x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended June 30, 2011 |
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Delaware
|
04-3106389
|
|
(State or other jurisdiction of
|
(IRS Employer Identification No.)
|
|
incorporation or organization)
|
||
59 Maiden Lane, 6th Floor, New York, New York
|
10038
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Large accelerated filer ¨
|
Accelerated filer x
|
|
Non-accelerated filer ¨
|
Smaller reporting company ¨
|
|
(Do not check if a smaller reporting company)
|
|
Page
|
||
PART I
|
FINANCIAL INFORMATION
|
3
|
Item 1.
|
Unaudited Financial Statements:
|
|
Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 (audited)
|
3
|
|
Condensed Consolidated Statements of Income — Three and six months ended June 30, 2011 and 2010
|
4
|
|
Condensed Consolidated Statements of Cash Flows — Three and six months ended June 30, 2011 and 2010
|
5
|
|
Notes to Condensed Consolidated Financial Statements
|
6
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
30
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
52
|
Item 4.
|
Controls and Procedures
|
54
|
PART II
|
OTHER INFORMATION
|
54
|
Item 1.
|
Legal Proceedings
|
54
|
Item 1A.
|
Risk Factors
|
54
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
54
|
Item 3.
|
Defaults Upon Senior Securities
|
54
|
Item 4.
|
(Removed and Reserved)
|
54
|
Item 5.
|
Other Information
|
54
|
Item 6.
|
Exhibits
|
55
|
Signatures
|
56
|
June 30,
2011
|
December 31,
2010
|
|||||||
(Amounts in Thousands)
|
(Unaudited)
|
(Audited)
|
||||||
ASSETS
|
||||||||
Investments:
|
||||||||
Fixed maturities, available-for-sale, at market value (amortized cost $1,191,390; $1,192,844)
|
$
|
1,222,419
|
$
|
1,208,813
|
||||
Equity securities, available-for-sale, at market value (cost $19,204; $18,577)
|
19,367
|
17,412
|
||||||
Short-term investments
|
98,480
|
32,137
|
||||||
Equity investment in unconsolidated subsidiary – related party
|
86,633
|
77,136
|
||||||
Other investments
|
22,008
|
21,514
|
||||||
Total investments
|
1,448,907
|
1,357,012
|
||||||
Cash and cash equivalents
|
256,446
|
201,949
|
||||||
Accrued interest and dividends
|
10,050
|
7,979
|
||||||
Premiums receivable, net
|
877,047
|
727,561
|
||||||
Reinsurance recoverable (related party $426,930; $386,932)
|
1,006,410
|
775,432
|
||||||
Prepaid reinsurance premium (related party $320,720; $283,899)
|
507,999
|
484,960
|
||||||
Prepaid expenses and other assets
|
495,296
|
163,905
|
||||||
Federal income tax receivable
|
2,009
|
10,269
|
||||||
Deferred policy acquisition costs
|
258,557
|
224,671
|
||||||
Property and equipment, net
|
44,779
|
30,889
|
||||||
Goodwill
|
107,731
|
106,220
|
||||||
Intangible assets
|
120,366
|
91,606
|
||||||
|
$
|
5,135,597
|
$
|
4,182,453
|
||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
Liabilities:
|
||||||||
Loss and loss expense reserves
|
$
|
1,688,737
|
$
|
1,263,537
|
||||
Unearned premiums
|
1,212,703
|
1,024,965
|
||||||
Ceded reinsurance premiums payable (related party $152,869; $95,629)
|
310,894
|
266,314
|
||||||
Reinsurance payable on paid losses
|
10,855
|
11,343
|
||||||
Funds held under reinsurance treaties
|
55,324
|
3,217
|
||||||
Securities sold but not yet purchased, at market
|
141
|
8,847
|
||||||
Securities sold under agreements to repurchase, at contract value
|
211,867
|
347,617
|
||||||
Accrued expenses and other current liabilities
|
296,406
|
195,060
|
||||||
Deferred income taxes
|
67,428
|
9,883
|
||||||
Note payable on collateral loan – related party
|
167,975
|
167,975
|
||||||
Revolving credit facility
|
98,200
|
—
|
||||||
Secured term loan
|
10,413
|
—
|
||||||
Non-interest bearing note payable – net of unamortized discount of $303; $600
|
7,197
|
14,400
|
||||||
Term loan
|
—
|
6,667
|
||||||
Junior subordinated debt
|
123,714
|
123,714
|
||||||
Total liabilities
|
4,261,854
|
3,443,539
|
||||||
Commitments and contingencies
|
||||||||
Redeemable non-controlling interest
|
600
|
600
|
||||||
Stockholders’ equity:
|
||||||||
Common stock, $.01 par value; 100,000 shares authorized, 84,713 and 84,314 issued in 2011 and 2010, respectively; 59,913 and 59,565 outstanding in 2011 and 2010, respectively
|
847
|
844
|
||||||
Preferred stock, $.01 par value; 10,000 shares authorized
|
—
|
—
|
||||||
Additional paid-in capital
|
554,994
|
548,731
|
||||||
Treasury stock at cost; 24,800 and 24,816 shares in 2011 and 2010, respectively
|
(300,365
|
)
|
(300,489
|
)
|
||||
Accumulated other comprehensive income (loss)
|
16,404
|
(266
|
)
|
|||||
Retained earnings
|
553,478
|
467,694
|
||||||
Total AmTrust Financial Services, Inc. equity
|
825,358
|
716,514
|
||||||
Non-controlling interest
|
47,785
|
21,800
|
||||||
Total stockholders’ equity
|
873,143
|
738,314
|
||||||
|
$
|
5,135,597
|
$
|
4,182,453
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Revenues:
|
||||||||||||||||
Premium income:
|
||||||||||||||||
Net written premium
|
$
|
375,681
|
$
|
196,394
|
$
|
609,700
|
$
|
385,808
|
||||||||
Change in unearned premium
|
(127,399
|
)
|
(133
|
)
|
(161,080
|
)
|
(41,447
|
)
|
||||||||
Net earned premium
|
248,282
|
196,261
|
448,620
|
344,361
|
||||||||||||
Ceding commission – primarily related party
|
35,414
|
32,958
|
71,098
|
65,206
|
||||||||||||
Service and fee income (related parties – three months $4,459; $2,880 and six months $7,898; $5,548)
|
24,542
|
9,121
|
49,731
|
17,087
|
||||||||||||
Net investment income
|
13,167
|
14,686
|
27,359
|
28,285
|
||||||||||||
Net realized gain (loss) on investments
|
616
|
(6,544
|
)
|
1,031
|
(4,759
|
)
|
||||||||||
Total revenues
|
322,021
|
246,482
|
597,839
|
450,180
|
||||||||||||
Expenses:
|
||||||||||||||||
Loss and loss adjustment expense
|
170,008
|
121,510
|
298,704
|
211,331
|
||||||||||||
Acquisition costs and other underwriting expenses
|
89,580
|
79,579
|
170,814
|
140,925
|
||||||||||||
Other
|
18,564
|
9,336
|
38,760
|
15,570
|
||||||||||||
Total expenses
|
278,152
|
210,425
|
508,278
|
367,826
|
||||||||||||
Income before other income (expense), income taxes and equity in earnings of unconsolidated subsidiaries
|
43,869
|
36,057
|
89,561
|
82,354
|
||||||||||||
Other income (expense):
|
||||||||||||||||
Foreign currency gain
|
2,520
|
755
|
2,236
|
38
|
||||||||||||
Interest expense
|
(4,334
|
)
|
(3,063
|
)
|
(8,088
|
)
|
(6,635
|
)
|
||||||||
Net gain on investment in life settlement contracts
|
22,638
|
—
|
41,524
|
—
|
||||||||||||
Total other income (expense)
|
20,824
|
(2,308
|
)
|
35,672
|
(6,597
|
)
|
||||||||||
Income before income taxes and equity in earnings of unconsolidated subsidiaries
|
64,693
|
33,749
|
125,233
|
75,757
|
||||||||||||
Provision for income taxes
|
12,126
|
8,839
|
24,468
|
24,007
|
||||||||||||
Income before equity earnings of unconsolidated subsidiaries and non-controlling interest
|
52,567
|
24,910
|
100,765
|
51,750
|
||||||||||||
Equity in earnings of unconsolidated subsidiaries – related parties
|
4,077
|
5,913
|
7,200
|
17,773
|
||||||||||||
Net income
|
56,644
|
30,823
|
107,965
|
69,523
|
||||||||||||
Net income attributable to non-controlling interest of subsidiaries
|
(6,482
|
)
|
—
|
(12,620
|
)
|
—
|
||||||||||
Net income attributable to AmTrust Financial Services, Inc.
|
50,162
|
30,823
|
95,345
|
69,523
|
||||||||||||
Earnings per common share:
|
||||||||||||||||
Basic earnings per common share
|
$
|
0.84
|
$
|
0.52
|
$
|
1.60
|
$
|
1.17
|
||||||||
Diluted earnings per common share
|
$
|
0.81
|
$
|
0.51
|
$
|
1.55
|
$
|
1.15
|
||||||||
Dividends declared per common share
|
$
|
0.08
|
$
|
0.07
|
$
|
0.16
|
|
$
|
0.14
|
|||||||
Net realized gain (loss) on investments:
|
||||||||||||||||
Total other-than-temporary impairment loss
|
$
|
(345
|
)
|
$
|
(12,007
|
)
|
$
|
(345
|
)
|
$
|
(17,145
|
)
|
||||
Portion of loss recognized in other comprehensive income
|
—
|
—
|
—
|
—
|
||||||||||||
Net impairment losses recognized in earnings
|
(345
|
)
|
(12,007
|
)
|
(345
|
)
|
(17,145
|
)
|
||||||||
Other net realized gain on investments
|
961
|
5,463
|
1,376
|
12,386
|
||||||||||||
Net realized investment gain (loss)
|
$
|
616
|
$
|
(6,544
|
)
|
$
|
1,031
|
$
|
(4,759
|
)
|
Six Months Ended June 30,
|
||||||||
2011
|
2010
|
|||||||
Cash flows from operating activities:
|
||||||||
Net income
|
$
|
107,965
|
$
|
69,523
|
||||
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
Depreciation and amortization
|
31,764
|
7,945
|
||||||
Equity earnings and gain on investment in unconsolidated subsidiaries
|
(7,200
|
)
|
(17,773
|
)
|
||||
Gain on investment in life settlement contracts
|
(41,524
|
)
|
—
|
|||||
Realized gain marketable securities
|
(1,376
|
)
|
(12,386
|
)
|
||||
Non-cash write-down of marketable securities
|
345
|
17,145
|
||||||
Discount on notes payable
|
298
|
450
|
||||||
Stock compensation expense
|
2,827
|
1,860
|
||||||
Bad debt expense
|
4,167
|
3,510
|
||||||
Foreign currency (gain) loss
|
(2,236
|
)
|
(38
|
)
|
||||
Changes in assets - (increase) decrease:
|
||||||||
Premiums and note receivables
|
(130,990
|
)
|
(162,419
|
)
|
||||
Reinsurance recoverable
|
(82,829
|
)
|
(53,216
|
)
|
||||
Deferred policy acquisition costs, net
|
(33,886
|
)
|
(42,340
|
)
|
||||
Prepaid reinsurance premiums
|
(23,039
|
)
|
(35,907
|
)
|
||||
Prepaid expenses and other assets
|
(35,908
|
)
|
(739
|
)
|
||||
Changes in liabilities - increase (decrease):
|
||||||||
Reinsurance premium payable
|
44,580
|
94,480
|
||||||
Loss and loss expense reserve
|
57,179
|
62,671
|
||||||
Unearned premiums
|
165,925
|
88,653
|
||||||
Funds held under reinsurance treaties
|
52,107
|
(70
|
)
|
|||||
Deferred tax liability, net
|
(20,344
|
)
|
(4,170
|
)
|
||||
Accrued expenses and other current liabilities
|
87,070
|
(10,896
|
)
|
|||||
Net cash provided in operating activities
|
174,895
|
6,283
|
||||||
Cash flows from investing activities:
|
||||||||
Net (purchases) sales of securities with fixed maturities and short term investments
|
(72,409
|
)
|
95,734
|
|||||
Net (purchases) sales of equity securities
|
(176
|
) |
4,502
|
|||||
Net (purchases) sales of other investments
|
(451
|
)
|
(577
|
)
|
||||
Investment in ACAC
|
—
|
(53,055
|
)
|
|||||
Acquisition of and capitalized premiums for life settlement contracts
|
(26,504
|
)
|
—
|
|||||
Acquisition of subsidiaries, net of cash obtained
|
30,874
|
(3,553
|
)
|
|||||
Purchase of property and equipment
|
(18,315
|
)
|
(1,677
|
)
|
||||
Net cash (used in) provided by investing activities
|
(86,981
|
)
|
41,374
|
|||||
Cash flows from financing activities:
|
||||||||
Repurchase agreements, net
|
(135,750
|
)
|
65,478
|
|||||
Revolving credit facility borrowings
|
98,200
|
—
|
||||||
Secured loan agreement borrowings
|
10,800
|
—
|
||||||
Secured loan agreement repayment
|
(387
|
)
|
—
|
|||||
Term loan payment
|
(6,667
|
) |
(6,667
|
)
|
||||
Capital contribution to subsidiary
|
12,515
|
—
|
||||||
Stock option exercise and other
|
3,563
|
790
|
||||||
Dividends distributed on common stock
|
(9,551
|
)
|
(7,713
|
)
|
||||
Non-interest bearing note payment
|
(7,500
|
)
|
(7,500
|
)
|
||||
Debt financing fees
|
(1,394
|
)
|
—
|
|||||
Net cash (used in) provided by financing activities
|
(36,171
|
)
|
44,388
|
|
||||
Effect of exchange rate changes on cash
|
2,754
|
(9,446
|
)
|
|||||
Net increase in cash and cash equivalents
|
54,497
|
82,599
|
||||||
Cash and cash equivalents, beginning of the period
|
201,949
|
233,810
|
||||||
Cash and cash equivalents, end of the period
|
$
|
256,446
|
$
|
316,409
|
||||
Supplemental Cash Flow Information
|
||||||||
Income tax payments
|
$
|
6,280
|
$
|
7,258
|
||||
Interest payments on debt
|
6,566
|
8,434
|
1.
|
Basis of Reporting
|
2.
