Specialty Risk and Extended Warranty. We provide coverage for consumer and commercial goods and custom designed coverages, such as accidental damage plans and payment protection plans offered in connection with the sale of consumer and commercial goods, in the United States and Europe, and certain niche property, casualty and specialty liability risks in the United States and Europe, including general liability, employers’ liability and professional and medical liability.
Our former segment, Personal Lines Reinsurance, is in run-off. 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, terminating our participation in the Personal Lines Quota Share. The termination was on a run-off basis, meaning we continued 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 did not present the Personal Lines Reinsurance segment as a discontinued operation in accordance with ASC 205-20 Discontinued Operations.
We transact business primarily through our fifteen insurance subsidiaries domiciled in the United States and five insurance subsidiaries domiciled in Europe. We are authorized to write business in all 50 states in the United States and in the European Union. Through our subsidiary, AmTrust at Lloyd's, we are licensed to underwrite business internationally in locations where Lloyd's is licensed. Our principal operating subsidiaries are rated "A" (Excellent) by A.M. Best Company ("A.M. Best").
Insurance, particularly workers’ compensation, is, generally affected by seasonality. The first quarter generally produces greater premiums than subsequent quarters. Nevertheless, the impact of seasonality on our Small Commercial Business and Specialty Program segments has not been significant. We believe that this is because we serve many small businesses in different geographic locations. We believe seasonality may be muted by our acquisition activity. Additionally, our Specialty Risk and Extended Warranty segment may be impacted by seasonality due to consumer trends in the automotive and consumer electronic markets.
We evaluate our operations by monitoring key measures of growth and profitability, including return on equity and net combined ratio. Our return on equity was 28.4%, 22.5% and 17.5% for the years ended December 31, 2014, 2013 and 2012, respectively. Our overall financial objective is to produce a return on equity of 15.0% or more over the long term. In addition, we target a net combined ratio of 95.0% or lower over the long term, while seeking to maintain optimal operating leverage in our insurance subsidiaries commensurate with our A.M. Best rating objectives. Our net combined ratio was 90.7%, 90.5% and 90.1% for the years ended December 31, 2014, 2013 and 2012, respectively. A key factor in achieving our targeted net combined ratio is a continuous focus on our net expense ratio. Our strategy across our segments is to maintain premium rates, deploy capital judiciously, manage our expenses and focus on the businesses in which we have expertise, which we believe should provide opportunities for greater returns.
On January 3, 2014, we completed the acquisition of Insco Insurance Services, Inc. (“Insco Dico”) and its subsidiaries for a purchase price of approximately $88.7 million. The transaction was funded with our existing working capital. Insco Dico's subsidiaries include Developers Surety and Indemnity Company and Indemnity Company of California, which offer surety insurance to developers and contractors in all 50 states with California as the largest state. In addition, Insco Dico's subsidiary, Builders Insurance Services, markets general liability insurance policies to contractors in several states in the western region of the U.S. The goodwill and intangible assets, as well as Insco Dico's results of operations, are included as a component of the Small Commercial Business segment. The identifiable intangible assets consist of agency relationships, which have a 20 year life, and licenses that have an indefinite life. As a result of this transaction, we recorded approximately $55.5 million of written premium and approximately $3.7 million of service and fee income for the year ended December 31, 2014.
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 an acquisition gain of approximately $18.0 million.
As a result of this transaction, we recorded approximately $58.1 million and $32.1 million of written premium for the years ended December 31, 2014 and 2013, respectively.
In accordance with FASB ASC 944-805 Business Combinations, we adjusted to fair value Sequoia'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 $7.4 million. Additionally, we recorded $11.8 million of intangible assets that consist primarily of licenses and trademarks and have an indefinite life. The intangible assets, as well as Sequoia's results of operations, are included as a component of the Small Commercial Business segment from the date of acquisition. As a result of this transaction, we recorded an acquisition gain of approximately $5.2 million.
We recorded approximately $68.3 million and $79.7 million of written premium for the years ended December 31, 2014 and 2013, respectively.
