We currently lease office space in Bermuda (our corporate headquarters), the United States, the United Kingdom, Germany, Austria and Russia for the operation of our business. We also lease a property for employee use in Bermuda. Our office leases have remaining terms ranging from 3 months to approximately 5 years in length. We renew and enter into new leases in the ordinary course of business as needed. While we believe that the office space from these leased properties is sufficient for us to conduct our operations for the foreseeable future, we may need to expand into additional facilities to accommodate future growth. For more information on our leasing arrangements, please see Note 12 to the Consolidated Financial Statements in this Annual Report on Form 10-K.
We renewed our office space lease in Hamilton, Bermuda commencing December 1, 2012 for Maiden Holdings and Maiden Bermuda. The term of this agreement expires on November 30, 2017 with an option to renew for another five years. We have an office space lease in Mount Laurel, New Jersey expiring on May 31, 2015, for use by Maiden Re, Maiden US and Maiden Specialty. We have also executed an office space lease in Beaconsfield, Buckinghamshire, United Kingdom commencing on October 1, 2010, for Maiden Global; the initial term of this agreement expires on October 1, 2015, with one option of five years. We also have ten other office space leases in the U.S., one property lease in Bermuda and one office space lease in each of Germany, Austria and Russia, respectively, with various expiry dates.
Since our founding in 2007, we have entered into a series of significant strategic transactions that have transformed the scope and scale of our business while keeping our low volatility, non-catastrophe risk profile intact. These transactions have increased our gross premiums written to in excess of $2.0 billion in 2012 while strongly positioning our capital to extend its business platform both in the U.S. and internationally and include:
Entering into a quota share reinsurance agreement with American Capital Acquisition Corporation (“ACAC”) in 2010 (the “ACAC Quota Share”);
Completing a public debt offering of $107.5 million in June 2011 and repurchasing a like amount of our outstanding TRUPS Offering securities in July 2011 ("2011 Senior Notes");
Natural and man-made catastrophes occur each year that affect reinsurance industry results. In each of the last three 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. Consistent with our business model, the Company only experienced modest losses from the 2010 and 2011 global catastrophe events.
Despite the elevated levels of global and U.S. catastrophe losses affecting the industry during this period, industry financial conditions, taken as a whole, have continued to improve through a combination of very positive non-catastrophe underwriting results, enhanced balance sheets resulting from strong fixed income market performance and readily available capital sources for industry participants. As a result, capital positions across the insurance and reinsurance industry appeared to remain adequate through December 31, 2012.
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. Yields on these securities have continued to decline and remain at historically low levels. Interest rates are widely forecast to persist at such levels for the foreseeable future. During the third quarter of 2012, the U.S. Federal Reserve announced additional policy measures designed to provide greater liquidity to certain credit markets, in particular the mortgage-backed securities market. The U.S. Federal Reserve announced additional actions in the fourth quarter of 2012 further increasing liquidity in credit markets. The likely continued existence of these investment conditions should continue to adversely impact the results of the property and casualty industry generally, placing additional pressure on both insurance and reinsurance companies underwriting results.
As market conditions continue to develop, we continue to maintain our adherence to disciplined underwriting by declining business when pricing, terms and conditions do not meet our underwriting standards. Depending on the ultimate impact of Superstorm Sandy combined with the continuing unfavorable investment environment on industry capital positions and profitability, a significant positive effect on competition and pricing is possible. We believe we are well positioned to take advantage of market conditions should the pricing environment become more favorable.
In 2012, we incurred significant losses as a result of Superstorm Sandy which struck the Northeast U.S. on October 29, 2012. Presently, industry insured losses are likely to exceed $20 billion making it the largest catastrophe loss in U.S. history. Based on a comprehensive analysis of the Company's exposure in the affected area, as well as loss reports and estimates from clients, we initially expected the underwriting impact from Superstorm Sandy, net of applicable reinsurance and the Company's provision for normalized catastrophe losses to be in the range of between $25 million and $35 million. Maiden's exposure to this event emanates predominantly from the Company's excess property insurance business written by Maiden Specialty, and to a lesser extent from the U.S. assumed treaty reinsurance business written by Maiden US and the ACAC Quota Share.
