All of our properties are owned or leased by us or our subsidiaries and are used for office functions (corporate, claims, underwriting, business units) or as call centers. We own 19 properties worldwide, the majority of which consist of commercial office space. Our properties are not segregated by segment. We own significant properties in the U.S. in the states of California, Colorado, Connecticut, Florida, Ohio and Texas and internationally in the United Kingdom.
We lease approximately 1,170,500 square feet throughout the U.S. and internationally. These leases are generally short-term to medium-term leases for commercial office space. For additional information about these leases, see Note 23. "Commitments and Contingencies" to our consolidated financial statements appearing elsewhere in this Form 10-K.
On March 1, 2018, we announced that we had entered into a definitive agreement with Evergreen Parent, L.P., an entity formed by private equity funds managed by Stone Point Capital LLC ("Stone Point"), together with Barry D. Zyskind, our Chairman and CEO, George Karfunkel and Leah Karfunkel (collectively, the "Karfunkel-Zyskind Family"), in which Evergreen Parent will acquire the approximately 45% of our issued and outstanding common shares that the Karfunkel-Zyskind Family and certain of its affiliates and related parties do not presently own or control. The transaction values our fully diluted equity at approximately $2.7 billion, excluding our outstanding preferred stock. For additional information about the proposed merger, see Item 1. "Business" and Note 28. "Subsequent Events" to our consolidated financial statements elsewhere in this Form 10-K.
On November 3, 2017, we and Mayfield Holdings LLC (“Mayfield”), entered into a Contribution and Stock Purchase Agreement (the “Acquisition Agreement”) with MH JV Holdings L.P. (“Investor”), a newly-formed investment vehicle owned by affiliates of Madison Dearborn Partners, related to the Investor’s acquisition of a majority interest in the portion of our U.S.-based fee businesses that (a) act as managing general agents for the distribution, underwriting and procurement of property and casualty insurance on behalf of certain of our affiliates and other insurance carriers and (b) design, develop, market and act as third party administrators for programs for service contracts, limited warranties and replacement plans as further described in the Acquisition Agreement (the “U.S.-based fee business”). On February 28, 2018, we completed the transfer of the U.S.-based fee business to Mayfield and the Investor's acquisition of a majority interest in Mayfield. Additional information is presented in Note 28. “Subsequent Events” to our consolidated financial statements appearing elsewhere in this Form 10-K. The following description of our Specialty Risk and Extended Warranty segment summarizes our business as of December 31, 2017, without regard to the transfer of the U.S.-based fee business that occurred shortly before we filed this Form 10-K.
Small Commercial Business. We provide workers’ compensation, commercial package and other commercial insurance lines produced by wholesale agents, retail agents and brokers in the U.S.
We transact business primarily through our insurance subsidiaries, the majority of which are domiciled in the U.S. We also transact business through insurance subsidiaries domiciled internationally, primarily in Bermuda and Europe. We are authorized to write business in all 50 states, the District of Columbia and Puerto Rico. We have insurance operations in the United Kingdom, Ireland and Luxembourg and are authorized to write business throughout the European Union. Through our subsidiary, AmTrust at Lloyd's, we are licensed to underwrite business internationally in locations where Lloyd's is licensed. Our principal operating subsidiaries are rated "A" (Excellent) by A.M. Best Company ("A.M. Best"). On November 6, 2017, A.M. Best announced that it had placed our ratings under review with negative implications. For more information on our ratings, see "Item I. Business - Ratings".
AmeriHealth Casualty Insurance Company (now called AHC Insurance Company, "AHC") - Small Commercial Business segment
ANV Holding B.V. and its affiliates (collectively, "ANV") - Specialty Risk and Extended Warranty segment
N.V. Nationale Borg-Maatschappij and its affiliates (collectively, "Nationale Borg") - Specialty Risk and Extended Warranty segment
Republic Underwriters Insurance Company, Republic-Vanguard Insurance Company, Southern Underwriters Insurance Company, Republic Fire & Casualty Insurance Company, Southern Insurance Company, Republic Diversified Services, Inc., Republic Lloyds, Republic Group No. Two Company, Southern County Mutual Insurance Company, Canyon State Auto Insurance Services, Inc., and Eagle General Agency, Inc. (collectively, "Republic") - Small Commercial Business and Specialty Program segments
First Nationwide Title Insurance Agency - Specialty Risk and Extended Warranty segment
Insurance, particularly workers’ compensation, is, generally affected by seasonality. The first quarter generally produces greater premiums than subsequent quarters. Nevertheless, the impact of seasonality on our Small Commercial Business and Specialty Program segments has not been significant. We believe that this is because we serve many small businesses in different geographic locations. We believe seasonality may be muted by our acquisition activity, especially in years (such as 2016) when we completed several acquisitions. Additionally, our Specialty Risk and Extended Warranty segment may be impacted by the seasonality of the automotive and consumer electronic markets.
We evaluate our operations by monitoring key measures of growth and profitability, including return on equity and combined ratio. Our return on equity was (17.9)%, 15.8% and 21.8% for the years ended December 31, 2017, 2016 and 2015, respectively. Our overall financial objective is to produce a return on equity of 12.0% - 15.0% over the long term. In addition, we target a combined ratio of 95.0% or lower over the long term, while seeking to maintain optimal operating leverage in our insurance subsidiaries commensurate with our A.M. Best rating objectives. Our combined ratio was 112.9%, 93.7% and 91.6% for the years ended December 31, 2017, 2016 and 2015, respectively. Although we did not achieve our key growth and profitability measures for the year ended December 31, 2017, we do not consider this to be a trend. As described below in "Consolidated Results of Operations," we experienced catastrophe losses in our Small Commercial Business segment from Hurricanes Harvey, Irma and Maria and the earthquake in Mexico, prior period adverse reserve development in all of our segments and higher professional service fees.
Effective June 30, 2017, we entered into an adverse loss development cover agreement (the "agreement") with Premia Reinsurance Ltd. ("Premia"). Under the agreement, Premia will pay us for ultimate net losses paid by us in excess of a retention of $5,962.2 million, subject to an aggregate limit of $1,025.0 million, which provides $400.0 million of coverage in excess of our net carried loss reserves as of March 31, 2017 in the amount of $6,587.2 million.
During 2017 and 2016, we made several significant acquisitions. Additional financial information regarding our acquisitions is presented in Note 5. “Acquisitions” to our consolidated financial statements appearing elsewhere in this Form 10-K.
