We have operations in Bermuda and the United States which provide reinsurance through our wholly owned subsidiaries, Maiden Bermuda and Maiden US. Maiden Bermuda and Maiden US do not underwrite any direct insurance business. Maiden LF is a life insurer organized in Sweden and writes credit life insurance on a primary basis in support of Maiden Global business development efforts.
The following are strategic and capital transactions that occurred during the years ended December 31, 2014 and 2013.
On January 15, 2014, the Company's wholly owned U.S. holding company, Maiden Holdings North America ("Maiden NA"), repurchased all of the outstanding Trust Preferred Securities (the "TRUPS Offering"), with a face value of $152.5 million, which has substantially lowered our cost of capital. The Company utilized the net proceeds of its Senior Notes offering in November 2013 ("2013 Senior Notes"), as well as cash on hand, to redeem the junior subordinated debt. As a result of the redemption, during the year ended December 31, 2014, the Company incurred a non-recurring, non-cash charge of $28.2 million, which represents the accelerated amortization of original issuance discount and write-off of issuance costs associated with the junior subordinated debt.
The Preference Shares - Series B have no voting rights other than to elect two additional members of the board of directors if dividends on the Preference Shares - Series B have not been declared and paid for the equivalent of six or more dividend periods. The Preference Shares - Series B have been listed on NASDAQ and trading commenced on October 1, 2013 under the symbol "MHLDO".
Operating earnings, operating earnings per common share and operating return on average common equity are non-GAAP financial measures. See "Non-GAAP Financial Measures" for additional information and a reconciliation to the nearest U.S. GAAP financial measure (net income).
Total capital resources is the sum of the Company's debt and Maiden shareholders' equity. See "Non-GAAP Financial Measures" for additional information.
Diluted book value per common share is calculated by dividing common shareholders' equity, adjusted for assumed proceeds from the exercise of dilutive options, by the number of outstanding common shares plus dilutive options and restricted share units (assuming exercise of all dilutive share based awards). The Mandatory Convertible Preference Shares - Series B are excluded at December 31, 2014 and 2013 as they are anti-dilutive.
Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the Company’s results in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. However these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. These non-GAAP measures are:
Operating earnings are an internal performance measure used in the management of our operations and represents operating results excluding, as applicable on a recurring basis, the following:
Loss and related activity from our run-off operations comprised of our former segment NGHC Quota Share and our divested E&S business;
Operating Return on Average Common Equity ("Operating ROACE"): Management uses operating return on average common shareholders' equity as a measure of profitability that focuses on the return to common shareholders. It is calculated using operating earnings available to common shareholders (as defined above) divided by average common shareholders' equity. Management has set, as a target, a long-term average of 15% Operating ROACE, which management believes provides an attractive return to shareholders for the risk assumed from our business.
Ratio of Debt to Total Capital Resources: Management uses this measure to monitor the financial leverage of the Company. This measure is calculated using total debt divided by the sum of total Maiden shareholders' equity and total debt. The ratio of Debt to Total Capital Resources at December 31, 2014 and 2013 was computed as follows:
The repayment of the junior subordinated debt in the first quarter of 2014 combined with the increase in Maiden shareholders' equity described above has caused the reduction in the ratio in 2014.
Underwriting Income and Combined Ratio: The combined ratio is used in the insurance and reinsurance industry as a measure of underwriting profitability. Management measures underwriting results on an overall basis and for each segment on the basis of the combined ratio. The combined ratio is the sum of the net loss and loss expense ratio and the expense ratio and the computations of each component are described below. A combined ratio under 100% indicates underwriting profitability, as the net loss and LAE, commission and other acquisition expenses and general and administrative expenses are less than the net premiums earned and other insurance revenue on that business. We have generated underwriting income in each year since our inception. Underwriting income is calculated by subtracting net loss and LAE, commissions and other acquisition expenses and applicable general and administrative expenses from the net premiums earned and other insurance revenue and is the monetized counterpart of the combined ratio. For purposes of these operating measures, the fee-generating business which is included in the Diversified Reinsurance segment, is considered part of the underwriting operations of the Company.
The "net loss and loss adjustment expense ratio" is derived by dividing net loss and LAE by the sum of net premiums earned and other insurance revenue. The "commission and other acquisition expense ratio" is derived by dividing commission and other acquisition expenses by the sum of net premiums earned and other insurance revenue. The "general and administrative expense ratio" is derived by dividing general and administrative expenses by the sum of net premiums earned and other insurance revenue. The "expense ratio" is the sum of the commission and other acquisition expense ratio and the general and administrative expense ratio.
