectively referred to as the “Operating Subsidiaries.” References in this report to “U.S. Dollars,” “dollars,” “$” or “¢” are to the lawful currency of the United States of America, references to “British Pounds,” “pounds,” “GBP” or “£” are to the lawful currency of the United Kingdom and references to “euros” or “€” are to the lawful currency adopted by certain member states of the European Union (the “E.U.”), unless the context otherwise requires.
Cautionary Statement Regarding Forward-Looking Statements
This report contains 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 are made pursuant to the “safe harbor” provisions of The Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts. In particular, statements that use the words such as “believe,” “anticipate,” “expect,” “assume,” “objective,” “target,” “plan,” “estimate,” “project,” “seek,” “will,” “may,” “aim,” “likely,” “continue,” “intend,” “guidance,” “outlook,” “trends,” “future,” “could,” “would,” “should,” “target,” “predict,” “potential,” “on track” or their negatives or variations and similar terminology and words of similar import generally involve forward-looking statements.
All forward-looking statements rely on a number of assumptions, estimates and data concerning future results and events that are subject to a number of risks, uncertainties, assumptions and other factors, many of which are outside our control that could cause actual results to differ materially from such forward-looking statements. Accordingly, there are important factors that could cause our actual results to differ materially from those anticipated in the forward-looking statements. We believe that these factors include, but are not limited to, those set forth in Item 1A under “Risk Factors” as those factors may be updated from time to time in our periodic filings with the United States Securities and Exchange Commission (the “SEC”) which are accessible on the SEC’s website at http://www.sec.gov.
The inclusion of forward-looking statements in this report should not be considered as a representation by us that current plans or expectations will be achieved. Forward-looking statements speak only as of the date on which they are made and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.






2


PART I
Item 1.
Business
General
Aspen Insurance Holdings Limited (“Aspen Holdings”) was incorporated on May 23, 2002 as a holding company headquartered in Bermuda. We underwrite specialty insurance and reinsurance on a global basis through our Operating Subsidiaries based in Bermuda, the United States and the United Kingdom: Aspen U.K. and AUL (corporate member of Syndicate 4711 at Lloyd’s of London and managed by AMAL) (United Kingdom), Aspen Bermuda (Bermuda) and Aspen Specialty and AAIC (United States). We also have branches in Australia, Canada, Ireland, Singapore, Switzerland and the United Arab Emirates. Please see Exhibit 21.1 of this report for a complete list of our subsidiaries and our corporate chart.
Our goal is to generate superior value and long-term return on capital for our shareholders while ensuring that we have sufficient capital and liquidity to meet our obligations. We believe our global underwriting talent and product capabilities, coupled with our focus on expense discipline and risk management, position us to achieve this goal.
Business Combination
On August 27, 2018, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Highlands Holdings, Ltd., a Bermuda exempted company (“Highlands”), and Highlands Merger Sub, Ltd., a Bermuda exempted company and wholly-owned subsidiary of Highlands (“Merger Sub”). Under the Merger Agreement, subject to the satisfaction or waiver of certain conditions set forth therein, and in the related statutory merger agreement, the Company will merge with and into Merger Sub in accordance with the Bermuda Companies Act (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Highlands. Highlands and Merger Sub are affiliates of certain investment funds managed by affiliates of Apollo Global Management, LLC, a leading global alternative investment manager. As previously announced, Christopher O’Kane will step down from his position as Group Chief Executive Officer and director of the Board of Directors of the Company (the “Board”) on or shortly after the completion of the Merger and, subject to and contingent upon the Merger, will be replaced by Mark Cloutier.
Pursuant to the Merger Agreement, at the effective time of the Merger, each ordinary share of the Company issued and outstanding immediately prior to such time (other than ordinary shares owned by Aspen as treasury shares, owned by any subsidiary of the Company or owned by Highlands, Merger Sub or any of their respective subsidiaries, which will be canceled as set forth in the Merger Agreement) will be converted into the right to receive $42.75 in cash, without interest and less any required withholding taxes. At the effective time of the Merger, each of the Company’s issued and outstanding 5.95% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares and 5.625% Perpetual Non-Cumulative Preference Shares (collectively, the “Preference Shares”) will remain issued and outstanding. The Merger Agreement restricts the Company from declaring or paying any dividends other than the quarterly dividends on Aspen’s ordinary shares that were previously declared and publicly announced prior to the date of the Merger Agreement and periodic cash dividends on the Preference Shares in accordance with the terms of the applicable certificate of designation.
All required regulatory approvals in connection with the Merger have been obtained and we anticipate that the Merger will be completed shortly. The Merger is subject to the satisfaction or waiver of a number of conditions, including, among others, the maintenance of certain financial strength ratings of the Operating Subsidiaries. The Merger Agreement also contains certain termination rights, including Highlands’ right to terminate if we suffered aggregate net losses exceeding $350 million resulting from certain catastrophic events occurring between July 1, 2018 and January 31, 2019. We do not believe that the net catastrophe losses arising from such catastrophic events during the specified period exceeded $350 million. For further details on the potential risks related to the Merger, refer to Part I, Item 1A, “Risk Factors — Risks Relating to the Merger.”
For further details on the Merger, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Aspen’s Year In Review” and Note 19 of our consolidated financial statements, “Commitments and Contingencies — Contingent Liabilities.”
Reportable Segments
We manage our insurance and reinsurance businesses as two distinct business segments, Aspen Insurance and Aspen Reinsurance (“Aspen Re”), to enhance and better serve our global customer base. Financial data relating to our two business segments is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 5 of our consolidated financial statements, “Segment Reporting.”
Aspen Reinsurance. Aspen Re consists of (i) property catastrophe reinsurance, (ii) other property reinsurance, (iii) casualty reinsurance, and (iv) specialty reinsurance. Aspen Capital Markets forms part of the property catastrophe reinsurance line of business as it focuses primarily on property catastrophe business through the use of alternative capital. Aspen Re is led by Emil Issavi, President and Chief Underwriting Officer of Aspen Re.
 


3


In Aspen Re, property reinsurance business is assumed by Aspen Bermuda, Aspen U.K. and AUL (which is the sole corporate member of Syndicate 4711 at Lloyd’s of London (“Lloyd’s”) managed by AMAL) and written by teams located in Bermuda, Singapore, Switzerland, the United Kingdom, the United States, the United Arab Emirates and Australia. The property reinsurance business written in the United States is written exclusively by Aspen Re America as reinsurance intermediary.
Casualty reinsurance is mainly assumed by Aspen U.K. and AUL and written by teams located in Singapore, Switzerland, the United Kingdom, the United States, the United Arab Emirates and Australia. A small number of casualty reinsurance contracts are written by Aspen Bermuda. The business written in the United States is produced by Aspen Re America.
Specialty reinsurance is assumed by Aspen Bermuda, Aspen U.K., AUL, and AAIC and written by teams located in Ireland, Singapore, Switzerland, the United Kingdom, the United States, the United Arab Emirates and Australia. A small number of specialty reinsurance contracts are written by Aspen Bermuda. The reinsurance business written in the United States is produced by Aspen Re America and is written by AAIC.
Aspen Re continued its participation in the alternative reinsurance market through Aspen Capital Markets. Aspen Capital Markets focuses on developing alternative reinsurance structures to leverage Aspen Re’s existing underwriting franchise, increase its operational flexibility in the capital markets and provide investors direct access to its underwriting expertise.
Aspen Insurance. Our insurance segment consists of (i) property and casualty insurance, (ii) marine, aviation and energy insurance, (iii) and financial and professional lines insurance. The insurance segment is led by David Cohen, President and Chief Underwriting Officer of Aspen Insurance.
In our insurance segment, property and casualty insurance is written primarily in the London Market by Aspen U.K. and in the United States by AAIC and Aspen Specialty (on an admitted and excess and surplus lines basis, respectively). Our marine, aviation and energy insurance and financial and professional lines insurance are written mainly by Aspen U.K. and AUL with most of the same lines also written in the United States by AAIC and Aspen Specialty. We also write property, casualty and financial and professional lines business through Aspen Bermuda and marine, energy, financial and professional lines business through Aspen Singapore.





4


Business Segments
We are organized into two business segments, namely Aspen Re and Aspen Insurance. We have determined our reportable segments, Aspen Re and Aspen Insurance, by taking into account the manner in which management makes operating decisions and assesses operating performance. Profit or loss for each of the business segments is measured by underwriting profit or loss. Underwriting profit is the excess of net earned premiums over the sum of losses and loss expenses, amortization of deferred policy acquisition costs and general and administrative expenses. Underwriting profit or loss provides a basis for management to evaluate the segment’s underwriting performance.
We provide additional disclosures for corporate and other (non-operating) income and expenses. Corporate and other income and expenses include net investment income, net realized and unrealized investment gains or losses, expenses associated with managing the Aspen Group, certain strategic and non-recurring costs, changes in fair value of derivatives or loan notes issued by variable interest entities, interest expenses, net realized and unrealized foreign exchange gains or losses, and income taxes, none of which are allocated to the business segments. Corporate expenses are not allocated to our business segments as they typically do not fluctuate with the levels of premiums written and are not directly related to our business segment operations. We do not allocate our assets by business segment as we evaluate underwriting results of each business segment separately from the results of our investment portfolio.
The table below sets forth the gross written premiums by business segment for the twelve months ended December 31, 2018, 2017 and 2016:
 
 
 
Twelve Months Ended December 31, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
Business Segment
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
 
 
($ in millions, except for percentages)
Reinsurance
 
$
1,495.7

 
43.4
%
 
$
1,548.5

 
46.1
%
 
$
1,413.2

 
44.9
%
Insurance
 
1,951.2

 
56.6

 
1,812.4

 
53.9

 
1,733.8

 
55.1

Total
 
$
3,446.9

 
100.0
%
 
$
3,360.9

 
100.0
%
 
$
3,147.0

 
100.0
%
 

For a review of our results by business segment, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5 of our consolidated financial statements, “Segment Reporting.”
Reinsurance
Aspen Re consists of property catastrophe reinsurance, other property reinsurance, casualty reinsurance, and specialty reinsurance. In addition, Aspen Capital Markets forms part of property catastrophe reinsurance as it focuses primarily on property catastrophe business through the use of alternative capital. Aspen Capital Markets leverages the Company’s underwriting and analytical expertise and earns management and performance fees from the Company and other third party investors primarily through the management of ILS funds.


5


The reinsurance business we write can be analyzed by geographic region, reflecting the location of the reinsured risks, as set forth in the table below for the twelve months ended December 31, 2018, 2017 and 2016:
 
 
 
Twelve Months Ended December 31, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
Reinsurance
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written
Premiums 
 
% of Total 
 
 
 
($ in millions, except for percentages)
Australia/Asia
 
$
141.3

 
9.4
%
 
$
139.7

 
9.0
%
 
$
117.3

 
8.3
%
Caribbean
 
3.7

 
0.2

 
10.1

 
0.7

 
10.0

 
0.7

Europe (excluding U.K.)
 
75.0

 
5.0

 
82.0

 
5.3

 
99.1

 
7.0

United Kingdom
 
9.2

 
0.6

 
14.2

 
0.9

 
14.1

 
1.0

United States & Canada (1)
 
741.2

 
49.7

 
774.2

 
50.0

 
698.4

 
49.4

Worldwide excluding United States (2)
 
33.9

 
2.3

 
35.7

 
2.3

 
36.5

 
2.6

Worldwide including United States (3)
 
387.8

 
25.9

 
392.9

 
25.4

 
357.6

 
25.3

Others
 
103.6

 
6.9

 
99.7

 
6.4

 
80.2

 
5.7

Total
 
$
1,495.7

 
100.0
%
 
$
1,548.5

 
100.0
%
 
$
1,413.2

 
100.0
%
_______________
(1)
“United States and Canada” consists of individual policies that insure risks specifically in the United States and/or Canada, but not elsewhere. It also includes gross written premium of $259.7 million related to CGB Diversified Services, Inc. (“CGB DS”) and $33.1 million related to AG Logic Holdings, LLC and its affiliates (“AgriLogic”) which we purchased in January 2016 and sold in December 2017 as part of our strategic partnership with CGB DS (2017$269.7 million, 2016$178.9 million AgriLogic). For more information on CGB DS, refer to “— Specialty Reinsurance” below.
(2)
“Worldwide excluding the United States” consists of individual policies that insure risks wherever they may be across the world but specifically excludes the United States.
(3)
“Worldwide including the United States” consists of individual policies that insure risks wherever they may be across the world but specifically includes the United States.
Aspen Re’s gross written premiums by principal line of business were as follows for the twelve months ended December 31, 2018, 2017 and 2016:
 
 
 
Twelve Months Ended December 31, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
Reinsurance
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written
Premiums 
 
% of Total 
 
 
 
($ in millions, except for percentages)
Property catastrophe reinsurance
 
$
262.8

 
17.6
%
 
$
279.3

 
18.0
%
 
$
273.0

 
19.3
%
Other property reinsurance
 
346.0

 
23.1

 
350.3

 
22.6

 
328.2

 
23.2

Casualty reinsurance
 
328.1

 
21.9

 
319.0

 
20.6

 
320.6

 
22.7

Specialty reinsurance (1)
 
558.8

 
37.4

 
599.9

 
38.8

 
491.4

 
34.8

Total
 
$
1,495.7

 
100.0
%
 
$
1,548.5

 
100.0
%
 
$
1,413.2

 
100.0
%
 `1
_______________
(1)
Includes gross written premium of $259.7 million related to CGB DS and $33.1 million related to AgriLogic (2017$269.7 million, 2016$178.9 million related to AgriLogic).
Property Catastrophe Reinsurance: Property catastrophe reinsurance is generally written on a treaty excess of loss basis where we provide protection to an insurer for an agreed portion of the total losses from a single event in excess of a specified loss amount. In the event of a loss, most contracts provide for coverage of a second occurrence following the payment of a premium to reinstate the coverage under the contract, which is referred to as a reinstatement premium. The coverage provided under excess of loss reinsurance contracts may be on a worldwide basis or limited in scope to selected regions or geographical areas.
Aspen Capital Markets provides quota share support for Aspen Re’s global property catastrophe excess of loss reinsurance business. In 2018, quota share support for Aspen Re was provided by separate cells of Peregrine. For more information on Peregrine, refer to Note 7 of our consolidated financial statements, “Variable Interest Entities.”


6


Other Property Reinsurance: Other property reinsurance includes property risks written on excess of loss and proportional treaties, facultative or single risk reinsurance. Risk excess of loss reinsurance provides coverage to a reinsured where it experiences a loss in excess of its retention level on a single “risk” basis. A “risk” in this context might mean the insurance coverage on one building or a group of buildings for fire or explosion or the insurance coverage under a single policy which the reinsured treats as a single risk. This line of business is generally less exposed to accumulations of exposures and losses but can still be impacted by catastrophes, such as earthquakes and hurricanes. Proportional treaty reinsurance provides proportional coverage to the reinsured, meaning that, subject to event limits where applicable and ceding commissions, we pay the same share of the covered original losses as we receive in premiums charged for the covered risks. Proportional contracts typically involve close client relationships which often include regular audits of the cedants’ data.
Casualty Reinsurance: Casualty reinsurance is written on an excess of loss, proportional and facultative basis and consists of U.S. treaty, international treaty and casualty facultative reinsurance. Our U.S. treaty and facultative business comprises exposures to workers’ compensation (including catastrophe), medical malpractice, general liability, auto liability, professional liability and excess liability including umbrella liability. Our international treaty business reinsures exposures mainly with respect to general liability, auto liability, professional liability, workers’ compensation and excess liability.
Specialty Reinsurance: Specialty reinsurance is written on an excess of loss and proportional basis and consists of credit and surety reinsurance, agriculture reinsurance, mortgage reinsurance and insurance, marine, aviation, terrorism, engineering, cyber and other specialty lines. Our credit and surety reinsurance business consists of trade credit, surety (mainly European, Japanese and Latin American risks) and mortgage reinsurance and insurance and political risks. Our specialty agricultural reinsurance business covers crop and multi-peril business. Other specialty lines include reinsurance treaties and some insurance policies covering policyholders’ interests in marine, energy, aviation liability, space, contingency, terrorism, engineering, nuclear and personal accident. In addition, specialty reinsurance included admitted and direct U.S. crop insurance. U.S. crop insurance business previously written via AgriLogic is written on a reinsurance basis through our strategic partnership with CGB DS via Crop Re Services LLC (“Crop Re”), a Delaware limited liability company responsible for directing the placement of reinsurance on behalf of CGB DS and CGB Insurance Company (“CGBIC”), an Indiana insurance company affiliate of CGB DS and an RMA licensed crop insurer. For more information on Crop Re, see Note 6 of our consolidated financial statements, “Investments.” We have also increased our capacity through other collateralized reinsurance arrangements via Aspen Capital Markets.
A high percentage of the property catastrophe reinsurance contracts we write exclude or limit coverage for losses arising from the peril of terrorism. Within the U.S., our other property reinsurance contracts generally include limited coverage for acts that are certified as “acts of terrorism” by the U.S. Treasury Department under the Terrorism Risk Insurance Act (“TRIA”), the Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”), the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”), which expired on December 31, 2014, and now the Terrorism Risk Insurance Program Reauthorization Act of 2015 (the “2015 TRIA Reauthorization”). We have written a limited number of property reinsurance contracts, both on a pro rata and risk excess basis, specifically covering the peril of terrorism. These contracts typically exclude coverage protecting against nuclear, biological, chemical or radiological attack, though we have written a small number of contracts that do not exclude such attacks, the coverage of which may be applicable to non-terrorism events.


7


Insurance
Our insurance segment consists of property and casualty insurance, marine, aviation and energy insurance and financial and professional lines insurance. The insurance business we write can be analyzed by geographic region, reflecting the location of the insured risk, as set forth in the table below for the twelve months ended December 31, 2018, 2017 and 2016:
 
 
 
Twelve Months Ended December 31, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
Insurance
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written
Premiums 
 
% of Total 
 
 
 
($ in millions, except for percentages)
Australia/Asia
 
$
34.6

 
1.8
%
 
$
27.6

 
1.5
%
 
$
23.2

 
1.3
%
Caribbean
 
4.0

 
0.2

 
7.5

 
0.4

 
4.3

 
0.2

Europe (excluding U.K.)
 
17.6

 
0.9

 
12.5

 
0.7

 
10.6

 
0.6

United Kingdom
 
280.9

 
14.4

 
244.1

 
13.5

 
217.3

 
12.5

United States & Canada (1)
 
1,134.7

 
58.1

 
955.1

 
52.7

 
898.6

 
51.8

Worldwide excluding United States (2)
 
36.2

 
1.9

 
52.4

 
2.9

 
54.2

 
3.2

Worldwide including United States (3)
 
388.0

 
19.9

 
475.7

 
26.2

 
479.6

 
27.7

Others
 
55.2

 
2.8

 
37.5

 
2.1

 
46.0

 
2.7

Total
 
$
1,951.2

 
100.0
%
 
$
1,812.4

 
100.0
%
 
$
1,733.8

 
100.0
%
_______________ 
(1)
“United States and Canada” consists of individual policies that insure risks specifically in the United States and/or Canada, but not elsewhere.
(2)
“Worldwide excluding the United States” consists of individual policies that insure risks wherever they may be across the world but specifically excludes the United States.
(3)
“Worldwide including the United States” consists of individual policies that insure risks wherever they may be across the world but specifically includes the United States.
 
Our gross written premiums by our principal line of business within our insurance segment were as follows for the twelve months ended December 31, 2018, 2017 and 2016:
 
 
 
Twelve Months Ended December 31, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
Insurance
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written
Premiums 
 
% of Total 
 
 
 
($ in millions, except for percentages)
Property and casualty insurance
 
$
903.9

 
46.3
%
 
$
856.9

 
47.2
%
 
$
858.2

 
49.5
%
Marine, aviation and energy insurance
 
368.4

 
18.9

 
385.3

 
21.3

 
396.3

 
22.9

Financial and professional lines insurance
 
678.9

 
34.8

 
570.2

 
31.5

 
479.3

 
27.6

Total
 
$
1,951.2

 
100.0
%
 
$
1,812.4

 
100.0
%
 
$
1,733.8

 
100.0
%
 Property and Casualty Insurance: The property and casualty insurance line consists of U.S. and U.K. commercial property, commercial liability, U.S. primary casualty, excess casualty, environmental liability and railroad liability, written on a primary, excess, quota share, program and facultative basis.
U.S. and U.K. Commercial Property: Property insurance provides physical damage and business interruption coverage for losses arising from weather, fire, theft and other causes. The U.S. commercial property team covers mercantile, manufacturing, municipal and commercial real estate business. The U.K. commercial team’s client base is predominantly U.K. institutional property owners, small and middle market corporates and public sector clients.
Commercial Liability: Commercial liability is primarily written in the United Kingdom and provides employers’ liability coverage, products and public liability coverage for insureds domiciled in the United Kingdom and Ireland. The U.K. regional team also covers directors’ and officers’ (“D&O”) and professional indemnity, predominantly to small and medium corporates. On August 2, 2018, we announced our decision to cease underwriting international professional indemnity on the Lloyd’s platform.


8


U.S. Primary Casualty: The U.S. primary casualty account consists primarily of lines written within the primary insurance sectors. We are focused on delivering expertise to brokers and customers in hospitality, real estate, construction and products liability.
Excess Casualty: The excess casualty line comprises medium and large, sophisticated and risk-managed insureds worldwide and covers broad-based risks at lead/high excess attachment points, including general liability, commercial and residential construction liability, life science, railroads, trucking, product and public liability and associated types of cover found in general liability policies in the global insurance market, written from the United Kingdom, the United States and Bermuda.
Environmental Liability: The environmental account primarily provides contractors’ pollution liability and pollution legal liability across industry segments that have environmental regulatory drivers and contractual requirements for coverage, including real estate and public entities, contractors and engineers, energy contractors and environmental contractors and consultants. The business is written in both the primary and excess insurance markets in the United States, Canada and the United Kingdom.
Railroad Liability: Our railroad liability business was established in 2016 and consists of primary and excess liability business for freight, commuter and excursion railroads. It also provides general liability coverage to the railroad support industry (contractors, repair shops and products manufacturers) as well as contingent liability for railcar fleet owners/managers and railroad protective liability in the United States.
On a significant portion of our property and casualty insurance contracts we are obligated to offer terrorism coverage under TRIPRA, and now the 2015 TRIA Reauthorization. Wherever possible, we exclude coverage protection against nuclear, biological, chemical or radiological (“NBCR”) attacks. However, certain U.S. states (notably New York and Florida) prohibit admitted market companies, such as AAIC, from fully excluding such perils, resulting in some level of exposures to NBCR as well as fire following such events. In addition, we would expect to benefit from the protection of 2015 TRIA Reauthorization and the over-arching $100 billion industry loss cap (subject to the relevant deductible and co-retention).
Marine, Aviation and Energy Insurance: Our marine, aviation and energy insurance line consists of marine and energy liability, onshore energy physical damage, offshore energy physical damage, marine hull, specie and inland and ocean marine, written on a primary, excess, quota share, program and facultative basis.
Marine and Energy Liability: The marine and energy liability business based in the U.K. includes marine liability cover mainly related to the liabilities of ship-owners and port operators, including reinsurance of Protection and Indemnity Clubs (“P&I Clubs”). It also provides liability cover globally (including the U.S.) for companies in the oil and gas sector, both onshore and offshore and in the power generation sector. Our liability for U.S. commercial construction is now being written under our global excess casualty line and we are no longer writing new construction liability in this class.
Onshore Energy Physical Damage: Our marine, energy and construction property unit underwrites a variety of worldwide onshore energy and construction sector classes of business with a focus on property covers.
Offshore Energy Physical Damage: Offshore energy physical damage provides insurance cover against physical damage losses in addition to operators’ extra expenses for companies operating in the oil and gas exploration and production sector.
Marine Hull: The marine hull team insures physical damage to ships (including war and associated perils) and related marine assets. Effective August 2018, we ceased underwriting marine hull on the Lloyd’s platform although we continue to write hull-related risks in our U.S. ocean marine business.
Specie: The specie business line focuses on the insurance of high value property items on an all risks basis, including fine art, general and bank related specie, jewelers’ block and armored car.
Inland and Ocean Marine: The inland and ocean marine team writes business principally covering builders’ construction risk, contractors’ equipment, and global transportation exposures such as marine cargo and hull, inland transit, warehousing and war, in addition to exhibition, fine arts and museums insurance. The book also consists of our Managing General Agent, Blue Waters Insurers, Corp., which consists of inland, ocean marine and cargo business in Puerto Rico.
Aviation: In August 2018, we decided to no longer underwrite aviation business. Prior to August 2018, the aviation team wrote physical damage insurance on hulls and spares (including war and associated perils), aviation hull deductible cover and comprehensive legal liability for airlines, smaller operators of airline equipment, airports and associated business and non-critical component part manufacturers.
Financial and Professional Lines Insurance: Our financial and professional lines consists of financial and corporate risks, professional liability, management liability, credit and political risks, crisis management, accident and health, surety risks, and technology liability (cyber risks), written on a primary, excess, quota share, program and facultative basis.


9


Financial and Corporate Risks: Our financial institutions business is written on both a primary and excess of loss basis and consists of professional liability, crime insurance and D&O cover, with the largest exposure comprising risks headquartered in the United Kingdom, followed by Australia, the United States and Canada. We cover financial institutions including commercial and investment banks, asset managers, insurance companies, stockbrokers and insureds with hybrid business models. This account also includes a book of D&O insurance for commercial insureds located outside of the United States and a worldwide book of representations and warranties and tax indemnity business.
Professional Liability: Our professional liability business is written out of the United States (including errors and omissions (“E&O”)) and Bermuda and is written on both a primary and excess of loss basis. We insure a wide range of professions including lawyers, accountants, architects, engineers, doctors and medical technicians. This account also includes a portfolio of technology liability and data protection insurance. The data protection insurance covers firms for first party costs and third party liabilities associated with their breach of contractual or statutory data protection obligations. Prior to August 2018, we previously wrote professional liability on the Lloyd’s platform focusing on risks in the United Kingdom with some European, Australian and Canadian business.
Management Liability: Our management liability business is written out of the United States, the United Kingdom and Bermuda. We insure a diverse group of commercial and financial institutions predominantly on an excess basis. Our products include D&O liability, fiduciary liability, employment practices liability, fidelity insurance and blended liability programs including E&O liability. The focus of the account is predominantly on risks headquartered in the U.S. or risks with a material U.S. exposure.
Credit and Political Risks: The credit and political risks team writes business covering the credit and contract frustration risks on a variety of trade and non-trade related transactions, as well as political risks (including multi-year war on land cover). We provide credit and political risks cover worldwide but with concentrations in a number of countries, such as China, Brazil, Russia (where we significantly reduced our exposures from 2014), the Netherlands and the United States.
Crisis Management: The Crisis Management team writes insurance designed to protect individuals and corporations operating in high-risk areas around the world, including covering the shipping industry’s exposure to acts of piracy. It also writes terrorism and political violence insurance, providing coverage for damage to property (largely fixed assets such as buildings) resulting from acts of terrorism, strikes, riots, civil commotion or political violence, in addition to product recall business, a new product we began to write in 2016. This book is written on a global basis, although capacity is selectively deployed.
Accident and Health: The global accident and health team focuses on insurance and reinsurance products which help protect individuals, groups and companies from the consequences of accidental death or disability whether resulting from accident or sickness. This may include single or multi-person losses as well as major catastrophic events such as air crashes, earthquakes or terrorist attacks. Coverage written includes whole account treaty and facultative reinsurance protection for insurance companies.
Surety Risks: Our surety team writes commercial surety risks, admiralty bonds and similar maritime undertakings including, but not limited to, federal and public official bonds, license and permits and fiduciary and miscellaneous bonds, focused on Fortune 1000 companies and large, privately owned companies in the United States.
Technology Liability (Cyber Risks): Technology liability is written globally and provides coverage for technology, media and telecommunications firms offering protection for damages and legal defense expenses associated with financial loss claims from third parties and various forms of intellectual property breaches. We also incorporate data protection indemnity insurance against costs and liabilities that may arise when a company breaches its data protection obligations.
Underwriting and Reinsurance Purchasing
Our objective is to create a diversified portfolio of insurance and reinsurance risks, diversified across lines of business, products, geographic areas of coverage, cedants and sources. The acceptance of appropriately priced risk is the core of our business. Underwriting requires judgment, based on important assumptions about matters that are inherently unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. We view underwriting quality and risk management as critical to our success.
Underwriting. Our underwriting activities are managed in two product areas: reinsurance and insurance. For a discussion of our business and business segments, refer to “Business — General” and “Business — Business Segments” above.
Our Group Chief Executive Officer is supported by our Group Director of Underwriting who assists in the management of the underwriting process by developing our underwriting control framework and acting as an independent reviewer of underwriting activity across our businesses.  We underwrite according to the following principles:
operate within agreed boundaries as defined by the Aspen Underwriting Principles for the relevant class of business;


10


operate within prescribed maximum underwriting authority limits, which we delegate in accordance with an understanding of each individual’s capabilities, tailored to the classes of business written by the particular underwriter;
evaluate the underlying data provided by clients and adjust such data where we believe it does not adequately reflect the underlying exposure;
price each submission based on our experience in the class of business, and where appropriate, by deploying one or more actuarial models either developed internally or licensed from third-party providers;
maintain a peer review process to sustain high standards of underwriting discipline and consistency and a sampling methodology for simpler insurance risks;
more complex risks may involve peer review by several underwriters and input from catastrophe risk management specialists, our team of actuaries and senior management; and
risks outside of agreed underwriting authority limits are referred to the Group Chief Executive Officer and/or to the appropriate entity board as exceptions for approval before we accept the risks.
Reinsurance Purchasing.  We purchase reinsurance and retrocession to mitigate and diversify our risk exposure to a level consistent with our risk appetite and to increase our insurance and reinsurance underwriting capacity. These agreements provide for recovery of a portion of our losses and loss adjustment expenses from our reinsurers. The amount and type of reinsurance that we purchase varies from year to year and is dependent on a variety of factors, including, but not limited to, the cost of a particular reinsurance contract and the nature of our gross exposures assumed, with the aim of securing cost-effective protection. We have a centralized ceded reinsurance department which coordinates the placement of all of our treaty reinsurance placements.
We have reinsurance covers in place for the majority of our insurance classes of business on an excess-of-loss basis and/or proportional treaty basis. The excess of loss covers provide protection in various layers and excess of varying attachment points according to the scope of cover provided. In 2018, we increased proportional reinsurance protection compared to our previous coverage in 2017. In 2019 we expect to purchase less proportional reinsurance protection and more excess-of-loss protection compared to 2018.
With respect to natural perils coverage, we buy protections that cover both our insurance and reinsurance lines of business through a variety of products, including, but not limited to, excess of loss reinsurance, facultative reinsurance, aggregate covers, whole account covers and collaterized products which can be on either an indemnity or an index linked basis. For example, we may purchase industry loss warranty reinsurance which provides retrocessional coverage when insurance industry losses for a defined event exceed a certain level. We expect the type and level of coverage that we purchase will vary over time, reflecting our view of the changing dynamics of the underlying exposure and the reinsurance markets.  We manage our risk by seeking to limit the amount of exposure assumed from any one reinsured and the amount of the aggregate exposure to catastrophe losses from a single event in any one geographical zone.
On April 25, 2018, Kendall Re Ltd. (“Kendall Re”), a Bermuda exempted company licensed and registered as a special purpose insurer under the Bermuda Insurance Act 1978 and related regulations, issued $225.0 million Series 2018-1 Class A Principal At-Risk Variable Rate Notes due May 6, 2021 under a variable rate note program from which the proceeds will be used to provide Aspen Bermuda with fully-collateralized retrocessional reinsurance protections against losses from a range of international perils, including U.S. named storms, U.S. and Canada earthquakes, U.S. severe thunderstorms, U.S. wildfires, U.S. winter storms and European windstorms. Additionally, Aspen Re continues to purchase quota share protection for worldwide catastrophe losses through Aspen Capital Markets and other collateralized reinsurance arrangements.
Although reinsurance agreements contractually obligate our reinsurers to reimburse us for an agreed-upon portion of our gross paid losses, we remain liable to our insureds to the extent that our reinsurers do not meet their obligations under these agreements. As a result, and in line with our risk management objectives, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk on an on-going basis. In general, we seek to place our reinsurance with highly rated companies with which we have a strong trading relationship or have fully collateralized arrangements in place. We maintain a list of authorized reinsurers graded for short, medium and long tail business which is regularly reviewed and updated by the Reinsurance Credit Committee. For additional information, please refer to Note 9, “Reinsurance” of our consolidated financial statements.
Risk Management
We have a comprehensive risk management framework that defines the corporate risk appetite, risk strategy and the policies required to monitor, manage and mitigate the risk inherent in our business. In doing so, we aim to comply with corporate governance and industry best practice and to monitor risks against six main risk objectives: (i) ensuring losses remain within planned limits, (ii) ensuring volatility of results fall within planned limits, (iii) compliance with existing and emerging regulatory requirements,


11


(iv) preserving rating agency credit ratings, (v) maintaining adequate solvency and liquidity, and (vi) avoiding any reputational risk. Below is a summary of our current risk governance arrangements and risk management strategy:
Risk Governance
Board of Directors.  The Board considers effective identification, measurement, monitoring, management and reporting of the risks facing our business to be key elements of its responsibilities and those of the Group Chief Executive Officer and management. Matters relating to risk management that are reserved for the Board include approval of the internal controls and risk management framework and any changes to the Aspen Group’s risk appetite statement and key risk limits. The Board also receives reports at each scheduled meeting from the Group Chief Risk Officer and the Chair of the Risk Committee as well as training in risk management processes including the design, operation, use and limitations of the internal model. The internal model is an economic capital model which has been developed internally for use in certain business decision-making processes, the assessment of risk-based capital requirements and for various regulatory purposes. As a result of these arrangements and processes, the Board, assisted by management and the Board Committees, is able to exercise effective oversight of the operation of the risk management strategy described in “— Risk Management Strategy” below.
Board Committees.  The Board delegates oversight of the management of certain key risks to its Risk, Audit and Investment Committees. Each of the committees is chaired by an independent director of the Company who also reports to the Board on the committees’ discussions and matters arising.
Risk Committee:  The purpose of the Risk Committee is to assist the Board in its oversight duties in respect of the management of risk, including:
making recommendations to the Board regarding management’s proposals for the risk management framework, risk appetite, key risk limits and the use of our internal model;
monitoring compliance with the agreed Aspen Group risk appetite and key risk limits; and
oversight of the stress and scenario testing process established by management.
Audit Committee:  The Audit Committee is primarily responsible for assisting the Board in its oversight of the integrity of the financial statements. The Audit Committee is also responsible for reviewing the adequacy and effectiveness of the Company’s internal controls and receives regular reports from both internal and external auditors. In addition, the Audit Committee oversees the Company’s compliance with applicable laws and regulations.
Investment Committee:  The Investment Committee is primarily responsible for setting and monitoring the Aspen Group’s investment risk and asset allocation policies and ensuring that the Chair of the Risk Committee is kept informed of such matters.
Management Committees.  The Aspen Group also has a number of executive management committees which have oversight of certain risk management processes including the following:
Group Executive Committee:  The Group Executive Committee is the main executive committee responsible for advising the Group Chief Executive Officer on matters relating to the strategy and conduct of the Aspen Group’s business.
Capital and Risk Principles Committee:  The primary purpose of the Capital and Risk Principles Committee is to assist the Group Chief Executive Officer and the Group Chief Risk Officer in their oversight duties in respect of the design and operation of the Aspen Group’s risk management systems. In particular, it has specific responsibilities in relation to the internal model and for the establishment of risk limits for accumulating underwriting exposures and monitoring solvency and liquidity requirements.
Reserve Committee:  The Reserve Committee is responsible for managing reserving risk and making recommendations to the Group Chief Executive Officer and the Group Chief Financial Officer relating to the appropriate level of reserves to include in the Aspen 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 the management and control of underwriting risk, including oversight of the independent review of the quality of each team’s underwriting.
Reinsurance Credit Committee:  The purpose of the Reinsurance Credit Committee is to seek to minimize credit risks arising from insurance and reinsurance counterparties by the assessment and monitoring of collateralized reinsurance arrangements, direct cedants, intermediaries and reinsurers.
Group Operations Committee: The purpose of the Group Operations Committee is to oversee the Aspen Group’s operational support functions to ensure that they are strategically aligned to provide coordinated, efficient and cost effective operational support to the execution of the Aspen Group’s underwriting plans.


