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.
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,
and are based on current expectations that involve assumptions that are
difficult or impossible to predict accurately, many of which are beyond our
control. There can be no assurance that actual developments will be those
anticipated by us. 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, our estimates of the fair value
of our life settlement contracts, 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,
risks associated with conducting business outside the United States,
developments relating to existing agreements, disruptions to our business
relationships with Maiden Holdings, Ltd., American Capital Acquisition
Corporation, or third party agencies and warranty administrators, difficulties
with technology or breaches in data security, 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, 2011, 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 underserved by the market. We have grown by hiring teams of
underwriters with expertise in our specialty lines and acquiring 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 four business segments:
· 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.
· 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.
· 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.
· Personal Lines Reinsurance. We reinsure 10% of the net premiums of the GMACI
personal lines business, pursuant to a quota share reinsurance agreement
("Personal Lines Quota Share") with the GMACI personal lines insurance
companies.
32
We transact business primarily through eleven insurance company subsidiaries:
A.M. Coverage
Company Best Rated Coverage Type Offered Market DomiciledTechnology A (Excellent) Small Commercial Business, United States New Hampshire
Insurance
Specialty Program and
Company, Inc. Specialty Risk & Extended
("TIC") Warranty
Rochdale A (Excellent) Small Commercial Business, United States New York
Insurance Specialty Program and
Company ("RIC") Specialty Risk & Extended
Warranty
Wesco Insurance A (Excellent) Small Commercial Business, United StatesDelaware
Company ("WIC")
Specialty Program and
Specialty Risk & Extended
Warranty
Associated A (Excellent) Workers' Compensation and United States Florida
Industries Specialty Program
Insurance
Company, Inc.
("AIIC")
Milwaukee A (Excellent) Small Commercial Business United States Wisconsin
Casualty
Insurance Co.
("MCIC")
Security National A (Excellent) Small Commercial Business United States Texas
Insurance Company
("SNIC")
AmTrust Insurance A (Excellent) Small Commercial Business United States Kansas
Company of
Kansas, Inc.
("AICK")
AmTrust Lloyd's A (Excellent) Small Commercial Business United States Texas
Insurance Company
("ALIC")
AmTrust A (Excellent) Specialty Risk and European Union Ireland
International Extended Warranty; and United
Underwriters Specialty Program States
Limited ("AIU")
AmTrust Europe, A (Excellent) Specialty Risk and European Union England
Ltd. ("AEL") Extended Warranty
AmTrust A (Excellent) Reinsurance United States Bermuda
International and European
Insurance Ltd. Union
("AII")
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. In addition, we believe seasonality is muted by our
acquisition activity.
We evaluate our operations by monitoring key measures of growth and
profitability. We measure our growth by examining our net income, return on
average equity, and our loss, expense and combined ratios. The following summary
provides further explanation of the key measures that we use to evaluate our
results:
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 is ceded to third party reinsurers under reinsurance
agreements. The amount ceded under these reinsurance agreements is based on a
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, 2012 for an employer with a
constant payroll during the term of the policy, we would earn half of the
premiums in 2012 and the other half in 2013. We earn our specialty risk and
extended warranty coverages over the estimated exposure time period. The terms
vary depending on the risk and have an average duration of approximately 23
months, but range in duration from one month to 120 months.
33
Ceding Commission Revenues. Ceding commission is a commission we receive from
ceding gross written premium to third party reinsurers. We earn commissions on
reinsurance premiums ceded in a manner consistent with the recognition of the
direct acquisition costs of the underlying insurance policies, generally on a
pro-rata basis over the terms of the policies reinsured. In connection with the
Maiden Quota Share, which is our primary source of ceding commission, 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 our individual segments. As such, 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.
Service and Fee Income. We currently generate service and fee income from the
following sources:
· 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 parties.
· Servicing carrier - We act as a servicing carrier for workers' compensation
assigned risk plans in eight states. In addition, we also offer claims
adjusting and loss control services for fees to unaffiliated third parties.
· 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.
· Installment and reinstatement 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 cancelled for
non-payment, in jurisdictions where it is permitted and approved.
· Broker services - We provide brokerage services to Maiden in connection with
our reinsurance agreement for which we receive a fee.
· Asset management services - We currently manage the investment portfolios of
Maiden, ACAC and ACP Re, Ltd. for which we receive a management fee.
· Information technology services - We provide information technology services to
ACAC and its affiliates for a fee.
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 as available-for-sale. We report
net unrealized gains (losses) separately within accumulated other comprehensive
income on our balance sheet.
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 analyses. 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. These items are described
below:
· 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.
· Salaries and benefits expenses are those salaries and benefits expenses for
employees that are directly involved in the origination, issuance and
maintenance of policies, claims adjustment and accounting for insurance
transactions. We classify salaries and benefits associated with employees that
are involved in fee generating activities as other expenses.
· 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.
34
Gain on Investment in Life Settlement Contracts. The gain on investment in life
settlement contracts includes the gain on acquisition of life settlement
contracts, the gain 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 the discounted cash flow of the
anticipated death benefits, incorporating a number of factors, such as current
life expectancy assumptions, expected premium payment obligations and cost
assumptions, 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. The gain realized upon mortality event is the difference between the
death benefit received and the recorded fair value of that particular policy. We
allocate gain on investment in life settlement contracts to our segments based
on net written premium by segment.
Net Loss Ratio. The net 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 loss adjustment expense incurred to net
premiums earned.
Net Expense Ratio. The net 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 less ceding commission revenue to net premiums earned. As we allocate
certain acquisition costs and other underwriting expenses based on premium
volume to our segments, net loss ratio on a segment basis may be impacted period
over period by a shift in the mix of net written premium.
Net Combined Ratio. The net 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 net combined ratio is at or above 100%, an insurance
company cannot be profitable without investment income, and may not be
profitable if 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 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.
One of the key financial measures that we use to evaluate our operating
performance is return on average equity. Our return on annualized average equity
was 16.5% and 25.2% for the three months ended June 30, 2012 and 2011,
respectively, and 16.8% and 24.7% for the six months ended June 30, 2012 and
2011, respectively. In addition, we target a net combined ratio of 95% 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
net combined ratio was 88.9% and 90.3% for the three months ended June 30, 2012
and 2011, respectively, and 88.7% and 88.8% for the six months ended June 30,
2012 and 2011, respectively.
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, 2011.