•losses paid, which are actual cash payments to insureds, net of recoveries from reinsurers;
losses. They can be submitted up to 90 days after the close of the reporting period. Some proportional treaties have specific language requiring earlier notice of serious claims.
In selecting its best estimate, the Company considers the appropriateness of each methodology to the individual circumstances of the treaties and underwriting year for which the projection is made. The methodologies that the Company employs include, but may not be limited to, the Expected Loss Ratio method, the Reported Loss and Paid Loss Development methods and the Incurred and (as applicable) Paid Bornhuetter-Ferguson ("B-F") methods. In addition, the Company uses other methodologies to estimate liabilities for specific types of occurrences. For example, external and vendor catastrophe models may be used in the estimation of loss and LAE at the early stages of catastrophe losses before loss information is reported to the reinsurer.
The reserve methodologies employed by the Company are dependent on data that the Company collects. This data consists primarily of loss amounts and loss payments reported by the Company’s cedants, and premiums written and earned reported by cedants or estimated by the Company. The actuarial methods used by the Company to project loss reserves in the Diversified Reinsurance segment that it will pay in the future (future liabilities) do not generally include methodologies that are dependent on claim counts reported, claim counts settled or claim counts open as, due to the nature of the Company’s business, this information is not routinely provided by cedants for every treaty. Consequently, actuarial methods relying on this information cannot be used by the Company to estimate loss reserves in the Diversified Reinsurance segment. However, the Company does use actuarial methods in the AmTrust Reinsurance segments that are dependent on claim counts reported, claim counts settled or claim counts open.
The Loss Development ("LD") method is a common reserving method in which ultimate losses are estimated by applying a loss development factor to actual reported (or paid) loss experience. This method fully utilizes actual experience. Multiplication of underwriting year actual reported (or paid) losses by its respective development factor produces the estimated ultimate losses. The LD method is based upon the assumption that the relative change in a given underwriting year’s losses from one evaluation point to the next is similar to the relative change in prior underwriting years’ losses at similar evaluation points. In addition, this method is based on the assumption that the reserving and payment patterns as well as the claim handling procedures have not changed substantially over time. When a company has a sufficiently reliable loss development history, a development pattern based on the company’s historical indications may be used to develop losses to ultimate values.
The BF reserving technique is commonly used for long-tailed or erratic lines. It is also useful in situations where the reported loss experience is relatively immature and/or lacks sufficient credibility for the application of methods that are more heavily reliant on emerged experience. The BF method is an additive IBNR method that combines the ELR and LD techniques by splitting the expected loss into two pieces - expected reported (or paid) losses and expected unreported (or unpaid) losses. Expected unreported (unpaid) losses are added to the current actual reported (or paid) losses to produce an estimate of ultimate losses by underwriting year. The BF method introduces an element of stability that moderates the impact of inconsistent changes in paid and reported amounts.
The Company has underwritten the AmTrust Reinsurance segment since July 1, 2007. The majority of the exposure in the underlying book of business has significant seasoning, and allows for a significant amount of credibility in using parameters derived from historical experience to calculate reserve estimates. Some segments of the book are a result of recent acquisitions or newer markets for AmTrust. These segments require a greater level of assumptions and professional judgment in deriving reserve levels, which inherently implies a wider range of reasonable estimates. As a result, we have tended to rely on a weighted approach which primarily employs the LD method for aspects of the segment with ample historical data, while also considering the ELR method for exposure resulting from recent acquisitions, or a relative business with a more limited level of experience. The Company’s actuarial analysis of this book of business is more refined in that it utilizes a combination of quarterly and annual data instead of contract period data in totality. Additional data detailing items such as class of business, state, claim counts, frequency and severity is available, further enhancing the reserve analysis. Because of the refinement of the data, this allows for greater use of the loss development method earlier on in the maturity of the book than would ordinarily occur.
Potential Volatility in the Reserve for Loss and Loss Adjustment Expenses. In addition to the factors creating uncertainty in the Company’s estimate of loss and LAE, the Company’s estimated reserve for loss and LAE can change over time because of unexpected changes in the external environment. Potential changing external factors include:
changes in the quality of risk selection or pricing in the underwriting process.
Due to the inherent complexity of the assumptions used in establishing the Company’s loss and loss adjustment expense reserve estimates, final claim settlements made by the Company may vary significantly from the present estimates, particularly when those settlements may not occur until well into the future. The expected pattern of loss emergence and the projected level of profitability, two primary factors in establishing the loss and loss adjustment expense reserves, are subject to a normal level of variance. The recognition of this variance defines a possible range of reserve estimates, from which the best estimate of the provision for reserves is estimated. In addition, the Company’s segments have varying levels of seasoning with which the Company has direct experience and as a result, the reasonably likely variance of our expected loss ratio for each segment varies commensurately with that experience.
