We currently lease office space in Pembroke, Bermuda (our corporate headquarters), the U.S., the U.K., Germany, Ireland, Australia and Netherlands 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. While we believe that the office space from these leased properties is sufficient for us to conduct our operations for the foreseeable future, we may need to expand into additional facilities to accommodate future growth. To date, the cost of acquiring and maintaining our office space has not been material to us as a whole.
We are a Bermuda-based holding company, formerly focused on serving the needs of regional and specialty insurers in the U.S., Europe and select other global markets. We operate internationally providing branded auto and credit life insurance products through insurer partners to retail clients in the EU and other global markets. These products also produce reinsurance programs which are underwritten by Maiden Bermuda. Certain international credit life business is written on a primary basis by Maiden LF. We are also presently running off the liabilities associated with AmTrust whose contracts we terminated in early 2019.
While we expect to continue to pursue our international reinsurance solutions written through Maiden Bermuda, as discussed in Item 1. "Business", the sale of Maiden US, the Partial Termination Amendment and the termination of both of our quota share contracts with AmTrust will materially reduce our gross and net premiums written in 2019. We have significantly reduced our operating expenses and continue to review the steps necessary to reduce these costs further commensurate with the reduction in revenues we expect to experience.
Our business consists of two reportable segments: Diversified Reinsurance and AmTrust Reinsurance. As a result of the strategic decision to divest all of our U.S. treaty reinsurance operations as discussed below, we have revised the composition of our reportable segments. Our Diversified Reinsurance segment now only consists of a portfolio of predominantly property and casualty reinsurance business focusing on regional and specialty property and casualty insurance companies located primarily in Europe. Our AmTrust Reinsurance segment includes all business ceded by AmTrust to Maiden Bermuda, primarily the AmTrust Quota Share and the European Hospital Liability Quota Share. Please refer to Item 1. "Business - Our Reportable Segments" section for further discussion on our reportable segments.
As a result of the above decision to divest all of our U.S. treaty reinsurance operations, these operations are now classified as discontinued operations, and except as explicitly described as held for sale or as discontinued operations, and unless otherwise noted, all discussions and amounts presented herein relate to our continuing operations, except for net loss, net loss attributable to Maiden and net loss attributable to Maiden common shareholders.
On March 1, 2019, we terminated the Old LPT MTA with Enstar and simultaneously signed the New LPT/ADC MTA pursuant to which an Enstar subsidiary will assume liabilities for loss reserves as of December 31, 2018 associated with the quota share reinsurance agreements between Maiden Bermuda and AmTrust in excess of a $2.4 billion retention up to $675.0 million. The retention will be subject to adjustment for paid losses since December 31, 2018. The New LPT/ADC MTA and associated pending reinsurance agreement, which is subject to regulatory approval, will provide Maiden Bermuda with $175.0 million in adverse development cover over its carried AmTrust reserves at December 31, 2018. Management has assessed that the associated reinsurance agreement to the New LPT/ADC MTA meets the criteria for risk transfer and will be accounted for as retroactive reinsurance. Cumulative ceded losses exceeding $500.0 million would result in a deferred gain which would be recognized over the settlement period in proportion to cumulative losses collected over the estimated ultimate reinsurance recoverable. Consequently, cumulative adverse development subsequent to December 31, 2018, in excess of $500.0 million, may result in significant losses from operations until those periods when the deferred gain is recognized as a benefit to earnings.
There were no capital transactions during 2018. The following capital transactions occurred during the year ended December 31, 2017.
Calculated by adding together the net loss and LAE ratio and the expense ratio.
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) total other-than-temporary impairment losses; (3) foreign exchange gains or losses; and (4) loss and related activity from our NGHC Quota Share run-off operations. It also excludes on a non-recurring basis accelerated amortization of senior note issuance costs and loss from discontinued operations, net of income tax. We exclude net realized gains or losses on investment, total other-than-temporary impairment losses and foreign exchange gains or losses as we believe these are influenced by market opportunities and other factors. We do not believe the loss from discontinued operations, accelerated amortization of senior note issuance costs, and loss and related activity from our NGHC Quota Share run-off operations are representative of our ongoing and future business. We believe all of these amounts are largely independent of our business and future underwriting process and including them distorts the analysis of trends in our operations.
Non-GAAP operating loss attributable to Maiden common shareholders increased by $302.0 million for the year ended December 31, 2018 compared to the same period in 2017. This was largely due to an increase in underwriting loss of $304.4 million particularly caused by both significantly higher adverse prior year loss development and reserve strengthening during the year in our AmTrust Reinsurance segment. As a result of these factors, the combined ratio increased by 15.2 points year-over-year. The unfavorable underwriting performance was partially offset by net investment income which increased $12.2 million compared to the prior period.
