The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K. Amounts in tables may not reconcile due to rounding differences. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to the Company’s plans and strategy for its business, includes forward-looking statements that involve risk and uncertainties. Please see the “Special Note About Forward-Looking Statements” in this Annual Report on Form 10-K for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the “Risk Factors” set forth in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.
The following are the significant strategic transactions that have increased our gross premiums written:
Entering into the AmTrust Quota Share in 2007 and the European Hospital Liability Quota Share with AmTrust Europe Limited and AmTrust International Underwriters Limited in 2011, respectively;
Entering into the NGHC Quota Share in 2010. Effective August 1, 2013, however, this agreement was mutually terminated and is presently in run-off basis;
Completing the TRUPS Offering in January 2009. The net proceeds of this transaction were used as working capital for Maiden US and Maiden Specialty following acquisition in 2008;
We currently operate our business through three segments: Diversified Reinsurance, AmTrust Quota Share Reinsurance and NGHC Quota Share, which is in run-off (please see "Recent Developments - NGHC Quota Share" for additional information on this segment).
Natural and man-made catastrophes occur each year that affect reinsurance industry results. In recent years the insurance and reinsurance industry has experienced an extensive series of significant natural and man-made catastrophes, both globally and in the U.S., that negatively impacted overall industry performance. During 2013, industry experience from catastrophe losses was generally improved from levels in prior years, resulting in strongly positive industry financial results.
However, the property and casualty industry invests significant portions of its premiums and retained underwriting profits in fixed income maturities and relies significantly on investment income to generate acceptable levels of net income. In recent years, yields on these securities have declined sharply and have been at historically low levels as U.S. and global policy makers have provided record levels of liquidity to their respective economies. As 2013 ended, the U.S. Federal Reserve indicated that it had begun to reduce its liquidity measures, and would monitor the pace of those reductions depending on economic conditions and other key indicators. While the likely continued existence of these investment conditions, particularly on shorter duration assets, should continue to impact the results of the property and casualty industry generally, investment income may begin to respond to these changing circumstances if longer-term rates begin to rise, possibly reducing the pressure on insurance and reinsurance companies' underwriting results.
Although broad industry conditions brought about by these events remain supportive of improved pricing in primary insurance markets in the near term and numerous primary insurance market participants have reported a favorable pricing environment, recent indications suggest those conditions may be abating. Moreover, reinsurance industry financial conditions and the continuing influx of new capital have limited the amount of enhanced pricing the industry would normally experience during periods of increased catastrophe losses. More recently, January 1, 2014 reinsurance renewals for the industry appeared to show competitive pricing conditions, particularly in property catastrophe contracts which are more acutely feeling the impact of capital inflows and product innovations.
On January 15, 2014, the Company's wholly owned U.S. holding company, Maiden NA, repurchased all of the outstanding $152.5 million 14% Junior Subordinated Debt, which has substantially lowered our cost of capital. The Company primarily utilized the proceeds of the issuance of the 2013 Senior Notes, as well as cash on hand, to redeem the Junior Subordinated Debt. As a result of the redemption, in the first quarter of 2014, the Company will incur an additional non-recurring non-cash charge of $26.1 million, which represents the accelerated amortization of original issue discount 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 the NASDAQ and trading commenced on October 1, 2013 under the symbol "MHLDO".
On August 1, 2013, we received notice from NGHC of the termination of the NGHC Quota Share, effective on that date. The Company and NGHC mutually agreed that the termination is on a run-off basis, which means that Maiden Bermuda continues to earn premiums and remain liable for losses occurring subsequent to August 1, 2013 for any policies in force prior to and as of August 1, 2013, until those policies expire.
On April 22, 2013, we entered into a transaction with Brit whereby effective May 1, 2013, the Company and Brit's subsidiary, Brit Global Specialty, entered into a temporary 100% quota share reinsurance of E&S business written by Maiden. Brit subsequently assumed the renewal rights of our E&S business through BGSU, who is now writing the renewals of the assumed business into Brit Syndicates 2987. Employees of Maiden Specialty were transitioned to BGSU effective May 1, 2013. We also entered into supporting transition services and agency agreements with BGSU as part of this transaction. The existing in force E&S business written by the Company as of April 30, 2013 is presently being run-off. For the years ended December 31, 2013, 2012 and 2011, the E&S net premiums written by the Company totaled $(1.6) million, $19.6 million and $21.5 million, respectively, which represented 0.1%, 1.0% and 1.2% of our consolidated net premiums written for each respective year.
As we have described, our business model is designed to minimize our exposure to catastrophic property losses. Despite this approach, we periodically do incur losses from such events which exceed our provisions for normalized catastrophe activity.
In 2012, we incurred significant losses as a result of Superstorm Sandy which struck the Northeast U.S. on October 29, 2012. Maiden's exposure to this event emanated predominantly from the Company's excess property insurance business written by Maiden Specialty (we have now entered into a transaction to divest the Company of this business, as discussed above), and to a lesser extent from the U.S. assumed treaty reinsurance business written by Maiden US and the NGHC Quota Share. As of December 31, 2013, our current estimate of ultimate losses for Superstorm Sandy remains at $31.1 million and is unchanged from December 31, 2012.
There have been no other significant catastrophe losses in 2011, 2012 and 2013 above the Company's expected parameters which are incorporated into the pricing of our Maiden US accounts.
On August 22, 2012, we issued six million shares of 8.25% Preference Shares - Series A, par value $0.01 per share, at $25 per share. The Company received net proceeds of $145.0 million from the offering, after deducting expenses and underwriting discounts of $5.0 million. The Preference Shares - Series A have no stated maturity date and are redeemable in whole or in part at the option of the Company any time on or after August 29, 2017 at a redemption price of $25 per share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
Total capital resources is the sum of the Company's senior notes, junior subordinated debt and Maiden shareholders' equity. See “Non-GAAP Financial Measures” for additional information.