12


Group Chief Risk Officer.  Among other things, our Group Chief Risk Officer provides the Board and the Risk Committee with reports and advice on risk management issues.
 
Risk Management Strategy
We operate an integrated enterprise-wide risk management strategy designed to deliver shareholder value in a sustainable and efficient manner while providing a high level of policyholder protection. The execution of our integrated risk management strategy is based on:
the establishment and maintenance of an internal control and risk management system based on a three lines of defense approach to the allocation of responsibilities between risk accepting units (first line), risk management activity and oversight from other central control functions (second line) and independent assurance (third line);
identifying material risks to the achievement of the Aspen Group’s objectives including emerging risks;
the articulation at Group level of our risk appetite and a consistent set of key risk limits for each material component of risk;
the cascading of risk appetite and key risk limits for material risks to each operating subsidiary and, where appropriate, risk accepting business units;
measuring, monitoring, managing and reporting risk positions and trends;
the use, subject to an understanding of its limitations, of the internal model to test strategic and tactical business decisions and to assess compliance with the risk appetite statement; and
stress and scenario testing, including reverse stress testing, designed to help us better understand and develop contingency plans for the likely effects of extreme events or combinations of events on capital adequacy and liquidity.
Risk Appetite Statement.  The risk appetite statement is a central component of the Aspen Group’s overall risk management framework and is approved by the Board. It sets out, at a high level, how we think about risk in the context of our business model, Aspen Group objectives and strategy. It sets out boundary conditions and limits for the level of risk we assume, together with a statement of the reward we aim to receive for this level of risk. Our risk appetite statement comprises the following components:
Risk preferences:  a high level description of the types of risks we prefer to assume and those we prefer to minimize or avoid;
Return objective:  a description of the return on capital we seek to achieve, subject to our risk constraints;
Volatility constraint:  a target limit on earnings volatility; and
Capital constraint:  a minimum level of risk adjusted capital.
Risk Components.  The main types of risks that we face are summarized as follows:
Insurance risk:  The risk that underwriting results vary from their expected amounts, including the risk that reserves established in respect of prior periods differ significantly from the level of reserves included in the Aspen Group’s financial statements.
Market risk:  The risk of variation in the income generated by, and the fair value of, our investment portfolio, cash and cash equivalents and derivative contracts including the effect of changes in foreign currency exchange rates.
Credit risk:  The risk of diminution in the value of insurance receivables as a result of counter-party default. This principally comprises default and concentration risks relating to amounts receivable from intermediaries, policyholders and reinsurers. We include credit risks related to our investment portfolio under market risk. We include credit risks related to insurance contracts (e.g. credit and political risk policies) under insurance risk.
Liquidity risk: The risks of failing to maintain sufficient liquid financial resources to meet liabilities as they fall due or to provide collateral as required for commercial or regulatory purposes.
Operational risk: The risk of loss resulting from inadequate or failed internal processes, personnel or systems, or from external events.
Strategic risk:  The risk of adverse impact on shareholder value or income and capital of adverse business decisions, poor execution or failure to respond to market changes.


13


Regulatory risk: The risk of non-compliance with regulatory requirements, including ensuring we understand and comply with changes to those requirements is assessed and managed as operational risk. There is a residual risk that changes in regulation impact our ability to operate profitably in some jurisdictions or some lines of business.
Taxation risk: The risk that we do not understand, plan for and manage our tax obligations is assessed and managed as operational risk. There is a residual risk that changes in taxation impact our ability to operate profitably in some jurisdictions or some lines of business.
Emerging risk:  The risk that events or issues not previously identified or fully understood impact the operations or financial results of the Aspen Group.
We divide risks into “core” and “non-core” risks. Core risks comprise those risks which are inherent in the operation of our business, including insurance risks in respect of our underwriting operations and market and liquidity risks in respect of our investment activity. We intentionally expose the Company to core risks with a view to generating shareholder value but seek to manage the resulting volatility in our earnings and financial condition within the limits defined by our risk appetite. However, these core risks are intrinsically difficult to measure and manage and we may not, therefore, be successful in this respect. All other risks, including regulatory and operational risks, are classified as non-core. We seek, to the extent we regard as reasonably practicable and economically viable, to avoid or minimize our exposure to non-core risks.
Key Risk Limits.  We use the term risk limit to mean the upper limit of our tolerance for exposure to a given risk. Key risk limits are a sub-set of risk limits and are subject to annual approval by the Board on the advice of the Risk Committee as part of the annual business planning process. If a risk exceeds key risk limits, the Group Chief Risk Officer is required to report the excess and management’s plans for dealing with it to the Risk Committee.
Business Distribution
Our business is produced principally through brokers and reinsurance intermediaries. The brokerage distribution channel provides us with access to an efficient, global distribution system without the significant time and expense which would be incurred in creating wholly-owned distribution networks. The brokers and reinsurance intermediaries typically act in the interest of ceding clients or insurers and are instrumental to our continued relationship with our clients.
The following tables show our gross written premiums by broker for each of our business segments for the twelve months ended December 31, 2018, 2017 and 2016:
 
 
 
Twelve Months Ended December 31, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
Reinsurance
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written
Premiums 
 
% of Total 
 
 
 
($ in millions, except for percentages)
Aon Corporation
 
$
363.7

 
24.3
%
 
$
374.5

 
24.2
%
 
$
394.6

 
27.9
%
Marsh & McLennan Companies, Inc.
 
312.1

 
20.9

 
321.8

 
20.8

 
285.1

 
20.2

Willis Group Holdings, Ltd.
 
282.2

 
18.9

 
315.8

 
20.4

 
291.8

 
20.6

Others (1)
 
537.7

 
35.9

 
536.4

 
34.6

 
441.7

 
31.2

Total
 
$
1,495.7

 
100.0
%
 
$
1,548.5

 
100.0
%
 
$
1,413.2

 
100.0
%
_______________
(1) 
Includes gross written premium of $259.7 million related to CGB DS and $33.1 million related to AgriLogic (2017$269.7 million, 2016$178.9 million related to AgriLogic which we purchased in January 2016 and sold in December 2017) as part of our strategic partnership with CGB DS.



 


14



 
 
 
Twelve Months Ended December 31, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
Insurance
 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written Premiums
 
% of Total 
 
Gross
Written
Premiums 
 
% of Total 
 
 
 
($ in millions, except for percentages)
Marsh & McLennan Companies, Inc.
 
$
230.9

 
11.9
%
 
$
214.3

 
11.8
%
 
$
177.1

 
10.2
%
Aon Corporation
 
180.8

 
9.3

 
176.5

 
9.7

 
183.1

 
10.6

Willis Group Holdings, Ltd.
 
145.1

 
7.4

 
123.4

 
6.8

 
137.8

 
7.9

Brown & Brown Inc
 
121.9

 
6.2

 
57.3

 
3.2

 
44.2

 
2.5

Ryan Specialty
 
101.1

 
5.2

 
94.7

 
5.2

 
89.9

 
5.2

AmWINS Group Inc
 
86.4

 
4.4

 
86.8

 
4.8

 
66.6

 
3.8

CRC Swett
 
78.8

 
4.0

 
87.3

 
4.8

 
75.4

 
4.3

Arthur J Gallagher (UK) Limited
 
70.8

 
3.6

 
69.7

 
3.8

 
45.1

 
2.6

Jardine Lloyd Thompson Ltd.
 
58.5

 
3.0

 
56.6

 
3.1

 
47.7

 
2.8

Others
 
876.9

 
45.0

 
845.8

 
46.8

 
866.9

 
50.1

Total
 
$
1,951.2

 
100.0
%
 
$
1,812.4

 
100.0
%
 
$
1,733.8

 
100.0
%

Claims Management
We have a staff of experienced claims professionals organized into insurance and reinsurance teams which are managed separately. We have developed processes and internal business controls for identifying, tracking and settling claims, and authority levels have been established for all individuals involved in the reserving and settlement of claims.
The key responsibilities of our claims management departments are to:
process, manage and resolve reported insurance or reinsurance claims efficiently and accurately to ensure the proper application of intended coverage, reserving in a timely fashion for the probable ultimate cost of both indemnity and expense and make timely payments in the appropriate amount on those claims for which we are legally obligated to pay;
select appropriate counsel and experts for claims, manage claims-related litigation and regulatory compliance;
contribute to the underwriting process by collaborating with both underwriting teams and senior management in terms of the evolution of policy language and endorsements and providing claim-specific feedback and education regarding legal activity;
contribute to the analysis and reporting of financial data and forecasts by collaborating with the finance and actuarial functions relating to the drivers of actual claim reserve developments and potential for financial exposures on known claims; and
support our marketing efforts through the quality of our claims service.
On those accounts where it is applicable, a team of in-house claims professionals oversees and regularly audits claims handled under outsourcing agreements and manages those large claims and coverage issues on referral as required under the terms of those agreements.
Senior management receives a regular report on the status of our reserves and settlement of claims. We recognize that fair interpretation of our reinsurance agreements and insurance policies with our customers, and timely payment of valid claims, are a valuable service to our clients and enhance our reputation.
Reserves
Under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and applicable insurance laws and regulations in the countries in which we operate, we are required to establish loss reserves for the estimated unpaid portion of the ultimate liability for losses and loss expenses under the terms of our policies and agreements with our insured and reinsured customers. The process of estimating these reserves involves a considerable degree of judgment and, as of any given date, is inherently uncertain. For a full discussion regarding our loss and loss expenses reserving process, refer to Part II, Item 7, “Management’s Discussion and


15

Table of Contents

Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Reserving Approach” and Part II, Item 8, “Financial Statements and Supplementary Data” and Item 1A, “Risk Factors — Insurance Risks — Our financial condition and operating results may be adversely affected if actual claims exceed our loss reserves.”
Investments
Our current investment strategy is focused on delivering stable investment income and total return through all market cycles while maintaining appropriate portfolio liquidity and credit quality to meet the requirements of our customers, rating agencies and regulators. To enhance investment returns where possible, we tactically adjust the duration of the investment portfolio and asset allocation taking into account the average liability duration of our reinsurance and insurance risks and our views of interest rates, the yield curve, credit spreads and markets for different assets.
The Investment Committee of the Board establishes investment guidelines and supervises our investment activity. The Investment Committee regularly monitors our overall investment results and performance against our investment objectives and guidelines. These guidelines specify minimum criteria on the overall credit quality and liquidity characteristics of the portfolio, and include limitations on the size of certain holdings and restrictions on purchasing certain types of securities. Management and the Investment Committee review our investment performance and assess credit and market risk concentrations and exposures to issuers. We follow an investment strategy designed to emphasize the preservation of capital and provide sufficient liquidity for the prompt payment of claims.
In 2018, we engaged BlackRock Financial Management Inc., Alliance Capital Management L.P., DWS Investment Management Americas Inc., Pacific Investment Management Company LLC, Goldman Sachs Asset Management L.P. and Conning Asset Management Limited to provide investment advisory and management services for our portfolio of fixed income and equity investments. We have agreed to pay investment management fees based on the average market values of total assets held under management at the end of each calendar quarter. These agreements may be terminated generally by either party on short notice without penalty.
For additional information concerning our investments, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Note 6 of our consolidated financial statements, “Investments,” and Note 8 of our consolidated financial statements, “Fair Value Measurements.” For additional information concerning Other-Than-Temporary Impairment of Investments, refer to Note 2(c) of our consolidated financial statements, “Basis of Preparation and Significant Accounting Policies — Accounting for Investments, Cash and Cash Equivalents.”
Competition
The insurance and reinsurance industries are mature and highly competitive. Competition varies significantly on the basis of product and geography. Insurance and reinsurance companies compete on the basis of many factors, including premium charges, general reputation and perceived financial strength, the terms and conditions of the products offered, ratings assigned by independent rating agencies, speed of claims payments, reputation and experience in the particular risk to be underwritten, quality of service, the jurisdiction where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered and various other factors. Increased competition could result in fewer submissions for our products and services, lower rates charged, slower premium growth and less favorable policy terms and conditions, any of which could adversely impact our growth and profitability.
We compete with major U.S., U.K., Bermudian, European and other international insurers and reinsurers and underwriting syndicates from Lloyd’s, some of which have longer operating histories, more capital and/or more favorable ratings than we do, as well as greater marketing, management and business resources. We also compete with capital market participants that create alternative products, such as catastrophe bonds, that are intended to compete with traditional reinsurance products. In addition to asset managers and reinsurers who provide collateralized reinsurance and retrocessional coverage, the availability of these non-traditional products could reduce the demand for both traditional insurance and reinsurance products.
Our competitors include, but are not limited to, American International Group, Inc., Arch Capital Group Ltd., Axis Capital Holdings Limited, Chubb Limited, Sompo International, Everest Re Group Limited, Hannover Re, Lancashire Holdings Limited, Munich Re, PartnerRe Ltd., QBE Insurance Group Limited, Renaissance Re Holdings Ltd., SCOR SA, Swiss Re, Validus Holdings Ltd. (a subsidiary of AIG), XL Catlin (a subsidiary of AXA XL and AXA SA), MS Amlin plc and various Lloyd’s syndicates and Government-sponsored insurers and reinsurers.
 


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Ratings
Ratings by independent agencies are an important factor in establishing the competitive position of (re)insurance companies and are important to our ability to market and sell our products and services. Rating organizations continually review the financial positions of insurers, including us. As at February 11, 2019, the financial strength ratings of our Operating Subsidiaries were as follows:
Rating Agency
Rating
Rated Operating Subsidiary
Agencys Rating Definition
Ranking of Rating
 
 
 
 
 
Standard & Poor’s Financial Services LLC (“S&P”)
A (Strong - Negative outlook)
Aspen U.K and Aspen Bermuda
Strong capacity to meet financial commitments but somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than those in higher-rated categories
The ‘A’ grouping is the third highest of twelve major rating categories.
 
 
 
 
 
A.M. Best
A (Excellent) (Stable)
Aspen U.K., Aspen Bermuda, Aspen Specialty and AAIC
An excellent ability to meet ongoing insurance obligations
The ‘A’ grouping is the second highest of seven major rating categories.
 
 
 
 
 
Moody’s Investors Service, Inc. (“Moody’s”)
A2 (Negative outlook)
Aspen U.K and Aspen Bermuda
Considered upper-medium grade and subject to low credit risk
The ‘A’ grouping is the third highest of nine major rating categories. Each of the second through seventh categories has an appended numerical modifier of ‘1’, ‘2’ and ‘3’, indicating that the obligation ranks in the higher end, mid-category or lower end, respectively, of the rating category.
The rating agencies published updated reviews of our ratings following our announcement of the Merger. On August 28, 2018, S&P affirmed the ratings of the applicable Operating Subsidiaries and affirmed their outlook as negative. S&P stated that the negative outlook indicates the possibility that they may decrease the ratings of the applicable Operating Subsidiaries by one level if we do not improve our underwriting performance during the next two years. On August 29, 2018, Moody’s affirmed the ratings of the applicable Operating Subsidiaries and affirmed their outlook as negative. Moody’s noted that our business fundamentals will remain the key drivers for such ratings over the next twelve to eighteen months. On August 29, 2018, A.M. Best placed the ratings of the applicable Operating Subsidiaries under review with developing implications. A.M. Best stated that it needs to assess the impact of the planned change in ownership on our balance sheet strength, operating performance and business profile and the ratings will be addressed pending the completion of the Merger.
These ratings reflect the respective opinions of S&P, A.M. Best, and Moody regarding the ability of the relevant Operating Subsidiary to pay claims and are not evaluations directed to our investors or recommendations to buy, sell or hold our securities. These ratings are subject to periodic review by, and may be revised downward or revoked at the sole discretion of, S&P, A.M. Best, and Moody’s, respectively.
For a discussion of some potential risks relating to the ratings of our Operating Subsidiaries, refer to Part I, Item 1A, “Risk Factors — Risks Relating to the Merger — A condition of the Merger is the maintenance of financial strength ratings of our Operating Subsidiaries and Highlands may become entitled to terminate the Merger Agreement if we receive a clear indication from A.M. Best or S&P that such agency intends to downgrade the financial strength rating of our Operating Subsidiaries and if Highlands exercises such right it could adversely affect our business, financial condition and results of operations” and “Risk Factors — Strategic Risks — Our Operating Subsidiaries are rated and our Lloyd’s business benefits from a rating by one or more of A.M. Best, S&P and Moody’s and a decline in any of these ratings could adversely affect our standing among brokers and customers and cause our premiums and earnings to decrease.”  




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Employees
As at December 31, 2018, we employed 1,151 persons in the following countries:
Country
 
 
As at December 31, 2018
 
As at December 31, 2017
United Kingdom
 
611

 
686

United States
 
429

 
499

Bermuda
 
45

 
55

Switzerland
 
21

 
32

Singapore
 
26

 
33

Ireland
 
9

 
11

United Arab Emirates
 
7

 
8

France
 

 
4

Germany
 

 
3

Australia
 
3

 
3

Total
 
1,151

 
1,334


We believe that relations with our employees, none of which are subject to collective bargaining agreements, are good.

Regulatory Matters
General
The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. The discussion below summarizes the material laws and regulations applicable to our Operating Subsidiaries and, where relevant, Peregrine, Silverton and Aspen Capital Markets. Our Operating Subsidiaries have met or exceeded the solvency margins and ratios applicable to them under relevant law and regulation as at December 31, 2018 and December 31, 2017.
Bermuda Regulation
The Insurance Act 1978, as amended (the “Insurance Act”), regulates insurance companies and insurance intermediaries in Bermuda, and it provides that no person may carry on any insurance business in or from within Bermuda unless registered as an insurer or intermediary by the Bermuda Monetary Authority (the “BMA”) under the Insurance Act. The Insurance Act applies to both insurance and reinsurance business. We have one Bermuda-based Operating Subsidiary, Aspen Bermuda, a Class 4 insurer under the Insurance Act. We also have Peregrine and Silverton licensed as Special Purpose Insurers (“SPI”) under the Insurance Act. We also have a Bermuda-based insurance management subsidiary, ACM, which is registered under the Insurance Act as an insurance manager and as an insurance agent.
On March 25, 2016, Bermuda’s prudential framework for (re)insurance and group supervision was confirmed as being fully equivalent to the regulatory standards applied to European reinsurance companies and insurance groups in accordance with the requirements of the Solvency II Directive. Bermuda was granted this full ‘Solvency II equivalence’ for an unlimited period by the European Commission based on an assessment conducted by the European Insurance and Occupational Pensions Authority, and the equivalence decision was applied retroactively to January 1, 2016.
Group Supervision.  The BMA has implemented a framework for group supervision. The BMA may, in respect of an insurance group, determine whether it is appropriate for it to be the group supervisor of that group. For purposes of the Insurance Act, an insurance group is defined as a group of companies that conducts insurance business. If the BMA determines that it is the group supervisor, it designates a specified insurer that is a member of the insurance group as the “designated insurer” to facilitate and maintain compliance by the group with the Group Rules (as defined below). Pursuant to the Insurance Act, the BMA acts as the group supervisor of the Aspen Group and has designated Aspen Bermuda as the designated insurer.
In carrying out its functions, the BMA makes rules for assessing the financial situation and the solvency position of the Aspen Group and/or its members and rules in respect of the system of governance and risk management of the insurance group and supervisory reporting and disclosures of the insurance group.


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The current supervision, solvency and public disclosure rules (together, the “Group Rules”) apply to the Aspen Group so long as the BMA remains our group supervisor. Through the Group Rules, the BMA may take action which affects the Company. The most significant requirements of the Group Rules are set out below.
Group Financial Statements and Group Statutory Financial Return. Every insurance group is required to prepare an annual group statutory financial return which must be submitted to the BMA by the designated insurer within five months after its financial year end (unless specifically extended by the BMA for a longer period not exceeding eight months).
The group statutory financial return must consist of the following documents: a cover sheet, an insurance group business solvency certificate, statutory financial statements, particulars of ceded reinsurance comprising of the top ten unaffiliated reinsurers for which the group has the highest recoverable balances and any reinsurer with recoverable balances exceeding 15% of the insurance group’s statutory capital and surplus, any adjustments applied to the group financial statements by the group to produce the economic balance sheet in the form of a reconciliation, a list of non-insurance financial regulated entities owned by the group and particulars of qualifying members as defined within the Group Rules. The Group Rules prescribe the rules pertaining to the preparation and substance of the group statutory financial statements (which include, in statutory form, a group balance sheet, a group income statement, a group statement of capital and surplus, and notes thereto).
Every insurance group must prepare and submit, on an annual basis, consolidated audited financial statements including notes to the financial statements of the parent company of the group prepared under GAAP Standards (“Group Financial Statements”). The Group Financial Statements must be audited annually by the group’s approved auditor who must prepare an auditor’s report in accordance with generally accepted auditing standards. The designated insurer is required to file with the BMA annually the audited Group Financial Statements within five months from the end of the relevant financial year, or such longer period as permitted by the BMA not exceeding eight months. The Group Financial Statements are published by the BMA on its website.
In addition to the annual filings, every insurance group is required to submit quarterly consolidated financial statements of the parent company of the group, comprising unaudited consolidated group financial statements and a schedule of intra-group transactions and risk concentrations which will include details of material intra-group transactions, details surrounding all intra-group reinsurance and retrocession arrangements that have materialized since the most recent quarterly or annual financial return filed with the BMA and details of the top ten largest exposures to unaffiliated counterparties exposures exceeding 10% of the insurer’s statutory capital and surplus.
Group Capital and Solvency Return. Every insurance group must also prepare and submit a group capital and solvency return (“Group CSR”) in accordance with the Group Rules, which must consist of the following documents: a Group CSR declaration, the Group Bermuda Solvency Capital Requirement (“BSCR”), a risk-based capital adequacy model, and associated schedules, a Group Solvency Self-Assessment (“GSSA”), a Financial Condition Report and an opinion of a BMA approved Group Actuary on the economic balance sheet technical provisions. The Group Rules require that the insurance group perform the GSSA, which provides a determination of both the quality and quantity of the capital required to adequately cover material risks, at least annually. The Group CSR declaration must be signed by two directors of the parent company, one of which may be the chief executive, and either the chief risk officer or the chief financial officer of the parent company. The Group CSR must be filed within five months after the end of the financial year or such longer period, not exceeding eight months, as the BMA may determine.
Group Minimum Solvency Margin and Group Enhanced Capital Requirements. Aspen Holdings must ensure that the group’s statutory assets exceed the amount of its statutory liabilities by the aggregate minimum margin of solvency of each qualifying member. A member is a qualifying member of the insurance group if it is subject to solvency requirements in the jurisdiction in which it is registered.
Every insurance group must maintain available capital and surplus in an amount equal to or exceeding its Enhanced Capital Requirement (“ECR”). An insurance group’s ECR is to be calculated at the end of its relevant year by reference to either the BSCR Model or a BMA approved group internal capital model. For the financial year ending December 31, 2018, Aspen Holdings has relied on the BSCR model.
The BMA expects insurance groups to operate at or above a group Target Capital Level (“TCL”) which exceeds the Group ECR. The TCL for insurance groups is set at 120% of its Group ECR. The Aspen Group holds capital in excess of its TCL as at December 31, 2018.
Economic Balance Sheet Framework. The Economic Balance Sheet (“EBS”) framework is an accounting balance sheet approach using market consistent values for all current assets and current obligations relating to in-force business which applies to commercial insurers and insurance groups for which the BMA is group supervisor from the 2016 financial year end. The EBS framework is embedded as part of the Group CSR and forms the basis for the insurer’s ECR.
Public Disclosures. The Group Rules also include the requirement for insurance groups to prepare and publish a Financial Condition Report (“FCR”). Among other things, the FCR must provide details of measures governing business operations, the


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corporate governance framework, solvency and the financial performance of an insurance group. The FCR is publicly disclosed and is intended to provide additional information to the public in relation to the group’s business model, whereby they can make an informed assessment on whether the business is run in a prudent manner. The FCR is required to be filed with the BMA on or before the filing date of the Group CSR (May 31st of each year for Aspen Holdings) and will need to be published on the insurance group’s website, no later than fourteen days after being filed with the BMA.
Group Eligible Capital. The Group Rules also outline the eligible capital regime for insurance groups. The tiered capital system classifies all capital instruments into one of three tiers based on their “loss absorbency” characteristics with the highest quality capital classified as Tier 1 Capital and lesser quality capital classified as either Tier 2 Capital or Tier 3 Capital.
Group Governance. The Group Rules require Aspen Holdings to establish and effectively implement corporate governance policies and procedures, which it must periodically review to ensure they continue to support the overall organizational strategy of the group. In particular, Aspen Holdings must: (i) ensure that operational and oversight responsibilities of the group are clearly defined and documented and that the reporting of material deficiencies and fraudulent activities are transparent and devoid of conflicts of interest; (ii) establish systems for identifying on a risk sensitive basis those policies and procedures that must be reviewed annually and those policies and procedures that must be reviewed at other regular intervals; (iii) establish a risk management and internal controls framework and ensure that it is assessed regularly and such assessment is reported to the parent company board and the chief and senior executives; (iv) establish and maintain sound accounting and financial reporting procedures and practices for the group; and (v) establish and keep under review group functions relating to actuarial, compliance, internal audit and risk management functions which must address certain specific requirements as set out in the Group Rules.
A supervisory college was held by relevant regulators of the Aspen Group (i.e., the BMA, the PRA, North Dakota and Texas) in July 2018. Supervisory colleges are a regular part of the group supervision process and are intended to facilitate supervision on a group and legal entity level by allowing involved supervisors from various jurisdictions to acquire a better understanding of the group with respect to risk exposures and inherent risks, financial position and soundness, capital adequacy, business activities, risk management and governance systems. Similar to prior supervisory colleges, the BMA did not identify any material issues although it asked to be appraised of certain matters relating to the Aspen Group’s strategy, solvency and risk management.
Local Entity Supervision.  Aspen Bermuda, as an insurer carrying on general insurance business under the Insurance Act, is registered as a Class 4 insurer. In addition, the Insurance Act outlines provisions for SPIs, such as Peregrine and Silverton, insurance managers and insurance agents.
Principal Representative, Head and Principal Office. The Insurance Act requires every insurer, such as Aspen Bermuda, to appoint and maintain a principal representative resident in Bermuda and to maintain a principal office in Bermuda. The principal representative must be knowledgeable in insurance and is responsible for arranging the maintenance and custody of the statutory accounting records and for ensuring that the annual Statutory Financial Return, Statutory Financial Statements and Capital and Solvency Return for the insurer are filed. The principal representative is also responsible for notifying the BMA where the principal representative believes there is a likelihood of Aspen Bermuda becoming insolvent or that a reportable “event” under the Insurance Act has, to the principal representative’s knowledge, occurred or is believed to have occurred.
Further, any registered insurer that is a Class 3A, 3B, or Class 4 insurer, such as Aspen Bermuda, is required to maintain a head office in Bermuda and direct and manage its insurance business from Bermuda. The Bermuda Insurance Act provides that in considering whether an insurer satisfies the requirements of having its head office in Bermuda, the BMA may consider (i) where the underwriting, risk management and operational decision making occurs; (ii) whether senior executives who are responsible for, and involved in, the decision making are located in Bermuda; and (iii) where meetings of the board of directors occur. The BMA will also consider (i) the location where management meets to effect policy decisions; (ii) the residence of the officers, insurance managers or employees; and (iii) the residence of one or more directors in Bermuda.
Approved Independent Auditor. The Insurance Act generally requires all insurers to appoint an independent auditor who will annually audit and report on the insurer’s statutory financial statements and statutory financial return, with the exception of SPIs who may file an application under the Insurance Act to have the requirement of filing annual audited financial statements with the BMA waived. Aspen Bermuda, as a Class 4 insurer, must appoint an independent auditor who will annually audit and report on the GAAP financial statements and the statutory financial return of the insurer, both of which are required to be filed annually with the BMA. The independent auditor must be approved by the BMA.
Loss Reserve Specialist. Class 4 insurers are required to submit an opinion of their BMA approved loss reserve specialist with their capital and solvency return in respect of their EBS technical provisions.
Annual Financial Statements and Annual Statutory Financial Return. As prescribed by the Insurance Act, Aspen Bermuda, a Class 4 insurer, must prepare an annual statutory financial return which shall consist of an insurer information sheet, a report of the approved independent auditor on the statutory financial statements, a statutory balance sheet, a statutory statement of income, a statutory statement of capital and surplus, notes to the statutory financial statements and a statutory declaration of compliance.


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In addition to preparing statutory financial statements, Aspen Bermuda must file audited financial statements prepared in accordance with GAAP in respect of each financial year. Such statements must be filed with the BMA within a period of four months from the end of the financial year or such longer period, not exceeding seven months, as the BMA may determine. The audited financial statements will be published by the BMA.
Annual Capital and Solvency Return. Class 4 insurers are required to file a capital and solvency return in respect of their general business which must consist of the following documents: a CSR declaration, the BSCR and associated schedules, a Commercial Insurer’s Solvency Self-Assessment (“CISSA”), a Financial Condition Report and an opinion of a BMA approved Loss Reserve Specialist on the economic balance sheet technical provisions. The Insurance (Prudential Standards) (Class 4 and 3B Solvency Requirement) Rules 2008 require that the insurer perform the CISSA, which provided a determination of both the quality and quantity of the capital required to adequately cover material risks, at least annually. The CISSA allows the BMA to obtain an insurer’s view of the capital resources required to achieve its business objectives and to assess the company’s governance, risk management and controls surrounding this process. The CSR declaration must be signed by two directors of the company, one of which may be the Chief Executive Officer and either the Chief Risk Officer or the Chief Financial Officer. The CSR must be filed within four months after the end of the financial year or such longer period, not exceeding seven months, as the BMA may determine.
Public Disclosures. Commercial insurers are required to prepare an FCR providing details of, among other things, measures governing the business operations, corporate governance framework and solvency and financial performance of the insurer. Where the commercial insurer is part of an insurance group, the BMA, as Group Supervisor, may waive the submission of the legal entity FCR and may require the submission of the Group FCR which must clearly include information specific to the insurer. Aspen Bermuda has been granted a waiver for the submission of the legal entity FCR for the financial year ending December 31, 2018.
Enhanced Capital Requirements and Minimum Solvency Margin. The BSCR employs a standard mathematical model that correlates the risk underwritten by Bermuda insurers to the capital that is dedicated to their business. The BSCR applies a standard measurement format to the risk associated with an insurer’s assets, liabilities and premiums, including a formula to take account of the catastrophe risk exposure. Aspen Bermuda must maintain available capital and surplus in an amount equal to or exceeding its ECR calculated using the BSCR model.
In order to minimize the risk of a shortfall in capital arising from an unexpected adverse deviation, the BMA expects that insurers operate at or above a threshold captive level (termed the target capital level (“TCL”)), which exceeds an insurer’s ECR. The TCL for a Class 4 insurer is set at 120% of ECR. Aspen Bermuda holds capital in excess of its TCL as at December 31, 2018.
As a Class 4 Insurer, Aspen Bermuda is also required to meet a minimum margin of solvency, which is the minimum amount by which the value of the general business assets of the insurer must exceed its general business liabilities, being equal to the greater of: (i) $100,000,000; or (ii) 50% of net premiums written (being gross premiums written less any premiums ceded by the insurer (not exceeding 25% of gross premiums)) in its current financial year; or (iii) 15% of net losses and loss expense provisions and other insurance reserves; or (iv) 25% of the ECR reported at the end of its relevant year.
Minimum Liquidity Ratio.  The Insurance Act provides a minimum liquidity ratio for general business insurers, like Aspen Bermuda. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include, but are not limited to, cash and time deposits, quoted investments, unquoted bonds and debentures, investments in mortgage loans on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable and funds held by ceding reinsurers. There are certain categories of assets which, unless specifically permitted by the BMA, do not automatically qualify as relevant assets, such as unquoted equity securities, investments in and advances to affiliates and real estate and collateral loans. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax, sundry liabilities (by interpretation, those not specifically defined), and letters of credit and guarantees.
The BMA performed a prudential review of Aspen Bermuda in November 2016. No material issues were identified.
Supervision, Investigation and Intervention.  The BMA may appoint an inspector with extensive powers to investigate the affairs of an insurer, such as Aspen Bermuda, if it believes that such an investigation is in the best interests of its policyholders or persons who may become policyholders. In order to verify or supplement information otherwise provided to the BMA, the BMA may direct an insurer to produce documents or information relating to matters connected with its business.
An inspector may examine on oath any past or present officer, employee or insurance manager of the insurer under investigation in relation to its business and apply to the court in Bermuda for an order that other persons may also be examined on any matter relevant to the investigation. It is the duty of any insurer in relation to whose affairs an inspector has been appointed and of any past or present officer, employee or insurance manager of such insurer to produce to the inspector on request all books, records and documents relating to the insurer which are in its custody or control and to assist the inspector in connection with the investigation.


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If the BMA believes there is a risk of an insurer becoming insolvent or being in breach of the Insurance Act or any conditions imposed upon its registration under the Insurance Act, the BMA may, among other things, direct the insurer: (i) not to take on any new insurance business; (ii) not to vary any insurance contract if the effect would be to increase its liabilities; (iii) not to make certain investments; (iv) to realize certain investments; (v) to maintain in or transfer to the custody of a specified bank certain assets; (vi) not to declare or pay any dividends or other distributions, or to restrict the making of such payments; (vii) to limit its premium income; (viii) to remove a controller or officer; and/or (ix) to file a petition for the winding up of the insurer.