Other U.S.-based catastrophe experience in 2011 and 2012 were within the Company's expected parameters which are incorporated into the pricing of our Maiden US accounts. Despite these elevated level of weather-related losses in 2011 and 2012, consistent with its operating model, Maiden has maintained profitable underwriting results in both years.
On June 24, 2011, the Company’s wholly-owned U.S. holding company subsidiary, Maiden NA, closed the offering of $107.5 million aggregate principal amount of 8.25% Senior Notes due June 15, 2041 ("2011 Senior Notes"), which are fully and unconditionally guaranteed by Maiden Holdings. The 2011 Senior Notes are redeemable for cash, in whole or in part, on or after June 15, 2016, at 100% of the principal amount of the 2011 Senior Notes to be repurchased plus accrued and unpaid interest up to but excluding the redemption date. Maiden NA has listed the 2011 Senior Notes on the New York Stock Exchange and trading commenced on July 21, 2011 under the symbol “MHNA”.
The net proceeds from the 2012 Senior Notes of $96.6 million have been used for working capital and general corporate purposes.
The 2011 Senior Notes and 2012 Senior Notes may also be referred to as the "2011 Senior Note Offering" or the "2012 Senior Note Offering", respectively, and may collectively be referred to as the "Senior Note Offerings".
Net income attributable to Maiden common shareholders of $46.5 million, or $0.64 basic and diluted earnings per common share for the year ended December 31, 2012 compared to $28.5 million, or $0.40 basic and $0.39 diluted earnings per common share for the year ended December 31, 2011.
Gross premiums written of $2.0 billion for the year ended December 31, 2012, a 10.4% increase over the year ended December 31, 2011.
Net premiums earned of $1.8 billion for the year ended December 31, 2012, a 16.2% increase over the year ended December 31, 2011.
Net investment income of $81.2 million for the year ended December 31, 2012, a 8.4% increase over the year ended December 31, 2011.
Operating return on common equity(1) of 5.9%for the year ended December 31, 2012 compared to 9.2% for the year ended December 31, 2011.
In presenting the Company’s results, management has included and discussed certain non-GAAP financial measures. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the Company’s results of operations in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. However these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. These non-GAAP measures are:
We exclude net realized and unrealized gains or losses on investment and foreign exchange and other gains or losses as we believe that both are heavily influenced in part by market opportunities and other factors. We do not believe amortization of intangible assets are representative of our ongoing business. We believe all of these amounts are largely independent of our business and underwriting process and including them distorts the analysis of trends in our operations.
The following is a reconciliation of operating earnings to its most closely related GAAP measure, net income.
The decrease in Operating ROCE for the year ended December 31, 2012 is primarily due to lower net income in 2012 as a result of losses from Superstorm Sandy. In addition, Operating ROCE was further reduced by greater increases in the common shareholders' equity in 2012, the combined effect of net income along with higher other comprehensive income for the year ended December 31, 2012, the result of a $79.9 million increase in unrealized gains on the Company's fixed maturity investment portfolio.
Book Value per Common Share: Management uses growth in book value per common share as a prime measure of the value the Company is generating for its common shareholders, as management believes that growth in the Company’s book value per common share ultimately translates into growth in the Company’s share price. Book value per common share is calculated using common shareholders’ equity (shareholders' equity excluding the aggregate liquidation value of our preference shares) divided by the number of common shares outstanding. Preference Shares are not included in the computation of book value per common share. Book value per common share is impacted by the Company’s net income and external factors such as interest rates, which can drive changes in unrealized gains or losses on its investment portfolio. Book value per common share as of December 31, 2012, 2011 and 2010 is computed as follows:
For purposes of these operating measures, the fee-generating business (“IIS Fee Business”) associated with the IIS Acquisition which is included in the Diversified Reinsurance segment, is considered part of the underwriting operations of the Company. Certain portions of the IIS Fee Business are directly associated with 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 IIS 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.
