We currently lease office space in Pembroke, Bermuda (our corporate headquarters), the U.S., the U.K., Germany, Austria, Ireland, Australia, Netherlands and Russia for the operation of our business. We also lease a property for employee use in Bermuda. We renew and enter into new leases in the ordinary course of business as needed. Whilst 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. To date, the cost of acquiring and maintaining our office space has not been material to us as a whole.
Our business consists of two reportable segments: Diversified Reinsurance and AmTrust Reinsurance. Please refer to Item 1, "Business - Our Reportable Segments" section for a discussion on our reportable segments.
On June 15, 2017, Maiden Holdings issued 6,000,000 shares of 6.7% Preference Shares - Series D ("Preference Shares - Series D"), par value $0.01, at a price of $25 per preference share. We received net proceeds of $144.9 million from the offering after deducting issuance costs of $5.1 million, which were recognized as a reduction in additional paid-in capital. Each share, which is redeemable at our sole option beginning June 15, 2022, will be paid non-cumulative dividends at a rate of 6.7% per annum on the initial liquidation preference of $25 per share.
Issuance of 2016 Senior Notes and Redemption of 2011 Senior Notes
Non-GAAP operating (loss) earnings, non-GAAP operating (loss) earnings per common share, non-GAAP operating return on average common equity and underwriting loss are non-GAAP financial measures. See "Key Financial Measures" for additional information and a reconciliation to the nearest U.S. GAAP financial measure (net (loss) income).
Please refer to "Notes to Consolidated Financial Statements Note 12. Earnings per Common Share" included under Item 8 "Financial Statements and Supplementary Data" of this Form 10-K for the calculation of basic and diluted (loss) earnings per common share.
Diluted book value per common share is calculated by dividing common shareholders' equity, adjusted for assumed proceeds from the exercise of dilutive options, by the number of outstanding common shares plus dilutive options and restricted share units (assuming exercise of all dilutive share based awards). The Mandatory Convertible Preference Shares - Series B, which were converted into common shares on September 15, 2016, are excluded at December 31, 2016.
During a period of loss, the basic weighted average common shares outstanding is used in the denominator of the diluted loss per common share computation as the effect of including potential dilutive shares would be anti-dilutive.
Non-GAAP operating (loss) earnings is an internal performance measure used by management as these measures focus on the underlying fundamentals of the Company's operations by excluding, on a recurring basis: (1) net realized gains or losses on investment; (2) impairment losses related to investments which were recognized in earnings; (3) foreign exchange gains or losses; (4) amortization of intangible assets; (5) loss and related activity from our run-off operations comprised of our former segment NGHC Quota Share and our divested excess and surplus ("E&S") business; (6) accelerated amortization of senior note issuance costs; and (7) certain non-cash deferred tax (benefit) expenses. We exclude net realized gains or losses on investment, impairment losses related to investments, and foreign exchange gains or losses as we believe these are influenced by market opportunities and other factors. We do not believe amortization of intangible assets, accelerated amortization of senior note issuance costs, and loss and related activity from our run-off operations 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.
Book value and diluted book value per common share at December 31, 2017, 2016 and 2015 were computed as follows:
Underwriting (loss) income and Combined ratio: Management uses this non-GAAP measure as the combined ratio is commonly used in the insurance and reinsurance industry as a measure of underwriting profitability. Management measures underwriting results on an overall basis and for each segment on the basis of the combined ratio. The combined ratio is the sum of the net loss and LAE ratio and the expense ratio and the computations of each component are described below. A combined ratio under 100% indicates underwriting profitability, as the net loss and LAE, commission and other acquisition expenses and general and administrative expenses are less than the net premiums earned and other insurance revenue on that business.
In 2017, an underwriting loss was caused by adverse development of prior year losses of $321.5 million primarily in the AmTrust Reinsurance segment which had adverse development of $239.9 million. However, adverse prior year development was also experienced in our Diversified Reinsurance segment which had adverse development of $71.4 million and our Other category which had adverse development of $10.2 million. Current year underwriting results have also been impacted by increases in our initial loss picks for new premium earned in both the Diversified Reinsurance and AmTrust Reinsurance segments factoring in both market conditions and recent loss trends and experience. In 2016, an underwriting loss was caused by adverse reserve development of $165.3 million, primarily due to unfavorable commercial auto reserve development in both segments. Prior to 2016, we have generated underwriting income in each year since inception.