Non-GAAP operating loss attributable to Maiden common shareholders was $169.6 million for the year ended December 31, 2017 compared to non-GAAP operating earnings in the same period in 2016 of $39.6 million, a decrease of $209.2 million. This
was due to an increased underwriting loss of $228.7 million primarily caused by $247.2 million of adverse prior year loss development during 2017, largely related to Workers Compensation business, and to a lesser extent, the General Liability business within the AmTrust Reinsurance segment. As a result of these factors, the total loss ratio increased by 11.1% points year-over-year. The unfavorable underwriting performance was partially offset by net investment income which increased $15.4 million compared to the prior period.
Non-GAAP Operating ROACE for the years ended December 31, 2018, 2017 and 2016 was computed as follows:
Book value and diluted book value per common share at December 31, 2018, 2017 and 2016 were computed as follows:
Ratio of Debt to Total Capital Resources: Management uses this non-GAAP measure to monitor the financial leverage of the Company. This measure is calculated using the total principal amount of debt divided by the sum of total capital resources. The ratio of Debt to Total Capital Resources at December 31, 2018 and 2017 was computed as follows:
In 2018, an underwriting loss of $520.2 million was caused by adverse development of prior year losses of $403.2 million primarily in the AmTrust Reinsurance segment which had adverse development of $399.2 million. However, adverse prior year development was also experienced in our Diversified Reinsurance segment of $2.3 million and our Other category of $1.7 million. Current year underwriting results have also been impacted by increases in our initial loss picks for new premiums earned in our AmTrust Reinsurance segment factoring in both market conditions and recent loss trends and experience. In 2017, an underwriting loss of $215.8 million was caused by adverse reserve development of $247.2 million, primarily in our AmTrust Reinsurance segment which had adverse reserve development of $239.9 million. Prior to 2016, we have generated underwriting income in each year since inception.
It is important to understand our accounting policies in order to understand our financial position and results of operations. The Company’s Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following presents a discussion of those accounting policies and estimates that management believes are the most critical to its operations and require the most difficult, subjective and complex judgment. If actual events differ significantly from the underlying assumptions and estimates used by management, there could be material adjustments to prior estimates that could potentially adversely affect the Company’s results of operations, financial condition and liquidity. These critical accounting policies and estimates should be read in conjunction with "Notes to Consolidated Financial Statements - Note 2. Significant Accounting Policies" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report Form 10-K for a full understanding of the Company’s accounting policies.
Because a significant amount of time can elapse, particularly on longer-tail lines of business written on an excess of loss basis, between the assumption of risk, the occurrence of a loss event, the reporting of the event to an insurance company (the primary company or the cedant), the subsequent reporting to the reinsurance company ("the reinsurer") and the ultimate payment of the claim on the loss event by the reinsurer, the Company’s liability for unpaid loss and LAE ("loss reserves") is based largely upon estimates. The Company categorizes loss reserves into two types of reserves: reported outstanding loss reserves ("case reserves") and IBNR reserves. Case reserves represent, for each individual claim, an estimate of unpaid losses, either by the Company’s cedants or the Company’s claims handling professionals, and recorded by the Company. IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants.
For excess of loss treaties, cedants generally are required to report losses that either (i) exceed 50% of their retention; or (ii) have a reasonable probability of exceeding the retention; or (iii) meet defined reporting criteria. All excess of loss reinsurance claims that are reserved are reviewed on a periodic basis. In addition, reserves for loss and LAE are reviewed every quarter for each cedant. For proportional treaties, cedants are required to give a periodic statement of account, generally monthly or quarterly. These periodic statements typically include information regarding premiums written, premiums earned, unearned premiums, ceding commissions, brokerage amounts, applicable taxes, paid losses and reported outstanding losses. They can be submitted up to 90 days after the close of the reporting period. Some proportional treaties have specific language requiring earlier notice of serious claims.
The reserve for IBNR is estimated by management for each account based on various factors, including our underwriting team's expectations about loss experience, actuarial analysis and loss experience to date. Our actuaries employ standard actuarial methodologies to determine estimated ultimate loss reserves.
Loss reserves do not represent an exact calculation of liability. Rather, loss reserves are estimates of what we expect the ultimate resolution and administration of claims will cost. These estimates are based on actuarial projections and on our assessment of currently available data, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors. Loss reserve estimates are refined as experience develops and as claims are reported and resolved. In addition, the relatively long periods between when a loss occurs and when it may be reported to our claims department for our casualty reinsurance lines of business also increase the uncertainties of reserve estimates in such lines.
