Net Premiums Written
The table below compares net premiums written by our reportable segments, reconciled to the total consolidated net premiums written for the years ended December 31, 2022 and 2021:
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For the Year Ended December 31, | | 2022 | | | | 2021 | | | | Change in |
($ in thousands) | | Total | | | | Total | | | | $ | | % |
Diversified Reinsurance | | $ | 23,620 | | | | | $ | 16,098 | | | | | $ | 7,522 | | | 46.7 | % |
AmTrust Reinsurance | | (18,538) | | | | | (5,695) | | | | | (12,843) | | | 225.5 | % |
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Total | | $ | 5,082 | | | | | $ | 10,403 | | | | | $ | (5,321) | | | (51.1) | % |
Net premiums written for the year ended December 31, 2022 were $5.1 million compared to net premiums written of $10.4 million during 2021 due to the following:
•Net premiums written in the Diversified Reinsurance segment increased by $7.5 million or 46.7% for the year ended December 31, 2022 compared to 2021 primarily due to the prior year return of unearned premiums written in a German Auto quota share reinsurance contract in our IIS business which went into run-off on January 1, 2021 as well as direct premiums written by Maiden LF and Maiden GF which increased by $3.0 million or 14.0% during the year ended December 31, 2022 compared to 2021; and
•Negative premiums written in the AmTrust Reinsurance segment for the year ended December 31, 2022 was primarily related to $15.8 million of AmTrust Cession Adjustments.
Please refer to the analysis below of our Diversified Reinsurance and AmTrust Reinsurance segments for further details.
Net Premiums Earned
Net premiums earned decreased by $15.3 million or 28.8% for the year ended December 31, 2022 compared to 2021. The table below compares net premiums earned by our reportable segments, reconciled to the total consolidated net premiums earned, for the years ended December 31, 2022 and 2021:
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For the Year Ended December 31, | | 2022 | | | | 2021 | | Change in |
($ in thousands) | | Total | | | | Total | | | | $ | | % |
Diversified Reinsurance | | $ | 27,983 | | | | | $ | 27,681 | | | | | $ | 302 | | | 1.1 | % |
AmTrust Reinsurance | | 9,749 | | | | | 25,312 | | | | | (15,563) | | | (61.5) | % |
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Total | | $ | 37,732 | | | | | $ | 52,993 | | | | | $ | (15,261) | | | (28.8) | % |
Net premiums earned in the AmTrust Reinsurance segment for the year ended December 31, 2022 decreased by $15.6 million or 61.5% compared to 2021 primarily due to $15.8 million of AmTrust Cession Adjustments. Please refer to the analysis of our AmTrust Reinsurance segment for further discussion.
Net premiums earned in the Diversified Reinsurance segment for the year ended December 31, 2022 increased by $0.3 million or 1.1% compared to 2021. Please refer to the analysis of our Diversified Reinsurance segment for further discussion.
Other Insurance Revenue (Expense), Net
All other insurance revenue (expense), net is produced by our Diversified Reinsurance segment. Please refer to the analysis of our Diversified Reinsurance segment for further discussion regarding the sources of other insurance revenue (expense), net.
Net Investment Income
Net investment income decreased by $1.9 million or 6.1% for the year ended December 31, 2022 compared to 2021. This was primarily due to a decline in average aggregate fixed income assets of 31.7% driven by continued run-off of reinsurance liabilities previously written on prospective risks, resulting in significant negative operating cash flows as we run-off our existing reinsurance liabilities. Net investment income for the year ended December 31, 2022 was favorably impacted by a reversal of investment expense relating to certain alternative investments, which was a non-recurring item.
Net investment income experienced an increase in annualized average book yields to 2.2% for the year ended December 31, 2022 compared to 1.9% in 2021. Despite the sharp decline in average invested fixed income assets noted above, net investment income decreased at a much lower rate due to the following factors:
•shorter duration on our fixed income portfolio combined with 29.6% of fixed income investments as of December 31, 2022 are floating rate investments which enabled us to take advantage of a higher interest rate environment by reinvesting at higher yields more quickly;
•a higher crediting interest rate on our funds withheld balance with AmTrust, which had an average ending balance of $514.4 million during the year ended December 31, 2022, which increased to 2.1% in 2022 from 1.8% in 2021; and
•a higher weighted average interest rate on our loan to related party of $168.0 million which increased to 3.7% in 2022 from 2.1% in 2021.
The following table details our average aggregate fixed income assets (at cost) and investment book yield for the years ended December 31, 2022 and 2021:
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For the Year Ended December 31, | | 2022 | | 2021 |
| | ($ in thousands) |
Average aggregate fixed income assets, at cost (1) | | $ | 1,226,134 | | $ | 1,794,173 |
Annualized investment book yield | | 2.2 | % | | 1.9 | % |
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(1)Fixed income assets include AFS securities, cash and restricted cash, funds held receivable, and loan to related party. These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
Net Realized and Unrealized Investment (Losses) Gains
Net realized and unrealized investment losses of $5.1 million for the year ended December 31, 2022, and net realized and unrealized investment gains of $12.6 million for 2021 primarily reflect sales of fixed maturity bonds for the settlement of claim payments to AmTrust, the sale of which resulted in net realized losses of $3.0 million in 2022 compared to net realized gains of $9.1 million in 2021. The table below shows the breakdown of net realized investment gains (losses) and net unrealized investment gains (losses) by investment category for the years ended December 31, 2022 and 2021:
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For the Year Ended December 31, | | 2022 | | 2021 | | | | |
| | ($ in thousands) | | | | |
Net realized investment (losses) gains - Fixed maturity securities | | $ | (2,983) | | | $ | 9,097 | | | | | |
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Net realized investment gains - Equity securities | | 111 | | | 441 | | | | | |
Net unrealized investment gains - Equity securities | | 2,225 | | | 335 | | | | | |
Net realized and unrealized investment gains - Equity securities | | 2,336 | | | 776 | | | | | |
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Net realized investment gains - Other investments | | 79 | | | 275 | | | | | |
Net unrealized investment (losses) gains - Other investments | | (4,572) | | | 2,500 | | | | | |
Net realized and unrealized investment (losses) gains - Other investments | | (4,493) | | | 2,775 | | | | | |
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Total net realized and unrealized investment (losses) gains | | $ | (5,140) | | | $ | 12,648 | | | | | |
The following table summarizes our net realized and unrealized investment gains (losses) for the years ended December 31, 2022 and 2021, respectively:
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For the Year Ended December 31, | | | | | | 2022 | | 2021 |
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Net realized (losses) gains: | | | | | | ($ in thousands) |
Fixed income assets(1) | | | | | | (2,983) | | | 9,097 | |
Other investments, including equity securities | | | | | | 190 | | | 716 | |
Total net realized (losses) gains | | | | | | (2,793) | | | 9,813 | |
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Net unrealized (losses) gains: | | | | | | | | |
Other investments, including equity securities | | | | | | (2,347) | | | 2,835 | |
Total net unrealized (losses) gains | | | | | | (2,347) | | | 2,835 | |
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Total net realized and unrealized investment (losses) gains | | | | | | $ | (5,140) | | | $ | 12,648 | |
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Interest in Income (Loss) of Equity Method Investments
The interest in loss of equity method investments was $0.2 million for the year ended December 31, 2022 compared to an interest in income of equity method investments of $7.7 million for the year ended December 31, 2021. The results from equity method investments decreased by $8.0 million primarily due to a $5.1 million loss in our hedge fund equity method investments during the year ended December 31, 2022.
The Company's equity method investments include hedge fund investments of $5.4 million, real estate investments of $40.9 million and other investments of $33.8 million as of December 31, 2022. The following table details our interest in the (loss) income of equity method investments for the years ended December 31, 2022 and 2021, respectively:
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For the Year Ended December 31, | | | | | | 2022 | | 2021 |
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Hedge fund investments | | | | | | $ | (5,053) | | | $ | 3,494 | |
Real estate investments | | | | | | 29 | | | — | |
Other equity method investments | | | | | | 4,819 | | | 4,254 | |
Interest in (loss) income of equity method investments | | | | | | $ | (205) | | | $ | 7,748 | |
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Net Loss and Loss Adjustment Expenses
Net loss and LAE increased by $50.7 million during the year ended December 31, 2022 compared to 2021 largely due to significant net adverse prior year loss development in the AmTrust Reinsurance Segment compared to considerable favorable development experienced in this segment for 2021. The cessation of active reinsurance underwriting on prospective risks included the termination of the AmTrust Quota Share and European Hospital Liability Quota Share effective January 1, 2019.
Net loss and LAE for 2022 was impacted by net adverse prior year reserve development of $32.6 million compared to net favorable prior year reserve development of $27.6 million during 2021. The prior year development is discussed in greater detail in the individual segment discussion and analysis and is primarily associated with the run-off of terminated reinsurance contracts in the AmTrust Reinsurance and Diversified Reinsurance segments.
Commission and Other Acquisition Expenses
Commission and other acquisition expenses decreased by $6.3 million or 25.5% for the year ended December 31, 2022 compared to 2021 primarily due to negative earned premiums in the AmTrust Reinsurance segment which reduced commission costs related to the AmTrust Cession Adjustments by $5.4 million. Please see further discussion in the individual segment analysis below.
General and Administrative Expenses
General and administrative expenses include both segment and corporate expenses segregated for analytical purposes as a component of underwriting income. Total general and administrative expenses decreased by $5.1 million or 14.1% for the year ended December 31, 2022, compared to 2021 primarily due to lower corporate-related administrative expenses.
Corporate general and administrative expenses for the year ended December 31, 2022 decreased by $6.4 million or 24.8% compared to 2021 due to lower payroll costs, equity-based incentive staff compensation and lower regulatory and professional fees incurred.
General and administrative expenses for the years ended December 31, 2022 and 2021 are comprised of:
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For the Year Ended December 31, | | 2022 | | 2021 | | |
| | ($ in thousands) |
General and administrative expenses – segments | | $ | 11,634 | | | $ | 10,341 | | | |
General and administrative expenses – corporate | | 19,313 | | | 25,679 | | | |
Total general and administrative expenses | | $ | 30,947 | | | $ | 36,020 | | | |
Interest and Amortization Expenses
The interest and amortization expenses related to outstanding senior notes issued by Maiden Holdings in 2016 and Maiden NA in 2013 were $19.3 million for the years ended December 31, 2022 and 2021, respectively. Please refer to "Notes to Consolidated Financial Statements - Note 7 — Long-Term Debt" included under Item 8 "Financial Statements and Supplementary Data" of this Form 10-K for further details on the Senior Notes. The weighted average effective interest rate for the Senior Notes was 7.6% for the years ended December 31, 2022 and 2021, respectively.
Foreign Exchange and Other Gains
Net foreign exchange and other gains amounted to $8.3 million during the year ended December 31, 2022 compared to net foreign exchange and other gains of $7.7 million in 2021.
At December 31, 2022, net foreign exchange gains were primarily driven by exposures to euro, British pound and other non-USD denominated net loss reserves and insurance related liabilities in excess of foreign currency assets. Our non-USD denominated liabilities at December 31, 2022 included net loss reserves of $333.9 million. There was no new business written in non-USD currencies during the year ended December 31, 2022. Our foreign currency asset exposures at December 31, 2022 included $205.1 million of fixed maturity securities managed by our investment managers who have the discretion to hold foreign currency exposures as part of their total return strategy as well as $20.9 million of equity method real estate investments denominated in Canadian dollars.
Net foreign exchange gains of $8.9 million and $7.5 million for the years ended December 31, 2022 and 2021, respectively, were attributable to the strengthening of the U.S. dollar on the re-measurement of net loss reserves and insurance related liabilities denominated in British pound and euro.
Income Tax Benefit (Expense)
The Company recognized an income tax benefit of $0.6 million for the year ended December 31, 2022 compared to an income tax expense of $15.0 thousand recognized for 2021. The income tax expense for 2021 was largely generated on the operating losses of our international subsidiaries. The effective rate of income tax was 0.9% for the year ended December 31, 2022 compared to an income tax rate of 0.1% for the year ended December 31, 2021. The effective tax rate on the Company's net income differs from the statutory rate of zero percent under Bermuda law due to tax on foreign operations, primarily the U.S. and Sweden.
Underwriting Results by Reportable Segment
Diversified Reinsurance Segment
The underwriting results for our Diversified Reinsurance segment for the years ended December 31, 2022 and 2021 were as follows:
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For the Year Ended December 31, | | 2022 | | 2021 | | |
| | ($ in thousands) |
Gross premiums written | | $ | 24,017 | | | $ | 16,633 | | | |
Net premiums written | | $ | 23,620 | | | $ | 16,098 | | | |
Net premiums earned | | $ | 27,983 | | | $ | 27,681 | | | |
Other insurance (expense) revenue | | (4,530) | | | 1,067 | | | |
Net loss and LAE | | (12,483) | | | (4,286) | | | |
Commission and other acquisition expenses | | (14,164) | | | (15,093) | | | |
General and administrative expenses | | (8,857) | | | (7,827) | | | |
Underwriting (loss) income | | $ | (12,051) | | | $ | 1,542 | | | |
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Underwriting results in the Diversified Reinsurance segment decreased for the year ended December 31, 2022 compared to 2021. This was primarily due to results from GLS operations, which reported an underwriting loss of $8.9 million for the year ended December 31, 2022 compared to $0.1 million in 2021, primarily driven by a $4.8 million decrease in the fair value of underwriting-related derivatives due to the acceleration of covered payments which triggered coverage in excess of the contracts risk margin during the year ended December 31, 2022.
