Statement of income data and balance sheet data are derived from our audited Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. Except as explicitly described as held for sale or as discontinued operations, and unless otherwise noted, all discussions and amounts presented herein relate to our continuing operations except for net loss, net loss attributable to Maiden and net loss attributable to Maiden common shareholders. These historical results are not necessarily indicative of results to be expected from any future period. For further discussion of this risk, please see Item 1A. "Risk Factors" in this Annual Report on Form 10-K. You should read the following selected financial data in conjunction with the other information contained in this Annual Report on Form 10-K, including
In early 2018, our Board initiated the Strategic Review to evaluate ways to increase shareholder value as a result of continuing higher than targeted combined ratios and lower returns on equity than planned. This Strategic Review has resulted in a series of transactions that have transformed our operations and materially reduced the risk on our balance sheet. These transactions include:
On August 29, 2018, we entered into a Renewal Rights Agreement (“Renewal Rights”), with TransRe, pursuant to which we agreed to sell, and TransRe agreed to purchase Maiden US's rights to: (i) renew its treaty reinsurance agreements upon their expiration or cancellation, (ii) solicit renewals of and replacement coverages for the treaty reinsurance agreements and (iii) replicate and use the products and contract forms used in Maiden US’s business. The sale was consummated on August 29, 2018. We continue to earn premiums and remain liable for losses occurring subsequent to August 29, 2018 for any policies in force prior to and as of August 29, 2018, until those policies expire. The payment received for sale of the Renewal Rights was $7.5 million, subject to further increases in accordance with the agreement.
On December 27, 2018, we completed the previously announced US MTA with Enstar, pursuant to which Maiden NA sold, and Enstar purchased, all of the outstanding shares of common stock of Maiden US for gross consideration of $286.4 million, including estimated closing adjustments but subject to post-closing adjustments. The 2013 Senior Notes - 7.75% due 2043 and issued by Maiden NA, which are fully and unconditionally guaranteed by the Company, remain outstanding following the completion of the disposition of Maiden US. As previously disclosed, pursuant to the terms of the US MTA, Maiden Bermuda entered into a novation agreement and a retrocession agreement pursuant to which certain assets and liabilities associated with the U.S. treaty reinsurance business held by Maiden Bermuda were either novated or retroceded to Cavello, Enstar Holdings’s Bermuda reinsurance affiliate, in exchange for a ceding commission of $14.0 million, and (iii) Maiden Bermuda provided Enstar with a reinsurance cover for loss reserve development, up to a maximum of $25.0 million, when losses are more than $100.0 million in excess of the net loss and LAE recorded as of June 30, 2018.
As part of the Strategic Review during the fourth quarter of 2018, Maiden Holdings contributed as capital 35% of its ownership in Maiden Bermuda, to Maiden NA. Additionally, the proceeds of the sale of Maiden US were partially used by Maiden NA, among other things, to settle inter-company balances due to its Bermuda affiliates and as described below. In December 2018 and January 2019, Maiden NA contributed its proportionate share of capital contributions in the amount of $68.3 million in cash. Maiden NA also now maintains a portfolio of short-term investments, along with other strategic investments of $148.6 million at
December 31, 2018. We believe Maiden NA’s investments will create opportunities to utilize NOL which total $208.9 million as of December 31, 2018. These NOL’s are not presently recognized as deferred tax assets as a full valuation allowance is currently carried against them (for further details please see "Note 17. Taxation" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K). Taken together, we believe these measures should generate additional income for Maiden NA in a tax-efficient manner, while sharing in the improvement in profitability we anticipate in Maiden Bermuda as a result of the measures enacted in the Strategic Review.
On December 31, 2018, Maiden Bermuda entered into the Partial Termination Amendment with AmTrust through AmTrust’s subsidiary, AII, by which the parties agreed to amend the Amended and Restated Quota Share Agreement between Maiden Bermuda and AII, originally entered into on July 1, 2007 (the “AmTrust Quota Share”) and subsequently amended, that is currently in-force and set to expire on June 30, 2019. The Partial Termination Amendment provided for the cut-off of the ongoing and unearned premium of AmTrust’s Small Commercial Business and U.S. Specialty Risk and Extended Warranty business as of December 31, 2018, with the remainder of the AmTrust Quota Share remaining in place. The Partial Termination Amendment resulted in Maiden Bermuda returning approximately $716.1 million in unearned premium to AII, which nets to approximately $480.0 million after consideration of ceding commission and brokerage, which is subject to adjustment as discussed in the "Notes to Consolidated Financial Statements - Note 18. Subsequent Events" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. The Amendment was effective as of January 1, 2019.
On January 30, 2019, Maiden Bermuda, and AmTrust, through its wholly owned subsidiaries AII, AEL and AIU DAC, agreed to terminate on a run-off basis (i) the Amended and Restated Quota Share Agreement between Maiden Bermuda and AII, originally entered into on July 1, 2007 by which AII retrocedes to Maiden Bermuda certain lines of business assumed by AII from certain of AmTrust’s U.S., Irish and U.K. insurance company subsidiaries; and (ii) the Quota Share Reinsurance Contract among Maiden Bermuda, AEL and AIU DAC, originally entered into on April 1, 2011, by which AEL cedes 20% and AIU DAC cedes 40% to Maiden Bermuda of AmTrust’s European Hospital Liability business. Each termination was effective as of January 1, 2019.
