The following tables set forth our selected historical consolidated financial and operating information for the periods ended and as of the dates indicated. The selected consolidated income statement data for the years ended December 31, 2013, 2012 and 2011 and the balance sheet data as of December 31, 2013 and 2012 are derived from our audited financial statements included elsewhere in this report, which have been audited by BDO USA, LLP, our independent auditors. These historical results are not necessarily indicative of results to be expected from any future period. You should read the following selected consolidated financial information together with the other information contained in this report, including “
Personal Lines Reinsurance. Through July 31, 2013, we reinsured 10% of the net premiums of National General Holdings Corp.'s personal lines business, pursuant to the Personal Lines Quota Share with National General Holdings Corp.'s personal lines insurance companies. On August 1, 2013, we received notice, effective August 1, 2013, that our participation in the Personal Lines Quota Share was terminated. The termination is on a run-off basis, meaning we will continue to receive net premiums and assume net losses with respect to policies in force as of July 31, 2013 through the expiration of such policies, As we retained all assumed written premium through July 31, 2013 and the continuing cash flows associated with the business, we will not present the Personal Lines Reinsurance segment as a discontinued operation in accordance with ASC 205-20 Discontinued Operations.
Additionally, in May 2013, one of our subsidiaries entered into a transaction with an international corporation through the issuance of insurance policies covering the risk related to certain contractual liabilities. We received approximately $148 million in cash to service the contractual liabilities. The polices cover any additional liabilities related to the payment of the contractual liabilities. During the year ended December 31, 2013, we recognized approximately $78 million of written premium and approximately $18 million of earned premium related to these policies.
In accordance with FASB ASC 944-805 Business Combinations, we adjusted to fair value FNIC's loss and LAE reserves by taking the acquired loss reserves recorded and discounting them based on expected reserve payout pattern using a current risk free rate. This risk free interest rate was then adjusted based on different cash flow scenarios that use different payout and ultimate reserve assumptions deemed to be reasonably possible based upon the inherent uncertainties present in determining the amount and timing of payment of such reserves. The difference between the acquired loss and LAE reserves and our best estimate of the fair value of such reserves at acquisition date is amortized ratably over the payout period of the acquired loss and LAE reserves and was approximately $4.5 million. Additionally, we recorded intangible assets in the amount of $6.1 million, which consisted of state licenses and have an indefinite life. The intangible assets, as well as FNIC's results of operations from the date of acquisition, are included as a component of the Small Commercial Business segment. As a result of this transaction, we recorded a preliminary acquisition gain of approximately $18.5 million.
On May 3, 2013, we, through our wholly-owned subsidiary AMT Warranty Corp., completed the acquisition of CPPNA Holdings, Inc. (“CPPNA”) from CPP Group LLC, a company based in the United Kingdom, for approximately $40.0 million. CPPNA subsequently changed its name to AMTCS Holdings, Inc. (“AMTCS”). AMTCS provides administrative services for consumer protection products in the United States, including identity theft protection and warranties related to credit card purchases, to customers of AMTCS's financial services partners. In accordance with FASB ASC 805-10 Business Combinations, we recorded a purchase price of approximately $40.0 million, which consisted primarily of goodwill and intangible assets of approximately $17.3 million and $34.7 million, respectively, and a deferred tax liability of $12.1 million. The intangible asset consists of customer relationships and has a life of 12 years. The goodwill and intangibles, as well as AMTCS's results of operations, are included as a component of the Specialty Risk and Extended Warranty segment from the date of acquisition. As a result of this transaction, we recorded approximately $44.5 million of fee income during the year ended December 31, 2013 since the date of acquisition.
We recorded approximately $79.7 million of written premium for the year ended December 31, 2013 since the date of acquisition.
On February 28, 2013, we, through our wholly-owned subsidiary IGI Group Limited, acquired all of the issued and outstanding shares of capital stock of Car Care Plan (Holdings) Limited (“CCPH”) from Ally Insurance Holdings, Inc (“AIH”). CCPH is an administrator, insurer and provider of auto extended warranty, guaranteed asset protection (GAP), Wholesale Floorplan Insurance and other complementary insurance products. CCPH underwrites its products and the products of third-party administrators through its subsidiary Motors Insurance Company Limited, a UK insurer authorized by the Prudential Regulation Authority. CCPH has operations in the United Kingdom, Europe, China, North America and Latin America. We paid $72.4 million for the purchase of CCPH. In connection with the closing of the transaction, the parties (or their affiliates) entered into certain other agreements, including a transition services agreement, pursuant to which AIH provides certain transitional services to IGI Group Limited and us, and two reinsurance agreements, pursuant to which affiliates of AIH reinsures certain insurance contracts of such affiliates with affiliates of IGI Group Limited.
During 2013 and 2012, AmTrust Holdings Luxembourg S.A.R.L. (“AHL”) completed a series of acquisitions described below. AHL is a holding company that purchases Luxembourg-domiciled reinsurance entities. In connection with these transactions, we acquire cash and equalization reserves of the reinsurance companies. An equalization reserve is a catastrophe reserve in excess of required reserves established pursuant to Luxembourg law. Equalization reserves are required to be established for Luxembourg statutory and tax purposes, but are not recognized under U.S. GAAP. The equalization reserves originally established by the seller under Luxembourg law allowed the reinsurer to offset any taxable income. Equalization reserves are calculated on a line of business basis and are subject to a theoretical maximum amount, or cap, based on the expected premium volume described in the business plan of the reinsurance company as approved by the Luxembourg regulators and is subject to reassessment every five years. Each year, the Luxembourg reinsurer is required to adjust its equalization reserves by an amount equal to its statutory net income or net loss, determined based on premiums and investment income less incurred losses and other operating expenses. The yearly adjustment of the equalization reserve generally results in zero pretax income on a Luxembourg statutory and tax basis, as follows: in a year in which the reinsurer’s operations result in a statutory loss, the equalization reserves are taken down in an amount to balance the income statement to zero pretax income, and in a year in which the operations result in a gain, the equalization reserves are increased in an amount to balance the income statement to zero pretax income. If the reinsurer were to produce underwriting income in excess of the equalization reserve cap, or if the cap were to be reduced below the amount of the carried equalization reserves, the reinsurer would incur Luxembourg tax on the amount of such excess income or the amount by which the reserves exceeded the reduced cap, as applicable.