Underwriting income is calculated by subtracting net loss and LAE, commissions and other acquisition expenses and applicable general and administrative expenses from the net premiums earned and other insurance revenue and is the monetized counterpart of the combined ratio. For purposes of these non-GAAP operating measures, the fee-generating business which is included in our Diversified Reinsurance segment, is considered part of the underwriting operations of the Company.While an important metric of
success, underwriting (loss) income and combined ratio do not reflect all components of profitability, as they do not recognize the impact of investment income earned on premiums between the time premiums are received and the time loss payments are ultimately paid to clients. Because we do not manage our cash and investments by segment, investment income and interest expense are not allocated to individual reportable segments. Certain general and administrative expenses are allocated to segments based on actual costs incurred and estimated time spent by underwriting employees.
The "net loss and LAE ratio" is derived by dividing net loss and LAE by the sum of net premiums earned and other insurance revenue. The "commission and other acquisition expense ratio" is derived by dividing commission and other acquisition expenses by the sum of net premiums earned and other insurance revenue. The "general and administrative expense ratio" is derived by dividing general and administrative expenses by the sum of net premiums earned and other insurance revenue. The "expense ratio" is the sum of the commission and other acquisition expense ratio and the general and administrative expense ratio.
General: The amount of time that elapses before a claim is reported to the cedant and then subsequently reported to the reinsurer is commonly referred to in the industry as the reporting tail. Lines of business for which claims are reported quickly are commonly referred to as short-tailed lines; and lines of business for which a longer period of time elapses before claims are reported to the reinsurer are commonly referred to as long-tailed lines. In general, for reinsurance, the time lags are longer than for primary business due to the delay that occurs between the cedant becoming aware of a loss and reporting the information to its reinsurer(s). The delay varies by reinsurance market (country of cedant), type of treaty, whether losses are paid by the cedant and the size of the loss. The delay could vary from a few weeks to a year or sometimes longer.
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 analysis of the appropriateness of the reserve for IBNR is reviewed quarterly, with adjustments made as appropriate. To the extent actual reported losses exceed expected losses, the carried estimate of the ultimate losses may 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 may 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.
With the guidance of the methods described in "Notes to Consolidated Financial Statements Note 9. Reserve for Loss and Loss Adjustment Expenses" included under Item 8 "Financial Statement and Supplementary Data", actuarial judgment is applied in the determination of ultimate losses. In general, the Company’s segments have varying levels of seasoning with which the Company has direct experience and as a result, differing methods are utilized to estimate loss and LAE reserves in each segment.
The Company has underwritten the AmTrust Reinsurance segment since July 1, 2007. The majority of the exposure in the underlying book of business has significant seasoning, and allows for a significant amount of credibility in using parameters derived from historical experience to calculate reserve estimates. Some segments of the book are a result of recent acquisitions or newer markets for AmTrust. These segments require a greater level of assumptions and professional judgment in deriving reserve levels, which inherently implies a wider range of reasonable estimates. As a result, we have tended to rely on a weighted approach which primarily employs the LD method for aspects of the segment with ample historical data, while also considering the ELR or BF method for exposure resulting from recent acquisitions, or a relative business with a more limited level of experience. The Frequency-Severity ("FS") method is also considered for segments of the AmTrust book for which claim count information is available. The Company’s actuarial analysis of this book of business is more refined in that it utilizes a combination of quarterly and annual data instead of contract period data in totality. Additional data detailing items such as class of business, state, claim counts, frequency and severity is available in many instances, further enhancing the reserve analysis.
