We executed an office space lease in Hamilton, Bermuda commencing September 1, 2009 for Maiden Holdings and Maiden Bermuda. The initial term of this agreement expires on November 1, 2012 with one option of five years. We have an office space lease in Mount Laurel, New Jersey expiring on May 31, 2015, for use by Maiden Re, Maiden US and Maiden Specialty. We have also executed an office space lease in Beaconsfield, Buckinghamshire, United Kingdom commencing on October 1, 2010, for Maiden Global; the initial term of this agreement expires on October 1, 2015, with one option of five years. We also have four other office space leases in the United States, one property lease in Bermuda and one office space lease in Germany and Austria, respectively, with various expiry dates.
Selected Financial Data. The following tables set forth our summary historical statement of operations data and summary balance sheet data as of and for the years ended December 31, 2010, 2009 and 2008. Statement of operations data and balance sheet data are derived from our audited consolidated financial statements, which have been prepared in accordance with GAAP. These historical results are not necessarily indicative of results to be expected from any future period. For further discussion of this risk see Item 1A. “Risk Factors” in this Form 10-K. You should read the following selected financial data in conjunction with the other information contained in this Form 10-K, including
Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this Report. Amounts in tables may not reconcile due to rounding differences. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to the Company’s plans and strategy for its business, includes forward-looking statements that involve risk and uncertainties. Please see the “Special Note About Forward-Looking Statements” in this Report for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the “Risk Factors” set forth in this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein. Finally, the Company only commenced operations in 2007.
• Entering into a quota share reinsurance agreement with AmTrust Financial Services, Inc. (“AmTrust”) in 2007 (the “AmTrust Quota Share”);
• Entering into the a quota share reinsurance agreement with American Capital Acquisition Corporation (“ACAC”) in 2010 (the “ACAC Quota Share”); and
We provide reinsurance through our wholly owned subsidiaries, Maiden Reinsurance Company (“Maiden US”) and Maiden Insurance Company Ltd. (“Maiden Bermuda”) and have operations in the United States and Bermuda. On a more limited basis, Maiden Specialty Insurance Company (“Maiden Specialty”), a wholly owned subsidiary of Maiden US, provides primary insurance on a surplus lines basis focusing on non-catastrophe inland marine and property coverages. Maiden Bermuda does not underwrite any primary insurance business.
• A renewal rights agreement under which Maiden Bermuda underwrites certain assumed reinsurance business written by GMAC International Insurance Company, Ltd. (“GMAC IICL”), which covers primarily personal auto and credit life coverages offered by primary insurers in association with programs IIS designs and implements for original equipment automobile manufacturers;
• Acquisition of GMAC Life Försäkrings (“GMAC LF”), a credit life insurer domiciled in Sweden which writes certain credit life insurance in association through automobile financings offered through participating automobile dealerships and original equipment automobile manufacturers which has been renamed Maiden Life Försäkrings AB (“Maiden LF”).
According to the loss portfolio transfer provisions of the IICL Agreement, the Company assumed the loss reserves of $98.8 million associated with the GMAC IICL business as of November 30, 2010. The Company also assumed unearned premium, net of acquisition costs, of approximately $19.2 million.
As a result of assumption of these liabilities, at November 30, 2010 the underlying assets in support of these collateral arrangements totaled $141.8 million. The Company now assumes one hundred percent (100%) of all premiums and losses for which GMAC IICL is otherwise entitled to or liable in respect of the reinsurance contracts.
We will pay a fee to GMAC IICL for the right to renew the expiring reinsurance contracts, subject to a minimum payment of $4 million, over a three-year period commencing November 30, 2010.
The aggregate purchase price of GMAC VS and GMAC LF at November 30, 2010 was $22.3 million, which was the tangible book value of each entity. All balances of the IIS Acquisition were settled on an estimated basis and pursuant to the terms of the underlying agreements, will be subject to adjustment to the final actual balances as of November 30, 2010 in the first quarter of 2011.
The Company expects the transaction to be accretive to 2011 earnings, and to generally perform within its overall stated targets.
