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, 2018
¨
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
_______________________________

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12400998&doc=12
_______________________________
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, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x
 
Accelerated Filer o
 
Non-Accelerated Filer o
 
Smaller Reporting Company o
 
Emerging Growth Company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 3, 2018, the Registrant had one class of Common Stock ($0.01 par value), of which 197,577,246 shares were issued and outstanding.




INDEX
 
 
Page
 
 
 
 
 
 
 
 
 


2

TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
AMTRUST FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(In Millions, Except Par Value per Share)
  
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Investments:
 
 
 
Fixed maturity securities, available-for-sale, at fair value (amortized cost $8,376.8; and $7,408.7)
$
8,278.3

 
$
7,488.3

Fixed maturity securities, trading, at fair value (amortized cost $150.0; and $52.2)
148.8

 
49.8

Equity securities, at fair value (cost $137.3; and $195.9) (1)
154.3

 
211.7

Short-term investments
169.7

 
187.8

Other investments (related party $271.6; and $56.6)
441.5

 
212.0

Total investments
9,192.6

 
8,149.6

Cash and cash equivalents
668.8

 
763.1

Restricted cash and cash equivalents
532.2

 
480.1

Accrued interest and dividends
62.6

 
64.4

Premiums receivable, net (related party $165.7; and $0)
3,069.7

 
2,784.8

Reinsurance recoverable (related party $3,188.7; and $3,026.8)
6,053.2

 
6,131.4

Prepaid reinsurance premiums (related party $1,248.0; and $1,172.3)
2,304.1

 
2,137.3

Federal income tax receivable
69.8

 
73.9

Deferred policy acquisition costs
980.9

 
922.9

Assets held for sale

 
900.9

Property and equipment, net
421.1

 
453.4

Goodwill
529.5

 
552.9

Intangible assets
350.6

 
380.8

Other assets (related party $195.7; and $271.4; recorded at fair value $1.9; and $20.8)
1,526.2

 
1,423.1

Total assets
$
25,761.3

 
$
25,218.6

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Loss and loss adjustment expense reserves
$
12,345.3

 
$
12,138.8

Unearned premiums
5,703.4

 
5,279.2

Ceded reinsurance premiums payable (related party $412.8; and $402.4)
898.4

 
809.6

Funds held under reinsurance treaties
75.5

 
83.6

Note payable on collateral loan – related party
168.0

 
168.0

Securities sold but not yet purchased, at fair value
161.8

 
75.5

Securities sold under agreements to repurchase
214.8

 

Liabilities held for sale

 
761.7

Deferred gain on retroactive reinsurance
317.9

 
330.0

Debt (net of debt issuance cost of $14.4, and $15.0)
1,315.3

 
1,288.7

Accrued expenses and other liabilities (related party $55.3; and $0; recorded at fair value $34.4; and $78.6)
959.8

 
913.5

Total liabilities
22,160.2

 
21,848.6

Commitments and contingencies


 


Redeemable non-controlling interest

 
1.9

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value; 500.0 shares authorized; 210.8 issued in 2018 and 2017; 197.5 and 196.1 outstanding in 2018 and 2017, respectively
2.1

 
2.1

Preferred stock, $0.01 par value; 10.0 shares authorized; 5.4 issued and outstanding in 2018 and 2017; $913.7 aggregated liquidation preference in 2018 and 2017
913.7

 
913.7

Additional paid-in capital
1,622.8

 
1,639.6

Treasury stock at cost; 13.2 and 14.7 shares in 2018 and 2017, respectively
(218.2
)
 
(242.1
)
Accumulated other comprehensive (loss) income, net of tax
(150.6
)
 
15.5

Retained earnings
1,373.8

 
860.9

Total AmTrust Financial Services, Inc. equity
3,543.6

 
3,189.7

Non-controlling interest
57.5

 
178.4

Total stockholders’ equity
3,601.1

 
3,368.1

Total liabilities and stockholders’ equity
$
25,761.3

 
$
25,218.6

(1) 
In connection with the adoption of ASU 2016-01, the consolidated balance sheets as of December 31, 2017 have been recast for comparability. See Note 2. "Recent Accounting Pronouncements" for additional information on the adoption of ASU 2016-01.
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

AMTRUST FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In Millions, Except Per Share Data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 

 
 
 
 
 
 
Net earned premiums
 
$
1,286.2

 
$
1,380.7

 
$
2,641.1

 
$
2,603.2

Service and fee income (related parties - three months $12.7; $35.6 and six months $27.2; $55.9)
 
49.3

 
168.4

 
165.4

 
305.9

Net investment income
 
68.3

 
49.3

 
136.5

 
112.6

Net realized gain on investments
 
5.4

 
23.5

 
7.7

 
32.1

Gain on sale of U.S.-based fee business
 

 

 
724.1

 

Other
 
(2.5
)
 
(1.5
)
 
5.2

 
7.2

Total revenues
 
1,406.7

 
1,620.4

 
3,680.0

 
3,061.0

Losses and expenses:
 
 

 
 

 
 
 
 
Loss and loss adjustment expenses
 
933.7

 
1,024.5

 
1,906.6

 
1,864.8

Amortization of deferred acquisition costs (net of ceding commission - related party - three months $156.0; $158.2 and six months $314.9; $311.9)
 
310.4

 
207.8

 
526.0

 
413.7

Underwriting, general and administrative expenses
 
121.1

 
165.4

 
333.7

 
287.7

Interest expense (net of interest income - related party - three months $1.2; $1.2 and six months $2.3; $2.3)
 
21.9

 
24.2

 
44.7

 
47.8

Foreign currency loss (gain)
 
11.6

 
58.9

 
(14.9
)
 
76.9

Other
 
109.3

 
199.8

 
323.9

 
362.7

Total losses and expenses
 
1,508.0

 
1,680.6

 
3,120.0

 
3,053.6

(Loss) income before income taxes and equity in earnings of unconsolidated subsidiaries
 
(101.3
)
 
(60.2
)
 
560.0

 
7.4

(Benefit) provision for income taxes
 
(4.4
)
 
(19.8
)
 
(19.0
)
 
