from these leased properties is sufficient for us to conduct our operations for the foreseeable future, we may need to expand into additional facilities to accommodate future growth. For more information on our leasing arrangements, please see Note 12 of the notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.
We executed an office space lease in Hamilton, Bermuda commencing September 1, 2009 for Maiden Holdings and Maiden Bermuda. The initial term of this agreement expires on November 1, 2012 with one option of five years. We have an office space lease in Mount Laurel, New Jersey expiring on May 31, 2015, for use by Maiden Re, Maiden US and Maiden Specialty. We have also executed an office space lease in Beaconsfield, Buckinghamshire, United Kingdom commencing on October 1, 2010, for Maiden Global; the initial term of this agreement expires on October 1, 2015, with one option of five years. We also have ten other office space leases in the United States, one property lease in Bermuda and one office space lease in Germany, Austria, Australia and Russia, respectively, with various expiry dates.
Since our founding in 2007, we have entered into a series of significant strategic transactions that have transformed the scope and scale of our business while keeping our low volatility, non-catastrophe risk profile intact. These transactions have increased our net premiums written to in excess of $1.7 billion while strongly positioning our capital to extend its business platform both in the U.S. and internationally and include:
Acquiring and expanding the reinsurance operations of GMAC Insurance from GMACI Holdings, LLC in 2008 (the “GMAC Acquisition”);
Completing a private placement of trust preferred securities of approximately $260.1 million in 2009 (the “TRUPS Offering”);
Acquiring the majority of the reinsurance-related infrastructure, assets and liabilities of U.K.-based GMAC International Insurance Services, Ltd. in 2010 (the “IIS Acquisition”).
We are a Bermuda-based holding company formed in June 2007 primarily focused on serving the needs of regional and specialty insurers in the United States and Europe by providing innovative reinsurance solutions designed to support their capital needs. We specialize in reinsurance solutions that optimize financing by providing coverage within the more predictable and actuarially credible lower layers of coverage and/or reinsuring risks that are believed to be lower hazard, more predictable and generally not susceptible to catastrophe claims. Our tailored solutions include a variety of value added services focused on helping our clients grow and prosper.
We provide reinsurance through our wholly owned subsidiaries, Maiden US and Maiden Bermuda and have operations in the United States and Bermuda. On a more limited basis, Maiden Specialty, a wholly owned subsidiary of Maiden US, provides primary insurance on a surplus lines basis focusing on non-catastrophe inland marine and property coverages. Maiden Bermuda does not underwrite any primary insurance business. Maiden LF is a life insurer organized in Sweden and writes credit life insurance on a primary basis in support of Maiden Global business development efforts.
In addition, the property and casualty industry invests significant portions of its premiums and retained underwriting profits in fixed income maturities; yields on these securities are at historically low levels and are widely forecast to remain at such levels for the foreseeable future. Continued existence of these conditions will adversely impact the results of the property and casualty industry generally, placing additional pressure on companies underwriting results at a time that market conditions may not be supportive of sustained, longer-term additional pricing measures which would stabilize underwriting trends.
Maiden NA has listed the Senior Notes on the New York Stock Exchange and trading commenced on July 21, 2011 under the symbol “MHNA.”
On November 30, 2010, we acquired the majority of the reinsurance-related infrastructure, assets and liabilities of GMAC IIS. GMAC IIS is based in the United Kingdom and also included the following primary components, the sum of which is referred to as the IIS Acquisition:
The IICL Agreement under which Maiden Bermuda reinsures all of the existing contracts written by GMAC IICL pursuant to a loss portfolio transfer; under the purchase agreement, all future contracts will be underwritten by Maiden Bermuda;
The substantial majority of the premiums and losses underwritten by GMAC IICL are subject to collateral requirements in the form of letters of credit and trust agreements. At the closing of the IIS Acquisition, the Company settled cash balances applicable to the subject reinsurance contracts with GMAC IICL. Actual assets in support of the liabilities assumed under the IICL Agreement were transferred to the Company when the subject individual agreements were novated to Maiden Bermuda. The substantial majority of subject contracts have been novated as at December 31, 2011. Please refer to the section entitled “IIS Acquisition - Funds Withheld” in the Liquidity and Capital Resources section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K for further information.
As a result of the assumption of these liabilities, at November 30, 2010, the underlying assets in support of these collateral arrangements totaled $141.8 million. The Company now assumes one hundred percent (100%) of all premiums and losses for which GMAC IICL is otherwise entitled to or liable in respect of the reinsurance contracts.