On June 27, 2017, Maiden Holdings fully redeemed all of the Maiden NA's 8.0% 2012 Senior Notes due 2042, using a portion of the proceeds from the Preference Shares - Series D issuance, thus lowering our cost of capital. The 2012 Senior Notes were redeemed at a redemption price equal to 100% of the principal amount of $100.0 million plus accrued and unpaid interest on the principal amount being redeemed up to, but not including, the redemption date. As a result, the Company accelerated the amortization of the remaining 2012 Senior Note issuance cost of $2.8 million.
The Preference Shares - Series D have no voting rights other than to elect two additional members of the board of directors if dividends on the Preference Shares - Series D have not been declared and paid for the equivalent of six or more dividend periods. The Preference Shares - Series D have been listed on NYSE and trading commenced on June 15, 2017 under the symbol "MHPRD".
In addition to the Consolidated Balance Sheets and Consolidated Statements of Income and Comprehensive Income, management uses certain key financial measures, some of which are non-GAAP measures, to evaluate its financial performance and the overall growth in value generated for the Company’s common shareholders. Management believes that these measures, which may be defined differently by other companies, explain the Company’s results in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. The non-GAAP measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. These key financial measures are:
Non-GAAP Operating Return on Average Common Equity ("Non-GAAP Operating ROACE"): Management uses non-GAAP operating return on average common shareholders' equity as a measure of profitability that focuses on the return to common shareholders. It is calculated using non-GAAP operating (loss) earnings available to common shareholders (as defined above) divided by average common shareholders' equity.
Average common shareholders' equity for the year ended December 31, 2016 is adjusted for the period the Mandatory Convertible Preference Shares - Series B are outstanding (prior to mandatory conversion date of September 15, 2016).
Book Value per Common Share and Diluted Book Value per Common Share: Management uses growth in both of these metrics as a prime measure of the value we are generating for our common shareholders, as management believes that growth in each metric ultimately results in growth in the Company’s common share price. These metrics are impacted by the Company’s net (loss) income and external factors, such as interest rates, which can drive changes in unrealized gains or losses on our investment portfolio and share repurchases which amounted to $0.9 million during the year ended December 31, 2018 (2017 - $25.7 million). At December 31, 2018, book value per common share decreased by 88.3% and diluted book value per common share decreased by 88.2%, compared to December 31, 2017, primarily due to decreased retained earnings caused by our net loss during the year as well as the decline in accumulated other comprehensive income ("AOCI") during the year due to unrealized losses on our investment portfolio. Please see "Liquidity and Capital Resources - Investments" on page 72 for further information on the change in fair value of our fixed maturity investment portfolio.
In conjunction with underwriting (loss) income, combined ratio is commonly used in the insurance and reinsurance industry as a measure of underwriting profitability. Management measures underwriting results on an overall basis and for each segment on the basis of the combined ratio. The combined ratio is the sum of the net loss and LAE ratio and the expense ratio and the computations of each component are described below. A combined ratio under 100% indicates underwriting profitability, as the net loss and LAE, commission and other acquisition expenses and general and administrative expenses are less than the net premiums earned and other insurance revenue on that business. Please refer to "Notes to Consolidated Financial Statements - Note 3. Segment Reporting" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further details.
Underwriting (loss) income is calculated by subtracting net loss and LAE, commissions and other acquisition expenses and applicable general and administrative expenses from the net premiums earned and other insurance revenue and is the monetized counterpart of the combined ratio. For purposes of these non-GAAP operating measures, the fee-generating business which is included in our Diversified Reinsurance segment, is considered part of the underwriting operations of the Company.While an important metric of success, underwriting (loss) income and combined ratio do not reflect all components of profitability, as they do not recognize the impact of investment income earned on premiums between the time premiums are received and the time loss payments are ultimately paid to clients. Because we do not manage our cash and investments by segment, investment income and interest expense are not allocated to individual reportable segments. Certain general and administrative expenses are generally allocated to segments based on actual costs incurred.
As a result of the transactions implemented in 2018 and early 2019, the Company's gross and net premiums written will be materially lower in 2019 and investment income will become a significantly larger portion of our revenues.
Our expenses consist largely of net loss and LAE, commission and other acquisition expenses, general and administrative expenses, interest and amortization expenses, amortization of intangible assets including any write off, and foreign exchange and other gains or losses, including on a non-recurring basis, losses from disposal of subsidiaries.
For all lines, the Company’s objective is to estimate ultimate loss and LAE. Total loss reserves are then calculated by subtracting losses paid. Similarly, IBNR reserves are calculated by subtracting case reserves from total loss reserves. IBNR is the estimated liability for (1) changes in the values of claims that have been reported to us but are not yet settled, as well as (2) claims that have occurred but have not yet been reported as well as (3) claims that are closed but subsequently reopened. Each claim is settled individually based upon its merits, and particularly for longer-tailed lines of business, it is not unusual for a claim to take years after being reported to be settled and paid, especially if legal action is involved. These claims may also require changes in anticipated future payments due to changes in medical conditions or changes in expected inflationary pressures. As a result, the reserve for loss and LAE include significant estimates for IBNR reserves.
In selecting management's best estimate of loss and LAE reserves, we consider the range of results produced by many actuarial methods and the appropriateness of those estimates. These methodologies are described in "Notes to Consolidated Financial Statements - Note 9. Reserve for Loss and Loss Adjustment Expenses" included under Item 8 "Financial Statement and Supplementary Data".