NGHC is a publicly-held specialty personal lines insurance holding company (Nasdaq: NGHC) that operates twenty-two insurance companies in the U.S. and provides a variety of insurance products, including personal and commercial automobile, homeowners and umbrella, and supplemental health. NGHC's two largest stockholders are the Trust and a grantor retained annuity trust controlled by Leah Karfunkel. Leah Karfunkel, who is co-trustee of the Michael Karfunkel Family 2005 Trust (the "Trust") along with Barry Zyskind, is a member of our board of directors and the mother-in-law of Barry Zyskind, our Chairman, President and Chief Executive Officer. The ultimate beneficiaries of the Trust include Leah Karfunkel’s children, one of whom is married to Mr. Zyskind. In addition, Barry Karfunkel, the son of Leah Karfunkel and brother-in-law of Barry Zyskind, is the chief executive officer of NGHC and Barry Zyskind is NGHC's non-executive chairman of the board. In accordance with ASC 323-10-15, Investments-Equity Method and Joint Ventures, until June 9, 2017, we accounted for our investment in NGHC under the equity method as we had the ability to exert significant influence on NGHC's operations.
On June 9, 2017, we announced that we had entered into agreements to sell 10.6 million common shares of NGHC at a price of $20.00 per share (representing a discount of 8.3% to NGHC's common stock closing market price on the Nasdaq Stock Exchange on June 8, 2017). The sale was completed through separate, privately negotiated purchase agreements with unaffiliated third parties and resulted in a $68.4 million realized gain, which is reflected in the Equity in earnings of unconsolidated subsidiaries - related parties caption on the consolidated statements of operations. As a result of the transaction, our ownership interest in NGHC decreased from approximately 11.5% to approximately 1.6%, which remained unchanged at December 31, 2017.
On September 13, 2017, AmTrust North America, Inc. (“ANA”), one of our wholly-owned subsidiaries, entered into an Asset Purchase and License Agreement (the “Agreement”) with NGHC, pursuant to which ANA sold to NGHC the personal lines policy management system that ANA had developed for NGHC (the “System”), the related intellectual property, as well as a non-exclusive perpetual license to certain software programs NGHC may use in connection with the System. NGHC will pay ANA consideration of $200.0 million, which is payable in three equal installments, with the first payment made upon the execution of the Agreement, the second payment payable upon the six-month anniversary of the Agreement (which was paid in the first quarter of 2018), and the third payment payable upon the completion of the full separation and transfer of the System to NGHC’s operating environment in accordance with the terms of the Agreement or eighteen months, whichever is later. The consideration also compensated ANA for System licensing fees of $9.3 million through the date of sale. In addition, NGHC will be required to pay ANA costs for the implementation of the System in NGHC’s environment (up to $5.0 million) and certain other production and development support costs consistent with past practice. NGHC offered employment to over 100 ANA employees who support the System. During the period of September 13, 2017 through December 31, 2017, NGHC was required to pay ANA costs for the following items: implementation of the System in NGHC's environment, ongoing production support of NGHC's environment, transition costs for the employees to whom NGHC offered employment to support the System and hardware purchased to facilitate the implementation of the System.
We have a perpetual license to use the System for our own internal purposes. We may not sell or sublicense the System to a third party and, for a period of three years, we may not build a personal lines policy system for any third party. NGHC has a perpetual license to use certain of our software applications in connection with the System, while we retain all ownership rights to these software applications. Except in certain limited circumstances, NGHC may not sell or sublicense our software to a third party.
Additional financial information is presented in Note 15. “Related Party Transactions” to our consolidated financial statements appearing elsewhere in this Form 10-K.
During 2017, the LSC entities acquired seven life settlement contracts for approximately $16.5 million and had seven life settlement contracts mature for approximately $48.0 million in cash.
These two transactions divested us of all but six remaining life settlement policies. As of December 31, 2017, the remaining six policies had a fair value of $20.8 million. At this time, we do not expect to be an active purchaser of life settlement policies.
Additional financial information regarding our investment in life settlements is presented in Note 6. “Investment in Life Settlements” to our consolidated financial statements appearing elsewhere in this Form 10-K.
Net Written Premiums. Net written premiums is gross written premiums less that portion of premiums that we cede to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula contained in the individual reinsurance agreement.
Net Earned Premiums. Net earned premiums is the earned portion of our net written premiums. We earn insurance premiums on a pro rata basis over the term of the policy. At the end of each reporting period, gross written premiums that are not earned are classified as unearned premiums, which are earned in subsequent periods over the remaining term of the policy. Our workers’ compensation insurance and commercial package policies typically have a term of one year. Thus, for a one-year policy written on July 1, 2017 for an employer with a constant payroll during the term of the policy, we would earn half of the premiums from July 1, 2017 through December 31, 2017 and the other half from January 1, 2018 to June 30, 2018. We earn our specialty risk and extended warranty coverages over the estimated exposure time period. The terms vary depending on the risk and range in duration from one to 120 months.
Management services - We provide services to insurance consumers, traditional insurers and insurance producers by offering flexible and cost effective alternatives to traditional insurance tools in the form of various risk retention groups and captive management companies, as well as management of workers’ compensation and commercial property programs. We also offer programs and alternative funding options for non-profit and public sector organizations for the management of their state unemployment insurance obligations. As discussed above, on February 28, 2018, we completed the transfer of the U.S.-based fee business to Mayfield and the Investor's acquisition of a majority interest in Mayfield, which we expect will impact the service and fee income generated from this source.
Insurance fees - We recognize fee income associated with the issuance of workers’ compensation policies for installment fees, in jurisdictions where it is permitted and approved, and reinstatement fees, which are fees charged to reinstate a policy after it has been canceled for non-payment, in jurisdictions where it is permitted and approved. Additionally, we recognize broker commissions and policy management fees associated with general liability policies placed by one of our managing general agencies.
Broker services - We provide brokerage services to Maiden in connection with our reinsurance agreement for which we receive a fee.
Information technology services - We provide information technology, printing, mailing and lockbox services to NGHC and its affiliates for a fee. As discussed above, during the third quarter 2017, we sold the personal lines policy management system we had developed for NGHC, and terminated the master services agreement with NGHC by which we provided these information technology services. For this reason, we expect the service and fee income derived from these services to significantly decrease going forward.
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses consist of policy acquisition expenses, salaries and benefits and general and administrative expenses, net of ceding commissions. These costs are originally deferred and then amortized into expense ratably in relation to net earned premiums and consist of the following:
Policy acquisition expenses comprise commissions directly attributable to those agents, wholesalers or brokers that produce premiums written on our behalf. In most instances, we pay commissions based on collected premiums, which reduces our credit risk exposure associated with producers in case a policyholder does not pay a premium. We pay state and local taxes, licenses and fees, assessments and contributions to various state guaranty funds based on our premiums or losses in each state. If the business is reinsured, these expenses are offset by ceding commissions received.