|
Recent Accounting Pronouncements
|
(Amounts in Thousands)
|
Original or
amortized
cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Market
value
|
||||||||||||
Preferred stock
|
$
|
6,029
|
$
|
357
|
$
|
42
|
$
|
6,344
|
||||||||
Common stock
|
13,175
|
1,456
|
1,608
|
13,023
|
||||||||||||
U.S. treasury securities
|
92,204
|
1,928
|
328
|
93,804
|
||||||||||||
U.S. government agencies
|
18,224
|
1,651
|
—
|
19,875
|
||||||||||||
Municipal bonds
|
84,923
|
1,214
|
821
|
85,316
|
||||||||||||
Corporate bonds:
|
||||||||||||||||
Finance
|
425,108
|
13,295
|
9,500
|
428,903
|
||||||||||||
Industrial
|
50,663
|
2,241
|
56
|
52,848
|
||||||||||||
Utilities
|
39,177
|
2,019
|
126
|
41,070
|
||||||||||||
Commercial mortgage backed securities
|
1,568
|
111
|
—
|
1,679
|
||||||||||||
Residential mortgage backed securities:
|
||||||||||||||||
Agency backed
|
470,641
|
18,658
|
131
|
489,168
|
||||||||||||
Non-agency backed
|
7,868
|
848
|
4
|
8,712
|
||||||||||||
Asset-backed securities
|
1,014
|
30
|
—
|
1,044
|
||||||||||||
|
$
|
1,210,594
|
$
|
43,808
|
$
|
12,616
|
$
|
1,241,786
|
(Amounts in Thousands)
|
Amortized
Cost
|
Fair Value
|
||||||
Due in one year or less
|
$
|
8,544
|
$
|
8,774
|
||||
Due after one through five years
|
172,070
|
172,512
|
||||||
Due after five through ten years
|
403,511
|
413,724
|
||||||
Due after ten years
|
126,174
|
126,806
|
||||||
Mortgage backed securities
|
481,091
|
500,603
|
||||||
Total fixed maturities
|
$
|
1,191,390
|
$
|
1,222,419
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
(Amounts in Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Fixed maturities
|
$
|
12,302
|
$
|
11,666
|
$
|
25,976
|
$
|
23,370
|
||||||||
Equity maturities
|
120
|
32
|
286
|
359
|
||||||||||||
Cash and cash equivalents
|
966
|
1,910
|
1,572
|
2,755
|
||||||||||||
Note receivable – related party
|
—
|
1,204
|
—
|
2,049
|
||||||||||||
13,388
|
14,812
|
27,834
|
28,533
|
|||||||||||||
Less: Investment expenses and interest expense on securities sold under agreements to repurchase
|
221
|
126
|
475
|
248
|
||||||||||||
$
|
13,167
|
$
|
14,686
|
$
|
27,359
|
$
|
28,285
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
(Amounts in Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Equity securities
|
$
|
345
|
$
|
1,467
|
$
|
345
|
$
|
6,605
|
||||||||
Fixed maturities
|
-
|
10,540
|
-
|
10,540
|
||||||||||||
345
|
12,007
|
345
|
17,145
|
Less Than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||||||||||
(Amounts in Thousands)
|
Fair
Market
Value
|
Unrealized
Losses
|
No. of
Positions
Held
|
Fair
Market
Value
|
Unrealized
Losses
|
No. of
Positions
Held
|
Fair
Market
Value
|
Unrealized
Losses
|
||||||||||||||||||||||||
Common and preferred stock
|
$
|
948
|
$
|
581
|
7
|
$
|
4,665
|
$
|
1,069
|
58
|
$
|
5,613
|
$
|
1,650
|
||||||||||||||||||
U.S. treasury securities
|
51,590
|
328
|
8
|
—
|
—
|
—
|
51,590
|
328
|
||||||||||||||||||||||||
Municipal bonds
|
51,387
|
821
|
15
|
—
|
—
|
—
|
51,387
|
821
|
||||||||||||||||||||||||
Corporate bonds:
|
||||||||||||||||||||||||||||||||
Finance
|
116,309
|
2,768
|
28
|
94,203
|
6,732
|
13
|
210,512
|
9,500
|
||||||||||||||||||||||||
Industrial
|
7,871
|
56
|
4
|
—
|
—
|
—
|
7,871
|
56
|
||||||||||||||||||||||||
Utilities
|
23,401
|
126
|
3
|
—
|
—
|
—
|
23,401
|
126
|
||||||||||||||||||||||||
Commercial Mortgage backed securities
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
Residential mortgage backed securities:
|
||||||||||||||||||||||||||||||||
Agency backed
|
112,605
|
131
|
11
|
—
|
—
|
—
|
112,605
|
131
|
||||||||||||||||||||||||
Non-agency backed
|
—
|
—
|
—
|
25
|
4
|
1
|
25
|
4
|
||||||||||||||||||||||||
Total temporarily impaired securities
|
$
|
364,111
|
$
|
4,811
|
76
|
$
|
98,893
|
$
|
7,805
|
72
|
$
|
463,004
|
$
|
12,616
|
(Amounts in Thousands)
|
Total
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
Assets:
|
||||||||||||||||
U.S. treasury securities
|
$
|
93,804
|
$
|
93,804
|
$
|
—
|
$
|
—
|
||||||||
U.S. government agencies
|
19,875
|
—
|
19,875
|
—
|
||||||||||||
Municipal bonds
|
85,316
|
—
|
85,316
|
—
|
||||||||||||
Corporate bonds:
|
||||||||||||||||
Finance
|
428,903
|
—
|
428,903
|
—
|
||||||||||||
Industrial
|
52,848
|
—
|
52,848
|
—
|
||||||||||||
Utilities
|
41,070
|
—
|
41,070
|
—
|
||||||||||||
Commercial mortgage backed securities
|
1,679
|
—
|
1,679
|
—
|
||||||||||||
Residential mortgage backed securities:
|
||||||||||||||||
Agency backed
|
489,168
|
—
|
489,168
|
—
|
||||||||||||
Non-agency backed
|
8,712
|
—
|
8,712
|
—
|
||||||||||||
Asset-backed securities
|
1,044
|
—
|
1,044
|
—
|
||||||||||||
Equity securities
|
19,367
|
19,367
|
—
|
—
|
||||||||||||
Short term investments
|
98,480
|
98,480
|
—
|
—
|
||||||||||||
Other investments
|
22,008
|
—
|
—
|
22,008
|
||||||||||||
Life settlement contracts
|
108,710
|
—
|
—
|
108,710
|
||||||||||||
$
|
1,470,984
|
$
|
211,651
|
$
|
1,128,615
|
$
|
130,718
|
|||||||||
Liabilities:
|
||||||||||||||||
Equity securities sold but not yet purchased, market
|
$
|
141
|
$
|
141
|
$
|
—
|
$
|
—
|
||||||||
Securities sold under agreements to repurchase, at contract value
|
211,867
|
—
|
211,867
|
—
|
||||||||||||
Life settlement contract profit commission
|
9,267
|
—
|
—
|
9,267
|
||||||||||||
|
$
|
221,275
|
$
|
141
|
$
|
211,867
|
$
|
9,267
|
(Amounts in
Thousands)
|
Balance as of
March 31,
2011
|
Net income
|
Other
comprehensive
income
|
Purchases
and
issuances
|
Sales and
settlements
|
Net
transfers
into (out of)
Level 3
|
Balance as of
June 30,
2011
|
|||||||||||||||||||||
Other investments
|
$
|
22,512
|
$
|
—
|
$
|
(875
|
)
|
$
|
786
|
$
|
(415
|
)
|
$
|
—
|
$
|
22,008
|
||||||||||||
Life settlement contracts
|
63,686
|
33,842
|
—
|
11,182
|
—
|
—
|
108,710
|
|||||||||||||||||||||
Life settlement contract profit commission
|
(5,589
|
)
|
(3,678
|
)
|
—
|
—
|
—
|
—
|
(9,267
|
)
|
||||||||||||||||||
Total
|
$
|
80,609
|
$
|
30,164
|
$
|
(875
|
)
|
$
|
11,968
|
$
|
(415
|
)
|
$
|
—
|
$
|
121,451
|
(Amounts in
Thousands)
|
Balance as of
December 31,
2010
|
Net income
|
Other
comprehensive
income
|
Purchases
and
issuances
|
Sales and
settlements
|
Net
transfers
into (out of)
Level 3
|
Balance as of
June 30,
2011
|
|||||||||||||||||||||
Other investments
|
$
|
21,514
|
$
|
661
|
$
|
(377
|
)
|
$
|
866
|
$
|
(656
|
)
|
$
|
—
|
$
|
22,008
|
||||||||||||
Life settlement contracts
|
22,155
|
57,962
|
—
|
28,593
|
—
|
—
|
108,710
|
|||||||||||||||||||||
Life settlement contract profit commission
|
(4,711
|
)
|
(4,556
|
)
|
—
|
—
|
—
|
—
|
(9,267
|
)
|
||||||||||||||||||
Total
|
$
|
38,958
|
$
|
54,067
|
$
|
(377
|
)
|
$
|
29,459
|
$
|
(656
|
)
|
$
|
—
|
$
|
121,451
|
(Amounts in
Thousands)
|
Balance as of
March 31,
2010
|
Net income
|
Other
comprehensive
income
|
Purchases
and
issuances
|
Sales and
settlements
|
Net
transfers
into (out of)
Level 3
|
Balance as of
June 30,
2010
|
|||||||||||||||||||||
Other investments
|
$
|
14,019
|
$
|
—
|
$
|
(685
|
)
|
$
|
108
|
$
|
(119
|
)
|
$
|
—
|
$
|
13,323
|
||||||||||||
Derivatives
|
(353
|
)
|
133
|
—
|
—
|
—
|
—
|
(220
|
)
|
|||||||||||||||||||
Total
|
$
|
13,666
|
$
|
133
|
$
|
(685
|
)
|
$
|
108
|
$
|
(119
|
)
|
$
|
—
|
$
|
13,103
|
(Amounts in
Thousands)
|
Balance as of
December 31,
2009
|
Net income
|
Other
comprehensive
income
|
Purchases
and
issuances
|
Sales and
settlements
|
Net
transfers
into (out of)
Level 3
|
Balance as of
June 30,
2010
|
|||||||||||||||||||||
Other investments
|
$
|
12,746
|
$
|
277
|
$
|
296
|
$
|
123
|
$
|
(119
|
)
|
$
|
—
|
$
|
13,323
|
|||||||||||||
Derivatives
|
(1,893
|
)
|
133
|
—
|
—
|
1,540
|
—
|
(220
|
)
|
|||||||||||||||||||
Total
|
$
|
10,853
|
$
|
410
|
$
|
296
|
$
|
123
|
$
|
1,421
|
$
|
—
|
$
|
13,103
|
|
•
|
Equity and Fixed Income Investments: Fair value disclosures for these investments are disclosed above in this note. The carrying values of cash, short term investments and investment income accrued approximate their fair values;
|
|
•
|
Premiums Receivable: The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair values due to the short term nature of the asset;
|
|
•
|
Subordinated Debentures and Debt: The carrying values reported in the accompanying balance sheets for these financial instruments approximate fair value. Fair value was estimated using projected cash flows, discounted at rates currently being offered for similar notes.
|
Aggregate
|
|||||||||||||||||
Liquidation
|
Aggregate
|
Per
|
|||||||||||||||
Amount of
|
Liquidation
|
Aggregate
|
Annum
|
||||||||||||||
(Amounts in Thousands)
|
Trust
|
Amount of
|
Principal
|
Stated
|
Interest
|
||||||||||||
Preferred
|
Common
|
Amount
|
Maturity
|
Rate of
|
|||||||||||||
Name of Trust
|
Securities
|
Securities
|
of Notes
|
of Notes
|
Notes
|
||||||||||||
AmTrust Capital Financing Trust I
|
$
|
25,000
|
$
|
774
|
$
|
25,774
|
3/17/2035
|
8.275
|
% (1)
|
||||||||
AmTrust Capital Financing Trust II
|
25,000
|
774
|
25,774
|
6/15/2035
|
7.710
|
(1)
|
|||||||||||
AmTrust Capital Financing Trust III
|
30,000
|
928
|
30,928
|
9/15/2036
|
8.830
|
(2)
|
|||||||||||
AmTrust Capital Financing Trust IV
|
40,000
|
1,238
|
41,238
|
3/15/2037
|
7.930
|
(3)
|
|||||||||||
Total trust preferred securities
|
$
|
120,000
|
$
|
3,714
|
$
|
123,714
|
|
(1)
|
The interest rate will change to three-month LIBOR plus 3.40% after the tenth anniversary in 2015.
|
|
(2)
|
The interest rate will change to LIBOR plus 3.30% after the fifth anniversary in 2011.
|
|
(3)
|
The interest rate will change to LIBOR plus 3.00% after the fifth anniversary in 2012.
|
(Amounts in Thousands)
|
2011
|
2012
|
2013
|
2014
|
2015
|
Thereafter
|
||||||||||||||||||
Junior subordinated debt
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
123,714
|
||||||||||||
Revolving credit facility
|
—
|
—
|
—
|
98,200
|
—
|
—
|
||||||||||||||||||
Secured loan
|
395
|
977
|
1,021
|
1,068
|
1,116
|
5,836
|
||||||||||||||||||
Promissory note
|
—
|
7,197
|
—
|
—
|
—
|
—
|
||||||||||||||||||
Total
|
$
|
395
|
$
|
8,174
|
$
|
1,021
|
$
|
99,268
|
$
|
1,116
|
$
|
129,550
|
6.
|
Acquisition Costs and Other Underwriting Expenses
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
(Amounts in Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Policy acquisition expenses
|
$
|
56,499
|
$
|
50,122
|
$
|
103,316
|
$
|
75,413
|
||||||||
Salaries and benefits
|
31,969
|
23,062
|
59,891
|
48,415
|
||||||||||||
Other insurance general and administrative expenses
|
1,112
|
6,395
|
7,607
|
17,097
|
||||||||||||
$
|
89,580
|
$
|
79,579
|
$
|
170,814
|
$
|
140,925
|
7.
|
Earnings Per Share
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
(Amounts in Thousands except per share)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Basic earnings per share:
|
||||||||||||||||
Net income attributable to AmTrust Financial Services, Inc. shareholders
|
$
|
50,162
|
$
|
30,823
|
$
|
95,345
|
$
|
69,523
|
||||||||
Less: Net income allocated to participating securities and redeemable non-controlling interest
|
39
|
26
|
64
|
32
|
||||||||||||
Net income allocated to AmTrust Financial Services, Inc. common shareholders
|
$
|
50,123
|
$
|
30,797
|
$
|
95,281
|
$
|
69,491
|
||||||||
Weighted average common shares outstanding – basic
|
59,880
|
59,486
|
59,766
|
59,412
|
||||||||||||
Less: Weighted average participating shares outstanding
|
36
|
50
|
42
|
27
|
||||||||||||
Weighted average common shares outstanding - basic
|
59,844
|
59,436
|
59,724
|
59,385
|
||||||||||||
Net income per AmTrust Financial Services, Inc. common share - basic
|
$
|
0.84
|
$
|
0.52
|
$
|
1.60
|
$
|
1.17
|
||||||||
Diluted earnings per share:
|
||||||||||||||||
Net income attributable to AmTrust Financial Services, Inc. shareholders
|
$
|
50,162
|
$
|
30,823
|
$
|
95,345
|
$
|
69,523
|
||||||||
Less: Net income allocated to participating securities and redeemable non-controlling interest
|
39
|
26
|
64
|
32
|
||||||||||||
Net income allocated to AmTrust Financial Services, Inc. common shareholders
|
$
|
50,123
|
$
|
30,797
|
$
|
95,281
|
$
|
69,491
|
||||||||
Weighted average common shares outstanding – basic
|
59,844
|
59,436
|
59,724
|
59,385
|
||||||||||||
Plus: Dilutive effect of stock options, other
|
1,778
|
920
|
1,670
|
887
|
||||||||||||
Weighted average common shares outstanding – dilutive
|
61,622
|
60,356
|
61,394
|
60,272
|
||||||||||||
Net income per AmTrust Financial Services, Inc. common shares – diluted
|
$
|
0.81
|
$
|
0.51
|
$
|
1.55
|
$
|
1.15
|
8.
|
Share Based Compensation
|
2011
|
2010
|
|||||||||||||||
(Amounts in Thousands Except per Share)
|
Shares
|
Weighted
Average
Exercise Price
|
Shares
|
Weighted
Average
Exercise Price
|
||||||||||||
Outstanding at beginning of period
|
4,127
|
$
|
10.46
|
4,168
|
$
|
10.12
|
||||||||||
Granted
|
175
|
14.98
|
141
|
13.35
|
||||||||||||
Exercised
|
(333
|
)
|
9.40
|
(101
|
)
|
7.50
|
||||||||||
Cancelled or terminated
|
(65
|
)
|
16.48
|
(32
|
)
|
12.08
|
||||||||||
Outstanding end of period
|
3,904
|
$
|
10.68
|
4,176
|
$
|
10.24
|
9.
|
Comprehensive Income and Shareholder Equity
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
(Amounts in Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Net income attributable to AmTrust
|
$
|
50,162
|
$
|
30,823
|
$
|
95,345
|
$
|
69,523
|
||||||||
Unrealized holding gain (loss)
|
7,128
|
(4,253
|
)
|
10,400
|
3,744
|
|||||||||||
Reclassification adjustment
|
498
|
6,252
|
1,751
|
10,407
|
||||||||||||
Foreign currency translation
|
679
|
(3,300
|
)
|
4,519
|
(8,847
|
)
|
||||||||||
Comprehensive income
|
$
|
58,467
|
$
|
29,522
|
$
|
112,015
|
$
|
74,827
|
(Amounts in thousands)
|
AmTrust
|
Non-Controlling
Interests
|
Total
|
|||||||||
Beginning Balance, January 1, 2011
|
$ | 716,514 | $ | 21,800 | $ | 738,314 | ||||||
Net income
|
95,345 | 12,620 | 107,965 | |||||||||
Unrealized holding gains and reclassification
|
12,151 | — | 12,151 | |||||||||
Foreign currency translation
|
4,519 | — | 4,519 | |||||||||
Comprehensive income
|
112,015 | 12,620 | 124,635 | |||||||||
Capital contribution
|
— | 13,365 | 13,365 | |||||||||
Dividends
|
(9,561 | ) | — | (9,561 | ) | |||||||
Share exercises and compensation, other
|
6,390 | — | 6,390 | |||||||||
Ending Balance, June 30, 2011
|
$ | 825,358 | $ | 47,785 | $ | 873,143 |
10.
|
Income Taxes
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
(Amounts in Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Income before provision for income taxes, equity in earnings of unconsolidated subsidiaries
|
$
|
64,693
|
$
|
33,749
|
$
|
125,233
|
$
|
75,757
|
||||||||
Equity in earnings of unconsolidated subsidiaries
|
4,077
|
5,913
|
7,200
|
17,773
|
||||||||||||
Non-controlling interest
|
(6,482
|
)
|
—
|
(12,620
|
)
|
—
|
||||||||||
$
|
62,288
|
$
|
39,662
|
$
|
119,813
|
$
|
93,530
|
|||||||||
Income taxes at statutory rates
|
$
|
21,801
|
$
|
13,882
|
$
|
41,934
|
$
|
32,736
|
||||||||
Effect of income not subject to U.S. taxation
|
(9,693
|
)
|
(5,724
|
)
|
(17,336
|
)
|
(8,969
|
)
|
||||||||
Other, net
|
18
|
681
|
(130
|
)
|
240
|
|||||||||||
Provision for income taxes as shown on the Condensed Consolidated Statements of Income
|
$
|
12,126
|
$
|
8,839
|
$
|
24,468
|
$
|
24,007
|
||||||||
GAAP effective tax rate
|
19.5
|
%
|
22.3
|
%
|
20.4
|
%
|
25.7
|
%
|
11.
|
Related Party Transactions
|
(Amounts in Thousands)
|
June 30,
2011
|
December 31,
2010
|
||||||
Assets and liabilities:
|
||||||||
Reinsurance recoverable
|
$
|
426,930
|
$
|
386,932
|
||||
Prepaid reinsurance premium
|
320,720
|
283,899
|
||||||
Ceded reinsurance premiums payable
|
(152,869
|
)
|
(95,629
|
)
|
||||
Note payable
|
(167,975
|
)
|
(167,975
|
)
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
(Amounts in Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Results of operations:
|
|
|||||||||||||||
Premium written – ceded
|
$
|
(213,919
|
)
|
$
|
(112,465
|
)
|
$
|
(340,641
|
)
|
$
|
(226,557
|
)
|
||||
Change in unearned premium – ceded
|
77,227
|
6,166
|
90,013
|
17,855
|
||||||||||||
Earned premium - ceded
|
$
|
(136,692
|
)
|
$
|
(106,299
|
)
|
$
|
(250,628
|
)
|
$
|
(208,702
|
)
|
||||
Ceding commission on premium written
|
$
|
44,160
|
$
|
36,124
|
$
|
83,885
|
$
|
71,104
|
||||||||
Ceding commission – deferred
|
(9,796
|
)
|
(2,925
|
)
|
(13,712
|
)
|
(5,898
|
)
|
||||||||
Ceding commission – earned
|
$
|
34,364
|
$
|
33,199
|
$
|
70,173
|
$
|
65,206
|
||||||||
Incurred loss and loss adjustment expense – ceded
|
$
|
98,957
|
$
|
64,274
|
$
|
181,064
|
$
|
135,446
|
||||||||
Interest expense on collateral loan
|
472
|
25
|
958
|
507
|
12.
|
Acquisitions
|
13.
|
Investment in Life Settlements
|
(Amounts in thousands, except Life Settlement Contracts)
Remaining life expectancy as of June 30, 2011
|
Number of Life
Settlement
Contracts
|
Fair Value
|
Face Value
|
|||||||||
0-1
|
—
|
$
|
—
|
$
|
—
|
|||||||
1-2
|
—
|
—
|
—
|
|||||||||
2-3
|
—
|
—
|
—
|
|||||||||
3-4
|
1
|
6,355
|
10,000
|
|||||||||
4-5
|
3
|
8,848
|
20,000
|
|||||||||
Thereafter
|
190
|
93,507
|
1,245,933
|
|||||||||
Total
|
194
|
$
|
108,710
|
$
|
1,275,933
|
(Amounts in thousands)
|
Premiums Due on
Life Settlement
Contracts
|
Premiums
Due
on Premium
Finance
Loans
|
Total
|
|||||||||
2011
|
$
|
17,322
|
$
|
2,706
|
$
|
20,028
|
||||||
2012
|
20,907
|
4,149
|
25,056
|
|||||||||
2013
|
22,647
|
4,311
|
26,958
|
|||||||||
2014
|
23,534
|
4,680
|
28,214
|
|||||||||
2015
|
24,949
|
5,030
|
29,979
|
|||||||||
Thereafter
|
497,466
|
170,114
|
667,580
|
|||||||||
Total
|
$
|
606,825
|
$
|
190,990
|
$
|
797,815
|
14.
|
Contingent Liabilities
|
15.