The BMA has the power to assist other regulatory authorities, including foreign insurance regulatory authorities, with their investigations involving insurance and reinsurance companies in Bermuda if it is satisfied that the assistance being requested is in connection with the discharge of regulatory responsibilities and that such cooperation is in the public interest.
Restrictions on Dividends, Distributions and Reduction of Capital.  Our Bermuda subsidiaries must comply with the provisions of the Bermuda Companies Act 1981, as amended (the “Companies Act”), regulating the payment of dividends and distributions. A Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (i) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) the realizable value of the company’s assets would thereby be less than its liabilities. Further, as mandated by the Insurance Act, an insurer may not declare or pay any dividends during any financial year if it would cause the insurer to fail to meet its relevant margins, and an insurer which fails to meet its relevant margins on the last day of any financial year may not, without the approval of the BMA, declare or pay any dividends during the next financial year. In addition, as a Class 4 insurer, Aspen Bermuda may not in any financial year pay dividends which would exceed 25% of its total statutory capital and surplus, as shown on its statutory balance sheet in relation to the previous financial year, unless it files with the BMA a solvency affidavit at least seven days in advance. Further, Aspen Bermuda must obtain the prior approval of the BMA before reducing by 15% or more its total statutory capital as set out in its previous year’s financial statements.
Special Purpose Insurer. Peregrine and Silverton are registered as SPIs licensed to carry on special purpose business under the Insurance Act. Special purpose business is defined under the Insurance Act as insurance business under which an insurer fully funds its liabilities to the persons insured through (i) the proceeds of any one or more of (x) a debt issuance where the repayment rights of the providers of such debt are subordinated to the rights of the person insured, or (y) some other financing mechanism approved by the BMA; (ii) cash; and (iii) time deposits. An SPI may only enter into contracts, or otherwise assume obligations, that are solely necessary for it to give effect to the special purpose for which it has been established.
Unlike other (re)insurers, SPIs are fully funded to meet their (re)insurance obligations and are deemed “bankruptcy remote”. As a result, the application and supervision processes are streamlined to facilitate the transparent structure. As SPIs, Peregrine and Silverton need to maintain a minimum solvency margin by which the value of the special purpose business assets must exceed its special purpose business liabilities by at least $1.00. Further, SPIs are currently not required to file annual loss reserve specialist opinions. SPIs are required to file electronic statutory financial returns via an E-SFR system. The BMA has the discretion to modify such insurer’s statutory filings requirements under the Insurance Act. Like other (re)insurers, the principal representative of an SPI has a duty to inform the BMA in relation to solvency matters, where applicable.
Segregated Account Companies. Peregrine and Silverton are also registered in Bermuda as segregated accounts companies under the Segregated Accounts Companies Act 2000, as amended. As a segregated accounts company, Peregrine and Silverton are required to segregate the assets and liabilities linked to their respective segregated accounts from the assets and liabilities linked to their other respective segregated accounts and from their general account assets and liabilities. The assets of each segregated account are only intended to be used to meet liabilities to creditors of that segregated account and are not intended to be available to meet liabilities to creditors in respect of other segregated accounts or, except where otherwise agreed and permitted by law, general account creditors of Peregrine or Silverton. The segregated account representative of a segregated accounts company has the duty to inform the Registrar of Companies in relation to solvency matters and non-compliance, where applicable.
Change of Controller and Officer Notifications.  Under the Insurance Act, where the shares of a shareholder or insurer or the shares of its parent company are traded on a recognized stock exchange, each shareholder or prospective shareholder will be responsible for notifying the BMA in writing of his becoming or ceasing to be a shareholder controller, directly or indirectly, of 10%, 20%, 33% or 50% of Aspen Holdings and ultimately Aspen Bermuda, Peregrine and Silverton within 45 days of such a change. The BMA may serve a notice of objection on any shareholder controller of Aspen Bermuda, Peregrine and Silverton if it appears to the BMA that the person is no longer fit and proper to be such a controller. A shareholder controller must notify the BMA where he has reduced or disposed of his holding in a Class 4 insurer where the proportion of the voting rights in the insurer held by him will have reduced or fallen below 10%, 20%, 33% or 50% not later than 45 days after such disposal.
Aspen Bermuda is required to notify the BMA in writing in the event of any person becoming or ceasing to be a controller, a controller being a managing director, chief executive of the insurer or of another company of which it is a subsidiary, or other person in accordance with whose directions or instructions the directors or controllers of the insurer or of another company of which it is a subsidiary are accustomed to act, including any person who holds, or is entitled to exercise, 10% or more of the voting


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shares or voting power or is able to exercise a significant influence over the management of Aspen Bermuda. Peregrine and Silverton are required to file with the annual statutory financial statements a list of every person who has become or ceased to be a shareholder controller, director or other officer during the financial year.
Each of Aspen Holdings and Aspen Bermuda is required to notify the BMA in writing in the event any person has become or ceased to be an officer of it, an officer being a director, chief executive or senior executive performing duties of underwriting, actuarial, risk management, compliance, internal audit, finance or investment matters. ACM is required to notify the BMA in writing in the event any person becomes or ceases to be a shareholder controller or officer of ACM within 14 days of such change.
Applications were made to the BMA with respect to each of Aspen Bermuda, Peregrine, Silverton and ACM pursuant to change of controller and officer notifications under the Insurance Act in connection with the Merger. The BMA provided its approval in early 2019.
Notification of Material Change. No insurer shall take any steps to give effect to a material change, unless it has first served such notice on the BMA that it intends to effect such material change and before the end of 30 days, either the BMA has notified such company in writing that it has no objection to such change or that period has lapsed without the BMA having issued a notice of objection.
Designated insurers are also required to give notice to the BMA if any member of its group intends to give effect to any material change as defined under the Insurance Act. The designated insurer shall notify the BMA of any material change, effected by a member of the group, within 30 days of such material change taking effect.

An application was made to the BMA on behalf of Aspen Bermuda pursuant to a material change notification under the Insurance Act in connection with the Merger. The BMA provided its approval in early 2019.
The Bermuda Insurance Code of Conduct. All Bermuda insurers are required to comply with the BMA’s Insurance Code of Conduct (the “Bermuda Insurance Code”) which was last amended in July 2015. The Bermuda Insurance Code is divided into six categories, including: (i) Proportionality Principle; (ii) Corporate Governance; (iii) Risk Management; (iv) Governance Mechanism; (v) Outsourcing; and (vi) Market Discipline and Disclosure. These categories contain the duties, requirements and compliance standards to be adhered to by all insurers under the Insurance Act. Failure to comply with these requirements will be a factor taken into account by the BMA in determining whether an insurer is conducting its business in a sound and prudent manner under the Insurance Act and could result in the BMA exercising its powers of intervention and will be a factor in calculating the operational risk charge applicable in accordance with that insurer’s risk based capital model.
In 2016, the BMA introduced an Insurance Manager Code of Conduct (the “Manager Code”) that insurance managers such as ACM are required to comply with. The Manager Code establishes duties, requirements and standards to be complied with by insurance managers registered under the Insurance Act, including the procedures and principles to be observed by such persons.
U.K. and E.U. Regulation
General. U.K. insurance companies are regulated by the Prudential Regulation Authority (the “PRA”) and the Financial Conduct Authority (the “FCA”). The PRA is responsible for the prudential regulation of banks, building societies, credit unions, insurers and major investment firms and the FCA is responsible, among other things, for the regulation of the conduct of business of financial services firms. Aspen U.K. is authorized by the PRA to effect and carry out (re)insurance contracts in the U.K. in all classes of general (non-life) business and is regulated by both the PRA and the FCA for prudential and conduct of business matters, respectively.
An insurance company with authorization to write insurance business in the U.K. may currently provide cross-border services in other member states of the European Economic Area (“EEA”) subject to having notified the appropriate EEA host state regulator via the PRA prior to commencement of the provision of services and the appropriate EEA host state regulator not having good reason to refuse consent. As an alternative, such an insurance company may establish a branch office within another EEA member state, subject to it also notifying the appropriate EEA host state regulator via the PRA. Aspen U.K. notified the Financial Services Authority (the “FSA”) (the PRA’s predecessor) of its intention to write insurance and reinsurance business in all other EEA member states. As a result, Aspen U.K. is licensed to write insurance business under the “freedom of services” within all EEA member states and under the “freedom of establishment” rights in Ireland (freedom of services and freedom of establishment rights together, “Passporting Rights”) contained in the European Council’s Insurance Directives. As a general insurer, Aspen U.K. is able to carry out reinsurance business on a cross-border services basis across the EEA. The PRA is responsible for the prudential regulation of Aspen U.K.’s European branch and the FCA and the Central Bank of Ireland (CBI) is responsible for the conduct of business regulation of the Irish branch.
Following the United Kingdom’s decision to withdraw from the E.U. (“Brexit”), our U.K. operations may lose their EEA financial services Passporting Rights, depending on the U.K.’s withdrawal agreement or any transitional arrangements. Aspen will


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utilize the newly established Lloyd’s Brussels Subsidiary through Aspen Managing Agency Limited (“AMAL”). The Lloyd’s Brussels Subsidiary is a Lloyd’s insurance company set up in Belgium to ensure Lloyd’s partners can continue to access the market across the EEA. The Lloyd’s Brussels Subsidiary is authorized and regulated by the National Bank of Belgium and regulated by the Financial Services and Markets Authority. The Lloyd’s Brussels Subsidiary commenced writing all non-life risks from non-U.K. EEA countries from January 1, 2019.
To further mitigate against the risks of Brexit, we submitted an application to the Central Bank of Ireland for authorization of a new insurance subsidiary in Dublin, Republic of Ireland. Aspen Ireland will ensure that we can continue serving partners and clients in the EEA following the U.K.’s exit from the E.U. Subject to regulatory approval, it is anticipated that Aspen Ireland will be operational during the first half of 2019.
Depending on the outcome of political negotiations associated with Brexit, it may be necessary for Aspen to undertake portfolio transfers of its EEA insurance policies to allow for contract continuity post-Brexit. Such an undertaking would involve the transfer of all non-U.K. EEA underwriting liabilities existing in relevant insurance classes in Aspen U.K. to Aspen Ireland and allow these liabilities to continue to be administered post-Brexit. A similar transfer of EEA insurance policies would be required between Lloyd’s and Lloyd’s Brussels Subsidiary.
For more information on the uncertainty surrounding the implementation and effect of Brexit, refer to Part I, Item 1A, “Risk Factors — Regulatory Risks — The United Kingdom’s decision to withdraw from the E.U. could adversely impact our business, results of operations and financial condition” below.
Supervision.  The PRA’s most recent review of Aspen U.K. was in April 2018 when they undertook their Periodic Summary Meeting. During 2018, the PRA has focused on underwriting performance in the wider specialty insurance market. Aspen maintains an ongoing dialogue with the PRA on this topic. The FCA last conducted a review of Aspen U.K. in February 2015 and no material issues were raised as a result of this review.
Restrictions on Dividend Payments.  The company law of England and Wales prohibits English companies, including Aspen U.K., AMAL and AUL, from declaring dividends to their shareholders unless they have profits available for distribution. The determination of whether a company has profits available for distribution is based on its accumulated realized profits and other distributable reserves less its accumulated realized losses. While the U.K. insurance regulatory rules impose no statutory restrictions on a general insurer’s ability to declare a dividend, the PRA’s rules require each authorized insurance company within its jurisdiction to maintain its solvency margin at all times. In line with common market practice for regulated institutions, the PRA previously requested that it be afforded with the opportunity to provide a “non-objection” prior to all future dividend payments made by Aspen U.K. In 2017, the PRA stated that they no longer routinely require Aspen U.K. to apply for a non-objection to dividends provided such dividend payment and Aspen U.K.’s resulting capital position are within Aspen U.K.’s board-approved solvency capital risk appetite.
Solvency Requirements. Under the E.U. directive covering the capital adequacy, risk management and regulatory reporting for insurers (the “Solvency II Directive”), an insurer has the option of seeking the approval of a full or partial internal model from its regulator or to use a standard formula to calculate its capital requirements. On December 5, 2015, Aspen U.K. received approval from the PRA to use an agreed Internal Model to calculate its Solvency Capital Requirement (“SCR”) for Aspen U.K. and Aspen European from January 1, 2016. Aspen U.K. is required to ensure that the Internal Model operates properly on a continuous basis and that it continues to comply with the “Solvency Capital Requirements — Internal Models” provisions as set out in the PRA rulebook and Solvency II Delegated Acts. If Aspen U.K. fails to comply with these requirements, the PRA may revoke its approval for Aspen U.K. to use the Internal Model or apply a capital buffer to the SCR calculated by the Internal Model. Aspen U.K. must maintain the ability to calculate its SCR using the Standard Formula as prescribed by European Insurance and Occupational Pensions Authority (“EIOPA”) in accordance with the Solvency II Directive.
On February 11, 2019, Aspen European and Aspen Holdings (acting as guarantor of Aspen European) entered into an LOC facility agreement with National Australia Bank Limited, London Branch, for the purpose of obtaining a letter of credit in favor of Aspen U.K. for a sum not to exceed $100 million. This facility enables Aspen U.K. to use a letter of credit as Tier 2 Ancillary Own Funds to meet its internal risk appetite requirements above its SCR. Up to 50% of the SCR can be covered by Tier 2 capital as represented by the Ancillary Own Funds. In the event Aspen U.K. demands payment of cash funds under this facility, Aspen Holdings as guarantor would be required to repay the letter of credit.
Aspen U.K. is required to maintain a minimum margin of solvency equivalent to its SCR at all times, the calculation of which depends on the type and amount of insurance business written. The financial resources maintained in support of the SCR must be adequate, both as to amount and quality, to ensure that there is no significant risk that Aspen U.K.’s liabilities cannot be met as they fall due. If the PRA considers that there are insufficient capital resources, it can advise an insurer of the amount and quality of capital resources it considers necessary for that insurer. For more information regarding the risks associated with Solvency II, refer to Part I, Item 1A, “Risk Factors — Regulatory Risks — The E.U. Directive on Solvency II may affect the way in which Aspen U.K. and AMAL manage their businesses.”


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Under the Solvency II regime, solvency requirements apply to both Aspen U.K. and Aspen European. Aspen U.K. is also required to meet local capital requirements for its branches in Canada, Singapore, Australia and its insurance activities in Switzerland. Aspen U.K. holds capital in excess of all of its regulatory capital requirements as at December 31, 2018.
Solvency II Regime Reports and Returns. Under the Solvency II regime, Aspen U.K. is required to disclose to the PRA quarterly and annually Quantitative Reporting Templates (“QRTs”) and, at least every three years, a narrative Regular Supervisory Report (“RSR”). The QRTs report quantitative information on a Solvency II and local GAAP basis including, among other things, the balance sheet and own funds, Solvency II capital position, invested assets, premiums, claims and technical provisions, reinsurance and group specific information. The RSR includes both qualitative and quantitative information and is more forward-looking. Aspen U.K. must also complete a set of annual National Specific Templates (“NSTs”) which are only applicable to solo firms (i.e., specific companies as against groups). An annual Solvency and Financial Condition Report (“SFCR”), which must include a mixture of narrative information and a sub-set of the QRTs, must also be submitted and posted on Aspen’s website. Similarly, Aspen U.K. must submit an annual Own Risk and Solvency Assessment (“ORSA”) to the PRA. The ORSA report is produced annually and provides a summary of all of the activity and processes during the preceding year to assess and report on risks and ensure that our overall solvency needs are met at all times including a forward-looking assessment. It also explains the linkages between business strategy, business planning and capital and risk management processes. In 2016, the PRA granted Aspen U.K. a waiver for five years absolving it from the requirement to produce the QRTs, RSR, SFCR and ORSA at EEA-sub-group level due to Aspen Bermuda being subject to equivalent group supervision.
There are additional returns required by local regulators for Aspen U.K.’s branches in Australia, Canada, Ireland, Singapore and Switzerland.
Change of Control Prior Notifications.  The PRA and the FCA regulate the acquisition of “control” of any U.K. insurance company and Lloyd’s managing agent which are authorized under the Financial Services and Markets Act 2000 (“FSMA”). Any legal entity or individual that (together with any person with whom it or he is “acting in concert”) directly or indirectly acquires 10% or more of the shares in a U.K. authorized insurance company or Lloyd’s managing agent, or their parent company, or is entitled to exercise or control the exercise of 10% or more of the voting power in such authorized insurance company or Lloyd’s managing agent or their parent company, would be considered to have acquired “control” for the purposes of the relevant legislation, as would a person who had significant influence over the management of such authorized insurance company or their parent company by virtue of his shareholding or voting power in either. A purchaser of 10% or more of the ordinary shares of the Company would therefore be considered to have acquired “control” of Aspen U.K. or AMAL. Under FSMA, any person proposing to acquire “control” over a U.K. authorized insurance company must give prior notification to the PRA and the FCA of his intention to do so. The PRA and the FCA would then have upwards of sixty working days to consider that person’s application to acquire “control.” Failure to make the relevant prior application could result in action being taken against Aspen U.K. or AMAL (as relevant) by the PRA and the FCA. Failure to make the relevant prior application would constitute criminal offense. A person who is already deemed to have “control” will require prior approval of the PRA and the FCA if such person increases their level of “control” beyond certain percentages. These percentages are 20%, 30% and 50%. Similar requirements apply in relation to the acquisition of control of a U.K. authorized person which is an insurance intermediary (such as AUKSSL and ARML) except that the threshold triggering the requirement for prior approval is 20% of the shares or voting power in the insurance intermediary or its parent company. The approval of the Council of Lloyd’s is also required in relation to the change of control of a Lloyd’s managing agent or member. Broadly, Lloyd’s applies the same tests in relation to control as are set out in FSMA (see above) and in practice coordinates its approval process with that of the PRA. Change of control applications have been filed by Highlands in connection with the Merger and those applications were approved in early 2019.
PRA, FCA and Bank of England Powers Over Unregulated Parent Companies. The Financial Services Act 2012 created additional powers for the FCA, PRA and the Bank of England to impose requirements on U.K. parent companies, such as Aspen European, of certain regulated firms. The powers allow the regulators to: (i) direct qualifying parent undertakings to comply with specific requirements; (ii) take enforcement action against qualifying parent undertakings if those directions are breached; and (iii) gather information from qualifying parent undertakings. For example, if an authorized firm is in crisis, the new powers may allow a regulator to direct a parent company to provide that firm with capital or liquidity necessary to improve the position of the firm. The definition of “qualifying parent undertakings” could allow the regulators to exercise these powers against an intermediate U.K. parent company of an insurer that is not at the head of the ownership chain. How the FCA, PRA and Bank of England will exercise these powers over unregulated holding companies remains uncertain but the FCA, PRA and Bank of England have indicated that they will be used rarely and only where the other regulatory tools available are ineffective.
Senior Managers and Certification Regime. In December 2018, the FCA and PRA extended the application of the Senior Managers & Certification Regime, which previously applied to U.K.-regulated entities in the banking sector, to insurers, reinsurers, Lloyd’s managing agencies, insurance intermediaries and other U.K.-regulated entities. The Senior Managers & Certification Regime (“SM&CR”) is an enhanced individual accountability framework which builds upon and replaces the existing regulatory framework of the Senior Insurance Managers Regime. The SM&CR seeks to ensure that senior persons who are effectively running


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insurance firms, or who have responsibility for other key functions at those firms, meet standards of fitness and propriety for acting with integrity, honesty and skill and that senior management be responsible for compliance with U.K. regulatory requirements.
Insurance Distribution Directive. On October 1, 2018, the Insurance Distribution Directive (“IDD”) replaced the Insurance Mediation Directive (“IMD”). While IMD only applied to insurance intermediaries, IDD applies to all those who conduct insurance distribution to customers, such as insurers (i.e., Aspen U.K.), Lloyd’s managing agencies (i.e., AMAL), insurance intermediaries (i.e., AUKSSL and ARML) and firms such as banks or retailers who provide insurance alongside their primary business and whose customers range from individual consumers to large multinational organizations. The main provisions of IDD include remuneration disclosure, cross-selling limitations and professional training requirements.
Branch Regulations
Switzerland
General.  Aspen U.K. established a branch in Zurich, Switzerland in 2007 to write property and casualty reinsurance. The Federal Office of Private Insurance, a predecessor to the Financial Markets Supervisory Authority (“FINMA”) confirmed that such reinsurance operations were not subject to its supervision under the Insurance Supervision Act (Switzerland), so long as the Swiss branch only writes reinsurance.
In 2010, Aspen U.K. received approval from FINMA to establish an insurance branch in Zurich, Switzerland. The activities of the Switzerland insurance branch are regulated by FINMA pursuant to the Insurance Supervision Act (Switzerland). In 2016, it was confirmed that FINMA was obliged to supervise the reinsurance operations of Aspen U.K.’s Swiss branch as a result of having both insurance and reinsurance operations in Switzerland. Effective 2017, we decided to no longer write insurance business via the insurance branch in Switzerland.
Supervision.  FINMA conducted a review of Aspen U.K.’s Swiss operations in November 2018. No material issues were identified.
Singapore
General.  In 2008, Aspen U.K. received approval from the Monetary Authority of Singapore (“MAS”) to establish a reinsurance branch in Singapore. The activities of the Singapore branch are regulated by the MAS pursuant to The Insurance Act of Singapore. Aspen U.K. is also registered by the Accounting and Corporate Regulatory Authority (“ACRA”) as a foreign company in Singapore and in that capacity is separately regulated by ACRA pursuant to The Companies Act of Singapore. AMAL set up a subsidiary company, Aspen Singapore Pte. Ltd. (“ASPL”), to access insurance business in Singapore and regulatory approval for ASPL to act as an intermediary was received from MAS in 2015. ASPL was incorporated by ACRA in 2015 as a local company regulated by the Companies Act of Singapore.
Supervision.  The MAS conducted a review in August 2016 of the Singapore branch of Aspen U.K. No material issues were identified.
Canada
General.  Aspen U.K. has a Canadian branch whose activities are regulated by the Office of the Superintendent of Financial Institutions (“OSFI”). OSFI is the federal regulatory authority that supervises Canadian and non-Canadian insurance companies operating in Canada pursuant to the Insurance Companies Act (Canada). In addition, the branch is subject to the laws and regulations of each of the provinces and territories in which it is licensed.
Supervision.  OSFI carried out an inspection visit to the Canadian branch of Aspen U.K. in September 2014. No material issues were identified. OSFI has informed us that it plans to conduct a review of our Canadian branch in April 2019.
Australia
General.  In 2008, Aspen U.K. received authorization from the Australian Prudential Regulation Authority (“APRA”) to establish a branch in Australia. The activities of the Australian branch are regulated by APRA pursuant to the Insurance Act of Australia 1973. Aspen U.K. is also registered by the Australian Securities and Investments Commission as a foreign company in Australia under the Corporations Act of Australia 2001.
Supervision.  APRA undertook a review of Aspen U.K.’s Australian branch in November 2018. No material issues were identified.


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For additional information on our branches, refer to Note 19(a) of our consolidated financial statements, “Commitments and Contingent Liabilities — Restricted Assets.”
Other Regulated Firms

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

Dubai

General. AUKSSL established a branch in Dubai through which it places reinsurance business into Aspen U.K. The Dubai Financial Services Authority (“DFSA”) confirmed its approval of the branch in 2015. The DFSA undertook a review of AUKSSL’s Dubai branch in June 2018. No material issues were identified.
Lloyd’s Regulation
General.  We participate in the Lloyd’s market through our ownership of AMAL and AUL. AMAL is the managing agent for Syndicate 4711. AUL provides underwriting capacity to Syndicate 4711 and is a Lloyd’s corporate member. AMAL is authorized by the PRA and regulated by the FCA and the PRA. AMAL received FSA (predecessor to the PRA and FCA) authorization in 2008. Our Lloyd’s operations are also subject to supervision by the Council of Lloyd’s. AMAL received authorization from Lloyd’s for Syndicate 4711 in 2008. The PRA and the FCA have been granted broad authorization and intervention powers as they relate to the operations of all insurers, including Lloyd’s syndicates, operating in the U.K. The Lloyd’s market is authorized by the PRA and regulated by both the PRA and the FCA and is required to implement certain rules prescribed by the PRA and the FCA, which it does by the powers it has under the Lloyd’s Act 1982 relating to the operation of the Lloyd’s market. Lloyd’s prescribes, in respect of its managing agents and corporate members, certain minimum standards relating to their management and control, solvency and various other requirements. The PRA and the FCA directly monitor Lloyd’s managing agents’ compliance with their own regulatory requirements. If it appears to the PRA or the FCA that either Lloyd’s is not fulfilling its regulatory responsibilities or that managing agents are not complying with the applicable regulatory rules and guidance, they may intervene in accordance with their powers under the FSMA. By entering into a membership agreement with Lloyd’s, AUL undertakes to comply with all Lloyd’s byelaws and regulations as well as the provisions of the Lloyd’s Acts and FSMA that are applicable to it. The operation of Syndicate 4711, as well as AMAL and their respective directors, are subject to the Lloyd’s supervisory regime.
Supervision.  AMAL was in scope for the PRA Periodic Summary Meeting performed in April 2018. The small number of actions arising from the review have been completed.
Solvency Requirements.  Underwriting capacity of a member of Lloyd’s must be supported by providing a deposit (referred to as “Funds at Lloyd’s”) in the form of cash, securities or letters of credit in an amount determined in accordance with Lloyd’s requirements and the Solvency II regime. The amount of such deposit is calculated for each member through the completion of an annual capital adequacy exercise. Under these requirements, Lloyd’s must demonstrate that each member has sufficient assets to meet its underwriting liabilities plus a required solvency margin. This margin can have the effect of reducing the amount of funds available to distribute as profits to the member or increasing the amount required to be funded by the member to cover its solvency margin. In 2015, Lloyd’s received confirmation that its application to use its Internal Model to calculate its SCR was approved by the PRA. Effective in 2016, Lloyd’s Internal Model has been used to calculate Lloyd’s capital requirement.
Restrictions.   A Reinsurance to Close (“RITC”) is a reinsurance contract to transfer the responsibility for discharging all the liabilities that attach to one year of account of a syndicate into a later year of account of the same or different syndicate in return for a premium. A RITC is usually put in place after the third year of operations of a syndicate year of account. If the managing agency concludes that an appropriate RITC for a syndicate that it manages cannot be determined equitably or negotiated on commercially acceptable terms in respect of a particular underwriting year, the underwriting year must remain open and be placed into run-off. During this period there cannot be a release of the Funds at Lloyd’s of a corporate member that is a member of that syndicate without the consent of Lloyd’s and such consent will only be considered where the member has surplus Funds at Lloyd’s.
Intervention Powers.  The Council of Lloyd’s has wide discretionary powers to regulate members’ underwriting at Lloyd’s. It may, for instance, change the basis on which syndicate expenses are allocated or vary the Funds at Lloyd’s or the investment criteria applicable to the provision of Funds at Lloyd’s. Exercising any of these powers might affect the return on an investment of the corporate member in a given underwriting year. Further, the annual business plans of a syndicate are subject to the review and approval of the Lloyd’s Franchise Board. The Franchise Board is responsible for setting risk management and profitability targets for the Lloyd’s market and operates a business planning and monitoring process for all syndicates.
If a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund, which in many respects acts as an equivalent to a state guaranty fund in the United States. If Lloyd’s determines that the Central


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Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members. The Council of Lloyd’s has discretion to call or assess up to 3% of a member’s underwriting capacity in any one year as a Central Fund contribution. Our syndicate capacity for the 2019 underwriting year is $611.3 million (2018 underwriting year — $736.0 million). Above this level, it requires consent of members voting at a general meeting.
Jersey Regulation
General.  In 2010, we purchased APJ Jersey, a Jersey registered insurance company which is subject to the jurisdiction of the Jersey Financial Services Commission (“JFSC”). The JFSC sets the solvency regime for insurance companies under its jurisdiction. APJ Jersey holds funds in excess of the minimum requirement.
Supervision.  JFSC undertook a review of APJ Jersey in March 2013. No material matters were identified.
U.S. Regulation
General. AAIC is a Texas-domiciled insurance company and is licensed to write insurance on an admitted basis in 50 U.S. states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. In addition, AAIC is a certified surety company approved by the U.S. Department of the Treasury.  
We also write surplus lines policies through Aspen Specialty, Aspen U.K. and AMAL. Aspen Specialty is an insurance company domiciled and licensed in North Dakota and is therefore subject to North Dakota laws and regulations applicable to domestic insurers. Although Aspen Specialty is not licensed in any other state, it is eligible to write surplus lines policies on a non-admitted basis in all other U.S. states and the District of Columbia. Aspen Specialty accepts business only through licensed surplus lines brokers and does not market directly to the public.
Aspen U.K. is not licensed to write insurance on an admitted basis in any state in the U.S. but, as an alien insurer, it is eligible to write surplus lines business in all 50 U.S. states, the District of Columbia and other U.S. jurisdictions based on its listing in the Quarterly Listing of Alien Insurers of the International Insurers Department (“IID”) of the National Association of Insurance Commissioners (“NAIC”). Pursuant to IID requirements, Aspen U.K. has established a U.S. surplus lines trust fund with a U.S. bank to secure U.S. surplus lines policies. Syndicate 4711 also appears on the IID listing. As of December 31, 2018, Aspen U.K.’s and Syndicate 4711’s surplus lines trust funds were $198.8 million.
Following the enactment of the Non-Admitted and Reinsurance Reform Act (the “NRRA”) as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), no U.S. state can prohibit a surplus lines broker from placing business with a non-admitted insurer domiciled outside the U.S., such as Aspen U.K., that appears on the IID. IID listed insurers are required to report and continually maintain a capital and/or surplus amount of $45 million. As a matter of U.S. federal law, this means that Aspen U.K. should be surplus lines eligible in every U.S. state, even in states where Aspen U.K. has not previously been an eligible surplus lines insurer. Some states have developed eligibility standards and filing requirements separate from the IID listing, and our satisfaction of this additional listing or filing requirement is necessary to maintain our eligibility and acceptance by surplus lines brokers in those states.
Aspen Specialty, Aspen U.K. and AMAL are subject to limited state insurance regulations in states where they are surplus lines eligible. Specifically, rate and form regulations otherwise applicable to admitted insurers generally do not apply to Aspen Specialty, Aspen U.K. and AMAL’s surplus lines transactions. In addition, because Aspen U.K. and AMAL are not licensed under the laws of any U.S. state, U.S. solvency regulation tools otherwise applicable to admitted insurers do not generally apply to Aspen U.K. and AMAL. However, Aspen U.K. and AMAL are subject to federal and state incidental regulations in areas such as those pertaining to federal and state reporting related to terrorism coverage and post-disaster emergency orders. We monitor federal and state regulations and directives and comply as necessary for all affected subsidiaries.
Aspen Management is a Massachusetts corporation licensed as a surplus lines broker in Massachusetts, Connecticut, Georgia, New York and Texas. ASIS is a California limited liability company licensed as a surplus lines broker in California. Aspen Management and ASIS serve as surplus lines brokers only for companies within the Aspen Group and do not act on behalf of non-Aspen third parties or market directly to the public.
Aspen Re America is a Delaware corporation and functions as a reinsurance intermediary with offices in Connecticut, Florida, Georgia, Illinois and New York. Aspen Re America acts as a reinsurance intermediary for Aspen U.K. and as an approved Lloyd’s coverholder for the purpose of accessing certain non-U.S. business for AMAL only. Aspen Re America does not provide reinsurance intermediary services for non-Aspen third parties or market directly to the public.
Aspen U.S. Services is a Delaware corporation that provides administrative and technical services to our U.S. entities, primarily from our Rocky Hill, Connecticut office. It is authorized to contract such business in the various states where we have physical offices. No filings are required with state insurance departments.


