We currently lease office space in 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 4 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 April 30, 2015, for use by Maiden Re and Maiden US. We have also executed a lease in Beaconsfield, Buckinghamshire, U.K. commencing on September 30, 2010, for Maiden Global; the initial term of this agreement expires on September 30, 2020, with an option to cancel after five years. We also have one office space lease in each of Germany, Austria and Russia, respectively, with various expiry dates.
The following tables set forth our summary historical statement of income data and summary balance sheet data as of and for the years ended December 31, 2013, 2012 and 2011. 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. These historical results are not necessarily indicative of results to be expected from any future period. For further discussion of this risk 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
Since our founding in 2007, we have entered into a series of significant strategic and capital 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 gross premiums written to in excess of $2.2 billion in 2013 while significantly enhancing our capital position to approximately $1.6 billion as of December 31, 2013, in each case, strongly positioning our capital to extend our business platform both in the U.S. and internationally.
Reducing our net exposure to natural hazard events by selling the primary insurance business written on a surplus lines basis by Maiden Specialty, a wholly owned subsidiary of Maiden US, to Brit Insurance in May 2013. Maiden Specialty provided non-catastrophe inland marine and property coverages. As of December 31, 2013, a limited number of policies in-force as of April 30, 2013 remain in run-off;
The following are the transactions that have strengthened our capital position:
Completing a public offering of the 2011 Senior Notes and repurchasing a like amount of our outstanding Junior Subordinated Debt in July 2011;
Completing a public offering of the 2012 Senior Notes in March 2012. The net proceeds were used for working capital and general corporate purposes;
Completing a public offering of the Preference Shares - Series A in August 2012. The Company received net proceeds of $145.0 million from the offering. The net proceeds from the offering were used for continued support and development of our reinsurance business and for other general corporate purposes;
Completing a public offering of the Preference Shares - Series B in October 2013. We received net proceeds of $159.7 million from the offering, after deducting issuance costs. The net proceeds from the offering were used for general corporate purposes, primarily to support the continuing growth of our reinsurance operations; and
Completing a public debt offering of the 2013 Senior Notes in November 2013. The net proceeds of $147.4 million and existing cash were used to repurchase all of the remaining portion of the Company's outstanding Junior Subordinated Debt on January 15, 2014.
We are a Bermuda-based holding company formed in June 2007 primarily focused on serving the needs of regional and specialty insurers in the U.S. 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 U.S. and Bermuda. Maiden Specialty, a wholly owned subsidiary of Maiden US, previously provided primary insurance on a surplus lines basis focusing on non-catastrophe inland marine and property coverages. On April 22, 2013, we entered into a transaction which began divesting us of this business commencing on May 1, 2013. Please see "Recent Developments - Divestiture of Maiden's E&S Property Business" on page 59. Maiden Bermuda does not underwrite any direct 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.
The market conditions in which we operate have historically been cyclical, experiencing periods of price erosion followed by rate strengthening as a result of catastrophes or other significant losses that affect the overall capacity of the industry to provide coverage. During the year ended December 31, 2013, the reinsurance market has been characterized by significant competition in most lines of business. There continues to be an influx of new capital from sources not considered traditional investors in the reinsurance industry, primarily in the property catastrophe segment of the reinsurance market, which is further enhancing overall industry competitive conditions.
Despite the elevated levels of global and U.S. catastrophe losses affecting the industry during the last several years, industry financial conditions, taken as a whole, have continued to improve through a combination of positive non-catastrophe underwriting results, enhanced balance sheets resulting from positive fixed income market performance which have resulted in meaningful unrealized gains in those underlying assets and readily available capital sources for industry participants, including the aforementioned inflow of capital from non-traditional market participants. As a result, capital positions across the insurance and reinsurance industry appear to remain strong through December 31, 2013.
While the business we write as part of our business model is somewhat more insulated from these competitive conditions, we are experiencing some residual pricing pressures as a result of broader industry conditions. As market conditions continue to develop, we continue to maintain our adherence to disciplined underwriting by declining business when pricing, terms and conditions do not meet our underwriting standards. We believe that we are well positioned to take advantage of market conditions should the pricing environment become more favorable.
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 2013 Senior Notes are an unsecured and unsubordinated obligation of the Company and rank ahead of the Junior Subordinated Debt. 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 the New York Stock Exchange and trading commenced on November 27, 2013 under the symbol "MHNC".
In October 2013, we issued three million three hundred thousand shares of 7.25% Preference Shares - Series B, par value $0.01, at a price of $50 per preference share. The Company received net proceeds of $159.7 million from the offering after deducting issuance costs of $5.3 million. Each share, which is not redeemable, will be paid cumulative dividends at a rate of 7.25% per annum on the initial liquidation preference of $50 per share.
The holders of the Preference Shares - Series A have no voting rights other than the right to elect up to two directors if preference share dividends are not declared and paid for six or more dividend periods. The Preference Shares - Series A have been listed on the New York Stock Exchange and trading commenced on August 31, 2012 under the symbol "MHPRA".
On March 27, 2012, the Company, through Maiden NA, issued $100.0 million principal amount of 8.00% 2012 Senior Notes due on March 27, 2042, which are fully and unconditionally guaranteed by the Company. The 2012 Senior Notes are redeemable for cash, in whole or in part, on or after March 27, 2017, at 100% of the principal amount to be redeemed plus accrued and unpaid interest to but excluding the redemption date. Maiden NA has listed the 2012 Senior Notes on the New York Stock Exchange and trading commenced on March 29, 2012 under the symbol "MHNB". The net proceeds from the 2012 Senior Notes of $96.6 million have been used for working capital and general corporate purposes.