1.6

(Loss) income before equity in earnings of unconsolidated subsidiaries
 
(96.9
)
 
(40.4
)
 
579.0

 
5.8

Equity in earnings of unconsolidated subsidiaries
 

 
69.5

 

 
73.5

Net (loss) income
 
(96.9
)
 
29.1

 
579.0

 
79.3

Net income attributable to non-controlling interest and redeemable non-controlling interest of subsidiaries
 
(2.8
)
 
(6.7
)
 
(0.3
)
 
(17.7
)
Net (loss) income attributable to AmTrust stockholders
 
(99.7
)
 
22.4

 
578.7

 
61.6

Dividends on preferred stock
 
(16.5
)
 
(16.5
)
 
(33.1
)
 
(33.1
)
Net (loss) income attributable to AmTrust common stockholders
 
$
(116.2
)
 
$
5.9

 
$
545.6

 
$
28.5

(Loss) earnings per common share:
 
 

 
 

 
 
 
 
Basic (loss) earnings per share
 
$
(0.59
)
 
$
0.03

 
$
2.78

 
$
0.16

Diluted (loss) earnings per share
 
$
(0.59
)
 
$
0.03

 
$
2.77

 
$
0.16

Dividends declared per common share
 
$

 
$
0.17

 
$
0.17

 
$
0.34


See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

AMTRUST FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In Millions)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net (loss) income
$
(96.9
)
 
$
29.1

 
$
579.0

 
$
79.3

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(86.6
)
 
62.7

 
(24.4
)
 
76.6

Change in fair value of interest rate swap

 

 

 
0.1

Unrealized (loss) gain on debt securities:
 
 
 
 
 
 
 
Gross unrealized holding (loss) gain
(17.8
)
 
66.1

 
(174.9
)
 
98.1

Less tax (benefit) expense
(5.6
)
 
16.6

 
(38.0
)
 
23.0

Cumulative effect of change in accounting principles, net of taxes of $20.4 for the six months ended June 30, 2018 (1)

 

 
(0.7
)
 

Net unrealized holding (loss) gain
(12.2
)
 
49.5

 
(137.6
)
 
75.1

Reclassification adjustment for investment gain included in net (loss) income:
 
 
 
 
 
 
 
Other net realized gain on investments
(2.5
)
 
(19.3
)
 
(4.1
)
 
(30.9
)
Reclassification adjustment for investment gain included in net (loss) income
(2.5
)
 
(19.3
)
 
(4.1
)
 
(30.9
)
Other comprehensive (loss) income, net of tax
(101.3
)
 
92.9

 
(166.1
)
 
120.9

Comprehensive (loss) income
(198.2
)
 
122.0

 
412.9

 
200.2

Less: comprehensive income attributable to non-controlling and redeemable non-controlling interest
2.8

 
6.7

 
0.3

 
17.7

Comprehensive (loss) income attributable to AmTrust Financial Services, Inc.
$
(201.0
)
 
$
115.3

 
$
412.6

 
$
182.5

(1) 
See Note 2. "Recent Accounting Pronouncements" for additional information on the adoptions of ASU 2016-01 and ASU 2018-02.


See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

AMTRUST FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In Millions)
 
Six Months Ended June 30,
 
2018
 
2017 (1)
Net cash provided by operating activities
$
323.9

 
$
277.6

Cash flows from investing activities:
 
 
 
Purchases of:
 
 
 
Fixed maturity securities, available-for-sale
(2,125.3
)
 
(1,112.4
)
Fixed maturity securities, trading
(383.2
)
 
(312.9
)
Equity securities
(114.7
)
 
(11.2
)
Other investments
(13.5
)
 
(15.6
)
Subsidiaries, net of cash received
0.1

 
(97.8
)
Property, equipment and software, net
(4.9
)
 
(188.7
)
Life settlement contracts

 
(16.5
)
Sales of:
 
 
 
Fixed maturity securities, available-for-sale (includes maturities & paydowns)
1,079.1

 
988.3

Fixed maturity securities, trading
282.9

 
309.4

Equity securities
181.7

 
151.7

Other investments
4.0

 
65.7

Securities sold but not purchased, net
85.4

 
21.5

Equity method investment

 
211.3

Subsidiary, net of cash transferred (2)
538.4

 

Short term investments, net
35.2

 

Receipt of life settlement contract proceeds

 
33.2

Net cash (used in) provided by investing activities
(434.8
)
 
26.0

Cash flows from financing activities:
 
 
 
Securities sold under agreements to repurchase, net
214.8

 
(128.6
)
Secured loan agreements borrowings

 
105.6

Secured loan agreements payments
(3.8
)
 
(7.5
)
Promissory notes and other proceeds (payments)
13.3

 
(52.3
)
Financing fees

 
(0.2
)
Common stock issuance

 
298.7

Contingent consideration payments
(1.4
)
 
(5.0
)
Non-controlling interest capital (dividends) contributions from consolidated subsidiaries, net
(114.6
)
 
12.4

Stock option exercise and other
(3.1
)
 
(1.4
)
Dividends distributed on common stock
(66.7
)
 
(58.1
)
Dividends distributed on preferred stock
(33.1
)
 
(33.1
)
Net cash (used in) provided by financing activities
5.4

 
130.5

Effect of exchange rate changes on cash
(26.6
)
 
19.1

Cash, cash equivalents and restricted cash included in business classified as held for sale, beginning of the year
89.9

 

Net (decrease) increase in cash, cash equivalents and restricted cash and restricted cash equivalents
(42.2
)
 
453.2

Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of the year
1,243.2

 
1,281.1

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of the period
$
1,201.0

 
$
1,734.3

(1) 
In connection with the adoption of ASU 2016-18, the disclosure for the six months ended June 30, 2017 has been recast for comparability. See Note 2. "Recent Accounting Pronouncements" for additional information on the adoption of ASU 2016-18.
(2) 
Relates to the transfer of our U.S.-based fee business. See Note 13. "Divestiture" for additional information.