Gross premiums written of $1.8 billion, a 39.6% increase over 2010 .
Operating return on equity of 9.2% for the year ended December 31, 2011 as compared to 10.2% for the year ended December 31, 2010.
Common shareholders’ equity of $768.6 million; book value per common share of $10.64 .
for 2011 and 2010, we exclude transaction expenses related to the IIS Acquisition as these are non-recurring; and
For purposes of these operating measures, the fee-generating business associated with the IIS Acquisition (“IIS Fee Business”) which is included in the Diversified Reinsurance segment, is considered part of the underwriting operations of the Company. Certain portions of the IIS Fee Business are directly associated with the underlying reinsurance contracts recorded in the Diversified Reinsurance segment. To the extent that the fees are generated on underlying insurance contracts sold to third parties that are then ceded under quota share reinsurance contracts to Maiden Bermuda, a proportionate share of the fee is offset against the related acquisition expense. To the extent that IIS Fee Business is not directly associated with premium revenue generated under the applicable reinsurance contracts, that fee revenue is separately reported on the line captioned “Other insurance revenue” in the Company’s Consolidated Statements of Income.
The “net loss and loss expense ratio” is derived by dividing net loss and loss adjustment expenses by the sum of net premiums earned and other insurance revenue. The “acquisition cost ratio” is derived by dividing commission and other acquisition expenses by the sum of net premiums earned and other insurance revenue. The “general and administrative expense ratio” is derived by dividing general and administrative expenses by the sum of net premiums
earned and other insurance revenue. The “expense ratio” is the sum of the acquisition cost ratio and the general and administrative expense ratio.
change in IBNR reserves, which are reserves established by us for changes in the values of claims that have been reported to us but are not yet settled, as well as claims that have occurred but have not yet been reported. The portion recoverable from reinsurers is deducted from the gross estimated loss.
It is important to understand our accounting policies in order to understand our financial position and results of operations. The Company’s Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following presents a discussion of those accounting policies and estimates that management believes are the most critical to its operations and require the most difficult, subjective and complex judgment. If actual events differ significantly from the underlying assumptions and estimates used by management, there could be material adjustments to prior estimates that could potentially adversely affect the Company’s results of operations, financial condition and liquidity. These critical accounting policies and estimates should be read in conjunction with the Company’s Notes to Consolidated Financial Statements, including Note 2, Significant Accounting Policies, for a full understanding of the Company’s accounting policies.
In selecting its best estimate, the Company considers the appropriateness of each methodology to the individual circumstances of the treaties and underwriting year for which the projection is made. The methodologies that the Company employs include, but may not be limited to, the Expected Loss Ratio method, the Reported Loss Development method and the Incurred and (as applicable) Paid Bornhuetter-Ferguson (B-F) methods. In addition, the Company uses other methodologies to estimate liabilities for specific types of occurrences. For example, external and vendor catastrophe models are typically used in the estimation of loss and loss adjustment expenses at the early stages of catastrophe losses before loss information is reported to the reinsurer.
While management believes that our case reserves and IBNR are sufficient to cover losses assumed by us, there can be no assurance that losses will not deviate from our reserves, possibly by material amounts. The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate. To the extent actual reported losses exceed estimated losses, the carried estimate of the ultimate losses will be increased (i.e., unfavorable reserve development), and to the extent actual reported losses are less than our expectations, the carried estimate of ultimate losses will be reduced (i.e., favorable reserve development). We record any changes in our loss reserve estimates and the related reinsurance recoverable in the periods in which they are determined.
Significant Assumptions Employed in the Estimation of Reserve for Loss and Loss Adjustment Expenses
The most significant assumptions used as at December 31, 2011 to estimate the reserve for loss and loss adjustment expenses within the Company’s segments are as follows:
The above four assumptions most significantly influence the Company’s determination of initial expected loss ratios and expected loss reporting patterns that are the key inputs which impact potential variability in the estimate of the reserve for loss and loss adjustment expenses and are applicable to each of the Company’s business segments. While there can be no assurance that any of the above assumptions will prove to be correct, we believe that these assumptions represent a realistic and appropriate basis for estimating the reserve for loss and loss adjustment expenses.