the loss and exposure information provided by ceding companies, insureds and brokers in support of their reinsurance submissions have been used by Maiden's pricing actuaries to derive meaningful estimates of the likely future performance of business bound with respect to each contract and policy;
In order to verify the accuracy and completeness of the information provided to the Company by its ceding company counterparties, the Company’s underwriters, actuaries, accounting and claims personnel perform underwriting and claims reviews, and at times also accounting and financial audits, of the Company’s ceding companies. Any material findings are communicated to the ceding companies and utilized in the establishment or revision of the Company’s case reserves and related IBNR reserve. On occasion, these reviews reveal that the ceding company’s reported loss and LAE do not comport with the terms of the contract with the Company. In such events, the Company strives to resolve the outstanding differences in an amicable fashion. The large majority of such differences are resolved in this manner. In the infrequent instance where an amicable solution is not feasible, the Company’s policy is to vigorously defend its position in litigation or arbitration. At December 31, 2017, the Company was not involved in any material claims litigation or arbitration proceedings.
Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company’s business activities can also impair the accuracy of its loss and LAE reserve estimates. At December 31, 2017, there were no significant backlogs related to the processing of policy or contract information in the Company’s segments.
The Company’s estimates of reserve for loss and LAE can also change over time because of changes in internal company operations, such as: alterations in claims handling procedures; growth in new lines of business where exposure and loss development patterns are not well established; or changes in the quality of risk selection or pricing in the underwriting process.
The Company provides proportional and non-proportional reinsurance coverage to cedants (insurance companies). Cedant's actual premiums are unknown at the time they enter into reinsurance agreement so treaties are based upon estimates of those premiums at the time the treaties are written and are typically adjusted as premiums are known. 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. Under proportional treaties, which represented 92.8% (2016 - 92.3%, 2015 - 91.0%) of gross premiums written for the year December 31, 2017, the Company shares proportionally in both the premiums and losses of the cedant and pays the cedant a commission to cover the cedant’s acquisition expenses. Under this type of treaty, the Company’s ultimate premiums written and earned and acquisition expenses are not known at the inception of the treaty and must be estimated until the cedant reports its actual results to the Company. Under non-proportional treaties, which represented 7.2% (2016 - 7.7%, 2015 - 9.0%) of gross premiums written for the year December 31, 2017, the Company is typically exposed to loss events in excess of a predetermined dollar amount or loss ratio and receives a deposit or minimum premium, which is subject to adjustment depending on the premium volume written by the cedant.
Acquisition expenses represent the costs of writing business that vary with, and are primarily related to, the production of the business. Acquisition expenses that are related to successful contracts are deferred and recognized as expense over the same period in which the related premiums are earned. Only certain expenses incurred in the successful acquisition of new and renewal insurance contracts are capitalized. Those expenses include incremental direct costs of contract acquisition that result directly from and are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. All other acquisition-related expenses, such as costs incurred for soliciting business, administration, and unsuccessful acquisition or renewal efforts are charged to expense as incurred. Administrative expenses, including rent, depreciation, occupancy, equipment, and all other general overhead expenses are considered indirect and are expensed as incurred.
Please refer to "Notes to Consolidated Financial Statements Note 5. Fair Value of Financial Instruments" included under Item 8 "Financial Statements and Supplementary Data" of this Form 10-K on page for a discussion on the fair value methodology and valuation techniques used by the Company to determine the fair value of the financial instruments held at December 31, 2017 and 2016.
Please refer to "Notes to Consolidated Financial Statements Note 2. "Significant Accounting Policies" included under Item 8 "Financial Statements and Supplementary Data" of this Form 10-K on page for a discussion on the OTTI evaluation performed by the Company. The Company recognized no OTTI through earnings for the years ended December 31, 2017 and 2016. For the year ended December 31, 2015, the Company recognized OTTI through earnings of $1.1 million. Please refer to "Notes to Consolidated Financial Statements Note 4. Investments" included under Item 8 "Financial Statements and Supplementary Data" of this Form 10-K on page for further details.
The Company recognizes Goodwill and Intangible Assets in connection with certain acquisitions. Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired and is assigned to the applicable reporting unit(s) on the acquisition date, based upon the expected benefit to be received by the reporting unit. Intangible Assets comprise both finite and indefinite life assets. Finite life intangible assets include customer and producer relationships and trademarks with useful life of 15 years. Insurance company licenses are considered indefinite life intangible assets.
Annually, the Company makes an 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 at December 31, 2017.