The reserve for loss and LAE at December 31, 2018 and 2017 was as follows:
With the guidance of the methods described in "Notes to Consolidated Financial Statements - Note 9. Reserve for Loss and Loss Adjustment Expenses" included under Item 8 "Financial Statement and Supplementary Data" of this Annual Report Form 10-K, actuarial judgment is applied in the determination of ultimate losses. In general, the Company’s segments have varying levels of seasoning with which the Company has direct experience and as a result, differing methods are utilized to estimate loss and LAE reserves in each segment.
In our Diversified Reinsurance segment, we have both books of business that have been in runoff for several years, and those that are active and have been underwritten during the last several years. In general, we utilize the Expected Loss Ratio ("ELR") approach at the onset of reserving an account, the Bornhuetter-Ferguson ("BF") method for business with less but maturing loss experience, and as the experience matures the Loss Development ("LD") method. The runoff book of business primarily used the LD method due to its maturity and amount the of experience which has emerged. For proportional business the Company relies heavily on the actual contract experience, whereas for excess of loss business there will be more usage of industry and/or Company specific benchmark assumptions.
Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company’s business activities can also impair the accuracy of its loss and LAE reserve estimates. At December 31, 2018, there were no significant backlogs related to the processing of policy or contract information in the Company’s segments.
Potential Volatility in the Reserve for Loss and Loss Adjustment Expenses: In addition to the factors creating uncertainty in the Company’s estimate of loss and LAE, the Company’s estimated reserve for loss and LAE can change over time because of unexpected changes in the external environment. Potential changing external factors include:
For pro-rata contracts and excess-of-loss contracts where no deposit or minimum premium is specified in the contract, premium written is recognized based on estimates of ultimate premiums provided by the ceding companies. Initial estimates of premium written are recognized in the period in which the underlying risks are incepted. Subsequent adjustments, based on reports of actual premium by the ceding companies, or revisions in estimates, are recorded in the period in which they are determined. Reinsurance premiums assumed are generally earned on a pro rata basis over the terms of the underlying policies or reinsurance contracts.
The Company provides proportional and non-proportional reinsurance coverage to cedants (insurance companies). Cedant's actual premiums are unknown at the time they enter into reinsurance agreement so treaties are based upon estimates of those premiums at the time the treaties are written and are typically adjusted as premiums are known. Reporting delays are inherent in the reinsurance industry and vary in length by type of treaty. As delays can vary from a few weeks to a year or sometimes longer, the Company produces accounting estimates to report premiums and commission and other acquisition expenses until it receives the cedants’ actual results. Under proportional treaties, which represented 99.8% (2017 - 99.5%, 2016 - 99.9%) of gross premiums written for the year December 31, 2018, the Company shares proportionally in both the premiums and losses of the cedant and pays the cedant a commission to cover the cedant’s acquisition expenses. Under this type of treaty, the Company’s ultimate premiums written and earned and acquisition expenses are not known at the inception of the treaty and must be estimated until the cedant reports its actual results to the Company. Under non-proportional treaties, which represented 0.2% (2017 - 0.5%, 2016 - 0.1%) of gross premiums written for the year December 31, 2018, the Company is typically exposed to loss events in excess of a predetermined dollar amount or loss ratio and receives a deposit or minimum premium, which is subject to adjustment depending on the premium volume written by the cedant.
Reported premiums written and earned and commission and other acquisition expenses on proportional treaties are generally based upon reports received from cedants and brokers, supplemented by the Company’s own estimates of premiums written and commission and other acquisition expenses for which ceding company reports have not been received. Premium and acquisition expense estimates are determined at the individual treaty level based upon contract provisions. The determination of estimates requires a review of the Company’s experience with cedants, a thorough understanding of the individual characteristics of each line of business and the ability to project the impact of current economic indicators on the volume of business written and ceded by the Company’s cedants. Estimates for premiums and commission and other acquisition expenses are updated continuously as new information is received from the cedants. Differences between such estimates and actual amounts are recorded in the period in which estimates are changed or the actual amounts are determined.
Please refer to "Notes to Consolidated Financial Statements - Note 2. Significant Accounting Policies" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K on page for a discussion on the OTTI evaluation performed by the Company. For the year ended December 31, 2018, the Company recognized $5.8 million of OTTI losses in its results of operation. The Company recognized no OTTI losses through earnings for the years ended December 31, 2017 and 2016. Please refer to "Notes to Consolidated Financial Statements - Note 4. Investments" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K on page for further details.
Annually, the Company makes an assessment as to whether the value of the Company’s goodwill and intangible assets are impaired. Impairment, which can be either partial or full, is based on a fair value analysis by individual reporting unit. The goodwill and intangible assets are subject to annual impairment testing on October 1 or when “triggering events” occur or circumstances change that could potentially reduce the fair value of a reporting unit below its carrying amount. Goodwill is considered impaired if the carrying amount of the reporting unit exceeds the fair value.
The sale of the Company's U.S. treaty reinsurance operations resulted in a triggering event and consequently during the year ended December 31, 2018, the Company has written off the remaining balance of goodwill and intangible assets. The goodwill and intangible assets were deemed to be permanently impaired due to the sale of the U.S. treaty reinsurance operations. Please refer to "Notes to Consolidated Financial Statements - Note 6. Discontinued Operations and Note 7. Goodwill and Intangible Assets" included under Item 8. "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K on page for further details of this disposal. The Company recognized an impairment loss of $74.2 million as a result of these dispositions, which is presented as part of the loss from discontinued operations for the year ended December 31, 2018.