GMAC Acquisition On October 31, 2008, we acquired the reinsurance operations of GMAC Insurance from GMACI Holdings, LLC (“GMACI”), which included the following components, the sum of which are referred to as the “GMAC Acquisition”:
• GMAC Direct Insurance Company (which was subsequently renamed Maiden Reinsurance Company); and
• Integon Specialty Insurance Company (which was subsequently renamed Maiden Specialty Insurance Company).
approximately $169.9 million. As a result of assumption of these liabilities, the Company initially received cash and investments of approximately $956.3 million from Motors. The Company now assumes one hundred percent (100%) of all premiums and losses for which Motors is otherwise entitled to or liable in respect of the reinsurance contracts.
TRUPS Offering To support the businesses acquired in the GMAC Acquisition and the North American operations of Maiden NA, on January 20, 2009, we completed the TRUPS Offering of approximately $260.1 million in the form of junior subordinated debentures (the “Debentures”) issued by Maiden Capital Financing Trust, a trust established by Maiden NA, and also issued 11,700,000 common shares to the purchasers. The Debentures mature in 2039 and carry an interest rate of 14%. Approximately 62% of these securities were placed privately with two of our Founding Shareholders (Michael Karfunkel and George Karfunkel), and the remainder with existing institutional investors.
• Operating earnings of $72.7 million, or $1.03 basic and $1.02 diluted operating earnings per share(1)
• Gross premiums written of $1.298 billion, a 23.8% increase over 2009
• Underwriting income of $50.1 million and combined ratio of 96.9%(1)
• Net investment income of $71.7 million, a 13.8% increase over 2009
• Common shareholders’ equity of $750.2 million; book value per common share of $10.40
• Total debt of $215.2 million and a debt to total capitalization ratio of 22.3%
(1) Operating earnings, operating earnings per share and operating return on equity are non-GAAP financial measures. See “Non-GAAP Financial Measures” for additional information and a reconciliation to the nearest GAAP financial measure (net income).
Non-GAAP Financial Measures In presenting the Company’s results, management has included and discussed certain non-GAAP financial measures. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the Company’s results of operations in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. However these measures should not be viewed as a substitute for those determined in accordance with GAAP. These non-GAAP measures are:
Operating Earnings and Operating Earnings per Share: In addition to presenting net income determined in accordance with GAAP, we believe that showing operating earnings enables investors, analysts, rating agencies and other users of our financial information to more easily analyze our results of operations in a manner similar to how management analyzes our underlying business performance. Operating earnings
should not be viewed as a substitute for GAAP net income. Operating earnings are an internal performance measure used in the management of our operations and represents operating results excluding, as applicable, realized investment gains or losses, foreign exchange gain or loss, the amortization of intangible assets, and in 2008 and 2010, non-recurring general and administrative expenses related to the GMAC Acquisition and the IIS Acquisition, respectively. We exclude net realized investment gains or losses and foreign exchange gain or loss as we believe that both are heavily influenced in part by market opportunities and other factors. We do not believe the amortization of intangible assets is representative of our ongoing business. The expenses related to the GMAC Acquisition and the IIS Acquisition are non-recurring. We believe all of these amounts are largely independent of our business and underwriting process and including them distorts the analysis of trends in our operations. The following is a reconciliation of operating income to its most closely related GAAP measure, net income.
Operating Return on Equity (“Operating ROE”): Management uses operating return on average shareholders’ equity as a measure of profitability that focuses on the return to common shareholders. It is calculated using operating earnings available to common shareholders (realized gains or losses on investments, foreign exchange gain and other (gains) losses, amortization of intangibles, and amortization of intangible assets) divided by average common shareholders’ equity. Management has set as a target a long-term average of 15% Operating ROE, which management believes provides an attractive return to shareholders for the risk assumed. Operating ROE for the years ended December 31, 2010, 2009 and 2008 is computed as follows:
Book Value per Share: Management uses growth in book value per share as a prime measure of the value the Company is generating for its common shareholders, as management believes that growth in the Company’s book value per share ultimately translates into growth in the Company’s stock price. Book value per share is calculated using common shareholders’ equity divided by the number of common shares outstanding. Book value per share is impacted by the Company’s net income and external factors such as interest rates, which can drive changes in unrealized gains or losses on its investment portfolio. Book value per share for the years ended December 31, 2010, 2009 and 2008 is computed as follows:
While an important metric of success, underwriting income and combined ratio do not reflect all components of profitability, as it does 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 assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segment’s proportional share of gross premiums written.