Diluted book value per common share is calculated by dividing common shareholders' equity, adjusted for assumed proceeds from the exercise of dilutive options, by the number of outstanding common shares plus dilutive options and restricted share units (assuming exercise of all dilutive stock based awards). The Mandatory Convertible Preference Shares - Series B are excluded as they are anti-dilutive as of December 31, 2013.
Ratio of debt to total capital resources is a non-GAAP financial measures. Adjusting for the January 15, 2014 repurchase of the Junior Subordinated debt, which had a carrying value of $126.4 million as of December 31, 2013 (and a face value of $152.5 million), on a pro-forma basis, the Company's ratio of debt to capital resources would have been 24.7% as of December 31, 2013, assuming the repurchase could have occurred during the year ended December 31, 2013 without incurring the redemption penalty. See “ Non-GAAP Financial Measures ” for additional information.
In presenting the Company’s results, management has included and discussed certain non-GAAP financial measures. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the Company’s results in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. However these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. These non-GAAP measures are:
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. Operating earnings are an internal performance measure used in the management of our operations and represents operating results excluding, as applicable on a recurring basis, the following:
We also exclude certain non-recurring expenditures that are material to understanding our results of operations. For the year ended December 31, 2013, we exclude the interest incurred on the 2013 Senior Notes given the one time nature of the additional funding cost. For the year ended December 31, 2012, there are no such non- recurring items.
The following is a reconciliation of operating earnings to its most closely related GAAP measure, net income:
Book Value per Common Share: Management uses growth in book value per common share as a prime measure of the value the Company is generating for its common shareholders, as management believes that growth in the Company’s book value per common share ultimately results in growth in the Company’s common share price. Book value per common share is calculated using common shareholders’ equity (shareholders' equity excluding the aggregate liquidation value of our preference shares) divided by the number of common shares outstanding. Book value per common share is impacted by the Company’s net income and external factors such as interest rates, which can drive changes in unrealized gains or losses on its investment portfolio. The 6.9% decrease in book value per common share for the year ended December 31, 2013 was principally the result of a decline of
$108.9 million in accumulated other comprehensive income. The decline resulted primarily from a decrease in the fair value of fixed income securities accounted for on an available-for-sale ("AFS") basis, the result of rising interest rates during 2013 (see "Liquidity and Capital Resources - Investments" on page 94 for further information).
The ratio of debt to total capital resources is a non-GAAP financial measure. Adjusting for the January 15, 2014 repurchase of the Junior Subordinated debt, which had a carrying value of $126.4 million as of December 31, 2013 (and a face value of $152.5 million), on a pro-forma basis, the Company's ratio of debt to capital resources would have been 24.7% as of December 31, 2013, assuming the repurchase could have occurred during the year ended December 31, 2013 without incurring the redemption penalty.
For purposes of these operating measures, the fee-generating business which is included in the Diversified Reinsurance segment, is considered part of the underwriting operations of the Company. Certain portions of the fee business are directly associated with
Our expenses consist largely of net loss and loss adjustment expenses, 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 loss adjustment expenses are comprised of three main components:
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.
Actuarial Methods Used to Estimate Loss and Loss Adjustment Expense Reserves
The BF reserving technique is commonly used for long-tailed or erratic lines. It is also useful in situations where the reported loss experience is relatively immature and/or lacks sufficient credibility for the application of methods that are more heavily reliant on emerged experience. The BF method is an additive IBNR method that combines the ELR and RLD techniques by splitting the expected loss into two pieces - expected reported (or paid) losses and expected unreported (or unpaid) losses. Expected unreported (unpaid) losses are added to the current actual reported (or paid) losses to produce an estimate of ultimate losses by underwriting year. The BF method introduces an element of stability that moderates the impact of inconsistent changes in paid and reported amounts.
In the Diversified Reinsurance segment, as of December 31, 2013, 90.3% of the loss reserves 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 25 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 RLD Method.
The most significant assumptions used as of December 31, 2013 to estimate the reserve for loss and loss adjustment expenses within the Company’s segments are as follows:
the diversity of loss development patterns among different types of reinsurance treaties or contracts; and
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 of December 31, 2013, 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 of December 31, 2013, there were no significant backlogs related to the processing of policy or contract information in the Company’s segments.
in the case of assumed reinsurance, changes in ceding company case reserving and reporting patterns.
The Company’s estimates of reserve for loss and loss adjustment expenses can also change over time because of changes in internal company operations, such as:
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 of December 31, 2013, 90.3% 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 of December 31, 2013. 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 $36.2 million.
The Company has underwritten the AmTrust Quota Share Reinsurance segment since July 1, 2007. This segment consists of business written under the Reinsurance Agreement since that time, and commencing April 1, 2011, the business associated with
the European Hospital Liability Quota Share. 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 inexperience 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. We believe a possible variance of our expected loss ratio for all applicable loss years for the AmTrust Quota Share segment was approximately three and a half percentage points as of December 31, 2013. If our final loss ratio for the AmTrust Quota Share segment were to vary by three point one percentage points from the expected loss ratios in aggregate, our required reserves after reinsurance recoverable would increase or decrease by approximately $110.0 million.
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 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 at segment level is recognized if the sum of anticipated losses and loss adjustment expenses, unamortized acquisition expenses and anticipated investment income exceeds unearned premium.