The Company has underwritten the AmTrust Reinsurance segment since July 1, 2007. A large portion 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 LD method can also be based on AmTrust specific historical information or information derived from industry sources, with actuarial judgment being used as to the credibility weighting employed. 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.
Significant Assumptions Employed in the Estimation of Reserve for Loss and Loss Adjustment Expenses: The most significant assumptions used at December 31, 2018 to estimate the reserve for loss and LAE within the Company’s segments are as follows:
historic loss development and trend experience may be used to predict future loss development and trends; and
The above four assumptions most significantly influence the Company’s determination of initial expected loss ratios and expected loss reporting and payment patterns that are the key inputs which impact potential variability in the estimate of the reserve for loss and LAE and are applicable to each of the Company’s business segments. These factors are combined with the actuarial judgment exercised by our reserving actuaries, and validated by the external review of our reserving levels. While there can be no assurance that any of the above assumptions will prove to be correct, we believe that this process represents a realistic and appropriate basis for estimating the reserve for loss and LAE. Loss emergence factors and expected loss ratios used in the reserving process are based on a blend of our own experience, cedant experience and industry benchmarks, when appropriate. The benchmarks selected were those that we believe are most similar to our underwriting business.
changes to characteristics of a claim over time, such as future medical needs or assessment of liability;
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, 2018, the Company was not involved in any material claims litigation or arbitration proceedings.
The Company’s estimate of loss reserves has changed materially for the years ended December 31, 2018 and 2017. The change in the loss reserve estimate from the prior year is referred to as Prior Year Development ("PPD"). The Company has experienced adverse PPD of $403.2 million and $247.2 million for the years ended December 31, 2018 and 2017, respectively. Please refer to “Notes to Consolidated Financial Statements - Note 9. Reserve for Loss and Loss Adjustment Expenses” included under Item 8. "Financial Statements and Supplementary Data" of this Form 10-K for further details.
The Company creates a statistical distribution around the estimate of reserve for loss and LAE based on an assumption of the volatility inherent in the estimate. The assumption of volatility is primarily based on parameters underlying the BSCR model as at December 31, 2018. The current estimate of volatility represents an increase in the expected volatility assumed as at December 31, 2017 of 11.3%. Due to adverse PPD for the years ended December 31, 2018 and 2017, the expected range of reasonable reserves has also widened, as the uncertainty inherent in the reserve estimate has surpassed previous expectations. As at December 31, 2018, the estimate of a reasonable range of reserves is based on one full standard deviation from the mean of the statistical distribution, which is an increase from approximately 84% of a standard deviation as at December 31, 2017.
Based on this reasonable range, our required reserves after reinsurance recoverable could increase by approximately $244.3 million, or 8.0%, of our consolidated net loss and LAE reserves. If the New LPT/ADC MTA between the Company and Enstar were to be considered, the variance in our required reserves would decrease to $69.3 million, or 2.7% of our consolidated net loss and LAE reserves as adjusted for the impact of the New LPT/ADC MTA.
The following table shows the analysis of goodwill and intangible assets:
Underwriting related general and administrative expenses is a non-GAAP measure. Please refer to "General and Administrative Expenses" below for additional information related to these corporate expenses and the reconciliation to those presented in our Consolidated Statements of Income.
Calculated by dividing net loss and LAE by the sum of net premiums earned and other insurance revenue.
Calculated by dividing all general and administrative expenses by the sum of net premiums earned and other insurance revenue.
an underwriting loss of $520.2 million compared to underwriting loss of $215.8 million during the year ended December 31, 2017. The deterioration in the underwriting result was principally due to:
adverse development of prior year losses of $403.2 million in 2018 compared to $247.2 million for the same period in 2017. This development, which is discussed in greater detail in the individual segment discussion and analysis, was primarily in our AmTrust Reinsurance segment for each respective period; and
realized losses on investment of $1.5 million for the year ended December 31, 2018 compared to realized gains of $12.2 million for the same period in 2017 and impairment losses in investments of $5.8 million for the year ended December 31, 2018 compared to $0 for the comparative period in 2017.