If a Luxembourg reinsurer can assume sufficient premium to maintain its equalization reserves or assume losses, which then reduce the equalization reserves, the reinsurer can permanently defer the income tax. Subsequent to the acquisition, we cede premium and associated losses to the reinsurance companies through intercompany reinsurance arrangements. Provided we are able to cede business that generates a net loss to the reinsurance companies through intercompany reinsurance arrangements sufficient to offset the reinsurers’ required reductions of the equalization reserves, Luxembourg would not, under laws currently in effect, impose any income, corporation or profits tax on the reinsurance companies. However, if the reinsurance companies were to cease reinsuring business without exhausting the equalization reserves, they would be taxed by Luxembourg at a rate of approximately 30%. As of December 31, 2013, we had approximately $621 million of unutilized equalization reserves and an associated deferred tax liability of approximately $186 million. During 2012 and 2011, we were able to reduce the overall expenses by a net amount of approximately $9 million and $27 million, respectively, to reflect the net reduction of the deferred tax liability offset by goodwill impairment charges related to the utilization of the equalization reserves. In 2013, the impact was immaterial. Under our business plans currently in effect, we expect that the ceded losses and expenses net of reinsurance premiums paid under the intercompany reinsurance agreements will cause the equalization reserves to be fully utilized in three to five years subsequent to the acquisition of the Luxembourg reinsurer, at which point the deferred tax liability relating to the equalization reserves will be extinguished. The effects of these intercompany reinsurance agreements are appropriately eliminated in consolidation and did not impact our gross and net loss reserves or loss ratio.
In December 2012, AHL acquired all the issued and outstanding stock of Inter Re S.A., a Luxembourg domiciled reinsurance company, from USG People. The purchase price of Inter Re S.A. was approximately $40.6 million. We recorded approximately $44.8 million of cash, goodwill of $8.5 million and a deferred tax liability of $12.7 million. Inter Re S.A. subsequently changed its name to AmTrust Re Epsilon.
In December 2012, AHL acquired all the issued and outstanding stock of Socare S.A., a Luxembourg domiciled reinsurance company, from Cactus S.A. The purchase price of Socare S.A. was approximately $119.3 million. We recorded approximately $130.5 million of cash, goodwill of $26.2 million and a deferred tax liability of $37.4 million. Socare S.A. subsequently changed its name to AmTrust Re Theta.
We have a strategic investment in National General Holding Corp. (“NGHC”). We formed NGHC with The Michael Karfunkel 2005 Grantor Retained Annuity Trust (the “Trust”) for the purpose of acquiring from GMAC Insurance Holdings, Inc. and Motor Insurance Corporation their U.S. consumer property and casualty insurance business, a writer of automobile coverages through independent agents in the United States. Its coverages include standard/preferred auto, RVs, non-standard auto and commercial auto. The acquisition included ten statutory insurance companies (the “NGHC Insurers”). From the time of the acquisition in 2010 until June 2013, Michael Karfunkel, individually, and the Trust owned 100% of NGHC’s common stock (subject to our conversion rights described below). Michael Karfunkel is the chairman of our board of directors and the father-in-law of Barry D. Zyskind, our chief executive officer. The ultimate beneficiaries of the Trust include Michael Karfunkel’s children, one of whom is married to Mr. Zyskind. In addition, Michael Karfunkel is the Chairman of the Board of Directors of NGHC.
Pursuant to the Amended Stock Purchase Agreement, NGHC issued and sold to us for an initial purchase price of approximately $53 million, which was equal to 25% of the capital initially required by NGHC, 53,054 shares of Series A Preferred Stock, which provided an 8% cumulative dividend, was non-redeemable and was convertible, at our option, into 21.25% of the issued and outstanding common stock of NGHC (the “Preferred Stock”). We had pre-emptive rights with respect to any future issuances of securities by NGHC and our conversion rights were subject to customary anti-dilution protections. We had the right to appoint two members of NGHC’s board of directors, which consists of up to six members. Subject to certain limitations, the board of directors of NGHC could not take any action at a meeting without at least one of our appointees in attendance and NGHC could not take certain corporate actions without the approval of a majority of its board of directors (including our two appointees).
On June 5, 2013, we converted our 53,054 shares of Preferred Stock into 42,958 shares of NGHC common stock, par value $0.01 per share, which became 12,295,430 shares of common stock after NGHC effected a 286.22:1 stock split on June 6, 2013. In addition, on June 5, 2013, NGHC declared our cumulative dividend of approximately $12.2 million on the Preferred Stock payable through that date. On June 6, 2013, NGHC issued 21,850,000 shares in a 144A offering, which resulted in us owning 15.4% of the issued and outstanding common stock of NGHC. In accordance with ASC 323-10-15, Investments-Equity Method and Joint Ventures, we continue to account for our investment in NGHC under the equity method as we have the ability to exert significant influence on NGHC's operations. We recorded a realized gain of $8.6 million from the decrease in our ownership percentage as a result of the stock issuance, which is included in equity in earnings of unconsolidated subsidiary.
A life settlement contract is a contract between the owner of a life insurance policy and a third-party who obtains the ownership and beneficiary rights of the underlying life insurance policy. During 2010, we formed Tiger Capital LLC (“Tiger”) with a subsidiary of NGHC for the purpose of acquiring life settlement contracts. In 2011, we formed AMT Capital Alpha, LLC (“AMT Alpha”) with a subsidiary of NGHC and AMT Capital Holdings, S.A. (“AMTCH”) with ACP Re, Ltd., for the purpose of acquiring additional life settlement contracts. On March 28, 2013, ACP Re, Ltd. sold its interest in AMTCH to NGHC. Additionally, in December 2013, we formed AMT Capital Holdings II S.A. (“AMTCH II”) with a subsidiary of NGHC for the purpose of acquiring life settlement contracts. We have a 50% ownership interest in each of Tiger, AMT Alpha, AMTCH, and AMTCH II (collectively, the “LSC Entities”). The LSC Entities may also acquire premium finance loans made in connection with the borrowers’ purchase of life insurance policies that are secured by the policy, which are in default at the time of purchase. The LSC Entities acquire the underlying policies through the borrowers’ voluntary surrender of the policy in satisfaction of the loan or foreclosure. A third party serves as the administrator of the Tiger and AMTCH II life settlement contract portfolios, for which it receives an administrative fee. The third party administrator is eligible to receive a percentage of profits after certain time and performance thresholds have been met. We provide for certain actuarial and finance functions related to the LSC Entities. Additionally, in conjunction with our 15.4% ownership percentage of NGHC, we ultimately receive 57.7% of the profits and losses of the LSC Entities. As such, in accordance with ASC 810-10, Consolidation, we have been deemed the primary beneficiary and, therefore, consolidate the LSC Entities.
exposure time period. The terms vary depending on the risk and have an average duration of approximately 24 months, but range in duration from one month to 120 months.