See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS
AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


Index
Note
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 


7

TABLE OF CONTENTS
AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Millions, Except Share and Per Share Data)


1. Basis of Reporting and Merger Agreement

Basis of Reporting

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 consolidated 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, 2017, previously filed with the Securities and Exchange Commission ("SEC") on March 16, 2018 ("Form 10-K").

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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

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, 2017, included in the Company’s Form 10-K filed with the SEC.

All material 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.

Merger Agreement

On March 1, 2018, the Company entered into an agreement and plan of merger with Evergreen Parent, L.P. (“Evergreen Parent”), an entity formed by private equity funds managed by Stone Point Capital LLC (“Stone Point”), together with Barry D. Zyskind, the Company’s Chairman and CEO, George Karfunkel and Leah Karfunkel (such individuals, collectively, the “Karfunkel-Zyskind Family”) pursuant to which Evergreen Parent will acquire all of the Company’s outstanding common shares, par value $0.01 per share (the “Common Stock”) that are not currently owned or controlled by the Karfunkel-Zyskind Family and its affiliates and certain related parties (the “Merger Agreement”). The Karfunkel-Zyskind Family and its affiliates and certain related parties currently own or control approximately 55% of the Company's outstanding shares of Common Stock. On June 6, 2018, the parties entered into Amendment No. 1 to the Merger Agreement (the “Amended Merger Agreement”).

Pursuant to the transactions contemplated by the Amended Merger Agreement, at the effective time of the merger, each outstanding share of the Company’s Common Stock (other than certain excluded shares) will be converted into the right to receive $14.75 per share of Common Stock in cash, without interest and less any required withholding taxes (the “Merger Consideration”). Common Stock owned by the Company, any wholly-owned subsidiary of the Company, a subsidiary formed to participate in the merger, Evergreen Parent (including the Rollover Shares (as defined below)) or holders who have properly exercised dissenters’ rights under Delaware law will not be converted into the right to receive the Merger Consideration.

On June 21, 2018, the Amended Merger Agreement was adopted by the affirmative vote of (i) the holders of at least a majority of all outstanding shares of Common Stock and (ii) the holders of at least a majority of all outstanding shares of Common Stock held by the “Public Stockholders” (defined as stockholders other than Evergreen Parent and its affiliates, the Rollover Stockholders (as defined below) and their respective affiliates and certain related parties and the Company’s directors and officers as set forth on Schedule I to the Merger Agreement), in each case, entitled to vote on the merger at a meeting of stockholders duly called and held for such purpose (the “Requisite Stockholder Vote”). Consummation of the merger remains subject to certain customary closing conditions, including regulatory approvals.

The Amended Merger Agreement contains customary termination rights for the Company and Evergreen Parent, which were described in the Company’s Current Report on Form 8-K filed with the SEC on March 1, 2018 and its Current Report on Form 8-K filed with the SEC on June 7, 2018. The Amended Merger Agreement also contains customary representations, warranties and

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TABLE OF CONTENTS
AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Millions, Except Share and Per Share Data)


covenants of the Company, including covenants to conduct its business in the ordinary course during the interim period between the execution of the Amended Merger Agreement and consummation of the merger and not to engage in certain types of transactions during this interim period without the prior written consent of Evergreen Parent.

Evergreen Parent has obtained equity financing commitments for the transactions contemplated by the Amended Merger Agreement, the aggregate proceeds of which, when combined with available cash resources of the Company, will be sufficient for Evergreen Parent to pay the aggregate Merger Consideration and all related fees and expenses. On March 1, 2018, private equity funds managed by Stone Point and an investment entity controlled by the Karfunkel-Zyskind Family committed to capitalize Evergreen Parent, at or immediately prior to the effective time of the merger, with an aggregate equity contribution in an amount up to $800.0 and $400.0, respectively, in exchange for equity interests in Evergreen Parent, subject to the terms and conditions set forth in certain equity financing commitment letters, dated as of March 1, 2018. On July 23, 2018, Evergreen Parent entered into subscription agreements, subject to certain conditions, with Enstar Group Limited (“Enstar”), an entity controlled by Madison Dearborn Partners (“MDP”), and for certain limited purposes, a private equity fund controlled by Stone Point and the investment entity controlled by the Karfunkel-Zyskind Family, pursuant to which Enstar and MDP agreed to purchase equity in Evergreen Parent in an aggregate amount of $200.0 and $150.0, respectively. This aggregate amount of equity financing provided to Evergreen Parent by Enstar and MDP will reduce, pro rata, the aggregate amount of equity financing provided to Evergreen Parent by the private equity funds managed by Stone Point and the investment entity controlled by the Karfunkel-Zyskind Family. In addition, the Karfunkel-Zyskind Family and its affiliates and certain related parties (the “Rollover Stockholders”) entered into a rollover agreement, dated as of March 1, 2018, pursuant to which such Rollover Stockholders committed to contribute all of the shares of Common Stock that they own to Evergreen Parent immediately prior to the closing of the merger (the “Rollover Shares”).

The Company incurred $36.6 of transaction expenses in connection with the merger during the six months ended June 30, 2018, respectively.

2. Recent Accounting Pronouncements

As compared to those described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017, the Company's significant accounting policies have been updated for the recent accounting pronouncements or changes in accounting pronouncements discussed below during the six months ended June 30, 2018.

Recent Accounting Standards, Adopted

In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments allow an entity to elect to reclassify the income tax effects of the United States of America ("U.S.") federal government enacted tax bill, the Tax Cuts and Jobs Act ("TCJA"), on items within accumulated other comprehensive income to retained earnings. If an entity elects to reclassify the income tax effects, the amount of that reclassification only includes the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment related to items remaining in accumulated other comprehensive income. An entity is not permitted to reclassify the effect of the change in the U.S. federal corporate income tax rate on gross valuation allowances that were originally charged to income from operations. An entity is required to disclose a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income. An entity is permitted to apply the guidance either at the beginning of the period of adoption or retrospectively to each period (or periods) in which the income tax effects of the TCJA are recognized. This guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted, including adoption in any interim period. The Company adopted the guidance early on January 1, 2018. The cumulative effect was an increase to accumulated other comprehensive income and a decrease to retained earnings of $16.0.