(3) Book value per common share is an operating metric. See “Non-GAAP Financial Measures” for additional information.
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. Operating ROACE for the years ended December 31, 2013, 2012 and 2011 is computed as follows:
Operating earnings in 2012 were reduced by $31.1 million due to losses incurred from Superstorm Sandy, net of applicable reinsurance and the Company's provision for normalized catastrophe activity. Excluding the effects of Superstorm Sandy, operating earnings attributable to common shareholders increased $7.9 million, or 9.9%, to $87.5 million for the year ended December 31, 2013, respectively, compared to 2012, mainly due to improved underwriting and investment income, partially offset by increases in interest expense, along with the payment of dividends on the Preference Shares.
Diluted Book Value per Common Share: 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 stock based awards). The Mandatory Convertible Preference Shares - Series B are excluded as they are anti-dilutive as of December 31, 2013.
Book value and diluted book value per common share as of December 31, 2013, 2012 and 2011 is computed as follows:
Ratio of Debt to Total Capital Resources: Management uses the Ratio of Debt to Total Capital Resources to monitor the financial leverage of the Company. This measure is calculated using total debt divided by the the sum of total Maiden shareholders' equity and total debt. Ratio of Debt to Total Capital Resources as of December 31, 2013 and December 31, 2012 is computed as follows:
the underlying reinsurance contracts recorded in the Diversified Reinsurance segment. To the extent that the fees are generated on underlying insurance contracts sold to third parties that are then ceded under quota share reinsurance contracts to Maiden Bermuda, a proportionate share of the fee is offset against the related acquisition expense. To the extent that fee business is not directly associated with premium revenue generated under the applicable reinsurance contracts, that fee revenue is separately reported on the line captioned “Other insurance revenue” in the Company’s Consolidated Statements of Income.
The “net loss and loss adjustment expense ratio” is derived by dividing net loss and loss adjustment expenses 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.
The Company's revenues also include fee income as well as income generated from our investment portfolio. The Company's investment portfolio is comprised of fixed maturity investments, held as AFS, and other investments held in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") Topic 944, “Financial Services” (“ASC 944”). In accordance with U.S. GAAP, these investments are carried at fair market value and unrealized gains and losses on the Company's investments are generally excluded from earnings. These unrealized gains and losses are included on the Company's Consolidated Balance Sheet in accumulated other comprehensive income as a separate component of shareholders' equity. If unrealized losses are considered to be other-than-temporarily impaired, such losses are included in earnings as a realized loss.
Commission and other acquisition expenses are comprised of commissions, brokerage fees and insurance taxes. Commissions and brokerage fees are usually calculated as a percentage of premiums and depend on the market and line of business and can, in certain instances, vary based on loss sensitive features of reinsurance contracts. Commission and other acquisition expenses are reported after: (1) deducting commissions received on ceded reinsurance; (2) deducting the part of commission and other acquisition expenses relating to unearned premiums; and (3) including the amortization of previously deferred commission and other acquisition expenses.
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. However, the Company does use actuarial methods in the AmTrust Quota Share Reinsurance and NGHC Quota Share segments that are dependent on claim counts reported, claim counts settled or claim counts open. Consequently, actuarial methods relying on this information cannot be used by the Company to estimate loss reserves in the Diversified Reinsurance segment.
The Company has underwritten the AmTrust Quota Share Reinsurance segment since July 1, 2007. This segment consists of business written under the Reinsurance Agreement since that time, and commencing April 1, 2011, the business associated with the European Hospital Liability Quota Share. In addition, certain aspects of this segment are associated with recent acquisitions by AmTrust and while the underlying experience of the book has significant seasoning, the combination of the shorter time frame with which the Company has direct experience with this business and the relative lack of experience the Company has with certain aspects of this business may result in a greater range of volatility. As a result, we have tended to rely on a weighted approach which primarily employs the RLD 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 monthly and quarterly data instead of contract period data in totality. As a result, a range of loss development factors are utilized due to the relative lack of seasoning of the underlying business as regards the Company’s experience. 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.
Factors Creating Uncertainty in the Estimation of the Reserve for Loss and Loss Adjustment Expenses.
While management does not at this time include an explicit or implicit provision for uncertainty in its reserve for loss and loss adjustment expenses, certain of the Company’s business lines are by their nature subject to additional uncertainties, which are discussed in detail below. In addition, the Company’s reserves are subject to additional factors which add to the uncertainty of estimating reserve for loss and loss adjustment expenses. Time lags in the reporting of losses can also introduce further ambiguity to the process of estimating reserve for loss and loss adjustment expenses.
The inherent uncertainty of estimating the Company’s reserve for loss and loss adjustment expenses increases principally due to:
The Company has underwritten the NGHC Quota Share segment since March 1, 2010. On August 1, 2013, the Company received notice from NGHC of the termination of the NGHC Quota Share effective on that date. The Company and NGHC mutually agreed that the termination is on a run-off basis, which means that Maiden Bermuda continues to earn premiums and remain liable for losses occurring subsequent to August 1, 2013 for any policies in force prior to and as of August 1, 2013 until those policies expire. NGHC's executive and technical management, including claims and underwriting, have significant experience with this book of business, which also has more than 15 years of loss experience associated with it. In addition, our management has experience with this book of business when part of our business and NGHC were owned by GMAC. As a result, we believe the possible variance of our expected loss ratio for all applicable loss years for the NGHC Quota Share segment was approximately one percentage point as of December 31, 2013. If our final loss ratio for the NGHC Quota Share segment were to vary by approximately one point two percentage points from the expected loss ratios in the aggregate, our required reserves after reinsurance recoverable would increase or decrease by approximately $10.6 million.
