Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. Amounts in the following discussion may not reconcile due to rounding differences.
Note on Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements that are intended to be covered by the safe harbors created by The Private Securities Litigation Reform Act of 1995. When we use words such as “anticipate,” “intend,” “plan,” “believe,” “estimate,” “expect,” or similar expressions, we do so to identify forward-looking statements. Examples of forward-looking statements include the plans and objectives of management for future operations, including those relating to future growth of our business activities and availability of funds, projections of the impact of potential errors or misstatements in our financial statements, estimates of the impact of material weaknesses in our internal control over financial reporting, and are based on current expectations that involve assumptions that are difficult or impossible to predict accurately and many of which are beyond our control. Actual results may differ materially from those expressed or implied in these statements as a result of significant risks and uncertainties, including, but not limited to, non-receipt of expected payments from insureds or reinsurers, changes in interest rates, a downgrade in the financial strength ratings of our insurance subsidiaries, the effect of the performance of financial markets on our investment portfolio, the amounts, timing and prices of any share repurchases made by us under our share repurchase program, development of claims and the effect on loss reserves, accuracy in projecting loss reserves, the cost and availability of reinsurance coverage, the effects of emerging claim and coverage issues, changes in the demand for our products, our degree of success in integrating acquired businesses, the effect of general economic conditions, state and federal legislation, regulations and regulatory investigations into industry practices, the impact of known or potential errors or misstatements in our financial statements, our ability to timely and effectively remediate the material weaknesses in our internal control over financial reporting and implement effective internal control over financial reporting and disclosure controls and procedures in the future, risks associated with conducting business outside the United States, the impact of Brexit, developments relating to existing agreements, disruptions to our business relationships with Maiden Holdings, Ltd. or National General Holdings Corp., breaches in data security or other disruptions with our technology, heightened competition, changes in pricing environments, and changes in asset valuations. Additional information about these risks and uncertainties, as well as others that may cause actual results to differ materially from those projected, is contained in our filings with the SEC, including our Annual Report on Form 10-K for the year ended
December 31, 2016
, and our quarterly reports on Form 10-Q. The projections and statements in this report speak only as of the date of this report and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
Overview
We are a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. We provide insurance coverage for small businesses and products with high volumes of insureds and loss profiles that we believe are predictable. We target lines of insurance that we believe generally are under served by the market. We have grown by hiring teams of underwriters with expertise in our specialty lines, through acquisitions of companies and assets that, in each case, provide access to distribution networks and renewal rights to established books of specialty insurance business. We have operations in three business segments:
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Small Commercial Business
. We provide workers’ compensation, commercial package and other commercial insurance lines produced by wholesale agents, retail agents and brokers in the United States.
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•
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Specialty Risk and Extended Warranty
. We provide coverage for consumer and commercial goods and custom designed coverages, such as accidental damage plans and payment protection plans offered in connection with the sale of consumer and commercial goods, in the United States and Europe, and certain niche property, casualty and specialty liability risks in the United States and Europe, including general liability, employers’ liability and professional and medical liability.
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Specialty Program
. We write commercial insurance for narrowly defined classes of insureds, requiring an in-depth knowledge of the insured’s industry segment, through general and other wholesale agents.
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We transact business primarily through our insurance subsidiaries, the majority of which are domiciled in the United States. We also transact business through insurance subsidiaries domiciled internationally, primarily in Bermuda and Europe. We are authorized to write business in all 50 states, the District of Columbia, and Puerto Rico. We have insurance operations in the United Kingdom, Ireland and Luxembourg and are authorized to write business throughout the European Union. Through our subsidiary, AmTrust at Lloyd's, we are licensed to underwrite business internationally in locations where Lloyd's is licensed. Our principal operating subsidiaries are rated "A"(Excellent) by A.M. Best Company ("A.M. Best").
For the three and nine months ended
September 30, 2017
, our results of operations include activity of entities we acquired either in 2016 or subsequent to
September 30, 2016
, primarily:
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PDP Group, Incorporated, PDP Holdings, Inc., and Pitcher & Doyle, ULC (collectively, "PDP") - Specialty Risk and Extended Warranty segment
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•
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AmeriHealth Casualty Insurance Company (now called AHC Insurance Company, "AHC") - Small Commercial Business segment
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•
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ANV Holding B.V. and its affiliates (collectively, "ANV") - Specialty Risk and Extended Warranty segment
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•
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Assure Space - Specialty Risk and Extended Warranty segment
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First Nationwide Title Insurance Agency - Specialty Risk and Extended Warranty segment
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Insurance, particularly workers’ compensation, is generally affected by seasonality. The first quarter generally produces greater premiums than subsequent quarters. Nevertheless, the impact of seasonality on our Small Commercial Business and Specialty Program segments has not been significant. We believe that this is because we serve many small businesses in different geographic locations. We believe seasonality may be muted by our acquisition activity. Additionally, our Specialty Risk and Extended Warranty segment may be impacted by the seasonality of the automotive and consumer electronic markets.
We evaluate our operations by monitoring key measures of growth and profitability, including return on equity and combined ratio. Our return on equity was
(26.1)%
and
13.5%
for the
three
months ended
September 30, 2017
and
2016
, respectively, and
(7.9)%
and
16.8%
for the
nine
months ended
September 30, 2017
and
2016
, respectively. Our overall financial objective is to produce a return on equity of 12.0%-15.0% over the long-term. In addition, we target a combined ratio of 95.0% or lower over the long term, while seeking to maintain optimal operating leverage in our insurance subsidiaries commensurate with our A.M. Best rating objectives. Our combined ratio was
134.4%
and
109.8%
for the
three
and nine months ended
September 30, 2017
, respectively, and
93.2%
and
92.2%
for the three and
nine
months ended September 30,
2016
, respectively. Although we did not achieve our key growth and profitability measures for the three and nine months ended
September 30, 2017
, we do not consider this to be a trend. As described below in "Consolidated Results of Operations for the Three and Nine Months Ended
September 30, 2017
and
2016
(Unaudited)," we experienced catastrophe losses in our Small Commercial Business segment from Hurricanes Harvey, Irma and Maria and the earthquake in Mexico, prior period adverse reserve development in all of our segments, higher professional service fees and a higher effective tax rate this quarter as compared to the same quarter a year ago.
A key factor in achieving our targeted combined ratio is a continuous focus on our expense ratio. Our strategy across our segments is to maintain premium rates, deploy capital judiciously, manage our expenses and focus on the businesses in which we have expertise, which we believe should provide opportunities for greater returns. Investment income is also 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 received from premiums for significant periods of time. Our net investment income was
$61.1 million
and
$59.9 million
for the
three
months ended
September 30, 2017
and
2016
, respectively, and
$173.7 million
and
$160.1 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
Adverse Loss Development Cover Agreement
Effective June 30, 2017, we entered into an adverse loss development cover agreement (the "agreement") with Premia Reinsurance Ltd. ("Premia"). Under the agreement, Premia will pay us for ultimate net losses paid by us in excess of a retention of
$5,963 million
, subject to an aggregate limit of
$1,025 million
, which provides
$400 million
of coverage in excess of our carried loss reserves as of
March 31, 2017
in the amount of approximately
$6,590 million
.
The consideration for this agreement is a
$675 million
payment, plus an annual claims monitoring fee, of which
$50 million
represents a payment for the coverage above the carried loss reserves of approximately
$6,590 million
.
The agreement has been accounted for as retroactive reinsurance, which resulted in a pre-tax loss of approximately
$59 million
, including the
$50 million
payment mentioned above and approximately
$9 million
representing the net present value of our obligation to pay
$1 million
annually in claims administration monitoring fees to Premia for up to
30
years. For the three and nine months periods ended
September 30, 2017
, we recorded
$327 million
and $400 million, respectively, of net adverse loss development, resulting in a
$337 million
deferred gain as of September 30, 2017. We will recognize the deferred gain in earnings over the estimated claim settlement period.
Restatement of Previously Issued Financial Statements
On March 14, 2017, the Audit Committee of our Board of Directors, in consultation with management and our current and former independent registered public accounting firms, concluded that our previously issued consolidated financial statements for the fiscal years 2014 and 2015 (including each of the four quarters within fiscal year 2015), as well as for the first three quarters of fiscal year 2016 needed to be restated to correct errors related to revenue recognition and bonus accruals, as well as other adjustments. The effects of the restatement are reflected in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The error related to the recognition of revenue for the portion of warranty contract revenue associated with administration services is reflected entirely within the results of operations for our Specialty Risk and Extended Warranty segment, while the remaining errors are reflected within the results of operations of all of our segments.
We included restated consolidated financial statements for fiscal years 2014 and 2015 in Note 3. “Restatement of Previously Issued Consolidated Financial Statements” of our Annual Report on Form 10-K for the year ended December 31, 2016. We included restated quarterly financial statements for the period ended March 31, 2016 in our Form 10-Q for the period ended March 31, 2017. We filed amended Quarterly Reports on Form 10-Q/A for the periods ended June 30, 2016 and September 30, 2016.
Principal Revenue and Expense Measures and Key Ratios
The following summary further describes our principal revenue and expense measures and key ratios that we use to evaluate our results of operations:
Gross Written Premium.
Gross written premium represents estimated premiums from each insurance policy that we write, including as a servicing carrier for assigned risk plans, during a reporting period based on the effective date of the individual policy. Certain policies that we underwrite are subject to premium audit at that policy’s cancellation or expiration. The final actual gross premiums written may vary from the original estimate based on changes to the final rating parameters or classifications of the policy.
Net Written Premium.
Net written premium is gross written premium less that portion of premium that we cede to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on the contractual formula contained in the individual reinsurance agreements.
Net Earned Premium.
Net earned premium is the earned portion of our net written premiums. We earn insurance premiums on a pro-rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums, which are earned in subsequent periods over the remaining term of the policy. Our workers’ compensation insurance and commercial package policies typically have a term of one year. Thus, for a one-year policy written on July 1, 2017 for an employer with a constant payroll during the term of the policy, we would earn half of the premiums in 2017 and the other half in 2018. We earn our specialty risk and extended warranty coverages over the estimated exposure time period. The terms vary depending on the risk. The coverages range in duration from one month to 120 months.
Service and Fee Income.
We currently generate service and fee income from the following sources:
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Product warranty registration and service — Our Specialty Risk and Extended Warranty business generates fee revenue for product warranty registration and claims handling services provided to unaffiliated third party retailers, manufacturers and dealerships. Additionally, we provide credit monitoring services for a fee.
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•
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Servicing carrier — We act as a servicing carrier for workers’ compensation assigned risk plans in multiple states. In addition, we also offer claims adjusting and loss control services for fees to unaffiliated third parties.
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Management services — We provide services to insurance consumers, traditional insurers and insurance producers by offering flexible and cost effective alternatives to traditional insurance tools in the form of various risk retention groups and captive management companies, as well as management of workers’ compensation and commercial property programs. We also offer programs and alternative funding options for non-profit and public sector organizations for the management of their state unemployment insurance obligations.