In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies that ASC 610-20 applies to the derecognition of nonfinancial assets and in substance nonfinancial assets unless other specific guidance applies. As a result, the new guidance does not apply to the derecognition of businesses, nonprofit activities, or financial assets (including equity method investments), or to certain revenue transactions accounted for as revenue from contracts with customers. The new guidance also clarifies that an in substance nonfinancial asset is an asset or group of assets for which substantially all of the fair value consists of nonfinancial assets and the group or subsidiary is not a business. In addition, transfers of nonfinancial assets to another entity in exchange for a noncontrolling ownership interest in that entity is accounted for

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AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - CONTINUED
(In Millions, Except Share and Per Share Data)

under ASC 610-20, and the specific guidance on such partial exchanges from ASC 845, Nonmonetary Transactions is eliminated. As a result of the new guidance, the guidance specific to real estate sales in ASC 360-20, Property, Plant, and Equipment-Real Estate Sales is eliminated. As such, sales and partial sales of real estate assets are subject to the same derecognition model as all other nonfinancial assets. The Company adopted this guidance on a modified retrospective basis. The adoption of this guidance on January 1, 2018 did not have a material effect on the Company's financial position, results of operations or cash flows.

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU is part of the FASB’s simplification initiative aimed at reducing complexity in accounting standards. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. As a result, a reporting entity recognizes the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction is also recognized at the time of the transfer. The adoption of this guidance on January 1, 2018 did not have a material effect on the Company's financial position, results of operations or cash flows.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments provide guidance and clarification for eight specific cash flow issues, which include debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank owned life insurance policies, distributions received from equity-method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, which provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. As a result, amounts generally described as restricted cash and restricted cash equivalents are required to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the statement of cash flows. An entity is required to disclose the amounts of cash, cash equivalents, and restricted cash, disaggregated by related captions within the balance sheet, reconciled to the total amount cash, cash equivalents, and restricted cash presented in the statement of cash flows, and to disclose information on the nature of restrictions on its cash, cash equivalents, and restricted cash. The Company adopted both ASUs on January 1, 2018 using a retrospective transition method to each period presented.

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 elect to measure equity investments that do not have readily determinable fair values 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 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 Company adopted the guidance on January 1, 2018. The cumulative effect was a decrease to accumulated other comprehensive income and an increase to retained earnings of $16.7. The Company elected to measure its equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, and applied the prospective transition method.

In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers. The new standard supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and eliminates industry-specific guidance. The core principle of the new standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, an entity should apply the following steps: identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the

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AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - CONTINUED
(In Millions, Except Share and Per Share Data)

contract, and recognize revenue when (or as) the entity satisfies a performance obligation. The new standard requires variable consideration to be estimated as part of the determination of the transaction price of a contract subject to a constraint based on a probability assessment of revenue reversal. The new standard also requires certain incremental costs incurred to obtain or fulfill a contract to be deferred and amortized on a systematic basis consistent with the transfer of goods or services to the customer. The guidance also requires additional disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts, including significant judgments and changes in judgments in determining the timing of satisfaction of performance obligations (over time or at a point in time), determining transaction price and amounts allocated to performance obligations, and assets recognized from the costs incurred to obtain or fulfill a contract. ASU 2014-09 does not apply to insurance contracts, leases, financial instruments, and certain other agreements that are within the scope of other GAAP guidance. The Company adopted the standard on January 1, 2018 using the modified retrospective method. The adoption of this guidance on January 1, 2018 did not have a material effect on the Company's financial position, results of operations or cash flows.

As a provider of property and casualty insurance products, the Company’s insurance contracts are accounted for as insurance which is not effected by the accounting policy changes. The accounting policy changes are applied to the Company’s contracts with customers related to the performance of services with no underlying insurance risk. The financial statement information reported for comparable prior periods is not adjusted for the accounting policy changes, and is reported in accordance with the accounting standards in effect under Topic 605, Revenue Recognition in accordance with the modified retrospective transition method applied under ASU 2014-09.

For the three and six months ended June 30, 2018, approximately $49.7 and $156.9, respectively, of revenues, or less than 5% of the Company's total revenues, are affected by the accounting policy changes. Refer to Note 12. "Segments" for disclosure of revenues from contracts with customers by business segment. On February 28, 2018, the Company completed the transfer of a majority interest in the portion of the Company's U.S.-based fee businesses that (a) act as managing general agents for the distribution, underwriting and procurement of property and casualty insurance on behalf of certain of the Company's affiliates and other insurance carriers and (b) design, develop, market and act as third party administrators for programs for service contracts, limited warranties and replacement plans as further described in the Acquisition Agreement (the “U.S.-based fee business”), that reduces service and fee income subsequent to the transfer date.

The Company’s revenues related to services provided to customers include, (i) product warranty registration and service, (ii) insurance-related services, broker and agency services, claims administration, management services, loss control and risk management services, and (iii) asset management services and other business services.

The Company’s broker and commission revenues are recognized at the point in time when the insurance or reinsurance is effective and the Company has the right to receive contract consideration, net of an adjustment for cancellations. The Company’s revenues from the other services are recognized on a pro rata basis over the contract service periods by allocating estimated contract consideration to the performance obligations which are satisfied as the services are provided and transferred to its customers. The contract consideration amounts received or receivable at inception of the contract service periods are recognized as deferred revenue.

The Company defers the incremental costs of obtaining contracts with customers and amortizes those costs over the contract service periods as services are transferred to the customers. The incremental costs incurred to obtain and fulfill contracts with customers are deferred when the costs a) relate directly to a specific contract or anticipated contract, b) generate or enhance resources that the Company will use in satisfying the performance obligation, and c) are expected to be recovered. Subsequent to the transfer of the U.S.-based fee business on February 28, 2018, the deferred contract costs are not significant. The Company expenses the incremental costs of obtaining contracts with customers as incurred if the amortization period of the asset that otherwise would have been recognized is one year or less as a permitted practical expedient.