Installment, reinstatement and policy fees - We recognize fee income associated with the issuance of workers’ compensation policies for installment fees, in jurisdictions where it is permitted and approved, and reinstatement fees, which are fees charged to reinstate a policy after it has been canceled for non-payment, in jurisdictions where it is permitted and approved. Additionally, we recognize policy fees associated with general liability policies placed by our subsidiary, Builders & Tradesmen's Insurance Services, Inc.
Net Investment Income and Realized Gains and (Losses). We invest our statutory surplus funds and the funds supporting our insurance liabilities primarily in cash and cash equivalents, fixed maturity and equity securities. Our net investment income includes interest and dividends earned on our invested assets. We report net realized gains and losses on our investments separately from our net investment income. Net realized gains occur when we sell our investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment. We classify equity securities and our fixed maturity securities as available-for-sale. We report net unrealized gains (losses) within accumulated other comprehensive income on our balance sheet.
Salaries and benefits expenses are those salaries and benefits expenses for employees that are directly involved in the origination, issuance and maintenance of policies, claims adjustment and accounting for insurance transactions. We classify salaries and benefits associated with employees that are involved in fee generating activities as other expenses.
General and administrative expenses are comprised of other costs associated with our insurance activities, such as federal excise tax, postage, telephones and internet access charges, as well as legal and auditing fees and board and bureau charges. They also include the amortization of intangible assets.
Other Expense. Other expense includes those charges that are related to the amortization of tangible and intangible assets and non-insurance fee generating activities in which we engage, including salaries and benefits expenses and other charges directly attributable to non-insurance fee generating activities, such as those generated by BTIS, CNH, Risk Services and Warrantech.
Net Loss Ratio. The net loss ratio is a measure of the underwriting profitability of an insurance company’s business. Expressed as a percentage, this is the ratio of net losses and LAE incurred to net premiums earned.
Ceding Commission. Ceding commission is a commission we receive from ceding gross written premium to third party reinsurers. We earn commissions on reinsurance premiums ceded in a manner consistent with the recognition of the direct acquisition costs of the underlying insurance policies, generally on a pro-rata basis over the terms of the policies reinsured. In connection with the Maiden Quota Share, which is our primary source of ceding commission, the amount we receive is a blended rate based on a contractual formula contained in the individual reinsurance agreements, and the rate may not correlate specifically to the cost structure of our individual segments. As such, we allocate earned ceding commissions to our segments based on each segment’s proportionate share of total acquisition costs and other underwriting expenses recognized during the period. Ceding commission is netted against acquisition costs and other underwriting expenses.
We believe this method, by which we track the development of claims incurred in a particular time period, is the best method for projecting our ultimate liability. Loss development factors are dependent on a number of elements, including frequency and severity of claims, length of time to achieve ultimate settlement of claims, projected inflation of medical costs and wages (for workers’ compensation), insurance policy coverage interpretations, judicial determinations and existing laws and regulations. The predictive ability of loss development factors is dependent on consistent underwriting, claims handling, and inflation, among other factors, and predictable legislatively and judicially imposed legal requirements. If all things remain equal, losses incurred in 2013 should develop similarly to losses incurred in 2012 and prior years. Thus, if the Net Loss Ratio for premiums written in year one is 55.0%, we expect that the Net Loss Ratio for premiums written in year two also would be 55.0%. However, due to the inherent uncertainty in the loss development factors, our actual liabilities may differ significantly from our original estimates.
On a monthly basis, we review our reserves to determine whether they are consistent with our actual results. In the event of a discrepancy, we would seek to determine the causes (underwriting, claims, inflation, regulatory) and would adjust our reserves accordingly. For example, if the development of our total incurred losses were 5% greater than the loss development factors would have predicted, we would adjust our reserves for the periods in question. In 2013, 2012 and 2011, our liabilities for unpaid losses and LAE attributable to prior years increased by $30.9 million, $12.9 million and $12.5 million, respectively, primarily as result of unfavorable loss development in our Small Commercial Business and Specialty Program segments as well as a portion of our European Casualty business in 2013 and in our Specialty Program segment in 2012 and 2011, due to higher actuarial estimates based on actual losses. We do not anticipate that we will make any material reserve adjustments, but will continue to monitor the accuracy of our loss development factors and adequacy of our reserves. Additional information regarding our reserves for loss and loss adjustment expenses can be found in “Item 1A. Risk Factors” and “Item 1. Business - Loss Reserves.”
the occurrence of a discrete credit event resulting in the issuer defaulting on material outstanding obligation or the issuer seeking protection under bankruptcy laws; and
Based on guidance in FASB ASC 320-10-65, in the event of the decline in fair value of a debt security, a holder of that security that does not intend to sell the debt security and for whom it is not more than likely than not that such holder will be required to sell the debt security before recovery of its amortized cost basis, is required to separate the decline in fair value into (a) the amount representing the credit loss and (b) the amount related to other factors. The amount of total decline in fair value related to the credit loss shall be recognized in earnings as an OTTI with the amount related to other factors recognized in accumulated other comprehensive loss net loss, net of tax. OTTI credit losses result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process, and different judgments and assumptions could affect the timing of the loss realization. During 2013, 2012 and 2011, we recorded impairment write-downs of approximately $2.9 million, $3.0 million and $4.4 million, respectively after determining that certain of our investments were OTTI.
Business Combinations - We account for business combinations under the acquisition method of accounting, which requires us to record assets acquired, liabilities assumed and any non-controlling interest in the acquiree at their respective fair values as of the acquisition date in our consolidated financial statements. We record contingent consideration at fair value based on the terms of the purchase agreement with subsequent changes in fair value recorded through earnings. The determination of fair value may require management to make significant estimates and assumptions. The purchase price is the fair value of the total consideration conveyed to the seller and we record the excess of the purchase price over the fair value of the acquired net assets, where applicable, as goodwill. We assign fair values to intangible assets based on valuation techniques including the income and market approaches. We expense costs associated with the acquisition of a business in the period incurred. We include the results of operations of an acquired business in our consolidated financial statements from the date of the acquisition.
Deferred income taxes reflect the impact of “temporary differences” between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The deferred tax asset primarily consists of book versus tax differences for premiums earned, loss and loss adjustment expense reserve discounting, policy acquisition costs, earned but unbilled premiums, and unrealized holding gains and losses on marketable equity securities. We record changes in deferred income tax assets and liabilities that are associated with components of other comprehensive
income, primarily unrealized investment gains and losses and foreign currency translation gains and losses, directly to other comprehensive income. Otherwise, we include changes in deferred income tax assets and liabilities as a component of income tax expense.
