Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2016
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
 
Commission file no. 001-33143
_______________________________

_______________________________
AmTrust Financial Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
04-3106389
(State or other jurisdiction of
 
(IRS Employer Identification No.)
incorporation or organization)
 
 
 
 
 
59 Maiden Lane, 43rd Floor, New York, New York
 
10038
(Address of principal executive offices)
 
(Zip Code)

(212) 220-7120
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer     x  
 
Accelerated filer       ¨
 
 
 
Non-accelerated filer         ¨
 
Smaller reporting company      ¨
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).Yes ¨ No x

As of August 1, 2016, the Registrant had one class of Common Stock ($.01 par value), of which 170,668,960 shares were issued and outstanding.





INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
AMTRUST FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(In Thousands, Except Par Value)
 
June 30,
2016
 
December 31,
2015
ASSETS
(Unaudited)
 
(Audited)
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $6,617,396; $5,482,042)
$
6,838,968

 
$
5,433,797

Equity securities, available-for-sale, at fair value (cost $171,492; $109,346)
161,880

 
104,497

Equity securities, trading, at fair value (cost $26,232; $26,937)
26,847

 
27,271

Short-term investments
127,880

 
84,266

Equity investment in unconsolidated subsidiaries – related party
149,573

 
138,023

Other investments (related party $68,186; $64,869; recorded at fair value $38,039; $30,309)
129,414

 
99,012

Total investments
7,434,562

 
5,886,866

Cash and cash equivalents
1,009,534

 
931,970

Restricted cash and cash equivalents
591,984

 
380,699

Accrued interest and dividends
55,940

 
51,487

Premiums receivable, net
2,562,165

 
2,115,653

Reinsurance recoverable (related party $2,236,292; $1,963,140)
3,856,087

 
3,008,670

Prepaid reinsurance premium (related party $1,194,588; $1,066,961)
1,924,747

 
1,531,866

Other assets (related party $205,320; $189,223; recorded at fair value $304,434; $264,001)
1,371,771

 
1,398,064

Deferred policy acquisition costs
873,641

 
704,243

Property and equipment, net
327,311

 
281,456

Goodwill
603,662

 
432,700

Intangible assets
395,589

 
367,345

 
$
21,006,993

 
$
17,091,019

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Loss and loss adjustment expense reserves
$
9,097,408

 
$
7,208,367

Unearned premiums
4,819,255

 
4,014,728

Ceded reinsurance premiums payable (related party $679,083; $379,988)
843,473

 
651,051

Accrued expenses and other liabilities (related party $167,975; $167,975; recorded at fair value $462,537; $132,558)
1,604,413

 
1,140,830

Debt
1,229,599

 
989,356

Total liabilities
17,594,148

 
14,004,332

Commitments and contingencies


 


Redeemable non-controlling interest
941

 
1,172

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value; 500,000 shares authorized; 196,455 issued in 2016 and 2015, respectively; 172,432 and 175,915 outstanding in 2016 and 2015, respectively
1,965

 
1,964

Preferred stock, $0.01 par value; 10,000 shares authorized; 5,112 and 4,968 issued and outstanding; $626,250 and $482,500 aggregated liquidation preference in 2016 and 2015, respectively.
626,250

 
482,500

Additional paid-in capital
1,380,153

 
1,383,492

Treasury stock at cost; 24,023 and 20,540 shares in 2016 and 2015, respectively
(262,984
)
 
(162,867
)
Accumulated other comprehensive loss, net of tax
(31,791
)
 
(130,262
)
Retained earnings
1,517,092

 
1,334,233

Total AmTrust Financial Services, Inc. equity
3,230,685

 
2,909,060

Non-controlling interest
181,219

 
176,455

Total stockholders’ equity
3,411,904

 
3,085,515

 
$
21,006,993

 
$
17,091,019


See accompanying notes to unaudited consolidated financial statements.

3



AmTrust Financial Services, Inc.
Consolidated Statements of Income
(Unaudited)
(In Thousands, Except Per Share Data)
 
 
Three Months Ended June 30,

Six Months Ended June 30,
 
 
2016

2015

2016

2015
Revenues:
 
 

 
 

 
 

 
 

Premium income:
 
 

 
 

 
 

 
 

Net written premium
 
$
1,268,436

 
$
1,008,721

 
$
2,489,115

 
$
2,051,910

Change in unearned premium
 
(86,684
)
 
(39,751
)
 
(233,081
)
 
(133,563
)
Net earned premium
 
1,181,752

 
968,970

 
2,256,034

 
1,918,347

Service and fee income (related parties - three months $21,608; $21,281 and six months $41,771; $38,685)
 
138,270

 
107,737

 
282,471

 
220,623

Net investment income
 
50,745

 
36,283

 
100,160

 
70,856

Net realized and unrealized gain (loss) on investments
 
15,099

 
(2,642
)
 
23,074

 
13,011

Total revenues
 
1,385,866

 
1,110,348

 
2,661,739

 
2,222,837

Expenses:
 
 

 
 

 
 

 
 

Loss and loss adjustment expense
 
784,393

 
638,475

 
1,499,466

 
1,251,758

Acquisition costs and other underwriting expenses (net of ceding commission - related party - three months $145,610; $129,222 and six months $284,001; $247,909)
 
298,803

 
238,710

 
563,437

 
470,386

Other
 
132,970

 
98,130

 
261,156

 
196,587

Total expenses
 
1,216,166

 
975,315

 
2,324,059

 
1,918,731

Income before other income (expense), income taxes and equity in earnings of unconsolidated subsidiaries
 
169,700

 
135,033

 
337,680

 
304,106

Other income (loss):
 
 

 
 

 
 

 
 

Interest expense (net of interest income - related party - three months $2,187; $2,211 and six months $4,375; $4,399)
 
(19,738
)
 
(9,646
)
 
(37,438
)
 
(19,901
)
Loss on extinguishment of debt
 

 

 

 
(4,714
)
Gain on investment in life settlement contracts net of profit commission
 
12,676

 
3,096

 
23,406

 
14,469

Foreign currency loss
 
(26,435
)
 
(47,320
)
 
(62,108
)
 
(7,366
)
Acquisition gain on purchase
 
39,097

 

 
48,775

 

Total other income (loss)
 
5,600

 
(53,870
)
 
(27,365
)
 
(17,512
)
Income before income taxes and equity in earnings of unconsolidated subsidiaries
 
175,300

 
81,163

 
310,315

 
286,594

Provision for income taxes
 
27,918

 
4,472

 
55,644

 
51,284

Income before equity in earnings of unconsolidated subsidiaries
 
147,382

 
76,691


254,671

 
235,310

Equity in earnings of unconsolidated subsidiaries – related parties
 
4,802

 
4,042

 
10,578

 
9,571

Net income
 
$
152,184

 
$
80,733

 
$
265,249

 
$
244,881

Net income attributable to redeemable non-controlling interest and non-controlling interest of subsidiaries
 
(5,817
)
 
(1,346
)
 
(9,834
)
 
(5,429
)
Net income attributable to AmTrust Financial Services, Inc.
 
$
146,367

 
$
79,387

 
$
255,415

 
$
239,452

Dividends on preferred stock
 
(11,576
)
 
(8,639
)
 
(20,367
)
 
(14,008
)
Net income attributable to AmTrust common stockholders
 
$
134,791

 
$
70,748

 
$
235,048

 
$
225,444

Earnings per common share:
 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.79

 
$
0.43

 
$
1.36

 
$
1.38

Diluted earnings per share
 
$
0.78


$
0.42

 
$
1.34

 
$
1.35

Dividends declared per common share
 
$
0.15

 
$
0.125

 
$
0.30

 
$
0.25

Net realized gain (loss) on investments:
 
 

 
 

 
 

 
 

Total other-than-temporary impairment loss
 
$
(16,956
)
 
$
(1,466
)
 
$
(16,956
)
 
$
(2,482
)
Portion of loss recognized in other comprehensive income
 

 

 

 

Net impairment losses recognized in earnings
 
(16,956
)
 
(1,466
)
 
(16,956
)
 
(2,482
)
Net realized gain (loss) on available for sale securities
 
33,391

 
(856
)
 
38,663

 
15,813

Net unrealized gain (loss) on trading securities and other investments
 
(1,336
)
 
(320
)
 
1,367

 
(320
)
Net realized investment gain (loss)
 
$
15,099

 
$
(2,642
)
 
$
23,074

 
$
13,011

See accompanying notes to unaudited consolidated financial statements.

4



AmTrust Financial Services, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In Thousands)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
152,184

 
$
80,733

 
$
265,249

 
$
244,881

Other comprehensive (loss) income, net of tax:
 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
(36,820
)
 
14,021

 
(84,665
)
 
(51,332
)
Change in fair value of interest rate swap
 
168

 
163

 
287

 
190

Unrealized gain (loss) on securities:
 
 
 
 
 
 
 
 
Gross unrealized holding gain (loss)
 
168,963

 
(91,679
)
 
293,683

 
(80,494
)
Tax expense arising during period
 
59,137


(32,088
)

102,789


(28,173
)
Net unrealized holding gain (loss)
 
109,826

 
(59,591
)
 
190,894

 
(52,321
)
Reclassification adjustments for investment gain (loss) included in net income, net of tax:
 
 
 
 
 
 
 
 
Other-than-temporary impairment loss
 
(10,537
)
 

 
(10,537
)
 

Other net realized gain (loss) on investments
 
2,920

 
(790
)
 
2,492

 
(1,205
)
Reclassification adjustments for investment gain (loss) included in net income:
 
(7,617
)
 
(790
)
 
(8,045
)
 
(1,205
)
Other comprehensive income (loss), net of tax
 
$
65,557

 
$
(46,197
)
 
$
98,471

 
$
(104,668
)
Comprehensive income
 
217,741

 
34,536

 
363,720

 
140,213

Less: Comprehensive income attributable to redeemable non-controlling interest and non-controlling interest
 
5,817

 
1,346

 
9,834

 
5,429

Comprehensive income attributable to AmTrust Financial Services, Inc.
 
$
211,924

 
$
33,190

 
$
353,886

 
$
134,784

 
See accompanying notes to unaudited consolidated financial statements.

5



AmTrust Financial Services, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 

 
 

Net income
$
265,249

 
$
244,881

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
54,842

 
38,519

Net amortization of bond premium or discount
9,707

 
6,537

Equity earnings on investment in unconsolidated subsidiaries
(10,578
)
 
(9,571
)
Gain on investment in life settlement contracts, net
(23,406
)
 
(14,469
)
Realized gain on available for sale securities and unrealized gain on trading securities
(40,030
)
 
(15,493
)
Non-cash write-down of available for sale securities
16,956

 
2,482

Discount on notes payable
2,910

 
2,769

Stock based compensation
11,542

 
10,436

Loss on extinguishment of debt

 
4,714

Bad debt expense
8,241

 
7,724

Foreign currency loss
62,108

 
7,366

Acquisition gain on purchase
(48,775
)
 

Changes in assets - (increase) decrease:
 

 
 

Premiums and note receivables
(350,748
)
 
(536,715
)
Reinsurance recoverable
(172,948
)
 
(355,989
)
Deferred policy acquisition costs, net
(125,499
)
 
(66,026
)
Prepaid reinsurance premiums
(392,881
)
 
(280,712
)
Other assets
186,005

 
(124,061
)
Changes in liabilities - increase (decrease):
 
 
 
Reinsurance premium payable
185,275

 
155,340

Loss and loss expense reserve
780,599

 
664,495

Unearned premiums
382,794

 
394,994

Funds held under reinsurance treaties
(28,041
)
 
13,525

Accrued expenses and other current liabilities
(202,549
)
 
174,391

Deferred taxes
47,989

 
(158,508
)
Net cash provided by operating activities
618,762

 
166,629

Cash flows from investing activities:
 

 
 

Purchases of fixed maturities, available-for-sale
(1,299,160
)
 
(1,168,051
)
Purchases of equity securities, available-for-sale
(111,284
)
 
(14,923
)
Purchase of equity securities, trading
(100,101
)
 
(109,555
)
Purchase of other investments
(18,509
)
 
(27,234
)
Sales of fixed maturities, available-for-sale
910,939

 
560,386

Sales of equity securities, available-for-sale
89,348

 
12,184

Sales of equity securities, trading
102,261

 
108,325

Sales of other investments
1,242

 
13,337

Net (purchase) sale of short term investments
(43,614
)
 
42,501

Net (purchase) sale of securities sold but not purchased
(17,448
)
 
15,456

Receipt of life settlement contract proceeds
8,058

 
81,014

Acquisition of subsidiaries, net of cash obtained
(118,607
)
 
(121,401
)
Increase in restricted cash and cash equivalents
(211,285
)
 
(62,715
)
Purchase of property and equipment
(65,538
)
 
(44,386
)
Net cash used in investing activities
(873,698
)
 
(715,062
)
 
 
 
 
 
 
 
 
 
 
 
 

6



Cash flows from financing activities:
 

 
 

Revolving credit facility borrowings

 
430,000

Revolving credit facility payments

 
(365,000
)
Repurchase agreements, net
366,860

 
48,819

Secured loan proceeds
39,361

 

Secured loan agreements payments
(3,569
)
 
(3,478
)
  Convertible senior notes settlement

 
(53,606
)
Subordinated notes due 2055 proceeds

 
150,000

Financing fees

 
(4,990
)
Common stock issuance
276

 
171,672

Common stock repurchase
(103,509
)
 

Preferred stock issuance
139,070

 
176,529

Non-controlling interest capital distributions from consolidated subsidiaries, net
(5,301
)
 
(41
)
Stock option exercise and other
(7,084
)
 
(1,982
)
Dividends distributed on common stock
(52,624
)
 
(39,901
)
Dividends distributed on preferred stock
(20,367
)
 
(14,008
)
Net cash provided by financing activities
353,113

 
494,014

Effect of exchange rate changes on cash
(20,613
)
 
(2,359
)
Net increase in cash and cash equivalents
77,564

 
(56,778
)
Cash and cash equivalents, beginning of the period
931,970

 
902,750

Cash and cash equivalents, end of the period
$
1,009,534

 
$
845,972

Supplemental Cash Flow Information
 

 
 

Income tax payments
$
22,575

 
$
226,278

Interest payments on debt
$
28,902

 
$
18,245

Declared dividends on common stock
$
52,189

 
$
41,187

 
See accompanying notes to unaudited consolidated financial statements.

7



Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
(Dollars In Thousands, Except Share and Per Share Data)
1.
 Basis of Reporting
  
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements. These interim statements should be read in conjunction with the financial statements and notes thereto included in the AmTrust Financial Services, Inc. (“AmTrust” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2015, previously filed with the Securities and Exchange Commission (“SEC”) on February 29, 2016. The balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
 
These interim consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim period and all such adjustments are of a normal recurring nature. The results of operations for the interim period are not necessarily indicative, if annualized, of those to be expected for the full year. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The Company implemented a two-for-one stock split on February 2, 2016. As a result, the Company retrospectively adjusted all share and per share amounts in the accompanying condensed consolidated financial statements and notes to the condensed consolidated financial statements to apply the effect of the stock split for all periods presented.
 
A detailed description of the Company’s significant accounting policies and management judgments is located in the audited consolidated financial statements for the year ended December 31, 2015, included in the Company’s Form 10-K filed with the SEC.
 
All significant inter-company transactions and accounts have been eliminated in the consolidated financial statements.
 
To facilitate period-to-period comparisons, certain reclassifications have been made to prior period consolidated financial statement amounts to conform to current period presentation.

Correction of an Immaterial Error

The Company identified an immaterial error related to its classification on the consolidated statement of cash flows for purchases and sales of securities sold but not yet purchased, at fair value. The Company determined that in prior periods reported, these amounts were improperly reflected as changes in accrued expenses and other current liabilities in cash flow from operating activities instead of securities sold but not yet purchased, at fair value, in cash flow from investing activities. The Company reviewed the impact of this error on the prior periods and determined that the error was not material to the prior period consolidated financial statements. The Company has corrected the consolidated statement of cash flows for the six months ended June 30, 2015 by presenting this amount separately within investing activities and decreasing the changes in accrued expenses and other current liabilities within operating activities. The impact of the error decreased the Company's net cash provided by operating activities by $15,456 and increased the Company's cash flows from investing activities by an equivalent amount for the period ended June 30, 2015.
2.
Recent Accounting Pronouncements
 
With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2016, as compared to those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, that are of significance, or potential significance, to the Company.

In June 2016, the Financial Accounting Standards Board ("FASB") completed its Financial Instruments—Credit Losses project by issuing Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The new guidance requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The new guidance affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The new guidance is effective for fiscal years,

8



and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.

In March 2016, the FASB issued Accounting Standards Update ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplified several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or a liability, and classification on the statement of cash flows. The updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which improves the operability and understandability of the implementation guidance on principal versus agent considerations by clarifying that 1) an entity determines whether it is a principal or an agent for each specific good or service promised to the customer; 2) an entity determines the nature of each specific good or service; 3) when another party is involved in providing goods or services to a customer, an entity that is a principal obtains control of (a) a good or another asset from the other party that it then transfers to the customer, (b) a right to a service that will be performed by another party, which gives the entity the ability to direct that party to provide the service to the customer on the entity's behalf, or (c) a good or service from the other party that is combines with other goods or services to provide the specific good or service to the customer; and 4) the purpose of the indicators in paragraph 606-10-55-39 in Topic 606 is to support or assist in the assessment of control. The effective date and transition requirement for this ASU are the same as the effective date and transition requirements of ASU 2014-09, which were deferred to the quarter ending March 31, 2018 by ASU 2015-14. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments, which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amended guidance in this ASU is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence prescribed by Topic 815. The updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This ASU should be applied on a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee to recognize a right of use asset and a lease liability on the balance sheet for leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The updated guidance is effective for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically, the guidance (a) requires equity investments to be measured at fair value with changes in fair value recognized in earnings. However, an entity may choose to measure equity investments that do not have readily determinable fair value at cost minus impairment, if any, plus or minus changes resulted from observable price changes in orderly transactions for identical or similar investments of the same issuer, (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (c) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost, (d) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (e) requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in  the instrument-specific credit risk

9



when the entity has elected to measure the liability at fair value in accordance with the fair value option, (f) requires separate presentation of financial assets and liabilities by measurement category and form on the balance sheet or the notes to the financial statements, and (g) clarifies that the need for a valuation allowance on a deferred tax asset related to an available for sale security should be evaluated with other deferred tax assets. The updated guidance is effective for reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer in a business combination transaction recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU requires that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. It also requires an entity to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The updated guidance was effective for reporting periods beginning after December 15, 2015, and should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued. The Company elected to early adopt this ASU on September 30, 2015. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

In May 2015, the FASB issued ASU 2015-09, Financial Services - Insurance (Topic 944): Disclosure about Short-Duration Contracts, which provides certain new and additional disclosure requirements about the liability for unpaid claims and claim adjustment expenses associated with short-duration contracts as defined in Topic 944. Pursuant to the updated guidance, all insurance entities that issue short-duration contracts are required to disclose, among other things, incurred and paid claims development information, a reconciliation of such information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, and significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including the reasons for the change and the effects on the financial statements. The updated guidance was effective for reporting periods beginning after December 15, 2015, and should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which provides guidance that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient, and limits certain disclosure requirements only to investments for which the entity elects to measure the fair value using that practical expedient. The updated guidance is effective for reporting periods beginning after December 15, 2015, and should be applied retrospectively for all periods presented. The Company adopted this ASU on January 1, 2016. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to determine whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The updated guidance is effective for reporting periods beginning after December 15, 2015, and can be adopted either prospectively to all arrangements entered into or materially modified after the effective date, or retrospectively. The Company adopted this ASU on January 1, 2016. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which provides updated guidance to clarify the required presentation of debt issuance costs. The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts. Amortization of debt issuance costs is to be reported as interest expense. The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance. The Company adopted this ASU on January 1, 2016. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.


10



In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which provides amended guidance on a reporting entity's evaluation whether to consolidate certain legal entities. Specifically, the amendments will modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting entities, eliminate the presumption that a general partner should consolidate a limited partnership, affect the consolidation analysis of reporting entities with interests in VIEs, particularly those that have fee arrangements and related party relationships, and provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The Company adopted this ASU on January 1, 2016. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

11





3.
Investments
 
(a) Available-for-Sale Securities
 
The cost or amortized cost, gross unrealized gains and losses, and estimated fair value of fixed maturities and equity securities classified as available-for-sale as of June 30, 2016 and December 31, 2015, are presented below:
(Amounts in Thousands)
As of June 30, 2016
 
Cost or amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair Value
Preferred stock
 
$
3,629

 
$

 
$
(33
)
 
$
3,596

Common stock
 
150,907

 
14,895

 
(7,518
)
 
158,284

U.S. treasury securities
 
272,547

 
4,778

 
(1
)
 
277,324

U.S. government agencies
 
9,541

 
207

 

 
9,748

Municipal bonds
 
838,930

 
40,406

 
(1,151
)
 
878,185

Foreign government
 
122,470

 
8,314

 
(503
)
 
130,281

Corporate bonds:
 
 

 
 

 
 

 
 

Finance
 
1,389,171

 
60,930

 
(18,270
)
 
1,431,831

Industrial
 
2,051,346

 
113,173

 
(25,306
)
 
2,139,213

Utilities
 
183,995

 
7,155

 
(4,749
)
 
186,401

Commercial mortgage backed securities
 
186,920

 
5,898

 
(1,731
)
 
191,087

Residential mortgage backed securities:
 
 

 
 

 
 

 
 

Agency backed
 
1,117,536

 
37,748

 
(254
)
 
1,155,030

Non-agency backed
 
51,932

 
1,495

 
(276
)
 
53,151

Collateralized loan / debt obligations
 
367,228

 
2,968

 
(9,122
)
 
361,074

Asset-backed securities
 
25,780

 
59

 
(196
)
 
25,643

 
 
$
6,771,932

 
$
298,026

 
$
(69,110
)
 
$
7,000,848

 
(Amounts in Thousands)
As of December 31, 2015
 
Cost or amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
 Fair value
Preferred stock
 
$
4,869

 
$
150

 
$
(30
)
 
$
4,989

Common stock
 
104,477

 
3,816

 
(8,785
)
 
99,508

U.S. treasury securities
 
69,547

 
1,470

 
(258
)
 
70,759

U.S. government agencies
 
45,586

 
235

 
(263
)
 
45,558

Municipal bonds
 
530,004

 
11,952

 
(1,530
)
 
540,426

Foreign government
 
109,645

 
4,912

 
(812
)
 
113,745

Corporate bonds:
 
 
 
 
 
 
 
 
Finance
 
1,358,765

 
38,058

 
(34,393
)
 
1,362,430

Industrial
 
1,706,772

 
20,542

 
(80,251
)
 
1,647,063

Utilities
 
157,067

 
1,548

 
(9,115
)
 
149,500

Commercial mortgage backed securities
 
151,164

 
1,334

 
(1,180
)
 
151,318

Residential mortgage backed securities:
 
 
 
 
 
 
 
 
Agency backed
 
964,059

 
14,912

 
(4,133
)
 
974,838

Non-agency backed
 
124,046

 
322

 
(4,139
)
 
120,229

Collateralized loan / debt obligation
 
232,245

 
10

 
(6,161
)
 
226,094

Asset backed securities
 
33,142

 
4

 
(1,309
)
 
31,837

 
 
$
5,591,388

 
$
99,265

 
$
(152,359
)
 
$
5,538,294



12



Investments in foreign government securities include securities issued by national entities as well as instruments that are unconditionally guaranteed by such entities. As of June 30, 2016, the Company's foreign government securities were issued or guaranteed primarily by governments in Europe, Canada and Mexico.

Proceeds from the sale of investments in available-for-sale securities during the three months ended June 30, 2016 and 2015 were approximately $797,529 and $270,324, respectively. Proceeds from the sale of investments in available-for-sale securities during the six months ended June 30, 2016 and 2015 were approximately $1,000,265 and $572,570, respectively.

A summary of the Company’s available-for-sale fixed maturities as of June 30, 2016 and December 31, 2015, by contractual maturity, is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
June 30, 2016
 
December 31, 2015
(Amounts in Thousands)
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
 Fair Value
Due in one year or less
 
$
216,852

 
$
217,214

 
$
125,563

 
$
124,763

Due after one through five years
 
1,508,569

 
1,543,107

 
913,365

 
909,634

Due after five through ten years
 
2,753,851

 
2,883,670

 
2,586,061

 
2,537,734

Due after ten years
 
388,727

 
408,992

 
352,397

 
357,288

Mortgage and asset backed securities
 
1,749,397

 
1,785,986

 
1,504,656

 
1,504,378

Total fixed maturities
 
$
6,617,396

 
$
6,838,969

 
$
5,482,042

 
$
5,433,797


Other-than-temporary impairment ("OTTI") charges of our fixed maturities and equity securities classified as available-for-sale are presented below:
 
 
Three Months Ended June 30,

Six Months Ended June 30,
(Amounts in Thousands)
 
2016

2015

2016

2015
Equity securities recognized in earnings
 
$
16,956

 
$
176

 
$
16,956

 
$
1,192

Fixed-maturity securities recognized in earnings
 

 
1,290

 

 
1,290

 
 
$
16,956

 
$
1,466

 
$
16,956

 
$
2,482



13



The tables below summarize the gross unrealized losses of our fixed maturity and equity securities by length of time the security has continuously been in an unrealized loss position as of June 30, 2016 and December 31, 2015:
 
 
 
Less Than 12 Months

12 Months or More

Total
(Amounts in Thousands)
As of June 30, 2016
 
Fair Market Value

Unrealized Losses

No. of Positions Held

Fair Market Value

Unrealized Losses

No. of Positions Held

Fair Market Value

Unrealized Losses
Common and preferred stock
 
$
19,282


$
(6,740
)

68


$
1,490


$
(812
)

28


$
20,772


$
(7,552
)
U.S. treasury securities
 
960

 
(1
)
 
5

 
651

 

 
1

 
1,611

 
(1
)
Municipal bonds
 
48,738


(456
)

36


15,391


(694
)

29


64,129


(1,150
)
Foreign government
 
13,405

 
(503
)
 
10

 

 

 

 
13,405

 
(503
)
Corporate bonds:
 
 


 


 


 


 


 


 


 

Finance
 
161,268


(17,068
)

109


42,783


(1,201
)

32


204,051


(18,269
)
Industrial
 
191,697


(20,201
)

162


119,185


(5,105
)

61


310,882


(25,306
)
Utilities
 
10,658

 
(1,702
)
 
17

 
20,747

 
(3,047
)
 
10

 
31,405

 
(4,749
)
Commercial mortgage backed securities
 
39,385

 
(547
)
 
16

 
47,712

 
(1,184
)
 
60

 
87,097

 
(1,731
)
Residential mortgage backed securities:
 
 


 


 


 


 


 


 


 

Agency backed
 
4,028


(13
)

28


26,573


(241
)

34


30,601


(254
)
Non-agency backed
 
18,001


(207
)

16


3,521


(70
)

5


21,522


(277
)
Collateralized loan / debt obligations
 
157,122

 
(6,105
)
 
61

 
58,079

 
(3,018
)
 
24

 
215,201

 
(9,123
)
Asset-backed securities
 
16,188

 
(187
)
 
23

 
1,041

 
(8
)
 
8

 
17,229

 
(195
)
Total temporarily impaired securities
 
$
680,732


$
(53,730
)

551


$
337,173


$
(15,380
)

292


$
1,017,905


$
(69,110
)
  
 
 
Less Than 12 Months
 
12 Months or More
 
Total
(Amounts in Thousands)
As of December 31, 2015
 
Fair Market Value
 
Unrealized Losses
 
No. of Positions Held
 
Fair Market Value
 
Unrealized Losses
 
No. of Positions Held
 
Fair Market Value
 
Unrealized Losses
Common and preferred stock
 
$
59,302

 
$
(8,711
)
 
67

 
$
402

 
$
(104
)
 
2

 
$
59,704

 
$
(8,815
)
U.S. treasury securities
 
31,658

 
(232
)
 
77

 
2,586

 
(26
)
 
8

 
34,244

 
(258
)
U.S. government agencies
 
22,412

 
(262
)
 
20

 
182

 
(1
)
 
2

 
22,594

 
(263
)
Municipal bonds
 
121,550

 
(867
)
 
111

 
17,163

 
(663
)
 
30

 
138,713

 
(1,530
)
Foreign government
 
18,598

 
(688
)
 
27

 
5,977

 
(124
)
 
1

 
24,575

 
(812
)
Corporate bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance
 
604,898

 
(33,068
)
 
349

 
59,020

 
(1,325
)
 
22

 
663,918

 
(34,393
)
Industrial
 
858,632

 
(65,887
)
 
633

 
82,495

 
(14,364
)
 
55

 
941,127

 
(80,251
)
 Utilities
 
79,358

 
(5,305
)
 
113

 
7,712

 
(3,810
)
 
5

 
87,070

 
(9,115
)
Commercial mortgage backed securities
 
35,405

 
(1,079
)
 
100

 
2,870

 
(101
)
 
6

 
38,275

 
(1,180
)
Residential mortgage backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency backed
 
334,224

 
(2,788
)
 
163

 
35,446

 
(1,345
)
 
29

 
369,670

 
(4,133
)
Non-agency backed
 
95,001

 
(4,077
)
 
39

 
4,023

 
(62
)
 
4

 
99,024

 
(4,139
)
Collateralized loan / debt obligations
 
201,086

 
(6,161
)
 
78

 

 

 

 
201,086

 
(6,161
)
Asset-backed securities
 
30,302

 
(1,309
)
 
70

 

 

 

 
30,302

 
(1,309
)
Total temporarily impaired securities
 
$
2,492,426

 
$
(130,434
)
 
1,847

 
$
217,876

 
$
(21,925
)
 
164

 
$
2,710,302

 
$
(152,359
)


14



There are 843 and 2,011 securities at June 30, 2016 and December 31, 2015, respectively, that account for the gross unrealized loss, none of which is deemed by the Company to be OTTI. At June 30, 2016, we have determined that the unrealized losses on fixed maturities were primarily due to market interest rate movements since their date of purchase. The Company considers an investment, primarily equity securities, to be impaired when it has been in a significant unrealized loss position (in excess of 35% of cost if the issuer has a market capitalization of under $1,000,000 and in excess of 25% of cost if the issuer has a market capitalization of $1,000,000 or more) for over 24 months. Additionally, other factors influencing the Company’s determination that unrealized losses were temporary included an evaluation of the investment’s discounted cash flows, the magnitude of the unrealized losses in relation to each security’s cost, near-term and long-term prospects of the issuer or the issuer's ability to have adequate resources to fulfill contractual obligations, the nature of the investment and management’s intent not to sell these securities, and it being not more likely than not that the Company will be required to sell these investments before anticipated recovery of fair value to the Company’s cost basis. As of June 30, 2016, for the $15,380 of unrealized losses related to securities in unrealized loss positions for a period of twelve or more consecutive months, $2,091 of those unrealized losses were related to securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost.

(b) Trading Securities

The original or amortized cost, estimated market value and gross unrealized appreciation and depreciation of trading securities as of June 30, 2016 and December 31, 2015 are presented in the tables below:
(Amounts in Thousands)
As of June 30, 2016
 
Cost or amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
 Market value
Common stock
 
$
26,232

 
$
1,215

 
$
(600
)
 
$
26,847


(Amounts in Thousands)
As of December 31, 2015
 
Cost or amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
 Market value
Common stock
 
$
26,937

 
$
739

 
$
(405
)
 
$
27,271


Proceeds from the sale of investments in trading securities during the three months ended June 30, 2016 and 2015 were approximately $49,517 and $48,057, respectively. Proceeds from the sale of investments in trading securities during the six months ended June 30, 2016 and 2015 were approximately $102,261 and $108,325, respectively.

