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 16 properties worldwide, the majority of which consist of commercial office space. Our properties are not segregated by segment. We own significant properties in the United States in the states of California, Colorado, Connecticut, Florida, Ohio and Texas and internationally in the United Kingdom.
We lease approximately 876,300 square feet throughout the United States and internationally. These leases are generally short-term to medium-term leases for commercial office space.
The following tables set forth our selected historical consolidated financial and operating information for the periods ended and as of the dates indicated. The selected consolidated income statement data for the years ended December 31, 2015, 2014 and 2013 and the balance sheet data as of December 31, 2015 and 2014 are derived from our audited financial statements included elsewhere in this report, which have been audited by BDO USA, LLP, our independent auditors. These historical results are not necessarily indicative of results to be expected from any future period. You should read the following selected consolidated financial information together with the other information contained in this report, including “
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. Additionally, our Specialty Risk and Extended Warranty segment may be impacted by 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 net combined ratio. Our return on equity was 22.7%, 28.4% and 22.5% for the years ended December 31, 2015, 2014 and 2013, respectively. Our overall financial objective is to produce a return on equity of 15.0% or more over the long term. In addition, we target a net 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 net combined ratio was 91.0%, 90.7% and 90.5% for the years ended December 31, 2015, 2014 and 2013, respectively. A key factor in achieving our targeted net combined ratio
Investment income is also an important part of our business. Because the period of time between our receipt of premiums and the ultimate settlement of claims is often several years or longer, we are able to invest cash from premiums for significant periods of time. Our net investment income was $156.3 million, $131.6 million and $84.8 million for the years ended December 31, 2015, 2014 and 2013, respectively. We held 18.9% and 19.7% of total invested assets in cash and cash equivalents as of December 31, 2015 and 2014, respectively.
During 2015 and 2014, we have made the following significant acquisitions:
On October 7, 2015, we acquired Springfield Insurance Company and its affiliates, Springfield Insurance Company Ltd. and Unified Grocers Insurance Services (collectively, "Springfield") for approximately $26.6 million in cash and a contingent earn-out valued at $5.0 million as of the acquisition date. Springfield, domiciled in California, is an insurance carrier providing workers' compensation and commercial package insurance to Unified Grocers Inc., an association of independently owned grocery stores, its members and its customers. We are in the process of completing our acquisition accounting and expect to have it completed in 2016. The goodwill and intangible assets, as well as Springfield's results of operations, will be included as a component of the Small Commercial Business segment. As a result of this acquisition, we recorded approximately $3.2 million of gross written premium and $0.6 million of service and fee income during the year ended December 31, 2015.
On March 2, 2015, we acquired CorePointe Insurance Company ("CorePointe") for approximately $68.8 million. CorePointe, a Michigan-based specialty property and casualty insurance company, markets commercial package insurance products primarily to automobile and motorcycle dealerships and auto repair shops. The majority of CorePointe's insurance products and services are distributed through managing general agents ("MGAs") with whom it has long-standing relationships. As a result of the acquisition, we recorded intangible assets in the amount of approximately $2.7 million, which consisted of approximately $1.2 million related to the valuation of the acquired loss and loss adjustment expense reserve and approximately $1.5 million for state licenses. Additionally, we recognized a gain of approximately $5.8 million related to the acquisition. CorePointe's results of
In January 2014, we entered into a cut through quota share reinsurance agreement (the “Cut Through Reinsurance Agreement”) with Tower Group International, Ltd. (“Tower”) to provide a 100% quota share for a majority of Tower's in force commercial lines policies and most new and renewal commercial lines business. At the inception of the Cut Through Reinsurance Agreement, we initially assumed $174 million of unearned premium. During 2014, we assumed approximately $475 million of premium, earned approximately $387 million of premium, and incurred approximately $225 million of loss and loss adjustment expense, respectively, related to the Cut Through Reinsurance Agreement. During the year ended December 31, 2014, we also incurred approximately $92 million of commission expense and approximately $16 million of unallocated claims expense as part of the Cut Through Reinsurance Agreement. Additionally, we recorded approximately $34 million of prepaid claim expense as of December 31, 2014, which is reported as a component of other assets.
In conjunction with ACP Re, Ltd.'s (“ACP Re”) merger with Tower, on September 15, 2014, we entered into various agreements with Tower including, primarily, a renewal rights agreement and a quota share reinsurance agreement. Based on the terms of the renewal rights agreement, we are required to pay a maximum amount of $30 million over a three year period based on 3% of gross written premium of the Tower commercial lines business. The quota share reinsurance agreement allows us to reinsure 100% of all losses for Tower’s new and renewal commercial lines business written after September 15, 2015. The quota share agreement replaced the Cut Through Reinsurance Agreement. As a result of the renewal rights transaction, we generated approximately $370 and $133 million of gross written premium for the year ended December 31, 2015 and 2014, respectively. Additionally, we loaned ACP Re $125 million to finance its purchase of Tower.