Net loss attributable to Maiden common shareholders for the year ended December 31, 2017 was $199.1 million compared to net income attributable to Maiden common shareholders of $15.2 million for the same period in 2016. The net decrease for the year ended December 31, 2017 compared to the same period in 2016 was primarily the result of the following:
an underwriting loss of $277.1 million compared to underwriting loss of $53.2 million during the year ended December 31, 2016. The deterioration in the underwriting result was principally due to:
Net income attributable to Maiden common shareholders for the year ended December 31, 2016 decreased to $15.2 million from $100.1 million for the same period in 2015. The factors that contributed to this net decrease were as follows:
redemption of the Company's 2011 Senior Notes in the second quarter of 2016 leading to a non-recurring, non-cash charge of $2.3 million, which represented the accelerated amortization of issuance costs associated with the redeemed debt.
Net premiums earned in our Diversified Reinsurance segment increased by $99.2 million or 13.7% for the year ended December 31, 2017 compared to the same period in 2016 as a result of overall growth in our Diversified Reinsurance segment's U.S. property and casualty premiums as well as a reduction in the corporate retrocessional program for 2017. These increases were offset by the commutation of a large account during the second quarter of 2017 which had return premium of $8.0 million. Please refer to the analysis of our Diversified Reinsurance segment on page 65 for further discussion.
Net premiums earned increased by $139.1 million, or 5.7%, for the year ended December 31, 2016 compared to the same period in 2015. The table below compares net premiums earned by our reportable segments, reconciled to the total consolidated net premiums earned, for the years ended December 31, 2016 and 2015:
Net premiums earned in the AmTrust Reinsurance segment increased by $159.4 million or 9.5% for the year ended December 31, 2016 compared to the same period in 2015 which reflects the impact of AmTrust's strong growth in 2016 from a combination of acquisition activity and ongoing organic growth. Please refer to the analysis of our AmTrust Reinsurance segment on page 68 for further discussion.
Net premiums earned in the Diversified Reinsurance segment decreased by $20.8 million or 2.8% for the year ended December 31, 2016 compared to the same period in 2015 due to the impact of lower 2015 net premiums written for the segment. Please refer to the analysis of our Diversified Reinsurance segment on page 65 for further discussion.
Net Investment Income, Net Realized Gains on Investment and Net Impairment Losses Recognized in Earnings
The following table details the Company's average invested assets and average book yield for the year ended December 31, 2017 compared to the same period in 2016:
For the year ended December 31, 2016, average invested assets grew by 12.9% giving rise to the increase in net investment income compared to the same period in 2015. The growth in net investment income, particularly when compared with the growth in invested assets, continues to be impacted by the current low interest rate environment which showed some improvement in the fourth quarter of 2016.
Ratio of net investment income over average invested assets at fair value.
The net loss and LAE increase during the year ended December 31, 2017 was due to adverse prior year loss development of $321.5 million during 2017 compared to $165.3 million recorded in 2016. This development, which is discussed in greater detail in the individual segment discussion and analysis, was primarily in our AmTrust Reinsurance segment, but adverse prior year development was also experienced in our Diversified Reinsurance Segment and Other category.
Excluding the impact of adverse prior year development, our net loss and LAE ratio would have been 67.0% for the year ended December 31, 2017 compared to 64.2% for the same period in 2016. The deterioration in loss ratios for the current year reflects increases we have made in our initial loss picks in both our Diversified Reinsurance and AmTrust Reinsurance segments factoring in both market conditions and recent loss trends and experience.
The net loss and LAE ratios were 70.6% and 66.9% for the years ended December 31, 2016 and 2015, respectively. The impact on the net loss and LAE ratios should be considered in conjunction with the commission and other acquisition expense ratio as changes to either ratio arise primarily due to changes in the mix of business and the impact of the change in the commission and other acquisition expense rates on quota share contracts with loss sensitive features. As a result of these factors, combined with adverse prior year development in both our Diversified Reinsurance and AmTrust Reinsurance segments and on the run-off of the NGHC Quota Share, in our Other category, the combined ratio (excluding the general and administrative expense ratio) increased by 4.0 points for the year ended December 31, 2016 compared to 2015.