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Insurance fees — We recognize fee income associated with the issuance of workers’ compensation policies for installment fees, in jurisdictions where it is permitted and approved, and reinstatement fees, which are fees charged to reinstate a policy after it has been canceled for non-payment, in jurisdictions where it is permitted and approved. Additionally, we recognize broker commissions and policy management fees associated with general liability policies placed by one of our managing general agencies.
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Broker services — We provide brokerage services to Maiden Holdings Ltd. ("Maiden") in connection with our reinsurance agreement for which we receive a fee.
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•
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Asset management services — We currently manage the investment portfolios of certain subsidiaries of Maiden, National General Holdings Corp. ("NGHC") and ACP Re, Ltd. ("ACP Re") for which we receive a management fee.
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Information technology services — We provide information technology, printing, mailing and lockbox services to NGHC and its affiliates for a fee. As discussed in Note 10. "Related Party Transactions — Significant Transactions with National General Holding Corp. — Sale of NPS and Termination of Master Service Agreement," during the third quarter of 2017, we sold the personal lines policy management system we had developed for NGHC, and terminated the master services agreement with NGHC by which we provided these information technology services. For this reason, we expect the service and fee income derived from these services to significantly decrease going forward.
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As discussed in Note 16. "Subsequent Event," the Company and Mayfield Holdings LLC (“Mayfield”), entered into a Contribution and Stock Purchase Agreement (the “Acquisition Agreement”) with FeeCo Holdings LP (“Investor”), a newly-formed investment vehicle owned by affiliates of Madison Dearborn Partners, related to the Investor’s acquisition of a majority interest in the portion of our U.S. fee-based business that (a) acts as a managing general agent for the distribution, underwriting and procurement of property and casualty insurance on behalf of certain of our affiliates and other insurance carriers and (b) designs, develops, markets and acts as a third party administrator for programs for service contracts, limited warranties and replacement plans (the “Business”).
Under the terms of the Acquisition Agreement, it is anticipated that (1) Investor will contribute to Mayfield
$210 million
in cash in exchange for
51%
of the common units of Mayfield (an entity formed to hold the Business), (2) we will, directly or indirectly, contribute into Mayfield a portion of the entities comprising the Business in exchange for
49%
of the common units of Mayfield (with an implied value of approximately
$200 million
) and (3) one or more subsidiaries of Mayfield will acquire from us, directly or indirectly, the remaining portion of the entities comprising the Business in exchange for a base cash purchase price of approximately
$950 million
(using proceeds from the cash contribution from Investor and the third-party indebtedness described below). The cash purchase price will be subject to customary purchase price adjustments based upon the amount of cash, indebtedness, transaction expenses and net working capital of Mayfield and its subsidiaries at the closing of the transactions relative to a target amount. In connection with the transaction, it is expected that one or more subsidiaries of Mayfield will incur new third-party indebtedness of approximately
$750 million
.
Following the closing of the transaction, we intend to cease consolidating the results of the Business within our financial statements and will report our ownership interest in Mayfield using the equity method of accounting.
Closing of the transaction is expected to occur in the first half of 2018, and is subject to certain customary conditions, including: (i) receipt of consents, authorizations and approvals from governmental authorities, including antitrust and insurance regulatory authorities; (ii) completion of certain internal restructuring steps; (iii) certain third-party consents; and (iv) certain other customary closing conditions. We will have the opportunity to continue to provide insurance coverage related to the Business, but anticipate this transaction will have a significant impact on our service and fee income post-closing.
Net Investment Income and Realized Gains and (Losses).
We invest our statutory surplus funds and the funds supporting our insurance liabilities primarily in cash and cash equivalents, fixed maturity and equity securities. Our net investment income includes interest and dividends earned on our invested assets. We report net realized gains and losses on our investments separately from our net investment income. Net realized gains occur when we sell our investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment. We classify equity securities and our fixed maturity securities primarily as available-for-sale. We report net unrealized gains (losses) on those securities classified as available-for-sale separately within accumulated other comprehensive income on our consolidated balance sheets. Additionally, we have a small portfolio of fixed maturity and equity securities classified as trading securities. We report unrealized gains (losses) on those securities classified as fixed maturity and trading securities within realized gains (losses).
Loss and Loss Adjustment Expenses Incurred.
Loss and loss adjustment expenses (“LAE”) incurred represent our largest expense item and, for any given reporting period, include estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and loss adjustment expenses related to estimates of future claim payments based on case-by-case valuations and statistical analysis. We seek to establish all reserves at the most likely ultimate exposure based on our historical claims experience. It is typical for our more serious bodily injury claims to take several years to settle and we revise our estimates as we receive additional information about the condition of injured employees and claimants and the costs of their medical treatment. Our ability to estimate loss and loss adjustment expenses accurately at the time of pricing our insurance policies is a critical factor in our profitability.
Acquisition Costs and Other Underwriting Expenses.
Acquisition costs and other underwriting expenses consist of policy acquisition expenses, salaries and benefits and general and administrative expenses, net of ceding commissions. These items are described below:
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Policy acquisition expenses comprise commissions directly attributable to those agents, wholesalers or brokers that produce premiums written on our behalf. In most instances, we pay commissions based on collected premium, which reduces our credit risk exposure associated with producers in case a policyholder does not pay a premium. We pay state and local taxes, licenses and fees, assessments and contributions to various state guaranty funds based on our premiums or losses in each state. Surcharges that we may be required to charge and collect from insureds in certain jurisdictions are recorded as accrued liabilities, rather than expense. These expenses are offset by ceding commissions received.
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Salaries and benefit expenses are comprised of salary and benefit costs associated with employees that are directly involved in the origination, issuance and maintenance of policies, claims adjustment and accounting for insurance transactions that are associated with the successful acquisition of insurance contracts. We classify salaries and benefits associated with employees that are involved in fee generating activities as other expenses.
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•
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General and administrative expenses are comprised of other costs associated with our insurance activities, such as federal excise tax, postage, telephones and internet access charges, as well as legal and auditing fees and board and bureau charges.
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•
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Ceding commission on reinsurance transactions is derived from ceding gross written premium to third party reinsurers, and is netted against acquisition costs and other underwriting expenses. In connection with the Maiden Quota Share, which is our primary source of ceding commissions, the amount we receive is a blended rate based on a contractual formula contained in the individual reinsurance agreements, and the rate may not correlate specifically to the cost structure of the individual segments. The ceding commissions we receive cover a portion of our deferred direct acquisition costs and a portion of other underwriting expenses. Ceding commissions received from reinsurance transactions that represent recovery of deferred direct acquisition costs are recorded as a reduction of unamortized deferred direct acquisition costs and the net amount is charged to expense in proportion to net earned premium recognized. Ceding commissions received from reinsurance transactions that represent the recovery of other underwriting expenses are recognized in the consolidated statements of income over the insurance contract period in proportion to the insurance protection provided and classified as a reduction of acquisition costs and other
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underwriting expenses. Ceding commissions received, but not yet earned, that represent the recovery of other underwriting expenses are classified as a component of accrued expenses and other current liabilities in the consolidated balance sheets. We allocate earned ceding commissions to our segments based on each segment’s proportionate share of total acquisition costs and other underwriting expenses recognized during the period.
Gain (loss) on Investment in Life Settlement Contracts
. The gain (loss) on investment in life settlement contracts includes the gain (loss) on acquisition or disposition of life settlement contracts, the gain (loss) realized upon a mortality event and the change in fair value of the investments in life settlements as evaluated at the end of each reporting period. We determine fair value based upon our estimate of the discounted cash flow related to policies (net of reserves for improvements in mortality, the possibility that the high net worth individuals represented in our portfolio may have access to better health care, the volatility inherent in determining the life expectancy of insureds with significant reported health impairments and the future expenses related to the administration of the portfolio), which incorporates current life expectancy assumptions, premium payments, credit exposure to the insurance companies that issued the life insurance policies and the rate of return that a buyer would require on the policies as no comparable market pricing is available. The gain (loss) realized upon a mortality event is the difference between the death benefit received and the recorded fair value of that particular policy. We allocate gain (loss) on investment in life settlement contracts to our segments based on gross written premium by segment.
Loss Ratio.
The loss ratio is a measure of the underwriting profitability of an insurance company's business. Expressed as a percentage, this is the ratio of net losses and LAE incurred to net premiums earned.
Expense Ratio.
The expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs and other underwriting expenses to net premiums earned. As we allocate certain acquisition costs and other underwriting expenses based on premium volume to our segments, the net expense ratio on a segment basis may be impacted period over period by a shift in the mix of net written premium.
Combined Ratio.
The combined ratio is a measure of an insurance company's overall underwriting profit. This is the sum of the net loss and net expense ratios. If the combined ratio is at or above 100 percent, an insurance company cannot be profitable without net investment income, and may not be profitable if net investment income is insufficient.
Net Premiums Earned less Expenses Included in Combined Ratio (Underwriting Income).
Underwriting income is a measure of an insurance company’s overall operating profitability before items such as net investment income, interest expense and income taxes.
Return on Equity.
We calculate return on equity by dividing net income by the average of shareholders’ equity.
Critical Accounting Policies
Our discussion and analysis of our results of operations, financial condition and liquidity are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities as of the date of the financial statements. As more information becomes known, these estimates and assumptions could change, which would have an impact on actual results that may differ materially from these estimates and judgments under different assumptions. We have not made any changes in estimates or judgments that have had a significant effect on the reported amounts as previously disclosed in our Annual Report on Form 10-K for the fiscal period ended
December 31, 2016
.