Underwriting (loss) income by business unit is detailed in the table below for the Diversified Reinsurance segment for the years ended December 31, 2022 and 2021:
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For the Year Ended December 31, | | 2022 | | 2021 | | |
| | ($ in thousands) |
International | | $ | (1,103) | | | $ | 261 | | | |
GLS | | (8,923) | | | (137) | | | |
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Other run-off lines | | (2,025) | | | 1,418 | | | |
Underwriting (loss) income | | $ | (12,051) | | | $ | 1,542 | | | |
Premiums - Gross premiums written increased by $7.4 million, or 44.4% for the year ended December 31, 2022 compared to 2021 primarily due to the prior year return of unearned premiums written in a German Auto quota share reinsurance contract in our IIS business which went into run-off on January 1, 2021. Direct premiums written by Maiden LF and Maiden GF increased by $2.7 million or 12.3% during the year ended December 31, 2022 compared to 2021.
Net premiums written for the year ended December 31, 2022 increased by $7.5 million or 46.7% compared to 2021 due to the prior year return of unearned premiums in our German Auto quota share reinsurance contract which went into run-off on January 1, 2021.
Net premiums earned increased by $0.3 million or 1.1% during the year ended December 31, 2022 compared to 2021.
Other Insurance (Expense) Revenue, Net - Other insurance (expense) revenue, net for the year ended December 31, 2022 includes fee income earned from our GLS business, fair value changes in derivatives related to certain coverages on retroactive reinsurance contracts written by GLS, and fee income derived from our IIS business not directly associated with premium revenue assumed by the Company as specified in the table below.
Total other insurance (expense) revenue, net decreased by $5.6 million for the year ended December 31, 2022 compared to 2021 largely due to fair value changes on non-hedged underwriting-related derivatives in GLS. The decrease in the fair value of underwriting-related derivatives of $4.8 million was due to the acceleration of covered payments which triggered coverage in excess of the contracts risk margin. The decline of International fee income was primarily due to an auto customer program that went into run-off on July 31, 2021.
The table below shows other insurance (expense) revenue, net by source for the years ended December 31, 2022 and 2021:
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For the Year Ended December 31, | | 2022 | | 2021 | | Change in $ | | |
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Change in fair value of non-hedged underwriting-related derivatives | | $ | (4,825) | | | $ | — | | | $ | (4,825) | | | |
Other service fee income | | 194 | | | 302 | | | (108) | | | |
International fee income | | 101 | | | 765 | | | (664) | | | |
Total other insurance (expense) revenue, net | | $ | (4,530) | | | $ | 1,067 | | | $ | (5,597) | | | |
Net Loss and LAE - Net loss and LAE increased by $8.2 million or 191.3% for the year ended December 31, 2022 compared to 2021. Net Loss and LAE was impacted by adverse prior year loss reserve development of $4.6 million during 2022, compared to the impact of favorable development of $3.6 million experienced during 2021.
The adverse prior year development in 2022 was primarily due to GLS contracts and other reinsurance run-off lines partly offset by favorable reserve development in German Auto Programs. The favorable prior year loss development in 2021 was due to German Auto Programs, the run-off of European Capital Solutions and facultative reinsurance run-off lines.
The table below details prior year loss development by line of business for the years ended December 31, 2022 and 2021:
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For the Year Ended December 31, | | 2022 | | 2021 |
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Prior Year Loss Development adverse (favorable) | | ($ in thousands) | | |
IIS business | | $ | (1,683) | | | | | $ | (2,044) | | | |
GLS | | 1,825 | | | | | — | | | |
Other run-off lines | | 4,410 | | | | | (1,517) | | | |
Total Diversified Reinsurance Prior Year Development | | $ | 4,552 | | | | | $ | (3,561) | | | |
Commission and Other Acquisition Expenses - Commission and other acquisition expenses decreased by $0.9 million or 6.2% for the year ended December 31, 2022 compared to 2021. The lower commission expense for the year ended December 31, 2022 was largely related to an auto customer program that went into run-off on July 31, 2021.
General and Administrative Expenses - General and administrative expenses increased by $1.0 million or 13.2% for the year ended December 31, 2022 compared to 2021.
AmTrust Reinsurance Segment
The AmTrust Reinsurance segment reported an underwriting loss of $42.9 million for the year ended December 31, 2022 compared to underwriting income of $10.0 million for the year ended December 31, 2021. The decrease in underwriting results for the year ended December 31, 2022 was largely driven by adverse prior year loss development of $28.1 million during the year ended December 31, 2022, which is detailed herein, compared to net favorable prior year loss development of $24.0 million in 2021.
A significant portion of the loss development for the year ended December 31, 2022 was the result of the receipt of newly emergent adverse loss data for both known and unknown claims across a series of liability lines detailed in "Net Loss and Loss Adjustment Expenses" further below, primarily on older underwriting years reported by AmTrust. Accordingly, we have adjusted our carried IBNR and continue to be responsive and proactive to the loss data we are receiving.
The AmTrust Cession Adjustments contributed an underwriting loss of $5.1 million to our reported results during the year ended December 31, 2022; excluding these adjustments, the AmTrust Reinsurance segment had an underwriting loss of $37.8 million on the run-off of unearned premium for terminated AmTrust reinsurance contracts.
The underwriting results for the AmTrust Reinsurance segment for the years ended December 31, 2022 and 2021 were as follows:
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For the Year Ended December 31, | | 2022 | | 2021 | | |
| | ($ in thousands) |
Gross premiums written | | $ | (18,538) | | | $ | (5,695) | | | |
Net premiums written | | $ | (18,538) | | | $ | (5,695) | | | |
Net premiums earned | | $ | 9,749 | | | $ | 25,312 | | | |
Net loss and LAE | | (45,508) | | | (3,021) | | | |
Commission and other acquisition expenses | | (4,347) | | | (9,747) | | | |
General and administrative expenses | | (2,777) | | | (2,514) | | | |
Underwriting (loss) income | | $ | (42,883) | | | $ | 10,030 | | | |
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Premiums - The table below shows net premiums written by category for the years ended December 31, 2022 and 2021:
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For the Year Ended December 31, | | 2022 | | | | 2021 | | | | Change in $ |
| | ($ in thousands) | | |
Net Premiums Written | | | | | | | | | | | | |
Small Commercial Business | | $ | (15,143) | | | | | $ | (6,445) | | | | | $ | (8,698) | | | |
Specialty Program | | 747 | | | | | (876) | | | | | 1,623 | | | |
Specialty Risk and Extended Warranty | | (4,142) | | | | | 1,626 | | | | | (5,768) | | | |
Total AmTrust Reinsurance | | $ | (18,538) | | | | | $ | (5,695) | | | | | $ | (12,843) | | | |
The negative gross and net premiums written for the year ended December 31, 2022 reflect the AmTrust Cession Adjustments which consist of higher than expected adjustments related to the following items:
•$11.0 million of premium reductions on Workers Compensation policy surcharges in Small Commercial Business subsequent to the termination of the AmTrust Quota Share; and
•$4.8 million of premium reductions to AmTrust's inuring reinsurance for certain programs in Specialty Risk and Extended Warranty which reduced the amount of premium ceded to Maiden.
There were also negative gross and net premiums written for the year ended December 31, 2022 and 2021 due to premium adjustments on Small Commercial Business policies in the AmTrust Quota Share. Furthermore, the termination of the AmTrust Quota Share and the European Hospital Liability Quota Share as of January 1, 2019 resulted in no new business written under these contracts since 2018.
Net premiums earned decreased by $15.6 million for the year ended December 31, 2022 compared to 2021 due to AmTrust Cession Adjustments and due to the termination of the AmTrust Quota Share and European Hospital Liability Quota Share as of January 1, 2019. Excluding AmTrust Cession Adjustments of $15.8 million, net premiums earned were $25.5 million for the year ended December 31, 2022 compared to $25.3 million in 2021. Negative premiums earned in the years ended December 31, 2022 and 2021 in Small Commercial Business were due to premium adjustments on such policies in the AmTrust Quota Share.
The table below details net premiums earned by category for the years ended December 31, 2022 and 2021:
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For the Year Ended December 31, | | 2022 | | 2021 | | |
($ in thousands) | | Total | | % of Total | | Total | | % of Total | | | | |
Net Premiums Earned | | | | | | | | | | | | |
Small Commercial Business | | $ | (15,131) | | | (155.2) | % | | $ | (6,095) | | | (24.1) | % | | | | |
Specialty Program | | 748 | | | 7.7 | % | | (853) | | | (3.4) | % | | | | |
Specialty Risk and Extended Warranty | | 24,132 | | | 247.5 | % | | 32,260 | | | 127.5 | % | | | | |
Total AmTrust Reinsurance | | $ | 9,749 | | | 100.0 | % | | $ | 25,312 | | | 100.0 | % | | | | |
Net Loss and Loss Adjustment Expenses - Net loss and LAE increased by $42.5 million for the year ended December 31, 2022 compared to 2021 largely due to net adverse prior year loss development of $28.1 million during the year ended December 31, 2022, compared to net favorable prior year loss development of $24.0 million in 2021.
Net adverse prior year loss development of $28.1 million during the year ended December 31, 2022 was due to unfavorable movements in Commercial Auto Liability, General Liability, Other Specialty Risk & Extended Warranty and European Hospital Liability partly offset by continued favorable development in Workers Compensation. European Hospital Liability was due in part to higher than expected loss emergence in Italian Hospital Liability policies as well as the agreed exit cost of $3.7 million (€3.4 million) for the commutation of French Hospital Liability policies as described in "Note 10. Related Party Transactions".
Net favorable prior year loss development in 2021 was due to Workers Compensation and Commercial Auto Liability partly offset by adverse development in General Liability and European Hospital Liability.
The table below details prior year loss development by lines of business for the years ended December 31, 2022 and 2021:
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For the Year Ended December 31, | | 2022 | | 2021 |
Prior Year Loss Development adverse (favorable) before the impact of the LPT/ADC Agreement | | ($ in thousands) | | |
Workers Compensation | | $ | (38,131) | | | | | $ | (22,242) | | | |
Commercial Auto Liability | | 19,088 | | | | | (29,918) | | | |
General Liability | | 18,452 | | | | | 20,868 | | | |
European Hospital Liability | | 13,247 | | | | | 7,885 | | | |
Other Lines | | (1,685) | | | | | (637) | | | |
Other Specialty Risk & Extended Warranty | | 17,113 | | | | | — | | | |
Total AmTrust Reinsurance Prior Year Development | | $ | 28,084 | | | | | $ | (24,044) | | | |
As of December 31, 2022, the reinsurance recoverable on unpaid losses under the LPT/ADC Agreement was $490.4 million. The LPT/ADC Agreement provides Maiden Reinsurance with $155.0 million in adverse development cover over its carried AmTrust Quota Share loss reserves at December 31, 2018. All lines of business in the table above are covered by the LPT/ADC Agreement, except for European Hospital Liability which is not part of the AmTrust Quota Share. European Hospital Liability business is not covered under the LPT/ADC Agreement and therefore, adverse development in this line of business may result in significant losses.
Commission and Other Acquisition Expenses - Commission and other acquisition expenses decreased by $5.4 million for the year ended December 31, 2022 compared to 2021 primarily due to AmTrust Cession Adjustments which resulted in negative earned premiums and a reduction to related brokerage fees.
Excluding AmTrust Cession Adjustments of $5.4 million, commission and other acquisition expenses were $9.7 million for the year ended December 31, 2022 compared to $9.7 million in 2021.
General and Administrative Expenses - General and administrative expenses increased by $0.3 million or 10.5% for the year ended December 31, 2022 compared to 2021 primarily due to higher letter of credit fees associated with the LPT/ADC Agreement.
Liquidity and Capital Resources
Liquidity
Maiden Holdings is a holding company and transacts no business of its own. We therefore rely on cash flows in the form of dividends, advances, loans and other permitted distributions from our subsidiary companies to pay expenses and make dividend payments on our common shares. The jurisdictions in which our operating subsidiaries are licensed to write business impose regulations requiring companies to maintain or meet statutory solvency and liquidity requirements and also place restrictions on the declaration and payment of dividends and other distributions.