In the Diversified Reinsurance segment, the Company’s executive and technical management, including claims and underwriting, have significant experience with this book of business, which also has more than 30 years of loss experience associated with it. Based on a range of reasonable reserve estimates, we believe that if our final loss ratio were to vary from the expected loss ratios in the aggregate, our required reserves after reinsurance recoverable could increase by approximately $54.4 million from December 31, 2014.
Only certain costs incurred in the successful acquisition of new and renewal insurance contracts are capitalized. Those costs include incremental direct costs of contract acquisition that result directly from and are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. All other acquisition-related costs, such as costs incurred for soliciting business, administration, and unsuccessful acquisition or renewal efforts are charged to expense as incurred. Administrative costs, including rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and are expensed as incurred.
Our AFS investment portfolio is the largest component of our consolidated assets and a multiple of shareholders’ equity, OTTI could be material to our financial condition and operating results particularly during periods of dislocation in the financial markets.
A security is "impaired" when its fair value of a fixed maturity security is below its amortized cost. On a quarterly basis, we review all impaired AFS securities to determine if the impairment is OTTI. The OTTI assessment is inherently judgmental, especially where securities have experienced severe declines in fair value in a short period. Our review process begins with a quantitative analysis to identify securities to be further evaluated for potential OTTI. For all identified securities, further fundamental analysis is performed that considers the following quantitative and qualitative factors:
The Company recognizes OTTI in earnings for its impaired AFS fixed maturity securities (i) for which the Company has the intent to sell the security or (ii) it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery and (iii) for those securities which have a credit loss. In assessing whether a credit loss exists, the Company compares the present value of the cash flows expected to be collected from the security with the amortized cost basis of the security.
Following a revision to our segment structure, the results of operations of the former NGHC Quota Share segment and the remnants of the E&S business have been included in "Other" category, and all prior periods presented herein have been reclassified to conform with the current year presentation.
redemption of the Company's Junior Subordinated Debt which resulted in a non-recurring, non-cash charge of $28.2 million, which represents the accelerated amortization of original issue discount and write-off of issuance costs associated with the Junior Subordinated Debt. Excluding this non-recurring, non-cash charge, net income attributable to Maiden common shareholders increased by 19.8% for the year ended December 31, 2014, compared to the same period in 2013;
net reduction in interest expense of $9.9 million primarily due to the redemption of the Junior Subordinated Debt in the first quarter of 2014, which previously incurred an annual interest charge of $21.4 million. This reduction was partially offset by the interest expense incurred by the Company on the 2013 Senior Notes issued on November 25, 2013, which has an annual interest charge of $11.9 million.
The increase in net premiums written in our AmTrust Reinsurance segment for the year ended December 31, 2014 compared to the same period in 2013 reflects AmTrust's continued expansion through continued organic growth and improved rate levels, particularly in its U.S. workers' compensation business as well as additional premiums written related to acquisitions. Net premiums written in our Diversified Reinsurance segment increased by $86.6 million, or 11.4%, for the year ended December 31, 2014 compared to the same period in 2013, primarily due to growth in the business written by Maiden US.
The decrease in the net premiums written in the Other category, including the former NGHC Quota Share segment, for the year ended December 31, 2013 compared to the same period in 2012, was due to the termination, effective August 1, 2013, of Maiden Bermuda's participation in the NGHC Quota Share. The Company and NGHC agreed that the termination is on a run-off basis, meaning Maiden Bermuda will receive 25% of the net premiums and assume 25% of the related net losses with respect to the policies in force as of August 1, 2013 through the expiration of the policies. The net premiums written on NGHC Quota Share decreased by $131.1 million or 44.3% for the year ended December 31, 2013 compared to the same period in 2012. Furthermore, also within the Other category, net premiums written related to the divested E&S business, effective May 1, 2013, decreased by $21.2 million, or 108.2%.
The table below compares net premiums earned by our reportable segments, reconciled to the total net premiums earned, for the years ended December 31, 2014 and 2013:
The increase in net premiums earned in the AmTrust Reinsurance segment, for the year ended December 31, 2014 compared to 2013 reflects AmTrust's continued expansion through continued organic growth and improved rate levels, particularly in its U.S. workers' compensation business as well as additional premiums written related to acquisitions. Net premiums earned in our Diversified Reinsurance segment increased by $100.8 million, or 13.4%, for the year ended December 31, 2014 compared to 2013. The growth in the U.S. is due to both new accounts and organic growth from certain existing Maiden US accounts.