Salaries and benefits expenses are comprised of costs associated with employees that are directly involved in the origination and issuance of policies. We classify salaries and benefits associated with employees that are involved in fee generating activities as other expenses.
Ceding commissions from reinsurance transactions are amounts we receive from ceding gross written premiums to third party reinsurers, and is netted against acquisition costs and other underwriting expenses. In connection with the Maiden Quota Share, which is our primary source of ceding commissions, the amount we receive is a blended rate based on a contractual formula contained in the individual reinsurance agreements, and the rate may not correlate specifically to the cost structure of the individual segments. The ceding commissions we receive cover a portion of our deferred direct acquisition costs and a portion of other underwriting expenses. Ceding commissions received from reinsurance transactions that represent recovery of deferred direct acquisition costs are recorded as a reduction of unamortized deferred direct acquisition costs and the net amount is charged to expense in proportion to net earned premiums recognized. Ceding commissions received from reinsurance transactions that represent the recovery of other underwriting expenses are
Income Tax Expense. We file a consolidated U.S. income tax return for our eligible domestic subsidiaries. Our non-domestic subdivisions file income tax returns in their respective local jurisdictions. As part of the U.S. consolidated income tax return filing, we are party to federal income tax allocation agreements amongst the includible entities. Under the tax allocation agreements, we pay to or receive from our subsidiaries the amount, if any, by which the group’s federal income tax liability was affected by virtue of inclusion of the subsidiary in the consolidated federal return.
Expense Ratio. The expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs and other underwriting expenses to net earned premiums. As we allocate certain acquisition costs and other underwriting expenses based on premium volume to our segments, the expense ratio on a segment basis may be impacted period over period by a shift in the mix of net written premiums.
Combined Ratio. The combined ratio is a measure of an insurance company’s overall underwriting profit. This is the sum of the loss ratio and net expense ratio. If the combined ratio is at or above 100 percent, an insurance company cannot be profitable without net investment income, and may not be profitable if net investment income is insufficient.
Loss development factors are a key assumption underlying many of the actuarial methods utilized. Loss development factors are ratios of how reported losses (on either a paid or an incurred basis) at an evaluation date (e.g. accident year, accident quarter, etc.) are expected to develop to ultimate losses for a defined group of claims. Loss development factors may be dependent on a number of elements, including frequency and severity of claims, length of time to achieve ultimate settlement of claims, case reserving practices, projected inflation of medical costs and wages (for workers’ compensation), insurance policy coverage interpretations, judicial determinations and existing laws and regulations. The predictive ability of loss development factors is enhanced by consistent underwriting, claims handling, and inflation, among other factors, and predictable legislatively and judicially imposed legal requirements. However, due to the inherent uncertainty in the loss development factors, future development may differ significantly from past development.
On a quarterly basis, we review our reserves to determine whether the expected loss emergence based on our actuarial assumptions is consistent with the actual loss emergence observed. We also perform monthly diagnostic reviews in the form of reported and paid loss ratios to date and compare these ratios at comparable historical points to detect any possible anomalous results. In the event of a result that looks materially different from our previous loss history, we seek to determine the causes (e.g., underwriting, claims, inflation, and/or regulatory) and may adjust our reserves depending on the identified cause. For example, if the emergence of our total incurred losses were greater or less than what our loss emergence patterns (development factors) would have predicted, we may adjust our reserves for the periods in question. In 2017, 2016 and 2015, our estimates for unpaid losses and LAE attributable to prior accident years increased by $419.0 million, $257.9 million and $33.9 million, respectively. For a discussion of the reserve development, see Note 11. "Short Duration Contracts" to our consolidated financial statements appearing elsewhere in this Form 10-K. We will continue to monitor the accuracy of our loss development factors and related actuarial assumptions, as well as the adequacy of our reserves.
As pertains to our warranty business, there is generally more uncertainty in the unearned premiums than in the IBNR reserve. While our warranty claims are short-tailed, the unearned portion of each contract earns over several years. Furthermore, warranty claims are generally reported immediately after they occur and are closed within months of reporting. The reserve for unearned premium is related to the portion of premiums written that is applicable to the unexpired term of the contract or policy in force. Insurance premiums on Specialty Risk and Extended Warranty programs are earned based on an estimated program coverage period. A portion of the premium for these policies does not earn evenly over the contract period. Instead, the premium is earned in proportion to the exposure to losses and the amount of insurance protection provided.
The portion of our reserves for loss and loss adjustment expenses that have been incurred but not reported, or IBNR, represent management’s best estimate (“MBE”) of the expected ultimate outcome in settling the insurance related liabilities incurred. Our process to arrive at the MBE incorporates actuarial estimations as indicated by the actuarial central estimate (“ACE”), risks, uncertainties, and other relevant information pertaining to the underlying loss exposures and our operational activities. We use a combination of internal actuarial resources as well as external consulting actuaries to assist in the evaluation of our reserves for loss and loss adjustment expenses.
For the years ended December 31, 2017 and 2016, our consideration of MBE begins with the ACE determined by our internal actuarial process for each line of business. Management evaluates each of the components that comprise the ACE, by line of business, and the actuarial methods used by our internal and external consulting actuaries. Management may elect to deviate from the ACE in certain instances, as it considers other quantitative and qualitative factors such as current operational information provided by claims, underwriting and other operational personnel, in selecting its MBE. At the conclusion of a comprehensive process and Group Reserve Committee discussions to critically assess and challenge the assumptions used to determine the ACE, management may, at times, place greater or lesser reliance on this quantitative and qualitative information to determine the MBE, relative to the actuarial estimates indicated by the ACE.
For year-end 2017, MBE differed from ACE for the following reasons: within the Small Commercial Business segment, after various considerations, including volatility, range and risk factors, the Group Reserve Committee determined to hold the current accident year loss ratio above the ACE primarily for the general liability, auto liability and workers' compensation lines of business, resulting in an increase in the actuarial estimate by $12.4 million.
Within the Specialty Program segment, the Group Reserve Committee determined that the emerging loss experience in our excess workers' compensation line did not support our actuaries' divergence from our pricing loss ratio and reduced the actuarial estimate, largely off-set by increases to the actuarial central estimate for other run-off and active programs. The overall segment reduction to the actuarial estimate was $4.2 million.
For year-end 2016, MBE differed from the ACE for the following reasons: within the Small Commercial Business segment, our Group Reserve Committee relied more heavily on the incurred loss development method than the actuaries, which projected a loss estimate that was $66.0 million lower and considered a number of subjective factors including a change in claims staffing for excess and surplus lines claims to reduce the actuarial estimate by an additional $9.8 million.
emergence within our retained layers and reduced the actuarial estimate by $33.0 million. Our Group Reserve Committee increased the ultimate loss ratios for commercial automobile, resulting in an increase in the actuarial estimate by $6.1 million.