On February 28, 2013, we, through our wholly-owned subsidiary AmTrust International Limited (“AIL”), 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 United Kingdom based insurer. 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 AIL and us, and two reinsurance agreements, pursuant to which affiliates of AIH reinsure certain insurance contracts of such affiliates with affiliates of AIL.
In December 2013, AHL acquired all the issued and outstanding stock of Atlas COPCO Reinsurance S.A., a Luxembourg domiciled reinsurance company, from ATLAS COPCO AB. The purchase price of Atlas COPCO Reinsurance S.A. was approximately $80.7 million. We recorded approximately $89.1 million of cash, goodwill of $16.9 million and a deferred tax liability of $25.3 million. Atlas COPCO Reinsurance S.A. subsequently changed its name to AmTrust Re Aries S.A.
In November 2013, AHL acquired all the issued and outstanding stock of Re'A FIN S.A., a Luxembourg domiciled reinsurance company, from SRIW Finance SA and SPARXIS SA. The purchase price of Re'A FIN S.A. was approximately $93.4 million. We recorded approximately $102.8 million of cash, goodwill of $18.7 million and a deferred tax liability of $28.1 million. Re'A FIN S.A. subsequently changed its name to AmTrust Re Taurus S.A.
We have a 13.2% ownership interest in National General Holding Corp. (“NGHC”). NGHC is publicly-held insurance holding company (Nasdaq: NGHC) that operates fifteen insurance companies in the United States and writes consumer property and casualty insurance business through independent agents for automobiles. Its coverages include standard/preferred auto, RVs, non-standard auto and commercial auto. NGHC's two largest stockholders are The Michael Karfunkel 2005 Grantor Retained Annuity Trust (the “Trust”) and Michael Karfunkel individually. 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. 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 $28.4 million, $11.6 million and $9.3 million of income during the years ended December 31, 2014, 2013 and 2012, respectively, related to our equity investment in NGHC.
We provide NGHC and its affiliates information technology development services in connection with the development and licensing of a policy management system at a cost which is currently 1.25% of gross written premium of NGHC and its affiliates plus our costs for development and support services. In addition, we provide NGHC and its affiliates printing and mailing services at a per piece cost for policy and policy related materials, such as invoices, quotes, notices and endorsements, associated with the policies we process for NGHC and its affiliates on the policy management system. We recorded recorded approximately $25.6 million, $24.2 million and $14.4 million of fee income for the years ended December 31, 2014, 2013 and 2012, respectively, related to this agreement. Additionally, we provided certain consulting services to NGHC related to Luxembourg-domiciled reinsurance entities in 2014, for which we received $1.1 million for the year ended December 31, 2014.
We currently have a 50% ownership interest in each of four entities for the purpose of acquiring life settlement contracts, with a subsidiary of NGHC owning the other 50%. 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. The entities (collectively, the “LSC Entities”) are:
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 policies. 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 certain actuarial and finance functions related to the LSC Entities. In conjunction with our 13.2% ownership percentage of NGHC, we ultimately receive 56.6% 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.
Product warranty registration and service - Our Specialty Risk and Extended Warranty business generates fee revenue for product warranty registration and claims handling services provided to unaffiliated third party retailers, manufacturers and dealerships. Additionally, we provide credit monitoring services for a fee.
Information technology services - We provide information technology and printing and mailing services to NGHC and its affiliates for a fee.
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.
Ceding commission on reinsurance transactions is a commission we receive from ceding gross written premium to third party reinsurers, and is netted against acquisition costs and other underwriting expenses. In connection with the Maiden Quota Share, which is our primary source of ceding commissions, 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 the individual segments. The ceding commissions we receive cover a portion of our capitalized direct acquisition costs and a portion of other underwriting expenses. Ceding commissions received from reinsurance transactions that represent recovery of capitalized direct acquisition costs are recorded as a reduction of capitalized unamortized deferred acquisition costs and the net amount is charged to expense in proportion to net premium revenue recognized. Ceding commissions received from reinsurance transactions that represent the recovery of other underwriting expenses are recognized in the income statement over the insurance contract period in proportion to the insurance protection provided and classified as a reduction of acquisition costs and other underwriting expenses. Ceding commissions received, but not yet earned, that represent the recovery of other underwriting expenses are classified as a component of accrued expenses and other current liabilities. We allocate earned ceding commissions to its segments based on each segment’s proportionate share of total acquisition costs and other underwriting expenses recognized during the period.