35
Results of Operations
Consolidated Results of Operations for the Three and Six Months Ended June 30,
2012 and 2011 (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
(Amounts in Thousands) 2012 2011 2012 2011
Gross written premium $ 637,438 $
558,462 $ 1,239,125$ 1,002,489
Net written premium $ 391,589 $ 375,681 $ 751,366 $ 609,700
Change in unearned premium (57,595 ) (127,399 ) (103,348 ) (161,080 )
Net earned premiums 333,994 248,282 648,018 448,620
Ceding commission - primarily related
party 44,550 35,414 90,824 71,098
Service and fee income (related
parties - three months $6,932; $4,459
and six months $13,024; $7,898) 33,011 24,542 73,549 49,731
Net investment income 16,344 13,167 30,862 27,359
Net realized gain on investments 2,703 616 1,555 1,031
Total revenues 430,602 322,021 844,808 597,839
Loss and loss adjustment expense 211,787 170,008 411,716 298,704
Acquisition costs and other
underwriting expenses 129,713 89,580 253,738 170,814
Other 32,320 18,564 67,959 38,760
Total expenses 373,820 278,152 733,413 508,278
Income before other income (expense),
income taxes and equity in earnings
(loss) of unconsolidated subsidiary 56,782 43,869 111,395 89,561
Other income (expense):
Interest expense (6,994 ) (4,334 ) (14,085 ) (8,088 )
Foreign currency (loss) gain (2,455 ) 2,520 (2,034 ) 2,236
Net gain on investment in life
settlement contracts 1,961 22,638 2,051 41,524
Total other income (expense) (7,488 ) 20,824 (14,068 ) 35,672
Income before income taxes and equity
in earnings (loss) of unconsolidated
subsidiary 49,294 64,693 97,327 125,233
Provision for income taxes 11,742 7,289 22,919 16,326
Income before equity in earnings
(loss) of unconsolidated subsidiary
and non-controlling interest 37,552 57,404 74,408 108,907
Equity in earnings of unconsolidated
subsidiary - related party 3,088 2,514 5,452 4,333
Net income 40,640 59,918 79,860 113,240
Non-controlling interest (282 ) (9,756 ) (416 ) (17,895 )
Net income attributable to AmTrust
Financial Services, Inc. $ 40,358 $ 50,162 $ 79,444 $ 95,345
Net realized gain (loss) on
investments:
Total other-than-temporary impairment
loss $ (1,208 ) $ (345 ) $ (1,208 ) $ (345 )
Portion of loss recognized in other
comprehensive income - - - -
Net impairment losses recognized in
earnings (1,208 ) (345 ) (1,208 ) (345 )
Other net realized gain on investments 3,911 961 2,763 1,376
Net realized investment loss $ 2,703 $ 616 $ 1,555 $ 1,031
Key measures:
Net loss ratio 63.4 % 68.5 % 63.5 % 66.6 %
Net expense ratio 25.5 % 21.8 % 25.1 % 22.2 %
Net combined ratio 88.9 % 90.3 % 88.7 % 88.8 %
36
Consolidated Result of Operations for the Three Months Ended June 30, 2012 and
2011
Gross Written Premium. Gross written premium increased $78.9 million, or 14.1%,
to $637.4 million from $558.5 million for the three months ended June 30, 2012
and 2011, respectively. The increase of $78.9 million was primarily attributable
to growth in our Small Commercial Business and Specialty Program segments. The
increase in Small Commercial Business resulted primarily from increases in
workers' compensation policy counts, the acquisitions of Majestic and BTIS in
2011 and rate increases in some of our key states. The increase in Specialty
Program resulted primarily from programs developed from new underwriting teams
we hired in 2010 and 2011.
Net Written Premium. Net written premium increased $15.9 million, or 4.2%, to
$391.6 million from $375.7 million for the three months ended June 30, 2012 and
2011, respectively. The increase(decrease) by segment was: Small Commercial
Business - ($8.9) million, Specialty Risk and Extended Warranty - ($12.9)
million, Specialty Program - $33.9 million and Personal Lines - $3.8 million.
Net written premium increased for the three months ended June 30, 2012 compared
to the same period in 2011 due to the increase in gross written premium in 2012
compared to 2011 partially offset by an increase in our assigned risk business
in our small commercial business segment for which we cede 100 percent.
Net Earned Premium. Net earned premium increased $85.7 million, or 34.5%, to
$334.0 million from $248.3 million for the three months ended June 30, 2012 and
2011, respectively. The increase by segment was: Small Commercial
Business - $19.5 million, Specialty Risk and Extended Warranty - $32.0 million,
Specialty Program - $30.8 million, and Personal Lines - $3.4 million.
Ceding Commission. Ceding commission represents commission earned primarily
through the Maiden Quota Share, whereby AmTrust receives a ceding commission
between 30% and 31%, depending on the mix of business ceded, for all business
except retail commercial package business, and 34.375% for retail commercial
package business, for written premiums ceded to Maiden. The ceding commission
earned during the three months ended June 30, 2012 and 2011 was $44.6 million
and $35.4 million, respectively. Ceding commission increased period over period
as a result of increased premium writings.
Service and Fee Income. Service and fee income increased $8.5 million, or 34.7%,
to $33.0 million from $24.5 million for the three months ended June 30, 2012 and
2011, respectively. The increase related to fee income of approximately $4
million produced from BTIS, which was acquired in December 2011, higher
technology fee income from ACAC of approximately $3 million and fees generated
by becoming a servicing carrier for workers' compensation assigned risk plans in
three additional states.
Net Investment Income. Net investment income increased $3.1 million, or 23.5%,
to $16.3 million from $13.2 million for the three months ended June 30, 2012 and
2011, respectively. The increase resulted primarily from having a higher average
balance of fixed security investment securities during the three months ended
June 30, 2012 compared to the three months ended June 30, 2011.
Net Realized Gains (Losses) on Investments.We incurred net realized gains on
investments of $2.7 million and $0.6 million for the three months ended June 30,
2012 and 2011, respectively. The increase resulted from our decision to sell
certain positions that had market values that exceeded our cost basis.
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased
$41.7 million, or 24.5%, to $211.7 million from $170.0 million for the three
months ended June 30, 2012 and 2011, respectively. Our loss ratio for the three
months ended June 30, 2012 and 2011 was 63.4% and 68.5%, respectively. The
decrease in the loss ratio in 2012 resulted from lower current accident year
selected ultimate losses as compared to selected ultimate losses from the prior
accident year.
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other
underwriting expenses increased $40.1 million, or 44.8%, to $129.7 million from
$89.6 million for the three months ended June 30, 2012 and 2011,
respectively. The expense ratio for the same periods increased to 25.5% from
21.8%, respectively, and impacted all segments. The increase in policy
acquisition costs was the largest contributor to the increase in the expense
ratio during the three months ended June 30, 2012, which was the result of a
change in business mix as well the adoption of the new accounting standard for
deferred acquisition costs during the first quarter of 2012.
Income Before Other Income (Expense), Income Taxes and Equity Earnings of
Unconsolidated Subsidiary. Income before other income (expense), income taxes
and equity earnings of unconsolidated subsidiary increased $12.9 million, or
29.4%, to $56.8 million from $43.9 million for the three months ended June 30,
2012 and 2011, respectively. The change in income from 2011 to 2012 resulted
primarily from improvement of the combined ratio of the insurance business.
Interest Expense. Interest expense for the three months ended March 31, 2012 was
$7.0 million, compared to $4.3 million for the same period in 2011. The increase
was primarily related to the issuance of an aggregate of $200 million of
convertible senior notes during December 2011 and January 2012.
Net Gain on Investment in Life Settlement Contracts. Gain on investment in life
settlement contracts was $2.0 million compared to $22.6 million for the three
months ended June 30, 2012 and 2011. During the three months ended June 30,
2012, we received a benefit of approximately $10 million from mortality events.
The gain in the second quarter of 2011 was generated by the purchase of a large
pool of distressed life settlement contracts. During the second quarter of 2012,
we purchased a minimal amount of contracts.
37
Provision for Income Tax. Income tax expense for the three months ended June 30,
2012 was $11.7 million, which resulted in an effective tax rate of 23.8%. Income
tax expense for the three months ended June 30, 2011 was $7.3 million, which
resulted in an effective tax rate of 11.3%. The increase in our effective rate
for the three months ended June 30, 2012 resulted primarily from earning a
higher percentage of pretax income in countries with higher effective rates.
Equity in Earnings of Unconsolidated Subsidiary - Related Party. Equity in
earnings of unconsolidated subsidiary - related party increased by $0.6 million
for the three months ended June 30, 2012 to $3.1 million compared to $2.5
million for the three months ended June 30, 2011. The increase period over
period resulted from higher contract and service fees reported by ACAC.
Consolidated Result of Operations for the Six Months Ended June 30, 2012 and
2011
Gross Written Premium. Gross written premium increased $236.6 million, or 23.6%,
to $1,239.1 million from $1,002.5 million for the six months ended June 30, 2012
and 2011, respectively. The increase of $236.6 million was primarily
attributable to growth in our Small Commercial Business and Specialty Program
segments. The increase in Small Commercial Business resulted primarily from
increases in workers' compensation policy counts, the acquisitions of Majestic
and BTIS in 2011 and rate increases in some of our key states. The increase in
Specialty Program resulted primarily from programs developed from new
underwriting teams we hired in 2010 and 2011.
Net Written Premium. Net written premium increased $141.7 million, or 23.2%, to
$751.4 million from $609.7 million for the six months ended June 30, 2012 and
2011, respectively. The increase by segment was: Small Commercial Business -
$32.3 million, Specialty Risk and Extended Warranty - $23.7 million, Specialty
Program - $76.9 million and Personal Lines - $8.8 million. Net written premium
increased for the six months ended June 30, 2012 compared to the same period in
2011 due to the increase in gross written premium in 2012 compared to 2011.