Acquisition costs are comprised of commissions, brokerage fees and insurance taxes. Commissions and brokerage fees are usually calculated as a percentage of premiums and depend on the market and line of business and can, in certain instances, vary based on loss sensitive features of reinsurance contracts. Acquisition costs are reported after (1) deducting commissions received on ceded reinsurance, (2) deducting the part of acquisition costs relating to unearned premiums and (3) including the amortization of previously deferred acquisition costs.
General and administrative expenses include personnel expenses including share-based compensation charges, rent expense, professional fees, information technology costs and other general operating expenses. We are experiencing increases in general and administrative expenses resulting from additional staff, increased share-based compensation expense, increased rent expense for our offices and increased professional fees. As the Company continues to expand and diversify in 2011, particularly through the IIS Acquisition, the completion of the implementation of the ACAC Quota Share and other initiatives across both its US and Bermuda platforms, we expect this trend to continue.
For all lines, the Company’s objective is to estimate ultimate losses and loss expenses. Total loss reserves are then calculated by subtracting losses paid. Similarly, IBNR reserves are calculated by subtraction of case reserves and ACRs from total loss reserves. IBNR is the estimated liability for (1) changes in the values of claims that have been reported to us but are not yet settled, as well as (2) claims that have occurred but have not yet been reported. Each claim is settled individually based upon its merits, and particularly for longer-tailed lines of business, it is not unusual for a claim to take years after being reported to settle, especially if legal action is involved. As a result, reserves for losses and loss expenses include significant estimates for IBNR reserves.
The reserve methodologies employed by the Company are dependent on data that the Company collects. This data consists primarily of loss amounts and loss payments reported by the Company’s cedants, and premiums written and earned reported by cedants or estimated by the Company. The actuarial methods used by the Company to project loss reserves that it will pay in the future (future liabilities) do not generally include methodologies that are dependent on claim counts reported, claim counts settled or claim counts open as, due to the nature of the Company’s business, this information is not routinely provided by cedants for every treaty. Consequently, actuarial methods relying on this information cannot be used by the Company to estimate loss reserves.
While management believes that our case reserves and IBNR are sufficient to cover losses assumed by us, there can be no assurance that losses will not deviate from our reserves, possibly by material amounts. The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate. To the extent actual reported losses exceed estimated losses, the carried estimate of the ultimate losses will be increased (i.e., unfavorable reserve development), and to the extent actual reported losses are less than our expectations, the carried estimate of ultimate losses will be reduced (i.e., favorable reserve development). We record any changes in our loss reserve estimates and the related reinsurance recoverables in the periods in which they are determined.
The Expected Loss Ratio (“ELR”) method is a technique that multiplicatively applies an expected loss ratio to earned premium to yield estimated ultimate losses. The ELR assumption is derived most often from the pricing of the business that is being reserved but can be based on historical experience of the business. This method is frequently used for the purpose of stability in the early valuations of an underwriting year with large and uncertain loss development factors. This technique does not take into account actual loss experience for the underwriting year being projected. As an underwriting year matures and actual loss experience becomes available, other methods may be applied in determining the estimated ultimate losses.
In the Diversified Reinsurance segment, as of December 31, 2010, 86.4% of the loss reserves in the Diversified Reinsurance segment are associated with the business acquired in the GMAC Acquisition. The Company’s executive and technical management, including claims and underwriting, have significant experience with this book of business, which also has more than 25 years of loss experience associated with it. In general for the Diversified Reinsurance segment we utilize the Expected Loss Ratio approach at the onset of reserving an account, the Incurred Bornheutter-Ferguson method for business with less but maturing loss experience, and as the experience matures the Reported Loss Development Method.
3. historic loss development and trend experience is assumed to be indicative of future loss development and trends; and
(i) the lag in time between the time claims are reported to the ceding company and the time they are reported through one or more reinsurance broker intermediaries to the Company;
Under proportional treaties, which represented 79.6% of gross premiums written for the year December 31, 2010, 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 costs. Under this type of treaty, the Company’s ultimate premiums written and earned and acquisition costs 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 20.4% of gross premiums written for the year December 31, 2010, the Company is typically exposed to loss events in excess of a predetermined dollar amount or loss ratio and receives a fixed or minimum premium, which is subject to upward adjustment depending on the premium volume written by the cedant.