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 Builders & Tradesman's Insurance Services, Inc. ("BTIS"), CNH Industrial Canada Insurance and CNH Industrial Insurance Agency Inc. (collectively, "CNH"), First Nonprofit Insurance Company ("FNIC"), RS Acquisition Holdco, LLC and it subsidiaries (collectively, "Risk Services") and Warrantech Corporation and its subsidiaries (collectively, "Warrantech").
Our significant accounting policies are discussed in Note 2. "Significant Accounting Policies" in the audited consolidated financial statements included elsewhere in this report. We believe that our most critical accounting policies relate to the reporting of earned premium, reserves for loss and loss adjustment expenses, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from third party reinsurers, deferred policy acquisition costs, valuation of investments, valuation of life settlement contracts and related profit commission, business combinations, goodwill and intangible assets, and income taxes and valuation allowance, each of which is discussed below.
Reserves for Loss and Loss Adjustment Expenses and Unearned Premium Reserves. We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses related to the investigation and settlement of policy claims. Our reserves for loss and loss adjustment expenses represent the estimated cost of all reported and unreported loss and loss adjustment expenses incurred and unpaid at any given point in time based on known facts and circumstances. In establishing our reserves, we do not use loss discounting, which would involve recognizing the time value of money and offsetting estimates of future payments by future expected investment income. Our reserves for loss and loss adjustment expenses are estimated using case-by-case valuations and statistical analysis.
Equity Securities. We utilize a pricing service to estimate the fair value of the majority of our available-for-sale and trading equity securities. The pricing service utilizes market quotations for equity securities that have quoted market prices in active markets and their respective quoted prices are provided as fair value. We classify the values of these equity securities as Level 1. The pricing service also provides fair value estimates for certain equity securities whose fair value is based on observable market information rather than market quotes. We classify the value of these equity securities as Level 2. We also hold certain equity securities that are issued by privately-held entities or direct equity investments that do not have an active market. We estimate the fair value of these securities primarily based on inputs such as third party broker quote, issuers' book value, market multiples, and other inputs. These equity securities are classified as Level 3 due to significant unobservable inputs used in the valuation.
Other Investments. Other investments consisted primarily of investments in limited partnerships, an interest in a syndicated term loan, and annuities. Other investments accounted for only approximately 0.6% of our investment portfolio as of December 31, 2014. We estimate the fair value of other investments based on significant unobservable inputs in the valuation process. As a result, we classified the fair value estimates as Level 3 in the financial hierarchy. We have determined that our investments in Level 3 securities are not material to our financial position or results of operations.
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 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 2014, 2013 and 2012, we recorded impairment write-downs of approximately $8.0 million, $2.9 million and $3.0 million, respectively, after determining that certain of our investments were OTTI.
Life Settlement Profit Commission. We retain a third party service provider to perform certain administration functions to effectively manage the life settlement contracts held by Tiger Capital, LLC and AMT Capital Holdings II S.A. and a portion of their fee is contingent on the overall profitability of the life settlement contracts. We accrue the related profit commission on life settlements at fair value, in relation to life settlements purchased prior to December 31, 2010. This profit commission is calculated based on the discounted anticipated cash flows and the provisions of the underlying contract. In addition, we accrue a best estimate in relation to profit commission due on certain life settlement contracts acquired subsequent to December 31, 2010 as no contractual relationship currently exists.