Net Earned Premium. Net earned premium increased $199.4 million, or 44.4%, to
$648.0 million from $448.6 million for the six months ended June 30, 2012 and
2011, respectively. The increase by segment was: Small Commercial
Business - $50.0 million, Specialty Risk and Extended Warranty - $83.0 million,
Specialty Program - $59.6 million, and Personal Lines - $6.8 million.
Ceding Commission. Ceding commission represents commission earned primarily
through the Maiden Quota Share, whereby AmTrust receives a ceding commission
between 30% and 31%, depending on the mix of business ceded, for all business
except retail commercial package business, and 34.375% for retail commercial
package business, for written premiums ceded to Maiden. The ceding commission
earned during the six months ended June 30, 2012 and 2011 was $90.8 million and
$71.1 million, respectively. Ceding commission increased period over period as a
result of increased premium writings. Additionally, effective April 1, 2011, we
entered into a 40% quota share reinsurance agreement with Maiden covering our
European medical liability business for which we receive a five percent ceding
commission. Prior to April 1, 2011, we ceded this business to another reinsurer.
Service and Fee Income. Service and fee income increased $23.8 million, or
47.9%, to $73.5 million from $49.7 million for the six months ended June 30,
2012 and 2011, respectively. The increase related to fee income of approximately
$11 million produced from BTIS, which was acquired in December 2011, higher
technology fee income from ACAC of approximately $5 million, higher fee income
of approximately $5 million from Warrantech from new programs and fees generated
by becoming a servicing carrier for workers' compensation assigned risk plans in
three additional states.
Net Investment Income. Net investment income increased $3.5 million, or 12.8%,
to $30.9 million from $27.4 million for the six months ended June 30, 2012 and
2011, respectively. The increase resulted primarily from having a higher average
balance of fixed security investment securities during the six months ended June
30, 2012 compared to the six months ended June 30, 2011.
Net Realized Gains (Losses) on Investments. We incurred net realized gains on
investments of $1.6 million and $1.0 million for the six months ended June 30,
2012 and 2011, respectively. The increase resulted from our decision to sell
certain positions that had market values that exceeded our cost basis during the
six months ended June 30, 2012.
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased
$113.3 million, or 38.0%, to $412.0 million from $298.7 million for the six
months ended June 30, 2012 and 2011, respectively. Our loss ratio for the six
months ended June 30, 2012 and 2011 was 63.5% and 66.6%, respectively. The
decrease in the loss ratio in 2012 resulted from lower current accident year
selected ultimate losses as compared to selected ultimate losses from the prior
accident year.
38
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other
underwriting expenses increased $82.9 million, or 48.5%, to $253.7 million from
$170.8 million for the six months ended June 30, 2012 and 2011,
respectively. The expense ratio for the same periods increased to 25.1% from
22.2%, respectively, and impacted all segments. The increase in policy
acquisition costs was the largest contributor to the increase in the expense
ratio during the six months ended June 30, 2012, which was the result of a
change in business mix as well the adoption of the new accounting standard for
deferred acquisition costs during the first quarter of 2012.
Income Before Other Income (Expense), Income Taxes and Equity Earnings of
Unconsolidated Subsidiary. Income before other income (expense), income taxes
and equity earnings of unconsolidated subsidiary increased $21.8 million, or
24.3%, to $111.4 million from $89.6 million for the six months ended June 30,
2012 and 2011, respectively. The change in income from 2011 to 2012 resulted
primarily from improvement of the combined ratio of the insurance business.
Interest Expense. Interest expense for the six months ended June 30, 2012 was
$14.1 million, compared to $8.1 million for the same period in 2011. The
increase was primarily related to the issuance of an aggregate of $200 million
of convertible senior notes during December 2011 and January 2012.
Net Gain on Investment in Life Settlement Contracts. Gain on investment in life
settlement contracts was $2.1 million compared to $41.5 million for the six
months ended June 30, 2012 and 2011. During the six months ended June 30, 2012,
we received a benefit of approximately $10 million from mortality events. The
gain in the first six months of 2011 was generated by the purchase of a large
pool of distressed life settlement contracts. During the six months ended June
30, 2012, we purchased a minimal amount of contracts.
Provision for Income Tax. Income tax expense for the six months ended June 30,
2012 was $22.9 million, which resulted in an effective tax rate of 23.5%. Income
tax expense for the six months ended June 30, 2011 was $16.3 million, which
resulted in an effective tax rate of 13.0%. The increase in our effective rate
for the six months ended June 30, 2012 resulted primarily from earning a higher
percentage of pretax income in countries with higher effective rates.
Equity in Earnings of Unconsolidated Subsidiary - Related Party. Equity in
earnings of unconsolidated subsidiary - related party increased by $1.2 million
for the six months ended June 30, 2012 to $5.5 million compared to $4.3 million
for the six months ended June 30, 2011. The increase period over period resulted
from higher contract and service fees reported by ACAC.
39
Small Commercial Business Segment Results of Operations for the Three and Six
Months Ended June 30, 2012 and 2011 (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
(Amounts in Thousands) 2012 2011 2012 2011
Gross written premium $ 214,127 $ 174,607 $ 446,478$ 315,323
Net written premium 104,270 113,221 223,160 190,872
Change in unearned premium (10,702 ) (39,187 ) (37,264 ) (54,977 )
Net earned premiums 93,568 74,034 185,896 135,895
Ceding commission - primarily related
party 15,458 13,570 32,590 31,895
Loss and loss adjustment expense 60,305 49,927 119,529 86,690
Acquisition costs and other
underwriting expenses 42,165 31,653 85,095 66,409
Total expenses 102,470 81,580 204,624 153,099
Underwriting income $ 6,556 $ 6,024 $ 13,862 $ 14,691
Key measures:
Net loss ratio 64.5 % 67.4 % 64.3 % 63.8 %
Net expense ratio 28.5 % 24.4 % 28.2 % 25.4 %
Net combined ratio 93.0 % 91.9 % 92.5 % 89.2 %
Reconciliation of net expense ratio:
Acquisition costs and other
underwriting expenses $ 42,165 $ 31,653 $ 85,095 $ 66,409
Less: ceding commission revenue -
primarily related party 15,458 13,570 32,590 31,895
26,707 18,083 52,505 34,514
Net earned premium $ 93,568 $ 74,034 $ 185,896 $ 135,895
Net expense ratio 28.5 % 24.4 % 28.2 % 25.4 %
Small Commercial Business Segment Results of Operations for the Three Months
Ended June 30, 2012 and 2011
Gross Written Premium. Gross written premium increased $39.5 million, or 22.6%,
to $214.1 million from $174.6 million for the three months ended June 30, 2012
and 2011, respectively. A majority of the increase relates to an approximately
nine percent increase in policy issuances in the first half of 2012 and rate
increases in certain key states. In addition, approximately $16 million resulted
from the Majestic acquisition in the third quarter of 2011. Approximately $18
million resulted from other acquisitions.
Net Written Premium. Net written premium decreased $8.9 million, or 7.9%, to
$104.3 million from $113.2 million for the three months ended June 30, 2012 and
2011, respectively. The decrease in net written premium resulted from an
increase in our assigned risk business, for which we cede 100 percent of our
gross written business, for the three months ended June 30, 2012 compared to the
three months ended June 30, 2011, partially offset by an increase in gross
written premium during the same period.
Net Earned Premium. Net earned premium increased $19.5 million, or 26.3%, to
$93.6 million from $74.1 million for the three months ended June 30, 2012 and
2011, respectively. As premiums written earn ratably over a twelve month period,
the increase in net premium earned resulted from higher net written premium for
the twelve months ended June 30, 2012 compared to the twelve months ended June
30, 2011.