General and administrative expenses include personnel expenses including share-based compensation charges, rent expense, professional fees, information technology costs and other general operating expenses.
Because a significant amount of time can elapse between the assumption of risk, particularly on longer-tail lines of business, occurrence of a loss event, the reporting of the event to an insurance company (the primary company or the cedant), the subsequent reporting to the reinsurance company ("the reinsurer") and the ultimate payment of the claim on the loss event by the reinsurer, the Company’s liability for unpaid loss and loss adjustment expenses ("loss reserves") is based largely upon estimates. The Company categorizes loss reserves into three types of reserves: reported outstanding loss reserves ("case reserves"), ACRs and IBNR reserves. Case reserves represent unpaid losses reported by the Company’s cedants and recorded by the Company. ACRs are established for particular circumstances where, on the basis of individual loss reports, the Company estimates that the particular loss or collection of losses covered by a treaty may be greater than those advised by the cedant. IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves and ACRs. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants. The Company also estimates the future unallocated loss adjustment expenses (“ULAE”) associated with the loss reserves and these form part of the Company’s loss adjustment expense reserves.
For excess of loss treaties, cedents generally are required to report losses that either exceed 50% of the retention, have a reasonable probability of exceeding the retention or meet defined reporting criteria. All reinsurance claims that are reserved are reviewed at least every six months. For proportional treaties, cedents are required to give a periodic statement of account, generally monthly or quarterly. These periodic statements typically include information regarding written premiums, earned premiums, unearned premiums, ceding commissions, brokerage amounts, applicable taxes, paid losses and outstanding losses. They can be submitted 60 to 90 days after the close of the reporting period. Some proportional treaties have specific language regarding earlier notice of serious claim.
For all lines, the Company’s objective is to estimate ultimate loss and loss adjustment expenses. Total loss reserves are then calculated by subtracting losses paid. Similarly, IBNR reserves are calculated by subtraction of case reserves and ACRs from total loss reserves. IBNR is the estimated liability for (1) changes in the values of claims that have been reported to us but are not yet settled, as well as (2) claims that have occurred but have not yet been reported. Each claim is settled individually based upon its merits, and particularly for longer-tailed lines of business, it is not unusual for a claim to take years after being reported to settle, especially if legal action is involved. As a result, the reserve for loss and loss adjustment expenses include significant estimates for IBNR reserves.
In selecting its best estimate, the Company considers the appropriateness of each methodology to the individual circumstances of the treaties and underwriting year for which the projection is made. The methodologies that the
While management believes that our case reserves and IBNR are sufficient to cover losses assumed by us, there can be no assurance that losses will not deviate from our reserves, possibly by material amounts. The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate. To the extent actual reported losses exceed estimated losses, the carried estimate of the ultimate losses will be increased (i.e. unfavorable reserve development), and to the extent actual reported losses are less than our expectations, the carried estimate of ultimate losses will be reduced (i.e. favorable reserve development). We record any changes in our loss reserve estimates and the related reinsurance recoverable in the periods in which they are determined.
We utilize a variety of standard actuarial methods in our analysis. The selections from these various methods are based on the loss development characteristics of the specific line of business. The actuarial methods we utilize include:
reliable loss development history, a development pattern based on the company’s historical indications may be used to develop losses to ultimate values.
The Company has underwritten the ACAC Quota Share segment since March 1, 2010. ACAC'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 ACAC were owned by GMAC. As a result, we believe the possible variance of our expected loss ratio for all applicable loss years for the ACAC Quota Share segment was approximately one percentage point as of December 31, 2012. If our final loss ratio for the ACAC Quota Share segment were to vary by approximately one percentage point from the expected loss ratios in the aggregate, our required reserves after reinsurance recoverable would increase or decrease by approximately $6.5 million.