The Company typically utilizes the fair values received from the Pricing Service. If quoted market prices and an estimate from the Pricing Service are unavailable, the Company produces an estimate of fair value based on dealer quotations for recent activity in positions with the same or similar characteristics to that being valued or through consensus pricing of a pricing service. Depending on the level of observable inputs, the Company will then determine if the estimate is Level 2 or Level 3 hierarchy. Approximately 95.1% and 97.6%, respectively of the Company’s fixed maturity investments are categorized as Level 2 within the fair value hierarchy as of December 31, 2010 and 2009. At December 31, 2010 and 2009, we have not adjusted any pricing provided by the Pricing Services.
At December 31, 2010 and December 31, 2009, the Company has no fixed income investments that are guaranteed by third parties. We do not have any direct exposure to third party guarantors as of December 31, 2010 or December 31, 2009.
U.S. government and U.S. government agencies: Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Federal Farm Credit Bank, Government National Mortgage Association and the Federal National Mortgage Association. The fair values of U.S. government securities are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. We believe the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.
Non-U.S. government bonds: Comprised of non-U.S. government bonds issued by non-U.S. governments primarily Germany, Belgium and Netherlands. These securities are generally priced by pricing services. The pricing services may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical models which may incorporate spreads, interest rate data and market/sector news. As the significant inputs used to price non-U.S. government bonds are observable market inputs, the fair values of non-U.S. government bonds are included in the Level 2 fair value hierarchy.
Other investments: The fair values of the hedge funds are based on the net asset value of the funds as reported by the fund manager, and as such, the fair values of those hedge funds are included in the Level 3 fair value hierarchy.
Loan to related party: The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value.
• Length of time and extent to which the fair value has been less than amortized cost;
• Adverse conditions specifically related to the security or to specific conditions in an industry or geographic area;
• Failure, if any, of the issuer of the security to make scheduled payments; and
the amortized cost is written down to the estimated recovery value with a corresponding charge to realized loss on our Consolidated Statements of Income, as this is also deemed the credit portion of the OTTI. The remainder of the decline to fair value is recorded to other comprehensive income (“OCI”), as an unrealized OTTI loss on our Consolidated Balance Sheets, as this is considered a noncredit (i.e., recoverable) impairment.
The following shows the other-than-temporary impairment charges during the years ended December 31, 2010, 2009 and 2008 for our fixed maturity investments by category:
Goodwill and Intangible Assets The GMAC Acquisition and IIS Acquisition created certain assets separately described in our financial statements as Goodwill and Intangible Assets, respectively. Goodwill is calculated as the excess of purchase price over the net fair value of assets acquired. Intangible Assets consist of 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.
In making an assessment of the value of its goodwill and intangible assets, the Company uses both market based and non-market based valuations. Assumptions underlying these valuations include an analysis of the Company’s stock price relative to both its book value and its net income in addition to forecasts of future cash flows and future profits. Significant changes in the data underlying these assumptions could result in an assessment of impairment of the Company’s goodwill asset. In addition, if the current economic environment and/or the Company’s financial performance were to deteriorate significantly, this could lead to an impairment of goodwill and intangible, the write-off of which would be recorded against net income in the period such deterioration occurred. If a 5% decline in the fair value of the reporting units occurred, this would not result in an impairment of the goodwill asset at December 31, 2010.
Net income for the year ended December 31, 2010 was $69.9 million compared to net income of $61.1 million for the same period in 2009, a 14.4% increase. The improvement was the result of higher underwriting income of $1.9 million due to the commencement of the ACAC Quota Share in 2010 and continuing growth in the AmTrust Quota Share segment offset by a higher combined ratio. Net income was further enhanced by investment income which was $8.7 million higher in 2010 as investable assets grew significantly as a result of positive operating cash flow and the aforementioned premium growth. The Company also realized investment gains of $6.6 million as it selectively sold certain securities compared to a $0.3 million realized investment gain in 2009. These improvements were also offset by higher operating expenses, in part due to expenses associated with the IIS Acquisition, the first full year of interest expense from the junior subordinated debt issued in 2009 and minor foreign exchange losses (compared to gains in 2009).