Ceding Commission. The ceding commission earned during the three months ended
June 30, 2012 and 2011 was $15.4 million and $13.6 million, respectively. The
ceding commission increased period over period as result of an increase in net
earned premium, which was partially offset by a decrease in the allocation of
ceding commission to this segment. The decrease in the allocation of ceding
commission to this segment resulted from the decrease in the segment's
proportionate share of our overall policy acquisition expense in the second
quarter.
40
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased
$10.4 million, or 20.8%, to $60.3 million from $49.9 million for the three
months ended June 30, 2012 and 2011, respectively. Our loss ratio for the
segment for the three months ended June 30, 2012 decreased to 64.5% from 67.4%
for the three months ended June 30, 2011. The decrease in the loss ratio in the
three months ended June 30, 2012 resulted primarily from lower current accident
year selected ultimate losses as compared to selected ultimate losses in prior
accident years.
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other
underwriting expenses increased $10.5 million, or 33.1%, to $42.2 million from
$31.7 million for the three months ended June 30, 2012 and 2011, respectively.
The expense ratio increased to 28.5% for the three months ended June 30, 2012
from 24.4% for the three months ended June 30, 2011. The increase in the expense
ratio resulted primarily from a lower allocation percentage of ceding commission
to the segment during the three months ended June 30, 2012 compared to the same
period in 2011, the recognition of higher policy acquisition expense due to
changes in business mix and the adoption of the new accounting standard for
deferred acquisition costs in 2012 on a prospective basis.
Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting
Income). Net premiums earned less expenses included in combined ratio increased
$0.6 million, or 10.0%, to $6.6 million from $6.0 million for the three months
ended June 30, 2012 and 2011, respectively. This increase resulted primarily
from a decrease to the segment's loss ratio in the second quarter of 2012
compared to the second quarter of 2011.
Small Commercial Business Segment Results of Operations for the Six Months Ended
June 30, 2012 and 2011
Gross Written Premium. Gross written premium increased $131.2 million, or
41.6%, to $446.5 million from $315.3 million for the six months ended June 30,
2012 and 2011, respectively. A majority of the increase related to an
approximately nine percent increase in policy issuances in the first half of
2012 as well as rate increases in certain key states. In addition, approximately
$35 million resulted from the Majestic acquisition in the third quarter of 2011.
Approximately $34 million resulted from other acquisitions.
Net Written Premium. Net written premium increased $32.3 million, or 16.9%, to
$223.2 million from $190.9 million for the six months ended June 30, 2012 and
2011, respectively. The increase in net premium resulted from an increase in
gross written premium for the six months ended June 30, 2012 compared to the six
months ended June 30, 2011, partially offset by an increase in our assigned risk
business, for which we cede 100 percent of our gross written business.
Net Earned Premium. Net earned premium increased $50.0 million, or 36.8%, to
$185.9 million from $135.9 million for the six months ended June 30, 2012 and
2011, respectively. As premiums written earn ratably over a twelve month period,
the increase in net premium earned resulted from higher net written premium for
the twelve months ended June 30, 2012 compared to the twelve months ended June
30, 2011.
Ceding Commission. The ceding commission earned during the six months ended
June 30, 2012 and 2011 was $32.6 million and $32.0 million, respectively. The
ceding commission increased period over period as result of an increase in net
earned premium, which was partially offset by a decrease in the allocation of
ceding commission to this segment. The decrease in the allocation of ceding
commission to this segment resulted from the decrease in the segment's
proportionate share of our overall policy acquisition expense.
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased
$32.8 million, or 37.8%, to $119.5 million from $86.7 million for the six months
ended June 30, 2012 and 2011, respectively. Our loss ratio for the segment for
the six months ended June 30, 2012 increased to 64.3% from 63.8% for the six
months ended June 30, 2011. The increase in the loss ratio in the six months
ended June 30, 2012 resulted primarily from higher current accident year
selected ultimate losses as compared to selected ultimate losses in prior
accident years.
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other
underwriting expenses increased $18.7 million, or 28.2%, to $85.1 million from
$66.4 million for the six months ended June 30, 2012 and 2011, respectively. The
expense ratio increased to 28.2% for the six months ended June 30, 2012 from
25.4% for the six months ended June 30, 2011. The increase in the expense ratio
resulted primarily from the lower allocation of ceding commission to the segment
during the six months ended June 30, 2012 compared to the same period in 2011,
the recognition of higher policy acquisition expense due to changes in business
mix and the adoption of the new accounting standard for deferred acquisition
costs in 2012 on a prospective basis.
Net Earned Premiums less Expense Included in Combined Ratio (Underwriting
Income). Net premiums earned less expenses included in combined ratio decreased
$0.8 million, or 5.4%, to $13.9 million from $14.7 million for the six months
ended June 30, 2012 and 2011, respectively. This decrease resulted primarily
from an increase to the segment's expense ratio in the second quarter of 2012
compared to the second quarter of 2011.
41
Specialty Risk and Extended Warranty Segment Results of Operations for the Three
and Six Months Ended June 30, 2012 and 2011 (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
(Amounts in Thousands) 2012 2011 2012 2011
Gross written premium $ 272,610 $ 265,502 $ 506,699$ 493,250
Net written premium 172,259 185,178 313,420 289,725
Change in unearned premium (30,652 ) (75,547 ) (36,240 ) (95,517 )
Net earned premiums 141,607 109,631 277,180 194,208
Ceding commission - primarily related
party 16,174 13,787 33,368 26,686
Loss and loss adjustment expense 85,628 76,053 169,071 133,477
Acquisition costs and other
underwriting expenses 44,038 31,658 87,123 58,306
Total expenses 129,666 107,711 256,194 191,783
Underwriting income $ 28,115 $ 15,707 $ 54,354 $ 29,111
Key measures:
Net loss ratio 60.5 % 69.4 % 61.0 % 68.7 %
Net expense ratio 19.7 % 16.3 % 19.4 % 16.3 %
Net combined ratio 80.1 % 85.7 % 80.4 % 85.0 %
Reconciliation of net expense ratio:
Acquisition costs and other
underwriting expenses $ 44,038 $ 31,658 $ 87,123 $ 58,306
Less: ceding commission revenue -
primarily related party 16,174 13,787 33,368 26,686
27,864 17,871 53,755 31,620
Net earned premium $ 141,607 $ 109,631 $ 277,180 $ 194,208
Net expense ratio 19.7 % 16.3 % 19.4 % 16.3 %
Specialty Risk and Extended Warranty Segment Results of Operations for the Three
Months Ended June 30, 2012 and 2011
Gross Written Premium. Gross written premium increased $7.1 million, or 2.7%, to
$272.6 million from $265.5 million for the three months ended June 30, 2012 and
2011, respectively. The increase related primarily to growth in our European
business, although European gross written premium was negatively impacted by
approximately six percent as a result of fluctuations in currency rates.
Net Written Premium. Net written premium decreased $12.9 million, or 7%, to
$172.3 million from $185.2 million for the three months ended June 30, 2012 and
2011, respectively. The decrease in net written premium resulted from an
increase in the percentage of gross written premium ceded to reinsurers for the
three months ended June 30, 2012 compared to the three months ended June 30,
2011, partially offset by an increase in gross written premium during the same
period.
Net Earned Premium. Net earned premium increased $32.0 million, or 29.2%, to
$141.6 million from $109.6 million for the three months ended June 30, 2012 and
2011, respectively. As net premiums written are earned ratably over the term of
a policy, which on average is 23 months, the increase resulted from growth in
net written premium between 2010 and 2012.
Ceding Commission. The ceding commission earned during the three months ended
June 30, 2012 and 2011 was $16.2 million and $13.8 million, respectively. The
increase related to the allocation to this segment of its proportionate share of
our overall policy acquisition expense.
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased
$9.5 million, or 12.5%, to $85.6 million from $76.1 million for the three months
ended June 30, 2012 and 2011, respectively. Our loss ratio for the segment for
the three months ended June 30, 2012 decreased to 60.5% from 69.4% for the three
months ended June 30, 2011. The decrease in the loss ratio for the three months
ended June 30, 2012 resulted primarily from lower current accident year selected
ultimate losses as compared to selected ultimate losses in prior accident years
and a change in business mix.
