We currently lease office space in Hamilton, Bermuda (our corporate headquarters), the U.S., the U.K., Germany, Austria and Russia for the operation of our business. We also lease a property for employee use in Bermuda. Our office leases have remaining terms ranging approximately from 1 month to 6 years in length. We renew and enter into new leases in the ordinary course of business as needed. While we believe that the office space 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 11. Commitments and Contingencies of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Our office space lease in Hamilton, Bermuda for Maiden Holdings and Maiden Bermuda expires on November 30, 2017 with an option to renew for another five years. We have an office space lease in Mount Laurel, New Jersey expiring on September 30, 2020, for use by Maiden Re and Maiden US. We also lease office space in the U.K. Germany, Austria and Russia, respectively, with various expiry dates.
The following tables set forth our selected consolidated financial data and other financial information at the end of and for each of the years in the five-year period ended December 31, 2014.
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K and Item 1, "Business - General Overview" on page 2. Amounts in tables may not reconcile due to rounding differences. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to the Company’s plans and strategy for its business, includes forward-looking statements that involve risk and uncertainties. Please see the "Special Note About Forward-Looking Statements" in this Annual Report on Form 10-K for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the "Risk Factors" set forth in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.
Our business consists of two reportable segments: Diversified Reinsurance and AmTrust Reinsurance (previously titled AmTrust Quota Share Reinsurance). Please refer to Item 1, "Business - Our Reportable Segments" section of this Annual Report on Form 10-K for the year ended December 31, 2014 for a discussion on the revised structure of the reportable segments.
On November 25, 2013, the Company, through Maiden NA, issued $152.5 million principal amount of 7.75% 2013 Senior Notes due on December 1, 2043, which are fully and unconditionally guaranteed by the Company. The 2013 Senior Notes are redeemable for cash, in whole or in part, on or after December 1, 2018 at 100% of the principal amount to be redeemed plus accrued and unpaid interest up to but excluding the redemption date. The effective interest rate of the 2013 Senior Notes, based on the net proceeds received, was 8.02%. The net proceeds from the sale of the 2013 Senior Notes were $147.4 million after deducting issuance costs of $5.1 million. Maiden NA has listed the 2013 Senior Notes on NYSE and trading commenced on November 27, 2013 under the symbol "MHNC".
On April 22, 2013, we entered into a transaction with Brit whereby effective May 1, 2013, the Company and Brit's subsidiary, Brit Global Specialty, entered into a temporary 100% quota share reinsurance of E&S business written by Maiden. Brit subsequently assumed the renewal rights of our E&S business through BGSU, who is now writing the renewals of the assumed business into Brit Syndicates 2987. Employees of Maiden Specialty were transitioned to BGSU effective May 1, 2013. We also entered into supporting transition services and agency agreements with BGSU as part of this transaction. The existing in force E&S business written by the Company as of April 30, 2013 is presently being run-off. For the years ended December 31, 2014, 2013 and 2012, the E&S net premiums written by the Company totaled $(1.5) million, $(1.6) million and $19.6 million, respectively, which represented 0.1%, 0.1% and 1.0% of our consolidated net premiums written for each respective year.
Calculated by adding together the net loss and loss adjustment expense ratio, commission and other acquisition expense ratio and general and administrative expense ratio.
Total debt in 2014 is the Company's Senior Notes and in 2013, it is the sum of the Company's senior notes and Junior Subordinated Debt.
In addition to the Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Income (Loss), 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.
Operating Earnings and Operating Earnings per Common Share: In addition to presenting net income determined in accordance with U.S. GAAP, we believe that showing operating earnings enables investors, analysts, rating agencies and other users of our financial information to more easily analyze our results in a manner similar to how management analyzes our underlying business performance. Operating earnings should not be viewed as a substitute for U.S. GAAP net income.
We also exclude certain non-recurring items that are material to understanding our results of operations. For the year ended December 31, 2014, we exclude the following non-recurring items:
The accelerated amortization of the junior subordinated debt discount and the write-off of the associated issuance costs.