Results of Operations
Consolidated Results of Operations for the Three and Nine Months Ended
September 30, 2017
and
2016
(Unaudited)
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2017
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2016
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2017
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2016
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(Amounts in Thousands)
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(As restated)
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(As restated)
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Gross written premium
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$
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1,990,775
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$
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2,034,098
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$
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6,456,802
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$
|
6,040,284
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Net written premium
|
$
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1,175,757
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$
|
1,216,050
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|
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$
|
3,891,725
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$
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3,705,165
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Change in unearned premium
|
17,120
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(19,814
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)
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(95,607
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)
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(252,895
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)
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Net earned premium
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1,192,877
|
|
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1,196,236
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3,796,118
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3,452,270
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Service and fee income (related parties - three months $55,931; $19,367 and nine months $81,221; $61,137)
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180,505
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133,857
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486,447
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|
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386,968
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Net investment income
|
61,103
|
|
|
59,919
|
|
|
173,654
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|
160,079
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Net realized gain on investments
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24,520
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|
8,230
|
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56,590
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|
31,304
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Total revenues
|
1,459,005
|
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1,398,242
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|
|
4,512,809
|
|
|
4,030,621
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Loss and loss adjustment expense
|
1,266,118
|
|
|
811,048
|
|
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3,130,930
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|
|
2,310,514
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Acquisition costs and other underwriting expenses (net of ceding commission - related party - three months $136,316; $158,216 and nine months $448,249; $440,561)
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337,086
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303,992
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1,038,496
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|
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870,937
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Other
|
177,350
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|
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139,251
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|
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540,063
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|
|
402,862
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Total expenses
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1,780,554
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1,254,291
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|
|
4,709,489
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|
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3,584,313
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(Loss) income before other income, (benefit) provision for income taxes, equity in earnings of unconsolidated subsidiaries and non-controlling interest
|
(321,549
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)
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143,951
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|
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(196,680
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)
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446,308
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Other income (loss):
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Interest expense (net of interest income - related party - three months $1,169; $2,061 and nine months $3,487; $6,436)
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(22,873
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)
|
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(22,124
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)
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(70,703
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)
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(55,910
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)
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(Loss) gain on investment in life settlement contracts net of profit commission
|
(924
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)
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5,485
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6,425
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28,891
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Foreign currency loss
|
(62,819
|
)
|
|
(10,880
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)
|
|
(139,735
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)
|
|
(78,108
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)
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Gain on acquisition
|
—
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|
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—
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|
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—
|
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48,775
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Gain on sale of policy management system
|
186,755
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|
|
—
|
|
|
186,755
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|
|
—
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Total other income (loss)
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100,139
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|
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(27,519
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)
|
|
(17,258
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)
|
|
(56,352
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)
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(Loss) income (benefit) before provision for income taxes, equity in earnings of unconsolidated subsidiaries and non-controlling interest
|
(221,410
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)
|
|
116,432
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|
|
(213,938
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)
|
|
389,956
|
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(Benefit) provision for income taxes
|
(62,588
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)
|
|
23,185
|
|
|
(60,959
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)
|
|
65,952
|
|
(Loss) income before equity in earnings of unconsolidated subsidiaries
|
(158,822
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)
|
|
93,247
|
|
|
(152,979
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)
|
|
324,004
|
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Equity in earnings of unconsolidated subsidiaries – related parties
|
—
|
|
|
1,954
|
|
|
73,488
|
|
|
12,532
|
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Net (loss) income
|
$
|
(158,822
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)
|
|
$
|
95,201
|
|
|
$
|
(79,491
|
)
|
|
$
|
336,536
|
|
Net income attributable to non-controlling interest and redeemable non-controlling interest of subsidiaries
|
718
|
|
|
(2,975
|
)
|
|
(17,010
|
)
|
|
(12,809
|
)
|
Net (loss) income attributable to AmTrust Financial Services, Inc.
|
$
|
(158,104
|
)
|
|
$
|
92,226
|
|
|
$
|
(96,501
|
)
|
|
$
|
323,727
|
|
Dividends on preferred stock
|
(16,571
|
)
|
|
(11,576
|
)
|
|
(49,713
|
)
|
|
(31,943
|
)
|
Net (loss) income attributable to AmTrust common shareholders
|
$
|
(174,675
|
)
|
|
$
|
80,650
|
|
|
$
|
(146,214
|
)
|
|
$
|
291,784
|
|
|
|
|
|
|
|
|
|
Key measures:
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
106.1
|
%
|
|
67.8
|
%
|
|
82.5
|
%
|
|
66.9
|
%
|
Expense ratio
|
28.3
|
%
|
|
25.4
|
%
|
|
27.3
|
%
|
|
25.3
|
%
|
Combined ratio
|
134.4
|
%
|
|
93.2
|
%
|
|
109.8
|
%
|
|
92.2
|
%
|
Consolidated Results of Operations for the Three Months Ended
September 30, 2017
and
2016
(Unaudited)
Gross Written Premium.
Gross written premium decreased
$43.3 million
, or
(2.1)%
, to
$1,990.8 million
from
$2,034.1 million
for the
three
months ended
September 30, 2017
and
2016
, respectively. The decrease in our gross written premium was primarily attributable to the termination of certain programs in our Specialty Program segment and was offset by an increase in our Small Commercial Business and Specialty Risk and Extended Warranty segments. The majority of the increase in the Small Commercial Business segment was attributable to an increase in the number of workers' compensation policies issued, partially offset by a slight decrease in premium rate. The increase in our Specialty Risk and Extended Warranty segment was attributable to our acquisition of ANV, which contributed approximately $115 million of gross written premium.
Net Written Premium
. Net written premium decreased
$40.3 million
, or
(3.3)%
, to
$1,175.8 million
from
$1,216.1 million
for the
three
months ended
September 30, 2017
and
2016
, respectively. The decrease is primarily related to the decrease in gross written premium, and a slight decrease in the retention of gross written premium to
59.1%
from
59.8%
for the three months ended
September 30, 2017
and
2016
, respectively. The decrease in retention resulted from an increase, as compared to the same period
2016
, in business written that is reinsured under the Maiden Quota Share agreement or with other third party reinsurers.
Net Earned Premium.
Net earned premium decreased
$3.4 million
, or
(0.3)%
, to
$1,192.9 million
from
$1,196.2 million
for the
three
months ended
September 30, 2017
and
2016
, respectively. The decrease in net earned premium resulted from a decrease in gross written premium in the third quarter of
2017
compared to the third quarter of
2016
.
Service and
Fee Income.
Service and fee income increased
$46.6 million
, or
34.8%
, to
$180.5 million
from
$133.9 million
for the
three
months ended
September 30, 2017
and
2016
, respectively. The increase includes a $38 million reclass of an amount previously included as a component of Acquisition Costs and Other Underwriting Expenses in the first half of 2017. The Specialty Risk and Extended Warranty segment fees increased by approximately $8 million, primarily from acquisitions of PDP, First Nationwide Title Insurance Agency and Assure Space. Fees for services provided to Maiden and NGHC increased approximately $6 million for the third quarter of
2017
compared to the third quarter of
2016
.
Net Investment Income.
Net investment income increased
$1.2 million
, or
2.0%
, to
$61.1 million
from
$59.9 million
for the
three
months ended
September 30, 2017
and
2016
, respectively. The increase was due to investment income from available for sale securities, which resulted primarily from having higher average invested assets arising from our investment of certain proceeds from our $300 million private placement, preferred stock offerings occurring in
2016
and investment portfolios obtained through acquisitions.
Net Realized Gains/(Loss) on Investments.
We had net realized gains on investments of
$24.5 million
and
$8.2 million
for the
three
months ended
September 30, 2017
and
2016
, respectively. The increase related to an increase in sales of securities in gain positions.
Loss and Loss Adjustment Expenses; Loss Ratio.
Loss and loss adjustment expenses increased
$455.1 million
, or
56.1%
, to
$1,266.1 million
for the
three
months ended
September 30, 2017
from
$811.0 million
for the
three
months ended
September 30, 2016
. Our loss ratio for the
three
months ended
September 30, 2017
and
2016
was
106.1%
and
67.8%
, respectively. Included in the
106.1%
loss ratio was $326.9 million of prior period adverse reserve development representing
27.4%
of the loss ratio and 5.2% of the prior year-ending net reserve balance, which is covered under the ADC agreement. The majority of the development related to our Specialty Program segment, which has led to re-underwriting, rate changes, and/or termination of certain commercial auto and general liability programs in that segment. In addition, the increase in our loss ratio was partially attributable to net catastrophe losses of $54.2 million (representing 4.5% of the loss ratio).
Acquisition Costs and Other Underwriting Expense; Expense Ratio.
Acquisition costs and other underwriting expenses increased
$33.1 million
, or
10.9%
, to
$337.1 million
for the
three
months ended
September 30, 2017
from
$304.0 million
for the
three
months ended
September 30, 2016
. During the three months ended September 30, 2017, we reclassed approximately $31 million of net miscellaneous income, which was included as a reduction to Acquisition Costs and Other Underwriting Expense during the first half of 2017. The components of the reclass included recording $38 million of Service and Fee Income and $7 million of Other Expense. Acquisition costs and other underwriting expenses in each period were reduced by ceding commission primarily earned through the Maiden Quota Share, through which we receive a ceding commission of 31% of premiums ceded for all business except retail commercial package business, and 34.375% for retail commercial package business. The ceding commission earned during the
three
months ended
September 30, 2017
and
2016
was $138.6 million and
$161.3 million
, respectively. The decrease in ceding commission earned was a result of a decrease in total commission expense, which resulted in receiving a smaller ceding commission from the Maiden Quota Share. Our ceding commission earned from the Maiden Quota Share as a percentage of our total commission expense was consistent period to period. On a consolidated basis, we retained
59.1%
of our gross written premium for the
three
months ended
September 30, 2017
, compared to
59.8%
for the
three
months ended
September 30, 2016
as business written by ANV does not participate in the Maiden Quota share. Our overall expense ratio was
28.3%
and
25.4%
during the
three
months ended
September 30, 2017
and
2016
, respectively. The increase in the expense ratio was primarily a result of higher direct acquisition costs related to our 2016 acquisition of ANV, and higher professional service fees.
(Loss) Income Before Other Income (Expense), Income Taxes and Equity Earnings of Unconsolidated Subsidiaries
. (Loss) Income before other income (expense), income taxes and equity earnings of unconsolidated subsidiaries decreased
$465.5 million
, or
323.4%
, to
$(321.5) million
for the
three
months ended
September 30, 2017
from
$144.0 million
for the
three
months ended
September 30, 2016
. The decrease primarily resulted from an increase in loss and loss adjustment expenses caused by the adverse loss development and net catastrophe losses.
Net Interest Expense.
Net interest expense for the
three
months ended
September 30, 2017
was
$22.9 million
, compared to
$22.1 million
for the same period in
2016
. The increase related to interest expense on real estate loans, and a decrease in interest income on our loan to ACP Re, partially offset by lower interest expense on promissory notes due to a pay down of principal on the notes.
Net (Loss) Gain on Investment in Life Settlement Contracts.
We recognized a loss on investment in life settlement contracts of
$0.9 million
for the
three
months ended
September 30, 2017
compared to a gain of
$5.5 million
for the
three
months ended
September 30, 2016
. The decrease primarily related to a loss recognized on the sale of 114 policies during the three months ended September 30, 2017, partially offset by an increase in the value of the remaining policies during the same period. Additionally, two policies matured during the
three
months ended
September 30, 2017
and no policies matured during the
three
months ended
September 30, 2016
.
Foreign Currency Gain (Loss).
The foreign currency transaction loss was
$62.8 million
during the
three
months ended
September 30, 2017
compared to a loss of
$10.9 million
during the same period in
2016
. The loss for the three months ended September 30, 2017 related to the weakening of the U.S. dollar compared to the British pound and Euro, which negatively impacts our Bermuda reinsurance subsidiary that reinsures European-denominated risks. The loss for the prior period resulted from the weakening of the British pound sterling compared to the Euro, which negatively impacts our U.K. insurance subsidiaries that write Euro-denominated risks that are re-valued at the end of the quarter.
Provision (Benefit) for Income Tax.