the lag in time between the time claims are reported to the ceding company and the time they are reported through one or more reinsurance broker intermediaries to the Company;
In order to verify the accuracy and completeness of the information provided to the Company by its ceding company counterparties, the Company’s underwriters, actuaries, accounting and claims personnel perform underwriting and claims reviews of the Company’s ceding companies. Any material findings are communicated to the ceding companies and utilized in the establishment or revision of the Company’s case reserves and related IBNR reserve. On occasion, these reviews reveal that the ceding company’s reported loss and loss adjustment expenses do not comport with the terms of the contract with the Company. In such events, the Company strives to resolve the outstanding differences in an amicable fashion. The large majority of such differences are resolved in this manner. In the infrequent instance where an amicable solution is not feasible, the Company’s policy is to vigorously defend its position in litigation or arbitration. As at December 31, 2011, the Company was not involved in any material claims litigation or arbitration proceedings.
Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company’s business activities can also impair the accuracy of its loss and loss adjustment expense reserve estimates. As at December 31, 2011, there were no significant backlogs related to the processing of policy or contract information in the Company’s segments.
The Company assumes in its loss and loss adjustment expense reserving process that, on average, the time periods between the recording of expected losses and the reporting of actual losses are predictable when measured in the aggregate and over time. The time period over which all losses are expected to be reported to the Company varies significantly by line of business. This period can range from a few quarters for some lines, such as property, to many years for some casualty lines of business. To the extent that actual reported losses are reported more quickly or more slowly than expected, the Company may adjust its estimate of ultimate loss.
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 loss adjustment expenses , the Company’s estimated reserve for loss and loss adjustment expenses can change over time because of unexpected changes in the external environment. Potential changing external factors include:
In addition, the Company’s segments have varying levels of seasoning with which the Company has direct experience and as a result, the reasonably likely variance of our expected loss ratio for each segment varies commensurately with that experience. As at December 31, 2011, 88.7% of the loss reserves in the Diversified Reinsurance segment are associated with the business acquired in the GMAC Acquisition. The Company’s executive and technical management, including claims and underwriting, have significant experience with this book of business, which also has more than 25 years of loss experience associated with it. We believe the possible variance of our expected loss ratio for all applicable loss years for the Diversified Reinsurance segment was approximately one percentage point as at December 31, 2011. If our final loss ratio for the Diversified Reinsurance segment were to vary by approximately one percentage point from the expected loss ratios in the aggregate, our required reserves after reinsurance recoverable would increase or decrease by approximately $20.0 million.
Under proportional treaties, which represented 80.7% of gross premiums written for the year December 31, 2011, the Company shares proportionally in both the premiums and losses of the cedant and pays the cedant a commission
Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect our own assumptions about assumptions that market participants would use. Examples of assets and liabilities utilizing Level 3 inputs include: insurance and reinsurance derivative contracts; hedge and credit funds with partial transparency; and collateralized loan obligation (“CLO”) - equity tranche securities that
The Company typically utilizes the fair values received from the Pricing Service. If quoted market prices and an estimate from the Pricing Service are unavailable, the Company produces an estimate of fair value based on dealer quotations for recent activity in positions with the same or similar characteristics to that being valued or through consensus pricing of a pricing service. Depending on the level of observable inputs, the Company will then determine if the estimate is Level 2 or Level 3 hierarchy. Approximately 97.7% and 95.1%, respectively of the Company’s fixed maturity investments are categorized as Level 2 within the fair value hierarchy as at December 31, 2011 and 2010. At December 31, 2011 and 2010, we have not adjusted any pricing provided by the Pricing Services.
The Company will challenge any prices for its investments which are not considered to represent fair value. If a fair value is challenged, the Company will typically obtain a non-binding quote from a broker-dealer; multiple quotations are not typically sought. As at December 31, 2011 and 2010, three securities and one security, respectively, are valued using the market approach. At those dates, approximately $11.4 million and $8.6 million, respectively or less than 0.6% and 0.5%, respectively of Level 2 fixed maturities, was priced using a quotation from a broker as opposed to the Pricing Service. At December 31, 2011 and 2010, we have not adjusted any pricing provided by broker-dealers based on the review performed by our investment managers.