The interest and amortization expenses related to Senior Notes were $23.3 million for the year ended December 31, 2017 compared to $28.2 million for the same period in 2016. The decrease in interest expense was due to the redemption of the 8% 2012 Senior Notes in June 2017 and the refinancing of the 8.25% 2011 Senior Notes with the 6.625% 2016 Senior Notes in June 2016. Please refer to "Notes to Consolidated Financial Statements Note 7. Long Term Debt" for details on the Company’s Senior Notes. The weighted average effective interest rate for the Company's debt was 7.7% for the year ended December 31, 2017 compared to 8.02% in 2016.
On June 27, 2017, Maiden NA fully redeemed all of its 2012 Senior Notes using the proceeds from the Preference Shares - Series D issuance. The 2012 Senior Notes were redeemed at a redemption price equal to 100% of the principal amount of $100.0 million plus accrued and unpaid interest on the principal amount being redeemed up to, but not including, the redemption date. As a result, the Company accelerated the amortization of the remaining 2012 Senior Note issuance cost of $2.8 million.
The Company recorded income tax benefit of $3.6 million and income tax expense of $1.6 million and $2.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. These amounts relate to income tax on the earnings of our international subsidiaries, non-cash U.S. deferred tax expense relating to timing differences and state taxes incurred by our U.S. subsidiaries. The income tax benefit in 2017 mainly came from the U.S deferred tax liability due to the rate change resulting from the 2017 Act which was effective January 1, 2018. The effective rate of income tax was 2.1% for the year ended December 31, 2017 compared to 3.2% and 1.6% for the years ended December 31, 2016 and 2015, respectively.
On June 15, 2017, the Company issued a total of 6,000,000, 6.7% Preference Shares - Series D, par value $0.01 per share, at a price of $25 per preference share. Please refer to "Notes to Condensed Consolidated Financial Statements Note 13. Shareholders' Equity" for details on the Company’s preference shares.
The underwriting results and associated ratios for our Diversified Reinsurance segment for the years ended December 31, 2017, 2016 and 2015 were as follows:
Adverse prior year loss development of $71.4 million during 2017, compared to $96.8 million recorded in the same period in 2016. The 2017 development was largely due to a higher than expected loss emergence emanating largely from commercial auto as well as certain specific contracts across several lines of business, with over half of the development coming from two accounts. The 2016 adverse prior year development was primarily from the commercial auto liability line of business; and
Premiums - Gross premiums written decreased by $1.6 million, or 0.2% for the year ended December 31, 2017 compared to the same period in 2016. The decrease was primarily due to the commutation and return of the unearned premium of a large account during the second quarter of 2017.
Net premiums written for the year ended December 31, 2017 increased by $41.2 million or 5.4% as a result of the reduction in the corporate retrocessional program for 2017 and new business written partly offset by the decrease in gross premiums written previously described. The retention ratio of written premiums increased to 98.1% for the year ended December 31, 2017 compared to 92.9% for the same period in 2016 due to the lower utilization of retrocessional capacity in 2017.
The table below shows net premiums written by line of business for the years ended December 31, 2017 and 2016:
Within our Diversified Reinsurance segment, the business written by Maiden US experienced an increase in net premiums earned for the year ended December 31, 2017 compared to the same period in 2016 due to overall growth in all sub-segments as well as a reduction in the corporate retrocessional program for 2017. These increases were partly offset by the commutation of a large account during the second quarter of 2017.
Other Insurance Revenue - Other insurance revenue, which represents fee income that is not directly associated with premium revenue assumed by the Company decreased by $1.0 million for the year ended December 31, 2017 compared to the same period in 2016.
Net Loss and Loss Adjustment Expenses - Net loss and LAE increased by $71.4 million, or 12.3%, for the year ended December 31, 2017 compared to 2016. Net loss and LAE ratios were 78.1% and 78.9% for the years ended December 31, 2017 and 2016, respectively.