As of December 31, 2022, the Company had investable assets of $1.2 billion compared to $1.7 billion as of December 31, 2021. Investable assets are the combined total of our investments, cash and cash equivalents (including restricted cash), loan to a related party and funds withheld receivable. The decrease in our investable assets is primarily the result of the cessation of active reinsurance underwriting of new prospective risks since 2019 which subsequently resulted in negative operating cash flows to settle claim payments from the run-off of liabilities from our reinsurance portfolio in 2022.
As discussed in "Item 1. Business", Maiden Reinsurance re-domesticated from Bermuda to Vermont on March 16, 2020. We continue to be actively engaged with the Vermont DFR regarding Maiden Reinsurance's longer term business plan, including its investment policy, changes to which require prior regulatory approval as stipulated by Vermont law or the Vermont DFR for any active underwriting, capital management or other strategic initiatives. Maiden Reinsurance has received all necessary approvals required to date by the Vermont DFR, including its activities via GLS and its investment policy, which includes: 1) the expansion of approved asset classes for investment reflecting not only Maiden Reinsurance’s solvency position but the material reduction in required capital necessary to operate its business as discussed further in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity & Capital Resources – Cash and Investments; and 2) the purchase of affiliated securities as demonstrated in the recent preference share tender offers and the recently completed Exchange. The Investment Policy, as approved and as amended, maintains our established investment management and governance practices.
During the second quarter of 2022, the Vermont DFR approved an annual dividend program to be paid by Maiden Reinsurance to Maiden NA, with notification to the Vermont DFR as dividends are paid. Subsequent to that approval, Maiden Reinsurance has paid $18.8 million in dividends to Maiden NA during the year ended December 31, 2022.
Maiden Reinsurance is regulated by the Vermont DFR and is the principal operating subsidiary of Maiden Holdings. At December 31, 2022, Maiden Reinsurance had statutory capital and surplus of $898.1 million, exceeding the amounts required to be maintained of $107.0 million at December 31, 2022. Under its license as an affiliated reinsurer under the captive licensing laws in the State of Vermont, Maiden Reinsurance requires the approval of the Vermont DFR for the payment of any dividends. During the year ended December 31, 2022, Maiden Reinsurance paid dividends of $18.8 million to Maiden NA. During the years ended December 31, 2022 and 2021, Maiden NA did not pay any dividends to Maiden Holdings during both periods.
Maiden Holdings has two Swedish domiciled operating subsidiaries, Maiden LF and Maiden GF, which are both regulated by the Swedish FSA. At December 31, 2022, Maiden LF and Maiden GF each had a statutory capital and surplus of $7.8 million and $8.5 million, respectively, exceeding the amounts required to be maintained of $4.3 million and $5.6 million, respectively, at December 31, 2022. Maiden LF and Maiden GF are subject to statutory and regulatory restrictions under the Swedish FSA that limit the maximum amount of annual dividends or distributions paid by Maiden LF and Maiden GF to Maiden Holdings. At December 31, 2022, Maiden LF and Maiden GF are not allowed to pay dividends or distributions without the permission of the Swedish FSA. During the years ended December 31, 2022 and 2021, Maiden LF and Maiden GF did not pay any dividends to Maiden Holdings.
Maiden Holdings’ wholly owned U.K. subsidiary, Maiden Global, operates as a reinsurance services and holding company. Maiden Global is subject to regulation by the U.K. Financial Conduct Authority (the "FCA"). At December 31, 2022, Maiden Global is allowed to pay dividends or distributions not exceeding $3.8 million. Maiden Global paid dividends of $1.1 million to Maiden Holdings during the year ended December 31, 2022, however there were no dividends paid in 2021.
We may experience continued volatility in our results of operations which could negatively impact our financial condition and create a reduction in the amount of available distribution or dividend capacity from our regulated reinsurance subsidiaries, which would also reduce liquidity. Further, we and our insurance subsidiaries may need additional capital to maintain compliance with regulatory capital requirements and/or be required to post additional collateral under existing reinsurance arrangements, which could reduce our liquidity.
Operating, investing and financing cash flows
Our sources of funds historically have consisted of premium receipts net of commissions and brokerage, investment income, net proceeds from capital raising activities, and proceeds from sales, maturities, pay downs and redemption of investments. Cash is currently used primarily to pay loss and LAE, ceded reinsurance premium, general and administrative expenses, and interest expense, with the remainder of cash in excess of our operating requirements made available to our investment managers for investment in accordance with our investment policy, as well as for capital management such as repurchasing our shares.
Our business has undergone significant changes since 2018. As previously noted, we have engaged in a series of transactions that have materially reduced our balance sheet risk and transformed our operations. As a result of these transactions, we are not engaged in any active underwriting of new prospective reinsurance business thus our net premiums written will continue to be materially lower and investment income will become a significantly larger portion of our total revenues. We are writing new retroactive risks through GLS, however this will be smaller in relation to the run-off of our prior reinsurance business. Despite
the initial inflow of new business from GLS, the run-off of our prior reinsurance business has continued to cause significant negative operating cash flows as we run off the AmTrust Reinsurance segment reserves as shown in the cash flows table below.
While the development of the GLS platform over time should further enhance our ability to pursue the asset and capital management pillars of our business strategy, we expect the trend of negative overall cash flows to continue to reduce our asset base going forward into 2023 and beyond.
We expect to use funds from cash and investment portfolios, collected premiums on reinsurance contracts in force or being run-off, investment income and proceeds from investment sales and redemptions to meet our expected claims payments and operational expenses. Claim payments will be principally from the run-off of existing reserves for losses and LAE. A significant portion of those liabilities are collateralized and claim payments will be funded by using this collateral which should provide sufficient funding to fulfill those obligations.
The Company’s management believes its current sources of liquidity are adequate to meet its cash requirements for the next twelve months as we generally expect negative operating cash flows to be sufficiently offset by positive investing cash flows. While we continue to expect our cash flows to be sufficient to meet our cash requirements and to operate our business, our ability to execute our asset and capital management initiatives are dependent on maintaining adequate levels of unrestricted liquidity and cash flows. Our expanded asset management strategy can be impacted by both investment specific and broader financial market conditions and may not produce the expected liquidity and cash flows these investments are designed to achieve, or the timing thereof may also be impacted by those factors. We experienced such conditions during 2022.
At December 31, 2022 and 2021, unrestricted cash and cash equivalents and unrestricted fixed maturity investments were $64.3 million and $81.1 million, respectively. The decrease of $16.8 million in unrestricted cash and fixed maturity investments during 2022 was primarily the result of the following key items:
• $10.0 million utilized for the 2021 Preference Share Repurchase Program,
•$47.2 million utilized for net purchases of alternative investments including equity method investments, and
•$19.1 million utilized for interest payments on the Senior Notes, partly offset by:
•excess collateral releases of $64.6 million during the year including $45.0 million of collateral released by AmTrust.
Please see the related discussion on cash flows from investing and financing activities below. The table below summarizes our operating, investing and financing cash flows for the years ended December 31, 2022 and 2021:
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For the Year Ended December 31, | | 2022 | | 2021 | | |
| | ($ in thousands) |
Operating activities | | $ | (195,928) | | | $ | (394,430) | | | |
Investing activities | | 188,790 | | | 464,064 | | | |
Financing activities | | (10,983) | | | (138,903) | | | |
Effect of exchange rate changes on foreign currency cash | | (1,342) | | | (470) | | | |
Total decrease in cash, cash equivalents and restricted cash | | $ | (19,463) | | | $ | (69,739) | | | |
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Cash Flows from Operating Activities
Cash flows used in operating activities for the year ended December 31, 2022 were $195.9 million compared to cash flows used in operating activities of $394.4 million for the year ended December 31, 2021, a decrease of $198.5 million. The operating cash flows used in operations for the years ended December 31, 2022 and 2021 were primarily the result of claims payments for the runoff of existing reserves for terminated AmTrust Quota Share and the European Hospital Liability Quota Share contracts as well as return of premiums due to AmTrust Cession Adjustments.
Cash Flows from Investing Activities
Cash flows provided by investing activities consist of proceeds from sales and maturities of investments net of payments for investments acquired. Net cash provided by investing activities was $188.8 million for the year ended December 31, 2022 compared to $464.1 million for 2021 due to proceeds from sales of fixed maturity investments which were made primarily to settle claim payments and repurchase the Company's preference shares during the years ended December 31, 2022 and 2021.
For the year ended December 31, 2022, the proceeds from the sales, maturities and calls exceeded the purchases of fixed maturity securities by $233.4 million compared to net proceeds of $575.4 million during 2021. The net proceeds were partly offset by $47.2 million utilized for net purchases of alternative investments, including equity method investments, during the year ended December 31, 2022.
Cash Flows from Financing Activities
Cash flows used in financing activities were $11.0 million for the year ended December 31, 2022 compared to $138.9 million during 2021 primarily due to the repurchase of the Company's Preference Shares. The Company paid $10.0 million for the repurchase of 1,581,509 preference shares pursuant to the 2021 Preference Share Repurchase Program during the year ended December 31, 2022 compared to $136.3 million paid during 2021 for 9,404,012 preference shares. The Company also paid $1.0
million for common share repurchases from employees which represent tax withholding in respect of tax obligations on vesting of both non-performance-based and discretionary performance-based restricted shares during 2022.
No dividends on common or preference shares were paid during 2022 and 2021. Our Board of Directors has not declared any common or preference share dividends since the third quarter of 2018. After the Exchange, there are no longer any preference shares outstanding as of December 31, 2022.
Restrictions, Collateral and Specific Requirements
Maiden Reinsurance is generally required to post collateral security with respect to any reinsurance liabilities it assumes from ceding insurers domiciled in the U.S. to obtain credit on their U.S. statutory financial statements with respect to reinsurance recoverables due to them. Consequently, cash and cash equivalents and investments are pledged in favor of ceding companies to comply with relevant insurance regulations or contractual requirements.
At December 31, 2022, the Company had letters of credit outstanding of $40.3 million for collateral purposes which are secured by cash and fixed maturities with a fair value of $47.1 million.
At December 31, 2022 and 2021, restricted cash and cash equivalents and fixed maturity investments used as collateral were $296.8 million and $582.1 million, respectively. This collateral represents 82.2% and 87.8% of the fair value of our total fixed maturity investments and cash, restricted cash and cash equivalents at December 31, 2022 and 2021, respectively. The following table provides additional information on restricted cash and fixed maturities used as collateral at December 31, 2022 and 2021:
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December 31, | | 2022 | | 2021 |
($ in thousands) | | Restricted Cash & Equivalents | | Fixed Maturities | | Total | | Restricted Cash & Equivalents | | Fixed Maturities | | Total |
Diversified Reinsurance | | $ | 13,122 | | $ | 48,101 | | $ | 61,223 | | $ | 34,298 | | $ | 48,845 | | $ | 83,143 |
AmTrust Reinsurance | | 2,516 | | 233,091 | | 235,607 | | 5,121 | | 493,883 | | 499,004 |
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Total | | $ | 15,638 | | $ | 281,192 | | $ | 296,830 | | $ | 39,419 | | $ | 542,728 | | $ | 582,147 |
As a % of Consolidated Balance Sheet captions | | 100.0% | | 89.4% | | 89.9% | | 100.0% | | 90.9% | | 91.5% |
Maiden Reinsurance loaned funds of $168.0 million to AmTrust at December 31, 2022 and 2021, respectively, to partially satisfy its collateral requirements with AII. Advances under the loan are secured by promissory notes and the loan is carried at cost. On January 30, 2019, in connection with the termination of the AmTrust Quota Share, the Company and AmTrust amended the Loan Agreement between Maiden Reinsurance, AmTrust and AII, originally entered into on November 16, 2007, to extend the maturity date to January 1, 2025 and the parties acknowledged that due to the termination of the AmTrust Quota Share, no further loans or advances may be made pursuant to the Loan Agreement.
On January 11, 2019, a portion of the existing trust accounts used for collateral on the AmTrust Quota Share were converted to a funds withheld arrangement. The Company transferred $575.0 million to AmTrust as a funds withheld receivable which bears an annual interest rate of 2.1%, subject to annual adjustment. The annual interest rate was 1.8% for the duration of 2021. At December 31, 2022, the funds withheld balance was $416.8 million compared to $575.0 million at December 31, 2021.
On January 24, 2019, Maiden Reinsurance transferred cash of €45.1 million ($51.2 million) to AIU DAC as a funds withheld receivable to serve as collateral for the European Hospital Liability Quota Share. AIU DAC paid Maiden Reinsurance a fixed annual interest rate of 0.5% on the average daily funds withheld balance. Effective July 1, 2022, Maiden Reinsurance and AIU DAC entered into an agreement ("Commutation Agreement") which provided for AIU DAC to assume all reserves ceded by AIU DAC to Maiden Reinsurance with respect to AIU DAC’s French Medical Malpractice exposures for underwriting years 2012 through 2018 reinsured by Maiden Reinsurance under the European Hospital Liability Quota Share. In accordance with the Commutation Agreement, Maiden Reinsurance paid $31,291 (€29,401) to AIU DAC, which is the sum of net ceded reserves of $27,625 (€25,956) and an agreed exit cost of $3,666 (€3,444). As a result of the Commutation Agreement, Maiden Reinsurance reduced its exposure to AmTrust's Hospital Liability business, however, it continues to have exposure to Italian medical malpractice liabilities under the European Hospital Liability Quota Share. For AIU DAC, the Company utilized funds withheld to satisfy its collateral requirements which was used to settle the Commutation Agreement on September 12, 2022. Therefore, at December 31, 2022, the funds withheld under this agreement was eliminated compared to $26.5 million held at December 31, 2021.