To validate prices, the Company compares the fair value estimates to its knowledge of the current market and will investigate prices that it considers not to be representative of fair value. In addition, our process to validate the market prices obtained from the Pricing Service includes, but is not limited to, periodic evaluation of model pricing methodologies and analytical reviews of certain prices. We also periodically perform testing of the market to determine trading activity, or lack of trading activity, as well as evaluating the variability of market prices. Securities sold during the quarter are also “back-tested” (i.e., the sales prices are compared to the previous month end reported market price to determine the reasonableness of the reported market price). There were no material differences between the prices from the Pricing Service and the prices obtained from our validation procedures as at December 31, 2011 and 2010.
U.S. Government and U.S. Government agencies: Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Government National Mortgage Association and the Federal National Mortgage Association. The fair values of U.S. government securities are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. We believe the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.
Non-U.S. government bonds: Comprised of non-U.S. government bonds issued by non-U.S. governments primarily Germany, Sweden and Netherlands. These securities are generally priced by pricing services. The pricing services may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical models which may incorporate spreads, interest rate data and market/sector news. As the significant inputs used to price non-U.S. government bonds are observable market inputs, the fair values of non-U.S. government bonds are included in the Level 2 fair value hierarchy.
Other mortgage-backed securities: Other mortgage-backed securities consist of a CMBS. This security is priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. As the significant inputs used to price the CMBS are observable market inputs, the fair value of the CMBS is included in the Level 2 fair value hierarchy.
Corporate bonds: Comprised of bonds issued by corporations that on acquisition are rated BBB-/Baa3 or higher . These securities are generally priced by pricing services. The fair values of corporate bonds that are short-term are priced, by the pricing services, using the spread above the London Interbank Offering Rate ("LIBOR') yield curve and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker/dealers, trade prices and the new issue market. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.
Senior notes: The amount reported in the accompanying balance sheets for these financial instruments represents the carrying value of the notes. At December 31, 2011, the fair value of the 8.25% senior notes was $104.9 million based on its traded price and yield information obtained from third party service provider.
to, decisions to reposition our security portfolio, sale of securities to meet cash flow needs and sales of securities to capitalize on favorable pricing. In order to determine the amount of the credit loss for a fixed maturity security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The discount rate is the effective interest rate implicit in the underlying fixed maturity security. The effective interest rate is the original yield or the coupon if the fixed maturity security was previously impaired. If OTTI exists and we have the intent to sell the security, we conclude that the entire OTTI is credit-related and the amortized cost for the security is written down to current fair value with a corresponding charge to realized loss on our Consolidated Statements of Income. If we do not intend to sell a fixed maturity security or it is not more likely than not we will be required to sell a fixed maturity security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected is less than the amortized cost of the fixed maturity security (referred to as the credit loss), we conclude that an OTTI has occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge to realized loss on our Consolidated Statements of Income, as this is also deemed the credit portion of the OTTI. The remainder of the decline to fair value is recorded to other comprehensive income (“OCI”), as an unrealized OTTI loss on our Consolidated Balance Sheets, as this is considered a noncredit (i.e., recoverable) impairment.
Calculated by dividing commission and other acquisition expenses by net premiums earned and other insurance revenue.
Calculated by adding together net loss and loss expense ratio, acquisition cost ratio and general and administrative expense ratio.
Net income attributable to Maiden shareholders for the year ended December 31, 2010 was $69.9 million compared to $61.1 million for the same period in 2009, a 14.4% increase. The improvement was the result of higher underwriting income of $1.9 million due to the commencement of the ACAC Quota Share in 2010 and continuing growth in the AmTrust Quota Share Reinsurance segment offset by a higher combined ratio. Net income was further enhanced by investment income which was $8.7 million higher in 2010 as investable assets grew significantly as a result of positive operating cash flow and the aforementioned premium growth. The Company also realized investment gains of $6.6 million as it selectively sold certain securities compared to a $0.3 million realized investment gains in 2009. These improvements were also offset by higher operating expenses, in part due to expenses associated with the IIS Acquisition, the first full year of interest expense from the junior subordinated debt issued in 2009 and minor foreign exchange losses (compared to gains in 2009).
The increase in net premiums written was primarily the result of the following:
Growth in the AmTrust Quota Share Reinsurance segment premium. The commencement of the European Hospital Liability Quota Share increased premiums written by $95.3 million in the year ended December 31, 2011, while the business assumed under the Master Agreement increased $106.0 million in the year ended December 31, 2011.
Growth in the ACAC Quota Share segment. 2011 includes a full year of results compared to only ten months in 2010, resulting in growth of $50.5 million or 24.5% for the year ended December 31, 2011 as compared to 2010.