Net Investment Income. Net investment income increased $46.8 million, or 55.2%, to $131.6 million from $84.8 million for the years ended December 31, 2014 and 2013, respectively. The increase resulted primarily from having a higher average portfolio of fixed security investment securities during 2014 compared to 2013, as a result of the acquisitions of AmTrust at Lloyd's, Insco Dico and Comp Options, the issuance of preferred stock and cash generated from operations, partially offset by lower overall yields.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses increased $825.3 million, or 54.4%, to $2,342.6 million for the year ended December 31, 2014 from $1,517.4 million for the year ended December 31, 2013. Our loss ratio for the years ended December 31, 2014 and 2013 was 66.4% and 67.0%, respectively. The loss ratio remained stable year over year as current accident year selected ultimate losses remained consistent with selected ultimate losses from prior years in our Specialty Risk and Extended Warranty and Specialty Program segments. Current accident year selected ultimate losses were lower than selected ultimate losses from prior years in our Small Commercial Business segment. This was partially offset by premium assumed in 2014 through the Cut Through Reinsurance Agreement with Tower, which had higher ultimate loss selections than our policies in similar lines of business, and having a higher percentage of earned premium from worker's compensation policies in the state of California in 2014, for which we assign a higher ultimate loss selection than for worker's compensation policies written in other states. We did not have any material increases or decreases as a result of prior year loss development.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $323.8 million, or 60.7%, to $856.9 million for the year ended December 31, 2014 from $533.2 million for the year ended December 31, 2013. Acquisition costs and other underwriting expenses were reduced in each period by ceding commission
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; and 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,
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 $250 million of 6.125% notes due 2023 issued in August of 2013.
Net Written Premium. Net written premium increased $947.1 million, or 101.3%, to $1,882.4 million from $935.3 million for the years ended December 31, 2014 and 2013, respectively. The increase in net premium resulted from an increase in gross written premium for the year ended December 31, 2014 compared to the year ended December 31, 2013, as well as an increase in the retention of gross written premium period over period caused by growth in lines of business that are not covered by the Maiden Quota Share. Our retention of gross written premium for the segment was 62.8% and 56.3% for the years ended December 31, 2014 and 2013, respectively.
Net Earned Premium. Net earned premium increased $773.0 million, or 92.7%, to $1,606.8 million for the year ended December 31, 2014 from $833.8 million for the year ended December 31, 2013. 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, 2014 compared to the year ended December 31, 2013, as well as an increase in our retention of gross written premium to 62.8% in 2014 from 56.3% in 2013. Additionally, during the year ended December 31, 2014, we earned, in full, the $174 million of unearned premium we assumed from Tower during the first quarter of 2014 pursuant to the Cut Through Reinsurance Agreement with Tower.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $204.1 million, or 95.9%, to $417.0 million for the year ended December 31, 2014 from $212.8 million for the year ended December 31, 2013. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the years ended December 31, 2014 and 2013 of $197.7 million and $117.1 million, respectively. The ceding commission increased period over period as a result of an increase in net earned premium, as the segment received a larger allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio increased to 25.9% for the year ended December 31, 2014 compared to 25.5% for the year ended December 31, 2013. The slight increase in expense ratio period over period was attributable to higher policy acquisition costs in 2014 from changes in business mix, which resulted from the assumption of business through the Cut Through Reinsurance Agreement, and an increase in commercial package and excess and surplus lines business, which have higher policy acquisition costs than other business we write.
Net Written Premium. Net written premium increased $460.9 million, or 97.2%, to $935.3 million from $474.4 million for the years ended December 31, 2013 and 2012, respectively. The increase in net premium resulted from an increase in gross written premium for the year ended December 31, 2013 compared to the year ended December 31, 2012, as well as an increase in the retention rate of gross written premium period over period. Our retention of gross written premium for the segment was 56.3% and 50.8% for the years ended December 31, 2013 and 2012, respectively. This was partially offset by an increase in our assigned risk business in 2013, for which we cede 100 percent of our gross written business.