The Company provides proportional and non-proportional reinsurance coverage to cedants (insurance companies). In most cases, cedants seek protection for business that they have not yet written at the time they enter into reinsurance agreements and thus have to estimate the volume of premiums they will cede to the Company. Reporting delays are inherent in the reinsurance industry and vary in length by type of treaty. As delays can vary from a few weeks to a year or sometimes longer, the Company produces accounting estimates to report premiums and commission and other acquisition expenses until it receives the cedants’ actual results.
Commission and other acquisition expenses represent the costs of writing business that vary with, and are primarily related to, the production of insurance and reinsurance business. Policy and contract commission and other acquisition expenses, including assumed commissions and other direct operating expenses are deferred and recognized as expense as related premiums are earned. The Company considers anticipated investment income in determining the recoverability of these costs and believes they are fully recoverable. A premium deficiency at segment level is recognized if the sum of anticipated losses and loss adjustment expenses, unamortized acquisition expenses and anticipated investment income exceed unearned premium.
The Company currently classifies its fixed maturity investments as AFS, other investments at fair value in accordance with FASB ASC Topic 944, “Financial Services” (“ASC 944”) and short-term investments as AFS. Pursuant to U.S. GAAP, these investments are carried at estimated fair value, with net unrealized gains or losses excluded from earnings and included in shareholders’ equity as a component of accumulated other comprehensive (loss) income.
Non-U.S. government bonds: Comprised of bonds issued by non-U.S. governments and their agencies along with supranational organizations. These securities are generally priced by pricing services. The pricing services may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical models which may incorporate spreads, interest rate data and market/sector news. As the significant inputs used to price non-U.S. government bonds are observable market inputs, the fair values of non-U.S. government bonds are included in the Level 2 fair value hierarchy.
Corporate bonds: Comprised of bonds issued by corporations that on acquisition are rated BBB-/Baa3 or higher. These securities are generally priced by pricing services. The fair values of corporate bonds that are short-term are priced, by the pricing services, using the spread above the London Interbank Offering Rate ("LIBOR") yield curve and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker/dealers, trade prices and the new issue market. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker dealers. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.
Municipal bonds: Municipal bonds comprise bonds and auction rate securities issued by U.S. state and municipality entities or agencies. The fair values of municipal bonds are generally priced by pricing services. The pricing services typically use spreads obtained from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the municipal bonds are observable market inputs, municipals are classified within Level 2. Municipal auction rate securities are reported in the Consolidated Balance Sheets at cost which approximates their fair value.
Reinsurance balance receivable: The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value due to short term nature of the assets.
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, 2012, the fair value of the 2011 Senior Notes was $112.8 million and the fair value of the 2012 Senior Notes was $105.6 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 (“OCI”), 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, 2012, 2011 and 2010.
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, 2012 of $94.4 million.
In making an assessment of the value of its goodwill and intangible assets, the Company uses both market based and non-market based valuations. Assumptions underlying these valuations include an analysis of the Company’s share
price relative to both its book value and its net income in addition to forecasts of future cash flows and future profits. Significant changes in the data underlying these assumptions could result in an assessment of impairment of the Company’s goodwill asset. In addition, if the current economic environment and/or the Company’s financial performance were to deteriorate significantly, this could lead to an impairment of goodwill and intangible, the write-off of which would be recorded against net income in the period such deterioration occurred. If a 5% decline in the fair value of the reporting units occurred, this would not result in an impairment of the goodwill asset at December 31, 2012.
In 2012, net income 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 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 Preference Shares.