In 2015, we commenced the process of enhancing our in-house corporate actuarial function, which included the hiring of a chief actuary, chief reserving actuary and chief pricing actuary and additional actuarial resources. This resulted in an extensive review of our processes for establishing loss and loss adjustment expense reserves. Beginning in 2015 and continuing in 2016, our new actuarial team implemented additional processes, including the establishment of a Group Reserve Committee. By the end of 2016, the new actuarial team had performed reviews of loss and loss adjustment expense reserves for all material lines of business and our carried reserve position generally converged with our ACE.
The changes in the MBE adjustments from 2015 to 2016 reflect the impact of changes in our process for establishing loss and loss adjustment expenses reserves, which were implemented in 2016 and resulted in changes to both our carried reserves and ACE. However, the changes in the MBE adjustments generally did not have a corresponding impact on our net loss ratios for each segment. For example, the change in the MBE adjustment in our Small Commercial Business segment from $139 million in 2015 (an increase to ACE) to $(76) million in 2016 (a decrease to the ACE) resulting in a change to our net loss ratio, which increased to 66.3% in 2016 from 65.4% in 2015, indicating that the performance of the business remained consistent notwithstanding the change in the MBE adjustment from 2015 to 2016.
As part of a business combination, we record an acquisition price paid that is in excess of net assets acquired (“goodwill”), and it is not amortized. We amortize intangible assets with a finite life over the estimated useful life of the asset. We do not amortize intangible assets with an indefinite useful life. We review our finite-lived intangible assets for impairment when events or change in circumstances indicate that the carrying value of such intangible assets may not be recoverable from estimated cash flows.
Valuation and Recoverability of Goodwill. Goodwill represented $741.2 million and $686.6 million of our $25.2 billion and $22.6 billion total assets as of December 31, 2017 and 2016, respectively. We review our goodwill annually as of October 1 for impairment, or more frequently if indicators of impairment exist. We regularly assess whether any indicators of impairment exist. Such indicators include, but are not limited to: a sustained significant decline in our share price and market capitalization or a significant decline in our expected future cash flows due to changes in company-specific factors or the broader business climate. The evaluation of such factors requires considerable management judgment. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.
For each reporting unit, we first compare its fair value with its net book value. If the fair value exceeds its net book value, goodwill is deemed not to be impaired, and no further testing is necessary. If the net book value exceeds its fair value, we would perform a second test to measure the amount of impairment if any. To determine the amount of any impairment, we would determine the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination. Specifically, we would determine the fair value of all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill were less than the recorded goodwill, we would record an impairment charge for the difference.
The following describes the valuation methodologies used in both 2017 and 2016 to derive the fair value of the reporting units.
Income Approach - We use a Discounted Cash Flow Analysis (“DCF”) to value the reporting unit based upon the expected earnings available for distribution over future periods. We project free cash flows to equal future earnings, less the amount of capital required for the business. We discount this cash flow stream back to its present value by the reporting unit’s cost of capital factor. We base earnings used in the projections on best estimate projections of revenue growth, loss experience, investment income, and expenses. The cost of capital assumed for each reporting unit reflects our estimates of the risks inherent in the forecasts.
We do a fifty percent weighting between the Market and Income approaches for all reporting units, with the exception of the Specialty Program reporting unit where only the income approach is used. This reporting unit is undergoing operational
The determination of fair value of the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, earnings and required capital projections discussed above, discount rates, taxes, terminal growth rates, operating income forecasts for each reporting unit and the weighting assigned to the results of each of the two valuation methods described above. Due to the inherent uncertainty involved in making these estimates, actual results could differ materially from those estimates. We evaluated the significant assumptions used to determine the fair values of each reporting unit, both individually and in the aggregate and concluded they are reasonable.
Should current market conditions continue for an extended period, or should the operating results of any of our reporting units decline substantially compared to projected results, we could determine that we need to record a non-cash impairment charge related to goodwill. Any such charge would have no effect on either our cash balance or future cash flows.
Income Taxes. We file a consolidated U.S. income tax return for our eligible domestic subsidiaries. Our non-domestic subdivisions file income tax returns in their respective local jurisdictions. As part of the U.S. consolidated income tax return filing, we are party to federal income tax allocation agreements amongst the includible entities. Under the tax allocation agreements, we pay to or receive from our subsidiaries the amount, if any, by which the group’s federal income tax liability was affected by virtue of inclusion of the subsidiary in the consolidated federal return.
Deferred income taxes reflect the impact of “temporary differences” between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The deferred tax asset primarily consists of book versus tax differences for premiums earned, loss and loss adjustment expense reserve discounting, policy acquisition costs, and net operating losses. We record changes in deferred income tax assets and liabilities that are associated with components of other comprehensive income, primarily unrealized investment gains and losses, directly to other comprehensive income. Otherwise, we include changes in deferred income tax assets and liabilities as a component of income tax expense.
We recognize deferred tax assets to the extent we believe that these assets are more likely than not to be realized. In assessing the more likely than not recoverability of deferred tax assets, management considers whether it is more likely than not that we will generate future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. If necessary, we establish a valuation allowance to reduce the deferred tax assets to the amounts that are more likely than not to be realized.
Net Written Premiums. Net written premiums increased $301.2 million, or 6.2%, to $5,152.5 million from $4,851.3 million for the years ended December 31, 2017 and 2016, respectively. Net written premiums increased primarily due to an increase in gross written premiums for the year ended December 31, 2017 compared to the year ended December 31, 2016.
Net Earned Premiums. Net earned premiums increased $388.1 million, or 8.3%, to $5,056.1 million from $4,668.0 million for the years ended December 31, 2017 and 2016, respectively. The increase primarily resulted from an increase in gross written premiums during the year ended December 31, 2017 compared to the year ended December 31, 2016, and policies assumed from the ANV acquisition, which had accelerated earnings patterns relative to our business prior to the acquisition.
Net Realized Gains on Investments. We had net realized gains on investments of $63.1 million and $36.5 million for the years ended December 31, 2017 and 2016, respectively. The increase in net realized gains on investments related primarily to increases in gains on other invested assets and available-for-sale equity securities during the year ended December 31, 2017 and other-than-temporary impairment ("OTTI") of $31.7 million incurred during the year ended December 31, 2016, partially offset by losses on trading securities during the year ended December 31, 2017 compared with gains on trading securities during the year ended December 31, 2016.