The unfavorable movements above were modestly offset by the following favorable factors:
foreign exchange gains of $4.5 million for the year ended December 31, 2018 compared to foreign exchange losses of $14.9 million for the same period in 2017 due to the recent weakening of the euro and British pound relative to the U.S. dollar;
dividends paid to preference shareholders decreased by $3.5 million for the year ended December 31, 2018 compared to the same period in 2017. Our Board did not declare dividends on any of our Preference Shares series during the fourth quarter of 2018. This was partially offset by the $7.5 million of dividends paid on the Preference Shares - Series D during the year ended December 31, 2018 compared to $5.0 million paid for the same period in 2017 as these preference shares were only issued on June 15, 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 main factors that contributed to this net decrease were as follows:
foreign exchange losses of $14.9 million for the year ended December 31, 2017 compared to foreign exchange gains of $13.4 million for the same period in 2016 due to the strengthening of the euro and British pound relative to the U.S. dollar which negatively impacted our Bermuda reinsurance subsidiary that reinsures British pound and euro-denominated risks.
interest and amortization expenses decreased to $23.3 million compared to $28.2 million for the same period in 2016 due to the redemption of the 2012 Senior Notes on June 27, 2017; and
Diversified Reinsurance segment increased by $46.8 million or 56.7% driven by new account growth and expansion of the Australia Warranty program, German Auto program and other client relationships in our European Capital Solutions business during 2018 as well as new business development; and
Please refer to the analysis below of our Diversified Reinsurance and AmTrust Reinsurance segments for further details.
Net premiums written increased by $69.7 million, or 3.5%, for the year ended December 31, 2017 compared to the same period in 2016. The table below compares net premiums written by our reportable segments, reconciled to the total consolidated net premiums written, for the years ended December 31, 2017 and 2016:
The $66.4 million increase in net premiums written in our AmTrust Reinsurance segment for the year ended December 31, 2017 compared to the same period in 2016 was primarily due to the lower utilization of retrocessional capacity as the ratio of net premiums written to gross premiums written increased to 98.1% for 2017 compared to 94.1% for the prior period.
Net premiums earned in our Diversified Reinsurance segment for the year ended December 31, 2018 increased by $29.5 million or 35.5% compared to the same period in 2017 as a result of overall growth in the German auto programs as well as new client development in our European Capital Solutions business. Please refer to the analysis of our Diversified Reinsurance segment on page 63 for further discussion.
Net premiums earned increased by $67.1 million, or 3.5%, for the year ended December 31, 2017 compared to the same period in 2016. 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, 2017 and 2016:
The following table details the Company's average investable assets and average book yield for the year ended December 31, 2018 compared to the same period in 2017:
Net Realized Gains on Investment - Net realized losses on investment were $1.5 million for the year ended December 31, 2018, compared to net realized gains on investment of $12.2 million for the same period in 2017.
Net Impairment Losses Recognized in Earnings - The Company recognized $5.8 million of OTTI losses in earnings for the year ended December 31, 2018 but did not have an OTTI charge for the year ended December 31, 2017.
The following table details the Company's average investable assets and average book yield for the year ended December 31, 2017 compared to the same period in 2016:
Net loss and LAE increased by $324.7 million, or 20.9%, during the year ended December 31, 2018. This was largely due to adverse prior year loss development of $403.2 million or 19.8 points during 2018 compared to $247.2 million or 12.4 points recorded in 2017. This development, which is discussed in greater detail in the individual segment discussion and analysis, was primarily in our AmTrust Reinsurance segment where significant reserve strengthening occurred in both respective periods. The net loss and LAE ratios were 92.3% and 77.7% for the years ended December 31, 2018 and 2017, respectively.
Net loss and LAE increased by $265.9 million for the year ended December 31, 2017 compared to 2016 which largely reflects $247.2 million or 12.4% of adverse reserve development experienced primarily in our AmTrust Reinsurance segment during 2017. The net loss and LAE ratios were 77.7% and 66.6% for the years ended December 31, 2017 and 2016, respectively.
Also, the higher loss ratios reflect increases we have made in our initial loss ratios on current year premiums earned in both our Diversified Reinsurance and AmTrust Reinsurance segments factoring in both market conditions and recent loss trends and experience.
Commission and other acquisition expenses increased by $28.3 million, or 4.6%, for the year ended December 31, 2017 compared to December 31, 2016. The commission and other acquisition expense ratio increased to 32.2% for the year December 31, 2017 compared to 31.8% for the same period in 2016. The commission and other acquisition expense ratio is largely dependent on the mix of business within the AmTrust Reinsurance segment and the mix of pro-rata and excess of loss business within the Diversified Reinsurance segment.
General and administrative expenses include expenses which are segregated for analytical purposes as a component of underwriting income. General and administrative expenses comprise:
Total general and administrative expenses increased by $11.9 million, or 22.5%, for the year ended December 31, 2018 compared to 2017 due to higher compensation benefits paid under certain executive separation agreements as well as higher audit, legal, and other professional fees and technology-related expenses. The general and administrative expense ratio increased to 3.2% for the years ended December 31, 2018 from 2.6% for the year ended December 31, 2017 as a result of the aforementioned significantly higher expenses incurred despite higher earned premiums compared to the prior period. Non-recurring expenses of $5.5 million, which are related to compensation benefits paid under certain executive separation agreements, increased the general and administrative expense ratio by 0.3% for the year ended December 31, 2018 compared to 2017.
