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 also have four other office space leases in the United States and four apartment leases in Bermuda with various expiry dates.
We currently manage our business through two operating segments: Diversified Reinsurance and AmTrust Quota Share. We will add a third segment, ACAC Personal Lines Quota Share in 2010 as a result of the ACAC Transaction discussed below. As of December 31, 2009, we had approximately $2.6 billion in total assets, $676.5 million of total shareholders’ equity and $891.6 million in total capital, which includes shareholders’ equity and junior subordinated debt.
Recent Developments 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 RE LLC (“GMAC RE”), a reinsurance managing general agent writing business on behalf of Motors Insurance Corporation (“Motors”) and the renewal rights for the business written through GMAC RE (which was subsequently renamed Maiden Re Insurance Services, LLC (“Maiden Re”));
• Integon Specialty Insurance Company (“Integon”) (which was subsequently renamed Maiden Specialty Insurance Company).
In conjunction with the acquisition of GMAC RE, on October 31, 2008, the Company and Motors entered into a Portfolio Transfer and Quota Share Reinsurance Agreement (“Agreement”) under which the Company reinsures (i) all of the existing contracts written by GMAC RE pursuant to a loss portfolio transfer and (ii) contracts written pursuant to a fronting arrangement with Motors. According to the loss portfolio transfer provisions of the Agreement, the Company assumed the loss reserves of $755.6 million associated with the GMAC RE business as of October 31, 2008. The Company also assumed unearned premium of 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.
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.
ACAC Transaction In November 2009, we announced an agreement in principal with American Capital Acquisition Corporation (“ACAC”) regarding a multi-year 25% quota share agreement expected to generate over $200 million in annual revenue. The contract commenced on March 1, 2010 after final regulatory approval and the closing of ACAC’s acquisition of GMACI’s U.S. consumer property and casualty insurance business, as well as a small amount of commercial auto business. This business generated over $1.0 billion in net written premium in each of 2008 and 2009. ACAC is owned by one of our Founding Shareholders, Michael Karfunkel, and the Michael Karfunkel 2005 Grantor Retained Annuity Trust (the “Trust”), which is controlled by Michael Karfunkel. The Trust currently owns 72.4% of ACAC’s issued and outstanding common stock, Michael Karfunkel currently owns 27.6% of ACAC’s issued and outstanding common stock, and AmTrust owns preferred shares convertible into 21.25% of the issued and outstanding common stock of ACAC. In addition to reinsurance support, we will provide support services focused on helping ACAC to continue its profitable expansion.
• Operating earnings of $64.9 million, or $0.93 diluted operating earnings per share(1)
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, non-recurring general and administrative expenses related to the GMAC Acquisition. 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 amortization of intangible assets are representative of our ongoing business. The expenses related to the GMAC 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.
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
The Company’s revenues also include income generated from its investment portfolio. The Company’s investment portfolio is comprised of fixed maturity investments, short term investments and other investments that are held as available for sale. In accordance with GAAP, these investments are carried at fair market value and unrealized gains and losses on the Company’s investments are generally excluded from earnings. These unrealized gains and losses are included on the Company’s balance sheet in accumulated other comprehensive (loss) income as a separate component of shareholders’ equity. If unrealized losses are considered to be other-than-temporarily impaired, such losses are included in earnings as a realized loss.
Because a significant amount of time can elapse between the assumption of risk, particularly on longer-tail lines of business, occurrence of a loss event, the reporting of the event to an insurance company (the primary company or the cedant), the subsequent reporting to the reinsurance company (the reinsurer) and the ultimate payment of the claim on the loss event by the reinsurer, the Company’s liability for unpaid losses and loss expenses (loss reserves) is based largely upon estimates. The Company categorizes loss reserves into three types of reserves: reported outstanding loss reserves (case reserves), additional case reserves (ACRs) and incurred but not reported (IBNR) reserves. Case reserves represent unpaid losses reported by the Company’s cedants and recorded by the Company. ACRs are established for particular circumstances where, on the basis of individual loss reports, the Company estimates that the particular loss or collection of losses covered by a treaty may be greater than those advised by the cedant. IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves and ACRs. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants. The Company also estimates the future unallocated loss adjustment expenses (ULAE) associated with the loss reserves and these form part of the Company’s loss adjustment expense reserves
Reserves for losses and loss expenses as of December 31, 2009 and 2008 were comprised of the following:
Actuarial Methods Used to Estimate Loss and Loss Expense Reserves We utilize a variety of standard actuarial methods in our analysis. The selections from these various methods are based on the loss development characteristics of the specific line of business. The actuarial methods we utilize include:
In the Diversified Reinsurance segment, as of December 31, 2009, 97.5% 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.