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In December 2017, Aspen U.S. Holdings sold all AgriLogic subsidiaries, except AgriLogic Consulting, to CGB DS, a Louisiana corporation, in exchange for a 23.2% stake in the newly formed company, Crop Re, a Delaware limited liability company responsible for directing the placement of reinsurance on behalf of CGB DS and CGBIC, an Indiana insurance company affiliate of CGB DS and a Risk Management Agency licensed crop insurer. The remaining 76.8% of Crop Re is owned by CGB DS. AAIC’s primary crop insurance coverage will be run-off and AAIC, or an affiliate of AAIC, will provide quota share reinsurance to CGBIC for both federal and state regulated crop insurance as part of Aspen’s ownership in Crop Re. For more information on Crop Re, refer to Note 6 of our consolidated financial statements, “Investments.” Effective February 1, 2018, Aspen U.S. Holdings sold 50% of AgriLogic Consulting to one of the original founders of AgriLogic and 10% to CGB DS in exchange for a percentage of future cash flows of AgriLogic Consulting. Aspen U.S. Holdings retains a 40% interest in AgriLogic Consulting.
Blue Waters Insurers, Corp. is a Puerto Rico licensed insurance producer that is authorized to issue marine coverage on behalf of AAIC. Puerto Rico is a territory of the U.S. and an NAIC accredited jurisdiction.
State Insurance Holding Company Acts. Aspen Specialty and its affiliates are subject to the insurance holding company laws of North Dakota, and AAIC and its affiliates are subject to the insurance holding company laws of Texas. The holding company laws require that each U.S. insurance company within the holding company system furnish annual information about certain transactions with affiliated companies. Generally, all material transactions among companies in the holding company system affecting Aspen Specialty or AAIC, including sales, loans, reinsurance agreements, service agreements and dividend payments, must be fair and, if material or of a specified category, require prior notice and approval or non-disapproval by the North Dakota Commissioner of Insurance for Aspen Specialty or the Texas Commissioner of Insurance for AAIC.
The insurance holding company laws of North Dakota and Texas also require the annual submission of an enterprise risk report by a domestic insurer’s ultimate controlling person identifying risks likely to have a material adverse effect upon the financial condition or liquidity of such insurer or its insurance holding company system as a whole.
Change of Control Prior Notifications.  Before a person can acquire control of a U.S. domestic insurer or its holding company (or any person controlling such domestic insurer or holding company), such as the Company, prior written approval must generally be obtained from the insurance commissioner of the state where the insurer is domiciled. A person is generally presumed to have acquired “control” if it acquires, directly or indirectly, 10% or more of the voting securities of a U.S. domestic insurer or its holding company. This statutory presumption of control may be rebutted by a showing that control does not exist in fact.
Prior to granting approval of a “Form A” application to acquire control of a domestic insurer or its holding company, the domiciliary state insurance commissioner will consider such factors as the financial strength of the proposed acquirer, the integrity and management of the acquirer’s board of directors and executive officers, the acquirer’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. These laws also require prior notice of a proposed divestiture of a controlling interest in a domestic insurer or its holding company. These laws may discourage potential acquisition or divestiture proposals and may delay, deter or prevent a change of control involving us, including through unsolicited transactions that some or all of our shareholders might consider to be desirable.
In connection with the Merger, Highlands filed a Form A change of control application with the Texas Department of Insurance in respect to AAIC in October 2018 and made a similar change of control filing in November 2018 with the North Dakota Insurance Department with respect to Aspen Specialty. North Dakota approved the Aspen Specialty change of control in November 2018 and Texas approved the AAIC change of control in February 2019.
State Insurance Regulation.  State insurance authorities have broad authority to regulate admitted insurance business, including licensing, admitted assets, capital and surplus, market conduct, regulating unfair trade and claims practices, establishing reserve requirements or solvency standards, filing of rates and forms and regulating investments and dividends.
AAIC and Aspen Specialty prepare statutory financial statements in accordance with Statutory Accounting Principles (“SAP”) and procedures prescribed or permitted by applicable domiciliary states. State insurance laws and regulations require Aspen Specialty and AAIC to file statutory financial statements with insurance departments in every state where they are licensed. State insurance departments also conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies licensed in their states. Coordinated financial examinations are generally carried out every five years by the insurance departments of the domiciliary states under guidelines promulgated by the NAIC. In 2014, AAIC and ASIC completed Texas and North Dakota financial examinations for the five-year period ending December 31, 2012 and no material issues were identified. A routine financial examination of AAIC and ASIC commenced in late 2017 for the period January 1, 2013 through December 31, 2017 for which no report has yet been issued.
Statutory Accounting Principles.  SAP is a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is generally designed to report information in respect of an insurance company’s ability to meet its obligations to policyholders and claimants, and focuses on surplus adequacy. Accordingly, statutory


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accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.
U.S. GAAP is concerned with a company’s solvency but it is also concerned with other financial measurements, such as income and cash flows. Accordingly, U.S. GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with U.S. GAAP as opposed to SAP.
The application of the SAP rules on AAIC and Aspen Specialty, established by the NAIC and adopted by the Departments of Insurance of the states, establishes, among other things, the amount of statutory surplus and statutory net income of our U.S. Operating Subsidiaries and thus determines, in part, the amount of funds they have available to pay as dividends to parent company entities.
State Dividend Limitations.  Under North Dakota and Texas law, respectively, Aspen Specialty and AAIC may only pay dividends out of earned surplus as distinguished from contributed surplus. In addition, under North Dakota and Texas law, an insurance company’s policyholder surplus after payment of a dividend must be reasonable in relation to its outstanding liabilities and adequate for its financial needs.
In addition, the ability of Aspen Specialty or AAIC to declare extraordinary dividends is subject to prior approval of the applicable state insurance regulator. The North Dakota insurance law defines an extraordinary dividend as a dividend that exceeds, together with all dividends declared or distributed by the insurer within the preceding twelve months, the lesser of:
10% of its policyholders surplus as of the preceding December 31; or
the net income, not including realized capital gains, for the preceding calendar year.
The Texas insurance law defines an extraordinary dividend as a dividend that exceeds, together with all dividends declared or distributed by the insurer within the preceding twelve months, the greater of:
10% of its policyholders surplus as of the preceding December 31; or
the net income for the preceding calendar year.
Aspen U.S. Holdings must also meet its own dividend eligibility requirements under Delaware corporate law in order to distribute any dividends received from Aspen Specialty and AAIC. In particular, any dividend paid by Aspen U.S. Holdings must be declared out of surplus or net profits.
The dividend limitations imposed by the North Dakota and Texas insurance laws are based on the financial results of Aspen Specialty and AAIC determined by using SAP accounting practices, which differ in certain respects from accounting principles used in financial statements prepared in conformity with U.S. GAAP. The significant differences relate to deferred acquisition expenses, deferred income taxes, required investment reserves, reserve calculation assumptions and surplus notes. Since both North Dakota and Texas law require insurance companies to pay dividends out of earned surplus as distinguished from contributed surplus, neither Aspen Specialty nor AAIC could pay a dividend as of December 31, 2018.
Own Risk and Solvency Assessment (ORSA). The North Dakota and Texas insurance laws require an insurer, or the insurance group, to conduct an internal own risk and solvency assessment at least annually of such insurer’s material risks in normal and stressed environments and submit an annual summary report, which is a confidential assessment of the material and relevant risks associated with such insurer’s business plan, as well as the sufficiency of its capital resources to support these risks. We have filed the annual required summary report of our own risk and solvency assessment with the Texas Department of Insurance, our lead U.S. insurance regulator.
Cybersecurity Regulations. In 2017, new cybersecurity rules took effect for financial institutions, insurers and certain other companies supervised by the New York Department of Financial Services (the “NYDFS Cybersecurity Regulation”), such as AAIC, which is licensed in New York. The NYDFS Cybersecurity Regulation imposes significant regulatory burdens intended to protect the confidentiality, integrity and availability of information systems.
In 2017, the NAIC also adopted the Insurance Data Security Model Law (the “Cybersecurity Model Law”). The Cybersecurity Model Law requires insurers, insurance producers and other entities required to be licensed under state insurance laws to comply with certain requirements under state insurance laws, such as developing and maintaining a written information security program, conducting risk and overseeing the data security practices of third-party vendors. The Cybersecurity Model Law closely resembles the NYDFS Cybersecurity Regulation and has been adopted by several U.S. states. If all U.S. states fail to enact the Cybersecurity Model Law within the next five years, federal legislation in this area may be enacted to pre-empt state law.


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State Risk-Based Capital Regulations.  Most states require their domestic insurers to annually report their risk-based capital based on a formula that takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. The states use the formula as an early warning regulatory tool to identify possibly inadequately capitalized insurers for the purposes of initiating regulatory action, and not as a means to rank insurers generally. Most states’ insurance law imposes broad confidentiality requirements on those engaged in any manner in the insurance business and on the regulator as to the use and publication of risk-based capital data. The regulator typically has explicit regulatory authority to require various actions by, or to take various actions against, insurers whose total adjusted capital does not exceed certain risk-based capital levels.

Additionally, since February 2016, the NAIC has been developing a methodology for the calculation of group capital for all entities in an insurance holding company system. The goal is to provide a simple method for U.S. regulators to aggregate the available capital and the minimum capital of each entity in a group in a way that applies to all companies regardless of their structure. One conceptual issue with the group capital calculation is its intended use, which regulators have still not articulated, other than characterizing it as “another regulatory tool,” rather than a regulatory requirement. While the group capital calculation is still under discussion and will be field tested by volunteers in 2019, it is expected that the new group capital calculation tool will use a risk-based capital aggregation methodology.
Residual Market Mechanisms and Guaranty Funds.  Licensed and admitted U.S. insurers such as Aspen Specialty and AAIC are required to participate in various state residual market mechanisms whose goal is to provide affordability and availability of insurance to those consumers who may not otherwise be able to obtain insurance, including, for example catastrophe insurance in high-risk areas. The mechanics of how each state’s residual markets operate may differ, but generally, risks are either assigned to various private carriers or the state manages the risk through a pooling arrangement. If losses exceed the funds the pool has available to pay those losses, the pools have the ability to assess insurers to provide additional funds to the pool. The amounts of the assessment for each company are normally based upon the proportion of each insurer’s (and in some cases the insurer’s and its affiliates’) written premium for coverages similar to those provided by the pool, and are frequently uncapped. State guaranty associations also have the ability to assess licensed U.S. insurers in order to provide funds for payment of losses for insurers which have become insolvent. In many cases, but not all, assessed insurers may recoup the amount of these guaranty fund and state pool assessments through premium rates, premium tax credits or policy surcharges.
Operations of Aspen U.K. and Aspen Bermuda.  Aspen U.K. and Aspen Bermuda are not admitted to engage in the business of insurance in the U.S. although, as stated above, Aspen U.K. and Syndicate 4711, due to their inclusion in the NAIC Quarterly Listing of Alien Insurers, are eligible to write surplus lines business as alien, non-admitted insurers in all 50 U.S. states, the District of Columbia and other U.S. jurisdictions, such as Puerto Rico, in accordance with the Dodd-Frank Act. The laws of most states regulate or prohibit the sale of insurance and reinsurance within their jurisdictions by non-admitted insurers and reinsurers. We do not intend that Aspen Bermuda maintain an office or solicit, advertise, settle claims or conduct other insurance activities in any jurisdiction other than Bermuda where the conduct of such activities would require Aspen Bermuda to be so admitted. Aspen U.K. does not maintain an office in the U.S. but it reinsures U.S. primary risk as an alien accredited/trusteed reinsurer in 50 U.S. states and the District of Columbia and, as noted above, writes excess and surplus lines business as an eligible, but non-admitted, alien surplus lines insurer. It accepts business only through U.S. licensed surplus lines brokers and does not market directly to the public. Although it does not underwrite or handle claims directly in the U.S., Aspen U.K. may grant limited underwriting authorities and retain third-party administrators, duly licensed, for the purpose of facilitating U.S business. Aspen U.K. has also issued limited underwriting authorities to various affiliated U.S. entities described above.
In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers’ business operations are affected by regulatory requirements in various U.S. states governing “credit for reinsurance” laws imposed on ceding companies. In general, a ceding company which obtains reinsurance from a reinsurer that is licensed, accredited, authorized or approved by the jurisdiction or state in which the reinsurer is domiciled is permitted to take a credit on its statutory financial statements in an aggregate amount equal to the liability for unearned premiums (which are that portion of premiums written which applies to the unexpired portion of the policy period) and loss reserves and loss adjustment expense reserves ceded to the reinsurer. However, cedants are permitted to take a credit to statutory surplus resulting from reinsurance obtained from a non-licensed and non-accredited reinsurer only to the extent that the reinsurer provides a letter of credit, trust account or other acceptable security arrangement.
For its U.S. reinsurance activities, Aspen U.K. has established and must maintain a multi-beneficiary U.S. trust fund for the benefit of its U.S. cedants so that they are able to take financial statement credit for reinsurance without the need for Aspen U.K. to post contract-specific security. The minimum trust fund amount is $20.0 million plus an amount equal to 100% of Aspen U.K.’s U.S. reinsurance liabilities collateralized under this arrangement. The total market value of assets in the Aspen U.K. multi-beneficiary trust were $1,336.4 million as at December 31, 2018 and $1,350.9 million as at December 31, 2017. For its U.S. reinsurance activities, Aspen Bermuda likewise has established and must maintain a multi-beneficiary U.S. trust fund for the benefit of its U.S. cedants so that they are able to take financial statement credit for reinsurance without the need for Aspen Bermuda to post contract specific security. The minimum trust fund amount is $20.0 million plus an amount equal to 100% of Aspen Bermuda’s U.S. reinsurance liabilities collateralized under this arrangement. As further explained below, Aspen Bermuda obtained


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approval to post reduced collateral in Florida, New York and North Dakota (i.e., 20% versus 100%). As at December 31, 2018, the total value of assets held in the Aspen Bermuda multi-beneficiary trust were $1,112.4 million (2017 —$1,333.6 million).
As a result of the Dodd-Frank Act, only a ceding insurer’s state of domicile can dictate the credit for reinsurance requirements. Other NAIC jurisdictions in which a ceding insurer is licensed are no longer able to require additional collateral from non-admitted reinsurers or otherwise impose their own credit for reinsurance laws on ceding insurers domiciled in other states. In 2011, the NAIC adopted revisions to its Credit for Reinsurance Model Law and Model Regulation (together the “Amended Credit for Reinsurance Model Act”). As at December 1, 2017, the Amended Credit for Reinsurance Model Act has been adopted in at least 34 states, including Texas, where the law took effect on January 1, 2018 and North Dakota, where the law took effect on January 1, 2016. In those states that have adopted the Amended Credit for Reinsurance Model Act and adopted regulations to establish application and approval procedures, qualifying non-admitted reinsurers domiciled in “qualified jurisdictions” who meet certain minimum rating and capital requirements would, upon application to and approval by the state Insurance Departments, be permitted to post less than the 100% collateral currently required with respect to a cedant domiciled in that state. Bermuda is among the approved “qualified jurisdictions” which allows U.S. states that have adopted the Amended Credit for Reinsurance Model Act to implement reduced collateral requirements with respect to reinsurers domiciled in Bermuda, such as Aspen Bermuda. Aspen Bermuda has obtained approval to post reduced collateral in Florida, New York and North Dakota (i.e., 20% versus 100%). Texas promulgated regulations, effective June 19, 2018, that permit a reinsurer to post less than 100% collateral. We will continue to monitor developments in collateral reduction with a view to seeking approval to post reduced collateral in other relevant states over time.
Further, the Dodd-Frank Act authorizes the U.S. Department of Treasury and the Office of the U.S. Trade Representative to negotiate covered agreements governing certain matters relating to insurance with foreign jurisdictions, including reinsurance collateral, group supervision and exchange of information between supervisory authorities. Such covered agreements could pre-empt state insurance laws. In September 2017, the U.S. federal authorities and the E.U. signed a covered agreement and, in response to Brexit, the U.S. and U.K. signed a covered agreement in December 2018 consistent with the U.S. and E.U. agreement. In terms of reinsurance, both covered agreements eliminate collateral and local presence requirements for alien reinsurers operating in non-domestic markets. In connection with an alien reinsurer’s assumption of insurance business from a U.S. cedant, both covered agreements give U.S. states five years from execution to remove existing reinsurance collateral requirements for alien reinsurers that meet certain standards. These standards include minimum capital and solvency ratios, confirmation of financial condition by the reinsurer’s domestic regulator and claims payment standards. If U.S. states do not remove such reinsurance collateral requirements within the five year period, U.S. state credit for reinsurance laws could be subject to federal collateral reduction legislation that pre-empts the state laws.
The NAIC is working on proposed amendments to the Amended Credit for Reinsurance Model Act and Model Regulation in order to satisfy the substantive and timing requirements of the covered agreements. In addition to removing the reinsurance collateral obligations for alien reinsurers, the proposed NAIC amendments would also provide a means by which reinsurers domiciled in other qualifying non-U.S. jurisdictions as well as reinsurers domiciled in qualifying states can achieve equivalent reinsurance collateral status for reinsurance contracts with U.S. insurers.
Lloyd’s is licensed as a market in Illinois, Kentucky and the U.S. Virgin Islands to write insurance business. It is also eligible to write surplus lines and reinsurance business in all other U.S. states and territories. Lloyd’s as a whole makes certain returns to U.S. regulators and each syndicate makes quarterly trust returns to the New York Department of Financial Services with respect to its surplus lines and reinsurance business. Separate trust funds are in place to support this business. As at December 31, 2018, Syndicate 4711 had $75.2 million (December 31, 2017 — $73.1 million) held in trust for its surplus lines business and $43.1 million (December 31, 2017 — $49.3 million) held in trust for its reinsurance business.
Investment adviser regulation. Our subsidiary Aspen Capital Advisors Inc. (“Aspen Advisors”) is registered with the SEC as a registered investment adviser. Aspen Advisors is the investment adviser to a private investment fund that primarily invests in securities tied to weather, natural disasters or other insurance risks as well as certain collateralized property catastrophe reinsurance contracts. In the future, Aspen Advisors may form and manage additional privately offered pooled investment vehicles, customize funds for single investors or groups of investors or manage separately managed accounts of other qualified clients on a limited basis. Aspen Advisors net assets under management as at December 31, 2018 were $86.3 million (December 31, 2017 — $91.9 million), all of which were managed on a discretionary basis. The amount disclosed differs from Aspen Advisors “regulatory assets under management” disclosed in Part 1 of its Form ADV, which is calculated in accordance with the requirements of that form.
Aspen Advisors is subject to regulation as an investment adviser by the SEC. Federal and state securities laws and regulations are primarily intended to protect investors in the securities markets and generally grant regulatory agencies broad rulemaking and enforcement powers, including the power to limit or restrict the conduct of business for failure to comply with such laws and regulations. The SEC and state securities regulatory authorities from time to time may make inquiries and conduct examinations regarding compliance by Aspen Advisors with securities and other laws and regulations. We intend to cooperate with such inquiries and examinations and take corrective action when warranted. Aspen Advisors may also be subject to similar laws and regulations


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in foreign countries if it provides investment advisory services, offers products similar to those described above or conducts other activities.
Available Information
Our website is maintained at www.aspen.co. The information on our website is not incorporated by reference in this report. We make available, free of charge through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. We also make available, free of charge from our website, our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Audit Committee Charter, Compensation Committee Charter, Corporate Governance and Nominating Committee Charter, Disclosure Policy and Director Independence Standards. Such information is also available in print for any shareholder who sends a request to Aspen Insurance Holdings Limited, Attention: Company Secretary, 141 Front Street, Hamilton HM19, Bermuda.
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The address of the SEC’s website is www.sec.gov.



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Item 1A.
Risk Factors

You should carefully consider the following risk factors and all other information set forth in this report, including our consolidated financial statements and the notes thereto. Any of the risks described below could materially and adversely affect our business, operating results or financial condition and could cause the trading price of our securities to decline significantly. The risk factors described below could also 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 SEC. The risks and uncertainties described below are not the only ones we face. However, these are the risks we believe to be material as of the date of this report. Additional risks not presently known to us or that we currently deem immaterial may also impair our future business or operating results.
Introduction
As with any publicly traded company, investing in our equity and debt securities carries risks. Our risk management strategy is designed to identify, measure, monitor and manage material risks that we can control and which could adversely affect our financial condition and operating results. We have invested significant resources to develop the appropriate risk management policies and procedures to implement this strategy. Nonetheless, the future business environment is intrinsically uncertain and difficult to forecast and, as a result, our risk management methods may not be successful. For more information on our risk management strategy, refer to Part I, Item 1, “Business — Risk Management — Risk Management Strategy.”
Risks Relating to the Merger

Failure to consummate the Merger within the expected time frame or at all could have a material adverse impact on our business, financial condition and results of operations.
There can be no assurance that the Merger will be consummated. The Merger is subject to the satisfaction or waiver of a number of conditions, including, among others, the maintenance of certain financial strength ratings of certain of our Operating Subsidiaries. Refer to “— A condition of the Merger is the maintenance of financial strength ratings of our Operating Subsidiaries and Highlands may become entitled to terminate the Merger Agreement if we receive a clear indication from A.M. Best or S&P that such agency intends to downgrade the financial strength rating of our Operating Subsidiaries and if Highlands exercises such right it could adversely affect our business, financial condition and results of operations” below. The Merger Agreement also contains certain termination rights, including Highlands’ right to terminate if we suffered aggregate net losses exceeding $350 million. The closing conditions for the Merger may not be satisfied or satisfied on a timely basis which makes the completion and timing of the completion of the Merger uncertain.
If the Merger is not completed on a timely basis or at all, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Merger, we may be subject to a number of risks including the following:
The price of our ordinary shares could decrease significantly given the current stock price reflects a market assumption that the Merger will occur;
If the Merger is not consummated, the investment goals of our shareholders may be materially different than those of our shareholders on a pre-Merger announcement basis given trading in our ordinary shares increased substantially following the announcement of the Merger Agreement;
Under certain circumstances, we may be required to pay Highlands a termination fee in the amount of $82.9 million, which may affect our financial condition and results of operations;
The Merger may not be completed as a result of the occurrence of an event, change or other circumstances that have a material adverse effect on our business;
If the Merger is not consummated, management and key personnel may be required to expend considerable time and effort reviewing and reconsidering our long-term strategy, which may detract from their ability to run our core business; and
Current and prospective employees may experience uncertainty about their future roles with us, which might adversely affect our ability to attract and retain employees who generate and service our business.
The announcement of the Merger may adversely affect our business, financial condition and results of operations.
We are subject to business uncertainties and contractual restrictions while the Merger is pending and uncertainty about the effect of the Merger on our employees and the brokers, insurers, cedants, customers and other third parties with whom we have a business relationship may have an adverse effect on our business, operations and financial condition regardless of whether or not the Merger is completed. These risks include the following, all of which could be exacerbated by a delay in the completion of the Merger:


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Our ratings may be adversely affected, which could have an adverse effect on our business, financial condition and operating results;
Brokers, insurers, cedants, customers and other third parties with whom we have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with us as a result of the Merger, which could negatively affect our revenues, earnings and cash flows, as well as the market price of our ordinary shares;
The manner in which brokers, insurers, cedants and other third parties perceive the Company may be negatively impacted, which in turn could affect our ability to compete for or write new business or obtain renewals in the marketplace;
Current and prospective employees may experience uncertainty about their future roles with us, which might adversely affect our ability to attract and retain employees who generate and service our business;
Time and resources committed by our management to matters relating to the Merger could otherwise have been devoted to our existing business or to pursuing other beneficial opportunities; and
We could be subject to litigation related to the Merger, including litigation related to any failure to complete the Merger or related to any enforcement proceeding commenced against the Company to perform its obligations under the Merger Agreement.
In addition, we expect to pay significant costs relating to the Merger, such as financial, legal, accounting advisory and printing fees, whether or not the Merger is completed. For more information, refer to Note 19(d) of our consolidated financial statements, “Commitments and Contingencies — Contingent Liabilities.”

A condition of the Merger is the maintenance of financial strength ratings of our Operating Subsidiaries and Highlands may become entitled to terminate the Merger Agreement if we receive a clear indication from A.M. Best or S&P that such agency intends to downgrade the financial strength rating of our Operating Subsidiaries and if Highlands exercises such right it could adversely affect our business, financial condition and results of operations.
A condition of the Merger is the maintenance of financial strength ratings of our Operating Subsidiaries. For further details on the ratings of our Operating Subsidiaries, refer to Part I, Item 1 “Business — Ratings” above. Under the Merger Agreement, Highlands may be entitled to terminate the Merger Agreement following a clear indication from A.M. Best or S&P that such rating agency intends to downgrade the financial strength rating of our Operating Subsidiaries. If we receive such indication, under the Merger Agreement, we have agreed to cooperate with Highlands and work together in good faith to develop and implement in a timely manner a plan for addressing any matters raised by such rating agency so as to avoid a rating downgrade. If no agreement can be reached, we maintain the right to take such measures as we reasonably see fit. If we take measures that cause, or would reasonably be expected to cause, a Triggering Event (as defined in the Merger Agreement) without the consent of Highlands, then Highlands may become entitled to terminate the Merger Agreement following notification to us.
As described above, failure to consummate the Merger could have a material adverse impact on our business, financial condition and results of operations. Refer to “— Failure to consummate the Merger within the expected time frame or at all could have a material adverse impact on our business, financial condition and results of operations” above. The adverse effects of a termination of the Merger Agreement could be compounded by the adverse effects of a rating downgrade on our competitive position in the (re)insurance industry, liquidity and financial flexibility as described below under “— Our Operating Subsidiaries are rated and our Lloyd’s business benefits from a rating by one or more of A.M. Best, S&P and Moody’s and a decline in any of these ratings could adversely affect our standing among brokers and customers and cause our premiums and earnings to decrease.”
Insurance Risks
Our financial condition and operating results may be adversely affected by the occurrence of catastrophic events.
As part of our insurance and reinsurance operations, we assume substantial exposure to losses resulting from catastrophic events. Catastrophes can be caused by various unpredictable events, including, but not limited to, severe weather, floods, explosions, wildfires, volcanic eruptions, earthquakes and tsunamis. The severe weather events to which we are exposed include tropical storms, cyclones, hurricanes, winter storms, tornadoes, hailstorms and severe rainfall causing flash floods.
The incidence, severity and magnitude of catastrophes are inherently unpredictable and our losses from such catastrophes have been and can be substantial. In addition, we expect that increases in the values and concentrations of insured property will increase the severity of such occurrences in the future and that global climate change may increase the frequency and severity of severe weather events, wildfires and flooding. Although we attempt to manage our exposure to such events through a multitude of approaches (including geographic diversification, geographic limits, individual policy limits, exclusions or limitations from coverage, purchase of reinsurance and expansion of supportive collateralized capacity), the availability of these management tools


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may be dependent on market factors and, to the extent available, may not respond in the way that we expect. In addition, a single catastrophic event could affect multiple geographic zones or the frequency or severity of catastrophic events could exceed our estimates. As a result, the occurrence of one or more catastrophic events or an unusual frequency of smaller events may result in substantial volatility in, and may materially adversely affect, our business, financial condition or operating results.
The models we use to assess our exposure to losses from future catastrophes contain inherent uncertainties and our actual losses may therefore differ significantly from expectations.
To help assess our exposure to losses from catastrophes we use computer-based models which simulate multiple scenarios using a variety of assumptions. These models are developed in part by third party vendors and their effectiveness relies on the numerous inputs and assumptions contained within them, including, but not limited to, scientific research, historical data, exposure data provided by insureds and reinsureds, data on the terms and conditions of insurance policies and the professional judgment of our employees and other industry specialists. While the models have evolved considerably over time, they do not necessarily accurately measure the statistical distribution of future losses due to the inherent limitations of the inputs and assumptions on which they rely. These limitations are evidenced by significant variation in the results obtained from different models, material changes in model results over time due to refinement of the underlying data elements and assumptions and the uncertain predictive capability and performance of models over longer time intervals. The effect of these limitations is that future losses from catastrophic events may be larger and more frequent than expected or reported in our financial statements to date based on model assumptions, resulting in a material adverse effect on our financial condition or operating results.
Global climate change may have a material adverse effect on our operating results and financial condition if we do not adequately assess and price for any increased frequency and severity of catastrophes resulting from these environmental factors.
There is widespread consensus in the scientific community that there is a long-term upward trend in global air and sea temperatures which is likely to increase the severity and frequency of severe weather events over the coming decades. Rising sea levels are also expected to add to the risks associated with coastal flooding in many geographical areas. Large scale climate change could also increase both the frequency and severity of natural catastrophes and our loss costs associated with property damage and business interruption due to storms, floods and other weather-related events. In addition, global climate change could impair our ability to predict the costs associated with future weather events and could also give rise to new environmental liability claims in the energy, manufacturing and other industries we serve.
Given the scientific uncertainty of predicting the effect of climate cycles and climate change on the frequency and severity of catastrophes and the lack of adequate predictive tools, we may not be able to adequately model the associated exposures and potential losses in connection with such catastrophes which could have a material adverse effect on our business, financial condition or operating results.
Our operating results may be adversely affected by one or more large losses from events other than catastrophes.
Large losses from single events can occur if we are exposed to such events through more than one (re)insurance contract. Such losses are referred to as “clash losses.” We seek to manage our exposure to large losses from events other than catastrophes by identifying possible scenarios under which we could be exposed and limiting our exposure to these potential scenarios. Some of the more significant scenarios we have identified are terrorist attacks, fire, explosion or spill at a refinery or offshore oil and gas installation, the collapse of a major office building, accidents at nuclear power stations, a series of simultaneous cyber-attacks, the collision of two ships, an explosion in a port and the loss of a passenger airplane.
These risks are inherently unpredictable. It is difficult to predict the frequency of events of this nature and to estimate the amount of loss that any given occurrence will generate. Some of these large losses may also have the potential for exposure across multiple lines of business. As a consequence, our results could be materially adversely affected if there is an unexpected large number of clash losses in a period or if there is one or more of such losses of an unexpected large value. Our results may also be adversely affected if losses arise from a scenario we have not modeled. To the extent that losses from these risks occur, our financial condition and operating results could be materially affected.
We could face unanticipated losses from war, terrorism and political unrest, government action that is hostile to commercial interests and from sovereign, sub-sovereign and corporate defaults, and these or other unanticipated losses could have a material adverse effect on our financial condition or operating results.
We have substantial exposure to unexpected, large losses resulting from man-made catastrophic events such as, but not limited to, acts of war, acts of terrorism and losses resulting from political instability, government action that is hostile to commercial interests and sovereign, sub-sovereign and corporate defaults. These risks are inherently unpredictable as it is difficult to predict


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their occurrence with statistical certainty or to estimate the amount of loss such an occurrence may generate. Terrorist attacks around the globe and ongoing unrest in the Middle East and North Korea have highlighted the unpredictable but increasingly present threat of terrorism and political instability.
Terrorist events could generate greater interest in political violence insurance coverage and greater awareness of the risks multinational corporations face in conflict-prone regions. We closely monitor the amount and types of coverage we provide for terrorism risk under insurance policies and reinsurance treaties. Even in cases where we have deliberately sought to exclude such coverage, there can be no assurance that a court or arbitration panel will interpret policy language or issue a ruling favorable to us. Accordingly, we may not be able to eliminate our exposure to terrorist events and there remains a risk that our reserves will not be adequate to cover such losses should they materialize. Notably, the Terrorism Risk Insurance Program Reauthorization Act of 2015 (the “2015 TRIA Reauthorization”) does not provide coverage for reinsurance losses. In addition, we have limited terrorism coverage for exposure to catastrophe losses related to acts of terrorism in the reinsurance that we purchase. Although the 2015 TRIA Reauthorization provides benefits in the event of certain acts of terrorism occurring in the United States, those benefits are subject to a deductible and other limitations.
The 2015 TRIA Reauthorization, which extended the Terrorism Risk Insurance Act of 2002 to December 31, 2020, fixed the insurer deductible at 20% of an insurer’s direct earned premium of the preceding calendar year and the federal share of compensation at 85% of insured losses that exceed insurer deductibles, but only until January 1, 2016, from which time the federal share decreased, and will continue to decrease, by 1 percentage point per calendar year until it is equal to 80%. Given the unpredictable frequency and severity of terrorism losses and the limited terrorism coverage in our own reinsurance program, future losses from acts of terrorism could materially and adversely affect our operating results or financial condition.
Our operating results may be adversely affected by an unexpected accumulation of attritional losses.
In addition to our exposures to catastrophes and other large losses as discussed above, our operating results may be adversely affected by unexpectedly large accumulations of attritional losses. We seek to manage this risk by using appropriate underwriting processes to guide the pricing, terms and acceptance of risks. These processes, which may include pricing models, are intended to ensure that premiums received are sufficient to cover the expected levels of attritional losses and a contribution to the cost of catastrophes and large losses where necessary. However, it is possible that our underwriting approaches or our pricing models may not work as intended and that actual losses from a class of risks may be greater than expected. Our pricing models are also subject to the same limitations as the models used to assess our exposure to catastrophe losses noted above. Accordingly, these factors could adversely impact our financial condition and/or operating results.
The effects of emerging claim and coverage issues, such as (but not limited to) bad faith claims or disputed policy terms, on our business are uncertain.
Claim and coverage issues can arise when the application of (re)insurance policy language to potentially covered claims is unclear or disputed by the parties. When such issues emerge they may adversely affect our business by extending coverage beyond our underwriting intent or increasing the number or size of claims. In some instances, these coverage changes may not become apparent until after we have issued (re)insurance contracts that are affected by such changes. As a result, the full extent of our liability under (re)insurance policies may not be known for many years after the policies are issued. Emerging claim and coverage issues could therefore have an adverse effect on our operating results and financial condition. In particular, our exposure to casualty (re)insurance lines increases our potential exposure to this risk due to the uncertainties of expanded theories of liability and the “long-tail” nature of these lines of business.
Recently, the Florida insurance market has seen an increase in losses and loss adjustment expenses due to the prevalence of assignment of benefits (“AOB”) claims. Through AOB, homeowners are increasingly assigning the benefit of their insurance recovery to third parties (including the right to claim back legal fees if they are successful in arguing for a larger than initially offered pay-out). AOB practice in Florida has been characterized by an inflated size and number of claims, increased litigation, interference in the adjustment of claims and the assertion of bad faith actions and one-way attorney fees. There were a large number of AOB claims following Hurricane Irma in 2017. It remains to be seen whether AOB claims will materially alter the loss experience of (re)insurers in the wake of Hurricane Michael in 2018, however, ongoing AOB activity and related potentially fraudulent claims activity may materially affect us by inflating the size of our losses and loss adjustment expenses.
The monetary impact of certain claims may be difficult to predict or ascertain upon inception and potential losses from such claims can be significant. For example, the full extent of our liability and exposure from claims of bad faith is not ascertainable until the claim has been presented and investigated. As such, a significant award in monetary terms on the basis of bad faith could adversely affect our financial condition or operating results.