The following table reconciles our operating earnings to its most closely related U.S. GAAP measure, net income:
Operating ROACE for the years ended December 31, 2014, 2013 and 2012 was computed as follows:
Operating earnings attributable to Maiden common shareholders increased by $30.2 million, or 34.5% for the year ended December 31, 2014 compared to December 31, 2013. This increase is mainly due to higher investment income combined with lower interest and amortization expense, offset by additional preference share dividend payments on the Preference Shares - Series B issued in October 2013.
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 income and external factors, such as interest rates, which can drive changes in unrealized gains or losses on our investment portfolio. The 13.9% and 14.2% increase in book value per common share and diluted book value per common share, respectively, at December 31, 2014 compared to December 31, 2013 was principally the result of an increase of $69.5 million in accumulated other comprehensive income ("AOCI"), reflecting the impact of lower interest rates on the fair value of Maiden’s fixed income investment portfolio during the year ended December 31, 2014 (see "Liquidity and Capital Resources - Investments" on page 83 for further information), combined with an increase in retained earnings due to improved investment income and reduced interest expenses offset by dividend payments on both our common and preference shares and the non-recurring charges related to the accelerated amortization of the junior subordinated debt discount and issuance costs incurred during the first quarter. Book value and diluted book value per common share at December 31, 2014, 2013 and 2012 were computed as follows:
The Company's revenues also include fee income as well as income generated from our investment portfolio. The Company's investment portfolio is comprised of fixed maturity investments, currently held as AFS, short-term investments and other investments. In accordance with U.S. GAAP, these investments are carried at fair market value and unrealized gains and losses on the Company's investments are generally excluded from earnings. These unrealized gains and losses are included on the Company's Consolidated Balance Sheet in AOCI as a separate component of shareholders' equity. If unrealized losses are considered to be other-than-temporarily impaired due to a credit event, such losses are included in earnings as a realized loss.
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 and foreign exchange and other gains or losses. Net loss and LAE has three main components:
Because a significant amount of time can elapse between the assumption of risk, particularly on longer-tail lines of business, occurrence of a loss event, the reporting of the event to an insurance company (the primary company or the cedant), the subsequent reporting to the reinsurance company ("the reinsurer") and the ultimate payment of the claim on the loss event by the reinsurer, the Company’s liability for unpaid loss and LAE ("loss reserves") is based largely upon estimates. The Company categorizes loss reserves into three types of reserves: reported outstanding loss reserves ("case reserves") and IBNR reserves. Case reserves represent unpaid losses reported by the Company’s cedants and recorded by the Company. IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants. The Company also estimates the future unallocated loss adjustment expenses ("ULAE") associated with the loss reserves and these form part of the Company’s loss adjustment expense reserves.
For excess of loss treaties, cedents generally are required to report losses that either (i) exceed 50% of their retention; or (ii) have a reasonable probability of exceeding the retention; or (iii) meet defined reporting criteria. All reinsurance claims that are reserved are reviewed at least every six months. For proportional treaties, cedents are required to give a periodic statement of account, generally monthly or quarterly. These periodic statements typically include information regarding written premiums, earned premiums, unearned premiums, ceding commissions, brokerage amounts, applicable taxes, paid losses and outstanding
The reserve for loss and LAE at December 31, 2014 and 2013 was as follows:
The Expected Loss Ratio ("ELR") method is a technique that multiplicatively applies an expected loss ratio to earned premium to yield estimated ultimate losses. The ELR assumption is derived most often from the pricing of the business that is being reserved but can be based on historical experience of the business. This method is frequently used for the purpose of stability in the early valuations of an underwriting year with large and uncertain loss development factors. This technique does not take into account
actual loss experience for the underwriting year being projected. As an underwriting year matures and actual loss experience becomes available, other methods may be applied in determining the estimated ultimate losses.