Income tax benefit for the three months ended
September 30, 2017
was
$62.6 million
, which resulted in an effective tax rate of 28.3% on the pre-tax loss, compared to an income tax provision of $23.2 million, which resulted in an effective tax rate of
19.9%
on the pre-tax income for the three months ended September 30, 2016. The change from income tax expense to an income tax benefit in the three months ended September 30, 2017 compared to the three months ended September 30, 2016, resulted from recognizing a pre-tax loss for the three months ended September 30, 2017 compared to recognizing pre-tax income for the three months ended September 30, 2016.
Equity in Earnings of Unconsolidated Subsidiaries - Related Parties
. Equity in earnings of unconsolidated subsidiaries – related parties was
$0.0 million
and
$2.0 million
for the
three
months ended
September 30, 2017
and
2016
, respectively. The decrease resulted from discontinuing the equity method of accounting related to our ownership of NGHC shares of common stock in the second quarter of 2017.
Consolidated Results of Operations for the Nine Months Ended
September 30, 2017
and
2016
(Unaudited)
Gross Written Premium.
Gross written premium increased
$416.5 million
, or
6.9%
, to
$6,456.8 million
from
$6,040.3 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The increase was attributable to growth in our Small Commercial Business and Specialty Risk and Extended Warranty segments. The majority of the increase in the Small Commercial Business segment was attributable to an increase in the number of workers' compensation policies issued and the acquisition of Republic, which contributed approximately $81 million of additional gross written premium, partially offset by a slight decrease in premium rate. The increase in our Specialty Risk and Extended Warranty segment was attributable to our acquisition of ANV, which contributed approximately $467 million of gross written premium. The increase in our gross written premium was partially offset by the termination of certain workers' compensation and general liability programs in our Specialty Program segment.
Net Written Premium
. Net written premium increased
$186.6 million
, or
5.0%
, to
$3,891.7 million
from
$3,705.2 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. Net written premium increased primarily due to an increase in gross written premium, partially offset by a decrease in the retention of gross written premium to
60.3%
from
61.3%
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The decrease in retention resulted from an increase, as compared to the same period in
2016
, in business written that is reinsured under the Maiden Quota Share agreement or with other third party reinsurers.
Net Earned Premium.
Net earned premium increased
$343.8 million
, or
10.0%
, to
$3,796.1 million
from
$3,452.3 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The increase primarily resulted from an increase in gross written premium during the nine months ended September 30,
2017
compared to the nine months ended September 30,
2016
, and policies assumed from the ANV acquisition, which had accelerated earnings patterns.
Service and
Fee Income.
Service and fee income increased
$99.5 million
, or
25.7%
, to
$486.4 million
from
$387.0 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The increase includes $38 million related to European service and fee business. The Specialty Risk and Extended Warranty segment increased fees incrementally by approximately $31 million from acquisitions of PDP, First Nationwide Title Insurance Agency and Assure Space. Fees for services provided to Maiden and NGHC increased approximately $19 million for the first nine months of
2017
compared to the first nine months of
2016
.
Net Investment Income.
Net investment income increased
$13.6 million
, or
8.5%
, to
$173.7 million
from
$160.1 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The increase resulted primarily from having higher average invested assets during the
nine
months ended
September 30, 2017
compared to the same period in
2016
, primarily arising from our investment of certain proceeds from
2016
preferred stock offerings and investment portfolios obtained through acquisitions.
Net Realized Gains/(Loss) on Investments.
We had net realized gains on investments of
$56.6 million
and
$31.3 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The increase related primarily to losses from other-than-temporary impairment of securities of $26 million during the nine months ended September 30, 2016.
Loss and Loss Adjustment Expenses; Loss Ratio.
Loss and loss adjustment expenses increased
$820.4 million
, or
35.5%
, to
$3,130.9 million
for the
nine
months ended
September 30, 2017
from
$2,310.5 million
for the
nine
months ended
September 30, 2016
. Our loss ratio for the
nine
months ended
September 30, 2017
and
2016
was
82.5%
and
66.9%
, respectively. Included in the
82.5%
loss ratio was $418.9 million (representing 11.0% of the loss ratio and 6.7% of the prior year-ending net reserve balance) of prior period adverse reserve development primarily in our Small Commercial Business and Specialty Program segments, which has led to re-underwriting, rate changes, and/or termination of certain specialty programs that generated the prior period adverse reserve development. In addition, the increase in our loss ratio was partially attributable to catastrophe losses of $103 million (representing 2.7% of the loss ratio).
Acquisition Costs and Other Underwriting Expenses; Expense Ratio.
Acquisition costs and other underwriting expenses increased
$167.6 million
, or
19.2%
, to
$1,038.5 million
for the
nine
months ended
September 30, 2017
from
$870.9 million
for the
nine
months ended
September 30, 2016
. Acquisition costs and other underwriting expenses in each period were reduced by ceding commission primarily earned through the Maiden Quota Share, through which we receive a ceding commission of 31% of premiums ceded for all business except retail commercial package business, and 34.375% for retail commercial package business. The ceding commission earned during the
nine
months ended
September 30, 2017
and
2016
was
$455.9 million
and
$447.8 million
, respectively. Ceding commission increased as a result of increases in gross written premium and a decrease in our retention of gross written premium. On a consolidated basis, we retained 60.3% of our gross written premium for the nine months ended
September 30, 2017
, compared to 61.3% for the nine months ended
September 30, 2016
. Our overall expense ratio was
27.3%
and
25.3%
during the
nine
months ended
September 30, 2017
and
2016
, respectively. The increase in the expense ratio was a result, primarily, of higher direct acquisition costs from our 2016 acquisitions of Republic, Nationale Borg and ANV, and higher professional service fees.
(Loss) Income Before Other Income (Expense), Income Taxes and Equity Earnings of Unconsolidated Subsidiaries
. Income before other income (expense), income taxes and equity earnings of unconsolidated subsidiaries decreased
$643.0 million
, or
144.1%
, to
$(196.7) million
for the
nine
months ended
September 30, 2017
from
$446.3 million
for the
nine
months ended
September 30, 2016
. The decrease resulted primarily from the increase in loss and loss adjustment expense caused by adverse loss development and net catastrophe losses.
Net Interest Expense.
Net interest expense for the
nine
months ended
September 30, 2017
was
$70.7 million
, compared to
$55.9 million
for the same period in
2016
. The increase primarily related to interest expense on additional debt issued and assumed in connection with the Republic acquisition of $1.8 million, a decrease of interest received from our loan to ACP Re of $2.9 million, higher interest expense on real estate loans of $3.0 million along with an overall increase in our use of letters of credit.
Net Gain on Investment in Life Settlement Contracts.
We recognized gains on investment in life settlement contracts of
$6.4 million
for the
nine
months ended
September 30, 2017
compared to
$28.9 million
for the
nine
months ended
September 30, 2016
. The decrease primarily related to a loss recognized on the sale of 114 policies during the three months ended September 30, 2017, partially offset by an increase in the value of the remaining policies during the same period. Four policies matured during the
nine
months ended
September 30, 2017
and three policies matured during the
nine
months ended
September 30, 2016
.
Foreign Currency (Loss) Gain.
The foreign currency transaction loss was
$139.7 million
during the
nine
months ended
September 30, 2017
compared to a loss of
$78.1 million
during the same period in
2016
. The loss for the
nine
months ended September 30, 2017 related to the weakening of the U.S. dollar compared to the British pound and Euro, which negatively impacts our Bermuda reinsurance subsidiary that reinsures European-denominated risks. The loss for the prior period resulted from the weakening of the British pound sterling compared to the Euro, which negatively impacts our U.K. insurance subsidiaries that write Euro-denominated risks that are re-valued at the end of the quarter.
Provision (Benefit) for Income Tax.
Income tax benefit for the nine months ended
September 30, 2017
was
$61.0 million
, which resulted in an effective tax rate of 28.5%, compared to an income tax provision of
$66.0 million
for the nine months ended
September 30, 2016
, which resulted in an effective tax rate of
16.9%
. The change from income tax expense to an income tax benefit in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, resulted from recognizing a pre-tax loss for the nine months ended September 30, 2017 compared to recognizing pre-tax income for the nine months ended September 30, 2016.
Equity in Earnings of Unconsolidated Subsidiaries - Related Parties
. Equity in earnings of unconsolidated subsidiaries – related parties was
$73.5 million
and
$12.5 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The increase resulted primarily from a gain of $68.4 million recognized from our sale of 10.6 million shares of NGHC stock during the nine months ended
September 30, 2017
.
Small Commercial Business Segment Results of Operations for the Three and Nine Months Ended
September 30, 2017
and
2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
(Amounts in Thousands)
|
|
|
(As restated)
|
|
|
|
(As restated)
|
Gross written premium
|
$
|
1,012,663
|
|
|
$
|
998,071
|
|
|
$
|
3,393,240
|
|
|
$
|
3,124,761
|
|
|
|
|
|
|
|
|
|
Net written premium
|
$
|
498,514
|
|
|
$
|
457,871
|
|
|
$
|
1,796,255
|
|
|
$
|
1,684,037
|
|
Change in unearned premium
|
30,565
|
|
|
59,127
|
|
|
(81,687
|
)
|
|
(89,967
|
)
|
Net earned premium
|
529,079
|
|
|
516,998
|
|
|
1,714,568
|
|
|
1,594,070
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense
|
546,219
|
|
|
344,531
|
|
|
1,390,557
|
|
|
1,060,165
|
|
Acquisition costs and other underwriting expenses
|
154,739
|
|
|
134,520
|
|
|
479,559
|
|
|
418,201
|
|
|
700,958
|
|
|
479,051
|
|
|
1,870,116
|
|
|
1,478,366
|
|
Underwriting (loss) income
|
$
|
(171,879
|
)
|
|
$
|
37,947
|
|
|
$
|
(155,548
|
)
|
|
$
|
115,704
|
|
|
|
|
|
|
|
|
|
Key measures:
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
103.2
|
%
|
|
66.6
|
%
|
|
81.1
|
%
|
|
66.5
|
%
|
Expense ratio
|
29.3
|
%
|
|
26.1
|
%
|
|
28.0
|
%
|
|
26.2
|
%
|
Combined ratio
|
132.5
|
%
|
|
92.7
|
%
|
|
109.1
|
%
|
|
92.7
|
%
|
Small Commercial Business Segment Results of Operations for the Three Months Ended
September 30, 2017
and
2016
(Unaudited)
Gross Written Premium.
Gross written premium increased
$14.6 million
, or
1.5%
, to
$1,012.7 million
for the
three
months ended
September 30, 2017
from
$998.1 million
for the
three
months ended
September 30, 2016
. The increase was attributable to an increase in the number of workers' compensation policies issued, partially offset by a slight decrease in premium rate.