The $98.2 million difference for the year ended December 31, 2017 between the adverse development recorded in the financial statements and the accident year disclosure contained in Note 11. “Short Duration Contracts” is comprised of the following items:
Other. Other expenses increased $141.8 million, or 25.1%, to $705.8 million for the year ended December 31, 2017 from $564.1 million for the year ended December 31, 2016. The increase resulted primarily from higher depreciation and amortization expense of approximately $41.0 million, the acquisition of PDP, which had approximately $25 million of other expenses, $20 million related to fee businesses in Europe, and higher overall costs related to year-end auditing and consulting resources.
Gain on Acquisition. We did not recognize a gain on acquisition during the year ended December 31, 2017. We recognized a gain on acquisition of approximately $48.8 million for the year ended December 31, 2016, primarily related to the purchase of Genworth.
(Benefit) Provision for Income Tax. Income tax benefit for the year ended December 31, 2017 was $99.4 million, which resulted in an effective tax rate of 19.6%, compared to an income tax expense of $85.3 million for the year ended December 31, 2016, which resulted in an effective tax rate of 17.1%. Our effective tax rate increased in 2017 compared to 2016 due to several factors. During 2017, the Tax Cuts and Jobs Act ("The TCJA") was enacted. The TCJA reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, creates new taxes on certain foreign sourced earnings, and revises the tax treatment of certain items for property and casualty insurers. As of December 31, 2017, we have not completed our accounting for the tax effects of enactment of the TCJA; however, as provided in SEC Staff Accounting Bulletin No. 118, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. For the items for which we were able to determine a reasonable estimate, we recognized a provisional expense amount of $72.5 million. This amount is related to the restatement of deferred taxes from 35% to the newly enacted 2018 rate of 21%, and is included as a component of income tax benefit from continuing operations. In all cases, we will continue to make and refine our calculations as we complete additional analysis. In addition, our estimates may also be affected as we gain a more thorough understanding of the tax law. As noted above, under The TCJA, undistributed post-1986 earnings and profits (E&P) previously deferred from US income taxes are subject to a one-time transition tax. Based on an initial review, it is reasonably expected that we will not incur the one-time transitional tax liability. This expectation may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.
Equity in Earnings of Unconsolidated Subsidiaries - Related Party. Equity in earnings of unconsolidated subsidiaries - related party was $73.5 million and $15.6 million for the years ended December 31, 2017 and 2016, respectively. The increase resulted primarily from a gain of $68.4 million recognized from our sale of 10.6 million common shares of NGHC stock during the year ended December 31, 2017.
Gross Written Premiums. Gross written premiums increased $1,149.7 million, or 16.9%, to $7,949.3 million from $6,799.5 million for the years ended December 31, 2016 and 2015, respectively. The increase of $1,149.7 million was attributable to growth in our Small Commercial Business and Specialty Risk and Extended Warranty segments, while growth in our Specialty Program segment was relatively flat. The majority of the increase in the Small Commercial Business segment was attributable to an increase in the number of workers' compensation policies issued, and the acquisitions of Republic, ARI and Springfield, which contributed approximately $380 million of gross written premiums. The increase in our Specialty Risk and Extended Warranty segment was attributable to our acquisitions of ANV, Nationale Borg and Warranty Solutions, which contributed approximately $237 million of gross written premium, expansion of our existing programs in Europe, and growth within our Lloyd's platform, partially offset by the negative foreign currency impact of the weakening of the British pound sterling and the Euro against the U.S. dollar. The increase of gross written premiums in our Specialty Program segment as a result of the April 2016 acquisition of Republic, which contributed $155 million, was partially offset by the reduction or termination of certain workers' compensation and commercial package programs.
Net Written Premiums. Net written premiums increased $589.4 million, or 13.8%, to $4,851.3 million from $4,261.9 million for the years ended December 31, 2016 and 2015, respectively. The increase by segment was: Small Commercial Business - $314.1 million; Specialty Risk and Extended Warranty - $271.3 million; and Specialty Program - $4.0 million. Net written premiums increased for the year ended December 31, 2016 compared to 2015 due to an increase in gross written premium, partially offset by a decrease in the retention of gross written premiums to 61.0% from 62.7% for the years ended December 31, 2016 and 2015, respectively. The decrease in retention resulted from a small increase, as compared to the same period in 2015, in business written that is reinsured under the Maiden Quota Share agreement or with other third party reinsurers.
Net Investment Income. Net investment income increased $51.8 million, or 33.1%, to $208.0 million from $156.3 million for the years ended December 31, 2016 and 2015, respectively. The increase resulted primarily from having a 45% higher average value of invested assets during the year ended December 31, 2016 compared to the year ended December 31, 2015, arising from our investment of certain proceeds from stock and debt offerings occurring since the second half of 2015 and investment portfolios obtained through acquisitions.
In Note 13. “Short Duration Contracts” of our 2016 Form 10-K, we allocated by accident year $78.8 million in development that we recorded upon acquiring certain subsidiaries in 2016. Such development is recorded in the pre-acquisition financial statements of the acquired entities, but, appropriately, is not included in our results of operations. In addition, in 2016, we recorded $16 million in favorable development for accident years prior to 2008, which was not included in Note 13. “Short Duration Contracts” in our 2016 Form 10-K
Lines of business not included in Note 13. “Short Duration Contracts” of our 2016 Form 10-K had $79.3 million in unfavorable development in 2016, $66 million of which related to our 2011 loss portfolio transfer from Majestic Insurance Company ("Majestic"). The recognition of the Majestic prior year development resulted from the extensive actuarial review that began in 2015 as part of our enhanced actuarial process. We note that the loss reserves that we assumed as part of the transaction arise out of very different workers’ compensation risks than those that we typically underwrite, both in class and the size of the risk. The average Majestic premium was $175,000 as compared to our average premium, which is below $10,000.
Finally, we believe that the effect of changes in foreign exchange rates and our allocation by accident year of IBNR, reinsurance cessions, and underwriting year data, which we had not previously maintained by accident year, resulted in the remaining $118.9 million million difference between Note 12. “Loss and Loss Adjustment Expense Reserves” and Note 13. “Short Duration Contracts” in our 2016 Form 10-K.
Interest Expense. Interest expense for the years ended December 31, 2016 and 2015 was $79.5 million and $55.4 million, respectively. The majority of the increase related to additional interest expense of approximately $12.4 million incurred from the issuance of an aggregate of $285 million of subordinated notes in June and September 2015. Additionally, we incurred interest expense related to additional debt issued and assumed in connection with the Republic acquisition of $7.1 million, along with an overall increase in use of letters of credit.
Foreign Currency Gain (Loss). The foreign currency transaction loss was $29.3 million compared to a gain of $47.3 million during the years ended December 31, 2016 and 2015, respectively. The loss during the year ended December 31, 2016 resulted from the weakening of the British pound compared to the Euro, which negatively impacted our U.K. insurance subsidiaries that write Euro-denominated risks that are re-valued at the end of each reporting period.