No impairment was recorded during the same period in 2017. During 2016, the Company wrote off the goodwill relating to the acquisition of a majority interest in Regulatory Capital Limited, which was deemed to be permanently impaired. The Company recognized an impairment loss of $1.8 million which is presented as part of the loss from discontinued operations for the year ended December 31, 2016.
The following table sets forth our selected Consolidated Statement of Income data for each of the years indicated:
Underwriting (loss) income is a non-GAAP measure and is calculated as net premiums earned plus other insurance revenue less net loss and LAE, commission and other acquisition expenses and general and administrative expenses directly related to underwriting activities.
Net loss attributable to Maiden common shareholders for the year ended December 31, 2018 was $570.3 million compared to net loss attributable to Maiden common shareholders of $199.1 million for the same period in 2017. The net decrease in results for the year ended December 31, 2018 compared to the same period in 2017 was primarily due to the following:
higher initial loss ratios on current year premiums earned during 2018 in our AmTrust Reinsurance segment factoring in both market conditions and recent loss trends and experience.
total general and administrative expenses increased by $11.9 million for the year ended December 31, 2018 compared to the same period in 2017 due to increases in compensation benefits paid under certain executive separation agreements, higher audit, legal and other professional fees incurred as well as higher technology-related expenses; and
net investment income increased by $12.2 million or 9.8% for the year ended December 31, 2018 compared to the same period in 2017 largely due to the growth in average investable assets of 8.1% from the same period in 2017;
an underwriting loss of $215.8 million compared to underwriting income of $12.9 million for the same period in 2016. The deterioration of the underwriting result was primarily the result of $247.2 million of adverse prior year development, compared to $77.0 million for the same period in 2016. This development was primarily in our AmTrust Reinsurance segment for each respective period and discussed in greater detail in the individual segment discussion and analysis; and
The unfavorable movements above were partially offset by the following favorable factors:
net investment income increased by $15.4 million, or 14.2%, to $124.1 million, for the year ended December 31, 2017 compared to $108.7 million for the same period in 2016 which reflects growth in average investable assets of 5.4% for the year ended December 31, 2017;
realized gains on investment of $12.2 million for the year ended December 31, 2017 compared to realized gains of $6.8 million for the same period in 2016;
The following is a discussion on the results of our operations for the years ended December 31, 2018, 2017 and 2016:
Net premiums written decreased by $22.8 million, or 1.1%, for the year ended December 31, 2018 compared to the same period in 2017. The table below compares net premiums written by our reportable segments, reconciled to the total consolidated net premiums written, for the years ended December 31, 2018 and 2017:
Net premiums written for the year ended December 31, 2018 decreased by 1.1% compared to the same period in 2017 due to the following:
AmTrust Reinsurance segment decreased by $69.6 million or 3.6% mainly due to a combination of market conditions and underwriting measures applied by AmTrust during the year for Small Commercial Business, particularly within the workers' compensation portfolio, as well as AmTrust buying significantly more inuring reinsurance for Specialty Program.
The $3.3 million increase in net premiums written in our Diversified Reinsurance segment for the year ended December 31, 2017 compared to the same period in 2016 was mainly due to growth in new treaty contracts written in Europe by Maiden Bermuda in 2017 as the demand for reinsurance to support capital has risen in response to Solvency II regulations in Europe.
Net premiums earned increased by $33.5 million or 1.7% for the year ended December 31, 2018 compared to the same period in 2017. The table below compares net premiums earned by our reportable segments, reconciled to the total consolidated net premiums earned, for the years ended December 31, 2018 and 2017:
Net premiums earned in the AmTrust Reinsurance segment for the year ended December 31, 2018 increased modestly by $4.1 million or 0.2% compared to the same period in 2017. Please refer to the analysis of our AmTrust Reinsurance segment on page 66 for further discussion.
Net premiums earned in the AmTrust Reinsurance segment increased by $66.0 million or 3.6% for the year ended December 31, 2017 compared to the same period in 2016 which primarily reflects the impact of the lower utilization of retrocessional capacity compared to the prior period as discussed in the net premiums written section above. Please refer to the analysis of our AmTrust Reinsurance segment on page 66 for further discussion.
Net premiums earned in the Diversified Reinsurance segment modestly increased by $1.0 million or 1.3% for the year ended December 31, 2017 compared to the same period in 2016. Please refer to the analysis of our Diversified Reinsurance segment on page 63 for further discussion.
All of our Other Insurance Revenue is produced by our Diversified Reinsurance segment. Please refer to the analysis of our Diversified Reinsurance segment on page 63 for further discussion.
Net Investment Income - Net investment income increased by $12.2 million, or 9.8%, for the year ended December 31, 2018 compared to the same period in 2017, largely due to the growth in average invested assets of 8.1%. The increase was also driven by $3.0 million of higher interest income on the loan to related party as the terms of the agreement changed effective December 18, 2017.
The average of the Company's investments, cash and cash equivalents, restricted cash and cash equivalents and loan to related party held during the year.
Net Investment Income - Net investment income increased by $15.4 million, or 14.2% to $124.1 million for the year ended December 31, 2017 compared to the same period in 2016. For the year ended December 31, 2017, average investable assets grew by 5.4% giving rise to increased net investment income compared to the same period in 2016, combined with higher average yields of 3.1% for the year ended December 31, 2017 compared to 2.9% for the same period in 2016.