|
Segments
|
(Amounts in Thousands)
|
Small
Commercial
Business
|
Specialty Risk
and Extended
Warranty
|
Specialty
Program
|
Personal
Lines
Reinsurance
|
Corporate
and Other
|
Total
|
||||||||||||||||||
Three months ended June 30, 2011:
|
||||||||||||||||||||||||
Gross written premium
|
$
|
174,607
|
$
|
265,502
|
$
|
93,354
|
$
|
24,999
|
$
|
—
|
$
|
558,462
|
||||||||||||
Net written premium
|
113,221
|
185,178
|
52,283
|
24,999
|
—
|
375,681
|
||||||||||||||||||
Change in unearned premium
|
(39,187
|
)
|
(75,547
|
)
|
(12,145
|
)
|
(520
|
)
|
—
|
(127,399
|
)
|
|||||||||||||
Net earned premium
|
74,034
|
109,631
|
40,138
|
24,479
|
—
|
248,282
|
||||||||||||||||||
Ceding commission - primarily related party
|
13,570
|
13,787
|
8,057
|
—
|
—
|
35,414
|
||||||||||||||||||
Loss and loss adjustment expense
|
(49,927
|
)
|
(76,053
|
)
|
(28,362
|
)
|
(15,666
|
)
|
—
|
(170,008
|
)
|
|||||||||||||
Acquisition costs and other underwriting expenses
|
(31,653
|
)
|
(31,658
|
)
|
(18,314
|
)
|
(7,955
|
)
|
(89,580
|
)
|
||||||||||||||
(81,580
|
)
|
(107,711
|
)
|
(46,676
|
)
|
(23,621
|
)
|
—
|
(259,588
|
)
|
||||||||||||||
Underwriting income
|
6,024
|
15,707
|
1,519
|
858
|
—
|
24,108
|
||||||||||||||||||
Service and fee income
|
5,177
|
14,904
|
1
|
—
|
4,460
|
24,542
|
||||||||||||||||||
Investment income and realized gain (loss)
|
7,059
|
4,491
|
1,902
|
331
|
—
|
13,783
|
||||||||||||||||||
Other expenses
|
(4,713
|
)
|
(10,488
|
)
|
(2,732
|
)
|
(631
|
)
|
—
|
(18,564
|
)
|
|||||||||||||
Interest expense
|
(1,150
|
)
|
(2,394
|
)
|
(625
|
)
|
(165
|
)
|
—
|
(4,334
|
)
|
|||||||||||||
Foreign currency gain
|
—
|
2,520
|
—
|
—
|
—
|
2,520
|
||||||||||||||||||
Gain on life settlement contracts
|
6,045
|
12,464
|
3,259
|
870
|
—
|
22,638
|
||||||||||||||||||
Provision for income taxes
|
(3,452
|
)
|
(6,990
|
)
|
(605
|
)
|
(237
|
)
|
(842
|
)
|
(12,126
|
)
|
||||||||||||
Equity in earnings of unconsolidated subsidiaries – related party
|
—
|
—
|
—
|
—
|
4,077
|
4,077
|
||||||||||||||||||
Non-controlling interest
|
(1,693
|
)
|
(3,610
|
)
|
(942
|
)
|
(237
|
)
|
—
|
(6,482
|
)
|
|||||||||||||
Net income attributable to AmTrust Financial Services, Inc.
|
$
|
13,297
|
$
|
26,604
|
$
|
1,777
|
$
|
789
|
$
|
7,695
|
$
|
50,162
|
(Amounts in Thousands)
|
Small
Commercial
Business
|
Specialty Risk
and Extended
Warranty
|
Specialty
Program
|
Personal
Lines
Reinsurance
|
Corporate
and Other
|
Total
|
||||||||||||||||||
Three months ended June 30, 2010:
|
||||||||||||||||||||||||
Gross written premium
|
$
|
107,600
|
$
|
197,470
|
$
|
77,712
|
$
|
25,860
|
$
|
—
|
$
|
408,642
|
||||||||||||
Net written premium
|
56,052
|
74,216
|
40,266
|
25,860
|
—
|
196,394
|
||||||||||||||||||
Change in unearned premium
|
9,208
|
12,371
|
(5,205
|
)
|
(16,507
|
)
|
—
|
(133
|
)
|
|||||||||||||||
Net earned premium
|
65,260
|
86,587
|
35,061
|
9,353
|
—
|
196,261
|
||||||||||||||||||
Ceding commission - primarily related party
|
12,954
|
12,927
|
7,077
|
—
|
—
|
32,958
|
||||||||||||||||||
Loss and loss adjustment expense
|
(39,347
|
)
|
(54,064
|
)
|
(22,253
|
)
|
(5,846
|
)
|
—
|
(121,510
|
)
|
|||||||||||||
Acquisition costs and other underwriting expenses
|
(30,541
|
)
|
(29,338
|
)
|
(16,660
|
)
|
(3,040
|
)
|
—
|
(79,579
|
)
|
|||||||||||||
(69,888
|
)
|
(83,402
|
)
|
(38,913
|
)
|
(8,886
|
)
|
—
|
(201,089
|
)
|
||||||||||||||
Underwriting income
|
8,326
|
16,112
|
3,225
|
467
|
—
|
28,130
|
||||||||||||||||||
Service and fee income
|
2,978
|
3,261
|
—
|
—
|
2,882
|
9,121
|
||||||||||||||||||
Investment income and realized gain (loss)
|
3,096
|
2,584
|
1,873
|
589
|
—
|
8,142
|
||||||||||||||||||
Other expenses
|
(2,933
|
)
|
(3,736
|
)
|
(1,967
|
)
|
(700
|
)
|
—
|
(9,336
|
)
|
|||||||||||||
Interest expense
|
(928
|
)
|
(1,174
|
)
|
(689
|
)
|
(272
|
)
|
—
|
(3,063
|
)
|
|||||||||||||
Foreign currency gain
|
—
|
755
|
—
|
—
|
—
|
755
|
||||||||||||||||||
Provision for income taxes
|
(2,737
|
)
|
(4,692
|
)
|
(627
|
)
|
(23
|
)
|
(760
|
)
|
(8,839
|
)
|
||||||||||||
Equity in earnings of unconsolidated subsidiaries – related party
|
—
|
—
|
—
|
—
|
5,913
|
5,913
|
||||||||||||||||||
Net income attributable to AmTrust Financial Services, Inc.
|
$
|
7,802
|
$
|
13,110
|
$
|
1,815
|
$
|
61
|
$
|
8,035
|
$
|
30,823
|
(Amounts in Thousands)
|
Small
Commercial
Business
|
Specialty Risk
and Extended
Warranty
|
Specialty
Program
|
Personal
Lines
Reinsurance
|
Corporate
and Other
|
Total
|
||||||||||||||||||
Six months ended June 30, 2011:
|
||||||||||||||||||||||||
Gross written premium
|
$
|
315,323
|
$
|
493,250
|
$
|
143,330
|
$
|
50,586
|
$
|
—
|
$
|
1,002,489
|
||||||||||||
Net written premium
|
190,872
|
289,725
|
78,517
|
50,586
|
—
|
609,700
|
||||||||||||||||||
Change in unearned premium
|
(54,977
|
)
|
(95,517
|
)
|
(7,609
|
)
|
(2,977
|
)
|
—
|
(161,080
|
)
|
|||||||||||||
Net earned premium
|
135,895
|
194,208
|
70,908
|
47,609
|
—
|
448,620
|
||||||||||||||||||
Ceding commission - primarily related party
|
31,895
|
26,686
|
12,517
|
—
|
—
|
71,098
|
||||||||||||||||||
Loss and loss adjustment expense
|
(86,690
|
)
|
(133,477
|
)
|
(48,067
|
)
|
(30,470
|
)
|
—
|
(298,704
|
)
|
|||||||||||||
Acquisition costs and other underwriting expenses
|
(66,409
|
)
|
(58,306
|
)
|
(30,626
|
)
|
(15,473
|
)
|
—
|
(170,814
|
)
|
|||||||||||||
(153,099
|
)
|
(191,783
|
)
|
(78,693
|
)
|
(45,943
|
)
|
—
|
(469,518
|
)
|
||||||||||||||
Underwriting income
|
14,691
|
29,111
|
4,732
|
1,666
|
—
|
50,200
|
||||||||||||||||||
Service and fee income
|
10,418
|
31,410
|
5
|
—
|
7,898
|
49,731
|
||||||||||||||||||
Investment income and realized gain (loss)
|
12,809
|
10,006
|
4,505
|
1,070
|
—
|
28,390
|
||||||||||||||||||
Other expenses
|
(12,025
|
)
|
(19,509
|
)
|
(5,163
|
)
|
(2,063
|
)
|
—
|
(38,760
|
)
|
|||||||||||||
Interest expense
|
(2,509
|
)
|
(4,071
|
)
|
(1,077
|
)
|
(431
|
)
|
—
|
(8,088
|
)
|
|||||||||||||
Foreign currency gain
|
—
|
2,236
|
—
|
—
|
—
|
2,236
|
||||||||||||||||||
Gain on life settlement contracts
|
12,882
|
20,900
|
5,532
|
2,210
|
—
|
41,524
|
||||||||||||||||||
Provision for income taxes
|
(7,086
|
)
|
(13,693
|
)
|
(1,667
|
)
|
(479
|
)
|
(1.543
|
)
|
(24,468
|
)
|
||||||||||||
Equity in earnings of unconsolidated investment – related party
|
—
|
—
|
—
|
—
|
7,200
|
7,200
|
||||||||||||||||||
Non-controlling interest
|
(3,915
|
)
|
(6,352
|
)
|
(1,681
|
)
|
(672
|
)
|
—
|
(12,620
|
)
|
|||||||||||||
Net income
|
$
|
25,265
|
$
|
50,038
|
$
|
5,186
|
$
|
1,301
|
$
|
13,555
|
$
|
95,345
|
(Amounts in Thousands)
|
Small
Commercial
Business
|
Specialty Risk
and Extended
Warranty
|
Specialty
Program
|
Personal
Lines
Reinsurance
|
Corporate
and Other
|
Total
|
||||||||||||||||||
Six months ended June 30, 2010:
|
||||||||||||||||||||||||
Gross written premium
|
$
|
230,302
|
$
|
349,644
|
$
|
132,367
|
$
|
34,560
|
$
|
—
|
$
|
746,873
|
||||||||||||
Net written premium
|
117,490
|
160,265
|
73,493
|
34,560
|
—
|
385,808
|
||||||||||||||||||
Change in unearned premium
|
7,374
|
(21,914
|
)
|
(1,700
|
)
|
(25,207
|
)
|
—
|
(41,447
|
)
|
||||||||||||||
Net earned premium
|
124,864
|
138,351
|
71,793
|
9,353
|
—
|
344,361
|
||||||||||||||||||
Ceding commission - primarily related party
|
34,180
|
20,830
|
10,196
|
—
|
—
|
65,206
|
||||||||||||||||||
Loss and loss adjustment expense
|
(74,435
|
)
|
(85,224
|
)
|
(45,826
|
)
|
(5,846
|
)
|
—
|
(211,331
|
)
|
|||||||||||||
Acquisition costs and other underwriting expenses
|
(64,722
|
)
|
(44,049
|
)
|
(29,114
|
)
|
(3,040
|
)
|
—
|
(140,925
|
)
|
|||||||||||||
(139,157
|
)
|
(129,273
|
)
|
(74,940
|
)
|
(8,886
|
)
|
—
|
(352,256
|
)
|
||||||||||||||
Underwriting income
|
19,887
|
29,908
|
7,049
|
467
|
—
|
57,311
|
||||||||||||||||||
Service and fee income
|
5,552
|
5,987
|
—
|
—
|
5,548
|
17,087
|
||||||||||||||||||
Investment income and realized gain (loss)
|
9,752
|
7,867
|
5,102
|
805
|
—
|
23,526
|
||||||||||||||||||
Other expenses
|
(5,125
|
)
|
(6,583
|
)
|
(2,983
|
)
|
(879
|
)
|
—
|
(15,570
|
)
|
|||||||||||||
Interest expense
|
(2,185
|
)
|
(2,805
|
)
|
(1,271
|
)
|
(374
|
)
|
—
|
(6,635
|
)
|
|||||||||||||
Foreign currency gain
|
—
|
38
|
—
|
—
|
—
|
38
|
||||||||||||||||||
Provision for income taxes
|
(8,835
|
)
|
(10,905
|
)
|
(2,503
|
)
|
(6
|
)
|
(1,758
|
)
|
(24,007
|
)
|
||||||||||||
Equity in earnings of unconsolidated investment – related party
|
—
|
—
|
—
|
—
|
17,773
|
17,773
|
||||||||||||||||||
Net income
|
$
|
19,046
|
$
|
23,507
|
$
|
5,394
|
$
|
13
|
$
|
21,563
|
$
|
69,523
|
(Amounts in Thousands)
|
Small
Commercial
Business
|
Specialty Risk
and Extended
Warranty
|
Specialty
Program
|
Personal
Lines
Reinsurance
|
Corporate
and other
|
Total
|
||||||||||||||||||
As of June 30, 2011:
|
||||||||||||||||||||||||
Fixed assets
|
$
|
13,892
|
$
|
22,538
|
$
|
5,965
|
$
|
2,384
|
$
|
—
|
$
|
44,779
|
||||||||||||
Goodwill and intangible assets
|
85,833
|
127,441
|
14,823
|
—
|
—
|
228,097
|
||||||||||||||||||
Total assets
|
2,061,692
|
2,205,550
|
716,114
|
152,241
|
—
|
5,135,597
|
||||||||||||||||||
As of December 31, 2010:
|
||||||||||||||||||||||||
Fixed assets
|
$
|
9,839
|
$
|
13,386
|
$
|
5,694
|
$
|
1,970
|
$
|
—
|
$
|
30,889
|
||||||||||||
Goodwill and intangible assets
|
87,001
|
95,737
|
15,088
|
—
|
—
|
197,826
|
||||||||||||||||||
Total assets
|
1,581,946
|
1,716,980
|
741,835
|
141,692
|
—
|
4,182,453
|
|
·
|
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, United Kingdom and Europe, and certain 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 homogeneous, 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 GMAC personal lines business, pursuant to a quota share reinsurance agreement (“Personal Lines Quota Share”) with the GMAC personal lines insurance companies.
|
Company
|
A.M.
Best Rated
|
Coverage Type Offered
|
Coverage
Market
|
Domiciled
|
||||
Technology Insurance Company, Inc. (“TIC”)
|
A (Excellent)
|
Small commercial, middle market property & casualty, specialty risk & extended warranty and reinsurance for GMAC
|
United States
|
New Hampshire
|
||||
Rochdale Insurance
Company (“RIC”)
|
A (Excellent)
|
Small commercial, middle market property & casualty and specialty risk & extended warranty
|
United States
|
New York
|
||||
Wesco Insurance Company (“WIC”)
|
A (Excellent)
|
Small commercial, middle market property & casualty and specialty risk & extended warranty
|
United States
|
Delaware
|
||||
Associated Industries Insurance Company, Inc. (“AIIC”)
|
A (Excellent)
|
Workers’ compensation
|
United States
|
Florida
|
||||
Milwaukee Casualty Insurance Company (“MCIC”)
|
A (Excellent)
|
Small Commercial Business
|
United States
|
Wisconsin
|
||||
Security National Insurance Company (“SNIC”)
|
A (Excellent)
|
Small Commercial Business
|
United States
|
Texas
|
||||
AmTrust Insurance Company of Kansas, Inc. (“AICK”)
|
A (Excellent)
|
Small Commercial Business
|
United States
|
Kansas
|
||||
AmTrust Lloyd’s Insurance Company (“ALIC”)
|
A (Excellent)
|
Small Commercial Business
|
United States
|
Texas
|
||||
AmTrust International Underwriters Limited (“AIU”)
|
A (Excellent)
|
Specialty Risk and Extended Warranty
|
European
Union
|
Ireland
|
||||
AmTrust Europe, Ltd. (“AEL”)
|
A (Excellent)
|
Specialty Risk and Extended Warranty
|
European
Union
|
England
|
||||
AmTrust International Insurance Ltd. (“AII”)
|
A (Excellent)
|
Reinsurance for consolidated subsidiaries
|
United States
and European
Union
|
Bermuda
|
|
•
|
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 the Alabama, Arkansas, Illinois, Indiana, Georgia and Kansas workers’ compensation assigned risk plans. 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 agreements for which we receive a fee.
|
|
•
|
Asset management services — We currently manage the investment portfolios of Maiden and ACAC for which we receive a management fee.
|
|
•
|
Information technology services — We provide information technology services to ACAC and its affiliates for a fee.
|
|
•
|
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.