The Company has underwritten the AmTrust Quota Share segment since July 1, 2007. Certain aspects of this segment are associated with recent acquisitions by AmTrust and while the underlying experience of the book has significant seasoning, the combination of the shorter time frame with which the Company has direct
experience with this business and the relative inexperience of certain aspects of this business may result in a greater range of volatility. As a result, we have tended to rely on a weighted approach which primarily employs the Reported Loss Development Method while also considering the Expected Loss Ratio Method. The Company’s actuarial analysis of this book of business is more refined in that it utilizes a combination of monthly and quarterly data instead of contract period data in totality. As a result, a range of loss development factors are utilized due to the relative lack of seasoning of the underlying business as regards the Company’s experience. Because of the refinement of the data, this allows for greater use of the loss development method earlier on in the maturity of the book than would ordinarily occur
The inherent uncertainty of estimating the Company’s loss and loss expense reserves increases principally due to:
(iii) the diversity of loss development patterns among different types of reinsurance treaties or contracts, and
(iv) the Company’s need to rely on its ceding companies for loss information, which also exposes the Company to changes in the reserving philosophy of the ceding company and the adequacy of its underlying case reserves.
Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company’s business activities can also impair the accuracy of its loss and loss expense reserve estimates. As of December 31, 2009, there were no significant backlogs related to the processing of policy or contract information in the Company’s segments.
• changes in the inflation rate for goods and services related to the covered damages;
• in the case of assumed reinsurance, changes in ceding company case reserving and reporting patterns.
Due to the inherent complexity of the assumptions used in establishing the Company’s loss and loss expense reserve estimates, final claim settlements made by the Company may vary significantly from the present estimates, particularly when those settlements may not occur until well into the future.
In addition, the Company’s segments have varying levels of seasoning with which the Company has direct experience and as a result, the reasonably likely variance of our expected loss ratio for each segment varies commensurately with that experience. As of December 31, 2009, 97.5% 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. We believe the possible variance of our expected loss ratio for all applicable loss years for the Diversified Reinsurance segment was approximately one percentage point as of December 31, 2009. If our final loss ratio for the Diversified Reinsurance segment were to vary by approximately one percentage point from the expected loss ratios in the aggregate, our required reserves after reinsurance recoverable would increase or decrease by approximately $55.5 million.
Premiums and Acquisition Costs The Company provides proportional and non-proportional reinsurance coverage to cedants (insurance companies). In most cases, cedants seek protection for business that they have not yet written at the time they enter into reinsurance agreements and thus have to estimate the volume of premiums they will cede to the Company. Reporting delays are inherent in the reinsurance industry and vary in length by type of treaty. As delays can vary from a few weeks to a year or sometimes longer, the Company produces accounting estimates to report premiums and acquisition costs until it receives the cedants’ actual results.
Fair Value of Financial Instruments The Company currently classifies all of its fixed income investment, which consist of fixed maturity investments, other investments and short-term investments, as “available for sale”. Pursuant to GAAP, these investments are carried at estimated fair value, with net unrealized gains or losses excluded from earnings and included in shareholders’ equity as a component of accumulated other comprehensive (loss) income.
• Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Examples of assets and liabilities utilizing Level 1 inputs include: exchange-traded equity securities, U.S. Treasury securities, and listed derivatives that are actively traded.
• Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data. Examples of assets and liabilities utilizing Level 2 inputs include: listed derivatives that are not actively traded; U.S. government-sponsored agency securities; non-U.S. government obligations; corporate and municipal bonds; mortgage-backed securities (“MBS”) and asset-backed securities (“ABS”); short-duration high yield fund, and over-the-counter (“OTC”) derivatives (e.g. foreign currency options and forward contracts).
• Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our own assumptions about assumptions that market participants might use. Examples of assets and liabilities utilizing Level 3 inputs include: insurance and reinsurance derivative contracts; hedge and credit funds with partial transparency; and collateralized loan obligation (“CLO”) - equity tranche securities that are traded in less liquid markets.
There were no other-than-temporary impaired securities during the year ended December 31, 2009 and in the period from May 31 (inception) to December 31, 2007. During the year ended December 31, 2008, we identified three securities which were considered to be other-than-temporarily impaired. Consequently, the cost of these securities was written down to fair value and we recognized a realized loss of $43.3 million for the year ended December 31, 2008. Finally, there were no other-than-temporary impaired securities in 2009.
Goodwill and Intangible Assets The GMAC 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.
ASC Topic 805, Business Combinations requires that the Company make an annual assessment as to whether the value of the Company’s goodwill and intangible assets are impaired. Impairment, which can be either partial or full, is based on a fair value analysis by individual reporting unit. Based upon the Company’s assessment at the reporting unit level, there was no impairment of its goodwill and intangible assets as of December 31, 2009 of $52.6 million and $51.3 million, respectively
Results of Operations The following table sets forth our selected consolidated statement of operations data for each of the periods indicated. Comparisons primarily of the 2009 to 2008 period are significantly influenced by the effects of the first full year of the GMAC Acquisition and the TRUPS issuance. For the 2008 to 2007 period, comparisons are significantly influenced by the GMAC Acquisition and the first full year of the AmTrust Quota Share segment. As a result, meaningful comparisons are difficult and the segment information provided in the section immediately after this discussion may provide readers with more useful analysis of the Company’s results.
Net Income 2009 vs. 2008. Net Income for the year ended December 31, 2009 was $61.1 million compared to net income of $18.8 million for the same period in 2008. The increased net income was generally the result of an improvement in underwriting profit of $19.9 million due to the first full year of results after the GMAC Acquisition, despite a modest decline in the combined ratio. In addition, investment income increased by $25.7 million, the result of both the first full year of results after the GMAC Acquisition and the investment of the proceeds of the TRUPS issuance. Net realized investment gains were $0.3 million in 2009 as compared to net realized investment losses of $37.5 million as there was no re-occurrence in 2009 of OTTI losses that occurred in 2008.The improvement in underwriting and investment income more than offset the increase in interest expense associated with the TRUPS issuance. The Company’s expense ratio declined as a result of the increase in revenue associated with the GMAC Acquisition although underlying general and administrative expenses increased on a year to year basis consistent with the growth in revenues. Amortization of intangible assets increased by $5.4 million as a result of the first full year of results after the GMAC Acquisition. Net income for the year ended December 31, 2009 included a net foreign exchange and other gain of $2.4 million and a deferred U.S. tax expense of $1.3 million.
2008 vs. 2007. Net income for the year ended December 31, 2008 was $18.8 million compared to net income of $22.1 million for the period from May 31 (inception) to December 31, 2007. The decrease was the result of net realized investment losses and increased general and administrative expenses, which offset improvements in underwriting income of $18.9 million as a result of the first full year of the Company’s operations and the GMAC Acquisition. Improvement in investment income also occurred due the inclusion of a full twelve months in 2008 and the GMAC Acquisition on October 31, 2008. Net income for the year ended December 31, 2008 included a net foreign exchange loss of $1.4 million and amortization of intangible assets of $1.2 million.
Premiums We evaluate our business by segment, distinguishing between Diversified Reinsurance and AmTrust Quota Share segments. The following chart illustrates the mix of our business on both a net premiums written and net premiums earned basis.
• In our Diversified Reinsurance segment - the GMAC Acquisition was effective November 1, 2008 and the unearned premium transfer resulted in net premiums written increasing by $252.9 million.
Net Premiums Earned Comparison of Years Ended December 31, 2009 and December 31, 2008 Net premiums earned increased by $499.8 million, or 119.0%, for the year ended December 31, 2009 compared to the year ended December 31, 2008. The increase in gross premiums earned was primarily the result of the following:
• In our AmTrust Quota Share Segment - the first full year of premium for the AmTrust Quota Share segment as this contract incepted on July 1, 2007. In 2008 our net premiums earned were $335.0 million compared to $110.2 million, which included unearned premium transferred on the inception of the contract and net premium earned for the period from July 1, 2007 to December 31, 2007. In 2008, that business also included a one-time unearned premium transfer of $82.2 million of which $67.2 million was earned in 2008 as a result of the Company’s reinsurance of premiums and losses assumed by AmTrust pursuant to its acquisition of UBI in May 2008.