The interest and amortization expenses related to the Senior Notes were $19.3 million for the year ended December 31, 2018 compared to $23.3 million for the same period in 2017. The decrease in interest expense compared to the prior period was due to the redemption of the 8.0% 2012 Senior Notes in June 2017. Please refer to "Notes to Consolidated Financial Statements - Note 11. Long Term Debt" included under Item 8 "Financial Statements and Supplementary Data" of this Form 10-K for further details on the Senior Notes. The weighted average effective interest rate for the Senior Notes was 7.6% for the year ended December 31, 2018 compared to 7.7% in 2017.
On June 27, 2017, Maiden NA fully redeemed 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, we accelerated the amortization of the remaining 2012 Senior Notes issuance cost of $2.8 million during the year ended December 31, 2017.
We recorded income tax expense of $0.4 million, income tax benefit of $6.8 million and income tax expense $0.4 million for the years ended December 31, 2018, 2017 and 2016, respectively. These amounts relate to income tax on the earnings (losses) of our international subsidiaries. The effective rate of income tax was (0.1)% for the year ended December 31, 2018 compared to 4.4% and 0.5% for the years ended December 31, 2017 and 2016, respectively.
lower net adverse prior year loss development which was $2.3 million or 1.9 points during 2018, compared to $5.4 million or 5.8 points for the same period in 2017. The 2018 development was largely due to adverse facultative reinsurance run-off written by Maiden Bermuda through 2014 partially offset by favorable development in International auto programs. The 2017 adverse prior year development was primarily from facultative reinsurance run-off lines as well as claims activity in International auto programs; and
Net premiums earned increased by $29.5 million, or 35.5%, during the year ended December 31, 2018 compared to the same period in 2017. The table below shows net premiums earned by line of business:
Within our Diversified Reinsurance segment, the business written by International experienced higher net premiums earned for the year ended December 31, 2018 compared to the same period in 2017 due to new account growth and expansion of client relationships in our European Capital Solutions business. In addition, there was overall growth in German Auto programs and other underwriting actions taken to generate new business development within the Life and General international lines for 2018.
Other Insurance Revenue - Other insurance revenue, which represents fee income from our IIS business that is not directly associated with premium revenue assumed by the Company decreased by $0.1 million to $9.7 million for the year ended December 31, 2018 compared to the same period in 2017.
higher initial loss ratios on current year premiums earned during the year ended December 31, 2018, factoring in both market conditions and recent loss trends and experience.
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 3.0 points for the year ended December 31, 2018 compared to 2017.
Commission and Other Acquisition Expenses - Commission and other acquisition expenses increased by $9.7 million, or 33.5%, for the year ended December 31, 2018 compared to 2017. The commission and other acquisition expense ratios increased slightly to 31.7% for the year ended December 31, 2018 compared to 31.3% for the same period in 2017 primarily due to the change in the mix of pro rata versus excess of loss premiums written during the year. Please refer to the reasons for the changes in the combined ratio discussed in the preceding paragraph.
General and Administrative Expenses - General and administrative expenses increased by $1.4 million, or 8.9%, for the year ended December 31, 2018 compared to 2017. The general and administrative expense ratio decreased to 14.2% for the year ended December 31, 2018 compared to 17.2% for the year ended December 31, 2017 as a result of higher premium earned compared to the prior period. The overall expense ratio (including commission and other acquisition expenses) was 45.9% and 48.5% for the years ended December 31, 2018 and 2017, respectively.
Net premiums written increased by $3.3 million or 4.1%, for the year December 31, 2017, compared to the same period in 2016 due to growth resulting from new European treaty contracts written by Maiden Bermuda in 2017. The table below illustrates net premiums written by line of business in this segment:
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 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 increased by 1.1 points for the year ended December 31, 2017 compared to 2016.
The AmTrust Reinsurance segment reported an underwriting loss of $513.1 million for the year ended December 31, 2018 compared to an underwriting loss of $207.1 million for the year ended December 31, 2017 and underwriting income of $30.1 million for the year ended December 31, 2016. The underwriting results and associated ratios for the AmTrust Reinsurance segment for the years ended December 31, 2018, 2017 and 2016 were as follows:
adverse prior year loss development of $399.2 million or 20.8 points during 2018 compared to $239.9 million or 12.5 points during 2017, which is explained below in further detail for each respective period:
Nearly half of the prior year loss development in 2018 was from workers' compensation, primarily driven by accident years 2014 to 2016 due to an increased expectation of loss development at later maturities. Other significant adverse loss development occurred in European hospital liability within Specialty Risk and Extended Warranty, and the general liability and commercial auto lines within Small Commercial Business and Specialty Program where elevated loss activity had been observed. The adverse loss development in European hospital liability was partly caused by the failure of the Italian government to implement a law passed in April 2017 which was expected to reduce medical malpractice costs, and also by a reduced expectation with regards to the ultimate amount of no-payment claims.