Reported premiums written and earned and commission and other acquisition expenses on proportional treaties are generally based upon reports received from cedants and brokers, supplemented by the Company’s own estimates of premiums written and commission and other acquisition expenses for which ceding company reports have not been received. Premium and acquisition expenses estimates are determined at the individual treaty level. The determination of estimates requires a review of the Company’s experience with cedants, a thorough understanding of the individual characteristics of each line of business and the ability to project the impact of current economic indicators on the volume of business written and ceded by the Company’s cedants. Estimates for premiums and commission and other acquisition expenses are updated continuously as new information is received from the cedants. Differences between such estimates and actual amounts are recorded in the period in which estimates are changed or the actual amounts are determined.
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Examples of assets and liabilities utilizing Level 1 inputs include: exchange-traded equity securities, U.S. Treasury securities, and listed derivatives that are actively traded.
Level 2 - Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data. Examples of assets and liabilities utilizing Level 2 inputs include: listed derivatives that are not actively traded; U.S. government-sponsored agency securities; non-U.S. government obligations; corporate and municipal bonds; mortgage-backed securities (“MBS”) and asset-backed securities (“ABS”); short-duration high yield fund, and over-the-counter (“OTC”) derivatives (e.g. foreign currency options and forward contracts); and
For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in the Level 1 hierarchy. To date, we have only included U.S. government fixed maturity instruments as level 1. The Company receives the quoted market prices from a third party, a nationally recognized pricing service provider (“Pricing Service”). When quoted market prices are unavailable, the Company utilizes the Pricing Service to determine an estimate of fair value. The fair value estimates are included in the Level 2 hierarchy. The Pricing Service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information and for structured securities, cash flow and, when available, loan performance data. The Pricing Service’s evaluated pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing, to prepare evaluations. In addition, the Pricing Service uses model processes, such as the Option Adjusted Spread model, to assess interest rate impact and develop prepayment scenarios. The market inputs that the Pricing Service normally seeks for evaluations of securities, listed in approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.
The Company typically utilizes the fair values received from the Pricing Service. If quoted market prices and an estimate from the Pricing Service are unavailable, the Company produces an estimate of fair value based on dealer quotations for recent activity
The Company will challenge any prices for its investments which are not considered to represent fair value. If a fair value is challenged, the Company will typically obtain a non-binding quote from a broker-dealer; multiple quotations are not typically sought. As of December 31, 2013 and 2012, 4.7% and 0.3%, respectively, of its fixed maturities are valued using the market approach. At those dates, a total of five securities and one security, respectively, or approximately $150.3 million and $26.1 million, respectively, of Level 2 fixed maturities, were priced using a quotation from a broker and/or custodian as opposed to the Pricing Service. For each of these securities, the Pricing Service was not able to value these newly-issued U.S. agency bonds due to the lack of information available as of December 31, 2013 and 2012. Each of these securities were valued subsequently in January 2014 and 2013, respectively, by the Pricing Service. At December 31, 2013 and 2012, we have not adjusted any pricing provided to us based on the review performed by our investment managers.
At December 31, 2013 and 2012, the Company has no fixed income investments that are guaranteed by third parties. We do not have any direct exposure to third party guarantors as of December 31, 2013 and 2012.
U.S. government and U.S. agencies - mortgage-backed - Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Government National Mortgage Association and the Federal National Mortgage Association. The fair values of U.S. treasury securities are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. We believe the market for U.S. treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. agency bonds are determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. agency bonds are included in the Level 2 fair value hierarchy.
Senior notes - The amount reported in the accompanying balance sheets for these financial instruments represents the carrying value of the notes. The fair values are based on quoted prices of identical instruments in inactive markets and as such, are included in the Level 2 hierarchy. At December 31, 2013, the fair value of the 2011 Senior Notes was $101.5 million, the 2012 Senior Notes was $89.8 million and the fair value of the 2013 Senior Notes was $126.2 million
When assessing our intent to sell a fixed maturity security or if it is more likely that we will be required to sell a fixed maturity security before recovery of its cost basis, we evaluate facts and circumstances such as, but not limited to, decisions to reposition our security portfolio, sale of securities to meet cash flow needs and sales of securities to capitalize on favorable pricing. In order to determine the amount of the credit loss for a fixed maturity security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The discount rate is the effective interest rate implicit in the underlying fixed maturity security. The effective interest rate is the original yield or the coupon if the fixed maturity security was previously impaired. If OTTI exists and we have the intent to sell the security, we conclude that the entire OTTI is credit-related and the amortized cost for the security is written down to current fair value with a corresponding charge to realized loss on our Consolidated Statements of Income. If we do not intend to sell a fixed maturity security or it is not more likely than not we will be required to sell a fixed maturity security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected is less than the amortized cost of the fixed maturity security (referred to as the credit loss), we conclude that an OTTI has occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge to realized loss on our Consolidated Statements of Income, as this is also deemed the credit portion of the OTTI. The remainder of the decline to fair value is recorded to other comprehensive income, as an unrealized OTTI loss on our Consolidated Balance Sheets, as this is considered a noncredit (i.e. recoverable) impairment.
There were no other-than-temporary impaired securities during the years ended December 31, 2013, 2012 and 2011.
ASC Topic 805, Business Combinations requires that the Company make an annual assessment as to whether the value of the Company’s goodwill and intangible assets are impaired. Impairment, which can be either partial or full, is based on a fair value analysis by individual reporting unit. Based upon the Company’s assessment at the reporting unit level, there was no impairment of its goodwill and intangible assets as of December 31, 2013 of $90.6 million.
Calculated by adding together commission and other acquisition expense ratio and general and administrative expense ratio.
Calculated by adding together net loss and loss adjustment expense ratio and the expense ratio.
Net income attributable to Maiden common shareholders for the year ended December 31, 2013 was $87.9 million compared to $46.5 million for the same period in 2012. The net income for the year ended December 31, 2012 was reduced by $31.1 million due to the underwriting impact of Superstorm Sandy, which is net of applicable reinsurance and the Company's provision for normalized catastrophe activity. Excluding the catastrophe losses in 2012, net income for the year ended December 31, 2013 increased by $10.3 million, or 13.3%, compared to the same period in 2012. The higher net income during 2013 was primarily due to improvements in our underwriting and investment income, offset by higher interest expense and dividends on the Preference Shares.