Loss and Loss Adjustment Expenses Comparison of Years Ended December 31, 2009 and December 31, 2008 Loss and loss adjustment expenses increased by $344.9 million, or 130.8%, for the year ended December 31, 2009 as compared to the same period in 2008, due to the first full twelve months of the business associated with the GMAC Acquisition in November 2008.
In 2009 and 2008, the Company recognized $14.5 million and $3.7 million, respectively, of favorable development on prior year’s reserves, principally due to favorable development in its Diversified Reinsurance segment in both years. The Company amortized gains as a reduction of losses incurred of $10.8 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
The loss ratios were 62.8% and 59.0% for the year ended December 31, 2008 and the period from May 31 (inception) to December 31, 2007, respectively. The increase was the result of both the increase in gross premiums and business acquired in the GMAC Acquisition having a higher loss ratio.
Losses and loss adjustment expenses incurred include in a $1.6 million amortized gain relating to favorable development of the loss portfolio transfer from the GMAC Acquisition. At December 31, 2008, the actuarial estimate for loss and loss expenses reserves for the loss portfolio transfer from the GMAC Acquisition was $3.7 million lower than the original estimate. This favorable development on the release of a property reserve is amortized into income over the settlement period of the subject losses. The total favorable development was $3.7 million and the remaining $2 million is recorded as a deferred gain in the Company’s loss reserves at December 31, 2008 that are included in the accompanying balance sheet.
• Directors’ and insurance costs increased by approximately $0.8 million due primarily to a full year’s expense relating to the GMAC Acquisition.
Comparison of Year Ended December 31, 2008 and Period from May 31 (Inception) to December 31, 2007 Other operating expenses increased by $12.0 million, or 405.8%, for the year ended December 31, 2008 compared to the period from May 31 (inception) to December 31, 2007. The increase primarily is due to the GMAC Acquisition in November 2008 and a full year of operations in 2008.
Net realized investment losses were $37.6 million for the year ended December 31, 2008 compared to net realized investment gain of $0.2 million the period from May 31 (inception) to December 31, 2007. Net realized investment losses for the year ended December 31, 2008 were comprised of the following:
Diversified Reinsurance Segment The following table summarizes the underwriting results and associated ratios for the Diversified Reinsurance segment for the years ended December 31, 2009 and 2008 and the period from May 31 (inception) to December 31, 2007. Comparisons for the 2008 and 2007 periods are not meaningful as the GMAC Acquisition, which was completed on October 31, 2008, affected only a partial period in 2008 and 2009 constitutes the first full year of operations for this business.
Comparison of Years Ended December 31, 2009 and 2008 The combined ratio decreased to 94.9% for the year ended December 31, 2009 as compared to 96.3% in the same period ended 2008. Comparisons for the 2008 and 2007 periods are not meaningful as the GMAC Acquisition, which was completed on October 31, 2008, was only a partial period in 2008 and 2009 constitutes the first full year of operations for this business.
Net Losses and Loss Expenses. Net losses and loss expenses increased by $327.8 million, or 497.3%, for the year ended December 31, 2009 compared to the same period in 2008. Loss ratios were 69.3% and 77.5% for the years ended December 31, 2009 and 2008, respectively. Comparison of loss ratio results between 2009 and 2008 and not meaningful as the GMAC Acquisition took place on October 31, 2008 and 2009 was the first full year of operations for the business associated with the GMAC Acquisition.
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 Year Ended December 31, 2008 and the Period from May 31 (Inception) to December 31, 2007 The combined ratio increased to 96.3% for the year ended December 31, 2008 as compared to 69.7% for the period from May 31 (inception) to December 31, 2007. Meaningful comparisons are not available as 2007 was the initial period for the Company, and the amount of business produced was immaterial, and 2008 was affected by the GMAC Acquisition.