Net premiums earned increased by $4.1 million, or 0.2% for the year ended December 31, 2018 compared to the same period in 2017 mainly due to growth in net premiums written on the Specialty Risk and Extended Warranty lines of business within the AmTrust quota share and the lower utilization of retrocessional capacity in 2018 compared to 2017. The table below details net premiums earned by category for the years ended December 31, 2018 and 2017:
Net Loss and Loss Adjustment Expenses - Net loss and LAE increased by $308.1 million, or 20.6%, for the year ended December 31, 2018 compared to the same period in 2017. Net loss and LAE ratios increased to 94.4% for the year ended December 31, 2018 compared to 78.4% for the same period in 2017.
During the year ended December 31, 2018, the net loss and LAE ratio increased by 16.0 points compared to the same period in 2017 due to the following factors:
More than half of the 2017 adverse prior year loss development was from workers' compensation in Small Commercial Business driven by accident years 2012 and subsequent, which increased as a percentage of business written during this time period. Other significant development was experienced in commercial auto as well as general liability within AmTrust's Specialty Program and Small Commercial Business segments, predominantly in accident years 2012 and subsequent, as a result of industry-wide trends including increasing claim severity and claim frequency; and
higher initial loss ratios on current year premiums earned during the year factoring in both market conditions and recent loss trends and experience as well as elevated actual current accident year activity within Specialty Risk and Extended Warranty lines.
Premiums - Net premiums written increased by $66.4 million or 3.5% for the year ended December 31, 2017 compared to the same period in 2016 which was primarily due to the lower utilization of retrocessional capacity in 2017. The ratio of net premiums written to gross premiums written increased to 98.1% for the year ended December 31, 2017 compared to 94.1% for the same period in 2016.
Net Loss and Loss Adjustment Expenses - Net loss and LAE increased by $273.1 million, or 22.3%, for the year ended December 31, 2017 compared to the same period in 2016. Net loss and LAE ratios were 78.4% and 66.5% for the years ended December 31, 2017 and 2016, respectively. The net loss and LAE ratio for the year ended December 31, 2017 increased largely due to the following:
higher adverse prior year loss development which was $239.9 million or 12.5 points during 2017, with more than half of the adverse development related to workers' compensation, and to a lesser extent, general liability and commercial auto from both Specialty Program and Small Commercial Business. This compared to $54.0 million or 2.9 points of adverse development for the same period in 2016 which was largely due to program commercial auto as well as program general liability and includes a fourth quarter reserve charge of $52.0 million related to these lines in 2016.
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 to 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 fluctuation in the ratios during the year ended
December 31, 2017 compared to 2016 reflects the change in the mix of business towards towards higher acquisition cost insurance coverages, such as Small Commercial Business which has a higher commission rate than the European Hospital Liability Quota Share. 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.
On March 1, 2019, we terminated the Old LPT MTA with Enstar dated as of November 9, 2018 and simultaneously signed a New LPT/ADC MTA pursuant to which an Enstar subsidiary will assume liabilities for loss reserves as of December 31, 2018 associated with the quota share reinsurance agreements between Maiden Bermuda and AmTrust in excess of a $2.44 billion retention up to $675.0 million. The $2.44 billion retention will be subject to adjustment for paid losses since December 31, 2018. The New LPT/ADC MTA and associated pending reinsurance agreement, which is subject to regulatory approval, will provide Maiden Bermuda with $175.0 million in adverse development cover over its carried AmTrust reserves at December 31, 2018. Management has assessed that the associated reinsurance agreement to the New LPT/ADC MTA meets the criteria for risk transfer and will be accounted for as retroactive reinsurance. Cumulative ceded losses exceeding $500.0 million would result in a deferred gain which would be recognized over the settlement period in proportion to cumulative losses collected over the estimated ultimate reinsurance recoverable. Consequently, cumulative adverse development subsequent to December 31, 2018, in excess of $500.0 million, may result in significant losses from operations until those periods when the deferred gain is recognized as a benefit to earnings.