The average of the Company's investments, cash and cash equivalents, restricted cash and loan to related party held during the year.
Ratio of net investment income over average investable assets at fair value.
Commission and other acquisition expenses increased by $10.9 million or 1.7% for the year ended December 31, 2018 compared to 2017. The commission and other acquisition expense ratio remained flat at 32.2% for the year ended December 31, 2018 compared to the same period in 2017. The commission and other acquisition expense ratio is largely dependent on the mix of business within the AmTrust Reinsurance segment and the mix of pro-rata and excess of loss business within the Diversified Reinsurance segment.
Total general and administrative expenses increased by $2.8 million, or 5.5%, for the year ended December 31, 2017 compared to 2016 due to higher legal, other professional fees and technology-related expenses partly offset by lower employee-related expenses. The general and administrative expense ratio remained flat at 2.6% for the years ended December 31, 2017 and 2016.
The interest and amortization expenses related to the Senior Notes were $23.3 million for the year ended December 31, 2017 compared to $28.2 million for the same period in 2016. The decrease in interest expense compared to the prior period was due to the redemption of the 8.0% 2012 Senior Notes in June 2017 and the refinancing of the 8.25% 2011 Senior Notes with the 6.625% 2016 Senior Notes in June 2016. The weighted average effective interest rate for the Senior Notes was 7.7% for the year ended December 31, 2017 compared to 8.02% in 2016. Please refer to "Notes to Consolidated Financial Statements - Note 11. Long Term Debt" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further details on the Senior Notes.
For the year ended December 31, 2018, dividends paid to preference shareholders decreased by $3.5 million or 12.1% compared to the same period in 2017 as no dividends were declared by our Board for the fourth quarter of 2018. This was partially offset by the $7.5 million of dividends paid on the Preference Shares - Series D during the year ended December 31, 2018 compared to $5.0 million paid for the same period in 2017 as these preference shares were only issued on June 15, 2017.
The underwriting results and associated ratios for our Diversified Reinsurance segment for the years ended December 31, 2018, 2017 and 2016 were as follows:
The combined ratio for the year ended December 31, 2018 decreased to 104.4% compared to 107.4% in 2017 primarily due to the following:
higher initial loss ratios on current year premiums earned during the year.
Net premiums written for the year ended December 31, 2018 increased by $46.8 million or 56.7% as a result of new account growth and expansion of client relationships in our European Capital Solutions business for 2018 and higher net premiums written in our German Auto programs. Also, the retention ratio of premiums written increased to 98.3% for the year ended December 31, 2018 compared to 97.5% for the same period in 2017 due to the lower utilization of retrocessional capacity.
Net Loss and Loss Adjustment Expenses - Net loss and LAE increased by $16.7 million, or 30.6%, for the year ended December 31, 2018 compared to 2017. Net loss and LAE ratios were 58.5% and 58.9% for the years ended December 31, 2018 and 2017, respectively.
The net loss and LAE ratio decreased by 0.4 points for the year ended December 31, 2018 compared to the same period in 2017 due to the following factors:
The combined ratio increased to 107.4% for the year ended December 31, 2017 compared to 106.3% for the year ended December 31, 2016. The combined ratio was impacted by adverse prior year loss development of $5.4 million or 5.8 points in 2017 compared to $11.1 million or 11.9 points in 2016. Higher initial loss ratios on current year premiums earned during 2017 also contributed to the increase in combined ratio compared to 2016.
Premiums - Gross premiums written increased by $2.2 million or 2.7% to $84.6 million for the year ended December 31, 2017 compared to the same period in 2016 primarily due to growth from new European treaty contracts written by Maiden Bermuda in 2017 due to higher demand for European Capital Solutions as a result of the Solvency II regime.
Within our Diversified Reinsurance segment, International experienced $2.2 million or 2.8% growth in net premiums earned for the year ended December 31, 2017 compared to the same period in 2016 due to higher premiums earned from the European treaty contracts written by Maiden Bermuda in 2017 as the demand for European Capital Solutions has increased under the Solvency II regime.
Other Insurance Revenue - Other insurance revenue, which represents fee income that is not directly associated with premium revenue assumed by the Company decreased by $1.0 million to $9.8 million for the year ended December 31, 2017 compared to the same period in 2016 primarily caused by weaker auto sales in Europe compared to the prior period.
Net Loss and Loss Adjustment Expenses - Net loss and LAE increased by $2.9 million, or 5.6%, for the year ended December 31, 2017 compared to 2016. Net loss and LAE ratios were 58.9% and 55.8% for the years ended December 31, 2017 and 2016, respectively.
Commission and Other Acquisition Expenses - Commission and other acquisition expenses decreased by $2.2 million or 7.1%, to $29.0 million for the year ended December 31, 2017 compared to 2016. The commission and other acquisition expense ratios decreased to 31.3% for the year ended December 31, 2017 compared to 33.7% for the same period in 2016 due to the change in the mix of business written. Please refer to the reasons for the changes in the combined ratio discussed in the preceding paragraph.
General and Administrative Expenses - General and administrative expenses increased by $0.4 million, or 2.8%, for the year ended December 31, 2017 compared to 2016. The general and administrative expense ratio was 17.2% and 16.8% for the years ended December 31, 2017 and 2016, respectively. The overall expense ratio (including commission and other acquisition expenses) was 48.5% and 50.5% for the years ended December 31, 2017 and 2016, respectively.