Premiums. Gross premiums written increased by $288.6 million, for the year ended December 31, 2008 compared to the period from May 31 (inception) to December 31, 2007. The increase primarily resulted from the GMAC Acquisition.
The table below illustrates net premiums earned by line of business in this segment for the years ended December 31, 2008 and the period from May 31 (inception) to December 31, 2007.
Net Losses and Loss Expenses. Net losses and loss expenses increased by $65.9 million, for the year ended December 31, 2008 compared to the period from May 31 (inception) to December 31, 2007. The loss ratios were 77.5% and 69.7% for the year ended December 31, 2008 and the period from May 31 (inception) to December 31, 2007, respectively. The increase was the result of both the increase in gross premiums and business acquired in the GMAC Acquisition having a higher loss ratio.
General and Administrative Expenses. General and administrative expenses increased by $6.9 million, for the year ended December 31, 2008 compared to the period from May 31 (inception) to December 31, 2007. The increase was due to the GMAC Acquisition.
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.
Premiums. Net premiums written increased by $191.4 million, or 77.4%, for the year ended December 31, 2008 compared to the period from May 31 (inception) to December 31, 2007. The increase in net premiums written is due to a combination of organic and acquisition growth by AmTrust, and receiving a full 12 months of premium in 2008. In 2007 we commenced the Quota Share Agreement with AmTrust effective July 1, 2007 that included a receipt of unearned premium transfer at inception.
Net premiums earned increased by $224.9 million, or 204.2%, for the year ended December 31, 2008 compared to the period from May 31 (inception) to December 31, 2007. The increase in net premiums earned is due to a combination of organic and acquisition growth by AmTrust, and receiving a full 12 months of premium in 2008. In 2007 we commenced the Quota Share Agreement with AmTrust effective July 1, 2007 that included a receipt of unearned premium transfer at inception.
Net Losses and Loss Expenses. Net losses and loss expenses increased by $132.8 million, or 204.3%, for the year ended December 31, 2008 compared to the period from May 31 (inception) to December 31, 2007. Loss ratios were 59.0% for the period ended December 31, 2008 and 59.0% for the period from May 31 (inception) to December 31, 2007, respectively.
The payment of dividends from Maiden Holdings’ Bermuda-domiciled operating subsidiary Maiden Bermuda is, under certain circumstances, limited under Bermuda law, which requires our Bermuda operating subsidiary to maintain certain measures of solvency and liquidity. In addition, Bermuda regulations require approval from the Bermuda Monetary Authority for any reduction of capital in excess of 15% of statutory capital, as defined in the Insurance Act. At December 31, 2009, the statutory capital and surplus of Maiden Insurance was $569.1 million, and the amount of capital and surplus required to be maintained was $143.0 million. During 2009 Maiden Insurance paid no dividends to our holding company, as compared to $10.0 million in 2008.
Restrictions, Collateral and Specific Requirements Maiden Bermuda, is neither licensed nor admitted as an insurer, nor is it accredited as a reinsurer, in any jurisdiction in the United States. As a result, it is generally required to post collateral security with respect to any reinsurance liabilities it assumes from ceding insurers domiciled in the United States in order for U.S. ceding companies to obtain credit on their U.S. statutory financial statements with respect to insurance liabilities ceded to them. Under applicable statutory provisions, the security arrangements may be in the form of letters of credit, reinsurance trusts maintained by trustees or funds-withheld arrangements where assets are held by the ceding company.
Maiden US also offers to its clients, on a voluntary basis, the ability to collateralize certain liabilities related to the reinsurance contracts it issues. Under these arrangements, Maiden retains broad investment discretion in order to achieve its business objectives while offering clients the additional security a collateralized arrangement offers. We believe this offers the Company a significant competitive advantage and improves the Company’s retention of high-quality clients. As a result of the transition of relationships as a result of the GMAC Acquisition, as of December 31, 2009 certain of these liabilities and collateralized arrangements are on the records of Maiden Bermuda while the remaining are on the records of Maiden US.