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
(Amounts in Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Gross written premium
|
$ | 558,462 | $ | 408,642 | $ | 1,002,489 | $ | 746,873 | ||||||||
Net written premium
|
$ | 375,681 | $ | 196,394 | $ | 609,700 | $ | 385,808 | ||||||||
Change in unearned premium
|
(127,399 | ) | (133 | ) | (161,080 | ) | (41,447 | ) | ||||||||
Net earned premium
|
248,282 | 196,261 | 448,620 | 344,361 | ||||||||||||
Ceding commission – primarily related party
|
35,414 | 32,958 | 71,098 | 65,206 | ||||||||||||
Service and fee income (related parties – three months $4,459; $2,880 and six months $7,898; $5,548)
|
24,542 | 9,121 | 49,731 | 17,087 | ||||||||||||
Net investment income
|
13,167 | 14,686 | 27,359 | 28,285 | ||||||||||||
Net realized gain (loss) on investments
|
616 | (6,544 | ) | 1,031 | (4,759 | ) | ||||||||||
Total revenues
|
322,021 | 246,482 | 597,839 | 450,180 | ||||||||||||
Loss and loss adjustment expense
|
170,008 | 121,510 | 298,704 | 211,331 | ||||||||||||
Acquisition costs and other underwriting expenses
|
89,580 | 79,579 | 170,814 | 140,925 | ||||||||||||
Other
|
18,564 | 9,336 | 38,760 | 15,570 | ||||||||||||
Total expenses
|
278,152 | 210,425 | 508,278 | 367,826 | ||||||||||||
Income before other income (expense), income taxes and equity in earnings of unconsolidated subsidiaries
|
43,869 | 36,057 | 89,561 | 82,354 | ||||||||||||
Other income (expense):
|
||||||||||||||||
Foreign currency gain
|
2,520 | 755 | 2,236 | 38 | ||||||||||||
Interest expense
|
(4,334 | ) | (3,063 | ) | (8,088 | ) | (6,635 | ) | ||||||||
Gain on acquisition of life settlement contracts
|
22,638 | — | 41,524 | — | ||||||||||||
Total other income (expense)
|
20,824 | (2,308 | ) | 35,672 | (6,597 | ) | ||||||||||
Income before income taxes and equity in earnings of unconsolidated subsidiaries
|
64,693 | 33,749 | 125,233 | 75,757 | ||||||||||||
Provision for income taxes
|
12,126 | 8,839 | 24,468 | 24,007 | ||||||||||||
Income before equity earnings of unconsolidated subsidiaries and non-controlling interest
|
52,567 | 24,910 | 100,765 | 51,750 | ||||||||||||
Equity in earnings of unconsolidated subsidiaries – related parties
|
4,077 | 5,913 | 7,200 | 17,773 | ||||||||||||
Net income
|
56,644 | 30,823 | 107,965 | 69,523 | ||||||||||||
Non-controlling interest
|
(6,482 | ) | — | (12,620 | ) | — | ||||||||||
Net income attributable to AmTrust Financial Services, Inc.
|
$ | 50,162 | $ | 30,823 | $ | 95,345 | $ | 69,523 | ||||||||
Key measures:
|
||||||||||||||||
Net loss ratio
|
68.5 | % | 61.9 | % | 66.6 | % | 61.4 | % | ||||||||
Net expense ratio
|
21.8 | % | 23.8 | % | 22.2 | % | 22.0 | % | ||||||||
Net combined ratio
|
90.3 | % | 85.7 | % | 88.8 | % | 83.4 | % | ||||||||
Net realized loss on investments:
|
||||||||||||||||
Total other-than-temporary impairment loss
|
$ | (345 | ) | $ | (12,007 | ) | $ | (345 | ) | $ | (17,145 | ) | ||||
Portion of loss recognized in other comprehensive income
|
— | — | — | — | ||||||||||||
Net impairment losses recognized in earnings
|
(345 | ) | (12,007 | ) | (345 | ) | (17,145 | ) | ||||||||
Other net realized gain on investments
|
961 | 5,463 | 1,376 | 12,386 | ||||||||||||
Net realized investment gain (loss)
|
$ | 616 | $ | (6,544 | ) | $ | 1,031 | $ | (4,759 | ) |
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
(Amounts in Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Gross written premium
|
$ | 174,607 | $ | 107,600 | $ | 315,323 | $ | 230,302 | ||||||||
Net written premium
|
113,221 | 56,052 | 190,872 | 117,490 | ||||||||||||
Change in unearned premium
|
(39,187 | ) | 9,208 | (54,977 | ) | 7,374 | ||||||||||
Net earned premium
|
74,034 | 65,260 | 135,895 | 124,864 | ||||||||||||
Ceding commission – primarily related party
|
13,570 | 12,954 | 31,895 | 34,180 | ||||||||||||
Loss and loss adjustment expense
|
49,927 | 39,347 | 86,690 | 74,435 | ||||||||||||
Acquisition costs and other underwriting expenses
|
31,653 | 30,541 | 66,409 | 64,722 | ||||||||||||
Total expenses
|
81,580 | 69,888 | 153,099 | 139,157 | ||||||||||||
Underwriting income
|
$ | 6,024 | $ | 8,326 | $ | 14,691 | $ | 19,887 | ||||||||
Key measures:
|
||||||||||||||||
Net loss ratio
|
67.4 | % | 60.3 | % | 63.8 | % | 59.6 | % | ||||||||
Net expense ratio
|
24.4 | % | 26.9 | % | 25.4 | % | 24.5 | % | ||||||||
Net combined ratio
|
91.9 | % | 87.2 | % | 89.2 | % | 84.1 | % | ||||||||
Reconciliation of net expense ratio:
|
||||||||||||||||
Acquisition costs and other underwriting expenses
|
$ | 31,653 | $ | 30,541 | $ | 66,409 | $ | 64,722 | ||||||||
Less: ceding commission revenue – primarily related party
|
13,570 | 12,954 | 31,895 | 34,180 | ||||||||||||
18,083 | 17,587 | 34,514 | 30,542 | |||||||||||||
Net earned premium
|
$ | 74,034 | $ | 65,260 | $ | 135,895 | $ | 124,864 | ||||||||
Net expense ratio
|
24.4 | % | 26.9 | % | 25.4 | % | 24.5 | % |
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
(Amounts in Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Gross written premium
|
$
|
265,502
|
$
|
197,470
|
$
|
493,250
|
$
|
349,644
|
||||||||
Net written premium
|
185,178
|
74,216
|
289,725
|
160,265
|
||||||||||||
Change in unearned premium
|
(75,547
|
)
|
12,371
|
(95,517
|
)
|
(21,914
|
)
|
|||||||||
Net earned premium
|
109,631
|
86,587
|
194,208
|
138,351
|
||||||||||||
Ceding commission – primarily related party
|
13,787
|
12,927
|
26,686
|
20,830
|
||||||||||||
Loss and loss adjustment expense
|
76,053
|
54,064
|
133,477
|
85,224
|
||||||||||||
Acquisition costs and other underwriting expenses
|
31,658
|
29,338
|
58,306
|
44,049
|
||||||||||||
Total expenses
|
107,711
|
83,402
|
191,783
|
129,273
|
||||||||||||
Underwriting income
|
$
|
15,707
|
$
|
16,112
|
$
|
29,111
|
$
|
29,908
|
||||||||
Key measures:
|
||||||||||||||||
Net loss ratio
|
69.4
|
%
|
62.4
|
%
|
68.7
|
%
|
61.6
|
%
|
||||||||
Net expense ratio
|
16.3
|
%
|
19.0
|
%
|
16.3
|
%
|
16.8
|
%
|
||||||||
Net combined ratio
|
85.7
|
%
|
81.4
|
%
|
85.0
|
%
|
78.4
|
%
|
||||||||
Reconciliation of net expense ratio:
|
||||||||||||||||
Acquisition costs and other underwriting expenses
|
$
|
31,658
|
$
|
29,338
|
$
|
58,306
|
$
|
44,049
|
||||||||
Less: ceding commission revenue – primarily related party
|
13,787
|
12,927
|
26,686
|
20,830
|
||||||||||||
17,871
|
16,411
|
31,620
|
23,219
|
|||||||||||||
Net earned premium
|
$
|
109,631
|
$
|
86,587
|
$
|
194,208
|
$
|
138,351
|
||||||||
Net expense ratio
|
16.3
|
%
|
19.0
|
%
|
16.3
|
%
|
16.8
|
%
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
(Amounts in Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Gross written premium
|
$
|
93,354
|
$
|
77,712
|
$
|
143,330
|
$
|
132,367
|
||||||||
Net written premium
|
52,283
|
40,266
|
78,517
|
73,493
|
||||||||||||
Change in unearned premium
|
(12,145
|
)
|
(5,205
|
)
|
(7,609
|
)
|
(1,700
|
)
|
||||||||
Net earned premium
|
40,138
|
35,061
|
70,908
|
71,793
|
||||||||||||
Ceding commission – primarily related party
|
8,057
|
7,077
|
12,517
|
10,196
|
||||||||||||
Loss and loss adjustment expense
|
28,362
|
22,253
|
48,067
|
45,826
|
||||||||||||
Acquisition costs and other underwriting expenses
|
18,314
|
16,660
|
30,626
|
29,114
|
||||||||||||
Total expenses
|
46,676
|
38,913
|
78,693
|
74,940
|
||||||||||||
Underwriting income
|
$
|
1,519
|
$
|
3,225
|
$
|
4,732
|
$
|
7,049
|
||||||||
Key measures:
|
||||||||||||||||
Net loss ratio
|
70.7
|
%
|
63.5
|
%
|
67.8
|
%
|
63.8
|
%
|
||||||||
Net expense ratio
|
25.6
|
%
|
27.3
|
%
|
25.5
|
%
|
26.4
|
%
|
||||||||
Net combined ratio
|
96.2
|
%
|
90.8
|
%
|
93.3
|
%
|
90.2
|
%
|
||||||||
Reconciliation of net expense ratio:
|
||||||||||||||||
Acquisition costs and other underwriting expenses
|
$
|
18,314
|
$
|
16,660
|
$
|
30,626
|
$
|
29,114
|
||||||||
Less: ceding commission revenue – primarily related party
|
8,057
|
7,077
|
12,517
|
10,196
|
||||||||||||
10,257
|
9,583
|
18,109
|
18,918
|
|||||||||||||
Net earned premium
|
$
|
40,138
|
$
|
35,061
|
$
|
70,908
|
$
|
71,793
|
||||||||
Net expense ratio
|
25.6
|
%
|
27.3
|
%
|
25.5
|
%
|
26.4
|
%
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
(Amounts in Thousands)
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Gross written premium
|
$
|
24,999
|
$
|
25,860
|
$
|
50,586
|
$
|
34,560
|
||||||||
Net written premium
|
24,999
|
25,860
|
50,586
|
34,560
|
||||||||||||
Change in unearned premium
|
(520
|
)
|
(16,507
|
)
|
(2,977
|
)
|
(25,207
|
)
|
||||||||
Net earned premium
|
24,479
|
9,353
|
47,609
|
9,353
|
||||||||||||
Loss and loss adjustment expense
|
15,666
|
5,846
|
30,470
|
5,846
|
||||||||||||
Acquisition costs and other underwriting expenses
|
7,955
|
3,040
|
15,473
|
3,040
|
||||||||||||
Total expenses
|
23,621
|
8,886
|
45,943
|
8,886
|
||||||||||||
Underwriting income
|
$
|
858
|
$
|
467
|
$
|
1,666
|
$
|
467
|
||||||||
Key measures:
|
||||||||||||||||
Net loss ratio
|
64.0
|
%
|
62.5
|
%
|
64.0
|
%
|
62.5
|
%
|
||||||||
Net expense ratio
|
32.5
|
%
|
32.5
|
%
|
32.5
|
%
|
32.5
|
%
|
||||||||
Net combined ratio
|
96.5
|
%
|
95.0
|
%
|
96.5
|
%
|
95.0
|
%
|
Six Months Ended June 30,
|
||||||||
(Amounts in Thousands)
|
2011
|
2010
|
||||||
Cash and cash equivalents provided by (used in):
|
||||||||
Operating activities
|
$
|
174,895
|
$
|
6,283
|
||||
Investing activities
|
(86,981
|
)
|
41,374
|
|||||
Financing activities
|
(36,171
|
)
|
44,388
|
|
June 30,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
|
(Amounts in Thousands)
|
|||||||
Selected Assets:
|
|
|
||||||
Prepaid expenses and other assets
|
$
|
495,296
|
$
|
163,905
|
||||
Intangible assets
|
120,366
|
91,606
|
||||||
Selected Liabilities:
|
|
|||||||
Accrued expenses and other current liabilities
|
$
|
296,406
|
$
|
195,060
|
||||
Deferred income taxes
|
67,428
|
9,883
|
June 30, 2011
|
December 31, 2010
|
|||||||||||||||
(Amounts in Thousands)
|
Carrying
Value
|
Percentage of
Portfolio
|
Carrying
Value
|
Percentage of
Portfolio
|
||||||||||||
Cash and cash equivalents
|
$
|
256,446
|
16.1
|
%
|
$
|
201,949
|
13.8
|
%
|
||||||||
Time and short-term deposits
|
98,480
|
6.2
|
32,137
|
2.2
|
||||||||||||
U.S. treasury securities
|
93,804
|
5.9
|
82,447
|
5.6
|
||||||||||||
U.S. government agencies
|
19,875
|
1.2
|
7,162
|
0.5
|
||||||||||||
Municipals
|
85,316
|
5.3
|
66,676
|
4.6
|
||||||||||||
Commercial mortgage back securities
|
1,679
|
0.1
|
2,076
|
0.1
|
||||||||||||
Residential mortgage backed securities:
|
||||||||||||||||
Agency backed
|
489,168
|
30.6
|
546,098
|
37.4
|
||||||||||||
Non-agency backed
|
8,712
|
0.5
|
8,591
|
0.6
|
||||||||||||
Asset backed securities
|
1,044
|
0.1
|
2,687
|
0.2
|
||||||||||||
Corporate bonds
|
522,821
|
32.8
|
493,076
|
33.8
|
||||||||||||
Preferred stocks
|
6,344
|
0.4
|
7,037
|
0.5
|
||||||||||||
Common stocks
|
13,023
|
0.8
|
10,375
|
0.7
|
||||||||||||
$
|
1,596,712
|
100.0
|
%
|
$
|
1,460,311
|
100.0
|
%
|
|
•
|
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.
|
(Amounts in thousands)
|
2011
|
2010
|
||||||
Equity securities
|
$
|
345
|
$
|
6,605
|
||||
Fixed maturity securities
|
—
|
10,540
|
||||||
$
|
345
|
$
|
17,145
|
Hypothetical Change in Interest Rates
|
Fair Value
|
Estimated
Change in
Fair Value
|
Hypothetical Percentage
Increase (Decrease) in
Shareholders’ Equity
|
|||||||||
(Amounts in Thousands)
|
||||||||||||
200 basis point increase
|
$
|
1,098,079
|
$
|
(124,340
|
)
|
(9.8)
|
%
|
|||||
100 basis point increase
|
1,154,743
|
(67,676
|
)
|
(5.3)
|
||||||||
No change
|
1,222,419
|
—
|
—
|
|||||||||
100 basis point decrease
|
1,239,541
|
17,122
|
1.3
|
|||||||||
200 basis point decrease
|
1,325,901
|
103,482
|
8.1
|
Hypothetical Change in Interest Rates
|
Fair Value
|
Estimated
Change in
Fair Value
|
Hypothetical
Percentage
Increase
(Decrease) in
Shareholders’
Equity
|
|||||||||
(Amounts in Thousands)
|
||||||||||||
5% increase
|
$
|
20,335
|
$
|
968
|
0.1
|
%
|
||||||
No change
|
19,367
|
—
|
—
|
|||||||||
5 % decrease
|
18,399
|
(968
|
)
|
(0.1
|
)
|
Exhibit
Number
|
Description
|
|
10.1
|
Waiver and Amendment No. 1 to Credit Agreement, dated June 30, 2011, among the Company, JPMorgan Chase Bank, N.A., as Administrative Agent, and the lending institutions party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (No. 001-33143) filed on July 5, 2011).
|
|
10.2
|
Endorsement No. 1 to the Amended and Restated Quota Share Reinsurance Agreement, dated July 26, 2011, between AmTrust International Insurance, Ltd. and Maiden Insurance Company Ltd.
|
|
10.3
|
Quota Share Reinsurance Agreement, dated April 1, 2011, among AmTrust Europe Ltd., AmTrust International Underwriters Limited, and Maiden Insurance Company Ltd., as amended by Endorsement No.1 to the Quota Share Reinsurance Agreement, dated July 26, 2011, among AmTrust Europe Ltd., AmTrust International Underwriters Limited, and Maiden Insurance Company Ltd.
|
|
31.1
|
Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the quarter ended June 30, 2011.
|
|
31.2
|
Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the quarter ended June 30, 2011.
|
|
32.1
|
Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended June 30, 2011.
|
32.2
|
Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended June 30, 2011.
|
|
101.1
|
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Income; (iii) the Consolidated Statements of Cash Flows; and (iv) the Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text (submitted electronically herewith).
|
|
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101.1 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
|
AmTrust Financial Services, Inc.
|
||
(Registrant)
|
||
Date: August 4, 2011
|
/s/ Barry D. Zyskind
|
|
Barry D. Zyskind
President and Chief Executive Officer
|
||
/s/ Ronald E. Pipoly, Jr.
|
||
Ronald E. Pipoly, Jr.
Chief Financial Officer
|
“A.
|
This Agreement shall remain in effect until July 1, 2014, and shall automatically renew for successive three-year periods thereafter, unless the Reinsurer or Company elects to terminate this Agreement effective as of July 1, 2014 or as of the expiration of any successive three-year period. If the Reinsurer or Company elects to so terminate this Agreement, it shall give written notice to the other party hereto not less than nine months prior to either July 1, 2014 or the expiration of any successive three-year period.”
|
“A.
|
The Reinsurer will timely fund or provide security for its share of the Obligations (as defined below) by:
|
|
1.
|
transferring to the Company assets (the "Reinsurer Trust Assets") for deposit into one or more trust accounts established or to be established by Company for the sole benefit of such Affiliate (each, a “Trust Account”) with a trustee (the “Trustee”), which Trustee shall be at the time a Trust Account is established, and shall continue to be, a member of the Federal Reserve System and shall not be a parent, subsidiary or affiliate of the Reinsurer, Company or such Affiliate, pursuant to a trust agreement meeting the applicable requirements of the jurisdictions having regulatory authority over each applicable Affiliate (each a “Trust Agreement”);
|
|
2.
|
delivering one or more clean, unconditional and irrevocable letters of credit to such Affiliate (each, a "Letter of Credit") in form and substance satisfying the requirements of the jurisdictions having regulatory authority over such Affiliate; and/or
|
|
3.
|
requesting that the Company cause such Affiliate to withhold Subject Premium in lieu of remitting Affiliate Subject Premium to the Company (the "Subject Withheld Funds", together with any other Affiliate Subject Premium that shall be withheld under an Underlying Reinsurance Agreement, the “Withheld Funds”) in accordance with the terms of the Underlying Reinsurance Agreement with such Affiliate.
|
“C.
|
The Reinsurer shall allow the Company a commission on all Subject Premium ceded hereunder and attributable to Covered Business determined in accordance with the provisions of Schedule B to this Agreement. The Company shall allow the Reinsurer return commission on return premiums at the rate in effect when the return premiums were originally ceded to the Reinsurer. It is expressly agreed that the ceding commission allowed the Company includes provision for all commissions, taxes, assessments (other than assessments based on losses of an Affiliate, as a ceding company under an Underlying Reinsurance Agreement) and all other expenses of whatever nature of the Company and Affiliates, except loss adjustment expenses.”
|
A.
|
The Reinsurer shall allow the Company a provisional 31% commission on all Subject Premium ceded hereunder and attributable to Covered Business (excluding UBI related business as described in Paragraph C. below), which shall be subject to the following adjustment:
|
|
1.
|
Greater than or equal to 42% of the total ceded premium for Covered Business for those three quarters, the commission for the subject quarter shall be reduced from 31% to 30%;
|
|
2.
|
Greater than or equal to 38% of the total ceded premium for Covered Business for those three quarters but less than 42%, the commission for the subject quarter shall be reduced from 31% to 30.5%.
|
B.
|
The Company shall include its calculation of the percentage of ceded premium for Covered Business attributable to Specialty Risk and Extended Warranty business with its quarterly report to the Reinsurer in accordance with Article VII of the Agreement.
|
C.
|
The Reinsurer shall allow the Company a 34.375% commission on Subject Premium related to Retail Commercial Package Business.”
|
AMTRUST INTERNATIONAL INSURANCE, LTD.
|
|
By:
|
/s/ Michael Bott
|
Dated:
|
July 26, 2011
|
MAIDEN INSURANCE COMPANY LTD.
|
|
By:
|
/s/ David A. Lamneck
|
Dated:
|
July 26, 2011
|
Quota Share Reinsurance Contract
|
Reinsured
|
AmTrust Europe Limited, Nottingham, England and/or AmTrust International Underwriters Limited, Eire.
|
|
Principal Address
|
Market Square House
St. James’s Street
Nottingham
NG1 6FG
United Kingdom
|
|
Preamble
|
Whereas the Reinsured underwrite certain business and are desirous of reinsuring a proportion of such business, being all policies and/or contracts. Now therefore it is agreed that this Contract shall indemnify the Reinsured, subject to the following terms and conditions.