Pursuant to Bermuda law, we must also ensure that the value of the group's assets exceeds the amount of the group's liabilities by the aggregate Group MSM. Since December 31, 2013, we have been required to maintain available group capital and surplus at a level equal to or in excess of the Group ECR which is established by reference to either the Group BSCR model or an approved group internal capital model. As of December 31, 2018, the Group did not meet the Group ECR standards established by the BMA while the the Group MSM is expected to be met. We had communicated such conditions to the BMA and are following the guidelines of a reportable “event” as stipulated by Bermuda insurance law. Considering the actions taken by Maiden Bermuda to cure its Bermuda ECR breach described above, including the New LPT/ADC MTA with Enstar, we expect the Group MSM and ECR standards to be met and to increase further during 2019. Consistent with the continuing recovery of our capital base, we remain actively engaged in ongoing discussions with the BMA regarding the formulation of our longer term business plan, which will require the approval of the BMA for any new reinsurance business. In addition, we have voluntarily undertaken with the BMA not to make any capital distributions of any kind, including the payment of common or preferred dividends, without the express consent of the BMA.
Maiden Holdings has two Swedish domiciled operating subsidiaries, Maiden LF and Maiden GF, both regulated by the Swedish FSA. At December 31, 2018, Maiden LF and Maiden GF each has a statutory capital and surplus of $7.6 million and $6.2 million, respectively, which exceed the amount required to be maintained of $4.2 million at December 31, 2018. 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, 2018, Maiden LF and Maiden GF are allowed to pay dividends or distributions not exceeding $1.9 million and $0, respectively. During 2018 and 2017, 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 was for the period ended December 31, 2017.
Our business has undergone significant changes in the last year. As previously noted, the Strategic Review has resulted in a series of transactions that have materially reduced the risk on our balance sheet and are transforming our operations. As a result of the transactions entered into from the Strategic Review, the Company's gross and net premiums written will be materially lower in 2019 and investment income will become a significantly larger portion of our revenues. We believe this will significantly reduce our operating cash flow.
We generally expect negative operating cash flows to be met or exceeded by positive investing cash flows. Overall, we expect our cash flows, together with our existing capital base and unrestricted cash and investments to be sufficient to meet cash requirements and to operate our business.
Cash flows provided by operating activities for the year ended December 31, 2018 were $182.3 million compared to $458.6 million for the year ended December 31, 2017, a 60.2% decrease. Cash flows used in discontinued operations were $99.3 million for the year ended December 31, 2018 compared to cash flows provided by discontinued operations of $34.0 million in the year ended December 31, 2017. Cash flows provided by continuing operating activities for the year ended December 31, 2018 were $281.6 million compared to $424.6 million for the year ended December 31, 2017, a 33.7% decrease. The decrease in operating cash flows from continuing operations was the result of higher payment of losses and decreased gross premiums written in 2018 compared to 2017, offset by the increase in reserves for loss and LAE during the year ended December 31, 2018 of $207.6 million, which reflects significant adverse prior year development recognized during 2018.
Cash flows used in financing activities were $68.0 million for the year ended December 31, 2018 compared to $60.4 million for the same period in 2017. The lower net cash outflow for the year ended December 31, 2017 compared to the same period in 2018 was due to the issuance of new preference shares with net proceeds of $144.9 million, which was partially used to redeem the 2012 Senior Notes issuance of $100.0 million as well as the repurchase of common shares of $25.7 million during 2017, the bulk of which was made under the Company's authorized share repurchase program. The Company did not have any capital transactions during the year ended December 31, 2018.
In addition, there was a decrease in dividends paid on preference shares of $3.5 million due to the suspension of preferred dividend payments during the fourth quarter of 2018, combined with the decrease in dividends paid to common shareholders of $10.1 million in 2018 compared to the same period in 2017. The decrease was due to: 1) the lower number of common shares outstanding during 2018; 2) a decrease in the dividend rate paid per share in the third quarter of 2018 and 3) the Board not declaring a dividend payment to common shareholders in the fourth quarter of 2018. The reduced number of average common shares outstanding was due mainly to repurchase of 3,667,134 common shares during the second half of 2017, and the repurchase of 205,000 common shares in the third quarter of 2018 which was made under the Company's authorized share repurchase program.
We do not currently anticipate that the restrictions on liquidity resulting from restrictions on the payments of dividends by our subsidiary companies or from assets committed in trust accounts or those assets used to collateralize the letter of credit facilities will have a material impact on our ability to carry out our normal business activities.
The investment of our funds is designed to ensure safety of principal while generating current income. Accordingly, our funds are invested in liquid, investment-grade fixed income securities which are designated as either AFS or HTM. During the year ended December 31, 2018, we did not designate any additional fixed maturities as HTM. In 2017, the Company designated certain corporate and municipal bonds previously classified as AFS to HTM to reflect our intention of holding these bonds until maturity. Please see "Notes to Consolidated Financial Statements - Note 4. Investments" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
The movement in the market values of our AFS fixed maturity portfolio was a net reduction of $66.6 million, primarily due to unrealized losses caused by rising interest rates and widening credit spreads that have resulted in negative returns for U.S. corporate and agency bonds during the year ended December 31, 2018. Please see "Liquidity and Capital Resources - Capital Resources" on page 77 for further information.