Investments Our funds are primarily invested in liquid, high-grade fixed income securities. The table below shows the aggregate amounts of our invested assets at fair value at December 31, 2009 and 2008:
Due to volatility in the fixed income markets in 2009, particularly in the first half of the year, the Company methodically invested the proceeds of the TRUPS issuance received in January 2009 over the course of the year. During that time frame, these funds were held in cash and cash equivalents and given the historically low interest rate environment, temporarily reduced the Company’s effective investment yield on its portfolio. Investment yield on average invested assets was 3.5% for the year ended December 31, 2009 as compared to (0.03)% for the year ended December 31, 2008. Nearly all of those proceeds had been invested by December 31, 2009. As of December 31, 2009 and 2008, net accumulated unrealized gains (loss) were $32.7 million and $(44.5) million, respectively. The change in unrealized gains or losses during 2009 reflected movements in interest rates and credit spread tightening partially offset by the recognition of approximately $0.3 million of realized gains.
As of December 31, 2009 and December 31, 2008, 99% and 99%, respectively, of our fixed income portfolio 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 less. The following table summarizes the composition of the fair value of our fixed maturity investments at the dates indicated by ratings as assigned by Standard & Poor’s (“S&P”) and/or other rating agencies when S&P ratings were not available:
The Company holds no asset-backed securities or sovereign securities of foreign governments. The majority of the Company’s U.S. government agency-based securities holdings are mortgage-backed securities. Additional details on the mortgage-backed securities component of our U.S. government agency-based investment portfolio at December 31, 2009 and 2008 are provided below:
The Company has also increased its holdings of corporate securities in 2009 to take advantage of various investment opportunities in this asset class. As of December 31, 2009 and 2008, 46.8% and 61.4% of its corporate securities were floating rate securities. Security holdings by sector in this asset class as of December 31, 2009 and 2008 are as follows:
Financial Strength Ratings Financial strength ratings represent the opinions of rating agencies on our capacity to meet our obligations. Some of our reinsurance treaties contain special funding and termination clauses that are triggered in the event that we or one of our subsidiaries is downgraded by one of the major rating agencies to levels specified in the treaties, or our capital is significantly reduced. If such an event were to happen, we would be required, in certain instances, to post collateral in the form of letters of credit and/or trust accounts against existing outstanding losses, if any, related to the treaty. In a limited number of instances, the subject treaties could be cancelled retroactively or commuted by the cedant and might affect our ability to write business. As of March 15, 2010, our financial strength rating from A.M. Best was A-.
As of December 31, 2009, our shareholders’ equity was $676.5 million, a 32.7% increase compared to $509.8 million as of December 31, 2008. The increase was due primarily to net income for the year ended December 31, 2009 of $61.1 million and unrealized gains on investments of $77.2 million offset by dividends declared of $17.2 million.
Under the terms of the Trust Preferred Securities, the Company can repay the principal balance in full or in part at any time. However, if the Company repays such principal within five years of the date of issuance, it is required to pay an additional amount equal to one full year of interest on the amount of Trust Preferred Securities repaid. If the full amount of the Trust Preferred Securities were repaid within five years of the date of issuance, the additional amount due would be $36.4 million, which would be a reduction in earnings.
Further, the value of the common shares issued to purchasers of the Trust Preferred Securities are being carried as a reduction of the liability for the Trust Preferred Securities with the value being amortized against the Company’s earnings over the 30-year term of the Trust Preferred Securities. At December 31, 2009, the unamortized amount carried as a reduction of the Company’s liability for the Trust Preferred Securities was $44.9 million. If the Company were to repay the Trust Preferred Securities in full or in part at any time prior to their maturity date, the Company would have to recognize a commensurate amount as a reduction of earnings at that time.
The amounts included for reserve for losses and loss expenses reflect the estimated timing of expected loss payments on known claims and anticipated future claims as of December 31, 2008. Both the amount and timing of cash flows are uncertain and do not have contractual payout terms. For a discussion of these uncertainties, refer to “Critical Accounting Policies - Reserve for Losses and Loss Expenses.” Due to the inherent uncertainty in the process of estimating the timing of these payments, there is a risk that the amounts paid in any period will differ significantly from those disclosed. Total estimated obligations will be funded by existing cash and investments.