With the guidance of the methods above, 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 the Diversified Reinsurance segment, at December 31, 2014, 91.9% of the reserves for loss and LAE in the Diversified Reinsurance segment are associated with the business acquired in the GMAC Acquisition (which includes new business written subsequent to that transaction). The Company’s executive and technical management, including claims and underwriting, have significant experience with this book of business, which also has more than 30 years of loss experience associated with it. In general for the Diversified Reinsurance segment we utilize the ELR approach at the onset of reserving an account, the BF method for business with less but maturing loss experience, and as the experience matures the LD Method.
The most significant assumptions used at December 31, 2014 to estimate the reserve for loss and LAE within the Company’s segments are as follows:
the loss and exposure information provided by ceding companies, insureds and brokers in support of their submissions have been used by Maiden's pricing actuaries to derive meaningful estimates of the likely future performance of business bound with respect to each contract and policy;
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. At December 31, 2014, there were no significant backlogs related to the processing of policy or contract information in the Company’s segments.
changes in the litigation environment regarding the representation of plaintiffs and potential plaintiffs;
The Company has underwritten the AmTrust Reinsurance segment since July 1, 2007. In addition, certain aspects of this segment are associated with recent acquisitions by AmTrust and while the underlying experience of the book has significant seasoning, the combination of the shorter time frame with which the Company has direct experience with this business and the relative immaturity of certain aspects of this business may result in a greater range of volatility in the reasonably likely variance of our expected loss ratio for all applicable loss years in the segment compared to the Diversified Reinsurance segment. Based on a range of reasonable reserve estimates, we believe that if our final loss ratio for the AmTrust Reinsurance segment were to vary from the expected loss ratios in aggregate, our required reserves after reinsurance recoverable could increase by approximately $165.1 million from December 31, 2014.
The Company provides proportional and non-proportional reinsurance coverage to cedants (insurance companies). In most cases, cedants seek protection for business that they have not yet written at the time they enter into reinsurance agreements and thus have to estimate the volume of premiums they will cede to the Company. Reporting delays are inherent in the reinsurance industry and vary in length by type of treaty. As delays can vary from a few weeks to a year or sometimes longer, the Company produces accounting estimates to report premiums and commission and other acquisition expenses until it receives the cedants’ actual results. Under proportional treaties, which represented 88.2% of gross premiums written for the year December 31, 2014, 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 11.8% of gross premiums written for the year December 31, 2014, the Company is typically exposed to loss events in excess of a predetermined dollar amount or loss ratio and receives a fixed or minimum premium, which is subject to adjustment depending on the premium volume written by the cedant.
Commission and other acquisition expenses represent the costs of writing business that vary with, and are primarily related to, the production of insurance and reinsurance business. Policy and contract commission and other acquisition expenses, including assumed commissions and other direct operating expenses that are related to successful contracts are deferred and recognized as expense as related premiums are earned. The Company considers anticipated investment income in determining the recoverability of these costs and believes they are fully recoverable. A premium deficiency is recognized if the sum of anticipated losses and LAE, unamortized acquisition expenses and anticipated investment income exceeds unearned premium.
The Company currently classifies its fixed maturity, short-term and other investments as AFS. Pursuant to U.S. GAAP, these investments are carried at estimated fair value, with net unrealized gains or losses excluded from earnings and included in shareholders’ equity as a component of AOCI.
Recoveries or additional declines in fair value subsequent to the balance sheet date.
In making an assessment of the value of its goodwill and intangible assets, the Company uses both market based and non-market based valuations. Assumptions underlying these valuations include an analysis of the Company’s share price relative to both its book value and its net income in addition to forecasts of future cash flows and future profits. Significant changes in the data underlying these assumptions could result in an assessment of impairment of the Company’s goodwill asset. In addition, if the current economic environment and/or the Company’s financial performance were to deteriorate significantly, this could lead to an impairment of goodwill and intangible, the write-off of which would be recorded against net income in the period such deterioration occurred. If a 5% decline in the fair value of the reporting units occurred, this would not result in an impairment of the goodwill asset at December 31, 2014.