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 are traded in less liquid markets.
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 99.5% and 98.3%, respectively, of the Company’s fixed maturity investments are categorized as Level 2 within the fair value hierarchy as of December 31, 2013 and 2012. At December 31, 2013 and 2012, we have not adjusted any pricing provided by the Pricing Services.
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, as appropriate, 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 of December 31, 2013 and 2012.
Non-U.S. government bonds - Comprised of bonds issued by non-U.S. governments and their agencies along with supranational organizations. 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 bonds consist of three commercial mortgage-backed securities ("CMBS"). These securities are 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.
Municipal bonds - auction rate - Comprised of auction rate securities issued by U.S. state and municipality entities or agencies. Municipal auction rate securities are reported in the Consolidated Balance Sheets at fair value which approximates their cost. As the significant inputs used to price the auction rate securities are observable market inputs, auction rate securities are classified within Level 2.
Other investments - The fair values of the investments in limited partnerships are determined by the fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals, and as such, the fair values are included in the Level 3 fair value hierarchy. The fair value of the investment in preference shares of a start-up insurance producer was determined using recent private market transactions, and as such, the fair value is included in the Level 3 fair value hierarchy.
Loan to related party - The carrying value reported in the accompanying balance sheets for this financial instrument approximates its fair value.
Junior subordinated debt - The amount reported in the accompanying balance sheets for this financial instrument represents the carrying value of the debt. The fair value of the debt was derived using the Black-Derman-Toy model. As the fair value of the junior subordinated debt is determined using observable market inputs in the Black-Derman-Toy model, the fair value is included in the Level 2 fair value hierarchy. At December 31, 2013, the fair value of the debt was $152.5 million.
The improvement in underwriting income in both periods reflects the continuing premium growth of the Company along with stable combined ratios. Despite marginally lower overall portfolio yields, the improvement in investment income reflects the 16.1% increase in average invested assets for the year ended December 31, 2013, respectively, compared to the same period in 2012.
The results in 2011 were adversely affected by non-recurring charges related to the 2011 Senior Note Offering which included $15.1 million of junior subordinated debt repurchase expense and $20.3 million of accelerated amortization of subordinated debt discount and issuance costs. The 2011 results also include $9.5 million in losses related to thunderstorm and tornado activity across the U.S. in the second quarter, net of the Company’s quarterly provisions for normalized catastrophe activity.
We evaluate our business by operating segments, Diversified Reinsurance, AmTrust Quota Share Reinsurance and the NGHC Quota Share segments (please refer to "Recent Developments - NGHC Quota Share" on page 59 for additional information on this segment).
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 Quota Share Reinsurance segment offset primarily by reductions in our business written in the NGHC Quota Share segment in 2013. The table below compares net premiums written by segment for the years ended December 31, 2013 and 2012:
The decrease in the net premiums written in the NGHC Quota Share segment for the year ended December 31, 2013 compared to the same period in 2012, was due to the termination, effective August 1, 2013, of Maiden Bermuda's participation in the NGHC Quota Share. The Company and NGHC agreed that the termination is on a run-off basis, meaning Maiden Bermuda will receive 25% of the net premiums and assume 25% of the related net losses with respect to the policies in force as of August 1, 2013 through the expiration of the policies.
Growth in the NGHC Quota Share segment - For the year ended December 31, 2012, net premiums written increased by 39.5 million or 15.4% compared to the year ended December 31, 2011, as NGHC continues to expand its business.
These increases were offset by reductions in business written in the Diversified Reinsurance segment, primarily by Maiden US, which experienced a decrease in premiums written for the year ended December 31, 2012 of $17.3 million, or 2.6%, compared to December 31, 2011. In addition to writing fewer new accounts in 2012, Maiden US added a number of large proportional contracts in the second half of 2011 which had sizable in-force and unearned premiums assumed, which did not recur in 2012. Finally, several large proportional reinsurance contracts that no longer met Maiden US' profitability criteria were non-renewed, contributing to the decrease.
Maiden Bermuda and IIS also decreased their written premium by $15.4 million, or 12.0%, during the year ended December 31, 2012 compared to December 31, 2011, largely due to non-renewals of certain accounts which were partially offset by new account activity.
Net premiums earned increased by $197.1 million, or 10.9%, for the year ended December 31, 2013 compared to the same period in 2012.
The table below compares net premiums earned by segment for the years ended December 31, 2013 and 2012:
Growth in the AmTrust Quota Share Reinsurance segment - The commencement of the European Hospital Liability Quota Share on April 1, 2011 increased premiums earned by $49.4 million, or 72.6%, for the year ended December 31, 2012 compared to the year ended December 31, 2011, while the business assumed under the Reinsurance Agreement increased $120.2 million, or 24.5%, for the year ended December 31, 2012 compared to the year ended December 31, 2011.
Growth in the NGHC Quota Share segment - For the year ended December 31, 2012, net premiums earned increased by $34.9 million, or 14.2%, compared to the year ended December 31, 2011, as NGHC continued to expand its business.
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 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 $0.1 million, or 1.3%, for the year ended December 31, 2013, compared to 2012. 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 the U.S. and Russia.
Net Investment Income and Net Realized and Unrealized Gains on Investments
(1)The average of the Company's investments, cash and cash equivalents, restricted cash, loan to a related party, due to broker and funds withheld balance as of each quarter during the year.