Provision for Income Tax. Income tax expense was $85.3 million for the year ended December 31, 2016, which resulted in an effective tax rate of 17.1%. Income tax expense was $38.9 million for the year ended December 31, 2015, which resulted in an effective tax rate of 8.3%. Our effective tax rate increased in 2016 compared to 2015 due to several factors. During 2015, our provision for income tax benefited from a return to provision adjustment during the third quarter of approximately $80 million, or 17.0%. The return to provision was driven primarily by changes in permanent transfer pricing tax adjustments. During 2016, our favorable permanent transfer pricing adjustment was reduced from $372 million to $8 million as a result of fewer transactions between our Bermuda reinsurer and our Luxembourg reinsurers. The deferred tax liabilities attributable to our Luxembourg reinsurers included a valuation allowance of approximately $5 million and $81 million at December 31, 2016 and 2015, respectively. The valuation allowance was the result of our current inability to generate sufficient future income in Luxembourg in order to fully utilize the net operating losses (NOLs) incurred to date.
Small Commercial Business Segment Results of Operations 2017 Compared to 2016
Net Written Premiums. Net written premiums increased $59.6 million, or 2.7%, to $2,305.8 million from $2,246.2 million for the years ended December 31, 2017 and 2016, respectively. The increase in net written premiums resulted from an increase in gross written premiums for the year ended December 31, 2017 compared to the same period in 2016, partially offset by a decrease in the retention of gross written premiums during 2017 compared to 2016. Our retention of gross written premiums for the segment decreased to 53.1% from 55.9% for the years ended December 31, 2017 and 2016, respectively, resulting from our ceding to third party reinsurers a large portion of the gross written premiums generated as a result of our April 2016 acquisition of Republic.
Net Earned Premiums. Net earned premiums increased $103.2 million, or 4.7%, to $2,306.7 million for the year ended December 31, 2017 from $2,203.5 million for the year ended December 31, 2016. As premiums written are primarily earned ratably over an annual period, the increase in net earned premiums resulted from higher net written premiums for the year ended December 31, 2017 compared to the same period in 2016.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses increased $352.4 million, or 24.1%, to $1,812.9 million for the year ended December 31, 2017 from $1,460.5 million for the year ended December 31, 2016. Our loss ratio for the segment for the year ended December 31, 2017 increased to 78.6% from 66.3% for the year ended December 31, 2016. The increase in the loss ratio was primarily the result of adverse reserve development of $162.5 million (representing 7.0 loss ratio points) due to higher severity of claims in our workers' compensation as well as our commercial auto portfolio, soft market conditions in workers' compensation in California and the incremental increase in catastrophe losses of $33.2 million (representing 1.4 loss ratio points).
Net Earned Premiums. Net earned premiums increased $316.6 million, or 16.8%, to $2,203.5 million for the year ended December 31, 2016 from $1,886.9 million for the year ended December 31, 2015. As premiums written are earned ratably over an annual period, the increase in net earned premiums resulted from higher net written premiums for the year ended December 31, 2016 compared to the year ended December 31, 2015.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $105.8 million, or 21.7%, to $592.6 million for the year ended December 31, 2016 from $486.8 million for the year ended December 31, 2015. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the years ended December 31, 2016 and 2015 of $288.8 million and $253.2 million, respectively. The expense ratio increased to 26.9% for the year ended December 31, 2016 compared to 25.8% for the year ended December 31, 2015, respectively, primarily as a result of higher direct acquisition costs from Republic, a large percentage of the business in this segment during the year ended December 31, 2016.
Specialty Risk and Extended Warranty Segment Results of Operations 2017 Compared to 2016
Gross Written Premiums. Gross written premiums increased $594.2 million, or 23.6%, to $3,115.5 million for the year ended December 31, 2017 from $2,521.3 million for the year ended December 31, 2016. We experienced growth primarily in our European business during the year ended December 31, 2017 compared to the year ended December 31, 2016, while our U.S. business decreased slightly period over period. Our 2016 acquisition of ANV added gross written premiums of $536.4 million to our European business, which was partially offset by fluctuations in European exchange rates.
Net Written Premiums. Net written premiums increased $492.9 million, or 28.6%, to $2,215.0 million from $1,722.1 million for the years ended December 31, 2017 and 2016, respectively. The increase in net written premiums resulted from an increase of gross written premiums for the year ended December 31, 2017 compared to the same period in 2016. Our retention of gross written premiums period over period increased to 71.1% and 68.3% for the years ended December 31, 2017 and 2016, respectively.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expense increased $510.1 million, or 49.8%, to $1,533.6 million for the year ended December 31, 2017 from $1,023.5 million for the year ended December 31, 2016. Our loss ratio for the segment for the year ended December 31, 2017 increased to 76.3% from 66.3% for the same period in 2016. The increase in the loss ratio resulted from having a higher percentage of net earned premiums in lines of business with higher ultimate loss selections during the year ended December 31, 2017 compared to the year ended December 31, 2016, which related to the Lloyd's business and Italian hospital liability business. We had $83.4 million (representing 4.1 loss ratio points) of prior year loss reserve development in the year ended December 31, 2017. The segment had catastrophe losses of $66.3 million (representing 3.3 loss ratio points) in the year ended December 31, 2017.
Net Earned Premiums Less Expenses Included in Combined Ratio (Underwriting (Loss)Income). The segment's underwriting result was a loss of $185.9 million for the year ended December 31, 2017 compared to $148.0 million of underwriting income for the year ended December 31, 2016. The decrease was attributable to an increase in the segment's combined ratio during the year ended December 31, 2017 compared to the year ended December 31, 2016, partially offset by an increase of net earned premiums.
Net Written Premiums. Net written premiums decreased $251.3 million, or 28.5%, to $631.7 million for the year ended December 31, 2017 from $883.0 million for the same period in 2016 as a result of the decrease in gross written premiums period over period partially offset by the cession of a smaller percentage of gross written premiums to reinsurers during the year ended December 31, 2017 compared to the same period in 2016. Our overall retention of gross written premiums for the segment was 64.7% and 62.7% for the years ended December 31, 2017 and 2016, respectively.