Premiums We evaluate our business by segment, distinguishing between Diversified Reinsurance, AmTrust Quota Share and ACAC Quota Share segments. The following chart illustrates the mix of our business on both a net premiums written and net premiums earned basis.
The mix of business has diversified and levels of premium in relation to the total have fluctuated in recent years due to the significant transactions we have entered into. The Diversified Reinsurance segment increased significantly in 2008 as a result of the GMAC Acquisition, which increased further in 2009 as the GMAC Acquisition completed its first full year of operation. This segment declined in 2010 as a percentage of the total due to the combination of our disciplined underwriting and ongoing competitive market conditions which resulted in a lower premium result for Maiden US. This decline was offset somewhat by the completion of the IIS Acquisition at the end of 2010. The AmTrust Quota Share segment reflects the continuing growth of this segment. The commencement of the ACAC Quota Share segment in 2010 expanded the ongoing diversification of the Company.
• Commencement of the ACAC Quota Share. As noted, this new segment commenced on March 1, 2010 and contributed $205.7 million to net premiums written during 2010.
• Continuing growth in our AmTrust Quota Share segment. This segment grew by $95.6 million or 25.7%, largely as a result of AmTrust’s increase in its Specialty Risk and Extended Warranty business, particularly internationally, during 2010. AmTrust continued to experience growth in its other segments, consistent with its growth and expansion strategy.
Comparison of Years Ended December 31, 2009 and December 31, 2008 Net premiums written increased by $303.0 million, or 41.7%, for the year ended December 31, 2009 compared to the year ended December 31, 2008. The increase in gross premiums written was primarily the result of the following:
• In our AmTrust Quota Share segment. This increase was partially offset by a decrease of $66.3 million or 15.1% in written premium generated by our AmTrust Quota Share segment, the result of lower premiums from AmTrust’s Small Commercial Business segment. In 2008, that business included a one-time unearned premium transfer of $82.2 million as a result of the Company’s reinsurance of premiums and losses assumed by AmTrust pursuant to its acquisition of Unitrin Business Insurance (“UBI”) business in May 2008. Excluding that one-time premium, the premium written in that overall segment increased $15.9 million or 4.5% in 2009 as compared to 2008.
• Commencement of the ACAC Quota Share on March 1, 2010 which resulted in net earned premiums of $123.5 million.
• Due to its closing late in the fourth quarter on November 30, 2010, earned premiums from the IIS Acquisition were limited, at $5.4 million.
• Premium earned on the AmTrust Quota Share segment has increased by $16.9 million or 5.0% as a result of higher earned premium from AmTrust’s Specialty Program segment of $15.1 million and $9.0 million from AmTrust’s Specialty Risk and Extended Warranty segment offset by lower premiums from AmTrust’s Small Commercial Business segment. The impact of the change in earned premium relating to a one- time unearned premium transfer was $55.8 million as a result of the Company’s reinsurance of premiums and losses assumed by AmTrust pursuant to its acquisition of UBI in May 2008. Excluding the impact of that one-time premium, the premium earned in that overall segment increased $72.7 million or 26.0% in 2009 as compared to 2008.
Loss and Loss Adjustment Expenses Comparison of Years Ended December 31, 2010 and December 31, 2009 Loss and loss adjustment expenses increased by $146.5 million, or 24.1%, for the year ended December 31, 2010 as compared to the same period in 2009, primarily reflecting the continuing growth in the Company as a result of the commencement of the ACAC Quota Share in 2010 and the continuing growth of the AmTrust Quota Share in 2010 compared to 2009.