Net premiums written increased by $197.4 million, or 19.2%, for the year ended December 31, 2010 compared to the year ended December 31, 2009. The table below compares net premiums written by segment for the years ended December 31, 2010 and 2009.
Continuing growth in our AmTrust Quota Share Reinsurance segment. This segment grew by $95.6 million or 25.7%, largely as a result of AmTrust’s increase in its Specialty Risk and Extended Warranty business, particularly internationally, during 2010. AmTrust continued to experience growth in its other segments, consistent with its growth and expansion strategy.
The increase in net premiums earned was primarily the result of the following:
Growth in the ACAC Quota Share segment. As noted, this new segment commenced on March 1, 2010 and thus the year ended December 31, 2011 represents a full year of operations as compared to only ten months in 2010, contributing $122.3 million of the increase for the year ended December 31, 2011 .
Net premiums earned increased by $249.9 million, or 27.2%, for the year ended December 31, 2010 compared to the year ended December 31, 2009. The table below compares net premiums earned by segment for the years ended December 31, 2010 and 2009.
Commencement of the ACAC Quota Share on March 1, 2010 which resulted in net earned premiums of $123.5 million.
Continuing growth in all segments of the AmTrust Quota Share Reinsurance, which resulted in earned premium growth of $93.2 million or 26.5%.
The loss ratios were 66.6% and 64.6% for the years ended December 31, 2011 and 2010, respectively. The underwriting impact of U.S storm activity in 2011 increased the loss ratio by 0.6 % in 2011. Without the storm losses, the Company's loss ratio for the year ended December 31, 2011 would have been 66.0%, reflecting stable loss ratios in the Diversified Reinsurance segment as a result of the IIS Acquisition, offset by higher loss ratios in the AmTrust and ACAC segments.
Net loss and loss adjustment expenses increased by $146.5 million, or 24.1%, for the year ended December 31, 2010 as compared to the same period in 2009, primarily reflecting the continuing growth in the Company as a result of the commencement of the ACAC Quota Share in 2010 and the continuing growth of the AmTrust Quota Share Reinsurance in 2010 compared to 2009.
In 2010 and 2009, the Company recognized $32.9 million and $11.4 million, respectively, of favorable development on prior years' reserves, principally due to favorable development in its Diversified Reinsurance segment in both years. The total favorable development relating to the loss portfolio transfer since the closing of the GMAC Acquisition has been $43.8 million and the remaining $6.2 million is recorded as a deferred gain and is part of the Company’s reserve for loss and loss adjustment expenses at December 31, 2010 that are included in the accompanying Consolidated Balance Sheet. Included in the total favorable development were amortized gains from the loss portfolio acquired as part of the GMAC Acquisition, recorded as a reduction of losses incurred of $25.3 million and $10.7 million for the years ended December 31, 2010 and 2009, respectively.
Commission and other acquisition expenses increased by $102.1 million, or 30.3%, for the year ended December 31, 2011 compared to the same period in 2010 due to the ongoing premium growth of the Company. However, the acquisition cost ratio decreased to 28.0% for the year ended December 31, 2011 as compared to 28.8% for the same periods in 2010, respectively.This reflects the growth in earned premium offset by: 1) modifications to the ceding commission made under the Master Agreement; 2) lower ceding commissions under the European Hospital Liability
Quota Share; and 3) a lower ceding commission under the ACAC Quota Share due to an increase in the loss ratio (under the loss sensitive feature of that segment's reinsurance contract).
Commission and other acquisition expenses increased by $95.3 million, or 39.5%, for the year ended December 31, 2010 compared to the same period in 2009. This reflects both the growth in earned premium and the continuing shift in our mix of business to quota share business which typically has a higher acquisition cost ratio. In particular, the commencement of the ACAC Quota Share in 2010 and Diversified Reinsurance segment have contributed to the increase. For the Diversified Segment, the increases were due to the following factors: 1) 2009 reflects only a partial year of earned premiums in this segment as the first full year of operations from the GMAC Acquisition had not yet been completed; 2) the unearned premium portfolio assumed as part of the GMAC Acquisition was acquired net of commission and other acquisition expenses; 3) the Diversified Reinsurance segment’s mix of business continues to shift from excess of loss to pro rata business which has a higher acquisition cost ratio; and 4) increased commissions accruals on the 2009 and 2010 underwriting years due to lower loss ratios. Finally, for the period November 30, 2010 to December 31, 2010, we earned gross fee income from the IIS Acquisition of $0.8 million, which is netted against commission and other acquisition expenses in the accompanying Consolidated Statements of Income.