Net income attributable to Maiden common shareholders for the year ended December 31, 2011 was $28.5 million compared to $69.9 million for the same period in 2010. The lower result in 2011 was due to charges related to the 2011 Senior Note Offering which include $15.1 million of junior subordinated debt repurchase expense and $20.3 million of accelerated amortization of junior subordinated debt discount and issuance costs. The 2011 results reflect continued strong premium growth in all of the Company’s operating segments, offset by higher combined ratios in each of its segments. The 2011 results include $9.5 million in losses related to thunderstorm and tornado activity across the U.S. in the second quarter, net of the Company’s quarterly provisions for normalized catastrophe activity. In addition, the lower result reflects realized and unrealized gains on investments of $0.5 million in 2011 compared to realized and unrealized gains on investments of $6.6 million in 2010.
Growth on recurring business in the AmTrust Quota Share Reinsurance segment - 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
Growth in the ACAC Quota Share segment - For the year ended December 31, 2012, net premiums written increased by $39.5 million or 15.4% compared to the year ended December 31, 2011, as ACAC continues to expand its business.
Maiden Bermuda and IIS also decreased their written premium by $15.4 million or 12.0% during the year ended December 31, 2012compared to December 31, 2011, largely due to non-renewals of certain accounts which were partially offset by new account activity.
Continued underwriting discipline by Maiden US. Maiden US continues to maintain its underwriting discipline in the face of ongoing significant market competition. However, Maiden US continues to see demand for its products and the year ended December 31, 2011, was successful in securing a series of new accounts and experienced strong organic growth, which resulted in increased premiums of $167.4 million, or 33.4% during the year.
Growth in the AmTrust Quota Share Reinsurance segment premium. The commencement of the European Hospital Liability Quota Share increased premiums written by $95.3 million in the year ended December 31, 2011, while the business assumed under the Reinsurance Agreement increased $106.0 million in the year ended December 31, 2011.
Growth in the ACAC Quota Share segment. 2011 includes a full year of results compared to only ten months in 2010, resulting in growth of $50.5 million or 24.5% for the year ended December 31, 2011 compared to 2010.
Excluding the business associated with the European Hospital Liability Quota Share, $197.9 million or 49.4% of the increase in net premiums written for the year ended December 31, 2011 compared to the same period in 2010 was attributable to the automobile line of business, primarily personal auto.
Growth in the AmTrust Quota Share Reinsurance segment - The commencement of the European Hospital Liability Quota Share on April 1, 2011 increased premiums earned by $49.4 million or 72.6% for the year ended December 31, 2012 compared to the year ended December 31, 2011, while the business assumed under the Reinsurance Agreement increased $120.2 million or 24.5% for the year ended December 31, 2012 compared to the year ended December 31, 2011.
Net premiums earned increased by $382.6 million, or 32.7%, for the year ended December 31, 2011 compared to the year ended December 31, 2010. The table below compares net premiums earned by segment for the years ended December 31, 2011 and 2010.
First full calendar year of the IIS Acquisition. The IIS Acquisition was completed on November 30, 2010 and thus the year ended December 31, 2011 represents the first full calendar year of operations for the business associated with the IIS Acquisition, which contributed $107.3 million of the overall increase in net premiums earned year ended December 31, 2011 compared to 2010.
Growth in the AmTrust Quota Share Reinsurance segment premium. The commencement of the European Hospital Liability Quota Share on April 1, 2011 increased premiums earned by $68.1 million for the year ended December 31, 2011 while the business assumed under the Reinsurance Agreement increased $45.0 million for the year ended December 31, 2011 compared to the year ended December 31, 2010, respectively.
Other insurance revenue represents the IIS Fee Business, which consists primarily of commissions on German auto business produced, that is not directly associated with premium revenue assumed by the Company and 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.
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. government agency mortgage-backed securities portfolio, resulting in increased levels of amortization of bond premiums by $5.1 million in 2012 compared to 2011.
Net Realized and Unrealized Gains (Losses) on Investments - Net realized gains on investments were $1.9 million for the year ended December 31, 2012 compared to net realized and unrealized gains of $0.5 million for the year ended December 31, 2011, see "Liquidity and Capital Resources - Investments" on page 103 for further information.
*Ratio of net investment income over average invested assets, at fair value, including cash and cash equivalents and loan to related party.