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The (re)insurance business is historically cyclical and we expect to experience periods with excess underwriting capacity and unfavorable premium rates and policy terms and conditions.
The insurance and reinsurance industry has historically been cyclical. It is characterized by periods of intense competition on price and policy terms and conditions due to excessive underwriting capacity (a “soft” market) and periods when shortages of capacity permit favorable premium levels (a “hard” market). The supply of (re)insurance has increased over the past several years as a result of capital provided by new entrants to the market, including alternative third party capital providers, and the commitment of additional capital by existing or new (re)insurers which has caused premium rates to decrease. Further development of these factors could lead to a significant reduction in premium rates, less favorable policy terms and conditions and fewer submissions for our underwriting services. In addition, hard markets, if any, are likely to be shorter and more regional than in the past as a result of this new capital. Changes in the frequency and severity of losses suffered by insureds and insurers may also significantly affect the cycles of the (re)insurance business. In addition, the cycle may fluctuate as a result of changes in economic, legal, political and social factors. Since cyclicality is due in large part to the collective actions of insurers, reinsurers and general economic conditions and the occurrence of unpredictable events, we cannot predict the timing or duration of changes in the market cycle. If we fail to manage the cyclical nature of the (re)insurance business, our operating results and financial condition could be materially adversely affected.
A material proportion of our business relies on the assessment and pricing of individual risks by third parties.
We authorize managing general agents, general agents and other producers to write business on our behalf from time to time within underwriting authorities we prescribe. We rely on the underwriting controls of these agents and producers to write business within the underwriting authorities we provide. Although we monitor our underwriting on an ongoing basis, our monitoring efforts may not be adequate and our agents and producers may exceed their underwriting authorities or otherwise breach obligations owed to us. There is also the risk that we may be held responsible for obligations that arise from the acts or omissions of third parties if they are deemed to have acted on our behalf. In addition, our agents, producers, insureds or other third parties may commit fraud or otherwise breach their obligation to us. To the extent that our agents, producers, insureds or other third parties exceed their authorities, commit fraud or otherwise breach obligations owed to us, our operating results and financial condition may be materially adversely affected.
Our reliance on third party assessment and pricing of individual risk extends to our reinsurance treaty business. Similar to other reinsurers, we do not separately evaluate each of the individual risks assumed under most reinsurance treaties. We are therefore largely dependent on the original underwriting decisions made by ceding companies. We are subject to the risk that the ceding companies may not have adequately evaluated the risks to be reinsured and that the premiums ceded to us may not adequately compensate us for the risks we assume and the losses we may incur. As a result of this reliance on ceding companies, our operating results and financial condition may be materially adversely affected.
The failure of any risk management and loss limitation methods we employ could have a material adverse effect on our financial condition and operating results.
We employ various risk management and loss limitation methods. We seek to mitigate our loss exposure by writing a number of our insurance and reinsurance contracts on an excess of loss basis, such that we only pay losses that exceed a specified retention. We also seek to limit certain risks, such as catastrophes and political risks, by geographic diversification. Geographic zone limitations involve significant underwriting judgments, including the determination of zone boundaries and the allocation of policy limits to zones. In the case of proportional (also known as pro rata) property reinsurance treaties, we often seek per occurrence limitations or loss and loss expense ratio caps to limit the impact of losses from any one event, although we may not be able to obtain such limits in certain markets. Various provisions in our policies intended to limit our risks, such as limitations or exclusions from certain coverage and choice of forum, may not always be enforceable. Purchasing reinsurance is another loss limitation method we employ which may not always respond in the way intended due to disputes relating to coverage terms, exclusions or counterparty credit risk.
We cannot guarantee that any of these loss limitation methods will be effective or that disputes relating to coverage will be resolved in our favor. As a result of the risks that we (re)insure, unforeseen events could result in claims that substantially exceed our expectations which could have a material adverse effect on our financial condition or operating results.
The reinsurance that we purchase may not always be available on favorable terms or we may choose to retain a higher proportion of particular risks compared to previous years.
From time to time, market conditions have limited, and in some cases prevented, insurers and reinsurers from obtaining the types and amounts of reinsurance that they consider adequate for their business needs. Accordingly, we may not be able to obtain our desired amount of reinsurance or retrocession protection on terms that are acceptable to us from entities with a satisfactory


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credit rating or which is collateralized. Even if such capacity is available, we may also choose to retain a higher proportion of particular risks than in previous years due to pricing, terms and conditions or strategic emphasis. We may also seek alternative means of transferring risk, including expanded participation via our Aspen Capital Markets platform in alternative reinsurance structures. These solutions may not provide commensurate levels of protection compared to traditional retrocession. Our inability to obtain adequate reinsurance or other protection for our own account at favorable prices and on acceptable terms could have a material adverse effect on our business, operating results and financial condition.
Our financial condition and operating results may be adversely affected if actual claims exceed our loss reserves.
Our operating results and financial condition depend on our ability to accurately assess the potential losses associated with the risks that we (re)insure. While we believe that our loss reserves as of December 31, 2018 were adequate, establishing an appropriate level of loss reserves is an inherently uncertain process and requires a considerable amount of judgment. In addition, changes in the level of inflation also result in an increased level of uncertainty in our estimation of loss reserves, particularly for those lines of business that are considered “long-tail,” such as casualty, as they require a relatively long period of time to finalize and settle claims for a given accident year. To the extent actual claims exceed our expectations, we will be required to recognize the less favorable experience immediately which could cause a material increase in our provisions for liabilities and a reduction in our profitability, including operating losses and reduction of capital.
For example, if catastrophic events or other large losses occur, we may fail to adequately estimate our reserve requirements and our actual losses and loss expenses may deviate, perhaps substantially, from our reserve estimates. Reserving for losses in the property and catastrophe markets is inherently complicated in that losses in excess of the attachment level of the policies are characterized by high severity and low frequency, and other factors which could vary significantly as claims are settled. This limits the volume of relevant industry claims experience available from which to reliably predict ultimate losses following a loss event.
Only reserves applicable to losses incurred up to the reporting date may be set aside in our financial statements, with no allowance for future losses. However, there are specific areas of our current reserves which have additional uncertainty associated with them. In property reinsurance, there is uncertainty relating to the ultimate settlement of losses related to Hurricanes Harvey, Irma and Maria that occurred in the third quarter of 2017, the California Wildfires that occurred in the fourth quarter of 2017 and 2018, Typhoon Jebi and Hurricane Florence that occurred in the third quarter of 2018 and Hurricane Michael that occurred in the fourth quarter of 2018. The actual development of losses and expenses versus our estimates creates a high level of uncertainty.
Some of these events have also impacted specialty reinsurance, marine and energy insurance and, to a lesser degree, there is a risk of litigation associated with the hurricanes which may affect casualty reinsurance. In casualty reinsurance, there are additional uncertainties associated with claims emanating from the 2008 global financial crisis and subsequent market events, and the potential for new types of claim to arise given the long-tail nature of many of the reinsurance risks. In the insurance segment, we wrote a book of financial institutions risks which have a number of notifications relating to the financial crisis in 2008 and subsequent market events. These factors can impact the claims adjustment processes which are dependent on the gathering of the necessary information on which to assess coverage, liability, causation and quantum.
Our calculation of reserves for losses and loss expenses also includes assumptions about future payments for settlement of claims and claims-handling expenses, such as medical treatment and litigation costs. We write casualty business in the United States, the United Kingdom, Australia and certain other territories where claims inflation has in many years run at higher rates than general inflation. To the extent inflation causes these costs to increase above reserves established for these claims, we will be required to increase our loss reserves with a corresponding reduction in our net income in the period in which the deficiency is identified, which could materially adversely affect our financial results.
The preparation of our financial statements requires us to make many estimates and judgments that are more difficult than companies operating outside the financial sector.
The preparation of our consolidated financial statements requires us to make many estimates and judgments that affect the reported amounts of assets, liabilities (including reserves), revenues and expenses and related disclosures of contingent liabilities. We evaluate our estimates on an ongoing basis, including those related to premium recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, impairments, income taxes, contingencies, derivatives and litigation. We base our estimates on market prices, where possible, and on various other assumptions we believe to be reasonable under the circumstances, which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
While we believe that our earliest accident years are capable of providing us with meaningful actuarial indications, estimates and judgments for new (re)insurance lines of business are more difficult to make than those made for more mature lines of business because we have more limited historical information through December 31, 2018. A significant part of our current loss reserves is in respect of incurred but not reported (“IBNR”) reserves. This IBNR reserve is based almost entirely on estimates involving


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actuarial and statistical projections of our expectations of the ultimate settlement and administration costs. In addition to limited historical information for certain lines of business, we utilize actuarial models as well as historical insurance industry loss development patterns to establish loss reserves. Accordingly, actual claims and claim expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements, which could materially adversely affect our financial results.
If actual renewals of our existing policies and contracts do not meet expectations, our gross written premiums in future fiscal periods and our future operating results could be materially adversely affected.
A majority of our insurance policies and reinsurance contracts are for a one-year term. We make assumptions about the renewal rate and pricing of our prior year’s policies and contracts in our financial forecasting process. If actual renewals do not meet expectations, our gross written premiums in future fiscal periods and our future operating results and financial condition could be materially adversely affected. For Aspen Re, this risk is especially prevalent in the first quarter of each year when a large number of annual reinsurance contracts are subject to renewal.

Cyber threats are an evolving risk area affecting not only the specific cyber insurance we provide but also the liability coverage we provide.
We have introduced processes to manage our potential liabilities as a result of specific cyber coverage and other cover we provide to our (re)insurance clients. However, given that this is an area where the threat landscape is uncertain and continuing to evolve, there is a risk that increases in the frequency and effectiveness of cyber-attacks on our clients could adversely affect our financial condition and operating results. This risk is also dependent on the measures our clients use to protect themselves to keep pace with the emerging threat, as well as the development and issuance of policy terms which are reactive to the evolving threat landscape.
Our U.S. excess and surplus lines insurance business is subject to non-standard risks and increased risk from changing market conditions.  
Excess and surplus lines insurance forms a substantial portion of the business written by our U.S.-based insurance operations. We also write U.S. excess and surplus lines insurance from the U.K. Excess and surplus lines insurance covers risks that are typically more complex and unusual than standard risks and requires a high degree of specialized underwriting. As a result, excess and surplus lines risks do not often fit the underwriting criteria of standard insurance carriers. Our excess and surplus lines insurance business fills the insurance needs of businesses with unique characteristics and is generally considered higher risk than the standard market. If our underwriting staff inadequately judges and prices the risks associated with the business underwritten in the excess and surplus lines market, our financial results could be adversely impacted.
Further, the excess and surplus lines market is significantly affected by the conditions of the property and casualty insurance market in general. This cyclicality can be more pronounced in the excess and surplus market than in the standard insurance market. During times of hard market conditions (when market conditions are more favorable to insurers because rates increase and coverage terms become more restrictive), business tends to move from the admitted market to the excess and surplus lines market and growth in the excess and surplus market tends to accelerate faster than growth in the standard insurance market. When soft market conditions are prevalent (when market conditions are less favorable to insurers because rates decrease and coverage terms become less restrictive), standard insurance carriers tend to grant more expansive coverage terms and expand market share by moving into business lines traditionally characterized as excess and surplus lines, exacerbating the effect of rate decreases. If we fail to manage the cyclical nature and volatility of the revenues and profit we generate in the excess and surplus lines market, our financial results could be adversely impacted.
Market and Liquidity Risks
Our financial condition and operating results may be adversely affected by reductions in the aggregate value of our investment portfolio.
Our operating results depend in part on the performance of our investment portfolio. Our funds are invested by several professional investment management firms in accordance with our investment guidelines. Our investment guidelines stress diversification of risks, preservation of capital and provision of liquidity. For more information on our investment guidelines, refer to “Business — Investments” under Part I, Item 1 above. However, our investments are subject to a variety of financial and capital market risks including, but not limited to, changes in interest rates, credit spreads, equity prices, foreign currency exchange rates, market volatility and risks inherent to particular securities. Prolonged and severe disruptions in the public debt and equity markets, including, among other things, widening of credit spreads, bankruptcies, defaults, and significant ratings downgrades, may cause significant losses in our investment portfolio. Market volatility can make it difficult to value certain securities if their trading


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becomes infrequent. Depending on market conditions, we could incur substantial additional realized and unrealized investment losses in future periods.
Separately, the occurrence of large claims may force us to liquidate securities at an inopportune time which may cause us to realize capital losses. Large investment losses could decrease our asset base and thereby affect our ability to underwrite new business. Additionally, such losses could have a material adverse impact on our shareholders’ equity, business and financial strength and debt ratings. For the twelve months ended December 31, 2018, our net invested assets generated a total return of $52.2 million before tax.
The aggregate performance of our investment portfolio also depends to a significant extent on the ability of our investment managers to select and manage appropriate investments. As a result, we are also exposed to operational risks which may include, but are not limited to, a failure of our investment managers to perform their services in a manner consistent with our investment guidelines, technological and staffing deficiencies, inadequate disaster recovery plans, interruptions to business operations due to impaired performance or failure or inaccessibility of information or IT systems. The result of any of these operational risks could adversely affect our investment portfolio, financial performance and ability to conduct our business.

Our results of operations and investment portfolio may be materially affected by conditions impacting the level of interest rates in the global capital markets and major economies, such as central bank policies on interest rates and the rate of inflation.

As a global insurance and reinsurance company, we are affected by the monetary policies of the Bank of England, the European Central Bank, the U.S. Federal Reserve Board and other central banks around the world. Since the Financial Crisis of 2007 and 2008 these central banks have taken a number of actions to spur economic activity such as keeping interest rates low and enacting Quantitative Easing. Unconventional monetary policy from the major central banks, and reversal of such policies, and moderate global economic growth remain key uncertainties for markets and our business. In December 2015 the U.S. Federal Reserve raised the Federal Funds Rate for the first time since the Financial Crisis, effectively embarking on a tightening cycle to normalize interest rates which have risen 2.00% from 2015 to 2018. In September 2017, the Federal Reserve announced it will begin to reduce the size of its balance sheet effectively beginning a reversal of Quantitative Easing to normalize the balance sheet whilst maintaining its tightening cycle bias. Other central banks have expressed their intention to pare back unprecedented monetary stimulus by normalizing both their policy rates and balance sheets as economic growth improves.

The U.S. Federal Reserve has raised rates multiple times in 2018 and has signaled more may be expected in 2019. Such actions may have a material impact on the pricing levels of our fixed-income investments. Refer to Note 23 of our consolidated financial statements, “Subsequent Events” for information on the interest rate swaps we executed in January 2019.

Our exposure to interest rate risk relates primarily to the market price and cash flow variability of fixed income instruments that are associated with changes in interest rates. Our investment portfolio contains interest rate sensitive instruments, such as fixed income securities which have been, and will likely continue to be, affected by changes in interest rates from central bank monetary policies, domestic and international economic and political conditions, levels of inflation and other factors beyond our control.

Interest rates are highly sensitive to many factors, including governmental monetary policies, inflation, domestic and international economic and political conditions and other factors beyond our control. For example, inflation could lead to higher interest rates causing the current unrealized gain position in our fixed maturity portfolio to decrease. As a result of the interest rate environment, we have diversified our investment portfolio by investing in a real estate fund and emerging market debt to enhance the returns on our investment portfolio. However, these assets are riskier in nature and could adversely impact our investment portfolio.

Interest rate fluctuations could also have an adverse effect on our mortgage reinsurance business. In both the U.S. and international mortgage markets, rising interest rates, among other factors, generally reduce the volume of new mortgage originations. A decline in the volume of new mortgage originations would have an adverse effect on our new mortgage reinsurance written. Conversely, declining interest rates historically have increased the rate at which borrowers refinance their existing mortgages, thereby resulting in cancellations of the mortgage insurance covering the refinanced loans, potentially having an adverse effect on the volume of mortgage insurance underlying our reinsurance, our levels of premium and any growth in such business.

Steps that may be taken by central banks to raise interest rates in the future to combat higher inflation than we had anticipated could, in turn, lead to an increase in our loss costs. Changes in the level of inflation also result in an increased level of uncertainty in our estimation of loss reserves for our long-tail lines of business. As a result of the above factors, our business, financial condition, liquidity or operating results could be adversely affected.


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Unexpected volatility or illiquidity associated with some of our investments could significantly and negatively affect our financial results, liquidity and ability to conduct business.
We hold, or may in the future purchase, certain investments such as publicly traded equities, high yield bonds, bank loans, emerging market debt, non-agency residential mortgage-backed securities, asset-backed securities, commercial mortgage-backed securities, real estate funds, middle market loans and short term secured products. During the height of the financial crisis, both fixed income and equity markets were more illiquid and volatile than expected. If we require significant amounts of cash on short notice in excess of normal cash requirements, we may have difficulty selling these investments in a timely manner and/or be forced to sell them for less than we otherwise would have been able to realize. If we are forced to sell our assets in unfavorable market conditions, there can be no assurance that we will be able to sell them for the prices at which we have recorded them and we may be forced to sell them at significantly lower prices. As a result of the above factors, our business, financial condition, liquidity or operating results could be adversely affected.
Volatility and uncertainty in general economic conditions and in financial, commodity and mortgage markets could adversely impact our business prospects, operating results, financial position and liquidity.
In recent years, global financial markets have been characterized by volatility and uncertainty. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or make credit harder to obtain. Uncertainties in the financial and commodity markets may also affect our counterparties which could adversely affect their ability to meet their obligations to us. For example, a significant portion of the business sourced by Crop Re Services LLC (“Crop Re”) provides revenue protection to farmers for their expected crop revenues which can be affected by changes in crop prices. Significant losses to our agriculture classes of business could be incurred in the event of a decline in agricultural commodity prices prior to harvest which could, in turn, affect our financial condition or operating results.
Deterioration or volatility in the financial markets or general economic and political conditions could result in a prolonged economic downturn or trigger another recession and our operating results, financial position and liquidity could be materially and adversely affected. Further, unfavorable economic conditions could have a material adverse effect on certain of the lines of business we write, including, but not limited to, credit and political risks, professional liability and surety risks.
We provide credit reinsurance to mortgage guaranty insurers and commercial credit insurers. We are exposed to the risk that losses from mortgage insurance materially exceed the net premiums that are received to cover such risks, which may, subject to liability caps, result in operating and economic losses to us. Mortgage insurance underwriting losses that have the potential to exceed our risk appetite are associated with the systemic impacts of severe mortgage defaults, driven by large scale economic downturns and high unemployment. As of December 31, 2018, the majority of our exposure to mortgage-related underwriting risks was in the United States, with a smaller amount of exposure in Australia.
A downgrade of U.S. or non-U.S. government securities by credit rating agencies could adversely impact the value of such securities in our investment portfolio and create uncertainty in the market generally.
A downgrade of U.S. or non-U.S. government securities by credit rating agencies has the potential to adversely impact the value of our investment portfolio and may cause the average credit rating of our investment portfolio to fall and create greater volatility in the prices of our other investments. In addition, a downgrade in the rating of U.S. or non-U.S. government securities may have an adverse impact on fixed income markets or have a material adverse effect on our financial condition or operating results.
The determination of the amount of allowances and impairments taken on our investments is highly subjective and could materially impact our operating results or financial position.
We perform reviews of our investments on a quarterly basis to determine whether declines in fair value below the cost basis are considered other-than-temporary impairments in accordance with applicable accounting guidance regarding the recognition and presentation of other-than-temporary impairments. The process of determining whether a security is other-than-temporarily impaired requires judgment and involves analyzing many factors. For additional information regarding this process, see Note 2(c) of our consolidated financial statements, “Basis of Preparation and Significant Accounting Policies —Accounting for Investments, Cash and Cash Equivalents.” Assessing the accuracy of the level of impairments taken, and allowances reflected, in our financial statements is inherently uncertain given the subjective nature of the process. Furthermore, additional impairments may need to be taken or allowances provided in the future with respect to events that may impact specific investments. While historically our other-than-temporary impairments have not been material, historical trends may not be indicative of future impairments or allowances. Thus future material impairments themselves or any error in accurately accounting for them may have a material adverse effect on our financial condition or results of operations.



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Our investment portfolio and our credit and political risk underwriting exposures may be materially adversely affected by global climate change regulation and other factors.

World leaders met at the 2015 United Nations Climate Change Conference in December 2015 in Paris and agreed to limit global greenhouse gas emissions in the atmosphere to a level which would not increase the average global temperature by more than 2° Celsius, with an aspiration of limiting such increase to 1.5° Celsius (the “Paris Agreement”). In order for governments to achieve their existing and future international commitments to limit the concentration of greenhouse gases under the Paris Agreement, there is widespread consensus in the scientific community that a significant percentage of existing proven fossil fuel reserves may not be consumed. In addition, divestment campaigns, which call on asset owners to divest from direct ownership of commingled funds that include fossil fuel equities and bonds, likewise signals a change in society’s attitude towards the social and environmental externalities of doing business.

The U.S. Government nevertheless indicated that it would cease participating in the Paris Agreement on June 1, 2017 (confirmed at the recent G20 meeting of November 30 - December 1, 2018), which may create further uncertainty regarding investment and valuation for both the fossil fuel and renewable sectors. In accordance with the Paris Agreement, the earliest possible effective withdrawal date by the United States from the Paris Agreement cannot be before November 4, 2020.

As a result of the above, energy companies and other companies engaged in the production or storage of fossil fuels may experience unexpected or premature devaluations or write-offs of their fossil fuel reserves. As at December 31, 2018, we had $229.1 million, or 2.96% of our Managed Portfolio, invested in the energy sector. Government policies to slow global climate change by, for example, setting limits on carbon emissions may also have an adverse impact on other sectors, such as utilities, transportation and manufacturing. A material change in the asset value of fossil fuels or the securities of energy companies and companies in these other sectors may therefore materially adversely affect our investment portfolio and our results of operations and financial condition.

We provide credit and political risk insurance to banks and other institutions providing lending to government and private organizations. In some cases the lending relates to private organizations involved in the energy sector or governments or government agencies which are dependent on fossil fuels for their revenue. A material change in the asset value of fossil fuels may therefore materially adversely affect our exposures to credit and political risk.

Our financial condition or operating results may be adversely affected by currency fluctuations that we may not be effective at mitigating.

A significant portion of our operations is conducted outside the United States. Accordingly, we are subject to legal, economic and market risks associated with operating in countries throughout the world, including devaluations and fluctuations in currency exchange rates, imposition or increase of investment and other restrictions by foreign governments; and the requirement of complying with a wide variety of laws.

We report our operating results and financial condition in U.S. Dollars. Outside the United States, we predominantly generate revenue and expenses in the local currency. Our U.S. operations earn revenue and incur expenses primarily in U.S. dollars. In our London market operations, we earn revenue in a number of different currencies, but expenses are almost entirely incurred in the British Pound. In addition to the U.S. Dollar and the British Pound, our functional currencies are the Euro, the Swiss Franc, the Australian Dollar, the Canadian Dollar and the Singapore Dollar. The table below gives an approximate analysis of gross written premiums and general, administrative and corporate expenses by currency for the year ended December 31, 2018.
 
U.S. Dollars

 
GBP

 
Other

 
Gross Written Premiums
74.4
%
 
8.9
%
 
16.7
%
 
General, Administrative and Corporate Expenses
74.3
%
 
19.2
%
 
6.5
%
 

During the course of 2018, the U.S. Dollar/British Pound exchange rate, our most significant exchange rate exposure, fluctuated from a high of £1:$1.4339 to a low of £1:$1.2487. For the twelve months ended December 31, 2018, 16.7% of our gross premiums were written in currencies other than the U.S. Dollar and the British Pound (201717.3%). Further, a portion of our loss reserves and investments are also in currencies other than the U.S. Dollar and the British Pound. We may, from time to time, experience losses resulting from fluctuations in the values of these non-U.S./non-British currencies which could adversely affect our results.

As a result of devaluations and fluctuations in currency exchange rates or the imposition of limitations on conversion of foreign currencies into U.S. Dollars, we are subject to currency translation exposure on the profits of our operations, in addition to economic


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exposure. Furthermore, the mismatch between the British Pound revenues and expenses, together with any net British Pound balance sheet position we hold in our London market operations creates a currency exchange exposure. Through our underwriting of credit and political risk, we are also exposed to the risk of paying claims in the event that a host government imposes a moratorium on the remittance overseas of foreign currency payments.

Following the U.K’s decision to withdraw from the E.U., as further described under “— The United Kingdom’s decision to withdraw from the E.U. could adversely impact our business, results of operations and financial condition” below, the value of the British Pound significantly weakened as compared to the U.S. Dollar. The British Pound continued to be volatile in 2018 and has not returned to the levels experienced before the U.K.’s referendum given the uncertainty regarding the U.K.’s withdrawal agreement or any transitional arrangements. As a result, the U.S. Dollars required to be translated into British Pounds to cover our net sterling expenses has decreased, while our net British Pound assets we hold became less valuable when translated into U.S. Dollars. This risk could have a significant adverse effect on our financial condition, cash flow and results of operations in the future if the British Pound continues to weaken.

From time to time we may hedge part of our operating exposure to exchange rate movements but such mitigating attempts may not be successful. We may use forward exchange contracts to manage some of our foreign currency exposure. However, it is possible that we will not successfully structure those contracts so as to effectively manage these risks, or we may take managing steps that have the unintended effect of increasing the risk if predictions turn out not to be accurate, which could adversely affect our operating results.
Credit Risks
Our operating results may be adversely affected by the failure of policyholders, brokers or other intermediaries to honor their payment obligations.
In accordance with industry practice, we generally pay amounts owed on claims under our insurance and reinsurance contracts to brokers and these brokers, in turn, pay these amounts to the clients that purchased insurance and reinsurance from us. In some jurisdictions where we write a significant amount of business, if a broker fails to make such a payment it is highly likely that we will be liable to the client for the deficiency because of local laws or contractual obligations. Likewise, when the client pays premiums for policies to brokers for payment to us, these premiums are generally considered to have been paid and, in most cases, the client will no longer be liable to us for those amounts whether or not we have actually received the premiums. Consequently, we assume a degree of credit risk associated with brokers with respect to most of our (re)insurance business.
In addition, bankruptcy, liquidity problems, distressed financial conditions or the general effects of economic recession may increase the risk that policyholders may not pay a part of, or the full amount of, premiums owed to us despite an obligation to do so. The terms of our contracts or local law may not permit us to cancel our insurance even if we have not received payment. If non-payment becomes widespread, whether as a result of bankruptcy, lack of liquidity, adverse economic conditions, operational failure, delay due to litigation, bad faith and fraud or other events, it could have a material adverse impact on our business and operating results.
Our financial condition and operating results may be adversely affected by the failure of one or more reinsurers or capital market counterparties to meet their payment obligations.
We purchase reinsurance for our own account in order to mitigate the effect of certain large and multiple losses upon our financial condition. Our reinsurers or capital market counterparts are dependent on their ratings in order to continue to write business and some have suffered downgrades in ratings in the past as a result of their exposures. Our reinsurers or capital market counterparties may also be affected by adverse developments in the financial markets, which could adversely affect their ability to meet their obligations to us. Insolvency of these counterparties, their inability to continue to write business or reluctance to make timely payments under the terms of their agreements with us could have a material adverse effect on us because we remain liable to our insureds or cedants in respect of the reinsured risks.
Our liquidity and counterparty risk exposures may be adversely affected by the impairment of financial institutions.
We routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutions. We are exposed to the risk that these counterparties are unable to make payments or provide collateral to a third party when required, or that securities that we own are required to be sold at a loss in order to meet liquidity, collateral or other payment requirements. In addition, our investments in various fixed income securities issued by financial institutions exposes us to credit risk in the event of default by these issuers. With respect to derivatives transactions that require exchange of collateral, due to mark to market movements, our risk may be exacerbated in the event of default by a counterparty. In such an event, we may not receive the collateral due to us from the defaulted counterparty. Refer to Note 23 of


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our consolidated financial statements, “Subsequent Events” for information on the interest rate swaps we executed in January 2019. Any such losses could materially and adversely affect our business and operating results.
Strategic Risks
Our operating effectiveness and efficiency initiative aimed at optimizing our business processes is subject to execution risk, may subject our business to other risks and may not realize the intended benefits.
We have launched, and plan to continue to implement, our program to enhance operating effectiveness and efficiency and to enhance our market position (the “Effectiveness and Efficiency Program”). The Effectiveness and Efficiency Program presents potential uncertainties and risks that may impact our ability to achieve anticipated operating enhancements and/or cost reductions, or otherwise impact our business including:
our ability to successfully develop and execute the Effectiveness and Efficiency Program to create operating and cost efficiencies through focus on improving several operational levers;
charges relating to the Effectiveness and Efficiency Program being different from those initially estimated, including changes in the size and components of different aspects;
changes in the planned timing of the Effectiveness and Efficiency Program;
the results and timing of employee consultation processes and related regulations in certain jurisdictions where we operate;
disruption in our business associated with the Effectiveness and Efficiency Program and related activities;
disruption to our internal control environment;
whether the Effectiveness and Efficiency Program provides a sufficient return on our capital expenditure investment over time; and
whether new IT and data tools enable intended results.
In addition, as part of the Effectiveness and Efficiency Program, we may reduce employee headcount and these actions may adversely disrupt operating activities, may negatively affect employee morale and loyalty and may make it more difficult to retain or rehire key personnel. A lower headcount may result in a decrease in gross written premiums across particular insurance and reinsurance lines due to lower production in our accounts.
If we are not successful in developing and executing the Effectiveness and Efficiency Program, we may not be able to achieve targeted expense savings within the expected time frame, which could adversely impact our business, results of operations and financial condition. Our failure to achieve targeted operating enhancements and/or cost reductions could also result in the implementation of additional restructuring related activities, which may be dilutive to our earnings and otherwise materially adversely affect our business, financial condition or results of operations. For more information on the Effectiveness and Efficiency Program, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Aspen’s Year in Review.”
We operate in a highly competitive environment and substantial new capital inflows into the (re)insurance industry may increase competition.
Insurance and reinsurance markets are highly competitive. We continue to experience increased competition in a number of lines of business which has caused a decline in rate increases or a reduction in rates in such lines. We compete with existing international and regional (re)insurers some of which have greater financial, marketing and management resources than us. We also compete with new market entrants and alternative capital markets, funds and other providers of insurance and alternative reinsurance products such as insurance-linked securities, catastrophe bonds and derivatives. In recent years, hedge funds, pension funds, endowments and investment banks have been increasingly active in the reinsurance market and markets for related risks. Further, we believe new entrants or existing competitors may attempt to replicate all or part of our business model and provide further competition in the markets in which we participate. We generally expect increased competition from a wider range of entrants over time. We have already seen that such new or alternative capital causes reductions in prices of our products and reduces the duration or amplitude of attractive portions of the historical market cycles. Refer to Part I, Item 1, “Business — Competition” above for a discussion of our competitors. Recently, insureds have retained a greater proportion of their risk portfolios than previously, and industrial and commercial companies have increasingly relied on their own subsidiary insurance companies and other mechanisms for funding their risks rather than via risk transferring insurance. We have sought to address this risk by developing our own capital markets capability but there is no guarantee it will succeed.
Increased competition could result in fewer submissions, lower premium rates, less favorable policy terms and conditions and greater expenses relating to customer acquisition and retention, which could have a material adverse impact on our operating results or financial condition.


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Our Operating Subsidiaries are rated and our Lloyd’s business benefits from a rating by one or more of A.M. Best, S&P and Moody’s and a decline in any of these ratings could adversely affect our standing among brokers and customers and cause our premiums and earnings to decrease.
Ratings have become an increasingly important factor in establishing the competitive position of insurance and reinsurance companies. Rating agencies represent independent opinions of the financial strength of insurers and reinsurers and their ability to meet policyholder obligations. These ratings are not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold our ordinary shares. The ratings of our Operating Subsidiaries are subject to periodic review by, and may be placed on credit watch, revised downward or revoked at the sole discretion of, A.M. Best, Moody’s or S&P. For information on the ratings of our Operating Subsidiaries and the updated reviews from the rating agencies following our announcement of the Merger, refer to Part I, Item 1, “Business — Ratings” above.
If our Operating Subsidiaries’ or Lloyd’s ratings are reduced from their current levels by any of A.M. Best, Moody’s or S&P, our competitive position in the (re)insurance industry might suffer and it may be more difficult for us to market our products, expand our (re)insurance portfolio and renew our existing (re)insurance policies and agreements. A rating downgrade may also require us to establish trusts or post letters of credit for ceding company clients and could trigger provisions allowing some clients to terminate their (re)insurance contracts with us. Some contracts also provide for the return of premium to the ceding client in the event of a rating downgrade. It is increasingly common for our reinsurance contracts to contain such terms. Whether a cedant would exercise any of these rights could depend on various factors, such as the reason for and the extent of such downgrade, the prevailing market conditions and the pricing and availability of replacement reinsurance coverage. A downgrade could result in a substantial loss of business as ceding companies and brokers that place such business move to other reinsurers with higher ratings and therefore such downgrade may materially and adversely impact our business, operating results, liquidity and financial flexibility.
In addition, a downgrade of the financial strength rating of Aspen U.K., Aspen Bermuda or Aspen Specialty by A.M. Best below “B++” would constitute an event of default under our revolving credit facility with Barclays Bank PLC and other lenders. Additionally, the cost and availability of unsecured financing are generally dependent on the borrower’s long-term and short-term debt ratings. A lower rating may lead to higher borrowing costs, thereby adversely impacting our liquidity and financial flexibility and by extension our business, financial condition and results of operations.
For information on the potential risks associated with a downgrade of the financial strength ratings of our Operating Subsidiaries in connection with the Merger, refer to “— A condition of the Merger is the maintenance of financial strength ratings of our Operating Subsidiaries and Highlands may become entitled to terminate the Merger Agreement if we receive a clear indication from A.M. Best or S&P that such agency intends to downgrade the financial strength rating of our Operating Subsidiaries and if Highlands exercises such right it could adversely affect our business, financial condition and results of operations” above.
Any future acquisitions, growth of our operations through the addition of new lines of (re)insurance business, expansion into new geographic regions and/or joint ventures or partnerships may expose us to risks.
As part of our long-term strategy, we have pursued, and may continue to pursue, growth through acquisitions and/or strategic investments in new businesses. We may also decide to sell businesses or enter into strategic ventures with third parties. Further, we may engage in confidential acquisition negotiations that are not publicly announced unless and until those negotiations result in a definitive agreement. Such negotiations would likely require management and key personnel to expend considerable time and effort on the negotiations, which may detract from their ability to run our core business. In addition, an acquisition can be expensive and time consuming. Although considerable funds may be expended in the negotiations phase, an acquisition or disposition, including the Merger, may ultimately not be completed for a variety of reasons.
We have limited experience in identifying quality merger or acquisition candidates, as well as successfully acquiring and integrating their operations. Successful integration depends, among other things, on our ability to effectively integrate acquired businesses or new personnel into our existing risk management techniques, manage any regulatory issues created by our entry into new markets and geographic locations, retain key personnel and obtain personnel required for expanded operations. The failure to integrate successfully or to manage the challenges presented by the integration process, such as in connection with the Merger, may have an adverse effect on our business, financial condition or results of operations. See “Risks Related to the Merger” above.

Consolidation in the (re)insurance industry could adversely impact our business and results of operations.

Continued consolidation in the (re)insurance industry could lead consolidated entities to try to use their enhanced market power to negotiate price reductions for our products and services and/or obtain a larger market share through increased line sizes. If competitive pressures reduce our prices, we would expect to write less business on a gross written premium basis. As the (re)insurance industry consolidates, competition for customers will become more intense and the importance of acquiring and properly servicing each customer will become greater. We could incur greater expenses relating to customer acquisition and retention, further reducing our operating margins. The resulting change in the competitive landscape may also impact our ability


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to attract the most talented insurance professionals and retain and incentivize existing employees. In addition, insurance companies that merge may be able to spread their risks across a consolidated, larger capital base so that they require less reinsurance.

If our competitors join this trend of consolidation, we could also experience more robust competition from larger, better capitalized competitors. The effect of such consolidation and possible increased scale of our competitors may mean that we experience increased pressure on rates, with the prospect that we may choose to write less business overall, and relatively more business at unfavorable rates as a result. Any of the foregoing could adversely affect our business, strategy or our results of operations.
We depend on a few brokers for a large portion of our insurance and reinsurance revenues and the loss of business provided by any one of those brokers could adversely affect us.
We market our insurance and reinsurance products worldwide primarily through insurance and reinsurance brokers. Refer to Part I, Item 1, “Business — Business Distribution” above for our principal brokers by segment. Several of these brokers also have, or may in the future acquire, ownership interests in (re)insurance companies that compete with us, and these brokers may favor their own (re)insurers over other companies. The failure or inability of brokers to market our (re)insurance products successfully or the loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business.
In addition, there has been a trend of increased consolidation of agents and brokers. As we distribute most of our products through agents and brokers, consolidation could impact our ability to access business and our relationships with, and fees paid to, agents and brokers. In the Lloyds’s market, independent London wholesalers continue to be acquired by larger global brokers, which may result in enhanced market power for these larger brokers in placing (re)insurance. Consolidation of distributors may also increase the likelihood that distributors will try to renegotiate the terms of existing selling agreements to terms less favorable to us. As brokers merge with or acquire each other, any resulting failure or inability of brokers to market our products successfully, or the loss of a substantial portion of the business sourced by one or more of our key brokers, could have a material adverse effect on our business and results of operations.
Our efforts to expand in targeted markets or develop products may not be successful and may create increased risks.
A number of our planned business initiatives involve expanding existing products in targeted markets or developing new products. For example, Aspen Advisors is registered as an investment adviser with the SEC and advises on insurance-linked securities. Through Aspen Capital Markets, our alternative reinsurance division, we have also expanded our participation in the alternative reinsurance market through collateralized reinsurance arrangements. To develop new markets and products, we may need to make substantial capital and operating expenditures, which may adversely affect our results in the near term. In addition, the demand for new markets or products may not meet our expectations. To the extent we are able to expand in new markets or market new products, our risk exposures may change and the data and models we use to manage such exposures may not be as sophisticated as those we use in existing markets or with existing products. This, in turn, could lead to losses in excess of expectations that individually or in the aggregate may materially adversely affect our business, financial condition and results of operations.
We are exposed to risks in connection with our management of alternative reinsurance platforms on behalf of investors in Peregrine, Silverton and in any other entities Aspen Capital Markets manages or could manage in the future.
Those of our subsidiaries that are engaged in the management of alternative reinsurance platforms as part of our Aspen Capital Markets division may owe certain legal duties and obligations to third party investors (including reporting obligations) and are subject to a variety of often complex laws and regulations relating to the management of those structures. Although we continually monitor our policies and procedures to ensure compliance, faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established policies and procedures could result in our failure to comply with applicable laws or regulations which could result in significant liabilities, penalties or other losses and significantly harm our business and results of operations.
In addition, our third party investors may decide not to renew their interests in the entities we manage which could materially impact the financial condition of such entities. Certain of our third party capital investors provide significant capital investment in respect of the entities we manage. The loss or alteration of this capital support could be detrimental to our financial condition and results of operations. Moreover, we can provide no assurance that we may be able to attract and raise additional third party capital for our existing managed entities or for potential new managed entities and therefore we may forego existing and/or potential attractive fee income and other income-generating opportunities.
Furthermore, notwithstanding any capital holdback, we may decide to return to our investors all or a portion of the third party capital held by entities we manage as collateral prior to the maturity specified in the terms of the particular underlying transactional documents. A return of capital to our investors is final. As a result, if we release collateral early and capital is returned to our


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investors, we may not have sufficient collateral to pay the claims associated with such losses in the event losses are significantly larger than we anticipated.
We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.
Our future capital requirements depend on many factors, including our ability to write new business successfully, deploy capital into more profitable business lines, identify acquisition opportunities, manage investments and preserve capital in volatile markets, and establish premium rates and reserves at levels sufficient to cover losses. Our operations are subject to significant volatility in capital due to our exposure to potentially significant catastrophic events. We monitor our capital adequacy on an ongoing basis. To the extent our funds are insufficient to fund future operating requirements or cover claims losses, we may need to raise additional funds through corporate finance transactions or curtail our growth and reduce our liabilities. Any such financing, if available at all, may be on terms that are not favorable to us. Our ability to raise any financing is also restricted under the Merger Agreement. Our ability to raise such capital successfully would depend upon the facts and circumstances at the time, including our financial position and operating results, market conditions and applicable regulatory filings and legal issues. If we cannot obtain adequate capital on favorable terms, or obtain it at all, our business, financial condition and operating results could be adversely affected.
Our debt, credit and International Swaps and Derivatives Association (“ISDA”) agreements may limit our financial and operational flexibility, which may affect our financial condition, liquidity and ability to conduct our business.
We have incurred indebtedness and may incur additional indebtedness in the future. Additionally, we have entered into credit facilities with various institutions which provide revolving lines of credit to us and our Operating Subsidiaries and issue letters of credit to our clients in the ordinary course of business. We have also entered into ISDA agreements relating to derivative transactions. Refer to Note 23 of our consolidated financial statements, “Subsequent Events” for information on the interest rate swaps we executed in January 2019. The agreements relating to our debt, credit facilities and our ISDA agreements contain covenants that may limit our ability, among other things, to borrow money, make particular types of investments or other restricted payments, sell assets, merge or consolidate. Some of these agreements also require us to maintain specified ratings and financial ratios, including a minimum net worth covenant. If we fail to comply with these covenants or meet required financial ratios, the lenders or counterparties under these agreements could declare a default and demand immediate repayment of all amounts owed to them. As a result, our business, financial condition and operating results could be adversely affected.
If we are in default under the terms of these agreements, we may also be restricted in our ability to declare or pay any dividends, redeem, purchase or acquire any shares or make a liquidation payment and are at risk of cross-default on other arrangements. In addition, the cost and availability of these arrangements vary and any adverse change in the cost or availability of such arrangements could adversely impact our business, financial condition and operating results.
 