Net Written Premium
. Net written premium increased
$40.6 million
, or
8.9%
, to
$498.5 million
for the
three
months ended
September 30, 2017
from
$457.9 million
for the
three
months ended
September 30, 2016
. The increase in net written premium resulted from an increase in gross written premium for the
three
months ended
September 30, 2017
compared to the same period
in
2016
, and an increase in the retention of gross written premium during
2017
compared to
2016
. Our retention of gross written premium for the segment was
49.2%
and
45.9%
for the
three
months ended
September 30, 2017
and
2016
, respectively.
Net Earned Premium.
Net earned premium increased
$12.1 million
, or
2.3%
, to
$529.1 million
for the
three
months ended
September 30, 2017
from
$517.0 million
for the
three
months ended
September 30, 2016
. As premiums written are primarily earned ratably over an annual period, the increase in net earned premium resulted from higher net written premium for the twelve months ended
September 30, 2017
compared to the same period in
2016
.
Loss and Loss Adjustment Expenses; Loss Ratio.
Loss and loss adjustment expenses increased
$201.7 million
, or
58.5%
, to
$546.2 million
for the
three
months ended
September 30, 2017
from
$344.5 million
for the
three
months ended
September 30, 2016
. Our loss ratio for the segment for the
three
months ended
September 30, 2017
increased to
103.2%
compared to
66.6%
for the
three
months ended
September 30, 2016
. The increase in the loss ratio was, primarily, the result of $106 million of adverse reserve development (representing 20.1% of the loss ratio) due to higher severity of claims in New York and soft market conditions in California and the incremental increase in catastrophe losses of $0.3 million (representing 0.1% of the loss ratio). Additionally, a portion of the increase related to higher current accident year selected ultimate losses as compared to the prior period.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio.
Acquisition costs and other underwriting expenses increased
$20.2 million
, or
15.0%
, to
$154.7 million
for the
three
months ended
September 30, 2017
from
$134.5 million
for the
three
months ended
September 30, 2016
. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the three months ended
September 30, 2017
and
2016
of
$63.6 million
and
$71.9 million
, respectively. The segment was allocated ceding commission for its proportionate share of our overall policy acquisition expense. The decrease related to our overall decrease in ceding commission earned during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The expense ratio increased to
29.3%
for the
three
months ended
September 30, 2017
from
26.1%
for the
three
months ended
September 30, 2016
.
Net Earned Premiums less Expense Included in Combined Ratio (Underwriting (Loss) Income).
Net premiums earned less expenses included in combined ratio decreased
$209.8 million
, or
552.9%
, to
$(171.9) million
for the
three
months ended
September 30, 2017
from
$37.9 million
for the
three
months ended
September 30, 2016
. The decrease resulted primarily from an increase in the loss ratio and expense ratio during the
three
months ended
September 30, 2017
compared to the
three
months ended
September 30, 2016
.
Small Commercial Business Segment Results of Operations for the Nine Months Ended
September 30, 2017
and
2016
(Unaudited)
Gross Written Premium.
Gross written premium increased
$268.5 million
, or
8.6%
, to
$3,393.2 million
for the
nine
months ended
September 30, 2017
from
$3,124.8 million
for the
nine
months ended
September 30, 2016
. The increase was attributable to an increase in the number of workers' compensation policies issued, partially offset by a slight decrease in premium rate. In addition, the acquisition of Republic contributed approximately $136 million of incremental gross written premium for the nine months ended
September 30, 2017
.
Net Written Premium
. Net written premium increased
$112.2 million
, or
6.7%
, to
$1,796.3 million
for the
nine
months ended
September 30, 2017
from
$1,684.0 million
for the
nine
months ended
September 30, 2016
. The increase in net written premium resulted from an increase in gross written premium for the
nine
months ended
September 30, 2017
compared to the same period in
2016
, partially offset by a decrease in the retention of gross written premium during
2017
compared to
2016
. Our retention of gross written premium for the segment was
52.9%
and
53.9%
for the
nine
months ended
September 30, 2017
and
2016
, respectively, resulting from our ceding to third party reinsurers a large portion of the gross written premium generated as a result of our April 2016 acquisition of Republic.
Net Earned Premium.
Net earned premium increased
$120.5 million
, or
7.6%
, to
$1,714.6 million
for the
nine
months ended
September 30, 2017
from
$1,594.1 million
for the
nine
months ended
September 30, 2016
. As premiums written are primarily earned ratably over an annual period, the increase in net earned premium resulted from higher net written premium for the twelve months ended
September 30, 2017
compared to the same period in
2016
.
Loss and Loss Adjustment Expenses; Loss Ratio.
Loss and loss adjustment expenses increased
$330.4 million
, or
31.2%
, to
$1,390.6 million
for the
nine
months ended
September 30, 2017
from
$1,060.2 million
for the
nine
months ended
September 30, 2016
. Our loss ratio for the segment for the
nine
months ended
September 30, 2017
increased to
81.1%
compared to
66.5%
for the
nine
months ended
September 30, 2016
. The increase in the loss ratio was primarily the result of adverse reserve development of $145.2 million (representing 8.5% of the loss ratio) due to higher severity of claims in New York and soft market conditions in California and the incremental increase in catastrophe losses of $29.6 million (representing 1.7% of the loss ratio).
Acquisition Costs and Other Underwriting Expenses; Expense Ratio.
Acquisition costs and other underwriting expenses increased
$61.4 million
, or
14.7%
, to
$479.6 million
for the
nine
months ended
September 30, 2017
from
$418.2 million
for the
nine
months ended
September 30, 2016
. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the
nine
months ended
September 30, 2017
and
2016
of
$210.5 million
and
$218.5 million
, respectively. The segment was allocated ceding commission for its proportionate share of our overall policy acquisition expense. The decrease related to our overall decrease in ceding commission earned during the nine months ended September 30, 2017 compared to the three months ended September 30, 2016. The expense ratio increased to
28.0%
from
26.2%
for the
nine
months ended
September 30, 2017
and
2016
, respectively, primarily as a result of higher direct acquisition costs from the Republic business for the entire nine months in 2017 as compared to the business written in this segment during the portion of the nine months of
2016
before we acquired Republic.
Net Earned Premiums less Expense Included in Combined Ratio (Underwriting (Loss) Income).
Net earned premiums less expenses included in combined ratio decreased
$271.3 million
, or
234.4%
, to
$(155.5) million
for the
nine
months ended
September 30, 2017
from income of
$115.7 million
for the
nine
months ended
September 30, 2016
. The decrease resulted primarily from an increase in the loss ratio and expense ratio during the
nine
months ended
September 30, 2017
compared to the
nine
months ended
September 30, 2016
.
Specialty Risk and Extended Warranty Segment Results of Operations for the Three and Nine Months Ended
September 30, 2017
and
2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
(Amounts in Thousands)
|
|
|
(As restated)
|
|
|
|
(As restated)
|
Gross written premium
|
$
|
756,714
|
|
|
$
|
598,977
|
|
|
$
|
2,285,088
|
|
|
$
|
1,779,984
|
|
|
|
|
|
|
|
|
|
Net written premium
|
$
|
525,308
|
|
|
$
|
448,845
|
|
|
$
|
1,591,002
|
|
|
$
|
1,233,739
|
|
Change in unearned premium
|
(42,490
|
)
|
|
(21,526
|
)
|
|
(95,691
|
)
|
|
(126,695
|
)
|
Net earned premium
|
482,818
|
|
|
427,319
|
|
|
1,495,311
|
|
|
1,107,044
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense
|
458,379
|
|
|
293,956
|
|
|
1,141,823
|
|
|
736,220
|
|
Acquisition costs and other underwriting expenses
|
126,312
|
|
|
86,240
|
|
|
385,085
|
|
|
237,864
|
|
|
584,691
|
|
|
380,196
|
|
|
1,526,908
|
|
|
974,084
|
|
Underwriting (loss) income
|
$
|
(101,873
|
)
|
|
$
|
47,123
|
|
|
$
|
(31,597
|
)
|
|
$
|
132,960
|
|
|
|
|
|
|
|
|
|
Key measures:
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
94.9
|
%
|
|
68.8
|
%
|
|
76.4
|
%
|
|
66.5
|
%
|
Expense ratio
|
26.2
|
%
|
|
20.2
|
%
|
|
25.7
|
%
|
|
21.5
|
%
|
Combined ratio
|
121.1
|
%
|
|
89.0
|
%
|
|
102.1
|
%
|
|
88.0
|
%
|
Specialty Risk and Extended Warranty Segment Results of Operations for the Three Months Ended
September 30, 2017
and
2016
(Unaudited)
Gross Written Premium
. Gross written premium increased
$157.7 million
, or
26.3%
, to
$756.7 million
for the
three
months ended
September 30, 2017
from
$599.0 million
for the
three
months ended
September 30, 2016
. We experienced growth primarily in our European business, while our U.S. business was relatively flat period over period. Our 2016 acquisition of ANV added gross written premium of $115 million to our European business, which was partially offset by fluctuations in European exchange rates.
Net Written Premium
. Net written premium increased
$76.5 million
, or
17.0%
, to
$525.3 million
for the
three
months ended
September 30, 2017
from
$448.8 million
for the
three
months ended
September 30, 2016
. The increase in net written premium resulted from an increase of gross written premium for the
three
months ended
September 30, 2017
compared to the same period in
2016
, partially offset by a decrease in our retention of gross written premium period over period. Our overall retention of gross written premium for the segment decreased to
69.4%
from
74.9%
. The decrease in the retention of gross written premium primarily related to the ANV business, acquired in November 2016, which is not reinsured under the Maiden Quota Share agreement.
In addition, beginning in July 2017, our U.K. subsidiary reduced the share of its Italian hospital liability business ceded to Maiden from 32.5% to 20.0%.
Net Earned Premium
. Net earned premium increased
$55.5 million
, or
13.0%
, to
$482.8 million
for the
three
months ended
September 30, 2017
from
$427.3 million
for the
three
months ended
September 30, 2016
. Net earned premium increased due to an increase in net written premium during the twelve months ended
September 30, 2017
compared to the same period in
2016
. As net written premium is earned ratably over the term of a policy, the increase in net earned premium resulted from the increase in net written premium period over period.
Loss and Loss Adjustment Expenses; Loss Ratio.
Loss and loss adjustment expenses increased
$164.4 million
, or
55.9%
, to
$458.4 million
for the
three
months ended
September 30, 2017
from
$294.0 million
for the
three
months ended
September 30, 2016
. Our loss ratio for the segment for the
three
months ended
September 30, 2017
increased to
94.9%
from
68.8%
compared with the same period in
2016
. The increase in the loss ratio resulted from having a higher percentage of net earned premium in lines of business with higher ultimate loss selections during the
three
months ended
September 30, 2017
compared to the
three
months ended
September 30, 2016
. Additionally, we had $69.2 million (representing 14.3% of the loss ratio) of prior period adverse reserve development adverse related to the Lloyd's business and Italian medical malpractice business in the
three
months ended
September 30, 2017
, and $12.9 million of prior period adverse year loss reserve development in the three months ended September 30,
2016
. The adverse reserve development was primarily driven by unfavorable development related to emerging loss experience beyond the prior indications based on new and updated data. The segment had net catastrophe losses of $40.3 million (representing 8.3% of the loss ratio).