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AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - CONTINUED
(In Millions, Except Share and Per Share Data)

Recent Accounting Standards, Not Yet Adopted

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The new guidance shortens the amortization period for the premium on callable debt securities to the earliest call date. The amortization period for the discount on callable debt securities is not changed by the new guidance, and continues to be amortized to maturity. The new guidance more closely aligns interest income recorded on debt securities held at a premium or a discount with the economics of the underlying instrument. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact this standard will have on its financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment charges. Under the current guidance, if the fair value of a reporting unit is lower than its carrying amount, an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount. The implied fair value of goodwill is calculated by deducting the fair value of all assets and liabilities of the reporting unit from the reporting unit’s fair value. Under the new guidance, an entity will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value not to exceed the amount of goodwill allocated to that reporting unit. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the impact this standard will have on its financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected by recording an allowance for credit losses, presented as a deduction from the amortized cost basis, with changes in the allowance recorded as credit loss expense based on management's current estimate of expected credit losses each period. The new standard also requires impairment relating to credit losses on available-for-sale debt securities to be presented through an allowance for credit losses with changes in the allowance recorded in the period of the change as credit loss expense or reversal of credit loss expense. Any impairment amount not recorded through an allowance for credit losses on available-for-sale debt securities is recorded through other comprehensive income. This new standard is effective for fiscal years beginning after December 15, 2019, including interim reporting periods within that reporting period. The Company is currently evaluating the impact this standard will have on its financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard amends the guidance for leasing transactions. The guidance requires a lessee to classify lease contracts as finance or operating leases, and to recognize assets and liabilities for the rights and obligations created by leasing transactions with lease terms more than twelve months. The guidance substantially retains the criteria for classifying leasing transactions as finance or operating leases. For finance leases, a lessee recognizes a right-of-use asset and a lease liability initially measured at the present value of the lease payments, and recognizes interest expense on the lease liability separately from the amortization of the right-of-use asset. For operating leases, a lessee recognizes a right-of-use asset and a lease liability initially measured at the present value of the lease payments, and recognizes lease expense on a straight-line basis. The guidance requires a lessor to recognize lease income related to an operating lease generally on a straight-line basis over the lease term. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. In January 2018, the FASB issued ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842 that provides a lessee or lessor the election to not assess whether land easements, not currently accounted for as leases under the current lease guidance, are leases under the new standard. On a prospective basis after adoption of the guidance, a lessee or lessor is required to apply the new standard to new or modified land easements. In July 2018, the FASB issued ASU 2018-11, Targeted Improvements that permits the initial application of the new standard as of the effective date and the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2018-11 also provides lessors with an option, by class of underlying asset, to not separate nonlease components from the related lease component and, instead, to account for those components as a single component subject to certain criteria. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that period. Early adoption is permitted. The Company is implementing changes to its enterprise reporting systems and its processes in conjunction with the evaluation of the new standard on the existing lease agreements. The Company plans to adopt the new standard as of January 1, 2019, and to recognize any cumulative-effect adjustment to the opening balance of retained earnings as of the date of adoption.

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AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - CONTINUED
(In Millions, Except Share and Per Share Data)

The Company is currently evaluating the impact this standard will have on its financial position, results of operations or cash flows.

3. Investments

(a) Available-for-Sale Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale as of June 30, 2018 and December 31, 2017, are presented below:
As of June 30, 2018
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. treasury securities
 
$
299.7

 
$
0.9

 
$
(3.0
)
 
$
297.6

U.S. government agencies
 
131.4

 
0.8

 
(1.6
)
 
130.6

Municipal bonds
 
822.5

 
7.6

 
(9.0
)
 
821.1

Foreign government
 
286.5

 
1.3

 
(3.9
)
 
283.9

Corporate bonds:
 
 
 
 
 
 
 
 
Finance
 
1,909.8

 
13.9

 
(37.3
)
 
1,886.4

Industrial
 
2,400.3

 
16.4

 
(55.5
)
 
2,361.2

Utilities
 
325.6

 
4.5

 
(7.3
)
 
322.8

Commercial mortgage-backed securities
 
397.2

 
1.6

 
(14.1
)
 
384.7

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency backed
 
916.3

 
1.5

 
(16.8
)
 
901.0

Non-agency backed
 
7.6

 

 

 
7.6

Collateralized loan / debt obligation
 
822.6

 
4.4

 
(2.9
)
 
824.1

Asset backed securities
 
57.3

 
0.1

 
(0.1
)
 
57.3

Total available-for-sale securities
 
$
8,376.8

 
$
53.0

 
$
(151.5
)
 
$
8,278.3


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AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - CONTINUED
(In Millions, Except Share and Per Share Data)

As of December 31, 2017 (1)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. treasury securities
 
$
301.6

 
$
0.9

 
$
(3.2
)
 
$
299.3

U.S. government agencies
 
51.1

 

 
(0.6
)
 
50.5

Municipal bonds
 
1,035.5

 
15.9

 
(5.9
)
 
1,045.5

Foreign government
 
151.4

 
3.5

 
(3.2
)
 
151.7

Corporate bonds:
 
 
 
 
 
 
 
 
Finance
 
1,733.2

 
48.1

 
(11.9
)
 
1,769.4

Industrial
 
2,237.0

 
57.3

 
(26.1
)
 
2,268.2

Utilities
 
323.8

 
10.7

 
(2.1
)
 
332.4

Commercial mortgage-backed securities
 
419.3

 
3.8

 
(10.4
)
 
412.7

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency backed
 
562.0

 
5.8

 
(11.4
)
 
556.4

Non-agency backed
 
6.9

 

 
(0.1
)
 
6.8

Collateralized loan / debt obligation
 
591.2

 
9.7

 
(0.3
)
 
600.6

Asset backed securities
 
30.1

 
0.1

 
(0.1
)
 
30.1

Less: Assets classified as held for sale (See Note 13)
 
(34.4
)
 
(0.9
)
 

 
(35.3
)
Total available-for-sale securities
 
$
7,408.7

 
$
154.9

 
$
(75.3
)
 
$
7,488.3

 
 
(1) 
In connection with the adoption of ASU 2016-01, the disclosure for December 31, 2017 has been recast for comparability. See Note 2. "Recent Accounting Pronouncements" for additional information on the impact of the adoption of ASU 2016-01.