Net Earned Premiums. Net earned premiums decreased $180.9 million, or 19.7%, to $739.7 million for the year ended December 31, 2017 from $920.6 million for the same period in 2016. As premiums written are typically earned ratably over an annual period, the decrease in net earned premiums resulted from lower net written premiums for the year ended December 31, 2017 compared to the same period in 2016. Net earned premiums decreased year over year proportionately less than net written premiums during the same period as a decline in net earned premiums lags slightly behind a decrease in net written premiums.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses decreased $24.5 million, or 9.3%, to $240.6 million for the year ended December 31, 2017 from $265.2 million for the same period in 2016. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the year ended December 31, 2017 and 2016 of $91.8 million and $129.2 million, respectively. Our expense ratio was 32.5% for the year ended December 31, 2017 compared to 28.8% for the year ended December 31, 2016, primarily as a result of decreases to ceding commission and higher allocation of corporate expense, partially offset by the termination of programs with lower acquisition costs as compared to the current business written in this segment.
the years ended December 31, 2016. The decrease was due to a higher combined ratio coupled with a lower level of net earned premiums in the year ended December 31, 2017 compared to the same period in 2016.
Net Earned Premium. Net earned premiums increased $91.3 million, or 11.0%, to $920.6 million for the year ended December 31, 2016 from $829.3 million for the year ended December 31, 2015. As premiums written are earned ratably over an annual period, the increase in net premium earned resulted from higher net written premiums for 2016 compared to 2015. Net earned premiums increased year over year proportionately more than net written premiums during the same comparative periods because, with the acquisition of Republic occurring mid-year 2016, more of the premium earned in this segment during 2016 was from our historic program business, which we retain at a higher rate than we retain the Republic business.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses increased $86.6 million, or 15.1%, to $658.3 million for the year ended December 31, 2016 compared to $571.7 million for the year ended December 31, 2015. Our loss ratio for the segment for the year ended December 31, 2016 increased to 71.5% from 68.9% for the year ended December 31, 2015. The increase in the loss ratio resulted from higher selected ultimate losses for current and prior accident year as compared to originally selected ultimate losses in prior accident years. As discussed in Note 11. "Short Duration Contracts," to our consolidated financial statements appearing elsewhere in this Form 10-K, this was the result of prior period adverse development, driven primarily by our commercial auto and general liability programs (including public entity, habitational and non-admitted programs). Our internal actuarial group, which added significant additional resources and expertise throughout 2015, confirmed, in 2016, adverse loss trends in these programs. As a result, management has either terminated or re-underwritten the programs responsible for the adverse loss development.
Net earned premiums Less Expenses Included in Combined Ratio (Underwriting Income). The segment's underwriting result was a loss of $2.9 million compared with income of $28.7 million for the years ended December 31, 2016 and 2015, respectively. The decrease was due to a higher loss ratio in 2016 compared to 2015.
The first priority of our investment strategy is preservation of capital, with a secondary focus on maximizing an appropriate risk adjusted return. We maintain sufficient liquidity from funds generated from operations to meet our anticipated insurance obligations and operating and capital expenditure needs, including debt service and additional payments in connection with our past producer network and renewal rights acquisitions. The excess funds will be invested in accordance with both the overall corporate investment guidelines as well as an individual subsidiary’s investment guidelines. Our investment guidelines are designed to maximize investment returns through a prudent distribution of cash and cash equivalents, fixed maturity securities and equity positions. Cash and cash equivalents include cash on deposit, commercial paper, pooled short-term money market funds and certificates of deposit with an original maturity of 90 days or less. Our fixed maturity securities include obligations of the U.S. Treasury or U.S. government agencies, obligations of local governments, obligations of foreign governments, obligations of U.S. and Canadian corporations, mortgages guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, Federal Farm Credit entities, and asset-backed securities and commercial mortgage obligations. Our equity securities include common stocks of U.S. and Canadian corporations.
The fair value of our investments is subject to risks of fluctuations in credit quality and interest rates. We use various models and stress test scenarios to monitor and manage interest rate risk. We attempt to manage our interest rate risk by maintaining an appropriate relationship between the effective duration of the investment portfolio and the approximate duration of our liabilities (e.g., policy claims and debt obligations). The table below summarizes the average duration rate by type of fixed maturity security as well as detailing the average yield as of December 31, 2017 and 2016:
We analyze our fixed maturity and equity securities in an unrealized loss position for OTTI each reporting period. There were no OTTI charges of our fixed maturity and equity securities classified as available-for-sale and other investments for the year ended December 31, 2017. Amounts for the years ended December 31, 2016 and 2015 are shown in the table below:
Additionally, we had gross unrealized losses of $75.3 million related to available-for sale fixed maturity securities and $3.0 million related to available-for-sale equity securities as of December 31, 2017.
Our investment in marketable equity securities classified as available-for-sale consist of investments in preferred and common stock across a wide range of sectors. We evaluated the near-term prospects for recovery of fair value in relation to the severity and duration of the impairment and have determined in each case that the probability of recovery is reasonable and we have the ability and intent to hold these investments until a recovery of fair value. We believe the gross unrealized losses for equity securities classified as available-for-sale of $3.0 million as of December 31, 2017 are not material to our financial position.
For further information on our investments and related performance, see Note 3. “Investments” to our consolidated financial statements appearing elsewhere in this Form 10-K.
We may generate liquidity through a combination of debt or equity securities issuances, as well as financing through borrowing and sales of assets at the holding company. During 2017, we issued $300.0 million of common stock. During 2016, we issued $431.3 million of preferred stock. For further information on the issuances, see Note 21. “Stockholders' Equity” to our consolidated financial statements appearing elsewhere in this Form 10-K. We also generated liquidity during 2017 by the sale of assets. For further information on the sale and future sale of assets, see Note 6. “Investment in Life Settlement Contracts”, Note 15. "Related Party Transactions" and Note 27. "Divestitures" to our consolidated financial statements appearing elsewhere in this Form 10-K.
The laws of the jurisdictions in which our insurance subsidiaries are organized regulate and restrict, under certain circumstances, their ability to pay dividends to us. As of December 31, 2017 and 2016, respectively, our insurance subsidiaries would have been permitted to pay dividends in the aggregate of approximately $824.0 million and $749.3 million, respectively. Our insurance subsidiaries paid dividends to us of $586.0 million, $18.0 million and $63.6 million in 2017, 2016 and 2015, respectively. In addition, the terms of our debt arrangements limit our ability to pay dividends on our common stock, and future borrowings may include prohibitions and restrictions on dividends. Additional information regarding our dividends is presented in “Item 1. Business - Regulation,” in “Item 1A. Risk Factors” and in “Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchase of Equity Securities - Dividend Policy” appearing elsewhere in this Form 10-K.