Salary and employee welfare costs, including share compensation expense, increased approximately $7.9 million due to the 50 additional employees added in November 2010 as part of the IIS acquisition;
Other expenses, including regulatory, depreciation and technology expenses, increased in by approximately $3.0 million.
Additional general & administrative expenses incurred of $1.3 million including premises related, regulatory and other filing fees, insurance and IT expenses.
Depreciation expense increased by $0.6 million which reflects the full years depreciation expense on capital assets added in 2009 as well as depreciation on capital assets added in 2010.
a continuing decline in the duration of the Company's investment portfolio, brought about largely by an increase in prepayments in the Company's mortgage-backed securities portfolio.
Net realized and unrealized gains on investment were $0.5 million for the year ended December 31, 2011 compared to $6.6 million for the same period in 2010. In 2011, these were offset by $3.5 million in net unrealized losses on short sales of certain U.S. Treasury securities. For additional information on the Company’s investments and realized and unrealized gains and losses, please refer to Liquidity and Capital Resources.
Net investment income increased by $8.7 million, or 13.8%, for the year ended December 31, 2010 compared to the same period in 2009. Average invested assets were approximately $2.1 billion for the year ended December 31, 2010 compared to approximately $1.8 billion for the year ended December 31, 2009, a 16.7% increase. Continued growth in the overall book of business combined with positive cash flow from operations contributed to the growth in invested assets.
The average yield for the years ended December 31, 2010 and 2009 was 3.5%. We increased our allocation to corporate bonds during 2010, generating higher yields. This was offset by yields in cash and cash equivalents which have continued to be at historically low levels throughout 2010. Interest on the loan to AmTrust amounted to $2.0 million in 2010 compared to $2.4 million for the same period in 2009 due to a reduction in average 30 day LIBOR interest rates during 2010. Investment management fees and expenses of $3.0 million and $2.7 million were incurred during the years ended December 31, 2010 and 2009, respectively.
Net realized and unrealized gains on investment were $6.6 million for the year ended December 31, 2010 compared to $0.3 million for the same period in 2009. For additional information on the Company’s investments and realized and unrealized gains and losses, please refer to Liquidity and Capital Resources.
The decrease in interest and amortization expense for the year ended December 31, 2011 as compared to the same period in 2010 was due to the repurchase on July 15, 2011 of $107.5 million of the TRUPS Offering which have a coupon of 14.0%, the repurchase of which was financed with the issuance of the Senior Notes, which have a coupon of 8.25%. The weighted average interest rate was 14.8% for the year ended December 31, 2011 as compared to 16.95% for the same period in 2010, respectively.
The Company recorded a deferred tax expense of $1.3 million, $1.2 million and $1.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. These amounts are related to the goodwill associated with the Company’s acquisition of its U.S. subsidiaries in the GMAC Acquisition. For U.S. tax purposes, this goodwill is deductible and is amortized over a fifteen year period. For U.S. GAAP reporting purposes, this goodwill is recorded as an asset subject to impairment testing and is not recorded as expense, creating a temporary difference. Further, under U.S. GAAP, deferred tax liabilities associated with indefinite lived intangibles cannot be applied to valuation allowance tests for recognition of net deferred tax assets. Presently, the Company carries a full valuation allowance against its U.S. originated deferred tax assets and due to the Company’s lack of historical experience, it would be premature to recognize the associated tax asset and accordingly we have recorded a full valuation reserve for the tax benefit of our U.S. net operating losses. The effect of this expense will be reversed as: 1) we develop U.S. taxable income to permit recognition of the net deferred tax asset; and 2) the amortization period of the goodwill for tax purposes is exhausted.
The following table summarizes the underwriting results and associated ratios for the Diversified Reinsurance segment for the years ended December 31, 2011, 2010 and 2009:
The table below illustrates net premiums earned by line of business in this segment for the years ended December 31, 2011 and 2010:
Net Loss and Loss Adjustment Expenses. Net loss and loss adjustment expenses increased by $107.8 million, or 27.3%, for the year ended December 31, 2011 compared to the same period in 2010. Loss ratios were 66.0% and 65.6% for the years ended December 31, 2011 and 2010, respectively. The underwriting impact of U.S storm activity increased the loss ratio by 1.2% for the year ended December 31, 2011. Adjusted for the storm losses, the Company's loss ratio for the year ended December 31, 2011 was 64.8%.