Proceeds from the sales of investments in available-for-sale securities were $342.0 and $464.9 during the three months ended June 30, 2018 and 2017, respectively, and $1,079.1 and $988.3 during the six months ended June 30, 2018 and 2017, respectively.

A summary of the Company’s available-for-sale securities as of June 30, 2018 and December 31, 2017, 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, 2018
 
December 31, 2017
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
319.8

 
$
317.3

 
$
228.1

 
$
226.7

Due after one through five years
1,875.8

 
1,877.7

 
1,811.3

 
1,845.5

Due after five through ten years
3,455.4

 
3,383.4

 
3,199.7

 
3,239.8

Due after ten years
524.8

 
525.2

 
594.5

 
605.0

Mortgage and asset backed securities
2,201.0

 
2,174.7

 
1,609.5

 
1,606.6

Less: Assets classified as held for sale (See Note 13)

 

 
(34.4
)
 
(35.3
)
Total
$
8,376.8

 
$
8,278.3

 
$
7,408.7

 
$
7,488.3



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AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - CONTINUED
(In Millions, Except Share and Per Share Data)

The tables below summarize the gross unrealized losses of the Company's available-for-sale securities by length of time the security has continuously been in an unrealized loss position as of June 30, 2018 and December 31, 2017:
 
 
Less Than 12 Months
 
12 Months or More
 
Total
As of June 30, 2018
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. treasury securities
 
$
40.6

 
$
(0.4
)
 
$
233.9

 
$
(2.6
)
 
$
274.5

 
$
(3.0
)
U.S. government agencies
 
94.6

 
(1.6
)
 
1.5

 

 
96.1

 
(1.6
)
Municipal bonds
 
256.3

 
(4.6
)
 
134.2

 
(4.4
)
 
390.5

 
(9.0
)
Foreign government
 
182.5

 
(3.2
)
 
14.6

 
(0.7
)
 
197.1

 
(3.9
)
Corporate bonds:
 
 
 
 
 
 
 
 
 
 
 
 
Finance
 
1,299.7

 
(34.0
)
 
73.1

 
(3.3
)
 
1,372.8

 
(37.3
)
Industrial
 
1,544.0

 
(43.2
)
 
190.9

 
(12.3
)
 
1,734.9

 
(55.5
)
Utilities
 
223.4

 
(7.0
)
 
9.2

 
(0.3
)
 
232.6

 
(7.3
)
Commercial mortgage-backed securities
 
164.0

 
(5.4
)
 
127.4

 
(8.7
)
 
291.4

 
(14.1
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency backed
 
557.5

 
(9.6
)
 
120.4

 
(7.2
)
 
677.9

 
(16.8
)
Collateralized loan / debt obligations
 
316.9

 
(2.9
)
 

 

 
316.9

 
(2.9
)
Asset backed securities
 
4.0

 

 
0.7

 
(0.1
)
 
4.7

 
(0.1
)
Total
 
$
4,683.5

 
$
(111.9
)
 
$
905.9

 
$
(39.6
)
 
$
5,589.4

 
$
(151.5
)
 
 
Less Than 12 Months
 
12 Months or More
 
Total
As of December 31, 2017 (1)
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. treasury securities
 
$
41.9

 
$
(0.5
)
 
$
247.0

 
$
(2.7
)
 
$
288.9

 
$
(3.2
)
U.S. government agencies
 
48.7

 
(0.6
)
 
0.5

 

 
49.2

 
(0.6
)
Municipal bonds
 
171.3

 
(2.7
)
 
178.7

 
(3.2
)
 
350.0

 
(5.9
)
Foreign government
 
57.4

 
(2.2
)
 
17.1

 
(1.0
)
 
74.5

 
(3.2
)
Corporate bonds:
 
 
 
 
 
 
 
 
 
 
 
 
Finance
 
419.3

 
(9.7
)
 
91.5

 
(2.2
)
 
510.8

 
(11.9
)
Industrial
 
437.1

 
(16.4
)
 
255.4

 
(9.7
)
 
692.5

 
(26.1
)
Utilities
 
72.5

 
(2.0
)
 
11.9

 
(0.1
)
 
84.4

 
(2.1
)
Commercial mortgage-backed securities
 
81.5

 
(4.1
)
 
157.5

 
(6.3
)
 
239.0

 
(10.4
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency backed
 
91.7

 
(4.7
)
 
167.8

 
(6.7
)
 
259.5

 
(11.4
)
Non-agency backed
 
2.9

 

 
0.8

 
(0.1
)
 
3.7

 
(0.1
)
Collateralized loan / debt obligations
 
56.8

 
(0.2
)
 
4.3

 
(0.1
)
 
61.1

 
(0.3
)
Asset backed securities
 
7.1

 

 
3.1

 
(0.1
)
 
10.2

 
(0.1
)
Total
 
$
1,488.2

 
$
(43.1
)
 
$
1,135.6

 
$
(32.2
)
 
$
2,623.8

 
$
(75.3
)
 
 
(1) 
In connection with the adoption of ASU 2016-01, the disclosure for December 31, 2017 has been recast for comparability. See Note 2. "Recent Accounting Pronouncements" for additional information on the impact of the adoption of ASU 2016-01.

There were 3,596 and 2,086 individual security lots as of June 30, 2018 and December 31, 2017, respectively, that account for the gross unrealized loss, none of which is deemed by the Company to be other-than-temporarily impaired ("OTTI"). The Company analyzes its fixed maturity securities in an unrealized loss position for OTTI each reporting period. Beginning January 1, 2018, the Company generally evaluates an investment for impairment when it has been in an unrealized loss position of 20% or more of amortized cost for twelve consecutive months. As of June 30, 2018, the Company has determined that the unrealized losses on fixed maturity securities were primarily due to market interest rate movements since their date of purchase. As of June 30, 2018, for the $39.6 of unrealized losses related to securities in unrealized loss positions for a period of twelve or more

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AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - CONTINUED
(In Millions, Except Share and Per Share Data)

consecutive months, none were related to securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost.

There were no material credit-related OTTI charges for the three and six months ended June 30, 2018 and 2017.