(c) Investment Income
 
Net investment income for the three and six months ended June 30, 2016 and 2015 was derived from the following sources:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in Thousands)
 
2016
 
2015
 
2016
 
2015
Fixed maturities, available-for-sale
 
$
46,235

 
$
35,199

 
$
92,428

 
$
67,952

Equity securities, available-for-sale
 
4,098

 
661

 
6,462

 
1,070

Equity securities, trading
 
(125
)
 
32

 
(278
)
 
40

Cash and short term investments
 
686

 
923

 
1,772

 
2,588

 
 
50,894

 
36,815

 
100,384

 
71,650

Investment expenses
 
(149
)
 
(532
)
 
(224
)
 
(794
)
 
 
$
50,745

 
$
36,283

 
$
100,160

 
$
70,856


15




(d) Realized Gains and Losses
 
The tables below summarize the gross realized gains and (losses) for the three and six months ended June 30, 2016 and 2015:

(Amounts in Thousands)
Three Months Ended June 30, 2016
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturities, available-for-sale
 
$
35,008

 
$
(1,571
)
 
$
33,437

Equity securities, available-for-sale
 
608

 
(658
)
 
(50
)
Equity securities, trading
 
5,315

 
(5,575
)
 
(260
)
Other invested assets
 
4

 
(1,076
)
 
(1,072
)
Write-down of equity securities, available-for-sale
 

 
(16,956
)
 
(16,956
)
 
 
$
40,935

 
$
(25,836
)
 
$
15,099

 
 
 
 
 
 
 
(Amounts in Thousands)
Three Months Ended June 30, 2015
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturities, available-for-sale
 
$
2,228

 
$
(3,653
)
 
$
(1,425
)
Equity securities, available-for-sale
 
102

 
(32
)
 
70

Equity securities, trading
 
3,414

 
(2,025
)
 
1,389

Other invested assets
 

 
(1,210
)
 
(1,210
)
Write-down of fixed maturities, available-for-sale
 

 
(274
)
 
(274
)
Write-down of equity securities, available-for-sale
 

 
(1,192
)
 
(1,192
)
 
 
$
5,744

 
$
(8,386
)
 
$
(2,642
)
 
 
 
 
 
 
 
(Amounts in Thousands)
Six Months Ended June 30, 2016
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturities, available-for-sale
 
$
39,811

 
$
(1,617
)
 
$
38,194

Equity securities, available-for-sale
 
1,268

 
(799
)
 
469

Equity securities, trading
 
14,927

 
(12,431
)
 
2,496

Other invested assets
 
4

 
(1,133
)
 
(1,129
)
Write-down of equity securities, available-for-sale
 

 
(16,956
)
 
(16,956
)
 
 
$
56,010

 
$
(32,936
)
 
$
23,074

 
 
 
 
 
 
 
(Amounts in Thousands)
Six Months Ended June 30, 2015
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturities, available-for-sale
 
$
22,922

 
$
(7,843
)
 
$
15,079

Equity securities, available-for-sale
 
2,266

 
(1,711
)
 
555

Equity securities, trading
 
6,737

 
(4,500
)
 
2,237

Other invested assets
 

 
(2,378
)
 
(2,378
)
Write-down of fixed securities, available-for-sale
 

 
(1,290
)
 
(1,290
)
Write-down of equity securities, trading

 

 
(1,192
)
 
(1,192
)
 
 
$
31,925

 
$
(18,914
)
 
$
13,011


(e) Derivatives
 
The Company from time to time invests in a limited number of derivatives and other financial instruments as part of its investment portfolio to manage interest rate changes or other exposures to a particular financial market. The Company records changes in valuation on its derivative positions not designated as a hedge, if any, as a component of net realized gains and losses. The Company records changes in valuation on its hedge positions as a component of other comprehensive income.

As of June 30, 2016 and December 31, 2015, the Company had two interest rate swaps designated as hedges that were recorded as a liability in the total amount of $636 and $1,077, respectively, and were included as a component of accrued expenses and other liabilities.
 

16



The following table presents the notional amounts by remaining maturity of the Company’s interest rate swaps as of June 30, 2016:
 
 
 
Remaining Life of Notional Amount (1)
 
(Amounts in Thousands)
 
One Year
 
Two Through Five Years
 
Six Through Ten Years
 
After Ten Years
 
Total
Interest rate swaps
 
$
70,000

 
$

 
$

 
$

 
$
70,000

 
(1) 
Notional amount is not representative of either market risk or credit risk and is not recorded in the consolidated balance sheet.

(f) Restricted Cash and Investments
 
The Company, in order to conduct business in certain states, is required to maintain letters of credit or assets on deposit to support state mandated regulatory requirements and certain third party agreements. The Company also utilizes trust accounts to collateralize business with its reinsurance counterparties. These assets are primarily in the form of cash and certain high grade securities. The fair values of the Company's restricted assets as of June 30, 2016 and December 31, 2015 are as follows:
 
(Amounts in Thousands)
 
June 30, 2016
 
December 31, 2015
Restricted cash and cash equivalents
 
$
591,984

 
$
380,699

Restricted investments - fixed maturities at fair value
 
1,815,846

 
1,490,547

Total restricted cash, cash equivalents, and investments
 
$
2,407,830

 
$
1,871,246

 
(g) Other

Securities sold but not yet purchased are securities that the Company has sold, but does not own, in anticipation of a decline in the market value of the security. The Company's risk is that the value of the security will increase rather than decline. Consequently, the settlement amount of the liability for securities sold, not yet purchased may exceed the amount recorded in the consolidated balance sheet as the Company is obligated to purchase the securities sold, not yet purchased in the market at prevailing prices to settle the obligations. To establish a position in security sold, not yet purchased, the Company needs to borrow the security for delivery to the buyer. When the transaction is open, the liability for the obligation to replace the borrowed security is marked to market and an unrealized gain or loss is recorded. At the time the transaction is closed, the Company realizes a gain or loss equal to the differences between the price at which the security was sold and the cost of replacing the borrowed security. While the transaction is open, the Company will also incur an expense for any dividends or interest which will be paid to the lender of the securities. The Company’s liability for securities to be delivered is measured at their fair value and was $21,170 and $38,618 as of June 30, 2016 and December 31, 2015, respectively. The securities sold but not yet purchased consisted primarily of equity and fixed maturity securities, and the liability for securities sold but not yet purchased is included in accrued expenses and other liabilities in the condensed consolidated balance sheet.

As of June 30, 2016, the Company had 28 repurchase agreements with an outstanding principal amount of $366,860, which approximates fair value, at interest rates between 0.70% and 1.00%. The Company had 24 repurchase agreements with one counter-party totaling $232,540 and 4 repurchase agreements with another counter-party totaling $134,319. Interest expense associated with these repurchase agreements for the three and six months ended June 30, 2016 was $52. The Company had approximately $326,586 of collateral pledged in support of these agreements. The Company records interest expense related to repurchase agreements as a component of investment income.

17





4.
Fair Value of Financial Instruments

The following tables present the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis as of June 30, 2016 and December 31, 2015:
 
(Amounts in Thousands)
As of June 30, 2016
 
Total

Level 1

Level 2

Level 3
Assets:
 
 


 


 


 

U.S. treasury securities
 
$
277,324


$
277,324


$


$

U.S. government agencies
 
9,748




9,748



Municipal bonds
 
878,185




878,185



Foreign government
 
130,281

 

 
130,281

 

Corporate bonds and other bonds:
 
 


 


 


 

Finance
 
1,431,831




1,431,831



Industrial
 
2,139,213




2,139,213



Utilities
 
186,401




186,401



Commercial mortgage backed securities
 
191,087




191,087



Residential mortgage backed securities:
 
 


 


 


 

Agency backed
 
1,155,030




1,155,030



Non-agency backed
 
53,151




53,151



Collateralized loan / debt obligations
 
361,074

 

 
361,074

 

Asset-backed securities
 
25,644

 

 
25,644

 

Equity securities, available-for-sale
 
161,879


129,994


7,121


24,764

Equity securities, trading
 
26,847

 
26,847

 

 

Short term investments
 
127,880


127,880





Other investments
 
38,039






38,039

Life settlement contracts
 
304,434






304,434

 
 
$
7,498,048


$
562,045


$
6,568,766


$
367,237

Liabilities:
 
 


 


 


 

Equity securities sold but not yet purchased
 
$
21,170

 
$
21,170

 
$

 
$

Securities sold under agreements to repurchase, at contract value
 
366,860




366,860



Life settlement contract profit commission
 
9,054






9,054

Contingent consideration
 
64,817

 

 

 
64,817

Derivatives
 
636




636



 
 
$
462,537


$
21,170


$
367,496


$
73,871

 

18



(Amounts in Thousands)
As of December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
70,759

 
$
70,759

 
$

 
$

U.S. government agencies
 
45,558

 

 
45,558

 

Municipal bonds
 
540,426

 

 
540,426

 

Foreign government
 
113,745

 

 
113,745

 

Corporate bonds and other bonds:
 

 
 
 

 
 
Finance
 
1,362,430

 

 
1,362,430

 

Industrial
 
1,647,063

 

 
1,647,063

 

Utilities
 
149,500

 

 
149,500

 

Commercial mortgage backed securities
 
151,318

 

 
151,318

 

Residential mortgage backed securities:
 
 
 
 
 
 
 
 
Agency backed
 
974,838

 

 
974,838

 

Non-agency backed
 
120,229

 

 
120,229

 

Collateralized loan / debt obligations
 
226,094

 

 
226,094

 

Asset-backed securities
 
31,837

 

 
31,837

 

Equity securities, available-for-sale
 
104,497

 
38,563

 
28,723

 
37,211

Equity securities, trading
 
27,271

 
27,271

 

 

Short term investments
 
84,266

 
84,266

 

 

Other investments
 
30,309

 

 

 
30,309

Life settlement contracts
 
264,001

 

 

 
264,001

 
 
$
5,944,141

 
$
220,859

 
$
5,391,761

 
$
331,521

Liabilities:
 
 
 
 
 
 
 
 
Equity securities sold but not yet purchased
 
$
18,163

 
$
18,163

 
$

 
$

Fixed maturity securities sold but not yet purchased
 
20,455

 

 
20,455

 

Life settlement contract profit commission
 
15,406

 

 

 
15,406

Contingent consideration
 
77,457

 

 

 
77,457

Derivatives
 
1,077

 

 
1,077

 

 
 
$
132,558

 
$
18,163

 
$
21,532

 
$
92,863


There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2016 and 2015, respectively.

The Company classifies its financial assets and liabilities in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.  This classification requires judgment in assessing the market and pricing methodologies for a particular security.  The fair value hierarchy includes the following three levels:
 
Level 1 – Valuations are based on unadjusted quoted market prices in active markets for identical financial assets or liabilities.

Examples of instruments utilizing Level 1 inputs include: exchange-traded securities and U.S. Treasury bonds.
 
Level 2 – Valuations of financial assets and liabilities are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets obtained from third party pricing services or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data. The fair value of securities in this category are determined by management after reviewing market prices obtained from independent pricing services and brokers.
 
Examples of instruments utilizing Level 2 inputs include: U.S. government-sponsored agency securities; non-U.S. government obligations; corporate and municipal bonds; mortgage-backed bonds; asset-backed securities; listed derivatives that are not actively traded; and equity securities that are not publicly traded.

19




Level 3 – Valuations are based on unobservable inputs for assets and liabilities where there is little or no market activity.  Management’s assumptions are used in internal valuation pricing models to determine the fair value of financial assets or liabilities, which may include projected cash flows, collateral performance or liquidity circumstances in the security or similar securities that may have occurred since the prior pricing period.

Examples of instruments utilizing Level 3 inputs include: hedge and credit funds with partial transparency.

The following tables provides a summary of changes in fair value of the Company’s Level 3 financial assets and liabilities for the three and six months ended June 30, 2016 and 2015:
(Amounts in Thousands)

Balance as of March 31, 2016

Net income

Other comprehensive income

Purchases and issuances

Sales and settlements

Net transfers into (out of) Level 3

Balance as of June 30,
2016
Other investments

$
42,322


$
(330
)

$


$
320


$
(97
)

$
(4,176
)

$
38,039

Equity securities, available-for-sale
 
25,556

 

 
(776
)
 
(16
)
 

 

 
24,764

Life settlement contracts

294,573


28,532




11,330


(30,001
)



304,434

Life settlement contract profit commission

(7,168
)

(1,886
)









(9,054
)
Contingent consideration
 
(64,738
)
 
(1,761
)
 

 
(11,461
)
 
13,143

 

 
(64,817
)
Total

$
290,545


$
24,555


$
(776
)

$
173


$
(16,955
)

$
(4,176
)

$
293,366

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in Thousands)
 
Balance as of January 1, 2016
 
Net income
 
Other comprehensive income
 
Purchases and issuances
 
Sales and settlements
 
Net transfers into (out of) Level 3
 
Balance as of June 30,
2016
Other investments
 
$
30,309

 
$
(1,486
)
 
$

 
$
695

 
$
(286
)
 
$
8,807

 
$
38,039

Equity securities, available-for-sale
 
37,211

 

 
(12,449
)
 
2

 

 

 
24,764

Life settlement contracts
 
264,001

 
59,161

 

 
11,330

 
(30,058
)
 

 
304,434

Life settlement contract profit commission
 
(15,406
)
 
(9,054
)
 

 

 
15,406

 

 
(9,054
)
Contingent consideration
 
(77,457
)
 
(2,346
)
 

 
(8,460
)
 
23,446

 

 
(64,817
)
Total
 
$
238,658


$
46,275


$
(12,449
)

$
3,567


$
8,508


$
8,807


$
293,366

(Amounts in Thousands)
 
Balance as of March 31, 2015
 
Net income
 
Other comprehensive income
 
Purchases and issuances
 
Sales and settlements
 
Net transfers into (out of) Level 3
 
Balance as of June 30, 2015
Other investments
 
$
14,496

 
$
(58
)
 
$

 
$
321

 
$

 
$

 
$
14,759

Equity securities, available-for-sale
 
37,765

 

 
2,467

 

 

 

 
40,232

Life settlement contracts
 
259,785

 
17,640

 

 

 
(10,032
)
 

 
267,393

Life settlement contract profit commission
 
(14,575
)
 
(2,419
)
 

 

 

 

 
(16,994
)
Contingent consideration
 
(82,514
)
 

 

 
28

 
5,696

 

 
(76,790
)
Total
 
$
214,957


$
15,163


$
2,467


$
349


$
(4,336
)

$


$
228,600

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Amounts in Thousands)
 
Balance as of January 1, 2015
 
Net income
 
Other comprehensive income
 
Purchases and issuances
 
Sales and settlements
 
Net transfers into (out of) Level 3
 
Balance as of June 30, 2015
Other investments
 
$
13,315

 
$
414

 
$

 
$
1,367

 
$
(337
)
 
$

 
$
14,759

Equity securities, available-for-sale
 
34,886

 

 
5,392

 

 
(46
)
 
 
 
40,232

Life settlement contracts
 
264,517

 
38,890

 

 

 
(36,014
)
 

 
267,393

Life settlement contract profit commission
 
(16,534
)
 
(460
)
 

 

 

 

 
(16,994
)
Contingent consideration
 
(41,704
)
 

 

 
(44,960
)
 
9,874

 

 
(76,790
)
Total
 
$
254,480


$
38,844


$
5,392


$
(43,593
)

$
(26,523
)

$


$
228,600


 The Company changed its classification from Level 2 to Level 3 in the fair value hierarchy for certain of its foreign investments of approximately $8,807 during the six months ended June 30, 2016 based on a better understanding of the inputs and assumptions related to the security. The Company's policy for transfers between fair value levels, transfer into the levels, and transfer out of levels is to recognize such transfers as of the actual date of the event or change in circumstances that cause the transfer. The Company had no transfers among the levels of fair value hierarchy during the six months ended June 30, 2015.
 

20



A reconciliation of net income for life settlement contracts in the above table to gain on investment in life settlement contracts net of profit commission included in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015 is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in Thousands)
 
2016
 
2015
 
2016
 
2015
Net income
 
$
28,532

 
$
17,640

 
$
59,161

 
$
38,890

Premiums paid
 
(13,354
)
 
(11,158
)
 
(25,456
)
 
(22,288
)
Profit commission
 
(1,886
)
 
(2,419
)
 
(9,054
)
 
(460
)
Other expenses
 
(616
)
 
(967
)
 
(1,245
)
 
(1,673
)
Gain on investment in life settlement contracts
 
$
12,676

 
$
3,096

 
$
23,406

 
$
14,469


The Company uses the following methods and assumptions in estimating its fair value disclosures for financial instruments:

Equity and Fixed Income Investments: Fair value disclosures for these investments are disclosed above in this note. As of June 30, 2016, the Company's Level 3 equity securities consisted primarily of privately placed warrants of companies that have publicly traded common stock. The fair value of these equity securities as of June 30, 2016 was derived from the quoted price of the underlying common stock adjusted for other inputs that are not market observable.

Cash and cash equivalents, restricted cash and cash equivalents, and short term investments: The carrying value of cash and cash equivalents, restricted cash and cash equivalents, and short term investments approximate their respective fair value and are classified as Level 1 in the fair value hierarchy.

Premiums Receivable: The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair values due to the short term nature of the asset and are classified as Level 1 in the fair value hierarchy.

Other Investments: Other investments that are reported at fair value consisted primarily of investments in private limited partnerships, certain foreign investments, and other. Other investments reported at fair value accounted for approximately 0.5% of the Company's investment portfolio as of June 30, 2016, which the Company believes is immaterial to its overall financial position or its results of operations. The Company estimates the fair value based on significant unobservable inputs in the valuation process. As a result, the Company classified the fair value estimates as Level 3 in the fair value hierarchy.

Equity Investment in Unconsolidated Subsidiaries - Related Party: The Company has an ownership percentage of approximately 12% in National General Holdings Corp. ("NGHC"), a publicly held insurance holding company (Nasdaq: NGHC). The Company accounts for this investment under the equity method of accounting as it has the ability to exert significant influence on NGHC. The fair value and carrying value of the investment was approximately $263,368 and $149,573, respectively, as of June 30, 2016.

Subordinated Debentures and Debt: The fair value of the Company's material debt arrangements as of June 30, 2016 was as follows:
 
Carrying Value
 
Fair Value
7.25% Subordinated Notes due 2055
$
145,140

 
$
153,420

7.50% Subordinated Notes due 2055
130,628

 
139,914

2.75% Convertible senior notes due 2044
163,269

 
178,833

6.125% Notes due 2023
248,048

 
259,224

Junior subordinated debentures due 2035-2037
121,984

 
80,900

Trust preferred securities due 2033-2037
92,786

 
92,786

Revolving credit facility
130,000

 
130,000

Other
197,744

 
197,744


The 7.25% subordinated notes due 2055, the 7.50% subordinated notes due 2055, the 2.75% convertible senior notes due 2044, and the 6.125% notes due 2023 are publicly traded instruments and are classified as

21



Level 1 in the fair value hierarchy. The fair value of the junior subordinated debentures due 2035-2037 was determined using the Black-Derman-Toy interest rate lattice model and is classified as Level 3 in the fair value hierarchy. In determining the fair value of its remaining debt, the Company uses estimates based on rates currently available to the Company for debt with similar terms and remaining maturities. Accordingly, the fair value of other debt is classified as Level 2 within the valuation hierarchy. The Company considers its other debt's carrying value to approximate fair value as their interest rates approximate current borrowing rates.

Derivatives: The Company classifies interest rate swaps as Level 2 in the fair value hierarchy.  The Company uses these interest rate swaps to hedge floating interest rates on its debt, thereby changing the variable rate exposure to a fixed rate exposure for interest on these obligations.  The estimated fair value of the interest rate swaps, which is obtained from a third party pricing service, is measured using discounted cash flow analysis that incorporates significant observable inputs, including the LIBOR forward curve and a measurement of volatility.

Contingent consideration: The fair value of contingent consideration is based on a discounted cash flow methodology and is classified as Level 3 in the fair value hierarchy. The range of discount rates used for contingent consideration was primarily between 8% and 14%.

Life settlement contracts and life settlement contract profit commission: The fair value of life settlement contracts as well as life settlement profit commission liability is based on information available to the Company at the end of the reporting period. These financial instruments are classified as Level 3 in the fair value hierarchy. The Company considers the following factors in its fair value estimates: cost at date of purchase, recent purchases and sales of similar investments (if available and applicable), financial standing of the issuer, changes in economic conditions affecting the issuer, maintenance cost, premiums, benefits, standard actuarially developed mortality tables and life expectancy reports prepared by nationally recognized and independent third party medical underwriters. The Company estimates the fair value of a life insurance policy by applying an investment discount rate based on the cost of funding the Company's life settlement contracts as compared to returns on investments in asset classes with comparable credit quality, which the Company has determined to be 7.5%, to the expected cash flow generated by the policies in the Company's life settlement portfolio (death benefits less premium payments), net of policy specific adjustments and reserves. In order to confirm the integrity of their calculation of fair value, the Company, quarterly, retains an independent third-party actuary to verify that the actuarial modeling used by the Company to determine fair value was performed correctly and that the valuation, as determined through the Company's actuarial modeling, is consistent with other methodologies. The Company considers this information in its assessment of the reasonableness of the life expectancy and discount rate inputs used in the valuation of these investments.

The Company adjusts the standard mortality for each insured for the insured's life expectancy based on reviews of the insured's medical records and the independent life expectancy reports based thereon. The Company establishes policy specific reserves for the following uncertainties: improvements in mortality, the possibility that the high net worth individuals represented in its portfolio may have access to better health care, the volatility inherent in determining the life expectancy of insureds with significant reported health impairments, and the future expenses related to the administration of the portfolio, which incorporates current life expectancy assumptions, premium payments, the credit exposure to the insurance company that issued the life settlement contracts and the rate of return that a buyer would require on the contracts as no comparable market pricing is available. Prior to 2015, the Company established policy specific reserves for the possibility that the issuer of the policy or a third party would contest the payment of the death benefit payable to the Company. The Company determined that the contestability reserve was no longer necessary in 2015 due to historical experience. The application of the investment discount rate to the expected cash flow generated by the portfolio, net of the policy specific reserves, yields the fair value of the portfolio. The effective discount rate reflects the relationship between the fair value and the expected cash flow gross of these reserves.


22



The following summarizes data utilized in estimating the fair value of the portfolio of life insurance policies as of June 30, 2016 and December 31, 2015 and, as described in Note 5. "Investments in Life Settlements", only includes data for policies to which the Company assigned value at those dates:
 
 
 
 
June 30,
2016
 
December 31,
2015
Average age of insured
 
82.5 years

 
82.0 years

Average life expectancy, months (1)
 
108


114

Average face amount per policy (Amounts in thousands)
 
$
6,365

 
$
6,564

Effective discount rate (2)
 
12.8
%
 
13.7
%

(1) 
Standard life expectancy as adjusted for specific circumstances.
(2) 
Effective discount rate ("EDR") is the Company's estimated internal rate of return on its life settlement contract portfolio and is determined from the gross expected cash flows and valuation of the portfolio. The valuation of the portfolio is calculated net of all reserves using a 7.5% discount rate. The EDR is inclusive of the reserves and the gross expected cash flows of the portfolio. The Company anticipates that the EDR's range is between 12.5% and 17.5% and reflects the uncertainty that exists surrounding the information available as of the reporting date. As the accuracy and reliability of information improves (declines), the EDR will decrease (increase).

The Company's assumptions are, by their nature, inherently uncertain and the effect of changes in estimates may be significant. The fair value measurements used in estimating the present value calculation are derived from valuation techniques generally used in the industry that include inputs for the asset that are not based on observable market data. The extent to which the fair value could reasonably vary in the near term has been quantified by evaluating the effect of changes in significant underlying assumptions used to estimate the fair value amount. If the life expectancies were increased or decreased by 4 months and the discount factors were increased or decreased by 1% while all other variables were held constant, the carrying value of the investment in life insurance policies would increase or (decrease) by the unaudited amounts summarized below as of June 30, 2016 and December 31, 2015:
 
 
Change in life expectancy
(Amounts in Thousands)
 
Plus 4 Months
 
Minus 4 Months
Investment in life policies:
 
 

 
 

June 30, 2016
 
$
(38,254
)
 
$
45,092

December 31, 2015
 
$
(37,697
)
 
$
40,997

 
 
 
Change in discount rate (1)
(Amounts in Thousands)
 
Plus 1%
 
Minus 1%
Investment in life policies:
 
 

 
 

June 30, 2016
 
$
(26,601
)
 
$
29,514

December 31, 2015
 
$
(26,558
)
 
$
29,644

 
 
 
 
 
 
 
(1)
Discount rate is a present value calculation that considers legal risk, credit risk and liquidity risk and is a component of EDR.

23




5.
Investment in Life Settlements
 
The Company has a 50% ownership interest in each of four entities (collectively, the "LSC Entities") formed for the purpose of acquiring life settlement contracts, with a subsidiary of NGHC owning the remaining 50%. The LSC Entities are: Tiger Capital LLC (“Tiger”); AMT Capital Alpha, LLC (“AMT Alpha”); AMT Capital Holdings, S.A. (“AMTCH”); and AMT Capital Holdings II, S.A. (“AMTCH II”).

A life settlement contract is a contract between the owner of a life insurance policy and a third-party who obtains the ownership and beneficiary rights of the underlying life insurance policy. During the three months ended March 31, 2016, the Company terminated an agreement with a third party administrator of the Tiger and AMTCH II life settlement contract portfolios, under which the third party received an administrative fee. The third party administrator was also eligible to receive a percentage of profits after certain time and performance thresholds had been met. The Company provides certain actuarial and finance functions related to the LSC Entities. In conjunction with the Company’s approximate 12% ownership percentage of NGHC, the Company ultimately receives 56% of the profits and losses of the LSC Entities. As such, in accordance with ASC 810-10, Consolidation, the Company has been deemed the primary beneficiary and, therefore, consolidate the LSC Entities.

The Company accounts for investments in life settlements in accordance with ASC 325-30, Investments in Insurance Contracts, which states that an investor shall elect to account for its investments in life settlement contracts by using either the investment method or the fair value method. The election is made on an instrument-by-instrument basis and is irrevocable. The Company has elected to account for these policies using the fair value method. The Company determines fair value based upon its estimate of the discounted cash flow related to policies (net of the reserves for improvements in mortality, the possibility that the high net worth individuals represented in its portfolio may have access to better health care, the volatility inherent in determining the life expectancy of insureds with significant reported health impairments, and the future expenses related to the administration of the portfolio), which incorporates current life expectancy assumptions, premium payments, the credit exposure to the insurance company that issued the life settlement contracts and the rate of return that a buyer would require on the contracts as no comparable market pricing is available. Prior to 2015, the Company established policy specific reserves for the possibility that the issuer of the policy or a third party would contest the payment of the death benefit payable to the Company. The Company determined that the contestability reserve was no longer necessary in 2015 due to historical experience. The application of the investment discount rate to the expected cash flow generated by the portfolio, net of the policy specific reserves, yields the fair value of the portfolio. The effective discount rate reflects the relationship between the fair value and the expected cash flow gross of these reserves.

Capital contributions were made to the LSC Entities during the three and six months ended June 30, 2016 totaling $11,000. The Company recorded a gain of $12,676 and $3,096 on investment in life settlement contracts, net of profit commission, for the three months ended June 30, 2016 and 2015, respectively, and $23,406 and $14,469 for the six months ended June 30, 2016 and 2015.

The following tables describe the Company’s investment in life settlements as of June 30, 2016 and December 31, 2015:
 
(Amounts in Thousands, except number of Life Settlement Contracts) 
Expected Maturity Term in Years
 
Number of Life Settlement Contracts
 
Fair Value (1)
 
Face Value
As of June 30, 2016
 
 
 
 
 
 
0-1
 

 
$

 
$

1-2
 
1

 
1,868

 
2,500

2-3
 
8

 
42,956

 
71,000

3-4
 
9

 
35,331

 
64,422

4-5
 
9

 
19,542

 
62,000

Thereafter
 
228

 
204,737

 
1,412,314

Total
 
255

 
$
304,434

 
$
1,612,236


24



(Amounts in Thousands, except number of Life Settlement Contracts) 
Expected Maturity Term in Years
 
Number of Life Settlement Contracts
 
Fair Value (1)
 
Face Value
As of December 31, 2015
 
 
 
 
 
 
0-1
 

 
$

 
$

1-2
 

 

 

2-3
 
8

 
31,261

 
70,500

3-4
 
8

 
20,117

 
46,500

4-5
 
4

 
6,760

 
20,000

Thereafter
 
235

 
205,863

 
1,481,313

Total
 
255

 
$
264,001

 
$
1,618,313

 
 
 
 
 
 
 
 

(1)
The Company determined the fair value as of June 30, 2016 based on 215 policies out of 255 policies, as the Company assigned no value to 40 of the policies as of June 30, 2016. The Company determined the fair value as of December 31, 2015 based on 213 policies out of 255 policies, as the Company assigned no value to 42 of the policies as of December 31, 2015. The Company estimated the fair value of a life insurance policy using a cash flow model with an appropriate discount rate. In some cases, the cash flow model calculates the value of an individual policy to be negative, and therefore the fair value of the policy is zero as no liability exists when a negative value is calculated. The Company is not contractually bound to pay the premium on its life settlement contracts and, therefore, would not pay a willing buyer to assume title of these contracts. Additionally, certain of the Company's acquired policies were structured to have low premium payments at inception of the policy term, which later escalate greatly towards the tail end of the policy term. At the current time, the Company expenses all premium paid, even on policies with zero fair value. Once the premium payments escalate, the Company may allow the policies to lapse. In the event that death benefits are realized in the time frame between initial acquisition and premium escalation, it is a benefit to cash flow.

For these contracts where the Company determined the fair value to be negative and therefore assigned a fair value of zero, the table below details the amount of premiums paid and the death benefits received during the twelve months preceding June 30, 2016 and December 31, 2015:

(Amounts in Thousands, except number of Life Settlement Contracts)
 
June 30, 2016
 
December 31, 2015
Number of policies with a negative value from discounted cash flow model as of period end
 
40

 
42

Premiums paid for the preceding twelve month period for period ended
 
$
7,163

 
$
4,971

Death benefit received
 
$

 
$


Premiums to be paid by the LSC Entities for each of the five succeeding fiscal years to keep the life insurance policies in force as of June 30, 2016, are as follows:
 
(Amounts in Thousands)
 
Premiums Due on Life  Settlement Contracts
2016
 
$
64,353

2017
 
42,020

2018
 
43,105

2019
 
41,350

2020
 
37,788

Thereafter
 
443,511

Total
 
$
672,127

   

25





6. Deferred Policy Acquisition Costs

The following table reflects the amounts of policy acquisition costs deferred and amortized for the three and six months ended June 30, 2016 and 2015:

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in Thousands)
 
2016
 
2015
 
2016
 
2015
Balance, beginning of period
 
$
761,802

 
$
651,884

 
$
704,243

 
$
628,383

Acquisition costs deferred
 
298,981

 
211,760

 
530,364

 
391,459

Amortization
 
(187,142
)
 
(168,494
)
 
(360,966
)
 
(324,692
)
Balance, end of period
 
$
873,641

 
$
695,150

 
$
873,641

 
$
695,150



7. Debt
 
The Company’s outstanding debt consisted of the following at June 30, 2016 and December 31, 2015:

 
(Amounts in Thousands)
 
June 30, 2016

December 31, 2015
Revolving credit facility
 
$
130,000

 
$
130,000

5.5% Convertible senior notes due 2021 (the "2021 Notes")
 
5,166


5,103

2.75% Convertible senior notes due 2044 (the "2044 Notes")
 
163,269

 
160,258

6.125% Senior notes due 2023 (the "2023 Notes")
 
248,048


247,911

Junior subordinated debentures (the "2035-2037 Notes")
 
121,984


118,226

Trust preferred securities (the "2033-2037 TPS Notes")
 
92,786

 

7.25% Subordinated Notes due 2055 (the "7.25% 2055 Notes")
 
145,140

 
145,078

7.50% Subordinated Notes due 2055 (the "7.50% 2055 Notes")
 
130,628

 
130,572

Secured loan agreements
 
74,038


38,455

Promissory notes
 
118,540


13,753

 
 
$
1,229,599


$
989,356


Aggregate scheduled maturities of the Company’s outstanding debt, excluding unamortized deferred origination costs, at June 30, 2016 are:
(Amounts in Thousands)
 
 
 
2016
 
 
$
3,617

 
2017
 
 
33,690

 
2018
 
 
35,921

 
2019
 
 
160,798

 
2020
 
 
26,576

 
Thereafter
 
 
985,539

(1) 
Total scheduled payments
 
1,246,141

 
Unamortized deferred origination costs
 
(16,542
)
 
 
 
 
1,229,599

 
 
 
 
 
 
 
(1)
Amount includes debt outstanding under the 2021 Notes and 2044 Notes, which is net of unamortized original issue discount of $795 and $48,352, respectively.