The total favorable development relating to the loss portfolio transfer since the closing of the GMAC and IIS Acquisitions has been $68.9 million and the remaining $2.6 million is recorded as a deferred gain in the Company’s reserve for loss and loss adjustment expenses at December 31, 2011 that are included in the accompanying Consolidated Balance Sheet.
The combined ratio increased to 95.4% for the year ended December 31, 2010 as compared to 94.9% in the same period ended 2009. The increase in the combined ratio is largely due to lower profitability from the Accident & Health line of business. This segment includes business associated with the IIS Acquisition; however, since the transaction was only completed on November 30, 2010, the transaction had limited impact on the 2010 figures and comparisons to 2009.
Premiums. Net premiums written decreased by $103.9 million, or 15.8%, for the year ended December 31, 2010 as compared to the same period in 2009. The table below illustrates net premiums written by line of business in this segment for the years ended December 31, 2010 and 2009:
Net Loss and Loss Adjustment Expenses. Net loss and loss adjustment expenses increased by $0.8 million, or 0.2%, for the year ended December 31, 2010 compared to the same period in 2009. Loss ratios were 65.6% and 69.3% for the years ended December 31, 2010 and 2009, respectively.
Effective April 1, 2011, the Company entered into a series of contract modifications with AmTrust regarding the reinsurance coverage it provides under the Master Agreement, including the ceding commission arrangements contained within that contract. These changes include: 1) extension of the Master Agreement for one additional year, to July 1, 2014, while continuing the automatic three-year renewal subject to the provisions of the contract; 2) a reduction of the ceding commission payable under the Master Agreement to 30.0% for the period April 1, 2011 to December 31, 2011; and 3) subsequent to December 31, 2011, a provision which potentially reduces the ceding commission payable based on the mix of business ceded under the Master Agreement, excluding business related to the Unitrin Business Insurance (“UBI”) business to either 30.5% or 30.0%.
The following table summarizes the underwriting results and associated ratios for the AmTrust Quota Share Reinsurance segment for the years ended December 31, 2011, 2010 and 2009:
The combined ratio increased to 97.3% for year ended December 31, 2011 as compared to 95.9% in 2010. The cause of the increase was due to an increase in the overall loss ratio, offset by a reduction in commissions as a result of a negotiated reduction in the ceding commission of 1.0% effective April 1, 2011, and the change in mix of business due to the commencement of the European Hospital Liability Quota Share.
Commission and Other Acquisition Expenses. Commission and other acquisition expenses increased by $15.8 million, or 11.0%, for the year ended December 31, 2011 compared to the same period in 2010. The commission and acquisition ratio declined to 28.8% for the year ended December 31, 2011 as compared to 32.5% in 2010. The change in both the expenses and ratio reflects the modifications to ceding commission made under the Master Agreement and the lower ceding commission under the European Hospital Liability Quota Share, both effective April 1, 2011. The impact of the lower ceding commission rate reduced the amount of ceding commission paid to AmTrust by $3.4 million for the year ended December 31, 2011. Expenses have also increased in both periods as a result of ongoing growth in earned premium.
The combined ratio increased to 95.9% for the year ended December 31, 2010 as compared to 94.5% in the same period ended 2009. The increase was primarily due to a higher loss ratio reflecting ongoing changes in the mix of business within the segment, particularly ongoing growth in AmTrust’s Specialty Risk and Extended Warranty line of business.
Premiums. Net premiums written increased by $95.6 million, or 25.7%, for the year ended December 31, 2010 as compared to the same period in 2009. The table below illustrates net premiums written by AmTrust’s segments for the years ended December 31, 2010 and 2009:
The increase in net premiums written is the result of continuing growth in AmTrust’s Specialty Risk and Extended Warranty line, particularly internationally. AmTrust continues to expand its business, both organically and through acquisitions, and as a result, continues to experience growth in its Small Commercial Business and Specialty Program lines of business as well in 2010 as compared to 2009.