The combined ratio increased 16.0 points to 126.8% for the year ended December 31, 2018 compared to 110.8% during the same period in 2017 due to the following:
More than half of the 2017 prior year loss development was from workers' compensation in Small Commercial Business driven by accident years 2012 and subsequent, which increased as a percentage of business written during this time period. Other significant development was experienced in commercial auto as well as general liability within AmTrust's Specialty Program and Small Commercial Business segments, predominantly in accident years 2012 and subsequent, as a result of industry-wide trends including increasing claim severity and claim frequency; and
higher initial loss ratios for current year premiums earned during the year factoring in both market conditions and recent loss trends and experience as well as elevated actual current accident year activity within the Specialty Risk and Extended Warranty lines.
Premiums - Gross premiums written decreased by $107.2 million or 5.4% during the year ended December 31, 2018 compared to the same period in 2017. The change in gross premiums written for the year ended December 31, 2018 compared to the same period in 2017 reflects reductions in Small Commercial Business and Specialty Program partially offset by significant growth within Specialty Risk and Extended Warranty.
The table below shows net premiums written by category for the years ended December 31, 2018 and 2017:
Net premiums written in our AmTrust Reinsurance segment for the year ended December 31, 2018 decreased by $69.6 million or 3.6% compared to the same period in 2017 due to reductions in Small Commercial Business assumed from AmTrust partially offset by growth in the Specialty Risk and Extended Warranty lines of business and the lower utilization of retrocessional capacity in 2018 compared to 2017. The decrease in Small Commercial Business was due to a combination of market conditions and underwriting measures applied by AmTrust during the year. The ratio of net premiums written to gross premiums written increased to 99.9% for the year ended December 31, 2018 compared to 98.1% for the same period in 2017.
adverse prior year loss development of $399.2 million or 20.8 points during 2018, compared to $239.9 million or 12.5 points during 2017 which is discussed in further detail below for each respective period:
Nearly half of the adverse prior year loss development in 2018 was from workers' compensation, driven by accident years 2014 to 2016 due to an increased expectation of loss development at later maturities. Other significant adverse loss development occurred in European hospital liability within Specialty Risk and Extended Warranty, and the general liability and commercial auto lines within Small Commercial Business and Specialty Program where elevated loss activity had been observed. The adverse loss development in European hospital liability was partly caused by the failure of the Italian government to implement a law passed in April 2017 which was expected to reduce medical malpractice costs, and also by a reduced expectation with regards to the ultimate amount of no-payment claims;
General and Administrative Expenses - General and administrative expenses increased by $0.8 million, or 26.0%, for the year ended December 31, 2018 compared to the same period in 2017. The general and administrative expense ratio has remained unchanged at 0.2% for the years ended December 31, 2018 and 2017, respectively. The overall expense ratio (including commission and other acquisition expenses) was 32.4% for both years ended December 31, 2018 and 2017.
adverse reserve development of $239.9 million or 12.5 points related primarily to workers' compensation business, and to a lesser extent, development occurred in the general liability and commercial auto lines within Specialty Program and Small Commercial Business. Adverse prior year development in 2016 was $54.0 million or 2.9 points due to significant claims development within program commercial auto as well as program general liability within both Specialty Program and Small Commercial Business, predominantly in accident years 2012 and subsequent; and
higher initial loss ratios for current year premiums earned during the year in response to recent industry-wide trends of increasing claims frequency and severity on certain lines of business.
higher initial loss ratios on current year premiums earned during the year factoring in both market conditions and recent loss trends and experience.
Maiden Holdings is a holding company and transacts no business of its own. We therefore rely on cash flows in the form of dividends, advances, loans and other permitted distributions from our subsidiary companies to pay expenses and make dividend payments on our common and preference shares. The jurisdictions in which our operating subsidiaries are licensed to write business impose regulations requiring companies to maintain or meet statutory solvency and liquidity requirements. Some jurisdictions also place restrictions on the declaration and payment of dividends and other distributions.
Under the Old LPT MTA, we were to enter into a retrocession agreement with Enstar to effect a loss portfolio transfer in which an Enstar entity would assume loss reserves of approximately $2.675 billion associated with quota share reinsurance contracts that Maiden Bermuda has with AmTrust. That proposed retrocession was to apply to losses arising and/or claims made on or prior to June 30, 2018.
On December 31, 2018, Maiden Bermuda, entered into the Partial Termination Amendment with AmTrust, through AmTrust’s subsidiary AII, by which the parties agreed to amend the AmTrust Quota Share, originally entered into on July 1, 2007 and subsequently amended, that is currently in-force and is set to expire on June 30, 2019. The Partial Termination Amendment provides for the cut-off of the ongoing and unearned premium of AmTrust’s Small Commercial Business and U.S. Specialty Risk and Extended Warranty business as of December 31, 2018, with the remainder of the AmTrust Quota Share remaining in place. The Partial Termination Amendment was effective as of January 1, 2019.
On January 30, 2019, Maiden Bermuda and AII, AEL and AIU DAC agreed to terminate on a run-off basis the (i) AmTrust Quota Share; and (ii) European Hospital Liability Quota Share 20% and AIU DAC cedes 40% to Maiden Bermuda of AmTrust’s European Hospital Liability business. Each termination was effective as of January 1, 2019.