The titles allocated to the clauses listed under Conditions are intended solely for the convenience of reference and will not affect the meaning, interpretation, construction or effect of this Contract.
|
|
Type
|
Quota Share Treaty.
|
|
Class and Period of Business
|
This Contract shall cover all policies classified by the Reinsured as Medical Malpractice, including associated liability coverages and policies covering physician defense costs, written or renewed by the Reinsured on or after 2nd April 2011.
This Contract will also cover all such policies written or renewed by the Reinsured on or before 1st April 2011 at the sole option of the Reinsured (the “Inforce Option”), such option to be exercised by June 30, 2011.
This Contract shall remain in effect continuously thereafter unless the Reinsurer or Reinsured elects to terminate this Contract effective as of April 1, 2012 or any April 2 thereafter. If the Reinsurer or Reinsured elects to so terminate this Contract, it shall give written notice to the other party hereto not less than four months prior to the termination date. Termination shall be on a run-off basis, with runoff to include the full original term of multi-year policies. In the alternative, the Reinsured in its sole option may elect to cut off the Reinsurer’s liabilities and return the associated unearned premium, with such cut-off to occur either as of the date of termination or as of the first anniversary date of each multi-year policy that falls on or after the termination date.
|
|
Treaty Detail
|
The Reinsured shall cede and the Reinsurer shall accept by way of reinsurance a Quota Share Percentage of the business stated in ‘Class and Period of Business’.
The percentage Quota Share Cession to the Reinsurer shall be Forty per cent (40%). Cessions to AmTrust International Insurance Ltd. shall be deemed retained by the Reinsured.
The maximum limit of liability attaching hereunder shall be:
|
EUR 5,000,000 (Five Million Euros) or currency equivalent (on a 100% (One Hundred Percent) basis) per original claim any one original policy.
The Reinsured may submit risks that are not otherwise subject to this Contract, including but not limited to risks with limits greater than EUD 5,000,000, to the Reinsurer for Special Acceptance (“Acceptance”). Such risks, if accepted by the Reinsurer in its sole judgment, will be subject to the terms of this Contract except to the extent that such terms are modified in the Acceptance. For any such risks, the Reinsurer shall confirm its Acceptance in writing, along with any modification of the Contract terms for such Acceptance. The Reinsurer’s written confirmation of the Acceptance will become part of the Contract.
It is agreed that the liability of the Reinsurer on all business ceded hereunder shall commence and cease simultaneously with that of the original Policies and shall follow the original terms, clauses, conditions and settlements of the said Policies, subject to the terms and conditions of this Contract.
|
||
Original Net Premium
|
In respect of the risks ceded hereunder the Reinsured shall pay to the Reinsurer their proportion of the Original Net Premiums.
Original Net Premium shall mean the gross premium written by the Reinsured on business protected hereunder during the period of this Contract less taxes, cancellations, returned premiums and original commissions.
|
|
Territorial Scope
|
The territorial scope of this Contract shall be as provided in the risks ceded hereunder for insureds located in Italy.
|
|
Commission
|
The Reinsurer shall allow the Reinsured a Fixed Commission of 3.5% (Three and one half Percent) on Original Net Premium ceded hereunder.
The Reinsurer shall further allow the Reinsured a Profit Share on Original Net Premiums ceded hereunder, being in addition to the 3.5% Fixed Commission.
The Profit Share will apply separately to each twelve month period this Contract remains in effect (“Contract Year”) and will be adjusted quarterly, the first adjustment to be made 1st April 2013. Reinsured’s Profit Share is 50% of the amount by which Incurred Net Loss Ratio is below 65% of the Original Net Premium. For purposes of calculating profit share, multi-year policies shall be split into individual years so that the maximum original policy period in a Contract Year shall be 12 months plus odd time not exceeding 18 months in all. In the event that the Reinsured exercises its Inforce Option as described above, the premium and losses reinsured under that option will be combined with the first Contract Year for the calculation of the Profit Share. The first Contract Year will be- April 2, 2011 through March 31, 2012, both days inclusive, and subsequent Contract Years will begin April 1 of each year).
“Incurred Net Loss Ratio” shall be defined as net paid and outstanding Losses (inclusive of IBNR as established by the Reinsured after consultation with the Reinsurer), being paid and outstanding Losses (“Losses” being further defined under the Loss Settlement Clause) less third party recoveries, divided by Original Net Premium (as defined above) for risks attaching during the Contract Year, as a percentage.
|
|
Brokerage
|
1.25% on Original Net Premium ceded.
|
Accounts
|
Accounts of the transactions between the Reinsured and the Reinsurer hereunder both in respect of premiums and Losses and all items relative to these risks, separately for each Contract Year, shall be rendered by the Reinsured to the Reinsurer quaterly and received by the Reinsuer within 30 (Thirty) days after the end of each quarter. After receipt of the account by the Reinsurer the balance due hereon shall be paid within 30 (Thirty) days thereafter.
The Reinsured shall provide a full individual claim listing quarterly for each of the risks ceded hereunder.
|
|
Cash Loss Limit
|
Should any claim payment hereunder in respect of any loss to this Contract exceed EUR 50,000 (Fifty thousand Euros) (for 100%) or currency equivalent then the Reinsured may request special payment by the Reinsurer of the relative amount of such Cash Claim on submission in writing of full loss details. Amounts falling to the share of the Reinsurer will be due immediately (and in any event within 30 days).
|
|
Reinsurer Contract Documentation
|
This document details the contract terms entered into by the Reinsurer and constitutes the contract document.
With the exception of Contract Endorsements, which may become necessary to formalise any amendments or alterations to this Contract, no further evidence of cover will be issued.
|
|
Security
|
The Reinsurer will post security equal to 100% of the ceded unearned premium and outstanding Losses including IBNR/ calculated by the Reinsured at 75% confidence factor immediately upon being asked to do so and adjusted quarterly. Security shall only be required if the Reinsurer’s Bests rating is reduced to lower than A minus stable or if the Reinsurer’s surplus is less than $600,000,000.
|
|
Conditions
|
Reinsurance Clause
It is agreed that the liability of the Reinsurer on all business ceded hereunder shall commence and cease simultaneously with that of the original policies and shall follow the original terms of the said policies, subject to the terms of this Contract.
|
|
Offset Clause
The Reinsured and the Reinsurer, each at its option, may offset any balance or balances, whether on account of premiums, claims and losses, loss expenses or salvages due from one party to the other under this Contract.
|
||
Loss Settlement Clause
“Losses” as defined herein include all loss settlements made or to be made by the Reinsured, provided the same are within the terms of the original policies, - including loss adjustment costs and expenses allocable to a specific claim incurred by the Reinsured in the investigation, appraisal, adjustment, settlement, litigation, defence or appeal of a specific claim. Losses shall be unconditionally binding upon the Reinsurer and amounts falling to the share of the Reinsurer shall be payable by them upon reasonable evidence of the amount paid being given by the Reinsured.
|
||
Currency Conversion Clause
For the purpose of this Contract currencies other than the currency in which this Contract is written shall be converted into that currency at the rates of exchange used in the Reinsured’s books or where there is a specific remittance for a loss settlement at the rates of exchange used in making such remittance.
|
Inspection Clause
For as long as either party remains under any liability hereunder the Reinsured shall, upon request by the Reinsurer, make available at the Reinsured’s head office or wherever the same may be located, for inspection at any reasonable time by such representatives as may be authorised by the Reinsurer for that purpose, all non-privileged information (meaning information which would not breach an applicable privilege by being shared) relating to business reinsured hereunder in the Reinsured’s possession or under its control and the said representatives may arrange for copies to be made at the Reinsurer’s expense of any of the records containing such information as they may require.
If required by the Reinsured, the Reinsurer agrees to enter into a confidentiality agreement prior to undertaking any inspection of records. This would provide that all terms and conditions of this Contract and any information provided in the course of inspection shall be kept confidential by the Reinsurer as against third parties, unless the disclosure is in line with those scenarios detailed in the “Confidentiality” Clause.
|
||
Confidentiality Clause
The Reinsurer shall regard the transactions under this Contract as strictly confidential and shall not at any time, during its currency or thereafter, make any use, either directly or indirectly, of the information afforded of the business and connections of the Reinsured which shall or may in any way operate to the prejudice or detriment of the latter.
The restrictions as outlined in the Clause shall not apply to communication or disclosures that the Reinsurer is required to make to its statutory auditors, retrocessionaires, associates, legal counsel, arbitrators involved in any arbitration procedures under this Contract or disclosures required upon subpoena or other duly issued order of a court of other governmental agency or regulatory authority.
|
||
Follow the Fortunes
A. Any business ceded hereunder is subject to the terms and conditions of the Reinsured’s Original Policy or Policies and automatically follows all changes in coverage and all endorsements made a part of such policy or policies. Should any regulatory or other legal restriction of any state require modification of any subject policy to which this Contract applies, the liability of the Reinsurer will follow that of the Reinsured.
B. Nothing herein will in any manner create any obligations or establish any rights against the Reinsurer in favour of any third parties or any persons not parties to this Contract except as provided in the Insolvency Clause.
|
||
Errors and Omissions Clause
Any inadvertent error or omission on the part of either the Reinsured or the Reinsurer shall not relieve either party from any liability which would have attached hereunder, provided that such error or omission is rectified immediately upon discovery.
|
Special Termination Clause
The Reinsurer may terminate this Contract in the event of any of the following (clauses 1 through 5 below, collectively, the “Reinsured Special Termination Events”) by written notice to the Reinsured no later than thirty (30) days (or in the case of a Reinsured Special Termination Event described in subsection (1) below, ten (10) days) following actual knowledge of the applicable Reinsured Special Termination Event by the Reinsurer:
1) the Reinsured is thirty (30) or more days in arrears on payment due to the Reinsurer under this Contract, and has not cured such breach within thirty (30) days following written notice thereof from the Reinsurer (unless the amount not so paid is the subject of a good faith dispute) (a “Reinsured Payment Default”);
2) the Reinsured has ceased writing new or renewal business and has elected to run off its existing business or an insurance or other regulatory authority has ordered such party to cease writing new or renewal business;
3) the Reinsured has become insolvent, or has been placed into liquidation or receivership (whether voluntary or involuntary), or there have been instituted against it proceedings for the appointment of a receiver, liquidator, rehabilitator, conservator, or trustee in bankruptcy or other agent known by whatever name, to take possession of its assets or control of its operations
4) a Reinsured Change of Control has occurred. For purposes of this Agreement, a “Reinsured Change of Control” will be deemed to occur with respect to the Reinsured when either (a) an individual person, corporation or other entity, or a group of commonly controlled persons, corporations or entities, acquires, including through merger, directly or indirectly, more than fifty percent (50%) of the voting securities of the Reinsured or obtains the power to vote (directly or through proxies) more than fifty percent (50%) of the voting securities of the Reinsured, except if such individual person, corporation or other entity is under common control with such Reinsured, or (b) AmTrust Financial Services, Inc. (“AmTrust”) no longer directly or indirectly controls the power to vote more than fifty percent (50%) of the voting securities of the Reinsured; provided that in no event shall the acquisition, including through merger, of more than fifty percent (50%) of the voting securities of AmTrust or of the power to vote (directly or through proxies) more than fifty percent (50%) of the voting securities of AmTrust, or the merger, combination or amalgamation of AmTrust into any person, or similar transaction pursuant to which AmTrust shall not be the surviving entity, be deemed a " Reinsured Change of Control"; or
5) the combined shareholders' equity of the Reinsured and the Affiliates is reduced to 50% or less of the amount of such shareholders’ equity at either the inception of this Contract or at the latest renewal or anniversary date of this Contract.
Termination as a result of a Reinsured Payment Default shall be effective upon not less than ten (10) days prior written notice from the Reinsurer to the Reinsured, and termination as a result of any other Reinsured Special Termination Event shall be effective upon not less than thirty (30) days prior written notice from the Reinsurer to the Reinsured. For greater certainty, the Reinsurer may not terminate this Contract as a result of a Reinsured Special Termination Event unless such event is continuing on the date it delivers its notice of termination to the Reinsured.
The Reinsured may terminate this Contract, in the event of any of the following (clauses 1 through 6 below, collectively, the “Reinsurer Special Termination Events”) by written notice to the Reinsurer no later than thirty (30) days (or in the case of a Reinsurer Special Termination Event described in subsection (1) below, ten (10) days) following actual knowledge of the applicable Reinsurer Special Termination Event by the Reinsured:
|
1) the Reinsurer is thirty (30) or more days in arrears on payment due to the Reinsured under this Contract and the Reinsurer has not cured such breach within thirty (30) days following written notice thereof from the Reinsured (unless the amount not so paid is the subject of a good faith dispute) (a “Reinsurer Payment Default”);
2) the Reinsurer has ceased writing new or renewal business and has elected to run off its existing business or an insurance or other regulatory authority has ordered the party to cease writing new or renewal business;
3) the Reinsurer has become insolvent, or has been placed into liquidation or receivership (whether voluntary or involuntary), or there have been instituted against it proceedings for the appointment of a receiver, liquidator, rehabilitator, conservator, or trustee in bankruptcy or other agent known by whatever name, to take possession of its assets or control of its operations;
4) a Reinsurer Change of Control has occurred. For purposes of this Agreement, a “Reinsurer Change of Control” will be deemed to occur when either (a) an individual person, corporation or other entity, or a group of commonly controlled persons, corporations or entities, acquires, including through merger, directly or indirectly, more than fifty percent (50%) of the voting securities of the Reinsurer or obtains the power to vote (directly or through proxies) more than fifty percent (50%) of the voting securities of the Reinsurer, except if such individual person, corporation or other entity is under common control with the Reinsurer or (b) Maiden Holdings, Ltd. no longer directly or indirectly controls the power to vote more than fifty percent (50%) of the voting securities of the Reinsurer;
5) the Reinsurer's shareholders' equity is reduced to 50% or less of the amount of its shareholders’ equity at either the inception of this Contract or at the latest renewal or anniversary date of this Contract; or
6) The Reinsurer fails to maintain an A.M. Best rating of A- (Stable) or better.
Termination as a result of a Reinsurer Payment Default shall be effective upon not less than ten (10) days prior written notice from the Reinsured to the Reinsurer, and termination as a result of any other Reinsurer Special Termination Event shall be effective upon not less than thirty (30) days prior written notice from the Reinsured to the Reinsurer. For greater certainty, the Reinsured may not terminate this Contract as a result of a Reinsurer Special Termination Event unless such event is continuing on the date the applicable Reinsured delivers its notice of termination to the Reinsurer.
Following the effective date of the termination of this Contract as described in this termination clause all reinsurance hereunder shall remain in force until the expiration date, anniversary date, or prior termination date of all Policies included therein, unless, not later than thirty (30) days following such effective date of termination of this Contract, the Reinsured shall elect that the Reinsurer shall not be liable for any Losses that occur, accrue or arise on or after the effective date of termination. If the Reinsured shall make such election, within thirty (30) days following the date of such election, the Reinsurer shall return to the Reinsured the unearned premium applicable to such Policies in force at the time and date of termination, less the unearned portion of the ceding commission paid thereon.
|
Insolvency Clause (G86)
|
|||||
1.
|
Where an Insolvency Event occurs in relation to the Reinsured the following terms shall apply (and, in the event of any inconsistency between these terms and any other terms of this Contract, these terms shall prevail):
|
||||
(1)
|
Notwithstanding any requirement in this Contract that the Reinsured shall actually make payment in discharge of its liability to its policyholder before becoming entitled to payment from the Reinsurer.
|
||||
a)
|
the Reinsurer shall be liable to pay the Reinsured even though the Reinsured is unable to actually pay, or to discharge its liability to, its policyholder, but
|
||||
b)
|
nothing in this Clause shall operate to accelerate the date for payment by the Reinsurer of any sum which may be payable to the Reinsured, which sum shall only become payable as and when the Reinsured would have discharged, by actual payment, its liability for its current net loss but for it being the subject of an Insolvency Event.
|
||||
(2)
|
The existence, quantum, valuation and date for payment of any sum which the Reinsurer is liable to pay the Reinsured under this Contract shall be those and only those for which the Reinsurer would be liable to the Reinsured if the liability of the Reinsured to its policyholders had been determined without reference to any term in any composition or scheme of arrangement or any similar such arrangement, entered into between the Reinsured and all or any part of its policyholders, unless and until the Reinsurer serves written notice to the contrary on the Reinsured in relation to any composition or scheme of arrangement.
|
||||
(3)
|
The Reinsurer shall be entitled (but not obliged) to set-off, against any sum which it may be liable to pay the Reinsured, any sum for which the Reinsured is liable to pay the Reinsurer.
|
||||
2.
|
An Insolvency Event shall occur if:
|
||||
(A)
|
i)
|
(in relation to (1), (2) and (3) above) a winding up petition is presented in respect of the Reinsured or a provisional liquidator is appointed over it or if the Reinsured goes into administration, administrative receivership or receivership or if the Reinsured has a scheme of arrangement or voluntary arrangement proposed in relation to all or any parts of its affairs; or
|
|||
ii)
|
(in relation to (1) above) if the Reinsured goes into compulsory or voluntary liquidation; or
|
||||
in each case, if the Reinsured becomes subject to any other similar insolvency process (whether under the laws of England and Wales or elsewhere); and
|
|||||
(B)
|
the Reinsured is unable to pay its debts as and when they fall due within the meaning of section 123 of the Insolvency Act 1986 (or any statutory amendment or re-enactment of that section). | ||||
Contracts (Rights of Third Parties) Act 1999 Clarification Clause NMA 2852 A person who is not a party to this Contract has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Contract but this does not affect any right or remedy of a third party which exists or is available apart from that Act. |
Intermediary Clause
All communications and notices served in accordance with any of the provisions of this Contract shall be addressed to the party concerned through the offices of AII Reinsurance Broker Ltd., Hamilton, Bermuda who are hereby recognised by all parties as the Intermediary.
|
||
Amendments Clause
It is understood and agreed that any mutually agreed modifications to this Contract (whether by Addendum/Endorsement or other written correspondence) shall be binding on both parties and shall be deemed to form a part of this Contract, and attached hereto.
|
||
Arbitration
|
All disputes and differences arising under or in connection with this Contract shall be referred to arbitration under ARIAS Arbitration Rules.
The Arbitration Tribunal shall consist of three arbitrators, one to be appointed by the Claimant, one to be appointed by the Respondent and the third to be appointed by the two appointed arbitrators.
The third member of the Tribunal shall be appointed as soon as practicable (and no later than 28 days) after the appointment of the two party-appointed arbitrators. The Tribunal shall be constituted upon the appointment of the third arbitrator.
The Arbitrators shall be persons (including those who have retired) with not less than ten years’ experience of insurance or reinsurance within the industry or as lawyers or other professional advisers serving the industry.
Where a party fails to appoint an arbitrator within 14 days of being called upon to do so or where the two party-appointed arbitrators fail to appoint a third within 28 days of their appointment, then upon application ARIAS (UK) will appoint an arbitrator to fill the vacancy. At any time prior to the appointment by ARIAS (UK) the party or arbitrators in default may make such appointment.