We previously classified Ceding commission - primarily related party as a component of revenue. We now include ceding commission earned as a reduction of acquisition costs and other underwriting expenses. The amount of ceding commission reclassified to Acquisition costs and other underwriting expenses was approximately $197 million and $154 million during the years ended December 31, 2012 and 2011, respectively.
Gross Written Premium. Gross written premium increased $1,367.6 million, or 49.7%, to $4,116.9 million from $2,749.3 million for the years ended December 31, 2013 and 2012, respectively. The increase of $1,367.6 million was primarily attributable to growth in our three primary segments. The increase in Small Commercial Business resulted primarily from increases in the number of policies issued as well as average policy size and the impact of the Sequoia and FNIC acquisitions. The largest increases came from the states of California, Florida, Illinois, New Jersey, New York and Pennsylvania. Additionally, in our Small Commercial Business segment, we had an increase in our assigned risk premium. The increase in Specialty Risk and Extended Warranty resulted from organic growth in Europe and domestically, the acquisition of CCPH and non-recurring insurance policies written in the second quarter of 2013. The increase in Specialty Program resulted primary from growth in existing workers' compensation programs and commercial package programs.
Net Written Premium. Net written premium increased $917.6 million, or 55.7%, to $2,565.7 million from $1,648.0 million for the years ended December 31, 2013 and 2012, respectively. The increase by segment was: Small Commercial Business - $460.9 million; Specialty Risk and Extended Warranty - $319.5 million; Specialty Program - $189.5 million. The increase was partially offset by a decrease in Personal Lines Reinsurance - $52.3 million. Net written premium increased for the year ended December 31, 2013 compared to the same period in 2012 due to the increase in gross written premium in 2013 compared to 2012, as well as higher retention of business in our Small Commercial Business segment and Specialty Risk and Extended Warranty segment that are not covered by the Maiden Quota Share. Our overall retention rates were 62.3% and 59.9% for the years ended December 31, 2013 and 2012, respectively.
Net Earned Premium. Net earned premium increased $847.1 million, or 59.7%, to $2,266.0 million from $1,418.9 million for the years ended December 31, 2013 and 2012, respectively. The increase by segment was: Small Commercial Business - $417.2 million; Specialty Risk and Extended Warranty - $270.3 million; Specialty Program - $171.8 million. The increase was partially offset by a decrease in Personal Lines Reinsurance - $12.2 million. The increase in net earned premium resulted from the increase in gross written premium in 2013 and the increase in retention rates to 62.3% in 2013 compared to 59.9% in 2012.
Net Investment Income. Net investment income increased $16.7 million, or 24.4%, to $84.8 million from $68.2 million for the years ended December 31, 2013 and 2012, respectively. The increase resulted primarily from having a higher average portfolio of fixed security investment securities during 2013 compared to 2012, as a result of the acquisitions of CCPH, Sequoia and FNIC, and the net cash proceeds obtained through the issuance of our $250 million $6.125% notes and $115 million of preferred stock in 2013, partially offset by lower overall yields.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses increased $594.7 million, or 64.5%, to $1,517.4 million for the year ended December 31, 2013 from $922.7 million for the year ended December 31, 2012. Our loss ratio for the years ended December 31, 2013 and 2012 was 67.0% and 65.0%, respectively. The increase in the loss ratio in 2013 primarily impacted our Specialty Risk and Extended Warranty segment and our Small Commercial Business segment. The increases resulted from higher ultimate loss selections in our European casualty business and changes in the proportionate share of business written by segment. Additionally, in 2013, our workers' compensation business in the state of California, for which we assign a higher ultimate loss selection than for workers' compensation policies written in other states, increased to approximately 24% of total written premium in the Small Commercial Business segment compared to 17% of total written premium in 2012.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $177.2 million, or 49.8%, to $533.2 million for the year ended December 31, 2013 from $356.0 million for the year ended December 31, 2012. Acquisition costs and other underwriting expenses were reduced in each period by ceding commission primarily earned through the Maiden Quota Share, whereby we receive a ceding commission of 31% of premiums ceded for all business except retail commercial package business, and 34.375% for retail commercial package business. The ceding commission earned during the years ended December 31, 2013 and 2012 was $276.6 million and $197.0 million, respectively. Ceding commission increased period over period as a result of increased premium writings and was consistent period over period as a percentage of earned premiums. The expense ratio decreased to 23.5% in 2013 from 25.1% in 2012, and was distributed across our three primary segments. The decrease in the expense ratio resulted from both a change in our business mix and economies of scale. During the year ended December 31, 2013, a higher percentage of the gross written premium was attributable to workers' compensation business in both the Small Commercial Business and Specialty Program segments, which have lower policy acquisition expenses.
Interest Expense. Interest expense for the years ended December 31, 2013 and 2012 was $34.7 million and $28.5 million, respectively. The increase was primarily related to interest expense on the 6.125% $250 million notes issued in August of 2013.
Net Gain on Investment in Life Settlement Contracts. We recognized a gain on investment in life settlement contracts of $3.8 million for the year ended December 31, 2013 compared to a gain of $13.8 million for the year ended December 31, 2012. The decrease in the gain from the life settlement contracts resulted from a lower net increase in fair value of the life settlement contracts.
Gross Written Premium. Gross written premium increased $598.9 million, or 27.8%, to $2,749.3 million from $2,150.4 million for the years ended December 31, 2012 and 2011, respectively. The increase of $598.9 million was primarily attributable to growth in our Small Commercial Business and Specialty Program segments. The increase in Small Commercial Business resulted primarily from increases in workers' compensation policy counts, the acquisitions of Majestic in July 2011 and BTIS in December 2011 and rate increases in some of our key states. The increase in Specialty Program resulted primarily from programs developed from new underwriting teams hired in 2010 and 2011.
Net Written Premium. Net written premium increased $371.4 million, or 29.1%, to $1,648.0 million from $1,276.6 million for the years ended December 31, 2012 and 2011, respectively. The increase by segment was: Small Commercial Business - $118.7 million; Specialty Risk and Extended Warranty - $9.0 million; Specialty Program - $228.3 million; and Personal Lines Reinsurance - $15.4 million. Net written premium increased for the year ended December 31, 2012 compared to the same period in 2011 due to the increase in gross written premium in 2012 compared to 2011 and was partially offset by higher retention of business in our Specialty Program segment that are not covered by the Maiden Quota Share.