We forecast claim payments based on our historical trends. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on a short-term and long-term basis. Cash payments for claims were $3,221.5 million, $2,545.4 million, and $1,866.3 million in 2017, 2016 and 2015, respectively. Historically, we have funded claim payments from cash flow from operations (principally premiums) net of amounts ceded to our third party reinsurers. We presently expect to maintain sufficient cash flow from operations to meet our anticipated claim obligations and operating and capital expenditure needs. Our total investment portfolio has increased from $8.9 billion (excluding $152.2 million of other investments) as of December 31, 2016 to $9.2 billion (excluding $212.0 million of other investments) as of December 31, 2017. We do not anticipate selling securities in our investment portfolio to pay claims or to fund operating expenses. Should circumstances arise that would require us to do so, we may incur losses on such sales, which would adversely affect our results of operations and financial condition and could reduce investment income in future periods.
The table below presents a summary of our cash flows for the years ended December 31, 2017, 2016 and 2015:
Net cash used in operating activities was $375.3 million for the year ended December 31, 2017, compared to net cash provided of $916.7 million for the same period in 2016. The decrease in cash provided by operating activities was primarily due to a $675.0 million premium payment to Premia during the year ended December 31, 2017, as well as an increase in cash used in funding reinsurance recoverables and timing of collection on those recoverables. In addition, the decrease in cash provided by operating activities was also impacted by an increase in claim payments. Cash payments for claims were approximately $3,222 million and $2,545 million in the years ended December 31, 2017 and 2016, respectively.
Net cash used in financing activities was $57.9 million for the year ended December 31, 2017, compared to net cash provided of $268.4 million for the year ended December 31, 2016. The decrease in cash provided by financing activities was primarily due to increased cash used to settle repurchase agreements, partially offset by cash received from the issuance of common stock through a private placement. Additional information on the private placement is presented in Note 15. "Related Party Transactions" to our consolidated financial statements appearing elsewhere in this Form 10-K.
Net cash used in investing activities was $1,606.0 million for the year ended December 31, 2016 and $1,639.0 million for the year ended December 31, 2015. The decrease in cash used in investing activities was primarily due to decreases in net purchases of fixed maturity and equity securities, capital expenditures and life settlement contract payouts. The decrease in cash used in investing activities was partially offset by an increase in cash used for acquisitions and increases of restricted cash.
During the last three years, we did not engage in short-term borrowings to fund our operations or for liquidity purposes. As discussed above, our insurance subsidiaries create liquidity by collecting and investing insurance premiums in advance of paying claims. Details about our investment portfolio can be found under Note 3. "Investments” to the consolidated financial statements appearing elsewhere in this Form 10-K.
Does not include our adverse loss development cover agreement with Premia. See Note 14. "Reinsurance" to our consolidated financial statements appearing elsewhere in this Form 10-K.
On March 2, 2018, A.M. Best downgraded Maiden Reinsurance Ltd. and Maiden Reinsurance North America Inc. from an "A" (Excellent) to an "A-" (Excellent).
For additional information, please refer the discussion above under "Overview - Adverse Loss Development Cover Agreement" and Note 14. "Reinsurance" to our consolidated financial statements appearing elsewhere in this Form 10-K.
In 2007, we entered into a master agreement with Maiden, as amended, by which the parties caused our Bermuda subsidiary, AII, and Maiden Reinsurance Ltd. ("Maiden Reinsurance") to enter into a quota share reinsurance agreement (the “Maiden Quota Share”), as amended. Under this agreement, AII retrocedes to Maiden Reinsurance certain lines of business assumed by AII from our U.S., Irish and U.K. (excluding Motors Insurance Company Limited, AMT Mortgage Insurance Limited and the Lloyd's syndicates) insurance companies (the “AmTrust Ceding Insurers”), net of the cost of unaffiliated inuring reinsurance (and in the case of our U.K. insurance subsidiary, AEL, net of commissions), an amount equal to 40% of the premium written by the AmTrust Ceding Insurers. AII also retrocedes 40% of losses. Effective July 1, 2018, with respect to AEL only, AII will assume from AEL and AII will retrocede to Maiden Reinsurance an amount equal to 20% of AEL's premium and 20% of related losses. Certain business that we commenced writing after the effective date of the Maiden Quota Share, including, among other lines, our European medical liability business included in the table above and business assumed from Tower Group International, Ltd. pursuant to the cut through reinsurance agreement, is not ceded to Maiden Reinsurance under the Maiden Quota Share (ceded business defined as “Covered Business”).
AII receives 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 is 34.375%. With regards to the Specialty Program portion of
Covered Business only, we will be responsible for ultimate net loss otherwise recoverable from Maiden Reinsurance to the extent that the loss ratio to Maiden Reinsurance, which will be determined on an inception to date basis from July 1, 2007 through the date of calculation, is between 81.5% and 95% (the “Specialty Program Loss Corridor”). For purposes of determining whether the loss ratio falls within the Specialty Program Loss Corridor, workers’ compensation business written in our Specialty Program segment from July 1, 2007 through December 31, 2012 is excluded from the loss ratio calculation.
We, through our subsidiaries AEL and AIU, have a reinsurance agreement with Maiden Reinsurance by which we cede to Maiden Reinsurance a percentage of our European medical liability business, including business in force at April 1, 2011. From April 1, 2011 through June 30, 2016, that percentage ceded by both AEL and AIU was 40%. Effective July 1, 2016, the percentage ceded by AEL decreased to 32.5%, and, effective July 1, 2017, decreased to 20%. The quota share had an initial term of one year and has been renewed through March 31, 2019. The agreement can be terminated at any April 1 by either party on four months’ prior written notice. Maiden Reinsurance pays us a 5% ceding commission, and we will earn a profit commission of 50% of the amount by which the ceded loss ratio is lower than 65%. We did not receive any profit commissions for this business for the years ended December 31, 2017 or 2016.
We recorded approximately $609.3 million, $599.5 million and $510.8 million of ceding commission for the years ended December 31, 2017, 2016 and 2015, respectively, as a result of the Maiden Quota Share.
The loss and loss adjustment expense payments due by period in the table above are based upon the loss and loss adjustment expense estimates as of December 31, 2017 and actuarial estimates of expected payout patterns and are not contractual liabilities as to a time certain. Our contractual liability is to provide benefits under the policy. As a result, our calculation of loss and loss adjustment expense payments due by period is subject to the same uncertainties associated with determining the level of loss and loss adjustment expenses generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our loss and loss adjustment expense estimate process, see “Item 7. Critical Accounting Policies - Loss Reserves.” Actual payments of loss and loss adjustment expenses by period will vary, perhaps materially, from the table above to the extent that current estimates of loss and loss adjustment expenses vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See “Item 7. Critical Accounting Policies - Risks Related to Our Business - Our loss reserves are based on estimates and may be inadequate to cover our actual losses” for a discussion of the uncertainties associated with estimating loss and loss adjustment expenses.
Includes commitments to further fund our other investments. For additional information on our other investments, see Note 2. "Significant Accounting Policies" to our consolidated financial statements appearing elsewhere in this Form 10-K.