The former NGHC Quota Share segment's, now disclosed within our Other category, net premiums earned decreased by $30.8 million, or 11.0%, for the year ended December 31, 2013 compared to the same period in 2012. The decrease was a result of the termination of Maiden Bermuda's participation in the NGHC Quota Share effective August 1, 2013. In addition, net premiums earned in the divested E&S business to Brit, effective May 1, 2013, decreased by $11.2 million or 55.8%.
The increase in net investment income for the year ended December 31, 2014 compared to the same period in 2013 is primarily the result of the 19.0% growth in average invested assets for the year ended December 31, 2014 compared to the same period in 2013 combined with improvement on our overall portfolio yields despite the continuing low interest rate environment. The growth in average invested assets during this period compared to the same period in 2013 was the result of: 1) our continued profitable growth and 2) strong positive cash flow from operations during the period reported which was offset by 3) the repayment of the Junior Subordinated Debt of $152.5 million on January 15, 2014.
Net Realized Gains on Investment - Net realized gains on investment were $1.2 million for the year ended December 31, 2014, compared to $3.6 million for the same period in 2013. See "Liquidity and Capital Resources - Investments" on page 83 for further information.
(1)The average of the sum of the Company's investments, cash and cash equivalents, restricted cash, loan to related party and due to broker at each quarter-end during the year.
Net Realized Gains on Investment - Net realized gains on investment were $3.6 million for the year ended December 31, 2013, compared to $1.9 million for the same period in 2012. See "Liquidity and Capital Resources - Investments" on page 83 for further information.
Net loss and LAE increased by $87.3 million, or 6.9%, for the year ended December 31, 2013 compared to 2012. The net loss and loss adjustment expense ratios were 67.0% and 69.5% for the years ended December 31, 2013 and 2012, respectively. As noted, catastrophic losses increased the Company’s loss ratios in 2012. These events increased the net loss and loss adjustment expense ratios by 1.7% in 2012.
Excluding losses from catastrophic events, net loss and loss adjustment expense ratios were 67.0% and 67.8% for the years ended December 31, 2013 and 2012, respectively. The decrease in the net loss and loss adjustment expense ratio for the year ended December 31, 2013 compared to the same period in 2012 arises in both the AmTrust Reinsurance segment and the Diversified Reinsurance segment, however these reductions were slightly offset by higher net loss and loss adjustment expense ratio for the year ended December 31, 2013 in the NGHC Quota Share. The Company amortized gains as a reduction of losses assumed from the GMAC Acquisition and the IIS Acquisition of $13.7 million for the year ended December 31, 2013 compared to $9.1 million for 2012.
Total general and administrative expenses increased by $4.2 million, or 7.3%, for the year ended December 31, 2014 compared to 2013. The increase in total general and administrative expenses is primarily due to an increase in legal expenses, employee compensation and technology expenses. The general and administrative expense ratio slightly decreased to 2.8% for the year ended December 31, 2014 from 2.9% for the year ended December 31, 2013.
The interest and amortization expense for the years ended December 31, 2014, 2013 and 2012 consists of:
The decrease in interest and amortization expense for the year ended December 31, 2014 compared to the same period in 2013 was the result of the redemption of the outstanding Junior Subordinated Debt on January 15, 2014, which had an effective interest rate of 16.95% and replacing it with the 2013 Senior Notes, which have an effective interest rate of 8.04%. The Company used the proceeds from the 2013 Senior Notes, along with cash on hand, to redeem the all of the outstanding Junior Subordinated Debt on January 15, 2014. The weighted average effective interest rate for the Company's debt for the year ended December 31, 2014 was 8.38% compared to 11.3% in 2013.
The increase in interest and amortization expense for the year ended December 31, 2013 compared to the same period in 2012 was due to: 1) the issuance of the 2012 Senior Notes on March 27, 2012; therefore we did not have a full quarter charge in the first quarter of 2012; and 2) the issuance of the 2013 Senior Notes on November 25, 2013, the proceeds of which, along with cash on hand, were used to redeem all of the outstanding Junior Subordinated Debt on January 15, 2014 and resulted in additional interest charges during the period from November 25, 2013 to December 31, 2013. The weighted average interest rate was 11.3% for the year ended December 31, 2013 compared to 11.7% in 2012.