Excluding the catastrophe losses in both 2012 and 2011, and the 2011 non-recurring charges, net income in 2012 increased to $77.6 million from $73.4 million in 2011, primarily as a result of improved investment income and investment and foreign exchange gains, which were partially offset by higher interest expenses and dividends on the Preference Shares.
The increases in the net premiums written in the AmTrust Quota Share Reinsurance segment for the year ended December 31, 2013 compared to the same period in 2012 reflects AmTrust's continuing expansion and ongoing organic growth, both of which are benefiting from improved rate levels, particularly in its U.S. workers' compensation business.
accounts. This was partially offset by: 1) the non-renewal of several large proportional U.S. reinsurance contracts that no longer met Maiden US profitability criteria in the second half of 2012; and 2) the decision by certain Maiden US clients to retain more business in 2013.
Net premiums written increased by $177.8 million, or 10.3%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. The table below compares net premiums written by segment for the years ended December 31, 2012 and 2011.
The increases in the net premiums earned in the AmTrust Quota Share Reinsurance segment, for the year ended December 31, 2013 compared to 2012 reflects the continued combination of AmTrust's continuing expansion and ongoing organic growth, both of which are benefiting from improved rate levels, particularly in its U.S. workers' compensation business.
Within the Diversified Reinsurance segment, the business underwritten by Maiden US business experienced a decrease in premiums earned for the year ended December 31, 2013 of $21.9 million, or 3.3%, compared to the same period in 2012 primarily due to:1) the non-renewal of several large proportional U.S. reinsurance contracts that no longer met Maiden US profitability criteria in 2012; and 2) the decision by certain Maiden US clients to retain more business in 2012. In addition, net premiums earned in Maiden Specialty decreased $7.7 million, or 49.5%, primarily due to the divestiture of our E&S business to Brit effective May 1, 2013. The net premiums earned associated with our International line remained stable during the year ended December 31, 2013 compared to 2012.
Net premiums earned increased by $251.4 million, or 16.2%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. The table below compares net premiums earned by segment for the years ended December 31, 2012 and 2011.
Growth in Maiden US business in the Diversified Reinsurance segment in 2011- Continued underwriting discipline and strong organic premium written growth in 2011, particularly the second half of that year, resulted in increased earned premiums by Maiden US of $73.8 million, or 12.3%, during the year ended December 31, 2012, compared to the year ended December 31, 2011. This growth in earned premium was partially offset by slower premium written growth in 2012 in Maiden US as noted. Additionally, reduced writings by Maiden Bermuda and the Company's international operations in 2011, as certain accounts reduced in size or were non-renewed, affected earned premium in 2012.
Other insurance revenue increased 2.0% for the year ended December 31, 2012 compared to the year ended December 31, 2011.
Despite the Company reducing the amount of cash held during 2012 and investing in longer term assets, the continuing decline in interest rates to historically low levels continue to reduce the Company's overall portfolio yield. Despite the lower portfolio yields, the increase in net investment income for the year ended December 31, 2012 compared to the same period in 2011 is the result of the 17.1% growth in average invested assets. The growth in average invested assets during this period is the result of:1) continued profitable growth in the overall book of business in all segments as described herein; 2) strong positive cash flow from operations during the year ended December 31, 2012; and 3) the issuance of the 2012 Senior Notes and the Preference Shares - Series A.
As a result, despite the increase in average invested assets, the historically low interest rate environment has continued to limit the growth of investment income in the year ended December 31, 2012 compared to 2011. Growth in net investment income in 2012 was additionally impacted negatively by increases in prepayments in excess of initially expected levels of the Company's U.S. agency bond portfolio, resulting in increased levels of amortization of bond premiums by $5.1 million in 2012 compared to 2011.
Net loss and loss adjustment expenses increased by $219.2 million, or 21.0%, for the year ended December 31, 2012 compared to 2011. The net loss and loss adjustment expense ratios were 69.5% and 66.6% for the years ended December 31, 2012 and 2011, respectively. As noted, catastrophic losses increased the Company’s loss ratios in 2012 and 2011, particularly the Diversified Reinsurance segment, the result of Superstorm Sandy in 2012 and thunderstorm and tornado activity in the U.S. in the second quarter of 2011. These events increased the net loss and loss adjustment expense ratios by 1.7% and 0.6% in 2012 and 2011, respectively.
Excluding losses from catastrophic events, net loss and loss adjustment expense ratios were 67.8% and 66.0% for the years ended December 31, 2012 and 2011, respectively. The increased net loss and loss adjustment expense ratios were largely the result of poor performance on certain accounts, primarily in Maiden US. The Company amortized gains as a reduction of losses assumed from the GMAC Acquisition and the IIS Acquisition of $9.1 million for year ended December 31, 2012, compared to $28.9 million in 2011. The higher net loss and loss adjustment expense ratios occurred in the Diversified Reinsurance segment, in particular Maiden US and the NGHC Quota Share segment.
Commission and other acquisition expenses increased by $64.5 million, or 13.1%, for the year ended December 31, 2013 compared to 2012. The commission and other acquisition expense ratio increased to 27.6% for the year ended December 31, 2013 compared to 27.1% for the same period in 2012. The change in the amount of expenses incurred reflects the continuing premium growth of the Company's business as discussed while the change in the ratio largely reflects: (1) continued growth and ongoing changes in the mix of business in the AmTrust Quota Share Reinsurance segment; (2) modifications made to the ceding commission of the NGHC Quota Share agreement effective October 1, 2012 and the AmTrust Quota Share Reinsurance Agreement, effective January 1, 2013; and (3) the impact of loss sensitive features on ceding commission in the Diversified Reinsurance segment, in particular on business written by Maiden US, due to improvements in the loss ratios for a number of contracts in that segment.