Currency and Foreign Exchange The Company’s reporting currency is the U.S. dollar. The Company has exposure to foreign currency risk as certain portions of the AmTrust Quota Share segment, including underwriting reinsurance exposures, collecting premiums and paying claims and other operating expenses in currencies other than the U.S. dollar and holding certain net assets in such currencies. The Company’s most significant foreign currency exposure is to the British pound. The Company may, from time to time, experience losses resulting from fluctuations in the values of foreign currencies, which could have an effect on the Company’s results of operations.
We measure monetary assets and liabilities denominated in foreign currencies at year end exchange rates, with the resulting foreign exchange gains and losses recognized in the Consolidated Statements of Operations. Revenues and expenses in foreign currencies are converted at average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income.
Net foreign exchange gains amounted to $1.9 million during the year ended December 31, 2009 compared to losses of $1.4 million and $1.0 thousand during the years ended December 31, 2008 and for the period May 31 to December 31, 2007, respectively.
Effects of Inflation The effects of inflation are considered implicitly in pricing and estimating reserves for unpaid losses and loss expenses. The effects of inflation could cause the severity of claims to rise in the future. To the extent inflation causes these costs, particularly medical treatments and litigation costs, to increase above reserves established for these claims, the Company will be required to increase the reserve for losses and loss expenses with a corresponding reduction in its earnings in the period in which the deficiency is identified. The actual effects of inflation on the results of operations of the Company cannot be accurately known until claims are ultimately settled.
Off-Balance Sheet Arrangements As of December 31, 2009, we did not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
Recent Accounting Pronouncements See Item 8, Note 2 to the Consolidated Financial Statements for a discussion on recently issued accounting pronouncements not yet adopted.
Business Combinations In April 2009, the FASB issued revised guidance for recognizing and measuring pre-acquisition contingencies in a business combination. Under the revised guidance which is now part of ASC 805, “Business Combinations”, pre-acquisition contingencies are recognized at their acquisition-date fair value if a fair value can be determined during the measurement period. If the acquisition-date fair value cannot be determined during the measurement period, a contingency (best estimate) is to be recognized if it is probable that an asset existed or liability had been incurred at the acquisition date and the amount can be reasonably estimated. The revised guidance does not prescribe specific accounting for subsequent measurement and accounting for contingencies. The adoption of the revised guidance on January 1, 2009 had no effect on the Company’s results of operations, financial position or liquidity.
Fair Value Measurements and Disclosures On April 1, 2009, the Company adopted the provisions of the FASB ASC 820-10-35, “Fair Value Measurements and Disclosures - Overall - Subsequent Measurement” (“ASC 820-10-35”), ASC 825-10-50, “Financial Instruments - Overall - Disclosure” (“ASC 825-10-50”), and ASC 320-10-35, “Investments - Debt and Equity Securities - Overall - Subsequent Measurement” (“ASC 320-10-35”) which are intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. The standard amends ASC Topic 820, Fair Value Measurements and Disclosures to require additional disclosures related to transfers between levels in the hierarchy of the fair value measurement. The standard is effective for interim and annual reporting periods beginning after December 15, 2009. The standard does not change how fair values are measured. Accordingly, the standard is not expected to have an impact on the Company’s consolidated results of operations and financial condition.
Accounting for Transfers of Financial Assets On June 12, 2009, the FASB issued FASB Statement No. 166, “Accounting for Transfers of Financial Assets,” (“SFAS 166”). SFAS 166 has not yet been adopted into the Codification and it requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of financial assets accounted for as a sale. It is a revision to FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. SFAS 166 is effective on a prospective basis in fiscal years beginning on or after November 15, 2009 and interim periods within those fiscal years, and will be adopted by the Company in the first quarter of fiscal year 2010. The Company is assessing the potential impact, if any, of the adoption of SFAS 166 on its consolidated results of operations and financial condition.
Consolidation of Variable Interest Entities On June 12, 2009, the FASB issued FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”). SFAS No. 167 amends FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities.” It has not yet been adopted into codification and it requires an
enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. It determines whether a reporting entity is required to consolidate another entity based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. SFAS No. 167 is effective on a prospective basis in fiscal years beginning on or after November 15, 2009, and interim periods within those fiscal years, and will be adopted by the Company in the first quarter of fiscal year 2010. The Company is assessing the potential impact, if any, of the adoption of SFAS No. 167 on its consolidated results of operations and financial condition.