Regulatory Risks
The regulatory systems under which we operate and potential changes thereto could have a material adverse effect on our business.
Our activities are subject to extensive regulation under the laws and regulations of the U.S., U.K., Bermuda and the E.U. and its member states and the other jurisdictions in which we operate. Our Operating Subsidiaries may not be able to maintain necessary licenses, permits, authorizations or accreditations in territories where we currently engage in business or obtain them in new territories, or may be able to do so only at significant cost. In addition, we may not be able to comply fully with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance or reinsurance companies or holding companies. In addition to insurance and financial industry regulations, our activities are also subject to relevant economic and trade sanctions, money laundering regulations, and anti-corruption laws including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, which may increase the costs of regulatory compliance, limit or restrict our ability to do business or engage in certain regulated activities, or subject us to the possibility of regulatory actions, proceedings and fines. Although we have in place systems and controls designed to comply with applicable laws and regulations, there can be no assurance that we, our employees, or our agents acting on our behalf are in full compliance with all applicable laws and regulations or their interpretation by the relevant authorities and given the complex nature of the risks, it may not always be possible for us to ascertain compliance with such laws and regulations. Failure to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws or regulations, including those referred to above, could subject us to investigations, criminal sanctions or civil remedies, including fines, injunctions, loss of an operating license, reputational consequences, and other sanctions, all of which could have a material adverse effect on our business. Changes in the laws or regulations to which our Operating Subsidiaries are subject could also have a material adverse effect on our business. In addition, in most jurisdictions, government regulatory authorities have the power to interpret or amend applicable laws and regulations, and have discretion to grant, renew or revoke licenses and approvals we need to conduct our activities. Such authorities may require us to incur substantial costs in order to comply with such laws and regulations. Refer to Part I, Item 1, “Business — Regulatory Matters” above for more information.


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The insurance and reinsurance industries are subject to political, regulatory and legislative initiatives or proposals from time to time which could adversely affect our business.  
Governments and regulatory bodies may take unpredictable action to ensure continued supply of insurance, particularly where a given event leads to withdrawal of capacity from the market. For example, regulators may seek to force us to offer certain covers to (re)insureds, constrain our flexibility to apply certain terms and conditions or constrain our ability to make changes to the pricing of our contracts. There can be no assurance as to the effect that any such governmental or regulatory actions will have on the financial markets generally or on our competitive position, business and financial condition.
The terms of the U.S. federal multi-peril crop insurance (“MPCI”) program, which is administered by the Risk Management Agency (the “RMA”) of the U.S. Department of Agriculture, may change and adversely impact us. The Agricultural Act of 2014, also known as the 2014 U.S. Farm Bill, was signed into law in February 2014 and fixes the terms of the MPCI program through February 2019. The Agricultural Improvement Act of 2018, which amends the terms of the MPCI program, was passed by the U.S. Senate on December 12, 2018. The RMA periodically reviews and proposes changes to the Standard Reinsurance Agreement (“SRA”) used in connection with the MPCI program. Given that agriculture insurance premiums driven by the MPCI program represent a large portion of the business produced by the portfolio of CGBIC, such changes to the SRA could impact MPCI risk and profitability, and, in turn, adversely affect our financial results through our crop reinsurance business.
Further, recent political initiatives to restrict free trade, end regulatory alignment and close markets, such as the U.K.’s decision to withdraw from the E.U. (“Brexit”) and the Trump administration’s decision to withdraw from the Trans-Pacific partnership, could adversely affect the insurance and reinsurance industry and, in turn, our business. The reinsurance industry is disproportionately impacted by restraints on the free flow of capital and risk because the value it provides depends on our ability to globally diversify risk. Increasing barriers to free trade and the free flow of capital could adversely affect our business strategy or results of operations.
Changes in regulations that adversely affect the U.S. mortgage insurance and reinsurance market could affect our operations significantly and could reduce the demand for mortgage insurance.
In addition to the general regulatory risks that are described herein, the reinsurance we write could also be indirectly affected by various additional regulations relating particularly to our U.S. mortgage reinsurance operations. U.S. federal and state regulations affect the scope of operations of mortgage guaranty insurers and commercial credit insurers, to whom we provide credit reinsurance. Legislative and regulatory changes could cause demand for private mortgage insurance to decrease, which could have an adverse impact on our U.S. mortgage reinsurance operations. Increases in the maximum loan amount that the U.S. Federal Housing Administration can insure, and reductions in the mortgage insurance premiums it charges, can reduce the demand for private mortgage insurance. Decreases in the maximum loan amounts government-sponsored enterprises, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (the “GSEs”), will purchase or guarantee, increases in GSE fees, or decreases in the maximum loan-to-value ratio for loans the GSEs will purchase, can also reduce demand for private mortgage insurance. Changes in these laws or regulations could have an indirect adverse impact on the profitability of our U.S. mortgage reinsurance business.
Material changes in voting rights and related party transactions may require regulatory approval or oversight by insurance regulators.
Insurance regulators, such as the PRA, the FCA and the BMA, impose certain requirements on operating entities they regulate including notification of shareholders, whether directly or indirectly, reaching certain levels of ownership. Prior approval of ownership and transfer of shares by the regulators may be required under certain circumstances. For example, if any entity were to hold 20% or more of the voting rights or 20% or more of the issued ordinary shares of Aspen Holdings, transactions between Aspen U.K. and such entity may have to be reported to the PRA if the value of those transactions exceeds certain threshold amounts that would render them material connected party transactions. In these circumstances, we can give no assurance that these material connected party transactions will not be subject to regulatory intervention by the PRA or other insurance regulators. See “Business — Regulatory Matters” in Item 1 above for more information.
Any transactions between companies within the Aspen Group that are material related party transactions also have to be reported to certain insurance regulators. We can give no assurance that the existence or effect of such related party transactions and the insurance regulator’s assessment of the overall solvency of Aspen Holdings and its subsidiaries, even in circumstances where the Operating Subsidiary has sufficient assets of its own to cover its required margin of solvency, would not result in regulatory intervention by the insurance regulators with regard to such Operating Subsidiary.


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One or more of our insurance subsidiaries may be required by its regulator to hold additional capital to meet relevant solvency requirements.
Any of our Operating Subsidiaries may be required to hold additional capital in order to meet solvency requirements. Among other matters, Bermuda statutes, regulations and policies of the BMA require Aspen Bermuda to maintain minimum levels of statutory capital, surplus and liquidity to meet solvency standards. The BMA has a risk-based capital adequacy model called the BSCR to assist the BMA both in measuring risk and in determining appropriate levels of capitalization for Aspen Bermuda and the Aspen Group (under the Group Supervision Regime). Further, the BMA requires Class 4 commercial insurers and insurance groups to perform an assessment of their own risk and solvency requirements. The Commercial Insurers / Group Solvency Self-Assessment have the insurer/insurance group determine the capital resources required to achieve its strategic goals, after assessing all reasonably foreseeable material risks arising from its operations or operational environment. These statutes and regulations may restrict our ability to write insurance and reinsurance policies, make certain investments and distribute funds. Refer to Part I, Item 1, “Business — Regulatory Matters — Bermuda Regulation — Group Minimum Solvency Margin and Group Enhanced Capital Requirements” above for more information.
Similarly, under the Solvency II regime, Aspen European and Aspen U.K. are required to provide the PRA with calculations of their solvency position. If they do not meet the solvency requirements this could trigger regulatory intervention by the PRA. Our Syndicate 4711 is also required to provide Lloyd’s with a calculation of the capital requirement for the next year’s syndicate business plan. Lloyd’s review that calculation and can require additional Funds at Lloyd’s to be lodged if they determine that there are issues with such calculation. Refer to Part I, Item 1, “Business — Regulatory Matters — U.K. and E.U. Regulation — Solvency Requirements” above for more information on our solvency requirements.
Aspen U.K. and Aspen European may be affected by the FCA, the PRA and the Bank of England powers over unregulated U.K. parent companies.

The Financial Services Act 2012 created powers for the FCA, the PRA and the Bank of England to impose requirements on U.K. parent companies of certain regulated firms, as referenced in Part I, Item 1, “Business — Regulatory Matters” above. The powers allow the regulators to: (i) direct qualifying parent undertakings to comply with specific requirements; (ii) take enforcement action against qualifying parent undertakings if those directions are breached; and (iii) gather information from qualifying parent undertakings. For example, if an authorized firm is in crisis, the powers may allow a regulator to direct a parent company to provide that firm with capital or liquidity necessary to improve the position of the firm. The definition of “qualifying parent undertakings” could allow the regulators to exercise these powers against an intermediate U.K. parent company of an insurer that is not at the head of the ownership chain. Aspen European, as an English-registered intermediate parent company of Aspen U.K., could potentially be subject to these powers and there can be no assurance as to the impact of such powers on our results of operations and/or financial condition.
The E.U. Directive on Solvency II may affect the way in which Aspen U.K. and AMAL manage their businesses.
The E.U. directive known as Solvency II covering the capital adequacy, risk management and regulatory reporting for insurers and reinsurers came into effect on 1 January 2016. Solvency II has established a revised set of E.U.-wide capital requirements, valuation techniques and risk management requirements that replace the minimum requirements in previous E.U. directives. Solvency II presents a number of risks to regulatory compliance, in particular for Aspen U.K. and AMAL. The Solvency II regime also requires an accelerated quarterly close process across the Aspen Group to allow those U.K. entities to meet their regulatory disclosure obligations.
Our approach to compliance is based on our current understanding of the Solvency II requirements and any material changes thereto could have a material adverse effect on our business. Aspen received approval from the PRA to use an agreed Internal Model to calculate its Solvency Capital Requirement (“SCR”) for Aspen U.K. and our European sub-group headed by Aspen European as from January 1, 2016. Aspen U.K. is required to ensure that the Internal Model operates properly on a continuous basis and that it continues to comply with the “Solvency Capital Requirements — Internal Models” provisions as set out in the PRA rulebook and Solvency II Delegated Acts. If Aspen U.K. fails to comply with these requirements, the PRA may impose capital add-ons requiring Aspen U.K. to hold more capital than the regulatory requirement calculated by its Internal Model. Failure to comply could result in the PRA revoking Aspen U.K.’s approval to use its Internal Model which, in turn, would require Aspen U.K. to calculate its regulatory capital in accordance with the PRA’s standard formula approach. Implementing the PRA’s standard formula approach would likely increase Aspen U.K.’s capital requirement and may adversely impact our operating results and financial conditions.
The European Commission deemed the regulatory regime in Bermuda to be “equivalent” to Solvency II with effect from January 1, 2016. With effect from October 12, 2016, Aspen European and Aspen U.K. have been granted a five year waiver from group supervision requirements being applied to the European sub-group due to Aspen Bermuda being subject to equivalent group supervision.


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Although Solvency II is now in force, uncertainty remains as to how the Solvency II regime will be enforced or amended and the effectiveness of the coordination and cooperation of information sharing among supervisory bodies and regulators, such as the PRA, with the BMA as group supervisor or the effect, if any, these developments may have on the Aspen Group’s operations and financial condition. This uncertainty has increased as a result of the unpredictable consequences of Brexit. The U.K. may agree with the E.U. a process by which its future Solvency II regime can be determined as equivalent with that of the remaining E.U. members in order to limit market disruption in a post-Brexit environment.
The activities of any of our insurance subsidiaries may be subject to review by insurance regulators of differing jurisdictions which may impose greater burdens than anticipated.
The activities of our Operating Subsidiaries may be subject to review by regulators where different supervisory expectations may exist. For example, Aspen U.K. is authorized to do business in the United Kingdom and has permission to conduct business in Canada, Switzerland, Australia, Singapore, Ireland, all other EEA states and certain Latin American countries. In addition, both Aspen U.K. and AMAL are eligible to write surplus lines business in 50 U.S. States, the District of Columbia, Puerto Rico and the U.S. Virgin Islands, as alien surplus lines insurers. We can give no assurance, however, that insurance regulators in the United States, Bermuda or elsewhere will not review the activities of Aspen U.K. and AMAL and assess that they are subject to such jurisdiction’s licensing or other requirements. As a result, both Aspen U.K and AMAL were subject to mandatory 2018 data calls under the 2015 TRIA Reauthorization propounded by the U.S. Federal Insurance Office and the NAIC.
Aspen Bermuda does not maintain a principal office and its personnel do not solicit, advertise, settle claims or conduct other activities that may constitute the transaction of the business of (re)insurance in any jurisdiction in which it is not licensed or otherwise not authorized to engage in such activities. However, inquiries or challenges to Aspen Bermuda’s (re)insurance activities may be raised in the future. The offshore insurance and reinsurance regulatory environment has become subject to increased scrutiny in many jurisdictions, including the U.S. at both Federal and state levels. Compliance with any new laws, regulations or settlements impacting offshore insurers or reinsurers, such as Aspen Bermuda, could have a material adverse effect on our business.
In addition, Aspen U.K. and Aspen Bermuda are currently affected by U.S. “credit for reinsurance” requirements in connection with their reinsurance of risks of U.S. cedants. Historically state insurance laws have required, alien, non-admitted reinsurers, such as Aspen U.K. and Aspen Bermuda, to fully collateralize their reinsurance obligations to U.S. cedants. As a result, Aspen U.K. and Aspen Bermuda have each established a multi-beneficiary U.S. trust fund for the benefit of their U.S. cedants, enabling such cedants to satisfy U.S. credit for reinsurance requirements. Unless otherwise subject to reduction, such U.S. trust funds must hold funds equal to 100% of the reinsurer’s reinsurance obligations to U.S. cedants.
In 2011, the NAIC amended its credit for reinsurance model law to permit non-U.S. reinsurers to post reduced reinsurance collateral in certain circumstances. A majority of states, including Texas, North Dakota, New York, Florida and California, have incorporated these changes into their state laws and regulations and therefore provide that if an alien, non-admitted reinsurer satisfies certain requirements, including rating and financial requirements, and is domiciled in a qualifying U.S. jurisdiction, it may post reinsurance collateral in an amount lower than 100% of the reinsurer’s obligations. Many non-U.S. reinsurers have applied for and received approval for reduced collateral in applicable states. Aspen Bermuda has received approval for reduced collateral in North Dakota, Florida and New York. Texas enacted a reduced credit for reinsurance statute effective January 1, 2018 and adopted enabling regulations effective June 19, 2018. Aspen Bermuda may file an application for reduced collateral in Texas. As a result, Aspen Bermuda could be subject to increased regulatory review by the regulators in such states.
On January 13, 2017, the U.S. federal authorities and their E.U. counterparts announced the successful completion of their negotiations of a covered agreement, which was signed on September 22, 2017. In terms of reinsurance, the covered agreement eliminates collateral and local presence requirements for E.U. and U.S. reinsurers operating in each other’s markets. In connection with an alien reinsurer’s assumption of insurance business from a U.S. cedant, the covered agreement gives the U.S. states five years from the execution of the covered agreement to remove the existing reinsurance collateral requirements for such alien, non-admitted reinsurers domiciled in the E.U. (such as Aspen U.K.) that meet certain standards. These standards include, among others, minimum capital and solvency ratios, confirmation of financial condition by the reinsurer’s domestic regulator and claims payment standards. If U.S. states do not remove such reinsurance collateral requirements, the states’ credit for reinsurance laws will face federal pre-emption determinations.
The NAIC is working on proposed amendments to the Amended Credit for Reinsurance Model Act and Model Regulation in order to satisfy the substantive and timing requirements of the covered agreement. In addition to removing the reinsurance collateral obligations for E.U. reinsurers as required by the covered agreement, the proposed NAIC amendments would also provide a means by which reinsurers domiciled in other qualifying non-U.S. jurisdictions as well as reinsurers domiciled in qualifying states can achieve equivalent reinsurance collateral status for reinsurance contracts with U.S. insurers. Additionally, on December 12, 2018, the U.S. federal authorities announced that they plan to enter into a covered agreement with the U.K., which will extend the benefits of the U.S./E.U. covered agreement to the U.K. after Brexit. For more detail on the U.S./E.U. covered agreement, refer to Part I, Item 1, “Business — Regulatory Matters” above. There is no guarantee, however, that cedants will be willing to accept reduced


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collateral pursuant to the covered agreement and NAIC requirements. In addition, to the extent we require liquid assets to meet certain cash obligations, the collateral requirements of Aspen U.K. and Aspen Bermuda’s multi-beneficiary U.S. trust fund could adversely impact our liquidity position
Changes to the Bermuda regulatory system, including changes to its Group Supervisory regime, could have a material adverse effect on our business.
The BMA is our group supervisor and has designated Aspen Bermuda as the designated insurer. As group supervisor, the BMA will (i) assess the Aspen Group’s compliance with the BMA’s solvency rules, (ii) perform ongoing supervisory review and assessment of the Aspen Group’s financial position and governance systems, (iii) coordinate the gathering and dissemination of relevant or essential information, (iv) convene and conduct supervisory colleges with other supervisory authorities that have regulatory oversight of entities within a group and (v) coordinate any enforcement action that may be taken against any of the members of the Aspen Group. We are unable to predict with certainty how these laws, frameworks and/or regulations will be enforced or amended, the form in which any pending or future laws, frameworks and/or regulations could be adopted, the effectiveness of the coordination and cooperation of information sharing among supervisory bodies and regulators, or the effect, if any, these developments would have on our operations and financial condition.
The Council of Lloyd’s and the Lloyd’s Franchise Board have wide discretionary powers to supervise members of Lloyd’s.
The Council of Lloyd’s may vary the method by which the capital requirement, or the investment criteria applicable to Funds at Lloyd’s, is determined. Variance to the capital requirement determination method might affect the maximum amount of the overall premium income that we are able to underwrite. Variation in both might affect our return on investments. The Lloyd’s Franchise Board also has wide discretionary powers in relation to the business of Lloyd’s managing agents, such as AMAL, including the requirement for compliance with the franchise performance and underwriting guidelines. The Lloyd’s Franchise Board imposes certain restrictions on underwriting or on reinsurance arrangements for any Lloyd’s syndicate and changes in these requirements imposed on us may have an adverse impact on our ability to underwrite which in turn will have an adverse effect on our financial performance.
Changes in Lloyd’s regulation or the Lloyd’s market could make Syndicate 4711 less attractive.
Changes in Lloyd’s regulation or other developments in the Lloyd’s market could make operating Syndicate 4711 less attractive. For example, Lloyd’s imposes a number of charges on businesses operating in the Lloyd’s market, including annual subscriptions and Central Fund levies for members and policy signing charges. Despite the principle that each member of Lloyd’s is only responsible for the proportion of risk written on its behalf, a Central Fund acts as a policyholder’s protection fund to make payments where other members have failed to pay valid claims. The Council of Lloyd’s may resolve to make payments from the Central Fund for the advancement and protection of members, which could lead to additional or special levies being payable by Syndicate 4711. The bases and amounts of these charges may be varied by Lloyd’s and could adversely affect our financial and operating results.
Syndicate 4711 may also be affected by a number of other changes in Lloyd’s regulation, such as changes to the process for the release of profits and new member compliance requirements. The ability of Lloyd’s syndicates to trade in certain classes of business at current levels may be dependent on the maintenance by Lloyd’s of a satisfactory credit rating issued by an accredited rating agency. At present, the financial security of the Lloyd’s market is regularly assessed by three independent rating agencies, A.M. Best, S&P and Fitch Ratings. Refer to “Credit Risks — Our Operating Subsidiaries are rated, and our Lloyd’s business benefits from a rating by one or more of A.M. Best, S&P and Moody’s, and a decline in any of these ratings could adversely affect our standing among brokers and customers and cause our premiums and earnings to decrease and limit our ability to pay dividends on our ordinary shares” above.
The syndicate capital setting process within AMAL is subject to the PRA rules but is conducted by Lloyd’s under its detailed procedures. Lloyd’s could request an increase in capital under the PRA rules in similar circumstances as set out in “Business — Regulatory Matters” in Item 1 above. Lloyd’s as whole, including Syndicate 4711, is also subject to the provisions of Solvency II as noted above.
Potential changes to the U.S. regulatory system could have an adverse effect on the business of our U.S. operating companies.
The purpose of the state insurance regulatory statutes is to protect U.S. policyholders, not our shareholders or noteholders. The system of regulation generally administered in the United States by the state insurance departments relates to, among other things, solvency standards, restrictions on the nature, quality and concentration of investments, statutory accounting standards, and the regulation of insurance policies, market conduct and premium rates. Among other matters, these statutes require Aspen Specialty and AAIC to maintain minimum levels of capital, surplus and liquidity and to comply with applicable risk-based capital


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requirements. Insurance holding company laws and regulations also impose restrictions on the insurer’s ability to pay dividends and distributions to its shareholders. Taken together, state regulation of insurer investments, premium rates, capital adequacy and dividend restrictions could potentially restrict the ability of Aspen entities in the U.S. to write new business or distribute assets to Aspen Holdings.
State insurance holding company laws also require prior notice and state insurance department approval of certain transactions between a U.S. insurer and any affiliate as well as changes in control of an insurer or its holding company. Any purchaser of 10% or more of the outstanding voting securities of an insurance company or its holding company is presumed to have acquired control, unless this presumption is rebutted. Therefore, an investor who intends to acquire 10% or more of our outstanding voting securities may need to comply with these laws and would be required to file applications with the North Dakota and Texas insurance departments for regulatory approvals for such acquisition and obtain prior approvals from such departments.
Recent changes in state insurance laws address a number of standards that affect insurance holding company systems, including corporate governance, group-wide supervision, own risk and solvency assessments, accounting for group-wide risks in risk-based capital calculations, cybersecurity matters and imposition of additional disclosure obligations. New U.S. laws and regulations or changes to existing laws and regulations or the interpretation of these laws and regulations could have a material adverse effect on our business or operating results.
In addition, the U.S. Congress has enacted legislation providing a greater role for the federal government in the regulation of insurance. For example, the Dodd-Frank Act established a Federal Insurance Office (“FIO”) within the U.S. Department of Treasury Department to collect data on the insurance industry, recommend changes to the state system of insurance regulation and pre-empt certain state insurance laws. One permitted area of federal involvement is the negotiation of “covered agreements” with foreign jurisdiction which would have the effect of pre-empting state law. For more information on the covered agreement between the U.S. and the E.U., refer to Part I, Item 1, “Business — Regulatory Matters — U.S. Regulation — Operations of Aspen U.K. and Aspen Bermuda.” The Dodd-Frank Act also authorized the creation of the Financial Stability Oversight Council (“FSOC”), a financial regulatory organization chaired by the U.S. Secretary of the Treasury. FSOC has the authority to determine that non-bank financial institutions such as insurance companies are systemically significant and therefore subject to prudential supervision by the Board of Governors of the Federal Reserve. There are currently no such non-bank financial institutions designated by FSOC as systemically significant. While we have received no notice from FSOC regarding a proposed determination of systemic importance, additional laws and regulation adopted in the future or changes in existing laws and regulations could impose significant burdens on us, impact the ways in which we conduct our business, increase compliance costs, duplicate state regulation and/or could result in a competitive disadvantage.
Despite the above, President Trump has expressed the goal of dismantling or rolling back the Dodd-Frank Act, which may present regulatory risks to our businesses. On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act (“Economic Growth Act”), which includes provisions meant to roll back certain banking regulations contained in the Dodd-Frank Act. Section 211 of the Economic Growth Act directs the Director of FIO and the Board of Governors of the Federal Reserve to (i) support increasing transparency at any global insurance or international standard setting regulatory or supervisory forum in which they participate, including by advocating for greater public access to IAIS meetings; and (ii) to achieve consensus positions with the states through the NAIC prior to taking a position with respect to an insurance proposal by a global insurance regulatory or supervisory forum. President Trump issued a signing statement with the Economic Growth Act signaling that the executive branch bodies may not achieve consensus positions with the states through the NAIC prior to taking a position on international insurance proposals. Thus, the Economic Growth Act may have a material effect on our business operations in the U.S. or elsewhere.
Changes in U.S. state insurance legislation and insurance department regulation may impact liabilities assumed by our business.
Aspen Specialty, AAIC, Aspen U.K. and various affiliates are subject to periodic changes in U.S. state insurance legislation and insurance department regulation which may materially affect the liabilities assumed by the companies in such states. For example, as a result of natural disasters or emergency orders, related regulations may be periodically issued or enacted by individual states. This may impact the cancellation or non-renewal of property policies issued in those states for an extended period of time, increasing the potential liability to us on such extended policies. Failure to adhere to these regulations could result in the imposition of fines, fees, penalties and loss of approval to write business in such states. Further, certain states with catastrophe exposures (e.g., California earthquakes and wildfires, Florida hurricanes) have opted to establish state-run, state-owned reinsurers that compete with us and therefore reduce the amount of business available to us.


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Government authorities seek to more closely monitor and regulate the insurance industry which may adversely affect our business.
The Attorneys General for multiple U.S. states and other insurance regulatory authorities have previously investigated a number of issues and practices within the insurance industry, and in particular insurance brokerage compensation practices. To the extent that state regulation of brokers and intermediaries becomes more onerous, costs of regulatory compliance for Aspen Management, ASIS and Aspen Re America will increase. These investigations of the insurance industry in general, whether involving us specifically or not, together with any legal or regulatory proceedings, related settlements and industry reform or other changes arising therefrom, may materially adversely affect our business and operating results.

The United Kingdoms decision to withdraw from the E.U. could adversely impact our business, results of operations and financial condition.
The formal process of the U.K. leaving the E.U. commenced on March 29, 2017 when the Prime Minister of the U.K. notified the European Council under Article 50 of the Treaty on the European Union (“Article 50”) of the U.K.’s intention to leave. The U.K. will remain a member state of the E.U. until it negotiates and reaches an agreement in relation to the withdrawal from the E.U. or, if earlier, upon the expiration of a two year period following the Article 50 notification (i.e. on March 29, 2019). In November 2018, the U.K. and E.U. announced agreement on a draft text of a withdrawal agreement, which would include the application of transitional provisions under which E.U. law would broadly remain in force in the U.K. until the end of December 2020. However, there is uncertainty as to whether the withdrawal agreement, which is subject to approval of the U.K. Parliament, will actually be entered. In the absence of such an agreement there would be no transitional provisions and a “hard” Brexit would occur on March 29, 2019, unless the U.K. Government were to revoke its Article 50 notice or if the two year period were to be extended.
The uncertainty surrounding the implementation and effect of Brexit, the terms and conditions of such exit, the legal and regulatory framework that would apply to the U.K. and its relationship with the remaining members of the E.U. (including in relation to trade and services) during a withdrawal process and after Brexit is effected has caused, and is likely to cause, increased economic volatility and market uncertainty globally, in particular volatility of currency exchange rates, interest rates and credit spreads. It has already led, and may continue to lead, to disruptions for the European and global financial markets, such as the decrease in the value of the British Pound and of market values of listed E.U. companies, in particular from the financial services and insurance sector, and the downgrade of the credit ratings for the U.K. by Standard & Poor’s, Moody’s and Fitch (all with negative outlook). For more information on the effect of a credit rating downgrade, refer to “Market and Liquidity Risks — A downgrade of U.S. or non-U.S. government securities by credit rating agencies could adversely impact the value of such securities in our investment portfolio and create uncertainty in the market generally” above. As well as short-term issues, the long-term effect of Brexit on the value of our investment portfolio at this time is uncertain, and such volatility and uncertainty will likely continue as negotiations progress to determine the future terms of the U.K.’s relationship with the E.U.
Brexit could lead to potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. We may have to review our underwriting platforms and incur additional regulatory costs as a result. Aspen U.K. may lose its EEA financial services passport which provides it the license to operate across borders within the single EEA market without obtaining local regulatory approval where insurers and cedants are located. For example, Aspen’s Lloyd’s operations are subject to the continued ability of Lloyd’s to operate a subsidiary in Brussels, Belgium to write Lloyd’s businesses would seek access to the single market following Brexit. Operational and capital requirements relating thereto might result in increased costs or Funds at Lloyd’s and might not provide the same access to markets that Aspen currently requires to conduct business in the EEA. In addition, depending on the terms of Brexit, the U.K.’s regulatory regime in terms of Solvency II regulation and governance could also diverge and no longer be equivalent. For more information, refer to “Regulatory Risks — The E.U. Directive on Solvency II may affect the way in which Aspen U.K. and AMAL manage their businesses” above.
Depending on the terms of Brexit or if there is a “hard” Brexit, the U.K. could also lose access to the single E.U. market and to the global trade deals negotiated by the E.U. on behalf of its members. Such a decline in trade could affect the attractiveness of the U.K. as a global investment center and, as a result, could have a detrimental impact on U.K. growth. Although we have an international customer base, we could be adversely affected by reduced growth and greater volatility in the U.K. economy.
Changes to U.K. immigration policy could likewise occur as a result of Brexit, including by restricting the free travel of employees from and to the U.K. Although the U.K. will likely seek to retain its diverse pool of talent, London’s role as a global center for specialty (re)insurance business may decline, particularly if financial services entities shift their headquarters to the E.U. and the E.U. financial services passport is not maintained.
There is also some concern that the result of the Brexit referendum could encourage other countries to conduct their own referenda on their continuing relationship with and participation in the E.U. This could possibly lead to exits by other E.U. members, which could draw out the current levels volatility and uncertainty being felt within the E.U. market. Any of the above effects of Brexit, and others which cannot be anticipated, could adversely affect our business, results of operations and financial condition.


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Changes in current accounting practices and future pronouncements may materially impact our reported financial results.
Unanticipated developments in accounting practices may require us to incur considerable additional expenses to comply with such developments, particularly if we are required to prepare information relating to prior periods for comparative purposes or to apply the new requirements retroactively. Such developments may also significantly impact the presentation of such financial statements and may require restatements. The impact of changes in current accounting practices and future pronouncements cannot be predicted but they may affect the calculation of net income, net equity and other relevant financial statement line items.
Other Operational Risks
We could be adversely affected by the loss of one or more of our senior underwriters or key employees or by an inability to attract and retain senior staff.
Our success has depended and will continue to depend, in substantial part, on our ability to attract and retain our teams of underwriters in various business lines and other key employees. The loss of one or more of our senior underwriters could adversely impact our business by, for example, making it more difficult to retain clients or other business contacts whose relationship depends in part on the service of the departing personnel. In general, the loss of key services of any members of our current underwriting teams may adversely affect our business and operating results.
We also rely substantially upon the services of our senior management team. Although we have employment agreements with all members of our senior management team, if we were to unexpectedly lose the services of one or more of our senior management team or other key personnel, our business or ratings could be adversely affected. For example, an unplanned change in our senior management team could cause a risk of disruption to our business including, but not limited to, our underwriting, claims handling, reserving and financial reporting functions. We do not currently maintain key-man life insurance policies with respect to any of our employees.
Changes in employment laws, taxation and acceptable compensation practice may limit our ability to attract senior employees to our current operating platforms.
Our business and operations are, by their nature, international and we compete for senior employees on a global basis. Changes in local employment legislation, taxation and the approach of regulatory bodies to compensation practice within our operating jurisdictions may impact our ability to recruit or retain senior employees or the cost to us of doing so. For example, in the United Kingdom the Senior Insurance Managers Regime (“SIMR”) extends the scope of regulatory pre-approval requirements for senior managers to more functions covered and to non-U.K. senior managers with the ability to influence U.K. companies. As well as the regulatory pre-approval for those senior insurance managers, there are evolving individual regulatory accountability requirements and sanctions and requirements in relation to their remuneration. Any failure to retain senior employees may adversely affect the strategic growth of our business and our operating results.
Our business is subject to risks related to litigation.
We may be subject to a variety of legal actions relating to our current and past business operations including, but not limited to, disputes over coverage or claims adjudication, including claims alleging that we have acted in bad faith in the administration of claims by our policyholders, disputes with our agents, producers or network providers over compensation and termination of contracts and related claims, disputes relating to certain business acquired or disposed of by us and disputes with former employees. We cannot determine with any certainty what new theories of recovery may evolve or what their impact may be on our business. Multi-party or class action claims may present additional exposure to substantial economic, non-economic or punitive damage awards. The loss of even one of these claims, if it results in a significant damage award or a judicial ruling that was otherwise detrimental, could create a precedent in the industry that affects a great many future or unrelated claims and so could have a material adverse effect on our operating results and financial condition. There is potential risk of increased litigation as a result of employees raising disputes or grievances in relation to Aspen’s Efficiency and Effectiveness Program.