Collateral arrangements with ceding insurers may subject our assets to security interests or require that a portion of our assets be pledged to, or otherwise held by, third parties. Although the investment income derived from these assets, while held in trust, accrues to our benefit, the investment of these assets is governed by the terms of the letter of credit facilities or the investment regulations of the state or territory of domicile of the ceding insurer, which may be more restrictive than the investment regulations applicable to the Company under U.S. law in the State of Vermont. The restrictions may result in lower investment yields on these assets, which may adversely affect our profitability.
We do not anticipate that restrictions on liquidity resulting from restrictions on the payments of dividends by our subsidiary companies or from assets committed in trust accounts or those assets used to collateralize letter of credit facilities will have a material impact on our ability to carry out our normal business activities.
Cash and Investments
Historically, the investment of our funds had generally been designed to ensure safety of principal while generating current income. Accordingly, the majority of our funds had been invested in liquid, investment-grade fixed income securities which are all designated as AFS at December 31, 2022.
As our insurance liabilities continue to run-off and the required capital to operate our business for regulatory purposes decreases, we have modified Maiden Reinsurance’s investment policy (which has been approved by the Vermont DFR as noted) and have expanded the range of asset classes we invest in to enhance the income and total returns our investment portfolio produces. We categorize these investments as alternative investments which include "Other Investments", "Equity Securities", and "Equity Method Investments" on our consolidated balance sheets as discussed in "Note 2 — Significant Accounting Policies" included under Part II Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
As of December 31, 2022 and 2021, our cash and investments consisted of:
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At December 31, | | 2022 | | 2021 |
| | ($ in thousands) |
Fixed maturities, available-for-sale, at fair value | | $ | 314,527 | | | $ | 597,145 | |
Equity investments, at fair value | | 43,621 | | | 24,003 | |
Equity method investments | | 80,159 | | | 83,742 | |
Other investments | | 148,753 | | | 117,722 | |
Total investments | | 587,060 | | | 822,612 | |
Cash and cash equivalents | | 30,986 | | | 26,668 | |
Restricted cash and cash equivalents | | 15,638 | | | 39,419 | |
Total Investments and Cash (including cash equivalents) | | $ | 633,684 | | | $ | 888,699 | |
In addition to the discussion on Cash and Cash Equivalents and Fixed Maturities that follows herein, please see "Notes to Consolidated Financial Statements - Note 4 — Investments" included under Part II Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further discussion on our AFS fixed income securities.
Under this revised investment policy, we have continued to increase the amount of alternative investments during 2022 and 2021, and we expect to continue to increase the amounts invested therein. Under our investment policy, alternative investments could include, but are not limited to, privately held investments, private equities, private credit lending funds, fixed-income funds, hedge funds, equity funds, real estate (including joint ventures and limited partnerships) and other non-fixed-income investments.
For further details on our alternative investments, in addition to the discussion of the investments herein, please see "Notes to Consolidated Financial Statements Note 4(b). Other Investments, Equity Securities and Equity Method Investments" included under Part II Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Our investment performance is subject to a variety of risks, including risks related to general economic conditions, market volatility, interest rate fluctuations, foreign exchange risk, liquidity risk and credit and default risk. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. An increase in interest rates could result in significant losses, realized or unrealized, in the value of our investment portfolio. A portion of our portfolio consists of alternative investments that subject us to restrictions on redemption, which may limit our ability to withdraw funds for some period of time after the initial investment. The values of, and returns on, such investments may also be more volatile.
We believe our other investments, equity securities and equity method investments portfolio provides diversification against our fixed-income investments and an opportunity for improved risk-adjusted return, however, the returns of these investments may be more volatile and we may experience significant unrealized gains or losses in a particular quarter or year. While we believe the returns produced by these investments will exceed our cost of capital, in particular our cost of debt capital, it is too soon to determine if the actual returns will achieve this objective and it may be an extended period of time before that determination can be made.
We may utilize and pay fees to various companies to provide investment advisory and/or management services related to these investments. These fees, which would be predominantly based upon the amount of assets under management, would be included in net investment income. In addition, costs associated with evaluating, analyzing and monitoring these investments may require additional expenditures than traditional marketable securities. During 2022, our investment expenses associated with our alternative investments decreased compared to 2021.
The substantial majority of our current and future investments are held by Maiden Reinsurance, whose investment policy has been approved by the Vermont DFR. We utilized a portion of Maiden Reinsurance's unrestricted assets to purchase affiliated securities and, during the year ended December 31, 2022, we utilized $10.0 million in conjunction with the 2021 Preference Share Repurchase Program. Maiden Reinsurance received all necessary approvals for its investment policy. Prior to the Exchange, we cumulatively invested $176.4 million in the preference shares of Maiden Holdings which have since been extinguished and exchanged for 41,439,348 common shares of the Company pursuant to the Exchange.
As a result of the Exchange, there are no preference shares outstanding. The market value of our common shares held by Maiden Reinsurance was $87.4 million at December 31, 2022.
Cash & Cash Equivalents
At December 31, 2022, we consider the levels of cash and cash equivalents we are holding to be within our targeted ranges. During periods when interest rates experience greater volatility, we have periodically maintained more cash and equivalents to better assess current market conditions and opportunities within our defined risk appetite, and may do so in future periods.
Fixed Maturity Investments
The average yield and average duration of our fixed maturities, by asset class, and our cash and cash equivalents (both restricted and unrestricted) are as follows:
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December 31, 2022 | | Original or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Average yield(1) | | Average duration(2) |
AFS Fixed maturities | | ($ in thousands) | | | | |
U.S. treasury bonds | | $ | 55,647 | | | $ | 1 | | | $ | (116) | | | $ | 55,532 | | | 4.0 | % | | 0.7 | |
U.S. agency bonds – mortgage-backed | | 38,767 | | | — | | | (4,402) | | | 34,365 | | | 2.7 | % | | 4.7 | |
Collateralized mortgage-backed securities | | 7,199 | | | — | | | (432) | | | 6,767 | | | 5.3 | % | | 2.7 | |
Non-U.S. government bonds | | 12,643 | | | — | | | (825) | | | 11,818 | | | 0.3 | % | | 2.8 | |
Collateralized loan obligations | | 119,120 | | | — | | | (5,028) | | | 114,092 | | | 3.1 | % | | 0.3 | |
Corporate bonds | | 97,063 | | | — | | | (5,110) | | | 91,953 | | | 1.5 | % | | 2.1 | |
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Total fixed maturities | | 330,439 | | | 1 | | | (15,913) | | | 314,527 | | | 2.7 | % | | 1.5 | |
Cash and cash equivalents | | 46,624 | | | — | | | — | | | 46,624 | | | 1.2 | % | | 0.0 | |
Total | | $ | 377,063 | | | $ | 1 | | | $ | (15,913) | | | $ | 361,151 | | | 2.5 | % | | 1.3 | |
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December 31, 2021 | | Original or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Average yield(1) | | Average duration(2) |
AFS fixed maturities | | ($ in thousands) | | | | |
U.S. treasury bonds | | $ | 59,989 | | | $ | — | | | $ | (110) | | | $ | 59,879 | | | 0.2 | % | | 0.9 | |
U.S. agency bonds – mortgage-backed | | 96,554 | | | 2,429 | | | (193) | | | 98,790 | | | 2.7 | % | | 2.1 | |
Collateralized mortgage-backed securities | | 14,972 | | | 565 | | | — | | | 15,537 | | | 3.2 | % | | 3.1 | |
Non-U.S. government bonds | | 3,163 | | | 113 | | | — | | | 3,276 | | | 0.3 | % | | 7.3 | |
Collateralized loan obligations | | 183,974 | | | 140 | | | (5,093) | | | 179,021 | | | 1.3 | % | | 0.3 | |
Corporate bonds | | 236,692 | | | 10,094 | | | (6,144) | | | 240,642 | | | 2.5 | % | | 2.7 | |
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Total AFS fixed maturities | | 595,344 | | | 13,341 | | | (11,540) | | | 597,145 | | | 1.9 | % | | 1.7 | |
Cash and cash equivalents | | 66,087 | | | — | | | — | | | 66,087 | | | — | % | | 0.0 | |
Total | | $ | 661,431 | | | $ | 13,341 | | | $ | (11,540) | | | $ | 663,232 | | | 1.7 | % | | 1.5 | |
(1) Average yield is calculated by dividing annualized investment income for each sub-component of fixed maturity securities and cash and cash equivalents (including amortization of premium or discount) by amortized cost.
(2) Average duration in years.
During the year ended December 31, 2022, the yield on the 10-year U.S. Treasury bond increased by 236 basis points to 3.88%. The 10-year U.S. Treasury rate is the key risk-free determinant in the fair value of many of the fixed income securities in our portfolio. The U.S. Treasury yield curve experienced a material upward shift during the year ended December 31, 2022, reflecting concerns of the U.S. Federal Reserve about ongoing inflation emanating from the combination of: 1) the continuing strength of the U.S. economy combined with inflationary pressures, particularly in labor markets; 2) geopolitical instability in Eastern Europe which threatened additional inflation and global economic stability; 3) the levels of fiscal stimulus administered by the U.S. federal government in recent years to support the economy, particularly during the COVID-19 pandemic; and 4) the anticipated monetary policy responses required to collectively temper these factors. Central banks globally have responded in similar fashion and continue to indicate additional interest rate increases are likely in 2023.
As a result of these and other factors, the movement in the market values of our fixed maturity portfolio during the year ended December 31, 2022 generated net unrealized losses of $17.7 million which reduced our book value per common share by $0.17 during that period. Current outlooks for global monetary policy indicate that substantial quantitative tightening by central banks in the U.S. and globally appears likely to continue. Our investment portfolios, in particular our fixed maturity portfolio, may be adversely impacted by unfavorable market conditions caused by these measures, which could cause continued volatility in our results of operations and negatively impact our financial condition.
Interest rate risk is the price sensitivity of a security to changes in interest rates. Credit spread risk is the price sensitivity of a security to changes in credit spreads. As noted, the fair value of our fixed maturity investments will fluctuate with changes in interest rates and credit spreads. We attempt to maintain adequate liquidity in our fixed maturity investments portfolio with a strategy designed to emphasize the preservation of our invested assets and provide sufficient liquidity for the prompt payment of claims and contract liabilities. Because we collateralize a significant portion of our insurance liabilities, unanticipated or large increases in interest rates could require us to utilize significant amounts of unrestricted cash and fixed maturity securities to provide additional collateral, which could impact our asset and capital management strategy described herein.
We also monitor the duration and structure of our investment portfolio as discussed below. As of December 31, 2022, the aggregate hypothetical change in fair value from an immediate 100 basis points increase in interest rates, assuming credit spreads remain constant, in our fixed maturity investments portfolio would decrease the fair value of that portfolio by $9.1 million. Actual shifts in interest rates may not change by the same magnitude across the maturity spectrum or on an individual security and, as a result, the impact on the fair value of our fixed maturity securities may be materially different from the resulting change in value described above.
To limit our exposure to unexpected interest rate increases which would reduce the value of our fixed income securities and reduce our shareholders' equity, we attempt to maintain the duration of our fixed maturity investment portfolio combined with our cash and cash equivalents, both restricted and unrestricted, within a reasonable range of the duration of our loss reserves. At December 31, 2022 and 2021, these respective durations in years were as follows:
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December 31, | | 2022 | | 2021 |
Fixed maturities and cash and cash equivalents | | 1.3 | | 1.5 |
Reserve for loss and LAE - gross of LPT/ADC Agreement reserves | | 5.3 | | 4.4 |
Reserve for loss and LAE - net of LPT/ADC Agreement reserves | | 1.1 | | 1.4 |
During the year ended December 31, 2022, the weighted average duration of our fixed maturity investment portfolio decreased by 0.2 years to 1.3 years while the duration for reserve for loss and LAE increased by 0.9 years to 5.3 years. The differential in duration between these assets and liabilities may fluctuate over time and, in the case of our fixed maturities, historically has been affected by factors such as market conditions, changes in asset mix and prepayment speeds in the case of both our U.S. agency mortgage-backed bonds ("Agency MBS") and commercial mortgage-backed securities. At December 31, 2022, the duration of our fixed maturity investment portfolio decreased compared to December 31, 2021 due to continued sales of fixed maturity investments primarily made to settle claim payments with AmTrust.