26



Additionally, the Company utilizes various letters of credit in its operations. The following is a summary of the Company's letters of credit as of June 30, 2016:

(Amounts in Thousands)
 
Letters of Credit Limit
 
Letters of Credit Outstanding
 
Letters of Credit Available
Revolving credit facility
 
$
175,000

 
$
120,136

 
$
54,864

Funds at Lloyd's facility, in USD equivalent
 
399,420

 
390,405

 
9,015

ING Bank N.V. and Deutsche Bank Netherlands N.V. facilities, in USD equivalent
 
87,300

 
67,976

 
19,324

Comerica bank letters of credit
 
75,000

 
48,467

 
26,533

Other letters of credit, in aggregate
 
1,675

 
1,675

 


Interest expense, including amortization of original issue discount and deferred origination costs, as well as applicable bank fees, related to the Company's outstanding debt and letters of credit for the three and six months ended June 30, 2016 and 2015 was:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in Thousands)
 
2016
 
2015
 
2016
 
2015
Revolving credit facility
 
$
1,098

 
$
728

 
$
2,254

 
$
1,544

Funds at Lloyd's facility
 
1,123

 
634

 
2,322

 
1,681

2021 Notes
 
114

 
245

 
229

 
594

2023 Notes
 
3,896

 
3,896

 
7,793

 
7,793

2035-2037 Notes
 
1,546

 
1,695

 
3,061

 
3,715

2033-2037 TPS Notes
 
769

 

 
769

 

2044 Notes
 
3,116

 
3,016

 
6,232

 
6,031

7.25% 2055 Notes
 
2,750

 
368

 
5,500

 
368

7.50% 2055 Notes
 
2,559

 

 
5,118

 

Secured loan agreements
 
178

 
223

 
367

 
459

Promissory notes
 
1,397

 
154

 
1,555

 
310

Other, including interest income
 
1,192

 
(1,313
)
 
2,238

 
(2,594
)
 
 
$
19,738

 
$
9,646

 
$
37,438

 
$
19,901


Promissory Note

On April 18, 2016, in connection with the acquisition of Republic Companies, Inc. and its affiliates ("Republic"), the Company issued a term promissory note ("TPM") to Delek Finance U.S. Inc. in the amount of $104,685 as part of the consideration. See Note 13. "Acquisitions" for a description of this transaction. The principal will be paid in four equal installments on each of the first four anniversaries of the issuance date. The note bears interest of 5.75% per annum and is payable from time to time based on the outstanding principal balance until the promissory note is fully paid. In the event that indebtedness under the Company's revolving credit facility or the Company's 2023 Notes is required to be paid on an accelerated basis, the holder of the TPM may cause the Company to repay unpaid principal and interest immediately. The Company recorded interest expense, including amortization of the deferred origination costs and fees associated with the loan agreement, of approximately $1,237 for the three and six months ended June 30, 2016.

2033-2037 TPS Notes

In connection with the acquisition of Republic, the Company assumed Republic's outstanding trust preferred securities. Republic participated in the private placement of floating rate capital securities through five capital trusts. Each trust was created solely for the purpose of issuing trust preferred securities. Republic has guaranteed the payment by the trusts of distributions and other amounts under the capital securities to the extent that the trusts have funds available for such payments. The trusts invested the proceeds from the private placement in junior subordinated debentures issued by Republic. The trusts must redeem the capital securities when the debentures are paid at maturity or upon any earlier prepayment of the debentures. The debentures may be prepaid if certain events occur, including a change in the tax status or regulatory capital treatment of the capital securities or a

27



change in the existing laws that require the trusts to register as an investment company. Under the provisions of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for up to twenty consecutive quarterly periods. If interest payments on the debentures are deferred, the distributions on the capital securities will also be deferred. In accordance with FASB ASC 810-10-25, the Republic does not consolidate such special purpose trusts, as Republic is not considered to be the primary beneficiary. The equity investment, totaling $2,786 as of June 30, 2016 on Republic's balance sheet, represents the Republic's ownership of common securities issued by the trusts.

The table below summarizes the Company’s trust preferred securities assumed in the Republic acquisition as of June 30, 2016:
(Amounts in Thousands)
Name of Trust
 
Aggregate
Liquidation
Amount of
Trust Preferred
Securities
 
Aggregate
Liquidation
Amount of
Common
Securities
 
Aggregate
Principal
Amount of
Notes
 
Stated
Maturity of
Notes
 
Per Annum
Interest
Rate of
Notes
RIG Capital Trust I
 
$
10,000

 
$
310

 
$
10,310

 
9/30/2033
 
4.631

(1)  
RIG Capital Statutory Trust II
 
20,000

 
619

 
20,619

 
10/29/2033
 
4.489

(2) 
RIG Capital Trust III
 
20,000

 
619

 
20,619

 
12/15/2036
 
3.853

(3) 
RIG Capital Trust IV
 
25,000

 
774

 
25,774

 
6/15/2037
 
3.853

(3) 
RIG Capital Trust V
 
15,000

 
464

 
15,464

 
9/15/2037
 
3.950

(4) 
Total trust preferred securities
 
$
90,000

 
$
2,786

 
$
92,786

 
 
 
 
 
 
 
(1)
The interest rate is three-month LIBOR plus 4.00%.
(2)
The interest rate is three-month LIBOR plus 3.85%.
(3)
The interest rate is three-month LIBOR plus 3.20%.
(4)
The interest rate is three-month LIBOR plus 3.30%.

Secured Loan Agreements

On April 7, 2016, the Company entered into a ten-year secured loan agreement with Citigroup Global Markets Realty Corp., in the aggregate amount of $29,000. The loan is secured by a commercial office building the Company owns in Dallas, Texas. The loan bears interest at a fixed rate of 4.96% per annum and requires monthly interest only payments of approximately $169 through May 6, 2026 and payment of principal at maturity. The Company recorded interest expense, including amortization of the deferred origination costs and fees associated with the loan agreement, of approximately $363 for the three and six months ended June 30, 2016.

On April 6, 2016, the Company through a wholly-owned subsidiary, entered into a five-year secured term loan agreement with Lloyd's Bank PLC in the aggregate amount of £7,800 (or $11,028) to finance the purchase of a commercial office building in Nottingham, U.K. The loan bears a variable rate of interest based on LIBOR plus a margin and was 2.83% as of June 30, 2016. The Company had deferred financing costs of £78 (or $114) related to the term loan. The mortgage requires quarterly principal payments of £30 and interest for the term of the loan with the remaining principal to be paid at maturity. The Company recorded interest expense, including amortization of the deferred origination costs and fees associated with the loan agreement, of approximately $86 for the three and six months ended June 30, 2016. Pursuant to a covenant in the agreement, if the loan exceeds 70% of the fair value of the property, the Company is required to pay the lender the entire amount necessary to reduce the outstanding principal balance to be equal to or less than 70% of the fair value of the building.

Nationale Borg

Through the Company's acquisition of N.V. Nationale Borg-Maatscappij and its affiliates ("Nationale Borg"), the Company assumed Nationale Borg's existing credit facilities pursuant to which trade related guarantees and comparable standby letters of credit are issued primarily to secure obligations owed by Nationale Borg to third parties in the normal course of business. See Note 13. "Acquisitions" for a description of this transaction. The credit facilities are with Deutsche Bank Netherlands N.V. and ING Bank N.V. and are primarily used to obtain guarantees for the benefit of financial institutions. The credit limit under these credit facilities is approximately £76,650 (or $87,300). The credit facilities were utilized for £61,239 (or $67,976) as of June 30, 2016. The Company recorded total interest expense of $97 for the three and six months ended June 30, 2016.

28





8.
Acquisition Costs and Other Underwriting Expenses
 
The following table summarizes the components of acquisition costs and other underwriting expenses for the three and six months ended June 30, 2016 and 2015:

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in Thousands)
 
2016
 
2015
 
2016
 
2015
Policy acquisition expenses
 
$
115,597

 
$
94,927

 
$
249,370

 
$
205,894

Salaries and benefits
 
159,006

 
135,736

 
284,534

 
243,158

Other insurance general and administrative expenses
 
24,200

 
8,047

 
29,533

 
21,334

 
 
$
298,803

 
$
238,710

 
$
563,437

 
$
470,386

 
9. Earnings Per Share
 
The Company implemented a two-for-one stock split on February 2, 2016. As such, the weighted average number of shares used for the basic and diluted earnings per share have been adjusted retrospectively to reflect the effect of the split.

During the three and six months ended June 30, 2016 and 2015, the Company’s unvested restricted shares contained rights to receive nonforfeitable dividends and were, therefore, considered participating securities. As a result, the Company computed earnings per share using the two-class method during the three months and six months ended June 30, 2016 and 2015. There were no outstanding unvested restricted shares as of June 30, 2016.


29



The following table is a summary of the elements used in calculating basic and diluted earnings per share for the three and six months ended June 30, 2016 and 2015:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in Thousands, except for earnings per share)
 
2016
 
2015
 
2016
 
2015
Basic earnings per share:
 
 
 
 
 
 
 
 
Net income attributable to AmTrust common shareholders
 
$
134,791

 
$
70,748

 
$
235,048

 
$
225,444

Less: Net income allocated to participating securities and redeemable non-controlling interest
 

 
173

 

 
561

Net income allocated to AmTrust common shareholders
 
$
134,791

 
$
70,575

 
$
235,048

 
$
224,883

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
 
171,160

 
165,120

 
173,334

 
163,904

Less: Weighted average participating shares outstanding
 

 
404

 

 
410

Weighted average common shares outstanding - basic
 
171,160

 
164,716

 
173,334

 
163,494

Net income per AmTrust common share - basic
 
$
0.79

 
$
0.43

 
$
1.36

 
$
1.38

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 

 
 

 
 

 
 

Net income attributable to AmTrust common shareholders
 
$
134,791

 
$
70,748

 
$
235,048

 
$
225,444

Less: Net income allocated to participating securities and redeemable non-controlling interest
 

 
173

 

 
561

Net income allocated to AmTrust common shareholders
 
$
134,791

 
$
70,575

 
$
235,048

 
$
224,883

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
 
171,160

 
164,716

 
173,334

 
163,494

Plus: Dilutive effect of stock options, convertible debt, other
 
1,865

 
3,352

 
1,881

 
3,622

Weighted average common shares outstanding – dilutive
 
173,025

 
168,068

 
175,215

 
167,116

Net income per AmTrust common shares – diluted
 
$
0.78

 
$
0.42

 
$
1.34

 
$
1.35

 
The Company's anti-dilutive securities excluded from diluted earnings per share calculation were immaterial for the three and six months ended June 30, 2016 and 2015, respectively.

10. Share Based Compensation
 
The Company’s 2010 Omnibus Incentive Plan (the “Plan”), which permits the Company to grant to its officers, employees and non-employee directors incentive compensation directly linked to the price of the Company’s stock, authorizes up to an aggregate of 14,630,136 shares of Company stock for awards of options to purchase shares of the Company’s common stock ("Stock Option"), restricted stock, restricted stock units (“RSU”), performance share units (“PSU”) or appreciation rights. Shares used may be either newly issued shares or treasury shares or both. The aggregate number of shares of common stock for which awards may be issued may not exceed 14,630,136 shares, subject to the authority of the Company’s Board of Directors to adjust this amount in the event of a consolidation, reorganization, stock dividend, stock split, recapitalization or similar transaction affecting the Company’s common stock. As of June 30, 2016, approximately 7,300,000 shares of Company common stock remained available for grants under the Plan.

The Company recognizes compensation expense under FASB ASC 718-10-25 for its share-based payments based on the fair value of the awards. Compensation expense for all share-based payments under ASC 718-10-30 was approximately $5,901 and $5,522 for the three months ended June 30, 2016 and 2015, respectively and $11,542 and $10,436 for the six months ended June 30, 2016 and 2015, respectively. The Company has unrecognized compensation cost related to unvested stock options, restricted stock and non-vested RSU awards of $53,361 and $39,111 at June 30, 2016 and December 31, 2015, respectively.


30



On December 15, 2015, the Company’s Board of Directors declared a two-for-one stock split on the Company’s common stock, payable in the form of a 100% stock dividend. On February 2, 2016, the dividend payment date, all options outstanding were adjusted by 100% and their respective exercise prices were reduced by 50%. The Company also adjusted outstanding RSUs, unvested restricted stock and PSUs for the split.

Stock Options

The Company grants stock options at prices equal to the closing stock price of the Company’s stock on the dates the options are granted. The options have a term of ten years from the date of grant and vest primarily in equal annual installments over the four year period following the date of grant for employee options. The Company uses the simplified method in determining the expected life. Employees have three months after the employment relationship ends to exercise all vested options. The fair value of each option grant is separately estimated for each vesting date. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date. The Company has estimated the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes-Merton multiple-option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense.

The following schedule shows all options granted, exercised, and expired under the Plan for the six months ended June 30, 2016 and 2015
 
2016
 
2015
 
 
 
Shares
 
Weighted Average Exercise Price
 
 
 
Shares
 
Weighted Average Exercise Price
Outstanding at beginning of period
2,783,880

 
$
6.99

 
3,868,740

 
$
5.80

Granted

 

 
85,000

 
27.09

Exercised
(345,137
)
 
3.79

 
(907,086
)
 
4.40

Canceled or terminated

 

 
(47,650
)
 
5.09

Outstanding at end of period
2,438,743

 
7.44

 
2,999,004

 
6.84

 
The Company did not grant any stock options during the six months ended June 30, 2016. The weighted average grant date fair value of options granted was $10.93 during the six months ended June 30, 2015.
 
The per share fair value of options was estimated at the date of grant based on the following weighted average assumptions for the six months ended June 30, 2015:
 
 
2015
Volatility
 
40.95
%
Risk-free interest rate
 
1.95
%
Weighted average expected lives in years
 
6.25

Dividend rate
 
1.85
%
Forfeiture rate
 
0.50
%

The intrinsic value of stock options exercised during the six months ended June 30, 2016 and 2015 was $7,436 and $21,108, respectively. The intrinsic value of stock options that were outstanding as of June 30, 2016 and December 31, 2015 was $41,992 and $66,300, respectively. The intrinsic value of stock options that were exercisable as of June 30, 2016 and December 31, 2015 was $41,617 and $64,705, respectively.

Cash received from options exercised was $1,249 and $3,835 during the six months ended June 30, 2016 and 2015, respectively. The excess tax benefit from award exercises was approximately $2,861 and $6,254 for the six months ended June 30, 2016 and 2015, respectively. Such benefits were recorded as a reduction of income tax payable and an increase in additional paid-in capital.

Restricted stock, RSU and PSU

The Company grants restricted shares, RSUs and PSUs with a grant date fair value equal to the closing stock price of the Company’s stock on the dates the shares or units are granted. The restricted shares and RSUs vest over a period of one to four years, while PSUs vest based on the terms of the awards.

31




A summary of the Company’s restricted stock and RSU activity for the six months ended June 30, 2016 and 2015 is shown below:
 
2016
 
2015
 
Shares or
Units
 
Weighted Average Grant Date Fair Value
 
Shares or
Units
 
Weighted Average Grant Date Fair Value
Non-vested at beginning of period
1,853,516

 
$
20.54

 
2,611,022

 
$
16.71

Granted
846,180

 
26.03

 
462,856

 
29.16

Vested
(789,186
)
 
17.45

 
(811,422
)
 
14.40

Forfeited
(32,987
)
 
23.73

 
(20,136
)
 
20.35

Non-vested at end of period
1,877,523

 
24.26

 
2,242,320

 
20.08

 
A summary of the Company's PSU activity for the six months ended June 30, 2016 and 2015 is shown below:
 
2016
 
2015
 
Shares or
Units
 
Weighted Average Grant Date Fair Value
 
Shares or
Units
 
Weighted Average Grant Date Fair Value
Non-vested at beginning of period
752,466

 
$
24.58

 
549,670

 
$
19.42

Granted
198,881

 
26.16

 
373,628

 
29.93

Vested
(234,358
)
 
22.89

 
(155,842
)
 
18.86

Forfeited
(35,766
)
 
25.57

 

 

Non-vested at end of period
681,223

 
25.57

 
767,456

 
24.65


PSUs are conditional grants of a specified maximum number of common shares. In general, grants are earned, subject to the attainment of pre-specified performance goals at the end of the pre-determined period.

32





11. Income Taxes
 
The following table is a reconciliation of the Company’s statutory income tax expense to its effective tax rate for the three and six months ended June 30, 2016 and 2015
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in Thousands)
 
2016
 
2015
 
2016
 
2015
Income before equity in earnings of unconsolidated subsidiaries
 
$
175,300

 
$
81,163

 
$
310,315

 
$
286,594

Tax at federal statutory rate of 35%
 
$
61,355

 
$
28,407

 
$
108,610

 
$
100,308

Tax effects resulting from:
 
 

 
 

 
 

 
 
Tax rate differences
 
(32,420
)
 
(20,239
)
 
(50,636
)
 
(23,489
)
Adjustment to prior year taxes
 

 
1,949

 

 
(27,659
)
Permanent adjustments
 
4,744

 
(5,116
)
 
1,167

 
(2,817
)
Valuation allowance
 
(9,425
)
 

 
(9,936
)
 

Other, net
 
3,664

 
(529
)
 
6,439

 
4,941

 
 
$
27,918

 
$
4,472


$
55,644

 
$
51,284

Effective tax rate
 
15.9
%
 
5.5
%
 
17.9
%
 
17.9
%
 
As of June 30, 2016, the Company has U.S. Net Operating Losses ("NOLs") of $52,885 that expire beginning in 2018 through 2036. These NOLs are subject to certain limitations under Section 382 of the Internal Revenue Code due to changes in ownership of $3,197 per year. The Company also has foreign NOLs of $675,422 that currently have no expiration. The Company’s management believes that as of June 30, 2016, except for a portion of foreign NOLs, it will realize the benefits of its deferred tax assets, which are included as a component of the other assets on the condensed consolidated balance sheet. As a result, the Company recorded a valuation allowance of $159,013 and $170,043 as of June 30, 2016 and December 31, 2015, respectively, related to the foreign NOLs. The decrease in the valuation allowance from December 31, 2015 to June 30, 2016 was driven primarily by the release of the valuation allowance on NOLs that were in place on the Company’s U.K. operations. The Company determined, based on income projections of the U.K. operations, that sufficient positive evidence exists that it is more likely than not that the NOL deferred tax assets will be realized. The Company did not utilize any equalization reserves attributed to its Luxembourg reinsurance companies during the three and six months ended June 30, 2016 and 2015, respectively.

The earnings of certain of the Company’s foreign subsidiaries have been indefinitely reinvested in foreign operations. Therefore, no provision has been made for any U.S. taxes or foreign withholding taxes that may be applicable upon any repatriation or disposition.

The Company’s major taxing jurisdictions include the U.S. (federal and state), the United Kingdom and Ireland. The years subject to potential audit vary depending on the tax jurisdiction. Generally, the Company’s statute of limitation is open for tax years ended December 31, 2011 and forward.

As permitted by FASB ASC 740-10 Income Taxes, the Company recognizes interest and penalties, if any, related to unrecognized tax benefits in its income tax provision. The Company does not have any unrecognized tax benefits and, therefore, has not recorded any unrecognized tax benefits, or any related interest and penalties, as of June 30, 2016 and December 31, 2015. No interest or penalties have been recorded by the Company for the three and six months ended June 30, 2016 and 2015, respectively. The Company does not anticipate any significant changes to its total unrecognized tax benefits in the next 12 months.

33





12. Related Party Transactions

The following disclosure includes, among other items, transactions with companies in which Michael Karfunkel had a controlling interest, either individually or through The Michael Karfunkel 2005 Family Trust (the “Trust”). Mr. Karfunkel passed away on April 27, 2016. At that time, he and the Trust were controlling shareholders of the Company, he was the Company’s Chairman of the Board, and the chairman and chief executive officer of National General Holdings Corp. Mr. Karfunkel’s wife, Mrs. Leah Karfunkel, was the primary beneficiary of Mr. Karfunkel’s estate, and is a co-trustee and primary beneficiary of the Trust.

Significant Transactions with Maiden Holdings, Ltd.
 
The Company has various reinsurance and service agreements with Maiden Holdings, Ltd. (“Maiden”). Maiden is a publicly-held Bermuda insurance holding company (Nasdaq: MHLD) formed by Michael Karfunkel, George Karfunkel and Barry Zyskind, principal shareholders, and, respectively, the Company's former chairman of the board of directors, a director, and the current chairman, chief executive officer and director of the Company. As of June 30, 2016, our principal shareholders, Leah Karfunkel (one of the Company's directors and co-trustee of The Trust), George Karfunkel and Barry Zyskind, own or control approximately 9.1%, 2.3% and 8.7%, respectively, of the issued and outstanding capital stock of Maiden. Mr. Zyskind serves as the non-executive chairman of the board of Maiden’s board of directors. Maiden Reinsurance Ltd. (“Maiden Reinsurance”), a wholly-owned subsidiary of Maiden, is a Bermuda reinsurer. The following section describes the agreements in place between the Company and its subsidiaries and Maiden and its subsidiaries.
 
Reinsurance Agreements with Maiden Holdings, Ltd.
 
In 2007, the Company and Maiden entered into a master agreement, as amended, by which the parties caused the Company’s Bermuda subsidiary, AmTrust International Insurance, Ltd. (“AII”), and Maiden Reinsurance to enter into a quota share reinsurance agreement (the “Maiden Quota Share”), as amended, by which AII retrocedes to Maiden Reinsurance an amount equal to 40% of the premium written by the Company’s U.S., Irish and U.K. insurance companies (the “AmTrust Ceding Insurers”), net of the cost of unaffiliated inuring reinsurance (and in the case of the Company’s U.K. insurance subsidiary, AmTrust Europe Ltd. ("AEL"), net of commissions). AII also retrocedes 40% of losses. Certain business that the Company commenced writing after the effective date of the Maiden Quota Share, including the Company’s European medical liability business discussed below, business assumed from Tower Group International, Ltd. ("Tower") pursuant to the cut-through quota share reinsurance agreement, and risks, other than workers’ compensation risks and certain business written by the Company’s Irish subsidiary, AmTrust International Underwriters Limited (“AIU”), for which the AmTrust Ceding Insurers’ net retention exceeds $5,000 is not ceded to Maiden Reinsurance under the Maiden Quota Share (ceded business defined as “Covered Business”).

AII receives a ceding commission of 31% of ceded written premiums with respect to all Covered Business other than retail commercial package business, for which the ceding commission remains 34.375%. With regards to the Specialty Program portion of Covered Business only, the Company will be responsible for ultimate net loss otherwise recoverable from Maiden Reinsurance to the extent that the loss ratio to Maiden Reinsurance, which shall be determined on an inception to date basis from July 1, 2007 through the date of calculation, is between 81.5% and 95% (the "Specialty Program Loss Corridor"). For the purpose of determining whether the loss ratio falls within the Specialty Program Loss Corridor, workers’ compensation business written in the Company’s Specialty Program segment from July 1, 2007 through December 31, 2012 is excluded from the loss ratio calculation.

The Maiden Quota Share was renewed through June 30, 2019 and will automatically renew for successive three-year terms unless either AII or Maiden Reinsurance notifies the other of its election not to renew no less than nine months prior to the end of any such three-year term. In addition, either party is entitled to terminate on thirty days’ notice or less upon the occurrence of certain early termination events, which include a default in payment, insolvency, change in control of AII or Maiden Reinsurance, run-off, or a reduction of 50% or more of the shareholders’ equity of Maiden Reinsurance or the combined shareholders’ equity of AII and the AmTrust Ceding Insurers.

The Company, through its subsidiaries AEL and AIU, has a reinsurance agreement with Maiden Reinsurance by which the Company cedes to Maiden Reinsurance 40% of its European medical liability business, including business in force at April 1, 2011. The quota share had an initial term of one year and has been renewed through March 31, 2017. The agreement can be terminated at any April 1 by either party on four months’ prior written notice. Maiden Reinsurance pays the Company a 5% ceding commission, and the Company will earn a profit commission of 50% of the amount by which the ceded loss ratio is lower than 65%.
 

34



The following is the effect on the Company’s results of operations for the three and six months ended June 30, 2016 and 2015 related to Maiden Reinsurance agreements:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in Thousands)
 
2016
 
2015
 
2016
 
2015
Results of operations:
 
 
 
 
 
 
 
 
Premium written – ceded
 
$
(529,267
)
 
$
(522,435
)
 
$
(1,072,955
)
 
$
(1,050,720
)
Change in unearned premium – ceded
 
40,704

 
89,077

 
127,402

 
217,692

Earned premium - ceded
 
$
(488,563
)
 
$
(433,358
)
 
$
(945,553
)
 
$
(833,028
)
Ceding commission on premium written
 
$
155,204

 
$
160,082

 
$
329,538

 
$
328,855

Ceding commission – deferred
 
(9,594
)
 
(30,860
)
 
(45,537
)
 
(80,946
)
Ceding commission – earned
 
$
145,610

 
$
129,222

 
$
284,001

 
$
247,909

Incurred loss and loss adjustment expense – ceded
 
$
304,480

 
$
336,540

 
$
659,334

 
$
585,930

 
Note Payable to Maiden – Collateral for Proportionate Share of Reinsurance Obligations
 
In conjunction with the Maiden Quota Share, as described above, the Company entered into a loan agreement with Maiden Reinsurance during the fourth quarter of 2007, whereby Maiden Reinsurance loaned to the Company the amount equal to AII's quota share of the obligations of the AmTrust Ceding Insurers that AII was then obligated to secure. The loan agreement provides for interest at a rate of LIBOR plus 90 basis points and is payable on a quarterly basis. Advances under the loan are secured by a promissory note and totaled $167,975 as of June 30, 2016 and December 31, 2015, respectively. The Company recorded $568 and $460 of interest expense during the three months ended June 30, 2016 and 2015, respectively, and $1,130 and $909 during the six months ended June 30, 2016 and 2015, respectively. Effective December 1, 2008, AII and Maiden Reinsurance entered into a Reinsurer Trust Assets Collateral agreement whereby Maiden Reinsurance is required to provide AII the assets required to secure Maiden’s proportional share of the Company’s obligations to its U.S. subsidiaries. The amount of this collateral contained in various reinsurance trusts as of June 30, 2016 was approximately $2,824,553. Maiden retains ownership of the collateral in the trust account.
 
Reinsurance Brokerage Agreement
 
The Company, through a subsidiary, has a reinsurance brokerage agreement with Maiden. Pursuant to the brokerage agreement, the Company provides brokerage services relating to the Maiden Quota Share for a fee equal to 1.25% of reinsured premium. The Company recorded $6,362 and $6,255 of brokerage commission during the three months ended June 30, 2016 and 2015, respectively, and $13,224 and $12,860 during the six months ended June 30, 2016 and 2015, respectively. The brokerage commission was recorded as a component of service and fee income.

Asset Management Agreement
 
The Company, through a subsidiary, has an asset management agreement with Maiden Reinsurance, pursuant to which the Company provides investment management services to Maiden Reinsurance and certain of its affiliates. As of June 30, 2016, the Company managed approximately $4,513,000 of assets related to this agreement. The asset management services fee is an annual rate of 0.20% for periods in which average invested assets are $1,000,000 or less and an annual rate of 0.15% for periods in which the average invested assets exceeds $1,000,000. As a result of this agreement, the Company recorded $1,697 and $1,506 of asset management fees during the three months ended June 30, 2016 and 2015, respectively, and $3,342 and $2,937 during the six months ended June 30, 2016 and 2015, respectively. The asset management fees were recorded as a component of service and fee income.

Significant Transactions with National General Holding Corp.
 
The Company has an ownership interest in NGHC of approximately 12%. NGHC is a publicly-held specialty personal lines insurance holding company (Nasdaq: NGHC) that operates fourteen insurance companies in the United States and provides a variety of insurance products, including personal and commercial automobile, homeowners and umbrella, and supplemental health. As of June 30, 2016, NGHC's two largest shareholders were The Trust and Leah Karfunkel individually. Leah Karfunkel is a member of the Company's Board of Directors, and the mother-in-law of Barry D. Zyskind, the Chairman, President and Chief Executive Officer of the Company. The ultimate beneficiaries of the Trust include Leah Karfunkel’s children, one of whom is married to Mr. Zyskind. In addition, Michael Karfunkel was the chairman and chief executive officer of NGHC when he passed away in April 2016, at which time Barry Karfunkel, the son of Michael and Leah Karfunkel and brother-in-law of Barry D. Zyskind,

35



was appointed chief executive officer of NGHC and Barry D. Zyskind was elected as NGHC's non-executive chairman of the board. In accordance with ASC 323-10-15, Investments-Equity Method and Joint Ventures, the Company accounts for its investment in NGHC under the equity method as it has the ability to exert significant influence on NGHC's operations.

During the three months ended June 30, 2016 and 2015, the Company recorded $4,802 and $3,819 of income, respectively, and $10,578 and $9,348 during the six months ended June 30, 2016 and 2015, respectively, related to its equity investment in NGHC.

Master Services Agreement
 
The Company provides NGHC and its affiliates information technology services in connection with the development and licensing of a policy management system. The Company provides the license at a cost that is currently 1.25% of gross written premium of NGHC and its affiliates plus the Company’s costs for development and support services. The Company provides development services at a price of cost plus 20%. In addition, the Company provides NGHC and its affiliates printing and mailing services at a per piece cost for policy and policy related materials, such as invoices, quotes, notices and endorsements, associated with the policies the Company processes for NGHC and its affiliates on the policy management system. The Company recorded approximately $11,276 and $10,353 of fee income during the three months ended June 30, 2016 and 2015, respectively, and $21,186 and $17,369 during the six months ended June 30, 2016 and 2015, respectively, related to this agreement. The fees for these services were recorded as a component of service and fee income.

Asset Management Agreement
 
A subsidiary of the Company manages the assets of certain of NGHC's subsidiaries, including the assets of reciprocal insurers managed by subsidiaries of NGHC, for an annual fee equal to 0.20% of the average aggregate value of the assets under management for the preceding quarter if the average aggregate value for the preceding quarter is $1,000,000 or less and 0.15% of the average aggregate value of the assets under management for the preceding quarter if the average aggregate value for that quarter is more than $1,000,000. The Company managed approximately $2,453,320 of assets as of June 30, 2016 related to this agreement. As a result of this agreement, the Company earned approximately $807 and $613 of asset management fees during the three months ended June 30, 2016 and 2015, respectively, and $1,600 and $1,139 during the six months ended June 30, 2016 and 2015, respectively. The asset management fees were recorded as a component of service and fee income.

800 Superior, LLC

The Company and NGHC each have a fifty percent ownership interest in 800 Superior, LLC ("800 Superior"), which owns an office building in Cleveland, Ohio. The cost of the building was approximately $7,500. The Company has been appointed managing member of 800 Superior. Additionally, in conjunction with the Company’s approximate 12% ownership percentage of NGHC, the Company ultimately receives 56% of the profits and losses of 800 Superior. As such, in accordance with ASC 810-10, Consolidation, the Company consolidates this entity. NGHC's portion of the net assets and earnings are recorded within non-controlling interest in the condensed consolidated financial statements.