Acquisition Costs and Other Underwriting Expenses; Expense Ratio.
Acquisition costs and other underwriting expenses increased
$40.1 million
, or
46.5%
, to
$126.3 million
for the
three
months ended
September 30, 2017
from
$86.2 million
for the
three
months ended
September 30, 2016
. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the
three
months ended
September 30, 2017
and
2016
of
$52.0 million
and
$50.4 million
, respectively. The ceding commission increased period over period as the segment received a consistent allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio was
26.2%
for the
three
months ended
September 30, 2017
compared to
20.2%
for the
three
months ended
September 30, 2016
. The increase in the expense ratio primarily resulted from increases in direct higher acquisition costs from our acquisition of ANV, and reclassing $31 million of net miscellaneous income recorded during the first half of 2017 to Service and Fee Income and Other Expense.
Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting (Loss) Income).
Net earned premiums less expenses included in combined ratio decreased
$149.0 million
, or
316.2%
, to
$(101.9) million
for the
three
months ended
September 30, 2017
from
$47.1 million
for the
three
months ended
September 30, 2016
. The decrease was attributable to an increase in the segment's loss ratio and expense ratio during the
three
months ended
September 30, 2017
compared to the
three
months ended
September 30, 2016
, partially offset by an increase in the level of earned premium.
Specialty Risk and Extended Warranty Segment Results of Operations for the Nine Months Ended
September 30, 2017
and
2016
(Unaudited)
Gross Written Premium
. Gross written premium increased
$505.1 million
, or
28.4%
, to
$2,285.1 million
for the
nine
months ended
September 30, 2017
from
$1,780.0 million
for the
nine
months ended
September 30, 2016
. We experienced growth primarily in our European business during the
nine
months ended
September 30, 2017
compared to the
nine
months ended
September 30, 2016
, while our U.S. business was relatively flat period over period. Our 2016 acquisition of ANV added gross written premium of $467 million to our European business, which was partially offset by fluctuations in European exchange rates.
Net Written Premium
. Net written premium increased
$357.3 million
, or
29.0%
, to
$1,591.0 million
for the
nine
months ended
September 30, 2017
from
$1,233.7 million
for the
nine
months ended
September 30, 2016
. The increase in net written premium resulted from an increase of gross written premium for the
nine
months ended
September 30, 2017
compared to the same period in
2016
. Our retention of gross written premium period over period increased slightly to
69.6%
from
69.3%
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
Net Earned Premium
. Net earned premium increased
$388.3 million
, or
35.1%
, to
$1,495.3 million
for the
nine
months ended
September 30, 2017
from
$1,107.0 million
for the
nine
months ended
September 30, 2016
. Net earned premium increased due to an increase in net written premium during the twelve months ended
September 30, 2017
compared to the same period in
2016
. As net written premium is earned ratably over the term of a policy, the increase in net earned premium resulted from the increase in net written premium period over period, and policies assumed from the ANV acquisition, which had accelerated earnings patterns.
Loss and Loss Adjustment Expenses; Loss Ratio.
Loss and loss adjustment expenses increased
$405.6 million
, or
55.1%
, to
$1,141.8 million
for the
nine
months ended
September 30, 2017
from
$736.2 million
for the
nine
months ended
September 30, 2016
. Our loss ratio for the segment for the
nine
months ended
September 30, 2017
increased to
76.4%
from
66.5%
for the same period in
2016
. The increase in the loss ratio resulted from having a higher percentage of net earned premium in lines of business with higher ultimate loss selections during the
nine
months ended
September 30, 2017
compared to the
nine
months ended
September 30, 2016
, which related to the Lloyd's business and Italian hospital liability business. We had $78.6 million (representing 5.3% of the loss ratio) of prior year loss reserve development in the nine months ended
September 30, 2017
, and $36.2 million of prior year loss reserve development in the nine months ended September 30,
2016
. The segment had catastrophe losses of $40.3 million (representing 2.7% of the loss ratio).
Acquisition Costs and Other Underwriting Expenses; Expense Ratio.
Acquisition costs and other underwriting expenses increased
$147.2 million
, or
61.9%
, to
$385.1 million
for the
nine
months ended
September 30, 2017
from
$237.9 million
for the
nine
months ended
September 30, 2016
. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the
nine
months ended
September 30, 2017
and
2016
of
$169.0 million
and
$125.8 million
, respectively. The ceding commission increased period over period as the segment received a consistent allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio was
25.7%
for the
nine
months ended
September 30, 2017
compared to
21.5%
for the
nine
months ended
September 30, 2016
. The increase in the expense ratio resulted from direct acquisition costs from our acquisitions of Nationale Borg and ANV, and reclassing $31 million of net miscellaneous income recorded during the first half of 2017 to Service and Fee Income and Other Expense.
Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting (Loss)Income).
Net earned premiums less expenses included in combined ratio decreased
$164.6 million
, or
123.8%
, to
$(31.6) million
for the
nine
months ended
September 30, 2017
from
$133.0 million
for the
nine
months ended
September 30, 2016
. The decrease was attributable to an increase in the segment's loss ratio during the
nine
months ended
September 30, 2017
compared to the
nine
months ended
September 30, 2016
, partially offset by an increase in the level of earned premium.
Specialty Program Segment Results of Operations for The Three and Nine Months Ended
September 30, 2017
and
2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
(Amounts in Thousands)
|
|
|
(As restated)
|
|
|
|
(As restated)
|
Gross written premium
|
$
|
221,398
|
|
|
$
|
437,050
|
|
|
$
|
778,474
|
|
|
$
|
1,135,539
|
|
|
|
|
|
|
|
|
|
Net written premium
|
$
|
151,935
|
|
|
309,334
|
|
|
$
|
504,468
|
|
|
$
|
787,389
|
|
Change in unearned premium
|
29,045
|
|
|
(57,415
|
)
|
|
81,771
|
|
|
(36,233
|
)
|
Net earned premium
|
180,980
|
|
|
251,919
|
|
|
586,239
|
|
|
751,156
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense
|
261,520
|
|
|
172,561
|
|
|
598,550
|
|
|
514,129
|
|
Acquisition costs and other underwriting expenses
|
56,035
|
|
|
83,232
|
|
|
173,852
|
|
|
214,872
|
|
|
317,555
|
|
|
255,793
|
|
|
772,402
|
|
|
729,001
|
|
Underwriting (loss) income
|
$
|
(136,575
|
)
|
|
$
|
(3,874
|
)
|
|
$
|
(186,163
|
)
|
|
$
|
22,155
|
|
|
|
|
|
|
|
|
|
Key measures:
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
144.5
|
%
|
|
68.5
|
%
|
|
102.1
|
%
|
|
68.4
|
%
|
Expense ratio
|
31.0
|
%
|
|
33.0
|
%
|
|
29.7
|
%
|
|
28.7
|
%
|
Combined ratio
|
175.5
|
%
|
|
101.5
|
%
|
|
131.8
|
%
|
|
97.1
|
%
|
Specialty Program Segment Results of Operations for the Three Months Ended
September 30, 2017
and
2016
(Unaudited)
Gross Written Premium
. Gross written premium decreased
$215.7 million
, or
(49.3)%
, to
$221.4 million
for the
three
months ended
September 30, 2017
from
$437.1 million
for the same period in
2016
. Gross written premium decreased period over period as the result of the termination of certain workers' compensation and general liability programs.
Net Written Premium
. Net written premium decreased
$157.4 million
, or
50.9%
, to
$151.9 million
for the
three
months ended
September 30, 2017
from
$309.3 million
for the same period in
2016
. Our overall retention of gross written premium for the segment decreased to
68.6%
from
70.8%
for the three months ended
September 30, 2017
and
2016
, respectively. The decrease in net written premium related to the decrease in gross written premium and a decrease in our retention of gross written premium.
Net Earned Premium.
Net earned premium decreased
$70.9 million
, or
28.2%
, to
$181 million
for the
three
months ended
September 30, 2017
from
$251.9 million
for the same period in
2016
. As premiums written are typically earned ratably over an annual period, the decrease in net earned premium resulted from lower net written premium for the period ended
September 30, 2017
compared to the same period in
2016
. Net earned premium decreased year over year proportionately less than net written premium during the same comparative period as a decline in net earned premium lags slightly behind a decrease in net written premium.
Loss and Loss Adjustment Expenses; Loss Ratio.
Loss and loss adjustment expenses increased
$89.0 million
, or
51.6%
, to
$261.5 million
for the
three
months ended
September 30, 2017
, compared to
$172.6 million
for the same period in
2016
. Our loss ratio for the segment increased to
144.5%
compared to
68.5%
for the
three
months ended
September 30, 2017
and
2016
, respectively. The increase in the loss ratio resulted from prior period adverse reserve development of $151.6 million, driven primarily by certain workers' compensation and general liability programs, which has led to re-underwriting, rate changes, and/or termination of the majority of the programs that generated the prior period adverse reserve development.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio
. Acquisition costs and other underwriting expenses decreased
$27.2 million
, or
32.7%
, to
$56.0 million
for the
three
months ended
September 30, 2017
from
$83.2 million
for the same period in
2016
. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the
three
months ended
September 30, 2017
and
2016
of
$23.0 million
and
$39.0 million
, respectively. The segment was allocated ceding commission for its proportionate share of our overall policy acquisition expense. The decrease related to our overall decrease in ceding commission earned during the three months ended September 30, 2017 compared to the three months ended September
30, 2016. Our expense ratio was
31.0%
and
33.0%
for the
three
months ended
September 30, 2017
and 2016, respectively, and was relatively flat as the issuance of a higher percentage of workers' compensation policies, which have lower policy acquisition costs than other types of business in this segment, was partially offset by the decrease in ceding commission.
Net Earned Premiums less Expense Included in Combined Ratio (Underwriting (Loss)).
Net earned premiums less expenses included in combined ratio decreased
$132.7 million
to
$(136.6) million
for the
three
months ended
September 30, 2017
from
$(3.9) million
for the
three
months ended
September 30, 2016
. The decrease was attributable to an increase in the segment's loss ratio coupled with a lower level of net earned premium in the
three
months ended
September 30, 2017
compared to the same period in
2016
.
Specialty Program Segment Results of Operations for the Nine Months Ended
September 30, 2017
and
2016
(Unaudited)
Gross Written Premium
. Gross written premium decreased
$357.1 million
, or
(31.4)%
, to
$778.5 million
for the nine months ended
September 30, 2017
from
$1,135.5 million
for the same period in
2016
. Gross written premium decreased period over period as the result of a termination of certain workers' compensation and general liability programs.