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We rely on the execution of complex internal processes to maintain our operations and the operational risks that are inherent to our business, including those resulting from fraud or employee errors or omissions, may result in financial losses. 

We rely on the accurate execution of complex internal processes to maintain our operations. We seek to monitor and control our exposure to risks arising from these processes through a risk control framework encompassing a variety of reporting systems, internal controls, management review processes and other mechanisms. We cannot provide absolute assurance that these processes and procedures will effectively control all known risks or effectively identify unforeseen risks, or that our employees and third party agents will effectively implement them. Loss may result from, among other things, fraud, errors, failure to document transactions properly, failure to obtain proper internal authorization, failure to comply with underwriting or other internal guidelines or failure to comply with regulatory requirements. Loss from these risks could adversely affect our business, results of operations and financial condition. In addition, insurance policies that we have in place with third parties may not protect us in the event that we experience a significant loss from these risks.
A failure in our operational systems or infrastructure or those of third parties, including those caused by security breaches or cyber-attacks could disrupt our business, damage our reputation and cause losses.
Our operations rely on the secure processing, storage, and transmission of confidential and other information and assets, including in our computer systems and networks. Our business, including our ability to adequately price products and services, establish reserves, provide an effective and secure service to our customers, value our investments and report our financial results in a timely and accurate manner, depends significantly on the integrity, availability and timeliness of the data we maintain, as well as the data and assets held through third party outsourcers, service providers and systems. Cybersecurity and technology threats can include phishing scams, account takeovers, introductions of malware, attempts at electronic break-ins, and the computerized submission of fraudulent and/or duplicative payment requests. Any such breaches or interference (including attempted breaches or interference) by third parties or by insiders that may occur in the future could have a material adverse impact on our business, reputation, financial condition or results of operations.
In an effort to ensure the integrity of such data, we implement new security measures and systems and improve or upgrade our existing security measures and systems on a continuing basis. Although we have implemented administrative and technical controls and take protective actions to reduce the risk of cyber incidents and to protect our information technology and assets, and we endeavor to modify such procedures as circumstances warrant and negotiate agreements with third party providers to protect our assets, such measures may be insufficient to prevent, among other things, unauthorized access, computer viruses, malware or other malicious code or cyber-attack, catastrophic events, system failures and disruptions (including in relation to new security measures and systems), employee errors or malfeasance, third party (including outsourced service providers) errors or malfeasance, loss of assets and other security events (each, a “Security Event”). Like other global companies, we have from time to time experienced, and are likely to continue to be subject to, Security Events, none of which to date have had a material adverse impact on our business, results of operations or financial condition. As the breadth and complexity of our security infrastructure continues to grow, the potential risk of a Security Event increases. If additional Security Events occur, these events may jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored with us, and transmitted through our computer systems and networks, or otherwise cause interruptions, delays, or malfunctions in our, our clients’, counterparties’ or third parties’ operations, or result in data loss or loss of assets which could result in significant losses and/or fines, reputational damage or a material adverse effect on our business, financial condition or operating results. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures and to pursue recovery of lost data or assets and we may be subject to litigation and financial losses. We currently maintain cyber liability insurance that provides third party or first party liability coverages to protect us, subject to policy limits and coverages, against certain events that could be a Security Event. However, a Security Event could nonetheless have a material adverse effect on our operating results or financial condition.
We outsource certain technology and business process functions to third parties including offshore and cloud service providers and may increasingly do so in the future. If we do not effectively develop, implement and monitor our outsourcing strategy, third party providers do not perform as anticipated or we experience technological or other problems with a transition, we may not realize productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and loss of business. Our outsourcing of certain technology and business processes functions to third parties may expose us to enhanced risks related to data security, which could result in monetary and reputational damages. In addition, our ability to receive services from third party providers may be impacted by cultural differences, political instability, unanticipated regulatory requirements or policies. As a result, our ability to conduct our business may be adversely affected.
Despite the contingency plans and facilities we have in place and our efforts to observe the regulatory requirements surrounding information security, our ability to conduct business may be adversely affected by a disruption of the infrastructure that supports our business in the communities in which we are located, or of outsourced services or functions, including a disruption involving electrical, communications, transportation, or other services we use. If a disruption occurs in one location and our employees in


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that location are unable to occupy our offices and conduct business or communicate with or travel to other locations, our ability to service and interact with clients may suffer and we may not be able to successfully implement contingency plans that depend on communication or travel. If sustained or repeated, such business interruption, system failure, service denial or data loss and/or damage could result in a deterioration of our ability to write and process business, provide customer service, pay claims in a timely fashion or perform other necessary business functions.
Data protection failures could disrupt our business, damage our reputation and cause losses.
The regulatory environment surrounding information security and privacy is increasingly demanding. We are subject to numerous U.S. federal and state laws and non-U.S. regulations governing the protection of personal and confidential information of our clients or employees, including in relation to medical records, credit card data and financial information.
On May 25, 2018, the European General Data Protection Regulation (the “GDPR”) became directly applicable in all E.U. member states replacing the Data Protection Directive (95/46/EC). We are subject to the GDPR when offering goods and services to E.U. based data subjects (regardless of whether involving our E.U. based subsidiary or operations). The GDPR sets out a number of requirements that must be complied with when handling the personal data of such E.U. based data subjects including: the obligation to appoint data protection officers where appropriate; new rights for individuals to be “forgotten” and rights to data portability; the principal of accountability and the obligations to report data breaches. The GDPR also retained and added to some existing requirements, including restrictions on transfers outside the EEA and the requirement to include specific data protection provisions in agreements with data processors. These laws and regulations are increasing in complexity and number, change frequently and sometimes conflict. In particular, the legislation introduced by each E.U. member state to implement the GDPR are not fully harmonized as the GDPR allows national variations in certain areas. We continue to monitor compliance with all relevant E.U. member states’ laws and regulations, including where permitted derogations from the GDPR are introduced.
The introduction of the GDPR, and the resultant changes in E.U. member states’ national laws and regulations, increased our compliance obligations and triggered an update of our policies and processes relating to our collection and use of data. There is a risk that these compliance obligations could increase, further leading to an increase in compliance costs which may have an adverse impact on our business, financial condition or results of operations.
If any person, including any of our employees or those with whom we share such information, negligently disregards or intentionally breaches our established controls with respect to our client or employee data, or otherwise mismanages or misappropriates that data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions. For example, sanctions for non-compliance with the GDPR could result in a penalty of up to the higher of (a) €20 million; and (b) 4% of a firm’s global annual revenue for the preceding financial year for certain infringements, such as unlawful data transfer outside of the EEA. In addition, a data breach could result in negative publicity which could damage our reputation and have an adverse effect on our business, financial condition or results of operations.
Our internal controls over financial reporting may have gaps or other deficiencies.
Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. However, our internal controls over financial reporting may have gaps or other deficiencies and there is no guarantee that significant deficiencies or material weaknesses in internal controls may not occur in the future. Any such gaps or deficiencies may require significant resources to remediate and may also expose us to litigation, regulatory fines or penalties, or other losses. Inadequate process design or a failure in operating effectiveness could result in a material misstatement of our financial statements due to, but not limited to, poorly designed systems, changes in end-user computing, poorly designed IT reports, ineffective oversight of outsourced processes, failure to perform relevant management reviews, accounting errors or duplicate payments, any of which could result in a restatement of financial accounts.
We may be adversely affected if our capital models provide materially different indications than actual results.
We have made substantial investments to develop proprietary analytic and modeling capabilities to facilitate our underwriting, risk management, capital modeling and allocation, and risk assessments relating to the risks we assume. These models and other tools help us to manage our risks, understand our capital utilization and risk aggregation, inform management and other stakeholders of capital requirements and seek to improve the risk/return profile or optimize the efficiency of the amount of capital we apply to cover the risks in the individual contracts we sell and in our portfolio as a whole. However, given the inherent uncertainty of modeling techniques and the application of such techniques, the possibility of human or systems error, the challenges inherent in consistent application of complex methodologies in a fluid business environment and other factors, our models, tools and databases may not accurately address the risks we currently cover or the emergence of new matters which might be deemed to impact certain of our coverages. Accordingly, our models may understate the exposures we are assuming. Conversely, our models may prove too conservative and contribute to factors which may impede our ability to grow in respect of new markets or perils or in connection


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with our current portfolio of coverages or the loss environment otherwise may prove more benign than our capital loading for catastrophes or other modeled losses. In such case of excess capital, we would make a judgment about redeploying the capital in lines of businesses or pursuing other capital management activities, such as dividends or share repurchases, which judgment will also depend on modeling techniques and results. If capital models prove inadequate, our result of operations and financial condition may be materially adversely impacted.
The failure of our underwriting processes could have an adverse effect on our results of operations or financial condition.
We seek to manage our loss exposure by maintaining a disciplined underwriting process throughout our (re)insurance operations. Underwriting is a matter of judgment, involving 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. The failure of any of the underwriting risk management strategies that we employ could have a material adverse effect on our financial condition, results of operations or cash flows.
We rely on internal controls to limit our risk exposure within prescribed parameters. However, our controls and monitoring efforts may be ineffective, permitting one or more underwriters to exceed their underwriting authority and cause us to (re)insure risks outside the agreed upon guidelines. To the extent that our underwriters exceed their authorities, agree to inappropriate contract terms and conditions or are influenced by broker incentives, or if there is ineffective channel management or inaccurate underwriting data capture and reporting leading to licensing and sanction breaches, our financial condition or results of operations could be materially adversely affected.
Risks Related to Our Securities
Our ability to pay dividends or to meet ongoing cash requirements may be constrained by our holding company structure.
We are a holding company and, as such, we do not expect to have any significant operations or assets other than our ownership of the shares of our subsidiaries, including our Operating Subsidiaries. Dividends and other permitted distributions and loans from our Operating Subsidiaries are expected to be our sole source of funds to meet ongoing cash requirements, including our debt service payments and other expenses, and dividend payments, to our preference and ordinary shareholders, as appropriate. Our Operating Subsidiaries are subject to capital, regulatory and other requirements that inform their ability to declare and pay dividends and make loans to other Aspen Group companies. In line with common market practice for regulated institutions, the PRA, the regulatory agency which oversees the prudential regulation of insurance companies in the U.K. such as Aspen U.K., previously requested that it be afforded the opportunity to provide a “non-objection” prior to all future dividend payments made by Aspen U.K. In 2017, the PRA stated that they no longer routinely require Aspen U.K. to apply for a non-objection to dividends provided such dividend payment and Aspen U.K.’s subsequent capital position are within Aspen U.K.’s board-approved solvency capital risk appetite. Refer to Part I, Item 1, “Business — Regulatory Matters — Bermuda Regulation — Restrictions on Dividends, Distributions and Reduction of Capital,” “Business — Regulatory Matters — U.K. and E.U. Regulation — Restrictions on Dividend Payments,” and “Business — Regulatory Matters — U.S. Regulation — State Dividend Limitations” above and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity” in Part II, Item 7 below for more information on our ability to pay dividends. These and other requirements may mean that our Operating Subsidiaries are unable to pay sufficient dividends to enable us to meet our ongoing cash requirements, which could materially adversely affect our liquidity or financial condition.
Certain regulatory and other constraints may limit our ability to pay dividends on our securities.
We are subject to Bermuda regulatory constraints that affect our ability to pay dividends on our ordinary shares and make other distributions on our Preference Shares (as defined below). Under the Companies Act, we may declare or pay a dividend or distribution out of contributed surplus only if we have reasonable grounds to believe that we are, and would after the payment be, able to meet our liabilities as they become due or if the realizable value of our assets would thereby not be less than our liabilities. Refer to Part I, Item 1, “Business — Regulatory Matters”, Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity” and Note 15 of our consolidated financial statements, “Statutory Requirements and Dividends Restrictions” for more information on our ability to pay dividends.
The Merger Agreement restricts the payment of dividends on our ordinary shares.
The Merger Agreement restricts us from declaring or paying any dividends on ordinary shares, including our regular quarterly dividend (other than the quarterly dividends on our ordinary shares that were declared and publicly announced prior to the date of the Merger Agreement).


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There are provisions in our charter documents which may reduce or increase the voting rights of our ordinary shares without regard to corresponding ownership.
In general, and except as provided below, shareholders have one vote for each ordinary share held by them and are entitled to vote at all meetings of shareholders. However, if, and so long as, the ordinary shares of a shareholder are treated as “controlled shares” (as determined under section 958 of the Internal Revenue Code of 1986, as amended (the “Code”)) of any U.S. Person (as defined below) and such controlled shares constitute 9.5% or more of the votes conferred by our issued shares, the voting rights with respect to the controlled shares of such U.S. Person (a “9.5% U.S. Shareholder”) shall be limited, in the aggregate, to a voting power of less than 9.5%, under a formula specified in our bye-laws. The formula is applied repeatedly until the voting power of all 9.5% U.S. Shareholders has been reduced to less than 9.5%. This provision was intended to mitigate the risk that Aspen Holdings or any of our non-U.S. subsidiaries would be characterized as a “controlled foreign corporation” for U.S. federal income tax purposes. As described below however, this provision will not mitigate this risk based on a recent legislative change. Refer to “Risks Related to Taxation — Holders of 10% or more of Aspen Holdings’ shares may be subject to U.S. income taxation under the controlled foreign corporation (“CFC”) rules” below for more information.
In addition, the Board may limit a shareholder’s voting rights (including appointment rights, if any, granted to holders of our 5.95% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares and 5.625% Perpetual Non-Cumulative Preference Shares, each with a liquidation preference of $25 per share (collectively, the “Preference Shares”)) where it deems it appropriate to do so to (i) avoid the existence of any 9.5% U.S. Shareholder, and (ii) avoid certain material adverse tax, legal or regulatory consequences to us or any holder of our shares or its affiliates. “Controlled shares” includes, among other things, all shares of the Company that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). As of December 31, 2018, there were 59,743,156 ordinary shares outstanding of which 5,675,600 ordinary shares would constitute 9.5% of the votes conferred by our issued and outstanding shares.
For purposes of this discussion, the term “U.S. Person” means: (i) a citizen or resident of the United States, (ii) a partnership or corporation, or entity treated as a corporation, created or organized in or under the laws of the United States, or any political subdivision thereof, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if either (x) a court within the United States is able to exercise primary supervision over the administration of such trust and one or more U.S. Persons have the authority to control all substantial decisions of such trust or (y) the trust has a valid election in effect to be treated as a U.S. Person for U.S. federal income tax purposes or (z) any other person or entity that is treated for U.S. federal income tax purposes as if it were one of the foregoing.
Under these provisions, certain shareholders may have their voting rights limited to less than one vote per share, while other shareholders may have voting rights in excess of one vote per share. Refer to Part II, Item 5, “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchaser of Equity Securities — Bye-Laws.” Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership.
As a result of any reallocation of votes, voting rights of some of our shareholders might increase above 5% of the aggregate voting power of the outstanding ordinary shares, thereby possibly resulting in such shareholders becoming a reporting person subject to Schedule 13D or 13G filing requirements under the Exchange Act. In addition, the reallocation of the votes of our shareholders could result in some of the shareholders becoming subject to filing requirements under Section 16 of the Exchange Act.
We also have the authority under our bye-laws to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be reallocated under the bye-laws. If a shareholder fails to respond to our request for information or submits incomplete or inaccurate information in response to a request by us, we may, in our sole discretion, eliminate such shareholder’s voting rights.
There are provisions in our bye-laws which may restrict the ability to transfer ordinary shares and which may require shareholders to sell their ordinary shares.
The Board may decline to register a transfer of any ordinary shares if it appears to the Board, in its sole and reasonable discretion, after taking into account the limitations on voting rights contained in our bye-laws, that any non-de minimis adverse tax, regulatory or legal consequences to us, any of our subsidiaries or any of our shareholders or their affiliates may occur as a result of such transfer. Our bye-laws also provide that if the Board determines that share ownership by a person may result in material adverse tax consequences to us, any of our subsidiaries or any shareholder or its affiliates, then we have the option to require that shareholder to sell the repurchase right for fair market value the minimum number of ordinary shares held by such person which is necessary to eliminate the material adverse tax consequences.


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Some of the provisions in our bye-laws and in the laws and regulations of the jurisdictions where we conduct business could delay or deter a takeover attempt that shareholders might consider desirable and may make it more difficult to replace members of our Board.
Our bye-laws contain provisions that may entrench directors and make it more difficult for shareholders to replace directors even if shareholders consider it beneficial to do so. These provisions could delay or prevent a change of control that shareholders might consider favorable. For example, these provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our ordinary shares offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our ordinary shares if they are viewed as discouraging changes in management and takeover attempts perceived as beneficial in the future.
For example, our bye-laws contain the following provisions that could have such an effect:
election of directors is staggered, meaning that members of only one of three classes of directors are elected each year;
directors serve for a term of three years (unless aged 70 years or older);
directors may decline to approve or register any transfer of shares to the extent they determine, in their sole discretion, that any non-de minimis adverse tax, regulatory or legal consequences to Aspen Holdings, any of its subsidiaries, shareholders or affiliates would result from such transfer;
if directors determine that share ownership by any person may result in material adverse tax consequences to Aspen Holdings, any of its subsidiaries, shareholders or affiliates, we have the option, but not the obligation, to purchase or assign to a third party the right to purchase the minimum number of shares held by such person solely to the extent that it is necessary to eliminate such material risk;
shareholders have limited ability to remove directors; and
if the ordinary shares of any U.S. Person constitute 9.5% or more of the votes conferred by the issued shares of Aspen Holdings, the voting rights with respect to the controlled shares of such U.S. Person shall be limited, in the aggregate, to a voting power of less than 9.5%, refer to “— There are provisions in our charter documents which may reduce or increase the voting rights of our ordinary shares without regard to corresponding ownership” above.

Further, as described under Part I, Item 1, “Business — Regulatory Matters,” prospective shareholders are required to notify our regulators on becoming “controllers” of any of our Operating Subsidiaries through ownership of ordinary shares above certain thresholds, typically 10% of outstanding ordinary shares. Some regulators, such as the PRA, require their approval prior to such shareholder becoming a “controller.” Other regulators may serve a notice of objection or are entitled to injunctive relief. There can be no assurance that the applicable regulatory body would agree that a shareholder who owned greater than 10% of our ordinary shares did not, because of the limitation on the voting power of such shares, control the applicable Operating Subsidiary.
These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of the Company, including through transactions, and in particular unsolicited transactions, that some or all of our shareholders might consider to be desirable. If these restrictions delay, deter or prevent a change of control, such restrictions may make it more difficult to replace members of our Board and may have the effect of entrenching management regardless of their performance.
We cannot pay a dividend on our ordinary shares unless the full dividends for the most recently ended dividend period on all outstanding Preference Shares have been declared and paid.
Our Preference Shares rank senior to our ordinary shares with respect to the payment of dividends. As a result, unless the full dividends for the most recently ended dividend period on all outstanding Preference Shares have been declared and paid (or declared and a sum sufficient for the payment thereof has been set aside), we cannot declare or pay a dividend on our ordinary shares. Under the terms of our Preference Shares, these restrictions will continue until full dividends on all outstanding Preference Shares for four consecutive dividend periods have been declared and paid (or declared and a sum sufficient for the payment thereof has been set aside for payment). Refer to Part II, Item 5 “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Description of our Preference Shares” below for more information on our Preference Shares.
Our ordinary shares rank junior to our Preference Shares in the event of a liquidation, winding up or dissolution of the Company.
In the event of a liquidation, winding up or dissolution of the Company, our ordinary shares rank junior to our Preference Shares. In such an event, there may not be sufficient assets remaining after payments to holders of our Preference Shares to ensure payments


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to holders of ordinary shares. Refer to Part II, Item 5 “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Description of our Preference Shares” below for more information on our Preference Shares.
U.S. persons who own our securities may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation.
The Companies Act, which applies to us, differs in some material respects from laws generally applicable to U.S. corporations and their shareholders. These differences include, but are not limited to, the manner in which directors must disclose transactions in which they have an interest, the rights of shareholders to bring class action and derivative lawsuits, the scope of indemnification available to directors and officers and provisions relating to the amalgamations, mergers and acquisitions and takeovers. Holders of our ordinary shares and Preference Shares may therefore have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction within the U.S.
Generally, the duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies typically do not have rights to take action against directors or officers of the company and may only do so in limited circumstances. Class actions and derivative actions are typically not available to shareholders under Bermuda law. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than that which actually approved it. When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company. Additionally, under our bye-laws and as permitted by Bermuda law, each shareholder has waived any claim or right of action against our directors or officers for any action taken by directors or officers in the performance of their duties, except for actions involving fraud or dishonesty. In addition, the rights of holders of our securities and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established as under statutes or judicial precedent in U.S. jurisdictions, particularly the State of Delaware.
We are a Bermuda company and it may be difficult to effect service of process on us or enforce judgments against us or our directors and executive officers in the United States.
We are incorporated under the laws of Bermuda and our business is based in Bermuda. In addition, certain of our directors and officers reside outside the United States, and a substantial portion of our assets and the assets of such persons are located in jurisdictions outside the United States. As such, it may be difficult or impossible to effect service of process upon us or those persons in the United States or to recover against us or them on judgments of U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws.
We have been advised by Bermuda counsel that there is no treaty in force between the U.S. and Bermuda providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. As a result, whether a U.S. judgment would be enforceable in Bermuda against us or our directors and officers depends on whether the U.S. court that entered the judgment is recognized by the Bermuda court as having jurisdiction over us or our directors and officers, as determined by reference to Bermuda conflict of law rules. A judgment debt from a U.S. court that is final and for a sum certain based on U.S. federal securities laws will not be enforceable in Bermuda unless the judgment debtor had submitted to the jurisdiction of the U.S. court, and the issue of submission and jurisdiction is a matter of Bermuda (not U.S.) law.
In addition to and irrespective of jurisdictional issues, the Bermuda courts will not enforce a U.S. federal securities law that is either penal or contrary to public policy in Bermuda. It is the advice of our Bermuda counsel that an action brought pursuant to a public or penal law, the purpose of which is the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity, will not be entertained by a Bermuda court. Certain remedies available under the laws of U.S. jurisdictions, including certain remedies under U.S. federal securities laws, would not be available under Bermuda law or enforceable in a Bermuda court, as they would be contrary to Bermuda public policy. Further, no claim may be brought in Bermuda against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial jurisdiction under Bermuda law and do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.


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The New York Stock Exchange may suspend trading generally as a result of technical issues which could cause an interruption in the trading market for our securities.
Our ordinary shares trade on the NYSE under the symbol “AHL” and our Preference Shares also trade on the NYSE. Trading in our securities that are listed on the NYSE may be halted due to a market disruption event, systems failure, cyber security attack or for other technical reasons. If the NYSE is unable to maintain the availability of its electronic trading systems or otherwise safeguard the security of trading within those platforms due to the occurrence of a technical failure, cyber-attack or other information security incident, an investor’s ability to trade in our securities may be compromised. On a few occasions in the past the NYSE has suspended trading in all securities listed on the NYSE due to unusual but major technical issues. During such a halt in trading, there may be no trading market for our ordinary shares or Preference Shares making it difficult for an investor to sell our securities in the volume, or at a price and time, which is attractive to such investor.
Risks Related to Taxation
Our non-U.S. companies (other than AUL) may be subject to U.S. income tax and that may have a material adverse effect on our operating results and your investment.
If Aspen Holdings or any of its non-U.S. subsidiaries (other than AUL) were considered to be engaged in a trade or business in the United States, it could be subject to U.S. corporate income and additional branch profits taxes on the portion of its earnings effectively connected to such U.S. business, in which case its operating results could be materially adversely affected. However, the operating results of Aspen U.K. should not be materially adversely affected as Aspen U.K. is considered to be engaged in a U.S. trade or business solely as a result of the binding authorities granted to certain subsidiaries incorporated in the United States.
We intend to manage the business of Aspen Holdings and its non-U.S. subsidiaries so that none of these companies (other than AUL) should be subject to U.S. corporate income tax because none of these companies should be treated as engaged in a trade or business within the United States (other than Aspen U.K. and APJ Jersey with respect to the business produced pursuant to the binding authorities granted to certain subsidiaries incorporated in the United States). However, U.S. excise tax on premium income attributable to U.S. risks, U.S. Base Erosion and Anti-abuse Tax (“BEAT”) on premium ceded from U.S. subsidiaries to non-U.S. related parties, U.S. withholding tax on certain U.S. source investment income, and U.S. corporate income and additional branch profits tax on the profits attributable to the business of Aspen U.K. produced pursuant to the above described binding authority agreements, and profits attributable to APJ Jersey reflecting the recent expansion of its business into the Latin American market may apply. However, because there is considerable uncertainty as to the activities which constitute being engaged in a trade or business within the United States, we cannot be certain that the U.S. Internal Revenue Service (“IRS”) will not contend successfully that some or all of Aspen Holdings or its non-U.S. subsidiaries (other than AUL) is/are engaged in a trade or business in the United States based on activities in addition to the binding authorities discussed above.
AUL is a member of Lloyd’s and subject to a closing agreement between Lloyd’s and the IRS (the “Closing Agreement”). Pursuant to the terms of the Closing Agreement, all members of Lloyd’s, including AUL, are subject to U.S. federal income taxation. Those members that are entitled to the benefits of a U.S. income tax treaty are deemed to be engaged in a U.S. trade or business through a U.S. permanent establishment. Those members not entitled to the benefits of such a treaty are merely deemed to be engaged in a U.S. trade or business. The Closing Agreement provides rules for determining the income considered to be attributable to the permanent establishment or U.S. trade or business. We believe that AUL may be entitled to the benefits of the U.S. income tax treaty with the U.K., although the position is not certain.
Our non-U.K. companies may be subject to U.K. tax that may have a material adverse effect on our operating results.
None of us, other than our subsidiaries that are incorporated in the U.K. (“the U.K. Subsidiaries”), should be treated as being resident in the U.K. for corporation tax purposes except for APJ Jersey which, although not incorporated in the U.K., is treated as resident in the U.K. as a result of its central management and control being exercised from the U.K. Each of us, other than the U.K. Subsidiaries and APJ Jersey, currently intends to manage our affairs so that none of us, other than the U.K. Subsidiaries and APJ Jersey, is resident in the U.K. for tax purposes.
A company that is not resident in the U.K. for corporation tax purposes can nevertheless be subject to U.K. corporation tax if it carries on a trade through a permanent establishment in the U.K. but, in that case, the charge to U.K. corporation tax is limited to profits (both revenue profits and capital gains) attributable directly or indirectly to such permanent establishment.
Each of us, other than the U.K. Subsidiaries and APJ Jersey, currently intends to operate in such a manner that none of us (other than the U.K. Subsidiaries and APJ Jersey) carries on a trade through a permanent establishment in the U.K. Nevertheless, because neither case law nor U.K. statute completely defines the activities that constitute trading in the U.K. through a permanent establishment, Her Majesty’s Revenue and Customs (“HMRC”) might contend successfully that any of us (other than the U.K. Subsidiaries and APJ Jersey) are trading in the U.K. through a permanent establishment.


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The U.K. has no income tax treaty with Bermuda. There are circumstances in which companies that are neither resident in the U.K. nor entitled to the protection afforded by a double tax treaty between the U.K. and the jurisdiction in which they are resident may be exposed to income tax in the U.K. (other than by deduction or withholding) on the profits of a trade carried on there, even if that trade is not carried on through a permanent establishment. However, each of us intends to operate in such a manner that none of us falls within the charge to income tax in the U.K. (other than by deduction or withholding).
If any of us, other than the U.K. Subsidiaries and APJ Jersey, were treated as being resident in the U.K. for U.K. corporation tax purposes, or as carrying on a trade in the U.K., whether or not through a permanent establishment, our operating results could be materially adversely affected.
Our U.K. operations may be affected by recent changes in U.K. and Australian tax law.
The U.K. Subsidiaries and APJ Jersey should be treated as resident in the U.K. and accordingly be subject to U.K. tax in respect of their worldwide income and gains. Any change in the basis or rate of U.K. corporation tax could materially adversely affect the operations of the U.K. resident companies. The U.K. corporation tax rate is currently 19% and will be reduced to 17% with effect from April 1, 2020.
The Organization for Economic Co-operation and Development (“OECD”) published its final reports on Base Erosion and Profit Shifting (“BEPS Reports”) in October 2015, containing recommendations on measures to coordinate multilateral action on international tax rules. Recommended actions include ensuring that transfer pricing outcomes are in line with value creation (noting that the current rules may facilitate the transfer of risks or capital away from countries where the economic activity takes place), neutralizing the effect of hybrid financial instruments and entities and limiting the deductibility of interest payments for tax purposes.
In response to the BEPS recommendations, revised transfer pricing guidelines have been adopted and legislation has been introduced in relation to hybrid mismatches, the latter of which came into effect on January 1, 2017. Legislation to restrict tax deductions for interest expenses of large groups, in line with the OECD’s recommendations, was brought into effect from April 1, 2017. These changes to U.K. tax law in response to the BEPS Reports may have a material adverse effect on our intra-group financing arrangements and our results.
Legislation restricting the amount of U.K. profit in any particular accounting period that can be offset by historical tax losses was brought into effect from April 1, 2017. Should utilization of any tax losses be delayed or restricted as a result of this legislation, this could have a material adverse effect on our results.
The U.K. diverted profits tax (“DPT”) is separate from U.K. corporation tax and is charged at a higher rate of 25%. It is an anti-avoidance measure aimed at protecting the U.K. tax base against the artificial diversion of profits that are being earned by activities carried out in the U.K. but which are not otherwise being taxed in the U.K., in particular as a result of arrangements amongst companies in the same multinational group.  The U.K.’s network of double tax treaties does not offer protection from a DPT charge. In the event that the rules apply to certain arrangements, then upfront payment of HMRC’s estimate of the deemed tax liability may be required. If any of our U.K. or non-U.K. companies is liable for DPT as a result of intra-group arrangements, this could have a material adverse effect on our results.

The U.K. Criminal Finances Act, which came into force on September 30, 2017, created a new corporate criminal offense of failure to prevent facilitation of tax evasion.  A company (wherever incorporated) will be guilty (on a strict liability basis) if a person performing services for or on behalf of that company (whether as an employee, agent or in any other capacity), facilitates the commission by another person of a U.K. tax evasion offense, or, in certain circumstances, a tax evasion offense under any non-U.K. law, unless the company can prove that it had reasonable prevention procedures in place. Should any Aspen Group entities be held criminally liable under this legislation, this may have a material impact on our results.
The Australian Government announced a new diverted profits tax which applies to tax years beginning on or after July 1, 2017. The diverted profits tax is set at 40% and is modeled on the U.K.’s DPT. If Aspen U.K.’s Australian branch is deemed liable for Australian DPT as a result of intra-group arrangements, this could have a material adverse effect on our results in future years.
Our U.K. and U.S. operations may be adversely affected by a transfer pricing adjustment in computing U.K. or U.S. taxable profits.
Any arrangements between U.K.-resident entities of the Aspen Group and other members of the Aspen Group are subject to the U.K. transfer pricing regime. Consequently, if any agreement (including any reinsurance agreements) between a U.K.-resident entity of the Aspen Group and any other Aspen Group entity (whether that entity is resident in or outside the U.K.) is found not to be on arm’s length terms and as a result a U.K. tax advantage is being obtained, an adjustment will be required to compute U.K. taxable profits as if such an agreement were on arm’s length terms. Similar rules apply in the U.S and would have a similar impact


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on our U.S. resident entities if transfer pricing adjustments were required. Any transfer pricing adjustment could adversely impact the tax charge suffered by the relevant U.K. or U.S. resident entities of the Aspen Group.

The BEPS Reports included a recommendation that groups should be required to report details of their operations and intra-group transactions in each jurisdiction, known as country by country reporting (“CBCR”). The U.K. has implemented these recommendations with effect from January 1, 2016. Many non-OECD countries are still considering the implications of the proposals. It is possible that our approach to transfer pricing may become subject to greater scrutiny from the tax authorities in the jurisdictions in which we operate, which may lead to transfer pricing audits in the future. Any transfer pricing adjustment could adversely impact the tax charge suffered by the relevant entities of the Aspen Group.

In April 2016, the E.U. issued proposals to require all E.U. entities (including branches) to publish their CBCR reports. The proposals, if implemented, are likely to cause increased audit activity from E.U. tax authorities. Legislation has been enacted giving power to introduce regulations requiring public disclosure of U.K. CBCR reports, although this power has not yet been exercised.
Our operations may be affected by the introduction of an E.U. financial transaction tax (“FTT”).

On February 14, 2013, the E.U. Commission published a proposal for a Directive for a common FTT in those E.U. Member States which choose to participate (the “FTT Zone”). The FTT proposal remains subject to negotiation between the participating Member States and consensus has not yet been reached as to the scope of the tax and how it should be levied. The introduction of FTT in the proposed or similar form could have an adverse effect on our business and operating results.

Our operations may be affected by the introduction of the Common Reporting Standard (“CRS”).
The CRS has been introduced as an initiative by the OECD and is imposed by its member countries, including those within the E.U. through the E.U. Directive on Administrative Co-operation. Similar to the U.S. Foreign Account Tax Compliance Act, the CRS requires financial institutions which are subject to the rules to report certain information in respect of financial account holders. We intend to operate in compliance with the CRS. Any inadvertent failure to do so may have an adverse effect on our business and operating results.
Recent and future changes in U.S. federal income tax law or the manner in which it is interpreted could materially adversely affect the non-U.S. insurance industry and our results of operations.

The Tax Cuts and Jobs Act (the “2017 Act”) was passed by the U.S. Congress and was signed into law on December 22, 2017, with certain provisions intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United States but have certain U.S. connections and United States persons investing in such companies.  For example, the 2017 Act includes BEAT that could make affiliate reinsurance between United States and non-U.S. members of the Aspen Group economically unfeasible. As discussed in more detail below, the 2017 Act also revises the rules applicable to passive foreign investment companies (“PFICs”) and controlled foreign corporations (“CFCs”).  Although we are currently unable to predict the ultimate impact of the 2017 Act on our business, shareholders and results of operations, the 2017 Act may increase the tax liability of the U.S. members of the Aspen Group that reinsure with non-U.S. Aspen Group members and may impact the timing and amount of U.S. federal income taxes imposed on certain U.S. shareholders.  Further, it is possible that other legislation could be introduced and enacted by the current Congress or future Congresses that could have an adverse impact on us. Thus in addition to direct risks, it is possible that over time the BEAT, and the Act generally, may result in increased prices for certain reinsurance or insurance products, which could cause a decrease in demand for these products and services due to limitations on the available resources of our clients or their underlying insureds. This could reduce our access to capital and in that event we could experience a material adverse effect on our business, financial condition and results of operations.

U.S. federal income tax laws and interpretations regarding whether a company is engaged in a trade or business within the U.S. is a PFIC, or whether U.S. Persons would be required to include in their gross income the “subpart F income” of a CFC or RPII are subject to change, possibly on a retroactive basis. There currently are only recently proposed regulations regarding the application of the PFIC rules to insurance companies, and the regulations regarding RPII have been in proposed form since 1991. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. The Company cannot be certain if, when, or in what form such regulations or pronouncements may be implemented or made, or whether such guidance will have a retroactive effect.