NGHC has an office lease agreement with 800 Superior. The lease agreement is through 2027. NGHC paid 800 Superior approximately $684 and $664 of rent during the three months ended June 30, 2016 and 2015, respectively, and $1,367 and $1,266 during the six months ended June 30, 2016 and 2015, respectively, under the lease agreement. As discussed in Note 14. "New Market Tax Credit," 800 Superior, the Company and NGHC participated in a financing transaction related to capital improvements on the office building. As part of that transaction, NGHC and the Company entered into an agreement related to the payment and performance guaranties provided by the Company to the various parties to the financing transaction whereby NGHC has agreed to contribute 50% toward any payments the Company is required to make pursuant to the guaranties.

4455 LBJ Freeway, LLC

In 2015, the Company and NGHC each acquired a fifty percent ownership interest in 4455 LBJ Freeway, LLC ("4455 LBJ Freeway"), which owns an office building in Dallas, Texas. The cost of the building was approximately $21,050. The Company has been appointed managing member of 4455 LBJ Freeway. Additionally, in conjunction with the Company’s approximate 12% ownership percentage of NGHC, the Company ultimately receives 56% of the profits and losses of 4455 LBJ Freeway. As such, in accordance with ASC 810-10, Consolidation, the Company consolidates this entity. NGHC's portion of the net assets and earnings are recorded within non-controlling interest in the condensed consolidated financial statements. The Company recorded approximately $518 of service and fee income related to rent for the three and six months ended June 30, 2016.
 

36



Significant Transactions with ACP Re, Ltd.

ACP Re, Ltd. (“ACP Re”) is a privately-held Bermuda reinsurance holding company owned by the Trust. In 2014, a subsidiary of ACP Re merged with Tower. As a result of the merger, ACP Re now operates 10 insurance companies in the United States and Bermuda. The following section describes the significant agreements in place between the Company and its subsidiaries and ACP Re and its subsidiaries.

Agreements as a result of the ACP Re / Tower Merger

The Company and ACP Re entered into the agreements and transactions described below, as well as the asset management agreement described above, as a result of ACP Re’s acquisition of 100% of the outstanding stock of Tower on September 15, 2014. As set forth in Note 18. “Subsequent Events,” in July 2016, Tower’s statutory insurance companies (the “Tower Companies”) merged into CastlePoint National Insurance Company (“CNIC”), with CNIC as the surviving entity, in connection with a Conservation Plan developed by the Commissioner of Insurance of the State of California for CNIC. Upon approval of the Conservation Plan by the Superior Court of the State of California, several of the agreements described below will either be amended or terminated.

Asset Management Agreement

A subsidiary of the Company provides asset management services to ACP Re and certain of its subsidiaries at (i) an annual rate of 0.20% of the average value of the invested assets under management, excluding investment in the Company's stock, for the preceding calendar quarter if the average value of such assets for the quarter was $1,000,000 or less, or (ii) an annual rate of 0.15% of the average value of the invested assets under management, excluding investment in the Company's stock, for the preceding calendar quarter if the average value of such assets for the quarter was greater than $1,000,000. The Company managed approximately $507,671 of assets as of June 30, 2016. The Company recorded approximately $226 and $358 of asset management fees during the three months ended June 30, 2016 and 2015, respectively, and $457 and $824 during the six months ended June 30, 2016 and 2015, respectively. The asset management fees were recorded as a component of service and fee income.

Commercial Lines Reinsurance Agreements
Technology Insurance Company, Inc. ("TIC") entered into the Commercial Lines Quota Share Reinsurance Agreement (the “CL Reinsurance Agreement”) with Tower’s ten statutory insurance companies (the “Tower Companies”) pursuant to which TIC reinsures 100% of all losses under the Tower Companies’ new and renewal commercial lines business written after September 15, 2014. The ceding commission payable by TIC under the CL Reinsurance Agreement is equal to the sum of (i) reimbursement of the Tower Companies’ acquisition costs in respect of the business covered, including commission payable to AmTrust North America, Inc., a subsidiary of the Company (“ANA”), pursuant to the CL MGA Agreement described below, and premium taxes and (ii) 2% of gross written premium (net of cancellations and return premiums) collected pursuant to the CL MGA Agreement described below. The CL Reinsurance Agreement will remain in effect until termination of the CL MGA Agreement. The Company no longer assumes premium under the CL Reinsurance Agreement and policies previously assumed are in run off.
Commercial Lines MGA Agreement
ANA produces and manages all new and renewal commercial lines business written by the Tower Companies pursuant to the Commercial Lines Managing General Agency Agreement (the “CL MGA Agreement”). As described above, all post-September 15, 2014 commercial lines business written by the Tower Companies is reinsured by TIC pursuant to the CL Reinsurance Agreement. The Tower Companies pay ANA a 10% commission on all business written pursuant to the CL MGA Agreement and reimburse ANA for commissions payable to agents producing such business. All payments by the Tower Companies to ANA pursuant to the CL MGA Agreement will be netted out of the ceding commission payable by TIC to the Tower Companies pursuant to the CL Reinsurance Agreement. The CL MGA Agreement has a term of ten years. The Company did not record any commission during the three and six months ended June 30, 2016, and recorded $1,487 and $2,058 of commission under the CL MGA Agreement during the three and six months ended June 30, 2015. The commission income was recorded as a component of service and fee income.
Commercial Lines Administrative Services Agreement
ANA, the Tower Companies and CastlePoint Reinsurance Company, Ltd. (“CP Re,” a subsidiary of ACP Re) entered into the Commercial Lines LPTA Administrative Services Agreement (the “CL Administrative Agreement”) pursuant to which ANA administers the runoff of CP Re’s and the Tower Companies’ commercial lines business written prior to September 15, 2014 at cost. CP Re and the Tower Companies reimburse ANA for its actual costs, including costs incurred in connection with claims

37



operations, out-of-pocket expenses, costs incurred in connection with any required modifications to ANA’s claims systems and an allocated portion of the claims service expenses paid by TIC to the Tower Companies pursuant to the CL Reinsurance Agreement. The CL Administrative Agreement will remain in effect until the first to occur of (i) the completed performance of all obligations and duties arising under the agreement, or (ii) mutual written consent. The Company charged ACP Re $1,057 and $6,447 for these services during the three months ended June 30, 2016 and 2015, respectively, and $5,983 and $23,443 for the six months ended June 30, 2016 and 2015, respectively, which were recorded as a reduction of salary and other expense. See Note 18. "Subsequent Events" elsewhere in this report for additional information on this agreement.
Stop-Loss and Retrocession Agreements
AII and National General Re, Ltd., a subsidiary of NGHC (“NG Re Ltd.”), as reinsurers, entered into a $250,000 Aggregate Stop Loss Reinsurance Agreement (the “Stop-Loss Agreement”) with CP Re. AII and NG Re Ltd. also entered into an Aggregate Stop Loss Retrocession Contract (the “Retrocession Agreement”) with ACP Re pursuant to which ACP Re will reinsure the full amount of any payments that AII and NG Re Ltd. are obligated to make to CP Re under the Stop-Loss Agreement. Pursuant to the Stop-Loss Agreement, each of the Company and NGHC will provide, severally, $125,000 of stop loss coverage with respect to the run-off of the Tower business written on or before September 15, 2014. The reinsurers’ obligation to indemnify CP Re under the Stop-Loss Agreement will be triggered only at such time as CP Re’s ultimate net loss related to the run-off of the pre-September 15, 2014 Tower business exceeds a retention equal to the Tower Companies’ loss and loss adjustment reserves and unearned premium reserves as of September 15, 2014, which the parties to the LPTA have agreed will be established upon reevaluation as of December 31, 2015. CP Re will pay AII and NG Re Ltd. total premium of $56,000 on the five-year anniversary of the Stop-Loss Agreement. The premium payable by AII and NG Re Ltd. to ACP Re pursuant to the Retrocession Agreement will be $56,000 in the aggregate, less a ceding commission of 5.5% to be retained by AII and NG Re Ltd. The Stop-Loss Agreement and the Retrocession Agreement are accounted for under the deposit method of accounting. See Note 18. "Subsequent Events" elsewhere in this report for additional information on this agreement.
ACP Re Credit Agreement
The Company, AII, and NG Re Ltd. entered into a credit agreement (the “ACP Re Credit Agreement”) among the Company, as Administrative Agent, ACP Re and Tower, now a wholly-owned subsidiary of ACP Re, as the borrowers (collectively, the “Borrowers”), ACP Re Holdings, LLC, as Guarantor, and AII and NG Re Ltd., as Lenders pursuant to which the Lenders made a $250,000 loan ($125,000 made by each Lender) to the Borrowers.
The ACP Re Credit Agreement has a maturity date of September 15, 2021. Outstanding borrowings under the ACP Re Credit Agreement bear interest at a fixed annual rate of 7%, payable semi-annually on the last day of January and July. Fees payable to the Company for its service as Administrative Agent include an annual fee equal to $30, plus reimbursement of costs, expenses and certain other charges. The obligations of the Borrowers are secured by (i) a first-priority pledge of 100% of the stock of ACP Re and ACP Re’s U.S. subsidiaries and 65% of the stock of certain of ACP Re’s foreign subsidiaries, and (ii) a first-priority lien on all of the assets of the Borrowers and Guarantor and certain of the assets of ACP Re’s subsidiaries (other than the Tower Companies).
The Borrowers have the right to prepay the amounts borrowed, in whole or in part. The Borrowers are required to prepay the amounts borrowed within thirty (30) days from the receipt of net cash proceeds received by ACP Re from (i) certain asset sales, (ii) the disposition of certain equity interests, (iii) the issuance or incurrence of certain debt, (iv) any dividend or distribution from Tower subsidiaries to ACP Re, (v) premiums and other payments received pursuant to the Retrocession Agreement, and (vi) any tax refunds, pension plan reversions, insurance proceeds, indemnity payments, purchase price adjustments (excluding working capital adjustments) under acquisition agreements, litigation proceeds and other similar receipts received by the Borrowers after the effective date of the ACP Re Credit Agreement, unless any of the foregoing proceeds (other than payments received pursuant to the Retrocession Agreement) are required for the ordinary course business operations of the Borrowers. The Borrowers are also required to deposit any excess cash flow (including payments under the Master Agreement) into a reserve account that also secures Borrowers’ obligations under the ACP Re Credit Agreement. Any funds in the reserve account after January 1, 2018 that exceed the amount of interest payable by the Borrowers for the remainder of the term of the ACP Re Credit Agreement must be applied by the Borrowers as a prepayment of principal under the ACP Re Credit Agreement.
The ACP Re Credit Agreement contains certain customary restrictive covenants (subject to negotiated exceptions and baskets), including restrictions on indebtedness, liens, acquisitions and investments, dispositions, creation of subsidiaries and restricted payments. There are also financial covenants that require ACP Re to maintain minimum current assets, a maximum leverage ratio, and a minimum fixed charge coverage ratio. If ACP Re fails to comply with the leverage ratio or fixed charge coverage ratio covenants as of any measurement date, the Borrowers may cure such breach by making a capital contribution to ACP Re sufficient to bring the Borrowers into compliance.

38



The ACP Re Credit Agreement also provides for customary events of default, with grace periods where appropriate, including failure to pay principal when due, failure to pay interest or fees within three business days after becoming due, failure to comply with covenants, breaches of representations and warranties, default under certain other indebtedness, certain insolvency, receivership or insurance regulatory events affecting the Borrowers, the occurrence of certain material judgments, certain amounts of reportable ERISA or foreign pension plan noncompliance events, a change in control of the Guarantor, any security interest created under the ACP Re Credit Agreement ceases to be in full force and effect, or if ACP Re defaults on its obligations under the Retrocession Agreement. Upon the occurrence and during the continuation of an event of default, the Company, as Administrative Agent, upon the request of any Lender, will declare the Borrowers’ obligations under the ACP Re Credit Agreement immediately due and payable and/or exercise any and all remedies and other rights under the ACP Re Credit Agreement.
As of June 30, 2016 and December 31, 2015, the Company recorded $129,375 and $129,375, respectively, of loan and related interest receivable as a component of other assets on the condensed consolidated balance sheet. The Company recorded total interest income of approximately $2,187 and $2,211 for the three months ended June 30, 2016 and 2015, respectively, and $4,375 and $4,399 during the six months ended June 30, 2016 and 2015, respectively, under the ACP Re Credit Agreement. See Note 18. "Subsequent Events" elsewhere in this report for additional information on this agreement.
Other Related Party Transactions

Lease Agreements
 
The Company leases office space at 59 Maiden Lane in New York, New York from 59 Maiden Lane Associates, LLC, an entity that is wholly-owned by Leah Karfunkel and George Karfunkel. The lease term is through May 2023. The Company paid approximately $356 and $483 of rent during the three months ended June 30, 2016 and 2015, respectively, and $738 and $948 during the six months ended June 30, 2016 and 2015, respectively, for the leased office space.

The Company leased office space in Chicago, Illinois from 135 LaSalle Property, LLC, an entity that is wholly-owned by entities controlled by Leah Karfunkel and George Karfunkel. The lease terminated on May 31, 2016. The Company paid rent of approximately $65 and $195 during the three months ended June 30, 2016 and 2015, respectively, and $197 and $270 during the six months ended June 30, 2016 and 2015, respectively, for the leased office space.

The Company leases office space in Chicago, Illinois from IC 233 Building Company LLC, a wholly-owned subsidiary of Illinois Center Building Company, discussed below. The lease term is ten years through the end of May 2026. The Company's rent expense was immaterial during the three and six months ended June 30, 2016 for the leased office space.

Equity Investments in Limited Partnerships

In February 2015, the Company invested approximately $9,700 in North Dearborn Building Company, L.P. (“North Dearborn”), a limited partnership that owns an office building in Chicago, Illinois. NGHC is also a limited partner in North Dearborn, and the general partner is NA Advisors GP LLC (“NA Advisors”), an entity controlled by Leah Karfunkel and managed by an unrelated third party. The Company and NGHC each received a 45% limited partnership interest in North Dearborn for their respective $9,700 investments, while NA Advisors invested approximately $2,200 and holds a 10% general partnership interest and a 10% profit interest, which NA Advisors pays to the unrelated third party manager. North Dearborn appointed NA Advisors as the general manager to oversee the day-to-day operations of the office building and pays NA Advisors an annual fee for these services. This investment is included within other investments and is accounted for using the equity method of accounting on a three-month lag basis. The Company recorded approximately $172 and $445 of income from this investment during the three and six months ended June 30, 2016 and $223 during the three and six months ended June 30, 2015.

In August 2015, certain of the Company's subsidiaries invested approximately $53,715 in Illinois Center Building Company, L.P. ("Illinois Center"), a limited partnership that owns an office building complex in Chicago, Illinois. NGHC and ACP Re are also limited partners in Illinois Center, and the general partner is NA Advisors. The Company and NGHC each have a 37.5% limited partnership interest in Illinois Center, while ACP Re has a 15.0% limited partnership interest. NA Advisors holds a 10% general partnership interest and a 10% profit interest, which NA Advisors pays to the unrelated third party manager. Illinois Center appointed NA Advisors as the general manager to oversee the day-to-day operations of the office building and pays NA Advisors an annual fee for these services. This investment is included within other investments and is accounted for using the equity method of accounting on a three month lag basis. The Company recorded approximately $1,154 and $1,747 of income from this investment during the three and six months ended June 30, 2016.
 
These limited partnerships are considered variable interest entities ("VIEs"). Based on current accounting guidance, the Company is required to consolidate any VIEs in which it is deemed to be the primary beneficiary through having: (i) power over

39



the significant activities of the entity, and (ii) having an obligation to absorb losses or the right to receive benefits from the VIE that are potentially significant to the VIE. The Company performed a primary beneficiary analysis on the aforementioned limited partnerships and determined the Company was not the primary beneficiary since it does not have power over the significant activities of the entity. These limited partnerships are recorded as a component of other investments on the condensed consolidated balance sheet. The carrying value of these limited partnerships, in aggregate, was $68,186 and $64,869 as of June 30, 2016 and December 31, 2015, respectively. The maximum exposure to loss, which is the estimated loss that would be incurred under severe, hypothetical circumstances, for which the possibility of occurrence is remote, such as where the value of the Company's interests declines to zero, without any consideration of recovery or offset from any economic hedges, was $68,186 and $64,869 as of June 30, 2016 and December 31, 2015, respectively. The maximum exposure to loss is a required disclosure under US GAAP and is not an indication of expected loss.

Use of the Company Aircraft
 
The Company and its wholly-owned subsidiary, AmTrust Underwriters, Inc. (“AUI”), are each a party to aircraft time share agreements with each of Maiden and NGHC. The agreements provide for payment to the Company or AUI for the usage of their respective company-owned aircraft and cover actual expenses incurred and permissible under federal aviation regulations. Such expenses include, among others, travel and lodging expenses of the crew, in-flight catering, flight planning and weather contract services, ground transportation, fuel, landing and hanger fees, and airport taxes. Neither the Company nor AUI charge Maiden or NGHC for the fixed costs that would be incurred in any event to operate the aircraft (for example, aircraft purchase costs, insurance and flight crew salaries). During the three months ended June 30, 2016, Maiden paid $17 and NGHC paid $27, respectively, for their use of the company-owned aircraft under these agreements. During the six months ended June 30, 2016, Maiden paid $39 and NGHC paid $40, respectively, for their use of the Company-owned aircraft under these agreements. The amount that each of Maiden and NGHC paid for the use of the Company-owned aircraft under these agreements was not material, either individually or in the aggregate, during the three and six months ended June 30, 2015.

In addition, for personal travel, Mr. Barry Zyskind, the Company’s Chairman, President and Chief Executive Officer, entered into an aircraft reimbursement agreement with the Company and AUI. Since entering into such agreements, Mr. Zyskind has fully reimbursed the Company and AUI for the incremental cost billed by the Company and AUI for his personal use of the respective company-owned aircraft. During the three months ended June 30, 2016 and 2015, Mr. Zyskind reimbursed the Company and AUI, in aggregate, $404 and $122, respectively, for his personal use of the company-owned aircraft. During the six months ended June 30, 2016 and 2015, Mr. Zyskind reimbursed the Company and AUI, in aggregate, $484 and $334, respectively, for his personal use of the company-owned aircraft.

40





13. Acquisitions

Nationale Borg

On May 31, 2016, the Company completed the acquisition of N.V. Nationale Borg-Maatscappij and its affiliates ("Nationale Borg") for £161,350 (or $179,583). Nationale Borg is an Amsterdam-based international direct writer and reinsurer of surety and trade credit insurance in over 70 countries that has been in existence for approximately 120 years.

A summary of the preliminary assets acquired and liabilities assumed for Nationale Borg are as follows:

(Amounts in Thousands)
 
 
Assets
 
 
 
Cash and investments
 
$
229,607

 
Premium receivable
 
4,301

 
Accrued interest and dividends
 
83

 
Reinsurance recoverable
 
4,322

 
Other assets
 
8,414

 
Property and equipment
 
10,319

 
Goodwill and intangible assets
 
55,424

Total assets
 
$
312,470

 
 
 
 
Liabilities
 
 
 
Loss and loss adjustment expense reserves
 
$
78,909

 
Unearned premiums
 
24,782

 
Accrued expenses and other liabilities
 
29,196

Total liabilities
 
$
132,887

Acquisition price
 
$
179,583


The goodwill and intangible assets, as well as Nationale Borg's results of operations, are included as a component of the Specialty Risk and Extended Warranty segment. The goodwill is not expected to be deductible for income tax purposes. The intangible assets consist primarily of trade names, licenses and agent relationships. The Company anticipates completing its acquisition accounting by the end of 2016. As a result of this acquisition, the Company recorded approximately $9,495 of gross written premium during the three months ended June 30, 2016.

First Nationwide Title Agency

On May 20, 2016, the Company completed the acquisition of First Nationwide Title Agency and its subsidiaries ("First Nationwide"). First Nationwide is a title agency providing title insurance products primarily in the state of New York. The consideration for the purchase consisted of approximately $24,200 at closing and contingent consideration based on profitability of the agency over a four-year period.

The net assets recorded for First Nationwide consisted primarily of goodwill and intangible assets and are included in the Specialty Risk and Extended Warranty segment. The goodwill is not expected to be deductible for income tax purposes. The intangible assets consist primarily of customer relationships and trade names. The Company anticipates completing its acquisition accounting by the end of 2016. First Nationwide's results of operations were immaterial for the three and six month periods ended June 30, 2016.


41



Genworth

On May 9, 2016, the Company completed the acquisition of Genworth Financial Mortgage Insurance Ltd. ("Genworth"). Genworth provides mortgage insurance in Europe, primarily in the U.K. Finland, Italy and Germany. The consideration given for Genworth consisted of cash of approximately $54,500.

A summary of the preliminary assets acquired and liabilities assumed for Genworth are as follows:

(Amounts in Thousands)
 
 
Assets
 
 
 
Cash and investments
 
$
239,695

 
Reinsurance recoverable
 
27,570

 
Other assets
 
8,422

 
Property and equipment
 
964

Total assets
 
$
276,651

 
 
 
 
Liabilities
 
 
 
Loss and loss adjustment expense reserves
 
$
84,463

 
Unearned premiums
 
76,308

 
Accrued expenses and other liabilities
 
13,060

Total liabilities
 
$
173,831

Acquisition price
 
$
54,500

Acquisition gain
 
$
48,320


Genworth's results of operations are included as a component of the Specialty Risk and Extended Warranty segment. The Company anticipates completing its acquisition accounting by the end of 2016. As a result of this acquisition, the Company recorded approximately $4,300 of gross written premium during the three and six months ended June 30, 2016.

Republic

On April 18, 2016, the Company completed the acquisition of Republic Companies, Inc. and its affiliates ("Republic") from Delek Group Ltd., and Republic Insurance Holdings, LLC. Republic provides commercial and personal lines property and casualty insurance through independent agents and managing general agents. Republic primarily distributes the majority of its business to individuals and small and medium-size businesses through a network of independent agents in the southwestern United States. In addition, Republic generates fee revenue by providing insurance services to third parties.

The consideration given for Republic consisted of approximately $113,456 of cash at closing, a promissory note payable of approximately $104,685 due to Delek Group Ltd. and deferred payments of approximately $15,200 that are owed to the minority owners of Republic. Further information on the promissory note can be found in "Note 7. Debt". The deferred payments will be made in nineteen quarterly installments of $800 beginning three months after the acquisition date.


42



A summary of the preliminary assets acquired and liabilities assumed for Republic are as follows:

(Amounts in Thousands)
 
 
Assets
 
 
 
Cash and investments
 
$
621,068

 
Premium receivable, net
 
85,455

 
Accrued interest and dividends
 
4,779

 
Reinsurance recoverable
 
625,023

 
Deferred tax assets
 
41,743

 
Other assets
 
220,004

 
Property and equipment
 
435

 
Goodwill and intangible assets
 
128,714

Total assets
 
$
1,727,221

 
 
 
 
Liabilities
 
 
 
Loss and loss adjustment expense reserves
 
$
885,898

 
Unearned premiums
 
301,972

 
Trust Preferred Outstanding
 
93,106

 
Accrued expenses and other liabilities
 
130,221

 
Funds held under reinsurance treaties

 
83,331

Total liabilities
 
$
1,494,528

Acquisition price
 
$
232,693


The goodwill and intangible assets as well as Republic's results of operations will be included as a component of the Small Commercial Business and Specialty Program segments. The goodwill is not expected to be deductible for income tax purposes. The intangible assets consist primarily of trade names, licenses and agent relationships. The Company anticipates completing its acquisition accounting by the end of 2016. As a result of this acquisition, the Company recorded approximately $153,126 of gross written premium and $1,544 of services and fee income during the three months ended June 30, 2016.

ARI Insurance Company

On January 22, 2016, the Company completed the acquisition of ARI Holdco Inc. ("ARIH") and its subsidiaries. ARIH's primary operating subsidiary, ARI Insurance Company ("ARI"), is an underwriter of commercial automobile insurance in New Jersey, Pennsylvania and Maryland. Immediately prior to the acquisition, ARI converted from a mutual form to a stock form of ownership in a transaction "sponsored" by the Company. As required by the plan of conversion and applicable Delaware law, the Company offered shares of its common stock, at a discount to the market price, to the members of ARI who held policies as of December 31, 2014 and the directors, officers and employees of ARI and its subsidiaries. The Company received subscriptions for approximately $276, resulting in the issuance by the Company of 12,347 (on a post-split basis) shares of its common stock at a discounted price of 20% (or approximately $69 in the aggregate) from the Company's market trading price. Pursuant to the stock purchase agreement, after the expiration of the offering, the Company purchased all of the authorized shares of capital stock of ARIH at a purchase price equal to the greater of the gross proceeds received by the Company in the offering, and $3,750. The Company made a payment to ARIH of $23,500, which included the $276 in proceeds the Company received in the offering, for the stock of ARI. Additionally, the Company, as part of the transaction, was required to make a payment to an employee bonus pool of ARI of $3,750, as discussed above. The remaining $23,500 of cash contributed to ARIH was retained by the Company. In accordance with FASB ASC 805-10 Business Combinations, the Company recorded an initial acquisition price of approximately $3,819.

43



A summary of the preliminary assets acquired and liabilities assumed for ARI are as follows:

(Amounts in Thousands)
 
 
Assets
 
 
 
Cash and investments
 
$
53,917

 
Premium receivable, net
 
15,577

 
Accrued interest and dividends
 
375

 
Reinsurance recoverable
 
17,554

 
Other assets
 
2,116

 
Intangible assets
 
1,097

Total assets
 
$
90,636

 
 
 
 
Liabilities
 
 
 
Loss and loss adjustment expense reserves
 
$
59,723

 
Unearned premiums
 
18,672

 
Accrued expenses and other liabilities
 
7,968

Total liabilities
 
$
86,363

Acquisition price
 
$
3,819

Acquisition gain
 
$
454


The intangible assets associated with the acquisition were initially measured at $1,097 and are not deductible for income tax purposes. The Company is in the process of completing its acquisition accounting and expects to have it completed in 2016. The intangible assets as well as ARI's results of operations are included as a component of the Small Commercial Business segment. As a result of this acquisition, the Company recorded approximately $12,227 and $25,610 of gross written premium during the three and six months ended June 30, 2016.


44



Springfield

On October 7, 2015, the Company acquired all of the issued and outstanding stock of Springfield Insurance Company and its affiliates, Springfield Insurance Company Ltd. and Unified Grocers Insurance Services (collectively "Springfield"). Springfield, domiciled in California, is an insurance carrier providing workers' compensation and commercial package insurance to Unified Grocers Inc., an association of independently owned grocery stores, its members and its customers. The purchase agreement required the Company to pay approximately $26,574 in cash on the acquisition date and contained an earn-out provision that is contingent on Springfield meeting certain performance conditions over a five-year period. The contingent consideration associated with the earn-out provision was initially valued at $5,000 as of the acquisition date.

A summary of the preliminary assets acquired and liabilities assumed for Springfield are as follows:

(Amounts in Thousands)
 
 
Assets
 
 
 
Cash and investments
 
$
93,837

 
Premium receivable, net
 
4,651

 
Accrued interest and dividends
 
470

 
Other assets
 
2,752

 
Deferred tax asset
 
1,905

 
Property and equipment
 
1,376

 
Goodwill and intangible assets
 
4,253

Total assets
 
$
109,244

 
 
 
 
Liabilities
 
 
 
Loss and loss adjustment expense reserves
 
$
65,725

 
Unearned premiums
 
7,006

 
Accrued expenses and other liabilities
 
4,199

 
Reinsurance payable on paid losses
 
740

Total liabilities
 
$
77,670

Acquisition price
 
$
31,574


The goodwill and intangible assets associated with the acquisition were initially measured at $4,253 and are not expected to be deductible for income tax purposes. The Company is in the process of completing its acquisition accounting and expects to have it completed in 2016. The goodwill and intangible assets as well as Springfield's results of operations are included as a component of the Small Commercial Business segment. As a result of this acquisition, the Company recorded approximately $1,760 and $4,878 of gross written premium for the three and six months ended June 30, 2016 and $428 and $842 of service and fee income during the three and six months ended June 30, 2016.


45



Warranty Solutions

On September 25, 2015, the Company acquired all of the issued and outstanding stock of Warranty Solutions, a Wells Fargo business ("Warranty Solutions"), for $156,247 in cash. Warranty Solutions designs, markets, administers and underwrites vehicle service contracts for new and used automobiles through a national network of more than 70 active agencies and 1,500 franchised and independent dealers.

A summary of the preliminary assets acquired and liabilities assumed for Warranty Solutions are as follows:

(Amounts in Thousands)
 
 
Assets
 
 
 
Cash and investments
 
$
192,015

 
Prepaid reinsurance premium
 
77,777

 
Other assets
 
22,466

 
Deferred tax asset
 
50,399

 
Goodwill and Intangible assets
 
84,215

Total assets
 
$
426,872

 
 
 
 
Liabilities
 
 
 
Loss and loss expense reserves
 
$
3,013

 
Unearned premiums
 
182,441

 
Accrued expenses and other liabilities
 
85,171

Total liabilities
 
$
270,625

Acquisition price
 
$
156,247


The goodwill and intangible assets associated with the acquisition were initially measured at $84,215, which initially included customer relationships and licenses. The goodwill associated with the acquisition is not deductible for income tax purposes. The Company is in the process of completing its acquisition accounting and expects to have it completed in 2016. The goodwill and intangible assets, as well as Warranty Solutions' results of operations, are included as a component of the Special Risk and Extended Warranty segment. As a result of this acquisition, during the three months ended June 30, 2016, the Company recorded approximately $22,290 of gross written premium and $20,615 of service and fee income, and for the six months ended June 30, 2016, the Company recorded approximately $46,008 of gross written premium and $44,934 of service and fee income.

Magna Carta

On March 11, 2016, one of our subsidiary insurance companies entered into a loss portfolio transfer with Public Service Insurance Company, Paramount Insurance Company and Western Select Insurance Company. The Company will reinsure 100% of the existing obligations with respect to their business for accident years 2014 and 2015, including a loss portfolio transfer of 100% of the loss and LAE reserves as of the effective date. The Company received approximately $163,400 of cash and recorded loss reserves of approximately $163,400. The Company followed deposit accounting under the guidelines of ASC 340-30, Other Assets and Deferred Costs. During the three and six months ended June 30, 2016, the Company (recovered) paid losses of approximately $(1,060) and 9,440, respectively. During the three and six months ended June 30, 2016, the Company did not record any gains or losses as a result of this transaction. Additionally, one of our subsidiaries entered into a renewal rights transaction with the forenamed parties as well as Creative Intermediaries, Inc., Magna Carta Companies, Inc. and Public Service Mutual Holding Company, whereby the Company may reinsure their existing book of policies for their commercial and property insurance business. The acquisition price paid for the renewal rights transaction was approximately $1,000.

Other

The Company had additional immaterial acquisitions totaling approximately $12,000 during the three and six months ended June 30, 2016. No individual acquisition or acquisitions in the aggregate were significant and, therefore, the Company was not required to include any pro forma financial information in this report.

46





14. New Market Tax Credit

In 2012, the Company's subsidiary, 800 Superior, LLC (an entity owned equally by the Company and NGHC) received $19,400 in net proceeds from a financing transaction the Company and NGHC entered into with Key Community Development Corporation (“KCDC”) related to a capital improvement project for an office building in Cleveland, Ohio owned by 800 Superior, LLC. The Company, NGHC and KCDC collectively made capital contributions (net of allocation fees) and loans to 800 Superior NMTC Investment Fund II LLC and 800 Superior NMTC Investment Fund I LLC (collectively, the “Investment Funds”) under a qualified New Markets Tax Credit (“NMTC”) program. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intended to induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their federal income taxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”). CDEs are privately managed investment institutions that are certified to make qualified low-income community investments (“QLICIs”).

In addition to the capital contributions and loans from the Company, NGHC and KCDC, as part of the transaction, the Investment Funds received, directly and indirectly, proceeds of approximately $8,000 from two loans originating from state and local governments of Ohio. These loans are each for a period of 15 years and have a weighted average interest rate approximately of 2.0% per annum.