Calculated by dividing commission and other acquisition expenses by the sum of net premiums earned and other insurance revenue.
decrease in underwriting income of $2.1 million due to elevated loss reserve estimates on the personal lines automobile business and adverse loss development relating to Superstorm Sandy in our Other category, comprised of our former segment NGHC Quota Share and the remnants of our E&S business, both of which are in run-off, respectively. Excluding the business included in the Other category, underwriting income improved by 32.9% due to a combination of continued premium growth from both of our reportable segments and a lower combined ratio on our AmTrust Reinsurance segment. However, these improvements were slightly offset by a marginally higher combined ratio in our Diversified Reinsurance segment; and
The following is a discussion on the results of our operations for the years ended December 31, 2014, 2013 and 2012:
Net premiums written increased by $361.8 million, or 17.3%, for the year ended December 31, 2014 compared to the same period in 2013. The increase in net premiums written was primarily the result of strong growth in business written in both the AmTrust Reinsurance and the Diversified Reinsurance segments.
The tables below compare net premiums written by our reportable segments, reconciled to the total net premiums written, for the years ended December 31, 2014 and 2013:
Net premiums written increased by $195.0 million, or 10.3%, for the year ended December 31, 2013 compared to the same period in 2012. The increase in net premiums written was primarily the result of strong growth in business written in the AmTrust Reinsurance segment offset primarily by reductions in our business written in the former NGHC Quota Share segment in 2013, now a component of our Other category. The table below compares net premiums written by reportable segment, reconciled to total net premiums written for the years ended December 31, 2013 and 2012:
The increase in net premiums written in the AmTrust Reinsurance segment for the year ended December 31, 2013 compared to the same period in 2012 reflects AmTrust's continuing expansion and continued organic growth, both of which are benefiting from improved rate levels, particularly in its U.S. workers' compensation business.
The business underwritten by our US operations, excluding the E&S business, experienced an increase in premiums written for the year ended December 31, 2013 of $19.3 million, or 3.1%, compared to the same period in 2012. This increase was primarily due to the addition of new accounts combined with organic growth from certain existing Maiden US accounts. This was partially offset by: 1) the non-renewal of several large proportional U.S. reinsurance contracts that no longer met Maiden US profitability criteria in the second half of 2012; and 2) the decision by certain Maiden US clients to retain more business in 2013.
The increases in net premiums earned in the AmTrust Reinsurance segment, for the year ended December 31, 2013 compared to 2012 reflects the continued combination of AmTrust's continuing expansion and continued organic growth, both of which are benefiting from improved rate levels, particularly in its U.S. workers' compensation business.
Other insurance revenue represents fee business that is not directly associated with premiums revenue assumed by the Company. See "Results of Operations- Diversified Reinsurance Segment" on page 73 for further information.
Net Investment Income, Net Realized Gains on Investments and Net Impairment Losses Recognized in Earnings
(1)The average of the Company's investments, cash and cash equivalents, restricted cash, loan to related party and funds withheld balance as of each quarter-end during the year.
Net Impairment Losses Recognized in Earnings - The Company recognized $2.4 million of OTTI for the year ended December 31, 2014 compared to none in 2013. Following the review of its AFS investments to determine whether declines in fair value below the amortized cost basis were considered other-than-temporary, at December 31, 2014, the Company determined that there was a credit impairment in respect of one corporate bond. The Company does not intend to sell this security, but we do not believe it is probable that we will recover the amortized cost basis of the security.
Net Investment Income - Net investment income increased by $10.2 million, or 12.5%, for the year ended December 31, 2013 compared to the same period in 2012. The following table details the Company's average invested assets and average book yield for the year ended December 31, 2013 compared to the same period in 2012:
(2) Ratio of net investment income over average invested assets at fair value.
Despite marginally lower overall portfolio yields, the increase in net investment income for the year ended December 31, 2013 compared to the same period in 2012 is the result of the 16.1% growth in average invested assets for the year ended December 31, 2013 compared to the same period in 2012. The growth in average invested assets during the period is the result of: 1) our continued profitable growth; 2) strong positive cash flow from operations during the period reported; and 3) the proceeds from the issuance of the 2013 Senior Notes and the Preference Shares - Series B offerings.