(b) Trading Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as trading as of June 30, 2018 and December 31, 2017 are presented in the tables below:
As of June 30, 2018
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Corporate bonds:
 
 
 
 
 
 
 
 
Industrial
 
$
25.3

 
$
0.6

 
$
(1.6
)
 
$
24.3

Finance
 
1.0

 

 

 
1.0

U.S. treasury securities
 
123.7

 
0.3

 
(0.5
)
 
123.5

Total trading securities
 
$
150.0

 
$
0.9

 
$
(2.1
)
 
$
148.8

As of December 31, 2017 (1)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Corporate bonds:
 
 
 
 
 
 
 
 
Industrial
 
$
26.7

 
$
0.1

 
$
(2.4
)
 
$
24.4

Finance
 
0.5

 

 

 
0.5

U.S. treasury securities
 
25.0

 

 
(0.1
)
 
24.9

Total trading securities
 
$
52.2

 
$
0.1

 
$
(2.5
)
 
$
49.8

 
 
(1) 
In connection with the adoption of ASU 2016-01, the disclosure for December 31, 2017 has been recast for comparability. See Note 2. "Recent Accounting Pronouncements" for additional information on the impact of the adoption of ASU 2016-01.

Proceeds from the sales of investments in trading securities were approximately $68.8 and $177.6 during the three months ended June 30, 2018 and 2017, respectively, and $282.9 and $309.4 during the six months ended June 30, 2018 and 2017, respectively.

The table below shows the portion of trading gains and losses for the period related to trading securities still held during the three months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017 (1)
 
2018
 
2017 (1)
Net losses recognized during the period on trading securities
$
(1.9
)
 
$
(1.5
)
 
$
(5.0
)
 
$
(4.6
)
Less: Net (gains) losses recognized during the period on trading securities sold during the period
(4.3
)
 
0.6

 
(3.9
)
 
2.4

Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date
$
2.4

 
$
(2.1
)
 
$
(1.1
)
 
$
(7.0
)
 
 
(1) 
In connection with the adoption of ASU 2016-01, the disclosure for the three and six months ended June 30, 2017 has been recast for comparability. See Note 2. "Recent Accounting Pronouncements" for additional information on the impact of the adoption of ASU 2016-01.


16

TABLE OF CONTENTS
AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - CONTINUED
(In Millions, Except Share and Per Share Data)

(c) Equity Securities

In accordance with the adoption of ASU 2016-01, the Company's equity securities are no longer bifurcated between available-for-sale and trading, but rather are measured at fair value with changes in fair value recognized in earnings. See Note 2. "Recent Accounting Pronouncements" for additional information on the impact of the adoption of ASU 2016-01.

The original cost, gross unrealized gains and losses, and estimated fair value of the Company's equity securities as of June 30, 2018 and December 31, 2017, are presented below:
As of June 30, 2018
 
Original Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Preferred stock
 
$
0.5

 
$

 
$

 
$
0.5

Common stock
 
136.8

 
37.3

 
(20.3
)
 
153.8

Total equity securities
 
$
137.3

 
$
37.3

 
$
(20.3
)
 
$
154.3

As of December 31, 2017
 
Original Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Preferred stock
 
$
0.5

 
$

 
$

 
$
0.5

Common stock
 
195.4

 
30.6

 
(14.8
)
 
211.2

Total equity securities
 
$
195.9

 
$
30.6

 
$
(14.8
)
 
$
211.7


Proceeds from the sales of investments in equity securities were approximately $58.8 and $32.4 during the three months ended June 30, 2018 and 2017, respectively, and $181.7 and $151.7 during the six months ended June 30, 2018 and 2017, respectively.

The table below shows the portion of gains and losses for the period related to equity securities still held during the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net gains recognized during the period on equity securities
$
4.6

 
$
11.9

 
$
8.7

 
$
17.0

Less: Net gains recognized during the period on equity securities sold during the period
(6.4
)
 
(4.4
)
 
(1.4
)
 
(5.0
)
Unrealized gains recognized during the reporting period on equity securities still held at the reporting date
$
11.0

 
$
16.3

 
$
10.1

 
$
22.0



17

TABLE OF CONTENTS
AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - CONTINUED
(In Millions, Except Share and Per Share Data)

(d) Investment Income

Net investment income for the three and six months ended June 30, 2018 and 2017 was derived from the following sources:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Fixed maturity securities, available-for-sale
$
62.0

 
$
69.4

 
$
121.4

 
$
126.7

Fixed maturity securities, trading
4.2

 

 
4.8

 
1.0

Equity securities (1)
0.4

 
0.2

 
0.7

 
1.6

Cash and short term investments
4.7

 
1.9

 
8.8

 
3.3

Other invested assets
0.3

 
(19.2
)
 
6.7

 
(15.0
)
Total investment income
71.6

 
52.3

 
142.4

 
117.6

Investment expenses and interest expense on securities sold under agreement to repurchase
(3.3
)
 
(3.0
)
 
(5.9
)
 
(5.0
)
Net investment income
$
68.3

 
$
49.3

 
$
136.5

 
$
112.6

 
 
(1) 
In connection with the adoption of ASU 2016-01, the disclosure for the three and six months ended June 30, 2017 has been recast for comparability. See Note 2. "Recent Accounting Pronouncements" for additional information on the impact of the adoption of ASU 2016-01.