At December 31, 2022, the duration of our loss reserves net of the LPT/ADC Agreement was slightly lower than the duration of our fixed maturity investment portfolio at December 31, 2022 driven by the commutation of certain European Hospital Liability policies which were long-tailed in nature and were not subject to the LPT/ADC Agreement.
To limit our exposure to unexpected interest rate increases that could reduce the value of our fixed maturity securities and our shareholders' equity, the Company holds floating rate securities whose fair values are less sensitive to changes in interest rates. At December 31, 2022 and December 31, 2021, 29.6% and 23.6%, respectively, of our fixed income investments are comprised of floating rate securities. The floating rate investment holdings at December 31, 2022 and December 31, 2021 were as follows:
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December 31, | | 2022 | | 2021 |
($ in thousands) | | Fair Value | | % of Total | | Fair Value | | % of Total |
Floating rate securities | | | | | | | | |
Collateralized loan obligations | | $ | 114,092 | | | 11.8 | % | | $ | 174,873 | | | 11.9 | % |
Collateralized mortgage-backed securities | | 4,773 | | | 0.5 | % | | 3,007 | | | 0.2 | % |
Corporate bonds | | — | | | — | % | | 1,145 | | | 0.1 | % |
Total floating rate AFS fixed maturities at fair value | | 118,865 | | | 12.3 | % | | 179,025 | | | 12.2 | % |
Loan to related party | | 167,975 | | | 17.3 | % | | 167,975 | | | 11.4 | % |
Total floating rate securities | | $ | 286,840 | | | 29.6 | % | | $ | 347,000 | | | 23.6 | % |
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Total fixed income investments at fair value (1) | | $ | 970,538 | | | | | $ | 1,467,619 | | | |
(1) Total fixed income investments at fair value include AFS fixed maturities, cash and restricted cash, funds withheld receivable, and loan to related party.
At December 31, 2022, 100.0% of the Company’s U.S. agency bond holdings are mortgage-backed. Additional details on the Agency MBS holdings at December 31, 2022 and 2021 were as follows:
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December 31, | | 2022 | | 2021 |
($ in thousands) | | Fair Value | | % of Total | | Fair Value | | % of Total |
| | | | | | | | |
FNMA – fixed rate | | $ | 18,750 | | | 54.6 | % | | $ | 47,419 | | | 48.0 | % |
| | | | | | | | |
FHLMC – fixed rate | | 13,034 | | | 37.9 | % | | 47,758 | | | 48.3 | % |
GNMA - variable rate | | 2,581 | | | 7.5 | % | | 3,613 | | | 3.7 | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total U.S. agency bonds | | $ | 34,365 | | | 100.0 | % | | $ | 98,790 | | | 100.0 | % |
Total U.S. agency MBS comprise 10.9% of our fixed maturity investment portfolio at December 31, 2022. Given their relative size to our total investments, if faster prepayment patterns were to occur over an extended period of time, this could potentially limit the growth in our investment income in certain circumstances or reduce the total amount of investment income we earn.
At December 31, 2022 and 2021, 98.5% and 97.8%, respectively, of our fixed maturity investments consisted of investment grade securities. We define a security as being below investment grade if it has an S&P credit rating of BB+ or equivalent, or less. Please see "Part II, Item 8 - Notes to Consolidated Financial Statements Note 4. Investments" for additional information on the credit rating of our fixed income portfolio.
The security holdings by sector and financial strength rating of our corporate bond holdings at December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ratings(1) | | | | |
December 31, 2022 | | AAA | | | | A+, A, A- | | BBB+, BBB, BBB- | | BB+ or lower | | Fair Value | | % of Corporate bonds |
Corporate bonds | | | | | | | | | | | | ($ in thousands) | | |
Basic Materials | | — | % | | | | — | % | | 5.3 | % | | — | % | | $ | 4,912 | | | 5.3 | % |
Communications | | — | % | | | | 5.7 | % | | 5.2 | % | | — | % | | 10,004 | | | 10.9 | % |
Consumer | | — | % | | | | 6.3 | % | | 39.1 | % | | — | % | | 41,767 | | | 45.4 | % |
Energy | | — | % | | | | 0.9 | % | | 7.7 | % | | — | % | | 7,860 | | | 8.6 | % |
Financial Institutions | | 1.6 | % | | | | 20.3 | % | | 0.4 | % | | 5.2 | % | | 25,272 | | | 27.5 | % |
Industrials | | — | % | | | | 2.3 | % | | — | % | | — | % | | 2,138 | | | 2.3 | % |
| | | | | | | | | | | | | | |
Total Corporate bonds | | 1.6 | % | | | | 35.5 | % | | 57.7 | % | | 5.2 | % | | $ | 91,953 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Ratings(1) | | | | |
December 31, 2021 | | | | AAA | | A+, A, A- | | BBB+, BBB, BBB- | | BB+ or lower | | Fair Value | | % of Corporate bonds |
Corporate bonds | | | | | | | | | | | | ($ in thousands) | | |
Basic Materials | | | | — | % | | 2.4 | % | | 1.7 | % | | — | % | | $ | 9,995 | | | 4.1 | % |
Communications | | | | — | % | | 2.4 | % | | 3.2 | % | | — | % | | 13,480 | | | 5.6 | % |
Consumer | | | | — | % | | 2.4 | % | | 31.3 | % | | 2.8 | % | | 87,753 | | | 36.5 | % |
Energy | | | | — | % | | 9.4 | % | | 4.8 | % | | — | % | | 34,068 | | | 14.2 | % |
Financial Institutions | | | | 0.6 | % | | 18.8 | % | | 12.9 | % | | 2.6 | % | | 84,025 | | | 34.9 | % |
Industrials | | | | — | % | | 1.0 | % | | — | % | | — | % | | 2,393 | | | 1.0 | % |
Technology | | | | — | % | | 3.7 | % | | — | % | | — | % | | 8,928 | | | 3.7 | % |
Total Corporate bonds | | | | 0.6 | % | | 40.1 | % | | 53.9 | % | | 5.4 | % | | $ | 240,642 | | | 100.0 | % |
(1) Ratings as assigned by S&P, or equivalent
The table below includes the Company’s ten largest corporate holdings at fair value and as a percentage of all fixed income securities held as at December 31, 2022, of which 100.0% are Euro denominated, with 54.7% invested in the Consumer Sector and 19.3% invested in the Financial Institutions sector:
| | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | Fair Value | | % of Total Fixed Income Holdings | | Rating(1) |
| | ($ in thousands) | | | | |
Anheuser-Busch INBEV NV, 2.875%, Due 9/25/2024 | | $ | 10,638 | | | 3.4 | % | | BBB+ |
Chubb Ina Holdings Inc., 1.55%, Due 3/15/2028 | | 6,139 | | | 1.9 | % | | A |
Kraft Heinz Foods Co., 1.5%, Due 5/24/2024 | | 6,118 | | | 1.9 | % | | BBB- |
Glencore Finance (Europe) LTD, 1.875%, Due 9/13/2023 | | 5,299 | | | 1.7 | % | | BBB+ |
Santander Consumer Finance SA, 1.125%, Due 10/9/2023 | | 5,281 | | | 1.7 | % | | A |
Volkswagen International Finance NV, 1.125%, Due 10/2/2023 | | 5,277 | | | 1.7 | % | | A- |
America Movil SAB DE CV, 1.5%, Due 3/10/2024 | | 5,221 | | | 1.7 | % | | A- |
Utah Acquisition Sub Inc., 2.25%, Due 11/22/2024 | | 5,165 | | | 1.6 | % | | BBB- |
Molson Coors Beverage Co., 1.25%, Due 7/15/2024 | | 5,164 | | | 1.6 | % | | BBB- |
PPG Industries Inc., 0.875%, Due 11/3/2025 | | 4,912 | | | 1.6 | % | | BBB+ |
Total | | $ | 59,214 | | | 18.8 | % | | |
(1) Ratings as assigned by S&P, or equivalent
At December 31, 2022 and 2021, respectively, we held the following non-U.S. dollar denominated securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, | | 2022 | | 2021 |
($ in thousands) | | Fair Value | | % of Total | | Fair Value | | % of Total |
Non-U.S. dollar denominated collateralized loan obligations | | $ | 102,812 | | | 50.1 | % | | $ | 113,399 | | | 42.9 | % |
Non-U.S. dollar denominated corporate bonds | | 90,491 | | | 44.1 | % | | 147,740 | | | 55.9 | % |
Non-U.S. government bonds | | 11,818 | | | 5.8 | % | | 3,275 | | | 1.2 | % |
Total non-U.S. dollar denominated securities | | $ | 205,121 | | | 100.0 | % | | $ | 264,414 | | | 100.0 | % |
At December 31, 2022 and 2021, respectively, 100.0% of our non-U.S. dollar denominated securities above were invested in euro. The net decrease in non-U.S. dollar denominated fixed maturities is largely due to the relative depreciation of euro denominated corporate bonds during the year ended December 31, 2022. At December 31, 2022 and 2021, all of the Company's non-U.S. government issuers have a rating of AA- or higher by S&P.
For our non-U.S. dollar denominated corporate bonds, the following table summarizes the composition of the fair value of our fixed maturity investments by ratings at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Ratings(1) at December 31, | | 2022 | | 2021 |
($ in thousands) | | Fair Value | | % of Total | | Fair Value | | % of Total |
| | | | | | | | |
| | | | | | | | |
A+, A, A- | | $ | 32,633 | | | 36.0 | % | | $ | 56,669 | | | 38.4 | % |
BBB+, BBB, BBB- | | 53,094 | | | 58.7 | % | | 78,021 | | | 52.8 | % |
BB+ or lower | | 4,764 | | | 5.3 | % | | 13,050 | | | 8.8 | % |
Total non-U.S. dollar denominated corporate bonds | | $ | 90,491 | | | 100.0 | % | | $ | 147,740 | | | 100.0 | % |
(1) Ratings as assigned by S&P, or equivalent
The Company does not employ any credit default protection against any of the fixed maturity investments held in non-U.S. dollar denominated currencies at December 31, 2022 and 2021, respectively.
Other Investments, Equity Investments and Equity Method Investments
Our alternative investments are categorized as other investments, equity securities and equity method investments as reported on our consolidated balance sheets. These include private equity funds, private credit funds and hedge funds investments, investments in limited partnerships, as well as investments in direct lending entities and investments in technology-oriented insurance related businesses known as insurtechs. Private equity investments consist of direct investments in privately held entities, investments in private equity funds and private equity co-investments with sponsoring entities. Private credit investments consist of loans and other debt securities of privately held entities or investment sponsors.
Our alternative investments as of December 31, 2022 and 2021 consisted of the following categories:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, | | 2022 | | 2021 |
($ in thousands) | | Carrying Value | | % of Total | | Carrying Value | | % of Total |
Publicly traded equity investments in common stocks | | $ | 386 | | | 0.1 | % | | $ | 1,174 | | | 0.5 | % |
Privately held common stocks | | 32,290 | | | 11.9 | % | | 22,029 | | | 9.8 | % |
Privately held preferred stocks | | 10,945 | | | 4.0 | % | | 800 | | | 0.4 | % |
Total equity securities | | 43,621 | | | 16.0 | % | | 24,003 | | | 10.7 | % |
| | | | | | | | |
Hedge fund investments | | 5,376 | | | 2.0 | % | | 32,929 | | | 14.6 | % |
Real estate investments | | 40,944 | | | 15.0 | % | | 44,050 | | | 19.5 | % |
Other equity method investments | | 33,839 | | | 12.4 | % | | 6,763 | | | 3.0 | % |
Total equity method investments | | 80,159 | | | 29.4 | % | | 83,742 | | | 37.1 | % |
| | | | | | | | |
Private equity funds | | 34,278 | | | 12.6 | % | | 23,324 | | | 10.3 | % |
Private credit funds | | 24,374 | | | 8.9 | % | | 20,922 | | | 9.3 | % |
Privately held equity investments | | 34,014 | | | 12.5 | % | | 30,500 | | | 13.5 | % |
Investment in direct lending funds (at cost) | | 56,087 | | | 20.6 | % | | 42,976 | | | 19.1 | % |
Total other investments | | 148,753 | | | 54.6 | % | | 117,722 | | | 52.2 | % |
| | | | | | | | |
Total alternative investments | | $ | 272,533 | | | 100.0 | % | | $ | 225,467 | | | 100.0 | % |
Our allocation to alternative investments increased to 43.0% of our total cash and investments as of December 31, 2022 compared to 25.4% as of December 31, 2021; and increased to 95.8% of our total shareholders' equity as of December 31, 2022 compared to 58.7% as of December 31, 2021.