Other. Other expenses increased $60.6 million, or 51.8%, to $177.7 million for the year ended December 31, 2012 from $117.1 million for the year ended December 31, 2011. The increase resulted primarily from the inclusion of BTIS's and CNH's operating costs for all of 2012 and six months of 2012, respectively, partially offset from a decrease in goodwill impairment in 2012 related to our Luxembourg reinsurance companies.
Income Before Other Income (Expense), Income Taxes and Equity in Earnings of Unconsolidated Subsidiaries. Income before other income (expense), income taxes and equity in earnings of unconsolidated subsidiaries increased $74.8 million, or 54.6%, to $211.8 million from $137.0 million for the years ended December 31, 2012 and 2011, respectively. The change in income from 2012 from 2011 resulted primarily from the increase in underwriting income of $53.0 million and higher net investment income and net realized gain on investments.
Provision for Income Tax. Income tax expense for the year ended December 31, 2012 was $21.3 million, which resulted in an effective tax rate of 10.8%. Income tax expense for the year ended December 31, 2011 was a benefit of $15.0 million, which resulted in a negative effective tax rate of 8.8%. The increase in our effective rate for the year ended December 31, 2012 resulted primarily from earning a higher percentage of pretax income in countries with higher effective rates. Additionally, for the years ended December 31, 2012 and 2011, income tax expense included a tax benefit of $25.6 million and $57.4 million, respectively, attributable to the reduction of the deferred tax liability associated with the equalization reserves of our Luxembourg reinsurer. The effect of this $25.6 million and $57.4 million tax benefit reduced the effective rate by approximately 10% and 26% in 2012 and 2011, respectively.
Equity in Earnings of Unconsolidated Subsidiaries - Related Parties. Equity in earnings of unconsolidated subsidiaries - related party increased by $4.4 million for the year ended December 31, 2012 to $9.3 million compared to $4.9 million for the year ended December 31, 2011. The majority of the increase period over period resulted from a negative purchase price adjustment of $3.6 million in 2011 related to NGHC's 2010 acquisition of its consumer property and casualty business.
Net Earned Premium. Net earned premium increased $417.2 million, or 100.2%, to $833.8 million for the year ended December 31, 2013 from $416.6 million for the year ended December 31, 2012. As premiums written earn ratably over an annual period, the increase in net premium earned resulted from higher net written premium for the year ended December 31, 2013 compared to the year ended December 31, 2012 as well as an increase the retention rate to 56.3% in 2013 from 50.8% in 2012.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses increased $277.8 million, or 102.6%, to $548.6 million for the year ended December 31, 2013 from $270.8 million for the year ended December 31, 2012. Our loss ratio for the segment for the year ended December 31, 2013 increased to 65.8% from 65.0% for the year ended December 31, 2012. The increase in the loss ratio in the year ended December 31, 2013 resulted primarily from higher current accident year selected ultimate losses as compared to selected ultimate losses in prior accident years.The higher current accident year selected ultimate losses resulted primarily from writing approximately 23.8% of gross written premium in the state of California in 2013 compared to approximately 17.3% in 2012, consisting primarily of workers' compensation business. We believe the ultimate loss ratio on California policies, on average, is higher than other states in which we conduct business. The increase in the loss ratio was not indicative of adverse reserve development.
Net Earned Premium Less Expenses Included in Combined Ratio (Underwriting Income). Net earned premium less expenses included in combined ratio increased to $72.4 million for the year ended December 31, 2013 compared to $34.8 million for the year ended December 31, 2012. This increase resulted primarily from an increase in the level of earned premium during the year ended December 31, 2013 compared to 2012, partially offset by higher loss and loss adjustment expenses during the year ended December 31, 2013 as compared to the year ended December 31, 2012.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses increased $68.9 million, or 34.1%, to $270.8 million for the year ended December 31, 2012 from $201.9 million for the year ended December 31, 2011 . Our loss ratio for the segment for the year ended December 31, 2012 increased to 65.0% from 63.0% for the year ended December 31, 2011. The increase in the loss ratio in the year ended December 31, 2012 resulted primarily from higher current accident year selected ultimate losses as compared to selected ultimate losses in prior accident years. The higher current accident year selected ultimate losses resulted primarily from writing approximately 17.3% of gross written premium in the state of California in 2012 compared to approximately 11.9% in 2011, which related primarily to workers' compensation business. We believe the ultimate loss ratio on California policies, on average, is higher than other states in which we conduct business. The increase in the loss ratio was not indicative of adverse reserve development.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $24.9 million, or 29.0%, to $110.9 million for the year ended December 31, 2012 from $85.9 million for the year ended December 31, 2011. The expense ratio decreased to 26.6% for the year ended December 31, 2012 compared to 26.8% for the year ended December 31, 2011. The decrease in the expense ratio resulted primarily from changes in business mix in 2012, when we earned more premium from our workers' compensation business, which has lower acquisition costs, than we earned from our commercial package business, partially offset by the adoption of the new accounting standard for deferred acquisition costs in 2012 on a prospective basis. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the years ended December 31, 2012 and 2011 of $69.9 million and $62.1 million, respectively. The ceding commission increased period over period as a result of an increase in net earned premium, as the segment received its allocation of ceding commission for its proportionate share of our overall policy acquisition expense.
Net Earned Premium Less Expenses Included in Combined Ratio (Underwriting Income). Net earned premium less expenses included in combined ratio increased to $34.8 million for the year ended December 31, 2012 compared to $32.4 million for the year ended December 31, 2011. This increase resulted primarily from higher ceding commission earned in 2012
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expense increased $204.3 million, or 59.9%, to $545.5 million for the year ended December 31, 2013 from $341.2 million for the year ended December 31, 2012. Our loss ratio for the segment for the year ended December 31, 2013 increased to 67.2% from 63.0% for the year ended December 31, 2012. The increase in the loss ratio for the year ended December 31, 2013 resulted primarily from higher ultimate loss selections in our European casualty business in the year ended December 31, 2013 compared to 2012.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $38.8 million, or 34.5%, to $151.2 million for the year ended December 31, 2013 from $112.5 million for the year ended December 31, 2012. The expense ratio decreased to 18.6% for the year ended December 31, 2013 compared to 20.8% for the year ended December 31, 2012. The decrease resulted from a decline in writing of legal expense policies, which have a
higher commission structure, coupled with premium expansion in businesses that have lower direct acquisition costs. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the years ended December 31, 2013 and 2012 of $83.2 million and $65.1 million, respectively. The ceding commission increased period over period as a result of an increase in net earned premium, as the segment received its allocation of ceding commission for its proportionate share of our overall policy acquisition expense.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expense increased $43.7 million, or 14.7%, to $341.2 million for the year ended December 31, 2012 from $297.5 million for the year ended December 31, 2011. Our loss ratio for the segment for the year ended December 31, 2012 decreased to 63.0% from 66.6% for the year ended December 31, 2011. The decrease in the loss ratio for the year ended December 31, 2012 resulted primarily from lower current accident year selected ultimate losses as compared to selected ultimate losses in prior accident years due to a shift in business mix within this segment created by a higher proportion of warranty policy claims compared to casualty policy claims.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $5.8 million, or 5.4%, to $112.5 million for the year ended December 31, 2012 from $106.7 million for the year ended December 31, 2011. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the years ended December 31, 2012 and 2011 of $65.1 million and $57.6 million, respectively. The ceding commission increased period over period as a result of an increase in net earned premium, as the segment received its allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio decreased to 20.8% for the year ended December 31, 2012 compared to 23.9% for the year ended December 31, 2011. The decrease in the expense ratio resulted primarily from a higher proportional increase in ceding commission earned compared to the increase in acquisition and other underwriting costs during 2012 as compared to 2011.