These changes were partially offset by the adoption of new accounting standards regarding the recognition of deferred commission and other acquisition expenses in the first quarter of 2012 which increased commission and other acquisition expenses by $2.0 million for the year ended December 31, 2012 compared to 2011.
Total general and administrative expenses increased by $4.9 million, or 9.0%, for the year ended December 31, 2013 compared to 2012. The increase in total general and administrative expenses is primarily a result of increases in payroll and technology expenses offset by decreases in office and other professional fees.The general and administrative expense ratio remained the same at 2.9% for the years ended December 31, 2013 and 2012.
The small decrease in total general and administrative expenses is primarily a result of decreases in office and technology expenses offset by increases in regulatory, legal and other professional fees.
The interest and amortization expense for the years ended December 31, 2013, 2012 and 2011 consists of:
The increase in interest and amortization expense for the year ended December 31, 2012 compared to the same period in 2011 was due to the issuance of 2012 Senior Notes during the first quarter 2012. These increases were offset by savings in interest expense realized due to the repurchase on July 15, 2011 of $107.5 million of the Junior Subordinated Debt, the repurchase of which was financed with the issuance of 2011 Senior Notes. The weighted average interest rate was 11.7% for the year ended December 31, 2012 compared to 14.8% in 2011.
The Preference Shares - Series A were issued on August 22, 2012. On October 1, 2013 three million Preference Shares - Series B were issued with an additional three hundred thousand issued on October 3, 2013.
Excluding losses from catastrophic events, combined ratios were 97.6% and 98.9% for the years ended December 31, 2013 and 2012, respectively. The decreased combined ratio was primarily the result of improved results in the business written by Maiden US and in our IIS business.
The business underwritten by Maiden US experienced an increase in premiums written for the year ended December 31, 2013 of $13.5 million, or 2.1%, compared to the same period in 2012 while net premiums written in Maiden Specialty decreased $17.8 million, or 109.1%, primarily due to the divestiture of our E&S business to Brit effective May 1, 2013. The increase in the Maiden US business was primarily due to the addition of new accounts combined with organic growth from certain existing Maiden US accounts. This was partially offset by: 1) the non-renewal of several large proportional U.S. reinsurance contracts that no longer met Maiden US profitability criteria in the second half of 2012; and 2) the decision by certain Maiden US clients to retain more business in 2013.
Excluding losses from catastrophic events, net loss and loss adjustment expense ratios were 68.1% and 68.7% for the years ended December 31, 2013 and 2012, respectively. The Company amortized gains as a reduction of losses assumed from the GMAC Acquisition and the IIS Acquisition of $13.7 million for year ended December 31, 2013, compared to $9.1 million in 2012.
Lower ceding commissions were recorded for the year ended December 31, 2013 compared to 2012 as a result of loss sensitive features on certain contracts, in particular business written by Maiden US. This was due to higher loss ratios on contracts with these features. For the year ended December 31, 2013, 56.7% of Maiden US net premiums written have loss sensitive features, which results in lower ceding commissions when loss ratios increase, compared to 54.8% for the year ended December 31, 2012. For the year ended December 31, 2013, the net effect of loss sensitive features on Maiden US reinsurance contracts reduced ceding commissions by $8.3 million, compared to $10.4 million in 2012.
The reduction in premium written in the segment was primarily attributable to Maiden US, which experienced a decrease in premiums written for the year ended December 31, 2012 of $17.3 million, or 2.6%, compared to December 31, 2011. In addition to writing fewer new accounts in 2012, Maiden US added a number of large proportional contracts in the second half of 2011 which had sizable in-force and unearned premiums assumed, which did not recur in 2012. Finally, several large proportional reinsurance contracts that no longer met Maiden US' profitability criteria were non-renewed, further contributing to the decrease.
Maiden Bermuda decreased its written premium by $15.4 million, or 12.0%, during the year ended December 31, 2012 compared to December 31, 2011, largely due to non-renewals of certain accounts which were partially offset by new account activity.
Despite the decrease in premiums written, strong organic premium written growth in 2011, particularly the second half of that year, resulted in increased earned premiums by Maiden US of $73.8 million, or 12.3%, during the year ended December 31, 2012, compared to the year ended December 31, 2011. This growth in earned premium was partially offset by slower premium written growth in 2012 in Maiden US as noted. Additionally, reduced writings by Maiden Bermuda and the Company's international operations, as certain accounts reduced in size or were non-renewed, affected earned premium in 2012.
On March 7, 2013, after receipt of approval from each of the Company’s and AmTrust’s Audit Committees, the Company and AmTrust executed an amendment to the Reinsurance Agreement, which provides for the extension of the term of the Reinsurance Agreement to July 1, 2016. The amendment further provides that, effective January 1, 2013, AII will receive a ceding commission of 31% of ceded written premiums with respect to all Covered Business other than retail commercial package business, for which the ceding commission will remain 34.375%. Though this commission adjustment eliminates its variable feature, the Company anticipates operating for the foreseeable future at that commission rate. Lastly, with regards to the Specialty Program portion of Covered Business only, AmTrust will be responsible for ultimate net loss otherwise recoverable from Maiden Bermuda to the extent that the loss ratio to Maiden Bermuda, which shall be determined on an inception to date basis from July 1, 2007 through the date of calculation, is between 81.5% and 95%. For the purposes of determining whether the loss ratio falls within the AmTrust Loss Corridor, workers' compensation business written in AmTrust's Specialty Program segment from July 1, 2007 through December 31, 2012 is excluded from the loss ratio calculation. Above and below the defined corridor, the Company will continue to reinsure losses at its proportional 40% share per the Reinsurance Agreement. The Company believes that these contract revisions will help to maintain the stability of the overall performance for the Reinsurance Agreement.