The Company and Maiden Bermuda failed to meet the requirements to hold sufficient capital to cover their respective ECR as of September 30, 2018 and December 31, 2018. Maiden Bermuda has taken a series of actions which have cured its previously reported breach of the ECR as discussed in "Note 1. Organization" and "Note 18. Subsequent Events" included under Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. The Company had communicated such conditions to the BMA and is following the guidelines of a reportable “event” as stipulated by Bermuda insurance law. These restorative actions have included, but are not limited to, the Partial Termination Amendment and the terminated reinsurance agreements with AmTrust which were both effective as of January 1, 2019, and capital contributions totaling $195.0 million by Maiden Bermuda's shareholders (Maiden Holdings and Maiden NA) in December 2018 and January 2019 using a portion of the proceeds from our sale of Maiden US. As a result of the actions taken in the Strategic Review during 2018 and 2019, and pending finalization of the New LPT/ADC MTA and associated reinsurance agreement, we estimate that the Company and Maiden Bermuda will have sufficient capital in excess of their respective ECR requirements and that this position should improve throughout 2019. The New LPT/ADC MTA, in combination with these previous measures, are expected to continue to further strengthen our capital position and solvency ratios throughout 2019.
The amount of dividends that can be distributed from Maiden Bermuda is, under certain circumstances, limited under Bermuda law and Bermuda regulatory requirements, which requires our Bermuda operating subsidiary to maintain certain measures of solvency and liquidity in accordance with the BSCR. Maiden Bermuda is restricted in paying dividends that would result in Maiden Bermuda failing to comply with the ECR as calculated based on the BSCR or cause Maiden Bermuda to fail to meet its relevant margins. At December 31, 2018, the statutory capital and surplus of Maiden Bermuda was $869.9 million and the maximum dividend Maiden Bermuda could pay, without a signed affidavit, having met minimum levels of statutory capital and surplus requirements was $0. During 2018, Maiden Bermuda paid no dividends to Maiden Holdings (2017 - $105.0 million). Maiden Bermuda has voluntarily undertaken with the BMA not to make any capital distributions, which would include but is not limited to dividends, without the express consent of the BMA.
The table below summarizes our operating, investing and financing cash flows for the years ended December 31, 2018, 2017 and 2016:
Cash flows from investing activities consist primarily of proceeds from the sales and maturities of investments and payments for investments acquired. The Company continues to deploy available cash for longer-term investments as investment conditions permit and to maintain, where possible, cash and cash equivalents balances at low levels. Net cash provided by investing activities was $32.9 million for the year ended December 31, 2018 compared to net cash used in investing activities of $359.9 million for the same period in 2017. Cash flows provided by discontinued operations was $104.9 million for the year ended December 31, 2018 compared to cash flows used in discontinued operations of $47.5 million for the same period in 2017.
Net cash flows used in investing activities from continuing operations was $72.0 million for the year ended December 31, 2018 compared to $312.3 million for the same period in 2017 as the purchases of fixed maturity securities were higher and the proceeds from the sales of fixed maturities were higher in 2018 compared to the same period in 2017. For the year ended December 31, 2018, the purchases of fixed maturity securities exceeded the proceeds from the sales, maturities and calls by $309.6 million compared to $318.8 million for the same period in 2017. Adding to the outflow in 2018 was the increase in net purchases from other investing activities of $18.3 million compared to net proceeds from other investing activities of $6.4 million for the same period in 2017. The net outflows above was offset by the proceeds from the sale of discontinued operations of $255.9 million for the year ended December 31, 2018.
The net cash used in financing activities for the years ended December 31, 2018, 2017 and 2016 was as follows:
Maiden Bermuda is generally required to post collateral security with respect to any reinsurance liabilities it assumes from ceding insurers domiciled in the U.S. in order for U.S. ceding companies to obtain credit on their U.S. statutory financial statements with respect to insurance liabilities ceded to them. Under applicable statutory provisions, the security arrangements may be in the form of letters of credit, reinsurance trusts maintained by trustees or funds withheld arrangements where assets are held by the ceding company.
Maiden Bermuda uses trust accounts, loan to related party, funds held and letters of credit to meet collateral requirements. Consequently, cash and cash equivalents and investments are pledged in favor of ceding companies in order to comply with relevant insurance regulations or contractual requirements.
At December 31, 2018 and 2017, restricted cash and cash equivalents and fixed maturity investments used as collateral were $4.0 billion and $3.7 billion, respectively. This collateral represents 91.9% and 93.6% of the fair value of our total fixed maturity investments and cash and cash equivalents (including restricted cash and cash equivalents) at December 31, 2018 and 2017, respectively.
The following table details additional information on those assets used as collateral at December 31, 2018 and 2017:
Maiden Bermuda has also loaned funds to AmTrust totaling $168.0 million at December 31, 2018 and 2017, respectively, to partially satisfy its collateral requirements with AII. Advances under the loan have been secured by promissory notes and the loan is carried at cost.
During the year ended December 31, 2018, the yield on the 10-year U.S. Treasury bond increased by 29 basis points to 2.69%. The 10-year U.S. Treasury is the key risk-free determinant in the fair value of many of the securities in our AFS portfolio. The upward shift in the U.S. Treasury yield curve reflects a strengthening U.S. economy with an expansionary fiscal policy contributing to strong labor markets. These factors have resulted in central banks to steadily move away from the monetary easing policy of the last number of years at a steady pace.