The Company incurred a non-recurring, non-cash charge of $28.2 million related to the accelerated amortization of the remaining discount and associated issuance costs following the redemption of the Junior Subordinated Debt on January 15, 2014.
The Company recorded a current income tax expense of $1.0 million, $0.9 million and $1.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. These amounts relate to income tax on the earnings of our international subsidiaries and state taxes incurred by our U.S. subsidiaries. The effective rate of current income tax was 0.9% for the year ended December 31, 2014 compared to 0.8% and 1.9% for the years ended December 31, 2013 and 2012, respectively.
All prior periods herein have been reclassified to conform with the revised presentation of this reportable segment following the removal of our divested U.S. E&S business, as it no longer meets the aggregation criteria under the applicable guidance.
Net Loss and Loss Adjustment Expenses - Net loss and LAE increased by $59.8 million, or 11.5%, for the year ended December 31, 2014 compared to 2013. Net loss and loss adjustment expense ratios were 66.8% and 67.8% for the years ended December 31, 2014 and 2013, respectively. The increase in the amount of net loss and LAE reflect the growth of this reportable segment following the addition by our US operations of new accounts during 2013 and 2014 combined with organic growth from certain existing accounts.
The following factors also contributed to the overall increase in losses: 1) elevated excess property loss activity from several Maiden US clients during the first half of 2014; and 2) a modest amount of reserve deterioration in commercial auto business during the third quarter 2014; offset by 3) more proportional business being written which has a lower loss ratio and higher expense ratio.
General and Administrative Expenses - Consistent with the Company's growth, general and administrative expenses increased by $0.6 million, or 1.4%, for the year ended December 31, 2014 compared to 2013. The general and administrative expense ratio was 5.0% and 5.5% for the years ended December 31, 2014 and 2013, respectively. The overall expense ratio (including commission and other acquisition expenses) was 31.9% and 30.3% for the years ended December 31, 2014 and 2013, respectively.
Within the Diversified Reinsurance segment, the business underwritten by our US operations experienced a decrease in premiums earned for the year ended December 31, 2013 of $16.1 million, or 2.4%, compared to the same period in 2012. The decrease in net premiums earned by Maiden US was primarily due to 1) the non-renewal of several large proportional U.S. reinsurance contracts that no longer met our profitability criteria in 2012; and 2) the decision by certain clients of our US operations to retain more business in 2013. These decreases were partially offset by the addition in 2013 of new accounts combined with organic growth from certain existing accounts.
Commission and Other Acquisition Expenses - Commission and other acquisition expenses decreased by $14.7 million, or 7.2%, for the year ended December 31, 2013 compared to 2012. The decrease for the year ended December 31, 2013 reflects the reduction in premiums earned for the segment in 2013 compared to 2012, consistent with the reasons cited in the discussion of the change in earned premiums.
General and Administrative Expenses - Consistent with the Company's growth, general and administrative expenses increased by $1.3 million, or 3.4%, for the year ended December 31, 2013 compared to 2012. The general and administrative expense ratio was 5.5% and 5.2% for the years ended December 31, 2013 and 2012, respectively. This increase reflects the decline in premiums earned exceeding the decline in general and administrative expenses for the year ended December 31, 2013 compared to 2012. The overall expense ratio (including commission and other acquisition expenses) was 30.3% and 31.3% for the years ended December 31, 2013 and 2012, respectively.
Premiums - Net premiums written increased by $440.6 million, or 37.7%, for the year ended December 31, 2014 compared to the same period in 2013. This increase reflects the continued continued organic growth and improved rate levels, particularly in U.S. workers' compensation.
General and Administrative Expenses - General and administrative expenses increased by $0.1 million, or 5.3%, for the year ended December 31, 2014 compared to the same period in 2013. The general and administrative expense ratio has remained flat at 0.2% for the year ended December 31, 2014 compared to the same period in 2013. The overall expense ratio (including commission and other acquisition expenses) was 30.6% and 29.7% for the years ended December 31, 2014 and 2013, respectively, reflecting the changes in the commission and other acquisition expense ratio.
Net premiums earned increased by $261.1 million, or 35.9% for the year ended December 31, 2013, compared to the same period in 2012. The increase in net premiums earned arises in each of the three components of the AmTrust Reinsurance segment. The overall increase reflects the continual ongoing growth of business written under the Reinsurance Agreement in 2013 and 2012. The table below details net premiums earned by line of business for the years ended December 31, 2013 and 2012:
Net Loss and Loss Adjustment Expenses - Net loss and LAE increased by $157.1 million, 31.7% for the year ended December 31, 2013 compared to the same period in 2012. Net loss and loss adjustment expense ratios were 66.1% and 68.2% for the years ended December 31, 2013 and 2012, respectively. The net loss and loss adjustment expense ratio has improved as the segments mix of business has continued to change, with the Small Commercial Business segment volume growing the most, in part due to the continued improvement in pricing that AmTrust is experiencing in certain lines of business in that segment, particularly workers' compensation.