Continued growth in the overall book of business combined with positive cash flow from operations contributed to the growth in invested assets. Despite the Company's premium growth and the increase in average invested assets, investment income grew at a slower rate in 2011 compared to 2010 reflecting:
the continued significant accumulation of cash and cash equivalents which occurred during 2011 and 2010 due largely to continuing strong operating cash flow; and
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 ACAC Quota Share segment.
Net loss and loss adjustment expenses increased by $288.0 million, or 38.1%, for the year ended December 31, 2011 compared to the same period in 2010, primarily reflecting the continuing growth in the Company as a result of the commencement of the ACAC Quota Share in 2010 and the continuing growth of the AmTrust Quota Share in 2011compared to 2010.
The total favorable development relating to the loss portfolio transfers since the closings of the GMAC Acquisition and the IIS Acquisition has been $68.9 million and the remaining $2.6 million is recorded as a deferred gain and is part of the Company’s reserve for loss and loss adjustment expenses at December 31, 2011 that are included in the accompanying Consolidated Balance Sheet. Included in the total favorable development were amortized gains from the loss portfolio acquired as part of the GMAC Acquisition and the IIS Acquisition, recorded as a reduction of losses incurred of $28.9 million and $25.3 million for the years ended December 31, 2011 and 2010, respectively.
Salary and employee welfare costs, including share compensation expense, increased approximately $7.9 million due to the 50 additional employees added in November 2010 as part of the IIS Acquisition;
Legal, audit and other professional fees decreased by $1.1 million - decreases in fees, primarily legal, arising due to smaller number and scale non-recurring activities in 2011 offset partially by increases relating to additional overseas locations;
Travel and office related expenses increased by $1.9 million, substantially all related to full years expenses relating to employees and offices acquired as part of the IIS Acquisition on November 30, 2010; and
The interest and amortization expense for the years ended December 31, 2012, 2011 and 2010 comprises:
The Company recorded a deferred tax expense of $1.1 million, $1.3 million and $1.2 million for the years ended December 31, 2012, 2011 and 2010, respectively. These amounts are related to the goodwill associated with the Company’s acquisition of its U.S. subsidiaries in the GMAC Acquisition. The effect of this expense will be reversed as: (1) we develop U.S. taxable income to permit recognition of the net deferred tax asset; and (2) the amortization period of the goodwill for tax purposes is exhausted.
The results of operations for our three segments, Diversified Reinsurance, AmTrust Quota Share Reinsurance and ACAC Quota Share are discussed below.
Results of this segment include the results of operations from the IIS Acquisition, which completed its first full year of operations in 2011. The following table summarizes the underwriting results and associated ratios for the Diversified Reinsurance segment for the years ended December 31, 2012, 2011 and 2010:
The combined ratio increased to 102.5% for the year ended December 31, 2012 compared to 97.1% in 2011. As noted, catastrophic losses increased this segments combined ratios in 2012 and 2011, 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 segment combined ratios by 3.6% and 1.2% in 2012 and 2011, respectively.
Excluding losses from catastrophic events, combined ratios were 98.9% and 95.9% for the years ended December 31, 2012 and 2011, respectively. The increased net loss and loss adjustment expense ratios were primarily the result of
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.
Excluding losses from catastrophic events, net loss and loss adjustment expense ratios were 68.7% and 64.8% 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. In addition to the lower amortized gains in 2012, the higher net loss and loss adjustment expense ratios were also impacted by higher current underwriting year loss ratios in both Maiden US and the international business written from the IIS Acquisition, in particular German Auto, as well as development from business written by Maiden Bermuda in prior years.
These increases were offset by the impact of loss sensitive features on ceding commission in the segment, in particular business written by Maiden US, due to higher loss ratios in 2012 from the impact of both Superstorm Sandy and non-catastrophe underwriting results. For the year ended December 31, 2012, 54.8% of the Maiden US net premiums written have loss sensitive features, which results in lower ceding commissions when loss ratios increase. For the year ended December 31, 2012, the net effect of loss sensitive features on Maiden US reinsurance contracts reduced ceding commission by $10.4 million, compared to $10.7 million for the year ended December 31, 2011.