Net Realized Gains on Investment - Net realized gains on investment were $3.6 million for the year ended December 31, 2013, compared to $1.9 million for the same period in 2012. See "Liquidity and Capital Resources - Investments" on page 94 for further information.
Net Investment Income - Net investment income increased by $6.3 million, or 8.4%, for the year ended December 31, 2012 compared to the same period in 2011. The following table details the Company's average invested assets and average book yield for the year ended December 31, 2012 compared to the same period in 2011.
(2) Ratio of net investment income over average invested assets, at fair value.
Net Realized and Unrealized Gains on Investments - Net realized gains on investments were $1.9 million for the year ended December 31, 2012 compared to net realized and unrealized gains of $0.5 million for the year ended December 31, 2011, see "Liquidity and Capital Resources - Investments" on page 94 for further information.
Net loss and loss adjustment expenses increased by $87.3 million, or 6.9%, for the year ended December 31, 2013 compared to 2012. The net loss and loss adjustment expense ratios were 67.0%and 69.5% for the years ended December 31, 2013 and 2012, respectively. As noted, catastrophic losses increased the Company’s loss ratios in 2012, particularly the Diversified Reinsurance segment, the result of Superstorm Sandy in 2012. These events increased the net loss and loss adjustment expense ratios by 1.7% in 2012.
Excluding losses from catastrophic events, net loss and loss adjustment expense ratios were 67.0% and 67.8% for the years ended December 31, 2013 and 2012, respectively. The decrease in the net loss and loss adjustment expense ratio for the year ended December 31, 2013 compared to the same period in 2012 arises in both the AmTrust Quota Share Reinsurance segment and the Diversified Reinsurance segment, in both Maiden Bermuda and Maiden US, however these reductions were slightly offset by higher net loss and loss adjustment expense ratio for the year ended December 31, 2013 in the NGHC Quota Share segment. The Company amortized gains as a reduction of losses assumed from the GMAC Acquisition and the IIS Acquisition of $13.7 million for the year ended December 31, 2013 compared to $9.1 million for 2012.
Commission and other acquisition expenses increased by $53.3 million, or 12.1%, for the year ended December 31, 2012 compared to 2011 due to the ongoing premium growth of the Company. However, the commission and other acquisition expense ratio decreased to 27.1% for the year ended December 31, 2012 compared to 28.0% in 2011, respectively. The reduced ratio largely reflects: (1) the impact of loss sensitive features on ceding commission in the Diversified Reinsurance segment, in particular business written by Maiden US, due to higher loss ratios in that segment; (2) continued growth and ongoing changes in the mix of business in the AmTrust Quota Share Reinsurance segment, including the impact of a full year of modifications to ceding commission made under the Reinsurance Agreement along with lower ceding commission and profit share under the European Hospital Liability Quota Share, effective April 1, 2011 and discussed in further detail in that segment's results; and (3) modifications made to ceding commission made to the NGHC Quota Share effective October 1, 2012.
The increase in interest and amortization expense for the year ended December 31, 2013 compared to the same period in 2012 was due to: 1) the issuance of the 2012 Senior Notes on March 27, 2012; therefore we did not have a full quarter charge in the first quarter of 2012; and 2) the issuance of the 2013 Senior Notes on November 25, 2013, the proceeds of which were used to redeem all of the outstanding securities under the TRUPS Offering on January 15, 2014 and resulted in additional interest charges during the period from November 25, 2013 to December 31, 2013. The weighted average interest rate was 11.3% for the year ended December 31, 2013 compared to 11.7% in 2012.
The Company recorded a current income tax expense of $0.9 million, $1.1 million and $0.6 million for the years ended December 31, 2013, 2012 and 2011 respectively. These amounts relate to income tax on the earnings of its international subsidiaries and state taxes incurred by its U.S. subsidiaries. The effective rate of current income tax was 0.8% for the year ended December 31, 2013 compared to 1.9% and 2.1% for the years ended December 31, 2012, 2011, respectively.
The Company recorded a net deferred tax expense of $1.0 million, $1.1 million and $1.3 million for the years ended December 31, 2013, 2012 and 2011, respectively. The net deferred tax expense arises due to the goodwill associated with the Company’s acquisition of its U.S. subsidiaries, and is offset by timing differences on recognition of certain items relating to our subsidiaries in Germany. The effect of the deferred tax expenses will be reversed as: (1) we develop U.S. taxable income to permit recognition of the net deferred tax asset on our balance sheet; and (2) the amortization period of the goodwill for tax purposes is exhausted.
The underwriting results and associated ratios for the Diversified Reinsurance segment for the years ended December 31, 2013, 2012 and 2011 were as follows:
The combined ratio decreased to 97.6% for the year ended December 31, 2013 compared to 102.5% in 2012. As noted, catastrophic losses increased this segments combined ratios in 2012, the result of Superstorm Sandy. This event increased the segment combined ratio by 3.6% in 2012.
Within the Diversified Reinsurance segment, the business underwritten by Maiden US experienced a decrease in premiums earned for the year ended December 31, 2013 of $21.9 million, or 3.3%, compared to the same period in 2012. In addition, net premiums earned in Maiden Specialty decreased $7.7 million, or 49.5%, primarily due to the divestiture of our E&S business to Brit effective May 1, 2013. The decrease in net premiums earned by Maiden US was primarily due to: 1) the non-renewal of several large proportional U.S. reinsurance contracts that no longer met Maiden US profitability criteria in 2012; and 2) the decision by certain Maiden US clients to retain more business in 2013. These decreases were partially offset by the addition in 2013 of new accounts combined with organic growth from certain existing Maiden US accounts.