In addition to these acquisitions, our results of operations for 2014 compared to 2013 include references to the following entities acquired prior to 2014: AmTrust at Lloyd’s Limited (“AmTrust at Lloyds”), AMTCS Holdings, Inc. (“AMTCS”), Sequoia Insurance Company (“Sequoia”) and Car Care Plan (Holdings) Limited (“CCPH”).
We have an approximate 12% ownership interest in National General Holding Corp. (“NGHC”). NGHC is a publicly-held specialty personal lines insurance holding company (Nasdaq: NGHC) that operates fifteen insurance companies in the United States and provides a variety of insurance products, including personal and commercial automobile, homeowners and umbrella, supplemental health, lender-placed and other niche insurance products. As of December 31, 2015, NGHC's two largest stockholders are The Michael Karfunkel 2005 Family Trust (the “Trust”) and Michael Karfunkel individually. Michael Karfunkel is the Chairman of our Board of Directors and the father-in-law of Barry D. Zyskind, our President and Chief Executive Officer. The ultimate beneficiaries of the Trust include Michael Karfunkel’s children, one of whom is married to Mr. Zyskind. In addition, Michael Karfunkel is the chairman, president and chief executive officer of NGHC. In accordance with ASC 323-10-15, Investments-Equity Method and Joint Ventures, we account for our investment in NGHC under the equity method as we have the ability to exert significant influence on NGHC's operations. We recorded $25.4 million, $28.4 million and $11.6 million of income during the years ended December 31, 2015, 2014 and 2013, respectively, related to our equity investment in NGHC.
A life settlement contract is a contract between the owner of a life insurance policy and a third-party who obtains the ownership and beneficiary rights of the underlying life insurance policy. The LSC Entities may also acquire premium finance loans made in connection with the borrowers’ purchase of life insurance policies that are secured by the policies. The LSC Entities acquire the underlying policies securing the loan through the borrowers’ voluntary surrender of the policy in satisfaction of the loan or foreclosure. A third party serves as the administrator of the Tiger and AMTCH II life settlement contract portfolios, for which it receives an administrative fee. The third party administrator is eligible to receive a percentage of profits after certain time and performance thresholds have been met. We provide certain actuarial and finance functions related to the LSC Entities. In conjunction with our 12.0% ownership percentage of NGHC, we ultimately receive 56.0% of the profits and losses of the LSC Entities. As such, in accordance with ASC 810-10, Consolidation, we have been deemed the primary beneficiary and, therefore, consolidate the LSC Entities.
Servicing carrier - We act as a servicing carrier for workers’ compensation assigned risk plans in multiple states. In addition, we also offer claims adjusting and loss control services for fees to unaffiliated third parties.
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.
Asset management services - We currently manage the investment portfolios of certain subsidiaries of Maiden, NGHC, and ACP Re, Ltd. for which we receive a management fee.
Net Expense Ratio. The net 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 premiums earned. As we allocate certain acquisition costs and other underwriting expenses based on premium volume to our segments, net loss ratio on a segment basis may be impacted period over period by a shift in the mix of net written premium.
Return on Equity. We calculate return on equity by dividing net income by the average of stockholders’ equity.
Loss development factors are a key assumption underlying many of the actuarial methods utilized. Loss development factors are the ratio of losses at successive evaluations for a defined group of claims (e.g., accident year, accident quarter, etc.). 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 dependent on consistent underwriting, claims handling, and inflation, among other factors, and predictable legislatively and judicially imposed legal requirements. If all things remain equal, losses incurred in 2015 should develop similarly to losses incurred in 2014 and prior years over comparable time periods. However, due to the inherent uncertainty in the loss development factors, future development may differ significantly from past development.
In the event of a 5% increase in claims frequency (all other things remaining equal) as measured by our workers' compensation insureds’ payroll, which we believe is the most important assumption regarding our business, our loss reserves as of December 31, 2015 would be understated by $52 million and would result in an after tax reduction in stockholders’ equity of $34 million. In the event of a 5% increase in claim severity (all other things remaining equal), which is the average incurred loss per claim, our loss and loss adjustment expense reserves would be understated by $35.3 million and would result in an after tax reduction in stockholders’ equity of $22.9 million.