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 the result of adverse reserve development. We did not have any material increases or decreases as a result of prior year loss development.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $101.9 million, or 91.9%, to $212.8 million for the year ended December 31, 2013 from $110.9 million for the year ended December 31, 2012. The expense ratio decreased to 25.5% for the year ended December 31, 2013 compared to 26.6% for the year ended December 31, 2012. The decrease in the expense ratio resulted both from 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 increase was attributable to workers' compensation business, which has lower policy acquisition expenses. Additionally, salary expense increased at a slower rate than earned premium due to the leveraging of our existing employee base. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the years ended December 31, 2013 and 2012 of $117.1 million and $69.9 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.
Gross Written Premium. Gross written premium increased $471.4 million, or 31.2%, to $1,983.1 million for the year ended December 31, 2014 from $1,511.6 million for the year ended December 31, 2013. The majority of the increase, approximately $323 million, related to the acquisition of AmTrust at Lloyd's in 2013. Additionally, the segment experienced growth in our existing business in both the U.S. and in Europe. We also benefited from an increase in the British Pound Sterling's average exchange rate in 2014 compared to 2013, which represented approximately 7% of the increase in gross written premium.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expense increased $272.3 million, or 49.9%, to $817.8 million for the year ended December 31, 2014 from $545.5 million for the year ended December 31, 2013. Our loss ratio for the segment for the year ended December 31, 2014 decreased to 66.4% from 67.2% for the year ended December 31, 2013. The decrease in the loss ratio for the year ended December 31, 2014 resulted primarily from lower ultimate loss selections in our European casualty business and U.S. business in the year ended December 31, 2014 compared to 2013. We did not have any material increases or decreases as a result of prior year loss development.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $102.7 million, or 67.9%, to $253.8 million for the year ended December 31, 2014 from $151.2 million for the years ended December 31, 2013. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the year ended December 31, 2014 and 2013 of $120.3 million and $83.2 million, respectively. Although ceding commission increased period over period, the segment received a smaller allocation of ceding commission for its proportionate share of our
Gross Written Premium. Gross written premium increased $392.9 million, or 35.1%, to $1,511.6 million for the year ended December 31, 2013 from $1,118.7 million for the year ended December 31, 2012. This segment experienced growth both in Europe and the United States. The growth in Europe was driven primarily by the acquisition of CCPH, which had premium writings of approximately $99 million, a non-recurring insurance policy totaling approximately $78 million and a new program written by a European subsidiary of approximately $47 million. The growth in the United States resulted from the underwriting of new programs, including programs related to our acquisition of CNH in July 2012 and AMTCS in 2013.
Net Earned Premium. Net earned premium increased $270.3 million, or 49.9%, to $811.8 million for the year ended December 31, 2013 from $541.6 million for the year ended December 31, 2012. As premiums written earn ratably over the term of a policy, the increase in net premium earned resulted from growth in net written premium in 2013 and 2012.
Net Written Premium. Net written premium increased $120.0 million, or 19.3%, to $740.5 million for the year ended December 31, 2014 from $620.5 million for the year ended December 31, 2013. The increase in net written premium resulted from an increase of gross written premium for the year ended December 31, 2014 compared to the year ended December 31, 2013, partially offset by a lower retention of gross written premium during 2014 compared to 2013. Our overall retention of gross written premium for the segment was 67.0% and 70.5% for the years ended December 31, 2014 and 2013, respectively. The decrease in the retention of gross written premium in 2014 related to an increase in business covered under the Maiden Quota Share.
Net Earned Premium. Net earned premium increased $158.2 million, or 30.4%, to $678.6 million for the year ended December 31, 2014 from $520.4 million for the year ended December 31, 2013. As premiums written earn ratably over an annual period, the increase in net premium earned resulted from higher net written premium for 2014 compared to 2013. Additionally, increase in net earned premium was positively impacted in 2014 from the segment having 81% of its total net written premium for the year generated during the first nine months of 2014 compared to 77% in 2013.
December 31, 2013. The increase related primarily to receiving a smaller allocation of ceding commission in 2014 compared to 2013.
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 of gross written premium for the segment was 70.5% and 74.5% for the years ended December 31, 2013 and 2012, respectively.