As discussed in Item 1, "Business - Our Reportable Segments" on page 4, during the year ended December 31, 2014, the Company revised the structure of its reportable segments resulting in the former NGHC Quota Share segment, which is currently in run-off, and the remnants of our U.S. E&S business, also in run-off, being combined together in the "Other" category.
The combined ratio increased to 167.4% for the year ended December 31, 2014 compared to 97.1% in 2013 due to this category being in run-off, with significantly lower net premiums earned for the year ended December 31, 2014 compared to 2013, combined with elevated loss reserve estimates on the personal lines automobile business and adverse loss development relating to Superstorm Sandy.
Net premiums earned decreased by $239.4 million, or 92.5%, for the year ended December 31, 2014 compared to 2013 due to this category being in run-off. The net premiums earned for the year ended December 31, 2014 relates to the earning of the remaining unearned premium reserves on NGHC Quota Share and the E&S business at December 31, 2013.
Loss and Loss Adjustment Expenses - Net losses and LAE decreased by $40.4 million, or 18.7%, for the year ended December 31, 2013 compared to the same period in 2012. Net loss and LAE ratios decreased to 68.1% for the year ended December 31, 2013, compared to 72.0% for the year ended December 31, 2012, due to the impact of catastrophic losses incurred on Superstorm Sandy that increased the net loss and loss adjustment expense ratio of the Other category by 10.3% in 2012. The decrease in losses from lower catastrophic claims in 2013 was partially offset by a change in the mix of business in the NGHC contract to exposures which have historically higher loss levels.
General and Administrative Expenses - General and administrative expenses remained flat at $0.7 million for the years ended December 31, 2013 and 2012.
The amount of dividends that can be distributed from Maiden Holdings’ Bermuda-domiciled operating subsidiary Maiden Bermuda is, under certain circumstances, limited under Bermuda law and Bermuda regulatory requirements, which requires our Bermuda operating subsidiary to maintain certain measures of solvency and liquidity in accordance with the BSCR. At December 31, 2014, the statutory capital and surplus of Maiden Bermuda was $1,289.2 million. Maiden Bermuda is allowed to pay dividends or distributions not exceeding $222.5 million. During 2014 and 2013, Maiden Bermuda did not pay any dividends to Maiden Holdings.
Maiden Holdings’ U.S. domiciled operating subsidiaries, Maiden US and Maiden Specialty, are subject to significant regulatory restrictions limiting their ability to declare and pay dividends by the states of Missouri and North Carolina, respectively, the states in which those subsidiaries are domiciled. In addition, there are restrictions based on risk-based capital, a test which is the threshold that constitutes the authorized control level. If Maiden US's or Maiden Specialty’s statutory capital and surplus falls below the authorized control level, their respective domiciliary insurance regulators are authorized to take whatever regulatory actions are considered necessary to protect policyholders and creditors. At December 31, 2014, Maiden US and Maiden Specialty have statutory capital and surplus of $288.1 million and $51.9 million, respectively, which exceeds the required level of minimum statutory capital and surplus by the states of Missouri and North Carolina, respectively. During 2014 and 2013, Maiden US and Maiden Specialty paid no dividends to their respective shareholders.
Maiden Holdings’ wholly owned U.K. subsidiary, Maiden Global, that operates as a reinsurance services and holding company, is subject to regulation by the U.K. Financial Conduct Authority (the "FCA") that limit the maximum amount of annual dividends or distributions paid by Maiden Global to the Company. At December 31, 2014, Maiden Global is allowed to pay dividends or distributions not exceeding $2.6 million. During the year, Maiden Global declared dividends totaling $2.3 million to Maiden Holdings.
Cash flows from operations for the year ended December 31, 2013 were $366.2 million compared to $319.1 million for the year ended December 31, 2012, a 14.8% increase. The Company's assets grew by $575.2 million, or 13.9%, as of December 31, 2013 compared to December 31, 2012. The increase in assets was largely due to the growth in premium written experienced by the Company in our AmTrust Reinsurance segment during 2013, offset by decreases in the previous segment NGHC Quota Share.