Extended Warranty segment because our warranty claims are short-tailed . Claims are generally reported immediately after they occur and are closed within months of reporting. In the Specialty Risk and Extended Warranty segment, the reserve for unearned premium is an estimate of our liability for projected future losses emanating from the unearned portion of written policies and is inherently more uncertain than the IBNR reserve. Approximately 52.6% of polices written have policy terms exceeding one year. A portion of these policies are not earned on a straight line over the contract period. Those policies are earned over the period of risk in proportion to the amount of insurance protection provided. As of December 31, 2015, we had unearned premium of approximately $682 million on these policies. An upward/downward movement of 5% on the entire pool of the earn out pattern for these policies would result in an increase/decrease in unearned premium of approximately $34.1 million. In 2015, we had no material changes to prior period estimates of these claim patterns. Our liability for return of unearned premium is not significant.
Additional information regarding our reserves for loss and loss adjustment expenses can be found in “Item 1A. Risk Factors” and “Item 1. Business - Loss Reserves.”
liquid due to lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction could occur. Fair values of other financial instruments approximate their carrying values. We report fixed maturity securities and equity securities classified as available-for-sale at their estimated fair values based on quoted market prices or a recognized pricing service, with unrealized gains and losses, net of tax effects, reported as a separate component of comprehensive income in stockholders’ equity. Equity securities classified as trading securities are stated at estimated fair market value. Gains and losses, both realized and unrealized, are included in the net realized gain or loss on investment on the consolidated statement of income. For both available-for-sale and trading securities, we determine realized gains and losses on the specific identification method.
Income Taxes. We file a consolidated United States ("US") 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 US 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, earned but unbilled premiums, and unrealized holding gains and losses on marketable equity securities. 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.
Gross Written Premium. Gross written premium increased $711.6 million, or 11.7%, to $6,799.5 million from $6,088.0 million for the years ended December 31, 2015 and 2014, respectively. The increase of $711.6 million is attributable to growth in all three of our segments, both organically and from the acquisitions of CorePointe, Springfield and Warranty Solutions. The majority of the increase in the Small Commercial Business segment was attributable to an increase in the number of workers' compensation policies issued, partially offset by the assumption of $199.7 million of non-recurring premium during the first quarter of 2014 as part of the cut through reinsurance agreement with Tower. The largest increases came from the states of California, Florida and New York. The increase in the Specialty Program segment resulted primarily from expansion of our existing programs. The majority of the increase in our Specialty Risk and Extended Warranty segment resulted from growth in our domestic business from expansion of existing programs, which was partially offset by declines in gross written premium in our European business due to the strengthening of the U.S. dollar relative to the Euro and British Pound.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses increased $339.6 million, or 14.5%, to $2,682.2 million for the year ended December 31, 2015 from $2,342.6 million for the year ended December 31, 2014. Our loss ratio for the years ended December 31, 2015 and 2014 was 66.7% and 66.4%, respectively. The loss ratio remained stable for the year ended December 31, 2015 compared to the year ended December 31, 2014 as current accident year selected ultimate losses remained consistent with selected ultimate losses from prior years. During the second half of 2015, our loss ratio increased in our Specialty Risk and Extended Warranty segment, which resulted from a revision to our ultimate losses on certain casualty lines in our European business due to an increase of our carried incurred but not reported claim reserves. The increase in the Specialty Risk and Extended Warranty loss ratio was partially offset by our Small Commercial Business segment's loss ratio, which decreased as a result of improved pricing on policy issuances combined with stable claims frequency and severity. We did not have any material increases or decreases as a result of prior year loss development.
Interest Expense. Interest expense for the years ended December 31, 2015 and 2014 was $48.1 million and $45.9 million, respectively. The increase was primarily related to the issuance of $285 million of subordinated notes in 2015, partially offset by interest income of approximately $6.1 million related to our $125 million loan to ACP Re, which we entered into during the third quarter of 2014.
Provision for Income Tax. Income tax expense was $66.3 million for the year ended December 31, 2015, which resulted in an effective rate of 12.0%. Income tax expense was $53.7 million for the year ended 2014, which resulted in an effective tax rate of 11.4% for the year ended December 31, 2014. During 2015, our provision for income tax benefited from a return to provision adjustment during the third quarter of approximately $80 million, or 13.7%. The return to provision was driven primarily by changes in permanent transfer pricing tax adjustments. Our effective tax rate was favorably impacted for 0.4% and 19.6% during the years ended December 31, 2015 and 2014, respectively, related to the reduction of our net deferred tax liability associated with the equalization reserves of our Luxembourg reinsurers, which was approximately $2 million and $92 million in 2015 and 2014, respectively. The deferred tax liabilities attributable to Luxembourg reinsurers included a valuation allowance of approximately $81 million and $0 million at December 31, 2015 and 2014, respectively. The valuation allowance was the result of our current inability to generate sufficient future income in Luxembourg in order to fully utilize the NOLs incurred to date. Absent the impact of the equalization reserves, our effective tax rates would have been 12.4% and 31.0% for the years ended December 31, 2015 and 2014, respectively.