At December 31, 2018, we consider the levels of cash and cash equivalents we are holding to be within our targeted ranges. During periods when interest rates experience greater volatility, we have periodically maintained more cash and cash equivalents to better assess current market conditions and opportunities within our defined risk appetite, and may do so in future periods. To limit our exposure to unexpected interest rate increases which would reduce the value of our fixed income securities and reduce our shareholders' equity, we attempt to maintain the duration of our fixed maturity investment portfolio combined with our cash and cash equivalents, both restricted and unrestricted, within a reasonable range of the duration of our loss reserves. At December 31, 2018 and 2017, these respective durations in years were as follows:
Our Agency MBS portfolio is 35.7% of our fixed maturity investments at December 31, 2018. Given the relative size of this portfolio to our total investments, if faster prepayment patterns were to occur over an extended period of time, this could potentially limit the growth in our investment income in certain circumstances, or even potentially reduce the total amount of investment income we earn.
Holdings by sector and financial strength rating of our corporate bonds at December 31, 2018 and 2017 were as follows:
At December 31, 2018 and December 31, 2017, respectively, we hold the following non-U.S. dollar denominated securities:
At December 31, 2018 and December 31, 2017, respectively, these non-U.S. securities are invested in the following currencies:
The Company does not employ any credit default protection against any of the fixed maturities held in non-U.S. dollar denominated currencies at December 31, 2018 and December 31, 2017, respectively.
The Company's reserve for loss and LAE increased by 28.0% primarily due to significant adverse prior year loss development of $403.2 million recognized during 2018 in our AmTrust Reinsurance segment as well as higher loss ratio picks factoring in both market conditions and recent loss trends and experience within both of our Diversified Reinsurance and AmTrust Reinsurance segments.
with a highly rated global insurer within our AmTrust Reinsurance segment effective July 1, 2018 which has reduced both the reinsurance recoverable on unpaid losses and prepaid reinsurance, as these accounts are included within our other assets, as well as reinsurance balances payable and ceded deferred acquisition costs, as these accounts are included within our other liabilities. The decrease in other liabilities is also due a lower level of liability for securities purchased as at December 31, 2018 compared to December 31, 2017.
The major factors contributing to the net decrease in capital resources were as follows:
net loss attributable to Maiden of $544.6 million. Please see "Results of Operations" on page 57 for a discussion of the Company’s net loss for the year ended December 31, 2018;
net decrease in AOCI of $79.0 million which arose due to: 1) higher net unrealized losses on investment of $81.7 million resulting from the net decrease in the fair value of our AFS investment portfolio relating to market price movements due to rising interest rates and widening credit spreads during 2018; and partially offset by 2) an increase in cumulative translation adjustments of $2.7 million due to the effect of the recent depreciation of the euro and British pound relative to the original currencies on our non-U.S. dollar net liabilities (excluding non-U.S. dollar denominated AFS fixed maturities);
dividends declared of $54.7 million related to the Company’s common and preferred shares; and partially offset by
On February 21, 2017, the Company's Board approved the repurchase of up to $100.0 million of the Company's common shares from time to time at market prices. During the year ended December 31, 2018, the Company repurchased a total of 205,000 common shares at an average price of $3.31 per share under its share repurchase authorization. At December 31, 2018, the Company has a remaining authorization of $74.2 million for share repurchases.
Please refer to "Notes to Consolidated Financial Statements - Note 14. Shareholders' Equity" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion of the equity instruments issued by the Company at December 31, 2018 and 2017.
(4) We have unfunded investment commitments related to our investments in limited partnerships, which are callable by our investment managers, as well as unfunded commitments on our investments in special purpose vehicles focused on lending vehicles at December 31, 2018.
We conduct business in a variety of foreign (non-U.S.) currencies, the principal exposures being the euro, the British pound, the Australian dollar, the Canadian dollar and the Swedish krona. Assets and liabilities denominated in foreign currencies are exposed to changes in currency exchange rates. Our reporting currency is the U.S. dollar, and exchange rate fluctuations relative to the U.S. dollar may materially impact our results and financial position. Our principal exposure to foreign currency risk is our obligation to settle claims in foreign currencies. In addition, in order to minimize this risk, we maintain and expect to continue to maintain a portion of our investment portfolio in investments denominated in currencies other than the U.S. dollar. We may employ various strategies (including hedging) to manage our exposure to foreign currency exchange risk. To the extent that these exposures are not fully hedged or the hedges are ineffective, our results of operations or equity may be adversely effected. At December 31, 2018, no such hedges or hedging strategies were in force or had been entered into. We measure monetary assets and liabilities denominated in foreign currencies at period end exchange rates, with the resulting foreign exchange gains and losses recognized in the Consolidated Statements of Income. Revenues and expenses in foreign currencies are converted at quarterly average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in AOCI.
The anticipated effects of inflation are considered explicitly in the pricing of the insured exposures, which are used as the initial estimates of reserves for loss and LAE. In addition, inflation is also implicitly accounted for in subsequent estimates of loss and LAE reserves, as the expected rate of emergence is in part predicated upon the historical levels of inflation that impact ultimate claim costs. To the extent inflation causes these costs, particularly medical treatments and litigation costs, to vary from the assumptions made in the pricing or reserving estimates, the Company will be required to change the reserve for loss and LAE with a corresponding change in its earnings in the period in which the variance is identified. The actual effects of inflation on the results of operations of the Company cannot be accurately known until claims are ultimately settled.