Net premiums earned increased by $93.2 million, or 26.5% for the year ended December 31, 2010, as compared
to the same period in 2009. The table below details net premiums earned by line of business for the years ended December 31, 2010 and 2009:
The combined ratio increased to 97.7% for the ended December 31, 2011 as compared to 96.6% for the period ended December 31, 2010. The cause of the increase was due to an increase in the overall loss ratio from 64.5% for the year ended December 31, 2010 to 65.3% for the year ended December 31, 2011.
Premiums. Net premiums written increased by $50.5 million, or 24.6% for the year ended December 31, 2011 compared to the year ended December 31, 2010. The table below details net premiums written by line of business in this segment for the years ended December 31, 2011 and 2010:
Net premium earned increased by $122.3 million, or 99.1% for the year ended December 31, 2011 compared to the year ended December 31, 2010. The table below details net premiums earned by line of business in this segment for the years ended December 31, 2011 and 2010:
Commission and Other Acquisition Expenses. The ACAC Quota Share provides that the reinsurers pay a provisional ceding commission equal to 32.5% of ceded earned premium, net of premiums ceded by the personal lines companies
Maiden Holdings is a holding company and transacts no business of its own. We therefore rely on cash flows to Maiden Holdings in the form of dividends, advances and loans and other permitted distributions from its subsidiary companies to make dividend payments on its common shares.
Our sources of funds primarily consist of premium receipts net of commissions, investment income, net proceeds from capital raising activities, which may include the issuance of common shares, and proceeds from sales and redemption of investments. Cash is used primarily to pay loss and loss adjustment expenses, general and administrative expenses and dividends, with the remainder made available to our investment managers for investment in accordance with our investment policy. A summary of cash flows provided by (used in) operating, investing and financing activities for the years ended December 31, 2011, 2010 and 2009 is as follows:
Cash flows from operations for the year ended December 31, 2011 were $181.3 million compared to $151.6 million for the year ended December 31, 2010. Cash flows from operations for the year ended December 31, 2011 were again strong due to continued positive underwriting results and reflect the continued overall growth of the Company in all segments. These positive factors were somewhat offset by the adverse net underwriting impact of second quarter 2011 U.S. thunderstorm and tornado activity totaling $9.5 million and lower growth in investment income during 2011. Cash flows from operations for the year ended December 31, 2010 were $151.6 million compared to $45.5 million for the year ended December 31, 2009. The increase in cash flows from operations for the year ended December 31, 2010 compared to December 31, 2009 was due to continued positive underwriting results and the continued growth of the
Cash flows used by financing activities were $99.5 million for the year ended December 31, 2011 compared to $37.2 million for the year ended December 31, 2010. Included in cash flows used in financing activities for the year ended December 31, 2011 were dividends paid of $20.9 million and $76.2 million of outflow relating to a reduction in the securities sold under agreements to repurchase, at contract value compared to dividends paid of $18.4 million and $19.2 million of outflow relating to a decrease in the securities sold under agreements to repurchase, at contract value, respectively, during the year ended December 31, 2010.
Maiden US also offers to its clients, on a voluntary basis, the ability to collateralize certain liabilities related to the reinsurance contracts it issues. Under these arrangements, Maiden retains broad investment discretion in order to achieve its business objectives while offering clients the additional security a collateralized arrangement offers. We believe this offers the Company a significant competitive advantage and improves the Company’s retention of high-quality clients. As a result of the transition of relationships as a result of the GMAC Acquisition, as at December 31, 2011 certain of these liabilities and collateralized arrangements are on the records of Maiden Bermuda while the remaining liabilities and collateralized arrangements are on the records of Maiden US.
As part of the AmTrust Master Agreement, Maiden Bermuda has also loaned funds totaling $168.0 million as at December 31, 2011 and 2010, respectively, to AII to satisfy collateral requirements. In addition, Maiden Bermuda has outstanding letters of credit totaling $97.5 million and $24.0 million as at December 31, 2011 and 2010, respectively.
The substantial majority of the premiums and losses underwritten by GMAC IICL are subject to collateral requirements in the form of letters of credit and trust agreements. At the closing of the IIS Acquisition, the Company settled cash balances applicable to the subject reinsurance contracts with GMAC IICL of $26.2 million. Actual assets in support of the liabilities assumed under the IICL Agreement will be transferred to the Company when the subject individual agreements are novated to Maiden Bermuda. In the interim, under the funds withheld provisions of the IICL Agreement, the Company is fully credited for the investment income earned by the underlying assets which support the letters of credit and trust agreements GMAC IICL has provided to its ceding companies.