Net Earned Premium Less Expenses Included in Combined Ratio (Underwriting Income). Net earned premium less expenses included in combined ratio increased to $87.9 million for the year ended December 31, 2012 compared to $42.6 million for the year ended December 31, 2011. The increase was attributable primarily to an improvement in the segment's loss ratio during the year ended December 31, 2012 compared to the year ended December 31, 2011.
Net Written Premium. Net written premium increased $189.5 million, or 44.0%, to $620.5 million for the year ended December 31, 2013 from $431.0 million for the year ended December 31, 2012. The increase in net written premium resulted from an increase of gross written premium for the year ended December 31, 2013 compared to the year ended December 31, 2012, partially offset by a lower retention of gross written premium during 2013 compared to 2012. Our overall retention rate for the segment was 70.5% and 74.5% for the years ended December 31, 2013 and 2012, respectively.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses increased $123.6 million, or 107.8%, to $238.3 million for the year ended December 31, 2012 compared to $114.7 million for the year ended December 31, 2011. Our loss ratio for the segment for the year ended December 31, 2012 increased to 68.4% from 66.9% for the year ended December 31, 2011. The increase in the loss ratio in the year ended December 31, 2012 resulted primarily from higher current accident year selected ultimate losses as compared to selected ultimate losses from prior years. The higher current accident year selected ultimate losses resulted primarily from writing approximately 35% of this segment's business in the state of California in 2012 compared to approximately 25% in 2011. We believe the ultimate loss ratio on California policies, on average, is higher than other states in which we conduct business. The increase in the loss ratio was not indicative of adverse development.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $51.0 million, or 107.6%, to $98.4 million for the year ended December 31, 2012 from $47.4 million for the year ended December 31, 2011. The expense ratio increased to 28.2% for the year ended December 31, 2012 from 27.6% for the year ended December 31, 2011. The increase in the expense ratio resulted, primarily, from higher policy acquisition expense as a percentage of earned premium for the year ended December 31, 2012 compared to the year ended December 31, 2011 as a result of changes in business mix and the adoption of the new accounting standard for deferred acquisitions costs in 2012 on a prospective basis, partially offset by salary expense that increased at a slower rate than earned premium due to leveraging of the segment's existing employee base. Acquisition costs and other underwriting expenses were reduced by the ceding commission earned during the years ended December 31, 2012 and 2011 of $62.0 million and $34.2 million, respectively. The increase in ceding commission period to period was attributed primarily to an increase in gross written premium in this segment relative to our other segments during the year ended December 31, 2012 and a shift in the mix of the programs written during the periods. For the year ended December 31, 2012, we wrote certain programs that have a higher percentage of policy acquisition expense to earned premium than in the year ended December 31, 2011 and, therefore, we allocated more ceding commission to the segment.
On August 1, 2013, we received notice from Integon that it was terminating, effective August 1, 2013, our participation in the Personal Lines Quota Share. The results of our operations from the quota share represent our Personal Lines Reinsurance segment. The termination is on a run-off basis, meaning we will continue to receive net premiums and assume related net losses
with respect to policies in force as of July 31, 2013 through the expiration of such policies. As we will retain all assumed written premium through July 31, 2013 and the continuing cash flows associated with the business, we will not present the Personal Lines Reinsurance segment as a discontinued operation in accordance with ASC 205-20 Discontinued Operations.
We assumed $65.8 million and $118.1 million of premium from the insurance companies of NGHC (the “NGHC Insurers”) for the years ended December 31, 2013 and 2012, respectively. The assumption of premium was flat between 2013 and 2012, as increases in assumed premium during the first seven months in 2013 were offset by the termination of the Personal Lines Quota Share in August 2013. Net earned premium decreased 10.9% in 2013 compared to 2012 due to termination of the quota share arrangement. Loss and loss adjustment expense increased 5.8% in 2013 compared to 2012, which resulted in a higher loss ratio. The increase in the net loss ratio in 2013 from 2012 resulted from experiencing higher ultimate losses in 2013 compared to 2012. The net expense ratio in 2013 compared to 2012 was consistent year over year.
The first priority of our investment strategy is preservation of capital, with a secondary focus on maximizing an appropriate risk adjusted return. We expect to maintain sufficient liquidity from funds generated from operations to meet our anticipated insurance obligations and operating and capital expenditure needs, including debt service and additional payments in connection with our past producer network and renewal rights acquisitions. The excess funds will be invested in accordance with both the overall corporate investment guidelines as well as an individual subsidiary’s investment guidelines. Our investment guidelines are designed to maximize investment returns through a prudent distribution of cash and cash equivalents, fixed maturities and equity positions. Cash and cash equivalents include cash on deposit, commercial paper, pooled short-term money market funds and certificates of deposit with an original maturity of 90 days or less. Our fixed maturity securities include obligations of the U.S. Treasury or U.S. government agencies, obligations of local governments, obligations of foreign
governments, obligations of U.S. and Canadian corporations, mortgages guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, Federal Farm Credit entities, and asset-backed securities and commercial mortgage obligations. Our equity securities include common stocks of U.S. and Canadian corporations.
Other investments represented approximately 0.6% and 0.5% of our total investment portfolio as of December 31, 2013 and 2012, respectively. At December 31, 2013, other investments consisted primarily of limited partnerships or hedge funds totaling $13.7 million, a mutual fund of $6.6 million, an interest in a pharmaceutical company of $4.2 million and an annuity of $1.3 million. At December 31, 2012, other investments consisted primarily of limited partnerships or hedge funds totaling $9.8 million and an annuity of $1.4 million.
the occurrence of a discrete credit event resulting in the issuer defaulting on material outstanding obligations or the issuer seeking protection under bankruptcy laws; and
Additionally, we had gross unrealized losses of $73.9 million related to fixed maturity securities and $2.1 million related to marketable equity securities as of December 31, 2013, none of which we deem to be OTTI.