Net Earned Premium. Net earned premium increased $171.8 million, or 49.3%, to $520.4 million for the year ended December 31, 2013 from $348.6 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 2013 compared to 2012.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses increased $116.8 million, or 49.0%, to $355.1 million for the year ended December 31, 2013 compared to $238.3 million for the year ended December 31, 2012. Our loss ratio for the segment for the year ended December 31, 2013 decreased to 68.2% from 68.4% for the year ended December 31, 2012. The loss ratio for 2013 and 2012 were consistent as current accident year selected ultimate losses were consistent with selected ultimate losses from prior years. We did not have any material increases or decreases as a result of prior year loss development.
Net Earned Premium Less Expenses Included in Combined Ratio (Underwriting Income). Net earned premium less expenses included in combined ratio were $26.7 million and $11.9 million for the years ended December 31, 2013 and 2012, respectively. The increase of $14.8 million resulted primarily from an increase in earned premium and by a reduction in the expense ratio in 2013 compared to 2012.
Personal Lines Reinsurance - Run Off Segment Results of Operations 2014 Compared to 2013
Personal Lines Reinsurance - Run Off Segment Results of Operations 2013 Compared to 2012
The table below summarizes the average duration by type of fixed maturity as well as detailing the average yield as of December 31, 2014 and 2013:
Other investments represented approximately 0.6% of our total investment portfolio as of December 31, 2014 and 2013. At December 31, 2014, other investments consisted primarily of limited partnerships totaling $16.1 million, an interest in a syndicated term loan of $13.0 million, and an annuity of $2.0 million. 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 biopharmaceutical company of $4.2 million and an annuity of $1.3 million.
Additionally, we had gross unrealized losses of $34.5 million related to fixed maturity securities and $7.9 million related to marketable equity securities as of December 31, 2014, none of which we deem to be OTTI.
Corporate bonds represent 60.3% of the fair value of our fixed maturities and 88.2% of the total unrealized losses of our fixed maturities. We own 1,439 corporate bonds in the industrial, bank and financial and other sectors, which have a fair value of approximately 28.8%, 28.3% and 3.2%, respectively, and 15.9%, 67.4% and 4.9% of total unrealized losses, respectively, of our fixed maturities as of December 31, 2014. 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.
Our investment in marketable equity securities consist of investments in preferred and common stock across a wide range of sectors. We evaluated the near-term prospects for recovery of fair value in relation to the severity and duration of the impairment and have determined in each case that the probability of recovery is reasonable and we have the ability and intent to hold these investments until a recovery of fair value. We believe the gross unrealized losses of $7.9 million as of December 31, 2014 are not material to our financial position.
The table below summarizes the gross unrealized losses of our available-for-sale fixed maturity and available-for-sale equity securities by length of time the security has continuously been in an unrealized loss position as of December 31, 2014:
There are 701 securities at December 31, 2014 that account for the gross unrealized loss, none of which we deem to be OTTI. Significant factors influencing our determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent not to sell these securities and it being not more likely than not that we will be required to sell these investments before anticipated recovery of fair value to our cost basis.
For further information on our investments and related performance, see Note 3. “Investments” in the audited consolidated financial statements included elsewhere in this report.
We are organized as a holding company with fifteen domestic and four international insurance company subsidiaries, as well as various other non-insurance subsidiaries. Our primary liquidity needs include payment of interest on various debt facilities, stockholder dividends and taxes. Our income is generated primarily from our insurance subsidiaries, service and fee income and investment income.
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 of these, exceeds our projections, we may have to raise additional capital sooner to support our growth. If we cannot obtain adequate capital on favorable terms or at all, we may be unable to support future growth or operating requirements and, as a result, our business, financial condition and results of operations could be adversely affected.
Net cash provided by operating activities was approximately $1,155.5 million for the year ended December 31, 2014, compared to $915.4 million for the same period in 2013. The increase in cash provided from operations resulted primarily from an increase in gross written premium written in 2014 compared to 2013.