During 2013, business written under the Reinsurance Agreement increased by $330.9 million or 46.4% compared to 2012 and this increase reflects AmTrust's continuing expansion and ongoing organic growth, both of which are benefiting from improved rate levels, particularly in US workers' compensation.
The table below illustrates net premiums written by AmTrust’s segments for the years ended December 31, 2013 and 2012:
Net Loss and Loss Adjustment Expenses - Net loss and loss expenses increased by $158.0 million, or 31.9%, for the year ended December 31, 2013 compared to the same period in 2012. Net loss and loss adjustment expense ratios were 66.0% and 68.0% for the years ended December 31, 2013 and 2012, respectively. The loss ratio has improved as the segments mix of business has continued to change, with the Small Commercial Business segment increasing at the fastest rate, in part due to the continued improvement in pricing that AmTrust is experiencing in certain lines of business in that segment, particularly workers' compensation.
Commission and Other Acquisition Expenses - Commission and other acquisition expenses increased by $91.0 million, or 45.4%, for the year ended December 31, 2013 compared to 2012. Expenses have increased in 2013 as a result of ongoing growth in earned premium in each component of the AmTrust Quota Share segment. The commission and other acquisition expense ratio increased to 29.5% for the year ended December 31, 2013 compared to 27.6% in 2012. The increase in the ratio reflects the higher proportion of net premiums earned from the Reinsurance Agreement, which has a higher commission rate, than the European Hospital Liability Quota Share compared to the same period in 2012.
Premiums - Net premiums written increased by $171.0 million, or 25.6% for the year ended December 31, 2012 compared to the same period in 2011. The results for the year ended December 31, 2011 include the $45.9 million in force and unearned premium assumed at the commencement of the European Hospital Liability Quota Share on April 1, 2011. Excluding that non-recurring item, net premiums written increased by $216.9 million, or 34.8%, for the year ended December 31, 2012 compared to 2011.
During 2012, business written under the Reinsurance Agreement increased by $139.3 million, or 24.3%, compared to 2011 and this increase reflects AmTrust's continuing expansion through acquisition and ongoing organic growth, both of which are benefiting from improved rate levels, particularly in workers' compensation. Business written under the European Hospital Liability
Quota Share increased by $31.8 million, or 33.4%, in 2012 compared to 2011, reflecting the first full year of writings from that contract.
The table below illustrates net premiums written by AmTrust’s segments for the years ended December 31, 2012 and 2011.
General and Administrative Expenses - General and administrative expenses decreased by $0.4 million, or 14.6%, for the year ended December 31, 2012 compared to the same period in 2011. The general and administrative expense ratio also decreased to 0.2% for the year ended December 31, 2012 compared to 0.4% for the year ended December 31, 2011. The overall expense ratio (including commission and other acquisition expenses) was 27.8% and 29.2% for the years ended December 31, 2012 and 2011, respectively, reflecting the changes in the commission and other acquisition expense ratio.
The combined ratio increased to 99.0% for the year ended December 31, 2013 compared to 97.2% for 2012. The higher combined ratio was primarily due to the increased proportion of agency business, which has historically performed at a higher loss ratio level.
Effective October 1, 2012, the parties amended the reinsurance agreement to decrease the provisional ceding commission from 32.5% to 32.0% of ceded earned premiums, net of premiums ceded by the personal lines companies for inuring reinsurance, subject to adjustment. The ceding commission is subject to adjustment to a minimum of 30.0% (changed from 30.5%), if the loss ratio is 64.5% or greater. The Company believes that the terms, conditions and pricing of the NGHC Quota Share have been determined by arm's length negotiations and reflect current market terms and conditions. For the year ended December 31, 2013, the effect of this contract amendment reduced ceded commissions by $0.8 million compared to $0.4 million for the year ended December 31, 2012.
Premiums - Net premiums written decreased by $131.1 million, or 44.3% for the year ended December 31, 2013 compared to the same period in 2012. As previously indicated, the reduction in net premiums written during 2013 was due to the termination, effective August 1, 2013, of Maiden Bermuda's participation in the NGHC Quota Share.
The table below details net premiums earned by line of business in this segment for the years ended December 31, 2013 and 2012:
For the years ended December 31, 2013 and 2012, the commission and other acquisition expense ratio of 31.3% and 31.5%, respectively, reflects the adjusted ceding commission recorded in addition to the U.S. Federal excise tax payable on this premium.
Premiums - Net premiums written increased by $39.5 million, or 15.4%, for the year ended December 31, 2012 compared to the same period in 2011. The table below details net premiums written by line of business in this segment for the years ended December 31, 2012 and 2011:
Commission and Other Acquisition Expenses - The NGHC Quota Share, as amended, provides that the reinsurers pay a provisional ceding commission equal to 32.0% of ceded earned premium, net of premiums ceded by the personal lines companies for inuring reinsurance, subject to adjustment. The ceding commission is subject to adjustment to a maximum of 34.5% if the loss ratio for the reinsured business is 60.5% or less and a minimum of 30.5% if the loss ratio is 64.5% or higher.
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, 2013, the statutory capital and surplus of Maiden Bermuda was $1,106.1 million. Maiden Bermuda is currently determining its BSCR as of December 31, 2013 and we estimate that Maiden Bermuda will be allowed to pay dividends or distributions not exceeding $218.2 million. During 2013 and 2012, Maiden Bermuda did not pay any dividends to Maiden Holdings.
Maiden Holdings’ Swedish domiciled operating subsidiary, Maiden LF, is regulated by the Swedish FSA. Maiden LF was required to maintain a minimum level of statutory capital and surplus of $5.1 million at December 31, 2013. Maiden LF is subject to statutory and regulatory restrictions under the Swedish FSA that limit the maximum amount of annual dividends or distributions paid by Maiden LF to Maiden Holdings. As of December 31, 2013, Maiden LF is allowed to pay dividends or distributions not exceeding $2.3 million. Maiden LF did not pay any dividends to Maiden Holdings.