42
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other
underwriting expenses increased $12.3 million, or 38.8%, to $44.0 million from
$31.7 million for the three months ended June 30, 2012 and 2011, respectively.
The expense ratio increased to 19.7% for the three months ended June 30, 2012
from 16.3% for the three months ended June 30, 2011. The increase in the expense
ratio resulted, primarily, from higher policy acquisition expense for the three
months ended June 30, 2012 compared to the three months ended June 30, 2011
related to changes in business mix and the adoption of a new accounting standard
for deferred acquisition costs in 2012 on a prospective basis.
Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting
Income). Net earned premiums less expenses included in combined ratio increased
$12.4 million, or 79.0%, to $28.1 million from $15.7 million for the three
months ended June 30, 2012 and 2011, respectively. The increase was attributable
primarily to an improvement in the segment's loss ratio during the three months
ended June 30, 2012 compared to the three months ended June 30, 2011.
Specialty Risk and Extended Warranty Segment Results of Operations for the Six
Months Ended June 30, 2012 and 2011
Gross Written Premium. Gross written premium increased $13.4 million, or 2.7%,
to $506.7 million from $493.3 million for the six months ended June 30, 2012 and
2011, respectively. The segment experienced growth in Europe, while U.S.
business was primarily flat. Additionally, European gross written premium was
negatively impacted by approximately four percent as a result of fluctuations in
currency rates.
Net Written Premium. Net written premium increased $23.7 million, or 8.2%, to
$313.4 million from $289.7 million for the six months ended June 30, 2012 and
2011, respectively. The increase in net written premium resulted from an
increase of gross written premium for the six months ended June 30, 2012
compared to the six months ended June 30, 2011, as well as the reduction in the
percentage of our European medical liability business ceded to reinsurers from
80% to 40% commencing in the second quarter of 2011.
Net Earned Premium. Net earned premium increased $83.0 million, or 42.7%, to
$277.2 million from $194.2 million for the six months ended June 30, 2012 and
2011, respectively. As net written premium is earned ratably over the term of a
policy, which on average is 23 months, the increase resulted from growth in net
written premium between 2010 and 2012 as well as our retention of a higher
percentage of net written premium related to our European medical liability
business.
Ceding Commission. The ceding commission earned during the six months ended
June 30, 2012 and 2011 was $33.4 million and $26.7 million, respectively. The
increase related to the allocation to this segment of its proportionate share of
our overall policy acquisition expense. Additionally, during the six months
ended June 30, 2012, we were party to a 40% quota share arrangement with Maiden
covering our European medical liability business for which we receive a five
percent ceding commission. During the first three months of 2011, we ceded this
business to another reinsurer.
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased
$35.6 million, or 26.7%, to $169.1 million from $133.5 million for the six
months ended June 30, 2012 and 2011, respectively. Our loss ratio for the
segment for the six months ended June 30, 2012 decreased to 61.0% from 68.7% for
the six months ended June 30, 2011. The decrease in the loss ratio for the six
months ended June 30, 2012 resulted primarily from lower current accident year
selected ultimate losses as compared to selected ultimate losses in prior
accident years and a change in business mix.
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other
underwriting expenses increased $28.8 million, or 49.4%, to $87.1 million from
$58.3 million for the six months ended June 30, 2012 and 2011, respectively. The
expense ratio increased to 19.4% for the six months ended June 30, 2012 from
16.3% for the six months ended June 30, 2011. The increase in the expense ratio
resulted primarily from higher policy acquisition expense for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011 related to
changes in business mix and the adoption of the new accounting standard for
deferred acquisition costs in 2012 on a prospective basis.
Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting
Income). Net earned premiums less expenses included in combined ratio increased
$25.3 million, or 86.9%, to $54.4 million from $29.1 million for the six months
ended June 30, 2012 and 2011, respectively. The increase was attributable
primarily to an improvement in the segment's loss ratio during the six months
ended June 30, 2012 compared to the six months ended June 30, 2011.
43
Specialty Program Segment Results of Operations for Three and Six Months Ended
June 30, 2012 and 2011(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
(Amounts in Thousands) 2012 2011 2012 2011
Gross written premium $ 121,878 $ 93,354 $ 226,516$ 143,330
Net written premium 86,237 52,283 155,354 78,517
Change in unearned premium (15,369 ) (12,145 ) (24,825 ) (7,609 )
Net earned premium 70,868 40,138 130,529 70,908
Ceding commission - primarily related
party 12,918 8,057 24,866 12,517
Loss and loss adjustment expense 47,826 28,362 88,020 48,067
Acquisition costs and other
underwriting expenses 34,985 18,314 64,924 30,626
Total expenses 82,811 46,676 152,944 78,693
Underwriting income $ 975 $ 1,519 $ 2,451 $ 4,732
Key measures:
Net loss ratio 67.5 % 70.7 % 67.4 % 67.8 %
Net expense ratio 31.1 % 25.6 % 30.7 % 25.5 %
Net combined ratio 98.6 % 96.2 % 98.1 % 93.3 %
Reconciliation of net expense ratio:
Acquisition costs and other
underwriting expenses $ 34,985 $ 18,314 $ 64,924 $ 30,626
Less: ceding commission revenue -
primarily related party 12,918 8,057 24,866 12,517
22,067 10,257 40,058 18,109
Net earned premium $ 70,868 $ 40,138 $ 130,529 $ 70,908
Net expense ratio 31.1 % 25.6 % 30.7 % 25.5 %
Specialty Program Segment Results of Operations for the Three Months Ended June
30, 2012 and 2011
Gross Written Premium. Gross written premium increased $28.5 million, or 30.5%,
to $121.9 million from $93.4 million for the three months ended June 30, 2012
and 2011, respectively. A majority of the increase in gross written premium
related to incremental growth of gross written premium on existing programs,
particularly in workers' compensation programs. Additionally, the segment
benefited from new program offerings primarily in commercial automotive and
general liability programs. The overall increase was partially offset by the
curtailment or termination of certain programs as a result of our continued
maintenance of our pricing and administrative discipline.
Net Written Premium. Net written premium increased $33.9 million, or 64.8%, to
$86.2 million from $52.3 million for the three months ended June 30, 2012 and
2011, respectively. The increase in net written premium resulted from an
increase in gross written premium for the three months ended June 30, 2012
compared to for the three months ended June 30, 2011 as well as a reduction in
the percentage of gross written premium ceded to reinsurers.
Net Earned Premium. Net earned premium increased $30.8 million, or 76.8%, to
$70.9 million from $40.1 million for the three months ended June 30, 2012 and
2011, respectively. As premiums written earn ratably over a twelve month period,
the increase in net premium earned resulted from higher net written premium for
the twelve months ended June 30, 2012 compared to the twelve months ended June
30, 2011.
Ceding Commission. The ceding commission earned during the three months ended
June 30, 2012 and 2011 was $13.0 million and $8.1 million, respectively. The
increase in ceding commission related primarily to an increase in gross written
premium in this segment relative to our other segments during the three months
ended June 30, 2012 as well as a continuing shift in the mix of the programs
written during the periods. For the three months ended June 30, 2012, we wrote
certain programs that have a higher percentage of policy acquisition costs to
earned premium than in the three months ended June 30, 2012 and, therefore, we
allocated more ceding commission to the segment.
44
Loss and Loss Adjustment Expenses.Loss and loss adjustment expenses increased
$19.4 million, or 68.3%, to $47.8 million for the three months ended June 30,
2012 compared to $28.4 million for the three months ended June 30, 2011. Our
loss ratio for the segment for the three months ended June 30, 2012 decreased to
67.5% from 70.7% for the three months ended June 30, 2011. The decrease in the
loss ratio in the three months ended June 30, 2012 resulted primarily from lower
current accident year selected ultimate losses as compared to selected ultimate
losses from prior years.
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other
underwriting expenses increased $16.7 million, or 91.3%, to $35.0 million from
$18.3 million for the three months ended June 30, 2012 and 2011, respectively.