In 2010 and 2009, the Company recognized $32.9 million and $11.4 million, respectively, of favorable development on prior year’s reserves, principally due to favorable development in its Diversified Reinsurance segment in both years. The total favorable development relating to the loss portfolio transfer since the closing of the GMAC Acquisition has been $43.8 million and the remaining $6.2 million is recorded as a deferred gain and is part of the Company’s loss reserves at December 31, 2010 that are included in the accompanying balance sheet. Included in the total favorable development were amortized gains from the loss portfolio acquired as part of the GMAC Acquisition, recorded as a reduction of losses incurred of $25.3 and $10.7 million for the years ended December 31, 2010 and 2009, respectively.
and 4) increased commissions accruals on the 2009 and 2010 underwriting years due to lower loss ratios. Finally, for the period November 30, 2010 to December 31, 2010, we earned gross fee income from the IIS Acquisition of $0.8 million, which is netted against commission and other acquisition expenses in the accompanying consolidated statements of income.
As a result, the acquisition cost ratio increased to 28.8% for the year ended December 31, 2010 as compared to 26.2% for the same periods in 2009, respectively. The 2010 ratios more accurately reflect recurring acquisition ratios as the transition from the GMAC Acquisition was completed near the end of 2009.
Comparison of Years Ended December 31, 2010 and December 31, 2009 Other operating expenses increased by $10.1 million, or 31.5%, for the year ended December 31, 2010 compared to the same period in 2009. The general and administrative expense ratio was 3.5% for the years ended December 31, 2010 and 2009, respectively. In 2010, other operating expenses for the year ended December 31, 2010, include $1.8 million of non-recurring expenses incurred to date as a result of the IIS Acquisition. Excluding these non-recurring expenses, the Company’s general and administrative expense ratio, which is a measure of its efficiency, was 3.4% for the years ended December 31, 2010 as compared to 3.5% for the same period in 2009, respectively.
As a result the overall expense ratio (including acquisition costs) was 32.3% and 29.7%, respectively for the years ended December 31, 2010 and 2009. The increase reflects the increased acquisition expenses and the costs associated with the IIS Acquisition previously described. The following is a breakdown of the major factors contributing to the increased operating expenses.
• Additional non-recurring expenses of $1.8 million, primarily legal, were incurred as a result of the IIS Acquisition.
• Depreciation expense increased by $0.6 million which reflects the full year’s depreciation expense on capital assets added in 2009 as well as depreciation on capital assets added in 2010.
• Other expenses of $0.6 million incurred by the entities acquired by IIS Acquisition in addition to the salary and professional expenses noted above.
• Rent and amortization of capital assets increased by approximately $1.8 million due primarily to a full year’s expense relating to the GMAC Acquisition.
• Information technology costs increased by approximately $3.3 million due primarily to a full year’s expense relating to the GMAC Acquisition.
Comparison of Years Ended December 31, 2009 and December 31, 2008 Net investment income increased by $25.7 million, or 69.1%, for the year ended December 31, 2009 compared to the same period in 2008. The increase was primarily the result of an increase in average invested assets resulting from the first full year of the GMAC Acquisition, the proceeds received from the TRUPS Offering and cash flow from operating and investing activities. Average invested assets were approximately $1.8 billion for the year ended December 31, 2009 compared to approximately $1.1 billion for the year ended December 31, 2008.
In addition to the increase in average invested assets, average yield increased to 3.5% for the year ended December 31, 2009 as compared to (0.03)% in 2008. The increased average invested assets were invested primarily in corporate bonds with higher yields offset by declines in interest rates on cash holdings, and this resulted in an increased yield despite an interest rate environment that generally resulted in lower yields. Interest on the loan to AmTrust amounted to $2.4 million in 2009 compared to $5.2 million for the same period in 2008 due to a reduction in 30 day LIBOR interest rates. Investment management fees and expenses of $2.7 million and $1.5 million were incurred during the year ended December 31, 2009 and 2008, respectively.
• A write-down of $37.4 million related to declines in the market value of corporate bonds in our available for sale portfolio that were considered to be other than temporary. In addition, we recognized an other-than-temporary impairment charge of $5.9 million for other investments.
The total favorable development relating to the loss portfolio transfer since the closing of the GMAC Acquisition has been $43.8 million and the remaining $6.2 million is recorded as a deferred gain in the Company’s loss reserves at December 31, 2010 that are included in the accompanying balance sheet. Included in the total favorable development were amortized gains from the loss portfolio acquired as part of the GMAC Acquisition, recorded as a reduction of losses incurred of $25.3 and $10.7 million for the years ended December 31, 2010 and 2009, respectively.