The Investment Funds then contributed the loan proceeds and capital contributions of $19,400 to two CDEs, which, in turn, loaned the funds on similar terms to 800 Superior, LLC. The proceeds of the loans from the CDEs (including loans representing the capital contribution made by KCDC, net of allocation fees) will be used to fund the capital improvement project. As collateral for these loans, the Company has granted a security interest in the assets acquired with the loan proceeds.

The Company and NGHC are each entitled to receive an equal portion of 49% of the benefits derived from the NMTCs generated by 800 Superior Investment Fund II LLC, while KCDC is entitled to the remaining 51%. The NMTC is subject to 100% recapture for a period of 7 years as provided in the Internal Revenue Code. During this seven-year compliance period, the entities involved are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in the projected tax benefits not being realized and, therefore, could require the Company to indemnify KCDC for any loss or recapture of NMTCs related to the financing until such time as the obligation to deliver tax benefits is relieved. The Company does not anticipate any credit recaptures will be required in connection with this arrangement. In addition, this transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase KCDC's interest in the Investment Funds in September 2019 at the end of the recapture period. The Company believes that KCDC will exercise its put option and, therefore, attributed an insignificant value to the put/call.
 
The Company has determined that the Investment Funds are VIEs. The ongoing activities of the Investment Funds - collecting and remitting interest and fees and NMTC compliance - were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the Investment Funds. When determining whether to consolidate the Investment Funds, Company management considered the contractual arrangements that obligate it to deliver tax benefits and provide various other guarantees to the structure, KCDC's lack of a material interest in the underlying economics of the project, and the fact that the Company is obligated to absorb losses of the Investment Funds. Also, the Company has an approximate 12% ownership in NGHC. The Company concluded that it was the primary beneficiary and consolidated the Investment Funds, as VIEs, in accordance with the accounting standard for consolidation. KCDC's contribution, net of syndication fees, is included as accrued liability in the accompanying condensed consolidated balance sheets. Direct costs incurred in structuring the financing arrangement are deferred and will be recognized as expense over the term of the loans. Incremental costs to maintain the structure during the compliance period are recognized as incurred.

47






15. Stockholder's Equity and Accumulated Other Comprehensive Income (Loss)

Common Stock

The Company implemented a two-for-one stock split on February 2, 2016.

Issuances of Preferred Stock

In March 2016, the Company completed a public offering of 5,750,000 of its depositary shares, each representing a 1/40th interest in a share of its 7.75% Non-Cumulative Preferred Stock, Series E, $0.01 par value per share (the "Series E Preferred Stock"), with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). Each depositary share entitles the holder to a proportional fractional interest in all rights and preferences of the Series E Preferred Stock represented thereby (including any dividend, liquidation, redemption and voting rights). Dividends on the Series E Preferred Stock represented by the depositary shares will be payable on the liquidation preference amount, on a non-cumulative basis, when, as and if declared by the Company’s board of directors, at a rate of 7.75% per annum, quarterly in arrears, on March 15, June 15, September 15, and December 15 of each year, beginning on June 15, 2016, from and including the date of original issuance. The Series E Preferred Stock represented by the depositary shares is not redeemable prior to March 15, 2021. After that date, the Company may redeem at its option, in whole or in part, the Series E Preferred Stock represented by the depositary shares at a redemption price of $1,000 per share (equivalent to $25 per depositary share) plus any declared and unpaid dividends for prior dividend periods and accrued but unpaid dividends (whether or not declared) for the then current dividend period. Net proceeds from this offering were $139,070. In addition, the Company incurred $4,680 in underwriting discount and commissions and expenses, which were recognized as a reduction to additional paid-in capital.

Stockholders' Equity

The following table summarizes the ownership components of total stockholders' equity:
 
 
 
Six Months Ended June 30,
 
 
2016
 
2015
(Amounts in Thousands)
 
AmTrust
 
Non-Controlling Interest
 
Total
 
AmTrust
 
Non-Controlling Interest
 
Total
Balance, December 31,
 
$
2,909,060

 
$
176,455

 
$
3,085,515

 
$
2,037,020

 
$
159,181

 
$
2,196,201

Net income
 
255,415

 
9,493

 
264,908

 
239,452

 
4,771

 
244,223

Unrealized holding gain (loss)
 
190,894

 

 
190,894

 
(52,321
)
 

 
(52,321
)
Reclassification adjustment
 
(8,045
)
 

 
(8,045
)
 
(1,205
)
 

 
(1,205
)
Foreign currency translation
 
(84,665
)
 

 
(84,665
)
 
(51,332
)
 
14

 
(51,318
)
Unrealized gain on interest rate swap
 
287

 

 
287

 
190

 

 
190

Extinguishment of 2021 senior notes, equity component
 

 

 

 
(3,345
)
 


 
(3,345
)
Share exercises, compensation and other
 
4,389

 

 
4,389

 
8,454

 

 
8,454

Common share (purchase) issuance, net
 
(103,164
)
 

 
(103,164
)
 
171,672

 

 
171,672

Common share dividends
 
(52,189
)
 
(10,229
)
 
(62,418
)
 
(41,249
)
 

 
(41,249
)
Preferred stock issuance, net of fees
 
139,070

 

 
139,070

 
176,529

 

 
176,529

Preferred stock dividends
 
(20,367
)
 

 
(20,367
)
 
(14,008
)
 

 
(14,008
)
Capital contribution (distribution), net
 

 
5,500

 
5,500

 

 
(1,478
)
 
(1,478
)
Balance, June 30,
 
$
3,230,685

 
$
181,219

 
$
3,411,904

 
$
2,469,857

 
$
162,488

 
$
2,632,345



48



During the six months ended June 30, 2016, net income attributable to non-controlling interest was $9,493 and net income attributable to redeemable non-controlling interest was $341. Net income for AmTrust, Non-controlling interest and Redeemable non-controlling interest totaled $9,834 for the six months ended June 30, 2016. During the six months ended June 30, 2015, net income attributable to non-controlling interest was $4,771 and net income attributable to redeemable non-controlling interest was $658. Net income for AmTrust, Non-controlling interest and Redeemable non-controlling interest totaled $5,429 for the six months ended June 30, 2015.

Accumulated Other Comprehensive Income (Loss)

The following table summarizes the activities and components of accumulated other comprehensive income (loss):

(Amounts in Thousands)
 
Foreign Currency Items
 
Unrealized Gains (Losses) on Investments
 
Interest Rate Swap Hedge
 
Net Benefit Plan Assets and Obligations Recognized in Stockholders' Equity
 
Accumulated Other Comprehensive Income (Loss)
Balance, March 31, 2016
 
$
(140,058
)
 
$
43,398

 
$
(581
)
 
$
(107
)
 
$
(97,348
)
Other comprehensive income (loss) before reclassification
 
(73,559
)
 
157,427

 
258

 

 
84,126

Amounts reclassed from accumulated other comprehensive income
 
16,912

 
(3,920
)
 

 

 
12,992

Income tax benefit (expense)
 
19,827

 
(51,298
)
 
(90
)
 

 
(31,561
)
Net current-period other comprehensive (loss) income
 
(36,820
)
 
102,209

 
168

 

 
65,557

Balance, June 30, 2016
 
$
(176,878
)
 
$
145,607

 
$
(413
)
 
$
(107
)
 
$
(31,791
)
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2015
 
$
(80,129
)
 
$
81,868

 
$
(1,294
)
 
$
(2,793
)
 
$
(2,348
)
Other comprehensive income before reclassification
 
21,571

 
(91,679
)
 
251

 

 
(69,857
)
Amounts reclassed from accumulated other comprehensive income
 

 
(1,216
)
 

 

 
(1,216
)
Income tax benefit (expense)
 
(7,550
)
 
32,514

 
(88
)
 

 
24,876

Net current-period other comprehensive income
 
14,021

 
(60,381
)
 
163

 

 
(46,197
)
Balance, June 30, 2015
 
$
(66,108
)
 
$
21,487

 
$
(1,131
)
 
$
(2,793
)
 
$
(48,545
)

49



(Amounts in Thousands)
 
Foreign Currency Items
 
Unrealized Gains (Losses) on Investments
 
Interest Rate Swap Hedge
 
Net Benefit Plan Assets and Obligations Recognized in Stockholders' Equity
 
Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2015
 
$
(92,213
)
 
$
(37,242
)
 
$
(700
)
 
$
(107
)
 
$
(130,262
)
Other comprehensive income (loss) before reclassification
 
(147,167
)
 
282,147

 
441

 

 
135,421

Amounts reclassed from accumulated other comprehensive income
 
16,912

 
(4,578
)
 

 

 
12,334

Income tax benefit (expense)
 
45,590

 
(94,720
)
 
(154
)
 

 
(49,284
)
Net current-period other comprehensive income (loss)
 
(84,665
)
 
182,849

 
287

 

 
98,471

Balance, June 30, 2016
 
$
(176,878
)
 
$
145,607

 
$
(413
)
 
$
(107
)
 
$
(31,791
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
 
$
(14,776
)
 
$
75,013

 
$
(1,321
)
 
$
(2,793
)
 
$
56,123

Other comprehensive income before reclassification
 
(78,972
)
 
(80,494
)
 
292

 

 
(159,174
)
Amounts reclassed from accumulated other comprehensive income
 

 
(1,854
)
 

 

 
(1,854
)
Income tax benefit (expense)
 
27,640

 
28,822

 
(102
)
 

 
56,360

Net current-period other comprehensive (loss) income
 
(51,332
)
 
(53,526
)
 
190

 

 
(104,668
)
Balance, June 30, 2015
 
$
(66,108
)
 
$
21,487

 
$
(1,131
)
 
$
(2,793
)
 
$
(48,545
)
 
 
 
 
 
 
 
 
 
 
 

16. Commitment and Contingent Liabilities
 
Litigation
 
The Company’s insurance subsidiaries are named as defendants in various legal actions arising principally from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the loss and LAE reserves. The Company’s management believes the resolution of those actions will not have a material adverse effect on the Company’s financial position or results of operations.

Pending Acquisition

Acquisition of ANV Holding B.V. and its affiliates ("ANV")

In April 2016, the Company entered into an agreement to acquire ANV from Ontario Teachers’ Pension Plan Board for approximately $218,700 in cash, subject to purchase price adjustments. ANV is a specialty insurance company that underwrites a variety of commercial property and casualty insurance products through its three Lloyd’s syndicates and managing general underwriter. The Company expects to fund the transaction with existing working capital, and, pending regulatory approval, to close the transaction during the second half of 2016.

50




17. Segments
 
The Company currently operates three business segments: Small Commercial Business; Specialty Risk and Extended Warranty; and Specialty Program. The Company also has a former segment, Personal Lines Reinsurance, which is in run-off and is now included within its Corporate and Other segment. The Corporate and Other segment also represents the activities of the holding company as well as a portion of service and fee revenue. In determining total assets (excluding cash and invested assets) by segment, the Company identifies those assets that are attributable to a particular segment such as deferred acquisition cost, reinsurance recoverable, goodwill, intangible assets and prepaid reinsurance while the remaining assets are allocated based on gross written premium by segment. In determining cash and invested assets by segment, the Company matches certain identifiable liabilities such as unearned premium and loss and loss adjustment expense reserves by segment. The remaining cash and invested assets are then allocated based on gross written premium by segment. Investment income and realized gains (losses) are determined by calculating an overall annual return on cash and invested assets and applying that overall return to the cash and invested assets by segment. Ceding commission is allocated to each segment based on that segment’s proportionate share of the Company’s overall acquisition costs. Interest expense is allocated based on gross written premium by segment. Income taxes are allocated on a pro-rata basis based on the Company’s effective tax rate. Additionally, management reviews the performance of underwriting income in assessing the performance of and making decisions regarding the allocation of resources to the segments. Underwriting income excludes, primarily, service and fee revenue, investment income and other revenues, other expenses, interest expense and income taxes. Management believes that providing this information in this manner is essential to providing the Company’s stockholders with an understanding of the Company’s business and operating performance.

During three and six months ended June 30, 2016 and 2015, the Company's Specialty Program segment derived over ten percent of its gross written premium primarily from one agent.

51




The following tables summarize the results of operations of the business segments for the three and six months ended June 30, 2016 and 2015:
 
 
 
 
 
 
 
 
 
 
 
(Amounts in Thousands)
 
Small Commercial Business
 
Specialty Risk and Extended Warranty
 
Specialty Program
 
Corporate and  Other
 
Total
Three Months Ended June 30, 2016:
 
 
 
 
 
 
 
 
 
 
Gross written premium
 
$
1,060,558

 
$
651,561

 
$
360,993

 
$

 
$
2,073,112

 
 
 
 
 
 
 
 
 
 
 
Net written premium
 
601,638

 
447,061

 
219,737

 

 
1,268,436

Change in unearned premium
 
(28,660
)
 
(89,177
)
 
31,153

 

 
(86,684
)
Net earned premium
 
572,978

 
357,884

 
250,890

 

 
1,181,752

 
 
 
 
 
 
 
 
 
 
 
Loss and loss adjustment expense
 
(382,950
)
 
(231,328
)
 
(170,115
)
 

 
(784,393
)
Acquisition costs and other underwriting expenses
 
(150,014
)
 
(78,842
)
 
(69,947
)
 

 
(298,803
)
 
 
(532,964
)
 
(310,170
)
 
(240,062
)
 

 
(1,083,196
)
Underwriting income
 
40,014

 
47,714

 
10,828

 

 
98,556

Service and fee income
 
25,745

 
83,120

 
1,228

 
28,177

 
138,270

Investment income and realized gain
 
28,193

 
19,506

 
18,211

 
(66
)
 
65,844

Other expenses
 
(67,938
)
 
(41,879
)
 
(23,153
)
 

 
(132,970
)
Interest expense
 
(10,112
)
 
(6,189
)
 
(3,437
)
 

 
(19,738
)
Foreign currency loss
 

 
(26,435
)
 

 

 
(26,435
)
Gain on life settlement contracts
 
6,507

 
3,961

 
2,208

 

 
12,676

Acquisition gain (reduction) on purchase
 
(9,223
)
 
48,320

 

 

 
39,097

Provision for income taxes
 
(1,451
)
 
(20,385
)
 
(1,020
)
 
(5,062
)
 
(27,918
)
Equity in earnings of unconsolidated subsidiary  – related party
 

 

 

 
4,802

 
4,802

Net income
 
$
11,735

 
$
107,733

 
$
4,865

 
$
27,851

 
$
152,184

 
 
 
 
 
 
 
 
 
 
 
(Amounts in Thousands)
 
Small Commercial Business
 
Specialty Risk and Extended Warranty
 
Specialty Program
 
Corporate and  Other
 
Total
Three Months Ended June 30, 2015:
 
 
 
 
 
 
 
 
 
 
Gross written premium
 
$
875,829

 
$
479,863

 
$
322,697

 
$

 
$
1,678,389

 
 
 
 
 
 
 
 
 
 
 
Net written premium
 
517,392

 
306,784

 
184,545

 

 
1,008,721

Change in unearned premium
 
(34,333
)
 
(22,816
)
 
17,398

 

 
(39,751
)
Net earned premium
 
483,059

 
283,968

 
201,943

 

 
968,970

 
 
 
 
 
 
 
 
 
 
 
Loss and loss adjustment expense
 
(314,344
)
 
(185,345
)
 
(138,786
)
 

 
(638,475
)
Acquisition costs and other underwriting expenses
 
(124,713
)
 
(57,309
)
 
(56,688
)
 

 
(238,710
)
 
 
(439,057
)
 
(242,654
)
 
(195,474
)
 

 
(877,185
)
Underwriting income
 
44,002

 
41,314

 
6,469

 

 
91,785

Service and fee income
 
25,043

 
61,770

 
31

 
20,893

 
107,737

Investment income and realized gain
 
15,604

 
11,807

 
6,216

 
14

 
33,641

Other expenses
 
(51,204
)
 
(28,038
)
 
(18,888
)
 

 
(98,130
)
Interest expense and loss on extinguishment of debt
 
(5,037
)
 
(2,792
)
 
(1,817
)
 

 
(9,646
)
Foreign currency loss
 

 
(47,320
)
 

 

 
(47,320
)
Gain on life settlement contracts
 
1,619

 
942

 
535

 

 
3,096

(Provision) benefit for income taxes
 
(3,409
)
 
636

 
1,463

 
(3,162
)
 
(4,472
)
Equity in earnings of unconsolidated subsidiary  – related party
 

 

 

 
4,042

 
4,042

Net income
 
$
26,618

 
$
38,319

 
$
(5,991
)
 
$
21,787

 
$
80,733



52



(Amounts in Thousands)
 
Small Commercial Business
 
Specialty Risk and Extended Warranty
 
Specialty Program
 
Corporate and  Other
 
Total
Six Months Ended June 30, 2016:
 
 
 
 
 
 
 
 
 
 
Gross written premium
 
$
2,126,690

 
$
1,181,007

 
$
698,489

 
$

 
$
4,006,186

 
 
 
 
 
 
 
 
 
 
 
Net written premium
 
1,226,166

 
784,894

 
478,055

 

 
2,489,115

Change in unearned premium
 
(149,094
)
 
(105,169
)
 
21,182

 

 
(233,081
)
Net earned premium
 
1,077,072

 
679,725

 
499,237

 

 
2,256,034

 
 
 
 
 
 
 
 
 
 
 
Loss and loss adjustment expense
 
(715,634
)
 
(442,264
)
 
(341,568
)
 

 
(1,499,466
)
Acquisition costs and other underwriting expenses
 
(280,442
)
 
(148,183
)
 
(134,812
)
 

 
(563,437
)
 
 
(996,076
)
 
(590,447
)
 
(476,380
)
 

 
(2,062,903
)
Underwriting income
 
80,996

 
89,278

 
22,857

 

 
193,131

Service and fee income
 
58,282

 
172,900

 
1,517

 
49,772

 
282,471

Investment income and realized gain
 
55,047

 
38,676

 
29,511

 

 
123,234

Other expenses
 
(138,635
)
 
(76,988
)
 
(45,533
)
 

 
(261,156
)
Interest expense
 
(19,874
)
 
(11,037
)
 
(6,527
)
 

 
(37,438
)
Foreign currency loss
 

 
(62,108
)
 

 

 
(62,108
)
Gain on life settlement contracts
 
12,425

 
6,900

 
4,081

 

 
23,406

Acquisition gain on purchase
 
455

 
48,320

 

 

 
48,775

(Provision) benefit for income taxes
 
(8,444
)
 
(35,711
)
 
(1,024
)
 
(10,465
)
 
(55,644
)
Equity in earnings of unconsolidated subsidiary – related party
 

 

 

 
10,578

 
10,578

Net income
 
$
40,252

 
$
170,230

 
$
4,882

 
$
49,885

 
$
265,249

 
 
 
 
 
 
 
 
 
 
 
(Amounts in Thousands)
 
Small Commercial Business
 
Specialty Risk and Extended Warranty
 
Specialty Program
 
Corporate and  Other
 
Total
Six Months Ended June 30, 2015:
 
 
 
 
 
 
 
 
 
 
Gross written premium
 
$
1,776,948

 
$
950,733

 
$
681,844

 
$

 
$
3,409,525

 
 
 
 
 
 
 
 
 
 
 
Net written premium
 
1,040,632

 
594,473

 
416,805

 

 
2,051,910

Change in unearned premium
 
(133,582
)
 
18,626

 
(18,607
)
 

 
(133,563
)
Net earned premium
 
907,050

 
613,099

 
398,198

 

 
1,918,347

 
 
 
 
 
 
 
 
 
 
 
Loss and loss adjustment expense
 
(588,690
)
 
(393,985
)
 
(269,083
)
 

 
(1,251,758
)
Acquisition costs and other underwriting expenses
 
(234,392
)
 
(127,574
)
 
(108,420
)
 

 
(470,386
)
 
 
(823,082
)
 
(521,559
)
 
(377,503
)
 

 
(1,722,144
)
Underwriting income
 
83,968

 
91,540

 
20,695

 

 
196,203

Service and fee income
 
51,675

 
129,532

 
364

 
39,052

 
220,623

Investment income and realized gain
 
38,850

 
28,547

 
16,366

 
104

 
83,867

Other expenses
 
(102,455
)
 
(54,818
)
 
(39,314
)
 

 
(196,587
)
Interest expense and loss on extinguishment of debt
 
(12,828
)
 
(6,864
)
 
(4,923
)
 

 
(24,615
)
Foreign currency loss
 

 
(7,366
)
 

 

 
(7,366
)
Loss on life settlement contracts
 
7,540

 
4,035

 
2,894

 

 
14,469

(Provision) benefit for income taxes
 
(11,558
)
 
(31,966
)
 
678

 
(8,438
)
 
(51,284
)
Equity in earnings of unconsolidated subsidiary – related party
 

 

 

 
9,571

 
9,571

Net income
 
$
55,192

 
$
152,640

 
$
(3,240
)
 
$
40,289

 
$
244,881


53



The following tables summarize net earned premium by major line of business, by segment, for the three and six months ended June 30, 2016 and 2015:

(Amounts in Thousands)
 
Small
Commercial
Business
 
Specialty
Risk and
Extended
Warranty
 
Specialty
Program
 
Total
Three Months Ended June 30, 2016:
 
  

 
  

 
  

 
  

Workers' compensation
 
$
358,894

 
$

 
$
199,704

 
$
558,598

Warranty
 

 
179,169

 

 
179,169

Other liability
 

 
33,305

 
12,800

 
46,105

Commercial auto and liability, physical damage
 
111,992

 
8,684

 
30,602

 
151,278

Medical malpractice
 

 
62,733

 

 
62,733

Other
 
102,092

 
73,993

 
7,784

 
183,869

Total net earned premium
 
$
572,978

 
$
357,884

 
$
250,890

 
$
1,181,752

 
 
 
 
 
 
 
 
 
(Amounts in Thousands)
 
Small
Commercial
Business
 
Specialty
Risk and
Extended
Warranty
 
Specialty
Program
 
Total
Three Months Ended June 30, 2015:
 
  

 
  

 
  

 
  

Workers' compensation
 
$
322,703

 
$

 
$
86,344

 
$
409,047

Warranty
 

 
144,316

 

 
144,316

Other liability
 
14,425

 
32,485

 
35,333

 
82,243

Commercial auto and liability, physical damage
 
67,491

 
8,714

 
34,465

 
110,670

Medical malpractice
 

 
40,143

 

 
40,143

Other
 
78,440

 
58,310

 
45,801

 
182,551

Total net earned premium
 
$
483,059

 
$
283,968

 
$
201,943

 
$
968,970

 
 
 
 
 
 
 
 
 
(Amounts in Thousands)
 
Small
Commercial
Business
 
Specialty
Risk and
Extended
Warranty
 
Specialty
Program
 
Total
Six Months Ended June 30, 2016:
 
  

 
  

 
  

 
  

Workers' compensation
 
$
704,937

 
$

 
$
307,417

 
$
1,012,354

Warranty
 

 
347,502

 

 
347,502

Other liability
 
5,249

 
74,018

 
83,381

 
162,648

Commercial auto and liability, physical damage
 
197,896

 
17,176

 
65,745

 
280,817

Medical malpractice
 

 
106,750

 

 
106,750

Other
 
168,990

 
134,279

 
42,694

 
345,963

Total net earned premium
 
$
1,077,072

 
$
679,725

 
$
499,237

 
$
2,256,034

 
 
 
 
 
 
 
 
 
(Amounts in Thousands)
 
Small
Commercial
Business
 
Specialty
Risk and
Extended
Warranty
 
Specialty
Program
 
Total
Six Months Ended June 30, 2015:
 
  

 
  

 
  

 
  

Workers' compensation
 
$
614,768

 
$

 
$
163,946

 
$
778,714

Warranty
 

 
295,847

 

 
295,847

Other liability
 
24,944

 
65,296

 
75,853

 
166,093

Commercial auto and liability, physical damage
 
119,411

 
12,154

 
69,698

 
201,263

Medical malpractice
 

 
76,454

 

 
76,454

Other
 
147,927

 
163,348

 
88,701

 
399,976

Total net earned premium
 
$
907,050

 
$
613,099

 
$
398,198

 
$
1,918,347

 
 
 
 
 
 
 
 
 


54



The following table summarizes total assets of the business segments as of June 30, 2016 and December 31, 2015:

(Amounts in Thousands)
 
June 30, 2016
 
December 31, 2015
Small Commercial Business
 
$
9,860,406

 
$
7,781,045

Specialty Risk and Extended Warranty
 
6,974,608

 
6,370,861

Specialty Program
 
4,171,979

 
2,936,710

Corporate and Other
 

 
2,403

 
 
$
21,006,993

 
$
17,091,019


18. Subsequent Event

Share repurchase

Subsequent to June 30, 2016 through July 27, 2016, the Company repurchased 1,689,875 shares of its common stock for approximately $41,300 under the share repurchase program approved by the Company's Board of Directors.

Trust Risk Group dispute

In October 2014, a dispute arose between the Company's subsidiary, AmTrust Europe Ltd., and its Italian medical liability broker, Trust Risk Group SpA ("TRG"), and agent, Trust Risk Italia SRL ("TRI," a subsidiary of TRG, collectively, “TRG”). TRG asserted that it was entitled to advanced commissions of approximately €95,800 (or $106,300) related to the Company's Italian medical liability business produced by TRG. TRG deducted approximately €42,200 (or $46,800) from premium payable to the Company with the intention of deducting approximately €48,700 (or $54,100) from future premium payable to the Company. The Company disputed that TRG was entitled to advanced commission. The Company terminated its brokerage and agency relationship with TRG and TRI, respectively, and notified its insureds and retail brokers to pay premiums directly to the Company.

TRG initiated two arbitration proceedings against the Company in Milan, Italy seeking monetary damages based upon its allegations that the Company improperly terminated the producer agreements and an entitlement to advanced commissions on the business produced for the Company. Subsequently, the Company commenced litigation in England and the U.S. against Antonio Somma, the current or former principal of TRG, and Marco Lacchini, the chairman of the two arbitration proceedings pending in Milan, Italy. The Company brought the English and U.S. legal actions based on allegations that the two ongoing Italian arbitrations were not being conducted in accordance with the law, as well as certain other matters. The Company was successful in its application in Italy to remove Mr. Lacchini as chairman of the two arbitral tribunals.

As disclosed in the Company’s Current Report on Form 8-K filed on July 20, 2016, the Company, AmTrust Europe, Ltd., and TRG and Mr. Somma reached a settlement agreement on July 15, 2016 that included the dismissal of all actions, claims and counterclaims among the parties, the terms of which all parties agreed to keep confidential. The terms of the settlement did not have a material effect on the Company's results of operations, financial position or liquidity.

Restructuring of ACP Re Credit Agreement

As disclosed in the Company’s Current Report on Form 8-K filed on July 29, 2016, the Company, AII and NG Re Ltd. entered into a restatement agreement (the “Restatement Agreement”) to the ACP Re Credit Agreement described in the “Significant Transactions with ACP Re, Ltd.” subsection of Note 12. “Related Party Transactions” included elsewhere in this report. The following restated terms of the ACP Re Credit Agreement will become effective upon the approval of the Conservation Plan developed by the Commissioner of Insurance of the State of California for CNIC as successor by merger to all of the Tower Companies (the “Conservation Plan”) by the Superior Court of the State of California, which is supervising the Conservation Plan process:

The borrower will become ACP Re Holdings, LLC, a Delaware limited liability company owned by the Trust;
The Trust will cause ACP Re Holdings, LLC to maintain assets having a value greater than 115% of the value of the then outstanding loan balance, and if there is a shortfall, the Trust will make a contribution to ACP Re Holdings, LLC of assets having a market value of at least the shortfall (the “Maintenance Covenant”);
The amounts borrowed will be secured by equity interests, cash and cash equivalents, other investments held by ACP Re Holdings, LLC and proceeds of the foregoing in an amount equal to the requirements of the Maintenance Covenant;

55



The maturity date will change from September 15, 2021 to the twentieth anniversary of the date on which the restatement becomes effective;
Interest on the outstanding principal balance of $250,000 will change from a fixed annual rate of 7% (payable in cash, semi-annually in arrears) to a fixed annual rate of 3.7% (payable in cash, semi-annually in arrears), provided that up to 1.2% thereof may be paid in kind;
Commencing on the tenth anniversary of the date on which the restatement becomes effective, and for each year thereafter, two percent of the then outstanding principal balance of the loan (inclusive of any amounts previously paid in kind) will be due and payable;
At the Lenders’ discretion, ACP Re Holdings, LLC may repay the loan using cash or tradeable stock of an equivalent market value of any publicly traded company on the NYSE, NASDAQ or London stock exchange; and
A change of control of ACP Re Holdings, LLC of greater than 50% and an uncured breach of the Maintenance Covenant are included as events of default.

In addition, if the Conservation Plan is approved, the following agreements (all of which are described in the “Significant Transactions with ACP Re, Ltd.” subsection of Note 12. “Related Party Transactions” included elsewhere in this report) will be terminated: (a) the Stop-Loss Agreement, (b) the Retrocession Agreement, and (c) the CL Administrative Agreement. The hearing on the motion to approve the Conservation Plan is scheduled for September 13, 2016.


56



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. Amounts in the following discussion may not reconcile due to rounding differences.
 
Note on Forward-Looking Statements
 
This Form 10-Q contains certain forward-looking statements that are intended to be covered by the safe harbors created by The Private Securities Litigation Reform Act of 1995. When we use words such as “anticipate,” “intend,” “plan,” “believe,” “estimate,” “expect,” or similar expressions, we do so to identify forward-looking statements. Examples of forward-looking statements include the plans and objectives of management for future operations, including those relating to future growth of our business activities and availability of funds, and are based on current expectations that involve assumptions that are difficult or impossible to predict accurately and many of which are beyond our control. Actual results may differ materially from those expressed or implied in these statements as a result of significant risks and uncertainties, including, but not limited to, non-receipt of expected payments from insureds or reinsurers, changes in interest rates, a downgrade in the financial strength ratings of our insurance subsidiaries, the effect of the performance of financial markets on our investment portfolio, the amounts, timing and prices of any share repurchases made by us under our share repurchase program, development of claims and the effect on loss reserves, accuracy in projecting loss reserves, the cost and availability of reinsurance coverage, the effects of emerging claim and coverage issues, changes in the demand for our products, our degree of success in integrating acquired businesses, the effect of general economic conditions, state and federal legislation, regulations and regulatory investigations into industry practices, risks associated with conducting business outside the United States, the impact of Brexit, developments relating to existing agreements, disruptions to our business relationships with Maiden Holdings, Ltd., National General Holdings Corp., or ACP Re, Ltd., breaches in data security or other disruptions with our technology, heightened competition, changes in pricing environments, and changes in asset valuations. Additional information about these risks and uncertainties, as well as others that may cause actual results to differ materially from those projected, is contained in our filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2015, and our quarterly reports on Form 10-Q. The projections and statements in this report speak only as of the date of this report and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
 
Overview
 
We are a multinational specialty property and casualty insurer focused on generating consistent underwriting profits. We provide insurance coverage for small businesses and products with high volumes of insureds and loss profiles that we believe are predictable. We target lines of insurance that we believe generally are underserved by the market. We have grown by hiring teams of underwriters with expertise in our specialty lines, through acquisitions of companies and assets that, in each case, provide access to distribution networks and renewal rights to established books of specialty insurance business. We have operations in three business segments:
 
Small Commercial Business.  We provide workers’ compensation, commercial package and other commercial insurance lines produced by wholesale agents, retail agents and brokers in the United States.
Specialty Risk and Extended Warranty. We provide coverage for consumer and commercial goods and custom designed coverages, such as accidental damage plans and payment protection plans offered in connection with the sale of consumer and commercial goods, in the United States and Europe, and certain niche property, casualty and specialty liability risks in the United States and Europe, including general liability, employers’ liability and professional and medical liability.
Specialty Program. We write commercial insurance for narrowly defined classes of insureds, requiring an in-depth knowledge of the insured’s industry segment, through general and other wholesale agents.