Net loss and LAE increased by $148.7 million, or 11.0%, for the year ended December 31, 2014 compared to 2013. The net loss and loss adjustment expense ratios were 66.1% and 67.0% for the years ended December 31, 2014 and 2013, respectively. The increase in net loss and loss adjustment expense reflects the strong growth of the business in our reportable segments. The improvement in the net loss and loss expense ratio for the year ended December 31, 2014 compared to 2013 reflects the change in segment mix and also the continued improvement in pricing that AmTrust is experiencing in certain lines of business, particularly U.S. workers' compensation. The Company amortized gains as a reduction of losses assumed from the GMAC Acquisition and the IIS Acquisition of $8.1 million for the year ended December 31, 2014 compared to $13.7 million for 2013.
Commission and other acquisition expenses increased by $64.5 million, or 13.1%, for the year ended December 31, 2013 compared to 2012. The commission and other acquisition expense ratio increased to 27.6% for the year ended December 31, 2013 compared to 27.1% for the same period in 2012. The change in the amount of expenses incurred reflects the continuing premium growth of the Company's business as discussed while the change in the ratio largely reflects: (1) strong growth and ongoing changes in the mix of the AmTrust Reinsurance segment compared to our Diversified Reinsurance segment; (2) modifications made to the ceding commission of the NGHC Quota Share agreement effective October 1, 2012 and the AmTrust Quota Share Reinsurance Agreement, effective January 1, 2013; and (3) the impact of loss sensitive features on ceding commission in the Diversified Reinsurance segment, in particular on business written by Maiden US, due to improvements in the loss ratios for a number of contracts in that segment.
The accelerated amortization of junior subordinated debt discount and issuance cost for the years ended December 31, 2014, 2013 and 2012, respectively was as follows:
The Preference Shares - Series A were issued on August 22, 2012. On October 1, 2013, three million Preference Shares - Series B were issued with an additional three hundred thousand issued on October 3, 2013.
The results of operations for our reportable segments, Diversified Reinsurance and AmTrust Reinsurance, are discussed below:
The underwriting results and associated ratios for the Diversified Reinsurance segment for the years ended December 31, 2014, 2013 and 2012 were as follows:
The combined ratio increased to 98.7% for the year ended December 31, 2014 compared to 98.1% in 2013 due to 1) elevated excess property loss activity from several clients of our US operations during the first half of 2014 and 2) due to a modest amount of reserve deterioration in commercial auto business during 2014.
Premiums - Net premiums written increased by $86.6 million, or 11.4%, for the year ended December 31, 2014 compared to the same period in 2013. The table below shows net premiums written by line of business in this segment for the years ended December 31, 2014 and 2013:
Other Insurance Revenue - Other insurance revenue, which represents the fee business that is not directly associated with premium revenue assumed by the Company, decreased by $0.8 million for the year ended December 31, 2014 compared to the same period in 2013. Revenue from our German auto business represents 66.0% of other insurance revenue for the year ended December 31, 2014 compared to 64.3% for the same period in 2013. Other insurance revenue from the German auto business decreased by $0.3 million, or 3.3% for the year ended December 31, 2014 compared to the same period in 2013. In addition, other insurance revenue earned by our remaining operations, decreased by $0.5 million, or 10.3%, for the year ended December 31, 2014 compared to the same period in 2013.
Commission and Other Acquisition Expenses - Commission and other acquisition expenses increased by $43.1 million, or 22.6%, for the year ended December 31, 2014 compared to 2013. This increase reflects the increase in premiums earned for this period compared to the same period in 2013, consistent with the reasons cited in the discussion of the change in earned premiums. This increase reflects the higher mix of earned premium on pro-rata contracts, which incur a higher commission expense compared to excess of loss treaties for the year ended December 31, 2014 compared to 2013.
The combined ratio decreased to 98.1% for the year ended December 31, 2013 compared to 101.0% in 2012. The decreased combined ratio was primarily due to improved results in the business written by our US operations and our IIS business.