In addition to the categories described above, we also evaluate our alternative investments by the following asset classes:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, | | 2022 | | 2021 |
($ in thousands) | | Carrying Value | | % of Total | | Carrying Value | | % of Total |
Private Equity | | $ | 60,227 | | | 22.1 | % | | $ | 66,290 | | | 29.4 | % |
Private Credit | | 51,783 | | | 19.0 | % | | 20,863 | | | 9.2 | % |
Hedge Funds | | 5,376 | | | 2.0 | % | | 32,929 | | | 14.6 | % |
Alternatives | | 85,866 | | | 31.5 | % | | 46,490 | | | 20.6 | % |
Venture Capital | | 21,126 | | | 7.7 | % | | 7,344 | | | 3.3 | % |
Real Estate | | 48,155 | | | 17.7 | % | | 51,551 | | | 22.9 | % |
Total alternative investments | | $ | 272,533 | | | 100.0 | % | | $ | 225,467 | | | 100.0 | % |
During 2022, we funded $49.5 million of new investments largely focused on income producing assets reflecting the increase in interest rates experienced during the year. To the extent that interest rates and risk-adjusted credit quality remains appropriate, we expect to continue to focus on investments that will take advantage of that environment to produce current income.
For further details on these alternative investments, please see "Notes to Consolidated Financial Statements: Note 4(b) Other Investments, Equity Securities and Equity Method Investments" included under Part II Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Certain of the Company's investments in limited partnerships are related to real estate joint ventures with interests in multi-property projects with varying strategies ranging from the development of properties to the ownership of income-producing properties. In certain of these joint ventures, the Company has provided certain indemnities, guarantees and commitments to certain parties such that it may be required to make payments now or in the future. For further details on these financial guarantees, please see "Notes to Consolidated Financial Statements: Note 11 - Commitments, Contingencies and Guarantees" included under Part II Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Investment Results
The following table summarizes our investment results for the years ended December 31, 2022 and 2021, respectively:
| | | | | | | | | | | | | | | | | | |
For the Year Ended December 31, | | | | | | 2022 | | 2021 |
Net investment income | | | | | | ($ in thousands) |
Fixed income investments(1) | | | | | | $ | 27,055 | | | $ | 33,261 | |
Cash and restricted cash | | | | | | 428 | | | (3) | |
Other investments, including equities | | | | | | 2,987 | | | 1,103 | |
Investment expenses | | | | | | (400) | | | (2,348) | |
Total net investment income | | | | | | 30,070 | | | 32,013 | |
| | | | | | | | |
Net realized (losses) gains: | | | | | | | | |
Fixed income assets(1) | | | | | | (2,983) | | | 9,097 | |
Other investments, including equities | | | | | | 190 | | | 716 | |
Total net realized (losses) gains | | | | | | (2,793) | | | 9,813 | |
| | | | | | | | |
Net unrealized (losses) gains: | | | | | | | | |
Other investments, including equities | | | | | | (2,347) | | | 2,835 | |
Total net unrealized (losses) gains | | | | | | (2,347) | | | 2,835 | |
| | | | | | | | |
Interest in (loss) income of equity method investments: | | | | | | | | |
Interest in (loss) income of equity method investments | | | | | | (205) | | | 7,748 | |
Total interest in (loss) income of equity method investments | | | | | | (205) | | | 7,748 | |
| | | | | | | | |
Total investment return included in earnings (A) | | | | | | $ | 24,725 | | | $ | 52,409 | |
| | | | | | | | |
Other comprehensive loss: | | | | | | | | |
Unrealized losses on AFS securities and equity method investments excluding foreign exchange (B) | | | | | | $ | (24,247) | | | $ | (32,880) | |
Total investment return = (A) + (B) | | | | | | $ | 478 | | | $ | 19,529 | |
| | | | | | | | |
Annualized income from fixed income assets(2) | | | | | | $ | 27,483 | | | $ | 33,258 | |
Average aggregate fixed income assets, at cost(2) | | | | | | 1,226,134 | | | 1,794,173 | |
Annualized investment book yield | | | | | | 2.2 | % | | 1.9 | % |
| | | | | | | | |
Average aggregate invested assets, at fair value(3) | | | | | | $ | 1,468,077 | | | $ | 1,986,000 | |
Investment return included in net earnings | | | | | | 1.7 | % | | 2.6 | % |
Total investment return | | | | | | — | % | | 1.0 | % |
1.Fixed income investments include AFS securities as well as funds withheld receivable, and loan to related party.
2.Fixed income assets include AFS portfolio, cash and restricted cash, funds withheld receivable, and loan to related party.
3.Average aggregate invested assets include all investments (AFS and alternative investments), cash and restricted cash, loan to related party and funds withheld receivable and is computed as an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
The following table details total investment returns for our fixed income investments for the year ended December 31, 2022 and 2021, respectively:
| | | | | | | | | | | | | | | | | | |
Fixed Income Investments(1) | | | | For the Year Ended December 31, |
($ in thousands) | | | | | | 2022 | | 2021 |
Gross investment income | | | | | | $ | 27,483 | | | $ | 33,258 | |
Net realized (losses) gains | | | | | | (2,983) | | | 9,097 | |
Change in AOCI (3) | | | | | | (28,661) | | | (28,466) | |
Gross investment returns | | | | | | $ | (4,161) | | | $ | 13,889 | |
| | | | | | | | |
Average invested assets, at fair value (4) | | | | | | $ | 1,219,079 | | $ | 1,819,818 |
| | | | | | | | |
Gross Investment Returns | | | | | | (0.3) | % | | 0.8 | % |
| | | | | | | | |
Investment expenses | | | | | | $ | 417 | | | $ | 845 | |
Net investment returns | | | | | | $ | (4,578) | | | $ | 13,044 | |
| | | | | | | | |
Net Investment Returns | | | | | | (0.4) | % | | 0.7 | % |
Despite higher book yields on our fixed income investments, total returns on fixed income investments were negative for the year ended December 31, 2022 due to the impact of interest rates which increased during the year ended December 31, 2022 compared to 2021.
The following table details total investment returns for our alternative investments for the year ended December 31, 2022 and 2021, respectively:
| | | | | | | | | | | | | | | | | | |
Alternative Investments(2) | | | | For the Year Ended December 31, |
($ in thousands) | | | | | | 2022 | | 2021 |
Gross investment income | | | | | | $ | 2,782 | | | $ | 8,851 | |
Net realized and unrealized (losses) gains | | | | | | (2,157) | | | 3,551 | |
Change in AOCI (3) | | | | | | 4,414 | | | (4,414) | |
Gross investment returns | | | | | | $ | 5,039 | | | $ | 7,988 | |
| | | | | | | | |
Average invested assets, at fair value (4) | | | | | | $ | 249,000 | | $ | 166,182 |
| | | | | | | | |
Gross Investment Returns | | | | | | 2.0 | % | | 4.8 | % |
| | | | | | | | |
Investment expenses | | | | | | $ | (17) | | | $ | 1,503 | |
Net investment returns | | | | | | $ | 5,056 | | | $ | 6,485 | |
| | | | | | | | |
Net Investment Returns | | | | | | 2.0 | % | | 3.9 | % |
1.Fixed income investments includes AFS securities as well as cash, restricted cash, funds withheld receivable, and loan to related party.
2.Alternative investments includes other investments, equity securities, and equity method investments.
3.Change in AOCI excludes unrealized foreign exchange gains and losses.
4.Average invested assets is the average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
The following table details total investment returns for alternative investments by asset class at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | Private Equity | | Private Credit | | Hedge Funds | | Alternative Assets | | Venture Capital | | Real Estate | | Total |
| | ($ in thousands) |
Gross investment income | | $ | 1,269 | | $ | 2,025 | | $ | (5,053) | | $ | 3,993 | | $ | 125 | | $ | 423 | | $ | 2,782 |
Net realized and unrealized (losses) gains | | (1,717) | | (2,487) | | — | | 29 | | 2,307 | | (289) | | (2,157) |
Change in AOCI | | — | | — | | — | | 4,414 | | — | | — | | 4,414 |
Total Investment Return | | $ | (448) | | $ | (462) | | $ | (5,053) | | $ | 8,436 | | $ | 2,432 | | $ | 134 | | $ | 5,039 |
| | | | | | | | | | | | | | |
Average Investments | | $63,259 | | $36,323 | | $19,153 | | $ | 66,178 | | $ | 14,235 | | $ | 49,853 | | $ | 249,000 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Gross Investment Returns | | (0.7) | % | | (1.3) | % | | (26.4) | % | | 12.7 | % | | 17.1 | % | | 0.3 | % | | 2.0 | % |
Total investment returns on alternative investments were positive for the year ended December 31, 2022, however, net investment returns were lower compared to 2021. During the year ended December 31, 2022, positive returns in our alternative and venture capital asset classes were partly offset by losses in our hedge fund asset class as well as by modest losses in both private equity and private credit asset classes, largely due to rising interest rates and the resulting volatility in financial markets. The hedge fund asset class reported a loss of $5.1 million which reduced gross investment returns by 2.4% during the period. Excluding our hedge fund assets, our gross investment return would have been 4.4% for the year ended December 31, 2022.
The following table details total investment returns for alternative investments by asset class at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | Private Equity | | Private Credit | | Hedge Funds | | Alternative Assets | | Venture Capital | | Real Estate | | Total |
| | ($ in thousands) |
Gross investment income | | $ | 444 | | $ | 659 | | $ | 3,494 | | $ | 4,254 | | $ | — | | $ | — | | $ | 8,851 |
Net realized and unrealized (losses) gains | | 2,185 | | 668 | | — | | 275 | | 423 | | — | | 3,551 |
Change in AOCI | | — | | — | | — | | (4,414) | | — | | — | | (4,414) |
Total Investment Return | | $ | 2,629 | | $ | 1,327 | | $ | 3,494 | | $ | 115 | | $ | 423 | | $ | — | | $ | 7,988 |
| | | | | | | | | | | | | | |
Average Investments | | $ | 46,965 | | $ | 10,432 | | $ | 31,182 | | $ | 46,756 | | $ | 5,072 | | $ | 25,776 | | $ | 166,182 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Gross Investment Returns | | 5.6 | % | | 12.7 | % | | 11.2 | % | | 0.2 | % | | 8.3 | % | | — | % | | 4.8 | % |
For the year ended December 31, 2021, investment returns benefited from positive returns in the hedge fund and private credit asset classes largely resulting from strong financial markets performance.
Despite the volatility experienced in financial markets during 2022, we believe our alternative investment portfolio remains well positioned to achieve its targeted longer-term returns.
Other Balance Sheet Changes
The following table summarizes the Company's other material balance sheet changes at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, | | 2022 | | 2021 | | Change | | Change |
($ in thousands) | | | | | | $ | | % |
Reinsurance balances receivable, net | | $ | 10,707 | | | $ | 19,507 | | | $ | (8,800) | | | (45.1) | % |
| | | | | | | | |
Deferred commission and other acquisition expenses | | 24,976 | | | 36,703 | | | (11,727) | | | (32.0) | % |
Funds withheld receivable | | 441,412 | | | 636,412 | | | (195,000) | | | (30.6) | % |
Reserve for loss and LAE | | 1,131,408 | | | 1,489,373 | | | (357,965) | | | (24.0) | % |
Unearned premiums | | 67,081 | | | 100,131 | | | (33,050) | | | (33.0) | % |
Deferred gain on retroactive reinsurance | | 47,708 | | | 48,960 | | | (1,252) | | | (2.6) | % |
Accrued expenses and other liabilities | | 60,518 | | | 44,542 | | | 15,976 | | | 35.9 | % |
The Company's deferred commission and other acquisition expenses decreased by 32.0% and unearned premiums decreased by 33.0% primarily due to the termination of the remaining business under both quota share contracts with AmTrust which have been in run-off since January 1, 2019. Reinsurance balances receivable decreased by 45.1% primarily due to the collection of premiums receivable due from the European Hospital Liability Quota Share during the second quarter of 2022.
Funds withheld receivable decreased by 30.6% primarily due to lower funds withheld to be utilized as collateral for AmTrust Reinsurance segment with the commutation of French Hospital Liability polices under the European Hospital Liability Quota Share during the third quarter of 2022 and settlement of reinsurance losses payable due under the AmTrust Quota Share.
Accrued expenses and other liabilities increased by 35.9% primarily due to recognition of a derivative liability on retroactive reinsurance of $14.6 million for GLS policies as of December 31, 2022. The Company's reserve for loss and LAE decreased by 24.0% primarily due to the settlement of prior year loss claims for contracts under the AmTrust Quota Share.
The deferred gain on retroactive reinsurance decreased by 2.6% for the year ended December 31, 2022. Of the net adverse prior year loss development of $28.1 million reported in the AmTrust Reinsurance segment, $15.5 million of this development was subject to coverage under the LPT/ADC Agreement, and was substantially offset by $16.0 million of favorable loss development on certain Workers Compensation losses that were commuted to AmTrust in 2019 that inure to the benefit of Cavello as opposed to the Company under the terms of LPT/ADC Agreement.