Our sources of funds primarily consist of premium receipts net of commissions, investment income, net proceeds from capital raising activities, which may include the issuance of common and preference shares, and proceeds from sales and redemption of investments. Cash is used primarily to pay loss and loss adjustment expenses, general and administrative expenses and dividends, with the remainder made available to our investment managers for investment in accordance with our investment policy. The table below summarizes the cash flows provided by (used in) operating, investing and financing activities for the years ended December 31, 2013, 2012 and 2011:
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 $584.0 million for the year ended December 31, 2013 compared to $637.5 million for the same period in 2012. The Company continues to deploy available cash for longer-term investments as quickly as investment conditions permit and to maintain, where possible, cash and cash equivalents balances at low levels. However, fixed income markets have been volatile in 2013 and 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 and in certain instances, reductions in investment income despite the increase in invested assets. 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.
Cash flows provided by financing activities were $274.5 million and $208.8 million for the years ended December 31, 2013 and 2012, respectively, compared to $99.5 million used by financing activities in the year ended December 31, 2011.The increase in 2013 was attributable to the issuance of the Preference Shares - Series B in October 2013 and the 2013 Senior Notes which were issued in November 2013. The net proceeds from the 2013 Senior Notes and existing cash were used in January 2014 to repurchase all of the remaining outstanding securities under the TRUPS Offering. The increase in 2012 was attributable to the issuance of the 2012 Senior Notes and Preference Shares - Series A. The net cash inflow (outflow) from financing activities for the years ended December 31, 2013, 2012 and 2011 were as follows:
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, as of December 31, 2013 certain of these liabilities and collateralized arrangements are on the records of Maiden Bermuda while the remaining liabilities and collateralized arrangements are on the records of Maiden US.
As of December 31, 2013, total cash and cash equivalents and fixed maturity investments used as collateral were $2.2 billion compared to $2.0 billion as of December 31, 2012. The increase was primarily attributable to the increase in assets provided as collateral for the AmTrust Quota Share Reinsurance agreement reflecting continued growth.
As part of the Reinsurance Agreement, Maiden Bermuda has also loaned funds to AmTrust totaling $168.0 million as of December 31, 2013 and 2012, respectively, to satisfy collateral requirements with AII.
The investment of our funds is designed to ensure safety of principal while generating current income. Accordingly, our funds are invested in liquid, investment-grade fixed income securities and are designated AFS.The Company's AFS fixed maturity investments increased by $543.4 million or 20.7% as of December 31, 2013 compared to 2012, the result of continuing profitable growth and strong positive operating cash flow along with the proceeds of the 2013 Senior Notes and Preference Shares - Series B offerings which were completed during 2013.
As interest rates have begun to experience greater volatility in the last twelve months, we have periodically maintained more cash and cash equivalents in order to better assess current market conditions and opportunities within our defined risk appetite. As of December 31, 2013, our AFS fixed maturities and cash and cash equivalents are temporarily elevated with the proceeds of the 2013 Senior Notes issued in November 2013, which were used in January 2014 to repurchase the remaining existing TRUPS, which had a face value of $152.5 million. Adjusted for that repurchase, our cash and cash equivalent balances at December 31, 2013 are generally within an acceptable range that we would consider our portfolio fully invested at that date.
*Average yield is calculated by dividing annualized investment income for each sub-component of available-for sale securities (including amortization of premium or discount) by amortized cost and therefore does not include investment income earned on cash and cash equivalents or other short-term investments.
We review our investment portfolio for impairment on a quarterly basis. Impairments of investment securities results in a charge to operations when a market decline below cost is deemed to be other than temporary. To determine the recovery period of a fixed maturity security, we consider the facts and circumstances surrounding the underlying issuer including, but not limited to, the following:
The Company may, from time to time, engage in investment activity that will be considered trading activity, in amounts generally less than $100 million. This trading activity is generally focused on taking long or short positions in U.S. Treasury securities. These periodic activities are classified as trading for the purpose of augmenting where possible investment returns. Unrealized gains and losses from trading activities are recorded in net realized and unrealized gains on investment on the Company's Consolidated Statements of Income.
During 2013, the Company did not engage in any such trading activities. However, for the year ended December 31, 2012 and 2011, the Company recorded realized (losses) gains from trading activities of $(1.6) million and $0.8 million respectively.
The following tables present information regarding our available-for-sale securities and other investments that were in an unrealized loss position at December 31, 2013 and 2012, and split by the length of time the assets are in a continuous unrealized loss position:
As of December 31, 2013, there were approximately 140 securities in an unrealized loss position with a fair value of $1,582.7 million and unrealized losses of $66.3 million. Of these securities, there are 19 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $229.9 million and unrealized losses of $8.8 million.
The following table summarizes the fair value by contractual maturity of our AFS fixed maturity investment portfolio as of December 31, 2013 and 2012:
Substantially all the Company’s U.S. agency bond holdings are mortgage-backed. Additional details on the mortgage-backed bonds component of our U.S. agency bonds portfolio as of December 31, 2013 and 2012 are as follows:
A summary of changes in fair value associated with the Company's U.S. agency bonds - mortgage-backed portfolio for the years ended December 31, 2013 and 2012 follows:
Prior policy measures enacted by the U.S. Federal Reserve designed to provide greater liquidity to certain credit markets, in particular the mortgage backed securities market, continue to impact the Company's MBS portfolio. However, those conditions have been abating during 2013, as interest rates have begun to rise and in December 2013 the U.S. Federal Reserve reported it had begun to gradually reduce the amount of liquidity it is providing to credit markets.
Despite these changing market conditions, in 2013 and 2012 the cumulative effect of these policy measures has had the effect of maintaining an elevated level of paydowns on certain MBS in the Company's AFS portfolio and has resulted in higher levels of bond premium amortization we have been incurring, which has reduced the amount of net investment income reported by the Company as a result. These conditions may abate, however as interest rates stabilize or continue to increase from current levels.