We transact business primarily through our insurance subsidiaries, the majority of which are domiciled in the United States. We also transact business through insurance subsidiaries domiciled internationally, primarily in Bermuda and Europe. We are authorized to write business in all 50 states in the United States and in the European Union. Through our subsidiary, AmTrust at Lloyd's, we are licensed to underwrite business internationally in locations where Lloyd's is licensed. Our principal operating subsidiaries are rated "A"(Excellent) by A.M. Best Company ("A.M. Best").


57



For the three and six months ended June 30, 2016, our results of operations include activity of the entities we acquired subsequent to June 30, 2015, primarily:

N.V. Nationale Borg-Maatscappij and its affiliates (collectively, "Nationale Borg")
First Nationwide Title Agency and its subsidiaries (collectively, "First Nationwide")
Republic Underwriters Insurance Company, Republic-Vanguard Insurance Company, Southern Underwriters Insurance Company, Republic Fire & Casualty Insurance Company, Southern Insurance Company, Republic Diversified Services, Inc, Republic Lloyds, Republic Group No. Two Company, Southern County Mutual Insurance Company, Canyon State Auto Insurance Services, Inc., and Eagle General Agency, Inc. (collectively, "Republic ")
Genworth Financial Mortgage Insurance Limited and Genworth Financial Mortgage Services Limited (collectively, "Genworth")
ARI Insurance Company and ARI Casualty Company (collectively, "ARI")
Springfield Insurance Company, Springfield Insurance Company Limited, and Unified Grocers Insurance Services (collectively, "Springfield")
Heritage Indemnity Company, Warranty Solutions Management Corporation, Westlake Insurance Company (Bermuda), Ltd., Warranty Solutions Administrative Services, Inc., Heritage Mechanical Breakdown Corporation and WS Aftermarket Services Corporation (collectively, "Warranty Solutions")

In addition, on March 11, 2016, one of our subsidiary insurance companies entered into a loss portfolio transfer with Public Service Insurance Company, Paramount Insurance Company and Western Select Insurance Company. We will reinsure 100% of the existing obligations with respect to their business for accident years 2014 and 2015, including a loss portfolio transfer of 100% of the loss and LAE reserves as of the effective date. We received approximately $163.4 million of cash and recorded the obligation of approximately $163.4 million of loss reserves. During the three and six months ended June 30, 2016, we paid (recouped) losses of approximately $(1.1) million and $9.4 million, respectively. During the six months ended June 30, 2016, we did not record any gains or losses as a result of this transaction. Additionally, one of our subsidiaries entered into a renewal rights transaction, with the forenamed parties as well as Creative Intermediaries, Inc., Magna Carta Companies, Inc. and Public Service Mutual Holding Company, whereby we may reinsure their existing book of policies for their commercial and property insurance business. The acquisition price paid for the renewal rights transaction was approximately $1 million.

Insurance, particularly workers’ compensation, is generally affected by seasonality. The first quarter generally produces greater premiums than subsequent quarters. Nevertheless, the impact of seasonality on our Small Commercial Business and Specialty Program segments has not been significant. We believe that this is because we serve many small businesses in different geographic locations. We believe seasonality may be muted by our acquisition activity. Additionally, our Specialty Risk and Extended Warranty segment may be impacted by the seasonality of the automotive and consumer electronic markets.

 We evaluate our operations by monitoring key measures of growth and profitability, including return on equity and net combined ratio. Our return on annualized average equity was 21.1% and 14.3% for the three months ended June 30, 2016 and 2015, respectively, and 18.7% and 24.2% for the six months ended June 30, 2016 and 2015, respectively. Our overall financial objective is to produce a return on equity of 15.0% or more over the long term. In addition, we target a net combined ratio of 95.0% or lower over the long term, while seeking to maintain optimal operating leverage in our insurance subsidiaries commensurate with our A.M. Best rating objectives. Our net combined ratio was 91.7% and 90.5% for the three months ended June 30, 2016 and 2015, respectively, and 91.4% and 89.8% for the six months ended June 30, 2016 and 2015, respectively.

The following summary further describes our principal revenue and expense measures and key ratios that we use to evaluate our results of operations:
 
Gross Written Premium. Gross written premium represents estimated premiums from each insurance policy that we write, including as a servicing carrier for assigned risk plans, during a reporting period based on the effective date of the individual policy. Certain policies that we underwrite are subject to premium audit at that policy’s cancellation or expiration. The final actual gross premiums written may vary from the original estimate based on changes to the final rating parameters or classifications of the policy.
 
Net Written Premium. Net written premium is gross written premium less that portion of premium that we ceded to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on the contractual formula contained in the individual reinsurance agreements.
  
Net Earned Premium. Net earned premium is the earned portion of our net written premiums. We earn insurance premiums on a pro-rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are

58



classified as unearned premiums, which are earned in subsequent periods over the remaining term of the policy. Our workers’ compensation insurance and commercial package policies typically have a term of one year. Thus, for a one-year policy written on July 1, 2015 for an employer with a constant payroll during the term of the policy, we would earn half of the premiums in 2015 and the other half in 2016. We earn our specialty risk and extended warranty coverages over the estimated exposure time period. The terms vary depending on the risk. The coverages range in duration from one month to 120 months. Our U.S. warranty business has an average duration of 57 months, while our European warranty business has an average duration of 43 months and our European casualty business has an average duration of 12 months.

Service and Fee Income. We currently generate service and fee income from the following sources:
 
Product warranty registration and service — Our Specialty Risk and Extended Warranty business generates fee revenue for product warranty registration and claims handling services provided to unaffiliated third party retailers, manufacturers and dealerships. Additionally, we provide credit monitoring services for a fee.
Servicing carrier — We act as a servicing carrier for workers’ compensation assigned risk plans in multiple states. In addition, we also offer claims adjusting and loss control services for fees to unaffiliated third parties.
Management services — We provide services to insurance consumers, traditional insurers and insurance producers by offering flexible and cost effective alternatives to traditional insurance tools in the form of various risk retention groups and captive management companies, as well as management of workers’ compensation and commercial property programs. We also offer programs and alternative funding options for non-profit and public sector organizations for the management of their state unemployment insurance obligations.
Insurance fees — We recognize fee income associated with the issuance of workers’ compensation policies for installment fees, in jurisdictions where it is permitted and approved, and reinstatement fees, which are fees charged to reinstate a policy after it has been canceled for non-payment, in jurisdictions where it is permitted and approved. Additionally, we recognize broker commissions and policy management fees associated with general liability policies placed by one of our managing general agencies.
Broker services — We provide brokerage services to Maiden Holdings Ltd. ("Maiden") in connection with our reinsurance agreement for which we receive a fee.
Asset management services — We currently manage the investment portfolios of certain subsidiaries of Maiden, National General Holdings Corp. ("NGHC") and ACP Re, Ltd. ("ACP Re") for which we receive a management fee.
Information technology services — We provide information technology and printing and mailing services to NGHC and its affiliates for a fee.

Net Investment Income and Realized Gains and (Losses). We invest our statutory surplus funds and the funds supporting our insurance liabilities primarily in cash and cash equivalents, fixed maturity and equity securities. Our net investment income includes interest and dividends earned on our invested assets. We report net realized gains and losses on our investments separately from our net investment income. Net realized gains occur when we sell our investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment. We classify equity securities and our fixed maturity securities primarily as available-for-sale. We report net unrealized gains (losses) on those securities classified as available-for-sale separately within accumulated other comprehensive income on our balance sheet. Additionally, we have a small portfolio of equity securities classified as trading securities. We report unrealized gains (losses) on those securities classified as trading securities within realized gains (losses).

Loss and Loss Adjustment Expenses Incurred.   Loss and loss adjustment expenses (“LAE”) incurred represent our largest expense item and, for any given reporting period, include estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending and servicing claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and loss adjustment expenses related to estimates of future claim payments based on case-by-case valuations and statistical analysis. We seek to establish all reserves at the most likely ultimate exposure based on our historical claims experience. It is typical for our more serious bodily injury claims to take several years to settle and we revise our estimates as we receive additional information about the condition of injured employees and claimants and the costs of their medical treatment. Our ability to estimate loss and loss adjustment expenses accurately at the time of pricing our insurance policies is a critical factor in our profitability.


59



 Acquisition Costs and Other Underwriting Expenses.   Acquisition costs and other underwriting expenses consist of policy acquisition expenses, salaries and benefits and general and administrative expenses, net of ceding commissions. These items are described below:
 
Policy acquisition expenses comprise commissions directly attributable to those agents, wholesalers or brokers that produce premiums written on our behalf. In most instances, we pay commissions based on collected premium, which reduces our credit risk exposure associated with producers in case a policyholder does not pay a premium. We pay state and local taxes, licenses and fees, assessments and contributions to various state guaranty funds based on our premiums or losses in each state. Surcharges that we may be required to charge and collect from insureds in certain jurisdictions are recorded as accrued liabilities, rather than expense. These expenses are offset by ceding commissions received.
Salaries and benefits expenses are those salaries and benefits expenses for employees that are directly involved in the origination, issuance and maintenance of policies, claims adjustment and accounting for insurance transactions that are associated with successful acquisition of insurance contracts. We classify salaries and benefits associated with employees that are involved in fee generating activities as other expenses.
General and administrative expenses are comprised of other costs associated with our insurance activities, such as federal excise tax, postage, telephones and internet access charges, as well as legal and auditing fees and board and bureau charges.
Ceding commission on reinsurance transactions is a commission we receive from ceding gross written premium to third party reinsurers, and is netted against acquisition costs and other underwriting expenses. In connection with the Maiden Quota Share, which is our primary source of ceding commissions, the amount we receive is a blended rate based on a contractual formula contained in the individual reinsurance agreements, and the rate may not correlate specifically to the cost structure of the individual segments. The ceding commissions we receive cover a portion of our capitalized direct acquisition costs and a portion of other underwriting expenses. Ceding commissions received from reinsurance transactions that represent recovery of capitalized direct acquisition costs are recorded as a reduction of capitalized unamortized deferred acquisition costs and the net amount is charged to expense in proportion to net premium revenue recognized. Ceding commissions received from reinsurance transactions that represent the recovery of other underwriting expenses are recognized in the income statement over the insurance contract period in proportion to the insurance protection provided and classified as a reduction of acquisition costs and other underwriting expenses. Ceding commissions received, but not yet earned, that represent the recovery of other underwriting expenses are classified as a component of accrued expenses and other current liabilities. We allocate earned ceding commissions to our segments based on each segment’s proportionate share of total acquisition costs and other underwriting expenses recognized during the period.

Gain (loss) on Investment in Life Settlement Contracts.  The gain (loss) on investment in life settlement contracts includes the gain (loss) on acquisition of life settlement contracts, the gain (loss) realized upon a mortality event and the change in fair value of the investments in life settlements as evaluated at the end of each reporting period. We determine fair value based upon our estimate of the discounted cash flow related to policies (net of reserves for improvements in mortality, the possibility that the high net worth individuals represented in our portfolio may have access to better health care, the volatility inherent in determining the life expectancy of insureds with significant reported health impairments, the possibility that the issuer of the policy or a third party will contest the payment of the death benefit payable to us and the future expenses related to the administration of the portfolio), which incorporates current life expectancy assumptions, premium payments, credit exposure to the insurance companies that issued the life insurance policies and the rate of return that a buyer would require on the policies as no comparable market pricing is available. The gain (loss) realized upon a mortality event is the difference between the death benefit received and the recorded fair value of that particular policy. We allocate gain (loss) on investment in life settlement contracts to our segments based on gross written premium by segment.
 
Net Loss Ratio. The net loss ratio is a measure of the underwriting profitability of an insurance company's business. Expressed as a percentage, this is the ratio of net losses and LAE incurred to net premiums earned.
 
Net Expense Ratio. The net expense ratio is a measure of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of the sum of acquisition costs and other underwriting expenses to net premiums earned. As we allocate certain acquisition costs and other underwriting expenses based on premium volume to our segments, net loss ratio on a segment basis may be impacted period over period by a shift in the mix of net written premium.
 

60



Net Combined Ratio. The net combined ratio is a measure of an insurance company's overall underwriting profit. This is the sum of the net loss and net expense ratios. If the net combined ratio is at or above 100 percent, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient.
 
Net Premiums Earned less Expenses Included in Combined Ratio (Underwriting Income).  Underwriting income is a measure of an insurance company’s overall operating profitability before items such as investment income, interest expense and income taxes.
 
Return on Equity. We calculate return on equity by dividing net income by the average of shareholders’ equity.
 

Critical Accounting Policies
 
Our discussion and analysis of our results of operations, financial condition and liquidity are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities as of the date of the financial statements. As more information becomes known, these estimates and assumptions could change, which would have an impact on actual results that may differ materially from these estimates and judgments under different assumptions. We have not made any changes in estimates or judgments that have had a significant effect on the reported amounts as previously disclosed in our Annual Report on Form 10-K for the fiscal period ended December 31, 2015.

We implemented a two-for-one stock split on February 2, 2016. As a result, we retrospectively adjusted all share and per share amounts in the accompanying condensed consolidated financial statements and notes to the condensed consolidated financial statements to apply the effect of the stock split for all periods presented.




61



Results of Operations

Consolidated Results of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)
 
 
Three Months Ended June 30,

Six Months Ended June 30,
(Amounts in Thousands)
 
2016

2015

2016

2015
Gross written premium
 
$
2,073,112

 
$
1,678,389

 
$
4,006,186

 
$
3,409,525

 
 
 
 
 
 
 
 
 
Net written premium
 
$
1,268,436

 
$
1,008,721

 
$
2,489,115

 
$
2,051,910

Change in unearned premium
 
(86,684
)
 
(39,751
)
 
(233,081
)
 
(133,563
)
Net earned premium
 
1,181,752

 
968,970

 
2,256,034

 
1,918,347

Service and fee income (related parties - three months $21,608; $21,281 and six months $41,771; $38,685)
 
138,270

 
107,737

 
282,471

 
220,623

Net investment income
 
50,745

 
36,283

 
100,160

 
70,856

Net realized and unrealized gain (loss) on investments
 
15,099

 
(2,642
)
 
23,074

 
13,011

Total revenues
 
1,385,866

 
1,110,348

 
2,661,739

 
2,222,837

Loss and loss adjustment expense
 
784,393

 
638,475

 
1,499,466

 
1,251,758

Acquisition costs and other underwriting expenses (net of ceding commission - related party - three months $145,610; $129,222 and six months $284,001; $247,909)
 
298,803

 
238,710

 
563,437

 
470,386

Other
 
132,970

 
98,130

 
261,156

 
196,587

Total expenses
 
1,216,166

 
975,315

 
2,324,059

 
1,918,731

Income before other income (expense), income taxes and equity in earnings of unconsolidated subsidiaries
 
169,700

 
135,033

 
337,680

 
304,106

Other income (loss):
 
 

 
 

 
 

 
 

Interest expense (net of interest income - related party - three months $2,187; $2,211 and six months $4,375; $4,399)
 
(19,738
)
 
(9,646
)
 
(37,438
)
 
(19,901
)
Loss on extinguishment of debt
 

 

 

 
(4,714
)
Net gain on investment in life settlement contracts net of profit commission
 
12,676

 
3,096

 
23,406

 
14,469

Foreign currency loss
 
(26,435
)
 
(47,320
)
 
(62,108
)
 
(7,366
)
Acquisition gain on purchase
 
39,097

 

 
48,775

 

Total other (loss) income
 
5,600

 
(53,870
)
 
(27,365
)
 
(17,512
)
Income before income taxes and equity in earnings (loss) of unconsolidated subsidiaries
 
175,300

 
81,163

 
310,315

 
286,594

Provision for income taxes
 
27,918

 
4,472

 
55,644

 
51,284

Income before equity in earnings of unconsolidated subsidiaries
 
147,382

 
76,691

 
254,671

 
235,310

Equity in earnings of unconsolidated subsidiaries – related parties
 
4,802

 
4,042

 
10,578

 
9,571

Net income
 
152,184

 
80,733

 
265,249

 
244,881

Net income attributable to redeemable non-controlling interest and non-controlling interest of subsidiaries
 
(5,817
)
 
(1,346
)
 
(9,834
)
 
(5,429
)
Net income attributable to AmTrust Financial Services, Inc.
 
146,367

 
79,387

 
255,415

 
239,452

Dividends on preferred stock
 
(11,576
)
 
(8,639
)
 
(20,367
)
 
(14,008
)
Net income attributable to AmTrust common shareholders
 
$
134,791

 
$
70,748

 
$
235,048

 
$
225,444

 
 
 
 
 
 
 
 
 
Net realized gain (loss) on investments:
 
 

 
 

 
 

 
 

Total other-than-temporary impairment loss
 
$
(16,956
)
 
$
(1,466
)
 
$
(16,956
)
 
$
(2,482
)
Portion of loss recognized in other comprehensive income
 

 

 

 

Net impairment losses recognized in earnings
 
(16,956
)
 
(1,466
)
 
(16,956
)
 
(2,482
)
Net realized gain (loss) on available for sale securities
 
33,391

 
(856
)
 
38,663

 
15,813

Net unrealized gain on trading securities
 
(1,336
)
 
(320
)
 
1,367

 
(320
)
Net realized investment gain (loss)
 
$
15,099

 
$
(2,642
)
 
$
23,074

 
$
13,011

 
 
 
 
 
 
 
 
 
Key measures:
 
 

 
 

 
 

 
 

Net loss ratio
 
66.4
%
 
65.9
%
 
66.5
%
 
65.3
%
Net expense ratio
 
25.3
%
 
24.6
%
 
24.9
%
 
24.5
%
Net combined ratio
 
91.7
%
 
90.5
%
 
91.4
%
 
89.8
%


62




Consolidated Results of Operations for the Three Months Ended June 30, 2016 and 2015 (Unaudited)

Gross Written Premium. Gross written premium increased $394.7 million, or 23.5%, to $2,073.1 million from $1,678.4 million for the three months ended June 30, 2016 and 2015, respectively. The increase of $394.7 million was attributable to growth primarily in our Small Commercial Business and Specialty Risk and Extended Warranty segments. The majority of the increase in the Small Commercial Business segment was attributable to an increase in the number of workers' compensation policies issued and the acquisition of Republic, which produced $153 million of gross written premium during the three months ended June 30, 2016. The increase in our Specialty Risk and Extended Warranty segment was attributable to our acquisition of Warranty Solutions in September 2015, expansion of our existing programs in Europe, and growth within our Lloyd's platform.

Net Written Premium. Net written premium increased $259.7 million, or 25.7%, to $1,268.4 million from $1,008.7 million for the three months ended June 30, 2016 and 2015, respectively. The increase by segment was: Small Commercial Business - $84.2 million, Specialty Risk and Extended Warranty - $140.3 million and Specialty Program – $35.2 million. Net written premium increased for the three months ended June 30, 2016 compared to the same period in 2015 due to the increase in gross written premium, and an increase in the retention of gross written premium to 61.2% from 60.1% for the three months ended June 30, 2016 and 2015, respectively. The increase in retention resulted from a decrease, as compared to 2015, in business written that is reinsured under the Maiden Quota Share agreement.
 
Net Earned Premium. Net earned premium increased $212.8 million, or 22.0%, to $1,181.8 million from $969.0 million for the three months ended June 30, 2016 and 2015, respectively. The increase by segment was: Small Commercial Business — $89.9 million, Specialty Risk and Extended Warranty — $73.9 million and Specialty Program — $48.9 million. The increase in net earned premium resulted from an increase in gross written premium in the second quarter of 2016 compared to the second quarter of 2015.
  
Service and Fee Income. Service and fee income increased $30.5 million, or 28.3%, to $138.3 million from $107.7 million for the three months ended June 30, 2016 and 2015, respectively. Approximately $21 million of the increase is attributable to acquisitions, primarily Warranty Solutions. Fees for product warranty registration and claims handling services increased by approximately $8 million. Fees for services provided to Maiden, NGHC and ACP Re were flat period over period.
 
Net Investment Income. Net investment income increased $14.5 million, or 39.9%, to $50.7 million from $36.3 million for the three months ended June 30, 2016 and 2015, respectively. The increase resulted primarily from having a higher average value of fixed maturity securities during the three months ended June 30, 2016 compared to the same period in 2015, arising from our investment of certain proceeds from stock and debt offerings since the second half of 2015 and income from investment portfolios obtained in acquisitions.
 
Net Realized Gains/(Loss) on Investments. We had a net realized gain on investments of $15.1 million and a net realized loss on investments of $2.6 million for the three months ended June 30, 2016 and 2015, respectively. The increase related primarily to an increase in sales of securities in gain positions. Net realized gain/(loss) on investments were partially offset by a recognition of a loss of $0.3 million in 2016 compared to a gain of $1.4 million in 2015 on investments classified as trading securities. In addition, we had realized losses for other-than-temporary impairment of securities during the three months ended June 30, 2016 and 2015 of $16.6 million and $1.5 million, respectively.

 Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $145.9 million, or 22.9%, to $784.4 million for the three months ended June 30, 2016 from $638.5 million for the three months ended June 30, 2015. Our loss ratio for the three months ended June 30, 2016 and 2015 was 66.4% and 65.9%, respectively. The increase in the loss ratio resulted from higher selected ultimate losses for current and prior accident years as compared to originally selected ultimate losses in prior accident years primarily in our Small Commercial Business segment. This was the result, primarily, of revisions to our ultimate losses on certain casualty lines in our Small Commercial Business segment due to an increase in our carried incurred but not reported claim reserves. Although our loss ratio increased as compared to the second quarter of 2015, it decreased when compared to the last three quarters on a sequential basis when the loss ratio, on average, was 67.5%. The decrease as compared to the last three sequential quarters resulted primarily from a stabilizing of our ultimate losses on certain casualty lines in our European specialty risk and extended warranty business. We did not have any material increases or decreases as a result of prior year loss development.

Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $60.1 million, or 25.2%, to $298.8 million for the three months ended June 30, 2016 from $238.7 million for the three months ended June 30, 2015. Acquisition costs and other underwriting expenses in each period were reduced by ceding commission primarily earned through the Maiden Quota Share, through which we receive a ceding commission of 31% of premiums ceded for all business except retail commercial package business, and 34.375% for retail commercial package business. The ceding commission earned

63



during the three months ended June 30, 2016 and 2015 was $146.9 million and $129.2 million, respectively. Ceding commission increased period over period as a result of increases in gross written premium, partially offset by the retention of a larger percentage of our gross written premium. Our overall expense ratio increased period over period as a percentage of earned premium, and was 25.3% and 24.6% during the three months ended June 30, 2016 and 2015, respectively. The increase resulted primarily from higher policy acquisition costs based on premium distribution and other expenses.

Income Before Other Income (Expense), Income Taxes and Equity Earnings of Unconsolidated Subsidiaries. Income before other income (expense), income taxes and equity earnings of unconsolidated subsidiaries increased $34.7 million, or 25.7%, to $169.7 million for the three months ended June 30, 2016 from $135.0 million for the three months ended June 30, 2015. The $34.7 million increase resulted primarily from an increase in investment income and realized gains. Additionally, we benefited from an increase in earned premium, partially offset by a higher combined ratio.
 
Net Interest Expense. Net interest expense for the three months ended June 30, 2016 was $19.7 million, compared to $9.6 million for the same period in 2015. The majority of the increase related to additional interest expense incurred from the issuance of $285 million of subordinated notes in June and September 2015, and increased use of letters of credit.

 Net Gain (Loss) on Investment in Life Settlement Contracts Net of Profit Commission. We recognized gains on investment in life settlement contracts of $12.7 million for the three months ended June 30, 2016 compared to $3.1 million for the three months ended June 30, 2015. The increase in the recognized gain related to an increase in the fair value of the portfolio of policies, partially offset by increases in commission expense. Three policies matured during the three months ended June 30, 2016 and two policies matured during the three months ended June 30, 2015.

Foreign Currency Gain (Loss). The foreign currency transaction loss was $26.4 million during the three months ended June 30, 2016 compared to a transaction loss of $47.3 million during the same period in 2015. The loss during the three months ended June 30, 2016 resulted from the weakening of the British pound sterling compared to the Euro, which negatively impacted our European insurance subsidiaries that write Euro-denominated risks that are re-valued at the end of each reporting period.

Provision for Income Tax. Income tax provision for the three months ended June 30, 2016 was $27.9 million, which resulted in an effective tax rate of 15.9%, compared to an income tax benefit of $4.5 million, which resulted in an effective tax rate of 5.5% for the three months ended June 30, 2015. We did not have any benefit from utilization of equalization reserves of our Luxembourg reinsurers in either period. The overall increase in the effective tax rates in the three months ended June 30, 2016 compared to the three months ended June 30, 2015 resulted from a greater percentage of our taxable income generated in non-U.S. jurisdictions with lower tax rates and the release of certain valuation allowances on a deferred tax asset in the second quarter of 2015.

 Equity in Earnings of Unconsolidated Subsidiaries - Related Parties. Equity in earnings of unconsolidated subsidiaries - related parties was $4.8 million and $4.0 million for the three months ended June 30, 2016 and 2015, respectively. Our earnings from our equity investment was stable period over period.

Consolidated Results of Operations for the Six Months Ended June 30, 2016 and 2015 (Unaudited)

Gross Written Premium. Gross written premium increased $596.7 million, or 17.5%, to $4,006.2 million from $3,409.5 million for the six months ended June 30, 2016 and 2015, respectively. The increase of $596.7 million was attributable to growth in our Small Commercial Business and Specialty Risk and Extended Warranty segments. The majority of the increase in the Small Commercial Business segment was attributable to an increase in the number of workers' compensation policies issued and the acquisition of Republic. The increase in our Specialty Risk and Extended Warranty segment was attributable to our acquisition of Warranty Solutions in September 2015, expansion of our existing programs in Europe, and growth within our Lloyd's platform.

Net Written Premium. Net written premium increased $437.2 million, or 21.3%, to $2,489 million from $2,051.9 million for the six months ended June 30, 2016 and 2015, respectively. The increase by segment was: Small Commercial Business - $185.5 million, Specialty Risk and Extended Warranty - $190.4 million and Specialty Program – $61.3 million. Net written premium increased for the six months ended June 30, 2016 compared to the same period in 2015 due to the increase in gross written premium, and an increase in the retention of gross written premium to 62.1% from 60.2% for the six months ended June 30, 2016 and 2015, respectively. The increase in retention resulted from a decrease, as compared to 2015, in business written that is reinsured under the Maiden Quota Share agreement.
 
Net Earned Premium. Net earned premium increased $337.7 million, or 17.6%, to $2,256.0 million from $1,918.3 million for the six months ended June 30, 2016 and 2015, respectively. The increase by segment was: Small Commercial Business — $170.0 million, Specialty Risk and Extended Warranty — $66.6 million and Specialty Program — $101.0 million. The increase in net

64



earned premium resulted from an increase in gross written premium in the first six months of 2016 compared to the first six months of 2015.
  
Service and Fee Income. Service and fee income increased $61.8 million, or 28.0%, to $282 million from $220.6 million for the six months ended June 30, 2016 and 2015, respectively. Approximately $45 million of the increase is attributable to acquisitions, primarily Warranty Solutions. Fees for services provided to Maiden, NGHC and ACP Re increased by approximately $3 million and fees for product warranty registration and claims handling services increased by $14 million.
 
Net Investment Income. Net investment income increased $29.3 million, or 41.4%, to $100.2 million from $70.9 million for the six months ended June 30, 2016 and 2015, respectively. The increase resulted primarily from having a higher average value of fixed maturity securities during the six months ended June 30, 2016 compared to the same period in 2015, arising from our investment of certain proceeds from stock and debt offerings since the second half of 2015 and investment portfolios obtained through acquisitions.
 
Net Realized Gains/(Loss) on Investments. We had net realized gains on investments of $23.1 million and $13.0 million for the six months ended June 30, 2016 and 2015, respectively. The increase related primarily to an increase in sales of securities in gain positions. We had realized losses from other-than-temporary impairment of securities of $16.6 million and $2.5 million during the six months ended June 30, 2016 and 2015, respectively. Additionally, net realized gains included a recognition of a gain of $2.5 million in 2016 compared to a gain of $2.2 million in 2015 on investments classified as trading securities.

 Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $247.7 million, or 19.8%, to $1,499 million for the six months ended June 30, 2016 from $1,251.8 million for the six months ended June 30, 2015. Our loss ratio for the six months ended June 30, 2016 and 2015 was consistent period to period and was 66.5% and 65.3%, respectively. The increase in the loss ratio resulted from higher selected ultimate losses for current and prior accident years as compared to originally selected ultimate losses in prior accident years across all three segments. We did not have any material increases or decreases as a result of prior year loss development.

Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $93.1 million, or 19.8%, to $563.4 million for the six months ended June 30, 2016 from $470.4 million for the six months ended June 30, 2015. Acquisition costs and other underwriting expenses in each period were reduced by ceding commission primarily earned through the Maiden Quota Share, through which we receive a ceding commission of 31% of premiums ceded for all business except retail commercial package business, and 34.375% for retail commercial package business. The ceding commission earned during the six months ended June 30, 2016 and 2015 was $286.5 million and $247.9 million, respectively. Ceding commission increased period over period as a result of increases in gross written premium, partially offset by the retention of a larger percentage of our gross written premium. Our overall expense ratio increased period over period as a percentage of earned premium, and was 24.9% and 24.5% during the six months ended June 30, 2016 and 2015, respectively. The increase was primarily due to higher policy acquisition expenses in our Small Commercial Business segment and higher salary expense in our Specialty Risk and Extended Warranty segment.

Income Before Other Income (Expense), Income Taxes and Equity Earnings of Unconsolidated Subsidiaries. Income before other income (expense), income taxes and equity earnings of unconsolidated subsidiaries increased $33.6 million, or 11.0%, to $337.7 million for the six months ended June 30, 2016 from $304.1 million for the six months ended June 30, 2015. The $33.6 million increase resulted primarily from an increase in investment income and realized gains. Additionally, we benefited from an increase in earned premium, partially offset by a higher combined ratio.
 
Net Interest Expense. Net interest expense for the six months ended June 30, 2016 was $37.4 million, compared to $19.9 million for the same period in 2015. The majority of the increase related to additional interest expense incurred from the issuance of $285 million of subordinated notes in June and September 2015, which was approximately $10 million. Additionally, we incurred additional interest expense related to additional debt or assumed debt associated with the Republic acquisition, and an overall increase in use of letters of credit.

 Net Gain (Loss) on Investment in Life Settlement Contracts Net of Profit Commission. We recognized gains on investment in life settlement contracts of $23.4 million for the six months ended June 30, 2016 compared to $14.5 million for the six months ended June 30, 2015. The increase in the recognized gain related to an increase in the fair value of the portfolio of policies, partially offset by an increases in commission expense. Three policies matured during the six months ended June 30, 2016 and five policies matured during the six months ended June 30, 2015.

Foreign Currency Gain (Loss). The foreign currency transaction loss was $62.1 million during the six months ended June 30, 2016 compared to a transaction loss of $7.4 million during the same period in 2015, both of which resulted from fluctuations in

65



exchange rates related to internal reinsurance transactions between our European insurance companies and our Bermuda reinsurance company.

Provision for Income Tax. Income tax provision for the six months ended June 30, 2016 was $55.6 million, which resulted in an effective tax rate of 17.9%, compared to an income tax benefit of $51.3 million, which resulted in an effective tax rate of 17.9% for the six months ended June 30, 2015. We did not have any benefit from utilization of equalization reserves of our Luxembourg reinsurers in either period. The effective rates were consistent for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.

 Equity in Earnings of Unconsolidated Subsidiaries - Related Parties. Equity in earnings of unconsolidated subsidiaries - related parties was $10.6 million and $9.6 million for the six months ended June 30, 2016 and 2015, respectively. Our earnings from our equity investment was stable period over period.