Thus despite the increase in commission and other acquisition expenses in 2012 compared to 2011, the commission and other acquisition expense ratio decreased to 25.1% for the year ended December 31, 2012 compared to 26.3% in 2011.
The IIS Acquisition was completed on November 30, 2010 and the year ended December 31, 2011 represents the first full year of operations, which accounted for $76.2 million of the increase in net premiums written. For the year ended December 31, 2011, approximately 68.1% of the net premiums written of the International line of business was Personal Automobile business associated with the IIS Acquisition. The remainder of the net premiums written in the International line of business was Credit Life business associated with the IIS Acquisition. Further, approximately 50.5% of the net premiums written in the International line of business originated in Germany. No other country in International exceeded 10% of net premiums written for the year ended December 31, 2011. In addition, the business written by Maiden US experienced strong growth in the year ended December 31, 2011 of $167.4 million or 33.4% compared to the same period in 2010, when certain accounts were not renewed or more premiums was retained by clients. A series of new accounts were successfully added in 2011, both quota share and excess of loss, accounting for the increase in this business.
Other Insurance Revenue - Other insurance revenue of $12.6 million represents the IIS Fee Business that is not directly associated with premium revenue generated by the Company. The year ended December 31, 2011 represents the first full calendar periods of operations for the IIS Fee Business and is primarily in respect of the German auto business produced by OVS.
The total favorable development relating to the loss portfolio transfer since the closing of the GMAC Acquisition and the IIS Acquisition has been $68.9 million and the remaining $2.6 million is recorded as a deferred gain in the Company’s reserve for loss and loss adjustment expenses at December 31, 2011 that are included in the accompanying Consolidated Balance Sheet.
On March 7, 2013, after receipt of approval from each of the Company’s and AmTrust’s Audit Committee, 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, excluding workers’ compensation business included in the AmTrust’s Specialty Program segment from July 1, 2007 through December 31, 2012, 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%. 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.
On April 1, 2011, the Company entered into a separate one-year 40% quota share agreement with AmTrust Europe Limited and AmTrust International Underwriters Limited to cover those entities medical liability business in Europe ("European Hospital Liability Quota Share"), substantially all of which is in Italy. The Company's maximum limit of liability is €2 million and it will pay a ceding commission of 5.0% plus a profit share as defined in the agreement. The profit sharing is based upon the reinsured exceeding defined underwriting performance of each contract year, commencing two years after the beginning of each contract year. To the extent that the underwriting performance is exceeded, the Company will share 50% of the excess amounts computed. Pursuant to the terms of the European Hospital Liability Quota Share, the Company assumed the in-force and unearned premium as of April 1 which totaled $45.9 million. The business written under this agreement is included in the Specialty Risk and Extended Warranty line of business in the discussion that follows. As a result of the additional agreement with AmTrust, this segment has been renamed AmTrust Quota Share Reinsurance.
Effective January 1, 2012, the European Hospital Liability Quota Share was amended, thereby increasing the maximum liability attaching to €10,000 or currency equivalent (on a 100% basis) per original claim for any one original policy. Furthermore, amendments were also made to the contract to expand the territorial scope to include new territories, specifically France.
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 increase in earned premium reflects and is consistent with the growth in written premiums described above.
General and Administrative Expenses - General and administrative expenses increased by $0.8 million, or 52.2%, for the year ended December 31, 2011 compared to 2010. The general and administrative expense ratio also increased to 0.4% for the year ended December 31, 2011 compared to 0.3% for the year ended December 31, 2010. The overall expense ratio (including commission and other acquisition expenses) was 29.2% and 32.8% for the years ended December 31, 2011 and 2010, respectively, reflecting the changes in the commission and other acquisition expense ratio.