Gross Written Premium. Gross written premium increased $1,971.1 million, or 47.9%, to $6,088.0 million from $4,116.9 million for the years ended December 31, 2014 and 2013, respectively. The increase of $1,971.1 million was attributable to growth in all three of our segments and we grew both organically as well as from acquisitions. The increase in Small Commercial Business resulted primarily from the assumption of premium through the Cut Through Reinsurance Agreement with Tower, the acquisitions of Comp Options, FNIC, Insco Dico, and Sequoia, and increases in the number of policies issued. The largest increases came from the states of California, Florida, New Jersey and New York. The increase in Specialty Risk and Extended Warranty resulted from the acquisition of AmTrust at Lloyd's in 2013 and expansion of existing programs in the U.S. The increase in Specialty Program resulted primary from growth in existing programs.
Net Realized Gains (Losses) on Investments. We had net realized gains on investments of $16.4 million and $15.5 million for the years ended December 31, 2014 and 2013, respectively. We impaired approximately $8.0 million and $2.9 million of investments in 2014 and 2013, respectively, which reduced our overall gains. The increase in realized gains, excluding impairments, resulted primarily from having a larger portfolio of investments in 2014 compared to 2013.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $323.8 million, or 60.7%, to $856.9 million for the year ended December 31, 2014 from $533.2 million for the year ended December 31, 2013. Acquisition costs and other underwriting expenses were reduced in each period by ceding commission primarily earned through the Maiden Quota Share, whereby we receive a ceding commission of 31% of premiums ceded for all business except retail commercial package business, for which we receive a ceding commission of 34.375% for premiums ceded. The ceding commission earned during the years ended December 31, 2014 and 2013 was $405.1 million and $276.6 million, respectively. Ceding commission increased period over period as a result of increased premium writings and was reasonably consistent period over period as a percentage of ceded earned premiums. The expense ratio increased to 24.3% in 2014 from 23.5% in 2013 , and was impacted primarily by higher policy acquisition expenses in 2014 in our Specialty Risk and Extended Warranty segment.
Small Commercial Business Segment Results of Operations 2015 Compared to 2014
Gross Written Premium. Gross written premium increased $320.9 million, or 10.7%, to $3,320.7 million for the year ended December 31, 2015 from $2,999.7 million for the year ended December 31, 2014. The majority of the increase was attributable to an increase in the number of workers' compensation policies issued. Approximately 74% of this increase was from the states of California, Florida and New York. Additionally, the acquisition of Comp Options contributed approximately $46 million of incremental gross written premium for the year ended December 31, 2015. Absent the assumption of $199.7 million of non-recurring premium during the first three months of 2014, primarily related to our cut through reinsurance agreement with Tower, gross written premium would have increased by $520.6 million, or 17.4%.
Net Earned Premium. Net earned premium increased $280.1 million, or 17.4%, to $1,886.9 million for the year ended December 31, 2015 from $1,606.8 million for the year ended December 31, 2014. As premiums written are earned ratably over an annual period, the increase in net earned premium resulted from higher net written premium for the year ended December 31, 2015 compared to the year ended December 31, 2014, and premium assumed in 2014 through the cut through reinsurance agreement with Tower, which was not subject to the Maiden Quota Share.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $68.9 million, or 16.5%, to $485.9 million for the year ended December 31, 2015 from $417.0 million for the year ended December 31, 2014. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the years ended December 31, 2015 and 2014 of $261.2 million and $197.7 million, respectively. The ceding commission increased period over period as a result of an increase in net earned premium, as the segment received a larger allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio decreased to 25.8% for the year ended December 31, 2015 compared to 25.9% for the year ended December 31, 2014. The slight decrease in the expense ratio related to the increase in the percentage of worker's compensation policies, which have lower policy acquisition costs, in relation to the total number of policies issued in the segment during the second half of the 2015.