Net Written Premium
. Net written premium decreased
$283 million
, or
36%
, to
$504.5 million
for the
nine
months ended
September 30, 2017
from
$787.4 million
for the same period in
2016
as a result of the decrease in gross written premium period over period and the cession of a larger percentage of gross written premium to reinsurers during the
nine
months ended
September 30, 2017
compared to the same period in
2016
. Our overall retention of gross written premium for the segment was
64.8%
and
69.3%
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
Net Earned Premium.
Net earned premium decreased
$165 million
, or
22.0%
to
$586.2 million
for the
nine
months ended
September 30, 2017
from
$751.2 million
for the same period in
2016
. As premiums written are typically earned ratably over an annual period, the decrease in net earned premium resulted from lower net written premium for the annual period prior to the nine months ended
September 30, 2017
compared to the same period in
2016
. Net earned premium decreased year over year proportionately less than net written premium during the same comparative period as a decline in net earned premium lags slightly behind a decrease in net written premium.
Loss and Loss Adjustment Expenses; Loss Ratio.
Loss and loss adjustment expenses increased
$84.4 million
, or
16.4%
, to
$598.6 million
for the
nine
months ended
September 30, 2017
, compared to
$514.1 million
for the same period in
2016
. Our loss ratio for the segment increased to
102.1%
compared to
68.4%
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The increase in the loss ratio resulted from prior period adverse reserve development of $176.2 million, driven primarily by certain general liability and workers' compensation programs, which has led to re-underwriting, rate changes, and/or termination of the majority of the programs that generated the prior period adverse reserve development.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio
. Acquisition costs and other underwriting expenses decreased
$41.0 million
, or
19.1%
, to
$173.9 million
for the
nine
months ended
September 30, 2017
from
$214.9 million
for the same period in
2016
. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the
nine
months ended
September 30, 2017
and
2016
of
$76.3 million
and
$107.6 million
, respectively. The segment was allocated ceding commission for its proportionate share of our overall policy acquisition expense. The decrease related to our overall decrease in ceding commission earned during the three months ended September 30, 2017 compared to three months ended September 30, 2016. Our expense ratio was
29.7%
for the
nine
months ended
September 30, 2017
compared to
28.7%
for the
nine
months ended
September 30, 2016
, primarily as a result of decreases to ceding commission and higher allocation of corporate expense, partially offset by the termination of programs with lower acquisition costs as compared to the current business written in this segment.
Net Earned Premiums less Expense Included in Combined Ratio (Underwriting (Loss) Income).
Net earned premiums less expenses included in combined ratio decreased
$208.3 million
, or
940.3%
, to
$(186.2) million
for the
nine
months ended
September 30, 2017
from
$22.2 million
for the
nine
months ended
September 30, 2016
. The decrease was due to a higher combined ratio coupled with a lower level of net earned premium in the nine months ended
September 30, 2017
compared to the same period in
2016
.
Liquidity
and Capital Resources
Our principal sources of operating funds are premiums, service and fee income, investment income and proceeds from sales and maturities of investments. Our primary uses of operating funds include payments of claims and operating expenses. Currently, we pay claims using cash flow from operations and invest our excess cash primarily in fixed maturity and equity securities. We expect that projected cash flow from operations will provide us sufficient liquidity to fund our anticipated growth for at least the next twelve months. However, we do anticipate decreases in our operating cash flows from service and fee income as a result of our September 2017 sale of the NPS system to NGHC (as discussed in Note 10) and our upcoming contribution of portions of our U.S. fee businesses to a newly-formed investment vehicle in the first half of 2018 (as discussed in Note 16). If our growth attributable to potential acquisitions, internally generated growth or a combination of these, exceeds our projections, we may have to raise additional capital sooner to support our growth. As a result, we may from time to time raise capital from the issuance of equity, debt, equity-related debt or other capital securities, or seek to redeem, repurchase or exchange for other securities, prior to maturity, some or all of our outstanding debt in the open market, as circumstances allow. If we cannot obtain adequate capital or refinance all or a portion of our debt on favorable terms or at all, we may be unable to support future growth or operating requirements and, as a result, our business, financial condition and results of operation could be adversely affected. Additional information regarding our ability to access the public markets to raise capital is discussed in "Item 1A. Risk Factors" appearing elsewhere in this Form 10-Q.
The following table is a summary of our statement of cash flows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
(Amounts in Thousands)
|
|
|
(As restated)
|
Cash and cash equivalents (used in) provided by:
|
|
|
|
|
|
Operating activities
|
$
|
(74,242
|
)
|
|
$
|
880,660
|
|
Investing activities
|
223,549
|
|
|
(873,264
|
)
|
Financing activities
|
(3,934
|
)
|
|
147,486
|
|
Net cash used in operating activities was
$74 million
for the nine months ended September 30, 2017. Net cash provided by operating activities was
$881 million
for the
nine
months ended September 30, 2016. The decrease in cash provided by operating activities was primarily due to the net loss incurred for the nine months ended September 30, 2017, as well an increase in cash used in funding reinsurance recoverable and timing of collection on those recoverables. In addition, the decrease in cash provided by operating activities was also impacted by an increase in claim payments. Cash payments for claims were approximately
$2,293
million and
$1,867
million in the
nine
months ended
September 30, 2017
and
2016
, respectively.
Net cash provided by investing activities was
$224 million
for the nine months ended September 30, 2017. Net cash used in investing activities was
$873 million
for the
nine
months ended September 30, 2016. The increase in cash provided by investing activities was primarily due to an increase in cash received from sales of fixed maturity securities and equity securities and the sale of common shares of NGHC, life settlement contracts, and the NPS system. Please see Note 10 for additional information on the sales of NGHC shares and of the NPS system and Note 5 for additional information on the sale of life settlement contracts.
Net cash used in financing activities was
$4 million
for the nine months ended September 30, 2017. Net cash provided by financing activities was
$147 million
for the
nine
months ended September 30, 2016. The decrease in cash provided by financing activities was primarily due to increased cash used for repurchase agreements, partially offset by cash received from the issuance of common stock through a private placement. Please see Note 10 for additional information on the private placement.
Preferred Stock
We have six separate series (Series A through F) of non-cumulative preferred stock outstanding. Five of these series (Series B, C, D, E and F) were issued in offerings using depositary shares, each representing a 1/40th interest in a share of the particular series of preferred stock. Dividends on the Series A Preferred Stock and the Series B, C, D, E and F Preferred Stock represented by depositary shares are payable on the liquidation preference amount, on a non-cumulative basis, when, as and if declared by our Board of Directors, quarterly in arrears, on March 15, June 15, September 15, and December 15 of each year.
A summary description of the terms of these series of preferred stock is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Dividend rate per year %
|
|
Shares of Preferred Stock issued
|
|
Depositary shares issued
|
|
Liquidation preference amount per share of Preferred Stock $
|
|
Net proceeds ($ in thousands)
|
|
Dividend paid during the nine months ended September 30, 2017 ($ in thousands)
|
A
|
|
6.75
|
|
4,600,000
|
|
N/A
|
|
$
|
25
|
|
|
$
|
111,130
|
|
|
$
|
5,823
|
|
B
|
|
7.25
|
|
105,000
|
|
4,200,000
|
|
1,000
|
|
|
101,702
|
|
|
5,709
|
|
C
|
|
7.625
|
|
80,000
|
|
3,200,000
|
|
1,000
|
|
|
77,480
|
|
|
4,575
|
|
D
|
|
7.50
|
|
182,500
|
|
7,300,000
|
|
1,000
|
|
|
176,529
|
|
|
10,266
|
|
E
|
|
7.75
|
|
143,750
|
|
5,750,000
|
|
1,000
|
|
|
139,070
|
|
|
8,355
|
|
F
|
|
6.95
|
|
287,500
|
|
11,500,000
|
|
1,000
|
|
|
278,194
|
|
|
14,985
|
|
For a detailed description of our Preferred Stock, refer to Note 23. “Stockholder’s Equity” in Item 8. “Financial Statements and Supplementary Data” in our
2016
Form 10-K.
$300 Million Private Placement of Common Stock
On May 25, 2017, we issued
24,096
shares of common stock at a price of
$12.45
per share, through a private placement ("Private Placement") resulting in gross proceeds to us of
$300 million
. We contributed the proceeds from the Private Placement to our insurance subsidiaries to support their financial strength, continued organic growth, and writing of business. Certain members of the families of each of George Karfunkel, one of our directors, Leah Karfunkel, one of our directors, and Barry Zyskind, our Chairman, President and CEO, were the sole purchasers in the Private Placement. The purchasers received unregistered common shares in AmTrust, as well as certain rights to register the shares at a future date. Additionally, the purchasers agreed not to transfer the common stock, subject to certain limited exceptions for bona fide estate planning purposes, for a period of one-year from the date of purchase and not to exercise their right to vote their shares of common stock until after the conclusion of our
2018
annual meeting of shareholders.
Credit Sources
Credit Facilities
For further information on our credit facilities and outstanding notes, please see Note 7 to the Consolidated Financial Statements, included elsewhere in this report, and Note 15 in Item 8. "Financial Statements and Supplementary Data" in our
2016
Form 10-K.
Other Sources of Liquidity
In November 2016, one of our subsidiaries became a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh. Through membership, we have access to secured cash advances that can be used for supplemental liquidity purposes or other operational needs, as deemed appropriate by management. The amount of advances our subsidiary can take is dependent on eligible asset types available for pledge to secure the advances, which is limited by the statutory admitted assets and capital and surplus of the member subsidiary. At
September 30, 2017
, we had no outstanding borrowings with the FHLB.
Short-Term Borrowings
We did not engage in short-term borrowings to fund our operations or for liquidity purposes during the
nine
months ended
September 30, 2017
.
Contractual Obligations
During the
nine
months ended
September 30, 2017
, our contractual obligations have not changed materially from those discussed in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
Reinsurance
Our insurance subsidiaries utilize reinsurance agreements to transfer portions of the underlying risk of the business we write to various affiliated and third-party reinsurance companies. Reinsurance does not discharge or diminish our obligation to pay claims covered by the insurance policies we issue; however, it does permit us to recover certain incurred losses from our reinsurers and our reinsurance recoveries reduce the maximum loss that we may incur as a result of a covered loss event. We evaluate the financial condition of our reinsurers and place our reinsurance with a diverse group of companies and syndicates we believe to be financially stable. We carefully monitor the credit quality of our reinsurers. The total amount, cost and limits relating to the reinsurance coverage we purchase may vary from year to year based upon a variety of factors, including the availability of quality reinsurance at an acceptable price and the level of risk that we choose to retain for our own account.
Effective June 30, 2017, we entered into an adverse loss development cover agreement with Premia. Under the agreement, Premia will pay us for ultimate net losses paid by us in excess of a retention of
$5,963.0 million
, subject to an aggregate limit of
$1,025.0 million
, which provides
$400.0 million
of coverage in excess of our carried loss reserves as of
March 31, 2017
in the amount of approximately
$6,590.0 million
.