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Holders of 10% or more of Aspen Holdings’ shares may be subject to U.S. income taxation under the controlled foreign corporation (“CFC”) rules.
A “10% U.S. Shareholder” (as defined below) of a non-U.S. corporation that is a CFC at any time during a taxable year that owns shares in such non-U.S. corporation directly or indirectly through non-U.S. entities on the last day of the non-U.S. corporation’s taxable year during which it is a CFC must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC’s “subpart F income” and global low taxed intangible income (“GILTI”) even if the subpart F income or GILTI is not distributed. A “10% U.S. Shareholder” is a U.S. Person (as defined below) that owns (directly, indirectly through non-U.S. entities or “constructively” (as defined below)) at least 10% of the total combined voting power or value of all classes of stock of a non-U.S. corporation. The 2017 Act expanded the definition of 10% U.S. Shareholder to include ownership by value (rather than just vote), so provisions in our organizational documents described above reducing the voting power of 9.5% U.S. Shareholders will no longer mitigate the potential risk of 10% U.S. Shareholder status. “Subpart F income” of a non-U.S. insurance corporation typically includes “foreign personal holding company income” (such as interest, dividends and other types of passive income), as well as insurance and reinsurance income (including underwriting and investment income), and GILTI is generally business income of the CFC (other than subpart F income and certain other categories of income) reduced by 10% of the adjusted tax basis of the CFC’s depreciable tangible personal property (based on a computation that generally aggregates all of a 10% U.S. Shareholder’s GILTI from its investments in CFCs) that is potentially subject to further reductions depending on the nature of the applicable 10% U.S. Shareholder. A non-U.S. corporation is considered a CFC if “10% U.S. Shareholders” own (directly, indirectly through non-U.S. entities or by attribution by application of the constructive ownership rules of section 958(b) of the Code (i.e., “constructively”)) more than 50% of the total combined voting power of all classes of voting stock of that non-U.S. corporation, or the total value of all stock of that non-U.S. corporation. For the purposes of taking into account insurance income, a CFC also includes a non-U.S. corporation earning insurance income in which more than 25% of the total combined voting power of all classes of stock (or more than 25% of the total value of the stock) is owned by 10% U.S. Shareholders on any day during the taxable year of such corporation, if the gross amount of premiums or other consideration for the reinsurance or the issuing of insurance or annuity contracts (other than certain insurance or reinsurance related to some country risks written by certain insurance companies, not applicable here) exceeds 75% of the gross amount of all premiums or other consideration in respect of all risks.
For purposes of this discussion, the term “U.S. Person” means: (i) a citizen or resident of the United States, (ii) a partnership or corporation created or organized in or under the laws of the United States, or organized under the laws of any political subdivision thereof, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, (iv) a trust if either (x) a court within the United States is able to exercise primary supervision over the administration of such trust and one or more U.S. Persons have the authority to control all substantial decisions of such trust or (y) the trust has a valid election in effect to be treated as a U.S. Person for U.S. federal income tax purposes and (z) any other person or entity that is treated for U.S. federal income tax purposes as if it were one of the foregoing.
We believe that because of the anticipated dispersion of our share ownership, no U.S. Person who owns shares of Aspen Holdings directly or indirectly through one or more non-U.S. entities should be treated as owning (directly, indirectly through non-U.S. entities, or constructively) 10% or more of the total voting power or value of all classes of shares of Aspen Holdings or any of its non-U.S. subsidiaries. Our shares may not be as widely dispersed as we believe, however, due to the application of certain ownership attribution rules. No assurance may be given that a U.S. Person who owns our shares will not be characterized as a 10% U.S. Shareholder, in which case such U.S. Person may be subject to taxation under the CFC rules.
U.S. Persons who hold our shares may be subject to U.S. income taxation at ordinary income rates on their proportionate share of our related party insurance income (“RPII”).
If the RPII (determined on a gross basis) of any of our non-U.S. Operating Subsidiaries, Silverton, Peregrine and APJ Jersey were to equal or exceed 20% of that company’s gross insurance income in any taxable year and direct or indirect insureds (and persons related to those insureds) own directly or indirectly through entities 20% or more of the voting power or value of Aspen Holdings, then a U.S. Person who owns any shares of such non-U.S. Operating Subsidiary (directly or indirectly through non-U.S. entities) on the last day of the taxable year on which it is an RPII CFC would be required to include in its income for U.S. federal income tax purposes such person’s pro rata share of such company’s RPII for the entire taxable year, determined as if such RPII were distributed proportionately only to U.S. Persons on that date regardless of whether such income is distributed, in which case such person’s investment could be materially adversely affected. In addition, any RPII that is includible in the income of a U.S. tax-exempt organization may be treated as unrelated business taxable income. The amount of RPII earned by a non-U.S. Operating Subsidiary (generally, premium and related investment income from the indirect or direct insurance or reinsurance of any direct or indirect U.S. holder of shares or any person related to such holder) will depend on a number of factors, including the identity of persons directly or indirectly insured or reinsured by the company. We believe that the direct or indirect insureds of each of our non-U.S. Operating Subsidiaries (and related persons) did not directly or indirectly own 20% or more of either the voting power or value of our shares in prior years of operation and we do not expect this to be the case in the foreseeable future. Additionally, we do not expect gross RPII of each of our non-U.S. Operating Subsidiaries to equal or exceed 20% of its gross insurance income


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in any taxable year for the foreseeable future, but we cannot be certain that this will be the case because some of the factors which determine the extent of RPII may be beyond our control.
U.S. Persons who dispose of our shares may be subject to U.S. federal income taxation at the rates applicable to dividends on a portion of such disposition.
Section 1248 of the Code, in conjunction with the RPII rules, provides that if a U.S. Person disposes of shares in a non-U.S. corporation that earns insurance income in which U.S. Persons own 25% or more of the shares (even if the amount of gross RPII is less than 20% of the corporation’s gross insurance income and the ownership of its shares by direct or indirect insureds and related persons is less than the 20% threshold), any gain from the disposition will generally be treated as a dividend to the extent of the holder’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the holder owned the shares (whether or not such earnings and profits are attributable to RPII). In addition, such a holder will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the holder. These RPII rules should not apply to dispositions of our shares because Aspen Holdings will not itself be directly engaged in the insurance business. The RPII provisions, however, have never been interpreted by the courts or the Treasury Department in final regulations, and regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of the RPII rules by the IRS, the courts, or otherwise, might have retroactive effect. The Treasury Department has authority to impose, among other things, additional reporting requirements with respect to RPII. Accordingly, the meaning of the RPII provisions and the application thereof to us is uncertain.
U.S. Persons who hold our shares will be subject to adverse tax consequences if we are considered to be a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes.
If we are considered a PFIC for U.S. federal income tax purposes, a U.S. Person who owns any of our shares will be subject to adverse tax consequences, including subjecting the investor to a greater tax liability than might otherwise apply and subjecting the investor to tax on amounts in advance of the date on which tax would otherwise be imposed, in which case such U.S. Person’s investment could be materially adversely affected. In addition, if we were considered a PFIC, upon the death of any U.S. individual owning shares, such individual’s heirs or estate would not be entitled to a “step-up” in the basis of the shares that might otherwise be available under U.S. federal income tax laws. The 2017 Act limits the potential application of an insurance income exception to the PFIC rules to a non-U.S. insurance company that is a qualifying insurance corporation that would be taxable as an insurance company if it were a U.S. corporation and maintains insurance liabilities of more than 25% of such company’s assets for a taxable year (or maintains insurance liabilities that at least equal or exceed 10% of its assets and it satisfies a facts and circumstances test that requires a showing that the failure to exceed the 25% threshold is due to run-off or rating agency circumstances) (the “Reserve Test”). In addition, the IRS issued proposed regulations intended to clarify the application of the PFIC rules to non-U.S. insurance companies. These proposed regulations will not be effective until adopted in final form. We believe that we are not, have not been, and currently do not expect to become, a PFIC for U.S. federal income tax purposes. We cannot assure you, however, that we will not be deemed a PFIC by the IRS because we cannot predict the likelihood of finalization of the proposed regulations or the scope, nature, or impact of the proposed regulations on us, should they be formally adopted or enacted or whether our non-U.S. insurance subsidiaries will be able to satisfy the Reserve Test in future years. Accordingly, no assurance may be given that we will not be characterized as a PFIC. If we were considered a PFIC, it could have material adverse tax consequences for an investor that is subject to U.S. federal income taxation.
U.S. tax-exempt organizations who own our shares may recognize unrelated business taxable income.
A U.S. tax-exempt organization may recognize unrelated business taxable income if a portion of the insurance income of any of our non-U.S. Operating Subsidiaries is allocated to the organization, which generally would be the case if any of our non-U.S. Operating Subsidiaries is a CFC and the tax-exempt shareholder is a U.S. 10% Shareholder or there is RPII, certain exceptions do not apply and the tax-exempt organization owns any of our shares. Although we do not believe that any U.S. Persons should be allocated such insurance income, we cannot be certain that this will be the case. U.S. tax-exempt investors are advised to consult their own tax advisors.
Scope of application of the Foreign Account Tax Compliance Act (“FATCA”) is uncertain.
The FATCA provisions of the Code require withholding agents to withhold 30% of a U.S. dividend interest or other fixed payment made to a Foreign Financial Institution (“FFI”) and will, beginning January 1, 2019, require withholding on gross proceeds from the sale of securities which produce U.S. source interest or dividends, unless the FFI has entered into an agreement with the IRS to report account information for any of the FFI’s U.S. accountholders. Certain entities in the Aspen Group were identified as FFIs and were registered with the IRS ahead of the commencement date. The U.S. Treasury released models for Intergovernmental FATCA Agreements (“IGAs”) with other jurisdictions that will allow FFIs in those jurisdictions to report U.S. accountholder


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information only to local revenue authorities rather than the IRS. The U.K. / U.S. IGA was signed in September 2012. Non-Publicly Traded Securities Holders may be required to provide any information that we determine necessary to avoid the imposition of such withholding tax in order to allow us to satisfy such obligations. In the event that this withholding tax is imposed, our operating results could be materially adversely affected.
U.S. Persons may be subject to FBAR and Specified Foreign Financial Asset reporting requirements.
U.S. Persons holding our shares should consider their possible obligation to file FINCEN Form 114, Foreign Bank and Financial Accounts Report, with respect to their shares. Additionally, such U.S. and non-U.S. persons should consider their possible obligations to annually report certain information with respect to us with their U.S. federal income tax returns. Shareholders should consult their tax advisors with respect to these or any other reporting requirement which may apply with respect to their ownership of our shares.
The impact of Bermuda’s letter of commitment to the OECD to eliminate harmful tax practices is uncertain and could adversely affect our tax status in Bermuda.
The OECD has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD’s progress report dated April 2, 2009, Bermuda was designated as an OECD “White List” jurisdiction that has substantially implemented the internationally agreed tax standards. The standards for the OECD compliance are to have at least 12 signed Tax Information Exchange Agreements (“TIEAs”) with other OECD members or non-OECD members. Bermuda has signed approximately 41 TIEAs which exceeds the requisite amount and demonstrates Bermuda’s commitment to preserve the standards. In April 2016, Bermuda agreed to participate in the Tax Sharing requirements for CBCR. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes. We submitted a CBCR to the Bermudian tax authorities in December 2017.
Changes to Bermuda tax policies may impact our financial position.
Under current Bermuda law, we are not subject to tax on income, profits, withholding, capital gains or capital transfers. Furthermore, we obtained from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 (as amended) an assurance that, in the event Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of the tax will not be applicable to us or our operations until March 31, 2035. Tax policy and legislation in Bermuda could change in the future (as is the case in other jurisdictions) and as such no guarantee can be given as to whether the current tax treatment afforded to us will continue after March 31, 2035.
Item 1B.    Unresolved Staff Comments
Not applicable.
Item 2.
Properties
We lease office space in Hamilton, Bermuda where we are headquartered. In addition, the Company and its subsidiaries lease office space in the United States, the United Kingdom, Australia, Ireland, Singapore, Switzerland and the United Arab Emirates. We renew and enter into leases in the ordinary course of business as required. We believe our current facilities and the leaseholds with respect thereto are sufficient for us to conduct our operations for the foreseeable future. For more information on our leasing arrangements, refer to Note 19(b) of our consolidated financial statements, “Commitments and Contingent Liabilities — Operating leases.”
Item 3.
Legal Proceedings
Similar to the rest of the insurance and reinsurance industry, we are subject to litigation and arbitration in the ordinary course of our business. Our subsidiaries are regularly engaged in the investigation, conduct and defense of disputes, or potential disputes, resulting from questions of insurance and reinsurance coverage or claims activities. Pursuant to our insurance and reinsurance arrangements, many of these disputes are resolved by arbitration or other forms of alternative dispute resolution. In some jurisdictions, noticeably the U.S., a failure to deal with such disputes or potential disputes in an appropriate manner could result in an award of “bad faith” punitive damages against our Operating Subsidiaries. In addition, we may be subject to lawsuits and regulatory actions in the normal course of business that do not arise from, or directly relate to, insurance and reinsurance coverage or claims. This category of litigation typically involves, among other things, allegations of underwriting errors or omissions, employment claims or regulatory activity.


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While any legal or arbitration proceedings contain an element of uncertainty, we do not believe that the eventual outcome of any specific litigation, arbitration or alternative dispute resolution proceedings to which we are currently a party will have a material adverse effect on the financial condition of our business as a whole.
Item 4.
Mine Safety Disclosures
Not applicable.



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PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our ordinary shares began publicly trading on December 4, 2003. Prior to that time, there was no trading market for our ordinary shares. The New York Stock Exchange (“NYSE”) symbol for our ordinary shares is AHL. Pursuant to the Merger Agreement, at the effective time of the Merger, each of our ordinary shares issued and outstanding immediately prior to such time (other than ordinary shares owned by us as treasury shares, owned by any of our subsidiaries or owned by Highlands, Merger Sub or any of their respective subsidiaries, which will be canceled as set forth in the Merger Agreement) will be automatically canceled and converted into the right to receive $42.75 in cash, without interest and less any required withholding taxes. For further details, refer to Part I, Item 1, “Business — Business Combination.”
The following table sets forth the high and low sales prices per share of our ordinary shares as reported in composite NYSE trading and the dividends paid per ordinary share for the periods indicated:  
 
 
 
Price Range of
Ordinary Shares 
 
Dividends Paid Per
Ordinary Share 
Period
 
 
High 
 
Low 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
First Quarter
 
$45.00
 
$35.05
 
$0.24
Second Quarter
 
$45.35
 
$40.70
 
$0.24
Third Quarter
 
$41.80
 
$36.50
 
$0.24
Fourth Quarter
 
$42.08
 
$41.13
 
$0.00
2017
 
 
 
 
 
 
 
First Quarter
 
$57.70
 
$52.00
 
$0.22
Second Quarter
 
$53.80
 
$49.60
 
$0.24
Third Quarter
 
$51.75
 
$36.45
 
$0.24
Fourth Quarter
 
$43.00
 
$40.10
 
$0.24
Number of Holders of Ordinary Shares
As of December 31, 2018, there were 196 holders of record of our ordinary shares, not including beneficial owners of ordinary shares registered in nominee or street name, and there was one holder of record of each of our Preference Shares.
Dividends
The Merger Agreement restricts us from declaring or paying any dividends on our ordinary shares other than the quarterly dividends on our ordinary shares that were previously declared and publicly announced prior to the date of the Merger Agreement. We are not restricted under the Merger Agreement from declaring or paying periodic cash dividends on the Preference Shares in accordance with the terms of the applicable certificate of designation. For a summary of the restriction limiting our ability to declare and pay dividends on the our ordinary shares under the Merger Agreement, refer to Part I, Item 1, “Risk Factors — Risks Related to Our Securities — The Merger Agreement restricts the payment of dividends on our ordinary shares.” For further details on the Merger, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Aspen’s Year In Review.”
In addition, given we are a holding company and have no direct operations, our ability to pay dividends is restricted by the ability of the Operating Subsidiaries to pay us dividends. The ability of the Operating Subsidiaries to pay us dividends or other distributions is subject to the laws and regulations applicable to each jurisdiction, as well as the Operating Subsidiaries’ need to maintain capital requirements adequate to maintain their insurance and reinsurance operations and their financial strength ratings issued by independent rating agencies. For more information on the regulatory restrictions limiting the ability of our Operating Subsidiaries to declare and pay dividends, refer to Part I, Item 1, “Business — Regulatory Matters,” Item 1A, “Risk Factors — Risks Related to Our Securities — Our ability to pay dividends or to meet ongoing cash requirements may be constrained by our holding company structure” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity.”


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We are also subject to Bermuda regulatory constraints that affects our ability to pay dividends on our ordinary shares and Preference Shares and make other payments. Under the Companies Act, we may declare or pay a dividend or make a distribution out of distributable reserves only if we have reasonable grounds for believing that we are, and would after the payment be, able to pay our liabilities as they become due and if the realizable value of our assets would thereby not be less than our liabilities.
In addition, unless the full dividends for the most recently ended dividend period on all outstanding Preference Shares have been declared and paid, we cannot declare or pay a dividend on our ordinary shares. Our credit facilities also restrict our ability to pay dividends. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity.”
Purchases of Equity Securities by Issuer and Affiliated Purchasers

We did not repurchase any of our ordinary shares during the three months ended December 31, 2018. As at December 31, 2018, we had $220.0 million remaining under the share repurchase authorization program which expired on February 8, 2019 and was not renewed by the Board of Directors. As set forth in the Merger Agreement, we are restricted from redeeming, purchasing or otherwise acquiring any outstanding ordinary shares unless Highlands consents in writing.
Recent Sales of Unregistered Securities
None.
Securities Authorized For Issuance Under Equity Compensation Plans
Refer to “Equity Compensation Plan Information” contained in Part III, Item 12 below.



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Performance Graph
The following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, and the report shall not be deemed to be incorporated by reference into any prior or subsequent filing by the Company under the Securities Act or the Exchange Act.
The following graph illustrates the cumulative 5-year shareholder return, including reinvestment of dividends, of our ordinary shares compared with such return for the (i) S&P 500 Composite Stock Price Index and (ii) S&P Property & Casualty Industry Group Stock Price Index, in each case measured during the period from December 31, 2013 to December 31, 2018, assuming $100 was invested on December 31, 2013. As depicted in the graph below, the cumulative total return during this period was (i) 11.5% on our ordinary shares, (ii) 35.6% for the S&P 500 Composite Stock Price Index and (iii) 53.3% for the S&P Property & Casualty Industry Group Stock Price Index.
Comparison of 5 Year Cumulative Total Return*
Among Aspen Insurance Holdings Limited, the S&P 500 Composite Stock Price Index and
the S&P 500 Property & Casualty Industry Group Stock Price Index

396734268_chart-ec19a67b1894832bbbb.jpg
_______________
*$100 invested on December 31, 2013 in stock or index, including reinvestment of dividends (fiscal year ending December 31)
 
 
12/13 
 
12/14 
 
12/15
 
12/16
 
12/17
 
12/18
Aspen Insurance Holdings Limited
 
100.00

 
107.95

 
121.20

 
140.62

 
105.84

 
111.52

S&P 500
 
100.00

 
111.39

 
110.58

 
121.13

 
144.65

 
135.63

S&P 500 Property & Casualty Insurance
 
100.00

 
112.98

 
121.00

 
136.83

 
164.18

 
153.27

The stock price performance included in the graph above is not necessarily indicative of future stock performance.


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Bye-Laws Below is a description of our bye-laws, as amended, as of the date of this report:
The Board and Corporate Action.  Our bye-laws provide that the Board shall consist of not less than six and not more than 15 directors. Subject to our bye-laws and Bermuda law, the directors shall be elected or appointed by holders of ordinary shares. The Board is divided into three classes, designated Class I, Class II and Class III. Our Class I directors are elected to serve until the 2020 annual general meeting, our Class II directors are elected to serve until the 2018 annual general meeting and our Class III directors are elected to serve until our 2019 annual general meeting. Notwithstanding the foregoing, directors who are seventy years or older shall be elected every year and shall not be subject to a three-year term. In addition, notwithstanding the foregoing, each director shall hold office until such director’s successor shall have been duly elected or until such director is removed from office or such office is otherwise vacated. In the event of any change in the number of directors, the Board shall apportion any newly created directorships among, or reduce the number of directorships in, such class or classes as shall equalize, as nearly as possible, the number of directors in each class. In no event will a decrease in the number of directors shorten the term of any incumbent director.
Generally, the affirmative vote of a majority of the directors present at any meeting at which a quorum is present shall be required to authorize corporate action. Corporate action may also be taken by a unanimous written resolution of the Board without a meeting and with no need to give notice. The quorum necessary for the transaction of business of the Board may be fixed by the Board and, unless so fixed at any other number, shall be a majority of directors in office and in no event less than two directors.
Voting Cutbacks.  In general, and except as provided below, on a poll shareholders have one vote for each ordinary share held by them and are entitled to vote at all meetings of shareholders. However, if, and so long as, the shares of a shareholder in the Company are treated as “controlled shares” (as determined pursuant to section 958 of the Code) of any U.S. Person and such controlled shares constitute 9.5% or more of the votes conferred by the issued shares of Aspen Holdings, the voting rights with respect to the controlled shares owned by such U.S. Person shall be limited, in the aggregate, to a voting power of less than 9.5%, under a formula specified in our bye-laws. The formula is applied repeatedly until the voting power of all 9.5% U.S. Shareholders has been reduced to less than 9.5%. In addition, our Board may limit a shareholder’s voting rights when it deems it appropriate to do so to (i) avoid the existence of any 9.5% U.S. Shareholder; and (ii) avoid certain material adverse tax, legal or regulatory consequences to the Company or any of its subsidiaries or any shareholder or its affiliates. “Controlled shares” includes, among other things, all shares of the Company that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). The amount of any reduction of votes that occurs by operation of the above limitations will generally be reallocated proportionately among all other shareholders of Aspen Holdings whose shares were not “controlled shares” of the 9.5% U.S. Shareholder so long as such: (i) reallocation does not cause any person to become a 9.5% U.S. Shareholder and (ii) no portion of such reallocation shall apply to the shares held by Wellington Underwriting plc (“Wellington”) or the Names’ Trustee, except where the failure to apply such increase would result in any person becoming a 9.5% shareholder.
Under these provisions, certain shareholders may have their voting rights limited to less than one vote per share, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership. Our bye-laws provide that shareholders will be notified of their voting interests prior to any vote to be taken by them.
We are authorized to require any shareholder to provide information as to that shareholder’s beneficial share ownership, the names of persons having beneficial ownership of the shareholder’s shares, relationships with other shareholders or any other facts the directors may deem relevant to a determination of the number of ordinary shares attributable to any person. If any holder fails to respond to this request or submits incomplete or inaccurate information, we may, in our sole discretion, eliminate the shareholder’s voting rights. All information provided by the shareholder shall be treated by the Company as confidential information and shall be used by the Company solely for the purpose of establishing whether any 9.5% U.S. Shareholder exists (except as otherwise required by applicable law or regulation).
These voting cut-back provisions were incorporated into the Company’s bye-laws to seek to mitigate the risk of any U.S. Person that owns our ordinary shares directly or indirectly through non-U.S. entities being characterized as a 10% U.S. Shareholder for U.S. federal income tax purposes. However, the 2017 Act expanded the definition of 10% U.S. Shareholder to include ownership by value (rather than just vote), so provisions in our organizational documents described above reducing the voting power of 9.5% U.S. Shareholders will no longer mitigate the potential risk of 10% U.S. Shareholder status. Our shares may not be as widely dispersed as we believed at December 31, 2017 due to, for example, the application of certain ownership attribution rules, and no assurance may be given that a U.S Person who owns our shares will not be characterized as a 10% U.S. Shareholder, in which case such U.S. Person may be subject to taxation under the CFC rules and may have their votes cut-back as noted above. Refer to Part I, Item 1, “Risk Factors — Risks Related to Our Securities — There are provisions in our charter documents which may reduce or increase the voting rights of our ordinary shares” above.
Shareholder Action.  Except as otherwise required by the Companies Act and our bye-laws, any question proposed for the consideration of the shareholders at any general meeting requires the affirmative vote of a majority of the voting power of votes


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cast at such meeting (in each case, after taking into account voting power adjustments under our bye-laws). Our bye-laws require that annual general meetings be called by at least twenty-one (21) days’ written notice.
The following actions require approval by the affirmative vote of at least 75% of the voting power of shares entitled to vote at a meeting of shareholders (in each case, after taking into account voting power adjustments under our bye-laws): any amendment to Bye-Laws 13 (first sentence - Modification of Rights); 24 (Transfer of Shares); 49 (Voting); 63, 64, 65 and 66 (Adjustment of Voting Power); 67 (Other Adjustments of Voting Power); 76 (Purchase of Shares); 84 or 85 (Certain Subsidiaries); provided, however, that in the case of any amendments to Bye-Laws 24, 63, 64, 65, 66, 67 or 76, such amendment shall only be subject to this voting requirement if the Board determines in its sole discretion that such amendment could adversely affect any shareholder in any non-de minimis respect.
The discontinuance of the Company out of Bermuda to another jurisdiction shall be approved by the affirmative vote of at least 66% of the voting power of shares entitled to vote at a meeting of shareholders.
On December 10, 2018, holders of the Company’s ordinary shares approved an amendment to Bye-Law 50 (Voting) at the special general meeting of shareholders held on December 10, 2018 to reduce the shareholder vote required to approve a merger or amalgamation with, or a sale, lease or transfer of all or substantially all of the assets of the Company to, a third party from the affirmative vote of at least 66% of the voting power of the shares entitled to vote at a meeting of the shareholders to a simple majority of the votes cast at a meeting of the shareholders.
Shareholder action may be taken by resolution in writing signed by the shareholders (or the holders of such class of shares) who at the date of the notice of the resolution in writing represent the majority of votes that would be required if the resolution had been voted on at a meeting of the shareholders.
Amendment.  Our bye-laws may be revoked or amended by a majority of the Board, but no revocation or amendment shall be operative unless and until it is approved at a subsequent general meeting of the Company by the shareholders by resolution passed by a majority of the voting power of votes cast at such meeting (in each case, after taking into account voting power adjustments under the bye-laws) or such greater majority as required by our bye-laws.
Voting of Non-U.S. Subsidiary Shares.  If the voting rights of any shares of the Company are adjusted pursuant to our bye-laws and we are required or entitled to vote at a general meeting of any of Aspen U.K., Aspen Bermuda, Aspen U.K. Holdings, Aspen U.K. Services, AIUK Trustees, AMAL, AUL, Acorn or any other non-U.S. subsidiary of ours (together, the “Non-U.S. Subsidiaries”), our directors shall refer the subject matter of the vote to our shareholders and seek direction from such shareholders as to how they should vote on the resolution proposed by the Non-U.S. Subsidiary.
In the event that a voting cutback is required, substantially similar provisions are or will be contained in the bye-laws (or equivalent governing documents) of the Non-U.S. Subsidiaries. This provision was amended at the 2009 annual general meeting to require the application of this bye-law only in the event that a voting cutback is required, as described above.
Capital Reduction.  At the 2009 annual general meeting, our bye-laws were amended to permit a capital reduction of part of a class or series of shares.
Treasury Shares.  Our bye-laws permit the Board, at its discretion and without the sanction of a shareholder resolution, to authorize the acquisition of our own shares, or any class, at any price (whether at par or above or below) to be held as treasury shares upon such terms as the Board may determine, provided that such acquisition is effected in accordance with the provisions of the Companies Act. Subject to the provisions of our bye-laws, any of our shares held as treasury shares shall be at the disposal of the Board, which may hold all or any of the shares, dispose of or transfer all or any of the shares for cash or other consideration, or cancel all or any of the shares.
Corporate Purpose.  Our certificate of incorporation, memorandum of association and our bye-laws do not restrict our corporate purpose and objects.


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Description of our Preference Shares
5.95% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares. On April 25, 2013, the Board authorized the issuance and sale of up to $300.0 million of our 5.95% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares, with a liquidation preference of $25 per security (the “5.95% Preference Shares”). On May 2, 2013, we issued 11,000,000 5.95% Preference Shares for an aggregate amount of $275.0 million. At the effective time of the Merger, each issued and outstanding 5.95% Preference Share will remain issued and outstanding as a preference share and shall be entitled to the same dividend and all other preferences and privileges, rights, qualifications, limitations, and restrictions set forth in the certificate of designation. Dividends on our 5.95% Preference Shares are payable on a non-cumulative basis only when, as and if declared by the Board at the annual rate of 5.95% of the $25 liquidation preference of each 5.95% Preference Share, payable quarterly in cash on January 1, April 1, July 1 and October 1 of each year. Commencing on July 1, 2023, dividends on the 5.95% Preference Shares will be payable, on a non-cumulative basis, when, as and if declared by the Board, at a floating annual rate equal to 3-month LIBOR plus 4.06%. This floating dividend will be reset quarterly. Generally, unless the full dividends for the most recently ended dividend period on all outstanding 5.95% Preference Shares have been declared and paid, we cannot declare or pay a dividend on our ordinary shares.
Whenever dividends on any 5.95% Preference Shares have not been declared and paid for the equivalent of any six dividend periods, whether or not consecutive (a “nonpayment”), subject to certain conditions, the holders of the 5.95% Preference Shares, acting together as a single class with holders of any and all other series of preference shares having similar appointing rights then outstanding (including the 5.625% Preference Shares), will be entitled, at a special meeting called at the request of record holders of at least 20% of the aggregate liquidation preference of the 5.95% Preference Shares or of any other series of appointing preference shares then outstanding (including the e 5.625% Preference Shares) to the appointment of a total of two directors and the number of directors that comprise our Board will be increased by the number of directors so appointed. These appointing rights and the terms of the directors so appointed will continue until dividends on the 5.95% Preference Shares and any such series of voting preference shares following the nonpayment shall have been fully paid for at least four consecutive dividend periods.
In addition, the affirmative vote or consent of the holders of at least 662/3% of the aggregate liquidation preference of outstanding 5.95% Preference Shares and any series of appointing preference share (including the 5.625% Preference Shares), acting together as a single class, will be required for the authorization or issuance of any class or series of senior shares (or any security convertible into or exchangeable for senior notes) ranking senior to the 5.95% Preference Shares as to dividend rights or rights upon liquidation, winding up or dissolution and for amendments to our memorandum of association or bye-laws that would materially adversely affect the existing terms of the 5.95% Preference Shares.
We may redeem the 5.95% reference Shares at our option, in whole or in part, at a redemption price equal to $25 per 5.95% Preference Share, plus any declared and unpaid dividends, if any (i) on July 1, 2023 and on any dividend payment date thereafter and (ii) on any dividend payment date following the occurrence of a tax event or on the dividend payment date following the occurrence of a capital disqualification redemption event.

Our 5.95% Preference Shares are listed on the NYSE under symbol “AHLPRC.”
5.625% Perpetual Non-Cumulative Preference Shares. On July 27, 2016, the Board authorized the issuance and sale of up to $300.0 million of our 5.625% Perpetual Non-Cumulative Preference Shares, with a liquidation preference of $25 per security (the “5.625% Preference Shares”). On September 13, 2016, we issued 10,000,000 5.625% Preference Shares for an aggregate amount of $250.0 million. At the effective time of the Merger, each issued and outstanding 5.625% Preference Share will remain issued and outstanding and shall be entitled to the same dividend and all other preferences and privileges, rights, qualifications, limitations, and restrictions set forth in the certificate of designation. Dividends on our 5.625% Preference Shares are payable on a non-cumulative basis only when, as and if declared by the Board at the annual rate of 5.625% of the $25 liquidation preference of each 5.625% Preference Share, payable quarterly in cash on January 1, April 1, July 1 and October 1 of each year. In the event of our liquidation, winding up or dissolution, our ordinary shares will rank junior to the 5.625% Preference Shares.
Whenever dividends on any 5.625% Preference Shares have not been declared and paid for the equivalent of any six dividend periods, whether or not consecutive (a “nonpayment”), subject to certain conditions, the holders of our 5.625% reference Shares, acting together as a single class with holders of any and all other series of preference shares having similar appointing rights then outstanding (including the 5.95% Preference Shares), will be entitled to the appointment of a total of two directors and the number of directors that comprise our Board will be increased by the number of directors so appointed. These appointing rights and the terms of the directors so appointed will continue until dividends on the 5.625% Preference Shares and any such series of voting preference shares following the nonpayment shall have been fully paid for at least four consecutive dividend periods.
In addition, the affirmative vote or consent of the holders of at least 662/3% of the aggregate liquidation preference of outstanding 5.625% Preference Shares and any series of appointing preference shares (including the 5.95% Preference Shares), voting together as a single class, will be required for the authorization or issuance of any class or series of senior shares (or any security convertible


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into or exchangeable for senior shares) ranking senior to the 5.625% Preference Shares as to dividend rights or rights upon our liquidation and for amendments to our memorandum of association or bye-laws that would materially adversely affect the rights of holders of the 5.625% Preference Shares.
We may redeem the 5.625% Preference Shares at our option, in whole or in part, at a redemption price equal to $25 per 5.625% Preference Share, plus any declared and unpaid dividends, if any, (i) at any time following the occurrence of a tax event and (ii) on January 1, 2027 and any dividend payment date thereafter.
Our 5.625% Preference Shares are listed on the NYSE under the symbol “AHLPRD.”

Item 6.
Selected Financial Data
The following table sets forth our selected historical financial information for the periods ended and as of the dates indicated. The summary income statement data for the twelve months ended December 31, 2018, 2017, 2016, 2015 and 2014 and the balance sheet data as of December 31, 2018, 2017, 2016, 2015 and 2014 are derived from our audited consolidated financial statements. The consolidated financial statements as of December 31, 2018, and for each of the twelve months ended December 31, 2018, 2017 and 2016, and the report thereon of KPMG LLP, an independent registered public accounting firm, are included elsewhere in this report. These historical results, including the ratios presented below, are not necessarily indicative of results to be expected from any future period. You should read the following selected consolidated financial information along with the information contained in this report, including Item 8, “Financial Statements and Supplementary Data” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and related notes included elsewhere in this report.


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Twelve Months Ended December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
 
 
($ in millions, except per share amounts and percentages)
Summary Income Statement Data
 
 
 
 
 
 
 
Gross written premiums
 
$
3,446.9

 
$
3,360.9

 
$
3,147.0

 
$
2,997.3

 
$
2,902.7

Net premiums written
 
2,082.0

 
2,212.5

 
2,593.7

 
2,646.2

 
2,515.2

Net premiums earned
 
2,214.7

 
2,306.6

 
2,637.3

 
2,473.3

 
2,405.3

Loss and loss adjustment expenses
 
(1,573.0
)
 
(1,994.7
)
 
(1,576.1
)
 
(1,366.2
)
 
(1,307.5
)
Amortization of deferred policy acquisition costs, general, administrative and corporate expenses
 
(863.3
)
 
(902.7
)
 
(1,019.0
)
 
(907.6
)
 
(896.9
)
Net investment income
 
198.2

 
189.0

 
187.1

 
185.5

 
190.3

Net (loss)/income
 
(145.8
)
 
(266.4
)
 
203.4

 
323.1

 
355.8

Basic (loss)/earnings per share
 
(2.97
)