In 2011, the unusually high frequency of loss activity from U.S. thunderstorm and tornado impacted our U.S. clients in the second quarter of 2011, adversely affecting the Company's results. The 2011 results include $9.5 million in losses incurred by Maiden US 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. These losses increased our loss ratio and combined ratio for that period by 0.6% on a consolidated basis.
Operating earnings, operating earnings per common share and operating return on average common equity are non-generally accepted accounting principles (GAAP) financial measures. See “Non-GAAP Financial Measures” for additional information and a reconciliation to the nearest U.S. GAAP financial measure (net income).
Underwriting Income and Combined Ratio: The combined ratio is used in the insurance and reinsurance industry as a measure of underwriting profitability. Management measures underwriting results on an overall basis and for each segment on the basis of the combined ratio. The combined ratio is the sum of the net loss and loss expense ratio and the expense ratio and the computations of each component are described below. A combined ratio under 100% indicates underwriting profitability, as the net loss and loss adjustment expenses, commission and other acquisition expenses and general and administrative expenses are less than the net premiums earned and other insurance revenue on that business. We have generated underwriting income in each year since our inception. Underwriting income is calculated by subtracting net loss and loss adjustment expenses, commissions and other acquisition expenses and applicable general and administrative expenses from the net premiums earned and other insurance revenue and is the monetized counterpart of the combined ratio.
In selecting its best estimate, the Company considers the appropriateness of each methodology to the individual circumstances of the treaties and underwriting year for which the projection is made. The methodologies that the Company employs include, but may not be limited to, the Expected Loss Ratio method, the Reported Loss Development method and the Incurred and (as applicable) Paid Bornhuetter-Ferguson ("B-F") methods. In addition, the Company uses other methodologies to estimate liabilities for specific types of occurrences. For example, external and vendor catastrophe models are typically used in the estimation of loss and loss adjustment expenses at the early stages of catastrophe losses before loss information is reported to the reinsurer.
The reserve for loss and loss adjustment expenses as of December 31, 2013 and 2012 comprised of:
Under proportional treaties, which represented 83.1% of gross premiums written for the year December 31, 2013, 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 16.9% of gross premiums written for the year December 31, 2013, 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 upward adjustment depending on the premium volume written by the cedant.
FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between open market participants at the measurement date. Additionally, ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
The GMAC Acquisition and IIS Acquisition created certain assets separately described in our financial statements as Goodwill and Intangible Assets, respectively. Goodwill is calculated as the excess of purchase price over the net fair value of assets acquired. Intangible Assets consist of finite and indefinite life assets. Finite life intangible assets include customer and producer relationships and trademarks with useful life of 15 years. Insurance company licenses are considered indefinite life intangible assets.
Net income attributable to Maiden common shareholders for the year ended December 31, 2012 was $46.5 million compared to $28.5 million for the same period in 2011.
The business underwritten by Maiden US experienced an increase in premiums written for the year ended December 31, 2013 of $13.5 million, or 2.1%, compared to the same period in 2012 while net premiums written in Maiden Specialty decreased $17.8 million, or 109.1%, primarily due to the divestiture of our E&S business to Brit effective May 1, 2013. The increase in the Maiden US business was primarily due to the addition of new accounts combined with organic growth from certain existing Maiden US
Growth on recurring business in the AmTrust Quota Share Reinsurance segment - The results for the year ended December 31, 2011 include the $45.9 million in force and unearned premium assumed at the commencement of the European Hospital Liability Quota Share on April 1, 2011. Excluding that non-recurring item, net premiums written increased by $216.9 million, or 34.8%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. This increase reflects AmTrust's continuing expansion through acquisition and ongoing organic growth, both of which are benefiting from improved rate levels.
The NGHC Quota Share segment's 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 a result of the termination of Maiden Bermuda's participation in the NGHC Quota Share effective August 1, 2013.
Total general and administrative expenses decreased by $0.1 million, or 0.2%, for the year ended December 31, 2012 compared to 2011. The general and administrative expense ratio is 2.9% for the year ended December 31, 2012 compared to 3.5% in 2011. The decrease for the year reflects the continuing growth of larger quota share accounts which enable the Company to operate more efficiently.
The results of operations for our three segments, Diversified Reinsurance, AmTrust Quota Share Reinsurance and NGHC Quota Share are discussed below.
Premiums - Net premiums written decreased by $3.5 million, or 0.5%, for the year ended December 31, 2013 compared to the same period in 2012. The table below illustrates net premiums written by line of business in this segment for the years ended December 31, 2013 and 2012:
Net premiums earned decreased by $33.2 million, or 4.2%, during the year ended December 31, 2013 compared to the same period in 2012. The table below illustrates net premiums earned by line of business in this segment for the years ended December 31, 2013 and 2012:
Commission and Other Acquisition Expenses - Commission and other acquisition expenses decreased by $16.4 million, or 8.1%, for the year ended December 31, 2013 compared to 2012. The decrease for the year ended December 31, 2013 reflects the reduction in premiums earned for the segment in 2013 compared to 2012, consistent with the reasons cited in the discussion of the change in earned premiums.
Excluding losses from catastrophic events, combined ratios were 98.9% and 95.9% for the years ended December 31, 2012 and 2011, respectively. The increased net loss and loss adjustment expense ratios were primarily the result of were largely the result of poor performance on certain accounts, primarily in Maiden US and were partially offset by a lower commission and other acquisition expense ratio as a result of reductions in ceding commission from loss sensitive contract features, primarily written by Maiden US.
The combined ratio decreased to 95.8% for year ended December 31, 2012 compared to 97.3% in 2011, reflecting generally stable loss ratios and a lower commission and other acquisition expense ratio, which reflects ongoing changes in this segments mix of business and modifications to the Reinsurance Agreement's ceding commission.
At this time, Maiden Bermuda uses trust accounts primarily to meet collateral requirements - cash and cash equivalents and investments pledged in favor of ceding companies in order to comply with relevant insurance regulations.
In October 2013, the Company completed a public offering of three million three hundred thousand 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 issuance costs of $5.3 million. The Preference Shares - Series B are not redeemable and mandatorily convertible on September 15, 2016. The net proceeds from the offering are being used for continued support and development of our reinsurance business and for other general corporate purposes.
On August 22, 2012, the Company issued six million 8.25% Preference Shares - Series A, par value $0.01 per share, at $25 per share. The Company received net proceeds of $145.0 million from the offering. Dividends on the Preference Shares - Series A are non-cumulative. Consequently, in the event dividends are not declared on the Preference Shares for any dividend period, holders of Preference Shares - Series A will not be entitled to receive a dividend for such period, and such undeclared dividend will not accrue and will not be payable. The holders of Preference Shares - Series A will be entitled to receive dividend payments only when, as and if declared by the Company's board of directors or a duly authorized committee of the board of directors. Any such dividends will be payable from, and including, the date of original issue on a non-cumulative basis, quarterly in arrears. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 8.25% of the $25 liquidation preference per annum.
The value of the common shares issued to purchasers of the Trust Preferred Securities are being carried as a reduction of the liability for the Trust Preferred Securities with the value being amortized against the Company’s earnings over the 30-year term of the Trust Preferred Securities. At December 31, 2013 and 2012, the unamortized amount carried as a reduction of the Company’s liability for the junior subordinated debt was $26.1 million and $26.2 million, respectively.