Investing cash flows consist primarily of proceeds from the sales and maturities of investments and payments for investments acquired. Net cash used in investing activities was $471.9 million for the year ended December 31, 2014 compared to $584.0 million for the same period in 2013. The Company continues to deploy available cash for longer-term investments as investment conditions permit and to maintain, where possible, cash and cash equivalents balances at low levels. However, the Company has periodically maintained elevated levels of cash and cash equivalents to mitigate near-term volatility that may occur. These elevated cash levels may result in slower growth in investment income. For the year ended December 31, 2014, the purchases of fixed maturity securities exceeded the proceeds from the sales, maturities and calls by $257.6 million. This outflow was increased further by the increase in restricted cash and cash equivalents of $207.9 million and net purchases of other investments of $5.9 million during the same period.
Net cash used in investing activities was $584.0 million for the year ended December 31, 2013 compared to $637.5 million for the same period in 2012. For the year ended December 31, 2013, the purchases of fixed maturity securities exceeded the proceeds from the sales, maturities and calls by $637.4 million.
The net cash (outflow) inflow from financing activities for the years ended December 31, 2014, 2013 and 2012 were as follows:
At this time, Maiden Bermuda uses trust accounts, loan to related party and letters of credit to meet collateral requirements - consequently, cash and cash equivalents and investments are pledged in favor of ceding companies in order to comply with relevant insurance regulations.
Maiden US also offers to its clients, on a voluntary basis, the ability to collateralize certain liabilities related to the reinsurance contracts it issues. Under these arrangements, Maiden retains broad investment discretion in order to achieve its business objectives while giving clients the additional security a collateralized arrangement offers. We believe this offers the Company a significant competitive advantage and improves Maiden US’s retention of high-quality clients. As a result of the transition of relationships following the GMAC Acquisition, at December 31, 2014, certain of these liabilities and collateralized arrangements are recorded by Maiden Bermuda while the remaining liabilities and collateralized arrangements are recorded by Maiden US.
At December 31, 2014, total cash and cash equivalents and fixed maturity investments used as collateral were $3.1 billion compared to $2.2 billion at December 31, 2013. The increase was primarily attributable to the increase in assets provided as collateral for the AmTrust Reinsurance segment reflecting continued growth.
The following table details additional information on those assets at December 31, 2014 and 2013:
As part of the Reinsurance Agreement, Maiden Bermuda has also loaned funds to AmTrust totaling $168.0 million at December 31, 2014 and 2013, respectively, to partially satisfy collateral requirements with AII.
We do not currently anticipate that the restrictions on liquidity resulting from restrictions on the payments of dividends by our subsidiary companies or from assets committed in trust accounts or to collateralize the letter of credit facilities will have a material impact on our ability to carry out our normal business activities, including, our ability to make dividend payments on our common shares.
Due to continuing decline in interest rates, net unrealized gains on our AFS fixed maturity investments increased by $42.8 million during the year ended December 31, 2014 compared to December 31, 2013. This increase in net unrealized gains, combined with fixed maturity purchases of $778.7 million, was offset by the combined effect of: 1) paydowns from MBS securities; and 2) bond amortization and disposals, which in the aggregate totaled $526.7 million.
The increase in net unrealized gains on our AFS fixed maturity investments of $42.8 million is net of unrealized foreign exchange losses of $32.3 million arising on our non-U.S. dollar denominated investment portfolio, primarily on our euro-denominated investments, following the significant strengthening of the U.S. dollar versus the euro during the year ended December 31, 2014. These declines were substantially offset by decreases in our non-U.S. dollar net liabilities which are reflected in the movement in our cumulative translation adjustment, which is also a component of AOCI, in our shareholders equity. See "Liquidity and Capital Resources - Capital Resources" on page 89 for further information.
During the year ended December 31, 2014, the yield on the 10-year U.S. Treasury bond decreased by 87 basis points to 2.17%. The 10-year U.S. Treasury is the key risk-free determinant in the fair value of many of the securities in our AFS portfolio. The decline in interest rates during the year to date was largely due to conflicting global economic indicators, as weak European economic performance compared unfavorably with a strengthening US economy. Combined with increased global geopolitical uncertainties during the period, these factors resulted in increased demand for U.S. Treasury securities. These conditions more than offset the measures implemented by the U.S. Federal Reserve to transition its monetary policy and related liquidity measures back toward historical norms.
In order to limit our exposure to unexpected interest rate increases which would reduce the value of our fixed income securities and reduce our shareholders' equity, we attempt to maintain the duration of our AFS fixed maturity investment portfolio combined with our cash and cash equivalents, both restricted and unrestricted, within a reasonable range of the duration of our loss reserves.