Premiums - Net premiums written increased by $17.7 million, or 2.4%, for the year ended December 31, 2013 compared to the same period in 2012. The table below shows net premiums written by line of business in this segment for the years ended December 31, 2013 and 2012:
The table below shows net premiums earned by line of business in this segment for the years ended December 31, 2013 and 2012:
Other Insurance Revenue - Other insurance revenue, which represents the fee business that is not directly associated with premium revenue assumed by the Company, increased $1.3 million, or 10.4%, for the year ended December 31, 2013, compared to the same period in 2012. Revenue from our German auto business represented 64.3% of the total other insurance revenue for the year ended December 31, 2013, compared to 71.9% in 2012. Other insurance revenue from the German auto business decreased by $0.2 million, or 1.3%, for the year ended December 31, 2013 compared to 2012. In addition, other insurance revenue earned by our remaining operations increased $1.5 million, or 40.4%, for the year ended December 31, 2013 compared to 2012 primarily from U.S. and Russia.
Net Loss and Loss Adjustment Expenses - Net loss and LAE decreased by $29.4 million, or 5.4%, for the year ended December 31, 2013 compared to 2012. Net loss and loss adjustment expense ratios were 67.8% and 69.7% for the years ended December 31, 2013 and 2012, respectively. The Company amortized gains as a reduction of losses assumed from the GMAC Acquisition and the IIS Acquisition of $13.7 million for year ended December 31, 2013, compared to $9.1 million in 2012.
In addition, lower ceding commissions were recorded for the year ended December 31, 2013 compared to 2012 as a result of loss sensitive features on certain contracts, in particular business written by Maiden US. This was due to higher loss ratios on contracts with these features. For the year ended December 31, 2013, 57.6% of Maiden US net premiums written have loss sensitive features, which results in lower ceding commissions when loss ratios increase, compared to 56.5% for the year ended December 31, 2012. For the year ended December 31, 2013, the net effect of loss sensitive features on Maiden US reinsurance contracts reduced ceding commissions by $8.3 million, compared to $10.4 million in 2012.
The AmTrust Reinsurance segment reported strong growth, stable combined ratios and increasing underwriting income in each of the comparative periods reported. The underwriting results and associated ratios for the AmTrust Reinsurance segment for the years ended December 31, 2014, 2013 and 2012 were as follows:
The table below shows net premiums written by this segment for the years ended December 31, 2014 and 2013:
Premiums - Net premiums written increased by $329.6 million, or 39.2%, for the year ended December 31, 2013 compared to the same period in 2012. The increase in net premiums written reflects AmTrust's continuing expansion and continued organic growth, both of which are benefiting from improved rate levels, particularly in their Small Commercial Business segment. During 2013, business written under the Reinsurance Agreement increased by $330.9 million or 46.4% compared to 2012 and this increase reflects AmTrust's continuing expansion and ongoing organic growth, both of which are benefiting from improved rate levels, particularly in US workers' compensation. The table below shows net premiums written by this segment for the years ended December 31, 2013 and 2012.
Commission and Other Acquisition Expenses - Commission and other acquisition expenses increased by $91.0 million, or 45.4%, for the year ended December 31, 2013 compared to 2012. Expenses have increased in 2013 as a result of ongoing growth in earned premium in each component of the Reinsurance Agreement. The commission and other acquisition expense ratio increased to 29.5% for the year ended December 31, 2013 compared to 27.5% in 2012. The increase in the ratio reflects the higher proportion of net premiums earned from the Reinsurance Agreement, which has a higher commission rate, than the European Hospital Liability Quota Share compared to the same period in 2012.
Premiums - Net premiums written decreased by $165.4 million, or 101.5%, for the year ended December 31, 2014 compared to 2013 primarily due to 1) the mutually agreed termination of the NGHC Quota share, effective August 1, 2013; and 2) selling the primary insurance business written on a surplus lines basis by Maiden Specialty on May 1, 2013 to Brit. Furthermore, there were additional reinstatement premiums relating to ceded losses on our E&S business which also contributed to the decrease in net premiums written during the year ended December 31, 2014.