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 $0.1 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 loss adjustment expenses decreased by $55.5 million, or 9.5%, for the year ended December 31, 2013 compared to 2012. Net loss and loss adjustment expense ratios were 68.1% and 72.3% for the years ended December 31, 2013 and 2012, respectively. As noted, catastrophic losses increased this segments net loss and loss adjustment expense ratios in 2012, the result of Superstorm Sandy. This event increased the net loss and loss adjustment expense ratio by 3.6% in 2012.
General and Administrative Expenses - Consistent with the Company's growth, general and administrative expenses increased by $1.4 million, or 3.4%, for the year ended December 31, 2013 compared to 2012. The general and administrative expense ratio was 5.4% and 5.1% for the years ended December 31, 2013 and 2012, respectively. The increase in the ratios is due to the decline in premiums earned exceeding the decline in general and administrative expenses for the year ended December 31, 2013 compared to 2012. The overall expense ratio (including commission and other acquisition expenses) was 29.5% and 30.2% for the years ended December 31, 2013 and 2012, respectively.
The table below illustrates net premiums earned by line of business in this segment for the years ended December 31, 2012 and 2011:
Net Loss and Loss Adjustment Expenses - Net loss and loss adjustment expenses increased by $81.6 million, or 16.2%, for the year ended December 31, 2012 compared to 2011. Net loss and loss adjustment expense ratios were 72.3% and 66.0% for the years ended December 31, 2012 and 2011, respectively. As noted, catastrophic losses increased this segments net loss and loss adjustment expense ratios in 2012 and 2011, the result of Superstorm Sandy in 2012 and thunderstorm and tornado activity in the U.S. in the second quarter of 2011. These events increased the net loss and loss adjustment expense ratios by 3.6% and 1.2 % in 2012 and 2011, respectively.
Commission and Other Acquisition Expenses - Commission and other acquisition expenses increased by $3.0 million, or 1.5%, for the year ended December 31, 2012 compared to 2011. The increase during the year reflects the growth of the segment in 2012 compared to 2011, consistent with the reasons cited in the discussion of the change in earned premiums. In addition, as a result of the adoption of new accounting standards regarding the recognition of deferred commission and other acquisition expenses in the first quarter 2012, commission and other acquisition expenses increased an additional $2.0 million during year ended December 31, 2012 compared to 2011. The implementation of this new accounting standard increased the commission and other acquisition expense ratio for the segment by 0.3% for the year ended December 31, 2012.
General and Administrative Expenses - Consistent with the Company's growth, general and administrative expenses increased by $4.5 million, or 12.6%, for the year ended December 31, 2012 compared to 2011. The general and administrative expense ratio was 5.1% and 4.8% for the years ended December 31, 2012 and 2011, respectively. The overall expense ratio (including commission and other acquisition expenses) was 30.2% and 31.1% for the years ended December 31, 2012 and 2011, respectively.
The AmTrust Quota Share 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 Quota Share Reinsurance segment for the years ended December 31, 2013, 2012 and 2011 were as follows:
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 ongoing organic growth, both of which are benefiting from improved rate levels, particularly in their Small Commercial Business segment.
Net premiums earned increased by $261.1 million, or 35.9% for the year ended December 31, 2013, compared to the same period in 2012. The increase in net premiums earned arises in each of the three components of the AmTrust Quota Share Reinsurance segment. The overall increase reflects the continual ongoing growth of business written under the Reinsurance Agreement in 2013 and 2012. The table below details net premiums earned by line of business for the years ended December 31, 2013 and 2012:
General and Administrative Expenses - General and administrative expenses increased by $0.1 million, or 2.2%, for the year ended December 31, 2013 compared to the same period in 2012. The general and administrative expense ratio has remained flat at 0.2% for the year ended December 31, 2013 compared to the same period in 2012. The overall expense ratio (including commission and other acquisition expenses) was 29.7% and 27.8% for the years ended December 31, 2013 and 2012, respectively, reflecting the changes in the commission and other acquisition expense ratio.
Net premiums earned increased by $169.6 million, or 30.4% for the year ended December 31, 2012, compared to the same period in 2011. The increase reflects the ongoing growth of business written under the Reinsurance Agreement and the European Hospital Liability Quota Share.
The table below details net premiums earned by line of business for the years ended December 31, 2012 and 2011:
Net Loss and Loss Adjustment Expenses - Net loss and loss expenses increased by $114.3 million, or 30.1%, for the year ended December 31, 2012 compared to the the year ended December 31, 2011. Net loss and loss adjustment expense ratios were 68.0% and 68.1% for the years ended December 31, 2012 and 2011, respectively. Improved loss ratios in the workers' compensation line of business within Small Commercial were largely offset by higher loss ratios in Specialty Program. The Specialty Risk and Warranty loss ratios were generally stable.
Please refer to "Recent Developments - NGHC Quota Share " on page 59 for additional information on recent events affecting this segment. The following table summarizes the underwriting results and associated underwriting ratios for the NGHC Quota Share segment for the years ended December 31, 2013, 2012 and 2011:
The table below details net premiums written by line of business in this segment for the years ended December 31, 2013 and 2012:
Net premiums earned decreased by $30.8 million, or 11.0% for the year ended December 31, 2013 compared to the same period in 2012. The decrease was the result of the termination of Maiden Bermuda's participation in the NGHC Quota Share effective August 1, 2013.