Corporate bonds represent 56% of the fair value of our fixed maturities and 51% of the total unrealized losses of our fixed maturities. We own 1,053 corporate bonds in the industrial, bank and financial and other sectors, which have a fair value of approximately 32%, 22% and 2%, respectively, and 19%, 29% and 3% of total unrealized losses, respectively, of our fixed maturities. We believe that the unrealized losses in these securities are the result, primarily, of general economic conditions and not the condition of the issuers, which we believe are solvent and have the ability to meet their obligations. Therefore, we expect that the market price for these securities should recover within a reasonable time. Additionally, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis.
We may generate liquidity through a combination of debt or equity securities issuances, as well as financing through borrowing and sales of securities. During 2013, we issued $250 million of our 6.125% notes due 2023, $115 million of preferred stock and entered into a new £200 million credit facility to support our Lloyd's underwriting capacity. In 2012, we completed the issuance of ten-year, $200 million convertible senior notes and entered into a $200 million credit facility, which was not utilized (other than for letters of credit) as of December 31, 2013.
Our principal sources of operating funds are premiums, service and fee income, investment income and proceeds from sales and maturities of investments. Our primary uses of operating funds include payments of claims and operating expenses. Currently, we pay claims using cash flow from operations and invest our excess cash primarily in fixed maturity and equity securities. We expect that projected cash flow from operations will provide us sufficient liquidity to fund our anticipated growth, by providing capital to increase the surplus of our insurance subsidiaries, as well as for payment of claims and operating expenses, payment of interest and principal on debt facilities and other holding company expenses for at least the next twelve months. However, if our growth attributable to potential acquisitions, internally generated growth or a combination
Net cash provided by financing activities was $426.9 million for the year ended December 31, 2013 compared to net cash provided by financing activities in 2012 of $66.8 million. In 2013, we received net proceeds of approximately $247 million and $111 million from the issuance of notes and preferred shares, respectively, as well as $58 million from repurchase agreements. Additionally, we received approximately $36 million from non-controlling interest capital contributions to our subsidiaries, partially offset by approximately $33 million of total dividend payments. In 2012, cash provided by financing activities primarily included the receipt of $43 million from entering into repurchase agreements, $25 million from the issuance of our convertible senior notes, the contribution of approximately $23 million from non-controlling interests to our subsidiaries and the issuance of promissory notes of $13 million, partially offset by dividend payments of approximately $30 million and principal payment of debt obligations of approximately $14 million.
In 2013, fixed maturities increased $1,288.8 million and resulted primarily from acquisitions during 2013, use of cash generated from operations and use of cash from debt or equity issuance proceeds. Premium receivables increased $342.7 million as a result of the increase in premium writing in 2013, related primarily to growth in our three main segments and acquisitions. Prepaid expenses and other assets increased $451.2 million and resulted primarily from our continued investment in life settlement contracts and an increase in miscellaneous accounts receivable due to growth in fee related businesses.
In our proportional reinsurance programs, we generally receive a commission on the premium ceded to reinsurers. This compensates our insurance companies for the direct costs associated with production of the business, the servicing of the business during the term of the policies ceded, and the costs associated with placement of reinsurance that benefits the proportional programs. In addition, certain of our reinsurance treaties allow us to share in any net profits generated under such treaties with the reinsurers. Various reinsurance brokers may arrange for the placement of this reinsurance coverage on our behalf and are compensated, directly or indirectly, by the reinsurers. We also place reinsurance with direct markets and enter reinsurance relationships with third-party captives formed by agents and other business partners as a mechanism for sharing risk and profit.
At the time of the Majestic loss portfolio transfer, these entities were reinsurers of Majestic. We currently hold collateral of approximately $15 million in a trust account related to cessions for Twin Bridges, as well as approximately $22 million of funds held.
The following tables provide a summary of our primary treaty reinsurance programs as of December 31, 2013 for the United States and internationally:
If we incur catastrophe losses and loss settlement expenses that exceed the coverage limits of our reinsurance program, many of our property catastrophe programs have built in a fixed number of reinstatement of limits. For example, if we incur a property catastrophe loss, we are required to pay the reinsurers a reinstatement premium equal to the proportional amount of the limit utilized for the reinstatement of the original premium.
Effective January 1, 2013, AII receives a ceding commission of 31% of ceded written premiums with respect to all Covered Business other than retail commercial package business, for which the ceding commission remains 34.375%. With regards to the Specialty Program portion of Covered Business only, we will be responsible for ultimate net loss otherwise recoverable from Maiden Insurance to the extent that the loss ratio to Maiden Insurance, which will be determined on an inception to date basis from July 1, 2007 through the date of calculation, is between 81.5% and 95% (the “Specialty Program Loss Corridor”). For purposes of determining whether the loss ratio falls within the Specialty Program Loss Corridor, workers’ compensation business written in our Specialty Program segment from July 1, 2007 through December 31, 2012 is excluded from the loss ratio calculation.
We recorded approximately $276.6 million, $197.0 million and $154.0 million of ceding commission during 2013, 2012 and 2011, respectively, as a result of the Maiden Quota Share.
On August 10, 2012, we entered into a four-year, $200 million credit agreement (the “Credit Agreement”), among JPMorgan Chase Bank, N.A., as Administrative Agent, KeyBank National Association and SunTrust Bank, as Co-Syndication Agents, Associated Bank, National Association and Lloyds Securities Inc., as Co-Documentation Agents and various lending institutions party thereto. The credit facility is a revolving credit facility with a letter of credit sublimit of $100 million and an expansion feature not to exceed $100 million. Fees associated with the Credit Agreement were approximately $1.0 million. The Credit Agreement contains certain restrictive covenants customary for facilities of this type (subject to negotiated exceptions and baskets), including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and dispositions. There are also financial covenants that require us to maintain a minimum consolidated net worth, a maximum consolidated leverage ratio, a minimum fixed charge coverage ratio, a minimum risk-based capital and a minimum statutory surplus. We are in compliance with all covenants as of December 31, 2013.
As of December 31, 2013, we have no outstanding borrowings under this Credit Agreement. We have outstanding letters of credit in place under this Credit Agreement at December 31, 2013 for $83.5 million, which reduced the availability for letters of credit to $16.5 million as of December 31, 2013, and the availability under the facility to $116.5 million as of December 31, 2013.