Capital Resources
During the year ended December 31, 2022, book value per common share increased by 7.7% to $2.80 and diluted book value per common share increased by 7.7% to $2.79, compared to December 31, 2021 primarily due to net income available to Maiden common shareholders of $55.4 million partly offset by a net decrease in AOCI of $29.0 million for the year ended December 31, 2022. Capital resources consist of funds deployed in support of our operations. The following table shows the movement in our capital resources at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, | | 2022 | | 2021 | | Change | | Change |
($ in thousands) | | | | | | $ | | % |
Preference shares | | $ | — | | | $ | 159,210 | | | $ | (159,210) | | | (100.0) | % |
Common shares at par value | | 1,492 | | | 923 | | | 569 | | | 61.6 | % |
Additional paid-in capital | | 884,259 | | | 768,650 | | | 115,609 | | | 15.0 | % |
Accumulated other comprehensive loss | | (41,234) | | | (12,215) | | | (29,019) | | | 237.6 | % |
Accumulated deficit | | (442,863) | | | (498,295) | | | 55,432 | | | (11.1) | % |
Treasury shares, at cost | | (117,075) | | | (34,016) | | | (83,059) | | | 244.2 | % |
Common shareholders' equity | | 284,579 | | | 225,047 | | | 59,532 | | | 26.5 | % |
Total Maiden shareholders' equity | | 284,579 | | | 384,257 | | | (99,678) | | | (25.9) | % |
Senior Notes - principal amount | | 262,500 | | | 262,500 | | | — | | | — | % |
Total capital resources | | $ | 547,079 | | | $ | 646,757 | | | $ | (99,678) | | | (15.4) | % |
Total capital resources decreased by $99.7 million, or 15.4% compared to December 31, 2021 primarily due to the following:
•net decrease in Preference Shares of $159.2 million at par value due to the repurchase and Exchange of remaining shares during the year ended December 31, 2022;
•net increase in additional paid-in capital of $115.6 million due to $5.3 million relating to elimination of Preference Share issuance costs on remaining shares which were repurchased and exchanged during the year; and additional paid-in capital of $107.6 million for the total common shares issued under the Exchange, and share-based compensation of $2.7 million;
•net decrease in AOCI of $29.0 million which arose due to: (1) net unrealized losses on investment of $13.0 million due to a decrease of $17.7 million for our fixed income investment portfolio relating to market price movements from rising interest rates in the year ended December 31, 2022, partly offset by $4.4 million increase for equity method investments and $0.3 million increase in deferred taxes; and (2) a decrease in cumulative translation adjustments of $16.0 million during the year ended December 31, 2022;
•accumulated deficit decreased by $55.4 million due to gains recognized on the repurchase and Exchange of Preference Shares of $115.5 million for the year ended December 31, 2022 which increased retained earnings partly offset by a net loss of $60.0 million for the year ended December 31, 2022; and
•treasury shares increased by $83.1 million primarily due to common shares issued to Maiden Reinsurance under the Exchange of $82.1 million and shares repurchased due to tax obligations on restricted shares vesting of $1.0 million.
Please refer to "Notes to Consolidated Financial Statements - Note 6 — Shareholders' Equity" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion of the equity instruments issued by the Company at December 31, 2022 and 2021.
Book value and diluted book value per common share at December 31, 2022 and 2021 were computed as follows:
| | | | | | | | | | | | | | | | |
December 31, | | 2022 | | 2021 | | |
| | ($ in thousands except share and per share data) |
Ending Maiden common shareholders’ equity | | $ | 284,579 | | | $ | 225,047 | | | |
Proceeds from assumed conversion of dilutive options | | 4 | | | 10 | | | |
Numerator for diluted book value per common share calculation | | $ | 284,583 | | | $ | 225,057 | | | |
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Common shares outstanding | | 101,532,151 | | | 86,467,242 | | | |
Shares issued from assumed conversion of dilutive options and restricted share units | | 499,963 | | | 494,926 | | | |
Denominator for diluted book value per common share calculation | | 102,032,114 | | | 86,962,168 | | | |
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Book value per common share | | $ | 2.80 | | | $ | 2.60 | | | |
Diluted book value per common share | | 2.79 | | | 2.59 | | | |
Common Shares
On February 21, 2017, the Company's Board of Directors approved the repurchase of up to $100.0 million of the Company's common shares from time to time at market prices. During the year ended December 31, 2022, the Company did not repurchase any common shares under its share repurchase authorization as it was precluded from repurchasing its common shares due to its failure to pay dividends on its preference shares that were previously outstanding. At December 31, 2022, the Company had a remaining authorization of $74.2 million for share repurchases.
Preference Shares
On March 3, 2021 and May 6, 2021, the Company's Board of Directors approved the repurchase, including the repurchase by Maiden Reinsurance in accordance with its investment guidelines, of up to $100.0 million and $50.0 million, respectively, of the Company's preference shares from time to time at market prices in open market purchases or as were privately negotiated. The authorizations are collectively referred to as the "2021 Preference Share Repurchase Program".
Please refer to "Notes to Consolidated Financial Statements - 'Note 6 — Shareholders' Equity" under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a summary of repurchases made of the Company's preference shares during the year ended December 31, 2022.
On December 27, 2022, the Exchange was completed with record holders of the Series A, C and D Preference Shares and three common shares was exchanged as consideration for each of the Series A, C and D Preference Shares tendered. A total of 1,500,050 shares of Series A Preference Shares, 1,744,028 shares of Series C Preference Shares, and 1,542,806 shares of Series D Preference Shares were extinguished upon the issuance of 14,360,652 common shares to non-affiliates at a fair value of $28.4 million.
The number of the Company's Series A, C and D Preference Shares held by Maiden Reinsurance pursuant to the 2020 Tender Offer and the 2021 Preference Share Repurchase Program was 13,813,116 at the Exchange date. Therefore, 41,439,348 common shares were issued to Maiden Reinsurance in exchange for the preference shares held which are reflected as treasury shares on the Consolidated Balance Sheet and are not treated as outstanding shares for purposes of determining certain financial measures, both GAAP and non-GAAP, as of, and for the period ending, December 31, 2022.
As a result of the Exchange, the Preference Shares were delisted from and no longer trade on the New York Stock Exchange as of the Exchange Date. No Preference Shares are issued or outstanding, and the Preference Shares were deregistered under the Securities Exchange Act of 1934, as amended. In addition, all rights of the former holders related to ownership of the Preference Shares have terminated.
Please refer to "Notes to Consolidated Financial Statements - Note 6 — Shareholders' Equity" under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further information on the above transactions.
Senior Notes
There were no changes in the Company’s Senior Notes at December 31, 2022 compared to December 31, 2021 and the Company did not enter into any short-term borrowing arrangements during the year ended December 31, 2022. Please refer to "Notes to Consolidated Financial Statements - Note 7 — Long-Term Debt" included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion of the Senior Notes issued by the Company. The 2013 Senior Notes issued by Maiden NA are fully and unconditionally guaranteed by Maiden Holdings. The Senior Notes are unsecured and unsubordinated obligations of the Company.
Maiden Holdings does not have any significant operations or assets other than our ownership of the shares of our subsidiaries. The dividends and other permitted distributions from Maiden NA (and its subsidiaries) will be our sole source of funds to meet ongoing cash requirements, including debt service payments. Factors that may affect payments to holders of the 2013 Senior
Notes include restrictions on the payments of dividends by Maiden Reinsurance to Maiden NA which provides the sole source of income for interest payments on the 2013 Senior Notes. During the second quarter of 2022, the Vermont DFR approved an annual dividend program to be paid by Maiden Reinsurance to Maiden NA, with notification to the Vermont DFR as dividends are paid. Subsequent to that approval, Maiden Reinsurance paid $18.8 million in dividends to Maiden NA during the year ended December 31, 2022.
Summarized financial information of Maiden NA and Maiden Holdings as of December 31, 2022 and for the year ended December 31, 2022 were as follows:
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| | Maiden NA | | Maiden Holdings |
| | ($ in thousands) |
Total assets | | $ | 5,345 | | | $ | 8,460 | |
Total liabilities | | 150,142 | | | 109,843 | |
Amounts due from subsidiaries (not included in total assets above) | | 68 | | | 1,924 | |
Amounts due to subsidiaries (not included in total liabilities above) | | 13,646 | | | 2,505 | |
Related party loan payable (not included in total liabilities above) | | — | | | 270,904 | |
Total revenue | | 361 | | | 3,788 | |
Net loss | | (19,566) | | | (20,649) | |
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The summarized financial information above has been presented on a combined basis for the issuer Maiden NA and the guarantor Maiden Holdings, excluding all other subsidiaries. Intercompany balances and transactions between Maiden NA and Maiden Holdings, whose information is presented above on a combined basis, have been eliminated. Any investment by Maiden NA or Maiden Holdings in subsidiaries that are not issuers or guarantors is not presented in the financial information above. Intercompany balances with subsidiaries that are not issuers or guarantors and any related party transactions were separately disclosed above and are not included in the total assets and total liabilities presented for Maiden NA and Maiden Holdings.
The net loss for Maiden NA and Maiden Holdings was largely due to interest and amortization expenses on the Senior Notes as well as general and administrative expenses. The net loss in Maiden NA was also due to income tax expense incurred.
The ratio of Debt to Total Capital Resources at December 31, 2022 and 2021 was computed as follows:
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December 31, | | 2022 | | 2021 |
| | ($ in thousands) |
Senior notes - principal amount | | $ | 262,500 | | | $ | 262,500 | |
Maiden shareholders’ equity | | 284,579 | | | 384,257 | |
Total capital resources | | $ | 547,079 | | | $ | 646,757 | |
Ratio of debt to total capital resources | | 48.0 | % | | 40.6 | % |
Off-Balance Sheet Arrangements
Certain of the Company's investments in limited partnerships are related to real estate joint ventures with interests in multi-property projects with varying strategies ranging from the development of properties to the ownership of income-producing properties. In certain of these joint ventures, the Company has provided certain indemnities, guarantees and commitments to certain parties such that it may be required to make payments now or in the future as further described in the "Notes to Consolidated Financial Statements - Note 11 — Commitments, Contingencies and Guarantees " included under Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Any loss for which the Company could be liable would be contingent on the default of a loan by the real estate joint venture entity for which the Company provided a financial guarantee to a lender. While the Company has committed to aggregate limits as to the amount of guarantees it will provide as part of its limited partnerships, guarantees are only provided on an individual transaction basis and are subject to the terms and conditions of each transaction mutually agreed by the parties involved. The Company is not bound to such guarantees without its express authorization.
As discussed above, at December 31, 2022, guarantees of $42.1 million have been provided to lenders by the Company on behalf of real estate joint ventures, however, the likelihood of the Company incurring any losses pertaining to project level financing guarantees was determined to be remote. Therefore, no liability has been accrued under ASC 450-20.
Non-GAAP Financial Measures
As defined and described in the Key Financial Measures section, management uses certain key financial measures, some of which are non-GAAP measures, to evaluate the Company's financial performance and the overall growth in value generated for the Company’s common shareholders. Management believes that these financial measures, which may be defined differently by other companies, explain the Company’s results to investors in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. The calculation, reconciliation to nearest GAAP measure and discussion of relevant non-GAAP measures used by management are discussed below.
Non-GAAP operating earnings were $52.1 million for the year ended December 31, 2022, compared to non-GAAP operating earnings of $60.5 million in 2021. The reduction in the Company's non-GAAP operating results was largely due to a non-GAAP underwriting loss of $55.4 million for the year ended December 31, 2022, compared to a non-GAAP underwriting loss of $17.5 million in 2021. Underwriting performance was offset by gains of $115.5 million from the repurchase and exchange of preference shares at market values for the year ended December 31, 2022 compared to gains of $91.0 million for preference share repurchases during 2021.