Gross Written Premium. Gross written premium increased $1,339.7 million, or 80.7%, to $2,999.7 million for the year ended December 31, 2014 from $1,660.0 million for the year ended December 31, 2013. The majority of the increase, approximately $669 million, resulted from an increase in the number of policies issued as well as average policy size for both workers compensation policies and commercial package policies. Approximately 70% of this increase were from the states of California, Florida, New Jersey and New York. During 2014, we entered into the Cut Through Reinsurance Agreement with Tower, which resulted in our assumption of approximately $475 million of premium. Additionally, we wrote approximately $133 million of direct written premium from the renewal of Tower's commercial lines business. We also had incremental growth in gross written premium of approximately $90 million in 2014 related to the acquisitions of Comp Options, FNIC, Insco Dico and Sequoia.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $204.1 million, or 95.9%, to $417.0 million for the year ended December 31, 2014 from $212.8 million for the year ended December 31, 2013. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the years ended December 31, 2014 and 2013 of $197.7 million and $117.1 million, respectively. The ceding commission increased period over period as a result of an increase in net earned premium, as the segment received a larger allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio increased to 25.9% for the year ended December 31, 2014 compared to 25.5% for the year ended December 31, 2013. The slight increase in expense ratio period over period was attributable to higher policy acquisition costs in 2014 from changes in business mix, which resulted from the assumption
Gross Written Premium. Gross written premium increased $175.9 million, or 8.9%, to $2,158.9 million for the year ended December 31, 2015 from $1,983.1 million for the year ended December 31, 2014. We experienced growth in our U.S. business from new programs, expansion of existing lines of business and the assumption of unearned premium of approximately $48 million. The segment's European business was negatively impacted by currency fluctuations of approximately $156 million. Absent the impact of currency fluctuations, gross written premium for our European business would have increased by approximately $147 million for 2015 compared to 2014 as a result of an increase in warranty and Italian medical liability business.
Net Written Premium. Net written premium increased $117.1 million, or 8.8%, to $1,450.8 million from $1,333.7 million for the years ended December 31, 2015 and 2014, respectively. The increase in net written premium resulted from an increase of gross written premium for the year ended December 31, 2015 compared to the year ended December 31, 2014, as well as a consistent retention of gross written premium period over period. Our overall retention of gross written premium for the segment was 67.2% and 67.3% for the years ended December 31, 2015 and 2014, respectively.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expense increased $64.5 million, or 7.9%, to $882.3 million for the year ended December 31, 2015 from $817.8 million for the year ended December 31, 2014. Our loss ratio for the segment for the year ended December 31, 2015 increased to 67.6% from 66.4% for the year ended December 31, 2014. The increase in the loss ratio for the year ended December 31, 2015 resulted primarily from increases in selected ultimate losses for our European business for current and prior accident years resulting from the increase in our carried incurred but not reported claim reserves during the second half of 2015, which was offset by declines in our domestic selected ultimate losses compared to
selected losses in prior accident years. This increase was muted by consistent accident year selected ultimate losses compared to selected ultimate losses in prior accident years for our domestic business. We did not have any material increases or decreases as a result of prior year loss development.
Net Written Premium. Net written premium increased $389.7 million, or 41.3%, to $1,333.7 million from $944.1 million for the years ended December 31, 2014 and 2013, respectively. The increase in net written premium resulted from an increase of gross written premium for the year ended December 31, 2014 compared to the year ended December 31, 2013, as well as a higher retention of business during 2014 compared to 2013. Our overall retention of gross written premium for the segment was 67.3% and 62.5% for the years ended December 31, 2014 and 2013, respectively, as certain new programs written during the year ended December 31, 2014 are not covered by the Maiden Quota Share.
Net Earned Premium. Net earned premium increased $420.4 million, or 51.8%, to $1,232.2 million for the year ended December 31, 2014 from $811.8 million for the year ended December 31, 2013. As premiums written earn ratably over the term of a policy, the increase in net premium earned resulted from growth in net written premium in 2014 and 2013. The increase related to the assumption of approximately $222 million of unearned premium from the acquisition of AmTrust at Lloyd's in 2013, which consisted primarily of specialty property and casualty business and earned at a faster rate than warranty business in this segment.
Net Earned Premium Less Expenses Included in Combined Ratio (Underwriting Income). Net earned premium less expenses included in combined ratio increased to $160.7 million for the year ended December 31, 2014 compared to $115.1 million for the year ended December 31, 2013. This increase resulted primarily from an increase in the level of earned premium during the year ended December 31, 2014 compared to 2013, partially offset by a higher expense ratio during the year ended December 31, 2014 as compared to the year ended December 31, 2013.