Net cash used in investing activities was $1,052.0 million for the year ended December 31, 2014. Net cash used in investing activities was $929.6 million for the year ended December 31, 2013. In 2014, net cash used in investing activities primarily included approximately $736 million for the net purchase of fixed maturity and equity securities, $125 million for a loan to ACP Re, approximately $81 million for acquisitions, approximately $25 million for the acquisition of life settlement contracts, approximately $77 million for capital expenditures and approximately $85 million for an increase of restricted cash, partially offset by the receipt of cash for approximately $10 million from life settlement contract payouts and $20 million from the sale of a subsidiary. In 2013, net cash used in investing activities primarily included approximately $816 million for the net purchase of fixed maturities and equity securities, approximately $51 million for the acquisition of life settlement contracts, approximately $40 million for capital expenditures and approximately $21 million for an increase of restricted cash, partially offset by the receipt of cash for approximately $20 million from life settlement contract payouts.
Fees payable under this facility include a letter of credit participation fee (equal to the margin applicable to Eurodollar borrowings), 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 0.15% to 0.25% based on our consolidated leverage ratio, which was 0.175%).
Interest expense, including amortization of the deferred origination costs and fees associated with letters of credit, was approximately $1.7 million, $1.8 million, and $1.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.
We use this £235 million letter of credit facility to support our capacity at Lloyd’s as a member and/or reinsurer of Syndicates 2526, 1206 and 44 for the 2015 underwriting year of account, as well as prior open years of account. The facility is 40% secured by a pledge of a collateral account.
Fees payable under this letter of credit facility include a letter of credit issuance fee payable on the secured portion of the letters of credit at the rate of 0.50% and on the unsecured portion of the letters of credit determined based on AII’s then-current financial strength rating issued by A.M. Best. As of December 31, 2014, the applicable letter of credit fee rate on the unsecured portion was 1.15% based on AII’s A.M. Best financial strength rating of “A”. We also pay a commitment fee of 0.35% per year on the aggregate unutilized and un-canceled amount of the facility, and paid a facility fee upon closing of 0.15% of the total aggregate commitment.
As of December 31, 2014, we had outstanding letters of credit of £228.0 million (or $355.2 million) in place under this letter of credit facility. The aggregate unutilized amount under the facility was £7.0 million (or $10.9 million) as of December 31, 2014. We recorded total interest expense of $2.8 million for the year ended December 31, 2014. Interest expense recorded in 2013 was not material.
In 2014, fixed maturities increased $1,152.3 million and resulted primarily from acquisitions during 2014, utilizing cash from preferred share offerings and use of cash generated from operations. Securities pledged and securities sold under agreements to repurchase, at contract value, decreased as a result of settling all repurchase agreements outstanding in 2014. The increase in reinsurance recoverable is directly related to the increase in loss and loss expense reserves. Other assets increased $204.6 million and resulted primarily from our continued investment in life settlement contracts and a loan of $125 million to ACP Re in conjunction with its merger with Tower.
We purchase reinsurance on a proportional basis to cover loss frequency, individual risk severity and catastrophe exposure. We also purchase reinsurance on an excess of loss basis to cover individual risk severity and catastrophe exposure. Additionally, we may obtain facultative reinsurance protection on a single risk. The type and amount of reinsurance we purchase varies year to year based on our risk assessment, our desired retention levels based on profitability and other considerations, and the market availability of quality reinsurance at prices we consider acceptable. Our reinsurance programs renew throughout the year, and the price changes in recent years have not been material to our net underwriting results. Our reinsurance generally does not cover war or nuclear, biological, chemical or radiological terrorism risks.
The following table summarizes the top ten reinsurers that account for approximately 83% of our reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as of December 31, 2014:
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 Reinsurance to the extent that the loss ratio to Maiden Reinsurance, 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 $405.1 million, $276.6 million and $197.0 million of ceding commission during 2014, 2013 and 2012, respectively, as a result of the Maiden Quota Share.
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, 2014 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.
The interest related to the debt by period is as follows: $23.9 million - less than 1 year, $44.3 million - 1 - 3 years, $42.2 million - 3 - 5 years and $148.3 million - more than 5 years. In addition, included within debt and interest is $168 million related to the Maiden collateral loan and $1.8 million of associated interest.