Net Loss and Loss Adjustment Expenses - Net loss and LAE decreased by $151.1 million, or 85.8%, for the year ended December 31, 2014 compared to 2013 as a result of the significant reduction in the net premiums earned for the year ended December 31, 2014 compared to 2013. Net loss and loss adjustment expense ratios were 128.9% and 68.1% for the years ended December 31, 2014 and 2013, respectively. The increase in the net loss and loss adjustment expense ratio from 2013 was due to the elevated loss reserve estimates on the personal lines automobile business and adverse loss development relating to Superstorm Sandy incurred during the year ended December 31, 2014.
Commission and Other Acquisition Expenses - Commission and other acquisition expenses decreased by $67.7 million, or 91.0%, for the year ended December 31, 2014 compared to 2013 as a result of the significant reduction in the net premiums earned for the year ended December 31, 2014 compared to 2013.
General and Administrative Expenses - General and administrative expenses remained flat at $0.7 million for the years ended December 31, 2014 and 2013.
The combined ratio improved to 97.1% for the year ended December 31, 2013 compared to 100.9% for 2012. The lower combined ratio was primarily due to the impact of catastrophic losses incurred on Superstorm Sandy that increased the combined ratio of the Other category by 10.3% in 2012. The decrease in the combined ratio from lower catastrophic claims in 2013 was partially offset by an increase in the loss ratio on the NGHC Quota share, which was partially driven by a change in the mix of business to exposures which have historically performed at higher loss ratio levels.
Premiums - Net premiums written decreased by $152.3 million, or 48.3% for the year ended December 31, 2013 compared to 2012. As previously indicated, the reduction in net premiums written during 2013 was due to the termination, effective August 1, 2013, of Maiden Bermuda's participation in the NGHC Quota Share combined with the sale of the primary insurance business written on a surplus lines basis by Maiden Specialty on May 1, 2013 to Brit.
Net premiums earned decreased by $42.0 million, or 14.0% for the year ended December 31, 2013 compared to 2012 due to the reasons outlined in the discussion on the decreases on net premiums written above.
Commission and Other Acquisition Expenses - For the years ended December 31, 2013 and 2012, the commission and other acquisition expense ratio was 28.8% and 28.6%, respectively. The effect of the contract amendment discussed in Item 1, "Business - Our Reportable Segments - NGHC Quota Share (in run-off)", reduced ceded commissions by $0.8 million and $0.4 million for the years ended December 31, 2013 and 2012, respectively.
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 and loans and other permitted distributions from our subsidiary companies to make dividend payments on our common and preference shares.
The table below summarizes the cash flows provided by (used in) operating, investing and financing activities for the years ended December 31, 2014, 2013 and 2012:
Cash flows provided by financing activities during the year ended December 31, 2012 were $208.8 million. The increase from 2012 to 2013 was attributable to the issuance of the Preference Shares - Series B in October 2013 and the 2013 Senior Notes which were issued in November 2013.
The investment of our funds is designed to ensure safety of principal while generating current income. Accordingly, our funds are invested in liquid, investment-grade fixed income securities and all are currently designated AFS. The Company's AFS fixed maturity investments increased by $294.8 million or 9.3% at December 31, 2014 compared to 2013.
At December 31, 2014, we consider the levels of cash and cash equivalents we are holding to generally be within our targeted ranges. However, we have periodically maintained more cash and cash equivalents in order to better assess current market conditions and opportunities within our defined risk appetite, and may do so in future periods.
The following tables detail at December 31, 2014 and 2013, respectively, the average yield and average duration of our AFS assets, by asset class, and our cash and cash equivalents (restricted and unrestricted):
*Average yield is calculated by dividing annualized investment income for each sub-component of available-for sale securities and cash and cash equivalents (including amortization of premium or discount) by amortized cost.