Net Written Premium. Net written premium increased $136.7 million, or 18.5%, to $877.1 million for the year ended December 31, 2015 from $740.5 million for the year ended December 31, 2014. The increase in net written premium resulted from an increase of gross written premium for the year ended December 31, 2015 compared to the year ended December 31, 2014, partially offset by a lower retention of gross written premium during 2015 compared to 2014. Our overall retention of gross written premium for the segment was 66.5% and 67.0% for the years ended December 31, 2015 and 2014, respectively. The decrease in the retention of gross written premium in 2015 related to an increase in business written that is covered under the Maiden Quota Share.
Net Earned Premium. Net earned premium increased $151.2 million, or 22.3%, to $829.8 million for the year ended December 31, 2015 from $678.6 million for the year ended December 31, 2014. As premiums written are earned ratably over an annual period, the increase in net premium earned resulted from higher net written premium for 2015 compared to 2014.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses increased $109.4 million, or 24.0%, to $565.8 million for the year ended December 31, 2015 compared to $456.4 million for the year ended December 31, 2014. Our loss ratio for the segment for the year ended December 31, 2015 increased to 68.2% from 67.3% for the year ended December 31, 2014. The increase in the loss ratio resulted primarily from higher current accident year selected ultimate losses as compared to selected ultimate losses in prior accident years in certain general liability programs, and was partially offset by improved pricing. We did not have any material increases or decreases as a result of prior year loss development.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $44.9 million, or 24.5%, to $228.4 million for the year ended December 31, 2015 from $183.5 million for the year ended December 31, 2014. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the
years ended December 31, 2015 and 2014 by $123.0 million and $87.1 million, respectively. The ceding commission increased period over period as a result of an increase in net earned premium, as the segment received a larger allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio increased to 27.5% for the year ended December 31, 2015 from 27.0% for the year ended December 31, 2014. The increase in the expense ratio during 2015 related to the increase in the percentage of business in this segment derived from our commercial automobile and general liability businesses, which have higher policy acquisition costs than other types of business in this segment.
Gross Written Premium. Gross written premium increased $225.7 million, or 25.7%, to $1,105.2 million for the year ended December 31, 2014 from $879.5 million for the year ended December 31, 2013. The segment benefited primarily from the growth in existing programs, primarily in general liability and workers' compensation programs. Additionally, the segment had an increase of approximately 10% in gross written premium related to new programs.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses increased $101.4 million, or 28.6% , to $456.4 million for the year ended December 31, 2014 compared to $355.1 million for the year ended December 31, 2013. Our loss ratio for the segment for the year ended December 31, 2014 decreased to 67.3% from 68.2% for the year ended December 31, 2013. The decrease in the loss ratio for the year ended December 31, 2014 resulted primarily from a change in business mix. During the year ended December 31, 2014, we wrote a higher percentage of workers' compensation policies, which have lower ultimate loss selections than other types of policies issued in this segment. We did not have any material increases or decreases as a result of prior year loss development.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $44.9 million, or 32.4%, to $183.5 million for the year ended December 31, 2014 from $138.7 million for the year ended December 31, 2013. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the years ended December 31, 2014 and 2013 by $87.1 million and $76.3 million, respectively. Although ceding commission increased period over period, the segment received a smaller allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio increased to 27.0% for the year ended December 31, 2014 from 26.6% for the year ended December 31, 2013. The increase related primarily to receiving a smaller allocation of ceding commission in 2014 compared to 2013.
Net Earned Premium Less Expenses Included in Combined Ratio (Underwriting Income). Net earned premium less expenses included in combined ratio were $38.6 million and $26.7 million for the years ended December 31, 2014 and 2013, respectively. The increase of $12.0 million resulted primarily from an increase in earned premium and by a reduction in the combined ratio in 2014 compared to 2013.
Our investment portfolio, exclusive of our life settlement contracts, equity investment in unconsolidated related party subsidiaries, and other investments, is summarized in the table below by type of investment:
Other investments represented approximately 1.4% and 0.6% of our total investment portfolio as of December 31, 2015 and 2014, respectively. At December 31, 2015, other investments consisted primarily of real estate partnerships totaling $64.9 million, private limited partnerships totaling $21.2 million, an interest in a syndicated term loan of $6.3 million, and annuity and other investments totaling $6.7 million. At December 31, 2014, other investments consisted primarily of private limited partnerships totaling $13.3 million, an interest in a syndicated term loan of $13.0 million, and annuity and other investment of $4.9 million.
The impairment charges of our fixed-maturities and equity securities for the years ended December 31, 2015, 2014 and 2013 are presented in the table below:
Additionally, we had gross unrealized losses of $143.5 million related to fixed maturity securities and $8.8 million related to marketable equity securities as of December 31, 2015, none of which we deem to be OTTI.