Small Commercial Business Segment Results of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in Thousands)
 
2016
 
2015
 
2016
 
2015
Gross written premium
 
$
1,060,558

 
$
875,829

 
$
2,126,690

 
$
1,776,948

 
 
 
 
 
 
 
 
 
Net written premium
 
$
601,638

 
$
517,392

 
$
1,226,166

 
$
1,040,632

Change in unearned premium
 
(28,660
)
 
(34,333
)
 
(149,094
)
 
(133,582
)
Net earned premium
 
572,978

 
483,059

 
1,077,072

 
907,050

 
 
 
 
 
 
 
 
 
Loss and loss adjustment expense
 
(382,950
)
 
(314,344
)
 
(715,634
)
 
(588,690
)
Acquisition costs and other underwriting expenses
 
(150,014
)
 
(124,713
)
 
(280,442
)
 
(234,392
)
 
 
(532,964
)
 
(439,057
)
 
(996,076
)
 
(823,082
)
Underwriting income
 
$
40,014

 
$
44,002

 
$
80,996

 
$
83,968

 
 
 
 
 
 
 
 
 
Key measures:
 
 

 
 

 
 

 
 

Net loss ratio
 
66.8
%
 
65.1
%
 
66.4
%
 
64.9
%
Net expense ratio
 
26.2
%
 
25.8
%
 
26.1
%
 
25.8
%
Net combined ratio
 
93.0
%
 
90.9
%
 
92.5
%
 
90.7
%
 
Small Commercial Business Segment Results of Operations for the Three Months Ended June 30, 2016 and 2015 (Unaudited)

Gross Written Premium.  Gross written premium increased $184.7 million, or 21.1%, to $1,060.6 million for the three months ended June 30, 2016 from $875.8 million for the three months ended June 30, 2015. The increase was attributable to an increase in the number of workers' compensation policies issued and the continued growth in California and New York. The acquisition of Republic contributed approximately $102 million of incremental gross written premium, and the acquisitions of ARI and Springfield contributed an additional $13 million of gross written premium for the three months ended June 30, 2016.
 
Net Written Premium. Net written premium increased $84.2 million, or 16.3%, to $601.6 million for the three months ended June 30, 2016 from $517.4 million for the three months ended June 30, 2015. The increase resulted from an increase in gross written premium for the three months ended June 30, 2016 compared to the same period in 2015, partially offset by a decrease in the retention of gross written premium during 2016 compared to 2015. Our retention of gross written premium for the segment was 56.7% and 59.1% for the three months ended June 30, 2016 and 2015, respectively.
 
Net Earned Premium. Net earned premium increased $89.9 million, or 18.6%, to $573.0 million for the three months ended June 30, 2016 from $483.1 million for the three months ended June 30, 2015. As premiums written are earned ratably over an annual period, the increase in net earned premium resulted from higher net written premium for the twelve months ended June 30, 2016 compared to the same period in 2015.


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Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $68.6 million, or 21.8%, to $383.0 million for the three months ended June 30, 2016 from $314.3 million for the three months ended June 30, 2015. Our loss ratio for the segment for the three months ended June 30, 2016 increased to 66.8% compared to 65.1% for the three months ended June 30, 2015. The increase in the loss ratio was the result, primarily, of higher current accident year selected ultimate losses as compared to selected ultimate losses in the prior period, which related to growth in our non-workers' compensation business, to which we assign a higher ultimate loss selection. We did not have any material increases or decreases as a result of prior year loss development.

Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $25.3 million, or 20.3%, to $150.0 million for the three months ended June 30, 2016 from $124.7 million for the three months ended June 30, 2015. Acquisition costs and other underwriting expenses were reduced by ceding commission of $73.8 million and $67.2 million earned during the three months ended June 30, 2016 and 2015, respectively. The ceding commission increased period over period as a result of an increase in net earned premium, as the segment received a consistent allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio was 26.2% and 25.8% for the three months ended June 30, 2016 and 2015, respectively. The increase was due to higher policy acquisition costs resulting from an increase in commercial package policy issuances.

Net Earned Premiums less Expense Included in Combined Ratio (Underwriting Income). Net premiums earned less expenses included in combined ratio decreased $4.0 million, or 9.1%, to $40.0 million for the three months ended June 30, 2016 from $44.0 million for the three months ended June 30, 2015. The decrease resulted primarily from an increase in the combined ratio partially offset by a higher earned premium during the three months ended June 30, 2016 compared to the three months ended June 30, 2015.

Small Commercial Business Segment Results of Operations for the Six Months Ended June 30, 2016 and 2015 (Unaudited)

Gross Written Premium.  Gross written premium increased $349.7 million, or 19.7%, to $2,126.7 million for the six months ended June 30, 2016 from $1,776.9 million for the six months ended June 30, 2015. The increase was attributable to an increase in the number of workers' compensation policies issued and the continued growth in California, New York and Florida. The acquisition of Republic contributed approximately $102 million of incremental gross written premium, and the acquisitions of ARI and Springfield contributed an additional $30 million of gross written premium for the six months ended June 30, 2016.
 
Net Written Premium. Net written premium increased $185.5 million, or 17.8%, to $1,226.2 million for the six months ended June 30, 2016 from $1,040.6 million for the six months ended June 30, 2015. The increase resulted from an increase in gross written premium for the six months ended June 30, 2016 compared to the same period in 2015, partially offset by a decrease in the retention of gross written premium during 2016 compared to 2015. Our retention of gross written premium for the segment was 57.7% and 58.6% for the six months ended June 30, 2016 and 2015, respectively.
 
Net Earned Premium. Net earned premium increased $170.0 million, or 18.7%, to $1,077.1 million for the six months ended June 30, 2016 from $907.1 million for the six months ended June 30, 2015. As premiums written are earned ratably over an annual period, the increase in net earned premium resulted from higher net written premium for the twelve months ended June 30, 2016 compared to the same period in 2015.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $126.9 million, or 21.6%, to $715.6 million for the six months ended June 30, 2016 from $588.7 million for the six months ended June 30, 2015. Our loss ratio for the segment for the six months ended June 30, 2016 increased to 66.4% compared to 64.9% for the six months ended June 30, 2015. The increase in the loss ratio was the result, primarily, of higher current accident year selected ultimate losses as compared to selected ultimate losses in the prior period, which related to growth in our non-workers' compensation business, to which we assign a higher ultimate loss selection. We did not have any material increases or decreases as a result of prior year loss development.

Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $46.1 million, or 19.7%, to $280.4 million for the six months ended June 30, 2016 from $234.4 million for the six months ended June 30, 2015. Acquisition costs and other underwriting expenses were reduced by ceding commission of $142.6 million and $124.3 million earned during the six months ended June 30, 2016 and 2015, respectively. The ceding commission increased period over period as a result of an increase in net earned premium, as the segment received a consistent allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio was 26.1% and 25.8% for the six months ended June 30, 2016 and 2015, respectively, and increased primarily from higher policy acquisition costs resulting from an increase in commercial package policy issuances.

Net Earned Premiums less Expense Included in Combined Ratio (Underwriting Income). Net premiums earned less expenses included in combined ratio decreased $3.0 million, or 3.5%, to $81.0 million for the six months ended June 30, 2016 from $84.0

67



million for the six months ended June 30, 2015. The decrease resulted primarily from an increase in the combined ratio, partially offset by an increase to earned premium during the six months ended June 30, 2016 compared to the six months ended June 30, 2015.


68



Specialty Risk and Extended Warranty Segment Results of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in Thousands)
 
2016
 
2015
 
2016
 
2015
Gross written premium
 
$
651,561

 
$
479,863

 
$
1,181,007

 
$
950,733

 
 
 
 
 
 
 
 
 
Net written premium
 
$
447,061

 
$
306,784

 
$
784,894

 
$
594,473

Change in unearned premium
 
(89,177
)
 
(22,816
)
 
(105,169
)
 
18,626

Net earned premium
 
357,884

 
283,968

 
679,725

 
613,099

 
 
 
 
 
 
 
 
 
Loss and loss adjustment expense
 
(231,328
)
 
(185,345
)
 
(442,264
)
 
(393,985
)
Acquisition costs and other underwriting expenses
 
(78,842
)
 
(57,309
)
 
(148,183
)
 
(127,574
)
 
 
(310,170
)
 
(242,654
)
 
(590,447
)
 
(521,559
)
Underwriting income
 
$
47,714

 
$
41,314

 
$
89,278

 
$
91,540

 
 
 
 
 
 
 
 
 
Key measures:
 
 

 
 

 
 

 
 

Net loss ratio
 
64.6
%
 
65.3
%
 
65.1
%
 
64.3
%
Net expense ratio
 
22.1
%
 
20.2
%
 
21.8
%
 
20.8
%
Net combined ratio
 
86.7
%
 
85.5
%
 
86.9
%
 
85.1
%

Specialty Risk and Extended Warranty Segment Results of Operations for the Three Months Ended June 30, 2016 and 2015 (Unaudited)

Gross Written Premium. Gross written premium increased $171.7 million, or 35.8%, to $651.6 million for the three months ended June 30, 2016 from $479.9 million for the three months ended June 30, 2015. We experienced growth both domestically and in our European business during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. The increase in our U.S. business was the result of organic growth and expansion of existing business along with the acquisition of Warranty Solutions, which contributed $22 million of gross written premium. Additionally, in our European business, we grew our core businesses and our Lloyd's business during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. Fluctuations in European currencies reduced our gross written premiums during the second quarter of 2016 by approximately $24 million.
 
Net Written Premium. Net written premium increased $140.3 million, or 45.7%, to $447.1 million for the three months ended June 30, 2016 from $306.8 million for the three months ended June 30, 2015. The increase resulted from an increase of gross written premium for the three months ended June 30, 2016 compared to the same period in 2015 and an increase in our retention of gross written premium period over period. Our overall retention of gross written premium for the segment was 68.6% and 63.9% for the three months ended June 30, 2016 and 2015, respectively. The increase in the retention of gross written premium related to a decrease, as compared to 2015, in business that is reinsured under the Maiden Quota Share agreement.
 
Net Earned Premium. Net earned premium increased $73.9 million, or 26.0%, to $357.9 million for the three months ended June 30, 2016 from $284.0 million for the three months ended June 30, 2015. As net written premium is earned ratably over the term of a policy, the increase in net earned premium resulted from an increase in net written premium, partially offset by the writing of a higher mix of longer term business during the twelve months ended June 30, 2016 compared to the same period in 2015.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $46.0 million, or 24.8%, to $231.3 million for the three months ended June 30, 2016 from $185.3 million for the three months ended June 30, 2015. Our loss ratio for the segment for the three months ended June 30, 2016 decreased to 64.6% compared to 65.3% for the same period in 2015. The decrease in the loss ratio resulted from slightly lower selected ultimate losses for current accident years as compared to originally selected ultimate losses in prior accident years. The decrease resulted primarily from a stabilizing of our ultimate losses on certain casualty lines in our European specialty risk and extended warranty business. We did not have any material increases or decreases as a result of prior year loss development.


69



Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $21.5 million, or 37.6%, to $78.8 million for the three months ended June 30, 2016 from $57.3 million for the three months ended June 30, 2015. Acquisition costs and other underwriting expenses were reduced by ceding commission of $38.8 million and $31.8 million earned during the three months ended June 30, 2016 and 2015, respectively. The ceding commission was consistent period over period as the segment received a consistent allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio was 22.1% for the three months ended June 30, 2016 from 20.2% for the three months ended June 30, 2015. The increase in the expense ratio resulted from increases in salary expense.
 
Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting Income). Net earned premiums less expenses included in combined ratio increased $6.4 million, or 15.5%, to $47.7 million for the three months ended June 30, 2016 from $41.3 million for the three months ended June 30, 2015. The increase was attributable to an increase in the segment's earned premium partially offset by an increase in the segment’s combined ratio during the three months ended June 30, 2016 compared to the three months ended June 30, 2015.

Specialty Risk and Extended Warranty Segment Results of Operations for the Six Months Ended June 30, 2016 and 2015 (Unaudited)

Gross Written Premium. Gross written premium increased $230.3 million, or 24.2%, to $1,181.0 million for the six months ended June 30, 2016 from $950.7 million for the six months ended June 30, 2015. We experienced growth both domestically and in our European business during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. In our European business we grew our core businesses, which includes warranty and general liability products. Additionally, we grew our Lloyd's business during the first half of 2016 compared to the same period in 2015. Fluctuations in European currencies reduced our gross written premiums during the first half of 2016 by approximately $38 million. Our U.S. business increased during the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily based on growth in existing businesses and the acquisition of Warranty Solutions.
 
Net Written Premium. Net written premium increased $190.4 million, or 32.0%, to $784.9 million for the six months ended June 30, 2016 from $594.5 million for the six months ended June 30, 2015 as a result of an increase of gross written premium for the six months ended June 30, 2016 compared to the same period in 2015, and an increase in our retention of gross written premium period over period. Our overall retention of gross written premium for the segment was 66.5% and 62.5% for the six months ended June 30, 2016 and 2015, respectively. The increase in the retention of gross written premium related to a decrease, as compared to 2015, in business that is reinsured under the Maiden Quota Share agreement.
 
Net Earned Premium. Net earned premium increased $66.6 million, or 10.9%, to $679.7 million for the six months ended June 30, 2016 from $613.1 million for the six months ended June 30, 2015. Net earned premium increased due to an increase in net written premium, which was partially offset by the writing of a higher mix of longer term business during the twelve months ended June 30, 2016 compared to the same period in 2015, which is earned ratably over the term of a policy.

Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $48.3 million, or 12.3%, to $442.3 million for the six months ended June 30, 2016 from $394.0 million for the six months ended June 30, 2015. Our loss ratio for the segment for the six months ended June 30, 2016 increased to 65.1% compared to 64.3% for the same period in 2015. The increase in the loss ratio resulted from having a higher percentage of earned premium in lines of business with higher ultimate loss selections during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. We did not have any material increases or decreases as a result of prior year loss development.

Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $20.6 million, or 16.2%, to $148.2 million for the six months ended June 30, 2016 from $127.6 million for the six months ended June 30, 2015. Acquisition costs and other underwriting expenses were reduced by ceding commission of $75.3 million and $67.7 million earned during the six months ended June 30, 2016 and 2015, respectively. The ceding commission was consistent period over period as the segment received a consistent allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio was 21.8% for the six months ended June 30, 2016 from 20.8% for the six months ended June 30, 2015. The increase in the expense ratio resulted from increases in salary expense.
 
Net Earned Premiums less Expenses Included in Combined Ratio (Underwriting Income). Net earned premiums less expenses included in combined ratio decreased $2.3 million, or 2.5%, to $89.3 million for the six months ended June 30, 2016 from $91.5 million for the six months ended June 30, 2015. The decrease was attributable to an increase in the segment's combined ratio, partially offset by an increase in the segment’s earned premium during the six months ended June 30, 2016 compared to the six months ended June 30, 2015.


70



Specialty Program Segment Results of Operations for The Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in Thousands)
 
2016
 
2015
 
2016

2015
Gross written premium
 
$
360,993

 
$
322,697

 
$
698,489

 
$
681,844

 
 
 
 
 
 
 
 
 
Net written premium
 
$
219,737

 
$
184,545

 
$
478,055

 
$
416,805

Change in unearned premium
 
31,153

 
17,398

 
21,182

 
(18,607
)
Net earned premium
 
250,890

 
201,943

 
499,237

 
398,198

 
 
 
 
 
 
 
 
 
Loss and loss adjustment expense
 
(170,115
)
 
(138,786
)
 
(341,568
)
 
(269,083
)
Acquisition costs and other underwriting expenses
 
(69,947
)
 
(56,688
)
 
(134,812
)
 
(108,420
)
 
 
(240,062
)
 
(195,474
)
 
(476,380
)
 
(377,503
)
Underwriting income
 
$
10,828

 
$
6,469

 
$
22,857

 
$
20,695

 
 
 
 
 
 
 
 
 
Key measures:
 
 

 
 

 
 

 
 

Net loss ratio
 
67.8
%
 
68.7
%
 
68.4
%
 
67.6
%
Net expense ratio
 
27.9
%
 
28.1
%
 
27.0
%
 
27.2
%
Net combined ratio
 
95.7
%
 
96.8
%
 
95.4
%
 
94.8
%

Specialty Program Segment Results of Operations for the Three Months Ended June 30, 2016 and 2015 (Unaudited)

Gross Written Premium. Gross written premium increased $38.3 million, or 11.9%, to $361.0 million for the three months ended June 30, 2016 from $322.7 million for the same period in 2015. The majority of the increase resulted from the acquisition of Republic, which was $52 million, and an increase in new commercial package programs during the three months ended June 30, 2016. The increase was partially offset by the termination or curtailment of certain workers' compensation programs and commercial package programs.

Net Written Premium. Net written premium increased $35.2 million, or 19.1%, to $219.7 million for the three months ended June 30, 2016 from $184.5 million for the same period in 2015 as a result of an increase in gross written premium for the three months ended June 30, 2016 compared to the three months ended June 30, 2015, and the cession of a smaller percentage of gross written premium to reinsurers during 2016 compared to 2015. Our overall retention of gross written premium for the segment was 60.9% and 57.2% for the three months ended June 30, 2016 and 2015, respectively. The increase in the retention of gross written premium related to an increase in business written that is not covered under the Maiden Quota Share.

Net Earned Premium. Net earned premium increased $48.9 million, or 24.2%, to $250.9 million for the three months ended June 30, 2016 from $201.9 million for the same period in 2015. As premiums written are earned ratably over an annual period, the increase in net premium earned resulted from higher net written premium for the annual period prior to the twelve months ended June 30, 2016 compared to the same period in 2015.
 
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $31.3 million, or 22.6%, to $170.1 million for the three months ended June 30, 2016, compared to $138.8 million for the same period in 2015. Our loss ratio for the segment decreased to 67.8% compared to 68.7% for the three months ended June 30, 2016 and 2015, respectively. The decrease in the loss ratio resulted from lower selected ultimate losses for current and prior accident years as compared to originally selected ultimate losses in prior accident years. This was the result, primarily, of revisions to our selected ultimate losses on certain casualty lines due to a decrease in our incurred but not reported claim reserves. We did not have any material increases or decreases as a result of prior year loss development.
 
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $13.3 million, or 23.4%, to $69.9 million for the three months ended June 30, 2016 from $56.7 million for the same period in 2015. Acquisition costs and other underwriting expenses were reduced by ceding commission of $34.3 million and $30.7 million earned during the three months ended June 30, 2016 and 2015, respectively. The ceding commission increased period over period as a result of an increase in net earned premium, as the segment received its proportionate share of our overall policy acquisition expense. The expense ratio was 27.9% for the three months ended June 30, 2016 compared to 28.1% for the three months ended

71



June 30, 2015. The decrease in the expense ratio during the three months ended June 30, 2016 related to the issuance of a higher percentage of workers' compensation policies, which have lower policy acquisition costs than other types of business in this segment.
 
Net Earned Premiums less Expense Included in Combined Ratio (Underwriting Income). Net earned premiums less expenses included in combined ratio increased $4.4 million, or 67%, to $10.8 million for the three months ended June 30, 2016 from $6.5 million for the three months ended June 30, 2015. The increase resulted from higher earned premium and a decrease in the combined ratio in 2016 compared to 2015.

Specialty Program Segment Results of Operations for the Six Months Ended June 30, 2016 and 2015 (Unaudited)

Gross Written Premium. Gross written premium increased $16.6 million, or 2.4%, to $698.5 million for the six months ended June 30, 2016 from $681.8 million for the same period in 2015. Gross written premium increased modestly period over period as increases in gross written premium from the acquisition of Republic, which was $52 million, were partially offset by the termination or curtailment of certain commercial package programs. Additionally, during the six months ended June 30, 2015, we wrote one large policy for approximately $16 million that had an 18-month policy term, which if it is renewed, will not be renewed until the third quarter of 2016.

Net Written Premium. Net written premium increased $61.3 million, or 14.7%, to $478.1 million for the six months ended June 30, 2016 from $416.8 million for the same period in 2015. The increase in net written premium resulted from the cession of a smaller percentage of gross written premium to reinsurers during 2016 compared to 2015, and an increase in gross written premium for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. Our overall retention of gross written premium for the segment was 68.4% and 61.1% for the six months ended June 30, 2016 and 2015, respectively. The increase in the retention of gross written premium related to an increase in business written that is not covered under the Maiden Quota Share.

Net Earned Premium. Net earned premium increased $101.0 million, or 25.4%, to $499.2 million for the six months ended June 30, 2016 from $398.2 million for the same period in 2015. As premiums written are earned ratably over an annual period, the increase in net premium earned resulted from higher net written premium for the annual period prior to the twelve months ended June 30, 2016 compared to the same period in 2015.
 
Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses increased $72.5 million, or 26.9%, to $341.6 million for the six months ended June 30, 2016, compared to $269.1 million for the same period in 2015. Our loss ratio for the segment increased to 68.4% compared to 67.6% for the six months ended June 30, 2016 and 2015, respectively. The increase in the loss ratio resulted from higher selected ultimate losses for current and prior accident years as compared to originally selected ultimate losses in prior accident years. This was the result, primarily, of revisions to our selected ultimate losses on certain casualty lines due to an increase in our incurred but not reported claim reserves. We did not have any material increases or decreases as a result of prior year loss development.
 
Acquisition Costs and Other Underwriting Expenses. Acquisition costs and other underwriting expenses increased $26.4 million, or 24.3%, to $134.8 million for the six months ended June 30, 2016 from $108.4 million for the same period in 2015. Acquisition costs and other underwriting expenses were reduced by ceding commission of $68.5 million and $57.6 million earned during the six months ended June 30, 2016 and 2015, respectively. The ceding commission increased period over period as a result of an increase in net earned premium, as the segment received a larger allocation of ceding commission for its proportionate share of our overall policy acquisition expense. The expense ratio was 27.0% for the six months ended June 30, 2016 compared to 27.2% for the six months ended June 30, 2015. The decrease in the expense ratio during the three months ended June 30, 2016 related to the issuance of a higher percentage of workers' compensation policies, which have lower policy acquisition costs than other types of business in this segment.
 
Net Earned Premiums less Expense Included in Combined Ratio (Underwriting Income). Net earned premiums less expenses included in combined ratio increased $2.2 million, or 10.4%, to $22.9 million for the six months ended June 30, 2016 from $20.7 million for the six months ended June 30, 2015 due to an increase in earned premium, partially offset by an increase in the combined ratio in 2016 compared to 2015.







72





Liquidity and Capital Resources
 
Our principal sources of operating funds are premiums, service and fee income, investment income and proceeds from sales and maturities of investments. Our primary uses of operating funds include payments of claims and operating expenses. Currently, we pay claims using cash flow from operations and invest our excess cash primarily in fixed maturity and equity securities. We forecast claim payments based on our historical trends. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on short-term and long-term bases. Cash payments for claims were approximately $1,216 million and $874 million in the six months ended June 30, 2016 and 2015, respectively. We expect that projected cash flow from operations will provide us sufficient liquidity for at least twelve months to fund our anticipated growth, by providing capital to increase the surplus of our insurance subsidiaries, as well as for the payment of claims and operating expenses, payment of interest and principal on our debt facilities, payment of any cash in settlement of convertible senior notes submitted by holders for conversion, and other holding company expenses. We anticipate net income from operations will create sufficient additional surplus at our insurance subsidiaries, which will fund our growth. However, if our growth attributable to potential acquisitions, internally generated growth or a combination of these, exceeds our projections, we may have to raise additional capital sooner to support our growth and manage our debt profile. As a result, we may from time to time raise capital from the issuance of equity, debt, equity-related debt or other capital securities, or seek to redeem, repurchase or exchange for other securities, prior to maturity, some or all of our outstanding debt in the open market, as circumstances allow. If we cannot obtain adequate capital or refinance all or a portion of our debt on favorable terms or at all, we may be unable to support future growth or operating requirements and, as a result, our business, financial condition and results of operation could be adversely affected.

The following table is summary of our statement of cash flows: 
 
 
Six Months Ended June 30,
(Amounts in Thousands)
 
2016
 
2015
Cash and cash equivalents provided by (used in):
 
 

 
 

Operating activities
 
$
618,762

 
$
166,629

Investing activities
 
(873,698
)
 
(715,062
)
Financing activities
 
353,113

 
494,014

  
Net cash provided by operating activities for the six months ended June 30, 2016 increased compared to cash provided by operating activities in the six months ended June 30, 2015. The increase in cash provided from operations resulted primarily from an increase in reinsurance premium payable, loss and loss expense reserves and unearned premiums in 2016 compared to 2015.

Net cash used in investing activities was approximately $873.7 million during the six months ended June 30, 2016 and consisted primarily of approximately $452 million for the net purchase of fixed maturity securities, equity securities and short-term investments, approximately $211 million for an increase in restricted cash, approximately $119 million for acquisitions, and approximately $66 million for capital expenditures. Net cash used in investing activities was $715 million for the six months ended June 30, 2015 and consisted primarily of approximately $569 million for the net purchase of fixed maturity securities, equity securities, and short-term investments, approximately $63 million for restricted cash, approximately $121 million for acquisitions and approximately $44 million for capital expenditures, partially offset by the net proceeds of approximately $81 million received from the maturity of life settlement contracts.

Net cash provided by financing activities was approximately $353 million for the six months ended June 30, 2016 compared to approximately $494 million net cash provided by financing activities during the six months ended June 30, 2015. In 2016, we issued preferred stock for approximately $139 million, entered into secured loans of approximately $39 million and entered into repurchase transactions of approximately $367 million, which was partially offset by common and preferred stock dividends paid of approximately $73 million, and approximately $104 million to repurchase shares of our stock. In 2015, we issued preferred stock for approximately $177 million, common stock for approximately $172 million, issued $150 million in subordinated notes, entered into a repurchase agreements for approximately $49 million and utilized approximately $65 million of our revolving credit facility, which was partially offset by common and preferred stock dividends paid of approximately $54 million, and payment of approximately $54 million to settle conversions of our 2021 Notes.

73



 
Other Material Changes in Financial Position

(Amounts in thousands)
 
June 30, 2016
 
December 31, 2015
Selected Assets:
 
 
 
 
Fixed maturities, available-for-sale
 
$
6,838,968

 
$
5,433,797

Premium receivable, net
 
2,562,165

 
2,115,653

Reinsurance recoverable
 
3,856,087

 
3,008,670

 
 
 
 
 
Selected Liabilities:
 
 
 
 
Loss and loss expense reserve
 
9,097,408

 
7,208,367

Unearned premium
 
4,819,255

 
4,014,728

Debt
 
1,229,599

 
989,356


The increase in fixed maturities, available-for-sale, from December 31, 2015 to June 30, 2016 was primarily attributable to the acquisitions and utilization of cash from our preferred shared offering during the six months ended June 30, 2016. The increase in premium receivable, net related to higher premium writings and the acquisition of Republic. The majority of the increase in reinsurance recoverable related to the acquisition of Republic. The increase in loss and loss expense reserve and unearned premium related to an increase in premium writings and acquisitions. The increase in debt related primarily to the acquisition of Republic.


Common Stock
                                                                                                                                                                                                                                                                                                                                                                                                                                               
The Company implemented a two-for-one stock split on February 2, 2016.

Preferred Stock
                                                                                                                                                                                                                                                                                                                                                                                                                                               
We have outstanding five separate series (Series A through E) of non-cumulative preferred stock. Four of these series (Series B, C, D and E) were issued in offerings using depositary shares, each representing a 1/40th interest in a share of the particular series of preferred stock. Dividends on the Series A Preferred Stock and the Series B, C, D and E Preferred Stock represented by depositary shares are payable on the liquidation preference amount, on a non-cumulative basis, when, as and if declared by our Board of Directors, quarterly in arrears, on March 15, June 15, September 15, and December 15 of each year.

 

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A summary description of the terms of these series of preferred stock is presented in the table below:
Series
 
Dividend rate per year %
 
Shares of Preferred Stock issued
 
Depositary shares issued
 
Liquidation preference amount per share of Preferred Stock $
 
Net proceeds ($ in thousands)
 
Dividend paid during the six months ended June 30, 2016 ($ in thousands)
A
 
6.75
 
4,600,000
 
N/A
 
$
25

 
$
111,130

 
$
1,941

B
 
7.25
 
105,000
 
4,200,000
 
1,000

 
101,702

 
1,903

C
 
7.625
 
80,000
 
3,200,000
 
1,000

 
77,480

 
1,525

D
 
7.50
 
182,500
 
7,300,000
 
1,000

 
176,529

 
3,422

E
 
7.75
 
143,750
 
5,750,000
 
1,000

 
139,042

 
2,785


For a detailed description of our Series A Preferred Stock and Series B, C and D Preferred Stock represented by depositary shares, refer to Note 20. “Stockholder’s Equity” in Item 8. “Financial Statements and Supplementary Data” in our 2015 Form 10-K. For a detailed description related to our Series E Preferred Stock represented by depositary shares, refer to Note 15. “Stockholder’s Equity and Accumulated Other Comprehensive Income (Loss)” to the accompanying financial statements included elsewhere in this report.

Credit Facilities
 
$350 million credit facility

Our five-year, $350 million credit facility is a revolving credit facility with a letter of credit sublimit of $175 million and an expansion feature of not more than an additional $150 million. As of June 30, 2016, we had outstanding borrowings of $130 million and outstanding letters of credit in place under this Credit Agreement of $120.1 million, which reduced the total aggregate availability under the facility to $99.9 million and the availability for letters of credit to $54.9 million.

Borrowings under this credit facility bear interest at either the Alternate Base Rate or the LIBO rate. Borrowings bearing interest at a rate determined by reference to the Alternate Base Rate will bear interest at (x) the greatest of (a) the administrative agent’s prime rate, (b) the federal funds effective rate plus 0.5% or (c) the adjusted LIBO rate for a one-month interest period on such day plus 1.0%, plus (y) a margin ranging from 0.125% to 0.625%, adjusted on the basis of our consolidated leverage ratio. Eurodollar borrowings will bear interest at the adjusted LIBO rate for the interest period in effect plus a margin ranging from 1.125% to 1.625%, adjusted on the basis of our consolidated leverage ratio.

Fees payable by us under this credit facility include a letter of credit participation fee (equal to the margin applicable to Eurodollar borrowings), a letter of credit fronting fee with respect to each letter of credit (0.125%) and a commitment fee on the available commitments of the lenders (a range based on our consolidated leverage ratio, which was greater than or equal to 25% but less than 30%, resulting in a commitment fee rate of 0.20%).

Interest expense, including amortization of the deferred origination costs and fees associated with the letters of credit, was approximately $2.3 million and $1.5 million for six months ended June 30, 2016 and 2015, respectively.

Funds at Lloyd's facility

We use this £300 million (or $399 million) letter of credit facility to support our capacity at Lloyd’s as a member and/or reinsurer of Syndicates 2526, 1206 and 44 for the 2016 underwriting year of account, as well as prior open years of account. The facility is 35% secured by a pledge of a collateral account.

Fees payable under this letter of credit facility include a letter of credit issuance fee payable on the secured portion of the letters of credit at the rate of 0.50% and on the unsecured portion of the letters of credit determined based on AII's then-current financial strength rating issued by A.M. Best. As of June 30, 2016, the applicable letter of credit fee rate on the unsecured portion was 1.15% based on AII's A.M. Best financial strength rating of “A”. We also pay a commitment fee of 0.35% per year on the aggregate unutilized and uncanceled amount of the facility, and pay a facility fee upon closing of 0.15% of the total aggregate commitment.


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As of June 30, 2016, the Company had outstanding letters of credit of £300.0 million (or $390.4 million) in place under this credit facility, which reduced the aggregate availability under this facility to £6.8 million (or $9.0 million). We recorded total interest expense of approximately $2.3 million and $1.7 million during the six months ended June 30, 2016 and 2015, respectively.

Other letter of credit facilities
 
We, through one of our subsidiaries, have a secured letter of credit facility with Comerica Bank that we utilize to comply with the deposit requirements of the State of California and the U.S. Department of Labor as security for our obligations to workers’ compensation and Federal Longshore and Harbor Workers’ Compensation Act policyholders. The credit limit is for $75 million, of which $48.5 million was utilized as of June 30, 2016. We are required to pay a letter of credit participation fee for each letter of credit in the amount of 0.40%. In addition, we, through certain subsidiaries, have additional existing stand-by letters of credit with various lenders in the amount of $1.7 million as of June 30, 2016.