The Tribunal may in its sole discretion make such orders and directions as it considers to be necessary for the final determination of the matters in dispute. The Tribunal shall have the widest discretion permitted under the law governing the arbitral procedure when making such orders or directions.
The seat of arbitration shall be London, England.
The proper law of this Contract shall be the law of England.
|
|
Non-Waiver
|
The failure of the Reinsured or the Reinsurer to insist on compliance with this Contract or to exercise any right or remedy hereunder shall not constitute a waiver of any rights or remedy contained herein nor estop either party from thereafter demanding full and complete compliance nor prevent either party from exercising such rights or remedy in the future.
|
No Third Party Rights
|
Nothing in this Contract, express or implied, is intended to or shall confer upon any person, other than the parties hereto, any rights, benefits or remedies of any nature whatsoever under or by reason of this Contract.
|
|
Right to Associate
|
The Reinsurer shall have the right, but not the obligation, to associate at its own expense in the defense or settlement of all claims impacting this Contract, and the Reinsured shall cooperate with the Reinsurer in this regard. However, nothing in this clause shall over-ride the provisions of the Loss Settlements Clause.
|
|
Choice of Law & Jurisdiction
|
The validity, construction and performance of this Contract shall be governed by the law of England and Wales and the Courts of England and Wales shall have exclusive jurisdiction in any dispute hereunder.
|
AmTrust Europe, Limited
|
|
BY:
|
/s/ Jeremy Cadle
|
Dated
|
April 1, 2011
|
AmTrust International Underwriters, Limited
|
|
BY:
|
/s/ Edward Bennett, CEO
|
Dated
|
April 1, 2011
|
Maiden Insurance Company, Limited
|
|
BY:
|
/s/ David A. Lamneck, Senior Vice President
|
Dated
|
April 1, 2011
|
1)
|
The section entitled “Class and Period of Business” of this Contract shall be deleted and the following substituted therefor:
|
2)
|
The section entitled “Commission” of this Contract shall be deleted and the following substituted therefor:
|
3)
|
The section entitled “Conditions” of this Contract shall be amended by the inclusion of the following subsection directly after the subsection entitled “Loss Settlement Clause”:
|
4)
|
The section entitled “Security” of this Contract shall be deleted and the following substituted therefor:
|
5)
|
The name of the Reinsurer shall be corrected to “Maiden Insurance Company Ltd.” in all places it appears in the Contract.
|
AmTrust Europe, Limited
|
|
BY:
|
/s/ Jeremy Cadle
|
Dated
|
July 26, 2011
|
AmTrust International Underwriters, Limited
|
|
BY:
|
/s/ Ronan Conboy
|
Dated
|
July 26, 2011
|
Maiden Insurance Company Ltd.
|
|
BY:
|
/s/ David A. Lamneck
|
Dated
|
July 26, 2011
|
|
1.
|
I have reviewed this Quarterly Report on Form 10-Q of AmTrust Financial Services, Inc.;
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
(a)
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
(b)
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
(c)
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
(d)
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
|
(a)
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
|
(b)
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Dated: August 4, 2011
|
By:
|
/s/ Barry Zyskind
|
Barry Zyskind
|
||
President and Chief Executive Officer
(Principal Executive Officer)
|
|
1.
|
I have reviewed this Quarterly Report on Form 10-Q of AmTrust Financial Services, Inc.;
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
(a)
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
(b)
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
(c)
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
(d)
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
|
(a)
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
|
(b)
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Dated: August 4, 2011
|
By:
|
/s/ Ronald Pipoly
|
Ronald Pipoly
|
||
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
1.
|
The Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
|
2.
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: August 4, 2011
|
By:
|
/s/ Barry Zyskind
|
Barry Zyskind
President and Chief Executive Officer
(Principal Executive Officer)
|
|
1.
|
The Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
|
|
2.
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: August 4, 2011
|
By:
|
/s/ Ronald Pipoly
|
Ronald Pipoly
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data |
Jun. 30, 2011
|
Dec. 31, 2010
|
---|---|---|
Fixed maturities, available-for-sale, amortized cost | $ 1,191,390 | $ 1,192,844 |
Equity securities, available-for-sale, cost | 19,204 | 18,577 |
Non interest bearing note payable, unamortized discount | 303 | 600 |
Common stock, par value | $ 0.01 | $ 0.01 |
Common stock, shares authorized | 100,000 | 100,000 |
Common stock, issued | 84,713 | 84,314 |
Common stock, outstanding | 59,913 | 59,565 |
Preferred stock, par value | $ 0.01 | $ 0.01 |
Preferred stock, shares authorized | 10,000 | 10,000 |
Treasury stock at cost, shares | 24,800 | 24,816 |
Reinsurance recoverable | 1,006,410 | 775,432 |
Prepaid reinsurance premium | 507,999 | 484,960 |
Ceded reinsurance premiums payable | 310,894 | 266,314 |
Related Party Transactions
|
 |  |
Reinsurance recoverable | 426,930 | 386,932 |
Prepaid reinsurance premium | 320,720 | 283,899 |
Ceded reinsurance premiums payable | $ 152,869 | $ 95,629 |
Document and Entity Information
|
6 Months Ended | |
---|---|---|
Jun. 30, 2011
|
Jul. 29, 2011
|
|
Document Type | 10-Q | Â |
Amendment Flag | false | Â |
Document Period End Date | Jun. 30, 2011 | |
Document Fiscal Year Focus | 2011 | Â |
Document Fiscal Period Focus | Q2 | Â |
Trading Symbol | AFSI | Â |
Entity Registrant Name | AMTRUST FINANCIAL SERVICES, INC. | Â |
Entity Central Index Key | 0001365555 | Â |
Current Fiscal Year End Date | --12-31 | Â |
Entity Filer Category | Accelerated Filer | Â |
Entity Common Stock, Shares Outstanding | Â | 59,930,452 |
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Acquisition Costs and Other Underwriting Expenses
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
|
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Acquisition Costs and Other Underwriting Expenses |
The
following table summarizes the components of acquisition costs and
other underwriting expenses for the three and six months ended June
30, 2011 and 2010:
|
Related Party Transactions
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Related Party Transactions |
Maiden
The
Company has various reinsurance and service agreements with Maiden
Holdings, Ltd. (“Maiden”). Maiden is a
publicly-held Bermuda insurance holding company (Nasdaq: MHLD)
formed by Michael Karfunkel, George Karfunkel and Barry Zyskind,
the principal shareholders, and, respectively, the chairman of the
board of directors, a director, and the chief executive officer and
director of the Company. As of June 30, 2011, Michael Karfunkel
owns or controls approximately 13.9% of the issued and outstanding
capital stock of Maiden, George Karfunkel owns or controls
approximately 9.4% of the issued and outstanding capital stock of
Maiden and Mr. Zyskind owns or controls approximately 5.0% of the
issued and outstanding stock of Maiden. Mr. Zyskind serves as the
non-executive chairman of the board of Maiden’s board of
directors. Maiden Insurance Company, Ltd (“Maiden
Insurance”), a wholly-owned subsidiary of Maiden, is a
Bermuda reinsurer. The following section describes the
agreements in place between the Company and its subsidiaries and
Maiden and its subsidiaries.
Reinsurance Agreements
During
the third quarter of 2007, the Company and Maiden entered into a
master agreement, as amended, by which the parties caused the
Company’s Bermuda subsidiary, AmTrust International
Insurance, Ltd. (“AII”) and Maiden Insurance to enter
into a quota share reinsurance agreement (the “Maiden Quota
Share”), as amended, by which AII retrocedes to Maiden
Insurance an amount equal to 40% of the premium written by the
Company’s U.S., Irish and U.K. insurance companies (the
“AmTrust Ceding Insurers”), net of the cost of
unaffiliated inuring reinsurance (and in the case of the
Company’s U.K. insurance subsidiary, AmTrust Europe Ltd., net
of commissions) and 40% of losses, excluding certain specialty risk
programs that the Company commenced writing after the effective
date and risks, other than workers’ compensation risks and
certain business written by the Company’s Irish subsidiary,
AmTrust International Underwriters Limited (“AIU”), for
which the AmTrust Ceding Insurers’ net retention exceeds
$5,000 (“Covered Business”).
The
Maiden Quota Share, which had an initial term of three years, was
renewed for a three-year term effective July 1, 2010 and will
automatically renew for successive three-year terms, unless either
AII or Maiden Insurance notifies the other of its election not to
renew not less than nine months prior to the end of any such three
year term. Effective April 1, 2011, AII and Maiden Insurance
extended the term of the Maiden Quota Share to June 30,
2014. In addition, either party is entitled to terminate
on thirty days’ notice or less upon the occurrence of certain
early termination events, which include a default in payment,
insolvency, change in control of AII or Maiden Insurance, run-off,
or a reduction of 50% or more of the shareholders’ equity of
Maiden Insurance or the combined shareholders’ equity of AII
and the AmTrust Ceding Insurers.
Effective
April 1, 2011, the Maiden Quota Share, as amended, further provides
that AII receives a ceding commission of 30% of ceded written
premiums with respect to all Covered Business, except retail
commercial package business, for which the ceding commission
remains 34.375%. Commencing January 1, 2012, the ceding commission,
excluding the retail package business ceding commission (which
remains at 34.375%), will be adjusted to (a) 30% of ceded premium,
if the Specialty Risk and Extended Warranty subject premium,
excluding ceded premium related to our medical liability business
discussed below, is greater than or equal to 42% of the total
subject premium, (b) 30.5% of ceded premium, if the Specialty Risk
and Extended Warranty subject premium is less than 42% but greater
than or equal to 38%, or (c) 31% of ceded premium, if the Specialty
Risk and Extended Warranty subject premium is less than 38% of the
total subject premium. Prior to April 1, 2011, AII received a
ceding commission of 31% of ceded premiums with respect to all
Covered Business, except retail commercial package business, for
which the ceding commission was 34.375%.
Effective April 1, 2011, the Company, through its
subsidiaries AEL and AIU, entered into a reinsurance agreement with
Maiden Insurance by which the Company cedes to Maiden Insurance 40%
of its European medical liability business, including business in
force at April 1, 2011. The quota share has an initial term of one
year and can be terminated at April 1, 2012 or any April 1
thereafter by either party on four months’
notice. Maiden Insurance pays the Company a 5% ceding
commission, and the Company will earn a profit commission of 50% of
the amount by which the ceded loss ratio is lower than 65%.
The following is the effect
on the Company’s balance sheet as of June 30, 2011 and
December 31, 2010 and the results of operations for the three and
six months ended June 30, 2011 and 2010 related to the above
reinsurance agreements:
In
conjunction with the Maiden Quota Share, 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. Advances under the loan are secured by a
promissory note and totaled $167,975 as of June 30, 2011. The
Company recorded $958 and $507 of interest expense during the six
months ended June 30, 2011 and 2010,
respectively. Effective December 1, 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, 2011 was approximately $410,000.
Maiden retains ownership of the collateral in the trust
account.
Effective
September 1, 2010, the Company, through its subsidiary Technology
Insurance Company, Inc. (“TIC”), entered
into a quota share reinsurance agreement with Maiden Specialty
Insurance Company (“Maiden Specialty”) by which TIC
assumes a portion (generally 90%) of premiums and losses with
respect to certain surplus lines programs written by Maiden
Specialty on behalf of the Company (the “Surplus Lines
Facility”). The Surplus Lines Facility enables the Company to
write business on a surplus lines basis throughout the United
States. Currently, the Company is utilizing the Surplus Lines
Facility for two programs for which Maiden Specialty receives a
five percent ceding commission on all premiums ceded by Maiden
Specialty to TIC. The Surplus Lines Facility shall remain
continuously in force until terminated. As a result of
this agreement, the Company assumed approximately $9,400 of written
premium for which it earned approximately $3,400 and incurred
losses of approximately $2,200 for the six months ended June 30,
2011.
Effective
September 1, 2010, the Company, through its subsidiary, Security
National Insurance Company (“SNIC”), entered into a
reinsurance agreement with Maiden Reinsurance Company and an
unrelated third party. Under the agreement, which has a term of one
year, SNIC cedes 80% of the gross liabilities produced under the
Southern General Agency program to Maiden Reinsurance Company and
20% of the gross liabilities produced to the unrelated third
party. SNIC receives a five percent commission on ceded written
premiums. The reinsurance agreement’s impact on the
Company’s results of operations, financial position or
liquidity was immaterial for the six months ended June 30,
2011.
Reinsurance Brokerage Agreement
Effective
July 1, 2007, the Company, through a subsidiary, entered into a
reinsurance brokerage agreement with Maiden. Pursuant to the
brokerage agreement, the Company provides brokerage services
relating to the Maiden Quota Share for a fee equal to 1.25% of
reinsured premium. Effective April 1, 2011, the Company also
provides brokerage services to Maiden Insurance relating to the
reinsurance agreement on the European medical liability business
for a fee equal to 1.25% of reinsured premium. The
Company recorded $2,674 and $1,375 of brokerage commission
(recorded as a component of service and fee income) during the
three months ended June 30, 2011 and 2010, respectively and $4,258
and $2,885 during the six months ended June 30, 2011 and 2010,
respectively.
Asset Management Agreement
Effective July 1, 2007, the Company,
through a subsidiary, entered into an asset management agreement
with Maiden, pursuant to which the Company provides investment
management services to Maiden and its affiliates. The investment
management services fee is 0.20% per annum for periods in which
average invested assets are $1,000,000 or less and 0.15% per annum
for periods in which the average invested assets exceed $1,000,000.
As a result of this agreement, the Company earned approximately
$776 and $662 of investment management fees (recorded as a
component of service and fee income) for the three months ended
June 30, 2011 and 2010, respectively and $1,501 and $1,341 for the
six months ended June 30, 2011 and 2010, respectively.
Senior Notes
In
June 2011, the Company, through a subsidiary, participated as a
purchaser in a registered public offering by Maiden Holdings North
America, Ltd., a subsidiary of Maiden, for $12,500 of an aggregate
$107,500 principal amount of 8.25% Senior Notes due 2041 (the
“Notes”) that are fully and unconditionally guaranteed
by Maiden. The Notes are redeemable for cash, in whole or in
part, on or after June 15, 2016, at 100% of the principal amount of
the Notes to be redeemed plus accrued and unpaid interest to, but
not including, the redemption date. Maiden Holdings
North America, Ltd. issued the Notes to use the proceeds, together
with cash on hand, to repurchase, at 114% of the principal amount,
$107,500 of Maiden’s $260,000 outstanding trust preferred
securities, on a pro rata basis, to all of its trust preferred
securities holders. ACP Re, Ltd., an entity owned by a trust
controlled by Michael Karfunkel, the Company's Chairman of the
Board, accepted the offer to repurchase its $79,066 in principal
amount of trust preferred securities. The Company’s
Audit Committee reviewed and approved the Company’s
participation in this offering.
American Capital Acquisition Corporation
During
the three months ended March 31, 2010, the Company completed its
strategic investment in American Capital Acquisition Corporation
(“ACAC”). ACAC was formed by The Michael Karfunkel 2005
Grantor Retained Annuity Trust (the “Trust”) and the
Company for the purpose of acquiring from GMAC Insurance Holdings,
Inc. (“GMACI”) and Motor Insurance Corporation
(“MIC”, together with GMACI, “GMAC”),
GMAC’s U.S. consumer property and casualty insurance business
(the “GMAC Business”), a writer of automobile coverages
through independent agents in the United States. Its coverages
include standard/preferred auto, RVs, non-standard auto and
commercial auto. The acquisition included ten statutory insurance
companies (the “GMAC Insurers”). Michael Karfunkel,
individually, and the Trust, which is controlled by Michael
Karfunkel, own 100% of ACAC’s common stock (subject to the
Company’s conversion rights described below). Michael
Kafunkel is the chairman of the board of directors of the Company
and the father-in-law of Barry D. Zyskind, the chief executive
officer of the Company. The ultimate beneficiaries of the Trust
include Michael Karfunkel’s children, one of whom is married
to Mr. Zyskind. In addition, Michael Karfunkel is the Chairman of
the Board of Directors of ACAC.
Pursuant
to the Amended Stock Purchase Agreement, ACAC issued and sold to
the Company for an initial purchase price of approximately $53,000,
which was equal to 25% of the capital initially required by ACAC,
53,054 shares of Series A Preferred Stock, which provides an 8%
cumulative dividend, is non-redeemable and is convertible, at the
Company’s option, into 21.25% of the issued and outstanding
common stock of ACAC (the “Preferred Stock”). The
Company has pre-emptive rights with respect to any future issuances
of securities by ACAC and the Company’s conversion rights are
subject to customary anti-dilution protections. The Company has the
right to appoint two members of ACAC’s board of directors,
which consists of six members. Subject to certain limitations, the
board of directors of ACAC may not take any action in the absence
of the Company’s appointees and ACAC may not take certain
corporate actions without the unanimous prior approval of its board
of directors (including the Company’s
appointees).
The
Company, the Trust and Michael Karfunkel, individually, each shall
be required to make its or his proportionate share of deferred
payments payable by ACAC to GMAC pursuant to the GMAC Securities
Purchase Agreement, which are payable, annually on March 1 through
March 1, 2013, to the extent that ACAC is unable to otherwise
provide for such payments. The Company’s proportionate share
of such deferred payments will not exceed $15,000. In
addition, in connection with the Company’s investment, ACAC
will grant the Company a right of first refusal to purchase or to
reinsure commercial auto insurance business acquired from GMAC.
In
accordance with ASC 323-10-15, Investments-Equity Method and
Joint Ventures, the Company accounts for its investment in
ACAC under the equity method. The Company recorded $4,077 and
$6,142 of income during the three months ended June 30, 2011 and
2010, respectively and $7,200 and $18,919 during the six months
ended June 30, 2011 and 2010, respectively related to its equity
investment in ACAC.