Non-GAAP operating earnings and Non-GAAP diluted operating earnings per share attributable to common shareholders
Non-GAAP operating earnings and Non-GAAP diluted operating earnings per share attributable to common shareholders can be reconciled to the nearest U.S. GAAP financial measure as follows:
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For the Year Ended December 31, | | 2022 | | 2021 | | |
| | ($ in thousands except per share data) |
Net income available to Maiden common shareholders | | $ | 55,432 | | | $ | 117,643 | | | |
Add (subtract): | | | | | | |
Net realized and unrealized investment losses (gains) | | 5,140 | | | (12,648) | | | |
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Foreign exchange and other gains | | (8,255) | | | (7,685) | | | |
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Decrease in deferred gain on retroactive reinsurance | | (452) | | | (29,081) | | | |
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Interest in loss (income) of equity method investments | | 205 | | | (7,748) | | | |
Non-GAAP operating earnings | | $ | 52,070 | | | $ | 60,481 | | | |
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Diluted earnings per share attributable to common shareholders | | $ | 0.63 | | | $ | 1.35 | | | |
Add (subtract): | | | | | | |
Net realized and unrealized investment losses (gains) | | 0.06 | | | (0.14) | | | |
| | | | | | |
Foreign exchange and other gains | | (0.09) | | | (0.09) | | | |
| | | | | | |
Decrease in deferred gain on retroactive reinsurance | | (0.01) | | | (0.33) | | | |
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Interest in loss (income) of equity method investments | | 0.01 | | | (0.09) | | | |
Non-GAAP diluted operating earnings per common share attributable to common shareholders | | $ | 0.60 | | | $ | 0.70 | | | |
Non-GAAP Operating ROACE
Non-GAAP Operating ROACE for the years ended December 31, 2022 and 2021 was as follows:
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For the Year Ended December 31, and at December 31, | | 2022 | | 2021 | | |
| | ($ in thousands) |
Non-GAAP operating earnings | | $ | 52,070 | | | $ | 60,481 | | | |
Opening adjusted common shareholders’ equity | | 274,990 | | | 208,447 | | | |
Ending adjusted common shareholders’ equity | | 329,987 | | | 274,990 | | | |
Average adjusted common shareholders’ equity | | 302,489 | | | 241,719 | | | |
Non-GAAP Operating ROACE | | 17.2 | % | | 25.0 | % | | |
Non-GAAP Underwriting Results
The following summarizes our non-GAAP underwriting results for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
For the Year Ended December 31, | | 2022 | | 2021 |
| | ($ in thousands) |
Gross premiums written | | $ | 5,479 | | | $ | 10,938 | |
Net premiums written | | $ | 5,082 | | | $ | 10,403 | |
Net premiums earned | | $ | 37,732 | | | $ | 52,993 | |
Other insurance (expenses) revenue | | (4,530) | | | 1,067 | |
Non-GAAP net loss and LAE(1) | | (58,443) | | | (36,388) | |
Commission and other acquisition expenses | | (18,511) | | | (24,840) | |
General and administrative expenses | | (11,634) | | | (10,341) | |
Non-GAAP underwriting loss(1) | | $ | (55,386) | | | $ | (17,509) | |
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(1) Non-GAAP underwriting loss and non-GAAP net loss and LAE for the years ended December 31, 2022 and 2021 are adjusted for prior year reserve development subject to the LPT/ADC Agreement. Please see the "Key Financial Measures" section for definitions of non-GAAP underwriting loss and non-GAAP net loss and LAE.
The non-GAAP underwriting results include the impact of favorable prior year reserve development under the AmTrust Quota Share which is fully recoverable from Cavello under the LPT/ADC Agreement to show the ultimate economic benefit to the Company. As shown in the table above, adjusted for the decrease in the deferred gain under the LPT/ADC Agreement of $0.5 million during the year ended December 31, 2022, the non-GAAP underwriting loss was $55.4 million. This compared to a non-GAAP underwriting loss of $17.5 million for 2021 when adjusted for the decrease in the deferred gain under the LPT/ADC Agreement of $29.1 million during the year ended December 31, 2021. The non-GAAP underwriting loss above was driven by:
• underwriting results in the AmTrust Reinsurance segment not covered by the LPT/ADC Agreement, specifically the run-off of the AmTrust Quota Share with losses occurring after December 31, 2018;
• adverse loss development of $13.2 million in the European Hospital Liability Quota Share, which is not covered by the LPT/ADC Agreement;
• favorable development on commuted Workers Compensation losses which are contractually covered by the LPT/ADC Agreement that reduced the deferred gain liability on retroactive reinsurance for the year ended December 31, 2022; and
• underwriting loss of $12.1 million in the Diversified Reinsurance segment which included an underwriting loss of $8.9 million from GLS operations during the year ended December 31, 2022.
Non-GAAP Net Loss and LAE
Adjusted for the decrease in the deferred gain under the LPT/ADC Agreement, the non-GAAP net loss and LAE for the year ended December 31, 2022 increased by $0.5 million (2021 - $29.1 million) due to favorable loss experience for AmTrust reserves covered by the LPT/ADC Agreement which are ultimately recoverable from Cavello. This adjustment is reflected in the calculation of non-GAAP Loss and LAE in the table below:
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For the Year Ended December 31, | | 2022 | | 2021 |
| | ($ in thousands) |
Net loss and LAE | | $ | 57,991 | | | $ | 7,307 | |
Less: change in deferred gain on retroactive reinsurance under the LPT/ADC Agreement | | (452) | | | (29,081) | |
Non-GAAP net loss and LAE | | $ | 58,443 | | | $ | 36,388 | |
Adjusted Shareholders' Equity, Adjusted Total Capital Resources, Adjusted Book Value per Common Share and Ratio of Debt to Total Adjusted Capital Resources
The Adjusted Shareholders' Equity, Adjusted Total Capital Resources and Adjusted Book Value per Common Share at December 31, 2022 and 2021 reflect the addition of the unamortized deferred gain under the LPT/ADC Agreement to the GAAP shareholders' equity as depicted in the computations below. The deferred gain under the LPT/ADC Agreement was $45.4 million at December 31, 2022 compared to $45.9 million at December 31, 2021, and relates to loss reserves subject to that agreement that are fully recoverable from Cavello.
The decrease in the unamortized deferred gain under the LPT/ADC Agreement for the year ended December 31, 2022 is attributable to $0.5 million in loss and LAE recognized as favorable loss development in the Company's GAAP income statement for policies subject to the LPT/ADC Agreement. We believe the inclusion of this unamortized deferred gain under
these metrics better reflects the ultimate economic benefit of the LPT/ADC Agreement, which will improve the Company's shareholders' equity over the settlement period under the terms of the agreement.
The Adjusted Shareholders' Equity, Adjusted Total Capital Resources and Adjusted Book Value per Common Share at December 31, 2021 also reflected the LP Investment Adjustment of $4.1 million, which pertained to the equity accounting related to the fair value of certain hedged liabilities in an equity method investment held by the Company wherein the ultimate realizable value of the asset supporting the hedged liabilities was not recognized at fair value until its sale in 2022. We believe that this adjustment recognized the future realizable value and reflected the ultimate economic benefit of this investment which was sold at a realized gain during the year ended December 31, 2022 and improved the Company's shareholders' equity over the hedged contract period of the investment.
Reconciliation of shareholders' equity to Adjusted shareholders' equity and Adjusted Total Capital Resources
The following table computes adjusted shareholders' equity and adjusted total capital resources by recognizing the unamortized deferred gain under the LPT/ADC Agreement at December 31, 2022 and 2021 as well as the LP Investment Adjustment for the realizable value of an intangible asset in a limited partnership investment at December 31, 2021:
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December 31, | | 2022 | | 2021 | | Change | | Change |
($ in thousands) | | | | | | $ | | % |
Preference shares | | $ | — | | | $ | 159,210 | | | $ | (159,210) | | | (100.0) | % |
Common shareholders' equity | | 284,579 | | | 225,047 | | | 59,532 | | | 26.5 | % |
Total shareholders' equity | | 284,579 | | | 384,257 | | | (99,678) | | | (25.9) | % |
LP Investment Adjustment | | — | | | 4,083 | | | (4,083) | | | (100.0) | % |
Unamortized deferred gain on LPT/ADC Agreement | | 45,408 | | | 45,860 | | | (452) | | | (1.0) | % |
Adjusted shareholders' equity | | 329,987 | | | 434,200 | | | (104,213) | | | (24.0) | % |
Senior Notes - principal amount | | 262,500 | | | 262,500 | | | — | | | — | % |
Adjusted total capital resources | | $ | 592,487 | | | $ | 696,700 | | | $ | (104,213) | | | (15.0) | % |
Reconciliation of Book Value per Common Share to Adjusted Book Value per Common Share
The adjusted book value per common share as reconciled for the recognition of the unamortized deferred gain under the LPT/ADC Agreement as well as the LP Investment Adjustment for the realizable value of an intangible asset in a limited partnership investment at December 31, 2022 and 2021 was computed as follows:
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December 31, | | 2022 | | 2021 | | |
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Book value per common share | | $ | 2.80 | | | $ | 2.60 | | | |
Unamortized deferred gain on LPT/ADC Agreement | | 0.45 | | | 0.53 | | | |
LP Investment Adjustment | | — | | | 0.05 | | | |
Adjusted book value per common share | | $ | 3.25 | | | $ | 3.18 | | | |
Ratio of Debt to Adjusted Total Capital Resources
Management uses this non-GAAP measure to monitor the financial leverage of the Company. This measure is calculated using the total principal amount of debt divided by the sum of adjusted total capital resources as computed in the table above. The ratio of Debt to Adjusted Total Capital Resources at December 31, 2022 and 2021 was computed as follows:
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December 31, | | 2022 | | 2021 |
| | ($ in thousands) |
Senior notes - principal amount | | $ | 262,500 | | | $ | 262,500 | |
Adjusted shareholders’ equity | | 329,987 | | | 434,200 | |
Adjusted total capital resources | | $ | 592,487 | | | $ | 696,700 | |
Ratio of debt to adjusted total capital resources | | 44.3 | % | | 37.7 | % |
Currency and Foreign Exchange
We conduct business in a variety of foreign (non-U.S.) currencies, the principal exposures being the euro and the British pound. Assets and liabilities denominated in foreign currencies are exposed to changes in currency exchange rates. Our reporting currency is the U.S. dollar, and exchange rate fluctuations relative to the U.S. dollar may materially impact our results and financial position. Our principal exposure to foreign currency risk is our obligation to settle claims in foreign currencies. In addition, to minimize this risk, we maintain and expect to continue to maintain a portion of our investment portfolio in investments denominated in currencies other than the U.S. dollar. We may employ various strategies (including hedging) to manage our exposure to foreign currency exchange risk. To the extent that these exposures are not fully hedged or the hedges are ineffective, our results of operations or equity may be adversely effected. At December 31, 2022, no such hedges or hedging strategies were in force or had been entered into. We measure monetary assets and liabilities denominated in foreign currencies at period end exchange rates, with the resulting foreign exchange gains and losses recognized in the Consolidated Statements of Income. Revenues and expenses in foreign currencies are converted at quarterly average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in AOCI.
Net foreign exchange gains were $8.9 million during the year ended December 31, 2022 compared to net foreign exchange gains of $7.5 million during the year ended December 31, 2021.
At December 31, 2022, net foreign exchange gains were primarily driven by exposures to euro, British pound and other non-USD denominated net loss reserves and insurance related liabilities in excess of foreign currency assets. Our non-USD denominated liabilities at December 31, 2022 included reserves for net loss and LAE of $333.9 million. There was no new business written in non-USD currencies during the year ended December 31, 2022. Our foreign currency asset exposures at December 31, 2022 include $205.1 million of fixed maturity securities managed by our investment managers who have the discretion to hold foreign currency exposures as part of their total return strategy as well as $20.9 million of equity method real estate investments denominated in Canadian dollars.
Effects of Inflation
The anticipated effects of inflation are considered explicitly in the pricing of the insured exposures, which are used as the initial estimates of reserves for loss and LAE. In addition, inflation is also implicitly accounted for in subsequent estimates of loss and LAE reserves, as the expected rate of emergence is in part predicated upon the historical levels of inflation that impact ultimate claim costs. To the extent inflation causes these costs, particularly medical treatments and litigation costs, to vary from the assumptions made in the pricing or reserving estimates, the Company will be required to change the reserve for loss and LAE with a corresponding change in its earnings in the period in which the variance is identified. The actual effects of inflation on the results of operations of the Company cannot be accurately known until claims are ultimately settled.
We continue to monitor inflationary impacts resulting from recent government stimulus, sharp increases in demand, labor force and supply chain disruptions, among other factors, on our loss cost trends. Our reserves predominantly consist of workers’ compensation, general liability, and hospital liability. These long tailed lines of business have been subject to the longer term trend of social inflation, but we have not observed significant impacts for the recently elevated levels of inflation. We proactively analyze available data and we incorporate trends into our loss reserving assumptions to ensure we are considerate of current and future economic conditions.
Governmental policy responses to inflation have significantly increased interest rates which, in the short term, have contributed to unrealized losses on our fixed income investments, particularly on our fixed maturity securities. There remains uncertainty around the rate and direction of inflation and we continue to monitor our liquidity, capital and potential earnings impact of these changes but remain focused on our asset allocation decisions as described in our "Business Strategy" section of Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview".
Inflation may also result in increased wage pressures for our operating expenses, as we remain focused on being a competitive employer in our market. Labor shortages arising from the conditions of the COVID-19 pandemic have contributed to uncertainty in attracting and retaining talent that may put pressure on higher wage costs. Currently, salaries and incentive compensation costs comprise more than one-half of our total general and administrative expenses and thereby could have a material impact our net operating results.
Recent Accounting Pronouncements
Refer to "Notes to Consolidated Financial Statements - Note 2. Significant Accounting Policies" included under Item 8 "Financial Statement and Supplementary Data", of this Annual Report on Form 10-K for a discussion on recently issued accounting pronouncements not yet adopted.