Fees payable by us under the Credit Agreement include a letter of credit participation fee (which is the margin applicable to Eurodollar borrowings and was 1.50% at December 31, 2013), a letter of credit fronting fee with respect to each letter of credit 0.125% and a commitment fee on the available commitments of the lenders (a range of 0.20% to 0.30% based on our consolidated leverage ratio and was 0.25% at December 31, 2013).
Upon the occurrence of a fundamental change (as defined in the indenture governing the notes) holders of the Convertible Notes will have the right to require us to repurchase their Convertible Notes for cash, in whole or in part, at 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date.
We separately allocated the proceeds for the issuance of the Convertible Notes to a liability component and an equity component, which is the embedded conversion option. The equity component was reported as an adjustment to paid-in-capital, net of tax, and is reflected as an original issue discount (“OID”). The OID of $41.7 million and deferred origination costs
relating to the liability component of $4.8 million will be amortized into interest expense over the term of the loan of the Convertible Notes. After considering the contractual interest payments and amortization of the original discount, the Convertible Notes effective interest rate was 8.57%. Transaction costs of $1.3 million associated with the equity component were netted in paid-in-capital. Interest expense, including amortization of deferred origination costs, recognized on the Convertible Notes was $14.5 million, $14.0 million and $0.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
In August 2013, we issued $250 million aggregate principal amount of our 6.125% notes due 2023 (the “Notes”) to certain initial purchasers in a private placement. The Notes bear interest at a rate equal to 6.125% per year, payable semiannually in arrears on February 15th and August 15th of each year. The Notes will mature on August 15, 2023, unless earlier purchased by us. Fees associated with the Notes were approximately $2.6 million. The indenture governing the Notes contains covenants whereby the interest rate will increase by 0.50% per year if our consolidated leverage ratio exceeds 30% and does not exceed 35% and will increase an additional 1.00% per year (for an aggregate increase of 1.50% per year) if the consolidated leverage ratio exceeds 35%. As of December 31 , 2013, the consolidated leverage ratio was less than 30%. It is an event of default if we have a consolidated leverage ratio in excess of 35% for a period of 30 days, unless in connection with an acquisition, in which case the grace period is 18 months. The indenture governing the Notes also contains certain customary covenants, such as reporting of annual and quarterly financial results, and restrictions on certain mergers and consolidations, a limitation on liens, and a limitation on the disposition of stock of certain of our subsidiaries. The Notes rank equally with existing and future unsecured and unsubordinated indebtedness, including our convertible senior notes and amounts under the revolving credit agreement. Interest expense, including amortization of deferred origination costs, recognized on the Notes was approximately $5.8 million for the year ended December 31, 2013.
We established four special purpose trusts for the purpose of issuing trust preferred securities. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts, were invested by the trusts in junior subordinated debentures issued by us that mature between 2035 and 2037. In accordance with FASB ASC 810-10-25, we do not consolidate such special purpose trusts, as we are not considered to be the primary beneficiary. The equity investment, totaling $3.7 million as of December 31, 2013 on our consolidated balance sheet, represents our ownership of common securities issued by the trusts. The debentures require interest-only payments at an average rate of approximately 8% to be made on a quarterly basis, with principal due at maturity. The debentures contain covenants that restrict declaration of dividends on our common stock under certain circumstances, including default of payment. We incurred $2.6 million of placement fees in connection with these issuances, which is being amortized over thirty years. The aggregated principal amounts of the trust preferred securities were $123.7 million at both December 31, 2013 and 2012. We recorded $8.1 million, $8.3 million, and $9.9 million of interest expense for the years ended December 31, 2013, 2012 and 2011, respectively, related to these trust preferred securities.
During 2011, we, through a wholly-owned subsidiary, entered into a seven-year secured loan agreement with Bank of America Leasing & Capital, LLC in the aggregate amount of $10.8 million to finance the purchase of an aircraft. The loan bears interest at a fixed rate of 4.45%, requires monthly installment payments of approximately $0.1 million commencing on March 25, 2011 and ending on February 25, 2018, and a balloon payment of $3.2 million at the maturity date. The Company recorded interest expense of approximately $0.4 million for the years ended December 31, 2013, 2012 and 2011, respectively, related to this agreement. The loan is secured by the aircraft.
The agreement contains certain covenants that are similar to our revolving credit facility. Additionally, if the outstanding balance of this loan exceeds 90% of the fair value of the aircraft, we are required to pay the lender the entire amount necessary to reduce the outstanding principal balance to be equal to or less than 90% of the fair value of the aircraft. During 2013, we paid an additional $0.3 million to reduce the outstanding principal balance as required by these terms. The agreement allows us, under certain conditions, to repay the entire outstanding principal balance of this loan without penalty.
In conjunction with the Reinsurance Agreement between AII and Maiden Insurance (see Note 13. "Related Party Transactions"), AII entered into a loan agreement with Maiden Insurance during the fourth quarter of 2007, whereby Maiden Insurance loaned to AII the amount equal to its quota share of the obligations of the AmTrust Ceding Insurers that AII was then obligated to secure. The loan agreement provides for interest at a rate of LIBOR plus 90 basis points and is payable on a quarterly basis. Each advance under the loan is secured by a promissory note. Advances totaled $168 million as of December 31, 2013 and December 31, 2012. Effective December 31, 2008, AII and Maiden entered into a Reinsurer Trust Assets Collateral agreement whereby Maiden Insurance is required to provide AII the assets required to secure Maiden's proportionate share of our obligations to our U.S. subsidiaries. The amount of this collateral as of December 31, 2013 was approximately $1.10 billion. Maiden retains ownership of the collateral in the trust account.
The loss and loss adjustment expense payments due by period in the table above are based upon the loss and loss adjustment expense estimates as of December 31, 2013 and actuarial estimates of expected payout patterns and are not contractual liabilities as to a time certain. Our contractual liability is to provide benefits under the policy. As a result, our calculation of loss and loss adjustment expense payments due by period is subject to the same uncertainties associated with determining the level of loss and loss adjustment expenses generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our loss and loss adjustment expense estimate process, see “Item 1. Business - Loss Reserves.” Actual payments of loss and loss adjustment expenses by period will vary, perhaps materially, from the table above to the extent that current estimates of loss and loss adjustment expenses vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See “Item 1A. Risk Factors - Risks Related to Our Business - Our loss reserves are based on estimates and may be inadequate to cover our actual losses” for a discussion of the uncertainties associated with estimating loss and loss adjustment expenses.