Loss and Loss Adjustment Expenses - Net losses and loss expenses decreased by $15.2 million, or 8.3%, for the year ended December 31, 2013 compared to the same period in 2012. Net loss and loss adjustment expense ratios increased to 67.4% for the year ended December 31, 2013, compared to 65.5% for the year ended December 31, 2012, due to adverse development on prior underwriting years.
Commission and Other Acquisition Expenses - The NGHC Quota Share, as amended, provides that the reinsurers pay a provisional ceding commissions equal to 32.0% of ceded earned premiums, net of premiums ceded by the personal lines companies for inuring reinsurance, subject to adjustment. The ceding commission is subject to adjustment to a maximum of 34.5% if the loss ratio for the reinsured business is 60.5% or less and a minimum of 30.0% if the loss ratio is 64.5% or higher.
General and Administrative Expenses - General and administrative expenses decreased by $0.1 million for the year ended December 31, 2013 compared to the same period in 2012.
The combined ratio decreased to 97.2% for the year ended December 31, 2012 compared to 97.7% for the year ended December 31, 2011. In October 2012, NGHC incurred losses from Superstorm Sandy. Our share, net of inuring reinsurance, under the NGHC Quota Share was $2.0 million, which increased the net loss and loss adjustment expense ratio and combined ratio for the year ended December 31, 2012 by 0.7%. Excluding losses from Superstorm Sandy, the combined ratio decreased to 96.5% in 2012 from 97.7% in 2011. The cause of the decrease was a lower expense ratio in 2012, attributable in part to lower ceding commissions in 2012, the result of changes to the reinsurance agreement with NGHC.
Net premium earned increased by $34.9 million, or 14.2%, for the year ended December 31, 2012 compared to the same period in 2011.
Loss and Loss Adjustment Expenses - Net losses and loss expenses increased by $23.3 million, or 14.5%, for the year ended December 31, 2012 compared to the same period in 2011. As noted above, in October 2012, NGHC incurred losses from Superstorm Sandy. Our share, net of inuring reinsurance, under the NGHC Quota Share was $2.0 million, which increased the net loss and loss adjustment expense ratio for the year ended December 31, 2012 by 0.7%. Excluding losses from Superstorm Sandy, net loss and loss adjustment expense ratios decreased to 64.8% for the year ended December 31, 2012 compared to 65.3% for the year ended December 31, 2011.
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 subsidiaries to pay dividend payments on our common and preference shares.
Maiden Holdings’ wholly owned U.K. subsidiary, Maiden Global, that operates as a reinsurance services and holding company, is subject to regulation by the U.K. Financial Conduct Authority (the "FCA") that limit the maximum amount of annual dividends or distributions paid by Maiden Global to the Company. As of December 31, 2013, Maiden Global is allowed to pay dividends or distributions not exceeding $2.1 million. During the year, Maiden Global paid dividends totaling $3.2 million to Maiden Holdings.
Maiden Global's wholly owned subsidiary in Netherlands, Maiden Nederland B.V. ("Maiden Nederland"), operates as an insurance intermediary and is subject to regulation by the Netherlands Authority for Financial Markets (the "AFM"). There are no statutory minimum capital requirements imposed on Maiden Nederland by the AFM.
The inability of the subsidiaries of Maiden Holdings to pay dividends and other permitted distributions could have a material adverse effect on Maiden Holdings’ cash requirements and ability to make principal, interest and dividend payments on its debt, preference shares and common shares.
Cash flows from operations for the year ended December 31, 2013 were $366.2 million compared to $319.1 million for the year ended December 31, 2012, a 14.8% increase. The Company's assets grew by $575.2 million, or 13.9%, as of December 31, 2013 compared to December 31, 2012. The increase in assets was largely due to the growth in premium written experienced by the Company in our AmTrust Quota Share Reinsurance segment during 2013, offset by decreases in the NGHC Quota Share segment. Cash flows associated with AmTrust segments growth typically lag by at least one calendar quarter, and the Company anticipates seeing further cash flow benefits of that growth in 2014.
Cash flows from operations for the year ended December 31, 2012 were $319.1 million compared to $181.3 million for the year ended December 31, 2011. The increase in the amount of cash provided by operations in the year ended December 31, 2012 reflected the significant growth in the Company during both 2011 and 2012, along with continuing profitable combined ratios, despite the losses incurred by the Company in Superstorm Sandy. The Company's assets grew by $743.1 million or 21.9% as of December 31, 2012 compared to December 31, 2011, primarily reflecting the operating cash flows described, in addition to the issuance of the 2012 Senior Notes and the Preference Shares. Although the Company's rate of premium growth slowed in the second half of 2012, the combination of expected premium growth and stable combined ratios should continue to generate positive cash flow from operations resulting in continued growth in the Company's invested assets.
Net cash used in investing activities was $637.5 million for the year ended December 31, 2012 compared to $13.3 million provided by investing activities for the year ended December 31, 2011. Despite the current interest rate environment which continues to provide historically low fixed income yield levels, the Company continues to deploy available cash for longer-term investments as quickly as investment conditions permit and to maintain, where possible, cash and cash equivalents balances at low levels. Continuation of current market conditions however, may result in the Company accumulating elevated levels of cash and cash equivalents which may result in slower growth in investment income and in certain instances, reductions in investment income despite the increase in invested assets. For the year ended December 31, 2012, the purchases of fixed maturity securities exceeded the proceeds of sales, maturities and calls of such instruments by $619.2 million. Investing cash flows consist primarily of proceeds on the sale or maturity of fixed-maturity investments and payments for fixed-maturity investments acquired.