The following table summarizes the fair value by contractual maturity of our AFS fixed maturity investment portfolio at December 31, 2014 and 2013:
At December 31, 2014 and 2013, 98.2% of our fixed income portfolio consisted of investment grade securities. We define a security as being below investment grade if it has an S&P credit rating of BB+ or less. Please refer to "Notes to Consolidated Financial Statements Note 4. Investments" included under Item 8 "Financial Statements and Supplementary Data" of this Form 10-K for additional information on the credit rating of our fixed income portfolio.
Substantially all the Company’s U.S. agency bond holdings are mortgage-backed. Additional details on the MBS component of our U.S. agency bonds portfolio at December 31, 2014 and 2013 were as follows:
Policy measures enacted by the U.S. Federal Reserve designed to provide greater liquidity to certain credit markets, in particular the mortgage backed securities market, had impacted the Company's MBS portfolio for several years through 2013. However, those conditions began abating during 2013, as interest rates began to rise and in December 2013, the U.S. Federal Reserve began to gradually reduce the amount of liquidity it is providing to credit markets, which has continued in 2014. During the year ended December 31, 2014, the Company experienced the lowest levels of paydowns and amortization of bond premium of its MBS portfolio since 2011, partially contributing to the improvement in total investment income during those periods compared to 2013. These conditions may fluctuate, until such time that the interest rate environment gradually moves toward historical levels from those experienced during the last several years.
The security holdings by sector and financial strength rating in this asset class at December 31, 2014 and 2013 were as follows:
At December 31, 2014 and 2013, we own the following securities not denominated in U.S. dollars:
The increase in securities not denominated in U.S. dollars was primarily due to the investment of the net receipts from our euro denominated underwriting activity. We do not have any non-U.S. government and government related obligations of Greece, Ireland, Italy, Portugal and Spain at December 31, 2014 and 2013. At December 31, 2014 and 2013, 100.0%, of the Company's non-sovereign government issuers were rated A+ or higher by S&P. The five largest non-U.S. government or supranational issuers held by the Company at December 31, 2014 and 2013 are:
At December 31, 2014 and 2013, the Company recorded gross reserves for unpaid loss and LAE of $2.3 billion and $2.0 billion, respectively, and net reserves for unpaid loss and LAE of $2.2 billion and $1.9 billion for December 31, 2014 and 2013, respectively.
At December 31, 2014, consistent with the continued growth of the Company, deferred acquisition costs, reserve for loss and LAE and unearned premium balances increased in particular due to the strong premium written growth experienced in the AmTrust Reinsurance segment during the year ended December 31, 2014 compared to 2013. Reinsurance balances receivable, net decreased by 8.4% primarily due to the reduction in the outstanding receivable balances in the AmTrust Reinsurance segment.
increase in additional paid in capital of $3.9 million resulting from share-based compensation expense and exercising of options and issuance of common shares; and
Please refer to "Notes to Consolidated Financial Statements Note 13. Shareholders' Equity" included under Item 8 "Financial Statements and Supplementary Data" of this Form 10-K for a discussion of the equity instruments issued by the Company at December 31, 2014 and 2013.
The decrease of $126.4 million was entirely due to the redemption of the Junior Subordinated Debt on January 15, 2014 by the Company's wholly owned U.S. holding company Maiden NA, utilizing the proceeds from the issuance of the 2013 Senior Notes and cash on hand. There were no further changes in the Company’s indebtedness during 2014 and the Company did not enter into any short-term borrowing arrangements during the year ended December 31, 2014.
Net foreign exchange gains amounted to $3.6 million during the year ended December 31, 2014 compared to $1.7 million and $1.6 million during the years ended December 31, 2013 and 2012, respectively.
The effects of inflation are considered implicitly in pricing and estimating reserves loss and LAE. The effects of inflation could cause the severity of claims to rise in the future. To the extent inflation causes these costs, particularly medical treatments and litigation costs, to increase above reserves established for these claims, the Company will be required to increase the reserve for loss and LAE with a corresponding reduction in its earnings in the period in which the deficiency is identified. The actual effects of inflation on the results of operations of the Company cannot be accurately known until claims are ultimately settled.
At December 31, 2014, we did not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.