Through our acquisition of Nationale Borg, we assumed their existing credit facilities pursuant to which trade related guarantees and comparable standby letters of credit are issued primarily to secure obligations owed by Nationale Borg to third parties in the normal course of business. The credit facilities are with Deutsche Bank Netherlands N.V. and ING Bank N.V. and are primarily used to obtain guarantees for the benefit of financial institutions. The credit limit under these credit facilities is approximately £76.6 million (or $87.3 million). The credit facilities were utilized for £61.2 million (or $67.9 million) as of June 30, 2016. We recorded total interest expense of $0.1 million for the six months ended June 30, 2016.

For further information on these credit facilities, including applicable restrictive covenants and events of default, see Note 12. "Debt" in Item 8. "Financial Statements and Supplementary Data" in our 2015 Form 10-K.
 
Outstanding Notes
 
Convertible Debt

We have an outstanding principal balance of $214 million of Convertible Senior Notes due 2044 ("2044 Notes"), with a carrying value of approximately $163 million, that bear interest at a rate equal to 2.75% per year, payable semiannually in arrears on June 15th and December 15th of each year. Additionally, we have an outstanding principal balance of $6 million of Convertible Senior Notes due 2021 ("2021 Notes"), with a carrying a value of approximately $5 million, that bear interest at a rate equal to 5.5% per year, payable semiannually in arrears on June 15th and December 15th of each year. Interest expense recognized on the 2044 Notes was $6.2 million and $6 million during the six months ended June 30, 2016 and 2015, respectively. Interest expense recognized on the 2021 Notes was $0.2 million and $0.6 million for the six months ended June 30, 2016 and 2015, respectively. For further information on the 2044 Notes and the 2021 Notes, including contingent interest on the 2044 Notes, conversion triggers, redemption and repurchase features and the exchange of 2021 Notes for 2044 Notes, see Note 12. "Debt" in Item 8. "Financial Statements and Supplementary Data" in our 2015 Form 10-K.
  
6.125% Notes due 2023

We have outstanding $250 million aggregate principal amount of our 6.125% notes due 2023 ("2023 Notes"), with a carrying value of approximately $248 million, that bear interest at a rate equal to 6.125% per year, payable semiannually in arrears on February 15th and August 15th of each year. The interest rate will increase by 0.50% per year if our consolidated leverage ratio exceeds 30% and will increase an additional 1.00% per year (for an aggregate increase of 1.50% per year) if the consolidated leverage ratio exceeds 35%. As of June 30, 2016, the consolidated leverage ratio was less than 30%. Interest expense recognized on the 2023 Notes was approximately $7.8 million and $3.9 million for the six months ended June 30, 2016 and 2015, respectively. For further information on the 2023 Notes, including restrictive covenants and events of default, see Note 12. "Debt" in Item 8. "Financial Statements and Supplementary Data" in our 2015 Form 10-K.

7.25% Subordinated Notes due 2055
 
We have outstanding $150 million aggregate principal amount of our 7.25% subordinated notes due 2055 (the "7.25% 2055 Notes"), with a carrying value of approximately $145 million that bear interest at a rate equal to 7.25% per year, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2015. The 7.25% 2005 Notes mature on June 15, 2055. We have the right to redeem the 7.25% 2055 Notes, in whole or in part, on June 18, 2020, or on any interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest to, but not including, the date of redemption. The 7.25% 2055 Notes are our subordinated unsecured obligations and are structurally subordinated to all our existing and future indebtedness, liabilities and other obligations of our subsidiaries. Interest expense, including amortization of deferred origination costs, recognized on the 7.25% 2055 Notes was $5.5 million and

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$0.4 million for the six months ended June 30, 2016 and 2015, respectively. For further information on the 7.25% 2055 Notes, see Note 12. "Debt" in Item 8. "Financial Statements and Supplementary Data" in our 2015 Form 10-K.

2035-2037 Notes

We have outstanding $124 million aggregate principal amount of four junior subordinated debenture notes ("2035-2037 Notes"). These debenture notes, maturing between 2035 and 2037, were issued by us using the proceeds from issuing trust preferred securities in connection with establishing four special purpose trusts. The debentures require interest-only payments to be made on a quarterly basis, with principal due at maturity. The debentures contain covenants that restrict declaration of dividends on our common stock under certain circumstances, including default of payment. We recognized interest expense, including amortization of deferred origination costs, of approximately $3.1 million and $3.7 million for the six months ended June 30, 2016 and 2015, respectively. For further information on the 2035-2037 Notes, see Note 12. "Debt" in the audited consolidated financial statements included elsewhere in this report.

2033-2037 Notes

Through our acquisition of Republic, we assumed $93 million aggregate principal amount of five junior subordinated debenture notes ("2033-2037 Notes"). These debenture notes mature between 2033 and 2037. The debentures require interest-only payments to be made on a quarterly basis, with principal due at maturity. The debentures contain covenants that restrict declaration of dividends on our common stock under certain circumstances, including default of payment. We recognized interest expense, including amortization of deferred origination costs, of approximately $0.8 million for the six months ended June 30, 2016.

7.50% Subordinated Notes due 2055

We have outstanding $135 million aggregate principal amount of our 7.50% subordinated notes due 2055 (the "7.50% 2055 Notes"), with a carrying value of approximately $131 million, that bear interest at a rate equal to 7.50% per year, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing December 15, 2015. The 7.50% 2055 Notes mature on September 15, 2055. We have the right to redeem the 7.50% 2055 Notes, in whole or in part, on September 16, 2020, or on any interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the 7.50% 2055 Notes plus accrued and unpaid interest to, but not including, the date of redemption. The 7.50% 2055 Notes are our subordinated unsecured obligations and are structurally subordinated to all existing and future indebtedness, liabilities and other obligations of our subsidiaries. Interest expense, including amortization of deferred origination costs, recognized on the 7.50% 2055 Notes was $5.1 million for the six months ended June 30, 2016. For further information on the 7.50% 2055 Notes, see Note 12. "Debt" in Item 8. "Financial Statements and Supplementary Data" in our 2015 Form 10-K.

Delek Promissory Note

We have outstanding a term promissory note to Delek Finance U.S. Inc. in the amount of $104.7 million that we issued as part of the consideration for our acquisition of Republic. The principal will be paid in four equal installments on each of the first four anniversaries of the issuance date. The note bears interest of 5.75% per annum and is payable from time to time based on the outstanding principal balance until the promissory note is fully paid. In the event we are required to pay indebtedness under our revolving credit facility or our 2023 Notes on an accelerated basis, the holder of the term promissory note may cause us to repay unpaid principal and interest immediately. We recorded interest expense, including amortization of the deferred origination costs and fees associated with the loan agreement, of approximately $1.2 million for the three and six months ended June 30, 2016.

Short-Term Borrowings

We did not engage in short-term borrowings to fund our operations or for liquidity purposes during the six months ended June 30, 2016.

Contractual Obligations

During the six months ended June 30, 2016, our contractual obligations have not changed materially from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2015.

Reinsurance
 
 Our insurance subsidiaries utilize reinsurance agreements to transfer portions of the underlying risk of the business we write to various affiliated and third-party reinsurance companies. Reinsurance does not discharge or diminish our obligation to pay

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claims covered by the insurance policies we issue; however, it does permit us to recover certain incurred losses from our reinsurers and our reinsurance recoveries reduce the maximum loss that we may incur as a result of a covered loss event. We believe it is important to ensure that our reinsurance partners are financially strong and they generally carry at least an A.M. Best rating of ‘‘A-’’ (Excellent) at the time we enter into our reinsurance agreements. We also enter into reinsurance relationships with third-party captives formed by agents and other business partners as a mechanism for sharing risk and profit. The total amount, cost and limits relating to the reinsurance coverage we purchase may vary from year to year based upon a variety of factors, including the availability of quality reinsurance at an acceptable price and the level of risk that we choose to retain for our own account. We have not experienced any significant changes to our reinsurance programs since December 31, 2015. For a more detailed description of our reinsurance arrangements, including our reinsurance arrangements with Maiden Reinsurance Ltd., see ‘‘Reinsurance’’ in ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in our Annual Report on Form 10-K for the year ended December 31, 2015.

Cash and Investment Portfolio
 
Cash, which consists of cash, cash equivalents and restricted cash and cash equivalents, along with our investment portfolio, which consists of fixed maturity securities, equity securities, and short-term investments, but excludes life settlement contracts, other investments and equity investments, increased $1,795 million, or 25.8%, to $8.8 billion for the six months ended June 30, 2016 from $7.0 billion as of December 31, 2015. Our investment portfolio is primarily classified as available-for-sale, as defined by ASC 320, Investments — Debt and Equity Securities. The increase in our investment portfolio during the six months ended June 30, 2016 compared to December 31, 2015 was primarily attributable to the acquisition of ARI, Genworth, Nationale Borg and Republic, as well as the utilization of excess cash from our equity offering during the fourth quarter of 2015. Our fixed maturity securities, including fixed maturity securities pledged to support our repurchase agreement, had a fair value of $6.8 billion and an amortized cost of $6.6 billion as of June 30, 2016. Our equity securities, including both available-for-sale and trading equity securities, had a fair value of $188.7 million with a cost of $180.8 million as of June 30, 2016.


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Our cash and investment portfolio, exclusive of life settlement contracts, equity investment in unconsolidated related party subsidiaries, and other investments is summarized in the table below by type of investment:
 
 
June 30, 2016
 
December 31, 2015
(Amounts in Thousands)
 
Carrying Value
 
Percentage of Portfolio
 
Carrying Value
 
Percentage of Portfolio
Cash, cash equivalents and restricted cash
 
$
1,601,518

 
18.2
%
 
$
1,312,669

 
18.9
%
Short-term investments
 
127,880

 
1.5

 
84,266

 
1.2

U.S. treasury securities
 
277,324

 
3.2

 
70,759

 
1.0

U.S. government agencies
 
9,748

 
0.1

 
45,558

 
0.7

Municipals
 
878,185

 
10.0

 
540,426

 
7.8

Foreign government
 
130,281

 
1.5

 
113,745

 
1.6

Commercial mortgage back securities
 
191,087

 
2.2

 
151,318

 
2.2

Residential mortgage backed securities:
 
 

 
 

 
 

 
 

Agency backed
 
1,155,030

 
13.2

 
974,838

 
14.0

Non-agency backed
 
53,151

 
0.6

 
120,229

 
1.7

Collateralized loan / debt obligations
 
361,074

 
4.1

 
226,094

 
3.2

Asset-backed securities
 
25,643

 
0.3

 
31,837

 
0.5

Corporate bonds
 
3,757,445

 
43.0

 
3,158,993

 
45.3

Preferred stocks
 
3,596

 

 
4,989

 
0.1

Common stocks
 
185,131

 
2.1

 
126,779

 
1.8

 
 
$
8,757,093

 
100.0
%
 
$
6,962,500

 
100.0
%
 
The table below summarizes the credit quality of our fixed maturity securities as of June 30, 2016 and December 31, 2015, as rated by Standard and Poor’s.
 
 
June 30, 2016
 
December 31, 2015
U.S. Treasury
4.1
%
 
1.3
%
AAA
8.4

 
12.2

AA
31.3

 
29.0

A
28.8

 
28.8

BBB, BBB+, BBB-
23.7

 
25.8

BB, BB+, BB-
2.1

 
1.9

B, B+, B-
0.4

 
0.1

Other
1.2

 
0.9

Total
100.0
%
 
100.0
%


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The table below summarizes the average duration by type of fixed maturity as well as detailing the average yield as of June 30, 2016 and December 31, 2015:

 
June 30, 2016
 
December 31, 2015
 
Average Yield %
 
Average Duration in Years
 
Average Yield %
 
Average Duration in Years
U.S. treasury securities
1.28
 
3.1

 
1.73
 
3.9

U.S. government agencies
2.29
 
4.4

 
2.63
 
4.2

Foreign government
2.16
 
5.2

 
2.27
 
5.7

Corporate bonds
3.67
 
5.9

 
3.33
 
6.1

Municipal bonds
3.20
 
7.2

 
3.33
 
6.9

Collateralized loan / debt obligations
4.77
 
0.5

 
4.22
 
1.1

Mortgage and asset backed securities
3.32
 
5.2

 
3.38
 
4.6

 
As of June 30, 2016, the weighted average duration of our fixed income securities was approximately 5.48 years and had an average yield of 3.47%.

Other investments represented approximately1.5% and 1.4% of our total investment portfolio as of June 30, 2016 and December 31, 2015, respectively. At June 30, 2016, other investments consisted primarily of real estate partnerships totaling $82 million, private limited partnerships totaling $20 million, an interest in a syndicated term loan of $6 million, and annuity and other investments totaling $17 million. At December 31, 2015, other investments consisted primarily of real estate partnerships totaling $64.9 million, private limited partnerships totaling $21.2 million, an interest in a syndicated term loan of $6.3 million, and annuity and other investments totaling $6.7 million.

Based on guidance in FASB ASC 320-10-65, in the event of the decline in fair value of a debt security, a holder of that security that does not intend to sell the debt security and for whom it is not more than likely than not that such holder will be required to sell the debt security before recovery of its amortized cost basis, is required to separate the decline in fair value into (a) the amount representing the credit loss and (b) the amount related to other factors. The amount of total decline in fair value related to the credit loss shall be recognized in earnings as an other than temporary impairment ("OTTI"), with the amount related to other factors recognized in accumulated other comprehensive loss net loss, net of tax. OTTI credit losses result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process, and different judgments and assumptions could affect the timing of the loss realization.

Quarterly, our Investment Committee (“Committee”) evaluates each available-for-sale security that has an unrealized loss as of the end of the subject reporting period for OTTI. We generally consider an investment, primarily equity securities, to be impaired when it has been in a significant unrealized loss position (in excess of 35% of cost if the issuer has a market capitalization of under $1 billion and in excess of 25% of cost if the issuer has a market capitalization of $1 billion or more) for over 24 months. In addition, the Committee uses a set of quantitative and qualitative criteria to review our investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of our investments. The criteria the Committee primarily considers include:
 
the current fair value compared to amortized cost;
the length of time the security’s fair value has been below its amortized cost;
specific credit issues related to the issuer such as changes in credit rating, reduction or elimination of dividends or non-payment of scheduled interest payments;
whether management intends to sell the security and, if not, whether it is not more than likely than not that we will be required to sell the security before recovery of its amortized cost basis;
the financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings;
the occurrence of a discrete credit event resulting in the issuer defaulting on material outstanding obligations or the issuer seeking protection under bankruptcy laws; and
other items, including company management, media exposure, sponsors, marketing and advertising agreements, debt restructuring, regulatory changes, acquisitions and dispositions, pending litigation, distribution agreements and general industry trends.


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Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. We write down investments immediately that we consider to be impaired based on the above criteria collectively.

The impairment charges of our fixed and equity securities classified as available-for-sale for the six months ended June 30, 2016 and 2015 are presented in the table below:

(Amounts in Thousands)
 
2016
 
2015
Equity securities
 
$
16,956

 
$
1,192

Fixed maturity securities
 

 
1,290

 
 
$
16,956

 
$
2,482


Additionally, we had gross unrealized losses of $61.6 million related to available-for-sale fixed maturity securities and $7.6 million related to available-for-sale equity securities during the six months ended June 30, 2016.

As of June 30, 2016, we own 2,250 purchase lots of corporate bonds in the financial institutions, industrial, and other sectors, which account for approximately 31%, 21% and 3%, respectively, and 55% in the aggregate of the total fair value of our fixed maturity securities, and 30%, 41% and 8%, respectively, and 79% in the aggregate of the total unrealized losses of our fixed maturity securities. We believe that the unrealized losses in these securities are the result, primarily, of general economic conditions and not the condition of the issuers, which we believe are solvent and have the ability to meet their obligations. Therefore, we expect that the market price for these securities should recover within a reasonable time. Additionally, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis.
 
Our investment in marketable equity securities classified as available-for-sale consist of investments in preferred and common stock across a wide range of sectors. We evaluated the near-term prospects for recovery of fair value in relation to the severity and duration of the impairment and have determined in each case that the probability of recovery is reasonable and we have the ability and intent to hold these investments until a recovery of fair value. We believe the gross unrealized losses of $7.6 million as of June 30, 2016 are not material to our financial position.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Market Risk. Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are interest rate risk and equity price risk.

Interest Rate Risk. We had fixed maturity securities (excluding $127.9 million of short-term deposits) with a fair value of $6.8 billion and carrying value of $6.6 billion as of June 30, 2016 that are subject to interest rate risk. Interest rate risk is the risk that we may incur losses due to adverse changes in interest rates. Fluctuations in interest rates have a direct impact on the market valuation of our fixed maturity securities. We manage our exposure to interest rate risk through a disciplined asset and liability matching and capital management process. In the management of this risk, the characteristics of duration, credit and variability of cash flows are critical elements. These risks are assessed regularly and balanced within the context of our liability and capital position.

The table below summarizes the interest rate risk associated with our fixed maturity securities by illustrating the sensitivity of the fair value and carrying value of our fixed maturity securities as of June 30, 2016 to selected hypothetical changes in interest rates, and the associated impact on our stockholders’ equity. We anticipate that we will continue to meet our obligations out of income. We classify our fixed securities and equity securities as available-for-sale. Temporary changes in the fair value of our fixed maturity securities impact the carrying value of these securities and are reported in our stockholders’ equity as a component of other comprehensive income, net of deferred taxes.
 
The selected scenarios in the table below are not predictions of future events, but rather are intended to illustrate the effect such events may have on the fair value and carrying value of our available-for-sale fixed maturity securities and on our stockholders’ equity, each as of June 30, 2016.

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Hypothetical Change in Interest Rates
 
Fair Value
 
Estimated Change in Fair Value
 
Hypothetical Percentage (Increase)Decrease in Shareholders’ Equity
(Amounts in Thousands)
200 basis point increase
 
$
6,210,277

 
$
(628,693
)
 
(18.4
)%
100 basis point increase
 
6,511,946

 
(327,022
)
 
(9.6
)%
No change
 
6,838,968

 

 

100 basis point decrease
 
7,176,583

 
337,615

 
9.9
 %
200 basis point decrease
 
7,532,958

 
693,990

 
20.3
 %
 
Changes in interest rates would affect the fair market value of our fixed rate debt instruments but would not have an impact on our earnings or cash flow. We currently have $1,414.1 million of debt instruments (including a $168.0 million Maiden collateral loan) of which $955 million are fixed rate debt instruments. A fluctuation of 100 basis points in interest on our variable rate debt instruments, which are tied to LIBOR, would affect our earnings and cash flows by $4.6 million before income tax, on an annual basis, but would not affect the fair market value of the variable rate debt.
 
Liquidity Risk.   Liquidity risk represents our potential inability to meet all payment obligations when they become due. We maintain sufficient cash and marketable securities to fund claim payments and operations. We purchase reinsurance coverage to mitigate the liquidity risk of an unexpected rise in claims severity or frequency from catastrophic events or a single large loss. The availability, amount and cost of reinsurance depend on market conditions and may vary significantly.

Credit Risk. Credit risk is the potential loss arising principally from adverse changes in the financial condition of the issuers of our fixed maturity securities and the financial condition of our third party reinsurers. Additionally, we have counter-party credit risk with our repurchase agreement counter-parties and interest rate swap counter-parties.

We address the credit risk related to the issuers of our fixed maturity securities by investing primarily in fixed maturity securities that are rated “BBB-” or higher by Standard & Poor’s. We also independently monitor the financial condition of all issuers of our fixed maturity securities. To limit our risk exposure, we employ diversification policies that limit the credit exposure to any single issuer or business sector.

We are subject to credit risk with respect to our third party reinsurers. Although our third party reinsurers are obligated to reimburse us to the extent we cede risk to them, we are ultimately liable to our policyholders on all risks that have ceded. As a result, reinsurance contracts do not limit our ultimate obligations to pay claims covered under the insurance policies we issue and we might not collect amounts recoverable from our reinsurers. We address this credit risk by selecting reinsurers that have an A.M. Best rating of “A-” (Excellent) or better at the time we enter into the agreement and by performing, along with our reinsurance brokers, periodic credit reviews of our reinsurers. If one of our reinsurers suffers a credit downgrade, we may consider various options to lessen the risk of asset impairment, including commutation, novation and letters of credit.  See “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations —Reinsurance.”

Counter-party credit risk with our repurchase agreement counter-parties is mitigated by obtaining collateral. We obtain collateral in the amount of 110% of the value of the securities we have sold with agreement to repurchase. Additionally, repurchase agreements are only transacted with pre-approved counter-parties.

Foreign Currency Risk. We write insurance in the United Kingdom and certain other European Union member countries through several of our foreign insurance subsidiaries. While the functional currencies of these subsidiaries are the Euros and the British Pound, we write coverages that are settled in local currencies, including, primarily, the Euro and British Pound. We attempt to maintain sufficient local currency assets on deposit to minimize our exposure to realized currency losses. Assuming a 5% increase in the exchange rate of the local currency in which the claims will be paid and that we do not hold that local currency, we would recognize a $68.3 million after tax realized currency loss based on our outstanding foreign denominated reserves of $2,102 million at June 30, 2016.
 
 Equity Price Risk. Equity price risk is the risk that we may incur losses due to adverse changes in the market prices of the equity securities we hold in our investment portfolio, which include common stocks, non-redeemable preferred stocks and master limited partnerships. We classify our portfolio of equity securities as either available-for-sale or trading and carry these securities on our balance sheet at fair value. Accordingly, adverse changes in the market prices of our equity securities result in a decrease

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in the value of our total assets and a decrease in our shareholders’ equity. As of June 30, 2016, the equity securities in our investment portfolio had a fair value of $188.7 million, representing approximately 2% of our total invested assets on that date.

The table below illustrates the impact on our equity portfolio and financial position given a hypothetical movement in the broader equity markets. The selected scenarios in the table below are not predictions of future events, but rather are intended to illustrate the effect such events may have on the carrying value of our equity portfolio and on shareholders’ equity as of June 30, 2016.
Hypothetical Change in S&P 500 Index
 
Fair Value
 
Estimated Change in Fair Value
 
Hypothetical Percentage (Increase) Decrease in Shareholders’ Equity
(Amounts in Thousands)
25% increase
 
$
235,909

 
$
47,182

 
0.9
 %
No change
 
188,727

 

 
 
25% decrease
 
141,545

 
(47,182
)
 
(0.9
)%
 
Off Balance Sheet Risk. Securities sold but not yet purchased represent our obligations to deliver the specified security at the contracted price and, thereby, create a liability to purchase the security in the market at prevailing prices. Our liability for securities to be delivered is measured at fair value and, as of June 30, 2016, was $21.2 million and consisted primarily of equity securities. These transactions result in off-balance sheet risk, as our ultimate cost to satisfy the delivery of securities sold but not yet purchased may exceed the amount reflected at June 30, 2016.

Item 4. Controls and Procedures
 
Our management, with the participation and under the supervision of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act is timely recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

During the most recent fiscal quarter, there have been no changes in our internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION
 

Item 1.  Legal Proceedings

Securities Class Actions and Derivative Suit

We and certain of our officers were defendants in related putative securities class action lawsuits filed in February 2014 in the United States District Court for the Southern District of New York. Plaintiffs in the lawsuits purported to represent a class of our stockholders who purchased shares between February 15, 2011 and December 11, 2013. On April 24, 2014, the court issued an order consolidating the related actions, appointing lead plaintiffs and approving the selection of co-lead counsel. On September 4, 2014, the lead plaintiffs filed a consolidated amended complaint. The consolidated amended complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and under Section 11 of the Securities Act of 1933, as amended, and sought damages in an unspecified amount, attorney’s fees and other relief. The lead plaintiffs asserted the Section 11 claim on behalf of persons or entities who purchased our Series A preferred stock in or traceable to our public offering on June 5, 2013, and did not sell those shares of Series A preferred stock prior to December 12, 2013. On October 24, 2014, we filed a motion to dismiss the consolidated amended complaint, which was granted with prejudice on September 29, 2015. On October 19, 2015, the plaintiffs filed a notice of appeal, which appeal was heard by the Second Circuit Court of Appeals on April 18, 2016. On May 16, 2016, the Second Circuit Court of Appeals affirmed the judgment of the District Court for the Southern District of New York, dismissing with prejudice the consolidated amended complaint and concluding this matter in our favor.

In addition, we have received three stockholder demands for production, pursuant to Section 220 of the Delaware General Corporation Law, of our books and records. On April 7, 2015, one of those stockholders, Cambridge Retirement System, filed a derivative action in the Court of Chancery of the State of Delaware against the Company, as nominal defendant, and against our board of directors, Leah Karfunkel, and ACP Re, Ltd., as defendants. Cambridge amended its complaint on November 3, 2015 to add National General Holdings Corp. as a defendant. The stockholder purports to bring the derivative action on our behalf, alleging breaches of the duties of loyalty and care on the part of our directors and majority shareholders related to our transactions involving Tower Group International, Ltd. Cambridge's claim against National General Holdings Corp. and ACP Re, Ltd. is for unjust enrichment. The amended complaint seeks damages, disgorgement and reform of our governance practices. We believe the allegations in this action to be unfounded and will vigorously pursue our defenses; however, we cannot reasonably estimate the potential range of loss, if any.

Trust Risk Group dispute

In October 2014, a dispute arose between our subsidiary, AmTrust Europe Ltd., and its Italian medical liability broker, Trust Risk Group SpA ("TRG"), and agent, Trust Risk Italia SRL ("TRI," a subsidiary of TRG, collectively, “TRG”). TRG asserted that it was entitled to advanced commissions of approximately €95.8 million (or $106.3 million) related to our Italian medical liability business produced by TRG. TRG deducted approximately €42.2 million (or $46.8 million) from premium payable to us with the intention of deducting approximately €48.7 million (or $54.1 million) from future premium payable to us. We disputed that TRG was entitled to advanced commission. We terminated our brokerage and agency relationship with TRG and TRI, respectively, and notified our insureds and retail brokers to pay premiums directly to us.
TRG initiated two arbitration proceedings against us in Milan, Italy seeking monetary damages based upon its allegations that we improperly terminated the producer agreements and an entitlement to advanced commissions on the business produced for us. Subsequently, we commenced litigation in England and the U.S. against Antonio Somma, the current or former principal of TRG, and Marco Lacchini, the chairman of the two arbitration proceedings pending in Milan, Italy. We brought the English and U.S. legal actions based on allegations that the two ongoing Italian arbitrations were not being conducted in accordance with the law, as well as certain other matters. We were successful in our application in Italy to remove Mr. Lacchini as chairman of the two arbitral tribunals.

On July 15, 2016, the parties reached a settlement agreement that included the dismissal of all actions, claims and counterclaims among the parties, the terms of which all parties agreed to keep confidential.

Other than as discussed above, we are not involved presently in any material litigation nor, to our knowledge, is any material litigation threatened against us or our properties.



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Item 1A.  Risk Factors
 
“Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015 includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K. Except as presented below, there have been no material changes to the risk factors described in our Form 10-K.

The vote by the United Kingdom to leave the European Union could adversely affect us.

The United Kingdom (U.K.) held a referendum on June 23, 2016, in which a majority voted for the U.K.’s exit from the European Union (E.U.), commonly referred to as “Brexit.” As a result of this vote, it is expected that the U.K. will serve notice to withdraw from the E.U. and commence negotiations to determine the terms of that withdrawal, as well as the future terms of its relationship with the E.U. The effects of Brexit will depend on any agreements made during these negotiations, and as a result, our U.K. insurers and Lloyd’s syndicates face potential uncertainty regarding, among other things, the ability to transact business in E.U. countries. In addition, Brexit could adversely affect European or worldwide political, economic or market conditions and could lead to instability in global financial markets. Brexit could also lead to legal uncertainty and differing national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Any of these potential effects of Brexit, and others we cannot anticipate, could adversely affect our business, business opportunities, results of operations, financial condition and cash flows. Until Brexit takes effect, which may not happen for two years or more, the U.K. remains a full member of the E.U. and our U.K. insurers and Lloyd’s syndicates retain their access to transact business in other E.U. countries.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In December 2013, our Board of Directors approved a $150 million share repurchase program. In the second quarter of 2016, we entered into an amendment to our $350 million credit facility that expanded the restrictive covenant related to our repurchase of shares of our outstanding common stock. In connection with the amendment, our Board of Directors approved an increase of $200 million to our existing stock repurchase authorization. The Board of Directors may suspend, modify or terminate the repurchase program at any time without prior notice. Under this repurchase program, we are not obligated to repurchase any particular number of shares. Unless terminated earlier by resolution of our Board of Directors, the program will expire when we have repurchased the full value of the shares authorized. We completed approximately $80 million of common share repurchases during the second quarter of 2016 under this authorization.

The following table summarizes our stock repurchases for the three-month period ended June 30, 2016:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program
 
Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased Under Plan or Program (1)
April 1 - 30, 2016
 
2,096,017

 
24.79

 
2,096,017

 
$
223,680,225

May 1 - 31, 2016
 
448,506

 
25.93

 
448,506

 
212,050,450

June 1 - 30, 2016
 
1,031,337

 
24.57

 
1,031,337

 
186,707,462

Total
 
3,575,860

 
 
 
3,575,860

 
$
186,707,462

 
 
 
 
 
 
 
 
 
 
(1) In April 2016, our Board of Directors approved an increase of $200 million to our existing stock repurchase authorization. From January 1, 2016 through June 30, 2016, we repurchased 4,164,958 common shares for approximately $103 million under this program.

Item 3. Defaults Upon Senior Securities
 
None.
 
Item 4.  Mine Safety Disclosures
 

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None.

Item 5. Other Information
 
None.


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Item 6.  Exhibits
Exhibit
Number
 
Description
3.1
 
Amended and Restated Certificate of Incorporation of the Company (filed herewith).
 
 
 
3.2
 
Certificate of Amendment to the Company's Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (No. 001-33143) filed on May 19, 2016).
 
 
 
10.1
 
Amending Agreement, dated April 14, 2016, related to the £300,000,000 Facility Agreement, dated November 24, 2015, among AmTrust Corporate Capital Limited, AmTrust Corporate Member Limited and AmTrust Corporate Member Two Limited, AmTrust International Insurance, Ltd., the Company and ING Bank N.V. London Branch, and The Bank of Nova Scotia, London Branch (filed herewith).
 
 
 
10.2
 
Term Promissory Note, dated April 18, 2016, issued by the Company in favor of Delek Finance US Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (No. 001-33143) filed on April 20, 2016).
 
 
 
10.3
 
Amendment No. 5, dated May 12, 2016, to the Credit Agreement, dated September 12, 2014, among the Company, JPMorgan Chase Bank, N.A., as Administrative Agent, and the various lending institutions party thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (No. 001-33143) filed on May 12, 2016).
 
 
 
10.4*
 
2010 Omnibus Incentive Plan, as amended and restated (incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A filed on March 29, 2016).
 
 
 
10.5*
 
Form of Restricted Stock Unit Agreement, amended and restated effective May 19, 2016 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (No. 001-33143) filed on May 19, 2016).
 
 
 
10.6
 
Endorsement No. 3 to the Amended and Restated Quota Share Reinsurance Agreement, effective September 30, 2015, between AmTrust International Insurance, Ltd. and Maiden Reinsurance Ltd. (filed herewith).
 
 
 
31.1
 
Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the quarter ended June 30, 2016.
 
 
 
31.2
 
Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the quarter ended June 30, 2016.
 
 
 
32.1
 
Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended June 30, 2016.
 
 
 
32.2
 
Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended June 30, 2016.
 
 
 
101.1
 
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at June 30, 2016 and December 31, 2015; (ii) the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015; (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015; (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015; and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
 
* Indicates management contract or compensatory plan, contract or arrangement in which one or more directors or executive officers of the Company may be participants.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
AmTrust Financial Services, Inc.
 
 
(Registrant)
 
 
 
 
Date:
August 9, 2016
 
/s/ Barry D. Zyskind
 
 
 
Barry D. Zyskind
 
 
 
Chairman, President and Chief Executive Officer

 
 
 
 
 
 
 
/s/ Ronald E. Pipoly, Jr.
 
 
 
Ronald E. Pipoly, Jr.
 
 
 
Chief Financial Officer
 

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