Investment income is an important part of our business. Because the period of time between our receipt of premiums and the ultimate settlement of claims is often several years or longer, we are able to invest cash from premiums for significant periods of time. As a result, we expect to generate more investment income from our premiums as compared to insurance companies that operate in many other lines of business. Our net investment income was $54.5 million, $59.5 million and $50.9 million for the years ended 2009, 2008 and 2007, respectively. The Company held 16.5% and 14.1% of total invested assets in cash and cash equivalents as of December 31, 2009 and 2008, respectively. This relatively high concentration of cash and cash equivalents represents our reaction to the relatively flat debt yield curve and should enable the Company to quickly redeploy substantial assets should the interest rate environment change.
AmTrust Captive Holdings Limited (“ACHL”) and the Captives changed their names to AmTrust Re Beta, AmTrust Re 2007(Luxembourg) and AmTrust Re (Luxembourg), respectively. The purchase price of ACHL was $.02 million which represented the capital of ACHL. In accordance with FASB ASC 805-10, the Company recorded approximately $12.5 million of cash, $66.5 million of receivables and $79 million of loss reserves. ACHL is included in the Company’s Specialty Risk and Extended Warranty segment.
On a quarterly basis, and in some cases more frequently, we review our reserves to determine whether they are consistent with our actual results. In the event of a discrepancy, we would seek to determine the causes (underwriting, claims, inflation, regulatory) and would adjust our reserves accordingly. For example, if the development of our total incurred losses were 5% greater than the loss development factors would have predicted, we would adjust our reserves for the periods in question. In 2007, we recognized a $2.1 million deficiency in prior year’s reserves, related to our mandatory participation in the reinsurance pools which reinsure state assigned risk plans for workers compensation insurance. In 2008, we recognized a $0.5 million redundancy. In 2009, the Company’s liabilities for unpaid losses and LAE attributable to prior years decreased by $4.8 million as result of favorable development in the Small Commercial Business segment, partially offset by unfavorable development from the Company’s involuntary participation in NCCI pools. We do not anticipate that we will make any material reserve adjustments, but will continue to monitor the accuracy of our loss development factors and adequacy of our reserves. Additional information regarding our reserves for loss and loss adjustment expenses can be found in “Risk Factors” and “Business - Loss Reserves.”
Interest Expense. Interest expense for the years ended December 31, 2009 and 2008 was $16.9 million and $18.3 million, respectively. Interest expense declined during 2009 compared to 2008 as lower borrowing costs on the Company’s collateral loan of $168 million were partially offset by an increase from interest expense on an interest rate swap agreement and the full year impact of interest expense related to the Company’s $40 million term loan and $30 million promissory note entered into during the second quarter of 2008.
Net Earned Premium. Net earned premium decreased $5.1 million or 1.1% from $444.2 million to $439.1 million for the year ended December 31, 2007 and 2008, respectively. Net earned premium for the years ended 2007 and 2008, respectively, reflected cessions of $110.2 million and $285.1 million to Maiden Insurance under the terms of the Maiden Quota Share, which was entered into during the third quarter of 2007. The increase by segment before cessions was: Small Commercial Business - $44.2 million; Specialty Risk and Extended Warranty - $95.4 million; and Specialty Middle Market Business - $30.3 million.
Net Earned Premium. Net earned premium increased $66.0 million or 38.1% to $239.0 million for the year ended December 31, 2009 from $173.0 million for the year ended December 31, 2008. As premiums written earn ratably over a twelve month period, the increase in net earned premium resulted from higher net written premium for the twelve months ended December 31, 2009 compared to the twelve months ended December 31, 2008.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $21.8 million or 22.4% to $119.7 million for the year ended December 31, 2009 from $97.9 million for the year ended December 31, 2008. The expense ratio increased to 25.2% for the year ended December 31, 2009 from 22.4% for the year ended December 31, 2008. The increase in the expense ratio resulted from higher acquisition costs in 2009 than in 2008, as 2009 included an entire year of the commercial package business. Additionally, in 2008 the Company benefited from additional ceding commission received from Maiden Insurance during the period. Ceding commission, which is based on earned premium ceded by the Company, included the segment’s proportionate share of ceding commission earned on the $78.2 million of unearned premium that the Company had assumed on June 1, 2008 in connection with the UBI acquisition. The ceding commission revenue is allocated to each segment based on that segment’s proportionate share of the Company’s overall acquisition costs. Therefore, the reduction in ceding commission had the effect of increasing acquisition costs compared to the corresponding period in 2008.
Ceding Commission. Ceding commission represents commission earned primarily through the Maiden Quota Share, whereby AmTrust receives a 31% or 34.375% commission, depending on the type of business, on earned premium ceded to Maiden Insurance. The ceding commission earned during the years ended December 31, 2009 and 2008 was $28.6 million and $29.4 million, respectively. Ceding commission was consistent year over year as growth in premium ceded to Maiden Insurance in 2009 was offset, primarily, by the allocation in 2008 to this segment of its proportionate share of ceding commission related to the 2008 cession to Maiden Insurance of $78.2 million of unearned premium assumed in connection with the acquisition of UBI during the second quarter of 2008.
AmTrust may generate liquidity through a combination of debt or equity securities issuances, as well as financing through borrowing and sales of securities. In 2008, AmTrust entered into a three year $40 million term loan. Additionally, in 2008 AmTrust also issued a four year $30 million note in conjunction with the UBI acquisition. In 2007, AmTrust issued $40 million of junior subordinated debentures.
(4) At the time of the Company’s acquisition of AIIC, MIC was a reinsurer of AIIC and had an A rating. On June 9, 2009 MIC was downgraded to B++. We continue to collect payments from MIC on a timely basis.
• The first layer of this reinsurance provides at least $2.5 million and up to $3.0 million of coverage per occurrence in excess of a variable $2.0 - $2.5 million per occurrence retention. This layer has an annual aggregate reinsured limit of $12.0 million;
The Company recorded approximately $113 million, $114 million and $59 million of ceding commission during 2009, 2008 and 2007, respectively, as a result of this transaction. The agreement also will include, subject to regulatory requirements, the premiums and losses of any Covered Business of any, majority-owned insurance subsidiary that AmTrust may acquire in the future.
operations would decrease as we would cede a greater portion of our premiums written to our reinsurers. Conversely, our cash flow from operations would increase if the cost of reinsurance declined relative to our retention.
Term Loan On June 3, 2008, the Company entered into a term loan with JP Morgan Chase Bank, N.A. in the aggregate amount of $40 million. The term of the loan is for a period of three years and requires quarterly principal payments of 3.3 million, which began on September 3, 2008 and end on June 3, 2011. The loan carries a variable rate and is based on a Eurodollar rate plus an applicable margin. The Eurodollar rate is a periodic fixed rate equal to the London Inter bank Offered Rate “LIBOR” and had a margin rate of 185 basis points and was 2.11% as of December 31, 2009. The Company can prepay any amount of the loan after the first anniversary date without penalty upon prior notice. The term loan contains affirmative and negative covenants, including limitations on additional debt, limitations on investments and acquisitions outside the Company’s normal course of business. The loan requires the Company to maintain a debt to equity ratio of 0.35 to 1 or less. The Company recorded $1.5 million of interest expense during 2009 related to this agreement. The Company reduced the outstanding balance on the note during 2009 from $33.3 million to $20.0 million.