Acquisition Costs. Acquisition costs increased by $26.5 million, or 21.0%, for the year ended December 31, 2010 compared to the same period in 2009. The increase is due to the increase in earned premiums in 2010; in addition, acquisition costs in 2009 reflect the unearned premium portfolio assumed as part of the GMAC Acquisition, which was acquired net of acquisition costs and subsequently lowered acquisitions costs throughout 2009. As a result, the acquisition cost ratio increased to 25.4% for the year ended December 31, 2010 as compared to 22.2% for the same period in 2009. Finally, for the period November 30, 2010 to December 31, 2010, we earned gross fee income from programs developed by Maiden Global of $0.8 million, which is netted against commission and other acquisition expenses in the accompanying consolidated statements of income.
General and Administrative Expenses. General and administrative expenses increased by $6.9 million, or 36.0%, for the year ended December 31, 2010 compared to the same period in 2009. The general and administrative expense ratio was 4.4% and 3.4% for the years ended December 31, 2010 and 2009, respectively. The overall expense ratio (including acquisition costs) was 29.8% and 25.6% for the year ended December 31, 2010 and 2009, respectively. The increase is primarily due to the decline in premiums in 2010; in 2009, expenses were impacted by the first full year of operations from the GMAC Acquisition.
The table below illustrates net premiums earned by line of business in this segment for the years ended December 31, 2009 and 2008.
The Company amortized gains as a reduction of losses incurred of $10.7 million and $1.6 million for the years ended December 31, 2009 and 2008, respectively. In 2008, the amount of this favorable development related to settlement of case reserves, primarily property claims, for amounts lower than the case reserves carried at the time of the GMAC Acquisition. These amounts are largely timing related and are not likely to recur. The total favorable development relating to the loss portfolio transfer since the closing of the GMAC Acquisition has been $17.7 million and the remaining $5.4 million is recorded as a deferred gain in the Company’s loss reserves at December 31, 2009 that are included in the accompanying balance sheet.
Acquisition Costs. Acquisition costs increased by $117.1 million, or 1,294.2%, for the year ended December 31, 2009 compared to the same period in 2008. This increase is due to a number of factors, 2009 reflects a full years premiums, the unearned premium portfolio assumed as part of the GMAC Acquisition was acquired net of acquisition costs and increased commissions accruals on the 2008 underwriting year due to lower loss ratios.
General and Administrative Expenses. General and administrative expenses increased by $12.3 million, or 179.1%, for the year ended December 31, 2009 compared to the same period in 2008. The general and administrative expense ratio was 3.4% and 8.1% for the years ended December 31, 2009 and 2008,
respectively. The overall expense ratio (including acquisition costs) was 25.6% and 18.7% for the year ended December 31, 2009 and 2008, respectively. The increase is primarily due to the fact GMAC Acquisition took place on October 31, 2008 and 2009 was the first full year of operations for this business.
Comparison of Years Ended December 31, 2010 and 2009 The combined ratio increased to 95.9% for the year ended December 31, 2010 as compared to 94.5% in the same period ended 2009. The increase was primarily due to a higher loss ratio reflecting ongoing changes in the mix of business within the segment, particularly ongoing growth in AmTrust’s Specialty Risk and Extended Warranty line of business.
Premiums. Net premiums written increased by $95.6 million, or 25.7%, for the year ended December 31, 2010 as compared to the same period in 2009. The table below illustrates net premiums written by AmTrust’s segments for the years ended December 31, 2010 and 2009.
General and Administrative Expenses. General and administrative expenses decreased by $1.0 million, or 40.0%, for the year ended December 31, 2010 compared to the same period in 2009. The general and administrative expense ratio also declined to 0.3% for the year ended December 31, 2010 as compared to 0.7% for the year ended December 31, 2009. The decrease in both the actual expenses and the general and administrative expense ratio reflects the continued diversification of our overall book of business among different segments (which includes in 2010 the commencement of the ACAC Quota Share and the completion of the IIS Acquisition) and the resulting decreased allocation of overhead expenses to this segment in 2010 as compared to 2009. The 2010 ratio also reflects the continuing growth in the premiums written and earned in this segment. The overall expense ratio (including acquisition costs) was 32.8% and 33.4% for the year ended December 31, 2010 and 2009, respectively.