During the year ended December 31, 2018, the weighted average duration of our fixed maturity investment portfolio decreased by 0.2 years to 4.2 years; and the duration for reserve for loss and LAE increased by 0.9 years to 4.5 years mostly due to an increased expectation in paid loss emergence at later maturities. The differential in duration between these assets and liabilities may fluctuate over time and, in the case of fixed maturities, is affected by factors such as market conditions, changes in asset mix and prepayment speeds in the case of both our agency mortgage-backed securities ("Agency MBS') and commercial mortgage-backed securities ("CMBS"). The average yield and average duration of our fixed maturities, by asset class, and our cash and cash equivalents (restricted and unrestricted) are as follows:
The following table summarizes the Company's fixed maturity investment portfolio holdings by contractual maturity at December 31, 2018 and 2017:
At December 31, 2018 and 2017, 98.7% 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 following summarizes the credit ratings of our fixed maturities at December 31, 2018 and 2017:
At December 31, 2018, the Company’s ten largest corporate holdings, 100.0% of which are U.S. dollar denominated and 68.7% of which are in the Financial Institutions sector, at fair value and as a percentage of all fixed income securities, were as follows:
The net decrease in non-U.S. dollar denominated fixed maturities is primarily due to sales of euro-denominated corporate bonds during the year ended December 31, 2018. At December 31, 2018 and December 31, 2017, all of the Company's non-U.S. government and supranational issuers have a rating of A or higher by S&P.
Capital resources consist of funds deployed in support of our operations. Our total capital resources decreased by $677.9 million, or 45.4% at December 31, 2018, compared to December 31, 2017 due to the unfavorable movement in unrealized losses on our AFS investment portfolio and significant adverse loss development within our AmTrust Reinsurance segment. The Company’s management believes its current sources of liquidity are adequate to meet its cash requirements for the next 12 months. The following table shows the movement in total capital resources at December 31, 2018 and 2017:
Please refer to "Notes to Consolidated Financial Statements - Note 11. Long Term Debt and Note 14. Shareholders' Equity" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion of the Senior Notes. There were no changes in the issuances of Senior Notes at December 31, 2018 compared to December 31, 2017 and we did not enter into any short-term borrowing arrangements during the year ended December 31, 2018.
In the Company’s report on Form 10-Q for the quarterly period ended September 30, 2018, we specified that current analysis indicated that the conditions to redeem the 2013 Senior Notes as stipulated by the securities may exist but were pending final analysis. As a result of the conditions discussed in Item 1 “Business” and Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K as regards to Maiden NA, these conditions
do not exist and we have determined that the 2013 Senior Notes will remain outstanding, subject to the terms and conditions stipulated in those securities.
On November 14, 2018, A.M. Best downgraded the financial strength rating to B++ (Good) with negative outlook and implications from A- (Excellent) and the long-term issuer credit rating to “bbb” from “a-”, with negative outlook and implications, of Maiden Bermuda, the Company's primary operating subsidiary. In February 2019, we requested from A.M. Best to withdraw our rating. On February 28, 2019, A.M. Best approved the withdrawal with a final rating as "B++" (Good) with negative outlook and implications.
(1) The Company leases office space, an executive apartment, office equipment and company vehicles under various operating leases expiring in various years through 2022. For further details on operating lease commitments, please refer to ""Notes to Consolidated Financial Statements, Note 12. Commitments & Contingencies included under Item 8 "Financial Statement and Supplementary Data".
(2) For further details on the terms of our Senior Notes, please refer to "Notes to Consolidated Financial Statements - Note 11. Long-Term Debt included under Item 8 "Financial Statement and Supplementary Data".
(3) 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, 2018. 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, 2018.
Net foreign exchange gains were $6.0 million during the year ended December 31, 2018 compared to net foreign exchange losses of $14.9 million and net foreign exchange gains of $13.4 million during the years ended December 31, 2017 and 2016, respectively.
At December 31, 2018, we did not have any off-balance sheet arrangements as defined by Item 303(a) (4) of Regulation S-K.
Refer to "Notes to Consolidated Financial Statements - Note 2. Significant Accounting Policies" included under Item 8 "Financial Statement and Supplementary Data", of this Annual Report on Form 10-K for a discussion on recently issued accounting pronouncements not yet adopted.