As of December 31, 2015, we own 2,037 purchase lots of corporate bonds in the financial institutions, industrial and other sectors, which account for approximately 25.0%, 30.3% and 2.8%, respectively, and 58.1% in the aggregate of the total fair value of our fixed maturity securities and 24.0%, 55.9% and 6.3%, respectively, and 86.2% in aggregate of the total unrealized losses of our fixed maturity securities. We believe that the unrealized losses in these securities are the result, primarily, of general economic conditions and not the condition of the issuers, which we believe are solvent and have the ability to meet their obligations. Therefore, we expect that the market price for these securities should recover within a reasonable time. Additionally, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis.
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 of $8.8 million as of December 31, 2015 are not material to our financial position.
There are 2,011 securities at December 31, 2015 that account for the gross unrealized loss, none of which we deem to be OTTI. Significant factors influencing our determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent not to sell these securities and it being not more likely than not that we will be required to sell these investments before anticipated recovery of fair value to our cost basis.
We may generate liquidity through a combination of debt or equity securities issuances, as well as financing through borrowing and sales of securities. During 2015, we issued $487 million of common stock, $182.5 million of preferred stock and $285 million of debt. In 2014, we issued $185 million of preferred stock and completed a convertible debt exchange and issuance, which resulted in cash proceeds of approximately $68 million. Additionally, the borrowing capacity under our existing revolving credit facility is $350 million, and in 2015 we amended our £235 million (or $346 million) funds at Lloyd's credit facility to increase our borrowing capacity to £300 million (or $442 million).
capital to increase the surplus of our insurance subsidiaries, as well as for payment of claims and operating expenses, payment of interest and principal on our debt facilities, payment of any cash in settlement of our convertible senior notes submitted by holders for conversion, and other holding company expenses for at least the next twelve months. We anticipate net income from operations will create sufficient additional surplus at our insurance subsidiaries, which will fund our growth. However, if our growth attributable to potential acquisitions, internally generated growth or a combination of these, exceeds our projections, we may have to raise additional capital sooner to support our growth. If we cannot obtain adequate capital on favorable terms or at all, we may be unable to support future growth or operating requirements and, as a result, our business, financial condition and results of operations could be adversely affected.
Net cash provided by operating activities was approximately $990.8 million for the year ended December 31, 2015, compared to $1,142.5 million for the same period in 2014. The decrease in cash provided from operations from 2014 to 2015 resulted primarily from a reduction in deferred tax liabilities and increase in other assets in 2015 compared to 2014.
Net cash provided by financing activities was $781.8 million for the year ended December 31, 2015 compared to net cash used in financing activities in 2014 of $15.1 million. In 2015, we received proceeds of $487 million and $177 million from the issuance of common stock and preferred stock, respectively, and $285 million from the issuance of subordinated debt, which was partially offset by payments of $117 million for common and preferred stock dividends and $62 million for the settlement of convertible debt. In 2014, we paid approximately $293 million to settle repurchase agreements, approximately $68 million for preferred and common share dividends and approximately $59 million for share repurchases, which was partially offset by proceeds received of approximately $99 million and $179 million from the issuance of notes and preferred shares, respectively, as well as $120 million from borrowings under our revolving credit facility. Additionally, we received approximately $18 million from non-controlling interest capital contributions to our subsidiaries.
Borrowings under this facility bear interest at either the Alternate Base Rate or the LIBO rate. Borrowings bearing interest at a rate determined by reference to the Alternate Base Rate bear interest at (x) the greatest of (a) the administrative agent’s prime rate, (b) the federal funds effective rate plus 0.5%, or (c) the adjusted LIBO rate for a one-month interest period on such day plus 1.0%, plus (y) a margin ranging from 0.125% to 0.625%, adjusted on the basis of our consolidated leverage ratio. Eurodollar borrowings bear interest at the adjusted LIBO rate for the interest period in effect plus a margin ranging from 1.125% to 1.625%, adjusted on the basis of our consolidated leverage ratio.
Interest expense, including amortization of the deferred origination costs and fees associated with letters of credit, was approximately $3.7 million, $1.7 million, and $1.8 million for the years ended December 31, 2015, 2014 and 2013, respectively.
We use this £300 million (or $442.1 million) letter of credit facility to support our capacity at Lloyd’s as a member and/or reinsurer of Syndicates 2526, 1206 and 44 for the 2015 underwriting year of account, as well as prior open years of account. The facility is 35% secured by a pledge of a collateral account.
As of December 31, 2015, we had outstanding letters of credit of £295.4 million (or $435.3 million) in place under this letter of credit facility. The aggregate unutilized amount under the facility was £4.6 million (or $6.8 million) as of December 31, 2015. We recorded total interest expense of $3.4 million and $2.8 million for the years ended December 31, 2015 and 2014, respectively.