The expense ratio increased to 31.1% for the three months ended June 30, 2012
from 25.6% for the three months ended June 30, 2011. The increase in the expense
ratio resulted, primarily, from higher policy acquisition expense for the three
months ended June 30, 2012 compared to the three months ended June 30, 2011 as a
result of changes in business mix and the adoption of the new accounting
standard for deferred acquisition costs in 2012 on a prospective basis. In
addition, the increase in the expense ratio was attributable to the allocation
to this segment of a higher proportion of our unallocated expenses as a result
of the increase in premium compared to the three months ended June 30, 2011.
Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting
Income). Net earned premiums less expenses included in combined ratio
decreased $0.5 million, or 33.3%, to $1.0 million from $1.5 million for the
three months ended June 30, 2012 and 2011, respectively. The decrease of $0.5
million resulted primarily from an increase in the expense ratio during the
three months ended June 30, 2012 compared to the three months ended June 30,
2011.
Specialty Program Segment Results of Operations for the Six Months Ended June
30, 2012 and 2011
Gross Written Premium. Gross premium increased $83.2 million, or 58.1%, to
$226.5 million from $143.3 million for the six months ended June 30, 2012 and
2011, respectively. A majority of the increase in gross written premium related
to incremental growth of gross written premium on existing programs,
particularly in workers' compensation programs. Additionally, the segment
benefited from new program offerings primarily in excess and surplus lines,
commercial automotive, and general liability programs managed by new
underwriting teams hired in 2010 and 2011.
Net Written Premium. Net written premium increased $76.9 million, or 98%, to
$155.4 million from $78.5 million for the six months ended June 30, 2012 and
2011, respectively. The increase in net written premium resulted from an
increase in gross written premium for the six months ended June 30, 2012
compared to for the six months ended June 30, 2011.
Net Earned Premium. Net earned premium increased $59.6 million, or 84.1%, to
$130.5 million from $70.9 million for the six months ended June 30, 2012 and
2011, respectively. As premiums written earn ratably over a twelve month period,
the increase in net premium earned resulted from higher net written premium for
the twelve months ended June 30, 2012 compared to the twelve months ended June
30, 2011.
Ceding Commission. The ceding commission earned during the six months ended
June 30, 2012 and 2011 was $24.9 million and $12.5 million, respectively. The
increase in ceding commission related primarily to an increase in gross written
premium in this segment relative to our other segments during the six months
ended June 30, 2012 as well as a continuing shift in the mix of the programs
written during the periods. For the six months ended June 30, 2012, we wrote
certain programs that have a higher percentage of policy acquisition costs to
earned premium than in the six months ended June 30, 2011 and, therefore, we
allocated more ceding commission to the segment.
Loss and Loss Adjustment Expenses.Loss and loss adjustment expenses increased
$39.9 million, or 83.0%, to $88.0 million for the six months ended June 30, 2012
compared to $48.1 million for the six months ended June 30, 2011. Our loss ratio
for the segment for the six months ended June 30, 2012 decreased to 67.4% from
67.8% for the six months ended June 30, 2011. The decrease in the loss ratio in
the six months ended June 30, 2012 resulted primarily from lower current
accident year selected ultimate losses as compared to selected ultimate losses
from prior years.
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other
underwriting expenses increased $34.3 million, or 112.1%, to $64.9 million from
$30.6 million for the six months ended June 30, 2012 and 2011, respectively. The
expense ratio increased to 30.7% for the six months ended June 30, 2012 from
25.5% for the six months ended June 30, 2011. The increase in the expense ratio
resulted, primarily, from higher policy acquisition expense for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011 as a result
of changes in business mix and the adoption of the new accounting standard for
deferred acquisition costs in 2012 on a prospective basis. In addition, the
increase in the expense ratio was attributable to the allocation to this segment
of a higher proportion of our unallocated expenses as a result of the increase
in premium compared to the six months ended June 30, 2011.
45
Net Earned Premiums less Expense Included in Combined Ratio (Underwriting
Income). Net earned premiums less expenses included in combined ratio
decreased $2.2 million, or 46.8%, to $2.5 million from $4.7 million for the six
months ended June 30, 2012 and 2011, respectively. The decrease of $2.2 million
resulted primarily from an increase the expense ratio during the six months
ended June 30, 2012 compared to the six months ended June 30, 2011.
Personal Lines Reinsurance Segment Results of Operations for the Three and Six
Months Ended June 30, 2012 and 2011 (Unaudited)
Three Months Ended June 30 Six Months Ended June 30
(Amounts in Thousands) 2012 2011 2012 2011
Gross written premium $ 28,823 $ 24,999 $ 59,432 $ 50,586
Net written premium 28,823 24,999 59,432 50,586Change in unearned premium (872 ) (520 ) (5,019 ) (2,977 )
Net earned premium 27,951 24,479 54,413 47,609
Loss and loss adjustment expense 18,028 15,666 35,096 30,470
Acquisition costs and other
underwriting expenses 8,525 7,955 16,596 15,473
Total expenses 26,553 23,621 51,692 45,943
Underwriting income $ 1,398 $ 858 $ 2,721 $ 1,666
Key measures:
Net loss ratio 64.5 % 64.0 % 64.5 % 64.0 %
Net expense ratio 30.5 % 32.5 % 30.5 % 32.5 %
Net combined ratio 95.0 % 96.5 % 95.0 % 96.5 %
We assumed $28.8 million and $25.0 million of premium from the GMACI Insurers
for the three months ended June 30, 2012 and 2011, respectively, and $59.4
million and $50.6 million for the six months ended June 30, 2012 and 2011,
respectively. The increase related primarily to an increase in the GMACI
Insurers' premium writings during the equivalent time periods. Net earned
premium increased in 2012 compared to 2011 due to the earning cycle of assumed
written premium in 2011 and earned in 2012. Loss and loss adjustment expense
increased 15.1% and 15.2% for the three and six months ended June 30, 2012
compared to the same period in 2011. The net loss ratio increased due to higher
estimates based on actual losses. The decrease in the net expense ratio in 2012
compared to 2011 resulted from the sliding scale commission structure, by which
the ceding commission payable to GMACI decreases as the loss ratio increases.
Liquidity and Capital Resources
Our principal sources of operating funds are premiums, 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 forecast claim payments based on our
historical trends. We seek to manage the funding of claim payments by actively
managing available cash and forecasting cash flows on short-term and long-term
bases. Cash payments for claims were $367.5 million and $278.2 million in the
six months ended June 30, 2012 and 2011, respectively. We expect cash flow from
operations should be sufficient to meet our anticipated claim obligations,
provide us sufficient liquidity to fund our current operations and service our
debt instruments and anticipated growth for at least the next twelve months.
However, if our growth attributable to acquisitions, internally generated growth
or a combination of both exceeds our projections, we may have to raise
additional capital sooner to support our growth. If we cannot obtain adequate
capital 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 operations could be adversely affected.
The following table is summary of our statement of cash flows:
Six Months Ended
June 30,
(Amounts in Thousands) 2012 2011
Cash and cash equivalents provided by (used in):
Operating activities $ 224,501 $ 166,789
Investing activities (338,882 ) (106,326 )
Financing activities 64,578 (36,171 )
46
Net cash provided by operating activities for the six months ended June 30, 2012
increased compared to cash provided by operating activities in the six months
ended June 30, 2011. The increase in cash flow is the result, primarily, of an
overall increase in our reinsurance payables, which are typically paid in
arrears, thus providing us with a timing benefit on this cash we collected.
Cash used in investing activities during the six months ended June 30, 2012 was
approximately $339 million and consisted of approximately $284 million for the
net purchase of fixed maturity and equity securities, approximately $24 million
for the acquisition of and premium payments for life settlement contracts, an
increase in restricted cash of $22 million and capital expenditures of
approximately $15 million. Cash used in investing activities in the six months
ended June 30, 2011 was approximately $106 million and primarily consisted of
approximately $73 million for the net purchase of fixed and equity securities,
approximately $12 million for the purchase of an aircraft and approximately $27
million for the acquisition of and premium payments for life settlement
contracts partially offset by the net receipt of cash in the approximate amount
of $32 million received in connection with the acquisition of Luxembourg captive
insurance companies.