The following table details additional information on those assets as of December 31, 2013 and 2012:
This increase is net of a decline in the fair value of fixed maturity investments of $109.2 million during 2013, principally the result of rising interest rates during the period. During 2013, the yield on the 10-year U.S. Treasury bond increased by 126 basis points to 3.04%, as of December 31, 2013. 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 rise in interest rates during 2013 was primarily the result of modestly improving economic conditions. Key economic performance indicators improved to the degree that the U.S. Federal Reserve began to restrict the accommodative monetary policy and related liquidity measures implemented in recent years to stabilize both U.S. and global economic conditions.
As of December 31, 2013, the weighted average duration of our AFS fixed maturity investment portfolio was 4.6 years and there were approximately $34.3 million of net unrealized gains in the portfolio, compared to a duration of 3.5 years and net unrealized gains of $143.5 million in the portfolio as of December 31, 2012. During 2013, our MBS portfolio continued to experience a slow down in prepayments received on its MBS portfolio, as interest rates began to rise, and combined with the purchase of $392.6 million in new corporate bonds at an average duration of 7.5 years, the duration of our AFS portfolio increased by 1.1 years
at December 31, 2013 compared to the same date in 2012. The aggregate amounts of our invested AFS assets by asset class and in total as of those dates, including the average yield and duration were as follows:
When assessing our intent to sell a fixed maturity security or if it is more likely that we will be required to sell a fixed maturity security before recovery of its cost basis, we evaluate facts and circumstances such as, but not limited 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, as an unrealized OTTI loss on our Consolidated Balance Sheets, as this is considered a noncredit (i.e. recoverable) impairment
During the years ended December 31, 2013 and 2012, we recognized no OTTI. Based on our qualitative and quantitative impairment review of each asset class within our fixed maturity portfolio, the remaining unrealized losses on fixed maturities at December 31, 2013, were primarily due to widening of credit spreads since their date of purchase. Because we do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities until a recovery of fair value to amortized cost, we currently believe it is probable that we will collect all amounts due according to their respective contractual terms. Therefore we do not consider these fixed maturities to be other-than-temporarily impaired at December 31, 2013.
As of December 31, 2012, there were approximately 32 securities in an unrealized loss position with a fair value of $397.2 million and unrealized losses of $8.0 million. Of these securities, there are 9 securities that have been in an unrealized loss position for 12 months or greater with a fair value of $143.9 million and unrealized losses of $5.5 million.
As of December 31, 2013 and 2012, 98.2% and 98.6%, respectively, 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. The following table summarizes the composition of the fair value of our fixed maturities at the dates indicated by ratings as assigned by S&P (and/or other rating agencies when S&P ratings were not available):
The Company continues to experience elevated levels of paydowns of its U.S. agency bond - mortgage-backed portfolio for the year ended December 31, 2013, although the aggregate amount of paydowns declined in 2013 compared to the same period in 2012 as a result of the changes in the market in anticipation of these policy changes. The elevated levels of paydowns reflect the historically low interest rate environment in the U.S. and globally in recent years, resulting in higher refinancing activity in the U.S. mortgage markets.
Our U.S. Agency MBS portfolio is 39.9% of our fixed maturity investments as of December 31, 2013. Given the relative size of this portfolio to our total investments, if these faster prepayment patterns were to continue over an extended period of time, this could potentially have the effect of limiting the growth in our investment income in certain circumstances, or even potentially reducing the total amount of investment income we earn.
The Company holds no asset-backed securities other than the mortgage-backed securities it has described herein.
The security holdings by sector and financial strength rating by S&P in this asset class as of December 31, 2013 and 2012 are as follows:
During 2013, the Company reduced its allocation to corporate bonds rated BBB (including those with a + or - modifier), as it had reached our maximum allocation to those securities as a percentage of the total fixed maturities portfolio. We also reduced our exposure to corporate bonds in the Financial Institutions sector, as those securities may be more sensitive to rising interest rates, which occurred during 2013.
The Company’s 10 largest corporate holdings, 91.6% of which are in the Financial Institutions sector, as of December 31, 2013 as carried at fair value and as a percentage of all fixed income securities are as follows:
As of December 31, 2013 and 2012, 15.5% and 17.5% of our corporate securities were floating rate securities, respectively, all of which were in the Financial Institutions sector. These securities enable the Company to maintain flexibility in the face of volatile fixed income market conditions and allow us to take advantage of any unanticipated increases in interest rates which may occur.
To the extent that the Company's operating subsidiaries invest in fixed maturities issued by U.S. state and local governments, these investments are made on the merits of the underlying investment and not on the tax status of those securities.
As of December 31, 2013 and 2012, 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 and the receipt of British pound denominated investments following the novation of the final contract related to our IIS Acquisition. These British pound denominated investments were previously used to fulfill our collateral requirements on a funds withheld basis.
The Company establishes loss reserves to cover the estimated liability for the payment of all loss and loss adjustment expenses incurred with respect to premiums earned on the contracts that the Company writes. Loss reserves do not represent an exact calculation of the liability. Estimates of ultimate liabilities are contingent on many future events and the eventual outcome of these events may be different from the assumptions underlying the reserve estimates. The Company believes that the recorded unpaid loss and loss adjustment expenses represent management’s best estimate of the cost to settle the ultimate liabilities based on information available at December 31, 2013.