The consideration for this agreement is a
$675.0 million
payment, plus an annual claims monitoring fee, of which
$50.0 million
represents a premium payment for the coverage above the carried loss reserves of approximately
$6,590.0 million
. Premia deposited an incremental
$100.0 million
of excess collateral at inception and will also deposit incremental collateral in accordance with a pre-agreed schedule. We will pay interest deposited into the collateral trust account at a rate of
3.75%
per annum on any unpaid portion of the
$675.0 million
consideration amount from
July 1, 2017
to the date of payment, which must occur within
180
days following June 30, 2017. During the three months ended September 30, 2017, we paid consideration of $450.0 million to Premia, which was placed into a collateral trust account as security for Premia's claim payment obligations to us. Ceded reserves are collateralized by the premium payment and all investment income inures to the benefit of the collateral trust account. We have
$225.0 million
of the consideration remaining unpaid as of
September 30, 2017
, and incurred $4.5 million of interest expense related to the unpaid portion during the three months ended September 30, 2017, which was recorded as a reduction of the deferred gain.
In addition, effective August 1, 2017, we entered into a new quota share reinsurance contract with multiple, unrelated reinsurance partners, to reduce exposure to catastrophe and non-catastrophe events related to the business of our Republic Companies, Inc. (‘‘Republic’’) subsidiaries. The quota share contract has a cession rate of 62.5% covering the personal property policies at Republic and is designed to work in conjunction with our existing excess of loss reinsurance programs on catastrophe and non-catastrophe events. This contract reduces our exposure to and lessens financial volatility related to all catastrophe perils.
Except for the agreements discussed above, we have not experienced any significant changes to our reinsurance programs since
December 31, 2016
. For a more detailed description of our reinsurance arrangements, including our reinsurance arrangements with Maiden Reinsurance Ltd., see ‘‘Reinsurance’’ in ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
Goodwill
We test goodwill for impairment annually on October 1
st
or when “trigger” events occur or circumstances change that could potentially reduce the fair value of a reporting unit below its carrying amount. Goodwill is considered impaired if the carrying amount of the reporting unit exceeds the fair value. There are various indicators that a potential impairment trigger has occurred, including, but not limited to, evidence that the asset or reporting unit is performing below expectations, including significant variation of budget to actual results; plans to discontinue use of the reporting unit or to dispose of it; significant changes in internal staffing; and general economic conditions or specific company circumstances.
We do not limit the assessment of trigger indicators to those noted above, and for the period ended
September 30, 2017
, management considered the share price decline in the nine months of 2017, which in turn, lowered our market capitalization, as a potential impairment trigger.
Based on the consideration of all available evidence, including analysis of quantitative and qualitative factors, we believe the share price decline in the nine months of 2017 is relatively short-term in nature and is primarily related to the restatement of prior period results and associated material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, and is not indicative of an actual decline in our fair value or our reporting units' fair value. As a result, we have concluded that goodwill is not impaired as of
September 30, 2017
. We will continue to monitor the share price and underlying fundamentals of each of our reporting units during the remainder of 2017.
Cash and Investment Portfolio
Cash, which consists of cash, cash equivalents, restricted cash and restricted cash equivalents, along with our investment portfolio, which consists of fixed maturity securities, equity securities, and short-term investments, but excludes life settlement contracts, other investments and equity investment in unconsolidated related party subsidiaries, increased
$560.0 million
, or
6.3%
, to
$9.5 billion
for the
nine
months ended
September 30, 2017
from
$8.9 billion
as of
December 31, 2016
. Our investment portfolio is primarily classified as available-for-sale, as defined by ASC 320,
Investments — Debt and Equity Securities
. The increase in our investment portfolio during the
nine
months ended
September 30, 2017
compared to
December 31, 2016
was primarily attributable to the acquisition of AHC, $300 million of cash received from a private placement, cash received from the sale of a portion of our life settlement portfolio and the sale of a policy management system to NGHC. Our fixed maturity securities had a fair value of
$7.7 billion
and an amortized cost of
$7.5 billion
as of
September 30, 2017
. Our equity securities had a fair value of
$185.7 million
with a cost of
$176.2 million
as of
September 30, 2017
.
Our cash and investment portfolio, exclusive of life settlement contracts, equity investment in unconsolidated related party subsidiaries, and other investments is summarized in the table below by type of investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
(Amounts in Thousands)
|
|
Carrying Value
|
|
Percentage of Portfolio
|
|
Carrying Value
|
|
Percentage of Portfolio
|
Cash, cash equivalents and restricted cash
|
|
$
|
1,645,599
|
|
|
17.3
|
%
|
|
$
|
1,281,109
|
|
|
14.3
|
%
|
Short-term investments
|
|
7,141
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
U.S. treasury securities
|
|
328,795
|
|
|
3.5
|
|
|
330,654
|
|
|
3.7
|
|
U.S. government agencies
|
|
48,150
|
|
|
0.5
|
|
|
63,732
|
|
|
0.7
|
|
Municipals
|
|
905,793
|
|
|
9.5
|
|
|
854,170
|
|
|
9.6
|
|
Foreign government
|
|
187,116
|
|
|
2.0
|
|
|
152,876
|
|
|
1.7
|
|
Commercial mortgage back securities
|
|
460,991
|
|
|
4.9
|
|
|
177,994
|
|
|
2.0
|
|
Residential mortgage backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
810,894
|
|
|
8.5
|
|
|
1,210,385
|
|
|
13.6
|
|
Non-agency backed
|
|
5,649
|
|
|
0.1
|
|
|
61,229
|
|
|
0.7
|
|
Collateralized loan / debt obligations
|
|
626,348
|
|
|
6.6
|
|
|
484,405
|
|
|
5.4
|
|
Asset-backed securities
|
|
21,550
|
|
|
0.2
|
|
|
29,710
|
|
|
0.3
|
|
Corporate bonds
|
|
4,258,424
|
|
|
44.9
|
|
|
4,066,761
|
|
|
45.6
|
|
Preferred stocks
|
|
—
|
|
|
—
|
|
|
3,985
|
|
|
—
|
|
Common stocks
|
|
185,652
|
|
|
1.9
|
|
|
215,137
|
|
|
2.4
|
|
|
|
$
|
9,492,102
|
|
|
100.0
|
%
|
|
$
|
8,932,147
|
|
|
100.0
|
%
|
The table below summarizes the credit quality of our fixed maturity securities as of
September 30, 2017
and
December 31, 2016
, as rated by Standard and Poor’s:
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
U.S. Treasury
|
4.3
|
%
|
|
4.5
|
%
|
AAA
|
6.9
|
|
|
6.6
|
|
AA
|
29.1
|
|
|
32.6
|
|
A
|
30.2
|
|
|
28.9
|
|
BBB, BBB+, BBB-
|
24.9
|
|
|
24.2
|
|
BB, BB+, BB-
|
0.9
|
|
|
1.9
|
|
B, B+, B-
|
0.2
|
|
|
0.4
|
|
Other
|
3.5
|
|
|
0.9
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
As of
September 30, 2017
, the weighted average duration of our fixed maturity securities was approximately
4.44
years and had an average yield of
3.2%
.
Other investments represented approximately
1.5%
and
1.7%
of our total investment portfolio as of
September 30, 2017
and
December 31, 2016
, respectively. At
September 30, 2017
, other investments consisted primarily of real estate partnerships totaling
$86 million
, private limited partnerships totaling
$19 million
, a syndicated term loan of
$17 million
, and annuity and other investments totaling
$18 million
. At December 31, 2016, other investments consisted primarily of real estate partnerships totaling
$101 million
, private limited partnerships totaling
$24 million
, a syndicated term loan of
$15 million
, and annuity and other investments totaling
$12 million
.
Based on guidance in FASB ASC 320-10-65, in the event of the decline in fair value of a debt security, a holder of that security that does not intend to sell the debt security and for whom it is not more than likely than not that such holder will be required to sell the debt security before recovery of its amortized cost basis, is required to separate the decline in fair value into (a) the amount representing the credit loss and (b) the amount related to other factors. The amount of total decline in fair value related to the credit loss shall be recognized in earnings as an other than temporary impairment ("OTTI"), with the amount related to other factors recognized in accumulated other comprehensive loss, net of tax. OTTI credit losses result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process, and different judgments and assumptions could affect the timing of the loss realization.
On a quarterly basis, we analyze securities in an unrealized loss position for OTTI. We consider an investment to be impaired when it has been in an unrealized loss position greater than a de minimis threshold for over 12 months, excluding securities backed by the U.S. government (e.g., U.S. treasury securities or agency-backed residential mortgage-backed securities). Additionally, we review whether any of the impaired positions related to securities for which OTTI was previously recognized, and whether we intend to sell any of the securities in an unrealized loss position.
Once we complete the analysis described above, each security is further evaluated to assess whether the decline in the fair value of any investment below its cost basis is deemed other-than-temporary. We consider many factors in completing our quarterly review of securities with unrealized losses for other-than-temporary impairment. For equity securities, we consider the length of time and the extent to which the fair value has been below cost, the financial condition and near-term prospects of the issuer, including any specific events that may influence the operations of the issuer, and our intent and ability to retain our investment for a period of time sufficient to allow for any anticipated recovery in fair value. For fixed maturities, we consider, among other things, the length of time and the extent to which the fair value has been less than the amortized cost basis, adverse conditions and near-term prospects for improvement specifically related to the issuer, industry or geographic area, the historical and implied volatility of the fair value of the security, any information obtained from regulators and rating agencies, the issuer’s capital strength and the payment structure of the debt security and the likelihood the issuer will be able to make payments in the future (or the historical failure of the issuer to make scheduled interest or principal payments or payment of dividends).
Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. We write down investments immediately that we consider to be impaired based on the above criteria collectively. There were no impairment charges for the three and
nine
months ended
September 30, 2017
, respectively, but we recorded
$3 million
and
$20 million
of OTTI of equity securities during the three and
nine
months ended
September 30, 2016
.
As of
September 30, 2017
, we own corporate bonds in the financial institutions, industrial, and utilities sectors, which account for approximately
21.2%
,
29.5%
and
4.9%
, respectively, and
55.6%
in the aggregate of the total fair value of our fixed maturity securities, and
8.4%
,
27.9%
and
3.4%
, respectively, and
39.7%
in the aggregate of the total unrealized losses of our fixed maturity securities. We believe that the unrealized losses in these securities are the result, primarily, of general economic conditions and not the condition of the issuers, which we believe are solvent and have the ability to meet their obligations. Therefore, we expect that the market price for these securities should recover within a reasonable time. Additionally, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis.
Our investment in marketable equity securities classified as available-for-sale consists of investments in preferred and common stock across a wide range of sectors. We evaluated the near-term prospects for recovery of fair value in relation to the severity and duration of the impairment and have determined in each case that the probability of recovery is reasonable and we have the ability and intent to hold these investments until a recovery of fair value. We believe the gross unrealized losses of
$2.3 million
as of
September 30, 2017
are not material to our financial position.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2 to the Consolidated Financial Statements, included elsewhere in this report.