We do not have any non-U.S. government and government related obligations of Greece, Ireland, Italy, Portugal and Spain as of December 31, 2013 and 2012. As of December 31, 2013 and 2012, 91.9% and 90.1%, respectively, of the Company's non-sovereign government issuers were rated AA or higher by S&P. The five largest non-U.S. government or supranational issuers held by the Company as of December 31, 2013 and 2012 are:
For corporate bonds not denominated in U.S. dollars, the following table summarizes the composition of the fair value of our fixed maturity investments at the dates indicated by ratings as assigned by S&P and/or other rating agencies when S&P ratings were not available:
Financial strength ratings represent the opinions of rating agencies on our capacity to meet our obligations. Some of our reinsurance treaties contain special funding and termination clauses that are triggered in the event that we or one of our subsidiaries is downgraded by one of the major rating agencies to levels specified in the treaties, or our capital is significantly reduced. If such an event were to happen, we would be required, in certain instances, to post collateral in the form of letters of credit and/or trust accounts against existing outstanding losses, if any, related to the treaty. In a limited number of instances, the subject treaties could be cancelled retroactively or commuted by the cedant and might affect our ability to write business. Our principal operating subsidiaries are rated “A-” (Excellent) with a stable outlook by A.M. Best Company, which rating is the fourth highest of sixteen rating levels, and "BBB+" (Good) with a negative outlook by S&P, which is the eighth highest of twenty-two rating levels. Our Senior Note Offerings are all rated "BBB-" by S&P, and the Preference Shares are both rated "BB" by S&P.
On the mandatory conversion date, September 15, 2016, each of the then-outstanding Preference Shares - Series B will automatically convert into a variable number of shares of the Company’s common shares equal to the conversion rate, which will not be more than 4.0322 of the Company's common shares and not less than 3.2258, subject to conversion rate adjustments, that is based on the volume weighted average price per share of the Company’s common shares over the forty consecutive trading day period beginning on, and including, the forty-second scheduled trading day immediately preceding September 15, 2016 (the "final averaging period"). The mandatory conversion date is the third business day immediately following the last trading day of the final averaging period. The conversion rate will be adjusted from time to time if the Company issues common shares as a dividend, increases the cash dividend from $0.09 per share or in some other cases as described under "Description of Mandatory Convertible Preference Shares - Conversion Rate Adjustments" of the Form 424B2 Prospectus Supplement filed with the SEC on September 27, 2013.
On November 6, 2013, the Company’s Board of Directors approved an increase in the quarterly dividend payable to common shareholders from $0.09 to $0.11. The dividend will be payable on January 15, 2014 to shareholders of record as of January 2, 2014. Pursuant to the Conversion Rate Adjustment described above, the minimum and maximum conversion rates of 3.2258 and 4.0322, respectively, will be adjusted. The adjusted minimum and maximum conversion rates is determined after the close of business on January 2, 2014 (dividend record date), when the market price of the Company’s common stock is known. Using the adjusted conversion rate, the Company would issue approximately 19,840 more common shares upon conversion of the Preference Shares - Series B.
Therefore, we may from time to time issue up to an additional $147.5 million in securities pursuant to the shelf registration statement or otherwise pursuant to private offerings. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful.
The net proceeds from the 2011 Senior Note Offering were approximately $104.7 million, after issuance costs. With the underwriters’ exercise of a portion of their over-allotment option, the Company repurchased $107.5 million aggregate liquidation amount of TRUPS Offering on July 15, 2011.
On January 20, 2009, the Company established a special purpose trust for the purpose of issuing trust preferred securities. This involved private placement of 260,000 units (the “Units”), each Unit consisting of $1,000 principal amount of capital securities (the “Trust Preferred Securities”) of Maiden Capital Financing Trust (the “Trust”) and 45 common shares, $.01 par value, of the Company, for a purchase price of $1,000.45 per Unit.
As part of the transaction, the Company issued 11,700,000 common shares to the purchasers of the Trust Preferred Securities. The Trust Preferred Securities mature in 2039 and carry an interest rate of 14% and an effective rate of interest of 16.76%. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts, were invested by the trusts in subordinated debentures issued by the Company. The gross proceeds to the Company were approximately $260.1 million in the form of junior subordinated debt, before approximately $4.3 million of issuance costs.
In the normal course of business, the Company is a party to a variety of contractual obligations as summarized below. These contractual obligations are considered by the Company when assessing its liquidity requirements and the Company is confident in its ability to meet all of its obligations.
The Company’s aggregate contractual obligations as of December 31, 2013 are as follows:
The amounts included for reserve for loss and loss adjustment expenses reflect the estimated timing of expected loss payments on known claims and anticipated future claims as of December 31, 2013. Both the amount and timing of cash flows are uncertain and do not have contractual payout terms. For a discussion of these uncertainties, refer to “Critical Accounting Policies - Reserve for Loss and Loss Adjustment Expenses". 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.
Net foreign exchange gains amounted to $1.7 million during the year ended December 31, 2013 compared to $1.6 million during the year ended December 31, 2012 and $0.3 million during the year ended December 31, 2011.
The effects of inflation are considered implicitly in pricing and estimating reserves loss and loss adjustment expenses. The effects of inflation could cause the severity of claims to rise in the future. To the extent inflation causes these costs, particularly medical treatments and litigation costs, to increase above reserves established for these claims, the Company will be required to increase the reserve for loss and loss adjustment expenses with a corresponding reduction in its earnings in the period in which the deficiency is identified. The actual effects of inflation on the results of operations of the Company cannot be accurately known until claims are ultimately settled.
At December 31, 2013, we did not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
See Item 8, Note 2. Significant Accounting Policies to the Consolidated Financial Statements for a discussion on recently issued accounting pronouncements.