The impact on the net loss and LAE ratios should be considered in conjunction with the commission and other acquisition expense ratio as changes to either ratio can be effected by the changes in the mix of business and the impact of the increase in the commission and other acquisition expense rates on pro-rata contracts with loss sensitive features. As a result of these factors, as well as the impacts on the loss ratio described above, the combined ratio decreased by 2.3 points for the year ended December 31, 2017 compared to 2016.
Within our Diversified Reinsurance segment, the business written by both Maiden US and our IIS operations experienced a decrease in net premiums earned for the year ended December 31, 2016 compared to the same period in 2015 due to the impact of higher ceded premiums related to the retrocessional quota share agreement entered in 2015. The decrease, however, was slightly reduced by earned premiums from the European treaty contracts written by Maiden Bermuda in 2016.
Net Loss and Loss Adjustment Expenses - Net loss and LAE increased by $32.2 million, or 5.9%, for the year ended December 31, 2016 compared to 2015. Net loss and LAE ratios were 78.9% and 72.3% for the years ended December 31, 2016 and 2015, respectively, reflecting further adverse prior year development primarily from commercial auto liability in Maiden US of $85.7 million.
Net premiums earned increased by $66.0 million, or 3.6% for the year ended December 31, 2017 compared to the same period in 2016. Please see net premiums written section above for details related to the movement in earned premium. The retroceded premiums earned decreased by $27.8 million during the year ended December 31, 2017 compared to the same period in 2016. The table below details net premiums earned by line of business for the years ended December 31, 2017 and 2016:
Excluding prior year loss development, the net loss and LAE ratio for 2017 was 65.9% compared to 63.6% for 2016, reflecting higher initial expected loss ratios for premiums earned during the period.
Commission and Other Acquisition Expenses - Commission and other acquisition expenses increased by $30.0 million, or 5.1%, for the year ended December 31, 2017 compared the same period in 2016. The commission and other acquisition expense ratio increased to 32.2% for the year ended December 31, 2017 compared to 31.7% in 2016. The fluctuations in the ratios during the year ended December 31, 2017 compared to 2016 reflect the change in the mix of business. The commission ratio is also affected by the commission associated with the retrocession premium ceded during the year ended December 31, 2017 compared to the same period in 2016.
The AmTrust Reinsurance segment experienced growth during the year ended December 31, 2016 compared to 2015. However, the combined ratio increased to 98.4% for the year ended December 31, 2016 compared to 95.3% in 2015 largely due to adverse reserve development of $54.0 million related primarily to program commercial auto as well as program general liability business.
Net Loss and Loss Adjustment Expenses - Net loss and LAE increased by $151.8 million, or 14.1%, for the year ended December 31, 2016 compared to the same period in 2015. Net loss and LAE ratios were 66.5% and 63.8% for the years ended December 31, 2016 and 2015, respectively. The net loss and LAE ratio increased largely due to the $54.0 million adverse reserve development experienced in 2016, which primarily affected program commercial auto as well as program general liability reserves.
Commission and Other Acquisition Expenses - Commission and other acquisition expenses increased by $57.0 million, or 10.8%, for the year ended December 31, 2016 compared to 2015. The commission and other acquisition expense ratio increased to 31.7% for the year ended December 31, 2016 compared to 31.3% in 2015. The increase in the ratio during the year ended December 31, 2016 compared to 2015 reflects the higher proportion of net premiums earned from the Reinsurance Agreement, which has a higher commission rate than the European Hospital Liability Quota Share.
Maiden US is subject to regulatory restrictions limiting their ability to declare and pay dividends by the state of Missouri where it is domiciled. Without prior approval of its domiciliary commissioner, dividends to shareholders are limited by the laws of Missouri to the greater of 10% of statutory policyholders’ surplus at the preceding December 31, or net income, less net realized capital gain on investments, for the 12-month period ending December 31 of the preceding year. Additionally, Maiden US may only pay dividends if it has positive unassigned funds. Accordingly, the maximum dividend payments that can be made to shareholders in the next year without prior approval by the Missouri Department of Insurance is $0. During 2017 and 2016, Maiden US paid no dividends to Maiden NA. In addition, there are restrictions based on risk-based capital, a test which is the threshold that constitutes the authorized control level. If Maiden US's statutory capital and surplus falls below the authorized control level, the insurance regulator is authorized to take whatever regulatory actions are considered necessary to protect policyholders and creditors. At December 31, 2017, Maiden US has statutory capital and surplus of $301.7 million, which exceeds the required level of minimum statutory capital and surplus by the state of Missouri.