(e) Realized Gains and Losses

The tables below summarize the gross and net realized gains and (losses) for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
 
2018
 
2017
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturity securities, available-for-sale
$
16.4

 
$
(13.9
)
 
$
2.5

 
$
14.1

 
$
(0.9
)
 
$
13.2

Fixed maturity securities, trading

 
(1.9
)
 
(1.9
)
 
2.8

 
(4.3
)
 
(1.5
)
Equity securities (1)
10.1

 
(5.5
)
 
4.6

 
9.8

 
(13.7
)
 
(3.9
)
Other invested assets
0.2

 

 
0.2

 
15.7

 

 
15.7

Total
$
26.7

 
$
(21.3
)
 
$
5.4

 
$
42.4

 
$
(18.9
)
 
$
23.5

 
Six Months Ended June 30,
 
2018
 
2017
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturity securities, available-for-sale
$
19.9

 
$
(15.8
)
 
$
4.1

 
$
22.4

 
$
(2.1
)
 
$
20.3

Fixed maturity securities, trading
2.1

 
(7.1
)
 
(5.0
)
 
5.2

 
(9.8
)
 
(4.6
)
Equity securities (1)
23.7

 
(15.0
)
 
8.7

 
21.0

 
(20.6
)
 
0.4

Other invested assets
0.2

 

 
0.2

 
16.0

 

 
16.0

Other-than-temporary impairment of fixed maturity securities, available-for-sale

 
(0.3
)
 
(0.3
)
 

 

 

Total
$
45.9

 
$
(38.2
)
 
$
7.7

 
$
64.6

 
$
(32.5
)
 
$
32.1

 
 
(1) 
In connection with the adoption of ASU 2016-01, the disclosure for the three and six months ended June 30, 2017 has been recast for comparability. See Note 2. "Recent Accounting Pronouncements" for additional information on the impact of the adoption of ASU 2016-01.


18

TABLE OF CONTENTS
AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - CONTINUED
(In Millions, Except Share and Per Share Data)

(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 investment grade securities. The fair values of the Company's restricted assets as of June 30, 2018 and December 31, 2017 are as follows:

 
June 30, 2018
 
December 31, 2017
Restricted cash and cash equivalents
$
532.2

 
$
480.1

Restricted investments
3,062.2

 
3,193.8

Total restricted cash, cash equivalents and investments
$
3,594.4

 
$
3,673.9


(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. For more information related to these agreements, see Note 3. "Investments" to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. The Company’s liability for securities to be delivered is measured at their fair value and was $161.8 and $75.5 as of June 30, 2018 and December 31, 2017, respectively.

From time to time, the Company enters into repurchase agreements that are subject to a master netting arrangement, which are accounted for as collateralized borrowing transactions and are recorded at contract amounts. The Company receives cash or securities that it invests or holds in short term or fixed maturity securities. For more information related to these agreements, see Note 2. "Significant Accounting Policies" to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. As of June 30, 2018, the Company had 16 individual repurchase agreements outstanding with a principal amount of $214.8, which approximates fair value, at interest rates between 0.0% and 3.5%. The Company had approximately $227.5 of collateral pledged in support of these agreements as of June 30, 2018. As of December 31, 2017, the Company had no repurchase agreements outstanding.


19

TABLE OF CONTENTS
AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - CONTINUED
(In Millions, Except Share and Per Share Data)

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, 2018 and December 31, 2017:
As of June 30, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
Financial Assets
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
421.1

 
$
421.1

 
$

 
$

U.S. government agencies
 
130.6

 

 
130.6

 

Municipal bonds
 
821.1

 

 
820.5

 
0.6

Foreign government
 
283.9

 

 
283.9

 

Corporate bonds and other bonds:
 
 
 
 
 
 
 
 
Finance
 
1,887.4

 

 
1,887.4

 

Industrial
 
2,385.5

 

 
2,385.5

 

Utilities
 
322.8

 

 
322.8

 

Commercial mortgage-backed securities
 
384.7

 

 
362.6

 
22.1

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency backed
 
901.0

 

 
901.0

 

Non-agency backed
 
7.6

 

 
7.6

 

Collateralized loan / debt obligations
 
824.1

 

 
824.1

 

Asset-backed securities
 
57.3

 

 
56.5

 
0.8

Equity securities
 
154.3

 
153.2

 
0.3

 
0.8

Short term investments
 
169.7

 

 
169.7

 

Other investments
 
4.1

 

 

 
4.1

Life settlement contracts
 
1.9

 

 

 
1.9

Total financial assets
 
$
8,757.1

 
$
574.3

 
$
8,152.5

 
$
30.3

Financial Liabilities
 
 
 
 
 
 
 
 
Securities sold but not yet purchased
 
$
161.8

 
$
153.9

 
$
7.9

 
$

Securities sold under agreements to repurchase
 
214.8

 

 
214.8

 

Life settlement contract profit commission
 
3.2

 

 

 
3.2

Contingent consideration
 
31.2

 

 

 
31.2

Total financial liabilities
 
$
411.0

 
$
153.9

 
$
222.7

 
$
34.4


20

TABLE OF CONTENTS
AMTRUST FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - CONTINUED
(In Millions, Except Share and Per Share Data)

As of December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Financial Assets
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
324.2

 
$
324.2

 
$

 
$

U.S. government agencies
 
50.5

 

 
50.5

 

Municipal bonds
 
1,045.5

 

 
1,045.1

 
0.4

Foreign government
 
151.7

 

 
151.7

 

Corporate bonds and other bonds:
 
 
 
 
 
 
 
 
Finance
 
1,769.9

 

 
1,769.9

 

Industrial
 
2,292.6

 

 
2,292.6

 

Utilities
 
332.4

 

 
332.4

 

Commercial mortgage-backed securities
 
412.7

 

 
389.8

 
22.9

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency backed
 
556.4

 

 
556.4

 

Non-agency backed
 
6.8

 

 
6.8

 

Collateralized loan / debt obligations
 
600.6

 

 
600.6

 

Asset-backed securities
 
30.1

 

 
29.3

 
0.8

Equity securities
 
211.7

 
210.7

 
0.5

 
0.5

Short term investments
 
187.8

 

 
187.8

 

Other investments
 
5.0

 

 

 
5.0

Life settlement contracts
 
20.8

 

 

 
20.8

Less: Fixed maturity securities classified as held for sale (see note 13)
 
(35.3
)
 

 
(35.3
)
 

Total financial assets (1)
 
$
7,963.4

 
$
534.9

 
$
7,378.1

 
$
50.4

Financial Liabilities
 
 
 
 
 
 
 
 
Securities sold but not yet purchased
 
$
75.5

 
$
70.8

 
$
4.7

 
$

Life settlement contract profit commission
 
3.2

 

 

 
3.2

Contingent consideration
 
75.4

 

 

 
75.4

Total financial liabilities