Personal
Lines Quota Share
The
Company, effective March 1, 2010, reinsures 10% of the net premiums
of the GMAC Business, pursuant to a 50% quota share reinsurance
agreement (“Personal Lines Quota Share”) among the GMAC
Insurers, as cedents, and the Company, ACP Re, Ltd., a Bermuda
reinsurer that is a wholly-owned indirect subsidiary of the Trust,
and Maiden Insurance Company, Ltd., as reinsurers. The Personal
Lines Quota Share provides that the reinsurers, severally, in
accordance with their participation percentages, receive 50% of the
net premium of the GMAC Insurers and assume 50% of the related net
losses. The Company has a 20% participation in the Personal
Lines Quota Share, by which it receives 10% of the net premiums of
the personal lines business and assumes 10% of the related net
losses. The Personal Lines Quota Share has an initial term of three
years and will renew automatically for successive three-year terms
unless terminated by written notice not less than nine months prior
to the expiration of the current term. In addition, either party is
entitled to terminate on 60 days’ written notice or less upon
the occurrence of certain early termination events, which include a
default in payment, insolvency, change in control of the Company or
the GMAC Insurers, run-off, or a reduction of 50% or more of the
shareholders’ equity. The GMAC Insurers also may
terminate on nine months’ written notice following the
effective date of an initial public offering or private placement
of stock by ACAC or a subsidiary. The Personal Lines Quota Share
provides that the reinsurers pay a provisional ceding commission
equal to 32.5% of ceded earned premium, net of premiums ceded by
the personal lines companies for inuring reinsurance, subject to
adjustment to a maximum of 34.5% if the loss ratio for the
reinsured business is 60.5% or less and a minimum of 30.5% if the
loss ratio is 64.5% or higher. The Personal Lines Quota Share is
subject to a premium cap that limits the premium that could be
ceded by the GMAC Insurers to TIC to $121,000 during calendar year
2011 to the extent TIC was to determine, in good faith, that it
could not assume additional premium. The premium cap increases by
10% per annum thereafter. As a result of this agreement, the
Company assumed $24,999 and $25,860 of business from the
GMAC Insurers during the three months ended June 30, 2011 and 2010,
respectively, and $50,586 and $34,560 of business from the GMAC
Insurers during the six months ended June 30, 2011 and 2010,
respectively.
Information Technology Services Agreement
The
Company provides ACAC and its affiliates information technology
development services at a price of cost plus 20%. In addition, as a
new system developed by the Company is implemented and ACAC or its
affiliates begin using the system in its operations, the
Company is receiving a license fee for use of the systems in
the amount of 1.25% of gross premiums of ACAC and its affiliates
plus our costs for support services. The Company recorded
approximately $627 and $407 of fee income for the three months
ended June 30, 2011 and 2010, respectively, and $1,358 and $622 of
fee income for the six months ended June 30, 2011 and 2010,
respectively, related to this agreement. The terms and conditions
of this agreement are subject to regulatory approval.
Asset Management Agreement
The
Company manages the assets of ACAC and its subsidiaries for an
annual fee equal to 0.20% of the average aggregate value of the
assets under management for the preceding quarter if the average
aggregate value for the preceding quarter is $1,000,000 or less and
0.15% of the average aggregate value of the assets under management
for the preceding quarter if the average aggregate value for that
quarter is more than $1,000,000. As a result of this agreement, the
Company earned approximately $382 and $442 of investment management
fees for the three months ended June 30, 2011 and 2010,
respectively, and $781 and $583 of investment management fees for
the six months ended June 30, 2011 and 2010,
respectively.
As a result of these service agreements
with ACAC, the Company recorded fees totaling approximately $1,009
and $849 for the three months ended June 30, 2011 and 2010, and
$2,139 and $1,205 for the six months ended June 30, 2011 and 2010,
respectively. As of June 30, 2011, the outstanding
balance related to these service fees and reimbursable costs was
approximately $1,980.
Diversified
Diversified
Construction Management, LLC (“Diversified”) provided
construction management and general contractor services for a
Company subsidiary in 2011 and 2010. The Company recorded a total
of $30 and $226 for the three months ended June 30, 2011 and 2010,
respectively and $143 and $345 for the six months ended June 30,
2011, for Diversified’s services in connection with the
construction project. Robert A. Saxon, Jr., a principal of
Diversified, is the brother of Michael J. Saxon, the
Company’s Chief Operating Officer. During several prior
years, Diversified provided similar services to the Company. In
March 2010, the Audit Committee ratified our existing contractual
relationship and approved the ongoing contractual relationship with
Diversified, including a determination that the contracts were not
less favorable to the Company than similar services provided at
arm's length.
Office Lease Agreements
In
January 2008, the Company entered into an amended agreement for its
office space at 59 Maiden Lane in New York, New York from 59 Maiden
Lane Associates, LLC, an entity that is wholly-owned by Michael
Karfunkel and George Karfunkel. The lease was amended
such that it increased the leased space to 14,807 square feet and
extended the lease through December 31, 2017. The
Company’s Audit Committee reviewed and approved the extension
of the lease. The Company paid approximately $166 and
$160 for the lease for the three months ended June 30, 2011 and
2010, respectively and $345 and $328 for the six months ended June
30, 2011 and 2010, respectively.
In
January 2011, the Company entered into an amended agreement to
lease office space in Chicago, Illinois from 33 West Monroe
Associates, LLC, an entity that is wholly-owned by entities
controlled by Michael Karfunkel and George
Karfunkel. The lease was amended to increase the
leased space to 9,030 square feet and extend the lease through
October 31, 2017. The Company’s Audit Committee
reviewed and approved this amended lease agreement. The
Company paid approximately $65 and $78 for the three months ended
June 30, 2011 and 2010, respectively and $148 and $125 for the six
months ended June 30, 2011 and 2010, respectively.
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Recent Accounting Pronouncements
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Jun. 30, 2011
|
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Recent Accounting Pronouncements |
With
the exception of those discussed below, there have been no recent
accounting pronouncements or changes in accounting pronouncements
during the six months ended June 30, 2011, as compared to those
described in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2010, that are of significance, or
potential significance, to the Company.
In
June 2011, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2011-05 Comprehensive Income (Topic
220). This update requires that all non-owner
charges in stockholders’ equity be presented either in a
single continuous statement of comprehensive income or in two
separate but consecutive statements. In the two-step
approach, the first statement should present total net income and
its components followed consecutively by a second statement that
should present total other comprehensive income, the components of
other comprehensive income, and the total of comprehensive
income. The updated guidance is effective for fiscal
years and interim periods beginning on or after December 15, 2011
and is to be applied on a retrospective basis to the beginning of
the annual period of adoption. Early adoption is permitted and the
amendment does not require any transition
disclosure. The Company is currently assessing the
impact of the adoption of this guidance, but does not anticipate
any material impact on its results of operations, financial
position or liquidity.
In
May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic
820). The ASU generally aligns the principles for
fair value measurements and the related disclosure requirements
under GAAP and International Financial Reporting Standards
(“IFRS”). ASU 2011-04 changes certain fair
value measurement principles and enhances the disclosure
requirements, particularly for Level 3 fair value
measurements. The amendment is effective on a
prospective basis for interim and annual reporting periods
beginning after December 15, 2011 and early adoption is not
permitted. The Company is currently assessing the impact
of the adoption of this guidance, but does not anticipate any
material impact on its results of operations, financial position or
liquidity.
On
April 29, 2011, the FASB amended its guidance on accounting for
repurchase agreements. The amendments eliminate the criteria to
assess whether a transferor must have the ability to repurchase or
redeem the financial assets in order to demonstrate effective
control over the transferred asset. Under the amended guidance, a
transferor maintains effective control over transferred financial
assets (and thus accounts for the transfer as a secured borrowing)
if there is an agreement that both entitles and obligates the
transferor to repurchase the financial assets before maturity and
if all of the following conditions previously required are met: (i)
financial assets to be repurchased or redeemed are the same or
substantially the same as those transferred; (ii) repurchase or
redemption date before maturity at a fixed or determinable price;
and (iii) the agreement is entered into contemporaneously with, or
in contemplation of, the transfer. As a result, more
arrangements could be accounted for as secured borrowings rather
than sales. The updated guidance is effective on a
prospective basis for interim and annual reporting periods
beginning on or after December 15, 2011, and early adoption is
prohibited. The Company is currently evaluating the impact of the
adoption of this new guidance on its consolidated results of
operations and financial condition.
In
April 2011, the FASB issued updated guidance to clarify whether a
modification or restructuring of a receivable is considered a
troubled debt restructuring, i.e., whether the creditor has granted
a concession and whether the debtor is experiencing financial
difficulties. A modification or restructuring that is considered a
troubled debt restructuring will result in the creditor having to
account for the receivable as being impaired and will also result
in additional disclosure of the creditors’ troubled debt
restructuring activities. The updated guidance is effective for the
first interim period beginning on or after June 15, 2011 and is to
be applied on a retrospective basis to the beginning of the annual
period of adoption. The adoption of this guidance is not expected
to have a material impact on the Company’s results of
operations, financial position or liquidity.
In
December 2010, the FASB issued authoritative guidance on disclosure
of supplementary pro forma information for business combinations.
The new guidance specifies that if a public entity presents
comparative financial statements, the entity should disclose
revenue and earnings of the combined entity as though the business
combination that occurred during the current year had occurred as
of the beginning of the comparable prior annual reporting period.
The new guidance became effective for the Company on January 1,
2011. The adoption of this guidance is not expected to have a
material impact on the Company’s results of operations,
financial position or liquidity.
In
October 2010, the FASB issued updated guidance to address the
diversity in practice for the accounting for costs associated with
acquiring or renewing insurance contracts. This guidance modifies
the definition of acquisition costs to specify that a cost must be
directly related to the successful acquisition of a new or renewal
insurance contract in order to be deferred. If application of this
guidance would result in the capitalization of acquisition costs
that had not previously been capitalized by a reporting entity, the
entity may elect not to capitalize those costs. The updated
guidance is effective on either a retrospective or prospective
basis for interim and annual reporting periods beginning after
December 15, 2011, with early adoption permitted as of the
beginning of a company’s annual period. The Company is
currently evaluating the impact of the adoption of this new
guidance on its consolidated results of operations and financial
condition.
|
Share Based Compensation
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Jun. 30, 2011
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Share Based Compensation |
During
2010, the Company adopted the 2010 Omnibus Incentive Plan (the
“Plan”), which permits the Company to grant to
officers, employees and non-employee directors of the Company
incentive compensation directly linked to the price of the
Company’s stock. The Plan authorizes up to an aggregate of
6,045,511 shares of Company stock for awards of options to purchase
shares of the Company’s common stock, restricted stock,
restricted stock units (“RSU”) or appreciation rights.
Shares used may be either newly issued shares or treasury shares or
both. The aggregate number of shares of common stock for which
awards may be issued may not exceed 6,045,511 shares, subject to
the authority of the Company’s board of directors
(“Board”) to adjust this amount in the event of a
consolidation, reorganization, stock dividend, stock split,
recapitalization or similar transaction affecting the
Company’s common stock. All remaining unissued shares related
to the Company’s previously existing 2005 Equity Incentive
Plan were absorbed into the Plan. As of June 30, 2011,
approximately 5,600,000 shares of Company common stock remained
available for grants under the Plan.
The
Company recognizes compensation expense under FASB ASC 718-10-25
for its share-based payments based on the fair value of the awards.
The Company grants stock options at prices equal to the closing
stock price of the Company’s stock on the dates the options
are granted. The options have a term of ten years from the date of
grant and vest primarily in equal annual installments over the
four-year period following the date of grant for employee options.
Employees have three months after the employment relationship ends
to exercise all vested options. The fair value of each option grant
is separately estimated for each vesting date. The fair value of
each option is amortized into compensation expense on a
straight-line basis between the grant date for the award and each
vesting date. The Company has estimated the fair value of all stock
option awards as of the date of the grant by applying the
Black-Scholes-Merton multiple-option pricing valuation model. The
application of this valuation model involves assumptions that are
judgmental and highly sensitive in the determination of
compensation expense.
The
following schedule shows all options granted, exercised, and
expired under the Plan for the six months ended June 30, 2011 and
2010:
The
weighted average grant date fair value of options granted during
the six months ended June 30, 2011 and 2010 was approximately $7.24
and $3.66, respectively.
The Company issued 50,000 shares of
restricted stock with a market value of approximately $700 during
the six months ended June 30, 2010. The Board set a four-year
vesting period for the outstanding restricted shares. The fair
value of each restricted share grant is equal to the market price
of the Company’s common stock at the date of grant. Expense
relating to restricted shares is amortized ratably over the vesting
period. The Company recorded compensation expense of approximately
$89 and $49 during the three months ended June 30, 2011 and 2010,
respectively, and approximately $133 and $49 during the
six months ended June 30, 2011 and 2010, respectively, related to
this grant.
The
Company issued 202,456 and 90,828 restricted stock units
(“RSUs”) with a market value of approximately $4,124
and $1,250 during the six months ended June 30, 2011 and 2010,
respectively. The Board set a four-year vesting period for RSUs.
The fair value of each RSU is equal to the market price of the
Company’s common stock at the date of grant. Expense relating
to all RSU grants is amortized ratably over the vesting period. The
Company recorded compensation expense of approximately $360 and $39
during the three months ended June 30, 2011 and 2010, respectively,
and approximately $483 and $39 during the six months
ended June 30, 2011 and 2010, respectively, related to all existing
RSU grants.
Compensation
expense for all share-based payments under ASC 718-10-30 was
approximately $1,817 and $1,035 for the three months ended June 30,
2011 and 2010, respectively, and $3,276 and $1,860 for the six
months ended June 30, 2011 and 2010.
As
of June 30, 2011, there was approximately $7,759 of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements.
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Investment in Life Settlements
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Jun. 30, 2011
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Investment in Life Settlements |
During
the third quarter of 2010, the Company formed Tiger Capital LLC
(“Tiger”) with a subsidiary of ACAC for the purposes of
acquiring certain life settlement contracts. A life settlement
contract is a contract between the policy owner of a life insurance
policy and a third-party investor who obtains the ownership and
beneficiary rights of the underlying life insurance policy. Tiger
also acquired premium finance loans made in connection with the
borrower’s purchase of a life insurance policy that are
secured by the policy. The premium finance loans are in default and
Tiger is in the process of acquiring the underlying policies
through the borrower’s agreement to surrender the policy in
satisfaction of the loan or foreclosure. The Company and ACAC
each have a fifty percent ownership interest in Tiger.
Upon formation, the Company and ACAC each contributed approximately
$6,000 to purchase a portfolio of life insurance policies and
premium finance loans with a follow on contribution each of
approximately $5,000 during the fourth quarter of 2010.
Additionally, during the six months ended June 30, 2011 each party
contributed approximately $12,500 to Tiger. A third
party serves as the administrator of the life settlement
contract portfolio, for which it receives an annual
fee. Under the terms of the agreement, the third
party administrator is eligible to receive a percentage of
profits after certain time and performance thresholds have been
met.
During
the second quarter of 2011, the Company formed AMT Capital
Holdings, LLC (“AMTCH”) with a subsidiary of ACAC for
the purposes of acquiring additional life settlement contracts. The
Company and ACAC each have a fifty percent ownership
interest in AMTCH.
The
Company provides for certain actuarial and finance functions
related to Tiger and AMTCH. Additionally, in conjunction
with the Company’s 21.25% ownership percentage of ACAC, the
Company ultimately receives 60.6% of the profits and
losses of Tiger and AMTCH. As such, in accordance with
ASC 810-10, Consolidation, the
Company has been deemed the primary beneficiary and, therefore,
consolidates both entities.
During
the three and six months months ended June 30, 2011, Tiger and
AMTCH acquired certain life insurance policies for approximately
$12,663 and $23,643, respectively. The Company accounts
for investments in life settlements in accordance with ASC 325-30,
Investments in
Insurance Contracts, which states that an investor shall
elect to account for its investments in life settlement contracts
by using either the investment method or the fair value
method. The election is made on an
instrument-by-instrument basis and is irrevocable. The
Company has elected to account for these policies using the fair
value method. The Company determines fair value on a
discounted cash flow basis of anticipated death benefits,
incorporating current life expectancy assumptions, premium
payments, the credit exposure to the insurance company that issued
the life settlement contracts and the rate of return that a buyer
would require on the contracts as no comparable market pricing is
available. The Company recorded other income for the
three and six months ended June 30, 2011 of approximately $22,638
and $41,524, respectively, related to the life insurance
policies. The Company’s investments in life
settlements and cash value loans were approximately $116,028 as of
June 30, 2011 and are included in Prepaid expenses and other assets
on the Consolidated Balance Sheet.
In
addition to the 194 policies disclosed in the table below, the
Company owns 82 premium finance loans, which are secured by life
insurance policies and are carried at a value of $7,317. The face
value amount of the related 194 life insurance policies and 82
premium finance loans is approximately $1,275,933 and $467,200,
respectively. If policyholders default on these loans, the Company
will become the beneficiary on the underlying life insurance
policy, at which point the Company has the option to make premium
payments on the policies or allow the policies to lapse. If the
policyholders do not default on the loans, the Company will be
repaid the amount of the premium finance loans.
The
following table describes the Company’s investment in life
settlements as of June 30, 2011:
Premiums
to be paid for each of the five succeeding fiscal years to keep the
life insurance policies in force as of June 30, 2011, are as
follows:
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Comprehensive Income and Shareholder Equity
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Comprehensive Income and Shareholder Equity |
The
following table summarizes the components of comprehensive income
for the three and six months ended June 30, 2011 and
2010:
The
following table summarizes the ownership components of total equity
for the six months ended June 30, 2011:
There
were no distributions to non-controlling interests or changes in
ownership percentages during the six months ended June 30,
2011.
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Earnings Per Share
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Earnings Per Share |
Effective
January 1, 2009, the Company adopted ASC subtopic 260-10,
Determining
Whether Instruments Granted in Share-Based Payments Transactions
Are Participating Securities. ASC 260-10 provides that
unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents, whether paid or
unpaid, are participating securities and are to be included in the
computation of earnings per share under the two-class method. The
Company’s unvested restricted shares contain rights to
receive nonforfeitable dividends and are participating securities,
requiring the two-class method of computing earnings per
share.
The
following table is a summary of the elements used in
calculating basic and diluted earnings per share for the three and
six months ended June 30, 2011 and 2010:
As
of June 30, 2011, there were less than 100 anti-dilutive securities
excluded from diluted earnings per share.
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Investments
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Jun. 30, 2011
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Investments |
3. Investments
(a) Available-for-Sale Securities
The
original cost, estimated market value and gross unrealized
appreciation and depreciation of available-for-sale securities as
of June 30, 2011, are presented in the table below:
In
June 2011, the Company, through a subsidiary, purchased $12,500 of
an aggregate $107,500 principal amount of 8.25% Senior Notes issued
by Maiden Holdings North America, Ltd. that are fully guaranteed by
Maiden Holdings, Ltd. (“Maiden”), both related parties.
The Company has classified this fixed security in corporate finance
bonds and its market value at June 30, 2011 was
$12,500. For a further description of this transaction
see Note 11. “Related Party Transactions”.
Proceeds
from the sale of investments in available-for-sale securities
during the six months ended June 30, 2011 and 2010 were
approximately $738,742 and $369,726, respectively.
A
summary of the Company’s available-for-sale fixed securities
as of June 30, 2011, by contractual maturity, is shown below.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
(b) Investment Income
Net
investment income for the three and six months ended June 30, 2011
and 2010 was derived from the following sources:
(c) Other-Than-Temporary
Impairment
Other-than-temporary
impairment (“OTTI”) charges of our fixed-maturities and
equity securities for the three and six months ended June 30, 2011
and 2010 are presented in the table below:
The
table below summarizes the gross unrealized losses of our fixed
maturity and equity securities by length of time the securities
have continuously been in an unrealized position as of June 30,
2011:
There
are 148 securities at June 30, 2011 that account for the gross
unrealized loss, none of which is deemed by the Company to be OTTI.