Maiden Holdings has two Swedish domiciled operating subsidiaries, Maiden LF and Maiden GF, both regulated by the Swedish FSA. At December 31, 2017, Maiden LF and Maiden GF each has a statutory capital and surplus of $8.5 million and $6.4 million, respectively, which exceed the amount required to be maintained of $4.4 million at December 31, 2017. Maiden LF and Maiden GF are subject to statutory and regulatory restrictions under the Swedish FSA that limit the maximum amount of annual dividends or distributions paid by Maiden LF and Maiden GF to Maiden Holdings. At December 31, 2017, Maiden LF and Maiden GF are allowed to pay dividends or distributions not exceeding $2.5 million and $0, respectively. During 2017 and 2016, Maiden LF and Maiden GF paid no dividends. Maiden GF was granted a general insurance license effective September 14, 2016 and began writing business in 2017 therefore its first filing with the Swedish FSA is for the period ended December 31, 2017.
Maiden Holdings’ wholly owned U.K. subsidiary, Maiden Global, operates as a reinsurance services and holding company, is subject to regulation by the U.K. Financial Conduct Authority (the "FCA") that limit the maximum amount of annual dividends or distributions paid by Maiden Global to the Company. At December 31, 2017, Maiden Global is allowed to pay dividends or distributions not exceeding $3.3 million. During 2017 and 2016, Maiden Global paid dividends to Maiden Holdings of $0.7 million and $0, respectively.
Our sources of funds primarily consist of premium receipts net of commissions and brokerage, investment income, net proceeds from capital raising activities, which may include the issuance of debt and common and preference shares, and proceeds from sales and redemption of investments. Cash is used primarily to pay loss and LAE, ceded reinsurance premium, general and administrative expenses, interest expense and dividends, with the remainder in excess of our operating requirements, made available to our investment managers for investment in accordance with our investment policy.
Cash flows from investing activities consist primarily of proceeds from the sales and maturities of investments and payments for investments acquired. Net cash used in investing activities was $378.9 million for the year ended December 31, 2017 compared to $439.2 million for the same period in 2016. The Company continues to deploy available cash for longer-term investments as investment conditions permit and to maintain, where possible, cash and cash equivalents balances at low levels. For the year ended December 31, 2017, the purchases of fixed maturity securities exceeded the proceeds from the sales, maturities and calls by $365.6 million. Adding to the outflow was the increase in restricted cash and cash equivalents of $19.0 million offset by the net proceeds from other investing activities of $5.8 million.
The net cash (used in) provided by financing activities for the years ended December 31, 2017, 2016 and 2015 was as follows:
Maiden Bermuda uses trust accounts, loan to related party and letters of credit to meet collateral requirements. Consequently, cash and cash equivalents and investments are pledged in favor of ceding companies in order to comply with relevant insurance regulations or contractual requirements.
At December 31, 2017 and 2016, these respective durations in years were as follows:
The following table summarizes the Company's fixed maturity investment portfolio holdings by contractual maturity at December 31, 2017 and 2016:
At December 31, 2017, 98.5% of the Company’s U.S. agency bond holdings are mortgage-backed. Additional details on the Agency MBS at December 31, 2017 and 2016 were as follows:
Our Agency MBS portfolio is 39.2% of our fixed maturity investments at December 31, 2017. Given the relative size of this portfolio to our total investments, if faster prepayment patterns were to occur over an extended period of time, this could potentially limit the growth in our investment income in certain circumstances, or even potentially reduce the total amount of investment income we earn.
At December 31, 2017 and 2016, 99.0% and 96.5%, respectively, of our fixed maturity investments consisted of investment grade securities. We define a security as being below investment grade if it has an S&P credit rating of BB+ or equivalent, or less.