At December 31, 2014 and 2013, these respective durations in years were as follows:
purchase of short-term investments during 2014 with an average duration of 0.3 years.
These factors that gave rise to a lower weighted average duration of our AFS fixed maturity investment portfolio were partially offset by the purchase of $393.5 million in new corporate bonds at an average duration of 7.73 years, a higher average duration than the average duration at December 31, 2013.
Our U.S. agency MBS portfolio is 38.3% of our fixed maturity investments at December 31, 2014. Given the relative size of this portfolio to our total investments, if faster prepayment patterns were to occur over an extended period of time, this could potentially limit the growth in our investment income in certain circumstances, or even potentially reducing the total amount of investment income we earn. The Company holds no asset-backed securities other than the mortgage-backed securities it has described herein.
During the year ended December 31, 2014, the Company's allocation to corporate bonds rated BBB (including those with a + or - modifier) was generally stable, as we had reached our maximum allocation to those securities as a percentage of the total fixed maturities portfolio. We also reduced our exposure to corporate bonds in the Financial Institutions sector, as those securities may be more sensitive to rising interest rates. The Company’s ten largest corporate holdings, 91.3% of which are in the Financial Institutions sector, at December 31, 2014 as carried at fair value and as a percentage of all fixed income securities were as follows:
The Company does not employ any credit default protection against any of the fixed maturities held in non-U.S. denominated currencies.
The Company establishes loss reserves to cover the estimated liability for the payment of all loss and LAE incurred with respect to premiums earned on the contracts that the Company writes. Loss reserves do not represent an exact calculation of the liability. Estimates of ultimate liabilities are contingent on many future events and the eventual outcome of these events may be different from the assumptions underlying the reserve estimates. The Company believes that the recorded unpaid loss and LAE represent management’s best estimate of the cost to settle the ultimate liabilities based on information available at December 31, 2014.
The following table represents a reconciliation of our beginning and ending gross and net loss and loss adjustment expense reserves for the years ended December 31, 2014, 2013 and 2012:
See "Business - Reserve for Loss and Loss Adjustment Expenses" in Item 1 of Part I of this Report, "Critical Accounting Policies and Estimates - Reserve for Loss and Loss Adjustment Expenses" and "Results of Operations" above for a discussion of loss and LAE and prior years’ reserve developments.
The following summarizes other material balance sheet changes of the Company at December 31, 2014 and 2013:
Capital resources consist of funds deployed or available to be deployed in support of our business operations. Our total capital resources were $1,600.7 million at December 31, 2014, a $9.5 million, or 0.6%, net decrease from $1,610.2 million at December 31, 2013. Increases in common shareholders' equity during 2014 were offset by repayment of our junior subordinated debt during the year.
The following table shows the movement in total capital resources at December 31, 2014 and 2013:
Total Maiden shareholders' equity at December 31, 2014 increased by $116.9 million, or 10.4%, compared to December 31, 2013 primarily due to:
net income of $101.5 million. See "Results of Operations - Net Income" on page 67 for a discussion of the Company’s net income for the year ended December 31, 2014;
increase in AOCI following improvements in market values of our fixed maturity securities resulting in a net unrealized gain of $42.8 million. This net unrealized gain is net of unrealized foreign exchange losses of $32.3 million arising on our non-U.S. dollar denominated investment portfolio, primarily on our euro investments, following the significant strengthening of the U.S. dollar versus the euro during the year ended December 31, 2014. These declines were substantially offset by a corresponding decrease of $25.6 million in our non-U.S. dollar net liabilities which are reflected in the movement in our cumulative translation adjustment, which is also a component of AOCI;
dividend payments of $57.9 million related to the Company’s common and preferred shares.
The Company’s aggregate contractual obligations at December 31, 2014 are as follows:
The amounts included for reserve for loss and LAE reflect the estimated timing of expected loss payments on known claims and anticipated future claims at December 31, 2014. Both the amount and timing of cash flows are uncertain and do not have contractual payout terms. For a discussion of these uncertainties, please refer"Critical Accounting Policies - Reserve for Loss and Loss Adjustment Expenses" section included under Item 7 of this Annual Report on Form 10-K for the year ended December 31, 2014. Due to the inherent uncertainty in the process of estimating the timing of these payments, there is a risk that the amounts paid in any period will differ significantly from those disclosed. Total estimated obligations will be funded by existing cash and investments.
See our Consolidated Financial Statements and Notes thereto and required financial statement schedules commencing on pages through and S-1 through S-7 below.