Cash provided by financing activities for the six months ended June 30, 2012 was
approximately $65 million and consisted primarily of debt proceeds of
approximately $30 million, minority interest capital contributions to one of our
subsidiaries of approximately $10 million and borrowings from securities sold
under agreements to repurchase of approximately $40 million partially offset by
dividend payments of approximately $11 million and note payments of
approximately $8 million. Cash provided by financing activities for the six
months ended June 30, 2011 was approximately $36 million and consisted primarily
of repayment on repurchase agreements in the amount of approximately $136
million, debt principal payments of approximately $16 million, dividend payments
of approximately $10 million, partially offset by debt proceeds of approximately
$109 million and minority interest capital contributions to one of our
subsidiaries of approximately $13 million.
Revolving Credit Agreement
On January 28, 2011, we entered into a three-year, $150 million credit agreement
(the "Credit Agreement"), among JPMorgan Chase Bank, N.A., as Administrative
Agent, The Bank of Nova Scotia, as Syndication Agent, SunTrust Bank, as
Documentation Agent, and the various lending institutions party thereto. The
credit facility is a revolving credit facility with a letter of credit sublimit
of $50 million and an expansion feature not to exceed $50 million. Proceeds of
borrowings under the Credit Agreement may be used for working capital,
acquisitions and general corporate purposes. The Credit Agreement contains
certain restrictive covenants customary for facilities of this type (subject to
negotiated exceptions and baskets), including restrictions on indebtedness,
liens, acquisitions and investments, restricted payments and dispositions. There
are also financial covenants that require us to maintain a minimum consolidated
net worth, a maximum consolidated leverage ratio, a minimum fixed charge
coverage ratio, a minimum risk-based capital and a minimum statutory surplus.
As of June 30, 2012, we had no outstanding borrowings under this Credit
Agreement. We had outstanding letters of credit in place under this Credit
Agreement at June 30, 2012 for $48.9 million, which reduced the availability for
letters of credit to $1.1 million as of June 30, 2012 and the availability under
the facility to $101.1 million as of June 30, 2012.
Borrowings under the Credit Agreement will bear interest at (x) the greatest of
(a) the Administrative Agent's prime rate, (b) the federal funds effective rate
plus 0.5 percent or (c) the adjusted LIBO rate for a one month interest period
on such day plus 1 percent, plus (y) a margin that is adjusted on the basis of
our consolidated leverage ratio. Eurodollar borrowings under the Credit
Agreement will bear interest at the adjusted LIBO rate for the interest period
in effect plus a margin that is adjusted on the basis of our consolidated
leverage ratio. The interest rate on our credit facility as of June 30, 2012 was
2.50%. We recorded interest expense of approximately $1.0 million and $1.4
million for the six months ended June 30, 2012 and 2011, respectively, under the
Credit Agreement.
Fees payable by us under the Credit Agreement include a letter of credit
participation fee (which is the margin applicable to Eurodollar borrowings and
was 2.25% at June 30, 2012), a letter of credit fronting fee with respect to
each letter of credit (.125%) and a commitment fee on the available commitments
of the lenders (a range of .35% to .45% based on our consolidated leverage ratio
and was .40% at June 30, 2012).
47
Convertible Senior Notes
In December 2011, we issued $175 million aggregate principal amount of our 5.5%
convertible senior notes due 2021 (the "Notes") to certain initial purchasers in
a private placement. In January 2012, the Company issued an additional $25
million of the Notes to cover the initial purchasers' overallotment option,
bringing the aggregate amount of Notes issued to $200 million. The Notes will
bear interest at a rate equal to 5.50% per year, payable semiannually in arrears
on June 15th and December 15th of each year, beginning on June 15, 2012.
The Notes will mature on December 15, 2021 (the "Maturity Date"), unless
earlier purchased by us or converted into shares of our common stock, par value
$0.01 per share (the "Common Stock"). Prior to September 15, 2021, the Notes
will be convertible only upon satisfaction of certain conditions, and
thereafter, at any time prior to the close of business on the second scheduled
trading day immediately preceding the Maturity Date. The conversion rate at June
30, 2012 is equal to 31.4326 shares of Common Stock per $1,000 principal amount
of Notes, which corresponds to a conversion price of approximately $31.81 per
share of Common Stock. The conversion rate will be subject to adjustment upon
the occurrence of certain events as set forth in the indenture governing the
notes. Upon conversion of the Notes, we will, at its election, pay or deliver,
as the case may be, cash, shares of Common Stock, or a combination of cash
and
shares of Common Stock.
Upon the occurrence of a fundamental change (as defined in the indenture
governing the notes), holders of the Notes will have the right to require us to
repurchase their Notes for cash, in whole or in part, at 100% of the principal
amount of the Notes to be repurchased, plus any accrued and unpaid interest, if
any, to, but excluding, the fundamental change purchase date.
We separately allocated the proceeds for the issuance of the Notes to a
liability component and an equity component, which is the embedded conversion
option. The equity component was reported as an adjustment to paid-in-capital,
net of tax, and is reflected as an original issue discount ("OID"). The OID of
$41.6 million and deferred origination costs relating to the liability component
of $4.7 million will be amortized into interest expense over the term of the
loan of the Notes. After considering the contractual interest payments and
amortization of the original discount, the Notes effective interest rate was
8.57%. Transaction costs of $1.3 million associated with the equity component
were netted in paid-in-capital. Interest expense, including amortization of
deferred origination costs, recognized on the Notes was $6.9 million for the six
months ended June 30, 2012.
Secured Loan Agreement
During February 2011, through a wholly-owned subsidiary, we entered into a
seven-year secured loan agreement with Bank of America Leasing & Capital, LLC in
the aggregate amount of $10.8 million to finance the purchase of an aircraft.
The loan bears interest at a fixed rate of 4.45%, requires monthly installment
payments of approximately $0.1 million commencing on March 25, 2011 and ending
on February 25, 2018, and a balloon payment of $3.2 million at the maturity
date. We recorded interest expense of approximately $0.1 million for both the
six months ended June 30, 2012 and 2011, respectively, related to this
agreement. The loan is secured by an aircraft that our subsidiary acquired
in
February 2011.
The agreement contains certain covenants that are similar to our revolving
credit facility. Additionally, subsequent to February 25, 2012, but prior to
payment in full, if the outstanding balance of this loan exceeds 90% of the fair
value of the aircraft, we are required to pay the lender the entire amount
necessary to reduce the outstanding principal balance to be equal to or less
than 90% of the fair value of the aircraft. The agreement allows us, under
certain conditions, to repay the entire outstanding principal balance of this
loan without penalty.
Securities Sold (Purchased) Under Agreements to Repurchase (Sell), at Contract
Value
We enter into repurchase agreements and reverse repurchase agreements. The
agreements are accounted for as collateralized borrowing transactions and are
recorded at contract amounts. In the case of repurchase agreements, we receive
cash or securities, which we invest or hold in short term or fixed income
securities. As of June 30, 2012, there were $231.9 million principal amount
outstanding at interest rates between .38% and .47%. Interest expense associated
with these repurchase agreements for the six months ended June 30, 2012 was $0.3
million, of which $0 million was accrued as of June 30, 2012. We have
approximately $253.6 million of collateral pledged in support of these
agreements. Under reverse repurchase agreements, we lend cash or securities for
a short term. During the six months ended June 30, 2012, we entered into a
collateralized lending transaction with a principal amount of $57 million that
is included in cash and cash equivalents as of June 30, 2012. We retain
collateral of $57 million related to this agreement.