The security holdings by sector and financial strength rating of our corporate bond holdings at December 31, 2017 and 2016 were as follows:
The Company does not employ any credit default protection against any of the fixed maturities held in non-U.S. dollar denominated currencies at December 31, 2017 and December 31, 2016, respectively.
The reinsurance balances receivable decreased by 15.9% while the reinsurance recoverable on unpaid losses increased by 17.7% and the reserve for loss and LAE increased by 22.5% as at December 31, 2017 compared to December 31, 2016. The lower amount of net reinsurance balances receivable as at December 31, 2017 was primarily due to higher amount of losses paid in both our operating segments which were offset against the reinsurance premium receivable. The gross premiums written during the year ended December 31, 2017 also declined by $15.3 million or 0.5% compared to the same period in 2016. The reserve for loss and LAE increased due to adverse prior year development of $321.5 million recognized during 2017 from both of our reporting segments and from our run-off business in the Other category as well as higher initial loss ratio pick in 2017 compared to 2016 in both of our reporting segments. The higher reinsurance recoverable on unpaid losses as at December 31, 2017 compared to the prior year end was primarily due to the increase in reserve for loss and LAE combined with the adverse loss development discussed above.
Total Maiden shareholders' equity at December 31, 2017 decreased by $128.6 million, or 9.5%, compared to December 31, 2016 primarily due to:
issuance of new preference shares with net proceeds of $144.9 million after issuance cost of $5.1 million; and
net increase resulting from other share based transactions of $4.0 million.
On February 21, 2017, the Company's Board of Directors approved the repurchase of up to $100.0 million of the Company's common shares from time to time at market prices. During the year ended December 31, 2017, the Company repurchased a total of 3,667,134 common shares at an average price of $6.84 per share under its share repurchase authorization. At December 31, 2017, the Company has a remaining authorization of $74.9 million for share repurchases.
On June 27, 2017, we fully redeemed all of the 2012 Senior Notes using a portion of the proceeds from the Preference Shares - Series D issuance. The 2012 Senior Notes were redeemed at a redemption price equal to 100% of the principal amount of $100.0 million plus accrued and unpaid interest on the principal amount being redeemed up to, but not including, the redemption date. As a result, the Company accelerated the amortization of the remaining 2012 Senior Note issuance cost of $2.8 million. Please see related discussion in "Notes to Consolidated Financial Statements Note 7. Long Term Debt" and "Note 13. Shareholders' Equity" included under Item 8 "Financial Statements and Supplementary Data" of this Form 10-K. There were no further changes in the Company’s Senior Notes at December 31, 2017 compared to December 31, 2016 and the Company did not enter into any short-term borrowing arrangements during the year ended December 31, 2017.
In the normal course of business, the Company is a party to a variety of contractual obligations as summarized below. These contractual obligations are considered by the Company when assessing its liquidity requirements and the Company is confident in its ability to meet all of its obligations. The Company’s aggregate contractual obligations at December 31, 2017 are as follows:
(2) We purchase retrocessional protection for our reinsurance lines of business. The minimum and deposit premiums are contractually due in advance on a quarterly basis.
(3) For further details on the terms of our Senior notes, refer to "Notes to Consolidated Financial Statements, Note 7. Long-Term Debt included under Item 8 "Financial Statement and Supplementary Data".
(4) The amounts included for reserve for loss and LAE reflect the estimated timing of expected loss payments on known claims and anticipated future claims at December 31, 2017. Both the amount and timing of cash flows are uncertain and do not have contractual payout terms. For a discussion of these uncertainties, please refer to "Critical Accounting Policies - Reserve for Loss and Loss Adjustment Expenses" section included under Item 7 of this Annual Report on Form 10-K for the year ended December 31, 2017.
(5) We have unfunded investment commitments related to our investments in limited partnerships, which are callable by our investment managers.
Due to the inherent uncertainty in the process of estimating the timing of these payments, there is a risk that the amounts paid in any period will differ significantly from those disclosed. Total estimated obligations will be funded by existing cash and investments.
Refer to "Notes to Consolidated Financial Statements Note 2. Significant Accounting Policies" included under Item 8 "Financial Statement and Supplementary Data", of this Form 10-K for a discussion on recently issued accounting pronouncements not yet adopted.