We, through one of our subsidiaries, have a secured letter of credit facility with Comerica Bank that we utilize to comply with the deposit requirements of the State of California and the U.S. Department of Labor as security for our obligations to workers’ compensation and federal Longshore and Harbor Workers’ Compensation Act policyholders. The credit limit is for $75 million, of which $48.5 million was utilized as of December 31, 2015. We are required to pay a letter of credit participation fee for each letter of credit in the amount of 0.40%. In addition, we, through certain subsidiaries, have additional existing stand-by letters of credit with various lenders in the amount of $1.8 million as of December 31, 2015.
For further information on these credit facilities, including applicable restrictive covenants and events of default, see Note 12. “Debt” in the audited consolidated financial statements included elsewhere in this report.
We have outstanding $150 million aggregate principal amount of our 7.25% subordinated notes due 2055 (the "7.25% 2055 Notes") that bear interest at a rate equal to 7.25% per year, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2015. The 7.25% 2055 Notes mature on June 15, 2055. We have the right to redeem the 7.25% 2055 Notes, in whole or in part, on June 18, 2020, or on any interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest to, but not including, the date of redemption. The 7.25% 2055 Notes are our subordinated unsecured obligations and are structurally subordinated to all our existing and future indebtedness, liabilities and other obligations of our subsidiaries. Interest expense, including amortization of deferred origination costs, recognized on the 7.25% 2055 Notes was $5.9 million for the year ended December 31, 2015. For further information on the 7.25% 2055 Notes, see Note 12. "Debt" in the audited consolidated financial statements included elsewhere in this report.
Loss and loss expense reserves increased $1,544.2 million and unearned premium increased $567.5 million in 2015 due primarily to higher premium writings in 2015 compared to 2014 as well as assumed amounts from acquisitions in 2015. Accrued expenses and other liabilities increased $105.2 million primarily from acquisitions and increases in premium taxes, assessments and surcharges payable related to growth in premiums. Debt increased by $252.1 million in 2015 primarily as a result of the issuance of $285 million of subordinated notes.
At the time of the Majestic loss portfolio transfer, this entity was a reinsurer of Majestic. We currently hold collateral of approximately $29.3 million in a trust account related to cessions for Twin Bridges, as well as approximately $19.3 million of funds held.
Amount recoverable from Trinity Universal is the result of the UBI acquisition. Prior to our acquisition, MCIC, SNIC, AICK and ALIC ceded all of their net retention to Trinity Universal.
The following tables provide a summary of our primary treaty reinsurance programs as of December 31, 2015 for the United States and internationally:
In 2007, we entered into a master agreement with Maiden, as amended, by which our Bermuda subsidiary, AII, and Maiden Reinsurance Ltd. ("Maiden Reinsurance"), formerly known as Maiden Insurance Company, Ltd., entered into a quota share reinsurance agreement (the “Maiden Quota Share”), as amended. Under this agreement, AII retrocedes to Maiden Reinsurance an amount equal to 40% of the premium written by our U.S., Irish and U.K. insurance companies (the “AmTrust Ceding Insurers”), net of the cost of unaffiliated inuring reinsurance (and in the case of the our U.K. insurance subsidiary, AEL, net of commissions). AII also retrocedes 40% of losses. Certain business that we commenced writing after the effective date, including our European medical liability business included in the table above, business assumed from Tower pursuant to the cut through reinsurance agreement, and risks, other than workers’ compensation risks and certain business written by our Irish subsidiary, AmTrust International Underwriters Limited (“AIU”), for which the AmTrust Ceding Insurers’ net retention exceeds $5 million is not ceded to Maiden Reinsurance under the Maiden Quota Share (ceded business defined as “Covered Business”).
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.
AII and Maiden Reinsurance entered into an agreement to commute certain ceded loss reserves and unearned premium as of September 30, 2015 for an agreed consideration of approximately $107,000 for certain lines of business. As a result of this agreement, these lines of business will be excluded from future cessions to Maiden.
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, 2015 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 1. Business - 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 1A. Risk Factors - 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.
our obligation to pay any applicable assessments. If settlement of the claim is to be paid out over more than one year, our obligation to pay any related loss-based assessments extends for the same period of time. Because our reserves for loss and loss adjustment expenses are based on estimates, our accruals for loss-based insurance assessments are also based on estimates. Actual payments of loss and loss adjustment expenses may differ, perhaps materially, from our reserves. Accordingly, our actual loss-based insurance assessments may vary, perhaps materially, from our accruals.