48
Note Payable - Collateral for Proportionate Share of Reinsurance Obligation
In conjunction with the Reinsurance Agreement between AII and Maiden Insurance
(see Note 11. "Related Party Transactions"), AII entered into a loan agreement
with Maiden Insurance during the fourth quarter of 2007, whereby Maiden
Insurance loaned to AII the amount equal to its quota share of the obligations
of the AmTrust Ceding Insurers that AII was then obligated to secure. The loan
agreement provides for interest at a rate of LIBOR plus 90 basis points and is
payable on a quarterly basis. Each advance under the loan is secured by a
promissory note. Advances totaled $168 million as of June 30, 2012 and December
31, 2011. Effective December 31, 2008, AII and Maiden Insurance entered into a
Reinsurer Trust Assets Collateral agreement whereby Maiden Insurance is required
to provide AII the assets required to secure Maiden's proportionate share of the
Company's obligations to its U.S. subsidiaries. The amount of this collateral as
of June 30, 2012 was approximately $701.6 million. Maiden retains ownership of
the collateral in the trust account.
Comerica Letter of Credit Facility
In connection with the Majestic acquisition, we, through one of our
subsidiaries, entered into a secured letter of credit facility with Comerica
Bank during the three months ended September 30, 2011. We utilize the letter of
credit facility to comply with the deposit requirements of the State of
California and the U.S. Department of Labor as security for our obligations to
workers' compensation and federal Longshore and Harbor Workers' Compensation Act
policyholders. The credit limit is for $75 million and was utilized for $49.8
million as of June 30, 2012. We are required to pay a letter of credit
participation fee for each letter of credit in the amount of 0.40%.
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 believe it is important to ensure
that our reinsurance partners are financially strong and they generally carry at
least an A.M. Best rating of ''A-'' (Excellent) at the time we enter into our
reinsurance agreements. We also enter reinsurance relationships with third-party
captives formed by agents and other business partners as a mechanism for sharing
risk and profit. All of our captive reinsurance arrangements are fully secured.
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. We have not experienced any
significant changes to our reinsurance programs since December 31, 2011. For a
more detailed description of our reinsurance arrangements, including our
reinsurance arrangements with Maiden Insurance Company Ltd. (''Maiden
Insurance''), 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, 2011.
49
Investment Portfolio
Our investment portfolio, including cash and cash equivalents but excluding
life settlement contracts, other investments and equity investments, increased
$307.6 million, or 15.5%, to $2,287.8 million for the six months ended June 30,
2012 from $1,980.2 million as of December 31, 2011 (excluding $15.1 million and
$14.6 million of other investments, respectively). Our investment portfolio is
classified as available-for-sale, as defined by ASC 320, Investments - Debt and
Equity Securities. Our fixed maturity securities, gross, had a fair value of
$1,825.8 million and an amortized cost of $1,773.6 million as of June 30, 2012.
Our equity securities are reported at fair value and totaled $25.8 million with
a cost of $26.0 million as of June 30, 2012. Securities sold but not yet
purchased, which was $56.9 million as of June 30, 2012, represent our
obligations to deliver the specified security at the contracted price and
thereby create a liability to purchase the security in the market at prevailing
rates. Sales of securities under repurchase agreements, which were $231.9
million as of June 30, 2012, are accounted for as collateralized borrowing
transactions and are recorded at their contracted amounts. Our investment
portfolio exclusive of life settlement contracts and other investments is
summarized in the table below by type of investment:
June 30, 2012 December 31, 2011
Carrying Percentage of Carrying Percentage of
(Amounts in Thousands) Value Portfolio Value Portfolio
Cash, cash equivalents and restricted cash $ 403,093 17.6 % $ 421,837 21.3 %
Time and short-term deposits 33,134 1.4 128,565 6.5
U.S. treasury securities 46,863 2.0 53,274 2.7
U.S. government agencies 54,381 2.4 6,790 0.3
Municipals 273,052 12.0 275,017 13.9
Commercial mortgage back securities 10,118 0.4 150 -
Residential mortgage backed securities:
Agency backed 367,430 16.1 364,000 18.4
Non-agency backed 7,224 0.3 7,664 0.4
Corporate bonds 1,066,691 46.7 687,348 34.7
Preferred stocks 4,859 0.2 4,314 0.2
Common stocks 20,971 0.9 31,286 1.6
$ 2,287,816 100.0 % $ 1,980,245 100.0 %
The table below summarizes the credit quality of our fixed maturity securities
as of June 30, 2012 and December 31, 2011, as rated by Standard and Poor's.
2012 2011
U.S. Treasury 2.2 % 3.2 %
AAA 14.8 12.5
AA 34.7 39.7
A 24.2 23.0
BBB, BBB+, BBB- 23.0 20.1
BB, BB+, BB- 1.1 0.8
B, B+, B- - 0.4
Other - 0.3
Total 100.0 % 100.0 %
50
The table below summarizes the average duration by type of fixed maturity as
well as detailing the average yield as of June 30, 2012 and December 31, 2011:
June 30, 2012 December 31, 2011
Average Average
Average Duration Average Duration
Yield% in Years Yield% in Years
U.S. treasury securities 2.18 3.1 2.31 3.3
U.S. government agencies 4.05 3.7 4.12 2.9
Foreign government 3.84 5.2 3.98 5.6
Corporate bonds 4.31 4.9 4.38 3.7
Municipals 4.52 5.6 4.18 5.4
Mortgage and asset backed 3.80 2.6 3.68 2.6
As of June 30, 2012, the weighted average duration of our fixed income
securities was 4.5 years and had a yield of 4.2%.
Quarterly, our Investment Committee ("Committee") evaluates each security that
has an unrealized loss as of the end of the subject reporting period for OTTI.
We generally consider an investment to be impaired when it has been in a
significant unrealized loss position (in excess of 35% of cost if the issuer has
a market capitalization of under $1 billion and in excess of 25% of cost if the
issuer has a market capitalization of $1 billion or more) for over 24 months. In
addition, the Committee uses a set of quantitative and qualitative criteria to
review our investment portfolio to evaluate the necessity of recording
impairment losses for other-than-temporary declines in the fair value of our
investments. The criteria the Committee primarily considers include:
· the current fair value compared to amortized cost;
· the length of time the security's fair value has been below its amortized cost;
· specific credit issues related to the issuer such as changes in credit rating,
reduction or elimination of dividends or non-payment of scheduled interest
payments;
· whether management intends to sell the security and, if not, whether it is not
more than likely than not that the Company will be required to sell the
security before recovery of its amortized cost basis;
· the financial condition and near-term prospects of the issuer of the security,
including any specific events that may affect its operations or earnings;
· the occurrence of a discrete credit event resulting in the issuer defaulting on
material outstanding obligations or the issuer seeking protection under
bankruptcy laws; and
· other items, including company management, media exposure, sponsors, marketing
and advertising agreements, debt restructurings, regulatory changes,
acquisitions and dispositions, pending litigation, distribution agreements and
general industry trends.
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.
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 OTTI with the amount related to other
factors recognized in accumulated other comprehensive loss net 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.
The impairment charges of our fixed and equity securities for the six months
ended June 30, 2012 and 2011 are presented in the table below:
(Amounts in Thousands) 2012 2011
Equity securities $ 1,208 $ 345
Fixed maturity securities - -
$ 1,208 $ 345
In addition to the other-than-temporary impairment of $1.2 million recorded
during the six months ended June 30, 2012, we had $23.8 million of gross
unrealized losses, of which $2.5 million related to marketable equity securities
and $21.3 million related to fixed maturity securities.
51
Corporate bonds represent 58% of the fair value of our fixed maturities and 95%
of the total unrealized losses of our fixed maturities. We own 328 corporate
bonds in the industrial, bank and financial and other sectors, which have a fair
value of approximately 15%, 41% and 2%, respectively, and 15%, 76% and 4% of
total unrealized losses, respectively, of our fixed maturities. 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 consist 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. Within our portfolio of equity
securities, three common stocks comprised approximately 91% of the unrealized
loss, while their fair market value represented approximately 20% of the
portfolio. The duration of these impairments ranged from 9 to 12 months. The
remaining securities in a loss position are not considered individually
significant and accounted for 9% of our unrealized losses. We believe these
securities will recover and that we have the ability and intent to hold them to
recovery.