As of December 31, 2013 and 2012, the Company recorded gross reserves for unpaid loss and loss adjustment expenses of $2.0 billion and $1.7 billion, respectively, and net reserves for unpaid loss and loss adjustment expenses of $1.9 billion and $1.6 billion, respectively.
The following table provides a reconciliation of the net reserves for unpaid loss and loss adjustment expenses for the years ended December 31, 2013, 2012 and 2011:
See "Business - Reserve for Loss and Loss Adjustment Expenses" in Item 1 of Part I of this Report, "Critical Accounting Policies and Estimates - Reserve for Loss and Loss Adjustment Expenses" and "Results of Operations" above for a discussion of loss and loss adjustment expenses and prior years’ reserve developments.
The following summarizes other material changes in the financial position of the Company as of December 31, 2013 and 2012:
In general, the increases in these balances reflect the continued growth of the Company, in 2013 particularly in the AmTrust Quota Share Reinsurance segment. At December 31, 2013, reinsurance recoverable on unpaid losses decreased by $26.9 million compared to 2012, of which $49.8 million or 59.2% relates to reinsurance claims from Superstorm Sandy compared to $79.7 million or 71.9% of the balance relating to reinsurance claims from Superstorm Sandy in 2012. The reduction in reinsurance recoverable on unpaid losses arises primarily due to the settlement during the year ended December 31, 2013 of claims relating to Superstorm Sandy.
Capital resources consist of funds deployed or available to be deployed in support of our business operations. Our total capital resources were $1,610.2 million at December 31, 2013, a 19.4% increase from $1,349.1 million at December 31, 2012 and reflect the increase in the Company's shareholders, equity and debt issuances. The following table shows the movement in capital resources for the years ended December 31, 2013 and 2012:
The Company paid each of the Preference Shares - Series B a dividend of $0.745139 on the initial payment date, which covered the period October 1, 2013 until December 14, 2013. The Company will pay cumulative dividends on each of the Preference Shares - Series B at a rate of 7.25% per annum on the initial liquidation preference of $50 per share (equivalent to $3.625 per annum per Preference Share - Series B or $0.90625 per quarter). The Company will pay dividends quarterly, each year, to the extent that the Company has lawfully available funds to pay dividends and the board of directors declares a dividend payable, up to, and including, September 15, 2016 in cash and on September 15, 2016 or any earlier conversion date in cash, common shares, or a combination thereof, at the Company’s election and subject to the share cap, which is an amount per share equal to the product of (i) 2 and (ii) the maximum conversion rate of 4.0322, subject to conversion rate adjustments.
At any time prior to September 15, 2016, other than during the fundamental change conversion period (as defined in the prospectus supplement), a holder of mandatory convertible preference shares may elect to convert such holder's mandatory convertible preference shares at the minimum conversion rate of 3.2258 shares of the common stock per mandatory convertible preference share, subject to adjustment as described under "Description of Mandatory Convertible Preference Shares - Conversion Rate Adjustments" of the Form 424B2 Prospectus Supplement filed with the SEC on September 27, 2013.
Also on that date, the Company's Board of Directors authorized management at its discretion to purchase its outstanding common shares in an amount not exceeding 50% of the net proceeds of the Preference Share Offering. Repurchases under the program may be made in open market or privately negotiated transactions or otherwise, from time to time, depending on market conditions. For the period August 22, 2012 through December 31, 2013, the Company did not repurchase any of its common shares.
On November 25, 2013, the Company, through Maiden NA, issued the 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 2013 Senior Notes are an unsecured and unsubordinated obligation of the Company and rank ahead of the Junior Subordinated Debt, described below. The net proceeds from the sale of the 2013 Senior Notes were $147.4 million after issuance costs of $5.1 million.
On March 27, 2012, the Company completed an offering of $100.0 million aggregate principal amount of 8.00% Senior Notes due on March 27, 2042. The 2012 Senior Notes are redeemable for cash, in whole or in part, on or after March 27, 2017, at 100% of the principal amount to be redeemed plus accrued and unpaid interest to but excluding the redemption date.The net proceeds from the 2012 Senior Notes of $96.6 million have been used for working capital and general corporate purpose.
On June 24, 2011, the Company completed an offering of $107.5 million aggregate principal amount of 8.25% Senior Notes due June 15, 2041, including $7.5 million aggregate principal amount of 2011 Senior Notes to be issued and sold by the Company pursuant to the underwriters’ exercise in part of their overallotment option. The 2011 Senior Notes are redeemable for cash, in whole or in part, on or after June 15, 2016, at 100% of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to but excluding the redemption date.
Under the terms of the TRUPS Offering, on January 15, 2014, the Company's wholly owned U.S. holding company, Maiden NA, redeemed all of the remaining TRUPS with a face value of $152.5 million. The Company utilized the proceeds of the issuance of the 2013 Senior Notes and cash on hand to redeem the TRUPS. As a result of the redemption, in the first quarter of 2014 the Company will incur an additional non-recurring non-cash charge of $26.1 million, which represents the accelerated amortization of original issue discount associated with the TRUPS. As the repayment of the principal balance occurred after five years of the date of issuance, the Company is not required to pay the additional amount equal to one full year of interest on the amount of TRUPS redeemed.
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, the Swedish krona and the Russian ruble. 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 reduced by fluctuations in foreign currency exchange rates could materially adversely affect our financial condition and results of operations.
At December 31, 2013, 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 year 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 average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income.