The following table summarizes the underwriting results and associated ratios for the ACAC Quota Share segment for the years ended December 31, 2012 and 2011 and for the period March 1 to December 31, 2010:
Net premium earned increased by $34.9 million, or 14.2% for the year ended December 31, 2012 compared to the year ended December 31, 2011, as a result of the increase in premium written. The table below details net premiums earned by line of business in this segment for the years ended December 31, 2012 and 2011:
Loss and Loss Adjustment Expenses - Net losses and loss expenses increased by $23.3 million or 14.5% for the year ended December 31, 2012 compared to December 31, 2011. As noted above, in October 2012, ACAC incurred losses from Superstorm Sandy. Our share, net of inuring reinsurance, under the ACAC Quota Share was $2.0 million, which increased the net loss and loss adjustment expense ratio for the year ended December 31, 2012 by 0.7%. Excluding losses from Superstorm Sandy, net loss and loss adjustment expense ratios decreased to 64.8% for the year ended December 31, 2012 compared to 65.3% for the year ended December 31, 2011.
Net premium earned increased by $122.3 million, or 99.1% for the year ended December 31, 2011 compared to the period ended December 31, 2010. The table below details net premiums earned by line of business in this segment for the year ended December 31, 2011 and for the period from March 1 to December 31, 2010:
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 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. A summary of cash flows provided by (used in) operating, investing and financing activities for the years ended December 31, 2012, 2011 and 2010 is as follows:
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 $637.5 million during the year ended December 31, 2012 compared to $13.3 million provided by investing activities for the ended December 31, 2011. Despite the current interest rate environment which continues to provide historically low fixed income yield levels, 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. Continuation of current market conditions however, may result in the Company accumulating elevated levels of cash and cash equivalents which may result in slower growth in investment income and in certain instances, reductions in investment income despite the increase in invested assets. During the year ended December 31, 2012, the purchases of fixed maturity securities exceeded the proceeds of sales, maturities and calls of such instruments by $619.2 million. Investing cash flows consist primarily of proceeds on the sale or maturity of fixed-maturity investments and payments for fixed-maturity investments acquired.
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 offering clients the additional security a collateralized arrangement offers. We believe this offers the Company a significant competitive advantage and improves the Company’s retention of high-quality clients. As a result of the transition of relationships as a result of the GMAC Acquisition, as of December 31, 2012 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.
The following table details additional information on those assets as of December 31, 2012 and 2011:
As part of the Reinsurance Agreement, Maiden Bermuda has also loaned funds to AmTrust totaling $168.0 million as of December 31, 2012 and December 31, 2011, respectively, to satisfy collateral requirements with AII.
The substantial majority of the premiums and losses underwritten by GMAC IICL are subject to collateral requirements in the form of letters of credit and trust agreements. At the closing of the IIS Acquisition, the Company settled cash balances applicable to the subject reinsurance contracts with GMAC IICL of $26.2 million. Actual assets in support of the liabilities assumed under the IICL Agreement have been transferred to the Company when the subject individual agreements were novated to Maiden Bermuda.Until such time, under the funds withheld provisions of the IICL Agreement, the Company is fully credited for the investment income earned by the underlying assets which support the letters of credit and trust agreements GMAC IICL has provided to its ceding companies. As of December 31, 2012, one contract had not yet been novated and this is expected to occur in 2013. Maiden Bermuda now provides collateral in the form of both trusts and letters of credit as required by the respective reinsurance contracts.
The pre-existing funds withheld amounts (“IIS Funds Withheld”) and cash transferred to GMAC IICL are included in the Consolidated Balance Sheet as Funds Withheld. During 2011, the substantial majority of underlying reinsurance contracts were novated to Maiden Bermuda per the terms of the IICL Agreement. As of December 31, 2012 and December 31, 2011, the IIS Funds Withheld balance consisted of the following:
See our Consolidated Financial Statements and notes thereto and required financial statement schedules commencing on pages through and S-1 through S-7 below.