Significant factors influencing the Company’s determination
that unrealized losses were temporary included the magnitude of the
unrealized losses in relation to each security’s cost, the
nature of the investment and management’s intent not to sell
these securities and it being not more likely than not that the
Company will be required to sell these investments before
anticipated recovery of fair value to the Company’s cost
basis.
The Company from time to time invests in a
limited amount of derivatives and other financial instruments as
part of its investment portfolio to manage interest rate changes or
other exposures to a particular financial market. The Company
records changes in valuation on its derivative positions not
designated as a hedge as a component of net realized gains and
losses. The Company records changes in valuation on its hedge
positions as a component of other comprehensive income. As of June
30, 2011, the Company has
two interest rate swaps that were entered into in June 2011 related
to the Company’s trust preferred securities and will take
effect in September 2011 and June 2012.
(d) Other
Securities
sold but not yet purchased represent obligations of the Company to
deliver the specified security at the contracted price and,
thereby, create a liability to purchase the security in the market
at prevailing prices. The Company’s liability for securities
to be delivered is measured at their fair value and as of June 30,
2011 was $0 for corporate bonds and $141 related to equity
securities. These transactions result in off-balance sheet risk, as
the Company’s ultimate cost to satisfy the delivery of
securities sold but not yet purchased may exceed the amount
reflected at June 30, 2011. Subject to certain limitations, all
securities owned, to the extent required to cover the
Company’s obligations to sell or repledge the securities to
others, are pledged to the clearing broker.
The Company enters into repurchase agreements,
which are accounted for as collateralized borrowing transactions
and are recorded at contract amounts. The Company receives cash or
securities that it invests or holds in short term or fixed income
securities. As of June 30, 2011, there were $211,867 principal
amount outstanding at interest rates between 0.17% and 0.3%.
Interest expense associated with these repurchase agreements for
the three months ended June 30, 2011 and 2010 was $221 and $125,
respectively, of which $0 was accrued as of June 30, 2011. Interest
expense associated with the repurchase agreements for the six
months ended June 30, 2011 and 2010 was $474 and $248,
respectively. The Company has approximately $215,607 of collateral
pledged in support of these agreements.
|
Fair Value of Financial Instruments
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Jun. 30, 2011
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Fair Value of Financial Instruments |
4. Fair
Value of Financial Instruments
The
following table presents the level within the fair value hierarchy
at which the Company’s financial assets and financial
liabilities are measured on a recurring basis as of June 30,
2011:
The
Company classifies its financial assets and liabilities in the fair
value hierarchy based on the lowest level input that is significant
to the fair value measurement. This classification requires
judgment in assessing the market and pricing methodologies for a
particular security. The fair value hierarchy includes the
following three levels:
Level
1 – Valuations are based on unadjusted quoted market prices
in active markets for identical financial assets or
liabilities;
Level
2 – Valuations of financial assets and liabilities are based
on prices obtained from third party pricing services, dealer
quotations of the bid price using observable inputs, or through
consensus pricing of a pricing service; and
Level
3 – Valuations are based on unobservable inputs for assets
and liabilities where there is little or no market activity.
Management’s assumptions are used in internal valuation
pricing models to determine the fair value of financial assets or
liabilities.
For
additional discussion regarding techniques used to value the
Company’s investment portfolio, refer to Note 2.
“Significant Accounting Policies” in Item 8.
“Financial Statements and Supplementary Data” in its
2010 Form 10-K.
The
following table provides a summary of changes in fair value of the
Company’s Level 3 financial assets for the three and six
months ended June 30, 2011 and 2010:
The
Company had no transfers between levels during the three and six
months ended June 30, 2011 and 2010.
The
Company uses the following methods and assumptions in estimating
its fair value disclosures for financial instruments:
|
Acquisitions
|
6 Months Ended | |||
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Jun. 30, 2011
|
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Acquisitions |
Majestic
The
Company, through certain of its subsidiaries and the Insurance
Commissioner of the State of California acting solely in the
capacity as the statutory conservator (the
“Conservator”) of Majestic Insurance Company
(“Majestic”), entered into a Rehabilitation Agreement
that set forth a plan for the rehabilitation of Majestic (the
“Rehabilitation Plan”) by which the Company acquired
the business of Majestic through a Renewal Rights and Asset
Purchase Agreement (the “Purchase Agreement”), and a
Loss Portfolio Transfer and Quota Share Reinsurance Agreement (the
“Reinsurance Agreement”). On July 1, 2011,
the Company, through one of its subsidiaries, entered into the
Reinsurance Agreement, which was effective June 1, 2011, and
assumed all of Majestic’s liability for losses and loss
adjustment expenses under workers’ compensation insurance
policies of approximately $315,000 on a gross basis ($167,000 on a
net basis), without any aggregate limit, and certain contracts
related to Majestic's workers' compensation business, including
leases for Majestic's California office space. In
addition, the Company assumed 100% of the unearned premium
reserve of $26,000 on all in-force Majestic
policies. As of June 30, 2011, the Company recorded a receivable due
from Majestic of approximately $220,000 related to the cash and
invested assets, including assignment of Majestic’s
reinsurance recoverables of approximately $52,000, equal to
Majestic’s loss and loss adjustment expense reserves and
unearned premium reserves as of June 1, 2011, plus an additional
$26,000 related to a reserve deficiency. The Company
received the cash and invested assets on or about July 1,
2011. The Reinsurance Agreement also contains a profit
sharing provision whereby the Company pays Majestic up to 3% of net
earned premium related to current Majestic policies that are
renewed by the Company in the three year period commencing on the
closing date should the loss ratio on such policies for the three
year period be 65% or less.
In
consideration, on July 1, 2011, the Conservator and the
Company entered into the Purchase Agreement, whereby a Company
subsidiary acquired the right to offer, quote and solicit the
renewals of in-force workers’ compensation policies written
by Majestic and certain assets required by Majestic to conduct its
business, including intellectual property and information
technology, and furniture, fixtures and equipment. In
addition, the subsidiary offered employment to most of
Majestic’s California-based employees.
ICM Re
In
June 2011, the Company, through its subsidiary AmTrust Captive
Holdings Limited (“ACHL”), acquired all the issued and
outstanding stock of International Crédit Mutuel Reinsurance
SA (“ICM Re”), a Luxembourg domiciled captive insurance
company, from Assurance du Credit Mutuel IARD SA. The purchase
price of ICM Re was approximately $315,000. The Company recorded
approximately $347,000 of cash, intangible assets of $55,900 and a
deferred tax liability of $87,800. The Company assigned a life of
two years to the intangible assets, which have been classified as
contractual use rights. ICM Re subsequently changed its name
to AmTrust Re Alpha. ACHL is included in the Company’s
Specialty Risk and Extended Warranty segment.
The
ICM Re transaction allows the Company to obtain the benefit of the
captive’s capital and utilization of its existing and future
loss reserves through a series of reinsurance arrangements with a
subsidiary of the Company.
Warrantech
In
August 2010, the Company, through its wholly-owned subsidiary AMT
Warranty Corp., acquired 100% of the issued and outstanding capital
stock of Warrantech Corporation (“Warrantech”)
from WT Acquisition Holdings, LLC for approximately $7,500 in cash
and an earnout payment to the sellers of a minimum of $2,000 and a
maximum and $3,000 based on AMT Warranty Corp.’s EBITDA over
the three-year period from January 1, 2011 through December 31,
2013. At the time of the acquisition, the Company had a 27% equity
interest (in the form of preferred units) in WT Acquisition
Holdings, LLC and a $20,000 senior secured note due January 31,
2012 issued to it by Warrantech. Interest on the note
was payable monthly at a rate of 15% per annum and consisted of a
cash component at 11% per annum and 4% per annum for the issuance
of additional notes in principal amount equal to the interest not
paid in cash on such date. Warrantech is a developer,
marketer and third party administrator of service contracts and
aftermarket warranty products that largely serves the consumer
products and automotive industries in the U.S. and
Canada.
Immediately
prior to the consummation of this transaction, WT Acquisition
Holdings, LLC redeemed the Company’s preferred units that had
represented the Company’s 27% equity interest in that entity.
In addition, immediately following the transaction, AMT Warranty
Corp. was recapitalized and the Company contributed its note
receivable from Warrantech in the approximate amount of $24,100 to
AMT Warranty Corp. in exchange for Series A preferred stock, par
value $0.01 per share (the “Series A Preferred Stock”),
of AMT Warranty Corp. valued at $24,100. The Company also received
additional shares of Series A Preferred Stock such that the total
value of its 100% preferred share ownership in AMT Warranty Corp.
is equivalent to $50,700. Lastly, AMT Warranty Corp. issued 20% of
its issued and outstanding common stock to the Chairman of
Warrantech, which had a fair value of $6,900 as determined using
both a market and an income approach. Given its preference
position, absent the Company’s waiver, the Company will be
paid distributions on its Series A Preferred Stock before any
common shareholder would be entitled to a distribution on the
common stock.
As
a result, the ultimate acquisition price of Warrantech was $43,771
and the Company recorded goodwill and intangible assets of
approximately $49,868 and $29,600, respectively. Acquisition
related costs related to the deal were less than $100. The
intangible assets consisted of trademarks, agency relationships and
non-compete agreements, which had estimated lives of between 3 and
18 years. The results of operations from Warrantech, which are
included in the Company’s Specialty Risk and Extended
Warranty segment as a component of service and fee income, have
been recorded since the acquisition date and were approximately
$12,969 and $24,642 for the three and six months ended June 30,
2011, respectively.
Risk Services
During
June 2010, the Company completed the acquisition of eight direct
and indirect subsidiaries of RS Acquisition Holdings Corp.,
including Risk Services, LLC and PBOA, Inc. (collectively,
“Risk Services”). The entities acquired include various
risk retention and captive management companies, brokering entities
and workers’ compensation servicing entities. The acquired
companies are held in a newly created entity, RS Acquisition
Holdco, LLC. The Risk Services entities have offices in Florida,
Vermont, Nevada and the District of Columbia and are broadly
licensed.
The
Company has a majority ownership interest (80%) in Risk Acquisition
Holdco, LLC, for which the Company’s total consideration was
$11,700. Acquisition costs associated with the acquisition were
approximately $200. As part of the purchase agreement, the
non-controlling interest has the option under certain circumstances
to require the Company to purchase the remaining ownership interest
(20%) of Risk Services. In accordance with FASB ASC Topic 480,
Distinguishing
Liabilities from Equity, and FASB ASC Topic 815,
Derivatives and
Hedging, the Company has classified the remaining 20%
ownership interest of Risk Services as mezzanine equity on the
Consolidated Balance Sheet.
In
accordance with FASB ASC 805, Business Combinations,
the Company’s total consideration paid for Risk Services was
$11,700, which included cash of $11,100 and a value of $600 that
was assigned for the redeemable non-controlling interest as
determined using both a market and an income approach. The Company
assigned a value of approximately $5,000 to intangible assets and
$3,500 to goodwill. The intangible assets consisted of tradenames,
customer relationships, renewal rights and non-compete agreements
and have finite lives ranging from 4 years to 17 years. The Company
included approximately $1,645 and $3,743 in the results of
operations, as a component of service and fee income, for the three
and six months ended June 30, 2011, respectively, in its Small
Commercial Business segment.
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Debt
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Jun. 30, 2011
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Debt |
5. Debt
Junior Subordinated Debt
The
Company has established four special purpose trusts for the purpose
of issuing trust preferred securities. The proceeds from such
issuances, together with the proceeds of the related issuances of
common securities of the trusts, were invested by the trusts in
junior subordinated debentures issued by the Company. In accordance
with FASB ASC 810-10-25, the Company does not consolidate such
special purpose trusts, as the Company is not considered to be the
primary beneficiary. The equity investment, totaling $3,714 as of
June 30, 2011 on the Company’s consolidated balance sheet,
represents the Company’s ownership of common securities
issued by the trusts. The debentures require interest-only payments
to be made on a quarterly basis, with principal due at maturity.
The debentures contain covenants that restrict declaration of
dividends on the Company’s common stock under certain
circumstances, including default of payment. The Company incurred
$2,605 of placement fees in connection with these issuances, which
is being amortized over thirty years. The Company recorded $2,552
of interest expense for the three months ended June 30, 2011 and
2010 and $5,104 of interest expense for the six months ended June
30, 2011 and 2010, respectively, related to these trust preferred
securities.
The
table below summarizes the Company’s trust preferred
securities as of June 30, 2011:
In
June 2011, the Company entered into two interest rate swap
agreements related to these junior subordinated
debentures. Each agreement is for a period of five years
and will commence upon their respective tranche’s interest
rate changing from a fixed rate to a variable rate on their fifth
anniversary in 2011 and 2012.
Revolving Credit Agreement
On
January 28, 2011, the Company entered into a three-year, $150,000
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 $50,000 and an expansion feature not to exceed
$50,000. Proceeds of borrowings under the Credit Agreement may be
used for working capital, acquisitions and general corporate
purposes. In connection with entering into the Credit Agreement,
the Company terminated the then existing Term Loan and
Uncommitted Line of Credit Letter Agreement with JPMorgan Chase
Bank, N.A.
ABR
borrowings (which are borrowings bearing interest at a rate
determined by reference to the Alternate Base Rate) 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 the Company’s
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 the Company’s consolidated leverage
ratio.
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 the Company 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. The
Company was in compliance with all covenants as of June 30,
2011.
Effective
June 30, 2011, the “Company entered into a Waiver and
Amendment No. 1 (“Amendment”) to its Credit
Agreement. The Amendment modifies certain restrictive
covenants (indebtedness, liens and acquisitions) to permit the
Company’s acquisition of certain assets and liabilities of
Majestic Insurance Company (“Majestic”), as described
in Note 12. “Acquisitions” and provides for a waiver of
the Company’s compliance with a December 31, 2010 requirement
under Section 6.15(d), a financial covenant.
As
of June 30, 2011, the Company had outstanding borrowings of $98,200
under this Credit Agreement. The Company has outstanding letters of
credit in place under the agreement at June 30, 2011 for $48,237,
which reduced the availability on the line of credit for letters of
credit to $1,763 and the availability under the facility to $3,563
as of June 30, 2011. The Company did not record a gain or loss on
the extinguishment of its previous term loan. The Company
recorded approximately $1,140 of deferred financing costs related
to the Credit Agreement. Fees payable by the Company 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, 2011), 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 the Company’s consolidated leverage ratio and was
..40% at June 30, 2011). On July 1, 2011, the Company repaid $90,000
of its outstanding borrowings under the Credit Agreement, which had
been set aside for the Company’s acquisition of a Luxembourg
domiciled captive insurance company, reducing its outstanding
borrowings amount to $8,200.
The
interest rate on the credit facility as of June 30, 2011 was 2.50%.
The Company recorded interest expense of approximately $1,023 and
$1,418 for the three and six months ended June 30, 2011,
respectively, under the Credit Agreement. The Company
recorded interest expense of approximately $0 and $33 for the three
months ended June 30, 2011 and 2010, respectively, and $72 and $65
for the six months ended June 30, 2011 and 2010, respectively,
related to the term loan.
Secured
Loan Agreement
During
February 2011, the Company entered into a seven-year secured loan
agreement with Bank of America Leasing & Capital, LLC in the
aggregate amount of $10,800 to finance the purchase of an aircraft.
The loan bears interest at a fixed rate of 4.45%, requires monthly
installment payments of approximately $117 commencing on March 25,
2011 and ending on February 25, 2018, and a balloon payment of
$3,240 at the maturity date. The Company recorded approximately $70
of deferred financing costs related to this agreement. The
Company recorded interest expense of approximately $119 and $170
for the three and six months ended June 30, 2011, respectively,
related to this agreement. The loan is secured by an aircraft that
a Company subsidiary acquired in February 2011.
The
agreement contains certain covenants that are similar to the
Company’s 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, the Company is 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 the Company, under certain conditions, to
repay the entire outstanding principal balance of this loan without
penalty.
Promissory Note
In
connection with the stock and asset purchase agreement with a
subsidiary of Unitrin, Inc. (“Unitrin”), the Company,
on June 1, 2008, issued a promissory note to Unitrin in the amount
of $30,000. The note is non-interest bearing and requires four
annual principal payments of $7,500. The first three annual
principal payments were paid between 2009 and 2011, and the
remaining principal payment is due on June 1, 2012. Upon entering
into the promissory note, the Company calculated imputed interest
of $3,155 based on interest rates available to the Company, which
was 4.5%. Accordingly, the note’s carrying balance was
adjusted to $26,845 at the acquisition. The note is required to be
paid in full, immediately, under certain circumstances including a
default of payment or change of control of the Company. The Company
included $135 and $210 of amortized discount on the note in its
results of operations for the three months ended June 30, 2011 and
2010, respectively, and $298 and $450 for the six months ended June
30, 2011 and 2010, respectively. The note’s carrying value at
June 30, 2011 was $7,197.
Other Letters of Credit
In
addition to the aforementioned letters of credit, the Company,
through certain subsidiaries, has additional stand-by letters of
credit as of June 30, 2011 in the amount of $2,962.
Maturities of Debt
Maturities
of the Company’s debt subsequent to June 30, 2011 are as
follows:
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Segments
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Jun. 30, 2011
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Segments |
The
Company currently operates four business segments, Small Commercial
Business; Specialty Risk and Extended Warranty; Specialty Program
and Personal Lines Reinsurance. The “Corporate &
Other” segment represents the activities of the holding
company as well as a portion of service and fee revenue. In
determining total assets (excluding cash and invested assets) by
segment, the Company identifies those assets that are attributable
to a particular segment such as deferred acquisition cost,
reinsurance recoverable, goodwill, intangible assets and prepaid
reinsurance while the remaining assets are allocated based on net
written premium by segment. In determining cash and invested assets
by segment, the Company matches certain identifiable liabilities
such as unearned premium and loss and loss adjustment expense
reserves by segment. The remaining cash and invested assets are
then allocated based on net written premium by segment. Investment
income and realized gains (losses) are determined by calculating an
overall annual return on cash and invested assets and applying that
overall return to the cash and invested assets by segment. Ceding
commission revenue is allocated to each segment based on that
segment’s proportionate share of the Company’s overall
acquisition costs. Interest expense is allocated based on net
written premium by segment. Income taxes are allocated on a
pro-rata basis based on the Company’s effective tax rate.
Additionally, management reviews the performance of underwriting
income in assessing the performance of and making decisions
regarding the allocation of resources to the segments. Underwriting
income excludes, primarily, service and fee revenue, investment
income and other revenues, other expenses, interest expense and
income taxes. Management believes that providing this information
in this manner is essential to providing Company’s
shareholders with an understanding of the Company’s business
and operating performance.
The following tables summarize the results of operations of the
business segments for the three and six months ended June 30, 2011
and 2010:
The
following tables summarize long lived assets and total assets of
the business segments as of June 30, 2011 and December 31,
2010:
|
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