Comparison of Year Ended December 31, 2009 and 2008 The combined ratio increased to 94.5% for the year ended December 31, 2009 as compared to 92.5% in the same period ended 2008. The increase was primarily due to a higher loss ratio reflecting ongoing changes in the mix of business within the segment, particularly those premiums associated with the UBI unit within AmTrust’s Small Commercial Business segment, which generate higher loss ratios than the underlying core AmTrust Small Commercial Business segment.
Net premiums earned increased by $16.9 million, or 5.0%, for the year ended December 31, 2009 as compared to the same period in 2008. The table below illustrates net premiums earned by line of business for the years ended December 31, 2009 and 2008.
The impact of the change in earned premium relating to a one- time unearned premium transfer was $55.8 million as a result of the Company’s reinsurance of premiums and losses assumed by AmTrust pursuant to its acquisition of UBI business in May 2008. Excluding the impact of that one-time premium, the premium earned in that overall segment increased $72.7 million or 26.0% in 2009 as compared to 2008.
Acquisition Costs. Acquisition costs increased by $4.6 million, or 4.1%, for the year ended December31, 2009 compared to the same period in 2008. This is consistent with the increase in earned premium experienced excluding the one-time adjustment for the UBI premium acquired by AmTrust in 2008.
ACAC Quota Share Segment As noted, this segment commenced on March 1, 2010 and no comparable results are available for 2009 or 2008. Please refer to the above discussion of the ACAC Transaction. For the ten months ended December 31, 2010, the combined ratio was 96.6%, consisting of a loss ratio of 64.5% and an expense ratio of 31.9%.
Premiums. The table below details components by line of business of net premiums written and earned for the ten months ended December 31, 2010:
Our sources of funds primarily consist of premium receipts net of commissions, investment income, net proceeds from capital raising activities, which may include the issuance of common shares, and proceeds from sales and redemption of investments. Cash is used primarily to pay losses and loss expenses, general and administrative expenses and dividends, with the remainder made available to our investment managers for investment in accordance with our investment policy. A summary of cash flows from and (used) in operating, investing and financing activities for the years ended December 31, 2010, 2009 and 2008 is as follows:
As of December 31, 2010, total trust account deposits were $1,518.9 million compared to $1,375.6 million as of December 31, 2009. The following table details additional information on the trust account deposits by segment and by underlying asset as of December 31, 2010 and 2009:
For the Quota Share Agreement with AII, Maiden Bermuda has also loaned funds totaling $168.0 million as of December 31, 2010 and 2009, respectively, to AII to satisfy collateral requirements. In addition, Maiden Bermuda has outstanding letters of credit totaling $24.0 million and $19.6 million as of December 31, 2010 and 2009, respectively.
IIS Acquisition - Funds Withheld The substantial majority of the premiums and losses underwritten by GMAC IICL are subject to collateral requirements in the form of letters of credit and trust agreements. At the closing of the IIS Acquisition, the Company settled cash balances applicable to the subject reinsurance contracts with GMAC IICL of $26.2 million. Actual assets in support of the liabilities assumed under the IICL Agreement will be transferred to the Company when the subject individual agreements are novated to Maiden Bermuda. In the interim, under the funds withheld provisions of the IICL Agreement, the Company is fully credited for the investment income earned by the underlying assets which support the letters of credit and trust agreements GMAC IICL has provided to its ceding companies.
The fixed maturity portfolio consists of non-U.S. government debt, 67.1% of which is rated AAA as of December 31, 2010. The three largest non-U.S. sovereign government issuers are the United Kingdom (27.3%), Germany (18.2%) and Italy (15.9%). As of December 31, 2010, 9.6% of these securities consist of non-U.S. government obligations related to Ireland. We do not have any non-U.S. government and government related obligations related to Greece, Portugal or Spain as of December 31, 2010. See the discussion in Counterparty Credit Risk in
Financial Statements and Supplementary Data. See our consolidated financial statements and notes thereto and required financial statement schedules commencing on pages through and S-1 through S-7 below.